Tax havens are often connected to growth in tourism, as finance and tourism conveniently share infrastructural prerequisites. This paper addresses the detrimental impacts of a tax haven development strategy adopted by small open economies in relation to the development of their tourism industry. Utilizing the synthetic control method, we find that since the 2016 Panama Papers scandal, Panama’s tourism exports have fallen relative to an estimated counterfactual level that would have otherwise been attained. Moreover, based on an analysis of panel data drawn from 20 small open economies, we find that in the long run, the growth of the financial industry crowds out the tourism industry. Our findings warn tourism practitioners, based in tax havens, that they face an additional risk linked to potential tax scandals. Furthermore, the tourism industry may suffer reputational harm due to tax haven blacklisting and the crowding out of productive resources by the financial industry.
Bibliographical noteCopyright © The Author(s) 2023. This article is made available under a Creative Commons Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/.
Funding: The authors thank the Leverhulme Trust for funding the research presented in this article (under Grant Number: RPG-2017-419).
- Tourism development
- Tax havens
- The Panama Papers
- Crowding out
- Synthetic control method