Does tourism activity reduce the size of the informal economy? Capturing long-term heterogeneous linkages around the world

Abstract

This paper investigates the long-term and causal relationship between tourism activity and the informal economy in 76 countries from 1995 to 2015. We explore this relationship at the global level and by country group, using panel, co-integration techniques that indicate the existence of a long-run co-integration relationship between tourism and informal economy for the whole sample and at the level of country groups. Additionally, the paper analyzes the long-run coefficients of the model by using fully modified ordinary least square regressions (FMOLS). The results from FMOLS evidence a negative and significant impact of tourism on the informal economy at the global level and in high, upper-middle, and lower-middle income countries, but a positive link in low-income countries. However, the results reveal a heterogeneous long-run relationship within country groups. Also, the result of the Dumitrescu-Hurlin Granger causality test indicates bidirectional causality in the global sample, but the direction of causality varies by country group. The main policy implication derived from our findings suggests that in order to reduce the size of informal economy, policy-makers should foster tourism activities. JEL Classification : J01, L83, C23, O57, C00, C01