Economic Modelling 35 (2013) 185–191

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Economic Modelling
journal homepage: www.elsevier.com/locate/ecmod

Tourism–growth nexus in Pakistan: Evidence from ARDL bounds tests

Abdul Jalil a,⁎, Tahir Mahmood b, Muhammad Idrees a
a
School of Economics, Quaid-i-Azam University, Islamabad 45320, Pakistan
b
Department of Economics, Abdul Wali Khan University Mardan, Pakistan

a r t i c l e i n f o a b s t r a c t

Article history: This study is an attempt to test the long run relationship between international tourism and economic growth of
Accepted 24 June 2013 Pakistan by using Autoregressive Distributed Lag (ARDL) models over the period of 1972 to 2011. The initial
results show that the causality runs from tourism to economic growth. Furthermore, the estimated growth
JEL classification:
regression clearly indicates that the international tourism has a significantly positive impact on the economic
C32
growth of Pakistan along with other variables like physical capital and international trade. This implies that
L83
O11
the improvement in the tourism sector may enhance the economic growth activities in Pakistan.
© 2013 Elsevier B.V. All rights reserved.
Keywords:
Tourism
Economic growth
ARDL bounds tests
Pakistan

1. Introduction different econometric techniques and provide inconclusive results

Indeed, the tourism industry is an important business sector of the
world. The importance of this sector can be manifested from the fact
that it raises revenues, generates employment opportunities, encourages
the private sector and develops infrastructure (Gee, 1999). Recently, it is
generating about 9% of the total GDP and 8% of the employment oppor-
tunities of the world (World Economic Forum, 2011).1 The researchers
observe that the trickledown effect of tourism development not only en-
hances the tourism sector but also triggers overall economic growth (Lee
and Chang, 2008). Therefore, the tourism sector has gained tremendous
academic attention as an important determinant of the economic growth
of an economy.
The economists suggest different channels through which the tour-
ism sector may improve the level of economic growth of a country. For
example, the tourism industry contributes to economic growth by
increasing efficiency via competition between domestic firms and inter-
national tourist's destination (Bhagwati and Srinivasan, 1979; Krueger,
1980) and by creating economies of scale in the local firms (Helpman
and Krugman, 1985). Similarly, Lim (1997) and Oh (2005) point out
that the improvement in the inbound tourism is an important source
of rise in the income of household and government revenues.
The causal relationship between tourism and economic growth is
well documented in the literature of tourism economics. Different
studies focused on different countries, sample periods, variables and
⁎ Corresponding author.
E-mail addresses: jalil.hanif@gmail.com (A. Jalil), midrees@qau.edu.pk (M. Idrees).
1
Travel and Tourism Competitiveness Index (TTCI) 2011covers 139 economies.
(see Table 1).
The findings of the different studies can be summarized into four
main hypotheses. First, Tourism-led growth hypothesis suggests that
there is a unidirectional relationship from tourism to economic growth.
According to this hypothesis, the inbound tourism growth is one of the
engines of economic growth. Therefore, the restrictions on the inbound
tourists may hurt the process of economic growth. However, the
hypothesis of tourism-led growth is found mostly in small countries
such as Mexico (Brida et al., 2010), Taiwan (Chen and Wei, 2009),
Spain, Italy (Jimenez, 2008), South Africa (Akinboade and Braimoh,
2010) and Jordan (Kreishan, 2011). Second growth-led tourism hypoth-
esis shows that there is a unidirectional causality from economic growth
to improvement in the inbound tourism (Oh, 2005). It implies that the
restrictions on the international tourists have no or little adverse effects
on the economic growth of the country. Third, feedback hypothesis indi-
cates that there is bidirectional causality between inbound tourism and
economic growth. It implies that the inbound tourism and economic
growth jointly determine each other. This line of research is also not
an infant and a number of studies find the bidirectional causality be-
tween tourism and economic growth for various countries (Dritsakis,
2004; Durbarry, 2004). Fourth, neutrality hypothesis holds when no cau-
sality exists between international tourism and economic growth (Kim
et al., 2006; Ozturk and Ali, 2009). It implies that any restriction on the
international tourism policies does not affect the economic growth and
economic growth does not necessarily mean that international tourism
is improving.
Since the direction of causality has some certain policy implications, it
is important to reexamine the tourism–growth relationship in the

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http://dx.doi.org/10.1016/j.econmod.2013.06.034
186 A. Jalil et al. / Economic Modelling 35 (2013) 185–191

Table 1
Tourism growth nexus.

Authors Time coverage Econometric methodology Country coverage Causal relationship

Multi country cases

Lanza et al. (2003) 1977–1992 Almost ideal demand systems 13 OECD countries Tourism → growth
Adamos and Sofranis (2005). 1981–2004 Fixed effect estimation 162 Countries Tourism → growth
Skerrit and Huybers (2005) 1965–1992 Ordinary least square 37 Developing countries Tourism → growth
Neves and Paula (2008) 1982–2002 GMM and LSDV 94 Countries Tourism → growth
Po and Huang (2008) 1995–2005 Threshold autoregressive model 88 Countries Tourism → growth
Lee and Chang (2008) 1992–2002 Panel co-integration OECD and non-OECD countries Tourism → growth
Holzar (2010) 1970–2007 Ordinary least square 134 Countries Tourism → growth
Seetanah (2011) 1990–2007 GMM–Granger causality test 19 Islands Tourism → growth
Tiwari (2011) 1995–2008 Fixed and random effect models China, Pakistan, Russia, and India Tourism → growth

Single country cases

Balaguer and Cantavella-Jorda (2002) 1975–1997 Johansen co-integration Spain Tourism → growth
Dritsakis (2004) 1960–2000 Error correction model Greece Tourism ↔ growth
Durbarry (2004) 1952–1999 Error correction model Mauritius Tourism ↔ growth
Narayan (2004) 1970–2000 Error correction model Fiji Tourism → growth
Oh (2005). 1975–2001 Granger causality test Korea Growth → tourism
Kim et al. (2006) 1956–2002 Granger causality test Taiwan Tourism ≠ growth
Sr and Croes (2003) 1975–2000 Co-integration Aruba Tourism → growth
Jimenez (2008) 1990–2004 Dynamic panel techniques Spain and Italy Tourism → growth
Kaplan and Celik (2008) 1963–2005 VAR model Turkey Tourism → growth
Ozturk and Ali (2009) 1987–2007 ARDL Turkey Tourism ≠ growth
Chen and Wei (2009) 1975–2007 EGARCH-M Taiwan Tourism → growth
South Korea Growth ↔ tourism
Katircioglu (2009) 1960–2005 Granger causality test Cyprus Growth → tourism
Malik et al. (2010) 1972–2007 Johansen co-integration Pakistan Tourism → growth
Akinboade and Braimoh (2010) 1980–2005 VAR model South Africa Tourism → growth
Brida et al. (2008) 1980–2007 Johansen co-integration Mexico Tourism → growth
Noor (2009) 1973–2007 Johansen co-integration Pakistan Tourism → growth
Brida et al. (2010) 1987–2006 Johansen co-integration Mexico Tourism → growth
Chancharat and Chaancharat (2010) 1979–2007 Gregory–Hansen test Thailand Tourism → growth
Khalil et al. (2010) 1960–2005 Johansen co-integration Pakistan Growth ↔ tourism
Tang (2011) 1995–2009 Error correction model Malaysia Growth ↔ tourism
Kreishan (2011) 1970–2009 Johansen co-integration Jordan Tourism → growth

Note: “Tourism → growth” denotes causality running from tourism development to economic growth. “Growth → tourism” denotes causality running from economic growth to
tourism development. “Growth ↔ tourism” denotes bidirectional causality between tourism development and economic growth. Tourism ≠ growth denotes that neither tourism
is effecting growth nor growth is effecting tourism.

presence of contradictory claims of different studies. In particular, it be-
comes more important in the absence of a study which is based on the
longer data set. The present study is an attempt in the same direction
and the objective of this study is to come out with an evidence that
shows to what extent Pakistan economic growth reacts to the
evolution process of inbound tourism activity during the period of
1972 to 2011.
There are several reasons for choosing Pakistan as a case study to
test the tourism–growth nexus. Pakistan has unprecedented potential
to become an important tourist destination of the world due to its
pure landscapes and diverse culture. For example, different land-
scapes, ranging from the snow-capped mountains in the North to
the sunny beaches in the South, coupled with the lush green valleys
and skyscraper mountains such as the scenic Himalayan hills and K2
are the main sources of attraction for international tourists. Further-
more, ancient civilization such as the Mohenjo-Daro, Harappa and
Taxila has its own worth to prove that Pakistan is a tourist's heaven.
Importantly, Pakistan received more than 50,000 international tour-
ists per annum before global economic crisis. According to World
Economic Forum (2011), the overall share of travel and tourism is
6.5% of total gross domestic product (GDP). Furthermore, World
Economic Forum (2011) projected that travel and tourism will generate
about 3.43 million employment opportunities in 2011, which is 5.7% of
total employment level. Furthermore, the share of travel and tourism in
exports is 86 billion rupees, in 2011. It is also important to mention that
it improved its ranking from 125 in 2009 to 113 in 2010 according to
World Economic Forum (2011).
All these facts provide a substantial support for conducting a study
to test the impact of tourism in explaining the economic growth of
Pakistan. Unfortunately, despite its importance, little attention has been
paid to its quantitative analysis. There are very few studies, according to
the best of our knowledge, available for Pakistan (for example Khalil
et al., 2010; Malik et al., 2010; Noor, 2009). But these are based either
on the estimation of tourism demand functions or on using the traditional
econometric procedures. The present study is an attempt to fill this gap.
We try to investigate the long run relationships between tourism and
economic growth by using a relatively new co-integration technique
popularized with the name of Autoregressive Distributive Lag (ARDL)
model over the period of 1972 to 2011.
The remainder of the study is organized as follows. Section 2 sets the
analytical framework of the study. The econometric methodology is
presented in Section 3. Section 4 discusses variable construction and
data sources. Empirical results are given and discussed in Section 5.
Finally, Section 6 concludes and gives some policy implication.
2. Analytical framework
The empirical investigation carried out in the present article is based
on the standard Cobb–Douglas production function, with constant
returns, within the neoclassical framework having Hicks neutral tech-
nological process.
α
Y t ¼ At K t ð1Þ
where Yt is real per capita GDP; At is total factor productivity; Kt is per
worker capital series.
This type of production function is expanded in the literature of
macroeconomics in several ways. The researchers suggest a number of
variables that affect economic growth, for example inbound tourism
(Jimenez, 2008; Tang, 2011; Kreishan, 2011), physical capital stock
(Lucas, 1988; Mankiw et al., 1992), trade openness (Grossman and
 A. Jalil et al. / Economic Modelling 35 (2013) 185–191
Helpman, 1991; Lucas, 1988; Young, 1991) and inflation (Sidrauski,
1967; Faria, 2001).
Therefore, it is plausible to assume:
At ¼ f ðT; Z t Þ ð2Þ
where Zt is a vector of growth improving variables like the indicators
of tourism development, capital stocks, trade openness, inflation and
other macroeconomic policies and T incorporating the time dynamics.
We have discussed in the last section that tourism is an important
determinant of economic growth. However, there are several other
variables, along with tourism, that may affect economic growth. The
relationship between trade openness and economic growth is a long
debated issue in the theoretical and empirical literature of economics.
For example, Grossman and Helpman (1991), Lucas (1988), Young
(1991) and Rivera–Batiz and Xie (1993) note that trade openness
has negative effect on individual country, while Harrison (1996) doc-
uments that trade openness has a strong and positive impact on eco-
nomic growth. Similarly, Lee (1993) and Edwards (1998) document the
negative relationship between average tariff rates and economic growth.
The inconclusive results imply that the results of trade openness may not
be generalized for Pakistan. Therefore, we include it in our growth regres-
sion for quantifying its impact in the case of Pakistan.
Capital stock, according to neoclassical growth theory, is another im-
portant determinant of economic growth. Most of the studies established
a positive and significant relationship between capital stock and eco-
nomic growth (Lucas, 1988; Mankiw et al., 1992). Similarly, the debate
on inflation and economic growth is somewhat controversial. Consider-
ing the length of time, inflation has contrasting impact on economic
growth. In the short-run inflation has negative effect on growth rate of
output, while in the long-run GDP growth rate is not affected by persis-
tent high level (Sidrauski, 1967; Faria, 2001). Importantly, an inflation
rate within a moderate range is necessary for the health of the economy
in the case of Pakistan (Mallik and Chowdhury, 2001; Mubarak, 2005),
while a moderate and low level of inflation is harmful to the growth
rate of output (Lim, 1997). These contradictory findings motivate us to
include the inflation indicator in growth regression.
Keeping all above theoretical argument in view, we specify an
econometrically estimable equation, following Katircioglu (2009), as
follows:
yt ¼ α þ β1 tourt þ β2 tradet þ β3 capitalt þ β4 cpit þ μ t ð3Þ
where yt is the natural log of per capita real GDP, tourt is the natural log
per capita international tourism receipt, capitalt is the natural log of per
capita physical capital formation, tradet is the natural log of trade to GDP
ratio, cpit is consumer price index which is a proxy for inflation and u is
Gaussian error term.
3. Econometric methodology
As we have mentioned in the section of literature review a large vol-
ume of tourism–growth literature is based on Engle and Granger (1987),
Johansen (1991) and Johansen and Juselius (1990) cointegration tech-
niques. However, using the same methods with the same variables has
no more potential of any original contribution, because it increases
only the number of conflicting results with varying time periods and
we have serious doubts on the policies of tourism management. We
use the Autoregressive Distributed Lag (ARDL) model to avoid this prob-
lem. None of the studies, according to best of our knowledge, available
for Pakistan used the ARDL estimators for testing the tourism–growth
nexus.
The ARDL cointegration technique is introduced by Pesaran and Shin
(1999) and Pesaran et al. (2001). The researchers are using ARDL esti-
mator due to its several advantages. For example, it does not impose
the restriction that all under consideration data series have the same
187
order of integrations and it is applicable irrespective of whether the
regressors are I(0) or I(1) order of cointegration (Pesaran and Pesaran,
1997). Pesaran and Shin (1999) note that ARDL estimators produce the
true parameters as compared to Johansen and Juselius's cointegration
technique in the case of small sample and coefficients from the ARDL
estimators are super consistent in small sample sizes. Therefore, this is
more relevant in our case where we have a data series of 40 annual
observations. Furthermore, the endogeneity is less a problem in ARDL
framework because it is free of residual correlation. Pesaran and Shin
(1999) have shown that the ARDL method can distinguish between
dependent and explanatory variables and the estimation is possible
even when the explanatory variables are endogenous (Pesaran and
Pesaran, 1997; Pesaran et al., 2001). This is an important issue in the
case of tourism–growth nexus, because the published research presents
the mixed result on the direction of causality of tourism and economic
growth. Therefore, the ARDL modeling is adopted in this study.
ARDL framework of Eq. (3) is as follows:
Xp X p X p
Δ lnyt ¼ α 0 þ α 1 Δ lnyt−i þ α 2 Δ ln tourt−i þ α 3 Δtradet−i
X p i¼1 Xi¼1
p i¼1
þ α 4 Δcapitalt−i þ α 5 Δ ln cpit−i þ λ1 ln yt−1
i¼1 i¼1
þλ2 ln tourt−1 þ λ3 tradet−1 þ λ4 capitalt−1 þ λ5 ln cpit−1 þ εt :
ð4Þ
On the right-hand side, the expression from λ1 to λ5 depicts the
long-run relationship between the variables, while the expression
from α1 to α5 with the summation signs corresponds to the short-run
dynamics of the variables. On the other hand, α0 represents drift con-
stant and εt is Gaussian white noise.
The complete results for short-run and long-run dynamics through
ARDL bounds testing are obtained through several steps and procedure.
In the first step, Eq. (4) will be estimated through ordinary least square
(OLS) method and F-test will be conducted to test the existence of long
run relationship among the variables of Eq. (3).
The null hypothesis in Eq. (4) is H0 : λ1 = λ2 = λ3 = λ4 = λ5 = 0.
This means the nonexistence of long run relationship. While the alterna-
tive is H1:λ1 ≠ 0,λ2 ≠ 0,λ3 ≠ 0,λ4 ≠ 0,λ5 ≠ 0.
The calculated F-statistics value is compared with upper and lower
critical values which are given by Pesaran et al. (2001). If calculated
F-value exceeds the upper critical value, then null hypothesis of no
cointegration will be rejected irrespective of whether the variable are
I(0) or I(1). In the second step, we will estimate long run relationship
using the selected ARDL model through R2 criterion, Hannan Quinn
Criterion, Akaike Information Criterion (AIC) and Schwarz Criterion
(SBC). The following error correction model is estimated in the third
step.
Xp Xp Xp
Δyi ¼ β0 þ δi Δyt−i þ ϕi Δtourt−i þ ϖi Δtradet−i
X p i¼1 X
i¼1 p i¼1 ð5Þ
þ λi Δcapitalt−i þ θi Δcpit−i þ αECM t−1 þ U t :
i¼1 i¼1
The error correction model result indicates the speed of adjustment
back to long run equilibrium after a short run shock.
Several diagnostic tests are conducted to ensure the goodness of fit of
the model. These tests examine the serial correlation, functional form,
normality and heteroscedasticity associated with the selected model.
Furthermore, Pesaran and Pesaran (1997) suggest using Brown et al.'s
(1975) stability test to check the stability of the coefficient of the regres-
sion. This technique is also known as cumulative (CUSUM) and cumula-
tive sum of squares (CUSUMSQ). The CUSUM and CUSUMSQ statistics
are updated recursively and plotted against the break points. If the
plots of CUSUM and CUSUMSQ statistics stay within the critical bounds
188 A. Jalil et al. / Economic Modelling 35 (2013) 185–191

of 5% level of significance, the null hypothesis of all coefficients in the Table 3

given regression which is stable cannot be rejected. Unit root tests.

ADF k ADF K
4. Variable construction and data y −1.173 0 Δy −4.446⁎⁎⁎ 0
Tour −1.273 1 ΔTour −6.853⁎⁎⁎ 1
To accomplish our task, we take several variables like per capita GDP Trade −2.997 1 ΔTrade −6.296⁎⁎⁎ 2
(denoted by y), international tourism receipts (denoted by tour), capital Capital −0.937 1 ΔCapital −8.144⁎⁎⁎ 2
Cpi −3.766⁎ 2 ΔCpi −6.7734⁎⁎⁎ 1
stock (denoted by cap), inflation (denoted by cpi) and trade openness
(trade) directly from the Economic Survey of Pakistan and Handbook Notes: ADF augmented Dickey–Fuller test. k is the degree of augmentation that is auto-
of Statistics 2010. Trade openness ratio is the total value of exports matically determined by following the procedure of Campbell and Perron (1991).
⁎ Represents 10% level of significance.
and imports as share of GDP. ⁎⁎⁎ Represents 1% level of significance.
The data of the capital stocks is not available directly. Therefore, the
capital series is constructed from the perpetual inventory method. If we
assume that the capital depreciates at a rate of δ then Kt + 1 =
It + (1 − δ)Kt where, δ is the rate of depreciation and K(0) is the initial we estimate Eq. (4) by OLS estimation procedure and joint F-statistics is
stock in period zero. Initial capital stock can be estimated in a number of computed. The results of computed F-statistics and the critical values
ways; here we follow Nehru and Dhareshwar (1993). The value of in- suggested by Pesaran et al. (2001) at different levels of significance are
vestment in the first period is estimated through a linear regression of given in Table 4. The F-statistics is well beyond the critical value at 5%
the log of investment against time. The fitted value of initial investment level of significance. Therefore, this is an evidence of strong long run
is used to calculate initial capital stock using the following equation: relationship among the variables.
Kt = It/(g + δ). Here, g is the rate of growth of GDP and δ is deprecia- The growth led tourism hypothesis is also well observed in the
tion rate of capital. We choose 4% rate of depreciation following Khan empirical literature of economics (Oh, 2005). Therefore, there is prob-
(2006) and Jalil and Feridun (2011). The summary of the main macro- ability of endogeneity between tourism and economic growth. Ang
economic indicators and their descriptive statistics are presented in (2010) suggests that Eq. (4) should be re-estimated by keeping tourism
Table 2. as dependent variable to address the problem of endogeneity. If the cal-
culated values of F-statistics remain below the lower bound of the crit-
5. Empirical results ical value then it implies that there is no long run relationship, when
tourism is a dependent variable and growth does not lead to improve
One of the major advantages of using the ARDL estimators is that it can the tourism. We also follow the same methodology and the results are
be used without taking the consideration of data series which is either presented in the lower panel of Table 3. It is evident that the
I(0), I(1) or frictionally co-integrated. However, Ouattara (2004) docu- F. calculated values are significantly lower than the lower bound of
ments that ARDL estimators may not be valid for any data series which the critical value of Pesaran et al. (2001). Therefore, we conclude
is generated by I(2) process or beyond because Pesaran et al. (2001) ex- that there is only one co-integration vector from tourism to growth.
plicitly mentioned that the ARDL bounds tests is subject to the assump- We have established that there exists a long run relationship between
tion that the variables are integrated of order (0) or (1). Therefore, tourism development and economic growth of Pakistan. However, the
testing the level of stationarity is still necessary. For this purpose we use direction of causality is not clear from the ARDL cointegration test. There-
the Augmented Dickey–Fuller (ADF) estimators to check the stationary fore, we shall conduct the Granger causality test for establishing the
process of the data series. The results of the ADF tests are presented in direction of causality. It is clear from Table 5 that the null hypothesis of
Table 3. It is evident from the ADF results that some of the data set are tourism does not Granger cause GDP is clearly rejected at 1% but the
integrated of I(0) or I(1). Importantly, none of the data series are I(2) or null hypothesis of GDP does not Granger cause tourism is accepted.
above. Therefore, we are justified for using the ARDL estimators. This result concludes that causality runs through tourism to economic
Unit root test confirms that none of the series is integrated of I(2); growth and not vice versa in the case of Pakistan.
therefore, we may apply ARDL bounds testing procedures for establishing Next, we estimate Eq. (4) following the ARDL co-integration tech-
the long-run relationship between tourism and economic growth. For this nique for the long run estimates. We estimated the model keeping the
different criteria, like R2 criterion, Hannan Quinn Criterion, AIC Criterion
and SBC Criterion, in mind to find the coefficient of the level of variables.
Table 2 The long run and short run results of all models were almost near to
Main macroindicators and descriptive statistics.
identical. Therefore, we present only the results of the model that
Years y Tour Trade Capital Cpi were selected on the basis of AIC criterion as Monte Carlo experiment
1972–75 18.955 13.816 4.976 13.548 3.450 of Liew (2004) documented that AIC is superior to other criteria, partic-
1976–80 8.727 14.038 6.458 12.519 3.436 ularly when time span is less than 60 observations.
1981–85 7.169 14.362 7.612 12.769 3.519 The results of long run estimates are presented in Table 6.
1986–90 6.784 14.664 8.062 13.034 3.575 The coefficient of tour, which is 0.1987, implies that 1% increase in inter-
1991–95 11.197 14.915 8.184 13.252 3.603
1996–00 7.297 15.090 8.350 13.331 3.518
national tourism receipts leads to 0.20% increase in real per capita
2000–05 5.172 15.274 8.848 13.382 3.460 GDP in the long run. The finding confirms the tourism-led growth
2006 7.921 15.461 9.477 13.642 3.650 hypothesis, that is, the improvements in the inbound tourism activities
2007 7.599 15.516 9.744 13.770 3.570
2008 12.000 15.532 9.712 13.840 3.604
2009 20.000 15.568 10.112 13.720 3.503 Table 4
2010 10.700 15.610 10.084 13.699 3.462 Bounds tests for the existence of a long relationship.
2011 12.933 15.648 10.342 13.612 3.381
5% Critical 10% Critical
Descriptive statistics bounds bounds
Mean 14.736 7.862 3.516 13.187 9.378
F-statistics I(0) I(1) I(0) I(1)
Median 14.820 8.110 3.533 13.269 8.270
Maximum 15.610 10.110 3.661 14.580 26.660 Tourism led growth 4.9217 3.12 4.25 2.75 3.79
Minimum 13.730 3.920 3.322 12.194 2.910 Growth led tourism 1.0382 3.12 4.25 2.75 3.79
Std. dev. 0.567 1.389 0.093 0.513 5.409
Source of critical values: Pesaran et al. (2001).
 A. Jalil et al. / Economic Modelling 35 (2013) 185–191
Table 5
Granger causality test.
Null hypothesis F-statistics p-Values
GDP does not granger cause tourism 0.3765 0.4131
Tourism does not Granger cause GDP 3.1925 0.0116
may lead to higher level of economic growth. The results of our study
are in line with the recent empirical studies, for example, Balaguer
and Cantavella-Jorda (2002), Vanegas and Croes (2003), Dritsakis
(2004), Durbarry (2004), Skerrit and Huybers (2005), Neves and Paula
(2008), Lee and Chang (2008), Kaplan and Celik (2008), Jimenez
(2008), Brida et al. (2010), Tang (2011) and Kreishan (2011) and in
sharp contrast with Oh (2005) and Katircioglu (2009) which have a
stance of growth led tourism hypothesis. The results are statistically sig-
nificant at 1% level of significance.
Then we use some important control variables, like interna-
tional trade, capital stock and inflation. The coefficient of trade, a
measure of international trade, implies that a 1% increase in the
volume of international trade will lead to 0.32% rise in real per
capita GDP. The results of the present study are consistent with
Beck (2002), and Katircioglu (2009), which have a stance that
the improvement in the international trade will lead to higher level
of output. Importantly, our findings are also consistent with Jalil and
Feridun (2011) and Shahbaz (2012) who document that trade has a sta-
tistically significant positive impact on the economic growth in the case
of Pakistan.
The empirical economic literature provides an inconclusive de-
bate on the long run relationship of inflation and economic growth.
For example, Ghosh and Phillips (1998), Khan and Senhadji (2001)
and Sarel (1996) show a negative relationship between inflation
and economic growth, while Akerlof et al. (1996) favor low but pos-
itive inflation which may keep the economy to grow. However, our
results favor the stance of Ghosh and Phillips (1998), Khan and
Senhadji (2001) and Sarel (1996) in the case of Pakistan. Specifical-
ly, we find a statistically significant negative sign with a magnitude
of 0.7459.
The coefficient of capital implies that 1% increase in physical capital
contributes to real per capita GDP of almost 0.7181%. The magnitude is
showing diminishing marginal returns to capital which is consistent
with the neo classical school of thought. However, the magnitude is
relatively higher as compared to Jalil and Feridun (2011) in the case of
Pakistan.
Next the results of the short run analysis and the coefficient of the
error correction terms are presented in Table 7. The short run results
are almost same in the signs as compared to the long run and are in
line with a priori expectations. However, the magnitudes of the short
run estimates are smaller as compared to the long run estimates. This
Table 6
Long run ARDL estimates.
Dependent variable is the natural log of per capita GDP
Regressor Coefficient T-states
Tour 0.1987 4.5711
Trade 0.3233 3.9073
Capital 0.7181 2.4285
Cpi −0.7459 −4.4453
Intercept 0.2615 1.8648
Diagnostic test statistics (p-values)
χ2 (serial correlation)
χ2 (functional form)
χ2 (normality)
χ2 (heteroscedasticity)
189
Table 7
Short run ARDL estimate.
Dependent variable is the natural log of per capita GDP
Regressor Coefficient T-states
ΔTour 0.1391 2.0495
ΔTrade 0.206 2.0987
ΔCapital 0.253 3.2292
ΔCpi −0.4283 −1.8331
ΔIntercept 0.2858 2.8291
Ecm(−1) −0.2848 3.5167
Diagnostic test statistics
R-squared 0.8280
F 7.4331
DW 1.8671
CUSUM Stable
CUSUMSQ Stable
Ecm = y − 0.1987 ∗ tour − 0.3233 ∗ trade − 0.7181 ∗ capital + 0.7459 ∗ cpi − 0.2615.
finding indicates that our selected variables have the stronger impact
on the economic growth in the long run.
The important outcome of the short run dynamics is the calculation
of the coefficient of ECM. The lagged error correction coefficient
ECMt − 1 is presented in the last row of the upper panel of Table 6. The
lagged error correction coefficients, ECMt − 1 are correct in sign, and sig-
nificant in both cases verifying the established co-integrating relation-
ships among the variables. The coefficient of ECMt − 1 shows the speed
of the adjustment back to the long-run equilibrium after a short run
shock. For example, the coefficient of ECMt − 1 is 0.2825. This implies,
nearly 28% of the disequilibria of the previous year's shock adjusting
back to the long run equilibrium in the current year.
Our model passes through the diagnostic tests. The results are
reported in the lower panel of Table 5. The p-values of the χ2 state
that there is no evidence of serial correlation and heteroscedasticity.
Furthermore, the p-value 0.16 of functional form is an evidence of
well specification of the model and p-value 0.42 is an indication of
the acceptance of the null hypothesis of normality assumption of
the residuals. Furthermore, the plots of CUSUM and CUSUMSQ sta-
tistics are well within the critical bounds, implying that all coeffi-
cients in the error-correction model are stable.2 Therefore, the
preferred growth equation can be used for policy decision-making
purposes, such that the impact of policy changes considering the ex-
planatory variables of growth equation will not cause major distor-
tion in the level of per capita GDP, since the parameters in this
equation seem to follow a stable pattern during the estimation
period.
6. Conclusion
Indeed, explaining the economic growth dynamics is an arduous
task and a number of important factors have been discussed in the vari-
ety of growth models. A plethora of studies consider that the inbound
tourism is one of them. However, this line of research is completely
missing in the case of Pakistan which is generating 6.5% of the GDP
from travel and tourism World Economic Forum (2011). The present
study is an attempt to test the tourism led growth hypothesis in the
case of Pakistan over the period of 1972 to 2011. The findings of the
present study confirm the tourism led growth hypothesis in the case
of Pakistan. Therefore, in general, we support the evidence for many
countries that the improvement in the international tourism is one of
the important sources of economic growth in the case of Pakistan. We
settle this conclusion by estimating the growth regression through the
ARDL estimators due to its several advantages over the other estima-
0.7386
tors. It is also important to mention here that we explicitly reject the
0.1644
0.4282
0.5848 2
The graphs are not presented to save space; however, these are available upon request.
190 A. Jalil et al. / Economic Modelling 35 (2013) 185–191
growth led tourism hypothesis in the case of Pakistan. Specifically, 1%
increase in international tourism receipts leads to 0.1987% increase in
real per capita GDP in the long run. Therefore, international tourism re-
ceipts can be regarded as pivotal channels to boost economic growth.
The result of robustness check is also in line with the previous infer-
ences. Trade and capital are other important determinants of the eco-
nomic growth of Pakistan.
The empirical evidences of the present study provide two poten-
tially fruitful research possibilities. First, consider and explore the
internal tourism which is one of the vital sources of economic
growth along with the traditional channels, for example, physical
capital, human capital, international trade and financial develop-
ment in the case of Pakistan. Second, explore the possibilities of
protecting and enhance the possibilities of tourism especially in
the scenario of lacking the directing resources, for example, security,
energy, infrastructure and marketing skills. Therefore, the govern-
ment should help travel and tourism industry for expanding as
much as possible by focusing attention on long-run policies (Lee
and Chang, 2008). Furthermore, the strong evidence of long run re-
lationship between tourism and economic growth may also moti-
vate the researcher for constructing the theoretical models of
economic growth by incorporating the impact of tourism in the
case of Pakistan.
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