Evaluating the Tourism-Led Economic Growth Hypothesis in a Developing Country: The Case Of Albania

This paper evaluates the impact of tourism on economic growth for Albania using an error correction mechanism approach. We compare fluctuations in the total economic contribution of the travel and tourism sector in the economy and the real effective exchange rate, with changes in real GDP growth rate. Using a cointegration method for the long run analysis and the error correction mechanism to assess the short run dynamics of the model, we conclude that a 5 percent increase in net earnings from travel and tourism in Albania accounts for more than 1.7 percent increase in real income. We also assess that in the event of a break in the long run equilibrium between tourism and economic growth, it would take 26.3 percent correction effort per quarter to reestablish the equilibrium relation to its determined level. This means that the time period needed to weather an economic shock in the tourism sector and get it back to its long run equilibrium is almost one year (or 11.4 months). Generally speaking, the results found in this study support the hypothesized conviction that tourism development supports higher GDP growth ratios.