Economic Research and Perspectives

Economic Research and Perspectives

Indirect effect of tourism on economic vulnerability in selected developing countries: a non-linear PSTR approach

Authors
Farouq Mahmoudi-Razgeh 1
Ali Rezazadeh 2
Yousef Mohammadzadeh 2
1 M.A. Student in Economics, Urmia University, Urmia, Iran
2 Associate Professor, Department of Economics, Urmia University, Urmia, Iran
10.22034/24.1.313
Abstract
رIntroduction

The tourism sector plays a pivotal role in national economic development because it promotes the development of related industries such as transportation. The boosting effect of tourism on economic growth is more obvious in developing countries with abundant tourism resources (Dieke, 2003). However, tourism development undergoes great dynamic changes due to complex and volatile external environments, such as global climate change and social disturbances with a high degree of uncertainty (Nguyen et al., 2020; Scott et al., 2019). thus, the tourism economy has become very fragile and has a weak ability to withstand risks from various sources (Wang et al., 2022). Therefore, this study attempts to examine the Indirect impact of tourism on economic vulnerability and other factors affecting economic vulnerability in selected developing countries over the period 1995-2021 by using a panel smooth transition regression model.

Methodology

In this study, the nonlinear threshold effect of tourism on economic vulnerability in selected developing countries is examined using a PSTR model. For this purpose, following Gonzalez et al. (2005) and Colletaz & Hurlin (2006), a PSTR model with two regimes and a transition function is defined. according to the study of Colletaz & Hurlin (2006), can be chosen among the explanatory variables, the lag of the dependent variable, or any other variable outside the model that is theoretically related to the model under study and causes a nonlinear relationship.

qit represents the transition variable and, according Gonzalez et al. (2005) suggest that, in practice, considering one or two thresholds, m = 1 or m = 2 , is sufficient to account for parameter variability. For m =1 , the model implies that the two extreme regimes are associated with low and high values of transition variable with a single monotonic transition of the coefficients from β0 to β0+β1 as transition variable increases, with the change centered around location parameters. When →∞ , transition function the model becomes an indicator function Iqit>c1 , defined as IA=1 when event A occurs and 0 otherwise. In this case, the PSTR model in (1) reduces to the two-regime panel threshold model of Hansen (1999). For m = 2, the transition function has its minimum at c1+c22 and reaches 1 at both low and high values of qit . In this case, the transition function (2) becomes constant for any value of m when γ → 0 . In this case, the model collapses into a fixed effects homogeneous or linear panel regression model. Accordingly, in the PSTR model, based on the observations of the transition variable and the slope parameter, the estimated coefficients are continuous and bounded between F = 1 and F = 0.

As mentioned earlier, another salient feature of the PSTR model is that it provides a parametric approach to cross-country heterogeneity and time instability of the slope coefficients, allowing the parameters to change smoothly as a function of the threshold variable yit . More precisely, the income elasticity for the i th country at time t is defined by the weighted average of the parameters β0 and β1 .

It is worth noting that the estimation of the parameters of the PSTR model consists in eliminating the individual effects by removing the individual means and then applying nonlinear least squares (NLS) to the transformed model (see for details, Gonzalez et al., 2005). This method is equivalent to maximum likelihood (ML) estimation in the case of normal errors.

Following Gonzalez et al. (2005), Colletaz & Hurlin (2006), and Jude (2010), the estimation steps of a PSTR model are as follows: First, the linearity test against PSTR is performed using Wald Tests (LMw ) coefficients, Fisher Tests (LMF ) coefficients and LRT Tests (LR ) coefficient statistics according to Colletaz & Hurlin (2006). Once we have rejected the linearity hypothesis, we can verify that nonlinearity no longer exists. Then it is a matter of testing whether there is a transition function or whether there are at least two transition functions.

Results and Discussion:

The results show that in the first regime, trade openness has a negative effect on economic vulnerability, which has decreased and turned positive after crossing the threshold location in the second regime. Government expenditure has a positive effect on economic vulnerability, and after crossing the threshold location and entering the second regime, its effect gradually decreased and became positive. Inflation coefficients in the regime had a negative and insignificant effect on economic vulnerability, which after crossing the threshold location and entering the second regime, its effect gradually decreased and became positive, but it was significant at the 10 percent level.

Also, the results show that before the threshold location and at low levels of tourism income, the logarithm of financial development has a negative and significant effect on economic vulnerability, and after the threshold location and entering the second regime, this effect is still negative and increases. The coefficients of the logarithm of total unemployment have a negative effect on economic vulnerability in the first regime and before the threshold location. By crossing the threshold location and entering the second regime, this effect decreases and becomes positive.

Conclusion

In this study, the threshold and Indirect effect of tourism on economic vulnerability in selected developing countries during 1995-2021 was investigated. For this purpose, the PSTR model provided and developed by Gonzalez et al. (2005) and Colletaz & Hurlin (2006) was used. The estimation results suggested a nonlinear relationship between trade openness, financial development, government spending, total unemployment, inflation and economic vulnerability. Moreover, considering a threshold with two regimes or a transition function is sufficient to investigate nonlinear behaviors. The results show that the threshold of the transition variable is equal to 3.1378 and the slope parameter is equal to 33.8978, which include only one transition function and only one threshold.

Considering the positive impact of tourism on financial development and government spending, it can be said that the development of tourism income can indirectly reduce the economic vulnerability of developing countries by increasing financial development and national income and adjusting industrial structures, while this mediating effect at the level Social does not appear. Therefore, it is suggested that considering that in developing countries where the overall economic strength of a country is weak, with low economic development, the development of international tourism should be cautious. The main task should be to create infrastructure and stimulate domestic consumption. Investment should be focused on industries such as manufacturing and financial development to increase the growth of GDP and improve people's quality of life. Physical needs are the most important factor to maintain economic stability and prevent economic vulnerability. For these countries, attention should be paid to domestic tourism by strengthening the construction of tourism service facilities, adjusting the structure of the tourism industry and ensuring the sustainable development of international tourism, while accelerating the development of domestic tourism.

From an institutional perspective, creating active employment policies to create preferential employment conditions for low-income people can further ensure the positive impact of low-level international tourism on economic vulnerability. Finally, regardless of the level of economic development, one should have a clear understanding of the performance of the tourism industry based on the state of the country. This is possible by correctly positioning the tourism industry and not exaggerating the role of tourism and not giving up on its development due to some negative factors. Economic vulnerability can be effectively reduced only by combining tourism with other industries and focusing on overall economic development.
Keywords
tourism
Economic vulnerability
Developing Countries
PSTR

Subjects

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Economic Research and Perspectives
Volume 24, Issue 1
Spring 2024
Pages 313-341