Is the Tourism-Led Growth Hypothesis Valid for the Dominican Republic: Results from the Bounds Test for Cointegration and Granger Causality Tests

Abstract

The tourism-led growth hypothesis (TLGH) posits a positive relation between the growth of the tourism sector and overall economic growth. International tourism is an important sector of the Dominican economy and posted strong rates of growth over the past decades. Tourism receipts represent 10 percent of gross domestic product and 32 percent of total exports. The number of international visitors grew at a yearly average of 6.8 percent during the period 1991-2012. The strong growth of the tourism sector makes this an ideal case to examine the validity of the tourism-led growth hypothesis. Toward this end, this paper employs the ‘bounds’ testing approach to co-integration of Pesaran et al. (2001) and  the results show the existence of a long-run equilibrium relationship between tourist arrivals and overall economic growth. Employing a method developed by Bårdsen (1989) to derive long-run coefficients the findings reveal that a one percent increase in tourist arrivals produces a 0.88 percent increase in overall economic growth. Moreover, Granger Pairwise causality tests show causality running from tourist arrivals to aggregate output expansion. These results in favor of the hypothesis of tourism-driven economic growth in the Dominican Republic suggest the need for the government to promote the  tourism sector.

Key words: Tourism-led growth hypothesis, error correction model, ‘bounds’ test, Granger Pairwise causality tests