Authors: Shrabani Saha Lincoln International Business School, University of Lincoln, United Kingdom and Ghialy Yap, Business School, Edith Cowan University, Perth, Australia
Title: How Does Political Instability Influence the Effect of Tourism Demand on Economic Growth?”
Tourism is a growing industry in the world and it has a significant potential in generating foreign earnings and sustaining economic development for most countries. For the developing countries, tourism is one of the important sectors that generate source of tax revenue for the nations and could alleviate poverty. As tourism is a labour intensive sector, the rising demand for travel can create more employment opportunities within the countries and enhance economic growth. Despite the benefit of tourism to economic growth, this industry can be easily deteriorated by any political and social unrest incidence. Hence, this study investigates the effect of tourism demand on economic growth by employing the panel data for 137 countries over the period from 1995 to 2012, considering the role of political instability in each country as an absorptive factor. We employ panel fixed effects and system generalised methods of moments (SGMM) techniques to address the omitted variable biases and the endogeneity problems in the relationships. The estimation results indicate that although tourism demand alone does promote economic growth, however, it has a significant negative effect on economic growth when there a considerable level of political instability arises in a country. The threshold level of political instability separating the negative and positive effects of tourism demand on economic growth is approximately in the 25th percentile from the least politically unstable countries. The existence of a political instability threshold implies a counter-intuitive proposition: that tourism demand promotes economic growth where political instability is below a threshold level and inhibits economic growth in countries where political instability is above the threshold level. The marginal effects of tourism demand on economic growth based on quantiles of tourism revenue-gross domestic product (GDP) ratio illustrate that political instability reduces economic growth in middle-tolower quantiles. We use four different measures of tourism demand viz, tourism revenue, tourism revenue-gross domestic product ratio, tourist arrivals and tourist arrival per capita and our results are robust in various measures of tourism demand. Furthermore our results are robust in various estimation techniques.