Regional Formation and Development Studies

KLAIPĖDA UNIVERSITY SOCIAL SCIENCE FACULTY

REGIONAL FORMATION AND DEVELOPMENT STUDIES

Journal of Social Sciences

No. 3 (8)

Klaipėda, 2012 Regional Formation and Development Studies

Klaipėda University Social Science Faculty

Scientific Editor Prof. Dr. Antanas Bučinskas Klaipėda University (Lithuania) Deputy of scientific editor Prof. Dr. Ligita Šimanskienė Klaipėda University (Lithuania) Editorial board: Assoc. Prof. Dr. Ciprian Beniamin Benea University of Oradea (Romania) Prof. Habil. Dr. Remigijus Čiegis Vilnius University (Lithuania) Prof. Dr. Larisa Emeljanova I. Kant Federal University (Russia Federation) Assoc. Prof. Dr. Sebastian Gadal University of Versailles Saint Quentin en Yvelines (France) Prof. Dr. Hilmar Þór Hilmarsson University of Acureyri (Iceland) Prof. Dr. Vytautas Juščius Klaipėda University (Lithuania) Prof. Dr. Jose Manuel Lasierra Zaragoza University (Spain) Prof. Dr. Vaidutis Laurėnas Klaipėda University (Lithuania) Prof. Habil. Dr. Tadeusz Palmowski Gdansk University (Poland) Assoc. Prof. Dr. Romana Provazniková Pardubice University (Czech Republic) Prof. Habil. Dr. Bronislaw Sitek Alicide De Gasperi University (Poland) Prof. Dr. Biruta Sloka Latvia University (Latvia) Assoc. Prof. Dr. Eduardas Spiriajevas Klaipėda University (Lithuania) Prof. Dr. Rimantas Stašys Klaipėda University (Lithuania) Prof. Habil. Dr. Gerhard Strohmeier Alpen-Adria Universitat Klagenfurt (Austria) Prof. Habil. Dr. Stasys Vaitekūnas Klaipėda University (Lithuania) Prof. Habil. Dr. Povilas Zakarevičius Vytautas Magnus University (Lithuania)

Lithuanian language editor: Vilma Urbonavičiūtė (Lithuania) Layout: Karolis Saukantas (Lithuania) Cover design: Vilhelmas Giedraitis (Lithuania)

The first number was published in 2007. There are 3 annual volumes in Lithuanian, English languages. The first numbers of journal were included in EBSCO Publishing Business Source Complete databases (http://www.ebscohost.com/titleLists/bth-journals.pdf.).

Address: Herkaus Manto g. 84, LT-92294 Klaipėda, Lietuva, tel. (370 46) 39 88 95, fax (370 46) 39 89 99

Internet address: http://www.ku.lt/leid

Every paper is revised by two reviewers ISSN 2029-9370 PREFACE

This journal number is dedicated to the 8th International Scientific Conference “Sustainable Develo- pment in Regions: Challenges and Perspectives”. It was held in Social Sciences Faculty at Klaipeda Univer- sity. The major objective of the conference is critical discussion of sustainable development in regions from different academic and disciplinary perspectives. The conference aims at bringing together researchers from various countries who study regions, and who can offer new theoretical ideas and their practical application in relevant case studies. Papers printed in this number united idea about sustainability and regions; describe possible ways how to solve problems.

Deputy of scientific editor Prof. Dr. Ligita Šimanskienė, Klaipėda University (Lithuania)

PRATARMĖ

Šis žurnalo numeris skirtas VIII tarptautinei mokslinei konferencijai „Darnus regionų vystymas: iššū- kiai ir perspektyvos“, kuri vyko Klaipėdos universiteto Socialinių mokslų fakultete. Esminis konferencijos tikslas – akademinė ir tarpdalykinė diskusija dėl darnios regionų plėtros. Konferencijoje siekta surinkti skir- tingų šalių mokslininkus, kurie domisi regionų tematika, siekiant išgryninti naujas teorines idėjas ir pateikti praktinių pasiūlymų iš atliktų studijų bei mokslinių tyrimų, keistis patirtimi. Šiame numeryje spausdintus straipsnius vienija darnumo ir regionų idėja, aptariami būdai, kaip spręsti pasitaikančias problemas.

Redaktoriaus pavaduotoja Prof. dr. Ligita Šimanskienė, Klaipėdos universitetas (Lietuva)

3 TURINYS

Ieva Andersone, Elina Gaile-Sarkane Consumer Needs Analysis as a Base for Sustainable Development of Entrepreneurship / 6 (Vartotojų poreikių, kaip darnaus įmonės vystymosi pagrindo, analizė) / 14

László Berényi Developing Environmental Competence / 15 (Aplinkos apsaugos kompetencijos ugdymas) / 24

Gabrielė Burbulytė-Tsiskarishvili Measuring Peripherality and Accessibility for Lithuanian Regional Policy / 25 (Regionų periferiškumo ir pasiekiamumo matavimai kuriant Lietuvos regioninę politiką) / 35

Konstantins Cernavskis Financial Stability of Enterprise as the Main Precondition for Sustainable Development of Economy / 36 (Verslo finansinis stabilumas, kaip esminė darnaus ekonomikos vystymosi prielaida) / 46

Remigijus Čiegis, Darius Burgis The Problems of Lithuanian Landscape in the Context of Sustainable Development / 47 (Lietuvos kraštovaizdžio problemos darnaus vystymosi kontekste) / 55

Sylwia Ćmiel The Innovative Activity in the Balanced Regional and Organizational Development of Poland and the European Union / 57 (Inovacinė veikla darniai plėtojant Europos Sąjungos ir Lenkijos regionus bei organizacijas) / 64

Renata Dagiliūtė Sustainability of Lithuanian Regions: Application of Composite Index / 65 (Lietuvos regionų darnumas: sudėtinio indekso taikymas) / 73

Bożena Gajdzik Sustainable Steelworks in Polish Market / 75 (Plieno liejimas Lenkijos rinkoje darnumo aspektu) / 83

Ingrida Gečienė, Šarūnas Matulaitis Lithuanian Diaspora Role in Sustainable Development of Country / 84 (Lietuvių diasporų vaidmuo, siekiant darnaus šalies vystymo) / 91

Deimena Kiyak, Tomas Reichenbachas The Impact of Lithuanian Financial Crisis for National Economy: Comparative Study / 92 (Lietuvos finansų krizių poveikio šalies ekonomikai palyginamasis tyrimas) / 104

Anna Kladova, Liudmila Parfenova, Vytautas Juščius The Influence of Foreign Bank Entry on the Development of Regional Financial Markets / 106 (Užsienio bankų ekspansijos įtaka regioninių finansų rinkų plėtrai) / 117

Kirils Kondratovs Modelling Financial Stability Index for Latvian Financial System / 118 (Finansinio stabilumo indekso modeliavimas Latvijos finansinėje sistemoje) / 129

Linutė Kraujutaitytė Methodological Stories on Regional Governance / 130 (Regioninės valdysenos metodologinės istorijos) / 144

Gunita Mazūre Direct State Aid Measures for Agriculture and Rural Development in Latvia / 145 (Tiesioginė valstybės parama žemės ūkio ir kaimo plėtrai Latvijoje) / 156

4 Iwona Niedziółka Sustainable Tourism Development / 157 ( Darnaus turizmo vystymas) / 166

Kristina Puksta, Peteris Laurins Outsourcing Document Management System / Application as Key Factor for Compliant Process Implementation and Increasing Management Efficiency / 167 (Dokumentų valdymo sistema / programa, kaip esminis suderinto proceso vyksmo ir valdymo efektyvumo didinimo veiksnys) / 176

Olev Raju Economic Crisis and Local Governments Budget in Estonia / 177 (Ekonominė krizė ir savivaldybių biudžetas Estijoje) / 189

Valery I. Roldugin Latvia’s Monetary Policy during the 2000s / 190 (Latvijos monetarinė politika dutūkstantaisiais) / 201

Bronisław Sitek European Policy towards Regional Innovation Strategy Illustrated with the Example of the Mazovia (Poland) / 202 (Europos regioninė inovacijų strategija, iliustruota Mozovijos (Lenkija) pavyzdžiu / 210

Magdalena Sitek The Dynamics of the European Union Regional Policy / 211 (Europos Sąjungos regioninės politikos dinamika) / 220

Solvita Sunite Individual Responsibility Integration in Latvian Health Financing Model – Challenges and Opportunities / 221 (Individualios atsakomybės įtraukimas į Latvijos sveikatos priežiūros finansavimo modelį – iššūkiai ir galimybės) / 230

Rosita Uznienė Media – Agents of Socialization / 231 (Media – socializacijos agentai) / 239

Ludmila Verovska Internal Control System as Continuous Basis of Efficient and Stable Company Development / 240 (Vidinė kontrolės sistema, kaip nuolatinės veiksmingos ir stabilios bendrovės plėtros pagrindas) / 246

Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons The Analysis of Latvia Households’ Consumption Expenditure in Scope of Sustainable Development / 247 (Latvijos namų ūkių išlaidų vartojimo analizė darnaus vystymosi kontekste) / 255

Elena Vitkienė Long-Term Principle Concept for Sustainable Development of Coastal Zone Management / 257 (Ilgalaikio principo, kaip darniai valdyti pajūrio zoną, konceptas) / 264

Anna Wziątek-Staśko Diversity Management as a Key Factor in the Regional Development Process / 265 (Įvairovės valdymas, kaip esminis regionų vystymosi veiksnys) / 274

Anna Zhigalova Building Consumer Oriented Strategy for a Specialised Regional Store Chain / 275 (Į vartotojus orientuotos strategijos specializuotų regioninių parduotuvių tinklui kūrimas) / 286

5 Ieva Andersone, Elina Gaile-Sarkane CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

Ieva Andersone1, Elina Gaile-Sarkane2

Riga Technical University (Latvia)

Abstract Knowledge about consumer needs, factors and motives affecting behavior is one of the ways of ensuring entrepreneurship competitiveness. Authors present the results of the study on the A. Maslow’s hierarchy of needs within the context of consumer behavior components affecting consumer behavior from a perspective of entrepreneurial decision making. Authors employ well known methods of research – statistical analysis, grouping, evaluation, predicting etc. In the course of the present research by synthesis of theoretical developments and practical experience decision making model is made. A. Maslow’s theory serves as the basis for developing a range of theories dealing with consumer behavior, therefore, when developing the consumer behavior model in Latvia, the author decided to integrate the better known theories. The use of models prepared by the authors in sales, entrepreneurship, and other sectors of economy provide an opportunity to reasonably plan investments for the relevant time period, to avoid mistakes, and to improve the overall economic effectiveness of the company’s operations and usefulness of resource utilization. KEYWORDS: Consumer needs, A. Maslow’s hierarchy of needs, classification of consumption objects and production means.

JEL codes: M11, M31

Introduction

Research problem: The global economic crisis has proven that changes of the financial situation in the world directly affect consumption. Statistical data show that 98 % of sectors and companies working in them were affected by the economic crisis. As a result, many companies went bankrupt; many increased the operating efficiency or re-structured the operations. Hence, the following assumption was proven true: each company is potentially interested in determining the goods, which the consumer is ready to purchase, for which goods the consumer is ready to spend money at his or her disposal. Research purpose is on the basis of consumer behavior analysis to develop model of decision making for needs of entrepreneurship, especially for trading organizations. Research object is customer needs and possibility to classify them for ensuring right decision making. The main goal of research is to classify a goods according to the consumer needs. Very special role in presented research is devoted to analyze the theories and to integrate them into the consumer behavior model, at first, structuring of goods and services in the relevant models. Research tasks are to analyze possibility classify good according their impact on consumer needs; to merge together latest findings in customer needs analysis with existing well known consumer behavior mo-

1 Ieva Andersone – Riga Technical University, Faculty of Engineering Economics and Management, lecturer. Scientific interests: Marketing, Consumer behavior. E-mail: [email protected] Tel.: +371 676 086 47. 2 Elina Gaile-Sarkane – Riga Technical University, Faculty of Engineering Economics and Management, Professor. Scientific interests: Marketing, Consumer behavior. E-mail: [email protected]

6 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) dels, to develop model for decision making in entrepreneurship with an aim to ensure development of trading organizations and customer well-being. Research methods: Conventional quantitative and qualitative data analysis methods of the economics science and management science have been employed. Authors employ well known methods of research – statistical analysis, grouping, evaluation, predicting etc. In the course of the present research by synthesis of theoretical developments and practical experience decision making model is made.

1. Latvian consumer portrait

Consumer behavior is known to be affected by a range of various factors. Several authors with globally recognized researches have conducted studies on mutual interaction of factors, they have grouped, analyzed and evaluated them, etc., in order to analyze consumer behavior more precisely. One of the key parameters important in each study of consumer behavior is the demographic profile or consumer portrait. Upon summarizing the information available in scientific studies, the author concludes that factors that form the demographic profile of a consumer are as follows: age, gender, occupation, education, marital status, income, living conditions, and lifespan (Evans, Berman, 1987: 115). Since the authors studies the consumer behavior of Latvia, the authors performed an analysis of the relevant statistical data in order to create the Latvian consumer portrait. At the beginning of the year 2011, there were 2 million 229 thousand inhabitants in Latvia. Within a decade, since the beginning of the year 2000, the population has declined by 152 thousand people (Central Statistical Bureau, 2012). The proportion of urban and rural inhabitants in the overall population over the course of last five years has not changed considerably – 68 % of population lives in cities, but 32 % – in rural areas. High concentration of inhabitants of Latvia is observed in the capital – at the beginning of 2011, 700 thousand people lived in Riga (31.4 % of the country’s inhabitations). However, since 2000, the number of people living in Riga has declined by 66 thousand (Central Statistical Bureau, 2012). The average size of a household in 2011 is 2.48 persons. In cities, 1–2 person households are the most common, and their proportion in 2010 was 59.4 %. The parameter of household size is one of the important parameters for forecasting consumer behavior. Normally, according to the size of a household, the volume and structure of consumption is forecasted, as well as the future potential demand is planned (Central Statis- tical Bureau, 2012). Household consumption expenses on average in the country, if calculated per member of household, in 2010 were Latvian Lats (further: LVL) 178.01 per month, which is 91 % of the average results regarding expenses in the year 2009. The main consumption priority in all households is expenses for subsistence – 28.3 % of the total expenses of consumption and the proportion of these expenses in consumption expenses, in comparison with the previous year (26.7 %) have increased slightly. At the same time, expenses for food on average per member of household have decreased from LVL 52.04 down to LVL 50.47 (Central Statistical Bureau, 2012). Overall, in all households generally such primary expenses as costs for food, housing maintenance and utility payments, transportation costs, purchasing clothing and footwear, and health care formed two thirds (66 %) of the overall consumption costs. The second biggest expense item after food since 2006 has been transportation expenses, however in 2009, the second biggest item was expenses for housing and utilities. It is the household expense item, in which an increase in costs is observed several years in a row, and it indisputably affects the overall consumption cost structure. Upon summarizing the study results, the author has created the portrait of a Latvian consumer. The La- tvian consumer is generally 40.9 years old with life expectancy of 68–69 years for men and 78–79 years for women. The consumer is of working age and has paid employment with the average income of LVL 192 per month, spends income for food (26.7 %), housing maintenance and improvement (15.5 %), transport

7 Ieva Andersone, Elina Gaile-Sarkane CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

(13.1 %), clothing and footwear (5.3 %), entertainment and culture (8 %), communications (5.1 %), restaurants and cafés (4.3 %), health care (5.3 %), alcohol and tobacco (3.6 %). He/she lives in the city, in a multi- apartment building; the average number of people per household is 2.51 people. 14 % have higher education and 37.2 % are married (Central Statistical Bureau, 2012). The consumer portrait can be used in entrepreneurship for making marketing planning decisions.

2. Classification of goods

The motive is the rational consciousness act, the grounds for a person’s behavior, which is triggered before the behavior and determines the behavior forms, choice of means, direction of action, desire to act (Garleja,Vidnere, 2001: 95). The stronger is motivation, the faster the consumer makes a decision on consumption (also purchasing). Motivation is affected by a range of factors: functional ability of a person, energy, interests, authorities, social standards and norms, external stimuli, situations, etc. The purchase of goods or the use of services is equally affected by several motives. When analyzing, which of the motives of existing and potential clients at this time and in the nearest future could be decisive, when determining the use of a product, then, in fact, the following question must be answered: what will be the benefits for the performer of activity (Veide, 2004: 148). The occurring processes in the society’s behavior are difficult to explain, because in practice, very rarely such behavior can be observed, which is based on satisfying the basic needs, at the base of behavior are various motives, which can usually be only determined, but cannot be easily measured. Members of the society often consume services and goods not due to necessity, but instead guided by various other motives, they cannot be easily measured, but they can be identified and their variable factors can be determined (Praude, 2001: 65). A. Maslow’s theory in the modern day management has been improved and adapted for the changes of the era and it is interpreted in different ways. Upon summarizing the messages related to A. Maslow’s hierarchy of needs within the context of consumer behavior, the author has grouped various products according to Maslow’s levels of needs. The authors realize that it is infeasible to implement identical classification in all markets. The authors wishes to emphasize that such classification can be formed, by setting restrictions according to geographic, economic, political, religious, national, and other restrictions. Furthermore, such classification is limited in time. A. Maslow’s theory serves as the basis for developing a range of theories dealing with consumer behavior, therefore, when developing the consumer behavior model in Latvia, the author decided to integrate the better known theories: yy A. Maslow’s hierarchy (pyramid) of needs; yy Classification of consumption objects and production means; yy The effect of affiliation to social groups on the choice of the product and trade brand; yy Distribution of roles in a family, when purchasing various products.

In order to combine the said theories and to integrate them into the consumer behavior model, at first, structuring of goods and services in the relevant models must be carried out. Authors assume that within the framework of one social layer, the level of hierarchy of satisfying the needs, to which a group of goods belongs to, can be precisely determined.

8 ISSN 2029-9370. Regional FoRmation and development StudieS, no. 3 (8)

Figure 1. Distribution of products and services in accordance with the Maslow hierarchy theory Source: fi gure by the authors

Figure 2. Relationship of A. Maslow’s pyramid of needs with classifi cation of goods and the impact of affi liation to social groups on the choice of products and brands Source: fi gure by the authors

Similarly, products can be grouped according to the impact of affi liation to social groups on the choice of products and brands. All products can be divided into four types (bearden, Etzel, 1982: 185): y Public prestige products; y Personal prestige products;

9 Ieva Andersone, Elina Gaile-Sarkane CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

yy Necessary public products; yy Necessary personal products.

The product distribution mentioned in this theory is applicable to A. Maslow’s hierarchy of needs, the necessary personal products correspond to the physiological needs, but other products are distributed into several groups. Upon summarizing all of the afore-considered theories and novelties proposed by the authors, it can be concluded that the hierarchy of needs by A. Maslow is at the base of many theories. The author has summarized the interconnections in Figure 2. The authors conclude that the process of classification of goods according to the consumers’ needs is a rather big challenge; however, establishment of such classification is justified by the need of measuring the supply and demand in a particular market. The author recommends developing such mathematical models for evaluating the demand of separate groups of goods, which could be modeled with one, two, or several variables. The developed model can serve to forecast and make decisions at several levels – starting with national level down to company and individual level. In order to approbate the classification of goods in accordance with the consumers’ needs developed by the author (hereinafter CGACN), a focus group was created, which included consumers of various age, of both genders, having consumption experience, along with theoretical and practical knowledge in the field of marketing. As a result of the work of the focus group, the following conclusions were made regarding CGACN: yy The distribution of products and services into levels for each consumer is different; yy The CGACN developed by the authors can be used as an additional method to segment the consumers; yy The CGACN developed by the authors can be used by any manufacturer to position the assortment products according to the consumer needs. The promotion paper includes an example on the use of CGACN; yy Different needs dominate in A. Maslow’s pyramid of need for each age phase, therefore the CGACN model can be used in various age groups, when the understanding of specific needs expands.

Classification of goods cannot be applicable to a specific level, it applies to all levels, because, for example, goods purchased with purpose correspond to several levels. The bibliographical sources provide various models, which include factors affecting consumer behavior. The authors have gathered information available in various bibliographical sources concerning consumer behavior and factors affecting it.

3. Sustainable Development and Entrepreneurship

Sustainable development, a concept originally popularized by the 1987 report Our Common Future, proposes that future prosperity depends on preserving “natural capital” – air, water, and other ecological treasures – and that doing so will require balancing human activity with nature’s ability to renew itself (World Commission on Environment and Development, 1987). Within the realm of business, this idea refers to development that meets the needs of business organizations without compromising the ability of future generations to meet their own needs. The goals of economic and social development must, therefore, be defined in terms of sustainability. In this context, development is taken to mean a progressive transformation of economy and society which is sustainable in a physical sense (Lozada, 1999). Sustainability is the capacity to create, test, and maintain adaptive capability. Development is the process of creating, testing, and maintaining opportunity. The phrase that combines the two, ‘sustainable development’ thus refers to the goal of fostering adaptive capabilities and creating opportunities. It is therefore not an oxymoron, but a term that describes a logical partnership (Holling, 2001: 400). Sustainable development

10 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations. According to Hasna Vancock, sustainability is a process which tells of a development of all aspects of human life affecting sustenance. It means resolving the conflict between the various competing goals, and involves simultaneous pursuit of economic prosperity, environmental quality and social equity famously known as three dimensions with the resultant vector being technology, hence it is a continually evolving process; the ‘journey’ (the process of achieving sustainability) is of course vitally important, but only as a means of getting to the destination (the desired future state). However, the ‘destination’ of sustainability is not a fixed place in the normal sense that we understand with destination. Instead, it is a set of wishful characteristics of a future system. At the same time, the opinion exists that: “Sustainable development is said to set limits upon the developing world. While current first world countries polluted significantly during their development, the same countries encourage third world countries to reduce pollution, which sometimes impedes growth. Some consider that the implementation of sustainable development would mean a reversion to pre-modern lifestyles.” Others have criticized the overuse of the term: “The word sustainable has been used in too many situations today, and ecological sustainability is one of those terms that confuse a lot of people. You hear about sustainable development, sustainable growth, sustainable economies, sustainable societies, and sustainable agriculture. Everything is sustainable” (Temple, 1992).

4. The decision making model in entrepreneurship

Since a great volume of data is necessary for modeling, then each company, which plans to perform modeling, must be able to ensure all the necessary information about clients and their consumption habits. That, for its part, means that a company must perform regular market and consumer opinion studies. Upon summarizing the aforementioned information, it must be concluded that the model developed by the authors is useful in entrepreneurship to analyze a company’s return on investments, to determine the perspective and less perspective fields of investments, to plan advertising communications, etc. All models can be used each separately, thus increasing the company’s operating effectiveness in trade. However, the authors believe that the greatest overall effectiveness can be achieved if retail companies used advantages offered by all developed models. In order to demonstrate, how the developed models can be effectively used, the authors suggest choosing the following approach (see Fig. 3): yy To perform sector analysis by using the author’s developed model for assessing the parameters affecting consumer behavior. By using this model, it can be determined, which of these factors dominate in decision-making and how, as the investments change, consumer behavior changes (i.e. sales volume will increase). yy Afterwards, the authors suggest performing an analysis of the company’s assortment, using classification of goods according to the consumer’s needs. The needs corresponding to each segment, age group, and group of goods can be determined, and this information can be used when positioning the goods or services in the consumer market or when performing other activity directed at strengthening or increasing demand. yy The third step, as suggested by the authors, is using the model of consumer expectations theory and based on consumer expectations, the understood fair reward and insignificant rewards, to develop direct impact factors, including improving the salespersons’ performance at the shop and paying increased attention to the arrangement of the commercial premises.

11 Ieva Andersone, Elina Gaile-Sarkane CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

Figure 3. The decision-making model in entrepreneurship, based on practical applicability of consumer behavior models developed by the author Source: authors created figure, novelty

In accordance with the authors proposed approach, after obtaining and summarizing modeling information, the company’s marketing strategy must be defined and marketing measures must be planned. After the marketing measures, it is recommended to determine effectiveness of measures and there with – also the effectiveness of the use of models. As one of the important components in implementing any marketing campaign is client servicing at the point of sales, the author recommends paying particular attention to this stage. The use of models prepared by the authors in sales, entrepreneurship, and other sectors of economy provide an opportunity to reasonably plan investments for the relevant time period, to avoid mistakes, and to improve the overall economic effectiveness of the company’s operations and usefulness of resource utilization.

12 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

The use of models simultaneously ensures an increase in the trading volume and minimization of a company’s costs.

Conclusions

A. Maslow’s hierarchy of needs in the modern-day management has been supplemented, adapted for the changes of the era, and it is interpreted differently. Studies show that all consumer goods can be placed into the Maslow’s pyramid of needs and to use this theory for analyzing and forecasting that theory. It is a rather great challenge to perform classification of goods in accordance with the consumer needs; however development of such classification can be justified with the need to measure supply and demand in a particular market. For this purpose, mathematical models for evaluating demand can be developed in order to ensure modeling with one, two, or more variables. It is recommended that entrepreneurs, who deal with selling goods or services in the market of Latvia, divide the consumer’s decision-making process into subgroups according to the consumer’s choice (decision-making): habitual decision-making (impulsive decision-making, routine decision-making), restricted decision-making, and expanded decision-making. Based on such division of the decision-making process, the companies can make a well-grounded choice for the development and action strategies. For making decisions at a retail company and for long-term strategic development planning, the author suggests using the entire set of models described and developed in the promotion paper, which would ensure logical and well-grounded decision-making within the specific territory. Timely and well-grounded use of the developed models would ensure sustainable development of companies in Latvia.

References

Andersone, I., Gaile-Sarkane, E. (2009). Digital Consumer Behavior and Motivation Theories. Management, Econo- mics and business development in European conditions. VII International Scientific Conference, Brno, 28th–29th May 2009, p. 1–11. Bearden, O. W., Etzel, J. M. (1982). Reference Group Influence on Product and Brand Purchase Decision. Journal of Consumer Behaviour, Vol. 9, September, p. 183–194. Evans, J. R., Berman, B. (1987). Marketing. Consumer demographics. New York: Macmillan publishing company, p. 115–159. Foscht, T., Swoboda, B. (2007). Käuferverhalten. Grundlagen – Perspektiven – Anwendungen. 3. aktualisierte Auflage, Wiesbaden: Gabler. Garleja, R. (2001). Sociālā uzvedība patērētāja izvēles vadīšanā. Rīga: RaKa, 179 lpp. Garleja, R., Vidnere, M. (2000). Psiholoģijas un sociālās uzvedības aspekti ekonomikā. Rīga: RaKa, 264 lpp. Hasna, A. M. (2007). Dimensions of sustainability. Journal of Engineering for Sustainable Development: Energy, En- vironment, and Health, Vol. 2 (1), p. 47–57. Holling, C. S. (2001). Understanding the complexity of economic, ecological and social systems. Ecosystems, Vol. 4, p. 390–405. Kotler, Ph., Keller, K. L., Bradly, M., Goodman, M., Hansen, T. (2009). Marketing management. Pearson Prentice Hall: 1st. European ed., 889 p. Lozada, H. R. (1999). Ecological sustainability and marketing strategy: review and implications. Available at: www. sbaer.uca.edu/research/mma/1999/24.pdf Mājsaimniecību patēriņa izdevumu struktūra 1996–2010 Latvijā. Centrālās statistikas pārvaldes datu bāze. Available at: http://data.csb.gov.lv/Dialog/Saveshow.asp Pastāvīgo iedzīvotāju nacionālais sastāvs gada sākumā. Centrālās statistikas pārvaldes datu bāze. Available at: http:// data.csb.gov.lv/Dialog/Saveshow.asp Pastāvīgo iedzīvotāju skaits pēc dzimuma un dzīvesvietas gada sākumā. Centrālās statistikas pārvaldes datu bāze. Available at http://data.csb.gov.lv/Dialog/varval.asp?ma=IS0020&ti= IS02%2E+PAST%C2V%CEGO+IEDZ%C EVOT%C2JU+SKAITS+P%C7C+DZIMUMA+UN+DZ%CEVESVIETAS+GADA+S%C2KUM%C2&path=../ DATABASE/Iedzsoc/Ikgad%E7jie%20statistikas%20dati/Iedz%EEvot%E2ji/&lang=16 Praude, V. (1994). Ko ražot, kā pārdot un kā iekarot tirgu. Riga, 95 lpp. Praude, V., Beļčikovs, J. (2001). Menedžments. Rīga: Vaidelote, 508 lpp.

13 Ieva Andersone, Elina Gaile-Sarkane CONSUMER NEEDS ANALYSIS AS A BASE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP

Temple, S. (1992). Interview remarks, “Old Issue, New Urgency?” Wisconsin Environmental Dimension, Spring, Vol. 1, No. 1, p. 1. The World Commission on Environment and Development. (1987). New York: Oxford University Press, 8. p. Veide, M. (2006). Reklāmas psiholoģija. Rīga: Jumava, 247 lpp.

VARTOTOJŲ POREIKIŲ, KAIP DARNAUS ĮMONĖS VYSTYMOSI PAGRINDO, ANALIZĖ

Ieva Andersone, Elina Gaile-Sarkane Rygos technikos universitetas (Latvija)

Santrauka

Pažinti vartotojų poreikius, veiksnius, kurie daro įtaką jų elgsenai, yra būtina, siekiant užtikrinti organizacijos konkurencingumą. Autorių pateikti tyrimo rezultatai remiasi A. Maslowo poreikių hierarchija vartotojų elgsenos kontekste valdymo sprendimo priėmimo požiūriu. Autorės taiko statistinės analizės, grupavimo, vertinimo, prognozavimo ir kt. metodus, pateikia sprendimų priėmimo modelį. A. Maslowo teorija taikoma kaip pagrindas daugelyje vartotojų elgsenos teorijų, todėl kurdamos vartotojų elgsenos modelį Latvijoje, autorės nusprendė integruoti labiausiai žinomas teorijas. Sukurto modelio taikymas įvairiuose ekonomikos sektoriuose leidžia racionaliai planuoti investicijas, išvengti klaidų ir padidinti ekonominį bendrovės efek- tyvumą. PAGRINDINIAI ŽODŽIAI: vartotojų poreikiai, A. Maslowo poreikių hierarchija, vartojimo objektų ir gamybos priemonių klasifikacija.

JEL kodai: M11, M31

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Developing environmental competence

László Berényi1

University of Miskolc (Hungary)

Abstract Achieving a higher level of sustainable development is an increasingly important issue. Developing environmental consciousness on individuals and organizations can be successful only on a stable methodological base. This task is feasible with the support of competence management. The paper summarizes a comprehensive model for evaluating environmental consciousness that provides the necessary frames and empiric results of analysing the environmental management tools and the organizational size. This research was carried out as part of the TAMOP-4.2.1.B-10/2/KONV-2010-0001 project with support by the European Union, co-financed by the European Social Fund. Keywords: environmental management, consciousness, organizational development.

JEL codes: Q500, Q590

Introduction

Achieving a higher level of sustainable development is an increasingly important issue. There are several theoretical models and practical tools but the realization is difficult because of the various characteristic of the stakeholders. Organizations are both producers of goods and employer so they have a dual role and responsibility in sustainable development. Interests and values shall be harmonized with the development possibilities in an effective way. Establishing the suitable management tools and development program needs a comprehensive approach that covers both the process and content; and allows coordinating the individual and organizational aspects of the problem. Expanding the interpretation of the competence to organizational level gives new opportunities for researches. Competence management includes tools for identification, exploitation and development of knowledge, ability and skills that increase the organizational competitiveness. Paying attention to environmental competence on organization level allows the management to harmonize the business objectives and the sustainability. In addition environmental competence is a horizontal one that shall be integrated into other competences. The theoretical question of this paper is: How to define a unified frame set of measurement and development? The aim of empiric analysis is to present some initial characteristics of Hungarian organizations that help to introduce the suitable management tools in order to develop and to take the advantages of environmental competences. The paper alloys the author’s former results on environmental management with the concept of competence management.

1 László Berényi – University of Miskolc, Faculty of Economics, Institute of Management Science, associate professor, PhD. Scientific interest: environmental management, quality management, ergonomics. E-mail: [email protected] Tel.: +3646 565 111 / 1774.

15 László Berényi Developing environmental competence

1. Research background

This research was carried out as part of the TAMOP-4.2.1.B-10/2/KONV-2010-0001 project with support by the European Union, co-financed by the European Social Fund. The project aims improving the quality of higher education by establishing excellence centres for strategic research areas of the University of Miskolc. The project runs between 2011–2013. There are four excellence centres defined that cover the professional skills of the University of Miskolc. Mechatronics and Logistics Excellence Centre give the frame of organizational researches as well. Dr. Dezső Szakály is the leader of the Scientific Research Group for “Innovative Solutions for the Management of Or- ganizations to Increase Competitiveness”. Developing new, innovative organizational solutions in order to increase the effectiveness of the production and logistics systems by using the competence-based approach is coordinated by Dr. Mariann Somo- si Veres. Analysing the competencies and the competences in connection with the sustainable development is essential for developing environmental consciousness both on individual and corporate level.

2. Competence, competence management

2.1. Interpretation of competences

‘Competence’ can be interpreted as the ability to perform an activity properly. It is a set of defined behaviours that provide a structured guide enabling the identification, evaluation and development of the behaviours in individual employees (Szelestey, 2012). Competence also can be defined as knowledge and ability for performing certain tasks or roles. There are various classifications in connection with competences. In an organizational view Szabó (2008) summarizes in her PhD Dissertation four categories of competences based on the practice-oriented approach of the EU: yy basic competences: general and frequent ones that are used in various areas of the life. These give the basis of developing other competences; yy key-competences: general elements of each profession. It is categorized by an EU framework (see later) and can be defined as important competences from a specified aspect; yy generic competences: general and independent support elements of successful work, e.g. importance vision, decision making skills, innovative approach, problem-orientation; yy functional competences: special skills and abilities in connection with a specified work.

It is useful and critical to take into consideration the regulation of the European Union. The European Re- ference Framework (2007) defines eight key competences that are necessary in order to realize the objectives of life long learning: yy communication in the mother tongue: ability to express and interpret concepts, thoughts, opinions etc. in both oral and written way; yy communication in foreign languages: it has a similar role than communication in mother tongue but it allows the understanding between various cultures and countries; yy mathematical competence and basic competences in science and technology: basic mathematical and scientific knowledge and thinking is necessary in order to solve problems in everyday situations, and to understand the happenings around us; yy digital competence: digital communication has a spread role in organization and in our whole life, including the access to learning materials as well; yy learning to learn: it is related to learning process by establishing the ability to pursue and organise the own way; yy social and civic competences: social competence refers to personal, civic one to interpersonal and intercultural situations and problem solving;

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yy sense of initiative and entrepreneurship is the ability to turn ideas into action: it involves creativity, innovation and risk-taking, as well as the ability to plan and manage projects in order to achieve objectives; yy cultural awareness and expression: it covers appreciation of the importance of the creative expression of ideas, experiences and emotions in a range of media (music, performing arts, literature and the visual arts).

2.2. Organizational and individual competences

Organizational (corporate) competence is more than the sum of individual ones. Of course the organizational performance depends on the knowledge and ability of the members. One of the most interesting challenges of competence management is to segregate and harmonize the tool set of using and developing them. Institute of Management Sciences of the University of Miskolc focuses on the corporate level by but there are individual competences taken into consideration as well. In a simplified approach an organization shall focus on the organizational competences in order to increase the own competitiveness. Using up the individual knowledge and competence generates the necessary tasks for the organizations: collecting the knowledge, selection of employee, seeking for motivation points, supporting the knowledge-flow by coordination tools (meetings, teamwork etc.), building up databases and knowledge bases. Awuah (2001) interprets organizational competence as the sum of individual and corporate abilities, knowledge and capacities. Research of the theme has the own history. In the 1970’s the need for rationalization (Susánszky, 1984) was a similar challenge. The 7S model and searching the excellence by the McKin- sey and Co. were worldwide known (Peters, Waterman, 1991). The objectives of organizational competence management are similar: finding the factors of successful operation. Somosi (2011) draws up a model that summarizes each level of competences (Figure 1).

Figure 1. Organizational competence Source: Somosi, 2011: 12

17 László Berényi Developing environmental competence

Measuring and developing competences are key factors of organizational development. Individual and organizational competences shall be harmonized in order to increase the business competitiveness. Knowledge, readiness, preparedness of people as workers has significant effect on the organizational performance as well. Elementary and higher education system shall prepare the knowledge of students for the successful work but most of the requirements come from the employer. Some elements of knowledge, ability and skills are to be learned only in the organization. Economic science interprets the concept of competence for the organizations as well. The basic idea is not brand new but the modern information technologies and management tools give the actuality of rethin- king the content of the topic.

2.3. Environmental competence

Environmental questions, problems and approach are often pushed into the background. Both people and organization are selfish. The satisfaction of needs and the limited access to resources are the main barriers because in case of less money, time etc. resources are available for the ‘classic’ processes and interest: yy ‘business-as-usual’ approach overshadows the environmental interest, yy there are problems of information flow, i.e. it is difficult to judge the relevance of information.

Environmental competence is a horizontal competence i.e. it shall be integrated into factual and other competences. Solving the environmental problems requires the cooperation of various sciences and fields of operation. There is a growing interest in global environmental problems from the 1960’s. The principle of sustainable development (Brundtland, 1987) gives a general approach to the global problems by taking the economic side into consideration but it does not define the concrete way of actions. The principle shall be filled up in the mirror of the local problems and possibilities. Varga (2006) analyses the environmental competence in harmony with the eight EU key-competences. His explanation is obvious and it justifies the accuracy of the concept that environmental competence has a horizontal characteristic. It is not possible to express our ideas neither in oral nor in written form without the competence of communication. Of course the environmental aspects and information are not to acquire without appropriate communication. Communication in foreign language spreads the possibilities. Mathe- matical and scientific competences are necessary because there are natural and mechanical processes and events in the background of environmental pollution and problems.

3. Developing environmental competence

3.1. Comprehensive model of environmental consciousness

Systematically developing environmental competence needs a framework that allows monitoring and evaluating the progress. A comprehensive model (Figure 2) gives frame of both evaluation and development actions that is suitable to describe behaviour of both people and organizations. Moreover the environment and the environmental problems are common; those are over people or organizations. Environmental consciousness can be defined as a quality indicator of the activities in the mirror of the values of sustainable development. The comprehensive model (Figure 2.) uses a different approach from the usual models of environmental marketing. The core of the model is based on the process of decision making. Decision is a critical point of the actions. Field of decisions displaces the disposition of other models. Management science has professional methods for analysing the ways and whys of decision making, instead of accepting the unreliable introspective reports. Disposition to actions is not an outlaw but it shall be interpreted in a specific way. Some characteristics of ‘how to make decisions’ are the following: yy People have specified objectives and a specified level of knowledge: conception about good and bad, handsome, useful and ugly etc. The opinions and the actual knowledge may be difficult to change. These factors shall be handled as enablers.

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Figure 2. Comprehensive model of environmental consciousness Source: own edition

yy There are situational circumstances. Our behaviour may be different depending on being alone, with friends, with family or at work. Sometimes these circumstances motivate people to decide inconsis- tently. This is another conflict between financial possibilities and desires. yy Decision making means choosing between the known possibilities. Realisation is the accomplishment and evaluation of the selected solution. yy Learning is based on the evaluation. New experiences will confirm or overwrite the factors covered as enablers in my model. Next time our decision may be different in a similar situation.

3.2. Management tools of developing environmental competence

Teamwork, creative decision-making support methods (brainstorming, 6-3-5 etc.), business intelligence software can be useful support tools of developing environmental consciousness. Using management standards (ISO 14001 for environmental management system), EU directives (EMAS) represents more sophisticated tools. Of course there are specified tools for developing environmental performance: Eco-mapping (Engel, 2000), due diligence (Nafti, Miller, 2000), environmental accounting and environmental performance evaluation (especially ISO 14031 standard) can be highlighted. The positive correlation between environmental competence and the size of organization seems to be obvious but the practical experiences draw up a more complex situation.

4. Size of organization and environmental consciousness

4.1. Objectives and research sample

The quantitative sample of analysing the relationship between environmental competence and the size of organization contains 81 producers, service-oriented and public service organisations. 6 times the size was unidentified. Results in this paper are based on the answers of the 75 identified organisations. Distribution of the sample is shown in Table 1.

19 László Berényi Developing environmental competence

Table 1. Distribution of the sample

Small-sized Medium-sized Large-sized organizations Total 18 27 30 Producer 3 10 20 Service Oriented 13 11 7 Public Service 2 5 3 Source: own edition

4.2. Management system and commitment

Commitment of the management can be represented by proposing objectives for the organisation and establishing management standards. Another problem is whether these are in order to reach a certificate or these are the elements of the scale of value. From the point of view of excellence it is encouraging that most of the organisations try to establish factual objectives. Figure 3. shows that there is a positive correlation between the existence of quality/environmental objectives and the size of the organization. Results on corporate vision may be surprising at the first sight but knowing the cultural and management characteristics of small organisations the relation is obvious. A small sized one has determinant function and mission (e.g. the independence of the entrepreneur or earning familiar bread). On the other side – because of its largeness – a large organization can not exist without a regulated scale of values in details. A medium sized organization may be on a dynamic way of enlargement. This may cause the uncertainty and changes in objectives. The most popular management standard is the ISO 9001. In average 49 % of the respondents have build a system on the requirements of it. The popularity of environmental management system (ISO 14001) is lower, except large organisations. The number of EMAS users is at a low level, but in a few years increase is to promise. The usage of ISO 9004 designates that there are some organisations that would like to reach a higher level than the minimum requirements.

Figure 3. Commitment of the top-management by the size of the organization Source: own edition

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Figure 4. Management system usage by organizational size Source: own edition

4.3. Environmental information and communication

Collecting relevant environmental and business information is determinative in order to establish environmentally conscious actions. Organisations primarily try to collect information from the official journals and from state institutes. Conferences are quite popular, but environmental and management journals are represented at a low rate. It is interesting to note that these journals play a featured role for the small sized organizations.

Figure 5. Information sources Source: own edition

21 László Berényi Developing environmental competence

Conferences and exhibitions are visited by most of the managers. Workers are sent only by the 50–60 % of the organisations. This rate must be increased because each worker most get known the new technologies and processes to be able to adapt them successfully.

Table 2. Most popular Internal Communication-Solutions by the size of the Organization

Small sized Medium sized Large sized No. Tools % Tool % Tool % Informal 1 87,2 Small groups 76,8 Intranet 77 communication 2 Small groups 80 Internet 66 Small groups 71,8 Informal Wall- 3 Internet 66,6 61,8 62,2 Communication newspaper Source: own edition

Internal communication has a determinant role on giving and collecting the relevant information. The research collects the possible and used methods of doing that. The three most popular solutions are summarized in Table 2. In connection with external partnership the research focused on the quality of the partnership by self- report of the answerer organizations. Higher values (max. 100 %) in Table 3 show better quality. Average partnership with environmental institutions is at a medium level. Large enterprises represent the highest value but their performance shall not be over-estimated. The reason for this is that they are the real winner of the partnership from a business perspective even though they are the dartboard of the environmental de- monstrations as well.

Table 3. Results on partnership

Small Medium Large Local environmental acitivists (%) 48,9 55,0 67,3 National environmental acitivists (%) 40,0 58,8 64,0 International organisations (%) 46,7 58,5 61,5 Media (%) 54,5 71,8 76,5 Source: own edition

4.4. Environment-oriented management tool set

The core task of environmental management is the performance evaluation. 17 % of small organisations, 36 % of medium ones and 70 % of large ones claim that there are proceedings for regular environmental performance evaluation. Services of external specialists are used by most of small and medium organisations and by less then half of the large ones. External support is necessary for small sized ones because they do not have accurate technological, methodical and HR background to be able to achieve the evaluation. It is interesting to analyse the areas of environmental performance evaluation and furthermore the rate of ‘it would be useful’ answers.

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Figure 6. Usage of performance evaluation by small organization (%) Source: own edition

Figure 7. Usage of performance evaluation by large organization (%) Source: own edition

Conclusions

Developing environmental competence can not be achieved without the organizational aspects and context. Empiric results in this paper draw up some characteristics of various organizations that may ground the successful development actions. A practical and important question is whether the larger organizations with management, technological and financial wider possibilities were greener. Results presented above implicate that there is a positive

23 László Berényi Developing environmental competence correlation between the indicators of environmental consciousness and the size of the organisation. But the problem is more difficult because of the following reasons: yy the representation of SMEs is extremely high in Hungarian economy (over 95 % of the organizations, 70 % of the employment); yy the business, financial etc. possibilities are different in these organisations. Governance (local and national) and large organisations must support their development by factual and financial aid. Having the right information and right circumstances – because of the variegation in activity and culture – the smaller organisation can become the motors of the environmental management development. Based on the competence-based approach individual and organizational actions of developing environmental consciousness may be successful. Sustainable development designates the targets but the way is hard and not always clear. Results in this paper help to build up the acceptable and effective development programs and actions.

References

Awuah, G. B. (1993). A firm’s competence development through its network of exchange relationship.Journal of Busi- ness and Industrial Marketing, Vol. 16, No. 7, p. 574–599. Brundtland, G. H. et al (1987). Our Common Future. Oxford: Oxford Univerity Press. Engel, H. W. (2000). Környezeti térképezés (Eco-mapping). Budapest: Követ-Inem Egyesület. Key Competences for Life Long Learning. (2007). European Reference Framework. Brussels: European Communities. Nafti, R., Miller, J. (2000). Gondos bánásmód (Due dilignece). Budapest: Követ-Inem Egyesület. Peters, T. J., Waterman, R. H. (1991). In Search of Excellence: Lessons from America’s Best-Run Companies. New York: Harper & Row. Somosi Veres, M. (2011). Basic Capability: Development of Organization and Individual Capabilities. Magyar Minőség, Vol. 20, No. 5, p. 11–20. Susánszky, J. (1984). A racionalizálás módszertana (Methodology of rationalizing). Budapest: Műszaki Könyvkiadó. Szabó, Sz. (2008). A vezetői kompetencia-fejlesztés tapasztalatai és lehetőségei egyes rendvédelmi szervek hivatásos állománya körében. (The leadership competencies and development experiences and opportunities for individual professional portfolio among law enforcement agencies). PhD értekezés. Zrínyi Miklós Nemzetvédelmi Egyetem. Szelestey, J. Kompetencia model kidolgozásának elméleti háttere (Theroretical Background of establishing competence model). Working Paper. Source: www.erg.bme.hu/szakkepzes/4felev/SelesteyKompetencia.pdf (22.02.2012). Varga, A. (2006). Környezeti kompetenciák fejlesztése tanítási gyakorlatban (Developing Environmental Competences in education practice). OFI. Budapest. Source: http://www.oki.hu/oldal.php? tipus=cikk&kod =Hidak-Kornyezeti (22.02.2012).

Aplinkos aPSAUGOS kompetencijos ugdymas

László Berényi Miskolco universitetas (Vengrija)

Santrauka

Vis svarbesniu uždaviniu tampa aukštesnio lygio darnaus vystymosi siekis. Individų ir organizacijų aplinkosauginio sąmoningumo ugdymas gali būti sėkmingas tik taikant stabilią metodologiją. Čia galima pasitelkti kompetencijų valdymą. Šiame straipsnyje aprašomas aplinkosauginio sąmoningumo matavimo modelis, kuris suteikia reikiamų empirinių duomenų aplinkosauginio valdymo priemonių ir organizacijos dydžio analizei. Tyrimas atliktas kaip projekto TAMOP-4.2.1.B-10/2/KONV-2010-0001 dalis, remiant Euro- pos Sąjungai, kofinansuojant Europos Socialiniam Fondui. PAGRINDiniai žodžiai: aplinkosauginis valdymas, sąmoningumas, organizacijų vystymas.

JEL kodai: Q500, Q590

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measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY

Gabrielė Burbulytė-Tsiskarishvili1

Klaipėda University (Lithuania)

Abstract Regional policy is a very dynamic and broad concept. As we can see from Lithuanian regional policy, regions can be formed very flexibly, using different spatial areas (counties as well as municipalities). This is justified by the main purpose of regional policy – dealing with social and economic inequality. The aim of the Government is, therefore, to identify the remote territories and to divert certain assistance in time. The Government, however, uses short-handed instruments, namely economic indicators, for the revealing of problem areas in Lithuania. The article argues that this is not enough: peripherality and accessibility indicators could be calculated for Lithuanian regions. Calculations of data using the formulas presented quite clear picture and tendencies of territorial development. They proved the existence of poor development axes and good development nucleus. The trend towards institutional development of 6 potential regions in Lithuania could be envisaged. KEYWORDS: region, regional policy, peripherality, accessibility.

JEL codes: R000, R120, R150, R190

Introduction

Regional policy is a very dynamic and broad concept. Various territorial units could be used as the basis for regional formation. As we can see from Lithuanian regional policy, regions can be formed very flexibly, using different spatial areas (counties as well as municipalities). This flexibility is justified by the main purpose of regional policy – dealing with social and economic inequality. The main idea is that the spread of economic policy does not cover all the states’ territory equally. Certain centers and certain peripheries appear as the result of uneven distribution of wealth. The aim of the Government is, therefore, to identify the remote territories and to divert certain assistance in time. The problem of the research is, therefore, to present that Lithuanian regional policy is very ambivalent, as we can talk about regional policy without regions. Regions are used as analytical concepts subjected to the need of the Government. The purpose of the article, therefore, is to provide the more objective instruments for the identification of regions. The main object is to present peripherality and accessibility calculations for Lithuanian regions. The tasks of the article are: yy to present the dynamic of regional policy notions and perceptions; yy shortly introduce with the evolution of Lithuanian regional policy and its targets; yy to present different methods for peripherality and accessibility calculations; yy calculate peripherality and accessibility indicators for Lithuania regions and present these result in maps.

1 Gabrielė Burbulytė-Tsiskarishvili – Klaipėda University, Department of Geography, Department of Public Administration and Law, lecturer. Scientific interest: regional policy, regional economics. E-mail: [email protected].

25 Gabrielė Burbulytė-Tsiskarishvili measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY

For the achievement of the purpose and the tasks, the following methods were used: SPSS and GIS, mathematical calculations and analysis.

1. What is regional research about? Different approaches, all about the same

The notion of region is used very freely and very unrestrictedly in economic research. Using a broad variety of economic criteria, economists employ this term for identifying territories of very different scale: from sub-national to supra-national levels. In regional economy, however, there is a tendency towards identifying a region as a local community (Dicken, 2003: 75), as a sub-national territorial unit (Степанов, 2000: 10) the boundaries of which ought not to coincide with the boundaries of a politico-administrative unit (Armstrong & Taylor, 2004: 2). The notion of region that is employed in regional economy is usually used at micro-scale. Such an approach is widely used in the EU, in its regional policy. At mezzo- and macro-scale a more unattached concept of region is used. It enables the forming of a very new geo-economic map of the world economy (Dicken, 2003: 33). Therefore at macro-scale it is possible to find three great economic regions (it would be more properly to call them economic areas) as NAFTA, the EU, and ASEAN (or South East Asia). The UN and the World Bank, however, are following the Cold War era practice of dividing the world into the three main areas/regions according to their level of economic development. Such a division distinguishes the well-developed countries that belong to the OECD organization, the transition economy countries that belong to the CEE and CIS, and the developing countries that belong to the rest of the world. Of course, it is possible to scale these areas, especially those of the developing countries, into mezzo-regions. Nevertheless, the concept of mezzo-scale region is more commonly used for identifying the so-called ‘economic corridors’ that are emerging as the outcome of economic globalization. The notion of region in political research is used also very broadly. Firstly, regions traditionally were understood as a form of a state’s territorial political organization. Regions constituted a very important regional level (between national and local levels) of territorial political organization. The processes of globalization, however, are changing many elements of public policy. The regional level is changing too. As John (2001) indicates, territorial units at local level are cooperating in order to resist the pressure of global powers. They create alliances which should be called as meso. The term, however, did not stick. Instead of the term meso, the term of mezzo-scale region is used for identifying these new forms of cooperation. Secondly, the term region can be used in domestic/national policy. Here the term refers to regional policy. Regional policy, however, is understood as part of a state’s economic policy. In such a case the notion of region is identical to that used in regional economy, i.e. a region is realized as a sub-national micro-scale territorial unit. Thirdly, the term region is broadly and very freely used in international politics where it refers to all, as B. Buzan (1997) points out, “hot and interesting for international media places of the world.” This article treats region as a sub-national micro-scale territorial unit that is affected by regional policy which aims implementing goals such as fighting economic and social inequality, uneven distribution of economic and social wealth. Regional policy, respectively, deals with territoriality. Uneven distribution of economic and social wealth is treated in spatial dimension – uneven distribution creates cores of development, namely, centers, and margins of development, namely, peripheries. For a long time in Europe, peripherality was strongly associated with geographical position of a particular territory, therefore, “until very recently most interventions addressing peripherality have involved attempts to ameliorate the economic disadvantage of remoteness through investment in physical infrastructure” (Copus, 2000: 2), investment in physical accessibility. Reality, however, shows that “certain peripheral and less accessible regions exhibit high levels of economic growth despite their disadvantaged locations… Factors other than location may be (and have been) employed to explain regional growth or, converse- ly, poor performance” (Copus, Skuras, 2006: 29). It leads to the new dimension of “aspatial peripherality” where economic development is understood to be fostered by essentially non-geographic processes (Copus, 2000, 2001), what means that we should start talking about the accessibility of social and human capital. The article, therefore, presents the basic initial calculations of peripherality and accessibility for Lithu- anian regions.

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2. Lithuanian regional policy and regionalization: a short overview

The process of territorial decentralization in Lithuania started in 1995, when the new territorial-administrative reform was introduced. In accordance with the Law on Administrative Territorial Units, Lithuania was divided into two main sub-national territorial administrative tiers: 10 counties – higher administrative units, whose management is organized by the Government and 56 municipalities – lower administrative units, where self-government was preserved (since the year of 2000, there are 60 lower administrative units). By decision of a municipal council, a municipality may divide its territory into smaller units – wards. Li- thuania differs from its neighbors in that it has established large municipalities in terms of territory (through amalgamation of different settlements in one municipal territory) and the population. It appears, therefore, that regional level of governance (understanding it the way as it was mentioned in the chapter above) is/was missing in Lithuanian territorial – administrative division. Nonetheless, the Government has started regional development programmes since 1997. First of all, the Law on Regional Development was introduced in 2000 and amended in 2002. The same 2002 the Parliament accepted the Ge- neral Plan of Territorial Development. Both these documents treated region and regional policy in the terms of regional economy – the main aim was to minimize territorial socio-economic differences. The means for achieving this aim, however, were not clear enough. Not clear enough, until the Government and the Par- liament introduced several new documents concerning territorial development vision until 2013.2 All these documents diverted regional policy towards socio-economic cohesion. It appeared, firstly, that the Government and the Parliament are keener to see counties as future regions (in terms of administrative regional policy). Nonetheless, the later steps (especially those of the year 2010 when the administrations of the counties were abolished leaving counties as territorial units only) cleared out that regions will be formed according the need. They will be used as analytical units for the implementation of regional policy. As we can see in picture 1, according the General Plan of Lithuanian Territory Development, and other documents, concerning regional policy until 2013, there are 14+1 target regions: 14 municipalities with very low socio-economic indicators and 1 special Ignalina Nuclear Plant region (covering Ignalina, Zarasų rajonas and Visaginas municipalities). The Government used various, though, namely, economic indicators for determining of such territories. The experience of the EU regional policy (especially the development of the European Spatial Development Perspective and The European Spatial Planning Observatory Network/ ESPON) enables the use of multi-dimensional indicators. As a small part of this multi-dimensional variety it is possible to indicate peripherality and accessibility calculations for the identification of remote regions.

3. Different methods measuring peripherality and accessibility

Traditionally, accessibility and peripherality indicators are used to identify remote regions: “A peripherality indicator can be interpreted as an inverse function of accessibility, i.e. the higher the accessibility, the less peripheral a region is located and vice versa” (Schürmann, Talaat, 2002: 6). According to A. K. Co- pus (1999), all the broad variety of accessibility and peripherality indicators falls into two broad types: yy The first group utilizes gravity model-based methodologies to estimate “economic” or “market” potential.3 yy The second group comprises “travel time/cost” and “daily accessibility” indicators.4

2 LR Seimas. (2002). LR Regioninės plėtros įstatymas (nauja redakcija). 2002 m. gruodžio 10 d. Nr. IX-1285. Valstybės žinios, Nr. 123-5558. LR Seimas (2002). LR Teritorijos Bendrasis Planas, 2002 m. spalio 29 d., Nr. IX-1154. 3 In this case it is assumed that the potential for economic activity at any location is a function both of its proximity to other economic centers and of their economic size or “mass”. The analogy with the law of gravity is explicit in that the influence of each centre on the “economic potential” of a location is assumed to be directly proportional to the volume of economic activity at the former, and inversely proportional to the distance separating them. The economic potential of the location is found by summing the influences on it of all other centers in the system (Copus, 1999: 1). 4 Although conceptually simpler and more intuitive than the first group, these have become dominant in recent years due to ease of estimation using modern GIS software. Essential these approaches answer one of three questions: the total cost of travelling from each locality to all the major economic center; number of people that can be reached with a day trip (3–4 hours each way) from each point on the map; or the total cost of accessing a total market of n people from each location (Copus, 1999: 1).

27 Gabrielė Burbulytė-Tsiskarishvili measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY

Figure 1. Target regions (municipalities) according Lithuanian regional policy until 2013

As a milestone for the gravity model-based methodologies the works of D. Keeble and his colleagues must be mentioned. A premise is that the potential for economic activity at any location is a function of its proximity to other economic centers. The analogy with the law of gravity is explicit in that the influence of each centre on the “economic potential” of a location is assumed to be directly proportional to the volume (or “mass”) of economic activity at the former, and inversely proportional to the distance separating them. The economic potential of the location is found by summing the influences of all other centers in the system. This is expressed in the formula (1):

where: Pi – is the index of peripherality for location i;

Mj – is an economic “mass” variable in location j; Dij – is the distance between locations i and j;

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This methodology was improved by many other scientists5, among whom it is worth to mention the research by J. Gutiérrez and P. Urbano.6 It focuses on the accessibility of major centers of economic activity (defined as cities of more than 300,000 people) rather than regions and presented the new modified equation (2):

where:

Ai – is the accessibility of node i;

– is the impedance7 through the network between nodes i and j;

8 GDPj – is the gross domestic product of the destination node j.

Travel time/cost and daily accessibility models are based on the average travel time calculations using different types of transport networks, combining different routs and modes. The spread of such models was enabled by the development of GIS. Among other works it is worth to mention research by H. Lutter and his team9, G. Chatelus and A. Ulied10, and by K. Spiekermann ir M. Wegner11 (Copus, 1999, 2000; Schürmann, Talaat, 2002; Spiekermann, Neubauer, 2002). The H. Lutter study developed an unweighted travel time indicator for the regions of the EU12. Average travel times were calculated between each NUTS III region and 194 major cities. These travel times are estimated on the basis of a set of simplified transport networks, not unlike that used by D. Keeble, but rather more detailed, and multi-modal, allowing the software to select the fastest route, whether by road, rail or air. G. Chatelus and A. Ulied generally take the economic development benefits of improved accessibility as given, although, interestingly, they point out that improved transport infrastructure, although necessary, is not sufficient. K. Spiekermann and M. Wege- ner use a sophisticated Daily Accessibility methodology to assess the effect of the TENS on core-periphery differences in Europe. A 10 kilometer grid raster data file provides population data, which is combined with a simplified rail network. They acknowledge the importance of service quality, reliability and speed, the low

5 Linneker, B. J., Spence, N. A. (1992). An accessibility analysis of the impact of the M25 London Orbital Motorway on Britain. Regional studies, No. 26, p. 31–47; Frost, M. E., Spence, N. A. (1995). The rediscovery of accessibility and economic potential: the critical issue of self potential. Environment and Planning A, Nr. 27, p. 1833–1848; Smith, D. M., Gibb, R. (1993). The regional impact of the Channel Tunnel: a return to potential analysis. Geoforum, Vol. 24 (2), p. 183–192; Bruinsma, F., Rietveld, P. (1993). Urban agglomerations in European infrastructure networks. Urban Studies, Vol. 30 (6), p. 919–934. 6 Gutiérrez, J., Urbano, P. (1996). Accessibility in the European Union: the impact of the Trans-European road network. Journal of Transport Geography, Vol. 4, p. 15–25. 7 “Impedences” were travel times calculated for the route between each pair of nodes, using a detailed digital road/ferry network, each class of road having a difference average speed, and changes of mode (road-ferry) and crossing city centres incurring time penalties. 8 This was estimated by applying the GDP per capita for the surrounding region to the population of the city. 9 Lutter, H., Pütz, T., Spangenberg, M. (1992). Accessibility and peripherality of Community regions: the role of road, long- distance railways and airport networks. Report to the European Commission, DG XVI, Bonn, Bundesforschungsanstalt fur Landeskunde und Raumordnung. 10 Chatelus, G., Ulied, A. (1995). Union territorial strategies linked to the Trans-European Transportation Network. Final report to DG VII. Paris/Barcelona, INRETS-DEST/MCRIT. 11 Spiekermann, K., Wegner, M. (1996). Trans-European Networks and unequal accessibility in Europe. European Journal of Re- gional Development (EUREG), No. 4, p. 35–42.

29 Gabrielė Burbulytė-Tsiskarishvili measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY proportion of production costs accounted for by transport in many modern industries, the various impacts of information and communications technology, and the increasing role of other factors (quality of life, access to information and specialist business services and so on) in industrial location decision making. They stress the fact that infrastructural improvements often work to the disadvantage of peripheral areas, especially if they link central cities together, or even if they link the core with the periphery. In general terms, then, accessibility is a construct of two functions, one representing the activities or opportunities to be reached and one representing the effort, time, distance, or cost needed to reach them (Schürmann, Talaat, 2002: 6) and can be expressed in formula (3):

where:

Ai – is the accessibility of region;

Wj – is the activity W to be reached in region j;

Cij – is the generalized cost of reaching region j from region i.

The functions g(Wj) and f(cij) are called activity functions and impedence functions, respectively (Schür- mann, Talaat, 2002: 6). The formula (3) can be modified according to the different functions used.

4. Peripherality and accessibility of Lithuanian regions (municipalities)

As Lithuania is not a very big country in terms of territory size, travel time/cost or daily accessibility calculations are not so meaningful for the regional potential analysis. More actual become activity and network impedance functions. For the purpose of comparative calculations, in this article the gravity-based formula (1) and the following modifications of formula (3) are used:

where:

Ai – area i accessibility;

Pj – population size in area j;

dij – Euclidean distance between area i and j.

where:

Ai – area i accessibility;

cij – network impedance;

dij – Euclidean distance between area i and j;

Wj – is the mass W to be reached in region j.

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For the calculations using the gravity-based formula, as an economic mass variable in location j (Mj) an average gross monthly earnings indicator for the year 2008 is used. For the calculations of Dij variable, distance among municipalities’ centers is calculated. In the article, data presented by Lithuanian Road Administration under the Ministry of Transport and Communications is used. The bigger the value, the more peripheral a territory is. The results are presented in the 2nd picture. As we can see from the picture 2, the gravity model-based calculation of peripherality index did not give us much information needed for the formation of regional policy. Even the use of economic mass variable (average gross monthly earnings) did not present any interesting difference that regional policy could aim to. Distance among municipalities dominated and, though with some exceptions, the same picture of Lithuania territory evolved.

Figure 2. Peripherality index of Lithuanian municipalities

It is worth to try the accessibility indicators instead. For the calculations of accessibility using the formula (4), population size of certain municipality is used and the Euclidean distance among municipalities is calculated. For the calculations of accessibility using the formula (5), an average gross monthly earnings indicator for the year 2008 is used as mass W variable (Wj).

And an additional variable of impedance (cij) is introduced. I used the distance to the regional centers and the capital as the main impedance function. The Euclidean distance among municipalities is calculated as well.

For the calculations of dij variable in both formulas, distance data presented by Lithuanian Road Adminis- tration under the Ministry of Transport and Communications is used. The real distance values in kilometers

31 Gabrielė Burbulytė-Tsiskarishvili measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY are transformed into the proximity matrix of distances using SPSS 11.0 (measured using Squared Euclidean distance interval, standardized by Z scores). The results are presented in the 3rd and the 4th pictures.

Figure 3. Accessibility index of Lithuanian municipalities according formula (4)

As we can see from the both pictures, a very different view (in comparison with the gravity model-based calculations) appears. The lower the value of Ai, the less accessible is the certain area. From picture 3 we can identify more than 14 remote areas that need state’s assistance in development. These remote areas create very clear axes of low development (as presented by bold lines in the picture 3). According to calculations, with the exclusion of Vilnius city and Vilnius rajonas municipalities, almost all south-eastern part of Lithuania, south-western border region, and northern border territories are deeply remote. It partly could be explained by the size of population: usually border regions are less populated. As this accessibility index uses population size as the main variable, it does not seem very suitable for the identification of really remote areas in terms of socio-economic development.

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Figure 4. Accessibility index of Lithuanian municipalities according formula (5)

Figure 5. The potential regions for Lithuanian regional policy

33 Gabrielė Burbulytė-Tsiskarishvili measuring PERIPHERALITY AND accessibility for LITHUANIAN REGIONAL POLICY

Inclusion of economic activity variable and impedance function provides us a new, a much better, view of spatial development (picture 4). It shows quite clear nucleus of good development, i.e. Vilnius-Kaunas axis (what proves that talks about Vilnius-Kaunas dipolis is not cheap at all) and Klaipėda region. Howe- ver, almost the same (with some more or less exceptions) axes of low development territories (bold lines in picture 4) appear. Though calculations provide different results, certain tendencies are possible to evolve. These tendencies are: yy firstly, the possible ways of accessibility calculations provides certain nucleus of development, namely Vilnius-Kaunas region and Klaipėda region; yy Šiauliai-Panevėžys form the second nucleus of development; yy the rest territories could be named as the remote ones.

The presented tendencies enable to talk about the need for the Government to concentrate its regional policy towards 6 potential regions as presented in the 5th picture. This could lead towards the institutionali- zation of regional policy and the introduction of possible new tier of territorial-administrative governance.

Conclusions

As we can see from the conducted research, it is very difficult to talk about effective regional policy without having a complex instrumental base for the identification of regions (if we understand regional policy in terms of regional economy, i.e. as dealing with socio-economic territorial differences). A very broad complex analysis is needed. The EU regional policy has established a certain institutions for this, namely the European Spatial Deve- lopment Perspective and The European Spatial Planning Observatory Network/ESPON. Scientist, gathered under the ESPON, elaborate multi-layer calculations for the reveal of problem territories in the EU. Lithuanian regional policy is deeply oriented towards the EU regional policy. The Government, however, uses short-handed instruments, namely economic indicators, for the revealing of problem areas in Lithuania. The article argues that this is not enough. A more complex analysis is needed. As a part of such complex analysis, peripherality and accessibility indicators could be calculated for Lithuanian regions. The calculations provided in the article proved that the gravity model-based formulas are not enough. A more complex analysis is needed. Accessibility indicators, especially using economic variables and impedance functions, prove to be more adequate. Calculations of data using the accessibility formulas presented quite clear picture and tendencies of territorial development. They proved the existence of poor development axes and good development nucleus. Despite the fact, that a more complex analysis should be done, and that peripherality and accessibility calculations are only a very small part of complex spatial research, the trend towards institutional development of 6 potential regions in Lithuania could be envisaged.

References

Armstrong, H., Taylor, J. (2004). Regional economics and policy (3rd ed.). Oxford: Blackwell. Buzan, B. (1997). Žmonės, valstybės ir baimė: tarptautinio saugumo studijos po Antrojo pasaulinio karo. Vilnius: Eugrimas. Copus, K. A. (1999). A New Peripherality Index for the NUTS III Regions of the European Union. Report for DGXVI. Copus, A. K. (2000). Peripherality concepts and indicators for evaluation. Evaluation for quality conference. Copus, K. A. (2001). From Core-periphery to Polycentric Development: Concepts of Spatial and Aspatial Peripherality. European Planning Studies, Vol. 9, No. 4, p. 539–552. Copus, A. K., Skuras, D. (2006). Accessibility, Innovative Milieu and the Innovative Activity of Business in EU Pe- ripheral and Lagging Areas. In: T. Noronha Vaz, E. J. de Morgan, P. Nijkamp (eds.) The New European Rurality: Strategies for a small firm. London: Ashgate, p. 29–39. Dicken, P. (2003). Global shift: re-shaping the global economic map in the 21st century. 4th ed. London: Sage. John, P. (2001). Local governance in Western Europe. London: Sage.

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Paasi, A. (2000). Re-constructing regions and regional identity. Nethur lecture, Nijungen, the Netherlands. Website: Lietuvos automobilių kelių direkcijos internetinis puslapis: Schürmann, C., Talaat, A. (2002). The European Peripherality Index. Paper presented at the 42nd Congress of the European Regional Science Association (ERSA), Dortmund, 27–31 August, 2002. Website: SPESP (2000). Spatial Visions of Europe. Website: Spiekermann, K., Neubauer, J. (2002), European Accessibility and Peripherality: Concepts, Models and Indicators. Nordregio Working Paper, Nr. 9, p. 42. Website: Степанов, М. В. (ред.) (2000). Региональная экономика: учебное пособие. Мoсква: Инфра-М, РЭА.

Regionų PERIFERIŠKUMO IR PASIEKIAMUMO MATAVIMAI KURIANT LIETUVOS REGIONINĘ POLITIKĄ

Gabrielė Burbulytė-Tsiskarishvili Klaipėdos universitetas (Lietuva)

Santrauka

Regiono samprata labai plačiai paplitusi. Vis dėlto nepaisant didelių šio termino vartojimo apimčių, są- vokos turinys ir esmė nėra vienareikšmiai ir neginčijami. Lietuvos regioninės politikos raida atskleidžia, kad regionai gali būti ne tik skirtingai suprantami, bet ir labai lanksčiai formuojami, naudojant skirtingus teritorinius arealus (pvz., apskritis, savivaldybes ar jų junginius). Toks labilumas pateisinamas dėl vienos pa- grindinės priežasties – siekiama išvengti netolygios socialinės ir ekonominės erdvinės plėtros. Valdžiai tenka svarbus uždavinys – laiku nustatyti atsiliekančias (socialiniu-ekonominiu požiūriu) teritorijas, kad galėtų suteikti joms pagalbą ir paramą. Vis dėlto, kaip galima pastebėti iš Lietuvos regioninės politikos, tokioms teritorijoms nustatyti naudojami gana riboti instrumentai (iš esmės tik ekonominiai rodikliai). Europos Sąjungos mastu išplėtota kompleksinė įvertinimo sistema. Pavienių teritorijų periferiškumo ir pasiekiamumo matavimai yra šios kompleksinės įvertinimo sistemos dalis. Straipsnyje, taikant skirtingus matematinius skaičiavimus, pateikiami periferiškumo ir pasiekiamumo rodikliai Lietuvos savivaldybėms. Nepaisant kai kurių esminių skirtumų, skaičiavimai atskleidžia, kad Lietuvoje formuojasi du sėkmingos raidos branduoliai (Vilniaus-Kauno bipolis ir Klaipėdos regionas), atskiras vidutinės raidos branduolys (Šiau- liai-Panevėžys) bei trys silpnos raidos ašys. Tokios tendencijos leidžia daryti prielaidas apie galimybę Lietu- voje institucionalizuoti šešis potencialius regionus. PAGRINDINIAI ŽODŽIAI: regionas, regioninė politika, periferiškumas, pasiekiamumas.

JEL kodai: R000, R120, R150, R190

35 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY

FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY

Konstantins Cernavskis1

University of Latvia (Latvia)

Abstract The problem of financial stability of a modern enterprise predestines a long-term development of state. The long-term development strategy-making concepts, binding to each member state, have been legislated in the European Union. A sustainable development is a balanced and socially responsible economic development subject to preservation of the environment and resources for the benefit of future generations. A national sustainable development plan prior to 2020 is required for each EU country. Under the development priorities situation typical to Baltic States, featuring a relative deficiency of mineral resources with some possibilities of development of high-end technologies, transit industry may be deemed the main priority. The enterprise financial stability concept is the main objective, regarded as a mandatory condition for ensuring a long-term and sustainable development as exemplified by the two renowned air carriers. The methods of scientific research most frequently applied in economics domain have been used: monographic, comparative, hierarchical and quantitative methods of financial ratios. KEYWORDS: financial stability, activity, processes, compensatory mechanisms, sustainable development.

JEL codes: G320, G390

Introduction

The economic instability existing nowadays under the crisis bailout circumstances inevitably affects business systems of all levels; therefore, any manager team should be ready for taking prompt actions of planning and process monitoring at the enterprise. The domain of finance is normally highlighted as one of the main fields at an enterprise, since the result to be achieved depends on quality, deadline, and volume of funding necessary. By examining the notion of stability in the context of ensuring a sustainable and long-term development, the author of this article is underlining the necessity of investigating that concept and developing a new method of its application. The new enterprise financial system stabilization technique implies a partial disclaimer on generally-accepted elements and methods of anti-crisis financial management; it is based on a separate analysis of activity and processes running at an enterprise. The purpose of this article is a research investigation of the origin and evolution of the concept of stability, as well as the development of an innovative technique of financial stabilization of enterprise to provide for a long-term and sustainable development of economy of a modern European country. To attain the goal, the author has posed the tasks as follows: yy investigating the origin and the evolution of stability concept; yy determination of the role of stability in the process of ensuring a long-term sustainable development; 1 Konstantins Cernavskis – University of Latvia, Faculty of Economics and Management. Scientific field: corporate finance, financial management and innovative financial diagnostics of an enterprise. E-mail: [email protected] Tel.: +371 294 487 37.

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yy developing the concept of financial stability at enterprise level; yy to work out the innovative model of financial stabilization of enterprise and its basic principles, drawing a comparison between two well-known European air transportation companies; yy validation of the model against the actual relevant data obtained from the two operating companies – the Latvian “Air Baltic” and the Estonian “Estonian Air”; yy interpretation of the model results, drawing conclusions, and working out proposals for improving the results of enterprise activities.

In the course of writing this article, the methods of scientific research most frequently applied in economics domain have been used. In the theoretical part, monographic, comparative, and hierarchical methods, as well as induction and deduction method, have been used. In the practical part, the official annual report data from the Register of Enterprises of Latvia and Estonia over a 10-year period have been used; moreover, quantitative methods of financial ratios, integral indices, the dynamic and structural analysis, as well as the qualitative method applying some elements of Gleiser’s grounded theory have been used. The standard methods of scientific research are used: the comparative analysis, a graphic method, an induction method, a monographic method. The conclusions and proposals put forward by the author as a result of the investigation research are practical concerns. The formulated proposals enable company management to work out a new method of achieving financial stabilization which, subject to particular characteristics of a specific enterprise, may be applied in the context of actual business activity.

1. The background and evolution of the notion of stability

The notion “stability” is derived from Latin. As translated from Latin, the term stabilis means steadiness and regularity. A stable object is characterized by such definitions as flat-footed, steady, firm, steadfast, safe, unchangeable, consistent, solid, inexorable, permanent, and constantly running (Dvorecky, 2011: 1). The majority of glossaries construe the term ‘stability’ through the aggregate of a number of synonyms only, not offering any definition. For instance, the Encyclopaedia Britannica defines the term ‘stability’ as a grade, a wear property, a capacity for retaining steadiness, hardness, and firmness, as well as a degree of hardness and a body’s capability of getting back to its initial condition after having lost equilibrium state (An Encyclopea- dia Britannica, 2011: 1). Lack of any general definition confirms that the term investigated has an exceptio- nally wide sense. Moreover, it has the property of functionality, i.e., the notion of stability may be applied to describe the functioning of various fields of science. The notion of stability was used for the first time in ancient Rome, in first centuries AD, when it meant, first of all, safe existence of society; namely, the initial function of the definition pertained to a segment of military strategy. Later, in XV–XVI centuries, this notion was used at the beginning of the formation of Russian State, in tsarist days of Ivan the Terrible (The history of Russia of XVI century, 2011: 1). This time again, stability was connected with policy and strategic actions from the tsarist armed forces. In ancient Rome, stability was attributed to family values. According to the investigations made by Richard Suller, a historian from the Chicago University, it was exactly the history of ancient Rome that served as starting point for the formation of the core family values as an element of society’s stability; those values haven’t lost a bit of their relevance in modern social sciences (Saller, 2011: 1). Therefore, one can come to the conclusion that stability had initially occurred in the sphere of social sciences and sciences describing society; this undoubtedly emphasizes the importance of the investigation of that notion exactly in this sphere. Later, the term “stability” came to exact sciences as physics, for example. Already in the middle of XX century, there occur such notions as “Automatic stabilization”, “Ideal stabilization”, “stabilization variables” etc., aimed at attaining one and the same goal. Form that point of view stability of a system is the maintenance of a preset, time-constant value of one (or a few) controlled quantities, irrespective of any external

37 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY and internal disturbing (de-stabilizing) impacts striving for deflecting the controlled variable from the preset value (The Large Soviet Encyclopaedia, 2011: 1). When analyzing the investigated term in trans-disciplinary context, the author has marked some definite interrelationship between various interpretations given by functional definitions of specific areas of knowledge, thus, enabling the author to formulate the method of searching the general definition. Stemming from the definition given by the sociology dictionary, stability is a system’s functional performance, keeping its own structure intact and maintaining balance (Antinazi, 2009: 1). Therefore, one can come to the conclusion that all the elements of that system should maintain equilibrium. The interaction between the subsystems is a continuous activity which can be expressed in the course of simulation through multifactor regressive function. As a result, having determined the coefficient value of the influence exercised by a separate factor upon the effective vector, one can filter out subsystems of low significance. The author believes that such an approach allows one to determine and identify functional pathologies of the system investigated.

2. Stability as a foundation for long-term development

The conditions of market development and stability at international level are provided by special political and economic institutions. The European Commission is, in particular, a modern international institute regulating the economic stability issues in the European Region. On holding World summit on SD – Gui- dance in preparing National SD strategy, the European Commission produced a legal document entitled COM/2001/0264 Communication from the Commission A Sustainable Europe for a Better World: A Euro- pean Union Strategy for Sustainable Development, – regulating the procedure of working out long-term development strategies with respect to the countries of European Union (EUR-Lex Access to European Union Law, 2012: 1). Each country develops those strategies independently, in compliance with the principles accepted. Those principles are aimed at attaining three goals: economic growth, social convergence, and environmental protection (EU Commission on sustainable development, 2011: 1). Attaining the goals posed means sustainable development and the long term-oriented growth of economies in trans-national aspect. Consequently, the prerequisites for ensuring a long-term development both of an individual state and an economic group of states are the provision of stability within the economies of those countries. Various institutions are engaged in the provision of financial stability on an international scale. Financial Stability Board is one of those institutions. The association unites 64 agencies from 24 leading countries of the world. It includes central banks, Ministries of Finance, banking sector overseeing institutions, insurance agencies, accounting companies, and other international organizations. Among the member countries are USA, Argentina, BRICS, Japan, Germany, France, Canada and some other countries. The affiliated organizations include the World Bank, the European Commission, the Basel Committee on Banking Supervision (BCBS), and some others. On an international level, FSB is engaged in coordinating the work of national financial authorities; it unites national-level bodies responsible for financial stability of the principle subjects of those states: in the sphere of state finance, in the banking sector, and in business environment (Financial Stability Board Homepage, 2011: 1). Business environment is the main segment of the investigation since it constitutes the major part of the entire economy of a state. An aspect describing the state of activities of a separate enterprise, the corresponding industry, and the economy as a whole is historical financial information highlighting the results of those activities. The aim of the high ranking managers is to find and establish this moment of optimum correlation between the owned and borrowed capital and as a result increase the company’s value.

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3. Financial sustainability of the enterprise as an important component of stability

Financial sustainability in the modern economic space is used on a fairly wide scale: this term is used at all levels – from a separate household or an individual entrepreneur to global world finance systems and their activities. Financial sustainability of a commercial agency is defined by law as solvency or capability of being liable for obligations assumed for a long time period. Financial stability is a component of the general stability of enterprise, the cash flow balance, the availability of resources allowing the agency to run its activities within a long time frame, including an efficient control of its equity and borrowed capital and providing for manufacture of products (Glossaries and Encyclopaedias on Academician, 2011: 1). The above-quoted statement is confirmed by some works of foreign scientists as well. For instance, V. V. Bo- charov believes management of equity and borrowed capital of company, as well as working out methods of the capital structure optimization, to be one of the most complicated problems to be solved in the course of management of corporate finance (Bocharov, 2001: 93). Those capital structure optimization methods were first suggested by Professor I. A. Blank in his papers published in 1988–2000. According to Blank’s assumption, the optimal capital structure reflects such a ratio of equity and borrowed capital usage that provides for the most efficient relationship between profit ratios of the equity and the borrowed capital, which directly influences the increment of corporate value (Yensen, 2001: 21; Blank, 2011: 67; Kopitov, 2006: 148). Some authors of various sources of theory of finance directly interconnect the notions “stability” and “solvency” fairly frequently. For instance, in the opinion of M.Yensen who had introduced the notion of a free cash flow index for scientific use in the 1980-ies to show which cash resources may potentially be placed at the disposal of company owners (Yensen, 2001: 22), one can conclude that the company may be deemed financially stable if the free cash flow is available, and vice versa. However, the notion of solvency denoting the financial standing of company enabling the latter to pay off all of its debts at maturity (Financial Glossary, 2012: 1; Lozovsky, 2007: 88) is only a constituent part of corporate finance stability. Irrespective of company activity profile, three types of cash flow are inherent in any company operating in market environment. Those are cash flows obtained from the main activities, investment operations, and financial activities of company. In the aggregate, all those flows characterize the general ‘wave’ of flows of free cash flow for owners. M. Yensen defines that flow as FCFE (Free Cash Flows to Equity) index. According to the conclusions drawn by M. Yensen, positive values of FCFE index demonstrate business strength while positive dynamics of FCFE can show the business stability. On the contrary, negative values of FCFE illustrate weakness of business and the dependence of company’s operations on borrowed money mobilized. Negative values of FCFE may occur due to instability of the main flow, i.e. the flow obtained from operational activities, and also due to the necessity of major investments and large repayments of debts. Negative flow of money resources free to owner attests exactly to its instability: the company being in such a condition can develop only if supported by some major cash flow from funding. From the above-quoted principle of free cash flow shaping, it is quite obvious that this criterion can be regarded as an integral index of stability of a modern commercial agency. The possibility of using that index when analyzing the company standing on market should be the primary goal of financial experts; however, to determine the company standing, a number of tasks should be accomplished to estimate the three above-stated components: operating activities, investment operations, and financial activity. This expert investigation is practically accomplished through using some methods and procedures of the classical financial analysis.

4. Methodology of stage-wise analysis of enterprise stabilization

The conducted investigation of theoretical aspects of financial analysis and the enterprise financial condition assessment methods and procedures predetermined the necessity of working out a methodology for stage-wise stabilization procedure. The procedure is necessary to analyze the factual evidence to be found

39 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY in the second chapter. The procedure suggested is based on the main principles of assessment of financial condition, rapidity changes, comparative analysis, and ratios sensitivity analysis. The procedure is a complex, multi-level plan of analysis of enterprise’s finance, consisting of three main stages. The first stage is the above-mentioned Identification; this is a preliminary analysis of enterprise activities. At that stage, the principal methods and approaches of financial analysis and ratio calculation theory are used, such as the balance assets and liabilities profile, liquidity, profitability, assets and liabilities turnover; furthermore, dynamic and structural analysis of fiscal accounting is performed – both with respect to the enterprise itself and against the general background of the entire industry. The identification process is run based on the financial data history; it reflects the results attained in the past. At the same time, however, it can not rule out the possibility of constructing trends and forecasting financial processes of the enterprise.

Figure 1. The schematic model of enterprise activity and processes Source: created by author

At this point, it is necessary to determine the difference between “activity” and “processes” within the framework of the procedure developed. In the opinion of L. Faingloz, activity of an enterprise and management processes are different categories. An effective support of activities claims for a sequence of actions implying conversion of the idea generated into end product. Consequently, such a conversion is aimed at working out some activity service mechanisms based on its one-to-one correspondence to the unique process (Faingloz, 2011: 186; Kopitov, 2011: 200). From all that has been said it follows that the activity and the processes are running apart from each other but they are continuously influencing each other at the same time, which attests to the necessity of investigating those categories and their mutual influence separately but within the framework of a definite system. Fig. 2 shows the activity and processes interaction scheme at local enterprise level under a definite business environment. Within the framework of the investigation, it is assumed that ‘activity’ is the total of the economic activities of enterprise, aimed at converting the idea into the end product, – while ‘process’ is a response of the financial condition of enterprise to interference from management’s decisions. If the results obtained at the identification stage attest to the fact that the enterprise is stable but, at the same time, interference of some significant processes takes place as a result of decisions taken by management – a deregulation of financial stability of the enterprise takes place. This phenomenon is described by the second stage of the procedure – systematization. At the systematization stage, processes leading to financial deregulation of activities are analyzed. Those are unique with respect to each enterprise, but, at the same time, they have some definite common features,

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Figure 2. The procedure of stage-wise analysis of enterprise stabilization Source: created by author

based on which one can develop a model and define the factors withdrawing the system from the steady-stated condition. Therefore, conducting case-studies of different enterprises from various branches may yield different results but similar tendencies. It is exactly at this stage that inductive selection or systematization of the criteria of enterprise financial stability takes place. The systematization process is run on the basis of relevant (up-to-date) data and it reflects the results achieved at the moment of the analysis or in the recent past. The third stage of the procedure is stabilization. At that stage, inverse processes aimed at transferring or returning the enterprise financial system to the state of stability are searched and assessed. The author defines those anti-processes as compensatory mechanisms. The concept of compensatory mechanisms implies that each process bringing a financial system out of the state of stability may be opposed by another process returning system to that state. And the system being unstable means that no compensatory mechanisms are activated. There may be a few reasons; however, the main reason is the enterprise managerial staff ignorance as to the existence of such possibilities. At the stage of stabilization, simulation of activity-compensating inverse processes is performed; moreover, continuous controlling of sensitivity of identified ratios obtained at the first stage is made. Comparative analysis is performed to reveal the necessity of getting back to the previous stages of analysis. The stabilization process is run on the basis of relevant and prognostic data, and it reflects the future-oriented results of the activity of enterprise investigated.

5. Determination of financial stability level as exemplified by a comparison between two carriers

Within the framework of the practical approval of stage-wise analysis of financial stabilization, some financial information was used, describing the activity of two renowned carriers: the Latvian air carrier “air Baltic” and the Estonian “Estonian Air”. The factual evidence investigation period is 10 years: from 2001 to 2010. In terms of duration, that period corresponds to the duration of an intermediate-term business cycle, and, in terms of the theory of statistical analysis, the period is deemed to be quite sufficient for revealing trend dependencies and making forecasts (Kaplan, 2006: 44; Norton, 2006: 45). The identification stage yielded some results illustrating the earnings records from the companies investigated.

41 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY

Figure 3. AIR BALTIC and ESTONIAN AIR profit dynamics comparison Source: created by author, using company’s official financial reporting data

The trend differences are visualized distinctly: with respect to the Estonian company, the trend is positive while with regard to the Latvian company it is dramatically negative; an incommensurable loss of profit has been recorded from 2008 to 2011 year-on-year. The author performing analysis through the ratio-based method has revealed the fact allowing one to claim that, if a company is running at a loss, a number of indices lose their economic sense; consequently, those indices are unfit for being used in this situation. For example, such business activity indices as commercial and financial profitability, a number of structural indices of capital, and the indices of balance and leverage do not fully reflect the reality with respect to an unprofitable company without certain assumptions. Moreover, any forecasting of rapidity changes by using standard statistical methods becomes impossible without using a well-balanced method, according to which, equilibrium between quantitative and qualitative investigation methods is to be found (Bryman, 2008: 54). To eliminate the above-stated drawback inherent in financial analysis, the author suggests that some integral or integrated indices of financial activity should be used, commensurate with absolute values of property and funding sources. This method of analytical comparison may be presented in the form of two groups of identifiers: yy The integral (integrated) indices: possibility of bankruptcy, sustainable growth pace, and a free cash flow. yy The absolute values of property, financial results, and funding sources: assets, turnover, profit, equity capital, and total value of debt.

At the identification stage, some results have also been obtained describing the tendencies of bankruptcy possibility dynamics calculated according to the technique developed by E. Altman, and the comparison of free cash flow of the air carriers investigated. It is obvious from the graph that the possibility of insolvency faced by the Latvian company is much higher than that of the Estonian counterpart. However, the free cash flow dynamics is negative with respect to both enterprises, and it has similar tendencies (Fig. 4).

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Figure 4. AIR BALTIC and ESTONIAN AIR bankruptcy probability dynamics comparison Source: created by author, using company’s official financial reporting data

Figure 5. AIR BALTIC FCFE index and property comparison Source: created by author, using company’s official financial reporting data

To scale those indices against the efficiency of property change, the assets and gross debt change dynamics is assessed, since similar tendencies of negative cash flow may attest to making investments into the upgrading of the aircraft fleet and the park of other fixed assets. As in the case with the Latvian company, the last upgrading of the aircraft fleet was recorded in 2008; moreover, a major change of the capital structure was recorded – an incommensurably large credit was received in 2008. The Creditor is JSC AS “Latvijas Krājbanka” – a bank currently insolvent. In the process of financial identification of the Latvian company, two facts have been revealed – the loan was disbursed without a preliminary assessment of financial results of the company (which experienced losses in 2008). Moreover, as a result of the loan, which is not covered by the grand total of assets (as is seen from Fig. 5) – the free cash flow of the owners should not have dropped so abruptly. Unlike the LatvianC ompany, the Estonian counterpart made the last investments into the aircraft fleet in 2010; however, that was accomplished at the expense of the inner potential of the agency, whereupon the drop of the free cash flow may be deemed justified.

43 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY

Figure 6. ESTONIAN AIR FCFE index and property comparison Source: created by author, using company’s official financial reporting data

This situation attests to uncertainty and financial instability observed in the activity run by the Latvian company as against to its Estonian counterpart. According to the ‘imbalance quadrants’ model, in order to turn the financial condition of those air carriers from the instability zone to the stability zone, it is necessary to investigate and offer some compensatory mechanisms to be used, which would ensure balance of power of the system, thus enabling one to attain stability.

Conclusions

The approach and the stage-wise stabilization procedure examined in this article are fundamental concepts of the problem of financial stability of enterprise. This scientific approach is innovative since it has not actually been investigated and used to stabilize an enterprise. Moreover, unlike the generally accepted qualitative methods of financial analysis which are insufficient for making managerial decisions – this approach provides for a simultaneous balanced use both of qualitative and quantitative investigation methods. The author investigating some items of operation of renowned European air carriers at system analysis level, has put forward a hypothesis stating that the activity and the processes at an enterprise level are characterized by altogether different conceptual interpretation. Based on the model suggested, according to which, an activity reflects the conversion of an idea and a resource into end product, while a process describes that activity through some definite values and norms – the author has come to the conclusions as follows: yy Activity and processes at enterprise level should be investigated not jointly and not separately but rather as elements interconnected within the framework of a definite system; yy According to system analysis theory, a system investigated is a complex system since some completely incompatible factors exist among its elements; yy As a result of interaction, elements of a system can bring the system into two states: stability (if the internal force vectors are directed so as equilibrium is provided) or instability (if the internal force vectors provide for disequilibrium, i.e., some factors dominate over the others); yy The stability assessment is made according to the “disequilibrium quadrants” model suggested by the author, uniting both quantitative and qualitative criteria, with the model serving as an efficient support for making managerial decisions; yy An assessment of financial results of the activities run by the two renowned companies was made by applying the above-stated procedure; as a result, an essential instability of the financial system of the Latvian company as opposed to the Estonian one was stated. The fact is proved by the calculated indices of bankruptcy possibility, forecasted sustainable growth, and free cash flow. However, the fol-

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lowing processes have rendered a negative impact on the activity of both enterprises: loss of turnover, loss of profit, loss of a part of equity capital, and the joint debt increase.

According to the above-stated conclusions, the author has put the following proposals based on the task of the third part of the procedure – with the view of stabilizing the activity: yy The management of the Latvian enterprise should state and systemize the processes withdrawing the company’s activity from the state of stability; in this case, this implies revision and revaluation of the capital balance to cover the borrowed funds by using the company’s own assets; yy The management of the Estonian enterprise should determine the principal compensatory mechanisms precluding systematic loss of profit and free cash flow; yy The analysis and planning departments of both enterprises should apply the multiple procedure of stage-wise stabilization of the financial system; so far as the compensatory steps are taken by the management, a repeated identification of the enterprise should be made not less than once in a quarter; yy When analyzing factor sensitivity, the analysis and planning departments of both enterprises should use relevant data on changes of external economic environment – both of the country of their own and the partner states; yy The management of the two enterprises should check the degree of financial stability of competitors against the background of the competitive industry, using the “disequilibrium quadrants” model, paying special attention to problematic agencies, since the prerequisites for a correct support of managerial decisions work more actively exactly in instable systems.

Form all that has been said it follows that an enterprise achieving financial stability of its activities passes through the stage-wise procedure of stabilization. So far as individual stages are passed on the way from the state of instability to the state of stability, certain changes take place at the scale level. From a loss of equity capital, one can return to loss of turnover only, having retained property. From a loss of turnover, one can return to loss profit, having preserved the rate of economic growth. Finally, from a loss of profit, one can return to free cash flows for owners, to the aircraft fleet development, an efficient implementation of investment projects, and creation of economic value. The enterprise is capable of passing from economic value of business to the highest surge of development – social responsiveness. Creation of economic value of business is a result of managerial activity; the procedure suggested by the author provides exactly for the support of managerial decisions. Sustainable development, in its turn, is the goal of a long-term sustainable development of State confirmed by European legislation. With the aid of the financial stability provision model suggested by the author, the management of any European enterprise is capable of achieving stage-wise stabilization. Everything depends on the goals and the competence of management proper – whether the management will be capable of passing all the stages of the procedure sequentially or it will still prefer misleading, customary, and “easier” methods.

References

An Encyclopeadia Britannica Company. (2012). Merriam Webster Dictionary. Web resource. Available at: http://www. merriam-webster.com/dictionary/stability Antinazi. (2009). The Encyclopaedia of sociology. Web resource. Available at: http://dic.academic.ru/dic.nsf/socio/3 918/%D0%A1%D0%A2%D0%90%D0%91%D0%98%D0%9B%D0%AC%D0%9D%D0%9E%D0%A1%D0%A 2%D0%AC Blank, I. A. (2011). Finance resource management. Moscow: Omega-L. Bocharov, V. V. (2001). Corporate finance. St. Petersburg: Peter. Bryman, A. (2008). Social Research Methods. 3rd edit. Oxford: Oxford University Press. Cokins, G. (2008). Performance management Finding the missing pieces (To close the intelligence gap). John Willey & Sons Inc, SAS: The power to know. Dvorecky, I. H. (2011). The general latin-russian dictionary. Web resource. Available at: http://linguaeterna.com/voca- bula/show.php?n=42895

45 Konstantins Cernavskis FINANCIAL STABILITY OF ENTERPRISE AS THE MAIN PRECONDITION FOR SUSTAINABLE DEVELOPMENT OF ECONOMY

EU Commission on sustainable development acting as the preparatory commitee for the World summit on SD. (2011). Guidance in preparing National SD strategy: Managing Sustainable Development in the New Millenium. Web resource. Available at: http://www.un.org/esa/sustdev/publications/nsds_guidance.pdf EU Financial Stability Board Homepage: Overview. Web resource. Available at: http://www.financialstabilityboard. org/about/overview.htm EUR-Lex Access to European Union Law. (2011). Web-resource. Available at: http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:52001DC0264:EN:NOT Faingloz, L., Kopitov, R. (2011). Investigation of Factors Influencing Logistic Activities. Proceedings of the 11th Inter- national Conference “Reliability and Statistics in Transportation and Communication”. Riga: TSI. Glossaries and Encyclopaedias on Academician. (2011). Web resource. Available at: http://dic.academic.ru/dic.nsf/ ruwiki/695587 Kaplan, S. R., Norton, P. D. (2006). Alignment using the balanced Scoreland to create corporate synergies. Boston, Massachusetts: Harvard Business School Press. Kopitov, R. A. (2006). Finance management. Riga: Transport and Telecommunication Institute. Lozovsky, L. S., Rayzberg, B. A., Starodubceva, E. B. (2007). Modern economic dictionary. Moscow: Infra-M. Saller, R. (2011). Family Values in Ancient Rome. Web resource. Available at: http://fathom.lib.uchicago. edu/1/777777121908/ The history of Russia of XVI century. Web resource. Available at: http://ote4estvo.ru/kratkaya-istoriya-rossii/627-istoriya-rossii-16-veka.html The Large Soviet Encyclopaedia. (2012). Web resource. Available at: http://bse.sci-lib.com/article105650.html The Register of enterprises of Republic of Latvia Database. Financial reports of AS “AIR Baltic Corporation”. Web resource. Available at: http://www.ur.gov.lv and http://www.lursoft.lv The Register of enterprises of Republic of Estonia Database. Financial reports of AS “ESTONIAN AIR”. Web resource. Available at: http://ariregister.rik.ee and http://www.rik.ee/e-ariregister.

VERSLO FINANSINIS STABILUMAS, KAIP ESMINĖ DARNAUS EKONOMIKOS VYSTYMOSI PRIELAIDA

Konstantins Cernavskis Latvijos universitetas (Latvija)

Santrauka

Modernioms organizacijoms būdingas finansinio stabilumo nebuvimas lemia ilgalaikį valstybės vysty- mąsi. Europos Sąjungoje sukurtos ilgalaikio vystymosi strategijos kūrimo koncepcijos, privalomos visoms šalims narėms. Darnus vystymasis – tai socialiai atsakingas vystymasis, nukreiptas į aplinkos ir išteklių išsaugojimą ateities kartoms. Iki 2020 metų kiekviena ES šalis narė privalo parengti darnaus vystymosi strategiją. Baltijos šalims būdingi vystymosi prioritetai nulemti gamtos išteklių trūkumo, galimybių plėtoti aukštąsias technologijas ir tranzitą. Įmonių finansinis stabilumas yra pagrindinis prioritetas, laikytinas būtina sąlyga ilgalaikiam darniam vystymuisi užtikrinti, tai iliustruojama dviejų žinomų oro transporto bendrovių pavyzdžiu. Šiame straipsnyje taikyti ekonomikos moksle populiariausi metodai: lyginamasis, hierarchinis ir kiekybinis finansinių proporcijų. PAGRINDINIAI ŽODŽIAI: finansinis stabilumas, veikla, procesai, kompensavimo mechanizmai, darnus vystymasis.

JEL kodai: G320, G390

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THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT

Remigijus Čiegis1, Darius Burgis2

Klaipėda University (Lithuania)

Abstract The landscape of any country is the reflection of territorial expression of its socio-economical and ecological processes. Several problems regarding Lithuania’s landscape could be distinguished: a) problems of land parcels; b) problems of forests; c) problems of protected territories and natural frameworks; d) problems of Curonian spit; e) problems of coastal sands. Self contained renaturalization of Lithuanian landscape, implementation of programs from the strategic documents of the government and active participation of local communities, could lead to at least partial restoration of the impoverished Lithuanian landscape and increase of its stability. KEYWORDS: landscape, sustainable development, forests, protected areas.

JEL codes: Q010, Q150, Q200, Q580

Introduction

Densely populated character and the existence of few wilderness areas in Western Europe have contributed to the fact that cultural landscapes have become an important management category. Conservation effort in most Western European countries has therefore focused upon lived-in, working landscapes. These landscapes depend on human intervention (Jansen, 2009). The landscape is always changing and is always influenced by the human economic activity. We could say that there are almost no natural landscapes in Lithuania that are untouched by human hand. It is obvious that intense economic activity will continue to pose a threat to natural elements of landscapes, protected areas and recreational zones; the solution could be the orientation to sustainable development. According to Gražulevičiūtė-Vileniškė (2007) interconnections between landscape and sustainable development are not so widely analyzed, if we compare it to other scientific fields. Economic literature offers over 100 (Jacobs (1995) mentions as many as 386) definitions on sustainable development, mostly oriented towards separate sectors – e.g. environmental, economic, civilization – or emphasizing managerial, technical or philosophical/political decisions, and thus expressing rather different concepts of sustainable development (Munasinghe, 1993; Pearce et al, 1989; Pezzey, 1989; Pezzoli, 1997). Considering the fact that not a single reference presented a feasible definition of sustainable development which could incorporate all aspects of the concept under investigation, we think it is appropriate to use the definition provided in Brundtland commission’s report “Our Common Future” (1987), which discloses the

1 Remigijus Čiegis – Professor of Klaipėda University, Faculty of Social Sciences; Vilnius University, Kaunas Faculty of Humanities and Vytautas Magnus University, Faculty of Economics and Management. Scientific fields: macroeconomics, environmental economics, environmental management, regional development, and sustainable development. E-mail: [email protected]; [email protected] 2 Darius Burgis – Assistant of Klaipėda University department of Management and doctoral student of Vytautas Magnus University, Faculty of Economics and Management, department of Management. Scientific fields: crisis management, sustainable development, IT in management. E-mail: [email protected] Tel.: +370 619 294 77.

47 Remigijus Čiegis, Darius Burgis THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT idea of sustainable development best. It postulates that sustainable development is the kind of development, which satisfies the current needs without endangering the future generations to satisfy their own. This definition of sustainable development is the most frequently cited one and seems to be more exhaustive than the majority of others. The essence of Brundtland’s statement is fair distribution of natural resources both among different generations and among the present generation of people from the first, the second, and the third world, and finding a positive consensus between the environmental, social, and economic dimensions of environment. In this paper we will use the concept of sustainable development defined as a certain com- promise among environmental, economic, and social goals of community, allowing for wellbeing for the present and future generations (Čiegis et al., 2009). As Selman (2010) notes, the re-positioning of landscape within the sustainable development agenda, reflects the fact that landscape’s systemic properties place it at the centre of actions regarding ecosystem services and environmental change. At a policy level, landscape has been seen to underpin ‘natural capital’, supplying non-market or public benefits (e.g. biodiversity, carbon sequestration, health benefits, property values, urban microclimate, regeneration and social cohesion), and supporting a range of ecosystem services. The purpose of the article – to analyze the problems of Lithuanian landscape in the context of sustainable development. The object of research – the problems of Lithuanian landscape. The tasks of the article: a) to reveal the importance of landscape in the context of sustainable development; b) to analyze the main problems of Lithuanian landscape with the relation to sustainable development; c) to discuss the solutions to the problems of Lithuanian landscape in the context of sustainable development. Research methods: theoretical analysis of scientific literature and legal documents.

1. The importance of landscape in the context of sustainable development

A landscape covers all of the territory of the country including cities, towns, rural areas, forests and waters, it greatly influences the life and activities of society, it is the foundation of national identity and part of quality of life. The landscape of any country is the reflection of territorial expression of its socio-economical and ecological processes. The geographical structure and architectural expression of the landscape, its functional and ecological quality is inseparable from the development of the country as a whole, mainly from the dominant regulations of land-use and environmental protection. Lithuanian landscape is not an exception, its future formation, use and protection is closely related to the development of the whole country. According to Bučas (2001), a landscape – is a terrain perceived by humans, the character of which is defined by the interaction of natural and human activities. A landscape – is an entirety of relief, climate, air, water, soil, flora, fauna and culture. One of the main attributes of a landscape that determine its identity, is a territorial-spatial mosaic, formed by the interaction of human activities and natural processes. Jones and Stenseke (2011) also note, that the term “Landscape” is broader than that of a view of a scenic panorama and broader than “nature” and “environment”. It is, rather, a place constituted through the tangible and intangible social and cultural practices that shape the land. That is why the prerogative of the state and society is to create and develop the variety of means for the protection, usage, formation and planning of landscape. These means should ensure that the landscape is formed according to the principles of sustainable development, to become the result of coexistence between humans and natural environment that would be fit for living, working and recreation. The environment protection strategy of Lithuania (Lietuvos aplinkos apsaugos strategija, 1996) set the main goal as to set the preconditions for sustainable development of the country by preserving clean and healthy environment, preserving biodiversity, diversity of landscape and optimizing use of nature; the management of landscape became one of the priorities of environmental policy of the EU. Current Lithuanian landscape formed as the result of hundreds of years of human activity and is not homogenous. In various parts of the country the landscape has different levels of acculturation, it performs different social and economic functions, differs in structure, form, expression, cultural and social significance. Studies of landscape dynamics became especially relevant at the beginning of the 21st century. This was

48 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) mainly predetermined by political reasons: land restitution and privatization of forests, water bodies and farmlands (Bauža, Baužienė, 2008). During all historical periods industrial factors determined the change in the structure of the landscape structure and its distinction, natural conditions – territorial diversity, long process of formation and transition – compositional maturity. The most esthetically valuable landscapes in Lithuania are Curonian Spit, coastal dunes, hilly and laky Molėtai, Zarasai, Utena, Ignalina and Rokiškis districts (Daukšas, 2004). In nature, every man seeks the direct satisfaction provided by the environment: admire the landscapes (hills of Žemaitija heights, the blueness of lakes of Aukštaitija, the blue pines of Dzūkija, or marvelous dunes of Curonian spit), to feel the esthetical charm and the comfort of soul. These services provided by nature often are intangible and can be “consumed” only directly, mostly unconsciously, but they are never the less very important. Anyone who experienced the exhilaration while boating in a lake, the serenity of hiking, or the beauty of sunset, will admit that environment can provide us with amenities that have no substitutes. But we should note that if we dump the amount of waste (W) to the environment, that is greater than the ability of the environment to assimilate (A), that is when W>A, we risk to break this economic function of the environment, as polluted rivers, lakes and wasted landscape cannot provide it (Čiegis, 2009).

2. The main problems of Lithuanian landscape in the context of sustainable development

Several problems regarding Lithuania’s landscape could be distinguished: a) the problems of land parcels; b) problems of forests; c) problems of protected territories and natural frameworks; d) problems of Curonian spit; e) problems of coastal sands. The problems of land parcels. The landscape of Lithuania is always changing; part of this change can be attributed to the land reform, which is directly related to the urbanization of the landscape. The laws of economics state that the beauty of the landscape can increase the price of land more than several times, but when restituting property this was not taken into the account. The owners that recovered land parcels for agricultural activity in aesthetically attractive environments, sought to change the purpose of the parcel into residential. Therefore, picturesque and rural environments began to sprawl with urban quarters, which led to the change of the visual appearance of the environment into the urbanized one. The main features of Lithuanian landscape always were small visual spaces and small land-use, which is why the quality of the landscapes of small lakes and river valleys are greatly influenced even by a single settlement. As it is noted in the National strategy of sustainable development (Nacionalinė darnaus vystymosi strategija, 2009), after the restitution of independence, part of infertile, but very important in the aspect of biodiversity, meadows and pastures were abandoned, sward by crummy trees and bushes. Abandoned land has negative impact on the development of agriculture and the image of Lithuania (Kuliešis, Šalengaitė, 2010). No mechanism of compensation for the restriction of economic activity in protected areas was created. The creation of ownership of small parcels hindered the control of construction process, which led to the illegal construction in protected and recreational areas. Increased usage of the coastal area led to the de- naturalization of coastal landscape. Abandoned, non-recultivated quarries and dumps, partially dismantled buildings that gradually became places of illegal dumping, scarred the landscape. The land reform also changed the structure of the landscape: natural or semi-natural territories of the landscape diminished, changed gradually by urban territories or territories of intense agriculture. Problems of forests. A forest is a living organism that could be rationally used, recreated and improved or it can be misused and aggravated. Forests are very important to life on Earth in general, by being an integral part of natural landscape they influence the surrounding fields, water bodies, climate and atmosphere; they protect the soil from erosion and increase the fertility of the fields (Čiegis, 2004). Since the eighties of the XX century, European countries faced a new forest problem – desiccation of regional forests due to pollution, acid rains and increased concentration of underground ozone (Juknys, 2002).

49 Remigijus Čiegis, Darius Burgis THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT

Forests are also harmed by illegal logging in private and state forests, especially in private forests this problem became a widely spread phenomenon. Illegal logging also harmed reserves, national and regional parks. Forest fires are another urgent problem, usually they are caused by the illegal burning of last year’s grass in the fields, dry, hot summers and springs create conditions for rapid spread of such fires. Problems of protected territories. Both cultural and natural landscapes are protected in Lithuania. Rapid change in economical and social conditions influenced the state of protected territories, raised new problems, especially related to private property in protected territories and illegal construction. According to the Agency of state protected territories, main problems of protected territories in Lithuania are: a) lack of documents for territorial planning; b) insufficient funding for activities in protected territories; c) regulation of land privatization process; d) unfulfilled regimen of protection and use of protected territories; e) insufficient recreational infrastructure in national and regional parks; f) negative image of protected territories; g) lack of compensation for restrictions. When analyzing the problems of protected territories one must note that in the process of privatization part of public territories became private territories with restricted access. This means that some parts of the landscape became accessible only to the owners of a particular territory and restricted to everybody else. On the other hand, scenic landscape is not a property of a single owner, but of society as a whole, because what is provided by nature, such as air, comfortable landscape, recreation, various ecosystems – all of this are public goods that should be accessible to all of the society (Čiegis, 2009). The problems of Curonian spit. Curonian spit is a peninsula that separates Curonian lagoon from the Baltic Sea, northern part of this peninsula belongs to the Republic of Lithuania, the rest of it – to Kalinin- grad region of Russian Federation. The World Heritage List includes the Curonian Spit as a valuable cultural landscape – a unique harmony between the nature and human activities, a harmony that emerged through centuries. The Curonian Spit retains its cultural landscape, which is still evolving and keeps an active social part in the modern society through its traditions. It was ecological wisdom, enormous physical efforts and financial input of people that enabled, in the 19th century, to create a cultural landscape which later was managed and maintained with care. The problem of preservation and continuation of landscaping traditions, of their transfer to future generations, gained the momentum recently, after the notorious boom of unsanctioned building work in the National Park of the Curonian Spit (Šostak, Kutut, 2009). One must note that, although recreational activities and tourism are the main source of income in Curo- nian spit, the government and local municipalities do not pay enough attention to the preservation of natural and cultural resources, the preservation of the landscape is not the upmost priority. The seashore of the peninsula is quite stable and its condition is thought to be satisfactory, but there are favorable conditions for the erosion of the shore near Juodkrantė and Preila that is why constant surveillance and upkeep is necessary. There is a high risk of forest fires in Curonian spit, the fires destroy the forests and vegetation of coastal dunes, destroy the forest floor, turf of the dunes and uncover the subsoil, which increases the carry through of sand and leads to the degradation of dunes. The problems of coastal sands. Over the last twenty years the condition of many seashores in Euro- pe deteriorated. It is acknowledged that because of the climate change the level of the global ocean is rising, there are more storms and hurricanes, which leads to the increased erosion of shores and decline of beaches. The development of maritime industry had great influence on the evolution of Baltic Sea shore of Lithuania, its unbalanced nature negatively impacts the processes of the shore formation. The condition of the coastal sands is especially alarming near the town of Palanga, where each year the beach is declining more and more despite the efforts to preserve it. Bučas (2007) notes, that one of the biggest problems of Lithuania’s coast is the diminishing of protective dune, which is being destroyed in some places not only by the natural forces, but also by the people that are using the beach and dunes for recreational purposes. Some of the reasons for deteriorating state of landscape in Lithuania could be attributed to global issues (global warming and acid rains), and cannot be solved by Lithuania alone, the solution requires international cooperation on regional and global levels, on the other hand there is a lot to be done to improve the state of the landscape on national and local levels.

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3. Possible solutions to the problems of Lithuanian landscape in the context of sustainable development

Up until now economic development did little to reverse its negative influence on the environment, but now the situation has to change drastically, people have to act so that it would not endanger the future existence of humanity. To do that we must understand that to solve the environmental problems is more than just pushing them aside – relocating the responsibility to people in other time or places (Čiegis, 2001). These principles could be attributed to the conservation of landscapes as well, because, as it is stated in the Convention of Eu- ropean landscape – landscape plays an important part in culture, ecology, environment and social spheres, and is also a useful resource for the economy, whose protection, cleaning and planning can create jobs. Landscape contributes to the formation of local culture and is one of the most important parts of European natural and cultural heritage, which increases the welfare of the people and determines European identity. After the restoration on Lithuanian independence, more systematic approach to the preservation of the landscape can be seen. Due to self-contained renaturalization the amount of forests and other natural territories increased, as did biodiversity and diversity of landscape. During last 15 years barren lands were planted with forest, total amount of forests in Lithuania increased by 1 percent. The area of protected territories doubled since 1990, a system of protected territories was formed, and the network of protected territories is being integrated to the European ecological networks. Lithuania’s natural framework continues to be developed, habitats are inventoried, dumps and quarries are being recultivated, projects for planting forest in barren lands are being prepared (Nacionalinė darnaus vystymosi strategija, 2009). In order to solve the problems of abandoned land Kuliešis and Šalengaitė (2010) propose to change the method of land tax calculation so that it would be calculated from the value of the land, implement compulsory declaration of crops even for those who do not get the direct payouts and use of the methodology for misused land by National Payment agency for all of the abandoned land. They also note gradual decline of abandoned land in Lithuania during recent years. When talking about the preservation of the environment and landscapes in particular often two approaches are distinguished – “the fortress approach” and “the community approach” (Bučas, 2007; Daugstad, 2011). The first approach stresses the importance of fines and restrictions in the process of conservation, while the community approach leans on the participation of local communities in solving the problems of landscape and decision making. The second approach is closer to the concept of sustainable development as it stresses the balance of economic needs of the community and the environmental protection. We could take the community approach to solving the problems of Lithuanian landscape and the problems of Curonian Spit in particular. Armaitienė, Povilanskas, Vaškaitis (2009) provided arguments of the necessity to change functional zoning principles of the Curonian Spit and draw the functional zones according to the gradient boundaries of the strip seascapes – along the longitudinal axes of the strip seascapes of the Curonian Spit instead of the current functional divides along the perpendicular axes. As a consequent result of such changes should be a radical change towards regulation of the dune tourism on the Curonian Spit, which means to abolish any restrictions for tourists to enter and travel across the sandy plain. Kalvaliauskas (2009) also agrees, that sustainable and balanced development should be recognized as the only rational way of Curonian Spit management because any attempt to totally stop the natural processes of socioeconomic development would not be good. Namely this way of stable development lies at the basis of the new Master plan worked out by the Neringa Municipality. One of the main goals of national strategy of sustainable development (Nacionalinė darnaus vystymosi strategija, 2009) is to increase the area covered by forests by 3–5 percent till 2020 and achieve that forest would cover 35 percent of the country by that time; this amount of forests would be optimal for Lithuania. In order to reach this goal the area of forest should increase by 240 000 ha. Each year around 4-5000 ha of former agricultural territories are reforested naturally, other areas are being reforested by the foresters. Be- cause the development of agriculture in the areas of low fertility is not viable, most of the landowners plan on planting such territories with forest. Also, since 2005 support of ES structural funds for planting forest in private land is available, this further increased the rate of forest planting. All this lets us believe that the goals set in National strategy of sustainable development will be achieved, which will lead to a more concentrated

51 Remigijus Čiegis, Darius Burgis THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT structure of ecological property and expansion of natural framework. Natural framework could be described as a uniform network of territories for natural ecological compensation that ensures ecological balance of a landscape, natural relations between protected territories, other territories important from environmental perspective or habitats, also ensures the migration of plants and animals between them. According to Buivy- das, the main structural elements of natural framework are: a) geographical; b) topological; c) hydrological; d) geological; e) dendrological characters of a locality (Čiegis, Pareigis, 2010). Natural framework is also important to urbanized territories. Natural framework of a city is a natural complex that influences the composition of city plan and volumetric, ecological stability and recreational comfort. Three main functions of the natural framework in the city can be distinguished: a) compositional (natural framework of the city emphasizes the architectural composition of a city, provides expression and distinction to the cityscape); b) recreational (natural territories are attractive to the citizens and are used for leisure activities); c) ecological compensation (in one way or another all of the green spaces of a city are carrying out this function. The system of green spaces should be designed so that the living space would be divided by stretches that are wider than 100 meters and territories that are not bigger than 250 ha) (Čiegis, Pareigis, 2010). The optimization of the structure of the land-use would create the conditions for the preservation of the landscape of the country, biodiversity, ecological balance and would help regulate the process of urbanization. Now it is nationally recognized that protection of natural environment requires additional efforts from the government and society to ensure rational usage of natural resources and their protection. The usage of natural resources must be combined with environmental protection, because the solutions of the landscape problems are very expensive. According to Daukšas (2004), in order to preserve and improve the landscape, one must plan and design it. We could not say that the landscape in Lithuania is neglected. After the restoration of independence, a lot of work has been done in order to improve the condition of the landscape: laws have been passed – Law of environmental protection, Law of protected territories, Law of land, Law of forest, Construction law (Lie- tuvos Respublikos aplinkos apsaugos įstatymas, 1992; Lietuvos Respublikos saugomų teritorijų įstatymas, 1993; Lietuvos Respublikos žemės įstatymas 1994; Lietuvos Respublikos miškų įstatymas, 1994; Lietuvos Respublikos statybos įstatymas, 1996), each activity that is influencing the landscape is being regulated by territorial plans and norms. A wide system of protected territories was created in Lithuania – reserves, 10 types of sanctuaries (among them 47 for landscape, they cover 0,8 percent of country’s territory), national and regional parks, where complexes, objects of nature and culture are preserved. The network of national parks in Lithuania was finally formed in 1991, in 1992 the system of regional parks was formed and the network of national reserves expanded, in 2002 the first reserve of biosphere was established. In 2004 the development of the network of territories NATURA has began, first territories for the protection of birds were approved, some territories for the protection of habitats were established. In 2000 Lithuania joined the Florentine convention of landscape that became active since 2004. In this convention the importance of all landscapes is admitted, even those of “day to day”, where humans live their daily lives. The means for protecting, managing and planning European landscapes that should ensure the sustainable development, based on balanced and harmonic relation between social needs, economic activity and ecology, are laid out in this treaty. Natural framework (strips of varied ecological importance, levels of protection and differential economic activity that divide the territory and are composed of forests, river valleys, recreational zones, protected territories and other elements) that was validated in the law of protected territories obligates to protect and optimize the structure of landscape (Daukšas, 2004). Understanding of landscape as a dynamically evolving phenomenon, its protection, management and formation to meet the economic, social, cultural, ecological and esthetical needs of society is one of the underlying goals of the state. Previously implemented melioration projects greatly influenced the development of Lithuania’s landscapes. Expansion of agriculture, use of more powerful machinery and expansion of farmlands led to the destruction of swamps and small forests. Because of these reasons the agro landscape has changed dra-

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Figure 1. Integration of environmental strategies for solving problems of Lithuanian landscape Source: created by authors

matically. After the restitution of independence the land reform had a positive influence on the development of the landscape. The steps planned by the state should ensure more active development of landscape protection and management in the context of European legal system, they help to form the policy in this field and address the attention of the society to the existing problems. It is very important to continue to support the integrated implementation of landscape protection and rational land-use principles in the projects of territory development. When implementing the principles of sustainable development it is important to coordinate the goals of national landscape protection, the needs of municipalities and private initiative, while keeping the respect to private property and aiming that the preservation of landscape would be the goal determined by mutual respect and understanding in the society. It is important to evaluate the opportunities for environment protection provided by the legal regulation and strategic planning of the European Union. In 1995 the strategy of European environment was formed, it was aimed at coordinating the activities, the use of technical and financial resources, scientific research, exchange of information for the protection and improvement of European biodiversity and diversity of the landscapes. The main goals of the strategy are: a) to significantly lessen the threats for European biodiversity and diversity of landscapes; b) increase the resistance of European biodiversity and diversity of landscapes; c) strengthen the ecological harmony of Europe; d) ensure the participation of the society in the activities of protection of European biodiversity and diversity of landscapes. We should note that this strategy distinguishes itself with an innovatory perspective and essential direction for the achievement of goals – the protection of European biodiversity and diversity of landscape. This goal integrates the ecological principles to social and economic sectors and this corresponds very well to the essence of the philosophy of sustainable development. It is also notable that this strategy ensures the integration of various positions of states and regions, the unity of national and regional goals when implementing the United Nations Biodiversity Convention (Figure 1). The European Landscape Convention sets the goal of stimulating the general public to participate actively in planning, forming, and developing the landscape they live in. Mobilization and empowerment of local community are important for sustainable regional development. This requires in depth knowledge of landscape’s physical, historical and cultural features (Clemetsen, 2011, Larsson, 2011). Without a doubt, self contained renaturalization of Lithuanian landscape, increase in biodiversity, the implementation of programs from the strategic documents of the government and active participation of local communities, could lead to at least partial restoration of the impoverished Lithuanian landscape and increase of its stability. As it is

53 Remigijus Čiegis, Darius Burgis THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT noted in the National strategy of sustainable development (Nacionalinė darnaus vystymosi strategija, 2009), further participation in the development of European ecological networks would present an opportunity to acquire the funds from international programs for the development of national system of protected territories and the formation of natural framework.

Conclusions

The landscape of any country is the reflection of territorial expression of its socio-economical and ecological processes, it is a place constituted through the tangible and intangible social and cultural practices that shape the land. The geographical structure and architectural expression of the landscape, its functional and ecological quality is inseparable from the development of the country as a whole, mainly from the dominant regulations of land-use and environmental protection. The prerogative of state and society is to create and to develop the variety of means for the protection, usage, formation and planning of landscape. These means should ensure that the landscape is formed according to the principles of sustainable development, to become the result of coexistence between humans and natural environment, which meets the quality requirements for living, work and recreation. When talking about the preservation of the environment and landscapes in particular two approaches are distinguished – “the fortress approach” and “the community approach”. The first approach stresses the importance of fines and restrictions in the process of conservation, while the community approach leans on the participation of local communities in solving the problems of landscape and decision making. When implementing the principles of sustainable development it is important to coordinate the goals of national landscape protection, the needs of municipalities and private initiative, while keeping the respect to private property and aiming that the preservation of landscape would be the goal determined by mutual respect and understanding in the society. Without a doubt, self contained renaturalization of Lithuanian landscape, increase in biodiversity, the implementation of programs from the strategic documents of the government and active participation of local communities, could lead to at least partial restoration of the impoverished Lithuanian landscape and increase of its stability.

References

Armaitienė, A., Povilanskas, R., Vaškaitis, E. (2009). Atsakingas kopų turizmas Kuršių nerijoje: tvarkymo principai. Tiltai, Nr. 2, p. 83–94. Bauža, D., Baužienė, I. (2008). Evaluation of landscape changes in Lithuania in the second half of the 20th century. Geografija, Vol. 44, No. 2, p. 28–35. Bučas, J. (2007). Tradicijos tęstinumo problemos kraštotvarkoje. Besiformuojantis ir formuojamas kraštovaizdis: konferencijos pranešimų medžiaga. Kaunas: Technologija, p. 9–24. Bučas, J. (2001). Kraštotvarkos pagrindai. Kaunas: Technologija. Čiegis, R. (2004). Ekonomika ir aplinka: subalansuotos plėtros valdymas. Kaunas: Vytauto Didžiojo universiteto leidykla. Čiegis, R. (2009). Gamtos išteklių ir aplinkos ekonomika. Klaipėda: Klaipėdos universiteto leidykla. Čiegis, R. (2001). Aplinkos vadybos koncepcijų svarba sėkmingai verslo plėtrai. Organizacijų vadyba: sisteminiai tyrimai, Nr. 20, p. 57–67. Čiegis, R., Pareigis, R. (2010). Darnių miestų ekonomika. Vilnius: Vilniaus universiteto leidykla. Clemetsen, M. (2011). Landscape Perception Through Participation. The European Landscape Convention: Challenges of Participation. Dordrecht: Springer. Daugstad, K. (2011). The participatory Dimension in Nature Conservation Process. The European Landscape Conven- tion: Challenges of Participation. Dordrecht: Springer. Daukšas, J. (2004). Aplinkos apsaugos technologijos. Šiauliai: VšĮ Šiaulių universiteto leidykla. Gražulevičiūtė-Vileniškė, I. (2007). Darnaus kraštovaizdžio vystymosi dimensijos. Besiformuojantis ir formuojamas kraštovaizdis: konferencijos pranešimų medžiaga. Kaunas: Technologija, p. 24–32.

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Jacobs, M. (1995). Sustainable Development – From Broad Rhetoric to local Reality. Conference Proceedings from Agenda 21 in Cheshire, 1 December 1994, Chesire County Council, Document No. 49. Jansen, J. (2009). Sustainable development and protected landscapes: the case of The Netherlands. International Jour- nal of Sustainable Development & World Ecology Vol. 16, No. 1, p. 37–47. Jones, M., Stenseke, M. (2011). The Issue of Public Participation in the European Landscape Convention. The Europe- an Landscape Convention: Challenges of Participation. Dordrecht: Springer. Juknys, R. (1960). Aplinkotyros pagrindai. Kaunas: Vytauto Didžiojo universiteto leidykla. Kavaliauskas, P. (2010). Sustainable and balanced development of Lithuanian Curonian Spit and Neringa municipality: planning and political aspects. Technological and economic development of economy, Vol. 16 (1), p. 58–74. Kuliešis, G., Šalengaitė, D. (2010). Apleista žemė Lietuvoje: problemos, galimi sprendimo būdai. Management theory and studies for rural business and infrastructure development, Vol. 5 (24), p. 116–127. Larsson, A. (2011). Regional Landscape Strategies and Public Participation. The European Landscape Convention: Challenges of Participation. Dordrecht: Springer. Lietuvos aplinkos apsaugos strategija. (1996). Website: www.am.lt/LSP/files/AA-strategija.doc Lietuvos Respublikos aplinkos apsaugos įstatymas. (1992). Website: http://www.istatymas.lt/ istatymai/aplinkos_ap- saugos_istatymas.htm. Lietuvos Respublikos miškų įstatymas. (1994). Website: http://www.istatymas.lt/istatymai/ misku_istatymas.htm. Lietuvos Respublikos saugomų teritorijų įstatymas. (1993). Website: http://www.Istatymas.lt/ istatymai/saugomu_teri- toriju_istatymas.htm. Lietuvos Respublikos statybos įstatymas. (1996). Website: http://www.istatymas.lt/istatymai/ statybos_istatymas.htm. Lietuvos Respublikos žemės įstatymas. (1994). Website: http://www.istatymas.lt/istatymai/zemes _istatymas.htm. Munasinghe, M. (1993). Environmental Economics and Biodiversity Management in Developing Countries. Ambio, Vol. 22 (2–3), p. 126–135. Nacionalinė darnaus vystymosi strategija. (2009). Website: http://www.smm.lt/veikla/docs/dv_ svietimas /0.816819001255418152.pdf. Pearce, D., Markandya, A., Barbier, E. (1989). Blueprint for a Green Economy. London. Pezzey, J. (1989). Economic Analysis of Sustainable Growth and Sustainable Development. The World Bank Environ- mental Department Working paper, No. 15. Washington D. C. Pezzzoli, K. (1997). Sustainable development: A transdisciplinary overview of the literature. Journal of Environmental Planning and management, Vol. 40, p. 549–574. Selman, P. (2010). Landscape planning – preservation, conservation and sustainable development. Town planning review, Vol. 81 (4), p. 381–406. Šostak, O., Kutut, V. (2009). Investigation into expansion of illegal construction in the national park of Curonian Spit. Business: Theory and Practice, Vol. 10 (3), p. 223–232.

LIETUVOS KRAŠTOVAIZDŽIO PROBLEMOS DARNAUS VYSTYMOSI KONTEKSTE

Remigijus Čiegis, Darius Burgis Klaipėdos universitetas (Lietuva)

Santrauka

Kraštovaizdis nuolat kinta, nes jam nuolatos daro poveikį žmonių ūkinė veikla. Galima teigti, kad Lietu- voje natūralių, žmogaus veiklos nepaliestų kraštovaizdžio vietų beveik nėra. Akivaizdu, kad intensyvi ūkinė veikla ir toliau kels pavojų gamtiniams kraštovaizdžio elementams, saugomoms ir rekreacinėms teritorijoms. Išeitis – orientavimasis į darnų vystymąsi, kuris gali būti apibūdintas kaip aplinkosauginių, ekonominių ir socialinių visuomenės tikslų, priemonių bei veiksmų dermė, sudaranti galimybes pasiekti visuotinę gerovę dabartinei ir būsimoms kartoms, neperžengiant leistinų poveikio aplinkai ribų. Šio straipsnio tikslas – išanalizuoti Lietuvos kraštovaizdžio problemas darnaus vystymosi kontekste. Tyrimo objektas – Lietuvos kraštovaizdžio problemos.

55 Remigijus Čiegis, Darius Burgis THE PROBLEMS OF LITHUANIAN LANDSCAPE IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT

Straipsnyje keliami uždaviniai: a) atskleisti kraštovaizdžio reikšmę darnaus vystymosi kontekste; b) iša- nalizuoti pagrindines Lietuvos kraštovaizdžio problemas darnaus vystymosi kontekste; c) aptarti kraštovaiz- džio problemų sprendimo galimybes darnaus vystymosi kontekste. Bet kurios šalies kraštovaizdis yra joje vykstančių socialinių-ekonominių ir ekologinių procesų terito- rinės raiškos atspindys. Jo geografinė struktūra ir architektūrinė išraiška, jo funkcinė bei ekologinė kokybė yra neatsiejamos nuo visos šalies raidos, pirmiausia nuo valstybėje priimtų ar įsigalėjusių politinių ir teisinių žemėnaudos bei aplinkosaugos nuostatų. Todėl valstybės ir visuomenės priedermė yra plėtoti kraštovaizdžio apsaugos, naudojimo, formavimo ir planavimo būdų įvairovę siekiant, kad visi kraštovaizdžiai būtų formuojami laikantis darnaus vystymosi principų ir taptų kokybišku žmogaus bei gamtinės aplinkos sambūvio rezultatu, kuris tenkintų gyvenamosios, darbo bei poilsio aplinkos kokybės reikalavimus. Galima skirti šias Lietuvos kraštovaizdžio problemas: a) žemės sklypų; b) miškų; c) saugomų teritorijų ir gamtinių karkasų; d) Kuršių nerijos; e) pajūrio juostos smėlynų. Įgyvendinant darnaus vystymosi principus, šiuo metu labai svarbu koordinuoti strateginius valstybės kraštovaizdžio apsaugos tikslus, savivaldybių poreikius ir privačią iniciatyvą, laikantis pagarbos privačiai nuosavybei ir siekiant, kad kraštovaizdžio išsaugojimas būtų užda- vinys, nulemtas abipusio visuomenės supratimo ir pagarbos. Neabejotina, kad savaiminė Lietuvos krašto- vaizdžio renatūralizacija, biologinės įvairovės didėjimas, kryptingas valstybiniuose strateginiuose dokumen- tuose numatytų programų įgyvendinimas ir vietinių bendruomenių dalyvavimas sprendžiant kraštovaizdžio problemas, leistų bent iš dalies atkurti nuskurdintą Lietuvos kraštovaizdį ir padidinti jo stabilumą. PAGRINDINIAI ŽODŽIAI: kraštovaizdis, darnus vystymasis, miškai, saugomos teritorijos.

JEL klasifikacija: Q010, Q150, Q200, Q580

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THE INNOVATIVE ACTIVITY IN THE BALANCED REGIONAL AND ORGANIZATIONAL DEVELOPMENT OF POLAND AND THE EUROPEAN UNION

Sylwia Ćmiel1

The Alcide De Gasperi University of Euroregional Economy in Jozefow (Poland)

Abstract The aim of the article is the analysis of the innovative activity in the balanced development of regions and organizations in Poland and the EU. A state is responsible for the level of innovativeness transferring finances for the research and development as well as implementing proper financial and legal instruments stimulating innovative endeavours of enterprises according to the applied economy politics. An enterprise is the basic objective of the innovative politics in Poland and the EU as well as implementing innovativeness with the benefits for economy. Enterprises, especially the smaller and medium ones, try to cooperate within innovativeness with the companies from the same branches, other branches in the country and abroad, with universities, B+R institutions, including laboratories, intermediary companies in a transfer, financing innovativeness, with scientific and technical parks, local authorities representatives as well as other representatives of an innovative environment. Those include also advisor companies, organizers of fairs, exhibitions, conferences, seminars and trainings. In Poland, the finances of innovativeness is done mainly by the companies themselves and the development of intermediary companies within transferring the EU’s funds as well as the financial or credit ones that are the suppliers of the capital, e.g. venture capital. KEYWORD: innovations, management, knowledge-based economy.

JEL codes: O310

Introduction

The dynamics of growth on the markets resulting from the competitiveness and fast technical advance forces organizations to active participation in obtaining, creating of knowledge and using it in innovativeness. Knowledge and qualifications of organizations (including their staff) as well as innovativeness that are the result of implementing and developing them, nowadays become the source of long-term competitive prevail on the markets and the indicator of economical profit in conditions of globalization and built economy based on knowledge. Innovativeness being one of the key issue of the strategy Europe 2020, will demand making numerous more effective actions than so far within the area in the EU’s member states. The postulated model of the civilization development of Poland based on the polarization-diffusion concept, as the Report of Poland 2030 claims, as well as demands of the above mentioned new strategy, should result in suitable steps to improvement of the level of innovativeness not only in industry but also in the sector of services whose importance will still grow. It is significant to create a proper system of enhancing to undertake B+R activity and a knowledge instrument as well as recognizing existing barriers of innovative activity and effective prevention of them.

1 Sylwia Ćmiel – The Alcide De Gasperi University of Europregional Economy in Jozefow. Scientific interests: Innovations, Man- agement, Human Resource, Pedagogy, Juvenile Crime, Cyber-Violence. E-mail: [email protected], Tel.: +(48) 227 891 903 wew.13.

57 Sylwia Ćmiel THE INNOVATIVE ACTIVITY IN THE BALANCED REGIONAL AND ORGANIZATIONAL DEVELOPMENT OF POLAND AND THE EUROPEAN UNION

The aim of the article is the analysis of the innovative activity in the balanced development of regions and organizations in Poland and the EU. In order to achieve the goal in the article, the following problems have been presented and described: yy The innovative process and innovativeness of organizations; yy Innovative activity of the sector of services in Poland and the EU; yy The process of innovation and regional development.

The method – the analysis of scientific articles, own observation.

1. The innovative process and innovativeness of organizations

Innovations are related with positive changes leading to facilitating the productive processes. Innovations are the function of human opportunities, logical thinking and drawing conclusions concerning new conditions and relations. The notion of innovativeness was introduced to the sciences of economy by an Austrian economist J. A. Schumpeter at the beginning of the 20th century. In the broaden meaning of the notion of innovativeness, the following definitions can be set as examples: yy implementing new products, technology or way of behavior to wider usage; yy everything percept by humans as a new one, independently of objective novelty of ideas or things; yy all goods percept as a new one; yy an idea, practice or object that is percept as a new one by a human or an accepting unit (Matusiak, 2010: 20–21).

The range of innovativeness of enterprises results from the character and kind of activity. The object of innovativeness may be production, technology of production, methods and instruments of work organization and processes. Scientific literature explains that an innovative enterprise is the one that substitutes the current solutions with other ones. For the statistics needs, it is accepted that an innovative enterprise means the company that has introduced a new or significantly improved product to the market or implemented new or significant processes, bought new technology, undertaken new investments and conducted trainings concerning innovativeness in the researched time, most often three year time. Contemporary innovativeness is not limited only to technological solutions. It is important to implement new or significantly improved products, new solutions according to production, service and marketing process and organization of work (Lis, Szot-Gawryś, 2010: 6, 331). Innovativeness means the clue of the process concerning renewing of what an organization offers (its products and/or services) as well as the ways of generating and delivering them (Pavitt et., 1998: 14). There- fore, authors distinguish three kinds of innovativeness: product (new products); process (new processes) and service (new services). Of course, not all novelties mean innovativeness. Therefore, it is worth to remind that not long ago the literature of the subject first of all the product and process innovations were distinguished, that were treated as technological advance. Distinguishing the third category of service innovation is reasonable for at least two reasons: yy services are of more and more importance in contemporary market economy; yy new services are often the result of technical advance.

In the division there is a distinction of organizational innovativeness, namely changes of corporate or work organization. Organizational innovations often accompany technical innovations, e.g. a completely new organization of the production department changing into completely new technology of manufacturing. This is a significant kind of innovation nowadays (Jasiński, 2009: 10). Innovation is a result of complex set of processes which create together an innovative process. According to the definition of W. Janosz, the innovative process is completed in the term from the first concept to the

58 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) first accomplishment (…) in this notion, the innovative process means material and non-material changes of elements in particular economic unit. Implementing a new product or solution in a social practice becomes a basic event in such comprehended process (Janasz, 1999: 71). A new service may be certainly that product. The innovation is claimed to be a successful process when it consists of the following phases (Jasiński, 2009: 14): yy scanning the environment (internal and external) – for identification of market and other signals; yy strategic option choice (alternative) – in order to react on identified signals; yy allocation of funds allowing to answer the signals; yy project implementation from the concept to introduction to the market (a new product/service) or inside a company (a new manufacturing process) – in order to effective response to the signals; yy learning on the experience which is supposed to lead to advance, improvement or re-innovation.

Phase four, including the process of research, namely research-development works and the process of research result transformation to practical implementation, plays a significant role. The latter one determines the appearance of innovativeness. If we consider the scientific research result commercialization, the project research result should provide a particular offer for industry/business (Jasiński, 2009: 15). A company is the key participant of an innovative process since, on the one hand it reports demand for new scientific-technical solutions, and on the other hand it offers supply of technical innovations. Nowadays, the acceleration of technical advance is not, contrary to all appearances, a scientist (a scientific institution) but an innovatively oriented entrepreneur (an innovative enterprise). An innovative company should be: based on knowledge, a learning institution, and a network. A. Sosnowska has undertaken a test of an innovative enterprise classification. She distinguishes two main types of such companies: 1) large international corporations, especially those acting in the areas of high technology; 2) small and medium enterprises acting in so called niche areas using market space not occupied by large corporation from different reasons. Small innovative companies are divided into three broad categories: yy small companies within traditional industry, e.g. textiles, footwear, woods, metal; yy modern small units applying so called market niche strategy in the industry of scientific instruments, electronics, computer assisted designing; yy small companies based on FONT (new technology based firms), those companies usually act in the areas described as technological clusters that appear in: biotechnology, energetic technology, advanced material technology and information technology (Jasiński, 2009: 26).

One of the characteristic feature in contemporary science and technology in the developed countries is appearance and development of companies based on new technology. The FONT type companies mean developing firms producing and selling goods and services that state a significant element of contemporary science. The basic feature that distinguishes such a company from other enterprises is conversion – science transfer (broadly defined) into a new technology (New technology-based firms in Britain and Germany, 1998: 2). In the UK in 1980’s there were over four hundred such companies near Cambridge. Such firms are set up by private entrepreneurs usually being hired among former workers of research-development departments (laboratories) of large industrial companies or university scientists or MA or PhD graduates. The characteristic features of the FONT type companies are: new on the market, small (employing on average dozen or several dozens of staff); based on venture capital, usually private one with a high risk rate; entitled to different financial preferences, independently from those which all small companies may use (Jasiński, 2009: 13).1

2. Innovative activity in the service sector in Poland and the EU

Intelligent development based on knowledge and innovation that is one of the priorities of the Europe 2020 strategy demands strengthening innovativeness level both in production and service sectors. The highly

59 Sylwia Ćmiel THE INNOVATIVE ACTIVITY IN THE BALANCED REGIONAL AND ORGANIZATIONAL DEVELOPMENT OF POLAND AND THE EUROPEAN UNION developed countries experience proves that a significant element of their so far success is structural changes in economy and metamorphosis observed within the sector of services. A particular contribution into accele- rating economy development belongs to services connected with creating and implementing innovativeness as well as generating and spreading information and other knowledge assets. The increase of service importance has become an economy rule and the demand of civilization advance in all countries regardless their advance level. The specific feature of the service sector is the growth of its importance together with the economy growth (Wiśniewska, 2011: 179). There is a difference between innovativeness processes in industrial and service companies. The comparison of industrial and service innovations is presented in the Table 1 below.

Table 1. The comparison of the industrial and service innovations

Industrial innovation Service innovation - Creation of new or improved products - Creating new or improved services - Introducing new or improved technology of production - Introducing new or improved methods of services - Implementing a new way of sale or purchase - Applying a new way of interaction with customers and - Opening a new market for sale of products suppliers - Applying new raw materials - Opening a new market for services - Implementing changes in the organization of production - Applying new materials or instruments - Implementing changes in the organization of services Source: Niedzielski, 2008: 232

Innovative activity in services means acquiring new technology while industry is a creator of new technological solutions. Those technologies derive from an independent development research. Service innovations are based mostly on knowledge acquired from outside. To present the difference between innovativeness of production and services it is claimed that patents for production sector is the same as trademarks for services. It means a bigger competitiveness in the sector of services since it is easier to appear on the market but more difficult to keep and last in the position of a leader (Gula, 2007: 18) An important source in service innovations are employees, their creativity, enterprising and the level of knowledge including qualifications and competence. Thus, service activity is more focused on staff trainings in order to acquiring new knowledge. Statistics prove that the share of innovative companies grows together with the number of functioning entities both in industry and service sectors. Among small companies in the service sector financial agency services are the most innovative ones. In the group of medium entities, innovations are most often implemented by IT companies, and among the so called large enterprises, the highest number belongs to mailing service and telecommunication. Both in industry and the service sector, actively innovative enterprises implement process innovations more often that product ones – see Table 2. Peculiar character of service activity causes the enterprises functioning in the sphere implement organizational or marketing innovations more often that product or process ones. The share of service companies which implemented that type of innovation in Poland and the EU-25 is presented in Table 3. The decrease of the percentage of service companies implementing innovation in the total number of service enterprises in Poland in 2008 was also accompanied by the decrease (from 18.8 % in 2006 to 12.6 % in 2008) of the percentage of companies which had incurred expenditures on product and process innovations. Such a situation certainly influenced unfavorably the growth of the innovativeness level of the sector. The growth of expenditures for innovative activity by 51.8 % should be evaluated positively, which was 12.6 billion zlotys in 2008 in the sector of services. The situation in the area is presented in Table 4.

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Table 2. Innovative enterprises in the sector of services and industry in Poland according to the kind of implemented innovations

Companies which implemented product and/or process innovations in % of all enterprises Particulars Total New or significantly Including the New or significantly improved products new ones for improved processes the market Years 2004–2006 Industry in total 23.2 15.7 7.6 19.4 Services in total 21.2 13.3 7.4 17.1 Years 2006–2008 Industry in total 21.3 15.5 9.3 17.0 Services in total 15.6 10.3 6.3 12.3 Bulk and commission trade 12.7 7.4 5.0 9.1 excluding car and motorbike trade Transport, tourist related activity 10.3 5.7 1.9 8.9 Mail and telecommunication 33.6 26.8 18.7 26.2 Financial brokerage 39.3 33.1 15.9 31.3 IT 34.1 29.7 24.7 26.4 Activity concerning architecture 16.2 10.0 7.4 12.4 and engineering, research and analysis Source: Janasz, 2011: 190

Table 3. Organizational and marketing innovations in service enterprises in Poland and the EU-25

Enterprises which implemented organizational and/or marketing innovations Total Organizational Marketing innovations Years innovations in % enterprises in total UE-25 2002–2004 26.0 23.7 13.0 POLAND 2004–2006 32.6 27.6 19.8 2006–2008 19.8 14.9 13.9 Source: Janasz, 2011: 190

Table 4. The innovative activity expenditure structure changes in the sector of services in Poland

% expenses for innovative activity Particulars 1999 2003 2006 2008 Activity B+R 4.5 28.3 11.2 7.4 Purchase of ready technology (documents, rights) 8.9 6.2 4.1 2.0 Software 4.7 7.8 11.5 11.1 Innovative expenses for buildings and lands 11.9 12.2 12.5 24.6 Investment expenses for machines and technical equipment 62.3 37.8 47.3 48.7 Staff training 2.4 1.7 1.3 0.6 Marketing 3.3 2.5 4.9 2.9 Other 2.0 3.5 7.2 2.7 Source: Janasz, 2011: 191

61 Sylwia Ćmiel THE INNOVATIVE ACTIVITY IN THE BALANCED REGIONAL AND ORGANIZATIONAL DEVELOPMENT OF POLAND AND THE EUROPEAN UNION

Table four above presents that the biggest percentage belongs to expenditure on machinery and technical machines in total expenditures on innovative activity in the service sector in Poland. Low and decreasing percentage of expenditures on research and development works since 2003 is alarming. This situation means prevailing egzogenic character of innovative changes. Well qualified employees are the basis of processes of generating innovations inside a company and it is also one of the key elements of building absorbent potential in case of implementing solutions acquired from outside. As the research undergone within CIS-4 proves that the lack of qualified staff is an important factor disturbing in running an innovative activity for 9.6 % of the service sector companies of the EU-27. Therefore, constantly decreasing percentage of expenditures on staff trainings in the total expenditures on innovative activity in the service sector in Poland is worth taking into account.

The innovation process and the regional development

The regional innovative system consists of complementary and related sub-systems consisting of regional acting groups including: yy entites (production and service sub-system) participating in the system of creating innovation, technology transfer, implementing and commercialization of new solutions; yy scientific institutions and B+R sector (educational and science and research sub-system) including different research and development companies, higher education and other scientific institutions acting in the area of innovation and technology transfer; yy innovativeness and technology transfer support institutions (infrastructural sub-system) created by numerous entities supporting innovative processes, e.g. technological parks, incubators, innovative technology transfer centers; yy local and regional authorities that are the connecting element and starting activity of particular systems through effective innovative policy described within regional innovation strategy.

Regional innovation system is a system of companies and public and private organizations that create innovation on the basis of interaction and common learning. The foundation of regional system innovation activity is social and cultural and institutional environment (Nowakowska, Przygodzki, Sokołowicz, 2011: 101). Considering a company structure and external relations and innovation networks PH. Cook indicated located interactive and worldwide innovation systems: yy Located – regional systems are dominated by small and medium enterprises sector. Culture and innovative skills of local companies are not properly developed but simultaneously local research units are open and capable of network cooperation with the companies functioning in the region. The public innovation sector and B+R are of a significant importance, since the private sector is less significant. There are strong tendencies to create network and associations of different kinds between entities and public authorities. yy Interactive – in regional innovation systems their simultaneously exist large and small companies, in the system itself there is a “reasonable balance” between particular companies and their big complementary (entities of small and medium enterprises sector, large international corporations, B+R units, public authorities). yy Worldwide – in regional innovation systems there is a dominance of global information supported by local sector of small and medium enterprises, (e.g. networks creating clusters), strongly dependant on the large international corporations. Innovation sources and research and development activity mostly derive from internal B+R structures but simultaneously the systems mean well developed public infrastructure of innovation support, addressed to the sector of small and medium enterprises. In the sector private finances of innovation and research and development activity prevail.

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Conclusions

The analysis and comparison of the innovative activity in a balanced development of regions and organizations in Poland and the EU included in this derivation has been completed through discussing the following issues: an innovative process and innovativeness of organizations have been described, an innovative activity of the services sector in Poland and the EU has been proved as well as an innovative process and regional development have been compared. Through this analysis the following conclusions may be drawn: yy There are positive changes connected with innovations leading to facilitation of manufacturing processes. yy Knowledge management and constant progress in the technology and management areas is a necessary condition to the region and enterprise development. yy Observations and research indicate growing engagement of enterprise innovativeness, problems connected with their functioning in a given area including activity for local community. yy Development of the contemporary economy leads to the growth of the role and significance of knowledge, intellect, enterprising and enterprise innovativeness through employment innovativeness.

Drawing general conclusions, today’s innovative activity and enterprising are thought to be a necessary condition to the economy and social growth and development thus it is the main topic of discussion of the Polish government and society as well as of other EU’s countries. The expression of the above in the EU is so called Lisbon Strategy. The research concerning the level of innovativeness in the EU has been undergone every year since 2000 within the European Innovation Scoreboard (EIS) project. EIS provides comparable results concerning the level of innovativeness in particular countries and shows the headway on the way to the most competitive economy in the world (according to the Lisobon strategy assumptions). It is also a European forum for comparison (benchmarking) and experience exchange between particular countries. The latest report Internatio- nal Institute for Management Development (IMD) evaluates competitiveness of 58 states according to 300 detailed criteria (World Competitiveness Yearbook, 2010). In the contemporary set of the most competitive world economies, Poland has noted, 2 years in a row, a big advance, from the 44th up to the 22nd place. Within the EU 27 Poland has overtaken 11 countries.

References

Dolińska, M. (2010). Innowacje w gospodarce opartej na wiedzy. Warszawa: Polskie Wydawnictwo Ekonomiczne S.A. Gula, K. (2007). Czy ktoś widział innowacje w usługach. Innowacyjny start, Nr. 2 (5). Janasz, W. (1999). Innowacyjne strategie rozwoju przemysłu. Szczecin: Fundacja Uniwersytetu Szczecińskiego. Janasz, W. (2011). Innowacje w zrównoważonym rozwoju. Warszawa: Difin. Jasiński, A. H. (edit) (2009). Innowacje małych i średnich przedsiębiorstw w świetle badań empirycznych. Warszawa: Promocja XXI Sp. z o.o. Lis, S., Szot-Gawryś, T. (2008). Przedsiębiorczość i innowacje – problem, koncepcje, wyzwania. Kielce: Wyższa Szkoła Umiejętności im. S. Staszica w Kielcach. Matusiak, K. B. (2010). Budowa powiązań nauki z biznesem w gospodarce opartej na wiedzy. Rola i miejsce uniwersytetu w procesach innowacyjnych. Warszawa. New technology-based firms in Britain and Germany. Anglo-German Foundation. (1988). London. Niedzielski, P. (2008). Zarządzanie innowacjami w przedsiębiorstwach usługowych. In: B. Filipiak, A. Panasiak (eds.). Przedsiębiorstwo usługowe. Zarządzanie. Warszawa: PWN. Nowakowska, A., Przygodzki, Z., Sokołowicz, M. E. (2011). Region w gospodarce opartej na wiedzy. Kapitał ludzki – Innowacje – Korporacje transnarodowe. Warszawa: Difin. Pavitt, K et al. (1998). Managing innovation: Integrating technological, market and organizational change. Chichester: Wiley. The World Competitiveness Scoreboard. (1988). Wiśniewska, J. (2011). Aktywność innowacyjna sektora usług w Polsce. In: W. Janasz (ed.). Innowacje w zrównoważo- nym rozwoju organizacji. Warszawa: Difin.

63 Sylwia Ćmiel THE INNOVATIVE ACTIVITY IN THE BALANCED REGIONAL AND ORGANIZATIONAL DEVELOPMENT OF POLAND AND THE EUROPEAN UNION

INOVACINĖ VEIKLA DARNIAI PLĖTOJANT EUROPOS SĄJUNGOS IR LENKIJOS REGIONUS BEI ORGANIZACIJAS

Sylwia Ćmiel Alcide De Gasperi Euroregionų ekonomikos universitetas Jozefow (Lenkija)

Santrauka

Šio straipsnio tikslas – išanalizuoti inovacinę veiklą darniai plėtojant ES ir Lenkijos regionus bei organizacijas. Valstybė yra atsakinga už inovacijų lygį, finansų pervedimą tyrimams ir plėtrai, tinkamų finansinių ir teisinių priemonių, skatinančių inovatyvią įmonių veiklą, taikymą, įgyvendinant ekonominę politiką. Nau- jovių taikymas keliant ekonomiką yra pagrindinis Lenkijos ir ES vykdomos inovacinės politikos objektas. Organizacijos, ypač smulkios ir vidutinės, siekia bendradarbiauti inovacijų srityje su tos pačios šakos orga- nizacijomis, kitomis šakomis toje pačioje šalyje, universitetais, verslą ir technologijas kuriančiomis (V+T) institucijomis, įskaitant laboratorijas, finansines inovacijas, mokslo ir technologijų parkus, vietos valdžios ir inovatyvios aplinkos atstovus. Čia minėtinos ir konsultacinės bendrovės, mugių, parodų, konferencijų, seminarų ir mokymų organizatoriai. Lenkijoje inovatyvumas finansuojamas iš esmės pačių bendrovių ir jų tarpininkių, kurios padeda panaudoti ES fondų lėšas, taip pat finansinių arba kredito organizacijų, kurios teikia kapitalą (pvz., rizikos kapitalas). PAGRINDINIAI ŽODŽIAI: inovacijos, vadyba, žinių ekonomika.

JEL kodai: O310

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SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX

Renata Dagiliūtė1

Vytautas Magnus University (Lithuania)

Abstract Sustainable development has become one of the most discussed issues on national, regional and international levels. Together with policy development, the need to assess the current situation and the achieved progress in sustainability has arisen. In Lithuania integrated evaluations of sustainability are rather rare, therefore this paper aims to apply composite index for Lithuanian regions – counties. Research focuses on four regions of Lithuania: ones with the highest and with the lowest GDP values over the period of 2000–2010. The analysed indicators were normalized calculating T values and recalculating some of indicators to have them in the same direction and applying equal weight basis approach. The results reveal rather different development of selected regions. In all areas analysed (economy, environment, health and social issues) Vilnius County has improved most. Meanwhile situation in Tauragė region has only worsened. Though not only economic issues are important then assessing the development course, regions with higher economic development favour in general and their development is more stable and sustainable. KEYWORDS: sustainable development, regions, Lithuania, sustainability indicators.

JEL codes: Q 01

Introduction

Sustainable development and related issues has come to the political agenda since 1987 with the Brund- land report (WCED, 1987). Different sustainability aims and targets are expressed in numerous international documents (Agenda 21 [1992], Johannesburg Implementation Plan [2002]) and regional as well as national sustainable development strategies (EU Sustainable development strategy [2001, 2006], Lithuanian National development strategy [2003, 2009]) and other documents. Attention to sustainable and even development of the regions is given at all policy levels and is one of the main aims of sustainable development declared in the National strategy for sustainable development of Lithuania (2009). Together with policy development, the need to assess the current situation and the achieved progress in sustainability has arisen. However, the development of Lithuanian regions has been evaluated only on descriptive separate indicators basis (Juknys, 2008) or rather short period of time (Ginevičius, Podvezko, 2009; Brauers, et al., 2010). And very often only economic issues are stressed then comparing the regions, especially on the political level. Therefore this paper aims to apply composite index for selected Lithuanian regions with different GDP levels and evaluate their development over the period of 2000–2010. The main tasks of the paper are to evaluate changes of separate indicators, calculate sub-indexes and the composite index as well as to assess their changes during the period under analysis and shortly discuss the probable importance of economic issues on the overall development of regions. The object of the paper is 4 Lithuanian regions with highest

1 Renata Dagiliūtė – Vytautas Magnus University, Department of Environmental Sciences, lecturer, dr. Scientific interest: sustainable development, sustainable consumption and production. E-mail: [email protected] Tel.: +370 37 327 904.

65 Renata Dagiliūtė SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX

(Klaipėda, Vilnius counties) and with lowest (Marijampolė and Tauragė counties) GDP on average over the period of 2000–2010. Methods used in the paper include comparative literature review, data gathering and analysis, descriptive statistics and normalization, sub-index and composite index calculation, as well as comparative analysis.

1. Theoretical aspects of index application for sustainable development assessment

As already mentioned, together with policy development, the need to assess the sustainability issues has arisen. In most cases sets of various indicators are foreseen and monitored and are used as tool for further policy making and improvement. As, according to the J. Spangenberg (2002a, 2002b), indicators of sustainability should be based on all pillars of sustainability, to cover all dimensions of sustainability composite indices are usually constructed (Čiegis, Ramanauskienė, 2011) allowing generic evaluation of various aspects (Kumar Singh et al., 2009). Such composite indices are also seen as a tool for the assessment of sustainable development in general. However, selection of proper indicators and construction of indexes is one of the assessment challenges. Especially the later should be treated carefully as can become very subjective or meaningless (Hueting and Reijnders, 2004) by losing some information due to the high level of aggregation and normalization, transformation (Kumar Singh et al., 2009). To avoid this, uncertainties should be minimized and controlled (Flo- ridi et al., 2011). Another critical aspect of index construction is restricted availability of the data needed as well as indicators selection might be influenced by country peculiarities (Böhinger and Jochem, 2007). De- spite some critique a number of various indices and composite indicators have been developed and different methodologies have been applied for sustainability assessment as some reviews reveal: Living planet index, Ecological footprint, Environmental sustainability index, Human development index, Well-being index, City development index Innovation index, Living planet index and others (Böhinger and Jochem, 2007, Kumar Singh et al., 2009, Mori and Christodoulou, 2012). Constructed indices are applied on global, regional, national and local levels. For example M. Floridi et al. (2011) applied composite sustainability index for 20 Italian regions covering 66 indicators and using Z scores and find out that regions better dealing with socio-economic issues were performing not so well in environmental issues. Another integrated sustainability index has been applied on different levels in Lithu- ania: on national level (Čiegis, Ramanauskienė, 2011), local regional level (Šimanskienė et al., 2011) and even on sector level (Štreimikienė, Mikalauskienė, 2009). The research of L. Šimanskienė et al. (2011) has showed that despite some improvements in 2007, in 2008 integrated index composed from 9 indicators declined due to the environmental degradation in Klaipėda County, though social and economic issues have improved. R. Ginevičius and V. Podvezko (2009) applied multiple criteria methods and estimated that during the 2003–2007 period Vilnius and Klaipėda regions were among most rapidly and stable developing regions, and Tauragė and Marijampolė regions were among the slowest ones. Applied for the regional development evaluation and covering 16 objectives MOORA method (Brauers et al., 2010) have showed that Tauragė region was the second worst region concerning general well-being of the Lithuanian regions. Marijampolė County performed much better according these authors, and Klaipėda and Vilnius regions were ranked as the best performing regions according well-being in 2008.

2. Construction of composite index

As the indicators and indices are useful tool for policy making, and decisions making as well as progress assessment, the composite index (based on City development index principles (UN, 2001)) was applied for the regions of Lithuania in order to determine the course of the regions’ development. Though regions can be characterized from geographical, political, social, ethnical economical perspective, usually boundaries of the region are determined by the administrative division of the country (Ginevičius, Podvezko, 2009). This concept of the region was used in the paper.

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Usually then assessing the progress and achievements economy issues are dominating. Hence, from the point of sustainability social and environmental aspects should be taken into account. To highlight the importance of these aspects for sustainability, the regions with highest and with the lowest gross domestic product (GDP) per capita over 2000–2010 has been chosen for the deeper analysis. According to the data of Statistical office of Lithuania during this period the Vilnius and the Klaipeda regions have been selected as the regions with the highest GDP/cap amounting on average to 32 889 LTL/cap and 21 911 LTL/cap respectively. And the regions of Tauragė and Marijampolė were selected as the regions with the lowest GDP/cap values, respectively 10 995 LTL/cap and 13 747 LTL/cap on average over the 2000–2010 period. For the composite index the following indicators presented in Table 1 were selected and composed the sub-indices and the final composite index. Selection and grouping of the indicators was based on literature review and author’s opinion on importance and interconnection of the indicators as well as data availability, which quite often has been very restricted.

Table 1. Selected indicators and composition of the index

Indicator Sub-index Composite index GDP, LTL/cap Unemployment rate, % Economy Recipients of social allowances, % Wastewater treated to the standards, % Water consumption in household sector, m3/cap/yr Environment Emission of NO , kg/cap x Composite sustainability Infant mortality, number/1000 live births index Life expectancy Health Hospitals/100 000 inh. Libraries/100 000 inh. Post-secondary education, % of 25–64 age population Social environment Crimes/100 000 inh. Natural population increase/decrease per 1 000 inh.

All the indicators of each year were standardized using T scores obtaining values from 0 to 100 using this formula:

, (1)

where: x is value of indicator of a given year; – mean value of a given indicator; s – standard deviation of the given indicator.

Those T values which increase indicated unsustainable trends were recalculated to have all indicators in one “direction”. And increase of the value indicates improvement. All indicators were included into sub- indexes on the equal weight basis. Calculated sub-indices have been included into final composite index on equal proportions as well (Table 1). Based on the data of the department of Statistics of Lithuania, research covers development changes in Klaipėda, Marijampolė, Tauragė and Vilnius regions over the period of 2000–2010.

67 Renata Dagiliūtė SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX

3. Indicators of development and sub-indices of Lithuanian regions

3.1. Economy indicators and sub-index

Economy related indicators and their changes are presented in the Table 2. Over the period under analysis gross domestic product (GDP) has been increasing in all regions. The most pronounced growth nearly 2.5 times was registered in Vilnius County and 96 % growth was characteristic for Marijampolė County. Despite this growth differences between the regions has only increased. If in the beginning of the period under analysis GDP/cap in Tauragė County was 2 times, in the end of the period already – 2.41 times lower the level of Vilnius County. Marijampolė County also had 2.38 times lower GDP/cap than Vilnius County and 34 % lower GDP/cap than Klaipėda County in 2010. Some growth trends, hence negative from point of sustainability, were observed in the number of recipients of social allowances. This indicator has especially increased from 2008 and the biggest increase (nearly 60 %) is registered in Tauragė County amounting to 8.2 % of all population of this region. However, the unemployment rates were highest in Klaipėda (18.2 %) and Vilnius counties (16.2 %) in 2010. Also it should be noted that all economy related indicators have been influenced by financial crisis and after peak values in 2007 or 2008 have decreased/worsened in 2009.

Table 2. Economy related indicators and sub-index in 2000 and 2010

County Indicator Klaipėda Marijampolė Tauragė Vilnius 2000 2010 2000 2010 2000 2010 2000 2010 Real values 14 635 32 200 9 212 18 100 7 755 15 500 17 913 43 200 GDP, LTL/cap T values 45,03 60,74 40,18 48,13 38,87 45,80 47,96 70,58 Unemployment rate, Real values 14,2 18,2 14,7 15 13,6 11,3 17,3 16,2 % T values 41,46 33,16 40,42 39,79 42,70 47,77 35,03 37,31 Recipients of social Real values 2,93 4,33 3,94 6,06 5,22 8,23 2,55 3,54 allowances, % T values 49,51 41,71 43,89 32,12 36,74 20,02 51,59 46,09 Economy sub-index T values 45,33 45,2 41,5 40,1 39,44 37,76 44,86 51,32

Source: Statistic of Lithuania, author’s calculations

Due to different trends of separate indicators, the economy sub-index indicate that over the period of 2000–2010 economic situation has improved only in Vilnius County (Table 2, bold values), other counties have showed rather moderate results. The economy sub-index in Vilnius region amounted to 51.3, in Klaipėda region – 45.3, in Marijampolė region – 40.1, and in Tauragė – 37.7 in 2010. Though GDP/cap values have been increasing in all counties, in some cases like Klaipėda or Tauragė counties other indicators (unemployment rate or number of social allowance recipients) have influenced final results.

3.2. Environmental indicators and sub-index

From the environmental indicators most significant improvement is registered in waste water treatment (Table 3). In all counties under analysis the amount of wastewater treated to the standards has reached not less than 95%. The maximum 100 % of wastewater treated has been reached in Marijampolė County. Water consumption has been decreasing also in all counties except Vilnius region with some slight increase. The highest water consumption has been registered in this county amounting to 39 m3/cap/yr in 2010.

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Relative NOx pollution has decreased in Vilnius County (29 %) and Tauragė County has shown some stable levels. Meanwhile in Klaipėda county pollution increased about 20 % and in Marijampolė nearly two times. The later could be associated with intense transport flows and changes in energy sector. Despite that air pollution in Marijampolė County (1.45 kg NOx/cap) was lower than in Klaipėda (1.7 kg NOx/cap) and

Vilnius County (2.24 kg NOx/cap) in 2010.

Table 3. Environment related indicators and sub-index in 2000 and 2010

County Indicator Klaipėda Marijampolė Tauragė Vilnius 2000 2010 2000 2010 2000 2010 2000 2010 Wastewater treated to Real values 12 99 28 100 13 95 10 99 the standards, % T values 51,16 59,90 52,80 59,98 51,34 59,47 50,97 59,86 Household water Real values 38,24 25,77 27,25 24,85 19,14 16,76 38,58 39,00 consumption, m3/cap/yr T values 35,65 54,66 52,40 56,07 64,77 68,40 35,12 34,48 Real values 1,43 1,70 0,80 1,45 0,68 0,68 3,16 2,24 Emission of NOx, kg/cap T values 50,55 46,40 59,99 50,19 61,80 61,79 24,51 38,40 Environment sub-index T values 45,79 53,65 55,06 55,41 59,30 63,22 36,86 44,25

Source: Statistic of Lithuania, author’s calculations

Despite some negative trends, overall environmental situation is improving and environmental sub-index has been increasing in all counties under analysis (Table 3, bold values). However, better environmental situation is registered in counties with not such pronounced economy level and growth: Tauragė and Marijampolė counties amounting respectively to 63.2 and 55.4 in 2010. These counties also had higher index values in the beginning of the period under analysis, but the situation in Marijampolė region has improved rather slightly to compare to the achievements of other counties. Despite improvements, to compare to the other counties the worst situation is in the Vilnius County: environmental sub-index in this county amounts only to 44.25.

3.3. Health protection indicators and sub-index

Health related indicators have been improving over the period with some exception with the number of hospitals (Table 4). The later could be related to the health system reform and closure or reunification of some hospitals, especially in the more distinct areas.

Table 4. Health related indicators and sub-index in 2000 and 2010

Source: Statistic of Lithuania, author’s calculations

69 Renata Dagiliūtė SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX

Other two indicators under analysis have shown positive trends. In all counties, except Tauragė region, infant mortality has decreased significantly (around two times) amounting to 3.7–4.4 infant deaths per 1000 live births. Life expectancy has been also increasing with most pronounced growth (2.8 %) in Marijampolė County. For this indicator Tauragė county also has shown slowest improvement. Different pace of improvement and different starting points resulted that the highest life expectancy was registered in Klaipėda County (74.1) and the lowest in Tauragė County (71.5) in 2010 (Table 4). Overall health index was highest in Klaipėda County (61.93), followed by Vilnius region (59.76). Mari- jampolė County has reached only the initial (2000) levels of development of the leading regions amounting to 53.72 in 2010. And the situation has even worsened and health index has decreased in Tauragė County; despite this region have had the best starting position in 2000.

3.4. Social environment indicators and sub-index

Social development also has been uneven in the Lithuanian counties (Table 5). The most significant achievement is registered in the post-secondary education. However leading counties were those with strong County centres and having universities. Number of libraries has been decreasing in all regions, except Tauragė region; the later could be influenced probably not with the opening of new libraries, but more with migration rates. If emigration rate in Vilnius region was 29.9 persons per 1000 inhabitants, in Tauragė County this indicator was significantly higher amounting to 41.6 in 2010, i.e., more than 1.5 times higher. Positively should be evaluated decreased number of crimes in most of counties, except Vilnius region with some increase during the 2000–2010 period. The highest number of crimes was also characteristic for Vilnius County in 2010; hence in the beginning of the period Klaipėda County was identified as a county with highest number of the crimes (Table 5).

Table 5. Social issues related indicators and sub-index in 2000 and 2010

Source: Statistic of Lithuania, author’s calculations

Natural change of population also varied between the counties and if Klaipėda, Marijampolė and Tauragė regions have showed negative tendencies, Vilnius County has improved situation and now has positive natural population increase (0.7). The highest natural decrease (-4.5) is registered in Tauragė region. As already mentioned, this region has the lowest GDP, high number of social allowances recipients and consequently high migration rates leading to low birth rates. Summing up the results of social indicators reveal that counties with relatively higher level of post- secondary education and more or less positive natural population increase have shown the most pronounced

70 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) improvement, hence having lower starting positions. These are Klaipeda (54.34) and Vilnius (55.11) counties. Social index of Marijampolė County has decreased slightly over the period under analysis and the most pronounced drop (10 %) of social development is registered in Tauragė County.

4. Composite index of sustainability in Lithuanian regions

Results of the composite index indicated that regions which have shown improvement in all 4 (Vilnius County) or at least 3 (Klaipėda County) sub-indexes have been developing in more sustainable way. The overall composite index has increased in Vilnius County (14 %), Klaipėda County (12 %), and Marijampolė County (2 %) (Fig. 1). However, situation in Tauragė region has worsened (5%) and only in environmental sphere positive changes has been taking place over 2000–2010 in this county (Table 3). It is seen that the composite index of Tauragė County fluctuated most during the period under analysis and experienced rather difficult episodes already in the beginning of 2000’s then index values were lower the level of 2000 (Fig. 1). The development of the regions was much more pronounced until the global financial crisis. During the 2000–2008 the composite index in Vilnius County increased 17 %, in Klaipėda County – 15 %, in Marijampolė County – 7 %, and Tauragė County – 3 % (Fig. 1).

Figure 1. Changes of composite index of different regions of Lithuania over 2000–2010 period Source: author’s calculations

Hence, all counties under analysis have experienced negative impact of global financial crisis and from 2008 composite index had decreased in all regions. The most reactive in his case was Tauragė County (8 %), which has been demonstrating rather week development comparing to the other regions. The 5 % drop is registered for Marijampolė region, 3 % – in Klaipėda region and only 1 % – in Vilnius region. Summing up, this suggests that lacking behind regions are also most vulnerable ones and their sustainability is more challengeable. The other important issue is that at the beginning of the period under analysis, both Klaipėda (48) and Vilnius (46) counties had lower values of composite index than Tauragė and Marijampolė regions, but have developed much faster and at the end of the period reached the highest values (Fig. 2). And oppositely, Tauragė County with the highest (52) index value in 2000 have experienced negative changes leading even to the decrease of composite index amounting to 49.6 in 2010. Marijampolė County remained more or less on the same development levels fluctuating from 48.46 to 53.32 over the whole period under analysis.

71 Renata Dagiliūtė SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX

Figure 2. Composite index of different regions of Lithuania in 2000 and 2010 Source: author’s calculations

Conclusions

During the 2000–2010 only Vilnius region have demonstrated positive economic development. Hence, if positive economy development was characteristic only to Vilnius county, environmental situation has improved in all counties under analysis. It should be mentioned that better environmental situation is registered in counties with not such pronounced economy growth. And oppositely, the better economic situation was observed, the lower environmental sub-index values were registered. Health aspects have been improving also in all, except Tauragė, regions. Especially positively should be treated increase in life expectancy and decrease in infant deaths. Despite that, social issues remain quite problematic, especially in the counties with weak economic situation. Only Klaipėda and Vilnius regions achieved some progress in this area. As already mentioned relatively more vulnerable regions reacted to the global financial crisis more than relatively stable with higher GDP level regions. On the one hand, analysis have revealed that not only economic issues are important then assessing the sustainability. But on the other it have showed, if environmental issues seem to be depended on economic development only in some cases, it is more obvious that economic issues play a crucial role on social aspects and directly and indirectly on the health indicators, too. Hence, overall conclusion could be made, that regions with higher economic development favour in general and their development is more stable. Or otherwise, economic development is needed to achieve certain level of heath, social and environment protection in order to achieve more stable and sustainable development. Research also has revealed that composite index is beneficial for the comparison on the regions and the assessment of achieved progress. However, high level of aggregation should be taken into account and challenging hot spots on the sub-index level or individual indicator level should be identified for the problem solving. Therefore more detail analysis involving more indicators (for ex. level of debts or number of suicides and so on) and more Lithuanian regions would be beneficial for sustainability assessment and adequate policy making.

References

Böhringer, Ch., Jochem, P. E. P. (2007). Measuring the immeasurable – A survey of sustainability indices. Ecological economics, Vol. 63, p. 1–8.

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Brauers, W. K. M., Ginevičius, R., Podvezko, V. (2010): Regional development in Lithuania considering multiple objectives by the MOORA method. Technological and Economic Development of Economy, Vol. 16, p. 4, 613–640. Čiegis, R., Ramanauskienė, J. (2011). Integrated assessment of sustainable development: Lithuanian case [in Lithu- anian]. Management theory and studies for rural business and infrastructure development, Vol. 2 (26), p. 39–49. Commission of European Communities. (2001). A sustainable Europe for a Better World: a European Union for sustainable development. COM (2001) 264 final. Brussels. Council of the European Union. (2006). Renewed EU Sustainable Development Strategy. Brussels. 26 June 2006. No. 10917/06. Floridi, M., Pagni, S., Falorni, S., Luzzati, T. (2011). An exercise in composite indicators construction: Assessing the sustainability of Italian regions. Ecological economics, Vol. 70, p. 1440–1447. Ginevičius, R., Podvezko, V. (2009). Evaluating the changes in economic and social development of Lithuanian counties by multiple criteria methods. Technological and Economic Development of Economy, Vol. 15, p. 3, 418–436. Hueting, R., Reijnders, L. (2004). Broad sustainability contra sustainability: the proper construction of sustainability indicators. Ecological Economics, Vol. 50, p. 249–260. Juknys, R. (2008). National sustainable development strategy implementation report 2005–2007 [in Lithuanian]. Min- istry of Environment, Vilnius. Mori, K., Christodoulou, A. (2012). Review of sustainability indices and indicators: Towards a new City Sustainability Index (CSI). Environmental Impact Assessment Review, Vol. 32, p. 94–106. National strategy for sustainable development. (2009). Approved by Resolution No 1160 of the Government of the Re- public of Lithuania of 11 September 2003 (as amended by Resolution No 1247 of the Government of the Republic of Lithuania of 16 September 2009). Rajesh, K. S., Murty H. R., Gupta, S. K., Dikshit, A. K. (2009). An overview of sustainability assessment methodologies. Ecological Indicators, Vol. 9, p. 189–212. Šimanskienė, L., Čiegis, R., Ramanauskienė, J. (2011). Assessment of sustainable development of Klaipeda county [in Lithuanian]. Tiltai, Nr. 1, p. 1–8. Spangenberg, J. H. (2002a). Environmental space and the prism of sustainability: frameworks for indicators measuring sustainable development. Ecological Indicators, Vol. 2, p. 295–309. Spangenberg, J. H. (2002b). Institutional sustainability indicators: an analysis of the institutions in Agenda 21 and a draft set of indicators for monitoring their effectively. Sustainable Development, Vol. 10, p. 103–115. Štreimikienė, D., Mikalauskienė, A. (2009). Application of integrated indicators for monitoring the National energy strategy. Energetika, Vol. 55, No. 3, p. 158–166. The Lithuanian strategy for sustainable development: Efficient economy, healthy environment, prosperous society (NSSD). (2003). Approved by Resolution No. 1160 of September 11, 2003 of the Government of the Republic of Lithuania, Vilnius, Lutute. United Nations. (1992). Agenda 21. The United Nations Programme of Action from Rio. UN. Available: http://www. un.org/esa/dsd/agenda21/index.shtml United Nations. (2001). The State of the World’s Cities Report 2001. The United Nations Centre for Human Settlements (Habitat). Available: http://www.un.org/ga/Istanbul+5/statereport.htm United Nations. (2002). Johannesburg Plan of Implementation. Department of Economic and social Affairs. Division for Sustainable Development. UN. Available: http://www.un.org/esa/sustdev/documents/WSSD_POI_PD/English/ POIToc.htm World Commission on Environment and Development. (WCED). (1987). Our common future. Oxford, Oxford Univer- sity Press, 470 p.

LIETUVOS REGIONŲ DARNUMAS: SUDĖTINIO INDEKSO TAIKYMAS

Renata Dagiliūtė Vytauto Didžiojo universitetas (Lietuva)

Santrauka

Darnus vystymasis – viena pagrindinių diskutuojamų temų nacionaliniu, regioniniu ir pasaulio mastu. Darnumo vertinimas aktualus ir regionų vystymuisi. Kaip numato Lietuvos nacionalinė darnaus vystymosi

73 Renata Dagiliūtė SUSTAINABILITY OF LITHUANIAN REGIONS: APPLICATION OF COMPOSITE INDEX strategija, darnus regionų vystymasis yra vienas iš darnaus vystymosi tikslų. Tačiau Lietuvos atveju dažnai regionų vystymosi vertinimas remiasi tik aprašomąja pavienių rodiklių analize, o apibendrintas vertinimas taikomas retai. Todėl šio straipsnio tikslas – pritaikyti sudėtinį darnumo indeksą Lietuvos regionų – apskri- čių – vystymuisi įvertinti. Tyrimo objektas – 4 Lietuvos regionai: 2 regionai, kurių didžiausias (Klaipė- dos, Vilniaus) ir 2 – mažiausias (Marijampolės ir Tauragės) BVP vidurkis per visą 2000–2010 laikotarpį. Analizuoti darnumo rodikliai buvo normalizuoti, perskaičiuojant juos į T balus ir suvienodinant jų kryptis. Sudėtinis indeksas apskaičiuotas lygių svoriu principu įtraukiant visus subindeksus, kurie savo ruožtu lygių svorių principu buvo sudaryti iš atitinkamų rodiklių. Rezultatai parodė, kad regionai vystėsi gana netolygiai. Visuose analizuojamuose aspektuose (ekonomika, aplinka, sveikata, socialinė aplinka) pažanga stebima tik Vilniaus apskrityje. Tuo tarpu Tauragės apskrityje situacija tik prastėjo, nors šio regiono geriausia aplinkos būklė. Vis dėlto, nors lyginamų regionų BVP/1 gyv. skyrėsi net kelis kartus, bendras vystymosi rodiklis taip labai nesiskyrė. Tyrimas parodė, kad ne vien ekonominiai aspektai yra aktualūs vertinant vystymosi eigą, tačiau labiau ekonomiškai išsivystę regionai vis dėlto vystėsi tolygiau ir darniau. PAGRINDINIAI ŽODŽIAI: darnus vystymasis, regionai, Lietuva, darnumo rodikliai.

JEL klasifikacija: Q 01

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SUSTAINABLE STEELWORKS IN POLISH MARKET

Bożena Gajdzik1

Silesian University of Technology (Poland)

Abstract In the paper market situation of domestic steelworks during restructuring process was characterized. In the analysis the key elements of enterprises competitiveness were presented. Moreover the organizational changes in the steelworks plants and their influence on the sustainability were presented too. In the paper two kinds of restructuring were described: repair and development. KEYWORDS: sustainable steelworks, restructuring process, improvement, sustainability.

JEL codes: Q010, Q150

Introduction

After 1989 new challenges appeared for the functioning of the enterprises in Poland. Transformations happening in all walks of social and economical lives influenced the introduction of changes in enterprises, which resulted from the necessity to adjust them to the requirements of the market economy. Enterprises in many sectors of economy were obliged to adjust to new conditions, first of all, in need of survival, and next in order to develop and build sustainability. During the analysis of the functioning of enterprises in Poland two forms of restructuring processes were noticed. First form – repair restructuring were realised in the initial period of economical changes. The aim of the restructuring programs at that time was the survival of the steelworks plants. In the period (after 1990) steelworks plants realized first environmental investments. Second form – development programs (first years of new century until the global economic crisis) which helped them to be sustainable steelworks plant in all of their activities. The aim of this paper is to discuss the most important areas of introduced changes in the functioning of steelworks, especially in the area of it sustainability. The key problem of the paper is meaning the sustainability in steelworks. How components of its activities create sustainable business. This publication is a result of observations of changes occurring in metallurgy sector in Poland. Object of research – restructuring process in enterprises of the metallurgical sector. The purpose of research: presentation of the way from restructuring process to sustainable business for example metallurgical enterprises. Foundation: sustainable enterprise is the result of restructuring process. Metallurgical enterprises have to realize two forms of restructuring: yy repairing programs; yy development programs.

The tasks of the article are to try to refer to the following issues: yy Repair restructuring process in steelworks – the first step to sustainability.

1 Bożena Gajdzik (Ph.D) – The Silesian University of Technology, Materials Science and Metallurgy Faculty, Management of Computer Science Department. Scientific interest: management and economy. E-mail: [email protected] Tel.: 32 603 43 26.

75 Bożena Gajdzik SUSTAINABLE STEELWORKS IN POLISH MARKET

yy Development restructuring process in steelworks – the second step to sustainability. yy Features of sustainable steelworks.

The method: the analysis of scientific articles, statistical materials and own research.

1. Repair restructuring process in steelworks – the first step to sustainability

The term „restructuring” was for many years identified with repairing of the enterprise functioning. The meaning of the radical changes and necessity of their introduction were underlined. They were a result of critical signals most often connected with lack of financial fluidity of the enterprises (Malara, 2001: 16; Nalepka, 2008:19; Durlik, 1998: 48; Bowman, Singh, 1993: 6). The radical changes are features of repair restructuring process. New definitions of restructuring appeared together with the introduction of the economy rules which were open to the demands of globalisation. In those, the need of constant reconstructions, mod- ernisations, improvements and updates in the enterprise were exposed and underlined. It is also important to point at the fact that the aim of restructuring is the achievement of the highest effectiveness of enterprise functioning (Porada-Rochoń, 2009: 69; Malara, 2001: 36). The highest effectiveness is the key element of development restructuring process. Moreover development restructuring process is connected with realisation of strategy of value increase of an enterprise (Hurry, 1993: 16). The restructuring process very often causes changes in enterprise strategy. There is dependence between strategy, environment and restructuring process. Enterprise environment influence both strategy and restructuring process (Chandler, 1962: 14–16). Modern enterprise realize sustainable strategy according to international program. The strategic elements of changes in enterprises during restructuring process cause that enterprises change their values (Thierry, 1995: 14). In sustainable concept the new values are called sustainable value. In sustainability enterprises build sustainable value in long period. The first step to building new enterprise value in metallurgical sector in Poland was repair restructuring. The sustainable development of enterprises must go before urgent changes (Singh, 1993: 148–150). Such changes were realized in restructuring programs in many enterprises of different sectors of industry in 90. XX century. Repair programs in enterprises in Easter and Central Europe were results of economy transformation. In outer countries of Europe and in US changes in enterprises was called reengineering (Manganelli, Klein, 1998: 21–26). In the paper only repair programs in Polish metallurgical sector was described. Repair actions in Polish metallurgy sector began in 1992 with government program of metallurgy restructuring. The most important event then was closing the privatization transaction of Polskie Huty Stali. Corporation, in the end of 2003, was taken over by British LNM Group, which was later bought by Indian ISPAT later named Mittal Steel Company. In June 2006 concern Mittal merged with Arcelor. Nowadays ArcelorMittal Poland is the largest steel producer in Poland, concentrating more than 70 percent of Polish steel production capacity. The Group employs over 12 thousand people. Six steel pants create the enterprise ArcelorMittal Poland. They are located in five cities: Kraków, Dąbrowa Górnicza, Sosnowiec, Świętochło- wice and Chorzów. After ten years work, modernization, investments worth over PLN 4 billion and transfer of the world’s best practices – all in order to give the Polish steel industry a new face. In repair restructuring process five strategic investment projects were realized in ArcelorMittal Poland: 1) The new Hot Strip Mill in Kraków; 2) the new Continuous Caster in Dąbrowa Górnicza; 3) the new Colour Coating Line in Święto- chłowice; 4) the modernized Wire Rod Mill in Sosnowiec; 5) the modernization of Blast Furnance in Dąbro- wa Górnicza. Realized investments were first step to sustainable business (Gajdzik, 2012: 54). According to definition of sustainable development the environmental investments have important place in the concept (Piontek, 2002: 10). Very important palace in repair restructuring process had employment reduction. The employment in Polish steelworks was reduced from 147 000 people in 1990 to 25 000 in 2010. The effect of the employment reduction is the improvement of the work efficiency. Before restructuring, one worker equalled about

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130 tonnes of steel a year and now it is 500 tonnes a year (the average in the European Union is around 600 tonnes of steel a year per worker) (Gajdzik, 2012: 58). The next change was production reduction. In the 80s of 20th century the metallurgy sector on Polish market produced up to 19 million tonnes of crude steel a year and in 2010 a sum of 8 million tonnes of steel was reached. Reduction of the production was caused by market demand, particularly in building sector (residential and infrastructural) as well as automotive, machinery builder, home appliances and metals industries. Production of crude steel was reduced and the production of manufactured products increased. In the area of use of metallurgical products an increase of sales in flat products and pipes was noticed, which means products of high added value. In order to increase sales of metallurgical products the production and distribution enterprises created specialised service centres offering the selection of products adjusted to individual expectations of customers (Gajdzik, 2011: 945–952). The result of the repair programs in the enterprises was a new subject structure of the metallurgical market. Until 2005 the ownership changes took place in most Polish steelworks which caused the creation of new metallurgical enterprises, often with new names. Most steelworks changed their legal status and on the basis of the possessions of the steelworks new production and service companies were created. Four metallurgical enterprises: ArcelorMittal Poland, CMC Zawiercie, Huta Ostrowiec and Huta Częstochowa (ISD Donbas) manufacture together over 90 % of Polish steel. Owner of the enterprises is foreign capital (Gajdzik, 2011: 945–952). To sum up, the basis for repair restructuring in Polish metallurgical sector were the activities on the operational and resources level (Ingram, 2002: 25). The downsizing type activities dominated, based on reduction of employment, reduction of the production size and the sales decrease. In the period of changes steelworks had to spend significant sums of money for modernisation of the production process in order to prepare the production for the concept of sustainable development. The basic assumption here was the reduction of negative (often uncontrolled influence of steelworks on the environment). The restructuring process of enterprises in metallurgical sector was realized in all countries in Easter and Central Europe during economy changes. For example the new owner of Steelworks Plant Koszyce is US Steel, Nova Steelworks – Mittal Steel, Vitkovice Steel – now Evraz Group, new owner of Dunaferr is ISD Donbas. Steelworks plants in Czech Republic produced 11 million tonnes of crude steel before restructuring, now 8.1 million tonnes. Employment in steelwork plants before restructuring process 94 000 people, now 24 000 people. In Rumanian steelworks plants was produced 15 million tonnes of crude steel, after restructuring steelworks produce 8 million tonnes. Employment in Rumania was 123 000 people, now about 50 000 people (on the base of EU Report about Restructuring in Metallurgical Sector http://eur-lex.europa. eu/LexUriServ).

2. Development restructuring process in steelworks – the second step to sustainability

A process of the development restructuring started in 2005 but first symptoms of changes were observed in 2004. Metallurgy branch activated as a result of huge demand for steel and metallurgical products on Chi- nese market. From 2004 the metallurgy sector in Poland started to earn net profit. The year 2005 was also very important for development restructuring. This was a year of completion of most ownership changes. In 2005, for the first time since the 90s of 20th century, an increase of the employed workers in the metallurgy sector has been observed. Good financial situation of the steelworks resulted in the increase of the expenses for investments. In 2006 the Polish metallurgy spent 1 billion euro on environmental investments (Gajdzik, 2011: 945–952). Strategic investments of ArcelorMittal Poland, 2004–2008 were presented in table 1.

77 Bożena Gajdzik SUSTAINABLE STEELWORKS IN POLISH MARKET

Table 1. Strategic investments of Arcelor Mittal Poland, 2004–2011

Investment Investment time Investment cost Effects/production capacity July 2005 – June 28th, Production capacity 2.4 million Hot strip mill in Kraków USD 400 m 2007 tonnes per year Continuous casting December 2005 – CCM machine is environmentally line no. 3 in Dąbrowa USD 141.6 m December 29, 2006 friendly Górnicza Products of highest quality. The capacity of the mill comes to Modernization of wire November 2006 USD 42.18 m 750 000 tonnes a year. The modern rod mill in Sosnowiec efficient furnace produces 160 tonnes per hour Colour coating line in Target capacity of the line amounts 2006 USD 33.42 m Świętochłowice to 200 000 tonnes a year A full overhaul and Capacity of the furnaces was modernization of blast September 2006 USD 84 M improved from 6 000 do 7 000 furnace no. 2 in Dąbrowa tonnes of the hot metal a day Górnicza A new coke battery Modernization and no.11 was launched in USD 60 M The highest capacity construction of new coke March 2006 batteries at Zdzieszowice A new battery no. 12 – Coke Plant came into use in April USD 63 M The highest capacity 2009 Effects: automotive operations, the Modernization of cold November 2009 USD 33M highest quality parameters of rolled rolling mill in Kraków products System for dedusting at The investment allowed to reduce the process line for BF 2 2006 PLN 30 million dust emission by 40 % since 2004 in Dąbrowa Górnicza Investment allowed to replace Construction of the PCI coke used in the BF process with installation for blast pulverized coal and in turn to Completed in 2007 – furnaces no. 3 and 5 in reduce emission of dusts, sulphur

Kraków dioxide, NOx, hydrocarbons and carbon monoxide at the coke plant Investment allowed to eliminate Modernization of the dangerous substances like arsenic Chemical Department at Completed in 2011 PLN 100 million oxide or sulphurous acid from the Kraków Coke Plant process PLN 4.5 million and was co-financed by 1 000 000 m3 of water per year National Found for have been saved as a result of an Closing circuits of water 2011 Environmental Protection investment in closing water circuits in the Batory Unit and Water Management in ArcelorMittal Poland Batory and European Regional Unit Development Fund The energy consumption in the Modernization Hot – – Kraków Hot Roiling Mill decreased Roiling Mill in Kraków by 50 % Kraków PLN 7 850 000 Soundproofing noise Świetochłowice PLN systematically Reduction of noise sources 850 000 Królewska PLN 204 000

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Investment Investment time Investment cost Effects/production capacity Installation of a new strip cooling line in – PLN 1 million Quality of sewage Świętochłowice Dąbrowa Górnicza PLN 2 A sewage treatment plant 2011 million Quality of sewage Kraków PLN 40 million Source: Report AMP, 2010: 18–29.

Environmental protection is a strategic goal of the company ArcelorMittal Poland provided for in the Integrated Management System Policy compliant with ISO 14001:2004. The Environmental Manage- ment System according to standard ISO 14001:2004 is integrated with Quality Management System (ISO 9001:2008) and Safety and Health Management System (PN-N 18001:2004). ArcelorMittal Poland promotes its activities by 3xS which stand for Safe, Sustainable, Steel and 4xC which are Cash, Customer, Cost, Communication. The basic areas of strategic competitive advantage of the enterprise are taking care of the customer, the environment and work safety. Apart from the investments concerning the expansion of the real estates, the companies completed also some organisational and management innovations. An important aspect of changes was also the introduction of the ideas of Kaizen philosophy, allowing for constant improvement of the functioning in an enterprise. People managed by clear criteria, treated justly and respectably, who perceive similarly relations between organisation and surrounding, certainly will make effort to repay with the same. Employee’s honesty towards employer, loyalty towards coworkers, legibility and maximum objectivity in evaluating employee, in the process of bonificating him/her, also punishing if needed, are the leading attributes of ethical organisation. Via taking social responsibility challenges company improves its standards of behaviour towards stakeholders (employees, contactors, and customers), same time avoiding costs of ‘bad partnership’. These changes influence shaping the organisational culture of the company based on trust, responsibility and clearness for all interested parties (Wziątek-Staśko, 2011: 73). The good way to create such culture is diversity management- the highest human resources development level. It is a task which requires special competences and deep analysis to notice, understand and apply solutions that seriously tackle employee diversity in an organisation. It will be harmful and not beneficial to an organisation if the process lacks necessary professional approach (Wziątek-Staśko, 2012: 149). The health and safety management system is crucial in the management of a steelworks plant after repair restructuring process. It affects both economic (work efficiency growth) and social factors (employees satisfaction). A safe workplace (with a low accident rate) contributes to profit growth and competitiveness of a company. An important objective of health and safety management is to minimize the number of accidents and prevent them by identifying and eliminating the most dangerous spots on the site. The reduction of the accident rate in ArcelorMittal Poland is to be accomplished through the following actions: a comprehensive involvement of workers, worker observation and reporting workers’ behaviour, collection of data on health and safety at work and their use in the removal of barriers and threats, implementation of health and safety procedures and system, regular audits, implementation of annual action plans for the improvement of safety in individual production plants. Together with the health and safety strategy in the plants there are not only annual working conditions improvement plans but also programmes to raise workers’ awareness. As health and safety are also a marketing tool for the company the following slogan has been adopted: We build a safe organization. We are not as strong as our products and therefore health and safety issues are our priority. Journey to zero accidents in work Gajdzik, Borowik, 2008: 66–70). In 2003 there were 184 accidents in four steelworks plants of the company. In 2005 there were 99 accidents. In 2006 there were 119 accidents and in 2007 there were 74 accidents, now only 18 accidents (Fig. 1).

79 Bożena Gajdzik SUSTAINABLE STEELWORKS IN POLISH MARKET

Figure 1. Work accidents in ArcelorMittal Poland in 2003-2011 (accidents with a break) Source: Report safety and Health AMP, 2003–2011.

Other example tasks implemented by the enterprises within development restructuring were: diversification of products (going beyond the previous range of business activity of the enterprise), expansion of production assortment (new products with higher added value), technological innovations which help reach the world class standards of production (World Class Manufacturing), implementation of new work organisation methods and management techniques, entering the new sales markets, extended marketing activities based on the knowledge of the brand, combining the capital groups (takeovers, mergers), vertical and horizontal consolidations. Efficient development restructuring allows the enterprises to compete on the world markets and to increase their market value. In conclusion, development restructuring process in steelworks plants is characterised by high competence level (strategic areas are quality, environment and work safety), development of human resources (reduction of employment and raising the qualifications of the employees), creation of innovative solutions in the field of production and specialised services, openness to the relationships with the surrounding, and what is crucial, accumulation of knowledge in the area of management and organisation.

3. Features of sustainable steelworks

Sustainable development is conditioned by the ability of the enterprise to manage in the dynamic surrounding. Models of sustainable development which are based on exposing only the financial ecological investments quickly grow old and make way for models in which the non-financial aspects are exposed together with ecological-economical calculation as integrated measuring instrument of economic, ecological and social efficiency (Nowak, 2002: 50). Modern concept of sustainable development of steelworks is based on initiation of tasks which limit the negative effects of business activities towards the environment and society; it means also being a responsible enterprise towards various groups of stakeholders (workers, customers, counterparties). Sustainable development requires the completion of many aims. These are: economic aims connected with business activity, ecological aims in the form of limiting the negative influence of the business on the natural environment, social aims based on co-operation of business with social life and the aims connected with work safety and protection of health of the employees. Modern steelworks have learned the “good job” by investing in people, the environment and social relationships. Steelworks are aware of the fact that they are a part of complex surrounding and that they do not exist and function alone in this complex surrounding (Gajdzik, 2008: 109–119).

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On the basis of the sustainable development concept, new paradigms of business activities of enterprises appear, particularly the new modern mega-paradigm which is sustainability (…) as a determinant of moder- nity in functioning of the enterprises and their vitality (life energy). Sustainability is “the ability of the enterprise to learn continuously, to adapt and develop, to revitalise and reconstruct and the ability for re-orientation in order to keep the long-lasting and distinguished position on the market by offering the superior value to the purchaser today and in the future, by organic changeability which constitutes the business models and results from creating new possibilities and aims and meeting their demands by balancing the interests of various groups” (Grudzewski and others, 2010: 26). Sustainability must be based on the openness to of the enterprise to changes. The concept of sustainability, when efficiently applied in the enterprise, provides the “successful existence” in the new reality (Grudzewski and others, 2010: 29). The main ideas of sustainability are all the “re” concepts: restructuring, re-vitalising, re-organisation, reconstruction, and reorientation) which are integral part of the changes of the enterprises in dynamic surrounding. There is conformity of aims between sustainability and restructuring. In both of them the enterprise strives at reviving the business and achieving the possibility to continue business activity. In our deliberation so far, restructuring was divided into repair restructuring and development restructuring. In context of sustainability, repair restructuring is the basis for development restructuring the result of which is sustainable business. If an enterprise is characterised by sustainability then it may be called a sustainable enterprise and its business activities may be called sustainable business (Grudzewski, 2010: 29). Taking into account the range of tasks undertaken by the enterprise, in order to reach sustainability, there are three levels of the maturity of the enterprise: 1. Low maturity level is when in business practice there are not enough proofs of ecological effects of business activity of the enterprise, investments are completed in a limited range and many planned investments remain investments only on paper. 2. Medium maturity level is a situation when the effects of completed ecological investments are visible, additionally the enterprise starts to improve the chosen areas of business activity, the company is customer-oriented but the reference of aims to the needs of other groups of stakeholders is small. 3. High maturity level occurs when the improvement tasks are applied in all areas of functioning in the enterprise, there are innovative activities, the enterprise invests a lot in process, product and technological innovations and the aims of the enterprise are oriented on all groups of stakeholders.

On the third (highest) level of sustainability development, the enterprise created a new value which is called sustainable value (Grudzewski and others, 2010: 157), and which is the result of the completion of the whole set of integrated aims. Sustainable value of the enterprise is the result of a synergy of activities connected with raising the level of many of its attributes. Those attributes may concern the assets of the enterprise (purchase and installation of new tangible assets, new or modernised technologies, purchase of patents and licenses), their financial situation (profit of the enterprise, increase of dividend for shareholders), added value (difference between the value of the manufactured goods and the costs of their manufacturing), the image of the brand (tradition of the brand on the market, the popularity of the brand among customers), relationship of the enterprise with stakeholders (network connections, loyalty programs for customers, activities of the company for the sake of the local communities, for example by volunteer activities of the employees) and other activities which work for the sake of the company – goodwill (Kamela-Sowińska, 1996: 32; Michalski, 2001: 26). As it is underlined by A. Rappaport (1999: 11) the main sources of value creation in the enterprise are innovations, they are the core, and in case of sustainable value these are ecological innovations which aim at reducing the negative influence of the business on the natural environment. On the basis of such assumption a new concept of “valuable innovations” or “innovations of value” appeared (Kim, Mauborgne, 2004: 172–180), which are such innovations which bring effects for the environment. For the companies to be able to start creating innovations of value, they need to have such resources first which are the sources for value generation. Therefore, the enterprise must conduct or must have conducted the restructuring process. The consequence of sustainable development of the enterprise is the growth of importance of connecting

81 Bożena Gajdzik SUSTAINABLE STEELWORKS IN POLISH MARKET various categories of enterprise value assessment. The measurable aspect of an efficient company is reaching own economical goals as well as maintaining the beneficial relationship with the surrounding. Generally speaking, a sustainable company is one characterised by the following qualities: yy has fixed sustainable strategy of development, which is implemented in a consistent way; yy integrates its business aims with other aims, the completion of which is a chance to exist in dynamic surrounding; yy is an innovative company in terms of technology, production, organisation and management; yy is an intelligent company – puts emphasis on development of intellectual capital, manages the knowledge, has specified tasks on all levels of organisation; yy treats its manufacturing potential as fluent and open, backs up new ideas which are often initiated by employees of the lowest rank in the organisation; yy creates new value which requires continuous changes in operational systems and strategies of acting – transfer of technologies, purchase of patents, licenses, development of B+R section, development of knowledge of employees; yy is effective learning oriented, that is learning connected with searching, application and spreading the knowledge in order to achieve the status of sustainable enterprise.

Conclusions

The changes in metallurgical sector observed recently allow for a statement that steelworks in Poland are sustainable. Ecological investments and improvement of various areas of functioning will make the completion of the sustainable development model possible. New enterprises are going to be created, the so- called sustainable ones, in which besides the hard factors (manufacturing technology) the competences of employees and pro-social and pro-ecological play an important role. In the end, it is worth to mention the assumptions of sustainability of metallurgical enterprise Arcelor Mittal Poland, which was treated as case study for this publication: Our obligation towards the world around us goes beyond the results of the company; it comprises the people in who we invest, the communities we support and the world in which we function. It is a long-term concept which is the basic element of our business philosophy (ArcelorMittal, “Polska Stal”, nr 31/2007). General conclusion which can be drawn on the basis of observation of changes occurring in metallurgical sector is the following: thanks to restructuring the steelworks prepared themselves for sustainability, modernisation of manufacturing processes took place together with increase of efficiency, increase of work safety and increase of product quality. Changes implemented in the steelworks may be considered key changes for sustainable development because only innovative enterprises can build up new sustainable value in the concept of which both the needs of internal business and the needs and expectations of customers and other groups of stakeholders are equally important.

References

Bowman, E. H., Singh, H. (1993). Corporate Restructuring. Reconfiguring the Firm. Strategic Management Journal, Vol. 14, Special Issue, p. 6. Chandler, A. D. (1962). Strategy and structure. MIT Press, Cambridge, p. 14–16. Durlik, I. (1998). Restrukturyzacja procesów gospodarczych. Reengineering. Teoria i praktyka. Warszawa: Placet. Gajdzik, B. (2011). Competitiveness of metallurgical enterprises after restructuring in domestic steel industry. Hutnik- Wiadomości Hutnicze, Vol. 78, No. 11, p. 945–952. Gajdzik, B. (2008). Kodeks nowych wartości w przedsiębiorstwach produkcyjnych. In: M. Duczmal, T. Pokusa (eds.). Ekonomiczno-społeczne problemy współczesnego zarządzania i komunikacji. Seria: Monografie i Opracowania, Opole: Wyższa Szkoła Zarządzania i Administracji, s. 109–119. Gajdzik, B. (2012). A metallurgical plant after restructuring. Dynamics of changes in domestic metallurgical sector in 1992–2010. Gliwice: Politechnika Śląska.

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Gajdzik, B., Borowik, S. (2008). The safety and hygiene of work in the steel company. Hutnik –Wiadomości Hutnicze, Vol. 75, No. 2, s. 66–70. Grudzewski, W. M., Hejduk, I. K., Sankowska, A., Wańtuchowicz, M. (2010). Sustainability w biznesie. Warszawa: Poltext, s. 26. Hurry, Z. D. (1993). Restructuring in the Global Economy. Strategic Management Journal, Vol. 93, No. 14, s. 16. Ingram, M. (2002). Cele i techniki restrukturyzacji przedsiębiorstw. Katowice: AE, s. 25. Kamela-Sowińska, A. (1996). Wartość firmy. Warszawa: PWE, s. 32. Kim, W. C., Mauborgne, R. (2004). Value innovation, Harvard Business Review, Vol. 82, No. 7/8, s. 172–180. Malara, Z. (2001). Restrukturyzacja organizacyjna przedsiębiorstwa. Wrocław: Politechnika Wrocławska. Manganelli, R. L., Klein, M. M. (1998). Reengineering. PWE, Warszawa, p. 21–26. Michalski, M. (2001). Zarządzanie przez wartość. Warszawa: WIG-Press. Nalepka, A. (2006). Restrukturyzacja przedsiębiorstwa. Zarys problematyki. In: M. Rochoń (ed.). Efektywność restrukturyzacji finansowej przedsiębiorstw. Szczecin: Wydawnictwo Walkowska. Nowak, Z. (2001). Zarządzanie środowiskiem, part 2. Gliwice: Wydawnictwo Politechniki Śląskiej. Piontek, B. (2002). Rozwój zrównoważony i trwały w miernikach oraz w systemach sprawozdawczości. Bytom: Wyższa Szkoła Ekonomii i Administracji. Porada-Rochoń, M. (2009). Restrukturyzacja przedsiębiorstw w procesie adaptacji do współczesnego otoczenia. Pers- pektywa międzynarodowa. Warszawa: Difin. Rappaport, A. (1999). Wartość dla akcjonariuszy. Warszawa: WIG-Press, s. 11. Raport AMP. (2010). Social responsibility. Dąbrowa Górnicza: AMP, p. 18–19. Singh, H. (1993). Challenges in Researching Corporate Restructuring. Journal of Management Studies, No. 30, p. 148–150. Thierry, D. (1995). Restructurations et reconversions. Concepts et methods. Editions L’ Harmattan, p. 14. Wziątek-Staśko, A. (2011). Ethics in the HRM process as a way to the sustainable development of the organization. Journal of Management and Sustainable Development, Vol. 29, No. 2, p. 71–75. Wziątek-Staśko, A. (2012). Diversity Management – narzędzie skutecznego motywowania pracowników. DIFIN, Warszawa, p. 149.

PLIENO LIEJIMAS LENKIJOS RINKOJE DARNUMO ASPEKTU

Bożena Gajdzik Silezijos technologijos universitetas (Lenkija)

Santrauka

Šiame straipsnyje apibūdinama plieno liejimo rinkos situacija restruktūrizacijos procese, išanalizuoti ir pateikti pagrindiniai įmonės konkurencingumo elementai. Taip pat nagrinėjami organizaciniai pokyčiai plieno liejimo fabrikuose ir jų poveikis darniam vystymuisi. Straipsnyje nagrinėjamos dvi konkrečios plieno liejimo įmonių restruktūrizavimo rūšys: modifikavimas ir vystymas. PAGRINDINIAI ŽODŽIAI: darnus plieno liejimas, restruktūrizavimas, tobulinimas, darnumas.

JEL kodai: Q010, Q150

83 Ingrida Gečienė, Šarūnas Matulaitis LITHUANIAN DIASPORA ROLE IN SUSTAINABLE DEVELOPMENT OF COUNTRY

LITHUANIAN DIASPORA ROLE IN SUSTAINABLE DEVELOPMENT OF COUNTRY

Ingrida Gečienė1, Šarūnas Matulaitis2

Institute of Social Innovations (Lithuania)

Abstract The world wide experience of communication and cooperation of diasporas and origin countries shows various ways and forms how diasporas can contribute towards sustainable development of origin country. Lithuania also has relatively huge diaspora and faces increasing emigration every year. However, it still neglects the potential of it’s diaspora involvement in contributing to well-being of the country. In order to reveal the potential of Lithuanian diaspora the qualitative research was conducted. It used expert interview method with 12 leaders of foreign Lithuanian communities and organizations. The research revealed that Lithuanian diaspora is willing and could contribute significantly to the country’s sustainable development in various areas: scientific, business, cultural and social ones. In order to facilitate this cooperation, Lithuanian government should decrease barriers for cooperation and implement measures that would take into account the diversity of diaspora groups interests and possibilities, provide relevant information about means of engagement and support already existing and new diaspora networks and their initiatives. KEYWORDS: Lithuanian diaspora, international cooperation, sustainable development, regional development

JEL codes: Q010, Q560

Introduction

Lithuanian Strategy for Sustainable Development, that seeks to mobilize citizens for sustainable development in the main scientific, economic and social areas, is more focused on the country’s inner potential. Ho- wever, one can notice that within 20 years of independence, more than 0.5 million people have left Lithuania. According to some assessments, about one million persons of Lithuanian origin are currently living outside of Lithuania (Lithuanian Foreign communities), the Lithuanian diaspora has huge potential to contribute to the country’s sustainable development. Lithuanian diaspora in this article is defined as a foreign resident Lithuanian part of the nation, consisting of citizens of the Republic of Lithuania and Lithuanian descent, as well as non-Lithuanian descent, origi- nating themselves from Lithuania, and connecting themselves with Lithuania’s historical, cultural, social, economic and political ties. Usually, the notion of “diaspora” seems to better incorporate populations that are “settled” abroad, people who became citizens of their host country and second-born generations (Iones- cu, 2006). However nowadays, only a small part of people who emigrate to the foreign countries tend to cut all connections with home country. Therefore, a number of academic authors tend to use the notion of “transnational communities” instead of diaspora to emphasize the idea of movement and exchange between home and host countries, and to attract attention to the existence of informal networks. In this paper into term

1 Ingrida Genienė – Institute of Social Innovations, Vilnius University, Faculty of Communication and Lithuanian social research center. Scientific interest: sociology. E-mail: [email protected] Tel.: +370 686 216 41. 2 Šarūnas Matulaitis – Institute of Social Innovations. Scientific interest: sociology. E-mail: [email protected] Tel.: +3706 740 520 2.

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“diaspora” authors incorporate the shifting networks of diaspora members who form or take part in various host and origin country communities and networks abroad. Most countries, what suffer from extensive emigration, usually emphasize the losses for the country: decreasing work power, brain drain, decreasing tax collection, aging society, etc. Nevertheless, some authors reveal positive consequences: origin countries can gain by easing unemployment as well as banking the remittances, investments and knowledge transfers of engaged emigrants (Gamlen, 2006). Besides, contribution to home country’s development is possible not only through financial investment, trade, etc. but also through non-financial means (technical and business skills, know-how, useful connections, etc.). This article aims to reveal the Lithuanian diaspora potential of contributing to the well-being of the country. To this aim, the article discusses the benefits of cooperation with the diaspora in the context of promoting sustainable development, presents the forms of diaspora assistance to the country and uses the 2012 research results to present the Lithuanian diaspora potential to contribute to the well-being of the country (A/N – the study was commisioned by LR Prime Minister’s Office for the European Social Fund funded project for Lithuania’s EU Affairs of the system efficiency). This article is based on the latest scientific studies (Johnson and Sedaca, 2004; Kuznecov, 2006; Ionesku, 2006; Gamlen, 2006, 2009, 2011 and other) that analyze the cooperation forms and areas were diaspora could contribute to the sustainable development of the country. These perceptions are further carried out by Lithuanian diaspora possibilities to contribute to the well-being of the state research that reveals potential means of Lithuanian diaspora involvement in the country’s sustainable development. The study used expert interviews with heads of Lithuanian communities abroad, representatives of diaspora organizations, and returned active members of the diaspora.

1. Means of diaspora contribution to the countries of origin

The global economy and increasing emigration helps to create favorable conditions for the formation of diasporas. The struggle for talent and the brain, as the main factors of advanced and developing society gua- rantors, is going through the various emigration and immigration, education and business and other policies, creating favorable conditions for the development of diasporas (Kuznecov, 2006: 3). Following Gamlen, this article approaches “diaspora” as “an umbrella term for the many extraterritorial groups that, through processes of interacting with their origin state, are in various stages of formation” (Gamlen, 2009: 4). This approach emphasizes that diasporas are not homogenous entities and include: yy temporary or transnational migrants who spread their time between their sending state and elsewhere and fall more or less arbitrarily into one or other policy category of the origin state; yy longer-term but still first-generation emigrants settled in another country; yy descendants of emigrants who – in certain places at certain times – identify as diasporic or even as members of a fully fledged diaspora “community”.

Diaspora individuals and diaspora-organized entities are extremely varied. According to Ionescu, decision makers willing to collaborate with diaspora in home and host countries “are faced with a multitude of interlocutors who often represent diverse interests”. For home country policies engaging diasporas for development to be realistic and effective, the home country’s development strategy and the particular choice of diaspora members willing to engage themselves either for motives of philanthropy or profit, in particular development activities in their home countries, has to be compatible and mutually supportive (Ionescu, 2006: 27). These different forms of cooperation and communication can become quite a substantial factor in order to reinforce sustainable development strategies for engaging the diaspora in the economic, scientific, and other fields in different world regions and individual countries. However, this potential is often overlooked in countries of origin and therefore it is not included in domestic policy plans. Foreign good experience in promoting cooperation with diaspora nearly has not been studied in Lithu- ania so far. The only survey conducted by the Institute of Social Innovations under the project of Lithuanian

85 Ingrida Gečienė, Šarūnas Matulaitis LITHUANIAN DIASPORA ROLE IN SUSTAINABLE DEVELOPMENT OF COUNTRY

Foreign Support Center “Brain Drain program design and implementation” in this field analyzes scientists and researchers experience attraction strategies in foreign countries. This study analyzes the experience of 11 countries in collaboration with scientists from the diasporas. Study revealed that the foreign countries, especially smaller ones (such as Finland, Switzerland), focused on brain exchange and cooperation with scientists however, bigger ones are more concentrated to brain attraction. As it was noticed the members of diaspora are often involved in development of their country through research collaboration and through investment (The task for Lithuania – from brain drain to brain attraction, 2008). Investing in your origin country is one of the main support forms for the country’s development from diaspora: diasporas in China, India and Israel played an important role in attracting foreign direct investment then the investments in these countries were considered too risky (Kuznecov et al., 2003). However, as Gam- len emphasize, the biggest economic impact of diasporas for origin countries are made by remittances. The significance of remittances has become a cornerstone of migration and development studies: “To repeat one of the best known development mantras, in 2006 the total value of global remittances flows to developing countries topped US$220 billion (having almost doubled in the previous four years), and only foreign direct investment flows supply poorer countries with more stable currency than remittances” (Gamlen, 2008: 6). As Goldin and Reinert (2006: 176) note, developing countries governments usually welcome remittances as contributions to national development because they reduce poverty and boost living standards among recipients, and can have a stabilizing effect during periods of upheaval. Johnson and Sedaca (2004) presents five ways in which diasporas could participate in countries of origin economy: individual financial remittances, collective financial remittances (social, infrastructure and business projects), diasporas business networks, diasporas investment instruments (diasporas, investment funds, development banks, diasporas bonds) and knowledge transfer mechanisms (professional knowledge networks, virtual knowledge and technology transfer, short-term voluntary counseling). Koznecov also states, that emigrated citizens do not have to be investors, or contribute financially in order to have a positive impact on a national or regional development. To national or regional sustainable development members of the diaspora can contribute by being a “bridges” to a new markets, new sources of investment, new competencies, experience and other. According to Kuznetsov, influential members of diasporas can also successfully raise public debate on the new country’s sustainable development projects, on possible reform plans or support their implementation (Kuznecov, 2006: 3). Similarly, “the mobilization of knowledge and skills of these expatriate professionals can play an even more effective role [in] facilitating economic development in their countries of origin [than individual or collective remittances]” (Johnson and Sedaca, 2004: 73). Gamlen reveals that in context of ‘New Growth’ economic theories, which conceive of knowledge as the engine of growth, knowledge transfer became even more of interest in mitigating brain drain and promoting brain circulation: it has stimulated interest in promoting transfers of knowledge and technologies from abroad in order to promote economic growth at home (Gamlen, 2010: 7). The other type of knowledge transfer policy is based around cultivating what are sometimes called ‘diaspora knowledge networks’ – dispersed networks of researchers from the home country that collaborate on scientific projects in the hope of benefit- ing for their home country (Kuznetsov, 2006). However, not only academic networks can contribute towards origin country development, but also business and professional networks. One example of this, provided by Ancien and others, would be the Asia- Pacific Business Forum, which brings together 11 Irish Business Groups. This Forum provides opportunities to share ideas, resources and reputation. Another organization, the Irish Chamber of Commerce is a transnational economic network, which has 13 chapters in the United States. Among other networks that can also be mentioned are the Irish Technology Leadership Group in Silicon Valley (Irish elite corporation network managers who support the Irish ICT sector dissemination of Irish business ideas), BioLink (biotechnology network of professionals in the United States), Techlink UK (Irish scientists network working in London and seeking to commercialize their laboratory inventions). And more examples – Irish network in New York and San Francisco, network of Irish professionals in London (Ancien, Boyle, Kitchin, 2009: 25). Ionescu

86 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) provide other examples of diaspora networks: the Lebanese and the Armenian diaspora, which helps con- nect the diaspora’s and the country’s of origin potential and business initiatives, or network of The Indus Entrepreneur – one of the largest networks in the Indian diaspora, which has helped India to gain trust by such investors as Helwett Packard (Ionescu, 2006: 27). These examples show how diaspora’s knowledge and contacts are used in their home country’s economic development. A newly formed trend in cooperation with diasporas is development of a global networks connecting the country of origin with its diaspora. An example of this might be an international network of GlobalScot founded in 2001. This network connects more than 800 influential, valuable experience and contacts with the Scots or people with Scottish roots, who voluntarily devote their time and experience to serve the economic growth in Scotland. Learning from GlobalScot experience the similar networks were created in Chile and South Africa (Chile Global and Global South Africa) (Ancien, Boyle, Kitchin, 2009: 25). Other examples: in 2010 the Global Irish Network, which currently includes more than 300 influential Irish and Irish-related foreign persons, was created. Network members represent a wide range of business and professional fields in 40 countries. They are the source of Ireland’s international experience in order to revive the economy. Network members show strong links with Ireland and have high achievements in international business relations, or the promotion of Ireland. The network is also the country’s international reputation-building partner. Ionescu gives an example of Korea global network model which aims to encourage a formation of decentralized cultural, social and economic networks between Korea and the foreign communities (Ionescu, 2006: 27). Community-based initiatives are another forms in which diaspora can contribute and support the development of their country. For example, Ionescu mentions Mexico’s initiative “Programa de Iniciativas Ciudadano 3 x 1 in Mexico” which connects the diaspora funds with federal, state and municipal budgets. Another example is the Catalan Development Cooperation Fund (FCCD), which is a non-profit organization that operates mainly in Latin America and encourages diaspora willing to engage in development projects in their home country. The aforementioned examples really does not cover all the possible ways of cooperation, however, it reveals a wide range of opportunities for the diaspora to contribute to the sustainable development of their countries of origin. In order to analyze the ways in which Lithuanian diaspora could contribute to its country’s sustainable development in the next chapter the results of the research are discussed.

2. Benefits of cooperation with the Lithuanian diaspora in the context of promoting sustainable development

In 2009, the Government of Lithuania approved the new National Sustainable Development Strategy. A new strategy for sustainable development in Lithuania sets the priorities that include: mitigation of climate change and clean energy production, sustainable transport, sustainable consumption and production, natural resource protection and management, public health, education and the role of education, the preservation of Lithuanian cultural identity, social inclusion (poverty and social exclusion), demographic and migration processes management, global poverty and sustainable development challenges, as well as sustainable consumption and development cooperation. In implementing this strategy, the main governmental aims are to coordinate and harmonize the basic components of sustainable development (environmental, economic and social) and the development of industries, to enable all sectors of society to participate actively in sustainable development and to jointly progress the results to the international, regional, local long-term and fundamental interests of the compa- tibility of the implementation of sustainable development in all spheres of life-time (National Sustainable Development Strategy, 2009: 32). However, it is important to note that the latter document is more oriented to the inner potential of the country’s sustainable development goals. Meanwhile, the Lithuanian diaspora role in contributing to national well-being creation remains unnoticed. Ethnic Minorities and Emigration Department in 2006 conducted

87 Ingrida Gečienė, Šarūnas Matulaitis LITHUANIAN DIASPORA ROLE IN SUSTAINABLE DEVELOPMENT OF COUNTRY the study “Lithuanian long-term strategy in respect of immigration and emigration” which highlights that in an aging society with ever increasing emigration it is particularly important to change attitudes towards Lithuanians living abroad to maximize their involvement in the life of Lithuania (Motieka, Adomėnas, Dani- liauskas, 2006: 127). Thus, the priorities should shift to include the diaspora to contribute to the sustainable development of their country or region. It should be noted that recently steps were being taken to strengthen Lithuania’s relations with the diaspora when it was understood that diaspora’s experience can be used for the development of the Lithuanian state welfare. The Government of Lithuania in 2011 approved the resolution “Global Lithuania” – in order to create program (for year 2011–2019) of foreign citizens’ involvement in public life of Lithuania (“Global Lithuania – Lithuanian foreign involvement in public life”, 2011). This program aims to “provide mechanisms to encourage the Lithuanians abroad to promote the Lithuanian language, Lithuanian national identity, to strengthen the Lithuanian diaspora relations with Lithuania, and engaging in various areas of public life and contribute to well-being creation in Lithuania” (“Global Lithuania – Lithuanian foreign involvement in public life”, 2011). Though the program involves the aim to strengthen the relations with the diaspora, so far these aims are directed mainly for the fostering of national identity among Lithuanian diaspora. So the demand for search of effective cooperation with the diaspora is still very important.

3. Lithuanian diaspora priorities and ways to contribute to the country’s sustainable development

In 2012 Mykolas Riomeris university gathered researchers that conducted a qualitative research „Possi- bilities to use Lithuanian diaspora potential to the country’s development“ that analyze Lithuanian diaspora priorities and ways to contribute to the sustainable development of their country. The aim of the research was to clarify the foreign Lithuanians opinion on the most promising means of cooperation with diasporas in European countries and their application possibilities for the case of Lithuania (Gudelis, Gečienė, Jakule- vičienė, 2012). This research covers these objectives: yy To identify the factors hindering the Lithuanian diaspora to engage in the life of Lithuania. yy Discuss what are the possibilities of different Lithuanian diaspora groups to participate in the life of Lithuania and create its well-being. yy Provide guidance on the use of the diaspora potential priority areas to generate well-being of the country.

In order to discuss the aims and objectives of the research, 12 interviews with experts were conducted on January 16–22, 2012. Interview experts were selected by these criteria: yy Membership and active participation (current and former) in activities of Lithuanian communities abroad: the World Lithuanian Community, United States of America (hereinafter – the U.S.), Belgian, Spanish, Dutch and Lithuanian community in Ireland (A/N – by the place of residence the survey experts distributed as follows: 1 from Ireland, 1 from Belgium, 2 from the United States, 1 from the UK, 1 from Spain, 1 from Canada, 4 from Lithuania, 1 from the Netherlands); yy Membership and / or participation in the Lithuanian foreign organizations: the World Lithuanian Youth Union, the United Kingdom (hereinafter – UK) Lithuanian Youth Union, Lithuanian Global Leaders, Santara-Šviesa; yy Return to Lithuania after a long time spent abroad and / or membership in returned to Lithuania organizations: “Sugrįžus”, Futura Scientia.

It was also intended to examine the different diaspora groups representatives (education, business and culture). The research revealed that different host countries have very different diaspora groups by social characteristics and the number of members in the diaspora. Moreover, diaspora groups and their interests

88 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) differ in terms of emigration wave, generation and diaspora members citizenship. Therefore the interests and possibilities of Lithuanian diaspora are various in engaging to origin country’s development. Accordingly, the specific types of policy intervention are needed for different diaspora groups. In general, the research results showed that the Lithuanian diaspora is willing to cooperate and contribute significantly to the country’s sustainable development in various areas. However, it is important to emphasize that despite the relatively large diaspora’s scientific, cultural and business potential, there is some cooperation barriers that slows the possibilities to use these benefits enough: yy the lack of initiative in foreign Lithuanian communities; yy the lack of attention to Lithuanian communities from Lithuania. This is associated with issue of citizenship, weak efforts of the Lithuanian authorities to liaise with foreign Lithuanians, and the lack of funding; yy the lack of information how diaspora can contribute to well-being of Lithuania; yy negative attitudes towards emigrants in Lithuanian society.

The research also revealed key fields and ways in which members of the diaspora can contribute to the country’s well-being: yy science and education (exchange of knowledge, students practice, Lithuanian schools, joint projects, expert service and advice); yy business (mentoring and financial support to projects and investments in Lithuania, students practice in business enterprises in Lithuania and presentations for business opportunities in Lithuania); yy culture (works presentation of Lithuanian artists, their financing, organization of art festivals); yy social exclusion (support for Lithuania’s social projects and institutions (such as children’s homes), “invite friends to Lithuania” program, student meetings, conferences, debates, etc.).

According to the research participants expressed views, the main directions of diaspora potential use were set: to provide needed for cooperation information, to reduce the contraposition of the Lithuanian people and the diaspora, to focus on the youth involvement in development of origin country, to note and support already existing private and non-governmental initiatives, to use diaspora’ knowledge and experience in all fields – science, business, culture, etc. By providing guidance on the use of knowledge and experience of diaspora, experts stressed the importance of all scientific and business, cultural and social issues in order to create well-being in Lithuania. In the science field diaspora’s potential could be useful by: representing Lithuania education abroad, improving education institutions and their activities in Lithuania, creating foreign scientists working in Lithuanian data base and attracting large investments, promoting foreign workers to include teachers and students to the Lithuanian business development, providing them with practical tasks in the internship in Lithuanian companies, and supporting initiatives aimed at attracting more researchers to Lithuania. In business and economic field cooperation with the diaspora can help: to inform foreign business world of Lithuanian business and products, to inform about business and job opportunities in Lithuania, to organize business missions or “job fairs” where businessmen from Lithuania could present job opportunities in their companies, attract investment in Lithuania, and to raise funds in Lithuania. In cultural and social field cooperation with the diaspora can help: to represent Lithuanian culture abroad, to organize the exchange of innovative projects promoting creativity, to utilize diaspora knowledge and experiences (called know-how) to promote cultural tourism in Lithuania, and to attract support for the social needs of Lithuania. Experts, interviewed during the research, also proposed some forms of cooperation between diaspora and Lithuanian society: first, to support Global network of Lithuania and professional network development. It is recommended to take greater account of existing initiatives and networks under development in different areas, based on the most Lithuanian foreign ideas and the best ways to use their voluntary work in the

89 Ingrida Gečienė, Šarūnas Matulaitis LITHUANIAN DIASPORA ROLE IN SUSTAINABLE DEVELOPMENT OF COUNTRY creation of welfare in Lithuania. The idea is not to create a professional network “artificially”, but rather to maintain and promote already developed or emerging networks. Second, the cooperation in the field of information: detailed and relevant information to the Lithuanians abroad, and effective communication capabilities between diaspora and Lithuanian authorities. The need for information covers the following areas: information about Lithuania’s initiatives, strategies, programs, about the activities in politics and government, the Government’s objectives, changes in the economy, the social services and security, employment and training opportunities for non-governmental organizations and initiatives and the like. Dissemi- nation of information to be carried out through various networks and web sites, for example, via Global Lithuanian website, with links to other networks is possible without intention to centralize all information. Third, the database development initiative is supported by most experts as an instrument for facilitating cooperation and contact search capabilities. However, the data collection and update capabilities and data security in cyberspace is questioned. According to some experts, in order to create database efficiency and its relevance to consumers, there should be a steady database management and data processing that could be achieved by assigning responsible persons.

Conclusions

Wide Lithuanian diaspora abroad has a huge potential for contributing to the country’s sustainable development. As emigration is increasing, this potential rises every year. However, the Lithuanian state’s sustainable development policies are mainly focused on the country’s internal capacity. Meanwhile, the Lithuanian diaspora role in contributing to national well-being creation remains unnoticed. Recently some actions were done, in order to strengthen Lithuania’s relations with the diaspora so that Lithuanian diaspora experience could be used for the development of Lithuanian national prosperity, but so far these measures are relatively limited and focused mainly for ethnic purposes for Lithuanian communities abroad. So the broader means of cooperation with the diaspora are still to be found. Knowing the other countries good practice it can be said that Lithuanian diaspora transnational relations, networks and forms of cooperation can be quite a substantial factor in order to reinforce sustainable development strategies for engaging diasporas in the economic, scientific, and other fields. The study showed that, despite some obstacles for Lithuanian diaspora to cooperate with origin country, Li- thuanian diaspora is willing and could contribute significantly to the country’s sustainable development in various areas: scientific, business, cultural and social. Therefore, the task of Lithuanian government is to decrease these barriers – lack of information how to contribute to the well-being of Lithuania and lack of attention of Lithuanian government towards diaspora potential – by implementing diaspora engagement oriented measures. These measures should take into account the existing diversity of Lithuanian diaspora groups, to be oriented towards providing relevant and accessible information, as well as inspiring and supporting already existing and new diaspora networks and their initiatives.

References

Ancien, D., Boyle, M., Kitchin, R. (2009). Exploring Diaspora Strategies: An International Comparison. Ireland: NUIM, p. 1–39. Gamlen, A. (2006). Diaspora Engagement Policies: What are they, and what kinds of states use them? UK: University of Oxford. Working Paper, No. 32, p. 1–31. Gamlen, A. (2008). Why Engage Diasporas? ESRC Centre on Migration, Policy and Society. UK: University of Ox- ford. Working Paper, No. 63, p. 1–17. Gamlen, A. (2010). People on the Move: Managing Migration in Today’s Commonwealth (The First Report of the Ramphal Commission on Migration and Development in the Commonwealth). London: The Ramphal Centre. Gamlen, A. (2011). Engaging Asia: The Role of the Diaspora. Outlook Report 15. Wellington: Asia New Zeland Foundation. Global Lithuania – Lithuanian foreign involvement in public life – program of the year 2011–2019. Government Order, No. 389 of the 2011 March 30.

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Gudelis, D., Gečienė, I., Jakulevičienė, L. (2012). Lietuvos diasporos potencialo panaudojimas valstybės gerovei kurti: Europos Sąjungos šalių narių geroji praktika [The use of Lithuanian diaspora potential for well – being of state]. Vilnius: MRU. Ionesku, D. (2006). Engaging Diasporas as Development Partners for Home and Destination Countries: Challenges for Policymakers. Geneva: IOM, No. 26, p. 1–89. Johnson, B., Sedaca, S. (2004). Diasporas, Émigrés and Development: Economic Linkages and Programmatic Re- sponses. A Special Study of the U.S. Agency for International Development (USAID). Trade Enhancement for the Services Sector (TESS) Project. Lithuanian Foreign communities. Access via the Internet: http://www.urm.lt/index.php?-1923348399 LR Vyriausybės nutarimas Nr. 389 dėl „Globalios Lietuvos“ – užsienio lietuvių įsitraukimo į valstybės gyvenimą – kūrimo 2011–2019 metų programos patvirtinimo 2011 m. kovo 30 d. [Lithuanian Government Order No. 389 of the “Global Lithu- ania” – Lithuanians abroad involvement in public life – creation for 2011–2019 program confirmation. March 30, 2011]. Nacionalinė darnaus vystymosi strategija. (2009). Rugsėjo 16 d., Nr. 1247 [The National Strategy for Sustainable De- velopment. September 16, 2009, No. 1247]. Kathleen, N., Erin, P. (2004). Beyond Remittances: The Role of Diaspora in Poverty Reduction in their Countries of Origin. Washington, D.C.: MPI, p. 1–51. Kuznetsov, Y. (ed.) (2006). Diaspora Networks and the International Migration of Skills: How Countries Can Draw on Their Talent Abroad. WBI Development Studies. Washington, D.C.: World Bank, p. 1–12. Lindsay, B. (2004). Diaporas and Economic Development: State of Knowledge. Washinton, D.C.: Georgetown University. Motieka, E., Adomėnas, M., Daniliauskas, J. (2006). Lietuvos valstybės ilgalaikė strategija lietuvių emigracijos ir išeivijos atžvilgiu. Vilnius: Strateginių studijų centras. “The task for Lithuania – from brain drain to brain attraction”. The project “Brain Drain Program Development and Implementation” final edition. (2008). Vertovec, S. (2005). The Political Importance of Diasporas, Centre on Migration, Policy and Society. UK: University of Oxford. Working Paper, No. 13, p. 1–13.

Lietuvių diasporų vaidmuo, siekiant darnaus šalies vystymo

Ingrida Gečienė, Šarūnas Matulaitis Socialinių inovacijų institutas (Lietuva)

Santrauka

Skirtingų pasaulio šalių ir jų diasporų bendravimo bei bendradarbiavimo patirtis rodo daug skirtingų būdų, kaip diasporos gali prisidėti prie tvaraus savo šalies vystymosi. Lietuva turi gana didelę diasporą, kuri galėtų nemažai prisidėti prie savo šalies vystymosi. Vis didėjantys emigracijos mastai nuolat didina lietuvių, gyvenančių užsienyje, skaičių, ypač pastaraisiais metais. Taigi lietuvių mokslinis, kultūrinis ir ekonominis potencialas už Lietuvos ribų nuolat auga. Deja, šie pokyčiai ir didelis diasporos potencialas vis dar yra men- kai suvokti ir panaudojami Lietuvoje. Siekiant išsiaiškinti diasporos potencialą, 2012 m. atliktas Lietuvių diasporos požiūrio ir galimybių prisi- dėti prie savo šalies vystymosi tyrimas: atlikta 12 interviu su užsienio lietuvių bendruomenių ir organizacijų vadovais. Tyrimo rezultatai atskleidė, kad lietuvių diasporos nariai nori ir turi galimybių reikšmingai prisi- dėti prie tvaraus šalies vystymosi įvairiose srityse: mokslo, verslo, kultūros ir socialinėje. Siekdama skatinti tokį bendradarbiavimą Lietuvos Vyriausybė turėtų padėti įveikti čia iškylančias kliūtis ir įgyvendinti priemo- nes, kad būtų atsižvelgiama į įvairių išeivių grupių interesus bei galimybes, teikti informaciją apie galimybes bendrauti ir bendradarbiauti, remti esamus ir naujus diasporos tinklus bei jų iniciatyvas. PAGRINDINIAI ŽODŽIAI: lietuvių diaspora, tarptautinis bendradarbiavimas, darnus vystymasis, re- gioninis vystymasis.

JEL klasifikacija: Q010, Q560.

91 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

Deimena Kiyak1, Tomas Reichenbachas2

Klaipėda University, Vilnius University (Lithuania)

Abstract Emphasizing sustainable economic development preconditions in Lithuania and in order to research the formation of regional policy, the article was made on Lithuania financial crisis impact on the economy, comparative study. It was found that in the literature lacks of general method to compare the different financial crises that have occurred in different regions, countries or at different intervals impact to economic indicators, so was created financial crisis impact on countries economy index, to compare this diferent impact. The study identified three financial crisis which negatively affected Lithuanian economy – “Lithunia banking crisis” (1995), “Rus- sian financial crisis” (1998) and “Global Financial Crisis” (2008). Based on this new index calculations, the financial crisis affect was compared and found that the greatest negative impact on the economy caused the Global financial crisis (2008). Examining the specifics of Lithuania’s economy noted that all of the financial crisis affected the gross domestic product growth, labor market and the country budget balance. Meanwhile, the impact on other macroeconomic indicators of the crisis depended on the crises specifics and was different. KEY WORDS: financial crisis, financial crisis index, the banking crisis, the Russian financial crisis, the global financial crisis.

JEL CODES: C180; G000; G010.

Introduction

The main problem in assessing the impact of financial crisis is the country’s lack of comparability of economic indicators. If the financial crisis spill two countries it is possible to determine which country the crisis was more harmful (gross domestic product (GDP) shrinks, rise in unemployment and so on.). However, if the financial crisis on the conflicting data, for example, sharply fell in a country’s GDP, but unemployment remained almost unchanged, while another country’s unemployment rates has risen sharply, but GDP was almost not reduced – there is a financial crisis impact comparability problems. This problem becomes even greater when considering the larger number of economic indicators. Other highlights a lack of comparability between the developing countries compared to economic indicators during the financial crisis in developed ones. For example, strong GDP growth in the economy can just slow its growth rate, while in another country (developed) GDP may decline; in this case, there is a problem of comparability GDP changes. Consequently, to compare financial crisis impact on economy needs to evaluation of all the negative effects of into a single whole. For this you need an index to show the extent of the negative impact on the country’s economy due to

1 Deimena Kiyak – Klaipėda University, Department of economics, social sciences, Assoc. Prof. Scientific interest: finance, accounting, pricing, financial and economic analysis. E-mail: [email protected] Tel.: +370 682 202 53. 2 Tomas Reichenbachas – Vilnius University, master’s degree student, social sciences, economy. Scientific interest: fnance, economy. E-mail: [email protected] Tel.: +370 620 514 03.

92 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) financial crisis. Such an index would help to compare different types of financial crises on individual regions of the country, the country or even different countries. The object of research: financial crisis impact on the country’s economic performance. The aim of research – to conduct a comparative study of the financial crisis impact on Lithuania‘s national economy. The research objectives: yy To create the index which allows to compare financial crisis negative impact on economy. yy Approve reliability of this index. yy Calculate and compare the effects of financial crises to the Lithuania‘s economy index for the banking crisis, the Russian financial crisis and the global financial crisis.

Research methods: systematic literature analysis; statistical indicators clustering, comparison and summary; economic indicators analysis and synthesis, the financial crisis index creation and counting.

1. Formation of financial crisis impact on the economy index

During the last few decades world increasingly faces with problems of instability in the financial system (banking bankruptcies, stock market downturns, currency crises, etc.). Part of the financial crisis are local (Mexican peso crisis, 1995; Argentine peso devaluation and insolvency, 2001), other part – regional (Sout- heast Asian financial crisis, 1997), and another financial crisis transcends national and continental boundaries and become global (subprime mortgage crisis, 2008). Global financial systems in the world are closely linked, so the financial sector problems in one country strongly affects other countries. However, local and regional, and global financial crisis impact on economies differences. While many authors produce many economic indicators to be affected by the financial crisis, but there is problem in assessing the impact of financial crises to the country economic problems, there is no single model of how to assess the financial crisis impact on the economy, and there is no methodology to compare this effects on the different countries. Klyvienė et al. (1998) just do a comparison of key macroeconomic indicators (inflation dynamics, GDP growth, unemployment, etc.), Račickas et al. (2010), Kuodis et al. (2009), Denskytė (2010) examines in detail one particular financial crisis dynamic. However, such a comparison is not always enough. Consequently, to compare financial crisis impact on economy needs to evaluation of all the negative effects of into a single whole. For this you need an index to show the extent of financial crisis negative impact on the economy. Such an index would help to compare different types of financial crises on the country or different countries. The scientific literature submitting, that financial crisis and economic downturn can last variety of time. The negative impact on GDP growth and other key indicators can last from several months to several decades. This depends on what type of financial crisis hit the country, how the country’s public respond, international financial and economic support to a country (such as IMF support), etc. However, the authors Cerda (2009), Wyplosz (1998), Sachs (1996) state that the financial crisis usually lasts for 1–3 years, and the vast majority of them last no more than 5 years.

Fro mating financial crisis impact on the economy index (XFKPE), it is assumed that the negative impact of the country last no longer than 5 years and evaluate changes in national economic indicators: gross domestic product growth dynamics, changes in the labor market (unemployment rate and the “net” wage change); changes in the dynamics of inflation, current account balance change, and the credit market changes (changes in interest rates and credit growth dynamics); stock price index changes (deviation of the index from its peak before the crisis), the national budget balance changes. Before assessing these changes should be examined in detail how the financial crisis has affected them (primary inputs and logic-effect relationship). Thus, to avoid uncertainty, if the economy is not driven by a financial crisis, but also other economic processes (such as structural economic transformation).

93 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

If, a logical analysis of the financial crisis shows that, financial crisis had a small (or even no) effect on economic indicator change, we do not include it in the calculation of the index (equals zero, assumption that deviation of this index is not a financial crisis impact on the economy).

Also, before calculating the financial crisis impact on the country’s economy index (XFKPE), is esential to determine the initial starting point of the financial crisis, it is a date, we assume that the financial crisis began. Assessing the economic indicators it is assumed that if there was no financial crisis impact, these indicators would have remained the same or their trend would be the same as before the financial crisis (for example, gross domestic product grow). According Račickas et al. (2010), Sachs (1996), Mishkin (1992), Krugman (2008), Harvey (2010) GDP is one of the key indicators that reflect the economic level of a given area (usually the country). Gross domestic product is defined as the market value of all final goods and services produced within a certain period of time (usually years). GDP reflects the country’s economic status and helps to identify the country’s economic cycle. According to Wyplosz (1998), Harvey (2010), Krugman (2008) a consequence of the financial crisis are the economic recession (real GDP drop two quarters in a row). But the financial crisis could just cause a slowdown in economic growth. Effect on the country’s GDP is highly dependent on economic growth before the financial crisis. In order to assess the dynamics of GDP must be determined the former growth rate (before the financial crisis). For this purpose, we use “trend” function, and projecte country’s GDP if the country would be untouched by the financial crisis. Comparing the predicted values and real GDP, the resulting negative impact is calculated as a percentage change between these values. Real GDP growth rate values calculated for five years after the start of the financial crisis, summed values obtained and the final result is identified YIBVP. If the calculation results in a situation that the actual GDP exceeds the forecast, this year’s results are not cumulative, and equated to zero. Such a situation could arise if after a few years after the financial crisis, the economy is recovering faster than the growth before the financial crisis. This can happen if the financial crisis was much shorter than 5 years, or if the financial crisis on GDP was not significant. Also quick recovery is possible after economic stimulus, international investment. If in this situation cannot be determined former GDP growth rate and it’s not possible to forecast GDP growth, then in the calculation it is used expected GDP loss, according to the situation. Many authors (Račickas et al., 2010; Simonavičienės et al., 2009; Vetlov et al., 2006) argue that the financial crisis have significant impact on the labor market because of slowing economic growth, businesses faced with declining profits or even losses, and the result – decreasing wages or redundancy. Then economy is in a recession phase, the demand for labour generally decreases and unemployment increases. Growing unemployment increase labour supply and wages decline. Changes in the labour during the financial crisis can be determined using the following algorithm: determining the average level of unemployment in the country before the financial crisis (five years before the financial crisis, the arithmetic mean, or if the unemployment rate has been stable or longer-term data are not available in the short period of 3 or 2 years), and subtracted from the resulting size of the actual unemployment level, during the financial crisis, and this data is summed. If there is a risk that after financial crisis during the five-year period unemployment rate can be lower than before the financial crisis, than this year is not included. The result is identifiedY iun. In order to evaluate changes in wages we compare the former wages with post financial crisis wages. If a financial crisis at the beginning of earnings still rose, but later fell – the highest point would be the reference for a former wage. The resulting negative values between pre and post crisis wages summed up and calculated the percentage of pre-crisis net wages. This indicator is identified –Y IW.

The total financial crisis impact on the labor market indicator is expressed as Yilm and calculated as the sum of YIW and Yiun. During the financial crises often commodity (oil, gold, grains and others) prices becomes unstable, and it has a direct influence on price stability. Račickas et al. (2010), Mishkin (1992) argues that during the financial crises overvalued financial assets price drops significantly (most common it are stocks, real estate and

94 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) raw materials). However, the raw materials needed for the production of basic goods prices tend to fall least. According to Harvey (2010) may result a situation then during financial crisis, inflation is rising. This may be due to commodity price appreciation, or the large capital inflows into the country’s economy. Inflation dynamics can be assessed by former five-year average inflation rate. If the inflation rate has been constant, or longer-term data are not available, can be used shorter period of 3 or 2 years. Former five-year average inflation rate is compared with the actual inflation rate five years after the financial crisis began.

These changes are summed to give a rate of Yii, which can be both positive and negative, as inflation during the financial crisis can both increase and decrease, so these figures must be modulated (ie, only the absolute value is taken). The resulting index reflects the price stability, but not the price dynamics. During the financial crises (especially in regional and global), the country’s imports reduce and exports shows how the country’s economy is dependent on the other countries’ economies, as well as how country’s economy is strongly affected by the financial crisis. According Daraškevičiūtės et al. (2007), analysing a small and open economies, the majority believed that the export recovery is one of the characters indicating the country’s economic recovery. Therefore, the current account balance will be assessed on a current account balance for the year before the financial crisis and the current account balance for five years after the financial crisis erupted in the amount of difference. If this rate in any year is positive, ie the current account position has improved, it will not be cumulative. This indicator is expressed as Yiesd. The average interest rate – a financial indicator showing the average price of financial resources in the country which pays the country’s economic units to which these resources is needed. It is accepted that during economic growth interest rate is higher than its long-term average, while the beginning of the economic downturn in the country, they are lower than the average long-term (often one of the factors influencing it – central bank’s policy). Most average interest rates in the country reflect the inter-bank interest rate indexes – LIBOR (USD) and EURIBOR; EURLIBOR (EUR), VILIBOR (Lithuania). Commercial banks have issued loans to the country’s residents or businesses to issue variable rates, which are associated with one of these indices (depending on the currency), and accompanied by the bank margin. However, such an assessment is not always accurate because of the financial crisis during the growing mistrust of business debt interest rates may increase, decrease, even in the interbank lending rate (due to the central bank), banks can increase their margins (as happened in 2008 and 1930, the Great Depression in the U.S.). According to, Kuodis et al. (2005) in small financial crisis-affected countries with currency board regime, the interest rate during the financial crisis is particularly unstable, can often occur because of high capital outflow from the country, or the speculative attacks against the currency board. Dynamics of credit growth rate is often identified with the bank’s total loan portfolio in the country – which is what residents and businesses borrowed. If loans become poor quality because of financial crisis, the deterioration in banks’ loan portfolio could lead to banking crises in the country. Meanwhile, decreasing the total loan portfolio in the country means that is issued less loan than the backed – this often means reduced economic activity.

Credit market developments in the country (Yicm) are analysed in two ways – interest rates and general commercial banking loan portfolio shift. Interest rates are analysed as interest rates change from pre financial crisis average. The interest rate reflects the average commercial bank lending interest rates. If during the period no data on commercial banks’ loan interest can be found, can be used other indicators that reflect the cost of credit to businesses and residents in the country. This can be a corporate bond yield dynamics, because, according to the Efficient Market Hypothesis, the same risks to subjects must be reflected in the same interest rate, in this case, both the bond and bank credit interest rates should be the same. To assess the impact should be calculated pre financial crisis, interest rates and a post financial crisis (five years after its start), the interest rate differential. If interest rates increase, the value is summed up. The index assessment taken into account only credit resource availability depreciation. The index value named – Yir. Total commercial banks’ loan portfolio can be analysed as a pre-crisis loan portfolio and post-crisis loan portfolio within five years after the financial crisis start, the percentage difference. If the loan portfolio increased during the financial crisis is taken at the peak reached at the end of the year. The index value identifiesY IC.

95 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

According to, Danilenko (2009) statistical indicators’, enabling to see the stock market dynamics and trends, is an equity indexes. According to Leipus et al. (2003), Boreika (2009) the relationship between stock prices and the country’s macroeconomic indicators are widely analysed in the literature. Share price index decline is often seen as an early warning signal of financial crisis. Continuing financial crisis, stock prices continued to decrease. However, the stock price index and is considered one of the first signs of economic recovery. Stock market index change can be seen as the local stock market index of the peak before the financial crisis (or at financial crisis) and index a local minimum after financial crisis, which as a drop from the highest point of the former before the financial crisis began. If the stock market index remained unchanged during the financial crisis, the assessment rate is not calculated, the index equal to zero. Since this change is often very high – and often reach 90 %, a change in its assessment of the total weight of the index must be minimized ie multiplied by 1/5 (1 % drop in the stock market index will be equal to 0.2 % annual GDP growth rate of decline). If this is not done, then we have an incomplete index size, during financial crisis, the most economic indicators don’t change, and the strong stock market decline, could lead to very high total index (XFKPE). This indicator is identifiedY ism. In assessing the state of the national budget can be calculated five years post financial crisis and before the financial crisis in the former state budget balance difference. If a country before the financial crisis had a surplus, will be simply summed deficit values. If, during these five years, at least one year, the country had a budget deficit, which was lower than before the financial crisis, it will not be included in the total sum. The fiscal balance indicator is identified as Yid. Summary of information about the financial crisis impact on the country’s economy index calculation and its components are provided in the first table.

2. Assessment of reliability of financial crisis impact on the country economy index

The worst economic crisis in the history of finance is considered “The Great Depression (GD) (1930 crisis), which took place in the USA” (Krugman, 2009; Bernanke, 1983). In order to determine the optimal use of financial crisis impact on the country economy index was calculate the GD index value in the first table, all the indicators of this crisis by the data. The calculations showed in Tables 2–3. The result is that the index value XFKPE = 402.19 XFKPE considered reliable, which can be compared with each other outside, inside, comprehensive, national, regional and global financial crises.

Table 1. The financial crisis impact on the country’s economy index, calculation algorithm and its component parts

Indicators Indicators value

Financial crisis impact on the country‘s economy index XFKPE

Calculation of financial crisis impact on the country‘s economy index XFKPE = YIBVP+Yilm+Yii+Yiesd+Yicm+1/5 Yism+Yid Sub-indexes of financial crisis impact on the country‘s economy index

Financial crisis impact on GDP YIBVP.

Financial crisis impact on unemployment Yiun

Financial crisis impact on net wages Yiw

Financial crisis impact on labour market Yilm = Yiun + Yiw

Financial crisis impact on price stability (inflation) Yii

Financial crisis impact on current account balance Yiesd

Financial crisis impact on interest rates Yir

Financial crisis impact on country’s banks’ loan portfolio Yic

Financial crisis impact on credit market Yicm = Yir + Yic

Financial crisis impact on stock market Yism

Financial crisis impact on budget balance Yid. Source: the authors’ conclusion

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Table 2. The Great Depression impact on U.S. economy index calculation

Curent Difference Stock GDP GDP Acount Difference Budget Year Difference as perc. of market U.S. mln. forecast balance as perc. deficit GDP price GDP perc. 1929 1302 1302 0 -1.35 0 -0.46 251.08 1930 1176 1234.32 -8.3218 4.96 -1.51 -0.16 -0.96 199.59 1931 1081 1253.82 -172.825 15.99 -1.60 -0.25 0.17 125.09 1932 925 1273.96 -348.969 37.73 -1.73 -0.38 2.78 57.81 1933 937 1295.04 -358.042 38.21 -1.94 -0.59 3.27 74.63 1934 1302 1302 -255.782 24.11 -1.51 -0.16 3.11 85.52

YIBVP = 120.99 Yiesd = 1.53 Yid = 9,33 Yism = 76,7 Source: the authors’ calculation

Table 3. The Great Depression impact on U.S. economy index calculation

Unem- Loans ploy- Differ- Wages Differ- Interest Differ- Differ- Year (mln Inflation ment ence index ence rates* ence ence USD) rate 1925– 4.01 0 103 0 4.75 0 11592.2 MAX -0.5 0 1929 1930 8.67 4.66 103.2 0.2 4.71 -0.04 7677.0 -6.4 5.9 1931 15.82 11.81 97.7 -5.3 6.13 1.38 4022.9 -9.3 8.8 1932 25.53 21.52 83.8 -19.2 6.21 1.46 1730.3 -10.3 9.8 1933 24.75 20.74 80.2 -22.8 5.88 1.13 1053.7 MIN 0.8 -1.3 1934 21.60 17.59 91.0 -12 4.69 -0.06 2212.3 1.5 -2

Yiun 76.32 Yiw 59.3 Yir 3.97 Yic 90.91 Yii 24.5

XFKPE = 120.99 + 135.62 +24.5 + 1.53+ 94.88 + 1/5(76.7)+ 9.33 = 402.19 Source: the authors’ calculation

In Table 3, the index calculations encountered this problem: *The average interbank interest rates over the period were not counted, but in the meantime, companies bond yield reflects the opportunity for companies to borrow, so calculations uses average bond yield for the company. This calculation is based on the efficient market hypothesis and the arbitrage principle, which assumes that the bank borrowing rate should be similar or the trends are similar.

3. The financial crisis that affected the economy of Lithuania indexes comparative analysis of the impact

Lithuanian economy in 1990–2011 were affected by three financial crisis, which, was different. It’s: yy The banking crisis, which took place in 1995. Country’s internal financial crises. yy Russian financial crisis, which took place in 1998. Currency crises which has affected the surrounding regions. yy The global financial crisis, which took place in 2008. The world problems took place at the same time as Lithuanian real estate bubble burst, and the end of the growth of bank credit. The financial crisis can be considered as a complex financial crisis at the same time as the financial crisis originated in Lithuania and the world (global financial crisis had a negative impact on the economy of Lithuania).

97 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

The logic analysis of financial crises that affected the economy of Lithuania, shows that all crisis were different (different types of financial crises, the crisis is internal, part external). Their impacts on the country’s macroeconomic indicators were also different. In order to compare financial crisis we use the financial crisis impact on economy index. Lithuanian banking crises in 1995. Lithuania due to the unfavourable economic situation, the commercial orientation of banks in the early inflationary profits, rapidly changing economic situation (even several times changed monetary units circulating in Lithuania and other reasons, went bankrupt or were liquidated – a large part of the country’s banks. This crisis was led by Lithuanian economy factors: enterprise confused between settlements, depositors panic (which is also one of the reasons for the bankruptcy of the banks), reduced lending, loss of revenue collection, increased the current account deficit, a strong increase in unemployment. However, the assessment of this financial crisis impact faces challenges: economic situation in Lithuania 1990–1994 was a very unstable: high inflation (hyperinflation reaching limits) Currency uncertain system (before the introduction of the litas and currency board with the U.S. dollar), declining GDP, which began to grow only in 1995 (and this year, as the banking crisis starts). Therefore, it is difficult to assess the financial impact of the crisis to economic indicators. GDP started to grow in financial crisis, so it is difficult to determine it losses (the calculation assumes that GDP loss is equal to the loss of funds that were needed to restructure the banking sector). Rise in inflation trends in 1990–1993 were mainly result in economic restructuring and the transition to a market economy (to overcome the price adjustment). However, the introduction of the litas (and then when it currency board with the U.S. dollar), inflation started to decline in 1994–1998 it will continue to decline rapidly, but the financial crisis impact on this decline was not clear, but it is clear that financial crisis was not the main cause of this, so this effect will not be considered. Interest rates also declined and even then some banks faced with problems – it links to inflation, and a sufficiently large bank competition. But the financial crisis did not affect the interest rate decline, this decline in interest rates link to declining inflation.

Another problem in calculating the financial crisis impact on economy index (XFKPE) is unstable economic situation, as well as a brief history of Lithuania, so it is difficult to determine the long-term trends in macroeconomic indicators (GDP growth, inflation, unemployment). The stock exchange in Lithuania was established only in 1995, and in the period 1990–2011 had little value in raising capital for companies, and it is not a viable competition for bank loans. Banking crisis, which took place in 1995 index and calculating the components at 5–6 tables.

Table 5. The banking crisis that took place in 1995, the Lithuanian economy affect components of the index determination

Current Budget Year GDP GDP loss* % GDP Inflation** Difference account Difference deficits*** balance 1994 16904.2 0 72.2 0 2.1 0 6.5 1995 26924.46 1200 4.46% 39.7 0 10.2 8.1 5.1 1996 33706.35 1200 3.56% 24.6 0 9.2 7.1 4.6 1997 40514.87 1200 2.96% 8.9 0 10.2 8.1 1.6 1998 45016.22 1200 2.67% 5.1 0 12.1 10 4.6 1999 43885.44 1200 2.73% 0.7 0 11.2 9.1 7.8

YIBVP 16.38 Yii 0 Yiesd 42.4 11.,3 Source: the authors’ calculation

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Table 6. The banking crisis that took place in 1995, the Lithuanian economy affect components of the index determination and assessment

Unemployment Interest Loans Year Difference Net wages Difference Difference rate rates (mln Lt.) 1994 3.6 2.5 266.7 29.81 0 4 205.4 1995 6.1 3.5 362.6 95.9 23.88 0 4 652.5 MAX 1996 7.1 2.3 466.7 200 16.00 0 4 393.9 MIN 1997 5.9 2.8 576.6 309.9 11.93 0 4 929.9 1998 6.4 4.8 683.7 417 12.57 0 6 939.0 1999 8.4 2.5 722.4 455.7 12.98 0 7 457.1

Yiun 15.9 Yiw 0 Yir 0 Yic 5.56

XFKPE = 16.38 + 15.9 +0+ 42.4+ 5.56 + 1/5(0)+ 11.3 = 91.54 Source: the authors’ calculation

In Tables 5–6 comparability index calculations encountered the following problems: * The GDP dropped significantly in 1990–1993 due to the economic transition to a market economy, and it began to rise only in 1994–1995 (this does not directly lead to the banking crisis) it is difficult to determine the negative banking crisis impact on the country’s economy. In this case, restructuring the banking sector has cost the State of Lithuania 1.2 billion litas. This figure is considered as direct loss of GDP. Thus, it is assumed that if the banking crisis does not come, Lithuania’s GDP would have been bigeer 1.2 billion lt. every year. ** Inflationary trends in Lithuania was driven by curency exchange rate changes, and economic stabilization. The banking crisis has had an effect, but it was not significant, so financial crisis impact on inflation in the calculation of the index is equal to 0. *** While calculating the financial crisis impact on the budget deficit should be used pre crisis deficit level, but in this case, such a provision is not appropriate. Before the critical years of 1993–1994 budget deficit has been associated with structural reforms in the transition to a market economy, while the budgets for the year 1995–1997 has been planned to be balanced, but the freezing corporate funds in banks, and the erosion of the banks paid income taxes (due to losses and provisions), the state budget faced with problems (failure to collect taxes). Meanwhile, the budget deficit in 1998–1999 is related to the problems of the Russian financial crisis. The consequences of the banking crisis have been resolved since 1997 when the deficit fell sharply. The calculation of the banking crisis in 1995–1997 summed up the impact of the budget deficit. Russian financial crisis of 1998. In 1998, Russia devaluated its currency (the ruble), and this had a negative impact on the linked countries. However, the Russian financial crisis began, did not cause the country’s financial crisis (this is because the financial relations with Russia was not strong; banks did not invest their capital there). Therefore, it cannot be considered an internal crisis. In 1998, the Russian ruble devaluation caused a strong reduction of Lithuania’s exports, but it had little influence on the current account deficit. While in 1998–1999 the impact was small, but in 2000 the current account deficit began to decline rapidly, cause of readjustment of the export to other markets (Western Europe). 1998 starts with economic slowdown (the economy declined only in 1999) and this had a negative effect on unemployment rate. Sharp drop in inflation, has increased the state budget deficit. 2000 (in comparison) decreased commercial banks loans portfolio. Russian financial crisis, which took place in 1998 and the calculation of the index components are sho- wen in 7–8 tables.

99 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

Table 7 Russian financial crisis, which took place in 1998, the Lithuanian economy affect components of the index determination

Difference % of Current Budget Year GDP compared Inflation Difference Difference Difference GDP account deficit to forecast 1997 40514.87 8.9 -9.8 1.6 1998 45016.22 1144.71 2.54 5.1 0 -11.6 -1.8 4.6 3 1999 43885.44 4369.97 9.96 0.7 -4.4 -10.9 -1.1 7.8 6.2 2000 45736.77 10161.55 22.22 1.0 -4.1 -5.9 3.9 2.8 1.2 2001 48636.93 13277.13 27.30 1.3 -3.8 -4.7 5.1 1.4 -0.2 2002 52070.03 15990.35 30.71 0.3 -4.8 -5.1 4.7 1.8 0.2

Yii 17.1 Yiesd 2.9 Yid 10.6 YIBVP 92.73 Source: the authors’ calculation

Table 8. Russian financial crisis, which took place in 1998, the Lithuanian economy affect components of the index and the index of determination

Net Interest Loans Year Unemployment Difference Difference Difference wages rates (mln. Lt) 1997 5.4 576.6 11.93 4 929.9 1998 6.4 1 683.7 12.57 0.64 6 939.0 1999 8.4 3 722.4 12.98 1.05 7 457.1 MAX 2000 11.5 6.1 692.2 -4.36% 11.03 -0.9 7 291.5 MIN 2001 12.5 7.1 699.4 -3.29% 8.13 -3.8 8 456.2 2002 13.8 8.4 728.4 6.08 -5.85 10 081.5 Y Y 7.65 Y 1.69 Y 2.22 iun 25.6 iw ir ic

XFKPE = 92.73 + 33.25+17.1 + 2.9+ 3.91 + 1/5(56.1) + 10.6 = 171.71

Source: the authors’ calculation

The global financial crisis in 2008. The complex financial crisis has had a strong negative impact on a number of macroeconomic indicators. Strong GDP decline, the unemployment rate reached its highest level during the 1990–2011 period. Inflation was fluctuating (in financial crises beginning in 2008 it grew. Due to unfavourable trends in world commodity markets, and then strongly decreased). Sharp drop in commercial banks’ loan portfolio, increasing the interest rate on newly issued loans in litas (and thus reduced overall credit availability), increased the budget deficit. Global financial crisis that took place in 2008 index components calculation is shownTables 9–10.

Table 9. Global financial crisis, in 2008, the impact on Lithuanian economy index determination

Difference Current % of Budget Year GDP compared Inflation Difference account Difference Difference GDP deficit to forecast balance 2007 98669.12 4.1 0 -14.5 0 0.3 0 2008 111482.6 0 0 11.1 7 -13.1 1.4 4.2 3.9 2009 91525.92 19399.18 21.20% 4.2 0.1 4.3 18.8 9.7 9.4 2010 94625.33 26982.77 28.52% 1.2 2.9 1.8 16.3 7.7 7.4 2011 112355.3 20137.66 17.92% 3.3 0.8 – – 5.8 5.5 2012 119444.5 23738.93 19.87% 3.3 0.8 – – 2.8 2.5

Yii 11.51 Yiesd 0 Yid 28.7 YIBVP 87.51 Source: the authors’ calculation

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Table 10. Global financial crisis 2008, the impact on the economy components and index determination

OMX Vilnius Unem- Net Difference Interest Loans Year Difference Difference Difference stock ployment wages (%) rates (mln Lt) exchange index 2007 6,1 1351.9 6.75 64 214.6 591.44

2008 5.8 -0.3 1650.9 10.64 3.89 74 806.0 172.71 2009 13.7 7.6 1602.0 -3.05 13.49 6.74 67 855.0 151.40 2010 17.8 11.7 1553.8 -6.25 11.35 4.6 66 095.3 261.69 2011 14.9 8.8 1611.3 -2.46 8.71 1.96 64 743.6 13.45 – 2012 11.5 5.4 1722.4 4.15 – 0 – –

Yiun 33.5 Yiw 11.76 Yir 17.19 Yic 13.45 74.4

XFKPE = 87.51 + 45.26 + 11.51 + 0 + 30.64 + 1/5(74.4) + 28.7 = 218.5

Source: the authors’ calculation

As can be seen from Tables 9–10, the Lithuanian economy was strongest affected by a complex financial crisis in 2008. The financial impact of the crisis index (XFKPE) is as high as 218.5. Russian financial crisis impact index is 171.71. Meanwhile, the least affected by the the banking crisis. Financial crisis impact on the economy index is 91.54. 1930, the U.S. Great Depression affect on the U.S. index was 402.19. Analysing the financial crisis can be seen the different effects of financial crisis, but Russia and the global financial crisis are quite similar (Fig. 1). The most damage this crisis has made to the prospects for GDP growth (54 % of the total index and 40.05 %). The banking crisis impact on GDP growth outlook was 16.38 (17.98 % of the total impact of the crisis). These financial crises had a significant impact on GDP growth due to the fact that GDP growth before these financial crises was very high (before the Russian financial crisis, GDP growth reached 7.3 %, and before the global financial crisis – 9.8 %). After financial crises the GDP fell (in 1999 and 2009) because this indicator has reached very high values, before. It is also possible to see a tendency that Lithuanian GDP growth is not stable, it tends to grow strongly, as well as a significant decline. Comparing all financial crises is noted that all financial crises had major impact on (Fig. 1) labour market

(Yilm). Its values compared to all index were: the banking crisis, 17.36 % the Russian financial crisis 19.36 %; global financial crisis, 20.71 %. There is also a significant impact on the budget balance: (Fig. 1). 12.34 % during the banking crisis, 6.17 % during the Russian financial crisis, 13.14 % during the global financial crisis.

Figure 1. Financial crises impact on Lithuanian economy component distribution Source: the authors’ calculation

101 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

Inflationary trends during financial crises in Lithuania were not strongly affected: the Russian financial crisis reached 17.1 (9.95 % of the total financial crisis impact), the global financial crisis, 11.51 (5.2 % of the total financial crisis impact). So we can say that the financial crises had little impact on price stability. Lithuania did not cause the financial crisis with very high inflation, or prolonged deflation. Analysing financial crises impact on the country’s stock market we see that Lithuania’s share price indices reflecting the decline during the crisis was hit seriously (during Russian financial crisis, index fell 56.1 %, during global financial crisis it fell 74.4 %). During bank crisis in 1995, the stock market index has not yet been calculated, and the National Stock Exchange was at an early stage of creation. Meanwhile, the financial crisis impact on the current account deficit and the credit market was different. During the banking crisis impact on the current account deficit was very high (42.4 points or 46.3 % of the total impact of the crisis), while during the Russian crisis and the global financial crisis negative impact was small or none at all. During Russian crisis, the effects was 2.9 % of impact, during the global financial crisis it had no impact (current account had deficit, but during the crisis reached a surplus).

Financial crises impacts on credit markets (Yicm) were different, the banking crisis and the Russian financial crisis impacts were small, respectively 5.56 and 3.91. Meanwhile, the global financial crisis, this effect was 30.64 (14.02 % of the total financial impact of the crisis). This can be explained by the fact that the banks’ effect on economy growth in 2005–2007, and after global financial crisis was much higher than in other crises, the loan portfolio was high, there has been extensive growth in the loan portfolio in 2003–2007, while the interest rates in 2007 was the lowest during the 20-year period, and the global turmoil that started in real estate sector reached banks sector quickly and have been strongly affected by the global credit markets. Meanwhile, during banking and Russian financial crises, credit market turmoil was not large. During banking crisis loans portfolio was still very low and the interest rates was high (and therefore, even at crisis, have fallen), while during Russian financial crisis, interest rates changed only slightly, while the loan portfolio maintained almost the same.

Conclusions

In the scientific literature, there is lack of methodology for comparing the financial crisis negative impact on economy. In terms of specific financial crisis impact on the economy, or comparing impact on different countries or at different times are not any methods to compare the negative effects. It was concluded to make a financial crisis impact on economy. This index helps to compare the different financial crises in different countries by combining all the negative impact “parts”. This index values reliability can be compared with calculated U.S. “The Great Depression 1930 financial crisis index value – 402.19. Analysing the economic development of Lithuania in 1990–2011 identified three financial crises that affected the country’s economy. Banking Crisis (1995) – is an internal banking crisis. Russian financial crisis (1998) – external currency and debt crises. The global financial crisis (2008) – a complex global financial (real estate bubble, debt crisis, banking crisis) crisis. Was calculated index to compare impact of these crises on country’s economy. In summary, all of financial crises affected the economy of Lithuania in different ways, but the calculation of the financial crisis impact on the country’s economic index suggest that the greatest impact on the economy of Lithuania was made by global financial crisis (2008) – index value 218.5. Similar in many ways, but much less impact was made by the Russian financial crisis (1998) – index value 171.71. The banking crisis (1995) had the lowest impact on economy, index value 91.54. None of the financial crisis impact on the Lithuanian economy was greater than the Great Depression impact on the U.S. economy. All financial crises had a major effect on GDP growth, labour market, and budget balance. The impact on the stock market was also similar, it fell more than 50 % during the Russian financial crisis and the global financial crisis. Impact on inflation was small, because the crisis has been associated with high inflation or high deflation. Meanwhile, the impacts on current account deficit and the credit market had been different and related to the specifics of the individual crisis. The current account balance was most negatively

102 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) affected by the banking crisis (1995). Banking crisis affected the current account deficit, while the other did not. A credit market was significantly impacted by global financial crisis (2008), while other crises, negative effect were not significant.

References

Bernanke, B. (1983). Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression. The American Economic Review, Vol. 73 [Interactive]. Access the Internet: . Boreika, P., Pilinkus, D. (2009). Macroeconomic indicators and stock price correlation between the Baltic countries. Economics and Management, Vol. 14, p. 692–699. Danilenko, S. (2009). Macroeconomic processes affect the stock market survey. Economics and Management, Vol. 14, p. 731–736. Daraškevičiūtė, B., Glinskienė, R., Lapinskienė, D. (2007). The Peculiarities of Lithuania’s Export in the Context of Integration to the European Union. Economics and Management, Vol. 12, p. 721–727. Deksnytė, I., Pukelienė, V. (2010). Currency crisis on the economies of: Russia and the repercussions of the case in Lithuania. Applied Economics: systematic Research, Vol. 4 (1), p. 151–165. FRB Monthly Review [interactive]. Access the Internet . FRB Monthly Review [interactive]. Access the Internet: . Harvey, T. J. (2010). Modeling financial crises: a schematic approach. Journal of Post Keynesian Economics, Vol. 33 (1), p. 61–82. Krugman, P. (2008). The Return of Depresion Economics and The crisis of 2008. London: Penguin books. Krugman, P. (2003). A model of balance of payment crises. Journal of money, credit & banking, Vol. 11 (3), p. 311–325. Kuodis, R. (2008). Lithuanian economic transformation of the 1990–2008 year: Phases and major economic policy errors. Monetary Studies, Vol. 2, p. 97–98. Leipus, R., Norvaiša, R. (2003). Financial market theory. Monetary Studies, Vol. 4, p. 5–28. Bank of Lithuania. (1996). 1995 Annual Report. Vilnius: Bank of Lithuania. Bank of Lithuania. (1997). 1996 Annual Report. Vilnius: Bank of Lithuania. Bank of Lithuania. (1998). 1997 Annual Report. Vilnius: Bank of Lithuania. Bank of Lithuania. (1999). 1998 Annual Report. Vilnius: Bank of Lithuania. Lithuanian banks Database [interactive]. Access the Internet: . Mishkin, F. (1992). Anatomy of a Financial Crisis. Journal of Evolutionary Economics, Vol. 2, p. 115–130 [interactive]. Access the Internet: . Račickas, E., Vasiliauskaitė, A. (2010). Global financial crisis and its impact on Lithuania economy. Economics and Management, Vol. 15, p. 1006–1017. Sachs, J., Tornell, A., Velasco, A. (1996). Financial crises in emerging markets: The lessons from 1995. Brookings Pa- pers on Economic Activity, Vol. 1 (27), p. 147–199. Simanavičienė, A., Užkurytė, L. (2009). Changes in the labor market during the economic recession the case of Lithu- ania. Economics and Management, Vol. 14, p. 940–946. Department of Statistics to the Government of the Republic of Lithuania [interactive]. Access the Internet: http://www. stat.gov.lt/lt/. Vetlov, I., Virbickas, E. (2006). Lithuanian labor market flexibility. Monetary Studies, Vol. 1, p. 5–22. Wyplosz, C. (1998). Globalised financial markets and financial crises. Regulatory and supervisory challenges in New era of global finance. The Hague: Fondad, p. 70–87.

103 Deimena Kiyak, Tomas Reichenbachas THE IMPACT OF LITHUANIAN FINANCIAL CRISIS FOR NATIONAL ECONOMY: COMPARATIVE STUDY

LIETUVOS FINANSŲ KRIZIŲ POVEIKIO ŠALIES EKONOMIKAI PALYGINAMASIS TYRIMAS

Deimena Kiyak, Tomas Reichenbachas Klaipėdos universitetas (Lietuva)

Santrauka

Akcentuojant darnaus ekonominio vystymosi prielaidas Lietuvoje ir siekiant tyrimų pagrindu kurti re- gioninę politiką, straipsnyje atliekamas Lietuvoje vykusių finansų krizių poveikio šalies ekonomikai palyginamasis tyrimas. Nors daugelis mokslininkų išskiria nemažai ekonominių rodiklių, kurie paveikti finansų krizių, tačiau vertinant finansų krizių poveikį šalies ekonomikai susiduriama su problemomis, nėra bendro modelio, kaip įvertinti finansų krizės poveikį šalies ekonomikai, nėra ir metodikos, kaip palyginti šį poveikį su kitų finansų krizių poveikiu šaliai. Finansų krizės poveikiui įvertinti būtina visas neigiamas poveikio „dalis“ sujungti į vieną visumą, t. y. reikia indekso, kuris parodytų, kokio masto neigiamas poveikis ištiko šalies ekonomiką dėl finansų krizės. Toks indeksas padėtų palyginti skirtingų tipų finansų krizių poveikį šaliai arba skirtingoms šalims. Siekiant atlikti Lietuvos finansų krizių poveikio šalies ekonomikai palyginamąjį tyrimą sudarytas finansų krizių neigiamo poveikio šalies ekonomikai nustatymo palyginamumo indeksas, kuris padeda palyginti skirtingų finansų krizių neigiamą poveikį skirtingoms šalims, nes sujungia visas neigiamo poveikio „dalis“. Sudarytame indekse atsiskleidžia finansų krizės poveikis šalies BVP, nedarbo lygiui, neto darbo užmokesčiui, darbo rinkai, kainų stabilumui (infliacijai), einamosios sąskaitos balansui, palū- kanų normoms, bendram komercinių bankų paskolų portfeliui, kredito ir akcijų rinkai, biudžeto balansui. Siekiant patvirtinti sudaryto indekso reikšmės patikimumą ir nustatyti bazinę palyginimo indekso reikšmę, apskaičiuotas pačios didžiausios ekonomikos istorijoje finansų krizės („Didžiosios depresijos“ 1930 metų krizės, įvykusios JAV) indeksas. Gauta šio indekso reikšmė XFKPE = 402,19 laikoma patikima, pagal ją galima palyginti tarpusavyje išorės, vidaus, kompleksines, šalies, regiono ir globalias finansų krizes. Nustatyta, kad Lietuvoje 1990–2010 metų laikotarpiu įvyko trys Lietuvos ekonomiką neigiamai paveikusios finansų krizės: „Bankų krizė“ (1995) – vidinė šalies finansų krizė, „Rusijos finansų krizė“ (1998) – valiutinė krizė, paveikusi aplinkinį regioną, ir „Globali finansų krizė“ (2008), t. y. kompleksinė finansų krizė, vienu metu kilusi tiek Lietuvoje, tiek pasaulyje. Atlikus loginę finansų krizių, paveikusių Lietuvos ekonomiką, analizę, aiškėja, kad visos jos skirtingos (skiriasi finansų krizių tipai: dalis krizių yra vidinės, dalis išorinės). Skiriasi ir jų poveikis šalies makroekonominiams rodikliams. Straipsnyje apibendrinti Lietuvoje vykusių finansų krizių poveikio ekonomikai pagrindiniai veiksniai. „Bankų krizės“ (1995) poveikio Lietuvos ekonomikai pagrindiniai veiksniai: sutrikę įmonių tarpusavio atsiskaitymai, indėlininkų panika (tai pat viena iš dalies bankų bankroto priežasčių), sumažėjęs kreditavimas ir biudžeto pajamų surinkimas, padidėjęs einamosios sąskaitos deficitas, gerokai išaugęs nedarbas. „Rusijos finansų krizė“ (1998) lėmė struktūrinius Lietuvos tarptautinės prekybos pokyčius. Eksportuotojai pradėjo orientuotis į Vakarų rinkas, o priklausomybė nuo NVS šalių ėmė mažėti. Akcentuotina tai, kad Rusijos finansų krizė nepaveikė Lietuvos finansų sistemos, ir nesukėlė bankinės sistemos krizės Lietuvoje. Finansinis sektorius nepatyrė sukrėtimų. „Globali finansų krizė“ (2008) neigiamai paveikė daugelį makroekonominių rodiklių: gerokai smuko BVP, išaugo nedarbo lygis, kito inflia- cija, sumažėjo komercinių bankų paskolų portfelis, didėjo palūkanų norma už naujai litais išduotas paskolas, sumažėjo kreditavimo galimybės, padidėjo biudžeto deficitas. Pritaikius sudaryto indekso modelį gautos

šios finansų krizių Lietuvoje indeksų reikšmės: globalios finansų krizės (2008) indeksas (XFKPE) siekia net 218,5, Rusijos finansų krizės (1998) poveikio indeksas – 171,71, tuo tarpu mažiausiai ekonomiką paveikė bankų krizė (1995), nes finansų krizių poveikio ekonomikai indeksas siekia 91,54. Nei vienos finansų krizės poveikis Lietuvos ekonomikai nebuvo didesnis nei Didžiosios depresijos poveikis JAV ekonomikai. Visos vykusios finansų krizės labai paveikė BVP augimą, darbo rinką, valstybės biudžeto balansą. Poveikis akcijų rinkai taip pat buvo panašus, jos smuko daugiau nei 50 % tiek per Rusijos finansų krizę, tiek per globalią finansų krizę. Infliacijai Lietuvą paveikusios finansų krizės turėjo mažai įtakos, nes šios krizės su didele inf-

104 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) liacija ar defliacija nebuvo susijusios. Tuo tarpu poveikis einamosios sąskaitos deficitui ir kredito rinkai buvo skirtingas ir susijęs su pavienių krizių specifika. Einamosios sąskaitos balansą labiausiai neigiamai paveikė „Bankų krizė“ (1995). Ji taip pat smarkiai paveikė einamosios sąskaitos deficitą, ko negalima pasakyti apie kitas nagrinėtas krizes. Kredito rinkai didelį neigiamą poveikį turėjo globali finansų krizė (2008), tuo tarpu kitų krizių neigiamas poveikis kredito rinkai nebuvo didelis. PAGRINDINIAI ŽODŽIAI: finansų krizė, finansų krizės indeksas, bankų krizė, Rusijos finansų krizė, globali finansų krizė.

JEL klasifikacija: G000; G010.

105 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS

THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS

Anna Kladova1, Liudmila Parfenova2, Vytautas Juščius3

Rosgosstrakh, Ltd. (Russia), Yaroslavl State University (Russia), Klaipėda University (Lithuania)

Abstract Intensive international activity of banks caused by fairly recently lifted financial restrictions in many countries has been a subject of great scientific interest ever since. The article describes various short-term consequences of foreign bank penetration in the financial markets of some of the regions of the world. The authors pay specific attention to the reasons and modes of foreign bank entry in emerging market and transition market economies as well as to the differences in the impact of such entry on the stability and efficiency of financial systems and economies of the countries of Asia, Latin America, Central and Eastern Europe and Russia. Research methods: systemic, comparative and logical analysis. KEYWORDS: foreign bank entry, emerging market economies, bank competition, banking sector stability.

JEL CODES: G21, G32

Introduction

Intense globalization of the world economy is an objective reality of the 21st century. The process of globalization presupposes financial liberalization of national economies. Financial liberalization minimizes the government’s role in the financial sector letting market forces independently determine the ways and areas of resources’ distribution in that sphere. Banking market liberalization is a crucial part of financial liberalization. Intensive foreign bank penetration has been one of the main trends of international finance development in the past two decades. The banks were particularly interested in conquering the freshly opened banking markets of such regions as Asia, Latin America, Central and Eastern Europe as well as the markets of the former Soviet Union republics, especially Russia. The reasons and modes of entry varied from region to region depending on many factors. The effects caused by the penetration also differed significantly, bordering on the opposite. The impact was especially strong on the condition of bank competition, on the welfare of local banks as well as on the access to credit for small and medium enterprises. The purpose of this article is to compare the influence of foreign bank penetration on the development of financial, especially banking, markets in different regions of the world. The primary question to be ans- 1 Anna Kladova – Branch of Rosgosstrakh, Ltd in the Yaroslavl region, chief lawyer of the subrogation group. Scientific interest: bank competition, financial markets in EME countries. E-mail: [email protected] Tel.: +7903 691 6272. 2 Liudmila Parfenova – dr. Yaroslavl State University, dean of the Economic Department, head of the chair of finance and credit, professor. Scientific interest: international finance, European economic integration. E-mail: [email protected] Tel.: +74852 303 344. 3 Vytautas Juščius – dr. Klaipėda University, Faculty of Social Sciences, head of the Economic Department, professor. Scientific interest: Corporate social responsibility, globalization. E-mail: [email protected] Tel.: +370 46 398 677.

106 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) wered in this article is whether the financial sectors in Asia, Latin America, Central and Eastern Europe and Russia reacted in the same way to the entry of foreign banks in the past decades. In order to fulfill this task, results of numerous empirical studies of foreign bank entry will be compared. The objectives set for the research are: yy To define the key reasons of foreign bank penetration as well as the merits and flaws of the process. yy To identify specifics of foreign bank entry into the liberated markets of Asia, Latin America, Central and Eastern Europe and Russia correspondingly.

Research methods: systemic comparative and logical analysis.

1. The basic determinants and short-term effects of foreign bank entry

Since the 1960s international activity of banks has been growing steadily due to the development of international trade flows, foreign direct investment and the process of globalization of capital markets. There are two main types of such activity: performing cross-border operations and activities of banks outside of their home country (Lensink, 2003: 2). The latter has been a subject of strong scientific interest for more than a decade because of the rapid growth since the late 1990s of the presence of foreign bank capital in banking sectors of numerous countries, especially in emerging market and transition market economies. Prior to the wave of financial liberalization in the 1990s, countries often used various policies to restrict entry of foreign banks. Such policies reflected the governments’ strong hesitation to open their national financial markets to competition from abroad. On average, across developing countries, the share of bank assets held by foreign banks has risen from 22 percent in 1996 to 39 percent in 2005 (Cull, 2010: 2). Such intensive foreign bank expansion is mainly due to considerable financial liberalization carried out in developing countries which implies lowering or eliminating entry barriers to the banking markets of those countries. However, the increase of foreign bank presence in the banking markets of various regions of the world has been uneven. Thus, the share of the banking system’s assets controlled by foreign banks in the transition economies of Central and Eastern Europe as well as in the emerging market economies of Latin America has been growing steadily, reaching a rather high average level (52 percent and 50 percent correspondingly), while foreign bank participation has remained constant at very low levels in South Asia (7.5 percent). In East Asia foreign bank entry has increased since the mid-1990s, but it still represents less than 20 percent of the system (Cull, 2010: 3). There are two basic approaches to defining the determinants of such aggressive expansion of foreign banks: the “follow the customer” hypothesis and the eclectic theory (Fotopoulos, 2011: 15). According to the former, foreign banks are driven by passive, defensive motives and penetrate the markets of emerging and transition economies in order to follow the expansion of their non-financial clients from the home country. In this case the banks intend to retain their relationships with domestic clients abroad. The potential of the penetrated banking sectors in such situations is usually insignificant for the banks. The eclectic theory, on the other hand, states that the previous hypothesis alone is not able to fully account for the phenomenon and should be amplified with more aggressive motives. Therefore, according to the theory, foreign banks choose to penetrate a certain bank market not only to follow their domestic customers but also to expand their own business and raise their profits. The key determinants of the penetration in this case include three groups of factors (see figure 1). This approach has been gaining more and more support in the empirical literature throughout the last decade. Various kinds of research carried out in different regions of the world have proven that the eclectic theory offers a more accurate and complete explanation of the reasons which make the foreign banks choose a certain country or a certain group of countries as an area for foreign direct investment (Focarelli, 2001: 4; Fotopoulos, 2011: 16). At the same time, each foreign bank extends the realm of its activity for an individual set of those reasons, depending on the bank’s final goals. The banks which penetrate foreign markets, as a rule, have certain traits in common. For instance, such banks are usually rather large and effectively managed ones. Besides, they are located in the open to interna-

107 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS tional trade countries with highly developed banking systems. The profitability and the share of non-interest over total income of such banks are usually higher as well (Pozzolo, 2008: 4). Thus, the most successful banks in their home countries are the ones most prone to foreign direct investment.

Figure 1. The basic determinants of foreign bank entry

The ways in which foreign banks penetrate national banking markets vary significantly from a classical “de novo” entry or mergers and acquisitions of domestic banks to even taking part in a privatization of state- owned local banks. The mode foreign banks choose to use in order to enter a market of a certain country, in many respects, determines the impact such penetration might cause on the economy of the host country. The presence of foreign capital in a national banking market is commonly viewed as a phenomenon causing positive consequences for both the banking sector and the economy of the host country, in general. However, thorough research of the impact of foreign bank expansion on national economies of a considerable number of countries has revealed certain negative effects of growing non-residents’ control of the assets of national banking systems. A review of foreign bank penetration’s benefits and drawbacks usually covered in theoretical and empirical studies is presented in table 1. It should be noted that the advantages and drawbacks described in table 1 are viewed as short-term effects because the time-series of banking activities in the emerging and transition economies are rather short making it difficult for a scientist to analyze any long-term effects of the process of foreign bank expansion. Therefore, all estimations interpreted as short-term effects of foreign banks entry may significantly differ from long-term results of such activity (Liuhto, 2006: 41). The countries the banking markets of which have been the objects of the most intensive foreign bank penetration differ greatly in terms of geography, demography, politics and economy. Those differences have caused certain specificity of the process and its results in such regions as Latin America, Asia, Central and Eastern Europe and Russia.

108 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

Table 1. Benefits and drawbacks of foreign bank penetration

Object of influence Benefits Drawbacks 1. Increase in the host country’s banking 1. Danger of a foreign country’s control. An Financial system and sector’s efficiency due to the import of ability to control allocation of loan resources economy of a host new banking technologies, products and implies possessing fairly significant economic country management techniques. power in any type of economy. 2. Increase in bank competition. 2. Contradiction between the interests of 3. Increase in the country’s banking sector’s foreign banks and the host country. Foreign stability. Subsidiaries of foreign banks are banks may be interested solely in promoting less sensitive to crises taking place in the their compatriot exporters or in providing host country due to their better access to services to the projects carried out by the financial resources from abroad and their customers from their home country. more diverse loan portfolios. 3. Differences between the home and the host 4. Increase in the country’s banking sector’s countries’ regulations. The home country’s capitalization, which is an especially urgent authorities lose their regulatory control over issue in times of a crisis. the foreign bank’s branch abroad. Therefore, 5. Increase in the country’s banking if the banking sector’s regulations in the host sector’s profitability due to the economy of country are weaker and less efficient, foreign scale. Foreign banks are able to stimulate banks might engage in riskier and more the process of the country’s banking negligent operations. sector consolidation since they usually 4. Reduction in margins, profitability and possess enough knowledge and practical overall expenses of domestically owned banks. experience of performing other types of 5. Less access to credit for small and medium financial services, i.e. insurance, brokerage enterprises. services, etc. 6. Danger of financial crises in foreign banks’ 6. Financial market’s development. Foreign home countries spilling over into the host bank entry is able to stimulate the host countries country’s interbank market’s progress and attract the clients, who otherwise might have used the services of banks in other countries. 7. Improvement of the financial sector’s infrastructure due to the import of the banks’ experience of rendering high quality services, the banks’ know-how, accounting practices, etc. 8. Mobilization of foreign direct investment 1. Obtaining letters from parent banks 1. Problems with putting guarantees of support Domestic banks guaranteeing financial support of the to practice. Parent banks’ written guarantees purchased by foreign branch in case of a crisis in the host country. of financial support are often nothing more banks in the course of 2. Easier access to relatively cheap foreign than “comfort letters” representing only moral expansion sources of funding commitment. 2. Limited access to foreign sources of funding outside of the parent bank. Quite often parent banks reduce operational costs by closing its branch’s foreign funding channels and becoming its only source of financial resources abroad. Such actions make the branch more dependent on the willingness of the parent bank to provide funding in stressful situations and, thus, make it weaker and more vulnerable in times of crises Source: Compiled by the authors based on (Gardenas, 2004; Liuhto, 2006)

109 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS

2. The influence of foreign bank entry in Asia

India is one of the countries of Asia in which the drawbacks of foreign bank penetration are most apparent. Up to 1991 the economy of India, in general, and its financial sector were strictly regulated by the state which dominated in most of economic sectors. As a result of the 1991 balance of payments crisis, India has conducted a series of structural reforms in order to raise its banking sector’s competitiveness. In the course of those reforms India has granted foreign banks entry into its national market on a condition of only entering it “de novo” – purchasing controlling interest of domestic banks was strictly prohibited. Rapid foreign banks expansion which followed the liberalization of Indian financial market, despite any expectations, had a negative impact on the condition of the country’s banking sector. First of all, foreign banks mostly penetrated urban areas almost completely ignoring poor and rural parts of the country. Furt- hermore, since the start of the expansion the total number of bank branches has declined, particularly in the rural areas (Singh, 2006: 1). Besides, the country experienced a systematic decline in domestic banks’ lending. According to empirical research, such decline appeared to be supply-driven rather than demand-driven. On average, Indian firms were 7.6 percentage points less likely to have a long-term loan of any size following the entry of a foreign bank (Gormley, 2007: 4). In spite of the fact that small and medium enterprises in India constitute about 40 percent of the country’s total production, approximately 30 percent of exports and are the country’s second largest employer after agricultural businesses, the most rapidly growing segment of Indian banking market nowadays is consumer retail loans. Foreign banks concentrate on rendering “exclusive banking” services to wealthy and affluent, according to Indian standards, clients who can afford a minimum balance of US$5000 in their accounts with the bank (Singh, 2006: 3). Thus, the objectives of foreign banks in India differ fundamentally from the initial goals pursued by the state during the liberalization reforms. Due to this fact, the colossal need in bank services of the large part of Indian population living in rural and poor areas is getting stronger while the efficiency of the country’s banking sector is dropping dramatically. While foreign bank entry into Chinese financial markets has started later than the one in India, it has been no less impetuous and has caused partly similar impact on the financial sector of the country. On December 11, 2001, China gained entry into the World Trade Organization (WTO). The pressure from WTO forced China to abandon its initial strategy of limited financial liberalization. As a result, foreign banks were granted permission to conduct all types of foreign exchange transactions with foreign clients immediately upon accession of China to the WTO. The geographical restrictions on local currency business of foreign banks were phased out over five years; four cities were open upon accession, four additional ones – thereafter. Fo- reign strategic investment started in China in 2001, when the International Financial Corporation (IFC), the private sector arm of the World Bank Group, first purchased 7 percent of stakes in the Bank of Shanghai, a city commercial bank in China (Hasan, 2012: 6). Within two years after accession, China permitted foreign banks to provide local currency services to Chinese enterprises. In December, 2003 the “ceiling” on foreign ownership in Chinese banks was raised from 15 percent to 20 percent for a single bank and to 25 percent overall. Mergers and acquires were also encouraged. Thus, while in most other countries, foreign investment took the form of direct takeovers or majority shareholding, foreign investment in China’s banks has taken the form of minority shareholding with very limited ownership involvement. Within five years of China’s accession into the WTO, the country was obliged to eliminate all current non-prudential measures regarding the ownership, operation and establishment of foreign banks, as well as those concerning their branches and restrictions on issuing licenses (national treatment). One of the major attraction points for the foreign banks was the size of personal savings in China, exceeding a trillion US dollars in 2005. Besides, the banks preferred to penetrate the coastal regions and cities of China, where the bulk of the country’s banking was concentrated (Singh, 2006: 2). According to the Almanac of China’s Finance and Banking, the number of greenfield (“de novo”) banks had increased close to 600 by

110 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) the end of 2009, almost three times of that in 2001. According to the Annual Report of China Banking Re- gulatory Commission (CBRC), 31 Chinese commercial banks had introduced foreign strategic investors by the end of 2009 (Huang, 2011: 814). By the end of 2010, banks of 14 countries or zones have set up 37 foreign-owned banks (including 223 branches), 2 joint-owned banks (including 6 branches and one subsidiary body) and one foreign-owned finance company. There are 74 foreign banks of 25 countries and zones which set up 90 branches. There are 360 operational institutions totally, almost doubling that of 2004. Total asset of foreign banks in China is twice more than that in 2004 and is 1.85 percent of total asset of financial institutions of Chinese banking sector (Li, 2011: 1). The banking sector of China in general benefited from foreign bank expansion, e.g. recent research has shown that introduction of foreign strategic investors has had a positive effect on the promotion of profit efficiency of Chinese commercial banks (Li, 2011: 7). Indeed, the opening up of Chinese banking sector has posed no immediate threat to the four large state-owned banks because of their vast branch networks in both urban and rural areas. However, the principal losses of foreign capital expansion in China, as well as in India, were suffered by small and medium banks providing a major share of lending to small and medium enterprises. Considering the fact that such enterprises are the engines of China’s economy, a decline in loans in this sphere might have negative repercussions on the economic growth of the country in the future. In this case, even various microcredit programs – quite a widespread phenomenon in India – are not able to substitute for the formal banking industry because they only cover a small fraction of the under-banked population. Considering that such credit is often used on everyday consumption purposes, microcredit programs are not capable of satisfying the growing credit needs of farmers, rural entrepreneurs and small businesses. As for China, these kinds of programs do not exist there on a major scale. At the same time, extensive empirical research of the banking sector in Bangladesh had shown that the danger of losing market share is coming not from foreign penetration, at least in the short run, but from the reasons within the country, including the low quality of loans and poor borrowers’ discipline. If this problem is solved, foreign bank entry will have a positive impact on Bangladeshi banking market by introducing the advanced banking technologies and increasing operational efficiency of domestic banks (Raihan, 2000: 14). The results of foreign bank entry into the national markets of emerging economy countries of Asia corro- borate the theories of bank competition that take into account information asymmetries in the banking industry. According to those theories, stronger competition in banking sectors in conditions of information asymmetries may make access to credit much more difficult for certain firms. In less developed countries, foreign banks enjoy easier access to funding; however, their access to information is usually limited in comparison with domestic banks. High costs of obtaining information about domestic firms may force foreign banks to follow the strategy of “cherry picking” – providing loans to the most profitable and opaque companies. As a result, foreign banks compete domestic ones away from some segments of the market as well as drive less attractive and opaque companies off domestic banks thereby reducing credit access to firms in these spheres (Gormley, 2007: 4).

3. The influence of foreign bank entry in Latin America

One of the specific features of foreign bank penetration in the financial markets of Latin America, which started in the mid-1990s, was the fact that it was mostly accomplished not in “de novo” mode but through the purchase of distressed banks during crises (Yeyati, 2007: 1635). This is especially true for Mexico, where non-residents have gained control over 83 percent of the banking sector’s assets and the top five banks have been acquired by foreigners by 2005 (Beck, 2007: 1). The degree of some of the foreign banks’ presence in certain segments of Mexican banking sector is even more impressive. For example, by 2004 the share of foreign banks in derivatives operations has exceeded 90 percent (Gardenas, 2004: 3). Besides, the determinants of foreign, especially European, bank entry into some of the banking markets of the region are also rather specific. For example, the desire of the Old World’s banks to operate in Brazilian

111 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS banking market was based on two key motives. Some banks grew substantially by following merger and acquisition-based expansion strategies in their domestic markets with a view to positioning themselves as leaders there. This policy allowed them to increase their competitiveness and grow large enough to expand internationally. Thus, after consolidating their position in the domestic market they extended their operations abroad. Others, on the contrary, themselves being large banks in highly concentrated small or medium sized systems, increasingly expanded their operations to other geographical markets, since domestic alternatives were limited (Rodrigues de Paula, 2003: 175). It should be noted that Brazil’s policy on permitting foreign bank entry into its banking market has been very selective compared to other large Latin American countries. Such selectiveness has prevented Brazilian domestic private-sector banks from being “swallowed up” by foreign ones. As a result, private sector domestic banks are still hegemonic in Brazil compared to foreign ones. The events in Argentina in 2001 and 2002 demonstrate the problems that an economy faces during an economic and financial crisis when the financial system of the country is dominated by foreign banks. Besides, the unwise measures taken by the government of Argentina at the time forced foreign banks not to recapitalize their sinking subsidiaries in the country which aggravated the consequences of the crisis (Gardenas, 2004: 9). On the whole, foreign bank entry into the markets of Latin America has caused a decrease in the level of bank competition in the region but at the same time its influence on the national banking sectors’ stability and efficiency was positive. However, in Mexico, while the share of municipalities served by foreign banks increased along with the rise in foreign bank participation, branch penetration fell for all banks in the system. The rural and poor districts where the ones to suffer the greatest decline in the banking services coverage. Deposits and loans per capita dropped for banks that became foreign and for Mexico as a whole, given the fact that the five largest and most important banks in the system became foreign-owned. The decline in loans was only partially offset by the behavior of domestic banks which seemed to lend more as the foreign presence in the market grew (Beck, 2007: 19). Therefore, although the general depth of bank branch penetration in Mexico seems to have increased, the chances of a bank branch opening in a certain district becomes a reality only in rich urban municipalities. Scientists believe that the different impact of foreign bank entry on the levels of bank competition and efficiency in different host countries depends on the situation in the host country’s banking market. Various studies on the subject suggest that foreign bank entry can bring potential gains in this area except in environments that limit competitive forces, such as when bank concentration is high, bank activities are restricted, and bank entry and exit is difficult (Beck, 2007: 2). Besides, foreign direct investment influences financial markets of emerging economies and industrialized countries differently. In emerging economies, subsidiaries of foreign banks enjoy higher interest rate margins and profitability than domestically owned banks, whereas in industrialized economies the opposite is true. This effect on markets may stem from both the actual entry of new competitors, as well as be a consequence of the increased likelihood of new entries to the industry in pursue of high profits (i.e. market contestability). These contrasting results could be explained by the different origin of the mergers and acquisitions which take place in emerging economies and industrialized countries. Foreign bank entry in emerging economies has been the result of dealing with financial crises, while in mature economies foreign entry comes from competitive pressures. In contrast with industrialized countries, cross-border mergers and acquisitions in Latin America have led to an almost universal increase of bank concentration indices (Gardenas, 2004: 3).

4. The influence of foreign bank entry in Central and Eastern Europe

Multinational banks’ intensive participation in the development of transition economy countries became especially apparent since the dawn of the 1990s. The banks’ choice of a host country for their foreign direct investment was usually based on the similar institutional and legal systems, common history, language and geographical proximity of the two countries. It is not surprising, therefore, that 60 percent of foreign banks in

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Latin America came from the USA and Spain, while 90 percent of non-resident banks in Central and Eastern Europe came from within the EU (Miklaszewska, 2009: 57). The scale of the penetration was truly tremendous. In 1995, foreign bank assets constituted about 5 percent of total bank assets of the region, while by 2006 they exceeded 80 percent. In Poland, as in other countries of the region, a dramatic inflow of foreign bank capital took place in pre-EU accession period: between 1998 and 2000 the share of foreign bank assets in the total bank assets of the country increased from 17 to 70 percent (Miklaszewska, 2009: 59). Currently, foreign banks own more than 50 percent of the equity capital of banks in Central and Eastern Europe. In some of those countries, such as Estonia, Bulgaria, the Czech Republic, Slovakia, foreign banks control up to 80 percent of the banking markets (Liuhto, 2006: 41). Such dominance in the banking markets of the region in most cases has led to creating stable banking sectors, at least from the institutional point of view (Gorshkov, 2011: 2). The reasons of EU banks’ entry into the markets of some of the transition economies included high potential of those countries’ economic growth, attractive prospects of the countries’ profitability growth upon their accession into the EU as well as efficient reforms carried out by the governments. Due to these reasons, the principal mode of foreign bank entry into the markets of the Central and Eastern countries was purchasing a controlling share of an already established bank (either by participation in privatization processes or buying a controlling stake in publicly traded banks) or by purchasing a license from a small local bank and converting it into 100 percent foreign-owned daughter company of a global bank. As a result of such operations, currently most of the largest banks in the region are at least partially, but usually 100 percent foreign-owned. In contrast with the influence of foreign bank entry in Latin America, the process has led to an increase in bank competition in the banking markets of the Central and Eastern European transition economies. The impact on loans and interest margins of domestic banks in the region, however, was not uniform. In particular, when the foreign banks entering national banking markets were comparatively larger than the domestic ones, the latter due to the increasing competition had to offer their clients better loan conditions and, as a result, suffer increasing loan losses. Besides, larger foreign banks were able to achieve certain economy of scale. In other cases, foreign bank penetration did not have such a significant impact on the subject (Liuhto, 2006: 53). The consequences of foreign bank entry into the banking markets of transition economies depended greatly on the banks’ mode of entry. Mergers and acquisitions of domestic banks by the non-residents led to virtual extinctions of the former and resulted in the decline in domestic loans. At the same time, the entry of foreign banks via greenfield investment (de novo) was associated with higher rate of firm creation in more opaque industries – a sign of market segmentation where greenfield foreign banks attracted transparent borrowers and, thus, intensified competitive pressure on domestic banks to increase their supply of loans to small and medium enterprises. Nonetheless, foreign bank entry into the financial markets of the region has decreased the access of small and medium companies to credit and, therefore, has led to lower rates of firm entry and higher rates of firm exit in opaque industries in relation to more transparent industries (Havrylchyk, 2011: 17). Empirical research of the short-term effects of foreign bank entry on bank performance in the Central and Eastern European countries has also shown that in countries with less developed banking sectors foreign bank capital expansion leads to the growth of overhead costs associated with the need to upgrade the sector’s technological level. These results have corroborated “the technology gap hypothesis”, according to which the size of the technological gap between foreign and domestic banks determines the degree to which foreign bank expansion influences the size of domestic banks’ overhead costs (Liuhto, 2006: 56).

5. The influence of foreign bank entry in Russia

Quite active penetration of foreign bank capital into the banking sector of Russia, which became especially prominent in the 2000s, was determined both by the specifics of the economic situation in the country and by Russia’s expanding international relationships. The motivation behind foreign direct investment in Russia coincided, for the most part, with the reasons of foreign bank penetration in Latin America. One of the few exceptions was the lack of need to escape from domestic financial regulations, growing competition or

113 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS a dramatic decline in profits in home countries. Mostly, the desire to cooperate with Russia was determined by political interactions and historical ties between Russia and some of the home countries of the foreign banks. In particular, this is true for such banks as Bank of China, bank of Scotland, some French banks, etc. In many cases, the growth of non-residential presence in the banking sector of Russia was accounted for by high economic development rate. The rapid way in which Russian economy grew in the 2000s managed to attract some prominent foreign non-financial companies. In order to maintain the bank-customer relationships, the banks from their home countries chose to follow their clients to Russia. This approach was particularly typical for many Japanese banks which were willing to support their clients in a new market by investing in big and significant projects. Deposits and bank retail were the least of their priorities. It is still true for most of the Japanese banks operating in Russia: they are less competitive and prefer to stick to the “main bank” features when they establish relationships with the clients. The reasons for such slow progress of Japanese banks in Russia include insufficient infrastructure development, lack of transparency of the country’s economy as well as entry barriers in the banking sector. Besides, there are certain factors (including macroeconomic and structural imbalances of the economy, etc.) which stipulate high potential banking profits in the banking market of Russia. Therefore, part of the motivation behind intensive foreign bank entry into this sector is so-called “high risk-high return” motivation. A desire to maintain an image of a global international bank is often also a part of the banks’ motivation (Gorshkov, 2011: 8). Theoretical and empirical literature on the subject describes four basic modes of foreign bank entry into the banking market of Russia: establishing a subsidiary bank (de novo entry), establishing a joint venture with a Russian domestic bank, minor shareholder participation and establishing a representative office in Russia. The last mode is often preferred by foreign banks despite the fact that such units have no right to perform banking operations. The purpose of establishing a representative office in Russia is collecting the necessary information about the market in Russia and providing domestic clients with it. As a rule, a few years later foreign banks convert the office into a subsidiary bank falling under the jurisdiction of Russia. Such step-by-step approach is caused by the serious preliminary work necessary to be done in order to establish a subsidiary, including being licensed by the Bank of Russia. Typically, foreign banks prefer to create 100 percent foreign-owned subsidiaries because of such issues as mistrust and low transparency level of property rights protection (Gorshkov, 2011: 10). The product placement strategies used by foreign banks in the banking market of Russia include three basic types: universal strategy (multiproduct and multiclient), specialized strategy (monoproduct and monoclient) and combined strategy (either monoproduct and multiclient, or multiproduct and monoclient). The first strategy was especially popular before the financial crisis of 2008 both with foreign and domestic banks in Russia which resulted in gradual ejecting of domestic banks from certain segments of the market, including those of the basic mass market banking products and services (Mamonov, 2009: 185–186). The number of foreign-owned, at least partially, banks registered in Russia has almost doubled during the period from 2001 to 2012 while the total number of banks in the country has been gradually decreasing since 2005 (see figure 2).

Figure 2. The number of foreign-owned banks and the total number of banks in Russia in 2001–2012 Source: Bank of Russia

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While the number of foreign-owned banks in Russia grew steadily in the last decade, the total degree of foreign participation in the country’s banking sector kept decreasing. In 2003–2008, the share of non-residents in the total capital of the sector increased from 5.2 percent to 28.5 percent. However, it has shrunk to 28.1 percent by January, 2011 and to 27.2 percent by January, 2012. Besides, in the last two years the number of 100 percent foreign-owned banks in Russia has decreased from 82 to 77, while the number of their regional branches has gone from 242 to 155 (Bank of Russia). Due to the recent financial crisis, serious shifts occurred in the group of foreign bank subsidiaries in Russia. The rate of growth of the banks aimed at traditional for their parent banks types of business was considerably high. At the same time, the banks which were excessively concentrated on new market niches before the crises were losing their positions and started to announce their full or partial exit from the banking market of Russia (Mamonov, 2011: 30). In February, 2011 the largest world player in the agricultural loans market Rabobank Groep NV’s subsidiary in Russia returned its license to the Bank of Russia. The bank couldn’t compete with the state-owned mammoth – Rosselkhozbank, a monopolist in the agro-industrial segment of the country’s banking sphere. The foreign stock-holders of five other subsidiaries sold 100 percent of their stock to the residents in 2011 (Bank of Russia). According to thorough research, foreign bank expansion in Russia is a factor causing positive impact on the level of bank competition and, therefore, on the stability of the banking market in the country (Korobov, 2010: 16; Mamonov, 2010: 21). Besides, available empirical evidence for Russia shows that in the 2000s the margins of Russian domestic banks, both state-controlled and private ones, have been decreasing towards the level of margins in foreign-owned banks (Fungáčová, 2010: 15). The decrease of foreign capital participation in the banking sector of Russia is one of the factors causing an increase in the industry’s concentration levels and, therefore, a decline in bank competition. The systematic decline in the total number of banks operating in Russia was mostly a result of the drop of the number of banks in the Central federal district, while the number of banks in other federal districts was considerably stable up to 2010. Another proof of the growing concentration in the country’s banking sector is the dynamics of CR5 and CR200 concentration ratios as well as those of the Herfindahl-Hirschman index (see figure 3).

Figure 3. Concentration ratios and HHI for the banking sector of Russia in 2003–2012 Source: Bank of Russia

Various non-structural researches also attest to the fact that the level of bank competition in Russia has been decreasing due to the decline in foreign bank presence (Mamonov, 2010: 19). Insufficient levels of bank competition in the country may cause the raise of financial services’ prices, limit the access of companies and individuals to credit and pose a threat to the banking sector’s stability if the banks become too big to fail. In the current situation, Russia needs to find alternative ways of resisting the growth of bank market

115 Anna Kladova, Liudmila Parfenova, Vytautas Juščius THE INFLUENCE OF FOREIGN BANK ENTRY ON THE DEVELOPMENT OF REGIONAL FINANCIAL MARKETS concentration in order to provide efficiency and stability of the market. A possible means of such resistance is regional consolidation which implies creating powerful regional financial institutions able to compete with state-owned banks, as a result of mergers and acquisitions of several small and medium regional banks.

Conclusions

A study of the influence of foreign bank entry into the banking markets of Asia, Latin America, Central and Eastern Europe as well as Russia has shown that this phenomenon causes different consequences in different countries depending on many factors. One of the chief determinants of the positive or negative “sign” of the expansion’s overall influence is the host country’s level of development, both in termsof economy, in general, and the banking sector, in particular. One of the most questionable “classic” results of foreign bank penetration seems to be its positive influence of the host country’s level of bank competition. This turned out to be true only in Central and Eastern Europe and in Russia. Active acquisition of domestic banks in Latin America has made the banking markets of the region more vulnerable to crises imported from abroad, while the stability of banking sectors in Russia and in the countries of Central and Eastern Europe has benefited greatly from the process. Such differences might have been caused by different potential of independent development characteristic for the banking markets of the latter regions. Besides, the fact that foreign bank entry in Latin America has been carried out during and as a result of financial crises, while the other regions were prospering during the process, might have also played a certain role in determining the different outcomes of the penetration.

References

Bank of Russia. Available at: http://www.cbr.ru Beck, T., Martinez Peria, M. S. (2007). Foreign Bank Acquisitions and Outreach, Evidence from Mexico. Available at: http://www.imf.org/external/np/seminars/eng/2008/strureform/pdf/bkacq.pdf Cull, R., Martinez Peria, M. S. (2010). Foreign Bank Participation in Developing Countries: What Do We Know about the Drivers and Consequences of This Phenomenon? Policy Research Working Paper, WPS5398. Focarelli, D., Pozzolo, A. F. (2001). Where Do Banks Expand Abroad? An Empirical Analysis. Available at: http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=301644 Fotopoulos, S., Siokis, F., Papapanagos, H. (2011). The determinants of the foreign banks’ expansion in South Europe: Do Greek banks still follow their customers abroad or not? International Conference on Economics, Business and Management, IPED, Vol. 2, p. 15–19. Fungáčová, Z., Solanko, L., Weill, L. (2010). Market Power in the Russian Banking Industry. BOFIT Discussion Paper, No. 3. Gardenas, J., Graf, J. P., O’Dogherty, P. (2004). Foreign banks entry in emerging market economies: a host country perspective. Available at: http://www.bis.org/publ/cgfs22Mexico.pdf Gormley, T. A. (2007). Banking Competition in Developing Countries: Does Foreign Bank Entry Improve Credit Access? Available at: http://fic.wharton.upenn.edu/fic/india/11gormley.pdf Gorshkov, V. (2011). Foreign Banks’ Entry into the Russian Market: Motivation, Entry Modes and Strategies. Kyoto Institute of Economic Research Discussion paper, No. 801. Hasan, I., Xie, R. (2012). A note on foreign bank entry and bank corporate governance in China. BOFIT Discussion Paper, No. 8. Havrylchyk, O. (2011). The Effect of Foreign Bank Presence on Firm Entry and Exit in Transition Economies. BOFIT Discussion Papers, No. 11. Huang, X., Zeng, Y. (2011). The Impacts of Foreign Bank Entry on Credit Scale and Business Structure of Chinese Commercial Banks. Modern Economy, Issue 2, p. 814–822. Korobov, Y. I. (2010). Bank competition at the present point. Bankovskoye delo, No. 11, p. 13–16. Lensink, R., Hermes, N. (2003). The Short-Term Effects of Foreign Bank Entry on Domestic Bank Behaviour: Does Economic Development Matter? Available at: http://www.rug.nl/staff/c.l.m.hermes/foreign_banks_and_economic_ development.pdf Li, W. (2011). Effects of Foreign Banks Entry on Efficiency of Chinese Commercial Banks. Available at: http://isi2011. congressplanner.eu/pdfs/950120.pdf

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Liuhto, K., Sorg, M., Uiboupin, J. (2006). Foreign Banks Entry and Bank Performance in the CEE Countries. Banks and Bank Systems, Vol. 1, Issue 3, p. 41–59. Mamonov, M. E. (2010). Non-structural approach to evaluating the level of bank competition in Russian banking sector. Bankovskoye delo, Vol. 11, p. 17–24. Mamonov, M. E., Pestova, A. A., Solntsev, O. G. (2011). The banking system of Russia on the way out of the crisis. Bankovskoye delo, Vol. 5, p. 21–31. Mamonov, M. E., Solntsev, O. G. (2009). Expansion of Foreign Banks into the Russian Market for Banking Services: Interim Results, Tentative Prospects. The Journal of New Economic Association, Vol. 1–2, p. 175–189. Miklaszewska, E., Mikolajczyk, K. (2009). Foreign Bank Entry and Bank Performance in Poland: Testing the Global Advantage Hypothesis. Journal of Money, Investment and Banking, Vol. 10, p. 57–78. Pozzolo, A. F. (2008). Bank cross-border mergers and acquisitions (Causes, consequences and recent trends). Econo- mics & Statistics Discussion paper, Vol. 08/48. Raihan, A., Morium, S. (2000). Foreign Bank Penetration In Bangladesh: is it Too Bad to Lose Market Share? Bank Parikrama, Vol. 15, No. 1, March. Rodrigues de Paula, L. F. (2003). The Determinants of Recent Foreign Bank Penetration in Brazil. Cepal Review, Is- sue 79, p. 159–176. Singh, K. (2006). Entry of Foreign Banks in India and China: A Brief Note. Available at: http://www.madhyam.org.in/ admin/tender/Entry%20of%20Foreign%20Banks%20in%20India%20and%20China,%20A%20Note.pdf

UŽSIENIO BANKŲ EKSPANSIJOS ĮTAKA REGIONINIŲ FINANSŲ RINKŲ PLĖTRAI

Anna Kladova, Liudmila Parfenova, Vytautas Juščius Akcinė bendrovė „Rosgosstrakh“ (Rusija), Jaroslavlio valstybinis universitetas (Rusija), Klaipėdos universitetas (Lietuva)

Santrauka

Sparti pasaulinės ekonomikos globalizacija skatina liberalizuoti nacionalinių ūkių finansų sistemas. Rin- kų liberalizavimas ypač ryškus bankų sektoriuje. Bankų skverbimasis į kitų šalių ekonominę veiklą ypač paspartėjo per pastaruosius du dešimtmečius. Bankus labai domino naujos Azijos, Lotynų Amerikos, Centri- nės ir Rytų Europos finansų rinkos. Bankų skverbimosi į kitų šalių rinkas būdai regionuose skyrėsi, nes tai lėmė skirtingi šių regionų veiksniai. Savo veiklą užsienyje siekė plėtoti dideli bankai, reziduojantys atviros ekonomikos šalyse, kur išplėtota finansų sistema. Paplitęs įsigijimo ir susiliejimo būdas – dukterinių ben- drovių ir filialų steigimas užsienio šalyse. Užsienio bankų ekspansija akivaizdžiai paveikė bankų sektoriaus konkurencinę aplinką, vietinių bankų ekonominės veiklos rezultatus, smulkaus bei vidutinio verslo kreditavimo sąlygas. Galima pastebėti, kad stiprių užsienio bankų atėjimas į šalį padidina jos finansų sektoriaus efektyvumą, stabilumą, pelningumą, kapitalizacijos lygį ir konkurenciją bankų sektoriuje. Vis dėlto finansų sektoriaus internacionalizacija turi ir neigiamų padarinių. Užsienio bankai silpnina vietinės kilmės bankų pozicijas, jų veiklą sunkiau kontroliuoti nacionalinės ekonominės politikos instrumentais, padidėja finansų krizių, kilusių kitose šalyse, eskalacija. PAGRINDINIAI ŽODŽIAI: užsienio bankų skverbimasis, naujos rinkos ekonomikos šalys, bankų konku- rencija, bankų sektoriaus stabilumas.

JEL kodai: G21, G32

117 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

Kirils Kondratovs1

University of Latvia (Latvia)

Abstract Financial disturbances can be costly. In particular, systemic events in financial markets, such as banking crises, often affect the whole society in a deeply traumatising way. Consequently, it is important to anticipate risks of such adverse development so as to try to prevent that kind of disaster and ensure financial stability. Author of this paper analyses fragility of financial system of Latvia to the fluctuations in global economy and changes in direction of international capital flows by creating complex financial system stability index. Results have proven that dynamics of every developed sub-index show unique economic processes defining Latvian financial system’s stability. Secondly, sub-indices analysis allows to determine that Latvian financial vulnerability began to worsen in 2005, however, Latvian financial stability downward movement started in 2002, that in its turn shows the necessity for Latvian economic policy makers to get more actively involved in preventing growing risks of economy. Latvian financial system stability index established in this working paper and its accompanying methodology can be further used in follow-up research and Latvian financial stability index improvement. KEYWORDS: financial system, financial stability, index modeling.

JEL Code: G01

Introduction

Financial disturbances can be costly. In particular, systemic events in financial markets, such as banking crises, often affect the whole society in a deeply traumatising way. Consequently, it is important to anticipate the risks of such adverse development so as to try to prevent that kind of disaster and ensure financial stability. The object of the research – Latvian financial system. This paper aims at construction of financial fragility composite index for Latvian financial system and estimating econometric model that describes mentioned index development. The objectives set for the research are: yy to examine international experience of statistical indicators usage when evaluating financial stability; yy to establish complex stability index for financial system of Latvia; yy to model stability index using econometric error correction model.

Following research methods have been used during working paper development: literature review (its generalization, systematization and visualization), statistical analyses and econometric modelling. Econo- metric modelling has been performed using EViews software. Quarterly data sample (from 2001: 2 till 2011: 1) has been collected from Financial and Capital Market Commission of Latvia, Bank of Latvia, Central Statistical Bureau of Latvia, statistical office of the European Union, Research Institute of the Centre for Economic Studies.

1 Kirils Kondratovs – University of Latvia, Faculty of Economics and Management, Ph.D. student. Scientific interest: economet- rics, macro financial management. E-mail: [email protected] Tel.: +371 292 312 04.

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1. International experience of statistical indicators usage when evaluating financial stability

In last twenty years researchers, including ones from central banks, have been trying to identify conditions that would ensure financial stability. For this purpose they have used various statistical indicators that characterize and describe vulnerability of financial system. In reality many central banks in their financial stability reports try to evaluate financial stability related risks while only focusing on few main indicators. Furthermore there are efforts to create unified tools that would allow evaluating level of financial instability or stress. There are significant advantages to financial systems stability qualitative tools that would allow to follow developments in financial system if compared to qualitative measuring. Qualitative tools would allow policy creators and financial systems participants to: {1} better supervise level of financial system stability; {2} forecast sources and consequences of financial stress; {3} communicate with other institutions and population on current situation and forecasted development in a more efficient manner. Čihák (Čihák, 2007: 1–2) in his publication defines following characteristics of a good financial stability indicator can be easily calculated, easily interpreted, is based on adequate assumptions and has clear theoretical base. Author of this working paper will evaluate newly established Latvian financial stability indicator taking into account financial stability indicators characteristics that were mentioned earlier. However in author’s opinion there are 2 more characteristics of a good financial stability indicator – it gives true Figure if applied to historical data; it can be economically modelled using fundamental factors of national economy. Approach on forming and developing financial stability assessment tools has changed with the course of time. Eventually centre of attention for financial stability assessment and supervision has shifted from micro to macro level. If before early warning indicators that reflected risk of insolvency for specific institutions were analysed then now central position has been taken by assessment of broad financial market risks, institutional and infrastructure risks. Supervision of financial system at macrolevel is very important and after last world financial crisis it has become even more urgent. For example, in 2010 UK Financial Services Authority chanirman A. Turner said: “We need a new set of macro-prudential policy tools which will enable the authorities more directly to influence the supply of credit [...] These tools are needed because credit/asset price cycles can be key drivers of macroeconomic volatility and potential financial instability” (Turner, 2010: 1). In 2010 H. Hanoun (Hannoun, 2010: 1–26), deputy General Manager of the Bank for International Settlements, offered to add a level of macro-prudential policy to the micro-prudential policy base, therefore eliminating systemic risks. In H. Hannoun’s opinion this additional level would have two important aspects: its goal would be to ensure stability in the course of time; it would ensure financial system stability in any given time period. As it is seen from above macro supervision plays a great part in ensuring financial stability. Therefore development of relevant tools in order to effectively supervise macro economy is crucial. Policy makers and academic researchers focus on several quantitative indicators aiming to assess financial stability. Interna- tional Monetary Fund developed set of financial stability indicators (IMF, 2006: 75–87); also Hawkins and Klau (Hawkins, Klau, 2000), Nelson and Perli (Nelson, Perli, 2005), Gray and others (Gray, Merton, Bodie, 2007) work can be metioned as examples. Figure below summarizes sectors of economy that are usually analysed in scope of financial stability assessment in research papers (see Figure 1). Analysing real sector the most often used statistical indicators are: GDP changes trend and pace; fiscal position of government; inflation. Pace and trend of GDP changes indicate economy health and development potential. GDP is an important indicator, especially in conjunction with such economic indicators as loans volume and fiscal deficit. Nega- tive or low GDP trend points to economy in recession. Excessively high GDP trend could indicate economy overheating and unsustainable growth.

119 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

Figure 1. Sectors of economy that get usually analysed in scope of financial stability assessment Source: Blaise and Kaushik work “Measures of financial stability” (Blaise, Kaushik, 2009: 367–369), author’s Figure

Government’s fiscal position shows possibility to attract additional funding for its unbalanced expenses. High level of sovereign debt to GDP indicates relatively unsustainable sovereign debt and country exposu- re. In scope of inflation various price indices dynamics are assessed. High inflation indicates weakening of economy structure, debt increase and also increasing risk of external competitive capacity decline. Too low inflation could encourage financial bubbles. Similar economic indicators describing above mentioned sectors’ development and related financial stability risks are used both in scientific research papers and central banks’ financial stability reports (see Figure 1). It is noteworthy that some central banks actively use composite indices (see Table 1. Use of composite indices in financial stability reports).

Table 1. Use of composite indices in financial stability reports

Financial stability Banking index Index of financial Monetary condition index condition index Czech Republic X Switzerland X X UK X X Hungary X Turkey X ECB X IMF X X X

Source: Blaise and Kaushik work “Measures of financial stability” (Blaise, Kaushik, 2009: 373–374)

However, as it can be seen from the table, use of composite indices for financial stability assessment is not yet widely spread and used indices are primarily indices of banking and financial state. Interesting fact is that none of the mentioned countries and international institutions has developed monetary condition index. According to publicly available information none of the above mentioned composite indices has yet been developed and used for financial stability analysis in Latvia. All that together even further stresses the importance of this working paper. Composite indices advantages and development opportunities and principles are discussed in the next part of this working paper.

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2. Establishment of Latvian Financial System Stability Index

In 2010 Albulescu created composite financial stability index for Romania, thus greatly contributing to the development of financial stability assessment methodology described in research literature (Albulescu, 2010: 81–98). Approach described in his publication is taken as a base for Latvian financial stability index establishment. Working paper’s author will analyse available statistical data and will establish new Latvian financial stability assessment method that will be specifically adjusted for Latvian economic conditions. Wor- king paper’s author establishes Latvian financial system stability index using five sub-indices that are also established by this working paper’s author and that describe development of Latvian financial system. These 5 sub-indices are incorporated in one system with the development of domestic and foreign economic and financial environment (see Figure 2): (a) financial development index, (b) financial vulnerability index, (c) financial stability index, (d) European economic environment index and (e) European financial environment index.

Figure 2. Latvian Financial System Stability Index comprising indices Source: author’s Figure

(a) Financial development index Working paper’s author derives financial development index from 10 statistical indicators that describe Latvian financial system development and its effectiveness: ratio of financial market level of capitalization to GDP; ratio of disbursed Latvian lat (LVL) loans to GDP; ROE; ROA; banks funding effective interest rate; effective deposit interest rate; effective loan interest rate; net interest income margin; interest rate spread; banks reforms and interest rates liberalization index. (b) Financial vulnerability index: share of credit to households for housing purchases in credit total issued to residents; loans issued to non-banks to deposits; ratio of total deposits to M2 (broad money); share of demand deposits in total deposits. (c) Financial stability index: inflation level; ratio of state budget deficit to GDP; ratio of current account deficit to GDP; real effective exchange rate value increase or deterioration. (d) European economic environment index: Eurozone economics climate index; Eurozone inflation level; Eurozone growth rate. (e) European financial environment index: Respectively, in order to develop European financial environment index paper’s author has used data on harmonized long-term interest rates for Eurozone countries that are evaluated by the ECB and that represent government bonds with 10 year maturity. Variance is calculated from selected interest rates; in author’s opinion this variance characterizes financial environment of the Eurozone. After data selection composite index is calculated as a weighted average of chosen variables. Method of weighting indicators can differ: using overall factors analysis; weights can be chosen based on the size

121 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM and importance of the market that is described by specific economic indicator; using sample’s cumulative distribution function; using macroeconomic model’s simulation results; assigning identical weights to all economic indicators. Last approach is the most common and includes indicators’ normalization and establishing of composite index using same indicators’ weight. Blaise and Kaushik (Blaise, Kaushik, 2009: 370–371), as well as Al- bulescu (Albulescu, 2010: 81–98) working paper’s author will use same weights for all selected economic indicators in order to establish Latvian financial stability index. Similar to Albulescu approach this working paper’s author will use empirical normalization which in its nature is similar to mathematical normalization where lower and upper limits define interval from 0 to 100 which is achieved using formula (1) and multiplying its right part with 100. Empirical normalization method is based on formula:

Yt = X t − min X max X − min X , (1)

where Yt is variable’s normalized time series value for period t;

Xt is variable’s actual time series value for period; minX and maxX – respectively variable’s time series minimum and maximum values.

Normalization of selected indicators and establishment of Latvian financial system stability index’s sub- indices have been performed using formula (1). That results in definition of Latvian financial system stability index. Depending on sub-factors’ impact vectors reverse formula has also been applied to avoid cases when normalized factors eliminate each other’s impact on sub-index dynamics (for example, inflation level increase negatively impacts financial vulnerability index while current account deficit improvement positively impacts financial vulnerability index).

(2)

Figure 3. Latvian financial system stability index Source: data from FCMC, Bank of Latvia, CSB, author’s calculations

One could point out that Latvian financial system stability has been consistently decreasing starting from 2001 (see Figure 3). Especially rapid drop in Latvian financial system stability has been observed starting from early 2008, marking economic problems related to Latvian economy overheating. Firstly, analysing Latvian financial system stability index comprising sub-indices one can conclude that each and every sub-index has different development trend dynamics that are supported by very low level

122 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) of mutual correlation (see Table 2). That means that dynamics of every developed sub-index show unique economic processes defining Latvian financial system’s stability. Secondly, sub-indices analysis allows to determine that Latvian financial vulnerability began to worsen in 2005, however, Latvian financial stability downward movement started in 2002, that in its turn shows the necessity for Latvian economic policy makers to get more actively involved in preventing growing risks of economy. It is worth to add that overall Latvian financial system has been relatively stable up until 2008, but this was due to the fact that one part of this system has been experiencing positive changes while the other has been accumulating growing risks. Therefore, analysing only overall Latvian financial system stability index and ignoring sub-indices can lead to missing important signals on Latvian financial system stability potential risks and as a result being late on applying adequate improvement measures.

Table 2. Correlation among sub-indices of Latvian financial system stability index quarterly movements

Latvian Latvian Latvian European European financial financial financial economic financial development vulnerability stability index environment environment index index index index Latvian financial 1.00 development index Latvian financial -0.25 1.00 vulnerability index Latvian financial stability 0.09 0.17 1.00 index European economic -0.05 0.00 0.10 1.00 environment index European financial 0.20 0.24 -0.05 0.08 1.00 environment index Source: author’s calculations

As it has already been mentioned, Latvian financial stability index comprises 5 sub-indices and gets calculated as a weighted average with identical weights assigned to all sub-indices, in this way assuming same level of influence for all involved indices. First of them is Latvian financial development index (see Figure 4). As it can be seen from the Figure since joining the EU Latvian financial development index has been gradually improving up until the beginning of 2008.

Figure 4. Latvian financial development index Source: data from FCMC, Bank of Latvia, CSB, author’s calculations

123 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

Latvian financial vulnerability index is the next component of Latvian financial system’s stability index (see Figure 5). Here we can see a completely different Figure. It is clearly seen that Latvian financial vulnerability index began to decrease starting from the second half of 2005, thus pointing at increasing economic risks. This period corresponds to the beginning of Latvian economy overheating.

Figure 5. Latvian financial vulnerability index Source: data from FCMC, Bank of Latvia, CSB, author’s calculations

Poor quality assets write-offs and cessions to related 3rd party companies artificially improve banks’ fi- nancials. Therefore there is a risk that it is impossible to reflect those actions using econometric modelling based on fundamental economic factors.

Figure 6. Latvian financial stability index Source: data from FCMC, Bank of Latvia, CSB, author’s calculations

Second to the last index that is included in Latvian financial system stability index is European economic environment index (see Figure 7). European economic environment index dynamics reflect European economy’s cyclical development. It is interesting to note that European economic environment index started to notably worsen from as early as the beginning of 2008; it mainly happened due to unfavourable price dynamics in world markets. Analysing last sub-index of Latvian financial system stability index it can be derived that in time period from 2002 to 2008 European financial environment was very favourable and sustainable (see Figure 8). However, world financial crisis has rapidly changed the Figure, shifting European financial environment index down to very unfavourable. It has remained at that level throughout 2009. In 2010 conditions have improved, but European financial environment has not reached even half of what it has been before, pointing at structural issues in some of European countries.

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Figure 7. European economic environment index Source: data from Eurostat, CESifo, author’s calculations

Figure 8. European financial environment index Source: data from Eurostat, CESifo, author’s calculations

Evaluating all developed indices together it can be concluded that they reflect situation in Latvia and world in a very efficient manner. Speaking of rapid decline in Latvian financial stability index in 2008 it is evident that it pointed at the necessity of quick response measures from economy policy makers in order to prevent situation’s further worsening. It either has not been done or has not been done effectively. But even more interesting conclusions can be drawn from established sub-indices dynamics analysis.

3. Latvian financial system stability index modelling

Econometric error correction model has been developed in order to assess macroeconomic fundamental factors’ impact on Latvian financial stability index dynamics. This model belongs to the class of dynamic regression models and is used to analyse short-term impacts. It comprises two parts: yy long-term equation; yy short-term equation with error correction factor.

Long-term equation reflects fundamental variable impact on dependent variable and is based on long- term regularities that exist among economic time series used in modelling. In other words, mutually cointe- greted economic time series have to be used while assessing long-term econometric equation. Cointegration power must be 1, or in other words cointegration analysis must conclude that there is only one cointegration vector among used time series. This would mean that there is long-term correlation between time series and that it can be written down in one equation.

125 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

Theoretical form of long-term equation for the econometric model in question can be written down as follows:

, (3) where c – constant, – Latvian financial stability index at time periodt ; c is constant of the equation, is macroeconomic fundamental factor at time period t and is regression error at time period t.

Econometric hypothesis on ß coefficient signs in equation 3 will be defined after establishment of asses- sable econometric model with specific macroeconomic factors. Construction of short-term equation with error correction factor is the second step of error correction model creation:

, (4)

where represents difference, is error correction coefficient, is regression error in time period t.

Actual econometric model of long-term equation can be depicted in following way:

, (5)

Where:

F1 – Ratio of foreign currency loans to nominal GDP in period t;

F2 – 3 month interbank market interest rate RIGIBOR in period t;

F3 – Nominal effective currency exchange rate (logarithm);

F4 – Real workforce effectiveness (logarithm);

F5 – Actual real GDP level deviation from potential real GDP to real GDP in period t;

F6 – Actual unemployment level deviation from structural unemployment level in period t.

In order to evaluate level of structural unemployment and potential level of real GDP Hodrick-Prescott filter has been used. It allows separating short and long-term fluctuations from the economic variable, thus evaluating long-term development trend of the variable; this trend is traditionally treated as structural trend or potential level. During variable filtering standard Hodrick-Prescott’s filter “smoothing” coefficient has been used – the one that is normally used for smoothing quarterly data Results of econometric modelling of Latvian financial stability index for long-term equation are reflected in next table (see Table 3). During econometric modelling 6 out of 14 selected fundamental indicators that characterize economic development showed the best results. As it can be seen all evaluated coefficients are of statistical importance and their signs comply with previously expressed economic hypothesis. Variables variances within the econometric model explain more than 96 % of long-term fluctuations of Latvian financial stability index.

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Table 3. Modelling Latvian financial stability: long-term equation result

Dependent variable: Method: Least squares Sample: 2001 year 2 quarter – 2011 year 1 quarter Included observations: 41 Variable Coefficient Std. Error t-Statistic Prob. Constant -3.193 1.789 -1.785 0.083 ratio of foreign currency loans -0.128 0.014 -9.246 0.000 to nominal GDP 3 month interbank market -0.011 0.001 -8.115 0.000 interest rate RIGIBOR Nominal effective currency 0.749 0.340 2.205 0.034 exchange rate (log) Real workforce effectiveness 0.783 0.260 3.006 0.005 (logarithm) Actual real GDP level deviation from potential real 0.770 0.227 3.386 0.002 GDP to real GDP Actual unemployment level deviation from structural 0.012 0.005 2.557 0.015 unemployment level R-squared 0.969 Mean dependent var 0.587 Adjusted R-squared 0.964 S.D.dependent var 0.133 S.E. of regression 0.025 Akaike info criterion -4.362 Sum of squared resid 0.022 Schwarz criterion -4.069 Loglikelihood 96.412 Hannan-Quinn criter. -4.255 F-statistic 179.808 Durbin-Watson stat 1.679 Prob(F-statistic) 0.000 Source: author’s calculation

Results gained from evaluating the long-term econometric model are interpreted as follows: yy Foreign currency loan weight increase in GDP by 10 bps reduces Latvian financial stability by 1.28 bps with other variables remaining unchanged. yy 3-month RIGIBOR increase by 1 bps reduces Latvian financial stability index by 0.01 bps with other variables remaining unchanged. yy Nominal effective exchange rate increase by 10 % improves Latvian financial stability index by 7.49 bps with other variables remaining unchanged. yy Real workforce effectiveness increase by 10 % improves Latvian financial stability index by 7.83 bps with other variables remaining unchanged. yy Actual real GDP positive (negative) deviation from potential real GDP to real GDP ratio increase by 1 bps improves (worsens) Latvian financial stability index by 0.77 bps with other variables remaining unchanged. yy 1 bps increase of actual unemployment level’s positive (negative) deviations from structural unemployment level improves (worsens) Latvian financial stability index by 0.01 bps with other variables remaining unchanged.

It is worth noting that quality of evaluated econometric model is good. Its F-statistics results prove its correct structure and Durbin-Watson statistics is satisfactory, pointing at autocorrelation absence amongst model errors.

127 Kirils Kondratovs MODELLING FINANCIAL STABILITY INDEX FOR LATVIAN FINANCIAL SYSTEM

Following econometrical tests has been performed to make sure that there is cointegration between model variables, the variables are stable, there is no error series correlation and etc.: Unit root, Dickey-Fuller, Breusch-Godfrey regression error, Heteroscedasticity and CUSUM. Due to paper size restrictions author is not able to provide full description and necessity of performed tests. Evaluating long-term econometric model it is possible to evaluate short-term error correction model, too, based on its theoretical definition (2):

(6)

In addition to selected fundamental variables dummy variable has been added – its value is 0 at all periods except for Q4 of 2009 when its value is 1. It has been done because of the fact that in given periods selected fundamental variables couldn’t accura- tely define short-term dynamics of Latvian financial stability index. This could be due to the banking sector actions that resulted in non-earning portfolio write-off and bad quality assets hand over to 3rd parties with the purpose to show better financial results on books. In order to eliminate effect of those manipulations on econometric model’s evaluation, dummy variables have been introduced. Due to paper size restrictions author is not able to provide full description of short-term equation calculation.

Conclusions and suggestions

Following conclusions and suggestions are based on author’s performed research and analysis: 1. Newly established index and its accompanying methodology can be further used in follow-up research and Latvian financial stability index improvement. 2. Latvian economic policy makers need Latvian financial system stability index that can be: easily calculated; easily interpreted; easily communicated across; defined econometrically using fundamental economic factors; used for taking timely response measures on financial system stability emerging threats. 3. From 14 selected fundamental economic factors only 6 proved their econometric modelling usefulness. These factors are: ratio of foreign currency loans to nominal GDP; 3 month interbank market interest rate RIGIBOR; nominal effective currency exchange rate; real workforce effectiveness; actual real GDP level deviation from potential real GDP to real GDP; actual unemployment level deviation from structural unemployment level. 4. Latvian financial system stability index established in this working paper would have allowed to determine economy’s critically grown risks in 2008 and would have given at least half a year before the beginning of economic correction to perform loss minimising measures.

References

Albulescu, C. T. (2010). Forecasting the Romanian financial system stability using a stochastic simulation model. Ro- manian Journal of Economic Forecasting, p. 81–98. Bank of Latvia. Website: http://www.bank.lv/en/statistics/activities/ Blaise, G., Kaushik, J. (2009). Measures of financial stability – a review. IFC Bulletin, p. 365–380. CSB, Central Statistical Bureau of Latvia. Website: http://www.csb.gov.lv/en CESifo, Research “Ifo” Institute of the Center for Economic Studies (CES). Website: http://www.cesifo-group.de/portal/page/portal/ifoHome Čihák, M. (2007). Systemic loss: a measure of financial stability.Czech Journal of Economics and Finance, Vol. 1–2 (57), p. 5–26. EUROSTAT, statistical office of the European Union. Website: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home FCMC, Financial and Capital Market Commission. Website: http://www.fktk.lv/en/statistics/latest/

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Gray, D., Merton, R., Bodie, Z. (2007). New framework for measuring and managing macrofinancial risk and financial stability. NBER Working Paper. Hannoun, H. (2010, February). Towards a global financial stability framework. Retrieved August 25, 2011, from Bank International Settlements: http://www.bis.org/speeches/sp100303.pdf Hawkins, J., Klau, M. (2000). Measuring potential vulnerabilities in emerging market economies. Bank for Internatio- nal Settlements. IMF. (2006, April 4). Financial Soundness Indicators: Compilation Guide. Retrieved August 25, 2011, from Internatio- nal Monetary Fund: http://www.imf.org/external/pubs/ft/fsi/guide/2006/index.htm Nelson, W., Perli, R. (2005). Selected indicators of financial stability. 4th Joint Central Bank Research Conference on “Risk Measurement and Systemic Risk”. ECB Frankfurt am Main. Turner, A. (2010, March 17). What do banks do, what should they do, and what public policies are needed to ensure best results for the real economy? Retrieved august 25, 2011, from Financial Services Authority: http://www.fsa. gov.uk/pubs/speeches/at_17mar10.pdf

FINANSINIO STABILUMO INDEKSO MODELIAVIMAS LATVIJOS FINANSINĖJE SISTEMOJE

Kirils Kondratovs Latvijos universitetas (Latvija)

Santrauka

Finansiniai neramumai gali brangiai kainuoti. Ypač tai pasakytina apie sisteminius įvykius finansų rin- kose, tokius kaip bankų krizės, kurie skaudžiai paveikia visą visuomenę. Todėl svarbu numatyti tokių įvykių riziką, kad būtų galima išvengti nelaimės ir užtikrinti finansinį stabilumą. Šio straipsnio autorius analizuoja Latvijos finansų sistemos trapumą ir priklausymą nuo svyravimų pasaulinėje ekonomikoje bei pasikeitimų tarptautinio kapitalo srautuose, kuriuos galima įvertinti kompleksiniu finansinės sistemos stabilumo indeksu. Kiekvienas iš nustatytų subindeksų atskleidžia unikalius ekonomikos procesus, kurie lemia Latvijos finan- sinės sistemos stabilumą. Subindeksų analizė taip pat leidžia nustatyti, kad Latvijos finansinis pažeidžiamu- mas ėmė sparčiai didėti nuo 2005 metų (blogėti pradėjo dar 2002 metais), taigi Latvijos ekonominės politikos kūrėjai turėtų aktyviau įsitraukti į kylančios rizikos ekonominei sistemai mažinimą. Latvijos finansinės sistemos stabilumo indeksas ir metodologija, pateikti šitame straipsnyje, gali būti panaudoti tolesniuose tyrimuose ir Latvijos finansinio stabilumo indeksui tobulinti. PAGRINDINIAI ŽODŽIAI: finansinė sistema, finansinis stabilumas, indekso modeliavimas.

JEL kodai: G01

129 Linutė Kraujutaitytė METHODOLOGICAL STORIES ON REGIONAL GOVERNANCE

METHODOLOGICAL STORIES ON REGIONAL GOVERNANCE

Linutė Kraujutaitytė1

Klaipėda University (Lithuania)

Abstract We are participants of ever changing peripherization. A growing external control over social sciences has been spotted lately in academic community. This inspires to investigate a Lithuanian case on the discourse of regional governance in order to understand the impact of social research methodology in the processes of peripherization. With the intention to deemphasize domination, the article describes eleven stories designed for constituting methodological meanings of regional governance (RG) arrived at while reflecting upon public, academic and legal written texts. Texts were chosen to illustrate variety of international and national discourses, which manage the chain of reasoning on RG. The article ends with some insights on understanding RG and its methodological roots associated with three sets of principles drawn from qualitative research, quantitative research and discourse research. KEYWORDS: methodology, social sciences, discourse research, regional governance.

JEL codes: R590; H190; C180.

Introduction

In the Neolithic Age: There are nine and sixty ways of constructing tribal lays, and every single one of them is right! Rudyard Kipling

That happened in the Neolithic age. Now do we live in a different age? Are there still “nine and sixty ways” valid for writing tribal scientific lays? Many academics would caution about the growing external attempts to control social research by creating obstacles to publishing (e.g., Dodge, Ospina, Foldy, 2005; Konickis, 2003; Norvaiša, 2010) or by promoting traditional knowledge divides and privileged positions of some disciplines (ISSC, 2010). These ideas imply our research purpose to make sure, what are methodological hierarchies in social sciences in Lithuania? A case on regional governance (RG) makes it easier to approach the problem. Discourse research (DR) is a tool for revealing peripherised genealogies (Foucault, 1971; Gabriel, 2000). Is discourse research popular on RG in Lithuania? Personal experience suggests that hardly it is, especially in public administration texts. Elusive writings on RG show the signs that both DR and RG is still under peripheral spotlight (see, e.g., Atkočiūnienė et. al., 2010; Bileišis, 2012; Bruneckienė, Kučinskas, 2011; Daugirdas, Mačiulytė, 2006; Donskis, 2010; Dudinskaitė, 2011; Grigienė, 2011; Nakrošis, Martinaitis, 2011; Svetikas, 2007; Vaitekūnas, 2007; Žilinskas, 2009). What all these fragile shreds may mean in uncovering discursive nature of hegemonic methodologies? With these notes and some good intentions to deemphasize domination, we are led by some specific motiva- tions in the article, as follows:

1 Linutė Kraujutaitytė – Klaipėda University, Department of Public Administration and Law, prof. dr. Scientific interests: management, higher education, scientific research methodology. E-mail: [email protected] Tel.: +370 690 969 64.

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yy To resist traditional methodological forces which try to control the text. yy To remain open to post-modern undercidability in order to secure dynamical flow of reflection and a state of mind of “being and asking” (Sverdiolas, 2002); yy To take caution through diversity and ambiguity not to prescribe a single model that is up to discipline others (Focoult, 1961); yy To reveal some ways through which social researchers of RG are being subjugated for coming to know and occupy special approaches in academic hierarchies.

The article consists of eleven sections designed for constituting methodological meanings of RG arrived at while reflecting upon public, academic and legal written texts. The texts were chosen to illustrate variety of international and national discourses – more or less stable (deductive and legal) and flexible (empirical), which manage the chain of reasoning and empower to understand concepts, discourses and their implications for social researchers and for the future of RG in Lithuania.

1. A Story on Discourse Research

What is discourse research? The next question is how discourse research may be carried out? Whenever we touch upon a discourse idea, various stories should come to our heads: success story, problem story, change story. A story comes out when we want to share our ideas with others. So, a story may imply a discourse and a discourse may imply a narrative and vice versa (see, e.g., Anderson, 2003; Dodge, Ospina, Foldy, 2005; Feldman, Sköldberg, Brown, Horner, 2004; Foucault, 1971; Gabriel, 2000; Wells, 2011). All are expressed by a text. Texts contain meanings. We usually would not bother to participate in a meaningless discourse or tell a meaningless story. So texts are intentionally constructed. Any text may be an object of our attention: written, visual, sound, etc. Texts illuminate meaningful understanding of social reality and our experience. Texts may convey alternative, opposite, implicit (hidden), explicit and other meanings. We focus on explicit meanings, which will be con- densed into emphatic stories. These make easier to stress contextual weight and reveal hidden genealogical meanings that may not be seen without the enquiry. Meanings given by a story teller and a reader may be the same and may be different. Sameness occurs from methodological stability, while differences stem from interpretation: both are inevitable. However, if we encounter similar two stories, they dispense nomenclature – methodological stability. Implication: intention for convention vs. intention for discontinuity. This article is about both: about methodological stability and instability, normative and empirical interpretation. Turned to an enquiry method, interpretation is for revealing meanings. As such, interpretation may be based on a conceptual framework or may just be directed by the general questions: “What is a story that the text renders?”; “What is it all about?”; “What message it yields?” These questions are adequate to our case. A conceptual framework that we may appeal to, – e.g., hegemony, power, human rights, indigenous culture, oppression or equality, sustainable development, etc. – constrains our capacities of interpretation, since the sense in or the point of view from which we are going to discuss RG is already known. Contrarily, our approach free of any background political theory allows unbundling various intuitive insights. On the other hand, if our conceptual pathway is known, a question persists: why then we should strive for inquiry? Perhaps the reasons are the same as in the case of not knowing conceptually what to look for: for the sake of knowledge development that may be meaningful to each of us differently; for richer understanding of the subject and each other; for expanding our scientific horizons; for keeping balance between nomenclature and creativity, between the centre and periphery; for learning to express no domination over others; for that we care about people and their equal rights. People shape stories and stories shape people. If our story is to announce a single and the only methodological truth, we definitely are on the way to dominate over the other “nine and sixty” possible ways of constructing stories.

131 Linutė Kraujutaitytė METHODOLOGICAL STORIES ON REGIONAL GOVERNANCE

Nevertheless, a story is told in order to persuade others that the meaning the author wishes to be heard is the right one. Right meaning is not the same as a true one. Although both may be based on facts and theories; both may be directed to achieve some important targets; both may be addressed to provoke others for re-action; both may be arrived at by similar methods; however true meaning constitute stability, while a right one renders seeds for change. Plato’s allegory of the cave, Hardin’s tragedy of the commons, Marx’s theory of capital or Simone de Beauvoir’s oeuvre on the second sex all are exemplars of grand narratives. They all may constrain the directions of our intentional thinking. Nevertheless, they all are right stories. They all render discontent rather than content: they all inspire to change a status quo. They all have openings, actors, moving targets, plots, closures and audiences to whom they are designated. Yet, yesterday they all sparkled with epistemological meanings. Today they are just rhetoric of the past. The most stable are normative stories because of deduction and convention. A normative story is on how things should be in the ideal state that we think might be right for all. If legally approved, a normative story becomes a binding one. So first, what does it mean RG in academic deductive sense? Second, what are the stories on RG that the legal texts portray? What renders those legal stories on RG in conventional sense?

2. International Stories on G and RG

Regional authorities together with local ones are the main actors closest to lay people and citizens. They act as initiators for encouraging people engagement in various social projects of everyday life. The key role of regional authorities for advancing governance (G) denotes something that is alternative to market driven mechanisms, top-down management or hierarchical structures of government (see., e.g., Ágh, 2010; Bache, Flinders, 2004; Bileišis, 2012; Bufon, 2011; Godsäter, Söderbaum, 2008; Marschal, 2003). While government designates a “command and control” principle, governance is understood in terms of autonomy, egalitarism, negotiations, agreements and community networks empowerment principles. While government is about one-sided regulation, governance is about sharing authority and responsibility between many social, political and administrative actors: governance = sharing authority. How different policy and non-governmental actors share formal authority and responsibility? This is a vital question that might be addressed by a democratic citizen to a democratic governor. A wider view of understanding governance has been generalized in such concepts as meta-governance, multi-level, multi-actor, polycentric or institutional network governance as well as inter-sectoral governance or private-public partnerships (PPP). Altogether, these theories capture the idea of growing dispersion of central government authority both vertically and horizontally. They explain the need for creating close in- terdependence between government and nongovernmental actors operating at different territorial levels. As a result, they may signal about the arrival of a new style of public management, called as a co-management. Vertical discursive dimension of governance refers to co-management operating at different territorial levels, such as supranational, national, regional and local. Therefore a story on multi-level governance may be about, for example, the ways, how complex local problems of a small municipality can be handled by negotiations in Brussels for regional structural funds. Or it may be about possibilities of a regional councilor to represent the interests of a region at local, national or supranational levels. The leading part takes meta- governance, which decides on who will regulate and how. Horizontal dimension signals about co-management performed by multi-actors, such as states (governments), markets (business) and civil society. Collaboration and negotiation between these actors is of particular importance. So a horizontal discourse on governance may focus on negotiations, shared responsibilities, competences and recourses addressed towards and for the sake of a community in order it were empowered to overcome a complex problem. This type of theorizing may run along the headlines of PPP frameworks, including discussions on network or inter-sectoral governance. A story line “from government to governance” may even be evoked to mean the move of national sovereignty to regional authority in the sense that the national state has been gradually replaced by new forms of territorial organization and multi-level cooperation (Bagdzevičienė, Vasiliauskaitė, 2002; Bufon, 2011;

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Burbulytė, 2005; Jäger, Köhler, 2008). Since there might be regions of different territorial scale, so might be different regional places for developing different regional authorities, which promote diversified regional governance too. In this sense we may focus on (3M or 4M theory): 1. Micro level regional governance, related to subnational territorial institutions acting in different administrative subdivisions of unitary or federal types of states or confederations. A topic on regional governance in Lithuania might be an example. 2. Meso level regional governance relative to conglomerations of a few international actors and territorial initiatives concentrated on indigenous regional targets, such as, e.g., The Baltic See Region, NAFTA, Euro- pean area region, Asian or African region. 3. Macro level regional governance associated with the supranational arrangements and co-management frameworks such as, e.g., The Council of Europe, NATO or UN. Experience of the Congress of European Municipalities and Regions may be cited also as an example of a discourse on how regional governance works at international macro level. On the other hand, we may even attribute such projects as UN or NATO to a different – mega level of regional governance (the 4-th M theory). Here we have captured a small slice of dynamism of the discourse on RG rather than temporal stability, to which we are going to turn next while trying to explicate structural-functional stories attached to the 3M theoretical approaches.

3. A Macro Legal Story on RG

This story on RG may be about democracy development in Europe told by the Council of Europe (see e.g., CE, 2012; CLRAE, 2001, 2012). The Congress of Local and Regional Authorities of the Council of Europe (CLRAE) is one of the main supranational players in assuring the rule of law and Human Rights in Europe. It is a pan-European political assembly with the 636 members of which hold elective office. The members of the assembly are regional and municipal councilors, mayors or presidents from 47 European states, including Lithuania. The CLRAE mission is to promote local and regional democracy, improve local and regional governance and strengthen self-government of regional and local institutions. The CLRAE is a consultative institution with the supervising obligation to check how the principles laid down in the European Charter of Local Self- Government are being applied in the European states. “It encourages the devolution and regionalisation processes, as well as transfrontier co-operation between cities and regions” (CE, 2012). The Congress initiates international treaties and projects for strengthening local democracy and transfrontier co-operation. It also encourages setting up of national associations of local and regional authorities, local democracy agencies and the new kind of Euro-region. The European Charter of Local Self-Government, drawn up by the Congress, was ratified by the Seimas of the Republic of Lithuania in May of 1999. This act represents Lithuania’s promise to follow the Charter’s principles as well as the Congress’ recommendations. What commitment has Lithuania’s authorities to ad- here to, while following the Congress recommendation and how Lithuania succeeds? How the legal written discourse between Lithuania’s authorities and the congress has been flowing? In 2001 the Congress states that Europe expects Lithuania’s territorial administrative reform unfolding into the “enlarged regions run by directly elected regional councils representing a genuine system of regional self-government” (CLRAE, 2001, art. 14). The Congress recommends constructing regional governance based on concrete socio-economical and ethno-cultural needs, revealed by means of a regular consultation with the population. In general, the Congress sees Lithuania’s administrative reforms run towards the creation of a system of regional self-government as a new tier of authority with its specific executive bodies and administrative structures, which share responsibilities with municipalities, based on the principle of subsidiarity. A decade past and the Congress prepares a second set of Reccomendation numbered 321 (CLRAE, 2012), which registers the concern of the Congress that in Lithuania “since 2010, administrative functions have been removed from the counties and re-distributed to either central or local government, moving away

133 Linutė Kraujutaitytė METHODOLOGICAL STORIES ON REGIONAL GOVERNANCE from (rather than moving towards) a system incorporating regional government, without putting in place a structure that could compensate for its loss”. In this case the Congress addresses its recommendation to the Committee of Ministers for it would invite the Lithuanian authorities to “take measures to develop stronger regional tiers by increasing the number of competences of the Regional Development Councils, strengthening their administrative apparatus and allowing them to establish regional budgets” (CLRAE, 2012). The promise given by Lithuania to Europe is still a valid challenge.

4. A Meso Legal Story on RG

In the similar way as the macro story, meso story may also focus on democratic style of regional management: democratic style of management = governance = co-management = authority sharing = policy coordination = participating democracy. However if the macro story transmits the message of the CLRAE’s mission to promote democracy at regional and local level, the meso story, which the EU authorities have been developing, focuses on the governance as the vital tool for promoting economic, social and territorial development and enhancing cohesion between regions (see, e.g., EC, 2001; CR, 2009). So, both authorities are interested in improving governance at regional and local level for combating inequalities. The first actors take care about democratic equal rights; the second players stress equal access to other social goods in terms of sustainable development and quality of life. As regards RG, the issue of democratic deficit is a priority concern by the EU (see, e.g., CR, 2009; IES, 2009). The EU notes that the level of trust of citizens in politicians and public administrators has been constantly decreasing. Citizen interest in political parties and voting has been diminishing. Expectations for better life have been increasing in the proportion with the demands to authorities. Satisfaction with government actions has been declining. The gap between the governors and the governed has been expanding. These facts put at risk of undermining representative democracy. The reasoning line runs like that: if only a minority of citizens express their political will, e.g., to participate in elections, this way legitimized political decision making may be found questionable. Therefore the governing models that see elections as the sole instrument of democracy need to be reconsidered and redesigned. Governments need to empower citizens for broader political participation and cooperation. Engaged citizens in governance are more likely to be informed, active, satisfied and expressing more trust in government. What is the best way to implement the approach of “building Europe in partnership”? “Governance” means rules, processes and behaviour that affect the way in which powers are exercised at European level, particularly as regards openness, participation, accountability, effectiveness and coherence” (EC, 2001). So the White Paper directs attention towards the mode of multi-level governance while announcing governance principles to be acted upon, implemented, maintained and enhanced. Moreover, the Committee of the Regions (CR, 2009) takes over the efforts to advance and follow such European political and administrative culture, which recognizes that: yy local and regional authorities are genuine “partners” rather than mere intermediaries. yy the principle of subsidiarity is guaranteed both legally and in practice; yy fundamental rights, which include local and regional autonomy and respect for diversity are assured; responsibility shared along all tiers of government; yy a pan-European consensus on multi-level governance based on democratic values is established; common and shared understanding of European governance is promoted; yy a process for integrating the objectives of local and regional authorities within the strategies of the European Union is evoked.

These guiding ideas promote political action that has been constructed on the grounds of democratically elected local and regional authorities in the EU. The Commission establishes systematic dialog with Europe- an and national associations (EU, 2012). Members of the states have their constitutional autonomy to form the tiers of regional authorities. Therefore, in the EU member states, actors sharing responsibilities between

134 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) local, regional and national authorities vary, ranging from voluntary institutions to directly or indirectly elected regional councils and assemblies. Nevertheless, actions of the European Commission’s Directorate General for Regional Policy (DGRP) shape the development of RG in the EU member states. It is not only in the sense that regional policy targets and strategic programs are being set at European and national levels and implemented at regional and local levels. It is not so much in the sense that those programs are financially supported by the EU. Much more than that are the DGRP’s efforts to implement the approach of “building Europe in partnership”, based on diversity and solidarity. The mission of the DGRP is “to strengthen economic, social and territorial cohesion by reducing disparities between the levels of development of regions and countries of the European Union” (DGRP, 2012). While managing such frameworks as, e.g., the European Regional Development Fund, the Cohesion Fund, the European Union Solidarity Fund, the DGRP assists less prosperous EU regions in job creation, competitiveness, economic growth, improved quality of life and sustainable development. However, the access to the funds is available only to those who commit themselves to the principles of partnership governance at least in four fundamental senses as follows: yy Co-operation between economic and social partners; yy Co-financing: EU + national/regional funds; yy Co-ordination of measures and resources for socioeconomic and territorial cohesion. yy Co-management = multilevel decision making and implementation.

Responsibility for assuring wide multi-actor participation in the RG takes the agency of the Committee of the Regions (the Committee). It represents the local and regional authorities within the European institutional system and plays the role of a partner in the dialogue (see, e.g., EU, 2012). The Com- mittee consists of 344 members and alternates from all 27 EU Member States. Members and alternates are appointed for a five-year term by theC ouncil, acting on proposals from the EU countries. Each country chooses its members in its own way, but the delegations all reflect the political, geographical and regional/local balance in their country. The members are elected members of or key players in local or regional authorities in their home region. The committee’s mission is to incorporate regional and local authorities and the communities they represent in the EU’s decision-making process and to inform them about EU policies. The Committee accu- mulates local and regional points of view and puts them forward on EU legislation by issuing reports (‘opinions’) on Commission proposals (EU, 2012). Although the Committee of the Regions is an advisory body, The European Commission, the European Parliament and the Council are legally obliged to consult the Committee and to receive its approval prior to EU decisions are taken on matters concerning local and regional governance. If the macro story on RG sounds like polite reproach to Lithuania expressed by representatives of Europe, the meso story is beyond the reproach. Nevertheless, the support of EU must insert remorse on the part of Lithuania. Perhaps we must regret for being seeds in a scorched land, just because the waters has flown past.

5. A Micro Legal Story on no-Governance

We do have neither governance (Bileišis, 2012), nor regional governance (Dudinskaitė, 2011; CEC, 2008; Šileika, Šimulienė, 2011) in Lithuania. So the story on no-governance may run along the lines of how government style is going to be changed and implemented. The Program on the Development of Public Admi- nistration (LRS, 2012) states the necessity of the reform in order to increase efficiency of public administration (PA) and meet the needs of Lithuanian people. The main mission of PA is to fulfill people needs. People need authorities to be more open and transparent, more effective and more available for public participation. How these priority needs are planned to be turned into practice?

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First, Lithuanian people complain they lack information on how public institutions work and what kind of changes implement. So if transparency is a problem, regulation on better delivery of information is the very solution. Second, officials rarely consult with the people while preparing public projects. So if hearing people advice is a problem, better regulation on systemic consultations between authorities and the stakeholders is a solution. Third, people would be happy to offer some advice on policies; however officials are not bound legally to include their proposals in the frameworks of decisions. So if responsibility of public officials is a problem, better regulation on the procedures of consultations is the solution: officials will be obliged to register people participation, to monitor it and measure its impact for decision making. Fourth, In Lithuania legal acts guarantee people’s right to informal participation in the decision making processes on both levels – national and local, and people would definitely exercise this right if they could; people lack skills of public responsibility, they lack knowledge and competences of leadership. So people need to be taught how to practice initiative and how to exercise and promote leadership; so do public officials. Fifth, people complain on the quality of public services that do not correspond to people needs. The best answer to that are institutionalized national standards on the quality of public services which support the principles of subsidiarity and wider public participation. Moreover, permanent service quality monitoring should be strengthened and centralized; administrative service of the “one stop shop” should be advanced; possibilities for the dialog on service quality between users and suppliers should be created; institutional conditions for increasing competition of public service suppliers should be innovated on the lines of public “money follows the service” user rather than its supplier; public services should be concentrated around the newly established centers. Finally, evidence based and result oriented strategic management should be advanced following the objectives to strengthened the capacities of strategic planning; to minimize regulation; to level hierarchical authority structures; to optimize management structures by joining small public institutions into the bigger centers; to homogenize the activities of public institutions; to increase attractiveness of public office; to strengthen monitoring of its activities; to reinforce collaboration between public institutions; to enhance the capacities of using innovative technologies of public management. So the mini story on no governance persuasively states that the government in Lithuania is going to be very busy in centralizing and decentralizing; in increasing regulation and minimizing it; in bureaucratizing and dehierarhisizing PA structures; in homogenizing and diversifying their rules in 2012–2020: very busy government vs. very passive citizens. Government is an inevitable event; public must be a reaction.

6. A Micro Legal Story on no-RG

The Ministry of the Interior of the Republic of Lithuania (MI) is responsible for state policy in the field of public administration, including regional public administration (LRS, 2000). The MI arranges and coordinates production and implementation of both policies. Apropos: in Lithuania, regional public administration is of two types: 1) regional public administration of European support managed by the Finance Ministry of the Republic of Lithuania and 2) regional public administration of Lithuania’s support (national regional administration) managed by the Ministry of Interior. So national regional public administration = national public government of Lithuania’s regions. The main task of national regional policy in Lithuania is focused on redistribution of public investments in favor of less developed regions (MI, 2012). It is aimed at reduction of regional socio-economic (statistical) disparities within the (statistical units of the) country. It is implemented via regional development plans, national strategies and programs, local and regional initiatives (MI, 2012). Strategic provisions of national regional policy are incorporated into EU structural support programming documents which allows using EU support for national regional policy (MI, 2012). The main actors in the area of national RP development are as follows (MI, 2012; LRS, 2000; VRM, 2012): (1) The Government of the Republic of Lithuania (GRL), (2) The Ministry of the Interior (MI), (3) The National Council of Regional Development (NCRD), (4) The Councils of Regional Development (CRD),

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(5) ministries, municipalities, social and economic partners. (1) The GRL holds the power for making decisions related to regional policy (RP): it institutionalizes national RP. It composes regions demarcating the lines between and regionalizing counties and municipalities; the proposal of the demarcation for approval it transmits to the Seimas (LRS, 1994). GRL also appoints members to the NCRD and approves its chairman. (2) The Ministry of the Interior (MI) coordinates the development and implementation processes of regional policy. Among other mandates, the MI approves the members to the Council of Regional Development (CRD); approves the regulation on the actions of the NCRD and organizes meetings of its members; prepares programs related to the reduction of disparities between regions and the development of problem regions in Lithuania; administers finance of the program of regional development; controls municipalities and other public institutions how they implement MI’s recommended provisions (LRS, 2000). There are two main subdivisions at the MI (VRM, 2012). The first one is the Department of Regional Policy (DRP). The second one is the Department of Regional Development (DRD). The first one produces policy of regional development, the second one implements it at deferent territorial counties. The first one resides at the centre, the second one is deconcentrated along the counties. DRP participates in producing projects of legal acts, while DRD has the right to produce projects of plans on regional development. DRP orders, while DRD executes. DRD coordinates the activities of municipalities and social partners, while DRP controls how DRD and other MI’s subordinate offices work in the field of regional policy. (3) The National Council of Regional Development (NCRD) holds the status of consultative institution: it discusses national planning documents on RG, prepares recommendations for their improvements. Nevert- heless, its approval is obligatory prior to the MI’s prepared programs proceed to the GRL (LRS, 2000). The NCRD include representatives from ministries and other governmental institutions, the Association of Local Authorities in Lithuania, social and economic partners and the chairmen of the CRD. The NCRD members meet at least two times a year. They can invite to the meetings social and economic partners from the sectors that have no representatives in the NCRD. Invited people participate on advisory terms. (4) The Councils of Regional development (CRD) exercise advisory powers at the national level and some authority force for the development of regions at the territorial county level. There are 10 territorial counties, each having a separate Council of Regional Development in Lithuania. Municipality mayors be- longing to the same region, delegated representatives from the region municipality councils and members appointed by the GRL compose the structure of the CRD. It is a collegial institution which mission is to stimulate sustainable development of the region. The CRD works in collaboration with the central-regional DRD, the latter serving as a secretariat of the first. TheC RD approves its own regulation of actions and elects its chairman. It also holds powers to approve planning documents on the development of its own region, to select projects addressed to put the plans into practice and to control their implementation. The micro legal story is the newest story on regional government in Lithuania. It signals about centralized regional government in Lithuania 2012. Its nearest roots may be visible in a multi-voiced story in 2010, to which we are going to turn further.

7. A Multi-voice Story on delimitation

Counties and municipalities are legal territorial administrative units of the Republic of Lithuania (LRS, 1994). Counties are administrated by the Government of the Republic of Lithuania; institutions of local authorities are in charge for the management of municipalities. The county is formed out of the territories of the municipalities that have common social, economic, ethnic and cultural interests. There are 10 counties and 60 municipalities in Lithuania. Are counties the same as regions in Lithuania? Yes and no. Yes, they are in the sense of planning and implementation of regional policy: national regional policy is planned and implemented in the counties (DRP, 2012). No, they are not in the sense of the GRL’s right to transcend the boundaries of counties while seeking national interests: the Government can construct purposeful non-administrative territories (regions) out of a few counties or municipalities that have the same territorial boundaries (DRP, 2012). This has helped Lithu-

137 Linutė Kraujutaitytė METHODOLOGICAL STORIES ON REGIONAL GOVERNANCE anian authorities to be flexible in consolidating national regional policy with the EU regional policy, which is administrated on the bases of NUTS. NUTS = legal nomenclature of classification dividing territorial units for statistics within the EU territory (EC, 2007). NUTS classification embraces a three-level structure that defines minimum and maximum population thresholds for the size of the NUTS Euro-regions. Lithuania is a Euro region close to NUTS 1. Its territory can be further divided into units of NUTS 2 (Lithuania), which in turn are divided into NUTS 3 level territorial units (10 counties and their non-administrative territorial conglomerations which the GRL is free to construct). Statistics is helpful in particular while deciding which regions need badly financial and other support. However this freedom of the GRL for maneuvering with the territorial boundaries was one of the many reasons which determined political will to reform public administration in Lithuania in 2010. Since juris- dictions of public administration and implementation of regional policy diverge, authority areas also become unclear. If regional policy is planned and implemented in the counties, they must have democratic (elected) powers for exercising authority based on clear cut boundaries of a particular territory (see, e.g., Daugirdas, Mačiulytė, 2006; Dudinskaitė, 2011; Svetikas, 2007). Moreover, centralized government of counties is ineffective for its decisions are too far off people; centralization produces passive regional policy which does not lead to expected results; instead of focusing on increasing county’s competitiveness, regional policy is still concentrating on the direct support to the counties in need; such policy increase problem region’s dependence on the national and the EU support rather than increasing its competitive potentials; because the average county calculates 350 000 people, Lithuania’s counties in general are too small for conforming to the NUTS 2 regulation, accordingly to claim support available from the EU for minimizing regional socio-economic differences starting from 2014 (ibid). So in 2010 the reform measures on the county administrations have been implemented in Lithuania. This counts as an empirical event, which results have already been reveled in the previous Micro Legal Story on no-RG. A reaction by Lithuanian experts towards the reform is another event worth of our attention for it presents another – empirical inductive meaning on RG.

8. A Story on Auca 2010

In 2010 the county governor’s administration (CGA) was abolished in Lithuania. It was a fact that passed not without attention of social researchers. What does the fact of the administrative change mean in terms of regional governance according to the minds of Lithuania’s experts in governing matters ♠? L. Dudinskaitė’s (2011) story on the case is extremely comprehensive, drawn from texts of academic literature and experts’ interview recordings. She reveals a rich pool of data for further utility, exhibiting a particoloured reasonage (♣♥) of the administrative reform in Lithuania. Using the reasonage we will construct a new story of Auca 2010, building it on the principle of “everything matters” ♠♥. What does it mean in terms of changed RG situation ♠? What Lithuanian experts wish us to believe concerning Auca 2010 ♥? How the process of telling stories and persuasion has been constructed ♥? Let’s the story start from determinism: Lithuania’s reform of county administration as well as many other administrative events in Lithuania have been determined by external, rather than internal national forces ♣ (Dudinskaitė, 2011♠; Nakrošis, Martinaitis, 2011♣). Auca 2010 has been prompted by the world economic crises of 2008 as well as by the EU pressures. Earlier formed political ideas gained momentum of being established: external pressures were transformed into internal change. Imagine the situation. Who has any interests in the reform? Municipalities have. They have been expecting to gain more powers. Unfortunately, they were failed, since the bulk of the functions from the CGA were handed back to central authorities. The fifteenth national administration cabinet also is concerned with the reform. Lithuania needs to eco- nomize. The global crisis brings this message; the Constitution of the Republic of Lithuania does not forbid centralization ♣. Besides, national government has its powers to initiate the reform or not to. After all, regional policy also is one of the main obligations to be performed by the national government.

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A good opportunity occurred, a new solution for saving public money by reducing bureaucratic apparatus was found. The aim of Auca 2010 had been meant for decentralization of public administration. However, during hard times centralized ways of regulation are more effective than decentralized. So in order to save a sparrow in our palm we have to lose an elk in the forest. Heroic deeds require some intermediate periods even at the expenses of democratic principles. Saving money turned to be the priority. Auca 2010 mirrors no special ideological aspirations. It has occurred not because of any particular con- servative, liberal, socio-democratic or other political ambitions. All parties supported the reform. It was a consensual political decision ♠. Nevertheless, the reform must be understood in terms of accidental collision of external forces ♥♣. Some hidden intentions may also be penetrating ♥. Managerial interests of sharing functions were overridden by political ones. This may have to do with the right party intention for revenging the oppositional party: the county governors had been established by the lefts, they were supposed to be sus- pended by the rights. Hidden intentions may also be attributed to the scapegoating: it is the county governor’ fault that life in Lithuania is not easy. No other alternative models of RG were offered and discussed; no debates on how to share administrative functions initiated. Silence was useful to the government for relocating functions according to its own convenience. Lithuanian mass media was politicized; it delivered information, which politicians saw to be necessary to. The media intentionally witnessed the reform beneficial for society. So politicians, rather than reporters designed the minds of Lithuanians ♥. The reform was crafted by political elites. They persuaded society to conceive county administration adversely: regional government consumed money; it was very passive in public life; it protracted land reform; it duplicated functions of municipalities, its poor management and financial misconduct failed to meet people needs, etc... So it is too little to say that the CGA was understood as not being useful; rather it was seen as being wasteful. Regional administration is economically detrimental. Society believed. On the other hand, society has been little concerned with reforms lately. Therefore the main idea of simplifying public administration by cutting its one hierarchical unit came to seem very attractive. The Ministry of Internal worked hard on preparing amendments of about a hundred legal acts, analyzing of relocation of administrative functions between the levels and sections of government as well as organizing the reform in counties. Duplicated functions were eliminated; some functions were decentralized, the others centralized; the minister of the MI used often to stress the reform would allow much saving. Yet, society did not receive information on the details of the reform flow: e.g., how and why functions, money and staff were relocated; how much money spent on what and how much money were saved. The reform process was protracted, legalization of decisions was late; cases on debts of county governor administration stacked up in courts; misconducts were tried to be calculated. Fired people from the CGA were disappointed. However it is impossible to make all people happy during changes. Besides, the majority of administrative staff was moved to analogical working places transformed to ministries or municipalities. Still, many issues remain relevant, such as staff skills, relationship between functions and finance allocated to municipalities; the need to change Constitution of the Republic of Lithuania for further decentralization; land management. Municipalities are not content with the reform results. Situation of Lithuanian people after the reform has not been changed, except that people might feel un- comfortable for a while. But because the bureaucratic apparatus has been slightly minimized, it might even be much easier for our society not only to understand how government runs but also much more comfortable to handle their own private business: fewer levels of authority, more private life. Critical reflections of the preparation for the reform and on its ex-post implementation were very rare and sporadic. Media in Lithuania usually delivers bad news. Since it kept silence, Auca 2010 is good news. After all, Auca 2010 is only the first step of the reform. It is a nationalization of regional policy for the preparation to the new programming period. Formation of new regions is going to be the next step. Having in mind that regional policy is natio- nalized, now it is a policy of drift; even though we had got some blaming from European organizations for not established principles of self-governance at a county level. We need a new public administration model for RP; we need regional governance.

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In sum, the abolition of the CGA means political promotion, determined by the consensual political decision as a result of rhetorical pressure for financial profit ♥. The nature of the decision is populist (all agree), promotional (we regulate), scapegoating (it is its fault, not ours), imitating governing (we make things move) and simulating the efforts of effective governing (we save public money) ♣. The overall result of the reform is contrary to the recommendations of the Council of Europe: instead of decentralization national government turned to more centralization. Anyway, governing processes now are simpler and more comfortable to national governing institutions. Democracy costs much. Therefore exercising democracy has not been attracting Lithuanian government yet. Government needs movement. The movement of Auca 2010 has put Lithuanians on great expenses in terms of money, democracy and human rights. Generalization which stems from the revealed data ♣: in 2010 the administrative unit of county authority (Auca) in Lithuania experienced the reform during which deconcentrated county governors office (the CGA) was replaced by the national county agency, i.e. by the deconcentrated DRD (a secretariat). In Lithu- anian language, sounding of Auca denotes a victim: Auca suffered the reform, however survived unchanged in its centralized RG nature. This “metamorphosis” is a real event and a social phenomenon of 2010 that from now on may be called Auca 2010: the administrative reform aims to reform national regional government, yet produces no more than the national regional government ♣. Can we say then that a management reform sometimes may mean much ado about nothing ♠? Perhaps; Auca 2010 has gone ♣. The story on it is for us to learn ♥. Paradox of rebranding ♥♣: Lithuanian government is in fact submissive for its acts are changed by external social forces. Yet the indigenous sabotage is evident: European authorities prefer democracy while Lithuanian government firmly resists it in terms of RG. Why is it so?

9. A Story on centralized reasonage ♣

Why regional reform in Lithuania has never taken the direction of decentralization? This is the question that has been openly discussed in a conference and transformed into a written text, which looks like a public dope (see: Donskis, 2010). Reasonage on Lithuania non-decentralization persuades that: yy Lithuanians stick with a primitive nationalism supported by the lack of identity. yy The local autonomy has been eroding: city councils and mayors lack powers to act. yy Political parties promise decentralization, once they get into, they act on centralization. yy President office powers are too weak: though all presidents of independent Lithuania see the state as decentralized country, rights to decide on regional policy are in the hands of the Seimas and the Ca- binet of Ministers. yy Decentralized authority in Lithuania will cause the country to receive significantly less funding from the EU for Regional Policy intended to decrease socioeconomic disparities. yy Lithuania is understood as one of 271 EU regions in Brussels. Centralized decisions on fund allocation for regional policy are being made in Vilnius, the capital of Lithuania. Responsible ministries in the centre are too busy for being truly concerned with the right situation in the regions. As a result, EU funds are being allocated not for the right targets.

In general, democracy does not work in Lithuania because it is underfinanced (?). This would be too simple explanation persuading that matter is prior to consciousness. This would make us take somehow a Marxist position: economy is the basis of culture. Although we may not like it, we still stay on the same Marxists tune if we reason that decentralization fails because those who have power are not interested in losing bags, which feed them. Unfortunately, this is also a precarious conclusion. It makes us believe that all who have power are selfish, while in fact human nature is much more complicated than just one category can explain. We may find some other reasons and accumulate some more reasons, compare and weight upon them until we find the very reasonage that satisfies us. We may… if it would be meaningful ♥. And it is truly meaningful for some social researchers, while the others find some different meaningful pathways of partici-

140 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) pating in the discourse on RG ♥. Not least is speechlessness of the speechless that matters. It constitutes the very semantic closure of the reasonage of centralized authority.

Conclusions

♥: Insights on regional governance There is difference stressed between the governance of national, regional and local levels in the international and Lithuanian discourses. Regional is something in between of and transcending national and local. It is something that we need a middle-range theory to explain it. RG means both something less and something more than national state governance in terms of territorial design, scope of interests, institutional rules and governmental mission. As we have seen in the stories on no-RG, regional may be understood as being the same as national. Ho- wever, in cognitive terms then our discourse may proceed on regional government rather than governance. In empirical sense, a question of authority taking care to integrate interests of central minority with peripheral majority in the national community comes to be relevant. How then we are to slow down the minority acting in the centre, who running much faster than majority in the periphery, subjects the majority for the minority speedy purposes to be fulfilled? ♣: Insights on RG methodology Stability: we usually associate methodology with ontological and epistemological research principles. While constructing stories we draw our ideas from different methodological collections. At least three sets of them can be envisaged in the stories on RG: (1) brick – ♣, (2) bricolage – ♠, (3) brand – ♥ thinking. Appe- aling to their essences, what matters here is difference between the truth of a fact, experience and meaning. All in our minds are mutually supportive rather than excluding each other. The signs of ♣, ♠, ♥ illuminating distinct sets of principles respectively provide us with some evidence showed in the stories above. ♣ A Story on a brick methodology covers the idea that facts are bricks out of which we built knowledge. Social world (RG) is natural/real; it is outside our minds; a researcher is an impartial mediator between reality and truth. Catch the natural order objectively! Seek objective truth! Think rationally, check empiri- cally! Nature determines social world. People act according to laws of nature. If we know those laws, we can control social life. If we can predict floods, we must be able to predict RG developments. Variables, experiments, observations, verifications or falsifications and measurements are to help us to determine what the nature of a natural thing is and how it works. Language constructs reliable research instruments, they reveal true data. Hypotheses, facts, laws, numbers, calculations, statistics, explanations, causes and generalizations compound the main stuff of understanding. Research is disciplinary; inclusion is highly selective (no values!); research quality is assured by validity, credibility and reliability; methodological nomenclature is straightforward: from roots to fruits. All these are very meaningful to the brick methodology followers. This is a fact. ♠ A Story on a bricolage methodology may be drawn from the idea that a researcher is a bricoleur and the research is a bricolage. The researcher constructs not only the bricks, but also the ways of brick construction out of social experience. Norms, behavior, institutions, processes, language, etc.: what is social phenomenon (RG) and how it manifests through experiences? All that we can know best are social events that might be initiated or reacted to by us. A researcher reacts to social events within his or her horizon of ideas and theories. Researcher’s values matter, so does intersubjective truth. Make order out of disorder! Build theory from practice! Seek consensus through interactions! Forecasting and understanding are both important. If we illuminate regular reactions, we may predict social actions (stimulus-reaction). Questions, inter-subjective lived experiences, definitions, facts and interpretations regulate research. Still, quantity is superior than quality; Research is multi-disciplinary; its quality standards are rigor (coherence), relevance, interaction, self-reflection, every-day language. Nomenclature is soft – including rather than excluding. All these are very meaningful to the bricolage methodology followers. This is mine and yours social experience.

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♥ A Story on a brand methodology: social world, practice and experience is the confluence of mental brands. They develop through discourses. If we want to change practice, we must change discourse. All discourses are textual, all texts are accidental, all accidents are unique moments; all moments may count. Reflect upon them, illuminate intuitive insights, deconstruct order, decrease oppression! If people create stories, it must mean something. A researcher makes sense of stories told over times. How social world (RG) is constructed through ideas? How people make senses? How particular discourses (on RG) come to being and are sustained? Dismantle hegemonic unity (stability)! Restore diversity (flexibility)! Provide the insights on the bigger picture! Create a new brand! Signs, symbols, tropes, paradoxes, dilemmas, metaphors, all other cognitive tools are at work while making sense of textual reality. Disciplinary boundaries are irrelevant; no generalizations, just directions of thoughts; no systems, just accidental sets of ideas; no conclusions, just implications; no truth claims, just significant assertions. Preferences: self-made language, hidden values, exceptions, unexpectedness, alternatives, shades, persuasiveness. All these are meaningful to the brand methodology followers. This is what matters. This may be meaningful in different senses. This is what I mean. These methodological stories and their separate principles revealed are satellite ideas whenever we are immersed in social research. They inevitably control the discourse on RG. Their roots may be traced to some philosophical discourses. The brick story ♣ may be associated with the principles of realism, empiricism and positivism (quantitative research); the bricolage ♠ may relate to the rules of apriorism, behaviorism and phenomenology (qualitative research); while the brand story ♥ is constructed out of idealism, phenomenology, linguistics, semiotics, critical theory (discourse research). An implication: in Lithuania the principles of discourse research on RG are rare and scattered through out the texts. This may signal about DR inferiority. We have tried to pull DR out of periphery while prioritizing it in the context of RG texts.

References

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Dodge, J., Ospina, S. M., Foldy, E. G. (2005). Integrating Rigor and Relevance in Public Administration Scholarship: The Contribution of Narrative Inquiry. Public Administration Review, Vol. 65, No. 3. DRP (2012). Lietuvos regioninė politika. Retrieved 1 May, 2012 from http://www.vrm.lt/nrp/ Dudinskaitė, L. (2011). Viešojo administravimo reforma Lietuvoje: apskričių viršininkų administracijų panaikinimas. Vilnius: MRU. EC. (2007). Regions in the European Union. Nomenclature of Territorial Units for Statistics. EC. (2001). European Governance. A White Paper. Brussels. EU. (2012). Committee of the Regions. Retrieved 12 May, 2012 from http://europa.eu/about-eu/institutions-bodies/cor/ index_en.htm. Feldman, M. S., Skoldberg, K., Brown, R. N., Horner, D. (2004). Making Sense of Stories: A Rhetorical Approach to Narrative Analysis. Journal of Public Administration Research and Theory, Vol. 14, Issue 2 April. Ferry, M. (2003). Regional Governance in the EU: A Comparative Assessment. Glasgow: European Policies Research Centre. Foucault, M. (1971). Diskurso tvarka. Vilnius: Baltos lankos, 1998. Gabriel, I. (2000). Storytelling in organizations. Oxford: Oxford University Press. Godsäter, A., Söderbaum, F. (2008). The Role of Civil Society in Regional Governance: The Case of Eastern and Sout- hern Africa. Paper for GARNET Annual Conference on The role of civil society in regional governance. Bordeaux. Grigienė, K. (2011). Konstituciniai pagrindai regioninei savivaldai Lietuvoje ir kitose Vidurio ir Rytų Europos šalyse: ar apskričių (regionų) reforma determinuoja konstitucijos pataisų poreikį? Socialinių mokslų studijos, Nr. 3 (4). Jäger, J., Köhler, B. (2008). Theoretical Approaches to Regional Governance. Theory of Governance. Working Paper Series by the University of Applied Sciences BFI Vienna, No. 51. IES. (2009). Participation in the European Project: How to mobilize citizens at the local, regional, national and Euro- pean levels. The European Union. ISSC (2010). World Social Science Report. Knowledge Divides. Paris: Unesco. Konickis, A. (2003). Mokslinės spaudos paradoksai. Eidos. Retrieved 15 May, 2010 from http://www.litlogos.lt/eidos/ actual/konicky.html LRS (2012). Viešojo valdymo tobulinimo 2012–2020 metų programa. Valstybės žinios, Nr. 22-1009. LRS (2000). Regioninės plėtros įstatymas. Valstybės žinios, Nr. 66-1987. A.r. 2010-07-01. LRS. (1994). Lietuvos Respublikos teritorijos administracinių vienetų ir jų ribų įstatymas. Įstatymas paskelbtas: Žin., 1994, Nr. 60-1183. Aktuali redakcija nuo 2010.04.10 Norvaiša, R. (2010). Požiūris į mokslą ir akademinės veiklos vertinimas. Mokslo Lietuva, Nr. 11 (433). Nakrošis, V., Martinaitis, Ž. (2011). “Sunrise” and “sunset” of Lithuanian agencies. Transylvanian Review of Adminis- trative Sciences, Vol. 35, p. 93–114. Marschal, T. (2003). Regional Governance in United Kingdom. Informationen zur Raumentwicklung, Heft 8/9. MI. (2012). Republic of Lithuania. Ministry of the Interior. Retrieved 3 May, 2012 from http://www.vrm.lt/index. php?id=1386&lang=2. Sverdiolas, A. (2002). Būti ir klausti. Hermeneutinės filosofijos studijos, t. 1. Vilnius: Strofa. Svetikas, K. Ž. (2007). Lietuvos regioninės plėtros politika. Ekonomika ir vadyba: aktualijos ir perspektyvos, Nr. 1 (8). Šileika, A., Šimulienė, R. (2011). Europos Sąjungos struktūrinių fondų panaudojimo Lietuvos regionuose 2005–2009 metais socialinė-ekonominė analizė. Ekonomika ir vadyba: aktualijos ir perspektyvos, Nr. 1(21). Vaitekūnas, S. (2007). Kalba tarptautinėje konferencijoje. Lietuvos regionų valdymo modelis: koks jis yra šiandien ir koks turėtų būti ateityje. Vilnius: LRS. Žilinskas, G. (2009). Šiuolaikinės apskričių ir regionų valdymo problemos. Viešoji politika ir administravimas, Nr. 27. VRM (2012). Ministerijos administracijos padaliniai ir įstaigos prie ministerijos. Retrieved 3 May, 2012 from http:// www.vrm.lt/ Wells, K. (2011). Narrative Inquiry. Oxford University Press.

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REGIONINĖS VALDYSENOS METODOLOGINĖS ISTORIJOS

Linutė Kraujutaitytė Klaipėdos universitetas (Lietuva)

Santrauka

Tarptautiniu lygmeniu diskutuojama, kad pastaruoju metu stiprėja socialinių mokslinių tyrimų kontrolė: publikacijoms keliami vienpusiški nomenklatūriniai reikalavimai, remiamas tradicinis žinių suskaldymas, periferizuojami nauji diskursai. Šis teiginys skatina tyrinėti Lietuvos atvejį mėginant suprasti socialinių mokslų metodologijos vaidmenį periferizacijos procese. Todėl gilinamasi į regioninės valdysenos (RV) diskurso situaciją: kokios metodologinės hierarchijos vyrauja diskurse, kuris susijęs su regionine valdysena? Straipsnį sudaro vienuolika skyrių. Juose, remiantis diskurso tyrimo metodologija, atskleidžiamos istorijos, išryškinamos RV prasmės ir reikšmės, atskleidžiami trys metodologinių principų rinkiniai – diskursų apie RV geneologija. PAGRINDINIAI ŽODŽIAI: metodologija, socialiniai mokslai, diskurso tyrimas, regioninė valdysena.

JEL kodai: R590; H190; C180.

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DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA

Gunita Mazūre1

Latvia University of Agriculture (Latvia)

Abstract Development of agriculture is a substantial element of a balanced development of a country, comprising the development of agricultural, forestry and fishery sectors as well as the aggregate of other economic, social, and ecological activities related to the rural environment. The two main types of state aid provided to agriculture and rural development include direct and indirect support. The state aid shall be fully consistent with the basic guidelines of the European Community regarding the support for agriculture. The aim of the research is to discuss the legal regulation in the sphere of state aid allocation and to analyse the dynamics and impact of allocated national subsidies for the development of agriculture and rural development. Currently, the requirements for allocation state aid in the form of subsidies undergo fundamental amendments within the framework of simplification of regulatory enactments of the EU CAP. The amendments relate to both the content and procedures of the requirements. The goal is to speed up the conformation and approval of state aid payments and to simplify the requirements for allocation of subsidies. It is envisaged that the amendments would not affect the targets of subsidies but they would provide more earmarked state support. KEYWORDS: state aid, subsidies, agriculture, crop production, livestock production, impact assessment.

JEL codes: Q10, Q14, Q18

Introduction

Agriculture subsidies are government programmes providing benefits to farmers for the purpose of stabi- lising food prices, ensuring plentiful food production, and guaranteeing farmers’ basic incomes. State aid for agriculture in Latvia is mainly provided in three ways: yy direct support – state subsidies for the producers of certain agricultural produce (like cattle breeding, crop farming etc.); yy indirect support – tax relief, state subsidies programmes that establish pre-conditions for efficient agricultural activities and identification of production (like promotion of agricultural produce market, agricultural data surveillance, development of science and education, establishment of animal register etc.); yy investment co-financing – state subsidies programmes for certain measures (like improvement of agricultural land, technical modernisation of agricultural production, purchase of breed animals, purchase of elite seed etc.).

However, state aid is aimed at those farms that guarantee stable production and improve economic efficiency indicators (Mazūre, 2005: 61). The research is narrowed to direct support, thus, analysing granted national subsidies. Many researchers in Latvia and other countries (Lithuania, the Czech Republic, Poland etc.) have discussed aspects related to the state support for agriculture and evaluated its economic efficiency

1 Gunita Mazūre – Latvia University of Agriculture, Faculty of Economics, Dr. oec., Assoc. Prof. Scientific interest: financial support, crediting, investments, rural development. E-mail: [email protected] Tel.: + 371 298 446 28.

145 Gunita Mazūre DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA

(Ciburiene, 2009; Dibrova, Dibrova, 2009; Jakusonoka, 2007; Jasjko, 2000; Karpik, 2008; Kotane, 2003; Makutenas, Makuteniene, 2004; Mayrand, Dionne, Paquin, 2003; Mazūre, 2003, 2005; Melece, Prauliņš, 2010; Ohvril, 2003; Pilvere, 2010, 2011; Reiljan, Tamm, 2008; Ribasauskiene, Kairyte, Meyers, 2007; Špič- ka, Boudný, Janotová, 2009; Upite, 2010; Zawojska, 2008, 2009). These findings reveal various problems requiring solutions, however, this study is based on the following hypothesis: national subsidies directed towards the crop and livestock production development affect the production output. The research object is national subsidies. The research aim is to discuss the legal regulation in the sphere of state aid allocation and to analyse the dynamics and impact of allocated national subsidies for the development of agriculture and rural development. The aim of research has set a number of tasks: yy to provide an overview on legal regulation determining the procedure for the allocation of national subsidies; yy to analyse the dynamics of allocated national subsidies for agriculture and rural development; yy to analyse the impact of national subsidies allocated for crop production and livestock production on crop and livestock production output in farms of various sizes.

The information summarised by the Rural Support Service (RSS), which administers the allocation and disbursement of subsidies and the FADN data were used to identify the amount of granted subsidies to agriculture and rural development by the farms of various sizes. The Farm Accountancy Data Network (FADN) is an instrument for evaluating the income of agricultural holdings and the impacts of the Common Agri- cultural Policy. The concept of the FADN was launched in 1965, when the Council Regulation 79/65 established the legal basis for the organisation of the network. It consists of an annual survey carried out by the Member States of the European Union. In Latvia, the establishment of the FADN system was started in 1997 consistent with the EU FADN guidelines and specific conditions of Latvia. Each Member State has its own organisational and technical system for information collection, summarisation, and processing. However, the system ensures a certain and standardised information on agricultural holdings compliant with the single EU methodological requirements (Lauku saimniecības, 2009: 10). The basic criteria for the classification of agricultural holdings are region, specialisation, and economic size. The economic size of a farm characterises its potential to create value added, and it determines largely the competitiveness of the farm, depending on its specialisations. The farm’s total standard gross margin has to be computed to determine the economic size of a farm. The economic size of the EU farms is expressed in the European Size Units (ESU) – 1 ESU is equivalent to EUR 1200 (Pilvere, 2011: 38). Latvia different from the EU FADN classifies agricultural holdings in seven groups (Table 1).

Table 1. Economic size classes of agricultural holdings

EU FADN grouping Latvia FADN grouping Description of class Class ESU Class ESU I <2 Very small farms II 2–4 1 2–4 III 4–6 Small farms 2 4–8 IV 6–8 V 8–12 Medium small farms 3 8–16 VI 12–16 VII 16–40 Medium large farms 4 16–40 VIII 40–100 Large farms 5 40–100 IX 100–250 6 100–250 Very large farms X >250 7 >250 Source: Commission Decision 85/377/EEC and Lauku saimniecības, 2009: 10

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Unfortunately, the entire EU statistic system was changed in 2010, thus, initiating the transfer to the assessment of economic size by the value of standard output – it makes the comparison of the data with previous periods difficult. Therefore, the amount of granted subsidies is analysed for the period of 2005–2009 and in some cases for 2010–2011. The structure of EU agricultural holdings differs greatly; hence, it is required to determine the economic size of agricultural holdings (farms) as farms of various sizes exist in different countries. This is the economic size threshold, which is 2 ESU in Latvia. Each Member State determines its own economic size threshold, for example, it is 2 ESU in Estonia, Lithuania, Poland, and Ireland, while 16 ESU in the Netherlands, Belgium, and the UK (Lauku saimniecības, 2010: 10). In Latvia, the economic size threshold equals to EUR 4000. In addition, the information compiled by the Rural Support Service, the Ministry of Agriculture, scientific publications of foreign and local researchers and other materials have been used for the purpose of the study. The research is mainly based on the monographic descriptive method as well as the methods of analysis and synthesis are used to study the problem elements and synthesise coherencies or formulate regularities. The regression analysis was used to determine the relationship between the amount of disbursed subsidies and production output or to clarify whether the amount of allocated subsidies affect the production output. The correlation analysis was used to show the strength of relation between the pairs of variables. The tool Regression of MS Excel was used for data processing and the analysis.

1. Legal regulation determining the procedure for allocation of subsidies

The state aid shall be fully consistent with the basic guidelines of the European Community regarding the support for agriculture. Currently, the requirements for allocation state aid in the form of subsidies undergo fundamental amendments within the framework of simplification of regulatory enactments of the EU CAP. The amendments relate to both the content and procedures of the requirements. The goal is to speed up the conformation and approval of state aid payments and to simplify the requirements for allocation of subsidies. It is envisaged that the amendments would not affect the targets of subsidies but they would provide more earmarked state support. State aid rules in the agricultural sector are based on three different perspectives: 1) the agricultural state aid rules follow the general principles of competition policy; 2) state aid rules in the agricultural sector have to be coherent with the EU’s common agricultural and rural development policies; 3) the rules have to be compatible with the EU’s international obligations, in particular the WTO Agreement on Agriculture. Council Regulation (EC) No. 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the Common Agricultural Policy and establishing certain support schemes for farmers enshrines a fundamental change in the way Community support to farmers is to be granted. Council Regulation (EC) No. 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) establishes the framework for rural development policy for the years 2007–2013, confirming the role of rural development as the second pillar of the Common Agricultural Policy. Articles 88 and 89 of the Regulation (EC) No. 1698/2005 contain specific provisions in respect of the state aid. Article 5 provides that support for rural development measures must be in conformity with the Treaty and any acts adopted under it (Council Regulation (EC) No. 1782/2003, 2003). The Community guidelines for state aid in the agriculture and forestry sector 2007–2013 apply to all state aid, granted in connection with activities related to the production, processing and marketing of agricultural products falling within the scope of Annex I of the Treaty. They apply to any aid measure, in whatever form, including aid measures financed by parafiscal taxes, which falls within the definition of state aid laid down in Article 87(1) of the Treaty. These guidelines do not apply to state aids in the fisheries and aquaculture sector. The guidelines cover state aid in the agriculture and forestry sector for the period of 2007–2013 and replace the previous guidelines established for agriculture. These guidelines apply to state aid granted for the production, processing and marketing of agricultural products. Annex I of the Treaty on the Functioning of the European Union provides a detailed list of the agricultural products included. They do not apply to the

147 Gunita Mazūre DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA fisheries and aquaculture sector but, unlike the previous ones (2000–2006), are applicable for aid for some forestry activities. In Latvia, the law “On Agriculture and Rural Development” is the umbrella law ensuring the development of agriculture and rural areas. The purpose of the law is to provide a legal basis for agricultural development and to specify sustainable agricultural and rural development policy in accordance with the Common Agricultural Policy and the Common Fisheries Policy of the European Union. Therefore, the state aid and the European Union support shall be granted to promote agricultural and rural development as well as to raise the standard of living for the population of rural territories. The law stipulates that the state support for agricultural development in the form of subsidies may not be less than 2.5 % of the total expenditures of the annual government consolidated budget that are covered from grants from general revenues, deducting the contributions to the budget of the European Union (Lauksaimniecības un lauku attīstības likums, 2004). The law states the minimum amount of cash flow to be channelled for the development of agricultural competitiveness and it is the only legal enactment that ensures regular and projectable amount of the state support financing. The Cabinet Regulation No. 332 “Procedure by which the European Support for Processing of Skimmed Milk into Casein and Casein Products and for Use of Skimmed Milk and Skimmed Milk Powder in Forage is Allocated, Administered and Controlled” adopted on 20 April 2004 and issued pursuant to Sections 4 and 7, Clause 5 of the Law “On Agriculture and Rural Development” states the procedures by which the European Support for processing of skimmed milk into casein and casein products and for use of skimmed milk and skimmed milk powder in forage is allocated, administered and controlled. The Rural Support Service allo- cates, administrates and controls the support (Kārtība, kādā tiek piešķirts, administrēts un uzraudzīts Eiropas Savienības atbalsts vājpiena pārstrādei kazeīnā un kazeinātos un vājpiena un vājpiena pulvera izmantošanai lopbarībā, 2004). Another very important legal enactment refers to the Cabinet Regulation No. 173 “Procedure by which State Aid and EU Support is Allocated for Agriculture within the Framework of Direct Support Schemes” adopted on 1 March 2011 and issued pursuant to Section 4, Clause 5 of the Law “On Agriculture and Rural Development”. These regulations prescribe the procedures by which the state aid and EU support is allocated for agriculture within the framework of direct support schemes. For the purpose of the regulations, the state aid and EU support includes single area payments; supplementary state direct payments for she-cattle and she-sheep, ton of milk quota, grass and flax seed and potato starch etc.; separated supplementary state direct payments for areas, cattle, milk etc.; payment for sugar; support for areas of raspberries and strawberries grown for processing; special support for milk; special payment for improvement of starch quality; and special payment for improvement of seed potatoes and seed forage plants (Kārtība, kādā tiek piešķirts valsts un Eiropas Savienības atbalsts lauksaimniecībai tiešā atbalsta shēmu ietvaros, 2011). On 14 February 2012, the Cabinet adopted the Regulation No. 112 “Regulations on State Aid for Agri- culture and Procedure for its Allocation”. The regulations prescribe measures for the state aid for agriculture and rural development, the amount of state aid and the criteria and procedure for its allocation (Noteikumi par valsts atbalstu lauksaimniecībai un tā piešķiršanas kārtību, 2012). Another recent Cabinet Regulation was passed on 17 January 2012 “Procedure by which the State Aid is Allocated for Registering of Breeding Animals into the Breed Register as well as for Determination of their Genetic Quality and Evaluation of Productivity Data”. The support is provided pursuant to the EC Regulation No. 1857/2006. The support is aimed at promotion of breed activities in pig farming, sheep farming, dairy farming, and horse breeding (Kārtība, kādā piešķir valsts atbalstu vaislas lauksaimniecības dzīvnieku ierakstīšanai ciltsgrāmatā, kā arī to ģenētiskās kvalitātes noteikšanai un produktivitātes datu izvērtēšanai, 2012). “Regulations regarding Procedures for Accounting and Granting of de minimis Aid and Samples of de minimis Aid Accounting Forms” are issued pursuant to Section 48, Paragraph one of the Law On Control of Aid for Commercial Activity. These Regulations prescribe the procedures for accounting and granting of de minimis aid as well as prescribe the following samples of de minimis aid accounting forms: an accounting form regarding the received de minimis aid and an accounting form for the granting of new de minimis aid (Noteikumi par de minimis atbalsta uzskaites un piešķiršanas kārtību un de minimis atbalsta uzskaites veidlapu paraugiem, 2008).

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2. National subsidies granted to agriculture and rural development

Generally, farm subsidies refer to the economic tool used by the government for influencing food prices and maintaining food supply. These funds are normally given as cash payment or a grant to the farm. The purpose of subsidies is to facilitate the competitiveness of agricultural products in domestic and foreign markets, to stimulate the stabilisation of agricultural industries and to introduce modern technologies in farming households. In Latvia, national subsidies are granted to promote agricultural and rural development as well as to increase the living standard of rural population. They are allocated in addition to the EU support measures. The amount of allocated subsidies has consistently increased from 1994 to 2003 reaching the growth of 8.89 times in comparison with 1994, hence, totally exceeding LVL 39.28 million. The other tremendous peak was observed in 2006 reaching the highest amount of allocated subsidies in the analysed period (LVL 58.1 million). The development of financing allocated under the state subsidies programmes is reflected in Figure 1.

Figure 1. Number and chain increase rate of allocated national subsidies for agriculture and rural development in Latvia for the period of 1994-2011 Source: Kopsavilkums par subsīdiju (…), 2000–2011 and author’s calculations

Figure 1 outlines that practical application of subsidies under the implementation of agricultural policy of Latvia was started from 1994. The target was to develop the declined seed farming and cattle breeding in general and subsidies were disbursed as direct and indirect payments. Direct subsidies then were mainly disbursed to increase the quality of resources and provision of raw materials in processing companies, including: yy sowings and sales of elite seeds; yy sales of flax and potatoes for processing (since 1995); yy development of healthy and high quality herds (cattle breeding, pig breeding, sheep breeding and horse-breeding), thus paying for the number of animals; yy sales of meat young stock for processing.

Indirect subsidies were targeted for the development of science, seed farming, performance of selection (from 1996) and the improvement of quality in milk processing companies. The procurement of breed abroad served as co-financing for investments at that time, where the main target was to improve the quality indicators of herd of Latvia. Figure 1 presents the chain increase rates calculations. The highest absolute increase of the chain of subsidies was observed in 2006, when the amount of subsidies increased by LVL 30.5 million or 110.5 % compared with the previous year. However, in 2007, total subsidies amounted to LVL 32.27 million experiencing a decline of LVL 25.8 million or 44.4 %. When looking at the considerable differences in comparison

149 Gunita Mazūre DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA with 2006, it has to be borne in mind that in 2006 the government granted additional subsidies on top of the existing subsidies for LVL 25.8 million as compensation for losses incurred by drought. Consequently, the very significant base increase rates reached in 2003 and 2006 have to be mentioned, when the amount of disbursed subsidies increased by 790 % and 1220 % (9 and 13 times) respectively. In 2010, the total amount of paid subsidies equalled LVL 10.3 million; yet, additional LVL 3.9 million were allocated from the government consolidated budget for the pig-breeding sector to maintain the core of sow pedigree. Hence, the total amount of subsidies comprised LVL 14.27 million. The provision of an additional support was based on the rapid increase of grain prices and decrease of pork purchase prices. National subsidies are used for the implementation of specific programmes. Subsidies in Latvia are disbursed for technical modernisation of production, amelioration of soil, increase of farm efficiency, and other similar objectives. Yet, it has to be remarked that the attraction of investments is the most efficient only in several programmes. Relatively, the largest and the most stable programme has been “Development of animal husbandry”, which comprises 32.54 % of the total amount of allocated subsidies. This programme is followed by “Investment and support for investment in agriculture” with the share of 24.55 %. The share of other subsidy programmes is less than 10 %. The breakdown of subsidies by years and programmes is given in Table 2. This table includes a section “Other programmes”, which covers those subsidy programmes that have varied by years, like support for covering interest payments, support for the introduction of the EU requirements, support for promotion of investment in agriculture, support for foreign cooperation projects, support for agro-marketing activities, support for elimination of agricultural risk, and similar programmes and measures.

Table 2. The dynamics of subsidies allocated for the agricultural sector and their breakdown according to the programmes In Latvia between 2005 and 2011, LVL thousand

Subsidies Relative 2005 2006 2007 2008 2009 2010 2011 Total programme % Improvement of 1,549.0 280.2 1,554.3 292.1 123.0 0.0 0.0 3,798.6 2.06 agricultural land Development of 6,670.0 9,990.6 11,025.3 11,043.6 15,762.6 3,684.0 1,781.9 59,958.0 32.54 animal husbandry Development of crop 977.0 1,764.5 865.9 821.5 622.0 465.1 72.4 5,588.4 3.03 farming Education, science and dissemination of 2,573.6 2,037.0 2,870.8 3,269.7 766.1 811.7 395.3 12,724.2 6.91 information Support for organic 243.0 213.7 198.3 0.0 0.0 0.0 0.0 655.0 0.36 farming Market promotion 743.0 1,102.3 1,374.0 2,855.1 53.3 245.2 152.7 6,525.6 3.54 Co-financing for Latvia and foreign 290.0 250.0 79.2 100.0 0.0 0.0 0.0 719.2 0.39 projects Investment and support for investment 8,295.5 11,058.1 10,836.7 5,608.4 6,245.6 1,044.9 2,152.3 45,241.5 24.55 in agriculture Other programmes 2,083.3 30,951.9 3,469.0 5,931.1 1,626.7 4,068.4 916.3 49,046.7 26.62 Total 23,424.4 57,648.3 32,273.5 29,921.5 25,199.3 10,319.3 5,470.9 184,257.2 100 Source: Kopsavilkums par subsīdiju (…), 2005–2011 and author’s calculations

According to Table 2, only 3 out of more than 20 programmes implemented over the period analysed may be considered as stable subsidy programmes used for the attraction of investments and support of agricultural production. The annual amount and breakdown of subsidies depend on the state political and financial situation and changes alongside with it.

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In 2008 in comparison with 2007, the programme “Improvement of agricultural land” experienced the largest reduction of financing, since the largest amounts of subsidies were directed towards the animal husbandry sector and promotion of investment in agriculture. Similar decline was observed also in the subsidy programme “Market promotion”. At the same time, the programme “Development of animal husbandry” experienced considerable increase in 2009 and a four-fold decrease in 2010. The amount of allocated subsidies declined with the beginning of the financial and economic crisis in 2009 and the decline has also continued in 2010 and 2011. Detailed analysis on the programmes shows that “Development of animal husbandry” is the largest subsidy programme directed towards the promotion of establishment of healthy and qualitative herds, keeping and growing of young cattle and production of qualitative forage. This subsidy programme includes 10 - 15 sub-programmes depending on the annual state policy. The total amount of subsidies allocated under this programme amounts to LVL 59 958 or 32.54 % of the total amount allocated over the period analysed. The largest increase in financing of the programme was observed in 2009 when the financing increased by 42.7 % in comparison with the previous year. The second largest programme “Investment and support for investment in agriculture” covers LVL 45 241.5 or 24.55 % of the total amount of allocated subsidies. The total amount of subsidies has started to decline in 2008, when the amount decreased by 48.2 % compared with the previous year. Unfortunately, the decrease has continued also in the rest of the analysed years, finally slightly exceeding LVL 2 million in 2011. Support for improvement of agricultural land has ceased in 2010, Support for organic farming – 2008, and co-financing for Latvia and foreign projects – 2009. State aid for fishery and modernisation of agricultural production was stopped from 2004; these changes relate with Latvia’s accession to the EU and the respective EU criteria and requirements.

3. Impact of national subsidies allocated for crop production and livestock production on crop and livestock production output in farms of various sizes

Latvia’s accession to the EU had a positive effect on the amount of support to the farms – its percentage increased for all Latvia’s farms revenue structure. The following tables (Table 3, Table 4) show the amount of support allocated for crop and livestock production to the farms of various sizes. The tables cover the data for the period ending in 2009, since the FADN methodology was changed in 2010, and thus, the data by farm sizes are incomparable.

Table 3. The amount of subsidies allocated for crop production in farms of Latvia for the period of 2005–2009, LVL

Average per Years / ESU 2-<4 4-<8 8-<16 16-<40 40-<100 100-<250 >=250 farm 2005 288 791 1,843 3,327 10,725 23,103 42,522 1,369 2006 276 666 1,334 4,124 10,512 23,854 58,462 1,488 2007 105 299 541 1,616 4,326 10,809 13,263 632 2008 182 287 820 2,408 7,136 23,951 46,131 1,110 2009 123 266 677 2,024 5,054 15,318 41,479 867 2009/2005, % -57.3 -66.4 -63.2 -39.2 -52.9 -33.7 -2.5 -36.7 Source: Lauku saimniecības ...2005–2009 and author’s calculations

The largest average amount of subsidies per farm was allocated in 2006, when it equalled LVL 1488, while the smallest one comprising LVL 632 was allocated in 2007. In general, the amount of subsidies allocated for crop production has decreased by 36.7 % in the period of 2005–2009. Farms of all the sizes have experienced a decrease in the amount of subsidies – the largest decline was observed in small (4-<8

151 Gunita Mazūre DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA

ESU) and medium small farms (8-<16 ESU), while very large farms (>= 250 ESU) experienced the smallest decrease in the amount of subsidies for crop production. The reason could be the fact that very large farms generate more revenues themselves and the amount of subsidies they rely on is not so significant. The amount of subsidies paid for livestock production shows completely different scene. The sector of livestock production shows a continuous increase compared with the sector of crop production over the whole analysed period.

Table 4. The amount of subsidies allocated for livestock production in farms of Latvia for the period of 2005–2009, LVL

Average per Years / ESU 2-<4 4-<8 8-<16 16-<40 40-<100 100-<250 >=250 farm 2005 346 510 748 1,441 2,638 10,419 14,634 695 2006 477 769 1,580 2,952 4,122 21,013 33,413 1,276 2007 568 1,047 2,377 4,117 8,050 10,808 72,669 1,824 2008 597 1,119 2,088 3,550 7,233 16,851 65,740 1,789 2009 719 1,265 2,399 4,496 8,665 14,525 59,877 2,000 2009/2005, % 107.7 148.0 220.7 212.0 228.5 39.4 309.2 187.8 Source: Lauku saimniecības (...), 2005–2009 and author’s calculations

The largest average amount of subsidies per farm was paid in 2009, when it amounted to LVL 2000. Ana- lysing the amount of subsidies paid to farms of various sizes leads to the conclusion that the largest increase in the amount of subsidies for livestock production was observed for very large farms (>=250 ESU), while the smallest one for large farms (100-<250 ESU). The respective figures are 309 % and 39 %; hence, the difference is almost 8 times. The regression analysis was used to determine the relationship between the amount of disbursed subsidies and production output or to clarify whether the amount of allocated subsidies affect the production output. Therefore, the amount of subsidies paid for crop or livestock production was chosen as an independent variable (x), while crop or livestock production output – as a dependent variable (y). The tool Regression of MS Excel was used for data processing and the analysis. The results of the regression analysis are summarised in Table 5.

Table 5. Relationship between the amount of disbursed subsidies and production output in farms of various sizes

Average per 2 -< 4 4 -< 8 8 -< 16 16 -< 40 40 -< 100 100 -< 250 >= 250 farm Impact of subsidies on crop production output Multiple R 0.59 0.44 0.84 0.09 0.69 0.33 0.28 0.39 R Square 0.35 0.19 0.70 0.01 0.47 0.11 0.08 0.15 Impact of subsidies on livestock production output Multiple R 0.37 0.66 0.76 0.78 0.79 0.92 0.72 0.78 R Square 0.14 0.43 0.57 0.61 0.63 0.85 0.51 0.61 Source: author’s calculations

The general conclusion is that subsidies are not the only factor affecting the production output. The majority of cases showed a weak or very weak correlation. A very strong relationship (r = 0.85) was revealed between the amount of subsidies and production output for large farms (100 – <250 ESU) in the sector of livestock production. The average indicators per farm show a medium strong correlation (r = 0.61). Practically, no correlation or very weak correlation is found between the amount of subsidies and production output in the sector of crop production. The strongest relationship is observed in the group of medium

152 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) small farms (8 – < 16 ESU), where the correlation coefficient equals 0.70. Therefore, more detailed analysis including more factors like the EU support, utilised agricultural area, total production output, net turnover, assets, liabilities, farm revenues, and other indicators shall be analysed to determine the relationship between the financing and production output.

Conclusions

1. State aid rules in the agricultural sector are based on three different perspectives: they follow the general principles of competition policy; they have to be coherent with the EU’s common agricultural and rural development policies; and they have to be compatible with the EU’s international obligations, in particular the WTO Agreement on Agriculture 2. The general purpose of subsidies is to facilitate the competitiveness of agricultural products in domestic and foreign markets, to stimulate the stabilisation of agricultural industries and to introduce modern technologies in farming households. In Latvia, national subsidies are granted to promote agricultural and rural development as well as to increase the living standard of rural population. 3. National subsidies in Latvia are disbursed for technical modernisation of production, amelioration of soil, increase of farm efficiency and other similar objectives. The attraction of investments is the most efficient only in several programmes. The largest and the most stable programme has been “Development of animal husbandry”, which comprises 32.54% of the total amount of allocated subsidies. This programme is followed by “Investment and support for investment in agriculture” with the share of 24.55 %. 4. The largest average amount of subsidies per farm was allocated in 2006, when it equalled to LVL 1488, while the smallest one comprising LVL 632 was allocated in 2007. Farms of all the sizes have experienced a decrease in the amount of subsidies – the largest decline was observed in small (4 – <8 ESU) and medium small farms (8-<16 ESU), while very large farms (> = 250 ESU) experienced the smallest decrease in the amount of subsidies for crop production. The reason could be the fact that very large farms generate more revenues themselves and the amount of subsidies they rely on is not so significant. 5. The sector of livestock production shows a continuous increase compared with the sector of crop production over the whole analysed period. The largest average amount of subsidies per farm was paid in 2009, when it amounted to LVL 2000. The largest increase in the amount of subsidies for livestock production was observed for very large farms (> = 250 ESU), while the smallest one for large farms (100-<250 ESU). The respective figures are 309 % and 39 %; hence, the difference is almost 8 times. 6. Subsidies are not the only factor affecting the production output, since the majority of cases showed a weak or very weak correlation. A very strong relationship (r = 0.85) was revealed between the amount of subsidies and production output for large farms (100-<250 ESU) in the sector of livestock production. The average indicators per farm show a medium strong correlation (r = 0.61). 7. Practically, no correlation or very weak correlation is found between the amount of subsidies and production output in the sector of crop production. The strongest relationship is observed in the group of medium small farms (8 -< 16 ESU), where the correlation coefficient equals 0.70.

References

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Lauku saimniecības. Darba ekonomiskās analīzes rezultāti. (2008). Rural Farms. Results of Economic Analysis. Retrie- ved: https://sudat.lvaei.lv/Login.aspx?ReturnUrl=%2fDefault.aspx. Access: 12 May 2012. Lauku saimniecības. Darba ekonomiskās analīzes rezultāti. (2007). Rural Farms. Results of Economic Analysis. Retrie- ved: https://sudat.lvaei.lv/Login.aspx?ReturnUrl=%2fDefault.aspx. Access: 12 May 2012. Lauku saimniecības. Darba ekonomiskās analīzes rezultāti. (2006). Rural Farms. Results of Economic Analysis. Retrie- ved: https://sudat.lvaei.lv/Login.aspx?ReturnUrl=%2fDefault.aspx. Access: 12 May 2012. Lauku saimniecības. Darba ekonomiskās analīzes rezultāti. (2005). Rural Farms. Results of Economic Analysis. Retrie- ved: https://sudat.lvaei.lv/Login.aspx?ReturnUrl=%2fDefault.aspx. Access: 12 May 2012. Makutenas, V., Makuteniene, D. (2004). State Support Agriculture in Lithuania and Its Economic Evaluation. Economic Science for Rural Development. Proceedings of the International Scientific Conference, Jelgava, p. 107–112. Mayrand, K., Dionne, S., Paquin, M. (2003). The Economic and Environmental Impacts of Agricultural Subsidies: An Assessment of the 2002 US Farm Bill & Doha Round. Unisféra International Centre, Isaak Pageot-LeBel. Retrieved: http://ictsd.org/downloads/2008/04/usfarm.pdf. Access: 14 May 2012. Mazūre, G. (2003). National Support for the Development of Agriculture in Latvia. Perspectives of the Baltic States’ Agriculture under the CAP Reform. Proceedings of the International Scientific Conference, Tartu, p. 151–165. Mazūre, G. (2005). Implementation of State Support Policy for the Development of Agriculture. Economic Science for Rural Development’ 2005. Proceedings of the International Scientific Conference, Jelgava: LLU, p. 61–69. Melece, L., Prauliņš, A. (2010). Regional Aspects of Farm’s Subsidies in Latvia. Economics and Management, Vol. 15, p. 662–668. Noteikumi par de minimis atbalsta uzskaites un piešķiršanas kārtību un de minimis atbalsta uzskaites veidlapu paraugiem. Regulations regarding Procedures for Accounting and Granting of de minimis Aid and Samples of de minimis Aid Accounting Forms. MK noteikumi Nr. 58. Retrieved: http://www.likumi.lv/doc.php?id=170779&from=off. Ac- cess: 5 May 2012. Noteikumi par valsts atbalstu lauksaimniecībai un tā piešķiršanas kārtību (Regulations on State Aid for Agriculture and Procedure for its Allocation) MK noteikumi Nr. 112. Retrieved: http://www.likumi.lv/doc.php?id=244949. Access: 5 May 2012. Ohvril, T. (2003). Rural Development Problems in Estonia During the Transition Period. Economic Science for Rural Development. Proceedings of the International Scientific Conference, Jelgava, p. 385–391. Pilvere, I. (2011). Role of Support Payments for Farms of Various Sizes in Latvia. Economics and Rural Development. Research Papers. Vol. 7, No. 2, p. 38–44. Pilvere, I., Pilvere, A. (2010). Evaluation of National and the EU Support for Agriculture in Latvia. Human Resources – the Main Factor of Regional Development, No. 3. Klaipeda University Faculty of Social Sciences, p. 44–51. Reiljan, J., Tamm, D. (2008). The Impact of Government Policy on the Competitiveness of the Estonian Agricultural Sector. Economic Science for Rural Development 2008: Proceedings of the International Scientific Conference No. 17, Jelgava, p. 125–135. Ribašauskienė, E., Kairytė, E., Meyers, W. H. (2007). Territorial Dimensions of Lithuanian Rural Development Plan 2004–2006: Lessons for 2007–2013. Žemės ūkio mokslai, Nr. 14, p. 11–18. Vilnius. Rural Support Service. Retrived: http//www.lad.gov.lv. Access: 7 May 2012. Saktiņa, D., Meyers, W. H. (2005). EU and National Rural Support Programmes in Latvia: Targeting the Disadvan- taged. Discussion paper for evaluation of implementation of EU Rural development policy measures in Latvia and elaboration of recommendation for new programming period. Retrieved: http://www.lvan.lv/wp-content/ uploads/2011/12/Evaluation_RDP_2004_06.pdf. Access: 10 May 2012. Špička, J., Boudný, J., Janotová, B. (s.y). The role of subsidies in managing the operating risk of agricultural enterprises. Institute of Agricultural Economics and Information, Prague, Czech Republic. Retrieved: http://www.agricul- turejournal. Access: 15 May 2012. Upite, I. (2010). Relationships between Investment Support and Production in Latvian Agriculture. Economic Science for Rural Development 2010: Proceedings of the International Scientific Conference, No. 21. Jelgava, p. 14–21. Zawojska, A. (2008). Distribution of EU and National Funds Supporting Agriculture and Rural Development: Empiri- cal Insights from Mazovia Region. Problems of World Agriculture, Vol. 3 (XVIII), p. 92–104. Zawojska, A. (2009). Impact Assessment of the European Union Funds to Support Rural Population and Economy in Poland. Economic Science for Rural Development 2010: Proceedings of the International Scientific Conference, No. 18, p. 150–156. Jelgava.

155 Gunita Mazūre DIRECT STATE AID MEASURES FOR AGRICULTURE AND RURAL DEVELOPMENT IN LATVIA

TIESIOGINĖ VALSTYBĖS PARAMA ŽEMĖS ŪKIO IR KAIMO PLĖTRAI LATVIJOJE

Gunita Mazūre Latvijos žemės ūkio universitetas (Latvija)

Santrauka

Žemės ūkio plėtra yra svarbus šalies vystymosi elementas, apimantis žemdirbystės, miškininkystės ir žuvininkystės sektorius bei kitas ekonomines, socialines ir ekologines veiklas, kurios susijusios su kaimo aplinka. Valstybės parama žemės ūkio ir kaimo plėtrai gali būti tiesioginė ir netiesioginė, ji turi būti sude- rinta su Europos Sąjungos paramos žemės ūkiui gairėmis. Tyrimu siekta ištirti teisinį valstybinės paramos skirstymo reguliavimą ir išanalizuoti paskirstytų nacionalinių subsidijų žemės ūkio ir kaimo plėtrai dinamiką bei poveikį. Šiuo metu valstybinės paramos skirstymo reikalavimai koreguojami siekiant supaprastinti ES reguliuojančių aktų įgyvendinimą. Keičiami tiek turinys, tiek procedūros, siekiant paspartinti patvirtinimo procesą ir supaprastinti subsidijų gavimo reikalavimus. PAGRINDINIAI ŽODŽIAI: valstybės parama, subsidijos, žemės ūkis, pasėlių produktyvumas, galvijų prieaugis, įtakos vertinimas.

JEL kodai: Q10, Q14, Q18

156 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

SUSTAINABLE TOURISM DEVELOPMENT

Iwona Niedziółka1

Alcide De Gasperi University of Euroregional Economy in Józefów (Poland)

Abstract The article presents the main ideas of sustainable tourism – new form of tourism promoted by authorities, environmental and social institutions and international organizations. It implies taking into account economic, environmental, and socio-cultural aspect by planning and management of tourism. The article presents historical background of the idea of sustainability and main international events concerning this topic. The author highlights negative effects of tourism that can be prevented by applying the principles of sustainable development. KEYWORDS: sustainable tourism, responsible tourism, ecotourism.

JEL codes: L830, Q010

Introduction

Sustainability is a popular trend in nowadays life, concerning development and operation, also in tourism sector. However, there is confusion about the different meanings of sustainability and whether it can be achieved in tourism. Therefore a problem arises: does sustainable development apply to tourism? The purpose of this paper is to reveal the necessity of sustainable development in tourism due to limited resources and significant concern about environment that are to be used by future generations. The object of this article is to present sustainable tourism: concept, definition and historical background. Moreover, the author presents its own critical view on the sustainable tourism development in Poland – current situation and the need for change. The tasks arising from the purpose are as following: to present economic aspect, environmental aspect and socio-cultural aspect influencing sustainable tourism. Monographic and descriptive method was applied in the paper. It is worth emphasizing that there is a large number of American and English literature on the topic. Sustainable tourism is a term often explained, described and used in Western tourism handbo- oks, sometimes even as a separate publication. However, there is not much literature in Polish publications. It may be due to low level of development of tourism sector in Poland as a science on tourism is rather young and not well developed yet. The other reason may be little interest in the issue of sustainability among touristic facility management. Most of Polish literature base on foreign bibliography and international documents introducing sustainability principles.

1. Legislation and historical background

Rapid socio-economic development based on the use of natural resources such as space, mineral resources and water degraded environment to such an extent that it became necessary to revise rules for the use of

1 Iwona Niedziółka – M.A. Alcide De Gasperi University of Euroregional Economy in Józefów (Poland). Scientific interest: tourism law, European law, customer and competition protection. E-mail: [email protected] Tel.: +482 278 919 03.

157 Iwona Niedziółka SUSTAINABLE TOURISM DEVELOPMENT the environment. Taking into account the irreversibility and limitations of many elements of the natural environment, the increasing level of interference in the natural environment through the exploitation, destruction and pollution will lead to a situation in which the socio-economic development is impossible without resources. The main role in building awareness about environmental degradation and the depletion of its resources have played in the report “The Limits to Growth” by D. L. Meadows and “Man and His Environment” by U’Thant that were published in the late 60s. These became the foundation for international discussions. In the early 1970s the first United Nations (UNEP) Conference on the Human Environment chaired by U’Thant than UN Secretary-General took place in Stockholm. It produced an action plan for the environment based on: yy the global environmental assessment programme – Earthwatch; yy environmental management activities; yy international measured to support the national and international actions of assessment and management (Cooper, Fletcher, Fyall, Gilbert, Wanhill, 2008).

The Stockholm Conference resulted in commissioning of the World Conservation Strategy which can be seen as implementation measure of the human environmental action plan. The next landmark in the pathway to sustainability was the Brundtland Report “Our Common Future” in 1987 provided by World Commission on Environment and Development (WCED), called Brundtland Commission after the name of chairman Gro Harlem Brundtland former Prime Minister of Norway due to her strong background in sciences and health. One of the commission’s primary goals was to: “help define shared perceptions of long-term environmental issues and the appropriate efforts needed to deal successfully with the problems of protecting and enhancing the environment, a long-term agenda for action during the coming decades, and aspiration goals of the world community” (Cooper, Fletcher, Fyall, Gilbert, Wanhill, 2008). The document adopts a definition of sustainable development as following: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The Brundtland Report has been criticized on the grounds that many of its plans did not materialize but it provided a valuable platform for the debate. The impact of this document soon led to the UN organizing a major international conference on the topic. Within 5 years of the Bruntdland Report the Earth Summit (The Conference on Environment and Develo- pment) was held in Rio de Janeiro in 1992. The conference put down a landmark on sustainability in the form of a broad action strategy known as Agenda 21. Although tourism neither appeared as an issue in Brutdland Report, nor was included in Agenda, the industry’s planning and development have been heavily influenced by their recommendations (Holloway, 2009). The result of the conference was also a document containing the fundamental principles on which the state policy on socio-economic development should be based taking into account environmental conditions, the so called Rio Declaration containing 27 principles defining the rights and duties of nations in terms of sustainable development. The year 1992 was a crucial year for sustainability. The hospitality industry launched its International Hotel Environment Initiative (IHEI), designed to reduce the impact of staying visitors on the environment. Also, the same year the UK-based pressure group Tourism Concern set out its own guidelines and begun actively to lobby the private sector to take more account of the need for sustainable planning. Tourism Concern guidelines: 1. Using resources sustainably; 2. Reducing overconsumption and waste; 3. Maintaining diversity; 4. Integrating tourism into planning; 5. Supporting local economies; 6. Involving local economies; 7. Consulting stakeholders and the public; 8. Training staff;

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9. Marketing tourism responsibly; 10. Undertaking research.

These principles appear to achieve more balance between socio-cultural and environmental elements (Holloway, 2009). It is very important to mention here also the Kyoto Protocol from 1997 aimed to reduce green house effect by limiting CO2 emissions. Tourism is the center stage in these concerns because travel for leisure purposes is not a fundamental necessity and it contributes to CO2 emissions through the consumption of fossil fuels used to transport people on holiday, at the destination and in the accommodation they use. The transport causes around

75 % of the CO2 emissions generated by tourism, with aviation responsible for around 40 %. Improving energy efficiency in transportation may be expected to generate a reduction of 32 % in the emissions per passenger kilometer between 2005 and 2035. However, the quantity of emissions varies depending on the mode of transport used, with long-haul travel the greatest contributor to highly emission-intense trips (Page, 2011). At the beginning of the XXIst century the idea of sustainable tourism has become more popular among public sector which is responsible for planning and strategy and also private, i.e. travelling and touristic enterprises. The United Nations Environmental Programme (UNEP) introduced its Initiative for Sustainable Tourism, which was aimed at tour operators. This was followed by the UN declaration to designate the year 2002 as the International Year of Ecotourism. Later-on a World Summit on Sustainable Development was held in Johannes- burg (also called “Rio+10”). This initiative for the first time stressed the importance of sustainable development in tourism. Moreover a world eco-tourism summit was held in Quebec in the same year. Other organizations connected to the industry such as World Tourism Organization (UNWTO) or the World Travel and Tourism Council (WTTC) contributed to the principles of sustainable development, which aims to minimize damage the environment, wildlife and local populations caused by tourists and the industry. Together with the Earth Council they encourage the industry to take the lead in preserving the environment in the areas they operate. The future will show if there is a true will among governments to implement the global strategies and actions that were set out more than a decade ago.

2. Concept of sustainability

To explore the principles and objectives of sustainable development in tourism first it is necessary to define the term “sustainable development”. Despite the widespread acceptance of sustainable development, there remains a lack of consensus over the actual meaning of this term. It means different things to different people and can be applied to many context, including tourism. Nonetheless, the most general but accurate is the definition provided by the Bruntdland Report: “Sustainable development is one that meets the needs of the present generation without comprising the ability for future generations to meet their own needs”. This definition identifies basic principles of sustainability, such as: yy takes a holistic approach to planning and strategy; yy protects the environment (biodiversity) and man-made heritage; yy preserves the essential ecological processes; yy facilitates and engages public participation; yy ensures that productivity can be sustained into the long-term future. yy provides for a better level of fairness and opportunity between different countries. (Cooper, Fletcher, Fyall, Gilbert, Wanhill, 2008).

The concept of sustainable development (variously described as eco-development, self-sustaining development or suspensory development). Sustainable development is based on three pillars: economic development, environmental protection and social development. Recently the term “social development” is being replaced as the “socio-cultural development”. This concept assumes properly and consciously shaped

159 Iwona Niedziółka SUSTAINABLE TOURISM DEVELOPMENT relationship between the pillars, which are intended to ensure intra- and inter-generational economic, environmental and social balance (Meyer, Milewski, 2009: 84). Currently concepts of sustainability are included in the vast majority of regional development strategies; the term appears even in the Polish Constitution. Sustainable tourism is defined as all forms of activities, management and development of tourism that preserve natural, economic and social integrity and guarantee maintenance of natural and cultural resources. Sustainable tourism development guidelines and management practices are applicable to all forms of tourism in all types of destinations, including mass tourism and the various niche tourism segments. Thus, implementation of sustainable tourism principles requires: yy Making optimal use of environmental resources that constitute a key element in tourism development, maintaining essential ecological processes and helping to conserve natural heritage and biodiversity. yy Respecting the socio-cultural authenticity of host communities, conserve their built and living cultural heritage and traditional values, and contribute to inter-cultural understanding and tolerance. yy Ensuring viable, long-term economic operations, providing socio-economic benefits to all stakeholders that are fairly distributed, including stable employment and income-earning opportunities and social services to host communities, and contributing to poverty alleviation (UNEP, 2004).

Sustainable tourism development requires the informed participation of all relevant stakeholders, as well as strong political leadership to ensure wide participation and consensus building. Achieving sustainable tourism is a continuous process and it requires constant monitoring of impacts, introducing the necessary preventive and/or corrective measures whenever necessary. Sustainable tourism should also maintain a high level of tourist satisfaction and ensure a meaningful experience to the tourists, raising their awareness about sustainability issues and promoting sustainable tourism practices amongst them. Sustainable tourism concerns particularly important aspects such as competitive and socially responsible tourism businesses, the opportunity to participate in tourism for all citizens, good employment opportunities in the sector and benefit from tourism activities for the local community. This requires the preservation of cultural integrity and the integration of environmental protection and cultural heritage resources in programs related to tourism. Extensive attempts to implement the principles of sustainable tourism development are made both at the regional level and at the level of tourism enterprises. A specific kind of sustainable tourism is “eco-tourism” defined by The International Ecotourism Society as the responsible travel to natural areas that preserve the environment and sustain the local people welfare. It includes at the same time elements of rural and cultural tourism. Besides subscribing to the principles of sustainable tourism, ecotourism has specific principles: it contributes actively to the conservation of natural and cultural heritage, it includes local communities in planning, development and operation activities, and it contributes to their welfare, it involves complete and interesting explanations for visitors, regarding the natural and cultural resources, it is intended mainly to individual visitors and also to small organized groups. This kind of tourism often includes activities in nature such as: hiking, mountain climbing, observing the living beings in their natural habitat, etc. Moreover, it can also incorporate cultural activities, too. Ecotourism plays an important role in education, it is a chance to learn respect for nature, for the local culture, and for some it is a chance to self-reflection being inspired by the beauty of the surroundings. Another characteristic aspect of ecotourism is to obtain benefits for the local community. This means hiring local staff, sourcing local products, local involvement in decision making and organization of tourist activities (Sambotin, Sam- botin, Patrascoiu, Coroian, Merce, 2011).

3. Principles of sustainable development in tourism enterprises

The principles of sustainable development in tourism enterprises is applied relatively rare. It is due to the fact that tourism businesses in the economic calculation do not include (or include to a limited extent) the social costs and costs related to environmental protection. In practice, the most common solutions are

160 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) those that are inexpensive (printing booklets, marking the site, etc.) helping to reduce costs (energy saving in hotels, recycling), allow for better positioning of the brand companies to distinguish themselves from the competition, induce a positive reaction of customers (see: Sharpley, Telfer, 2008). The most important barriers to the application of the principles of sustainable development by companies should include a lack of awareness of the problem, the need to reduce costs and lack of conviction that the use of such practices can be reflected in an increased number of clients. Among tourism enterprises organizers of tourism and ship-owners rarely apply the principles of sustainable development (mainly due to the high level of variable costs and the high elasticity of demand), while the transport undertakings and hotel management often include sustainable principles when shaping their product (due to higher share of less price-sensitive business customers). The introduction of these principles by companies is also influenced by their surroundings (in Northern Europe organizations apply the principles of sustainable development more often than in the Mediter- ranean) and size (larger companies often use this type of practice) (Meyer, Milewski, 2009). Local Agenda 21 is a comprehensive plan of action to be taken locally by organizations and local authorities in every area in which human impacts on the environment. It is a kind of guide on how to plan regional development according to the principles of sustainability. Local Agenda 21 processes emphasize a cooperative approach to identifying the community’s goal for tourism and creating an action plan to achieve these goals (UNEP, 2003; see also Kazimierczak, 2005).

4. Aims of sustainable tourism

The main aim of creating strategy of sustainable tourism for a given region is defined as an increase of the number of tourists with the principles of sustainable development. This aim can be achieved by a number of specific objectives, such as: yy coordination of all parties interested in developing of tourism in the region; yy inventory of area tourism product; yy consideration of the interests of local communities and the environment in shaping the tourism product and marketing activities; yy assessment of marketing and product perception by potential buyers; yy developing a vision, mission and framework marketing plan activities for the duration of the strategy; yy developing a common brand of region; yy developing tools to evaluate progress in implementing the strategy (Meyer, Milewski, 2009).

As sustainability is considered in 3 contexts: economical, environmental and socio-cultural it is necessary to divide aims of sustainable tourism also in those 3 aspects.

4.1. Economical aspects of sustainable tourism

a) Economic profitability Ensuring the viability and competitiveness of regions and businesses to achieve long-term viability; b) Local prosperity Maximizing the economic benefits of tourism to the local community, including the expenditure of tourists in the area; c) Quality of employment Increasing the quantity and quality of jobs related to tourism in the local community, including wages, work environment and employment opportunities without discrimination; d) Social equity Ensuring fair and equal distribution of social and economic benefits coming from tourism (Panasiuk, 2011: 110).

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4.2. Environmental aspects of sustainable tourism

a) Physical integrity Maintaining and building quality of the landscape, in both urban and rural areas and preventing form ecological and visual pollution; b) Biological diversity Promoting and protecting environment, natural habitats and wildlife, as well as minimizing the impact of tourism on the environment; c) Effective waste management Minimizing of the use of rare and non-renewable resources in the development of tourism; d) Clean environment Minimizing of water, air, soil pollution and reduction of generating waste by tourists and tourist operators (Panasiuk, 2011).

4.3. Socio-cultural aspects of sustainable tourism

a) Welfare of the community Building welfare of the community including social infrastructure, access to resources, environmental quality and avoidance of social corruption and the exploitation of the resources; b) Cultural wealth Maintaining and developing cultural heritage, local culture, customs, and the exceptional nature of the host community; c) Meeting expectations of visitors Providing safe and enjoyable tourist experience, which will meet the needs of tourists and will be available to all? d) Local control Authority for planning and decision-making in the management of tourism by local communities (Pana- siuk, 2011).

5. Sustainable tourism in Poland

Although the term ‘ecotourism’ ‘sustainable tourism’ is very fashionable, as for now it is mostly a theoretical approach. There are some single examples of ‘eco-hotels’ like the world-wide famous InterContinental Hotels Group (IHG) on Bora Bora or a Polish hotel in Bysłowiec, but generally tourism and especially hospitality sector is slowly changing into a more eco-friendly branch. Despite that Polish hotel managers are often well aware of the concept of ecology and sustainability, this fact does not play an important role in marketing campaigns yet2. It can be caused by few factors. Customers of polish accommodation services may not be conscious of the idea of eco-hotels or may not be interested of such hotel service providers. The second possible reason is that eco-hotels might be seen as more expensive due to their ‘innovative’ and ‘modern’ systems. The idea is emerging on Polish hostelling market slowly. Polish Hotel Association (Polskie Zrzeszenie Hoteli) is preparing the first eco-label “EKOHOTEL”. Moreover, more hotel managers apply to get ISO 14001 standard prepared by Eco Management and Audit Scheme and European standard of management (Pasko, Staszewska-Ludwiczak, 2008). Within the ever changing standards on the market it is supposed that more entrepreneurs will try to acquire some certificates confirming their aspirations to be more social responsible.

2 According to the research made by Paulina Bohdanowicz in 2002 82.7 % of respondents think that environmental protection is a key aspect of welfare and further development of tourism. However, only 10% of hotel managers use this fact in advertisements. See: www.serwis-hotelarski.gastroma.pl/art/article_3276.php.

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Nevertheless, probably most of hotel managers are interested in being recognized more eco-friendly only for financial reasons. Reduction of running costs is the most important incentive for encouraging environmental actions. Most of introduced innovative technologies are based on energy-saving or reducing waste production systems, such as: making use of renewable energy resources (wind, geothermal, tides, sun-light energy etc. in Poland reached level of 8 % in 2010 according to Polish Economic Chamber of Renewable Energy)3 or effective systems of building insulation. The reduction of the usage of water is reached by installation of ‘economic’ system of water flush or water aerators in taps. Hotels use labels enhancing consumers to save water, not to change towels every day etc. All those technologies and incentives used in hotels are welcome. However, they are introduced mostly for economic reason. Other postulates such as waste recycling are not that readily introduced by managers. In this situation it is difficult to declare whether legal requirements will strengthen or hamper development towards sustainability. Accommodation is only one branch in whole tourism sector. The most energy is used in transportation. Here not lot can be done by a single entrepreneur or by consumer. Tourists have no influence on the usage of fuel for planes, ships, trains or buses. Traveling and transportation is bound with technology development. As it comes to economic and socio-cultural aspect of tourism in Poland it is comparative to the rest of world, as written in section 6 – impact of tourism.

6. The impacts of tourism

The need to apply the principles of sustainable development in tourism sector is very important from the point of functioning of this sector, as it is directly and indirectly dependent on natural resources and their quality. Meanwhile tourism activities contribute to both positive and negative effects in all three aspects of sustainability.

6.1. Economic impact

The development of tourism in a country or region is recognized as a huge economic opportunity to reduce poverty by generated income and employment. However, if tourism is not developed and managed responsibly, taking into account local needs and concerns, the actual economic benefits may be substantially less than expected. The main three economic benefits of tourism are: reduction of unemployment, development of infrastructure and financial and non-financial income to the region. The increased spending power of employees and their families that results from more tourism jobs. Mo- reover, economic benefits can sometimes be induced in a place a long way from the tourism destination or holiday: for instance, cruise ship workers often send their wages back to their home countries. Tourism as every other industry needs a well-developed infrastructure network. This means not only roads and rail tracks, but also social and cultural infrastructure, such as restaurants, pubs, hospitals, theaters, cinemas, entertainment centers etc. Direct benefits are all money that comes to the region in a form of expenditure by tourists at the destination for food, souvenirs, excursions, tips, etc. They also include money paid by tour operators to local suppliers, including hotels and local transport companies. Indirect benefits include income generated by goods and services provided to the tourists. For example, food purchased by the hotels can provide jobs and revenues for local farmers or factories. Maximizing the use of local products can increase these indirect impacts, meaning that a destination needs fewer tourists to generate the same economic benefit. The key manner in which local populations fail to benefit from tourism is through revenue ‘leakages’ – when the goods and services used in tourism are produced and purchased outside the country or region. In addition, government expenditure on tourism infrastructure, such as sanitation, roads, airports or health

3 http://www.pigeo.org.pl

163 Iwona Niedziółka SUSTAINABLE TOURISM DEVELOPMENT facilities, may mean that less funds are available for basic services for the local population. Other potential costs include the expense of addressing air and water pollution generated by tourist activities, losses to the economy caused by illness related to pollution, and an increased cost of living for local people, as tourist. Moreover, an inflation of prices of goods and services in high-season can be noticed. Labor barrier occurs in the absence of an adequate number of workers willing and have the relevant qualifications to work in tourism.

6.2. Environmental impact

Tourism can have wide-ranging and sometimes irreversible negative impacts on the environment. In some of the most extreme cases, long-term environmental degradation has destroyed the very features that once attracted tourists to a place, leading tour operators and their clients to abandon the older destination in favor of new, undama- ged ones. Not properly planned tourism can lead to landscape degradation and biodiversity loss through the conversion of natural habitats and damage to coastal areas, forests, coral reefs and other ecosystems (Sitek, 2007). Most vulnerable to degradation are considered particularly vulnerable areas with high natural values, including coastal areas, alpine areas, freshwater ecosystems and Antarctic and Arctic coasts (Panasiuk, 2011). Tourism contributes to the disorder of water balance, generates the waste produced by tourism enterprises and tourists themselves. Transportation to tourism destinations has global impact through the carbon dioxide emissions of airplanes and other forms of transportation that contribute to human-induced climate change. Although tourism can lead to environmental costs, it can also be a source of benefits for the environment. The revenues generated thanks to tourism sector can contribute significantly to preservation of protected areas, such as: coral reefs or forests. Moreover, ecotourism can help promoting eco-friendly way leisure. Corporate social responsibility introduces standards that will conserve water and energy and reduce waste generation etc. (UNEP/WTO, 2005). At this point it should be noticed that tourism will always have negative influence on environment like every other industry. Nevertheless it should be a priority to lower the negative effects as much as possible, even if they cannot be all eliminated.

6.3. Socio-cultural impact

Negative consequences of tourism development are associated with changes in the local social environment. Foreign guests often disturb in local way of life and social structures and practices. Local culture is commercialized, authenticity of the regional culture diasporas. There is an increasing number of social conflicts and pathology of the local population. Tour operators can help encourage positive cultural changes and prevent negative impacts by supporting local enterprises and encouraging appropriate behavior by tourists. Disseminating information on appropriate behavior to clients and reducing the opportunities for them to display inappropriate behavior may help to reduce the chances of conflict and cultural disruption (UNEP, 2005). The model below presents an example of the relationship between tourism and local policy taking into account economic, socio-cultural and environmental aspects. Three main aspects make up the tourism industry and its impact on sustainability i.e. transportation, accommodation services and purpose of travel. Those three separately also have impact on destination place but seen altogether present more general view on the model. The model stresses the importance of responsible managing of tourist traffic.

Recommendations

Sustainable development principles are applied in tourism mostly when they are seen as profitable. En- trepreneurs in hospitality industry (i.e. providing accommodation service) introduce environmental friendly solutions mostly because of economical reason. It can also be seen as an advantage from marketing point of view. Eco-labels may attract customers – tourists to specific destinations.

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Figure 1. Example of functioning of tourism in destination place with its connection to local policy and management of tourist traffic

Tourism may harm local communities by interference of outsiders to the society in destination place. From another point of view, however, tourism can help preserving cultural heritage. Historical sites are being renovated and protected to attract visitors, although they will last in origin destination for future generations. It is recommended to put more emphasis on education of tourists, when it comes to their contact with local communities. More respect and understanding should be given to the hosts. Furthermore, accommodation entrepreneurs should consider more, not only current needs of their clients, but also future needs of local community. They ought to understand that without the cooperation with host society, consideration of the environment, they cannot survive as an attractive tourist destination.

Conclusions

Application of sustainability principles is the best way to preserve tourism destinations from degradation in social, cultural and environmental way. Tourism, properly planned can also increase income and be source of wealth of local community. Tour operators are able to attract capital from banks and investors, therefore tourism may be seen as easy way to access to capital. Sustainable actions can help lower operating costs by reducing generation of waste and usage of water and energy. However, more qualified employees are needed, therefore

165 Iwona Niedziółka SUSTAINABLE TOURISM DEVELOPMENT human capital will also grow. A reputation for being sustainable adds value to touristic enterprises’ brands and strengthens their market position, making them less vulnerable to short-term market and economic changes. In this way introducing principles of sustainable development, however is an expensive process, it can be profitable in long term perspective.

References

Cooper, C., Fletcher, J., Fyall, A., Gilbert, D., Wanhill, S. (2008). Tourism Principles and Practice. England: Pearsons Education Limited. Holloway, J. C. (2009). The business of tourism. England: Pearsons Education Limited. Integrating Sustainability into business. A Management Guide for Responsible Tour Operations. (2005). France, UNEP. Kazimierczak, M. (2005). The ethics of sustainable development in tourism of postindustrial age. Poznań, Wydawnictwo Wyższa Szkoła Hotelarstwa i Gastronomii w Poznaniu. Making Tourism More Sustainable. A Guide for Policy Makers. (2005). France/Spain, UNEP/WTO. Meyer, B., Milewski, D. (2009) Strategie rozwoju turystyki w regionie. Wydawnictwo Naukowe PWN. Page, S. J. (2011). Tourism Management. An Introduction. Butterworth-Heinemann. Panasiuk, A. (red.) (2011). Ekonomika turystyki i rekreacji. Wydawnictwo Naukowe PWN. Pasko, K., Staszewska-Ludwiczak, A. (2008). “Green hotels” – hotele przyjazne środowisku – innowacyjna działal- ność w hotelarstwie. In: D. Chudy-Hyski, M. Żemła (red.). Turystyka – Innowacje – Konsument. Górnośląska Wyższa Szkoła Handlowa im. Wojciecha Korfantego. Sâmbotin, D., Sâmbotin, A., Patrascoiu, M., Coroian, A., Merce, I. I. (2011). Ecotourism – a model of sustainable development of tourism means. Journal Lucrari Stiintifice, Universitatea de Stiinte Agricole Si Medicina Veterinara a Banatului, Timisoara, Seria I, Management Agricol, Vol. 13, No. 4, p. 221–226. Sitek, M. (2007). Polityka ochrony środowiska w sektorze usług turystycznych w świetle prawa Unii Europejskiej. Olsztyn: Wydawnictwo Uniwersytetu Warmińsko-Mazurskiego. Sharpley, R., Telfer, D. (2008). Tourism and Development. USA: Taylor&Francis Group. Tourism and Local Agenda 21. The Role of Local Authorities in Sustainable Tourism. (2003). France/Germany, UNEP/ ICLEI. United Nations Environment Programme. (2004). Sustainable Tourism: Definition. Website: http://www.unep.fr/scp/ tourism/sustain/ (13.05.2012). Website: http://www.pigeo.org.pl Website: http://www.serwis-hotelarski.gastroma.pl/art/article_3276.php.

DARNAUS TURIZMO VYSTYMAS

Iwona Niedziółka Alcide De Gasperi Euroregionines Ekonomikos Universitetas, Józefów (Lenkija)

Santrauka

Šiame straipsnyje pateikiamos pagrindinės darnaus turizmo – naujos turizmo formos, kurią skatina val- džia, aplinkosauginės ir socialinės institucijos bei tarptautinės organizacijos. Ji lemia ekonominių, aplin- kosauginių ir sociokultūrinių aspektų įvertinimą turizmo valdymo srityje. Straipsnyje pateikiama istorinė darnumo idėjos kilmė ir pagrindiniai tarptautiniai įvykiai, susiję su šia tema. Autorius atskleidžia neigiamą turizmo poveikį, kurio galima išvengti taikant darnaus vystymosi principus. PAGRINDINIAI ŽODŽIAI: darnus turizmas, atsakingas turizmas, ekoturizmas.

JEL kodai: L830, Q010

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OUTSOURCING DOCUMENT MANAGEMENT SYSTEM/APPLICATION AS KEY FACTOR FOR COMPLIANT PROCESS IMPLEMENTATION AND INCREASING MANAGEMENT EFFICIENCY

Kristina Puksta1, Peteris Laurins2

University of Latvia (Latvia)

Abstract Today, in knowledge and information technology era, the world’s businesses, both large and small, are increasingly seeking to use information technologies – especially information systems. There are implemented and maintained several of information systems: resource view based, customer orientated, document exchange information systems and universal ones, as opposed to specialized, and contains a lot more functionality offer. Information systems are implemented to ensure the core business functionality by au- tomating certain processes, providing benefits such as business process transparency, arrangement and actualization. By the use of information systems certain services became popular, which are related with the established information system maintenance – the ongoing process of auditing, risk identification and management, and compliance regulations, laws, standards and guidelines. Such compliance is essential for the better functioning of information systems and aligns its activities. This article explores a theory of IT outsourcing and IT Compliance definition to give an idea of the need for it, and point to the benefits organizations can in carrying out these processes – system dynamics modeling research method was used in following research. KEYWORDS: IT Compliance, Outsourcing, Business Efficiency, Electronic Documents Management Systems.

JEL code: M150

Introduction

In the world more and more information systems have been implemented. Information system users have become both the public and private sector representatives. To supply different processes or Organizations and institutions there have been used different types of information systems which are comprehensive, characterized by their universality. Organizations implementing information systems, expects and receives such benefits, which concerned to the organization processes and their alignment, automation, but little attention is paid to aspects such as information systems infrastructure, data security, system security, information systems for general compliance with the established standard-providing the process of incorporation in accordance with national and international regulations, guidelines and agreements. The reason of this poor awareness from business is occupation or simple reliance on information systems and its developers. The consequences of such negligence might negatively affect organization own information systems and core activities. Current article will discuss the problems that show that the Non-IT service provider companies have a low IT Compliance in Their IT Infrastructure. The article purpose is to find the way for Organizations how to increase their business efficiency using IT Compliance. 1 Kristina Puksta – University of Latvia, Faculty of Economics and Management, Mg.sc.soc. Scientific interest: information technology, management. E-mail: [email protected] Tel.: +371 298 622 00. 2 Peteris Laurins – University of Latvia, Faculty of Economics and Management, Mg.sc.soc. Scientific interest: information technology, management. E-mail: [email protected] Tel.: +371 265 489 9.

167 Kristina Puksta, Peteris Laurins OUTSOURCING DOCUMENT MANAGEMENT SYSTEM/APPLICATION AS KEY FACTOR FOR COMPLIANT PROCESS IMPLEMENTATION AND INCREASING... MANAGEMENT EFFICIENCY

To achieve its goals authors have committed following tasks: a look at the IT outsourcing theories to provide a broader view of information systems implementation process deficiencies and benefits, see the IT Compliance fundamental concepts to give an idea of the need for it and use as well as a look at the IT Com- pliance at the nature of the practical examples - Outsourced EDMS, which will set standards and regulatory requirements relating to the EDMS adjustment measures. In conclusion section authors will find out the EDMS IT Compliance effect on business efficiency and for that system dynamics modeling method will be used. EDMS as the system was the object what was used to reach the goals of the research. During the preparation of the article system dynamics modeling research method was used to capture the objects interconnection and impact between themselves. Foreign and Latvian scientists work were used for the research of its methodologies base. Scientific conferences and seminars, as well as the practical results were also used for research input.

1. Review of existing IT outsourcing theories

The outsourcing process is a complex structure consisting of numerous activities and sub-activities, carrying many managerial dilemmas and challenges. Many theories have been utilized to help the academic researchers to understand the nature of those activities, and to help practitioners successfully manage the process. It is a common knowledge that each phenomenon can be described by several frameworks that are embedded in various theoretical approaches. From its occurrence, the outsourcing has been approached by different theories. This creates confusion among the researchers of the outsourcing phenomenon. Authors Pe- runovic and Pedersen on 2007 had collected and identified significant number of theories that could explain the outsourcing phenomenon (Perunovic, Pedersen, 2007). Authors have found previous researches where Perunovic and Pedersen on 2007 have done literature study in outsourcing theories from the 1990 up to 2006. Table below shows their papers and the theories utilized. The last column indicates phases of the outsourcing process the paper and its theoretical grounding have addressed. The abbreviations P, VS, T, MR, and R stand for the phases of the outsourcing process i.e., Prepa- ration, Vendor(s) Selection, Transition, Managing relationship, and Reconsideration.

Table 1. Theories utilized in the research of the outsourcing process

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Source: Perunović, Pedersen, 2007. Outsourcing Process and Theories

Reviewing the table it is obvious that almost all of the theories from 1990 till 2006 are applicable for preparation phase. But in this survey authors didn’t found any IT Compliance or Due Diligence topic related theory what caused a reason to look deeper in this case. Authors have selected four most challenging theories for broader view what was done mostly by Perunovic and Pedersen on 2007.

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1.1. Transaction Cost Economics

Transaction cost economics (TCE) has been the most utilized theory of outsourcing. TCE is perceived to provide the best decision making tools to help organizations to decide to outsource and to prepare themselves for forthcoming outsourcing arrangements. The governance features of the theory influenced that it has been applied in studying the Managing relationship phase, whilst the concept of switching costs made the theory applicable in the reconsideration phase. Another useful issue for outsourcing provided by TCE is explanation of contractual complexity. Though TCE has not been utilized explicitly for studying the Vendor selection phase, its sub-theory (if we may say so), the theory of incomplete contracting, has been applied in studying the structure and contents of outsourcing contracts, and related preparation and contract management activities. Even though it has been exercised extensively in outsourcing applications, the TCE has several indulgencies. Lacity and Willcocks (1995) found that the original mapping to the TCE framework only explained few IT sourcing decisions and generated much more anomalies in their sample. Another critique could be that TCE relies on a single transaction as a unit of analysis, neglecting the contemporary industrial collaborative arrangements. Finally, TCE is static, which doesn’t correspond to dynamism of current business environment (Perunović, Pedersen, 2007). So despite of the fact that this theory is used for Preparation, Vendors Selection, Managing relationship, and Reconsideration it is too wide and the to concrete at the same time what could cause anomalies as researchers describe it before. No IT Compliance or Due Diligence has been included.

1.2. Relational View

Relational view develops and explains how firms gain and sustain competitive advantage within inter-organizational relationships. Its key premise – the concept of relational rents has been explored to explain how firms choose their future outsourcing partners and preferred type of the relationship. It has been also utilized in studying the Transition, Managing relationship and Reconsideration phases. This makes the relational view to be the only theory that has been applied in the research of all the outsourcing process’ phases (Perunović, Pedersen, 2007). Here authors see the risk that this theory has almost one of the highest risks to avoid any IT Complian- ce review before outsourcing as in different countries due to cultural environment inter-organizational relationship are more close then expected where any DUE Diligence process could be done quite formal.

1.3. Resource-based View

The core premise of the resource-based view is that resources and capabilities can vary significantly across firms, and that these differences can be stable. If resources and capabilities of a firm are mixed and deployed in a proper way they can create competitive advantage for the firm. The resource-based view in outsourcing builds from a proposition that an organization that lacks valuable, rare, inimitable and organized resources and capabilities, shall seek for an external provider in order to overcome that weakness. Therefore the most prominent use of the theory is in the Preparation phase of the outsourcing process for defining the decision making framework and in the vendor selection phase for selecting an appropriate vendor. The theory has been also used to explain some of the key issues of the Managing relationship and Reconsideration phases (Perunović, Pedersen, 2007). It is essential during preparation phase to do risk assessment if the labor resource cut-off is the only reason to do outsourcing. It is proved that in companies who’s core business is not connected to provide IT services, IT infrastructure is not compliant.

1.4. Knowledge-based View

The knowledge-based view provides insight in understanding how individuals co-operate to produce goods and services. The knowledge-based view distinguishes two ways how knowledge is shared among

170 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) partners. They are knowledge generation and knowledge application. The knowledge-based view has been used in utilized in the outsourcing research to prove that knowledge sharing in the Managing relationship phase is positively related to the success of an outsourcing arrangement (Perunović, Pedersen, 2007). It should be checked how the knowledge is documented, do the company has intellectual knowledge repository or any other documented evidence what could make easier take-over during the Transition. If this is not included in the contract to do so, then in practice there could be dispute about it.

1.5. IT Compliance challenge in companies

IT compliance in organizations and companies had always been a challenge. For example – those companies, who are IT services, are not their core business mostly has problems with their IT infrastructure compliance with data security and IT management best practices – like ITIL. Those companies, who start to outsource their IT infrastructure, are usually surprised how non-compliance their IT infrastructure has been before. Usually there are lack of proper technical documentation and processes, who describe how the IT infrastructure should be managed and what to do in critical situations. Usually these gaps have been found too lately when Outsourcing Company has started to take over responsibility. Such an activity like Due Diligence has not always performed, what is usually caused by saving finances and that always affects outsourcing transition and transformation process. On the next sections step to be more compliant in IT will be described – example will be observed of electronic document management system (EDMS) implementation.

2. Electronic Document Management Systems (EDMS) as a IT outsourcing product

Currently a lot of organizations has found reasonable to improve their IT infrastructure implementing EDMS. Its purpose is to supply exchange electronically documents internally in the organization and exter- nally. EDMS has been widely used in such organizations where document flow is significant or its core business requires usage such a system: for example – automatic invoice creation and sending, fast invoice receive and payment, document approval etc. – all what happens with documents daily. Areas where EDMS are used most often are connected with consumer retail, cargo, logistics, accounting service and IT infrastructure services or maintenance, where applicable electronically documents are produced and approved. Today world’s practice show, that EDMS mostly are used in following organizations: yy Huge enterprises, where amount of employees are above 250, who provides qualitative and effective exchange of electronically documents between all employees and business partners/public sector organizations. yy Small and (10–49 employees) and medium companies (50–249), if their profile is dependent from operational and qualitative document exchange process. Necessity for EDMS is higher if organization’s branches are located in different locations. In these cases electronically document exchange happens only thru EDMS.

EDMS has been used to supply following processes, but not limited to: yy electronic document process supply on digital environment according its lifecycle phases: creation, registration, update, version management, copying, delegation, execution, coordination, distribution and archiving; yy document movement automatisation (receiving documents, linking and sending); yy searching for documents on digital environment; yy document circulation process controls implementation; yy security measures (ContentManager.eu.com, 2011).

Organizations who have decided to use the EDMS must meet the following criteria: the current movement is a complex document, the document in a process of at least 3 members, the company’s job more than

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10 units and the company has regional branches (Puksta, Laurins, 2012: 3). Only when at least half of the above criteria have been met, implementation of EDMS is useful for organization. On IT market there exists in several EDMS systems – specialized in providing enterprise-specific business processes and multi-purpose, designed for small businesses, because the document provides basic life tasks. It is important that prior to the adoption of EDMS implementation, the organization accomplish a business process analysis. The EDMS benefit and lack determination should be the analysis task. CCH Australian Company who is engaged in various business areas of research, in 2009 made benefit analysis of the use of EDMS. Replies to the questions were received from the companies where EDMS is used every day and those who were planning to use it. After the survey: 72.8 % of respondents claimed that the company increased efficiency and productivity, better organization of the process sequence – 69.1 %, improving risk management – 65.6 %, 56.3 % of respondents noticed a decrease in document maintenance and storage costs (Moore, 2009). Respondents who plan to implement EDMS, according results of surveys, mostly expect: improvement of the organizational process sequence, the risk management improvements, the company’s efficiency and productivity increases, Figure 1 (Moore, 2009).

Figure 1. Professionals and Electronic Document Management Systems Source: Moore, 2009.

An entrepreneur in today’s market is offered several options for EDMS purchase and one of them – EDMS as outsourced solution (Outsourcing Document Management System). EDMS as outsource solution provides to organizations opportunity to hire a team of IT professionals engaged in EDMS customization, implementation and maintenance activities (Phillips, Andrews, 2003). Outsourcing offer, for example, following benefit-driven effect: the company does not increase the number of employees, the company focused solely on primary activities. Contractor has the option to choose to buy a ready-made EDMS that is versatile, but cheaper, or to invest more and to order EDMS, which will be adapted for his needs. Organization shall in any case have to deal with employees’ investment in training to work with the new system.

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By studying the outsourcing situation in Latvia, it can be concluded that the main problem is uncertainty about the customer experience. EDMS, as a content management solution has been offered by the Latvian companies such as: SIA “Hortus Digital”, LLC “DPA” Ltd. and “AstonBaltic” and also the foreign companies, such as: FileNet, Documentum, OpenText, Identitech, Hummingbird (Phillips, Andrews, 2003).

3. EDMS and IT compliance impact on business efficiency at company

As a result of implemented outsourced service EDMS is viewed from the perspective of IT Compliance. Outsourcers, renting EDMS, have to make analysis in order to establish an information system functioning regulatory and standards set, and perform EDMS compliance or verification audit. An audit helps to identify risks at least in the EDMS-related areas: data security, user authorization and access rights, the activities (record deletion, modification or addition) record, process life-cycle structure, managed content (documents according to their types, forms and documents blanks) compliance with regulatory laws and standards. IT Compliance can be classified into the following groups: yy legislation relating to the general processes of information systems: data security, user logins and access rights, and the operation records (Wright, 2008: 116); yy implementation of procedures or regulations relating to the company’s business processes: Business Process Integration Information System in accordance with procedures or rules; yy standards or regulations relating to information systems managed by the content: documents, templa- tes, forms, electronic signature, copyright; yy The authors found the following International Organization for Standardization standards relating to the EDMS and its managed content: - ISO 2709 Information and documentation – Format for information Exchange; - ISO 15489 Information and documentation – Records management; - ISO 21127 Information and documentation – A reference ontology for the interchange of cultural heritage information; - ISO 23950 Information and documentation – Information retrieval (Z39.50) – Application service definition and protocol specification; - ISO 10244 Document management – Business process base lining and analysis; - ISO 32000 Document management – Portable document format.

The above standards are international, but they should be limited to national-level regulatory and standards, as well as the company’s internal regulations, manuals and specifications for information systems subordinate to them (Ademero, 2012). In Latvian situation, they are: Latvian national legislation relating to information systems development and maintenance of electronic documents, electronic signature, the Latvian national standards, as well as each company, according to specific, internal procedures and agreements. IT Compliance according to the Latvian state law provides the EDMS general subordinate. Is defined as, for example, EDMS can cooperate with other public sector information systems or archiving documents may be applied to EDMS archiving process. In this way, are standardized and adapted to the functioning of the EDMS. Latvian national standards can set various types of conditions for developing documents and EDMS section may affect the preparation of its documents or forms design. Blanks and / or forms development takes place once, according to existing regulations, and shall be amended only if it is approved by regulatory changes. The following blanks or forms in the information system users to resolve time-consuming regulatory law studies at the moment is to develop a document in which the work piece is maintained in the information system. The company’s internal rules or an agreement defining the soft EDMS business procedures of the way that is minimally different from the processes that take place in real life. This process integration guarantees that users will be able to quickly retrain to the new EDMS and daily work tasks will have much better quality.

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Although today, Latvian IT Compliance is not much performed and often used in practice, it is increasingly realized in foreign companies. By studying the experience of foreign companies, it is clarified that the IT Compliance contributes to the company’s operating actualization by solving the following tasks: reduces administrative costs, are listed in the company’s basic processes, arranged in the utilization of resources, is possible to make functioning resources monitoring, check information systems what is organized according to international regulations, reduces the data theft and unauthorized access risk, and logs/checks EDMS end user’s activities. Using system dynamics modeling research method, the authors have portrayed the impact of IT Com- pliance at the company, which was introduced and arranged with EDMS, see Figure 2. Greatest benefits of IT Compliance are considered to be the EDMS general arrangement that results in a reduced system of data theft or hacking risk. In case of risk execution, the company’s competitiveness would be destroyed and hence its ability to compete with other organizations/competitors would be reduced. Another consequence of the EDMS system functions arranging is the return of the investment in EDMS, which allows organizations increase confidence that the implemented solutions are useful. Of course this statement is valid if the company’s core business is dependent to a large volume document processing. Any increase in utilization of EDMS follows with increase of higher company’s business process performance, which is closer to reality. This business process integration in EDMS encourages system end user better adoption, therefore, would increase usage of the system and the results of their quality. If the quality of data increases, then the use of risk will be reduced, which means that the data used for processing and analysis will provide the advantage of the opportunity to take timely and correct decisions. In meanwhile – correctness of the decision depends on the company’s business process better execution. Chart was completed when the results of EDMS users will increase and IT Compliance requirement to perform a reduction executes.

Figure 2. System Dynamic Diagram of EDMS and IT compliance Impact on a Business Efficiency Source: Puksta, 2012.

Conclusions

Although today the IT Compliance in Latvia has not been much observed, the authors can clearly say that it is necessary and it has a role in the business. The authors, using system dynamics modeling techniques have shown the importance of IT Compliance at enhancing the efficiency of the company. For most business

174 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) benefit from IT Compliance performance of existing information systems in accordance with the existing arrangement: the international and national regulations, standards, the company’s internal policies, agreements, and specific actions – procedures. Such a readjustment of the most common activities are reached: general functioning arrangement of the information system, business process customization to practical work, content managed with existing regulations, which generally brings corporate business processes to increase output. Aligning the functioning of the system obtains improvement of the safety system to reduce data theft or the risk of tearing. Not everybody in the world is immune to hacker attacks, and particular occurrence of the risk bears any loss of business. One of the worst scenarios would be loss of market position and competitiveness reduction, as a competitor take over and use theft data for their own benefit. Organizations who want to make more compliant their IT infrastructure could be not only large or medium-sized enterprises but also small companies, since the implementation of information systems no longer require large investments in IT technology development, as well as IT staff maintenance. Currently on the market there are available following solutions such as: information systems or outsourced cloud computing products and software as a service. Solutions are available for rent and pay only for the use of – charge calculation methodology of the “Pay-as-you-go”, which includes the cost of maintenance. Using these solutions, the operators had planned to promote the development of information technology to execute the plans for cost save. For the development of the company must take care that in turn provides long-lasting market position. For the state that would mean the opportunity to grow and increase everyone’s standard of living, which already has the benefit that every citizen can feel personally. The more businesses companies invest in their development, the more likely it will be to live well.

References

Ademero, Inc. (2012). 12 Things to Know About Document Compliance. Ademero. Website: http://www.ademero.com/ document-management/12-things-to-know-about-document-compliance_article, visited on 30.05.2012. Computhink, Inc Corporate Headquarters. (2012). Are You Compliant? The Legal Need for Document Management. Computhink website: http://www.computhink.com/about-us/compliancy/ [26.04.2012]. ContentManager.eu.com. (2011). Benefits of a Document Management System. ContentManager.eu.com website: http:// www.contentmanager.eu.com/dmsbens.htm [26.04.2012]. DeLuccia IV, J. J. (2008). IT Compliance and Controls: Best Practices for Implementation. New Jersey: Wiley. Moore, L. (2009). Professionals and Electronic Document Management – EDM delivers value beyond expectations. CCH website: http://www.cchatter.com.au/?p=114 [26.04.2012]. Perunović, Z., Pedersen, J. L. (2007). Outsourcing Process and Theories. Dallas: POMS 18th Annual Conference, p. 8–13. Phillips, J., Andrews, L. (2003). Outsourced Document Management: Is it the Solution for Your Organization? Digital Publishing Solutions: http://www.dpsmagazine.com/content/ContentCT.asp?P=98 [26.04.2012]. Puksta, K., Laurins, P. (2012). Management Information System’s Usage and Topicality at Small and Medium Enteprise Segment. Riga: School of Business Administration Turiba. Wright, C. S. (2008). The IT Regulatory and Standards Compliance Handbook: How to Survive Information Systems Audit and Assessment. Burlington: Syngress.

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DOKUMENTŲ VALDYMO SISTEMA / PROGRAMA, KAIP ESMINIS SUDERINTO PROCESO VYKSMO IR VALDYMO EFEKTYVUMO DIDINIMO VEIKSNYS

Kristina Puksta, Peteris Laurins Latvijos universitetas (Latvija)

Santrauka

Šiandien, žinių ir informacinių technologijų eroje, pasaulio verslas (tiek didelis, tiek mažas) vis labiau siekia išnaudoti informacines technologijas, ypač informacines sistemas. Šiuo metu taikoma keletas infor- macinių sistemų: paremtos ištekliais, orientuotos į klientus, dokumentų apsikeitimo sistemos ir universalios sistemos, lemiančios daug didesnį funkcionalumą. Informacinės sistemos diegiamos siekiant verslo funkcio- nalumo automatizuojant tam tikrus procesus, tai suteikia verslo procesams skaidrumo, tvarkos ir palengvina jų įgyvendinimą. Taikant informacines sistemas, populiarėja paslaugos, susijusios su informacinių sistemų palaikymu – nuolatinis auditas, rizikos nustatymas ir valdymas, suderinamumo reguliavimas, taisyklės, stan- dartai bei gairės. Toks suderinamumas yra būtinas, siekiant veiksmingo informacinių sistemų funkcionavimo. Šiame straipsnyje nagrinėjama IT teorija ir IT suderinamumo samprata, išryškinama šių procesų taiky- mo organizacijose nauda. Darbe taikytas sistemų dinamikos modeliavimo metodas. PAGRINDINIAI ŽODŽIAI: IT suderinamumas, iškėlimas, verslo efektyvumas, elektroninės dokumentų valdymo sistemos.

JEL kodas: M150

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ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

Olev Raju1

Tartu University (Estonia)

Abstract The system of local governments financing, which is used in Estonia is based on personal income tax and supports paid by the state. A system of that kind creates enormous inequality between the local governments. The continuing decrease of income taxes and the increase of tax-free minimum arises the role of state supports. Central government reduced essentially the part of income taxes assigned for local governments and supports in 2007–2010. That’s why the municipalities met a difficult economic situation. The greatest costs for municipalities is education. Government has taken a course to abolishing rural schools. As the analyses demonstrate the schools are enormous source of incomes for municipalities. Therefore the abolishment of schools would made the financial situation of municipalities worse even more. A special method wasn’t created for the analysis. The classical economic means – tables, indexes and marginal analyses were used. KEYWORDS: local government, income tax, economic supports

JEL code: H610.

Introduction

The aim of this paper isn’t the analyses of the essence of local governments, their additional functions or the division of their functions between state government and local governments. The essence of the local government and its functions in a concrete state are determined by the constitution of a state. In this field different states have got different practices. There is a different amount of local government’s level in Europe: one (in Finland), two (Sweden, Denmark) and even three (Italy). We originate from the present situation of Estonia. There are 226 local governments in Estonia with its 1.3 million people. It’s obvious that there isn’t any reason for a two-level (or moreover, three-level) local government system in small Estonia. The question lies, how the functions are divided between the central power and the local governments and how these small local governments can mange with their tasks. That’s why the additional functions of local municipalities have got an essentially smaller amount than in most EU member states. For example, the ratio of employees between the central level, regional level and local level is 23.9:11.9:56.7, respectively in Denmark and the ratio of state and local governments are 22:78 in Finland. So, the structure of central government is almost the same in two-level and three-level local government systems – 23.9 and 22, respectively. Since also the GDP per person in Estonia is 2–3 times lower (according to the method used to calculate) then in most of these countries, it is clear that the local governments play a slightly smaller role in Estonia. In Estonia the local governments are not responsible for health care, employment, law enforcement and rescue services. Regardless to the fact that the proportion of the local government’s function has slightly increased in the last few years, their role in education and social care is limited.

1 olev Raju – Tartu University, Economic Faculty, Prof. habil. dr. Scientific interest: Taxation, Local Governments, Budgets, Re- sponsibility. E-mail: [email protected] Tel.: +372 737 584 3.

177 Olev Raju ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

If we observe the financing of local governments, then we originate from the division of functions between the central government and local governments de facto and from the situation, wherein the local governments can solve their problems. The problem is especially actual in connection with the economic crisis of 2007–2010 and its influence on the financing of local governments. With an end-to-end budget the local governments are looking for a way to cut expenses. In almost all of the local government the biggest expense is education: schools, pre-school facilities and also extra-curricular facilities such as sport schools, Bobby clubs etc. It has initiated an understanding that school is a significant financial burden to the local government’s budget. Let us set a hypothesis – school brings into the local government’s budget at least as much as it takes. Regarding pre-school facilities the picture isn’t as clear – these do not exist in all of the local governments (especially in the smaller ones) and the level of expenses varies significantly. Also, since the statistics for pre-school facilities is incomplete, despite the relatively large analogy of the situation we will not examine them. In scientific literature (but also in media etc) this issue has not been studied according to our data. A special methodics wasn’t created for the analysis. The classical economic means – tables, indexes and marginal analyses – were used. The analysis is based on data from years 2004–2010 as the information from 2011, time as the paper was written, was published only partially. In the interest of the clarity of the analysis the first step is to observe the financing system for local governments of Estonia. The proportion of individual income tax and equalisation fun (those financial channels that depend on school) in the local governments total income will be shown in it. We will observe the local government expenses to schools to prove the hypothesis. Sums added to the local governments budgets due to the existence of schools will be analysed more closely. In the last case it is also important to find ways to evaluate indirect, mediated gains.

1. The financing local governments in Estonia and Europe

There are 226 local governments in Estonia with its 1.3 million people. The number of the citizens is between 92 in Ruhnu parish (it was just 68 persons a few years ago) up to almost 400.000 in Tallinn. It’s obvious that there isn’t any reason for a two-level local government system in Estonia. The question lies, how the functions are divided between the central power and the local governments and how these small local governments can mange with their tasks. The concentration of the power into Tallinn (together with the problems of the financing of the local governments) is the reason why the role of the local governments is considerably moderate than it’s used to in Europe. The economical importance of the local governments is relatively moderate in Estonia, it forms about 8–9 % of the GDP (Ulst, 2002: 465) and 6 % for some of them (Riigieelarve, 2004: 23–49). The same index was 23 % in Finland, 25 % in Sweden and even 33% in Denmark in 1995 (Raju, 2010: 348). As GDP per person in Estonia is 2–3 times lower (it depends on the method of the estimation) than in these states, so it’s obvious that the role of the local governments in Estonia is much more moderate. The local governments of Estonia don’t vouch for health, employment, security, and lifesaving service. Despite of some improvement of their role in recent years their role is limited in education and social welfare services. But there’s a lack of financial aids even for such a limited amount of functions; the system of their financing is unsatisfactory. Different systems of financing of local governments are used in Europe. Conditionally, these systems could be divided into two groups. According to the first system the local government gets its revenues from the entrepreneurship of the region. The plus of the system is the interest it makes to the development of the entrepreneurship – the more developed the entrepreneurship is, the bigger are the revenues of the local government.

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Table 1. The structure of the incomes of the local budgets in Estonia

2007 2008 2009 2010 Million Million Million Million % % % % euros euros euros euros Incomes 1288 100 1454 100 1292 100 1270 100 Taxes 676 52,5 794 54,6 692 53,6 650 51,2 Personal income tax inside it 630 48,9 734 50,5 634 49,1 585 46,1 Land tax 35 2,7 48 3,3 48 3,7 51 4,0 Other taxes 11 0,9 12 0,8 10 0,8 14 1,1 Equalization fond 92 7,1 92 6,3 70 5,4 70 5,5 Block grant from state budget 208 16,1 240 16,5 221 17,1 230 18,1 Other state grants 94 7,3 100 6,9 45 3,5 52 4.1 Transfer from foundations 24 1,9 26 1,8 69 5,3 69 5.4 Economic activity 151 11,7 153 10,5 151 11,7 153 12.0 Others 43 3,4 49 3,3 44 3,4 46 3,6 Source: The author’s calculations based on the Ministry of finance homepage.http://www.fin.ee/

According to the second system the local governments get the main part of their incomes from the taxes based on properties (tax for a real estate, tax for a car, tax for a bicycle, tax for the land, and tax for the heritage) and from several compensations for the use of the natural resources (as the payment for the usage for fishing, water, local building materials etc), it makes no difference whether they are called taxes, fees or somehow else. In Estonia the proportion of these taxes and payments is currently 3.5 % from the total revenue of the local governments (Table 1 and 2). In Estonia the sources for local governments’ incomes according to the Local Government Financial Management Act are: 1) tax revenues; 2) revenues from sale of goods and services; 3) received support; 4) others. This group forms the main income source for local governments and it includes personal income tax, land tax and the fee for using natural resources. The distribution has changed repeatedly since these taxes were set. Local taxes were set by the local governments in accordance to the law. In this case the inspector of taxes is the local government, but with a contract the duties can be transferred to the revenue office’s county division. The local governments have been allowed to set taxes since 1996. The sources of income for Esto- nia’s local governments are versatile and there about 100 units of income source positions can be found in reports. Generally the local governments’ incomes are divided as shown in table 1. As it is visible, the main source of income is personal income tax, which is a divided tax. That means that the sums go partly to the state and partly to the local governments according to the persons registered place of residence. From the 2007 by the system of financing of local governments of Estonia first of all the local governments get a part of the income tax from the persons of their territory, which is equal to 11.9 % of the gross income. Unfortunately it was repeatedly cut during the economic crisis: in 2009 it was 11.3 %, in 2010 11.39 %, in 2011 11 % and in 2012 11.4 %. This cutting of the rate of allocations enhanced the sums going to the local governments (Table 1). The share of local taxes in local governments’ budgets is modest, advertisement tax and road and street closure tax are more widely used; also, parking charge is remarkable in bigger cities (Table 2). The local governments get a significant part of their incomes from the state budget in addition to personal income tax. These sums are either single-purposed (table 1 block grand) or for local governments with a lower base of income as an equalisation fund (Table 1 equalisation fund).

179 Olev Raju ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

Table 2. Local taxes in Estonia 2010

Road and Animal Advertise- Parking Local taxes Sale tax street closure Boat tax tax ment tax charge tax Local governments using taxes 1 3 47 19 8 1 Income from local taxes 3 5544 37 019 19 072 79 727 68 (thousand euros) Source: Ministry of Finance. http://www.fin.ee/?id=11191

In addition to the income tax the local governments get an essential part of their revenues of the budget as transactions from the state budget. These sums are dedicated or support funds for the local governments of lower revenue basis.

2. Problems in personal income tax base financing

The financing system of the local governments, which basis on the personal income tax, contains unavoidably several dissentions in Estonian conditions. The amount of the functions of the local governments in Estonia is smaller than it is considered to be right in Europe; and that’s in spite of their certain extension. The extension of the functions of the local governments unavoidably enlarges their expenses. First of all, the difference between the smallest and the greatest salary is continuously growing, so the difference inside the income tax per person differentiates among the local government units. In 2004 the difference was 501 euro (the largest in Viimsi – 567euro and the smallest at Peipsiääre – 66 euro) or 8.6 times. In 2007 it was 9.5 times or 953 euro (The biggest in Viimsi – 1064 euro per person and the smallest at Peipsiääre – 111 euro per person. In 1999 it was 4.3 times (by the calculations of the author according to the data from Estonian Towns Union). The difference would be even more if a greater part of the personal income would be left to the local county governments. Another problem, which exasperates the usage of the income tax as the main source of revenue, is the rise of the untaxed minimum. Today the untaxed minimum is so little in Estonia that it can’t carry on its social functions. Also, the amount of the present untaxed minimum of Estonia isn’t in accordance even with the minimal conceptions, which have been developed in European Union. Therefore, Estonia will unavoidably meet the enlargement of the untaxed minimum, which will decrease the main component of the local governments’ revenue basis – personal income tax. The first possibility to relieve the total inequality is to differentiate the proportion of the income tax, which will be left to the local governments (the interest rate). These local governments, which have got a higher average salary on their territories, get a smaller per cent from the personal income tax on the basis of the system and the other way round: these local governments, which have got a lower average salary on their territories, a bigger per cent. A system of this kind equalizes (in some amount) the level of the revenues of the local governments. The differentiation of the per cent of the separation of the personal income tax in the budgets of the local governments makes problems first of all to these local governments, who are proceeding from one group to another. A situation may arise where the incoming income tax of the local governments is decreasing together with the rise of the salary. Therefore the delimitation of the groups makes problems. And certainly, 10–20 greatest local governments of the biggest group (among them is Tallinn, too) are against a system of that kind. The differentiation of the part, which goes to the local governments from the income tax doesn’t solve the problems, which come from the rise of the untaxed minimum. (Once more it has to be stressed that the rise of the untaxed minimum will be unavoidable in the next years.)

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3. The cost basis and revenue basis financing

The financing of the local governments has been tried to be approached as according to cost basis, so according to income basis. Both the positions have got their supporters. But we haven’t found considerable works of economical theory, which would analyse the problem according to Eastern European states. The budgets of the local governments were compiled according to cost basis in Estonia until 1995 i.e. they were paid from the expected costs of a concrete local government. It was difficult to bring them out, so the estimation of the level of the costs of the next year was practically done through a principle – the level of the costs of the last year plus some growth percentage. If a local government succeeded in “uprising” the percentage of the costs in one year, then a comfortable life was ensured for many years. In order to liquidate a situation of that kind, which is characteristic to socialistic controlled economy and would stimulate economic mismanagement, it was decided to transit to the financing of the local governments according to the revenue basis i.e. it’s the variance, which was in use with some modifications until 2003 and which critics has been given before. The system was frequently tried to be improved in 1996–2002 (the planned own revenue per person of the last period was replaced with the real revenue, the method of the estimation of the real amount of population was improved etc). These improvements have led to the demolishment of the system according to the revenue basis. The example of the latter ones are the living allowances, which are given to the local governments according to the cost basis; the money for the municipal schools etc. All together they can be compared with the money divided according to revenue basis (Kohalike, 2004). So, de facto we’ve reached a situation wherein the local governments are financed as according to cost basis, so according to income basis. A question, if a financing according to cost basis or according to revenue basis has been arisen in the last years. As it has been said, the local governments are as about the cashiers while paying living allowances etc as they get money from the state and pay it according to the laws. The problem of a budget – cost basis or revenue basis – doesn’t matter that part of the budget of the local governments – this part of revenues can be only according to the cost basis. The problem if according to cost basis or according to income basis has been actual in the estimation and the assurance of the own revenue per person; that’s been especially actual while finding out and dividing the amount of the equalization fund. The principle of dividing the fund was dominantly according to the revenue basis in 1996–2002. The less the own revenues per person of a local government (personal income tax, land tax, operating payment for the natural resources) were – the more money from the equalization fund was given. If the inland revenues arose, the sums from a concrete relief fund for the local government lessened at once. That decreased the motivation of the local governments to increase their own revenues per person. Another insufficiency of the formula used in 1996–2002 to divide the relief fund was its total separation from the costs. The essential level of costs per person could be and is different among the local governments. It depends on the aged and sexual structure, the dispersion of the settlements (so, the length of the communications – streets, roads, technological settings etc) and other factors. The formula of the relief fund ignored these factors. The division of the equalization fund is based on a new formula since 2003. It’s trying to integrate the cost basis (which was used before 1995) and the revenue basis (1996–2002) approaches. The support T allocated from the budget equalisation fund (here in after equalisation fund) to a local government budget shall be calculated as follows: (Ministry of Finance http://www.fin/ee/index.prp?id)

T = (AK – AT) · k, Where:

181 Olev Raju ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

T – size of the budget equalisation fund in the specific local government; AK – calculated average operating expenses of the specific local government; AT – calculated revenue of the specific local government; k – coefficient of level of support; Cn – the number of children (0–6 years of age), number of school-age children (7–18 years of age), size of the working population (19–64 years of age)and the number of elderly persons (more than 65 years of age) according to the data in the population register, the calculated length of local roads and streets (roads with solid surface by coefficient 0.26, city streets by coefficient 0.74; roads with non-solid surface by coefficient 0.047) in kilometres according to the national register of roads and the weighted average number of disabled persons who are taken care of and to whom caregiver services are provided according to the caregiver‘s allowance report last three years at the specific local government; Pn – calculated average operating expenses in euro per child, school-age child, person of working age, elderly person, disabled person who is taken care of and person to whom caregiver services are provided and per kilometre of the calculated length of local road and city street in local governments; – the total amount of the number of children, school-aged children, persons of working-age, elderly persons, the weighted average number of disabled persons who are taken care of and to whom caregiver services are provided in the specific local government multiplied by the calculated length of local roads and city streets in kilometres adjusted by coefficients and the calculated average operating expenses of local governments in euro calculated per unit in respect of each corresponding indicator; TM – receipt of personal income tax at the specific local government in 3 last years, respectively, multiplied by 11.4% and divided by the calculated income tax rate for the local government in force in the relevant year – calculated land tax in the specific local government;

RM – receipt of the extraction tax for the mining right and the fee for the special use of water in the specific local government in last 3 years

The formula doesn’t satisfy all the problems arising from weak revenue basis of many local governments, that’s in spite of its complicatedness, which also makes its usage more difficult. Its usage offers to delay the cardinal reforms in the creation of the local governments’ revenue basis in 3–4 years, but it doesn’t solve the existing problems. That’s why the new searches for financing the local governments are especially important.

4. Economic crisis as a reducer of the budgets of local governments

The economic crisis, which captured Europe in 2008–2010 and hasn’t still ended in some states, influenced the economic situation of local governments, particularly their budgets. The governments of majority states proceeded from the necessity to support the local governments as the governing institutions, which are the nearest to people in a situation of that kind (EN-EERP, 2010). As Estonian state budget essentially decreased and the role of local governments in the total expenses of public sector decreased, so it’s obvious that the budgets of local governments decreased much more than the budget of central government. Also, it took place under the conditions wherein the role of local governments in the expenses of public sector is the lowest in Estonia. The decrease of the incomes of the budgets of the local governments is especially obvious if the structure of the decrease of tax funds from table 1 would be observed. The individual income tax decreased the most in 2008–2009; it forms the biggest part of tax incomes of local governments. To top it all, the central government decreased the part of individual income tax for the local governments from 11.93 % gross profit to 11.4 %, it means by 4.45 %. The state saved its budget by increasing taxes (Table 4).

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Table 3. Estonian state budget and local budgets 2007–2010

2007 2008 2009 2010 Million Growth Million Growth Million Growth Million Growth euros rate euros rate euros rate euros rate State budget 5250 +12,1 5537 +5,4 5477 +1.1 5610 +2,4 Local budgets 1288 +8,9 1454 +11.9 1292 -11,2 1270 -1,8 Source: the author’s calculations based on the Ministry of Finance homepage. http://www.fin.ee/.

The excises and turnover tax were increased, but not the individual income tax; it means, the taxes coming in the budget of central government not for the local governments, were increased. Also, the sums paid from the budget to support the local governments were essentially decreased by the state. The sums paid for local governments from the equalization fund were 92 mil euro in 2007, 92 mil euro in 2008, 70 mil euro in 2009, 70 mil euro in 2010 and 71 mil euro in 2011 (Table 1).

Table 4. Rates of the main taxes in Estonia in 2008–2010 (per cent)

Taxes 2008 2009 2010 Social benefits tax 33 33 33 Income tax 21 21 21 VAT 18 191 20 Percentage of excise tax in retail sales 12.9 17 17.5 Unemployment insurance tax (employer) 0.30 0.881 1.25 Unemployment insurance tax (employee) 0.60 1.731 2.5 1measured average of the year’s real tax rates

Source: Homepages Ministry of Finance. http://www.fin.ee/index.php?id=233

It’s generally considered in Europe that the economic crisis has finished in spite of still existing problems. The same has been repeatedly declared by Estonian government. But there aren’t any changes in planning incomings among state taxes in 2011. The amount of incomes in local budgets from individuals has been left on the level of 2009, it’s 11.4 %. The excises for tobacco products and the excise for electricity will arise among from the taxes but these won’t influence the budgets of local governments directly. Also, the sums coming in from the equation fund won’t increase. Consequently, the level of the budgets of local governments will still remain lower than it was before the crisis for a long period. As Estonian state budget was “saved” by support from EC and the rise of tax rates (Table 4), the local governments’ budgets continued to decrease.

5. School’s direct impact to local governments’ budget

School is a place, where the financing is not based on incomes but on costs. Schools economic expenses and the salaries of the teaching staff are paid from the state budget according to the amount of students. State budget is used to finance bigger investments as well – renovating schools or building new schools. As the local government here so-called the cashier the minimal possible expenses from the local governments to school is 0. The local governments’ have got back in the last few years 11.4 % of total income from salaries. Estonian local governments altogether spent 553 million euros on schools (12 million for primary schools, 144 million for secondary schools, 386 million on high-schools and 11 million on schools for adults) in 2010, which was almost 30 % of the total budget of local governments (Kohalike, 2011).

183 Olev Raju ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

Figure 1. Local governments and central government income in Estonia 2007–2011 Source: Ministry of Finance. http://www.fin.ee

Initially, it seems that the local government is just the cashier regarding this money – the money comes from state budget and goes out as well. Although the local governments do not have anything to say in spending this money there is still a direct financial interest from the local governments – the income tax paid from this money goes to the local governments according to the formula below. Therefore it can be said that thanks to the schools the local governments directly received of the salaries in those expenses multiplied by 11.4 %. There is no official statistics to show how much of the finances spent for schools consist of salaries (at least according to our data). However, it is possible to find it in few local governments based on their input data. The city of Tartu spent 14.1 million euros on schools, out of which 10.7 million euro or 79.7 % (authors calculations based on input data) on salaries in 2010. Using the same method for calculation this percentage in the town Viljandi was 80 % and in Ülenurme parish 80.1 %. As the deviations were very small then by the usage of 80 % as average and by considering the possible mistakes it is possible to say that the salaries from school added approximately 553 x 0,8 x 0.114 = 50.4 million euros (according to the author input data to the local governments’ budgets in 2010). In reality this sum is bigger; it’s based on ceteris paribus principle, the additional income in the form of salaries for employees of school catering, heating and other facilities providing service for schools. This issue will be studied more closely below. The situation is more complicated with pre-school childcare and sport and hobby schools (extracurricular activities). Their funds do not come from the state budget; the finances spent on the personal income tax go to the budget of local government’s. On extracurricular activities in 2010 the local governments spent 49.1 million euro and on pre-school childcare 108.6 million euro (Kohalike, 2010). The fact, which makes calculations difficult, is that accountancy for these is different from comprehensive schools; that’s why it is even

184 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) more complicated to bring out the expenses on salaries. In Tartu it was approximately 71–72 % in 2010; the accountancy did not make it possible to study this data with enough accuracy (Tartu has its own agenda done extra analyses which helped here in Viljandi and Ülenurme). Based on the data from Tartu it can be said that return income from these sums was in 2006 at least (49.1+108.6) x 0.7 x 0.114 = 12.6 million euros. Extra incomes from the salaries for people working for companies providing services for schools have not been considered here either. The extra indirect incomes from income taxes from the investment sums from the state budget are extremely important. However, in these local governments (especially in the smaller ones), wherein new schools have been built with state funds these sums have been highly significant in some years. It’s regardless to the fact that these smaller local governments had to use the services of builders from abroad. There can be one conclusion. Due to several reasons mentioned here in the next few years the local governments funding system, which is based not on personal income tax has to be cardinally reformed (Raju, 2007). Therefore, the budgets of local governments need extra income sources at least to the extent of 50–60 million euros to compensate the loss of return incomes during this reform. However, the schools effect on the budget of local governments is only positive. Regardless to the size of the coefficients the formula includes an inconsistency. This inconsistency exists with the salaries of teachers as well. The bigger they are, the smaller is the sum from the compensation fund. Therefore, the income from the salaries of teachers and other staff related to schools decreases the sums coming from the compensation fund (AK in the formula above). At the same time it is all AT in the formula considered as the variable. This means that finally everything depends on the variable, which is more significant in finding Tn. The variable AT for the last year’s income tax is calculated with the coefficient of 0.5 (earlier coefficients were respectively 0.3 and 0.2), it is clear that the level of earnings of constant rises, the difference AK–AT (which is the most important factor for calculating the compensation fund’s size) are due to school (salaries of people related to school) positive. Hence the conclusion – school brings to the local government more incomes then expenses from the equalization fund. It can be applied to those local governments that get extra finances from the equalization. As for those local governments that do not get finances from equalization fund, every euro from income taxes is simply an addition to the budget. (NB! Approximately 40 % of the population in these local governments!) The rest have to be taken into account if the income from personal income taxes increases the sums from equalization fund would decrease according to the formulas coefficient k, which has so far been 0.9. This value for the coefficient means that from every euro from income taxes the return fund’s sums will be decreased by 0.9 x 0.5 = 0.45 euros in he following year, the year after that by 0.3 x 0.9 = 0.27 euros and in the third year by 0.2 x 0.9 = 0.18 euro. So, the statement, that the local governments should not increase their own revenues because it automatically decreases the sums from revenue fund by 90 %, isn’t corrects. In conclusion I would like to stress that all the calculations above have been made without considering indirect incomes (income tax from institutions providing services for schools) and without income tax from single payments from the state budget (particularly for building and renovating schools). These revenues will be studied below.

6. School as the indirect increasers of the revenues of local governments

Most of the people related to schools get their salary from the state and a smaller proportion from the budgets of local governments. Teachers and headmasters get their salary from the state; the rest of the school staff – economic staff (cleaners, workmen, heaters etc), extracurricular activities guidance, speech therapist, psychologist etc. get their salary from the local government. Schools pay for contract work (mostly repairing works in the summer period in addition to those mentioned above). The school functions as a mediator for trading (this is where most of the money is spent) and for catering staff the school is being heated and supplied with water; also, school uses transport (mostly buses), school is a considerable mediator that offers work for the bank etc. From all these and other not mentioned payments the personal income tax goes again to the budget of local government’s.

185 Olev Raju ECONOMIC CRISIS AND LOCAL GOVERNMENTS BUDGET IN ESTONIA

The amount of the income tax from these indirect payments that support the budget of local government is difficult to calculate. However, let us try to bring out this sum at least approximately. It is useful to divide these payments into two factors in order to find the growth of local governments budgets based on these indirect incomes. One can be named second level complementary incomes. This includes the income tax from services provided directly for schools, such as payments for bus companies for using the bus for a field trip. Others are extremely indirect incomes such as income taxes from a cashier who was paid in relation to the fact that a teacher paid for merchandise to the cashier with their salary. It is possible to find the first one with somewhat specific results and the second one probably not. As pointed out previously the local governments spent on education in 2010 was 553 million euros. Approximately 80 % of it went to salaries. The schools paid 19 million euros for several services. In addition the local governments paid 5 million euros for several assistance services, 7 million euros for students’ buses and 10 million euros for other expenses (not the schools staff). So, the local governments paid 41 million euros for these services (author calculations, Rahandusministeeriumi, 2010). To add 17 million euros from pre-school education and 8 million euros for sports and hobby schools we can see that the local governments paid 63 million euros related to education. Based on how much the salaries form GDP, which was 47.7 % in 2010 the payments as salaries from the sum were 30 million euros from which the income tax to the local governments (11.4 %) was 7.9 million euros. Certainly, this calculation is approximate but considering that the bills the schools pay divide among different fields – transport, heating, school supplies, catering etc. – it is possible to assume that the average proportion of salaries is not very different from Estonian average. It is much more difficult to bring out how much the sales increased for banks, retail trade etc. in relation to the schools. In any case the personal income tax to the local governments could not have been smaller then from direct bills. Therefore, it can be said that the actual return income to the budgets of local governments due to schools is at least 60 million euros bigger. New funding system means must be found to compensate that amount as well during the transition to. Schools earn some money themselves. Incomes from educational institutions’ economic activities were 44 million euros in 2010 (Kohalike, 2010). It increased local government’s incomes, too (minus the expenses made to earn it).

7. The influence of children on the coefficients of equalization fund

As stated above, those local governments, whose income is below 90 % of the average of state, average income gets extra payments from the equalization fund. The amount of school age children is included to the formula above to calculate equalization fund. So, the number of children effect the size of equalization fund, is included. Certainly, the formula doesn’t state whether these children really attend school in the territory where they are registered or if they attend a school at all; but simplifying, as we did above, we can consider them as schoolchildren with only a minor mistake in the calculations (at least calculating the average because if they do not attend a school in their home parish with a few small exceptions on the territory of another local government). There is a multiplication Cn · Pn, where Cn is the amount of people in the age group on the territory of local government (in our calculations schoolchildren are of age 7–18) and Pn is calculated by the average operating expenses in euros per child, school-age child, person of working age, elderly person, disabled person who are taken care of and persons to whom caregiver services are provided per kilometre of the calculated length of local road and city street in local governments, in the formula. Local government’s income is subtracted from the sum of all the age groups’ multiplications. The difference is the base for finding the equalization fund’s sum for the local government. Since a large amount of the sum of child related expenses comes from the state budget, there is a double effect here. The sum includes almost 100 % school related expenses – the other expenses, such as playgrounds etc, play a marginal role in the budgets of local governments. The coefficient Pn in the age group 0–6 is 13.133, in 7–8 it is 10.443, in the age group 19–64 it is 4.325 and in 65+ it is 6.285. It means that every child

186 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) gives twice the money the adult does. The specific sum depends on the difference between expenses and incomes in the local government’s budget. Considering the differences in the coefficients in 0–6, 7–18, 19–64 and 65+ age groups it becomes clear that due to the children almost 40% of the compensation fund is divided (Don’t forget that part of these funds are divided by the road network on the local government’s territory.

8. School’s incomes are bigger than costs

Let us try to compare the sums going to the budgets of local government’s budgets (and coming from them) that are related to schools. We will exclude the finances, wherein local governments are merely the cashier such as teacher salaries, which come directly from the state budget and for which the local governments can’t chip in. As mentioned above, the expenses of local governments for schools that were not covered from the state budget in 2010 were 373 million euros. The existence of schools directly increased the budget of local governments from extra income taxes by 313 million euros. At least 640 million euros of income tax is added to this from salaries of several service providers. The local governments are on the positive side with this calculation alone as about managing schools. This means that expenses made to schools are smaller then the (extra) income received due to schools. The sums that the local governments receive regarding single significant payments from the state budget to build and renovate schools are not considered here (the income tax from the salaries of the builders goes to the budget of local governments). Also, the money schools receive for several services is actually an extra income for the local governments (in 2010 44 million euros) (Rahandusministeerium...). With this sum the expenses made to provide the services would certainly have to be deducted, but the current system for reporting can not differentiate it. Those local governments that do not get payments from compensation fund 1 can’t longer be analysed. However, for those, which get payments from compensation fund 1, the extra incomes from the fund are linked to the income tax from the salaries paid through schools, and the amount of school-aged children. The income tax decreases payments from the fund 0.5 k in the first year, 0.3k in the second and 0.2 k in the third where k is a coefficient of 0.9. Therefore it is less than the common opinion of 90 %.

Conclusions

1. The possibilities of the local government’s financing system of Estonia, which is based on personal income taxes, are running down. Unavoidably accompanying great differences in the levels of income tax and consequently the local government’s revenues and the unavoidable rise of the untaxed minimum demand a cardinal and rapid reform of the present system. 2. Leaving a bigger part from the income tax to local governments can’t solve the problem of the weakness of their revenue basis and groundlessly great difference. Even if the part will be risen up to 100 %, the weakness of most local governments’ revenue basis would not be solved. At the same time the difference between the local government revenue levels rises essentially (that will intensify even more together with the essential rise of the untaxed minimum). 3. The congruence of the cost basis and the revenue basis of the financing of local governments has been arisen in the last years. There aren’t any considerable works of economic theory, which would analyse the problem according to the situation of Eastern European states. 4. The economic crisis of 2008–2010 was directly expressed in the financial situation of local governments. Majority of European states considered it necessary to support financially the local governments as the governing institutions, which are the closest ones to people. The relative importance of local governments in total expenditures of public sector increased as a result of it in many states in these years. 5. The income ta, which is got from the wages paid by school, is a source of move funds from the state budget to the local governments’ budgets due to it. The extra sum of money from income taxes thanks

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to the payments made in all children’s institutions in 2010 was even with incomplete calculations more than 650 million euros. 6. The amount of money to the local governments thanks to the exsistence of schools in 2010 was at least 40 million euros. In addition to the abovementioned facts all the local municipalities, which doesn’t get any compensation from compensatory fund, get additional profit due to schools. The additional income forms a remarkable percentage of the decrease of compensatory fund’s 1 sums for the local municipalities getting profit from compensatory fund. School has got a dual influence on the sums of compensatory fund 1. As the formula of the sums of compensatory fund income has coefficients, which put the incoming sums into dependence from the age division of the population, so the local municipalities, who’ll have more children, get more assignments due to greater coefficient in age group 0–6 years. The wages paid in schools and pre-schools increase the profit. 7. In addition local governments receive extra revenues thanks to schools otherwise they receive compensation from the equalisation fund. In those local governments which receive payments from the equalisation fund this extra revenue from income taxes decreases the amount from the equalisation fund. The school has two effects on the payments from the equalisation fund. There are coefficients in the formula for calculating the equalisation fund that link the sums with age groups, then thanks to the coefficients in age groups (0–6 13,133; 7–18 10,44; 19–64 4,33; 65+ 6,28) those local governments with more children receive more revenue. That’s way the salaries in schools and children’s institutions increases their own incomes. From the equalisation fund (in 2010 90 million euros) those local governments get more revenue if their own income per person is smaller. But the revenue for local governments didn’t decrease with the coefficient 0.9 as it is widely thought but significantly less. 8. Incomes from educational institutions provided services added 45 million euro to the local government’s budgets. With the current accounting system it is not possible to bring out which part belongs to school and which from the educational institutions. 9. Costs of pre-school institutions are dominantly covered from local governments’ budgets (they are not compensated directly from the state budget). That’s why the costs of pre-school children’s institutions are bigger to the local governments then the revenue regardless to parents’ participation. The current accounting system is practically impossible for bringing out those costs.

References

EN-EERP Survey report: FINAL. (2010). European Economic Recovery Plan in Regions & Cities: One year on January. Kohaliku omavalitsuse tulu ühe elaniku kohta 2004 aastal. Website: http://www.fin/ee/index.php?id=12510 Kohalike omavalitsuste kuuaruanne. (2006). Website: http://www.fin.ee/index.php?id=12555 Kohalike omavalitsuste kuuaruanne. (2011). Website: http://www.fin.ee/index.php?id=12597 Rahandusministeeriumi kodulehekülg. Website: http://www.fin/ee/index.prp?id Raju, O. (2003). Omavalitsuste rahastamise probleeme Eestis. Eesti majanduspoliitika teel Euroopa Liitu: XI teadus – ja koolituskonverentsi ettekanded-artiklid. Tartu–Värska, 26–28 juuni, p. 466–474. Raju, O. (2010). Taxes. Estonian State budget and Economic crises. Discussions on Estonian Economic Policy. Berlin- Tallinn, p. 347–358. Riigieelarve eelnõu seletuskiri. (2004). Tallinn. Ulst, E., Jaakson, A. (2002). Keskvalitsuse ja kohaliku omavalitsuse fiskaalsuhete arengusuunad. Euroopa Liiduga liitumise mõju Eesti majanduspoliitikale. Berliin–Tallinn, p. 457–470.

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EKONOMINĖ KRIZĖ IR SAVIVALDYBIŲ BIUDŽETAS ESTIJOJE

Olev Raju Tartu universitetas (Estija)

Santrauka

Estijoje taikoma savivaldybių finansavimo sistema paremta pajamų mokesčiu ir centrinės valdžios tei- kiama parama. Tai lemia didelę nelygybę tarp savivaldybių. Besitęsiantis pajamų mokesčio mažėjimas ir neapmokestinamo minimumo kilimas didina centrinės valdžios paramos įtaką. Centrinė valdžia 2007–2010 metais gerokai sumažino tiek pajamų mokesčio dalį, skirtą savivaldybėms, tiek tiesioginę paramą. Dėl to savivaldybės pateko į sunkią ekonominę situaciją. Didžiausios išmokos savivaldybėms skiriamos švieti- mui, vyriausybė ėmėsi mažinti mokyklų skaičių kaimo vietovėse. Analizė parodė, kad mokyklos yra didelis savivaldybių pajamų šaltinis, todėl tolesnis jų skaičiaus mažinimas tik dar labiau pablogintų savivaldybių finansinę padėtį. PAGRINDINIAI ŽODŽIAI: savivaldybės, pajamų mokestis, ekonominė parama.

JEL kodas: H610.

189 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S

LATVIA’S MONETARY POLICY DURING THE 2000S

Valery I. Roldugin1

Baltic Interenational Academy (Latvia)

Abstract The main purpose of this article is twofold. The first objective is to follow the main trends in the development in the Latvian’s monetary policy and the European Monetary system accession process, with a focus on the local currency stability problems. It discusses the process and strategies for choice of the strategy as well as the main issues that have arisen in the accession process. The second objective of this article is to investigate the on-going monetary policy of the Bank of Latvia, to analyse the basic principles of its operations and influence on national economic growth. Both objectives fully corresponding to the article’s research object, i.e. to a monetary policy of the Bank of Latvia. Regarding the developed countries the general monetary policy objectives deals not only with maintenance of stability of the exchange rate and general price level, but also with stimulation of economic development, growth of employment and incomes of the citizens. The period from 2003 till 2010 is being investigated. We use a wide range of research methods, such as: grouping method, method of comparison of financial ratios and etc. KEYWORDS: economic growth, monetary policy, central bank, monetary aggregate, monetary instruments

JEL codes: E500

Introduction

The monetary policy instruments of the Bank of Latvia are already in line with those used in the euro area. Like the European Central Bank, the Bank of Latvia also uses the reserve requirements, market operations, as well as standing facilities of lending and deposit of funds. Assets of Bank of Latvia including gold and exchange currency reserves, serve as maintenance of money issue in Latvia. External reserves of Bank of Latvia which include gold reserves and foreign currency, and also currency from basket SDR in the end of 2010 has reached 4074.6 mill. lats (in 2003 – 830.5 mill. lats). The choice of the strategy depends on the size of country, level of openness, economic growth, relations between the key objectives and the intermediate target, features of financial and capital markets and other economic factors. The key objective of the central bank’s monetary policy is to facilitate the favorable macroeconomic environment for growth of the national economy in the long term. The course of global economic development assumes that monetary policy, employment and financial stability can foster the economic growth most of all by ensuring the low inflation rate. Economic growth has stopped and even decreased in Latvia, as well as Baltic States and euro area in general thus restricting possibilities of profitable transactions carried out by Latvian economic basic units – enterprises in both domestic and export markets. Rapid economic growth in recent years in Latvia was mostly based on private consumption increase and large credit resource injections mainly in activities related to real estate market development.

1 Roldugin I. Valery – Baltic Interenational Academy. Full professorship of Economic Department, Areas of Economics and Fi- nance. Professor possesses the international reputation as an expert in area of monetary regulation and banking. He is the official adviser of the known enterprises including: Institute of Economic Reforms of Uzbekistan, Latvian Technological Park of RTU, JSC “Izoterms”, SIA “Ausek” etc. Scientific interests: economics and finance. E-mail: [email protected] Tel.: +371 671 005 40.

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2008 marked a turning point in Latvia’s economic development, which began to decelerate after several years of buoyant growth. Insufficient improvement in performance and efficiency of national economy, public administration and public services structure reduced the overall economic competitiveness, which was particularly influenced by recession in the export market. First signs of a slowdown of the economic growth became apparent in the second half of the year, when the implementation of the anti-inflation plan produced by the government, moderation of funding from parent bank and tightening of the banks’ lending policies resulted in a rather abrupt deceleration of the domestic lending growth. The reasons of failures of monetary policy include the methods of monetary regulation used by the Bank of Latvia. There is a danger of traps in the course of application of the monetary policy instruments. It is necessary that the Bank of Latvia should carefully chose the necessary financial tools of monetary policy. The author offers the ways of the solving of these problems on the basis of main principles using the achievements of world economic thought. In the conditions of a financial crisis the Bank of Latvia is able to achieve its targets while using the various financial instruments.

1. Trends of Latvia’s monetary policy

The major quantity indicator of monetary circulation is the money supply representing a total purchasing volume and legal tenders, which serve for economic circulation of financial recourses of private persons, enterprises and state. The analysis of structure and dynamics of money supply has a great significance for development of reference points of the monetary policy of central bank. The monetary aggregates are applied to money supply definition. The cash assets are the basis of all monetary aggregates. The share of cash in money offer can vary depending on the circumstances. So, the more economy of the state is developed, the more banking system is stable and wide and the fewer shares of cash. The Bank of Latvia applies the following main monetary aggregates to the characteristic of monetary system and banking: (М0) monetary base – monetary base is calculated on the basis of the Bank of Latvia’s methodology and comprises the lats banknotes and coins issued by the Bank of Latvia and demand deposits of resident MFIs and financial institutions (overnight deposits) with the Bank of Latvia. TheC entral bank directly creates this part of the monetary offer. By increasing the assets the Central bank creates the money of high efficiency, by reducing it destroys them. The opportunities of Central bank towards the creation of money of high efficiency are extremely great, as its liabilities (passives) are the money itself. М2Х (wide money) – broad money aggregates are calculated on the basis of the Bank of Latvia’s methodology and comprise the lats banknotes and coins issued by the Bank of Latvia (less vault cash of MFIs) and overnight deposits and time deposits in lats and foreign currencies (including deposits redeemable at notice and repurchase agreements) held with MFIs by resident non-financial corporations, financial institutions, households and non-profit institutions serving the households. M2X incorporates the deposits placed by local governments as a net position on the demand side. This parameter characterizes the total money in national economy. As foreign currency is of great significance for Latvian economics, this parameter includes both the deposits of the enterprises and private persons in foreign currency2. Let’s review the monetary parameters presented in table 1. The velocity of money testifies the communication between monetary circulation and processes of economic development. Aggravation of the macroeconomic risks and lower savings induced acceleration of the velocity of money, growing from 2.3 in 2007 to 2.7 in 2008. Resident financial institution, non-financial corporation and household deposits with MFIs decreased by 205.9 million lats or 3.9 % in 2008 in comparison with an increase of 16.9 % in 2007. In 2003, the velocity of money made 2.9 times per year. The economic situation stimulated the decrease of rate of the money turnover from 2.7 in 2008 till 2.0 in 2010. In relation to this parameter Latvia approaches to the developed countries where the speed of money turnover does not exceed 1.5 times. The decrease of rate of turnover of monetary volume (in 1.5 times) for the last 8 years cannot lower the negative influence of prompt monetary growth which increases more than by 40 % in 2006.

2 Short-Term Forecasts of Latvia‘s Real Gross Domestic Product Growth Using Monthly Indicators: Beļkovskis, 2008.

191 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S

Table 1. The basic indicators of monetary policy in Latvia from 2003 till 2010

(mill. lats) 2003 2004 2005 2006 2007 2008 2009 2010 GDP (Current prices) 6392.8 7434.5 9059.1 11171.6 14779.8 16243.2 13070.6 12738.7 Growth GDP (%) 111.0 116.3 121.0 123.3 132.3 109.9 80.5 97.5 M0 806.8 957.2 1350.7 2248.8 2471.2 2111.5 1645.8 1755.2 M2X 2220.3 2816.5 3905.8 5479.9 6171.3 5931.4 5796.2 6390.0 Growth M2X (%) 119.0 127.0 138.7 140.3 112.6 96.1 97.7 110.2 M2X / M0 (%) 275.2 294.2 289.2 243.6 249.7 280.9 352.2 364.1 GDP/ M2X 2.9 2.7 2.3 2.0 2.3 2.7 2.3 2.0

Source: The Bank of Latvia: Annual Report 2003–2010.

The behavior of the monetary aggregates in 2008 mirrored the sharp downturn of the economic development with both domestic and external demand shrinking, as well as the impact of the global financial crisis on the Latvian banking system and money market. In 2009 M2X decreased by 2.3 % (a growth of 10.2 % in 2010) and amounted to 5796.2 million lats at the end of 2009 (see table 1). With the economic development coming to a halt in the second half of the 2008, banks cutting down on their lending business remarkably and confidence with regard to the financial sector deteriorating. The negative rate of the monetary expansion was primarily a result of the decelerating growth of MFI loans to the private sector, with the total loans outstanding shrinking in the last three year of the 2000s. The monetary situation in Latvia is characterized also by other parameters: monetary multiplicator (М2X/ М0) and velocity of money (nominal GDP/М2X). The great importance has monetary multiplicator – a parameter describing the opportunities of economy as a whole and banking system in particular to increase a money stock in a turnover. Its size pays off as the attitude of М2X to monetary base (М0). The monetary multiplicator is necessary to control over the monetary volume dynamics and the rate of inflation in Latvia. In 2010, the monetary multiplicator has changed essentially, and by the end of the year it consisted 364.1 % (in 2003 – 275.2 %). Monetary base M0 decreased by 14.6 % in 2008 and totaled 2111.5 million lats at the end of the year, whereas the cash component of the monetary base grew to 48.2 % in comparison with 42.5 % at the end of 2007. Deposits from credit institutions and other financial institutions held by the Bank of Latvia declined by 328.3 million lats or 23.1 % in 2008 as opposed to a 21.0 % increase in 2007. For the second consecutive year, the demand for cash decreased, and currency in circulation shrank by 31.4 million lats or 3.0 % (by 2.3 % in 2007). The development trends of monetary aggregates were influenced by drying up capital inflows and foreign exchange interventions of the central bank reflected in the changes of net external assets. Negative net foreign assets of MFIs grew by 31.9 % during the year, amounting to 5914.6 million lats, whereas the respective indicator of the Bank of Latvia decreased by 16.0 % and totaled 2332.3 million lats at the end of 2008. Thus the growth of the negative net foreign asset position decelerated considerably in comparison with 2007, when it expanded 1.7 times. Nevertheless, Latvia experience significant economic growth beginning in 2004 with EU accession. This followed the U.S. strategy to prevent an economic recession through asset inflation following the collapse of its stock markets in 2000. The USA and other developed countries flooded a world economy cheap credit resources. Thus, developed countries created credit found its way into Latvia through Swedish banks. Com- bine with EU structural funds, the Latvian economy headily increased of GDP, until the inevitable global economy crisis led to Latvia’s disastrous fall. But, Latvia’s economy was not purely the victim of induced events. The Bank of Latvia and other state regulators are also responsible.

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The basic problem of Latvia for the last ten years was a balance of payments deficit of current transactions. Balance of payments deficit arises as a result of excess of import over export. Within last 8 years the volume of foreign trade of Latvia has considerably increased in 3 times. The volume of foreign trade has been increasing year from a year, except 2009 when the consequences of the financial crisis have occurred (table 2).

Table 2. Parameters of foreign trade of Latvia from 2003 till 2010

(mill. lats) 2003 2004 2005 2006 2007 2008 2009 2010 Import 2497.4 2989.2 4866.9 6378.5 7780.2 7484.4 4709.8 5911.9 Export 1408.8 1650.6 2888.2 3293.2 4040.3 4406.0 3602.0 4695.0 Balance -1088.6 -1338.6 -1978.7 -3085.3 -3739.9 -3078.4 -1107.8 -1216.9 Source: The Bank of Latvia: Annual Report 2003–2010.

In 2008, the foreign trade dynamics was affected by the global financial crisis and weakening domestic and external demand. Exports of goods expanded by 9.1 % (a 15.1 % rise in the first nine months of the year and 7.2 % drop in the fourth quarter). Imports of goods continued to shrink gradually, recording a 3.8 % downslide on an annual basis. The excess of imports of goods over exports of goods decreased to 69.9 % (92.6 % in 2007) and the foreign trade deficit narrowed by 17.7 %. The role of the EU in Latvia’s foreign trade is strengthening: 73.1 % of total export from Latvia went to the EU countries in 2008 (76.1 % in 2007). Let’s consider the main financial instruments and principles of monetary policy in Latvia. The choice of monetary instruments is wide enough. The basic tools of monetary regulation are: the standing facilities of lending and deposit of funds (refinancing); the reserve requirements; the market operations. The choice and combination of instruments of monetary regulation depends, first of all, on issues, which are settled by central bank at the stage of economic development. The regulation of discount rate relates to market instruments of monetary regulation. The mechanism of regulation is simple enough; therefore it is widely used in developed and developing countries. The official discount rate is a reference point for other market rates. The above level of official discount rate is the above cost of central bank refinancing. It means that the policy of change of discount rate represents a variant of regulation of qualitative parameter of money market – the cost of bank credits. The refinancing of commercial banks is carried out by holding of credit auctions, granting of Lombard loans, etc. The Bank of Latvia has started using of refinancing as monetary policy instrument in 1993 only by granting the short-term credits to commercial banks for liquidity maintenance. Originally the credits were granted to each bank within the limits depending on the bank’s performance in accordance with regulatory requirements established by the Bank of Latvia. Such an order was necessary because the credits were granted without collateral. Since November 1993, when the demand for credits exceeded the supply of credit resources, the Bank of Latvia has started carrying out of the credit auctions. As earlier, the credits were granted without collateral, therefore the quantity of the participants of auction was defined depending on the size of the equity capital of the bank, liquidity, and the bank performance in accordance with regulations of the Bank of Latvia. The Bank of Latvia has started granting the Lombard loans in September 1995. It is the form of refinancing when the Central bank grants the credit under pledge. The Bank of Latvia grants two types of Lombard loans: the automatic Lombard loans and Lombard loans on demand. The commercial banks can exceed the balance of the correspondent account within the limit of the Lombard loan during a payday for maintenance of efficiency of the interbank payment system. The Bank of Latvia grants the credits to commercial bank for one day in amount of the debit balance of corresponding account, in case the commercial bank could not involve the money resources till the end of a payday to liquidate the lack of resources on a corresponding

193 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S account. The Bank of Latvia grants the Lombard loans to commercial banks automatically in the end of a payday without special requirement. The basis for the Lombard loan issuance is the special agreement between the Bank of Latvia and commercial bank. Usually the Lombard loan interest rate is higher than credits repo interest rate. It is a kind of “penalty” for the usage of resources of the Central bank. The interest rate of Lombard loans can vary depending on the terms of drawdown. As the Lombard loans interest rate is higher than the interbank market interest rates and the interest rate of refinancing of the Bank of Latvia, the demand for these credits is usually small. The commercial banks use the Lombard loans only in case of emergency. The Bank of Latvia supports the money volume in the set parameters and adjusts the level of liquidity of commercial banks by changing the minimal reserve requirements. It is assumed that credit institutions have to hold a certain share (currently 6 %) of the attracted non-bank deposits with the Bank of Latvia. In event the reserve requirements are increased, these credit institutions will have to hold more funds with the Central bank. It means that the amount of funds attracted by credit institutions, which is at their disposal and could be freely placed in the economics, thus increasing the level of credit and broad money, will decrease. The reserve requirements as a monetary policy instrument ensure the higher stability in the monetary base demand and facilitate the effectiveness of market operations, preventing the excessive interbank interest rate daily fluctuations.

2. Three dogmatic “rule”

There is a dogmatic “rule” of the monetary policy: the actual rate of refinancing should be positive (though it was negative in many developed countries in specific years, and in 2007 the refinancing rate was below the rates of inflation in the majority of these countries). In Latvia, the monetary market rate is below the inflation rates. It is obvious there is an imported inflation in the conditions of prices rise which is underestimated by the Central Bank. Accordingly, it overestimates the measurements of the base inflation depending only on the monetary factors. Therefore, the refinancing rate should be minimal, i.e. at a level of correctly estimated base inflation. In the first half of 2007, the Bank of Latvia continued to pursue the tough monetary policy and in two occasions raised the refinancing rate by a total of 100 basis points (to 6.0 %), thereby dampening the excessive domestic demand. Later, when the signs of economic overheating abated, the Bank of Latvia left its interest rates unchanged, but in the first half of 2008 due to the slowdown in the growth of lending and the associated deterioration in the banks’ role in fuelling the domestic demand, it lowered the minimum reserve requirement for bank liabilities with agreed maturity of over 2 years by 2.0 percentage points (to 6.0 %). The reasons of failures of monetary policy include the methods of monetary regulation used by the Bank of Latvia. They are reduced by application of several “rules” which are considered to be suitable for any condition in any country. The first “rule”: in order to decrease the rates of inflation it is necessary to limit the monetary offer or to apply the quantitative credit restrictions or to overestimate the refinancing rate. One more dogmatic “rule” – in order to decrease the inflation it is necessary to strengthen the rate of national currency; on other hand, it reduces the price competitiveness of national commodity producers. It could be raised by depreciation of the credits, but it is forbidden by the first “rule”. The application of such “rules” of monetary policy by no means is rather offensive: the economics can get to a condition called by the “trap”. In such conditions the measures of state regulation do not bring positive results. These traps are known: “the debt”, “the liquidities” and “the negative effect rendered by strengthening of actual exchange rate of national currency on economic development”. The debt trap occurs at excessive debts of the state and private sector at small duration of debt. By involving the short-term and intermediate term loans under low interests the borrowers count them as refinance by new loans. In case of steep increase of interest rates in the financial markets its long service sharply rises. If the borrower is not in position to extinguish it, the avalanche growth of debts begins, and it is impossible to extinguish it even after decrease of the interest rates. Now, there is a growth of interest rates which were

194 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) on rather low level for the long period. The Latvian enterprises borrowed the financial resources abroad and can shortly face the refinancing problem and service of debts. The liquidity trap occurs at too low nominal interest rates when the Central Bank decreases refinancing rate, but it do not lead to expansion of the credits and stimulation of economic growth. The third trap is caused by the increase in balance of the international payments. It leads to the strengthening of national currency and shifting of employment to sphere of services. The Bank of Latvia can use the maintenance of the exchange rate by buying up the foreign currency, and it conducts to the growth of monetary offer and inflation strengthening. At high inflation the strengthening or stability of the nominal exchange rate leads to strengthening of the actual exchange rate. In other words, the efforts of the Central Bank do not achieve the object on maintenance of price competitiveness. Thus, there is a necessity of sterilisation of superfluous liquidity. The escalating of the gold and exchange currency reserves by Latvia basically is crediting of the USA and the European Union countries. The inflation is mostly supported by excessive inflows of a variety of financing: the credit resources from foreign parent banks, the foreign direct investment, the EU funding, the workers’ remittances from abroad. To avoid the imported inflation the high validity of monetary policy is required. For example, the most effective remedy of the negative effect rendered by strengthening of actual exchange rate is crediting of the enterprises by the government and the Central Bank by replacing the foreign loans. Certainly, such replacement of credits is better than the accumulation of superfluous currency provisions. However, from the macroeconomic point of view the replacement of foreign loans of the Latvian enterprises by local credits is similar to repayment of external debt. Now, the Latvian commercial banks involve the foreign loans, and the Central Bank is compelled to buy up the foreign currency, generating the superfluous monetary offer which needs to be sterilised immediately. With the view of restriction of money growth the Bank of Latvia does not refinance sufficiently the credit organisations by establishing the refinancing rate at high level. It leads to the overestimate of credit resources cost for banks and enterprises. Therefore, the Latvian enterprises increase the foreign loans. The vicious circle turns out – the Bank of Latvia is compelled to get the additional volumes of the foreign currency arri- ving in the form of foreign credits to private sector of economy, increasing thereby the monetary base. The government is compelled to “freeze” huge budgetary funds on accounts of the Bank of Latvia in order not to admit an excessive monetary issue and inflation strengthening. The failure includes the preservation of high average rates of inflation which exceed 15.4 % in 2008. The ways of their decrease in conformity with anti-inflationary program developed by the government are not enough clear. At low technological efficiency of the majority of Latvian economic branches and growing world prices for energy sources it is impossible to stop inflation, including the attempts to limit the growth of monetary weight. However, the high inflation at stable or raising exchange rate of Lat leads to the strengthening of the actual rate of exchange, and consequently – to corresponding decrease of competitiveness of the Latvian enterprises. Though the indicator of parity of purchasing capacity is considerably underestimated regarding the currencies of the developed countries, the actual exchange rate strengthening brakes the economic growth and promotes the advancing growth of import. At high inflation the investors of banks receive negative real percent on deposits, and the enterprises pay the overestimated income and added cost taxes.

3. Problems of devaluation of Lat

The Bank of Latvia should be regarded as a state administrative body which carries out the main responsibility for development of events of the monetary sphere. Its priority direction was always the external stabilization of the national currency which strengthening shall promote the internal sustainability as well. Over the past 18 years, the Latvian currency had a fixed exchange rate. Since June 1993 Lat had a floating rate, and in February 1994, the Bank of Latvia pegged the Lat’s exchange rate to the SDR basket (1 SDR = 0.7997 LVL). On January 1, 2005 it was pegged to the EURO (1 EUR = 0.702804 LVL). The fluctuations are admitted within + / -1 % of the pegged rate.

195 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S

On May 1, 2004, when Latvia has joined EU, the Bank of Latvia became a member of the European central banks system and began the preparations on Euro adoption that was planned to take place in early 2008 according to the plans at those times. No big changes in the activities of the Bank of Latvia have happened. Bank continued to perform the former economic functions, including monetary policy to ensure the operation of the payment system, the circulation of cash, preparation of financial statistics and balance of state payments and perform the macroeconomic analysis and research including the identification of trends in economic development in the scales of the European Union. The administrative functions including licensing and control over the banks have been handed over to the Financial and Capital Market Commission in 2001. Since May 1, 2004, the Bank of Latvia became the holder of the shares of the capital of the European Central Bank (ECB). The total share in the registered capital of the European Central Bank was established at 0.2978 %, or 16,571.6 thousand euro. The share of the Bank of Latvia in the ECB’s capital was calculated on the basis of volume of the country’s economy and population. The Bank of Latvia brought 750 thousand Lats and 1763 thousand Lats into the fixed capitals of the European Central Bank and Bank respectively for Inter- national Payments. The Bank of Latvia uses the available foreign currency for the corresponding installments. The Bank of Latvia aspired to direct the currency rate policy on achievement of low inflation and convergence of the prices for the goods and services and level of inflation similar the countries, which national currencies are included into SDR basket. Latvia enjoys one of the most liberal currency regimes in the world. Both the citizens and foreigners can open accounts in Lats and in other currencies without restrictions and freely sell and buy Lats by other currencies. The commercial banks credited in foreign currency not only the entities, but also the individuals. As a result, the real estate transactions have been carried out not in foreign currency rather than in national one. The same picture could be observed in the automobile market. The Bank of Latvia have been buying and selling the basket of SDR currencies on requests of commercial banks without restrictions. The primary long-term goal of approximately 65 % of the world’s central banks is the prices stabilization; the second most common goal is the sustainability of national currency. The small countries with open economies (like Latvia) usually stick to the second long-term goal. It is impossible to achieve both goals at once because the central bank can control just one direction: either inflation or exchange rate. Initially, the activity of the Bank of Latvia in the conditions of high inflation was directed on fight against inflation by the means of strict monetary policy. In 1992–1994, the monetary base М0 was the main indicator of Bank of Latvia because it was easier to supervise the monetary base, rather than other monetary aggregates in the conditions of high inflation (58.7 % in 1992, 34.9 % in 1993). The situation analysis after inflation decrease showed that the fiscal policy and monopolists’ price regulation incl. power industry, transport etc., became the determining factors. The internal assets of Bank of Latvia became the target parameter; and the minimum limit of net external assets of the Bank of Latvia was set to maintain the stability of Lat what was connected with an unofficial pegging of Lat to SDR. The Baltic States started their programs of sustainability of national currency in the middle of 1992. The economists had faced a problem when choosing the exchange rate mode: to accept the floating exchange rate or to operate the fixed rate. Though the programs of sustainability of the Baltic States differed from each other, however, all of them came nearly to the same result, i.e. Estonia stuck the national currency to the fixed rate of DM, Lithuania stuck to US dollar and Latvia stuck to SDR. The main criteria were: to prevent the national economy from external shocks in a best possible way and to ensure the financial and economic sustainability of the restructuring of the economy. In 1992, Estonia exchanged the Soviet rubles at the market rate of 10:1 and equated Krone at a rate of DM/EEK 8. Lithuania replaced the intermediate currency in the form of coupon by Lit in June, 1993, and pegged it to US dollar at a rate of USD/LTL 4 since April, 1994. It is interesting that in 1936 the rates of Estonian Krone, Lithuanian Lit and Latvian Lat against US dollar were following: USD 1/EEM 6.95/LTL 4.38/LVL 5.04. In 1999, the rates of three Baltic currencies to US dollar were respectively: USD 1/EEK 11.2/ LTL 4/LVL 0.59.

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There is a question how the current rate of Lat against US dollar could be established almost ten times higher in comparison with 1936. On September 28, 1936 one British pound had been cost 25.11 LVL3. Pre- sently, the Latvian Lat is the main competitor for the pound. The Latvian Lat was heavier than pound, i.e. its rate was GBP/LVL 0.7910 as of March 1, 20104. So, the purchasing power of Lat was approximately set on the same level as in 1936. Let’s view the chronology of events related to the establishment of the new national currency rate in 1990-ies. It is known that Latvia lost independence on July 17, 1940. The Latvian Lat was in circulation as a legal payment instrument till November 25, 1940 when the Soviet ruble had been introduced in parallel at a rate of 1 Lat = 1 ruble. Since March 25, 1941 all Lat cash and deposits over 1000 Lats (rubles) have been cancelled without any warning. Such monetary confiscation has been carried out in three Baltic republics. Two currencies were functioned in Latvia from 1941 to 1945. There were the German occupational money Reichsmark (RM), and also the Soviet rubles at a rate 10 rubles = 1Reichshsmark. After the Second World War till 1992 only Soviet rubles were in circulation. Only after Latvia had regained its independence and the law “On the Bank of Latvia” had been adopted on May 12, 1992, there was an opportunity to carry out the monetary reforms targeted to establishing of a national currency circulation. To do this, the Bank of Latvia has specially established a committee for monetary reform (Latvijas Republikas Augstākās padomes Naudas reformas komiteja) that decided to introduce a temporary currency - the Latvian ruble on May 2, 1992. The first stage of reform began on May 7, 1992, when the Bank of Latvia issued a temporary money - the Latvian ruble, which were in circulation along with the Soviet rubles at a rate 1 Latvian ruble = 1 ruble. Since July 20, 1992 the parallel circulation was stopped, and the Latvian ruble became the sole legal payment instrument. Finally, the first five-banknotes came into circulation on March 5, 1993, which were used in parallel with the Latvian rubles at a rate of 1 Lat = 200 Latvian rubles. The Latvian ruble was in parallel circulation with the Lat till October 18, 1993. Within 1992 there was a sharp shortage of cash in circulation in the state what was threatening to cause a serious social crisis. So, if in February, 1992 the amount of cash exported from Latvia exceeded the quantity of Soviet rubles imported to Latvia on 122 million banknotes (5.9 %), in April of the same year this amount equaled to 686 million banknotes (29.2 %)5. Moreover, at the beginning of 1993 the Latvian parliament discussed a case connected with unauthorized export of cash in amount of 665 million Soviet rubles in railway car to Russia. The Commodity Exchange carried out its operations in the building of the Ministry of Agriculture. Com- modity brokers have been changing the meat to paper, shoes to cereal, etc. The employees have been paid often by the enterprises products. In November 1993, there were 66 registered banks. The annual interest rate for deposits was as follows: Banka Baltija – 90 %, Latvijas Depozitu banka – 45 %, Latvijas Industriala banka – 60 %. Now it is difficult to apprehend, but the liter of milk cost 14 centimes at the end of 1992, and the US dollar buying rate fixed by the Bank of Latvia was 0.8350 LVL and 0.5919 LVL already at the end of 1993 [13]. For January 1, 1995 the official rate of US dollar was fixed by the Bank of Latvia on a level 0.5480VL. L As we can see, the Bank of Latvia took as a basis the rate of Soviet ruble while establishing a rate of Lat. Therefore, on a moment national currency introduction, its rate initially was artificially overestimated. The high rate of Lat allowed supporting one of the highest rates of economic growth among the countries of Eastern and Central Europe (see tab. 1). The nominal GDP has been growing on more than 20 % a year in pre-crisis years. For example, its growth was 23.3 % in 2006, and 32.3 % in 2007.

3 Latvijas nacionālā valūta – vēsture un šodiena: Ducmane, 2010. 4 Exchange Rates of the Bank of Latvia. 5 The Latvian Ruble versus the Russian Ruble.

197 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S

4. Preparation for the participation in the European Monetary Union

Accession to the EU implies preparation for the participation in the Economic and Monetary Union and introduction of the euro, for the new Member States of the EU may not choose to stay outside the euro area. Hence, after joining the EU, Latvia will have to demonstrate its capability to meet the criteria for joining the Economic and Mo- netary Union. The Cabinet of Ministers and responsible public administration institutions will take steps necessary to comply with Maastricht convergence criteria to ensure euro changeover as soon as possible. Economic convergence is a serious pre-requisite for successful operation of a monetary union; therefore, prior to joining the euro area the EU Member States have to ensure compliance with the Maastricht convergence criteria: achieve price stability, sustainability of the Government’s financial position, exchange rate stability against the euro and long-term interest rate convergence. Maastricht convergence criteria: yy price stability is measured as the average consumer price increase of the last 12 months in three EU Member States with the lowest inflation plus 1.5 percentage points; yy sustainability of the Government’s financial position means that the Government deficit and the Go- vernment debt do not exceed 3 % and 60 % of GDP, respectively; yy long-term interest rates convergence criterion is interpreted as the average yield rate of 10-year Go- vernment bonds within a 12 months period in three countries with the lowest inflation plus 2 percentage points; yy exchange rate stability criterion provides for participation in the Exchange Rate Mechanism II (ERM II) without severe tensions, which, in turn, primarily means without currency devaluation against the euro. If required, other adequate indicators may be used to assess stability.

In order to achieve the key objective as well as join the Economic and Monetary Union successfully, the Bank of Latvia has chosen its exchange rate strategy for the implementation of monetary policy. Now Latvia almost complies with the majority of the Maastricht convergence criteria necessary for joining the Economic and Monetary Union (except for a parameter of Interest rates on government long-term securities).

Table 3. The compliance with the Maastricht criteria

Latvia’s Latvia’s Latvia’s Criterion in Criterion in Criterion as performance performance performance in 2005 2008 at June 2010 in 2005 in 2008 June 2010 Budget deficit -3.0 -1.0 -3.0 -4.0 -3.0 -7.7 (% of GDP) Government 60.0 14.7 60.0 19.5 60.0 44.7* debt (% of GDP) Average annual 2.5 6.7 4.1 15.3 2.4 -1.2 inflation rate (%) Interest rates on government 5.4 3.96 6. 24 6.43 5.2 10.34 long-term securities (%) Fixed Fixed Fixed Fixed Fixed exchange Fixed exchange exchange exchange rate exchange exchange rate against rate against rate against against the rate against rate against the euro and the euro and Exchange rate the euro and SDR since the euro and the euro and participation in participation in regime participation in 1994 participation in participation in ERM II for at ERM II since ERM II for at ERM II for at ERM II since least two years May 2005 least two years least two years May 2005 Source: Data of the central Statistical Bureau of Latvia and Eurostat.

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Statistical data available for the last years indicate that the initial plan of Latvia to adopt the euro in 2008 cannot be implemented due to the high inflation rate. The schedule has not been revised as yet but according to the information released by the Ministry of Finance, in 2007 the Government would discuss a new target for the changeover to the euro, tentatively in 2012–2014. The introduction of the euro in Latvia will be an issue of the EU multilateral relations affecting common interests of all EU countries. Therefore, the projected timeframe for the introduction of the euro is merely tentative and will gain an official status only after the completion of all negotiations and other formal procedures. The high rate of Lat stimulated a wide import of consumer goods displacing the Latvian producers from domestic market that brought to the decrease of internal accumulation. In 1936, the gold content of Lat was 0.29032254 grams of gold, and its parity to dollar equaled USD/LVL 3.03. The rate of Lat at the Riga Exchange quoted on the same level. However, after adoption of law “On currency reform” on September 28, 1936 which provided the devaluation of Lat on 40 %, its rate at the Riga Exchange decreased to USD/LVL 5.046. The Latvian exporters returned what they have lost due to the growth of Lat rate before the currency reform, i.e. the same 40 %. Considering the indicators of national economy of Latvia after Lat devaluation in 1936, we see that it promoted the improving of economic situation. In 1937, in comparison with 1935 the amount of bank deposits increased on 67 %, employment grew on 18 %, a number of the unemployed people was reduced by 50 %. The U.S. scientists carried out a study which stated that the fixed rate would bring Latvian economy to such a decline, which’s incomparable with the U.S. recession during the Great Depression years of 1929–337. The- refore, it is not casual that the rating agency Moody’s and British analytical center Capital Economics point out the risk of devaluation of the Lat. The news agency Bloomberg referring to the experts of the U.S. bank Brown Brothers Harriman & Co. reported that the Latvian currency may be devalued against the EURO by 50 %. Many Western economists spoke about the necessity of devaluation of national Latvian currency. Ken- neth Rogoff, the Professor of the Harvard University and the former chief economist of the International Mo- netary Fund, considers that Latvia should devaluate Lat to avoid the toughening of economic crisis. It should be noted that the IMF has no univalent position concerning devaluation of Lat. According to Prime Minister Valdis Dombrovskis at discussions about financial aid to Latvia, the IMF wouldn’t object the devaluation of national currency but without insisting on it. Ilmars Rimshevich, the President of the Bank of Latvia expressed opinion that Lat devaluation would pull down the economy of Latvia for one night. It is necessary to agree with him as it is necessary to treat devaluation of Lat extremely carefully. The situation is similar to the tense spring. The devaluation must be based on exact calculations and shouldn’t be carried out without any damage to the population. There required the thorough economic calculations for search of an optimal rate which would correspond to the parity of purchasing power of Lat to foreign currency more precisely than today. The price reform will demand many efforts because the standard of price expressed in a new rate of Lat will change that should affect the size of salaries, pensions and other social payments, the state budget and its external balance of payments. The volume of export of the Latvian industrial and agricultural output will increase. Accordingly, the taxes and also the sums required for repayment of received earlier foreign loans will increase. All these points should be considered while starting such painful operation as devaluation of national currency. In spite of the fact that devaluation of Lat is matured, Euro adoption is more of big modern importance. Therefore, referring to a world experience, we should not abandon the possibility of joining the Euro zone de facto, although the process of co-ordination with the European Central Bank may not be less complex than the joining of Euro zone. In Latvia, a market undergoes a process of Euroization for a long time (Roldugin, 2002). Euro has pres- sed Lat long ago in the conclusion of credit and trading agreements. In order to find the correct options it is possible to make use of experience of the European and other countries which use Euro as national currency, but didn’t enter the Euro zone: Montenegro, Kosovo, Andorra, Monaco, San Marino, Mayotta, etc.

6 Latvijas nacionālā valūta – vēsture un šodiena: Ducmane, 2010. 7 ASV pētnieki: Lata fiksētās piesaistes dēļ Latvija nonāks dziļas recesijas slazdā.

199 Valery I. Roldugin LATVIA’S MONETARY POLICY DURING THE 2000S

Conclusions

For the past years the modern two-level banking system was established and developed in the country. Gradually, there formed the competitive credit and financial infrastructure which basic elements were the commercial banks. Some of them have already got a high international rating. The Association of the Latvian Banks turned into national bank association. At the same time, there is an unpredictability of actions of the Latvian administrative bodies. A main goal of the Bank of Latvia and the Financial and Capital Market Commission is the ensuring of the general sustainability in the monetary and credit markets. Thus, exercising all rights defined by the law, the Bank of Latvia should provide a stability of the prices, and the Financial and Capital Market Commission should treat everyone who forms the instability in finances and capital market in whole or in its separate sectors by their activity or non-activity. The results of research testify the mistakes of the central bank made at the moment of establishment of national currency rate. The country had a possibility to provide unreasonably high rates of GDP growth due to the overestimated currency especially in the middle of the 2000th. In order to solve these problems it is necessary to boost the access of Latvia into Euro zone since the adaption of Euro will help the Bank of Latvia not to carry out a number of aforementioned actions. An effective banking system is one of the most important conditions of economic development of Latvia. It is assumed that Latvian economy will be able to implement positively the experience of monetary and credit regulation accumulated in world practice.

References

Beļkovskis, K. (2008). Short-Term Forecasts of Latvia’s Real Gross Domestic Product Growth Using Monthly Indica- tors. Riga, p. 45–54. Roldugin, V. (2002). Nav izslēgta Latvijas tirgus eirozācija. Latvijas ekonomists, No. 4 (88), p. 91–97. Rīga. The Bank of Latvia: Annual Report 2003–2010. Available at: http://www.bank.lv/ statistika/datu-telpa/apraksti/apraksti (accessed Mar. 28, 2012). Data of the central Statistical Bureau of Latvia. Available at: http://www.csb.gov.lv/en (accessed Dec. 12, 2011). Data of Eurostat. Available at: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/ home/ (accessed: May. 11, 2012). Ārzemju valūtu tirgus Latvijas Republikā. (2011). Available at: http://www.bank.lv/Lat/main/ all/pubrun/lbgadaparsk/ lb1993gadparsk/valstekon/arvvalutas/ (accessed Nov. 8, 2011). ASV pētnieki: Lata fiksētās piesaistes dēļ Latvija nonāks dziļas recesijas slazdā.(2011). BNS. 2010. gada 4. Februāris. Available at: http://www.diena.lv/Lat/business/hotnews/asv-petnieki-Lata-fiksetas-piesaistes-del-Latvija-nonaks- dzilas-recesijas-slazda (accessed Dec. 23, 2011). Ducmane, K. (2011). Latvijas nacionālā valūta – vēsture un šodiena. Available at: http://www.bank.lv/nauda/Latvijas- nacionala-valuta (accessed Jan. 16, 2012). The Latvian Ruble versus the Russian Ruble. Available at: http://www.bank.lv/eng/main/ all/pubrun/lbgadaparsk/lb- 1992gadparsk/valstekon1992/rublelvvsrus/ Exchange Rates of the Bank of Latvia. Available at: http://www.bank.lv/Lat/ main/all/finfo/notvalkur/ (accessed Nov. 2, 2011). МВФ не требует от Латвии девальвации национальной валюты. РИА “Новости”. Категории: Латвия МВФ. Available at: http://www.afn.by/news/i/119319 (accessed Feb. 10, 2012). Главный эксперт МВФ: Латвия должна девальвировать лат, чтобы избежать ужесточения экономического кризиса. Available at: http://rus.db.lv/r/528-finansy/23081-eks-glavnyj-ekonomist-mvf-Latvija-dolzhna-deval-vi- rovat-Lat-chtoby-izbezhat-uzhestochenija-ekonomich (accessed Jan. 25, 2012).

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LATVIJOS MONETARINĖ POLITIKA DUTŪKSTANTAISIAIS

Valery I. Roldugin Tarptautinė Baltijos akademija (Latvija)

Santrauka

Šiuo straipsniu siekiama dviejų tikslų. Pirmas – nustatyti pagrindines Latvijos monetarinės politikos vystymosi kryptis ir perėjimą į Europos monetarinę sistemą, atkreipiant dėmesį į vietinės valiutos stabilumo problemą. Antrasis tikslas – ištirti šiuo metu Latvijos banko vykdomą monetarinę politiką, išanalizuoti pagrindinius jos funkcionavimo principus ir įtaką nacionalinės ekonomikos augimui. Besivystančiose šalyse pagrindinis monetarinės politikos tikslas – ne tik palaikyti stabilų valiutos kursą ir kainų lygį, bet ir skatinti ekonomikos vystymąsi, mažinti nedarbą ir didinti piliečių pajamas. Straipsnyje tiriamas periodas nuo 2003 iki 2010. Taikoma nemažai įvairių tyrimo metodų: grupavimo, lyginamasis, analitinis ir kt. PAGRINDINIAI ŽODŽIAI: ekonomikos augimas, monetarinė politika, centrinis bankas, monetariniai instrumentai.

JEL kodas: E500

201 Bronisław Sitek EUROPEAN POLICY TOWARDS REGIONAL INNOVATION STRATEGY ILLUSTRATED WITH THE EXAMPLE OF THE MAZOVIA (POLAND)

EUROPEAN POLICY TOWARDS REGIONAL INNOVATION STRATEGY ILLUSTRATED WITH THE EXAMPLE OF THE MAZOVIA (POLAND)

Bronisław Sitek1

Alcide De Gasperi University of Euroregional Economy (Poland)

Abstract Globalization process has a gradually stronger influence on economic development. In this new reality the main indicator is innovation. Various regions of European Union formulate Regional Innovation Strategies (RIS). The goal of this document is to formulate essential elements of regional development strategy. This kind of strategy was created for the Mazovia region. In the document we can read that Mazovia is the most innovative region in Poland, however, it is still far behind regions in highly developed countries. The main strength of Mazovia is the fact that it is a capital region, which means a better access for enterprises to information, important contacts and promotion. Nevertheless, we still can experience many barriers, undermining regular regional development, such as insufficient grants for scientific research or inadequate engagement of public administration to help entrepreneurs. KEYWORDS: innovation, strategy of development, business environment institutions, friendly administration, region.

JEL code: R110

Introduction

Contemporary globalization processes have a growing influence on governments of particular countries, but also on decisions of local and regional authorities. One of the signs of globalization is the weakening role of state, and its position, with simultaneously growing autonomy of regions. Globalization doesn’t bring state’s sovereignty to an end but it leads to rationalization of political and social functions executed by the state. Thanks to that, regional authorities are given a bigger scope of statutory and actual competences, as well as bigger responsibility for local matters. Among them, it is important to list a need for economic, scientific and social development (Wojtaszczyk, Jakubowski, 2007: 254). Despite efforts having been made, we can still observe big differences in the level of economic development among particular states and regions in Europe. In the framework of emerging regional policy of the European Union, there are actions being taken, which are aiming to implement the policy of cohesion, which goal is to avoid existing disparities. With regards to the policy, many initiatives are taken, such as bringing financial programs to life, creating new institutions, including Committee of the Regions. However, the biggest step forward was to remove barriers that inhibited free flow of people, services and capital (Zabala- Ituriagagoita, Jimenes-Saez, Castro-Martinez, 2004: 1145). One of the most important factors of regional development is its connection with science, especially innovation- a crucial element driving enterprises to develop. Innovation allows us to perceive new possibilities of development and find new forms of creativity, accumulate know-how and bring organization of work to a higher level (Schumpeter, 1986: 894). Another important element of innovation is applying new 1 Bronisław Sitek – Alcide De Gasperi University of Euroregional Economy, Prof. dr. habil. Scientific interest: Roman law, comparative law, European law. E-mail: [email protected], Tel. +48 22 789 60 96.

202 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) procedures of production or human resource management http://www.come.uw.edu.pl/stypendia/files/Mazo- wieckie_RSI.pdf [2012-03-19]. The subject of this elaboration is to analyze regional innovation strategies, recommended by the Euro- pean Union and implemented by particular regions. More than 100 regions in the EU have formulated the strategy, including 15 out of 16 regions in Poland. A thorough analysis will be given to the regional strategy of Masovian Voivodeship that was implemented by its assembly, Sejmik of Voivodeship, for the 2007–2015 period (http://www.come.uw.edu.pl/ stypendia/files/Mazowieckie_RSI.pdf [2012-03-19]). The goal of the elaboration is to evaluate the presumptions and effects of implementation of regional innovation strategies, particularly those concerning Masovian Voivodeship. It is also vital to show the value of such strategies, as many of such initiatives become just empty words that are important only of the ruling party. I will also try to indicate possible solutions that could help to better use regional innovation strategies. The subject of the elaboration does not appear very frequently in strictly scientific publications. Ne- vertheless, we can find many publications and analysis of this issue that are available on the Internet. The analysis of regional innovation strategies is a very alluring and up-to-date issue as the European Commission ordered to renew them before 2014. Taking this action is necessary because of a need to rationally utilize EU financial resources by the regions http://ris.slaskie.pl/en/articles/about_project/0/268( [2012-03-19]). The research task of this paper is to define the concept of “regional innovation strategy”, the definition of conditions creating the concept of Mazovia Regional Innovation Strategy and the definition of the innovation phenomenon in the province of Mazovia. An important task is to identify factors influencing the innovation of Mazovia, including identification of business environment and quality of business relationships with the public administration. The results of this study are achieved through the analysis of documents that are recognized as soft law. It can be assumed, therefore, that not binding nature of these documents make their efficiency very low. Hence it seems necessary to take steps to measure these effects quantitatively by referring to the results of the efficiency of already developed regional innovation strategies.

1. What is regional innovation strategy?

According to a common belief, the innovation system is headed towards widely understood business. Surprisingly, one of the crucial elements of this system is public administration, including the one on the regional level. This administration is not only the user of innovation created in public or private sector, but it also has big influence on the implementation process (ADIT, 2008). The regional strategy is an element of region’s strategic management. The management comprises all functions connected with formulation and implementation of regional strategies, as well as project management, financial management and control. Thus, regional strategies are one of the key elements of regional management. They are created on the level of bigger organizational units, such as lands, provinces or voivodeships in Poland. The strategies are the basis for development of regional policy on the level of self-governing voivodeship. The regional strategies should be consistent with: yy decision-making competences of voivodeship governments; yy a need to create partnership relations with national and local level of public authorities; yy a need to have partnership relations between voivodeship government and private sector together with social partners; yy requirements of the EU regarding, in particular, goals, principles and directives of structural funds (Klasik, 2000: 8).

The above-mentioned globalization process requires complete restructuring of regions. Transforming regions need to become more competitive. As a consequence, the actions of regions need to be headed towards new types of production, services, areas of education or a completely new lifestyle of an entire local community. This, in turn, requires a new management class to be emerged – a class that is able to cope with new challenges, notably with reference to creating information society. Therefore, we require transfer of technology and

203 Bronisław Sitek EUROPEAN POLICY TOWARDS REGIONAL INNOVATION STRATEGY ILLUSTRATED WITH THE EXAMPLE OF THE MAZOVIA (POLAND) information connected with internationalization and exchange of experience. In readings as well as in EU documents there are following types of innovation listed: product innovation, process innovation, organizational innovation and marketing innovation. We can also observe an absolute innovation, when it is a completely new solution on a global scale, or it can be a new solution for a particular enterprise (but already known somewhere else) – then we can speak of imitational innovation. Another important symptom of this phenomenon is the change of people’s mentality in their everyday lives, but most of all, in professional, business and consumer life. Thus, innovation becomes a driving force for all changes, including those on a regional level. Innova- tion must be present in all priorities and objectives indicated by regional policies. Regions need to become spiritusmovens in the area of creating capability to action in a new way that brings more satisfactory results. Regional authorities need to motivate private enterprises in a way that they consistently search for and utilize results of scientific research as well as R&D (research and development) (Swadźb, 2002: 15). Regional innovation strategies (RIS) are planning documents. Their goal is to coordinate actions taken by region in a way that they lead to increase of innovation. RISs are created by the authorities of a region. This type of document was first created in the mid 90s of 20th Century. The document’s role is to collect data in the planning process and is as basis for implementing objectives (Cook, 2000: 2). The creation of RIS can be divided into a couple of steps, which are as follows: yy perform diagnosis before the planning action starts. It consists of sectorial analysis of regional economy, direct and focused interviews as well as interpretation of collected data – most frequently with use of SWOT analysis; yy formation of goals by confronting actual state of affairs, and plausible changes to it, with aspirations of the authorities, businessmen, scientific research centers and other subjects to regional innovation system; yy RIS implementation (Sztando, 2011: 521).

First steps in order to implement innovative actions in European Communities were taken in the 80s. One of those actions was the implementation of a program called STRIDE (Science and Technology for Regional Development in Europe), which priority was to intensify research and speed up technological development on a regional level. Back then, the European Commission placed emphasis on creating regional subprograms supporting the innovation. In order to strengthen strategic planning in the area of technology in particular regions, it was decided to create subprograms called Regional Technology Plans (RTP). It was expected that these programs would increase innovativeness of the regions. RTP was build based on individual approach to each of the regions. The feedback analysis of STRIDE indicated a need to take further actions. In the 90s the European Commission proposed introduction of subsequent programs, especially Regional Innovation and Technology Transfer Strategies and Infrastructures (RITTS) and Regional Innovation Strategies (RIS). RITTS program was launched in 1994 and it was supervised by DG XIII (enterprises). The goal of this project was to improve the quality of affiliation between technology-supporting subjects, financial institutions and needs of regional enterprises. In turn, RIS program has been launched by DG XVI (Regional Policy). Both programs are similar to each other. RIS program places more emphasis on building widespread partnership between important entities in the region and European Regional Development Fund. It is hoped that this program will shape a new consciousness in all areas of life, including economics. As a consequence, it should create a new culture of innovativeness, increase efforts in regional infrastructure, and strengthen potential and competences of small and middle-sized enterprises. This all should create a triangle of cooperation: business – science – (regional) administration. Regions should initiate creating new clusters and webs, as well as ensure coordination and exchange of experience between the regions (Szultka, 2004: 11–15).

2. Conditions of Regional Innovation Strategy for Mazovia region

Regional Innovation Strategy for Mazovia region is not a random document but it perfectly fits itself among similar strategies that have been created for other regions in the EU, starting from the beginning of

204 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) the 90s. Creators of this strategy are aware of changes taking place in production processes, particularly the trend of resigning from mass production and choosing elastic production instead. Rapidly changing trends require quick reaction from the producers or service providers. Creators of the strategy are therefore aware that innovativeness is a paradigm of globalization. New technologies and new solutions though, shorten the distance (even the physical one) between the providers and customers. Regional Innovation Strategy for Mazovia is a reflection of arrangements made in the Lisbon Strategy. In 2000 the European Council accepted a strategy on development of the EU for the next decade. Although, the European Union has failed to implement this strategy in practice, it is valuable to notice that the ideas, that the document contained, were reasonable and consistent with the worldwide trends of economic development. Politicians in Lisbon agreed that innovativeness should be a cornerstone of the European economy. The source of the innovativeness should be scientific research, particularly in applied sciences (Barbachows- ka 2011: 84). Back then, the following goals were formulated: yy Increase of expenditure for research and development to the level of 3 % GDP; yy Reduction of bureaucracy and other impediments faced by entrepreneurs; yy Increase in employment to the level of 70 % for men and 60 % for women (Brocka-Palacz, 2009: 20).

The policy of innovativeness, defined in the Lisbon Strategy, was supposed to become one of the basic instruments for strengthening the role of not only particular states, but also regions in their struggle against competitiveness of products from USA, China, India and other Asian countries. Implementation of the Lis- bon Strategy was bound up with the implementation of structural funds and Framework Programmes. Structural funds of the European Union are focused on the goals related to the growth of innovation and innovativeness. Therefore, all the programs that are created on both state and regional level, include actions and propositions of the projects that would increase innovativeness and innovation potential of Poland and respective regions (e.g. Operational Programme Innovative Economy, Operational Programme Human Capi- tal, Regional Operational Program for the Masovian Voivodeship etc.) (Regionalna Strategia Innowacji dla Mazowsza, 2007–2015: 7). In case of the Framework Programmes, it is worth emphasizing that the budget for the 6th Framework Programme of the European Commission was the third biggest one, after agricultural policy and structural funds. In 2013 the expenditure for the 7th Framework Programme will outnumber by 75 % the funds assigned in 2006 to the 6th Framework Programme. Regional Innovation Strategy for Mazovia is also related to other documents having been created, directly or indirectly, as result of the Lisbon Strategy. In particular: yy “Innovation Policy in a knowledge economy” (2000); yy Subsequent reports regarding cohesion in the UE, notably “Growing regions, growing Europe. Fourth report on economic and social cohesion” (2007).

The analyzed document was created in 2006 and it is perfectly compatible with similar documents already existing in the European Union or Poland. Its creators hope that the implementation of the ideas embedded in the document would improve the present situation in the Mazovia region, especially in the area of competitiveness. It is assumed that in every bigger town in Mazovia there will be a technology park that would become a place of creating possibilities for scientific research and, most importantly, implementing the effects of this research. RIS for Mazovia Region is a document closely associated with another strategic documents. In pt. 19 of the document the following documents were pointed at: yy “Strategy of development for the Masovian Voivodeship until 2020”, which contains three goals: building the information society and improving the quality of life of Voivodeship’s inhabitants; increasing competitiveness of the region on the international level; improving social, economic and spatial cohesion of the region;

205 Bronisław Sitek EUROPEAN POLICY TOWARDS REGIONAL INNOVATION STRATEGY ILLUSTRATED WITH THE EXAMPLE OF THE MAZOVIA (POLAND)

yy “Strategy of e-development of Masovian Voivodeship” that focuses on information and communication technologies.

3. Characteristic of Masovian Voivodeship

Masovian Voivodeship is the biggest voivodeship in Poland. It has a surface of 35.559 sq km and this is more than 11 % of the surface of the whole country. To better illustrate its potential, it is worth mention- ing that the surface of Estonia is 45.226 sq km, so it’s not much bigger than the Masovian voivodeship. The population of the region is 5.170 mln. inhabitants. The population density is 145 people per sq km, whereas Poland has a density of 112 people per sq km. Mazovia is a highly urbanized region and the unemployment rate is one of the lowest in the country – 10.4 % compared with 13.2 % in the rest of the country.2 The Masovian Voivodeship is the best-developed region in Poland. According to pt. 22 of the RIS for Mazovia the value of GDP in this region, which is one of the 16 regions in Poland, is approximately 20.5 % of the country’s GDP. The amount of GDP per 1 person in the Masovian Voivodeship is 36.6 thousand PLN and it is more than 150 % of the country’s average (24.2 thousand PLN). This is one of the reasons why Masovian Voivodeshipis a leader in many rankings concerning economic potential and competitiveness of the Polish regions. It is particularly visible in all rankings regarding absorption of the competitive-innovative potential as well as innovative potential. Mazovia, being the undisputed economic leader in Poland, including the area of implementation of innovation, is still far behind in the European rankings, especially in comparison with the regions of the so-called “old Europe”. Poorer regions can be found only in the countries that joined the EU only recently- namely Bulgaria and Romania. Among 260 regions that were included in the ranking, Masovian voivodeship was placed at 213th place. When it comes to the amount of expenditure for scientific research, it is slightly better Mazovia is on 138th place. According to pt. 46 of RIS Masovian Voivodeship is an attractive region for both domestic and foreign investors. Investment expenditure amounts to ca. 4000 PLN yearly per person whereas the national average is 2150 PLN. However, the expenditure is not evenly allocated and it is easy to see that sectors such as architectural engineering, public administration, defense infrastructure or business services are given insufficient grants. On the contrary, the investing expenditure in the areas such as transport, telecommunication, education and tourism (esp. accommodation sector) is constantly growing.

3. Innovativeness in Masovian Voivodeship

Masovian Voivodeship has one of the highest rates of investment expenditure in Poland. More than 42.5 % of enterprises bear costs of investment expenditure (pt. 49 RIS). However, it’s worth pointing out that the high-tech solutions appear mainly in big and middle-sized enterprises. When it comes to small and so-called micro-enterprises, the innovativeness effect is much weaker that in similar companies in other parts of Poland- in this ranking Mazovia is situated on 11th place (pt. 50 & 51 of RIS). This situation is probably an outcome of the situation in the country, where small and middle-sized companies don’t have funds sufficient to allocate part of their spending on innovation. Nevertheless, Mazovia has the highest index in implementing technologies form the high-tech area. New technologies are vastly used in pharmaceutical, computer and cosmetic industry (pt. 54 of RIS). Expenditure on investment operations is incurred mainly by private enterprises and this amounts to almost 96 %. Money is invested in buying new machines, technological appliances and new technologies. However, it is worth pointing out that those forms of innovative purchases don’t go together with acquiring the newest technologies or high-tech devices. Sellers usually dispose of appliances or technologies that had already been used in highly developed countries. Thus, we can speak of imitative innovativeness. The big-

2 All data is taken from the main website of the Polish Central Statistical Office: http://www.stat.gov.pl/gus/5840_1446_PLK_ HTML.htm [2012-03-21].

206 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) gest shortcoming is lack of cooperation between business and science (and that includes research being made in academic institution). Entrepreneurs don’t see any point in investing in scientific research in order to over- take other regions or countries. Hence, the amount of expenditure in R&D sector in Masovian Voivodeship is merely 9 %. In comparison, in highly developed countries this is around 40 % (pt. 55 of RIS). The biggest investments were made in sectors such as food, chemical, IT and pharmaceutical industry (Pietruszyńska, 2006). This shows that external support for SMEs (small and middle-sized enterprises) in acquiring funds for innovation in production process is a necessity. A particular role is to be played by the regional authorities, which task is not only distribution of cohesion funds, but also stimulating entrepreneurs to take innovative actions. Unfortunately, Mazovia is the region whose support for innovative enterprises is the weakest in the country. Effects of Mazovia regional authorities’ innovative actions, which are taken together with entrepreneurs, are best seen in the area of improvement of production quality and providing services. Mainly large companies, having more financial resources that could be allocated for scientific research or acquiring new technologies, have exposed those effects. For the innovation implementation process it is important to define the sources of information. The most important thing is an external source, i.e. a possibility of acquiring data through the interested enterprise. Another, equally important sources of information about innovation are conferences, fairs and exhibitions, periodicals or scientific publications. What is worrisome is that entrepreneurs take little, or no advantage from information provided by consulting companies, universities and colleges, research institutions or Polish Academy of Sciences’ units (pt. 60). Another important factor having strong influence on increasing innovativeness in the enterprises is cooperation and diffusion. The cooperation should include not only the companies their selves, but also institutions of public administration, colleges/universities and foreign subjects. The cooperation analysis presented in Mazovia’s RIS (pt. 61) shows that entrepreneurs prefer vertical agreements, i.e. agreements between clients and suppliers. Large enterprises prefer cooperation with foreign suppliers. In turn, SMEs reluctantly sign agreements with foreign partners. Implementation of innovation faces many barriers that have various forms, depending on the size of the enterprise and its position. One of the most important barriers to innovation are (Wojnicka, 2007): yy too high costs of taking innovation in the region of Mazovia, (whereas in many regions of countries there were no resources available). Most of the enterprises finance any innovation at their own expense. Hence, support from the authorities is a necessary condition notably for SMEs, e.g. from the structural funds; yy many enterprises, especially SMEs, find it relatively difficult to find business partners; yy lack of qualified personnel; yy entrepreneurs have insufficient knowledge regarding innovation, means of implementing innovative programs in their enterprises, possibilities of gaining help from the public administration; yy Insufficient support from the authorities, particularly from the local authorities.

In comparison with the rest of the country Masovian Voivodeship is situated at the first place when it comes to the advancement in the scientific and research-development sphere. There are 332 scientific-research facilities within Mazovia region, which is 30 % of all Polish facilities of this type (pt. 67). However, the total sum of expenditure in this area is unsatisfactory, since 83.7 % of the costs incurred are personal costs and mere 16.3 % are resources allocated on investment in fixed assets. This, in turn, causes underfunding of the scientific base, which might result in collapse of development research in predictable future (pt. 68). Anot- her unsetting phenomenon is the fact that expenditure on research and development comes largely from the state’s budget and it amounts at 60.5 %, and the expenditure from entrepreneurs is estimated at merely 7.3 % (pt. 72). This huge disproportion of the expenditure’s origin in this area results from inadequate activity of the research centers that don’t establish communication with the entrepreneurs.

207 Bronisław Sitek EUROPEAN POLICY TOWARDS REGIONAL INNOVATION STRATEGY ILLUSTRATED WITH THE EXAMPLE OF THE MAZOVIA (POLAND)

Innovation possibilities of Masovian Voivodeship presented in this part of the elaboration show that it is the fastest developing region in Poland. Despite existing barriers in implementing innovation, Mazovia has the biggest potential to cooperate with another regions, including those outside of Poland.

4. Factors having influence on innovativeness of Mazovia

Literature points out many factors having influence on the increase in innovativeness. According to RIS, one of the most important factors concerning Mazovia is: yy business environment institutions; yy the quality of relations between business and public administration.

4.1. Business environment institutions

There are 43 business environment institutions in the area of Masovian Voivodeship. These include: associations for regional and local development, development agencies, guilds and chambers of commerce, specialized local government units and colleges/universities active in the R&D area. These institutions are not evenly spread across the region. The majority of them, nearly 60 %, are based in Warsaw. Another 23 % of them are based in towns with population bigger than 50.000 inhabitants. Therefore, there are still vast areas in the region void of influence of those institutions (Matusiak, 2007, pt. 79). Since some time, preparations have been made to create Płock Industrial and Technological Park as well as Warsaw Technological Park. However, for the time being, those units still haven’t come into existence. Instead, there are various other institutions, such as: Polish Agency of Enterprise Development, Industry Development Agency, Po- lish Federation of Engineering Associations, Polish Chamber of Commerce, Foundation for Polish Science, Information Processing Institute, Foundation for Academic Business Incubators and many other (pt. 81) (Swianiewicz, Dziemianowicz, Mackiewicz, 2000). The undertaken analysis (pt. 82) shows that we can list the following obstacles that impede effective work of enterprise and innovativeness support units: yy lack of financial resources that could be allocated to buy necessary equipment and to improve the standard of provided services, problems in cooperation with local and regional authorities and little (or lack of) support from their side; yy staffing issues and lack of back-up in form of scientists and consultants; yy lack of technology transfer procedures; yy presented offer mismatches the needs of the market and SMEs; yy lack of measurable benefits from the cooperation and limited commercial capability of the offered solutions; yy distrust and suspicion that is dominating in mutual contacts combined with a conviction about low qualifications of potential partners. This attitude is a straight effect of lack of experience and cooperation patterns.

4.2. Quality of the relations between business and public administration.

One of the cornerstones of innovativeness is friendly administration. This attitude is common in Germa- ny, Austria and other well-developed countries. Alas, this is not the case in the countries that recently joined the European Union and one of good examples of this are Masovian Voivodeship’s authorities. According to the data included in pt. 85 of RIS, public administration, including the one on the regional level, does not support the enterprises well enough in their innovative actions. The majority of communities in Mazovia is qualified as passive communities, i.e. those that are not active in the process of fundraising from the EU, and that includes the area of innovative actions.

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Obviously, EU funds are not the only ones that regions or communities should use (Dziemianowicz, 2007). Likewise, in this area, the whole region (as well as particular communities) is placed on the bottom of regions’ ranking in Poland. In this area the leaders are communities from West Pomerania and Lesser Poland. However, the innovativeness of the Masovian Voivodeship comes from the fact that it has the capital of Poland within its borders. All chief and central administration institutions of Poland based in the region stimulate the increase in innovativeness thanks to e.g. easier and quicker access to information, more possibilities of establishing contacts (both domestic and foreign), better promotion of the region and enterprises within.

Conclusions

Innovation is a basis of economic growth of states, regions, and communities but most of all, enterprises. Process of implementation of new technologies, procedures or, in other words, new thoughts, has been intensified since the 80s of the previous century. This is followed by respective actions taken by the European Union, Member States and their regions. One of the most visible effects of those steps being taken is creation of Regional Innovation Strategies (RIS). Such a document can be found in most of EU’s regions. The main objective of this document is to show hitherto achievements in implementing new ideas, generated by research units for production purposes or for the use of the service sector (R&D) (European Commission, 2007). RIS has been developed for the Masovian Voivodeship too. Having read the document that Mazovia we can conclude that is the most innovative region in Poland, however, in comparison with all the best EU regions it is two more than two hundred places behind. Thus, this is the region having the most innovative implementation processes in Poland. However, it is important not to forget about many barriers preventing even better implementation of innovation. The most important are: yy relatively low expenditure on scientific research coming from the private sector; yy insufficient coordination of innovative actions from the regional authorities; yy enterprises, particularly small and middle-sized ones, lack support from the regional authorities; yy no system making research and development in the region compatible with the needs of the market; yy need for increasing activity of public administration and bigger engagement in helping the entrepreneurs.

It is believed that RIS is a necessary document that could give us a view over the whole voivodeship, but at the same time, we can observe too much formality of the authorities on the levels of preparation and implementation processes. Much suggests that the RIS is a good material for a brief analysis but it’s not very useful when it comes to implementing it.

References

ADIT. (2008). Méthode de diagnostic du système d’innovation dans les régions françaises, Paris. Website: www.adit.fr/ IT/download/etude.php?id_titre=3 [2012-03-21]. Altshuller, G. S. (1984). Creativity as an Exact Science. The Theory of the Solution of Inventive Problems. CRC Press. Barbachowska, B. (2011). Rola kadry kierowniczej w budowaniu potencjału kapitału intelektualnego, na podstawie przedsiębiorstwa „X” – studium przypadków. Journal of Modern Science, Vol. 4, No. 11. p. 83–94. Brocka-Palacz, B., Teichman, E. (2009). Strategia lizbońska z perspektywy wybranych krajów i regionów. Warszawa: Szkoła Głowna Handlowa. Cook, Ph. (2000). The Governance of Innovation in Europa. Regional Perspectives on Global Competitiveness. Lon- don: Wellington House. Dziemianowicz, W. (2007). Wymiary pasywności lokalnej – wyniki badań ankietowych. W: W. Dziemianowicz, P. Swia- niewicz (eds.). Pasywna gmina. Warszawa: Studia KPZK PAN. European Commission. (2007). Innovative Strategies and Actions: Results of 15 Years of Experimentation. Website: http://ec.europa.eu/regional_policy/funds/2007/innovation/guide_innovation _en.pdf [2012-03-21].

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Klasik, A. (2000). Strategia rozwoju region. Studia Regionalne i Lokalne, Vol. 3, No. 3. p. 7–22. Matusiak, K. B. (2007). Potencjał instytucji wsparcia w województwie mazowieckim. Materiał niepublikowany, opracowany w ramach projektu RIS MAZOVIA. Warszawa: Mazowiecki Urząd Marszałkowski. Pietruszyńska, K. (2006). Promocja osiągnięć badawczych jednostek naukowych wśród przedsiębiorstw i instytucji otoczenia biznesu na przykładzie Mazowsza – podejmowane działania, potrzeby i bariery. Raport z badania. Materiał niepublikowany, opracowany w ramach projektu RIS MAZOVIA. Warszawa: Mazowiecki Urząd Marszałkowski. Regionalna Strategia Innowacji dla Mazowsza 2007–2015. Website: http://www.come.uw.edu.pl/ stypendia/files/Mazowieckie_RSI.pdf [2012-03-21]. Schumpeter, J. A. (1986). History of Economic Analysis. London: Allen&Unwin Ltd. Swadźb, S. (2002). Edukacja i innowacyjność w rozwoju regionów. Tychy: Śląskie Wydawnictwa Naukowe. Swianiewicz, P., Dziemianowicz, W., Mackiewicz, M. (2000), Sprawność instytucjonalna administracji samorządowej w Polsce – zróżnicowanie regionalne. Warszawa: IBnGR. Sztando, A. (2011). Europejskie Regionalne Strategie innowacji jako źródło wzorców dla Polski. Prace Naukowe Uniwersytety Ekonomicznego we Wrocławiu, No. 152. Wrocław: Uniwersytet Ekonomiczny we Wrocławiu. Szultka, S., Tamowicz, P., Mackiewicz, M. (2004). Regionalne strategie i systemy innowacji. Najlepsze praktyki. Reko- mendacje dla Polski. Gdańsk: Instytut Badan nad Gospodarką Rynkową. Wojnicka, E. (2007). Analiza trendów regionalnych i narodowych w zakresie innowacyjności, przedsiębiorczości i wzrostu gospodarczego. Ekspertyza przygotowana na potrzeby projektu RIS MAZOVIA. Warszawa: Mazowiecki Urząd Marszałkowski. Wojtaszczyk, K. A., Jakubowski, W. (2007). Społeczeństwo i polityka. Podstawy nauk politycznych. Warszawa: Aspra-JR. Zabala-Ituriagagoita, J. M., Jimenes-Saez, F., Castro-Martinez E. (2004). Evaluating European Regional Innovation Strategies. European Planning Studies, Vol. 16, No. 8, p. 1145–1160.

EUROPOS REGIONINĖ INOVACIJŲ STRATEGIJA, ILIUSTRUOTA MOZOVIJOS (LENKIJA) PAVYZDŽIU

Bronisław Sitek Alcide De Gasperi euroregionų ekonomikos universitetas (Lenkija)

Santrauka

Globalizacijos procesas daro vis didesnį poveikį ekonomikos vystymuisi. Šioje naujoje realybėje svar- biausiu rodikliu tampa inovacija. Įvairūs Europos Sąjungos regionai kuria regionines inovacijų strategijas (RIS). Šio straipsnio tikslas – apibrėžti esminius regionų vystymosi strategijos aspektus. Tokia strategija buvo parengta Mozovijos regione, kuris yra inovatyviausias Lenkijos regionas, nors vis dar gerokai atsilieka nuo labiau išsivysčiusių šalių regionų. Pagrindinis Mozovijos regiono privalumas – jame įsikūrusi Lenkijos sostinė, tai reiškia, kad organizacijoms lengviau prieinama svarbi informacija, kontaktai ir parama. Vis dėlto šiame regione iškyla sunkumų, kurie stabdo regiono vystymąsi. Iš jų paminėtini nepakankamas mokslinių tyrimų finansavimas ir nepakankama parama verslui. PAGRINDINIAI ŽODŽIAI: inovacija, vystymosi strategija, verslo aplinkos institucijos, draugiška ad- ministracija, regionai.

JEL kodas: R110

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THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY

Magdalena Sitek1

Alcide De Gasperi University of Euroregional Economy (Poland)

Abstract The subject of this paper is to present the shape, the legal basis and the prospects for the development of the European Union regional policy. This policy assumes great importance in the face of weakening of state’s structures due to the European Union bodies and decentralization of management of local affairs. The EU regional policy is a very problematic area and requires extensive studies. Thus, I confined myself to analyze the development of basis of the EU regional policy primarily through the prism of treaty law. The analysis showed a rate of development which process still continues. Despite a good legal basis, the EU regional policy still requires constant adjustment, especially when it comes to rationalizing subsidies. The passive regional policy leads to promote only the economically under developed areas. Therefore, it is necessary for the implementation of programs to support the innovation, especially in highly developed regions, which are the engine of the whole European Union economy. KEYWORDS: regions, cohesion policy, structural programmes, innovative economy, the Regional Committee.

JEL code: R110, K100

Introduction

The European Union regional policy constitutes one of the most important directions of the activities that have been undertaken from the nineties of the twentieth century. The distribution of the Union assistance appropriations by means of the governments of the Member States not always has been effective as it was expected, particularly, over the area of smoothing away the economic differences, existing within the countries. The classic example is here Italy, which is divided into rich north and relatively poor south. The subject of this work is presenting the development of regional policy in connection with the urgent problems which need solution, in the under – developed regions. We should assume the working hypothesis, that in the European Union, despite the efforts which are undertaken, the wide-ranging differentiation in development of the particular regions still exists. The purpose of this work is to indicate the necessary measures to equalize the chances of development of the regions which are economically under – developed. For this purpose, we are going to analyze specifically, the European Union treaty law principles, to show the regional policy development and to signalize the possibilities of undertaking the new pro innovative and pro investment activities in under – developed areas. The subject of the European Union regional policy was undertaken many times by numerous Polish and foreign scientists, among others: A. Bałaban (Bałaban, 1998: 48), J. Ciapała (Ciapała, 1998: 92), B. Woś (Woś, 2005: 21) or F. Zucca (Zucca, 2001: 15). These authors write about the European Union regions from different points of view. Among others, they deal with the political, ecological and social issues, particularly

1 Magdalena Sitek – Alcide De Gasperi University of Euroregional Economy In Józefów, dr. habil. Scientific interest: European law, Tourism law. E-mail: [email protected] Tel.: +48 22 789 19 03.

211 Magdalena Sitek THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY the differences in economic development and others. Highly rarely they take the issue of creating the regional policies in the light of the treaty regulations. In this work there is undertaken the descriptive and historical method, the purpose of it, is the presentation of the development of creating the European Union regional policy and its influence on the legal regulations. However, the most important are the treaty regulations. Therefore, the most significant issue is to analyze the development of the treaty inscriptions concerning the creation of the regional policy. There is necessary to use the functional method, due to which, it will be possible to show different solutions of the same issue by means of different instruments, performing the same function. This method allows also showing the law in practice (Tokarczyk, 1989: 145). According to the research tasks, such issues should be added here: analysis of the development of Eu- ropean Union regional policy, description of its objectives, such as promoting the growth of economically backward regions and helping regions in economical or social transition. Additionally, the research tasks contain: description of human resource development, innovation as the essential impact on the regional development and treaty base of the European Union’s regional policy.

1. Development of the European Union regional policy (European Communities)

The notion region is not clear and it contains different forms and terms typical for the European Union Member States. There can be the voivodeships (Poland), lands (Germany and Austria), departments (Fran- ce), regions (Italy), regions and cultural communities (Belgium), but there can also be the other, untypical units of the territorial division, as for example the French oversea territories or the island autonomic regions (Portugal). The regional division generally has its historical origin, but also the geographical or political ones. Therefore, the regions are bigger administrative units, which have certain autonomy. According to the Charter of the European Regional Self-Government from 1991, regions have to have the elective, legislative and executive organs. Moreover, the autonomy constitutes the possibility to have at disposal the own financial measures from grants, the local payments or taxes (Sitek, 2011: 51). The existing or creating the regions is connected with the European Union regional policy and with more and more intensive implementation of the regional policy. There are a lot of reasons of creating the regional policy. All of them have to be seen in the light of the globalization process of the international relations. The most important are the political and economic reasons (Puga, 2001: 45–51). After the second world war, according to the idea of Alcide De Gasperi, Robert Schuman and Konrad Adenauer, there was initiated the process of building the united Europe. There were created three European communities, i.e. the Coal and Steel Community (1952–2002), the Atomic Energy Community (1957–2002) and the European Economic Community (1957–2002). The basic purpose of creating the new European order was to build the united economic area, free of any financial or administrative barriers. However, the political issues constituted some significant reason of regionalization. The national state, which conception was initiated during the Renaissance period, brought numerous political conflicts, which were the reason of many wars. The problematic issue was, in particular, the route of boundaries, which were artificially marked out. When creating them, there was not taken into consideration the historical, social or geographical integrity, but the natural resources existing in the administrated territory. The conflicts about Lorraine and Ruhr, the regions situated on the borderland of France and Germany, are the example of that situation. According to the Potsdam and Yalta Agreement, there were lain out the areas of influence of the world-superpowers, without any arrangements with the local communities. As a consequence, there were created the boundaries for political needs, without consideration of the historical or geographical conditio- ning. On the borderland of Poland and, at that time, Czechoslovakia, Teschen was divided into two, while on the borderland of Poland and Germany, Zgorzelec left on Polish part and Gorlitz on the German part. The consequences of the Second World War determined the European post-war leaders to undertake the activities towards building the new Europe. The economic development and the policy of smoothing away the chances among the member states should have been the foundation. Such the activities, at one point, did

212 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) not bring the expected results, since the financial measures allocated to the member states were not correct. As a consequence, the European Communities governments were determined to the gradual development of regional policy. The beginnings of community regional policy should be found in the Treaty on the European Economic Community (1957), there are some first normative bases there. In 1962 there was initiated the idea of creating the regional fund, partly from the measures for creating the European Orientation Fund and the Agri- cultural guarantee. However, only just in 1969, the Commission submitted in the Council, the project of working out the regional policy. They postulated creating the permanent committee of regional development. The task of that committee was to harmonize the regional policy, and finally, creating the regional development fund. That fund was created during the meeting of the leaders of countries and Communities governments in December 1974, and it started its activity on 1st January 1975 (Doliwa-Klepacki, 2005: 545–546). Nowadays, this is the most significant instrument of the EU common regional policy. The aim of this fund is the assistance in the economic development of the regions economically less developed (Wilson, 2000: 33). The essential stages in the regional policy development are the Integrated Mediterranean Programmes, which were implemented in 1985, and the purpose of them was to prepare the communities to the integration with Spain and Portugal. The realization of that programme was supported on the measures from several structural funds within particular areas and regions of some new member states. The European Single Act (1987) initiated the new stage of the regional development policy. At that time, there was announced, among others, the reform of structural funds and increasing the expenditures appointed to the regional policy. That reform was implemented in 1988. Some new purposes of the regional policy were defined. In 1992, in the Maastricht Treaty, there was created the Coherency Fund, which started its activities in 1994. The Coherency Fund is the supplementation of the structural funds and its purpose is to achieve the economic and social coherency of the Member States. The following programmes support the regional policy (Naruszewicz, 2004: 275): yy The European Regional Development Fund; yy The European Social Fund; yy The Financial Instrument Supporting the Fishery.

And the following Community initiatives: yy Interreg III; yy Urban II; yy Equal; yy Leader+.

The significant stage of the regional policy development was creating the Committee of Regions in 1994. This institution is the centre of giving opinions from their own initiative or according to the legal principles. It participates in making the decisions on regional matters, particularly concerning the social policy, the employment matters, the health and environmental protection (Roberts, 2002: 255).

2. The regional policy purposes

The regional policy purposes were, to a certain extent, drafted above. However, this is necessary to analyze more precisely, the purposes defined in the founding treaties and some later normative regulations of that type. There are three basic purposes of the regional policy, namely: yy Promoting the regional development of some under-developed regions, offering them the new investments; yy Supporting the regions over the economic or social transformation period; yy Development of human resources on regional level.

213 Magdalena Sitek THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY

2.1. Promoting the development of the under-developed regions

The first and basic purpose is promoting the under-developed regions. In the European Unionthere are 270 regions with different economic development levels and population. Among them, there are some regions which achieve over 200% of the average gross income of the European Union GDP, e.g. London, Brussels and Paris, but there are also some poor regions, as for example the Greek regions or some of them in Poland, the example is here the Warmian – Mazurian Voivodeship. In these regions the income per capita is almost five times less than in Paris. The existing disproportion in the development of many European Union regions determines the necessity to undertake the adequate activities, not only by the governments of the Member States, but also by the Eu- ropean Union organs, on the basis of the subsidiarity principle. Therefore, in 1988 the European Community was divided into NTUS, that is to say Nomenclature of Territorial Units for Statistic. There are five NTUS, but for our work the most important is NTUS 2, which includes our voivodeships. Altogether, there are 271 NTUS 2, therein Poland has 16 of them, but Lithuania 1 (Gmyrek, 2000: 1). According to the data included in the document, prepared by the Commission in November 2010, entitled the Fifth Report, about the economic, social and territorial coherency: among numerous data there was indicated that the investment into the future of Europe shows that the most significant economic development and GDP is noted down in the EU newly accepted Member States, i.e. in Poland, Lithuania, Slovakia, Czech Republic and even in Romania and Bulgaria. However, the level of the wealth of regions and countries is inversely proportional; namely, the richer regions are still in the countries of former European Union. To realize this purpose, there are some cohesion activities undertaken, which pursue towards rebuilding the under-developed regions. The most significant is the economic cohesion, which aim is to smooth the differences in the GDP income per capita within the same country and within the whole Union. We can also say about the social cohesion. In this case we mean to smooth away the differences between the countries and regions with unemployment problems or the other social problems, therein the aging society problems. In the end, we can also say about the spatial cohesion, which means the improvement of the access to the peripheral areas by constructing the roads, motorways, airports or the other infrastructural objects (Szlachta, 2000: 45).

2.2. The regions in economic and social transformation

Another category of regions are these, where there are economic and social transformations. There are some regions in the European Union, where there has been the monoculture in the economic structure for ages, e.g. Silesia, situated on the borderland of three countries-nationalities: Poland, Germany and Czech Republic. That was the terrain rich of coal and different kinds of ores, therein the iron ore. In 1989 after the crash of the Communistic system in Poland and after implementing the European Union environmental protection policy, and because of some political transformations in Poland, it was obvious that the restructuring of this region will be necessary, as well as manipulation of the investments into the light and medium industry which is ecologically cleaner. The rural regions are in this group. They have the backward agriculture with the excessive employment in this sector of economy. These changes are mostly visible in small and medium companies (Mączyńska, 2001: 9). The changes in the economic structure in former under developed regions are faster in the urbanized centers, in other words, where the road and air transport infrastructure is better developed. Whereas, the changes in rural areas are slower, since the infrastructure there, is worse. The similar process occurs in case of social transformation, in particular if it is about the decrease in unemployment. The increase of employment is noticeable in urban regions, whereas, it is only insignificant in rural areas. There is too much proportion of the society who works in agricultural sector in rural regions (Steinen, 1991: 19–31). The regions with economic and social transformation are being temporary financed. They are situated between the convergence and competitiveness regions. The convergence regions are these, where GDP per capita does not exceed 75 % of the EU-27 level, whereas, the competitiveness regions are the richest regions.

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The European Regional Development Fund and the European Social Fund give the financial support to transforming regions.

2.3. The human resources development

The third aim of regional policy is the human resources development. To achieve this aim it is necessary to implement the reforms of educational systems, to intensify the vocational trainings and to increase the rate of employment, taking into consideration the equal chances in the access to the labor market and stimulating the labor market to activities. There is necessary to support the high-risk groups. The European Social Fund finances this assignment. The basis of economic development, supported on the innovative economy is education. Meanwhile, the statistic data shows quite significant differentiation in education of the Member States societies. Generally, in the European Union, in the group of people aged 25 to 64, approximately 25 % has the higher education. The biggest number of educated people is in Inner-London region, the number of people with higher education in that region, is as many as 51 %, and in the Belgian province Braban Wallon it is 49 %. The least number of people with higher education is in Portuguese Azores, only 8 % and in Severozapad in Czech Republic, only 8 %. In Poland there is also significant differentiation, in Mazovian region it is 29 %, whereas in Kuyavian- Pomeranian and Opole voivodeships only 16.2 % (Matusiak, 2011: 1). One of the basic Union activities, within the human resources development, is implementing the educational programme life lasting education. Basically, this assignment is introduced in the territories of individual countries, regardless of the differentiation of particular regions, what is not positive to the cohesion policy. Within the framework of European Union, the significant changes are introduced to the educational programmes already in primary schools, so that the innovativeness becomes the element of young people mentality (Kotarba-Kańczugowska, 2009: 13). The different Union programmes support the realization of the educational development plans in regions, among others the programme “Life lasting education”. The Erasmus and Leonardo da Vinci programmes are for people at the age until 30. The European Social Fund, the so-called soft programme, is the programme applied for people at other different age bracket. There is the European Adjusting to Globalization Fund, which supports the people who lost their work places because of the global business transformations. The aim of this programme is to help to find a job and to organize trainings allowing obtaining the new jobs, adjusted to the needs of changing labor market2. In the Strategy Europe 2020, it is assumed that till 2020, there should be at least 15 % of the EU citizens within the age bracket between 25–60, who takes part in everlasting education, whereas the percentage of people at the age bracket between 30–35, having the higher education, should be at least 40 %. There is also necessary to raise the financial expenditures not only by the Member States, but also by the self-governments of individual regions, because of the need to increase or change the citizen’s qualifications. There was accepted in the Europe 2020 Strategy that the expenditures should not be lower than 3 %. This level of expenditures in the EU is achieved so far only in one region. In the Amsterdam Treaty (1997) there was introduced the notion of territorial cohesion. It means that it is necessary to improve the financial involvement into the development of education in regions, to organize the trainings and other forms of increasing the skills. The purpose of such activities should be to teach people to predict changes and to know how to cope with them. It is also very important to build the united society. The investments in education should be joined with the investments in infrastructure, enterprise and innovations.

2.4. Innovativeness as a driving force of the regional development

The notion innovativeness is ambiguous; hence, it is quite difficult to define it univocally. It is claimed, that the first person that created the definition of the notion innovativeness was J. Schumpeter. According to

2 The fifth report on economic, social and territorial cohesion: Investments in the future of Europe 2010: 188 in http://ec.europa. eu/regional_policy/sources/docoffic/official/reports/cohesion5/pdf/5cr_pl.pdf) [15.04.2012]

215 Magdalena Sitek THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY him, the innovativeness is the significant change if the function of production, e.g. through joining different elements of production. He distinguished the invention (a new scientific thought), the innovation and the imitativeness. Innovation is the internal factor, necessary to the company or region development (Schumpe- ter, 1986: 894). Innovativeness has the most significant meaning to the economic development. However, G. S. Altshuller claims that the innovativeness is linked with the creativity, hence, the innovativeness is manifested by the distinct organization and gathering the knowledge, perceiving the world, creating the new ideas and implementing them into practice (Altshuller, 1984: 23). Therefore, it is assumed, that the innovativeness occurs if there are applied some distinct procedures of producing the given goods and the distinct implementation into practice. Innovativeness is first of all implemented in the companies together with researches. Where as the regions have the inspiring function. Hence, in the European Union it is emphasized to join the activities of scientific researches centers with the companies B+R. Therefore, the regions authorities should not discover innovativeness or do any new implementations, but they should animate the researches centers and companies existing in the given territory to act towards an innovative way. The local authorities of the regions can achieve the goals of the Union innovative policy through the improvement of the former educational system and trainings of the children, youth and adults, through the development of new culture directed towards protection of the environment, tolerance and the openness to the new ideas, but the innovativeness can be achieved first of all through the advanced scientific researches connected with the creative initiative. The notion initiative contains not only the area of production and business, but mainly the service (Maczuga, 2002: 57). The regional innovativeness should be grounded in the growth of employment in the sector of advanced technologies. Such the growth of employment is noted down mainly in the highly developed regions. The rest of the regions definitely differ from this level, which does not provide the full realization of the coherency policy. The reflection of such the condition is the new patents. In this case, also the biggest number of patents is registered in the highly developed regions. The weaker areas do not have enough proper research personnel or any funds to implement the modern technologies, which are quite expensive (Kuciński, 2010: 30). The existing differentiation of the innovative process in the European Union is visible from the perspective of the regional indicator of the innovative effectiveness. Innovativeness brings numerous positive effects. In particular, the innovativeness through the education and trainings. It leads to the decrease of unemployment rate, mainly within the highly educated social group. The labor productivity is also improved mainly in highly developed regions. However, the development is weaker in the regions of convergence or these being in the transformation process (Woś, 2005: 52). Therefore, the regional authorities have to do their best to base the practice on the proper preparation of the personnel at all the levels of administration and on the solid economic principles. The institutional workers, entrepreneurs and the ordinary dwellers of the regions have to accept as natural reaction to do something in the innovative way, not to repeat the same, even if they do it with the intention to do better (Drucker, 2004: 29). In 1993 there was worked out the White Paper on Growth, Competitiveness and Employment. On the basis of this document the European Commission worked out the pilot plan of activities called the Regio- nal Technology Plan – RTP. In December 1995 the European Commission published The Green Paper on Innovation, which was amended in1996. In 1994 the European Commission implemented The Regional Technology Plan RTP, later known as the Regional Innovation Strategy – RIS. The Regional Innovation and Technology Transfer Infrastructures and Strategies – RITTS, amended the RIS strategy. There were also worked out the regional innovative strategies, as for example the Regional Strategy of Innovativeness for the Mazovia 2005–2015 (Mahdjoubi, 1997: 5).

2.5. The treaty bases of the European Union regional policy

The regional policy was not the basis of the activities of the former community decision makers in Brussels. That was also visible in the treaty legislation. However, together with coping with the important

216 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) economic issues, in other words, after the legal regulations in the treaty law, there was the time to regulate the other types of policies, also the regional policy, and to the introduction of the policy of innovativeness. Here, there is going to be presented, the issue of creating the regional policy in the treaty law in connection with the policy of innovativeness.

2.6. The founding treaties

There were three founding treaties, but only in one of them, in the Treaty on the European Economic Community from 1957, there is stated about the regionalism. In the preamble the signatories declared the harmonic development and the need to smooth away the differences among the particular regions, particularly if we mean the regions economically underdeveloped. The regional issue is also mentioned in case of defining the frameworks of the agricultural policy. In article 39 of the Treaty there is stated that the common agricultural policy should take into consideration the differentiations in the development of individual agricultural regions. In turn, in article 49, where it is stated about the free flow of people, they say about the necessity to establish such the mechanisms, which will allow keeping the balance in the labor market, taking into consideration the unemployment differentiation in different regions of the Community. Some similar regulations are stated in the topic of the transport policy. In article 75, §3 there was stated about the development of transport infrastructure. The European legisla- tor authorized the European Commission to publish the proper legal regulations, taking into consideration the level of living and employment in particular regions. In article 80, §2, it was allowed to obtain the Euro- pean Commission agreement to make the exception to the rule of forbidding any economic and administrative barriers in the market of transportation service, particularly financial supporting of the companies. Such the exception to the rules was possible on account of the regional underdevelopment. In article 82 we can find the example, in which there was allowed to apply different payments in the regions economically and politically affected by the division of Germany after the Second World War. In article 92, §3 there are some regulations allowing the state financial support to the companies. Such kind of help was allowed to support the economic development of the regions with the low living standards and poor employment rate. Some similar solutions are also in articles 226 and 227. This is specific that in the founding treaties there is not anything stated about the innovativeness. The assistance and in consequence the legal regulations have rather ordering character, they support the under developed regions. In 1986, on the basis of the European Single Act, there was implemented the Economic Community and some numerous changes in the Treaty on European Economic Community. There were introduced a lot of articles and amendments to the treaty. Among others, there was introduced the topic V concerning the coherency of economic and social policies of the Member States. The purpose of that policy is to smooth the existing differences in the development of particular regions. In article 130c and d, it is stated about the changes in funds supporting the regional development, in particular in the European Fund of Regional Development. In turn, in topic VII concerning the environmental protection there is introduced article 130r, in which it is stated the necessity of taking the actions by the community organs and institutions within the balanced protection of environment in individual regions (Barcz, Koliński, 1990: 89). However, the regional policy has the smoothing, not innovative, character.

2.7. From Maastricht to Lisbon

In the European Union Treaty from 1992, called the Maastricht Treaty, some statements from the previous treaties were amended. In article 130c, it is appointed the purpose of the European Regional Fund, which is smoothing away the basic regional disproportions in the Community, through participating in the development and structural adjustment of the under developed regions and through transformations of the

217 Magdalena Sitek THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY ruined industrial regions. In article 130r it is emphasized the protection of environment in regions, particularly the under developed regions. However, the most important resolution of that Treaty was to create the Committee of Regions in article 198a. The Treaty on European Union was the first treaty where it is stated about the innovativeness. In article 130 it is decided that the Community and the Member States have to assure the necessary conditions for the Community industrial competitiveness. Their activities are aimed towards the better exploitation of the industrial potential of innovative policies, researches and technological development (Barcik, Wentkowski, 2008: 326). The Amsterdam Treaty (1997) did not introduce any new elements in this framework. In turn the Nice Treaty, in article 137 the Treaty on European Union was amended, there was introduced the notion of innovativeness. The Member States are responsible for the innovative activities. These activities should be undertaken together with the modernization of the educational system, the exchange of information and good practice (Verrilli, 2001: 67). In the Lisbon Treaty in 2007 in the amended article 3b, there was introduced the information about the European Union, that it acts on the basis of subsidiarity, which means it does not replace the activities of the Member States or the regional authorities. In turn, in article 158, there is stated that the European Union activities are directed towards the rural regions, the industrial regions under the transformations process, the regions suffering from some serious and permanent negative natural and demographic conditions, for example the northernmost regions with very low density of population, the islands regions, transborder and mountain regions. The innovative activities are treated marginally even in the latest treaties. The legislative procedures are concentrated mainly on the policy of cohesion. The better situation is in the secondary law of the European Union, where numerous legal acts contain the authorizations and liabilities for the regions to introduce the innovative activities, particularly the new technologies and procedures.

Conclusions

The experiences of the Second World War were the basis of the European integration activities in the 1950s of the 20th century. The common activities undertaken then were directed towards the liquidation of the barriers stopping the economic development, particularly standardizing the payments and introducing the principles of public contribution to private entrepreneurs. Regional policy is one of the most important policies of the European Union. It was initiated in the 1960s. The substantial political decisions were made and the institutional and treaty regulations were introduced over the basic stages of the development of that policy. The purpose of the European Union is to smooth away the existing differences in economic and social development among 271 Union regions. The European Communities in the past, and nowadays the European Union activities, are taken on the basis of subsidiarity. The regional policy is more and more based on the principles of innovative economy. The analysis of economic and social situation in Europe signalized that there is a need to undertake the activities smoothing away the differentiation in the development of regions. That fact was the basis of the community regional policy. In this way the regions became the subject of the European policy, which is reflected in the Treaty on European Economic Community and in the European Single Act. Whereas in the Treaty on European Union there was created the Committee of Regions, which is the significant institution for the regional policy. The characteristic feature of the European regional policy, which is noted in the treaties, is implementing the coherency policy. The existing differentiation in the economic and social development of the regions requires undertaking the activities directed towards smoothing these differences. The basic instruments of the coherency policy are the programmes, particularly the European Fund on Regional Development. In some exceptional cases the European Commission can allow to use the public support. The former European Union regional policy is therefore the passive policy. It is in general based on supporting the underdeveloped regions. Meanwhile, in the regional policy based on the treaty law, there is

218 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) not the element of innovativeness, which should consist in implementing the innovative education, the new procedures of administration activities and implementing the new technologies. Therefore, the European Union should animate the regional authorities to the better, dynamic and innovative activities.

References

Altshuller, G. S. (1984). Creativity as an Exact Science. The Theory of the Solution of Inventive Problems. CRC Press. Bałaban, A. (1998). Polska koncepcja regionu. In: A. Bałaban, B. Sitek (eds.). Region Europejski a polskie województwo. Toruń: Wit-Graf. Barcik, J. Wentkowska, A. Prawo Unii Europejskiej z uwzględnieniem Traktatu z Lizbony. Warszawa: C. H. Beck. Barcz, J., Koliński, A. (1990). Jednolity Akt Europejski. Zagadnienia prawne i instytucjonalne. Warszawa: Polski Ins- tytut Spraw Międzynarodowych. Ciapała, J. (1998). Zasada subsydiarności w Konstytucji Rzeczpospolitej Polskiej i w Unii Europejskiej. In: A. Bałaban, B. Sitek (eds.). Region Europejski a polskie województwo. Toruń: Wit-Graf. Doliwa-Klepacki, Z. M. (2005). Integracja Europeejska. Łącznie z uczestnictwem Polski w UE i Konstytucją dla Eu- ropy. Białystok: Temida2. Drucker, P. F. (2004). Natchnienie i fart czyli Innowacja i przedsiębiorczość. Warszawa: Studio EMKA. Gmyrek, A. M. (2000). Nomenklatura Statystyczna NUTS... Wspólnoty Europejskiej, No. 6. Kotarba-Kańczugowska, M. (2009). Innowacje pedagogiczne w międzynarodowych raportach edukacyjnych. Warszawa: Wydawnictwo Akademickie ŻAK. Kuciński, K. (2010). Przedsiębiorczość a rozwój regionalny w Polsce. Warszawa: Difin. Maczuga, T. (2002). Innowacje w Unii Europejskiej. In: S. Swadźby (ed.). Edukacja i innowacyjność w rozwoju regi- onów. Tychy: Śląskie Wydawnictwa Naukowe. Mahdjoubi, D. (1997). Regional Innovation Straegies in the European Community. Website: http://www.ischool.utexas. edu/~darius/12-RIS-EU.pdf [2012-03-12]. Matusiak, T. (2011). Nowa publikacja Eurostatu: regiony pod lupą. Website: http://www.uniaeurop ejska.org/nowa-publikacja-eurostatu-regiony-pod-lupa Mączyńska, E. (ed.) (2001). Restrukturyzacja przedsiębiorstw w procesie transformacji gospodarki Polskiej, t. 2. Studia wybranych przypadków. Warszawa: Wydawnictwo DiG. Naruszewicz, S. (2004). Polityka spójności Unii Europejskiej. Wybrane zagadnienia. Warszawa: Difin. Piecha, K., Kulikowski, M. (2003). Przedsiębiorczość: szansą na sukces rządu, gospodarki, przedsiębiorstw, społeczeństwa. Warszawa: Instytut Wiedzy. Puga, D. (2001). European Regional Policies in the light of recent location theories. Journal of Economic Geography, Vol. 18, No. 1, p. 45–51. Roberts, A. (2002). Multilateral Institutions and the Right to Information: Experience in the European Union. European Public Law, No. 8. Schumpeter, J. A. (1986). History of Economic Analysis. London: Allen&Unwin Ltd. Sitek, M. (2011). Samorządy loklane w świetle polityki regionalnej Unii Europejskiej. In: B. Sitek, D. Barańska, K. Nau- mowicz. Funkcjonowanie samorządu terytorialnego w wybranyach państwach UE. Olsztyn: Wydawnictwo UWM. Steinen, M. (1991). State Aid, Regional Policy and Locational Competition in the European Union. European Urban and Regional Studies, Vol. 4, No. 1, p. 19–31. Szlachta, J. (2000). Problemy polityki rozwoju regionalnego Polski w warunkach integracji europejskiej. In: J. Hausner, M. Marody (eds.). Jakość zarządzania: Polska bliżej Unii Europejskiej? EU-monitoring IV. Kraków: Małopolska Szkoła Administracji Publicznej. Tokarczyk, R. (1989). Wprowadzenie do komparatystyki prawniczej. Lublin: Wydawnictwo Lubelskie. Verrilli, A. (2001). Il Trattato di Nizza. Napoli: Esselibri S.p.A. Wilson, Th. M. (2000). Obstacles to European Union regional policy in the Northern Ireland borderlands. Human Or- ganization, Vol. 12, No. 2, p. 33–38. Woś, B. (2005). Rozwój regionów i polityka regionalna w Unii Europejskiej oraz w Polsce. Wrocław: Politechnika Wrocławska. Zucca, F. (2001). Autonomie locali e federazione sovranazionale. La battaglia del Conseil des communes et régions d’Europe per l’unità europea. Bolognia: Il Mulino.

219 Magdalena Sitek THE DYNAMICS OF THE EUROPEAN UNION REGIONAL POLICY

EUROPOS SĄJUNGOS REGIONINĖS POLITIKOS DINAMIKA

Magdalena Sitek Alcide De Gasperi euroregionų ekonomikos universitetas (Lenkija)

Santrauka

Šio straipsnio tikslas – pateikti Europos Sąjungos regioninės politikos formą, jos teisinį pagrindą ir pagrindines vystymosi perspektyvas. Ši politika tampa vis svarbesnė vykstant decentralizacijai ES valstybėse narėse, vis daugiau valdžios atiduodant regionams. ES regioninė politika yra problemiška sritis, kurią būtina tyrinėti, todėl autorius ES regioninės politikos vystymąsi analizuoja per sutarčių teisės prizmę. Analizė paro- dė tebesitęsiančio vystymosi mastą. Nepaisant geros teisinės bazės, ES regioninė politika turi būti nuolat de- rinama, ypač kai kalbama apie subsidijų racionalizavimą. Pasyvi regioninė politika lemia tai, kad remiamos tik ekonomiškai nepakankamai išsivysčiusios teritorijos, todėl būtina diegti programas, kuriomis remiama inovacija, ypač išsivysčiusiuose regionuose, kurie yra visos ES ekonomikos variklis. PAGRINDINIAI ŽODŽIAI: regionai, sanglaudos politika, struktūrinės programos, inovacinė ekonomika, Regionų komitetas.

JEL kodai: R110, K100

220 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

INDIVIDUAL RESPONSIBILITY INTEGRATION IN LATVIAN HEALTH FINANCING MODEL – CHALLENGES AND OPPORTUNITIES

Solvita Sunite1

University of Latvia (Latvia)

Abstract Wherewith actualisation of health promotion as an important aspect in the context of public health maintenance, the questions which are connected to public joint responsibility in their health maintenance and improvement attain even greater importance. Taking into consideration the insufficient health quality of Latvian population which ranks Latvia in one of the last places among the European countries, actualisation and implementation of individual responsibility dimension in the health care financing model, is viewed as a possibility of improvement of the current situation. The research overlooked the approaches of individual responsibility integration in health care models employed by the developed countries, classifying those several parameters, established the insufficient Latvian population involvement level which is characterised by large health influencing harmful habit prevalence and low involvement level in illness prevention measures, as well as marked the main challenges and possibilities, introducing individual responsibility dimension in Latvian health care financing model which are referred to both increasing the payment solidarity and lifestyle and behaviour changes. KEYWORDS: health, individual responsibility, health incentives.

JEL codes: I120, I130

Introduction

With acceptance of sustainable economic development as a modern national economy development base direction, public health maintenance and improvement of public health indexes is viewed as preconditions for provision of the human capital development. Matters concerning the health inequalities reduction are currently defined as priority both in global and at the level of certain countries. Based on the research on health influencing factors which have proved that lifestyle and socio – economic factors form 49–53 % of total external factor influence on health, surrounding environment factors – 17–20%, inheritance18–22 %, but health care – only 8–10 % (Bezrodnaja, 2011: 241), even larger role in the public health care maintenance is allocated to the health promotion, emphasising public responsibility for health influencing factors which are in their sphere of influence. Thus the problem connected to population involvement and individual responsibility in their health maintenance and improvement, conducting to the overall public health index improvement, is fundamental in this research. Although the problem is widely researched in developed countries, in Latvia it has not been actualised enough, thus leaving remarkable part of public health influencing factors completely outside the healthcare system influence sphere. However, the insufficient Latvian public health quality, which has taken 22 place

1 Solvita Sunite – University of Latvia, Economic Dpt., master’s degree in Economics, doctorant. Scientific interest: National Economics, Health Economics. E-mail address: [email protected] Tel.: +371 294 735 74.

221 Solvita Sunite INDIVIDUAL RESPONSIBILITY INTEGRATON IN LATVIAN HEALTH FINANCING MODEL – CHALLENGES AND OPPORTUNITIES among 27 EU countries (Jeremic et al., 2011: 1764), indicates that Latvian health care system, i.e. health care financing, needs serious reforms by incorporation of additional dimension. The aim of the research is to evaluate individual responsibility dimension integration possibilities in Latvian health care financing model, reviewing the possible challenges and possibilities. Public health characterising indexes and the implemented tools for the stimulation of their quantitative and qualitative changes serve as the research object. In the course of the research the following tasks were solved: evaluation of approaches implemented by the developed countries in integration of individual responsibility in the health care financing models, analysis of several Latvian public health indexes and their influencing factors connected to the individual behaviour, i.e. health influencing harmful habit prevalence and participation in illness prevention, as well as inspection of possibilities of individual responsibility dimension integration in Latvian health financing model, taking into consideration the possible limitations. The research is based on WHO, European Commission, National Health Service, Health Economic Centre, CSB, SRS statistical and published research numeral data, applying syntheses, analysis, monographic and statistical methods.

1. Experience of developed countries in public responsibility implementation in health care model – classification of existing approaches

Strengthening the recognition that illness prevention financially is more beneficial to the government than illness treatment; the health care system focus of developed countries gradually changes from health care to health promotion. Based on WHO international health promotion conferences, health promotion is being recognized as an essential element of health development. It is a process of enabling people to increase control over, and to improve, their health. People have to be at the centre of health promotion action and decision-making processes for them to be effective (WHO, 2009: 17, 19). Although health promotion activities are oriented on the wider public joint involvement and responsibility on decisions in the health care maintenance, it forecasts definite individual involvement and joint responsibility. Thus, for example, WHO program defines that Community involvement in health basically means that communities take responsibility for their own health through: yy adoption of behaviour to prevent and treat diseases; yy effective participation in disease control activities; yy contribution to the design, implementation and monitoring of health programmes; yy provision of resources for health (WHO, 2006: 1). The mentioned function directions serve as the fun- dament for health strategy development in certain countries and are integrated in various health promotion programs, but the first and the second of those are successfully implemented in the framework of healthcare financing models.

Unfortunately, reviewing the existing practice of developed countries, it can be concluded that the aspect of health promotion not always is successfully integrated in existing health care models. Despite the call for health promotion and disease prevention in the Declaration of Alma-Ata and the appeal for the reorientation of health services in the Ottawa Charter, the prevailing models of health care throughout the world are still primarily curative. Curative care still predominates over preventive and developmental activities, such as health promotion (Moulton et al., 2006: 274). Therefore, analysing the previous experience of various factors directly unconnected to the health care, i.e. public behaviour and lifestyle factor, integration in health care models, it must be mentioned that the discussed approach has not achieved all-embracing character. Although the concept of individual responsibility is a necessary consequence of any substantial amount of freedom and therefore present in practically all areas of society, it is rarely articulated or used as a rationing principle in the health-care context (Tinghog et al., 2009: 203). Nevertheless individual responsibility dimension in the health care models of several countries is described and analysed in detail, promoting the development of this public behaviour influencing instrument. For example, lifestyle influencing factor integration in Netherlands health care model has proposed a framework, depicted as a funnel with sieves, consisting of

222 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) four explicit selection criteria to be used in funding decisions: necessity, effectiveness, cost-effectiveness (or efficiency) and own responsibility/payment.(Rappange, Brouwer, 2012: 245). Investigating the experience of developed countries in exploitation of individual responsibility dimension, implementing it both as an element of health care promotion and incorporation as the separate health financing model component, it can be concluded both differentiating and joint features, which allow to classify the existing approaches by several criteria, i.e.: yy by expected action manner (service choice influencing and consumer behaviour influencing solutions) – is distinguished service rationalisation, when financing for such health care services which are expensive and not critical in health maintenance aspect is not provided, leaving the possibility to the population- to finance it from their own means, e.g., in vitro fertilization, dental care for adults (Tinghog et al., 2009: 203), and stimulation of lifestyle habit change, motivating to quit smoking, turn to physical activities, and other; yy by healthcare level (primary, secondary care) – allocation of certain privileges and bonuses for participation in regular examinations at the primary health care level, for example, screening test (Schmidt et al., 2009: 727), or cash rewards to sickness funds enrolees who were not hospitalised for the previous year (Voigt, 2010: 13) at the secondary healthcare level; yy by the target group(individual oriented strategies, group strategies, community strategies, organizational strategies [Moulton et al., 2006: 271]) – parting programs that are oriented on an individual health risk reduction concerning the habits of food and physical activities, immunisation, preventive measure implementation, etc., which are oriented on certain population group, e.g., infant parents allocating certain privileges for their health care on certain conditions which are done regarding their child immunisation (Lagarde et al., 2007: 1904), as well as the strategies oriented on the wider society groups which basically are focused on healthy work environment facilitation; yy by responsibility object (responsibility for health(factors) and responsibility for health care (outcomes) [Tinghog et al., 2009: 205]) – implementation of different approaches concerning negative health influencing habit reduction (factors) as well as participation in illness prevention measures and timely treatment inception (outcomes); yy by the achieved result (participation or result achievement approach) – there is discussion on the best choice between the cost – effectiveness and provision of equality principle, at the same time USA has legal regulation of this matter, allowing financial individual responsibility implementation for implication in healthy lifestyle programs but forbidding financial discrimination by the achieved results (Mello, Rosenthal, 2008: 196); yy by characterization of chosen incentives (positive and negative incentives-or ‘carrots’ and ‘sticks’ [Voigt, 2010: 4]) – are widely implemented different kinds of positive incentives as compensation of fitness subscription expenses, reduced insurance premiums or co-payment rates for non-smokers, money prizes for weight loss etc., less popular are negative incentives which come in increased insurance premium and co-payment forms for those who practice unhealthy lifestyle refusing to give it up.

As the successful examples of individual responsibility integration in the health financing system can be mentioned the instruments implemented in health care models of Germany, Netherlands, United Kingdom, and USA. The results indicate that broader health-system structures, such as Beveridgian or Bismarckian financing arrangements or gatekeeping, are not significant determinants of efficiency. Significant contribu- tors to efficiency are policy instruments that directly target patient behaviours, such as insurance coverage and cost sharing, and those that directly target physician behaviours, such as physician payment methods (Wranik, 2012: 197). The existing approaches integrated in health financing models are evaluated ambiguously, as the most common arguments of critics can be mentioned the following-patients responsibility for factors that may be out of their control, holding some patients to a standard of behaviour that is not required of other patients (Bishop, Brodkey, 2006: 756) as well as other circumstances which creates unequal conditions to the

223 Solvita Sunite INDIVIDUAL RESPONSIBILITY INTEGRATON IN LATVIAN HEALTH FINANCING MODEL – CHALLENGES AND OPPORTUNITIES certain patient groups causing risk of inequity that would further disadvantage the people most in need of health improvements, doctors might be assigned watchdog roles that might harm the therapeutic relationship (Schmidt et al., 2010: 1), hereto doctors of primary care potentially can be uninterested in population lifestyle habit changes, as in cases when patient participation results are not included in the system of primary health care doctors quantitative judgment, treating disease is reimbursable but preventing is not (Foege, 2010: 9). Although varied possibilities for individual involvement facilitation allow to choose instrument range in conformance with the situation of specific country, taking into consideration actual indexes which characterize public education level, average income level, harmful health influencing habit prevalence, lifestyle traditions, etc. Thus it can be concluded that incentives for healthy behaviour may be part of an effective national response to risk factors for chronic disease (Schmidt et al., 2010: 3).

2. Latvian population health and participation in its maintenance – actual situation

According to the WHO data, non-infectious diseases can be considered as the cause of death in 2/3 of all death cases in the world (WHO, 2011: 9). Unhealthy lifestyle habits as smoking, exceeding alcohol consumption, unbalanced diet and insufficient physical activities can be considered as one of the important causes of non-infectious disease source, therefore it is important to evaluate separate health affecting harmful habit prevalence in Latvia in comparison to the average EU level as well as the indexes of separate countries of Baltic sea region considering common geographical and historical facts. As it was mentioned previously Latvian public health indexes demonstrate one of the lowest performance levels among the EU countries which is confirmed by: yy noticeable falling behind from the average EU levels in terms of expected healthy years of life – according to the authors calculation life expectancy for males at the age of 65 comprises 57 %, but for females 68 % from the average EU level and only 32 % for males and 39 % for females from life expectancy at the age of 65 in Sweden (EC, 2009); yy high morbidity with circulatory system diseases – the calculations are proving that Latvian standardized mortality index from circulatory system diseases in Latvia by 220 % exceeds the average EU level, but differences from northern countries are even more noticeable, exceeding even 300 % in comparison to the Danish indexes (EC, 2009); yy unsatisfactory situation in the mental health area – based on the calculations, standardized mortality index from suicides and intentional self harm by 201 % exceeds the average level of EU countries and by 209 % – respective index of Denmark (EC, 2009).

Data on health affecting harmful habit prevalence in comparison to the average indexes of EU countries are gathered in Figure 1. The data in Figure 1 demonstrates the existing relevance between harmful health affecting habit prevalence and it’s caused harm to the health providing the coherences which are analogical to the tendencies in the area of public health quality described above. Latvian daily smokers’ density among the adult population, which in 2009 reached 33.7 % from the adult population is the highest index among the Baltic countries, it exceeds the average EU index by 39 % and is noticeably higher than northern countries indexes, exceeding Danish index by 77 %, Finnish – by 81 %, but Swedish even by 136 %. As a negative tendency can be considered increasing number of regular smokers, according to the research of National Health Service in 2011 the number of daily smokers reached 40 %, i.e., in comparison to the 2009 is noted the density increase of regular smokers by 19 % (National Health Service, 2011: 16). Although the obesity indexes among the adult population do not differ sharply from the average EU indexes demonstrating only 9 % exceed over the average EU countries level, the difference from northern countries is much larger – even 66 %, in comparison with the index that characterises the obesity among adult population in Sweden. Additionally insufficient perception on obesity is observed among the Latvian population as only 53 % from the responded males with increased body mass index have admitted the problem (Health Economic Centre, 2011: 20). This situation can be explained with unhealthy diet

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Figure 1. Non-medical health affecting factors prevalence in EUR countries, 2009 Source: OECD, 2011; Health in Baltic countries, 2010; WHO, 2011, author’s estimates

habits – in Latvia fresh vegetables on a daily basis are consumed only by 35.3 % from population ,i.e., in the young adult group only by 26.3 %, at the same time 54.3 % of population have completely excluded milk from their diet, 47.5 % – dairy products, – and with Latvian population sedentary lifestyle – 49 % of population does not take up physical activities (Health Economic Centre, 2011: 16, 22). Dangerous situation is observed in the matter of alcohol consumption which together with causing other health problems, leaves direct impact on mental health which is characterised by previously viewed suicide and intentional self harm occasion number. According to the population research data, alcohol is consumed by 85.4 % from Latvian population, i.e., 87.4 % Latvian adult males and 83.6 % females, but at least 6 alcohol doses at least once a week are consumed by 10.1 % males and 0.7 % females (National Health Service, 2011: 31). Although there are no available believable statistical data on the quantity of consumed alcohol, taking into consideration the massive density of unregistered alcohol in Latvia, by the authors estimates it composes 14–16 litres per capita, taking the 1st place among the Baltic countries and exceeding the average EU index by 20 % (WHO, 2011) Taking into consideration the different quality of consumed alcohol, which is determined by the eminent density of illegal, self-made and surrogate alcohol, its influence on public health is much more destructive than in countries, where mainly qualitative alcohol is consumed. It is clear that maintaining the existing harmful health influencing habit prevalence among the Latvian population, decreasing of non infectious disease morbidity and mortality indexes is not expected in the near future. Individual involvement in their health maintenance demonstratively illustrates the data on public involvement in illness prevention measures, i.e., regular health checks and vaccination level, which is gathered in Figure 2. For better interpretation of the mentioned indexes, density of Latvian population which, according to the research data, evaluates their health condition as insufficiently good, bad or very bad is marked. The data in Figure 2 allows concluding that despite the high Latvian population density that evaluates their health quality as insufficient, only part of the population group implement regular measures in their health maintenance and improvement. Although the blood pressure, cholesterol and sugar level tests are done in the framework of GP visit, thus are not connected to the additional time and finance contribution, the survey showed that 34.3 % of respondents have never had the sugar level blood test, but 41.1 % have never had

225 Solvita Sunite INDIVIDUAL RESPONSIBILITY INTEGRATON IN LATVIAN HEALTH FINANCING MODEL – CHALLENGES AND OPPORTUNITIES

Figure 2. Proportion of population involved in illness prevention activities in Latvia, 2010, % Source: Health Economic Centre, 2011: 11

a cholesterol test (Health Economic Centre, 2011: 12). Vaccination level has also been very low, especially against the flu diseases, i.e. the high risk group, in the population group of over 65 years old in Latvia only 2.9 % has been vaccinated, whilst the average EU countries vaccination level in this group reached 27.9 % (European Commission, 2009). Thus it can be concluded that Latvian population involvement in their health maintenance and illness prevention can be rated as insufficient and the potential of preventive measures in disease prevention is not fully exploited due to the low activity of Latvian population. Overall it can be affirmed that the wide prevalence of harmful health affecting habits among the Latvian population and insufficient involvement in their health maintenance has left quintessential negative influence on public health indexes, therefore, to facilitate the improvement of Latvian population health quality the integration of individual responsibility dimension in the health care model is considered an acute necessity.

3. Possible action direction in Latvian individual responsibility determination, integrating it in the health financing model

Considering the excising situation in Latvia discussed above, it can be concluded that previous actions in the health maintenance area have not substantially influenced the lifestyle and health behaviour of Latvian population. It is confirmed by the evaluation of Public health strategy goal achievement done by Health Economic Centre, admitting that from goals which are referred to non infectious diseases and reduction of the negative influence of external factors, the goal of accident reduction is achieved till 2010, i.e., reduction of road accident caused health harm frequency, however goals, which are referred to the population diet and physical activities habit change and its caused obesity indexes, as so as smoking and alcohol consumption prevalence are not achieved (Health Economic Centre, 2010: 93, 108, 114, 116). Cardinal population lifestyle changes which would increase the population responsibility for their health maintenance and illness prevention measure implementation can be reached only with measures which supplement the moral and

226 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) social responsibility with financial joint responsibility. Thus it is important to evaluate the possibilities of integration of population joint responsibility dimension in Latvian health care financing model. It must be admitted that the existing health financing model, which is based on the general tax revenues, does not contribute Latvian population involvement in the healthcare financing, thus not providing the abi- dance of health care solidarity principles. Considering the illegal employment as well as the noticeable density of population who leave the country in order to work seasonal jobs abroad, on average only 66.4 % from economically active population and 80.2 % from employed, in 2011 have paid taxes from their regular income (CSB, 2011; SRS, 2011). Simultaneously the state paid health services in the framework of existing quota are available to all state population without reference of joint involvement in the health care financing, thus reducing the availability of state paid health care services. The existing model generates the restrictions to the certain population financial contribution and accounting and comparison of health care service utilization. Thus, as one of the resolves to the optimization of the health financing system can be considered the health financing individual responsibility personalization, implementing health financing model, which is based on compulsory health insurance principles. Therefore the following order would be implemented: state paid health care besides the emergency medical services would be provided only for the working population in work capacity-age who has made the certain payments. Thus, as an additional gain of such system the potential increasing of overall tax income, increasing the basis of tax payers can be viewed. Considering the conclusions that health systems would find it profitable to more aggressively encourage tobacco cessation, healthful diets, physical activity, blood-pressure control and diabetes control (Foege, 2010: 10), as well as the conclusions on Latvian population insufficient involvement in their health maintenance done in the previous chapter, Latvian joint responsibility in the health financing system should be based on health affecting lifestyle habits and participation in illness prevention measures, i.e., smoking, alcohol consumption, diet and physical activity indexes, regular examination and vaccination indexes. Further research is necessary for fuller quantitative measurements analysis of certain health incentives, considering the most appropriate tools for the Latvian situation such positive incentives as lower general insurance rates or reduced health services co-payments for individuals who practise healthy lifestyle and participate in regular illness prevention measures. In addition, the gradual remission plan for the individuals, who improve their health condition at the longer time period, e.g., giving up smoking, joining physical activities and the like, would be efficient. Thus, the reward system would stimulate the following: achievement of certain results and their maintenance, the involvement in the health maintenance and improvement activities, thus contributing gradual changes in the public behaviour. Resistant reaction of the certain part of population on restrictions which possibly could be caused to the practisers of the unhealthy lifestyle is viewed as s a potential barrier in the implementation of such system. For reduction of this negative influence insurance of additional informative campaigns would be necessary, popu- larising healthy lifestyle habits and providing the information on unfavourable consequences of harmful habits. Employer involvement in its turn can be viewed as a separate challenge in reduction of health affecting harmful habit prevalence, e.g., offering reduced employer tax rates for those employers who cover the expenses of employee physical activities, implement smoking restrictions in workplace etc. For the health care specialists, especially for the stimulation of primary care doctor involvement, additional awarding would be required from the state or insurer for certain doctors, whose patients have implemented positive health affecting behaviour changes at the certain time period. As a substantial challenge in this aspect, is considered to be the establishment of new practise, providing the development of effective system for the data registration and maintenance, such approach is viewed as real, considering the well developed practise of GP institution in Latvia. The question of the development of overall, accessible to all primary care specialists system must be actualized at the state level, thus providing unified methodological approach. Without a doubt, the implementation of all mentioned action directions must be integrated in overall national economy and state health care strategy in addition to the implementation of individual responsibility dimension in health financing model, anticipating not only the other health care system components, but also

227 Solvita Sunite INDIVIDUAL RESPONSIBILITY INTEGRATON IN LATVIAN HEALTH FINANCING MODEL – CHALLENGES AND OPPORTUNITIES other national economy industries support in health promotion, i.e., education, socio- cultural environment, improving the condition of surrounding environment, thus providing coordinated action program in provision of public health maintenance.

Conclusions

Examining the developed countries experience in individual responsibility dimension integration in the health financing models, it can be concluded: despite that the individual responsibility integration in health financing models is not considered as generally accepted practice, many of the developed countries are implementing various approaches which can be classified by several features as expected action manner, healthcare level, target group, responsibility object, achieved result, characterization of chosen incentives, and the like. The employed approaches are evaluated not unequivocally, marking the following as the potential risks: inequality raise in the health care services access, the dual role of primary care service providers, which can lead to the reduction of provided service quality and low interest of the service provider in the result achievement. However, overall the positive role of individual responsibility integration in facilitation of population behaviour change is recognized, facilitating reduction of harmful health affecting habit prevalence and wider public involvement in illness prevention measures. Therefore it can be affirmed that the individual responsibility integration in the health financing model would be successfully brought into effect regarding it as one of the perspective development directions in improvement of Latvian health care financing. Analysing the current Latvian public health indexes and performing the individual health quality affecting factor research can be concluded that the insufficient health quality of Latvian population is linked with the wide negative health affective habit prevalence as well as the insufficient individual involvement in illness prevention measures. Therefore, the individual financial joint responsibility dimension integration in health financing model is considered as necessary precondition for the improvement of the situation in public health field, promoting broader population involvement in their health maintenance and improvement. Although the individual responsibility integration in the health care system is positively evaluated in the aspect of population health quality, however, the potential barriers for implementation of such system can be considered the following: inimical reaction of the certain part of population, low interest level of primary health specialist, deficiency of appropriate evaluation and calculate methodology as well as lack of unified state database for data calculation and maintenance. Considering the developed countries experience and the current Latvian situation the most corresponding financial joint responsibility mechanisms are considered the positive incentives, i.e., certain reduction from standard insurance premium, for those citizens who implement healthy lifestyle and perform regular illness prevention measures, in parallel foreseeing certain privilege program for those who move towards reaching this status. The changes in the health financing model are viewed as additional challenges of individual responsibility integration in the health financing system. It is necessary to implement the health financing model change in order to provide the individual financial joint responsibility, declining the financial model, which is based on general tax revenues in favour of compulsory health insurance model, which would facilitate involvement of larger part of public in the health care financing. Taking into consideration that individual responsibility integration in Latvian health financing model is viewed as one of the possibilities for improvement of public health indexes and Latvian health care system effectiveness further research is necessary in the aim to perform intensified analysis of instruments suitable for individual financial joint responsibility and system development of certain qualitative indexes.

References

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Central statistical Bureau. (2012). Employment and Unemployment – Key indicators. Website: http://www.csb.gov.lv/ en/statistikas-temas/employment-and-unemployment-key-indicators-30679.html Commission on Social Determinants of Health. (2008). Closing the gap in a generation: Health equity through action on the social determinants of health. Geneva: WHO Press Costain, L., Croker, H. (2005). Helping individuals to help themselves. Proceedings of the Nutrition Society, No. 64, p. 89–96. European Comission. (2011). Health in Europe: Information and Data Interface. Website: http://ec.europa.eu/health/ indicators/echi/list/index_en.htm#id4 European Economic and Social Committee. (2009). Questions and Answers on Solidarity in health: Reducing health inequalities in the EU. Website: http://europa.eu/rapid/pressReleasesAction. do?reference=MEMO/09/467&format =HTML&aged=1&language=EN&guiLanguage=en Foege, W. H. (2010). Social determinants of health and health-care solutions. Public Health Reports, Vol. 125, p. 8–10. Font, J. C., Mladovsky, F. (2008). Social capital and the social formation of health-related preferences and behaviours. Health Economics, Policy and Law, No. 3, p. 413–427. Health Economic Centre. (2011). Latvijas iedzīvotāju veselību ietekmējošo paradumu pētījums 2010. Riga: Veselības Ekonomikas centrs. Health Economic Centre. (2010). Sabiedrības veselības stratēģijas mērķu sasniegšanas izvērtējums. Website: http:// vec.gov.lv/uploads/files/4ecfdd8ae6732.pdf Health in the Baltic Countries 2010. (2010). 19th edition. Website: http://www.vmnvd.gov.lv/ uploads/ files/4f546ace90211.pdf Iliffe, S., Swift, C., Harari, D., Kharicha, K., Goodman, C., Manthorpe, J. (2010). Health promotion in later life: public and professional perspectives on an expert system for health risk appraisal. Primary Health Care Research & De- velopment, No. 11, p. 187–196. Jeremic, V., Seke, K., Radojicic, Z. et als. (2011). Measuring health of countries: a novel approach. HealthMED, Vol. 5, No. 6, p.1762–1766. Kolosnitsyna, M., Sitdikov, M. (2012). Makrodeterminanty zdorovogo obraza zhizni. Mirovaia ekonomika i mezhduna- rodnye otnosheniia, No. 2, p. 27–37. Website: http://dlib.eastview.com/browse /doc/26784588. Komduur, R. H., Korthals, M., Molder, H. (2009). The good life: living for health and a life without risks? On a prominent script of nutrigenomics. British Journal of Nutrition, Vol. 101, p. 307–316. Lagarde, M., Haines, A., Palmer, N. (2007). Conditional cash transfers for improving uptake of health interventions in low – and middle-income countries. The Journal of the American Medical Association, Vol. 298 (16), p. 1900–1910. Mello, M. M., Rosenthal, M. B. (2008). Wellness Programs and Lifestyle Discrimination – the legal limits. The New England Journal of Medicine, Vol. 359, p. 192–199. Moulton, G., Frankish, J., Rootman, I., Cole, C., Gray D. (2006). Building on a foundation: strategies, processes and outcomes of health promotion in primary health care settings. Primary Health Care Research and Development, Vol. 7, p. 269–277. Nacional Health Service. (2012). Addictive substance use prevalence in Latvia 2011. Website: http://www.vmnvd.gov. lv/uploads/files/4f7165d1500fb.pdf OECD Libraries. (2011). Tobacco consumption.Percentage of population who are daily smokers. Website: http://www. oecd-ilibrary.org/social-issues-migration-health/tobacco-consumption _20758480-table14 Rappange, D. R., Brouwer, W. B. F. (2012). The evaluation of lifestyle interventions in the Netherlands. Health Econo- mics, Policy and Law, No. 7, p. 243–261. Schmidt, H. (2007). Personal responsibility for health – developments under the German Healthcare Reform 2007’. European Journal of Health Law, No. 14(3), p. 241–250. Schmidt, H. (2009). Personal responsibility in the NHS Constitution and the social determinants of health approach: competitive or complementary? Health Economics, Policy and Law, No. 4, p. 129–138. Schmidt, H., Gerber, A., Stock, S. (2009). What can we learn from German health incentive schemes? British Medical Journal, No. 339, p. 725–728. Schmidt, H., Voigt, K., Wikler, D. (2010). Carrots, sticks, and health care reform –problems with wellness incentives. New England Journal of Medicine, No. 362(2), p. e3(1)–e3(3). State Revenue Service. (2012). Customs statistics. Website: http://www.vid.gov.lv/default.aspx? tabid=11&id=78&hl=1 Tinghőg, G., Carlsson, P., Lyttkens, C. H. (2010). Individual responsibility for what? – A conceptual framework for exploring the suitability of private financing in a publicly funded health-care system. Health Economics, Policy and Law, No. 5, p. 201–223. Voigt, K. (2010). Incentives, health promotion and equality. Health Economics, Policy and Law. Available on: CJO 2010 doi:10.1017/S1744133110000277 WHO (2006). Community Involvement in Health. Website: http://www.afro.who.int/en/clusters-a-programmes/hss/health-policy-a-service-delivery/features/2235-community-involvement-in-health.html

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WHO (2011). WHO Global Infobase. Website: https://apps.who.int/infobase/Indicators.aspx WHO (2011). Global status report on noncommunicable diseases 2010. Website: http://whqlibdoc.who.int/publications/2011/9789240686458_eng.pdf WHO (2009). Milestones in Health Promotion. Statements from Global Conferences. Website: http://www.who.int/ healthpromotion/Milestones_Health_Promotion_05022010.pdf Wranik, D. (2012). Healthcare policy tools as determinants of health-system efficiency: evidence from the OECD. He- alth Economics, Policy and Law, No. 7, p. 197–226.

INDIVIDUALIOS ATSAKOMYBĖS įtraukimas Į LATVIJOS SVEIKATOS PRIEŽIŪROS FINANSAVIMO MODELĮ – IŠŠŪKIAI IR GALIMYBĖS

Solvita Sunite Latvijos universitetas (Latvija)

Santrauka

Sveikatos gerinimas yra svarbi visuomenės sveikatos išsaugojimo dalis, todėl klausimai, susiję su atsako- mybe už sveikatos išsaugojimą ir jos gerinimą, tampa ypač svarbūs. Turint omenyje nepakankamą Latvijos visuomenės sveikatingumo lygį – vieną žemiausių tarp Europos Sąjungos narių, asmeninės atsakomybės dimensija sveikatos finansavimo modelyje suvokiama kaip galimybė esamą situaciją gerinti. Šiame tyrime apžvelgtos asmeninės atsakomybės įtraukimo į sveikatos priežiūros modelius prieigos, taikomos išsivys- čiusiose šalyse, suklasifikuoti keletas parametrų, nustatytas nepakankamas Latvijos gyventojų įsitraukimas, kuris apibūdinamas dideliu žalingų sveikatai įpročių paplitimu ir menku domėjimusi sergamumo prevenci- jos priemonėmis. Nustatyti pagrindiniai iššūkiai ir galimybės, susiję su asmeninės atsakomybės įtraukimu į Latvijos sveikatos priežiūros finansavimo modelį, kas leistų sutelkti mokėjimus ir padėtų keisti gyvenimo būdą bei elgseną. PAGRINDINIAI ŽODŽIAI: sveikata, asmeninė atsakomybė, sveikatos skatinimas.

JEL kodai: I120, I130

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MEDIA – AGENTS OF SOCIALIZATION

Rosita Uznienė1

Klaipeda University (Lithuania)

Abstract Medias make impact on social environment – they influence individual interrelations, communication, approach to oneself and entire world, “insist” on certain stereotypes in different situations. They take active part in socialization of individuals. Socialization is perceived as a continuous lifelong process, in which values, standards, social state, roles and patterns of social behaviour are mastered. The article analyzes impact of media (social agents) in socialization processes of individuals. KEYWORDS: media, agent, socialization, media experience, media texts, media action mode, audience.

JEL codes: Z19.

Introduction

Media related info-sphere is a part of modern life, an agent of social transformation and changes. The very notion of “agent” implicates a subject – “a reason for something, taking place in animate and inanimate nature” (International Dictionary, 2004: 21), whereas the notion of medias is related to characterization and definition of mass media. Accordingly, medias are to be treated as factors, taking part in socialization of individuals and causing reasons for alteration in these processes. Socialization is perceived as a lifelong process, continuing throughout entire individual life and assisting in mastering of values, standards, social state, roles and patterns of social behaviour. In other words, socialization is the process of personality formation/self-formation and functioning, when consciousness and behaviour related features, regulating individual relationship with society are gained. Different agents participate in socialization – they are people (parents, teachers, peers) and social structures (school, religion, mass media, working environment, different institutions). Researchers (Plungė, 2011; McLuhan, 2003; Nabi, Oliver, 2009 et al.) emphasize that medias are not only the agents of socialization. They are also treated as a socio-cultural factor, transforming entire neighbouring environment. Their impact on individuals can be both positive and negative, since they bring changes into the process of cognition and effect. They develop the “here and now effect” and take part in following processes, related to socialization of individuals: yy social adaptation of individuals eindividual adaptation to socio-cultural conditions and social roles, standards and social groups, organizations or social institutions); yy interiorization (internalization) processes (mastering of social standards, values and their transition to internal human world); yy exteriorization (externalization) processes (reaction to external cultural stimulus on the basis of internalized standards and activity patterns).

1 Rosita Uznienė – Klaipėda University, Faculty of Social Science, Communication department, doctor, lecturer. Scientific interests: Media and Socialization, Media and Audience, Media Education, Public Relations. E-mail: [email protected] Tel.: +370 46 398 660.

231 Rosita Uzniene MEDIA – AGENTS OF SOCIALIZATION

Scientific problem. In socialization related processes each individual interacts with medias (their texts). Therefore, it is important to answer the question – in which processes of socialization their impact on individuals is strongest? Aim of the research is to make analysis of media impacts on individuals in their process of socialization. Object of the research is the impact of medias on individuals. Tasks (objectives): yy to make analysis of relation between media action mode and impact; yy to discuss the importance of individual media related experience in processes of socialization; yy to explore media related impact on individuals in processes of socialization.

Methods: analysis of scientific literature, questionnaire, analysis of mathematic-statistic data (percentage frequencies).

1. Relation between media action mode and impact

Medias influence social environment – they make impact on interrelations of individuals, communication, approach to oneself and entire world, “insist” on certain stereotypes in different situations. They take active part in socialization of individuals. Diversification is typical to them, since it provides them with opportunity for penetration into environment, in which individuals personally could hardly ever penetrate. In other words, boundaries between different environments are eliminated. This impact in community could be entitled as media action mode (methods and styles of action and activities). Above action mode consists of entire chain of these action methods and all this is operated by medias. They are always focused on specific aim, depending on targets that information is orientated on. There are following landmarks in media action mode: yy analysis of audience preferences/choice, when media action mode is focused on specific demands of audience (personal, social, cultural, etc.); yy analysis of social standards and interests – media action mode is focused on demands of community, in which interaction of medias and audience takes place; yy medias as a factor, making social impact.

Media action mode is always focused on specific aim (audience). Their relations are specific and result in mutual and productive interaction, which predetermines or not successive and progressive functioning of each mass media. Media audience is a group of people, individual/individuals, contacting with media texts and differentiated on the basis of different attributes (age, social, education, racial, national, etc.). Media texts are any mass media and any messages (article, film, TV, radio show, etc.). Media action mode is focused on: yy planning of information, which is topical and relevant for audience; rendering of daily assistance (audience is searching for answers in topical daily issues and problem solution ways); yy spread and dissemination of scientific knowledge and education.

In their contacts with audience trends in media action mode could be characterized in the following way: yy informational, i. e. information about global events and those in the nearest and closest social environment of individuals; yy satisfaction of individual general interests and striving for knowledge, i. e. teaching and establishment of proper possibilities for self-education; yy identification of personality, when media action mode is focused on strengthening of individual’s personal values, knowledge and patterns of behaviour; identification of individuals with values of others; establishment and development of opportunities for search of self-realization;

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yy social communication, when individuals are provided with opportunities for realization of own emphatic abilities, experience and social communication, for shaping of base in dialogue and implementation of social roles, satisfaction of demands for integration within communities; yy entertaining, when media action mode is orientated towards individual emotional discharge and organization of leisure time, escapism (premeditated avoidance of relevant social problems, escapism from reality, life in imaginary world), aesthetic satisfaction, sexual excitement.

Therefore, trends in media action mode are integrated into all processes of individual socialization – social adaptation, interiorization (internalization) and exteriorization. Significance and importance of media action mode in community is defined by following functions: cognitive (reception of information and acquisition of knowledge); relaxing (entertainment and escape from inaction and boredom); satisfaction of individual demands (e. g., escape from reality or search for replacement of social contacts). The more media action mode is directed towards individuals (not as entire audience, but towards specific human), the more its expression is productive.D . G. Myers (2008: 284) emphasizes that “the more mass media is closer to daily life, the more suggestive is its information“. It is necessary to note that the power of informational impact depends on persuasion methods, which are: yy major – the process, when persuaded people concentrate their attention on arguments and react positively thinking – media action mode is orientated towards subservience (audience gets what it wants – entertainment, solving personality identification related problems); yy minor – the process, when people are affected by accidental actions and without any consideration they concentrate on signs and symbols that induce for approval without exhaustive reply. Media action mode is focused on topical problems, relevant for entire audience (global events, social injustice, etc.).

Efficiency of media action mode depends on whether or not information in media texts is related to ple- asant experience. If it is related, this information becomes more persuasive. Effect is the indicator of media action mode and its efficiency. Therefore, impact should be realized as a consequence of action mode. Media action mode and indicator of its efficiency (impact) depend on the trend of socialization: yy organized (purposeful) socialization – when a specially designed system of media impact concentrates on formation of specific type of personality, on specific social aims and interests. Organized socialization is determined by other social institutions, social groups, social control, social status, roles and relations; yy spontaneous (disorganized) base for socialization is spontaneous adoption of specific social skills, individually interacting with medias (or their texts). In the process of spontaneous socialization changes in results of activity take place. These changes are materialized in culture (abilities and skills), in ideas, standards of behaviour and regulations.

Medias function in a wide social space and make impact on its different structures and levels. Efficiency of media action mode and its content in the process of personal socialization depend on the level of society’s development, democratic achievements, social and historical conditions, culture and traditions.

2. Media experience in individual socialization related processes

Mass media enables to perceive and understand social reality, existing here and now and to get a huge amount of different information. Excess of the latter deforms the tactics in mastering of knowledge: individual needs no further recollections – the only thing he has to know is where and how to search for information. Medias change his sensations, inner world and social links. Most of medias are items, assisting in production and distribution of other products. We are living in “transformed and transferred reality” – surrounding reality turns into informational screens, delivering different messages (Mostauskis, 2011: 31). Reception of reality is recoded in accordance with principles and requirements of communication, whereas media related

233 Rosita Uzniene MEDIA – AGENTS OF SOCIALIZATION space orientates itself in accordance with expectations of audience, modelling them and further improving. Media is environment, offering us information about reality in the shape of alternative experience. The more information humans receive about the world, the more remote it becomes (Mostauskis, 2011: 35). Technolo- gies provide individual with opportunities for introduction to the world and knowledge about it rather than the world itself. Media related info-sphere “ties” audience and forms subjection: “we tie us up with technological prostheses and technological dependence on networks of informational stream” (McLuchan, 2003: 53). Media texts provide us with positive and (or) negative experience. Content of media texts functions like a powerful info-sphere and its major role is in presentation of social reality to audience (Devereux, 2009: 23). According to Ž. J. Jackūnas (2008: 27), “experience is environment, in which meaning is given to information that reflects comprehensible (perceptible) phenomena”. Medias help individuals to improve and enlarge their media experience – “social experience, gained in the process of personal development, when learning and employing technical and scientific heritage of society” (Jovaiša, 2007: 202). Medias are creations of social intellectual potential and technical progress. They predetermine changes in communities and general individual experience. According to J. Dewey, experience is “the most important and decisive factor in perceiving the world and planning the future“ (Duoblienė, 2006: 16). Dictionary of Psychology (1993: 205) characterizes experience as “practice based sensual, empiric cognition of reality, as entirety of knowledge and abilities”. However, “experience is improving only in interpretational space. Interpretation is perceived as interaction of phenomenon and personal experience” (Jackūnas, 2009: 4–6). After analysis of researchers’ positions the author of this article designed a scheme of human experience, in which following components were emphasized: knowledge, abilities, skills, sensations and views (creed, approach, position, attitude) (see Fig. 3). Ž. J. Jackūnas (2008, p. 24) maintains that “experience is a system of meanings, recording personally significant knowledge, abilities, impressions and values“, whereas proficiency by him is defined asa source of experience, differently integrated by each individual in the process of socialization. Experience

Firgure 1. Human experience. Source: edit. By Uznienė, 2010

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Figure 2. Formation of media experience (N – attitude, approach; P – views; I – interests) Source: edit. By Uznienė, 2010

gives impulse to development of science, theory, practice and is treated as being equivalent to following phenomena: approach to environment, personal actions, spiritual, physical processes and interpersonal relations. Dictionaries of Lithuanian language define proficiency/experience as acquired practical knowledge, sensations and abilities (http://www.lkz.lt/dzl.php). Technical progress and modern technologies contribute largely to individual experience in socialization related processes. Every member of community is living, thinking and acting in informational space, in which he experiences sensual, cognitive, empiric and theoretical understanding of objective reality. Medias create info-sphere, providing individual with opportunities for understanding of micro and microenvironment without direct interaction with it. Media experience starts developing from the very moment, when individuals become a part of media audience. Presumably, sequence in development of media experience is very much like that of general personal experience. Author of the article introduces a scheme about formation of media experience (see Fig. 4). On the basis of researchers’ positions and own insights the author introduces definition of media experience: they are experiences, based on media messages, which are further generalized and abstracted in accordance with individual thinking and perception, later in real life revealing themselves in the form of applicability principle (knowledge, abilities, skills, sensations and views). Individual experience, acquired via content of media texts and other forms of presentation, can’t make real and direct impact on medias, though the latter ones integrate themselves into socialization processes of individuals and make impact on them. In the process of socialization individuals get involved in specific environment, taking over social experience as external one, transforming it later into internal, integrating it together with media experience. As an object he experiences the impact of social environment and changes it as a subject. On the basis of individual media experience medias influence on transformation processes of societies: from traditional to modern, from modern to post-modern, also performing the role of mass intermediary (Devereux, 2009: 13).

3. Impact of medias on socialization processes of individuals: research

Description of research. Aim of the research is to estimate influence of medias in socialization processes of individuals. Questionnaire is the Instrument of the research. The structure of questionnaire was planned on the basis of general principles and recommendations for arrangement of questions (Kardelis, 2002: 189–191). It is structured into “introductory, major and final (Tidikis, 2003: 483).

235 Rosita Uzniene MEDIA – AGENTS OF SOCIALIZATION

Sample of the research – 108 respondents, ageing from 18 to 25 (respondents were not differentiated on gender basis), including 78 % of those studying in higher schools of Klaipėda and 22 % working in local and regional private and state companies. Time of the research: December 2011 – March 2012n. SPSS software (version 14.0) was employed for analysis of data. Descriptive statistics in percentage frequencies was employed in data processing. Results of the research. The research revealed respondents’ opinion about functions of media in socialization related processes. Almost all respondents (96 %) emphasized informative function as their essential one; 71 % of them maintained that in the process of socialization media performs recreational function, i.e. provide with entertainment and relax. Respondents (58 %) underlined that media assists in finding other countries and entire world (educative function), 36 % maintained that it helps to establish social contacts. Only 19 % of them emphasized their cultural function, i.e. assistance in understanding national culture and traditions (see Fig. 3). On the basis of received results it is possible to maintain that above functions of media are integrated into all processes of individual socialization (social adaptation, internalization, exteriorization), take part in them and influence them.

Firgure 3. Functions of media in the process of socialization (percentage frequencies)

In the process of above research importance of media action mode inn processes of individual socialization was discovered. Respondents emphasized following basic dominants of action mode: self-education (56 %), establishment of behaviour related standards (56 %), fosterage of values (22 %) and self-realization related processes (35 %). Received results show that media action mode is orientated towards specific demands of audience (self-education and self-realization processes), towards needs and demands of community, in which interaction between media and audience takes place (fosterage of values). Media action mode is also orientated towards social influence establishment( of behaviour related standards) (see Fig. 4).

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Firgure 4. Importance of media action mode in the process of socialization (percentage frequencies)

It was also important to clarify reasons of interaction between media and individuals. It was discovered that respondents (63 %) interact with medias (their texts), as they search for information and knowledge; 46 % of them become part of media audience, hoping to relax and properly spend their leisure time; about 21 % of respondents search for “sharp” sensations; 13 % of them noted that they search for interaction with media texts to escape from troubles and reality; 9 % of respondents search there for answers to specific questions of their spiritual life.

Firgure 5. Reasons of interaction between media and individuals (percentage frequencies)

237 Rosita Uzniene MEDIA – AGENTS OF SOCIALIZATION

The research also confirmed the fact of applicability of media experience in real life. Respondents (25 %) emphasized that they employ media experience in their vocational activity; 23 % do not employ it at all; 21 % employ it for overcoming of own personal (mental, spiritual) problems; 12 % – for planning of their future and 16 % of respondents employ it when communicating with their friends. Some of them (3 %) noted that they employ media experience for other purposes: purchasing different items or property, choosing products, decorating their residence, etc. Presumably, individuals employ media experience in their daily life. Accordingly, this experience is integrated into socialization processes.

Firgure 6. Employment of media experience in daily life (percentage frequencies)

Conclusions

1. Trends of media action mode are integrated into all socialization processes of individuals (social adaptation, interiorization (internalization) and exteriorization). 2. Media action mode is orientated towards specific demands of audience (self-education and self-realization processes) and demands of communities, in which interaction of media and audience takes place (fostering of values). Media action mode is also orientated towards social influence (consolidation of behaviour related standards). 3. Media experience is proficiency, received via media messages. They are generalized and abstracted in accordance with personal thinking and perception and show themselves up in real life on the basis of applicability principle (knowledge, abilities, skills, sensations and views). The research revealed the fact of media experience and its applicability in real life. This experience is integrated into individual socialization related processes (social adaptation, interiorization (internalization) and exteriorization). 4. Medias are important agents of individual socialization and their action mode predetermines positive and negative aspects in the process of socialization.

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References

Beamish, P. W., Morrison, A. J., Inkpen, A. C., Rosenzweig, P. M. (2003). International Management. Singapore: McGraw-Hill. Carnevale, P. J., Choi, D. W. (2000). Culture in the mediation of International disputes. International Journal of Psyhol- ogy, No. 35. London: Psychology Press. Croteau, D., Hoynes, W. (2000). Media /Society: Industrines, Images, and Audiences. Thousand Oaks: Pine Forge Press. Devereux Eoin. (2009). Understanding the media. Second edition. London: Sage. Duoblienė, L. (2006). Šiuolaikinė ugdymo filosofija: refleksijos ir dialogo link. Vilnius: Tyto alba. EU Enlargement – 20 Myths and Facts about Enlargement. (2006). European Commission. Luxembourg: Office for Official Publications of the European Communities. Jacikevičius, A. (1996). Siela, mokslas, gyvensena. Psichologijos įvadas studijų pradžiai. Vilnius: Žodynas. Jackūnas, Ž. J. (2008). Patyrimas, patirtis ir supratimas. Website: http://www.litlogos.lt/L56/logos56_020_028psl.pdf Jackūnas, Ž. J. (2009). Lietuvos švietimo kaitos patirtis [interaktyvus]. Website: http://www.smm.lt/strategija/docs/vssi/090219/ Jovaiša, L. (2007). Enciklopedinis edukologijos žodynas. Vilnius: Gimtasis žodis. Kardelis, K. (2002). Mokslinių tyrimų metodologija ir metodai. 2-asis leid. Kaunas: Judex. McLuhan, M. (2003). Kaip suprasti medijas. Žmogaus tęsiniai. Vilnius: Baltos lankos. Myers, G. D. (2008). Socialinė psichologija. Kaunas: UAB Poligrafija ir informatika. Nabi, L. R., Oliver, M. B. (2009). The Sage Handbook of Media Processes and Effects. USA: Sage. Nacionalinis tapatumas medijų kultūroje. (2011). Vilnius: Lietuvos kultūros tyrimų institutas. Nugent, N. (2006). Introduction: Does Size Matter in the European Union? European Integration, Vol. 28, No. 1, p. 14–20. Psichologijos žodynas. (1993). Vilnius: Mokslo ir enciklopedijų leidykla. Tarptautinių žodžių žodynas. (2004). Trečasis leidimas. Vilnius: Alma littera. Tidikis, R. (2003). Socialinių mokslų tyrimų metodologija. Vilnius: Lietuvos teisės universitetas. Шариков, А. В. (1989). Возрастные особенности телевизионных орентаций школников. Дис. д-ра пед. наук. Москва.

MEDIA – SOCIALIZACIJOS AGENTAI

Rosita Uznienė Klaipėdos universitetas (Lietuva)

Santrauka

Medijų infosfera – šiuolaikinio gyvenimo dalis. Medijos veikia socialinę aplinką – daro įtaką individų tarpusavio santykiams, bendravimui, požiūriui į save ir pasaulį, „diktuoja“ stereotipus įvairiose gyvenimo situacijose. Medijos – visuomenės transformacijos ir socialinių pokyčių agentas. Medijų veiksenos kryptys nukreiptos į visus individų socializacijos procesus – socialinę adaptaciją, interiorizaciją (internalizaciją) bei eksteriorizaciją. Individai, sąveikaudami su medijomis (jų tekstais), kaupia medijinę patirtį. Medijinė patirtis – medijų pranešimais gaunami patyrimai, kurie, atsižvelgiant į asmens individualias mąstymo ir suvo- kimo galimybes, apibendrinami, abstrahuojami ir realizuojami pritaikomumo principu realiame gyvenime (žiniomis, mokėjimais, įgūdžiais, jausmais, pažiūromis). Tyrimas atskleidė medijų veiksenos priklausomybę nuo individų medijinės patirties, kuri lemia pozityvius arba negatyvius aspektus individų socializacijos pro- cesuose (socialinėje adaptacijoje, interiorizacijoje [internalizacijoje] bei eksteriorizacijoje). PAGRINDINIAI ŽODŽIAI: media, agentas, socializacija, medijinė patirtis, media tekstai, medijų veik- sena, auditorija.

JEL kodas: Z19.

239 Ludmila Verovska Internal Control System as Continuous Basis of Efficient and Stable Company Development

Internal Control System as Continuous Basis of Efficient and Stable Company Development

Ludmila Verovska1

The Baltic International Academy (Latvia)

Abstract In condition of global financial crisis companies and investors pay greater and greater attention to the reliability of financial records. An efficient system of internal control (ICS) contributes significantly to this effect. The aim of the research is to consolidate the international experience in the sphere of the development and regulation of the system of internal control, to assess the feasibility of its application to various Latvian enterprises, and to propose a conception and a model of realisation of ICS in medium and small companies. According to the author, there are two main obstacles to the application of the studied theories relevant to the field of internal control in Latvia. The first one is the insufficiency of legislative framework, intended only for listed companies, and the second one is a start-up phase of business development, when the owner and top management are often combined in one and the same person and, therefore, they may believe that all is under their control and there is no need to create a special system of control. The theoretical and methodological foundation of the research was derived from the study of a wide range of activities in the field of corporate management and internal control as well as provisions of regulatory and legislative acts defining the scope of requirements to ICS. In order to achieve the set aim, several objectives were realised: the regulation of ICS in the area of corporate legislation of the USA and the EU was analysed; the conceptual principles and existing models of internal control were summarised; the concept of development of the ICS for medium and small enterprises was formulated, and the necessity to introduce recommendations to the currently effective legislation of Latvia was substantiated. KEYWORDS: Internal control system (ICS), model COSO, regulation of EU corporate legislation, operation of ICS in small and medium companies, non-public sector companies.

JEL codes: M42

Introduction

The internal control is an integral part of efficient company management. Its principal aim is to create the competitive advantage of a company, to increase its financial stability, and instill confidence in investors to the credibility of presented records, which issues have become especially urgent in the context of economic recession. Investors want to be sure that the enterprise wherein they invested their money operates on universal and comprehensible principles, presented reports are reliable, and their interests are protected. The choice of a form of the internal control depends on the complexity of the company’s structure, its legal form, the scale of activity, features of the industrial segment in which a company operates, reasonable expediency, and sensible managerial attitude to the issue of control. The introduction of ICS is a sophisticated creative process, where the formal approach is impossible even when the degree of methodological elaboration is high. Every enterprise is unique and ICS will be characteristic of the company where it is applied. The object of research is ICS, its implementation in a company and its legal regulation.

1 Ludmila Verovska – the Baltic International Academy, Financial Management Faculty, as. prof., Dr. oec. Scientific interest: Financial Management, Audit. E-mail: [email protected] Tel.: +371 261 006 46.

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The purpose of the article is to develop recommendations based of the study of ICS conceptual principles for the creation of ICS in enterprises and for its evaluation by independent auditors. The following research methods have been used in the paper: the analysis of scientific literature, comparative and statistical analyses, and systematization of existing views on the problem. In the conditions of unstable economic growth and dynamic change of the business environment more attention is being attracted to creation of an efficient internal control system (ICS) in companies. ICS is not a novel phenomenon, many managers and owners of companies have used the internal control informally and unconsciously before, focusing on the expenditure of funds and preservation of material resources. When business activity becomes more complex, the risks increase, and the managerial process requires more qualified decisions. In this case an informal, weakly organized approach to the system of control may negate all the efforts of management. This is the reason why the topic of internal control has become actively studied in both methodological and organisational aspects and in the aspect of practical application.

1. Model COSO

The most authoritative study in the field of internal control is considered to be a methodology developed by the Committee of Sponsoring Organizations of the Treadwey Commission (COSO) founded in the USA in 1985 (Committee of Sponsoring Organizations of the Treadway Committee. COSO, 1992). The main task of the Committee was to give recommendations for corporate’ management on key aspects of business organisation, business ethics, financial reporting, internal control, risk management and fraud prevention. The development of COSO model went in several stages. The first stage is associated with the report “The conceptual principles of internal control” published in 1992 which contained a general definition of internal control and described its model, with which the systems of internal control of different companies could be compared and improved. The internal control was seen as a process accomplished by the board of directors, management and other personnel of the company, and intended to provide sufficient certainty regarding the achievement of the company’s objectives in the following three areas: yy the efficiency and productivity of operations; yy reliability of financial reports; yy observance of laws and regulations.

The proposed model included five components: the controlled environment, risk assessment, means of control, information and communication, and monitoring. The second stage is associated with the initiation of the COSO project in 2001through which the conceptual foundations of risk management were developed. The results of the project were laid in the basis of Sarbanes-Oxley Act. According to this Act, public companies were required to create and maintain a system of internal control, and the management board of the company was required to provide information on the efficiency of this controlling system confirmed by an independent auditor. In 2004 the paper “Conceptual principles of the enterprise risk management” was published. The new COSO model continued considering the issues of internal control, but the emphasis was shifted to the concept of risk management. “The conceptual principles of internal control” is still being used as the accepted standard in financial reporting. The new model included five components of the previous model, and three new components: the internal environment, setting of objectives, identification of events, risk assessment and responding to risks, means of control, information and communication, and monitoring. The risk management model was aimed at achieving the goals of a company in the following four areas: yy strategic goals (the mission of a company); yy operational objectives (effective and efficient useof resources); yy objectives in the field of preparation of reports – the reliability of reports; yy objectives in the field of compliance with laws and legal regulations.

241 Ludmila Verovska Internal Control System as Continuous Basis of Efficient and Stable Company Development

The third stage was initiated by the report “The internal control over presentation of financial reports” published in 2006. The report provided a kind of guidance to small public companies. Its aim was to provide methodological assistance in how to apply the COSO model and introduce a system of efficient internal control in smaller companies.

2. Regulation of EU corporate legislation

There is a lack of uniform EU requirements to the organization of systems of internal control, but the discussion and the development of legislation on this issue has become increasingly active. The eighth EU Directive, adopted on 17 May 2006, is of particular importance to this effect (EU Directive 2006/46/EC). The Directive adopted three important provisions: yy the companies representing public interest, should appoint auditing committees, which will have a greater responsibility in risk management and the function of oversight of the systems of internal control and audit; yy such audit committees should be responsible for selecting an external auditor and for providing oversight of its independence; yy the report of the independent auditor should disclose significant deficiencies, if there are any, of the system of internal control over the processes of fpreparation of financial reports.

Directive required a high level of responsibility from the part of the board members for the content of reporting documents, improved the transparency of reporting on related party transactions and off-balance sheet items, and made the reporting documentation of internal corporate control mandatory for public companies. How important is this for Latvia, where the number of public companies is small? There are 32 enterprises, including – 7 active at Riga Stock Exchange (Birža NASDAQ OMX Riga). In 2011 the incomes of the largest of them were the following: stock-holding company AS “Olainfarm” – €52.179 mln (Financial statements AS “Olainfarm”), stock-holding company AS “Latvijas kuģniecība” – €97.576 mln (Financial statements AS “Latvijas kuģniecība”), stock-holding company AS “Grindeks” – €69.573 mln (Financial statements AS “Grin- deks”). At the same time, there are a number of much larger companies functioning in Latvia, which though not public, are sistemgenerating major taxpaying enterprises, which activities affect the successful work of many other enterprises in Latvia. The example of such company is AS “Latvenergo” (Financial statements AS “La- tvenergo”), which income totaled to €963.84 mln lats in 2010. The recent corruption scandal associated with this company, confirms that the preparation of mandatory reporting documentation of internal corporate control should be extended to such enterprises, even though they are not public.

3. The definition of internal control, its distinction from the internal audit

The internal control is a process, which task is to provide reasonable guarantee that the specific goals are fulfilled in such areas as efficiency and necessity of work, responsibility of employees, the reliability of financial reports and their compliance with laws and regulations. In contrast to the internal control, the internal audit verifies the effectiveness of the internal control. The responsibilities of the internal auditor do not include the establishment of internal control and its technical maintenance. The internal audit assesses the processes and procedures of the internal control within a certain period of time, i.e. temporarily, but the internal control is a continuous process. The internal control is a method that ensures the adequate level of protection against operational risks, including financial and liability risks. Implementation of the internal control in the company is first of all the duty of its director. Besides this, every employee is important in exercising control over operation of the company, usage of resources and performance of their official duties. The internal control is characterized by high ethical standards and values, which every employee should be aware of and share.

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4. The efficient internal control and the boundaries of the internal control

It is important to understand that no matter how well developed the measures of the internal control are, no matter how sufficient they may seem, there is no absolute guarantee that the internal control can detect and prevent fraud and help to achieve the goals of the company. The existence of the human factor suggests the possibility of error in judgment and processes. There is always a possibility that the internal control may be changed in the interests of particular individuals under the pressure of the company’s management or conspiracy among employees. The efficient internal control is based on balance. The structure of efficient internal control resides in the right balance between the cost of procedure and risks associated with it. If measures of internal control are excessive, this makes it expensive and that reduces the efficiency of a company and adversely affects the psychological climate of the team.

5. The system of internal control

The choice of the implementation form of the internal control depends on the complexity of the corporate structure, its legal form, the scale of activity, features of the industry segment, reasonable expediency, the attitude of management to the issue of control, and the requirements of owners. By developing an effective system of internal company control the administration board wishes to achieve several goals: to provide itself with reliable information, to convince investors in the reliability of financial reports; to ensure the effectiveness of the company’s economic activity, to observe the compliance with the prescribed accounting policy and applicable laws and regulations. The introduction of ICS is a complex creative process, in which the formal approach is not possible, even when the degree of elaboration of a methodology is very advanced. Every enterprise is unique, and the ICS will be characteristic of the company, where it is applied. In its most general form the system of internal control can be represented as a flowchart shown in Figure 1 (prepared by the authors). The environment of the company is created and used by the top management. This environment defines the corporate atmosphere, and all the employees are aware of this element of control. The management environment consists of the following factors: yy an intelligent corporate structure, based on the scale and nature of the company’s activity; yy principles of integrity and ethical values set out clearly by the management and applied in practice, yy the personnel selection guided by the management commitment to hire only such people that observe ethical principles and have a required level of competence, yy a clear strategy of management and working style in relation to the preparation of financial documents, compliance with corporate policy and procedures, and delegation of responsibility.

The effective decision making is largely dependent on the quality of information available to decision makers. The company should receive timely information in electronic and in paper form, on both external and internal developments.

Figure 1. The system of internal control

243 Ludmila Verovska Internal Control System as Continuous Basis of Efficient and Stable Company Development

Figure 2. The block diagram representing the implementation of the internal control system

The communication systems of the company are its information channels and methods of transmission. In order to achieve maximum efficiency it is necessary to ensure a free flow of communication among all levels of personnel in the company as well as at the level of its departments and divisions. In the event that the company has a regional unit, it is necessary to ensure effective and regular communication between that and the central functional unit. Controlling measures for achievement of the goals of the company consist of two elements: yy the policy of control; yy the procedures of control.

The policy of control can be represented in the form of instruction (formal method), which describes procedures and flowcharts, as well as in the oral or verbal form (informal method). Procedures for monitoring of specific activities can be performed manually or via computer. Examples of such activities are the comparison of the budget planned and factual performance, permission, approval, agreement of sums, access to computers, asset protection, etc. The division of responsibility for processing, registration and coordination of transactions, where more than one employee is involved, should be fixed by regulations. The system of internal control (management environment, policies and procedures of control) is constantly changing. Therefore, in order to ensure the efficient control system, the management should perio- dically upgrade it. Monitoring can be used as a method of self-appraisal, or independent appraisal carried out by an internal or external auditor, or a combination of these methods. In the process of monitoring it is necessary to specify the strengths and weaknesses of the internal control. The authorized persons should be notified on the identified deficiencies and necessary changes should be made. Then a follow-up procedure should be entered as a next measure. According to the results of monitoring the management board takes measures to reduce the risks of the company. These measures may be a change in the documentary statement of the distribution of duties, cor-

244 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) rections in accounting or credit policy, etc. The system of the internal control of the company may be designed by an external expert, or by the company specialists (inside each department and division). But in order to fulfill the role of a monitoring agent, the internal audit should not be responsible for designing, creating, and maintaining of control. It can only make recommendations for improvement. At the core of the implementation of ICS two approaches can be used: the integrated approach – when all aspects and all transactions of an enterprise are subject to control; and risk-based approach – when only those transactions are subject to control which risks are higher. The basis of choice is the principle of balance. The implementation of the system of internal control can be represented in the block-diagram (Figure 2). The system of internal control can be introduced in the operating activity gradually by divisions, or firstly by identifying operations of higher risk that require special attention.

Conclusions

ICS should not exist outside the major system of company management. It should be related to the mission, goals and objectives of the company and help to achieve the goals of administration. No matter how perfect a model of ICS could be, it will always tend to have certain limitations, and therefore cannot guarantee absolute protection, but it is able to reduce the risk of unreliable information and the possibility of fraud in the company. Every company is unique and its goals, objectives and activities for their achievement are unique too. Every particular company should create its own model of the ICS integrated into its management structure. ICS is not a static model; it changes and evolves together with the company. Despite the fact that the process of creating an ICS requires an investment, even the companies that do not have large resources are able to create their own system of internal control. The author’s conception of the ICS means the sum total of a company structure, rules of its functioning and the exercise of control over the way how specific goals in such areas as the effectiveness and necessity of work, responsibilities of employees, the veracity of financial statements and their compliance with laws and regulations are accomplished. A possible variant of the ICS and its implementation in the operational functioning of a company are represented in block diagrams. In the EU the requirements to the quality of ICS within companies have substantially increased over the past six years, but they relate mostly to the listed companies. The analysis proved that this is not sufficient. There is a need to extend these requirements to large public companies, which are not listed, but yet affect the development of all sectors of the economy of a state. The report of the management on the status of ICS in the company shall be confirmed in the public part of the conclusion made by an independent auditor.

References

Arens, A. A., Elder, R. I., Beasley, M. S. (2003). Auditing and assurance services an intergrated approach. 9th ed. Prentice Hall, 765 p. Beasley, M. S., Bruce, C. B., Hancock, B. V. (2010). COSO’s 2010 Report on ERM. Current State of Enterprise Risk. Oversight and Market Perceptions of COSO’s ERM Framwork. Website: www.erm.coso.org Birža NASDAQ OMX. Riga. Website: http://www.nasdaqomxbaltic.com/market/?lang=lv Committee of Sponsoring Organizations of the Treadway Commission (COSO). (1992). Internal Control – Integrated Framework. New York: AICPA, 1992. Committee of Sponsoring Organizations of the Treadway Committee (COSO). (1992). Internal Control – Integrated Framework, Executive Summary. Website: www.coso.org EU Directive 2006/46/EC. Website: http://www.standardsetter.de/drsc/docs/pressreleases/avendertung4 und7EU- RL140606engfinal.pdf Financial statements AS “Grindeks”. Website: www.grindeks.lv Financial statements AS “Latvenergo”. Website: www.latvenergo.lv Financial statements AS “Latvijas kuģniecība”. Website: www.lk.lv Financial statements AS “Olainfarm”. Website: www.olainfarm.lv

245 Ludmila Verovska Internal Control System as Continuous Basis of Efficient and Stable Company Development

Internal Control Working Party, Internal Control: Guidance for Directors on the Combined Code. (1999). London: The Institute of Chartered Accountants in England & Wales. The official Journal of the E.U. (2006). Website: http://guap.ru/news/55045 Аренс, А. А., Лоббек, Дж. К. (2003). Аудит (пер с англ.). Москва: Финансы и статистика, 558 с. Гританс, Я. М. (2011). Система внутреннего контроля: как эффективно бороться с корпоративным мошеничеством. Москва: Инфотропик Медиа, 304 с. Гританс, Я. М. (2011). Формирование комплексной системы внутреннего контроля и защиты активов коммерческих организаций и холдингов. Москва: Тоска Testuite. Дефлиз, Ф. Л., Дженик, Г. Р., О’Рейли, В. М., Хирш, М. Б. (1997). Аудит Монтгомери (пер. c англ.). Москва: Аудит, ЮНИТИ, 542 с. Мюллер, Г., Гернан, Х., Минк, Г. (2003). Учет: международная перспектива (пер. с англ.). Москва: Финансы и статистика, 136 с. Подход JSG к проектам по организации системы внутреннего контроля в компании. (2007). Website: www.isgr. ru Соколов, Б. Н. (2006). Внутренний контроль в коммерческой организации. Москва: Омега-Л, 250 с. Соколов, Б. Н., Рукин, В. В. (2007). Системы внутреннего контроля (организация, методики, практика). Москва: Экономика, 448 с. Харрингтон, Дж. Х. (1990). Управление качеством в американских корпорациях (сокр.пер.с англ.). Москва: Экономика, 272 с.

Vidinė kontrolės sistema, kaip nuolatinĖs VEIKSMINGOS ir stabilIOS BENDROVĖS PLĖTROS pagrindas

Ludmila Verovska Tarptautinė Baltijos akademija (Latvija)

Santrauka

Kilus pasaulinei finansų krizei, bendrovės ir investuotojai vis labiau rūpinasi finansinių dokumentų pati- kimumu, ypač svarbi šiuo požiūriu veiksminga vidaus kontrolės sistema (IKS). Šio tyrimo tikslas – sutelkti tarptautinę vidinės kontrolės sistemos tobulinimo ir reguliavimo patirtį, įvertinti jos pritaikymo Latvijos organizacijose galimybes bei pasiūlyti IKS įgyvendinimo smulkiajame ir vidutiniame versle modelį. Autorės nuomone, siekiant vidinės kontrolės teorijas pritaikyti Latvijoje, kyla dvi pagrindinės problemos. Visų pir- ma – nepakankama teisinė bazė, antra – verslo steigimo fazė, kai bendrovės savininkas ir vadovas – vienas ir tas pats asmuo, dėl to gali susidaryti įspūdis, kad viskas yra kontroliuojama, todėl vidinės kontrolės sistemos nereikia. Teorinis ir metodinis tyrimo pagrindas – plataus spektro veiklų valdymo ir vidinės kontrolės anali- zė, teisės aktų, reguliuojančių IKS veiklą, nagrinėjimas. Siekiant išsikeltų tikslų, įgyvendinti keli uždaviniai: išanalizuotas IKS teisinis reguliavimas JAV ir ES; apibendrinti konceptualūs esamų IKS modelių principai; pateikta IKS modelio smulkiam ir vidutiniam verslui koncepcija; atskleistas poreikis tobulinti esamą Latvi- jos teisinę bazę. PAGRINDINIAI ŽODŽIAI: vidinės kontrolės sistema (IKS), COSO modelis, ES verslo teisė, IKS veiki- mas smulkiajame ir vidutiniame versle.

JEL kodas: M42

246 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT

Anastasija Vilciņa1, Gunta Grīnberga-Zālīte2, Raivis Andersons3

Latvia University of Agriculture (Latvia)

Abstract Basing on critical analysis of Latvia households’ consumption expenditure structure during the period from 2003 until 2010, the authors have identified the main tendencies of changes and characterized the main macroeconomic indicators, which have seriously influenced the consumption structure during different phases of economic cycle. The authors have applied econometric methods to characterize the correlation of particular consumption expenditure groups’ proportion with households’ consumption expenditure. The analysis enabled the authors to detect, which consumption expenditure groups exactly are the most important for ensuring the welfare level, and E. En- gel’s regularity was also discussed in this respect. The analysis of the data obtained in scope of the households’ member survey enabled the authors to identify the main directions of consumer behaviour changes during the economic recession period and present proposals for improvement of consumption as a significant indicator of country’s welfare and sustainable development. KEYWORDS: Latvia households, consumption expenditure, welfare level.

JEL codes: E21, E31, H31

Introduction

In nowadays, sustainable development issues acquire more importance in countries’ national programmatic documents, e.g. materials of the United Nations Commission on Sustainable Development, and are the topic of the day in scientific conferences. Lately, sustainable development has a special focus on the population’s life quality issues and welfare, which is closely connected with population’s sustainable consumption, living conditions, and poverty reduction. The definition provided by Latvia Commercial Activity Competitiveness and Innovation Promotion Programme 2007–2013 states that sustainable development is integrated and balanced development of society welfare, environment and economy, which satisfies the population’s current social and economic needs; ensures compliance with environmental requirements and does not jeopardize the satisfaction of next generations’ needs as well as ensures the conservation of biodiversity. According to this definition, the consumption quality has an important role – it reflects and aggregates both indicators of economic dimension and resulting indicators of social dimension thus indicating at the character of sustainable development and importance of its pillars’ integration. Under conditions, when the growth rate of countries is slowing down and new recession threats are serious enough, it is significant to emphasize the factors affecting consumption and identify the necessity

1 Anastasija Vilciņa – Latvia University of Agriculture, Faculty of Economics, Dr. oec., Professor. Scientific interest: macroeconomics, regional economics. E-mail: [email protected] Tel.: +371 630 210 41. 2 Gunta Grīnberga-Zālīte – Latvia University of Agriculture, Faculty of Economics, Dr. oec., Assistant Professor. Scientific interest: macroeconomics, regional economics. E-mail: [email protected] Tel.: +371 294 635 45. 3 Raivis Andersons – Latvia University of Agriculture, Faculty of Economics, Mg. oec. Scientific interest: macroeconomics, regional economics. E-mail: [email protected]

247 Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT to change the former consumption habits. In scope of the current research, the authors have focused on the main macroeconomic indicators which influenced the consumption structure in Latvia during the period from 2003- 2010. The aim of the research is to reveal the consumption in the context of households’ expenditure structure as an important indicator of sustainable development. The aim of the research has set the following tasks: yy to characterize changes in the structure of households’ consumption expenditure in the period from 2003 until 2010; yy to reveal the factors influencing households’ consumption; yy to identify the directions of households’ consumption behaviour changes under conditions of deterioration of consumption quality.

In scope of the paper development, the following economic research methods were applied: analysis and synthesis, induction and deduction; monographic method; graphic method; sociological methods; statistical and econometrical methods. The authors of the paper have used appropriate theoretical findings and research results of foreign and Latvian scientists, annual reports of Latvia households’ budget, the website of Central Statistical Bureau (hereafter CSB) of the Republic of Latvia as well as primary information obtained in two surveys performed by the authors in 2011 and 2012.

1. The structure of households’ consumption expenditure and its changes in the period from 2003 until 2010

The amount of consumption expenditure is regarded as one of the sustainable development indicators, which reveals population’s welfare. This especially refers to the expenditure proportion of food in the overall structure of the household’s consumption expenditures. After arranging the goods and services consumed by Latvia households in the descending order according to their specific weight in the consumption structure per 1 member of the household in the period from 2003 until 2008 (Figure 1), it was detected that even during the period of economic growth the largest proportion was formed by food – almost 29 %, which is approximately one third of all the consumption costs. Consequently, by the mentioned indicator Latvia cannot be brought in line with the welfare standards of highly developed countries, as for e.g. in Luxemburg, according to the Eurostat data of households’ budget survey, the expenditure on food and non-alcoholic beverages do not exceed 15 % of the total consumption expenditure. The second most important group of consumption costs is “Transport”, which during the analyzed period made up more than 1/10 of the overall consumption expenditure structure. This suggests that the households in their daily life are very mobile as very often household members have to commute long distances from home to work. The third most important position of consumption expenditure is “Dwelling, water, electricity, gas and other fuels”, which in the overall consumption structure makes up approximately 12 %. In general, households spend more than 54 % of their total consumption expenditure on the previously mentioned first three groups of consumption. The positive sign is that households spend approximately 6–7 % of their consumption expenditure on “Recreation and culture” and “Communication”, yet negative is the fact that even during the economic growth period the expenditure positions “Health” and “Education” have been ranked in the last places of the consumption expenditure structure. After comparing households’ consumption structure with the recession period of Latvia economy (Figu- re 1) it can be concluded that: yy the three expenditure groups have remained unchanged, however their sequence has changed as the second place was taken by the position “Dwelling…”; yy in the cumulative proportion aspect, the mentioned expenditure groups in the households’ consumption structure made up for 2.3 % larger proportion than during the economic growth period;

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Figure 1. The Dynamics of households’ consumption expenditure on one household member in % in the period from 2003 until 2008 Source: authors’ calculations according to the data of CSB of the Republic of Latvia

yy the households have started to devote less resources on such expenditure groups as “Clothing and footwear”, “Furnishings, household equipment and routine household maintenance”.

Any household by its consumption expenditure chooses a particular consumption model which is characterized by particular regularities depending on the household’s consumption priorities. One of such regularities was discovered by the German statistician Ernst Engel – the regularity between the household’s income and food and non-alcoholic beverages’ consumption proportion against the total expenditure. The Engel’s regularity, according to modern requirements, is formulated as follows: alongside with the growth of households’ prosperity, their expenditure on food and non-alcoholic beverages increase in absolute numbers and their proportion against the disposable income amount envisaged for consumption decreases (Ciemina, 2009: 34). Food and non-alcoholic beverages are the largest expenditure position in the households’ expenditure per one household member, which can be maximally satisfied for a particular time. Therefore, such a regularity can be detected that under conditions of sufficient resources after maximal satisfaction of hunger and thirst it is possible to allocate more resources to other needs. The substantiation for this regularity existence is based on the fact that the particular expenditure position exists regardless of income and level of life – everyone needs food to ensure one’s life process. Moreover, households during the economy growth period cannot consume significantly more food than during the economy recession period although during the economy growth period they are able to purchase much more expensive and consequently more qualitative food. (Krastiņš, 2004: 70).

249 Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT

Considering the E. Engel’s regularities’ expression under Latvia conditions, it should be noted that the regularity will be analyzed taking into consideration the influencing indication household consumption expenditure of one household member per month and the resulting indication “Food and non-alcoholic beverages” expenditure consumption proportion in scope of the households’ consumption expenditure structure (Figure 2).

Figure 2. The share of consumption expenditure group “Food and non-alcoholic beverages” in the overall expenditure structure of a household member per month in percentage points depending on the household’s consumption Source: authors’ calculations according to the data of CSB of the Republic of Latvia

The calculated correlation coefficient r = -0.96 does not indicate a tight correlation of the mentioned consumption expenditure group with the households’’ consumption expenditure in LVL on one household member per month. Such connection with P = 0.95 credibility indicates that alongside with the increase of resources allocated for consumption on one household member, the food consumption proportion on one member has decreased. Besides, the determination coefficientR ² = 0.92 points at a tight connection. In order to detect, which positions of consumption expenditure are the most important in the context of welfare level and which are less sensitive to households’ consumption expenditure on one household member per month, the following relevant correlation, determination coefficients and p-values were calculated (Table 1). It is possible to conclude that consumption expenditure group “Alcoholic drinks, tobacco”, “Clothing and footwear”, “Housing, water, electricity, gas and other fuels”, “Furnishings, household equipment and routine household maintenance”, “Education” and “Hotels, cafes and restaurants” cannot be used as indicators of households’ prosperity. The proportion of the particular consumption expenditure group in the overall households’ consumption expenditure structure has a weak correlation with the total households’ consumption expenditure on one household member. Different situation can be observed in the consumption groups “Food and non-alcoholic drinks”, “Commu- nication”, “Health”, “Transport”, “Recreation and Culture” and “Miscellaneous goods and services”, the changes of which in the structure of consumption expenditure give evidence of changes in the population’s welfare. The increase of the proportion of the groups “Food and non-alcoholic drinks” and “Communication” in the structure of consumption expenditure gives evidence of deterioration of population’s welfare, whereas decrease of the particular consumption expenditure groups’ proportion points at population’s increasing welfare. The increase of the proportion of the consumption expenditure groups “Health”, “Transport”, “Recrea- tion and Culture” and “Miscellaneous goods and services” in the consumption expenditure structure points at population’s increasing welfare. Respectively, during the economic recession period these particular consumption expenditure groups will be the first on which the households will try to cut spending.

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Table1. Correlation coefficients of consumption expenditure groups, determination coefficients and p-values in relation to the households’ disposable income on one household member per month from 2003 until 2010

2 Consumption expenditure group r R p-value Food and non-alcoholic beverages -0.960 0.922 0.000 Alcoholic beverages, tobacco 0.493 0.243 0.210 Clothing and footwear 0.087 0.008 0.840 Housing, water, electricity, gas and other fuels 0.045 0.002 0.005 Furnishings, household equipment and routine household maintenance 0.345 0.119 0.040 Health 0.726 0.527 0.040 Transport 0.842 0.709 0.010 Communication -0.901 0.812 0.002 Recreation and culture 0.916 0.839 0.001 Education 0.285 0.081 0.490 Hotels, cafes and restaurants 0.047 0.002 0.910 Miscellaneous goods and services 0.874 0.764 0.005 Source: CSB of the Republic of Latvia

Under conditions when the welfare level increases, households tend to allocate the largest proportion of expenditure to such consumption expenditure as “Clothing and footwear” and “Recreation and culture” (Ciemiņa, 2009: 70).

2. Factors influencing consumption

Since 2003 the GDP per capita in Latvia tended to increase, which pointed at increasing welfare (Figu- re 3). Significant changes were caused by economic recession period when the GDP per capita in Latvia in 2009 decreased for 654 LVL or 1.2 times comparing to the year 2008. The slowdown of economic activity caused a negative effect on employment. Since 2003 the decrease in the registered unemployment gave evidence of economic growth, which during the economic growth period reached its lowest level in 2008 (Figure 4). Significant changes can be observed in 2009, when the registered unemployment level in comparison with 2008 increased three times. Alongside with employment reduction households’ welfare level deteriorated and the ability to consume decreased.

Figure 3. The Dynamics of GDP per capita, changes in % to the previous year in Latvia during the period from 2003 until 2010 Source: authors’ construction according to the data of CSB and Ministry of Economics of the Republic of Latvia

251 Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT

Figure 4. Registered unemployment rate in % in Latvia during the period from 2002 until 2010 Source: authors’ construction according to Indexmundi data

The households’ disposable income in LVL per one household member per month since 2003 tended to increase (Figure 5). The most rapid increase of the disposable income on one household member per month in LVL was observed from 2006 until 2008, when the GDP per capita increased and there was observed the lowest unemployment rate. Important part of households’ disposable income was formed by employment income – more then 70 %, whereas during the economic recession period the proportion of employment income decreased for 65 % of the total disposable income on one household member per month. More and more importance in the households’ budget obtained transfers, mainly social transfers.

Figure 5. Households’ disposable income, the composition of average income on one household member per month in LVL, in the period from 2003 to 2010 Source: Households’ budget survey data of the CSB of the Republic of Latvia

Credit liabilities are a serious burden for households’ budget (Voinea, Filip, 2011: 14) Alongside with increase in economic activity, in Latvia there was observed a tendency to take credits, mainly mortgage loans (according to SEB bank data, almost 80 % of credit portfolio is made up by mortgage loans), which caused a rapid increase in households’ liabilities (Figure 6). During the economic recession period the tendency to take credits declined, and for households it was important to cover the existing loans.

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Figure 6. The banking sector loans and deposits received in Latvia during the period from 2003 to 2010, changes in percentage points over the previous year Source: authors’ construction according to data of banks’ activity survey prepared by Association of Latvian Commercial Banks

The Figure 6 suggests that households react to the economic situation in the country and consequently change their consumption habits.

Figure 7. Household consumption expenditure on one household member per month in LVL in the period from 2003 to 2010 Source: authors’ construction according to the data of CSB of the Republic of Latvia

Respectively, during the economic growth period they increase their consumption expenditure on one household member per month, and during the economic recession period decrease consumption expenditure amount on one household member.

253 Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT

3. Households’ consumption behaviour changes under conditions of deterioration of consumption quality

In order to identify the changes in households’ behaviour under conditions of economy recession, the households’ survey was performed in March of 2011 (124 respondents) and 2012 (122 respondents) using a non-probability sample with accessibility or authenticity method. The main research results are as follows: yy half of the surveyed respondents admitted that the recession has seriously affected their consumption habits, 1/3 of the respondents had a neutral assessment, more than 1/10 of the respondents claimed that their consumption expenditure have been reduced insignificantly or very insignificantly; yy the respondents claimed that in scope of their shopping habits they have started to assess advertisement materials more critically – in 2011 little more than half of the respondents denied the influence of advertisements on their purchases, however in 2012 respondents were less explicit; yy during the economic recession period, as the most important criteria that are considered before making a purchase, were mentioned “practical considerations”, which suggests that the respondents were concentrating on the “Price” and “Quality”, which all in all emphasize the retention of the price dominance; yy the respondents more dramatically feel price changes in those consumption expenditure groups which make up their major expenditure; yy respondents most often reduce consumption expenditure on secondary consumption expenditure groups – “Clothing and footwear”, “Recreation and culture”, “Restaurants, cafes, hotels”; yy the comparison of the authors’ performed survey data in 2012 with the authors’ performed survey data in 2012 does not indicate important and significant differences. This could be explained by the fact that positive economic growth results on the households’ level materialize in a longer time period. As the result, households’ consumption still remains passive and cautious to changes in their consumption model.

Conclusions

1. The consumption reflects the result of important sustainable development economic and social dimensions’ indicators interaction, which is determined by characteristics of the particular economic cycle phase. 2. The households’ expenditure amount during the growth and recession phases of economic cycle are seriously influenced by such factors of economic and social dimensions as GDP per capita, unemployment level, credits, disposable income and salary. 3. The households’ expenditure proportion connected with satisfaction of urgent primary needs for food, dwelling and transport is considerable during the economic growth and recession phases, and it reduces the expected benefit in the aspect of social dimension of sustainable development. 4. In the overall structure of households’ expenditure, the proportion of consumption expenditure in different consumption groups correlate differently with the changes of households’ welfare level. 5. Households tend to adjust downwards consumption expenditure related to satisfaction of social and self-development needs, which is inconsistent with provision and advancement of sustainable development. 6. Alongside with the reduction of consumption expenditure amount, it is important for households to obtain the largest possible total utility for every spent monetary unit. Therefore, the requirements regarding the quality of goods and services increase. 7. During the economic recession period, functional consumption type prevails. Under such conditions, it is necessary for marketers to have a clear market position, precise marketing communication and rational explanation to persuade a customer to make a purchase.

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Proposals

1. In order to enhance households to manage effectively all their disposable income and to them sub- ordinated consumption expenditure under reduction conditions, it is necessary to provide consumers with training possibilities on financial management at the national level. 2. To ensure the welfare dominance, which is characteristic to sustainable development, it is necessary for households to make savings. 3. In the context of sustainable development, it is necessary in households’ consumption expenditure structure to increase the proportion of expenditure allocated for education and health. 4. In order to ensure the reduction of proportion of food expenditure in the overall households’ consumption structure, which is one of the country’s welfare level indicators, for policy markers it is advisable to consider the issue on the reduction of VAT rate on food products.

References

Ciemiņa, I. (2009). Latvijas iedzīvotāju patēriņa izdevumi un to izmaiņu tendences pēdējā desmitgadē. No: Latvijas Universitātes raksti. Ekonomika. Vadības zinātne, 743.sējums, 34.–42. lpp. Latvijas Universitāte. Ciemiņa, I., Krastiņš, O. (2004). Dati par iedzīvotāju labklājību: salīdzināšanas iespējas, novērtējums. No: Statistikas un pārvaldes problēmas. Rīga: Latvijas Statistikas institūts, lpp. 70.–81. Latvijas Komercbanku asociācija. Retrieved: http://www.bankasoc.lv/lv/statistika/banku_darbiba.html. Access: 16.04.2012. Latvijas statistikas gadagrāmata 2005. (2009). Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 2005, 302 lpp. LR Centrālās statistikas pārvalde. Latvijas statistikas gadagrāmata 2008. (2008). Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 568 lpp. Latvijas statistikas gadagrāmata 2009. (2009). Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 640 lpp. Latvijas statistikas gadagrāmata 2010. (2010). Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 600 lpp. Latvijas tautsaimniecības: makroekonomiskais apskats, No. 2 (31). (2007). Retrieved: http://www.em.gov.lv/images/ modules/ items/2007_2.pdf. Access: 16.04.2012. Latvijas tautsaimniecības: makroekonomiskais apskats. (2011). No. 2 (47). Retrieved: http://www.em.gov.lv/images/ modules/ items/2011_2.pdf. Access: 16.04.2012. LR Centrālās statistikas pārvalde. (2011). Latvijas statistikas gadagrāmata 2011. Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 496 lpp. LR Centrālās statistikas pārvalde. (2011). Mājsaimniecības budžeta apsekojuma galvenie rezultāti 2010 gadā. Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 39 lpp. Mājsaimniecības budžeta apsekojuma galvenie rezultāti 2009 gadā. (2010). Rīga: Latvijas Republikas Centrālā statistikas pārvalde, 41 lpp. Mājsaimniecības budžeta apsekojuma galvenie rezultāti 2010 gadā. Rīga: Latvijas Republikas Centrālā statistikas pār- valde, 41 lpp. Voinea, L., Filip, A. (2011). Analyzing the Main Changes in New Consumer Buying Behavior during Economic Crisis. International Journal of Economic Practices and Theories, Vol. 1, No. 1, p. 14–19. Retrieved: www.ijept.org/index. php/ijept/article/download/3/4. Access: 16.04.2012.

LATVIJOS NAMŲ ŪKIŲ IŠLAIDŲ VARTOJIMO ANALIZĖ DARNAUS VYSTYMOSI KONTEKSTE

Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons Latvijos žemės ūkio universitetas (Latvija)

Santrauka

Remdamiesi kritine Latvijos namų ūkių vartojimo išlaidų struktūros 2003–2010 m. analize, autoriai nu- statė pagrindines pokyčių tendencijas ir apibūdino pagrindinius makroekonominius rodiklius, kurie turėjo

255 Anastasija Vilciņa, Gunta Grīnberga-Zālīte, Raivis Andersons THE ANALYSIS OF LATVIA HOUSEHOLDS’ CONSUMPTION EXPENDITURE IN SCOPE OF SUSTAINABLE DEVELOPMENT

įtakos vartojimo struktūrai skirtingose ekonominio ciklo fazėse. Autoriai pritaikė ekonometrinius metodus ir apibūdino koreliaciją tarp tam tikrų išlaidų grupių santykio ir visų namų ūkio išlaidų. Analizė padėjo nustatyti, kurios vartojimo išlaidų grupės yra svarbiausios užtikrinant gerovės lygį, šiuo požiūriu nagrinėtas ir E. Engelio reguliarumas. Atlikta analizė padėjo nustatyti pagrindines vartotojų elgsenos pokyčių ekonomi- nės recesijos metu kryptis ir pateikti pasiūlymų, kaip tobulinti vartojimo, svarbaus šalies gerovės ir darnaus vystymosi, rodiklį. PAGRINDINIAI ŽODŽIAI: Latvijos namų ūkiai, vartojimo išlaidos, gerovės lygis.

JEL kodai: E21, E31, H31

256 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

LONG-TERM PRINCIPLE CONCEPT FOR SUSTAINABLE DEVELOPMENT OF COASTAL ZONE MANAGEMENT

Elena Vitkienė1

Klaipeda University (Lithuania)

Abstract The long-term principle concept is based on setting and achieving a vision for the future of coastal zone management. The vision for the sustainable development of coastal zone management includes utilizing new advances in scientific, technical, social and economic understanding of coastal sustainability. The coastal environment, dunes and beaches are outstanding natural assets. Their wildlife, cultural, historical and archaeological resources should be passed on to future generations in similar or better conditions than they are currently. The principle of long-term management can be analyzed according to these definitions (economics, ecology, ethics) concepts: comprehensive overview of systems, detailed investigation of issues, and the planning development of management practices that have a positive effect on the future. KEYWORDS: coastal zone, integrated socioeconomic responsibility, long-term principle concept, sustainable development.

JEL codes: M000, O200, Q010, Q540, Q550

Introduction

Financial crisis in the global economy, climate change and a lack of positive action has too often led to the destruction of much of our coastal zone – coastal areas, cultural heritage and landscape. These factors have often been exacerbated by poor coastal protection and conservation management, and at times by neglect. The methods of protection and conservation used on these coastal zones – dunes and beaches followed the preservation measures instructed by Natura 2000, European Commission (2000). These included the erection of sand-retaining fences made of brush and wattle, and the use of special sand. While these actions appear at first glance to have merits, it is evident that the construed plan and the precautionary measures intended to address concerns along the coastal zones and dunes were entirely ineffectual. In fact, with these scant methods of preservation, the damage caused during the strong winds were inevitable. Clearly, the erosion caused by this powerful force of nature could have been prevented by carefully designed out plans for long-term preservation. Specifically, the use of a combination of multifunctional methods: safe, simple and economical measures that recall past experience and utilize reliable practices. Changing nature and climate conditions, strong winds cause significant damage throughout the world and along the European coast. For example, the dunes and beaches of Palanga (resort of Baltic Sea, near Klaipėda Sea Port in Lithuania) are being increasingly eroded by repeated battering, such as was inflicted during the January 2007 hurricane “Ervin” and this bringing down process has been dragging on for every year up to now. Despite the investment of millions Euro in the past years towards the protection of Palanga’s natural dunes and beaches, the use of outdated technologies and ineffective precautionary measures proved inadequate.

1 Elena Vitkienė – Klaipėda University, Faculty of Social Sciences, Department of Economy, Prof. dr. Scientific interests: EU Regional Management Strategy, Service Economics and Marketing, Integrated Socioeconomic Responsibility. E-mail: [email protected] Tel.: +730 698 017 76.

257 Elena Vitkienė LONG-TERM PRINCIPLE CONCEPT FOR SUSTAINABLE DEVELOPMENT OF COASTAL ZONE MANAGEMENT

In fact, the global economy crisis, the natural environment, coastal cultural heritage and landscape values are influenced by decision-making and economic conditions elsewhere. Protected natural areas, coastal heritage sites and landscapes are very attractive settings for the growing demand for outdoor recreation and leisure activities in natural environments. Over 200 years ago, Adam Smith concluded that international exchange of goods was a source of greater wealth for all countries. Trade provides the possibility of increasing specialization and better utilization of each country’s natural resources. Coastal management has come a long way in the past 35 years, and if we want to ensure a stable future, we would do well-timed to remember the past, according to Aurelian Augustine (Philosopical…, 1980). The- refore, it is essential to review history before beginning the planning process. This perspective will enable critical thinking about the current conditions of coastal zones – coastal areas, dunes and beaches, and will provide a foundation from which we can establish intentionally long-term environmental and financial principles. Hence, it is valuable to remember and review the conclusions of several international conferences and symposium, especially the following: Littoral ’96 (Portsmouth, UK), Coastal Zone ’97 “The Next 25 Years” (Boston, Massachusetts, USA), Littoral ’98 (Barcelona, Spain), Littoral 2002 (Porto, Portugal), Littoral 2004 (Aberdeen, Scotland, UK), Dunes & Estuaries 2005 (Koksijde, Belgium), ICCCM ’05 (Tavira, Portugal) and Littoral 2006 (Gdansk, Poland). These international conferences, symposiums, meetings, and practical wor- kshops, along with the LIFE-Nature project “FEYDRA” (Dunes & Estuaries, 2005, Koksijde, Belgium), and important field trips in the coastal area region of Algarve (ICCCM’05, Algarve, Portugal), provide essential experience suited to raising awareness among European nations at the national, regional and local levels. These international conferences and strategic plans were excellent opportunities to evaluate the past, assess the present and plan for the future. The 1997 Coastal Zone Conference (Boston, USA) created a plan for the next 25 years, and especially the “Dorset Coast Strategy” (Brunsden, 1999, UK), where was set out a strategic coastal plan that extends to 2050, with a vision for many more years. The problem of this article is lack of understanding the meaning of the long-term principle concept of integrated responsibility and of the sustainable development of coastal zone – coastal areas management strategy. The purpose of this research is to establish a basis of thinking about the sustainable development of coastal zone – coastal areas management in terms of long-term principle concept. The object of the study is long-term principle concept for the coastal zone coastal areas sustainable development for coastal zone – coastal areas management strategy. The tasks of the research are the following: yy to analyze and generalize theoretic and practical aspects of the coast zones – coastal areas management problems; yy to introduce the long-principle principle concept model of integrated responsibility in the coastal zone – coastal areas management strategy yy to prepare and to present purpose – model of the hierarchy of goal – setting activities of the long-term principle concept of coastal zone – coastal areas management for sustainable development.

Therefore, the principal task was to present this model, which is grounded in the perspective of sustainable, long-term practices that acknowledge the past, but look forward to future renewed. The methods of this article are analysis and generalize scientific literature and practical material issues concerning coastal zone – coastal areas management and sustainable development problems. Also the research used a descriptive and synthesis methods, which helped to present the purposeful model of the long-term principle concept of integrated responsibility in the coastal zone – coastal areas management strategy, and to prepare and to show the model of the hierarchy of goal – setting activities of the long-term principle concept of coastal zone management strategy for sustainable development. In order to experience growth in the appreciation of coastal culture and landscape values, long-term strategies must include the integration of socio-economic (economic, ecological and ethical) responsibilities. Within the European Union, it is necessary to formulate responsible, cooperative approaches that are com-

258 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) mitted to long-term results. Both empirical and practical evidence demonstrate that the sustainable development of effective coastal zone management policies includes the integration of responsible socio-economic practises. The long-term principle concept is a philosophy of integrated coastal zone management which mandates that all activities has to be oriented towards long-term practises that protect our natural resources.

1. Some theoretical and practical materials considerations

Fundamental documents (European Commission, 2000), several authors (Cole, 1994; Hoffman and Moo- re, 1990; Goodhead and Johnson, Pickering, Taussik, 1996; Pickaver and Salman, 2006; Kotler, et al., 2001) utilized multidisciplinary approaches that unify methods from several different disciplines (i.e. ethics, economics, philosophy, strategic management, marketing, ecology and coastal recreation management). This approach allows for examination of coastal zone management problems from a various aspects, thereby leading to a more comprehensive view of the issues and the ability to formulate holistic practices for long- term environmental protection. In addition, strategic management theory and practise (Cole, 1994: 31), and analysis of strategic planning (Kotler, 2001: 96–97), the theory and practice of coastal recreation management, coastal management plans by D. Johnson (1996: 273–395) and the term “development plan” by J. Taussik (1996: 115–137), also strategies at national, regional and local levels will have a time horizon of at least 15 years. In the some place investigations are connected with coastal conservation and management (Gomes, et al., 2005), nature restoration practices in European coastal habitats (Herrier, et al., 2005), also M. C. Miller and J. Cogan (1997), J. Taussik and J. Mitchel (1996), and investigations assigned to a coastal innovations and initiatives (Tubielewicz, 2006), coastal areas socioeconomic value (Forkiewicz, Tubielewicz, 2006), discusses coastal zones – coastal areas management from new approach to harbour, coastal research, environmental risk problems, risk management, innovative concepts for coastal protection and education (Forkiewicz, 2006). All these theoretical and practical considerations are important for establishing environmental sustainability, and for making critical choices among the various alternate strategies. They also assist in the construction of realistic timelines, in the implementation of effective long-term economic measures, and in creating appropriate means to test and evaluate plans. These approaches provide a critical structure to the initial development of a vision for integrated coastal zone management, as well as for the ongoing view of the future. Complex and significant ethical, economic, sustainable development and management decisions are made based on the situation at any given time. The components of the long-term principle concept are include goals, methods, motives and consequences as they relate to integrated socio-economic management in global, European, national, regional and local coastal areas.

2. Long-term principle concept of the integrated responsibility

Indispensable to the sustainable development of integrated coastal zone management is the creation of long-term principles that encompass main components: economic, ecological and socio-ethical. Figure 1 presents a model of long-term principles of integrated responsibility of coastal zone management strategies, as prepared by the author. Economic responsibility. One basic supposition of the long-term principle is that economic responsibility must be utilized to the greatest possible benefit, and that ultimately “short-term projects need to be replaced by long-term programmes” (Pickaver and Salman, 2006: 12). Long-term financing is critical to sustaining ongoing programmes, and for providing support for new technologies. Ecological responsibility. Ecological responsibility is the main priority in developing long-term strategies for regional and national environmental management. Opinions regarding the relationship between humans and nature can be revealed in two differing moral trends: ecocentric views and anthropocentric views. Ecocentrism raises the question: does human moral responsibility for nature exist? Ethical/Social responsibility. Proponents of ecocentrism acknowledge the importance of the entire ecosphere, whether animate or inanimate. In contrast, anthropocentrism, which adheres to human domina-

259 Elena Vitkienė LONG-TERM PRINCIPLE CONCEPT FOR SUSTAINABLE DEVELOPMENT OF COASTAL ZONE MANAGEMENT tion over nature, essentially dismisses the need for such questioning. Increasingly, ecocentrists are deman- ding responsibility from society, and action that preserves nature rather than caters for humanity.

Figure 1. The model of the long-term principle of the integrated responsibility in the integrated coastal zone management strategy Source: Developed by article author (2006: 13; 2007: 113).

The model of long-term principles can be realistically actualized into strategies for environmental protection and integrated coastal zone management. But unemployed principal concept such long-term practises are enacted, natural resources such as the dunes on the beaches of Palanga (resort of the Baltic Sea, near Klaipėda Sea Port in Lithuania) were damaged by erosion again. Photographs in Figures 2a and 2b show the devastation of erosion following a repeating strong winds (photo by Andrius Pelakauskas).

Figure 2a. The beaches of Palanga after repeating strong winds

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Figure 2b. The dunes of Palanga after repeating strong winds

The long-term principle concept is guided by the use of local resources; responsible socio-economic commitments to the possible strategic choices and alternatives, taking into consideration the probabilities of failure; use of various protective measures and technologies; and a vision for multiple timelines according to sustainable development.

3. Key features and definitions of the long-term principle concept for the sustainable development of coastal zone – coastal areas management strategy.

The long-term principle concept for the sustainable development of coastal zone management is based around setting and achieving a vision for the future. The idea of the long-term principle concept can be presented and analysed according to three key features, where the major statements are: 1. Sustainable development of integrated coastal zone – coastal areas management must begin with an overview of the system as whole, and accurate understanding of management methodology. 2. Thorough investigation into the complex causes and variables in each scenario is essential to proper planning and management of coastal resources. 3. Long-term principles of integrated coastal zone management strategy will effect positive changes that will benefit the future for coastal areas sustainable development.

These key features lead to several questions that must be addressed. First, in scientific terminology, what does “concept” mean? Second, how does the long-term principle concept provide resolution to the problems of integrated coastal zone management? Third, how does this concept of long-term principles impact the future? For our purposes, a concept (Latin conceptus) refers to the origin of ideas that provides the foundation for further thought. Therefore, the scientific concept is the essential starting point for examining and understanding natural phenomena. It serves as a basis for testing the means and measures used in the sustainable development and planning of coastal zone – coastal areas management. The concept statement, specifically the concept of long-term principles, has been used by the author of this article in analysing possible strategic choices and considering various alternatives in the planning process, according to Cole (1994) hierarchy by goal – setting activities, which sets the time horizons (long-

261 Elena Vitkienė LONG-TERM PRINCIPLE CONCEPT FOR SUSTAINABLE DEVELOPMENT OF COASTAL ZONE MANAGEMENT term, mid-term, short-term). Figure 3 demonstrates the author’s model of the long-term principle concept for the sustainable development of integrated coastal zone management. Clearly, the model demonstrates that long-term principles of coastal zone – coastal areas management involve a various complex elements and definitions. 1. Mission refers to the sustainable development of short-term projects intended to address current coastal zone management issues. 2. Establishing a vision provides confidence in the methods, means, and operational techniques implemented to reach various goals and objectives. The vision further ensures that proven methods and appropriate technologies are utilized. 3. Timelines (short-term, mid-term, and long-term) help developers maintain priorities as they make strategic choices among alternate approaches. 4. Strategic alternatives consist of the hierarchy of plans (annual plan, long-range plan, strategic plan) that coincide with established timelines.

This model helps to identify the links between the different priorities expressed in purpose, goals and objectives, as well as the conflicts of opinion between scientists and practicians as they seek to develop coastal zone management strategies. Essentially, this model consists of the primary elements necessary for the sustainable development of long-term policies for coastal zone – coastal areas management strategy. These elements can be summarized as follows: 1. The mission establishes short-term, annual plans. 2. The vision encompasses both long-range and strategic planning within the timelines of either long- term or mid-term plans. The goals and objectives of long-range and strategic plans are founded on the principles of long-term management.

The goal of the mission is to establish a foundation of strategies that will lead to the establishment of a future vision. The vision, which gives long-term structure to goals, objectives and measures, is intended to motivate state bodies, scientists, public bodies, coastal project and planning managers to evaluate the socio- economic and environmental effects of solving coastal problems. The mission and vision of the long-term principle concept can be well thought-out in advance in order to avoid methodological and technological mistakes, or complicated situations where coastal projects and plans fail to materialize. The timelines at each level have considerably wide margins, and specific time allowances, especially in terms of new coastal protection and conservation projects, will vary greatly depending on the nature of the project. The purpose of this article was to provide an understanding of the planning process in sustainable development for coastal zone – coastal areas management strategy, setting forth a hierarchy of timelines along which to structure goals and objectives. Brief working definitions and illustrations in this paper demonstrate how various plans can be organized in order to provide not only short-term mission, but long-term vision.

Conclusions

The final working definition of the long-term principle concept for the sustainable development of coastal zone – coastal areas management strategy can be used as a benchmark in order to focus attention more on economic effectiveness, rather than on cost reduction. Being focused on effectiveness, scientists, engineers, planners and managers can utilize their understanding of advancements in science and technology, as well as social and economic aspects in order to identify the most suitable technologies, to develop appropriate competitive alternatives, to align with global, European, national or local levels/values, and to allocate resources (i.e. funds, people and heritage coasts) to maximum effect. The creation of a suitable financial plan, along with procedures for monitoring the progress of environmental protection provides an effective investment process that is able to meet the requirements of the

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Figure 3. Model of the hierarchy of goal-setting activities of the long-term principle of coastal zone – coastal areas management for sustainable development Source: Composed by author of this article (2007: 111–114). long-term principle concept. It is possible to end the discussion here regarding the sustainable development of integrated coastal recognizes the importance of understanding the system as a whole, and planning for the future through long-term principles.

References

Brunsden, D. (1999). Dorset Coast Strategy. Dorset Coast Forum. UK. Coastal Areas Socio-economic Value, Tourism and Recreation. (2006). Ed. A. Tubielewicz. Gdansk: EUROCAST – LITTORAL’2006. Coastal Innovations and Initiatives. (2006). Eds. M. Forkiewicz, A. Tubielewicz. Gdansk: EUROCAST – LITTORAL’2006. Cole, G. A. (1994). Strategic Management. London: Aldiner Place. Communication from the Commission to the Council and the European Parliament on Integrated Coastal Zone Mana- gement: A Strategy for Europe. (2000). European Commission. COM 2000 547 Final. Brussels.

263 Elena Vitkienė LONG-TERM PRINCIPLE CONCEPT FOR SUSTAINABLE DEVELOPMENT OF COASTAL ZONE MANAGEMENT

Gomes, F. V., Pinto, F. T., Neves das L., Sena, A., Ferreira O. (eds.) (2005). Proceedings of the First International Confe- rence on Coastal Conservation and Management in the Atlantic and Mediterranean (ICCCM’05). Portugal: Algarve. Goodhead, T., Johnson, D. (eds.) (1996). Coastal Recreation Management. The Sustainable development of maritime leisure. London, UK: E&FN Spon. Herrier, J. L., Mees, J., Salman, A., Seys, J., Van Nieuwenhuyse, H., Dobbleaere, I. (eds.) (2005). Proceedings ‘Dunes & Estuaries 2005’ – International Conference on Nature Restoration Practices in European Coastal Habitats. Kok- sijde, Belgium. VLIZ Special Publication 19. Hoffman,W. M., Moore, J. M. (1990). Business Ethics. New York. USA: Mc Graw-Hill Publishing Company, Inc. Johnson, D. (1996). Coastal management plans. Coastal Recreation management. London: Chapman and Hall, p. 273–295. Kotler, Ph., Amstrong, G., Sounders, S. F., Wong, V. (2001). Principles of Marketing. 3rd European ed. Prentice Hall. Miller, M. C., Cogan J. (eds.) (1997). Coastal Zone’97. The Next 25 years. Conference Proceedings. Volume 1–2. Boston, Massachusetts. New Approach to Harbour, Coastal Risk Management and Education. (2006). Ed. M. Forkiewicz. Gdansk: EUROCAST – LITTORAL’2006. Philosophical history of the Middle Ages. (1980). A. Rybelis (Editor-in-Chief). Vilnius, Lithuania: Mintis. Pickaver, A., Salman, A. (2006). Integrated coastal management- do we really have choice? Vol. 15, No. 1/2. Pickering, H. (1996). Limitation for coastal recreation. Coastal Recreation Management. London: Chapman and Hall, p. 69–91. Taussik, J. (1996). Planning and the provision of marine recreation facilities. Coastal Recreation management. London: Chapman and Hall, p. 115–137. Taussik, J., Michel, J. (1996). Partnership in Coastal Zone Management. Cardigan, UK: Samara Publishing Limited. Vitkiene, E. (2005a). Integrated Quality Management Coastal Recreation and Tourism Business Destinations Strategy. Proceedings of the First International Conference on Coastal Conservation and Mangement in the Atlantic and Mediterranean: Instituto De Hidraulica. Porto, Portugal, p. 503–510. Vitkienė, E. (2005b). Socioeconomic Responsibility Problems of the Coastal Areas Regional Management under the European Economic Integration. Tiltai (Humanities and Social Sciences), Nr. 3(32), p. 89–95. Klaipėda University, Lithuania. Vitkienė, E. (2005c). The Role of EU Regional Policy on the ethical responsibility for the development of recreation and tourism an conservation of European coastal habitats‘. Dunes and Estuaries: Proceedings International Conference on Nature Restoration Practises in European Coastal Habitats. Ostende, Belgium: Flanders, Marine Institute, p. 675–677. Vitkienė, E. (2006). Socio-economic Responsibility of the ICZM. Development. Coastal Areas, Socioeconomic Value, Tourism and Recreation. Gdansk: EUROCAST – LITTORAL’2006, p. 9–15. Vitkienė, E. (2007). Long-term principle concept for development of coastal zone management. Book of Abstracts of the 2nd International Conference on Coastal Conservation and Management. Tunisia: NOUHA EDITIONS, p. 111–114.

ILGALAIKIO PRINCIPO, KAIP DARNIAI VALDYTI PAJŪRIO ZONĄ, KONCEPTAS

Elena Vitkienė Klaipėdos universitetas (Lietuva)

Santrauka

Ilgalaikio principo konceptas paremtas pajūrio zonos valdymo ateities vizijos kūrimu ir jos įgyvendi- nimu. Pajūrio zonos darnaus vystymosi valdymo vizija apima naujausių mokslo, techninių, socialinių ir ekonominių laimėjimų taikymą. Pajūrio gamta, kopos ir paplūdimiai yra išskirtiniai gamtos ištekliai. Jų gyvūnija, kultūriniai, istoriniai ir archeologiniai ištekliai turi būti išsaugoti ateities kartoms tokios pat ar ge- resnės būklės nei yra šiandien. Ilgalaikio valdymo principas gali būti analizuojamas pagal šias koncepcijas (ekonomikos, ekologijos, etikos): sisteminė apžvalga, detalus problemų sprendimas ir valdymo veiksnių, kurie galėtų pagerinti ateitį, numatymas. PAGRINDINIAI ŽODŽIAI: pajūrio zona, integruota socioekonominė atsakomybė, ilgalaikio principo konceptas, darnus vystymasis.

JEL kodai: M000, O200, Q010, Q540, Q550

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DIVERSITY MANAGEMENT AS A KEY FACTOR IN THE REGIONAL DEVELOPMENT PROCESS

Anna Wziątek-Staśko1

Silesia University (Poland)

Sustainable development strategy does not stand a chance without commitment of the HR department – many people are not aware how many issues are handled by these departments (Kuraszko, 2012).

Abstract Economy operates in a broader social system, composed of households and enterprises but also by all institutions created by people. Law and politics is created and introduced in institutions in parallel to educational, administrative activities as well as any other social activities, including those related to the natural environment we live in. These institutions operate thanks to the social capital i.e. interconnected human resources. The quality of the social capital is dependent on mutual trust and relations in the society. For this reason, social capital is of key importance for sustainable development, both as a controller of the impact of the economy on the environment as well as the basis for the future development. The environment evolves continuously, there are rapidly changing economic processes and, in consequence, their impact on the environment is changing rapidly, tool. This brings some specific challenges to the resource and quality of human knowledge and the competence level of the human capital, as the only tool for a possible reduction of all imperfections. KEYWORDS: diversity management, regional development, human capital.

JEL codes: M12, M14, Q56

Introduction

Integration of three areas: the economy, society and environment are the key challenges to the contemporary world. However, it is not an easy task because each of the areas evolves continuously. Although seemingly clear, this thesis is definitely more convincing at the theoretical level and more difficult when put into practice. According to Jan Sendzimir: “More often solutions are chosen which ensure fast economic or political profit and lead to instant effects. Compared to such solutions, the sustainable development concept and an integrated and long-term approach related to the concept may seem insufficiently precise and concrete. Introduction of sustainable development faces an additional challenge i.e. change of our habits, related to the existing social structures (institutions), psychological structures (convictions) and physical structures (the infrastructure). Sustainable development requires a change in conceptual models which limit us and a skill to look at things with a fresh eye. We often refrain from using innovative tools and methods because of inertia and thinking patters (…), as ideas rooted in the outlook that caused these problems cannot solve them” (Kronenberg, Bergier, 2010: a part of the Introduction). The author notices with a concern that, unfortunately, the currently effectively economic growth paradigm continues to dominate the development concept, though

1 Anna Wziątek-Staśko – Adiunkt Uniwersytetu Śląskiego, Ph.D. Scientific interests: diversity management, HRM, innovations, gender. E-mail: [email protected], [email protected] Tel.: +48 32 3493801, 0606589373.

265 Anna Wziątek-Staśko DIVERSITY MANAGEMENT AS A KEY FACTOR IN THE REGIONAL DEVELOPMENT PROCESS its side effect destroys the society and the environment and contribute to a climate change. However, there is also another important issue: we need to change our way of thinking in order to consider the role of people in regional development management process, with a particular emphasis to their variety. Object of research – human capital vs. sustainable development. Purpose of research – emphasising the role of diversity management strategy in improving the regional development process. Human capital is a key factor in the management process. Organisation with a human face, organisation socially responsible, ethical organisation... these are the terms, which more and more often accompany considerations about contemporary business. Increasing lack of acceptance for negative effects of activity leaded by enterprises of 21st century (contamination of environment, pathologies in the areas of HRM, corruption and unethical behaviours towards market partners and customers), gave rise to necessity of deeper analysis of the ethics’ essence, especially in the context of treating it as a tool of creating contemporary organisation image, particularly responsible organization. This paper is an attempt to answer the following questions: yy How does the idea of Corporate Social Responsibility (CSR) fit into the sustainable development concept? yy Why does human capital play an important role in the process of regional development improvement and how to engage employees in environmentally-friendly practices? yy Why personnel diversity and skilful personnel diversity management may influence effectiveness of sustainable development strategy?

1. CSR as expression of an organisation’s care for sustainable development

The contemporary approach to the issue of CSR seems as importance and interesting as ambiguous in interpretation and practical implementation (Berenbeim, 2006: 501), (Waldman, Siegel, 2008: 117–120). According to Peter Drucker, organisations in a society of organizations are special purpose bodies. Each organisation is good in one task only and their specialization gives them the opportunity to fulfil their tasks. Or- ganisations may be harmful to themselves and to the society if they embark on tasks outside their specialized competences, values and their specialized function. The above-mentioned author undermines an argument brought forward by M. Friedman, a Noble Prize winner, that business is responsible only for economics of its operation. Operational economics is the first responsibility of business. Business which does not generate a profit or at least does not break even is socially irresponsible. It is a waste of social resources. However, it is not the only corporate responsibility component, according to Peter Drucker. A particular importance should be attached to POWER. The powerful must demonstrate exceptional responsibility, as power without responsibility is TYRANNY. In the light of the above, it should be required at all times that organizations and corporations are responsible (Drucker, 1999: 86; Swanson, 2008: 231). Responsible business is a strategic and long-term approach, based on the principles of a social dialogue and search for solutions beneficial to everyone. Responsible business is a result of ethical leadership, as claimed by (Tumasjan, Strobel, Welpe, 2011: 609–622; Avolio, Walumbwa, Weber, 2009: 421–449; Toor, Ofori, 2009: 533–547). Corporate Social Responsibility (CSR) has become one of important issues on which contemporary enterprises focus. Still, it is long before the topic occupies a central position in corporate strategies (Smith, 2003: 52–76; Steward, 2006: 14). It is also caused by lack of awareness as to the essence of the CSR (Porter, Kramer, 2006: 78–92), as it may be evidenced by many definitions of the term. Typically, Corporate Social Responsibility is a concept which helps enterprises, at the stage of building their strategy, to take social interests and environmental protection as well as relations with different stakeholders’ groups, into account voluntarily. In other words, corporate responsibility is an effective management strategy. Thanks to social dialogue it keeps at the local level, it contributes to growing corporate competition at the global level while creating conditions in support for sustainable social and economic development. Typically, CSR is described as “corporate citizenship, ethics, stewardship or sustainable development” (Laszlo, 2008: 34). A similar line of thinking on the CSR was also presented in works by other authors (Dahlsrud, 2008: 1–13; Hess, Rogovs-

266 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) ky, Dunfee, 2002: 110–125; Seifert, Morris, Bartkus, 2003: 195–211; Brammer, Millington, 2004: 268–294). Some authors tend to be more focused on the internal dimension of the CSR (human approach to the staff, friendly work conditions, and ethical behavior), other point to its external dimension (positive image, economic benefits to different groups of stakeholders) (Kormancova, 2011: 44–46). Other academics attempt to merge both areas and the concept seems the most reasonable. Irrespective of the number of proponents of each concept, it is worthwhile to be a socially responsible corporation as the “human face” of an enterprise may bring many corporate benefits: yy Increasing interest of investors – creditors are more interested in cooperation with proper companies, which apart from good financial results, managed in a transparent way, responsibly build their image and good relations with environment. For many investors financial credibility of the company is depended on its social credibility. yy Increasing consumers and stockholders loyalty – consumers’ growth of social awareness causes that in making choices they consider trust for a given company and its image. Growing group of consumers pays attention to ecologicalness of the product or service, complying with the rule of social responsibility in the process of its creation and general reputation of the company. yy Improving relations with community and local authorities – company share in local community life, taking long-term and rational social investments makes it easier to operate efficiently and peacefully. Social responsibility enables permanent inveteracy in community and gaining its citizens favor and trust of local authorities. yy Growing competiveness – introducing rules of responsible business is one of advantages, due to which companies get competitive supremacy. yy Improving organizing culture in the company – via taking challenges of social responsibility, company improves its standards of proceedings towards stockholders (employees, partners and customers), this way it avoids costs of bad partnership. These changes influence shaping organizing culture of the company based on trust, responsibility and transparency for all interested parties. yy Gaining and keeping the best employees – when the company’s image improves and employees trust increases, company becomes more attractive on the labour market, which allows attracting new and keeping best employees. yy Shaping a positive image of the company among employees – social responsibility of the company constitutes one of the elements of non-financial employee motivation. Thanks to ethical codes, social programmes, caring for environment, the company’s image in employees eyes is improved. Employees appreciate company functioning more if its partial activity is directed to solving essential- also for them – social problems (Wziątek-Staśko, 2009: 117–120).

According to Deloitte, issues related to the CSR and sustainable development should be included in the agenda of management board meetings globally. This thesis is not based on rightful thinking. While altruism may be noble, it is an insufficient a basis for a business (unlike in the case of NGOs or national governments). Deloitte believes that CSR and sustainable development is one of the fundamental areas in corporate activities. Companies which do not engage actively in CSR-related actions may find themselves doomed to a failure (http://obszarcsr.wordpress.com/2011/02/24/csr-i-zrownowazony-rozwoj – 10.05.2012). According to Deloitte’s experts: “A mature approach to the CSR brings more significant benefits than self-satisfaction resultant from engagement in charity work or environmental protection activities. A correctly defined strategic approach to the CSR may support the process of continuous business improvement, attract talents, promote a positive image, improve company’s operational transparency, improve compliance procedures, inspire partners in the chain of supply, attract investments, prompt stakeholders to action, increase competition and improve the financial result” (2011 Deloitte’s report). A list of benefits is long. Year on year, the number of companies running their social programmes are going up. These are both FMCG companies and manufacturers. Corporate responsibility programmes are also implemented in steelworks, which occupied a prominent position in influencing natural environment. Examples of steelworks’

267 Anna Wziątek-Staśko DIVERSITY MANAGEMENT AS A KEY FACTOR IN THE REGIONAL DEVELOPMENT PROCESS activities, such as e.g. ArcelorMittal Poland are analysed as case studies (Gajdzik, 2012: 352), and reports on social activity are available on their websites (www.arcelormittal.com)

2. Simulation of Employee Behaviour Aimed at Achieving Sustainable Development

Corporate Social Responsibility cannot be achieved without socially responsible employees. It is not sufficient that an organization decides on entering the path of social responsibility. It is only a start of a difficult journey. The key issue is for the company’s management board and its management to be truly convinced about effectiveness of the CSR concept and spreading this conviction on all other employees. Dissemination of the concept should go beyond a list of recommendations or a code of ethical conduct towards other staff and the environment. The best method is to give an example by acting. People are sustainable development creators and, at the same time, participants of the process. In contemporary economy, one of corporate success factors is creation of an open organization were employees can share and exchange their opinions and ideas, including specifically, their ideas and opinions on sustainable business. Each employee’s opinion on methods for running a sustainable business or sustainable development opportunities affects setting future goals of the company. An open organisation is guided by the concept of transferring more power and independence onto employees. Open organisations tend to be more flexible, creative and sustainability-capable (Gajdzik, 2009: 766–771).

Figure 1. Sustainable development creators Source: own study

Employer’s reliability and integrity towards employees, fair rewarding, appraisal and promotion, compliance, loyalty, openness to employee problems (including personal issues), car for work conditions and modern tools at work, credible and reliable communication – these are only some examples of socially responsible employer’s behavior in dealings with the staff. Identification with the company, care for the work place, fair and responsible approach to responsibilities at work, care for company’s assets, punctuality and integrity, care for company’s positive image, good personal relations, self-improvement – these are only some examples of what a socially responsible employee can offer to his employer. Joint efforts of them both will lead to creating a socially responsible organization. Certainly, interorganisational actions are just the first

268 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) step towards building sustainable development. The next step will involve stepping outside the organisation, with strongly extended circle of stakeholders: clients, vendors, suppliers, the media, and banks, NGOs and local government agencies, business organisations and the general public. Employees should be aware of all green and community-supporting campaigns and actions of the business because then can have an important contribution to their effectiveness. In many companies, methods were developed to engage the staff into projects by taking joint actions and promoting environmentally-friendly behaviour. In the research run in 2007 and 2008 by the Society for Human Resource Management focused on analysing environmentally friendly character of work places, respondents – employees of HR departments, listed the following best green practices: yy Availability of recycling programmes for stationary and office materials (plastic, glass, cans, polysty- rene foam; yy Use of energy-efficient lights and equipment e.g. presence controls, Energy Star certified equipment, laptops instead of PCs; yy Installation of automatic equipment shut-offs; yy procurement and leasing of consumables e.g. tones, Xerox machines, printers, faxes, treaded tires and double-refined oil; yy Promotion of walks, cycling and public transport; yy Collaboration with green trade partners and businesses; yy Reduced pollution in the production process e.g. emission of pollution to water and air; yy Participation in or financing local projects and initiatives such as tree planting and fund raising for environmental protection; yy Two-sided copying and printing; yy Use of energy-saving bulbs in office lamps; yy Pulling down blinds in the summer to save energy; yy Shutting unused computer off.

Sustainable development pays. According to 2007 research of Grant Thornton LLP, an USA-based audit company, a growing number of managers (of 500 in total), sustainable development may have a positive impact on their businesses and achievement of their strategic goals. Sustainable development means company’s capability to generate profits without sacrificing human, local or natural resources. According to the research, the highest benefits from programmes and strategies based on sustainable development principles include: a positive impact on the public opinion and customer relations as well as attracting new staff and long-term employment history. As a result, 77 % of respondents plan to increase their investment into environmental programmes (Kuraszko, http:// odpowiedzialnybiznes.pl/pl/baza-wiedzy/publikacje/artykuly/zrownowazony-rozwoj-a-kapital-ludzki, 2094.html – 30.04.2012).

3. Diversity Management as a part of CSR – an important determinant in the process of building sustainable development.

In the context of this paper, diversity management and its role in the processes deserves a particular attention among many aspects creating the image of a contemporary organization, which builds its social responsibility. Diversity management is about “noticing differences between people in (and outside) an enterprises and conscious development of strategies, policies and programmes which create a climate for respecting and using the differences for the benefit of the organization. Different people have different needs and the key issue is to be able to identify them in the right way” (Durbin, Lovell, Winters, 2008: 400). Diver- sity management is about creating such a work environment where each employee (irrespective of their sex, age, education, race, origin, sexual orientation, ability or disability, etc.) feels appreciated and respected and where can fully achieve their potential, which contributes to the organization’s success and is an expression of the organisation’s social responsibility.

269 Anna Wziątek-Staśko DIVERSITY MANAGEMENT AS A KEY FACTOR IN THE REGIONAL DEVELOPMENT PROCESS

Figure 2. Sustainable development circle Source: own study

Actually, very few researchers have made the effort to analyse the impact of implementing the diversity management strategy in an organisation on its employer’s branding and the degree of its perception as a socially responsible one. It is even more difficult to analyse a relation between this strategy and a broadly understood sustainable development concept. The interdependency should be more assessed as intuitively perceived. It is likely that such perception results from lack of sufficient knowledge both on diversity management and on the essence of social responsibility among entrepreneurs, which creates a substantial difficul- ty when operationalising the dependency. The answer to “diversity around an organization” (different stakeholders: clients, suppliers, shareholders, wholesalers and retailers, local communities, NGOs, state and local government agencies and their various interests) must be “diversity in an organization” (different employees and their proper management) as a method to optimize the degree of satisfying needs of both groups. A “responsibility-oriented” enterprise is an enterprise that responds positively to expectations of differentiated environment, institutions and people who form it. An enterprise is a collection of interests of those who are inside and outside the enterprise. Its survival requires meeting of stakeholders’ expectationns in the economic and social area. It is the degree of satisfying stakeholders’ expectations which determines the extent of social responsibility of a company and its CSR status. According to (Bear, Rahman, Post, 2010: 1–3), businesses with women prevailing on their boards, are more charity-prone and support creation of friendly work environment and, as emphasised by authors, are more socially responsible. However, this interdependency is difficult to be unequivocally confirmed and requires continuation of the analytical processes. However, irrespective of the sex of the organisation’s leaders, they must be “socially responsible”. The present makes leaders face increasing challenges and requirements and it is not only a result of a struggle with unethical behavior in business and an attempt to eliminate many scandals. Reality and problems of 21st century world force organisations to change (poverty, degrading environment, fight for human rights, employee rights, diseases such as AIDS) (Pless, Maak, Stahl, 2011: 238; Haugh, Talwar, 2010: 384), and terrorism on top of that. Organisations operating in a global environment must also act “global”. For example, ArcelorMittal Group, being the largest steel producer in the world treats mergers and acquisitions as the main strategic direction of the group. All the transactions are executed by the group of experienced and tested managers who usually fill the top managers’ positions in the new ventures. Gradually they move to the other plants being the parts of the corporation (Sroka, 2009: 62). In this context, the priority should go to a new way of looking

270 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) at management, a growing need to improve organisation’s flexibility, the ability to analyse the elements of its micro- and macro-environment in a comprehensive manner, a serious approach to human diversity. It is not an easy task. Many find diversification troublesome as most people prefer to operate on the basis of widely- held, well-proven patterns and operational procedures. The economic crisis experienced by many economies in the world, including economies in the largest countries, may have been an outcome of the omnipresent ignorance and self-confidence of “socially irresponsible” decision-makers. Contemporary enterprises should care to implement diversity management strategies as it is the leading determinant of their responsibility and the only path leading to building a socially responsible world.

4. Advantages of diversity management

Well-planned and implemented with conviction, diversity management many generate a number of measurable benefits to an organisation (Allen, Dawson, Wheatley, White, 2008: 20; Chavez, Weisinger, 2008: 331). Leading strengths of diversity management include: yy An impulse to come up with new ideas and achieve excellence in one’s attitude towards work. yy Enhanced adaptability of an organisation. yy A bigger pool of options for internal recruitment. yy A broader base for creating the core of company’s skills. yy More extensive opportunities of HR reconfiguration supporting selection of an optimum management strategy. yy A possibility of a more accurate work division and mutual replacement of employees thanks to com- plimentary qualifications. yy A bigger pool of potential company’s representatives to participate in negotiation processes. yy Increased knowledge resources of an organisation. yy Support for introducing the concept of a learning organisation, reduced monotony. yy Possibility to make more accurate decisions. yy Reduced distance to working out the best solutions thanks to an exchange of experience and ideas of diversified staff. yy Smoother process of overcoming resistance to changes – costs of lost opportunities resulting from abandoning some activities as well as other costs e.g. costs of staff turnover (unhappy staff leaving) can be calculated. yy An easier access to the talent base – a more open environment attracts more talented and more creative persons who hope to be able to put their ideas into practice. The skills of using the talent diversity influences maximisation of company’s profits. yy Improved work atmosphere – good atmosphere at work, with people open, outgoing, appreciated and respected enhances their commitment and effectiveness. An employee who feels important and valuable, whose work is appreciated and considered in case of promotions is more committed. yy Creating the atmosphere of cultural sensitivity and mutual tolerance. yy Enriching employees – employees influence one another, they work and operate in a diversified environment – it is an opportunity to learn from one another. yy A more extensive network of colleagues. yy Faster and more frequent finding opportunities in the environment. yy Improved company’s image and reputation – it is not only the issue of CSR but mostly the issue of the internal and external PR. It is also an opinion of an excellent employer – employer by choice. Such brand and name will attract the most talented graduates. Satisfied staff working in a friendly atmosphere, non-discriminated and respected, is the best tool building reputation and image of a trustful company among its future employees, clients and business partners. yy More effective management of an organisation – selection of management tools (recruitment and selection, motivation, career path, evaluation, leadership style, etc.) accounting for diversity of employee

271 Anna Wziątek-Staśko DIVERSITY MANAGEMENT AS A KEY FACTOR IN THE REGIONAL DEVELOPMENT PROCESS

helps to reduce the risk of a failure thus reducing the precious time required to reach the end result intended by the employer. In the light of the above, note that effective use of these tools depends both of competences of employees to whom they are applied and on competences of those who use them. The material was collected and edited on the basis of: A. Lipka (2004: 279–281); Raport “Firma=Różnorodność. Zrozumienie, poszanowanie, zarządzanie” (2009: 23–24), A. S. Bachmann (2006: 721–747), J. N. Cum- mings (2006: 352–364), S. K. Horwitz, I. B. Horwitz (2007: 987–1015), M. E. A. Jayne, R. L. Dipboye (2004: 409–424). It’s worth of considering and doing because personal development is a key determinant of the organizational development, this of the regional development and in the end – global development. Below find a graphic presentation of the interdependency (Figure 3).

Figure 3. From personal development to global development Source: own study

Conclusions

This paper has been written to address and emphasise the interdependency noticed between a skillful HR management in an organization and a sustainable development concept. Diversity management is based on a close relation between personnel, organisational culture and degree, to which the company’s mission is achieved. It applied to an invisible and often informal dimension of enterprise’s operation i.e. organizational culture (shared values, standards, convictions, habits as well as widely-held ways of thinking and behaving). It is an innovative personnel management strategy and it comes as the top level of deliberation over the role of a man in an enterprises (Wziątek-Staśko, 2012: 24), creating the real opportunity to optimize process flow effectiveness of many business processes. The strategy gains a particular importance when applied in a sustainable development concept. Note that there are some paradoxes in management. On the one hand, employees are expected to deliver the best performance and, on the other hand, organizations cannot get free from pathologies such as: discrimination, lobbing, corruption, nepotism which has a destructive impact on work efficiency and people’s private lives. On the one hand, organisations declare ethics its essential value and, on the other hand, they break the law by violating rules. On the one hand, businesses declare their social responsibility and, on the other, they operate on the basis of procedures which are not always clear. There are many such paradoxes. Why do they exist? They exist, because insufficient effort was put in making employees understand consequences of such approach. Or maybe managers do not have this awareness? Social and economic aspects were always in juxtaposition. What is socially desirable, it is unfortunately often not effective in the economic sense. Business effectiveness, on the other hand, often means limitations to the social sphere. In addition, the complexity of the relation is increased by the need to care for the environment. One must admit that this is a real challenge for the world and human mentality to care for

272 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) sustainable development. Actions should be based on small steps, starting from caring about the key issue – awareness of people – employees. Without full commitment of its creators, no project which expresses care for sustainable development is going to be successful. One may make the effort to build the commitment through understanding, acceptance and use of an innovative HR management strategy in an organisation i.e. diversity management.

References

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ĮVAIROVĖS VALDYMAS, KAIP ESMINIS REGIONŲ VYSTYMOSI VEIKSNYS

Anna Wziątek-Staśko Silezijos universitetas (Lenkija)

Santrauka

Ekonomika funkcionuoja platesnėje socialinėje sistemoje, kuri sudaryta iš namų ūkių ir įmonių bei kitų žmonių įsteigtų institucijų. Teisė ir politika kuriamos ir įgyvendinamos institucijose lygiagrečiai su švietimu, administracine ir kita socialine veikla. Šios institucijos veikia socialinio kapitalo, t. y. žmogiškųjų išteklių, dėka. Dėl šios priežasties socialinis kapitalas yra esminis darnaus vystymosi veiksnys – tiek kaip kontrolės mechanizmas, tiek kaip ateities vystymosi pagrindas. Aplinka nuolat kinta, kinta ir ekonominiai procesai, taigi ir jų įtaka gamtinei aplinkai. Todėl būtinos atitinkamos žinios ir atitinkamo kompetencijos lygio žmo- giškasis kapitalas, nes tik jis gali išspręsti susidariusias problemas. PAGRINDINIAI ŽODŽIAI: įvairovės valdymas, regionų vystymasis, žmogiškasis kapitalas.

JEL kodai: M12, M14, Q56

274 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8)

BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN

Anna Zhigalova1

University of Latvia (Latvia)

Abstract The research was made to identify how the retail strategy of a specialized regional chain should be reshaped in order to meet consumer requirements and satisfy their needs, compete against different store formats and maximize business efficiency. The analysis was made to identify alcoholic beverages consumption and buying habits, reasons and choice criteria of stores, perception, image and expectations of a specialized alcohol store. Also several business development ideas were tested, such as change of the assortment and evaluation of new concept of a retail chain. Sampled respondents were from 18 to 60 years old, who have bought alcoholic beverages last three months. Survey revealed that that consumer’s choice criteria of a retailer format differs considering different buying occasions and several dominant ‘must-haves’ were identified for a specialized retail store, such as location, assortment, price level of a best sellers and image of a store. KEYWORDS: consumer behavior, retail, strategy.

JEL codes: L66; M31; C81

Introduction

The structure of food retailing has changed dramatically over the last few decades. In previous years, main retail formats were traditional markets or grocery stores. Consumers purchase almost everything there including fresh fruit and vegetables, meat and fish and all other household supplies like dry food, bread, detergents, stationery and toys. Since the 1990’s, the food retailing industry has experienced tremendous growth. Modern retail outlets, such as supermarkets and hypermarkets now are dominating the local retail food trade. With new retail outlets emerging, consumers are reviewing where they will do shopping. The main problem in building long term sustainable strategy for a retail chain is in predicting how rapid change of environmental conditions (economical, social, legal and other circumstances) will impact consumer behavior, particularly – store choice. As the retail environment is becoming tougher and more competitive and consumers are growing more sophisticated, retailers make every effort to draw new customers to their stores and to encourage existing customers to keep patronizing their stores. However, consumers have different and diverse reasons in terms of choosing a particular store over alternative stores. Understanding these reasons in store choice is a formidable challenge. Moreover, retail market value is not growing what makes competitive push higher as market participants can grow business only by taking market shares from each other. Scandinavian modern trade key accounts that entered retail market of Baltic Region have very strong competitive advantages, such as centralized resources, long term experience and gained knowledge, heritage, lower costs due to various consolidations, better merchandising and synergy from collective knowledge

1 Anna Zhigalova – University of Latvia, Faculty of Economics and Management, applicant for doctoral studies. Scientific interests: marketing research, customer loyalty. E-mail: [email protected] Tel.: +371 295 483 43.

275 Anna Zhigalova BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN

(Efficient Consumer Response project, for example). Heavy marketing investments that are unavailable for majority of local players ensures strong superiority for those market players. Smaller regional retailers also have definite advantages, such as location, fresh stocks due to lower pipelines, lower fixed costs, local knowledge and mentality, accustomed service, etc., but they are much more limited in all resources to resist retail market reshaping in favour of modern trade. Alongside the development of the retail industry, the behavior of consumers has also changed experiencing dramatic shift in their lifestyle, which impacts on the way they purchase, including such factors as increase in personal disposable income, urbanisation and greater awareness of safety and quality issues, changes in diet. In these tough economic times, it is important to adjust strategy to fast changing consumer requirements and needs in order to keep loyal consumers and to attract new ones. Competition is growing permanently along with the need to cut costs in order to be more efficient and maximise profitability. The aim of the research was to identify how the retail strategy of a specialized regional chain should be reshaped in order to meet consumer requirements and satisfy their needs, compete against different store formats and maximize business efficiency. The objective of the research was to identify which factors are most influential in the consumers’ choice of a retail outlet when purchasing alcohol beverages and test several proposed concepts and strategies. It was made for a specialized retail store chain that belongs to “Latvijas Balzams” production and that consists of 55 specialised convenience stores in Latvia and 20 – in Lithuania. Research method: both quantitative and qualitative methods were used. Qualitative study was made in 5 focus groups, 5 respondents in each, equally men and women who have bought alcoholic beverages during last 3 months in LB and competitor stores, Latvian and Russian speaking. Quantitative survey targeted 18–60 years old residents of cities that have bought alcoholic beverages in the last three months. Sample size was 402 respondents.

1. Consumer’s consideration set choosing the retail store

An important research stream relevant to this paper is research on store choice. Store choice is one of the heavily studied areas in marketing (e.g., Aaker, Jones, 1971; Hisrich, Dornoff, Kernan, 1972; Hortman et al., 1990; Kahn, Schmittlein, 1989; Kau, Ehrenberg, 1984; Monroe, Guiltinan, 1975; Pessemier, 1980; Popkowski Leszczyc, Sinha, Timmermans, 2000; Solgaard, Hansen, 2003; Uncles, Hammond, 1995) and geography (e.g., Moore, 1990; Wrigley, Dunn, 1988). In the positioning of grocery retail stores, price, apparently plays the decisive role, and a much more important role than in the positioning of products and brands. Indeed, 90 % of all retail advertising in Europe is price related, and 70% is exclusively on price (Corstens, Corstens, 1995). This seems to indicate that store choice primarily is motivated by utility considerations rather than by hedonic considerations and that grocery shopping is a functional activity, where consumers’ perception of price plays the major role. In a study of consumers’ perceptions of grocery retail chains Solgaard (2000) was observed that although discount chains are rated very poorly compared to other supermarket formats on a whole range of store values except one, namely, good prices (in all 21 value aspects were rated), discount chains at the same time are growing and gaining market share. Store location has received much attention in research on store choice and for good reasons. Bell et al. (1998) refer to industry research in the US that indicates that location explains up to 70 % of the variations in the choice of grocery store. Refer also to Stanley and Sewall (1976), Verhallen and de Nooij (1982), Engstram and Larsen (1987), and Arnold et al. (1983), for the importance of the location or distance variable in store choice. The number and nature of neighboring stores may also be an important factor in the store choice. May (1981) argued that consumers tend to make more of their patronage decisions based on the shopping complex instead of the individual store. Hansen and Weinberg’s (1979) findings concerning choice of bank outlet support this argument; see also Gripsrud and Horverak (1986). The point is of course that the

276 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) ease with which the consumer can get from one facility to another type of facility is essential in explaining her choice of store. Service outputs also provide input for the positioning. Although an individual consumer alone might perform the chore of grocery shopping, it is the needs of the household that would be satisfied by this activity. Thus household size, and number and age of children will influence store choice behavior. Also, household characteristics, such as income, working hours and availability of a car put restrictions on, as well, as opportunities, for what is feasible for the household in terms of grocery purchasing. The theoretical framework for specifying the process that leads a consumer to choose a certain store from her consideration set of stores is drawn from the theories of consumer behavior developed in marketing (e.g., Blackwell et al., 2001) and from the microeconomic theory of the consumer (e.g., Deaton and Muellbauer, 1980). In line with these theories a consumer is assumed to form relative judgments about the available stores based on her/his attitudes towards the stores and on situational considerations. This enables him to express his behavioral intentions in terms of (perceived) utility assigned to each store. Situational considerations are a function of the consumer’s awareness of events (at the moment of choice) and/or the need to search for information that may affect her choice behavior. Some examples are: upcoming usage situations that require specific purchases, (Engstram, Larsen, 1987), pressure from competing retailers in terms of promotional offers that must be evaluated and shopping activities carried out in combination with other non-domestic activities, creating a possible need for evaluation of unknown shopping environments, etc. Thus the utility assigned to a particular store could also be depicted as a function of store attributes, personal characteristics including relevant household characteristics and situational considerations. Most consumers have patterns of grocery shopping which involve more than one store, (Corstens, Cors- tens, 1995). They regularly visit two or more stores simply because they arrange shopping trips from different geographical bases (e.g., home and work, or other non-domestic activities). Likewise different stores may serve different roles, either by shopping occasion (e.g., major shopping trip, lunch hour fill-up) or by specialty (e.g., vegetables, meat, discount, etc.). In addition, some consumers may visit stores on a regular repertoire basis, both to review prices in competing stores and because they enjoy a sense of variety. Still others may visit different stores looking for good values and also in an attempt to track down the items they prefer most. Finally individuals within a household may have different preferences for particular stores. For these reasons a consumer’s consideration set of visited stores may change from one purchase occasion to another within a short time period such as a week or even a day. A more regular pattern of store choice may, however, emerge over a longer time. In a paper “A hierarchical Bayes model of choice between supermarket formats” Solgaard et al. considered three formats: conventional supermarkets characterized by high-low pricing, wide assortment and some service, discount stores characterized by every-day-low-pricing, narrow assortment and no service, and hypermarkets, characterized by a pricing policy somewhat in between the two other formats, large assortment and some service.

2. Marketing Mix influence on consumer’s choice of a retail store

Various academic and commercial studies show that the seven Ps of marketing are critical in determining consumer choice of store. According to Engel, Blackwell and Miniard (1995) there are 10 determinant attributes of store choice: location, nature and quality of assortment, price, advertising and promotion, sales personnel, services offered, physical store attributes, nature of store clientele, store atmosphere, and post transaction service and satisfaction. In chronological order of importance Bates and Gabor (1987) found the following to be important in influencing shoppers’ choice of store: cheap prices, fair prices, good value, convenience, nearest to home and workplace, cleanliness, good layout, good quality, variety and choice, satisfaction, dividend, principle, member, employee, and delivery service. Starting with the most important, Euromonitor (1986) found the following 21 items were important ‘things liked about main store’. These are clean and hygienic, extensive range, store layout, good value, good parking, quality of foods, cheap or low prices, opens late, good fresh fruit and vegetables, spacious, easy

277 Anna Zhigalova BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN walking distance, good fresh meat, selection of frozen food, efficient checkout service, in-store bakery, own label products, chilled/ready foods, range of non foods, good fresh fish, carry out service, and other factors. In 1998 a British marketing research firm, Mintel, found that the following 13 factors were important in influencing consumer choice of store for main grocery shopping in Britain. Starting with the most important these factors are: quality of products, location/easy to get to, attractive prices, wide range of products, measures to ease queues at checkout, fresh food service counter (e.g. deli, fish), longer opening hours, good own label range, cash point facilities, express checkouts, customer loyalty cards, cash back facility, and financial services (Mintel, 1998). The consumer research Consumer Watch (2011) reveals that top factors influencing choice of store are: price: 54 % of consumers used their store because they liked the price offer; layout: 48 % of consumers used their store because they knew the layout; food choice: 44 % of consumers used their store because of the choice of food; location: 34% of consumers used their store because it was the closest to them/easiest to get to. Whilst price was the main deciding factor for less affluent consumers, it also plays an important role amongst those for whom money is less of an issue. The importance of a consistent store layout was emphasised. Once people had acquired a good knowledge of where products could be found within a store it seemed to play a considerable role in maintaining customer loyalty. Changes to the layout (perceived or real) were guaranteed to wind up shoppers, because they interrupted their shopping pattern and were thought to be done primarily to make consumers go down every aisle. Other aspects that come into the decision making process once these fundamentals are met are: promotions on offer, store not being too large, opening hours, own brand products, loyalty cards available. This shows that store choice is based on a combination of providing the right product offer in terms of price and choice and the convenience of the shopping trip in terms of finding the products and the ease of getting to a store.

3. Empirical Research Results

3.1. Empirical Research Objectives

Major business objective was to develop clear, differentiated retail strategy for Lithuania and Latvia based on consumer shopping habits (i.e. one-stop shopping vs. specialized stores) and needs (i.e. price, convenience, assortment), while taking into account current market perception and position of stores defining strong competitive advantages of Latvijas Balzams (LB) stores vs. competition. Major research tasks were to define alcoholic beverages consumption and buying habits of consumers; persons responsible for the alcohol purchase; reasons and choice criteria of the stores (Latvijas Balzams (LB), Rimi, Maxima, Eirovīns in Latvia and Alco Bravo, Gero Vyno Parduotuve, Filipopolis, Centrine Ge- rimu Isparduotuve, Vynoteka, Maxima and Rimi – in Lithuania), perception and expectations of LB image, associations and connection of “Latvijas Balzams” production image with LB stores, changes of the assortment, LB and competitor’s advantages and disadvantages, evaluation of new concept of LB. Specific research objectives were to define how do consumers buy alcohol (do they usually do one stop shopping vs. going to specialized alcohol stores, explore occasions where they would do one vs. the other, would they ever buy food in one store and go for a alcohol in another (wine vs spirits), etc); what factors are driving their store choice (is it alcohol related factors or other factors such as food and alcohol is secondary consideration; do they buy different alcohol segments, sizes, amounts, packaging based on store format; what is convenience); who is responsible for the alcohol purchase (are wife’s the gatekeepers for men or do men shop themselves, do men shop for women or do women purchase themselves); why do consumers shop at LB stores / Eurovins / Rimi / Maxima; For what occasions are they shopping; discuss concrete situations of purchase and consumption of the purchases (i.e. Friday Party vs. immediate consumption); what is the image of LB stores, how it is tied to the LB company image; are the stores seen as factory outlet stores or liquor

278 ISSN 2029-9370. Regional Formation and Development Studies, No. 3 (8) stores under the company logo; ranking of general alcohol purchase motivators vs. purchase motivators for choosing LB and discuss what LB does well and could improve. For non-consumers please discuss reasons for not shopping at LB stores. Probe importance of customer service and how import it is in their decision making; Probe also into importance of product knowledge by sales staff. Present ideas of new LB concept stores and get reactions.

3.2. Empirical Research Method

Both quantitative and qualitative methods were used. Qualitative study was made in 5 focus groups, 5 respondents in each, equally men and women who have bought alcoholic beverages during last 3 months in LB and competitor stores, Latvian and Russian speaking. Quantitative survey targeted 18–60 years old residents of cities that have bought alcoholic beverages in the last three months. Sample size was 402 respondents. Sampling: random – quota sampling method. Quota on residence – 200 interviews in Riga and 200 interviews in other cities. Survey process: interviews were performed by 18 interviewers who were trained and instructed for the particular survey.

3.3. Empirical Research Findings

Awareness map (see figure 1) shows good scoring for LB stores. They are located significantly above average, in well known and respected segment, among other major market leaders.

Figure 1. Shop Awareness Map Source: TNS Research (2011)

279 Anna Zhigalova BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN

According to spontaneous awareness LB is in the third place, while the total awareness level is very high – the same as for leading retailers – Rimi and Maxima. When asked to tell, why do they choose their main place for buying alcoholic beverages, respondents mainly say it is because of the location. It means that a wide chain of stores (which people can find on their way to or from home) is the one with higher potential for being chosen. The next aspect is the price and here regular/ different promotion campaigns are preferred. The assortment is the third factor of choice. The most popular special offer is discount for every purchase. The majority of people irrespective of their profile support it as is illustrated in Figure 2. A similar proportion of customers support loyalty cards that give a special discount.

Figure 2. Factors influencing choice of a specialized retailer by different consumer segments Source: TNS Research (2011)

Women, people with lower income and those, who spend up to 5Ls for alcoholic beverages on average per month, more often mention this. Buying several products and getting one for free is supported more by younger customers (18–25 years). Customers are segmented into users and non-users according to TNS customer Conversion ModelTM. LB stores have the highest ‘ambivalent’ (43 %) non-user rate as shown in a Figure 3. In general, for LB customers and non-customers one of the most important factors in the shop choice is favorable location. For committed customers of LB shops, the driving attribute is favorable store location and LB shops are perceived to perform better than any other shop. Such attributes as good shopping, experience and wide range of products (alcohol and other) also matter to this group of customers. It is important to keep the same performance on these attributes and communicate them to customers. The uncommitted customers of LB shops are driven by favorable prices and store location as well as regular price campaigns and discounts (these are 3 most important factors of shop choice for them). They see Maxima being better here (77 % of uncommitted customers of LB shops have bought alcoholic beverages in Maxima during the last 3 months). When looking at the whole alcoholic beverages retail market segmentation, overall there are not many committed customers. Rimi Hypermarket has 11 %, Maxima XX – 10 %, Rimi Supermarket 9 %, Maxima XXX – 7 % and LB – 5 % of their customers committed. It is also important to look at open non-customers to see whether the potential customer base is large enough to work on acquiring them. Here LB has the best position – it has a potential to gain 55 % of the target group. Stockmann has the second position (potential to gain 49 % of the target group).

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Figure 3. Overall commitment to shops of alcoholic beverages. Source: TNS Research (2011)

From the direct competitors the best potential is for Eirovīns (37 %); Tabakas Nams can attract 30 % and Laima – 24 % of the target group. But all 3 competitors have a very high level of strongly unavailable non- customers – there are many people who are unlikely to switch their current shop to these. The most important factors for committed users are favorable store location and prices as well as a shop appropriate to me as shown in Figure 4. The open non-customers of LB shops rate other shops better than LB on most of attributes. LB shops are perceived as having a slightly faster customer service. The most important factors for this group are favorable store location and prices as well as a shop appropriate to me.

281 Anna Zhigalova BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN

Figure 4. Factors Undermining Commitment to Latvijas Balzams stores Source: TNS Research (2011)

Figure 5. Factors Undermining Commitment to Latvijas Balzams stores Source: TNS Research (2011)

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When looking at unavailable non-customers of LB shops we can determine that the three key drivers are favorable store location, a shop appropriate to me and good shopping experience. At all aspects LB shops lose either to Maxima, Rimi or Eirovīns. As this non-customer segment is 24 % from the total target group and they know LB shops, it is first important to decide if they are worth efforts (according their demography, income and expenditures on alcoholic beverages). Qualitative study summary of alcoholic beverages store choice criteria (from high to low importance): yy Quality of alcoholic beverages (Consumers trust more in products bought in specialised stores. The majority of consumers say that beverages made by LB are of high quality because they are made in Latvia, not imported. At the same time, trust in alcoholic beverages bought in supermarkets is lower due to the lack of information about suppliers); yy Prices (When choosing alcoholic beverages, consumers pay much attention to price/campaigns. Be- fore purchasing a beverage, people check all prices and campaigns regarding the specific beverages; yy Location (Close to home, workplace or supermarket); yy Wide assortment (This is the main aspect. All categories of alcoholic beverages should be widely represented, if only the store is not specialising in one type of alcoholic beverages (wine, for example). A specialised store should satisfy everybody’s needs depending on the financial state and taste of each person); yy Customer service (In a specialised store, consumers expect an advice on available beverages. Howe- ver, it should not be pushy. It should be a recommendation, and consumers should be allowed to make the final decision; yy Layout of goods (A wide room; an opportunity to move freely along shelves; all products should be reachable and visible); yy Atmosphere in the trading place (Silent music (better without lyrics so that none of nationalities in Latvia had objections); no crowd; an opportunity to walk trough the store and look at beverages without hurry); yy Loyal customer card (Not mentioned spontaneously. When using a loyalty card, regular customers expect a very good price. They want to feel benefitted immediately, not by saving bonuses in a longer period); yy Parking place near the store.

Summary of an ideal specialized liqueur store is depicted in Figure 6.

Figure 6. An ideal specialised alcohol store: criteria summary Source: TNS Research (2011)

283 Anna Zhigalova BUILDING CONSUMER ORIENTED STRATEGY FOR A SPECIALISED REGIONAL STORE CHAIN

Conclusions

Factors that influence consumer’s choice of a retailer differs if consumers consider specialized convenience store or specialized alcohol store. Moreover, such factors are different if compare different consumer segments depending on their loyalty to the shop or demographic profile. Summary of learnings and strategic implications for LB stores based on market trend forecast and consumer research: yy Consumers have an emotional connection (national pride) based on history of Latvijas Balzams factory and long personal experience with brands there. LB name is the main reason people visit our stores – do not change brand name – as a main asset; yy Most important alcohol purchase motivator for consumers is guarantee that the product is authentic (meaning of good quality and safe) – LB has a unique competitive advantage as a producer – communicate to consumers that LB stores stand behind the quality and authenticity of all of the brands that LB retail sell as they are produced by LB; yy Consumers expect LB products in LB stores to have an equal or lower shelf and promotion prices vs. hyper and super markets – change current price policy in LB stores to match Maxima / Rimi; yy Consumer ideal location for a liquor store is close to place of residence, or place of work, on way home or near place where they buy food – reevaluate location of existing stores and create ideal map of store location based on high density living and working areas; high traffic on the way home locations; and near major hyper and super markets; yy Consumers shop at liquor stores when mainly alcoholic beverages are needed (if they also need food they shop at hyper markets) – target occasions where only alcohol is purchased and create a list of main alcohol purchase occasions with targeted communication; yy Consumers like to buy complementary goods (i.e. snacks) when buying alcohol – continue to offer complementary goods in LB stores; yy Consumers expect sales people in liquor stores to be knowledgeable about wines and spirits – increase sales staff knowledge, launch practice of permanent sales stuff training program; yy Consumers like to touch the products and read the labels when choosing alcoholic brands – move from counter service to self service; yy Customers are eager to find leading competitive brands in LB stores (one stop spirit shopping) – add leading competitive spirit and wine brands; yy Consumers shop at liquor stores when looking for a gift for someone – offer more gifting packs; yy Customers expect to find different assortment than hyper/ supers markets when visiting a liquor store – identify brands to be available in LB stores only.

Product yy Do not change brand name – it is the main asset yy Reinforce the products in LB stores come directly from the factory yy Adjust assortment based on right mix between LB and leading competitive brands yy Identify brands to be available only in LB stores (i.e. limited editions) yy Adjust assortment based on right mix of complementary goods yy Add special tourist packs to assortment of stores located in old town yy Finalize LB gifting packs

Price yy Change retail price on all Latvijas Balzams products to match Maxima / Rimi yy Develop store sets based on store location and customer’s purchasing power Place yy Create ideal map of store location based on consumer preferences

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yy Create a map of store location based on pedestrian traffic intensity

Promotion yy Communicate that Latvijas Balzams stores stand behind the quality and authenticity of all of its products yy Start advertising LB factory store message highlighting competitive pricing offers yy Create list of ‘alcohol only purchase’ occasions and target communication yy Introduce loyalty program for customers

People yy Create motivation system for store personnel linked to sales level, store performance and customer service yy All sales people need to be trained about spirits and wines including selling points for key brands yy Implement new salary policy

Process yy New retail strategy to be developed and launched yy Benefits and point of difference vs. other retailers to be communicated in a new marketing mix yy Implement self service where it makes sense yy Find most cost efficient way to implement Internet connection in stores and new IT system.

This study examined factors that influence choice of a retailer – specialized liqueur convenience store in particular. Business strategy and marketing mix was built based on the research results. Several test shops of a new concept were launched in order to examine consumer’s response and make amendments in the developed strategy. The study showed that a criterion of a liqueur store choice is very different if you consider one store or a chain, city or rural area, young or older consumers, loyal or uncommitted. The study proved that previously made strategy without in-depth understanding of consumer preferences led to market share loss and competitive advantage weakening.

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Į VARTOTOJUS NUKREIPTOS STRATEGIJOS SPECIALIZUOTŲ REGIONINIŲ PARDUOTUVIŲ TINKLUI KŪRIMAS

Anna Zhigalova Latvijos universitetas (Latvia)

Santrauka

Šiuo tyrimu siekta nustatyti, kaip turėtų būti pertvarkyta specializuotų regioninių parduotuvių tinklo strategija, kad ji atitiktų vartotojų poreikius, padėtų konkuruoti su kitomis parduotuvėmis ir padidintų verslo efektyvumą. Išanalizuoti alkoholinių gėrimų vartojimo ir pirkimo įpročiai, priežastys, parduotuvių pasirinkimo kriterijai, suvokimas, specializuotų alkoholio parduotuvių įvaizdis bei vartotojų lūkesčiai. Taip pat išbandyta keletas verslo plėtros idėjų, tokių kaip asortimento keitimas ir naujos pardavimo tinklo koncepcijos vertinimas. Apklausti respondentai nuo 18 iki 60 metų, kurie pirko alkoholinius gėrimus per pastaruosius tris mėnesius. Apklausa parodė, kad vartotojų pasirinkimo kriterijai priklauso nuo progos, kuriai perkami alkoholiniai gė- rimai, nustatyta ir keletas svarbių alkoholio parduotuvės kriterijų: vieta, asortimentas, perkamiausių prekių kainų lygis ir parduotuvės įvaizdis. PAGRINDINIAI ŽODŽIAI: vartotojų elgsena, mažmeninė prekyba, strategija.

JEL kodai: L66; M31: C81

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288 References should be ranged by alphabet. The names of the source must be leaning. The list of references should be no less 20. Some examples [Time New Roman; 11 pt]: Beamish, P. W., Morrison, A. J., Inkpen, A. C., Rosenzweig, P. M. (2003). International Management. Singapore: McGraw-Hill. EU Enlargement – 20 Myths and Facts about Enlargement. (2006). European Commission. Luxem- bourg: Office for Official Publications of the European Communities. Nugent, N. (2006). Introduction: Does Size Matter in the European Union? European Integration, Vol. 28, No. 1, p. 14–20.

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REGIONAL FORMATION AND DEVELOPMENT STUDIES Journal of Social Sciences No. 3 (8)

Klaipėda, 2012

SL 1335. 2012 09 17. Apimtis 36,5 sąl. sp. l. Tiražas 100 egz. Išleido ir spausdino Klaipėdos universiteto leidykla, Herkaus Manto g. 84, 92294 Klaipėda Tel. (8 46) 398 891, el. paštas: [email protected]; interneto adresas: http://www.ku.lt/leidykla/

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