Tourism development and economic growth: the Validity of the Tourism-Led Growth Hypothesis for Madeira

Abstract

Most island´s economies, such as Madeira, are confined to maximizing opportunities in the sectors not constrained by market proximity, as in the case of tourism. Previous empirical studies have mainly applied econometric models to find and characterize the relationship between tourism development and real GDP in the long run. While a few studies fail to corroborate this relationship due to its complex nature, most studies confirm the Tourism-Led Growth Hypothesis (TLGH) that links the economic growth on islands to THE tourism sector. This paper explores the validity of the tourism-led growth hypothesis for Madeira using annual data from 1978 to 2019. The results of the cointegration tests point to a positive long-run relationship between tourism receipts and economic growth. Moreover, the analysis of the short-run dynamics, based on a VECM reveal that this long-run linear relationship is stable. However, we need to the taking into account the existence of structural breaks, and a change of regime, and therefore sources of instability. From a “causality” point of view, the main finding suggests that there is long-run causality running from tourism to GDP but not the opposite. The overall results corroborate the widespread view of the region´s over-dependence on the tourism sector