Tourism Development and Economic Growth in Developing Countries

By Fkanayake, E. M.; Long, Aubrey E. | The International Journal of Business and Finance Research, January 1, 2012 | Go to article overview

Tourism Development and Economic Growth in Developing Countries


Fkanayake, E. M., Long, Aubrey E., The International Journal of Business and Finance Research


ABSTRACT

The objective of this study is to investigate the relationships between tourism development and economic growth in developing countries using the newly developed heterogeneous panel cointegration technique. This study examines the causal relationship between tourism development and economic growth using Granger causality tests in a multivariate model and using the annual data for the 1995-2009 period. The study finds no evidence to support the tourism-led growth hypothesis. The results of the FMOLS show that, though the elasticity of tourism revenue with respect to real GDP is not statistically significant for all regions, its positive sign indicates that tourism revenue makes a positive contribution to economic growth in developing countries. The results of the study suggest that governments of developing countries should focus on economic policies to promote tourism as a potential source of economic growth.

JEL: F43, L83, O40

KEYWORDS: Tourism, economic growth, panel cointegration, causality

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Tourism industry has emerged as one of the leading service industries in the global economy in recent decades. Economic flows generated by international tourism have become vital factors in economic growth and international economic relations in many developing countries. For example, according to the World Tourism Organization (2010), as a result of an ever increasing number of destinations opening up and investing in tourism development, modern tourism has become a key driver for socio-economic progress through the creation of jobs and enterprises, infrastructure development, and the export revenues earned. In addition, the contribution of tourism to worldwide economic activity is estimated at some 5% while its contribution to employment is estimated in the order of 6-7% of the overall number of direct and indirect jobs worldwide. According to the World Tourism Organization, between 1970 and 2009, there was a 48-fold increase in international tourism receipts rising from US$17.9 billion in 1970 to US$852 billion in 2009.

The importance of the tourism sector can further be understood based on recent statistics available from the World Travel & Tourism Council. According to the World Travel & Tourism Council's latest economic impact report (The World Travel & Tourism Council, 2011), the industry's direct contribution to global GDP increased by 3.3% in 2010 to US$1,770 billion and is expected to rise further by 4.5% to US$1,850 billion in 2011, creating an additional 3 million direct industry jobs. In addition, taking into account its wider economic impacts, travel and tourism's total economic contribution in 2011 is expected to account for US$5,987 billion or 9.1% of global GDP, and for 258 million jobs. The report also predicts that the direct contribution of travel and tourism to GDP is expected rise by 4.2% annually to US$2,860.5 billion (in constant 2011 prices) in 2021. In addition, the total contribution of travel and tourism to employment, including jobs indirectly supported by the industry, is forecast to be 258.6 million jobs (8.8% of total employment), visitor exports are expected to generate US$1,162.7 billion (5.8% of total exports), and total industry investment is estimated at US$652.4 billion or 4.5% of total investment in 2011.

Thus the tourism sector has become increasingly important industry to many developing countries as a source of revenue as well as a source of employment. Tourism generates a vital amount of foreign exchange earnings that contributes to the sustainable economic growth and development of developing countries. Given its increasing importance in the global economy, tourism sector has gained much attention in recent academic literature. According to Balaguer and Cantavella-Jorda (2002), international tourism would contribute to an income increase at least in two different ways as the export-led growth hypothesis postulates. …

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