WPS4834 P olicy R eseaRch W oRking P aPeR 4834 Foreign Informational Lobbying Can Enhance Tourism Evidence from the Caribbean Kishore Gawande William Maloney Gabriel V. Montes Rojas The World Bank Latin America and the Caribbean Region Office of the Chief Economist February 2009 Policy ReseaRch WoRking PaPeR 4834 Abstract There exist legal channels for informational lobbying a vehicle for development. Panel data are used to explore of U.S. policymakers by foreign principals. Foreign and quantify the association between foreign lobbying governments and private sector principals frequently by Caribbean principals and U.S. tourist arrivals to and intensively use this institutional channel to lobby on Caribbean destinations. A variety of sensitivity analyses trade and tourism issues. This paper empirically studies support the finding of a strong association. The policy whether such lobbying effectively achieves its goal of implications are obvious and potentially important for trade promotion in the context of Caribbean tourism, developing countries. and suggests the potential for using foreign lobbying as This paper--a product of the Office of the Chief Economist, Latin America and Caribbean Region--is part of a larger effort in the department to understand the determinants and impacts of trade flows. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at wmaloney@worldbank.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team FOREIGN INFORMATIONAL LOBBYING CAN ENHANCE TOURISM: EVIDENCE FROM THE CARIBBEAN KISHORE GAWANDE 1 TEXAS A&M UNIVERSITY WILLIAM MALONEY WORLD BANK GABRIEL V. MONTES ROJAS UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Keywords: Foreign Lobbying; Tourism; Panel data. JEL Code: F13, O54, C2, C3. 1 Corresponding author. Professor, Helen and Roy Ryu Chair in International Affairs, Bush School of Government and Adjunct Professor Department of Economics, Texas A&M University. Phone: (979) 458-8034. Email: kgawande@tamu.edu. This work is partially funded by the Regional Studies Program of the Latin American Region of the World Bank. We thank Alfonso Guida and Carlos Felipe Jaramillo for insightful discussions. The views expressed are our own, as is responsibility for any errors. Comments by the editor Gordon Hanson and two anonymous referees improved the paper considerably. Responsibility for any remaining errors is ours. 2 1. Introduction The Foreign Agent Registration Act of 1938 (FARA) provides a legal channel for foreign governments and businesses to lobby the US government and to influence the US public opinion. The main restriction is that such foreign "principals" must hire an "agent" based in the US. These agents may contact US government representatives on behalf of the foreign agent or engage in a public relations capacity for a foreign principal. Through this FARA channel, lobbying by foreign governments and foreign businesses has become a large and thriving industry. The total amount expended by US based agents on behalf of their foreign principals, reported by FARA agents to be nearly $US 600 million in 1999, is of the order of magnitude of total spending by all domestic political action committees (PACs). These lobbying activities are not exclusively the domain of rich countries. Since expanding trade with the US is among the chief motives for foreign lobbying, a variety of rich and poor countries participate in lobbying activities through FARA channels. For example, in 1999 more than 1000 principals from 160 countries sought to engage the attention of US policymakers (Department of Justice, FARA site, 2003). How do FARA agents lobby on the principals' behalf? In this paper, we argue that a significant part of the expenditures made by FARA agents on behalf of their clients are on informational activities targeted at policymakers. Such activities may be conducted through the media, but also by disseminating informational materials to legislators, government agencies, public officials, as well as civic and educational groups. 2 We draw on the theoretical literature on informational lobbying to frame our empirical work. Our focus is on the lobbying activities of a group of Caribbean countries that seek to promote tourism by US residents. Tourism constitutes a large part of their export earnings (Figure 1), and as traditional agro export industries have declined, tourism is increasingly looked to as a source of long run growth. However, there is concern that a high price elasticity for the relatively homogeneous package of "sea, sand, and sun" may be driving the perceived volatility of revenues and the observed erosion of the region's share of the global market. By lobbying, just as in advertising, tourism destinations may benefit from product differentiation and make 2 The sixteen-question registration form CRM-153 (formerly OBD-63) that FARA agents are required to fill out every 6 months inquires into the details of informational lobbying activities. 3 tourism less price sensitive. Engaged heavily in such activity are Caribbean governments and lobbies in those countries connected with the tourism industry. Jobst's (2002) data summaries of foreign lobbying (Jobst, 2002, Table 4) indicate that Latin American and Caribbean countries accounted for over 25 percent of total foreign lobbying in the US over the 1990-2000 decade. Our own FARA entries data indicates that the 13 Caribbean destinations used in our sample represent 6 percent of total foreign lobbying in the same period, of which, almost 60 percent was spent on tourism promotion. The paper empirically investigates whether these efforts are effective. More specifically, are foreign lobbies successful in achieving their aim of increasing tourism? What is the quantitative impact of lobbying on tourism? Does foreign lobbying confer market power by making the demand for tourism less price-inelastic? If the results show lobbying to be effective, they have a practical and straightforward policy implication for foreign countries. Countries endowed with natural amenities can, through legal lobbying channels, increase tourism by earning endorsements from the client country's government. In the economics literature, the only other empirical studies of foreign lobbying of which we are aware are Gawande, Krishna, and Robbins (2006), which studies the impact of foreign lobbying on US protectionism, and Kee, Olarreaga and Silva (2007) that studies whether South American lobbies succeeded in lowering US tariff preferences against those countries. Both studies indicate that foreign lobbying benefits countries that engage in it. An important difference is that in those studies, foreign lobbying is presumed to take the form of quid pro quo payment for services; thus, foreign lobbying "buys" reduction in a partner's protectionism. 3 This paper, on the other hand, views foreign lobbying as informational lobbying designed to shift a rationally ignorant policymaker's position on an issue. These assumptions are consistent with the facts. The rollback of US protection confers large rents to foreign exporters, and those exporters (via the help of FARA agents) initiate the lobbying efforts. Since domestic producers indulge in quid pro quo lobbying of legislators via PACs contributions, these foreign exporters must also compete in the political market. Foreign lobbying in tourism, on the other hand, involves agencies of foreign governments like tourism boards and there is little or no competition 3 FARA rules prohibit campaign or other monetary contributions to US politicians by foreigners, either directly or via FARA agents. However, this rule is easily circumvented by agents, whose payments, while explicitly recorded under their own names, are made implicitly on behalf of their principals. 4 from domestic firms in this political market. Thus, lobbyists do not need to play zero- or negative-sum rent-shifting games, as is the case of protectionism. Rather, foreign lobbying takes the form of conveying information. The link between tourism and development is relevant and empirically well-documented. That tourism promotes economic growth is confirmed in Dritsakis (2004) for Greece, Balaguer and Cantavella-Jordá (2002) for Spain, Oh (2005) for Korea, Durbarry (2004) for Mauritius, and Tosun (1999) and Guduz and Hatemi (2005) for Turkey. Cross-country studies by Sequeira and Campos (2006) and Brau, Lanza and Pigliaru (2003) demonstrate that tourism-specialized countries grow more than others. Sinclair's (1998) survey indicates that the main channel by which tourism helps growth is from the provision of foreign currency which can finance imports of capital goods. Further, since tourists consume goods with high domestic content, their arrival benefits domestic manufacturing and service sectors. Tourism boosts government revenues generated by taxes on incomes from tourism employment and tourism businesses, and by direct levies such as departure taxes. In sum, promoting tourism appears to be good for growth and development. We find that to be compelling motivation for our study. The paper proceeds as follows. Section 2 provides important background information about foreign lobbying institutions in the US. In Section 3 we view foreign lobbying in tourism as a mechanism for resolving informational asymmetries. We supply primary survey evidence in support of this idea. Section 4 describes the data and panel econometric models we use to study the impact of informational lobbying on tourism. Section 5 discusses the empirical results. Section 6 concludes. 2. Foreign Tourism Lobbying in the US The data set used in the estimation of our empirical model was assembled using reports that FARA requires the US Attorney General to make available to Congress. The report collects information about foreign agents operating within the United States. A foreign agent, in the view of the US Department of Justice, is somebody who (a) engages in political activities or acts in a public relations capacity for a foreign principal, (b) solicits or dispenses anything of value within the United States for a foreign principal, or (c) who represents the interests of a foreign principal before any agency or official of the US government. Each entry in the FARA annual reports contains (i) the name and address of the foreign agent, (ii) the name of the foreign 5 principal (usually a private firm, an industry association, or a government agency), (iii) the purpose of the agency, including any US government entities contacted, and (iv) amount of money paid to the agencies for their services. 4 The results presented in this paper use data taken from the reports that covered calendar years 1990-1999. Foreign lobbying encompasses a wide range of activities, including lobbying those connected with the US government, lobbying the media, and incurring expenditures on promoting trade through advertising (Husted, 1991). Our data do not include expenditures spent directly by the foreign principal on media or advertising but on their agents who, in turn, lobby policymakers. Many Caribbean principals are in fact government agencies, primarily tourism boards, entrusted with ensuring a steady flow of tourists every season. Jobst (2002, Table 7) indicates that 85 percent of all FARA expenditures by Latin American and Caribbean lobbies during the 1990s was spent on export promotion, which includes tourism promotion While FARA reports provide information about the money paid by foreign countries and the industry they represent, they do not provide information about how that money is used to achieve its objectives. In their studies, Krishna, Gawande and Robbins (2006) and Kee, Olarreaga and Silva (2007) assume that lobbying spending is a quid pro quo payment for changes in commercial policy either by lowering tariffs or resisting protectionist increases in tariffs. Since those studies are concerned with imports, and objective measures of policy (tariffs, nontariff barriers) may be targeted by lobbies, lobbying as payments-for-services is a reasonable assumption. Unlike trade in goods or services that are consumed in the home country (or "Mode 1" cross border trade) and may be regulated at the home country border, tourism involves consumption of foreign-produced goods and services within the foreign country's borders (or "Mode 2" consumption abroad). Further, there are few, if any, domestic lobbies that demand regulation of tourism, unlike the ubiquitous import-competing lobbies that demand protection from imports and subsidies for exports. Thus, government's motive behind regulating Mode 2 trade in services is distinct from government's motive behind regulating Mode 1 trade in goods. The latter motive has its source in satisfying import-competing lobbies, and is best understood as a protection-for-sale interaction between lobbies and the domestic government. Foreign lobbies that play this game must also make similar quid-pro-quo payments. The former motive has its 4 Of the 1500 individual FARA entries in 1990, about 1000 reported a dollar amount of transactions. We presume that the unreported amounts are either negligible or are randomly missing. 6 source in government's concern for the health and safety of its citizens. Regulating tourism (from the US, say) consists of disseminating information to the (American) public about incidents concerning health and safety at every possible destination. In the extreme, tourism is banned to a country with considerable risk of injury or fatality, or where the (US) government has no diplomatic presence and is unable to help its citizens (e.g. Cuba). The US government encourages Americans traveling abroad to register online on the State department website in order to make the US consulate in the country of their destination aware of their visit. In the process of doing so, they are made aware of a number of issues concerning that destination. This has become common practice for Americans going abroad. This suggests an important channel for lobbying to influence US tourism, namely influencing US government policies that may affect tourism along several dimensions. Tourists check the State Department's elaborate website for travel information (http://travel.state.gov/) on these and other issues before deciding upon their vacation destination and lobbying may be directed at providing information to counter or soften any negative information that the State department may otherwise place on their website, or provide positive information on how the host government has undertaken activities to ensure the safety of tourists. 5 More generally, it may provide information on improvements in security of the destination, disease prevention, or natural calamity management (availability of weather-proof hotels, evacuation plans, etc.). Other government policies can delay or accelerate tourism flows by expanding or canceling permits for commercial flights or affecting visa or passport requirements. Recently, the Federal Aviation Authority raised the safety rating of Venezuelan carriers, thereby ending a decade old dispute that had inhibited tourism to the host country. Interviews with lobbyists also suggest more stringent passport requirements to travel to Mexico, Canada and selected Caribbean islands in the wake of 9/11 were successfully lobbied against by several affected governments. The interviews also highlighted the recent efforts of the government of Kazakhstan to counteract the negative image of the country portrayed by the character Borat in the popular movie "Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan (2006)." 5 For example, Haiti is on the State Department Travel Alert Watch for kidnapping, violence and political instability. http://travel.state.gov/travel/cis_pa_tw/tw/tw_917.html 7 Why should lobbying target policymakers and how can such lobbying provide the incentives for policymakers to take action, when it is not a quid pro quo payment for "services"? In the next section, we offer a modified version of the Austen-Smith and Wright (1992, 1994) model of informational lobbying, as a plausible model of lobbying for trade policy that should be explored as an alternative to, or a complement to, the more popularly used models of quid- pro-quo lobbying in the literature. 3. Informational Lobbying In the case of tourism the information required to match buyers and sellers is more severe than for trade in goods since consumers personally care about the nature of the place and the people that produced the good. 6 Informational lobbying by the destination country offers a mechanism to overcome the costs of matching. The information provision that accompanies such lobbying is beneficial to the rationally ignorant home country policymaker whose objective is to encourage tourism abroad if there are no hazards associated with it. As such, it fits the mold of a classic information provision game in which the objective of the foreign lobbyist is to bring the position of the home country government closer to that of the foreign principal (usually the tourism promoting arm of the foreign government). 3.1 Theory The model of Austen-Smith and Wright (1992, 1994) aptly stylizes the informational lobbying that occurs in tourism, and we summarize the intuition behind its results. 7 The main premise of the model is that interest groups have private information about the consequences of a legislative decision. Suppose the interest groups are government agencies in Caribbean countries charged with maintaining and increasing tourism. The "policy" they care about is the possibility that the US government will provide negative information to potential American tourists about the islands with respect to weather (the ability of hotels and buildings to withstand hurricanes, infrastructure planning for safety in the event of hurricanes), adverse incidents (outbreaks of 6 Rauch and Trindade (2002, 2003) model ethnic networks, as institutions designed to overcome information frictions in trade in goods. 7 The model of Potters and van Winden (1992) also leads to similar results in the case of dichotomous outcomes that we consider here. 8 disease, issues of safety and security), and political state of the islands (whether change in governments can give rise to security concerns). The private information that they have is the actual state of their facilities vis-à-vis weather, safety and security, that is, whether their buildings are hurricane-proof and up to what level, whether evacuation planning and strategies are up to the mark, what regulations are in place to hold down disease and other security concerns, and how stable the political situation is. The US policymakers (legislators, the office of the executive that directs the State Department to provide information for tourists on their website) are relatively uninformed. Lobbying by the Caribbean interest group takes the form of (hiring a US agent according to FARA rules for) making a speech and providing information to the policymaker. Austen-Smith and Wright predict that interest groups choose to lobby legislators who are "friends" or whose prior position on issues is closer to that of the lobbyists. In our case, this implies that foreign principals use FARA agents to push US policymakers' priors closer to their own. We adapt the game with one foreign tourism-promoting lobby and one policymaker. There are two possible states of infrastructure and hotel construction and evacuation plans (in the event of an adverse weather or other incident), either R (run-down state) or G (good state) There are two possible policy actions. Policymakers may choose to place unflattering information (R, denoting "Red") about the state of the island or positive information (G, denoting "Green") The policymaker prefers R (discouraging tourists) in state R (run-down), and G (encouraging tourists) in state G (good). If the policymaker chooses policy G then it yields utility UL(G)=$1 in state G and UL(G)=-$1 in state R; if the policymaker chooses policy R then it yields utility UL(R)=$0 in both states. Suppose the prior probability assigned to the good state G is p<1/2 (by the policymaker and lobby). In the absence of any information from the lobby, policy R is chosen, as the expected utility of policy R(=0) is higher than policy G (=2p-1<0). The foreign tourism-promoting lobby obviously prefers policy G (green) to R (red): Its utilities in the two states are, respectively, UF(G)=$1, and UF(R)=-$1 regardless of whether the state is G or R. The lobby must incur a cost of $c for two things: (i) to learn the true state of infrastructure ­ which are both privately owned (hotels, tourist parks) and publicly owned (roads, transport, safety plans in the even of adverse incidents), and (ii) to hire a FARA agent in order to 9 communicate the message. Once the foreign lobby knows the true state, it instructs its FARA agent to convey the message "G" or "R" to the policymaker. After being given the lobby's message, the policymaker may try to verify the information by auditing the information at a cost of $k. The audit reveals the true state (run-down or good) with probability p=1. If the audit proves the lobby's message to be false, the policymaker penalizes the lobby $. Austen-Smith and Wright use the equilibrium concept of perfect Bayesian equilibrium and show that: 8 1. The lobby will never adopt the strategy of sending the message "G" regardless of the true state, because the policymaker, recognizing that there is no information in the signal, will choose to remain uninformed and choose policy R. 2. The lobby will not tell the truth all of the time, because a policymaker in a "believing" state offers the incentive to occasionally deviate from truth-telling and thereby earn a higher payoff. 3. Hence, the lobby will follow a strategy of always telling the truth if the state is G, and some of the time when it finds that the state is R with two implications. First, this induces the policymaker to update his probability of state G to be greater than p, since the lobby is willing to find the true state and tell the truth (at least some of time) when the true state is R. Second, the policymaker chooses a probability of auditing that will elicit as much truth-telling as possible when the state is R (the lower the penalty , the higher the probability it will do an audit). 4. The lobby will choose to send a message (i.e. lobby) only if it becomes informed of the true state (see 1. and 3. above), that is, it will lobby only if it is willing to expend $c to learn the true state (and hire the FARA agent). It will lobby only if p>c/2. We can assess and understand several real-world scenarios on the basis of the predictions from this model. First, the act of lobbying is by itself a signal by the foreign principal that it is beneficial to the principal to attempt to update the probability of the policymaker. The reason is 8 In games with incomplete information, the perfect Bayesian equilibrium (PBE) solution concept succeeds where the proven concept of subgame perfect Nash equilibrium ­ used widely to solve games of perfect or symmetric information ­ fails, usually because in games of incomplete information there may be no proper subgames. In games with incomplete information each information set is considered to be a set containing multiple histories (that is, various possible sequences of actions could have been taken in order to reach that point in the game). PBE requires each player to form beliefs (using Bayes rule) about the history of the game at each information set, and then select the best response. 10 that if the principal expends the effort (incurs $c) to upgrade his belief p about the good state, it means that either the cost of determining the true state is not onerous or the policymaker's prior probability p is very low. In either case, it pays the foreign principal to expend $c and send a message, that is, to lobby. Thus, the absence of foreign lobbying by a host country is also informative per se and suggests three possible country situations: (i) the principal is an arm of the foreign government and has the power to enforce safety regulations in order to change the state to G, but determines that incurring $c is too costly (see e.g. fn. 9 about Haiti); (ii) the principal is a private entity and it is beyond its means to determine the true state (therefore only few private entities lobby in the data); (iii) the principal may be the government or a private entity, and finds that the probability that the true state is R (run-down) is too high. In all three cases, p