Tourism and economic growth nexus revisited: A panel causality analysis for the case of the Mediterranean Region

Highlights

• Panel unit root and cross-sectional dependence techniques were employed

• Causal relationship between tourism and economic growth was tested

• Bi-directional causality found for tourism receipts and economic growth in Europe

• Bi-directional causality found for tourism expenditures and economic growth in Asia

• No causality found between tourism and economic growth in Africa

Abstract

Tourism is perceived as an important source of foreign exchange that is used for financing economic growth. This study offers a modern approach to tourism-led growth and investigates the causal relationship between tourism and economic growth in the European, Asian and African countries that border the Mediterranean Sea. The study uses panel data for the period 1998–2011, and adopts a panel Granger causality analysis developed by Dumitrescu and Hurlin (2012) to assess the contribution tourism makes to economic growth in each country. The results indicate that the direction of causality between tourism and economic growth depends on the country group and tourism indicator. Furthermore, the European countries are better able to generate growth from tourism in the Mediterranean region.

Introduction

Current trends in the economic environment motivate governments to find and subsidise productive sectors to solve macroeconomic problems such as growth, unemployment and fiscal or monetary instabilities. Tourism is one of the sectors that supports policy makers in overcoming these problems by supplying foreign exchange that can be used for financing foreign/domestic debts, creating regional employment opportunities that are crucial in coping with unemployment and promoting construction, transportation, accommodation and food/beverage sectors that, in turn, foster economic growth by providing added value. In addition, this sector also creates convergence across countries by transferring income from developed countries to developing ones. Thus, policy makers can benefit from tourism as a policy instrument for reducing regional welfare inequalities.

Despite these benefits, Balaguer and Cantavella-Jorda (2002) argue that, in a more traditional sense, tourism provides foreign exchange that is necessary for importing capital goods for production leading, in turn, to economic growth. From this perspective, the contribution of tourism to economic growth is called the tourism-led growth hypothesis, which is a simple reflection of the export-led growth hypothesis.

As in the energy-growth nexus, it is possible to construct the tourism-led growth hypothesis under four different lines (Ozturk, 2010). First, the growth hypothesis refers to a situation in which tourism plays a vital role in the economic growth process either directly and/or as a complement to other production factors. The growth hypothesis is supported if uni-directional causality is found from tourism to economic growth. In this case, policies aimed at subsidising tourism will have a positive impact on economic growth. Second, the conservation hypothesis means that economic growth is the dynamic that strengthens the tourism sector. The validity of the conservation hypothesis is proven if there is uni-directional causality from economic growth to tourism. In this situation, transferring subsidies from tourism to another sector will not have a negative impact on economic growth. Third, the feedback hypothesis denotes a reciprocal relationship between tourism and growth. The feedback hypothesis is supported if there exists bi-directional causality between tourism and economic growth. In the case of the validity of this hypothesis, tourism conservation policies may decrease economic growth performance, and similarly, chances of economic growth are reflected back to the tourism sector. Fourth, the neutrality hypothesis indicates that tourism has no effect on economic growth. The absence of causality between tourism and economic growth provides evidence for the presence of the neutrality hypothesis. In this context, by employing two different indicators (i.e., international tourism receipts and international tourism expenditures), this study aims at investigating the causal relationship between tourism and economic growth in the European, Asian and African countries that border the Mediterranean Sea by employing the panel Granger causality test of Dumitrescu and Hurlin (2012).

The paper is organised as follows. The next section reviews the literature and describes the novelty of the research. Section 3 presents the data, methodology and results. Finally, Section 4 concludes the paper.