Testing the Stability of Tourism-Led Growth Hypothesis for Ethiopia

Abstract

Tourism-Led Growth (TLG) hypothesis demonstrates the profound contribution of tourism industry to the growth of real income. This study examines the long-term impact of international tourism on economic growth in Ethiopia, using a series of annual data spanning from 1995 to 2018. We contribute to the existing empirical literature on Tourism-Led Growth hypothesis, by adopting the conventional least squares framework and the Engle-Granger cointegration test between tourism receipts, trade openness, expenditures on physical capital, expenditures on tertiary education and economic growth in Ethiopia. The Engle-Granger (1987) tested stable long-term relation between the variables considered. This partly guarantees the TLG hypothesis. However, contrary to the predictions of TLG, we have estimated insignificant impact of tourism receipts on the long-run growth of Ethiopian economy, while challenging trustworthiness of the hypothesis in the context of Ethiopia. Our results revealed that the theory itself is incomplete. Besides, the foreign direct investment and domestic investments in physical capital were found significant contributor of long-run real income growth in Ethiopia. It is recommended that the government of Ethiopia should encourage private sector participation to develop the necessary infrastructures in order to achieve higher room tenancy.