Relationship between Tourism and Economic Growth in Sri Lanka

Abstract

Tourism is one of the growing industries in Sri Lanka in the post war development. Its contribution to the Sri Lankan economy is vital in the same context. The objective of this study is to examine the causal relationship between economic growth and tourism earning in Sri Lanka during 1977-2012. This study employs Granger Causality tests using annual time series data to analyze the presence and direction of causality between economic growth and tourism earnings. The unit root test is carried out as a prerequisite test for cointegration test. Moreover, cointegration testing and error correction mechanism also used to analyse the long term relationship between two variables. The results reveal that there is uni-directional causality between economic growth and tourism earning, where economic growth only causes to tourism earnings, not the other way around. It is contrary to the tourism-led-economic growth hypothesis in the phase of development, since the priority of tourism earnings had been understood only a few years ago, due to the domestic war situation in the last three decades till about 2010. The study has implication for policy makers of Sri Lanka economic development that tourism should lead to economic growth in the future; and to attain such causality, they should presently devise strategies against the tourism-led-economic growth hypothesis.

Keywords: Sri Lanka, economic growth, tourism, causality, cointegration, unit root

JEL Classification: A23, B22, B23, B40, B41, C12, C22, C32, C52, L83, N10, N15, O53