Tourism Development and Economic Growth: Evidence from Northern Cyprus

There have been ongoing discussions and studies about the relationship between development of tourism in the economies of small islands and their related economic growth. In spite of the fact that solid empirical evidence that proves the nexus between tourism development in these regions and their economic growth exists, a large portion of it has remained unexplored such as the impact of bank loan disbursements on economic growth. Hitherto, limited attention has been paid to the specificity of the role of tourism-related loan or financial inducement in economic growth. This thesis examines the short-run and long run relationships between bank loan disbursements to the tourism sector and economic growth in North Cyprus. We structurally derive empirical equations for co-integration and error correction models by extending the original Solow growth model. The empirical findings suggest unidirectional causality from loans disbursed to the tourism sector to economic growth in North Cyprus for the period under study. Additionally, we show that tourism-related loan, human and technological advancement all spur economic growth in the short- and long-run. These findings’ main policy implication is that long-term complementary policies in the domestic banking system can increase access to financial sources for tourism enterprises and, consequently, promote tourism-led economic growth, especially in small tourism dependent economies where capital sources are scarce. Keywords: Tourism sector, Bank Loans, Economic growth, Co-integration models, Granger Causality, Small Island Economies