Managing economic growth through tourism: Does volatility of tourism matter?

Abstract

Tourism is one of the fast growing industries but being threatened by several challenges making it highly vulnerable. Therefore, this study investigates the impact of tourism and its uncertainty on economic growth. The analysis is carried out by using the panel of 155 counties and for the different income groups over the period 1971–2017. Initially, basic panel data approaches such as ordinary least squares, fixed and random effects models were utilized for estimation. The results confirm that international tourism help in achieving high economic growth, however, its uncertainty deter the growth effects. Moreover, the results of Granger causality confirm the bidirectional causality between tourism, tourism volatility and economic growth providing an evidence of endogeneity problem. Hence, to address this issue, system GMM estimator is used by introducing the instruments in economic growth model and the results of system GMM also confirm fixed and random effects findings. Further, the results for different income groups indicate the similar impact of tourism and its volatility on economic growth of low-income countries (LICs) and middle-income countries (MICs). The findings for upper income groups are, however, insignificant signaling that growth contribution of tourism and its volatility is not significant in these economies. The impulse response function highlights that response of economic growth to tourism and its volatility varies depending upon the income groups. Variance decomposition analysis, on the other hand, shows that in all income groups the influence of tourism and its volatility is strong in the long run. Based on findings, it is suggested that government should provide tourism facilities to ensure sustainable tourism for gaining high economic benefits mainly in LICs and MICs.