The Effect Of Tourism On Economic Growth In Ethiopia: Vector Error Correction Model

Abstract

Tourism is one of the world most important industries and the second-fastest growing sector. Tourism is crucial to the growth of many economies around the world and has been a topic of extensive research for many years, but very few studies have been conducted in the context of this country. This study analyzes the effect of tourism on economic growth in Ethiopia by using time series data from 1990 to 2022. The analyze is used vector error correction (VEC) model in order to check the relationship between variable. The data used in this analysis were secondary data collected from world development indicator, World Bank report. The study used descriptive and Inferential statistics of analyze. Johansen co-integration test was performed to determine the long term relations. As a result two co-integration vectors have been found, meaning that tourism income have had a positive effect on Ethiopia economic growth. The result of the study show that 1% increase in tourism receipts leads to economic growth by 32.4%. Granger causality test result also verify that the existence of co-integration relationship .According to granger causality test result it is understood that there is unidirectional causality from tourism receipts (TR) to economic growth (RGDP). As we observed from the forecasted value of real gross domestic product (RGDP), the value is gradually increasing in the near future (from 2022 -2030). Tourism receipts positively and significantly affect economic growth in Ethiopia. Tourism sector has significant relationship with Ethiopia economic growth in the long run and short run.