Nexus between Tourism Demand and Output Per Capita with Relative Importance of Trade Openness and Financial Development: A Study of Malaysia

Abstract

This paper revisits the tourism-growth nexus in Malaysia using time series quarter frequency data over the period of 1975-2013. We examine the impact of tourism using two separate indicators – tourism receipts per capita and visitor arrival per capita. Using the augmented Solow (1956) production function and the ARDL bounds procedure, we also incorporate trade openness and financial development, and account for structural break in series. Our results show the evidence of cointegration between the variables. Assessing the long-run results using both indicators of tourism demand, it is noted that the elasticity coefficient of tourism is 0.13 and 0.10 when considering visitor arrival and tourism receipts (in per capita terms), respectively. Notably, the impact of tourism demand is marginally higher with visitor arrival. The elasticity of trade openness is 0.19, of financial development is 0.09, and of capital share is 0.15. In the short-run, the coefficient of tourism is marginally negative, and for financial development and trade openness, it is 0.01 and 0.18, respectively. The Granger causality tests show bi-directional causation between tourism and output per capita, financial development and tourism, and trade openness and tourism demand, duly indicating the feedback or mutually reinforcing impact between the variables, and the evidence that tourism is central to enhancing the key sectors and the overall income level.

Keywords: tourism and output per capita, Malaysia, trade openness, financial development, tourism-led growth hypothesis