ICODECON, 2-4.10.2015, Kalamata, Greece. Conference Proceedings, ISBN 978-618-82146-1-3

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Conference proceedings of

1st International Conference of Development and Economy (ICODECON)

Conference Theme: The advantages and disadvantages of Economic Crises 2-4 October 2015, Kalamata

Editors: D. Petropoulos & G. Kyriazopoulos ,

January 2016.

Technological Educational Institute (TEI) of Peloponnese,

Antikalamos, 24100, Kalamata, Greece www.teikal.gr info: [email protected]

ISBN 978-618-82146-1-3

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

1st International Conference of Development and Economy (ICODECON) 2-4 October 2015

Elite City Resort, Kalamata, Greece.

Conference Theme: The advantages and disadvantages of Economic Crises

Conference site: www.icodecon.com info: [email protected]

Under the auspices of:

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Organizers

University of national and World economy,

Sofia, Bulgaria Technological Educational Institute www.unwe.bg/en (TEI) of Peloponnese, Kalamata, Greece www.teikal.gr

Alexandru ioan Cuza University, Technological Educational Institute of Western Iasi, Romania. Macedonia, Kozani, Greece www.uaic.ro http://www.teiwm.gr/index.php?lang=el

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

MAJOR SPONSOR OF THE CONFERENCE

http://www.kareliafoundation.org.gr/

The George and Victoria Karelias Foundation is the result of the ambition of George Karelias to transform his lifetime values into a lasting heritage. Born in Athens on March 14 1929, George Karelias studies Economics and Business Administration at George Washington University in the United States of America. During this time he also furthered his studies in Fine Art. In 1959, he settled in Kalamata and joined the family business. During a long and illustrious career, distinguished by creativity and innovation, he made his personal mark on the development of the Greek tobacco industry. A businessman, but also an artist, George Karelias was known for his exceptional talent for drawing and his great love of books and history. He never missed an opportunity to contribute to the cultural and economic advance of the Region of Messina, where he lived until his death in April 2000. A man of boldness, sensitivity and vision, generous yet personally modest, he decided in 1993 with his wife Victoria, to establish a public benefit foundation called the “The George and Victoria Karelias Foundation” to promote the greater common good through education and research. Today, the foundation is actively led by Victoria Karelias, who as President contributes her personal dynamism, passion for life and vision to the achievements of the foundation. In addition to this role, Victoria Karelias is Chairman of Karelia Tobacco Company, and President of several Greek cultural organizations The George and Victoria Karelias Foundation continues the work of George Karelias, faithfully following his vision and values: a better quality of life for Greek citizens through the improvement of the educational, research and economic achievements of the country. For its goals and vision to become reality, the George and Victoria Karelias: Supports individuals or groups who are establishing leading roles in the fields of Education and Research Organizes educational programs and sponsors conferences for the development of the Greek economy and its promotion both nationally and internationally Regularly creates business publications that present the latest results of specialized economic research. Student scholarships. The George and Victoria Karelias Foundation encourages every effort to acquire knowledge by selecting from among the most distinguished graduates of Greek origin and supporting them to continue their post-graduate education either at home or abroad.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The Conference Scientific Committee: President Dr. Petropoulos P. Dimitrios, Assoc. Prof. TEI of Peloponnese - Greece Vice President Dr. Kyriazopoulos Georgios, Lecturer TEI of Western Macedonia - Greece Members Dr. Aggelopoulos Stamatis, Assoc. Prof. Alexander TEI of Thessaloniki – Greece Dr. Aghiorghiesei Daniela, Prof. University Alexandru Ioan Cuza - Romania Dr. Alexandru Tugui, Prof. University Alexandru Ioan Cuza - Romania Dr. Anastasiei Bogdan, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr.Antoniadis Ioannis, Assist. Prof. TEI of Western Macedonia – Greece Dr. Asandului Laura , Prof. University Alexandru Ioan Cuza - Romania Dr. Baciu Livia, Prof. University Alexandru Ioan Cuza - Romania Dr. Bedrule-Grigoruta Maria Viorica, Prof. University Alexandru Ioan Cuza - Romania Dr. Bertea Patricia Assist. Lect. University Alexandru Ioan Cuza - Romania Dr. Bitsani Eugenia, Prof. TEI of Peloponnese - Greece Dr. Bobalca Iuliana Claudia, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Burny Philippe, Prof. University of Liege - Belgium Dr. Chionis Dionisios, Prof, Democritus University of Thrace - Greece Dr. Chiper Sorina, Lect. University Alexandru Ioan Cuza - Romania Dr. Clipa Raluca, Lect. University Alexandru Ioan Cuza - Romania Dr. Ciortescu Elena, Lect. University Alexandru Ioan Cuza - Romania Dr. Ciulu Ruxandra, Assoc. prof. University Alexandru Ioan Cuza - Romania Dr. Cocarta Luminita Andrei, Prof. University Alexandru Ioan Cuza - Romania Dr. Dinu Airinei, Prof. University Alexandru Ioan Cuza - Romania Dr. Drimpetas Evaggelos, Assoc. Prof, Democritus University of Thrace - Greece Dr. Dritsaki Chaidi, Assoc. Prof. TEI of Western Macedonia - Greece Dr. Dritsaki Melina, Assoc. Prof. in University of Warwick - United Kingdom

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Dr. Filos Ioannis, Assoc. Prof. Panteion University - Greece Dr. Firtescu Bogdan, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Galanos Georgios, Lecture Democritus University of Thrace - Greece Dr. Georgescu Iuliana, Prof. University Alexandru Ioan Cuza - Romania Dr. Geronikolaou Georgios, Lecturer in Democritus University of Thrace - Greece Dr. Giannakas Konstantinos, Prof. University of Nebraska-Lincoln - USA Dr. Hatzinikolaou Dimitrios, Assoc. Prof. University of Ioannina - Greece Dr. Hazak Aaro, Prof. Tallinn University of Technology - Estonia Dr. Iacobuta Andreea, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Ifrim Mihaela, Lect. University Alexandru Ioan Cuza - Romania Dr. Isan Vasile, Prof. University Alexandru Ioan Cuza - Romania Dr. Istrate Costel, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Ivanova Nedka, Prof. of UNWE - Bulgaria Dr. Jemna Danut, Prof. University Alexandru Ioan Cuza - Romania Dr. Kazakos Panos, Prof. University of Athens - Greece Dr. Karafolas Simeon, Prof. TEI of Western Macedonia - Greece Dr. Kopeva Diana, Prof. of UNWE – Bulgaria Dr. Koutroukis Theodoros, Assist. Prof. in Democritus University of Thrace - Greece Dr. Kyriazopoulos Georgios, Lecturer TEI of Western Macedonia - Greece Dr. Lazos Grigorios, Senior Executive in the Ministry of Economics - Greece Dr. Liargοvas Panagiotis, Prof. University of Peloponnese - Greece Dr. Lupu Dan, Assist. Lecturer, University Alexandru Ioan Cuza - Romania Dr. Maha Liviu, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Makris Ilias, Assoc. Prof. TEI of Peloponnese - Greece Dr. Manolica Adriana, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Maroudas Theodoros, Chief Executive in the Ministry of Economics - Greece Dr. Mavridakis Theofanis, Assoc. Prof. TEI of W. Greece - Greece Dr. Maxim Laura, Lect. University Alexandru Ioan Cuza - Romania Dr. Mircea Georgescu, Prof. University Alexandru Ioan Cuza - Romania Dr. Mironiuc Marilena, Prof. University Alexandru Ioan Cuza - Romania Dr. Mishev Plamen, Prof. DSc. of UNWE - Bulgaria Dr. Mitocaru Simona, Lect. University Alexandru Ioan Cuza - Romania Dr. Munteanu Corneliu, Prof. University Alexandru Ioan Cuza - Romania Dr. Mursa Gabi Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Nader Alber Assoc. Prof. Ain Shams University, Cairo, Egypt

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Dr. Nestian Stefan Andrei, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Nikolaidis N. Vasilios, Assist. Prof. TEI of Peloponnese - Greece Dr. Nita Valentin, Prof. University Alexandru Ioan Cuza - Romania Dr. Onofrei Mihaela, Prof. University Alexandru Ioan Cuza – Romania Dr. Oprea Florin, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Panagou Vasilios, Prof. of TEI of Piraeus - Greece Dr. Papadogonas Theodore, Assoc. Prof. TEI of Halkida - Greece Dr. Papadopoulos Savvas, Bank of Greece - Greece Dr. Papageorgiou Athanasios, Prof. TEI of Peloponnese - Greece Dr. Papakonstantinidis Leonidas, Prof. TEI of Peloponnese - Greece Dr. Papoudaki Foteini, Assoc. Prof. TEI of Peloponnese – Greece Dr. Pascariu Gabriela Carmen, Prof. University Alexandru Ioan Cuza - Romania Dr. Petropoulos P. Dimitrios, Assoc. Prof. TEI of Peloponnese - Greece Dr. Pintilescu Carmen, Prof. University Alexandru Ioan Cuza - Romania Dr. Pohoata Ion, Prof. University Alexandru Ioan Cuza - Romania Dr. Politis Evangelos, Prof. TEI Western Greece - Greece Dr. Popescu Cristian, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Poufinas Thomas, Lect. in Democritus University of Thrace - Greece Dr. Pragidis Ioannis-Chrisostomos, Lecturer in Democritus University of Thrace Greece Dr. Prodan Adriana, Prof. University Alexandru Ioan Cuza - Romania Dr. Prontzas Evangelos, Prof. Panteion University - Greece Dr. Rezitis Anthony, Prof. University of Patras - Greece / University of Helsinki - Finland Dr. Roman Cristina Teodora, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Roman Angela, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Sarafopoulos Georgios, Assoc. Prof. in Democritus University of Thrace - Greece Dr. Sariannidis Nikolaos, Assoc. Prof. TEI of Western Macedonia - Greece Dr. Sasu Constantin, Prof. University Alexandru Ioan Cuza - Romania Dr. Siskos Evangelos, Prof. TEI of Western Macedonia - Greece Dr. Spiliopoulos Odiseas, Assoc. Prof. TEI of Peloponnese – Greece Dr. Spyromitros Eleftherios, Assist. Prof. in Democritus University of Thrace - Greece Dr. Stavroyiannis Stavros, Prof. TEI of Peloponnese - Greece Dr. Tiganas Claudiu, Lect. University Alexandru Ioan Cuza - Romania Dr. Toderascu Carmen, Lect. University Alexandru Ioan Cuza - Romania Dr. Tugulea Carmen Oana, Assoc. Prof. University Alexandru Ioan Cuza - Romania Dr. Voicilas Dan-Marius Assoc. Prof. in Romanian Academy - Instit. of Agric. Economics - Romania

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Dr. Zait Adriana , Prof. University Alexandru Ioan Cuza - Romania Dr. Zait Dumitru, Prof. University Alexandru Ioan Cuza - Romania

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The Conference Organizing Committee: President Dr. Petropoulos P. Dimitrios, Assoc. Prof. TEI of Peloponnese - Greece Vice President Dr. Kyriazopoulos Georgios, Lecturer TEI of Western Macedonia - Greece

Members Dr. Chiper Sorina, Lect. University Alexandru Ioan Cuza - Romania Dr. Dritsaki Chaidi, Assoc. Prof. TEI of Western Macedonia - Greece Dr. Dritsaki Melina, Assoc. Prof. University of Warwick - United Kingdom Dr. Geronikolaou Georgios, Lecturer in Democritus University of Thrace - Greece Dr. Hazak Aaro, Prof. Tallinn University of Technology - Estonia Dr. Makris Ilias, Assoc. Prof. TEI of Peloponnese - Greece Dr. Mishev Plamen, Prof. DSc. of UNWE - Bulgaria Dr. Nikolaidis N. Vasilios, Assist. Prof. TEI of Peloponnese - Greece Dr. Papageorgiou Athanasios, Prof. TEI of Peloponnese - Greece Dr. Papakonstantinidis Leonidas, Prof. TEI of Peloponnese - Greece Dr. Papoudaki Foteini, Assoc. Prof. TEI of Peloponnese – Greece Dr. Rezitis Anthony, Prof. University of Patras - Greece / University of Helsinki - Finland Dr. Spiliopoulos Odiseas, Assoc. Prof. TEI of Peloponnese – Greece Dr. Spyromitros Eleftherios, Assist. Prof. in Democritus University of Thrace - Greece Dr. Stavroyiannis Stavros, Prof. TEI of Peloponnese - Greece

Organizing Assistants Anastasopoulos Christos, General Hospital of Messinia - Greece Athanasopoulou Elena, TEI of Peloponnese - Greece Dalipaj Bledi, Sybraxi Business Consultants - Greece Doussis Sheila, Alfa Training Center of Kalamata - Greece

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Germpana Eirini, TEI of Peloponnese - Greece Fatouros Dimitrios, TEI of Peloponnese - Greece Georgountzos Antonios, TEI of Peloponnese - Greece Karamitrou Konstantina, Institute of Professional Training Kalamata - Greece Kostriva Anna, TEI of Peloponnese - Greece Kottaridi Klimentia, TEI of Peloponnese - Greece Liakoura Georgia, TEI of Peloponnese - Greece Liggitsos Alexandros, TEI of Peloponnese - Greece Mouzakidi Aggeliki, University Alexandru Ioan Cuza - Romania Petropoulos Stavros, Kingston University of London Saravelakis Kostas, TEI of Peloponnese - Greece

Communication in English Msc. Tsompanou Olga

Skype Directions Aggouras Georgios, TEI of Peloponnese - Greece Galiotos Kostas, TEI of Peloponnese - Greece Papaioannou Pantelis, TEI of Western Macedonia - Greece

Secretary Liakoura Georgia, TEI of Peloponnese – Greece

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

FOREWORD In an international situation of intense quest, dispute, but also anguish for the future, the TEI of Peloponnese participates in the ambivalent economic scene, organizing the first “International Conference of Development and Economy”. Participate in the search and in persistent and painstaking work of scientists and researchers in the field of Economics and the need for themselves, to express their opinions, scientific findings and their suggestions.

The TEI of Peloponnese - a regional institution of higher education in Greece, in the heart of the Peloponnese -actively participates in national and international level, in the areas covered in the disciplines of its scientific fields. The organization of this Conference is part of our outreach policies and the search for new partnerships in the international arena.

I would like to express my congratulations to the Organizing Committee and especially to the fellow Professor D. Petropoulos, on the initiative of the organization and the excellent preparation of the Conference

I wish you every success in your work.

Prof. Dimitris Velissariou

Rector

TEI of Peloponnese

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The I.CO.D.ECON (International Conference of Development and Economy) is a coordinated effort of the Technological Educational Institute of Peloponnese (Greece) and the collaboration of University of National and World Economy, Sofia (Bulgaria), the University Alexandru Ioan Cuza, Iasi (Romania) and the Department of Accounting and Finance of the Technological Educational Institute of Western Macedonia (Greece), for extrovercy and promotion of scientific knowledge as a main tool for discovering opportunities at a time when the international community is plagued by the financial crisis.

The conference is held under the auspices of the Greek Ministry of Education - Ministry of Culture and the Ministry of Economy - Infrastructure - Shipping - Tourism of Greece, and under the auspices of the Economic Chamber of Greece.

This international conference aims to cover even a small gap in the expression of scientific knowledge at international level and become the starting point for discovering and presenting solutions in the fields of development and economy for a better tomorrow. Nevertheless, science and especially research, assessments, approaches with scientific background and oriented interpretation, evaluation of economic phenomena, and the deposit of scientific proposals and positions on key and specific issues (theoretical and practical) cannot be exhausted and there will always be room for new relevant scientific presentations and events.

Also ICODECON, wanting to give more emphasis on young scientists, has established the Prize for the best scientific research. We believe it is important to promote and support young researchers.

The ICODECON is implemented in a period of prolonged global economic crisis, which has affected in different ways the international economy, creating new data at all levels. This fact is reflected in papers submitted to the Conference.

The effort for the implementation of the 1st International Conference is characterized largely by success with more than 160 scientific papers submitted by both professors and young scientists from 33 countries and 5 continents. I would like to express my gratitude to them, for their very interesting proposals and their choice to present their original work and research at ICODECON.

On this occasion I would like to thank the Administrations of the four educational institutions, all Members of the Scientific Committee for their contributions, the members of the Organizing Committee and the Organizing Secretariat and all those who contributed to the realization of this International Conference. I would also like to thank two excellent professors Mr. Chionis and Mr. Drympetas, who along with the Head of Parliament Budget Office prof. Liargovas Panagiotis are the central scientific speakers of this international conference.

This book of proceedings (in cd form) contains the full papers which were presented at the conference. The full papers were evaluated and peer reviewed by academics of the

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 relevant fields, members of the scientific committee of the conference. After the fruitful comments and suggestions made by the reviewers, the authors of the papers which were accepted for publication submitted the revised papers to the editors of the proceedings’ book.

The high quality of the papers submitted to the conference is also proven by the number of conference papers which are accepted for publication in scientific journals, which are partners to the Conference ( mainly Research in Economics and Business: Central and Eastern Europe (REB), Business & Enterpreneurship Journal and Advances in Management and Applied Economics). These papers are not included in this book, for copyright reasons.

At the end I would like to thank and make particular reference to the George and Victoria Karelia Foundation, with the support of which we were able to realize with dignity this international scientific conference, an important event for the city of Kalamata.

Dr. Dimitrios P. Petropoulos

Associate professor

President of the Organizing and Scientific Committee of the Conference

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table of contents

The impact of FDI outflows on the Unemployment Rate in the source countries ...... 21 Issatay Doskaliyev ...... 21 The institutional reforms in the EU and the new financial mechanisms in the Eurozone after the debt crisis ...... 29 Psychalis M...... 29 Sectors attracting venture capital in Poland and other European countries ...... 45 Elżbieta Grzegorczyk ...... 45 Terms of trade of EU member countries in the context of changing primary commodity prices ...... 58 Witkowska, E. A...... 58 Importance of Export Led Growth in Transition Economies: Some Firm Level Evidence from Serbia ...... 71 Bozidar Cerovic & Sanja Mitic ...... 71 Implementation of plastics tax in Ghana: Cost-effectiveness analysis ...... 83 Kombat A. M...... 83 A (successful) story of Poland’s transformation and European integration. What can be advised to follow, and what – warned to avoid? ...... 92 Benon Gaziński ...... 92 Soil resources and the role in agriculture sector of Greek Economy...... 104 Ch. Paschalidis1, D. Petropoulos1, D. Paschalidis3 I. Chouliaras2, P. Sinioros4 and S. Sotiropoulos7 ...... 104 Principal Component Analysis of Wetland Functions and Values: The case of Wetland Agras- Vritta-Nisi ...... 107 Apostolidis Georgios ...... 107 Price and Quality Export Competitiveness in Bulgarian Agri-food Industry ...... 119 Nikolay Sterev, Dimitar Blagoev, Paskal Zhelev, Diana Kopeva ...... 119 Impact of the new Common Agricultural Policy (2015-2020) on the value of direct payments and on farmers’ income in Wallonia (South of Belgium) ...... 131 Ph. Burny1,2 and F. TerronesGavira2 ...... 131 Entrepreneurship and the state of SMEs in Poland. An example of central Poland ...... 136 Małgorzata Jabłońska ...... 136 Fourth Anti-Money Laundering Directive – New Requirements and Challenges for Bulgarian Accountants and Auditors ...... 145 A.Filipova-Slancheva ...... 145

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The relationship between the declared income and gross domestic product: A key factor in identifying tax evasion in the Greek economy...... 154 Lazos Grigorios, Maroudas Theodoros ...... 154 Is audit quality Implied by Accruals Quality associated with Audit fees and Auditor Tenure? Evidence from China ...... 159 Kikhia Hassan & Albitar Khaldoon & Jin Ping Zhang ...... 159 Women on “board”: Economic turmoil and the presence of women in positions of influence in Greece ...... 174 Anastasiou, S.1, Siassiakos, K2., Dermatis, Z.3 and Lazakidou, A.3 ...... 174 “Metalmanu, A Cluster of Metal Businesses in Western Macedonia, Greece” ...... 183 C. Voulgaraki, A.Maropoulos, S.Papanikolaou, D. Stimoniaris and S. Maropoulos ...... 183 Exploring the Relationship of Youth Entrepreneurship, in the light of entrepreneurial lectures in tertiary education, intentions and cultural background ...... 193 Bampasis Eleftherios ...... 193 Service-Oriented Systems and Service Level Agreements applied in Health Information Technologies ...... 204 Stella Christopoulou1, Theodore Kotsilieris2, Ioannis Anagnostopoulos3 and Vasiliki Dimopoulou4 ...... 204 Operating within Legislative Restrictions. Marketing Funds for Urban Restoration Supporting the Fight against Aesthetic Pollution...... 219 Odysseas N. Kopsidas1, Leonidas Fragkos-Livanios2 ...... 219 A new index to measure the human well-being in Wallonia and its communes (South of Belgium) ...... 231 Burny P...... 231 Dealing with Communication Barriers in Business Meetings - Focus on Intercultural Aspects ...... 237 Ciortescu E. and Cecal A...... 237 The Effects of Endorsement Sources towards Perceived Credibility ...... 242 Cara C. and Tocila T...... 242 Estimating Greek financial crisis impact on port authorities’ revenues: The case of a regional cruise homeport...... 252 S. Troumpetas1, C. Beneki2, D. Giannias1 & P. G. Eliopoulos3 ...... 252 Domestic Tourism: Is this a chance for regional development of Thessaly under financial crisis? ...... 265 D. Kyriakou1, N. Blanas2, D. Belias3 and A. Koustelios3 ...... 265 Macroeconomic developments in Turkey, 1980-2001 ...... 275 Ozlem Aytac ...... 275

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Exchange-Rate-Based Stabilizations: A Literature Review ...... 276 Ozlem Aytac ...... 276

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The impact of FDI outflows on the Unemployment Rate in the source countries

Issatay Doskaliyev Nazarbayev University, Kabanbay batyr, 53, block 23, room 613, [email protected]

Abstract

Over the past three decades the global trends in foreign direct investment (FDI) have been constantly increasing. Whereas FDI outflows have played a positive role in generating economic growth in developing countries, some feel that it plays a negative role in exporting jobs from the source countries to the host countries. This study is motivated by the puzzle in scholarly literature that outflows from high-wage countries serves as an instrument for exporting jobs to low-wage countries. In this paper why FDI outflows from “advanced economies”, leading to decrease in GPDI (Gross Private Domestic Investment), do not lead to job losses will be explained. It is somewhat paradoxical that with the decline of domestic investment in “advanced economies”, the employment rate does not decrease. The empirical data is based on the relationship between FDI outflows and the employment rate. It is clear that because of expansion of sales FDI outflows complement exports and, consequently, lead not to losses of jobs but to their protection in “advanced economies”.

KEYWORDS: FDI, unemployment rate, source countries, ‘advanced economies’.

INTRODUCTION Over the past three decades the global trends in foreign direct investment (FDI) have been constantly increasing. Whereas FDI outflows have played a positive role in generating economic growth in developing countries, some feel that it plays a negative role in exporting jobs from the source countries to the host countries. This study is motivated by the puzzle in scholarly literature that outflows from high-wage countries serves as an instrument for exporting jobs to low-wage countries. In this paper the issue of why FDI outflows from “advanced economies”, leading to decrease in GPDI (Gross Private Domestic Investment), do not lead to job losses will be explained. It is somewhat paradoxical that with the decline of domestic investment in “advanced economies”, the employment rate does not decrease. The empirical data is based on the relationship between FDI outflows and the employment rate. It is clear that because of expansion of sales FDI outflows complement exports and, consequently, lead not to losses of jobs but to their protection in “advanced economies”. In the next section information on literature will be provided that is used to explain a new theoretical argument that will clarify the crucial role of FDI outflows in the reduction of the unemployment rate in the home country. The theory is empirically tested using a sample of “advanced economies” by International Monetary Fund for the years 1960 to 2011. However, the FDI outflows data on such units of analysis as Taiwan and San Marino was not available. As a result, the theory is empirically tested using a sample of 33 “advanced economies” instead of 35. Yet a strong negative relationship between independent and dependent variables was not found. In the end of the paper, findings and factors that hampered conducting the research will be briefly discussed.

LITERATURE REVIEW There are a lot of academic materials that focus on the influence of FDI outflows on the source countries. The reason is that with the development of technologies and increasing globalization, the list of factors that influence FDI outflows has been significantly increased. However, the purpose of this paper is to analyze the trends using the most appropriate empirical works. The foundation for the recent literature was laid by Dunning (1958) in his book “American Investment in British Manufacturing Industry”. He claimed that the determinants of FDI outflows can be explained by organizational features of Multinational Enterprises. MNEs analyze all factors, which can influence on FDI outflows, before making investment into the target country. These determinants were more thoroughly explored by other respectable researchers. In his empirical analysis, Culem (1988) notes that such key characteristics of the market as its size, openness, labour costs and its technological level determine FDI decisions. For example, low

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 technological development of the host country will discourage FDI inflows. Blomström and Kokko (1997) evaluate the influence of such factor as borrowing costs on FDI flows. According to them, if borrowing costs in the host country are lower than in the source country, the source country will finance investment through borrowing from the host country. Hatzius (1997), analyzing financial markets of the United Kingdom and Germany, found that comparatively low exchange rates in the target countries attract foreign investors. The body of literature has pointed to a number of research conclusions that determine the relationship between FDI outflows and employment rate. 1) The relationship between FDI outflows and domestic investment. Feldstein (1994) found a negative relationship between FDI outflows and domestic investment. Specifically, he claims that a one unit increase in FDI outflows leads to one unit decrease in domestic investment. 2) The relationship between FDI outflows and exports. According to Jost’s findings (1997), there is a strong complementarity between these two variables. FDI outflows enable to expand production through affiliates, and, thus, complement exports. 3) The relationship between FDI outflows and unemployment rate. Brainard and Riker (1997) found that FDI outflows from the developed countries to the developing countries complement rather than substitute exports. This means that FDI outflows do not result in an increase in unemployment rate in the source country. Also, Muck and Demirsil found that FDI outflows can lead to decrease in unemployment rate in some countries.

THEORY The paper aims at explaining the paradox that for “advanced economies” FDI outflows lead not to job losses but to their protection. Theoretically, there is an indirect relationship between FDI outflows and gross capital formation. The higher FDI outflows, the lower gross capital formation (Al-Sadig 2013). This can be explained by the fact that the source countries, making direct investments in foreign countries, deprive themselves of these investments. Correspondingly, insufficient investment in domestic infrastructure must lead to job losses. However, in practice, outflows from the developed countries complement exports by expanding trade channels (Andersen and Hainaut 1998). In turn, this leads to the decline of unemployment rates in the source countries. These research conclusions lead me to the following hypothesis. Hypothesis: FDI outflows from “advanced economies” do not lead to the decline in the unemployment rate. We can see an example of the theory illustrated in the Republic of Korea (one of “advanced economies”). Analyzing the period from 2005 to 2007, one can see that FDI outflows gradually increase from 0.8% to 1.9%. This leads to decrease in gross capital formation from 30% to 29%. Theoretically, decrease in gross capital formation must lead to increase in the unemployment rate; however, in practice, the Republic of Korea had an increase in its unemployment rate from 3.7% to 3.2%. In the next section the test whether we can make inductive inference from this example will be tested.

DATA AND SAMPLE To determine the possible relationship between independent and dependent variables I use tables. To determine if two sets of data are significantly different from each other t-test is used because it is an appropriate tool to compare two means for the reasonably large sample n≥25. The statistical software used is STATA 12. To test the theory sample of 33 “advanced economies” by IMF (the data on San Marino and Taiwan is not provided by World Bank) for the period 1960 to 2011 will be used. The dependent variable is an unemployment rate. The data come from the World Bank’s compilation of data. The unemployment rate is defined as “share of the labor force that is without work but available for and seeking unemployment” (World Bank). For each level of FDI outflows, arithmetic mean of unemployment rate is calculated. Descriptive statistics for the variables are displayed in Table 1, which shows that 6.618% is the average unemployment rate for “advanced economies”.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 1: Descriptive Statistics for the Variables of Interest, 1960-2011

Min Max Mean Med Mode Var SD Obs FDI outflows (in %) 0 394.72 14.55 2.029 NA 4529.377 67.301 33 Unemployment rate (in %) 0 16.25 6.618 6.338 NA 10.722 3.274 33

The univariate distribution for the independent variable is illustrated in Figure 1. Here one can see that in the period from 1960 to 2001 countries with “advanced economies” did not tend to direct investments in other countries. However, an impressive rise in FDI outflows occurred in 2002 (19,555%). Then, in 2007, it reached the highest point, 23,874%. This shows that with the increasing globalization “advanced economies” become more and more interested in making investments in other countries. The independent variable of interest, FDI outflows, is defined as “an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise” (IMF). The variable is operationalized using data from World Bank, which represent FDI outflows as the percentage of GDP.

Figure 1: The univariate distribution for FDI outflows, 1960-2011

FDI outflows are divided in the corresponding groups: low (<1.1%), medium (1.1% - 3.5%), and high (>3.5%). For each group, the average unemployment rate is calculated. According to Figure 1, the relationship between FDI outflows and unemployment rate is not entirely direct because unemployment rate for medium FDI outflows is not consistent with the hypothesis that the higher FDI outflows lead to the lower unemployment rate in the source countries. However, the other part confirms the hypothesis. In particular, unemployment rate for those “advanced economies”, which have high FDI outflows, is less by 1,717% than unemployment rate for “advanced economies”, which have low FDI outflows.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Figure 2: The bivariate relationship between FDI outflows and unemployment rate in “advanced economies” by IMF, 1960-2011

EMPIRICAL FINDINGS The first hypothesis is tested in Tables 2, 3, and 4. Determining the relationship between average unemployment rates for low and medium FDI outflows, medium and high FDI outflows, and, finally, low and high FDI outflows, one can see that in two of three cases the null hypothesis is not rejected (.278<2.109 and 1.784<2.160). T-test indicates rather weak relationship between FDI outflows and unemployment rate that is not statistically significant (p=.78 and p=.09). The analysis for the relationship between unemployment rate for medium and high FDI outflows shows a low probability (p=.028) that the relationship happened by chance.

Table 2: The Relationship between Unemployment Rate for low FDI outflows and Unemployment Rate for medium FDI outflows, 1960-2011

Unemployment Rate for Unemployment Rate for low FDI outflows medium FDI outflows Mean 7.789167 7.383222 t obtained .278571 P(T<=t) two-tail .783934 t critical two-tail 2.109816

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 3: The Relationship between Unemployment Rate for medium FDI outflows and Unemployment Rate for high FDI outflows, 1960-2011

Unemployment Rate for medium FDI Unemployment Rate outflows for high FDI outflows Mean 7.789167 5.059778 t obtained 2.384752 P(T<=t) two-tail .028298 t Critical two-tail 2.100922

Table 4: The Relationship between Unemployment Rate for low FDI outflows and Unemployment Rate for high FDI outflows, 1960-2011

Unemployment Rate Unemployment Rate for low FDI outflows for high FDI outflows Mean 7.383222 5.059778 t obtained 1.784114 P(T<=t) two-tail .09775 t Critical two-tail 2.160369

Then, the control variable for GDP per capita is used. Sajid Rahman Khattak, analyzing an empirical relationship between FDI outflows and economic output in Pakistan, has noted that GDP has direct influence on outflows, as high GDP leads to high FDI outflows. So, making an inductive inference that Pakistan’s case can be applied to the other countries, a control variable for GDP per capita is used. Then, I divided “advanced economies” into two groups: less “advanced economies” and more “advanced economies”. For each group, I calculated average unemployment rate. I assumed that the higher the development of the country, the lower unemployment rate. However, this hypothesis was not confirmed. For all cases of less “advanced economies” group, null hypotheses were not rejected (.529<2.571, .669<2.571, and .273<2.776). In addition, the probabilities that the relationships happened by chance are very high (p=.619, p=.533, and p=.798).

Table 5: The Relationship between Unemployment Rate for low GDP per capita and Unemployment rate for medium GDP per capita for less “advanced economies”, 1960-2011

Unemployment Rate for Unemployment Rate for low FDI outflows medium FDI outflows Mean 9.49925 8.113 t obtained .5294 P(T<=t) two-tail .619181 t Critical two-tail 2.570582

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 6: The Relationship between Unemployment Rate for medium GDP per capita and Unemp6loyment rate for high GDP per capita for less “advanced economies”, 1960-2011

Unemployment Rate for medium FDI Unemployment Rate outflows for high FDI outflows Mean 9.49925 7.455 t obtained .669014 P(T<=t) two-tail .53313 t Critical two-tail 2.570582

Table 7: The Relationship between Unemployment Rate for low GDP per capita and Unemployment rate for high GDP per capita for less “advanced economies”, 1960-2011

Unemployment Rate Unemployment Rate for low FDI outflows for high FDI outflows Mean 8.113 7.455 t obtained .273116 P(T<=t) two-tail .798285 t Critical two-tail 2.776445

For two out of three cases of more “advanced economies”, null hypotheses were also not rejected (1.803<2.776 and .582<2.365). The probabilities that the relationships happened by chance are very high (p=.582 and p=.579). However, in comparison with the group for less “advanced economies”, the group for more “advanced economies” shows less weak relationship between FDI outflows and unemployment rate. In particular, the research hypothesis was confirmed in the case of medium and high FDI outflows (3.169>2.228).

Table 8: The Relationship between Unemployment Rate for low GDP per capita and Unemployment rate for medium GDP per capita for more “advanced economies”, 1960-2011

Unemployment Rate for medium FDI Unemployment Rate outflows for low FDI outflows Mean 7.363571 4.714 t obtained 1.802786 P(T<=t) two-tail .145765 t Critical two-tail 2.776445

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 9: The Relationship between Unemployment Rate for medium GDP per capita and Unemployment rate for high GDP per capita for more “advanced economies”, 1960-2011

Unemployment Rate for medium FDI Unemployment Rate outflows for high FDI outflows Mean 7.363571 4.3318 t obtained 3.168974 P(T<=t) two-tail .010005 t Critical two-tail 2.228139

Table 10: The Relationship between Unemployment Rate for low GDP per capita and Unemployment rate for high GDP per capita for more “advanced economies”, 1960-2011

Unemployment Rate Unemployment Rate for low FDI outflows for high FDI outflows Mean 4.9652 4.3318 t obtained .581948 P(T<=t) two-tail .578853 t Critical two-tail 2.364624

CONCLUSION The purpose of this paper is to explain the paradox that the FDI outflows do not negatively affect unemployment rate in “advanced economies”. From the empirical analysis, one can conclude that there are no convincing explanations on this paradox. So the hypothesis that FDI outflows do not lead to job losses in the source countries did not confirm. However, some points are worthwhile mentioning in this part. After the research, evidence was not found that a negative relationship between FDI outflows and unemployment rate exists. So if policy makers of “advanced economies” want to decrease unemployment rate in their countries, they should find alternatives to FDI. With the introduction of control variable, any relationship between GDP per capita and unemployment rate was not found. Unfortunately, more convincing evidence on relationship between FDI outflows and unemployment rate could be hampered by the subjective research. In particular, I made my own assumptions that the interval for low FDI outflows is below 1.1%, for medium FDI outflows – from 1.1% to 3.5%, and for high FDI outflows – above 3.5%. If different researchers made this empirical analysis, the results would not be the same. Another problem is that not all necessary information was available for the research. For example, the FDI outflows data on such units of analysis as Taiwan and San Marino was not available.

REFERENCES

Al-Sadig, A. 2013. “Outward Foreign Direct Investment and Domestic Investment: the Case of Developing Countries”, IMF Working Paper: 7-8.

Andersen, P. and P. Hainaut. 1998. “Foreign direct investment and employment in the industrial countries”. Bank for International Settlements. BIS Working Papers No. 61, Basle: Abstract.

Blomström, M. and A. Kokko. 1997. “Regional Integration and Foreign Direct Investment”, CEPR Discussion Paper, No. 1659.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Brainard, S. and D. Riker. 1997. “US Multinationals and competition from low-wage countries”, NBER Working Paper, No. 5959.

Culem, C. 1988. “The locational determinants of direct investments among industrial countries”, European Economic Review: 885-904.

Dunning, J. 1958. American Investment in British Manufacturing, George Allen and Unwin, London.

Feldstein, M. and C. Horioka. 1980. “Domestic saving and international capital flows”, Economic Journal: 314-29.

Hatzius, J. 1997. “Foreign direct investment, capital formation and labour costs: evidence from Britain and Germany”, Centre for Economic Performance Discussion Paper, No. 336.

Khattak S.R., Iqbal N., Khattak M., and Qadeer A. 2012. “Empirical Relationship Between Foreign Direct Investment and Economic Output in Pakistan”, Interdisciplinary Journal of Contemporary Research in Business, No. 4: 860.

Mucuk, M. and Demirsil M., 2013, “The effect of Foreign Direct Investment on Unemployment: Evidence from Panel Data for seven developing countries”, Journal of Business, Economics and Finance, No.3: 53-66.

Shaari, M., Hussain, N., and Halim, M., 2012, “The Impact of Foreign Direct Investment on the Unemployment Rate and Economic Growth in Malaysia, Journal of Applied Sciences Research, No. 9: 4900-4906

The World Bank, FDI Outflows, accessed April 3, 2013, URL: http://data.worldbank.org/indicator/BM.KLT.DINV.GD.ZS.

The World Bank (2013). GDP per Capita. accessed April 3, 2013, URL: http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD?page=1&order=wbapi_data_value_2008 %20wbapi_data_value%20wbapi_data_value-first&sort=asc

Zeb, N., Qiang F., and Sharif M., 2014. “Foreign direct investment and Unemployment Reduction in Pakistan”, College of Economics and Business Administration, Chongqinq University.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The institutional reforms in the EU and the new financial mechanisms in the Eurozone after the debt crisis

Psychalis M. Eirinis st. 62, p.c 15121, [email protected]

Abstract

The economic governance in the Eurozone and the EU is not the same after the crisis. The results of the financial crisis changed the EU’s way of thinking about addressing issues such as the public debt service, the banking system functioning, the ECB’s role and the depth of its intervention. When R. Mundell (1961) developed the theory of optimum currency areas the Eurozone was certainly not in his mind, while the same view is maintained by P. Krugman (2009) too. However, the EU financial and economic sector is entirely different today. After tens of EU bodies meetings there is now a number of new rescue mechanisms, institutions and regulations. But, are all these changes well enough to get the Eurozone out of the crisis? Certainly not, but they had never been given in the past as well. The “moral hazard” and the lack of a last resort lender did not finally work as the EU leaders thought. The Eurozone is the core of the EU and it is slowly evolved, step by step, from an economic to a political union. The EU has at its disposal the European Stability Mechanism (ESM) with a lending capacity of over half a billion euros, while there have been also other mechanisms like the EFSF and the EFSM, with the total sum of granted loans by these three mechanisms to date being amounted to over 350 billion euros. Additionally, the EU heads rapidly for a banking union through the establishment of new institutions like the Single Resolution Fund (SRF), the Single Resolution Mechanism (SRM) and the Single Supervisory Mechanism (SSM), which will supervise over 180 systemic banks in the Eurozone. Furthermore, the ECB used non-standard monetary policy mechanisms in order to support countries and banking institutions. The best known mechanism is the Quantitative Easing (QE) programme worth about one trillion euros. The new model of economic governance moves to a progressive direction, but the size of the instruments may not be enough for the EU to exit the crisis.

Keywords: economic governance, institutional reforms, Eurozone

1. Introduction This article is trying to highlight the institutional reforms promoted in the EU and the Eurozone, which aimed at the debt crisis resolution as well as the economic and political deepening. At the same time, it is noting the structural weaknesses that did not allow the EU and the Eurozone to deal immediately with the financial crisis. The global economic crisis burst out in September 20081 in the USA –like in October 1929– and a short time later shifted to the Old Continent. Chart 1 shows the evolution of GDP at current prices in the USA, the Eurozone, the EU, China and Russia. It is easily understood that the USA economy recovered much faster than anticipated and in 2010 it exceeded the GDP of 2008, whereas the Eurozone and the EU countries –though having achieved positive growth rates since 2011– have not reached yet the maximum GDP of 2008. The European edifice and more specifically its heart, namely the member states of the Economic and Monetary Union (EMU), did not manage to exit recession quickly, while, according to Charts 2 and 3, their growth and unemployment indexes2 are even now worse than those of the USA and China.

1 Although many economists had marked the real estate market recession since 2007 and the relative problems in the mortgage loan market due to high leverage that was transmitted to the financial sector, the international literature recognizes as the beginning of the global economic crisis the 15th of September 2008, the date when Lehman Brothers –the USA’s fourth largest investment bank– announced its bankruptcy.

2 According to figures of the World Bank, the unemployment rate for June 2015 in the USA was 5.3%, whereas in the Eurozone it was 11.1% and in the EU 9.6%. Respectively, the growth rate for the first quarter of 2015 in the USA was 2.9% compared to 1% in the Eurozone and 1.5% in the EU. 29

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Between 2011 and 2015 the euro depreciated by 30% against the US dollar3, while the Eurozone GDP increased marginally during the years 2009-2014 compared to the USA GDP, which soared over 18% in the same period. All the above-mentioned evidence supports the view that the euro edifice has not managed yet to exit the vicious circle of the economic crisis, the monetary uncertainty and the financial instability. Nevertheless, is the EU of 2008 the same with that of 2015? The answer is negative; of course, the EU is not the same; it is very different in economic, social and political terms. The time of the EU evolution since its establishment runs very slow, but during the last five years of the crisis the political time has been shrunk and many changes in the EU have been made, at least when it comes to economic governance and financial sector function. Finally, is the EU a shaky edifice that slowly collapses? Likewise, the answer to this question is also negative. The relative figures show that in 2014 the EU GDP remained the highest in the world (18.46 billion dollars), while it represented 29.78% of the global economy, which is a bit less than 1/3 of the global GDP, despite the fact that the EU constitutes just 7% of the global population4.

1.1 Economic governance in the EU The EU is not just a union of states; it is a sui generis entity, something much more than a confederation and way too much beyond a federation. The economic governance differs from the monetary governance5. The economic governance, which is the pillar of the EMU, includes the EU rules implemented by the states, but the economic policy remains at national level. On the contrary, the monetary policy has shifted to European level. According to theorists of this field (Barro and Gordon, 1983), the quality of monetary union depends on the rules, the prudence and the reputation of the central bank. As can be seen next, central bankers Trichet and Draghi maintained the ECB’s quality level at the highest possible standards and stabilized the monetary union amid debt crisis. On the other hand, some economists (Krugman, 2009), who claimed before 1999 that the EMU had not been fulfilling the conditions set by the theory of “Optimum Currency Areas” (OCA) and that it could hardly cope with an asymmetric economic shock, were at least partly confirmed.

1.2 Was the Eurozone prepared to deal with the crisis? The OCA theory (Mundell, 1961) argued that the adoption of a common currency from at least two states or a group of states, such as those of the Eurogroup, is legitimate since it would create more economic benefits than damages for them. The main criteria6 for an optimum currency area are the capital and workforce mobility7, the symmetric business cycles89 as well as the wage and price flexibility. Many economists (Krugman and Obstfeld, 2009, Gros and Thygesen, 1992) opposed the view that the Eurozone is an optimum currency area by stressing the ECB’s weakness to deal with

3 On 03.05.2011 the EUR/USD exchange rate was at 1.48, whereas on 11.03.2015 it was at 1.05. 4 All these data are collected from the highly recognized and reliable databases of the World Bank and the Eurostat. 5 The body in charge of the economic governance in the EU is Ecofin and in the Eurozone is Eurogroup, while for monetary governance issues the competent body is the ECB.

6 It is noted that the absence of certain circumstances can be addressed by the creation of a common budget (social transfers), which is the core of the confederalization. The EU budget amounts to 1.5% of the EU GDP compared to the USA budget, which amounts to 33% of the national GDP. 7 A recent study (Gáková and Dijkstra, 2010) proved that the US workforce mobility from state to state is about 3%, whereas that of the EU is only 1.2% even during the crisis. 8 A recent study (Antonakakis, Chatziantoniou and Filis, 2015) showed that the expansion of the debt crisis in the Eurozone can be explained by the business cycle crisis in regional countries (spillover effect). The debt crisis resolution can be achieved through a right macroeconomic policy, which will aim at the stabilization of regional economies and their economic development. 9 According to the analysis of credible economists (Degiannakis, Duffy and Filis, 2014), the EU member states and even more these of the Eurozone have neither similar business cycles nor a sufficient community budget and as a result there are serious problems for them in dealing with the crisis. 30

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 asymmetric shocks caused by the economic crisis. Added to that, the moral hazard in the Eurozone (Krugman, 2009) not only prevents states from being rescued by other states or the ECB10, but also left the monetary union exposed to a crisis nobody would (like to) imagine, since there was actually no emergency plan. A significant part of the economic crisis was due to the public debt surge and the inability of some governments to borrow so as to serve their obligations. Consequently, there were no appropriate mechanisms to deal with the debt crisis. A recent study (De Grauwe, 2013) holds that there were economic distortions and obstacles at national level before and after the monetary union, which did not allow the economic and monetary integration. Furthermore, after the monetary union there was neither fiscal discipline nor implementation of the monetary rules, since the Stability and Growth Pact was not implemented and, to make matters worse, the fiscal rules were loosened in “good” economic times. Additionally, due to the monetary union states lost their tools of economic equilibrium policy in order to deal with the shocks and the economic crisis.

2. The EU takes one step forward – Establishment of the European support mechanisms The Eurozone was designed without any provision of a financial assistance mechanism to deal with the moral hazard (Osman, 2012) as opposed to the EU, which provides the BoP11 assistance to the non-Euroarea member states; a mechanism with quite limited financial potential, though. However, when the debt crisis problem arose, the EU responded very fast –at least, according to its standards– to the exclusion of Portugal, Ireland and Greece from markets. The borrowing cost of these countries soared after 2008, as Chart 4 confirms, so that any public debt refinancing and state budget primary deficit covering became impossible. The EU established in May 2010 the European Financial Stabilization Mechanism (EFSM)12 and in June 2010 the European Financial Stability Facility (EFSF)13, which stopped its operations in June 2015, for it was succeeded since October 2012 by the European Stability Mechanism (ESM), which is a permanent support mechanism with a share capital of 60 billion euros. One of the differences between the EFSF and the ESM is that while the former constitutes a company having states as shareholders, being subject to private law and being located in Luxemburg, the latter is an intergovernmental organization, something much more than a company even at a semantic level for the prestige of the Eurozone and the process of its political deepening. Moreover, while the establishment of the EFSM is provided by the EU treaties and it can grant loans under the EU budget guarantee, the establishment of the EFSF and the ESM, on the contrary, is not provided by the treaties and the way of their granting loans is completely different from that of the EFSM. The aim of these mechanisms is to secure the EMU financial stability by supporting the Euroarea member states. Charts 5 and 6 and 7 show where the funds of rescue mechanisms have channeled into. Chart 7 confirms the fact that the EFSF granted Greece the biggest financial assistance, whereas rest countries were granted less funds. It is noted that the joint financial assistance provided by the EFSM and the ESM was about 700 billion euros. Chart 8 presents the change in interest rate spreads from June 2012 till February 2013 –using the German government bond rate as a benchmark– the period during which strong interventions were made towards the support of countries like Greece and Portugal. As it is easily understood, the EU’s establishment of support mechanisms changed the adverse situation of the governments in terms of

10 The ECB is not allowed by its statute to become a lender of last resort. 11 The Balance of Payments (BoP) allows the non-Euroarea member states to be granted medium- term loans in order to cover their financial needs. Recently, Romania, Latvia and Hungary –in cooperation with the IMF– made use of this assistance programme. However, the size of the mechanism is quite limited in case of a general crisis. 12 The EFSM was established by the 28 EU member states in May 2010. Its lending capacity amounts to 60 billion euros, which are under the EU budget guarantee. The EFSM provided financial assistance to Portugal and Ireland with 26 and 22.5 billion euros respectively, while in July 2015 it granted Greece a seven billion euro bridge loan. 13 The EFSF was established exclusively by the 17 Eurozone member states. Its lending capacity amounts to over 450 billion euros. The EFSF granted Ireland a 17.7 billion euro loan, Portugal a 26 billion euro loan and Greece a 130.9 billion euro loan. 31

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 financing their own obligations and appeased the markets, while all the countries that were in bailout programmes, except for Greece, are now borrowing from the international markets. The present debt crisis highlighted an innate weakness of the Eurozone, which is the absence of financial assistance mechanisms for the Euroarea member states. On the other hand, the EU responded very quickly to the rising problem and established three mechanisms. Currently, the lending capacity of these mechanisms is about half a trillion euros, while until now 368.5 billion euros have been granted. Table 4 presents the amounts that each mechanism lent to Euroarea member states.

3. The conservative ECB and the change of tack The ECB is a conservative bank, since its fundamental task lies in maintaining price stability, that is keeping a low inflation rate14, while according to the theoretical controversy of central bankers “Rules vs Discretion” (Barro and Gordon, 1983, Gordon and Leeper, 2006), the ECB was in favor of rules and against discretion contrary to other banks, like the US Federal Reserve (FED), in which price stability is associated with growth and employment. The ECB was built on Bundesbank model and thus it must not be considered accidental that its headquarters are in Germany. Perhaps it is more conservative than Bundesbank itself. The innate weakness of the Eurosystem to deal with the debt crisis is noticed from the difference in the evolution of Spain’s and UK’s bond prices. While Spain’s macroaggregates were in much better situation than those of the UK (De Grauwe, 2011), the borrowing cost for Spain rose during the crisis, whereas for the UK remained constant and then fell, as depicted in Charts 9 and 10. This happened because markets took for granted that the ECB would have difficulty in assisting Spain, as opposed to the Bank of England (BoE) that responded immediately by using monetary policy instruments to deal with a potential liquidity crisis of the UK government. But, did the ECB really stay inactive during the economic crisis? The ECB shifted the monetary policy after the crisis from the initial target of price stability to the targeted fight against the output gap. The ECB often exceeded its powers15 in order to restrain the debt crisis (Pronobis, 2014). The ECB used standard monetary policy instruments for crisis management, such as the open market operations16. However, the crisis was not possible to be addressed only by standard instruments and as a result the ECB used to a large extent non-standard financing instruments, mainly through asset purchase programmes17 (APP), since the monetary policy transmission mechanism was disrupted due to dysfunctions in market segments. On 26.07.2012, during the Global Investment Conference in London, Mario Draghi stated that “the ECB is ready to do whatever it takes to preserve the euro.” The reality confirmed that the ECB, in

14 According to article 127 (1) TFEU of the Lisbon Treaty, the ESCB’s fundamental task lies in maintaining price stability. 15 According to article 123 of the Lisbon Treaty, which replaced article 104 of the Maastricht Treaty, “overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.” The importance of article 123 should be reminded throughout the discussion for the ECB’s attitude and involvement in the debt crisis resolution process. 16 The open market operations are short-term (main refinancing operations – MROs) and long-term (long-term refinancing operations – LTROs), while the ECB’s biggest move was a three-year LTRO programme of one trillion euros in December 2011 and February 2012. 17 The non-standard financing instruments are used when the monetary policy cannot be implemented through standard financing instruments, namely in periods of economic crisis and financial instability. Such instruments are the following: a) the covered bond purchase programme (to date, two programmes have been completed –the CBPP1 and the CBPP2– and on 04.03.2015 the ECB decided to launch a third programme, namely the CBPP3), b) the asset-backed securities purchase programme (ABSPP), c) the secondary market public sector purchase programme (in fact, the PSPP is the quantitative easing programme which was decided by the ECB Governing Council on 22.01.2015 and was specified by the EU decision 2015/774), d) the bond repurchase programme (OMT), e) the security purchase programme (according to Eurosystem evidence, the ECB possesses through the SMP programme Spanish, Italian, Portuguese and Greek government bonds worth about 218 billion euros. The asset-backed securities and the cover bonds are used for the banking system liquidity support. 32

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 cooperation with the other EU bodies, exceeded itself. It took decisions that surprised the international community. The quantitative easing program announcement on 22.01.2015 –a government bond purchase programme of 60 billion euros per month till September 2016 (over one trillion euros in total)– impressed even the most optimist politicians and economists. It can be said that, according to the ECB statute, the interventions of the central bank moved across and maybe beyond the borderline of its territory as far as the direct and indirect financing of states and financial institutions is concerned. Nevertheless, its decisions were not contrary, but according to the political decisions made by the Euro Summits. It is no surprise that the Court of Justice of the European Union (CJEU), through a broad and progressive interpretation of the Treaty on the Functioning of the European Union (TFEU), ruled in favour of the ECB with its judgment in case C-62/14, concerning secondary market government bond purchases for countries with serious financing problems, which actually means indirect financing of governments. This judgement also paved the way for the quantitative easing programme (Quantitative Easing – QE). It is noted that the action against the ECB was brought by the Federal Constitutional Court of Germany, which, based on its own judgments, ruled that the ECB’s interventions were illegal. The ECB in cooperation with the European Commission (EC) contributed to all government support programmes. A decision of great importance for Greece was that of the Eurogroup on 21st February 2012, which stated that the ECB in association with the European central banks that possess Greek government bonds (SMP and ANFA holdings) will return these bonds to Greece in their purchase value and not their nominal value. This decision meant for Greece 6.3 billion euros net profit. Additionally, in 2012 and 2015 the ECB provided the Greek banking institutions, through the Emergency Liquidity Assistance (ELA), with a liquidity support of over 100 billion euros, even though there was no bailout programme and only with the prospect of signing one in order for them not to collapse (Götz, Haselmann, Krahnen, Steffen, 2015). Due to these choices the ECB was accused by several economists of operating as a lender of last resort as well as of putting in danger its solvency by supporting the Greek banking system, while it has been recommended that the ECB’s decisions and their rationale should be clear and well-grounded. According to the ECB report (2015), banks have lowered the credit rating level for granting loans to businesses and individuals by 13% since the beginning of 2015 so as to increase the number of granted loans and boost the liquidity in an environment of monetary policy easing, given that some countries of the Eurozone are even now still in deflation (July 2015 – Greece: 2.2%). Finally, the need for the ECB to take officially the role of the last resort lender is stressed, while it is recommended that more active policies must be forwarded in order that Euroarea avoids asymmetric business cycles (De Grauwe, 2013). All the aforementioned evidence clearly demonstrate that the ECB had serious weaknesses in dealing with the crisis, which emanate from its statute, its targets, its available tools and its conservatism that many ECB officers supported. The crisis restraining mechanisms were limited and the standard mechanisms were not adequate to deal with the problem. Despite its weaknesses, the ECB managed to keep the Eurozone alive and banks well recapitalised and firm, while there was also an obvious support to governments facing problems18 (Kouretas, Drakos, 2015). All these achievements were made by using instruments, programmes and mechanisms that were agreed at political level and implemented at techno-monetary level. Now the challenge for the ECB is to act in such a way that it reduces the output gap and enhances the consumer instinct trust (De Grauwe and Macchiarelli, 2015).

4. The road towards the European Banking Union

The government support to banks led many countries to the dramatic increase of their public debt,

18 The ECB purchased from the secondary market until the end of 2012 government bonds and provided assistance to banking institutions with the total sum of 320 billion euros, which equalled 3.5% of the Eurozone GDP, as opposed to FED and BoE, whose interventions in the US and UK economies equalled over 25% of their GDP. 33

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 while the fear of crisis transmission from one country to another restricted cross-border bank activities, thus slowing down growth and confining commerce strictly to national markets. The fragmentation in all parts of the chain, like in the financial markets, hinders growth, commerce and cooperation (Farhi and Tirole, 2014). The EU should have acted immediately in order to deal with the financial fragmentation, the uncontrolled European bank sector and the serious divergences in bank resolution and supervision rules, which led to lack of trust and market instability. The European Council of Heads of State and Government in cooperation with the European Parliament, the European Commission and the European Central Bank took a series of decisions1920 which enhance the ECB’s supervisory role21, while they also set the institutional pillars required for the banking union. The starting point was the common decision taken by the Ecofin and the Eurogroup on 18.12.2013, when they agreed the establishment of the Single Supervisory Mechanism (SSM), which was put in force on 04.11.2014. The ECB will supervise through the SSM 130 financial institutions, which represent 85% of the Eurozone financial system assets. In this way, the bank sector’s safety and robustness gap is covered, while financial solvency and banking integration at European level are also promoted (Magnus, Backman, Power, 2015). Furthermore, the European Parliament voted for and established the Single Resolution Mechanism (SRM) in April 2014, which will be put in force on 01.01.2016, after the EU bank recovery and resolution directive (BRRD)22 has been adopted by all member states. The SRM’s operation will be supported by the Single Resolution Fund (SRF). The SRF should reach at least 1% of the amount of covered deposits of all credit institutions authorised in all the banking union member states –which is estimated to be around 55 billion euros– and it is going to be built up over a period of eight years. In fact, the bank resolution financial burden shifts from national resources to a supranational fund (Lekkos and Leventakis, 2014). Through the banking union, the bond between the financial institutions bailout and the public debt –that is the substantial reason for the European debt crisis– is broken, while the first step for minimizing the borrowing cost difference, which hindered to date competition and growth, is also taken. The banking union will enhance the trust to the banking industry, shrink the fragmentation in the financial sector and reduce dramatically a bank-run risk. Finally, as far as the banking union is concerned, there was an agreement in April 2014 on the reform of the directive which provides the harmonisation of the national deposit guarantee schemes23. The banking union in association with the rescue mechanism establishment opens the discussion about the official, namely the institutional, transformation of the ECB into a lender of last resort (Xafa, 2015). Goodhart and Schoenmaker (2014) have argued for the need of the ECB financing states, although, as was mentioned above, it is formally not allowed to do so by its statute. Actually, however, this has been the case several times during the crisis.

5. The fiscal governance and the democratic legitimacy During the crisis, the Eurozone spread the panic of the financial markets to the political governance through strict austerity and fiscal consolidation packages, while the countries that implemented these packages were little benefited. Moreover, economic governance reforms took place in the Eurozone due to the economic crisis and under the massive pressure of the international markets

19 Council Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions – Text with SSM relevance 20 Regulation (EU) No 806/2014 of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 – Text with SRM relevance 21 The national central banks were charged until recently with the supervision of the national banking institutions. 22 Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions – Text with EEA relevance 23 Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes – Text with EEA relevance

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 and the government financial needs. Since 2010’s revision of the Stability and Growth Pact (SGP) a number of measures have been taken, with the so-called “Two Pack”24 –which is an evolution of a series of proposals known as the “Six Pack”25 – being their flagship. The “Six Pack” provides the strengthening of surveillance and assessment for the states in receipt of financial assistance, for those that are subject to an excessive deficit procedure and for those that are experiencing serious financial difficulties. Furthermore, both the preventive and the corrective arm of the SGP were revised towards a stricter direction by introducing the adoption of national fiscal rules, the prevention and the correction of macroeconomic imbalances and the intensification of deviation sanctions. The change in the government budget approval process is a typical example. More specifically, each member state will have to submit its draft budget for the following year by 15 October annually, namely before submitting it to the national parliament. If the EC has any objection about the draft budget then the government will have to revise it, while it is also provided that the states experiencing severe financial disturbance will come under enhanced surveillance and will also be compulsorily subject to a macroeconomic adjustment programme. Several economists criticised these reforms (Blanchard and Leigh, 2013), since the produced outcomes are inevitably associated with austerity programmes, while there is also a political problem concerning the infringement of the democratic principle “no taxation without representation”26. Additionally, they pointed out the essential difference between legal force and political legitimacy. Actually, they argue about the ability provided to the EC to enforce the adoption of new taxes or expenditure cuts from national governments, because in this way the fundamental principles of democratic legitimacy are undermined. According to De Grauwe & Yuemei Li (2013), as well as depicted in Chart 11, the higher the spreads the more intense the austerity measures were, something that seems quite as a punishment or penalty. Moreover, in the same study it can be figured out that the larger the austerity packages the higher the recession was, as it is also depicted in Chart 12. At the EU level, the member states co-signed on 01.03.2012 the intergovernmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), while on 01.01.2013 the Fiscal Compact –the TSCG fiscal component– entered into force. Since the beginning of the crisis as well as more recently –due to the strict austerity measures that accompanied bailout programmes– many economists (Wyplosz, 2015) have accused the EU of imposing infeasible requirements to countries that have no other choice to follow, which, according to them, is something fundamentally irrational and antidemocratic. In fact, the view that a country could be forced by another to take steps that it does not want to take is a violation of the EU democratic principle that all countries are equal.

6. Reflections The taboos of the European politicians about particular choices create serious problems to the economic integration and political deepening process. One typical example is the Eurogroup that although it takes the most important decisions, it does not have any legal or institutional status. Actually, it is an informal body with no minutes taken at its meetings, while its decisions define at least the future of the euro and the Eurozone. Likewise, the ECB Governing Council’s arbitrary way of setting the inflation target under 2% not only it does not secure the stable and sustainable growth, but rather confirms the imposition of personal obsessions at the expense of a really progressive economic policy.

24 The decision 6866/13 refers to a package of measures known as “Two Pack”, which includes: a) a regulation on enhanced surveillance of Euroarea member states that are experiencing or threatened with serious financial stability difficulties, b) a regulation on enhanced monitoring and assessment of draft budgetary plans of Euroarea member states, with closer monitoring for those in an excessive deficit procedure. 25 The EC issued six legislative proposals on 29.09.2010 relating to the reform and enforcement of the budgetary surveillance framework, the establishment and enforcement of a new surveillance framework to identify and correct emerging macroeconomic imbalances, and the harmonisation and strengthening of national budgetary frameworks. 26 Those who decide to impose a tax should bear the political cost of this decision, which is to publicly account for it. 35

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Furthermore, the amounts allocated by the European budget do not help essentially in the economic integration and political deepening of the EU member states and even more of the Eurozone member states. The fiscal union, through a strong EU budget, is far from the present reality. The structural funds, the Cohesion Fund, the European Investment Bank and other institutions help countries that undergo asymmetric shocks deal with them, but the amounts directed to these countries are too small27. The amount of 33 billion euros granted by the structural funds and that of 27 billion euros granted by the European Investment Bank cannot be seriously considered as an effective instrument for combating an asymmetric economic shock. Typically, the USA government federal budget equals 25% of the national GDP, while the EU budget equals less than 1.5% of the European GDP.

7. Conclusions The monetary union is something much more than a single exchange rate and a central bank. The loss of the sovereign monetary policy making is only one of the consequences for a country entering the common currency. The investors reacted faster than the cumbersome European governments and the absent European mechanisms, thus leading many countries to economic suffocation. The resolution of the “moral hazard” problem was not enough to prevent the debt crisis from spreading to several Eurozone member states. Both the EU and the ECB reacted in a multilevel way to address the crisis, through the creation of rescue mechanisms and emergency support programmes. A monetary union can work successfully as long as there is a single support and supervision mechanism at fiscal and banking level. Such mechanisms are provided by the political union, which is deeper than the economic union. These mechanisms were absent in the EU and due to the crisis they became gradually piece of the “euro-confederalisation” puzzle. However, their size, response speed and overall function continue to raise doubts about whether they can guarantee the Eurozone’s and the EU’s survival (De Grauwe and Li, 2015).

27 In order to be more easily understood the asymmetric shock cost and the need for smoothing out business cycles in the Eurozone member states, a typical finding from a recent study is given, (Antonakakis, Chatziantoniou, Filis, 2015) which prove that 80% of the business cycle shock in the EU member states are caused by the “spillover effect”, that is the shock dispersion from the rest EU member states. 36

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

8. Appendix: Charts - Tables

Chart 1: GDP at current prices

Chart 2: Growth rate

Chart 3: Unemployment rate

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Chart 4: Interest rate spreads for Eurozone member states

Chart 5: EFSF loans

Chart 6: ESM loans

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Chart 7: EFSM loans

Chart 8: The change in spread from June 2012 until February 2013

Chart 9: Interest rates of Spain and UK government bonds

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Chart 10: Spain and UK government debts

Chart 11: Austerity measures and spread levels

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Chart 12: Austerity measures and growth rate

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 1: GDP at current prices

GDP $ USA Euroarea EU China Russia 2006 13,855,888,000,000 11,171,913,753,944 15,277,153,474,532 2,729,784,031,906 989,930,542,279 2007 14,477,635,000,000 12,865,170,227,278 17,666,078,553,517 3,523,094,314,821 1,299,705,764,824 2008 14,718,582,000,000 14,104,469,320,998 19,012,781,861,265 4,558,431,073,438 1,660,846,387,625 2009 14,418,739,000,000 12,898,241,885,261 17,005,366,281,318 5,059,419,738,267 1,222,644,282,202 2010 14,964,372,000,000 12,635,364,066,139 16,937,824,892,179 6,039,658,508,486 1,524,917,468,442 2011 15,517,926,000,000 13,621,651,189,769 18,310,001,820,621 7,492,432,097,810 1,904,793,932,483 2012 16,163,158,000,000 12,642,794,345,501 17,232,152,914,473 8,461,623,162,714 2,016,112,133,645 2013 16,768,053,000,000 13,186,281,579,559 17,950,130,244,943 9,490,602,600,148 2,079,024,782,973 2014 17,419,000,000,000 13,402,747,137,991 18,460,645,625,272 10,360,105,247,908 1,860,597,922,763 Source: World Bank

Table 2: Growth rate

Growth China Euroarea EU Russia USA 2006 12.68823 3.258509 3.422497 8.153432 2.666626 2007 14.19496 3.060461 3.075478 8.53508 1.77857 2008 9.623377 0.494562 0.479147 5.247954 -0.29162 2009 9.233551 -4.54355 -4.41129 -7.82089 -2.77553 2010 10.63171 2.053446 2.124739 4.503726 2.53192 2011 9.484506 1.66137 1.761179 4.264177 1.601454 2012 7.750298 -0.82858 -0.49113 3.405547 2.321085 2013 7.68381 -0.36473 0.117218 1.340798 2.219308 2014 7.351 0.851212 1.294461 0.640486 2.388227 Source: World Bank

Table 3: Unemployment rate

Un.Rate USA Euroarea E.U Russia China 2006 4.7 8.324359 8.221834 7.1 4 2007 4.7 7.43085 7.175679 6 3.8 2008 5.9 7.498431 6.972234 6.2 4.4 2009 9.4 9.551122 8.956025 8.3 4.4

2010 9.7 10.18412 9.6352 7.3 4.2 2011 9 10.17533 9.611461 6.5 4.3 2012 8.2 11.40159 10.51036 5.5 4.5

2013 7.4 12.0867 10.93022 5.6 4.6

Source: World Bank

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 4: amounts that each mechanism lent

Mechanism/ Country Greece Cyprus Ireland Portugal Spain EFSF 130.9 0 17.7 26 0 ESM 86 9 0 0 41.3 EFSM 7.16 0 22.5 26 0 Total 224.06 9 40.2 52 41.3 Source: www.europa.com

References

Antonakakis, N., Chatziantoniou, I., Filis G., 2015, “Business Cycle Spillovers in the European Union: What is the Message Transmitted to the Core?”, The Manchester School, 83, 8, 119-225 Barro, R., Gordon, R., 1983, “Rules, discretion and reputation in a model of monetary policy”, Journal of Monetary Economics 12, 1, 101-121 Blanchard. O., Leigh. D., 2013, “Growth forecast errors and fiscal multipliers”, IMF Working Paper, 13, 1, 11-17. De Grauwe, P., Li, Y., 2015 “Has the Eurozone become less fragile? Some empirical tests”, Journal of Policy Modeling, 37, 3, 404-414 De Grauwe, P., Macchiarelli, P., 2015, “Animal spirits and credit cycles”, Journal of Economic Dynamics and Control, 59, 1, 95-117 De Grauwe. P., Li. Y., 2013, “Panic driven austerity and its implications”, http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-implications (08.09.2015) De Grauwe. P., 2011, “The Governance of a Fragile Eurozone”, http://www.ceps.eu/system/files/book/2011/05/WD%20346%20De%20Grauwe%20on%20Eurozone %20Governance.pdf (29.08.2015) De Grauwe. P., 2013, “Design failures in the Eurozone – can they be fixed?” http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper57.pdf (21.08.2015) Degiannakis, S., Duffy, D., & Fillis g., 2014, “Business Cycle Synchronization in EU: A Time- Varying Approach”, Scottish Journal of Political Economy, 61, 4, 348–370, Farhi, Ε., Tirole, J., 2014, “Liquid bundles”, Journal of Economic Theory, 158,2, 634-655 Gáková, Ζ. & Dijkstra, L., 2010, “Free Movement of Workers and Labour Market Adjustment: Recent Experiences from OECD Countries and the European Union”, http://www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/free- movement-of-workers-and-labour-market-adjustment_9789264177185-en#page (08.08.2015) Goodhart. C., Schoenmaker. D., 2014, “The ECB as Lender of last resort”, http://www.voxeu.org/article/ecb-lender-last-resort (17.09.2015) Gordon, D.B., Leeper, E.M., 2006, The price level, the quantity theory of money, and the fiscal theory of the price level, Scottish Journal of Political Economy, 53, 1, 4-27 Götz, M., Haselmann. R., Krahnen. J., Steffen. S., 2015, “Emergency liquidity assistance and Greek banks’ bankruptcy.” http://www.voxeu.org/article/emergency-liquidity-assistance-and-greek-banks-bankruptcy (16.09.2015) Gros. D, and Thygesen. N., 1992, “The Institutional Approach to Monetary Union”, The Economic Journal, 100,402, 925-935 Kouretas. P., Drakos, A., 2015, “The conduct of monetary policy in the Eurozone before and after the financial crisis.”, Economic Modelling 48,1, 83-92 Krugman, P., 2009, “The Return of Depression Economics and the Crisis of 2008”,W.W. Norton Company, New York

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Krugman. P., & Obstfel. M,, 2009 “Case Study: Is Europe an Optimum Currency Area?,” https://igeuropeanresearch.files.wordpress.com/2012/02/paper_ifier_martina_fuerrutter_feb2012.pdf (08.08.2015) Lekkos. I., Leventakis. A., 2014, “Economic Research”, www.piraeusbankgroup.com/~/media/Com/Downloads/Greek-Economy_Analysis/2014/Single- Supervisory-Mechanism.pdf (19.07.2015) Magnus. Μ., Backman. J., Power. C., 2015, “Banking Union”, http://www.europarl.europa.eu/ftu/pdf/el/FTU_4.2.4.pdf, (16.09.2015) Mundell. R., 1961, "A Theory of Optimum Currency Areas",The American Economic Review 51, 4, 657–665 Osman. G., 2012, “Moral Hazard and the Eurozone Crisis”, CFA Institute magazine, 26, 3, 18-19 Pronobis, M., 2014, “Is Monetary Policy of ECB the Right Response to the Eurozone Crisis?”, Procedia - Social and Behavioral Sciences, 156, 26, 398–403 The euro area bank lending survey, Second quarter, July 2015 Wyplosz, C., 2015, “The new European union”, http://www.voxeu.org/article/new-european-union, (20.08.2015) Xafa. M., 2015, European Banking Union 10 years on, https://www.cigionline.org/sites/default/files/cigi_paper_no.73_web.pdf (22.09.2015)

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Sectors attracting venture capital in Poland and other European countries

Elżbieta Grzegorczyk University of Lodz, Faculty of Economic and Sociology, Institute of Finance [email protected]

Introduction For both: the potential entrepreneurs and from the perspective of economic development, the distribution of industries in which capital providers are willing to invest their capital is extremely important. The PE/VC is perceived as the one invested in the areas widely named “innovative” such as: know-how, high-tech, etc. Relation with product, process or market innovation is understandable, as per the fact that they usually indicate the potential for outstanding growth, which by definition, is associated with expectations of high return of capital invested. The main objective of the following study is to analyse the spread of the private equity/ venture capital among sectors/ industries within the Polish economy and other European countries. Moreover, the aim of the study is an indication of sectors that draw the greatest attention of VC investors in Europe. In the analysis, special emphasis are placed on identifying sectors that might be treated as popular or specific within venture financing and identifying industry trends in recent years. What is more, interesting are also similarities and differences between chosen countries, in terms of industries that are attracting VC. Most of the PE/VC market reports published describe individual countries separately or combine them into subgroups usually as per their geographic location (e.g. CEE countries, Baltic countries, etc.). I strongly believe that the most appropriate grouping should depend on the level of development of the market, thus below analysis of PE/VC market, concern countries grouped in clusters distinguished based on their convergent traits and sector characteristics by taxonomic analysis. It gives the opportunity for reasonable comparison, which confront venture capital sectors interests in Poland with other countries from the same cluster to avoid comparing apples to oranges. In the study there were used statistics published by the EVCA28 (for years 2007-2014) for Poland and other selected countries. In addition, there were used statistical data provided by Eurostat29 and GUS30. Due to the nature of the sources, analysed data treat the PE/VC market generally, with no division into different types of private equity capital.

Sectors attracting PE/VC in Poland Analysing the investment preferences of VC funds in Poland for last 8 years (Table 1), it can be noticed, that although the distribution of capital between sectors occurs, it is not as significant as in the case of western Europe. In the analysed period, investors withdrew money from some sectors and at the same time they develop investment in areas that initially were considered as of little interest. Between 2009-2012, large sums of capital were invested in life sciences, which currently attract only around 4% of the total PE capital. According to data published in the report "Social Diagnosis 2013"31 in 2011 nearly 55,5% of working Poles used private healthcare, when in 2013 the percentage grew by 2,4 percent points to 57,9% [Czapiński, Panek, 2014, p. 127]. Reports indicate that the potential for private healthcare industry has been recognized by the financial markets. Investors in Poland decide to invest in companies within this profile [Jaka jest przyszłosć…]. Therefore, such a decline in investments in this area is highly surprising.

Table 1. The amount of PE/VC investments depending on the industry in Poland, in 2007-2014 [amount in euro k] POLAND ( in € k) 2007 2008 2009 2010 2011 2012 2013 2014

28 EVCA - European Private Equity & Venture Capital Association 29 Eurostat - European Statistical Office 30 Central Statistical Office of Poland (pl. GUS – Główny Urząd Statystyczny) 31 Polish report: „Diagnoza Społeczna 2013” 45

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Agriculture 0 0 82 320 0 0 0 0

Business & industrial 104 029 66 974 33 319 43 049 12 193 43 843 16 091 42 321 products

Business & industrial 1 256 26 049 22 485 63 659 18 770 3 564 58 820 2 605 services

Chemicals & materials 199 857 627 0 0 7 708 0 185

Communications 67 504 58 664 147 496 77 263 253 217 9 764 11 395 96 350

Computer & consumer 23 632 20 759 6 269 12 597 15 072 29 767 22 410 12 219 electronics

Construction 1 863 31 175 0 1 034 9 953 1 202 26 400 0

Consumer goods & retail 28 502 187 100 77 933 153 211 168 548 130 861 91 138 34 227

Consumer services 65 053 7 675 2 241 13 349 4 508 40 133 17 246 103 608

Energy & environment 0 64 294 1 100 0 11 501 32 056 29 728 20 260

Financial services 92 379 49 278 0 71 749 69 288 92 083 10 229 12 974

Life sciences 13 608 40 452 146 332 39 014 84 847 143 970 14 042 12 280

Real estate 3 420 510 44 300 1 073 0 0 0 0

Transportation 33 778 173 370 0 28 114 44 261 5 636 54 022 0

Unclassified 0 176 0 0 0 0 0 0

Total investment 435 224 727 334 482 183 504 432 692 157 540 588 351 520 337 029

Legend for colours (% of total PE/VC):

>30% >20% >10%

Source: Own based on EVCA Yearbook 2015.

The similar situation we can observe in the case of financial services, which in 2010-2012 were able to get 10%-17% of private equity and currently not more than 4%. Furthermore, the total value of the PE/VC in Poland is declining since 2012, thus total capital in 2014 represents only 62% of the amount reached in 201232. Therefore the decline of sector influence on gathering funds is even more forcible. The financial crisis had a strong impact on the reduction of interest in all: the financial services, consumer services and business & industrial services, especially in 2008-2009. However, currently PE investors' attention was directed towards consumer services, which in 2014 received more than 30% of the total private equity (around 103 million). It is surprising, however, that while in 2013 there was a significant increase in investment in business services, currently only 1% of equity goes to this sector, despite the optimistic forecasts on the significant development of this area. Poland is an increasingly frequently chosen country for location of modern business service centres. As indicated in the report "The potential development of services for business"33 [Polska południowa, 2014, p.3], this industry is currently one of the pillars of the Polish economy and the number of workplaces in the industry grow almost linearly. It is forecasted that the annual increase in new vacancies will reach the level of several thousand [10 lat sektora, 2014, p.74]. Industries, which continuously retain attractive for the PE/VC investors are communications

32 2012 – € 540.588k; 2013 – €351.520k; 2014 – € 337.029k. 33 Polish report: „Potencjał rozwoju usług dla biznesu” 46

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 and consumer goods & retail. When it comes to the former area, currently around 96 million euro (almost 30% of the total investment) finances telecommunications. The extremely rapid growth of mobile communication of the early XXI century has lost its strength, however, in this sector it is still believed to be relatively developing. The communications area is not only the mobile phone industry, but also widely understood media and IT. Consumer market is stable since 2008, as it continuously maintained the attention of venture investors, capturing from 34 million up to 187 million euro. So stable position may result from the fact that the majority of the entrepreneurs seeking financing from the PE/VC funds, have ideas for innovative products, whose main aim is to make peoples’ life easier or more enjoyable. The more products meet the needs of the society, the greater probability that the idea will gain a substantial audience and thus the company, in a relatively short period of time, achieve an increase in sales. It is worth mentioning that in the computers & customer electronics area, there is a decrease of capital. By definition, the electronics industry should be perceived as a perfect choice for PE investors as it gives the opportunity to achieve high profits, therefore it should easily gain funding. However, neither in Poland nor in Europe (generally), investments in this sector do not gather ample interest of PE/VC investors. Poland lacks in sufficiently innovative projects in the field of electronics, which could tempt potential venture funds. Industries which are perceived by investors as unprofitable, which they are rather reluctant to become involved in, are construction, agriculture, chemicals & materials. In the case of the first sector it is among other, due to the fact that projects in this area usually require relatively large amounts of money and the return on investment is highly dependent on the future status of the real estate market. It is difficult, therefore, to achieve above-average capital returns. Agriculture is assumed not to be attractive due to the lack of innovation in this field. Venture capital is not only about the sphere of highly advanced technologies (high-tech), but from the investors point of view, it constitute as an important source of innovative ideas that are worth investing in. The alarming fact is that investments in high-technologies in Poland are extremely small (table 2).

Table 2. The amount of PE/VC investment in high-tech sector in Poland, in 2007-2014 [amount in euro million]. POLAND ( in € m.) 2007 2008 2009 2010 2011 2012 2013 2014

Total PE/VC investment 781 727 480 504 689 541 352 337

high-tech investment 1 15 4 0,3 22 21 2 3

Source: own based on EVCA Yearbook 2015.

In 2014 the value of investments in highly developed technologies has not reached even 1% of the total PE/VC investments, such as in the previous year. Most countries in Central and Eastern Europe, invested no more than a few percent in the high-tech sector. In comparison, the average European share of high-tech in 2014 was 10.1% [EVCA 2015]. This may be the result of aversion of Polish investors to take excessive risks associated with the high technology area or from insufficient number of ideas in this area that investors would be willing to support financially. On the other hand, positive is the fact that the number of patents submitted by Poland at the European Patent Office is increasing (in 2004 - 124 patent applications, in 2012 - 469) [Eurostat, 2012], as well as the number of applications concerning strictly high-tech industry, which since 2004 has been doubled (41 applications in 2012). In Western Europe, however, the amounts are much higher - the average for European countries in 2012 is approximately 1900 total patent applications and 140 applications relating to high-tech [Eurostat 2012b]. Often for cheaper and safer way is to buy licenses and patents for technological solutions already proven. These, however, do not influence directly on the Polish market innovativeness. Poland has a huge area for improvement.

Sectors attracting PE/VC in selected congruous countries The analysis of sectors attracting venture capital in Poland and other countries should start with the countries cluster specifics. Clusters differentiation was made based on the taxonomic

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

analysis. The creator of multidimensional comparative analysis was Professor Z. Hellwig [Hellwig, 1968]. Proposed method is an estimation of the level of differentiation of objects described by a set of statistical characteristics. This lead consequently to identification of homogeneous groups - clusters of counties with similarities in their development [Kopczewska, 2009]. The taxonomic analysis of clusters for the five year period 2009-2013 brought the results to the four groups distinguished [Grzegorczyk, 2015, p.247], presented on the map 1 below. Clusters of countries are as follows:  First cluster: Germany, United Kingdom, France  Second cluster: the Belgium, Netherlands, Luxembourg, Denmark, Sweden, Finland, Norway, Switzerland, Austria and Spain  Third cluster: Italy, Greece, Portugal, Ireland, Baltic countries (Latvia, Lithuania, Estonia), Poland, Czech Republic, other CEE34  Fourth cluster: Romania, Bulgaria, Hungary, Ukraine When it comes to the discovered similarities within third cluster – where Poland is a member, this group contains a part of the Central and Eastern European countries and other ones of the eastern Mediterranean basin. In these cases the level of development of the PE/VC sector could be assessed as satisfactory.

Map 1. Map of Europe with analysed clusters indicated in 2014 Source: Grzegorczyk E., Private Equity/Venture Capital sector specifics in certain groups of countries within Europe [in:] 14th EBES Conference – Barcelona Proceeding Volume 3, EBES Barcelona 2014, p. 1944.

Countries indicated within third cluster are characterized by a low participation of PE/VC investments in total GDP value (around 1–2 %), while a low percentage in GDP is inadvisable because it reduces the possibility of a more rapid development of the economy [EVCA 2014c]. In this group from 28% to 50% of all sources employed are qualified employees hired in technology or science. Not significant difference comparing to the previous cluster (40%-58%). On average, the countries of this group report about 700 patents to the Patent Offices, which is not a significant number35. Venture capital in this cluster comes mainly from government agencies (from 31% to 58%), both indirectly and directly, in the form of quasi-funds, recapitalization of seed funds or

34 CEE – Central Eastern Europe (Ex-Yougoslavia and Slovakia) 35 Average no pf patents: Cluster 1 –11700; Cluster 2 – 1510; Cluster 4 – 72) 48

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

throughout funds of funds. When the distribution of resources between different industries is being concerned, in this group there is no longer visible such diversification as in the previous two clusters. All countries are focused mainly on 2–3 branches in a given year drawing from 60% up to 90% of the total PE/VC investment value. For each county, however, other sectors such are the area of interest. When it comes to investing in high technology, around 1%–13% of total investment finances high-tech. As per the level of company development, approximately 66% of capital is invested in buyout phase. However, such as in second group, the early phase of development gain in importance, as the companies in these stages, have the greatest difficulty in obtaining funding for the development. At the same time, these particular enterprises (SMEs) are the driving wheel of economies that want to catch up with more developed countries36. As Poland is combined in the third cluster, it seems most reasonable to confront PE/VC investor’s interests in Poland with other countries from the same cluster, where the level of development of the PE/VC sector is assessed as “satisfactory”. Third group consist of the countries from the Central and Eastern part of Europe (Poland, Czech Republic, Latvia, Lithuania, Estonia and Slovakia, Slovenia) and the countries of the eastern Mediterranean basin (Greece, Italy, Croatia), as well as Portugal and Ireland. It is visible, that in this cluster PE/VC investors are focused on particular sectors (table 3).

Table 3. The amount of PE/VC investments depending on the industry in indicated countries from Europe, in 2007 [amount in euro k] Czech Baltic Sector focus Poland CEE Greece Italy Portugal Republic countries

Agriculture 0 0 0 1 492 24 000 0 12 785

Business & industrial 104 029 49 233 3 000 0 0 722 260 15 668 products

Business & industrial 1 256 2 000 0 0 8 750 155 521 13 019 services

Chemicals & materials 199 8 091 0 0 0 61 860 24 885

Communications 67 504 1 038 7 431 3 023 41 508 174 075 5 245

Computer & consumer 23 632 0 2 976 0 0 70 538 3 761 electronics

Construction 1 863 0 20 525 0 0 15 500 10 178

Consumer goods & retail 28 502 8 091 21 518 27 000 238 1 156 695 8 079

Consumer services 65 053 1 063 1 582 2 100 0 80 229 29 436

Energy & environment 0 0 8 837 620 0 49 926 14 778

Financial services 92 379 0 0 0 0 84 734 11 020

Life sciences 13 608 0 5 600 9 000 15 125 47 978 6 300

Real estate 3 420 0 0 0 0 0 0

36 More information and details about the methodology of analysis and the characteristics of diversified clusters can be found in: Grzegorczyk E., 2015. Private Equity/Venture Capital sector specifics in certain groups of countries within Europe [in:] Mehmet H., Business Challenges in the Changing Economic Landscape – Vol. 1. Proceedings for the 14th Eurasia business and Economics Society Conference, Springer, pp.239-260. 49

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Transportation 33 778 0 0 620 0 219 250 0

Unclassified 0 0 0 0 0 0 50 970

Total investment 435 224 69 516 71 469 43 855 89 621 2 838 565 206 124

Subtotal High-Tech 1 102 0 3 731 0 14 780 134 716 43 399

Legend of colours:

>30% >20% >10% Source: own base on EVCA Yearbook 2015.

In all countries capital was concentrated mainly on 2-3 industries, which in 2007 consumed from 51% (Portugal) up to 94% (Czech) of the total value of PE/VC investments. In some of these countries other segments are almost completely omitted e.g. Czech, CEE, Baltic countries and Greece. It looks slightly different in case of Portugal, Italy and Poland, as there, although a few areas attract most of the venture capital; almost each sector grabs some of it. Those that gathers the biggest portion of PE/VC are however industrial products and customer goods. It might be related to the need of constant push facilitate life and make it more enjoyable in this part of Europe. Thus investors are seeking for entrepreneurs whose products meet these needs. What is worth mentioning, in 2007, in Portugal (21%) and Greece (17%) PE/VC invested a lot in high-tech. In Baltic countries and Italy investors financed technologies at amount around 5% or all PE/VC capital, but in the rest of the countries there was allocated not even 1%. The average within the cluster is around 5%. This situation may have a bad impact on the overall economy development. In 2014, the total capital amount in almost all countries from the third cluster fell significantly (except Portugal and CEE). These are echoes of the latest financial crisis, which touched, in a greater or lesser extent, almost all European countries, and resulted in more conservative approach when it goes to risky investments. The same as in 2007, (table 4) capital was mainly concentrated on 2-3 branches, gathering in 2014 from 51% (Portugal) up to 100% (Greece).

Table 4. The amount of PE/VC investments depending on the industry in indicated countries from Europe, in 2014 [amount in euro k] Czech Baltic Sector focus Poland CEE Greece Italy Portugal Republic countries

Agriculture 0 0 219 19 200 0 0 135

Business & industrial 42 321 0 2 203 3 800 0 234 597 24 042 products

Business & industrial 2 605 3 200 2 070 6 052 0 41 976 5 314 services

Chemicals & materials 185 0 196 0 0 101 933 1 165

Communications 96 350 6 267 3 934 250 198 18 898 8 959

Computer & consumer 12 219 1 819 1 864 4 903 0 4 999 11 727 electronics

Construction 0 0 0 0 0 3 000 35 512

Consumer goods & retail 34 227 2 600 2 811 1 000 0 191 337 34 694

Consumer services 103 608 0 1 998 9 436 0 52 687 19 769

Energy & environment 20 260 0 7 122 13 200 0 23 800 7 521

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Financial services 12 974 100 100 0 0 0 2 913

Life sciences 12 280 0 1 177 4 800 0 43 782 22 130

Real estate 0 0 0 0 0 0 53 625

Transportation 0 0 0 0 0 3 200 300

Unclassified 0 0 0 0 0 0 14 055

Total investment 337 029 13 986 23 694 62 641 198 720 209 241 861

Subtotal High-Tech 2 736 2 107 3 903 5 053 0 30 183 14 426

Legend of colours:

>30% >20% >10% Source: own base on EVCA Yearbook 2015.

It is worth to notice, that in Poland investors withdraw their money from some sectors (such as: real estate, transportation or construction) compared to 2007. The structure seems to be more similar to other countries from the group, where there are only a few sectors which are financed by PE/VC, but the rest is in the minority or even omitted. It may be a result of the fact, that the PE/VC market is not highly develop yet and venture investors, to manage the risk, prefer to keep in portfolios mainly the sectors, they perceive as profitable and rather predictable such as communications. In Portugal, however, the diversification of capital is visible, where each sector had the financial support from VC invertors. In 2014, the biggest amount of capital within the cluster went to business & industrial products (about € 306m), consumer goods & retail (about € 267m) and Consumer services (about € 187m). In turn, the least funded sectors were transportation, agriculture and financial services. When it comes to high-tech investments, the average for the cluster is 4% (Italy the most, Greece not at all).

Sectors in current PE/VC funds’ portfolios in Poland, Czech and Italy Each fund has its own investment policy and specific preferences as per the industry. Analysing the PE/VC investor’s interest in various sectors, therefore, it is worth to pay attention to the diversification of fund portfolios operating in different countries. Table 5 presents an analysis of the portfolios of more than 100 funds operating in Poland, Czech Republic and Italy, grouped by national PE/VC associations37. Some of the funds, due to the lack of publication of the current or sufficient data to verify whether the investment can be taken into account, had to be omitted38.

37 Poland – PSIK (Polskie Stowarzyszenie Inwestorów Kapitałowych); Czech – CVCA (Czech Private Equity and Venture Capital Assotiation); Itally – AIFI (Associazione Italiana del Private Equity e Venture Capital). 38 In the study there were taken into account the investments indicated by funds as the current (ongoing) projects and/or portfolio investments not older than 5 years. Projects considered are those that concern the particular country or the European markets. 51

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 5. Number of projects financed and number of funds investing the particular sectors in Poland, Czech Republic and Italy based on PE/VC funds’ portfolio analysis. Number of PE/VC funds that invested Number of projects financed by

in sectors PE/VC funds

Czech Czech Poland Italy TOTAL Poland Italy TOTAL Republic Republic

Agriculture 0 1 1 2 0 1 1 2

Business & industrial products 18 10 31 59 21 35 117 173

Business & industrial services 16 9 23 48 24 30 63 117

Chemicals & materials 8 4 11 23 10 10 26 46

Communications 20 11 28 59 56 73 96 225

Computer & consumer 11 7 12 30 12 19 18 49 electronics

Construction 6 2 2 10 8 1 2 11

Consumer goods & retail 14 10 33 57 23 36 103 162

Consumer services 19 4 18 41 27 13 37 77

Energy & environment 10 6 15 31 15 11 27 53

Financial services 9 8 8 25 17 17 14 48

Life sciences 20 9 19 48 26 43 69 138

Real estate 3 2 2 7 3 3 4 10

Transportation 6 6 2 14 6 10 3 19

Unclassified 5 0 0 5 5 0 0 5

Total no. of funds / projects 48 13 42 103 253 302 580 1135

Source: Own based on data from particular funds webpages (funds lists available on: PSIK http://www.psik.org.pl/fundusze.html; CVCA39; AIFI http://www.aifi.it)

The analysis, are in line with and confirms previous statistical one’s. However, in some sectors, it shows slightly different situation than earlier research. There should be highlighted a few important factors affecting the discrepancy results. In the following analysis of portfolios, the data relate to the amount of projects in the industry, not the amount of capital allocated for this purpose. In addition, many projects do not apply strictly to one sector, but is on the borderline of industries, making it difficult to qualify it. Moreover, survey-based projects are currently in the portfolio of PE/VC funds (funded no earlier than 2010). There are also projects funded by more than one fund, therefore may be included in the analysis twice or more. This does not affect negatively the interpretation, since the main question posed in the survey is about the industries that attract capital. Thus, if the project is able to attract more than one investor or if investors are willing to conduct the investment together, the better situation for the sector it shows. Analysing currently implemented capital projects financed by PE/VC, in the three indicated

39 Ondrej Ptacek, Equity Gap on the Venture Capital Market in the Czech Republic [in:] International Journal of Business and Management Vol. II (1), 2014, pp.67-68. 52

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

countries, definitely on the first place, there is the sector broadly understood as communication (i.e. the media and IT solutions). It is visible on the graph 1 below, that although statistics presented previously show a significant reduction in the total amount of capital in the communications sector between years 2007 and 2014, now almost one-fifth of all projects included in the PE/VC funds’ portfolios, are initiatives in modern media (e.g. mobile networks, portals, specialized software, etc.). More than half of the funds in Poland, the Czech Republic and Italy are interested in investing in this sector. Such disparities may arise from the fact that these projects do not need a lot of capital, so some might be unnoticed in the overall amount statistics. Similarly, in the sector business & industrial products there are many investors interested. In the countries taken into account, over 15% of all projects implemented with the help of PE/VC capital, support the ideas in this sector. However, when it comes to the total amount of venture capital, this sector gathers the biggest portion of funds. In this case it seems that the projects held in industry (such as: automotive, specialized machines, etc.) are absorbing a large sums of capital. The situation is similar in the consumer goods & retail sector. Interesting is the state in life sciences sector. Although from the overall statistical point of view, the attractiveness of this sector has been declining since 2007, it is considered by 46% of PE/VC funds as interesting – 138 projects are currently financed in the PE/VC fund portfolios.

Graph 1. Comparison of total investment amount and portfolio analysis results (for Poland, Czech and Italy combined as one). 0 50.000 100.000 150.000 200.000 250.000 300.000 Agriculture Business & industrial products Business & industrial services Chemicals & materials Communications Computer & consumer electronics Construction Consumer goods & retail Consumer services Energy & environment Financial services Life sciences Real estate Transportation Unclassified 0 50 100 150 200 250 Total no. of projects financed by PE/VC funds Total no. of PE/VC funds invested in sectors

Source: Own, based on data from particular funds webpages (funds lists available on: PSIK http://www.psik.org.pl/fundusze.html; CVCA40; AIFI http://www.aifi.it) Summary The European countries from the third cluster, including Poland, are characterized by low participation of PE/VC investments in Gross Domestic Product value (around 1%). There is still a large gap in the comparison with other European countries, where the percentage is from 3% to 5%. Although differences even within the cluster could be noticed, they have a lot in common. In Poland the most stable and continuously attractive for the PE/VC investors is sector of customer good and retail. What is important, almost 30% of the total investment finances telecommunications. As well private healthcare industry has been recognized by the financial markets. However, the financial crisis had a strong impact on the reduction of interest in all modern services, especially financial ones. Currently PE investors' attention was directed towards consumer services receiving more than 30%. Business services, gathers only 1%, despite the optimistic forecasts on the significant development of this area. It can be stated that Poland and other countries indicated in the cluster three, since 2007 are

40 Ondrej Ptacek, Equity Gap on the Venture Capital Market in the Czech Republic [in:] International Journal of Business and Management Vol. II (1), 2014, pp.67-68. 53

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

focused mainly on 2-3 main branches investing from about 51% up to 100% of the their total value of PE/VC investments. For each country, however, potential interesting sectors differs: e.g. in 2014 in Poland the most interesting were: consumer services (31%) and communication (28%); in the Czech Republic - communications (45%); in Baltic countries - Energy & environment (30%); in CEE countries – Agriculture (30%), which is unique interest in Europe; in Greece - communication (100%); in Italy - Business & industrial products (33%) and in Portugal - Real estate (22%) which is as well quite unusual among this part of Europe. Analysis only of the value of PE/VC investment is not presenting the whole picture of sector diversification. Comparing it with the sectors of currently financed projects showed in the PE/VC portfolios allows to present wider spectrum. Generally this study confirms previous results, however, in some aspects, it differ from earlier research. In case of communication and life sciences, although the capital invested is not considerable, a lot of projects attracted the interest from PE/VC funds. Both sectors are perceived as quickly developing which attract investor’s interest and, moreover, they tend to be less capital-absorbent, which gives PE/VC funds a greater possibility of capital movements within their portfolio and thus manage a risk.

Bibliography

Grzegorczyk E., 2015. Private Equity/Venture Capital sector specifics in certain groups of countries within Europe [in:] Mehmet H. Bilgin, H. Danis, E. Demir, U. Can (editors), Business Challenges in the Changing Economic Landscape – Vol. 1. Proceedings for the 14th Eurasia business and Economics Society Conference’ Eurasia Studies in Business and Economics 2/1, Springer, pp.239- 260. Ptacek O., 2014. Equity Gap on the Venture Capital Market in the Czech Republic [in:] International Journal of Business and Management Vol. II (1), pp.67-68. Kopczewska K., Kopczewski T.,Wojcik P., 2009. Metody ilościowe: Aplikacje ekonomiczne i finansowe. [Eng. Quantitative methods: Economic and financial implementations]. Warszawa: CeDeWu. Hellwig, Z.,1968. Zastosowanie metody taksonomicznej do typologicznego podziału krajów ze względu na poziom ich rozwoju oraz zasoby i strukturę wykwalifikowanych kadr [Eng. Application of the taxonomic method in typological dividing of countries due to their level of development as well as their resources and the structure of qualified staff]. Przegląd Statystyczny, 4, pp. 307-326. EVCA Yearbook 2015. European Private Equity Activity Data 2007-2014 [excel] Available at [Accessed 15 September 2015] EVCA Yearbook 2014, European Private Equity Venture Capital Association. (2014). EVCA Central and Eastern Europe Statistics 2013: An EVCA special paper. [online] Accessed August 28, 2014, from http://www.evca.eu/media/259990/_evca_bro_sp_cee2013.pdf [Accessed 15 March 2015]

Polska Południowa. Potencjał rozwoju usług dla biznesu. Zasoby ludzkie | Rynek nieruchomości , 2014. Advisory Group TEST Human Resources [pdf] Available at [Accessed 30 August 2015]. 10 Lat sektora nowoczesnych usług biznesowych w Polsce [Eng. 10 years of business services sector in Poland], 2014. HAYS Talen Solutions Intelligent Resourcing, [pdf] Available at [Accessed 1 May 2015].

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Eurostat 2012a. Patent applications to the European patent office (EPO) [online] Available at [Accessed 15 April 2015]. Eurostat 2012b. High-tech patent applications to the European patent office (EPO) [online] Available at [Accessed 15 April 2015]. Jaka jest przyszłość prywatnej ochrony zdrowia w Polsce? [Eng. What is the future of private health care in Poland?], Nowoczesna Klinika - Magazyn Prywatnej Ochrony Zdrowia [online] Available at http://www.nowoczesna- klinika.pl/pl/artykuly/17/analizy_raporty/1/334/Jaka_jest_przyszlosc_prywatnej_ochrony_zdrowia_w _Polsce_ [Accessed 23 September 2015]. Czapiński J., Panek, T., 2014. Diagnoza społeczna 2013. Warunki i jakość życia Polaków – Raport [Eng. Social Diagnosis 2013. The conditions and quality of life in Poland – Report] Warszawa [pdf] Available at < http://analizy.mpips.gov.pl/images/stories/publ_i_raporty/DS2013/Raport_glowny_Diagnoza_Spolecz na_2013.pdf> [Accessed 20 September 2015]. List of particular fund portfolios available at webpages published at PSIK Portal : - http://www.21concordia.com/ - http://3tscapital.com/ - http://www.abris-capital.com/ - http://www.adventinternational.pl/ - http://www.arxequity.com/ - http://www.avallon.pl/ - http://www.blackpearls.pl/ - http://www.bridgepoint.eu/ - http://www.seedfund.pl/ - http://www.c-p.pl/ - http://cee-equity.com/ - http://www.darbyoverseas.com/darby/index.jsp - http://www.vestor.pl/kim-jestesmy - http://www.ei.com.pl/pl/ - http://www.eqt.se/ - http://evf.com.pl/ - http://gpventures.pl/ - http://www.highlander-partners.com/ - http://www.ikinvest.com/ - http://www.imperasa.pl/ - http://www.innovacap.com/ - http://www.iqpartners.pl/ - http://www.kfk.org.pl/ - http://www.krokuspe.pl/ - http://mci.pl/ - http://www.mezzmanagement.com/ - http://www.mideuropa.com/ - http://www.montagu.com/ - http://www.oresaventures.com/ - http://www.pentonpartners.com/ - http://www.pinebridge.com/

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

- http://www.rp.com.pl/?id=1 - http://www.resourcepartners.eu/en - http://www.riversidecompany.com/ - http://www.royalton-partners.com/ - http://www.satus.pl/ - http://www.secus.pl/ - http://www.skyline.com.pl/ - http://http//speedupinnovation.com/ - http://www.syntaxis-capital.com/ - http://value4capital.com/ - http://www.warburgpincus.com/ - http://www.warsawequity.com/ - http://www.waterland.nu/ - http://www.wsicapital.pl/ List of particular fund portfolios available at webpages published at AIFI, : - http://www.035investimenti.it/ - http://www.21investimenti.com/ - http://www.aksiagroup.com/ - http://www.alcedo.it/ - http://groupealpha.com/ - http://www.altopartners.it/ - http://www.ambientasgr.com/ - http://www.antaresinvestimenti.it/it.html - http://www.ardian-investment.com/ - http://www.argos-soditic.com/ - http://www.apesgr.it/ - http://www.bcpartners.com/ - http://www.cinven.com/ - http://www.cfi.it/public/ - http://www.clessidrasgr.it/ - http://www.cvc.com/ - http://www.cooperarespa.it/ - http://www.consiliumsgr.it/index.php/en/ - http://www.doughtyhanson.com/ - http://dpixel.it/ - http://www.mastcap.com/ - http://www.emisys.it/ - http://www.f2isgr.it/f2isgr/index.html - http://www.finintprivatequity.it/it/01.php - http://www.fondoitaliano.it/ - http://www.fondostrategico.it/it/index.html - http://www.quadriviosgr.com/ - http://www.gradientesgr.it/en - http://www.higeurope.com/main/ - http://www.h2ispa.com/ - http://www.ipspa.it/ - http://www.mandarincp.com/en/ - http://www.mpventure.it/en/ - http://www.p101.it/portfolio/ - http://www.paipartners.com/ - http://www.sofinnova.fr/ - http://www.starcapital.it/ - http://fondisici.it/it/portafoglio/ - http://www.timventures.tim.it/

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

- http://unitedventures.it/ - http://www.vertis.it/ - http://www.wisesgr.it/it/profilo/WiseSGR/index.html - http://www.zernikemetaventures.com/SitePages/home.aspx List of particular fund portfolios available at webpages: - http://3tscapital.com/ - http://www.amundi.com/int/Welcome-to-Amundi - http://www.adventinternational.com/ - http://www.arguscapitalgroup.com/pl/ - http://www.arxequity.com/node/18?language=pl - http://www.credoventures.com/ - http://www.ei.com.pl/pl/ - http://www.genesiscapital.co.uk/ - http://www.gimv.com/en - http://www.mideuropa.com/polish/o-nas/ - http://www.pinebridge.com/ - http://www.riversidecompany.com/ - http://value4capital.com/portfolio-companies/

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Terms of trade of EU member countries in the context of changing primary commodity prices

Witkowska, E. A. Brandenburg University of Technology Cottbus-Senftenberg Erich-Weinert-Str.1 03046 Cottbus, Germany [email protected]

Ewa Anna Witkowska is a Research Assistant at Brandenburg University of Technology Cottbus-Senftenberg in Germany at the Chair of Business Administration and Corporate Finance. She graduated from Free University of Berlin in Business Administration with the degree Diplom-Kauffrau, which is equivalent to a Master’s degree, specializing in Accounting/Auditing and Strategic Management. Prior to finishing her degree, she studied abroad at San Diego State University with a focus on International Trade and International Business.

Abstract

In this paper, the terms of trade of EU member countries are presented and the reasons for their movements are discussed. The assumption is made that the diverging terms of trade development of industrialized countries is due to their differing specialization in specific export sectors and the corresponding price developments of these exported goods. The dynamics of primary commodity prices have an effect on the terms of trade of many European countries, therefore the long-term price developments of selected primary commodities are of interest. Illustrated in this context are the long-term price developments as well as the primary commodity terms of trade of the most important primary commodities, together with the underlying reasons for these trends.

Keywords: International Trade, Terms of Trade, Primary Commodity Prices

Introduction

In today’s globalized world, it is of great importance to calculate and analyze the terms of trade numbers, since they are an important indicator of the gains of trade (see Eiteman et al., 2010, p. 608) and welfare (see Krugman/Obstfeld, 2009, p. 93), as well as the international competitive advantage of a given country. They tell us about the domestic exports that are needed to secure the same level of imports. The terms of trade of a given nation are defined as the ratio of their average index of export prices relative to their average index of import prices:

Terms of trade =

(United Nations, 2012, p. 47). In the calculations, representative baskets are used, based on the most popular exports and imports of a given country. Usually, every country is interested in an improvement of their terms of trade since an increase means that, for a given quantity of exports, the country is now able to obtain a bigger quantity of imports.

In tab. 1 are depicted the terms of trade, also referred to as net barter terms of trade (see Sell, 2003, p. 182), from 2000 until 2013, of the “EU-28 countries“, which are the member states of the European Union by 1. July 2013.

The net barter terms of trade indices in tab. 1 are calculated as the percentage ratio of the export unit value indices to the import unit value indices, measured relative to the base year 2000. For the

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 calculations, a set of average price indices is constructed, and unit value indices at the country level are calculated using the current year’s trade values as weights (see World Bank Webpage, 2015).

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Tab. 1: Net barter terms of trade indices for the EU-28 countries - Base year: 2000

EU-28 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1. Austria 100.0 98.8 99.0 97.9 96.4 94.6 93.6 94.1 91.6 93.8 90.7 87.8 86.5 86.7 2. Belgium 100.0 99.7 101.3 100.7 98.6 98.9 98.5 99.4 95.9 99.0 96.2 95.0 94.2 94.4 3. Bulgaria 100.0 98.3 100.3 101.2 95.2 96.7 102.7 105.1 105.7 109.0 108.7 107.6 107.6 107.0 4. Cyprus 100.0 102.1 103.0 102.9 103.4 101.5 102.5 101.6 106.1 97.1 97.8 96.3 93.7 92.2 5. Czech Republic 100.0 101.6 103.7 104.3 107.0 106.4 104.4 104.6 102.8 105.5 103.3 102.8 101.5 101.6 6. Croatia 100.0 98.8 97.4 97.2 95.5 95.3 96.6 97.2 96.6 99.6 101.1 98.3 98.1 97.7 7. Denmark 100.0 100.8 100.4 100.3 97.5 99.6 99.3 100.7 101.1 99.5 99.9 99.7 100.1 100.0 8. Estonia 100.0 104.2 99.4 98.0 97.7 96.0 94.2 96.9 94.6 98.6 97.7 96.4 94.3 94.1 9. Finland 100.0 99.1 100.6 97.6 93.3 93.4 91.9 94.4 89.8 92.3 90.5 87.8 86.6 87.9 10. France 100.0 100.5 100.5 99.4 98.8 96.0 95.7 95.6 93.3 95.9 92.2 89.0 88.4 88.3 11. Germany 100.0 100.1 102.0 102.5 100.8 98.8 97.0 97.2 95.8 100.1 98.3 95.3 94.4 96.3 12. Greece 100.0 98.3 99.0 96.6 96.9 93.6 93.0 93.3 91.7 90.3 90.0 90.5 88.4 88.3 13. Hungary 100.0 98.9 98.7 99.5 98.5 96.8 93.3 93.1 91.8 95.2 93.0 93.5 93.0 95.2 14. Ireland 100.0 100.7 99.3 97.9 95.9 98.8 96.5 95.7 94.6 97.5 104.2 97.7 96.4 94.8 15. Italy 100.0 101.9 103.9 105.1 103.9 102.1 98.7 100.7 97.7 102.5 98.0 95.0 95.0 97.7 16. Latvia 100.0 101.4 104.7 104.2 106.7 103.7 102.7 108.8 104.5 104.2 106.5 105.4 102.6 104.2 17. Lithuania 100.0 98.7 99.1 103.3 104.0 100.5 97.7 98.9 96.0 97.4 95.1 94.5 94.3 93.4 18. Luxembourg 100.0 98.9 100.5 94.8 89.7 88.8 85.8 84.9 82.0 83.2 79.9 78.2 75.9 77.7 19. Malta 100.0 102.0 106.9 102.9 101.0 95.9 103.1 106.5 110.5 124.4 131.8 136.5 120.0 124.8 20. Netherlands 100.0 101.2 99.8 99.7 99.4 96.6 94.7 95.9 94.1 95.1 92.7 93.7 91.8 92.7 21. Poland 100.0 102.5 104.3 103.2 105.4 103.2 101.9 102.3 100.5 104.0 101.4 99.0 97.3 97.9 22. Portugal 100.0 99.6 100.3 98.2 97.3 94.1 93.3 93.0 90.4 94.4 92.9 91.5 91.3 92.6 23. Romania 100.0 100.3 102.4 103.6 107.1 107.2 108.7 108.7 107.8 109.2 110.3 111.1 110.4 109.7 24. Slovak Republic 100.0 97.3 98.3 100.5 101.9 102.0 99.3 98.1 94.7 97.7 94.0 93.2 91.6 91.6 25. Slovenia 100.0 101.1 102.8 102.9 101.5 98.3 98.3 97.1 95.3 98.9 95.8 94.5 93.6 94.6 26. Spain 100.0 99.4 99.9 99.5 98.2 96.0 94.9 95.0 91.9 96.9 93.0 89.1 87.9 89.3 27. Sweden 100.0 99.7 99.6 99.2 97.8 95.8 94.5 95.7 93.8 95.2 94.8 92.6 92.3 92.9 28. United Kingdom 100.0 100.7 100.0 101.6 102.0 104.0 103.8 103.8 104.2 102.8 102.7 101.0 100.6 102.2 Source: Own representation, data from World Bank Webpage 2015.

ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

A long-term analysis of the terms of trade of the EU member countries shows that the terms of trade are very diverse, which is an indication of the different trade patterns and economic powers of these countries. For a better overview and understanding, certain countries were chosen to illustrate the development graphically (see fig. 1). In fig.1 are selected the terms of trade of European countries with a relatively stable and strong economy (Belgium, Germany and Netherlands) and of economically weaker countries which have been strongly affected by the Euro crisis (Finland, Greece, Portugal and Spain).

Fig. 1: Terms of trade of selected EU member states

105

100

80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Belgium Finland Germany Greece Netherlands Portugal Spain

Source: Own representation, based on data from World Bank Webpage 2015.

As can be observed in fig. 1, the terms of trade of the chosen EU countries usually responded to certain economically relevant events. In consequence of the global financial crisis that began in the United States in 2007, almost all EU countries faced significant drops in their terms of trade in the following year. It is evident that the terms of trade of most EU countries had been falling since the year 2000. Why is that? A key reason had been the persistent rise in prices for raw materials since the beginning of the 21st century, which accounted for a large proportion of imports for many European countries. An important feature of this primary commodity boom had been a strong differentiation of price dynamics. The highest price increase had been denoted for metals and fuels, and the lowest for agricultural commodities (see IMF, 2008, p. 199). There was also a rise in prices for oilseeds and vegetable oils. An explanation for this phenomenon could be the use of these products for biofuel production (see Johnson, 2007, p. 54). The literature also points to the link between uranium prices and prices of coal and other fuels, as substitutes in the production of electricity (see Helbling et al.,

61 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

2008, p. 13). The main reason for the price increases of primary commodities in these years had been a sharp increase in demand for these products. There had certainly been a connection with the worldwide economic boom and the general growth of income per capita, but especially with the rapid pace of industrial development and economic expansion in the so-called emerging markets, mainly China and India (see United Nations, 2005, p. 73). The demand for crude oil had risen particularly strongly (see Helbling et al., 2008, p. 11), which resulted in a steady rise in crude oil prices since the beginning of the 21st century. In fig. 2, the worldwide primary energy consumption, and the high share of consumption by China and India can be seen. Fig. 2: Energy consumption

Source: World Bank Group 2015, p. 8. In the described price increase, the low elasticity of supply had been an issue as well. This is not surprising as can be noticed in the extensive literature about the low supply elasticity of the primary goods industry, especially in the short term (see for example Canuto, 2014, p. 3; see Hirshleifer et al., 2007, p. 195-197). The structural basis of the weak supply response had undoubtedly resulted from a general underinvestment in these sectors in the 90s of the 20th century, when primary commodity prices were still very low. As can be seen in fig. 1, the terms of trade of the shown EU member countries are decreasing, but at different speeds. The terms of trade of the countries Germany, Belgium and Netherlands are falling more slowly than those of Portugal, Spain, Greece and Finland. The evolution of the terms of trade of Germany is very interesting. The terms of trade of Germany show a downward movement, which means there is a deterioration of the terms of trade ratio. Does this imply that the German economy is getting worse off? So it might appear, if only the terms of trade development was viewed, but not the global revenue, which for that matter can be a valid little point of criticism regarding the terms-of-trade concept. If, for instance, certain German companies increase their productivity because of technological progress, and as a result their costs decrease, they can charge lower end-prices for certain products. As a consequence, the terms of trade of Germany deteriorate, but it is possible that there is economic growth in the country. Also, if German companies can sell a higher number of products in new markets because of good quality, reputation and marketing, which results in an increase of the total value of exports, then this situation can be in fact

62 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 quite advantageous for German companies, even if the terms of trade of Germany have a falling tendency. This has been the case of the German economy in the recent years. The quantity of the products they sold has been very high. Germany has been very successful in foreign markets and the surplus in the German trade balance has been relatively high.

On the other hand there were countries that had a worse terms of trade development (see fig. 1 - Finland, Greece, Portugal, and Spain) due to their weaker exports, partly less competitive products and less sophisticated exports (for export profiles, see United Nations, 2014, p. 88, 166, 176, 180, 272, 302, 338). The consequence had been debt growth, the recession has deepened and reduced the wealth.

As the example of Germany shows, a decrease in terms of trade is not necessarily detrimental for a country if it leads to a significant expansion in export volumes which results in an increase in the value of exports. The limitations in the informational value of the terms of trade has led to the development of a number of other concepts. One of them is the income terms of trade, which takes into consideration the quantities of exports. Income terms of trade are calculated as a multiplication of terms of trade with the index of the volume of exports (Knall/Wagner, 1986, p. 96). Another important concept is the factorial terms of trade. This ratio takes into account productivity gains in the domestic export industry and can be obtained by multiplying terms of trade with an index of factor productivity of the export industry (Wagner et al., 1983, p. 93 f.).

One possible explanation for the diverse developments of the terms of trade of the EU member countries (see fig. 1) could be seen in the different sectors of exports and imports of these countries. It can be assumed that when individualized, knowledge-based products have a dominant position in the export structure of a country, this country tends to have more benefits from trade in the long run compared to a country whose exports are largely composed of more standardized products.

For these two groups, standardized (mostly primary commodities) and individualized goods (mainly manufactured goods), fundamental differences for price elasticities of supply and demand can be found. The demand for standardized, i.e. primary products, tends to be very price elastic. When a producer of a standardized commodity increases the price, it may often be relatively easy for a buyer to find another supplier or a substitute product (see Mankiw, 2014, p. 91). In addition, the intensity of competition among suppliers in the case of primary products is often higher than with regard to individualized products, because primary commodities are in most cases relatively homogenous (see Porter, 1980, p. 19, where lack of differentiation is considered a structural industry factor that is fostering rivalry among competitors). In the case of standardized products, price elasticity of demand is usually greater than price elasticity of supply. The supply is often dependent on long production cycles. In the agricultural sector for instance, there are seasonal fluctuations (e.g. milk production) or cyclical fluctuations (e.g. pig cycle) (see Bundesministerium für Ernährung und Landwirtschaft, 2015, p. 7). Because of that, the price of primary commodities is to a large extend determined by demand. Suppliers of these products often have low possibilities of price determination.

Individualized goods, on the other hand, are often classified as non-substitutable or not easily substitutable in the perception of the end user. The demand for this type of goods is therefore relatively price inelastic. Demand for industrial products hardly decreases when there is a price increase, as consumers have access to only a few equivalent alternatives. Concerning individualized goods, there is usually a higher price elasticity of supply than of demand. In this case, supply is highly relevant for the determination of prices. The suppliers of such products tend to be in a relatively good position, because in some cases, the buyers of their products are dependent on them.

63 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

In the long run, world prices are influenced by various factors, such as income changes, structural, technological and other changes. In a long-term observation, especially income elasticity of demand plays an important role for world price formations, therefore this aspect will be discussed in the following. Income elasticity of demand for primary products is generally lower than for manufactured goods. Primary products (standardized goods) are usually necessity goods, of which demand remains constant, or possibly growing, but very slowly, when income increases. As a consequence, income elasticity of demand for primary commodities is relatively low, and the demand for goods of this kind usually does not keep pace with income. Demand for manufactured products however usually reacts very elastically with regard to income changes. When income increases, then on one hand, there is an increase in the demand for high quality products, or technologically advanced products. On the other hand, completely new needs for new products are created through marketing (Prebisch 1950, p. 18). As a result, there is a new demand for these products, as income increases. Prebisch and Singer are implying that primary commodity prices and manufacturers` prices have diverging evolutions in the long run (Prebisch, 1950; Singer, 1950). The relation of these two product sectors is reflected in the so called Primary Commodity Terms of Trade (see Ocampo/Parra, 2004, p.1):

Primary Commodity Terms of Trade (i.e. ”real“ price of a commodity) =

(Ocampo/Parra, 2004, p. 1, 17; World Bank Group, 2015, p. 12). The index “Primary Commodity Terms of Trade” depicts the primary commodity price index related to the Manufacturers` Unit Value (MUV). The World Bank uses the term of the “real“ price of a commodity (see World Bank Group, 2015, p. 12 with the example of agricultural commodities). Different categories of commodities can be chosen in order to analyze the price developments of selected product groups or even individual products. Usually, primary commodities are divided into the following groups: agricultural, metals and energy. Fig. 3 shows the terms of trade of those commodities from 1948 to 2013.

Fig. 3: Primary Commodity Terms of Trade

64 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Source: Baffes/Etienne 2014, p. 22. Fig. 3 shows the different long-term developments of the terms of trade of particular groups of primary commodities. Alongside the long-term trends shown in fig. 3, the primary commodity terms of trade also had short-term fluctuations, since their development had sometimes been strongly disrupted by natural disasters (such as drought periods), global economic changes (for example the devaluation of the dollar in 1971), wars, or harsh OPEC regulations in the case of oil. From 1948 until the end of the 20th century, a clear downward trend in the agriculture terms of trade is visible. A brief strong jump of the agricultural commodity terms of trade took place due to the increase in prices in the postwar years, as well as in 1973-74, i.a. due to the collapsing of the agricultural production (drought periods) in many areas of the world. During these periods, the growth pace of prices of agricultural commodities had been higher than the growth rate of prices of manufactured products. The falling terms of trade trend of agricultural commodities until the end of the 20th century shows that prices of manufactured goods had a tendency to be more advantageous than prices of agricultural commodities for this long period of time. This indicates that the export of agricultural commodities tended to be less profitable than of manufactured products. Therefore, the long-term development of a commodity terms of trade index can reveal the export profitability of the specified commodity. For metals, there was no clear downward or upward trend until the end of the 20th century. The energy terms of trade had no considerable changes in the time from 1948 until the early seventies. In the years 73-74 however, there had been major changes due to the oil crisis which was caused by the war in the Middle East and the subsequent oil embargo by the OPEC. Oil prices increased drastically and peaked in the beginning of 1974. Thereafter, the situation calmed down (see fig. 3). During the second oil crisis in 1979/80, oil prices had increased again for a short time period. The fear of a shortage in supply on the world market pushed the oil price to record levels of partly above 40 USD per barrel (see Mineralölwirtschaftsverband e. V., 2001, p. 15). By the end of the 1980s, the oil price dropped again (see Baffes et al., 2015, p. 6). Until the end of the 20th century there were no large changes in the energy terms of trade, only minor fluctuations.

65 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

At the beginning of the 21st century, substantial changes in the development of most primary terms of trade had taken place. The prices of most primary commodities began to rise faster than the prices of manufactured goods. One important reason had been the rising global demand for oil. The rapid economic growth of countries like China and India had resulted in a rising demand for raw materials and rising commodity prices. After a significant increase in mid-2008, primary commodity prices began to fall. That had been the effect of the global economic crisis. This strong decline had been visible until the first quarter of 2009. After that, prices began to rise again. However, since 2013, a decline in most primary commodity prices has taken place, which is illustrated in tab. 2.

Tab. 2: Nominal primary commodity price indices (2010 = 100) Primary Price indices (2010 = 1000) Change % commodities 2011 2012 2013 2014 2015F1 2014-15 Energy 129 128 127 118 67 - 43,3 Non-Energy2 120 110 102 97 83 - 14,4 Metals 113 96 91 85 68 - 19,2 Agricultural 122 114 106 103 89 - 13,0 Food 123 124 116 107 91 - 15,2 Beverage 116 93 83 102 93 - 8,7 Raw Materials 122 101 95 92 94 - 9,0 1 F denotes forecasts; 2 The Non-Energy price excludes precious metals.

Source: Own representation, based on data from World Bank Group 2015a, p. 4.

The price decline had mainly resulted from an insufficient demand from important emerging economies, especially China. But also leading primary commodity producers had played a part in contributing to the falling in commodity prices. In the hope of a lasting boom, managers had invested heavily in new capacities, only to face a market with insufficient demand (see Focus Webpage, 2015). Overcapacities had been created. In June 2014, a very strong oil price decrease had started. One reason for the price decline had been an excess supply on the international oil market, which had been mainly caused by the mass extraction of oil and gas from unconventional sources in the United States with the fracking technology. Using the fracking method, the US was able to increase its oil production to 4 million barrels per day (World Bank Group, 2015a, p. 16; Unternehmenspositionen Webpage, 2015). As a consequence, the US could improve its position on the oil market, while the OPEC lost its influence. Other major oil producers such as Saudi Arabia did not react with a restriction of their oil extraction, but, on the contrary, apparently produced even more in order to defend their market shares (see Unternehmenspositionen Webpage, 2015). Due to the nuclear agreement of the Iran with the US, and the resulting lifting of Iran’s oil export restrictions, it is very probable that Iran, a huge oil producer, will enter the world market very soon (see Tirone /Gaouette, 2015). World market prices for food had shown an increasing trend from the year 2000 onward. In 2007, the prices rose very strongly (food price crisis 2007-2008). From 2007 on, there has been a very strong food price volatility (see Bundesministerium für Ernährung und Landwirtschaft, 2015, p. 6), see fig. 4.

Fig. 4: Nominal food price index

66 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Source: Bundesministerium für Ernährung und Landwirtschaft, 2015, p.6.

In the middle of 2015, a stock market crash in China had taken place, and the Chinese economy deteriorated dramatically. This has had worldwide implications, especially for the German economy, which is very closely connected with China. China is Germany’s third largest trading partner. In 2014, Germany’s export worth to China had been 74 billion EUR. Especially the automakers are affected. For the year 2014, 44 % of global Volkswagen sales had been achieved in China, one fifth of BMWs business activities had been carried out in China, and Audi had sold every third car in China. Now the car sales in China are expected to decrease (Dometeit et al., 2015, p. 58). Moreover, the economic crisis in China has had a global impact on primary commodity prices (see World Bank Group 2015, p. 11). All major commodity price indices have fallen (see tab. 2, fig. 5). Fig. 5 shows the primary commodity terms of trade in the twenty-first century.

Fig. 5: Primary Commodity Terms of Trade since 2000

67 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Source: World Bank Group 2015, p.12.

Fig. 5 shows that the terms of trade of agriculture, energy and metals increased from the year 2000 until the year 2008. A temporary strong drop for all mentioned primary commodity terms of trade (especially strong for metals and energy) occurred in 2008 as a repercussion of the financial crisis, then the primary commodity prices recuperated. From 2013 onward, the primary commodity prices started decreasing. Falling world primary commodity prices do not necessarily have to raise economic concerns for everyone. For primary commodity exporting countries, this situation is admittedly disadvantageous. However, many consumers are now able to benefit from favorable prices, especially for energy. The industry can pass on lower prices to customers in order to boost demand. China is the largest importer of raw materials as well as the greatest beneficiary of the price decrease. Net importers of energy, such as the European Union, China, Japan, and India can expect purchasing power gains.

Conclusion It could be discovered that the terms of trade formations have responded to economic fluctuations, and that the terms of trade index can, under certain circumstances, give some information about the overall economic situation as well as the specific economic development of a given country. Furthermore, it could be shown that the structure of exports of a country and the corresponding price developments are affecting the gains from trade. A long-term falling trend of the agriculture commodity terms of trade indicates that the export of agriculture commodities tends to be less profitable than the export of manufactured goods. Therefore, the long-term development of a commodity terms of trade index can reveal the export profitability of the specified commodity. It can be assumed that the long-run development of the terms of trade ratio of industrialized countries that export relatively uncomplicated products with a small percentage of value added is worse than the terms of trade of those highly developed countries that export very specific, high quality goods with high value added. Countries with an export structure, in which individualized, knowledge-specific products have a dominant position, and that have a high diversification of their exports, tend to have more benefits from trade than countries that export less individualized goods. However, these benefits can only be maintained with continuous product and technology improvements that require high and consistent research and development activities. The necessary profitability of trade has a dynamic effect on the domestic economy, since the national suppliers face competitive pressures and competitive world prices. This leads to an adjustment of

68 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 production structures (improving productivity and specialization in favor of export goods), and a creation of incentives for investments in research and development. It can be concluded that the terms of trade concept is a very helpful and meaningful ratio which is particularly relevant in discussions about development and industrialization.

References

Baffes, J. / Etienne, X. (2014): Reconciling High Food Prices with Engel and Prebisch-Singer (Conference Paper). In: International Conference on Food Price Volatility: Causes and Consequences, held in Rabat, Morocco (February 25-26, 2014). Available from: [21.12.2015, 6:15 PM.]

Baffes, J. / Kose, M. / Ohnsorge, F. / Stocker, M. (2015): The Great Plunge in Oil Prices: Causes, Consequences and Policy Responses In: Policy Research Note, March 2015, World Bank Group, Washington/D.C.,USA.

Bundesministerium für Ernährung und Landwirtschaft (2015): Preisvolatilität und Spekulation auf den Märkten für Agrarrohstoffe, June 2015, Berlin, Germany.

Canuto, O. (2014): The Commodity Super Cycle: Is this time different? In: Economic Premise (EP), June 2014, Number 150, World Bank Group, Washington/D.C., USA.

Dometeit, G. / Frank, S. / Petring, J. / Stephan, S. / Röll, T. (2015): Dem Drachen geht die Puste aus. In: Focus, August 2015, No.34, p. 57-62.

Eiteman, D.K. / Stonehill, A.I. / Moffett, M.H. (2010): Multinational Business Finance, 12th edition, Pearson, Boston/MA, USA.

Focus Webpage (2015): Konjunktur – Verfall der Rohstoffpreise schreckt Anleger auf. Available from: [03.11.15, 1:17 PM].

Helbling, T. /Mercer-Blackman, V. /Cheng, K. (2008): Commodities Boom, Riding a Wave – Soaring commodity prices may have a lasting impact. In: Finance and Development – A quarterly magazine of the IMF, March 2008, Volume 25, No. 1, p. 10-15.

Hirshleifer et al. (2007): Price Theory and Applications – Decisions, markets and information, 7th edition, Cambridge University Press, New York/NY, USA.

IMF (2008): World Economic Outlook –Housing and the Business Cycle, April 2008, Washington/D.C., USA.

Johnson, S. (2007): The (Food) Price of Success – Higher global demand for calories brings inflationary pressure and more. In: Finance and development – A quarterly magazine of the IMF, December 2007, Volume 44, Number 4, Washington/D.C., USA.

Knall, B./ Wagner, N. (1986): Entwicklungsländer und Weltwirtschaft, Wiss. Buchges., Darmstadt, Germany.

69 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Krugman, P. / Obstfeld, M. (2009): International Economics – Theory and Policy, 8th edition, Pearson International Edition, Boston/MA, USA.

Mankiw, N.G. (2014): Principles of Economics, 7th edition, first published in 1997; Cengage Learning, Boston/MA, USA.

Mineralölwirtschaftsverband e.V. (2001): Mineralölforum – Energiemarkt im Wandel, Hamburg, Germany.

Ocampo, J.A. / Parra, M.A. (2004): The commodity terms of trade and their strategic implications for development. In: Jomo, K.S. (ed.): Globalization under Hegemony: The Changing World Economy, Oxford University Press, Oxford, UK.

Porter, M. (1980): Competitive Strategy – Techniques for analyzing industries and competitors, The Free Press, New York/NY, USA.

Prebisch, R. (1950): The Economic Development of Latin America and its Principal Problems, United Nations Economic Commission for Latin America, New York/NY, USA.

Sell, A. (2013): Einführung in die internationalen Wirtschaftsbeziehungen, 2. aktualisierte und erweiterte Auflage, Oldenbourg Wissenschaftsverlag GmbH, München, Germany.

Singer, H.W. (1950): The distribution of gains between investing and borrowing countries. In: American Economic Review, no. 2.

Tirone, J. / Gaouette, N. (2015): Iran Deal Milestone Starts the Clock in Oil Sanctions Relief. In: Bloomberg Business. Available from: [03.11.15, 5:00 PM].

United Nations (2005): Trade and Development Report, New York and Geneva.

United Nations (2012): World Economic Situation and Prospects, New York/NY, USA.

United Nations (2014): International Trade Statistics Yearbook, Volume I, Trade by Country, New York/NY, USA.

Unternehmenspositionen Webpage (2015): Rückgang der Rohstoffpreise in 2015. Available from: . [03.11.14, 4:30 PM].

Wagner, N./ Kaiser, M./ Beimdieck, F. (1983): Ökonomie der Entwicklungsländer, UTB, Stuttgart, Germany.

World Bank Group (2015): A World Bank Quarterly Report: Commodity Markets Outlook, Q3, July 2015, Washington/D.C., USA.

World Bank Group (2015a): A World Bank Quarterly Report: Commodity Markets Outlook, Q4, October 2015, Washington/D.C., USA.

World Bank Webpage (2015): Net barter terms of trade index (2000 = 100). Available from: . [03.11.14, 5:30 PM].

70 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Importance of Export Led Growth in Transition Economies: Some Firm Level Evidence from Serbia

Bozidar Cerovic & Sanja Mitic Faculty of Economics, University of Belgrade

Abstract

After the global crisis of 2007-08 it is recognised that the applied pattern of growth in a majority of transition economies has been erroneous for two main reasons: (a) it was based on import led local demand increase financed by foreign inflows favouring services and thus, producing a biased sectoral structure; (b) such a growth pattern was not changed during the reform advancement though empirical evidence suggested some necessary changes in relation to transition progress. Contrary to a simplified proposition that market forces should allocate resources in the most efficient way, after the crisis that has produced a sharp decline in economic activity of transition economies, a new idea emerged that export oriented production of tradable goods should be supported and advanced. The paper analyses this idea from an additional aspect focusing on the performance of exporting firms and their innovation practices. The analysis was conducted within a set of 71 Serbian firms. The analysis of various aspects of innovation practice (marketing mix innovations, new product development, process innovation, investment in research and development) of exporters and non-exporters, as well as of exporters to developed countries vs. exporters to less developed countries reveals important differences in their performance, that can be explained by international business experience and learning by exporting. In all aspects of innovation exporters perform better than non-exporters, as well as exporters to developed countries (EU countries) compared with exporters to less developed ones. It is particularly interesting that within the set of firms observed R&D activities are better developed among local exporters if compared with foreign owned firms that are mostly directed towards the local market raising a question on spillover effects that were expected from FDI in transition economies. These results additionally confirm the necessity of export led growth pattern during transition.

KEY WORDS: External relations, Innovation, Transition, Growth, Serbia

JEL CLASIFICATION: M31, O24, O32

1. Introduction: Transition and growth Some 25 years ago the process of economic transition was promoted for non-market economies, usually based on state owned capital. The process was seen as an appropriate and effectual way to a market economy model aimed at raising economic efficiency in these countries. Indeed, in the period of 1990s a huge reforming process was undertaken in ex-socialist, formerly communist led economies. The reforms were based on the idea of markets liberalisation followed by privatisation and deregulation intended to direct economies in question toward the most efficient use of resources and to a sustainable yet long-term economic growth. Since an initial recession was predicted it did not raise many dilemmas. Although it lasted longer and was deeper than it was expected after a while signs of growth and recovery appeared and in a decade or so some countries reached their pre-transition development level while the others restored positive growth rates.

Despite some early warnings (Kolodko and Nuti, 1997; Stiglitz, 1999) it was the global financial crisis and global recession that took place after 2007 to raise a lively debate on the growth model established during transition (and particularly given that the post-communist countries in Eastern Europe have

71 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 been among the most severely affected by its aftermath; see Prica and Uvalic, 2009). The key question was whether the model of growth pursued in large parts of Eastern Europe, based on neo-liberal policies of fast trade and financial liberalisation, flexible labour markets, deregulation and reduced role of governments, was the best policy option.

Shortly, it was recognised that the applied pattern of growth in a majority of transition economies has been erroneous for two main reasons. First, the model was based predominantly on import led local demand increase, which was financed by foreign inflows (acquired through privatisation and FDI in general). Also, foreign inflows were mainly directed to conquer local markets rather than to revive firms from old (inherited) industries. Therefore, they favoured non-tradable service sectors (telecommunications, finance, retailing etc.), and biased the sectoral structure of these economies. Finally, a pretty consensual conclusion was reached that the New Growth Model for transition economies should be founded on exports and even some new reforms were proposed (although still within the old framework, see Berglof, 2010). The second mistake was revealed after the analysis of the reforming process itself. It appeared that within the process some break points related to the reform progress could be identified. These break points required certain changes in growth patterns applied (see e.g. Fidrmuc and Tichit, 2007; Falcetti et al., 2006; Cerovic and Nojkovic, 2008, 2009; Dragutinovic-Mitrovic and Ivancev, 2010). Moreover, the analyses point at tradable goods and manufacturing industries as key factors of sustainable growth in transition economies in the longer run (see a detailed analysis in Cerovic et al. 2014). However, the growth pattern that was applied initially did not change during the first two decades of transition (that is, before the crisis).

Basically, a substantial lack of any industrial policy seems to be the major problem of a relatively slow and yet non-sustainable recovery and development of transition economies. Such a demise of industrial policy can explain an unexpectedly sharp fall in manufacturing production and too fast growth in services that was supported by FDI and resulted in a biased overall economic structure including a noticeable lack of tradable goods for exports. Nonetheless and parallel with studies critically examining the growth model applied during transition, there was a renewed interest in industrial policy within a broader policy framework. This was evidenced in a variety of papers discussing industrial policy issues, which could be of particular interest for further development of transition countries. Thus for example, Rodrik (2008) presents a number of theoretical arguments in favour of industrial policy understood as the means for stimulating certain economic activities necessary to promote structural changes. Chang (2009) is even more explicit regarding export- promoting policies. He argues that economic development is impossible without good export performance while some selectivity and targeting are found in virtually every industrial policy measure, even those intended for all enterprises: for example, when R&D, innovation, or other measures are favoured that could strengthen export oriented production.

Being incited by this kind of discussions and particularly interested in local circumstances regarding competitiveness and exporting capabilities of the Serbian firms, we joined a research project together with colleagues from the University of Ljubljana (Slovenia) on intangible capital use in the SEE countries41. The idea was to analyse to what extent firms do recognise intangible capital as a factor of competitiveness, to what extent it is developed within the firms and does it really add to competitive advantage of the firms in local and foreign markets. Our results based on a survey conducted in a set of the Serbian firms have been presented in several phases and in several occasions. The most comprehensive yet concentrated evidence could be found in our recent paper Cerovic et al. (2015).

41 Similar research projects have been conducted in Slovenia, Albania, Bosnia and Herzegovina and is in progress in Montenegro.

72 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

In this paper we shall draw attention to those results of our analyses that are important for the policy intended to promote export-led growth model just in accordance with the findings from the critical debate on the growth model applied in transition (that was briefly presented above). For that reason we shall particularly analyse exporting firms and the link between various kind of innovation, R&D and similar activities with their exporting results. In doing so we rely on some of our previous findings that point at the exporters as the firms with the most developed innovative practices, the most progressive approach to customers and other marketing activities and the most open for acquiring new knowledge. It will be shown that exports appear to be important for transition economies not only from macroeconomic perspective but also from the firms’ angle since exports promote innovation and bring new good practices to a larger extent than it can be done if businesses are oriented predominantly to local markets.

2. Methodology and rationale for the research In a broader project aimed at defining the role of intangible capital in Serbian firms we have conducted a survey within a set of 71 enterprises. Although the sample was formed by the so-called snow-ball method (that is, the firms were not chosen randomly) the structure of the sample covered the most remarkable features of the firms in Serbia. There were small, medium and large firms in approximately equal sub-samples (26, 22, and 23, respectively) allowing for certain comparisons as well as foreign owned and domestically owned firms in a 1:3 proportion, which reflects ownership structure within the economy as a whole. Intentionally, the sample was biased in favour of firms producing tradable goods (46 manufacturing and similar versus 25 firms from services) since these firms could better represent the use of intangible resources. The survey consisted of seven sections regarding (a) internal relations (b) human resource management and organisation (c) marketing and external relations (d) information technology (e) innovations (f) environmental protection (g) finance indicators.

Being taught by broadly accepted expectations that FDI both directly and indirectly that is, by means of spillovers, should bring the best business practices, new technologies and open new foreign markets to local producers, we posed a hypothesis that foreign owned firms should be leading in intangible capital use. Basically, the hypothesis was confirmed in many forms of intangible capital but nonetheless we met some unexpected yet indicative results. We shall refer to these results in the lines to follow.

When managers were asked whether they do assess their firms to be more successful than their competitors, 53% of firms demonstrated a pretty firm trust in their advantages. It is interesting to note that managers of foreign owned firms were just slightly more confident about the competitiveness of their products (56%) than the managers of domestically owned enterprises (52%) but this could be explained by some unrealistic overconfidence of local managers. Expectedly, when asked whether they consider their firms as leaders within the industry this gap was remarkably widened in favour of foreign owned firms. Around 63% of foreign firms consider them as leaders in their main markets compared with only 37% of domestically owned ones, which is a statistically significant difference (t=-1.856; p=0.068).

On the other hand, a deeper insight in a set of all 30 firms that claim leading position in their principal markets, we find 20 firms that sell 80-100% of products in the local market, plus 2 that sell 70-75% of their production also locally. The remaining output of these 22 companies is being sold predominantly in the neighbouring markets emerged from former Yugoslavia. Such business orientation can raise the question whether they are real leaders in their industries or rather enjoy some monopolistic power

73 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 within the local and/or regional boundaries. Indeed, among all the firms that attribute themselves a leading position there are only five large exporters (four of them earning even more than 50% of revenues in foreign markets) yet with a large portion of production that goes to developed markets. Surprisingly, they are all domestically owned firms (four are privatised)42.

After obtaining such a result we recalled some findings on much lesser than expected effects of FDI in transition economies regarding export orientation and technology and knowledge spillovers (see e.g.: Gunter, 2005; Gorodnichenkou et al. 2007). We have additionally confirmed such findings when examined the scope of R&D activities within the firms observed. It came out that exporters appeared once again as a set of the most advanced firms regarding investments in R&D. Some 22% of all exporters invest even more than 3% of their revenues in R&D. The role of R&D departments is also significantly better developed among exporters – their R&D departments are more active in solving the problems the firm sometimes meets, build information absorption and dissemination capabilities, puts essential guidelines for technological progress of their firms and acts as real agent of changes. Finally, in 43.8% of exporting firms there exists a separate and specialised department for R&D against 10.5 % with non-exporters (statistically significant difference: t=-2.680, p=0.009).

On the other hand 50% of foreign owned firms, which usually lead in management practices, did not invest in R&D while 36% not even had their local R&D departments. Actually, all of them are parts of larger international systems that usually organise R&D departments in other places predominantly in the countries of origin. Among them dominate firms that mainly are sellers of renowned producers’ products (only sometimes with some minor local finalisation). Hence, it is not surprising that all these firms do not organise local R&D departments nor they invest in R&D locally. However, this is fully in line with the above mentioned findings that point at relatively poor spillover effects of the FDI in transition economies: the expected spillovers of knowledge and technology are negligible while the survey results on R&D suggest that there is a relatively low existing level of technology (as well as a low prospect for its future development) in locally established foreign owned firms.

Consequently, we found that our hypothesis on the most advantageous position of foreign owned firms in bringing new practices that could empower local firms to develop their own activities did not hold in some important aspects. It appeared that domestically owned firms were more active in R&D investments, particularly (and expectedly) when larger firms were observed. It should be said that there were also examples of medium sized firms (32%, all manufacturers from various industries) that developed their own R&D departments particularly if they acted as exporters (though we found that the influence of R&D departments on companies’ development decisions was still pretty restricted). All these facts strengthened our intention to additionally analyse data on exporting firms and discover whether they could be seen as principal innovators and promoters of innovative practices that would improve competitiveness of a transition economy sometimes even more and on a broader scale than foreign owned firms could do and what industrial policy is needed to support such developments.

3. Innovation activities of exporting firms in Serbia

The link between exports and innovation is an intriguing research topic in academic literature. On macro level, there is firm evidence about relationship between export of an economy and its innovation capacity and knowledge accumulation (Harris and Moffat, 2011, p. 5). Since 1960s innovation ability has been viewed as a driver of international trade. Today, innovations are basic

42 A complete analysis in Cerovic et al. (2015)

74 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 prerequisite of economic growth and internationalization. Main results of studies on micro level reveal two sides of export-innovation relations (a) positive innovation impact on exports, as well as the reverse (b) positive exports effects regarding innovation. The former type of relations are more examined and empirically tested. Positive influence of innovations on export is empirically proved in the developed countries43 but also in emerging markets44.

Similar evidence is found among the firms from South-Eastern Europe. Moreover, a positive impact of innovations on export level is stronger in SEE firms than in the firms from Central and Eastern Europe though is a bit lesser if compared with firms from Baltic countries (v. micro-dyn.eu, 2014). An interesting research has been conducted in Slovenia, a country where 85% of firms are exporting, due to the small domestic market (Damijan and Kostevc, 2008, pp. 1-23). The research showed positive impact of innovations on export but also vice versa. Harris and Moffat (2011) reveal strong causal relations between exports and innovation, so that export activity of manufacturing and service firms increase probability of investment in research and development. Love and Roper (2013) showed that innovations without international business activities can not lead to sustained performance.

In our research we analyse innovation activities of Serbian firms from four aspects: (1) innovations in marketing mix; (2) new product development; (3) business process innovations and (4) investment in research and development (R&D).45 The first three parts address to main elements of the OECD definition of innovations.

Results obtained in regard to the first aspect of analysis are listed in the table 1. If compared with the average frequencies of innovations in marketing mix it appears that exporters innovate more often in all marketing mix elements. Also, more active (large) exporters have better results than the group of those with small exporting revenues and non exporters. These differences can be explained by adopted marketing strategies and marketing mix elements concerning specific characteristics of international markets that are necessary for any stable positioning in foreign markets.

Table 1 Marketing mix and innovations Promotion Product/service Distribution Price

All firms 61.4% 67.1% 65.7% 75%

Exporters 64.7% 70.59% 72.55% 77.55%

Non-exporters 52.63% 57.89% 47.37% 68.42%

MAE* 68.18% 68.18% 81.8% 85.71%

LAE** 58.33% 66.7% 58.33% 70.21%

* More active exporters, exporters that earn more than 33% of sales revenues in foreign markets

** Non-exporters and less active exporters (exporters that earn less than 33% of sales revenues in foreign markets)

43 See Van Beveren and Vandenbussche (2010), pp. 3–24, for Belgium; Wakelin (1998), pp. 829-841, for UK; Roper and Love (2002), pp. 1087–1102, for Germany; Cassiman and Martinez-Ros (2007), pp. 1-32 and López Rodríguez and García (2005), pp. 539–557, for Spain etc.) 44 See Anh et al. (2009), pp. 1-12, for Vietnam; Kumar and Siddharthan (1994), pp. 288–309, for India). 45 See Mitić, S. (2015), pp. 53-67

75 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The biggest differences between exporters and non-exporters in regard to marketing mix innovations are in distribution. There is also a difference between those that export to developed countries (EU countries) and to less developed ones (predominantly Western Balkans countries mostly emerged from former Yugoslavia). Some 76.2% of exporters to EU innovate distribution techniques, while only 70.8% of exporters to ex-YU and 54.2% of non-exporters undertake similar activities. As a marketing mix instrument, distribution success in international markets is related to cooperation with foreign intermediaries and foreign distribution infrastructure. These factors incite firms to adopt such a marketing instrument in an easier way. Sometimes, markets distribution channels are not easily accessible, forcing exporters to find new ways to enter such markets and to develop new distribution techniques. Based on this, Cavusgil and Zou (1994) empirically proved that locally adapted distribution is the major success factor for exporters, even more important than price competitiveness.

Second part of our analysis deals with the new product development. Firstly, we analyse whether there is some practice of new product development and what is its success. We continue our analysis by exploring what types of new products have been developed. Managers were asked to evaluate performance of their firms in comparison with competitors (table 2). There were three sequences of question that managers had to answer: 1. whether their company, in the last five years, was as successful as their main competitors in new products introduction, 2. whether it was more successful than the main competitors, 3. whether in new products introduction in the last five years company was a leading competitor in the market. Results show that almost 55% of exporters assess that they were more successful than competitors. This is a higher percentage than the one for of non-exporters (47.3%) despite the fact that it is much more difficult to compete in foreign markets. Finally, we did not find better performances of exporters regarding the last question, which is fairly understandable. First, it is hard to establish leadership in new product development in international markets, due to a higher level of competition there. Second, as it has already been explained in section 2, managers attributed more easily a leadership position to their firms if the firms that acted in local markets only and if were big enough to enjoy some market power.

Table 2 New product development in comparison with competitors successful as main more successful than main competitors competitors

All firms 84.29% 52.86%

Exporters 82.35% 54.9%

Non exporters 89.47% 47.37%

Regarding types of new products, respondents had to assess the importance of different types of new products for company’s strategy, according to their experience. They had to evaluate five levels of new product development (repositioning of existing products, improving existing products, extension of existing product lines, new product lines and new products for global market) by the following assessments: 3=high importance; 2=medium; 1=low importance; 0=not used (average assessments presented in table 3). Expectedly, exporting firms systematically attribute higher assessments to all sorts of innovation regarding their products when compared with non-exporters. Moreover, it appeared that larger and more active exporters would give even higher marks for innovative activities in all segments than the group of non-exporters and less active exporters would do. We also found some statistically significant differences between exporters and non-exporters in regard to extension of existing product lines (t=−2.226; p=0.003). It seems that such a result appears due to the fact that

76 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 exporters have to adjust existing domestic products when entering international markets and enlarge existing product lines in order to be competitive within a different regulatory, economic and cultural environment.

Table 3 Types of new products (average assessments) improving extension of new products repositioning of new product existing existing product for global existing products lines products lines market

All firms 1.95 2.28 2.03 2.08 2.17

Exporters 1,98 2,32 2,16 2,18 2,30

Non-exporters 1,88 2,18 1,63 1,75 1,73

MAE 2.05 2.45 2.09 2.23 2.32

LAE 1.91 2.2 2 2 2.09

Respondents evaluate importance of different types of new products: 0=not used; 1=low importance; 2=medium; 3=high importance

Similar results we met while exploring process innovations. Exporters appeared to be more open and keen to introduce innovations in process of production, logistics and distribution than non-exporters. Thus for example, 92% of exporting firms reported introduction of essential changes in process of production and 86% in processes of logistics and distribution while non-exporters confirmed these types of innovation in 72% and 83% respectively. However, we find certain level of overconfidence and overoptimistic self-evaluation in assessing activities in this part of the survey, which is the case already noticed as a characteristic of local managers, especially among managers and owners in smaller enterprises (Cerović and Petković, 2003). For that reason we treat these results with reserve, although they reveal some interesting differences among the firms.

In section 2 we have commented some specific results regarding R&D activities emphasising a remarkably better performance of exporting firms if compared with either all other firms or just with foreign ones in some aspects. This primacy relies not only on higher level of investments or better organisation of R&D but also on the role of R&D departments. When asked whether these departments take part in: (1) resolving the problems sometimes met by the firm, (2) building information absorption and dissemination capabilities and (3) introducing essential guidelines for technological progress of their firms and becoming the real agent of changes, the managers of exporting firms had much more to present. Once again it was found that exporting firms perform better in all segments yet with statistically significant differences in regard to building information absorption and dissemination capabilities (55.6% vs. 20% among non-exporters; t=-2.037, p=0.048).

Apart from this general findings we tested the hypothesis that the export destination also matters. Thus, we found out that exporters to more developed and demanding markets (EUX, exporting predominantly to EU countries) invest more in R&D than other groups of enterprises. For example,

77 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

35% of EUX invest more than 3% of their revenues in R&D compared with only 16.7% of exYUX (firms exporting to the region of former Yugoslavia) or 13% of non-exporters.

There are also obvious differences among these three groups of firms in regard to establishing specific R&D departments within the firms. Thus, 55.6% EUX have their own department for R&D, which can be found in 43.5% exYUX and in only 12% of non-exporters (which is a statistically significant difference: F=5.560, p=0.006). Similar results were found regarding the role of the R&D departments. Among the firms that export to EU there are almost two thirds (64.3%) whose R&D departments solve problems when they appear or build up information absorption and dissemination capabilities while this is the case in 58.8% among those that export to exYU markets and 21.4% among non-exporters (F=3.371, p=0.044). As to the most important role of the R&D departments (agent of changes) the small size of the sample does not allow a statistically significant difference to be identified but still points at a remarkable difference whatsoever: 57.1% of EUX vs. 41.2% of exYUX (as presented in table 4)

Table 4 Role of R&D department EUX exYUX

Solving the problems sometimes met by the firm 64.3% 58.8%

Building information absorption and dissemination capabilities 64.3% 58.8%

introducing essential guidelines for technological progress of 57.1% 41.2% their firms and becoming the real agent of changes

All these differences in innovation activities could be understood as an outcome of export experience. Nonetheless, innovation could also be seen as a prerequisite for successful exports, especially towards developed markets. Although one may point out that we face a mutual relationship, which is undoubtedly true, it is evident that exports foster knowledge spillovers from foreign markets and help in creating new knowledge and innovation within local firms. This learning by exporting process improves innovative capabilities along several lines: (1) interactions with foreign customers, in order to adapt supplies to their demand and needs, (2) interaction with foreign competitors, in order to differentiate offering, as well as an opportunity to learn from international best practices, (3) adapting to international (foreign) quality-technical-ecological standards and (4) sales increase resulting in economy of scale effect and a higher return on R&D or other innovation investments.

This is particularly noticeable when exporters to more demanding markets come under consideration. More developed international markets provide a higher potential for learning and urge for strategy adaptation (especially when firms come from less developed countries), which jointly lead to more frequent and effective innovations. For that reason, exporters to developed countries (EUX, exporters to EU countries in our sample) show quite expectedly a larger innovation potential than exporters to less developed economies. The results obtained from our survey among Serbian firms just confirm the learning perspective of exporting activities that is highlighted in several models of internationalisation.

78 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Thus, for example, Uppsala model, Innovation model, network based models etc. put learning in the centre of internationalisation process while internationalisation can be defined as a process of increasing international activities resulting from different sorts of learning. Insufficient knowledge is the main obstacle for international growth. From our standpoint the Uppsala model that puts experiential knowledge as the main force of internationalisation (Eriksson et al. 1997) is of specific interest. The model refers to knowledge of the international market, international buyers, the problems and the opportunities abroad and can be acquired only by operating in the international market. It is connected with particular market and it is relatively hard for transferring between firms and business units, while its accumulation is costly and time consuming. This is type of knowledge can be identified only among of exporters, and can be viewed as the main differential factor between exporters and non- exporters. Based on this we may finally conclude that the main drivers of change concerning business innovation and upgrading business practices in local firms are firmly related to their export orientation.

4. Conclusions

Economic debates emerged during the crisis known as Great Recession of 2007-09 currently point at certain deficiencies and errors in establishing growth and development model for transition economies. In line with some early but then neglected warnings there is almost a consensual statement that the growth model of transition economies should be re-directed towards exports and based on production of tangible goods. In our paper we have briefly discussed the issue and tried to reconsider this advice from the standpoint of firms that were oriented to exports. This approach appeared to be enlightening and helpful one since macro effects of the proposed so-called New Growth Model for transition economies were already broadly discussed.

The firm level analysis conducted within a sample of Serbian firms has shown that export oriented firms perform more innovative activities and show a higher level of capabilities to implement innovation in their businesses if compared with other firms. Moreover, in certain aspects they come in front of allegedly more experienced and the most desirable firms in transition economies owned by foreign investors. It seems that enterprises based on FDI are more frequently oriented to domestic markets, to service sector and apply a lower technological level that does not need specific investments in innovation, R&D etc. diminishing in that way usually expected technological and knowledge spillovers to local incumbent firms.

The findings obtained from our survey in regard to faster and broader innovation within exporting firms should not be surprising. They are in full accordance to many previous research conclusions on the relationship between exports and innovation. However, we find that the revealed differences in performance of exporting firms could open a new path and ease carrying out necessary structural changes towards the desired model of growth in a transition economy. This could be of particular importance for a proper design of industrial policy whose lack during transition has resulted in unfavourable outcomes in sectoral structure and in trade imbalances. Bearing all that in mind we shall propose three brief policy recommendations that could improve policy efficiency at the least possible costs under deficient investments after the crisis.

First, governments should not be reluctant to some traditional industrial policy measures that would favour and support export activities, companies and industries. Second, these measures might be

79 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 followed and supplemented by specific and indirectly export oriented policies, based on the survey results, that will favour innovation, investments in R&D and alike. However, the third and the most important part of these policies concerns government attitude regarding small and medium sized enterprises (SME). The results of our survey show that the best results in upgrading local businesses could be expected if firms export to more developed and demanding markets. Such markets are usually rather big and competitive putting in that way certain difficulties for new entries of SME in particular. On the other hand, in vast majority of transition economies one shall encounter mostly SME. Moreover, SME establishing is recommended and usually supported by government policies. In our view this is an incomplete and non-satisfactory policy: opening of new SME may be important but these firms cannot be left afterwards to act fully on their own with no support of larger companies and/or with no further policy measures that will be directed to SME clustering, cooperation and association particularly when trying to develop exporting activities and to improve their competitiveness by means of innovation. Since our results suggest that exports are the best channel for applying innovation and further advancement in competitiveness of local firms it seems that this kind of policy support could be sometimes even more effective and helpful than simple forms of individual subsidies and other direct incentives for fostering exports.

References

Anh, N. N., N. Jones, N. D. Nhat and N. D. Chuc (2009), “Capitalising on Innovation for Exports by the SME sector”, Working paper series No: 2009/15, DEPOCEN – Development and Policies Research Center, p. 1-12. Berglöf, E. (2010), “Foreword”, in EBRD, Transition Report 2010 – Recovery and Reform, London, EBRD, November. Cassiman B. and E. Martinez-Ros (2007) “Product Innovation and Exports: Evidence from Spanish Manufacturing”, IESE Business school, Working paper, No. 688, pp. 1-3\2. Cavusgil S. T. and S. Zou (1994), “Marketing Strategy-Performance Relationship: An Investigation of the Empirical Link in Export Market Ventures”, Journal of Marketing, 58, pp. 1–21. Cerovic, B. and A. Nojkovic (2009), “Transition and growth: What was taught and what happened”, Economc Annals, LIV (183), pp. 7-31. Cerovic, B. and A. Nojkovic (2008), “Measuring Transition Progress: Endogeneity and Initial Conditions”, in: Memaj, F. and Kächelein, H (eds.), Economic and Social Challenges and Problems, Vol. 1, Fakulteti i ekonomise, Tiranë, 2008, pp. 113-128 Cerovic, B., S. Mitic, A. Nojkovic (2015), “Intangible Capital in a Transition Economy - Improvements and Constraints: An Analysis of Serbian Firms”, South-Eastern Europe Journal of Economics, 13 (2), forthcoming Cerovic. B. and G. Petkovic (2003), “Privatisation in Serbia: Managers’ Perception of Privatisation Process, Outcomes and Competitiveness”, in: Stojanov and Culahovic, (eds.), From Transition to Development, Sarajevo, University of Sarajevo, Faculty of Economics Chang, H-J. (2009), “Industrial Policy: Can We Go Beyond an Unproductive Confrontation?”, Plenary Paper for ABCDE (Annual World Bank Conference on Development Economics), Seoul, South

80 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Korea, 22-24 June 2009, http://www.econ.cam.ac.uk/faculty/chang/pubs/ABCDE2009- Changpaper.pdf Damijan J. and C. Kostevc (2008), “Causal Link between Exporting and Innovation Activity: Evidence from Slovenian firms”, DYNREG – Dynamic Regions in a Knowledge Driven Global Economy, Working Paper, pp. 1-23 Dragutinovic Mitrovic, R. and O. Ivancev (2010), “Driving Forces of Economic Growth in the Second Decade of transition”, Economic Annals, LV (185), pp.7-32. Eriksson K., J. Johanson, A. Majkgård and D. D. Sharna (1997), “Experiential Knowledge and Cost in the Internationalization Process”, Journal of International Business Studies, 28 (2), pp. 337–360. Falcetti, E., T. Lysenko, and P. Sanfey (2006), “Reforms and growth in transition: Re-examining the evidence”, Journal of Comparative Economics, 34 (3), pp. 421-445. Fidrmuc, J. and A. Tichit (2007), “Mind the Break! Accounting for Changing Patterns of Growth during Transition”, CEDI Discussion Paper Series 07-06, Centre for Economic Development and Institutions (CEDI), Brunel University. Gorodnichenkou, Y., J. Svejnar, and K. Terrell (2007), “When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies”, Ross School of Business Working Paper Series, Working Paper no. 1101, October. Gunter, J. (2005), “The absence of technology spillovers from foreign direct investment in transition economies”, in: Welfens, P.J.and Wziatek-Kubiak, A. (eds.), Structural Change and Exchange Rate Dynamics, Springer, Berlin. Harris R. and J. Moffat (2011), "R&D, Innovation and Exporting", Spatial Economics Research Centre, SERC Discussion Paper 73. Kolodko, G. W. and D. M. Nuti (1997), “The Polish alternative: old myths, hard facts and new strategies in the successful Polish economic transformation”, WIDER Research for Action, No. 33, UNU-WIDER: Helsinki. Kumar N. and N. S. Siddharthan (1994), “Technology, firm size and export behaviour in developing countries: the case of Indian enterprise” Journal of Development Studies, 32(2), pp. 288–309. López Rodríguez J. and R. M. García Rodríguez (2005), “Technology and export behaviour: A resource-based view approach” International Business Review, 14, pp. 539–557 Love J. and S. Roper (2013), “SME Innovation, Exporting And Growth”, The Enterprise Research Centre, ERC White Paper No. 5. Micro-dyn.eu, (2014), www.micro-dyn.eu/index.php?action=filedownload&id=738, [approached: 01/08/14] Mitić, S. (2015), “Izvoz i inovacije: primer izvoznika iz Srbije”, Ekonomske ideje i praksa, No. 18, pp. 53-67. Prica, I. and M. Uvalić (2009), “The impact of the global economic crisis on Central and South Eastern Europe”, paper presented to the conference on Economic Policy and Global Recession, Belgrade, 25-27 September Rodrik, D. (2008), “Industrial policy: Don’t ask why, ask how”, Middle East Development Journal, Demo Issue: 1-29, Economic Research Forum. Roper S. and J. H. Love (2002), “Innovation and export performance: evidence from the UK and German manufacturing plants” Research Policy, 31, pp. 1087–1102.

81 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Stiglitz, J. E. (1999), “Whither Reform? Ten Years of Transition”, paper for the Annual Conference on Development Economics, World Bank Van Beveren I. and H. Vandenbussche (2010), “Product and Process Innovation and Firms’ decision to Export” Journal of Economic Policy Reform, 13 (1), pp. 3–24. Wakelin K. (1998), “Innovation and Export Behaviour at the Firm Level” Research Policy, 26, pp. 829-841.

82 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Implementation of plastics tax in Ghana: Cost-effectiveness analysis

Kombat A. M. Chair of Environmental Economics, LG 10, Room 533g Brandenburg Technical University Cottbus-Senftenberg-Germany [email protected]

Abstract

Plastic taxes are increasingly being used in many countries for plastic waste management and for revenue purposes. Plastics tax was first introduced in Ghana in 2010 to curb environmental degradation caused by widespread use of plastics under the auspices of Parliament of Ghana. The tax is 10% of the cost, insurance and freight value of plastics imported into Ghana. However, despite the potential of the tax in plastic waste management in Ghana, little research has been carried out to determine the extent to which the tax helps abate plastic waste cost-effectively. Thus, the aim of the paper is, therefore, to analyze the cost-effectiveness of the plastics tax in terms of abatement costs in achieving its goal. To achieve the research aim, a qualitative research methodology was adopted where semi-structured interviews were conducted with officials of relevant institutions who were selected using purposive sampling technique. Also, existing statistics, institutional reports, newspaper articles, government budget statements and studies of individuals were used. The interviews were analyzed qualitatively with the use of the transcription software f4. Additionally, descriptive statistics was used to assess the cost-effectiveness of the tax. The analysis showed that the implementation of the tax in terms of cost-effectiveness in reducing plastic litter is good. However, the work suggests further research in this respect in order to make sound statements.

Keywords: Cost-effectiveness, plastics, plastic waste, plastics tax, Ghana

1. Introduction

Plastic taxes are increasingly being used in many countries for plastic waste management and for revenue purposes (Dikgang et al., 2012; Hogg et al. 2011; Convery et al., 2007). Ghana is among the few African countries that have implemented plastic taxes. Others countries include South Africa and Uganda (Kombat, 2015). However, with increase production and consumption of plastics and its associated waste in Africa, the potential of increase use of plastics tax is very high (Dikgang et al., 2012). Generally, plastic taxes are used to shape production and consumption of plastic products, and associated environmental problems by putting prices on environmentally damaging behaviour so that every unit of plastic product consumed, produced or discarded becomes a cost to the polluter (see Stilwell 2012; Endres 2011). It is expected that an increase in the prices of the plastic products through the taxes would encourage consumers and producers to shift their consumption and production patterns in a more sustainable manner and induce them to adopt more environmentally friendly technologies (Field and Field 2013). The use of a tax for environmental management was first suggested by Pigou (1960). According to Pigou external cost of pollution could be internalized by imposing a tax on the pollutant at the level which reduces emissions to the point where the marginal benefits of internalization equal the marginal costs of abatement. Although Pigouvian tax has been criticized, it should not be dismissed as irrelevant to environmental policy. Still the idea of how externalities can be internalized is important as it forms theoretical framework to understand why markets fail to provide environmental goods and what can be done about it (Hanley et al., 2013). In addition, the Pigouvian tax has become godfather to a number of policy-relevant variants of taxation of externalities (Convery et al. 2007). However, its practical use is limited. Modern welfare economists believe a “perfect” internalization of externalities is not possible in practice because usually the required information is not available regarding polluters marginal damage and marginal abatement cost functions (Endres, 2011) hence the use of the price standard approach in this respect (Baumol and Oates, 1971, 1988).

83 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

With respect to waste management across the world, literature on the use of taxes to manage such waste has centred on producer-generated pollution. Among which are deposit-refund system or user charges for management of the waste (see e.g. Odoro-Appiah et al. 2013; Obeng-Odoom, 2013; Numata, 2009). In this work the focus is on an alternative instrument, more similar to that of Dikgang et al. (2012) and Convery et al. (2007), an upstream tax of 10% on plastics imported into Ghana. The tax was designed mainly to change consumer behaviour and help raise additional revenue to manage the plastic litter in Ghana (Government of Ghana Budget, 2011, 2013). However, despite the potential of the tax in plastic waste management, little research has been carried out to determine the extent to which the tax is been implemented cost-effectively in terms of abatement costs. Thus, the aim of the paper is, therefore, to analyze the plastics tax in terms of cost-effectiveness in achieving its goal regarding plastic waste management. The rest of the paper is structured as follows: section two sheds light on the plastics tax in Ghana whilst section three looks at the methodological issues regarding the sources of data, data collection techniques and analytical procedures. Section four presents the theoretical framework (i.e. costs-effectiveness criterion of the tax) used as underpin for the analysis. In the fifth section, there is analysis of the cost-effectiveness of the tax in terms of abatement of plastics, whilst discussion and conclusions are given in the last section.

2. Plastics tax

This section provides an overview of the Ghanaian plastics tax in terms of mechanisms (i.e. scope, rate, revenue, assessment and collection) as it is important to understand these mechanisms in order to analyze the cost-effectiveness. A law (i.e. Custom Act 809) to impose a 20% excise tax on the cost, insurance and freight value of plastics imported into Ghana was first enacted on 21st December 2010 by Parliament of Ghana (see Parliament of Ghana Report, 2010). The law which took effect on 1st February 2011 however exempted plastics for packaging of water because most households in Ghana used sachets of water as primary source of drinking water (Stoler et al., 2012) and imposing a tax on it would have affected prices of the sachet water (Obeng-Odoom, 2013). In 2012, the tax level was reduced from 20% to 15% with exemptions from the pharmaceutical and agricultural sectors under the Customs Act 840 (Government of Ghana Budget, 2012). This was further reduced to 10% in 2013 by Customs Act 863. All exemptions which were granted under Customs Acts 809 and 840 especially plastics for pharmaceutical and agricultural sectors as well as plastics for water packaging and bottling, PET (Polyethylene terephthalate) preform bottles, caps, and sleeves were removed and people who imported such plastics were asked to pay the tax (GRA, 2013). Also, Act 863 proposed an establishment of plastic waste recycling fund of which 50% of the tax revenue was to be paid into. The fund was to be used for recycling of plastic waste, production of plastic waste bins and bags and production and use of biodegradable plastics. The tax is administered by the Customs division of the Ghana Revenue Authority (GRA). The tax was meant to deal with plastic litter which had become nuisance to Ghanaians. Obeng- Odoom (2013) reports that about 250 tonnes of plastic waste were produced daily in Ghana in 2009. However, only 30% of the plastic waste generated was collected with 2% recycled and the rest littered, hanged on trees or found in water bodies (IRIN News, 2004). Since the introduction of the tax to the end of 2013, a total of GHȻ 33.86 million were collected (GRA, 2014). In the first year of implementation of the tax which was in 2011, the tax revenue amounted to GHȻ 10.33 million. The following year (2012), the tax revenue increase by GHȻ 3.23 million to GHȻ 13.56 million. It however, decreased to GHȻ 9.97 million in 2013. Part of the revenue is to be used to support plastic waste management for attainment of zero litter by 2015 as required by the Millennium Development Goal 7 on environmental sustainability (GSS, 2013) and also for defraying cost of administration of the tax (Kombat, 2015). The tax revenue is depicted in Figure 1.

84 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

14 13,56

12 10,33 9,97 10

4 Revenue (million GH₵) (million Revenue 2

0 2011 2012 2013

Year

US$ 1=GHȻ 3.19, €1= GHȻ 3.96 as of 8th December 2014 Figure 1: Plastics tax revenue in Ghana (2011-2013) Source: GRA (2014)

3. Methodology

This section of the paper deals with the methodological issues that are employed in this study. It discusses the sources of data, data collection techniques and analytical procedures employed in the study. Data for the analysis was collected from five main sources: interviews, statistics, institutional statements and reports, newspaper articles and government budget statements. Interviews were carried out by the author from February-April 2014 in Ghana with an average interview length of 1 hour 26 minutes. In all, 23 senior officials and chief directors from the relevant stakeholder organizations, namely: Ghana Revenue Authority (GRA); Environmental Protection Agency (EPA); Ministry of Finance and Economic Planning (MoFEP); Ministry of Environment Science and Technology (MEST); Zoomlion Ghana Ltd; Accra Plastic Waste Management Project, recycling companies and Ghana Plastic Manufacturers Association (GPMA) were interviewed. The purposive sampling method was adopted for the interviews mainly because of limited empirical studies on the subject matter. Semi-structured in-depth open-ended and closed-ended interview questions were designed and used as instruments for the interviews. The interview questions were developed based on the objective of the study and review of literature. The 32 interview questions were divided into three sections. Section one asked questions pertaining to the respondents and their institutions. Questions included the status of the respondents in their organizations and their knowledge on the plastics tax. Section two asked questions on the environmental problems that emanate from plastic use. Section three asked respondents about the abatement costs regarding the plastic litter. In the last section, respondents were asked follow-up questions. The digital voice recording device was used to capture the interviews, and additional notes taken with field notebook. The Transcription software f4 combined with a foot pedal were used to transcribe the interviews captured on the digital voice recorder. The transcribed data were then digitized and analyzed qualitatively. Furthermore, descriptive statistical analysis with the aid of Stata 9 software was used to evaluate cost-effectiveness of the tax.

85 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

4. Theoretical framework

This section provides background information on the economic criterion (i. e. cost-effectiveness) used to assess the Ghanaian plastics tax. Here, the analysis focuses on abatement costs. Usually environmental policy instruments have differing strengths and weaknesses, depending on the economic criteria used to assess them and the characteristics of the problems they are intended to solve (US-EPA, 2010; Skjærseth, 2004). In this paper however, cost-effectiveness criterion will be used to assess the Ghanaian plastics tax. This criterion has been chosen in order to test the extent to which the plastics tax provides incentives for consumers and firms to determine the cost-effective way of reducing the plastic litter (see Endres, 2011). Cost-effectiveness in the context of the study is the ability of the tax to reach its goals at least costs (Endres, 2011; Balana et al., 2011; Siebert, 2005). It is expected that a tax would produce the maximum environmental improvement possible for the resources being expended or, equivalently, it should achieve a given amount of environmental improvement at the least possible cost to society, private and public authorities (Field and Field, 2013; Endres, 2011; US-EPA; 2010). Usually a tax provides a strong incentive to select least cost abatement options (Endres, 2011). Although cost-effectiveness analysis of an environmental policy involves transaction costs46 and abatement costs, the paper focuses on the abatement costs since the tax was meant to abate plastic litter. Field and Field (2013) define abatement costs as the costs incurred in reducing the quantity of residuals being emitted into the environment. In general the greater the abatement, the greater the cost (Tonjes and Mallikarjun, 2013; Field and Field, 2013). Abatement costs differ from one source to another, depending on a variety of factors (Spiller et al., 2014). Even if the sources produce similar pollutants, the costs of abatement are likely to be different because of differences in abatement technology (Hanley et al., 2013; Field and Field, 2013). Abatement costs incurred in reducing pollutants to achieve environmental tax goals include: (1) changes in production technology by purchasing, installing, and operating new pollution control equipment (e.g. end-of-pipe treatment plants and filters), (2) changing a production or consumption process by using different inputs, different mixture of inputs or cleaner inputs (i.e. input switching), (3) changing production processes by reducing output, (4) capturing waste or residual products through recycling or reuse and selling them, (5) treatment, and (6) abandonment of a site (Hanley et al., 2013; Endres, 2011; OECD, 2001). Although taxes minimize total abatement costs of achieving environmental goals, they are expensive to the tax paying firms because they will always pay the tax and abatement in the end (Hanley et al., 2013). But, the more firms abate pollution, the less tax they pay. Abatement costs for Ghanaian policymakers are the costs the public and private institutions have to pay for the reduction in plastic litter. Here the polluting firms will always have to compare for each pollution unit whether it is less costly to abate or pay the tax. With this, the polluters accordingly reduce pollution as long as the pollution reduction cost for additional unit reduced lies below the tax rate. This shuffling leads to cost- effeteness level of reducing a pollutant (Endres, 2011). However, the judgment of the Ghanaian plastics tax against the cost-effectiveness criterion as presented here is the “textbook” analysis and therefore the assessment of the concrete plastics tax may generate different results.

5. Analysis

Encouraging recycling to create market for plastic waste in Ghana has been the major goal of the plastics tax. Although the tax bill enhanced the tax focus with respect to other environmental goals, reduction in plastic litter through recovery and recycling remained an important eligibility criterion and potential method of reducing the plastic litter. Generally, in order to reduce over dependent on virgin raw material importation from other countries and resultant plastics tax payments, the large Ghanaian plastic manufacturing companies (e.g. Blowplast Ghana Ltd, Petroplast, Duraplast and Poly Products Ghana Ltd) collect and process their plastic byproducts for (re-) use (Field interviews, 2014).

46 See Kombat (2015) and Wätzold and Schwerdtner (2005) for more details of the transaction costs.

86 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Therefore, the paper looks at the extent to which the policy goal of reducing plastic litter through recovery and recycling is achieved cost-effectively. Generally, the plastic recycling entails costs. Two types of costs are incurred in this respect. First, the upfront costs which include registration, location and equipment which can be accounted for as one-time expenses or amortized over the lifetime of the business. Second, is the annual operating costs which include such items as plastic waste, maintenance, utilities, labour, administrative expenses, licenses, supplies, insurance, residue disposal and publicity (Field interviews, 2014). The Ghanaian plastic recyclers continue to devise cost-effective strategies to improve on their activities and reduce costs. In this respect, special arrangements have been made between the plastic waste scavengers and recyclers to reduce transportation costs of recyclers regarding the procurement of plastic waste which invariably reduces recyclers cost of production. The major plastic waste collectors transport and sell the plastic waste at the recycling units at their own cost. However, this cost is minimized through the use of tricycles, trollies, bicycles and head portering (An interview with director of Accra Plastic Waste Management Project, 2014). Additionally, value placed on plastic waste attracts people to collect and sell the waste to recyclers. However, since the price of the plastic waste is determined by market forces, recyclers occasionally reduce their demand for the plastic waste in order to get lower prices. And given that supply of the plastic waste remains unchanged, the fall in demand for plastic waste leads to a fall in the equilibrium price and quantity of the plastic waste. Here because market prices are low, there will be no incentive on the part of the sellers to sell the plastic waste. However, in order to maximize profits, recyclers take advantage of the low prices to buy more plastic waste. The low prices then cause the scavengers to process the waste before selling to the recycling units as mechanism to get better prices (Interview with an official of Zoomlion Ltd, 2014). This however, invariably reduces the recycling costs of the recycling units in the recycling process. An important measure that leads to cost- effectiveness of reducing the plastic waste. Furthermore, accepting a wide range of plastic waste in a single-stream system for recycling improves recycling and the plastic litter than the disposal charge policies. In line with this, recyclers prefer buying the plastic waste in large quantities from the major collectors to buying from individual collector in small quantities (An interview with recycling companies, 2014). The director of Accra Plastic Waste Management Project proposes that all individual scavengers are obliged to sell their plastic waste to the major collectors from whom the recycling units can buy from. The director believes, since the major collectors have already gained some experience in this respect and have been accepted by many recycling companies, the change to obligatory plastics markets will be smooth and efficient. The director indicates that exchanges through intermediaries are cost-effective with respect to plastic waste trading. The director of Accra Plastic Waste Management Project in an interview further suggest that, the major and minor plastic waste collectors group into associations and cooperatives to enhance the plastic waste activities and help reduce transaction costs of the recycling companies. This way, each recycler can decide which cooperative group or major collector it deals with and that would help reduce unnecessary expenditure on plastic waste trading. They can simply save up time for hours with better prices at the market and still recycle. Considering the costs of recycling, the director’s proposal will help minimize these costs. Here recycling costs would be the responsibility of household consumers and thus reflect in the price of recycled plastic products compared with collection and disposal which has no such incentive47. If transaction costs forms part of the recycling costs, the transaction costs can be considered to be roughly the same in the recycling processes. Thus, if the definition of cost-effectiveness to minimize costs for recyclers is considered, then the recycling has the potential to be more cost- effective than collection and disposal of plastic waste. This is only the case, though, if additional costs arising from acquisition of plastic waste and any additional recycling costs (e.g. administrative expenses, overheads costs etc.) are compensated by cost saving measures by the recyclers. According to the recyclers, using the above stated mechanisms reduce recycling costs of their activities which has the potential of reducing plastic litter at least cost compared with collection and disposal at dumpsites.

47 See The Ghanaian Times (2014, February 17) and Rockson, (2013) for more information on plastic waste business in Ghana.

87 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

An interview with the recyclers indicate that an average monthly recycling cost per tonne of plastic waste is about GHȻ42.00, while Zoomlion Ghana Ltd (the major waste collection company in Ghana) puts an average collection and disposal cost per tonne of plastic waste per month at GHȻ 56.00. Comparing the costs of reducing the same volume of plastic waste under recycling and collection shows that the costs of achieving a given level of reduction in plastic waste are lower with the former. For a given tonne of plastic waste, cost savings of up GHȻ 14.00 is realized if recycling is opted. The cost savings here cannot be taken to mean cost-effectiveness of the plastic waste recycling activities as more systematic measurement and analysis needs to be carried out to determine this, because one would have to establish if the cost savings are not overcompensated by additional costs. However, an interview with directors of the Ministry of Environment Science and Technology, Environmental Protection Agency and recyclers indicates recycling is cost-effective in reducing plastic waste compared with collection and disposal at dumpsites and helps to reduce financial resources spent on importation of plastic raw material. For recycling technologies, efficiency gains seem plausible, for collection and disposal it seems less likely. Author’s interviews indicate that efficiency gains by using the recycling can be achieved if (1) operating costs of recycling are reduced, (2) the transaction costs are reduced by buying plastic wastes from middlemen instead of individual sellers, and (3) additional costs necessary to maintain the recycling business do not overcompensate any cost savings. On the contrary, Zoomlion Ghana Ltd indicates collection and disposal of plastic waste could be more cost-effective than recycling. To the company, when plastic waste is properly sorted, it becomes cheaper to collect and dispose them. However, because recycling is a means of obtaining cheap raw materials (i.e. pellets) for reuse, the company prefers recycling to collection and disposal. Additionally, the company recommends that scavenging of plastics be encouraged since it contributes to environmental cleanliness without additional cost to cities authorities. The company opined that scavenging is the cost-effective way of reducing the Ghanaian plastic litter. However, in Ghana, cost data are only available on the recycling and collection of plastic waste from the private recycling and collection companies where detail costs are found. Also, the amount of information on development of costs in the future of these companies is limited. For these reasons, it is not possible to determine the cost-effectiveness of the plastic waste recycling and collection, the two main ways of dealing with the plastic litter. Nor is it possible to derive cost- effective strategies for recycling and collection. These, and related topics will have to be tackled in future research where hypothesis maybe tested.

6. Discussion and conclusions

In terms of cost-effectiveness, the traditional economists’ view is that, a tax on a pollutant produces an incentive to individual or institution minimum costs because the emissions producer will usually weigh up whether he can abate a unit of pollutant lower than the tax burden resulting from emitting that unit and would therefore reduce emissions as long as the emission reduction cost for additional unit reduced lies below the tax rate (see Endres, 2011). It is however difficult to relate this argument to the Ghanaian plastics tax because of the low incentive effect of the tax to achieve the desire plastic litter reduction but in general abatement activities embarked on aimed at reducing plastic litter are relatively cost-effective. This is based on findings on similar policies in other countries (see e.g. Kombat, 2015; Tonjes and Mallikarjun, 2013; Dikgang et al., 2012; Hogg et al., 2011; Convery et al., 2007). However, as conditions are different in other countries regarding implementation of these taxes, in-depth analysis would be required to confirm the cost-effectiveness of the Ghanaian plastics tax in reaching its goal. Also, it is difficult to say the alternative abatement policy measures such as deposit-refund system, plastic litter education and point of sales tax would have achieved the tax goal at least costs as did in other countries (see Asmuni, et al., 2015; Numata, 2009; APEIS, 2006; Kulshreshtha and Sarangi, 2001). Notwithstanding, the study showed the cost-effectiveness of the Ghanaian plastics tax is good although further research is required to be able to make sound statements. This way, the study aim is

88 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 achieved but reminds us of the dangers of prejudiced generalizations when assessing policy instrument and of the need for detail analysis of each policy instruments before drawing conclusions.

Acknowledgement

The author is thankful to Prof. Dr. rer. pol. Frank Wätzold (Head of the Department of Environmental Economics of the Brandenburg Technical University-BTU, Cottbus-Senftenberg) for providing him with all the necessary logistics for his PhD study at BTU, Cottbus-Senftenberg. I also like to thank DAAD (Deutscher Akademischer Austausch Dienst/German Academic Exchange Service), Ghana Government Scholarship Secretariat and Ghana Revenue Authority for giving me the opportunity and multiple supports to accomplish my PhD study. Additionally, I wish to thank Graduate Research School of BTU Cottbus-Senftenberg for their financial support which enable me take part in the 1st International Conference of Development and Economy in Kalamata-Peloponnese, Greece to do a presentation on the paper. Finally, I wish to thank Kenneth Bedu-Addo for proofreading the manuscript.

References

APEIS (Asia-Pacific Environmental Innovation Strategies), 2006, Research on Innovation and Strategic Policy Options (RISPO)-Strategic Policy Option, Institute for Global Environmental Strategies, Kanagawa. Asmuni, S., Hussin, N. B., Khalili, J. M. and Zain, Z. M., 2015, Public Participation and Effectiveness of the No Plastic Bag Day Programme in Malaysia, Procedia-Social and Behavioral Sciences, (168), pp.328-340. Balana, B. B., Vinten, A. and Slee, B., 2011, A Review on Cost-Effectiveness Analysis of Agri- Environmental Measures Related to the EU WFD: Key Issues, Methods, and Application, Ecological Economics, (70), pp.1021-1031. Baumol, W. J. and Oats, W. E., 1971, The Use of Standards and Prices for the Protection of the Environment, The Swedish Journal of Economics, 73 (1), pp.42-54. Baumol, W. J., and Oats, W. E., 1988, The Theory of Environmental Policy (2nd ed.). Cambridge University Press, Cambridge. Convery, F., McDonnell, S. and Ferreira, S., 2007, The Most Popular Tax in Europe? Lessons from Irish Plastic Bags Levy, Environmental and Resource Economics, 38 (1), pp.1-11, DOI 10.1007/s10640-006-9059-2. Dikgang, J., Leiman, A. and Visser, M., 2012, Analysis of the Plastic-Bag Levy in South Africa, Resource, Conservation and Recycling, (66), pp.59-65.

Endres, A., 2011, Environmental Economics, Theory and Policy, Cambridge University Press, Cambridge. Field, C. D. and Field, M. K., 2013, Environmental Economics and Introduction (6th Ed.), McGraw- Hill /Irwin, New York. Government of Ghana Budget, 2011, Budget Statement and Economic Policy of the Government of Ghana for the 2011 Financial Year, Ghana Publishing Company/Assembly Press Ltd, Accra. Government of Ghana Budget, 2012, Budget Statement and Economic Policy of the Government of Ghana for the 2012 Financial Year, Ghana Publishing Company/Assembly Press Ltd, Accra. Government of Ghana Budget, 2013, Budget Statement and Economic Policy of the Government of Ghana for the 2013 Financial Year, Ghana Publishing Company/Assembly Press Ltd, Accra. GRA (Ghana Revenue Authority) (2014) Revenue Performance 2007-2013, GRA, Accra.

89 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

GRA (Ghana Revenue Authority), 2013, Tariff Interpretation Order,Ghana Revenue Authority Magazine, (5), pp. 2-31. GSS (Ghana Statistical Service), 2013, 2010 Population and Housing Census Report: Millennium Development Goals in Ghana, GSS, Accra. Hanley, N., Shogren, J. F. and White, B., 2013, Introduction to Environmental Economics, (2nd ed.), Oxford University Press, Oxford. Hogg, D., Sherrington, C. and Vergunst, T., 2011, A Comparative Study on Economic Instruments- Promoting Waste Prevention Final Report to Bruxelles Economic Instruments in Support of Waste Prevention on November 22, Brussels, Belgium, pp.2-14. IRIN (Integrated Regional Information Networks) News, 2004, Ghana: Government Declares Recycling War on Plastic Waste, [Online], July 21, Available from: http://www.irinnews .or/report/50772 [Accessed May 12, 2014]. Kombat A. M., 2015, Implementation of Environmental Taxation in Ghana, DBusiness.de GmbH, Berlin. Kulshreshtha, P. and Sarangi, S., 2001, “No Return, No Refund” An Analysis of Deposit-Refund Systems, Journal of Economic Behaviour and Organization, (46), pp.379-394. Numata, D., 2009, Economic Analysis of Deposit-Refund Systems with Measures for Mitigating Negative Impacts on Suppliers, Resources, Conservation and Recycling, (53), pp.199-207. Obeng-Odoom, F., 2013, Do African Cities have Markets for Plastics or Plastics for Market?, Review of African Political Economy, 40 (137), pp. 466-474. Odoro-Appiah, K., Ohene, A. D. and Sarbah, G., 2013, Fee-based Solid Waste Collection in Economically Developing Countries: The Case of Accra Metropolis, International Journal of Development and Sustainability 2 (2) in press-ISDS, Article ID: IJDS13013105 pp.2-11. OECD (Organization for Economic Co-operation and Development), 2001, The Environmentally Related Taxes in OECD Countries, Issues and Strategies, OECD, Paris. Parliament of Ghana Report (2010): Parliamentary Debates Official Report, December 21, Fourth Series, 71(40), pp. 4201-4223. Pigou, A.C., 1960, The Economics of Welfare, (4th Ed.), MacMillan, London. Rockson, G. N. K., Kemausuor, F., Seassey, R. and Yanful, E., 2013, Activities of Scavengers and Itinerants Buyers in Greater Accra, Ghana, Habitat International, (39), pp.148-155. Siebert, H., 2005, Economics of the Environment-Theory and Policy, (6th Ed.), Springer Science and Business Media, Heidelberg. Skjærseth, J. B., 2004, ‘Marine Pollution: International Ambition, Domestic Resistance’, In: Skjærseth, J. B. (Ed.) International Regimes and Norway’s Environmental Policy-Crossfire and Coherence, Ashgate Publishing Ltd, Adershot/Hampshire: pp. 254-262. Spiller, E., Stephens, H., Timmins, C. and Smith. A., 2014, The Effect of Gasoline Taxes and Public Transit Investment on Driving Patterns, Environmental and Resource Economics, (59), pp.633-657. Stilwell, F., 2012, ‘Marketising the Environment’, Journal of Australian Political Economy, (68), pp.108–127. Stoler, J, Weeks, R. and Fink, G., 2012, Sachet Drinking Water in Ghana’s Accra-Tema Metropolitan area: Past, Present and Future, Journal of Water, Sanitation and Hygiene for Development, 2 (4), pp.223-240. The Ghanaian Times, 2014, The Plastic Waste Business in Ghana, How far? February 17. Tonjes, D. J. and Mallikarjun, S., 2013, Cost-effectiveness of Recycling: A Systems Model, Waste Management, (33), pp. 2548-2556.

90 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

US-EPA (United States-Environmental Protection Agency) (2010) Guidelines for Preparing Economic Analyses, National Centre for Environmental Economics: Washington DC. Wätzold, F. and Schwerdtner, K., 2005, Why be Wasteful When Preserving a Valuable Resource? A Review Article on Cost-effectiveness of European Biodiversity Conservation Policy, Biological Conservation, 123 (3), pp.327-338.

91 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

A (successful) story of Poland’s transformation and European integration. What can be advised to follow, and what – warned to avoid?

Benon Gaziński Institute for Political Sciences, Warmia and Mazury University, Poland. Temporary: A Visiting Professor, Agro-Bio-Tech Gembloux, Universite de Liege, Belgium – a stay supported by the National Fund for Scientific Research, Brussels. [email protected]

Abstract

In this paper an attempt is undertaken to examine the issue of correlation between the system transformation and the European integration from the perspective of agriculture and development of rural areas in Poland. In the first part, the integration as an economic and social phenomenon is analyzed as well as the transformation of the economic and political system in Poland. In the second part, the experience of Polish agriculture in a centrally planned economy regime as well as system transformation is characterized and followed by an outline of the influence of the European integration on agriculture during the period of an association and the membership as well as some development trends as observed nowadays.

In final, third part some conclusions point out advantages and shortages of the undergoing processes of system transformation and European integration.

1. Integration process vs. system transformation Integration: definition and conditions

The word ‘integration’ is derived from Latin (integratio). It stands for integrating parts into one functional whole. In order to understand the essence of integration, it is helpful to refer to a notion of the system. Ancient Greeks expressed the meaning of this concept in a very concise way: a whole is more than a simple sum of its components. The mentioned ‘more’ embraces a new quality. It constitutes a benefit, revealed as a result of combining components into a singled whole, so one with another become correlated (a feedback effect often seen). Taking a car as an example, it is the ability to move by itself48.

Integration is not always voluntary (although at present this model seems to prevail, at least in the privileged parts of the world) – it also happens being forced from the outside. In the course of history, many events of military conquers have taken place, and the defeated could be assimilated by the winners. But quite opposite course is often recorded – the winners assimilated by the defeated. Correspondingly, three basic types of integration may be distinguished, depending on the character of the relations between the states:

 Politically unequal integration, while some partners are subordinated to the others (formerly: the Council for Mutual Economic Assistance (COMECON), colonial dependency).  Conventional integration of sovereign states (e.g. EFTA, CEFTA, NAFTA).  Conventional integration of states with voluntarily limited sovereignty for the sake of representing them supranational institutions (e.g. the European Union). Classifying the European Union into the third of the above mentioned categories is well- founded in the political design elaborated by Jean Monnet and Robert Schuman, regarded as “fathers”

48 B. Gaziński, Procesy integracyjne [in:] Podstawowe kategorie polityki, ed. S. Opara, D. Radziszewska- Szczepaniak, A. Zukowski, Olsztyn 2005, pp. 198 -200.

92 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 of united Europe. It also externalizes its unique feature of the institutional order, as compared with this one of a state, or a typical international organization.

At present, the European Union is at a stage of an advanced economic union. By enforcement of the solutions incribed in the Single European Act, a single internal market was created, characterized by four freedoms of transfer: goods (removal of non-tariff barriers), capital, services and people. As an “spill-over” effect of emerged internal European market, the program of common currency was launched in the Treaty on the European Union and realized by introducing the euro (in 1999 in a cashless form, and – in 2002 – replacing the national currencies in 12 Member States)49.

Transformation

The word ‘transformation’ is derived from Latin (transformation). It means a change and is used is various contexts of significance. In recent 25 years, it is widely spread to use the term the system transformation. It reflects the turnover, taking place in the countries departing from the system of real socialism, which have set a reform “package” to restore democratic structures of the state and to rebuild a market economy.

For political reasons and because of a very nature of the economic system, imposed after the World War II, Poland – for a half of a century – was not able to participate in processes encompassing the democratic European nations, like those leading to the establishment of the European Communities. It is clearly confirmed by the lack of any bilateral agreements between the People’s Republic of Poland [then official name of the country] and the European Communities (mutual relations were regulated by international law, as well as the two unilateral directives of the European Economic Community, on the principles of trade and economic cooperation with the Centrally Planned Economy states).

The first agreement on trade was signed only in September 1989, already in the early period of cabinet of Tadeusz Mazowiecki, the first post-war non-communist Prime Minister in the Central- Eastern Europe. Democratic turn in Poland initiated not only a new era in the relations with the “Western” Europe but also encouraged a peaceful process of rejecting the whole political and economic system in other socialist countries.

Let us pay an insight into the system transformation, which was undertaken in Poland in its contemporary historical context. It is noteworthy that the first transformation of the political system in the country started in 1918, with re-gaining the independence after 123 year long partition period. It meant the integration of the lands, which had belonged to the three surrounding countries, into one organism of the independent Polish state (introduction of uniform currency, law, taxes, educational system, re-designing of a network of communication, etc.). And the country development was disrupted by the war, just barely more than 20 years after.

In the years from 1944 to 1949 another transformation was imposed upon Poland, from the outer decision-making centre, Kremlin. That “revolution from abroad” covered the following areas:

a) Political system: Parliamentary democracy of the interwar period was replaced by the system of the totalitarian regime which defined itself as ‘the dictatorship of the proletariat’.

b) Economic system:  Market economy was replaced by the centrally planned one.  Private property, which dominates in the market economy, was supplanted by nationalized, so-called socialized ownership.

49 B. Gaziński, Unia Europejska nie tylko dla początkujących, Olsztyn 2002.

93 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The term “advanced socialism” was even invented, in the “new-speech”50 to describe the actual system performance but the ultimate goal, construction of a communism has been fortunately never achieved.

Thus, it can be easily noticed that the transformation undertaken in 1989 was directed in quite the opposite direction as that one of the 1940s:

a) Political system: The state of that time was submitted to thoroughgoing reconstruction focused on the formation of the system of parliamentary democracy,

b) Economic system:  Centrally planned economy was replaced by market economy,  The dominating nationalized economy made a room for the private property. From the first September 1939, when the peaceful development of the Polish state was curtailed by German aggression (and shortly later, 17-th September, by the Soviet one), till September 1989, when the recently established government of Tadeusz Mazowiecki launched the program of system transformation, more than 50 years and around have passed. For the entire half a century, the country developed in tight frames of a strange and ineffective social and economic system. It is the underlying cause of the resultant economic backwardness, as confirmed by the statistical data. It is estimated that in 1938 the national income in Poland was two-fold higher than in Greece. After 45 years of the real socialism that indicator was reversed in favour of Greece. The relations referring to other European states were similar.

The strategic choice made by Poland in 1989 to replace the inefficient system of real socialism by a more effective system of market economy did not mean, though – as many people expected – a rapid increase of the pace of the economic development. The fall of the GDP per capita, observed in the first years of transformation, stood for the costs of reconstruction of the political and economic system.

According to the statistics, in 1990 GDP per capita decreased by c. 8% in comparison with the year 1989, whereas in the next year – by the following 7%. A considerable part of the population of the country suffered from a marked deterioration of the standard of living. The burdens of transformation were more acute for those who were poor and less fortunate. However, the statistics painted an excessively gloomy picture of the situation, thus contributing to a rapid growth of disappointment and frustration among the society51. That phenomenon can be explained by several overlapping causes:

 The so-called ‘grey economy’¸ for example rapidly developing street trade, was not covered by the statistics. According to the Hungarian estimates of that time, its share in their economy was comparable with the recorded fall in GDP,  The new economic system constrained the production of useless trash which increased the statistics of the national income (e.g. at the time of common pocket calculators massively imported from abroad, the domestic industry still manufactured mechanic calculating devices, so-called ‘kręciołki’),  The scope of wasting was considerably decreased. If in the cooperative blocks of flats warmth escaped through the draughty windows and not insulated walls, then again owing to the increased output of mining and heat engineering, the national income increase was registered,  Inaccuracy in estimating the fair statistical data since in the previous system: a state-owned enterprise had strong incentives to show higher results ‘on paper’ than in reality (bonuses for the management and for the staff for exceeding the planned tasks). Meanwhile, a private

50 A term ”new speech” was introduced by Georg Orwell in his famous ”Year 1984” novel. 51 D. Rosati, Polska droga do rynku, Warszawa 1998, pp. 99 – 134.

94 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

enterprise could expect one clear prize for excellent results – higher taxes! The state ‘on the paper’, this time much lower values declared, was not surprising outcome. It is noteworthy that the costs of transformation were not borne by everyone and that they were not evenly spread. Thus, not everyone felt the benefits and could participate in the opportunities created by the emerging new system. Paradoxically, the beneficiaries of the new system were, in particular, those belonging to the former political establishment who easily got rid of its ideology, the support for which had frequently only a declarative, on-lip character, and successfully strived for a position of forerunners of capitalism.

The act of granting property rights to the nomenclature contributed to that considerably (that is the appropriation by the party and state elites of the national property) even prior to the formal fall of the real socialism as well as the subsequent so-called ‘thick line' policy (abandoning de- communization). On the other hand, among the losers of that time were the employees of the big industrial plants, which used to be the mainstay of ‘Solidarity’, whereas in the new circumstances they experienced workforce reductions and even bankruptcy of their companies …

The deterioration of mood was enhanced by the effect of demonstration by the growing rich beneficiaries of the changes, excessive expectations and forgetting the misery of life during the real socialism. The memory of empty shop shelves of the 1980s tended to be veiled by the short-lived prosperity of ‘the life on credit’ in the times of Edward Gierek52.

The lack of understanding for the ongoing transformation in the categories of system choice was clearly visible. People did not often realize the illusory nature of their expectations: that it would be possible to retain that what was deemed the positive side of the old system – stable job, lack of unemployment (at least the official one, since it occurred in a hidden form), social benefits, provided for free or at the level of prices, far away from the market equilibrium (expressed in the colloquial language: ‘what is being given' at the shop or to ‘receive’ a flat) and at the same time to avoid the ‘bad’ sides of the new system like unemployment, higher risk of doing business or the ‘rapacity’, characteristics of the “in statu nascendi” capitalism.

Meanwhile, the choice referred to the whole system, covering both the ‘good’ sides of it as well as the “bad” ones. The “Solidarity” uprising of the 1980s deprived the hitherto authorities of the social mandate to continue exercising power – the demand for political transformation towards the full democratization of the state was explicitly expressed. In the economic sphere the postulates were not so radical – the expectations of that time seem to by expressed by the parole: ‘socialism yes, distortions no’.

However, those and other deficiencies cannot veil the historical dimension of the changes – the transformation led to democracy:

 The freedom of assembly and to carry out political activity were granted.  Free elections were introduced.  The legal system, including the constitution, was amended.  New institutions were established, including: the office of the President and Senate, the upper Chamber of the Seym (Parliamnet), the Constitutional Tribunal, the Tribunal of State and the Supreme Administrative Court.  The fundamental human rights and citizen’s rights, which in the socialist system existed only on the paper, started to be provided. The transformation of the political system occasioned the introduction of the market economy:

 The ‘handmade' steering of the central plan was replaced by the market regulation.  The financial system was rebuild (convertibility of złoty, independence of banks).  The private sector became the dominating one (property relations, participation in creating GDP and employment).

52 J. Beksiak et.al., Polska gospodarka w XX wieku, Warszawa 1999.

95 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

 The institutional and legal system was adjusted to the demands of the reformed economy. In order to illustrate the scale of change, let’s give some examples regarding the last of the above points. In the period of the socialist economy, there was none regulating law act for starting business - the interwar Trade Codex turned out to be very helpful in the new circumstances! There were no statutory provisions regarding the collapse of enterprises – socialism simply did not admit such an option. There were also no legal bases for establishing foundations (such a law was adopted under the pressure of the initiators of a church foundation for the sake of Polish agriculture in the second half of 1980s).

The thorough reconstruction of the state is not the only one result of the system transformation. It also contributed to the change of the geopolitical localization of Poland on the map of the world:

 Instead of the three, the country has seven states-neighbors.  Poland met criteria and was accepted to a number of international institutions as: the International Monetary Fund, OECD or the Council of Europe.  The membership in the NATO and the European Union is of particular, strategic importance 53. Poland chose the way of a ‘shock therapy’ of economic reforms and is deemed a model example of success. Though there is still one shortcoming not to be overlooked. Poland stands among a few post-socialist countries where the problem of re-privatization remains to be solved, that is the law specifying the compensation for the nationalization of the private property, which was carried out against the law of that time. The transformation of the political system was carried out in a less fortunate way.

II. Agriculture: European integration and directions of changes

A characteristic feature of the Polish agriculture within decades of the previous system was the domination of the private sector – out of the post-socialist countries only Poland and Slovenia stood out in this respect. Comparing the agrarian structure of Poland and Hungary on the eve of the system transformation, a reversed pyramid of land ownership is obtained. In Poland, approx. 80% of farmland was privately held, approx. 15% was owned by the state farms, whereas the remaining, less than 5%, was used by agricultural production cooperatives. By contrast, in Hungary approx. 80% of farmland was occupied by production cooperatives, approx. 15% - by state farms, whereas the private sector made up only approx. 5% of land ownership (mainly house adjacent allotments).

Thus, Poland was in a relatively better situation than other countries of the region since the system changes referred only to a part of the farmland, not for almost all. However, a big modernization effort was necessary because agriculture did not meet European standards in terms of technology and efficiency and a lot to be done in food processing. Quite a similar picture presented agriculture in some other post-COMECON countries.

The beginning of the 1990s was the period of the vast opening in foreign trade. The liberalization of food trade caused an influx of a wide stream of products from abroad, not seen on the Polish market before, such as drinks in plastic bottles (for some time even mineral water was imported from Belgium!), sliced ham and cheeses, or a variety of dairy products. Domestic industry took up the challenge of the foreign competition. Imported products, their packaging, way of processing and

53 Globalizacja, integracja, transformacja. Główne problemy globalizacji, integracji europejskiej oraz transformacji politycznej Europy Środkowej i Wschodniej, ed. R. Backer, J. Marszałek-Kawa, J. Modrzyńska, Toruń 2003.

96 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 labelling, became the seeds to think of and potentially to follow. Furthermore, they were available for free and it was not necessary to do any market research to recognize the consumer preferences54.

The modernization of the processing plants and farms was also accelerated by the requirements of new quality norms. Since the beginning of the 1990s the Government Plenipotentiary on the European Integration and Foreign Assistance (in 1996 transformed into the Office for the Committee of European Integration) was, among other duties, obliged to monitor the new law in terms of its compatibility with the Communities acquis communautaire. The next factor was the influx of foreign capital. As a result, within around fifteen years, still before Poland formally joined the European Union, thorough changes were made to the whole branches of food processing, to cite only the brewing industry, dairy industry or meat industry as the most important examples.

One of the consequences of the fall of socialism was a thorough change of the structure of Polish foreign trade, which also referred to the turnover of food exportation. The dissolved Council of Mutual Economic Assistance was replaced by the European Community countries, whereas the main trade partner became Germany, replacing the USSR – the main trade partner of the Peoples’ Poland. It is worth mentioning that Germany was Polish main trade partner prior to the World War II, though one important difference. At that time, due to the aggressive German politics the two countries had hostile relations, whereas at present the relations are peaceful and friendly. Poland and Germany have become cooperating neighbors which overcome past resentments.

The Polish trade with the European Communities was regulated by the provisions of the European Treaty (as the Treaty establishing the Association between the Republic of Poland and the European Communities is popularly called). Signed (along with Hungary and the former Czechoslovakia) on 16th December 1991, it was enforced in Spring 1994. The part of the Agreement focused on the trade, the Interim Agreement, came into effect already in the year 1992. It provided for establishing a free trade area within the period of 10 years. It did not apply, however, to the agricultural produce.

An important provision was also the principle of asymmetry of mutual concessions in trade liberalization – their pace was supposed to be faster for the European Communities than for Poland. The paradox that – against the expected results of the association treaty – for many consecutive years, the balance of the food turnover remained negative for Poland, can be explained by series of factors.

The most important one was the protection against import from the third countries on the Communities borders (charging variable levies, later on the basis of GATT agreement converted into custom fees, bans on import and import quotas) and applying export subsidies. For instance, the last ones pushed Poland out of the market of the Kaliningrad region of the Russian Federation, where – since the beginning of the 1990s – the export of Polish food was dynamically growing.

Thus, no wonder that in those years preceding Poland’s accession to the European Union, farmers perceived the perspective of a membership with mistrust and fears. Their daily experience showed that the European Union could be called a ‘bad neighbor’, which practices dumping (the unfair practices in foreign trade referred to already before the war). The confirmation of this fact is the quite spectacular example of Hungary during the trade negotiations of the GATT Uruguay Round. In spite of being granted the official status of a candidate to the European Union, the country joined the so-called Cairns Group playing a team game against the European Communities.

It was finally Poland’s membership in the European Union which put an end to that clash of interests since Poland having been the ‘third’ country became the Member of the European Union and found itself inside the area formed by it. However, the formal acknowledgement of membership was preceded by a positive balance in food trade because Poland soon became the biggest net exporter of food exceeding Hungary (Fig. 1).

54 J. Siekierski, Liberalizacja handlu polskimi artykułami rolno-spożywczymi w procesie integracji gospodarczej [in:] Gospodarka Polski na przełomie wieków, ed. Z .Dach, Kraków 2002, . 263 – 277.

97 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Fig. 2. Agri-food and beverages trade balance (million USD).

The European Communities reacted very fast to the fall of real socialism and the initiation of deep reforms. Already in the year 1989, the decision was taken to set up the aid programme, PHARE (Poland Hungary Assistance for Restructuring their Economies), soon expanded onto other countries of the region, altogether including around fifteen countries. Designed to be a temporary assistance measure, on the final stage of its existence, it became the first pre-accession programme.

Admittedly, the agriculture made use of the PHARE means to a small extend, but in 1999, two subsequent pre-accession programs were set up, SAPARD and ISPA, out of which the first one applied exclusively to the agriculture and was supposed to be a form of training preceding the act of providing the candidate countries with much wider range of programmes and budget means, which became available from the moment of accession. In the document ‘Agenda 2000’, announced by the European Commission in July 1997 and agreed on the ‘summit’ in Berlin in 1999, the standpoint was adopted that the new member states are not going to have any access to the direct payment scheme till the end of the new budget period (2013). Such a standpoint was justified by the claim that the essence of the system of direct subsidies is to compensate for the income lost by the farmers as a result of decreasing the intervention prices (resultant from the reform of the Common Agricultural Policy). In the candidate states, these prices were lower than the Community ones. That is why, the farmers from the new member states are going to benefit from higher prices and there is no reason to provide them with the support of direct payments55.

Such a standpoint could not have been accepted by Polish negotiators (as well as by their colleagues from other candidate states). They argued that a lack of direct payments was an open and evident discrimination as per hectare they would have received much smaller benefits than their counterparts from the 'old' Union. Moreover, it is the Polish farmer not e.g. the Danish one who had to and still has to make a considerable modernization effort in order to meet the requirements of the single European market. Finally, the dispute was finished in a compromise – it was established that the level of the direct subsidies for Polish farmers was going to rise systematically, reaching the level of 100% in the year 2013, the last year of that budget period.

55 Obszary wiejskie w Polsce a integracja z Unią Europejską, ed. Cz. Sobków, Toruń 2002.

98 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The membership in the European Union meant not only obtaining access to the direct subsidies but also to a range of other agriculture support programmes, such as structural pension (for farmers in the pre-retirement age group who are going to make over their farms to successors modernizing their farms), support for young farmers, purchase of machines and modernization of buildings, land forestation, ecological farming, development of farm tourism as well as employment outside the farms, etc.

* *

The unprecedented enlargement of the European Union from 15 to 27 and then (following the accession of Croatia in 2013) to 28 Member States (a numerical growth by 75%) stands for a new epoch in the EU history, the epoch of overcoming the divisions persisting for the whole post-war half of the century. The employment in agriculture following the admission of new Member States was more than doubled. The relation between the number of farmers and the number of consumers in the EU-15 a compared with the EU-12 amounts to approx. 1 to 4 correspondingly (in order to maintain the same number of consumers in the ‘new’ Union it is necessary to employ four times as many people in agriculture).

Joining the Union has become, especially during the first years of membership, a strong development incentive taking into account the support for the agriculture from the Communities budget (the level of subsidies in the pre-membership period was at a much lower level than the EU average). As it could have been expected, after several years, the ‘accession incentive’ started to run out and price disparities to even out. What is more, the gradual withdrawal of the Union from the direct intervention on the market makes the farmers more susceptible to the risk due to price fluctuations. These prices are more frequently lower than the farmers expect. The positive side is the fact that a farmer is gradually going to get more and more freedom in making production decisions56.

The changeable farming conditions resulting from the gradual reforms of Common Agricultural Policy are the circumstances which Polish farmers should be accustomed to since they are hardened after decades of the politics of the socialist state, reluctant to them, whereas later, as a result of transformation, they lived in the conditions which were much closer to the principles of a market economy than the ‘old’ Union farmers.

It is also worth paying attention to some trends which have been observed in first years after the accession57:

1. the European integration has influenced the structure of household income sources in the way that in the farming households the incomes from farming stopped to be the most important position. 2. in the rural areas more than half of the households, do not obtain income from agriculture; 3. the eternal Achilles' heel of the country, the proportion of the farming income has improved in comparison with the pre-accession period from 65% (2003) to 83% (2006);

4. for the first time a new phenomenon has become apparent – positive balance of migration between the rural and urban areas;

56 B. Gaziński, Polskie rolnictwo w Unii EuropejskiejiI niektóre doświadczenia pierwszego roku członkostwa, „Biuletyn Instytutu Hodowli i Aklimatyzacji Roślin”, 242, 2006, pp. 3 – 14. 57 Marta Zielińska, M. Nodzykowski, Rolnictwo i rybołówstwo[in:] 5 lat Polski w Unii Europejskiej, red. M. Kałużyńska, K. Smyk, J. Wiśniewski, Warszawa 2009, pp. 73 – 103.

99 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

5. during the period of membership a change of farmer’s attitudes towards Poland’s membership in the European Union has taken place. Prior to the accession they belonged to the most skeptical part of the society, whereas now their support is at a higher level than the whole society average;

6. the urgent issue to be solved is the reform of the insurance system for farmers (the KRUS), which has been put off by successive governments.

The problems of agriculture and rural development are still going to be solved on the Community level at least in the years of the budget period of 2014 – 2020 (in the longer perspective it is difficult to make any forecasts).

III. General conclusions

1. “Bright” points of Polish transformation and European integration

i) Changed political and economic map of (not only) Europe It is Poland’s democratic turnover of 1989 which has catalised deep democratic processes within the bloc of then socialist countries. Establishment of the first post-war non-communist cabinet of T. Mazowiecki set an example to follow: democratic shifts in Hungary and Czechoslovakia. Exodus of Eastern Germans to Austria while Hungarians had opened the border contributed to the change of the GDR government and resultant fall of the Berlin Wall. And announcement of Lithuanian independence in March 1990 undermined the Soviet Union, dissolved in December 1991.

Political and economic map of Europe had undergone profound changes and Poland’s location aptly illustrates this: former three neighbor states being replaced by the seven new ones: Russia, Belorussia, Ukraine, Slovakia, the Czechs and (united) Germany.

Similarly deep changes occurred in Mediterranean and Balkan area.

Poland, located on this re-shaped map of Europe, is recognized as a reliable, respectable country and, as a EU Member State, aspirates to the role of a local leader58.

ii) Thorough reconstruction of the state Political transformation meant fundamental conversion of the institutional framework of the state. Some institutions were submitted to be abolished like the censorship office, or the Central Planning Office and other to be established: the post of the President and the Senate, upper Chamber of the Seym (Parliament) among the most important ones.

iii) Local self-government reform The reform was based on the tree foundations: democratic, free elections (including common election of the Heads of Communes and Presidents of the cities); establishment of a separate category of the property – communal ownership and strengthening of the commune budget.

iv) “Last not least” metamorphosis of the overall economy The cornerstones of the reform included: privatization, convertibility of złoty, the national currency and replacing the Centrally Planned Economy system by the market-oriented one with the price release. The structure of the ownership has been reversed:

“Socialist” economy ownership: Market economy ownership:

1. “Socialized” sector: 1. Private sector a) State; 2. Public sector:

58 A. Szczerbiak, Poland within the European Union: New awkward partner or New heart of Europe?(Routledge anvances in European politics: 76), Routledge, Abington 2012, 251 p.

100 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

b) Cooperative. a) state 2. Private sector b) communal In the new system, cooperative ownership “disappeared” as a separate category, being included into the private sector. In the old system, it is somewhat misleading to speak in term of real cooperatives, they were a mere semi-state forms – in Hungarian literature they make a good distinction: cooperatives in the “socialist” economy are referred as “collective” form of the ownership.

v) Stable state, solid economic bases: resistance to financial crisis During 2009, the first year after the collapse of the US Lehman Brothers Bank, Poland stands alone among 27 EU Member States, a “green” enclave, exhibiting small, but positive GDP growth. And still, the national economy performance is well above the EU average, with inflation recently replaced by slight deflation.

2.”Shadow” points of Polish transformation and European integration

i) Lack of re-privatization59 Poland belongs to one of a few post-socialist countries of the region, where this problem has not as yet been resolved.

ii) Low level of citizen’s participation in the system of democracy Polish political scene is stabilized by the two political parties, governing since 2007 Civic Platform (PO) and Law and Justice (PiS), permanently fighting each other. The system of proportional elections, practiced in the parliamentary elections and (bigger cities) in local ones led, in Polish conditions, to a “commander”- style of the party leadership, with no room for a party inner democracy (grassroot level structures have nothing to say concerning the sequence of candidates names on the election lists). And a mere citizen feels being alienated from political processes undergoing in home country. It is manifested by very low participating rate in elections, generally under 50%.

iii) EU citizenship The performance is not much better as referred to the EU citizenship. Poland stands up well above the EU average concerning citizen satisfaction of the EU membership. Public polls, results of 75-80% of the acceptance, put Poland on a leading rank among all 28 Member States (and the support for the EU has been enhanced during a period of the membership). But such a support is very weakly correlated with self-identification with a EU citizenship as is evidenced by very low participation in elections to the European Parliament, usually below 45%, one of the lowest among MS. EU is seen rather as a “sack of money” to make a use than a joint responsibility …

iv) Poland’s performance as an EU Member Country The most important Polish initiatives are related to Central and Eastern Europe, as the country pretend to become a regional leader. Activities on general European level are pronounced while they directly interfere with national interests (the Constitutional Treaty and then Treaty of Lisbon, disputes on the CO2 emission … ). Otherwise, Poland’s voice at the EU fora is relatively weak one. Indirectly, it is confirmed by the Polish Presidency of the second half of 2011. It was performed perfectly well concerning the organization but their six main priorities were edited in a style to avoid a real controversies, due to a discussion about EU future, coming into a turning point of its history …

v) Some shortcomings of the Poland’s transformation Polish system transformation – as compared to other post-communist countries – is widely accepted as a success story. Not putting such a general appraisal into doubt, some important drawbacks can be pointed out:

 Unemployment, hitting more severely younger generation;

59 Reprivatization: restoring ownership property by a state, or compensation for a property, lost during a period of socialism, mainly initial years of the system, done with the violation of then binding law regulations.

101 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

 Correlated migration outflow abroad, entailing those young and better educated (brain-drainage and escalating constraint to the pension scheme);  Law instability, undermining business activities (incoherent and complex taxes);  Absolutely justified fatal reputation of justice, incompetence and irresponsibility of judges (and prosecutors) …  “Last not least” weakened social ties, erosion of traditional values, including religious ones, bonding local societies and the family … During the first years of transformation, the driving force of economic and social development was the removal of the bottlenecks of socialism. And, gradually, this source has been dried and replaced by another accelerating factor – the European integration (not to be reduced to the financial inflow; improvement of the state and public institutional framework and positive effects of implementation of the acquis communautarie are of vital but underestimated importance).

Entering into the second decade of the EU (successful) membership, an important lesson from recent past has to be drawn – a third period has been emerging. This one of the necessary fulfillment of the remaining, uncompleted or badly introduced reforms – advantages of the European integration cannot serve as a substitute. And they cannot imitate inner development potentials.

Fig. 2 Cumulative GDP growth in the regions in the period 2004-2013 (2003 = 100)

60% 49% 49% 50% 37% 38% 40% 33% 33% 34% 28% 30% 27%

20% 14% 9% 11% 10%

Source: Poland’s 10 years in the European Union. Report, Ministry of Foreign Affairs, Warszawa 2014, p. 59

102 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Fig. 3. Per capita GDP compared to the EU-27 average in 2003 and 2012

90,00% 83,50%83,60% 80,80% 80,00% 75,90%76,40% 71,20%71,50% 66,50%66,90% 68,20% 70,00% 64,10%62,50% 60,00% 52,90% 54,50%54,40% 55,40% 47,40% 48,80% 49,80% 50,00% 43,80% 2003 40,00% 33,50%31,50% 2012 30,00% 20,00% 10,00% 0,00% BG RO LT HU PL EU9 EE LV SK CZ SI

Source: Poland’s 10 years in the European Union. Report, Ministry of Foreign Affairs, Warszawa 2014, p. 64

103 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Soil resources and the role in agriculture sector of Greek Economy.

Ch. Paschalidis1, D. Petropoulos1, D. Paschalidis3 I. Chouliaras2, P. Sinioros4 and S. Sotiropoulos7 1TEI Peloponnese, School of Agricultural Technology, Kalamata Messinia; 2 Environmental Management, Asset technology consulting, 2 Gioldasi, Neos kosmos Athens; 3Management Consulting, 17 Mitilinis Anixi Attiki; 4TEI PIRAEUS Egaleo Attiki; 5Greek Agricultural Insurance Organization, Tripoli, Greece E-mail: [email protected]

Abstract

In this paper some basics for Greek agriculture and the contribution of soil resources of the country are given. The main problems caused by reckless human activities in the territories as well as the measures to be taken for the protection of soil resources are described. The agricultural sector is one of the main pillars of the Greek economy. In the last 4 decades the contribution of agriculture section on GDP decrease from 15% to 6%. In Greece, the cultivated land was 66% of the total area between 2000 and 2006 covering the surface of 8.7 million hectares. Since soil used in agriculture 3.3 million hectares are grown, while 4.9 million of hectares is grass. About 500,000 hectares of farmland, left fallow per year. The 56% of farm land is lie in lowlands and the 44% are mounted and hilly areas. The 82, 7 % of the cultivated land lying in disadvantages areas. (56% of mountain areas). On the other hand, in 25 E.U countries the cultivating areas are 55.4% and 16.3% there are mounted and hilly areas.The 33% of the arable land is irrigated. In recent decades irritated areas have approximately tripled.

Keywords: Agriculture economy, sustainability, soil recourses

Introduction With the increase of population and overcrowding in the coming decades on the planet, land resources exploitation and reaping of the produced organic mass takes place and is projected to become more pronounced, resulting in disruption of the biological cycle. About 25% of the growing food needs can be met by increasing the cultivated area and 15% of the increase in multiple culture. 60% should come out from increased yields in land already cultivated. Worldwide, the cultivated land per capita will be reduced gradually from 3 acres, which is currently, at 2.3 acres up to 2020 (Lai R., 1991) and to 1.5 hectares up to 2050. Thus, the greatest challenge humanity has to face in the 21st century will be to meet the basic needs in food, fiber, fuel and raw materials, from the maximum available per capita land of 1.5 acres or less. The technologies for sustainable land and water management in the 21st century should take into consideration such a restriction. Main restrictions on the use of land resources for agricultural production is drought, nutrient stress, soil shallowness, water excess and continuous frost (Simonis A. 1993, Simonis A., et al.1994).

Greek Agriculture and Soil Resources Agricultural sector is considered to be one of the key sectors of Greek economy, however with significant and many problems. These problems mainly are related to the way policy, the enlargement of the European Union which strongly influences the viability and competitiveness of our country's agriculture. Fruits, vegetables, olive oil and cereals are traditional Mediterranean products and make up a large field of Greek rural economy referred on the level of employment, the cultivated land and

104 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 value production. During the last four decades the contribution of Greek agricultural sector to the Gross Domestic Product (GDP) has been reduced from 15% to less than 6%. The contribution of agricultural production to GDP decreased from 9.9% in 1995 to 7.3% in 2000 and then to 5.2% in 2006 (Kaditi E., Nitsche E., 2010). In Greece, the agricultural land was 66% of the total land in the period from 2000 to 2006, covering a surface of 8.7 million hectares. In relation to the soil used for agriculture, 3.3 million hectares are crops, while 0.49 million hectares are pasture. About 500.000 hectares of arable land are left under fallow each year. 33% of arable land is irrigated.

Table 1 Soil Allocation of Greece (%) (Land %)/ Decade 1960- 1969 1970- 1979 1980- 1989 1990- 1999 2000- 2003 Agriculture Land 70 71 71 70 66 Crops 23 23 22 22 21 Forestry ...... 26 28 Source: WDI 2007

Table 2 Categories of Quality of Greek Soil Resources 106 ha % High quality of Soil 2.49 19 Average quality of Soil 2.33 18 Low quality of Soil 7.57 57 Non uncluded area (urban land, lakes, etc) 0.79 6 Source: CEC 1992

Furthermore, 56% of arable land is in the lowland areas, while the rest are in mountainous or hilly areas. Finally, 82.7% of used agricultural land is located in disadvantaged areas, 56.4% from which is located in mountain areas. The corresponding quantities for the EU is 55% and 16.3%. Regarding the specificity of crops, in 2005 approximately 22% was mixed cultures, whereas 78% specialized (compared to 84% in 2003). It should be noted that used agricultural land covers only 30% of the total surface, and the average size of farms is less than 50 hectares, when for the UK is 55.7 hectares, Denmark 53.7 and France 48.7 hectares. (CEC, 1992) The number of farms is estimated at about 833.000, of which 76% have a size less than 5.0 acres while less than 1% have a size larger than 50 hectares. It should be stressed that, over time, the number of large farms has been increased at the expense of smaller ones. It is worth noting that the cultivated land in Greece has been decreased mainly because of the reductions in the production of cotton and tobacco, as well as grains and oilseed crops. In recent decades farmers were led to overexploitation of the most sensitive soil resources, leading many of them to suffer severe damage and great destruction from erosion and widespread degradation of their physical and chemical properties. Also the use of high quality productive land for industrial, residential, tourist and other non agriculture uses that severely destroy for ever or reduce the suitability of soils for agricultural use. National land policy (Yiassoglou, 1985) has to be determine that defines land use zones and key operating rules that ensure its sustainability.

References CEC (1992) The State of the Environment in the European Community, EEC Com (92) 23 Final- Vol III, Brussels, Belgium

105 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Lai R. (1991). Soil research for agricultural sustainability in the tropics, p. 66-90 In: NRC (ed) Toward sustainability, Nat. Ac. Press. Simonis A. (1993). Problem soils of Greece, FAO/ ECE symposium on Agriculture and the Environment, Geneva, Switzerland. Simonis A. (1994). Soil Resources - Agriculture, Proceedings of the 5th Greek Soil Conference, Xanthi. Kaditi E., Nitsche E. (2010). Report 60. The agricultural sector in Greece. Centre of Planning and Economic Research, Athens. Yiassoglou N. (1985). Land use, policy, defining and conditions in Greece. First scientific meeting of Greek Soil Association. Utilization of land resources Geotechnical 1, pp. 19-36. FAO (1979). Agriculture towards the year 2000, Rome, FAO. FAO (1983). Guidelines for the control of soil degradation, Rome, FAO. Simonis A. (1993). Problem soils of Greece, FAO / ECE Symposium on Agriculture and the Environment, Geneva, Switzerland.

106 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Principal Component Analysis of Wetland Functions and Values: The case of Wetland Agras-Vritta-Nisi

Apostolidis Georgios School of Spatial Planning and Development, Faculty of Engineering Aristotle University of Thessaloniki, 54124, Thessaloniki [email protected]

Abstract

During the last decades, the rational management of natural resources and the incitement of sustainable development constitute formulated a goal of policy of both supranational and national institutions. This research focuses on the evaluation of wetland functions and values. A rural area is selected, Natura 2000 (Wetland Agras-Vritta-Nisi) the Municipality of Edessa in Pella Regional Unit, where the researcher investigated the opinion of the residents for the contribution of wetland Functions and Values in local development. The survey was conducted using a questionnaire in 2013. For the analysis of the data, Factor Analysis in Principal Components was implemented in order to reduce the large number of variables into a smaller number of important factors and dimensions. The survey results of the Sampling indicate the important indicators for the wetland area of research.

Keywords: Functions, Values, Sustainable Development, Factor Analysis, PCA.

1. Introduction

In the European Union Policies, the countryside emerges as an area of preservation, protection and promotion of the natural habitat, the cultural values and the quality of life (Arabatzis et al., 2006). The natural and cultural sources are used sustainably, they blunt the regional inequalities, and they promote the multifunctional role of agriculture and the countryside, as well as contributing to the transformation of the current system of production (Hoogstra et al., 2004), (Arabatzis and Polyzos, 2008), (Polyzos and Arabatzis, 2008). This policy, applies through specific measures such as investment in agricultural holdings, agri-environmental measures, establishment of young farmers, training and sustainable forest management (Bryden, 1994), (Hoogstra et al., 2004), (Perez and Fernandez, 2006).

The Purpose of this study is to investigate the views of residents of wetland Agras-Vritta-Nisi for the contribution of wetland functions and values in local and regional development. The Ultimate Aim of the research was the potential development of ecosystem wetland.

2. Field of Research

The study focused on the prefecture of Pella, which is situated in Central Macedonia. The research was carried out in the Agras-Vritta-Nisi wetland, rural area of 1.629 residents, according to the Greek National Census of 2011. The existing legal protection regime of the wider area of the wetland has been included in the network Natura 2000 with Special Protection Areas-SPA according to the Elaboration of a Wetland Restoration Plan of Wetland Agras-Vritta-Nisi, Life Project-Nature 2005.

107 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

3. Sampling and Statistical Methodology

In order to collect the data from the local residents, a questionnaire was used, together with in-person interviews in two periods. The "population" under study included people of the Agras-Vritta-Nisi Wetland and the Wider Area. The sampling research method used was Simple Random Sampling (SRS), due to its simple approach and the minimum knowledge of the population required, compared to any other method (Damianou, 1999), (Matis, 2001). The sample size was estimated using SRS Formulae (Arabatzis et al., 2006), (Arabatzis and Kyriazopoulos, 2010), (Arabatzis et al., 2012), (Tsiantikoudis et al., 2013). Since the variables refer to proportions, the definition of the total sample size is provided by the following Formula:

n = t2 p(1 - p ) / e2 (1) where:

p = the proportion estimate,

t = the Student distribution value for a probability (1-α) = 0.95, and n-1 degrees of freedom.

In order to calculate the total sample size, it was necessary to carry out a Presampling with a Sample Size of 50 people. The variable "sex" presented the largest sample size, at a proportion p =0.54 thus 1- p = 0.46, and therefore the Total Sample Size calculated:

n = t 2 p (1-p) / e 2 = 1.96 2 x 0.54 x (1-0.54) / 0.05 2 = 381,61

Consequently, the Total Size of the Sample calculated 382 people.

The Reliability of the optimum scores, in the sense of internal consistency, was checked and evaluated using the Cronbach α Coefficient (Geer, 1993). Reliability indicators are considered to be satisfactory in general when they are higher or equal to 0.70 (Meulman and Heiser, 2004), (Siardos, 2005). In some cases, reliability indicators are also considered to be satisfactory or adequate when they are over or equal to 0.60, particularly when a Tool-Questionnaire-Criterion is applied for the first time on a population sample (Siardos, 2005).

The conducting of the results and the analysis of the data were realized by using the statistic program SPSS v.20.

4. Results and Discussion

The results from the questionnaires collected during the sampling period are presented. The following analysis refers to each variable for which data was gathered through the questionnaires.

108 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

In this study, the Multivariate Statistical Analysis of Factor Analysis in which the variables were reduced and analyzed was applied. The method applied is Principal Component (Principal Component Analysis-PCA).

The KMO and Bartlett's Test shows the sampling adequacy, it is revealed that in this investigation the analysis is appropriate because the value of Kaiser-Meyer-Olkin Measure of Sampling Adequacy is 0.568 therefore, the analysis is appropriate for the data. Moreover, the significance Sig. is <0.05 which means that there is a correlation between the variables.

Table 1. KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.568

Approx. Chi-Square 4872.771

Bartlett's Test of Sphericity df 276

Sig. 0

Table 2 shows the extracted components which are representative of the original variables as all the figures are high. Also, the conclusion is that some variables are more associated with some factor, e.g. 0.847 and others less, e.g. 0.599. Finally, the extraction column shows the percentage of variance of each variable which is explained by all the factors, the rest being lost.

Table 2. Correlation of Variables with Factors

Variables Initial Extraction

Water Storage 1 0.703

Food Web Support 1 0.662

Ground Water Recharge (Enrichment of Underwater Aquifer) 1 0.794

Sediment Retention 1 0.818

Nutrient Export 1 0.847

Flood Water Retention 1 0.778

Modification of Corrosive Effects 1 0.824

Storage and Release Heat 1 0.767

109 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Biological 1 0.663

Potable Water 1 0.784

Irrigation 1 0.733

Fishing 1 0.599

Livestock Farming 1 0.729

Gaming 1 0.769

Logging 1 0.671

Hydroelectric 1 0.694

Sand Collecting 1 0.716

Anti-Flood 1 0.608

Recreation-Entertainment 1 0.786

Cultural 1 0.683

Scientific 1 0.642

Educational 1 0.682

Anti-Corrosion 1 0.817

Climate Change (Climate Improvement) 1 0.696

The eigenvalues of the first eight factors are larger than the unit and explain 72.772% of the Variance, thus, eight factors are selected at this stage of the analysis.

Table 3 shows the eight factors which were extracted and the corresponding loadings of their variables. For example, the first variable: Recreation the first factor is selected (0.820). Corresponding reasonable interpretation follows for the other variables and relevant factors.

110 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 Table 3. Loadings

Component Variables 1 2 3 4 5 6 7 8

Recreation-Entertainment 0.820 -0.198 -0.002 -0.122 -0.035 -0.233 0.056 -0.015

Cultural 0.791 -0.016 0.109 -0.202 0.004 -0.022 0.055 0.032

Irrigation 0.760 -0.003 0.047 -0.134 0.254 -0.152 -0.197 -0.095

Livestock Farming 0.697 0.299 -0.020 0.339 -0.092 0.011 0.098 -0.142

Educational 0.680 -0.111 0.255 0.065 0.353 0.040 -0.020 -0.104

Fishing 0.676 0.155 0.209 0.081 -0.246 0.084 -0.004 -0.003

Gaming 0.600 0.165 -0.404 0.463 -0.027 0.040 -0.043 0.017

Hydroelectric 0.593 0.234 0.143 -0.026 -0.090 0.491 0.135 0.009

Scientific 0.577 -0.153 0.252 -0.256 0.238 0.254 0.010 0.189

Anti-Flood -0.005 0.693 0.090 -0.195 -0.089 -0.150 0.009 -0.228

Modification of Corrosive Effects -0.406 0.681 0.242 0.212 -0.026 0.284 0.043 -0.099

Storage and Release Heat 0.021 0.621 0.325 -0.291 0 -0.324 0.291 0.031

Anti-Corrosion -0.396 0.585 0,338 0.034 0.059 0.353 0.248 0.116

Sand Collecting 0.217 0.535 -0.425 0.106 -0.136 0.191 -0.365 0.051

Logging 0.356 0.493 -0.015 0.252 -0.355 -0.261 -0.041 0.205

Climate Change (Climate 0.168 0.450 -0.027 -0.330 -0.047 -0.379 -0.262 0.375 Improvement)

Sediment Retention 0.072 0.421 -0.620 -0.338 0.095 0.322 0.154 0.016

Flood Water Retention 0.020 0.310 0.608 -0.424 -0.211 0.108 -0.249 -0.119

Food Web Support 0.212 0.419 -0.432 -0.035 0.255 0.059 0.137 0.408

Water Storage -0.156 0.130 0.411 0.568 -0.102 -0.255 0.102 0.291

Nutrient Export -0.223 0.451 -0.158 0.002 0.571 -0.348 0.323 -0.129

Ground Water Recharge 0.083 0.008 0.474 0.313 0.565 0.143 -0.245 0.255

Biological 0.518 -0.171 0.064 0.118 -0.122 -0.038 0.527 -0.232

Potable Water 0.010 0.506 -0.049 0.211 0.243 -0.099 -0.360 -0.532

111 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 4 shows what the components after rotation represent. The first component (factor) is strongly associated with values: Scientific, Educational, Irrigation, Cultural, Recreation, Hydroelectric, Fisheries and function of Ground Water Recharge with correlation coefficients 0.779 , 0.752 , 0.721 , 0.720 , 0.644 , 0.600 , 0.542 , 0.426. Corresponding reasonable interpretation follows for the other variables and relevant factors.

According to the correlations obtained from Table 4, the eight Factors (Dimensions) are called:

1st Factor: Quality of Human Life in the Wetland

2nd Factor: Land Use of Wetland

3rd Factor: Protection Indicator

4th Factor: Bio-indicator or Eco-indicator of the Wetland

5th Factor: Storage of Sediment and Other Substances

6th Factor: Process Mechanisms of the Wetland

7th Factor: Water Value

8th Factor: Organic Diversity of the Wetland

Table 4. Rotation Matrix

Component Variables 1 2 3 4 5 6 7 8

Educational 0.779 0.027 -0.110 -0.102 -0.132 0.070 0.156 0.073

Scientific 0.752 -0.086 -0.004 -0.035 0.084 -0.056 -0.220 -0.095

Irrigation 0.721 0.150 -0.356 0.120 0.052 0.042 0.208 -0.039

Cultural 0.720 0.184 -0.225 0.177 0.095 -0.076 -0.098 0.154

Recreation-Entertainment 0.644 0.202 -0.497 0.115 0.011 -0.037 -0.089 0.245

Hydroelectric 0.600 0.311 0.342 -0.007 0.214 -0.189 -0.089 0.175

Fishing 0.542 0.404 0.012 0.150 -0.069 -0.270 -0.017 0.205

Gaming 0.276 0.749 -0.150 -0.222 0.049 0.161 0.124 0.128

Logging 0.053 0.677 0.003 0.409 -0.193 -0.036 -0.009 0.059

112 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Sand Collecting -0.021 0.669 0.101 0.076 0.356 -0.045 0.228 -0.268

Livestock Farming 0.470 0.596 0.022 0.049 -0.062 0.024 0.194 0.329

Anti-Corrosion -0.146 -0.056 0.852 0.230 -0.038 0.093 -0.024 -0.057

Modification of Corrosive Effects -0.269 0.118 0.785 0,195 -0.064 0.002 0.277 -0.051

Storage and Release Heat 0.081 -0.040 0.272 0.791 -0.063 0.195 0.032 0.126

Climate Change (Climate Improvement) 0.072 0.247 -0.161 0.655 0.056 0.075 -0.078 -0.400

Anti-Flood -0.046 0.138 0.264 0.611 0.151 0.022 0.342 0.065

Sediment Retention -0.028 0.250 0.173 0.082 0.795 0.290 -0.037 -0.037

Water Storage -0.155 0.197 0.226 0.082 -0.753 0.074 -0.101 0.022

Ground Water Recharge 0.426 -0.098 0.285 -0.210 -0.481 0.173 0.114 -0.450

Nutrient Export -0.130 -0.122 0.144 0.286 0.032 0.783 0.311 0.047

Flood Water Retention 0.219 -0.233 0.302 0.517 -0.007 -0.526 0.138 -0.144

Food Web Support 0.124 0.419 0.108 0.123 0.312 0.515 -0.194 -0.211

Potable Water -0.013 0.187 0.118 0.116 0.030 0.093 0.839 -0.090

Biological 0.385 0.096 -0.108 -0.056 -0.053 0.045 -0.103 0.690

Extraction Method: PCA

Rotation Method: Varimax with Kaiser Normalization

From the stage of Factor Analysis it is shown that only eight out of the 24 original variables met the statistical criteria therefore, Reliability Analysis was implemented.

1st Factor: Quality of Human Life in the Wetland

Cronbach's Alpha = 0.758

The above scale is considered reliable. The indicator Cronbach Alpha for the first factor regarding the values and functions of the Wetland is α = 0.758, which is considered high and the reliability of the scale is concluded to be high since this value indicates satisfactory internal consistency and the indicator is reliable.

In the next table of hypothetical values of indicator α, for the first factor we present the hypothetical values of Alpha if the corresponding variable was not included in the analysis. For the function of the Wetland, enrichment of vault we can see the hypothetical value of α is 0.820, therefore bigger than

113 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Cronbach Alpha = 0.758 which means that the particular variable will have to be excluded from the particular analysis. Also from the column Corrected Item-Total Correlation we can see that 0.187<0.5, therefore this function has to be excluded from the indicator since the factor α will become much bigger, equal to 0.820. As far as the Entertainment is concerned, the hypothetical value of α is 0.723, which is smaller than Cronbach Alpha = 0.758, which means that if the particular variable was not included in the analysis then Cronbach Alpha would have this value. Thus, the indicator will be reduced compared to its original value. The same pattern is followed with the rest variables.

Table 5. Hypothetical values Cronbach's Alpha (1st Factor)

Corrected Item-Total Cronbach's Alpha if Variables Correlation Item Deleted

Ground Water Recharge (Enrichment of Underwater 0.187 0.820 Aquifer)

Recreation- Entertainment 0.608 0.723

Cultural 0.602 0.703

Scientific 0.558 0.712

Educational 0.657 0.689

Irrigation 0.663 0.714

Fishing 0.479 0.730

Hydroelectric 0.496 0.755

2nd Factor: Land Use of Wetland

Cronbach's Alpha = 0.748

The above scale is considered reliable. The indicator Cronbach Alpha for the second factor regarding the values and functions of the Wetland is α = 0.748, which is considered high and the reliability of the scale is concluded to be high since this value indicates satisfactory internal consistency and the indicator is reliable.

In the following table of hypothetical values of indicator α, for the second factor we present the hypothetical values of Alpha if the corresponding value was not included in the analysis. For the Logging value, the hypothetical value of α is 0.710, which is smaller than Cronbach Alpha = 0.748. This means that if the particular value was not included in the analysis, then Cronbach Alpha would have this value. The same logical explanation is followed for the rest of the variables.

Table 6. Hypothetical values Cronbach's Alpha (2nd Factor)

114 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Corrected Item-Total Cronbach's Alpha if Item Variables Correlation Deleted

Logging 0.511 0.710

Gaming 0.631 0.641

Livestock Farming 0.574 0.673

Sand Collecting 0.465 0.731

3rd Factor: Protection Indicator

Cronbach's Alpha = 0.606

The indicator Cronbach Alpha for the third factor regarding the values and functions of the Wetland is α = 0.606 which is considered satisfactory and the reliability of the scale is concluded to be satisfactory since this value indicates sufficient internal consistency.

In the next table of hypothetical values of indicator α, for the third factor we present the hypothetical values of Alpha if the corresponding variable was not included in the analysis. For the anti-corrosion value, the hypothetical value of α is 0.355 which is considerably smaller than Cronbach Alpha = 0.606 which means that if the particular variable was not included in the analysis then Cronbach Alpha would have this value. For the water storage variable it is observed that the hypothetical value of α is 0.848, which is bigger than Cronbach Alpha = 0.606 meaning that the particular variable will have to be excluded from the analysis. Even from the column Corrected Item-Total Correlation it is observed that 0.233<0.5 and therefore this function will have to be omitted from the variable and therefore the indicator α will become much bigger, equal to 0.848.

Table 7. Hypothetical values Cronbach's Alpha (3rd Factor)

Corrected Item-Total Cronbach's Alpha if Item Deleted Variables Correlation

Anti-Corrosion 0.552 0.355

Modification of Corrosion Effects 0.551 0.324

Water Storage 0.233 0.848

4th Factor: Bio-indicator or Eco-indicator of the Wetland

Cronbach's Alpha = 0.618

115 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The indicator Cronbach Alpha for the fourth factor regarding the values and functions of the Wetland is α = 0.618 which is considered satisfactory and it is concluded that the reliability of the scale is sufficient and this value indicates satisfactory internal consistency.

In the following table of hypothetical values of the indicator α, concerning the fourth factor we present the hypothetical values of Alpha if the respective variant was not included in the analysis. Concerning the storage and release of heat the hypothetical value of α 0.510 being smaller than Cronbach Alpha = 0.618 which means that if the particular variable was not included in the analysis then Cronbach Alpha would have this value.

Table 8. Hypothetical values Cronbach's Alpha (4th Factor)

Corrected Item-Total Cronbach's Alpha if Item Variables Correlation Deleted

Storage and Release Heat 0.531 0.510

Climate Change (Climate Improvement) 0.322 0.617

Anti-Flood 0.478 0.487

Flood Water Retention 0.360 0.585

Finally, the 6th Factor brought out a very Alpha<0.5 which means not a satisfactory internal consistency and therefore may not be Reliable.

5. Conclusions

The results of the survey showed that the wetland functions and values should always be into account in the management and development of a region. The analysis of the data shows that there is a great need for the sustainable management of the environment and the natural resources in order to assess the goods and services provided by the wetland to humans so as to ensure that such goods will be lasting and stable in the future. In order for sustainable development of wetland to take place, the environment must be rationally managed by humans, and there should be consciousness, awareness and respect for it so as to avoid any negative consequences. A series of European Actions related to the preservation and management of wetlands aim to strengthen the regional and rural economy.

Wetland of Agras-Vritta-Nisi, has important economic and touristic value for the region of Edessa and Pella Regional Unit and contribute to the Local and Regional Development (RD). Wetland Functions and Values can influence the wetland structure and the Natural Resources (Grassland Resources, Herbs, Game Resources and Water Resources) of wetland and rural areas, and as a result, affect the role of natural resources in society. A New Tool can be used in this areas in Greece for Sustainable Environmental Policy and Governance.

116 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Given the close relationship between the environment with wetlands areas, the quality of functions and natural resources, can play a decisive role in wetland of Agras-Vritta-Nisi and an Integrated Environmental Management Evaluation System with Spatial Indicators (Decision Support System- DSS) should be implemented, aiming to comply with environmental legislation and other European Community requirements.

In order for a decision to be made locally and the construction of a spatial plan we always have to keep in mind the attitude and the opinion of the local residents. Acquiring specific knowledge and information is vital for the sustainable environmental management and their facilities, which cover a large number of various issues, and finally aid the full development of the natural resources. At the same time, results which are the outcome from the experience of socio-economic research can be used as a guideline for the future formation and implementation of a new policy of a product. Through this research we looked into the opinions of the local residents of the Wetland Agras-Vritta-Nisi linked to the Wetland functions and values of the Wetland and their contribution to the quality of life. The interaction developed in the area between users or consumers and the environment are very important, which can influence and start new financial growth locally.

6. References

Arabatzis, G., Polyzos, S. (2008), "Contribution of natural and socio-cultural resources in tourism development of mainland Greek prefectures: a typology". Journal of Environmental Protection and Ecology, 9(2): 446-464.

Arabatzis, G., Tsantopoulos, G., Tampakis, S., Soutsas. K. (2006), "Integrated rural development and the multifunctional role of forest: a theoretical and empirical study". Review of Economic Sciences, 10:19-38.

Arabatzis, G. and Kyriazopoulos, A. (2010), "Contribution of rangelands in quality of life: the case of Viotia prefecture, Greece". Journal of Environmental Protection and Ecology, 11(2): 733-745.

Arabatzis, G., Kitikidou, K., Tampakis, S., Soutsas, K. (2012), "The fuelwood consumption in a rural area of Greece". Renewable and Sustainable Energy Reviews, 16:6489-6496.

Bryden, J. (1994), "Prospects for Rural Areas in an Enlarged Europe". Journal of Rural Studies, 10(4):387-394.

Damianou, Ch. (1999), Sampling Methodology: Techniques and Applications, 3rd Edition Aithra, Athens (in Greek).

Elaboration of a Wetland Restoration Plan of Wetland Agras-Vritta-Nisi, Life Project-Nature 2005, "Implementation of management measures at the Agras Wetland".

Geer, J.P. (1993), Multivariate Analysis of Categorical Data: Applications. Sage Publications Inc., Thousand Oakes, 1993b.

Hoogstra, A.Μ., Schanz, Η., Wiersum, F.Κ. (2004), "The future of European forestry-between urbanization and rural development". Forest Policy and Economics, 6:441-445.

Meulman, J., Heiser, W. (2004), SPSS Categories 13.0. SPSS Inc., Chicago.

117 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Matis, K. (2001), Forest Sampling. Assets Exploitation and Management Society of Democritus University of Trace, Xanthi (in Greek).

NSS Census Prefecture of Pella, 2011.

Perez, S.F.O., Fernandez, A.J.M. (2006), "Forest externalities, demography and rural development in inland Spain", Forest Policy and Economics, 8:109-122.

Polyzos, S., Arabatzis, G. (2008), "Spatial distribution of natural resources and their contribution to regional development in Greece". Journal of Environmental Protection and Ecology, 9(1):183- 199.

Siardos, G. (2005), Methodology of Sociological Research. 2nd ed. Ziti Publications. Thessaloniki, (in Greek).

Tsiantikoudis, S., Soutsas, K., Apostolidis, G. (2013), "Contribution of Game Resources to the Quality of Life: The case of the Evros prefecture", Journal of Environmental Protection and Ecology, 14(1):240-246.

118 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Price and Quality Export Competitiveness in Bulgarian Agri-food Industry

Nikolay Sterev, Dimitar Blagoev, Paskal Zhelev, Diana Kopeva University of National and World Economy (UNWE), Sofia

1. Introduction

Food industry is one of the key industrial subsectors in Bulgarian economy. The food production sector accounts60 for about 13.51% of total industrial production in the country, contributing about 13.71% of total value added in industry. The sector provides employment to 15% of all employees in manufacturing. In 2014, the Bulgarian food industry was valued at about €4.8 billion, €4 billion of which was the share of the domestic market with the remainder exported. The role of the food industry is enlarged due to the close link to agriculture. Despite the immense structural changes in agri-food sector in the last 25 years, agri- food industry preserves and continues to expose certain level of competitiveness on the international market. European Union (EU) membership influenced the export competitiveness of the Bulgarian agri-food industry. It caused some shifts and adjustments in some subsectors, increasing the comparative advantage there while decreasing or remaining stable in others. The paper aims to analyze changes in the export competitiveness of the Bulgarian agri-food industry in the last ten years (2005-2014). Firstly, the applied methodology and data sources are described. Secondly, a brief summary of the state of the agri-food industry is presented, covering trade dynamics and structure of the agri-food export. Thirdly, the comparative advantage in Bulgaria’s foreign trade with agri-food products over the period 2005-2014 is presented. Finally, the last part contains main conclusions.

2. Methodology

Scholars use different indicators in their studies to measure the comparative advantage and competitiveness of given sectors and products on the international market. The trade approach has been most intensively used to evaluate competitiveness at a sector level. The comparative advantage theory traces its roots back to the works of John Stuart Mill, Adam Smith, and David Ricardo. During the last decade, it was enriched by various researchers and scholars such as Gehlhar and Pick (2002), Bojnec and Fertö (2007), Juhasz and Wagner (2013), Beres and Meszaros (2012), Torok and Jambor (2011). Most of the studies are focused on the competitiveness and comparative advantage in agriculture of new EU member states. In this paper, the analysis of export performance is based on evaluation of the Revealed Comparative Advantage (RCA) index, which was developed by Balassa (1965). The study covers a period of ten years (2005 – 2014), whereas data are extracted from UNCTAD Statistics.

60 Source: EUROSTAT

119 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The analysis is based on the following trade indicators:

(i) Export growth, which measures the growth of an export over a period of ten years (2005-2014). Changes in trade balance of agri-food products are traced and compared to the export of all products. (ii) Export product structure presents the shares of various product groups within the agri-food industry (iii) Market share reveals the top agri-food products in Bulgarian export, according to their world market position on a year by year basis in percentage (2005-2014). The market share analysis was done for commodity groups from 01-24 of the Harmonized Commodity Description and Coding System (HS) and their four-digit codes breakdown: (a) animals and animal products (HS 01-05), (b) vegetable products (HS 06-14 ), (c) animal or vegetable fats, oils and waxes (HS 15), (d) foodstuffs (HS 16-24). (iv) Revealed Comparative Advantage (RCA) – the concept of the RCA, initially formulated by Balassa61 (1965), and later widened and enlarged by various scholars62, is applied to examine the comparative advantages of two groups of agri-food products defined under the Harmonized System Codes (HS). The concept is based on conventional trade theory, where “X” represents the value of exports; “i” is a country (Bulgaria); “j” is a commodity; “t” is a set of commodities (agri-food products) and “n” is a set of countries (world trade).

RCA = (Xij/Xtj)/(Xin/Xtn) The RCA measures a country’s export of a commodity in relation to its total exports and the export performance of a set of countries. If RCA>1, then a comparative advantage is revealed. (v) Another widely used indicator to measure trade performance over time is the Relative Trade Balance (RTB) index. It compares the trade balance (exports minus imports) for a group of products to the total trade (exports plus imports) of that group of products.

RTB= (Xi-Mi)/(Xi+Mi), where Xi and Mi represent the value of exports and imports of industry “i” respectively. The measure ranges between [-1;1], with a neutral value of zero. If the value of the index is positive the national production is considered to be competitive in both foreign and domestic markets.63 (vi) Additionally to the market share, trade balance, and market structure, we use the Gohlhar and Pick (2002)64 approach to categorize the trade flows in four competition categories:

61 Balassa, B. (1965) ‘Trade Liberalisation and Revealed Comparative Advantage’, Manchester School of Economic and Social Studies, 33. pp. 99-123; Balassa, B. (1977) “Revealed” Comparative Advantage Revisited: An Analysis of Relative Export Share s of the Industrial Countries, 1953-1971, Manchester School 4 (1977); pp. 327-344. 62 Danges and Riedel (1977); Kunimoto (1977), Bowen (1983), Vollrath (1987, 1989, 1991) 63 Zhelev, P. (2013) Analysis of the International Competitiveness of the Bulgarian Furniture Industry, Trakia Journal of Sciences, 11 (1), p.228 64 Gehlhar, M.J. and Pick, D.H. (2002) Food trade balances and unit values: What can they reveal about price competition? Agribusiness: An International Journal, 18 (1). pp. 61-79

120 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

(a) Category 1: successful national price competition, (b) Category 2: unsuccessful national price competition, (c) Category 3: successful national quality competition, (d) Category 4: unsuccessful national quality competition.

3. Bulgarian Agri-food Industry: Trade Dynamics, Structure of the Agri-food Export; World Market Share

The agri-food industry was well-developed during the last decade, according to the previous analysis. But a question still remains: is the development equally spread among the agri-food specializations? The answer would help us to reveal two major findings:  What movement of the Bulgarian agri-food industry to expect for the next EU- planning period (2014-2020);  Which factors facilitate the better position of Bulgarian agri-food industry on the world market. Our findings are based on analysis of the agri-food turnover on the non-domestic market. First, the analysis covers a comparison between the non-domestic trade of Bulgarian agri-food products and total export (See Figure 1).

25,00 22,23 22,05 20,26 20,77 20,00

15,28 15,56 15,00 13,55 12,02 11,83

10,00 9,43

4,05 5,00 3,32 3,33 3,71 2,62 1,94 2,02 1,01 1,06 1,21

0,00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 All products Agri-food products

Figure 1. Export of Agri-food Products and Total Export (Bulgaria) in Bln. Euro Source: own calculations based on UNCTAD data The figure shows that the growth of the export of Bulgarian agri-food products is greater than the export of other products. The share of food export has augmented from 10.7% (2005) to 18.2% (2013). This preliminary result offers an insight that the Bulgarian food industry is more competitive than other Bulgarian production sectors. In addition, the food industry has experienced growth of its exports during the crisis period (2008-2009).

121 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Additional arguments could be found in the analysis of trade balance of the agri-food industry (See Figure 2).

4,50 165 180

4,00 147 150 160 142 138 141 3,50 140

3,00 117 116 108 120 2,50 91 100 2,00 80 1,50 60 1,00

40 0,50

0,00 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -0,50 0

Export Import Trade balance Export/Import (%) right scale

Figure 2. Trade Balance of Agri-food Products in Bulgaria in Bln. Euro Source: own calculations based on UNCTAD data

The agri-food export has been developed for the last 7 years. The figures show that the export of food products is stable and has rapidly overflown the agri-food import for this period. Nevertheless, two major trends have to be set:  The highest growth rate of export had been accounted for between 2009 and 2011, in comparison with the stable growth rate of agri-food import for the whole period. One possible reason is the Bulgarian full EU membership that gives a price advantage of the Bulgarian food products on the EU markets. Another point of view is also connected to a price advantage in order to minimize the food production costs inside the EU members in terms of economic crises (2008-2011).  The agri-food import has started to catch up with the level of export for the last two years (2013-2014), according to a slow decrease of the positive trade balance of Bulgarian agri-food sector. This state could be perceived as a first sign that 2007, the year with a negative agri-food trade balance, is not too far behind. The change of the agri-food trade on the non-domestic market is a result of structural changes of the food export (See Table 1).

122 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Table 1. Agri-food Export Structure of Bulgaria (%) 2005 2014 Cereals 17,0 25,0 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes 15,3 16,1 Tobacco and manufactured tobacco substitutes 9,5 10,1 Meat and edible meat offal 9,1 4,1 Beverages, spirits and vinegar 8,3 3,0 Cereal, flour, starch, milk preparations and products 6,5 4,9 Vegetable, fruit, nut, etc food preparations 5,3 2,8 Dairy products, eggs, honey, edible animal product nes 5,1 5,0 Edible vegetables and certain roots and tubers 4,4 1,8 Edible fruit, nuts, peel of citrus fruit, melons 3,1 2,3 Animal,vegetable fats and oils, cleavage products, etc 2,3 6,2 Residues, wastes of food industry, animal fodder 3,0 5,6 Others 11,1 13,2 Source: UNCTAD

According to the figures, the overall agri-food export growth could be explained with the structural changes of non-domestic trade of the Bulgarian food products.  a very huge enlargement of export with more than 50% for the whole period (2005-2014) of products such as: cereals; fats and oil; residues of food industry.  a very huge decrease of export with 50% and more than 50% of food products such as: meat; beverages; vegetables and fruits.  a stable export of products such as: tobacco; dairy products and others. The overall impact of the changing structure of agri-food export is shown on the next Figure 3. The figures give an assessment of the real growth potential of agri-food products divided in three groups:  Lagging agri-food products: they are falling behind the others. Examples of these groups are traditional specializations for Bulgarian agriculture and food production as follows: Sugar and sugar confectionary; oil seeds; live animals, and others;  Reinforcing agri-food products: they perform better on the market, but their export potential is gained. The examples of this group are part of traditional specializations for the Bulgarian agriculture and food production but they show a technological and product development as follows: Cereals; Tobacco; Edible fruits and edible vegetables, and others;  Developing agri-food products: they are some of the latest food specializations that possess enough potential to grow. The examples of this group are not traditional specializations for the Bulgarian agriculture and food production as follows: animals and vegetable fat and oils; coffee, tea and spices; residue of food industry; meat fish and seafood products. According to the given results, the further development of the agri-food trade on the non-domestic market should be argued with the change of export competitiveness of the agri- food products. Thus, the national agri-food policy had to follow the products development based on the competitive advantage of Bulgarian agri-food industry.

123 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

800

"Coffee, tea, mate and spices" 700 "Animal,vegetable fats and oils, cleavage products"

600 "Cereals" "Sugars and sugar confectionery" 500 "Tobacco and manufactured tobacco substitutes" "Oil seed, oleagic fruits, grain, seed, fruit, etc,..." 400 "Residues, wastes of food industry, animal fodder" "Meat, fish and seafood food preparations nes" 300 "Live trees, plants, bulbs, roots, cut flowers etc"

"Vegetable saps and 200 extracts nes..."

"Vegetable plaiting materials, 100 vegetable products nes"

"Live animals"

0 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 3. Growth Trends of Non-Domestic Trade of Agri-food Products in Bulgaria Source: own calculations based on UNCTAD data

124 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

4. Comparative Advantage in Bulgaria’s Foreign Trade with Agri-food Products

Over the last ten years, Bulgaria has shown a slight trend of increase in its agri-food sector competitiveness. This is evident from the dynamics of the two indicators used widely for competitiveness assessment (Revealed Comparative Advantage: RCA and Relative Trade Balance: RTB), which basically follow a similar trend (Figure 4).

2,50 0,30

0,25 2,00 0,20

1,50 0,15 0,10

1,00 0,05

0,00 0,50 -0,05

0,00 -0,10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 RTB (on the right scale)

Figure 4. Dynamics of Revealed Comparative Advantage (RCA) and Relative Trade Balance (RTB) Indices for Bulgaria’s Foreign Trade with Agri-food Products (2005- 2014)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 RCA 1.58 1.35 1.31 1.78 2.05 2.18 2.11 2.04 2.25 2.05 RTB 0.17 0.08 -0.05 0.04 0.08 0.16 0.19 0.17 0.25 0.20 Source: own calculations based on UNCTAD data

Throughout the analyzed period, the RCA index of Bulgaria’s agri-food products has always possessed values superior to 1 denoting the existence of a comparative advantage of the country on the world market. After Bulgaria’s EU accession in 2007, the RCA index has been rising, and since 2009 it has been constantly above 2, signifying a strengthened international competitive position of the sector. The same conclusions can be drawn by observing the dynamics of the RTB index. The only year in which Bulgaria was a net importer of agri-food products was 2007 when it joined the EU and had to fully liberalize its trade with the EU Member States and to adopt the Common Trade Policy which meant an increased competitive pressure also from third countries. However, as an EU member state Bulgaria started benefiting from the Common Agricultural Policy, and the funds had a positive effect on agri-food producers. Since 2008, Bulgaria has had a constant positive and (with a few exceptions) increasing trade balance with agri-food products in its trade with the world. The RTB index has reached its peak value in 2013 when it was 0.25, and for the last five years it has been permanently surpassing 0.15. The fact that Bulgaria has a solid specialization in agri-food industry which has an increasing comparative advantage, and has been registering a positive trade balance makes it legitimate to target the sector for support by the national industrial policy.

125 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Having established that the Bulgarian agri-food industry altogether is competitive on the world market, it is interesting to see which product groups have the highest comparative advantage. Such information is provided in Table 2.

Table 2 Bulgarian Agri-food Product Groups with a Comparative Advantage (RCA>1) in 2014 Cod Product groups / Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 e '24 Tobacco and manufactured 4.2 3.4 4.6 6.0 8.4 7.7 7.4 7.7 7.8 7.5 tobacco substitutes '10 Cereals 4.3 3.5 1.5 4.5 4.7 6.4 5.3 6.0 8.1 6.7 '12 Oil seed, oleaginous fruits, grain, 5.6 4.8 3.8 5.1 6.3 6.7 8.4 5.3 6.3 5.1 seed, fruit, etc., nes '11 Milling products, malt, starches, 0.3 0.1 0.9 0.9 2.3 2.8 2.4 3.1 2.8 3.2 inulin, wheat gluten '19 Cereal, flour, starch, milk 2.4 2.5 2.3 2.6 2.7 2.8 2.3 2.3 2.2 2.3 preparations and products '23 Residues, wastes of food 1.1 1.0 1.1 1.0 1.5 1.6 1.6 1.8 2.0 2.1 industry, animal fodder '15 Animal, vegetable fats and oils, 0.8 0.6 0.6 0.9 1.3 1.3 1.3 1.3 1.7 2.0 cleavage products, etc. '18 Cocoa and cocoa preparations 0.7 0.5 0.6 0.6 0.5 1.4 1.1 1.2 1.5 1.7 '04 Dairy products, eggs, honey, 1.3 1.1 1.3 1.6 1.8 1.6 1.3 1.6 1.6 1.6 edible animal product nes '20 Vegetable, fruit, nut, etc. food 1.9 1.7 1.7 1.7 2.0 2.1 1.6 1.5 1.4 1.5 preparations '17 Sugars and sugar confectionery 1.0 0.8 1.4 2.7 2.6 2.9 2.5 1.9 1.6 1.4 '09 Coffee, tea, mate and spices 0.6 0.6 0.7 1.2 1.3 1.1 0.8 1.2 1.1 1.3 Source: own calculations based on UNCTAD data

According to the values of the RCA index, the most competitive Bulgarian agri-food product groups in 2014 are '24 “Tobacco and manufactured tobacco substitutes”, '10 “Cereals” and '12“Oil seed, oleaginous fruits, grain, seed, fruit, etc., nes”. Throughout the analyzed period, on average, they have RCA values exceeding 4, which according to the Hinloopen and Marrewijk (2001)65 classification means that they possess ‘strong comparative advantage’. Product groups with a ‘medium comparative advantage’ (i.e. with a RCA index higher than 2 but lower than 4) are '11“Milling products, malt, starches, inulin, wheat gluten”, '19 “Cereal, flour, starch, milk preparations and products”, '23 “Residues, wastes of food industry, animal fodder”. Several product groups have managed to gain comparative advantage in the years of full EU membership of Bulgaria, while in 2005 they were at a comparative disadvantage. These are '09 “Coffee, tea, mate and spices”, '18 “Cocoa and cocoa preparations”, '15 “Animal, vegetable fats and oils, cleavage products, etc.”, and especially impressive has been the performance of '11 “Milling products, malt, starches, inulin, wheat gluten”, which managed to progress from comparative disadvantage to ‘medium comparative advantage’. On the negative side, four 2-digit HS code agri-food product groups have lost their comparative advantage in the last couple of years. While in 2005, '01 “Live animals”, '02

65 Hinloopen, J. and Van Marrewijk, Ch. (2001) On the empirical distribution of the Balassa index, Weltwirtschaftliches Archiv, vol. 137, issue 1, p.13 126 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

”Meat and edible meat offal”, '07“Edible vegetables and certain roots and tubers”, and '22 “Beverages, spirits and vinegar” had a RCA index of 1,04; 1,58; 1,46; and 1,54 respectively, since 2011 (for product group ’07) and 2013 (for product groups ’01, ’02 and ’22) they have turned into comparative disadvantage. The agri-food product groups that perform the best in Bulgaria’s foreign trade in terms of net exports are '10 “Cereals” and '12 “Oil seed, oleaginous fruits, grain, seed, fruit, etc., nes”, whose RTB index in 2014 has values of 0,86 and 0,70 respectively. Three product groups have managed to increase their competitiveness and turn from net importers to net exporters - '15 “Animal, vegetable fats and oils, cleavage products, etc.”, '11 ”Milling products, malt, starches, inulin, wheat gluten” and '23 ”Residues, wastes of food industry, animal fodder”.

Table 3 Bulgarian Agri-food Product Groups with a Positive Trading Balance (RTB>1) in 2014 Cod Product groups / Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 e '10 Cereals 0.89 0.85 0.21 0.71 0.74 0.82 0.83 0.86 0.90 0.86 '12 Oil seed, oleaginous fruits, 0.77 0.67 0.64 0.69 0.76 0.75 0.85 0.75 0.77 0.70 grain, seed, fruit, etc., nes '15 Animal, vegetable fats and oils, -0.20 -0.25 -0.33 -0.16 0.01 0.02 0.12 0.07 0.24 0.35 cleavage products, etc '11 Milling products, malt, starches, -0.58 -0.80 -0.21 -0.18 0.30 0.49 0.48 0.30 0.30 0.35 inulin, wheat gluten '24 Tobacco and manufactured 0.68 0.58 0.24 0.21 0.31 0.30 0.37 0.34 0.33 0.34 tobacco substitutes '23 Residues, wastes of food -0.22 -0.28 -0.26 -0.25 -0.05 0.08 0.10 0.18 0.26 0.26 industry, animal fodder '19 Cereal, flour, starch, milk 0.38 0.34 0.22 0.23 0.29 0.32 0.29 0.23 0.22 0.26 preparations and products '14 Vegetable plaiting materials, 0.56 0.22 -0.62 -0.87 -0.51 0.34 0.39 0.30 -0.10 0.20 vegetable products nes '16 Meat, fish and seafood food 0.42 0.41 -0.12 -0.31 -0.17 -0.22 -0.29 -0.27 -0.19 0.00 preparations nes Source: own calculations based on UNCTAD data

In order to determine the most competitive Bulgarian agri-food product groups we have to look at both the RCA and RTB indices. While a certain sector might have a positive RCA, its specialization might not be enough to guarantee a high competitive performance and a positive trade balance. According to Porter (1991), a sector is deemed competitive only if in addition to specialization above the world average, it has a positive trade balance, unless its RCA index is higher than 2.66 Taking this into consideration, we can determine the Bulgarian agri-food product groups which are highly competitive on the world markets. In 2014, these are: '24 “Tobacco and manufactured tobacco substitutes”, '10 “Cereals”, '12 “Oil seed, oleaginous fruits, grain, seed, fruit, etc., nes”, '11 “Milling products, malt, starches, inulin, wheat gluten”, '19 “Cereal, flour, starch, milk preparations and products”, '23 “Residues, wastes of food industry, animal fodder”, and '15 “Animal, vegetable fats and oils, cleavage products, etc.”.

66 Porter, M., (1991) Canada at the Crossroads, Business Council on National Issues and Supply and Services Canada, Ottawa, p. 412 127 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Next in our analysis, it is important to find out what are the dominating factors behind Bulgaria’s agri-food competitiveness. The two basic types of competitive advantage are lower cost (price) and differentiation. The terms ‘cost competitiveness’ and ‘price competitiveness’ are used interchangeably given the fact that the capacity to offer or sustain lower prices depends on the structure of production costs. Differentiation can be achieved by providing a superior value to the buyer in terms of quality and special features of the product. Thus, we shall try to delineate to what extent Bulgarian food producers rely on low price or on higher quality. To do so, we follow Gehlhar and Pick (2002) and use unit value difference and trade balance to disentangle Bulgaria’s foreign trade with agri-food products into four categories: successful price competition (trade surplus at lower export than import unit value), unsuccessful price competition (trade deficit at lower export than import unit value), successful quality competition (trade surplus at higher export than import unit value), unsuccessful quality competition (trade deficit at higher export than import unit value)67.

Table 4 Share of Bulgarian Exports of Agri-food Products According to Price/Quality Competitiveness in 2005-07 and 2012-14 (%) Category / Period 2005-07 2012-14 1 Successful price competition 62.9 61.4 2 Unsuccessful price competition 5.6 5.3 3 Successful quality competition 25.7 25.8 4 Unsuccessful quality competition 5.8 7.4 Source: own calculations based on UNCTAD data

The results from using the methodology of Gehlhar and Pick show that the share of competitive agri-food products (sum of categories 1 and 3) in Bulgaria’s foreign trade between 2005-2007 and 2012-2014 has slightly decreased - from 88,6 % to 87,2 %. However a positive feature is that products which are successful in competition either through lower price or better quality have much higher share (87,2%) than those which are not successful (12,8%). Altogether, the largest share in Bulgarian agri-food exports have products which rely on low prices to compete on the world markets (68,5% in 2005-2007 and 66,7% in 2012- 2014). This reflects a downgrade specialization of the national economy and inferior strategies of the Bulgarian agri-food firms focused on reduction of costs instead of differentiation. The most perspective category 3 (successful in quality competition) has a share of 25,8% in 2012-2014 in Bulgaria’s agri-food exports which is quite stable over time (25,7%, 7 years earlier). While the highest share of Bulgaria’s exports is concentrated in products successful in price and quality competition if we look at the number of product groups, we see a different picture. In 2012-2014, the largest number of 4-code HS product groups (70 out of 181) fell within category 4 (unsuccessful quality competition), followed by category 1 (successful price competition, 42 product groups), then category 2 (unsuccessful price competition, 40 product groups), and last category 3 (successful quality competition, just 29

67 Gehlhar, M. and Pick, D. (2002) Food trade balances and unit values: What can they reveal about price competition? Agribusiness: An International Journal 18 (1), pp. 61-79. 128 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 product groups). Taken together the number of product groups classified as unsuccessful in price and quality competition (110) is bigger than the ones that are successful (71). Table 5 provides information about the product groups which are classified as successful in price and quality competition. Within category 1 fall mostly commodities (such as various cereals, milling products, oilseeds, vegetable oils, animal fats etc.) as well as other primary goods (such as live animals, fruits). The same applies for category 3 where we find various types of unprocessed meat, eggs, honey, frozen vegetables and fruits, tobacco etc. Among processed food products and food preparations that successfully compete on price, we find traditional Bulgarian products, such as cheese and curd, and wine of fresh grapes. The Bulgarian agri-food goods with higher degree of processing and relatively higher value added that compete successfully based on product differentiation are: breakfast cereals and cereal bars; bread, biscuits, wafers, cakes and pastries; jams and marmalades; cigarettes.

Table 5. Bulgarian Agri-food Products Successful in Price/Quality Competition on the World Market in 2012-14 Category 1 - Successful price competition Category 3 - Successful quality (42 HS 4-code products out of 181) competition (29 HS 4-code products out of 181) 0101 Live horses, asses, mules and hinnies; 0102 Live bovine 0204 Meat of sheep or goats - fresh, chilled or frozen; animals; 0105 Live poultry; 0301 Live fish; 0406 Cheese and 0205 Meat of horses, asses or mules - fresh, chilled or curd; 0604 Foliage, branche etc; 0802 Nuts nes; 0814 Citrus frozen; 0207 Meat and edible offal, of the poultry of fruit and melon peel; 0909 Seeds of anise, badian, fennel, heading 01.05, fresh, chilled or frozen; 0307 Moluscs; coriander, etc.; 1001 Wheat and meslin; 1002 Rye; 1003 Barley; 0403 Buttermilk and yogurt; 0407 Birds' eggs in shell; 1004 Oats; 1005 Maize;1006 Rice; 1101 Wheat or meslin flour; 0408 Birds' eggs dried; 0409 Natural honey; 0410 1103 Cereal grouts, meal and pellets; 1104 Cereal grain, worked Edible products of animal origin, nes; 0508 Coral and post hulling, excluding rice; 1108 Starches; inulin; 1205 Rape or similar materials, e.g. shells; 0707 Cucumbers and colza seeds, whether or not broken; 1206 Sunflower seeds, gherkins, fresh or chilled; 0710 Frozen vegetables; whether or not broken; 1208 Flour and meals of oil seeds; 1210 0712 Dried vegetables; 0811 Frozen fruits & nuts; 0812 Hop cones, fresh or dried; 1213 Cereal straws and husks; 1214 Provisionally preserved fruits & nuts (unfit for Swede, mangold, fodder root, hay, lucerne, clover etc; 1501 immediate consumption); 0813 Dried fruit; 1207 Oil Lard and other pig & poultry fat; 1506 Animal fats &oils &their seeds; 1211 Medicinal plants; 1212 Locust beans; 1404 fractions; 1512 Safflower, sunflower/cotton-seed oil & fractions; Vegetable products, nes; 1522 Degras and residues; 1514 Rape,colza or mustard oil & their fractions; 1520 Glycerol 1904 Breakfast cereals & cereal bars; 1905 Bread, (glycerine); 1521 Vegetable waxes, beeswax & other insect biscuits, wafers, cakes and pastries; 2001 Cucumbers, waxes; 1605 Crustaceans & molluscs, prepared/preserved; 1702 gherkins and onions preserved by vinegar; 2007 Jams, Sugars, nes, incl chem pure lactose etc; artif. honey; caramel; fruit jellies & marmalades; 2307 Wine lees; argol 2008 Preserved fruits nes; 2105 Ice cream; 2204 Wine of fresh 2309 Animal feed preparations, nes; 2401 Tobacco grapes; 2205 Vermouth &other grape wine flavoured; 2206 unmanufactured; tobacco refuse; 2402 Cigars, cheroots, Fermented beverages, nes; 2207 Ethyl alcohol & other spirits; cigarillos & cigarettes 2302 Bran, sharps and other residues; 2303 Beet-pulp, bagasse and brewing or distilling dregs and waste; 2306 Oil-cake nes

Source: own calculations based on UNCTAD data

5. Conclusions

Over the last ten years, the international competitiveness of Bulgaria’s agri-food industry has registered a slight but steady trend of increase. This is evident when one looks at the level of export growth, the positive trade balance, the rise in the world market share, and the strengthening of the comparative advantage. The structure of Bulgaria’s agri-food exports is very low diversified with high dependence on cereals and oil-seeds. In 2012-2014, the largest share in the exports had products which rely on low prices to compete on the world markets (66,7%). Most of the exports (87,2%) fall within products successful in

129 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 competition either based on prices (61,4%) or quality (25,8%). However, the largest numbers of product groups (110 out of 181) are identified as unsuccessful in quality (70) and in price (40) competition. The state’s policy should be directed to stimulate a higher-degree of processing of the Bulgarian agri-food products through creation of local value chains. To that end, the various existing policy instruments (EU funds, cluster support measures, innovation and technological policy, export promotion policy, etc.) should be incorporated in a comprehensive long-term sectoral strategy.

References

Balassa, B. (1965) Trade Liberalisation and Revealed Comparative Advantage”, Manchester School of Economic and Social Studies, 33. p. 99-123. Balassa, B. (1977). “Revealed” Comparative Advantage Revisited: An Analysis of Relative Export Share s of the Industrial Countries, 1953-1971, Manchester School 4 (1977); pp. 327-344. Bojnec, S. and Ferto, I. (2007) Hungarian and Slovenian agro-food trade with three main European Union partners. Ekonomicky Časopis – Journal of Economics, 55, pp. 345- 358. Donges, J.B. and Riedel, J. (1976) "The expansion of manufactured exports in developing countries: An empirical assessment of supply and demand issues", Kiel Working Papers 49, Kiel Institute for the World Economy. Gehlhar, M.J. and Pick, D.H. (2002). Food trade balances and unit values: What can they reveal about price competition? Agribusiness: An International Journal, 18 (1). pp. 61-79. Hinloopen, J., and Ch. Van Marrewijk,(2001) On the Empirical Distribution of the Balassa Index, Weltwirtschaftliches Archiv, vol. 137, issue 1, pp.1-35 Kunimoto, K. (1977). Typology of Trade Intensity Indices. Hitotsubashi Journal of Economics, 17(2): pp. 15-32. Porter, M., (1991) Canada at the Crossroads, Business Council on National Issues and Supply and Services Canada, Ottawa, p. 412. Vollrath, T.L. (1991) A Theoretical Evaluation of Alternative Trade Intensity Measures of Revealed Comparative Advantage. Weltwirschaftliches Archiv, 130, pp. 263-279. Zhelev, P. (2013) Analysis of the International Competitiveness of the Bulgarian Furniture Industry, Trakia Journal of Sciences, 11 (1), pp. 227-236

130 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Impact of the new Common Agricultural Policy (2015-2020) on the value of direct payments and on farmers’ income in Wallonia (South of Belgium)

Ph. Burny1,2 and F. TerronesGavira2 1Centre wallon de Recherches agronomiques, 5030 Gembloux, Belgium 2Gembloux Agro-Bio Tech (University of Liege), 5030 Gembloux, Belgium Email: [email protected]

Abstract

A new Common Agricultural Policy was defined in 2013, with a new structure for direct payment. In Wallonia, the government implemented the following scheme: 30% for the green payment, 29.9% for the basic payment, 17% for the additional payment for the first 30 ha, 1.8% for young farmers and 21.3% for couple payments. Due to convergence, the mean support through direct payments will decline from 21,900 € in 2014 to 19,283 € in 2019. The number of losers will be equivalent to the number of gainers. Regions where cereals and sugar beet are produced will lose the most, where the region suitable for cattle raising will gain somewhat. There will be a better distribution of direct payments among farmers: the Gini index will decline from 0.55 to 0.49. The highest negative impact on income will occur for the specialties “green crops”, “crops and dairy cattle” and “crops and non-dairy cattle”: the least negative impact will be observed within the specialties “dairy cattle”, “meat cattle” and “dairy and meat cattle”. The reform will be more profitable for the farms from 30 to 50 ha and will mainly impact the largest farms. Finally, the CAP reform implemented in Wallonia guarantees a smooth evolution to 2020.

Keywords: Common Agricultural Policy, Wallonia, farm income.

1. Introduction

A new Common Agricultural Policy was defined in 2013 after several years of negotiations between the EU Commission, the Member States, the EU Parliament and the Council of Ministers (Burny and Gazinski, 2015). The EU Regulation No. 1307/2013 deals with the new architecture of the direct payments granted to farmers, giving the Member States or their regions several choices according to their own conditions and priorities. The Walloon Region (Belgium) finally defined its own policy which is described below. This policy is supposed to have as less and as slow consequences as possible in order to avoid too important losses for some farmers. However, it will have impacts on the value of direct payments and on farmers’ income. These impacts were calculated based on the available data before making the final choice of the new rules to be implemented in the Walloon Region, and are presented below.

2. New architecture of the direct payments in the Walloon Region

The new architecture of direct payments in Wallonia is illustrated in Figure 1.

131 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Figure 1 New architecture of direct payments in Wallonia (%) (2015-2020)

As it is compulsory for each Member State/Region, the “green payment” represents 30% of the total envelope for direct payments (Burny, 2014). This payment is submitted to conditions in favour of the environment (crop rotation, maintenance of permanent pastures, areas with specific environmental purposes). The specific payment for young farmers has been decided to reach 1.8% of the total amount of direct payments, according to the expected number of young settlers (Burny and Terrones Gavira, 2013). The maximum allowed by the EU regulation is 2%. A characteristic of the Walloon Region is its high level of payments which are still coupled: 21.3% of direct payments, including 18.8% for suckling cows, 1.2% for dairy cows, 1.1% for double-end cows and 0.2% for ewes. This share of coupled payments is largely above the figures mentioned in the EU regulation. However, the Walloon government used the possibility offered to negotiate a higher share, justified by the economic importance of the bovine meat sector. Among the options proposed to the Member States/Regions, the Walloon Region also decided to devote 17% of the available amount for direct payments to grant an additional payment for the first 30 ha of each farm. So doing, the remaining share of the so-called “basic payment” reaches only 29.9%.

3. Evolution of the total envelope for direct payments in Wallonia

As Belgium in one of the Member States where the payments per hectare were among the highest, it has to contribute to the principle of the convergence among the EU Member States. So, the total amount for direct payments will decline for Belgium and for its regions (Wallonia, Flanders and Brussels) between 2013 and 2020 (Table 1).

Table 1 Budget of the 1st pillar of the CAP for Belgium and Wallonia from 2013 to 2020 2013 2014 2015 2016 2017 2018 2019 2020

Budget 568,980 544,047 536,076 528,124 520,170 512,718 505,266 505,266 (000 €) Belgium Annual variation - -4.4 % -1.5 % -1.5 % -1.5 % -1.4 % -1.5 % - (%) Budget Wallonia 306,680 291,990 287,712 283,444 279,175 275,176 271,176 271,176 (000 €)

132 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Annual variation - -4.8 % -1.5 % -1.5 % -1.5 % -1.4 % -1.5 % - (%)

Not taking into account the possible inflation rate, the decline for the Walloon Region will reach 11.6%. If the number of farms remains the same (static model), the mean financial support per farm would decline from 21,900 € in 2014 to 19,283 € in 2019.

4. Positive and negative Impacts of the new architecture of direct payments on the support received by farmers from the first pillar of the CAP According to the available data and if the agricultural area and the number of farms remain equal through the period 2014-2019, it appears that 42% of the framers will lose a significant amount of money through direct payments while 44% will be significant gainers. These results are also a consequence of the principle of convergence within each Member State/region. For 14% of the farmers, the change, positive of negative, will be smaller than 5% compared to 2014, and so it can be considered as a status quo (Table 2). Losses are significant (more than 20%) for around 18% of Walloon farmers, while gains are significant for 31% of farmers. Looking into more details, it appears that the regions (like the silty agricultural region) where cereals and sugar beet are produced will lose the most, while the regions suitable for cattle breeding (like Ardenne) will gain. For the specialties “general crops”, “crops and dairy cattle”, and “crops and non- dairy cattle”, the negative impact on the farmers’ income will be the highest, contrary to the specialties “dairy cattle”, “meat cattle” and “double-end cattle”. Concerning the size of the farms, the new CAP will be more profitable for the middle-sized farms from 30 to 50 ha and will mainly impact negatively the largest farms.

Table 2 Losers and gainers between 2014 and 2019 % of Walloon farmers

LOSSES 50 % and more 0 From 30 to 50 % 6 From 20 to 30 % 12 From 10 to 20 % 16 From 5 to 10 % 8 TOTAL 42 STATU QUO (from - 5 % to 5 14 %) GAINS From 5 to 10 % 5 From 10 to 20 % 8 From 20 to 30 % 5 From 30 to 50 % 6 50 % and more 20 TOTAL 44

133 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

5. Distribution of financial support among farmers

Though the situation is improved compared to the previous one, it is still obvious that the financial support to farmers continues to be linked to the size of the farm (Figure 2). Globally, the larger is the farm, the bigger is the financial support. Nevertheless, it appears that in 2019 (in red), the dispersion of the points is less important than in 2014 (in blue), showing less disparity among farmers.

Figure 2 Financial support from the first pillar of the CAP according to the area of the farms in Wallonia (€/farm)

Effectively, in 2019, 50% of the direct payments will be granted to 20% of the farmers, against 18% in 2014. The Gini index (Worldbank, 2015), as a measure of inequality, can vary between 0, which reflects complete equality and 1, which indicates complete inequality (if one farmer gets all the direct payments, all others have none and the index is equal to 1; if each farmer receives the same support, the index is equal to 0) will decline from 0.55 to 0.49 (Terrones Gavira et al., 2015). The situation is illustrated in Figure 3.

Figure 3 Distribution of direct payments among farms (Gini index)

6. Conclusions

The implementation of the new Common Agricultural Policy (CAP) is a complex process. In the Walloon Region, it was sought since the beginning to get the smoothest evolution as possible, mainly 134 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 avoiding too big and brutal losses for some farmers, who could be forced to give up farming. Though the Walloon Region will get less financial support from the CAP budget, notably for direct payments, it seems that the results of the new CAP are finally politically acceptable. Smaller and younger farmers will get more support while the losses for largest farmers will be limited.

References

Burny, P., 2014. Greening of the Common Agricultural Policy: implementation in Wallonia (South of Belgium), Proceedings of the conference Ecological performance in a competitive economy, Academy of Economic Sciences of Bucharest. Supplement of the journal “Quality – access to success”, 103-105, Bucharest, Rumania. Burny, P., Gazinski, B., 2015. The Common Agricultural Policy in a changing world. Reforming and adjustment, In: Unia Europejska wobec wyzwan przyszlosci, Aspekty spoleczne, gospodarcze, i srodowiskowe. ISBN 978-83-7417-859-4. 270-281, Warsaw, Poland. Burny, P., Terrones Gavira, F., 2013. Possible implementation of the payment to young farmers within the first pillar of the Common Agricultural Policy. Proceedings of the sixth international scientific conference Rural Development 2013: Innovations and Sustainability. Aleksandras Stulginskis University, Kaunas, Lituanie, 54 – 56. Terrones Gavira, F., Burny, P., Lebailly, P., 2015. Service public de Wallonie, 2015. Impact et appui à la mise en oeuvre de la nouvelle réforme de la PAC au niveau wallon. Annexe 1. Impact de la réforme du premier pilier pour l’agriculture wallonne. 35p. Worldbank, 2015, GINI index (World Bank estimate), http://data.worldbank.org/indicator/SI.POV.GINI, 11 November 2015.

135 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Entrepreneurship and the state of SMEs in Poland. An example of central Poland

Małgorzata Jabłońska University of Lodz, Poland, Faculty of Economics and Sociology Department of Finance and Accounting of SMS [email protected]

In the literature it meets statement that refers to the enterprise as a fourth factor of production functioning within the rationalization and the use of innovative solutions conducive to economic development. On various attempts to define the concept of entrepreneurship the most prominence is its economic dimension. Entrepreneurship treats itself as one of the factors allowing for more efficient operation of the human individual or enterprise.

The concept of entrepreneurship is characterized by multi-dimensionality and heterogeneity. Depending on the purpose of the research concept that is narrowed or generalized. This is mainly due to the different perspectives on the problem of entrepreneurship on the part of sociologists, psychologists and economists. Each of the science formulates, therefore the definition of entrepreneurship, which directly corresponds to the position through it and touches the priority areas from the point of view of the individual sciences.

The level of entrepreneurship in Poland is relatively high. According to the data presented by the Polish Agency for Enterprise Development, the rate of entrepreneurship - defined as the share of adults who have set up their own business or take action in this direction - amounts to Polish 25%, while the EU average is 23%. In addition, the Polish economy is the sixth in the EU in terms of number of enterprises. According to Eurostat data, in Poland there are 1.52 million enterprises and their number is steadily growing. In the past ten years the number of newly established enterprises was higher than liquidated. The purpose of this article is to draw attention to the essence of the factors of finance in the development of entrepreneurship and regions. Financial capital constitutes the entire free cash that can be spent on new investment magnifying physical capital region and the funds allocated by the locals for consumption increasing domestic demand. Financial capital as a factor of regional development and at the same regional entrepreneurship is examined taking as the criterion the following aspects: - The financial situation of local governments and enterprises, - EU funding, - Incomes of the population, - The level of investment. The article analyzed centrally located region of Polish - Lodz province. Lodz province is centrally located region of the country, confronted with the consequences of the restructuring of traditional industries in the main cities of the region and with low potential of endogenous development in rural areas dominated by low-productivity agriculture. The preferred central location makes the region more attractive foreign investment.

KEYWORDS Entrepreneurship, polish region, finance,

JEL CLASSIFICATION CODES: R11

136 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Introduction

The concept of entrepreneurship is characterized by multidimensionality and heterogeneity. Depending on the purpose of the research this concept is either narrowed or generalized. This is mainly due to the different views on the problem of entrepreneurship presented by sociologists, psychologists and economists. Each scientific discipline formulates the definition of entrepreneurship, which directly corresponds to the its position and touches the priority areas of the individual disciplines. Economists approach to the issue of of entrepreneurship found its expression in regional termsbecause it is one of the most important factors of regional development is just a component of the social capital of the region. In the context of this study entrepreneurship is understood as the ability to undertake self-employment and to take risks. Entrepreneurship requires adequate stimulation by creating an environment conducive to the emergence of willingness to take business experience as then tending to its start and run.

The literature often emphasizes the key role of the SME sector in the economy of the country, mainly in terms of created GDP. SMEs in Poland account for nearly 99% of all active enterprises, while their share in the GDP creation is about 50%. It is therefore crucial to promote the idea of self-employment, but not only because of the large share of SME sector in GDP. Entrepreneurship of small and medium-sized enterprises has undoubtedly a significant impact on the development of regions and eventually of the entire economy. The measurable results of the launch of new enterprises a. o. are: starting new activities, creating new jobs, increased income of the population, expanding sales markets, use of local resources, growth of the investment attractiveness.

The goal of this paper is to draw attention to the importance of financial factors for the development of entrepreneurship in the regions. Financial capital is the entire free cash that can be spent on new investments increasing physical capital of the region, and the funds allocated by the inhabitants to consumption that increases domestic demand.

Role of SMEs in Polish Economy

Poland has a great potential of entrepreneurship: 590 thousand commercial law companies and civil law partnerships, and 2.8 million individuals who have registered economic activity. Every year, more than 300 thousand people begin their adventure with business. 166 firms hourly are registered in Poland. After three years of operation the half of them still develop successfully. In 2010, the firm achieved an average revenue of 1.9 million PLN (from 0.4 million PLN in micro- to 454.5 million PLN in large enterprises)68. Initiating entrepreneurial behavior is one of the greatest challenges of modern economies.

The literature often emphasizes the key role of the SME sector in the economy of the country, mainly in terms of the creation of GDP. SMEs in Poland account for nearly 99% of all active companies, while their share in GDP is about 50%. It is therefore crucial to promote the idea of self-employment, but not only because of the large share of SME sector in GDP. Entrepreneurship of small and medium-sized enterprises has undoubtedly a significant impact on the development of

68 Przedsiębiorcy w Polsce. Raport na temat wkładu przedsiębiorców w rozwój polski, PKPP Lewiatan, Warszawa 2014 r., p. 9 137 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 regions and eventually of the whole economy. The measurable results of the launch of new enterprises a. o. are: the emergence of new types of activity, creation of new jobs, growth of income of the population, expanding sales markets, the use of local resources, increase of investment attractiveness69. etc. The most important is the role of small and medium-sized enterprises in activating local and regional development, which mainly results from their relations with the local environment and creation of networking relationships. Entrepreneurial climate in the region is also important as it is the main factor encouraging the population to start new ventures. New ventures (which mainly SMEs) contribute to the improvement of living conditions of the local community.

Financial Factors as a Key Element for Regional Development

The factors of regional development and entrepreneurship in the region are those elements of the structure of the territory, which allow operating in the sphere of production, distribution, circulation and consumption70. The main of them are the internal qualities of entrepreneurs, which facilitate the decision-making (e.g. experience, age, creativity) but also the economic (financial infrastructure, market situation, market structure), financial (access to external sources of finance, social assistance), legal (legal conditions of running business) and social factors (e.g. social expectations regarding the role of man as the owner of the firm).

Classification of factors proposed by P. Churski refers to the current realities of socio- economic life in Poland. This taxonomy is derived from the theory of regional development. It can therefore be assumed that treating them as the determinants of regional entrepreneurship is justified. These factors include:

Human capital – is the most important type of capital for the contemporary development process and is created by the part of human resources actively or potentially involved in social and economic activities in consequence of the possessed knowledge, qualifications and skills. The aspects of human capital include:

- population situation,

- level of education and access to educational services,

- situation on the labor market.

Physical capital - essentially includes physical goods, mainly in the form of fixed assets serving as the basis of business activity. Aspects typical for physical capital include in particular:

- natural resources and natural environment.

- technical infrastructure,

- Social infrastructure,

69 Chądzyński M, Przedsiębiorczość, jako czynnik rozwoju sektora MSP w regionach, Wydawnictwo SGGW, Stowarzyszenie Ekonomistów Rolnictwa i Agrobiznesu, Roczniki Naukowe, tom XI, zeszyt 1, Warszawa 2009, p. 56. 70 Strzelecki Z., Polityka regionalna, [w;] Gospodarka regionalna i lokalna, red. Strzelecki Z., Wydawnictwo PWN, Warszawa 2008, p. 80. 138 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

- fixed assets of enterprises.

Financial capital is the entire free cash that can be spent on new investments increasing physical capital of the region and the funds allocated by the locals for consumption that increases domestic demand. Financial capital as a factor of regional development and regional entrepreneurship can be analyzed taking as a criterion the following aspects:

- financial situation of local governments and enterprises,

- EU funds,

- income of the population,

- level of investment.

Social capital - is a new category of capital affecting regional development. It consists of norms, values, social activities and relationships between social groups and thus affects the development of entrepreneurship and competitiveness of the region. The specificity of this type of capital makes it difficult to quantify. Social capital should be considered taking into account the following aspects:

- social activity,

- activities of non-governmental organizations,

- entrepreneurship.

Technological and organizational innovations are considered to be the main factor of regional development in all models of development. This includes all forms of innovations in the economy: technical and technological solutions, new organizational, institutional and management forms. Innovation analysis must take into account a set of aspects:

- innovativeness,

- business environment,

- development of the institutional sphere of market economy,

- structure of the economy.

External flows of people, capital and goods are now considered to be a complementary factor of the regional development. It builds exogenous activity in the region and promotes the development of its of endogenous activities. The analysis of this factor is carried out based on the determining aspects:

- migrations,

- foreign investment,

139 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

- foreign trade71.

Deserving special attention among these factors are those having a financial nature, governing the formation of new businesses in terms of their access to capital or stimulating their development through better access to knowledge, innovation, etc. Financial factors are rarely found in the literature as a separate group of factors that determines the phenomenon of regional entrepreneurship. In large part, they are classified as economic factors and were analyzed as such in previous research on regional entrepreneurship.

Economic state of the Lodz region

The Łódź Voivodship is a region located centrally in the country, confronted with the consequences of the restructuring of traditional industries in the main cities of the region and the low potential of endogenous development in rural areas dominated by low-productivity agriculture. The favorable central location makes the region an increasingly attractive place for foreign investment. The region, as well as the nearby Mazowieckie, has a dual character: a great city surrounded by underdeveloped and low-urbanized areas72. Łódź Voivodship generates 6.2% of the Polish GDP, which places it on a stable 6th position, right after the Voivodships: Mazowieckie (22%), Śląskie (13%), Wielkopolskie (9%),Dolnośląskie (8%), and Małopolskie (7%)73.

The Łódź Voivodship takes the 9th place in the country in terms of the area and 6th in terms of population. More than 64% of the population live in cities. The largest and dominant in the region is the city of Łódź. Nowadays, the largest number of inhabitants in the Łódź region was recorded in Łódź - approx. 725 thousand, which represented more than 28% of the population living in the Voivodship.

The city hosts approx. 50% of industrial enterprises, more than 30% of entities of high and medium-high technology and more than 50% of business environment entities. Compared to other regions, the Łódź Voivodship is economically relatively well developed. It is also characterized by a high employment activity rate.

Traditional industries, such as: energy, textile, industry ceramic and construction, furniture manufacturing, agro-industry, creative industries, medical and pharmaceutical industry; as well as modern services such as logistics, warehousing and outsourcing, are developing in the region. Preferential conditions for doing business in the region have been created, a. o. in two Special Economic Zones: Łódź Special Economic Zone, and Starachowice Special Economic Zone. The advantage of the Voivodship is its location at the intersection of two of the four pan-European transport corridors and the planned creation of the Central Traffic Junction.

71 Churski P., Czynniki rozwoju regionalnego i polityka regionalna w Polsce w okresie integracji z Unią Europejską, Wydawnictwo Naukowe UAM, Poznań 2008, p. 67-72 72 Gorzelak G., i inni, Propozycje możliwych kierunków działań rządu w poszczególnych regionach, w tym określenie potencjałów rozwojowych województw, Ministerstwo Rozwoju Regionalnego, Warszawa 2010, p. 111. 73 Analiza sytuacji społeczno-gospodarczej województwa Łódzkiego, Departament Polityki Regionalnej Urząd Marszałkowski Województwa Łódzkiego, Łódź 2010, p. 32. 140 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

The Economic Potential and Entrepreneurship of the Lodz Region

The Łódź Voivodship is associated mainly with the dynamically developing textile industry, which was flourishing in the first half of the nineteenth century. The dominant role of the industry determined the development of the region, its industrial specialization and at the same time caused its economic monoculture. The changes of the political system unlocked entrepreneurial attitudes among inhabitants, which has been reflected in an increase in the number of small and medium-sized enterprises since the early 90s of the 20th century. They were often developing based on the bankrupt large textile enterprises74. The consequence of unfavorable conditions for the development of the region is weakening the dynamics of its development, resulting in an outflow of people to other major cities, especially to the nearby Warsaw. This phenomenon is unfavorable for the region mainly because it concentrates highly skilled workers and professionals educated in universities located in Łódź. The advantage of the region lies in considerable lignite resources, so that the region has a surplus of cheap electricity - very large reserves of thermal waters, which can be the basis for the development of renewable energy and for the development of spa functions of the region.

The potential of the region lies in its central position, both in Poland and among the regions of Central and Eastern Europe. Opportunities for the region can result from foreign direct investment, which give an opportunity to locate modern services and new industries in the Łódź Voivodship. Large enterprises deciding to make investments in the Łódź region can choose between two basic scenarios. They can make investments in the technology park and they can also invest in the special economic zone.

Table: The dynamics of GDP per capita in the Łódź region, 2010-2012

Voivodship GDP per capita

2010 2011 2012

Poland 101,7

103,6 104,7 101,7

Łódź 104,4 105,0 102,3

Source: Own calculations based on Local Data Bank.

Łódź Voivodship is not as rich as Mazowieckie and Warsaw, but the distance between the Voivodship and Europe is steadily decreasing. The Łódź region is characterized by a medium level of economic development. This is evidenced by the level of GDP, which is growing faster than the national average. Three-quarters of GDP in the region is created in the business sector and one-third in the public sector. The industry of the Voivodship is characterized by still relatively low level of competitiveness, productivity and innovativeness, resulting from the significant share of textile and clothing industry and other sectors generating low added value and from the dominance of low innovation level micro, small and medium-sized enterprises. An important role in the economy of the

74 Sokołowicz M., E., Region wobec procesów globalizacji – terytorializacja przedsiębiorstw międzynarodowych (na przykładzie regionu łódzkiego), Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2008, p. 72. 141 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 region is played by traditional industries such as textile industry, food industry based on agricultural resources of the region as well as ceramics and building materials growing on the basis of the resource base existing in the region75. The economy of the region is dominated by industries with low added value, so even though the people employed here account for more than 8% of the total industrial employment in Poland, they produce only 5 to 7% of industrial production of the country.

Table: Output per 1,000 inhabitants in 2010-2012

Voivodship Output per 1000 inhabitants

2010 2011 2012

Poland 76,4 84,6 86,5

Łódź 66,4 73,9 76,2

Source: Own calculations based on BDL.

According to the CSO data there still have been development gaps between the Polish Voivodships for the last five years, Most of new companies have been registered in the Mazowieckie Voivodship. This is due to the fact that many firms see an opportunity to market their products and services in the capital city, a. o. because of its high population density. The data on the very City of Warsaw, however, distort the image of the entire Voivodship and it has therefore the highest development rates and the lowest unemployment rates in the country. The lowest level of entrepreneurship is observed in the Opolskie Voivodship and the regions located on the eastern border.

An important segment of the region's economy is the agricultural sector. In 2012 the Łódź region produced 8.2% of Polish gross agricultural output and 8.3% of production of commodities. The region is an important producer of fruit and vegetables and livestock. The production of grain in 2012 was 32.6% higher than in the previous year, while the production of animals for slaughter remained at the level of 2011. Potato crops in the Łódź region in 2012 accounted for 12.6% of the national production, which gave the region the first place in the country. The Łódź Voivodship has a small share in Polish export (3.1%) - compared to 6.2% share in the Polish GDP and 6.6% share in the population of our country. Therefore, the economic crisis in the European Union, which is the main market for export of Polish goods was not so harmful for the Łódź region. So we can conclude that the branch structure of industry, with a predominance of traditional industries and a relatively small share of the Łódź region in foreign trade saved the economy of the region from the effects of the crisis in Europe and the economic slowdown in Poland. The industry in the voivodship was strongly restructured in the recent years (visible a. o. in the increase of the share of: printing industry, production of building materials, environmental protection devices, household appliances and packaging, insulation, soft drinks, ceramic tiles, food processing and furniture industry). The textile

75 Research on potential and specialization of Polish regions – synthesis. Łódź Voivodship. Report co-financed by the European Union within the European Social Fund. Research within the project: „Wdrożenie systemu monitorowania polityk publicznych w województwie łódzkim” (POKL.05.02.01- 00-011/13), Nowakowska A. et al., Łódź 2013, p . 9. 142 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 industry, which for a long time the region was famous for, lost some of its importance, although it still plays an important role in shaping the labor market. The situation of this industry is linked to international competition, mainly from the Far East markets. Traditional industries still play the most important role in the region - hence a great importance of implementation of innovative techniques and technologies in the economy. The level of innovation in the Łódź region is low. The region is among the weakest in Europe in this respect76. Less than 15% of companies operating in the region conduct innovative activities (14.2% of production firms, 10.7% of service firms). The largest share among the most innovative firms is represented by large enterprises (56%), the share of medium- sized ones is approx. 28%, small firms - 7%. Low level of innovative activity of enterprises applies to any type of innovation, i.e. product, process, organizational and marketing innovations. Companies primarily implement innovations aiming at modernization of the existing production processes and at increasing productivity77.

The positive effects of entrepreneurship in the region include:

 high level of public sector investment, along with high growth rate in the years 2004 - 2011 (by 88.6%),  high level of entrepreneurship in Łódź and in the central counties,  high attractiveness for investors of the Łódź Special Economic Zone, which has become in recent years one of the most dynamically developing economic areas in Poland and in the world.

Conclusion

There are the sources in the literature that refer to the entrepreneurship as the fourth factor of production functioning within rationalization and the use of innovative solutions conducive to economic development. The various attempts to define the concept of entrepreneurship most often highlight its economic dimension. Entrepreneurship is therefore treated as one of the factors allowing for more efficient operation by individuals or enterprises.

The level of entrepreneurship in Poland is relatively high. According to the data presented by the Polish Agency for Enterprise Development (PARP), the rate of entrepreneurship - defined as the share of adults who have set up their own business or take actions in this direction - amounts to 25% in Poland, while the EU average is 23%. Moreover, Poland's economy takes the sixth place in the EU in terms of the number of enterprises. According to Eurostat there are 1.52 million enterprises in Poland and their number is steadily growing. In the past ten years, the number of newly established enterprises was higher than the number of closed businesses. Financial capital as a factor of regional development and of regional entrepreneurship is analyzed taking as a criterion the following aspects:

- financial situation of local governments and enterprises,

76 Świerkocki J., Fundusze strukturalne jako czynnik rozwoju gospodarczego w województwie łódzkim [w:] red. Świerkocki J., Rola funduszy strukturalnych Unii Europejskiej w rozwoju kapitału ludzkiego i społecznego w regionie łódzkim, Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2012, p. 366. 77 Regionalna Strategia Innowacji dla województwa Łódzkiego – LORIS 2030, Deloitte Business Consulting S.A., ŁARR, Łódź, p. 15. 143 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

- EU funds,

- incomes of the population,

- level of investment.

The paper analyzed the Łódź Voivodship - a region located centrally in the country, confronted with the consequences of the restructuring of traditional industries in the main cities of the region and the low potential of endogenous development in rural areas dominated by low- productivity agriculture. The favorable central location makes the region an increasingly attractive place for foreign investment. The region, as well as the nearby Mazowieckie, has a dual character: a great city surrounded by underdeveloped and low-urbanized areas. Łódź Voivodship produces 6.2% of the Polish GDP, which places it on a stable 6th position right after the Voivodships: Mazowieckie (22%), Śląskie (13%), Wielkopolskie (9%), Dolnośląskie (8%) and Małopolskie (7%).

References

Analiza sytuacji społeczno-gospodarczej województwa Łódzkiego, Departament Polityki Regionalnej Urząd Marszałkowski Województwa Łódzkiego, Łódź 2010. Bank Danych Lokalnych Chądzyński M, Przedsiębiorczość, jako czynnik rozwoju sektora MSP w regionach, Wydawnictwo SGGW, Stowarzyszenie Ekonomistów Rolnictwa i Agrobiznesu, Roczniki Naukowe, tom XI, zeszyt 1, Warszawa 2009. Churski P., Czynniki rozwoju regionalnego i polityka regionalna w Polsce w okresie integracji z Unią Europejską, Wydawnictwo Naukowe UAM, Poznań 2008.

Gorzelak G. et al, Propozycje możliwych kierunków działań rządu w poszczególnych regionach, w tym określenie potencjałów rozwojowych województw, Ministerstwo Rozwoju Regionalnego, Warszawa 2010. OECD Review of SME and Entrepreneurship Issues and Policies at National and Local Levels in Poland, Report on the Local Dimension, OECD. Przedsiębiorcy w Polsce. Raport na temat wkładu przedsiębiorców w rozwój polski, PKPP Lewiatan, Warszawa 2014.

Regionalna Strategia Innowacji dla województwa Łódzkiego – LORIS 2030, Deloitte Business Consulting S.A., ŁARR, Łódź.

Sokołowicz M., E., Region wobec procesów globalizacji – terytorializacja przedsiębiorstw międzynarodowych (na przykładzie regionu łódzkiego), Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2008.

Strzelecki Z., Polityka regionalna, [w;] Gospodarka regionalna i lokalna, red. Strzelecki Z., Wydawnictwo PWN, Warszawa 2008. Świerkocki J., Fundusze strukturalne jako czynnik rozwoju gospodarczego w województwie łódzkim [w:] red. Świerkocki J., Rola funduszy strukturalnych Unii Europejskiej w rozwoju kapitału ludzkiego i społecznego w regionie łódzkim, Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2012.

144 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Fourth Anti-Money Laundering Directive – New Requirements and Challenges for Bulgarian Accountants and Auditors

A.Filipova-Slancheva Sofia, Bulgaria E-mail: [email protected]

Abstract

This study assessed anti-money laundering requirements and the expected impact of the new EU Directive - Fourth Anti-Money Laundering Directive for Bulgarian accountants and auditors. The Directive was approved by European Parliament on 20/05/2015, and tightens the rules for EU Member States in respect of anti-money laundering and aligned them with international framework. With the new framework, money laundering and terrorist financing countering is reaching new heights. Hence involvement and role of certain professional groups – accountants, auditors expands and challenges their routine activities and professional practice.

Due to the role of their professional activity, accountants and auditors play crucial role in the fight against illegal activities, including also money laundering and terrorist financing.

In order to investigate the current status of the applied anti-money laundering practices, 10 members of the Institute of Public Accountants (randomly selected) plus 10 members of Association of the Professional Accounting Companies (randomly selected) are examined. The purpose of the research was to enclose their internal procedures, alignment with the requirements of LMML and LMMF and expected challenges stemming from the new Anti-Money Laundering Directive.

General conclusion was that the activity of accountants and auditors in Bulgaria is strictly regulated by Accountancy Law, Independent Financial Audit Law, as with respect of money-laundering and financing of terrorism Law on the Measures against Money Laundering (LMML) and Law on Measures against Financing of Terrorism (LMMF) are introduced and applied. In terms of legal framework, Bulgaria has transposed most of the EU-wide regulatory requirements in its national legal framework. Respective Associations has also issued certain ethic codes, where illegal activities are carefully treated - The Code of Ethics for Professional Accountants, applicable to all members of Institute of Public Accountants.

The analysis let to the insights that auditors are applying provisions from the respective Laws, internal procedures are in place. Here the Institute of Public Accountants contributes with guidelines, policies for risk mitigation, just to mention the few. In respect of accountants, the research shows that processes are not streamlined, involvement of the Association needs improvement. New legislative requirements (risk management, prediction of offences, due diligence beneficial ownership) will impose serious challenges for the sector, as dedicated involvement of all parties is needed.

KEYWORDS: New anti-money laundering Directive, accountants, auditors, challanges

JEL CLASSIFICATION CODES: M4 Accounting and Auditing

145 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

I. INTRODUCTION – MONEY LAUNDERING

Money laundering may be defined as an approach to hide the criminal origin of the money by entering the money into the financial system, hence legitimating them and tearing the connection with illegal actions (Reuter and Truman, 2004). Schneider (2004) argues that there are three primary aims of money laundering, which summarized could be defined as spending illegally obtained money in the official, legitimate economy, while hiding all traces of illegal activities.

The process of money laundering is accepted to be split into three steps (Reuter and Truman, 2004; Masciandro et al., 2007; Schneider, 2004). First step is defined as “placement”, i.e grey money enter the financial system, usually moved into bank accounts (Schneider, 2004). The second step in the process is “layering” - erasing the illegal origin of laundered money. The third step in the process is “integration”, which means that the money will be integrated back into the legal financial system. The Financial Action Task Force (FATF), which is an inter-governmental standard-setting body in the fight against money laundering, argues that “successful money laundering damages the integrity of the entire society and undermines democracy and the rule of the law” (FATF, 2014). Money laundering is feeding the continuance of criminal activities (FATF, 2014; FI, 2013b).

In Bulgaria, as is believed to be valid for most countries around the world, money laundering is more than extensive. It is worth mentioning that the magnitude is difficult, if not impossible, to be determined (FATF, 2014).

There are very few studies on money laundering and the expected prevention role of the auditor, especially in Bulgarian contexts.The lack of contemporary relevant studies might perhaps be explained by the fact that the auditor's role in this context not always has been obvious, or that it is not distinguished in relation to other occupational groups with reporting obligations. Having said that and the fact that money launders are becoming ever more “innovative” and sophisticated, new legislative approach is required. As summarized by Ringh and Sultani (2014), recruitment of a third party, with capacity and opportunity to detect and report crime and act as a preventive force, is an option. The auditor of a company may be that third party. Auditing means verification and giving credibility to the financial information provided by the company (Abel and Gerson, 2001; Audit Quality Forum, 2005; Grumet, 2006). Respectively, having in mind auditor`s insight into company business, their role in combating economic crime as stated by the Economic Crime Bureau, is of a paramount importance. This is valid both in terms of prevention and the notification thereof (EBM, 2004).

On the other hand, as summarized by various authors expectation gap for auditors exist and certainty for tracing activities, inventively hidden or not impacting the audited financial statements (Clarke, 1990; Melnik 2003). In this respect, He (2012) proposes auditor to report to self-regulatory body as a solution for the dilemma of losing client in case reporting suspicions of money laundering to the authorities.

II. EU ANTI-MONEY LAUNDERING LEGAL FRAMEWORK

EU legal framework in respect of money laundering and terrorist financing is to a large extent based on international standards adopted by the Financial Action Task Force (FATF) (http://www.fatf- 146 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 gafi.org/about/ ). The Financial Action Task Force (FATF) is an inter-governmental body established in 1989. FATF set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing. EU has developed its framework throughout the last decades, as rules and scope have evolved and expanded, targeting, all possible loopholes. The first elements put in place through the adoption of Council Directive 91/308/EEC of 10 June 1991. The Second Anti Money Laundering Directive (2001/97/EC) additionally extend the scope. Currently, Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Third AMLD) is applied. The Directive aims at protecting the soundness, integrity and stability of the financial system, against the risks of money laundering (ML) and terrorist financing (TF). On 5 June 2015, the Fourth European Union Anti-Money Laundering Directive (Directive EU 2015/849) was published in the Official Journal of the EU. The new Directive extends and replace the applicable currently Third Anti-Money Laundering Directive (2005/60/EC). All member states are obliged to transpose it into national law by 26 June 2017. Drivers for the development of the new Directive are revision of FATF Recommendations in 2012, EC report on Third Anti-Money Laundering Directive also published in 2012.

In order to strengthen member states abilities to counter money laundering and terrorist financing and improve consistency, the new Directive introduces several important changes: Introduction of an Ultimate Beneficial Owner (UBO) register – accurate, relevant information on beneficial ownership of all entities falling under the respective national jurisdiction. Purpose – enhanced transparency;

Risk-Based Approach – mechanism to identify and minimize the risks associated with money laundering and terrorist financing;

Customer Due Diligence Scope – the scope of CDD is enlarged compared to Third Directive in respect of circumstances which enforce CDD; Politically Exposed Persons (PEPs) – clarified definition and enhanced list of categories of individuals, who could be treated as PEPs. Members of governing bodies of political parties, directors, deputy directors, board members of international organizations are included in the list

Third Party Reliance – all obliged entities are allowed to leverage on third party compliance capabilities for CDD requirements Enforcement – detailed provisions on forms of sanctions and minimum measures

III. BULGARIAN LEGAL FRAMEWORK, PARTICIPANTS AND ROLES

Bulgarian regime on prevention of money laundering is based on EU legislation and the money laundering directives adopted within the EU. EU directives on money laundering sets a framework by which the member states jointly can take action against money laundering, since money laundering is stated to often be carried out on an international level, meaning that the measures taken on a national level will have limited effects (EBM, 2004).

147 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

Law on the Measures against Money Laundering (LMML), which has been amended several times since 1998, comprises the legal framework insofar. LMML is supplemented by Rules on Implementation Law on the Measures against Money Laundering (RILMML).

General customers due diligence (CDD) obligations are also applicable to designated non-financial businesses and professions, besides financial institutions.

Article 16 of LMML and Article 17 of RILMML require obliged entities to adopt internal rules for control and prevention on money laundering.

On 5th of February 2003, National Assembly adopted the Law on Measures against Financing of Terrorism (LMMF). Aim of the Law is prevention and disclosure of the actions of natural persons, legal entities, groups and organizations aimed at financing of terrorism. LMML covers various designated non-financial businesses and professions (DNFBP) (privatizations bodies; public notaries; political parties; sports organizations; dealers in arms, petrol and petroleum products; leasing enterprises; collective investment undertakings, investment intermediaries and management companies; pension insurance companies; trade unions and professional organizations; non-profit legal entities;private bailiffs, among others) chartered auditors. Obligations for DNFBP are equal to financial institutions in respect of customer identification, beneficial owner, keep records, notify State Agency for National Security for any suspicious activities; develop internal procedures and responsible units for AML/CFT. LMML and RILMML provide extensive coverage and legal framework, which incorporates FATF requirements and even exceed them.

State Agency for National Security (http://www.dans.bg/en/msip-091209-menu-en) plays a crucial role in the process of anti-money laundering. There is a specialized administrative directorate for financial intelligence within its structure. The Financial Intelligence Directorate (FID) collects, stores, investigates, analyzes and discloses financial intelligence under the terms andprocedures of the LMML and LMFT. FID collaborates with FATF (Financial Action Task Force) and MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism). MONEYVAL (http://www.coe.int/t/dghl/monitoring/moneyval/About/MONEYVAL_in_brief_en.asp) was established in 1997, as an organization developing measures within member states of the Council of Europe against money laundering and financing of terrorism; evaluating and recommending in order achieving effective systems.

Legal basis for the audit activity in Bulgaria is carried out under state and professional regulation. In force are the following laws: Accountancy Act Independent Financial Auditing Act

Since 2008, Independent Financial Audit Act has been harmonized with the EU Directive 2006/43/EC of the European Parliament and the Council on statutory audits of annual accounts and consolidated accounts. Only statuary auditors have the right to perform statutory audits of financial statements.

Professional standards include:

International Accounting Standards - IFRS and ISA

National Accounting Standards for the Financial Statements of Small and Medium- sized Enterprises

148 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

International Auditing Standards Code of Ethics of the Professional Accountants

Art 3 of Independent Financial Auditing Act stipulates that “the independent financial audit is performed by statutory auditors, members of the Institute of Certified Public Accountants.

In terms of accounting in Bulgaria, governing is done by the Accountancy Act, which is developed on the basis of the Fourth Directive of the Council of the EU. Hence, harmonizing the country’s statutory accounting legislation with the European Union one. Apart from auditing, accounting profession remains fragmented, which leads to low institutional capacity, as summarized by World Banks in its report on the Observance of Standards and Codes. There are four accounting associations: - two for individuals Institute of Professional Accountants in Bulgaria with, estimated to have 100 members; Union of Accountants with appr. 500 members and two for accounting firms - Association of Professional Accounting Companies with 65 members (http://www.apac- bg.org/index.php?page=10); Association of Accounting Offices, estimated to have more than 20 members. None of the associations operates a certification program or performs other functions ordinarily

IV. RESEARCH

In order to investigate the current status of anti-money laundering and auditors` and accountants` role, a survey was conducted in August and September 2015. An approach defined by Saunders et al. (2009) for simple random sampling was followed. Sample size is based on the number of registered auditors/auditing enterprises and accountants as sample size is determined at 10 members for accounting association, and 10 auditors plus 10 auditing enterprises, twenty altogether for auditing activity. Lists are obtained from web sites of the Association – IPAC and APAC. In the next stage, selected members are approached and structured questionnaire was sent, with 5 simple questions - internal procedures; alignment with the requirements of LMML and LMMF; expected challenges stemming from the new Anti-Money Laundering Directive; support by Association in terms of guidelines, drafts, etc. Yes/no questions – The respondent answers with a “yes” or a “no”.

V. FINDINGS FROM THE SURVEY

The Institute of Certified Public Accountants (ICPA) (http://ides.bg/en/Institution/InstitutionItem.aspx?NewsItem=66e02721-e485-4100-bc9e- 322c296aae0d&pg=1) is a single professional organization for all Certified Public Accountants in Bulgaria. ICPA is an independent, professional organization, headquartered in Sofia, with 12 regional organizations (4 based in Sofia and 8 countrywide). Currently, as of Sep. 15, members of ICPA are 791 registered auditors and 158 members registered specialized auditing enterprises. Independent Financial Audit Act regulates the activity of the Institute. All certified public accountants are licensed post exam pass, with register held in ICPA. It is worth mentioning that among other

149 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 activities, the Institute develops audit methodology and techniques for support and regulation of the profession.

ICPA is a full member of Federation of European Certified Public Accountants (FEE) since 2006 and member of International Federation of Accountants (IFAC) since 1995. ICPA, as a member of IFAC, has accepted Code of Ethics as developed by the International Ethics Standards Board for Accountants (IESBA). IEASBA (http://www.ethicsboard.org/about-iesba ) is an independent standard-setting organization, which develops high-quality ethical standards for professional accountants worldwide.

Association of the Professional Accounting Companies (APAC) is established in 2003. Association is based in Sofia and is a voluntary non-governmental sectoral organization. Members include specialized accounting and auditing companies, companies offering financial, tax and accounting consultations. Association provides some form of guidelines, imitate legal and regulatory amendments, organize seminars.

VI. CONCLUSION AND RECOMMENDATION

The aim of this research is to investigate the current status of the applied anti- money laundering practices in Bulgaria. Investigation was conducted from three perspectives, which are as follows:

Legal perspective;

Major participants with their role; Auditors and accountants responsibilities and requirements.

Bulgaria has transposed most of the EU-wide regulatory requirements in its national legal framework. In respect of money laundering and terrorist financing two laws are in place - Law on the Measures against Money Laundering (LMML) and Law on Measures against Financing of Terrorism (LMMF). It can be concluded that both laws are stricter than FATF standards.

Accountants and auditors` activity in Bulgaria is strictly regulated by Accountancy Law, Independent Financial Audit Law. Auditors are applying provisions from the respective Laws, internal procedures are in place. Professional associations play crucial role in the process of legal compliance. Respective Association has also issued certain ethic codes, where illegal activities are carefully treated - The Code of Ethics for Professional Accountants, applicable to all members of Institute of Public Accountants. The Institute of Public Accountants contributes with guidelines, policies for risk mitigation, just to mention the few. For the professional activities of accountants, various associations exist, which fragment it and leads to low institutional capacity. In the report, Association of the Professional Accounting Companies is selected, as one of the most involved and representative one. It can be concluded that APAC has taken some initial steps 150 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3 in respect of legal compliance, guidelines for anti-money laundering and terrorist financing, but more active role, with involvement of all other associations is needed.

General conclusion is that new legislative requirements (risk management, prediction of offences, due diligence beneficial ownership) will impose serious challenges for accountants and auditors. Expectations are Association to play even bigger role, provide comprehensive and holistic guidelines. It is worth mentioning also, that careful and precise addressing of expectation gap is needed, because these professions are under conflict of interest situation and might lose clients.

REFERENCES

Association of the Professional Accounting Companies. Retrieved from http://www.apac-bg.org/index.php?page=10

Abel, A. S. and Gerson, J. S. (2001) The CPA’s Role in Fighting Money Laundering. Journal of Accountancy. 191 (6) pp. 26-31

Clarke, M. (1990) Business Crime – Its Nature and Control. Oxford: Polity Press

Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on the prevention of the use of the financial system for the purpose of money laundering. Journal of the European Communities

Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. Journal of the European Union. L 309/15

Institute of Certified Public Accountants. Retrieved from http://ides.bg/en/Oditors.aspx Financial Action Task Force (2006) Third Mutual Evaluation/Detailed assessment report.Anti- Money Laundering and Combating the Financing of Terrorism: Sweden. Paris: Financial Action Task Force on Money Laundering

Financial Action Task Force (2012) International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – The FATF Recommendations. Financial Action Task Force on Money Laundering

Financial Action Task Force (2014) About us. http://www.fatf-gafi.org/pages/aboutus/ (Retrieved 2015-03-01)

Grumet, L. (2006) Money Laundering and the CPA – Fighting Apathy and Nonchalance.The CPA Journal. 76(4), p. 7

Hassink, H. D., Bollen, L. H., Meuwissen, R. G. and De Vries, M. J. (2009) Corporate Fraud and the Audit Expectations Gap: A Study Among Business Managers. Journal of International Accounting, Audition and Taxation. 18(2), pp. 85-100

151 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3

He, P. (2010) A Typological Study on Money Laundering. Journal of Money Laundering Control. 13(1), pp.15-32

Masciandaro, D., Takás, E. and Unger, B. (2007) Black Finance: The Economics of Money Laundering. Cheltenham: Edward Elgar Publishing Limited

Melnik, S. V. (2003) Accountants’ Anti Money-Laundering Responsibilities. The CPA Journal. Vol. 73, pp. 50-51

Reuter, P. and Truman, E. M. (2004) Chasing Dirty Money: The Fight Against Money Laundering. Washington DC: Institute for International Economics

Saunders, M., Lewis, P. and Thornhill, A. (2009) Research Methods for Business Students. 5th Ed. Edinburgh: Pearson Education Limited

Schneider, S. (2004) Organized Crime, Money Laundering and the Real Estate Market in Canada. Journal of Property Research. 21(2), pp. 99-118

The Audit Quality Forum (2005) Agency Theory and the Role of Audit. London: Institute of Chartered Accountants

152 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

APPENDICES

Appendix 1: Interview Questions Introduce question: Can you, please, present you/your organization, your position?

Question Yes/No Answer 1. Have you established internal procedures in respect of anti-money laundering and terrorist financing countering?

2. How do you or your organization align with the requirements of LMML and LMMF? 3. Have you reviewed the new Anti-Money Laundering Directive? 4. Do you expect challenges stemming from the new Anti-Money Laundering Directive? 5. Do you/your organization, as a member of professional association, receive support by the association in terms of AML guidelines, procedure

drafts, etc?

153 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

The relationship between the declared income and gross domestic product: A key factor in identifying tax evasion in the Greek economy.

Lazos Grigorios, Maroudas Theodoros Greek Ministry of Finance, Dioikitirio, 54 123 Thessaloniki Greece [email protected]

Abstract

It is a fact that the tax compliance is a crucial factor for achieving the goals of the state budget. Especially in a national economy like that of Greece, with acute financial problems nowadays, the above mentioned fact makes particularly urgent the adequate fight of tax evasion. Under this point of view, the tax administrations of economically developed countries – and the Greek tax authorities in recent years - have implemented risk analysis methods to enhance detection of divergent tax behavior. The present study attempts to contribute towards this direction by exploring Greek economic reality and the relation, by administrative region, between: the declared taxable income and the relevant tax income, as they are depicted in the submitted income tax returns of individuals taxpayers in the available tax statistics of the Greek Ministry of Finance, and the gross domestic product based on the data of the Greek statistical authority of the respective period. The analysis of these elements results in useful conclusions which can be integrated into a general plan of targeted tax audits, after completion of the risk analysis, in order to reduce tax evasion.

Keywords: Tax evasion, Income, Gross domestic product.

JEL Classification Codes: Η24, Η26

1. Introduction

Limited tax compliance undoubtedly constitutes a perpetual and particularly important problem for national economies. The consequences of the width of tax noncompliance on the public finances fundamentals are numerous and particularly determinant for the overall development of economy. Tax noncompliance results in the deficiency of Public Revenues, which in its turn, leads to the restriction of social benefits destined for the citizens, while it sets off the effort to attain the objectives of implementing the state budget. In parallel, this phenomenon distorts the exercise of economic policy as well as the implementation of its set objectives. Furthermore, tax noncompliance has direct consequences in the distribution of tax burden between consistent and honest taxpayers and those who evade taxes, thus causing additional tax burden on the former. The loss of tax income due to tax evasion may result in the imposition of supplementary taxes on declared income in order to compensate for these losses (Andreoni et al., 1998). Particularly, in an economy such as the Greek economy, which is characterized by long lasting pathogenies, the restriction of extended tax evasion apparently becomes an imperative need within the aim of affronting the chronic budgetary deficits, as well as of liberating all those healthy productive powers from unfair competition in order to render them helpful in the resurrection of National economy.

2. Theoretical framework

The strategy of dealing with tax noncompliance comprises different strategies, the most prevalent of which focus on the increase of the number of the tax audits conducted, the expansion of the width of the tax audit process, the establishment of stricter administrative and penal sanctions for the commitment of tax violations etc. (Alm and McKee, 2006).

154 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Sanctions and penalties for tax deviations in Greece are strict, unjustifiably strict in certain cases and by principle they initially impede tax evasion. Nevertheless, the greater problem posed is that the possibility of revealing tax evasion and then imposing the respective penalty is close to none, due to the inadequacy of the competent authorities, the conduct of few and inefficient tax audits, but also due to the complicated nature of the tax legislature, which consists the operative event for opaque practices. Therefore, this possibility, of detecting tax evasion and then imposing the respective penalty, should be increased with every possible means (Bank of Greece, 2010).

Tax compliance, as it is demonstrated by the review of the international bibliography is directly dependent on available income, the level of economic development, the level of social ethics, diverse demographic factors, the educational level, the legal framework etc. Granted that the specific determining factors vary per geographical region, it is consequently concluded that geographical region constitutes yet another indicator for the volume of tax compliance.

By implementing the specific premise on state level, (Friedland et al. 1978) have supported that tax evasion in Mediterranean countries is more acceptable than in Anglo-Saxon ones. Likewise, the countries of the European South present the lowest indicators of tax compliance in Europe, even though they have made significant efforts to reinforce the latter via the increased imposition of the tax system (Jackson and Milliron, 1986). It is manifest from the specific observations that Greece constitutes part of a wider geographical region, where tax noncompliance remains at high levels.

In the study of Matsaganis and Flevotomou (2010), which is unique in examining the parameter of geographical region and its correlation to the tax compliance of individual taxpayers in Greece, it has been observed that the submission of dishonest tax declarations is mainly located in southern Greece, where a percentage of 16% of the submitted tax declarations are dishonest. Furthermore, the respective percentage for the city of Athens is less than 6%. This event has been justified by the former researchers and attributed to the concentration of public services and public employees in Athens, as well as to the dissemination of incomes deriving from activities pertaining to the sector of constructions and tourism to the other regions. Moreover, according to Artavanis et al. (2012) tax evasion in Greece spreads without discrimination over all geographical regions of the country. The particularly high volume of tax evasion in a big city of central Greece, which has even been reported in a publication of the prominent economic journal Financial Times in 2011, makes a strong impression, following the aforementioned research findings. The specific city has been reported in the FT publication as the city with the greatest number of luxurious big-engine cars of a certain brand and type in Europe, while, in parallel, this city was flowingly accepting grants and transfers from the European Commission.

Tax administration authorities in defining their plan of action and in recently using the principles of risk management and analysis (Freedman et al., 2009) try to locate and evaluate those criteria which could be included in the process of selection of the tax cases under audit. According to the Ministry of Finance of India (2008), within the aim of defining and assessing the risk of tax noncompliance, a wide array of economic information should be compiled, on the basis of a relational data basis. The Greek tax administration has recently, in 2010, adopted the use of risk assessment methods, in order to organize the selection of tax cases to be audited.

On the grounds of the aforementioned it is concluded that the detection of the deviation between the declared income of taxpayers and the gross domestic product per geographical region in Greece could guide in a substantial manner the endeavors of the Greek tax administration for the limitation of excessive tax evasion. The specific parameter could be assessed either per se or included in the context of general assessment of risk factors on the basis of risk management and risk analysis.

3. Research methodology

The present research has been focused on income taxation of individual taxpayers. The research question posed pertains to the possibility of a remarkable existing deviation, per geographical region in Greece, between declared income of individual taxpayers and gross domestic product. Thus according to the hypothesis set in the research, if a sufficient correlation between the two

155 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 aforementioned volumes is not present in any of the administrative regions, then tax administration authorities should set tax audit as a priority in the specific regions.

Within the aim of attaining the research objectives, tax data have been drawn from the annual sheets of tax data, as published from 2001 to 2010 by the Greek Ministry of Finance. It is to be noted that since 2011 and on, no further data sheets have been published by the Ministry of Finance. Specifically, declared incomes, as submitted by the taxpayers in their tax declarations for the respective years, have been drawn from the years 2001 to 2010 per geographical region. It is to be noted that the present study has not taken into account tax exempted incomes or incomes that have been independently taxed (e.g. as the interests on deposits).

Furthermore, data pertaining to the gross domestic product per geographical region and for the same period of time (2001-2010) have been drawn from the Hellenic Statistical Authority (EL.STAT). As it is known the Gross Domestic Product (GDP) constitutes the sum of all the final goods and services that an economy annually produces, as expressed in terms of money. The GDP is calculated by the Hellenic Statistical Authority by three alternative methods that lead to the same result: a. by the income method, b. by the production method and c. by the expenditure method. The Gross Domestic Product is expressed as follows:

GDP = C + I + G + NX, where:

(Ι) Investment,

(G) Public expenditure for buying goods and services,

(ΝΧ) Net exports (exports minus imports)

It is equally to be noted that all the aforementioned volumes (declared incomes and GDP) have been deflated by their reduction to fixed values on the basis of the GDP of the year under study. Additionally, within the aim of clarifying the relevance between the two variables (declared incomes and GDP) the correlation coefficient Pearson r has been used. The correlation coefficient r gives a measure of the volume of correlation between the two variables. The correlation coefficient r between X and Y is given by the measure:

 (xi  x)(yi  y) r(X ,Y)  r  i1   2 2 (xi  x)  (yi  y) i1 i1

It acquires values in the closed space between -1 to 1. Especially if 0 < r < 1 then variables X and Y are positively linearly correlated. If -1 < r < 0 then variables X and Y are negatively linearly correlated. In case that r = 1 then the two variables present a perfect positive linear correlation, while if r = -1 then there is a perfect negative linear correlation. If, finally r = 0 then there is no linear correlation between the variables X and U (linearly uncorrelated).

4. Research Findings

By analyzing the correlation between the declared incomes and the GDP a significant degree of differentiation per administrative region emerges. Specifically, the correlation coefficient Pearson r in the 13 administrative regions ranged to a great width, with values from 0,17 to 0,98. More

156 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 analytically, the correlation coefficient in decreasing classification, per administrative region, along with the assessment of the correlation between the variables on the basis of the coefficient’s value is presented in the table given below:

Table 1: Correlation coefficient per administrative region between declared incomes and GDP

Assessment of the Correlation Administrative Region Correlation coefficient r coefficient r

1 0.98 Very strong correlation

2 0.90 Very strong correlation

3 0.87 Very strong correlation

4 0.77 Strong correlation

5 0.69 Strong correlation

6 0.68 Strong correlation

7 0.55 Moderate correlation

8 0.53 Moderate correlation

9 0.50 Moderate correlation

10 0.39 Weak correlation

11 0.31 Weak correlation

12 0.30 Weak correlation

13 0.17 No correlation

By analyzing the data presented in the aforementioned table it is demonstrated that:

a. In those regions where the correlation coefficient r is higher than the value 0.60 (strong-very strong correlation) there are initially no indications of increased tax evasion. b. In those regions where the correlation coefficient r is ranges from null to the value 0.60 (no, weak or moderate correlation) there are indications of increased tax invasion and thus the tax administrations should indicatively (by sampling) focus on tax audit in relation to other criteria of risk analysis.

It is even more worth mentioning that there is a very strong correlation, of the value of 0.98, in the region of Attica, fact which demonstrates that there are initially no indications of tax avoidance and evasion of taxed incomes from the taxpayers involved in the given region. The specific finding is close to the observation made by Matsaganis and Flevotomou (2010), as the latter, in the context of their respective research, depicted a relatively low percentage of tax evasion in the city of Athens.

This event is most probably due to the comparatively greater number of wage earner in the city of Athens, in comparison to other regions of Greece, due to the concentration observed (great number of public authorities, big companies etc.) and the low margins of tax evasion permissible for this category of taxpayers as compared to other categories of the latter. Moreover, according to Kamdar (1995) the American tax service IRS holds the belief that tax noncompliance is more characteristic of taxpayers with incomes deriving from enterprises, agricultural activities, as well as of self-employed taxpayers

157 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 who have the possibility to avoid taxes and hide incomes by declaring artificially overstated expenditure thus decreasing their declared incomes.

5. Conclusions - Proposals

By conducting the present research, it is shown that the correlation between the amount of declared incomes of individual taxpayers and the GDP per administrative region in Greece may constitute a powerful factor of prediction of the degree of tax noncompliance, so that the tax administration efforts to trace tax evasion focus, to a greater degree, on the specific administrative regions. The latter may be achieved either by the use of the research findings as they are or by their inclusion in a more general plan of tax evasion detection, which is to co-evaluate other risk factors too (e.g. the background of noncompliance etc.) and which is to be governed by the principles of risk analysis.

Further research is needed, which would focus –on a next level and on the grounds of the findings already yielded-, on locating income sources which display a greater amount of tax evasion per administrative region of the country in conjunction with research into the constituent composition of the GDP in those regions. Moreover, the impact of current tax legislature and applicable tax coefficients on the observed tax evasion could also be over time investigated for the period of the proposed research.

References

Alm, J. and McKee, M. (2006), “Audit certainty, audit productivity and taxpayer compliance”, National Tax Journal, vol. 59 (4), pp. 801-816.

Andreoni, J., Erard, B., and Feinstein, J. (1998), “Tax compliance.” Journal of Economic Literature, vol. 36 (2), pp. 818-860.

Artavanis, Ν., Morse, A., and Tsoutsoura, M. (2012), “Tax evasion αcross industries: soft credit evidence from Greece”. Fama-Miller Center for Research in Finance. The University of Chicago, Booth School of Business. Chicago Booth Paper No. 12-25

Bank of Greece (2010), "Monetary policy. Interim report 2010 ", Bank of Greece, Economic Research Department, Athens.

Freedman, J., Loomer, G. and Vella, J. (2009), “Corporate tax risk and tax avoidance: New approaches”, British Tax Review, 1, pp. 74-116.

Friedland, N., Maital, S. and Rutenberg, A. (1978), “A simulation study of income tax evasion”, Journal of Public Economics, vol. 10 (1), pp. 107-16.

Jackson, B. and Milliron, V. (1986), “Tax compliance research: Findings, problems and prospects”, Journal of Accounting Literature”, 5, pp. 125-165.

Kamdar, N. (1995), “Information reporting and tax compliance: An investigation using individual TCMP data”, Atlantic Economic Journal, vol. 23 (4), pp. 278-292.

Matsaganis, M. and Flevotomou, M. (2010), “Distributional implications of tax evasion in Greece”, London School of Economics and Political Science, The Hellenic Observatory, The European Institute, Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper, no 31.

Ministry of Finance India (2008), “Risk management manual 2008, principles for tax administration at the CBEC”, Central Board of Excise and Customs, Ministry of Finance, Goverment of India.

158 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Is audit quality Implied by Accruals Quality associated with Audit fees and Auditor Tenure? Evidence from China

Kikhia Hassan & Albitar Khaldoon & Jin Ping Zhang School of Accounting and Finance, Zhongnan University of Economics and Law, Wuhan, China E-mail: [email protected]

Abstract The Enron and Arthur Andersen scandal has raised concerns internationally about auditor independence and audit quality. Furthermore, the debate continues about the relationship between audit fees, auditor tenure and audit quality in spite of extensive empirical evidence examining audit failures and earnings management. Therefore, the purpose of current research is to determine the effect of audit fee and audit tenure both partially and simultaneously on the audit quality. Using a sample of Chinese firms, an environment where we believe it provides us with an opportunity to test whether the development of market and legal institutions affects the impact of audit fees and auditor tenure on audit quality. We employ the standard deviation of residuals from regressions relating current accruals to cash flows as proxy for audit quality. The paper documents statistically significant negative association between audit fees and audit quality. These findings are consistent with economic bonding being a determinant of auditor behavior rather than auditor reputational concerns. Further, the current paper shows a positive association between auditor tenure and audit quality in the earlier years of audit tenure. These results support the proposition that when the Learning Effect dominates the Bonding Effect in the earlier years of tenure, then audit quality is likely to be higher. Taken audit fees and audit tenure together, the results suggest that there is positive association between audit fees and audit quality in the earlier years of auditor tenure. Interestingly, the findings of our study have important implications for policymakers, auditors, multinational firms, and users of financial reports. As the rapid growth of China's economy gains global recognition, the Chinese stock market is capturing the attention of international investors. To a lesser extent, our paper also differs from the prior studies in methodology and findings in the investigation of audit quality.

Keywords: Audit quality, accruals quality, audit fees, auditor tenure.

1. Introduction Due to corporate scandals as Enron and WorldCom in the United States, there has been an increasing focus on auditor independence (Chen, Lin & Lin, 2008). Last decade, the performance of auditors is criticized and auditors are often perceived to lack independence. This lack of auditor independence decreases the quality of the audit. However, when the audit gives reasonably assurance there is always room for mistakes and errors that can decrease the audit quality and mislead a third party in his/her decision. This raises the question of what is a high quality audit. The most used definition of audit quality is DeAngelo’s (1981) which expresses the quality in terms of the auditor’s competence and independence. The quality is then dependent on the probability that the auditor will both discover a breach and report that breach (DeAngelo, 1981). In other word, to increase the auditors’ ability to detect questionable accounting practices it is important that the auditors and/or the audit firm are knowledgeable about the company and the industry. Furthermore, the auditors and/or audit firm ability to report these misstatements depend upon their independence from the client (Knechel, 2001). However, during the years after DeAngelo's definition of audit quality a number of studies regarding the audit quality has been performed with focus on a number of variables. Most of these studies have focused on the quality of the audit to see if they perform a low- or high quality audit. Jackson, Moldrich & Roebuck (2008) have studied audit quality from the perspective of mandatory audit firm rotation, Vanstraelen (2000) examines if a long-term audit mandate have an impact on audit quality. Yet other studies examines if auditor fees have an impact on audit quality (Hoitash, et.al., 2007).

We add to this literature by determining the effect of audit fee and audit tenure both partially and simultaneously on the audit quality in the Chinese capital market setting. China's unique institutional features provide us with an opportunity to test whether the development of market and legal institutions affects the impact of audit fees and audit tenure on audit quality. The reasons for choosing

159 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 the auditing area and more specifically if the audit fees and audit tenure have effects on audit quality are that it is an incompletely studied area. The above mentioned studies and also other studies that focus on audit quality provide ambiguous and inconclusive results.

Firstly, Fees paid to auditors can affect audit quality in two ways: large fees paid to auditors may increase the effort exerted by auditors, hence, increasing audit quality (Yuniarti, 2011). Alternatively, large fees paid to auditors, particularly those that are related to non-audit services, make auditors more economically dependent on their clients. Such financial reliance may induce a relationship whereby the auditor becomes reluctant to make appropriate inquiries during the audit for fear of losing highly profitable fees. Conversely, the potential for audit failure imposes significant economic costs on the auditor (DeAngelo, 1981; Simunic, 1984). Though a number of recent studies have examined the relationship between audit and non-audit fees and independence, they are ambiguous as to the relationship between audit fees and auditor behavior (Larcker and Richardson, 2004). They also differ on how fee composition and client importance affect auditor independence.

Secondly, the question of whether audit quality is affected by the length of time that an auditor serves a client has received extensive attention from researchers. According to Chen et al. (2008) “Regulators are concerned that as audit firm / partner tenure (the length of the auditor–client relationship) gets longer, auditors are more likely to compromise on their client’s accounting and reporting choices because they are “too familiar” with the management and because they want to retain the client’s business”. In accounting literature, this is known as the ‘familiarity threat’. Hence, there is argued that longer auditor tenure reduces the auditor's independence, and as a result the audit quality diminishes. On the contrary, it can be argued that as the auditor becomes more familiar with the client, he is better able to do an audit due to increased knowledge of the firm. The first years of auditing a new client involves start-up costs as a result of gaining sufficient understanding, as argued by DeAngelo (1991). The effects of this argument are opposed to the first, at least in the first years.

Furthermore, for audit quality proxy, Dechow and Dichev (2002) suggest a method of distinguishing informative accruals from no informative ones. They argue that when managers use discretionary accruals opportunistically, the current period accruals are less likely to be realized as future cash flows. In other words, the accrual quality measure, estimated as the association between current accruals and realized cash flows in the current as well as succeeding and previous years, deteriorates if the accruals are driven by opportunism, but not when they are motivated by the need to convey private information. Furthermore, the accrual quality measure is not subject to the criticism regarding the separation of discretionary and nondiscretionary accruals. On the basis of these considerations, we proxy audit quality by accrual quality. To sum up, ongoing interest in the issue suggests that this question has not been completely answered by extant research. In this paper, we provide additional insight into the debate by examining the impact of audit tenure, and audit fee both partially and simultaneously on the audit quality.

2. Literature Review and Hypotheses Development 2.1. Audit fees and audit quality The link between audit fees and audit quality is suggested by the signalling or reputation hypothesis (Lindberg, 2001). Models of reputation capital suggest that sellers expend resources in order to build a reputation because buyers are unable to determine product quality before purchasing (Klein and Leffler, 1981). Several studies suggest that higher audit fees are associated with higher audit quality in order to compensate for the high-price of reputation (see Simunic, 1980; Ferguson and Stokes, 2002). Evidence suggests that audit clients are willing to pay a fee premium on these auditors‟ reputations in order to get a better quality of service (Simunic, 1980). In other study, Elitzur and Falk (1996) suggest that audit fees have a positive relationship with planned audit quality. They examine planned audit quality and audit fees in a multiperiod model. Ordinarily, higher audit fees might inspire auditors to increase the audit quality. Hoitash et al. (2007) also agree that higher audit fees will increase the auditor's effort and result in a higher audit quality. Conversely, Ashbaugh et al. (2003) find no association between firms’ total fees and discretionary current accruals, nor any association between income increasing-accruals and client fees. Similarly, Chung and Kallapur (2003) find no association

160 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 between several audit-fee metrics and their estimate of discretionary accruals. In recent studies related to corporate governance, evidence suggests that lower audit fees could also be associated with a perceived higher audit quality. This is because the auditor might take into consideration that firms bound by a strong internal control environment will probably have a lower audit risk thus reducing the audit effort and audit fees by means of an effective internal corporate governance mechanism (Griffin et al., 2008; Krishnan and Visvanathan, 2009).

Furthermore, in their discussion of Kinney and Libby (2002) suggested that the threat to auditor independence could be as strong when the audit fee is large. Several studies that have empirically examined the relationship between audit quality and audit fee assume that audit services are quality- differentiated and that in a competitive market, quality differences are reflected in fees (Francis & Simon, 1987). Extending their sample to include all firms in China’s stock market and employing several different measures of abnormal audit fees, Fang and Hong (2008) find a positive relationship between audit fees and audit opinion improvement. Chen, Su, and Wu (2005) also show that there is a positive correlation between a higher abnormal audit fee and an improvement in audit opinion. In their research, Frankel et al. (2002), report a significant negative association between audit fees and the probability of meeting their earnings benchmarks such as a small positive earnings surprise (0 to 1 cents) over the last available consensus median analyst forecast and a small increase in earnings (0 to 1 cents) over the last year’s earnings. They also report a significant reduction in discretionary accruals when audit fee rank is high (see Frankel et al., 2002). However, it seems reasonable to suggest that increasing audit effort and therefore audit fees enable the auditors to get information and make judgments on the accrual estimation errors. Consequently, the auditor will require management to correct its estimates and modify its accounting methods to improve accrual quality and hence the audit quality. To sum up, the following hypothesis is suggested

H1: There is a significant and positive relationship between audit fee and accruals quality and hence audit quality.

2.2. Audit tenure and audit quality. After the accounting scandals of the last decade, the relationship between the auditor and the client is often scrutinized, resulting in questions about auditor independence. Mandatory audit firm rotation is recommended as a solution to improve the quality of financial reporting. This view is consistent with the argument that audit quality impairs when auditor tenure increases. A reduction in audit quality might occur, because auditors are more likely to agree with managers on important decisions as the length of the relationship between the auditor and the client increases (Chi and Huang 2005; Boone et al. 2008; Davis et al. 2009). This view is in line with the Bonding Effect explanation which related to auditor independence. However, the long-tenure association between the audit personnel/firm and the client may give rise to concerns about familiarity and self-interest threats to auditor independence. On other hand, earlier studies stress the negative impact of short tenure on audit quality in initial years of the auditor-client relationship (Geiger and Raghunandan 2002). However, the majority of the literature emphasizes the positive impact of long tenure on audit quality (Mansi et al. 2004; Ghosh and Moon 2005). This is consistent with the Learning Effect explanation that audit quality is low in the initial years as it takes time for the auditor to acquire the client-specific knowledge and audit quality increases as the auditor gets familiar with the client's business and information system. Furthermore, Solomon et al. (1999) document that as the length of the relationship between the auditor and the client increases, the auditor has more client-specific knowledge. As a consequence, it is less likely that the auditor relies on managerial estimates and becomes thus more independent of firms’ management. Myers and Omer (2003) investigate the extent to which auditor tenure is associated with the distribution of both income-increasing and income decreasing accruals. They document that both income-increasing and income-decreasing accruals are lower when auditor tenure increases, suggesting that audit quality increases with auditor tenure.

A more recent paper and by using Chinese data, Firth, et. al., (2012) find that firms with mandatory audit partner rotations are associated with a significantly higher likelihood of a modified audit opinion than are no-rotation firms. Moreover, they find similar evidence for voluntary audit firm rotation, although the significance level is much weaker than for mandatory partner rotation. However, they do not find robust evidence that mandatory audit firm rotation is more effective than other forms of

161 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 auditor rotation in enhancing audit quality. Based on the description of the studies above, the empirical analyses provide conflicting results. However, the current study argues that when an auditor starts a new audit engagement, he would spend more time to learn about the entity's business and its environment (including its internal controls). At the same time, it would take some time for the auditor to develop a close relationship with the client. Hence, the Learning Effect is likely to dominate the Bonding Effect in the earlier years of the auditor-client relationship. In contrast, as the Learning Effect weakens over time, the Bonding Effect strengthens over time as the auditor and the client gets close to each other. The Bonding Effect would dominate the Learning Effect either when the Learning Effect reduces to zero or when the negative force from the Bonding Effect dominates the positive force from the Learning Effect. Therefore, the current study predicts that the Learning Effect is likely to dominate in the earlier years and the Bonding Effect is likely to dominate in the later years of auditor tenure. Therefore, we set the following hypothesis:

H2: Audit quality is likely to increase in the earlier years of auditor tenure due to a Learning Effect and is likely to decrease in the later years of auditor tenure due to a Bonding Effect.

2.3. Audit fees, Auditor Tenure and Audit quality Research indicates that in addition to the high set up costs, auditors face a steep learning curve in the initial years of an engagement. Caramanis and Lennox (2008) provide direct evidence that auditors expend more effort (i.e., audit hours) in the first years of an audit. However, as tenure lengthens, auditors acquire a more complete understanding of their client’s operations. It follows that, all else constant, audit effort should decrease as tenure increases. Interestingly, however, audit fees generally increase with auditor tenure. Some recent studies examine the interaction between auditor tenure and either fees or auditor specialization. However, seemingly opposite conclusions are reached. One set of studies examines the interaction between auditor tenure and audit fees. Gul et al. (2007) find that nonaudit fees (but not audit fees) are associated with poorer audit quality in terms of higher discretionary current accruals for firms with short auditor tenure. In contrast, Stanley and DeZoort (2007) document that audit fees (but not nonaudit fees) are associated with improved audit quality in terms of lower likelihood of restatement for firms with short auditor tenure. Another set of studies examines the interaction between auditor tenure and auditor specialization, but results differ depending on the proxy for audit quality. Myers et al. (2003) find no such interaction with discretionary accruals. In contrast, using discretionary accruals and restatements as proxies for audit quality; other studies document this interaction (Gul et al. 2009).

However, for third hypothesis which related to the effect of auditor audit tenure and audit fee simultaneously on the audit quality, it is not easy to describe and measure service quality objectively with multiple indicators because service quality is an elusive and vague concept, thus, there is often an error in determining the nature and quality. With this in mind, we conjecture that when an auditor starts a new audit engagement he would spend more time to learn about the entity's business and it is also possible that the auditor may face special audit problems earlier in the tenure because of unfamiliarity with the client’s business, and thus may lead the auditors to increase his efforts, and therefore audit fees, to get information and make judgments on the accrual estimation errors. However over time, the auditor and his client will get close to each other, therefore, the Bonding Effect is likely to dominate in the later years of auditor tenure, It follows that, all else constant, audit effort should decrease, and hence audit fees. Consequently, the auditor might become lax enough to allow more (and larger) estimation errors than he or she would otherwise allow. Therefore, economic bonding reduces accrual quality even if the auditor is competent to detect the errors. On the basis of prior discussion, we set the following hypothesis:

H3: The positive association between accruals quality and audit fees in the earlier years of auditor tenure became negative in the later years.

3. Auditing Profession in China The Chinese audit profession is managed by the Chinese Institute of Certified Public Accountants (CICPA) and the Ministry of Finance (MOF) of China, and is jointly regulated for capital market practices by the China Securities Regulatory Commission (CSRC) and the MOF. To reinforce the accountability of CPAs who issue audit reports, the Ministry of Finance released a supplementary

162 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 regulation on the signing and stamping CPAs’ names on audit reports on July 2, 2001. This regulation, Notice of the Ministry of Finance on Related Issues of CPAs’ Signature and Seal on Audit Reports, required that the audit report should be signed and sealed by two CPAs who are licensed to issue the related audit report and should be sealed by the accounting firm of the two CPAs. More specifically, the regulation requires that the signers should include the audit partner, chief CPA or an entrusted deputy chief CPA, who makes the final review of the audit, and another CPA who is in charge of the daily work on the audit. These two signing auditors are required to assume the same legal liabilities (unless one can prove the contrary).

On April 13, 2003, the Ministry of Finance issued a revised version of No. 7 Independent Audit Standards—Audit Report, which became effective on July 1, 2003. Similar to the original version, the revised version states that audit reports should be signed and sealed by CPAs, and also sealed by the accounting firm. In addition, the revised version provided a template for the audit reports, which indicated that two CPAs were required to sign and stamp their names. On February 15, 2006, the Ministry of Finance issued No. 1501 Audit Standards of Chinese CPAs—Audit Report to replace No. 7 Independent Audit Standards—Audit Report. This batch of audit standards became effective from January 1, 2007. With respect to the requirements on the signature and seal of CPAs on audit reports, it is identical to the prior audit standard revised in 2003. The specific requirements on who should sign and seal audit reports are still the same as set out in the Ministry’s Notice that was issued in 2001. Thus, China has a relatively long history of requiring signatures of the two key auditors on an engagement.

4. Methodology 4.1. Sample and data collection We begin to select sample firms from China Stock Market & Accounting Research Database (CSMAR), which is widely used by many prior studies (e.g., Giannetti, Liao, and Yu, 2014). CSMAR database provides us with the data including audit fees of auditing the annual financial statements, the names of CPAs who signed the audit report, and the name of the audit firm, and the number of years as auditor with a current client, from all companies listed on both the Shanghai Stock Exchange and the Shenzhen Stock Exchange. Our raw sample includes 14334 observations during the period of 2007-2013. We start from 2007 because China’s Ministry of Finance issued new basic standards (namely Ministry of Finance’s 33 Action) for enterprise accounting in 2006, which were enforced from January 2007. Therefore, our sample starts from this year in order to keep consistence between cross-sectional data. Furthermore, in the calculation of the proxy for audit quality, we need related data during the five-year period between t-4 and period t (in order to keep sample, we don’t require the five year period to be consecutive). In this way, we get 6993 firm year observations whose proxy for audit quality is available from 2009-2013. Combing with data of audit tenure, audit fees and other control variables and dropping observations that lack the necessary data for estimating our models, our final data set contains 6957 observations (1318;1340;1411;1451;1437 observations in 2009-2013, respectively).

4.2. Empirical model First: Measure of audit quality

Dechow and Dichev (2002) argue that uncertainty in accruals can best be measured by the extent to which working capital accruals map into cash flow realizations. The key insight to their model is that accruals quality is affected by measurement error in accruals, irrespective of management’s purpose (e.g. imposing intentional or unintentional errors in the estimation of accruals). According to Francis et al. (2005) and from a practical perspective, the Dechow and Dichev (D&D) model is limited to current accruals (because of the long lead/lags between noncurrent accruals and ultimate cash flow realizations). Thus, consistent with McNichols (2002), they augment the D&D model by incorporating the fundamental variables included in the modified Jones model. This augmented model produces a better specified expectations model and, therefore, a better set of residuals. Following Francis et al. (2005), we estimate a cross-sectional accrual model as depicted in the following equation:

TCAt = β0 + β1 OCFt-1 + β2 OCFt + β3 OCFt+1 + β4 ΔREVt + β5 PPEt + vt (1)

163 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Whereas; TCA is total current accruals are calculated as (change in current assets – change in cash – (change in current liabilities – change in short-term debt included in current liabilities)), OCF is Operating cash flow obtained from cash flow statements, ΔREV is Changes in sales revenues, and PPE is gross values of property, plant and equipment. Consistent with Francis et al. (2005) we estimate equation (1) separately for each Fama and French (1997) industry group in year t. We winsorize the 1 percent extreme values from each tail and use the residual from equation (1) as our estimate for abnormal accruals. Subsequently, we use the estimated firm year residual during the five-year period between t - 4 and period t and calculate the standard deviation of these residual. In turn, we term the calculated standard deviation and use it as our proxy for accruals quality. A large standard deviation implies that discretionary accruals vary over time yielding low-accrual quality.

Second: Audit Quality and Audit Fees model.

Previous studies have modeled fees as a function of size, risk, complexity, auditor type and profitability. Our fee prediction model draws on Simunic (1984), Larcker and Richardson (2004) and Hay et al. (2006). However, in order to study the relationship between audit fees and audit quality proxy by accruals quality and as in Srinidhi and Gul (2007), we model AQ as a function of the fee variables and other determinants

AQ = β0 + β1 AF + β2 LNTA + β3 ROA t + β4 LOSS +β5 BIG4+ β6 SUBS + β7 FOREIGN + β8 LEV + industry dummiest + year dummiest + ut…….(2)

Whereas, AF is natural log of total audit fees paid to the auditor, LNTA is the natural log of the firm’s total assets, LOSS is An indicator variable equal to one if the audit client reported negative net income in either of the two previous fiscal years (zero otherwise), BIG4 is An indicator variable equal to one when the auditor is a member of the BIG4 (zero otherwise), FOREIGN is an indicator variable equal to 1 if the company has foreign operations (zero otherwise), LEV is total liabilities to total assets ratio.

Third: Audit Quality and Audit Tenure model.

In order to test the second hypothesis, the current study runs an OLS pooled regression on the following model:

AQ = β0 + β1 T + β 2T^2+ β3 LNTA + β4 ROA t + β5 LOSS +β6 BIG4+ β7 FOREIGN + β8 LEV + industry dummiest + year dummiest + ut….(3)

Whereas, T is the number of consecutive years that a firm has retained the auditor, T^2 is the square of T, LNTA is the natural log of the firm’s total assets; ROA is Return on assets defined as net income divided by total Assets, LOSS is an indicator variable equal to one if the audit client reported negative net income in either of the two previous fiscal years (zero otherwise); BIG4 is an indicator variable equal to one when the auditor is a member of the BIG4 (zero otherwise); FOREIGN is an indicator variable equal to 1 if the company has foreign operations (zero otherwise), LEV is total liabilities to total assets ratio, however, this equation includes control variables based on prior literature (Dechow and Dichev, 2002; Myers et. al., 2003; Krishnan, 2003; Reichelt and Wang, 2010).

Note that higher AQ indicates higher audit quality. Hence, to test the second hypothesis, we test whether the coefficient β1 on T is positive, and the coefficient β2 on T^2 is negative, indicating that audit quality increases in the earlier stage of auditor tenure and decreases in the later stage of auditor tenure. In addition, in my sensitivity tests, I also use alternative measures of auditor tenure to test the robustness of my results.

Fourth: Audit Tenure, Audit fees and Audit Quality model.

AQ = β0 + β1 AF+ β2 AF*T + β 3 AF*T2+ β4 LNTA + β5 ROA t + β6 LOSS +β7BIG4+ β8 FOREIGN + β9LEV + industry dummiest + year dummiest + ut…..(4)

164 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

5. Empirical Results 5.1. Descriptive statistics

Table 3 Descriptive statistics variable N Mean Median 1st 3st Min Max Std Dev. Quartile Quartile AQ 6993 0.0900 0.0700 0.0400 0.110 0 0.700 0.0700 AF 6993 13.32 13.22 12.90 13.59 12.21 15.52 0.610 T 6993 2.480 2 1 3 1 7 1.600 T2 6993 8.720 4 1 9 1 49 10.87 LNTA 6993 21.72 21.53 20.78 22.44 0 30.57 1.530 ROA 6993 0.0400 0.0400 0.0100 0.0700 -0.260 0.250 0.0700 LOSS 6993 0.0900 0 0 0 0 1 0.290 Big4 6993 0.0500 0 0 0 0 1 0.220 FOREIGN 6993 0.470 0 0 1 0 1 0.500 Lev 6993 0.480 0.470 0.290 0.640 0.0400 1.610 0.260

Table 1 summarizes the descriptive statistics for accrual quality and other variables used in this study. The mean (median) of AQ is 0.0900 (0.0700). The average total fees are 13.32. The average tenure (T) is 2.4 years with a minimum of 1 year and a maximum of 7 years whereas the minimum and maximum values of the square of auditor tenure (T2) are 1 and 49, respectively. The mean (median) of Size of the firm is 21.72 (21.53). Big 4 international accounting firms audit only 5% of the sample companies, which is very different from the audit market structure of the more developed capital markets (such as the U.S., Australia, or Taiwan). Most of the continuous control variables have an approximately symmetric distribution.

AQ AF T T2 LNTA ROA LOSS Big4 FORE Lev IGN AQ 1

AF - 1 0.064***

T - 0.195*** 1 0.056***

T2 - 0.197*** 0.967*** 1 0.049***

LNTA - 0.701*** 0.173*** 0.172*** 1 0.117***

ROA - 0.025*** - - 0.013 1 0.041*** 0.054*** 0.052***

LOSS 0.071*** - 0.014* 0.016** - - 1 0.058*** 0.123*** 0.642***

Big4 - 0.413*** 0.094*** 0.096*** 0.411*** 0.008 - 1 0.078*** 0.025* **

FOREIG - 0.018** 0.007 0.004 0.002 0 -0.012 - 1 N 0.093*** 0.017* * 165 Lev 0.170*** 0.200*** 0.069*** 0.070*** 0.241*** - 0.250* 0.100* - 1 0.372*** ** ** 0.093* ** ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

5.2. Univariate analysis Table 2 reports the correlations among the variables in the regression. Audit fees are positively correlated with audit tenure and the square of audit tenure. We observe a negative and significant correlation between audit fees and our measure of accruals quality (AQ). These results suggest that higher fees are associated with higher audit. Notably, our measure of accruals quality is negatively correlated with auditor tenure T and the square of auditor tenure T2, suggesting that longer tenure is associated with higher audit quality, consistent with prior literature. It is not surprising that auditor tenure and firm size are highly correlated (0.195***), so are the T and the square of auditor tenure T2and firm size (0.197***). The significant results in later regression analyses indicate that the multicollinearity between auditor tenure and firm age is not a problem.

However, care needs to be exercised when interpreting the Pearson correlation coefficients; this is because they cannot provide a reliable indicator of the association in a manner that controls for additional explanatory variables (Pallant, 2001). Therefore Tests were performed for detecting the level of collinearity among the independent variables in the mode for detecting the multi-collinearity among the independent variables in the model. The Multicollinearity was tested by finding the variance inflation factor values for independent variables relevant to the model. The values of the variance inflation factor greater than 10 and tolerance factor closer to zero will show the presence of Multicollinearity in the audit fees model. The result shows no signs of Multicollinearity in the models

5.3. Empirical Analysis This section discusses the results from the tests of my hypotheses presented in the third section of our study. We first present the results of the relation between auditor fees and audit quality. Next, the current study discusses the results on the impact of auditor tenure on audit quality. We end this section with the results on the effect of audit fees and audit tenure both simultaneously on audit quality.

5.3.1. The Impact of Audit fees on audit quality implied accruals quality In this section, we examine the relation between audit fees and audit quality. As described in previous sections, we employ the accruals quality measured by standard deviation of the residual (AQ) as the proxy for audit quality. We posit that a positive association between audit fees and audit quality, therefore, negative relationship between audit fees and the proxy for audit quality (AQ). This assumption is consistent with economic bonding rather than auditor reputation concerns.

We observe that audit fees are significant and positively related to the proxy which has been used for audit quality AQ; i.e. the higher the total audit fees the lower the quality. Audit fee is found to be positively related to our proxy of audit quality at 10% significance level (β = -0.024, p < 0.10). This association is significant and inconsistent with the univariate results presented in the previous section. The coefficients on the control variables are, by and large, also consistent over time. These results provide evidence in support of the view delineated above and those suggested in Kinney and Libby (2002); i.e. that economic bonding between clients and incumbent auditors can be empirically discerned by segregating the unexpected portion of the total fees. Furthermore, the presented result is inconsistence of the view of several studies which suggest that higher audit fees are associated with higher audit quality in order to compensate for the high-price of reputation (see Simunic, 1980; Ferguson and Stokes, 2002). It can be concluded that the first hypothesis (H1) is rejected, meaning that audit fee has significant effect on audit Quality, but The influence of audit fee on audit quality is negative, which means that the higher audit fee, the lower the audit quality is. The results are inconsistent with a research conducted by Yuniarti (2011) and Venkataraman, Weber and Willenborg (2008) which state that audit fee affect the audit quality. However, the results consistent with studies conducted by Sundgren and Tobias (2011) which state the audit fee have a negative impact on audit quality.

166 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 3 Regression Analysis The Impact of Audit fees on Audit Quality

AQ = β0 + β1 AF + β2 LNTA + β3 ROA t + β4 LOSS +β5 BIG4+ β6 SUBS + β7 FOREIGN + β8 LEV + industry dummiest + year dummiest + ut

Variable Name Coeff. T-statistic P-value Constant 0.120*** 4.27 0.0000 AF 0.024* 1.82 0.0690 LNTA -0.059*** -9.77 0.0000 ROA -0.080*** 4.9 0.0000 LOSS 0.010*** 3.12 0.0020 Big4 -0.025*** -3.43 0.0010 FOREIGN -0.016* -1.84 0.0660 Lev 0.056*** 15.26 0.0000 Year YES Industry YES

Number of Observations= 6578 T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0.1 R-squared = 0.412 Adjusted R-squared = 0.408 F statistic = 16.11

AF = natural log of total audit fees paid to the auditor; LNTA = the natural log of the firm’s total assets; ROA =Return on assets defined as net income divided by total Assets; LOSS = An indicator variable equal to one if the audit client reported negative net income in either of the two previous fiscal years (zero otherwise); BIG4 = is An indicator variable equal to one when the auditor is a member of the BIG4 (zero otherwise); FOREIGN = an indicator variable equal to 1 if the company has foreign operations (zero otherwise); LEV = total liabilities to total assets ratio.

5.3.2. The Impact of Auditor tenure on audit quality implied accruals quality Table 4 presents the results of model (3) testing the auditor tenure effects. The regression results for the full sample do indicate significant coefficients for audit tenure T, but don’t indicate significant coefficients for the square of audit tenure T2. However, the negative relation between T and AQ (the coefficient on T is -0.014) indicates that accrual quality improves as tenure lengthens. As predicted, the coefficient on T2 is positive (0.004), but its insignificant. The statistically significant negative sign on T suggesting that accrual quality initially increases with tenure at the early stage but there is no evidence supports that at later decreases with tenure at the later stage. One could draw the conclusion that the Learning Effect is likely to dominate the Bonding Effect in the earlier years of the auditor- client relationship. Even though the business environment is dynamic and constantly changing, the incremental information to learn over time tends to decrease and evens out at a certain point. The result for earlier years is consistent with Jackson et al. (2007) which state that the audit tenure can provide auditor a better understanding of his clients, thus increasing audit quality However, over the time, the insignificant coefficient of the square of audit tenure T2 don’t support our second

167 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 hypothesis. One possible explanation for such result that our study's period is only for five years, in such short period, we can't discover long term effect.

Table 4 Regression Analysis The Impact of Auditor tenure on Audit Quality AQ = β0 + β1 T + β2 T2+ β3 LNTA + β4 ROA t + β5 LOSS +β6 BIG4+ β7 FOREIGN + β8 LEV + industry dummiest + year dummiest + ut Variable Name Coeff. T-statistic P-value Constant 0.151*** 6.06 0.0000 T -0.014** -2.06 0.0400 T2 0.004 1.14 0.2530 LNTA -0.062*** -11.80 0.0000 ROA -0.083*** 5.25 0.0000 LOSS 0.009*** 3.00 0.0030 Big4 -0.032*** -3.16 0.0020 FOREIGN -0.014** -2.14 0.0320 Lev 0.057*** 16.02 0.0000 Year YES Industry YES

Number of Observations= 6,957 T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0.1 R-squared = 0.388 Adjusted R-squared = 0.372 F statistic = 17.33

T = the number of consecutive years that a firm has retained the auditor; T2 = the square of T; LNTA = the natural log of the firm’s total assets; ROA =Return on assets defined as net income divided by total Assets; LOSS = An indicator variable equal to one if the audit client reported negative net income in either of the two previous fiscal years (zero otherwise); BIG4 = is An indicator variable equal to one when the auditor is a member of the BIG4 (zero otherwise); FOREIGN = an indicator variable equal to 1 if the company has foreign operations (zero otherwise); LEV = total liabilities to total assets ratio.

5.3.3. The Impact of audit fees and audit tenure simultaneously on audit quality With regard to Model 4 that includes only audit fees AF and audit tenure AF*T and AF*T2, we observe significant and negative coefficients between our proxy of audit quality AQ and AF*T, but on other hand, we observe insignificant positive coefficient between AQ and AF*T2. However, the negative and significant coefficient of AF*T (-0.031**) enhances the notion that when an auditor starts a new audit engagement he would spend more time to learn about the entity's business and it is also possible that the auditor may face special audit problems earlier in the tenure because of unfamiliarity with the client’s business, and thus may lead the auditors to increase his efforts, and therefore audit fees, to get information and make judgments on the accrual estimation errors, therefore, we observed higher audit quality in the earlier years of the auditor-client relationship. On the contrary,

168 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 the insignificant confection of AF*T2 don’t support our third hypothesis which suggest the in the later years of auditor tenure there is negative relationship between audit fees and audit quality.

Table 5 Regression Analysis The Impact of audit fees and audit tenure simultaneously on audit quality AQ = β0 + β1 AF+ β2 AF*T + β 3 AF*T2+ β4 LNTA + β5 ROA t + β6 LOSS +β7BIG4+ β8 FOREIGN + β9LEV + industry dummiest + year dummiest + ut

Variable Name Coeff. T-statistic P-value Constant 0.055*** 4.36 0.0000 AF 0.026** 2.1 0.0360 AF*T -0.031** -2.08 0.0370 AF*T2 0.007 1.11 0.2670 LNTA -0.055*** -9.82 0.0000 ROA -0.078*** 4.82 0.0000 LOSS 0.010*** 3.07 0.0020 Big4 -0.035*** -3.22 0.0010 FOREIGN -0.013* -1.84 0.0650 Lev 0.055*** 15.05 0.0000 Year YES Industry YES

Number of Observations= 6578 T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0 R-squared = 0.453 Adjusted R-squared = 0.439 F statistic = 15.92

AF = natural log of total audit fees paid to the auditor; T = the number of consecutive years that a firm has retained the auditor; T2 = the square of T; LNTA = the natural log of the firm’s total assets; ROA =Return on assets defined as net income divided by total Assets; LOSS = An indicator variable equal to one if the audit client reported negative net income in either of the two previous fiscal years (zero otherwise); BIG4 = is An indicator variable equal to one when the auditor is a member of the BIG4 (zero otherwise); FOREIGN = an indicator variable equal to 1 if the company has foreign operations (zero otherwise); LEV = total liabilities to total assets ratio.

6. Conclusion This study was conducted to determine the effect of audit fee and audit tenure on audit quality either partially or simultaneously in the Chinese capital market setting. One important characteristic of China's reforms is the very uneven economic and legal development across the country. We believe that the differences in regional development can have profound effects on auditing (including audit quality. Using Chinese data and the standard deviation of residuals from regressions relating current accruals as proxy for audit quality, we document a negative effect of audit fess on audit quality and this result is consistent with economic bonding being a determinant of auditor behavior rather than auditor reputational concerns. However, for audit tenure and audit quality we propose that audit

169 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 quality is likely to increase with audit firm tenure due to a Learning Effect and decrease with audit firm tenure due to a Bonding Effect. The results support our argument that in the earlier years of audit tenure when the Learning Effect dominates Bonding Effect, then the audit quality will be higher. However, we fail to find significant relationship between audit tenure and audit quality in the later years due to shorthand of study's period. Furthermore, taking audit fees, audit tenure and audit quality together, we find positive association between audit fees and audit quality in the earlier years of auditor tenure.

The findings of our study have important implications for policymakers, auditors, multinational firms, and users of financial reports. As the rapid growth of China's economy gains global recognition, the Chinese stock market is capturing the attention of international investors. One important question that international institutional investors who enter the Chinese stock market must consider is whether the auditors and related arrangements play an effective role in mitigating information asymmetry. Given that other transitional and emerging markets exhibit some similar characteristics to China (e.g., poor legal and market infrastructure); our results may have some resonance for these countries. Furthermore, this study sheds some light on the debate about the boundaries of securities regulation. Many scholars support the helping hand theory of regulation, which argues that regulation by means such as mandatory audit rotation is beneficial, because it protects investors and promotes the growth of markets by increasing the supply of reliable information. Furthermore and importantly, our findings suggest that high audit fees do not always correlate with high audit quality. This has implications for academic research that uses audit fees as a proxy for audit quality or earnings quality. For audit fees literature, the present study indicates that the relationship between audit fees and accruals quality depends on the time period examined and the length of auditor tenure.

Our study is subject to a number of limitations. First, to simplify our empirical analysis, we assume a quadratic model correctly captures the true relation between auditor tenure and audit quality. However, future research may refine this simplified model and assumption. Second, this study relies on accrual quality to measure the audit quality. Using accruals might be a noisy proxy and thus, the measurement error associated with any estimation model may still drive my results. Third, our sample spans a timeframe consumed by regulatory changes and we only include audit fees in our empirical analysis to address the relationship between audit fees and audit quality due to the data constraints we couldn't find non-audit fees data. Fourth, perceived audit quality is vital for the efficient allocation of limited resources in the capital market. Therefore, whether my results extend to perceived audit quality also merit the consideration of future research. Finally, the audit committee takes on critical responsibility in ensuring the quality of financial reporting and the hiring and monitoring of auditors. Thus, without considering the effect of the audit committee, this study may have a correlated omitted variable problem. Therefore, it is worthwhile for future research to explore the role that the audit committee plays in the relation between auditor tenure and audit quality. Thus, we defer further investigation of this limitation to future research.

References

Boone, P., Khurana, K., & Raman, K. (2008). Audit Firm Tenure and the Equity Risk Premium. Journal of Accounting, Auditing & Finance, 23 (1): 115-140.

Chi, W., & Huang, H. (2005). Discretionary Accruals, Audit-firm Tenure and Audit-partner Tenure: Empirical Evidence from Taiwan. Journal of Contemporary Accounting and Economics 1: 65-92.

Chen, C., Lin, C., & Lin, Y. (2008). Audit Partner Tenure, Audit Firm Tenure, and Discretionary Accruals: Does Long Auditor Tenure Impair Earnings Quality? Contemporary Accounting Research, 25(2): 415 – 445.

DeAngelo, E. (1981). Auditor Size and Audit Quality. Journal of Accounting and Economics, 3, 183- 199.

170 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Davis, R., Soo, S., & Trompeter, M. (2009). Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts, Contemporary Accounting Research, 26: 517-548.

Dechow, P. & Dichev, I. (2002). The quality of accruals and earnings. The Accounting Review, 77( Supplement):35-59.

Elitzur R. & Falk, H. (1996). Planned audit quality. Journal of Accounting and Public Policy, 15(1): 247-269.

Firth, M., Rui, O. & Wu, X. (2012). How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China. The International Journal of Accounting, 47 (2012): 109–138

Fama, E. & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43(2):153- 93.

Fan, J., Tak, W., & Tianyu Z. (2007). Politically connected CEOs, corporate governance, and post- IPO performance of china's newly partially privatized firms. Journal of Financial Economics, 84:330- 357.

Francis, J., LaFond, R., Olsson, P. & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(1):295-327.

Fang, X., & Hong, Q. (2008). Abnormal audit fees and their damage to audit quality. China Accounting Review 6: 425-442.

Francis, R., & Simon, D. (1987). A test of audit pricing in the small- client segment of the USA. Audit Market. The accounting review, 62 (1): 142-157.

Ferguson, A., & Stokes, D., (2002). Brand name audit pricing, industry specialisation and leadership premiums post Big 8 and Big 6 mergers. Contemporary Accounting Research, 19:77-100.

Ghosh, A., &Moon, D. (2005). Auditor Tenure and Perceptions of Audit Quality. Accounting Review 80:585-612.

Geiger, M. A., and K. Raghunandan, 2002. Auditor Tenure and Audit Reporting Failures. Auditing: A Journal of Practice & Theory, 2(1): 67-78

Griffin, A., Lont, D., & Sun, Y. (2008). Corporate governance and audit fees: Evidence of countervailing relations. Journal of Contemporary Accounting & Economics. 4(1):18-49.

Giannetti, M., Guanmin, L., & Xiaoyun, Y. (2014). The brain gain of corporate boards: Evidence from china. Journal of Finance, 6(August):1-27.

Caramanis, C., & Lennox, C. (2008). Audit effort and earnings management. Journal of Accounting and Economics, 45: 116–138.

Gul, F., Jaggi, B., & Krishnan, G. (2007). Auditor independence: Evidence on the joint effects of auditor tenure and non-audit fees. Auditing: A Journal of Practice and Theory, 26 (2): 117–42.

Gul, F., Fung, Y., & Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors’ industry expertise. Journal of Accounting & Economics, 47 (3): 265–87.

Hoitash, R, Markelevicg, A & Barragato, A. (2007). Auditor fees and audit quality. Managerial Auditing Journal, 22, (8), 761-783.

171 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Hay, D., Knechel, W., & Wong, N. (2006). Audit fees: A meta-analysis of the effect of supply and demand attributes. Contemporary Accounting Research, 23(1): 141-191.

Jackson, B., Moldrich, M., & Roebuck, P. (2008). Mandatory audit firm rotation and audit quality, Managerial Auditing Journal, 23 (5): 420-437.

Krishnan, G., & Visvanathan, G. (2009). Do auditors price audit committee's expertise? The case of accounting versus no accounting financial experts. Journal of accounting, Auditing and Finance, 24, (1):115-144.

Kinney. R., & Libby, R. (2002). Discussion of the relation between auditors' fees for no audit services and earnings management. The Accounting Review, 77 (Supplement):107-14.

Knechel, R. (2001). Auditing, assurance & risk, southwestern. 2end edition.

Klein, B., &Leffler, K. (1981). The role of market forces in assuring contractual performance. Journal of Political Economy, 98: 615-641.

Linberg, L. (2001). Discussion of the demand for auditor reputation across international markets for audit services. The International Journal of Accounting, 36(4):429-432.

Larcker, F., & Richardson, S. (2004). Fees paid to audit firms, accrual choices, and corporate governance. Journal of Accounting Research, 42(3): 625-658.

Larcker, F., & Richardson, A. (2004). Fees paid to audit firms, accrual choices, and corporate governance. Journal of Accounting Research, 42(3):625-58.

McNichols, M. (2002). Discussion of the quality of accruals and earnings: the role of accrual estimation errors. The Accounting Review, 77(Supplement): 9- 61.

Myers, J., Myers, L., & Omer, T. (2003). exploring the term of the auditor-client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78(3): 779-799.

Mansi, S. A., W. F. Maxwell, and D. P. Miller, 2004. Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market, Journal of Accounting Research 42, 755-793.

Parasuraman, A., Zeithaml, Valarie A., & Berry, L. L. (1988). Seroquel: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing.64. (1). pp. 12-40

Simunic, .A. (1980). The pricing of audit services: theory and evidence. Journal of Accounting Research. 18(1):161-190.

Solomon, I., Shields, M., & Whittington, R. (1999). What do industry-specialist auditors know? Journal of Accounting Research, 37(1): 191–208.

Stanley, J., & Dezoort, T. (2007). Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects. Journal of Accounting and Public Policy, 26 (2): 131–59.

Simunic, A. (1984). Auditing, consulting, and auditor independence. Journal of Accounting Research, 22(2):679-702.

Srinidhi, N., & Gul, F. (2007). The differential effects of auditors’ non-audit and audit fees on accrual quality. Contemporary Accounting Research, 24(2): 595-629.

172 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Vanstraelen, A. (2000). Impact of renewable long-term audit mandates on audit quality. The European Accounting Review, 9(3):419-442

Yuniarti, R. (2011). Audit firm size, audit fee and audit quality. Journal of Global Management, 2(1):84-97

Acknowledgement

Firstly, I would like to express my sincere gratitude to my supervisor Prof. Wang xiong yuan, for his patience, motivation, and immense knowledge. His guidance helped me in all the time of research and writing of this article. My sincere thanks also goes to Mr. Albitar Khaldoon and Mrs. Jin Ping for the stimulating discussions, for the sleepless nights we were working together to write this article. Without their precious support it would not be possible to conduct this research. I would like also like to thank Zhongnan University of Economics and Law, the staff at the Accounting School for their efforts and assistance.

173 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Women on “board”: Economic turmoil and the presence of women in positions of influence in Greece

Anastasiou, S.1, Siassiakos, K2., Dermatis, Z.3 and Lazakidou, A.3 1 Business School, TEI of Central Greece, Greece, [email protected] 2 Supreme Council for Civil Personnel Selection (ASEP), Greece, [email protected] 3 Department of Economics, University of Peloponnese, Greece, [email protected]; [email protected]

Abstract

Since the beginning of the current global financial crisis, governments across Europe are trying to deal with recession and rising unemployment. Amidst this fierce international crisis, it would be “easy” to put aside issues such as gender equality and “focus” on economic recovery but this is a short-sighted perspective. Gender equality is vital for social and economic stability, long term sustainable development and growth. Societies that discriminate have a negative effect in their economic growth, weaker governance and a lower overall quality of life. The purpose of this paper is to examine the current situation and recent trends regarding the gender “balance” in key decision-making positions in Greece. For this purpose, a random sample from large organisations was surveyed. A gender gap was exhibited in several parameters including the wage differentials, female under- representation in higher levels decision-making positions in the public and the private sector and entrepreneurship. In fact, during the economic crisis the participation of women in Boards decreased in Greece and increased in the EU. The challenge for countries and international institutions is to prevent gender inequalities at work, particularly when societies experience financial hardship, as Greece is currently experiencing so dramatically.

Keywords: Equal Opportunities, labour market, gender gaps, financial crisis, Greece

1. Introduction

Since its beginning in 2008, the global financial crisis had an impact on the socioeconomic parameters of many national economies, affecting among other things banking systems and fiscal policies of many developed countries.

National governments are trying to deal with recession, credit freezes, and sharp decline in aggregated demand, investment and consumption, massive layoffs and the consequently dramatic rise in unemployment.

Although there is a sign of some improvement in labour market conditions in a number of countries, the recovery from the global economic crisis is uneven among national economies. Although in many economies, job losses initially affected mainly male employees, the medium effects seem to affect even more young people and women.

In Greece, the labour market situation remains till today very difficult with the lowest employment rate (50%) and the highest unemployment rate (25.6% in March 2015) in the OECD (OECD, 2015a). It has been estimated that 3 out of 4 unemployed people in Greece have been looking for work for longer than one year. In 2015 (June), long term unemployment rate in Greece was 18.2 % compared to 5.7% in the Euro Area. In 2015, almost 50% of 15-24 years old in Greece is declared unemployed while the unemployment rate of women is almost 30% compared to 10,2% in the EU28 (OECD, 2015b).

Amidst this international crisis, it would be “easy” to put aside issues such as gender equality and “focus” on economic recovery. This is a short-sighted perspective.

The purpose of this paper is to examine the current situation and recent trends regarding the gender “balance” in key decision-making positions with particular reference in Greece amidst the current financial crisis.

174 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

2. The issue of gender (in)equality in the labour market

2.1. Gender Equality

Gender equality is an important issue of a country’s economic and social development and effectiveness. It includes political, social and cultural dimensions. Economies that discriminate have a negative effect in their growth, weaker governance and a lower quality of life.

Main objective of gender equality policies is to ensure that everyone has the possibility to realise his/her full potential irrespective of their gender.

Gender equality at work is a multidimensional issue. Its key dimensions include: labour force participation, employment, earnings, job quality in terms of benefits, rights, opportunities for skills development (World Bank, 2013).

Despite the introduction and enactment of Laws and Directives for the provision of equal opportunities at work and the establishment of a general framework for the equal treatment and accessibility in employment and occupation, the phenomenon of gender inequality at work continuous to be a longstanding issue seen in various areas (Anastasiou and Siassiakos, 2014; Anastasiou et al, 2015).

There are many barriers that have been accounted for the difficulties women face in their efforts to rise to high level decision making positions. Apart of the “structural” barriers of bias and discrimination that to a large extend have been removed through relevant legislation and EU Directives, there are “stereotypical” barriers regarding the traditional preconceptions of gender roles where women are seen as primary caretakers of the household and family responsibilities and men as the primary family earners who hold high status positions in society (Kyriazis, 1998). These gender norms, where men are regarded as the main family “breadwinners” with women acting as “secondary earners,” often lead to unequal treatment in employment issues such as layoffs, job retention and rehiring (Green et al, 2010). Additional stereotypes involve perceptions on gender-based personal characteristics about the professional abilities and role(s) of men and women at work, male dominance in the administration, lack of awareness of the promotion system, lack of female role models, mentoring, peer support and networking (Lips and Kenner, 2007; Anastasiou and Papakostantinou, 2013).

2.2. Gender (in)equality and employment: The international reality

Research internationally suggests that organizations with a higher female representation at the most senior levels deliver stronger organisational and financial performance and better corporate governance. On the contrary, in cases where women have limited access to employment opportunities as in Asia and the Pacific, loses US$42 billion to US$47 billion annually have been reported (ILO, 2011).

Relevant research across countries underlines the reality that despite high level of education and the large percentage of female participation at work, there are still inequalities between man and women in issues like: wage gaps and female under-representation in higher levels decision-making positions both in the public and private sector (European Commission, 2013).

In fact, still there is no full equality between male and female employees in issues like:

- Political empowerment,

- Career advancement and participation in managerial and higher levels decision - making positions,

- Gender pay gaps. The gender pay gap can be seen in all countries irrespective of their Gross National Income (GNI) revealing that the issue of gender (in)equality at work permeates both wealthy and poorer countries. The average difference between male and female earnings is more than 15% while in several countries, like Estonia, exceeds 20% (European Commission, 2013). In OECD

175 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 countries, on average, women earn 16% less than men, with female top-earners paid 21% less than men. Women are more likely to work part-time and are over-represented in job activities that are not well paid. Since pension benefits are often earnings-related, disappearances in career profiles between men and women can lead to large gender disparities in pension payments (OECD, 2015a). Relevant research in 2011 pin points that across OECD countries, pension payments to individuals aged 65 and over were on average 28% lower for women while even larger are the pension gap in European countries like Germany (pension gap almost 45%) (OECD, 2015a).

Similar is the case regarding women’s career advancement and participation in managerial and higher levels decision - making positions although gender diversity of European boards has slightly increased over the recent years. In 2014, about 20% of board directors were women compared to 8% although less than 3% of board chair positions are held by women. Women hold just over 12% of committee chair positions in Europe, suggesting that as more women gain experience in board service, gender diversity in top board leadership roles may increase (Egonzehnder, 2014). Of the 33 European countries covered by the Commission database in 2013, only two (Iceland and Norway) managed to achieve gender balanced boards of large companies (European Commission, 2013).

Even worst is the case regarding female political empowerment where women occupy less than a fifth of parliamentary seats worldwide (OECD, 2015a). In 2012, for example, only about 20 % of national parliamentary seats worldwide were held by women politicians, who usually hold ministries with a socio-cultural focus (OECD, 2012). In the EU, women account (Aug. 2015) for 27% of senior ministers in national governments.

Similar to the international experience, in Greece, gender disparities can be viewed not only regarding pay differences but in broader areas especially in economic participation and opportunity and political empowerment (Table 1). Till today and in spite the large percentage of women’s enrolment in tertiary education, there are inequalities between man and women in Greece in issues like: wage differentials, female under-representation in higher levels decision-making positions in the public and the private sector and entrepreneurship (Tables 2, 3).

Table 1. Gender Gap Index – Greece’s overall Rank since the beginning of the crisis (2008-2014)

Gender Gap Index - Greece Rank Score *

2014 91st out of 142 Countries 0,678

2013 81st out of 135 Countries 0,678

2012 82nd out of 135 Countries 0,633

2011 56th out of 135 Countries 0,692

2010 58th out of 134 Countries 0,691

2009 85th out of 134 Countries 0,666

2008 75th out of 130 Countries 0,673

* The highest possible score is 1.00 (equality) and the lowest possible score is 0.00 (inequality)

Source: Information extracted from WEF. The Global Gender Gap Report 2014 (November 5th 2015)

Women are still noticeably under-represented especially in senior public decision-making positions, as in the case of the political realm where women are outnumbered by men as MPs and in ministerial positions (Table 3).

176 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 2. Greece’s Score in 4 main Gender Gap Index parameters (2008-2014)

Educational Health & Economic Political Attainment Survival Participation Empowerment (Score) (Score) (Score) (Score)

Year 2014 0.995 * 0.979 0.643 0.096

Year 2013 0.995 0.974 0.647 0.097

Year 2012 0.994 0.974 0.633 0.086

Year 2011 0.994 0.971 0.624 0.177

Year 2010 0.994 0.971 0.621 0.177

Year 2009 0.993 0.979 0.607 0.086

Year 2008 0.994 0.979 0.631 0.086

* The highest possible score is 1.00 (equality) and the lowest possible score is 0.00 (inequality)

Source: Information extracted from WEF. The Global Gender Gap Report 2014 (November 5th 2015)

Table 3. Share of female participation in Education, Senior Office, Legislative& Ministerial positions, Boardrooms, Firms’ ownership (2014)

Indices of female participation in % of Women positions of influence in Greece

Enrolment in Tertiary Education 50.7

University Professors 26.9

Wage equality for similar work 39.4 (survey)

Legislators, Senior Officers, 25.4 Managers

National Parliament (MPs) 21.2

Ministerial Positions 5.7

Board Members on listed Companies 9.0

Participation in Firms’ ownership 24.0

After WEF. The Global Gender Gap Report 2014 (November 7th 2015)

The economic crisis did not improve the gender gap in the participation of women in Boardrooms. In fact, during the economic crisis the participation of women in Boards decreased in Greece and increased in the EU (Figure 2).

177 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

25 EU %

20 GR%

5 % Women in Boardrooms inBoardrooms Women %

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 1. Participation of women in Boards in Greece (squares) and in the EU (triangles) during the economic crisis. (Data extracted from Eurostat database)

2.3. Equality at work and economic crisis

In periods of economic crises “everybody loses”. Internationally, progress in gender equality at work is stalled or even increased during recession, worsening economic conditions and deteriorating even more the position of women at work (World Bank, 2011; Kazandziska et al, 2012).

At the onset of the current economic crisis, both male and female employment was dramatically reduced. In countries like Germany, UK, Denmark and Slovakia male employment was hit first by the crisis but was soon reversed as economic sectors with more female employees were affected negatively after a few years into the global financial crisis (Lindström, 2013). Female job losses were higher, reviving and/or reinforcing traditional norms on gender roles and the key role of men as primal breadwinners and as such as the “legitimate” job holders.

In Greece, the current micro and macroeconomic conditions resulted in reduced government earnings, rising public debt and business uncertainty and unfavourable conditions for economic growth. Under such economic conditions, social inequality and the proportion of the population living in poverty has risen with unemployment in Greece and other neighbouring countries reaching unprecedented levels (Nicolik et al, 2013).

In countries like Greece, that have undergone recessions, austerity, major fiscal consolidation, long term wage and benefit cuts had a disproportionate impact on women and the gender gap. It could be argued that men and women were equally hit by the collapsing Greek economy. The international experience shows that the job market is segregated with men predominately employed in jobs that receive the “first” blow of a collapsing economy, like durable goods manufacturing industries and construction, whereas women may be more frequently employed in services, health, social services, teaching and family business (Otobe, 2011).

Women may have globally suffered initially less in terms of the number of jod losses, nevertheless in some cases this has been disproportionately more than men. In the private sector, for example, women frequently engage in forms of employment such as “non-standard paid work”, “informal paid work” and “unpaid work”, characterised by insecurity, temporality, seasonality and self-employment (Castells, 2000; Beck, 2000). Such forms of employment are related to higher levels of uncertainty, compared to a permanent work and characterized as precarious (Kim and Kurz, 2003; Mills and Blossfeld, 2003) with workers who experience such forms of employment facing economic, temporal and social uncertainty.

178 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

In Greece, after the implementation of austerity measures, depression has been much deeper than expected, inducing among other things a sharp rise in unemployment, especially for the young and women. Since 2010, the percentage of female employment in Greece has dropped, from 49% to 41.5%. In late 2011, 67.4% of Greek young women (15-19 years of age) were unemployed – an almost 40% increase since 2008 (Anastasiou et al, 2015). At the end of 2012, the highest unemployment rates were 48.2% for young women (20 –29 years of age) as against 39.2% for men of the same age (G.S.G.E., 2012). In the EU, Greece has the largest female unemployment and the most important gap between female and male unemployment (Tudora et al, 2015).

After six years of recession and although Greek economy is showing some signs of recovery, unemployment has reached unprecedented levels with both male and female employment keep decreasing (Figure 2). More than 70% of the unemployed have been without a job for more than one year and almost half for more than two years. In July 2015, 48.6% of young active population in Greece was unemployed - the highest in the European Union - with 21.5% male unemployment rate compared to 29.4 % female unemployment rate (ELSAT, August 2015).

Figure 2. % change in Female (squares) and Male (triangles) employment in Greece during the current economic crisis

The risk of poverty and social exclusion continues to increase and private investment is too weak to lead to a sustainable employment recovery in Greece (ILO, 2014).

Under economic crises and austerity, gender inequalities persist and new forms of discrimination may emerge (Tsiganou, 2014). Austerity measures impair work and pay equality progress and may even re- enforce the “traditional” stereotypes on gender roles and responsibilities (Karamessini and Rubery, 2013). Traditional views on gender roles, with men having the primal role as breadwinners with women’s role mainly on household responsibilities, can act as a barrier between women and their opportunities for a career (Eccles, 1987).

The slight decrease of gender gaps in employment, wages and working conditions in Greece over the last years does not reflect a “real” progress in gender equality but instead it has been attributed on the lower employment rates, the higher unemployment and the reduced earnings of both male and female workforce (Tsiganou, 2014).

3. Conclusion

Female labour force participation remains lower than male participation. Women account for most unpaid work, they are overrepresented in the informal sector and among the poor, face pay

179 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 differentials while female representation in senior public and private sector positions and entrepreneurship remains low (Elborgh-Woytek et al, 2013; Anastasiou and Siassiakos, 2014).

The costs of unequal opportunities at work are multirole: high turnover rates, skill shortages, constraints on growth and income (Bruegel and Perrons, 1985).

Apart of the social benefits of achieving gender equality, microeconomic and macroeconomic benefits of closing the gender gap include (Daly, 2007; European Union, 2012):

- Improvement of the global economy, employment growth, competitiveness and economic recovery - especially in periods of economic crises. Raising female labour force participation rate to specific male levels would raise, for example, GDP in the United States by 5 %, in Japan by 9% and in the United Arab Emirates by 12%.

- Positive implications for equity market performance and pension sustainability since more working women will have disposable income.

- Improved organizational and financial performance and anhancement of the quality of decision-making.

- Greater and better pool of skilled and motivated labour force.

- Enhancement of organizations’ reputation as equal opportunities employers. In Switzerland, for example, organizations can be awarded an equal pay logo if they have successfully implemented a “fair wage policy”.

- Creation of a fairer society.

Removing unlawful discrimination does not by itself guarantee that full participation and equality can been achieved. It is important to make up for the effects of unequal treatment in the past.

Towards this direction, apart of the legislative measures, non-legislative initiatives (European Commission, 2012, 2014) in national and corporate level can also help toward this direction. These include:

- Regular audits, gender equality plans and voluntary targets and quantitative goals for achieving equal representation of women in senior management and company boards. In Belgium, for example, a law has been introduced since 2012 specifying that differences in gender pay and labour costs should be outlined in companies’ annual audit.

- Transparent pay systems as a tool in achieving equal pay. This has been introduced in a number of European countries like Germany and Luxembourg aiming at monitoring whether equal pay exists between male and female employees.

- Work evaluations’ systems that are gender “unbiast” to ensure that work carried out - irrespective of gender - is of an “equal value”. In the U.K, for example, a Statutory Code of Practice on Equal Pay is published since 2011, acting as a guide on how equal pay legislation can be implemented in organizations.

- Publicity over the issue of equal opportunities at work. In Europe, a number of countries have taken initiatives like the Equal Pay Days with multiple activities taken by trade unions and women’s organizations like the provision of information regarding gender pay gap or holding meetings with government officials.

- Corporate policy in encouraging coaching, mentoring and networking for female employees and training provisions for female employees aiming at higher level positions.

- Promotion of a family oriented organizational culture and reconciliation between family and professional life by offering, for example, flexible work hours and further training and coaching for mothers returning to their work after maternity leave.

180 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

It is necessary to try and create a shift in attitudes and culture to support a positive change towards limiting inequalities at work and achieving greater female representation at senior public and private decision making positions allowing women to make full use of their professional skills and abilities.

Since gender equality is vital in achieving employment growth, competitiveness and economic recovery, it is vital that is not undermined as cuts are made across the labour market internationally (European Commission, 2013).

The challenge for national governments and international institutions is to prevent gender inequalities at work, particularly when societies experience financial hardship, as Greece is currently experiencing so dramatically.

References

Aguirre, D., DeAnne, L., Hoteit, C. Rupp & K. Sabbagh (2012), Empowering the Third Billion. Women and the World of Work, Booz and Company, San Francisco.

Anastasiou, S. & Siassiakos, K. (2014), “The importance of Equal Opportunities at Work: why should we care about it”,? Advances in Management and Applied Economics, Vol.4, No.6, pp.51-64.

Anastasiou S., Filippidis K. & Stergiou K. (2015), “Economic recession, austerity and gender inequality at work.Evidence from Greece and other Balkan countries”, Procedia Economics and Finance, Vol. 24, pp.41- 49.

Bruegel, I., & D. Perrons (1985), “Where do the costs for Unequal for Women Fall? An Analysis of the Costs of Unequal Pay and Sex Discrimination in the UK”, Gender, Work and Organization”, Vol. 2, No.3, pp.113-125.

Daly, K. (2007, “Gender Inequality, Growth and Global Ageing” Global Economics Paper No: 154, Goldman Sachs Economic Research.

Egonzehnder (2014), Egon Zehnder European Board Diversity Analysis with Global Perspective, UK.

Elborgh-Woytek, K., Newiak, M., Kochhar, K., Fabrizio, S., Kpodar, K., Wingender, P., Clements, B., & Schwartz, G. (2013), Women, Work, and the Economy: Macroeconomic Gains from Gender Equity. International Monetary Fund.

European Commission, (2012), Women in economic decision-making in the EU, Progress Report: A Europe 2020 initiative, EU, Brussels.

European Commission (2013), Women and men in leadership positions in the European Union, 2013: A review of the situation and recent progress, European Commission - Directorate-General for Justice, Brussels.

European Commission (2014), Tackling the gender pay gap in the European Union, Publications Office of the European Union: Luxembourg.

ILO & ADB (2011), Women and labour markets in Asia – Rebalancing for Gender Equality, ILO.

ILO (2014), Greece: Productive Jobs for Greece, International Labour Organization.

Green, D., R. King, & M. Miller-Dawkins (2010), The Global Economic Crisis and Developing Countries. Oxfam Research Report, Oxfam International, UK.

Karamessini, M., & Rubery, J. (2013), Women and austerity: the economic crisis and the future for gender equality. Routledge, London.

181 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Kyriazis, N. (1998), Women's employment and gender relations in Greece: Forces of modernization and tradition, “European Urban and Regional Studies”, Vol. 5, No. 1, pp. 65-75.

Lindström, T. (2013), What are the effects of the financial crisis on Gender Inequality? - The case of Greece. Lund University, Department of Sociology, BIDS.

Lips, H.M. & Kenner, E. (2007), “Effects on gender and dominance on leadership emergence: incentives make a difference”, Sex Roles, Vol. 56, pp. 563-571.

OECD (2012), Gender Equality in Education, Employment and Entrepreneurship: Final Report to the MCM 2012, C/MIN (2012) 5.

OECD (2015a). Employment Outlook: How does GREECE compare?, OECD, July.

OECD (2015b). Unemployment rate (indicator), OECD (Accessed 03/11/2015).

Karamanessi, M. (2012), “Labour market impact of four recessions on women and men in Greece: Comparative analysis in a long term perspective”, Social Cohesion and Development, Vol. 7, pp. 93- 104.

Tsiganou, J. (2014), “The Impact of Crisis on Gender Inequality: The Greek Case”, Social Inequalities in Europe, 20 June, Athens, Greece.

World Bank (2013), Gender at Work: A Companion to the World Development Report on Jobs, World Bank, Washington, D.C.

182 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

“Metalmanu, A Cluster of Metal Businesses in Western Macedonia, Greece”

C. Voulgaraki, A.Maropoulos, S.Papanikolaou, D. Stimoniaris and S. Maropoulos Department of Mechanical Engineering & Industrial Design, ΤΕΙ of Western Macedonia, Koila Kozani, Greece. E-mail: [email protected]

ABSTRACT.

Metalmanu is a Cluster of metal enterprises in Western Macedonia, Greece. It is an initiative of the Technological Research Centre of West Macedonia and is supported scientifically by the Technological Education Institute. It is made up by the Scientific Team (Members of Staff from scientific establishments) and the Metal Enterprises of the area. It was formed in 2008 and comprises approximately 250 businesses divided in five sectors quite different to each other but all with the same objective: Viability and Expansion.

It is hoped Metalmanu will become one of the approximately 800 clusters worldwide and will develop into one of the few successful clusters in Greece.

KEYWORDS Cluster, Metal Enterprises, Viability and Expansion, Scientific Support

1. INTRODUCTION

1.1 Regional Clusters

The role of clusters in a region is very important as they can offer opportunities for innovation and they can bring a wide range of benefits to both businesses and to the local and regional economy [1].

Regional Clusters promote innovation, enhance the economic growth of a region and give the opportunity to small and medium sized firms to develop. The problem of such firms is that they usually cannot afford to grow and modernize on their own so it is vital for them to be part of a network of similar enterprises so as to co-operate and thus be able to compete with large multinational firms. Regional Clusters are usually formed by SME’s in a certain geographical area where they stimulate and support collaboration, diffusion of knowledge and competitiveness among them [2].

Regional Clusters assist the firms to decrease their disadvantages and to change them into advantages, so they can participate in new markets [3]. In a Regional Cluster, there is cooperation between enterprises, universities and research centers of the region so that there is promotion of productivity of the firms, development of innovative strategies and increase in their competitiveness. In order to achieve Regional Clusters’ goals, cluster policies should be developed [4].

1.2 Cluster Policies

A cluster policy includes the development of the region and the promotion of innovation. It takes into consideration the type of enterprises that are going to collaborate with each other so they will contribute to successful operation of the cluster. Obviously, a cluster policy needs to

183 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 be in tune with the regional policy. For instance, in Greece there is no determining cluster policy but general cluster policies are all included in the regional policies which are under the umbrella of the Greek government policy. So, in many countries a cluster policy is not defined as an autonomous policy but it is part of regional policies [5-6].

The role of a cluster policy usually contains the diffusion of knowledge so there will be a guide to develop new and already existing clusters. Consequently, a fertile business environment will be provided suitable for the growth of clusters and adjusted to their needs. It is important that except for a cluster policy there are many factors that affect the creation and the development of clusters. There are a lot of cases that a government financial support is vital for the viability of a start up cluster but on the other hand there are instances that private actors undertake this financial role and they do not involve the public sector. Moreover, the presence of all types of enterprises in a cluster determines its successful growth, because there is a need for the existence of larger companies, of SME’s and start up’s so there will be a completed form of it [7].

Cluster policies strengthen cluster initiatives to create networks of cluster companies, research centers, universities and financial institutions [8]. The development of collaboration and networking of regional clusters promote R&D, support enterprises throughout their businesses, encourage and forward business products and services, so the potential benefits are the development and expansion of cluster firms and all the above contribute to the sustainable growth of the region [9].

1.3 Case Studies

The case studies reflect the relationship among the presence of clusters, innovation, regional and economic growth. Successful regional economic development matters only in combination with a good social and economic viability of a community [10-12]. The experiences gained from most clustering efforts seem to have been limited in most cases to a regional level, with very little transfer of knowledge or lessons learned to other clustering efforts at national or EU level [13-14].

Two case studies were selected and are presented bellow to show their successful duration (they exist until today). These examples also have specific characteristics that are similar to the key characteristics identified for the Region of Western Macedonia.

1.3.1. Cluster Effort in Sophia, Bulgaria [15]:

The Bulgarian ICT cluster Foundation “Bulgarian Cluster for Information and Communication Technologies” is a cluster initiative supporting emergence and development of clusters in the field of ICT in Bulgaria. The cluster was created in 2005 as a platform for fruitful dialogue and collaboration between ICT businesses and state administration. The Bulgarian ICT cluster has enjoyed government support, effectively defined and established itself within a broad range of organisations from business to infrastructure to education, and was launched with an agreement among ICT actors on the need for progress and active policy work at the government level. In the beginning, the main activities of the foundation were

184 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 focused to support government in elaboration of the basic ICT policies. Its main objective is ICT SME growth and development through promotion of cooperation, building competitiveness and creation of new business opportunities. ICT Cluster is a horizontal organization. It has ambition to create and to be a mentor of successful vertical clusters in different segments of ICT sector.

According to new economic challenges, in 2008 the organization changed its main priorities and focused all activities to help ICT SMEs to increase their competitiveness and to develop internationally. ICT Cluster is recognized as one of the core centers of cluster knowledge in Bulgaria. It is a member of several European cluster platforms and networks and maintains a very good relationship with many European and world clusters.

The main activities are devoted to reach the following goals:

 Creation of a favorable eco-system for further development of world class clusters in Bulgaria, particularly in ICT sector;

 Development of entrepreneurship, foundation of business skills, supporting establishment of national system for technology risk financing;

 Supporting ICT SMEs to increase their competitiveness, educate and train their management meet the challenges of global economy;

 Supporting innovation processes, boosting technology R&D in Bulgaria.

 Stimulate and support dialogue between state administration, enterprises and universities and research centers based on a triple helix approach.

1.3.2. Cluster Effort in Styria, Austria [16]:

Wood Cluster Styria (Austria, Holzcluster Steiermark GmbH) was established in 2001, and has grown into a mature cluster organization acting as (i) a vital regional interface between government, research, and business with manifold linkages beyond Styria and the forest- based sector; and (ii) essential innovation driver on regional to international level to improve the forest-based value added chain, and thus contributes to the overall regional economic development, especially in rural areas.

Wood is a potential regional strength for Southern Austria. The Technology Funds Program was an innovation scheme which focuses on strengthening the regional innovation system by implementing cross enterprise projects especially with intra-regional impact. This program was performed at the beginning of the cluster on very broad basis—enterprises need to address technology or skill issues common to a number of enterprises. The amount of funding (grants and subsidised loans) depends on factors such as the project difficulty, innovativeness and the number of companies that could potentially benefit.

Austria has adopted targeted support for innovation and technology transfer within the wood and digital media sectors. There is a high share of small businesses in the region and the program should result in increased competitiveness. Three types of activities are eligible:

185 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 intra-regional cooperation projects, projects in key sectors (wood is one of them) and cooperation projects between enterprises and R&D institutions.

Implications for the local and regional support institutions

• Start the clustering efforts with a open perimeter, do not set up the cluster players from the beginning, first define the new business or service the cluster should address, and then set the perimeter of the needed new value chain.

• Define the strategy to address the lead market together with the industry but independently from them, listen to the market leaders wherever they are, not only at your local industry. In close collaboration with its currently 147 cluster partners from forestry, sawmilling, pulp and paper industry, carpentry, window and flooring industry, HCS operates the Wood Innovation Center, a technology park dedicated to forest industries, and the ECW, a prototyping workshop and test bed for innovative ideas.

For several years, Holzcluster Steiermark GmbH operates its own Department for Internationalization with a clear focus on South East Europe. The internationalization team is active in the fields of forestry, biomass, innovation & cluster development, and timber construction with the aim to increase the wood consumption and knowledge on wood.

However, the effects of regional and cluster development policies over time are difficult to measure, as changes in economic indicators could be attributed to unrelated effects.

In the present work, a cluster of metal businesses is presented that has emerged out of governmental policies and more precisely out of the provision of financial incentives in the Region of Western Macedonia.

2. THE CASE OF METALMANU IN WESTERN MACEDONIA

2.1 The need of a metal cluster in Western Macedonia

There are many enterprises in Western Macedonia mainly in the sectors of metal, marble and timber. The collaboration among the local industry with the five power plants belonging to the Public Electricity Company has led to the creation of machining enterprises with important know-how and exceptional mechanical equipment. In addition all this industrial activity meant a great need for industrial buildings. Hence a big number of metal building construction enterprises and aluminum frame enterprises developed.

The Regional Authorities of Western Macedonia and the scientific community of the area realized the need for the Metal Industry of W.M with its numerous (approximately 250) factories and enterprises to develop and expand. Therefore, a cluster of the metal enterprises of Western Macedonia was formed, called Metalmanu (metal manufacture), in April 2009. It is made up by the Scientific Team (Members of Staff from the local scientific establishments) and the Metal Enterprises of the area aiming at their developing further and expanding as they now have the technical expertise and the trained technical staff to:

186 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

1. Claim more projects from the Public Electricity Corporation as some of the total budget is claimed by other enterprises outside W.M. To do this, local companies will have to co-operate so as to undertake the big projects which they cannot do individually.

2. Cross the borders of W.M. and find other markets within Greece.

3. Cross the borders of Greece towards the Balkan Countries which are now a new market within Europe and even aim at the Middle East.

4. Cover the need for R&D and Innovation.

The Technological Research Centre of Western Macedonia together with the Technological Education Institute have the suitable scientific and technical personnel, possess essential laboratory equipment in order to support scientifically this initiative and assist to enhance the further development of the metal cluster in Western Macedonia.

2.2. Description of “Metalmanu”

Metalmanu includes about 250 metal-enterprises in five sectors quite different to each other (machining, metal-construction, aluminum frames, special construction, trade materials and equipment), Table 1.

Table 1. Number of Metal Businesses in W.M.

Prefecture Machining Metal Aluminium Special Trade Total/ Construction Frames Construction Prefecture Materials

Equipment

KOZANI 27 27 74 3 4 135

GREVENA 3 9 9 2 2 25

KASTORIA 6 10 6 5 1 28

FLORINA 3 20 14 6 2 45

TOTAL 39 66 103 16 9 233

The Enterprises range from very small employing two or three staff to quite big with over fifty employees, Table 2. Most of them are family owned and this is the type of business the Greek Economy mainly depends on. Furthermore, they have the technical expertise and the trained technical staff to do a number of things. The entrepreneurs of the cluster have an intense interest for collaboration between them in order to deal with the improvement of production, competitiveness, research and innovation and entrance in new markets with high, qualitative requirements.

187 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 2. Total Data for the Metal Enterprises in Western Macedonia

Prefecture Number of Number Turnover Business of Employees KOZANI 135 823 60.983.440,00€

GREVENA 25 73 6.500.500,00€

FLORINA 45 71 5.195.000,00€

KASTORIA 28 45 2.367.000,00€

TOTAL 233 1012 75.045.940,00€

The contribution of the metal businesses’ turnover, which form the cluster, to the local economy is about 10% of the Regional Gross Domestic Product - GDP. These statistics were recorded at the period of 2008-2011, at the beginning of the economic crisis. A new analysis of the above data needs to be recorded again because of the new social-economic conditions.

“Metalmanu”, in general, aims to:

• Improve productivity and the quality of products and services.

• Enhance competitiveness, research and innovation.

• Develop new products and services adapted for the international market.

• Foster extraversion and access to new markets.

• Create an ‘ideal’ work environment.

“Metalmanu” has as principal target to differentiate the enterprises from the activity of the Public Power Cooperation (Fig.1) and its main objective is to enhance their viability and expansion. The cluster improves competitiveness and innovativeness of the metal enterprises of Western Macedonia and it strengthens the local, regional and national economy. Regional clustering strategies may help augment the competitive advantages of the firms, and compensate for their weaknesses, thereby allowing them to compete more effectively with various multinational competitors, each with their own diverse set of capabilities. This is the reason why there should be a subsidy for the cluster from National or European programs because “Metalmanu” needs opportunities to continue its function. “Metalmanu” started in 2009 from an initiative of the scientists of the Technological Research Centre and the entrepreneurs of the area. There was a memorandum that the participants signed to legalize the cluster. The participants are:

188 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

1. The Metal Enterprises of the Region.

2. The Research Technological Centre (Co-ordinator).

3. The Technological Institute of Western Macedonia.

4. The University of Western Macedonia.

5. The authorities of Western Macedonia (Region, Municipality, etc).

6. The Chambers of W.Macedonia (chamber of commerce, technical commerce, etc).

(a) (b)

Figure1. Map of Greece (a) and Map of PPC Stations in Western Macedonia (b)

Moreover, Metalamnu’s activities are:

1. The collaboration between the metal enterprises (participation in research programs, development of common projects).

2. The development of new products and patents research, technology and innovation.

3. The participation in National and European Programs.

4. The organization of scientific congresses, meetings, and the diffusion of knowledge between metal enterprises.

5. The promotion of extraversion and infiltration in new markets.

6. The use of laboratory equipment.

7. The certification of materials and products (resistance of materials, analyses, quality control).

8. The development of co-operations and the networking through, scientific institutions in national and international level.

189 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

2.3. “Metalmanu”Present Situation

Through a subsidy from the local development fund Metalmanu has visited Sweden (Jonkoping), Italy (Region of Toscany) and Germany to see best practices and gain knowledge and know-how and transfer it to the local busineesses in order to transform Western Macedonia in a Greek Region with a successful metal cluster. Furthermore, Metalmanu has developed a digital platform through which it advertises all the member- enterprises. This tool also informs all the members about the new research programs, exhibitions, congresses, new opportunities, new markets and technological news. Metalmanu supports with its experts and its state of the art technological equipment the enterprises so they find immediate solutions to their problems.

Specifically, at Technological Education Institute (TEI) of Western Macedonia there is a modern test center for industrial products and materials, the Center for Testing οf Materials and Constructions (CTMC). Its laboratories are equipped with hi-tech equipment and the highly trained professional staff guarantees precision measurements and analyses. As part of a higher education institute it is involved in applied research and participates in National and European programs.

Although “Metalmanu” has made a great effort, the economic crisis in Greece didn’t finally help it to address the barriers to higher competitiveness and innovation. The main problem is that the subsidy of the local development is over. Now, there is a need for new funding in order to continue its function which is vital for the whole region of Western Macedonia.

Despite the economic difficulties, the cluster management team of “Metalmanu”, has organized a lot of meetings for its members and in this way it managed to bring together the entrepreneurs so as to communicate to each other, assist co-operations between them, to inform them about European or National Programs and also to update their knowledge with new information such as ISO, quality control, etc. Moreover, “Metalmanu” has participated in conferences in order to promote its activities.

Finally, “Metalmanu” was benchmarked by the “European Secreteriat for Cluster Analysis” and was awarded the Excellence Initiative Bronze Label Certificate.

3. CONCLUSIONS

Nowadays, the intense competition and the rapid technological development require the cooperation of enterprises which are active in the same sector. It is important to create a network of metal clusters in Europe as a key factor in enhancing knowledge diffusion and best practice transfer. There will be an investigation of the geographical dispersion of firms in the regions and a digital platform of collaboration will be developed as it will be a useful tool with which the firms will be able to find ways to compete with multinational enterprises. Regional clustering strategies may help augment the competitive advantage of the firms, and compensate for their weakness, thereby allowing them to compete more effectively with various multinational competitors. This will be achieved if there is a benchmarking tool about the needs to be covered, and the techniques, the technologies and strategies that have to be

190 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 followed. So “Metalmanu” is important for the growth of the region of Western Macedonia and it also contributes to the prosperity of the state. The success of “Metalmanu” depends on new funding so there will be a motive for continual function of the cluster, whose role is crucial for the region of Western Macedonia.

4. REFERENCES

[1]N.Yelkikalana, E.Söylemezoğlua, A. Kıraya, R. Sönmeza, B. Ezilmeza and M. Altunb, “Clustering Approach as a Regional Development Tool”, Procedia - Social and Behavioral Sciences, vol.58, pp. 503-513, 2012.

[2]E.J.Feser and B.M.Edward, “National Industry Cluster Templates: A Framework for Applied Regional Clusters Analysis”, Regional Studies, vol.34.1, pp.1-19, 2000.

[3]S.Herliana, “Regional Innovation Cluster for Small and Medium Enterprises (SME): A Triple Helix Concept”, Procedia - Social and Behavioral Sciences, vol.169, pp. 151–160, 2015.

[4]D.D. Fundeanu and C.S. Badele, “Regional Innovation Cluster for Small and Medium Enterprises (SME): A Triple Helix Concept”, Procedia - Social and Behavioral Sciences, vol.124, pp. 405–414, 2014.

[5]C.Ketels, G. Lindqvist and O. Solvell, “Strengthening Clusters and Competitiveness in Europe. The Role of Cluster Organisations”, The Cluster Observatory, 2012.

[6]J.Nishimura and H. Okamuro, “Subsidy and Networking: The Effects of Direct and Indirect Support Programs of the Cluster Policy”, Research Policy, vol.40, iss.5, pp. 714–727, 2011.

[7]T.Broekel, D.Fornahl and A.Morrison, “Another Cluster Premium: Innovation Subsidies and R&D Collaboration Networks”, Research Policy, vol.44, iss.8, pp. 1431–1444, 2015.

[8]M.Porter, “Location,Competition and Economic Development: Local Clusters in a Global Economy” Economic Development Quartely, vol.14,iss.1, 2000.

[9] D.A. Wolfe, and M.S. Gertler, “Clusters from the inside and out: Local dynamics and global linkages”, Urban Studies vol.41,pp. 1071-1093, 2004.

[10] C.Chaplin, P.Cooke, L. D. Propris, S. MacNeill and J. Mateos-Garcia “Creative Clusters and Innovation: Putting creativity on the map”, NESTA, 2010.

[11] K. Dvojeda, F. Nagtegaal, M. Lengton & P. Datta, “Creative industries Analysis of Industry-Specific Framework Conditions”, Enterprise and Industry Directorate-General, Directorate D – “SMEs and Entrepreneurship”, Unit D5 – “SMEs: Clusters & Emerging Industries, European Union, 2013.

[12] A. Rodríguez-Pose, F. Comptour, “Do Clusters Generate Greater Innovation and Growth?, An Analysis of European Regions”, Department of European Economic Studies, 2011.

191 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

[13] Z.Yang, “The Role of Economic Clusters in Improving Urban Planning Support” Department of European Economic Studies.

[14] www.clustercollaboration.eu/documents/19868/0/best_practices_clusters-site.pdf

[15] http://www.ictcluster.bg/en/

[16] http://www.reram.eu/partners/consortium/hcs-wood-cluster-styria-austria.html

192 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Exploring the Relationship of Youth Entrepreneurship, in the light of entrepreneurial lectures in tertiary education, intentions and cultural background

Bampasis Eleftherios Scientific Associate of Innovation & Entrepreneurship Unit, University of Athens, Stadiou 5 str., Athens P.C 10562, Greece, [email protected]

Abstract

In the context of this paper we examine the relationship of Youth Entrepreneurship in the light of entrepreneurial lectures in tertiary education, intentions and cultural background. We suggest a form of Entrepreneurial Motivation Model based on “Theory of Planned Behaviour” which formed by (Ajzen, 1991). Theory of Planned Behaviour has also used of (Fayolle and Gailly, 2004; Krueger et al., 2000; Veciana et al., 2005). Our Entrepreneurial Motivation Model is evaluated for its validity by Structural Equation Modeling. We test the hypotheses that social norms influence the human behaviour in two ways: a) have an impact to personal traction to undertake business activities and b) a positive impact to self-efficacy (Edelman and Manolova, 2008; Peterman and Kennedy 2003). As independent variable will be set the intention of our sample to undertake entrepreneurial initiatives. That method allows the examination the causal factors of dummy variables. The collected variables are used in a multivariate multiple regression model formulation to evaluate the relative performance associated with them. For the results of econometric analysis we used the programme IBM SPSS AMOS 21 and IBM SPSS 20. Our final results of a research project based on 550 questionnaires (raw data) selected on a three years time period (2012-2014) by graduated students in University of Athens. It seems that entrepreneurial sessions among the students have positive attitudes on undertaking new business activities. (Zhao et al., 2005).

Keywords: youth entrepreneurship, motivation, education

1. INTRODUCTION In the context of this paper we examine how the entrepreneurship courses in higher education can contribute to positive change in the business culture by encouraging the entrepreneurial initiatives of students and graduates (Zhao et al., 2005; Bandura, 1982; Gist, 1987). The effective simulation of entrepreneurial activities in the educational process seems to affect the confidence of young potential entrepreneurs (self- efficacy) to undertake a business activity in the real economy, after their studies (Edelman and Manolova, 2008; Souitaris et al., 2007; Peterman and Kennedy, 2003). The assumption of the proposed model is that social norms can influence human behaviour in the direction of establishing a new start up enterprise by impacting both personal attraction he feels for entrepreneurial initiatives and effectiveness (self-efficacy). The raw data for further statistical analysis has been compiled from a specially designed questionnaire to be used for this purpose (Behling and Law, 2000). Most questions in the questionnaire constructed in a range of five possible answers (5-point likert-type scale). The questionnaire has been used with few variations and from other researchers (Kickul and Zaper, 2000); (Veciana et al., 2005; Ajzen, 1991, 2001 and 2002).

2. LITERATURE REVIEW - CONCEPTUAL FRAMEWORK The Theory of Planned Behaviour was originally presented as a Theory of Reasoned Action to predict the tendency of a person to behave in a certain way at a certain time and space (Ajzen and Fishbein, 1980; Fishbein and Ajzen, 1975). A key component of this model is that incentives human behaviour influenced by the attitude of the individual and depend on the subjective assessment of the risks and benefits of the result (Ajzen, 1985). The Theory of Planned Behaviour has been successfully used to predict and explain a wide range of behaviours around the Health and incentives, such as smoking,

193 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 alcohol, the use of health services etc. Theory of Planned Behaviour in the fiend of Education, distinguishes between three types of incentives: a) behavioural incentives, b) regulation incentives and c) control of behaviour incentives. Especially about control incentives, the Theory of Planned Behaviour consists of six theoretical structures which together represent control of a person in his behaviour. (Ajzen, 1991):

 Attitudes - Refers to the degree to which a person has formed favorable or unfavorable evaluations of his behaviour.  Behavioural motivation - Refers to mobilize factors which influence a given behaviour. The more powerful is the motivation for the implementation of the behaviour, the more likely this behaviour eventually implemented.  Subjective norms - Refers to personal beliefs of a person. The implementation of his subjective beliefs depends on whether other important people of his life applaud or not applaud this certain behaviour.  Social norms - Refers to the usual social codes of conduct at a group of people or a larger cultural base. Social norms are considered regulatory about the way a group of people take decisions in their own lives.  Perceived strength - Refers to the perceived presence of factors that facilitate the positive performance of behaviour. The perceived strength contributes to perceived behavioural control of the individual at each of these factors.  Perceived control behaviour - Refers to a person's perception of the ease or difficulty of applying a certain behaviour. The perceived behavioural control varies depending on the condition and action of a person. So, an individual has different perceptions of behavioural control according to the situation. This structure of the theory was led from Theory of Reasoned Action to Theory of Planned Behaviour. (Azjen, 1985; Ajzen and Madden 1986). The conceptual framework of this work is presented in Figure 1. Based on the Theory of Planned Behaviour (Ajzen, 1991; Kolvereid, 1996; Fayolle and Gailly, 2004; Krueger et al.,2000; Veciana et al., 2005, Linan, 2004). In the first stage of our analysis the model that we use is as follows:

Behavioural Model of Entrepreneurial Motivation

External (demographic) variables

Personal attraction

Perceived Social Norms Entrepreneurial incentive

Perceived Control Behaviour

Fig. 1: Model Specification of this Work

194 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

According the conceptual framework of this paper the main purpose of the questionnaire is to include questions intended to explore the impact of entrepreneurship education and culture in entrepreneurial incentives in the tertiary education. Specifically, we examine:

A) basic personal attributes of an aspiring entrepreneur (the need to achieve high targets, ability to self, creativity, a feel of independence, risk-taking appetite) B) Cultural - social environment that affects a person's behaviour (Azjen, 1991; Bandura 1993). The sample selection concerns graduates and postgraduates students from University of Athens. All the students who have responded to the questionnaire have had attended at least one entrepreneurship course and economy during their university studies. The final sample concerns 550 respondents and the raw data selected in three years time period (2012-2014). The questionnaire used to gather raw data consists of three (3) separate sections and thirty two (32) questions.

The first section includes ten (10) questions relating to social-demographic data. More specifically, in this section the respondents are asked to report their gender, in what age they attended entrepreneurship course, place of birth, religious beliefs, the department of University of Athens which was attended entrepreneurship lectures, the place of parents residence, as regards, the maximum educational level of parents, employment of father, mother. This section is important because it reveals the influence of cultural background in entrepreneurial incentives.

The second section of the questionnaire consists of a total of eleven (11) questions examining the intentions of students to create their own start-up company. Specifically, respondents are asked to report what they believe will offer them to start their own business, what factors will be an obstacle to their entrepreneurial decision, how capable they find themselves for entrepreneurship initiative, how likely they consider to start their own business at a five year period and in which sector they would like to start a new business. Also respondents answered what impact had the recent economic crisis in the decision establishing their own company and finally to answer what factors, such as the high cost, could be an obstacle for the development of youth entrepreneurship.

The third section, also consists of eleven (11) questions, which are aimed to evaluate the importance of entrepreneurial activities in tertiary education. Particularly, students evaluated the quality of education for entrepreneurial programs in higher education and also referred the factors that led them to desire attend entrepreneurship courses. According to the above review, we formulate the hypotheses to be empirically tested through the use of multivariate multiple regression. We propose the following hypotheses:

 H1: The social-demographics have a significant effect on incentives for establishing a new business.

 H2: The motivation of potential entrepreneurs are mostly personal choice that depends on incentives linked to the opportunity.

 H3: Personal attributes and self-efficacy of the aspiring entrepreneur have significant effect on the cultural elements and socio-demographic elements in establishing a new business.

195 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

3. METHODOLOGY – VARIABLES AND MEASURES Our Model of Entrepreneurial Motivation used variables arising indirectly through the answers to individual questions in the questionnaire. These variables are referred to the literature as «latent variables» (Wooldridge, 2009) and intended to approach the six theoretical structures, as they listed above in section “literature review – conceptual framework”. Applying factor analysis (principal component analysis) we are able to determine whether the questions in the questionnaire approach these six theoretical structures effectively. Initially, it is assumed that Question 15 refers to the “personal attraction” of the respondent. In this question the respondent is invited to express its intention and how likely is set up his own business in five year period. The figure below shows how we approach the concept of personal attraction (question 15): "How likely do you consider starting a real business in a five year period. In our analysis integrate a random error e1 for the q15 variable which based on the answers of respondents (figure 2).

Figure 2: Personal attraction as a non-observed variable Source: Author

Moreover, we approach the concept of "perceived social norms" by the responses to questions 17, 18, 19, 20 and 21, and examine the components that influence respondents to establish their own business, the impact of the economic crisis on their decision, how the economic crisis influence the decision to start a new business, under the general conditions prevailing in the country. The below picture shows that the perceptions social norms, as a non-observed variable it is approached by the responses to the questions 17, 18, 19, 20, and 21. Each of these observed variables associated with the corresponding random errors, as it shown in figure 3.

Figure 3: Recruit social norms as non observed variable Source: Author

196 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

The "perceived control behaviour" of respondents, approached from questions 13 & 14. These questions examine the self-efficacy of the individuals to establish a business in the future. In the picture below it seems that the "perceived control behaviour" approached from the answers to questions 13 & 14. The non-observed variable "perceived control" approached by the questions 13 & 14, which are observed variables with their corresponding random errors, as it is shown in figure 4.

Figure 4: Recruit control as non observed variable

Source: Author

Finally, the non-observed variable "business incentive" is approached from questions 11 & 12, which are expressing the motivation of respondents to the direction of taking business action. In the picture below shows the approach of non-observed variable of the observed variables which are shaped from the answers to questions 11 and 12. Thus, each of these questions displays random errors associated with these variables.

Figure 5: Business incentive as non observed variable Source: Author

By using principal component analysis we examine whether the questions (q11-q21) measure the four different theoretical structures: "Entrepreneurial incentive", "perceived social norms", "perceived control behaviour" and"personal attraction" (Freedman et al., 2012). Below, we present the results.

197 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 1: Table of factors (using principal component analysis) Πίνακας παραγόντων Παράγοντας 1 2 3 4 q11 0,741 0,078 -0,069 0,026 q12 0,656 -0,118 0,267 -0,25 q13 0,043 0,765 -0,276 0,085 q14 0,204 0,766 -0,168 0,063 q15 -0,02 0,187 0,511 0,453 q17 -0,055 0,151 -0,083 0,755 q18 -0,226 0,204 0,253 0,395 q19 0,389 -0,369 -0,006 0,457 q20 -0,001 -0,09 0,395 0,725 q21 0,218 -0,293 0,143 0,618 Principal Component Analysis.

As shown in the table, via the above questions we approach sufficiently the four conceptual structures. Through these conceptual structures we extract the four factors compatible with the original assumptions we have made. It is also important to examine whether the questions assumed that measure the same dimension, indeed measure the same factor. This appears from the correlations shown in the above table. High degree of correlation for each question indicates the factor that best explains (Freedman et al., 2012).

4. ENTREPRENEURIAL MOTIVATION MODEL The behavioural Model of Entrepreneurial Motivation is evaluated for its validity through the Structural Equation Model (Structural equation modeling (SEM)). This statistical technique allows to test the causal relationships using a combination of statistical data and qualitative assumptions. The structural equation model is a general, very powerful multivariate analysis technique that includes specialized forms of a number of other analytical methods (Kline, 2010). We use the “path analysis” method, according to which are assumed causal relations between the variables that concerns: a) the basic personal attributes of an aspiring entrepreneur and b) the cultural - social environment which affects a person's behaviour. As a dependent variable will be the intention of the sample for undertaking business activity. This method was chosen because it makes it possible to examine the causal relationship between the dummy variables.We investigate the relationships between variables using ANOVA variance analysis and cross tabulation analysis. Also we use a statistical test Pearson chi-square for testing independence between the variables. In the implementation of ANOVA analysis, the null hypothesis is that all groups are random samples of the same population. This is important because if the null hypothesis is not rejected, this will automatically mean that for different groups, resulting different averages and, therefore, there is a factor which also affects the results (Freedman et al., 2012). Based on the analysis of variance ANOVA, we check whether the demographic data of the sample have a significant impact on entrepreneurial incentives. For this purpose two different variables were created: the score of each respondent to Question 11 (q11) and the score to Question 12 (q12) which captures entrepreneurial disincentives. The higher the score to (q11), the more the respondent is mobilizing for entrepreneurship. Also, the higher the score in (q12), the more the respondent has disincentives to establish a new business (Table 2).

198 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 2: Test results ANOVA entrepreneurial incentives and disincentives based on demographic data of sample. ANOVA (p-values) Entrepreneurial Entrepreneurial incentives disincentives

Gender 0.045 0.045 Age 0.976 0.976 Place of Birth 0.427 0.065

Relegion 0.352 0.371 Department 0.000 0.038 Residence of 0.339 0.183 parents

Educational 0.705 0.239 Level of parents

Employment 0.372 0.267 father Employment 0.427 0.189 mother

As seen from the above table, the average score received by each student to questions 11 and 12 differ significantly by gender (p-values: 0.045 <0.05) and the department of university (p-values: 0.00, 0.038 <0.05). For all other categories, there is no statistically significant difference between the means of the groups regarding incentives, meaning that there is not significant affection to the entrepreneurial mobilization of respondents.

Also, we check whether the personal attributes and self-efficacy influence statistical significantly the entrepreneurial incentive and disincentive. For this purpose two different variables were created: the score of each respondent to Question 13 (q13) and the score to Question 14 (q14). They were created on this basis two variables which cumulatively indicate how high the degree of self-efficacy. Question 13 represents the personal attributes and question 14 the self-efficacy. As shown in the above table, the personal attributes, and the self-efficacy appear to have a significant effect on the business incentive and disincentive, as the p-value of the test is less than a significance level of 0.05. The results of variance ANOVA are presented below (Table 3):

Table 3: Test results ANOVA entrepreneurial incentives and disincentives, based on the personal attributes and self-efficacy.

ANOVA (p-values) Entrepreneurial Entrepreneurial incentives disincentives

Personal attributes 0.00 0.00 Self-efficacy 0.00 0.037

199 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Test results of ANOVA analysis to entrepreneurial incentives and disincentives which based on demographic data, personal attributes and self-efficacy of sample analyzed by path analysis, according to the model laid down in Chapter methodology. It seems that entrepreneurial education as a factor affects significantly the trend of undertaking a new business venture. Also, the entrepreneurial knowledge of the students appears to be applied prospectively for starting a new business. In conclusion, it seems that both personal attraction and entrepreneurial education (which affects perceived control through self-efficacy) are important variables of determing business motivation. On this basis, it is interesting to examine, if there is a dependency relationship between the entrepreneurial mobilization level (if total score is greater or smaller than zero) and whether respondents believed that implementation of entrepreneurial education can help them to start a new business activity. It is examined in what way business education affects the business motivation. In table 4 represented the results of cross-tabulation analysis with Pearson’s chi-square test is appropriate for categorical variables.

Table 4: Cross-tabulation of mobilization and entrepreneurial education Cross - tabulation Does Entrepreneurial education Total help you to start a new business activity?

Yes No other

Motivation Negative 9 10 4 23

Motivation Positive 363 88 76 527

Total 372 98 80 550

As shown in the above table, respondents who have a negative mobilization tend to respond more “No” in relation to the learning process of the entrepreneurship courses and starting a new business. The opposite happens with those who have a positive mobilization who tend to respond more “Yes”. Pearson’s chi-square statistical test gave height = 11.89 with a p-value 0.003 significance level. This means independence between the answers of motivated and non-motivated respondents undertaking a new business activity. In that case, there is a direct relationship between entrepreneurial education and business mobilization: if entrepreneurial knowledge provided is satisfactory, it will mobilize more aspiring entrepreneurs to start a new business.

Cross-tabulation Personal Total Attraction

Establish-ment Probably No Probably Yes Probability of (till betwee (0%) enterprise 50%) n probabilit (51%- y (100%) 99%)

200 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Motivation Negative 0 12 6 5 23

Possitive 65 206 238 18 527 Total 65 218 244 23 550

As shown in the above table, respondents who have a negative motivation in establishing a new business. These results may be verified through the statistical Pearson chi-square. Specifically, the statistical test is = 23.29 with a p-value 0.00. This demonstrates independence between the views of groups and hence the personal attraction actually affects a total mobilization.

Finally, for the purposes of the "path analysis" method, we suggest a variable which was created for demographics data and particularly for what seemed to have an effect on motivation (gender and university department). A dummy captures both the influence (multiplication of gender and age). Also, another variable was created: the business motivation (which represents scores of respondents on questions relating to incentives minus disincentives) to entrepreneurial activity. On this basis, when the result of subtraction is positive, it will mean that there are comparatively higher incentives, while if it is negative, there are more than disincentives.The table below shows the rates of the individual regressions and which expresses the above path analysis diagram.

Table 5: Analysis regression model with generalized least squares Regression Analysis (Generalised Least Squares) Depended Variable Independed Variable Factor Standard Error

Perceived behavioural External (demographic) 0.05 0.06 control variables

Perceived Social norms External (demographic) -0,05 0.09 variables

Personal Attraction External (demographic) 0.00 0.01 variables Perceived behavioural Perceived Social norms 0.32 0.03 control

Personal Attraction Perceived Social norms 0.00 0.00

Business Incentive Perceived behavioural 0.33 0.03 control

Business Incentive Personal Attraction -0,24 0.25

Business Incentive Perceived Social norms 0.01 0.03

As seen from the above individual regressions, the demographics of the respondents seem to have a positive effect on hires control (0.05), negative perceptions in social norms (-0.05) and no effect to personal attraction (0.00). Therefore, demographics (gender and age) have not any significant effect to the personal attraction, perceived social norms and perceived control behaviour in the sample. The perceptions social norms seems to have positive impact on the perceived control behaviour (0.32) and no effect to personal attraction (0.00). Finally, the Business Incentive seems to be affected of the

201 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 perceived control behaviour (0.33) and the personal attraction (-0.24). Also, the perceived social norms seems to have little effects to the business case (0.01).

5. CONCLUSION Based on the methodology followed in the context of this paper it seems that demographics play a small role in the formulation of the variables related to personal attraction, perceived social norms and perceived behavioural control. The perceived behavioural control seems to be the most important variable affecting the business case, along with personal attraction. In conclusion, the entrepreneurial lectures in tertiary education positively affects the self-efficacy and attitudes of students in the way of learning how to make a business plan and how to establish an enterprise, after their studies. Also, the empirical consideration of students who have attended entrepreneurship courses at the University of Athens shows that students increase their abilities, skills and knowledge by stimulating their business motivation and intention to undertake a business activity. It also came out that the fear of risk-taking is not an obstacle for those students who have completed courses in entrepreneurship.

REFERENCES [1] Ajzen I, Madden TJ (1986) Prediction of goal directed behavior: Attitudes, intentions and perceived behavioral control. Journal of Experimental Social Psychology 22: 453–474.

[2] Ajzen, I. (2001): “Nature and operation of attitudes”, Annual Review of Psychology, 52, 27-58.

[3] Ajzen, I. (2002): “Perceived behavioral control, self-efficacy, locus of control, and the theory of planned behavior”, Journal of Applied Social Psychology, 32, 1-20.

[4] Ajzen I (1985) From intentions to actions: A theory of planned behavior. In: Kuhl J, Beckmann J (eds) Action-control: From Cognition to Behavior. Heidelberg: Springer, pp.11–39.

[5] Ajzen I (1991) The theory of planned behavior. Organizational Behavior and Human Decision Processes 50: 179–211.

[6] Bandura, A. (1982). Self-efficacy mechanism in human agency . American Psychologist, 37(2), 122-147 .

[7] Bandura, A. (1993), “Social Cognitive Theory of Self-Regulation”, Organization Behavior and Human Decision Processes, 50, 248-287.

[8] Behling, O. and Law, K. S. (2000). Translating Questionnaires and Other Research Instruments. Problems and Solutions, Thousands Oaks: Sage Publications, Inc.

[9] Edelman, L. F. and Manolova, T. S. (2008). Entrepreneurship education: Correspondence between practices of nascent entrepreneurs and textbook prescriptions for success. Academy of Management Learning and Education, 7, 56-70.

[10] Fayolle, A. and Gailly, B. (2004): “Using the theory of planned behaviour to assess entrepreneurship teaching programs: a first experimentation”, IntEnt2004 Conference, Naples (Italy), 5-7 July.

[11] Freedman, D., Pisani, R., & Purves, R. (2012). Statistics (4th εκδ.). W.W Norton & Co

202 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

[12] Gist, M. E. (1987). Self-efficacy: Implications for organizational behavior and human resource management. Academy of Management Review, 12, 472-485.

[13] Kickul, J. and Zaper, J.A. (2000): “Untying the knot: Do personal and organizational determinants influence entrepreneurial intentions?”, Journal of Small Business and Entrepreneurship, 15 (3), 57-77.

[14] Kline, R.B. (2010). Principles and practice of structural equation modeling (Third Edition). New York: Guilford Press

[15] Kolvereid, L. (1996): “Prediction of employment status choice intentions”, Entrepreneurship Theory & Practice, 21(1), 47-57.

[16] Krueger, N. F. Jr., Reilly, M. D., Carsrud, A. L. (2000). Competing models of entrepreneurial intentions. Journal of Business Venturing, 15, 411-432.

[17] Krueger, N. F. Jr., Reilly, M. D., Carsrud, A. L. (2000). Competing models of entrepreneurial intentions. Journal of Business Venturing, 15, 411-432.

[18] Liñán, F. (2004): “Intention-based models of entrepreneurship education”, Piccolla Impresa / Small Business, Iss. 3, 11-35.

[19] Peterman, N. E. and Kennedy, J. (2003). Enterprise education: Influencing students' perceptions of entrepreneurship. Entrepreneurship: Theory and Practice, 28, 129-144.

[20] Souitaris, V. Zerbinati, S., and Al-Laham, A. (2007). Do entrepreneurship programmes raise entrepreneurial intention of science and engineering students? The effect of learning, inspiration and resources. Journal of Business Venturing, 22, 566–591.

[21] Veciana, J.M., Aponte, M. and Urbano, D. (2005): “University students’ attitudes towards entrepreneurship: a two countries comparison”, International Entrepreneurship and Management Journal, 1 (2), 165-182.

[22] Wooldridge, J. (2009). Introductory Econometrics: A Modern Approach (4th ed.). Cengage Learning.

[23] Zhao, H., Seibert, S. E., and Hills, G. E. (2005). The mediating role of self-efficacy in the development of entrepreneurial intentions. Journal of Applied Psychology, 90, 1265-1272.

203 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Service-Oriented Systems and Service Level Agreements applied in Health Information Technologies

Stella Christopoulou1, Theodore Kotsilieris2, Ioannis Anagnostopoulos3 and Vasiliki Dimopoulou4 1Dept. of Business and Organizations Administration, Technological Educational Institute of Peloponnese, Kalamata, Greece, [email protected] 2Dept. of Business and Organizations Administration, Technological Educational Institute of Peloponnese, Kalamata, Greece, [email protected] 3Dept. of Computer Science and Biomedical Informatics, School of Sciences, University of Thessaly, Lamia, Greece, [email protected] 4General Hospital of Kalamata, Greece

Abstract In nowadays, the majority of health care provision supported by Information Technology (IT) services including Internet, cloud tech, e-commerce, e-health etc. Some emerging issues around the application of these technologies and services are on the one hand their quality assurance, reliability and security. On the other hand research efforts also focus on their costing so as to allow potential users to enjoy the agreed service. Accordingly, a healthcare organization must fully investigate risks and its costs (operating, maintenance etc.) and apply appropriate metrics to assess the contribution of Information and Communication Technology (ICT) resources services and applications.

Towards this objective in cases that an organization outsourcing IT resources and services a useful tool that is widely used from enterprises within the contracts of information technology services trading is Service Level Management and Service Level Agreement (SLA). SLA is a contract between the user and the provider of the service. It is a document with legal validity that is part of a broader contract that accrues through the assignment and the provision of services to a third party partner.

The compilation of an SLA and the efficient monitoring of the offered services are of crucial financial importance. The SLAs management and the assessment of the measurements results performed are within the scope of every enterprise that provides such services in the field. Furthermore, software tools that focus on developing, managing and monitoring SLAs, are well-established.

Our work, thoroughly studies the issues of contract specifications, languages, standards and modelling of resource dependability for SLA-Based Services within the healthcare domain and analyzes them under the prism of the literature, research and business gained experience. Alongside, a detailed survey is attempted on specific characteristics of the SLAs of existing studies and especially in the healthcare field will be presented. Finally, we propose the development of an Integrated Health Economic Model for the Service Level Management in the health market.

KEYWORDS: Service-Oriented Systems; Service Level Agreement

JEL CLASSIFICATION CODES Health Economics (HE22)

Introduction Health economics [1], [2] is a scientific sector that consists of the ‘economics of health’ and the ‘economics of health care’. These sub disciplines are connected by the relationship between the state of health and the use of medical services. The ‘economics of health’ tries to explain individual health- related behavior on the basis of modern microeconomic theory and moreover seeks to determine whether there are health policies that are welfare improving. Also, the main issue of the ‘economics of health care’ is to explain the factors which determine the quantity and quality of medical services

204 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 produced in the economy and deals with the question of designing incentives for both suppliers and users of medical services.

Health economics involve methods and tools for the identification, measurement, valuation, and comparison of the costs (inputs) and benefits (outcomes) of two or more alternative options in order to improve medical and healthcare decision. Alternative options refer to the range of ways (treatments or activities) in which health care resources can be used to increase population health; for example, pharmaceutical and surgical interventions, screening and health promotion programmes [3]. Economic evaluation is used by policy makers and healthcare payers to inform medicine pricing and reimbursement decisions [4].

Generally, there several type of models, according to:

 whether all the model variables are deterministic, economic models can be classified as stochastic or non-stochastic models;  whether all the variables are quantitative, economic models are classified as discrete or continuous choice model;  the model's intended purpose/function, it can be classified as quantitative or qualitative;  the model's ambit, it can be classified as a general equilibrium model, a partial equilibrium model, or even a non-equilibrium model;  the economic agent's characteristics, models can be classified as rational agent models, representative agent models etc.

The various approaches to economic evaluation of health [1] compare the benefits of a health intervention to its cost. With regard to the benefits of the intervention, three alternative units of measurement can be distinguished:

 Natural units on a one-dimensional scale evaluation. The corresponding method of this evaluation is called Cost-effectiveness analysis. It measures outcomes in 'natural units', such as mmHg, symptom free days or life years gained.  Units of a cardinal utility function evaluation which maps the multi-dimensional concept of health into a scalar index. The corresponding method is called Cost–utility analysis that measures outcomes in a composite metric of both length and Quality of Life (QoL), the Quality-adjusted life year (QALY).  Units of money evaluation. The corresponding method is called Cost–benefit analysis. It costs and benefits are both valued in cash terms. Also in this category is included the Cost- minimization analysis in which the effectiveness of the comparators in question must be proven to be equivalent and Cost consequence analysis in which the outcomes are reported independently from costs.

A basic aspect in economics is the resource management. Consequently, a metrics framework for evaluation of economic resource allocation usually is used in service-oriented architectures (SOA). A SOA is an architectural pattern in computer software design in which application components provide services to other components via a communications protocol, typically over a network e.g. web and cloud services that supports content resource management [5]. A SOA provides a flexible architecture that unifies business processes by modularizing large applications into services. SOA management includes many interrelated functions such as Auditing, monitoring, and troubleshooting, Dynamic services or resources provisioning, Service lifecycle/state management, Scalability/extensibility and the Service-level agreement (SLA) management [6]. More specifically, an SLA identifies the service commitments of both service supplier and service buyer to each other at the limits of their responsibilities. SLAs include the definitions, the auditing functions, processes or outputs delivered from the service provider, and a set of pre-agreed performance levels [7].

205 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

The increasing use of SLAs can likely be explained by the increasing attention for outsourcing, which has become a popular and often used management technique [8]. Important reasons for the outsourcing of services include reduced costs, improved service quality and risk avoidance. Furthermore, outsourcing allows the client to exploit its expertise without distraction caused by non- core activities [8].

SLAs can be divided into two basic types: direct and indirect or support services [7]. The most frequently outsourced processes are Information and Communication Technology (ICT) applications [8]. SLAs are therefore most often used in the world of ICT and can be defined as “formal negotiated agreements that enable ICT organizations and their customers to collaboratively identify, discuss and manage ICT service expectations” [9]. An SLA should contain the following information: (a) services (b) service element requirements (c) service levels and (d) forms [7]. The SLAs are defined also at different levels, based on whether are targeted to different customer groups and/or supports different types of services e.g. Customer-based SLAs, Service-based SLAs, and Multilevel SLAs. Moreover, an organization may use an SLA as an internal business activity such as in ICT or in Human resource units, to enable quality of service to be benchmarked across different locations, departments or external service providers. Some of the common uses for an SLA would be for network operators and service providers, telecommunication service providers, Application Service Providers, Content Service Providers, Internet Service Providers, cloud computing service providers and outsourcing.

Aim and objectives of this study The broad aim of the study is to present the emerging models, applications, tools, and the factors likely to affect the success or failure of the Service Level Management (SLM) in health market. It also assesses whether the use of SLA contracts on ICT provides the tools with the capacities both for the implementation of the health as much as the proper evaluation of the services in order to be proposed for broader market entry. More analytically, the general objectives are: 1. Show the relative studies about the Healthcare management via ICTs supported by the use of SLAs. 2. Describe the Service Level Management models for ICT and SLA contracts on access to health services 3. Describe the formal structures that are used to describe the basic features and types of an SLA. 4. The applications of the SLM on ICT in health market (e.g. the government, development partners and health and medical public and private bodies) and how this explains the operation of SLA contracts. 5. Finally to highlight the need for the development of an Integrated Health Economic Model for SLM on ICT in the health market.

Methods The type of this review based on the methodological approach is a narrative review while also considered by its objective perspective [10] it is a model review.

Initially, for the needs of our research we searched in electronic databases (e.g. Scholar Google78 and ScienceDirect79) in accordance with specific searching criteria. We used as searching keywords the

78 www.scholar.google.com

206 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 proper combinations of the terms: service level agreement, service level management, health economics, Health Informatics, Health Information technologies and Information and Computer technologies. Accordingly we selected a large number of articles. We considered the relevance of these articles on the basis of our subject and of them chose finally 33 articles (Table 4) and included them in our review.

Table 4: The included articles in the review Νο Articles 1 (Aazadnia & Fasanghari, 2008) 2 (Bakalos, Kyriazis, Protonotarios, Varvarigou, & Barreto) 3 (Benharref & Serhani, 2014). 4 (Berbée, Gemmel, Droesbeke, Casteleyn, & Vandaele, 2009) 5 (Brandis, Dzombeta, & Haufe, 2014) 6 (Czajkowski, Foster, Kesselman, Sander, & Tuecke, 2002) 7 (Czekster, Fernandes, Sales, Webber, & Zorzo, 2011) 8 (Dinh, Lee, Niyato, & Wang, 2013) 9 (Evaluation, 2001) 10 (Faniyi, Bahsoon, & Theodoropoulos, 2012) 11 (Flynn, Gregory, Makki, & Gabbay, 2009) 12 (Group & Committee, 2006) 13 (Jrad, Tao, Brandic, & Streit, 2015) 14 (Karadsheh, 2012) 15 (Kertesz, Kecskemeti, & Brandic, 2014) 16 (Lamanna, Skene, & Emmerich, 2003) 17 (Larson, 1998) 18 (Liu & Ma, 2005) 19 (Lourenço, Santos-Pereira, Rijo, & Cruz-Correia, 2014) 20 (Ludwig, Keller, Dan, King, & Franck, 2003) 21 (Mac\'\ias & Guitart, 2015) 22 (Maurer, Emeakaroha, Brandic, & Altmann, 2012), 23 (McLaughlin, Burns, Toal, McKillen, & Sezer, 2012) 24 (Meziane & Benbernou, 2010) 25 (Mohanty & Xie, 2007) 26 (Nikolow, et al., 2013). 27 (Ranaldo & Zimeo, 2015) 28 (Reichl, Hausheer, & Stiller, 2003) 29 (Robert, Otrok, Quttoum, & Boukhris, 2012) 30 (Tebbani & Aib, 2006) 31 (Tikotekar, et al., 2008). 32 (Vilaplana, Solsona, Abella, Filgueira, & Rius, 2013) 33 (Yang, Nasser, Surridge, & Middleton, 2012)

Consequently the selected studies are compared and summarized on the basis of the existing theories and models. The results are presented in a qualitative rather than a quantitative level and discussed. Subsequently a Delphi method is used to gather expert opinions and to estimate our ideas. Then an introduction of a new model in the specific field of research is proposed.

79 www.sciencedirect.com

207 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Hence in following sections we will discuss about:

1. The healthcare management via ICTs (i.e market and ICT applications in healthcare), 2. the Service Level Management (i.e. Service Level Management models for ICT, the ICT services of providers described in SLAs and the measurements of SLAs) and finally 3. We focus on the SLM for ICT applications in the health market and proposed the development of a relative Integrated Health Economic Model in the specific domain.

Results Healthcare management via ICTs Outsourcing in information technology and e-business technologies (e-services, including IT applications, web, and cloud services) has led the software industry from software as products to software as services [11]. Initially in 2005, the researchers in the article [11] examined and estimated that service level management is an important factor concerning the adoption of application services. Using the Technology Acceptance Model obtained positive results about the use of service oriented electronic medical records.

Another study [12] about the management of primary care via eHealth services (Prescriptions, Medical Records, Email, Appointment system etc.) revealed that some patients perceive advantages (choice of appointment times and GP, easier communication with the practice, independence from receptionists), while others identified several disadvantages (lack of human contact, preference for conventional use, lack of IT or Internet experience and registration problems).

Also, the results of the study [13] depict that service oriented management along with the use of SLAs are useful for hospitals, as they improve people’s insight into processes, stimulate people to think about performance measurement and, in some cases, also lead to improved services. The main advantages of SLAs lie in improved process mapping and improved performance measurement. The contracts include SLAs relevant with different health domains and departments e.g. cleaning program, pharmacy (e.g. agreements on cooled medication), maintenance and operation of equipment, materials and technology, food services etc. [13].

Moreover, nowadays novel approaches are required to deal with increased demand for healthcare due to the growth of the aging population and the need for more innovative and cost effective solutions.

A valuable research [14] in Portuguese hospitals revealed that Service Level Management is one of the most critical processes for the management of information technology and products as services begin to be almost a necessary condition for the survival of ICT vendors. Also, it is identified that it is necessary to establish monitoring metrics to help in the evaluation of quality of service and provide real time information.

Market and ICT Applications in Healthcare Health care costs refer to the available resources of the health care system; for example, clinical staff and healthcare providers, capital equipment and buildings and consumables such drugs [3] and ICTs. ICT is a significant type of resource as may support eHealth services.

Accordingly, in creating an economic model of an eHealth application, we need to determine all the costs in a way that allows for a rational comparison. For example if we move from local to cloud computing architecture, we may compare the incurred cost of infrastructures and services as resources e.g. a server, storage, network, backup and archive, disaster recovery, software maintenance, help desk support, operational support personnel and infrastructure software costs. From the Quality of

208 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Service perspective these resources can be dynamically reconfigured to optimum resource utilization. This pool of resources is typically exploited by a pay-per-use model that is ruled by customized SLAs [15].

Service Level Management Service Level Management models for ICT The SLA Parameter Framework [16] provides a matrix for organizing parameters into six categories. The three parameter categories are 1) technology-specific, 2) service-specific and 3) technology/service-independent. The Customer has two interests: 1) impact on the single user and 2) aggregate performance for a defined period.

An essential issue in ICTs is to map activities such as computation or data transfer onto resources that meet the quality of service metrics requirements e.g. performance, cost, security, etc. [17].

We present the most common resource management models which require negotiation among application and resources to discover, reserve, acquire, configure, and monitor the required resources and the development and implementation of the relevant SLAs to deliver and perform the relative activities. Thus, some indicative examples from different ICT domains and research fields are depicted below.

Cloud models: The potential of accessing an infinite pool of computational resources at a drastically reduced price has made cloud computing popular. In nowadays, users have the option of selecting between multiple cloud providers and subsequently switching to a more reliable one in case of a provider’s inability to meet its SLA. In [18], the authors propose a novel dynamic data-driven architecture capable of realizing resource provision in a cloud federation with minimal SLA violations. One important element of any market mechanism is the pricing strategy adopted by both buyer and seller agents. Consequently, in this paper the jobs of the SLA are priced. For example is depicted the buying price computation. Thus, buyers (simulator instances) determine their private valuation for a job based on the following SLA parameters: (a) job priority and (b) expected job completion time. Their private valuation is determined by their utility function, which for buyer MS when allocating job J is defined by:

α β (1) where x1 and x2 represent price and reliability respectively;

U(x1) and U(x2) are price and reliability distribution functions respectively; and U(J) is the payoff derived from the execution of job J.

The co-efficients α and β represent the priority and expected job completion time as defined in the SLA.

The values of α and β are specified by the cloud user in the SLA such that the buyer’s objective reflects the actual weight of the job.

Consequently, the buyer seeks to maximize its utility function by meeting the job’s SLA constraint.

On the other is depicted the Selling Price Computation. Sellers (CSPs) compete in the cloud federation market to increase their profit. This means that they make trading decisions based on the utility they expect to derive from the execution of the job. The utility of a seller, when executing a job J is defined by:

209 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

(2) where S (J) is the selling price decision functions and C(J) is the cost incurred for executing the job. Eventually, the seller’s objective is to maximize its utility function at any given time.

Also, [19] presents a trust model for cloud markets, a capacity-driven utility model is adopted in [20] and a business-oriented cloud federation model for real-time applications in [21]. Moreover, [22] presents a framework for governance architecture management in cloud environments using a semantic perspective. Also, an interoperable and self-adaptive approach for SLA-based service virtualization in heterogeneous cloud environments has been established in [23].

Moreover in [24], the authors proposed a mapping approach that adapts SLA templates based on SLA mappings of users. It allows cloud users to define mappings between a public SLA template, which is available in the cloud market, and their private SLA templates, which are used for various in-house business processes of the cloud user. The simulation results of this research revealed that the use of heuristics within adaptation methods allows balancing the costs and benefits of the SLA mapping approach.

Finally, a study that describes architectures, applications and approaches of mobile cloud computing is described in [25].

Models for distributed systems: A resource management model applied in distributed systems is proposed in [17]. The model distinguishes three kinds of resource-independent service level agreements (a task SLA, a Resource SLA and a Binding SLA), formalizing agreements to deliver capability, perform activities, and bind activities to capabilities, respectively. Also a model of QoS Management in a Distributed Data Sharing and Archiving System is discussed in [26].

Web models: A stochastic model [27] for performance evaluation proposed as a model for QoS assessment in multi-tier web services, a dynamic privacy model is described in [28] and the Cumulus Pricing model as an adaptive framework for feasible, efficient, and user-friendly tariffing of Internet services described in [29].

Security models: A security policies and service level agreement to IaaS service model proposed in [30] to enhance security and transition.

Models for Networks and wireless systems: Nowadays, there is an explosion in the bandwidth consumed by sophisticated mobile communication devices. Consequently, QoS for traffic classes and flows has become a major issue for emerging wireless technologies, where the provisioning of SLA and QoS guarantees are vital for future operator business models and providers [31].

[31] proposes a full hardware implementation of a Weighted Fair Queuing packet scheduler. The architecture that has been implemented provides fine granularity QoS support for Internet traffic at multi-gigabit throughput rates. The circuit is ideal for deployment with high bandwidth wireline and wireless technologies where tiered services based on SLA’s are emerging for users and content providers.

Also, a distributed autonomic resource management model for Virtual Private Networks (VPN) is presented in [32]. This model needs to satisfy the VPN operators that have signed a SLA with the ISP to guarantee their QoS level.

Finally, a performance analysis of a novel Architecture for ubiquitous Mobile Communications (AMC) to integrate heterogeneous wireless systems is presented in [33]. The researchers’ proposal AMC eliminates the need for direct SLAs among service providers by using a third party, Network Inter-

210 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 operating Agent (NIA) and moreover, the number of SLAs required in AMC is also well determined for a given number of network operators.

Business models: There are some frameworks such as Information Technology Infrastructure Library (ITIL) for IT Service Management that consists of a set of guidelines that specify what an IT organization should do. More specifically in the paper [34] proposed an ITIL management based on Six Sigma business oriented approach to improve the Information Technology Service Management that also include one or more SLA processes. Six Sigma is a useful tool that may improve the management performance that is based on statistical measurement, drives quality improvement, and reduces operational costs that companies have used.

Service Level Agreement Definition Languages A Service Level Agreement Definition Language (SLA-DL) is a formal structure that is used to describe the basic features of an SLA. The most common characteristics are the following [35]:

 Parameterisation which refers to the ability of description of quantitative and moreover occasionally qualitative characteristics of services using the appropriate parameters.  Compositionality which refers to the ability of description of the services’ synthesis between different actors.  Validation which refers to the ability to control validation of syntax and cohesion of synthesized services.  Monitoring which refers to an automatic monitoring of the service provided.  Enforcement which refers to the possibility of agreed services in an automated manner via the implementation of the appropriate techniques. Some of the most known SLA-DLs are: a) The Web Service Level Agreement (WSLA) language is designed to capture service level agreements in a formal way to enable automatic configuration of both the service implementing system of the service providing organization as well as the system that is used to supervise the agreed quality of service. To facilitate automatic configuration the WSLA comprises: (a) a description of the parties, their roles (provider, customer, third parties) and the action interfaces they expose to the other parties of the contract, (b) a detailed specification of the service level parameters (SLA parameters) guarantees are applied to, and (c) a representation of the parties’ obligations that define the service level that is guaranteed with respect to the SLA Parameters defined in the service definition section [36]. b) The Service Level Agreement Legal and Open Model (SLALOM) that proposing an initial set of management mechanisms enhancing the SLA lifecycle. It consists of a specification for cloud SLAs that will allow the concise and clear description of SLAs in terms of the defined service quality attributes (objectives) and metrics [37] . c) The Generalized Service Level Agreement Model which is a language for SLA defined as an XML schema which implements the Generalized Service Level Agreement information model. It supports multi-party service relationships through a role-based mechanism. It is intended to catch up the complex nature of service interactivity in the broader range of SLA modeling of all sorts of IT business relationships and can be used by service providers, service customers, and third parties [38]. d) Service Level Agreement Language (SLAng) is a formal structure in an XML-based form for defining SLAs which rests on the description languages of the Web services (WSDL) and the server applications (J2EE, CORBA) [35].

211 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Types of SLAs In [35] are defined seven different types of SLAs. The authors of the article order the possible agreements between the different types of parties i.e. on the one hand identified in a reference model the Vertical SLAs which are the Application between applications/web-services and components, the Hosting which is between container and component providers, the Persistence between a container provider and an SSP and the Communication between container and network providers. On the other identified the Horizontal SLAs are the Service which is between component and web service providers, the Container between container providers and finally the Networking between network providers.

Responsibilities and Parameters (metrics) of SLAs For each kind of SLA a general structure is defined, including responsibilities of the client of the service, responsibilities of the service provider and mutual responsibilities to be complied by both of them. Responsibilities are expressed in terms of end-point, contractual and Service Level Specification (SLS) parameters (metrics or indicators) [35]. Metrics are definitions of values of service properties that are measured from a service providing system or computed from other metrics and constants. Metrics are the key instrument to describe what SLA Parameters mean by specifying how to measure the parameter values [36]. Some of the more common metrics that measure an SLA may include many measurements [7] [14] [16] [39] e.g. hours of service, response time, deadline for resolution, security service, serviceability, reliability, availability, performance, capacity, user satisfaction, business hours, request resolution time, recovery time, escalation procedures, emergency procedures, penalties, exclusions, interoperability, performance, responsibilities , integrity, confidence, latency, consistency etc. Finally, where a service provider fails to achieve the agreed service level, the service provider may pay “failure credits” to the client [7].

ICT Services of Providers described in SLAs More analytically, some of the more common ICT Services of Providers described in SLAs may be the following:  Network Infrastructure  Wireless and Mobile Computing  Telephony  Email  Web  User Account Provisioning  Application Software  Software licensing & patching  Minor software upgrades  Application server backup and recovery  User security & account management  Application data backup and recovery  Automated server monitoring  User security & account management  Application data backup and recovery  Automated server monitoring  IP Service with DSL Access

212 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

 Application service provided by the ISP to its Customers

Towards the development of an Integrated Health Economic Model for the Service Level Management in the health market The largest part of the health services are the hospital units. Consequently, it is necessary to equip hospitals with the means and methods needed to assure quality in their health services [13], which are the following:

 Conduct process mapping and performance measurement effectively and efficiently;  Efficiently manage the human and technological resources;  Concentrate on their core business - patient care;  Provide services at the highest quality possible

Moreover, in case of outsourcing health market services between the provider and the recipient of a service a SLA is applied. The relevant contracts made with healthcare organizations must respond to questions such as: (a) what services are included? (b) What impact exists when services do not work? (c) What actions can be taken by both parties? d) Who is responsible in case of default? [40] Accordingly we can imagine a health care organization as (a) a service buyer but also as (b) a service provider (i.e. telehealth and telecare services provision). For example, when a mobile user (recipient of health services) executes a mobile health application on the cloud, this may involve a software and/or data service provider (providing a software/data license), a mobile service provider, an Internet service provider and a cloud service provider. The recipient’s healthcare costs should be allocated between these actors with an accurate and reliable manner. Thus distinct SLAs are required among the entities that provide/enjoy a service from the other. All these SLAs must be compatible, complementary, clearly determined and complete.

Mobile service Mobile service Provider (1) Provider (2) S L 6 A A 1 L S Cloud service Provider S LA2

SLA5

Recipient of LA3 S Telehealth service health services 4 Provider S Internet A L L (Hospital/Healthcare center) A S service 6 Provider (1)

Software/Data Internet service service Provider Provider (2)

Figure 4: An SLA representation for mHealth application

As depicted in Fig. 1, the services of the service provider (e.g. telehealth), a hospital or a medical center requires the prior provision of ICT services and the corresponding application of the relevant SLA from the other providers (the cloud service provider, the Internet service provider etc.). In this case, it is useful to construct an integrated health economic model using a Cost–Utility analysis, and the relevant SLAs as a resource management tool. Thus SLAs may link costs of ICT services with

213 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 health services in QoL or QUALY (e.g. cost of service per patient’s earned year or improved health year). In this health economic model, the metrics of the services of the different SLAs must be connected by a suitable manner such as those resulting from the technical and clinical trials. The largest part of the health services is the hospital units. Consequently, it is necessary to provide health entities with the means and methods needed to enable quality of their health services [13], which are the following:

Moreover, many articles present the design of e-health systems especially in the cloud, modelled by SOA architectures and the use of SLAs to support QoS in healthcare domain [41], [42]. Also the researchers in [43] designed an ontological model for a semantic description of the problem and developed a novel utility-based genetic matching algorithm for selecting the cloud services with respect to the user requirements and the properties of the clouds. It was applied a simulation-based evaluation with a real DNA sequencing healthcare workflow as application. The results had shown the effectiveness of this approach in reducing the total costs and fulfilling the requested service quality even with large-scale service compositions. Finally it's known that the hospitals are heavily dependent on the proper functioning of ICT. This operation is agreed between supplier / customer based on SLAs that describe how the system should work and penalties in case of failure. In the research article [14] two Portuguese hospitals were examined for performance and maintenance of their SLAs. The results of the analysis point to the need for significant improvements in the details of the SLAs.

Discussion and Conclusion Present health systems face major challenges associated with the continuous scientific developments in the health sector, economics models, organizational reforms, the continuous increase of the pressure on public finances, the need to control deficits and debt, increase the demand posed by users and the society, and the use of new health practices due to technological developments.

These challenges imply the adoption of new management tools from existing health information so as to be capable of meeting the modern requirements especially in SOA. Major issues are the widespread application of these tools and the efficient management of limited resources that healthcare organizations have. The most essential features of these tools must promote a health system that supports the principles of quality, effectiveness, efficiency, equity and access to health care [14].

The implementation of SLAs in health domain is important for (a) Economical (b) Clinical/medical (c) Administrational/managerial/operational and (d) Technical reasons.

The major sectors of health market identified in the following areas:

 Health care financing market (e.g. pharmacies and pharmaceutical companies)  Physician and nurses services market (general practitioners and private physicians/clinicians of all specialties)  Institutional services market (e.g. hospitals, health centers, hospices, nursing homes, medical centers, clinics etc.)

214 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

 Input or factor markets80 and  Professional education market.

This review identified many applications relative to SLAs applied in HIT between IT companies as providers and hospitals as buyers. However, despite many studies, research and case studies in this domain we observe nonexistent evidence of similar applications on a business level applied between patients and hospitals. Furthermore, until today is totally absent an integrated health economic model and the relevant SLAs that operate as a resource management tool which additionally links properly the costs of ICT services with health services provided to the patients (inpatients and outpatients). Our future work intends to fill this gap as we include in our objectives the development of the indicators for the assessment of the modern ICTs (i.e. mobile web and cloud) that support health services. These indicators will be used as metrics of the proposed integrated health economic model to support SLAs contracts. Overall, an important conclusion of this review is that SLM is expected to play a potential role in improving the quality and access to healthcare services using ICTs and may reduce the costs.

References

[1] P. Zweifel, F. Breyer and M. Kifmann, Health economics, Springer Science \& Business Media, 2009.

[2] C. E. Phelps, Health Economics (3rd Edition), Boston: Addison Wesley, 2003.

[3] A. Briggs, M. Sculpher and K. Claxton, Decision modelling for health economic evaluation, Oxford university press, 2006.

[4] A. Haycox, "What is health economics?," What is...? series, pp. 1-8, April 2009.

[5] Msdn.microsoft.com., "Chapter 1: Service Oriented Architecture (SOA). Msdn.microsoft.com. Retrieved on May 30, 2014.," [Online]. Available: https://msdn.microsoft.com/en- us/library/bb833022.aspx. [Accessed 26 09 2015].

[6] M. P. Papazoglou and W.-J. van den Heuvel, "Service oriented architectures: approaches, technologies and research issues," The VLDB Journal, vol. 16, no. 3, pp. 389--415, mar 2007.

[7] K. D. Larson, "The role of service level agreements in IT service delivery," Information Management \& Computer Security, vol. 6, no. 3, pp. 128--132, 1998.

[8] N. Beaumont, "Service level agreements: An essential aspect of outsourcing," The Service Industries Journal, vol. 26, no. 4, pp. 381--395, 2006.

[9] N. Karten, "With service level agreements, less is more," Information Systems Management, vol. 21, no. 4, pp. 43--44, 2004.

[10] J. Noguchi, "The science review article – An opportune genre in the construction of science.," Linguistic Insights, vol. 17, 2006.

80 The markets in which the resources used to produce goods and services are exchanged.

215 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

[11] L. Liu and Q. Ma, "The impact of service level on the acceptance of application service oriented medical records," Information \& Management, vol. 42, no. 8, pp. 1121--1135, dec 2005.

[12] D. Flynn, P. Gregory, H. Makki and M. Gabbay, "Expectations and experiences of eHealth in primary care: a qualitative practice-based investigation.," International journal of medical informatics, vol. 78, no. 9, pp. 588--604, sep 2009.

[13] R. G. Berbée, P. Gemmel, B. Droesbeke, H. Casteleyn and D. Vandaele, "Evaluation of hospital service level agreements.," International journal of health care quality assurance, vol. 22, no. 5, pp. 483--497, 2009.

[14] J. Lourenço, C. Santos-Pereira, R. Rijo and R. Cruz-Correia, "Service Level Agreement of Information and Communication Technologies in Portuguese Hospitals," Procedia Technology, vol. 16, pp. 1397--1402, 2014.

[15] A. Tikotekar, G. Vallée, T. Naughton, H. Ong, C. Engelmann, S. L. Scott and A. M. Filippi, "Effects of virtualization on a scientific application running a hyperspectral radiative transfer code on virtual machines," in Proceedings of the 2nd workshop on System-level virtualization for high performance computing, 2008.

[16] P. Evaluation, "SLA Management Handbook," no. June, 2001.

[17] K. Czajkowski, I. Foster, C. Kesselman, V. Sander and S. Tuecke, "SNAP: A protocol for negotiating service level agreements and coordinating resource management in distributed systems," in Job scheduling strategies for parallel processing, 2002.

[18] F. Faniyi, R. Bahsoon and G. Theodoropoulos, "A Dynamic Data-Driven Simulation Approach for Preventing Service Level Agreement Violations in Cloud Federation," Procedia Computer Science, vol. 9, pp. 1167--1176, 2012.

[19] M. Mac\'\ias and J. Guitart, "Analysis of a trust model for SLA negotiation and enforcement in cloud markets," Future Generation Computer Systems, 2015.

[20] N. Ranaldo and E. Zimeo, "Capacity-driven utility model for service level agreement negotiation of cloud services," Future Generation Computer Systems, 2015.

[21] X. Yang, B. Nasser, M. Surridge and S. Middleton, "A business-oriented Cloud federation model for real-time applications," Future Generation Computer Systems, vol. 28, no. 8, pp. 1158--1167, 2012.

[22] K. Brandis, S. Dzombeta and K. Haufe, "Towards a framework for governance architecture management in cloud environments: A semantic perspective," Future Generation Computer Systems, vol. 32, pp. 274--281, 2014.

[23] a. Kertesz, G. Kecskemeti and I. Brandic, "An interoperable and self-adaptive approach for SLA- based service virtualization in heterogeneous Cloud environments," Future Generation Computer Systems, vol. 32, pp. 54--68, mar 2014.

[24] M. Maurer, V. C. Emeakaroha, I. Brandic and J. Altmann, "Cost–benefit analysis of an SLA mapping approach for defining standardized Cloud computing goods," Future Generation

216 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Computer Systems, vol. 28, no. 1, pp. 39--47, jan 2012.

[25] H. T. Dinh, C. Lee, D. Niyato and P. Wang, "A survey of mobile cloud computing: architecture, applications, and approaches," Wireless communications and mobile computing, vol. 13, no. 18, pp. 1587--1611, 2013.

[26] D. Nikolow, R. S\lota, S. Polak, D. Mitera, M. Pogoda, P. Winiarczyk and J. Kitowski, "Model of QoS Management in a Distributed Data Sharing and Archiving System," Procedia Computer Science, vol. 18, pp. 100--109, 2013.

[27] R. M. Czekster, P. Fernandes, A. Sales, T. Webber and A. F. Zorzo, "Stochastic model for QoS assessment in multi-tier web services," Electronic Notes in Theoretical Computer Science, vol. 275, pp. 53--72, 2011.

[28] H. Meziane and S. Benbernou, "A dynamic privacy model for web services," Computer Standards \& Interfaces, vol. 32, no. 5, pp. 288--304, 2010.

[29] P. Reichl, D. Hausheer and B. Stiller, "The Cumulus Pricing model as an adaptive framework for feasible, efficient, and user-friendly tariffing of Internet services," Computer Networks, vol. 43, no. 1, pp. 3--24, 2003.

[30] L. Karadsheh, "Applying security policies and service level agreement to IaaS service model to enhance security and transition," computers \& security, vol. 31, no. 3, pp. 315--326, 2012.

[31] K. McLaughlin, D. Burns, C. Toal, C. McKillen and S. Sezer, "Fully hardware based WFQ architecture for high-speed QoS packet scheduling," INTEGRATION, the VLSI journal, vol. 45, no. 1, pp. 99--109, 2012.

[32] J.-M. Robert, H. Otrok, A. N. Quttoum and R. Boukhris, "A distributed resource management model for Virtual Private Networks: Tit-for-Tat strategies," Computer Networks, vol. 56, no. 2, pp. 927--939, 2012.

[33] S. Mohanty and J. Xie, "Performance analysis of a novel architecture to integrate heterogeneous wireless systems," Computer Networks, vol. 51, no. 4, pp. 1095--1105, 2007.

[34] M. Aazadnia and M. Fasanghari, "Improving the Information Technology Service Management with Six Sigma," vol. 8, no. 3, pp. 144--150, 2008.

[35] D. Lamanna, J. Skene and W. Emmerich, "SLAng: A language for defining service level agreements. Future Trends of Distributed Computing Systems," in IEEE Intl. Workshop, 2003.

[36] H. Ludwig, A. Keller, A. Dan, R. P. King and R. Franck, "Web Service Level Agreement ( WSLA ) Language Specification," pp. 1--110, 2003.

[37] N. Bakalos, D. Kyriazis, E. Protonotarios, T. Varvarigou and O. Barreto, "SLA specification and reference model-a D3. 2".

[38] B. Tebbani and I. Aib, "GXLA a language for the specification of service level agreements," Springer, 2006, pp. 201--214.

217 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

[39] A. Group and G. Committee, "Chapter 4 Mobile Health Model on service level," 2006.

[40] J. Lourenço, C. Santos-pereira, R. Rijo and R. Cruz-correia, "Service Level Agreement of Information and Communication Technologies in Portuguese Hospitals," Procedia Technology, vol. 16, pp. 1397--1402, 2014.

[41] J. Vilaplana, F. Solsona, F. Abella, R. Filgueira and J. Rius, "The cloud paradigm applied to e- Health," BMC medical informatics and decision making, vol. 13, no. 1, p. 35, 2013.

[42] A. Benharref and M. A. Serhani, "Novel cloud and soa-based framework for e-health monitoring using wireless biosensors," Biomedical and Health Informatics, IEEE Journal of, vol. 18, no. 1, pp. 46--55, 2014.

[43] F. Jrad, J. Tao, I. Brandic and A. Streit, "SLA enactment for large-scale healthcare workflows on multi-Cloud," Future Generation Computer Systems, Vols. 43-44, pp. 135--148, feb 2015.

218 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Operating within Legislative Restrictions. Marketing Funds for Urban Restoration Supporting the Fight against Aesthetic Pollution.

Odysseas N. Kopsidas1, Leonidas Fragkos-Livanios2

1 Department of Industrial Management & Technology University of Piraeus 80 Karaoli&Dimitriou Str., 18534, Piraeus, Greece, e-mail: [email protected] 2 Division of Natural Sciences and Applications, Hellenic Army Academy, 16673, Vari, Attiki, Greece, e-mail: [email protected]

Abstract

We suggest a novel marketing approach operating within legislative restrictions such as the prohibition of outdoor advertising in a city environment. The case examined is the city of Athens. The purpose of this study is to present a modified model of internalizing external costs caused by the operation of a manufacturing unit in conjunction with a new reality created. The model is shaped by means of marketing practices. The environment is characterized as a public good. Contingent Valuation Method and expert opinions were used to evaluate the effect of aesthetic pollution and estimate the potential of our proposal. The proposal describes an exemplary collaboration between private and public sector that brings multiple benefits without burdening any social group, on the basis of a Pigouvian subsidy scheme for renovation of city building facades, including motive to encourage advertising on the scaffoldings used for the renovation (which is allowed by law). Advertisers will place advertising screens on the scaffold while revenues from advertising will fund the renovation of the facade of the building. The suggested solution combines two seemingly competing activities of the city, outdoor advertising and the aesthetic reconstruction of building facades. Activity is transferred from micro to macroeconomic level, while at the same time Pareto criterion of optimality is met.

Keywords: scaffolding advertising Aesthetic Pollution, Contingent Valuation Method, restoration

1. INTRODUCTION

Outdoor advertising is an activity that causes aesthetic (Flad, 1997) as well as material pollution (posters, billboards, sticker material etc.). In Europe alone there are between 2 and 8 million billboards displayed at any given time and this number is constantly growing. Every 2 weeks, over 6 million square metres of poster paper are thrown out. The paper is not recycled, the ink is not eco-friendly, and the glue used is toxic (ECOBOARD, 2014). Due to this, billboard advertising has a disastrous effect on the environment, and this issue needs to be addressed. The negative effects are pronounced on large urban centers, such as Athens. For many years the Greek Capital faced the problem of unrestrained advertising. The situation led to a legal ban and final dismantling of outdoor advertising. Businesses and advertisers no longer find legally physical space to display their products. One way out is the online advertising. The online advertising however does not fully cover the needs of the advertiser since a number of social groups (eg the elderly) have no - or limited at best- access to electronic technology. Consequently, the justified concern for aesthetic enhancement deprived the possibility of advertising to businesses and led to income loss for dozens of employees.

On another note and completely unrelated to the above, the aesthetic state of the city of Athens is scarred by the poor condition of the facades of a great number of private or public buildings. The dark gray and black color (literally) dominates the streets of large areas of the city, creating an atmosphere of depression. On certain streets sunlight is 'stifled' between 'black buildings'. Many buildings of great architectural value lay convicted under the 'gray' pollution accumulated over decades. There is a strong relationship between the perceived lightness of a building and the opinion

219 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 that it is dirty (Brimblecombe & Grossi, 2005). Blackening of light coloured fabric eventually reaches a point where it becomes publicly unacceptable and raises pressure for cleaning (Hamilton and Mansfield, 1992).This aesthetic, more specifically, this visual pollution has an important -albeit undefined- cost to the social and financial life of the Greek capital.

A relevant subsidies program with the name ‘ΠΡΟΣΟΨΗ’ ('Facade') was put in place by the Municipality of Athens. The aim of that program was the improvement of the city’s general aesthetic. The effect of this effort was negligible, with the vast majority of the affected buildings remaining in this plight. In the mind of the public, external renovation of buildings is a difficult or even impossible goal. Planning authorities have a statutory responsibility to plan for the sustainable development of their areas, primarily through the development plan process but also through local area plans. Nonstatutory framework plans and site development briefs can supplement but not replace the function of statutory plans (Government of Ireland, 2009).

2. FORMULATION OF THE PROBLEM

Building darkening due to particle deposits is up to a point a negative externality, since the property owner is not responsible for the air pollution which is a major factor of the process. From the other hand, fouling due to time passing, as well as damage and corrosion has to be dealt with by the land owner. The end result is an aesthetically polluted neighborhood and -by extend – city. This pollution affects functionally and financially the city, thus becoming a negative externality itself from the city’s point of view. Being hard, even impossible to pinpoint the responsible for this externality, the burden for its internalization is left mainly on the land owners and in many cases they are just not willing – or simply cannot afford- to pay, leading to total or partial neglecting of the necessary restoration.

Outdoor advertising on streets, building walls and terraces, is prohibited by law in Greece. This caused a crucial blow to an already struggling sector, especially the last 5 years of recession and led to job losses and shrinkage of the industry.

The arguments against outdoor advertisement traditionally have followed an aesthetic narrative with varying degrees of success in terms of restricting the proliferation of billboards. The public has consistently found outdoor advertising to be intrusive, ugly, crassly commercial, and a taint on nature. With billboards being an emblematic tool of the industry and marketing, the story of outdoor advertising is an ongoing struggle between an expanding industry and a resistant public. Signs are affecting seriously the visual environment of a city. They are prominent structures that are typically, and deliberately, highly visible in the public. From their first appearance in the late 19th Century through today, billboards have met resistance on aesthetic grounds. Flad (1997) comments that “…they [billboards] also do not perform an effective function. They simply encourage consumption’’.

Historically, the regulation of outdoor advertising has prompted a surprisingly prodigious amount of controversy and litigation. It has been challenged as a denial of free speech, due process and equal protection. It has been upheld on nuisance and real property grounds, and sustained on the basis of public health, safety, morality, comfort and convenience, aesthetics and the right to be let alone (Shutton, 1972). The argument against outdoor advertising which appears most often focuses on billboards’ adverse visual and aesthetic impact on the surrounding community. Advertising billboards are openly accused for “visual pollution” and how they “desecrate the landscape” (Flad, 1997).

In a study regarding the impact of billboards on real estate prices in the City of Philadelphia, USA, (Snyder, 2011) it was revealed that properties purchased within a small radius of billboards have a significant decrease in sale price and the correlation is statistically significant (p ≤ .05). Further, the analysis reveals a correlation between billboard density and home value. Billboards negatively impact home values.

There is compelling evidence that distraction is a major contributor to crashes (Lee, McElheny and Gibbons, 2007; Wang, Knipling & Goodman, 1996; Stutts et al., 2001; Klauer et al., 2006). The studies that have been conducted show convincingly that roadside advertising is distracting and that it

220 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 may lead to poorer vehicle control. However, the evidence is presently only suggestive of, although clearly consistent with, the notion that this in turn results in crashes. Studies providing direct evidence that roadside advertising plays a significant role in distraction based crashes are currently not available. A review by Austroads (2013) identifies the issue of distraction due to roadside advertising but suggests that it is reasonable to conclude that far less than 1% of all crashes and near crashes involved distraction from roadside advertising.

2.1. Methodology

2.1.1. Contingent Valuation Method

In this research, the Contingent Valuation Method (CVM) was used (adapted by Mitchell & Carson, 1989). Questioners were distributed to residents of selected neighbourhoods of Athens, in order to estimate their willingness-to-pay to support restoration projects on their neighbourhood and other areas in central Athens. The questioner format aims to probe the general attitude of citizens on restoration projects and extract quantitative data in monetary units on how they value abstract ideas such as visual pollution. Additionally, it screens citizen preference on alternative strategies for urban environmental improvement. Preferences of people are examined by asking people directly their WTP or WTA a change in environmental quality.

The survey is part of an on-going wider study regarding the aesthetic pollution of the city. Since it is not formed to investigate solely the idea presented here, the quantitative data analysis is out of the scope of the present work and therefore is not presented. We present only qualitative conclusion on ‘discomfort levels’ due to aesthetic pollution from building facades darkening and an estimate on WTP/WTA. A representative questioner sample can be seen in Appendix A, along with the answer results from a specific neighbourhood.

2.1.2. Getting expert opinions

To acquire the views of experts in the fields of advertising and real estate market, telephone interviews were conducted.

Six (6) professional advertisers were interviewed. Specific questions were addressed. Advertisers were questioned whether they would be interested to advertise on scaffolding if it is legal and if there is a relevant municipal program in place for the restoration of building facades, what would be the amount considered reasonable to allocate for the period that the restoration will last according to the size of the building and the time (for example, a seven-storey building with a width of 15-20 meters and for one month), what type of advertising they consider most appropriate for scaffolding (general commercial or industrial) and finally asked what was their opinion on the operation of such a venture.

Eleven (11) realtors were interviewed. They were asked on the real estate price trend on specific areas in Athens and Kozani, before and after restoration or improvement project on the area. They were asked on the importance of the facade state and how it is affected by darkening.

3. TOWARDS A SOLUTION OF THE PROBLEM

3.1. Results

Regarding the CVM questioners, the answers show two seemingly contradicting trends. The majority of residents are annoyed by the visual pollution in their neighbourhood and believe that restoration programmes are the key to the solution. They seem, however, not willing to pay -or at best, willing to pay very little (around 20-30 euros each in average) - for the improvement of the aesthetic of their environment.

The questioner presented in Appendix A is a representative sample. From the questionnaire circulated in the area of Thisio, respondents were separated by gender, age, whether working at the

221 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 aesthetically affected area or not, whether residing or not at the aesthetically affected area, whether they own real estate properties at the affected by aesthetic pollution area. We then applied Variance Analysis. The dependent variable is the amount of WTP. Independent variables are the nominal variables of the questionnaire. In a brief the results can be summed up as follows: WTP is dependent by age, respondents consider that effective treatment of aesthetic degradation will substantially benefit professionals (73% positives) and residents on the area, the impact of the renovations would be significant, they would have a practical benefit from a concerted effort by the municipality and citizens to address the aesthetic pollution (Great benefit 33%. Moderate 36%, Small 31%) and yet, in the absence of funding, respondents were willing to pay only 19.71 € in average.

On the other, advertisement experts, after admitting that outdoor advertisement is aesthetically unpleasant but it was (and still is in some cases albeit illegal) a substantial percentage of their income, were in general positive to the idea of scaffolding advertisement. Two of them suggested that electronic screens are the best way to go, since moving images attract more public attention. They raised concerns regarding the cost, considering that the restoration of a seven-storey building façade (working example) will last roughly a month and would cost 12000 euros or more. They unanimously agree that the endeavour would be successful only if a relevant municipal scheme is put in place, organising the activity, offering support in the form of a subsidy and buffering any ‘price war’ that might arise between marketing firms, something that would cut out small firms from the deal.

Realtors unanimously verified the hypothesis that aesthetic degradation of a location leads inevitably to lower market value of the neighbourhood properties. The opposite happens when the aesthetic value of the location is improved by restoration projects, with the land property prices following an upward trend. They generally agreed that properties next to billboards or on neighbourhoods that unrestricted outdoor advertising is in practice have lower prices. They unanimously agreed in the most emphatic way on the positive correlation between the price of the property and the appearance of the building facade, especially the shading of the colour. As one realtor said: “no one will buy a flat on a dirty building”, proving that in his mind a darkened façade implies an overall unclean building.

3.2. Aesthetic pollution and urban restoration.

The valuation of aesthetic pollution from buildings in the centre of Athens can be made with the tools offered by the Environment Economics. Environmental Economics, as a branch of economics, has a parallel course to the general economic theory at least since the 18th century. Each resource alone or in combination with others can be used in alternative ways. The problem that arises is how natural resources are distributed optimally on options presented. To establish a conceptual framework for our working hypothesis, we assume that environmental issues are basically microeconomic problems (discussed in Tye, 1985; Kinnaman, 2013). Consequently, their examination involves the use of basic concepts and analytical tools of neoclassical microeconomic theory. Any suggested plan must satisfy the principles of sustainable development: Financial, social and environmental sustainability.

The trend of area redevelopment first appeared in Western European metropolitan areas, particularly at cities with heavy urban heritage and fewer suburbanization tendencies. In the late 60s the demand for maintaining / upgrading of the cultural heritage in cities or regions with strong historical character was vocalized. At the same time, existing models and methods of urban development were challenged (Loures, 2015). At that period the renovation of the Jordaan district in Amsterdam and Harlem and VINGO in Stockholm began. In North America, an area with lighter urban tradition, the reuse of central areas for housing occurs largely combined with the questioning of the suburban model from an economic perspective. The oil crisis made the middle class realize the advantages of the central areas. Residential rebirth of neighborhoods developed in the 19th century, with massive renovation of old residential buildings, cannot be classified as redevelopment in the sense of total intervention in the public and private urban space, it gives however a vivid picture of the problems arising from upgrading a low-income strata residential area to a high income one (Karadimitriou, 2013). Similar cases, but in milder form, appeared in European cities, such as Maris district of Paris.

222 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Redevelopment projects of building facades have already been completed on five locations in the city of Athens. In those cases private companies, acting as donors, played a pivotal role. Moreover, seven building blocks located at Prospsygika Dourgouti area were completely renovated with funds deriving from private sponsors and the Municipality of Athens. More specifically: 1) Varvakeio Market, sponsored by «LIQUIMAR TANKER MANAGEMENT SA". 2) Pangratiou square, sponsored by the company "Titan AE “. 3) Athanasios Kanellopoulos square, sponsored by " VIOHALCO GREEK COPPER AND ALUMINIUM INDUSTRY". 4) Dexamenis Square, sponsored by "TERNA TOURIST AND SHIPPING COMPANY SA". 5) Madrid square, sponsored by "TOYOTA HELLAS SA". 6) Dourgouti Area, sponsored by the companies «J & P Avax SA" and "ATHINEON SA".

3.3. The case of the municipal garden at Kozani

In an attempt to screen a quantitative correlation between the aesthetic upgrade of a location and the benefits acquired by the land owners, the neighbourhood and the municipality it is relevant to refer to the positive effects by the creation of the municipal garden at the city of Kozani, effects reflected at neighborhood as well as city level. The decision to reform the former military camp, placed within the urban area of Kozani, was a turning point for the wider upgrade of the region, from the point of utilising the existing space as well as promoting the construction of new infrastructure, leading to the redevelopment of the area and eventually the creation of a "cultural neighbourhood ", a centre for multiple activities just a short distance from the commercial centre. The construction of the garden with all its technicalities marked the beginning for the aesthetic improvement of the area as well as its enrichment with cultural and sporting activities with substantial benefits that exceeds the scale of the neighbourhood and reaches the scale of the entire municipality.

Regarding the impact of the project in financial terms, two factors should be considered: a) the increase of the neighbourhood property values b) the additional municipal revenues due to the activities in the region. Following an investigation on real estate pricing from agencies activated at the city of Kozani, the years between the construction of the park and the burst of the financial crisis, the real estate values was steadily increasing for properties in the vicinity of the municipal gardens. Specifically, the average land price in the region in 2002-2004 amounted to 500 euro / sq.m. This value increased to 600 euro / sq.m. the next few years, an increase of 20%. According to city realtors (6 experts who replied anonymously to a telephone inquiry), real estate property values have trended upward, estimated that it would have risen even further if not for the financial crisis in 2009 which marked a sharp decline in construction activity and a consequent drop of commercial prices for land and buildings properties. Despite the recession though, prices have not dropped to levels below those of 2004. Further, according to the same realtors operating in the region, while rental housing prices follow the general downward trend in prices, the neighbourhood rents remain relatively high, even higher than the city's commercial centre.

4. DISCUSSION

It is obvious that the effect of the restoration of a neighbourhood, either by restoring the buildings or improving existing space is – as it was expected- positive in general, both in economic as well as environmental and aesthetique terms. Property values go up, recreational and cultural activities are boosted, the commercial activity is healthier and the satisfaction level of residents and visitors is increased. On the other, property value and social containment is negatively affected by the ‘darkening’ of building facades as well as outdoor advertising. The obvious course of action should be the removal of the negative factors and the promotion of the positive ones. The necessary restoration (painting and /or cleaning the facades) has a cost. Further, the ban of outdoor advertising deprives physical space from the marketing industry, leading to income loss and increased unemployment among the industry professionals. It is pivotal to emphasize that the proposal presented here is applicable only when and where there is legislative restriction to outdoor advertising

A Pigouvian subsidy scheme can be established on the grounds that the activity would generate external benefits, or else positive externalities. The externality caused by time and pollution, affecting

223 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 directly the property owners and indirectly the city (as shown above) is, in turn, internalized mainly to the advertised parties. As the marketing experts pointed out, the advertised parties would be more willing to participate if they can demonstrate corporate social responsibility (CSR). And CSR is a source of competitive advantage (Porter & Kramer, 2006). The private provision of public goods can generate value (McWilliams, 2011), and urban environment is a public good. Subsequently, the necessary investment on advertisement becomes also a tool to demonstrate CSR.

Our proposal describes an exemplary collaboration between private and public sector, presenting multiple benefits without burdening any social group. Energy is transferred from micro to macro level of economic activity, elevating practices from unit to the sum. According to V. Pareto, an activity is beneficial to society when improves the socioeconomic status of individuals, without a corresponding worsening of the socio-economic situation of others. It is then assumed that these activities tend to maximize social welfare. In this case, the Pareto criterion is met. The activity benefits the sum of society without harming any of its parts. The case combines issues addressed by different disciplines, such as Marketing, Natural Resources Management and Public Economics for reaching the socially optimal solution.

References

Austroads (2013). Impact of Roadside Advertising on Road Safety. AP-R420-13. Prepared by Paul Roberts, Kathy Boddington and Libby Rodwell. ARRB Group. Austroads Ltd. Sydney, A4. ISBN 978-1-921991-72-1.

Brimblecombe P., Grossi G.M. (2005). Aesthetic thresholds and blackening of stone buildings. Sci Total Environ 349, 175–189.

Carson, R.T., Mitchell, R.C., (1993). The value of clean water: the public’s willingness to pay for boatable, fishable, and swimmable quality water. Water Resources Research 29 (7), 2445–2454. ECOBOARD (2014). Final Report Summary - ECOBOARD (The New Eco-friendly Advertising Tool Which Gives an Alternative Real-Time Outdoor Advertising Media for SMEs). CORDIS, Project reference: 231979. Available at http://cordis.europa.eu/result/rcn/58285_en.html

Flad, H K. (1997). Country Clutter: Visual Pollution and the Rural Roadscape. Annals of the American Academy of Political and Social Science. 533, 123 -125.

Government of Ireland (2009). Guidelines for Planning Authorities on Sustainable Residential Development in Urban Areas (Cities, Towns & Villages). Available at http://www.environ.ie/en/Publications/DevelopmentandHousing/Planning/FileDownLoad,19164,en.pd f (accessed in December 2014).

Hamilton RS, Mansfield TA. (1992). The soiling of materials in the ambient atmosphere. Atmos Environ. 26A, 18, 3291 – 6.

Hochman O., Ofek H. (1979). A theory of the behavior of municipal governments: The case of internalizing pollution externalities. Journal of Urban Economics, Volume 6, Issue 4, 416–431.

J.V. Henderson (1977). Externalities in a spatial context: The case of air pollution. Journal of Public Economics. Volume 7, Issue 1, 89–110.

Karadimitriou N. (2013). Planning policy, sustainability and housebuilder practices: the move into (and out of?) the redevelopment of previously developed land. Progress in Planning. 82, 1–41.

Kinnaman T.C. (2013). Waste Disposal and Recycling. Reference Module in Earth Systems and Environmental Sciences. In Encyclopedia of Energy, Natural Resource, and Environmental Economics, 3, 109-113.

224 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Klauer SG, Dingus TA, Neale VL, Sudweeks JD, Ramsey DJ (2006). The impact of driver inattention on near-crash/crash risk: an analysis using the 100-car Naturalistic Driving Study data, report DOT HS 810 594, National Highway Traffic Safety Administration, Washington DC, USA.

Lee SE, McElheny MJ, Gibbons R. (2007). Driver performance and digital billboards: final report prepared for the Foundation for Outdoor Advertising Research and Education, Virginia Tech Transportation Institute, Center for Automotive Safety Research, Blacksburg, VA, USA.

Loures L. (2015). Post-industrial landscapes as drivers for urban redevelopment: Public versus expert perspectives towards the benefits and barriers of the reuse of post-industrial sites in urban areas. Habitat International. Special Issue: Exploratory Spatial Analysis of Urban Habitats. 45, 2, 72–81.

McWilliams A. (2011). Creating and Capturing Value. Strategic Corporate Social Responsibility, Resource-Based Theory, and Sustainable Competitive Advantage. Journal of Management, 37, 5, 1480-1495.

Miles M.P., Govin J.G. (2000). Environmental Marketing: A Source of Reputational, Competitive, and Financial Advantage. Journal of Business Ethics, Volume 23, Issue 3, 299-311.

Porter M., Kramer M.R. (2006). Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review. Available at https://hbr.org/2006/12/strategy-and-society-the-link-between-competitive-advantage-and-corporate- social-responsibility.

Snyder J. (2011). Beyond Aesthetics: How Billboards Affect Economic Prosperity. [pdf] Samuel S. Fels Fund. Available at http://www.scenic.org/storage/PDFs/Beyond_Aesthetics.pdf. [Accessed 13 February 2015].

Stutts, JC, Reinfurt, DW, Staplin, L, Rodgman, EA, (2001). The role of driver distraction in traffic crashes, AAA Foundation for Traffic Safety, Washington, DC, USA.

Sutton R. (1972). Billboard Regulations, and Aesthetics, 21 Clev. St. L. Rev. 194. Available at http://engagedscholarship.csuohio.edu/clevstlrev/vol21/iss2/19.

Tye W.M. (1985). Microeconomic measurement of the social costs of environmental regulation. Environmental Impact Assessment Review, 5, 2, 117-131.

Wang, JS, Knipling, RR, Goodman, MJ (1996). The role of driver inattention in crashes: new statistics from the 1995 crashworthiness data system. Association for the advancement of automotive medicine conference, 40th, 1996, Vancouver, Canada, AAAM, Des Plaines, Illinois, USA, 377-92.

225 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

APPENDIX A

Quantitative Data for Aesthetic Pollution

From the questionnaire circulated, respondents were separated by gender, age, whether working at the aesthetically affected area or not (employee), whether residing or not at the aesthetically affected area (citization), whether they own real estate properties at the affected by aesthetic pollution area (building) as follows:

226 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

227 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

We then apply Variance Analysis. The dependent variable is the amount of WTP. Independent variables are the nominal variables of the questionnaire. Tests of Between-Subjects Effects Dependent Variable:V5 Source Type III Sum of Squares Df Mean Square F Sig. Corrected 864362,990a 4 216090,748 1,565 ,219 Model Intercept 804100,165 1 804100,165 5,824 ,025 V1 ,000 0 . . . GENDER 371588,518 1 371588,518 2,691 ,115 EMPLOYEE 372,135 1 372,135 ,003 ,959 CITIZATION 15076,127 1 15076,127 ,109 ,744 BUILDINGS 239636,982 1 239636,982 1,736 ,201 Error 3037325,306 22 138060,241 Total 4839504,000 27 Corrected Total 3901688,296 26 a. R Squared = ,222 (Adjusted R Squared = ,080)

We observe that the WTP is not affected by any of the above variables (sex, work, residence and possession of the property) at 5% significance level.

There is dependency by age. Participants, according to age class, accept to participate financially (WTP) in the regeneration of facades as shown in the following chart. The classes are: 1: 18-25, 2: 26- 35, 3: 36-45, 4: 46-55, 5: 56-65, 5: more than 65 y.o.

From the linear regression analysis the following can be deduced:

We note that the coefficient of determination of the regression model where the dependent variable is WTP and the other identities from all other questions in the questionnaire are taken as independent variables is 0.853. Therefore the adjustment of the model is quite good.

228 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

According to the Kendall index we observe that the WTP is positively correlated with the volunteer work of the respondent for reconstruction of the facade, at a significance level of 5% (P-value = 0.027, r = 0.321) and the correlation is moderate. It appears that as the voluntary work of the respondent for redevelopment of the façade increases, so does the amount WTP as well.

Question: In an effort of the Municipal Authority in restoring the external of buildings and the absence of available financial resources, we make the assumption that citizens are asked to participate financially in a special account. In this case, how much you would you be willing to contribute? Average value: 19.71 €

We observe that the WTP is positively correlated with the contribution of the respondent to the account for the improvement of facades in Athens at 1% level of significance (P-value = 0.000, r = 0.692) and the correlation between them is strong. It appears that the more the contribution of the respondent to the account for the improvement of facades in Athens, the greater the WTP amount.

Question: Do you consider that effective treatment of aesthetic degradation will substantially benefit those who are active professionally on the area?

YES 87 73%

NO 31 26%

Question: What is the significance for you in general of the impact of environmental rehabilitation works (natural and urban) in the current economic situation? - Great 39% - Moderate 37% - Some 22% - Insignificant 3%

229 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Question: Do you have a practical benefit from a concerted effort by the municipality and citizens to address the aesthetic pollution;

Great 33%

Moderate 36%

Small 31%

Question: Educational level of respondents:

Primary school 1% Gymnasium 7% High School 29% College Degree 41% Postgraduate studies 23%

230 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

A new index to measure the human well-being in Wallonia and its communes (South of Belgium)

Burny P. Centre wallon de Recherches agronomiques, Rue du Bordia 04, 5030 Gembloux, Belgium Gembloux Agro-Bio Tech (University of Liège), Passage des Déportés 02, 5030 Gembloux, Belgium E-mail: [email protected]

Abstract

In 2012, the Walloon Government ordered the Walloon Institute for Prospective, Evaluation and Statistics (IWEPS) to calculate five indexes in order to guide and evaluate the public actions, together with the GDP. The index for the conditions of human well-being (CWBI) is presently the first step in the elaboration of the well- being index. The methodology is the one used by the Council of Europe. Actually, the CWBI is calculated by using 60 basic indicators, gathered into 8 families. After normalisation, the CWBI is the arithmetic mean of the 60 basic indicators, each of them having the same weight. The CWBI was calculated for the 262 communes of Wallonia and varies from 0.428 to 0.674, with a regional mean of 0.572. An opposition between urban and rural communes clearly appears, the last ones having the best scores. Communes along the borders of Germany and Luxemburg have the highest indexes, while communes in the old industrial areas have the lowest scores. Employment, income, family relations and security are the factors which are the most narrowly linked to the CWBI. At the communal level, social and security expenses per capita have a significant and negative correlation coefficient with the CWBI. In the future, in order to elaborate a finer index, new data, up to now not directly available, will be collected at the communal level, about quantitative and qualitative aspects.

Keywords: well-being index, Wallonia, local development

7. Introduction

During the period 2009-2014, the Walloon Government included in its “declaration of regional policy” and in its priorities action plan, the “Marshall Plan 2. Vert” (in reference to the economic plan developed in Europe by the US general G. Marshall just after the Second World War), a specific action devoted to the development of new indicators complementary to the Gross Domestic Product (GDP). On November 8, 2012 the Walloon Government ordered the Walloon Institute for Prospective, Evaluation and Statistics (IWEPS) to calculate five indexes in order to guide and evaluate the action of the government, together with the GDP: an index of the social situation, a well-being index, an index evaluating the ecological print and the bio-capacity, an index of environmental situation and an economic capital index. The index for the conditions of human well-being (CWBI) is a step to lead to the well-being index (WBI), which is still under elaboration. This paper presents the methodology to build the CWBI as it is defined in 2015, the results at the regional and communal levels and the discussion of these results, leading to further research.

8. Elaboration of the CWBI

The perception of well-being depends on many factors and also on personal experiences. It is a relative notion. So, the approach which has been adopted is the concept proposed by the Council of Europe in its Social Cohesion Strategy (Council of Europe, 2010). The concept of well-being is considered as “the product of complex interrelations between material and immaterial goods, between private and public goods, between private and public life, between personal and social equilibrium”. This interpretation of human well-being means that there is interdependence between individual well- being and social fairness within a sustainable perspective. In practice, the SPIRAL methodology used by the Council of Europe was implemented in fifteen cities and communes representative of the Walloon territorial diversity. Groups of persons from different social origins were surveyed about their meaning of well-being (Ruyters et al., 2011).

231 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

The collected information and data were analysed and then organised into “families”, which gather “dimensions”, which are themselves composed by “under-dimensions”, elaborated by gathering all the expressions of the citizens which have the same meaning, though delivered in different ways (Laffut and Ruyters, 2014). Finally, 60 indicators are gathered into 19 dimensions and 8 families (Table 1). Table 5 List of basic indicators and their gathering into dimensions and families Families Dimensions Basic indicators Family 1: means of Dimension 1: Life expectancy-Years of life lost at 70-Chronic living Health diseases-Handicapped persons-Consumption of anti- diabetic drugs- Pedestrian access to a pharmacy- Access to a hospital with emergency service-Access to a medical house. Dimension 2: Mean price of land for housing-Mean price of houses Housing as a share of the mean income-Houses without bathroom nor central heating-Households candidates for social housing. Dimension 3: Persons with no diploma or a diploma from the Teaching/Education primary school-Pupils on time at the secondary school – Access to a nursery or a primary school. Dimension 4: Employment rate for the 15-64 year old-Involuntary Employment part time workers-Occasional workers-Unemployment rate of the 15-64 year old-Long term unemployment- Median salary-Professional diseases. Dimension 5: Median income-Children in households without Income and income from work-Beneficiaries of social support- purchasing power Failing borrowers- Indebted persons. Dimension 6: Access to public transport. Mobility Family 2: Living Dimension 7: Air polluted accommodation-Soil-polluted environment Natural spaces and accommodation-Waste-Pedestrian access to a green environment area-Accommodation near a green area. Dimension 8: Small Pedestrian access to a food shop. scale trade Dimension 9: Heavy accidents-Badly injured or killed persons-Car Security robbery-Burglaries-Attacks on physical integrity. Family 3: Relations Dimension 10: Quality of commune website with the institutions Communication Dimension 11: Measures in favour of employment implemented by Institutions way of the communes- Measures in favour of employment working and public implemented by the state-Percentage of public management subsidised accommodation-Percentage of social loans in housing borrowing-Popularity of digital public spaces. Dimension 12: Percentage of non-voters-Openness to use the internet Democratic process to express opinion. Family 4: Personal Dimension 13: Single-parent households-Old isolated households- relations Family relations Divorce rate. Family 5: Social Dimension 14: Difference of lost years of life between men and equilibrium Equity of access to women. health care Dimension 15: Difference of unemployment rate between the 18-24 Equity of access to year old and the 25-49 year old-Salary differences- a good job Median salary differences between men and women. Dimension 16: Taxable total income differences. Equity of access to a reasonable salary Family 6: Personal Dimension 17: Relative capacity of nurseries-Number of places

232 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Families Dimensions Basic indicators equilibrium Time management subsidised in nurseries. Family 7: Well-being Dimension 18: Rate of suicide. feeling Feeling of (un)happiness Family 8: Dimension 19: Percentage of gifts in the tax declaration-Importance Values/attitudes/ Involvement in the of the declared gifts. initiatives/involvement society

The building of an index based on many variables is recommended by the OECD (2014): “to elaborate a multidimensional system of well-being indicators, which takes into account the advantages of specific location, is a crucial part of the way which public policies must follow to reach a better realization of the goals of the society”. So, the index for the conditions of human well-being is a synthetic index combining 60 indicators, which is calculated for the Walloon Region as a whole, but also for each of its 262 communes.

How is the CWBI calculated?

Firstly, all the values of the 60 basic indicators are normalised, thanks to the Min-Max normalisation method. So, the values of all the indicators vary from 0 to 1. For the indicators which have a negative impact on well-being, like the unemployment rate for example, it is the complement to 1 which is used. The CWBI is simply the arithmetic mean of the transformed values of the 60 basic indicators. So, this method gives the same weight to each of the 60 basic indicators. The collection of the basic data at the regional and the communal levels is uneasy, so a first synthetic index was calculated in 2014 and a second one in 2015, with finer and more relevant indicators.

9. Results

Among the 262 communes of the Walloon Region, the CWBI varies from 0.428 to 0.674 (Figure 1), the regional mean reaching 0.572 and the median being a little bit higher (0.579).

N u m b er s of co m m u n es Figure 5 Distribution of the CWBI calculated for the 262 communes of the Walloon Region Among the communes, 43% have a CWBI between 0.57 and 0.61; and 39% have a CWBI between 0.48 and 0.56 (Ruyters et al., 2015). The minimal value is obtained for Charleroi (0.428), one of the two biggest cities of the region, which was prosperous in the past but which declined later with the progressive disappearance of the coal mines and the steel industry. The highest CWBI is registered in Amel (0.674), a rural commune with large forest areas, near the German border. The value of the CWBI for each commune in Wallonia is illustrated in Figure 2.

233 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Figure 6 Value of the CWBI in the communes of Wallonia The clearest areas represent the weakest CWBI: they essentially correspond to the old industrialised areas, from Verviers, Dison and Liège in the East, to Charleroi, La Louvière and Mons in the West, together with Froidchapelle, Couvin and Hastière along the French border. On the contrary, the highest CWBI are observed in the communes belonging to the German-speaking Community and the communes along the borders of Germany and Luxemburg. High CWBI are also noted in rural communes of all provinces, residential communes (South of Brabant, Hesbaye, around the biggest cities), touristic communes of the valley of the Meuse and along the North-South axis Brussels-Namur-Arlon. As far as “dimensions” are taken into account, it can be observed: - that the level of well-being considerably varies in a given region, according to the considered “dimensions”, the variation being weakened in the global index; - the multidimensional approach, implemented at each specific territory, allows a better understanding of the equilibrium between different factors and the possible synergies through their corresponding policies.

9.1 Correlations between the CWBI and the “dimensions” of indicators

The correlation coefficients calculated between the CWBI and the dimensions of indicators are presented in Table 2. It appears clearly that economic aspects are very important to explain the feeling of well-being: employment, income and purchasing power are narrowly linked to the CWBI. However, a qualitative and entirely non-economic variable, family relations, is also strongly linked to the feeling of well- being. Security, involvement in the society, education and the environmental factors are also important. The equity of access to a reasonable income is strongly, but negatively correlated to the well-being. It is explained by the fact that when income increases, the inequality also increases. Some indicators, like time management or communication, have a low correlation with the well-being index. Some of them represent factors which are not distributed in all communes.

234 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Table 6 Correlation coefficients between the CWBI and the dimensions of indicators Dimensions Correlation coefficients Employment 0.896 Income and purchasing power 0.878 Family relations 0.730 Equity of access to a reasonable salary -0.730 Security 0.694 Involvement in the society 0.644 Teaching/education 0.571 Natural spaces and environment 0.525 Small scale trade -0.423 Institutions way of working and public management -0.408 Democratic process 0.359 Equity of access to health care 0.353 Mobility -0.352 Housing 0.320 Health 0.286 Feeling of (un)happiness 0.225 Equity of access to a good job -0.120 Time management 0.106 Communication 0.034

9.2 Correlation between the CWBI and the basic indicators The basic indicators which are the most correlated, positively or negatively, with the well-being index are presented in Table 3. Table 7 Basic indicators the most correlated with the CWBI Indicators Correlation coefficients Unemployment rate 15-64 year old -0.890 Failing borrowers -0.868 Children living in households without labour income -0.863 Involuntary part time job -0.819 Employment rate 15-64 year old 0.808 Pupils on time at secondary school 0.783 Median income 0.767

With no surprise, unemployment and financial difficulties have a highly negative correlation with the CWBI. On the contrary, employment, income and a good schooling have a positive impact on the well-being. On the opposite, some basic indicators are weakly linked to the CWBI (Table 4). Table 8 Basic indicators the least correlated with the CWBI Indicators Correlation coefficients Access to hospital with an emergency service -0.087 Access to green spaces 0.082 Measures in favour of employment implemented by the state -0.051 Difference of the median salary between men and women 0.044 Quality of the commune’s website 0.034 Use rate of digital public spaces -0.025 Several of these indicators have a weak correlation with the conditions for well-being index because they do not have a complete cover of the Walloon territory.

235 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

9.3 Correlation between the communal budget and the CWBI

Two components of the communal budget have a significant correlation coefficient with the CWBI: expenses per capita for security purpose (-0.36) and expenses per capita for social support (-0.47). The correlation is negative: when expenses for security and social support are high, it means that there are social problems, which have a negative impact on well-being, of course.

10. Conclusions

Well-being is a complex concept, including many dimensions: income, human relations, natural environment, security… Individual perception of well-being is also very variable. So, it is necessary to be cautious when general conclusions are drawn from a global index. However, such a multidimensional index can be interesting and useful in order to define and evaluate public policies which do not take into account the Gross Domestic Product only. Pure economic aspects are of course very important, but the concept of well-being is much larger and other aspects deserve the attention of the policy makers in our post-industrial society. Even in a region of a small West European country like Belgium, significant differences appear from one commune to another. The feeling of well-being is lower in big cities from the old industrial zones, with low income and high unemployment rate, while it is the highest in residential areas where the income is higher and the natural environment better. Such observations should help to define public policies which are better adapted to local conditions. So, further work will be done in the future in order to improve such tools like well-being indexes.

References

Conseil de l’Europe, 2010, Nouvelle Stratégie et Plan d’action du Conseil de l’Europe pour la cohésion sociale, approuvés par le Comité des Ministres du Conseil de l’Europe le 7 juillet 2010, Strasbourg. http://www.coe.int/t/dg3/socialpolicies/socialcohesiondev/source/2010Strategie_PlanAction_ CohesionSociale.pdf] (11 November 2015). Laffut, M., and Ruyters, C., 2014, Kidisti: un outil d’appréhension de la parole citoyenne, In: Frédéric Claisse, Catherine Laviolette, Min Reuchamps, Christine Ruyters (dir.), La participation en action, Ed. Coll. Méthodes participatives appliquées. Vol.4., PIE. Peter Lang, Belgium. OECD, 2014, Comment va la vie dans votre région?: Mesurer le bien-être régional et local pour les politiques publiques, Editions OECD, novembre 2014, Paris, France. Ruyters C., Laffut, M., Defays, D., and Colicis, O., 2011, Elaboration concertée d’indicateurs de bien- être dans les communes wallonnes. Partie 1: la genèse du projet et les premiers résultats de l’expérience en cours, Working paper of IWEPS, n°3, september 2011, Namur, Belgium. Ruyters, C., Reginster I., Vanden Dooren, L., Charlier, J., 2014, Indicateurs complémentaires au PIB : l’indice des conditions de bien-être en Wallonie (1er exercice), Rapport de recherche, IWEPS, Namur, Belgium. Ruyters, C., Reginster I., Vanden Dooren, L., Charlier, J., 2015. Indicateurs complémentaires au PIB: l’indice des conditions de bien-être en Wallonie (2e exercice). Rapport de recherche IWEPS. 35 p. + annexes, Namur, Belgium.

236 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Dealing with Communication Barriers in Business Meetings - Focus on Intercultural Aspects

Ciortescu E. and Cecal A. Faculty of Economics and Business Administration, “Alexandru Ioan Cuza” University, Iasi, Romania [email protected], [email protected]

Abstract It is now widely acknowledged that English has become the lingua franca in the Business environment worldwide. It is thus only natural that Business students aim, among others, to master English, in general, and Business English, in particular. The Business English trainer’s major challenge thus resides in his/her ability to familiarize his/her students with the appropriate language of the context they are going to participate in. As Jennifer Cope (2015) clearly states, “in ESP instruction, there needs to be an awareness that understanding a text is more than just knowing the meaning of the words and attention should be paid to the effect that context has on the discourse”. In the same line of thought, Adrian Tennant (2015) points to the fact that trainers must be able to teach students how to react in emergencies, how to ask for information, clarification, or explanations, i.e. students must learn how to communicate and participate effectively in the contexts that might occur in their professional lives. This paper aims to discuss the major communication barriers that may occur in international business meetings and to identify some behavioral and linguistic strategies based on the quite recently introduced PL (plain language) principles in order to help students cope with such situations.

Key Words: education, ESP, business communication, business meetings

Introduction The Faculty of Economics and Business Administration at the “Alexandru Ioan Cuza” University of Iasi organizes Business English classes (i.e., lectures and seminars) for its first and second year students. This implies the study of Business English for four semesters (2 hours per week). Depending on their specialization, they may continue the study of English in their third Undergraduate year or during Master programmes. However, our students’ level of English remains extremely heterogeneous. They are fed up with grammar rules and are hardly interested in literature and culture. What they are particularly keen to achieve is the ability to communicate in English, both in writing and orally. This is why our purpose is to enable them to use English in both professional and personal contexts. However, some difficulties arise with groups which normally gather students from the beginner up to the advanced level. Their large number is also an important issue: groups of 30 – 40 students (seminars) whose level of English, as we have already mentioned, is extremely varied. For these reasons, the use of PL principles in teaching Business English proves extremely efficient. In a 2012 article – Introducing Plain Language Principles to Business Communication Students -, Rachelle R. Greer rightfully argues that, nowadays, in the increasingly globalized world, business entities, governments, agencies, etc. must adapt their strategies in order to improve communication. She further notes that a means to reach this purpose resides in adopting PL principles. In order to do so, when developing a learning programme, business trainers must take into account the above-mentioned PL principles: “Plain Language has to do with clear and effective communication – nothing more or less” (Greer quoting Kimble, 1995: 52). Actually, the author identifies the main advantages in using PL: users understand and find information easier, PL documents are easier to update, PL principles can be used to train learners to write more clearly and concisely (Greer: 138), thus responding to Adrian Tennant’s urge to help learners communicate more effectively. In other words, what we need to accept is that the “gobbledygook” era has come to an end. We no longer want to spend time on concentrating our efforts to display a complexity of mind based on complicated structures and highly technical vocabulary that our negotiation partners might not understand, thus leaving room for embarrassment and communication gaps. Under these circumstances, our purpose is oriented towards helping students assimilate those particular structures and vocabulary which enable them to transmit a clear message. Meetings are an important stage in performing any type of business. Consequently, among the communication skills that our learners must acquire, the ability to transmit and receive messages in the context of business meetings proves of paramount importance. In order to enable them to communicate effectively, we should primarily identify the barriers that may occur in such contexts.

237 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

We have found that the major communication barriers in business meetings may be generally classified in intercultural and linguistic barriers. Once learners have developed an awareness of these, we may attempt to identify some linguistic and intercultural strategies meant to provide them with support in overcoming the communication barriers likely to occur in such settings. It must be noted that our target is to be reached by engaging the PL principles we have previously mentioned.

Intercultural Barriers Theorists have sustained different, even opposing, views about the impact of culture on business communication. Intercultural communication specialists Scollon and Wong Scollon claimed that “The subject of ‘intercultural communication’ is beset by a major problem, since there is really very little agreement on what people mean by the idea of culture in the first place… Cultures do not talk to each other; individuals do. In that sense all communication is interpersonal communication and can never be intercultural communication.” (2001: 138) Humes and Reilly adopted a more traditional approach to the intercultural issue, stating that “ National and ethnic cultures affect the objects or things that people have as well as the ideas, values, attitudes, and beliefs that they adopt… People make assumptions about the way things should be based on their cultural backgrounds, and these assumptions influence their behavior in individual, group, and organizational situations. But when individuals become exposed to other cultures, situations may not turn out as expected based on these inevitable differences in cultural backgrounds.” (2008: 118) While both quotations reflect facets of the truth, we must note that interpersonal and intercultural communication are closely intertwined in international settings, on the one hand, and that cultural barriers cause various degrees of failure in communication, controversy and conflict in meetings and other business settings, on the other hand. The political, economic and social environments in many regions of our world today abound in crises and conflicts generated by cultural differences. This may be caused either by the lack of awareness regarding cultural differences, or by the inability to adapt and integrate diversity. Besides cultural knowledge, intercultural competence implies possessing good cultural skills, which may be defined as “the ability to act and react in a variety of cultures, and to put this interaction to good effect. These skills include attitudes of openness and tolerance, and the ability to cope with ambiguity.” (Utley, 2007: 6) “Coping with ambiguity” necessarily implies, in our opinion, becoming familiar with the cultural aspects that may become setbacks in business meetings, aspects which will be discussed in the following paragraphs. For a successful outcome of business meetings, both national and organizational cultures should be taken into consideration, lest they should become barriers in communication. For instance, some cultures support a rather assertive, almost demanding, business communication style, whereas in other cultures a more passive approach is adopted. A culture may encourage long meetings that require patience and self-control, while people in other cultures may prefer quick resolution. In certain cultures, it is considered important to develop a personal relationship with business partners participating in meetings and negotiations, but in others only superficial knowledge of the persons involved is considered sufficient. In terms of hierarchy, corporate culture may stimulate or hinder open discussions, depending on the type of culture and on the hierarchical level of the partners involved in a meeting. Power distance is quite high in hierarchical organizations where decision-making is centralized. Because of numerous policies and procedures which impede flexibility and compromise, interactions between employees and managers at different levels of a company’s structure may be awkward or may carry a very high degree of formality. In international meetings, people coming from businesses with a flat structure find a barrier in the stiff bureaucracy of companies with numerous layers of management. Steve Cohen provides a good illustration of a situation in which levels of management act as a barrier in negotiation meetings: “… a negotiator was once involved in negotiating with a major national company. Eventually, he and the other party’s negotiator reached a deal they both considered fair. Each time the other firm’s negotiator submitted a ‘final’ document, a different level of the corporate hierarchy weighed in with objections to elements of the deal important to that part of the company. When the negotiator admitted that the decision-making process had to be approved by five levels at corporate headquarters, the first negotiator walked away from the deal.” (Schulman, 2003: 162) Researchers in the area of cross-cultural communication have made use of various cultural dimensions to describe and classify cultures around the world in attempting to ease the task of business communicators. Hofstede’s model analyzed cultures from the point of view of power

238 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 distance, individualism v. collectivism, femininity v. masculinity, short-term v. long-term orientation, and uncertainty avoidance. Trompenaars’ looked at dimensions such as: universalist v. particularist, individualist v. collectivist, specific v. diffuse, achievement oriented v. ascription, and neutral v. emotional. Hall classified groups as monochronic or polychronic, high or low context, and past- oriented or future-oriented. Kluckholn identified five dimensions – attitude to problems: time, Nature, nature of man, form of activity, and relation to one’s cultural compatriots. (Lewis in Voices, 2014:8) As for time, each of the cultural differences explained by the use of the above-mentioned classifications can raise barriers in the way of communication in business settings. A story by David Beadles exemplifies quite well how obstacles in business relations may appear due to different cultural attitudes towards time: “Three years ago, my then-boss (we’ll call him Joe) traveled abroad for the first time – to Amsterdam. Joe’s your typical American executive: fast thinking, talking and acting … Joe and I attended our first team business dinner, which was quite the event: a five course extravaganza with the finest of wines. Before we’d finished the second course, Joe was pacing the room. Towards the end of the meal, just as our European colleagues began sharing their expectations and hopes for our new venture, Joe was outside hailing a taxi.” (Schulman, 2003: 150). In relation to how concepts of time can influence business behavior in various cultures, we may also note that being early, right on time or late for a meeting or a negotiation session are behaviors considered perfectly acceptable in various national cultures, depending on people’s diverse perceptions and uses of time, and may cause frustration to culturally unaware business partners, eventually leading to communication breakdowns. In connection with time, timing can be seen as one of the factors with a significant, sometimes crucial, influence on the success or failure of business communication. While carrying business- related discussions on over the lunch break or at dinner is accepted in some cultures, in other cultures it is generally considered rude or intolerable to extend conversations outside the business context, when business partners and colleagues enjoy their private time. When you accidentally meet your opponent in town, shopping with his family or having a romantic dinner, it is certainly not a good time to ask if the contract will be signed, after all. Body language may sometimes be an insurmountable barrier in business communication. Reflecting on the negative impact that the lack of knowledge concerning foreign body-language gestures may have on the success of business encounters, Allan and Barbara Pease note that “Surprisingly … very few of today’s professionals take the time to learn international body-language customs. When it comes to doing international business, smart attire, excellent references and a good proposal can all become instantly unstuck by the smallest, most innocent gesture sinking the whole deal.” (Pease, 2011: 137) Besides the OK sign with its very diverse connotations in various cultures (Pease, 2011: 139), there are many other body attitudes and gestures which can make or break a deal. Body posture, eye-contact, the use and extent of personal space and the smile are all very important cultural non-verbal signals that can foster or hinder good business relations. Even the handshake, which has been largely adopted as a symbol of business interaction, may be improper in certain cultural contexts. For instance, “One area where handshakes have not become established is Japan, where such bodily contact can be considered impolite. Japanese people bow on first meeting, the person with the highest status bowing the least and the one with the least status bowing the most.” (Pease, 2011: 143) Adaptation seems to be the ultimate necessity in cases of intercultural interactions, both at national or regional level and at corporate level. But, as Richard Lewis puts it, “It is hardly likely that even the most informed and adaptable executive could envisage assuming 200 different personalities! … Such chameleon-like behavior is out of the question and unattainable, but the question of adaptation remains nevertheless important.” (Lewis in Voices, 2014:8)

Linguistic Barriers While the intercultural element remains of paramount importance in Business communication, we should also focus on the linguistic barriers which may occur in business meetings. Meetings and negotiations are interrelated because they both imply that agreement must be reached. Consequently, students must be taught how to react and interact in such contexts. The major needs we have identified are: to create a safe and credible context (by showing respect for the other participants) and by asking questions/ for opinions, to make polite requests, to clarify content/ to manage uncertainty, to answer questions.

239 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Proficiency in English grammar and general vocabulary could prove useless if the speaker ignores the basic issues which form the basis of the so-called “negotiation” discourse which is most likely to occur in meetings. It is thus our aim to familiarize our students with the main aspects which form the basis of the art of negotiation: meetings become necessary once an agreement needs to be reached; that is why negotiation is closely related to meetings. Consequently, besides basic grammar rules and business vocabulary, we need to teach our students how to react and interact in business contexts, more particularly in meetings/ negotiations. In order to create a safe and credible context, students must acquire knowledge related to formulating various types of questions, e.g. open questions (i.e. “Wh-“ questions), closed questions (i.e. “Yes/ No” questions, e.g. “Is it…?”, “Are you…?”), they must develop the ability to ask for opinions by using structures like “What do you think…?”, “How do you feel…?”; they must undoubtedly be able to make polite requests (in this case, among others, students must be aware of the various uses of modal verbs: e.g. can, could, would are generally used to make requests; could and would are more polite than can; they should also be introduced to the use of two-step questions which is extremely useful in negotiations: “Could you do me a favour? Could you send these documents to Clive?”). Polite requests are also addressed by means of using the past continuous form of certain verbs “I was wondering…”, “I was thinking…” which implies that it is important for Business students to acquire knowledge related to the formation and use of tenses (Business Spotlight, no. 5/2014: 45-7). It is quite often that, in business meetings and negotiations, when confronted with extremely varied points of view, meaning is lost. In order to clarify content/ manage uncertainty, students are encouraged to rephrase ideas, to politely ask for clarifications and to use structures such as: “That’s interesting. What do you mean when you say…”, “I’m not quite sure I understand/ Could you tell me more…”, “So, what you are asking is … is that right?” and to avoid sounding aggressive. Perhaps the most difficult part in meetings/ negotiations is to answer questions. The major fears that our students face in this field are related to the inability to understand a question and to actually answer it. In this case, we encourage them to paraphrase and ask for further information (e.g. “Could you tell me more…?”); and, in the unfortunate case when they actually do not know the answer, we suggest they should take on responsibility by saying “I’m not sure about this. What’s your experience?” (Business Spotlight, no. 3/2014: 29-34).

Conclusions Our paper has aimed to identify some relevant intercultural and linguistic barriers which may occur in international settings and to provide significant input related to the structures that may be successfully used in facilitating communication in business meetings and negotiations. Since time has clearly become a key resource particularly for young professionals striving to establish the bases of their career, our students’ communication needs represent a priority in setting the directions of our enterprise, i.e. to familiarize them with the key concepts of business communication in general and with those of business meetings, in particular, and to provide them with the necessary support to actively use the intercultural as well as the linguistic patterns we teach in Business English Classes in real life contexts. Our purpose is to identify the best means to achieve this and we have found that by engaging PL principles in teaching Business English, we respond to our students’ needs. Once familiarized with the intercultural and linguistic barriers specific to business meetings, students will improve their ability to use meeting and negotiation skills in real-life cross-cultural interactions.

References Beadles, D., 2003, “An American Expat’s View”, in Myra Shulman, Selected Readings in Business, Millennium Edition, The University of Michigan Press, pp. 160-163

Cohen, S. P., 2003, “Good Negotiation Equals Good Contracts”, in Myra Shulman, Selected Readings in Business, Millennium Edition, The University of Michigan Press, pp. 160-163

Cope, J., 2014, “From Critical Analysis to Critical Literacy in ESP. Developing Skills for Greater Understanding of UK, US and Australian English Texts”, in Current Development in English for Academic and Specific Purposes: Local Innovations and Global Perspectives, ed. by Prithvi Shrestha, Garnet Publishing Ltd., UK, pp. 9-26

240 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Humes, M. and Reilly, A. H., 2008, “Managing intercultural teams – The reorganization exercise”, in Journal of Management Education 32, pp. 118-137

Lewis, R., 2014, “Teaching cultural competence”, in IATEFL Voices, Issue 236, January-February, Oxford University Press, pp. 8-9

Pease, A. and B., 2011, Body Language in the Work Place, Orion Books, London, UK

Scollon, R. and Wong Scollon, S., 2001, Intercultural Communication: A Discourse Approach, Blackwell, Oxford

Tenant, A., 2015, “Mayday! Mayday!” in IATEFL Voices, September/October 246, p. 11

Utley, D., 2007, Intercultural Resource Pack: Intercultural communication resources for language teachers, Cambridge University Press, Cambridge, UK

Magazines: Business Spotlight, May-June 3/ 2014, Spotlight Verlag, Deutschland Business Spotlight, September-October 5/ 2015, Spotlight Verlag, Deutschland

241 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

The Effects of Endorsement Sources towards Perceived Credibility

Cara C. and Tocila T. PhD(c), Alexandru Ioan Cuza University of Iași, 14th Lapușneanu Street [email protected], [email protected]

Abstract

Financial crises usually involve budget cuts especially for the marketing department and there is a challenge for both researchers and practitioners to find more efficient ways to advertise. Efficiency can be achieved through a careful selection of communication strategies and implicitly, a smart endorser selection. This quantitative research aims to identify how different sources of endorsement (celebrities, experts and typical consumers) are perceived in terms of credibility and to explore how the attitudes and perceived credibility could be related to the need for cognition concept. The sample covered 394 Romanian subjects. Each subject was exposed to three different sources of endorsement through ad layouts. After the exposure, the level of perceived credibility towards each type of endorser and the level of need for cognition for each respondent were measured through an adaptation of Trustworthiness Scale of Ohanian (1990) and the Short Need for Cognition scale of Cacioppo, Petty and Kao (1984). The implications are theoretical, as these relationships are investigated for the first time and empirical, being useful for companies activating in the beauty industry.

KEYWORDS Endorsement Sources, Need for Cognition

JEL CLASSIFICATION CODES M31 Marketing, M37 Advertising

1. INTRODUCTION

In times of economic crisis both consumers and managers are changing their mentalities. While consumers may seek for more rational decisions, which imply more frugal thoughts and more time to think if a service or product is worth buying, managers usually use two kinds of approaches – they either make cuts on the marketing department or invest the same amount of pecuniary resources on smarter advertising. In terms of endorsement, managers find themselves at a turning point, considering the large amount of money that this strategy implies.

On the other hand, consumers who are inclined to deeply analyze anything may spend even more thought on making a purchase in crisis times. That could be a bigger potential problem for products that are satisfying a hedonic need or are advertised more emotional than rational.

This study focuses on providing insights for managers regarding the effectiveness of endorsement strategies in the beauty services industry and also aims to find if need for cognition has a role as a personality trait in the relation between credibility and attitude formation.

Source credibility. This concept is widely approached by researchers in the persuasion area. Essentially, it is the combination of perceived trust and expertise. It is believed that it is a key factor of communication in order for a message to achieve persuasion (Inoue et al., 2012). The concept of source credibility is a multidimensional one. Most often, researchers mention the expertise and the trustworthiness as sub-dimensions of the construct. The work of Ohanian (1990) summarizes the most important approaches until 1990 regarding the composition of the construct.

Overall, researchers agree that a highly credible source is more effective in the matter of behavioral and attitudinal changes. If consumers have a positive perception of a specific endorser in an ad, this situation is usually leading to a positive attitude formation towards the ad. A credible endorser is an important antecedent in ads and brands evaluation (Goldberg et al., 1990; Mitchell et al., 1981;

242 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Mackenzie et al., 1986). The credibility of the endorser positively influences the purchasing intention. This influence is based either on the attitude towards the ad or the attitude towards the brand (Yoon et al., 1998; Ferle et al., 2005).

Considering the fact that need for cognition has a contribution to the process of attitude formation and attitude change as a result of ad exposure (Petty, Cacioppo 1982) and the fact that source credibility is a complex construct, influenced by numerous endogenous or exogenous factors (Yoon, 1998), this study aims to establish if need for cognition somehow influences the relation between source credibility and ad efficacy.

Need for Cognition (abbreviated NFC) is an individual characteristic that is used to predict attitude and attitude change in the Elaboration Likelihood Model (Petty, Cacioppo, & Kao, 1984). NFC construct is used for measuring the degree to which one enjoys cognitive effort. Individuals with high NFC and low NFC tend to have different approaches to problems. While persons with high NFC have the need to think about the given stimuli or comparing them with previous experience, persons with low NFC tend to rely on others in the process of attitude formation or attitude change.

The Theory of Elaboration Likelihood implies that NFC trait is a constant characteristic of individuals or even an inborn one. Individuals’ attitude is considered to be more long lasting and to have a greater magnitude in cases of high tendency towards need for cognition (Petty, Cacioppo, & Kao, 1984). That’s is happening because they tend to analyze more the given piece of information, on the condition that the persuasive message includes some strong arguments that can be processed through central route. The conceptualization of NFC as a personality trait with an important role towards the attitude can be found in several articles (Petty, Cacioppo, & Kao, 1984; Cacioppo & Petty, 1982; Cacioppo & Petty, 1984; Cacioppo, Petty & Morris, 1983; Cacioppo, Petty, Kao & Rodriguez, 1986).

Considering that, an individual with high NFC will base his attitudes taking into account the rational facts rather the emotional ones. Rational facts are drawn either from arguments, from previous experience or from personal expertise. For a person that does not have a personal experience or personal expertise, the source of arguments could be important.

But what happens with the attitude of an individual with high NFC if an ad message does not contain rational, strong arguments? Will he retain his initial attitude or will he make an extrapolation based on the source of the message? The literature omitted an extrapolation effect of the source.

2. Method

394 subjects participated in an online survey. They were aged 18 – 55 years and the sample included both males and females from different Romanian counties. The majority of the subjects (214) were aged 18 to 25 years old. 141 subjects were aged 26 to 35, 25 subjects were aged 36 to 45 and 14 subjects were 46 - 55 years old. Out of the total of 394 subjects, 334 were females and 60 were males. The sample covered 19 Romanian counties – Alba, Bacău, Botoșani, Brăila, Brașov, Ilfov, Buzău, Cluj, Constanța, Galați, Iași, Maramureș, Mureș, Neamț, Olt, Sălaj, Suceava, Vaslui and Vrancea.

The questionnaire was distributed online, via several Facebook pages and groups. At the beginning it included the measurement of the initial purchase intention (2 items on a 9-point Likert scale), the initial intention of recommendation (1 item on a 9-point Likert scale) and the attitude towards cosmetic services (3 items on a 9-point Likert scale). Initial and final attitude were measured, using an adaptation of Dual Mediation Model’s constructs (Lutz, 1985)

The following item of the questionnaire referred the county of the subjects. Afterwards, three ad layouts were presented. Each one represented a different endorsement source for the Intraceuticals brand (cosmetic treatments). The first ad layout presented four celebrities (two international and two national celebrities, one male and three females), the second one presented four experts (two dermatologists and two estheticians, two Romanian, one Canadian and one from USA) and the third one presented four typical satisfied consumers (one male and two females).

After evaluating the ad layouts, the participants rated the credibility of each type of endorsement source - celebrity, expert and the typical satisfied consumer. The perceived credibility was measured

243 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 by an adaptation of the Ohanian’s trustworthiness scale and included four items – sincerity, credibility, trustworthiness and honesty, measured on a 9-point Likert scale.

After that, the measures of attitude, purchase and recommendation intention were again introduced, in order to track the changes after the exposure to the endorsement sources. Afterwards, the level of need for cognition was measured (18 items on a 9-point Likert scale). Some items were reversed; the mean was used for identifying the individual level of NFC. The final items of the questionnaire referred to the age and the gender of the participants. For all the scales the items were averaged for identifying the individual mean level.

The whole questionnaire, including the ad layouts, can be found in the Appendix section.

3. Results

Reliability analysis. Cronbach’s Alpha coefficients were used for identifying the internal consistency of the scales. α = 0.943 for initial purchase intention, α = 0.973 for final purchase intention, α = 0.927 for initial attitude, α = 0.956 for final attitude, α = 0.949 for celebrities’ trustworthiness, α = 0.956 for experts’ trustworthiness, α = 0.960 for consumers’ trustworthiness and α = 0.906 for the overall trustworthiness. All those scales were found internally consistent.

NFC’s Cronbach Alpha coefficient was initially α = 0.650. Eighth item was deleted in order to achieve an internal consistency of α = 0.718. This item was “I prefer to think about small, daily projects to long-term ones”.

Differences between the three endorsement sources in terms of credibility. A Friedman test revealed that the three categories of endorsers were perceived overall significantly different (χ2 (2) = 154.314, p < 0.05). The lowest credibility score belongs to celebrities (M = 1.59). The closest categories in terms of perceived credibility were the experts and the typical satisfied consumers (M = 2.31, M = 2.11). Experts were perceived as the most credible endorsers. Individual pair-wise analysis reported that all three categories are significantly different from each other (p< 0.05), so we can conclude that celebrities, experts and consumers are perceived in different ways in terms of credibility.

Attitudes changes. A Wilcoxon test was performed to determine if the changes in attitude, purchase intention and intentions of recommendation were significant. 158 subjects negatively changed their attitude after the exposure, while only 115 subjects positively changed their attitude. 121 did not change their attitude at all. Changes were significant, as α = 0.036.

The situation was reversed for the intention of recommendation, which, overall, has increased. 94 subjects negatively changed their purchase intentions while 166 positively changed their purchase intention. 134 subjects did not change their purchase intentions. Changes were significant, as α = 0.000.

The majority of the subjects (206) did not change their purchase intention, while 108 scored a positive change and 80 a negative one. Changes were significant (α = 0.039).

NFC correlations with attitude. In order to verify the link of the NFC construct with the observed components of attitude, several Spearman non parametrical correlation tests were conducted. Significant correlations were found between NFC and initial recommendation intention (rs = 0.146, p = 0.004), initial (rs = 0.145, p = 0.004), between NFC and final purchase intention (rs = 0.145, p = 0.004), between NFC and initial attitude (rs = 0.221, p = 0.000) and between NFC and final attitude (rs = 0.203, p = 0.000). All the correlations were weak and positive. Attitude towards the brand (both initial and final) had the highest correlation with NFC. NFC was not found to be significantly correlated with any change of attitude.

NFC in the credibility – attitudes relation. The general final attitude was composed by averaging the scores of final purchase intention, intention of recommendation and attitude towards the brand. Scores for each endorser category significantly predicted the general final attitude. For the celebrity endorsers

244 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 category, β1 = 0.264, t = 3.352, α = 0.001, for the expert endorsers category, β2 = 0.247, t = 3.408, α = 0.001) and for the satisfied consumers category, β3 = 0.174, t = 2.538, α = 0.012). For Need for cognition, β4 = 0.300, t = 9.565, α = 0.000. The combination of perceived credibility of each source and the Need for cognition indicator explained a significant proportion of variance of the general final attitude towards the service, adjusted R2 = 0.856, F = 586.801, α = 0.000.

In order to investigate if need for cognition has an interaction between source credibility and the attitude after the exposure, a multiple regression model was tested. After centering the regression terms, the interaction terms were computed. A small change in R square was present (a change of 0.002), but it was not significant (p > 0.05), thus Need for cognition does not moderate the relation between credibility and attitude after the exposure. It is, however, a valid predictor in the model.

Negative, neutral and positive changes. In order to investigate the particularities of each group that had a negative, positive or no change in attitudes, the whole sample was divided in three subsamples, based on the type of change recorded after the exposure to the ad.

The first three groups were divided by the changed in the intention of recommendation. Significant, positive and weak non-parametrical correlations were found between the group that had a positive change in the intention of recommendation and the perceived credibility of the advertised endorsers. Thus, the higher correlation was found between the positive change in recommendation and celebrities’ trustworthiness (rs = 0.280, p = 0.000), closely followed by the consumers’ (rs = 0.274, p = 0.000) and experts’ trustworthiness (rs = 0.274, p = 0.000). This means that celebrities express a slightly higher influence over the positive change of the intention of recommendation than the other sources of endorsement. Also for the group that positively changed their intention of recommendation manifested a higher non-parametrical correlation with the change in the purchase intention (rs = 0.224, p = 0.004) than with the change in attitude (rs = 0.182, p = 0.019). Some differences related to the gender of the subjects were found in the subsample that negatively changed their intention of recommendation. In this group, females have a significantly smaller negative change of the intention of recommendation than males (females’ mean rank = 45.41, compared to males’ mean rank = 73.50, p = 0.07). Furthermore, other subsamples were constructed, based on the changes in attitude. For the group that had a negative change of attitudes, were found two significant non-parametrical correlations, one with the trust in experts (rs = 0.210, p = 0.008) and one with the trust in the typical satisfied consumer (rs = 0.161, p = 0.043). This means that when the trust in experts and consumers increase, also increase the negative change of the attitude. Those who positively changed their attitude have a higher change of purchase intention (rs = 0.240, p = 0.010) and those who negatively changed their attitude have a higher change in the intention of recommendation (rs = 0.335, p = 0.000). The last criteria of subsample formation considered was the change in the purchase intention. The group that positively changed their purchase intention manifested a higher correlation with both celebrities’ trustworthiness (rs = 0.329, p = 0.001) and experts’ trustworthiness (rs = 0.291, p = 0.002) than the group that negatively changed their purchase intention (rs = 0.224, p = 0.046 for celebrities’ trustworthiness and rs = 0.249, p = 0.026). The correlation with consumers’ trustworthiness was not significant. The change in purchasing intention is correlated with the change in recommendation intention for the subsample that negatively changed their recommendation intention (rs = 0.272, p = 0.015). As regarding the group that positively changed their purchase intention, the degree to which their purchase intention changed is correlated with both change in attitude (rs = 0.389, p = 0.000) and recommendation intention (rs = 0.437, p = 0.000).

4. Conclusion and discussion

Each source of endorsement was perceived different in terms of credibility. Celebrities were considered the most unreliable and the typical satisfied consumer as the most reliable. Considering the budget required for the implementation of an endorsement strategy, this result is useful in choosing one source over another.

245 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

All the measured changes, in attitude, in intention of recommendation and in purchase intention were found to be statistically significant, so the exposure to the ads definitely had an effect over the subjects.

The analysis of subsamples formed by dividing subjects according to their positive or negative changes in intention of recommendation revealed that the group that scored positive changes had the highest trust in celebrities and the lowest trust in experts. It means that celebrities are most suitable if a change in intention of recommendation is desired. Further results implied that within the same group is more probable that the positive change in recommendation to be accompanied by a change in the purchase intention than a change in attitude. Within the group that negatively changed their intention of recommendation, males scored a significantly higher negative change than females.

The subsamples that depended on the change in attitude towards the service category exposed that the negative changes are linked to a higher trust in experts and typical satisfied consumers. This group also has a higher change in the intention of recommendation, while the positive changes of attitudes is associated with a higher change in purchase intention.

Regarding the particularities of the subsamples formed by the changes in purchase intention, the group that positively changed had higher associations with the trust in celebrities and experts than the group with negative changes. Essentially, it is more likely that a higher trust in those two types of sources to lead to a positive change of purchasing intention. The typical satisfied consumer does not have a role in the change of the purchase intention. The negative change of the purchase intention is linked to the change in the intention of recommendation, as the positive change of attitude is linked with both changes in attitude and recommendation intention.

Need for cognition was found to be a significant predictor, along with the perceived credibility of endorsers, for the final state of subjects’ attitudes. However, in this case, the construct does not act like a moderator. The relationship between need for cognition and the general final attitude, which includes final attitude towards the service, final purchase intention and final intention of recommendation, is positive, fact that implies that when a subject’s need for cognition is high, he tends to have a higher general attitude regarding this particular service. Even if we initially expected to found that differences between perceived credibility of each source would be explained in some extent by the individual levels of need for cognition, this was not the case with our sample. However, the fact that need for cognition was a valid predictor of attitude needs some further investigation in order to identify what is leading a subject with high need for cognition to a higher general attitude towards a service after the exposure to a message that purposely failed to include strong arguments of the advertised service.

This study has some limitations, the most poignant one being the sample size, which is not statistically significant for Romanian population. A shortcoming emerging from the sample composition is the heterogeneity of the subjects. A homogenous sample in terms of service usage, gender and age could offer more specific insights.

Acknowledgement

This work was co-financed from the European Social Fund through Sectoral Operational Programme Human Resources Development 2007-2013, project number POSDRU/187/1.5/S/155656 „Help for doctoral researchers in economic sciences in Romania”.

References

Cacioppo, J. T., & Petty, R. E. (1982). The need for cognition. Journal of Personality and Social Psychology, 42, 116-131;

246 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Cacioppo, J. T., & Petty, R. E. (1984). The need for cognition: Relationship to attitudinal processes. In R. P. McGlynn, J. E. Maddux, C. D. Stoltenberg, & J. H. Harvey (Eds.), Social perception in clinical and counseling psychology (pp. 91-119). Lubbock: Texas Tech University;

Cacioppo, J. T., Petty, R. E., & Morris, K. J. (1983). Effects of need for cognition on message evaluation, recall, and persuasion. Journal of Personality and Social Psychology,, 45, 805-818;

Cacioppo, J. T., Petty, R. E., Kao, C. E, & Rodriguez, R. (1986). Central and peripheral routes to persuasion: An individual difference perspective. Journal of Personality and Social Psychology, 51, 1032- 1043;

Goldberg, M.E. and Hartwick, J. (1990) ‘The effects of advertiser reputation and extremity of advertising claim on advertising effectiveness’, Journal of Consumer Research, 17, September, 172– 179;

Inoue, Y., & Kent, A. (2012). Investigating the role of corporate credibility in corporate social marketing: A case study of environmental initiatives by professional sport organizations. Sport Management Review, 15(3), 330-344;

La Ferle, C., & Choi, S. M. (2005). The importance of perceived endorser credibility in South Korean advertising. Journal of Current Issues & Research in Advertising, 27(2), 67-81;

Lutz. R. J. (1985). Affective and cognitive antecedents of attitude toward the ad: A conceptual framework. In L. F. Alwitt & A. A. Mitchell (Eds.), Psychological processes and advertising effects; Theory, research and application. Hillsdale, NJ: Lawrence Erlbaum Associate;

MacKenzie, S. B., Lutz, R. J., & Belch, G. E. (1986). The role of attitude toward the ad as a mediator of advertising effectiveness: A test of competing explanations. Journal of marketing research, 130- 143;

Mitchell, A. A. (1981). The dimensions of advertising involvement. Advances in consumer research, 8(1), 25-30;

Ohanian, R. (1990). Construction and validation of a scale to measure celebrity endorsers' perceived expertise, trustworthiness, and attractiveness. Journal of advertising, 39-52;

Petty, R. E., Cacioppo, J. T., & Kao, C. F. (1984). The efficient assessment of need for cognition. Journal of Personality Assessment, 48(3), 306-307;

Yoon, K., Kim, C. H., & Kim, M. S. (1998). A cross-cultural comparison of the effects of source credibility on attitudes and behavioral intentions. Mass Communication and Society, 1(3-4), 153-173.

247 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Appendix - Online survey

This study is addresses to both women and men. We make a few references to beauty treatments, but your opinion is valuable even if you do not use such services. Please complete the following questionnaire. All the responses are confidential. The required time is about 5 minutes.

Would you have a cosmetic treatment in the next 4 months?

Unlikely 1 2 3 4 5 6 7 8 9 Likely Definitely not 1 2 3 4 5 6 7 8 9 Definitely

Would you recommend to a friend a cosmetic treatment, regardless if you use it or not?

Definitely not 1 2 3 4 5 6 7 8 9 Definitely

What is your opinion about cosmetic treatments?

Negative 1 2 3 4 5 6 7 8 9 Positive Not worth the money 1 2 3 4 5 6 7 8 9 Worth the money Bad for skin 1 2 3 4 5 6 7 8 9 Good for skin

Next, we will present three categories of opinions about Intraceuticals cosmetic treatment, which treats a variety of skin problems. All the presented opinions are authentic and are expressed by the persons concerned. Please follow carefully the information of each material.

Specify the county where you live: …………………………………………………..

248 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

249 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

How sincere do you find the opinions of each group? (1 = not sincere, 9 = very sincere)

Celebrities’ opinions 1 2 3 4 5 6 7 8 9 Doctors’ opinions 1 2 3 4 5 6 7 8 9 Consumers’ opinions 1 2 3 4 5 6 7 8 9

How credible do you find the opinions of each group? (1 = not credible, 9 = very credible)

Celebrities’ opinions 1 2 3 4 5 6 7 8 9 Doctors’ opinions 1 2 3 4 5 6 7 8 9 Consumers’ opinions 1 2 3 4 5 6 7 8 9

How honest do you find the opinions of each group? (1 = not honest, 9 = very honest)

Celebrities’ opinions 1 2 3 4 5 6 7 8 9 Doctors’ opinions 1 2 3 4 5 6 7 8 9 Consumers’ opinions 1 2 3 4 5 6 7 8 9

How trustworthy do you find the opinions of each group? (1 = not trustworthy, 9 = very trustworthy)

Celebrities’ opinions 1 2 3 4 5 6 7 8 9 Doctors’ opinions 1 2 3 4 5 6 7 8 9 Consumers’ opinions 1 2 3 4 5 6 7 8 9

Now that you have viewed the material, we will resume a few questions from the beginning of the questionnaire. Would you have a cosmetic treatment in the next 4 months?

Unlikely 1 2 3 4 5 6 7 8 9 Likely Definitely not 1 2 3 4 5 6 7 8 9 Definitely

Would you recommend to a friend a cosmetic treatment, regardless if you use it or not?

Definitely not 1 2 3 4 5 6 7 8 9 Definitely

What is your opinion about cosmetic treatments?

Negative 1 2 3 4 5 6 7 8 9 Positive Not worth the money 1 2 3 4 5 6 7 8 9 Worth the money Bad for skin 1 2 3 4 5 6 7 8 9 Good for skin

250 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Finally, please answer a few questions about your profile. Indicate your degree of agreement for the following statements (1 = strongly disagree, 9 = strongly agree):

I would prefer complex to simple problems. 1 2 3 4 5 6 7 8 9 I like to have the responsibility of handling a situation that requires 1 2 3 4 5 6 7 8 9 a lot of thinking. Thinking is not my idea of fun. 1 2 3 4 5 6 7 8 9 I would rather do something that requires little thought than 1 2 3 4 5 6 7 8 9 something that is sure to challenge my thinking abilities. I try to anticipate and avoid situations where there is likely a chance 1 2 3 4 5 6 7 8 9 I will have to think in depth about something. I find satisfaction in deliberating hard and for long hours. 1 2 3 4 5 6 7 8 9 I only think as hard as I have to. 1 2 3 4 5 6 7 8 9 I prefer to think about small, daily projects to long-term ones. 1 2 3 4 5 6 7 8 9 I like tasks that require little thought once I’ve learned them. 1 2 3 4 5 6 7 8 9 The idea of relying on thought to make my way to the top appeals 1 2 3 4 5 6 7 8 9 to me. I really enjoy a task that involves coming up with new solutions to 1 2 3 4 5 6 7 8 9 problems. Learning new ways to think doesn’t excite me very much. 1 2 3 4 5 6 7 8 9 I prefer my life to be filled with puzzles that I must solve. 1 2 3 4 5 6 7 8 9 The notion of thinking abstractly is appealing to me. 1 2 3 4 5 6 7 8 9 I would prefer a task that is intellectual, difficult, and important to 1 2 3 4 5 6 7 8 9 one that is somewhat important but does not require much thought. I feel relief rather than satisfaction after completing a task that 1 2 3 4 5 6 7 8 9 required a lot of mental effort. It’s enough for me that something gets the job done; I don’t care 1 2 3 4 5 6 7 8 9 how or why it works. I usually end up deliberating about issues even when they do not 1 2 3 4 5 6 7 8 9 affect me personally. I would prefer complex to simple problems. 1 2 3 4 5 6 7 8 9

Gender: Female / Male

Age: 18 – 25 years / 26 – 35 years / 36 – 45 years / 46 – 55 years

251 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Estimating Greek financial crisis impact on port authorities’ revenues: The case of a regional cruise homeport.

S. Troumpetas1, C. Beneki2, D. Giannias1 & P. G. Eliopoulos3 1Hellenic Open University, School of Social Sciences, Greece 2Technological Educational Institute of Ionian Islands, School of Business and Economics, Department of Business Administration, Greece 3Technological Educational Institute of Western Greece, School of Business and Economics, Department of Accounting and Finance, Greece. [email protected]

Abstract

Cruises have become one of the most dynamic and fastest growing segments of the international tourist industry in terms of passenger demand and vessel supply. Although Greece is an attractive cruise tourist destination, it fails to make the most of its potential in terms of revenue generated due to lack of a sufficient number of homeports for cruise.

The cruise industry is a fast growing tourism sector and a key component of the local and national economy. Greek ports are key players in a competitive environment throughout the Mediterranean basin. Competitiveness in these ports depends on a number of factors such as port and terminal charges, location, services and most importantly, cruise-oriented attractions. This paper examines the governance model and pricing policy of twenty-two Greek ports representing nearly 75% of the overall cruise traffic in Greece. We then go on to assess the Greek financial crisis impact for the Heraklion Port Authority S.A. in terms of both passenger volume and revenues generated by cruise ship calls during 2008-2014 period.

Keywords: cruise industry, financial crisis, Port Authorities, port pricing, revenue estimation

1. INTRODUCTION

1.1 Cruise Industry Overview

In turbulent economic periods, like the current global economic crisis, cruise industry shows a remarkable resistance to the Sirens calls for economic recession (Lekakou et. al, 2011). Cruises have become one of the most dynamic and fastest growing segments of the international tourist industry in terms of passenger demand and vessel supply. Cruise ships are constantly growing in size, expanding their range of activities on-board in order to satisfy the complex demands of both first time and returning passengers (Castillo-Manzano et al. 2014). Cruise tourism can benefit a destination by increasing foreign exchange earnings, profit, taxes, employment, positive externalities and economies of scale (Brida 2014a; Pratt and Blake 2009). In addition, cruise tourism requires less infrastructure compared to stopover tourism at a tourist destination (Andriotis and Agiomirgianakis 2010).

The Caribbean has been the dominant deployment market of the cruise industry since its inception, but the Mediterranean cruise market has grown substantially in recent years (Rodrigue and Notteboom 2012). According to the Cruise Lines International Association (CLIA), the Caribbean accounts for more than a third of the global deployment capacity market share in 2015, while it is considered complimentary to the Mediterranean in the sense that Caribbean is dominantly serviced during the winter, while the Mediterranean experiences summer peak season (Rodrigue and Notteboom 2012).

252 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

During the last five years, the cruise industry has felt the impact of the financial crisis, but unlike many other industries, it had the advantage of several counter-crisis options, such as its ability to move ships and switch itineraries, to quickly adapt to the evolving demand and to enjoy a high perceived value for money spent (Brida et al. 2014b). Cruise market remains an oligopoly in that, through a process of consolidations and mergers, is dominated by three groups of companies (Carnival Group, Royal Caribbean and Norwegian Cruise Lines) which hold a cumulative 81.6% market share compared to 75% in 2008 (Lekakou et al. 2010; Cruise Market Watch 2015). According to the CLIA’s annual State of the Cruise Industry Report (CLIA 2015), twenty three million passengers are expected to sail until the end of 2015 to nearly one thousand ports of call in new exotic locations, especially in the fast growing Asian market. CLIA members also announced the launch of twenty two new cruise ships in 2015 for a total investment of four billion dollars.

1.2 Effects of financial crisis and the Cruise Industry in Greece

The financial crisis that hit first the US in 2007 influenced many developed and developing countries the main cause of which was the subprime mortgage crisis in USA (Ozturk, 2015). The effects, especially in Greece were especially deep due to its high debt level, low competitive power and unstable political structure. Therefore, this crisis largely affected the majority of economic activities in Greece in the primary, secondary and service sector (Papatheodorou and Arvanitis, 2014).

Despite the crisis, general and cruise tourism industry is currently undergoing a period of rapid expansion and Greece is included among the top most popular destinations worldwide. At a national level Greece had 24,3 million international tourism arrivals (including cruise passengers), which accounted 13,4 billion euros in 2014 (National Bank of Greece, 2014), as presented in the following figure:

Figure 1: Arrivals in Greece 2013-2014

25000 22033

20000 17920 15517 15000 General Tourism Arrivals 10000 Cruise Tourism Arrivals

5000 2374 2396 1428 0 2012 2013 2014

source: National Bank of Greece, Balance of Tourism Payments, 2014

In any case, Greece has about a 1.5% share of the world tourism market and a 2.9% of the European one (Ozturk, 2015, SETE, 2014); moreover and when all different impacts are considered, tourism

253 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 contributes by 17,3% to the total Greek GDP generating nearly 20% of total employment in the country (WTTC, 2015).

Although Greece is an attractive cruise tourist destination, it fails to make the most of its potential in terms of revenue generated. One of the main reasons for this failure is the lack of a sufficient number of homeports for cruise. In addition, the cruise industry, especially in Greece, remains an under- researched academic field in maritime economics. In the past few years, the industry has attracted just a handful of researchers from various fields investigating the complexity of its operational and commercial dynamics (Pallis et al. 2010).

2. LITERATURE REVIEW

Greek debt crisis offers an extensive field of study examined by many researchers (Gibson et. al., 2014, Mink and Haan, 2013, Karagiannis and Kondeas, 2012, Pagoulatos and Triantopoulos, 2009) and analyzed in numerous Greek and international textbooks. The crisis impact on Greek tourism is significantly less examined (Stylidis and Terzidou, 2014, Papatheodorou et. al., 2010, Kapiki, 2011) while papers addressing impacts on cruise tourism in Greece are few (Lekakou et. al, 2010 & 2011).

The discussion on port pricing and its impact on maritime economics began in 1982, when Janson and Schneerson highlighted the complexity of pricing practices at the time. References to the relation between port charges and port costs are also present in the seminal work of Thomas Thorburn in 1960. Pallis et al. (2010) analyzed 395 papers published between 1997 and 2008, highlighting how contributions in the area of policy and regulation have remained rather fragmented as attested by the few influential articles in terms of citations (Acciaro 2013). From a port economics point of view, the cruise sector seems to be neglected. Pallis et al. (2010) identified only four papers (Baird 1997; McCalla 1998; Butt 2007; Guerrero et al. 2008) dealing with cruise terminals (Lekakou et al. 2010).

The vast majority of research papers examining port pricing and policies mainly focus on cargo ships and port infrastructures dedicated to host this type of vessels. Goulielmos (1999) addressed port deregulation issues in major Greek ports, while Psaraftis (2007) discussed practical approaches in tariff reforms for the port of Piraeus. One year later, Pallis (2006) examined forms of port governance in Greece.

The cruise industry sells itineraries, not destinations, underlining the core importance in the selection of a sequence of ports of call. The challenge for the cruise operators is to develop competitive packages that optimize the deployment of their cruise ship fleet in view of minimizing operating costs (Mylonas 2012). According to their use by cruise companies, cruise ports are commonly classified in three categories: home ports, ports of call and hybrid ports (Lekakou et al. 2010). Home ports are the starting and ending point of a cruise, ports of call are stopover ports. Hybrid ports are both home and stopover ports. Our survey shows that only a small percent of cruise ports reviewed in Greece serve as hybrid ports. Pricing policies in Greek ports are highly dependent on their governance model as we explain in the following sections of this paper.

3. DATA

In order to estimate the impact of the crisis in terms of revenue loss, a distinction between a Port Authority (port corporation) and a Municipal Port Fund must be made. The main reason is that a Port Authority is required under law to publish its pricing policy and balance sheets in order to be

254 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 accessible to all stakeholders. On the other hand, data from a Municipal Port Fund can be collected either directly from its personnel.

The survey was carried out on February 2015, initially aiming at including thirty eight regional ports of call in Greece. The Municipal Port Fund personnel were contacted by telephone and were asked for data on the port dues per ton, the berth dues per meter, the passenger dues per passenger on-board, the waste disposal dues, the mooring dues and the pilotage dues. Overall, we collected information for twenty two regional ports. More specifically, our sample consists of six Port Authorities and sixteen Municipal Port Funds. In fact, this sample represents 75% of the overall cruise traffic in terms of passenger volume, while the six regional Port Authorities represent approximately 20% of cruise passenger traffic in Greece.

4. PRICING POLICIES AND TARIFFS ON GREECE’S REGIONAL PORTS OF CALL

Looking at the sources of revenue for ports, we find that, on the one hand, these consist of Port dues (

Pd ), Berth dues ( Bd ) and Passenger dues ( Paxd ), named Common Dues and, on the other hand, consist of ancillary charges that differ among ports like Waste Disposal dues (Wd ), Mooring dues (

M d ), Pilotage dues ( Pd ) and other dues. Common Dues are described as follows:

Common Dues  Pd  Bd  Paxd  x1GT  x2L  x3Pax ,

where is expressed as the product of the charge in euros per ton ( ) by the Gross Tonnage of the Pd x1 vessel ( GT ), Bd is expressed as the product of the charge in euros per meter ( x2 ) by the overall length of the vessel ( L ) and is expressed as the product of due per passenger onboard ( x3 ) by the number of passengers onboard ( Pax ). At this point, we should stress that the above charges refer to ports other than homeports (mainly Port Funds). Therefore, onboard passengers incur passenger dues. For homeports (with embarking and disembarking passengers), a different pricing scheme applies.

In Greek ports, every cruise ship calling is obliged to pay port dues. Berth dues are paid in case a ship uses a pier. The usage of port’s infrastructure (pier) is not mandatory. It depends on numerous factors like weather conditions, captain’s decisions, cruise company policy or congestion of vessels in the same harbor during summer peak season. Bd equals zero at ports with no such infrastructure (e.g. Santorini Island). Passenger dues are paid at all times. Our survey shows that Port dues are calculated by using the coefficient 0.0095162 (as amended by the Official Government Gazette No 310/B Bulletin dated 11/02/2004). In particular, to calculate the port dues for a cruise ship with a Gross

Tonnage of no more than 500 GT, it equals €3.20+ (GT 500) x1 . Birth dues are calculated by using the coefficient 0.2984901 (as amended by the Official Government Gazette No 310/B Bulletin dated 11/02/2004), except for one port. According to the personnel we contacted, there were slight variations in the fifth decimal places of the coefficients among the Municipal Port Funds. The coefficient 0.35 applies to onboard passengers at fifteen ports, except for one. Further investigation is necessary to identify this difference.

The calculation of the Common Dues is carried out without taking into account the same coefficients among the six regional Port Authorities in our sample. The port tariff of charges differs substantially,

255 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 ranging from 0.0094 to 0.4 euros for x1 coefficient, from 0.03 to 0.42 euros for x2 coefficient and from 0,35 to 2 euros for x3 coefficient. Compared to a Municipal Port Fund, a Port Authority is far more flexible to choose its optimal pricing policy for the provision of services and infrastructure (piers, terminals, security, passenger facilities, etc.)

As far as ancillary charges are concerned (Waste Disposal dues, Mooring dues), it appears that there is a lack of a coordinated tariff policy; thus, Port Authorities and Municipal Port Funds have been pretty much independent of one another. In many cases these services are provided by individual companies having a contract with the port authority.

5. PORT REVENUE ESTIMATES OF HERAKLION PORT AUTHORITY S.A. Are they affected by the financial crisis ?

Due to the lack of detailed data from all ports in our sample, it is difficult to reach an accurate estimate of the ports’ revenues. In this paper, we attempted to estimate the revenues of the Heraklion Port, one of the major regional ports in Greece. The selection of this port was based on the extent of cruise traffic data provided by port executives and the well-documented port policy.

First, we identified the number of calls and passengers by using the records of the cruise traffic data in the Heraklion port from 2008 to 2014. Due to lack of off-season data, 2011 has not been included in the following charts. The list provided by the authorities was restrained, recording ship names and number of passengers only. Thus, the values of the overall length and gross tonnage required for the estimation of revenues were obtained from the ship operators’ own websites.

As shown in Figure 2 , the port has seen increased number of cruise ship visits up to October. In fact, during the period of peak demand (May to September) the Heraklion port attracted a significant proportion (59% in 2013; 53% in 2014) of the annual cruise ship visits. Despite this, the arrivals of cruise ships at Heraklion port decreased significantly from 2008 to 2014, as demonstrated bellow.

Figure 2: Monthly cruise ship arrivals: 2008 to 2014

50 45 49 40 39 36 40 30 36 22 26 21 22 2008 20 15 10 17 18 18 2014 10 3 3 7 12 15 3 0 2 0 1

Our analysis shows that during our period of evaluation January to April arrivals are not greatly affected by the crisis. Peak season shows remarkable decrease in arrivals. The monthly difference in arrivals between 2008 and 2014 is displayed in the following graph:

256 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Figure 3: Absolute Difference in Arrivals between 2008 and 2014.

5 5 3 3 0 1 -2 -5

-10 -11 -15 -15 -20 -22 -25 -24 -24 -27 -27 -30

During the 2008-2014 period, a change in the arrival’s pattern between Peak and Low season was observed: From 2010 onwards, ship arrivals during Peak season are reduced, while arrivals during low season tend to increase. An interesting observation is that in 2014 and despite the overall decline in visits, low season ones held considerably better than peak season ones, resulting in an almost even distribution. The reason for this effect is open for research. (figure 4).

Figure 4: Peak and off-season cruise ship arrivals from 2008 to 2014

80% 75% 70% 69% 65% 64% 60% 59% 52% 50% 48% 40% 41% Peak Season 36% 35% Low Season 30% 31% 25% 20%

10%

0% 2008 2009 2010 2012 2013 2014

Over time, it becomes apparent (Figure 5) that more and larger vessels are calling at Heraklion port. Passenger behavior shows a similar trend, according to Figure 6.

Figures 5&6: Average Gross Tonnage of cruise ships and average passenger per ship calling at Heraklion port (2008-2014)

257 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

60000 1600 1365 1400 50000 45074 48865 1161 1440 39071 48362 1200 1100 40000 1190 1000 33560 37752 970 30000 800 20000 600 400 10000 200 0 0 2008 2010 2012 2014 2008 2010 2012 2014

Another conclusion drawn from passenger arrivals in the 2008-2014 period is that, while the number of individual ship calls at the port has decreased, the port's dependence on certain ships (and consequently, cruise operators) has increased, from 63 different ships (2008) to 40 (2014)

Using data from the Heraklion Port’s pricing policy (as amended by Official Government Gazette No 654/B Bulletin dated 27-4-2007) on port tariffs, the Common Dues equation is modified as follows:

Common Dues  0.02GT  0.4L  Paxd  Pl d , where

Paxd  0.5[(PaxOnboard  PaxDisembarked )  PaxBoarded  PaxDisembarked )] PaxBoarded Sd

and Sd is the security fee for passengers boarded at Heraklion port.

Pilotage dues are measured on the following scale shown in Τable 3, according to data supplied by the port executives, which are based on a joint ministerial decision.

Table 3. Charging Scales for Pilotage Dues

Gross Tonnage Pilotage Dues From To --- 500 52.95 501 1,000 70.39 1,001 2,000 123.34 2,001 3,500 203.35 3,501 5,000 283.35 5,001 7,000 353.73 7,001 10,000 433.16 10,001 15,000 512.59 15,001 20,000 600.40 20,000 and above 88,45€ per 10.000GT added

Our calculations, including all charges described, showed that the cruise industry contributes significantly to the revenue generated by the Heraklion port Authority. This contribution amounts to 7.1 to 8.1% of its annual turnover, namely, half a million euros on average.

258 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Despite the significant contribution of the cruise activity in the port Authority, the average contribution per passenger has been in constant decline since 2008. Excluding revenues from port dues (mooring and berthing), each passenger’s contribution to the total revenue generated from passenger dues decreased from €0.68 in 2008 to €0.55 in 2014. This is probably due to the decline in homeporting activity (disembarking and embarking), as shown in Figure 7. Compared to the primary homeport of Greece, that of Piraeus, Heraklion's decline seems more steep, with a decline of nearly 83% in boarding passengers, compared to 50% decrease for Piraeus Port (figure 8). In any case, during our evaluation period, boarding passengers’ numbers are almost reduced to half for both ports.

Figure 7: Boarded and Disembarked Passengers at Heraklion Port (2008-2014)

180.000

160.000

140.000

120.000 83.814

100.000 66.492 Pax Boarded 80.000 Pax Disembarked 60.000

40.000 83.305 25.472 67.243 23212 23.514 20.000 10.611 22733 24.080 27.274 11.592 0 2008 2009 2010 2012 2013 2014

Figure 8: Homeporting Activity 2008-2014 : Piraeus vs Heraklion Port Authority

512597 500000

400000

300000 256196 PIRAEUS 200000 HERAKLION

100000 67243 11592 0 2008 2009 2010 2012 2013 2014

Total revenues for 2012-2014 period are presented in Figure 10. According to our estimations, revenues over 30.000€ per month are collected from June to October throughout our evaluation period:

259 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Figure 9: Revenues from Cruise Activity for Heraklion’s Port Authority

90.000 € 80.000 € 70.000 € 60.000 € 50.000 € 40.000 € 2012 30.000 € 20.000 € 2013 10.000 € 2014 0 €

For year 2014, the three main sources of income for the port authority (berth, passenger and Pilotage dues) are presented in figure 10:

Figure 10: Revenues from Dues Categories (2014) for Heraklion Port

30.000 €

25.000 €

20.000 €

15.000 € berth

10.000 € pax pilotage 5.000 €

0 €

From January to June, Berth Dues score the highest amount of revenues for the port authority. This pattern changes in July and August when more passengers are using the port as embarkation point. From September to December Berth Dues exceed all other charges: Although there is a significant number of arrivals during this period, passengers on board are fewer, and embarkation passengers are significantly reduced.

Closing our analysis and trying to answer whether port revenues are affected during our 6 year test period (2008-2014) we would conclude that port revenues have indeed been affected, but not in the same way. All dues categories show an average decrease of 36.8% in revenues; Passenger generated revenues seem to be more affected with a decrease of nearly 50% which is explained by the similar behaviour of homeporting activity.

260 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Figure 11: Revenue Loss per Due Category: 2008-2014

250.000 €

200.000 € -24,73% 150.000 € -46,66% -38,07% 2008 100.000 € 2014

50.000 €

0 € PORT DUES PAX DUES PILOTAGE

The monthly revenues between 2008 and 2014 also drop, following the same pattern of monthly arrivals presented in figure 12:

Figure 12: Monthly revenue loss (2008-2014)

120.000 €

100.000 €

80.000 €

60.000 € 2008 40.000 € 2014 20.000 €

0 €

It should be noted that, according to our calculations, passenger dues on average amount to 30% of the total revenue generated by the Heraklion port Authority from the cruise activity. Therefore, extreme fluctuations in the port’s activity as homeport have a significant impact on its revenues, so we need to identify the factors affecting the eligibility of a port as homeport and how these factors are shaped over time. This is of vital importance for the competitiveness of Greek ports in the Mediterranean basin.

261 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

6. CONCLUSIONS

The port governance model is of vital importance in terms of information available to a researcher. Port Authorities are required under law to publish certain indexes – mainly of economic nature – yet municipal port funds are not. There is no common framework on information. As far as basic services are concerned, the pricing policies that have been observed are almost common at Municipal Port Funds. On the other hand, the pricing policies of Port Authorities are published either in Government Gazettes or in the Decisions of the Board of Directors and are subject to frequent readjustments. Our research has shown that there are differences in pricing.

We applied our findings using a regional port of reference, namely that of Heraklion, Crete. We tried to estimate cruise activity revenues based on its pricing policy and the available statistical data. It seems that the revenues generated from the calls made by cruise ships and their being in berth constitutes approximately 7.5% of the annual turnover for 2013 and 2014. We consider this to be an important ratio to the total port revenues, although our evaluation for a longer period of time, dating to the outbreak of the crisis in Greece shows a deep negative impact on cruise activity. Ship calls are reduced by 50% between 2008 and 2014 and similar reduction is observed in revenues generated by cruise activity. This is not the case for Heraklion Port alone, since Piraeus, the primary homeport of Greece, experiences the same effects.

Although this is a difficult period for Greek economy and debt crisis along with uncertainty affect tourism to all extents, challenges should not be ignored. Our study shows that trends are evolving on the cruise sector: Arrivals tend to be more evenly distributed along peak and low season and larger ships with more passengers are calling to Heraklion Port. We suspect that this has a significant impact, both on port’s passenger handling and personnel and civic (or/and) inland tourist destinations’ infrastructure. It is probable that port incurs additional costs by not exploiting the full potential of its personnel due to having to serve passengers en masse once or twice a day, only a few days per week.

In our future work we will be extending our data set with more ports and relevant data.

REFERENCES

 Acciaro, M. (2013), A Critical Review on Port Pricing Literature: What Role for academic research?, The Asian Journal of Shipping and Logistics, 29 (2):207-228.  Andriotis, K., Agiomirgianakis, G. (2010), Cruise Visitor’s experience in a Mediterranean port of call, International Journal of Tourism Research, 12 (4): 390-404.  Baird, A.J. (1997), An Investigation into the suitability of an enclosed seaport for cruise ships: The case of Leith, Maritime Policy and Management, 24 (1): p.31-43.  Brida , J.G., Scuderi, R. and Beka Seijas, M. (2014a), Segmenting Cruise Passengers Visiting Uruguay: A Factor-Cluster Analysis, International Journal of Tourism Research, 16: 209-222.  Brida , J.G., Chiappa, G., Meledu, M. and Pulina, M. (2014b), A comparison of Resident’s perceptions on Two Cruise Ports in the Mediterranean Sea, International Journal of Tourism Research, 16: 180-190.  Butt, N. (2007), The impact of cruise ship generated waste on home ports and ports of call: A study of Southampton, Marine Policy, 31:591-598.

262 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

 Castillo-Manzano, J., Fageda, X. and Gonzalez-Laxe, F. (2014), An analysis of the determinants of cruise traffic: An empirical application to the Spanish port system, Transportation Research Part E, 66: 115-125.  Cruise Lines International Association (CLIA) (2015), State of the Cruise Industry: 2015 to see Robust Growth. Published on February 9th 2015. http://www.cruising.org/regulatory/news/press_releases/2015/02/state-cruise- industry-2015- see-robust-growth Accessed on 20th of February 2015.

 Cruise Market Watch (2015), Cruise Industry Statistics, www.cruisemarketwatch.com Accessed the 10th of February, 2015.  Garrison, L., When Is the Best Time of Year to Cruise Europe?,about travel, http://cruises.about.com/od/cruiseplanning/a/europe_cruise_2.htm accessed on March 5th, 2015  Gibson H., Hall S., Tavlas G., (2014), Fundamentally Wrong: Market Pricing of Sovereigns and the Greek Financial Crisis, Journal of Macroeconomics, vol. 39, part. B, March 2014, pp. 405-419  Goulielmos A.M (1999), Deregulation in major Greek Ports: The way it has to be done, International Journal of Transport Economics XXVI (1), p.121-148  Guerrero, J.I.F, Selva, L.M. and Medina, R.P. (2008), Economic Impact of Western Mediterranean leisure ports, International Journal of Transport Economics, 35 (2): 251-272.  Hillman H., Best time to go on a Mediterranean cruise, http://www.hillmanwonders.com/mediterranean_cruise/mediterranean_cruise_time.htm accessed on March 5th, 2015  Janson, J.O., and Schneerson, D., (1982), Port Economics, Cambridge, MA: MIT Press.  Kapiki S.T (2011), The Impact of Economic Crisis on Tourism and Hospitality: Results from a Study in Greece, Central European Review of Economics and Finance, Vol. 2. No. 1 (2012), pp. 19-30  Karagiannis N. and Kondeas A., (2012), The Greek financial crisis and a developmental path to recovery: Lessons and Options, Real World Economics Review, issue 60, pp.54-73  Koubek, C. and Spencer Brown, C., When Is the Best Time to Cruise?, smarter travel, http://www.smartertravel.com/travel-advice/when-is-the-best-time-to-cruise.html?id=2766843  Lekakou, M., Pallis, A.A. and Vaggelas, G.K. (2010), Which Homeport in Europe: The cruise industry’s selection criteria, Tourismos: An international multidisciplinary journal of Tourism, 4(4), 215-240.  Lekakou M., Stefanidaki E., Vaggelas G., (2011), The economic impact of cruise to local economies. The case of an island. Presented at "Athens Tourism Conference" 2-3 February 2011, Athens, Greece  McCalla R.J. (1998), An investigation into site and situation: Cruise ship ports. Tijdschrift voor Economische en Sociale Geografie, 89 (1): 44-55.  Mylonas, P. Cruise Industry: A sector with potential revenues of 2bn, National Bank of Greece, Sectoral Report, August 2012.  National Bank of Greece (2014), Tourism Balance of Payments report, 2014 edition http://www.bankofgreece.gr/Pages/el/Bank/News/PressReleases/DispItem.aspx?Item_ID=494 5&List_ID=1af869f3-57fb-4de6-b9ae-bdfd83c66c95&Filter_by=DT  Ozturk S., and Sozdemir A., (2015), Effects of Global Financial Crisis on Greece Economy, Procedia Economics and Finance 23 (2015), pp.568-575  Pagoulatos G., and Triantopoulos C., (2009), The Return of the Greek Patient: Greece and the 2008 Global Financial Crisis, South European Society and Politics, vol. 14, Issue 1., 2009  Pallis, A.A, Vitsounis, T.K. and De Langen P.W. (2010), Port economics, policy and management: Review of an emerging research field, Transport Reviews, 30(1):115-161.  Palis A.A (2006), Port Governance in Greece, Research on Transportation Exonomics, vol.17, p.155-169  Papatheodorou A., Arvanitis P. (2014), Tourism And The Economic Crisis In Greece- Regional Perspectives, Region and Development vol. 39, 2014

263 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

 Papatheodorou A., Rosselo J., Xiao H. (2010), Global Economic Crisis and Tourism: Consequences and Perspectives, Journal of Travel Research February 2010 vol. 49 no. 1 pp 39-45  Pardali A. et al (2008), Determining the position of container handling ports, using the benchmarking analysis: the case of the Port of Piraeus, Maritime Policy & Management, vol. 35, issue 3, 2008 p.271-284  Pratt, S. and Blake, A. (2009), The economic impact of Hawaii’s cruise industry, Tourism Analysis, 14 (3): 337-351.  Psaraftis, H.N. (2007), Public Financing and Charging in EU seaports: The Case of Greece, paper presented at the annual conference of the International Association of Maritime Economists (IAME), Athens, July 2007.  Rodrigue, J.P. and Notteboom, T. (2012), The geography of Cruise Shipping: Itineraries, Capacity, Deployment and Ports of Call, IAME 2012 Conference Paper.  Sambracos, E. and Maniati, M. (2012), Competitiveness between short sea shipping and road freight transport in mainland port connections; the case of two Greek ports, Maritime Policy & Management, 39(3): 321-337.  SETE (2014), The importance of Tourism for Greece, 2014 edition  Stylidis D. and Terzidou M., (2014), Tourism and the economic crisis in Kavala, Greece, Annals of Tourism Research 44, pp. 210-226  Thorburn, T. (1960), Supply and Demand of Water Transport, FFI, School of Economics.  Vaggelas, G.K. and Pallis, A.A. (2010), Passenger ports, services provision and their benefits, Maritime Policy & Management, 37(1): 73-89.  World Travel & Tourism Council (WTTC, 2015), Travel & Tourism economic impact 2015, Greece, http://www.wttc.org/- /media/files/reports/economic%20impact%20research/countries%202015/greece2015.pdf

264 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Domestic Tourism: Is this a chance for regional development of Thessaly under financial crisis?

D. Kyriakou1, N. Blanas2, D. Belias3 and A. Koustelios3 1BSc, MSc, MBA, PhD Cand, Department of Economic Sciences, Aristotle University of Thessaloniki, Greece. 2Associate Professor, Department of Business Administration, T.E.I. of Thessaly, Greece 3 Department of Physical Education and Sport Science, University of Thessaly, Greece [email protected]

Abstract

During the last two decades tourism in Greece has become a mass industry concentrated in the island areas. Although they were not part of the more developed regions of the country, tourism in its current structure contributes to the strengthening of interregional disparities in Greece. In addition, in the centers of mass tourism socio-economical unsustainable demand and supply structures evolved. Simultaneously, a question was raised whether the domestic tourism market can increase, and can it offer a socio-economic alternative to the further expansion of international mass tourism. Thus, the so far little developed Center and Northern Greece, with an abundance of historical sites and natural highlights, can offer new destinations for domestic travelers while contributing to a sustainable development of these regions. As a precondition a national domestic tourism policy, stable prices and a strong promotion of the new destinations are essential in these turbulent economic times.

Keywords: Tourism Development, Tourism Planning, Regional Development, Policy, Financial Crisis

JEL: L83, O21, R11

1. Introductory thoughts

The global financial and economic crisis has dramatically affected the quality of life of most Eurozone countries. Increased unemployment rates, job insecurity, loss of income, the evaporation of wealth, cuts in private and public investments and a feeling of uncertainty and pessimism about the future are currently apparent in Southern European countries such as Greece, Spain, Portugal and Italy (Levy & Sidel, 2009; Voon & Voon, 2012). Such an economic context often results in massive changes in consumer behavior, including tourism demand (Smeral, 2009), which has been severely affected by the financial and economic crisis (Papatheodorou, Rossello, & Xiao, 2010).

As suggested by Stylidis and Terzidou (2014), tourists under an economic crisis show heterogeneous behavior. Households or individuals who live in certain regions or countries react differently during an economic crisis. Such distinction is relevant for the tourism management of the crisis. The determinants of tourism demand are usually decomposed between economic and non-economic factors (Nunkoo & Ramkissoon, 2012).). Given the same depth of economic crisis, the reaction will be different depending on the current level of household income. However, non-economic factors play also a relevant role in tourism

265 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 demand. Choi et al (2010) argues that different origins have different cultural and nationalistic backgrounds that explain part of the heterogeneous behavior of the households. Thus, preferences and willingness to pay of the tourists differ, especially in relation to a geographical pattern. In this sense, the place of residence works as a benchmark tourism destination alternative to compare the rest of destinations with. Usually traveling is more expensive than staying at home enjoying recreational one day visits or activities. The utility obtained from traveling needs to compensate sufficiently the additional money spent on it, otherwise, staying at home will be preferred. Hence, the attractiveness of the place of residence is key to understand the willingness to pay for traveling. Eugenio-Martin and Campos-Soria (2011) show that under income increases the willingness to travel abroad differs between countries by increasing probability of traveling abroad with income increases in some, whereas other countries keep preferring traveling domestically under the same income variation. The attractiveness of the place of residence works as a ‘pull’ factor to stay at home and practice domestic tourism. At the same time, lack of attractiveness of the place of residence works as a ‘push’ factor to travel abroad.

But what policy makers in Greece can actually do to develop and expand domestic tourism in order to combat economic crisis as well as tackle down seasonality thus create a sustainable and viable tourism product in Greece? Although it could be argued that the topic covered reflects seasoned thinking about answering the question 'what can be done' and if everything was 'well done', domestic tourism, as it can be seen in the core text of this paper, surfaces as a means towards the light of the tunnel.

2. An insight into economic crisis and tourism

This paper focuses on the global economic crisis that affected most of the world between 2008 and 2009, although for some countries it was extended much longer such as Greece. This crisis is characterized by a credit constraint that throttles liquidity and reduces consumption. Thus aggregate demand and GDP are also reduced, increasing unemployment and decreasing disposable income. Consequently, outbound tourism from affected countries is reduced. It has an impact on the number of arrivals in tourism destinations, as estimated by different authors (Page, Song, & Wu, 2012; Papatheodorou, Rossello & Xiao, 2010). Destinations may anticipate the demand shift, so that prices are usually reduced to keep up with the number of arrivals, thus decreasing expenditure at the destination (Ritchie, Molinar, & Frechtling, 2010; Smeral, 2010).

After a significant contraction in 2009, tourism rebounded strongly in 2010 and in 2011 the international tourist arrivals and receipts are projected to increase substantially until 2020. The external and internal threats of the economic crisis to the tourism industry are:

 External threats: recession; currency fluctuations; and taxation.  Internal threats: rising costs; falling revenues; unprofitability (Sian et al., 2009).

Crises occur at all levels of tourism operations with varying degrees of severity, from much publicised environmental, economic and political disasters through to internally generated crisis such as accidents and sudden illness (Beeton, 2001). The travel and tourism industry is susceptible to a wide range of internal and external forces and is impacted heavily by crisis events resulting in negative tourist perceptions (Pforr & Hosie, 2009).

The crucial role of tourism has been well documented in literature, and tourism is often perceived as a catalyst for national and regional economic development, revitalizing

266 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 communities and providing benefits to the local population (Andereck & Vogt, 2000; McGehee & Andereck, 2004). Research suggests that in times of economic uncertainty, perceptions and attitudes are subject to various types of economic and psychological influences (Voon & Voon, 2012). As many tourism destinations in Southern Europe are currently in economic recession, with their residents facing budget cuts and austerity measures, the economic context of the study, that is, the way residents perceive the state of their local economy, is expected to influence their responses to tourism expenditure. Nevertheless, previous research focused solely on exploring the effect of economic crises on tourism demand (Okumus, Altiny, & Arasli, 2005; Ritchie et al., 2010; Smeral, 2010).

Literature distinguishes between local demand for external tourism (outbound tourism) and demand for domestic tourism. The demand for domestic tourism is classified into external demand (inbound tourism) and local demand. External tourism has a bigger multiplier effect on the economy in the form of increased tourism income, tourism GDP, creation of jobs, support of inter-linked sectors such transportation and hospitality industries, and finally increased foreign reserves. Local demand for domestic tourism, while sharing some of the benefits of external tourism, helps in reducing foreign currency leakages conditioned by domestic tourism being a substitute for outbound tourism. The advantages of local tourism are due to the fact that it is less susceptible to regional and global economic and political disturbances. In addition to its economic impact, local demand for domestic tourism creates awareness of cultural heritage and loyalty to the country, increases ties among citizens within the country, and helps protect the environment through creating awareness. In the economic sense local tourism creates jobs and decreases poverty, limits the effect of seasonality of international tourism, and limits income drain from the country. The problem is in the ability to create, increase and sustain local demand for domestic tourism. More importantly, in the tourism demand literature, it is well acknowledged that income and tourism prices are the leading demand antecedents in tourism demand analyses. For example, most studies focus on income and price variables as demand antecedents for travel. Nevertheless, the literature neglects other possible socio-economic variables although relevant theory is existent such as family size, the availability of family and public transport, knowledge and awareness of local destinations, household debt, sense of national duty, availability of time for leisure, the number of hours worked in paid jobs as well as length of stay (Sheng and Chen, 2013).

As to the remaining determinants of micro level tourism expenditures, prior research has often distinguished between trip related characteristics on the one hand and socio-demographic variables on the other (e.g. Wang et al., 2006). On this issue there appears to be consensus that the former type of variables explains more of the variance in expenditures than the latter ones (Kastenholz, 2005). Among the crucial trip-related variables that consistently have shown explanatory power when linked to tourism expenditures are: (a) purpose of trip (Jang et al, 2005), (b) transportation mode (Fredman, 2008), and (c) various characteristics of the destination(s) in question (Kozak et al., 2008). On the other hand though, cutbacks or rethinking of tourism expenditure are divided into two mutually related decisions: Firstly, whether or not the tourists decided to cut back on tourism expenditure because of the crisis; and second, which of six options they employed as their cut-back strategy: “fewer holidays”, “reduced length of stay”, “cheaper means of transport”, “cheaper accommodation”, “travel closer to home” or “change the period of travel” (Eugenio-Martin et al, 2011).

267 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

3. Methodology

The main aim of the study is to decide whether a specific policy concerning boosting domestic tourism by promoting it would be applicable, suitable and useful for Thessaly in order not only to combat economic crisis but also tackle down seasonality. In order to reach a decision, tourism as an industry and the Greek tourism product are examined. Special attention is given to the fluctuation of numbers related to the attractiveness of Thessaly's tourism product and destinations. The impact of the economic crisis is also highlighted. The main part of the study focuses on how the National Tourism Organization, the Ministry of Tourism and tourism-related enterprises and professionals of the region use domestic tourism demand and whether they are promoting domestic tourism. The information extracted through the analysis is combined with knowledge gained after careful examination of studies focusing on the strategies formed mostly from government agencies in order to boost Thessaly’s domestic tourism potential. Last are discussed the political, economical, social and technological circumstances in Greece, that could affect the undertaking. After considering the above mentioned information, the study concludes in a proposition over the strategy that needs to be embedded, the possible barriers towards its accomplishment and the areas that should be further clarified before taking action. 4. Discussion

Greece is one of the most popular destinations in the Mediterranean, while tourism is considered in general a major financial activity. According to the Greek Tourism Confederation (SETE, 2013), Greek Tourism contributed in 2012 to the country’s GPA about 16,4%. Its contribution to employment was accounted for 18,3%. More specific, the International Tourism Receipts, the same year, reached 10 billion Euros. Due to the socioeconomic and political crisis Greece has undergone since 2009, Greek tourism was characterized by a general contraction in terms of both arrivals and receipts. However, corresponding data from the last two years show a clear tendency for the numbers to be restored (Hellenic Statistical Authority, 2014). Based on that fact, it is believed that tourism might be the driving force behind the country’s economic recovery (Kapiki, 2012).

As far as setting policies concerns, the authority in charge is, as expected the Ministry of Tourism. Supervised by the Ministry of Tourism, the Greek National Tourism Organization is basically responsible in taking theory into action or simply applying the policies set by the government. Of course, everything mentioned above, is surrounded by a European framework that basically allows interaction and encourages consumption of the within EU borders tourism product.

Acknowledging though the great effect a successful regional policy might have in boosting local tourism, regions’ and prefectures’ authorities do try to form specialized policies for the corresponding areas they serve. It is attempted for these policies to be custom-made and as a result, to rely on the specific and unique characteristics of the region. Among Greece’s competitive advantages are its rich cultural legacy, natural beauty and geographic diversity (Investingreece.gov.gr, 2015). However, what need to be considered are the not so favorable aspects of Greek tourism. The geography of Greek tourism is one of those. It refers to the dissimilar distribution of tourists’ visits. In particular, tourists prefer to visit coastal areas and islands. The fact of their concentration in such geographic regions can be explained through the establishment of Greece over the years as a destination, where visitors can enjoy sun and sea.

268 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Narrowing the selling proposition of the country in that diptych is actually the reason why tourism appears to have intense seasonality. The tourism product selected to be the flagship of Greek tourism can be offered only during the summer. Obviously, that fact generates a series of issues along with little exploitation of the already existing infrastructure and increased cost of use (Polyzos & Saratsis, 2013). Greece based its tourism development mainly on mass- market models and included the popular sun-sea-sand destinations view. However, this model is rather outdated and changes are needed. Hence, Greece started to evaluate its current tourism model, tourist activities and the need of alternative forms of tourism. Out of this evaluation, the following several weaknesses emerged (ELKE: The Hellenic Center for Investment): i) High seasonality and high density in peak seasons, ii) Dominance of mass tourism, iii) Lack of thematic and alternative forms of tourism, iv) Unhealthy public infrastructure. On the contrary, the following strengths existed within the Greek tourism (ELKE: The Hellenic Center for Investment): i) The increase in the number of tourist arrivals; ii) Diverse natural beauty; iii) Cultural and historical heritage; and iv) Vibrant folklore and Greek way of life.

As aforementioned it is Greek destinations which have a heavy reliance on a basic sun, sea and sand tourism approach. Hence, Thessaly region is busy trying to diversify its tourism product. The policy of tourism development was originally based in the specialized and decentralized planning of tourism development with emphasis on the balance between the economy, society and environment. In this context, structured tourism development projects are being promoted at local level which is designed to the interface function of the different sectors of the economy with tourism. The planned development and switching to a specialized and often qualitative demand are the main causes of the rapid development of special and alternative forms of tourism for the past twenty years.

Thessaly is a region located in Central Greece. It consists of four prefectures: Larissa, Magnesia, Trikala and Karditsa. Thessaly actually covers an area of about 14.000km3 and given the last census that took place in 2011, 732.762 people live there (Statistics.gr, 2011) . Considering the diversity of geomorphology in Greece that changes even within relatively narrow areas, the four counties mentioned above appear to have different characteristics based on their location. Larissa occupies the northern part of the region, while Magnesia the southeastern one. Both of them do have coastal areas, while Sporades islands (Skiathos, Skopelos and Alonissos) are considered a part of Magnesia. On the other hand, Trikala, located on the western part of the region and Karditsa, on the southwestern one are both landlocked. The city of Larissa is the capital of Thessaly and as such, it represents the financial, administrative, religious and scientific center of the region. As far as the ground of the prefecture concerns, it is 48% flat, 25% semi-mountainous and 27% mountainous. Mountains (Mount Olympus), along with rivers (Pineios) and lakes are present to Larissa’s natural landscape. The rich history of the prefecture is delivered through its religious and archaeological monuments and museums. Additionally, ski resorts and mountain trails already mapped do give an extra motive for tourists to visit Larissa even in winter (Lartourism.thessaly.gov.gr, 2015). Magnesia “combines the green mountain landscape with the deep blue of the Aegean sea”. More specific, Mount Pilion is quite famous not only from a natural beauty point of view but also due to the architecture of the local mansions. The three islands of the Northern Sporades are differentiated one from the other. Skiathos is characterized as the cosmopolitan island, while Skopelos is the more traditional one. On the other hand, Alonissos is the ecological island. At last, Volos, the capital of the prefecture, is supported by rich mythological background but also captures the visitor due to its unique dynamics and modern essence (Magnesia-tourism.gr, 2015). The prefecture of Trikala is quite distinctive as a destination due to its natural beauty. Chaliki mountain, Aspropotamos river,

269 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 along with lake Verlinga compose the basic landscape. However, religious attractions such as the monasteries of Meteora and the overall Kalampaka area, is what is even more distinctive about it (Meteorabooking.gr, 2015). As far as nature concerns, the prefecture of Karditsa is quite similar with the one of Trikala, with the religious aspect not so clearly outlined. Instead, there are several activities for tourists basically around Lake Plastira. Getting in touch with local tradition is also quite easy through following routes set from village to village (Karditsa - Tourist Guide, n.d.).

Besides the natural resources already mentioned, Thessaly possesses 19 caves and 9 medicinal spas that can be exploited for tourism purposes. In addition, across the whole region there are several areas that have been characterized over the years as areas with special ecological and aesthetic value. Both of them are protected through presidential decrees, ministerial decisions or European and international agreements, like NATURA 2000, CORINE and UNESCO sites (Department for Development Programming of Thessaly region, 2011).

Given the above and several studies examining the capacity of the region for sustainable tourism development, Thessaly can be competitive in the global tourism market. However, what needs to be taken into consideration is the different degree of exploitation of the capabilities different geographic areas possess (Ministry of Development, 2003). According to data released by the Hellenic Chamber of Hotels ('Border Research & Research of the Regional Allocation of the Annual Tourist Spending', 2013), Thessaly ranks eighth in both number of incoming visitors and number of overnights, out of the thirteen Greek regions. In terms of tourist spending, Thessaly comes ninth. However, when transforming the above in spending per overnight or spending per visitor, Thessaly falls in the eleventh and twelfth position, respectively. As expected, most tourists spending per overnight is observed in the islands of the South Aegean, in Crete, Attica and the islands of the North Aegean. All other regions’ rates are below the country’s average. Judging by the above data, Thessaly is not such an attractive destination by tourists’ perspective, no matter its potential. As a result, tourism does not contribute to the region’s economy as much as it does in other more popular regions.

Interesting information is also given by the percentage distribution of tourist spending per region per sector. In descending order, tourist spending in Thessaly is distributed along accommodation, transports, shopping, restaurants and cafes and entertainment. Comparing Thessaly with the other twelve regions, it reveals that tourists in Thessaly do spend more than those in the remaining ten. But how domestic tourism in Thessaly region can boost regional development and create scales of economy?

Nurturing our thinking and judging from the above mentioned, the question remains on what policy makers and professionals in Greece can actually do to develop and expand domestic tourism in order to combat economic crisis as well as tackle down seasonality thus create a sustainable and viable tourism product in Greece. One answer could be to listen and make a list of what potential domestic visitors want or expect to live when travelling domestically, in a few words what intrigues them to travel in their country. A synopsis of visitors' wants that has to be taken into consideration when tourism planning and what should tourism professionals do could be the following:

1. Introduction of low rates in hospitality sector and special family packages such as 'children go free' scheme during low season periods

270 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

2. Introduction of travel packages through low rates and/or reduction in travelling costs policies between home residence and destination by all means of transport in order to promote and increase domestic demand 3. Introduction of special coupons scheme that grants access or reduction in prices when visiting places of cultural interest 4. Introduction of promotional schemes when booking long haul journeys such as free nights, reduced or free travel expenses, free traditional activities in the relevant destination but also develop city-breaks scheme 5. Introduction of activities according to destination's culture and tradition and not 'what everyone in the world does' activities such as agro-tourism activities, mountain walks on foot, by bicycle and/or on horse, stay overnight in a monastery, 'a look into the ordinary life of locals' scheme 6. Introduction of a 'feeling like home' sentiment during the whole circle of pre-booking, booking and during visiting phases of the journey and not being seeing as 'money' 7. Introduction of 'I want to visit this place' sentiment through social media or advertisements that actually present a real place and not an imaginary one when visited due to photo image processing techniques.

In addition to those mentioned above a more business related schemes could be introduced to boost domestic tourism by utilising alternative ways such as:

1. Introduction of low rates and increase quality of services in planning, organising and hosting conventional tourism 2. Introduction of special school and/or university educational field trips to boost local economy in collaboration with the Ministry of Education 3. Introduction of special tourism areas in the concept of Exclusive Economic Zones in order to minimize the effect of the economic crisis and actually boost domestic tourism

Therefore both public and private tourism planners should take action to utilise ideas that are being introduced from potential tourists wants in order to create a product that eliminates seasonality and provides a sustainable future for Thessaly tourism under turbulent economic times.

5. Conclusion

The crisis has particularly strong impact and negative consequences in Greece not to mention the region of Thessaly. The country is undergoing a serious political crisis, as well, and it seems that the forthcoming elections are the only solution for the restoration of stability and social peace. In addition, tourism can be the driving force behind not only Thessaly's but also Greece's economic recovery. Therefore domestic tourism surfaces as a means of development in economic turbulent times even though locals have been severely affected by the economic crisis. However, for its achievement the country’s policy makers should take several measures towards restructuring and improving the sector. Although this in not something new, these measures include: enhancement of alternative forms of tourism; environmental protection; creation of quality infrastructure and boost of competitiveness through a tourism product that offers value for money and can boost domestic demand. The interregional disparities in Greece are especially high between the northern and island provinces with the latter facing large socio-economic problems. Tourism in general is a fragile business depending on many internal and external factors, therefore, a regional economy based on tourism only will never be sustainable. International tourism, which is

271 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6 subject to fashion as well as to politics, is especially susceptible to changes (Seckelmann, 2002). In Greece’s main tourism centres, however, not only the demand, but the supply structure of tourism, too, is unsustainable. This applies to the planning process and the income distribution in the tourism areas. The current tourism structure not only reflects the demand, but also reflects the supply of tourism attractions and facilities. Demand will probably not grow unless a new range of opportunities has been developed. Greece’s northern provinces will, of course, never replace seaside holidays, but they offer a more diversified tourism product. These regions have an abundance of historical sites and cultural heritage as well as many natural highlights. Domestic tourists, on the other hand, are not dependent on the instructions of a tour guide, since they speak the local language. They move freely in the whole destination area, especially as they often use their own cars or are familiar with the local transport system. They decide themselves where they want to shop and eat and are not interested in commercialised cultural performances, but in regular cultural events. Thus, they contribute to the regional income without demanding a very special infrastructure. This again allows local people to operate part-time in the tourism sector without neglecting their usual business, which reduces overdependence on the seasonal character of tourism (Tosun, 1998). As a response planners and politicians in the other parts of the country strive to promote their tourism sector to enhance the development of these neglected regions. The attractions of these areas are mainly of cultural and natural character and cannot directly compete with the sea resorts, but they can offer some alternatives to holidays at the coast. The historic sites and natural areas, which offer many possibilities for various kinds of sports, might not in every case be of interest for foreign tourists, who choose their destination out of an international range of offers. Previously undiscovered places in the less developed regions of Greece have the potential to become destinations for domestic tourism based upon natural and cultural assets, although most of the sites of interest are not yet developed for commercial tourism.

Finally, tourism, even domestic tourism, will never be the main economic base for most of the underdeveloped regions of Greece. Since it is a fragile sector depending on many internal and external factors, this is not desirable in any case. Nonetheless domestic tourism, that does not require an extensive investment and change as the international market, could become a basic element of a socially and economically sustainable regional development.

6. References

1. Andereck, K. L., & Vogt, C. A. (2000). The relationship between residents’ attitudes toward tourism and tourism development options. Journal of Travel Research, 39(1), 27–36. 2. Beeton, S. (2001). Horseback Tourism in Victoria: Cooperative, Proactive Crisis Management. Current Issues in Tourism, Vol. 4, No. 5, pp. 403-421 3. Border Research & Research of the Regional Allocation of the Annual Tourist Spending. (2013). 4. Chieh-Wen Sheng, Ming-Chia Chen, (2013),"Tourist experience expectations: questionnaire development and text narrative analysis", International Journal of Culture, Tourism and Hospitality Research, Vol. 7 Iss 1 pp. 93-104 http://dx.doi.org/10.1108/17506181311301390 5. Cho, V. (2010). A study of the non-economic determinants in tourism demand. International Journal of Tourism Research, 12(4), 307–320. 6. Choi, H. C., & Murray, I. (2010). Resident attitudes toward sustainable community tourism. Journal of Sustainable Tourism, 18(4), 575–594. 7. Department for Development Programming of Thessaly region,. (2011). Business Plan for Thessaly region (pp. 2-22). Larissa.

272 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

8. Discover Greece,. (2015). Discover Greece | Your Greek Travelling Guide. Retrieved 8 April 2015, from http://www.discovergreece.com/ 9. Eugenio-Martin, J. L., & Campos-Soria, J. A. (2011). The role of income and the substitution pattern between domestic and international tourism demand. Applied Economics, 43(20), 2519–2531. 10. Fredman, P. (2008). Determinants of visitor expenditures in mountain tourism. Tourism Economics, 14(2), 297–311. 11. Goh, C. (2012). Exploring impact of climate on tourism demand. Annals of Tourism Research, 39(4), 1859–1883. 12. Haro de Rosario, A., GΓ΅lvez RodrΓguez, M., & Caba PΓ©rez, M. (2013). Development of social media and web 2.0 in the top hotel chains. Tourism & Management Studies, 9(1), 13-19. 13. Hellenic Statistical Authority,. (2014). Greece in Figures (pp. 33-35). Piraeus: Statistical Information and Publications Division. 14. Investingreece.gov.gr,. (2015). ENTERPRISE GREECE. Retrieved 6 April 2015, from http://www.investingreece.gov.gr/default.asp?pid=36§orID=37&la=2 15. Jang, S., Cai, L. A., Morrison, A. M., & O’Leary, J. T. (2005). The effects of travel activities and seasons on expenditures. International Journal of Tourism Research, 7(6), 335–347. 16. Kapiki, S., (2012), The Impact of Economic Crisis on Tourism and Hospitality: Results from a Study in Greece, Central European Review of Economics and Finance, Vol. 2. No 1 (2012) pp. 19-30 17. Karditsa - Tourist Guide (1st ed., pp. 5-60). Karditsa. Retrieved from http://www.pthes.gov.gr/data/kard_tour_12el.pdf 18. Kastenholz, E. (2005). Analysing determinants of visitor spending for the rural tourist market in North Portugal. Tourism Economics, 11(4), 555–570. 19. Lartourism.thessaly.gov.gr,. (2015). Region of Thessaly – Regional Unit of Larissa – Tourism Gate. Retrieved 6 April 2015, from http://lartourism.thessaly.gov.gr/ 20. Levy, B. S., & Sidel, W. (2009). The economic crisis and public health. Social Medicine, 4(2), 82–87. 21. Magnesia-tourism.gr,. (2015. Home page. Retrieved 6 April 2015, from http://www.magnesia-tourism.gr/ 22. McGehee, N. G., & Andereck, K. L. (2004). Factors predicting rural residents’ support of tourism. Journal of Travel Research, 43, 131–140. 23. Ministry of Development,. (2003). Research about Tourism Development in Thessaly (pp. 1-16). Greek National Tourism Organization. 24. Nunkoo, R., & Ramkissoon, H. (2012). Power, trust, social exchange and community support. Annals of Tourism Research, 39(2), 997–1023. 25. Okumus, F., Altiny, M., & Arasli, H. (2005). The impact of turkey’s economic crisis of February 2001 on the tourism industry in Northern Cyprus. Tourism Management, 26, 95–104. 26. Page, S., Song, H., & Wu, D. C. (2012). Assessing the impacts of the global economic crisis and swine flu on inbound tourism demand in the United Kingdom. Journal of Travel Research, 51(2), 142–153. 27. Papatheodorou, A., Rossello, J., & Xiao, H. (2010). Global economic crisis and tourism: Consequences and perspectives. Journal of Travel Research, 49(1), 39–45. 28. Pforr, C. & Hosie, P. (2009). Crisis Management in the Tourism Industry (Eds.). Ashgate, UK 29. Polyzos, S., & Saratsis, G. (2013). The geography and characteristics of tourism in Greece, the position and perspectives of Thessaly. In Greek Conference of Administration and Economy (pp. 10-30). Larissa: ESDO.

273 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

30. Ritchie, B., Molinar, A. C. M., & Frechtling, D. C. (2010). Impact of the economic crisis on global tourism, foundations of the crisis: A North American perspective. Journal of Travel Research, 49(1), 5–15. 31. Seckelmann, A., (2002), Domestic tourism - a chance for regional development in Turkey?, Tourism Management 23 (2002) 85–92 32. SETE. (2013) (pp. 3-11). Athens. 33. Smeral, E. (2009). The impact of the financial and economic crisis on European tourism. Journal of Travel Research, 48(1), 3–13. 34. Smeral, E. (2010). The world recession and international tourism: Consequences, forecasts and open questions. Journal of Travel Research, 49(1), 31–38. 35. Statistics.gr,. (2011). PAGE-census2011. Retrieved 6 April 2015, from http://www.statistics.gr/portal/page/portal/ESYE/PAGE-census2011 36. Stylidis, D., Terzidou, M., (2014), Tourism and the economic crisis in Kavala, Greece, Annals of Tourism Research, 44, pp 210-226, Elsevier 37. Tosun, C. (1998). Roots of unsustainable tourism development at the local level: the case of Urgup in Turkey. Tourism Management,19(6), 595–610. 38. Voon, J. P., & Voon, J. C. (2012). A structural model of consumption: An application to China during the global financial crisis. The Journal of Socio-Economics, 41, 284 288. 39. Wang, Y., Rompf, P., Severt, D., & Peerapatdit, N. (2006). Examining and identifying the determinants of travel expenditure patterns. International Journal of Tourism Research, 8(5), 333–347.

274 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Macroeconomic developments in Turkey, 1980-2001

Ozlem Aytac Baskent University, Department of Economics, Ankara, Turkey [email protected]

Abstract

Turkey introduced an exchange-rate-based stabilization (ERBS) program in January 2000. The daily values of the foreign exchange basket for the next 12 months were announced to the public. Until June 2001, the rate of crawl would be set to be consistent with the targeted inflation rate. After then, the exchange rate policy would be based on a pre-announced widening band around a central parity. The program seemed to be on track until the economy was hit by a sudden attack on the Turkish currency in the second half of November 2000. After a few months of muddling through, a second attack hit the currency in late February. As a result of rapid capital flight, overnight interest rates jumped to over 4000 percent in uncompounded terms on 21 February 2001 and Turkey declared that it was going to implement a floating exchange rate regime from that date onwards. This was not the first time experience with the ERBS however. In fact, since 1980 authorities have been using exchange rate in order to stabilize the economy even if such an announcement has been avoided most of the time. This article analyzes macroeconomic developments in Turkey in the period of 1980-2001 with particular emphasis given on the exchange rate policy, and provides a rationale for why policymakers need to support their exchange rate arrangement with other economic policies that the arrangement requires. Although, a properly valued exchange rate is critical for sound economic management and sustained growth, it’s the adoption of appropriate monetary and fiscal policies that ultimately will ensure macroeconomic stability, regardless of the exchange rate arrangement. Since 1980, exchange rate has been used as the main stabilization instrument in Turkey. But it has never been supplemented with the necessary macroeconomic policies to ensure its success.

Keywords: Inflation stabilization; Fiscal deficit

Jel Classification Codes: E31, F4

275 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Exchange-Rate-Based Stabilizations: A Literature Review

Ozlem Aytac Baskent University, Department of Economics Eskisehir Yolu 20. Km, Baglica Kampusu, 06810 Etimesgut, Ankara, Turkey [email protected]

Abstract

The experience from stabilization programs undertaken in chronic inflation countries generated a controversial literature regarding the real effects of them and unique stylized facts for each type of stabilization strategy have been identified. Accordingly, exchange-rate-based stabilizations (ERBS) are associated with a boom-bust cycle in economic activity whereas; money-based stabilizations (MBS) display exactly the opposite. Although, the debate over whether ERBS is superior to MBS or the other way around for a successful and long lasting disinflation still has not reached an agreement. In practice, most stabilization plans in chronic inflation countries have preferred the exchange rate as the nominal anchor by pegging it to a low inflation currency, predominantly the US dollar. The empirical regularities observed in ERBS programs, namely a boom-bust cycle in consumption and economic activity, substantial real exchange rate appreciation and related deterioration in external accounts which often leads to full-blown balance of payments crisis with costly devaluations and large losses of international reserves; generated an extensive literature in development macroeconomics. Various optimizing models have been advanced in order to replicate these dynamics and find an explanation to them. This paper surveys the empirical and the theoretical aspects of the ERBS programs in a comprehensive manner. Qualitative and quantitative comparison of the existing theories indicates that durables incorporated weak credibility cum sticky price model proves to be the most compatible one with data. In the cases of successful stabilization programs however, one can argue that there is no reason why public should have been pessimistic about sustainability if sound macroeconomic reforms have been in place. But evidence show that even well- designed, credible ERBS plans; have displayed the same dynamics that failed programs displayed. And weak credibility cannot provide any explanation for those episodes since perfectly credible, permanent reduction in the rate of devaluation does not cause any real effects. Thus, why both credible and non-credible ERBS programs have generated similar dynamics and ended in full-blown currency crises still remains as a puzzle to be solved in the literature.

KEYWORDS Inflation stabilization, Consumption booms; Credibility

JEL CLASSIFICATION CODES E31, F41

276 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

Local products offered to the conference participants by

One of the largest olive oil producing companies in Greece and one of the leading exporting companies of the country. The famous multi-award winning brand of olive oils and olives “ILIADA” was born by AGROVIM. http://www.agrovim.gr/

AGROVIM S.A.

Inomessiniaki Winery offers a wide range of bottled wines, which is composed of either blended or of a single grape variety wines, covering the most demanding taste request, including the product line ANIMA and the brand FARÉ.

Inomessiniaki Winery http://www.inomessiniaki.gr/

Family run business offering bottled wine, ouzo & tsipouro and Olive oil since 1962.

http://www.kosteas.gr/

KOSTEAS

Papadimitriou C. C. SA has a modern production facility of 10,000m2 located in Messinia. All categories of products are

produced and packaged there PAPADIMITRIOU C.C. S.A. (Mustards, balsamic vinegars, olive oil and currants) for retailing or food service. www.papadim.com

277 ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-0-6

278