Exploring the Relationship between Tourism and Economic Growth in Small Island Economies: A Study of Fiji

This study examines the effect of tourism, measured by visitor arrivals) on the economic growth of Fiji, a small island economy, over the period 1975 to 2015. We use a neoclassical framework and regression analysis to examine the short-run and the long-run effects of tourism whilst accounting for structural breaks. We confirm the presence of a long-run association using the two-step procedure of Engle and Granger (1987) and the ARDL bounds test of Pesaran, Shin and Smith (2001). From the long-run results, we note that a 1% increase in visitor arrivals contribute about 0.22% to the GDP per capita. The short run elasticity is noted to be 0.19%. The study finds evidence of a unidirectional causality from economic growth to tourism, and mutually reinforcing effect between capital investment and tourism. Thus, we can expect greater impact of tourism on the economic growth through tourism related investment activities such as improvements in airports, roads, transportation, financial sector and telecommunications, and parks and beaches.