The Contribution of Tourism to Economic Growth: An Empirical Analysis for the Case of Chile

Abstract

International tourism is an important foreign exchange earner and an export for many low income countries as well as for developed ones. Nowadays many developing countries pay attention to economic policies for promoting international tourism as a potential strategic factor to development and economic growth. The tourism-led economic growth hypothesis (TLGH) postulates that tourism expansion leads to economic growth. It derives directly from the export-led growth hypothesis (ELGH) which states that the economic growth of countries can be generated not only by increasing the amount of labour and capital within the economy, but also expanding exports. Actually, exports generally contribute positively to economic growth through different ways: facilitating the exploitation of economies of scale, relieving the foreign exchange constraint, raising efficiency through increased competition and promoting the diffusion of technical knowledge.

In this paper we examine the contribution of tourism to economic growth in Chile. The objective is to investigate possible causal relationships among tourism expenditure, real exchange rate and economic growth using quarterly data from 1986 to 2007. We try to find a plausible answer to the question: "Does the tourism sector cause economic growth and/or can it be a key factor for the Chilean economy?". The hypothesis is tested empirically by using the Johansen cointegration test. In addition, a modified version of the Granger Causality test is performed in order to reveal the direction of causality between economic growth and tourism expansion. The results indicate that, during the last decades, economic growth in Chile has been sensible to the expansion of international tourism. The increase of this activity has produced multiplier effects over time. Recognition of the existence of a causal relationship between international tourism and economic growth has important implications for the development of different tourism marketing and policy decisions. In order to improve its economic growth performance, Chile, as empirical results support a tourism-led economic growth, should allocate more resources to tourism and travel industries prior to other segments.

Keywords: economic growth, tourism development, Johansen cointegration test, Granger causality

JEL Classification: O10, L83, C22