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The Impact of Tourism on Economic Growth: The Case of Turkey

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 The Impact of Tourism on Economic Growth: The
Case of Turkey
Yusuf Akan
Department of Economics, Ataturk University, Erzurum, Turkey
İ brahim Arslan
Department of Economics, Gaziantep University, Gaziantep, Turkey
and
Cem IÕ k
Institute of Social Science, Ataturk University, Erzurum, Turkey

Abstract: Globalization tendencies appeared as an outcome of scientific and

technological innovations in 20th century impact the tourism sector as well as
most other sectors. Like in many developing countries, the tourism sector
accompanied by the change of sectoral structure in Turkey is the main element
which determines Economic Growth. This study investigates the causal relations
between Tourism Sector and Economic Growth for the economy of Turkey by
using Phillips–Perron test, Cointegration approach, Granger Causality test and
a Vector Autoregression (VAR) model over the period of 1985-2007. Discussion
is given related to these findings and the implications to the country’s Tourism
Sector and also future research.
ı

Keywords: Tourism Income; Economic growth; Phillips–Perron; Granger

Causality; Cointegration; VAR model.

Introduction

M ain purpose of this study is to test whether or not there is an affect

to the relationship between economic growth rate and tourism
incomes in Turkish economy between the years 1985-2007.
Obviously, these effects will vary from one country to another
according to a wide set of circumstances, such as natural resource, culture
and socio-economic environment of tourism destinations (Pao, 2004).

Tourism and Economic Growth

Over the past decades, tourism has been steadily increasing, as well
as the importance of the tourism industry for the economy of many

Journal of Tourism, Volume IX, 2007

© 2007 by Centre for Mountain Tourism and Hospitality Studies. All rights reserved.
 The Impact of Tourism on Economic Growth: The Case of Turkey

countries in the world. According to World Tourism Organization (WTO),

tourism in the world grew fantastically from 689 million arrivals in 2000
to 808 million arrivals in 2005, with an average annual growth rate of 6, 5
percent. (UNWTO, 2006).
In 2005, the tourism sector accounted for 3 % to 10% of the GDP of
developing countries (UNWTO, 2005). The contribution of tourism to
economic growth and development is reflected in the form of exports since
it represents 40 percent of all exports of services, making it one of the
largest categories of international trade (UNWTO, 2006). According to
the estimates of the World Tourism Organization (2000), the number of
international people movements around the world will surge to 1602 million
by 2020, while tourism receipts will reach some US$200 billion.
Furthermore, the World Tourism Travel Council (2005) expects that the
scale of the world tourism industry, which made up roughly 10.4% of the
world’s GDP in 2004, will increase to 10.9% in 2014. When all components
of the tourism industry are taken into account, tourism consumption,
investment, government spending and exports, the industry grew 5.9% in
2004 alone, reaching US$5.5 trillion. The 10-year growth forecast is for
US$9.5 trillion in 2014. (See apex 3)
International tourism would contribute to an income increase at least
in two additional ways as the export-led growth hypothesis postulates. In
the first place, enhancing efficiency through competition between local
firms and the ones corresponding to other international tourist destinations
(Bhagwati & Srinivasan, 1979; Krueger, 1980), and in the second place,
facilitating the exploitation of economies of scale in local firms (Helpman
& Krugman, 1985; Balaguer & Jorda, 2002).
The quick development of tourism led to a growth of household
incomes and government revenues directly and indirectly by means of
multiplier effects, improving balance of payments and provoking tourism-
promoted government policies. As a result, the development of tourism
has usually been considered a positive contribution to economic growth
(Khan, Phang, & Toh, 1995; Lee & Kwon, 1995; Oh, 2005). Despite the
fact that tourism industry is, nowadays, of major importance for the world
economy and that for many countries is one of the largest single employers
and exporting services sector, applied economists have paid little attention
to the empirical examination of possible contributions of this sector to a
country’s economy as Papatheodorou (1999) argues in his paper. (Balaguer
& Jorda, 2002). In addition, tourist spending has served as an alternative

2 Journal of Tourism, Volume IX, 2007

 Yusuf Akan, brahim Arslan and Cem IÕ1k

form of exports, contributing to an ameliorated balance of payments

through foreign exchange earnings in many countries.
As such, tourism-generated proceeds have come to represent a
significant revenue source, increasing employment, household income and
government income in countries worldwide (Oh, 2005). Consequently, it
is not surprising to imagine that tourism can be a viable export-oriented
economic growth strategy for bringing jobs and development to the people
and help in the reduction of abject poverty (Fayissa et al. 2007). The great
advantage of tourism sector is that it tends to be labor intensive, so an
increase in production is normally achieved by an increase in employment.
This is advantageous for those economies that need to decrease
unemployment, although it also produces a shock in the job market rising
wages in the service sector, inducing mobility across sectors.
Sinclair (1998) suggested that when we attempt to identify and interpret
the relationship between tourism and economic activity, we must consider
it from two viewpoints, the advantages and disadvantages of tourism
development. Tourism, like any other impetus for economic development,
potentially has both positive and negative influences on communities and
their residents. Generally speaking, the positive contributions that tourism
I&
can make include the provision of hard currency, which may help to alleviate
a gap in foreign exchange and finance imports of capital goods, increases
in personal income, higher tax revenues and additional employment
opportunities. Beyond this, tourism expansion also affects the demand for
certain goods and services (Syriopoulos, 1995), including transportation
facilities, such as roads and airports (Eugenio-Martín & Morales, 2004),
much of which is specific to tourism as opposed to a more general use.
Apart from this, tourism expenditure by foreign tourists can enhance
domestic tourism construction as well as bring about an accumulation of
physical capital, and the needs for skilled labor in the tourism sectors will
cause human capital investment to increase. Thus, the tourism sector may
contribute significantly to economic growth.
On the one hand, an increase in production and income; on the other
hand, since tourism sector is labor intensive, an increase in employment.
Thus, the tourism sector may contribute significantly to both economic
growth and employment in these regions. This is particularly relevant in
the case of regions with high rates of unemployment, low levels of per
capita GDP and with export products facing difficulties in competing
internationally (Martin et al.2003).

Journal of Tourism, Volume IX, 2007 3

 The Impact of Tourism on Economic Growth: The Case of Turkey

Contrary to many of the predictions in the extant literature, as Hazari

and Ng (1993) pointed out, tourism affects most of the tertiary and
nondurable goods consumption sector. It should follow that the possible
effects from an increase in domestic prices that normally tend to reduce
welfare would be more than compensated for by the positive effects on
the country’s overall welfare. Meanwhile, expenditures by foreign tourists
may also alter domestic consumption patterns via the so-called
demonstration effect, and this can, in fact, be inflationary. These foreign
demands for nontraded goods by tourists may create a monopoly power
distortion hence causing welfare reduction effect (Balaguer & Cantavella-
Jorda, 2002; Hazari & Sgro, 2004).
Taking a broader perspective, Sinclair (1998) suggested that the costs
incurred from an expansion of the tourism industry (including much of the
expenditure for the provision and maintenance of infrastructure in the form
of additional water, roads, airports, sanitation and energy), is specific to
tourism rather than for more general usage.
In a more traditional sense it should be argued that tourism brings in
foreign exchange which can be used to import capital goods in order to
produce goods and services, leading in turn to economic growth
(McKinnon, 1964). In other words, it is possible that tourists provide a
remarkable part of the necessary financing for the country to import more
than to export. If those imports are capital goods or basic inputs for
producing goods in any area of the economy, then, it can be said that
earnings from tourism are playing a fundamental role in economic
development. In this case, nontourist regions would also benefit from it as
a result of the distribution of a country’s wealth. (Balaguer & Jorda, 2002).
It is generally assumed that tourism expansion should have a positive
contribution to economic growth (Kim et al., 2006).
In short, associated with the economic benefits of tourism are the
adverse economic, socio-cultural and environmental impact extensively
reported by Liu and Var (1986), Long, Perdue, and Allen (1990) and Milne
(1990). They proposed taking a wide range of economic, environmental
and social costs of tourism development into account. Thus, the costs with
respect to societal decay are sacrifices that particular groups or regions
must bear as a result of the implementation of mass tourism in developing
countries. The other case of social cost or spillover effects of tourism
development are on flora, fauna, rainfall, local customs and other ecological
and sociological factors that ultimately touch the welfare of the citizens.

4 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

Also among the adverse effects are congestion due to the traffic from
additional vehicles, noise pollution arising from additional operations of
airports, motor boats, and so on.
Tourism imposes still other costs on the host country. Such costs
include increased pollution, congestion, or despoliation of fragile
environments (Gursoy & Rutherford, 2004). Dunn and Dunn (2002) also
maintain that crime and violence are another major problem affecting the
tourism industry in some countries, and as such, they incur costs for crime
control and maintaining and improving public security. As the natural
environment is an important component of tourism, it represents a double-
edged problem for policy makers, who may find it hard to make relevant
decisions since many tourists are attracted by nature, yet at the same time,
many citizens of the host country along with environmentalists wish to keep
the natural environment intact(Jenner & Smith, 1992; Pearce, 1985).

Tourism and Sustainability

The success of the tourism sector in a country depends on different

aspects. Tourists usually demand four main goods and services in a
location: accommodation, food, transportation facilities and entertainment
services. In most developing countries, to satisfy this demand, the current
level of production needs to increase.
Meeting a growing demand from tourism poses some critical
challenges. We argue that there are three main areas which policymakers
need to be concerned with: infrastructures, education and safety. The
development of infrastructures is vital in any tourism project.
In this area we include aspects such as: household utilities as water,
electricity and telephone and transportation facilities as roads or public
transport system. Furthermore, we can include other kind of tourist
infrastructures that may help to promote tourism to the region. Education
is also a necessary condition for the potential success of local people in
the tourist activities. It usually requires knowledge concerning different
sectors as communication (languages), catering, hospitality, and
transportation and management skills. Safety is usually a highly appreciated
feature in tourism resorts. Most of the tourists look for places to spend a
nice and non-problematic stay. In this sense, we can argue that most of
the tourists are risk averse. This is a very important issue to take into
account when assessing the competitiveness of a tourist destination (Martin
et al.2003).

Journal of Tourism, Volume IX, 2007 5

 The Impact of Tourism on Economic Growth: The Case of Turkey

Another critical feature of the tourism sector is the attractiveness of

the location to be visited. Sometimes they are natural sites, such as beaches
or mountains. In other cases they are cities or particular attractions within
the city. Many like Sinclair (1998), point out that developing countries are
in a superior position when it comes to offering natural resources such as
wildlife, coral reefs and spectacular natural sights, like canyons, caves,
falls, deserts and natural springs.
We can define any of these tourism resources, as possessing a natural
capital or cultural heritage.
Different tourism resources have different values given by local
citizens or visitors and they are heterogeneously affected by the impact
produced by visitors. Moreover, we argue that each tourism resource is
associated with a different depreciation rate and regeneration rate (Martin
et al.2003).
The discussion thus far has centered on a detailed appraisal of the
economic growth as well as the potential environmental, social, cultural
and political benefits and costs of tourism development.
In next section, time series techniques that closely follow the empirical
economic growth literature are employed to test the influence of tourism
variables on economic growth in a time series data. A Granger causality
test is performed following the co integration approach to reveal the
direction of causality between economic growth and tourism expansion.

Literature Review
In general, establishing the relationship between tourism and economic
growth is essential as this sector is increasing at impressive rates and
policy-makers are attributing to the sector major importance (Sequeira &
Campos, 2005).
Tourism is one of the largest industries in the world and one of the
fastest growing sectors of economic activity. As regards benefits, the
prevailing literature Pearce (1991) classifies the socio-economic impacts
on the national or regional economy as follows:
z Balance of payments: for many countries, tourism is often the main
source of foreign exchange earnings;
z Regional development: tourism frequently spreads economic activities
across the internal border of the particular country;

6 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

z Diversification of the economy: because of its multi-faceted nature,

tourism may foster solid economic development;
z Income levels: the income effects of tourism may give rise to wide
variations in income multiplier;
z Government revenue: the government earns revenues due to tax
collections, although it has been acknowledged that significant
expenditures for building and construction activities may also be
required;
z Employment opportunities: in most countries tourism is an important
source of employment, especially for the less-educated and unskilled
laborforce.
To see the significance of tourism in explaining economic growth, we
have used the following studies, which are comparison of the empirical
results for tourism development and economic growth.
Earlier studies about the relationships between tourism development
and economic growth are currently “unfortunately blurry” due to there
being different results for different countries in the same subject or region,
different time periods within the same country and different methodologies
in different regions (See table 1).

Table I
Presents previously reported empirical results for the relation
between tourism and economic growth.

Samples Authors Empirical Period Countries Causal

method relationship
One Balaguer and Error correction 1975–1997 Spain Tourism fi
country Cantavella- model growth
Jorda (2002)
Durbarry Error correction 1952–1999 Mauritius Tourism ¤
(2004) model growth
Dritsakis Error correction 1960–2000 Greece Tourism ¤
(2004) model growth
Ghali OLS 1953–1970 Hawaii Tourism fi
(1976) growth
Kim et al. Granger causality 1971–2003 Taiwan Tourism ¤
(2006) test growth

contd. ...

Journal of Tourism, Volume IX, 2007 7

 The Impact of Tourism on Economic Growth: The Case of Turkey

Samples Authors Empirical Period Countries Causal

method relationship

Narayan Error correction 1970–2000 Fiji Growth fi

(2004) model tourism
Oh (2005) Granger causality 1975–2001 Korea Growth fi
test tourism
Vanegas Granger causality 1980-2005 Nicaragua Tourism fi
et al. (2007) test growth

Cross- Eugenio- Panel GLS 1980–1997 Latin Tourism fi

section Martín and American growth (in
Morales countries low-and
(2004) medium-
income
countries but
not in high-
income
countries)
Lanza Almost ideal 1977–1992 13 OECD Tourism fi
et al. demand system countries growth
(2003) (AIDS)
Lee Error correction 1990–2002 for OECD Tourism fi
et al. model and growth
(2002) nonOECD Tourism ¤
countries growth

Note: “Tourism fi growth” denotes causality running from tourism development to

economic growth. “Growth fi tourism” denotes causality running from economic growth
to tourism development. “Tourism¤growth” denotes bidirectional causality between
tourism development and economic growth.

In a recent study of the economic growth performance of Greece,

Dritsakis (2004) shows that tourism has a long-run economic growth
effect. Using Spain’s economic data, Balaguer and Cantavella-Jorda (2002)
confirm the validity of tourism-led growth hypothesis for long-run economic
performance.
Many developing countries have thus started to consider tourism as
an important and integral part of their economic growth and development
strategies as it serves as a source of scarce financial resources, job creation,
foreign exchange earnings, and technical assistance (Sinclair, 1998; Dieke,
2004; Fayissa et al. 2007).
For example, using Spanish data from 1975 to 1997, Balaguer and
Cantavella-Jorda (2002) discovered a stable long-run relationship between

8 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

tourism and economic growth. After conducting a standard Granger (1969)

causality test, the authors further found that tourism affected Spain’s
economic growth in one direction, thereby supporting the tourism-led growth
hypothesis. Although the authors mentioned that the tourism-led growth
hypothesis is not specific to developing countries, it was not clearly stated
that the theory could be applicable to all countries.
Dritsakis (2004) examined the impact of tourism on the long-run
economic growth of Greece using a similar method. One co integrated
vector was found among GDP, real effective exchange rate and
international tourism earnings from 1960 to 2000. Granger(1969) causality
tests based on Error Correction Models indicated that there is a strong
Granger causal relationship between international tourism earnings and
economic growth, a strong causal relationship between real exchange rate
and economic growth and simply causal relationships between economic
growth and international tourism earnings and between real exchange rate
and international tourism earnings. In sum, his study supports both tourism-
led economic development and economic-driven tourism growth.
To date, articles that have analyzed the causal relationship between
economic growth and tourism activity are limited and results have been
mixed. Our a priori expectation was that because Taiwan and South Korea
have a similar economic structure such as being export-oriented economies
(Sengupta & Espana, 1994) and that traditionally neither country has
considered tourism as a leading industry, empirical results of this study
would be similar to Oh’s (2005) results (Kim et al., 2006).
However, Oh (2005) disagreed with the tourism-led growth theory.
After Balaguer and Cantavella-Jorda’s (2002) work, Oh (2005) counter-
argued that the existence of the tourism-led growth hypothesis in Spain
may be attributed to the fact that Spain is one of the world’s top recipients
of international tourist revenues.
Tourism earnings in Spain comprise approximately 5.9 percent of its
GDP (WTO, 2000). The author used South Korea as a destination country
for comparison. Although South Korea and Spain are both developing
countries, the tourism industry in South Korea is not as strong as Spain.
For example, value-added revenue derived from tourism-related activities
accounts for 3.5 percent of South Korea’s GDP (Bank of Korea, 2002).
In his study, the co integration analysis indicated no long-run link between
tourism receipts and economic growth in South Korea over the period from

Journal of Tourism, Volume IX, 2007 9

 The Impact of Tourism on Economic Growth: The Case of Turkey

1975 to 2001. He further found an economic-driven tourism growth instead

of a tourism-led economic growth, thereby implying that in South Korea,
economic growth led tourism expansion rather than tourism expansion
causing economic growth.
Nevertheless, Chen and Devereux (1999) argue that tourism may
reduce welfare for trade regimes dominated by export taxes, or import
subsidies. Using a theoretical framework, they demonstrate that foreign
direct investment in the form of tourism is, for the most part, beneficial
while tourist immiserization is also possible in Sub-Saharan Africa. Thus
we cannot, a priori, predict the direction of the impact of tourism receipts
(TRPit) on the economic growth of Sub-Saharan African economies, based
on the above discussions. (Fayissa et al. 2007).
An increasing amount of literature has analyzed the relationship and
causality between tourism and the economic growth rate, both in specific
countries (Durbarry, 2004 for Mauritius or Balaguer and Cantavella-Jord´a,
2002 for Spain) or in broader samples (Eugenio- Mart´ýn, Morales and
Scarpa, 2004 for Latin America). The first used standard time-series
methods to conclude that tourism had fostered growth in Mauritius and
Spain, while the second used a dynamic panel data method estimator to
provide evidence that the increasing number of tourists per capita caused
more economic growth in the low and medium-income countries of Latin
America, but did not contribute to economic growth in richer countries.
The test done by Braw, Lanza and Pigliaru (2003) for a broad cross-section
of countries is not robust to the possible existence of endogeneity of
tourism. Tourism may be correlated with human capital, geographic or
cultural features, for instance, and may not be an independent determinant
of growth. Thus tourism can possibly foster growth within countries,
demanding a qualified labor force or promoting competitiveness but it may
be not able to explain differences in growth patterns between countries
that may derive from other explanatory factors (Sequeira & Campos, 2005).
The results provide evidence supporting a long-run steady-state
relationship between GDP and tourism development. This means that the
two variables are causally related at least in one direction (Engle &
Granger, 1987).
However, does economic growth cause tourism development or does
tourism development lead to economic growth? Based on previous
research, three different empirical results can be found: bidirectional

10 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

causality between tourism and economic growth and unidirectional causality

with either the tourism-led growth or economic-driven tourism growth
hypotheses. As for policy implications, if there is clear-cut unidirectional
causality from tourism development to economic development, then making
strides in tourism growth (tourism-led economic growth) is the most
practical approach. If the outcome shows the opposite direction of causality,
then every effort should be made for overall economic growth as this, in
turn, will result in the expansion of the tourism industry. If there is no causal
relationship between tourism growth and economic development, then there
is no feedback effect between each other. Finally, if the relationship is
bidirectional, and tourism and economic growth have a reciprocal causal
relationship, then a push in both areas would benefit both (Lee & Chang,
2008).
Tourism has become an important sector especially in developing
countries due to its effect on the payment balance, employment and
creating income, its high added value, positive effects on infrastructure
and superstructure and its effects to other sectors (Roe, 2001).
Tourism has been regarded as a major source of economic growth.
Many governments carry out projects about infrastructure services in order
to redouble the tourism with economic growth (Nowak et al, 2003).
Especially, after 1990, the importance and form of tourism has mostly
changed by the effect of globalization. The opportunity to get true
information immediately about not only the place to go but also advertising
has been obtained (Pearce, 2001).
Generally tourism sector maintains many subcomponents. These
components are activated by employment, exporting, input and output of
exchange, the transportation component and similar components (Binns
& Nel, 2002).

Model Specification and Time Series Analysis

We obtain estimates of the relationship between economic growth and
tourism income on main macroeconomic variables. In this study effect of
tourism incomes on economic growth is investigated. In the study the data
of tourism incomes and economic growth rates are used for the period of
1985–2007. These data is compiled from Central Bank (CBRT) Electronic
Data Delivery System and Tourism Ministry for the 1985–2007 periods.
Each of the variables is purified from seasonal variations. Fig. 1 shows a

Journal of Tourism, Volume IX, 2007 11

 The Impact of Tourism on Economic Growth: The Case of Turkey

120

100

80

60

40

20

-2 0

-4 0
86 88 90 92 94 96 98 00 02 0 4 0 6

E G TI

Figure 1: Tourism Incomes and Economic Growth Rate variables from 1985 to 2007

wavy movement for Tourism Incomes and Economic Growth Rate

variables from 1985 to 2007.
To determine whether the variables used in regression equations are
fixed or not Philips-Perron test was used. In Philips-Perron test, the results
are shown in Table II obtained by unit root analyze in order to determine
whether time series are stationarity or not.
When the variables of interest are non-stationary or exhibit a unit root,
the procedures of conventional econometric technique may not be
appropriate (Eagle & Granger, 1987; Enders, 1995). Granger and Newbold
(1974) pointed out that in the presence of non-stationary variables, an OLS
regression might become a spurious regression, thereby leading to biased
and meaningless results. It is important to test stationary of time-series
data to set up an appropriate methodology in the formation of econometric
models (Eagle & Granger, 1987). (Kim et al., 2006).
The problem with Equation 1 could arise as a consequence of the
spurious regression phenomenon first described by Granger and Newbold
(1974). This is due to nonstationary trends in time series data. The mean,
variance, and autocorrelation of the series are in general nonconstant
through time, the coefficient of determination (R2) may simply capture
correlated trends and low Durbin-Watson (DW) statistics may reflect
nonstationary residuals.
In this case, as Phillips (1986) argues, OLS estimates do not converge
to constants and the standard t and F statistics do not even have the limiting

12 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

distributions. In view of this concern, one has to investigate whether a

series is stationarity in levels, I(0), or stationarity in differences, I(1), I
(2); . . . ; I(n), in order to apply the correct methodology, avoiding any
spurious inferences (Balaguer & Jorda, 2002).
As shown in Fig. 1, in growing economies such as Turkey, economic
time-series data are likely to be non-stationary. Therefore, prior to testing
a long-run equilibrium relationship between tourism expansion and economic
growth, the Phillips–Perron (Phillips & Perron, 1988) tests were carried
to examine the presence of a unit root for all study variables. Results of
both ADF and PP tests for stationarity are reported in Table 2. Judged by
McKinnon’s (1991) critical values, the null hypothesis of one unit root
against the alternative of stationarity cannot be rejected in levels of
variables, but is rejected in their first differences. In other words, time-
series data of LEG and LTI are integrated of the same order 1, I (1).
Therefore, we proceeded with a long-run equilibrium analysis using the
co integration technique. (Kim et al., 2006).
Before specification and estimation of co integration and VAR, it is
required to examine the stationarity of the variables. In brief, stationarity
means that the mean and the variance of a series are constant through
time and the autocovariance of the series is not time varying (Enders,
1995). Since a wrong choice of transformation of the data gives biased
results and has consequences for wrong interpretation, a test of stationarity
is important to set up the specification and estimation of the correct model
(Engle & Granger, 1987). Therefore, the first step is to test the order of
integration of the variables. Integration means that past shocks remaining
undiluted affects the realizations of the series forever and a series has
theoretically infinite variance and a time-dependent mean (Enders, 1995).
Phillips–Perron (PP) tests were employed to test the non-stationarity of
the variables (Phillips & Perron, 1988). The results of testing the order of
natural logarithm of GDP and Tour are provided in Table 1. The tests
strongly supported the null hypothesis of non-stationarity before differencing
the variables and the first differenced series of GDP and Tour were
stationary based on the unit root tests. Accordingly, the variables were
expressed to be I(1). (Oh, 2005).
Testing stationarity of time series leads to the implementation of the
econometric model using the appropriate methodology. The stationarity of
the series was investigated by employing the unit root tests developed by
Phillips and Perron (1988). (Balaguer & Jorda, 2002).

Journal of Tourism, Volume IX, 2007 13

 The Impact of Tourism on Economic Growth: The Case of Turkey

Table II
Phillips-Perron Unit Root Analysis Results

Variable Constant Constant / time

trend

Variable (Level) LT &I -3.1121 -4.9124

LEG -2.8998 -2.0606
McKinnon Critical Values %1 -3.7204 -4.4678
%5 -2.9850 -3.6449
%10 -2.6318 -3.2614

Variable (First difference) ΔLT &I -13.8020* -12.7320*

ΔLEG -9.5554* -9.4312*
McKinnon Critical Values %1 -3.7695 -4.4407
%5 -3.0048 -3.6328
%10 -2.6422 -3.2546

Note: LEG represents the annual economic growth rate in natural logarithms; LEG
expresses tourism incomes in real terms and in natural logarithms. Δ denotes the
first difference of variable. The optimal lags selected for the truncation lag for the
PP test based on the Akaike information criterion (AIC, Judge, Griffiths, Hill,
Lutkepohl, & Lee, 1985). The symbol * indicates that the null hypothesis can be
rejected at the 1% level. Tests for unit roots have been carried out on EVIEWS 3.1.

Table 2 shows the different tests statistics with regard to the null
hypothesis of one unit root against the stationary alternative. The most
general model indicates that the null cannot be rejected for each variable
and therefore a unit root might exist. Looking at Table 3 it can be observed
that ΔLY; ΔLTOUSA and ΔLq reject an I (1) series in differences (or I
(2) in levels) against the alternative of an I (0) series in differences (or
I(1) in levels). Thus, the data generation process examination suggests
that the use of co integration techniques will be suitable to proceed with
the long-run analysis. (Balaguer & Jorda, 2002).
This paper uses Johansen’s co integration methodology, which is
suitable for estimation purposes when the variables are nonstationary, and
particularly when they are I (1) variables. It suggests likelihood ratio tests
which enable to test for the order of co integration and for restrictions on
the variables of the co integrating vector. A comprehensive description of
estimating co integrating vectors and testing hypothesis can be found in
Johansen (1988, 1995) and Johansen and Juselius (1990, 1992). This
approach estimates long-run or co integration relationships between

14 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

nonstationary variables using a maximum likelihood procedure which tests

for the number of co integrating relationships and estimates the parameters
of those co integrating relationships. Johansen (1988) proposes two
likelihood ratio tests for the co integration rank, a maximum eigenvalue
test and a trace test (Balaguer & Jorda, 2002).
The results of co integration tests are reported in Table 4. The two
test statistics, maximum eigenvalue (λMAX) and trace, are presented,
where λMAX tests for at most r co integrating vectors against the
alternative of exactly r + 1 co integrating relationships, while Trace tests
for at most r co integrating vectors against the alternative of at least r + 1
vectors (Balaguer & Jorda, 2002).
In order to find number of co integrated vectors, Johansen (1991),
Johansen and Juselius procedure had been followed. Computed trace
statistic and maximum self-value statistic results are compared to table
critic values. Both statistic critic values have been given by Johansen and
Juselius (1990). If the tests indicate that cointigrate vector/ vectors are
important, it is accepted that there is a long term relation between series.
Trace and maximum self value statistics are also used for determining the
number of cointegrate vector (The results are shown on Table).

Table III
Johansen co-integration test results

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.538087 16.34159 15.49471 0.0372
At most 1 * 0.220396 4.933530 3.841466 0.0049

Note: Trace is likelihood ratio statistic for the number of co-integration vectors.
L.R. test indicates 1 cointegrating equation(s) at 5% significance level.

As it is seen table 3, there are two associate vectors between

economic growth rate and tourism expansion. Because this is due to the
obtained trace values being higher than that of the 5% critical values and
therefore for this reason has been supported by a double sided causality
relation co-integration test.
Co-integration relationship especially presents whether or not there is
an affect to the relationship between economic growth rate and tourism

Journal of Tourism, Volume IX, 2007 15

 The Impact of Tourism on Economic Growth: The Case of Turkey

incomes in Turkish economy between the years 1985-2007. Consequently,

two co-integration equalities can be defined between the series this means
there is a long-term relationship.
Engle and Granger (1987) and Granger (1988) noted that if two time-
series variables are co integrated, then at least one -directional Granger-
causation exists. The existence of a stable long-run relationship
(cointegrating relationship) between economic growth and tourism
expansion implies that the two variables are causally related at least in
one direction. As a final step, to answer the question regarding the direction
of causation, the Granger causality tests were performed. Since two series
of economic growth and tourism expansion are cointegrated of order (1,
1), a VAR model can be constructed in terms of the levels of the data
(Engle & Granger, 1987). The causality tests between economic growth
and tourism expansion involve estimating the following bivariate regressions:

Growtht = μ1 + ∑ li =l α1i Growtht =i + ∑ li =l β1iTourismt =i + e1t , 1

Tourismt = μ 2 + ∑ li =l α 2iTourismt =i + ∑li =l β 2i Growtht =i + e2t , 2

Where μ is the deterministic component, et is white noise and Tourism

and Growth represents the tourism expansion (LTOUR) and economic
growth (LGDP), respectively. In a cointegrated system, the null hypothesis
that Tourism does NOT Granger-cause Growth cannot be rejected if

β11 = β12 = ...= β11=0.

Similarly, the null hypothesis that Growth does NOT Granger-cause

Tourism cannot be rejected
If
β21 = β22 = ...= β21=0.
Both hypotheses were tested by a standard F-test. The optimal lag l
was selected with the smallest values of Akaike Information Criteria (AIC)
and Schwartz Bayesian Criteria (SBC). Both criteria indicated lag 6 and
lag 3 as the optimal lag for the quarterly and annual data, respectively.
Then, the diagnostic checks with various lags were performed to ensure
that results of the causality test are not sensitive to the different lags
(Pindyck & Rubinfeld, 1991; Shan & Sun, 1998) (Kim et al., 2006).

16 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

Table 4 display results of the Granger causality test with annual data,
respectively. For quarterly data, the null hypothesis regarding no causation
of economic development (LGDP) to tourism expansion (LTOUR) is
rejected at the 5% significance level; the null concerning no causation of
tourism expansion (LTOUR) to economic growth (LGDP) is also rejected
at the 5% significance level. Therefore, the tourism-led economic growth
and the economic-led tourism expansion of this study are both supported.
The coexistence of the tourism-led economic growth and the economic-
led tourism expansion indicates a reciprocal relationship between the two
variables.

Table 4
Pairwise Granger Causality Tests

Sample: 1985 2007

Lags: 2
Null Hypothesis: Obs F-Statistic Probability
EG ——————— TI 21 5.51549 0.00679
TI ——————— EG 3.69238 0.00477

*F α (m, n-k) =0, 05 (2, 22) =3, 44

The F value calculated and the F value in the Table 4 is compared

and a conclusion is made. Because the calculated F value is higher than
the critical F value, the hypothesis that there is causality from EG to TI is
accepted. On the other hand, because the calculated F value is higher
than the critical F value, the hypothesis that there is causality from TI to
EG is accepted.
Similarly, when considered the effect of a standard error shock on
the rate of tourism incomes and growth, it can be seen that this shock
has positive effect on development as well as a standard error in tourism
incomes. (See apex 2)

Concluding remarks
Today investments and incentives made for tourism is getting higher
year by year in Turkey of which tourism income exceeding 10 billion
dollars. Like in many developing countries, the tourism sector accompanied
by the change of sectoral structure in Turkey is the main element which

Journal of Tourism, Volume IX, 2007 17

 The Impact of Tourism on Economic Growth: The Case of Turkey

determines Economic Growth. In this study, Tourism and Economic Growth

are conceptualized as an econometric model and an analysis is made to
relate Tourism Sector to Turkey’s Economic Growth. We obtained
estimates of the relationship between economic growth and tourism on
main macroeconomic variables. This study investigates the causal relations
between Tourism Sector and Economic Growth for the economy of Turkey
by using Phillips–Perron test, Cointegration approach, Granger Causality
test and a Vector Autoregression (VAR) model over the period of 1985-
2007. In addressing these factors, this study presents an empirical
investigation for Turkey’s Tourism Sector. In other words, Test results
indicate that Tourism Sector in Turkey is positively effected by Economic
Growth in the long run. The analysis shows, then, that a long-run stable
relationship between economic growth and tourism expansion exists. Since
the variables included in the model are nonstationary and present a unit
root, the Johansen technique has been applied. This methodology has
allowed to obtain a cointegrating relationship among the variables. These
variables represent indicators of Turkey economic growth, international
tourism income and external competitivity. The cointegration results provide
evidence of the existence of a unique cointegrating vector. Therefore, the
interpretation of its estimates should be straightforward.
Causality testing confirms the existence of that relationship in Granger
sense and, moreover, it provides necessary arguments to support the
tourism-led growth hypothesis. As expected, the earnings from international
tourism affect positively the Turkey economic growth. The strong impact
of tourist activity, according to the magnitude of the estimated parameter
would reveal the existence of important long-run multiplier effect. Finally,
the tourism industry to be thought to bring up more in the future is the
most important factor for accelerating and expansions of globalization.

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 The Impact of Tourism on Economic Growth: The Case of Turkey

Appendix 1: to deal with trend and fluctuation movement of both variables together

Appendix 2: The effects of a standard error shock on Tourism income and economic
growth rate

22 Journal of Tourism, Volume IX, 2007

Yusuf Akan, I&brahim Arslan and Cem IÕ1k

Em pirical Distribution

CDF Survivor

1.0 1.0

0.8 0.8

yt 0.6 yt 0.6
lii lii
b b
a a
b 0.4 b 0.4
or or
P P
0.2 0.2

0.0 0.0

-10 -8 -6 -4 -2 0 2 4 6 8 10 -10 -8 -6 -4 -2 0 2 4 6 8 10
EG EG

Quantile CDF
12
1.0

8
0.8
4
yt 0.6
i
0 il
G b
E a
b 0.4
or
-4 P
0.2
-8

0.0
-12
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 -30 -20 -10 0 10 20 30 40 50 60
Probability TI

Survivor Quantile
60
1.0
50

0.8 40
30
yt 0.6
i 20
il
b I 10
a T
b
o 0.4
r
P 0
0.2 -10

-20
0.0
-30
-30 -20 -10 0 10 20 30 40 50 60 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
TI Probability

Appendix 3.1

Journal of Tourism, Volume IX, 2007 23

 The Impact of Tourism on Economic Growth: The Case of Turkey

Appendix 3.2

24 Journal of Tourism, Volume IX, 2007

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