“THE TOURISM INDUSTRY, ITS CONTRIBUTION TO ECONOMIC

GROWTH AND FACTORS WHICH INFLUENCE THIS

RELATIONSHIP: AN EMPIRICAL STUDY OF PAKISTAN.”

Introduction
Tourism has been growing at an unprecedented speed over the past few decades.
During 2018, this sector grew at a rate of 3.9% which-for the eighth year in a row-is
faster than the growth rate of the world GDP. This brings with it many opportunities
but also many challenges ("Travel Tourism continues strong growth above global
GDP", 2019).

The Tourism sector has over time proven to be an excellent way for country’s to
boost their total revenue and help develop the economy. But this positive impact can
only fully be realised if all the stakeholders understand the complexities of the
relationship between tourism development and economic growth.

Pakistan has also over the years tried to grow this sector and have a better
international image as a tourist destination. According to the World Trade and
Tourism Council, the tourism sector contributed USD 20,098.9m in Pakistan during
2018 which is roughly 7.1% of the total economy (PAKISTAN 2019 ANNUAL
RESEARCH: KEY HIGHLIGHTS, 2019).

With tourism returning to Pakistan and the incumbent government prioritizing the
promotion of this sector, it is important now to understand how strong of a
relationship tourism has with development in our own economy and what factors
influence this. Only when proper research is conducted can well-informed and
effective policies be formulated. Effective planning and management is required in
order to best make use of the unique opportunities this sector brings and also
minimize negative externalities.

Through this project, the question of whether ​an increase in tourism has any
significant impact on the growth rate of the Pakistani economy​ shall be
addressed. Along with research questions on whether any external factors have a
significant effect on the tourism industry’s overall contribution to economic
development in Pakistan. The factors that shall be under scrutiny here are
terrorism​, ​Government spending on tourism infrastructure, purpose of
tourists’ visits, and being a member of cooperative projects and organisations
such as CPEC.

Objectives of the study:

The Objectives of this project are as follows:
 ● Find the direction and strength of relationship between tourism receipts and
the growth rate of Pakistan over a period of 20 years; i.e. 1997-2017
● Estimate to what extent the following factors have affected the tourism
industry’s contribution to economic development in Pakistan over the past 20
years:
○ Terrorism and Political Instability
○ Government spending on tourism infrastructure
○ Purpose of tourists’ visits (e.g. religious, educational, business, cultural,
eco-tourism and other)
○ Being a member of international and inter-regional cooperative projects
and organisations such as CPEC.
● Provide recommendation on how Pakistan can best and most effectively
make use of the tourism sector to benefit and stabilize its economy.

Background
Tourism remains one of the largest and fastest growing service sectors in the world
today. According to the World Travel and Tourism Council (WTTC), during 2018 the
travel and tourism sector contributed $8.8 trillion to the global economy and created
319 million jobs which represents about one in ten of all jobs in the world.
("Travel Tourism continues strong growth above global GDP", 2019).

Tourism hence understandably has become a major source of income and

employment for many countries worldwide. For less developed regions, this sector
presents an opportunity to help reduce poverty and overall improve their economic
development (Telfer and Sharpley, 2008).The economic benefits from tourism have
been widely accepted and recognised for example, increased tourist expenditure
boosts the host nation’s aggregate demand and creates employment opportunities
for the locals.

Over the years many measurement techniques have been used to gauge the effect
of tourism on economic development. But recently there has been an ongoing
debate on the feasibility of past indicators and a rising pressure on key stakeholders
to better and more accurately measure and communicate the impact of the tourism
industry ("Towards More Effective Impact Measurement in the Tourism Sector
Observations and Key Issues", 2015).

Researchers in the field like Hall and Richards (2000) have put forward various
reasons for why measuring the social, cultural and economic impact of tourism is
proving to be so difficult. The main problem is that most of the effects are indirect
and that there is an issue with pinning down a well-accepted methodology to base
research off of.
There is a rising concern that because of problems with the research, making
relevant and informed development plans shall be troublesome. And without proper
check and management, reliance on this sector for growth will then become a threat
to sustainable development especially in the less developed nations of the world.

Due to the strength and depth of the impact, it has become imperative that localized
and concentrated research is done to fully capture the actual effects-both positive
and negative-of tourism on the local economy.

Research has been undertaken across the world to empirically link tourism with
development in separate economies (Fayos Solá, 2014; Karim, 2019;). Along with
figuring out the strength of the tourism-development relationship a lot of work has
also gone into figuring out which factors influence this relationship. Every country’s
economy is different but a few factors which have a strong effect on tourism in the
context of Pakistan are Terrorism, the government spending on tourism
infrastructure and promotion, purpose of tourists’ visits, and being a member of
CPEC.

Terrorism and Tourism have been studied before especially in the past few decades
and the two variables have been noted to have a negative, unidirectional relationship
(Enders, Sandler & Parise, 1992). Since this sector can influence many of the
residents either directly or indirectly, most government tend to take a keen interest in
helping promote and develop the tourism destinations and infrastructure.
Government spending and proper, effective planning can have a profound positive
impact on the tourism industry.

Loomis & Caughlan (2006) proved empirically that the purpose of the trip can greatly
influence the impact of tourism on the economy. For example, business tourists tend
to spend more money than educational tourists but cultural tourists tend to have the
most community impact as they travel more widely within the country. Eco-tourism is
also a growing sub-sector on its own (Christina, 1996). The last factor that we shall
be discussing under this project is the influence on the tourism sector of being a
member of an international or regional cooperative project which is directly unrelated
to tourism. In Pakistan’s case we shall briefly be looking into whether being a part of
CPEC has drastically influenced tourism.

Significance
There are several stakeholders involved in the study of tourism and its contribution to
development. We can use a Mendlow (1981) matrix to show various levels of interest
and power that each group has. This can be useful when studying the impact of
tourism and also when formulating sustainable developmental plans.
Now that we have an overview of the various stakeholders involved, it begs the
question why it is necessary to address this relationship between tourism and
development in the first place, especially in the context of Pakistan.
● The Travel and Tourism sector is fast-growing and has a far-reaching impact
on international, national and regional trade, infrastructure, income,
investment, and the environment. This sector and its influence are a reality of
our contemporary world and must not be overlooked or taken for granted. It is
thus necessary to keep up with the changing dynamics within this field in
order to make the most effective and sustainable development plans.
● The incumbent government is focusing on this sector heavily and is making
efforts and policies to promote tourism (“Pakistan vision 2025”, 2019). To
make the plans and policies more effective and successful it is important to
base them on proper empirical research and theoretical underpinning.
● There are several factors which influence the tourism-development
relationship. It is necessary that we study the factors most prevalent in
Pakistan so that we can best make use of the opportunities this sector
presents and also minimize the negative externalities.
● Many jobs and livelihoods in Pakistan depend upon this sector and without
proper planning and an understanding of the various underlying relationships,
sustainable growth is not possible.
● Keeping Pakistan’s current economic situation in mind one can look towards
the tourism industry and its opportunities as a ray of hope. There are endless
possibilities and destinations that Pakistan has already been blessed with that
only need a little development and security stability in order to become heavy
revenue generating sources for the economy.

Review of Literature:
Several theories exist that specify the theoretical linkage between tourism
development and economic growth. The Tourism Area Life Cycle theory presented in
the 1980s by R. W. Butler (Butler 1980) remains one of the most recognised and
cited in tourism academic research. This theory was built on decades of work before
it namely, Doxey’s Irridex model (Doxey, 1975), Stanley ​Plog's Model of Tourists
Behavior (Plog, 1974), and Vernon’s Product Life cycle theory (Vernon, 1966).
According to the ​Tourism Area Life Cycle theory ​tourists spots and resorts change
and develop over a series of stages stages namely, exploration, involvement,
development, and consolidation. The destination goes through the stages and an
increasing number of tourists visit the country which leads to better development for
the region (Butler, 1990).
In some research articles the empirical relationship between tourism and economic
development are studied using the Autoregressive Distributed Lag (ARDL) approach
(Othman, Salleh & Sarmidi, 2012). This is a very commonly used model to study
economic relationships especially with time series data. In Othman et al, (2012) the
results show a significant relationship in the long run between tourism and economic
growth and also a strong link between tourism and foreign direct investment. In
seven out of the eighteen countries studied under the same research article it was
found that tourism development and economic growth can also show a two-way
relationship. It would be worth noting that all seven of the countries were fairly
developed countries and this two-way causal relationship did not hold for the
less-developed or developing countries.
During the research done specifically on the Pakistani economy to study the role of
tourism in economic growth by Khalil & Kakar (2007), a strong relationship was
established between tourism receipts and economic expansion. Their study was for
short-run analysis and an error-correction model was relied upon to establish the
causal relationship between the two variables.
Using the Johansen cointegration technique, Malik, J. et al (2010) established that in
the long run tourism has a positive impact on the GDP growth rate of Pakistan. The
findings were further supported by post-regression tests such as the Granger
Causality test.
Adnan Hye & Ali Khan (2013) also used the Johansen Juselius cointegration
technique as the research article quoted above to back up the hypothesis for a
tourism-led growth rate in Pakistan.

Methodology:
● Model Specification: Tourism and Economic growth are the variables in this
model whose relationship has widely been studied and reported
(Corte-Jimenez and Paulina, 2006; Fayos Solá, 2014; Karim, 2019;). In recent
years a shift has taken place to study the actual community based social
impacts of tourist activities (Zamani-Farahani and Musa, 2012). But for the
purpose of this report, focus shall be maintained on the economic impact of
tourism. An increase in tourism is said to have a positive, one-directional
impact on economic growth (Salleh​ et al​. 2007). Kaplan and Celik (2008) after
collecting data across half a decade from Turkey found a unidirectional
causality link between tourism development and economic performance.
Terrorism has been noted to have a negative, unidirectional
relationship with tourist activity, causing huge revenue losses to host
countries (Enders, Sandler & Parise, 1992). This link between terrorism
and tourism activity is one-way i.e. an increase in terrorism will lead to
a substantial decrease in tourism but not vice versa (Enders & Sandler,
1991).
Governments taking an active involvement in the tourism industry is
encouraged, especially in developing countries as it can help create
jobs and overall improve the economy by attracting tourists (Jenkins &
Henry, 1982). A broad scale tourism development plan on a federal
 and provincial/regional level is needed to successfully and positively
develop the tourism sector. So ​Government spending on tourism
infrastructure has a positive impact on tourism which in turn shall
theoretically have a positive impact on the economic development of a
country. This shall lead the government to spend more and focus more
intensely on this sector hence creating a positive loop.
It has empirically been proven that the purpose of the trip can greatly
influence the impact of tourism on the economy (Loomis & Caughlan,
2006).
Being a part of international and regional projects and organisations is
seen as a positive step in tourism development (Saarinen, Rogerson &
Manwa, 2014). China-Pakistan Economic Corridor or CPEC in
particular has been seen as as promoting not only tourism between the
two countries but also helping Pakistan to develop good infrastructure
for coastal and the northern mountainous tourist destinations (Ahmed
Awan, 2019).
● Data: The data collected shall be time-series in nature from ​1997-2017. A
time-series analysis has been chosen to show the impact and direction of
relationships as they’ve developed over the past two decades.
● Variables: There are two main variables in this report; tourist activity and
economic development. Tourist activity (T) is the independent variable
measured as total tourism revenue for Pakistan per year. The dependent
variable is economic development (D) which shall be taken as the annual
GDP (in current US$) of Pakistan.
■ Other independent variables include:
■ Terrorism and political instability (S). A terrorism index shall be
used to measure it.
■ Government spending (G) shall be measured using World Bank
data on Pakistani Government’s spending on travel and tourism
services per year in US$.
■ Purpose of tourists shall be measured by creating a dummy
variable for the different types of tourists. Here we shall consider
six types i.e. Religious, educational, Business, Cultural,
eco-tourism, and other. Five variables (P1, P2, P3, P4, P5) shall
be created as follows to measure the major purpose for tourism
for the various years.
■ The last variable is ​being a member of CPEC. A dummy variable
(C) shall be created assigning value 1 to the years Pakistan has
been part of CPEC and 0 otherwise.
● Methodology: Multiple linear regression analysis shall be used and the model
can be written as;
 ■ G = b0 + b1T + b2S + b3G + b4P1+ b5P2 + b6P3 + b7P4 +
b8P5 +b9C
● Data processing tool: MS Excel shall be used for data analysis.