Abstract

Island economies are generally well known tourist destinations and it is presumed that thus sector contributes a lot to their economy. In spite of this, we have not come across any empirical study that investigates the contributions of tourism to economic growth for these countries. Using a panel data of 12 island economies for the years that span from 1990 to 2006, this study explores the potential contribution of tourism to economic growth and development within the conventional augmented Solow growth model. Since economic growth is argued to be essentially a dynamic phenomenon, in addition to fixed effect estimates, we additionally employed Generalised Methods of Moments (GMM) method to account for these issues. The results show that tourism significantly contribute both to the current level of gross domestic product and the economic growth of island economies as do investments in physical and human capital and also openness. Moreover, growth is observed to be a dynamic phenomenon as judged by the positive and significant lagged dependent variable from the GMM estimates. Our findings imply that island economies could enhance their short-run economic growth by strategically strengthening their tourism industries.