Tourism and the shadow economy: Long-run and short-run implications for resource allocation

Abstract

This paper is one of the first which provides an in-depth quantitative analysis of how the development of the tourism industry impacts on the size of the shadow economy of a specific destination. The paper employs time-series techniques and annual data from 1960 to 2018 from Turkey. First, the size of the shadow economy is estimated using the electricity consumption method. The estimates are then used to assess the effect of tourism development on the size of the shadow economy. The findings show that there is a negative relationship between the two. A 1% increase in international tourism arrivals leads to a 0.21% and 0.316% fall in the size of the shadow economy in the short-run and long-run respectively. It implies that as the tourism sector develops, it becomes instrumental in modernising the Turkish economy leading to the movement of resources from the shadow economy to the formal sector. In the long-run the effect of the tourism industry in reducing the size of the shadow economy surpasses that of the financial sector of Turkey.