The asymmetric Effects of Political Risk, Exchange Rate and Inflation Rate on the Development of Tourism Industry in Iran

The tourism industry is one of the main factors of economic growth and improvement of social welfare in many developed and developing countries, stimulation of foreign investment, foreign exchange income, development of infrastructure, creation of job opportunities, and social interaction among tourists. Tourism promotes globalization and international cooperation between countries and increases awareness of environmental protection. The performance of tourism depends on the level of development of the industry. Countries with developed tourism, experience a much  greater economic growth compared to the countries with less developed tourism industry. Several factors affect the development of tourism industry. For example, tourism needs an advanced transportation network and other facilities to facilitate the movement of tourists from their own countries to the host countries and also within the host country. Therefore, the physical infrastructure is considered an important determining factor in the arrival of tourists. The current research examines the factors influencing the development of the tourism industry from other perspectives. The existing literature shows that tourism is vulnerable and prone to political risks related to poor  governance strategies, crime, conflicts, political instability, corruption, and terrorism. High levels of political risk make countries inaccessible to international tourists, making visiting those countries seem highly risky and expensive at the same time. In addition to the mentioned items, other factors such as inflation rate, exchange rate fluctuations and real exchange rate affect the tourism industry. In case of currency devaluation in the host country, the visiting rate will increase  as tourism products and services in the country become relatively cheap for tourists from countries with strong currencies. Another parameter in this regard is inflation category where there is a close correlation between the purchasing power of consumers, and rampant inflation rate. When the purchasing power of tourists decreases, they lose interest to travel to such destinations where life and travel expenditures are rather expensive and hardly affordable. However, when inflation decreases, more tourists visit the host country, where the cost of living and transportation is far cheaper.The research findings have shown that tourism has played a vital role in many low-income countries like Iran. Over the  recent years, the country has experienced severe fluctuations in the exchange rate and inflation rate. The accurate validation of exchange rate policies, inflation rate, and political risk is not only useful in the academic field but also for policymakers in practice to support the activity. The current research is innovative in terms of the subject and the econometric methods used. The research hypotheses are as follows: 1- There is a negative and significant relationship between political risk and tourism development. 2- There is a positive and significant relationship between the exchange rate and tourism development. 3- There is a negative and significant relationship between the inflation rate and tourism development.

This research analyzes the effects of political risk, exchange rate, and inflation rate on the development of tourism in the case of Iran in the period of 2000-2021 and uses the non-linear econometric approach (NARDL) to estimate the short-term and long-term coefficients. To perform statistical and econometric analysis, Eviews 13 software was used. The QARDL method is also used to check the robustness of the results.

Short-term and long-term evaluations of NARDL model shows that the effect of a positive exchange rate shock on tourism development is positive and significant both in the short and long term, while the effect of a negative exchange rate shock on tourism development in both the short and long term is negative and significant. In the case of political risk and inflation rate, the results are the opposite of the exchange rate, so the impact of the positive shock of political risk and inflation rate on the development of tourism is negative and significant both in the short and long term, while the effect of the negative shock of political risk and inflation rate on it is positive and significant. The results of long-term and short-term estimates are consistent and differ only in the size of influence in terms of coefficients, and they confirm the hypothesis of the present study. The biggest impact in the short term, with a reduction factor of 0.611, is related to the inflation rate. In the long term, the greatest impact with a reduction factor of 0.790 units is related to the positive shock of political risk.

The tourism economics literature has conclusively proved that tourism entering a country leads to economic development in the destination country. According to the reports of the World Tourism Organization (2018), tourism is the third largest industry in terms of global export earnings. Based on the results of this research, the following recommendations are suggested: Institutional reforms can help strengthen the economy of countries with low-quality institutions, and policymakers should consider the conditions of the tourism industry when setting country stabilization strategies. The increase in the inflation rate in recent years destroys the advantage of being cheap to travel to Iran due to the increase in the exchange rate, so policymakers should consider controlling the inflation rate.