In the United States, newscasters read out employment numbers and GDP growth figures. In Southern Europe, they read out tourist arrival numbers. In many countries, tourism has become synonymous with future economic prosperity. When put into numbers, the dependence of some countries on foreign tourist spending is staggering. In 2019, just before the COVID-19 pandemic threw global tourism into chaos, international tourist receipts were equivalent to 53% of Montenegro’s exports; the figures are similarly high for Albania (51%), Croatia (38%), Greece (28%), Portugal (23%), and even large countries like Spain (19%) and Turkey (16%). For comparison, automobiles are 17% of Germany’s exports and oil is 49% of the United Arab Emirates’ exports. Some European countries are more dependent on tourism than Dubai is on oil, and most of Southern Europe is more dependent on tourism than Germany is on exporting Volkswagens and BMWs.
In the eyes of economists, this is simply the magic of comparative advantage in trade at work. The Arabs were blessed with oil, the Germans with a work ethic, and the inhabitants of the Mediterranean with perhaps the world’s most comfortable climate and most beautiful coastline. Late last year, The Economist even called Spain the best economy in the developed world, with Greece not far behind. Why should it matter how a country earns a living, if GDP keeps going up?
The problem is that, to a first approximation, no country has ever reached the ranks of the global wealthiest countries by relying primarily on tourism and, moreover, many countries highly dependent on tourism remain very poor. Jamaica, Bali, the Maldives, and Fiji are globally recognizable, name-brand destinations that are as or even more dependent on tourism than Southern Europe. All four are also unenviably poor by European standards, despite having small or even tiny populations to share in the incoming tourism money.
The apparent or actual exceptions do not detract much from this picture. Macao is China’s Las Vegas, on steroids. Andorra is a small patch of land between France and Spain which is not part of the European Union and therefore does not levy sales taxes on alcohol, tobacco, perfume, and other goods—like an airport duty-free zone. Monaco is a sovereign neighborhood of a mid-sized French city populated by some of the world’s wealthiest people. Bermuda, Malta, Cyprus, and others are financial hubs as much as or more than they are tourism hotspots. Importantly, all of these states are also tiny in terms of population: the largest is Cyprus, with 1.3 million people, while Andorra, Bermuda, and Monaco have truly miniscule populations of less than 90,000 people each. Whatever works for idiosyncratic micro-states is unlikely to work for much larger states of five or ten million people, let alone fifty million or more.
Tourism is not a path to prosperity for Southern Europe or likely any nation with a more than trivial population because of the very nature of the activity: for a relatively limited financial reward, it is intensive in both labor and capital while being effectively a zero-sum competition between countries—in which any given country has very limited ability to compete through ingenuity or differentiation—all the while having pretty much only cascading negative externalities on the rest of the economy and society, from overcrowding cities to disincentivizing skilled labor. By my calculations, tourism grew as a share of the economy in all the main Southern European countries from 1999 to 2019. But rather than a new potential vector of economic dynamism and growth, rising tourism is a flashing red emergency siren, a sign of an economy that is failing at everything else.
The Math Does Not Add Up
Croatia is a small Mediterranean country with a winding coastline, plentiful islands, warm and crystal-clear seawater, and a central location reached easily from anywhere in Europe. Nowadays, it is trendy with young tourists and, as the newest EU member state, is still on the economic upswing. If any country in Southern Europe could get rich from tourism, it would be Croatia. How many tourist arrivals would be necessary for Croatia to achieve the GDP per capita of Switzerland, one of the wealthiest countries in the world?
The GDP per capita i.e. annual income per person of Switzerland is roughly $100,000 per year. The population of Croatia is 3.86 million people. To be as rich as Switzerland, Croatia would need $386 billion in income. The average tourist in Croatia reportedly spends about $200 per day. Therefore, to get as rich as Switzerland but solely from tourism, Croatia would need its tourists to spend 1.93 billion nights in the country each year. In 2024, international tourists spent only 85 million nights in the country. That is just 4% of the necessary figure, meaning the tourism sector would need to grow more than twenty times over. If all these billions of necessary tourist-nights were crammed into the traditional three-month summer “tourist season,” Croatia would need to simultaneously host 21.4 million tourists each day of each summer. This is over twenty times the current population of Croatia’s coastal regions.
These 85 million tourist-nights came from 17.4 million tourist arrivals. Assuming the same ratio holds, this would imply a need for Croatia to have 395 million tourist arrivals per year. This is more than the entire population of the United States visiting each year and four times more than the current figure for international tourist arrivals of France, the world leader. The physical infrastructure for Croatia to accommodate hundreds of millions of new tourists, outnumbering the locals ten or twenty to one every summer, does not exist. Forget hotels and Airbnbs—whole new towns and cities would need to be built. The roads do not exist. The airports do not exist. The power plants do not exist. The sewage systems do not exist. The capital investment, state capacity, and elite competence to build anything more than minor incremental expansions do not exist.
Moreover, the low-wage service workforce that would be demanded by such a colossal number of tourists does not exist. Croatia reportedly employs around 150,000 people in the tourism sector. If the number of tourists grew twenty-fold, so would, presumably, the number of workers in tourism, meaning the country would need some 3.4 million service workers in total. This is double the entire current Croatian labor force of 1.7 million people, which is moreover declining due to emigration, aging, and low fertility. Even if every last Croatian alive today worked in tourism, the country would still need to import an additional 1.7 million low-wage foreign laborers to hit the target, who would then make up a solid 30% of the new population and, of course, put the target of reaching Swiss GDP per capita still further out of reach.
Most importantly of all, the tourists who would pay for all this do not exist: in 2024, there were 1.4 billion tourist arrivals globally. For Croatia to have 395 million tourist arrivals would be 28% of global tourism market share, up from about 1% today. Even if the global tourism sector doubled in some future span of time, it is all but literally impossible that a small and undifferentiated country like Croatia would grow its market share more than ten times over, especially since the vast majority of new future tourists are likely to be Asians in Asia who will prefer to vacation closer to home, without first subjecting themselves to a twelve-hour flight. There is no shortage of sunny beaches in the world.
Even the more incrementalist, less ambitious version of the math does not add up. To reach Germany’s more modest GDP per capita of $56,000, Croatia would need a GDP of $216 billion. If we subtract Croatia’s existing GDP of $93 billion, that leaves us with a shortfall of $123 billion to be made up through tourism. If we optimistically and baselessly assume every additional tourist will spend $400 per day, like in Portugal, Croatia would need an additional 308 million tourist-nights, meaning it would need to quintuple the size of the current tourism sector while doubling the average spending per tourist. Spreading these tourists out across six rather than three months, we are imagining an additional 1.7 million tourists in the country each day of the spring and summer; the current 85 million annual tourist-nights spread across six months amount to around 472,000 tourists each day.
Growing a relatively mature tourism sector five times over is easier said than done: in the 37 years between the Yugoslav tourism peak of 1987 and 2024, Croatia’s total annual international tourist-nights grew by only about 40%, a compound annual growth rate (CAGR) of below 1%. It is true that these years saw a war, global financial crisis, and pandemic. But so what? Tourism is easily and deeply negatively affected by regional and global events that the tourism sector has no control over and almost as little ability to adapt around. That is the nature of the business. Any honest economic accounting must factor in this major disadvantage of betting on tourism, which is not true to nearly the same extent in, for example, manufacturing or finance. What are the chances of having no more recessions, wars, pandemics, or other crises in the coming decades?
Regardless, no matter how one massages the numbers, one can at best argue for a roughly 5% annual growth rate for unmolested Croatian tourism, which means it would take a perfect, uninterrupted streak of 32 years to get as rich from tourism, in the year 2057, as Germany is today. It is worth noting that, in the Croatian context, to endorse this plan is to admit Croatia is a failed country: thirty years after the fall of communism and a hard-won national independence, instead of celebrating Croatia’s economic convergence with Germany, we would be delaying it another thirty years into the future. By which time, of course, Germany is likely to have pulled further ahead.
In the end, even this mediocre outcome would still be an unjustifiably optimistic scenario. Peak tourism may have already passed Southern Europe by. Since 2019, hotel and restaurant prices in Croatia have surged by a whopping 50% and tourist arrivals have continued to slowly grow, but inflation has been so bad that the real earnings of the tourism sector are reportedly actually down almost 10% compared to 2019. This is, moreover, despite rapidly importing nearly 100,000 low-wage foreign laborers from across not just the Balkans but as far afield as India, Nepal, and the Philippines since roughly 2021, shattering a long-standing taboo on mass immigration and, to a tourist’s eyes, turning every waiter, cook, and driver in the country into a Third World migrant overnight. If Croatia cannot get rich from tourism, the rest of Southern Europe definitely cannot either.
Tourism Generates Limited and Unreliable Economic Surplus
A country becomes wealthy in much the same way that a business becomes profitable and valuable: it produces things that other people want, charges a price higher than the cost of production, and pockets the difference as profit, thus becoming wealthier. Compared to a typical company, countries only have a much more convoluted and politically contested system for deciding how to spend and distribute economic surplus—the national profit—coming into the country. This model starts to break down when considering countries or economic blocs large enough to sustain most if not all of the industries and technologies of the modern world on their own, without relying significantly on exports or imports. But for small and even medium-sized countries, it is as simple a model as one can use. Qatar is rich because it exports valuable natural gas. Denmark is rich because it exports valuable pharmaceuticals. Taiwan is rich because it exports valuable semiconductors.
The main exception to this rule is finance, which at least partially accounts for the wealth of small countries ranging from Singapore to Ireland. Countries can differentiate themselves by providing superior quality of governance for the financial activities and assets of both individuals and corporations. Economic surplus is then generated by charging fees, levying taxes, and seeking rents on the disproportionately large foreign capital a country attracts. This strategy is not as easy as shuffling paperwork, but relies on the government of a small country being strong enough to prevent domestic instability or over-extraction, as well as diplomatically skilled enough to avoid incurring the wrath of larger and more powerful states whose capital it is siphoning off. It is no coincidence that Switzerland and Singapore both make a point of military self-sufficiency and international neutrality.
By this logic, tourism can, of course, make a country wealthier, since tourism profit is national economic surplus. The problem is that compared to manufacturing, resource extraction, or finance, tourism is a much weaker, more limited, and unreliable engine for generating surplus. By definition, a country only becomes richer if it somehow generates more economic value per person. In economics, labor productivity is the measure of the amount of valuable output generated per worker-hour. For a country to become wealthy, it must have economic sectors and industries with high enough labor productivity for the country’s population as a whole to benefit, either directly through employment in or downstream of these sectors and industries, or indirectly through customary or government-led redistribution of surplus, such as through, say, Nordic-style social democracy or generous employment of native citizens in government jobs in the Arab Gulf states.
Something like finance faces effectively no natural limits to productivity, only social and political ones: there is nothing in the laws of physics that prevents a single person from managing the wealth of all other 8 billion people on the planet, let alone Singapore managing the wealth of half of Asia. This makes finance a potentially great way to be highly productive. The main limitation of this strategy is that it is a zero-sum competition, since any wealth managed in Singapore is wealth that is not managed in China, Dubai, Switzerland, or Manhattan. It also means not every country can become rich from finance at the same time.
Wealth from resource extraction depends on the demand for the resource and, for a geographically small country, its luckiness to be blessed with large deposits. In the modern world, generally the only natural resource valuable enough to make a country rich from extracting it has been energy—oil and natural gas. Hence the wealthiness of countries ranging from Norway to Brunei. But diamonds in Botswana and copper in Chile have also helped those countries get wealthier than their neighbors.
There is another strategy that does not depend on zero-sum competition or luck: the greatest and most reliable method for increasing labor productivity in history has been industrial manufacturing, constantly improving labor productivity through superior technology, practices, and logistics. It is this positive-sum method which created the modern world and which has allowed not just a few small countries to become rich, but many large countries. Industry and manufacturing are what have allowed the United States, Great Britain, France, Germany, Japan, South Korea, China, and many more to become wealthy countries today. Their continued industrial and scientific effort underwrites the wealth of every other country on the planet.
In comparison, the ceiling of labor productivity in tourism is laughably low. A single asset management firm can manage trillions of dollars in capital. A single oilfield can produce trillions of dollars in petroleum. A single factory can manufacture trillions of dollars worth of complex technological goods. But what can a single hotel, bar, or restaurant do? A water park? In tourism, productivity is effectively the same as it was in the time of the Pharaohs. Cooking meals, serving drinks, making beds, and cleaning toilets is labor-intensive and has proven deeply resistant to productivity gains from automation and new technology. This is undoubtedly partially because part of the very appeal of tourism is to be temporarily pampered by servants.
The inputs to tourism are difficult to scale and face hard limits. Each additional tourist in a country requires additional real estate, infrastructure, and service labor to be devoted to tourism, for accommodation and entertainment. In the limit, a country only has so many walkable cities, nice beaches, and fascinating attractions, and it cannot acquire more. Croatia is not going to invade Montenegro to secure the valuable revenue streams of Serbian tourists vacationing in Budva. The presence of tourists in such places also hits diminishing returns very quickly, as both tourists and locals lose value from overcrowding and the loss of authenticity. Scaling tourism requires absurdities like planning to shuffle hundreds of millions of people through medieval towns designed to house a few thousand. This dynamic is the opposite of what happens in finance, resource extraction, or manufacturing, which all benefit from effectively unbounded economies of scale.
On paper, tourism could be scaled with quality of tourist rather than quantity. Yet there are perhaps not enough millionaires and billionaires in the world to fund more than a single and very small country this way, like Macao. Perhaps one dense urban core full of high-stakes gambling, five-star hotels, and expensive prostitutes is enough for the world. Tourism cannot even scale to being a dynamic industry the whole year round, since tourists overwhelmingly take trips for short periods in the summer. Many industries in history have used persuasive marketing and lobbying campaigns to increase demand for their goods and services, but there is virtually no hope that the tourism lobbies of Southern Europe will succeed at convincing the corporations of the world to implement three months of annual vacation per employee.
A manufacturing workforce is one in which everyone, almost regardless of their skills or intelligence, is trained in difficult and complex technical work, from the plumbers to the lead engineers. This makes them skilled laborers, higher-value human capital. They are more valuable not just because they are useful, but because they are more adaptable to new industries in case of vigorous competition from abroad, new technologies that make the old industry obsolete, or plain old wars, pandemics, and other crises. A trained workforce even makes rare scientific and technical breakthroughs more likely, like Ozempic in Denmark or chip foundries in Taiwan. In tourism, your workforce just remains unskilled and underemployed forever. A tourism-based economy is really one composed of a class of unskilled real estate rentiers and a much larger class of low-wage servant labor. Being a servant, cook, or bartender sucks. But, frankly, so does being a landlord or restaurant owner. There are better and more rewarding professions for nations to pursue.
Southern Europe Needs Quality Governance and Competitive Industry
The Mediterranean countries are often lumped together by outsiders as lazy and unproductive. In reality, they are very heterogeneous: Italy is a great power of manufacturing less economically reliant on tourism than the United Kingdom or the Netherlands, with the second-largest manufacturing economy in Europe after Germany. Greece, in contrast, was for decades effectively a nation-level scheme to defraud foreign investors. Spain and the others lie somewhere in-between, though far closer to Italy than pre-2008 Greece. What these countries share today, however, are a list of similar negative trends: rapidly aging populations, collapsing birth rates, insolvent pension systems, uncompetitive industries, inflexible governance, and, worst of all, the emigration of young and educated natives, especially to other countries in the EU.
As these problems worsen, tourism becomes more appealing to business leaders, politicians, and policy-makers: although workers can emigrate, property cannot, and low-wage labor can easily be imported from abroad to service tourists from wealthier countries. Tourism can become the success story of the new economy, providing a hopeful, winning narrative to a voter base increasingly composed of aging landlords. But it is really just a way to temporarily ameliorate the financial stress caused by deeper economic and cultural problems that remain unsolved.
Governments should therefore not try to encourage a tourism-based economy with construction subsidies, expensive infrastructure targeted at tourists, low-wage immigration, or other such policies, all of which will either do nothing to solve the underlying issues or even make them worse. No extant European government is likely to solve the global problem of falling fertility, though some such as Hungary have tried without lasting success. But whatever funds and state capacity are left ought to be instead targeted at making domestic industries more competitive, seeding wholly new industries led by young entrepreneurs, reducing tax and entitlement burdens even to the displeasure of elderly voters, and repatriating young and skilled emigrants by any means necessary. It is progress in these directions, not the number of tourists arriving on RyanAir flights, which will give Southern Europe a chance of converging with its northern neighbors this century and reviving a prestige going back to the times of the ancient world.