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Effect of tourism on economic growth of Sri Lanka: accounting for capital per worker, exchange rate and structural breaks

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Abstract

We explore the nexus between tourism, exchange rate and economic growth in Sri Lanka over the period 1980–2014. Using the augmented Solow (Q J Econ 70(1):65–94, 1956) framework and the ARDL bounds procedure whilst accounting for structural breaks using Bai and Perron (J Appl Econ 18(1):1–22, 2003) multiple break tests, the short-run and long-run association and impacts are examined. The results confirm the presence of a long-run association between tourism receipts (% of GDP), exchange rate, capital per worker and output per worker. The regression results show a 1% increase in tourism receipts results in a 0.03 and 0.06% increase in output per worker in the short-run and long-run, respectively. A unidirectional causality is noted from tourism to output per worker; from exchange rate to output per worker and capital per worker; and from output to capital, in per worker terms. Finally, we note that although structural breaks periods have negative association with economic growth, they are not statistically significant.

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Fig. 1

Source World Bank (2015) and Sri Lanka Tourism Development Authority (http://www.sltda.lk/statistics)

Fig. 2

Source Authors’ estimation in Eviews 9

Fig. 3

Source Authors’ estimation using Eviews 9

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Notes

  1. A tourist is “as an individual who, for leisure or other purposes, temporarily leaves the place of residence for being hosted in a destination, activating successive economic effects that are worth investigating.” Candela and Figini (2012, p.18–19).

  2. http://dtxtq4w60xqpw.cloudfront.net/sites/all/files/pdf/unwto_barom15_04_august_excerpt__0.pdf.

  3. The calculation is based on deflators published by the US Government’s Bureau of Economic Analysis.

  4. Note that there can be growth retarding drivers such as crime, terrorism, political instability and the like.

  5. We sincerely thank an anonymous reviewer for insisting that we include the exchange rate in the model specification.

  6. The studies which confirm H2 includes: Kumar and Kumar (2012) for Fiji, Kumar (2014a)and (b) for Vietnam and Kenya.

  7. While the choice of the depreciation rate and the factor used for initial capital stock are arbitrary, care is taken to ensure that the plot of capital per worker exhibits concavity and hence diminishing returns to scale. We noted that considering the sample from 1970 to 2014, the capital share becomes grossly distorted and meaningless. Therefore, to restrict the analysis to theoretically justifiable results, we used sample size from 1980 to 2014.

  8. Also see Kumar and Stauvermann (2014) and the references therein for possible reasons for differences in capital share.

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Acknowledgements

Peter J. Stauvermann thankfully acknowledges the financial support from the research funds of the Changwon National University 2015–2016. All the authors are grateful to the editor and the anonymous reviewers for their comments and advice. The usual disclaimer applies.

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Authors and Affiliations

  1. Department of Global Business and Economics, Changwon National University, Gyeongnam, 9, Sarim Dong, 641-773, Changwon, Republic of Korea

    Peter Josef Stauvermann

  2. School of Accounting and Finance, The University of the South Pacific, Laucala Campus, Laucala Bay Road, Suva, Private Bag, Suva, Fiji

    Ronald Ravinesh Kumar

  3. Bolton Business School, University of Bolton, Deane Rd, Bolton, BL3 5AB, UK

    Ronald Ravinesh Kumar

  4. Leicester School of Management, University of Leicester, Leicester, LE1 7RH, UK

    Ronald Ravinesh Kumar

  5. COMSATS Institute of Information Technology, Islamabad, Pakistan

    Syed Jawad Hussain Shahzad

  6. School of Economics, The University of Fiji, Lautoka, Fiji

    Nikeel N. Kumar

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  1. Peter Josef Stauvermann
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Stauvermann, P.J., Kumar, R.R., Shahzad, S.J.H. et al. Effect of tourism on economic growth of Sri Lanka: accounting for capital per worker, exchange rate and structural breaks. Econ Change Restruct 51, 49–68 (2018). https://doi.org/10.1007/s10644-016-9198-6

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