Elsevier

Tourism Management Perspectives

Volume 28, October 2018, Pages 62-70
Tourism Management Perspectives

Testing the role of tourism and human capital development in economic growth. A panel causality study of micro states

https://doi.org/10.1016/j.tmp.2018.08.004Get rights and content

Highlights

  • Tourism is an attractive source of revenue.

  • Human capital development contribute more to economic growth.

  • Micro states appears to have diversify their economy.

  • Application of sound and reliable panel econometric methods.

Abstract

The tourism sector over the years has become an integral part of economic growth strategies and determinants. This study seeks to investigate the contribution of the tourism sector to economic growth of the micro states over the period 1995–2015, using second generation panel approach that accounts for cross-sectional dependence, by incorporating investment in human capital as an additional variable. The causal relationship and interaction between tourism, investment in human capital and economic growth is examined by employing the Granger causality testing approach introduced by Dumitrescu and Hurlin (2012). Our empirical results provide evidence in support of tourism-induced growth, tourism-induced human capital development and human capital development-induced growth. Over the sampled period, it appears tourism sector has not been contributing substantially to export earnings and economic growth. This might have led the policymakers in these states to diversify their economy from being tourism-dependent to human capital-based.

Introduction

Globally, the travel and tourism industry has experienced a tremendous increase in the recent years. In spite of the geopolitical agitation and moderate economic growth the developing and developed economies are experiencing, the travel and tourism industry is still performing well across the globe. The sector has been argued to account for a giant share of the World Gross Domestic Product (WTTC, 2008). Tourism industry is estimated to contribute about 9% share to global GDP, which is approximately about 7 trillion USD, and has also reduced global unemployment by creating employment opportunities in tourist centers (Koens & Wood, 2017), given the significant increase in the number of international tourists travelling around the world. Tourism over the years has led to positive exploitation of economies of scale in national firms (see Andriotis, 2002; Croes, 2006; Fagence, 1999; Lin & Liu, 2000). According to the World Travel and Tourism Council (WTTC, 2015), the sector (i.e. the travel and tourism industry) is expected to grow about 4% annually, a speedy rate when compared with the expected growth rate in the manufacturing, financial and transportation sectors respectively.

It is paramount to note that governments and policymakers in most of the micro states1 have prioritized the travel and tourism industry in order to maximize economic growth and competitiveness. According to the report of the World Economic Forum 2015, out of 141 economies across 90 indicators that were sampled to estimate travel and tourism competitiveness index, micro states were reported to prioritize travel and tourism industry more than the other larger countries in their quest for economic growth and development. The travel and tourism sector has been made a primary concern of the governments of these economies (Louca, 2006), while huge shares of the public funds have been channeled to develop projects, coordinate actors and make available resources necessary to promote and develop the sector. With the huge support this sector has received from the government, the travel and tourism sector has become attractive to both individual and private investors. Prioritizing travel and tourism means the governments of these economies have been playing a bigger role in attracting tourists through various fairs, exhibitions and national marketing campaigns (Louca, 2006).

The gesture of increasing government spending, branding/rebranding and several marketing campaigns towards travel and tourism is indicative of the value these countries attach to their travel and tourism sector. This raises our curiosity to examine in a panel study the contribution of the tourism sector over the years (considering data availability) to the economic growth of these micro states who have prioritized and committed physical, human and economic resources to develop their tourism sector. We aim to achieve the study objective by examining the direction of dynamic causality relationships between tourism and economic growth in the case of the micro states.

There has been growing attention regarding the controversy surrounding the tourism-induced growth hypothesis. According to Balaguer and Cantavella-Jorda (2002), the motivation behind this argument has been fueled by the extensive literature on the export-led growth hypothesis coupled with the contemporary models of non-tradable goods. Few studies have been carried out on tourism-led growth hypothesis when compared with the extant literature on the export-led growth hypothesis. Rather, most of the existing literatures focus on the relationship that exists between tourism and economic growth (Albalate & Bel, 2010; Choi & Sirakaya, 2006; Dritsakis, 2004; Dwyer & Forsyth, 2008; Falk, 2010; Hall, 1998; Holzner, 2011; Sinclair, 1998), and some studies on the relationship that exists between foreign trade and international tourism (Kulendran & Wilson, 2000; Shan & Wilson, 2001). However, on the tourism-led growth hypothesis, Balaguer and Cantavella-Jorda (2002) found an argument in support of the tourism-induced economic growth hypothesis in their analysis for Spain. Gunduz and Hatemi-J (2005) confirmed the tourism-led hypothesis for Turkey, while Oh (2005) failed to provide evidence for the Korean economy. The contradictory outcomes obtained and reported from the studies discussed above emerge from a number of factors such as different policies regarding tourism development in these individual countries and statistical or econometric techniques employed in the estimation analyses.

An extensive number of studies have examined the tourism-induced growth hypothesis for various countries and regions. Most of these studies examine this relationship by using either time series (see Katircioğlu, 2010a; Katircioğlu, 2010b; Tang & Tan, 2015) and/or panel data (see Antonakakis, Dragouni, & Filis, 2015; Brida, Cortes-Jimenez, & Pulina, 2016; Ivanov & Webster, 2007; Seghir, Mostéfa, Abbes, & Zakarya, 2015; Tugcu, 2014) econometric techniques, either through cointegration analysis or causality analysis or both. Recent papers incorporate some additional and significant variables such as energy consumption, foreign direct investment, exchange rate and human capital development (Akadiri, Akadiri, & Alola, 2017; Roudi, Arasli, & Akadiri, 2018) among others so as to account for omitted variable bias and also for these additional variables to serve as alternative determinants of economic growth, especially when dealing with a tourism earnings-dependent economy, such as in the case of micro states. However, in this paper, we evaluate the relationship between tourism and economic growth by incorporating investment in human capital for two purposes, omitted variable bias and as an alternative growth indicator. The literature on the causal relationship between tourism and economic growth has been extensively researched for various countries and/or regions. For instance, recent studies of Katircioğlu (2010a), Lean and Tang (2010), Arslanturk, Balcilar, and Ozdemir (2011), Gunduz and Hatemi-J (2005), Tang and Abosedra (2014), Akadiri et al. (2017), and Roudi et al. (2018) are all in line with the findings of Katircioğlu (2010b) where evidence was found in support of tourism-led growth hypothesis. Most of the previous studies have come to a conclusion that the tourism sector has a significant role to play in the economic growth of any tourist destination. However, these studies (Akadiri et al., 2017; Arslanturk et al., 2011; Gunduz & Hatemi-J, 2005; Katircioğlu, 2010a; Lean & Tang, 2010; Roudi et al., 2018; Sokhanvar, Çiftçioğlu, & Javid, 2018; Tang & Abosedra, 2014) appear not to elaborately examined, channels, through which these inherent benefits of tourism were maximized and its contributions to economic growth. Thus, we aim to fill this gap in literature.

This study also seeks to add to the existing literature on tourism-led growth hypothesis and to provide unique and current evidence to this theory in the case of the economies discussed above. These micro state countries merit the attention of several authors in the tourism-growth literature as the significance of tourism to the panel of countries is well acknowledged. These countries include Malta (Boissevain, 1977; Katircioglu, 2009a), Cyprus (Katircioglu, 2009b; Sharpley, 2003), Mauritius (Durburry, 2004), Singapore (Heng & Low, 1990; Lee, 2008), Spain (Balaguer & Cantavella-Jorda, 2002; Nowak, Sahli, & Cortés-Jiménez, 2007), Estonia (Jaakson, 1996) Seychelles (Archer & Fletcher, 1996) Barbados (Archer, 1984; Chase & Alon, 2002; Levy & Lerch, 1991), Iceland (Jóhannesson & Huijbens, 2010; Olafsdottir & Runnström, 2009) and small island developing states (Akadiri et al., 2017; Roudi et al., 2018).

Tourism has been seen as the most crucial source of foreign currency earnings in most of the tourist destinations in the world. However, statistical data from the World Development Indicators (WID, 2017) reported in Table 1 reveal that on average over the last 20 years, increase observed in international tourist arrivals within these micro states are not commensurate with the share of tourism receipts, both in export earnings and real gross domestic product. In contrast to the rise in tourist arrivals, the share of tourism receipts in export and real gross domestic product rapidly declined within the sampled periods.2 It is expected that the more international tourists arrive in a tourist destination, the higher should be the amount of tourist receipts, leading to an increase in economic growth. International tourists are expected to influence positively the economic growth of their host countries through increase in their consumption of domestic goods and services. However, the reverse seems to be the case in the sampled micro states. Increase in international tourist arrivals appears not to justify its course on export earnings and real gross domestic product. In addition, we observe that as share of tourism receipts on export earnings and real GDP decline, investment in human capital impact increases due to diversification of the economy.

One possible reason for this might be as a result of poor tourism marketing to attract capable and influential tourism lovers who are willing and able to visit and spend their resources in tourism host countries (see Hunt, 1975; Okumus, Okumus, & McKercher, 2007; Vellas & Bécherel, 1999). On the other hand, high cost of hotels and housing prices are capable of discouraging some tourists from patronizing registered hotels (Pattullo, 2005). They would rather source alternative housing (in order to spend less during their visit) which are generally not registered and do not count in the economic production activities of such tourist destinations (see Sharma & Dyer, 2009). Lastly, environmental degradation in terms of global warming (Pattullo, 2005), terrorism, political and economic instability (Sönmez, 1998) might be possible reasons to justify this phenomena. If there is one lesson we learnt from this juxtaposition, it is the fact that in validating tourism-induced growth hypothesis (see Katircioglu, 2009a; Katircioğlu, 2010a), whether this proposition is valid or not is not enough in tourism-growth literature to substantiate the impact of tourism on economic growth of the host country. It is equally important to study the trend in tourism, whether its benefits over time actually justify the costs in a real sense. This among other things motivated us to carry out this study.

In this paper, we examine the direction of causal relationship between tourism, human capital and economic growth by taking into consideration cross-sectional dependence in a panel-based model using second generation panel data techniques. Since inability to account for cross-sectional dependence in panel study can lead to spurious results and unreliable deductions and policy implications, we employ cross-sectional dependence test as proposed by Pesaran (2004) to test whether cross-sectional dependence is present or not. We also use panel unit root tests introduced by Maddala and Wu (1999) Fisher-type, and Pesaran (2007) to confirm the non-stationarity properties of the variables, while we employ panel bootstrapping cointegration testing approach proposed by Westerlund and Edgerton (2007) in examining long-run equilibrium relationships of the model. Lastly, we apply the Granger non-causality in heterogeneous panel-based test proposed by Dumitrescu and Hurlin (2012) to examine direction of causality, whether the variables employed in this study have predictive power over one another. This method is new, reliable and suitable for estimating direction of Granger causality relationship in panel data analysis compared to the asymptotic techniques.

This study seems to be among the few studies which have examined tourism-induced growth hypothesis in the case of micro states (Akadiri et al., 2017; Roudi et al., 2018), using second generation panel-based approach and incorporating the human capital development as additional variable. The novelty of this study lies in its application of new and more robust econometric techniques to substantiate the fact that tourism-induced growth hypothesis is still valid; however, international tourist arrivals do not necessarily mean increase in tourism earnings, as share of tourism receipts in export earnings and real GDP has been declining over the years. Based on our empirical results, we are of the opinion that tourism contribution towards export earnings and GDP has been on a decline in the last 20 years, although tourism still stimulates and contributes to growth, just not as substantially as expected in the micro states. Simply put, tourism contribution to export earnings and growth is overrated in the case of micro states. As tourism contribution towards export earnings and economic growth declines, perhaps as a result of unfriendly tourism destination policies, environmental degradation (Akadiri & Akadiri, in press), costly airfares, high housing prices, terrorism and social unrest, governments and policymakers are diversifying their economies and shifting attention towards investment in human capital as an alternative determinant of economic growth in the case of micro states.

The rest of the paper is structured as follows; section 2 provides an overview of tourism and human capital development in the micro state, section 3 presents the data and methodology employed, results and empirical findings are discussed in section 4, and the final section concludes the study.

Section snippets

An overview of tourism and human capital development in the micro states

Tourism has been identified as a potential economic growth sector in micro states. As a growth sector, tourism offers one of the rare opportunities for economic diversification (see Lin & Sung, 1984; Morakabati, Beavis, & Fletcher, 2014 and Sharpley, 2002) especially in micro states. Tourism has various interconnections with other economic sectors in such a way that if the sector is adequately incorporated into any nation's strategic developmental plans, with sufficient provisions for

Data and methodology

There are various possible ways one can measure the level of tourism. One of the means is through tourist receipts. Tourist receipts account for the level of earning generated by international tourists or foreign visitors. Another means is through the number of days or nights spent by foreign visitors and also through the number of international tourist arrivals. For the panel countries, the data on real GDP, tourist arrival and tourist receipt is obtained on the World Bank Database (online)

Results and empirical discussion

In this section, we discuss the results obtained from the panel empirical estimations. Before reporting the Granger causality analysis, we estimate the panel unit root tests and the cointegration test. For the unit root, we perform the Maddala and Wu (1999) and Pesaran (2007) tests. The estimated results from these unit root tests are reported in Table 3. For both tests, the null hypothesis of order I(0), that is, the variables are integrated of zero order, the estimated statistic tests are

Concluding remarks

The tourism-induced growth hypothesis was analyzed within the context where the level of tourism, economic growth and investment in human capital across micro states were controlled for. To establish reliability and trustworthiness of employing the recent panel data techniques which are sensitive to asymptotic attribute of time, we make use of annual frequency data for the available periods. We take into consideration cross-sectional dependence in order to observe the presence of common

Conflict of interest declaration

There is no conflict of interest for this submission.

Authors contribution

Amin Fahimi is a postgraduate student as the Department of Banking and Finance at Eastern Mediterranean University. I am currently supervising his postgraduate thesis. This manuscript is an extract from his thesis.

Seyi Saint Akadiri is an Instructor at the Department of Economics at Eastern Mediterranean University. I supervise, edit, correct and make suggestions where necessary for Amin's thesis and on this manuscript.

Mehdi Seraj is a PhD candidate at Department of Economics at Eastern

Amin Fahimi is a postgraduate student as the Department of Banking and Finance at Eastern Mediterranean University. His research interest include environmental tourism, tourism economics, and financial management.

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    Amin Fahimi is a postgraduate student as the Department of Banking and Finance at Eastern Mediterranean University. His research interest include environmental tourism, tourism economics, and financial management.

    Seyi Saint Akadiri is an Instructor at the Department of Economics at Eastern Mediterranean University. He is currently teaching finance related courses. His research interests include economic growth, energy economics, environmental economics, tourism economics, food policy and forecasting.

    Mehdi Seraj is a PhD candidate at Department of Economics at Eastern Mediterranean University where he is a PhD candidate in Economics. His research interests include economic growth, environmental economics, and tourism economics.

    Ada Chigozie Akadiri is a PhD student in the Department of Economics at the Eastern Mediterranean University. Her research interest includes economic growth, macroeconomics theory and policy, energy economics, environmental tourism and development economics.

    We would like to thank three anonymous referees for many helpful comments. However, any remaining errors are solely ours.

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