A $62 hotel room in Atacama, Chile
How can you be in one of the most expensive cities in the world, take a train or bus for a couple hours, then be in one of the cheapest places to travel? How is it that one of the most expensive countries to travel in can be right next to one that’s a fantastic value?
Even seasoned travelers sometimes end up in a travel destination that stumps them when it comes to costs. “I can’t believe how expensive this place is”—that’s a statement you’re not happy about uttering after arrival.
It’s a painful realization when you thought a place would, at worst, be on par with what things cost at home. Then you get there and start wondering why you have made three trips to the ATM in as many days and you thought you were being frugal.
It happened to me in the Atacama Desert region of Chile a few years ago. I heard backpackers who came from Ecuador or Panama muttering about it in neighboring Cartagena, Colombia a few weeks before that. Some are shocked when they find out how crazy expensive Australia is when their currency is strong, or how pricey Singapore is compared to the rest of Southeast Asia. People land in Iceland after getting a cheap flight deal and then realize what they paid for a flight is less than they will need to spend on lunch.
This is why a bit of pre-trip research is necessary. As I pointed out a decade ago now in the book Make Your Travel Dollars Worth a Fortune, most vacationers decide where they want to go and then try to fit that trip into their existing budget. That only works though if you know most of the costs up front, like on an organized tour, a cruise, or an all-inclusive vacation. Otherwise, it’s backwards: the cost of the destination should match the budget you’ve got. If not, you’re scrimping and sweating over the restaurant tabs.
Keep one eye on (print or web) international news because these factors all play a part.
What makes a travel destination expensive?
1) The population is wealthy.
This is the main one. It’s not an exact correlation, but the higher the per capita GDP of a country, the higher prices are going to be. Focus Economics did a study on the richest countries in the world in 2019, but also created projections for 2022 based on where economists think things are headed. Here’s who is the wealthiest on a per-capita basis, then where they’re projected to be in a few years.
Luxembourg (GDP per capita: $119,719)
The United States of America ($64,906)
What’s expected to change by 2022? Ireland will pass Switzerland, and both Sweden and Denmark will pass the USA. (So much for the repeatedly debunked GOP belief that high taxes destroy wealth.) Australia will drop out of the top-10.
It may be surprising to you that Canada, Germany, France, and the UK are not on that list, but they are in the top-20. Japan is the most surprising considering how expensive the country is, coming in at #23. It’s just behind Israel and New Zealand. I would imagine that’s partly because their population is so elderly, with a larger number of retired people than most countries. It’s also easier for tiny Luxembourg to rank high, with its limited population, than it is for a huge country like Canada.
Also, when a country’s wealth rises quickly, especially in relation to its neighbors, prices are going to rise. South Korea (#26) is now far wealthier than Malaysia or Thailand, and prices reflect that. Despite Spain’s problems, they’re #27 on the wealth scale, so it’s more expensive there than in neighboring Portugal and the per capita GDP is about three times that of Bulgaria.
2) Taxes are high.
The United States is a rather inexpensive place to travel compared to Europe, not because we’re less wealthy, but because taxes are much lower, especially on gas/petrol. (We get less from our government too, but that’s another story.)
If citizens pay a high percentage of their income in taxes or close to 20% on everything they purchase, that affects the price of everything, from food to fuel to hotel rates. Developing countries tend to have the lowest taxes of all and have trouble collecting what they’re owed on top of that. So Finland is not only richer than Latvia, it has much higher taxes, so goods and services cost more. If a country is oil-rich and keeps its domestic prices low, like the USA and Indonesia, you often won’t pay as much to get around by car, bus, or train. But that depends, because there could be government subsidies or the workers on those transit lines could be highly paid. Which leads us to…
3) Labor laws are inflexible.
This is another good/bad factor: if all workers make a good salary, prices for taxis, restaurants, and goods in stores are higher. If those workers can’t be fired without an act of God, that unfortunately means a very inefficient labor system too, which adds costs at every step of the transaction chain.
One reason prices are high in a country like France, Germany, or Switzerland is that it’s really tough to get rid of someone who is a lousy worker. So you have to build in slack. You also tend to be more cautious about bringing on someone new. This is part of the reason you see more automation in Europe for what would be service jobs somewhere else: think parking lot attendants, toll booth workers, cashiers, and the like. Otherwise these expensive cities in Western Europe would be even worse.
The labor tension is also why Lufthansa seems to be on strike every time you book a flight with them. Plus hey, somebody has to pay for those six-week vacations we are so envious of here on the other side of the ocean.
4) Distribution systems are inefficient.
Another reason retail prices in the U.S. are cheaper than in many developing countries is that we have a very lean distribution system. In Japan or Mexico, there may be six people taking their cut between manufacturer and consumer—and a monopoly or duopoly on top of that. This drives up prices and discourages innovation.
In efficient countries, there’s less waste in the system and fewer middlemen. There’s also healthy competition: five wireless carriers instead of one, ten grocery store chains instead of two. Five hundred beer brewers instead of one monopoly.
5) The currency is out of balance.
Brazil is sometimes expensive (though not right now) because their currency has gained in value. Costa Rica and Chile are expensive for travelers because of the strength of their currencies—sometimes valid, sometimes not. Chile has been outpacing its neighbors for years economically and lots of outside investment money has poured in. As commodity prices rise, countries that put out lots of commodities from under the ground see their currency vault up in a hurry.
When commodity prices drop, so does the value of the Canadian loonie. It may seem kind of looney on the surface, but it makes a lot of sense when you look at the fundamentals.
At other times though, the currency is artificially linked to the dollar or euro. In our part of the world that’s the case in Costa Rica and Belize, which both cost three times what you’ll spend in Guatemala.
6) Simple supply and demand.
The principles of basic economics still apply. If every room in a destination is sold out for three months straight, good luck finding a deal on a hotel. If you go to a popular spot that’s suffering from overtourism, in the height of the tourist season, you are not going to have any leverage. You will pay a painful price.
Forget trying to find any summer bargains in Venice, Florence, Barcelona, Paris, or Amsterdam. These are some of the most expensive cities to visit because they’re popular to the point of being overrun. To a lesser extent, you’ll face the same problem in Cusco, Luang Prabang, or the big U.S. national parks if you go at the peak of high season.
If, on the other hand, everyone is shunning a destination because of some recent setback or bad publicity, that may be the time to swoop in.
7) Everyone is out to rip you off.
In some cases, high prices are artificial by nature and there’s no logical reason for them except, “People are willing to pay.” Uganda has a per capita GDP of less than $800 per year. But don’t expect to find many bargains there. Most of the cities in Africa, in fact, seem way more expensive than they should be.
Every time I read criticism about traveling in French-speaking West Africa, this is the main complaint. If you could pay the real price, it may actually be cheap to travel around that region. Since every person you come in contact is trying to charge you double what a local would pay, however, it’s a daily struggle that drives up costs. No fun, but for every one of you, there are nine missionaries, aid workers, NGO executives, or UN managers on some kind of expense account. They are not nearly so price-sensitive because it’s not their money.
Want to figure out where your money will really stretch instead, in places that are cheaper than where you live now? Pick up a copy of The World’s Cheapest Destinations at Amazon, B&N, Apple’s iBookstore, or get your favorite independent bookstore to order it from Ingram. And check out this article on advice on traveling in expensive cities.