Modeling Tourism Development and Long-Run Economic Growth in Aruba

Tinbergen Institute Discussion Paper 13-145/VIII

Posted: 19 Sep 2013

See all articles by Jorge Ridderstaat

Jorge Ridderstaat

Centrale Bank van Aruba

Robertico Croes

University of Central Florida

Peter Nijkamp

Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: September 19, 2013

Abstract

Tourism has over the past decades turned into a core activity for accelerated growth. The purpose of this study is to determine the role of tourism in the economy of Aruba. More specifically, this investigation attempts to answer the following questions: (1) Is there is a long-run equilibrium relation between tourism development (TD) and economic growth in Aruba; and (2) if so, what is the causality direction between TD and economic growth? This exercise involves applying an econometric methodology consisting of unit root testing, co-integration analysis, vector error correction modeling (VECM), and Granger causality testing. The results show there is one co-integrating relation between these two variables, while the VECM comprises both a short- and a long-run relation. The short-run dynamics of the model suggests a speed of correction of 0.25%, meaning that it would take about 10.5 years to correct for disturbances back to equilibrium. The long-run relation indicates that a 1% change in tourism revenues would lead to a 0.49% increase in real GDP in the long-run, ceteris paribus. Our findings have also empirically verified the presence of the Tourism-Led Growth Hypothesis (TLGH) in the case of Aruba. They show that tourism is in part an endogenous growth process, requiring a systematic allocation of resources (e.g., financial means, leadership, creativity, innovation, and entrepreneurship) to sustain its development for local and regional economies.

Keywords: endogenous growth, tourism development, economic growth, sustainability, Aruba, tourism receipts, gross domestic product, unit root, cointegration, VECM, Granger causality

JEL Classification: O4

Suggested Citation

Ridderstaat, Jorge and Croes, Robertico and Nijkamp, Peter, Modeling Tourism Development and Long-Run Economic Growth in Aruba (September 19, 2013). Tinbergen Institute Discussion Paper 13-145/VIII. Available at SSRN: https://ssrn.com/abstract=2328127

Jorge Ridderstaat (Contact Author)

Centrale Bank van Aruba ( email )

J.E. Irausquin Boulevard 8
P.O. Box 18
Oranjestad, Dutch Caribbean
Aruba

Robertico Croes

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

Peter Nijkamp

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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