Tourism Led Growth Hypothesis in ASEAN

This is my latest working paper on the growth and ASEAN members. I am estimating economic growth in ASEAN using the hypothesis that tourism has a major role in economic growth since it creates a lot of backward and forward linkages as well as employments since it is labor-intensive industry. I use GMM dynamic panel analysis techniques using the data from the World Bank (2015) and the Penn World Table (Summers-Heston, 2002). ASEAN consists of nine countries; Brunei,Cambodia, Indonesia, Malaysia, Lao, the Philippines, Singapore,Thailand and Vietnam.

Introduction

International arrivals who visit and spend time in their travel destination create demand for goods and service in the destination countries. The demand for accommodation, food, transportation facilities and entertainment services are stimulated from the expansion in the tourism industry. In the developing countries, tourism industry can increase the current level of production, employment and income. Therefore, tourism industry may contribute significantly to both economic growth and employment in the destination countries and regions. Using Keynesian model of an open economy, tourist expenditure is counted as the service that the country exports and it is a stimulus to consumption of the visitors. The multiplier effect links the increase in export to the increase in production, income, market prices and exchange rates. From the macroeconomic point of view, tourism creates economic growth and employment.

Tourism is a part of service which has increasing share in the GDP component of the ASEAN countries. In 2012. service sector accounted for the highest share of GDP in eight ASEAN Member States. In 2008, it was the main source of national income only in six ASEAN countries (ASEAN Secretariat, 2013). Therefore, since the service sector become the main driver of growth. A strong evidence of tourism-led growth hypothesis can lead to an effective growth policy implications. ASEAN tourism industry has played a significant role in the economic growth of the region. Countries in ASEAN attracts tourists from their charm of culture, history, weather and natural resources. It is an interesting question that how much the tourism industry has effects on the overall economic growth in this region.

When we consider the tourism statistics in ASEAN, the tourist’s spending in each country in ASEAN is presented in table 1, calculated using total tourism receipts (Current US Dollar) per number of tourist arrivals. From table 1, in 2012 three countries that have highest tourist per capita among ASEAN countries are Singapore, Thailand, and Brunei. Three countries with the lowest tourist per capita are Lao, Cambodia and Myanmar. The overall trend of the tourist per capita is fluctuate during 1995-2012. In Lao, Malaysia, Myanmar, Thailand and Singapore, the tourists per capita dropped in 2005 compared to 1995 figures and picked up again in 2012. In Brunei, the Philippines and Vietnam, the tourist per capita has an increasing trend in seventeen years. In Cambodia, the trend increased in 2005 then slightly dropped in 2012. For the number of international arrivals, Malaysia, Thailand and Singapore are the countries that have highest number of visitors in 2012. The highest growth of the numbers of international arrival is in Lao in 2012 at 21.8.45% compared with the number in 2005. Cambodia’s visitors in 2005 compared to 1995 increased by 546.36%. In 2012, Cambodia’s number of international arrivals increased 152.04% compared to the number in 1995. Vietnam is another country with a high growth in the number of visitors. In 2005, there was 157.36% increase compared with 1995 and 96.95% increase in 2012 compared to 2005. Myanmar in 2012 compared with 2005 had a significantly increase at 155.60%. Among other countries in ASEAN, the number of international visitors has increased substantially during seventeen years as well.

Table 1 Tourists per capita in ASEAN for 1995, 2005, and 2012 (Current US Dollars)

1995 2005 2012
Brunei N/A 1515.87 1617.83
Cambodia 322.73 653.31 558.04
Indonesia 1209.30 1018.39 1176.40
Lao 866.67 212.80 215.42
Malaysia 675.3247 632.28 808.97
Myanmar 1444.44 357.76 749.36
Philippines 648.30 1050.32 1146.74
Thailand 1331.56 1046.25 1688.29
Singapore 1253.87 877.10 1735.54
Vietnam N/A 661.49 997.37
*Brunei data in the 2012 column is the tourists per capita in 2009 from the data availability limit.
**Myanmar data in the 2012 column is the tourists per capita in 2011 from the data availability limit.

Table 2 Number of International Tourist Arrivals (person)

1995 2005 2012
Brunei N/A 126,000 209,000
Cambodia 220,000 1,422,000 3,584,000
Indonesia 4,324,000 5,002,000 8,044,000
Lao 60,000 672,000 2,140,000
Malaysia 7,469,000 16,431,000 25,033,000
Myanmar 117,000 232,000 593,000
Philippines 1,760,000 2,623,000 4,273,000
Thailand 6,952,000 11,567,000 22,354,000
Singapore 6,070,000 7,079,000 11,098,000
Vietnam 1,351,000 3,477,000 6,848,000

Source: World Bank, World Economics Indicators, 2015

From the outstanding performance of the tourism industry in ASEAN, we can see that it has been expanding more than two decades. Since the tourism sector is becoming a great player in GDP of ASEAN countries, the research on the relationship between the performance of tourism sector and GDP can provide crucial information for policy formulation and strategic planning by the government, as well as the tourism businesses. This study estimates the relationship between GDP per capita in nine countries which are members of ASEAN during 1995-2011 using dynamic panel data analysis. The results confirm that the better performance of the tourism industry lead to higher GDP per capita among these countries. Other significant factor determining GDP per capita in this model are human capital, government consumption share, and the trade openness.

 Data and Variables

The data used in this study is from the Penn World Table (Summers-Heston, 2002) and the World Development Indicators (World Bank, 2015). Due to availability of data, the panel data consists of seventeen years periods from 1995 to 2011 in nine countries in ASEAN which consist of Brunei, Cambodia, Indonesia, Lao, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

To test the relationship between tourism and economic growth, we have used the flowing variables, which are standard in the endogenous growth literature (Barro, 1991 and Barro and Sala-i-Martin, 1995):

  • Tourism Arrivals as Population Proportion (T) is used to represent the tourism activity in the country. The study used number of international inbound tourists as a ration to total population.
  • Real Gross Domestic Product or per capita in the previous period (GDP-1) is used to measure conditional convergence and a negative sign is expected;
  • Index of Human Capital Per person, based on years of schooling (HC) is used as a proxy for human capital and a positive sign is expected. Index of human capital per person data is from Penn World Table, calculated based on years of schooling (Barro and Lee, 2012) and returns to education (Psacharopoulos, 1994);
  • Investment-Output Ratio (I/Y) is used as a proxy of physical capital investment and a positive sign is expected. The study used share of capital formation at current PPP from the Penn World Table to represent this variable;
  • Openness export plus imports to output ratio (OP) is used to measure the impact of the openness to the economic growth, positive sign is expected;
  • Government Consumption-Output Ratio (G/Y) is used to measure long-run crowding-out and the overall negative effect of government consumption in the long-run growth;

Estimation Result

estimation result

Conclusion

Southeast Asian countries have attracted international visitors to appreciate their beauty of culture, nature and people. Tourism industry have been growing share in the GDP of this region. This study tests the tourism-led growth hypothesis which states that tourism industry can bring sustainable economic growth in the long-run. The study empirically estimate the contribution of the tourism sector to GDP per capita in the nine ASEAN countries which consist of Brunei, Cambodia, Lao, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam during 1995-2011. The method used in this study is dynamic panel data analysis using Generalized Methods of Moment (GMM). The variables which this study hypothesized to influence the GDP per capita are number of tourism arrivals as a proportion of population, level of human capital which is represented by human capital index, trade openness, share of investment to the output and share of government consumption to the output. The Arellano-Bond dynamic panel data estimator shows that for the ASEAN countries, the tourism arrival proportion of population is a significant role in GDP per capita. This result confirms the tourism-led growth for ASEAN countries.

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