Testing the role of tourism and human capital development in economic growth. A panel causality study of micro states

The tourism sector over the years has become an integral part of economic growth strategies and determinants. This study seeks to investigate the contribution of the tourism sector to economic growth of the micro states over the period 1995-2015, using second generation panel approach that accounts for cross-sectional dependence, by incorporating investment in human capital as an additional variable. The causal relationship and interaction between tourism, investment in human capital and economic growth is examined by employing the Granger causality testing approach introduced by Dumitrescu and Hurlin (2012). Our empirical results provide evidence in support of tourism-induced growth, tourism-induced human capital development and human capital development-induced growth. Over the sampled period, it appears tourism sector has not been contributing substantially to export earnings and economic growth. This might have led the policymakers in these states to diversify their economy from being tourism-dependent to human capital-based.