Electronic copy available at: http://ssrn.com/abstract=1333102 Electronic copy available at: http://ssrn.com/abstract=1333102 The tourism-led-growth hypothesis for Uruguay * Juan Gabriel Brida † , Bibiana Lanzilotta ‡ , Stefania Lionetti £ and Wiston Adrián Risso § Abstract This short paper analyses the effects in the long-run of tourism on the economic growth of Uruguay. Using quarterly data from 1987.I to 2006.IV, the study uses cointegration analysis and shows the existence of a cointegrated vector among Uruguayan real per capita GDP, Argentinean tourism expenditure (the principal source of tourism in Uruguay), and real exchange rate between Uruguay and Argentina. We also show that the causality relationship goes positively in one way from Argentinean tourism expenditure to real per capita GDP of Uruguay. Finally, we compare our study with similar papers also investigating the TLGH. Keywords: economic growth; tourism earnings; Johansen cointegration test; Granger causality. JEL Classification: C22, E01, F43, L83, O54 The importance of exports in the long-run economic growth of countries is well documented and empirically tested. This proves that exports can promote or cause long-run economic growth and is known in the literature as the Export Led Growth Hypothesis (ELGH). In many countries, foreign currency receipts from tourism exceed receipts from all other sectors. Some authors have recently proposed the tourism-led growth hypothesis (TLGH), maintaining that international tourism is a strategic factor for long-run economic growth (Shan and Wilson, 2001). As in the ELGH, international tourism is recognised to have a positive effect on long- run economic growth through different channels. First, tourism is a significant foreign exchange earner contributing to capital goods that can be used in the production process. Second, tourism has an important role in stimulating investments in new infrastructure and competition. Third, tourism stimulates other economic industries by direct, indirect and induced effects. Fourth, tourism contributes to the generation of employment and the rise in incomes. Fifth, tourism causes positive economies of scale. Finally, tourism is an important factor in the diffusion of technical knowledge, stimulation of research and development, and the accumulation of human capital. The purpose of this study is to investigate the TLGH for Uruguay and to compare the results with similar papers. Although the tourism industry has grown significantly in Uruguay, tourism researchers have not paid much attention to the empirical assessment of the contribution that the tourism sector makes to the country. This note aims to answer the following questions. First, is there a long-run equilibrium relationship between tourism and economic growth in Uruguay? Second, if a stable long-run relationship exists, what is the direction of the causal relationship between these two variables? Tourism in Uruguay Uruguay is South America’s smallest country. Situated between Brazil and Argentina, it has the lowest poverty level and the highest life expectancy in Latin America. Uruguay is recognised for its economic, political and social stability, its democratic tradition and high * Our research was supported by the Free University of Bolzano, project Dynamic Methods in Tourism Economics. † School of Economics and Management ‐ Free University of Bolzano, Italy. E‐mail address: JuanGabriel.Brida@unibz.it Tel.: +39 0471 013492, Fax: +39 0471 013 009 ‡ CINVE, Uruguay. E‐mail address: bibiana@cinve.org.uy, Tel.: (598 2) 900 3051 ‐ 908 1533 £ IRE, University of Lugano, Switzerland. E‐mail address: stefania.lionetti@lu.unisi.ch, Tel.: +41 586664790 § Department of Economics ‐ University of Siena, Italy. E‐mail address: risso@unisi.it, Tel.: +39 0577 235058, Fax: +39 0577 232661 1