5 INT RODUCTION Tourism is a phenomenon that has grown constantly since the 50s. Economic crisis or other global forces have negatively affected it just for small amounts of time but, in general, trends have always been positive. There is no discussion that ther e are more important and urgent issues and sectors to be managed by the state; nevertheless, tourism is a more and more important generator of wealth, thus income, employment, development and externalities, both positive and negative. This has caused an in teresting change in countries’ policy definition in which, tourism policy, has gained more and more relevance. Moreover, tourism is still important for the economy of the most developed countries. In OECD countries, international tourism has grown faster t han GDP in the last ten years and it generates between 2% and 12% of GNP and between 3% and 11% of employment (OECD 2010; Keller 2008). If on one side developed countries face an increase of competition from developing countries, on the other side the bett er economic conditions of the latter create the opportunity to attract new markets. This argument should have definitely given an answer to the long debated question “should there be a tourism policy?” As affirmed by W. Revill Kerr, “there is a widespread failure to consider the fact that a tourism policy may be subordinate to wider economic developments policies, or entirely unnecessary” (W. Revill Kerr, 2003). The objective of this research is to create a framework with which to analyze national tourism policies. This framework has been created after a theoretical analysis of all the implications of state involvement in the tourism sector and the analysis of the problems and methods used for the evaluation of public policies.
Finally , the framework has be en tested applying it to the Italian case. The first chapter studies the reasons for state intervention in tourism and how it should intervene. The second chapter gives a look on the nature of tourism policy,
6 defining the implications derived from its hor izontal character. The third chapter analyses what are the scopes of tourism policy and explains the levels of intervention (micro and macro) of the state and its functions. The forth chapter introduces the concept of governance, the principles of good gov ernance and the institutional structure theory. The fifth chapter explains benefits and costs of the decentralization and the principle of subsidiarity. Chapter six defines the aspects of monitoring and evaluation, discussing the difficulties in evaluating a tourism policy and some possible solutions. Chapter seven deals with the creation of the analytical framework, explaining each part in detail. In chapter eight the model is used to analyze the Italian tourism policy, trying on one side to evaluate it an d on the other side to test the model in order to discover weaknesses and parts to be improved.
7 1. DEFINITION OF PUBLIC POLICY Public policy can be defined as “a set of interrelated decisions taken by a political actor or group of actors concerning the se lection of goals and the means of achieving them within a specified situation where those decisions should, in principle, be within the power of those actors to achieve” (William Jenkins in Policy Analysis: a Political and Organizational Perspective, 1978) . This definition can be considered extremely comprehensive of the concept of publ ic policy because it underlines not only its complexity (made up of many interrelated decisions and actors), but also the relevance of effective governance. Public policy, i n practice, should be developed with the so ‐ called Policy Cycle , five defined phases or steps through which policy starts and ends . The phases are: 1) agenda setting 2) policy formulation 3) adoption 4) implementation 5) evaluation. Each phase of the poli cy cycle corresponds to a phase of the so called application of problem solving. The definition of public policy, in democratic states, is a prerogative of the parliament and, in general, of the State, recognized through the elections by the people of a n ation. Thus it is clear how the organization of a State defines what are the functions and limits of every body or actor. As a matter of fact, a federal state works differently from unitary states. However, it is reductive to consider policy as a product m ade just by the State or public sector. Private sector has, in fact, profound influence on policy definition. Due to the complexity of the network of actors involved directly in policy making, the public policy theory speaks about “policy subsystems” to de fine the actors themselves. The variety of instruments that policy makers can use to implement a certain policy goes from coercive instruments , such as state control and regulations, to voluntary instruments such as the market, family and community, passin g through mix ed instruments such as taxes, subsidies etc. (Howlett, Ramesh 1995).
8 A certain public policy, evolving through the different phases of the policy cycle, is always influenced by many forces. These can be macro economic reasons, interactions bet ween institutions and economy, ideologies and also stakeholders, which means all the actors involved and conditioned by that pol icy. These characteristics make inevitably the fifth phase of policy cycle, evaluation, an extremely challenging task. Public po licy theory presents many possible points of view and argumentations upon this topic, however , the practical side or, in other words, the real implem entation of a policy evaluation (useful to underline w eak points and possible changes) remains still very v ague. This point becomes much more relevant when the p ublic policy to be analyzed is t ourism public policy. According to Edgell (1990) “the highest purpose of tourism policy is to integrate the economic; political; cultural; intellectual; and environmental benefits of tourism cohesively with people; destinations; and, countries in order to improve the global quality of life and provide a foundation for peace and prosperity: in essence, a statement of governments’ vision, goals and objectives.” If we consid er tourism policy from this point of view, it is clear how complicated and challenging can be a comprehensive evaluation of it. Moreover there is a common perception and agreement among scientists that “tourism research is not as highly valued as that of o ther disciplines” (Revil Kerr, 2003). These characteristics can be considered the main reason for such a diversity and lack of order in approaching tourism policy and its analysis and evaluation. Bibliography Edgell , D.L. , (1990 ) International Tourism Policy , Van Nostrand Reinhold , New York. Jenkins, W. (1978) Policy Analysis: a Political and Organizational Perspective , Martin Robertson, London. Kerr, R.W. (2003), From Tourism Public Policy, and a Strategic Management of Failure , Elsevier. Ramesh, H. (19 95 ) Studying public policy: Policy cycles and policy subsystems ,Oxford, (Italian edition).
9 2. THE RATIONAL FOR STATE INTERVENTION IN
TOURISM: WELFARE ECONOMICS 2.1. Welfare economics and public choice The welfare of a nation does not depend only on the r esources it has but also on the way it uses these resources. Welfare economics concerns the efficient allocation of resources and the distribution of income, that is to say it deals with the economic well being of a nation (Arrow 1951). Welfare economics i s based on two theorems. The first one argues that if the economy is competitive it is Pareto efficient and the second states that a Pareto efficient distribution of resources can be reached through a redistribution of wealth followed by a competitive proc ess. Concerning the first theorem, an economy is competitive when it is exchange efficient, production efficient and product mix efficient (Stiglitz 2000). However, in reality there are several restrictions on instruments that prevent policies to be Pareto efficient, this is why for governments benchmark is appropriate to take into consideration second best Pareto efficiency. Neoclassical and Keynesian economists believe that governments can correct market failures by intervening in the economy. The theory of welfare economics, however, cannot explain exhaustively the
government intervention. In fact, even if the correction of market failures should be the aim of political interventions, the public choice theory can explain why often the “economic” optimal choice is not undertaken. This is due to t he fact that programmes reflect the interests of politicians, namely to increase citizens’ consensus, rather then reflecting the interests of the “common good”. Therefore, policies reflect the preferences of voters , politicians and political institutions rather than reflecting optimal solutions for the efficient allocation and redistribution of resources. This is why the “ Public Choice School ” suggests that a market failure is not necessarily the justification for s tate intervention due to the costs of government failure. In conclusion, the planning and implementation of a policy is a
political decision and it is only in part defined by an economic reasoning. In fact,
10 other variables influence its definition, namely the institutional arrangements, the influence of interest groups, the allocation of power, the values and the ideology (Hall & Jenkins 1995; Hall 2008). Therefore, an additional role of government is to reduce non ‐ market failures produced by its very inter vention. The reasons for its failure are (Smeral 1998): the presence of public monopolies (such as transportation), many interest groups that affect the decision ‐ making, principle agent problems and lack of performance ‐ based processes in public organizatio ns. In order to reduce the negative effects of necessary government intervention, it should speed up its bureaucratic systems,
deregulate (even if regulation has to be effective in case of state monopolies) liberalize where it is possible, decrease the tax burden and relay on performance ‐ based public organizations. A different point of view is expressed by some heterodox schools of economics, which excludes the existence of “market failures” and believes the market is able to eliminate inefficiencies withou t government intervention. This is particularly thecase for the Austrian School which stands for what is called "Ordnungspolitik". This school, represented by August von Hayek, suggests a strictly limited role of government in the economy with an amount o f intervention s as small as possible, namely in the enforcement of law and in the creation of a “safety net” for the most needy people (von Hayek). 2.1.1. Market failures and distribution States intervene in the economy with two main objectives: allocatio n objective and redistribution objective. The first one concerns the fact that the market is not always efficient in economic terms, therefore the state can intervene in order to correct these market failures (or market inadequacies) to better reallocate r esources. The causes of market failure are (Stiglitz 2000): ‐ Imperfect competition: when competition is not perfect, the market is not Pareto efficient; the presence of monopoly, oligopoly or monopolistic competition is a sign of market failure.
11 ‐ Public good s: these are those goods that the private sector either underproduces or it does not produce at all due to their intrinsic nature of non ‐ rivalry and non ‐ excludability. Put another way, the enjoyment of an extra unit of a public good bears near zero margina l costs and it is impossible or very difficult to exclude other people from using it. ‐ Externalities: there are externalities when costs and benefits caused to third parties are not compensated. ‐ Incomplete markets: it happens when the market does not prov ide a good or a service in spite of the fact that the willingness to pay for such products is higher than the cost of production. An example is innovation whose production can be reduced due to transaction costs, enforcement problems and asymmetries of inf ormation. ‐ Information failures: the lack of information about products distorts the market since the buyers are not able to undertake the optimal choice according to their utility. ‐ Unemployment: it can be considered the evidence of market failure since in a
perfect market the demand for labour have to match the supply of it. The second objective (redistribution) relates to the absence of social commitment in market rules. This means that wealth is not distributed according to the society’s preferences, e ven if the market is economically efficient. Of course, state intervention is justified, besides the abovementioned objectives, when it has the possibility to improve the situation (availability of appropriate instruments) and when the cost of interventio n is lower than the benefits it creates. All things considered, the approach chosen hereafter is mainly that of the neoclassical school. The market presents situations of inefficiency, which will be
called “market inadequacies” instead of “market failures ”. Government can intervene in order to correct them, however, the risk of distorting the market is high.
In order to avoid the worsening of the situation instead of improving it, it is important that states limit their intervention to the creation of thos e framework
12 conditions necessary to reduce inefficiencies and to foster competitiveness. Governments have to avoid direct intervention, for example with subsidies, because this instrument creates heavy market distortions and makes inefficient the mechanism of the “spontaneous market order” (von Hayek). Besides limiting the intervention to some limited areas and using the less distorting instruments, governments should also diminish the risk of creating distortion by eliminating those factors that are the ca use of government failures. An efficient and simple bureaucracy helps to reduce transaction costs of actions undertaken, performance oriented public agencies can improve the public sector efficiency and limiting the lobbyist power help to reduce distorting influences concerning the decision ‐ making process. 2.1.2. Market inadequacies in the field of tourism In the field of tourism it is more appropriate to talk about market inadequacies instead of market failures. In fact, the presence of “market failure” i t is a strong assumption since tourism would exist even without state intervention. Cases of market inadequacies in tourism can be divided in those concerning companion policies and those related to promotion policies. Companion policies are territorial m anagement, nature and landscape protection, promotion of agriculture, incentivising of training and upgrading of infrastructures. Promotional policies include research and development , creation of innovative processes, organization and financing of destina tion marketing and tourism infrastructure. The following
market inadequacies have been identified in tourism. Public goods The main resources of tourism destinations are their attractions . They are the most important destination goods at the base of the va lue of a destination. Their importance and quality affect the possibility of SMEs to apply a value ‐ based pricing because they influence the willingness to pay of tourists (Keller 2005). Many natural and cultural resources are by nature public goods, they i ncrease the attractiveness of a destination and no stakeholder can be excluded.
13 The image of a destination is a public good because it is clearly non ‐ excludable and non ‐ rival in consumption. All stakeholders benefit from it and, in a fragmented sector such as tourism, it creates the umbrella brand (based on attractions) that allows SMEs to apply a value ‐ based pricing (Keller 2004). Moreover, a good image creates several positive externalities, that is to say the attraction of sophisticated firms, which in t urn attract more sophisticated visitors, which will ask for more and more sophisticated services (Keller & Smeral 1997) . The construction and maintenance of infrastructure is usually government’s responsibility due to their nature of public goods. If we c onsider general infrastructure such as roads, it becomes quite expensive to exclude people and, in addition to this, if we exclude people from consumption (when the marginal cost for its use is near zero) the result is underconsumption, that is to say mark et inefficiency. Concerning tourism infrastructure, even if sometimes these goods are inexpensively excludable (for example establishing a fee for a cultural centre or for an event) their creation increases the attractiveness of a destination and no actor can be excluded from it (free rider problem). The same argument is valid also for the general infrastructure; therefore, we can state that the building and maintenance of all kind of infrastructure in a destination increases the overall attractiveness and usability of it and no stakeholder can be excluded from the related benefits. It must be specified that the upgrading of infrastructure is of inter ‐ sectoral concern, and tourism can only affect decision taken in other economic policies related to infrastru cture. In fact, the quality of infrastructure influences the quality of the business environment in which all kind of company operates. Finally, also information and knowledge can be considered public goods, however this argument is developed in the sectio n concerning transaction costs of innovation and cooperation. Negative externalities This is related to the problem of common goods where consumption exceeds sustainable levels of utilization. The overuse of natural and cultural resources does not respect both the ecological and social carrying capacities. In fact, the social costs
14 (for example congestion) and environmental costs (for example pollution) are not charged on consumers, who incur only in market prices (Keller & Smeral 1997). Pollution, resourc es depletion and social frictions are negative externalities to be avoided for a sustainable prosperity of tourism. The role of state is to act as a territorial manager in order to find the right equilibrium between “ the need for protection and the need fo r development” (Keller 2008). Market powers On one side the trend is to deregulate and liberalize the market in order to make it more efficient. In spite of this, specific regulations to avoid strong market powers are still needed. In the case of tourism, the big market powers are airlines and TOs (oligopoly competition ) and there is the need to avoid mergers that lead to quasi ‐ monopoly situations and the creation of cartels. However, sometimes, the public intervention is not necessary. For example the evo lution of Internet is decreasing the power of intermediaries, or the very deregulation of aviation has decreased the power of flagship companies thanks to the development of low cost carriers. All things considered, a simple and effective antitrust body of laws is still important. Transaction costs The presence of important transaction costs avoids the right (socially efficient) production and consumption of certain goods or services. The presence of transaction costs in innovation and cooperation are dealt in the next section. Market distortions The main market distortions identified in tourism are (Keller & Smeral1997): ‐ Building of risk capital : European tourism SMEs are characterized by insufficient equity capital and a liability structure with high and f luctuating interest rates (Keller & Smeral 1997). Bieger explains that the loans granted to SMEs are scarce and with a high interest rate due to several peculiarities of such a fragmented sector. First, the smaller the firm, the higher the
15 transaction cost s, situation that decreases the appeal of investment in SMEs, due to the low return it can generate. This situation is worsened by the problem of asymmetric information between banks and firms. Second, several risk factors raises the interest rates of loan s. These risks are that firms
are tied to a specific location, their profitability depends also on other stakeholders of the destination, the risk of the property market and risks concerning the low rate of innovation and slow processes of decision making at the destination level. Finally, the re is the problem of moral hazard due to the uncertainty of profits (put another way the high standard deviation of return on equity) due to the low growth rate and volatility of demand influenced by exchange rates, se asonality, trends and exogenous factors such as weather conditions, natural disasters, terroristic attacks etc. (Bieger 2000). In conclusion, state intervention in facilitating access to capital is justified by the market distortion due to an incomplete ma rket for the granting of loans to the tourism sector. It can be considered an incomplete market since the private market fails to provide loans even if the cost is less than the potential willingness to pay, due to the presence of transaction costs and asy mmetries of information (Stiglitz 2000). ‐ Labour market inflexibilities and rigidities : social constraints that do not match completely market demand. Government should encourage more flexible working and opening times. ‐ Difficulty of market exit : it keeps f irms in the market even if their low efficiency would suggest leaving the market. Government should encourage
conversion into other kind of activities or to allow tax benefits in order to lower the burden of sunk costs that lower the entry and exit rates o f a market. 2.2. Transaction costs: innovation and cooperation Developed countries faces several problems in tourism growth due to several changes. Today, the tourism sector is not only competing with destinations in developed countries (which benefit fro m the so ‐ called “advantage of
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