Some Conjectures Regarding the Effectiveness of Economic Boycotts

The events surrounding the signing into law of Indiana’s Religious Freedom Restoration Act provide an interesting test case to see if boycotts, or threats thereof, can successfully induce policy changes. I find this an interesting analogue to the ongoing debate whether Western sanctions, particularly “smart sanctions” imposed on Russia, can have an impact.

As Michael Hiltzik has discussed, there have been cancellations of conventions, musical events, and incipient expansions. The most well-known example of a boycott that apparently subsequently induced a change in behavior involved the chain of events that occurred after Governor Meacham’s rescission of the decision to designate a Martin Luther King holiday in Arizona.

In 1990, after Tempe’s Sun Devils Stadium had been awarded the 1993 Super Bowl, Arizona voters rejected a ballot measure designating Martin Luther King Day as a state holiday. Within hours of the vote, the NFL rescinded the game, costing the state an estimated $100 million in economic impact. (The game was played at the Rose Bowl instead.)

This article discusses at greater length the reversal by Arizona voters that brought the Superbowl to Arizona in 1996. In the end, the boycott apparently worked, although that outcome took years to unfold. The article cites an ASU Business School estimate of the economic impact of obtaining the Superbowl at $305.8 million. It’s this experience that Hiltzik (and Koplowitz/IBT) attribute to Arizona Governor Jan Brewer’s veto of a similar bill last year.

Hiltzik comments:

This suggests that the real impact of the Indiana law might unfold over time, in opportunities for growth foregone rather than in tangible losses now. Indiana can probably kiss goodbye to any chance of attracting a large-scale relocation in an industry with a good record on gay rights, such as technology or entertainment. By their nature, however, these losses will be hard to connect directly to the law, unless it’s specifically cited in a corporate decision.

L. Libresco at FiveThirtyEight recounts the evidence and is not as sanguine on boycotts having the intended effect. That being said, I do think that the chances for effecting a discernable change in policy is greater than one might think at first glance. Taking a cue from the recent example of sanctions on Russia, it seems to me the relevant question is not the impact relative to gross state product, but rather how the costs are imposed on key constituencies within the state economy.

In the older literature on the efficacy of economic sanctions, the rule of thumb developed by Hufbauer and Schott et al. was that one needed to inflict an economic loss equivalent to 2% of GDP in order to have some degree of success. If one made an analogy to affecting state economies, one would be hard pressed to conclude that boycotts could inflict a 2% of gross state product loss. Indiana’s nominal gross state product in 2013 (latest available data) was $317 billion, so 1% would be $6.4 billion.

I don’t think that’s the relevant metric. To the extent that businesses are highly mobile between states, and can relatively quickly locate operations and activities in alternate states, the costs on specific groups could be sufficiently high to motivate enough lobbying to alter state policies. That is exactly the idea behind “smart sanctions” in the case of Russia, where many of the sanctions targeted individuals and specific firms, rather than the entire economy (see [1] [2]).

Now, the effectiveness of sanctions in the case of Russia was magnified by the underlying decline in the price of its primary export, oil. In the case of Indiana, the vulnerabilities are not so clear. On the other hand, Indiana’s growth prospects as measured by the Philadelphia Fed’s leading index have been dimming since early 2014, and the leading index now indicates slower growth than all of Indiana’s neighbors (this reading is from the December numbers).

The decision by the Governor of Arkansas to send legislation similar to Indiana’s RFRA back to the legislature signals that the costs of boycotts can be perceived to be measurable to groups with effective lobbying power.