Avoiding the Dutch Disease in tourism-led economies: reconciling tourism development and sectoral diversification

Abstract Although tourism has produced long-term growth and progress, the economic consequences of this economic specialisation, which is summarised by the paradoxical effect known as the Dutch Disease, alongside the worst financial performance in tourism-led economies as a result of the COVID-19 pandemic, indicate the need for diversification in such economies. Previous research has overwhelmingly shown that tourism development results in decreases in traditional exports, overdevelopment of services and marginalises the weight of industry in the economy. Using a theoretical dynamic general equilibrium model, this article demonstrates that the Dutch Disease can be avoided in tourism-led economies, precisely owing to tourism specialisation, and non-tourism development is possible. More importantly, non-tourism development can be achieved by simultaneously enhancing the quality of tourism-based activities to increase international competitiveness.