Is tourism a spur to economic growth in South Africa: An empirical investigation

Abstract

In this study, the dynamic Granger-causality between tourism development and economic growth in South Africa was empirically examined during the period 1995-2016. The study was motivated by the growing important role of the tourism sector in economic growth and development. It was also motivated by the limelight that the South African tourism sector has been enjoying in recent years, on the one hand, and the lack of sufficient coverage of tourism-growth nexus studies in many sub-Saharan African countries, on the other hand. Unlike some previous studies that used one proxy, the current study used two tourism proxies, namely tourist arrivals and tourism revenue, to examine this link. In addition, the study used exchange rate and foreign direct investment as intermittent variables in a multivariate Granger-causality model in order to address the omission-of-variable bias. To enhance the robustness of the results, the study also used two measures of tourism revenue, namely total tourism revenue and total tourism revenue as a percentage of GDP. Using the auto-regressive distributed lag (ARDL)-bounds testing approach and the error correction model, the study found that the direction of causality between tourism development and economic growth in South Africa is sensitive to the proxy used and the time under consideration. When the tourist arrivals variable is used as a proxy for tourism development, bidirectional causality between tourism development and economic growth is found to prevail in the short run, while a unidirectional causality from economic growth to tourism development is found to dominate in the long run. However, when tourism revenue is used as a proxy, a feedback relationship is found to prevail, but only in the short run. The result is robust across the two different measures of tourism revenue. The study, therefore, recommends that short-term policy efforts should be directed at developing the tourism sector and the real sector as both sectors have been found to reinforce each other in the short run, irrespective of the tourism proxy used.