Tourism and Economic Development: Evidence from Mexico's Coastline

Tourism is one of the most visible and fastest growing facets of globalization in developing countries. Despite widespread policy interest, however, we currently have limited empirical evidence on the economic consequences of this channel of market integration. This paper combines a rich collection of Mexican microdata with a quantitative spatial equilibrium model of trade in goods and tourism services and a new empirical strategy to estimate the long-run economic consequences of tourism. We estimate a number of reduced form effects of tourism on local economic outcomes in today's cross-section of Mexican municipalities. We develop an instrumental variable strategy that exploits geological and oceanographic variation in beach quality along the Mexican coastline. To assess tourism's welfare implications, we use a spatial equilibrium model, and use the reduced form moments to inform its calibration for counterfactual analysis. We find that tourism causes large and significant increases in long run local economic activity. These effects are driven by sizable positive spillovers on traded goods production. In the aggregate, however, we find that these spillovers are largely offset by reductions in agglomeration economies among non-touristic regions, so that the national gains from tourism are mainly driven by a classical market integration effect.