Tourism and the Pacific Island economies

Abstract

This chapter outlines the economic contribution of tourism to Pacific Island economies and reviews secondary data outlining tourism’s contribution to gross domestic product (GDP) and other economic indicators. The work tests the tourism-led growth hypothesis (TLGH) for Pacific Island economies in these regions. The TLGH states that an expansion in international tourism paves the way for economic growth because international tourism increases foreign exchange earnings that contribute to capital goods, further stimulating economic growth and employment. Alternatively, economic growth can stimulate tourism income, the so-called growth-led tourism hypothesis (GLTH). This can occur when a growing economy can create tourism-related business opportunities or when economies of scale, due to economic growth, decrease costs for the tourism sector, making tourism more competitive. The work tests whether the TLGH or the GLTH holds for different Pacific Island economies. For many island economies, there are few direct corresponding relationships between tourism and economic growth; expectations include Palau, where tourism ‘Granger causes’ economic growth, and economic growth, in turn, ‘Granger causes’ tourism. For Fiji, economic growth ‘Granger causes’ tourism, while for the Solomon Islands and Vanuatu, tourism ‘Granger causes’ economic growth. Post-pandemic, much more re-structuring should take place to enable tourism to be an engine for economic growth.