Assessing the Role of Tourism Demand and Financial Development in Economic Growth

Abstract

This study examines the impact of tourism demand and financial development on economic growth in five Western Balkan countries over the period 2000–2024. International tourist arrivals are used as a proxy for tourism demand, while domestic credit to the private sector represents financial development. Gross capital formation and labour force participation are included as control variables. To investigate the short-run and long-run relationships among the variables, the study employs a panel econometric framework comprising cross-sectional dependence tests, first- and second-generation panel unit root tests, panel cointegration tests, and the Pooled Mean Group Autoregressive Distributed Lag (PMG-ARDL) estimator. The Mean Group (MG) and Dynamic Fixed Effects (DFE) estimators are also estimated, while the Hausman specification test is used to select the preferred estimator. This study contributes to the tourism–finance–growth literature by providing updated panel evidence for five Western Balkan countries and by simultaneously examining tourism demand and financial development within a comprehensive PMG-ARDL framework. The results reveal significant cross-sectional dependence and confirm the existence of a stable long-run equilibrium relationship among the variables. The Hausman test supports the PMG estimator. The PMG-ARDL results indicate that tourism demand, financial development, gross capital formation, and labour force participation positively and significantly influence economic growth. Furthermore, the error-correction term is negative and significant, indicating that approximately 19.1% of short-run disequilibrium adjusts toward long-run equilibrium annually. The findings support the Tourism-Led Growth Hypothesis and highlight the importance of tourism development and financial sector expansion in promoting sustainable economic growth in the Western Balkan countries. JEL Classification: O40; Z32