Modelling International Tourism Demand and Implications of Its Volatility for Sri Lanka at a Disaggregate Level

Abstract

In some developing countries, tourism-led economic development strategies have been used to accelerate growth, generate employment opportunities, increase foreign exchange earnings and poverty reduction. To maximise benefits from tourism, appropriate policy decisions, infrastructure development and conducive business environments need to be developed. In order to make correct policy decisions, detailed studies on the demand side of tourism are needed in these countries. Sri Lanka is used as a case study in this thesis as it has identified tourism as a driving force of economic development since the end of the three decades war in May 2009. The thesis consists of four studies examining various aspects of tourism demand with an intention of providing policy inputs for tourism planning and management. The main purpose of the first study was to develop reliable and accurate forecasting models for total international arrivals in Sri Lanka and its top 10 source countries, using Seasonal Autoregresive Integrated Moving Average (SARIMA) method and monthly arrival data. Results demonstrate that (a) achieving Sri Lankan Government’s forecast of four million tourist arrivals by 2020 is highly unlikely, (b) accurate forecasting is necessary for tourism strategies and planning, and (c) the SARIMA method provides accurate forecasts in the presence of seasonality. The second study investigated whether political violence affects the persistence of volatility and the interdependencies between source markets using Autoregresive Integrated Moving Average – Generalised Autoregressive Conditional Heteroskedasticity (ARIMA-GARCH) and Autoregresive Integrated Moving Average- Glosten-Jagannathan-Runkle GARCH (ARIMA-GJR) models, and Dynamic Conditional Correlation (DCC) GARCH (1,1) models. The major findings of this study include that political violence leads to higher volatility and asymmetric effects, and that interdependencies between source markets are time-varying. Political violence creates more fluctuations in the dynamic correlation. Asian source markets, except Japan, show the lowest interdependencies with other countries, while advanced countries exhibit higher interdependencies. The main purpose of the third study was to investigate the impact of institutional quality and globalisation factors on various types of tourism demand using panel data analysis of the annual data of 29 source countries. The analysis reveals that economic freedom is a significant determinant of leisure, Visiting, Friends and Relatives (VFR) and business tourism demand; whereas civil liberty is significant only for leisure and business tourism demand. This indicates the importance of a long-term approach to institutional reforms aiming at achieving higher levels of economic freedom and political freedom to develop the tourism industry, while taking measures to achieve political stability and lower political risk for tourism development. Our results confirm that trade between the destination country and origin country is positively related to other types of tourism such as leisure and VFR tourism, apart from business tourism. Furthermore, strong evidence was found that migration stock is positively related to VFR tourism only. The government and destination managers should take migration trends into account in tourism planning. Moreover, disaggregate study of demand is required and depending on aggregate tourism demand models could lead to false conclusions The main purpose of the fourth study was to identify the spillover effects of tourism demand among Sri Lanka, India and the Maldives using monthly data from January 2001 to September 2019. Evidence for spillover effects was found. These findings have important implications for policies. Firstly, as the Maldives and Sri Lanka are complementary destinations for international tourists, tour operators and government agencies from each country could work closely together in other countries when it comes to promoting and marketing tourism products. Moreover, joint tour packages which included attractions in both countries could be introduced. And the same is valid for the Maldives and Kerala. The findings from these studies are useful for government agencies and private establishments in the industry for their policy making, designing of promotional campaigns, and planning of infrastructure.