Tourism Management 29 (2008) 180–192 Tourism development and economic growth: A closer look at panels Chien-Chiang Lee a,Ã , Chun-Ping Chang b a Department of Applied Economics, National Chung Hsing University, Taiwan b Department of Business Administration, Shih Chien University Kaohsiung Campus, Taiwan Received 4 January 2007; accepted 14 February 2007 Abstract This paper applies the new heterogeneous panel cointegration technique to re-investigate the long-run comovements and causal relationships between tourism development and economic growth for OECD and nonOECD countries (including those in Asia, Latin America and Sub-Sahara Africa) for the 1990–2002 period. On the global scale, after allowing for the heterogeneous country effect, a cointegrated relationship between GDP and tourism development is substantiated. It is also determined that tourism development has a greater impact on GDP in nonOECD countries than in OECD countries, and when the variable is tourism receipts, the greatest impact is in Sub-Sahara African countries. Additionally, the real effective exchange rate has significant effects on economic growth. Finally, in the long run, the panel causality test shows unidirectional causality relationships from tourism development to economic growth in OECD countries, bidirectional relationships in nonOECD countries, but only weak relationships in Asia. Our empirical findings have major policy implications. r 2007 Elsevier Ltd. All rights reserved. Keywords: Tourism development; GDP; Panel cointegration; Panel causality 1. Introduction Tourism business development has been the focus of study in recent times. A general consensus has emerged that it not only increases foreign exchange income, but also creates employment opportunities, stimulates the growth of the tourism industry and by virtue of this, triggers overall economic growth. As such, tourism development has become an important target for most governments. According to the estimates of the World Tourism Organization (WTO, 2000), the number of international people movements around the world will surge to 1602 million by 2020, while tourism receipts will reach some US$200 billion. Furthermore, the World Tourism Travel Council (WTTC, 2005) expects that the scale of the world tourism industry, which made up roughly 10.4% of the world’s GDP in 2004, will increase to 10.9% in 2014. When all components of the tourism industry are taken into account, i.e., tourism consumption, investment, govern- ment spending and exports, the industry grew 5.9% in 2004 alone, reaching US$5.5 trillion. The 10-year growth forecast is for US$9.5 trillion in 2014. For these very reasons, thoroughly investigating all aspects of tourism development and economic growth is extremely important for governments. The purpose of this paper is to empirically re-examine the long-run comovements and the causal relationships between economic growth and tourism development in a multivariate model with tourism real receipts per capita (TOUR1; Balaguer & Cantavella-Jorda, 2002), the number of international tourist arrivals per capita (TOUR2; Eugenio-Martı´n & Morales, 2004), 1 real effective exchange rate (RQ), 2 i.e., a proxy variable for external competitive- ARTICLE IN PRESS www.elsevier.com/locate/tourman 0261-5177/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.tourman.2007.02.013 Ã Corresponding author. Tel.: +886 4 22840352x308; fax: +886 4 22860255. E-mail address: ccl@nchu.edu.tw (C.-C. Lee). 1 International tourist arrivals often involve social costs for a host country. We discuss this in detail in Section 2. 2 Since the exchange rate measures the effective prices of goods and services in tourism rival country, most previous studies have adopted the real exchange rate as the proxy variable to compare tourism activity between two countries (see Dritsakis, 2004). In our paper, we investigate tourism development, and it covers tourism activity throughout the whole world. Therefore, we adopt the real effective exchange rate as the proxy variable for external competitiveness to avoid biasing our results because