David vs Goliath: The Advantage of Going Local in Tourism Promotion to Tackle Informality

FROM: Admir Malaj, Clara García Parra, Mirtjon Mita, Zenebe B. Uraguchi – 27. October 2019

The headlines are full of negative news about tourism and its destructive effects. Not only is it destroying top destinations, it’s also fueling unfair competition and informality in business practices.

Yet, not everything is doom and gloom. Having a bottom-up partnership for managing tourism destination in Albania, for example, has proved to have opposite effects to what international headlines present.

A Swiss government initiative, RisiAlbania, has been supporting public and private tourist players in the southern Albanian province of Gjirokastra to collaborate and jointly manage the destination by supporting them to create a new Association. Visit Gjirokastra includes 80 private sector entities as members as well as seven Municipalities and representatives from academia.

One of the most important functions of the Association is managing the branding of the destination. This led to the creation of the Association’s tourism promotion Website. Among other activities, the Association is organizing fair participation, festivals, trainings, workshops, business-to-business sessions, networking with other national and international tourism bodies, and advocacy.

A critical topic that the Association aims to tackle is high informality rates among tourism operators. This creates a situation of unfair competition.

So, what did they do about it for a long-term solution?

How informal are we talking about?

We’re aware of the myths of the informal sector – that it’s illegal activity and bad for growth; that there’s only one type of informality; that informality disappears with growth; that formality is a permanent status…

In Albania, informality is a hot topic and tourism is one the most negatively affected sectors. Albanian policy-makers have taken different initiatives to improve the situation in the last years, through introducing fiscal packages that incentivize formalization. However, the situation remains mostly unchanged.

The causes of informality are many and complex. According to Albanian Investment Council reports, they include unregulated market, unfair competition, corruption, burdensome fiscality, and a complex legal framework.

In the tourism industry, the situation is getting worse over the last years because of international digital marketing “monopolization” by powerful international tourism and travel online platforms, which offer accommodations or tours, promote informality in tourism due to the low barriers to joining these marketing channels. The commission rates are enormous, and the whole process is controlled by none other than the companies themselves. Local businesses as hotels, guesthouses, tour operators and travel agencies have very little to say, but they still agree to the conditions, because of the lack of other options.

International tourism and travel online platforms offer important opportunities for growth to local hospitality and tourism businesses, which can now easily access new clients through peer to peer (p2p) transactions. These platforms allow businesses such as hotels, guesthouses or local tour operators to sell directly to customers whom otherwise would be impossible to reach, guarantying safety of transactions for both parts.

But these platforms create gaps for informal economy, may contribute to “over-tourism”, and divert income to the platforms’ host countries from the tourism destination (typically 15% of the value of a booking. For reference, VAT in Albania is 6% and income tax is 10%).

So, is there a way where local authorities, local hospitality and tourism businesses, tourists and platform providers could converge for a win-win business model?

Global platforms like Booking, Tripadvisor or Airbnb are disruptive businesses that bring customers. These new models are changing how tourism works, mainly for the tourism that competes on price: hotels and hostels are facing increasing competition from guesthouses and forms of informal hospitality. This leads to a vicious cycle of decreases in prices, leading to cuts in operational costs, including employment. The loopholes for guesthouses in those platforms which allow them to operate informally and thus creating an unfair competitive advantage.

Local authorities are generally unprepared to these challenges and international platform administrators are not always eager to support.

A local solution for a global problem: The Visit Gjirokastra Association

There’re two ways to addressing the challenge. The first is confrontational stance by imposing regulations and constrains to slow down and contain international platforms’ market dominance. This’s resource consuming and for small and developing countries, and eventually counterproductive.

The second approach is to embrace the change and make it work for local contexts. Local destination management structures such as the Visit Gjirokastra Association can play a key role in this: by incorporating booking functions into the Website they have developed, they are supporting direct bookings (giving more control to the local stakeholders) and lower commission rates (10%) that will be partly reinvested into a common fund for the region’s tourism promotion.

One of the first issues raised by the Association members was whether informal tourism businesses could be promoted on the Website. The argument in favor of including them would be to show them the benefits of belonging to the Association, hoping that in due course this would lead to formalization. However, the argument against including them won: only formally registered businesses feature in it.

Since the portal was launched in June 2019, five businesses have formalized to be included, along with their 15 employees. While the numbers may not be impressive, the trend is encouraging.

The bigger picture on the informal sector

In today’s era of free competition, new players and partnerships are always more than welcome. Competition is needed to help the customers not only get a better deal for their money, but also simply a better product/service. Monopolies ruin chances for that.

Thankfully in the online booking market, there’s still chance to prevent that. We call it an open market, let’s keep it that way – but making sure the playing field is as fair as possible. This is the role that a project like RisiAlbania can play: Visit Gjirokastra is simply enabling tourism stakeholders to establish the rules of the game to ensure everyone competes fairly.

Yet, we need to be caution not to either demonize or romanticize the informal sector. It’s important to understand the heterogeneity in the informal economy, as well as the various factors that influence individuals’ and firms’ decisions to take their businesses to the informal economy.

The problem is, as David Pilling nicely puts it, “our definition of the economy is pretty crude”. Many of the informal sector activities don’t show up in most statistics – from farmers markets to garage sales, house chores, street vendors, open air markets and flea markets. Despite several years of studies, we still don’t know enough about transitions, adaptations and change of the informal economy.

Our approach should instead focus on stimulating a change in behavior of players – public and private, formal and informal – so that they are better able and motivated to perform important functions effectively. Specifically, while dealing with the informal economy, the solution is neither to encourage nor suppress it, but rather to reduce barriers for all businesses and increase productivity and better quality for workers.

Additional sources

 

Cover photo: Visit Gjirokastër Association

Admir Malaj
Admir Malaj is responsible for Monitoring and Results Measurement in the RisiAlbania project, which is a youth employment project implemented in Albania by a consortium of HELVETAS Swiss Intercooperation and Partners Albania for Change. He joined the RisiAlbania team at the end of 2016. He previously worked in different positions in the public administration and academic institutions on issues regarding mostly healthcare systems, social services and regulatory environment.
Clara García Parra is the Component Lead in Private Sector Development for RisiAlbania. She has worked on the design, implementation, monitoring and evaluation of sustainable and inclusive systems development programmes across Sub-Saharan Africa, South-East Asia and the Balkans region. Through her work, Clara has used a range of development approaches and instruments, including systemic approach, challenge funds, and the development of DCED-compliant results management frameworks.
Mirtjon Mita works as Intervention Manager for Tourism at RisiAlbania, an SDC youth employment project implemented by Helvetas and Partners Albania. He has a long experience of working with private businesses as a consultant and in top management positions in some of the most important enterprises in Albania. He joined RisiAlbania in 2017. He holds a Bachelor’s degree in Business Administration and a Master’s degree in Corporate Finance from Sapienza University of Rome.
Programme Coordinator, East and Southeast Europe, Senior Advisor, Sustainable & Inclusive Economies