Economic Policy Review ISSN 1313 - 0544

Should the State pay for advertising of the tourist business?

Author: Adriana Mladenova / 08.05.2008
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During 2008 every second the Government is spending minimum 805 levs or 2.9 million levs per hour and 69.5 million levs per day. You are probably asking yourself where is all that money going? It is spent on various "priority" projects and initiatives of "state importance".

The latest idea, which is promoted in the public space by the newly elected chairman of the National Board of Tourism Mr. Krasimir Gergov, is to set aside budget funds to advertise Bulgaria as a tourist destination.  We are talking about 75 million levs. According to the National Board the tourist business needs "an adequate partner in the State, with whose assistance to move the tourist industry".

If you are now wandering and asking yourself isn't the tourism one of the fastest developing sectors of the economy, the answer is yes!  The visits of foreigners to the country with the purpose of tourism have increased by 40% from 2002 according to the National Statistics Institute (NSI), while the hotels revenues have increased by more than 200% during the same period. A logical question arises - why is it necessary for the State to subsidize this sector, when it is apparent that it is doing very well?   

Not always the decisive factor is the economic logic. When you are spending someone else's money, the incentives are distorted and decisions are often taken to benefit certain circles and politically strong groups, not necessarily to benefit the society. The problem is, that economically unfounded ideas could be presented to the public in such way as to look as something positive in the eyes of the taxpayers. In this case they are talking that 1.5% of the revenues generated by tourism in the economy would be set aside for advertising. However it does not mean that only the tourist business will pay for this type of advertising. Just the opposite, the tourist companies (and not only they) would profit at the expense of the taxpayer. In other words every family must set aside approximately 15 EUR per year for someine to write advertising strategies, consultations and the state to conduct the actual advertising.  

The questions

  • Is there a kind of market failure, in order to justify the need of State support for the sector? Since it is one of the businesses considered with the best future, apparently not. In contrast to the pessimistic statements, during 2008 Bulgaria has risen by 11 places upwards in the global rating provided by the World Economic Forum for competitiveness of the tourist sector - from 57th to 43rd place among 130 countries.
  • Why is the State expected to develop destinations? That is not its task; it does not have the knowledge or the expertise in the state employees.
  • Does the state know (or the consultants which it would hire) what kind of tourist business to promote and where to direct the focus - sea, mountains, cultural, eco, country tourism? The taking of a central decision for common advertising of the country and creation of a certain image could lead to negative consequences for some of the participants in the branch and to change the incentives of the market. It is possible that would be favoritism of a specific kind of tourist business at the expense of another type.
  • Would the money be spent effectively? It is proven theoretically and empirically that the public sector is much more ineffective than the private sector in implementing projects which actually belong to the sphere of the private business.

Another proposal, which is creating confusion, is the desire to create a new Ministry of tourism in Bulgaria.  Now, when we expect changes in the government mandates, many lobbying groups are getting active in order to gain greater power and resources. However, there is no need to create a brand new ministry, which would mean greater and slower administration (political cabinet, chief secretary, etc.) and unnecessary bureaucracy in the sector. Similarly, it is not necessary to have a strategy and a central plan to develop certain sector of the economy.

Another argument in support of active government policy is the necessity of maintaining and marketing of the cultural sites. Taking into account that there is a special department within the Ministry of culture for protection of cultural monuments of as well as the "National Institute for Cultural Monuments", creating an additional administrative unit means not only wasting funds but also poverlapping of functions and a way more difficult coordination between the units. That leads to inconsistent policies.

What the State could do for the tourist business (which applies for all other economic initiatives in the country as well), is the following:

  • - Simplify the regulations of the business;
  • - Creating s working judiciary system and protection of the investors' rights;
  • - Observing the rights of ownership;
  • - Creating a favorable environment for conducting business, such as low taxes, equal treatment of the business, presence of transparent rules and friendly administrative procedures;
  • - Maintaining a stable political situation.

All of these measures would have a proven positive effect on the image of the country. The State must concentrate on that. Let the advertising be left in the hands of the private sector. Because the market knows best what are the customers' needs and how to attract their interest.