Bridging Theory and Empirics: A Growth Equation for Tourism-Driven Economies

Abstract

This paper presents a theoretical characterization of how tourism sector specialization stimulates (deters) economic growth that integrates both Tourism-Led and Beach Disease hypotheses. We develop a multisector growth model with tourism and non-tourism production from which we derive a growth equation that can be easily estimated by practitioners using conventional regression methods, building a bridge between theory and empirics. Under mild assumptions, we demonstrate theoretically that GDP per capita growth rate depends on the share the tourism sector represents over total GDP, Total Factor Productivity, and other determinants of the steady state of the economy. A testable implication is that a higher specialization in tourism services yields positive GDP per capita growth rates consistent with the Tourism-Led growth hypothesis if, and only if, the tourism sector is more productive than the rest of the economy. Otherwise, greater tourism specialization results in degrowth paths that are compatible with the Beach Disease. We also conduct simulation exercises illustrating the differential impacts of demand- and supply-side policies on long-term economic growth using calibrated parameters for Spain, a large economy in which more than 10% of GDP is generated by tourism-related activities.