CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

As an internationally traded service, international tourism has become one of the world’s major
trade categories. The overall export income generated by international tourism, including
passenger transport, exceeded US$ 1 trillion in 2010, or close to US$ 3 billion a day. Tourism
exports account for as much as 30% of the world’s exports of commercial services and 6% of
overall exports of goods and services. Globally, as an export category, tourism ranks fourth after
fuels, chemicals and automotive products. (UNWTO, 2011).

Worldwide, international tourism rebounded strongly, with international tourist arrivals up 6.6%
over 2009, to 940million in 2010. The increase more than offset the decline caused by the
economic downturn, with an additional 23 million arrivals over the former peak year of 2008.
(WTO,2010). According to the April 2011 Interim Update of the UNWTO World Tourism
Barometer, International tourist arrivals grew by close to 5% during the first two months of
2011, consolidating the rebound registered in 2010.

In spite of occasional shocks, international tourist arrivals have shown virtually uninterrupted
growth: from 25 million in 1950, to 277 million in 1980, to 435 million in 1990, to 675 million
in2000, and the current 940million. As growth has been particularly fast in the world’s emerging
regions, the share in international tourist arrivals received by emerging and developing
economies has steadily risen, from 31% in 1990 to 47% in 2010.(UNWTO, 2011).

Tourism industry is one of the economic activities which have higher capacity to generate
employment and attracting investments and foreign capital. It has also the capacity to generate
direct and indirect effects in the local economy.

1
Despite its positive endowments and the good growth in tourism over the past decade, it remains
true that Africa’s tourism potential is underexploited and underdeveloped. For example, Africa
attracted fewer than 4% of total international tourists and received less than 2% of international
tourist expenditure in 2002 (WTO, 2002). In sub-Saharan Africa, only South Africa is among the
top 40 global tourist destinations and only 13 of the 135 leading hotels of the world are situated
in Africa. (WTO, 2010).

Ethiopia was one of the first African countries to establish a tourist industry. In the 1960’s,
tourist arrivals grew at the rate of 12 percent a year. When the emperor Haile Selassie was
toppled and replaced by military regime, Ethiopia’s tourist sector was on a par with Kenya’s.
Ethiopia then had actually more to offer than Kenya; both had spectacular scenery and abundant
wildlife but Ethiopia also had historic sites and an identity defined by its own history, culture and
peoples, rather than by colonialism.(Yabiebal,2010).

We need to note that the tourism industry is an activity that continuously changes and is sensitive
to what is happening in the local and international environment. Tourism declined greatly during
the later 1970’s and the 1980’s under the Coordinating Committee of the Armed Forces, Police,
and Territorial Army (Derg). This was because restrictions on entry and free movement of
tourists during the military government. During this period, apart from periodic upgrades of the
infrastructure, there has been little investment and successive governments have largely
overlooked the sector. Recovery began in the 1990’s, but growth has been constrained by the
lack of suitable hotels and other infrastructure. The current government, Ethiopian People’s
Revolutionary Democratic Front (EPRDF), had inherited the power to attract about 81,581
tourists in 1991, that was only 8000 more than the 1973 record. This flow increased steadily to
139,000 in 1997, mainly due to the political stability and the market liberalization that attracted a
large number of businesses, conference and vacation tourists. Unfortunately, the country had war
with Eritrea in 1998. The war led to the decline in the number of tourists by 27,000, reducing the
number of tourists to 112,000 in that year and increased to 115,000 by the year 1999.

2
During the Ethio- Eritrean war, business travelers to Ethiopia considerably decreased in number
and that was replaced by vacation tourists, whose steady increase was only temporarily halted
during the war and showed significant increase after the war by threefold in the period under
consideration. In general, business tourism increased slowly to double in 2005 compared to
1991. Conference tourism has been the least contributor to tourism with sluggish growth and
falling share from the total tourist arrivals. (Yabibal, 2010).

Ethiopia’s tourism potential is diversified and that will help the country to benefit more from the
tourist sector. For example, natural attractions that include some of the highest and lowest places
in Africa along with immense wild life including some endemic ones; a very old and well
preserved historical traditions with fascinating steal, churches and castles are all a significant
tourist attraction places. In addition, an attractive cultural diversity of about 80 nations and
nationalities; and various ceremonies and rituals of the Ethiopian Orthodox Church, which opens
a window on the authentic world of the Old Testament (www.tourismethiopia.org) are also very
important in the tourism industry and significantly contribute to the revenue obtained from the
sector.

On the other hand, it is one of the poorly performing countries in terms of tourist arrivals and
consequently poor revenue from the sector. It is among the lowest tourism beneficiaries in the
continent sharing only 0.58 %, 180,000 arrivals in 2003 (Tourism statistical bulletin, 2006).
Ethiopia out performed only three countries in the continent in 2002 (Ministry of Culture and
Tourism, 2003). For example, the total number of tourist arrivals in Ethiopia in 2006 was
290,000, which was five times smaller than the number in neighboring Kenya that had 1,644,000
tourists in the same year (WDI, 2010). Even then, it was a major source of foreign exchange
earnings in the country claiming an average of 23.34% of the total export earnings from 1995 to
2007 (WDI, 2010).

3
In recent years, tourism business development has been the focus of study and research. In the
analysis of tourism, economists emphasis the economic effects of tourism on the economy. The
speedy growth of tourism causes an increase of household income and government revenues
through multiplier effects, improvement in the balance of payment, and growth of tourism
industry. Hence, the development of tourism has usually been considered a positive contribution
to economic growth (Khan et.al., 1995; Lee and Kwon, 1995; Lim, 1997 Khalil, et al.(undated)).

Though it is believed that the growth of tourism contributes to the growth of household incomes
and government revenues, available empirical evidences on the link between tourism industry
and economic growth has not yet been clear. Therefore, it is necessary to examine empirically
whether tourism growth actually caused the economic increase or, alternatively, did economic
expansion strongly contribute to tourism growth instead.

1.2 STATEMENT OF THE PROBLEM

Economic growth is the most powerful instrument for reducing poverty and improving the

quality of life in developing countries. Economic growth occurs whenever people take resources

and rearrange them in ways that are more valuable (Romer, 1994). Like other sectors of the

economy, tourism brings in foreign exchange which can be used to import capital goods in order

to produce goods and services, leading in turn to economic growth (McKinnon, 1964).

Ethiopia’s travel and tourism market has enormous potential. The country not only offers the
usual African game and cultural experiences to visitors, but also a rich array of historical and
ecological sites that set it apart from most of its neighbors. However, despite its huge potential,
the travel and tourism market has yet to develop to a point where it can make a significant
contribution to Ethiopia’s economic growth. While tourist numbers are rising, growth in arrivals
and tourism expenditure are by no means commensurate with the potential of the country’s
attractions (www.euromonitor.com). By recognizing the role of the tourism sector in the
country’s economy, the government of Ethiopia has given due attention to the sector.

4
However, there arises a question of whether tourism growth actually caused the economic
increase or, alternatively, did economic expansion strongly contribute to tourism growth instead.
If the later is the case, then it means the country should not worry much about the tourism sector,
as the economic growth itself will take care of the development of the tourism sector. Otherwise,
it is necessary to work and remove all the barriers or constraints for the development of the
tourism sector if the link is from tourism to economic growth. Hence, it would be possible to
argue that economic policies should be directed to improving the tourism industry for the
economy to grow rapidly.

Therefore, this kind of information will help policy makers and planners understand the
relationship between tourism industry and economic growth and design appropriate policies.
However, to our knowledge no formal empirical researches has been done in Ethiopia
(exceptions are Tsega, 2008; Yabibal, 2010) by using a time series analysis. This work will try to
fill this gap by using time series approach. Moreover, the thesis tries examine and understand the
contribution of the sector to Ethiopian economy.

1.3 OBJECTIVE OF THE STUDY

Policies and strategies for the given industry should be designed based on the relationship

between the sector and the overall economy. For example, if there is no causality relation

between tourism growth and economic development, then strategies such as tourism- promotion

may not be effective to achieve the desired objective.

Therefore, the main objective of the study is to examine the relationship between economic
growth and tourism sector in Ethiopia. Under this main objective, the following are the specific
objectives of this study:

i) Analyzing the patterns and trends of growth of tourism sector

ii) Assessing the contribution of tourism sector to the GDP of Ethiopia.

5
 iii) Examining whether there is a unidirectional or bidirectional casual relationship
between economic growth and tourism

iv) Suggesting the policy implications based on the empirical results.

1.4 SIGNIFICANCE OF THE STUDY

Development of tourism sector would lead to economic growth and development through

different directions. The urgent need for poverty assistance in Ethiopia and the substantial

potential economic contribution of tourism in Ethiopian economy justify the interest in

explaining the sector link with economic growth. To the best of the researcher’s knowledge, no

study has tried to analyze the link between economic growth and tourism in Ethiopia by using

time series data. Yabibal .M. (2010), Tsega (2008) and Fayissa et al (2007) have tried to examine

the relationship between tourism and economic growth using a panel data approach. One can

find few studies that use a time series approaches from other countries such as Pakistan and Sri

Lanka.

Therefore, the result of this study will help policy makers understand the relationship between
the tourism industry and economic growth in Ethiopia. Moreover, this study can supplement the
limited empirical evidence on the link between tourism sector and economic growth in Africa.

1.5 SCOPE AND LIMITATION OF THE STUDY

This study has some limitations. First, data on foreign direct investment cannot be found, because foreign

direct investment is recent phenomena in Ethiopia and the data could not be matched with the years of the

other variables.

6
Second, the empirical analysis of this study is also limited by the quality of data. This is because

data is collected from different institutions and lack of consistency of the data was the main

problem. Finally, this study employed annual figures; yet more might be learned of tourism and

economic growth using a larger sample (i.e. quarterly data) and control variables. However, this

is a typical problem for African countries in general and Ethiopia in particular.

1.6 ORGANIZATION OF THE STUDY

The remaining sections of this thesis are organized as follows: Chapter two provides description
of general overview of tourism sector in Ethiopia. Chapter three deals with the review of some
selected literatures. Both theoretical and empirical literatures are reviewed. Chapter four deals
with the data source and specification of the econometric model employed for the empirical
analysis. Chapter five discusses the empirical results. The causal relationship between tourism
and economic growth are analyzed in this chapter. The final chapter concludes and draws policy
implications.

7
 CHAPTER TWO

GENERAL OVERVIEW OF TOURISM SECTOR IN

ETHIOPIA
2.1 History of Tourism Sector in Ethiopia

Ethiopia’s territory includes seven UNESCO World Heritage Sites, four important national
parks, a source of the world’s longest river (the Blue Nile), and sites revered among adherents to
Christianity, Islam and Judaism and diverse African traditional societies. Ethiopia has very
distinct cultural and historic products based on (a) ancient Axumite civilizations and the
Ethiopian Orthodox Church; (b) the walled Old City of Harar with its seven gates considered as
the fourth holiest city in Islam; (c) as a cradle of civilization, with fossilized evidence of the
ancestors of homo sapiens as old as 4.4 million years B.C., and the much more famous
Dinknesh, or Lucy.( www.tourismethiopia.org)

Though Ethiopia faces an image problem for tourists, it is worth noting that this was not always
the case. Ethiopia was one of the first African countries to establish a tourist industry. Modern
tourism in Ethiopia can be said to have started with the formation of government body to develop
and control it in 1961. In common with many other countries (notably Morocco, Tunisia, Egypt
and Kenya that also started investing in tourism in the late 1960s), tourism was considered a key
economic growth sector in Ethiopia as early as 1966 when the first Tourism Development Master
Plan was developed. Guided by the plan, the government invested heavily in tourism
infrastructure in the subsequent decade – including establishing Ethiopian Airlines for
international and domestic air access, building airfields around the country at key tourism sites,
building hotels at or near these sites, and establishing a national tourism operation to take tourists
to the hotels and attractions. The main attraction was the “Historic Route” which at the time
(1968-73) Ethiopian Airlines was servicing with seven flights per day. The “Historic Route”
included Addis Ababa, Lalibela, Gondar, Axum and Asmara.( www.tourismethiopia.org)

8
From 1974, for two decades, the Ethiopian tourism industry suffered from the adverse effects of
a prolonged civil war, recurrent drought and famine, strained government relations with tourist
generating countries, and restrictions on entry and free movement of tourists during the military
government from 1974 to 1991. During this period, apart from periodic upgrades of the
infrastructure (such as airports and roads), there has been little investment and successive
governments have largely overlooked the sector. The tourism sector is in urgent need of re-
investment, in particular, the cultural and natural attractions, and human resources that form the
basis of the tourism product, have been completely neglected. Linkages to international tourism
networks, both for marketing and research purposes, have also been neglected.
(www.wikipedia.org).

Lack of coordination between stakeholders and the government resulted in poor infrastructure
development and under developed tourist sites as well as a shortage of skilled workers in the
sector. Generally, there was lack of marketing and promotional strategy as well as low awareness
of tourism by local communities. During the last few years, however, tourism has once again
emerged as a growth industry taking advantages of the current peace and stability in the country.
(www.wikipedia.org).

2.2 Trends in International Tourist Arrivals

The direct contribution of Travel & Tourism to GDP is expected to be ETB 20, 628.5 million in
2011 (4.6% of GDP). This primarily reflects the economic activity generated by industries such
as hotels, travel agents, airlines and other passenger transportation services (excluding commuter
services). But it also includes, for example, the activities of the restaurant and leisure industries
directly supported by tourists (WTCC, 2011).

9
 Figure 2.2.1 number of tourist arrivals from 1963-2005

Source: MCT (2010)

As can be seen from figure 2.2.1, the number of tourist arrivals rise from 19215 in 1963 to
73,662 in 1973. The number of tourists went down to 50, 220 in 1974 and 30,640 in 1975. This
has been due in part to natural phenomena such as droughts and famine. The other reason can be
attributed to the political and ideological expediencies of the military government that took
power by overthrowing Emperor Haileselasseie in 1974. Though the number started to grow to
above 60,000 after the year 1981 its rate was low. Due to the famine occurred in 1984, the
number of tourists has declined from 64, 240 in 1983 to 59, 552 in 1984. From 2000 onwards,
the number of tourist arrivals showed an increasing trend, due to the political stability and the
market liberalization that attracted large number of business, conference and vacation tourists.
Besides, the ongoing infrastructural development, especially road projects, can be mentioned as a
major factor. When ascertaining tourism demand for the purposes of tourism planning or strategy
development, it is critical that the total demand figures are further segmented by purpose of visit
as this gives a more accurate picture of tourism demand. (Yabibal,2010).

10
Figure 2.1.2. Tourist arrivals by purpose of visit from 1991-2008

300000

250000

200000
business
vacation
tourist arival

150000
transit
Conferenc
100000 e
Visiting
relative
50000 Not stated

0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
19 19 1 9 1 9 19 19 19 1 9 1 9 2 0 20 20 2 0 2 0 2 0 20 2 0 2 0
Year

Source: MCT (2010)

As can be shown from figure 2.1.2, business was the leading motive to visit Ethiopia from 1991
up to 1997. But in 1998 because of the Ethio-Eritrea war, business travelers to Ethiopia
considerably decreased in number and they were replaced by vacation tourists, whose steady
increase was only temporarily halted during the war. They showed significant increase after the
war by threefold during the period under consideration. In general, business tourism increased
slowly to double in 2005 compared to the number it had in 1991. Conference tourism has been
the least contributor to tourism with sluggish growth and falling share from the total tourist
arrivals.

The number of transit visitors in Ethiopia is directly related to airport efficiency, strong security
and growth of the Ethiopian Air Lines (Yabibal, 2010). And except during the Ethio- Eritrean
war and its aftermath (1998-2001), this number has grown steadily to register a five-fold increase
in 2005 from the 1991 record. The recent growth is mainly explained by the growth of the

11
Ethiopian Air Lines as one of the best airlines in Africa (World Bank, 2006). Almost every year,
the number of visitors whose purpose was to visit relatives showed a continuous but slower
increase. Still more than 10% of the tourists’ purpose of visiting Ethiopia is not known (Yabibal,
2010).

2.3 Trends in Tourism Receipts

The data on tourism receipts is available from 1971 onwards. The receipts show a stagnant and
sometimes a falling trend throughout the Derg period. Figure 2.3.1 shows the trends in tourism
receipts and the percentage growth starting from the year 1997.

Figure 2.3.1 Tourism receipts from 1997-2008

Receipts in USD
250
Receipts in USD ('millions)

200

150

100

50

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year

Receipts in USD

Source: MCT (2010)

In the year 1998 the receipts dropped by 24 percent. That was due to the decrease in the number
of arrivals because of the Ethio-Eritrea war. However, from the year 1998 onwards the receipts
showed an increasing trend.

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Specially starting from the year 2003, the receipts percentage growth remained double digit till it
dropped to 4.2 in 2008. This was mainly due to the world economic crises. Despite this, Ethiopia
managed to receive 204,855,489 US$ out of the sector.
For this the Ethiopian Millennium Celebration was considered as one of the main factor that
increased the number of tourists.

Figure 2.3.2 Tourism contribution to export and GDP at market price for the years 2006 to 2008
20
18
16
14
12
percentage

10
Percentage
8 contribution
6 to export

4 Percentage
2 contribution
to GDP
0
2006 2007 2008 Average
year

Source: National Bank of Ethiopia staff computation annual report 2003/04, MCT (2010)

As can be shown from figure 2.3.2 in 2008, tourism generates 13.98 percent of Ethiopia’s total
export earnings. The contribution of the industry to the Ethiopia’s gross domestic product (GDP)
declined from 1.12 percent in 2007 to 0.77 percent in 2008. Growth in tourism consumption was
driven by the number of vacation tourists.

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 2.4 DISTRIBUTION OF TOURIST STANDARD HOTEL
ACCOMMODATIONS AND TRANSPORT FACILITIES

Tourism is to a great extent dependent on the type and quantity of accommodation available.
Hotel accommodation is one of the major components of tourism development. A major
weakness of Ethiopia compared to its competitors is its hotel supply. In Ethiopia where tourist
attraction places are scattered all over the different regions, the distribution of hotel
accommodation specially the tourist class ones are a bit unbalanced. This fact can be depicted by
table 2.4.1,

Table 2.4.1 The distribution of tourist class hotels by region: a comparison between the year
2004 and 2008

Regional states 2004 2008

Number of Hotels Rooms Number of Hotels Rooms
Addis Ababa 38 2420 88 4449
Afar 4 109 9 174
Amhara 15 552 66 1781
Benshangul 1 26 6 122
Diredawa 5 294 16 551
Gambela 1 22 4 61
Harari 4 140 9 251
Oromia 44 1629 115 3083
Somali 13 434 11 215
SPNN 4 104 70 1661
Tigrai 28 561 43 1335
Total 157 6291 437 13683

Source: MCT (2010)

Ethiopia has a limited supply of tourist quality hotel rooms, especially outside of Addis Ababa
and the neighboring Oromiya region.

14
In fact, in five of the 11 regions there were five or fewer hotels considered of tourist standard in
the year 2004. During the four years period, this situation changed but still most of the high class
and luxurious hotels were located in big cities and there were few big hotels around tourist
destination areas specially in Tigrai and Amhara region.

The other issues that can be raised along with hotel accommodations are transportation facilities
and marketing and promotion activities. Transport is one of the basic components of tourism.
Availability of transport is a necessary condition for a tourist to travel to different tourist
attraction areas. In Ethiopia, transportation is one of the most important components of the
tourism value chain. All other components depend on transportation as a key variable. The two
modes of transportation to the cultural heritage areas are by car and by airplane. The route is
from Addis Ababa through Debre Markos, Bahrdar, Gondar, Debark, Axum, Adigrat, Mekele,
Wolldiya, and Lalibela back to Addis.

Almost all visitors arrive in Ethiopia by flying into Bole International Airport. The airport
handles over a million passengers a year and was up-graded in 2000 to a level that is more than
adequate for current demand. Of the 400 or so scheduled flights into Addis Ababa each week,
290 (72%) are Ethiopian Airlines. Passenger numbers come close to those in Nairobi while
Ethiopia has about an eighth the number of tourists of Kenya i.e. the number of tourists in
Ethiopia were one eighth of tourists in Kenya. Air transport is also one of the primary means of
accessing the historical sites, which are all accessible by air. Amongst the national parks, only
Nechisar National Park, which is very close to Arbaminch, is accessible by air with a 52-seater
plane, while Bale Mountains has a landing strip that can cater to a 17-seater plane.

While air transport is the primary means of getting to the historic sites, easy and fast access by
road will always be cheaper. A cheaper and quicker means of reaching certain sites will stimulate
tourist demand by drawing in those tourists (including domestic tourists) that cannot afford the
higher cost of air travel. Currently the road transport in the country, both asphalt and gravel
roads, originate from Addis Ababa to important cities, towns and centers of commercial,
industrial and agricultural sites.

15
International high way links Addis Ababa to neighboring countries like Djibouti, Kenya and
Sudan. Travelling by road allows tourist to experience Ethiopia’s wonderfull scenery,
topography and land escape.

Marketing and promotional activities of Ethiopian tourism sector has been performed by
Ministry of Culture and Tourism, Ministry of Foreign Affairs ,Ethiopian Airlines and private
sectors specially tour operators. Some strong tour operators promote the country’s attraction by
offering their services through their websites, printed materials and by attending different
international tour trade fairs.

Ministry of Culture and Tourism has promoted the country’s tourism attractions by using its
different publications, brochures and others, also the Ministry has its own website to promote the
country’s attractions. The Ministry has accomplished different tourism marketing and promotion
activities by participating and facilitating different international tourism related trade fair. Due to
very limited skilled staff, inadequate budget and poor marketing policy the country ‘s tourism
resources are not adequately promoted at desired level.

2.5 TOURISM SECTOR COMPARISON WITH COMPETING

COUNTRIES

Tourism is one of the major foreign exchange earners in Kenya and is second to the agricultural
sector. According to Kenya Tourist Board (KTB), in the year 2006 the industry earned
approximately US$800 million and this was accrued from 1.8 million visitors (Daily Nation,
2007). 10% of Kenya’s Gross Domestic product (GDP) is accounted for by the industry. The
industry is growing at an average rate of 9% per year and the government is doing all it can to
maintain this growth rate and even expand it to higher horizons.

16
Kenya’s tourism industry is very seasonal as it is highly inclined to international tourists’ load
whose flow is affected by weather and other factors in the source countries. There are three
seasons in a year, namely; Peak season, shoulder and low season. Peak season spans November
to March, low seasons starts in April and ends in June while shoulder season is between July and
October (SNV, 2007).

The development of tourism in Tunisia represents an economic opportunity, a choice and also a
basic future requirement. Improvement in the quality of hotel service is reflected in the
multiplicity of high standard units, with a total capacity increasing from 15000 beds in 1987 to
more than 65000 in 2000, or a four times increase, while the global rooming capacity rate has
doubled. The quality of services also improved through the introduction of a new classification
system for hotels, the 2000 standards. Efforts spent in terms of hotel training programs also
illustrate this policy which will enable Tunisian tourism to better serve conventional customers
and attract new types of clients. In quantitative terms, the rooming capacity in Tunisia has
considerably developed, increasing from 100, 000 beds in 1987 to 226, 000 beds in 2004 and
shall reach 300, 000 beds by 2025. The tourism sector contributes 7% to the GDP and generates
380, 000 direct and indirect jobs and covers 65% of the countries deficit. (WTCC,2011).

In Tanzania, tourism is one of the fastest growing industries. International visitor arrivals in
Tanzania grew since 1995 from 295,312 to612, 754 in 2005, with an expenditure of USD824,000
million in 2005 (TTB Annual report). Tourism represents the second largest factor of foreign
currency income after the mining sector; contributing 14 % to the GDP. Tanzania is ranked as
the 5th top tourism earner in Africa (US$739 million in 2001). (UNWTO report).

Ethiopia provides diverse products ranging from landscape scenery, wildlife, culture, history,
and archeology. The attractions are widely distributed throughout the country. Ethiopia’s many
national parks enable the visitor to enjoy the country’s scenery and its wildlife, conserved in
natural habitats, and offer opportunities for travel adventure unparalleled in Africa (Ministry of
Culture and Tourism,).

17
The origin of international tourists includes Africa, Europe, America, Middle East and Asia. The
contribution of Africa is considerable due to the presence of the African Union Head Quarters in
Addis Ababa, the capital city of Ethiopia. Moreover, many international organizations have their
offices in Addis Ababa. The tourism sector is growing fast (SNV, 2007).

Ethiopia has a total of 37000 sqkm of national parks, game reserves and sanctuaries. These are
home to some of the big game animals of which twenty one species of endemic animals and
several subspecies are found only in Ethiopia. Kenya represents a useful benchmark. This
southerly neighbor is acknowledged as a major African tourism destination. In part this is due to
the wide range of game associated with the Rift Valley. The Rift Valley extends into the south
Western regions of Ethiopia (Frederick et al., 2004).

From the above discussion, we can conclude that Ethiopia has more to offer than those
competing countries. If we take the nearest one as an example, Kenya’s tourist attractions are
more of natural like national parks, water sports, tea estates, wild animals and beaches. Ethiopia
has much more than that; the country’s historical places, the people’s identity and cultural values
are some that can be mentioned. Moreover, the seasonality problem did not affect the tourism
sector in Ethiopia as much as Kenya, because the country is known for its thirteen months of
sunshine. Despite this fact however, Kenya’s tourism contribution in every aspect is greater than
Ethiopia’s.

A publication prepared by the World Travel and Tourism Council in 2011 clearly explains this
fact by giving a rank for some competing destinations as well as world average. The competing
destinations selected are those that offer a similar tourism product as Ethiopia and compete for
tourists from the same set of markets.

The comparsion of the countries in terms of total contribution of GDP and total contribution
of employement ,along with the world avareage can be shown in figures 2.5.1 and 2.5.2
consecutively ;

18
Figure 2.5.1 Tourism's Total Contribution to GDP 2011

Source WTTC (2011)

The ranking of WTTC put Ethiopia at the 74th place while other competing countries get a
better rank in terms of tourism’s GDP total contribution out of countries around the world.
Figure 2.5.1 shows that the setor’s percentage share to GDP is 10.7 in Ethiopia , 11.39 in
Kenya , 17.04 in Tunisia and 12.86 in Tanzania. All countries, except Tunisia, are below the
world avarage which is 13.8.

As explained earlier, Ethiopia has too much to offer compared to other competing destinations
like Tunisia ,Tanzania and the likes but contributing less.

19
Figure 2.5.2 Tourism's Total Contribution to employment in 2011

% share to employement
18
16
14
12
10
8
6
4
2
0
Ethiopia kenya Tunisia Tanzania World average

% share to employement

Source WTTC (2011)

When we come to employement contribution as can be seen from figure 2.5.2, here again, all
countries except Tunisia fall below the world average. In both cases,in terms of tourism
contribution to GDP and the sector’s contribution to employement, Ethiopia is the least though
having this huge potential of possessing tourist attractions that appeal to a wide range of
interests. The combination of attractions is rare in a single country and includes a wealth of
historical, cultural, archaeological and anthropological sites, as well as numerous areas rich in
wildlife. Because of that, the country is expected to benefit from the sector a lot.

20
The sector showed an increasing trend in both tourist arrivals and tourism receipts from the year
1991 onwards and this was attributed to different factors like the increased investment in
infrastructure, privatization and the peaceful political situation.

The major challenge for Ethiopia compared to its competitors is accommodation. The country
has limited supply of tourist standard hotels especially around tourist attraction places.
Regarding transportation facilities, the Ethiopian airlines are playing a major role since most of
tourists enter the country through air transportation. The ongoing investment in infrastructure,
especially on roads makes it easier for tourists who travel to destinations that are accessible by
road. Concerning promoting the country, little has been done so far and more is expected in order
to change the image of the country.

Finally, a comparison is made with competing destinations; Though Ethiopia is more

advantageous regarding tourism sector, i.e the country not only offers the usual African game and
cultural experiences to visitors, but also a rich array of historical and ecological sites that set it
apart from most of its competing destinations, it is still at the bottom of the list in terms of the
sector’s total contribution to GDP and employment.

21
 CHAPTER THREE

LITERATURE REVIEW

3.1 Theoretical literature

3.1.1 What is tourism?

Tourism is the act of travel for the purpose of recreation and business, and the provision of
services for this act. Tourists are persons who are "travelling to and staying in places outside
their usual environment for not more than one consecutive year for leisure, business and other
purposes not related to the exercise of an activity remunerated from within the place
visited"(Official UNWTO definition).

3.1.2 Types and Forms of Tourism

Countries tourism resources can be broadly classified into natural tourism resources such as
fauna, land escape and lakes and non-natural tourisms resources such as historical places,
cultural heritages, and museums. There exist more than twenty tourism types having a great
advantage to economic growth. Some of the common types are listed as follows:

3.1.2.1 Inbound tourism: Inbound tourism has gained popularity and so has the number of
inbound tourists who may be of different types (chaudhary, 2009):

 In bound international tourist: a tourist who spend the nights in a place outside his/her
country of residence.

 In bound domestic tourist: a tourist who spend the nights in a place in side his/her
country of residence but outside his/her usual environment.

 Same day visitor: a visitor who does not spend the night in collective or private
accommodation in the place or country visited.

22
  Inbound international same day visitor: a same day visitor who does not spend the night
in the place visited, which is outside his /her country of residence.

 In bound domestic same day visitor: a visitor who does not spend the night in the place
visited , which is inside his/her country of residence but outside his/her environment.

3.1.2.2 Out bound tourism: Out bound tourism consumption comprises the consumption of
resident visitors outside the economic territory of the country of reference and provided by non-
residents. It does not include goods and services acquired for or after the trip within the country
of reference (chaudhary, 2009).

3.1.2.3. Ecotourism: This is a responsible travel to natural areas that conserves the environment
and improves the well-being of local people (TIES, 1990). According to Clare Gunn and Turgut
Var (2002), ecotourism is about uniting conservation, communities, and sustainable travel. This
means that those who implement and participate in ecotourism activities should follow certain
ecotourism principles. Some of these principles include things like building environmental and
cultural awareness and respect, providing financial benefits and empowerment for local people,
promoting moral and ethical responsibilities and behavior by all players, etc.1

3.1.2.4 Cultural tourism: Cultural tourism (or culture tourism) is the subset of tourism
concerned with a country or region’s culture, especially its arts. It generally focuses on
traditional communities who have diverse customs, generally unique form of art and distinct
social practices, which basically distinguishes it from other types/forms of culture. Cultural
tourism includes tourism in urban areas, particularly historic or large cities and their cultural
facilities such as museums and theatres. It can also include tourism in rural areas showcasing the
traditions of indigenous cultural communities (i.e. festivals, rituals), and their values and life
style. It is generally agreed that cultural tourists spend substantially more than standard tourists
do. This form of tourism is also becoming generally more popular thought Europe (chaudhary,
2009).

1
The detail discussions on the principles of ecotourism can be found in the book by Clare Gunn and Turgut Var
(2002): Tourism planning (4th ed), New York and London.

23
Cultural tourism gives visitors the opportunity to understand and appreciate the essential
character of a place and its culture as a whole. This includes history and archaeology, people
and their lifestyle (including the ways in which they earn a living and enjoy their leisure),
cultural diversity, arts and architecture, food, wine and other local produce, social, economic
and political structures, and landscape of the area.

It gives access to information, experience and activities which can help the visitor feel involved
with a place, its people and their heritage. Creating a relationship between the visitor and the host
community is an important feature of cultural tourism. Concepts of sustainability, authenticity,
integrity and education are as central to cultural tourism as they are to ecotourism.

Not all cultural products will be tourist attractions. The ability to attract visitors depends on the
extent to which they meet, or are able to meet certain criteria. According to Chaudhary (2009),
the following are the criteria necessary for tourist attractions in a given place or region:
Perceived quality of the product, awareness of being a tourist attraction, market awareness of the
product, customer service attitude - provides level of facilities and services that meets the needs
of its visitors, sustainability, extent to which the product is perceived as unique or special, extent
to which the product is perceived to provide a pleasurable experience and an enjoyable way for
customers to spend their leisure time, development and presentation to realize this potential,
community support and involvement, management commitment and capability

3.1.3 Economic Contribution of Tourism

Tourism’s contribution to economic growth has been well documented in the literature for many
developing countries, which were traditionally dependent upon primary products in export
earnings; tourism has become a major source of foreign exchange earnings. This has been vital
for such countries given their prevailing economic conditions.

24
Least developed country (LDC) or developing country ;- is the name given to a country which,
according to the United Nations, exhibits the lowest indicators of socioeconomic development,
with the lowest Human Development Index ratings of all countries in the world. The concept of
LDCs originated in the late 1960s A country is classified as a Least Developed Country if it
meets three criteria. (www.wikipedia.org)

 low-income (three-year average GNI per capita of less than US $905, which must exceed
$1,086 to leave the list)
 human resource weakness (based on indicators of nutrition, health, education and adult
literacy) and
 economic vulnerability (based on instability of agricultural production, instability of
exports of goods and services, economic importance of non-traditional activities,
merchandise export concentration, handicap of economic smallness, and the percentage
of population displaced by natural disasters).

Many developing countries have experienced severe deficits, particularly in the current account
of the balance of payments during past few decades. Furthermore, they have experienced an
increasing burden of foreign debt. A relatively high percentage of GDP and of the budget is
allocated for foreign loan settlement. With ongoing civil unrests in some of these countries, the
situation results in high defense budgets. In view of this volatile economic background, foreign
exchange earnings from tourism have been important contributions to economic development.

However, whether tourism actually contributes to the economic development depends, to a large
extent, on how efficient these countries are in allocating earnings from tourism. Balaguer and
Cantavella-Jorda (2002) argued that, in a more traditional sense, foreign exchange brought by
international tourism could well be used to import capital goods in order to produce other goods
and services, leading in turn to economic growth. This means that international tourists to a

25
particular destination might contribute significantly to finance the country’s imports. Further,
they argued that, “if those imports are capital goods or basic inputs for producing goods in any
area of the economy, then, it can be said that earnings from tourism are playing a fundamental
role in economic development”.

Currently, tourism sector is frequently justified on the bases of its potential contributions to
economic growth and development. It is widely assumed that tourism can help to eliminate the
widening economic gap between developed and less developed countries and ensure the steady
acceleration of economic and social development in particular in developing countries (WTO,
1980 cited in sharply and Telfer, 2006). Available evidence suggests that many developing
countries are able to raise a significant proportion of government revenue from international
tourism. For instance, the World Trade Organization (1998) claimed that these countries (most of
them are highly specialized tropical, tourist countries) raise 10 to 25 percent of government
revenue from the tourism sector. In some cases, more than 50 per cent of government revenue
has been generated by the tourism sector.

Statistics show that tourism in LDCs is still limited: 2.6% of the world market share in terms of
international tourist arrivals (ITAs) and of international tourism receipts (ITRs). However, the
growth in ITAs has been faster in LDCs than in the developing countries as a whole: 42.5% in
the former and 30.8% in the latter between 2001 and 2005 (15.8% for the world). Also in terms
of ITRs: 50.3% growth in LDCs and 40.6% in the developing world between 2001 and 2004
(33.2% for the world).

According to WTO (2010), there are several reasons that make tourism an especially suitable
economic growth sector for LDCs. First, tourism is consumed at the point of production; the
tourist has to go to the destination and spend his/her money there, opening an opportunity for
local businesses of all sorts, and allowing local communities to benefit through the informal
economy by selling goods and services directly to visitors.

Moreover, most LDCs have a comparative advantage in tourism over developed countries in that
they have assets of enormous value to the tourism industry - culture, art, music, natural
landscapes, wildlife and climate, including World Heritage Sites. Visits by tourists to such sites
can generate employment and income for communities as well as helping in the conservation of

26
cultural and natural assets. Second, tourism is a more diverse industry than many others. It has
the potential to support other economic activities, both through providing flexible, part time jobs
that can complement other livelihood options, and through creating income throughout a
complex supply chain of goods and services.

Tourism is labor intensive, which is particularly important in tackling poverty. It also provides a
wide range of different employment opportunities especially for women and young people - from
the highly skilled to the unskilled – and generally it require relatively little training. It creates
opportunities for many small and micro entrepreneurs, either in the formal or informal economy
since the start-up costs and entry barriers are generally low or can easily be lowered.

Tourism provides not only material benefits for the poor but also cultural pride. It creates greater
awareness of the natural environment and its economic value, a sense of ownership and reduced
vulnerability through diversification of income sources. Third, tourism has a spillover effect on
countries economic growth and development. The importance of tourism to a country’s economy
can be measured by looking at the proportion of national income created by tourism commonly
known as tourism income multiplier (TIM). In an economy with a low proportion of leakages,
such as low tax rates or low import levels, TIM will be high and tourism may in total contribute a
great deal more income than that originally spent by tourists themselves (Holloway, 1989).

3.1.4 Tourism and Poverty Alleviation

By analyzing a wide number of case studies in different developing countries, WTO (2004) has
identified seven different ways of addressing poverty through tourism. These can be applied in
almost every country, provided a number of issues are suitably addressed.
The first way is simply through the employment of the poor in tourism enterprises. This can
occur in small as well as large enterprises and in rural and urban areas. Policies that encourage
the employment of local people are more likely to open up opportunities for the poor. The
advantage of addressing poverty through existing tourism enterprises is that it enables the poor to
benefit from the entrepreneurial skills and market access of others, and can potentially reach
quite large numbers of people.

27
The Second is through the supply of goods and services to tourism enterprises by the poor. This
can happen at various points in the tourism supply chain, including the choice of products
featured by tour operators as well as goods and services provided to hotels, such as food,
handicrafts, building services at the construction stage, and so on. The advantage in the supply-
chain approach is that this can make use of existing skills in poor communities.

Third, through direct sales of goods and services to visitors by the poor. This is about the
informal economy, and includes stalls selling food and handicrafts, pottering, some forms of
transport, and informal accommodation. The informal sector is hugely important in many
developing countries and this can be one of the most direct ways of getting visitor spending into
the hands of the poor. However, it is characterized by chaotic trading conditions and over-
supply.

Fourth, there is the process of supporting the establishment of tourism enterprises by the poor.
These may be micro, small and medium sized enterprises (MSMEs) or community based
enterprises. Compared with working in the informal economy, this is about helping poor
communities develop something for the longer term, and about placing power and control in
their hands. Some of the challenges are access to capital, acquisition of skills, property rights and
legal recognition, etc.

Fifth, is through a tax or levy on tourism income or profits with proceeds benefiting poverty
reduction programs. This has the advantage of enabling resources to be channeled to the most
needy people and communities without requiring their involvement in tourism activity either
directly or indirectly. The approach can be at a national level, or at a local level. There are a
number of examples showing how this can work quite well at a local level – such as negotiating
concessions with tourism enterprises involving a proportion of income per bed night being given
to the local community.

28
However, approaches involving taxes and charges have to be treated with caution in order not to
deter investment and income flows in the long term. The sixth way has some similarities with the
previous one but here we are talking about voluntary giving by tourism enterprises and tourists.
This may include payments into general charities and programs, such as HIV/AIDS programs, by
tourists and tour operators, or more specific support for projects in destinations visited. Many
tourism enterprises are engaged in supporting social programs in their neighboring communities.
Funds from tourists may be collected in the country of origin or in the destination, through
voluntary supplements or invitations to donate.

Although these approaches can generate worthwhile resources that can be directed to needy
causes, it is important to be sensitive in promoting this type of activity and to avoid token
gestures. Finally, poor communities can benefit from investment in infrastructure stimulated by
tourism. This is about the provision of roads, energy supplies, sanitation, clean water and
telecommunications, on the back of tourism investment. Careful planning in such situations is
clearly very important and local communities should be involved from an early stage.

3.2 EMPIRICAL LITERATURE

Tourism is considered as an important and integral part of their economic growth and
development strategies as it serves as a source of scarce financial resources, job creation, foreign
exchange earnings, and technical assistance (Sinclair, 1998; Dieke, 2004). The available studies
on this area are reviewed below.

Using Spain’s economic data, Balaguer and Cantavella-Jorda (2002) examine the role of
tourism’s in long-run economic development. The hypothesis of tourism-led economic growth
was confirmed by applying cointegration and causality tests. The results indicate that, at least,
during the last three decades economic growth in Spain has been sensible to persistent expansion
of international tourism. The increase of this activity has produced multiplier effects over time.
External competitively has also been proved in the model to be a fundamental variable for

29
Spanish economic growth in the long run. Finally, they concluded that earnings from
international tourism affect positively the Spanish economic growth.

Kreishan (2010) conduct a research on the causality relations between tourism earnings and
economic growth (GDP) for Jordan, using annual data covering the period 1970-2009. The
Granger causality test is used to investigate the direction of causality between tourism and
economic growth. The findings of the study showed that there is a positive relationship between
tourism development and economic development in the long-run. Moreover, the Granger
causality test results revealed the presence of unidirectional causality from tourism earnings to
economic growth. The study appears to support tourism led-growth (TLG) hypothesis for Jordan,
which suggest that government should focus on economic policies to promote international
tourism as a potential source of economic growth in Jordan. Durbarry’s (2002) study on
Mauritius also supports the hypothesis of tourism-led economic growth. Other similar works by
Tosun (1999), Guduz and Hatemi (2005) and Zortuk (2009) have also found empirical support
for the tourism-led growth hypothesis in Turkey.

Eugenio-Mart´ın et al. (2004) investigate the relationship between tourism and economic growth
for Latin American countries (Costarica ,Panama, Mexico, Elsalvador ,Chile and Honduras)
from1985 through 1998. They employed a panel data approach and the Arellano-Bond estimator
for dynamic panels. The countries are decompose into three different groups according to GDP
per capita, They obtain estimates of the relationship between economic growth and growth in
tourists per capita conditional on main macroeconomic variables. The empirical results show that
tourism development can contribute to the economic growth of medium or low-income
countries, while such a role is unclear for developed countries. Based on their findings, they
argue that low-income countries need adequate levels of infrastructures, education and
development to attract tourists. On the other hand, Medium-income countries need high levels of
social development like health services and high GDP per capita levels. Similarly, Skerritt and
Huybers (2005) investigate the effect of International Tourism on GDP per capita of 37
developing countries. The results indicate that tourism positively affect economic development
in these countries.

30
Similarly, employing the convergence approach based on Barro and Sala-i-Martin (1992) type
analysis, Proenca and Soukiazis (2005) examine the impact of tourism on the per capita income
growth of Portuguese regions and draw the conclusion that tourism can be considered as an
alternative solution for enhancing regional growth in Portugal, if the supply characteristics of this
sector are improved. While Cunado and Garcia (2006) also find some evidence of conditional
convergence toward the African regional average (for Benin, Cameroon, Cape Verde, Djibouti,
Egypt, Ghana, Kenya, Mali, Uganda, and Zimbabwe) and the U.S. (for Cape Verde, Egypt,
Mauritius, Seychelles, and Tunisia), the coverage given to the contribution of tourism has been
scant.

Brau et al. (2007) set out to empirically investigate the observations made by Lanza and Pigliaru
(2000). They employ panel dataset of 143 countries, 14 of which are classified as ‘small tourism
countries’ (17 countries are classified as ‘tourism countries’; 14 of them are also classified as
small). They try to evaluate the relative growth performance of these 14 countries by regressing
economic growth on a set of dummy variables identifying groups of countries (OECD, Oil
producers, LDCs, Small) and different control variables. The results indicate that tourism
countries grow significantly faster than all the other sub-groups considered in their analysis.
Almost half of the 29 countries classified as ‘microstates’ are heavily dependent on tourism. The
authors conclude that small tourism countries perform much better than other small countries. In
their findings, smallness can be bad for growth, while the opposite is true when smallness goes
together with a specialization in tourism. Although these findings are useful they cannot be
considered definitive as the models do not include controls for factors that are considered
important in the endogenous growth literature, such as investment and human capital (though
they do include controls for some other factors, such as openness to trade and initial income
levels).

Hazari and Sgro (1995) developed a growth model in which they model tourism as an added
component to the domestic aggregate demand. Furthermore, they model the foreign supply of

31
capital and the growth in export as dependent on tourism growth. They concluded that tourism
has a positive impact on the long-run growth of the economy.

This is generated by tourism acting as a timesaving device, which allows the domestic
population to consume now rather than later. They found that growth in tourism facilitates
foreign capital inflow, thereby reducing the need for high domestic rates of saving and capital
accumulation.

Dritsakis (2004) examined the impact of tourism on the long-run economic growth of Greece. He
analyzed the causality of GDP, exchange rate and international tourism receipts and concluded
that there is a strong Ganger causality relationship between international tourism receipts and
economic growth. In addition, the study finds that there is a strong causal relationship between
exchange rate and economic growth, and moderate causal relationships between economic
growth and international tourism receipts and between exchange rate and international tourism
receipts.

Unfortunately, with respect of tourism and economic growth, there are very few studies that
analyze a single country over a certain time period. However, the original motivation of studying
economic growth must focus on the time-series dynamics of macroeconomic variables. Evidence
from the annual time-series of individual countries is potentially more reliable in identifying the
sources of countries' growth performances not least because it avoids questionable assumptions
implicit in much cross-country work.

The literature in Africa is scanty. According to Fayissa et al. (2007), there are only few empirical
studies that investigate the contributions of tourism to economic growth and development for
African economies. Some of the available empirical evidences on the continent are presented as
follows: Using a panel data of 42 African countries for the years that span from 1995 to 2004,
Fayissa et al.(2007) try to explore the potential contribution of tourism to economic growth and
development within the conventional neoclassical framework. Their findings show that receipts
from the tourism industry significantly contribute both to the current level of gross domestic

32
product and the economic growth of sub-Saharan African countries as do investments in physical
and human capital. They argue that African economies could enhance their short-run economic
growth by strategically strengthening their tourism industries.

Tsega (2008) using panel data set for the period 1995-2005 for forty-two African countries find
that there is a positive correlation between economic growth and tourism sector. According to
her findings the tourism sector contributes significantly to the economic growth of the countries.
On the other hand economic growth is vital for the development of tourism sector.

World Bank (2006) conducted a research for government of Ethiopia entitled Ethiopia towards a
strategy for pro-poor tourism development. By collecting quantitative data on tourism-centric
locations, the organization conducted a comprehensive work in the country. Under the objective
of responding to the government of Ethiopia request to define a strategy for tourism growth that
commensurate with its vision for tourism, they report that the industry is under–performing
relative to its tremendous potential value of its cultural heritage as an anchor for a tourism
industry. They argued that this is attributed to weakness in Ethiopia’s image, market presence
and penetration resulting in a demonstrable weak demand for its products; a severely under-
valued cultural and natural resource base; uncompetitive supplier and support services. Finally,
absence of efficacy coordinating and communicating governance framework to guide and
integrate the many stakeholders at both the national and sub national levels is also considered as
one among the many factors for the low performance of the industry.

Yabibal (2010) using a panel data of 40 countries identify main determinants of tourist flows in
Ethiopia. The study showed that the lagged tourist arrivals are a statistically significant
determinant of tourist flows in Ethiopia in addition to per capita income of sending countries,
CPI ratio of Ethiopia and Kenya, urbanization rate and distance from Addis to capital cities of
the sending countries.

Though Tourism is viewed as an engine for economic growth, little has been done in developing
countries especially in Ethiopia. The limited studies were focused mainly on analyzing

33
determinants of tourist arrivals on the country, challenges and opportunities. Moreover, the
available empirical studies focus on analyzing the relationship between tourism development and
economic growth conducted by employing different methods especially researches conducted in
Ethiopia mostly employed a panel data approach.

From the above review on empirical works, the researcher concludes that tourism and economic
growth are somehow linked positively, but it is difficult to generalize global or regional findings
to a single country. Hence this study will try to fill the gap by trying to find the link between
economic growth and tourism sector in Ethiopia using a time series approach and its contribution
for the growth of the country’s economy.

34
 CHAPTER FOUR

METHODOLOGY

4.1 DESCRIPTION OF VARIABLES AND SOURCE OF DATA

Most of the data in this study are obtained from National Bank of Ethiopia (NBE). Additional
sources include the publication of Ministry of Culture and Tourism (MCT) and Central Statistics
Agency (CSA). As already described in chapter I of this thesis, we could not be able to get
information on some variables such as foreign direct investment. Moreover, there were inconsistencies
in the data obtained from different institutions. The researcher deals with the inconsistencies by making a
comparison of all the data from different sources and choosing the most relevant sources.

Data used in this study are annual figures covering the period 1974-2007 The period of the study
is chosen considering the availability of the tourism receipts data and also to in order to take in to
consideration at least the three government regimes which have major impact on the sector’s
performance, and variables are real GDP, international inbound tourism receipts (TOURR), total
government expenditure (TGE), total consumption (TCONS), and gross domestic saving (GDS).
The gross domestic product (GDP) is one of the most used macroeconomic indicators for
measuring output. We consider the real GDP in order to take in to account the effect of price.
The nominal GDP is divided by the GDP deflator to get the real GDP for each year. Total
government expenditure includes all current expenditures for purchases of goods and services at
all levels of government. It comprises government final consumption expenditure, government
investment on capital formation and transfer payments. Total consumption (TCONS) consists of
all consumption expenditure by the residential sector. The international inbound tourism receipts
(TOURR) is the tourism receipts received from non-residents that travel to Ethiopia. Finally, the

35
gross domestic saving is the gross domestic product minus the final consumption in the country
so it comprises both the public and private savings. All the variables are expressed in natural
logarithms so that they may be considered as elasticities of the relevant variables.

4.2. EMPIRICAL STRATEGY

4.2.1 Model Specification

In order to explain the growth rate of output over long periods one is usually referred to a couple
of complementary approaches. Many empirical studies are based on growth theory, which
models the interactions among factor supplies, productivity growth, saving, and investment in
the process of growth. In this study, the researcher empirically tests whether there is a
unidirectional or bidirectional link between economic growth and tourism industry in Ethiopia.

4.2.1.1 The Long Run Model

The dependent variable, the real GDP, can be formulated as a function of the explanatory
variables such as total government expenditure, inbound international tourism receipts, real gross
domestic saving and real total consumption. Therefore, the growth equation can be modeled as
follows:

RGDP =f (, TOURR ,TGE ,GDS ,TCONS , ε )

t t
……………………………………………

(1)

Where
RGDPt = the real GDP at a time t

TOURR = the inbound international tourism receipts

36
 TGE = the Total government expenditure

GDS = the real gross domestic saving

TCONS = the real total consumption

εt = is the error term at time t

By expressing both the dependent and explanatory variables in log form the structural long run
formulation of the model for this study could be represented as:

ln RGDP=β 0 +β 1 lnTOURR+β 2 ln TGE+β 3 lnGDS +β 4 lnTCONS+ε t

……………………………………… (2)

Where

ln RGDP - is the logarithm of the real GDP at a time t

ln TOURR - is the logarithm of the inbound international tourism receipts

ln TGE - is the logarithm of Total government expenditure

ln GDS - is the logarithm of the real gross domestic saving

ln TCONS - is the logarithm of the real total consumption

β i - are the parameters to be estimated

ε i - is the disturbance term

As described earlier,
βi( β1 , β2 , β3 , β4 ) are interpreted as elasticities. The
.
variables included in this model include, tourism receipts, total government expenditure, gross

37
domestic saving and total consumption. All the necessary tests regarding the violation of the
basic assumptions of econometrics were conducted.

4.2.2 Unit Root Tests

The standard classical methods of estimation which are used in the applied econometric works
are based on a set of assumptions. An econometric analysis based on a time series data assumes
that the underlying time series is stationary. A variable is said to be covariance (weakly)
stationary if the mean and the variances of the variable are constant over time and the covariance
between two periods depends only on the gap between the periods, and not the actual time at
which this covariance is considered.
A non-stationary series has a different mean at different points in time and its variance increases
with the sample size. So, the first thing in an econometric work is to check whether a series is
stationary or not.

Using the classical estimation methods to estimate relationships with non-stationary variables
results in spurious regression. This is a situation in which results obtained suggest there are
statistically significant relationships between the variables in the regression model when in fact
all that is obtained is evidence of contemporaneous correlations rather than meaningful causal
relations. In time series data, the assumption that the error terms from successive observations
are uncorrelated is frequently invalid.

The variables are non stationary in the sense that the mean and variance depend on time and thus
there are no tendencies for them to hold back to a given value. Hence, the non-stationary (trend)
in variables needs to be removed first before getting into any econometric work. If the trend in a
variable is trend deterministic, then it is perfectly predictable and can either be removed by
regressing the variable on time (with the residuals from such a regression forming a new variable
which is trend-free and stationary) or can be captured by including a deterministic time trend as
one of the repressors in the model.

38
If on the other hand the trend is not deterministic (stochastic) then it is not perfectly predictable.
In such a case the variable needs to be differenced to nullify the trend and make it stationary. A

variable is said to be integrated of order one denoted I ( 1 ) if it must be differenced one time to

make it stationary. A level stationary series is said to be integrated of order zero i.e. I ( 0 ) . In

general, if the series need to be differenced d times before it becomes stationary, it is said to

be integrated of order d denoted I (d )

.

Assuming that
μt is a white noise error term with mean 0 and variance σ2 the random walk
model can be specified as follows:

Y t =ρY t−1 +μt ……………………………………………….. (3)

If ρ=1
, equation (3) becomes a random walk without drift and this is a situation of unit root

problem i.e. situation of stationary. The name unit is due to the fact that ρ=1 . If however

|ρ|<1, that is the absolute value of ρ is less than one, then it can be shown that the time

series
Y t is stationary.

The general idea behind the unit root test of stationary is that regressing
Y t on its lag ( Y t−1 )

and find out if estimated ρ is statistically equal to 1.

If
Y t−1 is subtracted from both sides of equation (3.2.3), the result is as follows

Y t −Y t−1 =ρY t−1 −Y t−1 +μt ……………………………………………..….. (4)

39
 = ( ρ−1 ) y t−1 +μt

Equation (3.2.4) can be written as follows:

ΔY t =αY t−1 +μ t ……………………………………………………… (5)

Where (ρ−1)yt−1+μt , ∆ is the first difference operator therefore (3.2.5) can be estimated and the

null hypothesis of α=0 will be tested. If α=ρ−1 , then ρ=1 , showing the existence of

unit root, i.e. the time series is non stationary. If α=0 , then equation 3.2.5 becomes

ΔY t =Y t −Y t−1=μ t ………………………………………………….. (6)

Since
μt is white noise error term it is stationary, which means that the first differences of
random walk time series are stationary.

Y
Under the null hypothesis that α=ρ−1 , the estimated t value of coefficient of t−1 in equation
(6) follows the t(tau) statistic the tau statistic or test is known as the dickey fuller (DF) test. The
DF test is estimated in three different forms, i.e. under the different null hypothesis.

i.
Y t is a random walk model without drift

ΔY t =αY t−1 +μ t ………………………………………... (7)

ii.
Y t is a random walk model with drift (drift here refers to the constant term)

ΔY t =β n +αY t−1 +μt ……………………………………. (8)

iii.
Y t is a random walk with a drift around a stochastic trend

40
 ΔY t =β 1 +β 2t +αY t −1 +μt ………………………………. (9)

Where t is the time or trend variable. In each case, the null hypothesis is that α=0 , i.e is there
is a unit root. The time series is non stationary. The alternative hypothesis is that α is less
than zero, i.e. the time series is stationary.

In the dickey fuller test it is assumed that the error term µt is uncorrelated but in case the µt is
correlated dickey and fuller have developed the augmented dickey-fuller (ADF) test. In the ADF
test the equations used in the DF test are augmented by adding the lagged values of the

dependent variables,
ΔY t thus, the ADF test consists of estimating the equation below

ΔY t =β 1 + β 2t +αY t−1 +α i ∑ ΔY t−i +ξ t ……………………………………….. (10)

Where
ξt is a pure white noise error term and Y t−i=(Y t−i −Y t−2 ) , ΔY t−2 =(Y t−2 −Y t−3 ) ,

etc in the ADF test the hypothesis to test is α is zero (i.e α=0 )

The ADF test is comparable to the simple DF test but it involves adding unknown number of
lagged first differences of the dependent variable to capture auto correlated omitted variables that

would otherwise enter the error term

μt .

To avoid the spurious regression problem that may arise from regressing a non stationary time
series, the non stationary time series can be transformed to make stationary. The transformation
method depends on whether the time series are difference stationary or trend stationary. If a time
series has a unit root, the first difference of such time series are stationary. Thus the solution here
is to take the first difference of the time series. In trend stationary process the time series is
regressed on time and the residuals from the regression will then be stationary.

41
4.2.3 Co integration Test

The co integration test is applied to detect the presence of any long term relationship between the
variables. The economic interpretation of co integration is that if two or more series are linked to
form an equilibrium relationship spanning the long-run, then even though the series themselves
may contain stochastic trends (i.e., non-stationary) they will nevertheless move closely together
overtime and the difference between them will be stable (i.e. stationary) (Enders, 1995).

First differencing, however, does possess a major limitation in that it tends to ignore the long run
properties of the data. Besides, economic theories are also generally formulated for levels of

variables rather than for differences. If two time series

Y t and X t are both integrated of

order d (i.e. I ( d ) ), then, in general, any linear combination of the two series will also be

I ( d ) ; that is, the residuals obtained on regressing Y t on X t are I ( d ) . If, however, there

exists a vector b, such that the disturbance term from the regression (e t =Y t −bX t ) is of a

lower order of integration I ( d−b ) , where b>0 , then Engle and Granger (1987)

define
Y t and X t as co integrated of order ( d , b )
.

There are different co integrating tests used to examine the existence of long run equilibrium
relations between variables. The well known tests are the maximum likelihood, Eiggen value,
and trace statistics (Harris, 1985). Co integration has received a formal treatment by Engle and

Granger (1987). Accordingly, if two time series variables,

Yt and
Xt are I ( 1 ) , then

Y t −βX t is an I ( 1 ) process for any number of β (Greene, 2003). For some β≠0
,

Y t −βX t is an I ( 0 ) process then Y and X are co integrated and β is called the co

integrated parameter .

42
The co integration equation can be expressed as follows

ln RGDP=β 0 ++ β1 lnTOURR+β 2 ln TGE+β3 ln GDS+β 4 ln TCONS+ε t ……. (11)

If the residual
ε t , which are subjected to unit root analysis are found to be I ( 0 ) , then the
variables are said to be co integrated and the above equation indicates a long run relationship
among the variables under consideration. Time series econometrics also requires an examination
of the short run relation and this is captured by Error correction test.

4.2.4 Error Correction Model (ECM)

Transforming the time series to stationary by differencing could remove the estimation bias.
Still, this has significant implication since it tends to forgo information on the long run properties
of the variables. Besides, economic theories are also generally formulated for levels of variables
rather than for differences. One approach to dealing with this problem is to employ a method that
combines long run information with a short run adjustment mechanism.

The short run behavior of equation 3.2.3 can be captured by the error term e t which is treated as
the “equilibrium error term”, this error term can be used to tie the short run behavior of
dependent variable to its long run value.
This error correction mechanism (ECM) corrects for disequilibrium and the relationship between
the co integrating variables can be expressed as ECM as follows:

Δ ln RGDP=β 0 +β 1 Δln TOURR t +β 2 Δln TGEt +β 3 Δ lnGDS t +β 4 Δln TCONSt + ECM t−1 ------------ (12)

Where ∆ denotes the first difference operator and

ECM t−1 is the lagged term. All the other
variables are as defined before.

43
The Error correction representation of equation (3.2.4) shows the short run and long run
dynamics. The long run dynamic is contained in the error correction term. The coefficient of the
error correction term is apriori expected to be negative. And the magnitude of this coefficient
shows the speed of adjustment towards the long run equilibrium.

4.2.5 Granger Causality

The test for Granger causality works by first doing a regression of ΔY on lagged values of
ΔY . (Here ΔY is the first difference of the variable Y - that is, Y minus its one-period-
prior value. The regressions are performed in terms of ΔY rather than Y if Y is not
stationary but ΔY is.) Once the set of significant lagged values for ΔY is found (via t-
statistics or p-values), the regression is augmented with lagged levels of ΔX . Any particular
lagged value of ΔX is retained in the regression if (1) it is significant according to a t-test, and
(2) it and the other lagged values of ΔX jointly add explanatory power to the model according
to an F-test. Then the null hypothesis of no Granger causality is accepted if and only if no lagged
values of ΔX have been retained in the regression.

Let y and x be stationary time series. To test the null hypothesis that x does not
Granger-cause y , one first finds the proper lagged values of y to include in a univariate
auto regression of y :

Y t =α 0 ++a1 y t−1 +a 2 y t−2 +am y t−m+εt

……………………………….. (13)

44
Here
y t−j is retained in the regression if and only if it has a significant t-statistic; m is the
greatest lag length for which the lagged dependent variable is significant.

Next, the auto regression is augmented by including lagged values of x:

Y t =α 0 ++a1 y t−1+a 2 y t−2 +am y t−m+b p x t− p+......b q x t−q+ε t ………….

(14)

One retains in this regression all lagged values of x that are individually significant according to
their t-statistics, provided that collectively they add explanatory power to the regression
according to an F-test (whose null hypothesis is no explanatory power jointly added by the x's).
In the notation of the above augmented regression, p is the shortest, and q is the longest,
lag length for which the lagged value of x is significant.

The null hypothesis that x does not Granger-cause y is accepted if and only if no lagged
values of x are retained in the regression.

CHAPTER FIVE

EMPIRICAL ANALYSIS

45
5.1 RESULTS OF UNIT ROOT TEST

As clearly mentioned in chapter three, before any meaningful regression is performed with the
time series variables, it is essential to test the existence of unit roots in the variables and hence to
establish their order of integration. The variables used in the analysis need to be stationary and/or
should be co integrated in order to infer a meaningful relationship from the regression.
Estimation of the co integration relationship to be undertaken in the next section requires all the
time series variables in the model to be integrated of order one. The test results of the augmented
Dickey-Fuller (ADF) statistics for all the time series variables used in the estimation are
presented in table 5.1.1 and 5.2.1 below.

Table 5.1.1 Unit root test results of variables in levels

Variables in ADF test Statistic ADF test Statistic K+ Result
levels without trend with trend
lnrGDP 2.588 2.111 8 Has a unit root
lnTOURR -0.320 -2.999 1 Has a unit root
lnGDS -2.654 -3.355 0 Has a unit root
lnTGE -2.685 -3.451 0 Has a unit root
lnTCONS -3.256 2.279 7 Has a unit root

*, **, and *** rejects the hypothesis of unit root at 10%, 5 % and 1% significance level,
respectively. + K, the number of lags, is chosen using the Akaike Information Criterion (AIC).

Table 5.1.2 Unit root test results of variables in first difference

Variables in ADF test Statistic ADF test Statistic K+ Result
first difference without trend with trend
∆ lnGDP -4.251*** -4.539 2 stationary
∆lnTOURR -3.856*** -4.494 8 stationary
∆ lnGDS -4.241*** -4.208 5 stationary
∆ lnTGE -6.019*** -5.923 1 stationary

46
 ∆lnTCONS -5.999*** -4.161 5 stationary
*, **, and *** rejects the hypothesis of unit root at 10%, 5 % and 1% significance level,
respectively. + K, the number of lags, is chosen using the Akaike Information Criterion (AIC).

The Akaike information criterion is a measure of the relative goodness of fit of a statistical
model. In the general case, the AIC is

Where k is the number of parameters in the statistical model, and L is the maximized value of the
likelihood function for the estimated model.

Given a set of candidate models for the data, the preferred model is the one with the minimum
AIC value. Hence AIC not only rewards goodness of fit, but also includes a penalty that is an
increasing function of the number of estimated parameters. This penalty discourages over fitting
(increasing the number of free parameters in the model improves the goodness of the fit,
regardless of the number of free parameters in the data-generating process).

Table 5.1.1 depicts the results for the unit root tests in level forms. Non stationary was never
rejected implying that all the time series variables in levels have unit root and are integrated of
order one, I (1). On the other hand table 5.1.2 shows the results of unit root tests for the first
differenced series. The hypothesis of non stationary (unit root) is rejected at 1% for all the
variables in their first differences. All the first differenced series are thus found to be without
unit roots so being stationary. Evidence non-stationary is rejected

5.2. COINTEGRATION ANALYSIS

Since all the variables in levels are of the same order; I(1), there is a possibility that these
variables are co integrated. The existence of a co integrating relationship implies the existence of
long-term relationship in the variables. The Johansen test for co integration using the trace test
provides the following output.

Table 5.2 Johansen co integration trace test

47
 H0= rank ≤ r Trace test P value
0 72.98016 (0.0274)
1 43.17121 (0.1285)
2 24.8918 (0.1675)
3 13.56900 (0.0955)
4 4.409308 (0.0357)

The results show that the variables are co-integrated with a maximum of one co integrating
equation. The null hypothesis of no co-integration among the variables is rejected at 5% levels of
significance.

The results thus demonstrate that the considered variables are co integrated in that there is a long
run equilibrium relationship among them and the existence of causality for instance, between
tourism receipts and GDP in at least one direction.

5.3. ESTIMATION OF THE LONG RUN MODEL

The fact that the time-series variables under consideration are non-stationary implies that, taken
alone, the variables do not have the tendency to revert to their long run levels.

The long run model given by

ln RGDP=β 0 +β 1 lnTOURR +β 2 ln TGE+ β 3 lnGDS +β 4 TCONS+ε t

It is estimated using OLS and the result is tabulated as shown below.

48
Table 5.3 Estimation of the long run model
Explanatory Variable Dependent Variable: lnRGDP

Constant 0.405 (9.901) ***

lnTOURR 0.088 (2.379) *
lnTGE 0.246 (0.057) ***
lnGDS 0.109 (0.057) ***
lnTCONS 0.921 (4.533) *
F-Statistic 149.331 (0.000) ***
R2 0.962
Log likelihood 51.361
Normality test 4.278 (0.117)
Hetro test 1.5230(0.2100)
DW 2.135
RSS 0.002
*, **, *** show that the null hypothesis is rejected at 10%, 5% and 1% significance levels, respectively. The figures
in parenthesis are standard errors and probabilities in the coefficients and diagnostic tests respectively.

Long run regression displays the long run relationship in the variables. Since the variables are co
integrated, OLS could make sense in depicting the long run relationship present in the variables.
The result shows that tourism receipts variable depicts a significant positive impact at10% level.
The total consumption variable shows a significant positive impact at 1% level.
Gross domestic saving had a significant positive impact at 10% level of significance; total
government expenditure has a significant positive impact at 1% level.

Jointly all the variables are significant at 1% as indicated by the F- statistic. The R 2 is higher as
expected showing a good fit in the model. The results of various diagnostic tests [the Breush-
Godfrey Lagrange Multiplier (LM) test for serial autocorrelation, the autoregressive conditional
hetroscedasticity test, the Jarque-Bera test for normality, the White's test for hetroscedasticity are
reported and all tests did not detect any problem of serial correlation, hetroscedasticity, non-
normality. Moreover, in the above long-run model, all coefficients have the anticipated signs
indicating that all the variables positively affect output.

49
Having already obtained the long-run model and estimated the coefficients, the next step will be
estimation of coefficients of the short-run dynamics that have important policy implication.

5.4. ESTIMATION OF THE ERROR CORRECTION MODEL

The Error correction model shows how the variables come back to the equilibrium after suffering
a shock. It also incorporates the short-term interactions and the speed of adjustment of the
variables towards long run equilibrium.

The error-correction model has been estimated using the OLS technique and the results are
summarized in Table 5.4.1.

Table 5.4.1 Result of error correction model

Explanatory Variable Dependent Variable: lnRGDP
Constant 0.034(0.00117) **

50
 ∆lnTOURR 0.157 (0.05293) **
∆lnTGE 0.222 ( 0.1402)
∆lnGDS 0.055 (0.039130)
∆lnTCONS 0.860(0.023372)
F-Statistic 5.498(0.001) ***
R2 0.9626
Log likelihood 57.361
ECMt-1 -0.925(0.0000) ***
Normality test 7.765 (0.2006)
DW 1.994
RSS 0.0019
*, **, *** show that the null hypothesis is rejected at 10%, 5% and 1% significance levels respectively. The
figures in parenthesis are standard errors and probabilities in the coefficients and diagnostic tests respectively.

In this approach a large model is estimated first which includes as many of the explanatory
variables and their lags as possible. Then all insignificant explanatory variables are continuously
dropped until a parsimonious model with few explanatory variables but acceptable in terms of
significance, economic interpretation and diagnostic validity is obtained.

In the error correction representation impact of tourism receipts is again seen to be significant
and positive at 5% level. The total consumption variable is positive and significant at slightly
more than 10% level of significance. Jointly all the variables are significant at 1% as indicated
by the F-statistic.

The fit of the regression as shown by the R2 (96.26%) is a good one. The diagnostic tests show a
good specification for the model. The residuals are normally distributed as is required. The
Durbin Watson statistic also confirms that there is no problem of serial autocorrelation.

In the above model, the coefficient of the error correction term is significant with expected sign
and of fairly large magnitude (-0.925). Its magnitude indicates that deviation from the long run
equilibrium is adjusted fairly quickly where 92.5% of the disequilibrium is removed each period.
The regression result indicates that tourism receipts significantly affect the growth of the
economy.

51
The causality between tourism receipts and economic growth is the final issue to be analyzed in
this section. The causality test is conducted by taking into account the co integration and error-
correction formulation of the variables. The researcher consider the null hypothesis that lnGDP
does not granger cause lnTOURR and vice versa. It helps to test whether economic growth has
got an impact on the tourism receipts in the country and vise versa. Our result shows that there is
no feedback effect of economic growth on the level of human capital. The result of the Granger
causality test is shown in the following table.

Table 5.4.2 Granger causality test

Null hypothesis F-statistic probability
LNTOURR does not
Granger Cause LNRGDP 0.39297 0.076
 LNRGDP does not Granger

Cause LNTOURR 2.26567 0.093

The causality between tourism receipts and growth is bilateral, that is, there is feedback causality
between them, which means that as tourism receipts in Ethiopia lead to enhanced economic
growth, so also does economic growth accelerate tourism receipts. This is not surprising because
as the tourists’ expenditures increase in the country, there will be a rise in the level of economic
activities, which in turn accelerate productivity and thereby economic growth.

52
 CHAPTER SIX

CONCLUSION AND POLICY IMPLICATIONS

6.1. CONCLUSION

International tourism is one of the fastest growing industries accounting for more than 10% of
total international trade and almost half of total trade and services and can be considered as one
of the world’s largest export earners. According to the World Tourism Organization (WTO),
Ethiopia offers a considerable potential for environmental and ecotourism, cultural tourism, and
discovery tourism. Different countries design a strategy for the sector so that they can derive the
maximum benefit out of it. The contribution of the tourism industry is significant in few African
countries such as Egypt, South Africa and Kenya.

Though Ethiopia was one of the first African countries to establish a tourist industry in early
1960’s, the tourism potential of the country remains largely untapped. From 1974 to 1991(during

53
the military regime), the sector suffered from different problems ranging from famine and
drought, political unrests to neglect of tourism products and the like.

During those periods the benefit from the sector was stagnant or rather shows a falling trend, that
was because of the strained government relation with tourist generating countries and the
restrictions on entry and free movements besides the investment on the sector was very low.

Both internal and external factors are responsible for the degree of contribution of the tourism
industry on the economy of the country. Political instability, lack of infrastructure, inadequate
promotion, etc were those that can be mentioned from the internal factors that have negative
impact on the growth of the industry and hence its contribution to the economy. External factors
such as world economic crisis have also contributed to the decline in the number of tourists in
Ethiopia.

Moreover, the sector still suffers from lack of tourist standard hotels and there is unbalanced
distribution of those hotels throughout the regions.Since the tourist attractions places are
scattered all over the different regions ,this is a major problem for the sector‘s development.

The marketing and promotional activities have been arranged by Ministry of Culture and
Tourism, Ministry of Foreign Affairs, Ethiopian Airlines and some private tour operators. But
due to very limited resources, both budgetary and lack of qualified personalities in the area,the
country’s tourist attractions are not adequately promoted at a desired level.

A comparison is also made with competing destinations, the competing destinations selected are
those that offer a similar tourism product as Ethiopia and compete for tourists from the same set
of origin markets. Though Ethiopia is more advantageous regarding tourism sector, i.e the
country not only offers the usual African game and cultural experiences to visitors, but also a
rich array of historical and ecological sites that set it apart from most of its competing
destinations, the country is still at the bottom of the list in terms of the sector’s total contribution
to GDP and employment.

54
The study examines the relationship between tourism receipts and economic growth using annual
data for the period 1974-2007. After constructing the required time series, this paper investigated
the impact of tourism receipts on economic growth in Ethiopia through the application of error
correction model. Pre-estimation tests of the statistical behavior of the variables (the ADF tests
for unit root) showed that all the variables used in the analysis are integrated of order one (I(1)).
The Johansen's technique was applied and the result of the co integration test supported the
existence of a single co integrating vector. Then, the long run equation was also estimated. The
results show that all the variables have the expected signs. The error-correction model was then
estimated. The regression result shows that the receipts from international tourists positively
impact the economic growth of Ethiopia. This significant impact of tourism on the Ethiopian
economy justifies the necessity of public intervention aimed to, on the one hand, promote and
increase international tourism demand and on the other hand provide and foster the development
of tourism supply.

The results of the Granger-causality tests on the other hand suggest that there is a feedback or
two-way causal relationship between GDP and tourism receipts. Thus, the researcher conclude
that Ethiopia’s tourism-exports have the potentials of translating to long run economic growth
and that the economic growth that is experienced by Ethiopia could be used to enhance tourism-
exports. Therefore, Ethiopia should embark on the provision of tourism infrastructure, sites,
facilities etc. that can enhance tourists’ choice of Ethiopia destination. Enabling tourism
environment that will attract investors in the tourism industry in the country should be put in
place.

6.1. POLCY IMPLICATIONS

A policy implication which can be drawn from this study is that Ethiopia can improve its
economic growth performance by strategically harnessing the contribution of the tourism
industry. The study justifies the necessity of continuing with the successful public intervention in
the tourism activity with investments in tourism infrastructures, improving transportation and
telecommunication systems, applying subsidies and given funds and incentives to tourism related

55
activities to develop alternative forms of tourism, promoting and monitoring continuously the
tourism activity.

Tourism is a very susceptible activity; the country must have a positive image to appeal to
potential tourists. Stable political conditions, security, adequate tourist facilities, accessibility,
and friendly people are assets for a country venturing into tourism development. In addition, as
explained before, promotional activities in Ethiopia are inadequate. Promotion spending
therefore needs to be designed to have the maximum impact by closely targeting priority markets
and using creative methods to promote tourism to Ethiopia. Collaboration with Ethiopian
Airlines will be critical.

Any decision made in developing tourism should pay attention to the preservation of cultural and
traditional values of the community at large. Since tourism is an area which affects governmental
departments such as agriculture, industry, labor, foreign and internal affairs, finance, etc,
involvement and cooperation at departmental level will enhance its development.

The private sector must be involved by investing in areas which can cover the establishment of
travel agencies, tour operation, hotels, motels, gift shops and related activities. Tour operators are
a good example of how the private sector can be involved in tourism sector. Here it is important
that government works with tour operators to improve current products but also works on air
linkages, and ICT and service standards to make the Ethiopian tourist product more accessible.

Gift shops and related activities are one way of promoting the country’s tourism products apart
from bringing foreign exchange earnings.Therefore, they must be available in better quality
outlets that are convenient for tourists, with payment facilities that make craft purchase possible.
This expansion is beyond the capacity of the public sector, so the private sector involvement in
this area is also useful. Schools have an important role in improving human resources in the
tourism sector, therefore private investor’s involvement in this area will be very helpful for the
sector’s development, and the existing ones should improve their standards.

56
A solution based on a regional approach is also appropriate. A strategy that, in this case, relies on
exploiting the well developed tourism capability of one competing country, like Kenya, and
coupling it to the latent potential of a neighbor, Ethiopia. In such a model, there are large areas of
commonality between the two countries that could be exploited; a possible approach would be
for the two countries to capitalize on the shared border and the fact that a major common
denominator is the Rift Valley. From Kenya's perspective, the tourism industry has almost
reached maturity. By extending the product offering to include initially, the south western Part of
Ethiopia, and by including tours to Ethiopia's historical route, an impetus can be given to both
countries tourism marketing. This will add an extra dimension to Kenya's product portfolio and
will enable Ethiopia to develop on the basis of a guaranteed tourism influx. Central to enhancing
competitiveness is the need to improve the quality of tourist infrastructure, which is currently
very low. Government should work with the private sector to create an environment in which this
will be improved. Partly this is about Government improving what has been already done and the
regulatory environment. However this is also about Government doing things which are
currently not happening effectively, like training staff, improving business infrastructure and
regulating service standards.

Further research on the various macroeconomic determinants of tourism revenue will help to
clearly identify the magnitude of each variables and hence to focus on specific measures for the
development of the industry. At micro level rigorous studies can be done for selected tourist
attraction areas so that the result will be valuable for policy makers at national and regional level
in the country.

57
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