ISET Economist Blog

A blog about economics in the South Caucasus.

Let Tourists Arrive and Georgia Thrive!

After the collapse of the Soviet Union it was believed that tourism might become one of Georgia’s “locomotive” sectors. While the Shevardnadze government failed to develop this potential, after the Rose Revolution, tourism became a top priority. Each year since 2005, the direct effect of tourism (i.e. the money spent by tourists) alone has contributed 6-7% of Georgia’s total GDP. Georgia is a net exporter of services, and tourism accounts for about 60% of these service exports. This is important income for the country, helping to finance the country’s large goods trade deficit and to reduce the depreciation pressure on the lari.

According to the Georgian National Tourism Agency (GNTA), international arrivals totaled almost 5.5 million people in 2014, 2% higher than in 2013. Three out of every four arrivals come from three neighboring countries: Turkey, Armenia and Azerbaijan. If Russia is included, tourists from neighboring countries make up 88% of all arrivals.

From 2005 to 2013, the number of international arrivals was increasing by an astounding average rate of 33% (!) every year. As a result, from 2005 to 2013, the number of arrivals increased tenfold. Last year, however, growth slowed down, due to economic difficulties in some of the neighbor countries, as well as artificial barriers of Georgia’s own making such as the new (more restrictive) visa regulations and the new immigration law. These regulations were a blow to many sectors of Georgia’s economy and, in particular, to tourism. As a result, fewer people arrived from Turkey (-10%), Iraq (-47%), and Iran (-51%), and since September, arrivals from China also declined. The direct air connection to Teheran was terminated.

While some of these countries may currently have minor significance as sources of tourists, they have paramount strategic importance for future tourism (and investment!). It is not likely that, within the next few years, huge numbers of Western Europeans and Americans will discover Georgia as a primary tourism destination, yet Iranians and Chinese also develop the taste for holiday travel. Had Georgia not acted to make it more difficult for travelers from these countries to enter the country, it could have become an important player in these new tourism markets.


The contribution of tourism to world gross domestic product (GDP) is just 3%, and the economies of countries where tourism accounts for a big share of the GDP often perform poorly. The most notorious case is Greece, where in 2011 tourism generated 18% of GDP ($15 billion dollars in absolute terms). As everyone knows, the Greek economy is totally on the skids. Another example is Spain – while being struck by the European economic crisis, the country boasts the second highest tourism revenues in the world of $60.4 billion dollars in 2013 (or about 6% of Spanish GDP).

Even if one disregards that tourism-centered economies are often weak, the absolute size of the tourism contributions is not that impressive. In 2012, the Spanish telecommunications provider Telefonica, one single company, generated revenues of about $85 billion, almost $25 billion more than Spain’s entire tourism sector. And this turnover was generated with just 275,000 employees, whereas 2 million Spaniards are working in tourism. Interpreting these numbers is not easy, because we do not know what value is added by the Telefonica personnel (portions of the revenues, both in tourism and in telecommunications, account for intermediate inputs). Yet, there can be no doubt that productivity (and hence average incomes) in telecommunication is much higher than in tourism.

On the surface, one might conclude that Greece and Spain should not serve as blueprints for the Georgian economy, and that, instead, Georgia should strive to develop more sophisticated sectors. A “national champion,” i.e. a company like Telefonica in Spain, might create more value than all the tourism businesses taken together (see “The Economics of Great Personalities” by Florian Biermann).

The argument of the apparent economic insignificance of tourism, however, misses many advantages and positive externalities associated with this sector.


First of all, tourism is an important source of income for low-skilled laborers and those living in rural areas. Transportation, hospitality, gastronomy, and tourist guide services provide employment without the need for higher education.
Equally important are the educational incentives created through tourism. To understand this, one has to appreciate the fact that work in the tourism sector provides a fast-track pathway to acquiring skills and knowledge that are valued by the labor market, such as language skills and service culture. Having such a pathway is critical given that people often fail to learn and upgrade their human capital given the high opportunity cost and the lack of ability to defer gratification.  One needs great stamina to attend boring lectures, read lengthy books, memorize material in which one is not interested, and to do all of this under the pressure of exams. Since the reward for all of this trouble typically comes several years later, it is not surprising that people who do not acquire much human capital are very often those who cannot defer gratification.

The Marshmallow Experiment:
An important psychological finding of the 20th century is that the ability to wait, or to defer gratification, is one of only two character traits which (1) can be measured among children and (2 predict in a statistically significant way the overall well-being and success of people in their later lives (the other one being the IQ). In the famous Stanford Marshmallow Experiment of the late 1960s, eminent psychologist Walter Mischel gave children marshmallows and told them that they would get more marshmallows if they would not eat the first marshmallow within 15 minutes. It turned out that those children who were able to wait did much better in their later lives. When they had reached adulthood, they earned higher salaries, had better educational achievements, and followed healthier lifestyles, among other accomplishments.

The advantage of working in the tourism sector is that relevant skills can be acquired in a piecemeal fashion with gratification following almost immediately. One learns a little bit of English, Russian, or any other language spoken by tourists, and is immediately qualified for certain jobs (selling in tourist stores, guiding people around, luring them into restaurants, etc.). And you do not even have to learn genuine English a la Shakespeare –  you can profit from knowing simplest phrases like “Where are you from?”, “XX good” (where XX is the home country of the tourist), “Shop here!”, “Low prices!”, “Good offer!”, “Come my friend, visit my shop!” and – the classic among tourism workers – “No problem!” (as a universal answer to any question the tourist might have).

Therefore, even people who lack the patience to invest in their human capital over the course of many years, because cannot defer gratification, may be able to upgrade their human capital step by step, as gratification is received quickly. Once they speak English, however, new opportunities emerge to further increase their human capital in relatively interesting ways through one of the many online courses offered on almost every subject (e.g. in tourism management), or by working or studying abroad.


Another important insight about tourism is that people avoid spending their holidays in places that are not interesting, livable, and beautiful. Thus, the more tourists come to Georgia, the more this country is perceived to have these favorable properties. That is reassuring.

Yet a beautiful and interesting place is not only attractive as a tourist destination, but also as a place to live. Tourism stimulates art, culture, gastronomy, and entertainment, which can then also be enjoyed by locals.

One of the authors of this article lived in Berlin for many years, where he could choose from three opera houses and two world-class orchestras (most famously, the Berlin Philharmonic). When he attended these performances, he remembers well sitting among many Asians, usually from Japan, who paid high prices to cross-subsidize the 10-20 euro tickets reserved for students from local universities. And after the concert was over, he could indulge in one of the hundreds of nice cafes and restaurants in the bohemian quarters of Friedrichshain and Prenzlauer Berg, of which there were only so many because of the masses of tourists roaming through the streets.

One can see the very same effect in Tbilisi. Not too long ago, a museum of modern art was established, arguably mainly to attract tourists. Now it has become also an interesting destination for locals. Likewise, the nice cafes in Vake and in the Old Town around Chardin Street, are frequented heavily by tourists, subsidizing street life for native Tbilisians. And that there is now the long overdue discussion about how one could make Tbilisi more attractive for pedestrians also results from the insight that tourists do not enjoy walking around in Tbilisi if: (a) zebra crossings are disregarded by cars, (b) the patrol police, while cruising around and shouting angrily out of their cars, does nothing to enforce pedestrian rights, and (c) the sidewalks are pitted and usually blocked by parking cars (see “Tbilisi – a City for Cars, Not for People”).

While many Tbilisians do not yet grasp that a car-friendly city is generally an awful place to live in, the incentive to attract tourists provides some extrinsic motivation for Tbilisi to provide a more pleasant experience for the pedestrians. In the same vein, to become more attractive for tourists, Georgia is working on a variety of initiatives to protect its nature and cultural heritage, to improve safety and upgrade tourist infrastructure. All of these initiatives will ultimately make Georgia a better place for everybody!

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Friday, 26 February 2021

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