Geopolitical-Risk and Economic Policy—Uncertainty Impacts on Tourist Flows from Neighboring Countries: A Wavelet Analysis

Alisa Kazakova,Insin Kim

doi:10.3390/su132413751

Abstract

This paper investigates the nexus of geopolitical risks (GPRs), economic policy uncertainty (EPU), and tourist arrivals in South Korea. Specifically, this research examines whether arrivals from neighboring tourism source countries (i.e., China and Japan) are influenced by geopolitical events and economic volatilities in South Korea. To establish the research purpose, we investigated the relationships among GPRs, EPU, and tourism demand by using monthly data from January 2003 to November 2019. Additionally, innovative techniques (continuous wavelets, wavelet coherency, and wavelet phase difference) were employed, which allow the decomposition of time series considering different time and frequency components. The results demonstrate inconsistent and heterogeneous co-movements between variables that are localized across different time periods and frequencies. In addition, we detected several significant coherencies that prove the important role of GPR and EPU in explaining changes in the numbers of tourists arriving in South Korea from China and Japan. In terms of time domain, negative and positive correlations in tourism demand were detected, meaning that economic and geopolitical shocks may not always lead to negative consequences. From the frequency domain, the causal effects of GPR mostly appear to have short- to mid-run implications, with almost no relationship in the low-frequency band, whereas EPU holds a heterogeneous influence varying short-term to long-term, including higher to lower frequencies. Results show the resilience of the tourism industry against the transient effects of economic and geopolitical shocks. Tourists become adversely affected by external events such as geopolitical risks and economic uncertainties, but the impact is not consistent over time for tourists from countries neighboring Korea. The findings provide a deeper understanding of how crisis events, including political instability and economic fluctuations, can affect inbound tourism in geographically and historically interrelated countries. Therefore, to minimize the negative effect on tourism demand, it is important for practitioners to consider potential external threats when making forecasts.

Highlights

Tourism has emerged as a significant contributor to a country’s economy, where the inflow of tourists results in the creation of more opportunities to provide services, the attraction of foreign investment to promote development, currency-exchange earnings, and tax-related revenues from tourism activities [1,2,3]
In a study by Saint Akadiri et al [14] conducted in Turkey, the findings demonstrated that both tourism development and economic growth are reduced during periods with high levels of geopolitical risk
In another study on the impacts of geopolitical risks (GPRs) and economic policy uncertainty (EPU) on tourism in a developing state (i.e., India) by Tiwari et al [3], the results revealed that EPU appeared to have shortrun consequences on tourist arrivals

Summary

Introduction

Tourism has emerged as a significant contributor to a country’s economy, where the inflow of tourists results in the creation of more opportunities to provide services, the attraction of foreign investment to promote development, currency-exchange earnings, and tax-related revenues from tourism activities [1,2,3]. The extant literature reports examples of evidence confirming the impact of tourism on economic expansion. A positive correlation was detected between the tourism sector and economic development with the former substantially contributing to the generation of economic benefits [5]. Several studies have demonstrated a positive causal relationship existing between the tourism industry and economic expansion (GDP) [6,7]. Recognized as an industry largely enhancing sustainable socio-economic growth of destinations, it is important for host countries to actively provide a proper tourism environment to attract visitors from across the globe [3,8].

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