Does Lobbying Matter More than Corruption In Less Developed Countries?* Nauro F. Campos University of Newcastle, University of Michigan Davidson Institute, and CEPR E-mail: n.f.campos@ncl.ac.uk Francesco Giovannoni Department of Economics and CMPO University of Bristol E-mail: francesco.giovannoni@bristol.ac.uk This version: December 2003 Abstract: This paper provides cross-country econometric evidence on lobbying using data for about 3,500 firms in 22 transition countries in the late 1990s. We show that firm size, firm ownership and national political institutions are important determinants of lobbying membership, and that lobbying is the most effective medium of influence (vis-à-vis corruption) in less developed countries. JEL codes: E23, D72, H26, O17, P16. Keywords: lobbying, corruption, transition, institutions. * We thank Toke Aidt and John Wildman for valuable comments on an earlier version of this paper. The usual disclaimer applies.
1. Introduction Although the economics literature on lobbying is large and growing, the attendant empirical evidence is scarce, limited to developed countries and either focuses on firm characteristics (e.g., size and sector) as main determinant of lobbying within a specific country or focuses on macroeconomic variables such as per-capita GDP in cross-country comparisons. 1 This paper investigates lobby membership and effectiveness by examining firm as well as institutional characteristics in less developed countries. We focus on transition economies because they provide an almost natural experiment setting: they started out with similar political institutions but implemented different economic and political reforms. Using 1999 survey data for about 3,750 firms in 22 transition economies, our results show that, in addition to the factors highlighted in the literature, political institutions have a significant effect on lobby membership. We also show that lobbies are effective even in a context in which corruption is commonly perceived to be the principal medium of influence, namely that of less developed countries. 2. Theoretical framework We first investigate the factors that determine firms' decisions to join lobby groups. Olson (1965) argues that lobby groups are more likely to form when free riders are easier to detect and discourage. Another aspect we investigate is motivated by the Grossman and Helpman s model (1994), which implies that pressure from international competition varies by sectors of activity and, thus, different sectors show different propensities to lobby (for protection). 2 1 Examples of these empirical literatures are Mitra et al. (2002) and Bischof (2003), respectively. See Drazen (2000), Persson and Tabellini (2000) and Grossman and Helpman (2001) for surveys of the extensive theoretical work on lobbying. Potters and Sloof (1996) provide a survey of the empirical literature. 2 See also Goldberg and Maggi (1999). 2
With specific reference to business lobbies, the first issue implies that lobby groups are more likely to form in more concentrated sectors. By the same reasoning, larger firms would be more willing to join a lobby. On the other hand, smaller firms could have more benefits from joining a lobby because they have fewer means of direct influence on political institutions. In our empirical analysis we will try to determine which of these two opposite effects is more important. Following Grossman and Helpman (1994), we also conjecture that sector of activity significantly affects the decision to lobby: different sectors show different propensities to lobby for protection from foreign competition. As this threat is admittedly difficult to measure empirically, we favor the use of sector indicator variables as an important control. Naturally, there are other factors in a firm's decision to join a lobby group. An issue that has received little attention is the impact of political institutions on lobby formation. We conjecture that the number of veto players in the political system has a positive influence on a firm's decision to lobby. In a system with many veto players, firms are less likely to have direct access to all those players relative to a system where the number of players it needs to influence is small. Therefore, a professional organization such as a lobby that can pool resources and coordinate influence is more likely to be effective. Finally, we also analyze the impact of the country's level of corruption on a firm's decision to join a lobby: if lobbying is a substitute for direct influence, we conjecture that a firm is less likely to join a lobby group in a country with relatively high levels of corruption. Having analyzed a firm's decision to join a lobby, we then study whether firms who join a lobby feel more or less capable of influencing policy. For developed economies, the view is that lobbying is very effective. However, as far as less developed countries are concerned, one might conjecture that the effectiveness of lobby groups might still be low vis-à-vis the effectiveness of direct influence (say corruption). Our results suggest otherwise. 3
3. Data We combine data from three sources. The Business Environment and Enterprise Performance Survey (BEEPS), conducted in 1999-2000 jointly by the European Bank for Reconstruction and Development and World Bank, has data on almost 4000 firms in 22 transition countries and provides information on lobbying membership and effectiveness. 3 The Database on Political Institutions (DPI) developed by the Development Research Group at the World Bank provides data on political institutions for a large number of countries over 1975-2000. 4 Our third and last data source is the 2001-2002 Freedom in the World survey from Freedom House, which provides data for 1999-2000 on corruption, political rights and civil liberties for about 192 countries. 5 4. Results Table 1 shows the results from probit estimation to study the relationship between a firm's decision to join a lobby group and the factors outlined above. 6 With respect to our hypotheses, there are a number of interesting results. In terms of firms characteristics, our results show that the number of full-time workers (firm size) has a significant and positive impact on the decision to join a lobby group. 7 The analysis also shows that if the firm is foreign-owned it is more likely to be a member of 3 The BEEPS data is available on-line at http://info.worldbank.org/governance/beeps/ 4 See Beck et al. (2001) for more details. The DPI data is available on-line at http://www.worldbank.org/research/bios/pkeefer/dpi2000_distributed.zip 5 The data is available on-line at http://www.freedomhouse.org/research/nattransit.htm 6 Results from the linear probability model are qualitatively the same as those reported in Table 1. 7 One could have expected decreasing returns to firm size, i.e. that very big firms would not gain as much by joining lobbies. Yet this result does not obtain. 4
a lobby group. 8. On the other hand, our results suggest that there is no systematic relationship between private ownership and the decision to join a lobby group. More importantly, our results show that characteristics of national political institutions have a positive impact on the likelihood of becoming a lobby member. Table 1 shows that in countries with a parliamentary system, firms are more likely to join lobby groups (we conjecture that this is because the number of veto players tends to be greater in parliamentary than presidential systems). 9 We also find corruption has a negative and significant impact on the decision to join a lobby. 10 Finally, the results show that firms located in the capital city are more likely to be members of lobby groups. Table 2 reports on the determinants of aggregate influence, 11 which is ascertained on two different sectors: the chief executive and the legislature. Here we use the seemingly unrelated (SUR) probit model with which we try to minimize bias introduced by the potential joint determination of lobby membership and aggregate influence. For influence both on the chief executive and the legislature, we find a positive and significant relationship between lobby membership and perceived influence. 12 Surprisingly, our analysis doesn't suggest any significant impact on aggregate influence of the level of corruption in the country (the result holds irrespective of the measure of corruption we 8 Note that the results obtained with respect to the level of economic development are compatible with those in Bischoff (2003) who shows that, among OECD countries, this is a significant factor in the decision to join a lobby. 9 See Persson and Tabellini (2003) for a discussion of the relationship between government structure and veto players. 10 Note that we provide both a country-level measure of corruption (from the Freedom in the World survey) and a firm-level measure of bribes as a percentage of firm revenues (from BEEPS). These results are also robust to the presence of sector-specific effects. 11 The questionnaire asks When a new law, rule, regulation or decree is being discussed that can have a substantial effect on your firm, how much impact does your firm typically have at the national level of government to try to influence the content of that law, rule, regulation or decree? The dependent variable was coded 1 if the firm answered that it felt it was influential, frequently influential or very influential, and zero if it answered never or seldom influential. 12 As expected, the impact of lobbying on aggregate influence is larger when the membership decision is taken into account (for instance, the firm has some information on how effective lobbying is). 5
use). Further, we find that private ownership has a negative impact on perceived influence, as publicly owned firms are clearly closer to state institutions. Interestingly, foreign ownership is also positively correlated with perceived influence although the evidence is stronger for the executive than for the legislative branch. This may suggest that in order to attract foreign investment, governments are particularly attentive to requests from foreign investors 13. Finally, we do not find very significant evidence of a link between levels of development (as measured by per capita GDP) and perceived aggregate influence. 5. Conclusions Our results show that as supported by previous studies, the decision to join a lobby group is positively correlated with firm size and economic development but we also show that the percentage of foreign investment in the firm, and the number of veto players in the political system have a positive influence on the decision. Also, we provide evidence that is compatible with our conjecture that lobbying is a substitute for the use of a firm's direct means of influence with policy makers. Finally, our results indicate that firms who join a lobby are more likely to be satisfied about their ability to influence decision makers thus showing that lobbying matters even in less developed (in our case, transition) countries. 13 The fact that the effect is much more robust for the executive than for the legislative branch seems 6
References Beck, Thorsten, George Clarke, Alberto Groff, Philip Keefer, and Patrick Walsh (2001) "New Tools in Comparative Political Economy: The Database of Political Institutions" World Bank Economic Review vol. 15, pp. 165-176. Bischoff, Ivo (2003), Determinants of the Increase in the Number of Interests Groups in Western Democracies: Theoretical Considerations and Evidence from 21 OECD Countries. Public Choice vol. 114, pp. 197-218. Drazen, Allan (2000), Political Economy in Macroeconomics, Princeton University Press. Goldberg, Pinelopi and Giovanni Maggi (1999), Protection for Sale: An empirical investigation, American Economic Review, vol. 89, pp. 1135-1155. Grossman, Gene and Elhanan Helpman (1994), Protection for Sale. American Economic Review, vol. 84, pp. 833-850. Grossman, Gene and Elhanan Helpman (2001), Special Interest Politics, MIT Press. Mitra, Devashish, Thomakos, Dimitrios and Mehmet Ulubasoglu (2002), `Protection for Sale' in a Developing Country: Democracy vs. Dictatorship, Review of Economics and Statistics, vol. 84, n.3, pp. 497-508. Olson, Mancur (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard University Press. Persson, Torsten and Guido Tabellini (2000), Political Economics: Explaining Economic Policy, MIT Press. Persson, Torsten and Guido Tabellini (2003), The Economic Effects of Constitutions, MIT Press. Potters, Jan and Randolph Sloof (1996) Interest Groups: A Survey of Empirical Models That Try To Assess Their Influence, European Journal of Political Economy 12, pp. 403-442. to be in accordance with this conjecture. 7
Table 1 What determines lobbying membership? Probit maximum-likelihood estimates (1) (2) (3) (4) Medium size firm.297*** (.061).350*** (.061).367*** (.062).352*** (.062) Large size firm.524*** (.068).588***.610***.595*** Private ownership -.049.009.034.0001 Foreign ownership.254*** (.068).230***.208***.230*** Located in capital city.173*** (.052).156*** (.053).151*** (.052).153*** (.053) Per capita GDP.00007*** (.000001).00004*** (.000008) -.000001 (.000019).00004*** (.000008) Parliamentary.450*** (.061).369*** (.062).445*** (.061) Corruption -.151*** (.025) Illegal payments percentage -.086** (.049) Constant -1.92*** (.124) -1.88*** (.124) -.838*** (.215) -1.83*** (.127) Sector dummies? Yes Yes Yes Yes Number of obs 3748 3748 3748 3748 Log likelihood -1887.0415-1859.4369-1841.4878-1857.8466 Notes: Standard errors, in parentheses, are robust to heteroscedasticity of unknown form. * Indicates statistically significant at the 10 percent level. ** Indicates statistically significant at the 5 percent level. *** Indicates statistically significant at the 1 percent level. 8
Table 2 What determines the effectiveness of aggregate influence? Probit maximum-likelihood estimates Overall influence on the executive branch Overall influence on the legislative branch (1) (2) (3) SUR (4) SUR (5) (6) (7) SUR (8) SUR Lobby member.5197*** (.0623).5176*** (.0608) 1.61*** (.103) 1.60*** (.100).551*** (.060).554*** (.060) 1.73*** (.093) 1.71*** (.092) Corruption -.0021 (.03001).017 (.027).019 (.030).037 (.026) Illegal payments percentage -.0583 (.0538) -.0634 (.048) -.033 (.054) -.047 (.047) Private ownership -.466*** (.07) -.473*** -.341*** (.072) -.346*** (.072) -.526*** -.527*** -.370*** -.373*** Foreign ownership.292*** (.078).292*** (.078).177** (.076).174** (.076).225*** (.077).222*** (.077).100 (.073).096 (.074) Located in capital city.003 (.059).002 (.059) -.074 (.057) -.079 (.057).025 (.059).021 (.059) -.070 (.056) -.074 (.056) Per capita GDP -.00002 -.00002** -.00004* -.00004***.00002.00001 -.00001 -.00002*** Constant -.149 (.246) -.124 (.111) -.311 (.225) -.141 (.107) -.550** (.245) -.387*** (.113) -.670*** (.216) -.367*** (.107) Sector dummies? Yes Yes Yes Yes Yes Yes Yes Yes Number of 2749 2749 2748 2748 2763 2763 2762 2762 observations Log likelihood -1547.2-1546.6-2928.9-2928.2-1510.4-1510.4-2893.9-2894.5 Notes: Standard errors, in parentheses, are robust to heteroscedasticity of unknown form. Instruments used for lobby membership in columns (3), (4),(7) and (8) are sector dummies, firm size, private and foreign ownership, parliament, and location in capital city. SUR is a maximum-likelihood two-equation seemingly unrelated (SUR) probit model. * Indicates statistically significant at the 10 percent level. ** Indicates statistically significant at the 5 percent level. *** Indicates statistically significant at the 1 percent level. 9