Geopolitical and economic instability.

What is the impact on the tourism

industry?

Christina Kalamida

A dissertation submitted in partial fulfillment of the requirements for the degree

of Master of Science in Applied Economics & Data Analysis

School of Economics & Business

Department of Economics

Master of Science

“Applied Economics and Data Analysis”

August 2021
University of Patras, Department of Economics

Christina Kalamida

© 2021 − All rights reserved

 Three-member Dissertation Committee

Research Supervisor: George Filis Assistant Professor

Dissertation Committee Member: Athanasios Tagkalakis Assistant Professor

Dissertation Committee Member: Nicholas Giannakopoulos Associate Professor

The present dissertation entitled

«Geopolitical and economic instability. What is the impact on the tourism

industry?»

was submitted by Christina Kalamida, Sid 1046404, in partial fulfillment

of the requirements for the degree of Master of Science in «Applied Economics &
Data Analysis» at the University of Patras and was approved by the Dissertation
Committee Members.
 Acknowledgments

I would like to express my profound gratitude to my supervisor, Assistant Professor

George Filis for the guidance and advice in the prosecution of this dissertation.
 Summary

The vulnerability of tourism industry attributed to uncertainties, that is politi-

cal turmoils, geopolitical risks and economic instabilities is significant and thus
the implementation of successful and effective policies in the field of tourism cri-
sis management are required. This dissertation investigates the impact of eco-
nomic, political and geopolitical instability on Greek inbound tourism between
2008-2020. Tourist arrivals from eleven tourism origin countries collected by the
monthly Travel Receipts Survey from the Bank of Greece are considered. The
explanatory variables consist of Economic Policy Uncertainty Index, Real GDP
per capita growth and Inflation of Greece and tourism origin countries, as well
as of Geopolitical Risk Index of Turkey, Saudi Arabia and Israel as neighboring
countries that may affect Greek tourism product. Overall, the empirical findings
show that tourist arrivals decline with economic uncertainty and geopolitical risk
of Israel and Saudi Arabia. By contrast, tourism industry in Greece grows with
GDP per capita growth, differences in inflation and geopolitical risk of Turkey.

Keywords: Economic Instability, Economic Policy Uncertainty, Geopolitical

Instability, Geopolitical Risk, Political Instability, Tourist Arrivals

i
 Περίληψη

Η ανθεκτικότητα του τουριστικού τομέα αναλογιζόμενη σε αβεβαιότητες σχετικά με

τις πολιτικές αναταραχές, το γεωπολιτικό ρίσκο και τις οικονομικές αστάθειες είναι
εξέχουσα και για το λόγο αυτό, η εφαρμογή αποδοτικών και επιτυχών πολιτικών
στο πλαίσιο της διαχείρισης κρίσεων του τουρισμού είναι απαραίτητη. Η παρούσα
διπλωματική εργασία εξετάζει την επίπτωση της οικονομικής, της πολιτικής και της
γεωπολιτικής αστάθειας στον εισερχόμενο τουρισμό της Ελλάδας μεταξύ 2008-2020.
Οι αφίξεις τουριστών αφορούν έντεκα χώρες προέλευσης, οι οποίες συλλέγονται
από την ΄Ερευνα Εισπράξεων της ΄Ερευνας Συνόρων της Τράπεζας Ελλάδος. Οι
εξαρτημένες μεταβλητές αποτελούνται από τον Δείκτη Αβεβαιότητας Οικονομικής
Πολιτικής, το Πραγματικό κατά κεφαλήν Ακαθάριστο Εγχώριο Προϊόν και τον Πλη-
θωρισμό της Ελλάδας και των χωρών προέλευσης, καθώς επίσης και από το Δείκτη
Γεωπολιτικού Ρίσκου της Τουρκίας, της Σαουδικής Αραβίας και του Ισραήλ, ως
τρεις γειτονικές χώρες των οποίων η γεωπολιτική ενδέχεται να επηρεάζει το Ελληνι-
κό τουριστικό προϊόν. Συνολικά, τα εμπειρικά αποτελέσματα δείχνουν ότι οι αφίξεις
μειώνονται με την οικονομική αβεβαιότητα και το γεωπολιτικό ρίσκο του Ισραήλ και
της Σαουδικής Αραβίας. Αντίθετα, ο τουριστικός τομέας ενισχύεται με το κατά κε-
φαλήν Ακαθάριστο Εγχώριο Προϊόν, τον Πληθωρισμό και το γεωπολιτικό ρίσκο της
Τουρκίας.

Λέξεις κλειδιά: Οικονομική Αστάθεια, Αβεβαιότητα Οικονομικής Πολιτικής, Γε-

ωπολιτική Αστάθεια, Γεωπολιτικό Ρίσκο, Πολιτική Αστάθεια, Αφίξεις Τουριστών

ii
Contents

1 Introduction 1
1.1 Aim of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Structure of the study . . . . . . . . . . . . . . . . . . . . . . . . . 3

2 Literature Review 4
2.1 Geopolitical, political instability and terrorism . . . . . . . . . . . . 4
2.2 Economic Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . 15

3 Empirical Model and Data 17

4 Results and Discussion 20

4.1 Descriptive statistics of indicators . . . . . . . . . . . . . . . . . . . 20
4.2 Distribution of inbound tourist arrivals . . . . . . . . . . . . . . . . 22
4.3 Distribution of destination’s country indicators . . . . . . . . . . . . 24
4.4 Distribution of tourism origin countries’ indicators . . . . . . . . . . 26
4.5 Uncertainty and Inbound tourist arrivals results . . . . . . . . . . . 30

5 Conclusion 33

Appendix A 36

iii
List of Tables

2.1 Empirical studies of geopolitical, political instability and terrorism . 13

4.1 Descriptive statistics of variables by country . . . . . . . . . . . . . 21

4.2 Uncertainty and Inbound tourist arrivals of Greece . . . . . . . . . 32

A.1 Uncertainty and Inbound tourist arrivals of Greece (Fixed effects

model) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
A.2 Hausman’s specification test . . . . . . . . . . . . . . . . . . . . . . 37

iv
List of Figures

4.1 Inbound tourist arrivals of Greece by tourism origin countries over

the period 2008-2020 quarterly . . . . . . . . . . . . . . . . . . . . . 22
4.2 Distribution of Inbound tourist arrivals of Greece by tourism origin
countries over the period 2008-2020 quarterly . . . . . . . . . . . . 23
4.3 Indicators of Greece over the period 2008-2020 quarterly . . . . . . 25
4.4 Economic Policy Uncertainty by tourism tourism origin countries
over the period 2008-2020 quarterly . . . . . . . . . . . . . . . . . . 26
4.5 GDP per capita by tourism origin countries over the period 2008-
2020 quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 Inflation rate by tourism origin countries over the period 2008-2020
quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.7 Geopolitical risk of neighboring countries over the period 2008-2020
quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

v
List of Abbreviations

EPU Economic Policy Uncertainty

GDP Gross Domestic Product

GPR Geopolitical Risk

vi
Chapter 1

Introduction

Tourism is considered an important sector that contributes to economic growth

and poverty outcomes, particularly in developing economies. Nevertheless, the in-
dustry is heavily vulnerable to social and political turmoils i.e. terrorism, violence,
wars, regional tensions, religious conflicts or military occupations and lightly dete-
riorated. From a broad perspective, politically unstable economies are frequently
subject to political and violence incidents which induce fluctuations in the tourism
planning process and public image of the destination (Issa and Altinay, 2006).
Globalization and the political and economic interdependence of economies entail
that any violent events in one nation might cause large effects on the welfare of
other nations (Richter and Waugh, 1986). In addition, global tourism provides
a substantial portion of world’s trade and to this end changes in travel patterns
induce spillover effects. Undeniably the 21st century has faced multiple terrorist
episodes around the globe whilst these attacks may often be coordinated by the
extensive use of technology and media (Baker and Coulter, 2007). Terrorism has
become the opponent of tourism by which terrorists foster their political and ide-
ological targets (Zopiatis et al., 2019). Tourism facilities and infrastructure i.e.
international airports and other means of transportation actuate ways of escape
and networks for weapons’ transfers. Within this context violent episodes via in-
ternational airports infrastructure provide sufficient evidence that such facilities
appeal terrorism episodes. Moreover, due to the interrelationship of economic
growth and tourism, terrorist attacks induce a significant drop in receipts. This
decline increases governmental costs and pressure against government officials that

1
 1.1 Aim of the study

must deal with the episodes (Hall and O’Sullivan, 1996). International geopolit-
ical environment may provoke the instability of economies and the disruption of
social welfare and cultural life of a place. A growing number of studies cite that
tourism development is substantially associated with political stability and terror-
ism outcomes (Enders & Todd Sandler, 1991 ; Sandler et al., 1992 ; Sonmez, 1998
; Brück & Wickström, 2004 ; Saha & Yap, 2014). Due to its intangible nature
tourism is heavily dependent on public image of the destination, which consti-
tutes a major determinant of travel destination choice (Bramwell and Rawding,
1996). When challenging conditions are existent within economies, the political
unrest threatens the regular operations of governments. Besides, violent and po-
litical incidents may appear related, since terrorism and violence can frequently
be indications of a political turmoil. In a general sense, geopolitical risk and polit-
ical instability still maintain their position in global attendance and the extensive
media coverage. Ultimately , the main findings of this dissertation suggest that
Greek inbound tourism declines with economic uncertainty and geopolitical risk
of Israel and Saudi Arabia. By contrast, tourism industry grows with GDP per
capita growth, differences in inflation and geopolitical risk of Turkey.

1.1 Aim of the study

Considering the theoretical background and the empirical studies, the role of
geopolitical and economic risk and the political turmoils within economies is
prominent on the disruption of tourism industry. In this framework, the pur-
pose of this dissertation is to empirically investigate the effects of geopolitical
and economic instability on Greek inbound tourist arrivals. The study employs
a dataset that incorporates economic indicators and the political uncertainty of
Greece, that is the destination country and eleven tourism origin countries. Given
the increased rivalry with neighboring countries i.e., Turkey, Israel and Saudi Ara-
bia, a geopolitical risk indicator of these economies is further considered to identify
the impact of geopolitics.

2
 1.2 Research Questions

1.2 Research Questions

This study then attempts to answer the following research questions:

i What is the impact of Greek economic instability on its inbound tourism?

ii What is the impact of the tourism origin’s country economic instability on

Greek inbound tourism?

iii What is the impact of Greek political turmoil on its inbound tourism?

iv What is the impact of the tourism origin’s country political turmoil on Greek
inbound tourism?

v Does geopolitical risk of neighboring countries deteriorate Greek inbound tourism?

1.3 Structure of the study

The dissertation consists of five Chapters. The second Chapter provides an ex-
tensive review of the tourism literature focusing on geopolitical and economic
instability. Both theoretical background and the empirical studies are cited. The
main findings of these studies are briefly illustrated to compile the indicators
determined by the global scientific community. Overall, this concise review en-
ables to develop the empirical model of this dissertation. Besides it provides the
challenge to comprehensively interpret and compare the empirical findings with
aforementioned studies. Chapter three analyses the construction of the empirical
model and the methods used to estimate the results. The employed dataset and
any transformations are also described. The results and the further discussion are
incorporated in Chapter four. Finally, the concluding remarks and limitations of
the dissertation are included in Chapter five.

3
Chapter 2

Literature Review

2.1 Geopolitical, political instability and terror-

ism
Terrorism and political violence have always been considered as contemporary is-
sues in terms of global affairs. To this end, economic outcomes of both factors
have gained the attention of tourism stakeholders (Pizam and Smith, 2000). Po-
litical, social or geopolitical instability has a significant effect on the demand and
supply of tourist services and products (Pizam and Mansfeld, 2006). The complex
relationship between different types of instability and tourism has gained the at-
tention of the international scientific community. Crime and tourism relationship
may range from an incidental event, that is tourists may accidentally be subject
to a terrorist attack, to a situation where tourists may intentionally be targets of
these acts (Ryan, 1993). Travelers might then be considered as objects of terrorist
attacks if they are perceived to be ambassadors of their tourism origin country
(Richter, 1983). Against this background, Richter (1983) suggests that tourism
may inherently be a political issue, in the framework of the conflicts between op-
ponents and proponents of tourism or among locals and tourists due to ideological
and cultural issues.

Besides, against conceptual heterogeneities across economies, most studies un-

equivocally support that in the absence of stability tourism industry may ar-
guably be disrupted (Baker and Coulter 2007). Travellers’ major concern is the

4
 2.1 Geopolitical, political instability and terrorism

maximization of their satisfaction given their safety in the destination, that is

the minimization of risk followed by possible threats (Beirman, 2002). In this
framework several empirical studies suggest that political instability and terror-
ism inversely affect tourism demand, but what is even more important is the
observable joint effect of these factors. In other words, the interaction between
political instability and terrorism explains the effects of tourism at different levels
of political risk. Besides, political instability negatively influences tourism demand
as terrorism rises. Against the stability of this relationship, terrorism provides a
positive effect on tourism when political instability is low. Instead, as instability
increases, terrorism tends to considerably reduce tourist arrivals (Saha and Yap,
2014). Alternatively, given a high political instability then a high risk of terrorism
leads to a substantial shock in tourism demand and supply.

Except from terrorism, political incidents such as ethnic cleansing, declarations

and riots may induce political unrest which in turn menaces the residents’ safety
(Hall and O’Sullivan, 1996). So, considering the study of Saha and Yap (2014),
tourism arrivals are certainly explained by political instability and terrorism alone.
Howbeit, more robust results are observed when the authors account for the joint
effect of these factors. The negative effects are severe and significantly depen-
dent on governmental policies. If a political struggle is evident in an economy,
government addresses the violence and posits long-term schemes for recovery and
development of tourism activities (Teye, 1988). However, the speed of recovery
hangs on governmental strategies and the potential and effectiveness of crisis man-
agement to restore tourism operations (Narayan 2005). Alternatively, economies
with effective law enforcement agencies and public authorities could prevent crimes
against tourists (Pizam et al., 1997).

Sonmez (1998) suggests that terrorist attacks periods are short and emerge sud-
denly, but the intense media coverage inevitably draws public attention. The situ-
ation is then transferred to a broader scale of global attention where the authorities
cannot control either the content of information or its extensiveness (O’connor et
al., 2008). In the absence of personal experience with terrorism or political risks,
tourists heavily rely on other sources of information and thus media present a

5
 2.1 Geopolitical, political instability and terrorism

key role in their perceptions of risk (Kapuściński and Richards, 2016). Unex-
pected terrorist turmoils intimidate tourists and reallocate tourism flows until
travellers’ memories and perceptions of terrorism fade. More precisely, tourism
activities wane when consumers’ perceptions of terrorist attacks are affected. In
this setting, the inclusion of risk in the process of tourism destination choice may
potentially disrupt decision-making. This occurs since travellers compare different
destinations considering their perceived benefits and costs of the trip. To this end
higher terrorist risk in a country will rationally lead to lower perceived safety,
which in turn reduces the willingness to visit destination (Sönmez and Graefe,
1998). The perceptions of risk and safety has gained the attention of travellers
since they need their place of residence to be secure, apart from covering other
expectations (Fletcher and Morakabati, 2008). Then the sense of insecurity and
threat constitute a significant barrier to travel which limits the development of
tourism industry. Consequently, given these circumstances a terrorist incidence
will certainly affect tourist demand (Buckley and Klemm, 1993).

Besides, political turmoil does not induce similar media coverage, but it impedes
travel decision to the affected destinations and barriers to international tourism are
then existent. Therefore, the international attention of political risk has significant
repercussions on the destination (Poirier, 1997). Politically unstable economies are
frequently subject to reduced tourism supply and fluctuating demand (Issa and
Altinay, 2006). Moreover, the occurrence and persistence of political turbulence
and terrorism will imperil country’s reputation as a safe destination. To this end,
terrorism dampens tourism arrivals since foreign governments deter their citizens
to travel in regions of high risk. As the author mentions tourists’ perceptions of
terrorist attacks and threats in a country affect the perceptions of a whole region.

Political instability, terrorism and further unexpected macroeconomic shocks are

the bane of tourism activities and hence have been extensively examined in the
academic research. Studies investigating the effects of political instability and
terrorism on tourism industry can be broadly divided into qualitative and quan-
titative. Prior studies are mainly focused on the analysis of secondary data, that
is qualitative analysis, while quantitative studies are principally noticed the last

6
 2.1 Geopolitical, political instability and terrorism

decade (Sonmez, 1988). Brück and Wickström (2004) recommend that the effects
of terrorism in different economic activities may vary across sectors, i.e. tourism is
a typical instance which may be subject to high burden. The consequences in the
tourism industry are larger due to its inherent characteristic to operate seasonally.
Once time has passed tourism services cannot be offered in the short run rather
than a predetermined time.

Tourism industry has certainly been vulnerable to different types of terrorism since
the 1960’s and the centralization of tourist activities, i.e. operating in specific
locations, makes tourists be threatened by criminals and terrorists. Although
tourists are most likely to be victims rather than targets for major acts of terrorism
considering historical incidents. Particularly, victims of violent acts are citizens
to whom the reasons of terrorist attacks are unambiguous (Richter et al., 1986).
From a broad perspective, tourism is sensitive to communities with erratic politics
and histories of ethnic tensions. In this context governments are aware that that
international tourism flows are negatively affected by political turmoils and violent
conditions that is terrorism. This Chapter cites and discusses both theoretical
background and empirical studies of political instability and terrorism outcomes
on tourism related activities.

Most empirical studies on the effects of political turmoil and terrorism on tourism
activities emerge after 2000, while prior studies are mainly focused on qualitative
analysis. Enders and Todd Sandler (1991) assuming a simultaneous relationship
between tourism and terrorism estimate a vector autoregressive model. A high
risk of terrorism increases the relative cost of tourism, so that travellers who act
rationally will substitute their decisions of a specific destination with another. The
authors use time series data of transnational terrorists incidents for Spain between
1970-1988 on monthly basis. The results suggest a unidirectional causality, that
is there is a significant and negative impact of terrorism on tourist arrivals. The
inverse relationship is not confirmed though. Moreover, what mostly matters
is that tourism industry is very sensitive to a typical violent incident when the
authors estimate the cumulative effect of the exogenous shock in the impulse
response function of tourism.

7
 2.1 Geopolitical, political instability and terrorism

Sandler et al. (1992) use terrorist incidents of Greece, Italy and Austria between
1968-1988 to estimate tourism revenues outcomes. The results suggest that the
response of tourism industry on exogenous shocks of terrorism endures six to nine
months since the event has occurred. The coefficient of the autoregressive com-
ponent of lag one shows that a terrorist incident that occurs at time t is expected
to provide long-lasting effects on the imminent revenues at about three quarters
ahead. This direct effect is arguably attributed to the memory of tourists against
terrorist incidents which prevents them from visiting the destination. Although
this impact diminishes after nine months have passed. Therefore, terrorism de-
ters tourism flows, while a generalization effect indicates that an incidence in one
country is negatively associated with the tourism flows in neighbour countries.

Syriopoulos (1995) estimates a tourism demand model for North European coun-
tries and USA regarding income level, effective relative prices and the real ex-
changes rates between tourism origin and destination countries. The reference
period is 1960-1987. The authors account for political turmoil incidents in some
countries, e.g. 1967-1974 Greek military coup or 1974-1976 Portuguese political
turbulence with dummy variables. To estimate the effects on tourism demand
they conduct time series estimates by country with an error correction econo-
metric model. Exchange rates may not inevitably be a source of receipts, while
Mediterranean countries are less vulnerable to disposable income rather than other
countries. Inflation rates and political turmoil incidents substantially influence
tourism consumption in the short run, while long-run effects are wider. Instead
tourism development is less sensitive to changes in relative effective prices in the
long-run. Political instability is then inversely correlated with tourism.

Drakos and Kutan (2003) perform an empirical examination of tourism terrorism

outcomes on tourism. They build their study on cross sectional data of terrorist
attacks and tourism market shares in Greece, Israel, and Turkey between 1991-
2000 on monthly basis. They further account for country-specific effects to capture
the unobserved heterogeneity across countries. The authors infer a significant drop
in tourist arrivals followed by an increase in terrorist incidents, as well as spillover
effects on neighbour countries. More precisely they estimate that Greece and

8
 2.1 Geopolitical, political instability and terrorism

Turkey share a spillover effect when a terrorist attack is existent, which shows a
strong competition between them in terms of tourism.

Neumayer (2004) investigates the outcomes on number of tourists, assuming that

arrivals’ data are more accurate than tourism expenditures where the last are
retrieved from the balance of payments. The explanatory variables include the
exchange rates between tourism origin and destination country, relative prices of
tourist goods and services and measurements of political instability and violence.
Latent variables consist of the number of terrorist and general violent incidents
and the internal and external conflict captured by the International Country Risk
Guide (ICRG). To account for political instability the author considers the polit-
ical rights and civil liberties index. The sample incorporates countries which are
observed over the period 1979-2000. The estimation results showcase significant
spillover effects within regions since political turmoil and violence induces long-
lasting effects on tourism, as well as across regions. In particular terms, there is
a substitution effect between regions due to the fact that political violence threat
reduces tourism activities in the affected region with respect to the world aver-
age. Moreover, the results indicate that as political violence raises tourist arrivals
lower.

Yap and Saha (2013) examine tourism development outcomes of political insta-
bility, terrorism, corruption and economic factors using fixed-effects estimations.
The sample consists of 139 countries which are observed over the period 1999-2009.
The authors build two theoretical models of tourist arrivals and revenues, i.e. they
found their study on the effects of political risk and the effects of economic factors.
Regarding the empirical estimations, political instability and terrorism induce a
drop in tourism activities, i.e. a decrease in tourism revenues and demand. How-
beit, what does mostly matter is that the effect of political instability is lower.

Saha and Yap (2014) analyse tourism outcomes of political instability and terror-
ism across 139 countries over the period 1999–2009. The empirical model includes
political instability, terrorism, real GDP, changes in real exchange and tourist at-
tractions to identify the variability of tourist demand and revenues. The authors
further regard two dummy variables that correspond to world historical heritage

9
 2.1 Geopolitical, political instability and terrorism

sites and natural wonders of the world which are accepted by the United Nations
Educational, Scientific and Cultural Organization. Towards one side, terrorism
incidents induce negative tourism outcomes. Although the direct effect of politi-
cal instability is insignificant, the results demonstrate an inverse effect at different
levels of terrorism. Alternatively, there is a joint significant impact of politi-
cal instability and terrorism on tourism demand. In the framework of economic
and cultural factors, real GDP and attraction and heritage are expected to raise
tourism activities.

Liu and Pratt (2017) investigate the relationship between tourism and terrorism
across 95 destinations over the period 1995-2012. To estimate this impact, they
account for a Gross Domestic Product Index as the income flows which are trans-
ferred from the tourism origin to the destination country and a Global Terrorism
Index from the Global Terrorism Database (GTD). These factors are then used to
estimate tourist arrivals outcomes given an Autoregressive Distributed Lag model.
Further explanatory variables as dummies capture exogenous shocks, i.e. the out-
break of 2009 global financial crisis and Syrian Civil War of 2011. In the context
of long-run effects of terrorism no statistical significance is observed. Albeit, there
is a statistically significant a negative impact of terrorism on tourist arrivals but
limited. Although when the authors control for time series estimations by country,
the results suggest that some countries are more vulnerable on terrorism episodes
than others, e.g. more democratic economies are more resilient to the attacks.

Asognu et al. (2019) quantify the relationship between tourism and terrorism and
peace factors. The study is focused on 163 countries which are analysed over the
period 2010-2016. The dependent variable is the number of tourist arrivals in
each country while thirteen explanatory variables are incorporated for prediction.
These determinants have been used by the empirical studies of tourism that cap-
ture political risk, terrorism and peace factors within economies. Lack of political
stability and the access to weapons negatively affect tourism outcomes, while the
presence of security officers and the number of incarcerations encourage tourism
development. Against major studies, the authors find that internal conflict in-
tensity, violent incidents and terrorism tendency showcase a positive impact on

10
 2.1 Geopolitical, political instability and terrorism

tourism. These peculiar estimations are perhaps attributed to the fact that these
events may raise tourism activities with lower political risks. Besides, factors like
levels of income and political stability mediates the association between tourism
and terrorism.

Against prior the aforementioned studies, Balli et al. (2019) estimate tourism and
geopolitical risk relationship based on a wavelet squared coherence approach. The
authors use tourism demand and global geopolitical risk index data to quantify
the relationship. They finally infer that the effect of geopolitical uncertainty on
tourism is heterogenous across countries and neither ultimate inference can be
conducted. Albeit the association is insignificant in some economies which shows
that tourism industry is not vulnerable to exogenous shocks in geopolitics. Al-
though this can be attributed to the fact that destinations may be perceived more
attractive by tourists rather than unsafe in terms of political risks. Albeit, the
negative effect in some economies is short term.

Demir et al. (2019) estimate the impact of geopolitical risks on inbound tourism
considering 18 counties which are analysed between 1995-2016. The determinants
further consist of GDP, exchange rates between tourism origin and destination
country, population and inflation. The results suggest that apart from geopo-
litical risk and inflation, tourism activities raise with GDP, exchange rates and
population. Instead, geopolitical risk and inflation are negatively associated with
tourism. Although tourism is adequately sensitive to changes in geopolitics since
the lagged coefficient is significant, which depicts that as geopolitical risks extend
inbound tourism is negatively affected one period ahead, i.e. the upcoming year.

Saint Akadiri et al. (2020) estimate a Vector Autoregressive model to identify

the interrelationships between tourism , geopolitical risk and economic growth on
Turkey. They account for time series quarterly data between 1985-2017 about
geopolitical risk index, Real Gross Domestic Product and the number of inbound
tourists. The results showcase that geopolitical risk Granger cause real GDP and
tourism, while the opposite relationships are not confirmed. Therefore, geopo-
litical risk causes fluctuations in the political and economic environment and a
considerable drop in tourism arrivals.

11
 2.1 Geopolitical, political instability and terrorism

Theocharous et al. (2020) explore the association between political instability and
tourism across Greece, Turkey, Cyprus and Israel based on monthly data between
1987-2012. The authors utilize a Vector Autoregressive model to estimate tourism
outcomes and an EGARCH model to control for the conditional volatility. The
results indicate significant spillover effects of political incidents in neighbor coun-
tries, i.e. positive impact of cooperation between destination and tourism origin
country. Instead, the existence of political conflicts across countries is accompa-
nied with negative tourism outcomes.

Lee et al. (2021) examine and comment on the debate on the association between
geopolitical risk and tourism. They found their study on 16 countries which are
observed over the period 2005-2017 on monthly basis. To account for heterogene-
ity and non-stasionarity issues they use the Augmented Mean Group and Common
Correlated Effects Mean Group estimators. The dependent variable is captured by
tourism receipts and the number of inbound tourists which is explained by geopo-
litical risk index, exchange rates between tourism origin and destination country,
price levels and the number of tourism industries. The results suggest that tourism
demand is negatively affected by geopolitical risk in the long run, which indicates
that political environment either global or local affects tourists’ destination deci-
sions and in turn the performance of the tourism industry. Therefore, the authors
infer that political stability and peace are major determinants of tourism growth.

Ultimately of the aforementioned empirical studies confirm that political risks and
violence incidents tend to lower tourism activities. Instead just limited studies
suggest an inverse relationship. Therefore, the expected signs of political risk and
terrorism are knowledgeably negative. With respect to economic stability, income
and exchange rates between tourism origin and destination counties positively
affect tourism development. However, it is anticipated that the sign of inflation will
be negative. Table 2.1 briefly illustrates the empirical studies. Last column then
captures the sign of the estimated coefficient of each corresponding explanatory
variable on the variable of interest, i.e. tourism demand.

12
 2.1 Geopolitical, political instability and terrorism

Table 2.1: Empirical studies of geopolitical, political instability and terrorism

Dependent Independent
Authors-Year Method Variable Variable Sig.

Sandler et al. (1992) ARIMA TR Terrorism incidents -

Enders and Sandler (1991) VAR TA Terrorism incidents -
Terrorism inc. TA no
Drakos and Kutan (2003) Consumer-choice model TA Terrorism incidents -
Neumayer (2004) Dynamic Fixed effects TA Terrorism incidents -
and GMM General violent events -
Internal conflict intensity -
External conflict intensity -
Human rights violation -
Yap and Saha (2013) Dynamic fixed effects TA Political instability index -
TR Terrorism -
Government stability no
Internal conflicts -
External conflicts -
Military in politics -
Religion in politics -
Ethnics tension -
Corruption -
Saha and Yap (2014) Fixed and random effects TA Political instability no
Pooled OLS Terrorism +
Political instabilityxTerrorism -
Real GDP +
Changes in real exchange rates -
Tourist attractions +
World historical sites +
World natural wonders +
Liu and Pratt (2017) ARDL TA Global Terrorism Index -
GDP Index +

13
 2.1 Geopolitical, political instability and terrorism

Dependent Independent
Authors-Year Method Variable Variable Sig.

Asongu et al. (2019) Dynamic GMM TA Global Terrorism Index (GTI) +

Negative Binomial Internal conflict intensity +
Perceptions of criminality no
Displaced people no
Political instability -
Political Terror Scale no
Incarcerations +
Homicides no
Violent crime no
Violent demonstrations -
Incarceration no
Security Officers & Police +
Military expenditure no
Armed Services Personnel no
Access to Weapons -
Balli et al. (2019) Wavelet squared TD Geopolitical risk index -
coherence approach +
Demir et al. (2019) Fixed effects and GMM Geopolitical risk index -
GDP +
Exchange rates +
Population +
Inflation -
Saint Akadiri et al. (2020) Var TA Real GDP no
Geopolitical risk index no
Real GDP TA no
Geopolitical risk index no
Geopolitical risk index TA -
Real GDP -
Theocharous et al. (2020) Var - EGARCH - GARCC TA Political instability - or +
Lee et al. (2021) AMG and CCEMG estimators TREC Geopolitical risk index -
IT Average global income +
Price level no
Exchange rate no
Number or tourism industries +

Note: TR: Tourism revenues, TA: Tourist Arrivals, TD: Tourism Demand, TREC: Tourism receipts, IT: Inbound tourism

14
 2.2 Economic Uncertainty

2.2 Economic Uncertainty

Previous section mentioned the empirical studies of geopolitical, political instabil-
ity and terrorism on the tourism literature. Although the results of the economic
indicators were not analysed. Founded on the aforementioned studies trends in
economic activities significantly affect tourist arrivals. Real GDP of the desti-
nation country is expected to increase tourist’s arrivals which implies that as an
economy’s income rise the number of travellers is expected to increase (Saha &
Yap, 2014 ; Gozgor & Demir, 2018 ; Demir et al., 2019). More recent studies
however draw attention to uncertainty due to economic policies which is captured
by an Economic Policy Uncertainty Index. Its potential effects on the tourism
industry have contemporarily been investigated in the tourism literature. Gonzor
& Ongan (2017) estimate the impact of economic policy uncertainty (EPU) on
tourism expenditures in the USA between 1998-2015. The findings suggest a neg-
ative effect of EPU on tourism spending, but inelastic which showcases that the
impacts on domestic tourism are low. Gonzor & Ongan (2018) anew investigate
EPU outcomes on inbound tourism of USA. between 1996-2015. As in their prior
study, the empirical results indicate a significant and negative effect on tourism
demand both in the short and long-run. Although the short run coefficient is
inelastic which showcases that tourism industry is not too sensitive to changes in
EPU.

Albeit the long run coefficient is elastic meaning that EPU may lead to significant
declines in tourism spending. Isik et al. (2020) examine the effect of EPU on the
demand of international tourist arrivals in USA between 1996-2017. Overall, trav-
ellers are sensitive to economic uncertainty i.e., as EPU in USA increases travellers
are less willing to plan their vacations. Nguyen et al. (2020) explore tourism ex-
penditures’ sensitivity to macroeconomic uncertainty attributed to policies. The
authors propose that higher EPU is expected to induce a significant rise in arrivals
but a drop in tourism expenditure per head. Against most studies, the authors
infer that tourism is perhaps an inferior good i.e., the existence of economic un-
certainty increases the probability of the county’s wealth, so that tourists spend
less of their money on their journey but travel more. Sharma & Khanna (2021)

15
 2.2 Economic Uncertainty

estimate the effects of global EPU on tourist arrivals based on a sample of 19

countries between 2010-2019. The findings demonstrate significant, but inverse
short and long-run effects. Particularly, as EPU increases, arrivals tend to signif-
icantly rise. Instead, arrivals are subject to significant declines in the long run,
which validates the study of Nguyen et al. (2020). However, the authors provide
further explanations of this negative association rather than considering tourism
as an inferior good. More precisely, they suggest that fluctuations in trade, mon-
etary and fiscal policies may induce positive spillovers in the long run. Secondly,
they assume that tourism industry is more resilient against EPU rather than other
industries. Travel plans may hence be postponed in the existence of uncertainties
due to economic policies.

The empirical studies mostly reveal that tourism industry is sensitive and nega-
tively affected by EPU and particularly in the short run. Although few studies
suggest that tourism activities may be enhanced with economic uncertainties and
that tourism industry is less vulnerable to EPU rather than other sectors.

16
Chapter 3

Empirical Model and Data

To estimate Greek inbound tourism outcomes given geopolitical, political and

economic instability, a panel dataset is employed. Overall, the indicators can be
broadly classified into destination’s, tourism origin’s and neighboring countries
characteristics. More precisely, the dependent variable is captured by inbound
tourism, i.e. the number of tourists who travel in Greece. Inbound tourism is
collected by the monthly Travel Receipts Survey from the Bank of Greece which
incorporates information about travel expenditure of non-Greek residents during
their accommodation in Greece. The number of inbound travellers in the survey
is observed by 19 tourism origin countries. However due to the inclusion of eco-
nomic policy uncertainty and geopolitical risk indexes, as discussed further down,
the dataset is founded on 11 out of 19 tourism origin countries, so that all interest
variables could be merged to the final dataset. The tourism origin countries consist
of Belgium, France, Italy, Australia, Canada, Netherlands, Russia, Spain, Sweden,
UK and USA . Besides, the interest variables are observed between 2008-2020 on
quarterly basis and the sample consists of 572 observations. Economic instability is
then determined by GDP, i.e. seasonally adjusted GDP per capita in fixed PPPs,
volume estimates and OECD reference year and Inflation, i.e. percentage change
of Consumer Price from the previous quarter. GDP per head and Inflation are
collected by OECD’s National Accounts and Prices and Purchasing Power Parities
databases, respectively. Political instability in terms of economic policy is captured
by Economic Policy Uncertainty Index, which is a composite index constructed by
three types of components. These however capture the uncertainty by 10 of the

17
largest newspapers articles, the Congressional Budget Office (CBO) which offers
federal tax code projections and Federal Reserve Bank’s forecasts on fundamental
macroeconomic indicators. A composite index that illustrates the role of geopoli-
tics is further incorporated in the dataset. Geopolitical Risk Index is calculated by
text-based results of 11 international newspapers. Economic Policy Uncertainty
and Geopolitical Risk indexes are retrieved by www.policyuncertainty.com web-
site. The empirical model is then be obtained as follows:

yit = β0 + β1 GDP P CG_GRit + β2 GDP P CG_ORIGit +

β3 DIN Fit + β4 EP U _GRit + β5 EP U _ORIGit + β6 GP R_T U Rit
+ β7 GP R_SAUit + β8 GP R_ISRit + αi + uit

where yit stands for the number of travellers, seasonally adjusted, in Greece from
each tourism origin country i = 1, 2, ..., 11, GDP P CG_GRit is the growth rate
of GDP per capita of Greece, hence independent of index i, GDP P CG_ORIGit
is the growth rate of GDP per capita of each tourism origin country, DIN Fit is
the difference in inflation rates between Greece and each tourism origin country
that illustrates inflation gap, EP U _GRit and EP U _ORIGit capture the natu-
ral logarithm of Economic Policy Uncertainty Index of Greece and tourism origin
country, respectively, while GP R_T U Rit , GP R_SAUit and GP R_ISRit indi-
cate the Geopolitical Risk Index of Turkey, Saudi Arabia and Israel. The GPR
indices of the aforementioned countries were selected to illustrate geopolitical risk
of neighboring countries which are expected to affect tourism outcomes in Greece.
Terrorism and political instability may induce spillover effects across neighboring
countries, i.e. high intensity attacks or political turmoils in Israel and Turkey
tend to raise tourist flows to Greece (Samitas et al., 2018). Besides, αi + uit com-
pose the error term eit which can be divided into the idiosyncratic error term uit
and random variables αi that capture the unobserved heterogeneity. An assump-
tion of the model is that both uit and αi are i.i.d., that is αi ∼ i.i.d.(0, σα2 ) and
uit ∼ i.i.d.(0, σu2 ). Given the model’s specification αi constitute random variables
that are distributed independently of the predictors xit , that is a strict exogeneity
between αi and xit in terms of the idiosyncratic error terms.Under strict exogeneity
hypothesis an assumption of the model is that E[uit |xit , αi = 0]. Then, both fixed
and random effects models impose strict exogeneity assumption. However, under

18
the random effects specification, a further assumption of the orthogonality between
αi and the regressors is implied indicating that E[αi |xit ] = E[αi ] = 0. Due to the
nature of the data, the random effects estimator is preferred rather than the fixed
effect. The selection between these estimators is founded on Hausman’s test, by
which under the null hypothesis the difference between the estimated coefficients
is not systematic, i.e., the fixed effects estimator is consistent but inefficient while
the random effects estimator efficient, Ho : cov(uit , xit ) = 0. The rejection of the
null hypothesis implies that the random effects estimator is inefficient and thus the
fixed effects is more appropriate. The results of the Hausman test fail to reject the
null hypothesis and to this end the model is estimated under the random effects
assumptions (Table A.2, Appendix).

19
Chapter 4

Results and Discussion

4.1 Descriptive statistics of indicators

Table 4.1 represents the summary statistics of GDP per capita, Inflation and
EPU by country. The average GDP per capita in Greece, i.e. the destination
country, between 2008-2020 is 28850 dollars and exceeds the median. This however
showcases that the distribution of GDP per capita is positively asymmetrical.
Instead, the distribution of inflation rate is more uniform since the mean is 0.84
% and the median 0.67 %, even though its standard deviation is high, that is
2.15 %. This is perhaps attributed to its platykurtic distribution which shows
the lack of outliers. Average EPU index in Greece is 406 which depicts that the
country has overall been subject to high political uncertainty between 2008-2020.
Considering tourism origin countries, USA, Netherlands and Sweden demonstrate
higher GDP per capita with respect to other countries. The distribution of GDP
per capita across tourism origin countries is uniform since the medians and the
means are approximately equal. Instead the distribution of inflation rates and
EPU is moderately skewed and particularly positively asymmetrical. To deter
the inclusion of outliers due to asymmetries, the variables were then converted to
logarithmic form.

20
 4.1 Descriptive statistics of indicators

Table 4.1: Descriptive statistics of variables by country

Country Variable Mean SD Median Min Max

Greece GDPPC 28850 3523 27323 24278 37410

INFL 0.84 2.15 0.67 -2.38 5.53
EPU 406 163 373 76 797
Australia GDPPC 46032 1592 46194 43490 48425
INFL 2.16 0.98 1.95 -0.30 5.00
EPU 379 142 337 187 767
Belgium GDPPC 45822 1409 45658 41322 48605
INFL 1.80 1.38 1.84 -1.22 5.59
EPU 340 127 292 234 954
Canada GDPPC 44016 1504 44339 39852 46289
INFL 1.60 0.82 1.60 -0.90 3.40
EPU 232 103 203 87 544
France GDPPC 40779 1340 40593 35164 43264
INFL 1.12 0.90 1.07 -0.42 3.30
EPU 725 213 685 302 1364
Italy GDPPC 37990 1437 38239 32176 41506
INFL 1.21 1.19 0.94 -0.48 3.97
EPU 369 100 355 192 611
Netherlands GDPPC 50742 1675 50235 48672 54093
INFL 1.63 0.84 1.60 0.00 3.20
EPU 106 33 98 61 188
Russia GDPPC 24179 1051 24443 21617 25927
INFL 7.52 4.04 6.60 2.30 16.20
EPU 199 114 172 72 706
Spain GDPPC 35264 1776 34922 29698 38219
INFL 1.22 1.56 1.10 -1.10 4.90
EPU 131 32 128 86 239
Sweden GDPPC 48628 2139 48189 44392 51791
INFL 1.13 1.25 1.00 -1.40 4.30
EPU 101 14 101 74 142
UK GDPPC 41560 1834 41712 34406 44164
INFL 2.08 1.01 2.20 0.30 4.50
EPU 159 58 149 77 360
USA GDPPC 55908 2890 55158 51599 61194
INFL 1.73 1.24 1.80 -1.60 5.30
EPU 156 61 143 76 402

GDPPC: GDP per capita, INFL: Inflation rate, EPU: Economic Policy Uncertainty index
21
 4.2 Distribution of inbound tourist arrivals

4.2 Distribution of inbound tourist arrivals

Figures 4.1 and 4.2 illustrate the timeseries plots of inbound tourist arrivals of
Greece by tourism origin countries between 2008-2020 and the boxplots, respec-
tively. Inbound tourist arrivals by each tourism origin country denote fluctuations
over time. Arrivals from Australia, Canada and USA showcase an upward trend.
With respect to boxplots and the upper quartiles, UK, France and Italy exhibit
higher number of tourist flows to Greece.

Figure 4.1: Inbound tourist arrivals of Greece by tourism origin countries over the
period 2008-2020 quarterly

22
 4.2 Distribution of inbound tourist arrivals

Figure 4.2: Distribution of Inbound tourist arrivals of Greece by tourism origin

countries over the period 2008-2020 quarterly

23
 4.3 Distribution of destination’s country indicators

4.3 Distribution of destination’s country indica-

tors
Figure 4.3 provides the time series plots of EPU, GDP per capita and inflation
rate in Greece. EPU displays persistence between 2008-2020, that is the series
moves upwards and downwards between two or more consecutive quarters. The
variability of EPU is associated with main economic and political incidents both
domestic and international. EPU shows an upward trend during 2008, before the
collapse of Lehman Brothers. Uncertainty is intensified followed by the debt-crisis
and particularly during the first, the second and the third quarters of 2015. By
contrast, EPU declines during 2017 led by a period of stabilization. Conversely
GDP per capita manifests a downward trend until the first quarter of 2012, stabi-
lizes until the first quarter of 2017, while reduces from the third quarter of 2019.
Evidently the decline in GDP per capita in 2019 is attributed to the outbreak
of Covid-2019. The persistence of the pandemic hence leads to a trough in the
second quarter of 2020. Instead, no trends are observed in inflation rate.

24
 4.3 Distribution of destination’s country indicators

Figure 4.3: Indicators of Greece over the period 2008-2020 quarterly

25
 4.4 Distribution of tourism origin countries’ indicators

4.4 Distribution of tourism origin countries’ in-

dicators
Figures 4.4-4.6 depict time series plots of EPU, GDP per capita and inflation
rate in tourism origin countries. EPU exhibits persistence between 2008-2020.
Nevertheless, USA, Sweden and UK are less frequently subject to political tur-
moils due to economic policies. Albeit France, Italy, Australia and Netherlands
are more vulnerable to economic policy uncertainty. Regarding Eurostat’s es-
timations fluctuations in EPU between 2010-2014 are mainly attributed to the
European sovereign debt crisis. In addition, EPU is heavily associated with the
announcement of Britain’s exit from the European Union in June 2016.

Figure 4.4: Economic Policy Uncertainty by tourism tourism origin countries over
the period 2008-2020 quarterly

26
 4.4 Distribution of tourism origin countries’ indicators

Against the persistence in EPU, GDP per capita showcases a deterministic trend
(Figure 4.5). In a first aspect the series drop until the end of 2008, except from
Australia’s series which exhibits an increasing GDP per capita until the first quar-
ter of 2020. The decline in 2008 is clearly imputable to the collapse of Lehman
Brothers. In addition, the series reach a trough in the third quarter of 2019 fol-
lowed by the outbreak of Covid-2019, whilst the downward trend between the first
and the second quarter of 2020 is observed in all countries. The onset of Covid-2019
affected the global economy, but the implications may be uneven across countries.
Precisely, UK, Spain, France and Italy displayed heaviest declines, that is -19.6 %,
-17.8 %, -13.3 % and -12.7 % in GDP per capita relative to the other countries.
By contrast, Russia showcased the lowest decline, i.e. -7.9 %.

Figure 4.5: GDP per capita by tourism origin countries over the period 2008-2020
quarterly

27
 4.4 Distribution of tourism origin countries’ indicators

In addition, inflation rates indicate persistence between 2008-2020, whilst Russia

receives the highest values (Figure 4.6). The decrease in the latest years is mainly
attributed to economic progress against the global financial crisis.

Figure 4.6: Inflation rate by tourism origin countries over the period 2008-2020
quarterly

28
 4.4 Distribution of tourism origin countries’ indicators

Geopolitical risk index of Israel, Saudi Arabia and Turkey is illustrated in Figure
4.7. Overall Israel is frequently subject to geopolitical turmoil compared to Saudi
Arabia and Turkey, but the shocks are heavily persistent in all countries. Gaza-
Israel clashes and the Israeli-Palestinian territorial conflict are major incidents
that have boosted Israel’s geopolitical risk.

Figure 4.7: Geopolitical risk of neighboring countries over the period 2008-2020
quarterly

29
 4.5 Uncertainty and Inbound tourist arrivals results

4.5 Uncertainty and Inbound tourist arrivals re-

sults
The empirical results of inbound tourist arrivals outcomes are presented in Table
4.2. Considering Hausman’s test the Table refers to the results of the random
effects estimator, whilst Table A.1, Appendix, further illustrates the results of the
fixed effects. Against Hausman’s results the empirical findings of the random ef-
fects are similar to the fixed effects estimators. To emend heteroscedasticity issues
robust standard errors are exploited. All the estimated coefficients are statisti-
cally significant at 1 % level of significance, while the robust standard errors are
displayed in parentheses. The overall significance that predicts whether the re-
gression model has a better fit than a model with an intercept and the R-squared
(R2 ) are further provided. Under the null hypothesis of Wald’s test for the random
effects model, the regression coefficients of the explanatory variables are jointly
zero. Founded on the power of the test, i.e. the probability P rob > X82 = 0,
the null hypothesis is rejected. Hence, it is inferred that at least one out of eight
unknown parameters is significantly different from zero. With respect to income
measure, both GDP per capita growth of Greece and tourism origin country co-
efficients are positive and elastic. The elastic coefficients signify that the number
of travellers in Greece is vulnerable to changes in GDP per capita growth. As
the income of tourism origin countries raise, travel expenditures grow, implying
that higher income in a country increases the demand of tourism products and
services. This suggests that an expansion in tourism industry may exhibit when
economic growth is existent. The economic well being of travellers is then vital
in tourism development since it increases tourists’ initiatives for travel planning.
These results are expected and consistent with the empirical studies (Saha & Yap,
2014 ; Ongan & Giray Gozgor, 2017 ; Demir et al., 2019 ; Saint Akadiri et al.,
2020).

The coefficient of the difference in inflation between Greece and the tourism origin
country is positive and can be interpreted with respect to the exchange rates, that
is the value of the foreign currency. More precisely, as inflation of tourism origin

30
 4.5 Uncertainty and Inbound tourist arrivals results

drops its currency becomes stronger relative to the Greek currency. Hence, the
currency strength in the foreign country implies that Greek tourism product is
cheaper, inducing an increase in inbound tourism.

Besides, the empirical results suggest that the number of travellers is negatively
associated with EPU in Greece and tourism origin country. As uncertainty due
to economic policies, that is political instability, increases inbound tourism is ex-
pected to significantly decrease. Political turmoil draws the attention of media
and impedes travel decision to the affected areas. To this end politically unstable
economies are often subject to a fluctuating tourism demand. The negative EPU-
tourism linkage is consistent to the empirical studies which reveal that as EPU
rises then tourist arrivals and travel expenditures are expected to fall (Gozgor &
Ongan, 2016 ; Gozgor & Demir, 2019 ; Isik et al., 2019 ; Nguyen et al., 2020). It is
inferred however that the coefficient of EPU in Greece is more elastic with respect
to the tourism origin country’s which depicts that arrivals are more vulnerable to
political uncertainties in Greece rather than turmoils in foreign countries.

In addition, the findings of geopolitical risk are mixed across neighboring countries.
From the one side the coefficient of geopolitical risk in Turkey is positive, while
the coefficients of risk associated with geopolitics in Saudi Arabia and Israel are
negative. It is then inferred that as geopolitical risk in Turkey rises inbound
tourism in Greece is expected to increase. This is attributed to the fact that
Turkey is Greece’s major tourist rival. Instead, from a historical perspective,
the increasing tensions in Saudi Arabia and Israel may induce war outcomes.
In this context as geopolitical risk in these countries increase the willingness to
travel in Greece lowers. Even though Turkey may be frequently subject to war
outcomes, these mainly occur in Eastern regions which in geographical lens do
not affect Greece. The negative geopolitical risk-tourism link is consistent with
prior empirical studies (Demir et al., 2019 ; Balli et al., 2019 ; Saint Akadiri et
al., 2020 ; Lee et al., 2021). Ultimately it is inferred that inbound tourism in
Greece is negatively associated with political turmoil due to economic policies and
geopolitical risk. Conversely, tourist arrivals increase with GDP per capita growth

31
 4.5 Uncertainty and Inbound tourist arrivals results

and differences in inflation between Greece and tourism origin country.

Table 4.2: Uncertainty and Inbound tourist arrivals of Greece

(1)
Random effects

TA

GDPPCG_GR 16.265***
(2.395)
GDPPCG_ORIG 9.846***
(2.931)
DINFL 0.290***
(0.042)
EPU_GR -1.202***
(0.094)
EPU_ORIG -0.166
(0.164)
GPR_TUR 2.234***
(0.195)
GPR_SAU -1.392***
(0.099)
GPR_ISR -1.451***
(0.266)
Constant 16.184***
(1.348)

R2 0.312
X82 1352
P rob > X82 0.000

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

32
Chapter 5

Conclusion

Terrorist, political and economic incidents, that is declarations, riots, political

turmoils, economic crises and depressions induce socioeconomic and political un-
rest. Consecutively, these episodes may menace travellers’ safety and lower their
willingness to visit the affected destinations. In light of these considerations, this
dissertation explores the effects of economic, political and geopolitical instability
on tourism outcomes. A dataset that incorporates GDP per capita, inflation and
EPU of Greece and eleven tourism origin countries, as well as geopolitical risk of
three neighboring countries, namely Turkey, Saudi Arabia and Israel is employed.
In short, the empirical results suggest that tourist arrivals reduce with economic
uncertainty and geopolitical risk of Israel and Saudi Arabia. Albeit the number of
travellers increases with GDP per capita growth, differences in inflation and geopo-
litical risk of Turkey. The signs of the estimated coefficients are the expected ones;
hence the findings are consistent with several empirical studies. For the research
questions of the study, the following answers are inferred. Research questions 1
“What is the impact of Greek economic instability on its inbound tourism?” and 2
“What is the impact of the tourism origin’s country economic instability on Greek
inbound tourism?”: As the income of Greece, that is the destination country and
tourism origin countries raise, the impact on inbound tourism is positive, imply-
ing that higher income in a country increases the demand of tourism products
and services. Besides, tourism is expected to grow with differences in inflation
between Greece and tourism origin country, signifying that the currency strength
in foreign country induced by rises in inflation, makes Greek tourism product

33
cheaper. In this context, it is inferred that economic instability negatively affects
the tourism industry. Research questions 3 “What is the impact of Greek political
turmoil on its inbound tourism?” and 4 “What is the impact of the tourism ori-
gin’s country political turmoil on Greek inbound tourism?”: Political instability
in Greece and tourism origin countries, captured by the uncertainty due to eco-
nomic policies, significantly deteriorates tourism outcomes. Therefore, politically
unstable economies frequently encounter variations in tourism demand. Neverthe-
less, it is observed that inbound tourism in Greece is more sensitive to political
uncertainties within the country rather than turmoils in foreign countries. Poli-
cymakers should then focus their attention towards the decrease of uncertainty to
strengthen inbound tourism. Indeed, the findings suggest that authorities might
take the necessary measures to stabilize changes in economic policies so that un-
certainties diminish. Research questions 5 “Does geopolitical risk of neighboring
countries deteriorate Greek inbound tourism?”: This answer is open to interpre-
tation depending on the geographic location of tourist rivals. Precisely, Turkey is
Greece’s major tourist rival; hence inbound tourism in Greece is expected to grow
as Turkey’s geopolitical risk rises. This can be interpreted with a risk assessment
based on tourists perceptions. Geopolitical risk mitigates consumers’ willingness
to travel in Turkey since their perceptions towards risks of terrorist and violent
incidents are negatively affected. When countries are subject to high geopolitical
turmoils, travellers’ perceived threat damages the tourism industry. The deterio-
ration of Turkish geopolitics makes Greece to reap the benefit of tourism demand.
Contrary to these findings, the number of travellers is predicted to decline with
geopolitical risk in Israel and Saudi Arabia. The negative association can be ex-
plained by the type of tensions occurring in these countries. Specifically, conflicts
in Saudi Arabia and Israel are heavily associated with war outcomes which in turn
make tourists unwilling to visit Greece as a neighboring country. Consequently,
policy uncertainties and geopolitical risks may harm Greek inbound tourism.

Two major limitations of this dissertation consist of the number of origin coun-
tries and the number of Greece’s major tourist rivals. Even though the monthly
Travel Receipts Survey from the Bank of Greece included the number of inbound

34
travellers from 19 tourism origin countries, the sample considered 11 out of 19
countries. This is attributed to the lack of data about Economic Policy Uncer-
tainty Index for the exclusive countries. To avoid the formation of missing values
in EPU index, 8 tourism origin countries were finally excluded. Moreover, the
second limitation is pertinent to the number of neighboring countries which are
assumed to be rivals in Greek tourism product. For instance, geopolitical risk
of Cyprus and Egypt should have also been considered for the effects on Greek
tourism demand. Instead, the lack of data about Geopolitical Risk Indices pre-
vented the analysis. Ultimately, for future research the effects of geopolitics of
further rival countries should be investigated. Most studies unequivocally suggest
that in the absence of stability, either political, geopolitical or economic, tourism
industry may arguably be disrupted.

Besides, it might be useful to examine whether the effects of political, economic and
geopolitical instability are resilient against income levels or levels of political tur-
moil, so that any conceptual heterogeneities are detected. In this framework if the
results vary across income or other specific characteristics, then policy implications
should be different between countries or even within countries across regions. The
empirical findings are important for policy makers and highlight the significance
of governments intervention in tourism development. Policy implications can be
formulated to moderate high political turmoils due to economic policies, as well
as to establish economic growth strategies. Government effectiveness, in terms
of economic policies, is crucial for the destination countries to attract tourists
and gain the economic benefits of tourism. Politically and economically unrest
economies damage their image as destination countries and discourage tourism
activity. Therefore, governments should make efforts to exhibit economic growth
and reduce economic and political uncertainties. In addition, the negative impact
of geopolitical risk suggests that governments should encourage tourists to visit
their country in times of terrorist and violent incidents in neighboring countries.
Precisely, governments might increase tourists’ perceptions of safety and lower risk
against these tensions, ensuring that these incidents will not affect the country’s
welfare.

35
Appendix A

Table A.1: Uncertainty and Inbound tourist arrivals of Greece (Fixed effects
model)

(1)
Fixed effects

TA

GDPPCG_GR 16.185***
(2.411)
GDPPCG_ORIG 9.711***
(2.933)
DINFL 0.290***
(0.043)
EPU_GR -1.191***
(0.094)
EPU_ORIG -0.201
(0.171)
GPR_TUR 2.240***
(0.194)
GPR_SAU -1.394***
(0.099)
GPR_ISR -1.465***
(0.258)
Constant 16.372***
(1.226)

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

36
Table A.2: Hausman’s specification test

Statistic Value

X82 2.78
P rob > X82 0.948

37
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