Does the shadow economy matter for tourism? International evidence

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Tourism is an important sector that contributes to government revenues, national income, foreign exchange earnings as well as provides job and business opportunities for many nations. In 2013, international tourist arrivals reached a record 1.1 billion worldwide, with USD1.2 billion in international tourism receipts. At the same time, the shadow economy in the tourism sector also flourished. In the European countries, Schneider reported that 20% to 25% of the shadow economy is represented by tourism-related industries, wholesale and retail, automotive and motorcycle sales and maintenance; transportation, storage and communications; and hotels and restaurants. Services given by these operators (unregistered and/or underreported) will ultimately be wiped off the map of high-quality tourist destinations and destroy the development of the tourism industry itself. This study examines the short-run and long-run dynamics between international tourist's arrival and shadow economy for 141 countries over the period 1995-2008. We used an error-correction model (ECM) combined with a system Generalized Method of Moments (GMM) to explore the long-run relationship between these two variables. Our results suggest that tourists' arrival and shadow economy are cointegrated. The long-run coefficients indicate a negative impact of the shadow economy on the tourism sector. This implies that the shadow economy plays a significant role in the global tourism industry.
Tourism , Shadow economy , Governance , Error-correction , System GMM
Din, Badariah H. and Habibullah, Muzafar Shah and Abdul Hamid, Baharom. (2015). Does the shadow economy matter for tourism? International evidence. Taylor Business Review, 5 (1), pp. 1-9.
Taylor's University

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