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TOURISM INDUSTRYS INCOME AND EXPENDITURE: TIME SERIES
EVIDENCE FROM CYPRUS
ABSTRACT
This study examined empirically the existence and nature of long-run relationships between income derived from the Tourism Industry in Cyprus and tourist arrivals on onehand; and three categories of expenditure (Transport and Communication, Hotels andRestaurants, Advertising and Promotion) on the other. The results suggest the existenceof positive long-run relationships between income derived from the tourism industry onone hand; and the categories of expenditure, (Hotels and Restaurants, Advertising andPromotion) on the other, with causality running both ways. Causality running both wayswas found also in the case of tourist arrivals and the category of Hotels and Restaurants.
Keywords: Tourism Industry; Cyprus; income; expenditure; long-run relationships.
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1. INTRODUCTION
Tourism is one of the most flourishing sectors in the world. Worldwide international
tourism receipts have grown by 12 per cent over the last ten years. Many countries are
setting targets in attempts to gain the additional income, foreign currency, employment
and tax revenue that the sector can provide. The Tourism Industry is also very important
for the economic growth. Tourism is the fastest growing industry in the European Union
with 2.5% to 4% growth per year in terms of turnover, and 1% to 1.5% in terms of
employment opportunities. The opinion of the European Economic and Social
Committee is that the Tourism Industry has a relatively secure future as the tourism
product does not run the risk of being left behind by technological change. Christos
Paputsis pointed out that tourism is now a priority for job creation in European priorities.
He pointed out that an enlarged European Union will become the biggest single tourist
market in the world. Geoffrey Lipman, President of the World Travel and Tourism
Council, predicted that the 7 million tourism jobs today in Europe and the 15 million jobs
they indirectly generate in construction or retailing will increase so fast that the sector
will more than double by 2010. He urged linking tourism to rural revitalization programs
within Europe, and development policy beyond it, and integrating tourism into transport
policy including the trans-European transport networks projects.
Taking into consideration what is mentioned above and the perspectives which are
unfolded in the tourism industry, for the Cyprus economy the Tourism Sector
unquestionably is of great importance. However, the break down of the tourism industry
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in Cyprus and the fluctuations that the industry presents especially after 1990 (see Figure
1), naturally raises a couple of questions. At one hand are these fluctuations due to
internal factors such as the decrease in productivity, the price increases and the
decrease in the quality of the tourist package, the international competitiveness, or due to
the fact that level of the expenditures made in the tourism industry are not satisfactory to
support the sustainable development of the sector? On the other hand are these
fluctuations due to external factors, such as regional and international conflicts (i.e. the
Gulf War, 1991, the international economic recession of 1993, and the War in Iraq in
2003).
FIGURE 1: INCOME FROM THE TOURISM INDUSTRY
0.00
5.00
10.00
15.00
20.00
25.00
1 9 6
0
1 9 6
2
1 9 6
4
1 9 6
6
1 9 6
8
1 9 7
0
1 9 7
2
1 9 7
4
1 9 7
6
1 9 7
8
1 9 8
0
1 9 8
2
1 9 8
4
1 9 8
6
1 9 8
8
1 9 9
0
1 9 9
2
1 9 9
4
1 9 9
6
1 9 9
8
2 0 0
0
% i
n G D P
Revenew From Tourism
Source: Developed by the author using data from the Cyprus Department of Statistics.
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The present study examines if in the long-run the expenditures made in the tourism
industry affect the sustainable growth of the industry. This study investigates a specific
group of expenses in the tourism industry, namely Transport and Communication (TC),
Hotels and Restaurants (HR), and Advertising and Promotion (AP) in relation to the
tourism income and the tourist arrivals for the period 1960-2001. It must be noted that,
for the Advertising and Promotional expenses the available data covers only the period
1975-2001. Also, Cyprus being a tourist destination, for reasons of simplicity, expenses
in TC is treated as expenditure made in the tourism industry.
The link between the tourism industrys expenditures and the economic growth of the
tourism industry has attracted considerable interest on the part of economic researchers
both in the theoretical as well as in the empirical level. The overall approach is that the
tourism industry may require major investments in basic infrastructure such as transport,
accommodation, water supply and health care (Kottrell 2001). Sinclair 1998, points out
that, countries potentially benefit from increasing expenditures on tourism. The
Keynesian approach supports the thesis that public and private expenditure in the tourism
industry is an important policy tool to be used to ensure a reasonable level of economic
activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh andSahni, 1984); and secure an increase in productive investment, thus providing a socially
optimal direction for growth and development (Ram, 1986), especially by a simultaneous
increase in short- and long-term revenues. It is argued on what has been said above, that
any delay in developing the tourism industry, will cost to the countrys economic growth
and will affect employment levels (Dallas 2001).
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This paper aims to shed some further empirical light on the issue of tourism
expenditures ability to promote economic growth by focusing on the experience of a
small, open economy, namely the one of Cyprus. Cyprus is a particularly interesting case
study because on one hand the income from the tourism industry (in terms of percentage
in GDP) records a significant increase during the period 1975-2001 (see Figure 1) and on
the other, for the same period it experienced a major increase in tourism expenditure.
Figure 2 reveals the nature of the tourism expenditure (in terms of percentage in GDP)
and Figure 3 reveals the nature of the tourism expenditure (in terms of percentage in the
tourism industrys income). What concerns financing the tourism expenditure under
study, Transport and Communication expenses are covered by the governments budget;
Advertising and Promotional expenses, although designated by the CTO, the government
strongly contributes to the budget of the CTO; Investments in Hotels and Restaurants are
made by the private sector engaged in the tourism industry.
In this paper we aim to acquire insights regarding the output effects of these
expenditures by means of examining, (a) the existence and nature of long-run
relationships between tourism industrys income and the categories of the tourism
industrys expenditure represented in Figure 3; (b) the existence and nature of long-runrelationships between tourist arrivals and the categories of expenditure under study.
These series being volume data instead of value are not affected by the price and
therefore do not introduce any correlation in the model. (c) The existence and nature of
long-run relationships between tourism industrys income and tourist arrivals. The
remainder of the paper is organized as follows: Section 2 outlines the theoretical
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background on which our empirical analysis is based. Section 3 presents the
methodology used and our econometric results. Section 4 discusses the post-1975
tourism policy and tourism activity in Cyprus in the light of the results obtained in
Section 3 and the annual reports of the Cyprus Tourism Organization. Section 5,
summarizes and offers some concluding remarks.
FIGURE 2: FIXED CAPITAL FORMATION
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1 9 6 0
1 9 6 2
1 9 6 4
1 9 6 6
1 9 6 8
1 9 7 0
1 9 7 2
1 9 7 4
1 9 7 6
1 9 7 8
1 9 8 0
1 9 8 2
1 9 8 4
1 9 8 6
1 9 8 8
1 9 9 0
1 9 9 2
1 9 9 4
1 9 9 6
1 9 9 8
2 0 0 0
% i
n G D P
Hotel and Restaurant Transport and Communication
Source: Developed by the author using data from the Cyprus Department of Statistics.
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2. THEORETICAL BACKROUND
The long-run relationship between public expenditure and real output, as is the case
of the infrastructure expenses under study (i.e. transportation and communication), has
attracted considerable attention in economic research. In particular, the ability of public
expenditure to influence national income is questioned in two levels. First, the nature of
the causality pattern is disputed: a number of public finance studies adopt the Wagners
law approach which states that national income causes public expenditure, mainly
through an increase in demand for public services. Within this framework, public
expenditure is treated as a behavioral variable, similar to private consumption. On the
other hand, a number of macroeconomic models adopt a view closer to the Keynesian
doctrine according to which public expenditure is an important policy tool able to
influence the level of equilibrium output. As Singh and Sahni (1984 p. 630) argue, if the
causality pattern were Wagnerian, public expenditure is delegated to a passive role, if
Keynesian, acquires the status of an important policy variable. In the case of transport
and communication expenditure, which is under study in this paper, we may assume that
as the number of tourist arrivals increases (according to the WTO data, by the year 2010
the incoming tourism will be 3,041,000) and tourism being a luxurious product, thedemand for transport and communication will increase. The increase in national income
resulted from tourism will give rise to an increase in the demand for traveling by the
internal tourism also. Looking at the Keyniesian doctrine transport and communication
may influence the level of equilibrium also by encouraging people to travel more and also
by making tourism destinations easier to be accessed.
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With the perspective the incoming tourism to increase (as recorded by the WTO), the
demand for hotels and restaurants as well as for any other constructions of tourist
character (i.e. tourist villages, parks, constructions for sports tourism and others), will
increase. This will give rise to increasing expenditure in the tourism industry and
positively influencing the level of output by attracting visitors from other tourism
segments and by offering higher quality services (Pashardes, Nearchos, Mitsis and
Panteli, 2002).
Second, even if we exclude the possibility of a causality pattern running from national
income to public expenditure, or from the tourism industrys income to private
investments in the tourism industry, it is not quite clear that increased public or private
outlays will have lasting positive output effects. Postulating a fixed level of taxation
revenue, authorities have two options, to finance a higher level of public expenditure
(transport and communication): either to monetize (accommodate) or/and to bond-finance
the expansion. Under a medium-term upward-sloping aggregate supply schedule, the
output implications of the fiscal expansion would have to be studied within a Barro-
Gordon (1983) set-up. Money financed deficits would cause positive output effects only
if they remain unanticipated by the private sector. Repeated and predictable monetaryaccommodation of deficits would result in a higher inflation rate without any long-run
output gain. This situation may arise when inflation causes a decrease in the demand for
traveling for both natives and foreign visitors. By resulting in a higher inflation rate,
money-financed budget deficits could then imply real costs for the economy through the
well-documented real costs of inflation. This situation will cause a decrease in the
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demand for traveling as well as in the demand for hotels and restaurants both for the
home natives and the visitors with a probable decrease in the tourist arrivals and in the
tourists spending. On the other hand, bond-financed public expenditure may involve
expansionary effects of a more lasting nature provided that the anticipation of future
interest payments causes positive wealth effects on current and future consumption (see
e.g. Blinder and Solow, 1973). However, such outcomes may be mitigated by crowding
out effects which can take place through two channels. First, through portfolio effects:
an increase in the stock of bonds may necessitate a similar increase in interest rates to
maintain equilibrium in the bonds market. Such an increase may imply a shift of the LM
curve (to the left), which could reduce the expansionary impact of the bond-financed
deficit. Second, through an upward-sloping aggregate supply curve: given a certain level
of nominal money, increasing prices caused by a fiscal expansion would lead to a
reduction in real money stock. That would cause an increase in interest rates and
negative wealth effects reducing private investment and consumption. Tourism being in
fact an industry exporting services, spending by the tourists is affected not only by the
domestic economic policies but also by the policies of their home countries. By causing
an increase in interest rates, bond-financed deficits may actually result in worse inflation
performance that, money-financed deficits in the line suggested by Sargent and Wallace
(1981). Finally, a bond-financed budget deficit would have no expansionary effect at all
(not even in the short-run) if the Ricardian Equivalence hypothesis were valid.
The role of public and private expenditures as output-promoting control variables has
also been highlighted in the framework of the endogenous growth literature pioneered by
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the seminal papers by Romer (1986) and Lucas (1988). Endogenous growth models
postulate that the economys output is conditioned not only on the level of physical
capital and labour stock (as it was the case in Solows (1956) neoclassical growth model),
but also on additional production factors which may enter the production function with
constant returns to scale alone. If this is the case, returns on investment on such
production factors need not diminish as the stock of the latter increases, and growth
differences among nations may persist indefinitely if, the rate of accumulation of the
specific production factors differ from country to country. Spending on public
infrastructure being one of them (see Aschauer, 1989), the present study will empirically
examine the case of transport and Communication expenditure in the tourism industry.
Finally public expenditure on infrastructure may be responsible for the creation of
positive externalities with potentially important output implications. However, the
endogenous growth models framework has also been used to highlight possibly harmful
effects of excessive government spending. For example, it has been suggested (see King
and Rebelo, 1990) that if increased public expenditure is financed through higher taxation
the economy may end in a development trap and pay a significant welfare cost as a
result of distortions affecting economic incentives.
Looking at advertisement and promotional expenses, as a category of expenditure
under study it has been argued that advertising produces sales (John Philip Jones 1995).
Thus, it may be assumed that, advertising strongly contributes to the growth of the tourist
industry by raising more income. It may be argued that an effective promotion of a well
developed tourist product responding to the needs of its perspective consumers may
increase tourist arrivals as well as tourists spending.
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3. METHODOLOGY
In this section we shall investigate the existence and nature of a long-run
relationship between, (a) income from the Tourism Industry in Cyprus and (b) Tourist
Arrivals on one hand; and a set of expenditure categories in the Tourism Industry on
the other. The existence and nature of long-run relationships between Tourism
Income and Tourism Arrivals will be investigated as well. We consider three
categories of expenditure in the tourism industry: Advertising and Promotion (AP)
designated by the Cyprus Tourism Organization (CTO), and the Gross Domestic
Fixed Capital Formation in Hotels and Restaurants (HR) as well as in Transport and
Communications (TC).
Our analysis is based on annual data. Data for Hotels and Restaurants (HR),
and Transport and Communication (TC), is obtained from the National Accounts of
the Cyprus Department of Statistics. Annual data for the Income from the Tourism
Industry in Cyprus, for the Advertising and Promotional expenses as well as for the
Tourist Arrivals is obtained from the Cyprus Tourism Organization.
Data is obtained for the period 1960-2001 a total of 41 observations, with the
exception of advertising and promotional expenses for which the available data is for
the period 1975-2001; a total of 26 observations.
Our econometric approach follows a two-step logic: First, we shall
investigate the existence of a long-run relationship between the logarithms of each of
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the three Tourism Industrys expenditure categories and the logarithms of the Income
from the Tourism Industry in Cyprus, and of the Tourist Arrivals. Second, for those
cases for which the cointegration hypothesis is not rejected, we undertake weak
exogeneity analysis in order to get indications regarding the direction of causality in
the Granger sense.
We started by investigating the stationarity properties of the variables
involved in the analysis using the (Augmented) Dickey-Fuller (1979) unit root tests.
As far as the logarithms of the variables are concerned, we tested the null hypothesis
of non-stationarity against the alternative that the series are trend-stationary. The
estimated ADF statistics suggested that all variables include a unit root. We proceed
by applying Johansens (1988) cointegration methodology. As a first step, the order
of the underlying VAR models to be used in the cointegration analysis has to be
specified. For each category of expenditure in the tourism industry, (Advertising and
Promotion designated by the CTO, Hotels and Restaurants and Transport and
Communication), we examined three different lag structures ranging from one to
three lagged values for each variable. In the estimated systems, for the Tourist
Arrivals and the Tourism Industrys Revenues, we faced misspecification problems of
residual non-normality. In order to overcome this problem we tested the statistical
significance of a number of dummy variables, aiming to capture the impact of shocks
which might be responsible for non-normality. Out of the cases examined, two
proved statistically significant. The first D1975, refers to year 1975 and it was the
period after the Turkish Invasion in Cyprus in July, 1974. The second, D1991, refers
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to year 1991 during the Gulf War. The inclusion of these dummies as unrestricted
variables (not entering the cointegration space) allows the acquisition of Gaussian
errors and yields well-specified systems.
The next issue raised in the process of formulation of the underlying VAR
system is whether or not deterministic terms like a constant and a trend should enter
the short and/or long-run models. To answer this question, we used the Pantula
principle, i.e. a number of joint hypotheses tests testing simultaneously both the
number of cointegrating relationships among the variables and the existence of
deterministic components. More specifically, for each category of Tourism
Expenditure considered, we estimated three models. The most restrictive (named
Model 1), assumes no linear trends in the levels of the data, i.e. an intercept which is
restricted to the cointegration space. The second (named Model 2), assumes the
existence of linear trends in the levels of the data, implying an intercept both in the
long-run model as well as in the short run model. The two intercepts, when
combined, leave only a constant in the short-run model. Finally, the least restrictive
model (named Model 3), assumes the existence of some long-run linear growth which
the model specification cannot account for, i.e. the existence of a trend term restricted
to the cointegration space. The Pantula principle involves the estimation of all three
models and the presentation of the results from the most restrictive hypothesis (i.e. r =
number of cointegrating relations = 0 and Model 1) through the least restrictive
hypothesis, i.e. r = number of variables entering the VAR -1 = N 1 and Model 3).
The model selection procedure comprises of moving across the rows of the upper half
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of each Table, from the most restrictive model towards the least restrictive one, and
stopping when the null hypothesis is not rejected for the first time.
The results referring to Transport and Communication (TC) appear in Table
1; to Hotels and Restaurants (HR) in Table 2; to Advertising and Promotion (AP) in
Table 3 (all in relation to the Income from the Tourist Industry). In relation to the
Tourist Arrivals, results referring to (TC) appear in Table 4; to (HR) in Table 5; to
(AP) in Table 6. Relating Tourist Arrivals with Income from the Tourism Industry,
results appear in Table 7. According to the Pantula principle, for all the categories of
expenditure, except in the case of tourist arrivals and (TC), both the rank ( max) and
the ( trace ) statistics show that the null hypothesis is for the first time not rejected for
r=1 in model 2 suggesting the existence of one cointegrating (positive) relationship
between each of these variables and the Tourism Income as well as the Tourist
Arrivals together with the existence of a constant, restricted to the cointegration
space. In the case of Tourist Arrivals and (TC), both the rank ( max) and the ( trace )
statistics show that the null hypothesis is for the first time not rejected for r=1 in
model 3, suggesting also the existence of one cointegrating (positive) relationship
between each of these variables and the Tourist Arrivals together with the existence
of a constant, restricted to the cointegration space. Finally, for the pair of variables
for which the hypothesis of cointegration was not rejected, we proceeded to weak
exogeneity analysis using the long-run weak exogeneity LR tests proposed by
Johansen and Juselius (1992). These consist of testing zero restrictions on the
elements of the alpha matrix (i.e. the matrix of coefficients of the speed of adjustment
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to long-run equilibrium) embedded in the estimated Vector Error Correction Model.
Only in the case of Arrivals and (HR) the LR test statistics show that none of the
variables is weakly exogenous to the system. In other words, the results suggest a
two-way causality pattern between Tourist Arrivals on one hand; and Hotels and
Restaurants (HR) on the other. In all the other cases the results suggest a one-way
causality pattern. The results of VEC Pairwise Granger Causality are shown in Table
8.
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TABLE 1: COINTEGRATION ANALYSIS: TOURISM INDUSTRYS
INCOME AND TRANSPORT AND COMMUNICATION (TC)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model1 Model 2 Model 3
max test 0 2 30,3 22,54 23,38
1 1 2,83+ 6,53 15,97
trace test 0 2 33,14 29,07 39,36
1 1 2,83+ 6,53 15,97
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 30,30** 11,44 33,14** 12,53
r 1 r = 2 2,83 3,84 2,83 3,84
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 2: COINTEGRATION ANALYSIS: TOURISM INDUSTRYS
INCOME AND HOTEL AND RESTAURANTS (HR)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model 1 Model 2 Model 3
max test 0 2 29,55 22,00 22,28
1 1 0,35+ 1,01 6,32
trace test 0 2 29,91 23,02 28,61
1 1 0,35+ 1,01 6,32
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 29,55** 11,44 29,91** 12,53
r 1 r = 2 0,35 3,84 0,35 3,84
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 3: COINTEGRATION ANALYSIS: TOURISM INDUSTRYS
INCOME AND ADVERTISING AND PROMOTION (AP)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model 1 Model 2 Model 3
max test 0 2 21,49 19,46 22,81
1 1 1,47+ 1,82 7,37
trace test 0 2 22,97 21,28 30,18
1 1 1,47+ 1,82 7,37
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 18,31** 14,07 20,88** 15,41
r 1 r = 2 2,56 3,76 2,56 3,76
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 4: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND
TRANSPORT AND COMMUNICATION (TC)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model1 Model 2 Model 3
max test 0 2 25,19 23,27 23,76
1 1 15,31 5,84 11,63+
trace test 0 2 40,51 29,11 35,40
1 1 15,31 5,84 11,63+
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 23,76** 18,96 35,40** 25,32
r 1 r = 2 11,63 12,25 11,63 12,25
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 5: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND
HOTELS AND RESTAURANTS (HR)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model 1 Model 2 Model 3
max test 0 2 19,60 11,64 12,24
1 1 2,67+ 1,11 5,94
trace test 0 2 22,28 12,76 18,49
1 1 2,67+ 1,11 5,94
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 19,60** 11,44 22,28** 12,53
r 1 r = 2 2,67 3,84 2,67 3,84
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 6: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND
ADVERTISING AND PROMOTION (AP)
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model1 Model 2 Model 3
max test 0 2 33,28 12,45 12,47
1 1 0,004+ 0,61 9,65
trace test 0 2 33,29 13,07 22,12
1 1 0,004+ 0,61 9,65
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 33,28** 11,44 33,29** 12,53
r 1 r = 2 0,004 3,84 0,004 3,84
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 7: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND
TOURISM INDUSTRYS INCOME
JOINT TEST FOR DETERMENISTIC COMPONENTS AND
COINTEGRATING RANK: THE PANTULA PRINCIPLE
Ho r n-r Model 1 Model 2 Model 3
max test 0 2 18,73 15,51 15,72
1 1 1,80+ 0,05 5,21
trace test 0 2 20,53 15,56 20,94
1 1 1,80+ 0,05 5,21
+ indicates the first time the null hypothesis is not rejected
DETERMINATION OF COINTEGRATING RANK
Ho H1 LR statistic 95% CV Trace statistic 95% CV
r = 0 r = 1 18,73** 11,44 20,53** 12,53
r 1 r = 2 1,80 3,84 1,80 3,84
* Rejects the null hypothesis at the 5% level
** Rejects the null hypothesis at the 1% level
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TABLE 8: VEC PAIRWISE GRANGER CAUSALITY
Dependent variable: D (INCOME)
Exclude Chi-sq df Prob.
D (TC) 8.5810 2 0.0137
Dependent variable: D (TC)
Exclude Chi-sq df Prob.
D (INCOME) 1.2991 2 0.5223
Dependent variable: D (INCOME)
Exclude Chi-sq df Prob.
D (HR) 5.7205 2 0.0573
Dependent variable: D (HR)
Exclude Chi-sq df Prob.
D (INCOME) 3.7646 2 0.1522
Dependent variable: D (INCOME)
Exclude Chi-sq df Prob.
D (AP) 3.0265 2 0.2202
Dependent variable: D (AP)
Exclude Chi-sq df Prob.
D (INCOME) 2.5401 2 0.2808
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Dependent variable: D (ARRIVALS)
Exclude Chi-sq df Prob.
D (TC) 5.6200 2 0.0602
Dependent variable: D (TC)
Exclude Chi-sq df Prob.
D (ARRIVALS) 1.5664 2 0.4569
Dependent variable: D (ARRIVALS)
Exclude Chi-sq df Prob.
D (HR) 5.7200 2 0.0617
Dependent variable: D (HR)
Exclude Chi-sq df Prob.
D (ARRIVALS) 5.1454 2 0.0763
Dependent variable: D (ARRIVALS)
Exclude Chi-sq df Prob.
D (AP) 1.6206 2 0.4447
Dependent variable: D (AP)
Exclude Chi-sq df Prob.
D (ARRIVALS) 55.5883 2 0.0000
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Dependent variable: D (ARRIVALS)
Exclude Chi-sq df Prob.
D (INCOME) 0.1111 2 0.9459
Dependent variable: D (INCOME)
Exclude Chi-sq df Prob.
D (ARRIVALS) 36.9125 2 0.0000
4. POST-1975 CYPRUS TOURISM POLICY: AN ASSESSMENT
After the Turkish invasion of 1974, the tourism industry represented less than
2,2% of the GDP. In the years that followed however, the tourism industry in Cyprus
achieved substantial developments and its contribution to the GDP exceeded 20%. A
very important impact of the tourism industry on the Cyprus Economy is also its
contribution to maintaining the balance of payments in the current account. The income
from the tourism industry is almost as much as the income derived from all the other
exported goods and services, and its the primary source of foreign currency.
The tourism industry also creates new working posts. It is estimated that, 25% of
the new working posts created after 1980, were due to the growth of the tourism industry.
At the beginning of the 90s however, fluctuations started to develop in the
tourism industry. This negative process continued up to the year 1996 after which the
tourism sector finds its way up again. However, the rate of growth of the industry
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Regarding Tourist Arrivals, the Granger Causality analysis shows a one-way
causality pattern between Tourist Arrivals on one hand; and Transport and
Communication on the other. Also the analysis shows a one-way causality pattern
between Advertising and Promotion on the one hand; and Arrivals on the other. There
is however a two-way causality pattern between Tourist Arrivals on one hand and
Hotels and Restaurants on the other.
Turning now to the examination of the results, referring to what we have termed
Tourism Industrys Expenditure (TC, HR and AP) it seems that the policy followed in
the tourism industry regarding Hotels and Restaurants is rather effective. In answering
the question of the form did expenditure in the tourism industry promoted Cyprus
Tourism Industrys Growth, for HR we can be firmly positive.
Turning now to the category Advertising and Promotional expenditure (AP), we
shall relate it with Income from the Tourist Industry and Tourist Arrivals. Although
there is a two-way causality pattern in the case of Income and AP and one-way causality
pattern running from AP to Tourist Arrivals. This may seem natural but following that,
there is not a causality pattern running from Tourist Arrivals to Tourism Industrys
Income. Thus, we may say that an internal factor which probably constitutes to the
above mentioned fluctuations in the Tourism Industry is not the so efficient Advertising
and Promotion of the tourist product.
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It has been found from the analysis also that there is also a one-way causality
pattern running from Tourism Income to TC and from Tourist Arrivals to TC. This
causality pattern may seem natural (i.e. the level of the expenditure for TC depends
upon the demand for TC from the travelers and also upon the availability of financial
resources), however since the quality of the tourist product has to be developed
(Pashardes 2002), in order to increase the competitiveness of the Cyprus tourism
product, further substantial investments in transport and communication without delay
will be of an advantage. In the long-run a two-way causality pattern between Income
and TC as well as between Arrivals and TC will be achieved.
FIGURE 4: TOURISM INCOME AND TOURIST ARRIVALS
0
200
400
600
800
1000
1200
1400
0 1000000 2000000 3000000
ARRIVALS
INCOME
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5. SUMMARY AND CONCLUSION
This paper has attempted to shed some further empirical light on the issue of the
link between expenditure in the tourism industry on the one hand; and income from the
tourism industry and tourist arrivals on the other. We have examined the role of three
categories of expenditure in the tourism industry in terms of promoting economic
growth and developing the tourism industry. Our results suggest that increases in
Hotels and Restaurants (HR) and Advertising and Promotional (AP) expenditure are
followed by increases in the income derived from the tourism industry as well as by
increases in the tourist arrivals.
On the other hand, increases in TC expenditure are not followed by increases in
the income from the tourism industry and in the tourist arrivals. At the same time the
increase in the tourist arrivals didnt give a proportional rise to the income derived from
the tourism industry.
On the basis of our results, we discussed the implications of the major categories
of expenditure (TC, HR and AP) made in the tourism industry in Cyprus between 1960
and 2001. We argued that in terms of output growth in the tourism industry, the
expansion has been effective and contributed to the economic growth of the tourism
industry in Cyprus as well as in the countrys GDP. From that point of view the tourism
policy adopted in Cyprus has been also effective.
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Having said that however, does not exclude the implementation of future
developments in the tourism industry in order to increase the competitiveness of the
tourism product and to meet the challenges of the global competition especially in the
Mediterranean.
For the further development of the tourism industry it would be necessary to
promote a more efficient advertising campaign especially in new markets and attracting
visitors with high purchasing power. This will help achieving a proportional increase of
the tourism industrys income to the tourist arrivals, leading to the need of offering
value for money to these visitors. Thus, the quality of the services offered should be
increased. Talking in terms of value for money, the tourism product cannot be isolated
from the infrastructure and the area of hotels and restaurants. Substantial investments
should be made in Transport and Communication as well as in Hotels and Restaurants
in order to increase the quality of the services offered by the latter and at the same time
to create a two-way causality pattern in the case of TC and maintain the causality
pattern in the case of HR and AP.
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