Long-Run Relationship Between Tourism Receipts and Economic Development in Pakistan: Evidence from a VECM Framework

Abstract

The present study investigates the long and short-run relationship between tourism receipts and inclusive growth dimension (measured as GDP per capita) in Pakistan with controls of employment, trade openness and inflation, using annual data for the period 2000-2025. It differs from the single-equation ARDL model which has been prevalent in the literature of Pakistan specific studies, and uses a complete Vector Error Correction Model (VECM) to estimate the long-run equilibrium and system-wide short-run feedback simultaneously. All series are found to be 1st order integrated by the unit root tests, which is a necessary condition for co-integration, and an Engle-Granger test and a Johansen test are used to confirm that there is a significant long-run equilibrium relationship. Tourism receipts, employment, trade openness and inflation have positive and negative long run effects on inclusive growth's growth dimension, respectively, with the consistent negative impact of trade deficits and macroeconomic instability. The error-correction term is negative, and is highly significant, with disequilibrium being corrected at around 77% per year. The short-run results demonstrate positive tourism impact, which supports the Tourism-Led Growth Hypothesis, and negative employment impact, which may be associated with the structural and/or disguised unemployment. The results suggest that tourism is a statistically sound development tool in and of itself and that it can be pursued against this background with targeted investments in the infrastructure and in the destination marketing, with the trade-liberalisation policy, on the other hand, being coupled with export-competitiveness measures. Inclusive growth is measured with GDP per capita, which only reflects the growth side of inclusive growth, and there is a scope for future research to include distributional indicators.