Tourism, trade and growth in Cyprus


Although the relationship between international trade and economic growing has found a broad application country in the literature over the old ages, this can non be said about touristry and growing or trade and touristry. This survey employs co-integration and Granger causality trials to analyze long-term relationship between touristry, trade and growing, and the way of causality among themselves for Cyprus. Results reveal that touristry is non co-integrated either with growing or trade whereas latter two are co-integrated and there is bidirectional causing between tourer reachings and growing, between exports and growing and eventually between exports and imports in Cyprus. Finally, consequences suggest unidirectional causing from tourer reachings to export growing in Cyprus.

I. Introduction

International touristry and international trade are two major beginnings of foreign exchange for little states every bit good as larger 1s. Small states, in peculiar little islands, have more dependence on touristry and trade than the larger 1s since their economic systems are based on merely a few sectors. For illustration, harmonizing to Kuznets ( 1966 ) , as the state gets smaller, its dependence on international trade would increase. On the other manus, although many economic experts agree that little states have similar advantages and disadvantages when compared to larger 1s, there are differences in the beginning of these disadvantages. Among common disadvantages are international tourism/trade dependence, exposure, high population growing rate, limited labour force, low labour efficiency, diseconomies of graduated table, low GDP ( Gross Domestic Product ) , high dependence on imports of intermediate and ingestion goods, and production of merely a few basic goods/services.

The little size of a state, in footings of country and population, may be economically advantageous. The littleness of a province in footings of country and population may in fact be a beginning of comparative advantage instead than being a restraint on economic growing and development. Specifically, littleness may be more than compensated by certain alone features possessed by little provinces. Export-oriented services tend to stand for such uniqueness and, hence, a footing for a possible comparative advantage ( Mehmet and Tahiroglu 2002 ) .

In the last few decennaries, some little provinces have been of import service centres in banking, fiscal and trade services. Among them are Singapore, Hong Kong, Bahrain, Bermuda, Malta, Jersey and Cyprus. The touristry sector has been a locomotor industry for some little economic systems and the exclusive beginning supplying a comparative advantage. Bermuda is a good illustration in the sense that it has emerged as a touristry centre, successfully working the ability to take advantage of a favourable clime and location. The strategic location of little provinces besides serves as an of import factor for supplying banking and fiscal services. In the Mediterranean Sea, two illustrations of this class are the South of Cyprus and Malta. Bermuda, Bahrain and Jersey are among other provinces as studied by Bowe et Al. ( 1998 ) . On the other manus, in the north side of Cyprus, higher instruction emerged as figure one sector lending to national income of the state. Having limitations on international trade and touristry industry with other states, Turkish Cypriots life in the North of Cyprus succeeded in set uping and developing higher instruction establishments that attracts many foreign pupils from different parts of the universe. Presently, there are six universities in North Cyprus where they attract pupils and academicians from more than 69 states ( SPO 2004 ) .

International touristry non merely contributes to economic public assistance of states but besides to their socio-cultural, environmental and ecological activities ( Lindberg and Johnson, 1997 ; Bull, 1991 ; Ryan, 1991 ; Pearce, 1989 ) . Luzzi and Fluckiger ( 2003 ) defines international touristry non as an industry but as a individual, complex and differentiated merchandise. It is complex because it includes a broad assortment of goods and services, and differentiated because each finish has alone characteristics. On the other manus, the intent of touristry can be in different signifiers: Leisure touristry, concern, sing friends and relations, instruction, conferences, or athleticss. Thus, international touristry is a major part to the public assistance of states in every field. As a consequence of these activities, tourers are likely to devour and purchase of goods/services that conveying economic impact to every sector of states such as transit, adjustment, circuit operators and shopping countries ( See besides Chang, 2000 ) .

There is an unverified inquiry of whether international touristry growing really causes economic growing or does economic growing contributes to tourism growing alternatively. Empirical surveies of the relationship between touristry and economic growing have been less strict in touristry literature ( Oh, 2005 ) . International touristry grosss are a major beginning of foreign exchange together with export grosss that good counterbalance current history shortages every bit good due to the fact that touristry disbursement serves as an alternate signifier of exports lending to ameliorated balance of payments in many states ( Oh, 2005 ) . On the other manus, since international touristry contributes to every sector of the economic systems, budget shortages besides benefits from these activities via revenue enhancement grosss. As McKinnon ( 1964 ) argues international touristry brings foreign exchange that can be used to import intermediate and capital goods to bring forth goods and services, which in bend leads to economic growing. Balaguer and Jorda ( 2002 ) turn out the cogency of tourism-led hypothesis for the Spanish economic system where the Spanish economic system is the 2nd largest receiver of international tourist net incomes ( 5.9 % of its GDP ) in the universe after the United States ( Oh, 2005 ) . However, there is a inquiry if this hypothesis can be proved for other states. Therefore, the tourism-led hypothesis deserves farther attending for the other economic systems.

On the other manus, many surveies in the literature proved the importance of international trade for economic growing good. Some support export-led hypothesis while others support import-led hypothesis for peculiar states. Although consequences on the way of relationship between international trade and economic growing are still once more inconclusive ( Balaguer and Jorda, 2002 ) , these surveies prove that international trade is important for economic growing of many states ( Shun and Sun, 1998 ; Xu, 1996 ; Jin, 1995 ; Bahmani-Oskooee and Alse, 1993, Marin, 1992 ; Chow, 1987 ) . Recent theoretical literature provides two chief mechanisms through which international trade may impact growing. The first is its consequence on the rate of invention. The 2nd is its consequence on the acceptance rate of engineerings from more advanced states that besides increases the economic system ‘s rate of entire factor productiveness growing ( Proudman et al. , 1998 ) .

International touristry and international trade mean greater integrating into the universe economic system which besides brings benefits to the economic systems such as employment creative activity, foreign exchange net incomes, authorities grosss, and income and employment multipliers ( See besides Clancy 1999 ) . There have been legion surveies analysing the effects of international touristry and trade sectors on particularly developing economic systems. However, the linkages between international touristry and international trade did non happen a broad application country in the literature ( See Shan and Wilson, 2001 ) . Do international tourer reachings promote international trade, or does international trade promote tourer reachings, or is there feedback causality among them? When international touristry leads to international trade, there will be an addition in import demand for foreign goods/services every bit good as an addition in export net incomes through its service history of balance of payments. Another deduction of international touristry for international trade is that it increases the image of domestic goods/services around the universe which create new trade chances ( Shan and Wilson, 2001 ; Kullendran ad Wilson, 1998 ) . On the other manus, when international trade leads to international touristry, this might go on through concern travel which in bend causes holiday travels at subsequently phases as a consequence of greater trade chances. Therefore, the relationship between international touristry and international trade is another issue that deserves farther attending from the research workers.

Aim and Importance of the Study

Having the importance of this issue that deserves farther attending, this survey through empirical observation investigates the possible carbon monoxide integrating and causal link between international touristry, international trade and economic growing in a little island, the South of Cyprus, which has become a new member to European Union ( EU ) apart from May 1, 2004 and is a developed state with 15.1 billion US $ GDP and 20,701 US $ per capita income as of 2004 figures ( Statistical Service, 2004 ) .

There are of import deductions and motives for making this survey: First, international trade plays an highly of import function amidst economic concerns, on the other manus, small reference is of international touristry, in malice of its importance among foreign outgo points ( Luzzi, 2003 ) ; and bulk of empirical surveies on touristry prediction are built on touristry demand maps. As Shan and Wilson ( 2001 ) reference several countries remain uncomplete in this kind of surveies and hence deserve farther surveies. For illustration, foremost, the function of international trade as one of the determiners of touristry demand is non good recognized in these surveies. Therefore, this survey will seek the relationship of non merely international touristry growing with economic growing but besides with international trade growing in a little island.

Second, the econometric techniques used in the old surveies of international touristry are by and large hapless missing new developments in econometrics such as co integrating and Granger causality constructs ( Shan and Wilson 2001 ; Lim 1997 ; Song et Al. 1997 ; Witt and Witt 1995 ) . Additionally, this survey is alone in the sense that it for the first clip searches the nexus between international touristry, international trade and economic growing trigon at the same clip by using the latest econometric techniques in the field where old empirical surveies in the literature considered the nexus between any brace of them for peculiar states ( Oh, 2005 ; Shan and Wilson, 2001 ; Clancy, 1999 ; Andrew, 1997 ; Wagner, 1997 ; Zhou et al. , 1997 ) till the minute.

Third, another deduction of this survey is that although there have been extended surveies ( Andronikou, 1987 ; Ioannides, 1992 ; Clements and Georgiou, 1998 ; Ayers, 2000 ; Cope, 2000 ; Ioannides and Holcomb, 2001 ; Sharpley and Forster, 2003 ; Sharpley, 2002 ) analysing the development and direction of touristry in Cyprus ; nevertheless, none of them has considered its impact on economic growing and international trade in the literature. Furthermore, there are really few surveies analysing international trade and its consequence on economic growing of Cyprus ( Andrikopoulos and Loizides, 2000 ; Ayres, 1999 ; Pattichis, 1999 ; Asseery and Perdikis, 1991 ; Kamperis, 1989 ) . Therefore, empirical surveies deserve attending to be made for the South Cyprus economic system. Yet, the consequences of this survey for the first clip are expected to give of import deductions for this island economic system.

And 4th, Cyprus job has been at the docket of universe states for more than 40 old ages. Now, the South of Cyprus became a member of the EU whereas the North of the island does non profit the EU ordinances. Therefore, this state of affairs will go on to merit attending from the universe states and the consequences of this survey are besides expected to give of import messages to policy shapers.

The paper returns as follows. Section II overviews the literature on international touristry, international trade and growing and gives brief sum-up of touristry and trade in Cyprus. Section III defines informations and methodological analysis of the survey. Section IV provides consequences and treatments and the paper concludes with Section V.


Evidence from Literature

This subdivision attempts to supply a reappraisal of the literature with an accent on international touristry, international trade and economic growing. Exports and international touristry grosss postulate the being of assorted statements for which both exports and international touristry receipts become a chief determiner of overall long tally economic growing. More specifically, export grosss and international touristry grosss bring in foreign exchange which can be used to import capital goods in order to bring forth goods and services, taking in bend to economic growing ( Balaguer and Jorda, 2002 ; Xu, 1998 ) . Thus, international trade and international touristry can be thought of one within the other that together contributes to economic growing. Exports plus imports divided by GDP is a good known step for openness of a state ( See Yanitkaya, 2003 ) . Since little economic systems have more trade dependence, the openness rate of these states is besides higher than larger 1s. Recent theoretical literature provides two chief mechanisms through which international openness may impact growing. The first is its consequence on the rate of invention. The 2nd is its consequence on the acceptance rate of engineerings from more advanced states that besides increases the economic system ‘s rate of entire factor productiveness growing ( Proudman et al. 1998 ) .

Whether export publicity leads to economic growing has been capable to considerable argument in the development and growing literature. Newly industrialised Asiatic states – in peculiar, Hong Kong, Singapore, Korea, Taiwan, Malaysia and Thailand – can be cited as illustrations of states sing export-led growing ( ELG ) . This scheme of growing has doubled their criterions of life in every ten twelvemonth rhythm. Many surveies have tested the ELG hypothesis for economic growing to seek for the relationship between export growing and economic growing. Extensive empirical surveies in the literature have adopted the construct of causality proposed by Granger ( 1969 ) and Sims ( 1972 ) to observe the causal relationship between exports and end product. Many of the surveies in the empirical literature show conflicting consequences. Furthermore, although exports are a constituent of GDP and therefore take straight to the growing of end product, while some surveies found support for the export-led growing hypothesis ( i.e. Chow, 1987 ; Bahmani-Oskee and Alse, 1993 ; Xu, 1996 ) , some others have found negative relationship, even for the economic systems that are good known for their export advancing policies ( i.e. Jung and Marshall, 1985 ; Darrat, 1986 ; Ahmed and Kwan, 1991 ; Dodaro, 1993 ) .

The new trade theory has contributed to the theoretical relationship between exports and growing sing effects on proficient efficiency ( Doyle 2001 ) . Rivera-Batiz and Romer ( 1991 ) show that enlargement of international trade additions growing by increasing the figure of specialised production inputs. However, this result is equivocal when there is imperfect competition and increasing returns to scale ( Doyle 2001 ) . Krugman ( 1979 ) , Dixit and Norman ( 1980 ) and Lancaster ( 1980 ) show economic systems of graduated table as a major cause of international trade, suggesting the cogency of the growth-led exports hypothesis. There are extended empirical surveies of the Trade-Led Growth ( TLG ) hypothesis which fail to bring forth conclusive findings ( Giles and Williams 1999 ; Deme 2002 ) . Some empirical surveies in the literature confirmed the TLG hypothesis for some states whereas some others rejected it for some other states, while, on the other manus, some surveies in the growing literature back up the ELG hypothesis and while some others investigate the Import-Led Growth ( ILG ) hypothesis ( Deme 2002 ) .

In the last decennary, in add-on to cross-country applications, clip series and causality analyses analyzing the export and economic growing relationship has gained importance. Additionally, the construct of the ILG hypothesis was besides practically considered in add-on to the ELG hypothesis holding the fact that imports are chiefly critical for natural stuffs, every bit good as intermediate goods and capital goods which are used in the production procedure of exported goods and services. This mechanism stimulates economic growing for many states. In the work of Bahmani-Oskooee and Alsee ( 1993 ) , bidirectional causality between export growing and economic growing was through empirical observation tested.

Chang ( 2000 ) added imports to the relationship between exports and GDP and founded a bidirectional relationship between income and exports, income and imports, and exports and imports in the instance of Taiwan. Arize ( 2002 ) found a long tally convergence and therefore a long tally equilibrium relationship between exports and imports utilizing informations for 50 states around the universe. This was parallel to the findings of Fountas and Wu ( 1999 ) , Granger ( 1986 ) , Gould and Ruffin ( 1996 ) and Husted ( 1992 ) . Howard ( 2002 ) worked on the causality between exports, imports and income ( GDP ) in Trinidad and Tobago, a crude oil exporting state where oil export roars raise income degrees but are normally followed by a slack. He found a unidirectional Granger causing from exports to income and bidirectional causing between exports and imports, and imports and income. He besides hinted to the importance of the relationship between export growing and income due to a publicity of export sector as a key to economic growing and development in most of the developing states.

Chow ( 1987 ) found a bi-directional causality export growing and economic growing for Hong Kong, Israel, Singapore, Taiwan and Brazil, unidirectional causality from export to economic growing for Mexico and no causality between these two for Argentina utilizing the Sims process. Jung and Marshall ( 1985 ) used Granger causality trials and supported the ELG hypothesis for four out of 30 seven developing states under consideration. They besides found important end product growing and export growing relationship for three states, an export-reducing growing relationship for six states and a growth-reducing exports relationship for three states. The empirical literature on ELG universe broad by and large shows that export growing plays an of import function in economic growing, although many states have late adopted liberalisation in their trade policies. Empirical surveies besides proved that developing states with favourable export growing have experienced high economic growing rates. Therefore, this shows that exports are one of the major beginnings of foreign currency for national economic systems.

Recently, few surveies have applied new developments in econometrics including co integrating and Granger Causality procedures to tourism surveies ( Shan and Wilson 2001 ) . The consequence of international touristry on economic growing of states has found limited application country in the literature. Balaguer and Jorda ( 2002 ) tested international touristry as a long tally economic growing factor for Spain utilizing co integrating and Granger causality techniques. They confirmed the tourism-led hypothesis through co integrating and causality proving for the Spanish economic system. They besides confirmed that economic growing in Spain has been reasonable to relentless enlargement of international touristry. On the other manus, Hazari and Sgro ( 1995 ) developed a theoretical account that indicated that universe demand for touristry would hold a positive consequence on the long tally economic growing of a little economic system. Shan and Wilson ( 2001 ) found bidirectional causing between international travel and international trade for China. They besides imply that trade flows do non associate with touristry in China. Therefore, Shan and Wilson ( 2001 ) suggest that old touristry surveies utilizing individual equation attacks may take to biased estimations since they fail to see possible feedbacks between trade and touristry, because international trade ( both exports and imports ) and international touristry are found to reenforce each other in many states.

Tourism and Trade in Cyprus

Cyprus has an unfastened, free-market, serviced-based economic system with some light fabrication. It promotes its geographical location as a “ span ” between West and East, along with its educated English-speaking population, moderate local costs, good air hose connexions, and telecommunications. In the past 20 old ages, the economic system has shifted from agribusiness to light fabrication and services. The service sector, including touristry, contributes 75.7 % to the GDP and employs 70.7 % of the labour force ( Statistical Service, 2004 ) . Over the old ages, the services sectors, and touristry in peculiar, provided the chief drift for growing. Trade is critical to the Cypriot economic system – the island is non self-sufficing in nutrient and has few natural resources. Therefore, as it is one of the features of little islands, Cyprus has heavy dependence on foreign trade. As is typical of island states with strong touristry sectors, Cyprus runs consistent ware trade shortages which are partly offset by strong excesss in services trade with aliens, but the net consequence of these two largest constituents of the current history balance is a current history shortage because the services excess is smaller than the trade shortage. In 2003, Cyprus ran a current history shortage which was about 3.4 % of its GDP ( Statistical Service, 2004 ) .

Cyprus enjoys a broad scope of natural resources in footings of landscape, traditional folklore, gastronomy, civilization and a pleasant clime. Over the last 40 old ages, Cyprus has emerged as a major Mediterranean summer-sun finish ( Sharpley, 2002 ) . The successful growing of international touristry underpinned a singular socio-economic development on the island ( Sharpley, 2002 ; Ayers, 2000 ; Seekings, 1997 ; Kammas and Salehi-Esfahani, 1992 ; Ioannides, 1992 ) . Therefore, the tourer industry in Cyprus is one of the most dynamic sectors of the economic system and one of the chief drive forces behind economic growing. Having this fact, the Cyprus Tourist Organization has drawn up a Strategic Plan for Tourism for the 2000-2010 period. As a selling program, it addresses every imaginable relevant facet ( Smith and Zwart 2002 ) . Among the marks of this program are to increase existent gross to CYP ( Cyprus lb ) 1.8 billion in 2010, to increase mean disbursement per tourer to CYP 512 in 2010, to decrease the extent of the touristry sector ‘s dependance on the season by recognizing a 33 % to 40 % lessening in tourer reachings during the extremum season ( from July to September ) and a coincident addition during the staying period to a degree of approximately 250,000 tourers per month, to increase the figure of tourer reachings to 4 million in 2010 and to increase the portion of return visits to 35 % in 2010.

However, touristry sector has late experienced a downswing in Cyprus mostly as a consequence of the terrorist onslaughts in the U.S. and the economic slow-down in Europe. For illustration, entire tourer reachings showed a diminution by 10.3 % in 2002. Due to the events of 11 September, the twelvemonth 2001 showed an addition of merely 0.39 % . The tourers who visit Cyprus originate chiefly from Central and Northern Europe, peculiarly the UK ( United Kingdom ) and Germany. In 2004, 56.7 % of entire tourer reachings ( 2.3 million tourers ) to Cyprus were from the UK where 6.9 % were from Germany and 5.7 % were from Greece. International touristry grosss of Cyprus were about 1.9 billion US $ in 2004 where these experienced a autumn between 2002 and 2004 ( Statistical Service, 2004 ) ..

Cyprus, due to its little domestic market and the unfastened nature of its economic system, considers entree to international markets as of extreme importance. As a consequence, foreign trade has ever been one of the chief sectors of the Cypriot economic system, lending well to the economic growing of the island. Trade balance in Cyprus has been systematically unfavourable since before 1960. Given its big and spread outing trade shortage, Cyprus was fortunate to hold a big and turning excess in its invisibles account, plenty even to countervail the trade shortage in 1987 and 1988. The major factors lending to this excess were tourist grosss, grosss from transportations, and income from other goods and services ( such as foreign military outgos in Cyprus, and foreign exchange from offshore endeavors ) . Trade balance was besides inveterate unfavourable even after 1974[ 1 ]. There were diminution in exports of Cyprus after 2000s every bit good. The portion of goods and services exports in GDP was 55.0 % in 2000, 51.4 % in 2002 and 46.4 % in 2003 ( Statistical Service, 2004 ) . The chief domestic exports of Cyprus are agricultural exports, particularly citrus fruits and murphies, and manufactured merchandises, most significantly vesture, footwear, chemicals, and machinery. The EU is the chief market for the exports of Cyprus. Among the EU members in export market of Cyprus are UK ( 24.4 % in 2003 ) , France ( 11.0 % in 2003 ) , Germany ( 7.2 % in 2003 ) , Greece ( 6.4 % in 2003 ) and Poland ( 3.7 % in 2003 ) . The other major block of states to which the exports of Cyprus continued to make good is the Arab states. On the other manus, Cyprus is dependent on imports for many natural stuffs, consumer goods, transit equipment, capital goods, and fuels. The portion of goods and services imports in GDP was 60.2 % in 2000, 59.5 % in 2002 and 57.8 % in 2003. The imports of Cyprus chiefly come from Russia ( 36.2 % of entire imports in 2003 ) , Greece ( 6.4 % of entire imports in 2003 ) , UK ( 5.3 % of entire imports in 2003 ) , Germany ( 5.2 % of entire imports in 2003 ) and Italy ( 5.1 % in 2003 ) ( Statistical Service, 2004 ) .


Datas used in this paper are one-year figures covering the period 1960 – 2003 and variables of the survey are existent gross domestic merchandise ( GDP ) , existent trade volume ( exports plus imports ) , existent exports, existent imports and entire tourers sing and suiting in tourer constitutions of Cyprus. Data are taken from World Bank Development Indicators CD-ROM ( World Bank, 2004 ) and Statistical Service of Cyprus ( Statistical Service, 2004 ) and variables are all at 1995 changeless US $ monetary values.

The Augmented Dickey-Fuller ( ADF ) and Phillips-Perron ( PP )[ 2 ]Unit Root Trials are employed to prove the integrating degree and the possible co-integration among the variables ( Dickey and Fuller 1981 ; Phillips and Perron 1988 ) . The PP processs, which compute a residuary discrepancy that is robust to auto-correlation, are applied to prove for unit roots as an option to ADF unit root trial.

Unless the research worker knows the existent informations bring forthing procedure, there is a inquiry refering whether it is most appropriate to include changeless term and tendency factor in the unit root procedure ( Enders 1995 ) . It might look sensible to prove the being of a unit root in the series utilizing the most general of the theoretical accounts. That is,

( 1 )

where Y is the series ; t = clip ( tendency factor ) ; a = changeless term ( impetus ) ; Iµt = Gaussian white noise and P = the slowdown order. The figure of lags “ P ” in the dependant variable was chosen by the Akaike Information Criteria ( AIC ) to guarantee that the mistakes are white noise. One job with the presence of the extra estimated parametric quantities is that it reduces grades of freedom and the power of the trial.

On the other manus, the research worker may neglect to reject the void hypothesis of a unit root ( i?§ = 0 ) because of a misspecification refering the deterministic portion of the arrested development. Therefore, Doldado, Jenkinson and Sosvilla-Rivero ( 1990 ) besides suggest get downing from the most general theoretical account to prove for a unit root when the signifier of the informations bring forthing procedure is unknown. The general rule is to take a specification that is a plausible description of the information under both the nothing and alternate hypotheses ( Hamilton 1994 ) . If the intercept or clip tendency is unsuitably omitted, the power of the trial can travel to zero ( Campbell and Perron 1991 ) . “ Reduced power means that the research worker will reason that the procedure contains a unit root when, in fact, none is present ” ( Enders 1995: 255 ) . A additive combination of incorporate variables are said to be co-integrated if the variables are stationary. Many economic theoretical accounts entail such co-integrating relationships ( Enders 1995 ) .

On the other manus, Perron ( 1989, 1990 ) and Perron and Vogelsang ( 1992 ) suggest that a structural interruption in the mean of a stationary variable is more likely to bias the DF-ADF trials towards the non-rejection of the nothing of a unit root in the procedure. Perron ( 1990 ) argues that disregarding the effects of structural interruptions can take to inadequate theoretical account specifications, hapless prognosis, specious unit root trial consequences and improper policy deductions. Therefore, Perron ( 1990 ) proposes an integrating degree trial for structural interruption, which is known as the “ Perron trial ” and provides the appropriate critical values[ 3 ]. In this survey, Perron ( 1990 ) trial was employed to see if the order of integrating is changed by the structural interruption. The usage of the Perron ( 1990 ) trial in this survey is justified by the fact that intercession of Turkey in 1974 had important effects on the Cypriot economic system. Perron ( 1990 ) suggest two types of methods to mensurate the consequence of structural interruptions: ( I ) the linear outlier theoretical account, which is recommended for series exhibiting a sudden alteration in mean, and ( two ) invention outlier theoretical account, which is suggested for a gradual alteration in the series ( See besides Perron and Vogelsang, 1992 ) . The linear outlier theoretical account was used in this survey due to the fact that intercession of Turkey in 1974 was a sudden event. Therefore, in this survey it is assumed that there might be a structural interruption in 1974 for the variables under consideration.

Perron ( 1990 ) trial was carried out in two stairss. First, remainders were estimated utilizing OLS ( ordinary least squares ) as follows:

( 2 )

Where DUt = 1 if T & gt ; Tb and 0 otherwise. Tb is the point where the interruption occurs. And Second, the following modified arrested development theoretical accounts were run by utilizing OLS. The trial of negativeness of i?§ is checked by utilizing appropriate critical values reported in the survey of Rybinski ( 1994, 1995 ) :

( degrees ) ( 3 )

( first differences ) ( 4 )

Where ( DUTB ) t = 1 if t = Tb + 1 and 0 otherwise. Tb is the break twelvemonth ( 1974 in this survey ) , DUTB is dummy variable for the interruption twelvemonth, i??t is the residuary obtained from equation ( 2 ) utilizing OLS and Greenwich Mean Time is the error term.

After the order of integrating is determined, co-integration between the variables should be tested to place any long tally relationship. Johansen hint trial is used for the co-integration trial in this paper. Cheung and Lai ( 1993 ) reference that the hint trial is more robust than the maximal Eigen value trial for co-integration. The Johansen hint trial efforts to find the figure of co-integrating vectors among variables. There should be at least one co-integrating vector for a possible co-integration. The Johansen ( 1988 ) and Johansen and Juselius ( 1990 ) attack allows the estimating of all possible carbon monoxide incorporating vectors between the set of variables and it is the most dependable trial to avoid the jobs which stems from Engel and Granger ( 1986 ) process[ 4 ]. This process can be expressed in the undermentioned VAR theoretical account:

( for T =1, aˆ¦T ) ( 5 )

Where Crosstalk, Xt-1, aˆ¦ , Xt-K are vectors of current and lagged values of P variables which are I ( 1 ) in the theoretical account ; i??1, aˆ¦. , i??K are matrices of coefficients with ( PXP ) dimensions ; i?­ is an intercept vector[ 5 ]; and et is a vector of random mistakes. The figure of lagged values, in pattern, is determined in such a manner that mistake footings are non significantly auto-correlated. Adding Xt-1, aˆ¦ , Xt-K and i??1 Xt-2, aˆ¦ , i??K-1 Xt-K to both sides and rearrange term the VAR theoretical account will be in the undermentioned signifier[ 6 ]:

( 6 )

where i?‡i=- ( I-i??i-aˆ¦.-i??i ) ; ( i=1, 2, aˆ¦ , K-1 ) ; i??=- ( I-i??1-aˆ¦.-i??1 ) and I is the individuality matrix. The rank of the matrix of coefficient, i?? gives the figure of long-term relationships between the variables of the system. Three possible instances are stated by Johansen and Juselius ( 1990 ) : I ) If the ranks equal P [ R ( i?? ) = P ] significance that i?? has full rank, so any additive combination of I ( 1 ) series is stationary. two ) If the rank peers zero ( R ( i?? ) = 0, i.e. i?? is a void matrix ) , so there is no co integrating relationship. Although a long-term relationship seems to be improbable, a short-term relationship may be identified by the first differences. three ) If the rank is between nothing and P ( 0 & lt ; R ( i?? ) & lt ; P ) , so there are matrices I± and I? with ( pxr ) dimension, so that it is possible to stand for i??= I± I?A? . Matrix I? is called the ‘co incorporating matrix ‘ whereas matrix I± is referred to as the ‘adjustment matrix ‘ or the ‘feedback matrix ‘ . Matrix I? has the belongings to transform I?A?Xt into a stationary procedure even tough Crosstalk is non in the equilibrium relationship. The rank of i?? is the figure of co incorporating relationship ( s ) ( i.e. R ) which is determined by proving whether its Eigen values ( I»i ) are statistically different from nothing. Johansen ( 1988 ) and Johansen and Juselius ( 1990 ) propose that utilizing the Eigen values of i?? ordered from the largest to the smallest is for calculation of hint statistics[ 7 ].. The hint statistic ( I»trace ) is computed by Asseery the undermentioned expression[ 8 ]:

, one = r+1, aˆ¦ , n-1 ( 7 )

and the hypotheses are:

H0: R = 0 H1: R i‚? 1

H0: R i‚? 1 H1: R i‚? 2

H0: R i‚? 2 H1: R i‚? 3

The determination that many macro clip series may incorporate a unit root has spurred the development of the theory of non-stationary clip series analysis. Empirical surveies have shown that the being of non-stationarity in the clip series considered can take to specious arrested development consequences and annul the decisions reached utilizing Granger causality. Toda and Phillips ( 1993 ) have led the methods to cover with Granger causality in I ( 1 ) systems of variables. Granger causality trials should be implemented under VAR ( Vector Autoregressive ) theoretical accounts if the series are non co integrated. Therefore, the series are expected to hold the undermentioned causal relationship:

, ( 8 )

( 9 )

where i?­t and Vermont are serially uncorrelated white-noise remainders ; and p, Q, R, and s are lag lengths for each variable in each equation. Equations ( 8 ) and ( 9 ) are besides known as a simple bivariate autoregressive ( AR ) theoretical account proving for Granger causality.

Using the same slowdown length for the variables in each equation, the theoretical account is estimated by least squares. To gauge causal way, the Granger trial employs F-statistics within a model of restricted and unrestricted theoretical accounts. For causality from X to Y or from Y to X as can be seen in equations ( 8 ) and ( 9 ) severally, lagged values of X in equation ( 8 ) and Y in equation ( 9 ) are used as a zero limitation. F-statistics are computed as

( 10 )

where RSSr and RSSu represent the residuary amounts of squares in restricted and unrestricted theoretical accounts, severally ; and dfr and dfu are, severally, the grades of freedom in restricted and unrestricted theoretical accounts. Harmonizing to the Granger causality trial, holding a statistically important F values in equations ( 8 ) and ( 9 ) would be adequate status to hold causing from X to Y and from Y to X severally.


Table 1 gives ADF and PP unit root trial consequences for the variables of the survey. Real GDP seems to be stationary in ADF trial at degree but non-stationary in PP trial at first difference. The 2nd trial ( PP ) will be taken into consideration in this survey due to the fact that PP procedures calculate a residuary discrepancy that is robust to auto-correlation and are applied to prove for unit roots as an option to ADF unit root trial. Furthermore, both trials reveal that existent trade volume, existent exports and existent imports are non-stationary at their degrees but stationary at their first differences. Therefore, they are said to be integrated of order one, I ( 1 ) together with existent GDP. On the other manus, international tourer reachings seem to be stationary at degree, that is integrated of order nothing, I ( 0 ) , as justified by both ADF and PP trials.

“ take in Table 1 ”

Additionally, Table 2 studies Perron ( 1990 ) unit root trials for structural interruption that might be statistically important in the twelvemonth of 1974. Perron ( 1990 ) reveals that no interruption is observed in any of the variables in this survey since Perron ( 1990 ) trial statistics are less than critical values as reported by Rybinski ( 1994 ; 1995 ) . Therefore, this shows that unit root trial consequences reached by ADF and PP trials are robust in this survey.

“ take in Table 2 ”

Since the variables except international tourer reachings are integrated at the same order, that are I ( 1 ) , they are now due to a co-integration trial. Co-integration between tourer reachings to Cyprus and any of other variables of the survey could non be inferred due to the fact that they are integrated at different orders based on the consequences of this survey. Thus, a long-term equilibrium relationship could non be inferred between international touristry and existent income in Cyprus. So, co-integration should be searched among the variables other than the tourer reachings.

Table 3 gives co-integration trial consequences for those variables that are integrated at I ( 1 ) . In add-on to co-integration trials among all of the variables, the same trial is employed for single relationships between the variables as can be seen from Table 3.

“ take in Table 3 ”

Johansen trial consequences show that none of the variables are co-integrated as both groups and persons since hint statistics are all less than 5 % and 1 % critical values. Therefore, the consequences show that a long tally equilibrium relationship could non be inferred among existent GDP and trade variables of Cyprus. Having no co-integration among the variables of the survey, Granger causality trials should be run under foremost differenced VAR theoretical accounts. That means that the variables holding I ( 1 ) belongings based on Table 1 were used in VAR theoretical accounts at their first differences whereas tourer arrivals` variable is used at its degree signifier.

On the other manus, there are methods for slowdown length choice in the recent literature such as AIC ( Akaike Information ) , SIC ( Schwartz Information Criterion ) and Hsiao ‘s ( 1979 ) consecutive process ( which combines Granger ‘s definition of causality and Akaike ‘s minimal concluding anticipation mistake ( FPE ) standard ) . However, due to the limited figure of observations in this survey, maximal slowdown is set to 3 and VAR theoretical accounts are estimated for each slowdown length. Pindyck and Rubinheld ( 1991 ) pointed out that it would be best to run the trial for a few different slowdown constructions and do certain that the consequences were non sensitive to the pick of slowdown length.

“ take in Table 4 ”

Table 4 provides VAR consequences for Granger causality trials. Results suggest some causal relationships among the variables. First, unidirectional causing from trade volume to existent GDP was obtained in the survey. Other unidirectional causalities in the survey exist from entire tourer reachings to existent trade volume, from existent imports to existent GDP and from entire tourer reachings to existent exports. On the other manus, bidirectional causing exists between entire tourer reachings to and existent GDP of Cyprus. Other bidirectional causalities in the survey exist between existent exports and existent GDP, and between existent exports and existent imports as can be seen from Table IV. Results of VAR theoretical accounts suggest no Granger causality between entire tourer reachings to and imports of Cyprus.

The consequences obtained from this survey are similar to the survey of Chang et Al ( 2000 ) where they besides found bidirectional causing between exports and imports, and between exports and economic growing for Taiwan. On the other manus, Howard ( 2002 ) found bidirectional causing between exports and imports every bit good but unidirectional causing running from exports to existent income in Trinidad and Tobago. The consequence of this survey that international tourer reachings Granger cause to international trade is different from the survey of Shan and Wilson where they found bidirectional causing among these in the instance of China. The other consequences of this survey that international touristry and existent income in Cyprus is non co-integrated and there is bidirectional causing between this two in the short-term context are besides different compared to the consequences of Balaguer and Jorda where they have confirmed the tourism-led hypothesis for Spain with the being of co-integration and unidirectional causing running from international touristry to existent income.


This survey through empirical observation tested the possibility of long-term equilibrium relationship and way of causality between internatinoal trade, international tourer reachings and economic growing in Cyprus. Consequences of co-integration trials reveal that a long-term equilibrium relationship could non be inferred between international trade, international touristry and economic growing in the Cypriot economic system. However, when series are non co- integrated, so there could still be a room for analyzing causal nexus among the variables at least in the short tally context. Granger causality consequences of this survey show that there is unidirectional causing running from international tourer reachings to a growing in entire trade volume and to a growing in exports. Unidirectional causing running from international tourer reachings to exports in Cyprus is consistent with old premises that international travel may bring on more trade chances, and consistent with the fact that concern travel has been an of import constituent of international travel around the universe since 1880s. Shan and Wilson ( 2001 ) and Kulendran and Wilson ( 1998 ) argue that more foreign tourers to a host state by and large increases the image of the state for its goods and services ; therefore, trade chances are likely to increase. In 2004, 89.4 % of tourers visited Cyprus for vacation intent where 5.9 % of them visited for concern and 4.5 % visited for friends and relations ( Statistical Service, 2004 ) . It is interesting to observe that no causing was obtained between import growing and international tourer reachings to Cyprus harmonizing to the consequences of this survey. However, the Cypriot economic system is dependent on the imports of intermediate and ingestion goods as mentioned before.

On the other manus, the way of causality between international tourer reachings and existent GDP growing is bidirectional ( two manner ) in Cyprus harmonizing to the consequences of this survey. This proves the cogency of a feedback relationhsip between existent income and international touristry in Cyprus. On the other manus, imports Granger cause existent GDP growing, while the relationship between existent GDP growing and export growing is once more bidirectional. This shows the fact that imports spur the economic growing of Cyprus. Exports and imports besides gives each other a causing ( bidirectional ) harmonizing to the consequences of this survey. Having these consequences, import-led growing hypothesis can be inferred for the Cypriot economic system at least in the short-term due to the fact that imports are critical for natural stuffs, intermediate and capital goods which are used in the production procedure of exported goods and services. Therefore, this mechanism stimulates economic growing as mentioned in Section III of the survey.

Apart from these consequences, nevertheless, there are some challenges confronting international touristry every bit good as foreign trade sector in Cyprus. There is slow growing in the figure of tourers sing Cyprus after 2000s. The island ‘s economic system is partially dependent on international touristry industry. Consequently, external events and the economic state of affairs in its chief tourer markets have a considerable influence. The figure of competitory finishs is turning against the tourer industry of Cyprus. Because of the economic recession in the chief tourer markets for Cyprus, people tend to prefer other, much cheaper finishs such as Spain and Turkey ( Smid and Zwart 2002 ) . Therefore, touristry selling should be given farther importance by the Cypriot governments. On the other manus, the continued high degree of force in Palestine and the menace of a U.S. ( United States ) -led invasion of Iraq, which could hold unanticipated effects on regional stableness, are besides maintaining a cloud over the island ‘s otherwise bright economic hereafter. Therefore, the EU might give the Cypriot economic system a encouragement in efficiency from farther entree to additions from trade.

Cyprus has entered into a Customs Union with the EU prior to the rank. Therefore, all trade policies have already been adjusted and are in full conformity with the EU ordinances. Consequently, accession to the EU is non expected to ensue in new chances for export to or from the EU every bit good as trade with other states due to the acceptance of the EU common imposts duty for most of the merchandises ( See Smid and Zwart 2002 ) . Therefore, holding this possibility the Greek Cypriot disposal should develop new schemes for bettering service sectors further. Particularly, successful touristry selling in international sphere should now be figure one precedence of the authorities. Turkish Cypriots, as mentioned before, succeeded in developing higher instruction sector. The island is now on the manner of being a “ higher instruction island ” as a consequence of freshly emerging international higher instruction establishments, particularly on the North of Cyprus. Therefore, the Greek Cypriot disposal might besides believe about concentrating on this sector every bit good to pull foreign exchange to the island due to the fact that higher instruction is the merely sector where Turkish Cypriotes are in front from Grecian Cypriots for the minute. Furthermore, there are presently five international universities in the north and two universities in the South of Cyprus.

This survey has shown that still there is a demand to measure the relationship of international touristry with international trade and economic growing as besides some of the consequences of this survey are consistent where some others are conflicting with other surveies in the literature. Therefore, a farther survey is recommended to make a similar survey for other islands around the universe for the intent of comparing with the consequences of this survey.

Acknowledgement – The writer would wish to thank to Professor Hasan Ali BICAK ( Dean of Faculty of Business and Economics, Eastern Mediterranean University, North Cyprus ) for his uninterrupted support and encouragement in every phase of his researches and academic life.