Causality Between Tourism And Economic Growth: Evidence From Sub Saharan Africa (SSA)

The tourism industry is among the largest and fastest growing sectors in the world. The contribution of tourism towards economic growth has become increasing important and many governments have incorporated several measures to upgrade their tourism industries in order to enjoy the benefits associated with a vibrant tourism sector. While some scholars found evidence supporting the tourism-led growth hypothesis (TLGH), there is also evidence that economic growth causes tourism development and that there exists a bidirectional causality between economic growth and tourism development. This study attempts to understand the relationship between tourism development and economic growth in Sub-Saharan Africa (SSA). Specifically, the current study examines causality between tourism development and economic growth for 10 SSA countries using annual time series data for the period 1994-2014. Our empirical methodology consists of unit root tests, cointegration analysis, vector error correction modeling and Granger causality testing for each country included in our sample. In order to control for the potential indirect relationship between tourism and economic growth, our empirical analysis incorporates the ratio of trade to GDP and the ratio of capital formation to GDP in a multivariate setting. Our empirical results showed support for the economic growth-led tourism development hypothesis, and the tourism-led growth hypothesis for 40% and 60% of the countries included in the study, respectively. The economic growth-led tourism development result suggests that 40% of the SSA countries mostly used their incomes to improve their tourism infrastructure with the objective of accelerating long-run economic growth. On the other hand, 60% of the SSA countries depend in part on tourism revenues to drive economic growth. In addition, the differences in the direction of causality across SSA countries could be due differences policies governing the tourism industry, colonial origin and other country specific institutional factors. We suggest different policy implications for SSA countries based on our causality results. Countries for which results confirmed the tourism-led growth hypothesis should allocate resources toward supporting the tourism industry and tourism related industries this will benefit economic growth. Alternatively, countries with results consistent with the economic growth-led tourism development should allocate their resources other sectors such as the manufacturing sector as well as the tourism industry and tourism related industries will benefit tourism development. Once developed, the tourism industry may help drive economic growth in these countries.