ABSTRACT

Although the relationship between international trade and economic growth has found a wide application area in the literature over the years, this can not be said about tourism and growth or trade and tourism. This study employs co-integration and Granger causality tests to examine long-run relationship between tourism, trade and growth, and the direction of causality among themselves for Cyprus. Results reveal that tourism is not co-integrated either with growth or trade whereas latter two are co-integrated and there is bidirectional causation between tourist arrivals and growth, between exports and growth and finally between exports and imports in Cyprus. Finally, results suggest unidirectional causation from tourist arrivals to export growth in Cyprus.

I. INTRODUCTION

International tourism and international trade are two major sources of foreign exchange for small countries as well as larger ones. Small countries, in particular small islands, have more dependency on tourism and trade than the larger ones since their economies are based on only a few sectors. For example, according to Kuznets (1966), as the country gets smaller, its dependency on international trade would increase. On the other hand, although many economists agree that small countries have similar advantages and disadvantages when compared to larger ones, there are differences in the origin of these disadvantages. Among common disadvantages are international tourism/trade dependency, vulnerability, high population growth rate, limited labor force, low labor efficiency, diseconomies of scale, low GDP (Gross Domestic Product), high dependency on imports of intermediate and consumption goods, and production of only a few basic goods/services.

The small size of a country, in terms of area and population, may be economically advantageous. The smallness of a state in terms of area and population may in fact be a source of comparative advantage rather than being a constraint on economic growth and development. Specifically, smallness may be more than compensated by certain unique characteristics possessed by small states. Export-oriented services tend to represent such uniqueness and, therefore, a basis for a potential comparative advantage (Mehmet and Tahiroglu 2002).

In the last few decades, some small states have been important service centers in banking, financial and trade services. Among them are Singapore, Hong Kong, Bahrain, Bermuda, Malta, Jersey and Cyprus. The tourism sector has been a locomotive industry for some small economies and the sole source providing a comparative advantage. Bermuda is a good example in the sense that it has emerged as a tourism center, successfully exploiting the ability to take advantage of a favorable climate and location. The strategic location of small states also serves as an important factor for providing banking and financial services. In the Mediterranean Sea, two examples of this category are the south of Cyprus and Malta. Bermuda, Bahrain and Jersey are among other states as studied by Bowe et al. (1998). On the other hand, in the north side of Cyprus, higher education emerged as number one sector contributing to national income of the country. Having restrictions on international trade and tourism industry with other countries, Turkish Cypriots living in the north of Cyprus succeeded in establishing and developing higher education institutions that attracts many foreign students from different regions of the world. Currently, there are six universities in North Cyprus where they attract students and academicians from more than 69 countries (SPO 2004).

International tourism not only contributes to economic welfare of countries but also to their socio-cultural, environmental and ecological activities (Lindberg and Johnson, 1997; Bull, 1991; Ryan, 1991; Pearce, 1989). Luzzi and Flückiger (2003) defines international tourism not as an industry but as a single, complex and differentiated product. It is complex because it includes a wide variety of goods and services, and differentiated because each destination has unique features. On the other hand, the purpose of tourism can be in different forms: Leisure tourism, business, visiting friends and relatives, education, conferences, or sports. Thus, international tourism is a major contribution to the welfare of countries in every field. As a result of these activities, tourists are likely to consume and purchase of goods/services that bring economic impact to every sector of countries such as transportation, accommodation, tour operators and shopping areas (See also Chang, 2000).