There (2000) stated that tourism has socio-cultural benefits

There
had been a substantial increase in the number of both theoretical and empirical
studies regarding the impact of tourism on economic growth. Besides, the literature also proposed a variety of estimation
methods and theoretical models that can be applied in conducting these studies.

This chapter provides a review of the major findings and
focuses on some shortcomings in the previous studies. This paper attempts to
highlight the gap in the literature to justify the present research
topic and differentiate it from the other studies.
The literature review is divided into three major
sections which are theoretical and empirical literature. The last section
presents a summary of the review and highlights the gap in the literature to
rationalize the current study.

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2.2 Review of the Theoretical Literature

Sinclair
and Stabler (1998) claimed that tourism expenditure can generate a large
proportion of a country’s income. Furthermore, they classified the impact of
such expenditure as either direct, indirect, and induced effects.

The
direct effects are the result of expenditure by tourists.  As such, income is generated for households
and businesses, and revenue is gained from taxes. Indirect effects, on the
other hand, involves intermediate consumption in an attempt to produce goods
and services in the tourism sector. Induced effects relate to expenditure made
by employees using wages from companies which are in direct contact with the
tourists.

As a
matter of fact, the benefits to tourism are vast in number. On the economic
side, tourism allows governments to earn extra tax revenues each year. Tourism
also helps in creating jobs for the local inhabitants, and expanding business
opportunities. Furthermore, tourism can act as a catalyst for investment. As
such, multinationals will look to invest in developing countries which are
visited by tourists. Also, governments can find themselves in a situation where
they need to invest on infrastructure to cater for the needs of the tourists.

Godfrey
and Clarke (2000) stated that tourism has socio-cultural benefits and that it
relates to the local quality of life and sense of place. As an illustration,
tourism promotes the celebration of local festivals and cultural events.
Nevertheless, tourism also has socio-cultural costs. In other words, local
inhabitants might forego their own culture to adopt the culture of tourists. This
can be noticed in Mauritius where the majority of the population have Indian
roots, but have a European lifestyle.

Regional
development is also a major benefit of tourism. As a matter of fact, tourism
can be used as a tool to reduce the disparities between different parts of a
country. Weaver and Fennell (1997) argue that several forms of rural tourism,
eco-tourism, and sun, sand, and sea tourism have all been used in an attempt to
develop peripheral regions, mostly in developing countries.

 There are also several costs and benefits of
tourism. As such, when resources are utilised in the tourism sector, they are
no more available to be used in other sectors of the economy. Consequently, it
is feared that development in other sectors may be crowded out by tourism.
However, this can be significant only if the economy is at full employment. If
this is not the case, productivity growth will tend to be rather low. As a
matter of fact, Townsend (1997) tags the general tendency of tourism to create
low-skilled, part-time, seasonal jobs as a drawback when it comes to the industry’s
capacity to create employment.

Tourism
also imposes some large direct costs on governments when it comes to
advertising the country as a dream destination. Furthermore, the government
also has to cater for the setting up and operation of tourism organisations.
Miscallaneous expenditure also includes the development and maintenance of
relevant infrastructure, and airport expansion.

Environmental
costs are also involved as far as tourism is concerned. As a matter of fact,
tourism may endanger natural resources such as beaches, or historical sites.
Furthermore, pollution is also a major cost. One can also argue that tourism
increases competition for limited resources in the form of water and land. Consequently,
this might cause land degradation, deterioration of scenery and loss of
wildlife habitats.

 

2.3 Review of the Empirical Literature

Several
attempts have been made to investigate the impact of tourism on economic growth
is several countries. As a matter of fact, empirical evidence bears witness
that tourism contributed to export-led economic growth.

Dritsakis
(2004), in his study on the economic growth performance of Greece, concluded
that tourism has an effect on economic growth in the long run. On the other
hand, Tosun (1999) and Guduz and Hatemi (2005) for Turkey, Eugenio-Martin and
Morales (2004) and Oh (2005) for Korea claimed the existence of tourism-led
growth. Furthermore, Balaguer and Cantavella-Jorda (2002), conducting a study
using Spain’s economic data, also arrived to the conclusion of tourism-led
economic growth.

Balaguer
and Cantavella-Jorda (2002) conducted an analysis on tourism as a long-run
economic growth factor. The sample country used was Spain. The results indicate
that an increase in tourism income has an effect on economic growth. Furthermore,
Dristakis (2004), while studying on tourism as a long-run economic growth
factor for Greece, concluded that there is a bi-directional relationship
between the 2 variables.

Eugenio-Martin
and Morales (2004) also conducted a study regarding the relationship between
tourism and economic growth. With their analysis based on a panel data
approach, and using data for the years 1985 to 1998 for Latin American
countries, they reached the conclusion that an increase in the number of
tourists affects economic growth positively for countries with low and medium
levels of income per capita.

Using
the new heterogeneous panel cointegration technique, Lee and Chang (2008)
conducted a study on tourism development and economic growth. They used a
sample of 32 countries, including both OECD and non-OECD countries. They
reached the conclusion that there exists a unidirectional link flowing from
tourism towards growth for OECD countries. However, for non-OECD countries,
they observed a bidirectional causality relationship.

Brau,
Lanza and Pigliaru (2003) used a sample of 143 countries in their study
attempting to determine how fast small tourist countries are growing. As such,
they selected 14 tourism countries out of the sample of 143. Using data
stretching from the year 1980 to 2003, they found out that tourism countries
grow faster than the other countries on the selected list. They further their
claim by concluding that while being small does not help a country when it
comes to growth, combined to tourist specialization, the smallness of a country
can be favorable. Sinclair (1998) adds to the claim by arguing that many
developing countries view tourism as a primordial part of their economic
growth.

Using
the convergence approach based on Barro and Sala-i-Martin (1992) type analysis,
Proenca and Soukiazis (2005) conducted a study on the impact of tourism on per
capita income growth. Collecting data for different regions of Portugal, they
concluded that tourism can help in enhancing regional growth in Portugal.
However, this will only hold if the supply side of the tourism sector is
improved. In other words, if infrastructures are built to accommodate for the
tourists, they will be able to promote regional growth.

Lanza
and Pigliaru (1999), using the Lucas’ two-sector endogenous growth model,
examined the effect of the tourist specialization of a country on its growth.
They reached the conclusion that countries with relatively large natural
resources, compared to the size of their labour force, have a better chance of
benefiting from comparative advantage in tourism. Furthermore, they argue that
those countries will grow faster than those specializing in the manufacturing
sector.

Ivanov
and Webster (2006) also conducted a study on measuring the impact of tourism on
economic growth. The research used data for the years 1997 to 2004 for the
countries Cyprus, Greece and Spain. The results point out that tourism is a
major contributor to the GDP of Greece. However, the study also concluded that
the tourism industry is decreasing the growth in Cyprus and Spain.

Oh
(2005) conducted a study on the contribution of tourism development to economic
growth in the Korean economy. The research uses Engle and Granger two-stage
approach and a bivariate Vector Autoregression (VAR) model. The study points
towards a one-way causality for economic-driven tourism growth in the Korean
economy.    

Looking
at the other variables, Falki (2009) conducted a study on the impact of
investment, more precisely FDI, on economic growth. Selecting Pakistan’s
economic data for the period 1980 to 2006, a positive relationship between the
two variables was noted.

Kornecki
and Borodulin (2006) also conducted a study on the impact of investment on
economic growth. Using U.S. data for the years 1981 to 2007, the results
pointed out that FDI has a significant influence on GDP growth in the U.S.

A
study has been carried out to investigate the relationship between inflation,
inflation uncertainty and economic growth in 94 emerging and developing
countries by Baharumshah, Slesman and Wohar (2016). Using GMM estimator from
1976 to 2010, the results show that the effect of low inflation is from
negative growth effect of high inflation rates and the growth. While in
non-inflation crisis countries, the negative-level effect of not keeping
inflation in check outweigh the positive effect from uncertainty. When
inflation reaches moderate ranges which are 5.6 to 15.9%, it is confirmed that
there is the existence of a positive effect of uncertainty about the inflation
rate on growth through a precautionary motive.

Regarding
exports and economic growth, Chow (1987) conducted a study on 8 countries for
the year 1960 to 1980. Bidirectional causality was to be noted for Brazil,
Hong-Kong, Israel, Korea, Taiwan and Singapore. On the other hand,
unidirectional causality was noticed in Mexico, while no causality was found
for Argentina. This was further agreed by Ram (1987), who conducted his study
for 88 countries for the years 1960 to 1982. As a matter of fact, he found a
positive correlation for more than 80 percent of the countries.

     

 

2.4 Summary and the Gap in the Literature

From
the literature that we had reviewed from the period of 1987 to 2016, several
researchers have investigated the impact of tourism on economic growth. Most of
the researches tend to portray comparisons between countries. In other words,
the efficiency with which the tourism sector affects economic growth is being
compared between countries. As such, the most common estimation methods are
panel data approach, and heterogeneous panel cointegration approach. However,
the Engle and Granger two stage approach, Granger Causality, and OLS have also
been noticed for researches with only one sample country.  The countries used in the existing research are
vast in numbers. This can be tentatively explained by the fact that some
researches were comparing the tourism sectors between developed and developing
nations. Furthermore, other researches classified countries as OECD and
non-OECD, and these make for the fact that the countries used in the existing
research vary in size, geographical location, and development status.   

In
this paper, the impact of tourism on economic growth in Mauritius will be
investigated. Other variables have also been added to the study in the form of
investment, inflation, and exports so as to be able to have a better indication
of the impact of tourism on growth. Mauritius has been chosen as the sample
country due to limited past studies, and the fact the country turned to tourism
after it could no more rely, as it did in the past, on the sugarcane and
textile industries. Furthermore, Mauritius is one of the best touristic
destinations in the World, and the country is also known to be an economic gem
for Africa, in spite of its size and small population.