“TOURISM INDUSTRY’S INCOME AND EXPENDITURE: TIME SERIES

EVIDENCE FROM CYPRUS”

ABSTRACT

This study examined empirically the existence and nature of long-run relationships
between income derived from the Tourism Industry in Cyprus and tourist arrivals on one
hand; and three categories of expenditure (Transport and Communication, Hotels and
Restaurants, Advertising and Promotion) on the other. The results suggest the existence
of positive long-run relationships between income derived from the tourism industry on
one hand; and the categories of expenditure, (Hotels and Restaurants, Advertising and
Promotion) on the other, with causality running both ways. Causality running both ways
was found also in the case of tourist arrivals and the category of Hotels and Restaurants.

Keywords: Tourism Industry; Cyprus; income; expenditure; long-run relationships.

1
 1. INTRODUCTION

Tourism is one of the most flourishing sectors in the world. Worldwide international

tourism receipts have grown by 12 per cent over the last ten years. Many countries are

setting targets in attempts to gain the additional income, foreign currency, employment

and tax revenue that the sector can provide. The Tourism Industry is also very important

for the economic growth. Tourism is the fastest growing industry in the European Union

with 2.5% to 4% growth per year in terms of turnover, and 1% to 1.5% in terms of

employment opportunities. The opinion of the European Economic and Social

Committee is that the Tourism Industry has a “relatively secure future” as the tourism

product does not run the risk of being left behind by technological change. Christos

Paputsis pointed out that tourism is now a priority for job creation in European priorities.

He pointed out that an enlarged European Union will become the biggest single tourist

market in the world. Geoffrey Lipman, President of the World Travel and Tourism

Council, predicted that the 7 million tourism jobs today in Europe and the 15 million jobs

they indirectly generate in construction or retailing will increase so fast that the sector

will more than double by 2010. He urged linking tourism to rural revitalization programs

within Europe, and development policy beyond it, and integrating tourism into transport

policy – including the trans-European transport networks projects.

Taking into consideration what is mentioned above and the perspectives which are

unfolded in the tourism industry, for the Cyprus economy the Tourism Sector

unquestionably is of great importance. However, the break down of the tourism industry

2
in Cyprus and the fluctuations that the industry presents especially after 1990 (see Figure

1), naturally raises a couple of questions. At one hand are these fluctuations due to

“internal” factors such as the decrease in productivity, the price increases and the

decrease in the quality of the tourist package, the international competitiveness, or due to

the fact that level of the expenditures made in the tourism industry are not satisfactory to

support the sustainable development of the sector? On the other hand are these

fluctuations due to external factors, such as regional and international conflicts (i.e. the

Gulf War, 1991, the international economic recession of 1993, and the War in Iraq in

2003).

FIGURE 1: INCOME FROM THE TOURISM INDUSTRY

25.00

20.00

15.00
% in GDP

10.00

5.00

0.00
0

0
6

0
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

Revenew From Tourism

Source: Developed by the author using data from the Cyprus Department of Statistics.

3
 The present study examines if in the long-run the expenditures made in the tourism

industry affect the sustainable growth of the industry. This study investigates a specific

group of expenses in the tourism industry, namely Transport and Communication (TC),

Hotels and Restaurants (HR), and Advertising and Promotion (AP) in relation to the

tourism income and the tourist arrivals for the period 1960-2001. It must be noted that,

for the Advertising and Promotional expenses the available data covers only the period

1975-2001. Also, Cyprus being a tourist destination, for reasons of simplicity, expenses

in TC is treated as expenditure made in the tourism industry.

The link between the tourism industry’s expenditures and the economic growth of the

tourism industry has attracted considerable interest on the part of economic researchers

both in the theoretical as well as in the empirical level. The overall approach is that the

tourism industry may require major investments in basic infrastructure such as transport,

accommodation, water supply and health care (Kottrell 2001). Sinclair 1998, points out

that, countries potentially benefit from increasing expenditures on tourism. The

Keynesian approach supports the thesis that public and private expenditure in the tourism

industry is an important policy tool to be used to ensure a reasonable level of economic

activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and

Sahni, 1984); and secure an increase in productive investment, thus providing a socially

optimal direction for growth and development (Ram, 1986), especially by a simultaneous

increase in short- and long-term revenues. It is argued on what has been said above, that

any delay in developing the tourism industry, will cost to the country’s economic growth

and will affect employment levels (Dallas 2001).

4
 This paper aims to shed some further empirical light on the issue of tourism

expenditure’s ability to promote economic growth by focusing on the experience of a

small, open economy, namely the one of Cyprus. Cyprus is a particularly interesting case

study because on one hand the income from the tourism industry (in terms of percentage

in GDP) records a significant increase during the period 1975-2001 (see Figure 1) and on

the other, for the same period it experienced a major increase in tourism expenditure.

Figure 2 reveals the nature of the tourism expenditure (in terms of percentage in GDP)

and Figure 3 reveals the nature of the tourism expenditure (in terms of percentage in the

tourism industry’s income). What concerns financing the tourism expenditure under

study, Transport and Communication expenses are covered by the government’s budget;

Advertising and Promotional expenses, although designated by the CTO, the government

strongly contributes to the budget of the CTO; Investments in Hotels and Restaurants are

made by the private sector engaged in the tourism industry.

In this paper we aim to acquire insights regarding the output effects of these

expenditures by means of examining, (a) the existence and nature of long-run

relationships between tourism industry’s income and the categories of the tourism

industry’s expenditure represented in Figure 3; (b) the existence and nature of long-run

relationships between tourist arrivals and the categories of expenditure under study.

These series being volume data instead of value are not affected by the price and

therefore do not introduce any correlation in the model. (c) The existence and nature of

long-run relationships between tourism industry’s income and tourist arrivals. The

remainder of the paper is organized as follows: Section 2 outlines the theoretical

5
background on which our empirical analysis is based. Section 3 presents the

methodology used and our econometric results. Section 4 discusses the post-1975

tourism policy and tourism activity in Cyprus in the light of the results obtained in

Section 3 and the annual reports of the Cyprus Tourism Organization. Section 5,

summarizes and offers some concluding remarks.

FIGURE 2: FIXED CAPITAL FORMATION

12.00

10.00

8.00
% in GDP

6.00

4.00

2.00

0.00
0

0
6

0
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Hotel and Restaurant Transport and Communication

Source: Developed by the author using data from the Cyprus Department of Statistics.

6
 FIGURE 3: EXPENDITURE IN THE TOURISM INDUSTRY

320.00

280.00

240.00
% in Tourism Revenew

200.00

160.00

120.00

80.00

40.00

0.00
0

0
6

0
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Hotesl and Restaurants Transport and Communication Advertisment and Promotion

Source: Developed by the author using data from the Cyprus Department of Statistics.

7
 2. THEORETICAL BACKROUND

The long-run relationship between public expenditure and real output, as is the case

of the infrastructure expenses under study (i.e. transportation and communication), has

attracted considerable attention in economic research. In particular, the ability of public

expenditure to influence national income is questioned in two levels. First, the nature of

the causality pattern is disputed: a number of public finance studies adopt the Wagner’s

law approach which states that national income causes public expenditure, mainly

through an increase in demand for public services. Within this framework, public

expenditure is treated as a behavioral variable, similar to private consumption. On the

other hand, a number of macroeconomic models adopt a view closer to the Keynesian

doctrine according to which public expenditure is an important policy tool able to

influence the level of equilibrium output. As Singh and Sahni (1984 p. 630) argue, if the

causality pattern were Wagnerian, public expenditure is delegated to a passive role, if

Keynesian, acquires the status of an important policy variable. In the case of transport

and communication expenditure, which is under study in this paper, we may assume that

as the number of tourist arrivals increases (according to the WTO data, by the year 2010

the incoming tourism will be 3,041,000) and tourism being a luxurious product, the

demand for transport and communication will increase. The increase in national income

resulted from tourism will give rise to an increase in the demand for traveling by the

internal tourism also. Looking at the Keyniesian doctrine transport and communication

may influence the level of equilibrium also by encouraging people to travel more and also

by making tourism destinations easier to be accessed.

8
 With the perspective the incoming tourism to increase (as recorded by the WTO), the

demand for hotels and restaurants as well as for any other constructions of tourist

character (i.e. tourist villages, parks, constructions for sports tourism and others), will

increase. This will give rise to increasing expenditure in the tourism industry and

positively influencing the level of output by attracting visitors from other tourism

segments and by offering higher quality services (Pashardes, Nearchos, Mitsis and

Panteli, 2002).

Second, even if we exclude the possibility of a causality pattern running from national

income to public expenditure, or from the tourism industry’s income to private

investments in the tourism industry, it is not quite clear that increased public or private

outlays will have lasting positive output effects. Postulating a fixed level of taxation

revenue, authorities have two options, to finance a higher level of public expenditure

(transport and communication): either to monetize (accommodate) or/and to bond-finance

the expansion. Under a medium-term upward-sloping aggregate supply schedule, the

output implications of the fiscal expansion would have to be studied within a Barro-

Gordon (1983) set-up. Money financed deficits would cause positive output effects only

if they remain unanticipated by the private sector. Repeated and predictable monetary

accommodation of deficits would result in a higher inflation rate without any long-run

output gain. This situation may arise when inflation causes a decrease in the demand for

traveling for both natives and foreign visitors. By resulting in a higher inflation rate,

money-financed budget deficits could then imply real costs for the economy through the

well-documented real costs of inflation. This situation will cause a decrease in the

9
demand for traveling as well as in the demand for hotels and restaurants both for the

home natives and the visitors with a probable decrease in the tourist arrivals and in the

tourists’ spending. On the other hand, bond-financed public expenditure may involve

expansionary effects of a more lasting nature provided that the anticipation of future

interest payments causes positive wealth effects on current and future consumption (see

e.g. Blinder and Solow, 1973). However, such outcomes may be mitigated by crowding

– out effects which can take place through two channels. First, through portfolio effects:

an increase in the stock of bonds may necessitate a similar increase in interest rates to

maintain equilibrium in the bonds’ market. Such an increase may imply a shift of the LM

curve (to the left), which could reduce the expansionary impact of the bond-financed

deficit. Second, through an upward-sloping aggregate supply curve: given a certain level

of nominal money, increasing prices caused by a fiscal expansion would lead to a

reduction in real money stock. That would cause an increase in interest rates and

negative wealth effects reducing private investment and consumption. Tourism being in

fact an industry exporting services, spending by the tourists is affected not only by the

domestic economic policies but also by the policies of their home countries. By causing

an increase in interest rates, bond-financed deficits may actually result in worse inflation

performance that, money-financed deficits in the line suggested by Sargent and Wallace

(1981). Finally, a bond-financed budget deficit would have no expansionary effect at all

(not even in the short-run) if the Ricardian Equivalence hypothesis were valid.

The role of public and private expenditures as output-promoting control variables has

also been highlighted in the framework of the endogenous growth literature pioneered by

10
the seminal papers by Romer (1986) and Lucas (1988). Endogenous growth models

postulate that the economy’s output is conditioned not only on the level of physical

capital and labour stock (as it was the case in Solow’s (1956) neoclassical growth model),

but also on additional production factors which may enter the production function with

constant returns to scale alone. If this is the case, returns on investment on such

production factors need not diminish as the stock of the latter increases, and growth

differences among nations may persist indefinitely if, the rate of accumulation of the

specific production factors differ from country to country. Spending on public

infrastructure being one of them (see Aschauer, 1989), the present study will empirically

examine the case of transport and Communication expenditure in the tourism industry.

Finally public expenditure on infrastructure may be responsible for the creation of

positive externalities with potentially important output implications. However, the

endogenous growth models framework has also been used to highlight possibly harmful

effects of excessive government spending. For example, it has been suggested (see King

and Rebelo, 1990) that if increased public expenditure is financed through higher taxation

the economy may end in a “development trap” and pay a significant welfare cost as a

result of distortions affecting economic incentives.

Looking at advertisement and promotional expenses, as a category of expenditure

under study it has been argued that advertising produces sales (John Philip Jones 1995).

Thus, it may be assumed that, advertising strongly contributes to the growth of the tourist

industry by raising more income. It may be argued that an effective promotion of a well

developed tourist product responding to the needs of its perspective consumers may

increase tourist arrivals as well as tourists’ spending.

11
 3. METHODOLOGY

In this section we shall investigate the existence and nature of a long-run

relationship between, (a) income from the Tourism Industry in Cyprus and (b) Tourist

Arrivals on one hand; and a set of expenditure categories in the Tourism Industry on

the other. The existence and nature of long-run relationships between Tourism

Income and Tourism Arrivals will be investigated as well. We consider three

categories of expenditure in the tourism industry: Advertising and Promotion (AP)

designated by the Cyprus Tourism Organization (CTO), and the Gross Domestic

Fixed Capital Formation in Hotels and Restaurants (HR) as well as in Transport and

Communications (TC).

Our analysis is based on annual data. Data for Hotels and Restaurants (HR),

and Transport and Communication (TC), is obtained from the National Accounts of

the Cyprus Department of Statistics. Annual data for the Income from the Tourism

Industry in Cyprus, for the Advertising and Promotional expenses as well as for the

Tourist Arrivals is obtained from the Cyprus Tourism Organization.

Data is obtained for the period 1960-2001 a total of 41 observations, with the

exception of advertising and promotional expenses for which the available data is for

the period 1975-2001; a total of 26 observations.

Our econometric approach follows a two-step logic: First, we shall

investigate the existence of a long-run relationship between the logarithms of each of

12
the three Tourism Industry’s expenditure categories and the logarithms of the Income

from the Tourism Industry in Cyprus, and of the Tourist Arrivals. Second, for those

cases for which the cointegration hypothesis is not rejected, we undertake weak

exogeneity analysis in order to get indications regarding the direction of causality in

the Granger sense.

We started by investigating the stationarity properties of the variables

involved in the analysis using the (Augmented) Dickey-Fuller (1979) unit root tests.

As far as the logarithms of the variables are concerned, we tested the null hypothesis

of non-stationarity against the alternative that the series are trend-stationary. The

estimated ADF statistics suggested that all variables include a unit root. We proceed

by applying Johansen’s (1988) cointegration methodology. As a first step, the order

of the underlying VAR models to be used in the cointegration analysis has to be

specified. For each category of expenditure in the tourism industry, (Advertising and

Promotion designated by the CTO, Hotels and Restaurants and Transport and

Communication), we examined three different lag structures ranging from one to

three lagged values for each variable. In the estimated systems, for the Tourist

Arrivals and the Tourism Industry’s Revenues, we faced misspecification problems of

residual non-normality. In order to overcome this problem we tested the statistical

significance of a number of dummy variables, aiming to capture the impact of shocks

which might be responsible for non-normality. Out of the cases examined, two

proved statistically significant. The first D1975, refers to year 1975 and it was the

period after the Turkish Invasion in Cyprus in July, 1974. The second, D1991, refers

13
to year 1991 during the Gulf War. The inclusion of these dummies as unrestricted

variables (not entering the cointegration space) allows the acquisition of Gaussian

errors and yields well-specified systems.

The next issue raised in the process of formulation of the underlying VAR

system is whether or not deterministic terms like a constant and a trend should enter

the short and/or long-run models. To answer this question, we used the Pantula

principle, i.e. a number of joint hypotheses tests testing simultaneously both the

number of cointegrating relationships among the variables and the existence of

deterministic components. More specifically, for each category of Tourism

Expenditure considered, we estimated three models. The most restrictive (named

Model 1), assumes no linear trends in the levels of the data, i.e. an intercept which is

restricted to the cointegration space. The second (named Model 2), assumes the

existence of linear trends in the levels of the data, implying an intercept both in the

long-run model as well as in the short run model. The two intercepts, when

combined, leave only a constant in the short-run model. Finally, the least restrictive

model (named Model 3), assumes the existence of some long-run linear growth which

the model specification cannot account for, i.e. the existence of a trend term restricted

to the cointegration space. The Pantula principle involves the estimation of all three

models and the presentation of the results from the most restrictive hypothesis (i.e. r =

number of cointegrating relations = 0 and Model 1) through the least restrictive

hypothesis, i.e. r = number of variables entering the VAR -1 = N – 1 and Model 3).

The model selection procedure comprises of moving across the rows of the upper half

14
of each Table, from the most restrictive model towards the least restrictive one, and

stopping when the null hypothesis is not rejected for the first time.

The results referring to Transport and Communication (TC) appear in Table

1; to Hotels and Restaurants (HR) in Table 2; to Advertising and Promotion (AP) in

Table 3 (all in relation to the Income from the Tourist Industry). In relation to the

Tourist Arrivals, results referring to (TC) appear in Table 4; to (HR) in Table 5; to

(AP) in Table 6. Relating Tourist Arrivals with Income from the Tourism Industry,

results appear in Table 7. According to the Pantula principle, for all the categories of

expenditure, except in the case of tourist arrivals and (TC), both the rank (λmax) and

the (λtrace) statistics show that the null hypothesis is for the first time not rejected for

r=1 in model 2 suggesting the existence of one cointegrating (positive) relationship

between each of these variables and the Tourism Income as well as the Tourist

Arrivals together with the existence of a constant, restricted to the cointegration

space. In the case of Tourist Arrivals and (TC), both the rank (λmax) and the (λtrace)

statistics show that the null hypothesis is for the first time not rejected for r=1 in

model 3, suggesting also the existence of one cointegrating (positive) relationship

between each of these variables and the Tourist Arrivals together with the existence

of a constant, restricted to the cointegration space. Finally, for the pair of variables

for which the hypothesis of cointegration was not rejected, we proceeded to weak

exogeneity analysis using the long-run weak exogeneity LR tests proposed by

Johansen and Juselius (1992). These consist of testing zero restrictions on the

elements of the alpha matrix (i.e. the matrix of coefficients of the speed of adjustment

15
to long-run equilibrium) embedded in the estimated Vector Error Correction Model.

Only in the case of Arrivals and (HR) the LR test statistics show that none of the

variables is weakly exogenous to the system. In other words, the results suggest a

two-way causality pattern between Tourist Arrivals on one hand; and Hotels and

Restaurants (HR) on the other. In all the other cases the results suggest a one-way

causality pattern. The results of VEC Pairwise Granger Causality are shown in Table

8.

16
 TABLE 1: COINTEGRATION ANALYSIS: TOURISM INDUSTRY’S

INCOME AND TRANSPORT AND COMMUNICATION (TC)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model1 Model 2 Model 3

λmax test 0 2 30,3 22,54 23,38

1 1 2,83+ 6,53 15,97

λtrace test 0 2 33,14 29,07 39,36

1 1 2,83+ 6,53 15,97

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 30,30** 11,44 33,14** 12,53

r≤1 r=2 2,83 3,84 2,83 3,84

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

17
 TABLE 2: COINTEGRATION ANALYSIS: TOURISM INDUSTRY’S

INCOME AND HOTEL AND RESTAURANTS (HR)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model 1 Model 2 Model 3

λmax test 0 2 29,55 22,00 22,28

1 1 0,35+ 1,01 6,32

λtrace test 0 2 29,91 23,02 28,61

1 1 0,35+ 1,01 6,32

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 29,55** 11,44 29,91** 12,53

r≤1 r=2 0,35 3,84 0,35 3,84

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

18
 TABLE 3: COINTEGRATION ANALYSIS: TOURISM INDUSTRY’S

INCOME AND ADVERTISING AND PROMOTION (AP)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model 1 Model 2 Model 3

λmax test 0 2 21,49 19,46 22,81

1 1 1,47+ 1,82 7,37

λtrace test 0 2 22,97 21,28 30,18

1 1 1,47+ 1,82 7,37

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 18,31** 14,07 20,88** 15,41

r≤1 r=2 2,56 3,76 2,56 3,76

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

19
 TABLE 4: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND

TRANSPORT AND COMMUNICATION (TC)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model1 Model 2 Model 3

λmax test 0 2 25,19 23,27 23,76

1 1 15,31 5,84 11,63+

λtrace test 0 2 40,51 29,11 35,40

1 1 15,31 5,84 11,63+

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 23,76** 18,96 35,40** 25,32

r≤1 r=2 11,63 12,25 11,63 12,25

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

20
 TABLE 5: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND

HOTELS AND RESTAURANTS (HR)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model 1 Model 2 Model 3

λmax test 0 2 19,60 11,64 12,24

1 1 2,67+ 1,11 5,94

λtrace test 0 2 22,28 12,76 18,49

1 1 2,67+ 1,11 5,94

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 19,60** 11,44 22,28** 12,53

r≤1 r=2 2,67 3,84 2,67 3,84

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

21
 TABLE 6: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND

ADVERTISING AND PROMOTION (AP)

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model1 Model 2 Model 3

λmax test 0 2 33,28 12,45 12,47

1 1 0,004+ 0,61 9,65

λtrace test 0 2 33,29 13,07 22,12

1 1 0,004+ 0,61 9,65

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 33,28** 11,44 33,29** 12,53

r≤1 r=2 0,004 3,84 0,004 3,84

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

22
 TABLE 7: COINTEGRATION ANALYSIS: TOURIST ARRIVALS AND

TOURISM INDUSTRY’S INCOME

JOINT TEST FOR DETERMENISTIC COMPONENTS AND

COINTEGRATING RANK: THE PANTULA PRINCIPLE

Ho r n-r Model 1 Model 2 Model 3

λmax test 0 2 18,73 15,51 15,72

1 1 1,80+ 0,05 5,21

λtrace test 0 2 20,53 15,56 20,94

1 1 1,80+ 0,05 5,21

+ indicates the first time the null hypothesis is not rejected

DETERMINATION OF COINTEGRATING RANK

Ho H1 LR statistic 95% CV Trace statistic 95% CV

r=0 r=1 18,73** 11,44 20,53** 12,53

r≤1 r=2 1,80 3,84 1,80 3,84

* Rejects the null hypothesis at the 5% level

** Rejects the null hypothesis at the 1% level

23
 TABLE 8: VEC PAIRWISE GRANGER CAUSALITY

Dependent variable: D (INCOME)

Exclude Chi-sq df Prob.

D (TC) 8.5810 2 0.0137

Dependent variable: D (TC)

Exclude Chi-sq df Prob.

D (INCOME) 1.2991 2 0.5223

Dependent variable: D (INCOME)

Exclude Chi-sq df Prob.

D (HR) 5.7205 2 0.0573

Dependent variable: D (HR)

Exclude Chi-sq df Prob.

D (INCOME) 3.7646 2 0.1522

Dependent variable: D (INCOME)

Exclude Chi-sq df Prob.

D (AP) 3.0265 2 0.2202

Dependent variable: D (AP)

Exclude Chi-sq df Prob.

D (INCOME) 2.5401 2 0.2808

24
Dependent variable: D (ARRIVALS)

Exclude Chi-sq df Prob.

D (TC) 5.6200 2 0.0602

Dependent variable: D (TC)

Exclude Chi-sq df Prob.

D (ARRIVALS) 1.5664 2 0.4569

Dependent variable: D (ARRIVALS)

Exclude Chi-sq df Prob.

D (HR) 5.7200 2 0.0617

Dependent variable: D (HR)

Exclude Chi-sq df Prob.

D (ARRIVALS) 5.1454 2 0.0763

Dependent variable: D (ARRIVALS)

Exclude Chi-sq df Prob.

D (AP) 1.6206 2 0.4447

Dependent variable: D (AP)

Exclude Chi-sq df Prob.

D (ARRIVALS) 55.5883 2 0.0000

25
 Dependent variable: D (ARRIVALS)

Exclude Chi-sq df Prob.

D (INCOME) 0.1111 2 0.9459

Dependent variable: D (INCOME)

Exclude Chi-sq df Prob.

D (ARRIVALS) 36.9125 2 0.0000

4. POST-1975 CYPRUS TOURISM POLICY: AN ASSESSMENT

After the Turkish invasion of 1974, the tourism industry represented less than

2,2% of the GDP. In the years that followed however, the tourism industry in Cyprus

achieved substantial developments and its contribution to the GDP exceeded 20%. A

very important impact of the tourism industry on the Cyprus Economy is also its

contribution to maintaining the balance of payments in the current account. The income

from the tourism industry is almost as much as the income derived from all the other

exported goods and services, and it’s the primary source of foreign currency.

The tourism industry also creates new working posts. It is estimated that, 25% of

the new working posts created after 1980, were due to the growth of the tourism industry.

At the beginning of the 90’s however, fluctuations started to develop in the

tourism industry. This negative process continued up to the year 1996 after which the

tourism sector finds its way up again. However, the rate of growth of the industry

26
didn’t reach the levels of the 80’s (Pashardes and others 2002). This shows that the

problems in the tourism industry were due to external factors, such as the Gulf War in

1991 and the economic recession of 1993.

For the period 1993-2000 there is the tendency that the tourist arrivals increase,

but there is the phenomenon that the income from the tourist industry does not increase

by the same rate as the tourist arrivals. This proves that the per capita tourist spending

has a tendency to decrease (see Figure 4). The VEC Pairwise Granger Causality (see

table 8), shows that there is not a causality pattern running between arrivals and income

from the tourism industry. One of the reasons is the exchange rate of the CYP

(Pashardes and others 2002). Although there is a substantial increase in the tourism

industry’s income our analysis shows that this should be much higher relative to the

tourist arrivals.

The importance of the income from the tourist industry on the other variables of

our analysis can be seen from the VEC Pairwise Granger Causality. The analysis shows

a one-way causality pattern between Income from the Tourism Industry on the one

hand; and Transport and Communication on the other. However, there is a two-way

causality pattern between the income from the tourist industry on the one hand; and

Hotels and Restaurants and Advertising and Promotion on the other. The contribution

of the category HR to the economy is remarkable. The Gross Capital Formation in the

area of HR has been increased substantially during the period 1980-1985.

27
 Regarding Tourist Arrivals, the Granger Causality analysis shows a one-way

causality pattern between Tourist Arrivals on one hand; and Transport and

Communication on the other. Also the analysis shows a one-way causality pattern

between Advertising and Promotion on the one hand; and Arrivals on the other. There

is however a two-way causality pattern between Tourist Arrivals on one hand and

Hotels and Restaurants on the other.

Turning now to the examination of the results, referring to what we have termed

Tourism Industry’s Expenditure (TC, HR and AP) it seems that the policy followed in

the tourism industry regarding Hotels and Restaurants is rather effective. In answering

the question of the form “did expenditure in the tourism industry promoted Cyprus

Tourism Industry’s Growth”, for HR we can be firmly positive.

Turning now to the category Advertising and Promotional expenditure (AP), we

shall relate it with Income from the Tourist Industry and Tourist Arrivals. Although

there is a two-way causality pattern in the case of Income and AP and one-way causality

pattern running from AP to Tourist Arrivals. This may seem natural but following that,

there is not a causality pattern running from Tourist Arrivals to Tourism Industry’s

Income. Thus, we may say that an internal factor which probably constitutes to the

above mentioned fluctuations in the Tourism Industry is not the so efficient Advertising

and Promotion of the tourist product.

28
 It has been found from the analysis also that there is also a one-way causality

pattern running from Tourism Income to TC and from Tourist Arrivals to TC. This

causality pattern may seem natural (i.e. the level of the expenditure for TC depends

upon the demand for TC from the travelers and also upon the availability of financial

resources), however since the quality of the tourist product has to be developed

(Pashardes 2002), in order to increase the competitiveness of the Cyprus tourism

product, further substantial investments in transport and communication without delay

will be of an advantage. In the long-run a two-way causality pattern between Income

and TC as well as between Arrivals and TC will be achieved.

FIGURE 4: TOURISM INCOME AND TOURIST ARRIVALS

1400

1200

1000

800
E
M
O 600
C
NI
400

200

0
0 1000000 2000000 3000000

ARRIVALS

29
 5. SUMMARY AND CONCLUSION

This paper has attempted to shed some further empirical light on the issue of the

link between expenditure in the tourism industry on the one hand; and income from the

tourism industry and tourist arrivals on the other. We have examined the role of three

categories of expenditure in the tourism industry in terms of promoting economic

growth and developing the tourism industry. Our results suggest that increases in

Hotels and Restaurants (HR) and Advertising and Promotional (AP) expenditure are

followed by increases in the income derived from the tourism industry as well as by

increases in the tourist arrivals.

On the other hand, increases in TC expenditure are not followed by increases in

the income from the tourism industry and in the tourist arrivals. At the same time the

increase in the tourist arrivals didn’t give a proportional rise to the income derived from

the tourism industry.

On the basis of our results, we discussed the implications of the major categories

of expenditure (TC, HR and AP) made in the tourism industry in Cyprus between 1960

and 2001. We argued that in terms of output growth in the tourism industry, the

expansion has been effective and contributed to the economic growth of the tourism

industry in Cyprus as well as in the country’s GDP. From that point of view the tourism

policy adopted in Cyprus has been also effective.

30
 Having said that however, does not exclude the implementation of future

developments in the tourism industry in order to increase the competitiveness of the

tourism product and to meet the challenges of the global competition especially in the

Mediterranean.

For the further development of the tourism industry it would be necessary to

promote a more efficient advertising campaign especially in new markets and attracting

visitors with high purchasing power. This will help achieving a proportional increase of

the tourism industry’s income to the tourist arrivals, leading to the need of offering

value for money to these visitors. Thus, the quality of the services offered should be

increased. Talking in terms of value for money, the tourism product cannot be isolated

from the infrastructure and the area of hotels and restaurants. Substantial investments

should be made in Transport and Communication as well as in Hotels and Restaurants

in order to increase the quality of the services offered by the latter and at the same time

to create a two-way causality pattern in the case of TC and maintain the causality

pattern in the case of HR and AP.

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