How Does Political Instability Influence the Effect of Tourism Demand on Economic Growth

This study investigates the effects of tourism demand (TD) on economic growth by employing panel fixed-effects and system-generalised-methods-of-moments techniques for over-hundred-countries for the period 1995-2012, considering the role of political instability (PI) in each country as an absorptive factor. The results indicate that TD alone does promote economic growth, however, it has a significant negative effect on economic growth when there a considerable level of PI arises in a country. The threshold level of PI separating the negative and positive effects of TD on economic growth is approximately in the 25 th -50 th percentile (PI value of approximately 2.5 from 0 to 10 point scale) from the least politically unstable countries. The threshold implies a counter-intuitive proposition: that TD promotes economic growth where PI is below a threshold level and inhibits economic growth where it is above the threshold level. For instance, a one-unit increase in TD reduces economic growth by 1.14 points at PI 5.7 (95 th percentile). The marginal effects of TD on economic growth based on various quantiles of tourism revenue-gross domestic product (GDP) ratio illustrate that PI reduces economic growth in lower-to-middle quantiles. However countries in the upper quantiles those earn quite a significant amount of tourism receipts, TD enhances economic growth where PI is relatively moderate. For example, country like New Zealand, where tourism revenue accounts for around 4% of GDP has a positive influence on economic growth due to the relatively low level of PI. Our results are robust in various measures of TD and estimation techniques.