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TABLE OF CONTENTS

1. Angrisani Massimo, Di Palo Cinzia, Fantaccione Roberto, Palazzo Anna Maria - The Leslie model and population stability: an application...............................................................................................4 2. Canco Irina – The decision-making method, another argument for the business success...............15 3. Černá Jana – Universities and firms in the Trnava self-governing region: aspects of cooperation..............................................................................................................................................24 4. Černikovaitė Miglė Eleonora – Brand value co-creation factors: stakeholder approach.................32 5. Diawara Barassou, Saeki Chikayoshi, Hanson Kobena – Social capital and poverty reduction – empirical evidence from Senegal........................................................................................................41 6. Dogaru Tatiana-Camelia – Shaping public policy in the context of welfare state transformation...75 7. Dokukina Anna A. - Prospects of Russian industrial development on the global market (the case of business aviation industry) .................................................................................................................86 8. Gogan Luminita-Maria, Draghici Anca – A performance model to evaluate human capital ..........101 9. Grigore Alina-Aurelia – Social economy entities: a worldwide overview........................................111 10. Ilollari (Findiku) Orkida, Gjino Gentiana - Which forces drive the banks to new investments?

Innovation mechanisms banks use to succeed challenges..............................................................121 11. Ianenkova Iryna – The use of international experience managing organizational capital in enterprises..........................................................................................................................................131 12. Ivan Dragos Lucian – A cluster of reconfigurations graining ground through Globalization. How is the family being transformed?......................................................................................................140 13. Khomiak Vasyl – Does the contagion effect of the Balance of Payment crisis exist? Ukrainian case.....................................................................................................................................................151 14. Liakhovets Olena – Democracy and economic freedom in a global modernization process: the case of Ukraine..........................................................................................................................................160 15. Lobont Oana-Ramona, Moldovan Nicoleta Claudia, Vladusel Ioana – Education regarding taxation from the attitude and intuition to experiment…………………………………..…………………172 16. Muça Brunilda, Doraci Galantina – Effects of informality in Albania’s small enterprises.............180 17. Naanwaab Cephas, Yeboah Osei-Agyeman – Migrant remittances and human capital investments……………………………………………………………………………………...….191 18. Roccisano Federica – On intergenerational mobility in Italy: what a difficult future for the young..................................................................................................................................................203 EYLDS Project Dissemination Panel 19. Barna Cristina - Education for active citizenship in national and European context...................217 20. Epure Manuela - Empowering youth leadership for democracy sustainability...............................223 21. Ruxandra Vasilescu - Semiotics and leadership: making meaning for the young generation.......234

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Book review 1. Barna Cristina - Jana Gašparíková, Jana M. Šafránková, Zdeňka Matoušková – ‘Innovative mission in education and science’…………………………………………………………………240

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The Leslie model and population stability: an application Massimo Angrisani 1, Cinzia Di Palo 2 , Roberto Fantaccione 3 , Anna Maria Palazzo 4 1

Sapienza University of Rome, Italy 2,4 University of Cassino, Italy 3 ITIS of Cassino, Italy

Abstract. In many countries with high socio-economic development, demographic trends highlight meaningful changes in the population structure and size especially due to the joined effects of declining fertility rates and increasing life expectancies, particularly at older ages. This phenomenon leads mainly to a drastic increase in the ratio of the elderly to the young active population and undermines the welfare systems. Specifically, it puts hard pressure on pension systems where the current expenditure is paid by the current contributions in the light of a pay-as-you-go financing because it occurs that the former is increasing and the latter is decreasing due to the afore-said phenomenon.

In this paper, first we analyse the population forecast of five high-income countries on the basis of the current values of fertility rates and survival probabilities. We apply the Leslie model in a form elaborated by one of the authors in a previous article written in collaboration. Our findings confirm that the considered populations numerically decrease according to the value of the Leslie dominant eigenvalue lower than one, while the percentage distribution by age stabilises itself proportionally to the Leslie dominant eigenvector.

The structure of this distribution indicates the afore-said “reversal” of the ratio of the elderly to the young population.

Therefore, also consistently with the criterion of Brauer-Solow, we estimate the adjustment rate of the fertility rates at all ages in the female Leslie matrix so that the dominant eigenvalue is equal to one and thus the population tends to stabilise in its size in addition to its percentage distribution by age. As it is clear, this adjustment also involves a change in the Leslie dominant eigenvector and a realignment of the ratio of the elderly to the young population on lower values.

Keywords: population stability, demographic changes, Leslie matrix model.

JEL Codes: C02, J10, J11

1. Introduction Population ageing is a demographic phenomenon in which fertility and mortality decline from higher to lower levels. Decreasing fertility and longer life expectancy redraw the age structure of the population as they involve the increase of the relative weight of the older age groups with respect to the total population. In fact, a decline in fertility reduces the number of babies and, hence, the number of younger people and an increase in longevity raises the number of surviving older people, so enlarging the size of the older age groups.

Currently, the phenomenon of the population aging involves many countries at high socio-economic development all over the world. Even though it has to be considered as a sign of well-being and progress 

Corresponding author. Tel.: + 39(0776)2994752; fax: +39(0776)2994834.

E-mail address: c.dipalo@unicas.it .

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under a social, cultural and economic point of view, at the same time it results in issues for the sustainability of social security systems, particularly if they are pay-as-you-go financed as usually it occurs. With specific regard to the major part of the European countries, which currently experience low rates of mortality up to advanced adult ages and persistent low rates of fertility, the observed or projected decline in the population is considered one of the main challenges to long-term social and economic sustainability, as highlighted by national governments and the European Commission. This is even more emphasised by the current economic crisis that puts a further increasing pressure on economic systems and negatively impacts on public finances.

Therefore, in order to better understand at which extent the socio-economic challenge of the population aging affects sustainability of social security schemes, it is appropriate to analyse the current and projected dynamics of the population and its distribution by age, whose changes depend on the trends in three key factors: fertility rates, survival probabilities, and net migration inflows. With regard to European countries, we refer to the analysis provided by the European Commission and the Economic Policy Committee (EPC) Working Group on Ageing Populations (AWG) published in the latest report of 2012 (Economic Policy Committee & European Commission, 2012).

In the next decades, it is expected a slow recovery in fertility rates. For the Europe as a whole, the total fertility rate is projected to rise from 1.59 in 2010 to 1.71 by 2060, with the exception of some countries, among which Sweden, where the total fertility rate is expected to decrease though remaining above 1.9, and countries as Belgium, Denmark and Finland where it is projected to remain stable. However, “…in all countries the fertility rates are expected to remain below the natural replacement rate of 2.1 in the period to 2060...”, (Economic Policy Committee & European Commission, 2012, p. 24).

Differently, a further increase in survival probabilities is expected. Life expectancy at birth is projected to increase by about 8 years for males moving from 76.7 in 2010 to 84.6 in 2060, and by about 6.5 years for females, moving from 82.5 in 2010 to 89.1 in 2060. The AWG population projections use the “convergence hypothesis”, namely life expectancy increases are assumed to be greater for countries at lower levels of life expectancy and smaller for those at higher levels, thus following convergent trajectories. In spite of the “convergence hypothesis” underlying the projections, countries as Italy and Sweden result in having the highest life expectancy at birth for male in 2010 (Italy 78.9 and Sweden 79.4) and in projection to 2060 (85.5 in Sweden and Italy).

Net migration to the European countries has to be considered jointly the previous factors. “… For the Europe as a whole, annual net inflows are projected to increase from about 1,043,000 people in 2010 (equivalent to 0.2% of the natural EU population) to 1,332,500 by 2020 and thereafter declining to 945,000 people by 2060…”, see (Economic Policy Committee & European Commission, 2012, p. 25). The cumulated net migration towards Europe is projected to be 60.7 million up to 2060, with particular concentration towards a few destination countries, first of all Italy (15.9 million cumulated up to 2060), followed by Spain (11.2 million) and United Kingdom(8.6 million).

According to the above cited report, under the assumed projected trends and on the basis of current policies, for the Europe as a whole the age-related public expenditure is projected to increase by 4.1 percentage points of GDP between 2010 and 2060. Specifically, the only public pension expenditure is projected to increase by 1.5 p.p. of GDP over the same period, even though with notable diversities across EU Member States depending on the stage of implementation of pension reforms.

The main goal of this paper consists in analysing the issue of population stability. We aim to understand if the population tends to stabilize under current fertility rates and survival probabilities, namely if the size and the percentage distribution by age of the population stabilise. We neglect the effects of migration as the question on the levels of migration required to compensate for low fertility rates is still debated, see e.g., among

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many others, Lesthaeghe (2000), Alho (2008). In recent years, migration has been considered as an important phenomenon driving the changing in the population, especially for many European countries that experienced an increase in the population size following an increasing immigration. On the other hand, “… numerous studies have shown that the numbers of migrants must be very large to have an appreciable effect on population aging…”, (National Research Council, 2001, p. 44). Other authors argue that international immigration does not play an important role in hindering the population ageing, see e.g. Guillemette and Robson (2009), and also that its role in changing age distributions has been far less important than that of fertility and mortality (Lesthaeghe (2000), United Nations (2009). In Angrisani, Attias, Bianchi and Varga (2012), the authors extend the Leslie model in order to include the immigration effects.

We apply the population projection model of (Leslie, 1945) in a form different from the classical method as it considers the population divided into sexes, as in Angrisani, Attias, Bianchi and Varga (2004). We consider four European countries, which are Germany, Italy, Spain and Sweden, and Japan that represents the most long-lived country, according to the OECD (2013).

The theory of Leslie tells us that under constant fertility rates and survival probabilities the population tends to stabilise in its percentage distribution by age, in any case. This phenomenon is clear referring to all considered populations, as in the numerical illustrations we report in Figure 1(b). With regard to the size, as in the numerical illustrations we report in Figure 1(a), the examined populations decline according yearly factors of decrease, which tend to the dominant eigenvalue of the reduced female Leslie matrix. This eigenvalue is less than one for each considered population.

The paper is structured as follows. In section 2, we briefly review the Leslie model and its modified form we use to numerical evaluation. In Section 3, we evaluate the dominant eigenvalue corresponding to the population matrix of the considered countries and we estimate the adjustment to be applied to the fertility rates at each age assuming unchanged the current probabilities of survival. Section 4 concludes.

2. The Leslie demographic model Projection matrix methods are well-known tools for modelling population dynamics.

In this paper, we deals with the population projection model of Leslie (1945), who wrote the pioneer work dealing with the ecologic problem of the population growth. We refer to a form different from the classical model as it considers the population divided into sexes, see the approach of Angrisani et al. (2004).

In the Leslie model, age-specific mortality and fertility rates are used to model the dynamics of population age structure. Both time and age are discrete variables defined on yearly bases.

We suppose that the individuals of a population are categorised into a finite number of age classes.

Let N  1 be the maximum attainable age by an individual being alive whatever the belonging sex is, namely no individual is alive at age N . We consider the population separated in the two sex and grouped in N age classes for i  0, 1, 2,... N  1 . In the following, let us denote with: -

x F  t  and x M  t  the N-dimensional vectors for the female and male population at time t , respectively;

-

 i the reproduction rate for females of age group i (counting all new-borns of both sexes) with i  0 for i  0, 1,2,... N  1 ;

-



x0F  0  x0  0 

the sex female ratio at birth in the year 0;

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-

 iF the female per capita birth rate with iF i  for i 15,16,...50 and iF  0 for the remaining age groups;

-

iF and iM the probabilities of surviving from age i to age i 1 for i  0, 1,2,... N  1 for females

and males, respectively.

Then, the corresponding N  N Leslie matrix for the female population is given by F  0 0 ... 15  F 0 ... 0 0 F  L   0 1F ... 0  . . ... .   0 0 ... 0 and the dynamics of the female population is

F ...  50

0 ...

0

...

0

0 ...

0

... ...

0 .

0 ... . ...

0 .

...

0

0 ...  NF 2

x F  t  1  LF x F  t 

0  0  0 .  0 

with t  0,1,2,...

Analogously, the corresponding N  N Leslie matrix for the male population is given by  0  M 0 M  L  0   .   0

0

... 0 ... 0 0 ...

0

0

... 0 ... 0 0 ...

0

1M .

... 0 ... 0 0 ... ... . ... . . ...

0 .

0

... 0 ... 0 0 ...  NM2

0  0  0 .  0 

and the dynamics of the male population is x M  t  1  LM x M  t  

1



e1 LF x F  t 

where e1 is the N-dimensional basic vector and a b   a1b1 , a2b2 ,...aN bN  .

with t  0,1,2,...

denotes the Hadamard product of vectors,

For the whole population, expressed by state vector x   x F x M  T , we have the following dynamics   x  t  1  x  t  with t  0,1,2,... where the 2 N  2 N block matrix  is defined as

 LF   d  0

0   0   L1M 

in which d is the N -dimensional row vector

 1 F 1 F d  0 0 ... 15 ...    50 

 0 ... 0 0  

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and L1M denotes the  N  1 N  matrix 0M  M  0 L1    .  0 

0

... 0 ... 0 0 ...

0

1M .

... 0 ... 0 0 ... ... . ... . . ...

0 .

0

... 0 ... 0 0 ...  NM2

0  0 . . 0 

Since nonnegative matrix  contains a zero column, it is not irreducible and therefore the PerronFrobenius theorem cannot be applied.

Then, following Angrisani et al. (2004), the existence of a demographic equilibrium, namely the existence of an equilibrium age distribution, is obtained by means of the application of the Perron-Frobenius theorem to a sub-matrix of the Leslie female matrix.

Therefore, we consider the nonnegative sub-matrix obtained by matrix LF extracting the first 51 rows and columns, i.e.  0  F 0  F L50   0  .   0

F F F  ... 15 ...  49  50  ... 0 ... 0 0   ... 0 ... 0 0 . ... . ... . .   F ... 0 ... 49 0 

0 0

1F .

0

F As verified in Angrisani et al. (2004), sub-matrix L50 is irreducible and primitive. Hence, by the PerronF Frobenius theorem, L50 has a unique positive eigenvalue 0 strictly dominant over the other eigenvalues,

namely 0  i for all i 1,2,3,...50 . This particular eigenvalue 0 is associated with a positive eigenvector 50 0F

x

(a population state referred to the women aged from 0 to 50). Furthermore, it follows that, fixed the

initial state vector that

50 F

x

 0

of the female sub-population aged from 0 to 50, there exists a number s  0 such

L  lim

F t 50 F x 50

t 

 0

0t

50 F

 lim

t 

x

0t

t   s



50 0 F

x

,

namely the existence of the asymptotic behaviour for female population restricted to ages up to 50 is proved.

From this result, it is also proved that the complete female population stabilizes asymptotically, i.e. lim

t 

xF t 

0t

 s x0 F ,

where x 0 F is a nonnegative eigenvector of matrix LF associated with the positive eigenvalue 0 and whose first 51 entries are equal to those of

50 0F

x

.

In a similar way, it is proved that also the male population stabilizes asymptotically, i.e.

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lim

t 

xM t 

0t

 s x0 M ,

where x0 M is a nonnegative eigenvector of matrix LM associated with the positive eigenvalue 0 .

Hence, for the whole population it is proved that a demographic equilibrium exists, “…that is a population state x 0 which is a nonnegative eigenvector of matrix  , associated with a positive eigenvalue 0 , and on the long term the age distribution of the population tends to the equilibrium age distribution in the sense that, for any initial state x  0  , there exists s  0 such that lim

t 

x t 

0t

 s x0 …”,

(1)

 x0 F  where x 0 is x 0    , see Angrisani et al. (2004), p. 363.

0M  x 

By (1), it follows that for large values of t the population vector is proportional to the nonnegative eigenvector x 0 associated with the positive eigenvalue 0 of matrix  . Consequently, the proportion of individuals in each class of age with respect to the total population tends to value of the ratio of the same age class and the total population of the eigenvector x 0 .

3. Applications In this section, we apply the Leslie model in the form reviewed above. We take into account four European countries, Germany, Italy, Spain and Sweden that experience very low mortality rates, and Japan that is the most long lived country in the world according to the list by the Organisation for Economic Cooperation and Development (OECD, 2013).

To examine trends in population dynamics, we rely on data for year 2008 available from the Human Mortality Database (HMD) (http://www.mortality.org, data downloaded on July 2013) for population and mortality. With regard to the fertility rates for the same year 2008, we take data available from the Eurostat Database (http://appsso.eurostat.ec.europa.eu, data downloaded on July 2013) for the considered European countries, from the Human Fertility Database (HFD) (http://www.humanfertility.org, data downloaded on July, 2013) for Japan.

Our goal consists in understanding if the population tends to stabilise under the current fertility rates and survival probabilities, namely if the size and the percentage age distribution of the population stabilise.

Hence, as a consequence of (1), we calculate the value of the dominant eigenvalue 0 evaluating the tendential value of the ratio between the values of the population in two consecutive years.

With regard to the size, each examined population declines, see Figure 1(a), according to a yearly factor of decrease that tends to the dominant eigenvalue of the reduced female Leslie matrix. This eigenvalue is less than one for each considered population. The theory of Leslie tells us that under constant fertility rates and survival probabilities the percentage distribution of population by age tends to stabilise. This phenomenon is clear referring to all considered populations, as in the numerical illustrations we report in Figure 1(b).

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(a) Total population

Japan, dominant eigenvalue 0.986522 (b) Age distribution in percentage

Germany, dominant eigenvalue 0.986822 (a) Total population (b) Age distribution in percentage

(a) Total population

Italy, dominant eigenvalue 0,988017 (b) Age distribution in percentage

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(a) Total population

Spain, dominant eigenvalue 0,988851 (b) Age distribution in percentage

Sweden, dominant eigenvalue 0,997283 (a) Total population (b) Age distribution in percentage

Fig. 1: Trends of the total population (a) and the age distribution of population by percentage (b).

Source: Authors' calculations based on data in HMD, HFD and Eurostat Database.

The fact that the dominant eigenvalue is less than one for each considered population is consistent with another statement of the Perron-Frobenius theorem for nonnegative and irreducible matrices. In fact, this statement asserts that for the dominant eigenvalue the following conditions hold









F F min L50 i u  0  max L50 i u i

i

(2)

th F where L50 i is the i raw of the Leslie reduced female matrix for i  0,1, 2,...50 and u  1,1,...,1 .

T

Conditions (2) are also known as “criterion of Brauer-Solow”.

F In fact, we note that the sum of the first raw entries of L50 is equal to the sum of the female per capita F birth rates,  iF , while the sum of the entries of each other raw of L50 is equal to the female survival

probability for age i  0,1,2,...,49 and, therefore, is less than one. For each considered country, the sum of





F the female per capita birth rates results less than one. Therefore, max L50 i u 1 and, hence, by (2), 0 1 . i

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Total population under adjusted fertility rates Japan

Germany

Italy

Spain

Sweden Adjustment rate of the fertility rates Japan

52,24%

Germany

50,36%

Italy

46,67%

Spain

42,38%

Sweden

8,84%

Fig. 2: Trends of the total population by age under adjustment in fertility rates.

Source: Authors' calculations based on data in HMD, HFD and Eurostat Database.

Based on the above-mentioned criterion of Brauer-Solow, necessary condition to the dominant eigenvalue is greater than or equal to one is that the sum of the female per capita birth rates is greater than or

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F equal to one. In fact, for each other raw of matrix L50 the sum of the entries is equal to a survival probability

and then is less than one. Since the sum of the female per capita birth rates is less than one under the current fertility rates, we ask by the question on the rate of increase in fertility rates at all ages in the female Leslie matrix so that the dominant eigenvalue is equal to one. In fact, in this case the population tends to stabilise in size, in addition to its percentage distribution by age. This phenomenon is clear in the graphs reported in Figure 2, in which for each considered country the size of population by age stabilises and, hence, the percentage distribution by age stabilises. We have to observe the change in the age structure of population that experiences growth in the relative “weight” of the younger classes of age with respect to the older ones.

In the calculation, we suppose that the female per capita birth rates change by a constant proportion at all ages, so that the adjusted female birth rates are given by iF *  1  k iF , where k is a constant determined so that the dominant eigenvalue differs from is one with an absolute error lower than 108 . In Figure 2, we illustrate obtained results.

4. Conclusion In this paper, we applied the Leslie model in the different form that considers the population divided into sexes, as in Angrisani et al. (2004), using the current values of fertility rates and survival probabilities of some countries at high socio-economic development and high life expectancy. Our analysis confirms that the considered populations numerically decline according to the value of the Leslie dominant eigenvalue, which results lower than one for each country, while the percentage distribution of population by age stabilizes as it is expected by the Perron-Frobenius theory.

Moreover, with regard to the issue of the population stability that concerns developed countries all over the world on the sustainability of the social security schemes pay-as-you-go financed, we have numerically evaluated the rate of adjustment of the fertility rates at all ages so that the dominant eigenvalue is equal to one, namely so that the population stabilises in the size besides in the percentage distribution by age.

5. References [1] Alho, J. M. Migration, fertility, and aging in stable populations. Demography. 2008, 45(3): 641-650.

[2] Angrisani, M., Attias, A., Bianchi, S., & Varga, Z. Demographic dynamics for the pay-as-you-go pension system. Pure Mathematics and Applications. 2004, 15(4), 357-374.

[3] Angrisani, M., Attias, A., Bianchi, S., & Varga, Z. Sustainability of a pay-as-you-go pension system by dynamic immigration control. Applied Mathematics and Computation. 2012, 219(5), 2442-2452.

[4] Economic Policy Committee, & European Commission. The 2012 Ageing report: Economic and budgetary projections for the 27 EU Member States (2010-2060). In: European Economy, Vol. 2. 2012, pp. 427.

[5] Eurostat Database. Statistics database. Available at http://epp.eurostat.ec.europa.eu (data downloaded on [July 2013]).

[6] Guillemette, Y., & Robson, W. No elixir of youth: Immigration cannot keep Canada young: CD Howe Institute, 2009.

[7] Human Fertility Database. Max Planck Institute for Demographic Research (Germany) Vienna Institute of Demography (Austria). Available at http://www.humanfertility.org (data downloaded on [July 2013]).

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[8] Human Mortality Database. University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Available at www.mortality.org or www.humanmortality.de (data downloaded on [July 2013]).

[9] Leslie, P. H. On the use of matrices in certain population mathematics. Biometrika. 1945, 33(3), 183-212.

[10] Lesthaeghe, R. Europe's demographic issues: fertility, household formation and replacement migration: Interface Demography, Vrije Universiteit Brussel, 2000.

[11] National Research Council. Preparing for an Aging World: The Case for Cross-National Research.

Washington, DC: The National Academies Press, 2001.

[12] OECD. Life expectancy at birth, total population 2013/2, 2013.

[13] United Nations. World population ageing. New York: Population English Edition. 2009, 7(4).

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The decision-making method, another argument for the business success Irina CANCO 1+ 1

Faculty of Business and Economics University of Pecs – Hungary, Ministry of Finance – Albania

Abstract.The attempt for successful decision-making in business has been and still is a continuous managerial concern. The decision- making activity is very old. The Antiquity is compared to the upcoming of the human society. Currently, when Albania is involved in the integration process within the European structures, decisionmaking gets a special importance. In this context, the focus refers to problems of the methods used in decisionmaking. According to researches it comes out 76% of the managers use consider the manual methods. But the society is currently facing many economic problems. Therefore, we think and believe that it is very important that decision-making in business should support a new vision: decision- making oriented towards the statistical, econometric mathematical and computational methods. The achievement of this intention is linked with continuous efforts of the experts to affect the managers in order to change their psychology, with the aim to orient the decision-making towards contemporary methods, traditionally relied on as accurate. After the theoretical treatment, considering the paper dimensions there will be an evidence of the factors that have defined the current status of decision-making in business. In this context, the paper is a modest contribution that intends to highlight the rate of the dependence of the business success from the decision- making. The analysis will consider the opinion of the experts aiming at an examination of the current situation of decision-making in Albanian businesses. Interview was used as the main instrument to gather data. The data processing will be made by statistic method.

Keywords: coefficient of association, coefficient of Spearman, decision-making, performance.

JEL codes: D70.

1. Problem definition Every individual either alone or in group, in every aspect of his/her activity, personal, familial, social or economic, is involved in a process of continuous decision-making. “Decision-making is an integral part of our daily lives. It ranges in scope from individual to the largest groups and societies, including nations and ultimately, organizations at the global level” (Chankong, Vira & Hiames Yacov,

+PhD student, Faculty of Business and Economics. Corresponding author: cancoirina@yahoo.com

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Y., 1983).

But decisions in the business are specific engagement. The decisions in the business organizations represent a managerial engagement and they are important parts of managerial responsibility.

Decisions are not an intention in themselves, they are made to fulfill certain intentions of the business, and seen from this point of view they are loaded with responsibility. They are numerous, of different types and conditioned by the problem to be solved, the time when they need to be made and the consequences they may have.

Analyzing some decisions in business there comes out that each of decision-making aspects and the whole process of decision-making is lead by judgment. According to Jeremy Kourdi (2003), Peter Drucker, when speaking about judgement states that: “Every decision is a risk-taking judgment …”. Treating the decision as a risky judgment from Peter Drucker, I think that he is based on the fact that the decision-maker cannot have full security of the decision-making consequences, because of the great number of factors that affect the decision, and because of the conditions where the decision is implemented. Therefore, further on Drucker defines that: “Effective executives try to make the few important decisions on the highest level of conceptual understanding” (Jeremy Kourdi, 2003). But judgment, on its side, is the thought dimension. The importance of thought in decision-making is highlighted by the fact that the thought is one of the three secrets of wise decision-making. According to Barry F. Anderson (2002): “The three secrets of wise decision-making are courage, creativity, and balance in the management of complexity”. According to the attitude of the author, it is easily noticed that the three secrets of wise decision-making have in their centre the thought.

From the decision-making point of view, the thought remains in the centre of each of the decision’s “secret” that Barry F. Anderson treats as follows: Rationality is a matter of direction in thought. Rationality in thinking gives the individual (manager) the necessary courage. Courage on the other hand is very important as it makes you act convincingly.

Creativity is a matter of richness of thought. Creative decision- making considers broad ranges of alternatives, bases for evaluating those alternatives and events that might affect their value.

Judgment is a matter of balance in thought. Judicious decision making weighs the various fact and value considerations in proportion to their importance.

It is common fact that the decision-making focuses on problems that have to do with the business performance. The goal of every decision-making process is the increase of the incomes, minimizing the insecurities, the risk reduction, etc. All these have highlighted the necessity of improving the decision-making. As a result, the improvement of the decision-making quality has found the proper interest in the academic level as well as in the managerial level.

Every decision is evaluated by the problem it solves and its cost, which is conditioned besides others, by the method use for its preparation. We focused on the method use for decision preparation.

Currently, the managers more often use simple methods that refer to experience and personal intuition in the decision-making, whose efficiency is not very sure. It is understandable that the power of intuition in decision-making may not always provide efficient decisions. The concept of intuition leads to approximation not to effective solution of the problem that the decision aims. Based on intuition only, the decision-making may not be considered good and rational. Thus, the intuitive method of management should be replaced with that one based on scientific logic as the logic not intuition is the best effect in decision-making. On the basis of this, it becomes obvious that intuition should not be totally ignored in the process of decision-making but on the contrary it can be inhanced if it is based

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on contemporary methods.

Methods that have been used and are still used in decision-making are being analyzed in the historical scope, have evolved in accordance to the social-economic development of the society in general and the development of sciences in specific. Regarding this evolution, the integrity of different methods of decision-making may be divided in two groups. In more concrete terms, I think that the decision-making method groups may be classified as follows: First Group – manual method. In this group, as a rule there should be involved the describing methods of the economic phenomena. These methods support the managers’ experience and intuition. Manual methods belong to the period before 20th century.

Second group - contemporary methods. The use of contemporary methods in decision-making is a potential opportunity to increase the profitability of managers and business directors from the science development. From the point of view of decision-making the use of contemporary methods considers a simpler and more explicit way compared to the respective treatments in the existing literature. The use of contemporary methods in decision-making is an intertwined problem between science and practice. The contemporary methods (statistical, mathematical, econometric, etc methods) belong to the 20th century.

Managerial commitment for the use of contemporary methods in decision-making should consider these methods not simply in preparing the decision but, also the conditions of the business environment. The environmental conditions in which the decision is made may indicate the model that should be used. Only in this way, the model used will lead the manager towards success. The use of contemporary methods requires considerable availability of scientific knowledge by the decisionmaking manager. The using of the contemporary methods in decision-making should be a priority of every managerial level that engages in decision-making. Contemporary method provides the pretended quality in decision- making, as they simplify the vision on the economic phenomena and precise the goals.

2. Methodology The methodology provided in this paper serves to the objectives settled and it considers: Table work: focuses on the relevant economic literature researches in Albanian and other languages, different researches and studies, definition of the sample, preparation of the interview, data processing and preparation of conclusions.

Field work: refers to researches in various institutions, interviews with experts preliminarily selected and interview.

In this paper two kinds of research have been considered. In more concrete terms - the descriptive research – statistical description is used with the aim of acknowledging the situation, and the verifying research – non-parametrical statistical analysis (coefficient of association and coefficient of Spearman) necessary to explain and highlight the relations between variables. These methods were used alone as well as combined with each other. Whereas, the results of the survey of this paper on the necessity of using contemporary methods in decision-making are analysed according to the hypothesis:

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H: Is it important relation between the method used in the decision- making and the business performance?

The study involved three countries: Albania, Macedonia, Montenegro.

3. Result analysis Business performance is of interest for managers of every managerial level as it has to do with the achievement of objectives defined through work. The performance starts with decision-making in business. Evaluating the importance of decision-making for achieving the objectives the method used is very important. Regarding the decision-making importance and considering its role in business performance the experts interviewed accept that there is an important connection between the method used in decision-making and the business performance.

4. Descriptive analysis The interviewed experts, according to their position regarding the role of the method used in decision-making and its impact in the business performance were grouped in two groups and each in two levels. In the first there are the experts that support the opinion that the manual methods provide the business performance, whereas in the second group there are experts who consider the contemporary methods as a condition for a good performance. The data gathered by their interview may be reflected in the contingence table with r = 2 rows and c = 2 columns where the factual densities are presented for every variant combination between the kind of the method used in decision-making and the business performance in other unchangeable conditions as follows: Table No.1 Variables Less successful (y1) Successful (y2) Σ

Use manual methods a=8 c= 4 a+c = 12

contemporary methods b=3 d=15 b+d =18

Σ a+b = 11 c+d = 19 n = 30

This table serves for studying the links that exist between the method used in decision-making and the business performance such as the coefficient of association, Pearson coefficient, Spearman coefficient etc. Considering the data on the table of contingence it is acceptable for the calculation of the coefficient of Spearman, as the Spearman correlation is a version of the Pearson product-moment correlation.

Referring to the table of contingence the experts may be grouped in two groups regarding the time context: First group – experts who appreciate the manual methods Second group – experts who appreciate the contemporary methods For a more accurate appreciation of the relationship between the kind of method used in decisionmaking and the business performance, the experts were asked to evaluate individually with point system according to LIKERT scale, the level of the impact of the decision-making methods in the business performance. From the entity of the experts positioned in the 4th quadrant of the table of contingence that appreciate the contemporary methods five of them denied at first to do the evaluation with points of the impact of the decision-making method in business performance according to

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LIKERT scale. We insisted by deep questions and this made possible the reduction of this number to three. In this way, we lead to 24 experts to be considered. The individual evaluation of the experts enabled the respective grouping of these evaluations and the calculation of the respective relative densities to the group as well as to the total number of respondents. The grouped data and their relative densities are presented in the following table: Table No.2 Likert scale 1 2 3 4 5 Total First group The level of estimate 0 2 5 4 1 12 Relative densities to the group 0 16.7 41.6 33.3 8.4 100 Relative densities to the total 0 8.4 20.7 16.7 4.2 50 Second group The level of estimate 0 0 6 3 3 12 Relative densities to the group 0 0 50 25 25 100 Relative densities to the total 0 0 25 12.5 12.5 50 Total 0 2 11 7 4 24 Relative densities to the total 0 8.4 45.7 29.2 16.7 100 From the above table we may notice that the experts start their evaluation from level “two”.

None of the experts despite the above grouping is not positioned in the level “one” of the LIKERT scale. Whereas 8.4% of the experts, considered in this paper, have evaluated the level “two”, the impact of the decision-making in the business performance. These belong to the first group of experts, the experts that appreciate the manual methods. The relative biggest density has the level “three” of the evaluation. In this evaluation there are represented 45.7% of the experts considered in the level “four” there are positioned 29.2 of them. In the 5th level of LIKERT scale of the evaluation there are 16.7% of the total number of experts considered. Whereas expanding the analysis in the 5th level of evaluation within the respective groups we may notice that: Experts of the first group represent only 4.2% of the total.

Experts of the second group represent 12.5% of the total of the experts considered.

Even though the experts appreciate very much the role of the contemporary methods in decisionmaking as a factor of success in business in some cases they are skeptic for the evaluation in level “five” of LIKERT scale of the method role. A great part of them think that the success of business in level “five” should not necessarily attribute to the kind of the method used as a series of barriers in this direction that according to them can discredit the method itself. Some of these barriers may be: - The quality of the available data that condition the quality of the decision and the respective reflection in the business performance which is a dominant opinion of the experts (87.5% of them).

- The professionalism of the manager to define the referring method for the available data. This is the opinion of 46% of the respondents with the claim that in this direction the manager, in order to be successful he should consider the opinion of experts.

Time as an important element considered by two point of views, the first one has to do with the time when the manager is provided with necessary data. Whereas, the second point of view, the “time” element has to do with the managerial engagement in the best time possible for the decision preparation. The time element is appreciated by 33% of the experts considered, as they claim, selection of time limits is a situation manageable by the decision-making manager.

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The way of decision implementation is referred by 26% of the respondents.

Selection of the contemporary method and the respective technique which is influenced by the problem specifics on which the decision was made.

5. The non-parametrical analysis Despite the above, all the experts think that there is a connection between the kind of the method used (either manual or contemporary) in decision-making and the business performance.

In order to consolidate this opinion, in the position of the researcher, the data of the interview were processed according to the non-parametric method of the range of Spearman. In order to use this method it is necessary a preliminary preparation such as: The gathered data from the interviews with experts should be preliminarily processed ordering them according to the increase of values. This is presented in the following table: Table No. 3 Nr. Manual method Contemporary method 1 2 3 2 2 3 3 3 3 4 3 3 5 3 3 6 3 3 7 3 4 8 4 4 9 4 4 10 4 5 11 4 5 12 5 5 The above data enable the processing by means of non parametric methods and concretely in this paper it is considered the coefficient of the range of Spearman. Starting from the labeling, this non parametric method considers – the range that expresses the place of variables according to their size in the same conditions compared.

The ranges are as follow: Rx 1.5 1.5 5 5 5 5 5 9.5 9.5 9.5 9.5

Ry 3.5 3.5 3.5 3.5 3.5 3.5 8 8 8 11 11

Di=Rx-Ry 2 2 1.5 1.5 1.5 1.5 3 1.5 1.5 1.5 1.5

Di2 4 4 2.25 2.25 2.25 2.25 9 2.25 2.25 2.25 2.25

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12 Total

11

1

1 36

The respective range are calculate as follow: The manual method:

The contemporary method:

Level “2”- (1+2)/2 = 1.5

Level “3”- (1+2+3+4+5+6)/6 = 3.5

Level “3”- (3+4+5+6+7)/5 = 5

Level “4”-(7+8+9)/3 = 8

Level “4” - (8+9+10+11)/4 = 9.5

Level “5”- (10+11+12)/3 = 11

The end of preliminarily preparation enables the processing of data. The data processing according to this method follows this order: Defining the rate of correlation between the variables by considering their respective ranges through this formula:

where: di - express the variation between the ranges of the values of the variables. n - expresses the number of variations Approximate mistake of this evaluating indicator on the importance of the correlation of the range according to Spearman is calculated as it follows: =0

It is calculated the factual value of the criterion “Zf”:

It is defined the critical value “Zα/2”

= 0.05/2 = 1.645

It is compared the “Zf” with “Zα/2“ In case Zf › Zα/2 it is said that the relation between the variables is very important.

Based on our dates:

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= 0.874

= 0.301 Zf = 0.874/0.301 = 2.903 › 1.645 So the relation between the variables is very important.

6. Indicators of the relations Despite the above, based on the data of the table of contingence, it is studied as well the relation between the kind of method used and the business performance. For this it is used the coefficient of the association.

The coefficient of association is treated in both its forms:

Ka =

- coefficient of Jul

Ka = 0.81

-

the coefficient of the relation

Kl =

Kl =

= 0.9

The coefficient of association in both its forms highlight the fact that the business performance positively depends considerably on the method used in decision-making.

For a more consolidated opinion the above conclusions are supported by the “rule of thumb”. So, if the coefficient is greater than 0.707 the relation between the variables is very important.

7. Conclusions and suggestions Developing alternatives of the economy highlight the necessity of the commitment in researches in

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various fields, among others in the field of decision-making, which is a challenge. From this point of view the researches are important as they highlight the problems that aim solutions. Thus the actual paper on the relationships between the kind of method used in decision-making and the business performance it highlighted these problems: •

Based on the surveys, analyses and evaluations of the experts it is noticed that the decision-making is a factor of success of the business especially in the conditions of the struggle of competition.

•

The use of statistical non-parametric methods highlight the positive relations between the method used in decision- making and the business performance.

•

Currently we can conclude that the use of contemporary methods in decision-making is not of a considerable degree. The obstacles in this direction has been and still is the background of the albanian managers as the result of the past economy which is extremely centralized. This has inevitably lead to non sufficient acknowledgement of the theory and practices of quality decisionmaking from the managers.

•

The shortages of qualifying programs in the decision-making field and the shortages of the consulence have been evident in the activity of the managers.

Though there is a positive attitude in using the contemporary methods in decision-making the situation of business in this direction has many handicaps. Therefore the following suggestions may be considered as very important:

8. Suggestions • •

It is required an institutional will to treat the managers in the field of decision-making in general and especially in the field of using the contemporary methods. .

It is necessary to increase the cooperation with universities in order to increase the business profitability by the application of science innovations.

9. Acknowledgements The study is supported by Albanian Excellence Fund.

10. References [1] Anderson Barry F., 2002: “The three secrets of wise decision making”; Single Reef Press Portland Oregon [2] Eliseva I.I., Juzbashev M.M., 2004: “Financi i statistika”; Moskva [3] Kothari, C.R., 2004: “Research Methodology, Methods and techniques”; New Age International (P) Ltd, PublisherC hankong, Vira & Hiames Yacov, Y., 1983 “Multiobjective Decision Making, Theory and Methodology”; Series Volume 8, Elsevier Sciences Publishing Co. Inc [4] Kourdi Jeremy , 2003: “Business Strategy. A guide of effective decision making”; published by Profile Books Ltd, 3A Exmouth House [5] Myslym Osmani, 2004 “Statistics”, GEER.

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Universities and firms in the Trnava self-governing region: aspects of co-operation Jana Černá1+ 1

University of Ss. Cyril and Methodius in Trnava, Faculty of Mass Media Communications, Slovakia

Abstract. The potential of universities has an indisputable influence on the whole regional environment. In general, this potential can be seen on 3 basic levels: (1) influence on the innovative entrepreneurial environment, (2) influence on the formation of human capital in the region, (3) influence on a further social and cultural development of the region. This contribution analyses the aspects of the universities’ influence on the entrepreneurial environment. At present, this subject is being discussed at the national level.

Moreover, Slovak universities themselves by their activities focus on different forms of co-operation. The cooperation between universities and enterprises is studied specifically for the Trnava Self-Governing Region which represents in the regional typology one of the economic core regions. As knowledge interactions and their distribution into the entrepreneurial environment behave differently in individual region types, they can be studied objectively only under concrete conditions. The analysis of the present state co-operation between universities and enterprises and the identification of barriers to knowledge distribution from universities into the entrepreneurial environment in the Trnava Self-Governing Region were the main objectives of the survey conducted in the second half of 2012.

Keywords: universities, enterprises, Trnava Self-Governing Region, co-operation, knowledge, barriers JEL Codes: O18, R11, R58

1. Introduction Within mutual co-operation relationships between universities and practice, many failures and weak points exist: companies and universities have different goals and priorities; there are problems with the search of convenient partners; universities’ research themes often do not correspond with the needs of practice; public sources necessary for the realisation of research are limited, etc. That is why under the current conditions of our country, co-operation between universities and entrepreneurial practice requires an increased mutual effort of communication, harmonisation of common procedures, the search of different ways of commercialising universities’ outcomes as well as increasing the absorption capacity of the business sector to process and profit from research outcomes. National or regional politics often interferes between the two subjects by various measures.

From the point of view of the character of individual actors in co-operation (OECD, 2007), three main types of relationship between higher education institutions and the business sphere are distinguished: +

PhD. Corresponding author. Tel.: + 421 33 55 65 208; fax: + 421 33 55 65 421. E-mail address: jana.cerna1@gmail.com

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e-mail: editors@reaser.eu   

relations between transnational companies and world-class universities – companies outsource a part of their research, e.g. by the use of university laboratories or co-operation with researchers and students; relations between universities and small high-technology firms (spin-offs or companies which are heavily reliant on professional knowledge, so-called knowledge-intensive business services); relations between companies of regional character (most often small and medium-sized businesses) and local higher education institutions. In the majority of cases, these are shortterm relations which are aimed at concrete project solving and accompanied by the formation of various clusters around universities.

The experience from the innovative companies’ practice has shown the necessity of getting involved in so-called knowledge networks and that is why such companies often become members of various alliances and partnerships which usually comprise universities as well. In several studies focused on the regional development and growth, the importance of the university-enterprise spatial proximity has been noticed (e.g. Crevoisier, 2007). The most innovative sectors are very often located in the proximity of universities and they connect their business activities with the research and development going on at universities. Knowledge becomes deeply rooted in the regional environment as a result of such intensive co-operation and a so-called learning region is born (e.g. B. Lundvall).

As for the classification of individual forms and levels of university-enterprise co-operation and the intensity of knowledge interactions, several methodologies can be found. Regional specificities are taken into consideration for example in the studies of Boucher, Conway and Meer (2003) 2, in our country for example Buček, Rehák and Hudec (2011)3. Other studies analyse co-operation from the point of view of the knowledge transfer intensity, e.g. the European Union’s “Connecting Universities to Regional Growth” (2011).

2. Initial state of the Trnava region From the point of view of the regional typology, the Trnava region can be classified as one of the economic core regions (in English publications, “old industrial regions”). Such regions are characterised by a high degree of specialisation on industrial branches in the past which reached its peak in our country in 1980’s. At present, structural problems and economic underdevelopment caused by ICT and orientation of national economies towards knowledge intensive sectors are typical for these regions. They lack the innovation environment and rigid industrial relations prevail in them. They are poorly attractive for new investors aesthetically and/or environmentally. The main remnant of the past industrial specialisation is an education system still oriented towards technical industrial branches which are however passé and often do not correspond with current market demands. Managerial skills are often missing (Tödtling, F., Trippl, M., 2005). Poor university-firm co-operation is closely related to the lack of mutual trust and missing tradition of co-operation between these institutions.4 Since economic core regions are characterised by lower research and development expenses in comparison with e.g. metropolitan regions, this situation can lead to insufficient saturation of research and development institutions’ activities (Buček et al., 2011).

2

UNIREG: research focused on the role of universities in the regional development. It was done in 14 regions of 7 different member states of the European Union.

3 REDIPE: research focused on regional dimensions of the knowledge economy. It was done in 4 regions at NUTS III level in Slovakia between 2009 and 2011.

4 Such questions of mutual trust between institutions are treated by the social capital theory.

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2.1 Methodology of survey In the second half of 2012, a questionnaire survey focused on the forms and barriers of co-operation between universities and companies located in the Trnava region was performed. The chosen sample of respondents represented business entities identified as innovative business entities operating in the territory of the Trnava Self-Governing Region. These subjects were addressed both electronically and in person, by a mixed research method. The questionnaire was anonymous. In total, 50 respondents were asked to participate in the survey, including micro-enterprises, small, medium-sized and big innovative companies. The response rate of the questionnaire represented 80%. In this contribution, we are going to deal only with some chosen results.

2.2 Survey about the forms of university-firm co-operation in the Trnava region - results The survey has shown that as much as 70% of respondents co-operated with universities. Companies identified several forms of co-operation shown in graph 1, whereas co-operative firms indicated most often several forms of co-operation at once. The most current forms of university-business co-operation were research co-operation in the form of final thesis supervision and informal contacts. Co-operation in the form of participation at conferences organised by universities also appeared in a significant number of answers. Then came the training of employees by university teachers and the membership of university boards. In the categories of common studies publishing, employee mobility and intellectual property no answer was recorded.

Graph 1: Forms of university-enterprise co-operation

Source: author

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e-mail: editors@reaser.eu Knowledge transformation and transfer are the most intensive in the case of research and technology centres and the least intensive in that of consultancy services.5 According to the results of the questionnaire survey carried out in the Trnava Self-Governing Region, the biggest number of answers can be approached to the character of consultancy services; in our country, they represent a form of mediation of new theoretical knowledge or research outcomes and show the lowest degree of complexity within the transformation mechanism: co-operation in research and development in the form of final thesis supervision and participation at conferences organised by universities. Answers referring to co-operation in science and research in the form of final thesis supervision demonstrate a considerable level of knowledge exchange between enterprises and universities in the Trnava region. It would be useful to examine in detail whether knowledge flow passes from companies to universities (if students learn from good, practical examples), or whether the outcomes of bachelor’s and master’s theses are later applied in business practice. In any case, these answers prove the existence of an important openness in enterprises and their willingness to discuss their business with universities.

According to the study UNIREG (2003), a high level of informal contacts was registered in central regions and economic core regions (whereas the studied Trnava Self-Governing Region belongs to the category of economic core regions). Although informal contacts appear in a high number of entrepreneurs’ answers, it is necessary to find out to what extent such informal contacts really end up in a concrete and economically quantifiable value. The fact that companies mentioned the existence of informal contacts as one of the forms of co-operation with universities can be considered as a positive finding taking into account the potential progress of mutual co-operation. This kind of answer can also mean that companies gain certain benefits for their business from these informal contacts since through informal contacts, tacit knowledge passes with greater intensity.6 This fact can therefore be positive for universities as it represents a certain potential to commercialise their research outcomes, to obtain up-to-date information about the needs of practice when it comes to the modification of study programmes or universities’ research orientation, etc. Given the ambiguity in the form of registered informal contacts, it would be useful to examine them more closely.

An interesting discovery is that almost all micro-enterprises (92%) cited informal contacts as one of the forms of co-operation and more than a half of them mentioned participation at conferences organised by universities (62%). From these results, it can be deduced that a certain contact with universities represents a contribution for the segment of micro-enterprises.

In our questionnaire survey, we found two firms which co-operated with universities on the basis of common infrastructure (common laboratories, equipment, ICT, localisation in common institutions, e.g. science parks). Both of them specialised in engineering, one belonging to the category of large enterprises, the other being a medium-sized business. We also took note of one firm which cooperated with universities on the bases of spin-off and academic entrepreneurship. This respondent also specialised in the engineering industry and belonged to the category of medium-sized businesses.

Co-operative companies were also asked about the stimuli which had led them to establish mutual co-operation with universities: whether the initiative had come from the part of the company or from that of the university department. Most of the firms (as much as 86% of respondents) said that the 5

According to the EU study “Connecting Universities to Regional Growth” (2011), individual forms of co-operation can be categorised into 5 basic mechanisms depending on their importance and influence on the economic development of the region: consultancy services, innovation vouchers, knowledge transfer partnerships, science parks, research and technology centres.

6 Studies dealing with knowledge economy distinguish between tacit knowledge (most often in an unsubstantial form; it can be an idea, a thought, etc.) and explicit knowledge (codified knowledge expressed in a material form through language, symbols, etc.).

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e-mail: editors@reaser.eu stimulus had come from themselves. Only 14% of the firms in our questionnaire survey admitted that the stimulus to co-operation had come from the part of the university.

Another aspect which indicates the importance and the extent of co-operation is whether companies, when choosing new employees, attach importance to the higher education institution that job applicants graduated from. As much as 86% of innovative companies admitted that they did not take into consideration the university that applicants had graduated from. They said that they were choosing their future employees according to the competences they showed. The rest of the sample (14%) answered that for them, the university mattered. All of these respondents represented firms – micro-enterprises. This fact can prove a different degree of flexibility when it comes to further training and education of employees depending on the size of individual company.

As it results from the survey, enterprises that did not co-operate with universities represented 30% of all subjects asked to participate. The vast majority of them – as much as 67% - identified as the biggest barrier to mutual co-operation the absence of a contact place at university (e.g. a competent person or department) that they could turn to in the question of co-operation. A quarter of respondents indicated as a barrier to co-operation the non-topicality of the content taught at universities which made them doubt about the usefulness of such co-operation for them. 8% of respondents indicated as the reason of non-cooperation the disinterest on the part of the university. The answers are shown in graph 2, Barriers to mutual co-operation.

Graph 2: Barriers to mutual co-operation

Source: author

A positive discovery regarding the potential co-operation relationship is the fact that according to 75% of respondents, non-cooperating companies are interested by future co-operation and other 17% of respondents are already considering it. The rest of the companies (8%) said that they had already been refused by a university in the past. The results are shown in graph 3, Interest in future co-operation with universities.

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Graph 2: Interest in future co-operation with universities

Source: author

In our questionnaire survey, we examined in more detail which type of knowledge transfer companies are most interested in. We divided knowledge into three categories:  analytical (science) knowledge: it is characteristic for e.g. natural sciences, etc.; scientifically oriented branches (e.g. nanotechnologies) proceed from it  synthetic (technical) knowledge: it is characteristic for e.g. engineering disciplines and social sciences  symbolic (creative) knowledge: it is characteristic for e.g. the domain of art and communication.

Respondents could choose several possibilities at once. Survey results show that companies are relatively equally interested in all forms of knowledge, with a slight dominance of synthetic knowledge:  analytical knowledge (30%),  synthetic knowledge (43%),  symbolic knowledge (27%).

3. Conclusion The survey accomplished by the Faculty of Mass Media Communication of the University of Ss. Cyril and Methodius in Trnava in co-operation with the Faculty of Materials Science and Technology in Trnava of the Slovak University of Technology in Bratislava in innovative companies of the Trnava SelfGoverning Region focused on the analysis of the current state of co-operation between enterprises and universities of the region as well as on barriers to such co-operation. As it results from the survey, in most

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e-mail: editors@reaser.eu cases, innovative companies co-operate with universities, and the size of the enterprise does not have essential influence on the character of co-operation relationships. Co-operation relationships based on consultancy services predominate. The most important forms of co-operation are research co-operation in the form of final thesis supervision, informal contacts and participation at conferences organised by universities. Informal contacts made between entrepreneurs and universities represent a big potential to the starting up of knowledge distribution from universities to the business environment as well as in relation to a more intensive knowledge transformation than in the case of consultancy services, dominant until now. Several factors were identified as serious barriers to co-operation between universities and companies: (1) absence of an information source indicating how to begin and proceed with intended cooperation; (2) conviction of enterprises that the content taught at universities is not topical and that is why mutual co-operation with universities is not useful for them; (3) disinterest in co-operation on the part of the university without further specification of reasons. From the point of view of the knowledge typology, enterprises operating in the Trnava region are interested by all kinds of knowledge: analytical, synthetic and symbolic.

4. References [1] Buček, M., Rehák, Š., Hudec, O. Regionálne dimenzie znalostnej ekonomiky. ISBN 978-80-225-3239-6. Web. 5 Apr. 2013. <http://147.232.5.162/krvam/files/clanky/katedra/redipe.pdf>.

[2] Boucher, B., Conway, Ch., Van der Meer, E. Tiers of Engagement by Universities in their Region’s Development.

Regional Studies, Volume 37, Issue 9, 2003. p. 887–897.

[3] Čambál, M., Zibrínova, Vaškovičová, E. Marketingová komunikácia v priemyselných podnikoch na Slovensku. In: Fórum manažéra: Teória a prax v riadení podniku. Bratislava: Lúč, 2012. ISSN 1336-7773, number 1/2012. p. 6163.

[4] Černá, J. Dynamika znalostí v regionálnych ekonomikách. In: Buček, M., et al. : Regionálny rozvoj – novšie teoretické koncepcie. Bratislava: Ekonóm, 2011. ISBN 978-80-225-3175-7.

[5] Ďurková, K., Čábyová, Ľ., Vicenová, E. Regional Development in Economic Core Regions. In: Review of Applied Socio-Economic Research. Volume 4, Issue 2, 2012. p. 87.

ISSN 2247-6172. Web. <http://reaser.eu/Current-Issue.php>.

[6] European Union, Regional Policy. Connecting Universities to Regional Growth: A Practical Guide. Web. 21 Sep. 2012. <http://ec.europa.eu/regional_policy/sources/docgener/presenta/universities2011/universities2011_en.pdf>.

[7] Kollárová, D. Formy starostlivosti o študentov a absolventov vysokých škôl. Zborník vedeckých prác z výskumného grantu VEGA č. reg. č1/1059/11 FMMC UCM in Trnava, 2012. ISBN 978-80-8105-436-5.

[8] Lundvall, B. Å., ed. National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning.

London: Pinter Publishers, 1992.

[9] Matúš, J. Sektorová analýza Trnavského samosprávneho kraja. Zborník vedeckých prác z výskumného grantu VEGA č. reg. č1/1059/11. FMMC UCM in Trnava, 2012. ISBN 978-80-8105-436-5.

[10] OECD. Higher Education and Regions – Globally Competitive, Locally Engaged. 2007. Web. <http://www.oecd.org/document/33/0,3343,en_2649_35961291_39378401_1_1_1_37455,00.html>.

[11] Petranová, D. Formy spolupráce univerzít a podnikov v podmienkach Fakulty masmediálnej komunikácie UCM v Trnave. Zborník vedeckých prác z výskumného grantu VEGA č. reg. č. 1/1059/11. FMMC UCM in Trnava, 2012. ISBN 978-80-8105-436-5

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e-mail: editors@reaser.eu [12] Rajčák, M. Klastrovanie ako akcelerátor inovácií v regióne. In: Spolupráca univerzít a podnikov. Zborník vedeckých prác z výskumného grantu VEGA reg. č. 1/1059/11. FMMC UCM in Trnava, 2012. ISBN 978-808105-436-5.

[13] Svoboda, J. Odvetvová analýza Trnavského regiónu. Zborník vedeckých prác z výskumného grantu VEGA č. reg. č. 1/1059/11. FMMC UCM in Trnava, 2012. ISBN 978-80-8105-436-5.

[14] Tödtling, F., Trippl, M. One size fits all? Towards a Differentiated Regional Innovation Policy Research?

Research Policy 34, 2005. p. 1203-1219.

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Brand value co-creation factors: stakeholder approach Miglė Eleonora Černikovaitė1+ 1

Mykolo Romerio University, Vilnius, Lithuania

Abstract. The aim of the article is reveal brand value creation from different point of views: customers and stakeholders. Literature analysis suggests brand value has become an important metric for brand health for consumers and corporate performance metric for many companies and investors. However increasing consumer power, accelerated social media, marketing promotions companies threatens the foundations of brand value. This article focus on measuring the influence of advertising, sales promotions, brand community, innovations and other incentives on brand value after controlling for net income and lagged brand valuation of Lithuanian companies. The article was prepared by using comparative analysis of scientific literature, integrated brand valuation model, empirical results from some Lithuanian companies and the author insights on this topic.

Keywords:

brand value creation, advertising, sales promotions, innovations, brand community,

stakeholders.

JEL Codes: M31, G32;.

1. Introduction Today, the brand value creation depends not only of the company's efforts, but more on the market, there consumers and brand stakeholders are encouraging and supporting the process of brand value creation.

Therefore, it is important, how brands will be adopted by stakeholders (i.e. consumers, employees and company leaders) and even transformed. Mechanism of common of brand value creation depends on networked communication dynamics, what will encourage stakeholder to contribute to product or service development and so on.

Managing factors of brand value creation has come to be viewed as critical long-term marketing performance of the company. (Sriram et al, 2007). Financial measures such as sales and profit provides only partial indicators of marketing performance (Mizik and Jacobson, 2008). Intangible, market-based assets, as brand community, product innovations, advertising and sales promotions on the other hand, provide deeper understanding of marketing performance, reconciling short and long term performance (Ambler, 2003) as well as connecting consumers, company and shareholder values (Sravistava, Shervani 1998). Only the few studies have considered the relative role of the integrated marketing mix (advertising, price promotion, product, and place) which might be called as the main factors of brand value creation from the company point of view (Chu, 2006, Christadoulidies, 2009, Ataman, 2010, Stahl, 2012, Buil, 2013 and others). But much less studies have covered the factors of co-creation of brand value from customers’, companies’ and +

PhD st., corresponding author: miglec@yahoo.com

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other stakeholders’ point of view on the long-term brand performance. Thus, little guidance is available to companies regarding the relative efficacy of their various marketing expenditures in the long run.

This paper aims to evaluate brand value creation factors from different point of views of different stakeholders and to examine the influence of brand value creation factors and other incentives which have impact on brand value This article is based on the comparative analysis of scientific literature, qualitative research of Lithuania and providing the author insights on the subject. The scientific problem- what is the result of co-creation of brand value from stakeholders’ point of view?

2. Consumer and stakeholder description 2.1.

Consumer definition in the contemporary society

Consumer is defined as a person who expresses the desire to buy, buy and use a product or service that a consumer's personal, family or household needs. (Bauman, 2002, Pranulis, Pajuodis, Smith, Virvilaitė, 2010). According to the French philosopher J.Baudrillard (2010), the consumer is driven by satisfying his needs, and in order to create successful human identity. That consumption has become a factor in determining the individual's social status, self-expression, and even self-awareness. But consumption still further encourage social differentiation, and the gap between rich and poor consumers. (Baudrillard, 2010).

The user can be described as reaching and to meet their family needs to know their rights as a consumer, to take care of their social status and self-expression, to take care of their personal quality of life, personal freedom of action in the free market. Consumers' perfect life defined by extrinsic values such as self-focus and selfishness and acquisition of material goods or image and position. These people have lower levels of personal wellbeing, they tend to over-consume and have concomitant high responsibility for environmental issues. Of course, they are not "perfect" at all. We now live in a society made up of people exhibiting more with the customers. In much of our consumption habits we no longer consume for the sake of delivering the real needs such as hunger or warmth so much as for abstract, created, extrinsically focused desires.

Therefore, consumers no longer so much consume the brand as products, but as lifestyles and attitudes associated with brands.

2.2.

Stakeholders’ description

Stakeholders can be described as interested entities or persons (Freeman et al. (2007), Also stakeholders is any group or individual who can affect the company's objectives, or face with the company's influence, in order to achieve those objectives. If the theory is a group of interested persons or person who owns part of the decisions or the results of the enterprise, in practice, they are classified as interest groups that can shape and steer the organization in a particular direction. Significant decisions regarding the development and deployment of innovation in an organization is made in response to the needs of the majority stakeholders.

According to T. Christensen et al. (2008), stakeholder influence creates an intrinsic value because of their management should be included in the strategy, planning and implementation of changes. Stakeholder management is based on the fact that the companies are huge, and their impact on society is quickly spreading. As a result, the company must increase accountability not exclusively to their shareholders, but also for different sectors. In this context, T. Christensen et al. (2008) distinguishes four types of company ownership interests: • economic (Brand)

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• legal framework; • ethical; • charity.

Economic (brand) and legal responsibilities associated with each of the business logic. Meanwhile, integrity and charity reflects the moral side, which does not comply with the principles of the business, but can gain a competitive advantage in brand value creation.

According to J. Solomon (2007) stakeholder groups include shareholders, employees, suppliers, customers, creditors, brand communities, public authorities and the general public, each of which directly or indirectly contribute to the brand value co-creation. Company employees interested in the company where they work activity and the more successful the company, the greater the value of the shares is expected to grow, the employees are more motivated by the work itself. The brand community interest in the activities of the company is a factor that includes the level of employment in the region, the population or environmental pollution. Authorities of the State interest in the organization gets three cuts. First of all, the authorities follow or company operates in accordance with the social, ethical and environmental standards, laws.

Second, analyzes on various aspects (employment rate, monetary policy, market supply, demand). Third, the use of obtained knowledge of fiscal policy, investment in the country's economy and tax firms correction (Solomon, 2007).

Lenders include banks and other financial institutions’ creditors to be sure that the organization is solvent and will be able to cover its debts. Suppliers interested in two aspects of the company's activities.

First, supplying raw materials, products or services, they want to be assured consideration. Second, the supplier expects the continuity of their marketing materials provided assurance. Customers want to be sure that they will be able to buy the same product or service. This is especially important for those customers who have purchased a product or service includes, integrates with your manufactured or supplied products (A. Mallin, 2004).

Value Creation interested parties are linked to their understanding and satisfaction. Organizations must understand the actual behavior of stakeholders and their potential for cooperation, and how they can help the company to achieve its objectives (which include the development and deployment of innovation in the organization), to assess stakeholder competitive threat. Stakeholder interests in the implementation does not involve making trade-offs. This includes innovation and business opportunities for the use, in order to target the interests of all groups in one direction.

2.3.

Brand value co-creation

By emphasizing the active role of the customers in the brand value creation process, while examining the customer-company’s relationship that might be acknowledged that brand value is determined by customers; value in-use perception, rather than through value-in-exchange. (Merz et al. ,2009) This shift in thinking about brand value creation probably becomes most apparent with the introduction of the customer equity concept (Blattberg and Deighton 1996). The consumer equity conceptualization constitutes a more customercentric approach to brand management. This highlights that customer and brand equity are solely determined by customers and hence thorough their perceived value-in-use. This approach represents the view that customers of the company are co-creators of brand value.

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The other scientist argued that not only external customers but also company’s employees (internal customers) co-create brand value. Consequently, this focus has contributed to an understanding that external and internal customers constitute operant resources. Especially it is evident in service industry, where the quality of the service thus brand image is determined by the qualification of employees and their perception of company’s brand values. Berry (2009) confirms that service branding framework applies that the company’s employees, rather than the product play a greater role in determining customer value. Service branding framework is the salient role of customer’s experience in the brand value creation process.

Therefore, internal customer (i.e. employees) shape and represent the brand promises made to external customers. (De Chernatony, 2010) Brands represent the vision and culture of the company and that this necessarily involves employees to shape and represent the company’s values and that is way employees constitute important sources for creating brand value.

Contemporary brand value scientists by delaminating the collective and dynamic brand developing and value creation process, come to a conception of stakeholders as brand value co-creators. Brand value is dynamically constructed through social interactions of different stakeholders. (Merz et al., 2009) So, brand value is viewed as a continuous social process (Muniz et al. 2001), there brand value is being co-created through stakeholders-based negotiations or social interactions (Aitken, 2007). Thus the value is located in the minds of its customers and the wider group of opinion makers, stakeholders or brand community. Brand communities consists of specific set of customers who may or may not own the brand, but they are the part of the collective social unit cantered on the brand and who adhere to the markers of community: consciousness’ of kind, presence of shared rituals and traditions, and sense of moral responsibility (Muniz et al, 2001). Relationship between Company, Consumers, Brand Communities is represented in Figure 2.

Figure 2: Relationship focus of customers, companies and stakeholders point of view

Source: Adopted from Merz et al. (2009 p. 337)

Furthermore, the relationships among the players in the brand value co-creation process (i.e. companies, including intermediaries, brands, and all stakeholders) warrant further exploration.

3. Brand value creation factors Rocha (2012) has stressed that in co-creation of brand value each stakeholder has different role and impact.

The main brand value creation factors can be divided to: internal and external factors.

Internal Factors: clarity of relationship and communication, consumers’ commitments, protection of brand, brand responsiveness and openness to brand community.

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Clarity of relationship and communications means internally about what the brand stands for and its values, positioning, and proposition to its target audiences. Clarity of brand values should be articulated and shared across the organization, for informing employees making them brand ambassadors.

Commitment of consumers and brand communities: Internal commitment to brand, and a belief of customers and brand communities in the importance of brand. The extent to which the brand receives support in terms of time, influence, and investment.

Protection of brand: it is important, how secure the brand is across a number of dimensions: legal protection, proprietary ingredients or design, scale or geographical spread.

Responsiveness: The ability to respond to market changes, challenges, and opportunities. The brand should have a sense of leadership internally, and a desire and ability to constantly evolve and renew itself.

The External Factors can be authenticity, relevance, differentiation, consistency, presence, understanding.

Authenticity: The brand is soundly based on an internal truth and capability. It has a defined heritage and a well-grounded value set. It can deliver against the (high) expectations that customers have of it.

Relevance: The matching with customer/consumer needs, desires, and decision criteria across all relevant demographics and geographies. Differentiation: The degree to which customers/consumers perceive the brand to have a differentiated positioning distinctive from the competition. Consistency: The degree to which a brand is experienced without fail across all touch points or formats. Presence: The extent to which a brand feels omnipresent and is talked about positively by consumers, customers, and opinion formers in both traditional and social media. Understanding: The brand is not only recognized by customers, but there is also an in-depth knowledge and understanding of its distinctive qualities and characteristics.

4. Empirical study of brand value creation: Lithuanian case Brand value can successfully be created today as advanced tools - emotional, experience in marketing, management of extreme moments, narrative scenarios based community development and fostering of employees at all levels advocates, carefully-considered brand extensions category scenario. (Balčiūnienė, 2013) The aim of empirical study is to reveal what are the main features influencing brand value creation in Lithuanian companies. The 3 hypotheses, based on aim of the research, were formulated: H1: Brand stakeholder (consumers, companies’ employees and brand communities) has bigger impact of brand value creation than company’s marketing actions.

H2: Integrated marketing mix (advertising, price promotion, product, and place) has a different impact on brand value.

H3: Brand value co-creation factors have positive effect on company’ performance.

The research method was selected as qualitative research (expert interview), where the 10 experts were asked 10 questions about the role of consumers, companies and stakeholders of brand value creation in Lithuanian companies and the marketing campaigns that have a long-term impact of brand values. Expert interview was chosen for its large experience, an expert can be a source of qualitative information and the Panel's opinion does not differ from the true solution (Rudzkiene, 2008) Questionnaire for expert interview was created according the brand value chain model and customers, company’s employers and brand communities brand relationship focus theory and were measured by open ended and Likert 7 points scale questions. Interview was conducted in via e-mail, during February-March, 2012 in Vilnius. There were questioned 10 competitive experts, having over 10 years practice in brand management and represents the

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four successful brand fast consumer goods categories in Lithuania: food and beverages, personal care, household care products and telecommunications.

H1: Consumers, companies’ employees and brand communities has bigger impact of brand value creation than company’s marketing actions Hypothesis was partially confirmed. Today, the brand value creation happening in the market, users are encouraged and supported. Therefore, it is important not only for what will be the original brand idea and communications, but also how it will be adopted by consumers and transformed to arrange for consumers, employees and other stakeholders thorough of networked communication spread, what mechanisms promote consumers' willingness to contribute to product or service development, etc. Still, over time, general laws and rates of change. In the initial stage of brand development is usually important to have a good product, and by using effective marketing actions to secure the consistently growing brand awareness (i.e., brand recognition, and identification of elements interface with the selected product category). Awareness is growing far beyond through means of communication, but also in improving the quality of products and services, expanding its reach in the market, allowing certain users or groups try to reduce financial risk.

H2: Integrated marketing mix (advertising, price promotion, product, and place) has a different impact on brand value co-creation.

The experts were asked to rate from 1 to 7 the different marketing criteria influencing brand value.

Selection and evaluation criteria were: 1. Brand market share annual change 2. Brand product innovation in the product category.

3. Brand awareness and advertising appeal.

4.

Brand marketing campaigns and sales promotions

5. Brand advertising investment share and the annual change 6. Brand communication effectiveness and image of traditional media 7. Brand communication effectiveness and image of social media.

To study the contradictory of expert assessments, H0 hypothesis was raised .The hypothesis is tested by estimating Kendall concordance coefficient W, according formula: Where S2- sum of squared deviations; 12S 2 m- number of expert, W 2 3 ; m (k  k ) k – number of expertise objects.

W values can vary from 0 to 1 (0 <W <1)) . In our case W has acquired 0.717.

The hypothesis about the fact that expert assessments are contradictory can be rejected, if calculated W value is not less than the critical value of Wα,. However, the significance of concordance coefficient can be evaluated by χ2 criterion, by comparing estimated statistical and critical value.

• Statistical value in this case was calculated according to equitation: W × m × (k-1) = 21.51, with selected significance level ɒ= 0.05, and the f-degree of freedom (k-1=6).

•

Critical value were found from χ2 critical values table  62 0,05 : =12.59

In present case, calculated statistical W × m × (k-1) value exceeds the critical χ2 value , i.e. 21.51> 12.59. Therefore, to be concluded that hypothesis that the estimates are controversial is rejected. Thus, the experts supported the study hypothesis that integrated marketing mix (advertising, price promotion, product,

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and place) has a different impact on brand value co-creation. According experts, the most reliable alternative is 3 brand awareness and advertising appeal.

H3: Brand value co-creation factors have positive effect on company’ performance.

According to experts brand value creation of the main objective is to help increase the brand product sales and improve their profitability. For the brand positively influence the company's financial indicators, it is necessary to create the value. The development phase is very important to gather all information from the product category and consumers to choose the right brand development strategy. It is important to decide on the target groups of consumers and brand communication strategy. Of course, it is important to select and establish a brand attributes that contribute to a targeted clear communication about the product.

However, brand should create and maintain consumer and brand relationship. Therefore, it is necessary not only to raise awareness of the latter to create and maintain the desired image, but also to strengthen customer loyalty and attachment to it. Brand development is precisely the most important consumer and brand relationship. Companies developing the brand's needs to develop the close relationships are with the user to guide the attachment and create, enhance brand value.

Successful brands in Lithuania do marketing, product innovation, advertising and sales promotion activities. But at the same tame successful brands that is created in Lithuania (for example. “Svyturys” beer or “MAXIMA” retail chain) have a good idea and communication consistency. The customer must hear clear communication of the brand value. Depending on the industry and brand development strategy, communication can be a rational, emphasizing the functional suitability and emotionally, creating empathic attachment or, in other words, the desire to identify themselves with the brand. The brand value is co-created by customers, employees and brand communities can be called and intangible assets of the company – i.e. a kind of "emotional value" of the brand, which creates financial benefits for the company, the brand owner.

"Emotional Value" is what you know about the brand image of the customers and what they have created of him. (Balčiūnienė, 2013) It is very important how company’s stakeholders behave the brand in respect of the extent agreed to pay for it, the market shares, which it creates a profitable enterprise. All business in the field of brands must be simple, easily recognizable and differentiate from competitors. If it is not enough awareness, the brand value need to constantly maintain and develop in order to maintain company performance. It is important that the user is attached to one brand or another. The attached site in particular has a positive emotional connection with the brand. Then the user is usually reasonably confident that his favorite brand, and thus the product is the best. Thus, H3 hypothesis was confirmed by collected opinions from experts.

5. Conclusions To summarize all the issues discussed in the article, the following conclusions can be made:  Brand value creation has come to be viewed as critical long-term marketing performance of the company. So various process of creating value for a brand that aligns with company’s actions, brand perception, customer behaviour and financial performance of the company measures were introduced.  Brand value chain definition was introduced, that is attempts to show the cause-effect patterns and attempts to explain how company’s marketing actions translate into market and financial performance and the company’s marketing actions.  The conceptual model of co-creation of brand value along with was created combining the brand value chain and the context common creation of brand value with consumers, employees and other

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stakeholders (brand communities), which through organized networked communication introduce the dynamics of the model.  Empirical study of Lithuanian companies has proved hypotheses of consumers, companies’ employees and brand communities has bigger impact of brand value creation than company’s marketing actions. Integrated marketing mix (advertising, price promotion, product, and place) has a different impact on brand value. The biggest impact has brand awareness and advertising appliance. Successful brands in Lithuania should have innovative idea and effective communication through traditional and social media to support brand value creation.  Despite that all businesses to quantify the value of the brand – it is relative metrics. The same sign a financial estimate could vary considerably, depending on the purpose and the methodology has been evaluated (as measured operating company's financial statements reflected the value of trademarks and licenses for activities to establish brand equity, brand value of the company's acquisition of brands as a partial asset sales value, and so on.).  In addition, future research may further examination the brand value co-creation process. And development of brand value measures (quantitative and qualitative) that would capture essence of the brand value co-creation process (in terms of process-oriented approach to assessing brand value) as measuring long-terms value of the brand.

6. References [1] Aravindakshan A., Rust R.T., Lemon K.N., Zeithaml V.A. (2004) Customer Equity: Making Marketing Strategy Financially Accountable Journal of Systems Science and Systems Engineering, 2004.

[2] Ataman M.B., Harald J. Van Heerde, Carl F. Mela (2010). The Long-Term Effect of Marketing Strategy on Brand Sales. Journal of Marketing Research: Vol. 47, No. 5, pp. 866-882.

[3] Balčiūnienė R. (2013) Interviu: mylimiausi lietuvių prekiniai ženklai – "Maxima" ir "Švyturys" (interviu su Artūras Urbonavičius, rinkos tyrimų bendrovės „Nielsen“ vadovas Baltijos šalims) Retrieved on March 18, 2013 from: http://vz.lt/article/2013/3/8/interviu-mylimiausi-lietuviu-prekiniai-zenklai-maxima-ir-svyturys [4] Balčiūnienė R. (2013) Prekės ženklas – ne tik vardas, logotipas ir gera idėja (interviu su K.Maikštėniene, ISM Executive School Rinkodaros strategijos ir valdymo programų vadovė Retrieved on March 18, 2013 from: http://vz.lt/article/2013/3/18/prekes-zenklas-ne-tik-vardas-logotipas-ir-gera-ideja-interviu [5] Buil I., Leslie de Chernatony, Eva Martínez. (2013) Examining the role of advertising and sales promotions in brand equity creation. Journal of Business Research 66:1, 115-122 [6] Christodoulides G., de Chernatony L. (2009) Consumer Based Brand equity Conceptualization and Measurement.

Retrieved on March 18, 2003 from: http://eprints.aston.ac.uk/17462/1/Consumer_based_brand_equity_conceptualizations_and_measurement.pdf [7] Chu S., Keh H.T.. (2006) Brand value creation: Analysis of the Interbrand-Business Week brand value rankings.

Marketing Letters. December 2006, Volume 17, Issue 4, pp 323-331 [8] Cova B. and Paranque B. (2012). Value creation versus destruction: The relationship between consumers, marketers and financiers. Journal of Brand Management (2012) 20, 147–158.

[9] Madden T J, Fehle F, Fournier S (2006) Brands matter: an empirical demonstration of the creation of shareholder value through branding. Journal of the Academy of Marketing Science, Spring 2006, Volume: 34 Issue: 2 pp.224235 (12 pages)

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Journal of The Academy of Marketing Science - J ACAD MARK SCI , vol. 37, no. 3, pp. 328-344, 2009 [11] Palmatier, R.W., Dant, R.P., Grewal, D., Evans, K.R. (2006), "Factors influencing the effectiveness of relationship marketing: a meta-analysis", Journal of Marketing, Vol. 70 No.October, pp.136-53.

[12] Rudzkienė V. et al. (2008) E. valdžia piliečiams: plėtros gairių Lietuvai nustatymas naudojant ateities įžvalgų metodologiją, - Vilnius: Lietuvos Valstybinis Mokslo ir Studijų Fondas. Retrieved on March 18, 2003 from :www.egov.lt/uploads/file/EVPGL_Ataskaita_2008_santrauka_psl.doc [13] Rocha M. (2012).

Brand valuation.

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[14] Sandner Ph. (2009) Trademark Filing Strategies and Their Valuation: Creating, Hedging, Modernizing, and.

Extending Brands.

Retrieved on March 18, 2003 from: http://www.inta.org/Academics/Documents/philippsandnertrademarkfilingstrategiesandtheirvaluation.pdf [15] Sriram S, Balachander S, ad Manohar U. Kalwani M.U (2007). Monitoring the Dynamics of Brand Equity Using Store-Level Data. Journal of Marketing: : Vol. 71, No. 2, pp. 61-78.

[16] Stahl F. , Mark Heitmann, Donald R. Lehmann, Scott A. Neslin. (2012) The Impact of Brand Equity on Customer Acquisition, Retention, and Profit Margin. Journal of Marketing 76:4, 44-63 [17] Veloutsou, C., and Christodoulides, G. (2011) European Study of Brand Equity. New Perspectives on Contemporary Marketing. Athens Institute of Education and Research, Athens. ISBN 9789609549691 [18] Worm S.. (2012) Branded Component Strategies: Ingredient Branding in B2B Management. Dissertation at University of Kaisereslautern (2009). Gabrel Werlag.

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Social capital and poverty reduction: empirical evidence from Senegal Barassou Diawara 1 +, Saeki Chikayoshi 2++, Kobena Hanson 3+++ 1

Knowledge and Learning Department, African Capacity Building Foundation, Harare, Zimbabwe 2

Faculty of Economics, Kyushu University, Fukuoka, Japan

3

African Capacity Building Foundation, Harare, Zimbabwe

Abstract. Social capital has been described as an empirically elusive concept, yet has also been heralded as the glue that holds communities together. The objective of this paper is to show that associational relationships, social norms and cohesion are important in partly explaining the poverty status of the household heads in Senegal. We make use of the 2005 Senegalese Household Survey to construct an index of social capital and show that it is correlated with the economic situation of the households. The instrumental variables estimations suggest that social capital has an impact on poverty. Besides, after disaggregating our sample based on the gender and location of the household head, our results still show the evidence that household heads with more social capital are less likely to be poor. The findings of this study support recent emphasis by international community and specialists of development economics on investing in social capital. Senegal being representative of other sub-Saharan African countries (capital social is traditionally and culturally important in Sub-Saharan Africa), governments in the continent need to take into account social capital in the formulation of public policies. Besides, encouraging the creation of and sustaining the existing social capital might be of great importance for poverty reduction purposes in sub-Saharan Africa.

Keywords: social capital, poverty, probit, instrumental variables, Senegal JEL Codes: I30, O10, R20

1. Introduction During the last two decades the concept of social capital is being actively popularized by scholars, namely economists, sociologists and political scientists (González-Arangüena, Khmelnitskaya, Manuel & del Pozo, 2011). The notion is seen as an important factor explaining the development level of the nations, the wealth of individuals and households and welfare of communities (Narayan & Pritchett, 1999). As an illustration, it is to be recognized that the World Bank (1998) has acknowledged social capital as a useful tool for poverty reduction. Through its “Social Capital Initiative”1 launched in 1996, the Bank has also shown the importance given to the concept of social capital. Furthermore, in 2002, the Journal of African

+ Knowledge and Learning Officer, Corresponding author. Tel. +2634304649 E-mail address: b.diawara@acbf-pact.org/bassojawara@yahoo.co.jp ++ Professor of Economics +++ Head of the Knowledge and Learning Department 1 See Grootaert and van Bastelaer (2002) for a synthesis of the findings and recommendations from the Social Capital Initiative.

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Economies has dedicated a special issue2 to the concept of social capital to show the importance and provoke economists to explore the related issues in much detail.

Social capital lends itself to multiple definitions, interpretations, and uses. The definition and measurement of social capital are still not unanimous (Grochowska & Strawiński, 2010). According to the World Bank, social capital refers to the “institutions, relationships and norms that shape the quality and quantity of a society’s social interactions”3. It is generally seen as a multidimensional concept incorporating different levels and units of analysis.

Though used in numerous studies since the late 1970s, Woolcock (1998) has argued that the most extensive empirical research and coherent theoretical advances on “social capital” have come in the late 1980s and 1990s. To date a couple of studies investigating the impact of social capital on the efficiency and sustainability of development programs have been done. Besides, various studies have paid attention to the measurement and definition of the concept of social capital. This is out of the scope of the present research.

This research focuses on the role of social capital in the welfare of individuals and households. Such approach, although not the first4, examines the impact of social capital on the expenditures capabilities and poverty status of household heads.

Empirical studies on the relationship between social capital and poverty (or economic outcomes) have been conducted at the macro and micro levels. For macro related studies, Knack and Keeper (1997) have shown that social capital proxied by civil and political liberties, civil community and trust has significant impacts on aggregate economic activity. Investigations at the micro level are relatively trickier because of the lack of proper data reflecting social capital. Empirical examinations at the individual or household levels are still ongoing and represent a relatively new area of research. For example, Putnam, Leonardi, and Nanetti (1993), in a seminal study, have shown that communities with high levels of social capital are found to be more prosperous than communities with low levels of social capital. Using the log of per capital consumption expenditure as measure of economic welfare, Narayan and Pritchett (1999) and Grootaert (1999) have provided evidence that, controlling for a set of individual and community characteristics, social capital leads to higher household welfare.

Although the literature on social capital has attempted to demonstrate the importance of social capital, it is to be recognized that it has not yet amply proven whether social capital helps the poor (Grootaert, 1999, p.

7). To our knowledge, there is no systematic study on the poverty effects of social capital in Senegal. This study is a first attempt. Using data from the “Enquête de Suivi de la Pauvreté au Sénégal” named ESPS-2005 (ESPS, 2005), the impacts of social capital on the poverty status of the households are estimated. In fact, Senegal is a useful study case because it is fairly representative of other moderately open, low income economies with relatively few natural resources.

The objective of this paper is to investigate the impact of social capital on the poverty status of households. Conducting such research is important because it can contribute to the debate on the impacts of social capital on household welfare in the sense that Grootaert (1999, p. 65) has acknowledged the necessity for future research to confirm the findings of studies conducted under the Social Capital Initiative. Besides, Narayan and Pritchett (1999)’s remarkable result that in Tanzania social capital matters more for household welfare than human capital constitutes a challenge to investigate this issue for other countries and assess how 2

See the Journal of African Economies, Volume 11, number 1. http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALDEVELOPMENT/EXTT [Accessed July 28, 2012] 4 The World Bank has conducted studies for countries such as Tanzania, Indonesia, Bolivia and Burkina Faso (Grootaert & van Bastelaer, 2002).

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general this finding is. In addition, this study investigates the impact of social capital for female and male headed household and for the rural and urban households.

The remaining of the paper is structured as follows. Section 2 introduces the definitions and measurements of the concepts of social capital and poverty. In section 3, the channels through which social capital affects the welfare of the individuals and therefore their poverty status are described. Section 4 gives a brief review of the literature on the relationship between social capital and poverty (or welfare). Section 5 presents the econometric model and data used in the empirical analyses. Sections 6 and 7 show the empirical results while the last section concludes the paper.

2. Conceptual framework 2.1.

On the concept of social capital

(1) Definition Social capital has been given many definitions arising from the lack of conceptual clarity. However, it is to be noted that although the definitions vary the concept is generally understood to be a social resource created through formal and informal relationships between people whether through individual, family, neighborhood or community related interactions. We however can classify the definitions depending on whether the concept is considered in the context of macro level analysis or in the micro level studies5.

At the macro level, social capital includes institutions such as governance, civil and economic liberty and the rule of law. Knack (1999) has surveyed the macro literature on social capital, and adopting the definition of Collier (1998), he has classified the concept into ‘government social capital’ and ‘civic social capital’. The former stands for governmental institutions that influence people’s ability to cooperate for mutual benefit.

Knack (1999), for example, has analyzed variables such as the enforceability of contracts, the rule of law, and the extent of civil liberties that are permitted by the state. ‘Civil social capital’ refers to common values, norms, informal networks, and associational memberships affecting the ability of individuals to work together to achieve common goals. At the micro level, social capital refers to the networks and norms that govern interactions among individuals, households and communities.

International organizations have also adopted their own definitions of the concept of social capital. For example, the World Bank (1999) considers that “social capital is not just the sum of the institutions which underpin a society－it is the glue that holds them together”. In addition, the OECD (2001) defines social capital as “networks, together with shared norms, values and understandings which facilitate cooperation within or among groups”.

(2) Measurements There is considerable debate and controversy over the measurement of social capital. The World Bank has been attempting to propose a harmonized measure of social capital while individual researchers have also been giving their own measurements (World Bank, 2004; Narayan & Pritchett, 1999; Putnam, 1995; Roslan,

5

It is also common to classify social capital into “bonding” social capital (ties to people who are similar in many aspects or characteristics), “bridging” social capital (i.e. ties to people who do not share many characteristics) and “linking” social capital (ties to people in position of authority). See Grooatert, Narayan, Nyhan and Woolcock (2004).

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Nor & Russayani, 2010). The search for a universal measure still continues. Measurements therefore depend on the assumptions made and the availability of socio-economic variables.

Putnam (1995), a pioneer on the research on social capital, has proposed an important approach distinguishing five components of social capital namely the community organizational life, the engagements in public affairs, the community volunteerism, the informal sociability and the trust. Variables considered as measures for the community organizational life are serving on the committee of a local organization, serving in office for a club or organization, the number of civic and social organizations per one thousand inhabitants, the mean number of club meetings attended during a year, and the mean number of group memberships. Proxies considered for engagements in public affairs are the turnout in presidential election and the participation in public meeting on town or school affairs. As a measure of community volunteerism, Putnam (1995) has taken into account the number of non-profit organizations per one thousand inhabitants, the mean number of times worked on community project and the mean number of volunteer placements during a year. Spending a lot of time visiting friends and the mean number of times entertained at home during the last year are proposed as measures of informal sociability. With respect to trust, Putnam (1995) suggests the susceptibility to trust others and the belief that most people are honest.

Grootaert, Oh and Swamy (2002) have focused on seven aspects to capture social capital. The variables considered and used as proxies of social capital are (1) the number of memberships in associations, (2) the degree of heterogeneity of the group, (3) the meeting attendance, (4) the index of participation, (5) the degree of informality of the association, (6) the community initiation and (7) the cash contribution score and work contribution score. Isham (2002) has taken into consideration group homogeneity, participatory norms and leadership heterogeneity as measurements of social capital.

The World Bank, through the Integrated Questionnaire for the Measurement of Social Capital (SC-IQ), has proposed to measure social capital via six broad sections namely groups and networks, trust and solidarity, collective action and cooperation, information and communication, social cohesion and inclusion and empowerment and political action (Grootaert, Narayan, Nyhan & Woolcock, 2004). The same indicators have been used by, among others, Roslan, Nor and Russayani (2010).

It is clear that social capital has been measured in a variety of innovative ways. However, it is to be noted that obtaining a single, consensual and true measure is probably not possible (Woolcock & Narayan, 2000). Therefore, this paper attempts to contribute to the debate.

2.2.

On the concept of poverty

(1) Definition Poverty is a contested concept, and there is no agreement on how to define the word more precisely.

Depending on the societies and changes overtime, the perceptions, contexts, meanings and usages may differ among the observers and researchers. For example, the World Bank (2001, p. 15) defines poverty as a â&#x20AC;&#x153;pronounced deprivation in wellbeingâ&#x20AC;?. Well-being is usually defined through three approaches, namely the monetary, basic needs and capabilities approaches. The monetary approach views poverty as a situation where households or individuals do not have enough resources to meet their needs while the basic needs approach of well-being considers poverty as associated with certain type of consumption good. The capabilities approach of poverty arises when people lack key capabilities, meaning they have inadequate income or education and training, or poor health, or insecurity, or low self-confidence, or a sense of powerlessness, or the absence of rights such as freedom of speech.

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The definition of the United Nations is mainly inspired by Sen (1987) and has been the base of the development of various poverty indexes. It has been extensively used for international comparison purposes.

Fundamentally, poverty is a “denial of choices and opportunities for a tolerable life” (UNDP, 1997, p. 5), a violation of human dignity. It means lack of basic capacity to participate effectively in society.

It is also to be noted that various other organizations (African Development Bank, Asian Development Bank, etc) as well as individual countries use to adopt their own definition of poverty which is basically similar to the definition of international organizations such as the World Bank and the United Nations.

Besides, the definitions may also differ depending on the perception of the people. For example, in Senegal, “a poor person is somebody who has nothing, who cannot meet his basic needs and who lives without access to opportunities” (DPS, 2002, p. 15)6.

(2) Measurements The most used measures of poverty are the headcount poverty, the poverty gap and the poverty severity.

The headcount poverty (P0) which measures the incidence of poverty by computing the proportion of the population living in households with per capita consumption below the poverty line is defined as follows:

where: Np and N are the number of poor and the total of the population, respectively; I(.) is an indicator function that takes on a value of 1 if the bracketed inequality is true and 0 otherwise; yi is the expenditure and; z represents the poverty line.

The poverty gap index (P1) measures the depth of poverty in a country or region, based on the aggregate poverty deficit of the poor relative to the poverty line. The index is expressed as follows:

The poverty severity index (P2) is defined as the mean of the squared proportionate poverty gap. The poverty severity is calculated as follows:

6

Although various definitions of poverty exist, to better understand the nature of poverty, practitioners and researchers employ several related poverty concepts. These include, among others, absolute and relative poverty, subjective and objective poverty, public and private poverty, chronic and transitory poverty, and extreme and moderate poverty.

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Other measures of poverty exist; for example, the Sen index, the Sen-Shorrocks-Thon index and the Watts index (See Haughton & Khandker, 2009). However, for simplicity and because the main objective of the present study is not to estimate the poverty figures, we focus on the headcount index which is one of our main dependent variables.

3. Linking social capital to household welfare Narayan and Pritchett (1999) have summarized the five mechanisms through which social capital can affect outcomes as suggested by the literature on the impacts of social capital on welfare.

(1) Public sector efficacy This idea stems from the seminal work of Putnam, Leonardi and Nanetti (1993). The analyses have shown that the regions of Italy in which the population had a greater degree of horizontal connections had more efficacious governments. The results have put into evidence that there is a close relationship between the number of voluntary associations and the efficacy of the regional government. The implication is that monitoring the performance of a government is facilitated by greater social capital.

(2) Direct provision of services This idea refers to the management of resources that are treated as common property such as improved water supplies, local irrigations capabilities and local roads. The role of social capital (for example, group or community cooperative) in solving local problems is particularly important. Narayan and Pritchett (1999) have documented that social capital may facilitate greater cooperation in the direct provision of services that benefit all members of the community. For example, in Tanzania, villages with more social capital were more likely to have had community road-building activities.

(3) Diffusion of innovations Greater linkages among individuals can facilitate the diffusion of innovations. For example, Isham (2002) has shown that households living in the Plains of Tanzania are more likely to have adopted fertilizer in the presence of social capital (mainly participatory norm i.e. the degree to which local customs promotes interactive decision-making). In rural Tanzania, there is a greater likelihood that households located in villages with larger social capital have used fertilizer, agrochemical inputs or improved seeds (Narayan & Pritchett, 1999).

(4) Sharing of information among members Participating in social networks increases the availability of information and lowers its cost. This can therefore lead to higher returns or profits if the information is, for instance, related to the prices of crop, the sources of credits, etc (Grootaert, Oh & Swamy, 2002). In the same line, Narayan and Pritchett (1999) have also acknowledged that greater associational activity can lead to less imperfect information and therefore lower transaction costs and greater range of market transactions.

(5) Reduction of opportunistic behavior and improved collective decision making Participation in networks and attitudes of mutual trust reduces the opportunistic behavior by community members. Individuals are therefore prone to defend the interest of the group. For example, such situation can be described by the mutual pressures in the case of rotating credits.

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In addition, participating in social networks makes it easier to reach collective decisions and implement collective action mainly because of the high level of trust (see Narayan & Pritchett, 1999).

4. Social capital and welfare: brief review of the literature Studies on the relationship between social capital and household welfare have started to be systematic and quantifiable with the Social Capital Initiative initiated by the World Bank and under which papers by, among others, Narayan and Pritchett (1999), Grootaert and Narayan (2004), Grootaert (1999) and Grootaert Oh and Swamy (2002) have been produced. The literature can therefore be classified into studies related to the World Bank project and those not related. However, we have adopted another classification constituting of studies related to developed countries and those done for developing countries7.

(1) Studies related to developed countries Putnam is considered as the pioneer in the studies related to social capital. In fact, since the publication of his book (Putnam, Leonardi & Nanetti, 1993), ‘social capital’ has become one of the key terms extensively used by international organizations, national governments and development partners. Putnam has made use of surveys, interviews and a diverse set of policy indicators to examine the institutional performance of twenty Italian regional governments. The main finding is that wide variations in the performance of governments are closely related to the vibrancy of associational life in each region. In fact, the density of associations explains the difference in economic performance between North and South Italy.

For example, the findings show that, in northern Italy, where the population participates actively in sports clubs, literary guilds, service groups and choral societies, regional governments are “efficient in their internal operation, creative in their policy initiatives and effective in implementing those initiatives” (Putnam et al., 1993, p. 81). By opposite, in southern Italy where patterns of civic and associational engagement are weaker, regional governments tend to be corrupt and inefficient. With respect to the relationship between social capital and economic performance, Putnam et al. (1993) have shown that the levels of social capital at the turn of the century account greatly for today's levels of economic development.

Following the works of Punam (Putnam, Leonardi & Nanetti, 1993), various studies have been conducted to ensure the role of social capital on welfare. Grochowska and Strawiński (2010) have examined the impact of social capital on individual wellbeing in Poland. They have used five dimensions of social capital namely organization membership, participation in local elections, volunteer behavior, size of social network and trust to construct a social capital index. The main difference with other studies is that they have considered a Mincer earning function. The findings have shown that social capital explains approximately 20% of income variation both at individual and household level, suggesting that social capital is a significant and unneglectable determinant of income. It is however to be noted that social capital does not have the highest impact as shown by some studies in developing countries (Grootaert, Oh & Swamy, 2002). The positive and statistically significant coefficient for the social activity proxy indicates that there is a positive influence of social capital on personal income meaning that the more active a person is, the higher the wage premium he or she receives. At the opposite of Grochowska and Strawiński (2010), Kuroki (2011) has attempted to adopt a different perspective by looking at the role of social capital on happiness (not on income).

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Adopting the classification ‘developed vs. developing countries’ can help to capture the main studies conducted and put into evidence the various results which might be different depending on whether the country into consideration is a developed or developing country.

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Kuroki (2011) has taken Japan as a case study to investigate whether social capital can increase individual happiness. He has proxied social capital through the variable ‘trust’. The individual subjective happiness (degree of happiness) is used as an indicator of wellbeing. After controlling for the possible endogeneity of the main independent variable (trust), the results have shown that social trust is positively and significantly associated with human welfare, suggesting that there is a causal relationship running from social capital to happiness. In particular, the findings have shown that the effect of social trust may depend on the beliefs that people have about trustworthiness of others. Furthermore, additional tests have suggested heterogeneous effects of social trust meaning that trustworthy environments do not necessarily benefit everyone. For example, the empirical evidence has indicated that trust-neutral individuals benefit from social trust in their area of resident while non-trusting ones do not.

Empirical results on the relationship between social capital and welfare are almost unanimous in the case of developed countries: social capital plays a significant role in the generation of income and is correlated with household welfare. Can the same findings be verified in developing countries?

(2) Studies conducted in developing countries Narayan and Pritchett (1999) have used the Social Capital and Poverty Survey (SCPS) to investigate the relationship between social capital and household welfare in rural Tanzania. The indicators of social capital used are the degree and characteristics of associational activity and trust among households. The various dimensions of social capital are used to construct an index of social capital. The results have shown that a one standard-deviation increase in the village social capital index is associated with at least 20% higher expenditures per person in each household in the village. The findings have witnessed that the effects of social capital on income (income and expenditure are used interchangeably) are relatively larger in comparison with other types of assets such as human and physical capital. Furthermore, Narayan and Pritchett (1999) have also documented the causal mechanisms through which social capital affects household welfare. The channels considered are better public services, use of advanced agricultural practices, membership in communal activities and use of credit for agricultural improvements. Similar study in the framework of the same project has also been conducted in Indonesia (Grootaert, 1999), Burkina Faso (Grootaert , Oh & Swamy, 2002) and Bolivia (Grootaert & Narayan, 2004).

Grootaert (1999) has tried to estimate the impact of social capital on household welfare and poverty in Indonesia. At the opposite of Narayan and Pritchett (1999), Grootaert (1999) has looked at separately the impacts of the social capital index and each dimension of the social capital. The dimensions taken into account are the density of associations, their internal heterogeneity, the frequency of meeting attendance, the members’ effective participation in decision making, the payment of dues (in cash and in kind) and the community orientation of associations. The empirical findings have shown that social capital index is positively and significantly associated with the household expenditure per capita and that the returns to the household are similar in magnitude to those from human capital. Furthermore, the additional tests on the disaggregated social capital dimensions have shown that the strongest effects were found to come from the number of memberships, the internal heterogeneity and the active participation in decision-making. Besides, Grootaert (1999) has also shown that social capital reduces the probability of being poor and the returns to household investment in social capital are higher for the poor than for the population at large. This evidence is especially true for the number of memberships and households’ active participation in decision making.

Similar findings have been found for the case of Burkina Faso, a landlocked country in West Africa (Grootaert, Oh & Swamy, 2002).

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Grootaert, Oh and Swamy (2002) have used the case of Burkina Faso to empirically investigate the importance of social capital for the welfare of rural households. The measures of social capital considered are the membership in local association and networks. An instrumental variable estimation has been used to control the endogeneity of social capital. The results have shown that a 5% increase in the endowment of social capital leads to an increase of 2.7% in the household expenditure per capita making the effect larger than that of human capital. The findings have indicated that social capital reduces the probability of being poor and the returns to household investment in social capital are higher for the poor than for the population at large. Similar results have also been found by Narayan and Pritchett (1999) in rural Tanzania.

Grootaert and Narayan (2004) have explored the linkages between social capital and household welfare and poverty in Bolivia. The social capital index is constructed using six dimensions namely the density in membership in agrarian syndicates, the degree of heterogeneity, the meeting attendance, the active participation index, the membership dues and the community orientation. The results have shown that local social capital makes a significant contribution to household welfare, over and above that stemming from human capital and other household assets. In addition, the findings have indicated that social capital reduces the probability to be poor and the returns to household investment in social capital are generally higher for the poor than for the rich. It is however to be noted that the dimension of social capital in play differs among the four study zones considered. For example, in Villa Serrano and Charagua where the institutional tradition is weaker, Grootaert and Narayan (2004) have found that there is a significant impact of membership both in agrarian syndicates and other associations on household welfare. Besides the studies under the auspices of the World Bank, individual researchers have attempted to contribute to the debate; that is the case of authors such as Roslan et al. (2010).

Roslan, Nor and Russayani (2010) have used primary data, collected from a sample of 2500 households in rural Malaysia to investigate the relationship between social capital and poverty. They have employed the same dimensions of social capital as in Grootaert, Narayan, Nyhan and Woolcock (2004) to construct an index of social capital. The empirical results have shown that social capital has a negative and significant effect on the probability of being poor. Therefore, the findings imply that, ceteris paribus, a unit increase in social capital will decrease the probability of household being poor by about 0.0129.

Two lessons emerge from the literature. First, it is evident from the literature that social capital plays an important role in the household generation of income. For example, besides directly affecting the household welfare, social capital can help in increasing the access to credit, fostering the adoption and diffusion of new technologies, leading thereafter to higher welfare. Second, empirical studies are still relatively scarce and there is no unanimity on the instruments used to measure social capital. To our knowledge, this is the first study to examine the relationship between social capital and welfare in Senegal. Besides attempting to fill such gap, this study also tries to contribute to the debate related to the measurement of social capital in developing countries.

5. Methodological issues and data 5.1.

Aggregate model

This study has benefited from the analytical framework applied earlier by Narayan and Pritchett (1999), Grootaert, Oh and Swamy (2002) and Grootaert (1999, 2001). The main idea behind such framework is that social capital is viewed as one class of assets available to households for generating income and making

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consumption possible. A conventional model of household economic behavior under constrained utility maximization is used to relate the level of household expenditure directly to the exogenous asset endowments of the household and variables describing the social and economic environment in which the household makes decisions. The model is formalized as follows:

where: Ei is the household expenditure per capita of household i; SCi, HCi and OCi represent the household endowment of social capital, human capital and other assets, respectively; Xi stands for a vector of household characteristics; Zi means a vector of region characteristics; and ɛi is an error term.

Model (4) is mainly characterized by the basic assumption that social capital is, like human and physical capital, ‘capital’ meaning that it is a stock which generates a measurable return to the household (Grootaert, 1999). We can note with previous literature that social capital has many features of ‘capital’. For instance, it requires resources (namely time) to be produced and is subject to accumulation and destruction. Besides, social capital can be acquired in formal and informal settings just like human capital. Much social capital is also built through interactions that occur for religious, cultural or social reasons.

In the above specification and following the previous literature, it is hypothesized that SCi, HCi and OCi would have a positive relationship with the natural logarithm of the household per capita expenditure.

Therefore social capital, human capital and the other assets are expected to be poverty reducing in the sense that they are supposed to contribute to an increase in household income. A priori, the sign of the vectors Xi and Zi cannot be determined due to the fact that each is constituted of various variables presented in the next sub-section. The variables consist of the demographic control variables, the locational dummy variables and the household characteristics variables.

5.2.

Data source and variables definition

The study relies on the 2005 Senegalese Household Survey known as ESPS-2005 (Enquête de Suivi de la Pauvreté au Sénégal; ESPS, 2005). Data were collected for the whole country and covered 13600 households in the 11 regions of Senegal8, i.e. 8564 in the urban area and 5036 in rural area. The ESPS-2005 is the first survey conducted in the framework of the global program for monitoring and assessing the poverty reduction strategies. It aims at devising relevant and easy-to-collect indicators for a regular appraisal of poverty reduction in Senegal. The information collected is related to education, health, employment, household assets, access to basic community services, public opinion vis-à-vis life conditions and expectations from the government. The data also relate to the priorities and solutions for poverty reduction as well as the population’s perception of the institutions. The survey consequently provides a large series of variables permitting the estimation of various valuable indicators at different geographical levels for different social categories (ESPS, 2005).

8

Senegal had 11 regions the time the ESPS-2005 survey was conducted. There are now 14 regions.

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Most of the variables used in this study are all self-explanatory and do not need much explanation. In the basic econometric specification (4), the dependent variable considered is the natural logarithm of the household per capita expenditure. It was considered in previous studies (see for example, Narayan & Pritchett, 1999; Grootaert, Oh & Swamy, 2002 and Grootaert, 1999; 2001).

Our main explanatory variable considered is the social capital index. It is constructed following Grootaert, Narayan, Nyhan and Woolcock (2004) who have proposed to view social capital as being constituted of six dimensions namely (i) groups and networks, (ii) trust and solidarity, (iii) collective action and cooperation, (iv) information and communication, (v) social cohesion and inclusion and (vi) empowerment and political action. It is to be noted that our dataset does not have variables on the last dimension which is related to the empowerment and political action. Therefore, we have not considered such dimension in the construction of the social capital index. However, we believe that such shortcoming will not significantly bias our results9. All the items representing each domain are in the form of ‘yes’ or ‘no’ answer.

A value of 1 is given to ‘yes’ answer while the value 0 is designated to ‘no’ answer. The social capital index is derived using the percentage of ‘yes’ answer and applying a linear transformation to get a 1-10 scale.

Table 1 summarizes the dimensions of social capital considered and the respective items.

The other independent variables are the education status of the household head, the asset index, the age of the household head and its square, the gender of the household head, the marital status of the household head, the family size and the location of the household. The education variable is a dummy variable for whether the household head is educated or not; it is expected to be positively associated with the income.

The asset index is constructed based on the ownership of the following assets: flatiron, refrigerator, mattress, watch, sewing machine, cooking-range, bicycle, motorbike, car, tractor, plow, cart, canoe, electric fan, air conditioner, home phone, cellphone and computer. All the items representing each domain are in the form of ‘yes’ or ‘no’ answer. A value of 1 is given to ‘yes’ answer while the value 0 is designated to ‘no’ answer.

The asset index is derived using a simple average. We follow Narayan and Pritchett (1999) at the difference that we did not assign different weights to the ownership of the different assets.

Table 1. Social capital dimensions and related indicators Dimension of social capital

Indicators considered

Groups and networks

(i) Membership in formal or informal association or organization (ii) Ability to get support from those other than family members and relatives in case of hardship

Trust and solidarity

(i) Most people in the community can be trusted (ii) Most people in the community always help each other

Collective action and cooperation

(i) More than half of the community contribute time or money toward common development goals (ii) High likelihood that people in the community cooperate to solve common problems

Information and communication 9

(i) Frequently listen to radio

Senegal has achieved a certain level of democracy with regular elections where most of the people vote.

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(i) Strong feeling of togetherness within the community (ii) Feeling safe from crime and violence when alone at home

Notes: The dimension ‘information and communication’ includes a third indicator called ‘frequently read newspaper’ which does not exist in the ESPS-2005 and is therefore not considered. Besides, the sixth dimension (empowerment and political action) is not shown in the table because the variable is not considered in the survey.

Source: Author’s own construction based on Grootaert, Narayan, Nyhan and Woolcock (2004)

The age of the household head and its square term are included to capture the nonlinear relationship between the age of the household head and the household welfare (Grootaert, Oh & Swamy, 2002). Given that there might be constraints in the generation of incomes depending on whether the household head is female or male (Narayan & Pritchett, 1999; Grootaert et al., 2002), we include the dummy variable for female headed household to control such characteristic. A dummy variable is also included to take into account the heads of household residing in rural areas under the assumption that those households may face special constraints to income generation. Similarly, there might be some differences in incomes generation between married and non-married household heads justifying the inclusion of a dummy variable. The household size is included in the regressions to take into consideration the routinely observed negative relationship between household welfare and household size (Narayan & Pritchett, 1999).

Control variables in the regressions include the regional dummy variables. Eleven dummies for the regions (provinces) of Senegal are taken into consideration. The regions are Dakar (taken as the base), Diourbel, Fatick, Kaolack, Kolda, Louga, Matam, Saint-Louis, Thies, Tambacounda and Ziguinchor. These variables capture the general economic and social conditions of the provinces along dimensions other than those which we were able to include in the model. See Table A.1 (Appendix) for the definition of the variables. Summary statistics of the variables considered in the regressions are presented in the Appendix (Table A.2).

5.3.

Endogeneity of social capital

In estimating the above equation (4), the major problem is that social capital and household welfare are endogenous. Therefore, to be able to interpret the relationship between social capital and household welfare as being causal, it is necessary to solve the probable endogeneity of social capital. The endogeneity of social capital can be explained by the fact that the associational activities might not be random in the sense individuals choose who they want to associate with and what groups they want to join (Darlauf & Fafchamps, 2004).

Another source of endogeneity is coming from the fact that the formation of networks and associations can be costly in terms of time and other resources. Conceivably, therefore, households with higher income can devote more resources to network formation and thus acquire more social capital more easily (Grootaert, Narayan, Nyhan & Woolcock, 2004).

The standard way to solve the endogeneity problem is to apply an instrumental variable (IV) estimation method which provides an empirical test of the extent of two-way causality. IV method uses the correlation between social capital and another variable (called the instrument) that is not determined by and does not

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determine welfare to estimate the effect of exogenous shifts in social capital on household welfare (Wooldridge, 2005). Such method has been used in past studies on the relationship between social capital and welfare (for example, Grootaert, Oh & Swamy, 2002; Narayan & Pritchett, 1999; Kuroki, 2011).

Narayan and Pritchett (1999) have used trust in strangers and trust in government officials as instrument for the group membership index (the index of social capital). The choice and validity of the instruments used have been criticized in the sense that it is argued that trust in either strangers or government officials is likely to have an independent effect on expenditure and therefore may not be a good instrument (Durlauf, 2002).

Grootaert et al. (2002) have used trust, length of residency and trend in membership in associations as instruments for social capital at the household level. Grootaert (1999) has considered ethnic and religious diversity, density and effectiveness of institutions and involvement in the procurement of social services and infrastructure as suitable instruments for social capital.

It is to be recognized that the choice of a valid instrument is a difficult one and this is due to the absence of explicit modeling of the process by which groups are formed and social capital created and so a researcher is forced to rely on intuition and guesswork (Durlauf & Fachamps, 2004). In this study, we are guided by intuition and, given the availability of data, have chosen the distance to the closest market, the distance to the closest public transport, the distance to the closest primary school, the distance to the closest secondary school and the distance to the closest telecentre10 as instruments for social capital. All the variables chosen as instruments have the particularity of fostering and encouraging interactions and exchanges among the individuals but are not directly related to the poverty status of the households. For example, there is no logic or evidence in the context of Senegal that poverty and closeness to a market, public transport, school or telecentre are significantly associated. In Senegal, the setting-up of markets, schools and transportation systems is not based on the welfare or poverty status of the household heads living in the area. In addition, we have also controlled various characteristics of the household heads to ensure that the instruments are not correlated with the unobservable variables that might be in the error term. Even though there might be certain issues associated with the above-mentioned instruments, the potential shortcomings may not significantly bias our empirical results.

6. Social capital and household welfare In this section we present the results related to the relationship between social capital and household per capita expenditure. Regression (1) in Table 2 shows the results with respect to the association between social capital index and household per capita expenditure while regression (2) presents the findings when the five dimensions of social capital are introduced separately. Regression (3) attempts to solve the probable endogeneity problem associated with social capital using an instrumental variable estimation method.

Regression (1) shows that there is a positive and significant relationship between social capital and per capita expenditure. Higher levels of social capital and household per capita expenditure tend to be significantly correlated. Such a positive association is also observed in countries like Tanzania, Burkina Faso and Bolivia (Narayan & Pritchett, 1999; Grootaert, Oh & Swamy, 2002 and Grootaert & Narayan, 2004). A look at regression (2) in Table 2 shows that the membership in organization or association, the trust in the 10

Depending on the country, telecenter is also called public internet access center (PIAP), village knowledge center, infocenter, community technology center (CTC), community multimedia center (CMC), multipurpose community telecenter (MCT), Common/Citizen Service Centre (CSC) or school-based telecentre. It is recognized as a place where people can get access to internet, use computers and utilize other digital technologies.

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people in the community, the contribution toward common development goals, the availability of television and the togetherness within the community might be the main mechanisms through which social capital affects the household per capital expenditure. In fact, the higher importance of â&#x20AC;&#x2DC;feeling of togetherness in the communityâ&#x20AC;&#x2122; can be well understood in the context of Senegal given the assistance of all types provided during the numerous ceremonies taking place in Senegal. Contributions received during the ceremonies remain a non-negligible part of the expenditures of Senegalese households. Membership in organization or association is also equally important in the Senegalese society where the membership in a tontine for example constitutes a real source of income and helps the households to smooth their consumption expenditures especially in lean periods. It is however to be noted that we cannot affirm with certainty to as a causal relationship given that the social capital variable might be endogenous.

The other significant independent variables showing a positive correlation with per capita expenditure are the asset ownership index, the dummy variables for the education and the gender of the household head (regressions 1 and 2; Table 2). The asset ownership and the per capita expenditure are significantly correlated meaning that the higher the value of assets owned the higher the expenditure capabilities of the household heads or vice versa (because we do not have evidence on the existence of a causal relationship).

The dummy variable for the educated households and the household expenditure per capita are positively and significantly associated implying that educated household heads are more likely to have higher per capita expenditure. A causal relationship is however not empirically demonstrated. Besides, regressions (1) and (2) also show that the female headed household and the household per capita expenditure are positively and statistically significantly correlated showing that female household heads are more spending-oriented comparatively to male headed households (Table 2). The results show that the dummy variable for married household heads and the household per capita expenditure are positively and significantly associated but the causal direction might be bidirectional in the sense that one may get married because of higher expenditure capabilities or because of onesâ&#x20AC;&#x2122; marital status one is obliged to spend more. Instrumental variable method can shed light on this issue.

Our empirical results show that there is a negative and significant relationship between the household per capita expenditure and the household size, on one hand, and the dummy variable for the households living in rural areas, on the other hand. Therefore, as expected, the larger the family size the lower is the household per capita expenditure. In addition, household living in rural areas, because of the fewer opportunities existing, may have lower household per capita expenditure. The results also show the lower expenditure capabilities of elder household heads. Besides, it is to be noted that the household heads living in the other regions of Senegal have lower household per capita expenditures respectively to the household heads living in Dakar, the capital.

The results of the instrumental variable estimation methods are presented in regression (3) of Table 2.

The regressions results from the IV estimations are considered as our preferred estimates where we draw our main conclusions because they infer a causal relationship between social capital and household per capita expenditure. The IV results show that the social capital index has a positive and statistically significant impact on the household per capital expenditure indicating that household heads with higher social capital are more likely to have higher per capita expenditure and therefore higher welfare. Thus, social capital through the associational activities, the trust in the members of the community and the feeling of togetherness may help the household heads gain higher levels of expenditure. Regression 3 in Table 2 shows that the dummy variable for the education of the household head, the dummy variable for household heads leaving in rural areas, the household size and all dummy variables for the different regions are still statistically significant. This finding does support Narayan and Pritchett (1999) on the fact that social capital

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has a causal effect on household welfare and that the estimated effect of social capital is substantially larger than the ordinary least squares estimates. The instrumental variables estimation used by Grooatert, Oh and Swamy, (2002) has also led to similar conclusion regarding the causal effect of social capital.

In clear terms, the analyses, so far, have shown that social capital has positive and significant effects on household welfare. However, it is rational and necessary to see whether social capital helps the poor escape from poverty and whether it is worth investing on it to reduce poverty in Senegal. The next section addresses this issue by estimating the impact of social capital on the probability of being poor.

Table 2. Social capital and household welfare (1) Simple

(2) OLS

capital index) Social capital index

(social Simple

(3) OLS

(social IV estimation (social

capital disaggregated)

0.038***(0.004)

capital index) 0.721***(0.114)

Membership in organization or association

0.035*(0.020)

Support from others in case of hardship

0.007(0.010)

Trust in the community

0.062***(0.009)

Mutual assistance

0.003(0.010)

Contribution towards common development goals

0.090***(0.023)

Ownership of radio

-0.006(0.014)

Ownership of television

0.026**(0.013)

Feeling of togetherness in the community

0.140***(0.010)

Safety

0.002(0.016)

Asset index

0.111***(0.002)

0.110***(0.003)

-0.040(0.026)

Educated household head

0.033***(0.010)

0.028***(0.010)

0.036*(0.019)

Female household head

0.060***(0.013)

0.064***(0.013)

0.028(0.023)

Rural household head

-0.267***(0.010)

-0.266***(0.011)

-0.305***(0.020)

Household size

-0.044***(0.001)

-0.044***(0.001)

-0.043***(0.002)

Age of the household head

-0.009***(0.002)

-0.009***(0.002)

-0.000(0.003)

Squared age

0.000***(0.000)

0.000***(0.000)

-0.000(0.000)

Married household head

0.045***(0.015)

0.042***(0.015)

-0.001(0.026)

Diourbel

-0.310***(0.017)

-0.307***(0.017)

-0.384***(0.035)

Fatick

-0.342***(0.018)

-0.338***(0.018)

-0.739***(0.077)

Kaolack

-0.245***(0.016)

-0.229***(0.016)

-0.419***(0.043)

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-0.293***(0.018)

-0.296***(0.018)

-0.273***(0.033)

Louga

-0.474***(0.019)

-0.461***(0.019)

-0.440***(0.032)

Matam

-0.135***(0.019)

-0.134***(0.019)

-0.326***(0.048)

Saint-Louis

0.060***(0.021)

0.078***(0.021)

-0.368***(0.082)

Tamba

-0.343***(0.020)

-0.334***(0.021)

-0.393***(0.036)

Thies

-0.209***(0.016)

-0.210***(0.016)

-0.076**(0.038)

Ziguinchor

-0.428***(0.019)

-0.435***(0.019)

-0.283***(0.042)

Constant

6.809***(0.051)

6.835***(0.055)

4.093***(0.464)

Observations

12,640

12,640

12,640

R-squared

0.518

0.524

Notes: The dependent variable is the household expenditure per capita; Dakar is taken as a base group for the regional dummy variables. Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

7. Social capital and household poverty status 7.1.

Results from the probit regressions

Table 3 presents the results of the estimations with respect to the impact of social capital on the probability of being poor, controlling for household characteristics and regional specificities. Regression (1) is related to the social capital index, regression (2) shows the results with the separate dimensions of social capital and regression (3) presents the instrumental variables regressions with the social capital index (Table 3). It is to be noted that regression (3) is considered as our preferred results.

Regression (1) shows that the social capital index and the poverty status of the household heads are negatively and significantly associated. We can presume a causal link running from social capital to poverty given that the estimated coefficient is significant when conducting the IV estimations. Therefore, the higher the social capital index the lower is the probability of being poor meaning that household heads with higher social capital are less likely to be poor. Table 8 presents the marginal effects generated after the IV estimates and shows that a one point increase in the social capital index of a given household head leads to a decrease in the probability of being poor by approximately 0.913. The poverty reduction effects of social capital may work through the channels described in the literature (Woolcock, 1998) and in the context of Senegal via the trust in community, the contribution towards common development goals, the importance of information and the feeling of togetherness in the community. However, the channels through which social capital affects the probability of being remain an empirical question to be investigated. The significant impact of social capital on the probability of being poor found in the case of Senegal has also been empirically shown by Grootaert (1999) for Indonesia.

Based on our preferred estimation results, regression (3) in Table 3 shows that the dummy variable for female headed households and the probability of being poor are negatively and statistically significantly associated suggesting that female headed households are less likely to be poor. This result might not be in

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line with the traditional view according to which male headed households are more likely to be rich because given more opportunities comparatively to women. The finding can be explained by the different policies directed toward the promotion and empowerment of women. Opposite result concerning the association between female headed household and probability of being poor has been found in Grootaert, Oh and Swamy, (2002) for the case of Burkina Faso. As expected, the dummy variable for rural households and the probability of being poor are positively and significantly correlated suggesting that household heads living in rural areas are more likely to be poor. This might be due to the relatively few opportunities existing, the lower education levels and low productivity in rural areas.

The results in regression (3) also show that, as expected, the household size and the probability of being poor are positively and significantly associated showing the burden associated with having many family members that are, in most of the cases, dependent on the head of the household who is the main breadwinner.

A positive relationship between the household size and the probability of being poor has also been found by Grootaert, Oh and Swamy, (2002) in Burkina Faso.

With respect to the locational dummy variables, the case of Thies needs some comments and explanations because the dummy variable for the region in question has shown a negative and significant relationship with the probability of being poor. This means that comparatively to the capital, Dakar which is taken as a comparative group, household heads living in Thies are less likely to be poor. It might be tricky to explain such result. However, it is needed to be recognized that in recent years, especially since 2000, Thies has become an economically important zone leading in the sector of fishery and tourism considered as the first pillars of the Senegalese economy. In 2005, the region of Thies has provided 65.8% of the unloading of fish followed by Dakar with 12.6%. During the same year also, Thies remains the leader in terms of receipts of the sales of fishery with 45.6% against 29.6% for the region of Dakar (Agence national de la statistique et de la dĂŠmographie [ANSD], 2006). Moreover, ANSD (2006) has also shown that Thies represents an important touristic zone with 43.4% of the overnight stays while Dakar follows with 40.5% of the overnight stays in 2005.

Table 3. Social capital and poverty status, full sample

Social capital index

(1)

(2)

Probit (social capital

Probit (social capital IV probit estimation

index)

disaggregated)

-0.094***(0.012)

(3)

(social capital index) -1.670***(0.287)

Membership in organization or association

-0.006(0.069)

Support from others in case of hardship

-0.031(0.030)

Trust in the community

-0.150***(0.029)

Mutual assistance

-0.020(0.031)

Contribution towards common development goals

-0.175***(0.063)

Ownership of radio set

0.043(0.037)

Ownership of television set

-0.126***(0.041)

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-0.351***(0.034)

Safety

-0.027(0.051)

Asset index

-0.249***(0.007)

-0.248***(0.009)

0.096(0.064)

Educated household head

-0.021(0.032)

-0.008(0.032)

-0.025(0.049)

Female household head

-0.269***(0.039)

-0.273***(0.039)

-0.195***(0.060)

Rural household head

0.169***(0.029)

0.158***(0.030)

0.256***(0.048)

Household size

0.099***(0.003)

0.100***(0.003)

0.098***(0.004)

Age of the household head

0.021***(0.005)

0.021***(0.005)

0.002(0.008)

Squared age

-0.000***(0.000)

-0.000***(0.000)

0.000(0.000)

Married household head

-0.182***(0.042)

-0.177***(0.042)

-0.080(0.067)

Diourbel

0.095*(0.057)

0.085(0.058)

0.261***(0.093)

Fatick

0.131**(0.058)

0.110*(0.059)

1.043***(0.188)

Kaolack

-0.068(0.058)

-0.123**(0.058)

0.326***(0.114)

Kolda

0.091(0.058)

0.083(0.059)

0.037(0.089)

Louga

0.364***(0.057)

0.327***(0.058)

0.282***(0.089)

Matam

-0.330***(0.060)

-0.345***(0.060)

0.103(0.121)

Saint-Louis

-0.787***(0.070)

-0.839***(0.071)

0.184(0.206)

Tamba

0.012(0.058)

-0.011(0.059)

0.123(0.091)

Thies

-0.242***(0.059)

-0.242***(0.060)

-0.554***(0.105)

Ziguinchor

0.286***(0.058)

0.295***(0.059)

-0.056(0.108)

Constant

0.061(0.145)

-0.047(0.153)

6.319***(1.159)

Observations

12,640

12,640

12,640

R2

0.252

0.257

Wald test of exogeneity (Chi-2)

73.87***

Validity of instruments (Amemiya-Lee-Newey Chi-2)

7.235

Joint significance of the instruments (F-test)

10.37***

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base group for the regional dummy variables. Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

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7.2.

Results from the disaggregated samples

(1) Disaggregation by gender Table 4 and Table 5 present the empirical results related to the impact of social capital on the probability of being poor for male headed households and female headed households respectively.

Table 4 shows that the social capital index and the probability of being poor for male headed households are negatively and significantly associated. Looking at the separate social capital dimensions, the results show that trust in the community, contribution towards common development goals and feeling of togetherness in the community are the dimensions of social capital having a significant relationship with the poverty status of male headed households (regression 2, Table 4). However, it is not possible to draw a causal relationship given the probable endogeneity problem associated with the variable ‘social capital index’. Regression (3) in Table 4 presents the results of the IV estimations; they are consistent with our previous finding. Social capital has a negative and statistically significant impact on the probability of being poor. For the sample of male headed households as well, those with higher social capital are less likely to be poor. Table 8 (regression 2) shows that the marginal effects for the case of male headed households is 0.902, implying that an increase of the social capital index by one unit reduces the probability of being poor by the above-mentioned value.

A close look at our preferred estimation results (regression 3) in Table 4 confirms the significant and negative relationship between the male headed poverty status, on one hand, and the dummy variable for the rural household heads and household size, on the other hand. The sample of male headed households again corroborates the results shown by the aggregate sample with respect to the positive association between the dummy variable for household heads living in rural areas and their poverty status. Thus, those living in rural areas might be more likely to be poor comparatively to the households living in urban areas mainly because of the opportunities given to the latter. Besides, the negative side of families of large size can be predictable through the positive and significant coefficient associated with the variable ‘household size’.

Table 4. Social capital and poverty status of male headed households (1)

(2)

(3)

Probit (social capital Probit (social capital IV index) Social capital index

disaggregated)

-0.122***(0.029)

probit

estimation

(social capital index) -1.605***(0.289)

Membership in organization or association

-0.113(0.172)

Support from others in case of hardship

0.043(0.069)

Trust in the community

-0.189***(0.069)

Mutual assistance

-0.081(0.076)

Contribution towards common development goals

-0.376***(0.113)

Ownership of radio set

-0.077(0.081)

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-0.033(0.094)

Feeling of togetherness in the community

-0.436***(0.081)

Safety

0.074(0.111)

Asset index

-0.271***(0.016)

-0.275***(0.022)

0.081(0.063)

Educated household head

0.032(0.078)

0.047(0.079)

-0.007(0.054)

Rural household head

-0.015(0.074)

-0.021(0.075)

0.244***(0.050)

Household size

0.134***(0.007)

0.137***(0.007)

0.092***(0.004)

Age of the household head

0.023**(0.011)

0.024**(0.011)

-0.003(0.010)

Squared age

-0.000**(0.000)

-0.000**(0.000)

0.000(0.000)

Married household head

-0.298***(0.067)

-0.283***(0.067)

0.033(0.097)

Diourbel

-0.021(0.120)

-0.032(0.122)

0.341***(0.106)

Fatick

0.128(0.120)

0.027(0.127)

0.993***(0.189)

Kaolack

-0.187(0.124)

-0.235*(0.125)

0.447***(0.133)

Kolda

-0.062(0.124)

-0.073(0.126)

0.137(0.100)

Louga

0.325***(0.124)

0.295**(0.126)

0.329***(0.099)

Matam

-0.491***(0.136)

-0.536***(0.138)

0.115(0.126)

Saint-Louis

-0.847***(0.170)

-0.919***(0.172)

0.311(0.235)

Tamba

-0.337**(0.145)

-0.375**(0.147)

0.148(0.098)

Thies

-0.327***(0.124)

-0.342***(0.125)

-0.477***(0.114)

Ziguinchor

0.256**(0.115)

0.265**(0.117)

0.043(0.115)

Constant

-0.033(0.340)

-0.003(0.347)

6.088***(1.188)

Observations

2,674

2,674

2,674

R2

0.270

0.279

Wald test of exogeneity (Chi-2)

65.18***

Validity of instruments (Amemiya-Lee-Newey Chi-2)

10.83

Joint significance of the instruments (F-test)

9.68***

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base group for the regional dummy variables. Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

The estimates related to the locational dummy variables have also shown that the region of Thies still keeps its dominant position relatively to the capital Dakar mainly because of the benefits of tourism and

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fishery which also constitute the first leading sectors of the Senegalese economy. The dummy variables associated with the other regions are positively related with the poverty status of the household heads meaning that household heads living in the regions of Diourbel, Fatick, Kaolack and Louga are more likely to be poor relatively to those living in the region of Dakar (Table 4). This can be explained by the fact that there are much more opportunities available at Dakar in comparison with the other regions which have fewer companies, less infrastructures and are more agriculturally-oriented.

The estimates summarized in Table 5 presents the empirical results on the relationship between the social capital index and the probability of being poor for female headed households. Regression (1) shows the simple probit results for the social capital index, regression (2) presents the probit estimates for the different dimensions of social capital and regression (3) summarizes the IV estimations for the social capital index. We mainly focus on the IV results which have corrected the endogeneity problem and are considered as our preferred estimates.

There is no significant difference between the results related to the sample of male headed households (shown in Table 4) and those concerning the sample of female headed households (presented in Table 5) especially with respect to the statistically significant coefficients. The significant impact of the social capital index is again confirmed in the case of female headed households. In fact, the significant and negative relationship between the social capital index and the poverty status of the female headed households suggests a causal link between social capital and the probability of being poor. Table 8 shows that a one unit increase in the social capital index of female headed households can reduce the probability of being poor by 0.926, a value slightly higher than in the sample of male headed households.

As in the full sample and the sample of male headed households, the results drawn from the female headed households also show that there is a positive and significant association between the household size and the poverty status, the dummy variable for rural household heads and the poverty status and the dummy variables for Diourbel, Fatick, Kaolack and Louga and the poverty status. Again, the negative and significant association between the dummy variable for Thies and the poverty status of female headed households is observed.

Table 5. Social capital and poverty status of female headed households (1) Probit

(2)

(3)

(social Probit (social capital IV probit estimation

capital index)

disaggregated)

(social

capital

index) Social capital index

-0.087***(0.013)

-1.630***(0.293)

Membership in organization or association

0.022(0.076)

Support from others in case of hardship

-0.043(0.033)

Trust in the community

-0.143***(0.031)

Mutual assistance

-0.004(0.034)

Contribution towards common development goals

-0.100(0.076)

Ownership of radio set

0.073*(0.042)

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-0.144***(0.047)

Feeling of togetherness in the community

-0.333***(0.037)

Safety

-0.043(0.057)

Asset index

-0.246***(0.008)

-0.244***(0.010)

0.087(0.064)

Educated household head

-0.025(0.035)

-0.010(0.036)

-0.007(0.054)

Rural household head

0.202***(0.032)

0.187***(0.033)

0.245***(0.051)

Household size

0.092***(0.003)

0.093***(0.003)

0.092***(0.004)

Age of the household head

0.019***(0.006)

0.018***(0.006)

-0.004(0.010)

Squared age

-0.000**(0.000)

-0.000**(0.000)

0.000(0.000)

Married household head

-0.0910.062)

-0.084(0.062)

0.035(0.098)

Diourbel

0.150**(0.066)

0.141**(0.067)

0.343***(0.107)

Fatick

0.156**(0.067)

0.147**(0.068)

1.008***(0.191)

Kaolack

-0.014(0.066)

-0.069(0.067)

0.455***(0.134)

Kolda

0.146**(0.066)

0.139**(0.067)

0.137(0.101)

Louga

0.390***(0.065)

0.354***(0.066)

0.328***(0.100)

Matam

-0.273***(0.067)

-0.287***(0.068)

0.121(0.128)

Saint-Louis

-0.755***(0.078)

-0.800***(0.080)

0.329(0.237)

Tamba

0.093(0.065)

0.071(0.066)

0.149(0.099)

Thies

-0.200***(0.068)

-0.197***(0.068)

-0.482***(0.115)

Ziguinchor

0.321***(0.068)

0.331***(0.069)

0.039(0.116)

Constant

-0.024(0.160)

-0.207(0.172)

6.191***(1.202)

Observations

9,966

9,966

9,966

R2

0.246

0.251

Wald test of exogeneity (Chi-2)

6.33**

Validity of instruments (Amemiya-Lee-Newey Chi-2)

2.56

Joint significance of the instruments (F-test)

1.19

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base group for the regional dummy variables.

Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

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(2) Disaggregation by location (urban versus rural areas) Table 6 and Table 7 respectively present the results of the estimations with respect to the sample of household heads living in urban areas and the sample of household heads living in rural areas. Such a disaggregation is important given the differences in culture, behaviors, opportunities, etc among the households living in rural areas and those residing in urban areas.

Regressions (1) and (3) in Table 6 all show that there is a negative and statistically significant relationship between the social capital index and the poverty status of household heads living in urban areas.

Our privileged estimates in regression (3) show that household heads with higher social capital index are less likely to be poor and the relationship is a causal one running from social capital to poverty status. Table 8 (regression 4) suggests that if the social capital index increases by one unit then the probability of being poor reduces by 0.664 for households heads residing in urban areas. Again, the important role played by social capital in the reduction of poverty is confirmed for the sample of household heads living in urban areas. The effects of social capital on urban poverty might be working through mainly the contribution towards common development goals and the feeling of togetherness in the community.

Based on our estimates in regression (3), Table 6 shows that there is a negative and significant relationship between the asset index and the poverty status of urban household heads. However, the relationship might not be causal in the sense that the poverty status of a given household head can influence the decision to own an asset or not. Besides, the results also show that the dummy variable for female headed households and the poverty status are negatively and significantly associated implying that female headed households are less likely to be poor. Such a result can be again explained by the empowerment and promotion of women. In addition, the size of the household is positively and significantly correlated with the poverty status of urban households, showing the heavy burden usually associated with families of large size.

Regression 3 also shows that the dummy variable for married households and the poverty status of rural households are negatively and significantly associated (Table 6). It is difficult to draw clear inference given that a bidirectional relationship is possible: married household heads might be more motivated and constrained to work hard for the family and are therefore less likely to be poor; alternatively, one can also think that household heads are married because they are not poor. Also, there is a non-linear relationship between the age of the household head and its poverty status.

Table 6. Social capital and poverty status of urban households (1)

(2)

(3)

Poverty (social capital Probit (social capital IV probit estimation index) Social capital index

disaggregated)

-0.082***(0.016)

(social capital index) -0.741**(0.327)

Membership in organization or association

0.009(0.096)

Support from others in case of hardship

0.067(0.041)

Trust in the community

-0.064(0.039)

Mutual assistance

-0.035(0.042)

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 64 URL: http://www.reaser.eu e-mail: editors@reaser.eu Contribution towards common development goals

-0.236***(0.078)

Ownership of radio set

0.028(0.052)

Ownership of television set

-0.047(0.050)

Feeling of togetherness in the community

-0.491***(0.044)

Safety

-0.026(0.070)

Asset index

-0.272***(0.009)

-0.269***(0.011)

-0.132*(0.070)

Educated household head

0.019(0.039)

0.030(0.039)

0.004(0.043)

Female headed household

-0.235***(0.047)

-0.246***(0.047)

-0.222***(0.052)

Household size

0.107***(0.003)

0.108***(0.004)

0.109***(0.004)

Age of the household head

0.025***(0.006)

0.024***(0.006)

0.018**(0.008)

Squared age

-0.000***(0.000)

-0.000***(0.000)

-0.000*(0.000)

Married household head

-0.212***(0.049)

-0.203***(0.050)

-0.175***(0.057)

Diourbel

0.239***(0.068)

0.279***(0.069)

0.283***(0.078)

Fatick

0.075(0.069)

-0.041(0.074)

0.530**(0.238)

Kaolack

-0.157**(0.069)

-0.202***(0.070)

-0.123(0.078)

Kolda

0.027(0.069)

-0.004(0.070)

0.003(0.077)

Louga

0.316***(0.067)

0.276***(0.068)

0.277***(0.077)

Matam

-0.713***(0.078)

-0.768***(0.080)

-0.506***(0.133)

Saint-Louis

-0.570***(0.104)

-0.631***(0.105)

-0.718***(0.135)

Tamba

-0.510***(0.073)

-0.625***(0.075)

-0.235(0.158)

Thies

-0.644***(0.076)

-0.654***(0.077)

-0.753***(0.099)

Ziguinchor

0.030(0.069)

0.050(0.070)

-0.153(0.118)

Constant

0.080(0.189)

0.071(0.201)

2.699**(1.313)

Observations

7,843

7,843

7,843

R2

0.272

0.284

Wald test of exogeneity (Chi-2)

4.990**

Validity of instruments (Amemiya-Lee-Newey Chi-2)

3.12

Joint significance of the instruments (F-test)

5.50***

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base group for the regional dummy variables. Standard

errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

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The coefficients associated with the dummy variables of the different regions shows that there is a positive and significant relationship between the poverty status and the dummy variables for the regions of Diourbel, Fatick and Louga (Table 6). This presumes that urban households in those three regions are significantly more likely to be poor comparatively to those living in the capital. Such situation is quite understandable given the relatively few opportunities in the related regions. In addition, the poverty status of urban households and the dummy variables associated with the regions of Thies, Saint-Louis and Matam are negatively and significantly correlated. This result might be explained by the fact that two of the regions (namely Thies and Saint-Louis) are major touristic and fishing zones while the region of Matam is a region benefiting from huge remittances of the diaspora.

Table 7 presents the results of the estimations related to the impact of social capital on the poverty status of rural households. Such a specification is indeed important given that the majority of poor people are in general located in rural areas. We pay a special attention to regression (3) in Table 7 since it is considered as our preferred estimations because correcting the probable endogeneity of social capital.

The social capital index and the poverty status of rural households are negatively and significantly associated. Therefore, in rural areas as well, we can presume that social capital has a significant impact on the probability of being poor: household heads with higher social capital are less likely to be poor. For instance, if the social capital index increases by one unit the probability of being poor will reduce by 0.939, a reduction far higher than in the case of the sample of household heads living in urban areas. Social connections and associational activities may indeed help in reducing rural poverty in Senegal.

The results show that there is a negative and significant correlation between the asset index and the poverty status of the household heads living in rural areas. It is however not easy to draw a causal relationship between the asset index and the welfare of household heads. In fact, it is possible that individuals get richer because of the assets they own; it is also probable that the welfare status of the household heads leads them to acquire more assets. This is an empirical question that needs to be settled in a different work. Regression (3) in Table 7 also shows that educated household heads living in rural areas are less likely to be poor. This relationship is also not causal; the poverty status and the dummy variable for â&#x20AC;&#x2DC;educated household headsâ&#x20AC;&#x2122; are just negatively and statistically significantly correlated. However, the relationship still infers on the importance of the association between education and poverty in rural areas.

Again, for rural household heads also, the size of the household and the poverty status are positively and significantly associated implying a burden associated with families of large size. The dummy variables for all regions of Senegal at the time the survey were conducted and the poverty status are positively and significantly related suggesting that household heads living in rural areas of the other regions (Dakar taken as the base category) are more likely to be poor. Such a result is understandable in the sense that rural areas are mainly agricultural. Furthermore, opportunities are much lower than in the region of Dakar.

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 66 URL: http://www.reaser.eu e-mail: editors@reaser.eu Table 7. Social capital and poverty status of rural households (1)

(2)

Probit (social capital Probit index)

(3) (social IV probit estimation (social capital

capital

index)

disaggregated) Social capital index

-0.052***(0.020)

-1.914***(0.443)

Membership in organization or association

0.014(0.104)

Support from others in case of hardship

0.021(0.046)

Trust in the community

-0.112**(0.045)

Mutual assistance

0.034(0.050)

Contribution towards common development goals

-0.274**(0.112)

Ownership of radio set

0.129**(0.058)

Ownership of television set

-0.369***(0.082)

Feeling of togetherness in the community

-0.242***(0.057)

Safety

0.005(0.080)

Asset index

-0.246***(0.013)

-0.233***(0.016)

-0.203*(0.106)

Educated household head

-0.058(0.063)

-0.037(0.064)

-0.213*(0.125)

Female household head

-0.367***(0.075)

-0.360***(0.076)

-0.199(0.134)

Household size

0.098***(0.005)

0.101***(0.005)

0.082***(0.008)

Age of the household head

0.011(0.008)

0.011(0.008)

-0.008(0.014)

Squared age

-0.000(0.000)

-0.000(0.000)

0.000(0.000)

Married household head

-0.044(0.085)

-0.042(0.085)

0.003 (0.147)

Diourbel

0.825***(0.157)

0.708***(0.160)

1.218***(0.267)

Fatick

1.141***(0.157)

1.098***(0.160)

1.963***(0.314)

Kaolack

0.969***(0.157)

0.847***(0.159)

2.118***(0.366)

Kolda

1.099***(0.158)

1.010***(0.161)

1.135***(0.253)

Louga

1.362***(0.158)

1.230***(0.162)

1.434***(0.253)

Matam

0.997***(0.156)

0.923***(0.159)

1.537***(0.279)

Saint-Louis

0.122(0.161)

0.016(0.164)

2.336***(0.573)

Tamba

1.687***(0.162)

1.660***(0.164)

0.974***(0.304)

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 67 URL: http://www.reaser.eu e-mail: editors@reaser.eu Thies

1.194***(0.158)

1.178***(0.159)

0.827***(0.266)

Ziguinchor

1.645***(0.161)

1.615***(0.164)

1.402***(0.260)

Constant

-0.906***(0.268)

-0.875***(0.284)

6.282***(1.725)

Observations

4,797

4,797

4,797

R2

0.204

0.213

Wald test of exogeneity (Chi-2)

54.32***

Validity of instruments (Amemiya-Lee-Newey

12.85

Chi-2) Joint significance of the instruments (F-test)

5.71***

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base group for the regional dummy variables.

Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

Table 8. Social capital and poverty status, the marginal effects (IV estimation results)

Social capital index

Observations

(1)

(2)

(3)

(4)

(5)

Full sample

Male

Female

Urban

Rural

-0.913***

-0.902***

-0.926***

-0.664***

-0.939***

(0.018)

(0.020)

(0.100)

(0.160)

(0.024)

12,640

9,966

2,674

7,843

4,797

Notes: The dependent variable is the headcount poverty; Dakar is taken as a base for the regional dummy variables.

Standard errors are in the parentheses. *, ** and *** represent the significance at 10%, 5% and 1% respectively.

8. Concluding remarks Social capital has been described as an empirically elusive concept, yet has also been heralded as the glue that holds communities together. Given the importance of community life and social connection in Africa (for example, extended family and variety of ceremonies and celebrations), it would be interesting to see how helpful is social capital for the welfare and poverty status of the households. Using the 2005 Senegalese Household Survey, we have constructed an index of social capital and empirically investigated the relationship between social capital and household welfare. Our results show that social capital is significantly associated with per capita household expenditure. Our results are in line with the findings of Narayan and Pritchett (1999), Grootaert, Oh and Swamy (2002) and Grootaert and Narayan (2004) for the case of Tanzania, Burkina Faso and Bolivia, respectively. In fact, higher social capital and higher per capita expenditure are more likely to be associated; there is a strong relationship between the level of associational activities and the household welfare.

The literature on social capital has identified (at least) three mechanisms through which social capital affects household welfare; they are sharing of information among association members, reduction of

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opportunistic behavior and improved collective decision making (Woolcock, 1998; Grootaert & Narayan, 2004). In this study, we presume that these mechanisms are embodied in the variables ‘trust in the community’, ‘contribution towards common development goals’ and ‘feeling of togetherness in the community’. In fact, in the context of Senegal, household heads with higher social capital are more likely to trust in most of the people in the community, more likely to participate in terms of money or time toward common development goals and more likely to have a strong feeling of togetherness in the community. In our regressions, the above-mentioned variables are significantly associated with the probability of being poor. It is however to be noted that we were not able to conclude as to a causal relationship given that an instrumental variable method was not applied for the disaggregated social capital variables.

The instrumental variables estimation used to correct the probable endogeneity of social capital (index) shows that there is a causal relationship between social capital and household per capita expenditure. Our findings therefore show that household heads with higher social capital are more likely to have higher per capita expenditure, better welfare and thereafter less likely to be poor. Social capital affects significantly the poverty status of the household heads. A disaggregation of the sample by gender (female and male headed households) and location (household heads living in rural and urban areas) confirms the results related to the significant impact of the social capital on the probability of being poor. The impacts are slightly higher for female headed households than for male headed households but greatly higher for household heads residing in rural areas comparatively to those living in urban areas.

Based on our results, we can suggest the promotion of social capital as a factor to increase the welfare of households and probably reduce poverty in Senegal. Therefore, we recommend the government to support the initiatives at the local, community, regional and state level aimed at creating and strengthening social capital. This study uses Senegal, representative of other sub-Saharan African countries, as a case study.

Therefore, the general conclusion of the study can well fit the context of the majority of sub-Saharan African countries. In fact, African countries are culturally based on the little consideration of personal wealth, the reciprocal trust, and a concern for honor and face saving and face giving (Littrell, 2011). African governments need to take into account social capital in the formulation of public policies. Besides, encouraging the creation of and sustaining the existing social capital might be of great of importance for poverty reduction purposes in sub-Saharan Africa. However, the policy levers available to expand social capital have not been empirically investigated in the present study. Therefore, further investigations are needed regarding the efficient and best ways to increase the social capital level in the Senegalese society.

What is evident is that our findings may support the role important of delegating responsibility to grassroots where the decision making might be more efficient.

Future research will look at the impact of social capital on household welfare in the respective regions of Senegal. In fact, given the regional differences in culture, geography, history and relative prosperity, reinforced by the significant coefficients of the locational dummy variables, it might be worthwhile to estimate regressions separately for each region. This is an objective of our future researches. Besides, it would be also necessary to compare the returns to social capital with those to human capital and physical capital in the case of Senegal given that they are considered as the three capitals contributing to the generation of incomes (Narayan and Pritchett, 1999; Grootaert, Oh & Swamy, 2002 and Grootaert & Narayan, 2004).

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9. Acknowledgements We are indebted to the Agence Nationale de la Statistique et de la Démographie (ANSD) of the Republic of Senegal for providing the dataset. This paper has been presented at the Japanese Association for Applied Economics Conference (17-18 November 2012, Meikai University, Japan), the Economic Engineering Research Workshop (16 October 2012, Faculty of Economics, Kyushu University, Japan) and the ACBF Brown Bag Seminar (23 May 2013, African Capacity Building Foundation, Harare, Zimbabwe). We would like to thank all the participants for their comments and suggestions.

10. References [1] Agence National de la Statistique et de la Démographie [ANSD]. (2006). Situation Economique et Sociale du Sénégal. Edition 2005. Dakar: Ministère de l’Economie et des Finances (République du Sénégal).

[2] Collier, P. (1998). Social Capital and Poverty. Social Capital Initiative Working Paper 4. World Bank, Social Development Department, Washington, D.C.: The World Bank.

[3] Direction de la Prévision et de la Statistique [DPS]. (2002). Deuxième enquête Sénégalaise auprès des Ménages (ESAM II), Dakar: Ministère de l’Economie et des Finances (République du Sénégal).

[4] Durlauf, S. (2002). On the Empirics of Social Capital. Economic Journal, 112 (483), 459-479.

[5] Durlauf, S., & Fafchamps, M. (2004). Social Capital. NBER Working Paper No.10485.

[6] Enquête de Suivi de la Pauvreté au Sénégal [ESPS]. (2005). Agence Nationale de la Statistique et de la Démographie (ANSD) de la République du Sénégal. www.ansd.sn.

[7] González-Arangüena, E., Khmelnitskaya, A., Manuel C., & del Pozo M. (2011). A Social Capital Index.

Cuaderno de Trabajo número 01/2012.

[8] Grochowska, A., & Strawiński, P. (2010). Impact of Social Capital on Individual Well-being in Poland Proxybased Approach. Working Papers No. 13/2010(36), University of Warsaw.

[9] Grootaert, C. (1999). Social Capital, Household Welfare, and Poverty in Indonesia. Local Level Institutions Working Paper 6. World Bank, Social Development Department, Washington, D.C.: The World Bank.

[10] Grootaert, C. (2001). Does Social Capital Help the Poor? A Synthesis of Findings from the Local Level Institutions Studies in Bolivia, Burkina Faso and Indonesia. Social Development Family, Washington D.C.: The World Bank.

[11] Grootaert, C., & Bastelaer, T. (2002). Understanding and Measuring Social Capital: A Synthesis of Findings and Recommendations from the Social Capital Initiative. The World Bank Washington, DC and The IRIS Center Department of Economics, University of Maryland University at College Park Maryland USA. [12] Grootaert, C., & Narayan, D. (2004). Local Institutions, Poverty and Household Welfare in Bolivia. World Development, 32(7), 1179–1198.

[13] Grootaert, C., Narayan, D., Nyhan, J.V., & Woolcock, M. (2004). Measuring Social Capital: An Integrated Questionnaire. World Bank Working Paper No. 18.

[14] Grootaert, C., Oh, G.T., & Swamy, A. (2002). Social Capital, Household Welfare and Poverty in Burkina Faso. Journal of African Economies, 11(1), 4-38.

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[16] Isham, J. (2002). The Effect of Social Capital on Fertiliser Adoption: Evidence from Rural Tanzania. Journal of African Economies, 11(1), 39-60.

[17] Knack, S. (1999). Social Capital, Growth, and Poverty: A Survey of Cross-Country Evidence. Social Capital Initiative Working Paper 7. World Bank, Social Development Department, Washington, D.C..

[18] Knack, S., & Keeper, P. (1997). Does Social Capital Have an Economic Payoff? A Cross-Country Investigation. Quarterly Journal of Economics, 112, 1251-1288.

[19] Kuroki, M. (2011). Does Social Trust Increase Individual Happiness in Japan? The Japanese Economic Review, 62(4), 444-459.

[20] Littrell, R.F. (2011). Contemporary Sub-Saharan African Managerial Leadership Research: Some Recent Empirical Studies. Asia Pacific Journal of Business and Management, 2(1), 65-91.

[21] Narayan, D., & Pritchett, L. (1999). Cents and Sociability: Household Income and Social Capital in Rural Tanzania. Economic Development and Cultural Change, 47(4), 871-897.

[22] Organization for Economic Co-operation and Development [OECD]. (2001). The Well-Being of Nations: the Role of Human and Social Capital. Centre for Educational Research and Innovation, Paris: OECD. [23] Putnam, R. (1995). Bowling Alone: Americaâ&#x20AC;&#x2122;s Declining Social Capital. Journal of Democracy, 6(1), 65-87.

[24] Putnam, R.D., Leonardi, R., & Nanetti, R.Y. (1993). Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press.

[25] Roslan, A., Nor, A.A., & Russayani, I. (2010). Social Capital Reduce Poverty? A Case Study of Rural Households in Terengganu, Malaysia. European Journal of Social Sciences, 14(4), 556-566.

[26] Sen, A. K. (1987). Hunger and Entitlements. Amsterdam: North Holland Press [27] United Nations Development Programme [UNDP]. (1997). Human Development Report. New York: Oxford University Press.

[28] Woolcock, M. (1998). Social Capital and Economic Development: Toward a Theoretical Synthesis and Policy Framework. Theory and Society, 27(2), 151-208.

[29] Woolcock, M., & Narayan, D. (2000). Social Capital: Implications for Development Theory, Research and Policy. World Bank Research Observer, 15 (2).

[30] Wooldridge, J. M. (2005). Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.

[31] World Bank. (1998). The Initiative on Defining, Monitoring and Measuring Social Capital: Overview and Program Description. Social Capital Initiative Working Paper No. 1, World Bank, Washington, D.C..

[32] World Bank.

(1999).

What is Social Capital?

PovertyNet. http://www.worldbank.org/poverty/scapital/whatsc.htm. [Accessed date: May 11, 2012].

Available

from:

[33] World Bank. (2001). World Development Report 2000/2001: Attacking Poverty. New York: Oxford University Press.

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from:

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11. Appendix Table A.1. Definition of the variables used in the empirical analyses Variable Household per capita expenditure Poverty status Social capital index

Membership in organization or association

Support from others in case of hardship

Trust in the community

Mutual assistance

Definition Total of the nonfood expenditures and food expenditures. The expenditures are in CFA franc, the currency of the Dummy variable showing whether the household head is poor or not.

Index constructed from 5 dimensions and showing the social capital of the household heads.

Dummy variable showing whether the household head is member of an organization/association or not.

Dummy variable showing whether the household head gets support from non-family members or not.

Dummy variable showing whether the household head gets support from friends and relatives or not Dummy variable showing whether the household head gets support from extended family or not

Contribution towards common development goals

Ready to make a contribution for the reduction of poverty in the community

Ownership of radio set

Dummy variable showing whether the household head has a radio or not

Ownership of television set

Dummy variable showing whether the household head has a TV or not

Feeling of togetherness in the community Safety Asset index

Dummy variable showing whether the household head is satisfactory about the expenditures in ceremonies Dummy variable showing whether the household head feels safe.

Index constructed from 20 dimensions and showing the asset ownership of the household heads.

Educated household head

Dummy variable showing whether the household head is educated or not.

Female headed household

Dummy variable showing whether the household head is female or not.

Rural household head

Dummy variable showing whether the household head is living in rural area or not.

Household size

The number of persons living in the household.

Age

Age of the household head.

Squared age

Square of the age of the household head.

Married household head

Dummy variable showing whether the household head is married or not.

Distance to the closest market

Distance from the dwelling of the household head to the closest market. The

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Distance from the dwelling of the household head to the closest public Distance to the closest public transport

transport. The distance is specified in number of minutes spent and the variable is ordered multinomial.

Distance from the dwelling of the household head to the closest primary

Distance to the closest primary school

school. The distance is specified in number of minutes spent and the variable is ordered multinomial.

Distance from the dwelling of the household head to the closest secondary

Distance to the closest secondary school

school. The distance is specified in number of minutes spent and the variable is ordered multinomial.

Distance from the dwelling of the household head to the closest telecentre.

Distance to the closest telecentre

The distance is specified in number of minutes spent and the variable is ordered multinomial.

Source: Based on ESPS (2005)

Table A.2. Summary statistics, full sample Variable

Observations

Mean

Household per capita expenditure (ln)

13568

6.570

Headcount poverty

13568

Social capital index

Standard

Min.

Max.

0.677

0.438

9.794

0.429

0.495

0

1

12640

4.916

1.235

1

10

Membership in organization or association

13568

0.039

0.194

0

1

Support from others in case of hardship

13568

0.294

0.456

0

1

Trust in the community

13568

0.363

0.481

0

1

Mutual assistance

13568

0.767

0.423

0

1

13568

0.954

0.210

0

1

Ownership of radio set

13568

0.821

0.383

0

1

Ownership of television set

13568

0.369

0.483

0

1

Feeling of togetherness in the community

13568

0.221

0.415

0

1

deviation

1. Per capita expenditure and poverty variable

2. Social capital variables

Contribution towards common development goals

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12640

0.073

0.260

0

1

Asset index

13568

5.028

2.748

0

21

Educated household head

13568

0.322

0.467

0

1

Female headed household

13568

0.212

0.409

0

1

Rural household head

13599

0.367

0.482

0

1

Household size

13568

9.012

5.699

1

68

Age

13568

50.659

14.640

16

99

Squared age

13568

2780.641

1594.384

256

9801

Married household head

13568

0.833

0.373

0

1

Diourbel

13599

0.088

0.284

0

1

Fatick

13599

0.088

0.284

0

1

Kaolack

13599

0.088

0.284

0

1

Kolda

13599

0.088

0.284

0

1

Louga

13599

0.088

0.284

0

1

Matam

13599

0.089

0.284

0

1

Saint-Louis

13599

0.088

0.284

0

1

Tamba

13599

0.088

0.284

0

1

Thies

13599

0.088

0.283

0

1

Ziguinchor

13599

0.088

0.284

0

1

Distance to the closest market

13568

2.304

1.527

1

5

Distance to the closest public transport

13568

2.019

1.460

1

5

Distance to the closest primary school

13568

1.530

1.089

1

5

Distance to the closest secondary school

13568

2.720

1.575

1

5

Distance to the closest telecentre

13568

1.863

1.540

1

5

3. Physical and human capital variables

4. Household characteristics

5. Regional dummies

6. Instrumental variables

Source: Based on ESPS (2005)

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Shaping public policy in the context of welfare state transformation 1

Tatiana-Camelia Dogaru1 National School of Political Studies and Public Administration, Bucharest, Romania

Abstract. In recent years, the issue of welfare has been the subject of much discussion and debate, and the welfare state is again in the spotlight. Nowadays, two kind of challenges (1) economic and financial crisis which started to unfold in 2008, and (2) the structural changes in labour markets in the context of Europe 2020 strategy and trends of demography create new pressures on welfare states. Thus, in the context of transformation of welfare states under the economic and political international movements, the national states have responded very differently to the new challenges, and the governments had to rethink the policymaking process in order to get the ultimately purpose of a public policy, means ensuring the citizens’ wellbeing. This paper analyses the Romanian government reforms, carried out under the Europeanization process and after the financial crisis, in various policy areas. The attention goes up on this case and aims: (a) to identify the challenges and perspectives of welfare state; (b) to study the policy-making process and the reform of contemporary employment policy made by Romania in the context of reconsidering public budget.

From a methodological standpoint, the research relies on comprehensive and systematic search of the vast literature on welfare state, and document analysis (among other Annual Reports, authorities’ data, resume, obtained by using free accession to information) and strategic documents.

Keywords: public policy-making, welfare state, employment and unemployment, international developments

JEL Codes: I38, E24, H53, J18.

1. Introduction Currently, the main topic of discussion with regard to world economy is the nature of welfare state and how quickly the crisis will be overcome and what kind of public policy will take in order to recover. The perspective on welfare system and its sources of performance is very different today than the understanding from previous years. Processes, such as globalisation, Europeanization, demographic change and public choice perspective on public policy-making have surely eroded the welfare state foundations of the European Union Member States. There has been too little consideration of how welfare states are being restructured in order to cope with new risks and needs, and how the underlying purpose and role of the modern welfare state is being reappraised.

Thus, the transformation of the state is both theoretically and empirically defined (Strange, 1999; Rosenau, 1995). The majority of authors who refer to the transformation of the state, the retreat of the state, or the de-nationalization of the state would argue that this has a decisive impact on the welfare systems (Schubert, 2009). In this context, policy-makers are struggling to find ways to cooperate and manage the 

Assist. professor. PhD. Tel.: + 40314169669; fax: + 40314169669 E-mail address: dogaru_tatiana@yahoo.com .

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current economic challenges while preparing their economies to perform well in an increasingly difficult and unpredictable global landscape. In the last years, Romania has made considerable progress developing institutions compatible with a market economy, and straightened the public policy capacity.

2. Theoretical background and methodological issues The role and size of welfare state has been under question in the context of geopolitical movements, and economic and financial crisis, with widespread consequences on economic performance, labour productivity and employment in all countries around the world. Intensifying the pressure on budget, increasing the likelihood of cuts in social services throughout Europe, changed the views on existing welfare states programs as well as demands for new programs. In this context a first sub-question would be: What is a welfare state in the twenty first century, in the areas of globalisation and Europeanization, where the welfare state seems to be slowly crossing national boundaries?

Having the assumption that two channels through which the economic and financial crisis affects the funding of social security system have been considered (Busch, 2010, p. 8), namely: (1) the higher unemployment, the expenditure of social insurance funds, and (2) falling of tax and contribution revenues, the following sub-question has been raised: To what extent the economic and financial crisis fosters the change of welfare state? So, taking into account all these landmarks, the author addresses the following main research question: How features of the emerging social policies fit into the current welfare state models?

Literature identifies (Armingeon and Beyeler, 2004) besides the objective, material constraints which are put on welfare state through international economic and political integration, a third “soft” policy models and ideas promoted by international actors. In this sense, Palier and Sykes, 2001, p. 10; Palier, 2003, p. 148) argue that “globalisation can be thought as a provider of specific solutions for the problems met by welfare states”. Providing alternative perspective, the new ideas may trigger policy changes. The Europeanization, also interpreted as a globalization process in the European realm (Matei, 2004; Matei and Matei, 2008) represents a state which is contiguous to European integration, encompassing among others its impact upon the national administrations, and welfare state’ understanding.

Given the goal and the nature of the work, rather of a paper that analyzes the country experience, the research methodology has been selected to give a view on national transformations of welfare state under the pressures of international actors, and not to go in-depth description of some theories or models of welfare state. In this sense, in this study, the author is interested in the relationship between perspectives on welfare states’ transformation and public policy process. The focal point is the possible effects of the measures took to implement the changes of welfare state on policy-making, and examines divergent trajectories of social development on Romania in the wake of the global crisis. The paper is based on quantitative and qualitative data, using a mixture of sources: 

the qualitative data are extracted by author from strategic and legislative documents in force in the field of social security;



the quantitative data come from statistics available in official databases of European and public authorities.

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3. Data analysis 3.1.

Status quo: Socio and economic context in Romania

In brief, there is no commonly agreed definition of the welfare state. Esping-Andersen (1990), perhaps the most prominent scholar in the field of welfare state research, defines the welfare state as the state’s responsibility for securing some basic modicum of welfare for its citizens. As Hort (2004) has pointed out, in his comprehensive historical overview of the modelling and theorising of the welfare state from its emergence to the current state of the art in comparative welfare state research at the beginning of the new millennium, the welfare state is a paired, or two-sided concept – welfare and state – but its foundation has always been the state, the nation-state. The majority of scholars who refer to the transformation of the state, especially the welfare state said that two processes (1) the retreat of the state and (2) the de-nationalization of the state had a decisive impact on the welfare systems.

In Romania, the transformation of the welfare state had a sinuous dynamic made up with period of fall and increase, being greatly determined by the evolution of country’s economy. From this point, the period 2000-2008 is one of continual and durable increase, but which is followed by the deep and structural crisis (ICCV). Also, the European Union enlargement is a crucial process for the understanding of the category welfare state. After its accession to EU, Romania started to change the policy-making process in order to increase the capacity for public policy and to adapt its welfare state to the European social model of welfare.

In this general context, in 2008 a new international process appears the global economic and financial crisis. This international phenomenon put pressure both on the economy of each states and the European social model, including Romanian welfare state, and link to the transformation of the welfare state principles and mechanisms. Therefore, in order to give an overview on Romanian welfare state’ transformation, the author chose to same of social policy indicators [in comparative view: Romania and the other member states], taking into consideration that the existence of welfare state is based on public revenues from taxes, fees and other forms. Brumby, J. and M. Verhoeven (2010) consider that the global crisis has challenged countries to sustain spending that promotes future economic growth and poverty reduction. So, it could be said that the transformation of the welfare state represents the way in which governments choose to do or not affects the outcome of social policy.

For Romania, as well as for almost all countries, the crisis has been a complex of interconnected crises: fiscal-budgetary, economic, political, moral, and of knowledge. It started as a financial one, then moving into an economic one, gradually. Policy makers are struggling to find ways to cooperate and manage the current economic challenges while preparing their economies to perform well in an increasingly difficult and unpredictable global landscape. In the last years, the expenditure has increased, especially for social protection that has the most important share in the total expenditure, and also, for this type there is the highest impact of economic and financial crisis. Labour market statistics cover a wide range of subjects, including employment and unemployment, quality of work, labour costs and earnings, job vacancies, and labour market policies (European Union - Eurostat, 2011). In this paper, the focus is on employment and unemployment as outcome of social policy developed by the welfare state. So, the [un]employment rate is considered as a key social indicator for analytical purposes when studying developments within labour markets.

Concerning the Romanian employment policy, it has a strong legacy of passivity, so in practice it has been a policy dealing with unemployment rather than employment and aiming just at easing the social

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impact of industrial transformations. Now, with the economic conditions changed, the policy has shifted from benefit provision to support for finding new jobs.

30.0 25.0 20.0 15.0 10.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

United

Sweden

Finland

Slovakia

Slovenia

Romania

Portugal

Poland

Austria

Malta

Netherlands

Hungary

Luxembourg

Lithuania

Latvia

Cyprus

Italy

Croatia

France

Spain

Greece

Ireland

Estonia

Germany

Czech

Denmark

Bulgaria

0.0

Belgium

5.0

2012

Fig. 1: Unemployment rate for EU Member States Source: the author based on Eurostat data, http://epp.eurostat.ec.europa.eu

Long-term unemployment is one of the main concerns of policy makers. Apart from its financial and social effects on personal life, long-term unemployment negatively affects social cohesion and, ultimately, may hinder economic growth. The unemployment rate is an important indicator with both social and economic dimensions. Looking to the unemployment rate reached by Member States, we remark that Romania had a relatively constant trend. The lowest rate reached 6.1% in 2008, followed by a small increase during the next two years, and ended in 2012 with a decrease of unemployment rate to 7.3%. The impact of economic crisis in Romania is reflected in the variation of unemployment rate, such as: rise (+0.4 ppt) in 2010, and (+0.1 ppt) in 2011, and fell (-0.4ppt) in 2012. It is worth mentioning, the situation of several member states [Bulgaria, Estonia, Ireland, Greece, Latvia, Lithuania, Hungary] that recorded for the first years a lowest rate, but since the economic crisis started they reached a bigger rate than Romania, between 10.3% - 17.5%. Furthermore, Spain has a special situation getting 25.2% in 2012. Generally, between 2011 and 2012, the unemployment rate rose in 17 Member States, dropped in 9 Member States, and remained stable in two, Hungary and Denmark.

Therefore, rising unemployment results in a loss of income for individuals increased pressure with respect to government spending on social benefits and a reduction in tax revenue. From an economic perspective, unemployment may be viewed as unused labour capacity (European Commission, 2013). On the other hand, the employment rate, in Romania, decreased during the next year after the crisis started to stand at 58.6%. During successive years the employment rate slightly increased in 2010 to reach 58.8%, again decreased to 58.5% in 2011 [the lowest rate for the period after the crisis hit], and recorded the highest employment rate 59.5% [for 2003-2012 period] in 2012. In this context, the countryâ&#x20AC;&#x2122;s Europe 2020 target of 70 % by 2020 remains a challenge (Council of the EU, 10649/2/13). Comparative with other Member States [Bulgaria, Denmark, Greece, Spain, and United Kingdom, where employment rate reached between 20032012 sinuous trends] Romania kept the rate around 58.7%.

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2003

2004

2005

2006

2007

2008

2009

2010

2011

United

Sweden

Finland

Slovakia

Slovenia

Romania

Poland

Portugal

Austria

Netherlands

Malta

Hungary

Luxembourg

Latvia

Lithuania

Cyprus

Italy

Croatia

France

Spain

Greece

Estonia

Germany

Denmark

Czech

Bulgaria

Belgium

90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Ireland

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2012

Fig.2: Employment rate for EU Member State Source: the author based on Eurostat data, http://epp.eurostat.ec.europa.eu

It is important to notice that in contrast with the period of strong labour market performance up to mid-2008, the labour market has the subject of a sharp setback over 2009 resulting in a drop of the employment rates, while unemployment rose strongly. If we are looking to national data reports (INSSE, 2011, 2012) it can be noted that distribution of employment by activities of the national economy pointed out: 29.0 % persons worked in agricultural sector, 28.6% in industry and constructions and 42.4% in services.

3.2.

Public policy-making and Romanian welfare state

Looking back to the transformation of welfare state a first milestone is the crash of socialist in certain countries the communist regime, because the institutional arrangements developed during that times differed widely from the Western European understanding of welfare states (Aidukaite 2004). After that moment, states started to rethink their functions and the nature of the Bismarck welfare state under the pressures of international actors and processes. Therefore, after the collapse of the socialist regime many countries began their transition from the communist type of welfare state towards new ‘Western-type’ welfare regimes.

Generally, the socialist welfare states were “stronger” in the sense of authority and bureaucracy (Tamás 2001, p. 5) and they were not exclusively organized via the central authority. In Romania, the welfare system was consolidated during communism, although its basis was set before. Two essential features characterize the welfare state for that period, namely maximal centralization and the link to employment (Dobre in Schubert et al, 2009). To these, Deacon (2000) added the following:

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the welfare system was an inseparable part of a total, political and economic system which was controlled by the monopolized power, and had minimal market mechanisms and political democracy;



the existed welfare state guaranteed employment and an egalitarian wage system with hidden privileges of the power elite;



party state monopolized decision making on the allocation of the national product and freely shifted resources between the accumulation and consumption, and between individual consumption and socialized provisions such as pension and health care.



pensions and other benefits were related to the wage system in which some categories of workers (especially employees in the heavy industry sector) had privileges;



state enterprises provided several cash and in-kind benefits and services to their employees, employees’ families and retirees, such as several sorts of allowances, partly free recreational facilities, vacations and day-care facilities.

Regarding the public policies, one thing is sure, before and after 1990, the government had to choose between taking or not taking an action to solve a domestic issue (Matei and Dogaru, 2012). The main difference consists in the different perspective on the decision-making process. In the post-revolutionary period, the policy -making took the form of a unilateral, rigid and hyper-centralized process (top - down).

During the transition period, the vertical of the power was separated, and under the pressure of some various interest groups and civil society, the mechanisms of carrying out public policies have become more horizontal (Vlasceanu in Zamfir, 1995). Analysing the content of social policies, Naumescu (2000) finds three main periods during transition: 

a period characterized by an explosion of more or less appropriate social measures, such as: (1) increase in salaries and benefits, (2) generous special benefits for particular groups etc. The author concludes that the main effect of this period was the exhaustion of the public budget in period when economic reforms and budgetary tightness would have been probably more appropriate.



a period that lasted until 1997 was called the period of ‘indexation’ when social policy consisted mainly of small increases in passive benefits only to hamper the effects of hesitant economic reforms.



only after 1997, governments committed themselves to substantial economic and social transformations. The economic changes taking place during the 1990s created high rates of frictional unemployment with workers moving from old jobs in declining sectors to new jobs in expanding sectors.

The process for accession to European Union, started in 2000, changed the view both on welfare state, and public policy process, because traditionally the notion of a welfare state link to a high degree of sovereignty, and the process of enlargement enforced this concept and the issue of restraint sovereignty.

Particularly in this period of accession, Romania tried to comply with the practices and the patterns of the EU and the reforming process of the public policies cycle aimed the transition from the normative-legal perspective to the analytical - managerial perspective. Transformation of welfare state determined changes on public policy process. For example, concerning the structural dimension, a series of institutions have been established in order to get the functions of welfare state in a modern time. The main authorities involved in the policy-making process are (Matei and Dogaru, 2011): 

the General Secretariat of Government - The Department of Public Policy;



the Line Ministries - The Public Policy Units at the level of the Ministries;

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the Inter- Ministerial Permanent Councils;



non-governmental organizations, other research institutes and centre.

The EU enlargement was not the only process that affected the welfare state understanding, but the process of deepening has been a more fundamental way for welfare states’ transformation. Dealing with interdependences, it can be assumed that the understanding and the conditions of welfare policies have become increasingly complex because of the deepening process. The influence of international actors on domestic policy-making is widely recognised (Matei, 2007). The European Commission, International Monetary Fund (IMF) and World Bank (WB) have been of key importance in shaping the timing and content of social policy reforms. Thus, the problems with the welfare state become even difficult if we take into consideration the elements of EU supra-nationality and the globalization trend, and the global economic and financial crisis demonstrated that the World Bank promoted the restructuring of the old welfare structures and provided governments with technical and financial assistance. If the influence of global actors (International Monetary Fund, World Bank) is more visible, the influence of Europeanization is not so visible and straightforward on social policy, because the European Union has shared competence with the Member States. Despite this in July 2010 the Council adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014), and a decision on guidelines for the employment policies of the Member States, which together form the “integrated guidelines” (Council Decision 2013/208/EU). So, according to Rys (2001b, p.185) “the EU does not impose on member countries any specific hard law rules on social policy”. However, in response to the high level of unemployment in Europe, the European Commission launched in April 2012 a set of measures to boost jobs, the so-called “Employment package”, aimed to provide a framework for coordination. For a better coordination in the area of social protection among the EU member states has been established the open method of coordination (Dogaru, 2013; Radaelli, 2003, pp. 31-32), aiming to help member states develop their own social policies through the process of learning about the best practices. According to Wehner et al. (2004), the main advantage of this method consists on taking into consideration the specific of local conditions, of a country where the new social policy measures are to be implemented. Labour market policy interventions are classified by type of action into three broad types – services, measures and supports – and into 9 detailed categories, namely (European Union Services, 2010; European Union Services, 2011, pp. 99-100): 

labour market policy services - cover all services and activities of the national Public Employment Services (PES) together with any other publicly funded services for jobseekers.



labour market policy measures - cover interventions that aim to provide people with new skills or experience of work in order to improve their employability or that encourage employers to create new jobs and take on unemployed people and other target groups.



o

training

o

job rotation and job sharing

o

employment incentives

o

supported employment and rehabilitation

o

direct job creation

o

start-up incentives

labour market policy support - cover financial assistance that aims to compensate individuals for loss of wage or salary and to support them during job-search. o

out-of-work income maintenance and support

o

early retirement

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In order to address the challenges outlined above in the national economic and employment policies areas, the Romanian government adapted the policy-making, integrating the following measures: (1) labour market services, (2) training, (3) job rotation and job sharing, (4) employment incentives, (5) supported employment and rehabilitation, (6) direct job creation, (7) start-up incentives and (8) out-of-work income maintenance and support. In fact there is considerable heterogeneity between countries in terms of both spending on labour market policies and the level of unemployment. For getting all this measures governments have to use their public revenue. In case of Romania, the government decide to assign money especially for employment incentives and out-of-work income maintenance and support measures. The table below represents a glance on Romanian public expenditure (millions of EUR) on the labour market policy.

Labour Market Policy Labour market services Training Job rotation and job sharing Employment incentives Supported employment and rehabilitation Direct job creation Start-up incentives Out-of-work income maintenance and support Early retirement

2003 20.659 5.043 0.000 29.103

2004 23.660 4.880 0.000 36.340

2005 30.657 10.705 0.000 44.079

2006 40.819 11.756 0.000 52.098

2007 46.225 12.752 0.000 52.288

2008 47.786 12.410 0.000 49.927

2009 37.043 4.148 0.000 35.690

2010 34.769 4.244 0.000 23.109

2011 35.231 6.046 0.000 15.419

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

23.110 0.242

20.434 0.380

31.007 0.394

33.179 0.807

29.168 0.827

20.077 1.047

7.990 0.039

7.368 0.033

5.984 0.025

275.328

296.859

313.952

270.819

283.708

242.515

449.610

679.610

324.265

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

Table 1: Romanian public expenditure on LMP Source: the author based on AMECO data

To see whether the amount spent by Romania is high or not, it is important to see the options of the others Member States. A first illustration of this is the extent to which expenditure on LMP as a proportion of GDP varies between countries. As we can see on the graph below, the highest relative level of expenditure in 2011, was occurred by Denmark, Ireland and Spain, and in 2010 only two, Ireland and Spain kept the rate (both 3.9 % of GDP). In contrast, Romania spent less than 1% of GDP on the labour market policy for all the period of analysis.

Fig. 3: Public expenditure on labour market policies, by type of action as % of GDP Source: Eurostat, http://epp.eurostat.ec.europa.eu

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Unfortunately, if we compare the level of spending on the labour market policy and the level of unemployment, we will not obtain relevant results, because the link between them does not tell us very much. It could be noted that a high level of expenditure on labour market policy do not relate with a lower unemployment rate. For example, in Spain which spends almost 3.9% of GDP, the unemployment rate got to more than 20.2% in the last three years, while in Ireland which has the same percentage of public expenditure on labour market policy the unemployment rate has been around 14.5% in the last three years, or Bulgaria that allows around 3.75% for labour policy, and that has an unemployment rate of 11.4 for the same years. There have also been cases when the states recorded the same unemployment rate, although they invest only few in activities for labour policy. Moreover, the European Commission asserted that the reasons for the lack of link between these two variables are complex and relate to historical institutional and economic factors as well as current government policy. In this context, the policy process has been guided by the package of macro-stabilization and structural measures, supported by a multilateral program with the World Bank, International Monetary Fund and the European Commission.

Overall, the problems with the welfare state become even difficult if we take into consideration the elements of EU supra-nationality.

3.3.

Final remarks and implications

Reaching the 2020 target of 75% for those aged 20-64 requires stronger commitments by Member States to considerable reforms under current economic circumstances, and unfortunately according to data provided by the European Commission the target do not appear feasible in Romania1. The European Council based on the Commission 2012 AGS, set out the policy guidance for Member States to submit their national reform programmes containing their plans for labour market reforms to achieve the EU headline targets set in the employment guidelines. Based on proposals of the Commission, the Council adopted country-specific recommendations underlining areas in which the Member States should undertake policy reforms within the overall framework of the guidelines for Employment Policies. Moreover, the European Council has established guidelines concerning health and safety protection at the workplace as well as guidelines for industrial law (Schäfer in Schubert 2009). The Romanian government started to implement its strict austerity plan in 2009, using the international loan. A first measure was certain cuts in public sector wages and jobs, but despite them, the agreed deficit target could not be reached, and the government passed another austerity package. This provides for deep cuts in the Romanian welfare state, with sweeping cuts of 15% in all social transfers and of 25% in public sector wages in order to bring about a structurally balanced budget by 2014.

Although, these measures helped Romania to carry out policies which lead the country toward growth in 2011, a series of factors push the growth around zero in 2012.

The analysis reflects that the level of social spending in Romania is low compared with the European average, and due to the EU enlargement and deepening process the term “welfare state” has become increasingly vague, so the public policy-making is under questions, since the economic and social policies can not be isolated from the global economic background. It could be assumed that the welfare policy reacts to economic risks. At a glance based on existing developed studies (Schubert et al, 2009; Seeleib-Kaiser, 2008) and on the current analysis it could be drawn as a result (table 2) the following developments and implications on welfare states’ transformation.

1

http://ec.europa.eu/europe2020/pdf/themes/18_employment_target.pdf, available on 02.11.2013.

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Welfare state

The fall of the Iron Curtain

Europeanization

Enhanced bureaucracy

Welfare regime and

Inseparable part of a total political and economic system controlled by the monopolized power.

Enlargement

Enhanced diversity of welfare states

Erosion of empirical base because of the addition of cases.

Deepening

Complex interdependence among EU Member States

Erosion of empirical base because of the temporal changes.

Limited sovereignty

Negatively defined European social model.

Emerging markets and Welfare Systems

Fragility of labour market and volatility of balance policies and efficiency.

EU supra-nationality Globalization

authority

Table 2: The influence of main developments on welfare state and regime Source: adapted from Schubert, 2009, p. 20

4. Selective references [1] Heise A., Lierse H.. The Effects of European Austerity Programmes on Social Security Systems. Modern Economy, 2011, 2: 498-513.

[2] Deacon B.. Eastern European Welfare States: The Impact of the Politics of Globalisation. Journal of European Social Policy. 2000, 10 (2): 146-161 [3] Palier B.. Analysing the Relationships between Globalisation, European Integration and Welfare State Changes, About COST A15 Activity. Global Social Policy, 2003, 3 (2):146-151.

[4] Radaelli C. M.. The Europeanization of Public Policy, in K. Featherstone, C. M. Radaelli. The Politics of Europeanization. Oxford: Oxford University Press, 2003.

[5] Esping-Andersen G.. The Three Worlds of Welfare Capitalism. Cambridge: Polity Press. 1990.

[6] Aidukaite J.. The Emergence of the Post-Socialist Welfare State, the Case of the Baltic States: Estonia, Latvia and Lithuania, Stockholm: Södertörns högskola, 2004, available at http://www.diva-portal.org/smash/get/diva2:191772 /FULLTEXT01.pdf [7] Brumby J., Verhoeven M.. Public Expenditure after the Global Financial Crisis, in World Bank, The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, Washington, D.C: World Bank, 2010: 193-206.

[8] Busch K.. World Economic Crisis and the Welfare State Possible solutions to reduce the economic and social imbalances in the world economy, Europe and Germany, International Policy Analysis, 2010, available at http://library.fes.de/pdf-files/id/ipa/07000.pdf.

[9] Hort S. E. O.. Western Experience – Eastern Experiment? Welfare State Models and Theories before and after the “Decennium Horribile”, in I. Grigoryeva, et al (eds.). Welfare State Development in Nordic Countries and Russia: A Comparative Perspective. St. Petersburg: Resource Center of St. Petersburg State University, 2004: 44-66.

[10] Dogaru T.C.. The Open method of coordination, a cross-border mechanism for social practice. EIRP Proceedings, 2013, 8:348-354.

[11] Rys V.. Transition Countries of Central Europe Entering the European Union: Some Social Protection Issues.

International Social Security Review, 2001b, 54 (2-3):177-189.

[12] Rosenau J.N.. (ed.). Governance without Government, ORDER and change in World Politics, Cambridge: Cambridge University Press, 1995.

[13] Seeleib-Kaiser M.. Welfare State Transformations, Basingstoke: Palgrave Macmillan, 2008.

[14] Strange S.. The Retreat of the State, the Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 1999.

[15] Tamás P.. The European Welfare State and Welfare Expectations in the Central European Enlargement Countries in P. Tamás and U. Becker (eds) Newsletter Social Science in Eastern Europe, special edition, Bonn: Social Science Information Centre, 2001, available at http://www.gesis.org/fileadmin/upload/dienstleistung /fachinformationen/newsletter_ssee/dokumente/archiv/nl2001_2.pdf [16] Palier B., Sykes R.. Challenges and Change: Issues and Perspectives in the Analysis of Globalization and the European Welfare States, in R. Sykes, B. Palier and P.M. Prior (eds) Globalization and European Welfare States,

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 85 URL: http://www.reaser.eu e-mail: editors@reaser.eu New York: Parlgrave, 2001.

[17] Matei A.. Evoluţia administraţiei europene. Concepte şi abordări fundamentale”, Drept comunitar, 2004, 3:29-43.

[18] Matei A., Matei L.. Globalization and Europeanization. A Projection on a European Model of Public Administration, Theoretical and Applied Economics, 2008, 4 (521):33-52.

[19] European Union – Eurostat. Labour market statistics. Luxembourg: Publications Office of the European Union, 2011.

[20] Council of the European Union, no. 10649/2/13 REV 2, Brussels, 20 June 2013, available at http://register.consilium.europa.eu/pdf/en/13/st10/st10649-re02.en13.pdf [21] INSSE. The activity of enterprises from industry, construction, trade and market services, in 2011, Press Release, 2012, 276.

[22] INSSE. The activity of the enterprises operating in the industry, construction, trade and market services sectors in 2010, Press Release, 2011, 248.

[23] Schubert K.et al. The Handbook of European Welfare Systems. USA: Routledge. 2009.

[24] Vlasceanu M.. Politica socială şi sectorul nonprofit. in E. Zamfir, C. Zamfir (coord.). Politici sociale: România în context european, Bucureşti: Ed. Alternative, 1995.

[25] Matei A., Dogaru T-C.. The Rationality of Public Policies. An analytical approach, Germany: GRIN Verlag, 2012.

[26] Matei A., Dogaru T-C.. The Reform of the National Public Policies Process under the Influence of Europeanization Changes, Theoretical and Applied Economics, 2011, volume XVIII, no. 1(554):75-110.

[27] Matei L.. Globalization and Public http://ssrn.com/abstract=1372064, 2007.

Policies.

Transnational

actors’

involvement.

available

at

[28] Council Decision on guidelines for the employment policies of the Member States, 2013/208/EU. [29] Radaelli C.M.. The Europeanization of Public Policy, in Featherstone, K., Radaelli, C.M. The Politics of Europeanization. Oxford: Oxford University Press, 2003.

[30] Wehner C.et al. The Role of the Different Actors in the Development of Social Policy. Paper presented at the EUSpecial Conference, Ghent, 13-16th May, 2004.

[31] Armingeon K., Beyeler M.. The OECD and European Welfare States. UK: Edward Elgar Publishing Limited, 2004.

[32] Naumescu V.. Politici sociale in Europa postbelica, Cluj-Napoca: EFES. 2000.

[33] Busch K., World Economic Crisis and the Welfare State-Possible solution to reduce the economic and social imbalances in the world economy, Europe and Germany. International Policy Analysis. Berlin: Friedrich Ebert Stiftung. 2010.

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Prospects of Russian industrial development on the global market (the case of business aviation industry) Anna A. Dokukina1+, 1

Plekhanov Russian University of Economics

Abstract. The global macroeconomic environment continues to be uncertain with the U.S. economy treading fastidiously on its recovery path, the Euro-zone debt crisis refusing to abate, and the most emerging markets attempting to stoke up economic growth momentum with a slight shift in overarching focus from merely combating inflation to adoption of a more balanced approach.

The significance of Business Aviation as an important part of national economies and a tool for the progress of entrepreneurship that provides an efficient management of large and medium-sized businesses was recognized by international business community long ago. Under the influence of crisis this sector has been treading cautiously on the recovery path over the recent years. Market participants, including Russian players, in the meanwhile, are working significantly towards building capacity for a potential demand.

The paper is devoted to the role of BA as a part of the civil aviation. It deals with the economic recession that had a strong negative impact on the demand for business jets. Pronounced decrease in demand occurred in North America and Western Europe â&#x20AC;&#x201C; the two largest geographic markets for business jets â&#x20AC;&#x201C; and its disproportional affect on the market of light and medium-sized jets are discussed. Finally, the study concerns opportunities for Russian BA on the Global Market.

Keywords: global economic challenges, industrial development, business aviation industry, prospects of Russia.

JEL Codes: O10, O14, R41

1. Introduction The global financial crisis caused impacts on almost each and every industry of the world. The key businesses which were showing good positions and were experiencing high development faced negative factors.

Being one of the most important parts of global production and services Business Aviation (BA) also got affected heavily by the crisis. The sector, that has been ever representing the high developing potential, encountered drop in growth rates and huge losses. In accordance with the reports on the Global Business Aviation Industry2, the global economic meltdown of 2008 registered a 3,4% decline in aircraft deliveries to 672 units as well as a moderate drop in industry billing to $18.9 billion for 2012. [5] In particular, the global recession had a substantial effect on the demand for business jets: that effect was felt most deeply in the market for light jets in the United States and, to a lesser extent, in Europe. U.S. purchases of very light jets were particularly hard hit by the recession and the accompanying financial crisis, as the smaller firms that tend to purchase these jets faced declining revenues and found it difficult to borrow from commercial banks. These companies postponed the purchase of new business jets and, in some cases, +

. Assoc.Prof. PhD (Economics), tel.: +7 916 6118987; fax: +7 495 9582947 E-mail address: Dokukina.AA@rea.ru 2 URL: http://www.noealtcorporateservices.com/business-aviation-industry.

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cancelled pre-existing orders3. Fractional ownership firms, which had in the past driven market growth even during recessionary periods, also held back on purchases of new jets, uncertain of future demand for their services. Order cancellations, particularly among manufacturers of very light, light, and certain medium to midsize jets (those priced between $4 million and $25 million) increased, as did the inventory of used business aircraft4. By contrast, the sale of larger business jets (those priced above $25 million), continued to rise during the period sustain sustained partly by consumer demand in the emerging markets as economies of these countries were less affected by the economic crises5..According to some industry analysts, these events resulted in a bifurcation, or division, in the market for business aircraft, in which demand for smaller business jets trended downward while demand for larger aircraft trended upward.

At the same time, the BA sector even being heavily impacted when the global crisis hit in 2008-2009 became stabilized in 2010-2011, helping to catalyze trade and investment6. Overall, BA has generated essential and sustainable employment, and promises to be an important contributor to a further economic recovery7.

Concerning the current development of BA industry in Russia it is characterized as fairly positive.

However, a high degree of uncertainty is quite obvious. Besides, number of publications and up-to-date market analyses are rather limited to have an objective overview of BA topic.

All in all, in Russia so far there has not been conducted a systematic and comprehensive market research of BA industry. But then, there are some expert opinions concerning the nearest future of Russian companies and their abilities to compete with foreign representatives of this market. [7] In general, the main problems are related to the macroeconomic situation, on the one hand, and absence of the state long-term development strategy of the industry, on the other hand. Additionally, the lack of effective management and decisionmaking process on the micro level is also mentioned.

Thus, the study as a basis of this paper is devoted to the role of BA as a part of the civil aviation. It deals with the economic recession that had a strong negative impact on the demand for business jets. Pronounced decrease in demand occurred in North America and Western Europe 8 – the two largest geographic markets for business jets – and its disproportional affect on the market of light and medium-sized jets are discussed.

Finally, the study concerns opportunities for Russian BA on the Global Market.

The paper presents the part of the research aimed at the following main points:  effect of crisis on BA Global Market;  peculiarities and tendencies of on-demand air transport services formation in Russia;  problems and obstacles of Russian BA market development;  prospects of Russian BA on the Global Market.

The main findings are connected with the outlook for Russian BA industry. One of the most important issues is to determine the vector of development of Russian business aviation from the long term perspective of integration in the Global Market. Russian air space can and should be utilized by on-demand air travel.

Moreover, huge prospects are proved by some factual data such as the average annual growth rate of

3

USITC, September 28, 2011, 44 (testimony of Robert Morin, U.S. Ex-Im Bank) and 166–67 (testimony of Ed Bolen, NBAA).

4 Bombardier Business Aircraft. “Market Forecast 2011–2030,” 2011. URL: http://www.bombardier.com/files/en/supporting_docs/BA-BBA_2011_Market_Forecast.pdfup.

5 USITC, September 28, 2011, 202 (testimony of Richard Aboulafia, Teal Group Corporation).

6 Report prepared on behalf of the EBAA The Role of Business Aviation in the European Economy, 2012. URL: http://www.ebaa.org/documents/document/20130716112754-2012-ebaa_oxford_report-final03_-_digital.pdf.

7 Aviation Week, on-line Magazine, Kerry Lynch BizJets Helping Spur European Recovery, Study Finds. URL: http://www.aviationweek.com/Article.aspx?id=/article-xml/awx_10_02_2012_p0-502295.xml.

8 Transportation Research Board (TRB). Light Commercial and Business Aviation Committee – Business Aviation Subcommittee, meeting notes, June 2, 2011. URL: http://www.trb.org/AnnualMeeting2011.

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business air transportation in recent years, which wae about four times higher than the similar indicators of civil aviation in general.

2. Industry key features According to the International Business Aviation Council (IBAC) BA is “an integral sector of aviation which concerns the operation or use of aircraft by companies for the non-scheduled carriage of passengers or goods as an aid to the conduct of their business, flown for purposes generally considered not for public hire and piloted by individuals having, at the minimum, a valid commercial pilot license...”9.

Planes and helicopters manufactured for the BA market are called business jets. They differ from the civil aircrafts primarily in the higher level comfort. It should be noted that till recently a clear and unambiguous definition of the “Business Aviation” concept could not be found even in the International Civil Aviation Organization (ICAO) collections. The point is that this concept exists only as a subsector of civil aviation. And approximately half of this subsector is flying by the rules for commercial airlines, with operator certificate (this part is called Aero-taxi); the other half is flying by the general aviation rules (this refers to the corporate carriers). Even here, the distinction is rather unclear. [2, 8] BA as a form of the global air transport network can compete with scheduled transportation and charter flights. The main sphere of business aviation is on-demand air travel and corporate transportation. [3] In the first case, the use of aircraft is associated with the business representatives including owners of the aircraft and individuals who are able to pay for personal air transport service to specialized carriers. Often such charter airlines or aero-taxi operators are small family-owned companies, which own a fleet of one or a few inexpensive aircraft. Their services are popular among organizations of a small business sector, retail, insurance agents, doctors, lawyers, and state officials. These planes can be also exploited for individual tourist trips or even in the emergency evacuation of sick and wounded. [10] Corporate transportation involves the operation of aircraft carrying both personnel and property. In such cases fleet often operated not only in corporate interests, but also on a commercial basis for charter flights.

So, business jets are used by individuals, corporations, and leasing firms as tools to enhance business productivity by transporting employees, customers, suppliers, and, to a lesser extent, parts or other assets quickly, often to locations not easily accessible through commercial airline service. Other advantages of business jet travel comparing to commercial airlines are connected with employee time savings, increased worker productivity, protection of intellectual property by permitting private communications en route, and improved customer interaction and support. To meet the specific needs of customers, business jets are designed and produced in an array of sizes, capacities, and capabilities, ranging from small-cabin jets designed for traveling short distances too much larger capacity jets with transoceanic capabilities.

An important feature of BA is the ability of its aircraft to use confined areas of some airfields, sometimes with poor coverage, as well as the airports in small towns where due to their low commercial viability general airliners are not provided at all or performed with large intervals.

Running through all forms of BA are the principles of flexibility and responsiveness, and for many fliers it is nothing less than business-critical. Unlike scheduled air services, BA is specifically tailored to the needs of the client. Statistics observation finds, for instance, that “96% of city pairs served by business aviation have no daily scheduled direct connections. The remaining 4% represent however more than 1/3 of business aviation traffic in volume”10. While these routes may not be considered viable by scheduled airlines, they are clearly important to business aviation users and the companies they represent. BA allows operating the flight on any required routes, regardless of the length of transfers or overnight stopovers, and to avoid visits to

9

IBAC. URL: http://www.ibac.org/about-ibac/ibac-definitions-of-business-aviation.

Report prepared on behalf of the EBAA. The Role of Business Aviation in the European Economy, 2012. URL: http://www.ebaa.org/documents/document/20130716112754-2012-ebaa_oxford_report-final03_-_digital.pdf.

10

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busy hub airports. Other main differences and features in service of BA flights can be shortly described as following:  irregularity of business flights that leads to operational changes of arrival and departure time or route changes;  necessity of operative changes in the schedule of aircraft maintenance;  difficulties of communication between English-speaking flight crews and airport staff;  raising safety standards of aircrafts and passengers;  special requirements for the onboard catering provided to passengers and crew members, etc.

3. Abstract of the history and current development of the global BA market The BA history began in the 20s of the 20th century. By the end of the Second World War BA industry began to develop rapidly in response to the creation of international corporations.

In different periods of market development (since 30-s of the 20th century) air transportation companies were created, merged and absorbed by other companies. As a result, such large aircraft manufacturing companies like Gulfstream Aerospace Corporation, Cessna Aircraft Company, Boeing Business Jets, Bombardier Aerospace, Hawker Beechcraft Corporation, Airbus S.A.S, Dassault Aviation and Embraer have reinforced their positions on the market of business jets.

Between 1985 and 2012, more than 97000 business jets of various models and configurations were produced globally11. It should be noted that out of the 97000 planes on the BA market approximately 15500 business jets were exploited for commercial purposes12. Other part of business jets are small planes used by agricultural aviation, emergency medical care, rescue, police, and business jets, which are privately owned and are not used for commercial aims.

Currently the market of business carriage saw the process of expansion of air transport services of higher comfort, or so called «Executive Shuttle Service». More and more airlines appear in this segment to organize and carry out flights on airplanes with VIP class salons. It is, as a rule, corporate airlines fleet owners, which could provide a flexible and convenient pricing policy for clients as well as to provide a high level of service and responsiveness. The service guarantees the departure after three hours after application receipt.

Moreover, a client is provided with booking hotels anywhere in the world, preparation of all necessary documents including visa support, and coordination of transfers. Finally, the confidentiality of services is always guaranteed. [4] The trends indicate that on-demand air travel on business jets becomes one of the effective tools of running business and contributes to the integration of economies of many states in the system of global economic relations. As surveys show “96% is a proportion of city pairs served by business aviation had no scheduled connection. The remaining 4% represent however more than 1/3 of business aviation traffic in volume. Moreover, 66% of corporate decision makers consider face-to-face meetings as critical to M&A success” 13..

Table 1 presents more basic factors associated with the development the global business aviation market.

On-line Business Aviation Portal “Business Jets Ru”. Aircraft Catalogue. URL: http://en.jets.ru/planes.

Dassault Aviation. Manufacturing by Dassault, directed by Jean-Louis Burési. Annual Report, 2012. URL: http://www.dassault-aviation.com/en/aviation/finance/publications/2011.html?L=1.

13 Gamba, F. Business aviation's key role in European economic recovery. 2011. URL: http://www.aircraftinteriorsinternational.com/articles.php?ArticleID=440.

11 12

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Table 1. Main characteristics of world BA market Indicators 1.

Demand for business jets

2.

Market growth rate 3.

4.

5.

6.

Customers, clients Characteristics of products Market entry, accessibility Commercial viability

Characteristics Annual sales reaches 600-700 business jets with worth volume 9 -11 billion dollars14 15 Uneven across regions: ranges from 8 to 20% per year16; Twice as fast as GDP – expected medium-term growth rate for business aviation demand at Paris-Le Bourget17; 164000 persons employed in business aviation only around Europe18.

Government agencies, large companies and corporations, businesses representatives Greater degree of differentiation of services High barriers to entry, require large capital investments Relatively high, especially in the VIP-transport

The business jet market has grown significantly in the last two decades, driven principally by increased corporate demand for business jets and the wider recognition of the utility of business jet travel. In some cases, business aviation has become a viable alternative to commercial air transport, allowing users to travel to multiple locations in a single day, to continue working while in transit, and to reach locations that are underserved by commercial airlines.19. The introduction of advanced and efficient business jet models, combined with the advent of charter and fractional ownership programs, have further increased the customer base for business jets and contributed to growing global demand.20.

North America and Europe were the leading geographic markets for business jets in 2010, as indicated by the number of business jets operating in those markets. “North America accounted for 10854 aircraft, or 70 percent of the global fleet”, while Europe accounted for 2501 aircraft, or 16 percent. These regions were followed by South America with 984 aircraft (6%) and Asia with 844 aircraft (5%). Africa is the smallest geographic market for business aircrafts in 2010 with only 322 aircraft in operation, or 2 percent of the global jet fleet.21.

Growth trends in number of business jets operating globally during the period 2006–2010 highlight the significance of emerging markets. The number of business jets in Asia increased at an average annual rate of 16,2% percent, in South America by 16,3%, and in Africa by 10,5%. In Europe the number of business jets grew by 10,8% during 2006–2010, whereas in North America the size of the business jet fleet increased by only 3,2%. The predicted changes in market share for business jet over the next 20 years is associated with

14

Bombardier Business Aircraft. “Market Forecast 2011–2030,” 2011. URL: http://www.bombardier.com/files/en/supporting_docs/BA-BBA_2011_Market_Forecast.pdfup.

15 Dassault Aviation. Manufacturing by Dassault, directed by Jean-Louis Burési. Annual Report, 2012. URL: http://www.dassault-aviation.com/en/aviation/finance/publications/2011.html?L=1.

16 Flight Global. Insight Fleet status report and analysis. URL: www.flightglobal.com/.../commercial-fleet-report2008.pdf.

17 Aboulafia, R. Looking Up from the Bottom of the Trough: Industry Overview and 2011 Market Forecast. Teal Group Corporation. New York, NY: April 2011.

18 International Business Aviation Council (IBAC) 2002, Policy 40-6 (20.06.2002).

19 USITC, September 28, 2011, 2-3 (testimony of Ed Bolen, NBAA). The term “business aviation,” as defined by the FAA, refers to the use of piston- or turbine-powered general aviation aircraft for business activities.

20 Forecast International. Analysis 3. The Market for Business Jet Aircraft 2010-2030. URL: http://www.forecastinternational.com/samples/F613_CompleteSample.pdf.

21 JETNET, USITC. URL: http://www.usitc.gov/publications/332/pub4314.pdf.

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the world general trend of capital movement and increasing purchasing power from North America toward emerging countries (fig 1)22.

Figure 1. Forecast geographic market share for business jets over the next 20 years

4. Effect of crisis on BA market and outlook for the long-term industry development As it has been mentioned above, the global recession that began in 2008 had a substantial effect on the demand for business jets influencing two leading markets of light jets â&#x20AC;&#x201C; United States and Europe. At the same time, a bright spot is the increasing demand for business jets on the emerging markets of Asia, Eastern Europe, Latin America, the Middle East, and Africa23. In this regions business jet demand increases rapidly, though relatively small in proportion to total global demand, and will likely drive future growth of the business jet market (fig. 2.)..For their part, established business jet manufacturers are poised to meet future demand growth with upgrades of existing aircrafts and the development of innovative models.

22

The data in this section pertain to business jets with a maximum take-off weight (MTOW) of 50,000 pounds or below. However, if business jets above 50,000 lbs. MTOW were included as part of the data, percentage growth rates by region would differ just slightly.

23 Bombardier Business Aircraft. Bombardier Input to ITC Section 332 Investigation. URL: http://www.usitc.gov/pardon.htm.

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2010 North America Europe Asia Pacific Latin America East 2008

0%

20%

40%

60%

80%

100%

Source: General Aviation Manufacturers Association, 2010 General Aviation Statistical Databook & Industry Outlook.

Figure 2. Share of total jet deliveries (including business jets above 50,000 pounds MTOW by market, 2008 and 2010 (%)

Overall business jet deliveries were down by 57% in 2011 from the peak of 1,121 aircraft in 2008, falling to a preliminary total of 485 aircrafts Deliveries in the very light business jet market segment, where HBC and Cessna were principal players until Embraer’s entry in 2007, fell by 71% from the 2008 peak of 371 aircrafts to a preliminary total of 106 aircrafts in 2011 (fig. 4.). In the light jet segment, deliveries fell by 45% from the 2008 high of 427 aircrafts to 204 aircrafts in 2010, but turned around in 2011 and grew by 26% percent to a preliminary total of 225 aircrafts. The very light and light market segments represented 78% percent of HBC’s deliveries and 89% of Cessna’s deliveries of the subject business jets in 2010, the latest available full-year data. In the medium to super midsize category, where Bombardier and Dassault are the principal players, deliveries fell by 52% from 323 aircrafts to a preliminary total of 154 aircrafts in

Figure 3. Global deliveries of business jets, by segment, 2006-11

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201124.

The global crisis made business aircraft manufacturers to reduce their staff. Thus, in December 2008 the largest company Cessna announced the reduction of 500 employees, and in January aircraft manufacturer fired another 2000 employees. Gulfstream Aerospace Corp. has cut 2700 jobs, a Hawker Beechcraft by the end of 2008 has reduced its staff by 2200 people25.

The drop in demand for the purchase of new aircraft is associated with a particular scheme of order and purchase from manufacturers. The fact is that in the process of new aircraft acquisition not only the producer and the end consumer are involved, but also financial and consulting institutions that finance the purchase.

Fulfillment of credit programs become more complicated or even come to nothing in the period of financial crisis. Banks increase credit rates due to the threat of non-payments or complicate the procedure of credit arrangements.

Traditional business jet customers (besides airlines companies) are brokers who bought planes for resale through various credit lines. This situation led to the cancellation of the order of new business jets up to 6570%. As a result of the cancellation of orders by end customers (airlines and individuals) the number of already made but not sold-out aircrafts also increased. Similar changes are occurring on the service market as well as in the sector of private aviation. Moreover, in connection with the expected drop in traffic, sale proposals of excessive fleet on the secondary market increases, which is determined by the high operation cost of private jets26.

Secondary market of airplanes is the market of the aircraft, which had expired factory warranty, i.e. from three to five years old. In 2008 the total growth of offers on the secondary market amounted to approximately 70%. The sales proposals of business jets in the period from 2008 to early 2009 on the secondary market in the United States increased from 1140 before 1813 (59%) and in Europe from 355 to 732 (51%)27.

By the start of the crisis in 2008 hundreds of models which would satisfy the demand of customers of different income levels was offered. However, the recession creates a mismatch of BA market supply and customers demand.

Nevertheless, expert opinions for BA industry prospects are quite positive. Basing on statistics the future outlook for the long-term market drivers of business jet industry growth is solid. These market drivers include: wealth creation, increasing business jet penetration in emerging economies, globalization and air market accessibility.

Manufacturers’ forecasts for new business jet deliveries during 2011–2030 indicate a continued shift in market demand toward the developing economies. At the end of this period, North America will likely account for only 40% of new business jet deliveries worldwide, with the remaining 60% of new business aircrafts destined for markets outside the United States and Canada. For example, China and Latin America are forecasted to account for respectively 10% and 9% of new business jet deliveries over the next 20 years, while Russia and India will each account for roughly 6% of such deliveries. Europe will remain the second28 largest market for business jets during 2011–2030, with an estimated market share of 17% .

24

Bombardier Business Aircraft. “Market Forecast 2011–2030,” 2011. URL: http://www.bombardier.com/files/en/supporting_docs/BA-BBA_2011_Market_Forecast.pdfup.

25 Corporate Jet Investor. Bombardier, Cessna, Hawker Beechcraft and IAI Fight to Win Joint Venture with China’s AVIC. June 29, 2011. URL: http://corpjetfin.live.subhub.com/articles/AVIC_business_jet_jointventure_Bombardier_Cessna_Hawker_Beechcraft_IAI_in_Chengdu_China-531.

26 On-line Journal «BizAvNews». Bakhtin, E., General Director of «AVCOM-D». Interview. August 30, 2013 URL: http://bizavnews.ru/237/5320.

27 On-line Journal «BizAvNews». Bakhtin. E., General Director of «AVCOM-D». Interview. August,30 2013 URL: http://bizavnews.ru/237/5320.

28 Bombardier Business Aircraft. Bombardier Input to ITC Section 332 Investigation. URL: http://www.usitc.gov/pardon.htm.

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As for the future competitiveness of the business jet industry it may be influenced by changes in such factors as regional demand, new entrants into the industry, workforce characteristics, government regulations pertaining to the environment, airspace usage, and aircraft user fees.

All in all, as it was noticed, the BA sector being affected by the global crisis managed to consolidate a position. According to Rob Wilson, president of Honeywell Business and General Aviation “…over the medium term, a return to historical growth conditions supported by globalization, wealth creation in developing nations and new aircraft development should boost orders and support accelerated growth beginning mid-decade. Despite the economic challenges our industry has been dealing with for the past 40 months, we believe some progress is being made”29.

5. Peculiarities and tendencies of air transport services formation in Russia Despite the fairly positive appraisals of BA development in the world including Russian market, today there are a number of problems restraining development of BA airlines in Russian Federation. Firt of all it is connected with lack of BA concept itself in domestic aviation.

According to the Air Code of the Russian Federation» (article 20), aviation is divided into:  civil aviation;  state aviation;  experimental aviation.

Thereby, existing regulations does not set appropriate rules to define the BA market, and do not solve the problem of separation the considered segment of the whole system of Civil Aviation. Thus, today, actually being the BA carrier, airlines obey the rules and requirements of civil aviation.

Russian BA industry appeared in the early 90s together with the formation of actual national business.

Until the early 2000s, although the market has evolved, growing about 10% annually30, it remained rather narrow segment, which counted just over a dozen companies. In the new century overheated growth of the Russian economy caused a real boom in the aviation business. Such a rise had a reliable ground – globalization and world economic growth. But a successful combination of factors resulted in a significant overheating of the market. Robust profits of enterprises, growth of large private capital and, on the one hand, the cheap dollar, and on the other hand, high oil and raw materials prices stimulate demand in developing economies. The share of deliveries to the international market in the total volume increased dramatically, which led aircraft manufacturers to an overestimation of scale and potential of geographical diversification of demand.

The global financial crisis began to make adjustments in the development of BA industry, both worldwide and in Russia. According to the reports the number of business flights in 2009 compared with 2008 reduced by 30-40%, and in money terms the volume of the market was reduced even more severe. This is due to the presence of high competition among airlines and decline in demand for business flights. This situation makes jets’ owners offer their services even at net costs, as just the maintenance and parking of aircrafts fall for owners very costly.[9] Because of the global crisis and the subsequent reduction in demand for business transportation, the number of foreign airlines in the Russian market reduced from 200 to 40 companies by the end of 200831.

Traditionally, active market of business aviation in Russia has been considering as close (inside): the business owners are reluctant to reveal details about the number of flights and passengers, as well as the direction of traffic. In addition, operators of business aircrafts are not counted in the ratings of the Transport 29

Honeywell Aerospace.

Global Business Aviation Forecast.

October 28, 2012.

URL: http://aerospace.honeywell.com/markets/business-aviation/2012/10-October/global-business-aviation-forecast 30 Khristenko, V., Minister of Industry and Energy of the Russian Federation at the Government hour in the State Duma October 24, 2006: “On measures taken by the Russian government, reform and development of the domestic aviation industry”. URL: http://www.minprom.gov.m/activity/avia/appearance.

31 Kukushkin, M. Business aviation loses customers. 2009. URL: http://www.aviaport.ru/digest/2009/02/20/167249.html.

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Clearing Company (TCP) as well as between the tap and small airlines are not signed contracts for the publication of information on transportation of passengers.

Monthly approximately about 2200-2400 business flights are performed in Russia. According to some data, about 60% of them are operated by foreign companies (taking into account private and commercial flights). However, official statistics on the total number of flights of business aviation performed on the Russian market does not exist, and all information received from different sources varies widely32.

Today about 158 business jets are registered in Russia. At the same time, the number of aircrafts, affiliated with the Russian owners, is more than 400 units. Thus, about two-thirds of Russian businessmen prefer to register aircraft abroad33.

The majority of the aircrafts based in the European part of the country: 63% are at in Moscow airports, 23% of all aircraft are in St. Petersburg airports. The most popular routes are Nizhniy Novgorod, Samara, Ufa and Novosibirsk. 83% of business aircrafts registered in Russia are belong to companies carrying out business and charter flights as well as corporations which buys business jets for their own needs. Largest Russian companies like Lukoil, Sibneft, Norilsk Nickel, Basic Element, Rosneft have corporate aircrafts, also used for commercial purposes. Some companies create a special business unit. For example, Gazprom established Gazprom Airline (“Gazpromavia”), which being rather large business carriers, are used to carry not only the management but also to the external charter flights. 17% of business jets operated by management companies are used in the interests of individuals34.

Average price of business jets operated in Russia is $18-35 million, with the majority of them are purchased on the secondary market. Here is basically Russian fleet Yak-40, Yak-42, Tu-134, Tu-154, Il-62 (some of them are improved for VIP-transportation), as well as foreign like Falcon, Hawker, Challenger, BAe, Boeing Business Jet, Embraer Legacy, Cessna, Learjet, Bombardier, Gulfstream, Dornier and others.

The acquisition of foreign aircraft involves the high capital costs and investments that the majority of companies do not dispose. Therefore, the existing fleet of business jets western production includes mainly outdated machines imported to the Russian Federation. Acquisition of the foreign aircraft is associated with high capital costs and investment, which most companies don't have. Therefore, the existing fleet of BA aircraft of Western production includes mainly obsolete machines, imported into the Russian Federation.

6. Basic problems and obstacles of Russian BA market development One of the key problems hindering the development of BA in Russia is that, from a legal point of view, at the present time BA does not officially exist as an independent type of national air transport activities. As it has been mentioned the main statute that regulates this industry in the country – “Air Code of the Russian Federation” – there is no concept of “business aviation” neither an article aimed at the interpretation of this activity. [1] The existing sectorial documentation does not reflect special features of BA, and, therefore, BA operators have to follow the general rules developed for regular airlines or charter flights. This problem does not allow Russian BA to create equal competitive opportunities with foreign airlines and increase the efficiency and effectiveness of air transport services. So, the main challenge for development of the domestic business aviation is connected with the necessity of clear legal and regulatory framework that, in its turn, must correspond with world international standards. Meanwhile, business transportation is one of the most rapidly growing directions of the world air transport development. In this connection, Russian BA is essentially an open niche that is not monopolized by one or two large operators.

32

Gromov, H. Prospects for upgrading the fleet of the airlines of Russia. Bulletin of transport information no. 129, March 2006.

33 Jarchow, B. Uncommon sense: Airline management 101. 2004. Assembly Magazine. URL: http://www.assemblymag.com/CDA/Article/information/feature Accessed: May 24, 2013.

34 Information Agency “Russian aviation and cosmonautics”. Overview of Aviation Industry in Russia. 2013. URL http://www.aex.ru/docs/2/2013/10/8/1894.

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Imperfection of air legislation is the cause of many conflicts of law provisions the airlines face with in the Russian territory. It makes complicated flight and service technologies planning in accordance with generally accepted in the international practice schemes. It also does not allow certifying aircraft at their introduction into service due to the absence of clear requirements to the system of airworthiness.

Development of air transport industry in regions is seriously affected by traditional for the Russian market problems such as registration of aircraft rights, a single customs regulation, weak infrastructure, lack of personnel, etc, and, mainly, by Russian air legislation, with very limited potential for further development.

Changes on the BA market in favor of domestic airlines are associated with the solutions of the complex of regulatory development problems as well as the market regulation mechanisms of the relationship between business passengers and airlines (fig. 4).

General obstacles of Russian BA development

Government Regulation A. Certification and licensing B. Organization of the aviation safety C. Issuing tickets for passengers D. Filing applicationsâ&#x20AC;&#x2122; deadlines for the flights implementation E. Transfer of aircraft for management by airline F. Import customs duties on foreign aircraft

Market Mechanisms A. Organization forms of business aircraft Operators B. Formalization of economic mutual relations between the aircraft owners and BA airlines C. Scheme of intercommunication of the BA market players

Figure 4. Issues restrained the development of BA in Russia

7. Prospects of Russian BA on the global market Due to geographical location and size of the Russian territory issuing the permits for overflight (the first freedom of the air) using the most direct and cost-effective routes is important for airlines of many states. In particular, the operation of the Trans Siberian route has a special interest, because it has no equivalent alternative. For example, if the length of Tokyo-Moscow-Rome through Siberia is slightly more than 10600 km, the route of Tokyo-Anchorage-Rome through Alaska is about 14000 km and the so-called southern route Tokyo-Calcutta-Bombay-Kuwait-Rome â&#x20AC;&#x201C; more than 14500 km.

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In exchange for the overflight right by foreign airlines over the territory of Russia using economically beneficial Trans Siberian route, the Russian airlines receive extensive privileges for passengers and cargoes transportation like the fifth and sixth freedoms of the air, which usually cause the greatest controversy in the practice of many states and granted infrequently. These agreements were the specific embodiment of one of the most important principles of modern international legal regulation of air communications – the principle of mutuality.

The operation of airlines that pass over Siberia on the basis of pooled agreements is also provided. When using the Trans Siberian airlines on the basis of pool arrangements both Russian and foreign airlines always have a fixed share of income, regardless of foreign airlines flights with landing on the Russian territory or in cases of non-stop flights. If the delivered in pool revenues of the Russian airline from the transportation of passengers and cargoes on the Trans Siberian route are less than the income of foreign airlines, the latter are obliged to pay to the Russian airline the difference with regard to conditions of pool agreement.

Granting the right of passing through Siberia to foreign airlines allows them to reduce time of flight by a few hours, thereby saving fuel. For the Russian Federation it is the flow of additional investments in the form of customs and airport fees, charges and taxes.

This issue obtained the particular relevance in time of crisis. The crisis led to a substantial decrease in demand and a growing desire to hold the positions of domestic carriers to limit leakage of funds abroad.

Airspace for vessels of BA in Russian is used by permissive principle, which implies a relatively long procedure of coordination with the structures of air traffic control and documentation. Nowadays, in most countries of the world a notification system has been introduced for flights in free zones. This sys system allows to any aircraft operator to takeoff immediately, just after submitting a notification about a flight to the appropriate authority of air traffic control, if the route does not cross the air space, requiring the issuing of the permit.

In Russia free air space is significantly large, but it is not structured and, as a result, used irrationally. In this regard, several changes can be considered to be introduced to current legislation [1]:  planning and coordinating the use of airspace in accordance with the national priorities established by article 13 in the Air Code of Russian Federation;  providing permissive or notification procedure for the use of airspace;  control of airspace using in compliance with federal rules.

Despite the changes, Business aviation flights in Russian are still complicated due to the need of obtaining permission one day in advance for domestic and international flights. In practice, this term can be reduced through intermediary organizations up to three hours, but obtaining permission for an urgent flight is always associated with serious difficulties and additional financial costs.

For foreign operators all procedures are more complicated since it is necessary to obtain a permit in five days before the flight, change the route or to organize an additional landing is almost impossible, as it requires obtaining a new permit. Of course, this situation differs from international practice, according to which BA operators do not need to obtain any permission for any operations. The same concerns the Russian operators, who do not need any prior permission for flights outside Russia.

While increasing number of business flights and huge cash flow in the industry, there are such normative standards, which forcing BA market players to work in illegal ways, which deprives the country's budget of real income. This is a result of governmental structures, when setting relations of the BA market participants, do not implement one of the fundamental principles of management - «consumer priority».

However, experts believe that the market of business services in Russia will continue to develop steadily in the future. They predict that the business transportation may provide an income of about $300 million annually on domestic flights and about $150 million on external (as it is estimated share of the foreign companies that carry Russian businessmen in Europe and America, and operating their Shuttle services from abroad), «excluding tax and employment auxiliary enterprises (airports, catering, repair, fuel supply etc.) that can also provide income to the

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budget of $25-50 million», considers Evgeny Bakhtin, a Vice-President of Russian United Business Aviation Association35.

According to the reports issued by National Business Aviation Association (NBAA) and the General Aviation Manufactures Association (GAMA), around 1,2 million people are employed in BA industry. Totally, branches of general and business aviation generate up to $150 billion per a year.

The comparison of U.S. and Russian markets suggest itself constantly: countries are comparable in territory and population, however, the United States approach to the development of the business aviation industry is radically different, demonstrating what results it can bring.

In the USA the business aviation is not only a generator of workplaces and producer of small airports, but also this industry is responsible for the supply of new pilots in the market of commercial aviation. The system of education in US cardinally differs from the Russian (and more precisely, Soviet) one, after flight school pilot should fly off a certain number of hours in different types of small aircraft.

It turns out that Russian economy is losing on several fronts by not allowing business aviation to develop. The economy does not get those workplaces that could have. Moreover, because of the lack of qualified, well-educated and well-trained staff working with business aircrafts, the national economy misses an opportunity to develop a base for pilot development. In addition, it also affects the taxes that replenish not only the state but also the local budgets. Finally, Russia is losing potential opportunities to participate in business jets manufacturing36.

Russian business aviation lacks for competent state regulation, the experience of which can be borrowed from America and Europe. The USA national law prohibited to use the airport, where there are not at least two competing companies offers private aircrafts services. In Europe the activity of the business-terminal is also regulated by the Antimonopoly legislation. In Russia, the situation is reverse: the trusting ground handling of charter flights to a single operator, airports begin to dictate the rules of the game to other market participants. Respectively, prices for airport handling in Moscow are three to four times higher than in Europe37.

In Russia gradually begins to develop ground infrastructure, adapted for BA. Its development strategy can be based on the experience of creation in foreign airports joint databases and specialized units for maintenance of different types of aircraft. Of course, significant investment is required, especially to attract major airlines. For VIP transport, for example, there are specific requirements. The terminal should be small in size, well technically equipped for work of appropriate services, including customs and border police. In the airports of the Moscow air hub several VIP-terminals were built, however, they do not meet all the necessary requirements. Most of VIP flights are operated in “Vnukovo” and “Sheremetievo” airports. There are not specialized terminals and ground base in other Russian cities. Besides the quality of runways coverage at these airports sometimes becomes the reason of mechanical malfunction and failures of sensitive foreign aircrafts. [8] Nevertheless, even taken into consideration these and other problems, the experts believe that Russia has quite a lot of preconditions for development of BA. Market potential is determined not only by huge territory.

Development of market relations, introduction of new dynamically developing companies, integration of Russian business into the world economic system and joining the WTO cause increasing demand and needs of business transportation. According to the forecasts of the Business Aviation Association, this market at stabilization of the Russian economy is expected to active growth up to 30-40% per year. [6]

8. Conclusion Creation of the long-term strategic planning concept for the development of BA should have a positive impact on the operations of airlines. It causes the increase of aircrafts registered in the Russian Federation. Obvi35

On-line Journal «BizAvNews». Bakhtin, E., General Director of «AVCOM-D». Interview. August 30, 2013. URL: http://bizavnews.ru/237/5320.

36 Volkova M. Loss of profits What loses the Russian economy without the full business aviation. JET magazine, №60, 05/06/2013, URL: http://www.jetmagazine.ru/cgi-bin/n-index.pl?mod=arts&id=56.

37 Information Agency “Russian aviation and cosmonautics”. Overview of Aviation Industry in Russia. 2013. URL http://www.aex.ru/docs/2/2013/10/8/1894/

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ously, schemes of intercommunication between the subjects of the market of the Russian Federation should be changed in the segment of commercial business flights.

Priority task for creating competitive BA industry is the improvement of legal base for the operation of business flights as well as the quality of services; expansion of the airspace use and airports in the territory of Russia, CIS and other countries; implementation of investment projects to assist domestic airlines in the acquisition and leasing of business jets; protection of their interests on the international market. etc. The tasks also are related to the development and enforcement of the highest possible safety and environmental standards adopted by European civil aviation as well as licensing flight personnel.

Finally, national legislation has an influence on BA operators. Not only are individual states responsible for issuing Air Operator Certificates, they also have an impact in location and business model decisions due to their respective taxation.

While the business jet industry is cyclical, it also has significant growth potential. The key market drivers such as wealth creation, globalization of trade, replacement demand, new aircraft programs, emerging market growth and greater market accessibility through fractional and branded charter demand are all showing positive trends.

Furthermore, the penetration of business jet fleets in many emerging markets is quite low by the moment, indicating significant growth potential as these economies are rapidly growing and are beginning to more readily accept business jets as productivity-boosting tools.

In this context, the continuous liberalization and deregulation of aviation markets, especially in the emerging countries, will provide new markets and growth potentials. Some BA players may furthermore find growth opportunities in niche markets and services.

In complementing the scheduled network the sector generates substantial economic benefits for the state as a whole, while also delivering jobs and growth directly in the communities where it is based. BA operations play a crucial role in driving demand in a much wider set of activities, including maintenance, research and development, training services and hospitality. Business aviation therefore has a key role to play in facilitating a recovery from world economic crisis, and this should be better recognized in policy formulation.

Being ambitious country Russia is able to establish the process of forming a civilized market, as there is no alternative but to integrate into the world economic system. It means that already now it is necessary to use the favorable conjuncture in the market of business air services for consolidation of positions and ensure sustainable prospects of market relations’ development in the Russian economy.

9. References [1] The Air code of the Russian Federation. № 60-FZ OF March 19, 1997 (with the last Amendments and Additions of December 25, 2012). The official text.

[2] Convention on International Civil Aviation. Original version December 7, 1944. Ninth edition, 2006 (Doc 7300/9) URL: http://www.icao.int/publications/Pages/doc7300.aspx.

[3] Eurocontrol Trends in Air Trafic. Vol.4. More to the Point: Business Aviation in Europe in 2007. URL: http://www.eurocontrol.int/sites/default/files/content/documents/official-documents/trends-in-air-traffic/tat4business-aviation-europe-2007.pdf.

[4] Federal Aviation Administration (FAA). Continuous Lower Emissions, Energy, and Noise (CLEEN) Program.

2008. URL: http://www.faa.gov/about/office_org/headquarters_offices/apl/research/aircraft_technology/cleen/.

[5] Arndt, A., Harsche, M., Braun, T., Eichinger, A., Pansch, A., Wagner, C., 2009. Economic Catalytic Impact of Air Transport in Germany – The Influence of Connectivity by Air on Regional Economic Development. Materials of 13th Air Transport Research Society World Conference. Abu Dhabi, UAE. 2009.

[6] Done, K. Embraer Faces Headwinds. Financial Times. October 10, 2011.

[7] Karzonov,

V.

Russia

Opens

Up

about

Bizav

Reform.

AINonline.

May

17,

2011.

URL:

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e-mail: editors@reaser.eu

http://www.ainonline.com/?q=aviation-news/ebace-convention-news/2011-05-16/russia-opens-about-bizavreform.

[8] Muborakshoeva, D. Evaluation of the strategic capabilities of organizations in business aviation in a systemic crisis. Bulletin of the Russian Academy of Natural Sciences (Economic Series) â&#x20AC;&#x201C; 2009, 7.

[9] Mustilli, M., Filomena, I. Competition, Technology Innovation, and Industrial Structure in the Business Aviation Industry. Emerging Issues and Challenges in Business and Economics. Firenze University Press. 2009.

[10] Sheehan, J. Business & Corporate Aviation Management: On Demand Air Travel. The McGraw Hill Companies.

2012.

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A performance model to evaluate intellectual capital Luminita-Maria Gogan1, Anca Draghici2 1, 2

Politehnica University of Timisoara, Engineering and Management Department, Timisoara, Romania

Abstract. We are living today in a knowledge society, a society shaped by the information revolution and advanced by communication technologies. At the dawn of this new age, the concept of intellectual capital has been used for the first time to explain the importance of intellectual resources - such as information, knowledge, and experience - in the modern economy. Today the intellectual capital is a key factor in company’s profitability and has become the preeminent resource for creating economic wealth. In this environment, the intellectual capital and intangible assets is fundamental to success. Intellectual capital consists of intangible assets, which if used properly become a source of sustainable competitive advantage.

To create value intellectual capital components must interact. Evaluation of the intellectual capital is an important activity for any organization operating in a competitive market and envisages the achievement of the intangibile assets but lower costs. The interest on measuring the intellectual capital was caused because accounting, as it is currently practiced, has lost much of its ability to inform as businesses have become more and more knowledge intensive. Traditional methods of valuation, based on accounting principles, where the value of the company’s assets is a portion of the value, have systematically undervalued companies.

Existence of non-financial standards is crucial to create company value, because accounting rules while constantly revised were originally designed for tangible assets, which is the source of wealth in the industrial period. Literature deals with evaluating intellectual capital in many ways, with many approaches developed over time from studies and research, most aiming at improving the performances of an organization is measuring by different instruments. This article represents a synthesis of the most know models used to evaluate intellectual capital and then implement it in the case of X Company. The findings support the hypothesis that a company’s intellectual capital influences favourably the organizational performance, and may indicate future competitiveness.

Keywords: intellectual capital, evaluation, model.

JEL Codes: J24, H83.

1. Introduction These last years, the attention in research dedicated to intellectual capital has shifted to evaluating intellectual capital [1]. The interest in evaluating intangible assets occurred since the second half of the 20th century, when scientists have realized that the resources and the amount of resources available to the company are not decisive in its results. A multitude of theories and models for evaluating intellectual capital are reflecting their rising importance and difficulty of finding a suitable model. Leif Edvinsson is the scientist who developed the first model of intellectual capital assessment called Skandia Navigator.



Corresponding author. Tel.: + 040-743-870026; fax: + 040-256-404287.

E-mail address: gogan_maria@yahoo.com .

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Evaluating intellectual capital is critical in order to compare different companies to estimate their real value or improvement to control year after year. Also, to improve the way companies manage their intellectual resources that create value and give back some benefits consequences maximize the benefits for the company.

In order to properly evaluate and manage intellectual capital there are a number of principles that should be observed [2]:



Organizations do not own human and customer capital. Organizations must recognize the shared nature of these assets that an organization can manage and profit from these assets.  To create human capital it can use, an organization needs to foster teamwork, communities of practice, and other social forms of learning.  Organizational wealth is created around skills and talents that are proprietary and scarce. To manage and develop human capital, organization s must recognize that people with talent are assets to invest in. Others should be managed closely with little or no investment.  Structural assets are the easiest to manage but those that customers are not really interested in or care least about.  Move from collecting knowledge for “just in case” scenarios to having information that customer’s need ready to hand, and that they might need within a reasonable time.  Information and knowledge can and should substitute for expensive physical and financial assets.  Knowledge work is custom work, where mass produced solutions will not yield high profits.  Every organization should re-analyze the value chain of the industry it belongs to in order to see what information is most crucial.  Focus on the flow of information in the business process not the flow of materials.  Human, structural and customer capital work together. It is not enough to invest in people, systems and customer separately. They can support or detract from each other.

To build a performance model for evaluating intellectual capital it is necessary to respect concepts of intellectual capital sharing elements between the organization and other stakeholders and to fulfill the principles listed above in order to streamline the process of evaluating and managing intellectual capital.

We propose and provide empirical support for a model of intellectual capital that includes the following three key factors: human capital, structural capital, and relational capital. Our model is offered as a useful tool to managers for assessing various aspects of intellectual capital within their organizations, with the view of identifying areas in most need of resources. It also serves as a prototype for gauging the overall intellectual capital of a company.

2. A review of the available IC evaluation models 2.1.

Limits of the accounting model

Financial accounting is mainly aimed at providing information on the financial statements of shareholders and investors to base decisions effectively. Current and potential investors and creditors take their investment and lending decisions based on financial statements. Therefore, any event that could affect the financial position and performance of the organization should be passed in future annual reports.

In traditional accounting systems most of the elements that make up the intellectual capital are not reflected in the balance sheet, the investments in these elements are charged to the profit which leads the organization and the carrying amount of the shares to be undervalued. For these reasons it is possible investors and managers to [3]:

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

Determine the rate of return on investments in intangible assets and the change in time of the investment efficiency of the organization.  Evaluate changes in the characteristics of investment assets intangbile.  Determine intellectual capital and the useful life of the elements that compose it.

Because the underlying factors that create value are not in the annual financial statements, knowledgebased organizations face obstacle discovery of their sources of funding or acquire them less profitable conditions. The problem raised is that intangible assets are difficult to recognize, and which they determine future earnings are more uncertain than in the case of tangible assets. There are currently evaluating various models of intellectual capital that seeks to consolidate the financial aspects of issues relating to intangible value. Most of these models consider intellectual capital as something that is not visible, but incorporating value staff skills, organizational processes and relationships with customers.

2.2.

Models of evaluation of intellectual capital

Many theories and models for evaluating intellectual capital reflect the growing importance and the difficulty of finding a suitable model. However, over the last years they have identified various intellectual capital evaluation models. The most popular measurement models as well as the most widely used or just the easiness of their applications of all non-financial measurement methods are: Balanced Scorecard, Intangible Assets Monitor, Skandia Navigator and Intellectual Capital Index.

Balanced Scorecard (BSC) was created by Robert Norton and David Kaplan, allows the manager to translate mission and strategy into a comprehensive evaluation. BSC focus on financial goals but also includes the performance drivers of these financial objectives. In addition to tracking financial results, BSC at the same time monitoring progress in building the capabilities and acquiring the intangible assets for future growth [4]. BSC has been developed from a recognition of an organization's ability to mobilize and exploit its tangible and intangible assets, has become more important than investing and managing physical assets, tangible. Managers in their efforts to build long-range competitive capabilities clashed with "real estate" model based on historical cost accounting [5].

Balanced Scorecard maintained traditional financial indicators. But these traditional financial indicators reflect past events, the appropriate tools for the industrial age organizations which invest in long-term capabilities and customer relationships were not critical for success.

These financial indicators are still unsuitable for guiding and evaluating the "journey" that knowledgebased organizations must go through in order to create value through investment in customers, suppliers, employees, processes, technology and innovation [6].

Over the past decade, the balanced scorecard has evolved from being a measurement framework to being a strategy implementation tool (fig.1). It represents a set of cause-and-effect relationships among output measures and performance drivers in the four perspectives [7]:

   

Financial measures: how do we look to shareholders, for example, cash flow and profitability?

Customer measures: how do our customers see us, for example, price as compared with competitors’ and product ratings?

Internal process measures: what must we excel at, for example, length of cycle times and level of waste?

Learning and growth measures: can we improve and create value, for example, percentage of sales derived from new products?

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Fig. 1: Balanced Scorecard Model

The capability of an organization in the management of intangible assets is more important to its success than investment and fixed asset management. Moreover, the fixed assets will be better exploited if we have a better prepared workforce, a good system, good relationship with suppliers of company.

A weakness of this model is that it does not consider relations with suppliers and other key stakeholders.

If a company depends on a particular supplier, the organization's position is not just one favourably.

Therefore, the relationship with the supplier and other suppliers are very important and should not be overlooked when developing such a model.

Intellectual Assets Monitor Sveiby's Intangible Assets Monitor (IAM) was developed from his experience as a partner and manager of a financial newspaper (fig.2). While working there, he realized that traditional financial statement of the organization "was a joke" and that most of the company's value lies in its "knowledge-based intangible assets".

The model developed by Sveiby is simply one that classifies intangible assets into three categories [8]:

ď&#x201A;ˇ ď&#x201A;ˇ ď&#x201A;ˇ

Competence of employees Internal structure External structure

Fig. 2: Intangible Assets Monitor Model

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The internal structure refers to systems, databases, patents, trademarks, concepts, administrative systems, processes that support the organization [9]. They are created by employees and belong to the organization.

Sometimes, it may be purchased from elsewhere. The internal structure belongs also to the internal organizational culture and work, formal and informal. The internal structure and the people who co-inhabit form the organization.

The individual skills of the employees reflect their ability to act in various situations. They include education, individual experience, skills, talents, abilities, cultural and social values, ideas of employees.

People are actually only true agents in business. All tangible and intangible assets of the organization are ultimately the result of their economic activity [10]. Therefore, companies are striving to reward their employees’ work and to retain as much for the benefit of their individual skills.

The external structure reflects the organization's relationships with its customers and suppliers, the stakeholders are relevant to the organization, brands, trademarks and reputation or image of the organization.

Some of these components may be the legal property, but the investment in their development cannot be controlled as well as in the internal structure due to elements of uncertainty [11]. The external structure of the components is in the possession of the organization, such as tangible resources. Their economic value is as intangible as the market value of a house. But this situation is the fact that we have not yet defined tools with which we can measure their value, as we do with the tangible resources of the company.

Unlike balanced score model, this model takes into account suppliers and other relevant stakeholders.

Depending on the type of organization, the external structure will be different from one company to another.

Skandia Navigator Model Skandia Navigator was developed in 1993 at the Swedish financial services company Skandia by a team led by Leif Edvinsson. In 1995, a supplement to Skandia's annual report used for the first time the word “IC”, instead of the accounting term “intangible assets”. Skandia Navigator incorporates the assumption that intellectual capital is the difference between market value and book value of the organization [12]. The model aims to provide a balanced view, and a basis for systematic management processes that are considered essential to create value in the future. Skandia has five areas: customer, human capital, processes, renewal and development capacity and financial area, offering a holistic view of the organization (fig.3).

Fig. 3: Skandia Navigator Model

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The customer aria gives an indicator on how well the company fills the needs of its customer via services and products. For the company it is important to define the customer’s needs.

The human area is the heart of the company and is essential in a value creation organization. The process of knowledge creation is visualized in this focus area. It is also important that the employees are pleased with their work situation; pleased employees lead to pleased customer improving company’s sales and result.

The processes area captures the actual processes of creating services and products company customer’s desire.

Customer, human and the process focus constitute the IC of a firm and represent the present stage of the company.

The renewal and development capacity area aims at reassuring the organizations long-term renewal and in part its sustainability. Renewal and development are the foundation that underpins the company's future.

The financial area captures the financial outcome of our activity. Some like to see it as a receipt. This could be profitability and growth that our shareholders demand from the company. The financial focus consists mainly in the company's balance sheet that deals with the past of the company [13].

Intellectual Capital Index The IC Index was created by Göran Roos and Johan Roos in London based on intellectual capital services. It is a tool for performance measurement of value creation process of an organization or business unit. The model is based primarily on research results in the fields of strategy and finance. It was developed as a means for managers to discover and articulate the hidden values in creating resources and processes and create a structure for measuring the achievement of strategic objectives at an enhanced level (fig.4). IC Index proposes replacing one individual indicators index and brainpower trying to correlate changes with changes in market value of the firm [14].

The IC Index is based on indicators relating to [15]:

   

Relationship capital Human capital Infrastructures Innovation

Fig. 4: Intellectual Capital Index

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IC Index value depends on the subjective assessment of these indicators and the choice of weights.

However, the IC Index gives managers the opportunity to understand the effects of a particular strategy on its intellectual capital and compare two versions to understand which one is better in terms of intellectual capital. The value is based on defining the strategic intent of the organization and as a starting point for the two separate processes, which subsequently merge to generate Intellectual Capital Index.

The first process is a rational and analytical process based on strategy, as stated in official documents, and the strategy aims at extracting tacit knowledge of managers about the size of the value created in the unit studied. It includes not only identifying the resources needed to create value, and use, or transformation from a resource to another (flows) and their relative importance in achieving the desired position in the future. The result of this process is viewed ultimately in a "Navigator" specific context [16].

The second process aims to develop relevant indicators, precise and robust key success factors identified as necessary to achieve the strategy. Subsequently, the indicators are weighted and sorted according to their relative importance determined by the navigator and according to their basic structure [17].

The end result is two sets of indices, one for stocks and one for streams. The first shows the changes in the resource base, while the latter shows how well managed organization to use resources to create value for shareholders.

Like other methods, intellectual capital indicator identifies key areas of interest that are vital to the organization. Unlike other methods, seeking a balance between different types of indicators, measures of intellectual capital indicator are combined to give an index of overall performance or efficiency.

Each of the presented models has strengths and weaknesses. Some are very easy to apply, but the relevance of the information to be running a fairly low. On the other hand, other models offer a more comprehensive picture of the concept of intellectual capital, but some organizations may have difficulties in their implementation.

3. The proposed model test and validation in a case study 3.1.

A proposed model for evaluating IC

The measurement and evaluation of intellectual capital is an exercise in trying to determine the value of ideas, skills and other products of the human intellect. The history of intellectual capital valuation is both fraught with problems and replete with opportunities. Current experiments in reporting and evaluating knowledge assets show that intellectual capital, once it is recognised and cultivated, is a potent force in enhancing organization value that is increasing results. The current paper proposes a performance evaluation model intellectual capital based on a set of balanced performance evaluation measures.

The proposed model has the following characteristics:



Includes IC in economic and financial reporting. Inclusion is necessary for company because intangible assets are critical to business success and obtaining competitive advantage.  Breakdown of intellectual capital. This implies a dynamic approach and a continuous process of transformation of intellectual capital in income generating resources.  Provide useful management information.  The possibility of comparing. This model allows comparisons between different business realities, focusing on monitoring the dynamics of IC. The aim of evaluating IC is to identify and use the intangible assets in order to gain competitive advantage. This model proposes three perspectives to evaluate IC according to its structure (fig. 5).

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  

Training and competence Creativity and innovation Talent retention policy

   

Systems and programs Research and development Organizational culture

  

Relationship with customers and suppliers Benchmarking Alliances and partnerships

Fig. 5: A proposed model for evaluating IC

The relevance of the proposed IC evaluation model lies in its ability to offer periodically, to the company management, information feedback, that enable corrective actions for the IC improvement and also, for their IC management strategy redesign for a long-term and sustainable competitive advantages through retrieving and utilizing organizational knowledge. Under the competitive circumstances knowledge becomes a vital capital; a company must strive for a dominant position for surviving and develop itself in an increase market competition.

3.2.

Case study – the proposed model test and validation

To demonstrate the usefulness of the proposed model for evaluating IC developed a case study of the organizational context of professional services companies. It was founded in 1991 in Romania and its turnover is of 42 million EUR and it has 660 employees (data available at the end of 2012).

Human capital An important aspect is that the organization spends considerable resources on training for its employees, thus encouraging innovation and constant improvement. Being creative and innovative is a requirement within the company and the type of innovation is incremental. Regarding the fact that some employees could go to organizations competing company believes that its resources and capabilities are the main source of competitive advantage. While the company retains competitive advantage and employee satisfaction at the highest level there is no concern on this issue. All employees are expected to develop professional development plans that reflect their goals and ambitions for the future and how they propose to achieve personal goals. The company has a policy of rewarding the employees according performance evaluation on individual and team level, politics being a mixture of incentives and opportunities for career advancement.

Structural capital New technologies are used to communicate with clients and representatives from other offices are teleconferences. Voice over IP technology is used in order to optimize communication costs. All works and

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processes developed within the organization are performed by electronic means, all the files used in a certain activity is stored in an intranet that is used to track the progress of all projects. All authorized partners can access information at any time. A network of culture is present within the organization and is shared by all employees they exchange ideas through a variety of databases, in recent year central management focusing on knowledge management.

Customer capital The company makes periodic benchmarking analysis regarding the level of performance of the competitors, but performs and various market research to understand how the market is positioned. The company is already a strong international presence, it expansion within new markets is usually on their own. In this innovative company is the result of interaction between stakeholders, culture, performance and ideas within or employees. It should develop creative approaches to solving client's constant, which is the only way they can truly offer quality services. The fact that the company has managed to maintain almost constant turnover means that markets recognize as a company that provides quality services truly innovative.

4. Conclusions The proposed model for the evaluation of IC is based on existing literature, but also on own observations (for reference, theoretical and applied research), upon different aspects that were taken into consideration, in a variety of organizations over the last years. This IC evaluation model enables organizations to pay more attention to the definition and understanding of the IC components, and to evaluate its developing tendency periodically in terms of IC. The results of using this model lead us to conclude that the success of the organization lies in the high level of investment and recognition they have in intellectual capital. Moreover, the results indicate that the company which uses this intellectual capital model has superior results. Consequently, we highlight the importance of detecting, evaluating and utilizing IC for new ventures stressing the potential benefits that such analysis can have on the initial steps taken by an entrepreneur in venture formation and business development.

5. References [1] Arveson P..

What is the Balanced http://www.balancedscorecard.org/basics/bsc1.html [20.06.2006]

Scorecard?

Online

publication:

[2] Bontis N.. Assessing knowledge assets: a review of the models used to measure Intellectual Capital. International Journal of Management Reviews. 2001, 3(1): 41-60.

[3] Bontis N.. Intellectual capital: an exploratory study that develops measures and models. Management Decision.

1998, 36 (2): 63 â&#x20AC;&#x201C; 76.

[4] Bueno-Campo, E., 1998. The key intangible capital as strategic in the current competition, Journal of Economic Studies. 1998, 50(164): 205-229.

[5] Edvinsson L. H. and Sullivan P.. Developing a model for managing intellectual capital. European Management Journal. 1997, 14(4): 354â&#x20AC;&#x201C;356.

[6] Edvinsson L.. Developing intellectual capital at Skandia. Long Range Planning. 1997, 30(3): 366-373.

[7] Itami O. H.. Mobilizing Invisible Assets. Boston. Harvard University Press. 1987.

[8] Kaplan R. S. and Norton D P. Putting the Balanced Scorecard to Work. Harvard Business Review. 1993, pp. 2-16.

[9] Kaplan R. S. and Norton D P. The Balanced Scorecard: measures that drive performance. Harvard Business Review. 1992, pp. 71-80.

[10] Kaplan R. S. and Norton D. P.. Using the Balanced Scorecard as a strategic management system. Harvard Business

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[11] Ordonez De Pablos P., Schiuma G., Spender J. C.. Intellectual capital and company's value creation dynamics, International Journal of Learning and Intellectual Capital. 2007, 4(4): 331-341.

[12] Roos G., Pike S., Fernstrom L.. Managing Intellectual Capital in Practice. Butterworth-Heinemann. New York.

2005, pp. 19.

[13] Roos G.and Roos J.. Measuring Your Companyâ&#x20AC;&#x2122;s Intellectual Performance. Long Range Planning, Special Issue on Intellectual Capital. 1997, 30(3): 413-426.

[14] Stewart T. A.. Intellectual Capital: The New Wealth of Organization s. New York. Doubleday. 1997.

[15] Sveiby K. E.. Tacit knowledge. The Knowledge Management Yearbook. 2000, pp. 18-27.

[16] Sveiby K. E.. The Intangible Assets Monitor. Journal of Human Resource Costing & Accounting. 1997, 2(1): 7397.

[17] Sveiby K. E.. The New Organizational Wealth: Managing and Measuring Knowledge Based Assets. Berrett Koehler. San Francisco.1997.

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Social economy entities: a worldwide overview Alina - Aurelia Grigore 1+ 1

Academy of Economic Studies, Bucharest, Romania React Association, Romania

Abstract: The third millennium strongly shook the classic economic models, which are no longer able to face social pressure and labor market challenges. Based on solidarity, social responsibility and sustainable growth, social economy is presented to be an alternative for solving the diverse problems of modern society, especially the work integration of vulnerable people. At the European level, the definition of social economy was first promoted in 2002 at the European Standing Conference of Cooperatives, Mutual Societies, Associations and Foundations and the term of “social enterprise” as actor of the social economy field was recognized in October 2011. But social enterprises’ history goes back hundreds of years ago and these organizations could be found all over the Globe.

This paper aims to present the social economy models existing worldwide and their mechanism of operation, with a focus on European social economy models.

Keywords: social economy, social economy entity, social enterprise, economy of solidarity.

JEL Codes: L30, L31

1. Social economy, social enterprise: history and definitions The society’s evolution in the third millennium brought serious challenges for classic economic models that were forced to face environmental problems, social pressure, limited resources and people’s increasingly diverse needs. New, alternative models that successfully combine both economic and social goals started to be promoted, as to solve social, economic and cultural problems. Social economy, known also as the economy of solidarity or the third sector mixes economic profitability with social solidarity and puts people in the center of the economic activity.

Although the concepts of social economy and social enterprise have been officially recognized and promoted in recent decades, their history goes back hundreds of years ago. In early history, social

+PhD student, e-mail: grigore.aurelia@yahoo.com

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economy is correlated with cooperatives and associations, which represent the “backbone” of the concept, but the latest decades, brought a new type of organization, the mutual society.These self-help organizations were created to respond the needs of “the most vulnerable and defenseless social groups” in the industrial capitalism of 18th century. (Campos, Chaves Avila, 2012).

According to the European Economic and Social Committee, the term of social economy was first promoted in the economics European literature in the beginning of the 19th century by the French liberal economist Charles Dunoyer, who published in 1830 a Treaty on social economy. Other French authors belonging to different schools of thought treated the social economy theme in their works, such as: the economist, socialist theoretician and politician Charles Constantin Pecqueur with the work “New theories of social and political economy” - 1842 (Théories nouvelles d'économie sociale et politique) and the mathematical economist Léon Walras with “Studies of social economy theory of the distribution of social wealth” - 1896 (Études d'économie sociale; Théorie de la répartition de la richesse sociale). Moreover, in 1856, the engineer, sociologist and economist Pierre Guillaume Frédéric le Play founded the International Society for Applied Studies of the social economy (SIEPES) a research body on social economy and social policies with 490 members.

In England, in the early beginning of the 18th century, social economy took the form of cooperative movement, when people from communities shared their income to buy various goods at a smaller price.

The article “The co-op began in Scotland”, shows that the first cooperative movement, called The Fenwick Weavers Society, began on March 14th, 1761, when 15 local weavers bough a sack of oatmeal and began selling the contents at a discount price. The 15 men signed to be "honest and Faithfull to one another...and to make good & sufficient work and exact neither higher nor lower prices than are accustomed" (Carrell, 2007). In 1813, Robert Owen, a pioneer of the cooperative movement, proposed a "A New View of Society”, based on a high ideal of communal life, a tenderness for vested rights, a conception of social service and social welfare wide enough to include honest citizens of all ranks (Potter, 1904). Another English promoter of the cooperative movement was Dr. William King, who founded The Co-operator Newspaper in 1828 and believed that workers should contribute with small, regular sums, for developing self-help shops that sell various goods to members.

In United States, social economy was promoted throughout credit unions and mutual banking institutions. In 1752,Benjamin Franklin together with the Philadelphia fire fighters founded The Philadelphia Contributionship, the nation’s oldest mutual insurance company. The company was modeled after the Amicable Contributionship of London and required equal sharing of risks for the policy holders.

On October 6, 1845, was set up the first Working Men’s Protective Union, with the aim of purchasing goods, at reduce prices for its members. The union promoted the first sickness and old – age insurance and become a model for similar organizations (Foner, 1998). A social economy leading figure in US was George Henry Evans, a reformer, a leader in the Working Men's movement of 1829 and experience in trade union movements of the 1830s. Evans founded the National Reform Association and promoted a program of free public lands for homesteaders, with the slogan "Vote Yourself a Farm."

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The term of social enterprise has a more recent history and was first promoted by Freer Spreckley in a publication appeared in 1981 and called “Social Audit – A Management Tool for Co-operative Working” (Ridley-Duff and Southcombe, 2011). According to Spreckley, social enterprise or co-operative could be found for the first time in the England, in 1649, when a group of digger took over waste land and cultivating it in common. The diggers adopted the social economy principles like “one person one vote, equal distribution of wealth and balanced social and commercial needs”. Spreckley defines the social enterprise as “an enterprise that is owned by those who work in it and perhaps reside in a given locality, is governed by registered social as well as commercial aims and objectives and run cooperatively…Traditionally, ‘capital hires labor’ with an overriding emphasis on making a ‘profit’ over and above any benefits either to the business itself or the workforce. Contrasted to this is the social enterprise where ‘labor hires capital’ with the emphasis on personal and social ‘liberation’ from exploitation by capital.”

Other authors consider that the term of social enterprise (l’impresa sociale), first appeared in the ’80s in Italy and began to be known only in mid-’90s (Defourny and Nyssens, 2001).

In the European Union, the definition of social economy was first officially promoted in 2002 at the European Standing Conference of Cooperatives, Mutual Societies, Associations and Foundations -“the social economy organizations are economic and social actors active in all sectors. They are mainly characterized by their aim and by their distinctive form of entrepreneurship. Social economy includes organizations such as cooperatives, mutual societies, associations and foundations. These enterprises are particulary active in fields such as social protection, social services, health, banking, insurance, agricultural production, consumer affairs, associative work, craft trades, housing, supply, neighborhood services, education and training, and the area of culture, sport and leisure activities” – and the term of “social enterprise” as actor of the social economy field was recognizes in October 2011, within the Social Business Initiative Communication, issued by European Commission. The Communication emphasizes that “a social enterprise is an operator in the social economy whose main objective is to have a social impact rather than make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative way and uses its profits primarily to achieve social objectives. It is managed in an open and responsible manner and, in particular, involves employees, consumers and stakeholders affected by its commercial activities.”

Moreover, the EMES European Research Network defines the social enterprises as “not-for-profit private organizations providing goods or services directly related to their explicit aim to benefit the community. They rely on a collective dynamics involving various types of stakeholders in their governing bodies, they place a high value on their autonomy and they bear economic risks linked to their activity" (Defourny and Nyssens, 2001).

At the European level, social economy entities include associations and foundations, cooperatives, credit cooperatives, agricultural cooperatives, credit unions, protected units, mutual societies that share a set of common principles, like:

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• • • • •

Solidarity, responsibility and individual involvement principles; Limited profit distribution; Reinvestment of the profit for achieving social objectives; Democratic and participatory method of organization (one member, one vote); Autonomy and independence regarding public institutions;

The EMES European Research Network draws four economic and five social criteria for social enterprises, as follows: Economic criteria: a) A continuous activity producing goods and/or selling services b) A high degree of autonomy c) A significant level of economic risk d) A minimum amount of paid work Social criteria: e) An explicit aim to benefit the community f) An initiative launched by a group of citizens g) A decision-making power not based on capital ownership h) A participatory nature, which involves various parties affected by the activity i) A limited profit distribution

2. Social economy organizations in the world Whether we are talking about cooperatives, nonprofit-like associations and foundations, mutual societies or credit unions, social enterprises or social economy initiatives could be found worldwide.

2.1. United States Social Enterprise Alliance (SEA) is the membership organization in North America that brings together over 900 social enterprises. Until its birth in 1998, the organization assumed different roles such as: an advocate for the field of social enterprises, a center of resources and a capacity builder. According to the SEA, social enterprises are businesses whose primary purpose is the common good. This organization or venture (within an organization) advances a social mission through market-based strategies. These strategies include receiving earned income in direct exchange for a product, service or privilege.

SEA believes that social enterprises represent an inflection point, the “Missing Middle” between public, business and nonprofit sector, being more efficiently than government, more sustainably and creatively than the nonprofit sector and more generously than business.

According to the study “Social Enterprise – a portrait to the field”, in US is a blurring line between nonprofit and for-profit entities. Nonprofits are becoming more interested in income generated activities,

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while for-profits tend to integrate social and environmental causes in their businesses.The study, which gathered 740 respondent organizations, emphasizes that the number of social enterprises has grown steadily since the 1970s and almost half of the organizations in the survey reported having two or more social enterprises. The social enterprises in US are active in workforce development, housing, community and economic development, education and health (top five mission areas among respondents), employ between 1 and 5 employees (41.7 % of respondents), and are more likely to operate in Western US. Moreover, the Great Social Enterprise Census realized by Pacific Community Ventures, shows that one third of the social enterprises respondent organizations are still registered as nonprofit organizations and organizations founded after 2005 are much more likely to register as for-profit entities, “C” Corporations (any corporation that, under United States federal income tax law, is taxed separately from its owners) or LLCs- limited liability company (flexible form of enterprise that blends elements of partnership and corporate structures). Only few organizations are registered as L3C, a social enterprise designedlow-profit limited liability companythat has a social goal, not an economic one.

Dennis R. Young(2001) in the article “Social Enterprise in the United States: Alternate Identities and Forms” identifies three types of social enterprises: Corporate Philanthropies – for profit businesses that use part of their profit or resources for common good, Social Purpose Organization–an organization with a social mission, which uses economic activities to support its mission and Hybrid–an organization with dual objectives - to make a profit for their owners and to contribute to the broader social good.

2.2. Latin America Confronted with political and economic challenges, the Latin American countries have an early history regarding social enterprises. The first Latin social enterprise is assumed to be founded in the early ’80s when Palmas del Espino started a win–win business for low income local coca leaves cultivators, encouraging them to plant oil palm and cocoa trees instead.

Latin American countries have an important cooperatives tradition. According to the International Cooperative Alliance, in Paraguay, 18% of the population is members of 1,047 co-operatives; in Uruguay, co-operatives are responsible for producing 90% of the total milk production, 340% of honey and 30% of wheat; in Colombia, the co-operative movement provides 137,888 jobs through direct employmentand in Brazil health cooperatives provide medical and dental services to 17.7 million people, almost 10% of the population.

Within the Latin America Social Business Conference (Conferencia Latinoamerica Negocios Sociales), Bernardo Javalquinto, President at Centro de Innovación y Desarrollo Tecnológico Latinoamericano defines social enterprises as organizations designed to face a social problem, which uses the profit or the income to conduct the social mission or to improve products and/or services.

2.3. New Zealand and Australia In New Zealand, social enterprises are seen as a hybrid space, which mixes social or environmental goals with commercial objectives. Moreover, New Zealand Department of Internal Affairs adopted the

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Social Traders in Australia’s definition of social enterprises and assigns them three characteristics: a social, cultural, or environmental mission; a substantial portion of its income derived from trade; and the majority of its profit/surplus reinvested in the fulfillment of its mission.

The survey “Mapping social enterprises in New Zealand”, conducted by New Zealand Department of Internal Affairs in 2012 shows that over 40% of the social enterprises in New Zealand are actively involved in the education and training sector, 22% in social assistance, 17% in recreation and sports and 15% in arts and heritage. In terms of legal entities, 52% of respondents declared to be charitable trust followed by 37 % incorporated societies.More than 65% of social enterprises declared to be owned by a nonprofit organization that is trading and 18% by a for-profit organization focused on social, cultural or environmental goals.

In Australia, Social Traders Organization identifies the following types of social enterprises: Cooperatives, Associations and Mutual based on membership benefits; Fair Trade Organizations which offer fair prices for goods produced in developing countries; Charitable Business Ventures that reinvest the profit for the charity mission of the organization; Community Enterprise providing benefits to the community in which they are located;Australian Disability Enterprises that employ people with a disability that are unable to work in mainstream businesses; Community Development Finance Institutions providing products and services to individuals, organizations and communities who have difficulty accessing mainstream finance; Social Firms that undertake commercial work in order to create employment for people with a disability; Intermediate Labor Market Companies which train, support and employ disadvantaged job seekers and Hybrids which do not entirely fit in one category and mixes different characteristics.

The organization estimates that there are up to 20 000 Australian social enterprises and 29% of notfor-profit organizations have some kind of business venture.

2.4. Asia Known as the birthplace of some of the most successful social enterprises, like Grameen Bank, and the most well-known representative of social businesses, Muhammad Yunus, Asia, is a place of paradigms for social enterprises as most of them have limited access to capital and low recognition of their work (Shahnaz, and Tan Shu Ming, 2009). The Social Enterprise Network Asia, a network of seven Asian countries (Indonesia, Japan, Malaysia, the Philippines, Singapore, Thailand and Vietnam) tries to counterbalance the Asian challenges and to promote the sustainable growth of the social enterprise sector in Asia especially in providing innovative and scalable solutions to the increasingly complex challenges in this region.

Jacques Defourny and Shin-Yang Kim in the paper “Emerging models of social enterprise in Eastern Asia: a cross-country analysis” present five different models of social enterprises:  Model A: Trading Non-profit Organization – non-for-profits that developed and deliver services (social services, education, culture etc.) for assuring their sustainability.

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 Model B: Work Integration Social Enterprise – a classical WISE which offers training, assistance and protected jobs for people with physical or mental disabilities, but also other vulnerable people.  Model C: Non-profit Co-operative – cooperatives that offer different benefits to their members, such as childcare, elderly care, but also cooperatives that promote fair trade products.  Model D: Social enterprise stemming from non-profit/for-profit partnerships – involvement of private companies in supporting social causes as part as their social responsibilities actions.  Model E: Community Development Enterprise – enterprises that rely on local resources and involve multi stakeholders as to contribute to the development of a specific area or community.

2.5. European Union In the European Union, social economy enjoys a wide recognition. According to the European Commission, the European social economy gathers 2 million enterprises (i.e. 10% of all European businesses) and employs over 11 million paid employees (the equivalent of 6% of the working population of the EU): out of these, 70% are employed in non-for-profit associations, 26% in cooperatives and 3% in mutual organizations. Social economy entities are present in almost every sector of the economy, such as banking, insurance, agriculture, craft, various commercial services, health and social services etc. The EU promoted social economy and social enterprises since December 1989 until today (Grigore, 2013).

December 1989

The Commission adopted a Communication on "business in Social economy sector"

1993

The Commission proposed three draft Regulations for a European Cooperative Society, a European Mutual Society and a European Association

2000

The autonomous European Standing Conference (Conférence Européenne Permanente CEP) of Co-operatives, Mutual societies, Associations and Foundations (CEP-CMAF) was created

2008

The CEP-CMAF changed its name to Social Economy Europe

19 February 2009

The European Parliament Resolution on Social Economy which recognizes the role and importance of social economy as a part of the European economy and the European social model, contributing to stable and sustainable growth

April 2011

Social entrepreneurship is included in the Single Market Act I:Twelve levers to boost growth and strengthen confidence "Working together to create new growth"

October 2011

A new definition of social enterprises is promoted within the „Social Business Initiative.

Creating a favourable climate for social enterprises, key stakeholders in the social economy and innovation” communication The Social economy and social entrepreneurship - Social Europe guide was published, which describes the living world of social economy organizations (such as cooperatives, associations, mutual societies and foundations) and the phenomenon of social

April 2013

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entrepreneurship

Fig 1.The most relevant European initiatives regarding social economy sector In the United Kingdom the most common social enterprises structures are: industrial and provident societies - co-operative societies which may distribute profit to members; companies limited by guarantee – preferred for many NGOs; companies limited by shares - equity-financed organizations that distribute profits to shareholders andlimited liability partnerships – partnerships of different organizations (Department of Internal Affairs, 2013).

The State of Social Enterprise Survey 2013 conducted by Social Enterprise UK shows that UK’s social enterprises are active in several fields such as business support / consultancy and education (each with 16%), employment and skills (14%), housing (13%), retail, culture and leisure, social care (each with 11%) and more than half of the respondents (52%) declared that they employ people with different disadvantages in labor market.

In Italy, social enterprises are mostly known throughout cooperatives or social cooperatives (Borzaga, 2001), due to the cooperative traditions and history of the country. A report elaborated by QUASAR – Qualità per isistemi a rete di imprese sociali in 2005 shows that Italy gathers over 240,000 social economy organizations – associations, social co-operatives, foundations and others – which have a turnover of €38 billion a year, employ 630,000 people and work with 3.3 million volunteers.

As no official definition of social enterprise is being recognized, in France is more common the term of social economy. The Study on practices and policies in the social enterprise sector in Europe deem that in France there are approximately 168,300 social enterprises (145,000 associations, 21,000 co-operatives, 2,000 mutual companies, 330 foundations) which employ 9 % of people.

The first Romanian social enterprise, the International Cooperative Alliance, was founded in 1895 and still exists today. But after 1990, the arts and crafts cooperative system has been confronted with a serious lack of image still needs to recover its prestige.

According to The Atlas of social economy (2012 Edition), in 2010, Romanian social economy included a total of over 31.000 organizations holding non-current assets, summing about 10 billion lei (equivalent to 2.5 billion euros), achieving annual incomes of 7.7 billion lei (approximately 2 billion euros) and employing over 100 thousand people, equivalent to 1.7% of wage-earning population and 1.1% of the employed population. (Constantinescu, 2012)

3. As a conclusion Social economy and social enterprises exist all over the world in various forms of organizations and different legal statuses. But most of them follow the same principles of developing economic activities and generating income for sustaining a common good. Even if social enterprises are called NGOs, NPOs,

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cooperatives, WISEs, social firms or hybrids, the most important aspect of them is the social mission that helps developing communities, hiring disadvantaged people, offering services for members or beneficiaries, and in the end creating a better, sustainable and inclusive society.

4. References [1] Barraket J., Collyer N., O’Connor M., and Anderson H., Finding Australia’s Social Enterprise Sector: Final Report, Australian Centre for Philanthropy and Nonprofit Studies June, 2010, Queensland [2] Campos J., Avila R., The social economy in the European Union, European Economic and Social Committee, 2012. Brussels [3] Carrell S., Strike Rochdale from the record books. The Co-op began in Scotland, The Guardian, August 2007 [4] Constantinescu S., The Atlas of Social Economy, Romania 2012, Bucharest [5] Defourny J., Nyssens M, Social enterprise in Europe: Recent trends and developments,Working Papers Series, no. 08/01, Liège: EMES European Research Network [6] Defourny J., Kim S., Emerging models of social enterprise in Eastern Asia: a cross-country analysis, Social Enterprise Journal, 2011 [7] Demoustier D., Rousseliere D., Social Economy as Social Science and Practice: Historical Perspectives on France, Eleventh World Congress of Social Economics, Social Economics: A Paradigm for a Global Society, June 8-11, 2004, Albertville, France [8] Foner S., P., History of the Labor Movement in the United States: Volume One: From the Colonial Times to the Founding of the American Federation of Labor, 8th printing fall '98, International Publishers Co. [9] Grigore A., Social Economy Marketing: A new age for marketing field, Network Intelligence Studies, Volume I, Issue 2, 2013, Bucharest [10] Potter B., The co-operative movement in Great Britain, London, S. Sonnenschein & co., lim.; New York, C. Scribner's sons, 1904, pp 1 -3 [11] Quarter, J., Mook, L., and Richmond B., What is the Social Economy?, Centre for Urban and Community Studies, Research Bulletin #13, March 2003 [12] Ridley-Duff R., Bull M., and Seanor P., Understanding Social Enterprise: Theory and Practice, SERC Conference 2008, Sage Publications [13] Shahnaz D., Tan Shu Ming P., Social Enterprise in Asia: Context and Opportunities, National University of Singapore, December 2009, Singapore [14] Spreckley F., Social Audit - A Management Tool for Co-operative Working, Beechwood College, 1981, Leeds, UK, p 6 [15] Young D., Social Enterprise in the United States: Alternate Identities and Forms, Prepared for: The EMES Conference, The Social Enterprise: A Comparative Perspective, December 13-15, 2001, Trento, Italy [16] Community Wealth Venture, Social enterprises, a portrait on the field, 2009, Washington, United States [17] Department of Internal Affairs, New Zealand, Legal structures for social enterprise, 2013, New Zealand [18] European Commission, Social Business Initiative. Creating a favorable climate for social enterprises, key stakeholders in the social economy and innovation, 2011, COM, Brussels

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[19] European Parliament, Official Journal of the European Union, 2010, Brussels [20] KMU FORSCHUNG AUSTRIA, Austrian Institute for SME Research Study on Practices and Policies in the Social Enterprise Sector in Europe, Country Fiches, June 2007, Viena [21] QUASAR – Qualità per I sistemi a rete di imprese sociali, Chambers take social enterprise on board, 2005, Italy, p 1 [22] http://www.aciamericas.coop/?lang=en [23] https://www.se-alliance.org/ [24] http://www.ies.org.ro/ [25] http://www.socialeconomy.eu.org/ [26] http://en.wikipedia.org/wiki/Social_enterprise [27] http://en.wikipedia.org/wiki/Low-profit_limited_liability_company [28] http://www.contributionship.com/history/index.html [29]http://www.musee.mutualite.fr/musee/museemutualiteeng.nsf/ObR/econosoc6?opendocument&Etage=x&Piece=x&Nb=1

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Which forces drive the banks to new investments?

Innovation mechanisms banks use to succeed challenges 1, 2

Orkida Ilollari (Findiku) 1+ , Gentiana Gjino 2++ Raiffeisen Bank, European University of Tirana, Albania

Abstract. Competition has created a fast-paced system where banks are changing in order to survive. This force of change is felt nowhere more strongly than in the financial services offered by Retail Industry. The traditional theories of Innovation would suggest that banks and companies can innovate by issuing new and/or improved products. In the context of the service, the product is the process. Consequently, innovation in the banking system stands more in the organizational changes process than in new product development in a traditional sense. This material will review the two tools by which innovation occurs, INNOVATIONS and EFFICIENCY in retail banking as well as other factors that make a bank gain a competitive advantage.

The essential functions performed by Retail Banking have remained relatively constant over the past decades, while the structure of Retail has gone under dramatic change. The main factors of this dramatic change are the augmented international competition, rapid innovations in new financial instruments and the explosive growth in information technology. This has brought an increased pressure on managers and bank employees to improve productivity and financial performance. The retail banking system continues to consolidate and to invest seriously in information technology. As a result, new electronic tools of banking transactions continue to develop due to their relative cost advantage with the paper-based banking system. The growing competition, along with the explosive changes in information technology, brings the need for banks to innovate in products, services, and traditional/alternative distribution channels. Describing the main factors and tools of banking innovation, the banks should be cautious in defining what makes an innovation efficient and effective in the banking system. Not all innovations are necessarily good and indispensable, and even if the innovation is a good idea, its execution can cost much more than its profits! The financial services are at the highest level of their performance and all this is due to technology development. However, this performance growth is not very tangible in the traditional back-office functions rather than in the integration of front- and back-office functions. The chief investments performed by the banks have consisted in platform automation for branches (traditional channel), call center and other alternative channels. It is to be emphasized that the most important force of change in the banking industry is the rapid evolution of consumer needs and desires. Therefore, banks must continue to innovate in order to fulfill the needs and desires of the consumer and at the same time develop new price structures to drift consumers away from high-cost delivery systems. This mixture of innovation and customer behavior modification lies at the heart of the modern banking organization.

Keywords: innovation, technology, competition, competitive advantage bank customer.

JEL Codes: G21.

+ PhD student, corresponding author: orkida.ilollari@raiffeisen.al ++ PhD student, corresponding author: gentiana.gjino@raiffeisen.al

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Innovation and banks challenges

The retail banking system continues to consolidate and to invest seriously in information technology. As a result, new electronic tools of bank transactions continue to develop due to their relative price advantage compared to the paper-based banking system.

The competition is increasing from other agents in the financial services industry continues to waste the market-share of banks. This competition, sideways with the big changes in information technology, brings the banks to the need to innovate in products, services, and delivery channels.

The essential functions performed by the banks, which structure the industry of providing payment and services, the facilitation of the allocation of economic resources over time and space, have remained relatively constant over the past decades, while the structure of the banks has gone under big change. The main factors of this dramatic change are the liberalization of internal procedures, augmented international competition, rapid innovations in new financial instruments and the explosive growth in information technology.

This change has brought an increased pressure on managers and employees to improve productivity and financial performance instantaneously.

Obviously the question is raised: how do banks manage to bridge these challenges, keeping in mind the increasing competition in the retail banking system and the rapid technological evolution?

This report will attempt to answer this question through the reflection of general trends in Retail. It will discuss the factors that are leading the need to innovate and how banks manage to bring these innovations. It must be known that not all innovations are necessarily good and even if the innovation is a good idea, its execution can cost much more than its profits

1.2

Change of consumer behavior

The force of change in the banking industry is the rapid evolution of consumer wants and needs.

Consumers are demanding at any time and place an increased variety in financial services.

As a result, banks can lose market share unless they invest in technologies and innovations.

The question is natural: how banks seize the value generated by these products? Actually, it is enough to look at the polemics about ATM fees to understand that this increase in variety may be harmful to a bankâ&#x20AC;&#x2122;s profits.

Over the last decades, banks have invested much in ATM machines due to their advantage on the cost per transaction. So, the traditional transaction is more expensive than ATM or â&#x20AC;&#x153;automated phone systemsâ&#x20AC;?.

This has made banks to make the effort to change consumer behavior by the added fees and a variety of values. However, despite these struggles, the total cost of serving certain customer segments has not changed meaningfully due to their change in behavior. The change in consumer behavior will bring the utmost profit to the banks by reducing costs.

Nevertheless, this change in behavior requires a long trail to be achieved. Consequently, banks must continue to innovate in order to reach the changing needs and desires of the consumer, while at the same

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time evolving new fee structures to transfer consumers away from high cost delivery systems. (Manual and paper-based transactions).

This mixture of innovation and behavior change should lie at the heart of the modern banking organization.

In simple words, these forces drive banks to more investments and research in the field of information technology to create new products and services for the consumer. This opportunity leads banks to invest in innovative provision systems, despite the need/ desire to change the behavior of the consumers.

1.3

Change and consolidation of rules

The retail banking system is experiencing a period of rapid consolidation as well as expansion into nontraditional banking products and services.

Initially, the regulations that restricted banks interests and the expansion of product lines of the banks started to weaken.

The changes concerning reserve limits, bank powers, geographic restraints, and the attenuation of GlassSteagall Act3 restrictions, allowed banks to merge through the product lines. The bank holding companies are progressively procuring similar financial companies, brokerage companies, and insurance companies in order to offer a full spectrum of financial products to their customers.

The key factors in every bank are â&#x20AC;&#x153;The Shared Wallet with othersâ&#x20AC;? and the will to attract and retain the financial business of the consumer. A main explanation for the consolidation of this industry is the desire to have sufficient extent to exploit scale economies in the processing of the transaction, and have purview cross-selling financial products.

However, several studies of efficiency in the banking industry show that neither scale economies nor range efficiency is the core cause of inefficiency.

2.

Strategies applied by the banks

Observations show clearly that in a few years the banking market has undergone through essential transformations. However traditional banks still keep a luggage of knowledge, competencies, image and structures. Nevertheless, the crucial element is the adaptation to the new characteristics of the market and not to see them as an obstacle to change.

All this often requires a modification of the basis strategies that take into account the new prospects of the market evolution. This is the most delicate stage because at this juncture it is decided the future of a bank. It is a decision that must be acquired by the attentive analysis of the market, the opportunities and risks that can be predicted. There is no need to decide to change, given that our competitors change, considering the situation as a trend.

3

The Glassâ&#x20AC;&#x201C;Steagall Act is a term often applied to the entire Banking Act of 1933

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Behaving like this might become a risk by not keeping a precise objective to meet, by making wrong interventions that require high expenditures and provide weak and often harmful. The real crucial factor of success for a virtual bank is that the bank should be clear in the strategic plan that it will follow.

From this point come the technological choices, the reference indicators, the products that will be distributed, how the communication will be done, the “pricing” policies, the workflow, the human resources employment, the formatting that will be implemented and the process of counters and staff retraining.

Having a clear strategic plan the bank knows the path to follow by anticipating and solving problems before they are encountered. This process of change must always have as a reference point the customer who must be constantly informed and participating in elections-made, or which shall be made, offers and overcoming potential risks. The client must never have the impression of being abandoned or forgotten, but it is the bank responsibility to engage and instruct them.

It must not be forgotten that the success of a new technology depends mainly on the degree of spreading to the public, which has to do with how its utility is understood. This is not only for the external customer but also for the internal one.

So staff should not see it as a threat for their job, but as a new employment opportunity connected to the technology introduction.

After identifying characteristics of its current and potential clients, the bank must harness this information with geographical areas where it operates, which are divided into:



Original location area - where the bank has a consolidated presence in time and clientele is stronger.



Other location areas.

At the end of this analysis, the bank will find ideal conditions to select the most appropriate strategy.

Using Porter's classification4 there are two types of strategies:

Cost Leadership Differentiation Although investments in technology provide more convenience, speed and efficiency, its adoption and usage must be well thought. As it concerns the banks, the choice of going online brings significant cost to them. The biggest costs are associated with investments in technology. Primarily, these costs go for the purchase and installation of equipment and hardware and software systems, and after for the reorganization of the internal structure, for hiring new expert staff, for the safety and integration with internal information systems.

In fact there is more spending. Technology is evaluating at a very fast pace and to follow its rhythm, as well as to maintain and improve the quality of providing services it is needed to continuously update technology5.

4

Porter, M.E. (2008) "The Five Competitive Forces That Shape Strategy", Harvard Business Review, January 2008, pp. 79–93.

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2.1

Cost leadership strategy "Cost leadership" is an aggressive strategy practiced especially by virtual banks as a new entry in the

banking industry.

It refers to those institutions which have decided to use their knowledge in this field to enter the financial market, becoming independent from those who up to that moment were their clients: the traditional banks: these institutions on the one hand have the advantage of having a high-technological “know how" and on the other hand have the problem of lack of public image, a consequence of lack of the self-delivery network in the territory.

In these cases a “cost leadership” strategy has a double benefit. If the image and the traditional approach cannot be used to attract customers, then a worthy alternative is applying extra advantageous prices, but of course offering services of the same quality level as competitors.

It is crucial not to reduce the quality level of services, as this risk giving a negative image and reputation decay even in those sectors where the bank is specialized. A second benefit of a "cost leadership" strategy is the fact that this strategy is difficult to be followed by other traditional banks.

These last mentioned have a series of costs that new actors (virtual banks) do not have, e.g. distribution network, therefore the do not have the possibility of significantly reducing the price of their services as they would otherwise further decrease their weak earnings.

While younger actors (new banks) do not have the problem of management and coordination between virtual and traditional channels, they have no distribution network; they do not have the problem of high costs for staff, for retraining etc. All this is translated into lower cost, which allows them to maintain a expenditures policy without the problem of reducing the price of services, on the one hand and attractive offers from the other side.

For the customer there is a risk that this might be only a "decoration", which has the function of catching attention without offering after wise services at really advantageous prices. Not always the bank that offers low prices implements a "cost leadership" policy.

We can say that this is a necessary, but not a sufficient condition. The type of customer targeted by this policy is the classic average customer with a low financial culture, which does not need much articulation, as less complexity as possible and that requires standard services.

As a result, a bank that intends to pursue this strategy should take into account that it has to deal with a very "wicked” clientele, who goes where it is economically more lucrative, and that the policy of making them "loyal" is hardly giving great results. Therefore it is needed to make known to customers that the services offered are the best not only price but also in quality.

But the problem is that this type of customer is unable to evaluate and does not even care to benefit from the added value that a service provides. Strategy builders know very well that one cannot continue like this for a long time till the competition is so high. Once the objective of raising the image in the market has been achieved, one should think of new strategies.

This does not necessarily mean increasing the cost of services to match the traditional levels. If in the first case the aimed strategy intended to allow rapid market shares gaining and by sacrificing the benefits or even with potential loss, it is important that the second step must aim profitability as well.

If banks continue with the "cost leadership" strategy, they are threatened to be included in a vicious circle, with consecutive price sales with negative consequences.

One strategy that can be taken into consideration at this point is the one of the "differentiated" offer: 5

Berger, Hunter and Timme (1993)

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2.2 Differentiation strategy This strategy can be used even by traditional banks that decide to differentiate services passing through the virtual channels, or it can be used by new operators as a second stage of their growth, after implementing firstly a “cost-leadership” strategy. “Differentiation" does not mean only passing to various distribution channels of products and services, but above all, to being able to create a quality differentiation from the offered services.

In fact, the introduction of information technologies in the banking sector was immediately assisted in the use of virtual channels in many traditional banks precisely with the objective of differentiation from other competitors.

The advantage of these interventions was very limited. In the case of implementing a "call center" or an internet site which is also relatively simple, the real struggle lies in the use of these new channels, in the ability of a service delivery qualitatively higher, compared to traditional channels, as well as towards those services offered by the competitor virtual channels.

Hence, elements such as: comfort or entry or overpassing cultural and space barriers allow them to distinguish between them different channels inside the bank itself, but not between banks. A real differentiation policy is based on the capacity of offering a range of services, the capacity to supply addedvalue information, the capacity to utilize all the powers that technology offers and the perception of those advantages by customers, the capacity of listening to customer needs and assisting step by step on using these new channels.

If the bank is able to do this, there will be an extended competitive advantage as long as the quality is hardly imitable and it gives the possibility of differentiation, by several competitors that use these new technologies, but in passive manner.

Only in this case differentiation would be real and perceptible by the final customer. In fact, it should be taken into account that, the average customer as the greatest integral part of the clientele, alone, is unable to distinguish the difference between channels or banks.

As a consequence the rapid implementation of technologies is not synonymous with success, but in contrary it risks to confuse the customer even worse. Thus, while it is difficult for a "cost leadership" policy to be practiced by a bank that is not confident in the strategic importance of virtual channels, and it widely uses a strategy of differentiation, it is often chosen by the customers that move quickly towards virtual banks, as well as by those who hinder.

The last mentioned risk to be found in the future, in a very unfavorable position reflecting a poor awareness of their mission and their objectives.

All this results in a waste of time, that in an economy dominated by technology, which is a rare and very precious resource. As for the clientele to whom this strategy is directed, it is noticed a difference, towards the objective of a “cost leadership" policy. If in this last case the bank aims the medium customer, for the policy of differentiation, the clientele is more evolved, with a higher level of general and financial culture. The Bank is put in dialogue position with those who know exactly what they want and what they expect from a banking service. They have very valuable time, and therefore are more open to the use of virtual channels.

Without doubts, satisfying a clientele with high demands, requires a great job, but if the bank manages to truly offer added value services, it would be willing to pay a "premium price" and will have a higher degree of trust compared to the clientele to whom a "cost leadership” strategy is directed.

The user of this bank is able to evaluate and distinguish quality, is always attentive to the news and by using the classification made by "Kotler"6 could be includes among the so-called "consumers pioneering".

6

Kotler P., Marketing Management (14th edition).

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From this analysis, it comes clear that the choice between these two strategies should be made after a careful study of the objectives, the type of customer, the traditions, the image, the resources and competencies of a bank.

A mistake at this stage can have many negative effects and influence operationally for a long period.

Besides these two main strategies, we could mention other smaller ones that can be used before the abovementioned strategies or with a combination of both.

3. New technologies and information delivery Technology plays a key role in the performance of banks. It is still difficult to ascertain the profits brought by big investments in technology.

According to studies7, in production there have been found huge profits in the investments made in information technology (IT), both in terms of equipment and staffs. For example, in the study by the National Research Council8 on IT, the problem in the context of banking system is summarized as follows: “Even the method for productivity measurement is not sufficient to improve in the quality of service offered to customers or for the availability of a much wider group of banking services.

The speed with which the processing of a loan application is completed is an indicator of service that is important to the consumer, as is the 24-hour availability through ATMs where the deposit and withdrawal services previously accessible only during the bank hours. None of these services is apprehended as higher banking output at the macroeconomic level.

Financial services have a greater performance due to technology. Still, this will not come in the traditional back-office functions. The performance improvements will be noticed in the integration of frontand back-office functions, for example in integrating business processes.

Roach9 indicates that the consolidation of back-office operations is due in large part to scale economies due to IT investments. He also states that “...new productivity opportunities are now spreading rapidly across the sales function of the service sector.” Main investments will occur mostly in the front-office functions where Kotler10 clearly explain this new trend. Instead of seeing the bank as a gathering line provider of standardized services, it can be viewed as a point of sale with flexible production capabilities.

At the core of the bank there is a wide-ranging customer database and a product profit database.

Nowadays banks are able to identify all the services used by any customer, the profit (or loss) on these services and the potentially profitable services which may be proposed to that customer.

Technological innovation in the retail banking industry has been drove on especially by new distribution channel systems. As the industry has provided through new technologies more means for consumers to access their accounts, they have added substantial costs to each financial institution. A need to fight these costs resulted in a topmost cost savings period, where many banks successfully got much of the cost deducted from the back office.

These cost savings came mostly through back office automation, which is a technological innovation that has been completed. After putting significant costs through distribution channels and managed to cut cost as much as possible in the back office, banks have realized that this was the key to profitability.

The primary innovations for income increasing occurring today are in platform automation for branch and call center personnel, and in the newest distribution channel, computer banking.

7

(Brynjolfsson and Hitt 1993): (Lichtenberg 1995) National Research Council” (1994; p.81) 9 Roach:” Opportunities and Challenges for a New Globalization, pg 10(Wiley 2009) 8

10

Philip Kotler (cit “Pine” 1993,pg. 43-44)

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Even though these innovations have many aspects in common, they serve different needs in the distribution strategy of retail banks.

Platform automation is the first attempt of retail banking industry at giving employees a single view of the customer. Prior to this innovation, it was not possible for an employee to view the entire customer relationship at once.

Why is this important? A total (or single) view lets the employees understand how important a customer is based on their portfolio of products, rather than on their current accounts balance. Retail banks collect and process information by product and transaction, not by customer.

Therefore, while it is quite easy to access all of the information on current account customers or on credit card customers, taking a slice of the data, per customer, is technologically difficult. In general every bank has encountered the same problems because systems were built with transaction processing per product.

Now, with the need to understand relationships, merging these data from a variety of systems and geographical areas (For example a credit card processing in another state from the other retail bank,) is a massive enterprise.

While electronic banking represents a new distribution channel, it also represents a zone for significant technological innovation. Banks have many alternatives available with this new channel, and with these alternatives come managerial decisions regarding alliances, outsourcing, developing new products that will affect future profitability.

Superficially, one could consider the electronic channel similar to the call center, where a customer is simply contacting the bank remotely, over the phone ot by the computer. The main difference between the channels comes in the diversity of ways that a bank can offer electronic banking and in the allegations resulting in each model.

Coincident with the retail banking industry transferring from cost-savings innovation to incomeincreasing innovation is the passage from in-home method to outsourcing.

4.

Conclusions

The financial banking market has changed, not only in growing opportunities, often based on questionable forecasts, but also with obtained results. So today it is observed the expense â&#x20AC;&#x201C; benefit proportion even at the time of reaching the break â&#x20AC;&#x201C; even point.

Technologies have become significant components for banking institutions, as much as it is noticed a convergence between banking and technology sector, composed of alliances and acquisitions.

Using technology does not mean changing the habits of using money. Instead, with the help of information and communication technologies, the overcoming of schedules is enabled, waste of time and bureaucratic aspects of traditional banking, to administer faster and more efficiently personal finances.

With these manners the customer is at the center of the bank and regularly led by the policy of Customer Relationship Marketing.

Firstly computer technology seemed to be only a support for the lifestyle and working style in industrial societies, rather than a changing factor. Likewise, for the bank losing or winning customers is faster than in the past, products are levied by "pull" type method.

Integration with innovation helps banks to gain competitive advantage by the rapid development of innovative products, enhancing the customer experience by responding to customer requests in a uniform way through various channels, increased benefits through "cross sell".

Retail banking cannot judge only in terms of working and number of counters, but by investing in technology, it will strengthen its distribution activities through electronic channels and new systems, where

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the main goal is meeting customer requirements by planning strategies that will determine the future, "Customer-oriented".

Each cost should be seen as a separate investment, making sure that any money cashed out of the bank will go back there, plus will provide a profit margin. Therefore for any costs shown in the financial statements, we should think how it has contributed to the final product and business performance.

Careful planning and clear tasks and responsibilities allocation is required for all those who will deal with it, because cost reduction is a process that can never be accomplished if procrastinated.

5.

References

[1] Amabile , Teresa, M., 1998. How to kill creativity, in Harvard Business Review.

[2] Bernacchi A., (2007), Sportelli bancari virtuali, decollo lento in Europa comScore Media Metrix.

[3] Berger, Hunter and Timme (1993), The Efficiency of Financial Institutions: A Review and Preview of Research Past, Present, and Future, Journal of Banking and Finance [4] Brynjolfsson and Hitt (1993): (Lichtenberg 1995), Productivity, Profit and Consumer Welfare: Three Different Measures of Information Technology's Value [5] Dosi, G. (Ed.), (1988). Technical Change and Economic Theory. Pinter Publishers, London, UK [6] E-banking service (http://www.ffiec.gov/ffiecinfobase/booklets/e_banking) [7] EFMA Studies, (May 2012), The future of face to face, how to make the transmisition a reality [8] Eaton, J., Kortum, S., (1999). International technology diffusion: theory and measurement. International Economic Review [9] Finalta & EFMA, ( Jan 2012) , Multichannel Banking in Europe, Reaching the next level in on line sales.

[10] Freeman, C., 1988. Japan: a new system of innovation. In: Dosi, G. (Ed.), Technical Change and Economic Theory.

Pinter Publishers, London, UK [11] Hunter, L.W. (1996), When fit doesnâ&#x20AC;&#x2122;t happen: The limits of business strategy as an explanation for variety in human resource management practices, presented at the Academy of Management Annual Meeting, Cincinnati, Ohio.

[12] Keller, W., (2000). Geographic localization of international technology diffusion. NBER Working Paper [13] Kotler P., Marketing Management (14th edition ), (2012).

[14] Lundvall, B.A. , (1988). Innovation as an interactive process: from user- producer interactive to the national system of innovation [15] Mauzy, J., Harriman, R., 2003. Creativity inc. Building an Inventive Organization. Harvard Business School Press.

[16] National Research Council (1994; p.81) [17] On-line banking service (http://www.investorwords.com/3420/online_banking) [18] Pictet,(2009) Banks, focus on the internet â&#x20AC;&#x201C; part 1, www.pictetfunds.com

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp 130 URL: http://www.reaser.eu E-mail: editors@reaser.eu [19] Pavitt, K. (1999): Technology, management and systems of innovation. Northampton: Edward Elgar.

[20] Porter, M.E., (1990). The Competitive Advantage of Nations. Free Press, New York.

[21] Piirto, J., (2004). Understanding Creativity.

[22] Philip Kotler (cit “Pine” 1993,pg. 43-44) [23] Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard Business Review, January 2008, pp. 79–93 [24] Roach, (2009), Opportunities and Challenges for a New Globalization, p 10, Wiley [25] Timmers P.,(2008), Business Models for Electronic Markets.

[26] T. Federici, A. Ferracchiati,(2009) La banca virtuale: una strada ancora da percorrere.

[27] Trajtenberg, M., (1990). Patents as Indicators of Innovation, Economic Analysis of Product Innovation. Harvard University Press, Cambridge, MA. [28] The Glass–Steagall Act is a term often applied to the entire Banking Act of 1933 [29] Vertova, G., (1999). Stability in national patterns of technological specialization: some historical evidence from patent data. Economics of Innovation and New Technology.

[30] Zucker, L., Darby, M., Brewer, M., (1998). Intellectual human capital and the birth of US biotechnology enterprises. American Economic Review.

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The use of international experience managing organizational capital in enterprises Iryna Ianenkova 1+ 1

Black Sea State University named Petro Mohyla Mykolaiv city, Ukraine

Abstract: Against a backdrop of economic innovation type is increasing convergence of information communication technologies and the rapid dissemination of new knowledge, which in turn support the expansion of technological and organizational innovation. Knowledge was one of the factors of production that can help companies to take part in the global competition. The basis for these processes is organizational capital.

At the present stage of the economic transformation problem of managing organizational capital is not to form and ÂŤfreezeÂť it, and further build-up and use. The way to enhance organizational capital is the skillful management of this unique environment, which must take into account its place in all planned and organized processes in the enterprise. Thus, in terms of increased competition between domestic and foreign enterprises it is vital to the formation and effective use of organizational capital.

Keywords: organizational capital, organizational capital management, human potential, HDI. JEL codes: L20, O15.

1.

Introduction

Organizational capital combines many elements that are essential for the effective functioning of the enterprise. And speaking of organizational capital we can but note that it is closely combined with human potential. After all, intellectual property, information technology and resources, electronic networks, organizational structure and management system now somehow created workers and cannot exist apart from them. As a result, the HDI is one of the indices which measure human potential, which is not possible without further development of organizational capital.

All countries are divided into groups depending on the income level based on the classification of the World Bank Countries with high, middle and low income countries. The United Nations uses the +

Doctor of Economic sciences, Associate professor e-mail: fler06@rambler.ru

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e-mail: editors@reaser.eu Human Development Index (HDI). HDI - integral index, calculated every year to compare and measure the standard of living, literacy, education and longevity as the main characteristics of the human potential of the study area. It is a standard tool for comparing the overall quality of life in different countries and regions. The index is published annually in the UNDP report on human development [1]. Human Development Index contains the following component characteristics, namely: - life expectancy ; - the level of literacy of the population (the number of years spent teaching , expected years of schooling); - gross domestic product (GDP) per capita in purchasing power parity dollars (PPP).

2.

Theoretical background

This article is devoted to the use of international experience managing organizational capital in enterprises. Post articles relevant today in view of the global economy that is increasingly dependent on high-tech products of the growing role of intellectual and information resources.

3.

Analysis and discussion

Ukraine and other countries - participants of the CIS (Russia, Belarus, Kazakhstan), are estimated to HDI countries with an average level of human development [1]. According to the results of 2011, the index for Ukraine was 0.729 and it exceeded the average HDI for the whole group. This can be explained by the high level of literacy of the adult population (index 99.7% higher than the average for the group ) and the high rate of enrollment (85 % versus 66 % for the group), which together gave the excess education index of 0.94 relative to the average for the group 0 ,75 [2]. It is clear that the HDI is not a comprehensive measure of human development rights, in particular, it does not include important indicators such as human rights, democratic freedoms and social equality, but it makes it possible to see the progress of human development. Turning to the data table 1.1, which presents trends in human development over the period 1995 - 2011, it certifies that the CIS countries (as well as in Central and Eastern Europe) after a significant decline in the second half of the 1990s was a turning point negative trend and they regained their pre-crisis level [ 3].

Table 1.1 Trends in the Human Development Index of individual countries with medium level of human development Country

1995

2000

2005

2007

2012

Russia

0,849

0,771

0,785

0,817

0,788

Belarus

0,866

0,781

0,775

0,826

0,793

Ukraine

0,842

0,744

0,755

0,796

0,740

Kazakhstan

0,798

0,754

0,736

0,804

0,754

Armenia

0,715

0,721

0,736

0,798

0,649

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Ukraine, unfortunately, still not fully regained lost ground, which is reflected in the value of HDI â&#x20AC;&#x201C; 0.740 in 2011 compared to 0.842 in 1995 partly explained by the fact that Ukraine spends unreasonably small in comparison with other countries on education and health. The data describe the level of public spending countries with different levels of human development. They show that in Ukraine the priority level of public expenditure on health (3.8 million) and education (4.6 million) is twice lower than in Norway, Iceland, Sweden and the U.S., which spends 7 to 9 percent of GDP on health care and 7 - 8% on education [4]. In general, the data presented above indicate that Ukraine has not yet entered the path of struggle for leadership in terms of organizational capital, particularly in terms of human capital, as it is trying to make Russia and thereby forms a knowledge-based economy in the system of values, and while developing its individual elements. This is confirmed by statistics table 1.2 [4].

Table 1.2 The level of public spending countries with different levels of human development in 2012 Country

The volume of public expenditure on: Health, million

Education, million

Countries with high levels of human development Norway

8,6

7,7

Iceland

8,8

8,0

Sweden United States

8,0 6,8

7,0 5,9

Countries with medium levels of human development Russia

3,3

3,7

Belarus

3,9

5,8

Ukraine

3,8

4,6

Kazakhstan

2,0

2,4

Armenia

1,2

3,25

Countries with low human development Djibouti

3,8

6,1

Lesotho

4,1

9,05

The data in table 1.2 indicate a low level of funding for health and education, as compared with countries with high, medium and even low human development. Accordingly, to improve the HDI Ukraine has to review the policy implementation costs of these components. It should be noted that the above indicators and indices give a description of the organizational capacity rather than capital. This is an important aspect of evaluation, as between potential and capital is significant differences, what are paying attention to both academics and practice. Organizational capacity enterprise - is possible, provided organizational resources at present and that can be used in the future to solve any problem achieve a certain goal (this does not mean that these features will ever implemented). Epistemological organizational capital - means to an end and organizational potential opportunities to achieve [4].

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e-mail: editors@reaser.eu In the context of the above, it is necessary to examine current practice assessment is human capital. It is appropriate to recall the methodology developed by the World Bank and has been proposed as part of the definition of indicators for sustainable development [5]. The method was developed to analyze the structure of national wealth, as some of its elements in the developed countries and developing countries. The concept proposed by World Bank experts in national wealth is: - natural capital; - produced capital (assets); - human capital (human resources); - social capital.

It should be noted that the authors of experimental techniques for the purpose of interstate comparisons were forced to make their calculations in a number of significant assumptions and several major simplifications. Thus, focusing only on the economic potential was not assessed social capital by which to understand "a set of networks, relationships, norms and institutions that affect the performance of the economy". In addition, human capital estimated by the residual principle calculated the present value of the remainder "no experience" pure national product (NNP) by the average number of years of productive life. From the findings of a product that can produce populations, computed the amount of assets and land, and this value was adopted in the evaluation of the quality of human resources [6].

Despite all the discussion questions proposed technique, its use has made it possible to assess the national wealth more than one hundred countries. The studies Bank staff makes it possible to conclude that the key role in national wealth of the world belongs to human resources - their average share in excess of 60 %, while the role of man-made capital is 15 % - 30 % of the world economy, natural capital depends on the availability of resources, ranging from 2% to 39%. The most prosperous national wealth of the country turned the United States, Switzerland, Canada, Japan, Norway, occupying in the world ranking top five places [6].

Unfortunately, the World Bank did not conduct evaluations of the national wealth of the CIS, which was associated with a lack of data and poor reliability. Experimental calculations of aggregate national wealth in the entire world community, as well as by groups of countries have made the team of Russian scientists. After considerable simplifications and assumptions, including the "same market conditions and identical prices" derived estimates that reflect the results of the total accumulation of wealth and the basic forms of capital in the world and including the CIS (table 1.3 ) [ 7]. Таble 1.3 Experimental evaluation of the human capital of the CIS countries in the early XXI century Country Country of CIS, total Azeybardzhan Belarus Armenia Georgia Kazakhstan Kirghizia Moldova Tajikistan

The total national wealth, trillion USA 39,9 0,6 1,8 0,2 0,3 1,5 0,2 0,2 0,2

Calculation of national wealth in capita thousand dollars. USA 142,2 70,0 181,6 58,0 58,8 100,7 50,0 53,5 26,8

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e-mail: editors@reaser.eu Turkmenistan Uzbekistan Ukraine

0,3 1,4 4,5

55,0 58,6 91,8

From the data in table 1.3, the results of the study, Russian scientists can understand that Ukraine has the considerable human potential among the countries that were part of the CIS. However, not enough to have potential, it should develop and implement. A striking example of this is the "flow of knowledge", which is observed in Ukraine in recent years. Thus, again, back to the point that the state should support the capacity to fund and create conditions for further development.

If you try to compare estimates of national wealth Ukraine made by Russian experts, we see that they are much higher than estimates Ukrainian researchers. This can be explained, firstly, using different techniques, and secondly, the Russians, using as a basis the approach of SNA - 93 to achieve comparability with other countries were based on the assumption of "equal market economy and world price levels", which is for countries with economies in transition is a very debatable point. The result obtained values of both Russia and Ukraine to reflect the scale of the existing building elements and its potential, not actual value assessments in the domestic prices are listed in U.S. dollars that is not an assessment of "how much Ukraine", and how it cost would have been applied if the same principles of evaluation of its components as well as wealth in market economies [6].

According to the World Bank in the structure of national wealth in many developed countries is dominated by human capital, which accounts for one third of the total value. Human capital is the only active equity, whereas all others are passive because they are all, without exception, subject to man. With respect to the position of investing in other types of capital, avoiding human, are not very effective. The human capital formed by the investment and accumulated rights as defined stock of health, knowledge, skills, capabilities, motivation, is appropriate to use one or another sphere of social reproduction, promotes productivity and efficiency and thereby affect the growth of material human welfare and economic growth of the state. According to the above, human capital is one of the indicators of organizational capital. The complexity of calculating the human capital method of valuation "method of production " is defined ambiguity as views of economists on the components of these costs (the need to consider all the costs of forming and educating people , including consumers , to ensure satisfaction of physiological needs, or just spending on education, training and training, science, innovation, health, mobility, culture), and the carriers of human capital (the entire population of the country or just a part of the economically active). In table 1.4 the calculated cost of capital accumulated total population of Ukraine by a calculation of consumer spending, which provide qualitative parameters for the formation of human capital (the amount of the subsistence minimum excluded as being directed to a simple reproduction of the population), which was carried Kondyrinoyu A.G. [6].

The calculation of the accumulated value of human capital suggests that its full reproductive cost in 2008 was 2,521 billion and in 2012 â&#x20AC;&#x201C; 7,680 billion or 54 thousand and 168 thousand per capita Ukraine respectively. However, the real value of human capital in 2000 prices per capita is much lower, so in 2008 it amounted to 37 thousand and in 2012 only 88 thousand.

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Table 1.4 Dynamics of changes in human capital in value terms, Ukraine for the period 2008 -2012 years Years

2008

2009

2010

2011

2012

Final consumption expenditure million

337879

422387

567136

776706

784797

Cost of Living, UAH

423

472

460

605

869

Consumer spending within subsistence, million

237049

258582

255024

333234

477602

Consumer spending on formation human capital, million

100830

163805

312112

443472

307195

Nominal value of accumulated human capital, million

2520750

4095125

7802800

11086800

7679875

Nominal value of accumulated human capital per capita, USD

53977.5

88067.2

168891.8

241542.5

167682.9

Consumer price index relative to 2000

1.4693

1.603

1.625

1.901

1.902

The real value of accumulated On human capital, million

1715613

2554663.1

4801723.1

5832088.4

4037789.2

The real value of accumulatedOn human capital human per capita, UAH

36736.9

54939.0

103933.4

127060.7

88161.3

Sections

Despite these low values of the cost of capital it should be noted that the costs exceeded the value of fixed assets in 2008 to 57 % , in 2011 to 72 % [8]. So, in Ukraine, as in all developed countries, human capital is a major factor of production and essential elements of aggregate capital, but its formation trends over the last decade indicate difficult conditions for human development in the country. Anyone - which capital, including man, determined the conditions under which it is formed and used and may deplete the absence or lack of investment level, which can lead to loss of reproductive capacity. As shown by table 1.4, the real value of accumulated human capital in 2012 compared to 2011 decreased by 30% in 2010 to 15%.

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e-mail: editors@reaser.eu It should be noted that there is a sufficient number of approaches and techniques that help determine the value of human capital, but they have differences that apply in each case, are not allowed to use the data for correct comparison. Therefore, the imperfection of existing evaluation methods only emphasizes the importance of developing a systematic approach to maximize the reflected economic realities and addresses the harmonization of the methodology and principles of assessment [8].

The study of organizational capital in the context of economic evaluation capitalization Ukraine showed that the balance of large and medium-sized Ukrainian companies share of intangible assets is low and ranges from 0.6 to 1% (table 1.5) [9].

Table 1.5 Organizational capital for large and medium-sized Ukrainian companies in 2007-2012 years Years

2007

2008

2009

2010

2011

2012

Sections The share of intangible assets in the balance sheets,%, end of period Non â&#x20AC;&#x201C; current

1.08

1.20

1.78

1.04

1.17

1.29

0.65

0.70

1.01

0.57

0.63

0.69

assets Assets

Estimation of capital, the average price for the year, million Total

4390.1

5043.7

6571.9

4606.4

5947.0

7319.5

Including the industry

2019.5

2039.5

1984.9

1498.2

1953.3

1973.4

The pace of change, % Organizational capital

-

114.9

130.3

70.1

129.1

123.1

Organizational capital in industry

-

101.0

97.3

75.5

130.4

101.0

From table 1.5, it is clear that the share of intangible assets in fixed assets during the five years is too low - the highest level of 1.78% was achieved in 2009. Assuming the value of intangible assets (calculated as the average value between indicators of the beginning and the end of the year) for assessing organizational capital, we can say that the group of large and medium-sized enterprises in Ukraine, its volume in nominal terms increased by 1.7 times from UAH 4,390,100,000 in 2007 to 7,319,500,000 USD in 2012. The low level of these assets reflected on the balance of Ukrainian enterprises confirms dynamics presented indicators reduces their market capitalization, gives underestimation of national intellectual capital, which is a negative reference point for investors who are interested in information about the status of companies in which they could invest.

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e-mail: editors@reaser.eu From the data of table 1.5 there is understandable uncertainty about the growth of organizational capital - the annual rate of change can be both positive at 30% in 2009 and 2011 and negative in 2010, indicating a lack of systemic dark state policy in this area [9]. The analysis of the data in table 3.5 showed that during the period from 2007 to 2009 there was growth both in total capital in the business and organizational. However, in 2010 there was a slowdown in growth capital. Again from 2010 to 2012 the overall cost of capital and organizational was again increasing. Moreover, after a decline in 2009, the theme Building capital has risen significantly. From table 3.5 it is clear that the bulk of both the total amount of capital, and organizational capital is occupied by industrial enterprises in Ukraine.

In practice, foreign institutional capital at the micro level as measured by indicators of: the scope and functions of information systems, structure and effectiveness of administrative and organizational investment in new methods of management and R & D, and others. At the macro level estimates of organizational capital of the country are indicators of investment in R & D, patents and invention registration, the number of companies in high-tech, high-tech products export share of total exports, as well as indicators that assess the degree of infrastructure development process and shipping information in society (e.g. the number of telephone main telephone lines per 1000 population, the number of mobile phones per et al.).

4. Conclusions Thus, the evidence suggests that the basic requirements for system indicators and indices that characterize these processes is the need for an integrated account of the maximum number of factors and conditions that affect the Information Society , in addition, they must be transparent and available for payments and to ensure maximum compatibility and comparability for use in different countries.

Ukraine still taking its first steps in this direction and how actively and systematically, it will solve the problem depends, among many other factors that determine the success and strategic direction of social and economic development, and the rate of transition to a society based on knowledge. The process of effective use of organizational capital of the enterprise and across the country is supported by the study of foreign experience. All considered the state provides significant incentives for the development of institutional capacity, leading to increased organizational capital. It gives special attention to the formation and use of human capital that is the basis for organizational development.

Foreign companies support the development of organizational capital through constant monitoring of its performance evaluation. Ukrainian companies are trying to introduce,e evaluate and increase the pace of organizational capital. The results of the study of foreign experience with organizational capital can be used by domestic firms.

5. References [1] Kendyukhov A., Institutional Protection of intellectual capital: the impact of modern marketing trends , Science. Don works NTU. - 2011. - Issue. 69: Series economy. - pp. 72 - 77.

[2]

2 Official Sites HDI - http://hdr.undp.org/en/site/

[3]

Statistical Yearbook of Ukraine for 2005 - 2011. - K.: Technology , 2012. - p.564

[4]

Statistical Yearbook ď &#x203A;Regions of Ukraine ď ? , Osaulenko , 2006 . - Part 1 . - p.511

ISSN: 2247-6172; ISSN-L: 2247-6172 Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013 ), pp 139 URL: http://www.reaser.eu

e-mail: editors@reaser.eu [5] Nezhyborets V., Theoretical and practical background of long-term and medium-term forecasting innovation in the economy of Ukraine , Theory and Practice of Intellectual Property. - 2007. - № 2. - pp 40 46.

[6] Kondyrina A., Valuation of Human Capital Ukraine [electronic resource] ,Scientific Bulletin CHDIEU: Economics and national economy.

2011. № 1 (9).

Access : http://archive.nbuv.gov.ua/portal/soc_gum/nvchdieu/2011_1/11.pdf [7] Kanygin J.M., Ksonzenko V.P., Ukrainian society: integration of intellectual capacity -Kyiv: Institute of Sociology of NAS of Ukraine, 2005. - p.396 [8]

Statistical Yearbook Regions of Ukraine  , Osaulenko. - 2012. - Part 1 - p.511

[9] 45.

Novykov D., Stimulation in organizational systems: Manual / Novikov. - Moscow: SINTEG. - 2009. – p

[10] Kavetsky V. Managing organizational knowledge as a form of intellectual capital, Problems of competitiveness of enterprises in conditions of instability of the world economy: the materials of All-Ukrainian. scientific and practical conf. (Vinnitsa, April 27, 2009 ). - Kiev: Universum -Vinnitsa , 2009. - p.341.

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A cluster of configurations and reconfigurations gaining ground through Globalization. How is the family being transformed?

Dragos Lucian Ivan1 1

The National School of Political Studies and Public Administration, Bucharest, Romania

Abstract. The nexus between globalization and family life is complex. Besides this, often it comes as a surprise to many that a mutual interference between the two entities exists. The influences of globalization through its manifestations and through the policies of the nation-state impact the family. Surprising is also that the intergenerational relationships within the family, relations that dictate the actions and inactions of the family, ultimately contribute to the success or failure of economic and politic agendas. Beyond the economic and politic plan, there is the social plan. Globalization is acting in the direction of transforming the social plan, while the family is traditionally a unit of social cohesion. My realization is that we are in the midst of a change that needs a greater holistic perspective because it is profound in it enormity.

Keywords: globalization, family, social, social dynamic JEL Codes: F60; J12; J13

1. Introduction Family life is changing confronted with globalization. It is only natural to assume that family is going through certain changes when faced with globalization. The term globalization is a misleading one, giving the impression that it refers to the global, leaving aside the intimate life of the individual. How could that be in a world with instant communication and augmented accessibility? Globalization did not only change the relationships between major players. Globalization does not concern only states and macro forms of existence in our societal system, but it concerns our everyday life experience. It does not cancel out the family or the individual, but it forces a redefinition of their existence. We believe that Giddens has captured a reality when stating that we are faced with a powerful feeling of individualism. Traditional family values are retreating, but we believe this process is only temporary. Traditional frameworks of identity are not dissolving, they are merely reconstructing themselves to suit the new individual identity within the global world. The individual continues to aspire towards having a family, towards belonging to a community. We are witnessing a move towards individualism, but this cannot be done outside the community. Man is a social person, a person that defines himself also through the relationships established. New patterns of identity are emerging for the individual, but also for the family. The family changes so as to be able to accommodate the new patterns of individual identity. There cannot be a global society without family.

1

Beneficiary of the â&#x20AC;&#x17E;Doctoral Scholarships for a Sustainable Societyâ&#x20AC;? project, co-financed by the European Union through the European Social Fund, Sectoral Operational Programme Human Resources and Development, 2007-2013.

E-mail: i_dragos_lucian@yahoo.com

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2. Methodological concerns 2.1.

Research questions What are the trends that influence the relationship between globalization and family?

This question refers mainly to the theoretical analysis of this issue and its importance in the relation to the overall system.

Do we notice any change in family life brought about by globalization?

How do scientific theoretical elites assess the relationship between globalization and the family? Can we notice a change in their perspective and structure?

2.2.

Assumptions Hypothesis 1: Theoretical models can become sectors of positive influence between theory and practice, this in turn can expand into research methodologies that support the theoretical aspect and capture the reality as it was depicted in theories, managing to either support or attack the theoretical support. Hypothesis 2: Theoretical observations show that there is a constant interaction between globalization and the family and this interaction is not one dimensioned. During this theoretical research we have used content analysis. We have chosen this type of analysis so as to be able to present, interpret and discover the trends that affect the EU-27. We have analyzed documents, scientific journals and scientific books and we were able to make correct inferences that constructed a broad description of the social phenomena that influence EU-27. The purpose of our content analysis was to build a general context describing the evolution and future trends within the EU-27. Our approach was from the earlier models. This was the starting point and was deductive in nature. From there we have advanced from the general to the specific.

2.3.

Limitations

As we have used this method we also took into consideration its limitations. The primary possibility of limitation for our study is the way in which the content has been analyzed. The content is made out of important and primary theories and their interpretation can be different. In order to prevent this we have analyzed a long bibliographical list on the topic of globalization, family and social change. The need for empirical research to support the theoretical perspective is another limit of this research.

3. Literature review and limits of previous research 3.1 Limits on family research One reason for the little research done in the field of family studies and how the family has changed under the influence of globalization is the fact that globalization is seen as something global. Globalization represents the public interest through its focus on economy and politics (Giddens, 2002:15-27). On the other hand, the family was perceived as the private sphere . Although the private sphere is something intimate, it does not elude the influence of the outside or the global. Through the constructed interpretation of family as the private sphere (Flaquer, 2010:57-60), although this is correct, it does not justify the lack of research as long as the family is private, but it is not isolated. The family cannot escape outside influence, nor can we say that it has to. The family represents the private life, the intimate life, but this does not mean that it escapes globalization or changes. We acknowledge the difference between the public sphere and the private sphere, but we believe that willingly or unwillingly the two interact and exist also through their opposition.

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As the public sphere is in a constant dynamics, in line with the reality (Dobrescu, Palada:2012:17-18) why would not the family be in the same type of dynamics. After all, the public sphere and the family share at least one value, that of solidarity. The civil society is associated with the term of solidarity sphere (Ciocea, C창rlan, 2012: 183-184), while the family is also linked with this notion. The family is not spare of change.

Exchanges and transformations exist as a result of their interaction or isolation. There is only an ideological distinction. In practice the two spheres constantly interact at different levels and influence each other. There has been little dialogue between researchers that study globalization and scientists preoccupied with family studies. We do not wish to oversimplify the discussion about globalization and propose the idea that the study of globalization was limited around economic and political issues (Zlotnich, 1961), but we wish to underline the fact that globalization has been analyzed mostly from these two perspectives. There has been interest on cultural globalization (Halman, Inglehart, Medramo, 2004:47-68), but little research on the relationship between globalization and family. This is surprising taking into account that many of the aspects of globalization find their way among the harmonies and conflicts of family life and family relationships. An anthropological researcher could conclude that the family and the intergenerational relationships it fosters form the foundation of what we call society.

Another reason that limited the research done in family studies was the existence of a fashionable topic.

During the evolution of family research the very definition of the family encouraged scientists to focus on those families that corresponded with the accepted model of the family. On the other hand, contemporary scientists focus more on new types of families that in the past were considered as abnormal.

The family is not suspended in time, space, and culture, but it has to be analyzed in context. It is surprisingly that little research has been done on the changes brought about by globalization.

3.2 Limits to globalization research Globalization has been constructed around the neoliberal model (Hajnal, 1983:90). This model constructed a particular type of state, the welfare state and its policies have tended to privatize individual and family survival (Biblarz, Stacey, 2010:5-9). Changes within intergenerational relationships in the family have not occurred only as a result of the actions that defragmented the family, but also as a result of the actions meant to reconstruct the family (Leccardi, Ruspini, 2006:109-113). Paradoxically the effort of the welfare state to privatize individual and family survival had the opposite effect. The family existed also based on the need to provide social protection. The moment the welfare state privatize even this type of social protection provided by the family, entire generations stopped looking at the family from this point of view (Cole, Durham, 2006:130-145). Through too intrusive policies the welfare state de-emphasized the importance of the family (Shoven, 2010:15-27). We can admit that these policies were good at the core, but in the conditions of the economic crisis, global competition and ageing of the population (Epure, 2012:9799) proved to be unsustainable (Settersten, Angel, 2011:167-180). The welfare state was forced to pull back from financing social protection, but this happened after the family lost its habit of providing social protection ((Mau, Mewes, Schoneck, 2012: 670-675). Although circumstances differ substantially this is the case in most Western countries.

Much has been discussed of the consequences of globalization. Observers have been quick to note down major events that mark the intensification of globalization (Streeten, 2001:86-93). Their vast majority focus on cataclysmic events such as 11 September 2011 to mark globalization. Major events have come to dominate the international discussion around globalization and it is tempting to conclude that globalization is limited by major observable changes that can be quantifiable. Such a conclusion overlooks the manifold social responses to globalization. We believe that this social aspect becomes evident these days. Even in the

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case of the European Union debates have started to be centered on the concept of solidarity. The crisis is no longer only an economic one, but there is debate around the solidarity crisis within the European Union (Dobrescu, Negrea-Busuioc, Radu, 2013:84). The European Union is vulnerable to socio-economic issues, not just to economic issues (Popoviciu, 2010:37). The economic crisis has caught the attention of the media and has become paramount in any discussion, leaving aside other dimensions. Similar examples can be found with other situations. Although the war on terrorism may have caught the media spotlight, the great globalization is more than these debated events. It takes place on the streets, within your family, not only on the battlefield, on the media spotlight or in the great financial institutions of the world. Public references to globalization has become increasingly synonymous with political, economic and military events. In this interdependent world people only started to reflect on the impact of international politics, economics and culture at home (Sharif, 2010). It is a lot to get used to. It is a lot to understand and comprehend. At this point it seems that globalization has resulted in new diverse patters of family and intergenerational relations (Albert, Ferring, 2012). The dynamics of ageing and family life are changing in our globalized world (Izuhara, 2010:189-201).

Globalization has created a new situation. Social scientist should be humbled by two realities that are becoming clearer and clearer. One is the failure to foresee the social changes that accompany globalization (Jamieson, Backett, Simpson, Wasoff, 2010).

This should make us diffident about our ability to anticipate the future accurately. The second is our weakness of our knowledge around the changes that take place at the level of the family and the way in which these changes interact with the greater society. We are stunned by this second one because there has been previous research on the changing patterns of the family (Willoughby, Olson, Carroll, Nelson, Miller, 2012:30-40). Family was seen as an entity in constant change, at least this was the case a couple of centuries ago (Bachofen, 1861; Maine, 1861; Morgan, 1877; Engels, 1902). All of these writers identified different stages of development for the family. Each stage of development was in direct link with the societal changes taking place at that moment (Amato, Booth, 2000:18-25). The industrial society was linked with the nuclear type family (Talcott Parson). The family was considered in a permanent evolution and a representation of the society (Shorter, 1975). The existence of a convergence between the type of society development and the type of family preferred was considered a natural thing (William Goode, 1963).

This weakness in knowledge should make us reluctant in proposing radical new plans without proper research and understanding. The most powerful engine of change in our contemporary society is the family (Bengston, Biblarz, Roberts, 2004:163-178). The most important point is that globalization clearly does allow for the existence of the family. We believe that it may even require its continuous effort to facilitate the construction of the local community within the globalized world.

4. Influences of globalization on family life Globalization suggests both a growing magnitude of global flows, but also a growing magnitude of family interaction within itself and with the rest of the society (Strong, DeVault, Cohen, 2010:113). It is only natural to assume that globalization means not only the enmeshed of the global within the state, but also the enmeshed of the global within the family. The spatial reach of globalization does not stop at the level of the continental or regional, but continues towards the level of the community and the family. The family becomes more embedded with the global. The global does not necessarily displaces the family level, but it influences it, and in turn the family influences all the other forms of organization. The family, as the base of any social order and of any type of social life has become so embedded with the global that it starts to influence the community. Gradually it has put its mark on the macro level structures.

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Globalization brings modernization and modernization changes the pattern of existence of the family.

Reactions against globalization have manifested all around the world, but they were directed against the economic and political status-quo. New animosities and conflicts arise from globalizations, but they are not that drastic in manifestation in comparison with the profound changes that take place at the level of the family. We only begin to be aware of the ways in which globalization affects us. Only recently has public perception begun to understand in what way globalization influences the economic and political sphere. The public perception is still a long way from understanding the profound and irreversible changes that took place at the social level of the family in the presence of globalization.

The routines of everyday family life have started to be dominated by the global (Noller, Karantzas, 2012:324-334). National and local circumstances still play their part, but we believe we are living in a time when for the first time the global brings its contribution to the everyday life of the family. The disjuncture between the everyday life and globalization gets smaller and smaller. Globalization has led to real structural changes in the micro scale of modern social organizations. This was evident in the past from the existence of world financial markets, the spread of popular culture and the growth of Multi-National Corporations. That was just another stage in the process. We are witnessing the spread of globalization at the level of the family.

Conceiving globalization as only an economic or political phenomenon would be misleading. It would leave out the social relations that are being changed.

Social reality is made out of several dimensions: the economic, the technological, the political, the cultural, the natural (Mann, 1986; Giddens, 1990). To expect globalization to influence only some of the strata of our complex society would be misleading and foolish. All the strata permeate each other and influence each other. Naturally, globalization needed time to permeate all the strata, but currently we believe it has reached the natural level, the natural social order of the family.

Globalization triggered a process of significant reconfiguration (Kaufmann, 2010:45-56). This reconfiguration could not have stopped only at some levels. Globalization is often seen as a process that changes the world order, but it is also a process that changes the principles of social life. It is only normal to analyze the family in the globalization context because globalization has created the context in which significant reconfiguration is possible. The global is mounted onto the regional and local and thus interacts with the family. The traditional conception of the family, in which it is positioned as the fundamental core unit of human society has at the base its inherited homogeneity. The family is supposed to be characterized by homogeneity and ruled by specific purposes. The form and state of the family has been altered under the pressure of international, transnational and collectivity forces. The family is no longer permeated only by domestic forces, but also by transnational networks (Castells, 1997:56-70).

4.1

Technology and the family

Technology promised to counteract the erosion of time and distance on social organization and interaction, but we are now seeing its limits. We have witnessed a growing interdependence with globalization, but this happened over the natural interdependence of the family. Although there is growing interdependence it related to the individual, not to the family. Growing interdependence of the individual with other entities outside the family has meant a decrease interdependence of the individual with the family.

There is only so much interdependence, after all. It has been a growing intensification of the enmeshment among the individual and the world, but while this happened it has decrease the social interactions within the family. Globalization has been perceived as taking place in the context of time-space compression. If the constraints of time and space no longer exist, why should it not influence the evolution of the family? The presence of instantaneous electronic communication has changed the way in which family members related to each other outside the family. Family members no longer perceive distance in the same way. Technology

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has been encouraged to surpass distance within the family members. This has encouraged the presence of geographical distance between family members. It also enhanced the temptation to leave the family at an earlier age and it encouraged geographical separation. Technology promised to overcome the erosion of relationships due to geographical distance.

4.2

Family life in the context of the thick globalization

In a thin globalization the need of the individual to socialize and to develop socially speaking was under severe barriers. With the rapid process of globalization, socio-economic activity stopped being limited to the family and to the local community. The socio-economic existence of the individual became part of a shrinking world. While it has positive aspects, a shrinking world has also changed the relationships within the family. A shrinking world meant that the individual could venture out in the world further than before. A familiar world meant that the individual no longer felt the need of the familiarity of the family for emotional support. The place of the family, in a shrinking world, where you feel at ease everywhere, has changed. A shrinking world meant that people extended the circle of what they called family to everybody to who they developed emotional bonds.

4.3

The global family and the local family

In a globalized world, with constant and instant communication it is a lot easier to construct apparently stable emotional connections. Wrapped in modernity, these connections seem to present greater value than the traditional ways of communicating and interacting. Being part of the global family has become a welcome target for many, sometimes forgetting of the importance of blood family. What distinguishes contemporary family from the traditional one is the differential emphasis given to the family in a globalized world. The material, cognitive, temporal and spatial characteristics of the family are seen differently by different generations. It is worth dwelling on these changes in an effort to clarify the concept of family and intergenerational relations in a globalized world. Looking over the major elements brought about by globalization: knowledge, movement of labor, trade, capital flows, foreign investment (Stiglitz) to which we add opportunities for individuals, the spread of technology, access to capital and the need for capital, it is easy to imagine what a powerful impact had globalization on the family.

4.4

The value of the individual within the global labor market

In the presence of globalization we have witnessed the shift towards the depreciation of the value of the individual in the work force. Capital is free to move and to choose the target for direct investment. This has made the labor market a lot more unstable for the individual. Recently more and more individuals choose to work for themselves. The entrepreneurial spirit is something typical for the model of growth promoted by globalization. In this context, however, the individual is the sole responsible for the success of the business.

Often the time spent for family decreases as any business requires constant care. There are different degrees of precariousness, instability and insecurity in the Romanian society as a result of the job market. This has put its fingerprint on the relationships established within the family.

4.5

Consumerism

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Globalization has created enchantment around consumerism. Parents have to either succumb or risk alienating other generations. New values have arisen and it is difficult to offer education within the family without coming into conflict with them. Traditional values of the family are difficult to transmit to young generations in a context in which more open values on sexuality and physical attractiveness reign supreme at a global level. Traditional norms such as durability and family cooperation are hard to balance with freedom of movement and playfulness. On the other hand, technology has been spread through globalization. It greatly improved the life of a family through health and living standard augmentation. Technology has changed, for better and for worse the way in which a family cares for its members and the way it socializes with its members.

I would like for us to start reconsidering the importance of the family in our contemporary society and to think about the future. I would like for us to start considering the subject of the family seriously and not take it for granted.

4.6

Overlapping networks

Globalization has developed overlapping networks. Once this happened the family has started to be under severe pressure and strain because it was designed for another world order. The locus for family existence can no longer be assumed to be represented by the local community or even the national state. the idea of self-determined individual or self-determined family can no longer be located within only the community. Some of the most fundamental forces that determine life-changes are sometimes beyond the control of the individual or of the family. The issues raised by these issues merit the most serious research.

We would like to reflect in depth upon this issue. Globalization has illuminated important transformations with the family. It would be highly implausible to assume that in a globalized world the family has not suffered any changes. It becomes even harder for the family to present itself as a discrete world or as a selfenclosed entity. It has become enmeshed in complex structures of overlapping forces, influences and relations. The family change spark can hardly come as a surprise, especially given the visibility of the worldâ&#x20AC;&#x2122;s new lifestyle in an age of globalization. Globalization is reshaping the family, although it represents a trend. We believe this trend is contingent upon many factors. It can be moderated, but not reversed. We witness a reconfiguration of the social geography of the family. In such a context we need to acquire a social understanding of the family so as to be able to explain the contemporary human condition. In a world where globalization is transforming societies, the family can become an expression of these transformations.

Understanding the family helps explain the patterns of global social change at the national and community level.

4.7

The welfare state: a new environment for the family

The idea that the family has been undermined by globalization has appeared both in scientific and nonscientific writing. Many writings have argued that the family is being replaced by other practices. We argue that the family continues to exist, but under a different form and that it goes through several changes. In our century, the family is clearly under attack and there is no doubt that there have been some serious changes.

Despite changes in the expectations and desires of individuals, despite changes in their behavior towards their family, it is important to understand that the vast majority of people desire a family of their own. They do not wish to eliminate the family. They still wish to be part of a family and wish to realize a family of their own. They find it difficult to harmonize this desire with present day expectations from themselves and with present day evolution. It is also accurate to say that present day globalization is eroding family as we are used to think of it. For better and for worse there still is a desire to start or to belong to a family. It is not easy

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to assess globalizationâ&#x20AC;&#x2122;s implications for the family. Looking at the welfare state and its present day condition we can note that the importance of the family has even actually increased. The current crisis has pointed out that the welfare state is much more limited that many realize. Any system presupposes some kind of social order.

The deepening of social pressures can harm all. Globalization has made it very difficult for the state to provide protection to social risks. In our period of crisis, a period in which the competiveness and even the survival of the welfare state is put into question we need to understand the way in which the family can manifest itself as a local welfare system. It could act as part of a local compensation in response to the need of the welfare state to pull out from spending too much on social protection.

Globalization may be perceived at the economic and political level, but it is truly realized at the level of the family. In contact with globalization the members of the family have to make choices, use opportunities, refuse responsibilities and support ideas. Actions and events brought about by globalization intersect with personal decisions because they arrive in the family context.

4.8

A new model of success

Globalization has brought about a new model of success. This model of success is based on individualism. This was seen as manifested both locally and globally, but never was it researched as potentially changing the way in which family intergenerational relationships work. The spirit of globalization is competition and social roles are less strongly ascribed. This was beneficial for economic development, but an individual cannot manifest a separate behavior in different circumstances. It is hard to separate work and family life, thus we expect an increase in intergenerational competition and on the importance of individual values. Affiliation and obligations are less important when compared with the entrepreneur spirit and with the desire to compete. It would be understandable the role played by globalization in strengthening individualism over group affiliation and moral obligations. Traditionally, the family has offered security through mutual support and through continuity. These are no longer values promoted by globalization that promotes personal and professional freedom. It promotes constituency over the stability of tradition.

Individualism is associated with the shaking of constrains. If we are to grasp contemporary changes in the world we need to understand the increase in social mobility and the new ideas of personal responsibility. In a globalized world relationships are more heterogeneous and are not dictated by grid constraints.

4.9

The clash between individualism and fundamentalism

Individualism can isolate the family from the community, but also the members of the family from the extended family and from themselves. The bonds between generations within the family are eroded because each individual becomes more autonomous from the family itself, and more dependent on the global economic situation. Education, training, lifestyle, residence, political views, aspiration and expectations come to be different and create more generational gaps. There is the danger that generations are drawn into competitive consumerism and miss out on the family bonds that can help development, both at the micro and macro level. We are curious whether we are witnessing a transfer from a family sense of belonging based on shared feelings to a self-interest individualism that is based on instrumental behavior. We tend to believe that intergenerational relationships are progressively weakened, but we cannot be sure that this process is oneway oriented. On the other hand through individualism globalization offers an excellent instrument for selfdevelopment and the perfect context to escaping from a limited opportunity environment. It is very interesting to put in balance these developments and notice the direct of evolution of the Romanian family.

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Individualism is prone to appear on certain generations. We assume that young generations are more inclined to this type of manifestation.

In the context of globalization, within the family we might even expect a clash between generations based on the distinction between individualism and fundamentalism. Rapid change can push one generation towards individualism, to gain from the changes brought about by globalization, while other generation can have a negative outlook of rapid changes and adopt fundamentalism. Fundamentalism is a desire for the past, a feeling of resentment towards contemporary evolution. In our globalized context we may expect a clash between fundamentalism and individualism within the family. This would not be surprising taking into account all the choices that are now available. A clash between the benefits of the individual and the good of the family has become a common discussion or a common source of conflict within the family. It brings into question another issue, the issue of power within the family. It is increasingly more difficult to realize who holds the power of decision within the family.

5. Conclusion Naturally, globalization stands for risks while the traditional family is perceived as a secure environment.

We are living in an age of change, a change that characterizes the family just as much as anything else.

Every family in every local community is confronted to a higher or lower degree to issues pertaining to globalization. Family continues to be the training ground for life. Its importance cannot be diminished. The understanding of the changes brought about by globalization can be of help to eliminate double-standards within society. Both globalization and the family environment have imperative demands from its members.

Misunderstanding or neglect can lead to segregation and isolation.

6. Acknowledgements I wish to thank Professor Paul Dobrescu from The National School of Political Studies and Public Administration, Bucharest, who supervises my research.

I am grateful to and I would also like to thank Professor Lluís Flaquer who was kind enough to supervise my research activity while a visiting scholar at the Universitat Autonoma de Barcelona (UAB), Departament de Sociologia and Fernando Antón Alonso, Tècnic de Suport a la Recerca, Departament de Sociologia, Universitat Autònoma de Barcelona.

I also owe my most sincere acknowledgements because the author, Ivan Dragos Lucian, is a beneficiary of the „Doctoral Scholarships for a Sustainable Society” project, co-financed by the European Union through the European Social Fund, Sectoral Operational Programme Human Resources and Development, 20072013.

Any errors or shortcomings are solely my own.

7. References [1] Albert, I., & Ferring, D. (2012). Intergenerational value transmission within the family and the role of emotional relationship quality. Family Science, 1-9.

[2] Biblarz, T., J. –Stacey, J. (2010). How does the gender of parents matters? Journal of Marriage and Family 3-22.

[3] Brian J. Willoughby, Chad D. Olson, Jason S. Carroll, Larry J. Nelson and Richard B. Miller. (2012). Sooner or later? The marital horizons of parents and their emerging adult children. Journal of Social and Personal Relationships 2012.

[4] Bryan Strong, Christine DeVault, Theodore F. Cohen. (2010). The Marriage and Family Experience: Intimate Relationship in a Changing Society. Wadsworth Publishing. pp. 2 – 120.)

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 149 URL: http://www.reaser.eu e-mail: editors@reaser.eu [5] Castells, M. (1997). The Information Age: Economy, Society and Culture. vol. I The Rise of the Network Society, Oxford: Polity Press.

[6] Carmen Leccardi, Elisabetta Ruspini. (2006). A New Youth? Young People, Generations and Family Life.

Ashgate.

[7] Ciocea, M., Cârlan, A.I. (2012). Debating Migration as a Public Concern: Diasporic Stances in Media Discourse.

Romanian Journal of Communication and Public Relations, vol. 14, No. 4 (28). Diasporic Identities, Media, and the Public Space (Special issue).181-201.

[8] Dobrescu, P., Palada, M. (2012). The Emergence of Two European Public Spheres: Center vs. Periphery.

Romanian Journal of Communication and Public Relations, Vol. 14, No. 2 (26). 11-27.

[9] Dobrescu, P., Negrea-Busuioc, E., Radu, L. (2013). Requiem for European Solidarity. An analysis of the European Discourse on the 2014-2020 Multiannual Financial Network. Romanian Journal of Communication and Public Relations, Vol. 15 No. 1 (29). April 2013:75-89.

[10] Epure, M. (2012). Population ageing – a demographic trend with various consequences. Review of Applied SocioEconomic Research. Volume 4, Issue 2, pp. 97-108.

[11] Eric Kaufmann, (2010), Shall the Religious Inherit the Earth? Demography and Politics in the Twenty-First Century, Profile Books Ltd., [12] Flaquer, L. (2010). Famílies i relacions familiars’. Revista Papers. Barcelona: Institut d’Estudis Regionals i Metropolitans de Barcelona. Núm. 52: pp. 50-62.

[13] Giddens, A. (2002). Runway World-How Globalisation Is Reshaping Our Lives, London: Profile Books.

[14] Giddens A. (1990). The Consequences of Modernity. Stanford University Press: Stanford, CT. [15] Hajnal, J. (1983). “Two Kinds of Pre-Industrial Household Formation System”, in R. Wall, J. Robin, and P. Laslett (eds), Family Forms in Historic Europe, Cambridge: Cambridge University Press, pp. 65–104.

[16] Jennifer Cole, Deborah Durham. (2006). Generations and Globalization: Youth, Age, and Family in the New World Economy (Tracking Globalization). Indiana University Press [17] John B. Shoven.(2010). Demography and the Economy. University of Chicago Press.

[18] Loek Halman, Ronald Inglehart, Jaime Diez Medramo, Ruud Luijkx. (2004). Changing Values and Beliefs in 85 countries, Brill Publishing House.

[19] Lynn Jamieson, Kathryn Backett Milburn, Roona Simpson and Fran Wasoff. (2010). Fertility and social change: the neglected contribution of men’s approaches tobecoming partners and parents. The Sociological Review, 58:3.

[20] Michael, Mann (1986). The Sources of Social Power: Volume 1, A History of Power from the Beginning to AD 1760, Cambridge University Press.

[21] Misa Izuhara, Ageing and Intergenerational Relations: Family Reciprocity from a global perspective, The Policy Press, University of Bristol, Great Britain, 2010 [22] Patricia Noller, Gery C. Karantzas. (2012). The Wiley-Blackwell Handbook of Couples and Family Relationships.

Wiley-Blackwell.

[23] Popoviciu, A. C. (2010). The European Social Law Between the Treaty of Rome and The Lisbon Strategy. Analele Universitatii din Oradea – Relatii Internationale si Studii Europene, Editura Universitatii din Oradea, 36-46.

[24] Richard A. Settersten, Jacqueline L. Angel. (2011). Handbook of Sociology of Aging, Springer.

[25] Sharif Gemie. (2010). Re-defining Refugees: Nations, Borders and Globalisation, The Cultural Frontieres of Europe, volume 9, spring 2010 [26] Steffen Mau, Jan Mewes, and Nadine M. Schoneck. (2012). What determines subjective socio-economic insecurity? Context and class in comparative perspective. Socio-Economic Review (2012) 10, 655–682.

[27] Streeten, P. P. (2001). Globalization: Threat or Opportunity, Barnes and nobles., USA. [28] Paul R. Amato, Alan Booth. (2000). A Generation at Risk. Growing up in an Era of Family Upheaval. Harvard University Press.

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Review of Applied Socio- Economic Research (Volume 6, Issue 2/ 2013), pp. 150 URL: http://www.reaser.eu e-mail: editors@reaser.eu [29] Vern L. Bengston, Timothy J. Biblarz, Robert E. L. Roberts. (2004). How Families Still Matter: A longitudinal Study of Youth in Two Generations. Cambridge University Press.

[30] Zlotnich, J., Population Pressure and Political Indecision, Foreign Affairs, July 1961, accessed on January 2012.

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Does the contagion effect of the Balance of Payment crisis exist?

Ukrainian case Vasyl Khomiak 1+, 1

Taras Shevchenko National University of Kyiv, Ukraine

Abstract. This paper aims at discussing and testing hypotheses about the contagion effect of the Balance of Payment (BoP) crisis on Ukrainian data. A review of the last highlighted discussions about the contagion effect and its impact on economy by applying traditional or spatial econometrics technique is made in paper. The main innovation of this paper is an attempt to test the contagion effect for Ukraine.

Observing the evolution of the BoP crisis from the 1990s up to now, it is clear that the contagion effect becomes a main trigger of crisis. In order to measure the impact of the contagion effect on crisis, the exchange market pressure index (EMPI) is calculated for Ukraine and its main partner countries. Estimation output shows that impact from the neighboring countries on Ukraine is much stronger during and after crisis episodes than before. Another approach based on received impulse function after VAR model estimation presents impact of the contagion effect.

In-sample forecast of the EMP index of Ukraine, based on different specifications, supports an idea about including external factors that help to express influence of the contagion effect. Finally, paper shows that contagion effect is one of the main triggers of the Balance of Payment crisis. Today the BoP crisis could not embrace just one country, and it becomes at least a problem for the whole region.

Keywords: Balance of Payment crisis, contagion effect, exchange market pressure index, etc JEL Codes: F47, E47

1. Introduction International trade growth with simultaneous increase of financial flows between countries creates conditions for economic growth, more efficient cooperation and allows involving more investments.

Nowadays, it is hard to imagine any successful economy without being deeply integrated internationally. At the same time, deeper cooperation creates additional risk of contagion, especially it falls within the Balance of Payment (BoP) crisis. Strong international cooperation, trade and financial in-and outflows regulated by administrative tools could cause misbalances in the external sector. As usual, these misbalances can be regulated by market mechanisms or administrative tools. The probability of the Balance of Payment crisis increases when external misbalances are too big, the external pressure growth and it is strengthened by price, political or some other shock. Impacts of the Balance of Payments crisis vary a lot: one just can cause a decrease in international reserves without impact on macroeconomic equilibrium; another could be resulted in national currency devaluation and can be a trigger of financial and banking crisis. The main challenge for +Research Assistant, e-mail: vasylkhomiak@gmail.com

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researchers who examine the BoP crisis is determination and estimation of main factors of the crisis. The Balance of Payment crisis is relatively new because of the globalization impact, but old as they are based on economic fundamentals. At the same time evolution of the BoP crisis shows weakening of fundamentals and strengthening of contagion effect as the main factor of the crisis. It means that any country anymore cannot protect itself from the BoP crisis by its own policy, they should minimize impact of the contagion effect.

Estimation and modeling of the BoP crisis spreading faced a problem that there is no universal definition of this process (Favero, Giavazzi 2002). The definition “contagion effect” is borrowed from medicine science guided by the idea that currency crises elsewhere in the world can spread among countries like a contagious disease. Contagion effect differs from interdependence by fact that impact thought traditional links during crisis period occurs much stronger than during tranquil period. But links cannot be formalized during the crisis period like in tranquil so it is much harder to measure contagion effect.

2. Evolution of the BoP crisis Before starting discussion about the contagion effect of the Balance of Payment crisis and channels of its spreading, I would like to show brief evolution of the Balance of Payment crisis. From the 1990s the world has witnessed three typical BoP crises. During the autumn of 1992, a wave of speculative attacks hit the European Monetary System and its periphery. Before the end of the year, five countries (Finland, the UK, Italy, Sweden and Norway) had floated their currencies. Despite attempts by a number of countries to fix the European Monetary System by devaluation (in Spain, Portugal and Ireland), the system was unsalvageable.

The Latin America crisis started in 1994, when Mexican peso was attacked and floated shortly after an unsuccessful devaluation. Argentina, Brazil, Peru and Venezuela could not pass up the Balance of Payment crisis. But not all Latin countries were attacked — Chile was the most visible exception. While there was little devaluation, the attacks were not without effect. Argentina macroeconomic policy in particular tightened dramatically precipitating a sharp recession.

The “Asian Flu” began with continued attacks on Thailand in the late spring of 1997 and continued till the July 1997. At the beginning crisis had attacked Malaysia, the Philippines, and Indonesia. Hong Kong and Korea were attacked somewhat later, the crisis then spread across the Pacific to Chile and Brazil. The contagion effect lingered on until at least the flotation of the Brazilian real in January 1999. All three waves of attacks were largely regional phenomena. Once a country had suffered a speculative attack – Thailand in 1997, Mexico in 1994, Finland in 1992 – its trading partners and competitors were disproportionately likely to be attacked themselves. Not all major trading partners devalued – indeed, not all major trading partners were even attacked.

The another example of the Balance of Payment crisis, that occurred in a frame of the Global financial crisis was sharp devaluation in a list of emerging countries in 2008 – Poland, Ukraine etc. The price collapse in commodity markets simultaneously with capital outflow due to liquidity tightening cause the Balance of Payment crisis in emerging countries. It resulted in sharp devaluation that became a trigger of the banking and debt crisis.

Evolution of the Balance of Payment crisis during the last decades shows a lot of changes. Compare with beginning of 1990s where fundamentals and self-behavior were the main triggers of the BoP crisis, contagion effect was discussed as the main driver after the Asian crisis. It is a reason why this paper aims on examine hypothesis that contagion effect exists.

The literature review shows different approaches and evolution of the understanding what constitutes the contagion effect. Despite of the pleiad of researchers examining the question of contagion in different

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theoretical frameworks: Gerlach and Smets (1995), Buiter, Corsetti and Pesenti (1996), Goldfajn and Vald´es (1996), Mason (1998), Drazen (1999), Calvo and Mendonza (2000), Corsetti et. al. (2000) and Loisel and Martin (2001) there is still no universal definition of contagious currency crisis. In 1999 Glick and Rose argued that currency crisis is contagious if it spreads from the initial target because of any reason. There are two different approaches how to explain why contagion spreads. The first relies on macroeconomic or financial similarity of countries. A crisis may spread from the initial target to another one if the two countries share various economic features such as weak banking systems, over-valued exchange rates or inadequate reserves. Also, the Balance of Payment crises may be regional if macroeconomic features of economies tend to be regional (Glick, Rose, 1997). The alternative view is that devaluation gives a country a temporary boost in its competitiveness. It’s trade competitors are then at a competitive disadvantage, because of countries that are adversely affected by the devaluation are likely to be attacked next. In this way, a currency crisis that hits one country (for any reason) may be expected to spread over to its trading partners A lot of well-known researchers: Eichengreen, Rose and Wyplosz (1996), Kaminsky, Lizondo and Reinhart (1998), Sachs, Tornell and Velasco (1996), Glick and Rose (1998), Kaminsky and Reinhart (2000) and Rijckeghem and Weder (2001) empirically investigate the concept of contagion. In most cases least squares and probit regressions prove evidence in favor of contagion, with trade channels favored over macroeconomic factors as transmission channels.

Assumption based on hypothesis about significance of the political relationships in spreading contagion effect was proposed by Drazen (1999). It is under question how to measure only political interaction, so this approach does not succeed. Feldstein (1997) argues that the political and economic objectives in Europe are actually conflicting. Drazen (1999) identifies two types of political factors that might help to understand contagion. Firstly, incomplete information about government objectives and the political nature of the exchange rate regime could be a potential explanation to the appearance of speculative attacks. Secondly, if maintaining a fixed exchange rate is tied together with achieving political integration within members of some international union then devaluation by one member will increase speculative pressures on the others.

Masson (1998) redefines the contagion suggesting that ‘true’ contagion is possible only in context of multiply equilibrium. Forbes and Rigobon (1999) take a more econometric based approach to show that the cross markets correlation coefficient is a biased measure to identify the contagion. Calvo and Mendoza (2000) argue that globalization of securities markets may promote contagion by reducing incentives in order to gather information and by increasing the number of arbitrary market portfolios. Herd behavior by portfolio managers may generate contagion type of effects. Loisel and Martin (2001) provide a theoretical framework where self-fulfilling expectations are generating a currency crisis when workers demand higher wages in the wake of expected devaluations, leading to actual devaluations.

Assumption about non-linear connection during contagion was tested in a number of recent papers (e.g. Baig and Goldfajn, 1998; Forbes and Rigobon, 1999; Rigobon, 2000). Most of papers proceed in three steps. First, the channels through which shocks are normally propagated across markets are indentified.

Rigobon in 1999 has stressed the importance of modeling interdependence to avoid a spurious detection of contagion: the same argument applies to the detection of non-linear interdependence. Rigobon (2000) solves this problem using a limited information technique constructed by splitting the sample into high- and lowvolatility observations (Favero, Giavazzi 2002).

We can discuss the contagion effect during currency crisis in case it spreads from the initial target, for any reason. There are at least two different types of explanations why the contagion spreads when

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transmission mechanisms are not mutually exclusive. The first relies on macroeconomic or financial similarity. A crisis may spread from the initial target to another if the two countries share various economic features such as weak banking systems, over-valued exchange rates or inadequate reserves. Currency crises may be regional if macroeconomic features of economies tend to be regional. The alternative view is that devaluation gives a temporary boost to a country in its competitiveness, in the presence of nominal rigidities.

In this way, a currency crisis that hits one country (for any reason) may be expected to spread to its trading partners(Glick, Rose 1999).

Also, researchers paid special attention on estimation techniques. McMillen (1992) proposes an EM-algorithm based estimation procedure. The idea is to replace the latent continuous variable with its expected value and then to apply standard well-established continuous variable spatial methods, for example, maximum likelihood estimation. Pinkse and Slade (1998) develop a generalized method of moments (GMM) based on procedure applicable only to spatial error models. Similarly to McMillen (1992), LeSage (1999) also replaces the latent continuous variable with its expected value, solving thereafter a spatial continuous model with a Gibbs sampling approach. Following the work of Vijverberg (1997) on the simulation of multivariate normal probabilities of high-order dimension, Beron and Vijverberg (1999) extend the original approach, recursive importance sampling to probit models in spatial contexts.

3. Structure of the contagion effect The review of papers dedicated to the contagion effect shows multiplicity of approaches in modeling contagion. Despite of absence of unique definition of the contagion effect, majority of scientist agree about the general structure of transmission mechanism in contagion effect. Generally, they can be grouped into two categories: financial interdependence and real interdependence. At least two different causes can lead to financial interdependence. Firstly, a crisis may be transmitted due to direct financial linkages because financial institutions may have large cross-border holdings. Second, indirect financial linkages, in particular presence of a common lender and decisions by institutional investors, recently received a lot of attention. A crisis in one country may induce a common lender to call loans and refuse to provide new credit, not just to countries that have already experienced a crisis but also to others, thus spreading the crisis across countries (Caramazza, Ricci and Salgado 2000). Similarly, institutional investors may be forced to withdraw their funds not only from a crisis country but also from other markets in order to raise cash for margin calls and to rebalance portfolios (Kodres and Pritzker 1999).

Another channel - real interdependence, it can either be explained through bilateral trade or through trade competition in third markets. Crisis in one country is more likely to spread to another economy if they both have a large degree of bilateral trade (income effects) or are strong competitors in third markets (price effects). Gerlach and Smets (1995) provided a theoretical model analyzing these links, while Eichengreen, Rose and Wyplosz (1996), Glick and Rose (1999), and Fratzscher (1998) found some empirical evidence of real linkages importance in spreading recent crises across markets.

Another paper (Frexedas, Vaya 2005) presents more detailed structure that consists from five channels of contagion: the first one is derived from the common shock, the second one occurs as a result of similarity in economic fundamentals in different countries, the third contagion link originates from the trade relationships, the fourth - from the political links between countries, and the fifth - from the financial links between countries

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4. Does Contagion Effect exist in Ukraine? Estimation The main practical contribution of the paper is to verify assumption whether contagion effect has impact on Ukraine. As it is mentioned above contagion effect means breaking traditional links that work during tranquil period and establishing some another transmission mechanism where impact from the external sector increases a lot. Before making analyses of the Balance of Payments crisis and impact estimations of the contagion effect, we should formalize what is this particular crisis and how it can be measured.

The key research question is identification of the dependent variable for investigation and estimation of econometrics models. In papers related to the first and the second generations of the BoP crisis exchange rate devaluation is considered to be the BoP crisis. But nowadays it became not so easy to answer the question what is the BoP crisis in condition when policy of monetary targeting passed away and central banks more often abandon the exchange rate targeting. Change in interest rate would be more reliable signal about the BoP crisis than changes in exchange rate in countries where policy of inflation targeting was implemented.

During the speculative attack, governments of emerging countries should decide very often to devaluate exchange rate or to spend reserves on its support on the market. The one of two scenarios would be selected depending on quantity of reserves and political factors (how soon elections would come, commitment before international organizations etc.).

In order to solve this problem in early 1990s, researchers widely started to use the Exchange Market Pressure Index (EMPi). In table 1, you can see two modifications of the EMP indexs used the most widely.

The first one is a change in reserves and exchange rate. It is often used in models for emerging countries where interest rate is a weak transmission channel and this instrument does not increase accuracy of results.

The second one consists from three components: exchange rate, international reserves and interest rate. This approach is efficient for countries with inflation targeting or where interest rate varies a lot.

Table 1. Components of the Exchange Market Pressure Indexes EMPi Components Changes in international exchange and interest rate

Authors reserves, Cuaresma, Slacik (2008) Fratzsher (2002), Herrera (1999), Eichengreen, Rose, Wyplosh (1997).

Changes in international reserves and Arias (2004), Chui (2002), Edison (2000), Kaminskyy, exchange rate Reinhart (1999).

Graphic analysis shows that exchange market pressure that includes interest rate could formalize the BoP crisis on Ukrainian data more precisely than without it. The index is estimated according to the formula 1  rm i ,t 1   i ,t 1  i i ,t E M Pi ,t     rm rm i ,t  e  i ,t  i i i ,t (1) where rmi,t – reserves of the National bank of Ukraine in international currency;

 rm – standard deviation of reserves of the National bank of Ukraine; ei,t – real effective exchange rate;

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 e – standard deviation of REER. ii,t – interest rate of the interbank market



- standard deviation of the interest rate of the interbank market To model the Exchange Market Pressure Index, typical model is used. It includes fundamental changes, changes on commodity markets and in partner countries (Fratzscher, 2002). The general model is presented below: EMP _ UA   0  1 * EMP _ RUS   2 * EMP _ PLN   3 * us _ int erest _ rate   4 * CRU _ steel _ index  (2)   5 * WTI   6 * CPI   7 * CA   8 * GDP   9 * PFTS  10 * int erest _ rate  11 * cred   where emp_rus, emp_pln - Exchange Market Pressure Index calculated for Russia and Poland that shows impact of crisis from neighboring countries; i

3 month LIBOR interest rate is taken to include interest rate of the USA - one of the main market players on the global level; CRU index represents trend on the metal market that is important for Ukraine as export-oriented country where metal export has the highest share; WTI price is an indicator of the commodity market energy sources. High energy consuming of Ukrainian industry means that volatility of energy prices impacts on Ukrainian import as well; Current account deficit measured as percentage from GDP is an indicator of the external position strength; CPI, interest rate and GDP represent fundamentals and internal economic state; PFTS index shows how attractive our market is for foreign investors.

Three models are used to test hypothesis about significance of contagion effect and impact of external sector. All independent variables mentioned in approach (2) are used in the model one. The model two contains only internal factors; model three contains internal factors and commodity market indicators without impact of partner countries. The estimation is presented in the Table 2.

According to Schwarz criterion, model one that includes all groups of factors gives the most precise results. The model 1 does not vary a lot from model 3 which differ just by partner country’s EMPs. Both of them demonstrate higher accuracy of estimation than model 2 based only on fundamentals. Picture 1 presents in-sample forecast of the Exchange Market Pressure Index based on models analyzed above. The forecast is done on the sample 2007.04-2012.12. We conclude that model 2 does not fit the reported value of the exchange market pressure well. It shows necessity to include external factors and EMPs of partner countries to the model.

Table 2. Estimation output Model 1

Model 2

P-value EMP_Russia(-2)

-0.18

0.09

EMP_Poland

0.10

0.10

EMP_UA(-1)

0.20

0.13

Model 3 Pvalue

P-value

0.47

0.00

0.13

0.33

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D(USA_3M_I(-1))

-0.93

0.02

-1.07

0.01

CRU(-3)

-0.01

0.01

-0.01

0.00

WTI_US

0.04

0.00

0.04

0.00

CPI(-2)

-0.37

0.01

-0.30

0.02

CA_TO_GDP(-1)

24.91

0.01

9.14

0.25

25.95

0.00

D(LN(GDP(-1)))

2.38

0.01

2.48

0.04

2.33

0.02

D(LN(PFTS(-1)))

0.70

0.50

1.93

0.06

-0.37

0.70

Interest rate(-3)

0.06

0.01

0.02

0.24

0.07

0.00

Schwarz criterion Durbin-Watson statistic

3.02

3.28

3.06

2.07

1.75

1.86

Despite model 1 works in the best way, model 3 also can be used for EMP index forecasting. It means that importance of EMP indexes of partner countries is not crucial in general model. So we can conclude about strong links of external sector and propensity to crisis. Estimation the model with EMP indexes of partner countries do not help to improve prediction power, but variables are significant with 10% interval. It shows that shocks on commodity markets or change of investorâ&#x20AC;&#x2122;s expectation impact all countries almost simultaneously.

2012M7

2012M2

2011M9

2011M4

2010M1

2010M6

2010M1

2009M8

2009M3

2008M1

2008M5

2007M1

2007M7

2007M2

2006M9

2006M4

2005M1

2005M6

2005M1

2004M8

2004M3

2003M1

2003M5

2002M1

2002M7

2002M2

2001M9

2001M4

2000M1

2000M6

6 4 2 0 -2 -4 -6 -8

2000M1

Exchange market pressure index, Ukraine

Years EMPpressure index,Model 1 Fig.1 Exchange market Ukraine

Model 2

Model 3

Fig.1 Exchange market pressure index, Ukraine Table 3 contains estimation results of the model composed only by the EMP indexes of partner countries only as independent variables in order to check hypothesis about significance of partner countryâ&#x20AC;&#x2122;s impact on Ukraine. Estimations made on different sample period. Model estimation on the whole period shows (Table 2) that EMP indexes of Poland and Russia are significant for Ukraine. In contrary, impacts of the European Union EMP index and the US interest rate are not significant. It is important to note that running the same model on the sample before crisis shows that all independent variables are insignificant.

But even EU exchange market pressure and US interest rate are significant during crisis period. P-value of the Polish and Russian Exchange Market Pressure Index increases in the same way as coefficients proving the fact that impact of partner countries becomes much stronger during crisis. The fact that EMP indexes of

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partner countries are insignificant during tranquil period and become more significant during crisis shows that contagion effect has strong impact on Ukraine.

Table 3. Estimation output, model based only on EMP indexes of partner countries All periods 2000:52012:7 P-value

Sample

Before crisis 2000:5P2008:8 value

During and after crisis 2008:1P2012:7 value

EU(-2)

0.05

0.42

-0.09

0.29

0.29

0.00

PLN

0.14

0.01

0.09

0.23

0.19

0.01

RUS

0.15

0.02

0.04

0.65

0.26

0.04

EMPUA(-1) D(USA_3M_I(-2))

0.38 0.42

0.00 0.26

0.24 -0.04

0.02 0.93

0.50 1.32

0.00 0.00

Schwarz criterion

3.20

3.15

3.10

Durbin-Watson stat

2.04

2.10

1.66

The impulse function was estimated to measure and analyze the strength of impact. The Vector Auto Regressive model (VAR) has been built on the EMP index of Ukraine, Russia and Poland. The stationary of indexes is proved by Dickey-Fuller test. VAR model contains two lags. Impulse reaction from 1 standard deviation shock from Russian EMP index cross â&#x20AC;&#x153;0â&#x20AC;? few times and cannot be analyzed. Because of crossing confidence band impulse function of Russia 1 standard deviation shock cannot be useful. The impulse function of 1 s.d shock of Polish EMP does not cross confidence band and could be observed on the picture below (Fig. 2).

Impact of 1 S.D of Polish EMP on Ukraine EMP 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1

1

2

3

4

5

6

7

8

9

10

-0.2 -0.3 All period

Before crisis

Crisis and after crisis period

Fig.2 Response of Ukrainian EMP on the 1.s.d shock of Polish EMP

5. Conclusion The problem of examining contagion effect is still actual for all emerging countries. Therefore, Eastern Europe is not an exclusion in this list. Deep integration of Eastern European countries via trade links and foreign capital entry to banking and real sectors makes such emerging countries as Ukraine, Poland, Romania etc. more disposed to be "infected" by the contagion effect of the Balance of Payment crisis. Evolution of the BoP crisis shows that economic fundamentals don't play leading role in its prediction

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anymore, but investorâ&#x20AC;&#x2122;s behavior and inflow of capital is closely connected with world conjuncture. As a result, the BoP crisis in partner countries could cause the contagion effect and the regional BoP crisis.

This paper proves that contagion effect has impact on Ukraine. Existence of contagion effect is proved by the fact that there is no impact of crisis in partner country during tranquil period in comparison with clear response of the Ukrainian EMP index to the one standard deviation shock of Polish EMP index during crisis period. But regression analysis proves that exclusion of partner countries allows to estimate the EMP index as well as without using this exclusion. The main trigger of the BoP crisis is a price shock on commodity markets. In Ukrainian case decline of ferrous metal prices could be a trigger as well as liquidity turbulences in developed countries accompanied by interest rate increase. It makes an Ukrainian sector not so much attractive for foreign investors as during tranquil period.

All this evidence shows that any shock of partner countries (especially EU members) would have impact on Ukraine with high probability during crisis period. Simultaneously, the danger of importing the BoP crisis to Ukraine from partner country is low if it is not global and is not caused by price decline on commodity markets. Therefore, it makes no sense to develop the Early Warning System for monitoring the EMP indexes of partner countries. Moreover, main attention should be given to commodity markets and liquidity issue because contagion effect occurs and can be crucial just during crisis period. Usually, institutions will apply administrative tools anyway during crisis that allows to decrease the negative impact from neighbour countries.

Acknowledgements The work on this paper was supported by an individual grant â&#x201E;&#x2013;12-5801 from the Economics Education and Research Consortium, Inc. (EERC), with funds provided by the Global Development Network and the Government of Sweden.

5. References [1] M. Fratzscher, Working paper #139 on currency crisis and contagion. European central bank Working paper series. April 2002 , ISSN 1561-0810 [2] R. Glick and A.K.Roes, Why are currency crisis contagious?, NBER Working Paper #6806, August 1999.

[3] G. L. Kaminsky, C. M. Reinhart, The twin crises: the causes of banking and balance-of-payments problems.

International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). 1996 [4] B. Eichengreen, A. K. Rose, Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises. NBER Working Papers 6370, National Bureau of Economic Research. 1998 [5] J. Frankel and G. Sarvelos, Are leading indicators of financial crises useful for assessing country vulnerability, Evidence from the 2008-09 global crisis, National bureau of economic research. 2010.

[6] G. Corsetti, M.Pericoli, M.Sbracia, Some contagion, some interdependence: more pitfalls in tests of financial contagion. Journal of International money and Finance24 (2005) [7] C.A. Favero, F. Giavazzi, Is the international propagation of financial shocks non-linear? Evidence from the ERM.Journal of International Economics 57 (2002) [8] A.Novo, Contagious currency crisis: a spatial probit approach. Working paper Banko de Portugal. 2003 [9] C.V. Rijckeghern, B.Weder, Sources of contagion: Finance or Trade. IMF Working paper 1999 [10] J. Babecky, T.Havranek, J.Mateju etc., Banking, Debt, and Currency Crises: Early warning Indicators for

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Developed Countries, Institute of Economic Studies Working paper 20/2012

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Democracy and economic freedom in a global modernization process: the case of Ukraine Olena Liakhovets 1 1

Petro Mohyla Black Sea State University, Ukraine

Abstract. The paper deals with the basic social and economic values which are associated with the modernization process in the economy of Ukraine. The analysis of statistical data shows that Ukraine is moving too slowly towards modernization, which is threatening for its stable economic development. There are many institutional factors that affect the modernization process. According to most scientists, among them are obsolescence of economic and social institutions, lack of innovation incentives, lack of interest of the state elites in profound changes, underdevelopment of democracy etc. among them. Democracy is considered to be the main consequence of the economic reforms as several researches have shown. We build linear regression to verify the assumption that modernization is closely associated with democracy using Polity IV and Freedom House indicators in Ukraine. As a result, the democracy level does not appear to be a consequence of the economic reforms success in Ukraine. Thus we assume that other institutional expressions of democracy combined in the Index of Economic Freedom are associated with economic development, such as income per capita. The model we build represents a close link between the Index of Economic Freedom and log income per capita, which is evidence of that the freedom in business, labour, trade and some other economic issues are the complements of modernization in Ukraine.

Keywords: democracy, economic freedom, globalization, income per capita, modernization JEL Codes: F63, O14, O43

1. Introduction Modernization is a global process according to Martinelli (2005), and has covered a number of countries in the world that can be characterized by industrial transformations [9]. One of the countries groups consists of former USSR states, where modernization processes has not gained such a power that would allow them to catch up with developed countries. Ukraine, Moldova, the Russian Federation, Kazakhstan have the same macroeconomic problems in common – low rates of economic growth, unbalanced budget, inflation, and institutional problems – weakness of state institutions and legislation, corruption, slow development of civil society and democracy. Weak involvement of Ukraine, Russia and other CIS countries in international innovation cooperation is largely determined by numerous challenges and barriers that reduce the attractiveness of countries as platforms for R&D by foreign companies. These preconditions do not stimulate the creation of incentives for the innovative development, which is the core of economic modernization.

In this study we consider the case of Ukraine as a country that is moving in the direction of Association with the European Union. The term “European integration” in EU-Ukraine relations seems like an advance, because in its full meaning this term anticipates certain agreed membership prospects. Currently, the idea of 

Assoc.Prof., PhD in Economics, corresponding author: o.liakhovetz@gmail.com

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clear prospects for Ukraine is expressed by the only institution from the European Union – the European Parliament [18, p.63]. There are certain standards of the economic development for the countries-candidates to join the European Union.

Modernization has a significant role for achieving these standards in Ukraine. As the President of Ukraine V.Yanukovych announced in January 2013, “the efficient modernization and implementation of reforms in different spheres of state activity are the only right way in conditions of difficult economic situation in the world. The modernization changes in different spheres of national economy were caused by the need of increasing the competitiveness of our national products on the world markets because Ukraine is the country that exports about 60% of its goods” [13].

But the indicators of economic and particularly innovative development of Ukraine reveal the lack of motivation and mobilization efforts by the government and Ukrainian society for the modernization breakthrough. Some statistical data about the innovative activity in Ukraine in 2000-2012 are in Table 1.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Enterprises own funding in total R&D expenditures, % 79.63 83.90 71.07 70.21 77.21 87.72 84.60 73.72 60.56 65.02 59.35 52.92 63.90

Table 1 R&D Statistics of Ukraine Government Innovative Proportion of share in total products innovative products R&D introduction, sales in industry expenditures, % units sales, % 0.44 2.83 6.8 1.51 7.0 3.04 7416 5.6 1.40 3978 5.8 0.49 3152 6.5 1.86 2408 6.7 1.33 2526 6.7 2.81 2446 5.9 1.60 2685 4.8 1.08 2408 3.8 1.04 3238 3.8 1.95 3403 3.3 Source: [16, author’s calculations]

Share of R&D works in GDP, % 1.16 1.11 1.11 1.24 1.19 1.09 0.98 0.93 0.90 0.95 0.90 0.79 0.80

General dynamics of indicators show that there are some changes in innovative activity, but in general the changes are not stable and sometimes reflect the opposite trend. The 16% reduction in the share of enterprises R&D expenditures and wavelike dynamics of government share is the evidence of weak motivation of businesses and a lack of interest and targeted policy of the government. The decline in R&D work proportion, in the share of innovative products sales and in the number of innovative products introduced verifies that modernization in Ukraine is curtailing.

2. Modernization restrainers Modernization processes in transition economies are supported by government economic policy that is based on Western paradigm of government regulation, in particular, on economy liberalization, privatization, free pricing etc. However, as most transition economies experience showed, the results of quick promotion of these values not only do not contribute to modernization, but also retard it. In particular, Makhonin et al (2002), investigating the transformation issues of Czech society, considers ungrounded “radical economic reform” as a reason of delay of the the Czech Republic economic modernization. He argues that the “reform” stimulated illegal, immoral economic behavior and extreme economic and social differentiation [8].

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The studies of Russian scientists (Inozemtsev, 2010; Pavlov, 2009) [10; 12] focus on the role of a state, in particular of governing elites, in creation and development of democracy, as well as on informal nature of ownership and emerging of â&#x20AC;&#x153;atypicalâ&#x20AC;? for democratic state institutions, the so-called patho-institutions (pathological institutions), of corruption, that cover-up the interests of the dominant owner by criminal organizations or law enforcement agencies.

Active development of these patho-institutions is inconsistent with the functioning of the necessary market institutions such as property rights, law enforcement, and development of democracy. In addition, Ukrainian institutions are characterized by archaic mechanisms and procedures that should regulate the economic, social and political life in a country. Power elites that support their existence are the biggest beneficiaries of the established patho-institutional environment.

Assessment of the level of interest of political elites in the modernization transformations both in Ukraine and in other countries of the former Soviet Union according to E.Treschenkov (2013) study shows that even the nature of education of Ukrainian authorities demonstrates the prevalence of pragmatism and materialism in their views. In particular, 19,5% of Ukraineâ&#x20AC;&#x2122;s political elite received a degree in economics in Soviet Union, 8% in construction industry, 20% in engineering, and 9% in agriculture.

The value factor that is the base of the economy renewal, its inclusion in the European integration process, and involvement in a global modernization process is beyond the understanding of the generation in power. Moreover, the level of their erudition in the matters of the EU and European integration is quite low.

Only 4% of the elite representatives have knowledge of expert level, and 8% of the sufficient level. The rest have either very general impression about European integration or do not know anything specific about it.

Besides the mentioned shortcomings it should be pointed out that they have no real interest in providing any reforms due to, firstly, some selfish desires of power, and secondly, the lack of understanding of the mechanisms of economic reforms, the lack of a clear concept of economic changes, and fear of failure that may cause a serious damage of image during the next elections.

This leads to the fact that there is no clearly established system of values in Ukrainian society that promotes innovation activity. In particular, the older generation, brought up on the old values, understands that they are not already the basis of socio-economic relations. And the younger generation has not yet absorbed European values because they are not supported by the state and social institutions, or some values are perceived as disfigured, e.g. such a value as money, wealth is often associated not with diligence, industry, efficiency, enterprisingness but with racketeering, corruption, easy money.

Own interests of large financial-industrial groups in the policy conducted by political elites also become an obstacle to speed up the reforms. In particular, the study of S. Zavadzki (2009) shows, that when in 2009 the export of Ukraine reduced by half especially to the EU countries, a deep reforming of Ukrainian economy in the short run could yield substantial loss for lobby groups. Therefore, the pace of negotiations concerning Free Trade Area between the EU and Ukraine has slowed down in what the head of Delegation of the European Commission in Kyiv J.M.P.Teixeira has accused the Ukrainian oligarchs [19].

The process of modernization includes increasing complexity of work with improving education and skills. This entails the deepening of social differentiation on the basis of meritocracy. In a modern democratic society based on meritocracy differentiation, depending on the complexity of work, should prevail over other statuses-creating variables. Such changes were characteristic for the Czech Republic economy in 1980-90th [8].

As for Ukraine, the meritocracy principle in carrier growth is hardly observed, but there is another

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principle inherent in national mentality and which forms one additional patho-institute of institutional system of Ukrainian society, this is the principle of informal relations and corruption. The system of moving through the ranks is clearer in a corporate sector where the interests in profit maximization prevails over familiarity.

Such an institutional environment becomes a significant barrier to the democratic processes development. In countries that are on their path to the postindustrial development democracy transforms into more sophisticated forms. Due to J.Kean (2009) democracy is always undergoing transformation, and now is the time of monitoring democracy. Blogging and other forms of media activity are being used for this [5].

But in Ukraine it has not reached yet its classical pattern. However, if we are going in the direction of the European Union, the modernization changes should be supported by democracy development, which is the core value of the European civilization, and is proclaimed in the EU Constitution and in the Treaty on European Union.

Democratic development is the inevitable part both of Ukrainian economic modernization and its society. Samuel Hantington in his work â&#x20AC;&#x153;Political Order in Changing Worldâ&#x20AC;? (1968) wrote that democratization was possible only at the final stage of modernization since the transition from traditional to industrial society was accompanied by violence and corruption and required authoritarian leadership, not democracy [3]. The same point of view is expressed in the research of A. Przeworski (1997), who argued that according to the modernization theory the modernization is one general process of which democratization is but the final stage [14].

Russian economist V.Inozemtsev argues that globalization should promote modernization and democratic principles, but democracy cannot be a prerequisite for economic development, it is likely to be its product. However, after reaching a certain level of economic development democracy may become the basis for its continuation. This argument stems from the fact that many countries have achieved high rates of economic modernization in the initial conditions not associated with democracy. There are new industrial countries among them, China, Taiwan, South Korea, where the authoritarian regime to a certain extent was the impetus for economic reforms, and often its initiator.

The comparison of Ukraine and Kazakhstan in the research of Raneta et al (2013) is evidence in favor of this hypothesis. He determined that Ukraine has higher level of democracy (Democracy Index 5.94 in 2011; Polity IV Index +7 in 2011) than Kazakhstan (Democracy Index 3.24 in 2011; Polity IV Index -6 in 2011).

Nevertheless, the comparison of economic development indicators of both countries enables us to assess that Kazakhstan had higher GDP (in current prices) in 2011 than Ukraine, namely $178.3 billion against $165 billion, while during 2006-2009 GDP of Kazakhstan was less than GDP of Ukraine. Moreover, GDP per capita (PPP) in Kazakhstan is consistently higher and is equal to $13,001 against $7233 in Ukraine [15].

These views are the expression of the so-called modernization hypothesis created by Seymour Martin Lipset (1959). He argues that institutional changes associated with the modernizing of the country shape the possibilities for the creation and consolidation of democracy [7]. There were many studies on this issue which examine the truthfulness of this assertion. Most of them are considered at Acemoglu et al (2007) research paper [1]. Econometric evidence provided in the mentioned researches validates the hypothesis.

Yet, Daron Acemoglu et alâ&#x20AC;&#x2122;s testing reveals that if to control omitted variables which are responsible for close link between income per capita that reflects the modernization success and democracy or to use other econometric techniques different from previous researchers, the effect of the income per capita on democracy disappears. So, if Ukraine achieves high level of economic development, it does not necessarily indicate the democracy.

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In our study we test the modernization hypothesis using the methodology from the mentioned work for the case of Ukraine and investigate the relationship between income per capita and other institutional outcomes of modernization process.

3. Linkage between democracy and income per capita: some econometric evidence In this section we are going to find out if the common tendency of close relationship between such variables as income per capita and democracy tested in Acemoglu et al (2007) is still continuing in transition countries, particularly in Ukraine.

Following the existing empirical research of Acemoglu et al (2007) we measure democracy in two ways: 1) by Polity IV measure of democracy in absolute values; 2) by Freedom House measure of democracy in absolute values. So we build two autoregression models, each with separate measure of democracy. Another variable used is log income per capita which is measured by GDP per capita. We have chosen GDP in 2005 constant international $, PPP, because it reflects the real amount of income according to economic, institutional and social conditions that take place in Ukraine each year of observation. In comparison to the mentioned author we do not test the cross-section data, but analyze time-series data for one country.

Data for Polity IV measure of democracy are available for the whole period of Ukrainian independence from 1991 to 2012. Data for Freedom House democracy measure are available only for the period 2003-2012 that shrink the sample, so the results we get are hardly representative. All the statistical indicators are presented in Table A.1 (see Appendix).

The scatter diagram of relationship between democracy Polity IV index and log income per capita is shown in Fig. 1.

Source: [Authorâ&#x20AC;&#x2122;s calculation] Fig. 1: The Relationship between Log of Income per Capita and Democracy Level in Ukraine, 1992-2012

The democracy level measured by Polity IV during 22 years fluctuated between 5 and 7 points, so the

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picture of the link does not reflect a strict dependence.

We build the linear autoregression model according to Acemoglu et al (2007):

yt      xt 1    yt 1   t ,

(1)

where yt, yt-1 are the democracy measures respectively in current and previous periods; xt-1 is GDP per capita, PPP, constant 2005 international $; α, β, γ are the parameters of the linear regression; εt is an error term that captured all other omitted factors. The lagged value of the democracy variable on the right hand side is included to capture persistence in democracy and also potentially mean-reverting dynamics [1, p.9].

The variable of major interest is xt-1. The estimated results can be found in Table A.2 (see Appendix).

They show that α and β are insignificant, but the relationship between yt and its lagged meaning yt-1 is reasonable. In this case, we neglect the possible inconsistency of estimates due to the use of lagged variables because the adjustment of the model is unlikely to lead to improved results.

We cannot verify that the current level of democracy is closely connected to the previous one, what can be explained by changing policies of each government in different periods of time. This may be evidence that the democracy development does not depend on institutional transformation but on the role and the will of the governing elites. Also, we can argue that modernization process in Ukraine is not associated with the level of democracy measured by Polity IV. Let us examine the same relationship using the data set of Freedom House measure of democracy. The sample consists of 9 observations, so any results cannot be interpreted as a common pattern for all the periods. Table A.2 shows the output of modeling. It indicates lack-of-fit sum of squares: low value of F-test and insignificance of t-statistics.

Thus, we confirm the previous model results and the absence of modernization effect on democracy. It means that even in the case of prospective development there is no guarantee that democracy in its European understanding will be established in Ukraine. As D.Lal (2000) states, given the differences among countries in their historically determined political habits, it is by no means certain that democracy will be viable in many climes. Yet, because democracy is not necessary for prosperity, countries can prosper by allowing economic freedom while maintaining their ancient habits, favoring various models of maintaining social order over policy systems based on individual political liberty [6, p.14-15].

4. Modeling relationship between index of economic freedom and income per capita As low level of democracy in Ukraine is not the main outcome of a slow economic modernization we consider that some institutional expressions of democracy are conclusive. The striking expression of democracy is freedom. Freedom and democracy are often used interchangeably, but the two are not synonymous. Democracy is indeed a set of ideas and principles about freedom, but it also consists of practices and procedures that have been molded through a long, often tortuous history. Democracy is the institutionalization of freedom [2].

Under the assumption that modernization generates and is generated by economic freedom we test the model of how two variables link – income per capita and Economic Freedom Index. It is calculated by The Heritage Foundation and The Wall Street Journal and combines the estimations of 10 positions of a country: (a) Business Freedom; (b) Trade Freedom; (c) Government Size/Spending; (d) Monetary Freedom; (e) Fiscal Freedom; (f) Property Rights; (g) Investment Freedom; (h) Financial Freedom; (i) Freedom from Corruption;

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(j) Labor Freedom.

We estimate an autoregression model, where yt, yt-1 are the Economic Freedom Indices respectively in estimated and previous periods. Data set is available for the period of 1995-2012 and presented in Table A.1 (see Appendix). The size of sample is 17 observations considering to the lagged variables. The scatter diagram of relationship between Economic Freedom Index and log income per capita is shown in Fig. 2.

We assume the linear dependence between variables and obtain the following results (see Table A.2 in Appendix). There are two significant parameters, they are α and γ, which means that the current level of economic freedom is dependent on its historical pattern. However, the relationship between log income per capita and Economic Freedom Index, firstly is insignificant, and secondly, reversible. Our effort to eliminate shortcomings of the model connected with autocorrelation give better results for the dependency direction and significance of parameters, but there remain worse results for R2 and F-test.

That is why we wonder, is the economic freedom not driven by modernization? A high level of correlation between these indicators (0.78) tells us that there is a close relationship. In societies which have some personal freedom constraints economic freedom support liberates innovative potential and contributes to the economic modernization. So, the linkage can be converse. The level of economic freedom in Ukraine has decreased since 2006. This may explain the slow rates of economic growth and innovation development.

Source: [Author’s calculation] Fig. 2: The Relationship between Log Income per Capita and Index of Economic Freedom in Ukraine, 1996-2012

To examine this assumption we estimate the linear regression:

xt      yt 1    xt 1  ut ,

(2)

where xt, xt-1 are the GDP per capita, PPP, constant 2005 international $, respectively in current and previous periods; yt-1 is the lagged Index of Economic Freedom; µ, φ, θ are the parameters of the linear regression; ut is an error term that captured all other omitted factors. The estimated results are presented in Table 2.

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Table 2. Autoregression Model Results: Estimating the Relationship between Log Income per Capita and Economic Freedom Level in Ukraine Log GDP per Capita (1) 0.429 (1.683)*

(Critical Meaning, p=0.05) (2) (1.761)

φ (Lagged Economic Freedom Index)

0.005 (2.715)

(1.761)

θ (Lagged Log of GDP per Capita)

0.821 (9.723)

(1.761)

R2

0.95

-

F

133.45

3.74

17

-

µ

t (number of periods observed) *Notes: t-statistics in brackets

Source: [Author’s calculation] We see that both parameters φ and θ reflecting the effect of lagged Economic Freedom Index and lagged log GDP per capita are significant. We test the hypothesis of error terms autocorrelation in autoregression model using the Durbin’s h-test. It determines that the autocorrelation in error terms is absent.

Therefore, we can verify that there is an impact of economic freedom on the modernization intensification.

5. Conclusions The research highlights the significance of relationship between modernization and democracy in Ukraine. It shows that modernization is mostly associated with establishment of democracy. However, as analysis of several studies showed, democracy is the consequence of economic development. That can be explained by the fact that there are several institutional constraints that restrain both the modernization process and democratic development, e.g. bureaucracy, corruption, values that have not been established firmly. Nevertheless, as Martinelli (2005) pointed out we should look at modernization from a transnational and transcultural perspective, and reject the view that modernization, once activated, moves inescapably toward establishing a certain type of mental outlook (scientific rationalism, pragmatic instrumentalism, secularism) and that certain types of institutional order (popular government, bureaucratic administration, market-driven industrial economy) are indifferent to the culture and politics of a given place.

Our efforts to support the modernization hypothesis about strong influence of modernization on democracy establishment were not successful enough. Our econometric evidence asserted the Acemoglu’s point of view that democracy is not a necessary consequence of modernization. Also, we tested this

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hypothesis on such a pattern of democracy as economic freedom and obtained weak results for autoregression parameters as well. We considered economic freedoms to be a drive for modernization, and this converse link for Ukraine was verified by the econometric modeling results. Thus, provision of economic freedom in the country is a necessary base for the country's modernization.

To improve our research results it is important to test the hypothesis of “economic freedommodernization” relationship on cross-sectional data from several countries.

6. Acknowledgements I thank my colleges, Netudykhata Kostiantyn and Synjov Oleksandr for some helpful discussions on the subject of the article.

7. References [1]

Acemoglu Daron, Simon Johnson, James A. Robinson, Pierre Yared. (2009). Reevaluating the Modernization Hypothesis. Journal of Monetary Economics, 56, 1043-1059.

[2]

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(2008).

U.S. Department of State publication http://iipdigital.usembassy.gov/st/english/publication/2011/05/20110503103633su0.3897908.html

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Huntington S.P. (1968). Political Order in Changing Societies, New Haven and London, Yale University Press.

[4]

Index of Economic Freedom: http://www.heritage.org/index/explore?view=by-region-country-year

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Kean J. (2009). The Life and Death of Democracy. London: W.W. Norton & Company.

[6]

Lal Deepak (2000). Does Modernization Require Westernization? The Independent Review, v. V, n.1, Summer, 5-24

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Lipset, Seymour M. (1959). Some Social Requisites of Democracy: Economic Development and Political Legitimacy, American Political Science Review, 53, 69-105

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Machonin P., P. Kucharzh, K. Mjuller, M. Tuchek, L. Hatnar, Ja. Chervenka. (2002).

Transformacyja i modernyzacyja cheshskogo obschestva, Socys, 7, 32-48

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Martinelli, Alberto. (2005). Global Modernization. Rethinking the project of modernity. London: Sage Publications Ltd.

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Nations in Transit Ratings and Average Scores: http://www.freedomhouse.org/report/nations-transit/2013/ukraine

[12]

Pavlov K.V. (2009). Patologicheskie processy v ekonomyke. M.: Magistr.

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President: Modernization and reformation of state are the only right way in conditions of difficult global economic situation, 18.01.2013, http://www.president.gov.ua/en/news/26615.html

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Przeworski, Adam and Fernando Limongi. (1997). Modernization: Theory and Facts, World Politics, 49, 155-183

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Raneta L., Kozhabaeva A. (2013). Kazahstan i Ukraina: politicheskie sistemy v kontekste

Ukraine,

Freedom

House:

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makrojekonomicheskoj situacii. Mirovaja ekonomika i mezhdunarodnye otnoshenija, 3, 97-103 [16]

State Statistics Service of Ukraine http://www.ukrstat.gov.ua

[17]

The World Bank Data: Ukraine, http://data.worldbank.org/country/ukraine

[18]

TresŃ henkov E. (2013). Dinamika i faktory evropejskoj integracii Ukrainy. Mirovaja ekonomika i mezhdunarodnye otnoshenija, 2, 63-74

[19]

Zawadzki S. Oligarchs Stall Ukraine Progress â&#x20AC;&#x201C; Top EU official. Reuters, 30.11.2009 http://uk.reuters.com/article/2009/11/30/ukraine-eu-idUKGEE5AT15620091130

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8. Appendix Year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Table A.1 Data for Autoregression Models Construction for Ukraine GDP per Capita, Log of Polity IV Freedom Index of PPP (constant 2005 GDP per Measure of House Economic international $) Capita Democracy Measure of Freedom Democracy 7369,1 3,87 6 6635,2 3,82 6 5688,1 3,75 5 4405,4 3,64 7 3898,7 3,59 7 39,90 3540,1 3,55 7 40,60 3465,3 3,54 7 43,50 3430,0 3,54 7 40,40 3455,5 3,54 7 43,70 3696,4 3,57 6 47,80 4077,3 3,61 6 48,50 4332,2 3,64 6 48,20 4778,0 3,68 6 4,71 51,10 5396,9 3,73 6 4,88 53,70 5583,4 3,75 6 4,50 55,80 6031,6 3,78 7 4,21 54,40 6547,1 3,82 7 4,25 51,50 6734,0 3,83 7 4,25 51,00 5762,9 3,76 7 4,39 48,80 6028,9 3,78 6 4,39 46,40 6365,2 3,80 6 4,61 45,80 6393,7 3,81 6 4,82 46,10 Source: [19; 20; 21]

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Table A.2 Autoregression Models Results: Investigating the Relationship between Log Income per Capita and Democracy Level (Economic Freedom Level) in Ukraine Polity IV Measure of Democracy

Freedom House (2) 0.475 (0.044)

Economic Freedom Index (3) 37.729 (1.874)

Economic Freedom Index (Instrumental Variable) (4) -134.998 (-3.213)

α

(1) 5.406 (1.080)*

β (Log GDP per Capita)

-0.443 (-0.375)

0.261 (0.108)

-9.653 (-1.458)

91.790 (4.056)

γ (Lagged Measure of Democracy (Economic Freedom))

0.414 (1.863)

0.676 (1.387)

0.961 (6.489)

-3.235 (-3.343)

R2

0.20

0.36

0.81

0.58

F

2.25

1.66

29.77

9.50

t (number of periods observed)

21

9

17

17

*Notes: t-statistics in brackets

Source: [Author’s calculation]

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Education regarding taxation from the attitude and intuition to experiment Oana-Ramona Lobont1+ , Nicoleta Claudia Moldovan2 , Ioana Vladusel3 , 1, 2, 3

Faculty of Economics and Business Administration/Department of Finance, West University of Timisoara, Timisoara, Romania

Abstract. This paper analyses students’ attitudes towards taxation . The literature in the field of tax compliance research shows that there is a relationship between tax knowledge and attitudes towards taxation, more specific, higher tax knowledge determines more favourable attitudes towards taxation. The more favourable attitudes are the more favourable behaviour could possibly be. What is important in studying tax compliance is indeed the tax behaviour, but this paper has had the purpose the observe and analyze students’ attitudes as a posible prediction of the future taxpayers’ behaviour, more or less compliant.

The paper was designed in the spirit of behavioral economics approach. According to this approach tax compliance research focuses on the non-economic determinants of taxpayers’ behavior like tax education, tax knowledge and attitudes towards taxation.

After summarysing the literature in the field of study, a survey was conducted among students who did or did not participate to a taxation course and did or did not pay taxes. The survey was designed using the american IRS Taxpayer Attitude Survey and other surveys developed by authors mentioned in the literature review. To measure attitudes towards taxation Likert scales were used. The respondents were asked to evaluate some statements and to express their level of agreement or disagreement with regard to those specific statements. The result are consistent with the previous research: there are differences in attitudes among the student groups and students who participated to a taxation course seem to have more favorable attitudes towards taxation.

Keywords: tax compliance, tax education, tax attitudes, taxpayer survey.

JEL Codes: H20, Z13.

1. Introduction The scientific issue approached by the current study is tax compliance. The significance of research in the field of tax compliance derives from the target of any tax administration to increase the collection of income taxes. The factors influencing the taxpayers’ decision towards certain behaviour – compliance or evasion are even more important, although making the remark that noncompliance is not always intended. We need a more intricate approach than the focus on the „homo economicus” taxpayer.

In the current study we have analyzed the influence of tax education on the attitudes towards taxation. The question that arises is whether tax education, development of tax knowledge +

Corresponding author: oana.lobont@feaa.uvt.ro; lobont_oana@yahoo.com;

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determines favourable attitudes. But this is only the first part of a more intricate question which would as well answer to the question whether more favourable attitudes lead to a favourable behaviour (fiscally – the tax compliance).

Starting from the study on tax education – tax attitudes relationship in literature, we conducted and managed a survey for students, seen as future taxpayers, although in the current study a part of the students were in the capacity of taxpayers in the moment of the survey gathering. If, theoretically, the education – attitudes relationship was targeted, without leaving out the necessity of taking into consideration the attitudes – behaviour relationship, we believe that the analysis of the students’, young people attitudes is important, but without leaving out the importance of the analysis regarding the behaviour of the students becoming taxpayers.

In the second section we made a synthesis of the main aspects referring to the subjective knowledge, the subjective concepts relating to taxation and attitudes. The goal is to illustrate their connection with tax compliance. Practically, we proposed ourselves to give an answer to the question: is tax education a factor which delineates taxpayer’s behaviour? We start from the premise that tax education can change the attitudes related to taxation. Even if they aren’t in the position of taxpayers yet, students have certain attitudes towards the taxation process.

The research methodology is described in the third section of the study, the achieved results are illustrated in the fourth section, and certain conclusions will be underlined.

2. Literature review The research in the field of tax compliance has as initial reference point the contribution of Schmölders (1970)[1] in the area of behavioral economics and economic psychology, distinguished in the study „Survey Research in Public Finance – A Behavioral Approach to Fiscal Theory”.

The research evolution in the field of tax compliance can be distinguished chronologically regarding two points of inflexion: at the beginning people started from the idea that a single taxpayer makes a rational decision choosing between paying his taxes or not, assuming the risk of being detected. This decision becomes a utility issue, respectively if the benefit of evasion covers the presumed cost in case of detection, then the taxpayer will make evasion. The models of Allingam and Sandmo (1972)[2] and Srinivasan (1973)[3] developed in this spirit.

On the other hand, Alm et al. (2012)[4] introduce three new paradigms: the compliance paradigm as a dilemma of social securities – the dilemma of social securities appears when the personal interest is in contrast with the collective one, the taxpayer considers that public incomes are spent ineffectually and that the other taxpayers do not comply with it; here interferes the importance of the interpersonal and institutional confidence, the paradigm of compliance as a behaviour of several different taxpayers – they take into account the fact that there are several types of taxpayers, being motivated both by financial aspects and by non-financial aspects and the paradigm of compliance as a psychological contract (between taxpayers, Government and tax authorities) – it is focused on the idea of social norm. As long as the group institutes compliance as a social norm, the taxpayers shall comply with, but if evasion is accepted by the group the compliance will no longer be considered a social norm.

These paradigms introduce in the analysis of the taxpayer’s behaviour subjects such as psychology and sociology, and Alm (2013)[5] shows that this approach is specific to behavioral economics.

As literature illustrates, tax compliance as behaviour of taxpayers is not influenced only by economic and legislative factors but also other factors such as tax education, personal, social or society norms – according to the classification made by Kirchler (2007)[6], tax morality other times called tax ethics (there is no clear distinction between the two concepts) connected with religiosity. Multiple studies treating the issue of the presence or absence of tax morality as an influence factor of certain attitudes or behaviors were also elaborated by Torgler (2002[7], 2005a[8], 2005b[9], 2006[10]).

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Eagly and Chaiken (1993)[11] define the attitude as a psychological direction expressed through the assessment of a certain object or certain situation through a certain degree of favor or detriment (agreement or disagreement).

Kirchler (2007)[6] asserts that definition of the attitudes involves three dimensions: cognitive dimension, affective dimension and conative dimension. The cognitive dimension of the attitudes refers to the thoughts related to the characteristics and attributes of an event or situation. In taxation this thing could be illustrated in the following way: the consideration that taxes are useful in the achievement of public assets provision or the thought that taxes represent wasted money. Practically, cognitive dimension supposes the knowledge of the taxation issues.

The affective dimension of the attitudes refers to the emotions and feelings that arise related to specific events and situations, in the field of taxation they materialize into feelings about taxes as an expression of citizen-state cooperation, feelings about taxes as a loss of income, assessment of the taxes as a mean of income redistribution or in feelings about the government's allocation policy.

The conative dimension presumes behavioral intentions and actions related to certain stimuli, in taxation it can be the case of compliance or evasion, of the answers to the legislative doors.

Tax knowledge is important in order to understand tax legislation which is complex. According to McKerchar (2001)[12], the complexity of law makes taxpayers feel incapable and lacking interest.

Moscovici (2001)[13] affirms that taxation comprehension by the common people â&#x20AC;&#x201C; the subjective comprehension, when it is taken as a part of the social representations it is not focused on checking if knowledge is correct, in accordance with legislation, but it is focused on the knowledge people have and on the way in which this knowledge forms a certain social representation.

Generally, according to Kirchlerâ&#x20AC;&#x2122;s conclusions (2007)[6], the completed surveys prove a positive relationship between tax knowledge and favourable attitudes in taxation. The relationship between the two was also studied, among others, by Eriksen and Fallan (1996)[14]. They presumed both the information from tax legislation and the financial knowledge as tax knowledge being necessary to calculate the economic consequences. The question they tried to answer to was whether the improvement of the tax knowledge leads to more favourable attitudes. To this effect, the authors tested two groups of students regarding the knowledge on taxation and the attitudes towards evasion. The two groups of students were: a group of students who attended to a tax legislation course and a group of students who attended to a marketing course. The test took place before and after the attendance to the mentioned courses. The results showed that in the case of the students who attended to a tax legislation course, the tax ethics improved. In the same direction, Grasso and Kaplan (1998)[15] showed that students who attended to a preliminary taxation course had the ethical standards on taxation issues higher than the students who attended to a general ethics course. Other studies focusing on the issue of the attitudes towards taxation were elaborated by: Song and Yarbrough (1978)[16], Dornstein (1987)[17] and Fallan (1999)[18], the last being a thorough study of the previous one elaborated y the author in 1996 in which gender is also introduced as a demographical variable.

Kirchler (2007)[6] states that subjective knowledge related to taxation is important in order to understand why people behave like they do, and the wider tax knowledge is positively correlated with compliance. Generally, people do not feel they have control over the tax legislation, this thing being also caused by its complexity, a fact which stops the willing compliance, leading to involuntary errors but which do not imply a propensity for evasion. But the same author states that the weak comprehension or misapprehension leads to lack of confidence, and confidence is essential in the climate between taxpayers and authorities.

But a greater importance is given in literature to tax education. Torgler (2002)[7] states that in a system with educated taxpayers who are confident in their own knowledge and taxpayers who are aware of the public finance utilization, transparency becomes a condition of the citizen cooperation.

Alm, Jackson and McKee (1990)[19] state that an increase of compliance takes place when taxpayers are aware of the direct connection between the taxes paid by them and the provision of desirable public assets. Moreover, when taxpayers were given the opportunity to decide by vote where

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incomes from the taxes paid by them should be directed to, the compliance increased (in comparison with the situation in which taxpayers were simply taxed without knowing the destination of the incomes thus collected by state). Other multiple studies (Alm, Jackson and McKee (1993)[20], Feld and Tyran (2002)[21], Pommerehne and Frey (1992) ) show the importance of taxpayers’ involvement in the decision of income allocation. When they have a word to express in the decision-making process, the compliance increases but the satisfaction regarding the efficiency of public services also increases.

In regard to the attitudes, according to the theory of the planned behaviour, elaborated by Ajzen (1991)[23], the behaviour is only partially predicted by attitudes. Multiple empirical studies proved a significant connection, although weak, between attitudes and behaviour: Vogel (1974)[24], Dornstein (1976)[25], Porcano (1988)[26], Wahlund (1992)[27], Chan, Troutman and O’Bryan (2000)[28], Niemirowschi et al. (2002)[29]. Even if it’s not sure that the positive attitudes determine the compliance, Lewis (1982)[30] states that if attitudes worsen, tax evasion will increase. In conclusion, the relationship between attitudes and behaviour, being either compliance or evasion, is a complex relationship.

However, Lewis (1979)[31] showed that attitudes towards taxation depended mostly on income. In his study in 1979, there were used Likert scale-type items, items referring to tax avoidance, tax pressure, the adequate treatment of tax evaders, the progressive taxation interests and the relationship between evasion and taxation interests. The persons with high incomes had a more increased antipathy towards taxes generally and especially towards the progressive taxation interests. They considered the tax avoidance more reasonable than the persons with lower incomes and they also considered that tax evaders should be treated with more tolerance.

Below we analyzed if the results of the current study correspond to the majority of the studies proving a direct relationship between tax education and favorable attitudes in taxation.

3. Methodology and data Andreoni el al. (1998)[32] has identified four information sources being necessary in the measurement and research in tax evasion area. It’s about: data obtained as a result of the tax controls, data obtained as a result of testing through surveys, data obtained as a result of the tax amnesties and data obtained as a result of the laboratory experiments. The survey advantage consists in the fact that they include socioeconomic, demographic and attitudinal variables. However, according to the previously mentioned authors, an issued is identified in case of survey: being based on what respondents state, information can be incorrect and the results of the surveys overestimate the compliance.

Under the aspect of the factors such us perceptions and attitudes, the issue of the measurement difficulty appears. According to Kirchler (2007)[6], most of the surveys use Likert scales in order to measure the degree of agreement of the taxpayers with tax evasion. A Likert-type item is a statement which the respondent is asked to assess considering any objective or subjective criteria; generally, the level of agreement or disagreement with the respective statement is tested. The scale is symmetric as it has an equal number of positive or negative positions in connection with a neutral position. In the current case, a five position scale has been used: totally agreement – code 5, mostly agreement – code 4, neither agreement nor disagreement – code 3, mostly disagreement – code 2, totally disagreement – code 1.

Starting from the concept and experiment made by Eriksen and Fallan (1996)[14], in order to identify and assess tax education influence on attitudes towards taxation we used the questionnaire method2 as research method. Internal Revenue Service3 Taxpayer Survey 2012 and the survey used by Song and Yarbrough (1978), World Values Survey and European Values Survey stayed at the base of the questionnaire construction.

2 3

We mention the agreement of Professor Lars Fallan to use this concept.

Internal Revenue Service represents the USA government agency for the tax income collection.

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Given the certification of survey in literature, as a questionnaire of attitudes, we consider that this methodology comes to support adequately the empirical endeavor we propose.

The survey structure presumed its division in four sections, using nominal-type items (items 1,2,3) and the fourth section item. Sections I, II and III are built-up of Likert scale-type items, these representing the three dimensions of the specified dimensions: cognitive, affective and conative. The questionnaire can be seen at https://docs.google.com/forms/d/1XbPucDtDrpGz6uQJ8FipRg9PW9Xrxng4OjV_6_R6ph8/viewform.

The questions applied test the opinions of two categories of students, those who attended a taxation course and those who didn’t attend to such a course, respectively.

Taking into consideration the hypothesis of the tax education importance but also the experience importance as a taxpayer in the delineation of the attitudes towards taxation, the formulated explorative questions were structured on 2 levels in order to analyze students’ opinions regarding:  their attendance or not to a taxation course;  the possession or not of the capacity of taxpayer.

The assessment of the tax education influence on the attitudes towards taxation was made on the basis of the answers received from the respondent students, which were selected on four groups, in this manner:  group I - „Yes, Yes”;  group II - „Yes, No”;  group III - „No, No”;  group IV - „No, Yes”.

The temporal interval taken into account is the period April 7th 2013- April 19th 2013.

The respondent sample taken into account was made of a number of 152 persons. In the applied questionnaires, 63% of the respondents attended to a taxation course and 62% were or are in the position of taxpayers. In regard to the current study cycle, 8% of the respondents are bachelor’s degree students in I year, 12% in II year, 19% in III year, 25% are Master’s degree students in I year, 35% in II year and there was an answer from the PhD cycle.

The question “To which extent you agree with the following statements?” is specific to each section, allowing for each item partly the presentation of the percentage in which each group of students agrees or not with the given statement.

4. Results Data was processed at the level of the whole sample and according to the four groups of answers received from the respondent students, these being transformed in relative measures.

The influence of cognitive dimension on the definition of the attitudes results from the answer to questions regarding the complexity of the Romanian tax legislation, the difficulty of acquiring knowledge related to taxation, the importance of the correct statement and the payment of tax obligations by the different categories of taxpayers, the veracity of the tax information sources, the perception on the ampleness of tax evasion phenomenon, the equity of the Romanian tax system or the reduction of the tax pressure, reflect a similar distribution of the respondents’ opinions.

The refinement of the analysis shows that in all four groups we can notice a strong agreement with the statements underlining the importance of the income collection in the case of the taxpayers – natural or legal persons with high incomes. Regarding the veracity of the tax information sources, almost half of the respondents agree in a great measure with the fact that ANAF (National Agency for Tax Administration) information sources are very useful but tax advisers represent a more useful source of tax assistance and information than the ANAF (National Agency for Tax Administration) sources. The perception of the “withholding tax” system importance is strong (65,79%) in the case of the respondents who attended to a taxation course possessing the capacity of taxpayer, but neutral answers can be distinguished in relatively high percentages in the case of the groups which didn’t attend to a taxation

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course. Regarding the tax evasion perception, a stronger agreement is shown in the case of the students who attended to a taxation course than the others and we can also notice the absence of total disagreement answers in the case of those who either didn’t attend to a taxation course or they do not possess the capacity of taxpayers or none of the two.

We also remark the perception on the inland tax system as an inequitable one, which is most strongly shown (63,16%) in the case of the students who didn’t attend to a taxation course and who weren’t in the position of taxpayers, a very close percentage (60,53%) emphasizing in the case of those who attended to a taxation course but who aren’t in the position of taxpayers.

Synthetically, we can estimate that the influence of the affective dimension on the attitudes’ definition is the result of the emotional and sentimental perception of the respondents concerning the uncertainty state generated by the frequent changes in the Romanian tax legislation matter, the degree of willing confrontation on tax payment, the degree of taxpayers’ satisfaction regarding the expert assistance offered by the representatives of the tax authorities but also regarding their behaviour in the relation with the taxpayer.

We can therefore remark, after an analysis refinement, a relatively high percentage (55,26%) of partial agreement of the respondents who acquired taxation knowledge, with the fact that legislative changes cause a state of uncertainty, but the most intensive agreement with the previous statement was shown by those who possessed the capacity of taxpayers. The feeling that taxpayers bring a contribution to society through the willingness to tax payment appears to all four groups of respondents, although there are also strong disagreements, especially in the case of group 1 and neutral answers as well, especially in the case of group 4. regarding the satisfaction related to the interaction with the employees of the tax authorities, strong disagreements are shown, the most intensive ( 31,58% ) being shown in the case of respondents who neither attended to a taxation course nor possessed the capacity of taxpayers.

The most intensive agreement (21,5%) regarding the ethical behaviour and competence of the employees in tax institutions can be noticed at groups 2 and 3.

Equally, the influence of affective dimension in defining the attitudes, also resulted from the answer to questions regarding the perception on the liability in the case of committing certain tax evasion actions, on the degree of taxpayers’ willing tax compliance generated by the fear of control and applicable sanctions, by the feeling of guilt, by the personal integrity or the fear of exclusion from a group membership. The fear of sanctions’ analysis as a factor of influence on the taxpayers’ decision to state and pay the tax obligation correctly allows us to notice that the strongest agreement is shown in the case of group 2 (39,47%) and the strongest disagreement in the case of group 4 (8,11%). The same trend can be also identified in regard to the feeling of guilt, the strongest agreement being shown in the case of group 2 (18,42%) and the strongest disagreement in the case of group 4 (21,62%). The influence of taxpayers’ personal integrity is shown in a pregnant manner in the case of group 3.

Overall, we can conclude that groups 1 and 2 consider the fear of sanctions as the strongest factor while groups 3 and 4 estimate the personal integrity as being the factor with the strongest influence.

Last but not least, the behavioral intentions and actions related to certain stimuli give content to the conative dimension as influence factor in defining the taxpayers’ attitudes, reflected by the answer to questions regarding the agreement or not with the ideas that the civic duty of each Romanian citizen is to pay taxes but equally the responsibility of each one is to denounce any person committing tax evasion, to inform the legal authorities on noticed aspects of illegality.

The analysis of the collected data led us to the conclusion that perception of the tax payment as a civic duty is strongly shown in the case of groups 1 and 2, the strongest disagreement being shown in the case of group 3. in regard to the responsibility of denouncing any person committing tax evasion, the most intensive agreement is shown in the case of groups 1 and 2 (29,31 % and 36,84% respectively).

Referring to the assertion that the taxpayer has no need to willingly offer information about illegal activities, if tax administration doesn’t request such information, the strongest agreement is shown in the case of group 2 (23,68%), high percentages of the neutral answers being noticed in the case of groups 1 and 4 and a partial agreement with this statement in the case of group 3.

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The question whether any person has to report to the tax administration any person committing tax evasion, even if it’s about a member of his family, the strongest agreements were shown in groups 1 and 2 (17,24% and 21,05% respectively), although neutral answers which are not to be neglected, and a stronger partial agreement in the case of group 3 appeared.

Regarding the semantic association of the tax notion, we notice the frequent association wit the following words:  Group 1 semantically associates the tax notion with: 21% „money”, 7% ,,state”. There also appear words such as „community”, „statement”, „state budget”, „compliance”, „necessary evil” and „control”.  Group 2 semantically associates the tax notion with: 23,68% cu „money”, 15,78% cu „payment”, 13,15% cu ,,obligation”, 10,52% ,,taxes”.  Group 3 semantically associates the tax notion with: 42,10% cu „money”, 16% cu „debt”. There also appear words such as „theft”, „abuse” and „to queue” or „donation”.  Group 4 semantically associates the tax notion with: 29,72% „money”, 27% „taxes”, 8% „evasion”.

5. Conclusion As shown above, a part of the results confirms the fact that tax education would lead to more favourable attitudes. Even if not each item shows it, in a great measure, we can notice differences between the answers and agreements of the respondents from the group who attended to a taxation course and the answers and agreements of the respondents from the group who didn’t attend to such a course. The differences are noticed both in the case of the cognitive dimension of attitudes and in the case of affective and conative dimensions.

More favourable attitudes of the students who attended to a taxation course in comparison with those who weren’t in this position, can be noticed regarding the perception on the difficulty of acquiring knowledge related to taxation, the importance of the withholding tax system, the equity of the tax system but also regarding the intention of considering tax as a civic duty and to denounce any person committing tax evasion, but also regarding the interest towards the aspects related to taxation.

Given the fact that the survey was interpreted according to the observation of differences between the results of the four groups of students, we must mention that the following step of the research is intended to be a statistical test of the following hypothesis: “Tax education leads to the improvement of the taxpayers’ attitudes”. What we believe it is important is the taxpayers’ behaviour which can be predicted or not by attitudes, as it has been illustrated in the literature synthesis. It remains to be seen whether the improvement of the tax knowledge leads to compliance or, on the contrary, to the avoidance or tax evasion, in other words whether tax education leads to the improvement of the tax behaviour.

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[28]. Chan C.W., Troutman C.S., and Oâ&#x20AC;&#x2122;Bryan D.. An expanded model of taxpayer compliance: Empirical evidence from the United States and Hong Kong. Journal of International Accounting, Auditing and Taxation. 2000, 9(2): 83-103.

[29]. Niemirowschi P., Wearing A.J., Baldwin S., Leonard B., and Mobbs C.. The influence of tax related behaviours, beliefs, attitudes and values on Australian taxpayer compliance. Is tax avoidance intentional and how serious an offence is it?, University of New South Wales, Sydney, 2002.

[30]. Lewis A.. The psychology of taxation. Martin Robertson, Oxford, 1982.

[31]. Lewis A.. An empirical assessment of tax mentality. Public Finance. 1979, 34(2): 245-257.

[32]. Andreoni J., Erard B., Feinstein J.S.. Tax compliance. Journal of Economic Literature. 1998, 36(2): 818860.

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Effects of informality in Albaniaâ&#x20AC;&#x2122;s small enterprises Brunilda Muça1+, Galantina Doraci2++ 1, 2

Faculty of Economy and Agribusiness, University of Tirana, Albania

Abstract. Employment is a major concern for Albania, while it transitioned from a centralized economy to a market economy. Labor conditions are an important factor of showcasing the economic wellbeing of the country as a whole.

The main concern regarding the labor market is tied to the effects informal employment brings in the economy.

Informality in Albania may be as high as 50 percent of its official Gross Domestic Product, or even higher. When manifested in the economic sphere, informality plays a critical role for creation of jobs and reduction of poverty.

Seizing informal economy and especially in the labor market is no easy task. But when achieved it provides visibility to those employed by the sectors, and the contribution they bring to the economy. Informality in the labor market mirrors informality in economy. The paper will focus on effects of employment in the Albanian informal economy, and provide results on a survey held in one of its capital main streets, targeting small businesses.

Keywords: informality, non-official economy, economic crises, labor market JEL Codes: E26, J40

1. Introduction The economic crisis that hit the world in the beginning of the 21st century once again showed the importance of making changes and shifts to befit the reality. Informal economy is no longer considered just something that happens out there, but something that impacts the lives of those who live in it. When institutions are slow, entrepreneurs intend to move swifter in that area in order to help them coop with that reality.

2. Materials and methodology Some reference points that have been used for the paper were various theoretical studies of renowned researchers of the field, including Schneider and Este, Feige, etc., as well as the experience of Albania. This study uses official data gathered through various means by prominent Albanian institutions, those made available publicly. Method used for gathering information is direct interview, to gather as much possible information. This survey was conducted in one of the busiest streets of Albaniaâ&#x20AC;&#x2122;s capital, Tirana. A standardized questionnaire was compiled, using closed, fixed responses, given that respondents are not used to interviews. The type of used interview is a structured one, in such a way that all respondents were asked the same questions with the same wording, and in the same sequence. Business activities ranged from newspaper boy; to cashiers working for different stores, such as grocery, carpet, clothes, woodwork, pet; +

PhD student, corresponding author: bruna.muca@gmail.com. ++ Prof.PhD., e-mail: galantina2003@yahoo.com

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beauty salons, restaurant, fast food, ice-cream store. It focused on those economical units considered as small businesses. Following is a synopsis of findings.

3. Research results The wind of change that swept throughout Eastern Europe in 1990, did impact Albania as well. The country transitioned from a centralized economy to an open market. The transition brought about two major changes: economic efficiency or in other terms material wellbeing, and a political democracy, including protection and adherence to human rights. However, major social problems sprung, including poverty, unemployment. Initially it was very difficult, given that it was a phenomenon which was previously controlled, and now it faced the necessity to be resolved. Unemployment as a macro-economic problem highly impacts the lowering of oneâ&#x20AC;&#x2122;s standard of living, without mentioning psycho-social problems of affected individuals. Labor market underwent a huge reform. Prior to the 90s the state was the only job provider, and regulator of economy.

After the 90s, the state ceased being a direct and sole regulator. Unemployment increased due to several factors: Disintegration of enterprises and agricultural cooperatives, though providing an opportunity to farmers to possess land, farming units were small, ranging between 0.52 to 1.13 hectares, and they also lacked tools. Recent data indicate that rural population in Albania carries its activities through 368,997 agricultural economic units, known also as farms.

Privatization of state owned enterprises; many became unemployed or were under social welfare.

Political stability of the time did not attract many direct foreign investments.

The demographic map of Albania changed during the transition years mainly due to inner migration.

Inhabitants coming from every corner of the country settled in around main cities, and created approximately 800 informal zones, establishing some 150,000 illegal settlements, whose construction costs range $3 to $4 billion. A very slow legalization process is underway, but as long as these are not legalized, this capital cannot be put to good use, such as for example to receive loans.

The experience of countries that have undergone such radical transitions shows that formalization of an economy is positively linked with the level of reforms in the economic sphere, and well established democratic and regulatory institutions. When institutions are weak, it allows for loopholes, and informality takes hold of certain aspects. Therefore, experience in the case of Albania shows that informal economy and corruption go hand-in-hand, and that there is as strong positive correlation between them. During the transition an important factor to be emphasized is the role employment plays in the market development. The economic wellbeing of a country is illustrated by the labor conditions. Therefore, one of the main concerns regarding the labor market is linked to the effects that informal employment brings in the economy.

Different classifications have been developed to explain trends of informal economy, and the authors of the paper have considered that the informal economy classification developed by Schneider and Enste in 2003, is useful for the study:

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a) Official Economy -

Public Sector

-

Private Sector

b) Non-official economy - Shadow Economy - Self-Sufficient Economy

National Economy

Official Economy

Public Sector

Private Sector

Non-official Economy

Shadow Economy

Self-Sufficient Economy

Fig. 1: Schneider and Enste (2003) Informal economy serves also as an important obstacle to increasing the budgetary revenues.

Several researches have been conducted, and this by very prestigious international organizations and institutions. In the last seven years, 2007- 2013, the CIA Fact book reports that informal economy in Albania is calculated to be around 50 percent of the official GDP. Due to the high level of informality and the fact that the country develops its economic ties mainly with Greece and Italy, whose informal sector reaches 20 percent, this also influences the high level of informality in Albania. Various materials provide different figures, within the range of 40 percent to 60 percent of GDP. Noteworthy is the fact that no comprehensive study on the size of informal economy in Albania has been conducted.

Research about informality in the labor market in Albania provides an average figure of 25 percent, which is quite considerable for the labor market dimension. One of the characteristics of the informal labor market is lack of formal job contracts.

The latest Labor Force Survey published by the Albanian Institute of Statistics showed that during the second trimester of 2013, labor force in Albania reached 1,106,480 persons, and registered unemployment rate is 12.8 %. Out of these 282,034 persons work in the non-agricultural sector and the figure has increased by 0.3%. A total of 518,796 persons work in Albaniaâ&#x20AC;&#x2122;s private agriculture sector, while the number of registered unemployed seeking a job is 141,850 persons, where 5.5% are on welfare.

The authors of this paper conducted a survey in one of the busiest streets of Tirana, known as Durres Street. It is one of the main arteries of the capital, and links the city center with the main highway, leading to the second largest city in Albania. Business owners and employees were interviewed. Based on data gathered thus far, the sample was made of 41 businesses, referred to as economic units. Table 1 shows number of employees reported by employers.

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Table 1. The number of employees reported by employers.

Number of employees

Employer

Weight

Less than 10

37

90%

Between 10 to 19

4

10%

Total

41

100%

Out of 41 economic units 90 percent of them have employed between 1 to 10 employees, and 4 of them between 10 to 19 employees, or 10 percent. Graphically is illustrated as per the following.

Employer 10% Less than 10 Between 10 to 19

90%

Fig. 2: Employees reported by Employers The same set of questions was asked to employees, and the following table shows the outcome.

The following table shows number of employees reported by employers.

Table 2. The number of employees reported by employers Number of employees

Employer

Weight

Less than 10

30

73%

Between 10 to 19

11

27%

Total

41

100%

30 employees or 73 percent reported that in the economical unit that has hired them work between 1 to 10 employees, and 11 employees or 27 percent said that in their economical unit work between 10 to 19 employees, displayed graphically as following.

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Employees 27% Less than 10 Between 10 to 19 73%

Fig 3. Employees reported by Employees If we were to graphically present the number of employees reported by employers and employees, the following graph would best describe it.

16 14 12 10 8

Employer

6

Employee

4 2 0 1

3

5

7

9

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Fig 4. Figure comparison Looking at the graph we noted that there was a mismatch between what each claimed. Only in five of the interviewed units, figures corresponded. Therefore, it shows that there are unregistered employees working for the economical units, thus those working in informality.

Following is a graph of gender disaggregation of what employers reported, where out of 203 employees, 150 were female and 53 male.

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Gender Disaggregation 26% male

female

74%

Fig. 5 Gender disaggregation as reported by Employers While figures reported by fellow-employees showed that out of 282 employees, 140 were female or 53 percent; and 122 were male, or 47 percent. Graph follows.

Gender Disaggregation

female 53%

male 47%

Fig. 6 Gender disaggregation as reported by Employees When each worker was asked if the economic unit was registered with the tax authorities, 5 out of 41 units reported that it was not. And when asked on reasons why, the reason they provided was that there was a cost to become formal.

There are different reasons why businesses operate informally. The aforementioned data showed that not all workers were formally registered with tax authorities, some of those not registered were family members of business owners, and in the case of the beauty salon one was an intern.

When employers were asked if the economic unit has been registered with the tax authorities, 70 percent of respondents said that the business was registered, 10 percent that they were in registration process, and 20 percent that they had not been registered. While when employees were asked the same questions, 45 percent said that the economic unit they work for is registered, 25 percent that it is in registration process, 5 percent that it is not, 10 percent that they do not know whether it is registered or not, and that 15 percent did not want to respond. Graph follows.

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Fig. 7 Economic Unit registration with tax authorities To the question of what is the legal status of the company, employers have reported that their company is a registered limited liability company. While according to employees, 67 percent said that their company is a limited liability company, while 11 percent that the company they work for is registered as an individual ownership and 22 percent that it is a joint stock company.

120% 100% 80% 60% Employer 40%

Employee

20% 0% Registered Limited Liability Company

Individual ownership

Joint stock company

Fig. 8 Legal status of the enterprise To the question of where do your normally undertake your job, employers said that on 55 percent of cases they held their activity in office, workshop, kiosk, independent from their house, while 45 percent said that the place where work is undertaken is within or close to their home. While employees said that 55 percent of cases work done is close to home, and 45 percent that it is undertaken in office, workshop, kiosk, independent from home. Graph follows.

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Fig. 9 Where is work undertaken

When employees were asked if they had a job contract, 75 percent of them said that they were not hired based on a written contract, and only 25 percent of them said they work based on a written contract or agreement. Graph follows.

Fig. 10 Employeesâ&#x20AC;&#x2122; contracts To the question if the employer pays contribution to the pension funds, employees responded that 30 percent of them are paid, 45 percent said that their employer does not pay their contribution to the pension fund, and 25 percent did not know if they were.

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Fig. 11 Employer paying contribution to pension funds It is understandable that one of the reasons for non-adherence to the law is a reason for acting in the informal economy. Considering what respondents said during the interviews, it once again shows that there is a general mindset according to which the law is not implemented, due to the chaotic situation, and this type of behavior serves as a stimulus to increasing informality. Another important fact is that in order to become formal, there are economic costs tied to that. Acting in the informal economy causes macroeconomic, micro-economic, and social problems. Hence, uncollected taxes reduce revenues collected by the state. And in turn would make government increase taxes. Also, informality lowers the quality of services and goods provided, especially when this is considerable. The current level of informal economy in Albania is concerning for the economic stability of the country.

When operating in the informal context those involved think only of just short-term or quick benefits, not considering costs related to informality. Penalties for operating in informal economy might include not profiting from services government provides to formal activities. And one of them is access to the legal system, involving property rights and trade law. Also, when businesses operate in the informal economy they might be unable to access legal support or even lack documents, which implies operating in an environment of uncertainty. In turn, capital costs increase, lowering the rate of investments.

4. Conclusions The problem of informal economy is utmost important for Albania. Informality is seen practically as a natural reaction, and most likely spontaneous to the inability of formal economy to fulfill the needs of a part of its members. In developing countries, and those in transition, informal economy provides an important contribution for economic growth, despite the fact it is accompanied by a series of problems, which deserve careful attention by policymakers and enforcers.

Informal business activities in Albania boomed after the country transitioned to a free market economy.

Reducing the size of informal economy is pivotal, and the working group proposes the following: A flourishing informal economy makes official statistics over unemployment, workforce, revenues, consumers, not credible. When this happens, drafted programs and policies based on incomplete data, become unsuitable for implementation. Informal economy in Albania was initially incentivized by

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unemployment, given informal economy makes it manageable. People had to have jobs than no job at all, and given informal economy is faster in dealing with changes and making the necessary shift to befit the reality, it was seen as the most suitable in the early beginnings.

As years progressed development of informal economy in Albania factored in other ingredients, such as widespread corruption, arbitrary and inconsistent legal and sublegal framework, bureaucracy both at the national and local government level, lack of information on how to become formal, existence of a familyeconomy, which makes up for ninety percent of small businesses in Albania, higher level of taxes.

A gradual control and formalization of economy would entail understanding the role it plays in the country, its size and scale in different sectors, developing a legal environment that leaves no room for informal economy, tax collection, state bureaucracy and social insurances, reducing the number of minors working in the informal sector.

Informal economy in Albania takes various forms and shapes: Temporary businesses viewed mostly as micro or family businesses Families making a living out of rural activities, or known as survival business activities Small and medium enterprises operating at various informal settings, who would pay cash their employees, to avoid taxes, etc.

Even some foreign capital companies have reportedly operated under this disguise Illegal and criminal activities, to include smuggling, money-laundry, operating under a legal business cover One of the most known forms of informal economy is evasion of fiscal obligation, and non-compliance with fiscal legislation. Predominant form of businesses under this category includes those that have not registered with tax authorities or that avoid fiscal obligations. Reportedly 15 percent of taxes went unpaid, but reality shows that it has doubled.

A decline in number of the active labor force in the official economy might serve as an indicator that numbers in informal economy have increased. When it comes to this type of calculation a blind-spot remains that fact that an individual could be employed in the formal, as well as informal sector.

If for estimating the size of informal economy, we were to use the transaction method, it states that there is a constant relation between transactions and total monetary unregistered income. However in order to receive reliable estimates, accurate figures are needed. Albania lacks these data, and there is no base year during the transaction period where there was no informal economy. Therefore variables which need to be calculated are influenced by the informal economy. We would be unable to accurately calculate its size, given the country lack these data.

Paper authorsâ&#x20AC;&#x2122; survey showed noteworthy results though it focused in only of the roads of the capital of Albania, Tirana. An increase in the number of family members working for small businesses was noted, including male and female ratio difference. Also, unpaid work was reported in the case of interns.

Informality affects the society as a whole. Education and health sectors are also affected, such as doctors and nurses working both a state hospitals and private clinics. Trade unions in Albania are substantially weak, and thus they do not exercise the necessary pressure to protect their membersâ&#x20AC;&#x2122; rights. Informality hampers honest competition.

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Combating informality remains critical in Albania. Establishing a profession and dedicated administration, putting in place monitoring and controlling mechanisms to trace fiscal evaders, treating equally all businesses, regardless of affiliations, will improve the business climate.

5. References [1] Central Intelligence Agency Factbook. 2013. Country Report: Albania . Last updated in September 2013.

[2] Data from the Ministry of Agriculture, Rural Development and Administration of Waters.

[3] Data from the Albanian General Tax Directorate [4] Feige, E. L. The Underground Economies, Tax Evasion and Information Distortion. Cambridge: Cambridge University Press, 1989.

[5] Information data from Albanian Institute of Statistics (INSTAT), Labor Force Survey.

[6] Schneider, F. Shadow economies and corruption in transition countries: preliminary findings. 2007 [7] Schneider, F. and Enste, D. Shadow Economies Around the World: Size, Causes and Consequences. International Monetary Fund Working Paper, 2000,WP/00/26: page1-56.

[8] Schneider, F. and Enste, D. The Shadow Economy: An International Survey. Cambridge: Cambridge University Press, 2003, page 98-99.

[9] Schneider, Friedrich, Size and Measurement of the Informal Economy in 110 Countries Around the World, 2002.

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Migrant remittances and human capital investments Cephas Naanwaab1+, Osei-Agyeman Yeboah2 1

Department of Economics, North Carolina A&T State University, 1601 E. Market Street, Greensboro, NC 27411, USA. 2

Department of Agribusiness, Applied Economics and Agriscience Education

North Carolina A&T State University, 1601 E. Market Street, Greensboro, NC 27411, USA.

Abstract. The objective of this paper is to investigate the effect of migrant remittances on human capital investments in remittance-receiving countries. Prior studies have generally focused on the effects of remittances on consumption and poverty reduction, without much effort given to human capital investments. We seek to fill this void by using a panel dataset comprising 71 developing countries drawn from the World Bank's six regions to analyze the impact of remittance receipts on investment in human capital. The methodology we employ in the analysis is based on a systems approach using three-stage least squares regressions to account for endogeneity and/or simultaneity bias of remittances. Contrary to previous findings that remittances only support consumption and yield no social returns, we find that remittances do have a positive and significant effect on two measures of human capital investments: educational spending and healthcare spending.

Key words: migrant remittances, health spending, educational investment JEL Codes: F22, F24, I22

1. Introduction It is estimated that over 215 million people, or 3% of the world population, live and work outside their countries of birth (World Bank, 2011). The combined total remittances sent by migrants to their home countries are over $483 billion annually (World Bank, 2011). A large chunk of this ($350 billion) goes to developing countries. For many developing countries, remittances are the second largest source of external financing, after foreign direct investment (Figure 1). As a result of the recent global economic crisis, remittances have become the most stable source of external funding for developing countries, especially when compared with foreign direct investments and other private transfers. In the last decade, the rate of growth of remittances to developing countries outpaced that of private capital and official development assistance (Acosta et al., 2007).

Much of the previous research on remittances has generally centered on the effects of remittances on consumption and poverty in the receiving countries. The conventional wisdom on remittances has been summed up into three stylized facts (Mansour, Chaaban and Litchfield., 2011). Firstly, remittances are spent only on household consumption (Lipton, 1980; Chandavarkar, 1980). Secondly, only a small portion of remittances goes into savings and investments (Sofranko and Idris, 1999; Lopez and Seligson, 1991; Glytsos, +

Corresponding author: Phone: 336.285.3351, Fax: 336.256.2055 E-mail: cbnaanwa@ncat.edu

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1993). Thirdly, remittances only yield private benefits and no significant social returns, and consequently no impact on economic growth of recipient countries (Gilani, Khan, and Iqbal, 1981; Adams, 1991, 2005; Alderman, 1996).

In view of the foregoing literature, several questions remain unanswered: what has been the effect of migrant remittances on human capital investments? Do remittance-receiving countries differ from nonrecipient countries in terms of social outcomes such as education and healthcare? The objective of this paper is to examine the effects of remittances on human capital investments such as healthcare and educational spending in remittance-receiving countries. To accomplish this objective we construct a cross-country panel dataset comprising remittance inflows and human capital investments (educational and health spending) of 71 developing countries from all six regions of the World Bank classification. We hypothesize that remittances provide excess liquidity, thus, allowing households to spend on basic necessities like food, while also meeting other human capital investment needs like healthcare and education. Very few studies have used cross-country data to study the effects of migrant remittances on human capital investments in developing countries.

Figure 1: Inflows of Remittances, Foreign Direct Investment and Official Development Assistance (All Developing Countries):1995 - 2010

Source: IMF Balance of Payments Statistics and World Bank Migration and Remittances Factbook 2011

2. Review of Previous Studies 2.1. Remittances and Human Capital Investment A number of studies have linked remittances to increased investment in education in remittancereceiving countries. Acosta (2006) found evidence that remittance is positively associated with educational attainment in El Salvador. Indeed, Acosta shows that remittances relax household budget constraints, thus, making it possible for increased consumption and investment in children's education. Controlling for the household's wealth and accounting for selection bias, his results show that girls and boys from households

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receiving remittances are likely to be enrolled in school than those from non-receiving households.

Furthermore, he shows that remittances are negatively associated with child labor and female labor supply.

Gupta et al. (2009) make the case that remittances are used to finance investments in education, housing, health, and better nutrition in Sub-Saharan Africa. For example, households receiving remittances in Zimbabwe are on average more educated than non-recipient households. Edwards and Ureta (2003) found that remittances greatly reduced the hazard of children dropping out of school in the case of remittancereceiving households in El Salvador. Similarly, Hanson and Woodruff (2002) studied the impact of remittances on child education in Mexico and found a positive effect of remittance on schooling. Mansuri (2006) studied the effect of economic migration on schooling outcomes in Pakistan. Using different measurements of schooling, the findings show a positive effect of migration on educational outcomes.

Children from migrant households are not only more likely to attend school; they are also less likely to drop out of school than their counterparts from non-migrant households in the same village.

Boraz (2005) used instrumental variable approach to study the impact of remittances on child human capital development in Mexico. His survey results showed a small positive effect of remittances on schooling, but only for children living in small cities. Calero et al. (2009) investigates the impact of remittances on human capital investment in Ecuador. By specifically focusing on the role of remittances on school enrollment and reduction in child labor, they found that remittances increased school enrolment and decreased the incidence of child labor.

Following an augmented human capital modeling approach, Mansour et al. (2011) evaluated the impact of migrant remittances on human capital accumulation among youth in Jordan. Their results showed that remittances had a positive significant effect on two outcomes: educational attendance and educational attainment. The magnitude of the impact on both outcomes was greater for men than for women. Drabo and Ebeke (2010) also found evidence that remittances increased access to health care services in developing countries.

3. Methods 3.1. Simultaneous system of equations Most studies investigating the impacts of migration and remittances have often relied on instrumental variable methods to deal with the problem of endogenous remittances. Empirical evidence has shown a pervasive existence of endogeneity between remittances and outcome variables of interest such as poverty, household consumption, and human capital investment (Acosta et al., 2007; Adams and Page, 2005; Gupta et al., 2009). Rather than using single equation estimation techniques like two-stage least squares to deal with endogeneity as done in most studies, we formulate and estimate a system of equations in which remittances, educational spending, and health expenditures are jointly determined. When endogeneity is involved, Wooldridge (2006) has shown that a systems estimation approach is generally more efficient than one relying on single-equation estimation by two-stage least squares (that is, instrumental variables approach).

It is our contention that remittances and human capital investments are simultaneously determined.

The more countries invest in building their human capital, the more skilled labor they will have. The excess skilled labor then migrates to other countries where there is a high demand for skilled labor and hence higher wages. Consequently, higher investment in education and healthcare can translate into higher migration rates, and by extension, higher remittance receipts. But the other way around is also plausible, i.e., higher

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receipts of remittances encourage investments in human capital leading to excess skilled labor which then migrate and bring back more remittances. To model this reverse causality, we employ three-stage least squares (3SLS) estimation procedure to explain the relationship between remittances, educational expenditures, and health expenditures.

3.2. A general simultaneous equations model A general simultaneous equations system is specified as follows;

(1) where is a vector of endogenous and predetermined variables in each equation, is a vector of structural parameters and is vector of error terms, assumed to be correlated across equations.

3.3. Estimators The two-stage least squares estimator of the system is derived in Greene (2003, pp.399) as; (2) This estimator is consistent but not efficient.

A consistent and efficient estimator (the 3SLS estimator) may be constructed from the covariance matrix of the vector of error terms; (3) whereI is an N x N identity matrix, product.

is the covariance matrix of error terms, and

denotes the Kronecker

Suppose the covariance matrix (or as it is done in practice its sample estimator) is known, the 3SLS estimator which is essentially a generalized least squares estimator is expressed as; (4) and its asymptotic covariance matrix is; (5)

3.4. Identification Greene (2003, pp. 385) describes the identification of a simultaneous equations system as crucial to its estimation. Identification concerns with whether the parameters of the systemâ&#x20AC;&#x201D;and that of each equationâ&#x20AC;&#x201D; can be uniquely estimated. The order condition for identification necessitates that the number of exogenous variables excluded from equation j must be at least as large as the number of endogenous variables included in equation j (Greene, 2003). The rank or sufficiency condition implies a large enough number of exogenous variables in the system to serve as instruments for each right-hand-side endogenous variable. Our empirical model includes enough exogenous variables to meet both order and rank conditions of identification.

3.5. Specification of the empirical model Two sets of simultaneous equation systems are estimated. In the first case, remittances and educational spending (both variables expressed as a share of GDP) are endogenously determined within the system, as follows;

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(6) (7) where all variables are expressed in natural logs (ln). This two-equation system has educational spending (Edus) and remittances (Remit) as endogenous, Z1 refers to exogenous variables included in the educational spending equation only, Z2are exogenous variables in the remittances equation only, and Xit are other predetermined variables in the system.

A similar system is specified below for the relationship between healthcare spending (HC) and remittances (expressed as shares of GDP).

(8) (9)

3.6. Wu-Hausman test of endogeneity Several studies have determined remittances to be endogenous to outcome variables in empirical analyses. We test for endogeneity between remittances and educational spending on the one hand, and remittances and healthcare spending on the other. We use the Wu-Hausman procedure to test for endogeneity.

Assuming we estimate equation (6) by the OLS procedure and want to find out if ln(Remitij) is endogenous;The procedure is outlined below; Step I: Estimate the reduced form equation and obtain the predicted residuals ln(Remitij)=co+c1Z1+c2Z2+c3Z3+c4Z4+u

(10)

where the Ziare exogenous variables (instruments).

Step II: Re-estimate the OLS equation (Eqn. 6) including the predicted residuals from Eqn. 10.

(11) Step III: Perform test of significance of H0:

=0

H1:

0

The hypothesis that ln(Remit) is exogenous The hypothesis that ln(Remit) is endogenous

If we reject the null hypothesis, it implies that remittance is endogenous and OLS results are inconsistent.

Thus, instrumental variable methods or simultaneous equations estimation should be preferred.

3.7. The data The data cover 71 developing countries from the World Bank’s six regionsover the period of 1998 to 2010. These six regions include; East Asia and Pacific (8 countries); Europe and Central Asia (14 countries); Latin America and the Caribbean (16 countries); Middle East and North Africa (7 countries); South Asia (5 countries), and Sub-Saharan Africa (21 countries). The countries included in the sample are those that have complete data for the given period of the study. Our sample covers all six regions of the world so as to be representative of all developing countries in terms of geography, size, and economic progress.

The remittances data are obtained from the IMF balance of payments statistics and the World Bank’s Migration and Remittances Factbook. Remittance, measured as inflows (current USD) is defined as the sum of three components—workers’ remittances, compensation of employees and migrants' transfers. This composite measure of remittances counts only officially recorded transfers. Educational and health care

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expenditures as percentage of gross domestic product of each country are obtained from World Bank Development Indicators.

Figure 2 plots a comparison of remittance inflows by region. Latin America and Caribbean countries (LAC) dominated the other regions in terms of volumes of remittance inflows for the most part of the late 1990s and early 2000s until 2006 when they were overtaken by East Asia and Pacific countries (EAP) predominated by massive inflows into China. Currently, the EAP and SAS regions remain the top recipients of remittances. Sub-Saharan Africa over the years has tended to receive the lowest remittances of any region. Low remittances in SSA may be attributed in part to high informal (unrecorded) remittances to the region. Freund and Spatafora (2005) estimates that informal remittances to developing countries are in the range of 35-75 percent of official remittances, and that Sub-Saharan Africa and Eastern Europe and Central Asia regions have relatively higher informal remittances while that of East Asia and the Pacific are relatively low. Moreover, South-South migration dominates South-North migration in the case of SSA compared to the other regions like LAC (where a greater percentage of migrants head North to USA and Canada), and similarly for the EAP and SAS (where most migrants head to Saudi Arabia and Western Europe).

Additional control variables like GDP per capita, labor force participation rates, and inflation are obtained from the World Bank Development Indicators. Percent of the population aged 15 and under as well as percent aged 65 and over are used as instrumental variables for educational and healthcare spending.

Another important variable is the Democ dummy variable which captures the effect of the receiving country's political regime type on volume of remittances received. The democracy dummy variable is constructed from the Polity IV database (Marshall et al., 2011). The Polity IV Project defines polity scores or regime scores for each country on a range from +10 (full democracy) to -10 (full autocracy). Polity is defined as a "political or governmental organization; a society or institution with an organized government; state; or body politic" (ibid, pp. 1).For our purpose, we define the Democ dummy variable to equal one if a country consistently scored a positive during the period covered in our data, and zero otherwise.

Figure 2: Remittances (Inflows) by Region, 1998 -2010 Remittance Inflows, Total ($US Million)

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1998

2000

EAP

ECA

2002 LAC

2004 MNA

2006 SAS

2008

2010

SSA

Source: IMF, Balance of Payments Statisticsand World Ban Migrant and Remittances Factbook2011.

Note: EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and Caribbean; MNA = Middle East and North Africa; SAS = South Asia; SSA = Sub-Saharan Africa

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4. Results There is evidence of endogeneity between remittances and the outcome variables. The WuHausman test results (not reported) confirm this to be the case. This endogeneity could arise as a result of several factors; reverse causality, omitted variables, measurement errors, and selection bias. The results show that remittances increase investment in human capital of recipient countries, but also countries that invest highly in human capital development tend to produce more remittances. This finding is possible because households are known to make decisions simultaneously; for example, to migrate, invest in education or healthcare, or consume in the present or save for the future. Reverse causality (feedback effect) and simultaneous decision making lead to a simultaneity bias, which if not taken into account could produce misleading estimates of the effect of remittances. To overcome this simultaneity bias, we estimated the simultaneous equation systems represented by equations (6) and (7), and (8) and (9).

Equations 6-9 were first estimated using ordinary least squares, then each pair of simultaneous equations was estimated by three-stage least squares method. Table 1 reports the estimated results of the OLS and 3SLS regressions for equations 6 and 7. Similarly, Table 2 reports the results of the OLS and 3SLS regressions for equations 8 and 9. Table 1 shows that controlling for endogenous effects, remittances have a positive effect on educational spending in both OLS as well as 3SLS regressions and this effect is very highly significant, statistically. However, the OLS estimate of the effect of remittances on educational spending has a downward bias (0.0623 versus 0.0793 in the 3SLS). Thus, if we use the OLS results we under-estimate the impact of migrant remittances on educational investment in receiving countries. We can infer from the 3SLS estimate that on average a 10% increase in migrant remittances is associated with a 0.79% increase in the percentage of the receiving country's gross domestic product allocated to investment in education. In a similar vein, and inferring from the results in Table 2, a 10% increase in migrant remittances is associated with a 0.30% increase in health spending (as a percent of GDP). The OLS estimate of the effect of remittance on health spending also shows a downward bias (0.0266 versus 0.0302 from the 3SLS equation).

These findings of positive effect of remittances on human capital investments areto be expected: remittances relax liquidity constraints, thus allowing households to meet food expenses and other (non-food) expenses such as investments in human capital and housing. Indeed, remittance receipts make it possible for households to undertake investments that otherwise would have been impossible due to credit constraints.

Gobel (2013) finds empirical evidence in the case of Ecuador that remittances increased expenditures on education and healthcare. Yang (2008) found in the case of Filipino households that educational expenditures rise while child labor falls as a result of a positive shock in remittance receipts.

Gross national income per capita (lngnpcap) is positively related to remittances, negatively related to healthcare spending but has no significant effect on educational spending. All things remaining equal, if a country's gross national income per capita is 1% higher than another, it can be expected to receive 0.24% to 0.39% more remittances than another similarly situated country with lower per capita income. The upshot of this finding is that, relatively poorer countries tend to receive less in remittances which is probably because they produce less migrants than relatively richer countries, that are probably able to send more migrants to other countries. It could also be a reflection of the skill level of the migrants: relatively richer countries educate more of their citizens, produce more skilled migrants who earn higher wages in the destination countries, and consequently remit more to their home countries. The results also show that relatively richer countries spend a lesser percentage of their GDP on healthcare. Thus, if per capita income increases by 10%, healthcare spending falls by 0.90%, ceteris paribus.

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We also investigate the effect of male and female participation in the labor force on human capital investments. The results show that the percentage of females in the labor force (lnlabprtfem) does not significantly affect educational spending in this sample of countries, while a higher percentage of males in the labor force (lnlabprtmal) is negatively associated with spending on education (-1.5). However, higher female participation in the labor force is positively associated with higher spending on healthcare (0.16) while higher male participation is negatively associated with healthcare spending (-0.80). Inflation (lninfl) does not appear to significantly influence investments in human capital. The inflation rate is only marginally significant in the educational spending equation with a negative sign. This would indicate that if the inflation rate goes up, spending on education falls, but we have no apriori expectation regarding the direction of effect of this variable. Based on intuition only, a positive effect of inflation would have made more sense in that in times of higher inflation people may want to put their money in long term investments like education.

The percent of population 15 and under (lnpop15) is not significantly different from zero, an indication that it does not have any relationship with educational spending but is negatively related to health expenditure. The Democracy dummy variable (Democ_dum) is positively related to the level of remittances.

Thus, democratic countries receive on average more than 40% more remittances than autocratic countries, ceteris paribus.

We also control for regional effects by including five regional dummy variables; EAP (East Asia and Pacific), LAC (Latin America and Caribbean), MNA (Middle East and North Africa), SAS (South Asia), and SSA (Sub Saharan Africa). Europe and Central Asia (ECA) is left out as the reference region. Thus, we interpret the coefficients on the included regional dummy variables relative to ECA. From Table 1, in terms of educational spending, four of these dummy variables are positive and significant. For example, the coefficient on ssa is 0.345, indicating that Sub-Saharan Africa countries spend more on education (as a percent of their GDP) than countries in ECA region. However, SSA countries receive less in remittances (as indicated by -1.197 in the remittances equation) than countries in the ECA region. Latin America and Caribbean countries also spend more on education (as percentage of GDP) than ECA countries. The same applies to countries of the MNA and EAP regions. Countries in South Asia (SAS) do not significantly spend more of their gross domestic product on education than countries in the ECA region.

As far as health spending is concerned, Table 2 shows that two regional dummy variables have a positive and significant effect on health spending, while two have a negative effect. Thus, LAC and MNA significantly spend more (as a % GDP) on healthcare services than countries of the ECA region. EAP and SAS countries significantly spend less on healthcare services (as a percent of GDP) relative to countries of the ECA region.

5. Conclusion Migrant remittance has become an important component of external financing for many developing countries around the world. The data show that remittances have become the most stable source of foreign exchange, and in some cases, accounts for a sizable share of gross domestic product of recipient countries.

It was once the belief of many scholars in this line of research that remittances only finance consumption (Lipton, 1980; Chandavarkar, 1980). This view, however, has now been proven wrong as more empirical evidence shows that remittances are put to uses beyond consumption; such as investments in housing, education, and healthcare.

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Rather than follow the traditional methodology of instrumental variables or two-stage least squares to determine the impact of remittances, this study uses the more robust approach of three-stage least squares estimation, which is a system estimator. The use of system estimation confers certain suitable properties (consistency and efficiency) that are lacking in the use of single equation two-stage least squares. Using a rich dataset of 71 developing countries drawn from six regions of the World Bank's classification, the results show that remittances positively impact educational and healthcare spending in developing countries.

Table 1: The Effect of Remittances on Educational investment (1) (2) (3) (4) lnedus lnremit lnedus lnremit OLS OLS 3SLS 3SLS lnremit 0.0623*** 0.0793*** (0.00960) (0.00972) lngnpcap 0.00278 0.325*** -0.0385 0.244** (0.0305) (0.0941) (0.0307) (0.0889) lninfl -0.0258+ -0.0182 (0.0145) (0.0145) lnlabprtfem 0.0603 -0.580* 0.0260 -0.658** (0.0598) (0.268) (0.0601) (0.237) lnlabprtmal -1.471*** 2.636** -1.535*** 1.011 (0.209) (0.857) (0.209) (0.845) lnpop15 0.137 0.0379 (0.1000) (0.104) ssa 0.291*** -1.407*** 0.345*** -1.197*** (0.0594) (0.223) (0.0586) (0.207) sas 0.0368 -0.805* 0.0669 -0.489 (0.0799) (0.364) (0.0776) (0.319) mna 0.420*** -0.463 0.459*** -0.977** (0.0749) (0.333) (0.0739) (0.313) eap 0.207** -1.227*** 0.207*** -0.926*** (0.0634) (0.273) (0.0628) (0.246) lac 0.349*** -1.560*** 0.434*** -0.766** (0.0626) (0.263) (0.0637) (0.247) *** lnedus 0.990 1.371*** (0.183) (0.175) Democ_dum 0.633*** 0.440** (0.163) (0.150) Cons 6.670*** -9.443* 7.648*** -1.936 (0.973) (4.010) (0.957) (3.999) N 577 591 512 512 R2 0.271 0.217 0.296 0.233 adj. R2 0.257 0.204 F 19.09 16.10 221.31 80.34 Standard errors in parentheses, +p< 0.10, *p< 0.05, **p< 0.01, ***p< 0.001 All explanatory variables are first lags of their natural logarithms except for dummy variables (ssa, mna, sas,eas,lac, Democ_dum); Remit=Remittances/GDP,â&#x20AC; denotes chi-square statistic. Note: EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and Caribbean; MNA = Middle East and North Africa; SAS = South Asia; SSA = Sub-Saharan Africa; gnpcap=gross national income per capita,

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labprtfem= labor force participation rate (females), labprtmal= labor force participation rate (males); pop15=percent of population aged 15 and under; infl=inflation rate.

Table 2: The Effect of Remittances on Healthcare investment (1) (2) (3) lnhc lnremit lnhc OLS OLS 3SLS *** Remit 0.0266 0.0302*** (0.00527) (0.00552) lngnpcap -0.0865*** 0.384*** -0.0947*** (0.0155) (0.0688) (0.0162) Ininfl 0.0161* 0.00695 (0.00785) (0.00815) Lnlabprtfem 0.165*** -1.027*** 0.157*** (0.0304) (0.184) (0.0323) lnlabprtmal -0.804*** 1.784** -0.760*** (0.105) (0.615) (0.108) lnpop15 -0.174*** -0.221*** (0.0521) (0.0558) *** ssa 0.0179 -1.096 0.0302 (0.0341) (0.166) (0.0350) sas -0.274*** -0.347 -0.273*** (0.0445) (0.270) (0.0449) mna 0.0953* -0.200 0.120** (0.0434) (0.250) (0.0447) *** *** eap -0.253 -0.704 -0.261*** (0.0342) (0.198) (0.0352) lac 0.257*** -0.555** 0.301*** (0.0348) (0.195) (0.0366) lnhc 0.624*** (0.171) Democ_dum 0.511*** (0.116) Cons 5.697*** -4.434 5.763*** (0.484) (2.831) (0.494) N 1125 1139 1019 R2 0.341 0.261 0.354 adj. R2 0.335 0.255 F 52.42 39.89 415.86† Standard errors in parentheses;+p< 0.10, *p< 0.05, **p< 0.01, ***p< 0.001

(4) lnremit 3SLS 0.394*** (0.0676) -1.117*** (0.174) 1.139+ (0.604) -0.915*** (0.159) -0.0916 (0.255) -0.313 (0.244) -0.474* (0.190) -0.0861 (0.186) 0.884*** (0.171) 0.404*** (0.114) -1.838 (2.778) 1019 0.299 480.79†

All explanatory variables are first lags of their natural logarithms except for dummy variables (ssa, mna, sas,eas,lac, Democ_dum); Remit=Remittances/GDP, † denotes chi-square statistic; Note: EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and Caribbean; MNA = Middle East and North Africa; SAS = South Asia; SSA = Sub-Saharan Africa; gnpcap=gross national income per capita, labprtfem= labor force participation rate (females), labprtmal= labor force participation rate (males); pop15=percent of population aged 15 and under; infl=inflation rate.

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6. References [1] Acosta, P. Labor Supply, School Attendance, and Remittance from International Migration: The Case of El Salvador. World Bank Policy Research Working Paper 3903, Washington, DC. 2006.

[2] Acosta, P., Calderon, C., Fajnzylber, P., and Lopez, H. What is the Impact of International Remittances on Poverty and Inequality in Latin America? World Development, 36(1):89-114. 2007.

[3] Adams, R.H. The Economic Uses and Impact of International Remittances in Rural Egypt. Economic Development and Cultural Change, 39: 695-722. 1991.

[4] Adams, R.H. Remittances, Household Expenditure and Investment in Guatemala. Policy Research Working Paper 3532. Washington, DC: The World Bank. 2005.

[5] Adams, R.H. and Page, J. Do International Migration and Remittances Reduce Poverty in Developing Countries? World Development, 33(10):1645-1669. 2005.

[6] Alderman, H. Saving and Economic Shocks in Rural Pakistan.Journal of Development Economics, 51 (2): 343-365. 1996.

[7] Borraz, F. Assessing the Impact of Remittances on schooling: the Mexican Experience. Global Economy Journal, 5(1):1-30. 2005.

[8] Calero, C., Bedi, A.S., and Sparrow, R. Remittances, Liquidity Constraints and Human Capital Investments in Ecuador. World Development, 37( 6): 1143-1154. 2009.

[9] Chandavarkar, A.G. Use of Migrants' Remittances in Labor-Exporting Countries.

Development, 17(2): 36-9. 1980.

Finance and

[10] Drabo, A. and Ebeke, C. Remittances, Public health Spending, and Foreign Aid in the Access to health Care Services in Development Countries. CERDI, Etudes et Documents, E 2010.04. 2010.

[11] Edwards, A.C., and Ureta, M. International Migration, Remittances and School: Evidence from El Salvador, Journal of Development Economics, 72(2): 429-461. 2003.

[12] Freund, C. and Spatafora, N. Remittances: transaction costs, determinants, and informal flows. World Bank Policy Research Working Paper 3704. 2005.

[13] Gilani, I., Khan, M., and Iqbal, M. Labor Migration from Pakistan to the Middle East and its Impact on the Domestic Economy. Research Report No. 127. Islamabad: Pakistan Institute of Development Economics. 1981.

[14] Glytsos, N.P. Measuring the Income Effects of Migrant Remittances: A Methodological Approach Applied to Greece. Economic Development and Cultural Change, 42 (1): 131-168. 1993.

[15] Greene, W.H. Econometric Analysis, 5th Ed.,pp. Prentice Hall, New York. 2003.

[16] Gobel, K. Remittances, expenditure patterns, and gender: parametric and semi parametric evidence from Ecuador. Journal of Migration, 2(1):1-19. 2013.

[17] Gupta, S., Pattillo, C.A., and Wagh, S. Effect of Remittances on Poverty and Financial Development in Sub-Saharan Africa. World Development 37 (1): 104-115. 2009.

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[18] Hanson, G. and Woodruff, C. Emigration and Educational Attainment in Mexico. Unpublished Manuscript, University of California, San Diego. 2003.

[19] IMF. Balance of Payments and International Investment Position Manual. The International Monetary Fund, Fifth Edition (BPM5). Washington, DC. 2007.

[20] Lipton, M. Migration from Rural Areas of Poor Countries: The Impact on Rural Productivity and Income Distribution. World Development, 8: 1-24. 1980.

[21] Lopez, J.R., and Seligso, M.A. Small Business Development in El Salvador: The Impact of Remittances. In Migration, Remittances and Small Business Development: Mexico and Caribbean Basin Countries, Vol.4 Ed. S. Diaz-Briquets and S. Weintraub. Boulder, Westview: Series on Development and International Migration in Mexico, Central America and the Caribbean Basin, pp. 594-624. 1991.

[22] Mansour, W., Chaaban, J.,and Litchfield, J. The Impact of Migrant Remittances on School Attendance and Education Attainment: Evidence from Jordan. International Migration Review, 45(4):812-851. 2011.

[23] Mansuri, G. Migration, School Attainment and Child Labor: Evidence from Rural Pakistan. World Bank Policy Research Working Paper 3945, June 2006. Development Research Group, World Bank, Washington DC. 2006.

[24] Marshall, M.G., Jaggers, K., and Gurr, T.R. PolityTM IV Project: Political Regime Characteristics and Transitions, 1800-2010. Center for Systemic Peace.www.systemicpeace.org/polity/polity4.htm. 2011.

[25] Sofranko,A.J., and Idris, K. Use of overseas migrant remittances to the extended family for business investment: A Research Note. Rural Sociology, 64: 464-481. 1999.

[26] Wooldridge, J.M. Introductory Econometrics; A Modern Approach. 3ed. Publisher: Thomson SouthWestern, pp. 567. 2006.

[27] World Bank. Outlook for Remittance Flows 2012-2014. Migration and Development Brief, #17.

Migration and Remittances Unit, The World Bank, Washington, DC. 2011.

[28] Yang, D. International Migration, Remittances and Household Investment: Evidence from Philippine Migrants' Exchange Rate Shocks. Economic Journal, 118: 591-630. 2008.

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On intergenerational mobility in Italy: what a difficult future for the young Federica Roccisano 1+ 1

Catholic University Doctoral School in Economic Policy Department of Economics and Social Sciences

Abstract: The objective of this paper is to make a description of the economic perspective of young people in Italy. To do this we will analyze two important problems. First of all we analyze the level of public debt and the meaning of this for the present young generations as well for the future generations. Then we investigate the intergenerational mobility. After it, weâ&#x20AC;&#x2122;ll estimate the intergenerational income elasticity for Italy using the TS2SLS estimator methodology. The analysis of the results highlights the particular situation of Italy in which the parental status can strongly influence the economic future of sons.

Keywords: intergenerational equity, inequality; intergenerational mobility; public policy JEL codes: J62, J68.

1. Introduction Today the Developed Countries, like the members of the European Union, are heavily prejudiced by numerous factors, like the population ageing or the slow birth rates. This kind of empirical evidence influences not only the population growth, but also the Welfare System of each State and as a consequence the dissemination of poverty in the population.

The objective of this paper is to demonstrate that the idea of intergenerational equity should be placed at the basis of future reforms in order to maintain the same opportunities between present and future generations and between elderly and young people. In particular, the work does not point the attention on the intra-generational equity but deals mostly with intergenerational equity, between different generations living at the same time (young and old, father and son) and between the present generations and future generations.

The intergenerational redistributive policies have two important characterizations: â&#x20AC;&#x153;First, issuing debt involves the promise of future transfers from yet-unborn generations. Second the promise is made without the consent of the future generations that will bear the burden of the redistribution1â&#x20AC;?.

The second characteristic shows that, about the case of the economic and redistributive aspect of equity, the biggest problem is related to the impossibility of creating a negotiation between the generations. The consequences of this impossibility have to be paid, once more, by the future + PhD student, e-mail: Federica.Roccisano@unicatt.it .

1 Tabellini G., 1991: p. 263

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generations because when they are asked to pay the debt has already been contracted. An important variable for this argument is the propensity to altruism, or solidarity, between the generations. This particular aspect is based upon the assumption according to which as parents take care of their children, so the present generations take care and consider the protection of future generations. This position loses its effectiveness if we consider that the propensity to altruism is variable in base of the family education and it is not linked to economic or normative aspects2.

The current rate of ageing is worrying because, in few years, the next generations shall have to pay the contributions to a portion of population that is increasing more and more3. It is evident that changes in the demographic structure, increasing the ratio of older age groups and classes of working age, can cause generational conflicts, lead to social tensions and undermine the social welfare systems with bad consequences on the life of the European population. The particular economic situation of today makes also difficult for young people to have the possibilities to gain the independence: “children remain dependent on their families for longer and delay setting up their own households”.4 In this paper we will analyse an important problem related to this situation: the redistribution of income (intergenerational mobility). Our area of study is one of the most problematic countries in Europe: Italy. To examine the evolution of intergenerational mobility in this Country, we will use data from the Survey of Household Income and Wealth (SHIW). For the analysis on the intergenerational transmission of poverty we will use data from the Intergenerational Module of the EU SILC 2005 Module on Intergenerational transmission of poverty and the EU-SILC 2011 Module on Intergenerational Transmission of Disadvantage.

2. On intergenerational equity 2.1 From Intergenerational transmission of poverty…

The trend of intergenerational mobility has changed following the evolution of the society during the first half of the 20th century: before the two world wars the grandparents of those born in the 1940s shared many of the same experiences with their children; while for those born in 1960 changes in work, employment and politics have produced a lot of benefits5. The worst situation regards people born in 1980 and 1990 when workers began to leave their job in increasing numbers and at earlier ages: poverty rates amongst the elder declined while younger households and opportunities rose6.

That is why many researchers talk about intergenerational crisis or intergenerational conflict to underline how the current situation is producing a very poor future for young generations7.

What emerges today is that the eradication of child and young poverty should be one of the priorities for all the Welfare System. If young people live in poor conditions with low income there will be long-term consequences: we will have poor adults who in turn raise poor children. The 2 Kotlikoff L.J., 2001 3 Bifulco R., D’Aloia A., 2008 4 Saraceno, 2008 5 Higgs, Gilleard, 2010 6 Costa, 1998 7 Emery T., 2012

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intergenerational transmission of poverty is from poor parents to poor children when the living conditions, the endowments and the investments on education of parents are not able to get better the socio-economic status of their sons8. That is the so-called generational bargain: “the basic idea of the inter-generational bargain is a simple one: in all ‘communities’, from family to globe, there are relationships for the transfer of resources between generations and these relationships carry with them often un-codified ‘rights’ and obligations”9. Unfortunately it does not depend just on individual motivations (altruistic or solidaristic), but it is also subject to the Welfare System, the economic conjuncture and the functioning of the societal structures and institutions, all of which can drive inequality and what is transferred to the next generation.

In his recent study Nolan has shown how the Welfare System influences the impact of intergenerational transmission of poverty. Particularly about Italy and Southern European Countries he highlights how the crucial role of the family makes the society quite “immobile” and so the child born in a poor family is designated to be a poor adult10.

Tab. 1: The Moore Approach to Intergenerational Transmission of Poverty What is transmitted How is it transmitted Financial, Material, Environmental Capital: Cash Land Debt Common Property resources Human Capital: Educational qualifications, knowledge, skills, coping/ survival strategies Good mental/physical health Disease, impairment Intelligence?

Social, Cultural, Political Capital: Traditions, institutions, norms of entitlement, value systems Position in community Access to key decision-makers, patrons, organisations ‘Cultures of poverty’?

Insurance, pensions Bequests, dispossession Bride wealth Environmental conservation/degradation Labour bondage Socialisation Investment of time/capital in care; education/training; health/nutrition Contagion, mother-to-child transmission Genetic inheritance

Which factor transmission

affect

Demographic factors: household structure, broader process of fertility transmission Nature of guardian: education and skill level Social, cultural, legal and governance related factors: norms Economic Factors: labour market Nature of living space: stigma, sense of community

Socialisation and education Kinship Locality Genetic inheritance

Intergenerational transmission of poverty involves private relations (between parents and sons) and public relations concerning public policies like the investments on educational system or the norms of entitlement determining access to capital. About the different institutions that can influence the lifecycle of a child one of the most important studies is the one made by Moore: he creates a taxonomy that explains what are the “material” and “immaterial” aspects in the intergenerational transmission of poverty and suggests how these aspects are transmitted. In Table 1 we can see the Moore taxonomy. If

8 Collard, 1999 9 McGregor, J. A., Copestake, J. G. and Wood, G. 1999 10 Nolan, 2012

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for the material aspect we can consider the transmission of land or debt, about the immaterial aspect we consider knowledge or skills, or the position in a community11.

What we can say is that the institutions that concur to influence the intergenerational transmission of poverty are not only the family, but also the market determining the economic health of a society, the community (friends, neighbours) defining the positions of different individuals and of course the State12. Policy-makers have to think not only to the aim of reducing child poverty in the present but also to get better the possibilities for future children and for future society. Investment policies, on the other hand, address family functioning, early childhood and public expenditures, so they deal with long-term investment in children and in their welfare. It is important to focus, for example, on investment on education, addressing not only early child development, but also the limitation toward the access to quality tertiary education or even to the labour market, due to early tracking or unfair and non-meritocratic selection practices. As Solon said, the progressivity of public policy can promote social mobility by compensating in the same degree family background and labour market inequalities13. In the next paragraph we will deepen the definition of intergenerational mobility.

2.2 …to intergenerational mobility The investigation on intergenerational mobility was made first by sociologists. The pioneers have studied intergenerational social mobility on the basis of correlations of parents’ and children’s “socioeconomic status” score14. While in the last decade sociologists have deepen mostly the persistence between parents and children’s outcomes15. Recently, also many economists have demonstrated the strong presence of intergenerational transmission of the economic status. The most reliable reason of this connection is the job of the head of household, but many researchers, e.g. sociologists or psychologists, have underlined the role of the “cultural inheritance” and also the environmental and genetic connectedness: the so-called influence of Nature and Nurture16. But Zimmerman in 1992 has demonstrated that regression estimates by the Nature and Nurture’s devotees are not capable of capturing linkage between genetic endowment and economic status17.

About the methodology to evaluate the intergenerational mobility the first step was made by Backer and Tomas in 1979 with their model, used to analyse the distribution of income across families, regions or countries. This first model was based on the utility maximization of parents’ household and on the centrality of endowments: the future wealth of children is related to all endowments determined none only by capitals or education but also by reputation, ability, race and other genetic characteristics of their family18.

11

Moore, 2001 Wood, 2000 13 Solon, 2004 14 Blau Duncan, 1967; Featherman Hauser, 1978 15 Lesser E.L., 2000 16 Solon G, 1992 17 Zimmerman D. J., 1992 18 Altzinger W., Schnetzer M., 2010 12

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After this first study, the two most important researchers in their study in 1992 Solon and Zimmerman19 have built the basis of the measurement of intergenerational mobility as the relationship between the socio-economic status and the income of parents and the status and income of their sons: (3)

where ys is the vector (in log terms) of the father’s permanent income while yd is the vector of son’s permanent income20. The coefficient β indicates the rate of the intergenerational elasticity and his value varies between 0 and 1. If β is high we will have a very strong impact of parental outcomes on children’s economic status: high level of intergenerational inequality and less intergenerational mobility21. If β is near zero we can say that there is no relation between son’s position and his parent’s position and that we are in a very mobile society.

A recent alternative to the elasticity β is the intergenerational correlation (ρ), or the correlation between the log earnings of the two individuals (father and son), that is equals to the elasticity only if the standard deviation σ of log earnings is the same for both generations22: (4)

Also if technically there are not many differences between these two measures, the first one, based on elasticity, is easier to estimate and to be used, because it is not prejudiced by classical measurement error in y1.

Finally, it is important to underline that to measure intergenerational mobility with the estimation of the elasticity we need to work on datasets that have information about lifetime earnings for both fathers and sons. The best way to have a realistic measure does not consider earnings in just one year for the two generations, but the average of at least 4 or 5 years23.

About the “preferable value” of the intergenerational mobility we have to consider some different positions. At the beginning, researchers such as Becker and Tomes, studying the condition of United States, have projected that the better value of the intergenerational elasticity should be 0.2 or less24.

But after some years, Solon and Zimmerman showed how it is possible to talk about mobile society also if the value of β is bigger: considering the average of income over some years (from 4 to 10) it is possible to have a better estimation of permanent income capacity and the value of intergenerational elasticity could be also 0.425. More recent studies, founded on more recent US data, argue that for the modern society the perfect value of β is around 0.626.

19

Solon 1992 and Zimmerman 1992 Mocetti S, 2007 21 Blanden j., Gregg P., Machin S., 2005 22 Black S.E., Devearux P.J., 2010 23 Solon G., 1992 24 Becker G.G., Tomes N., 1986 25 Solon G., 1992 and Zimmerman, 1992 26 Mazumder B, 2005 20

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Tab. 2: International Comparable Estimates of Intergenerational Mobility27 Country Dataset Sons Sons Earnings Measure of Parental Born Measure Status Britain British Cohort Study 1970 2000 (Age 30) Parental Income Average 1980-86 US Panel Study of 1954-70 Age 30 Parental income when son Income Dynamics were 10-16 (average) West Socio-Economic 1960-73 2000 Parental Income 1984-88 Germany Panel (average) Canada Intergenerational 1967-70 1998 Parental Income when son Income Data (from aged 16 tax register) Norway Register Data 1958 1992 and 1999 Father’s earnings 1974 (average) Denmark Register Data 1958-60 1998 and 2000 Father’s earnings 1980 Sweden Register Data 1962 1996 and 1999 Father’s earnings 1975 Finland Quinquennial Census 1958-60 1995 and 2000 Father’s earnings 1975 (average)

Value of β 0.271 0.289 0.171 0.143 0.139 0.143 0.143 0.147

Most of the analyses conducted on intergenerational mobility concern the United States or Northern Europe while in the other countries of Europe only recently the interest on this kind of argument is gowned. Table 1 shows us a little picture of the situation of US, Canada and the Northern Europe.

We can highlight how for all these countries the value of β is very little and so we can easily talk about mobile society. In the next chapter we will try to compare the data of Table 2 with data of our country: Italy.

3. Case study The actual situation of Italy is really difficult because of the global financial crisis, the high level of public debt and unemployment and the low level of GDP growth rate. As we said above, all the institutions (state, market and community) concur to determine the intergenerational transmission of poverty.

To have an evidence of this problematic situation we decide to consider the results of two important questions related to the feeling of young with the economic situation of the family. The first question that we analyse is part of the EU-SILC module on intergenerational transmission of poverty of 2005 and is about the periodicity financial problem of teenagers28. If we consider the answer of this question, we can evidence that Italy is placed at the bottom of the classification with Eastern countries, while the first positions are occupied by the Northern Countries (Tab. 3).

27

Blanden j., Gregg P., Machin S., 2005 For this variable, information is available from 23 countries (all participating in the 2005 survey, apart from DE, EL and PT). A large majority (21) put a question with the same response items as the required standard variable. There are possibly some marginal variations in the exact wording, but some of these may be simply due to language differences or the translation process, for example using phrases like “most of time”, “very often”, “always” etc. for the top response category.

Here are a few examples of question formulation.

28

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Tab. 3 : Teenage in family with financial problems ordered by (*) Our elaboration from EU-SILC Module 2005 Mostly Often Occasionally 9,6 14,5 1. Denmark

(*)Rarely 75,9

2. Norway

9,3

15,3

75,4

3. Island 21. Italy 22. Slovenia 23. Slovakia

9,9 41,4 43,5 43,3

15,6 28,1 29,6 32,1

74,5 30,5 27,9 24,6

Five years later a similar question was made to with in the Survey of EU-SILC Module of Intergenerational transmission of disadvantages of 2011. In this case the questioner paid more attention not to the periodicity of the problems, but just to an evaluation (moderately bad, bad, very bad) of the financial situation of the family29 . For the case of the numerosity of the “very bad” situation Italy occupies the ninth position, while for the “bad” at the seventeenth place and for the “moderately bad” is at the seventh place, worse than the Czech Republic and Estonia (tab. 4).

Tab. 4: Teenage in family describing the financial situation of the household.

Our elaboration from EU-SILC Module 2011 EU 27 (Average) Italy Value Very bad Bad Moderately bad

Ranking 4.3 8.2 19.6

9° 17° 7°

3.9 8.6 16.9

It is particularly important to underline how “the working sector” of the father determines for a son the possibility to be or not to be poor: as Nolan has shown in his study in Italy the poverty rate increase from 9,2% for whom was born in a family with a father working in high qualified sector to 25,1% for children born in a family with a father working in elementary sector30. The reason of this vulnerability is the crucial role of family as the principal agent of the support system and the very weak labour market. Because of this structural situation the rate of intergenerational mobility is lower than the most developed European Countries.

To have a measure of the intergenerational mobility we apply the classic equation of Solon.

Unfortunately Italy has not got a complete panel with all the information for at least two generations, like those used to study the countries in table 1. To overcome this obstacle we decided to follow a method already applied by several researchers, like Piraino and Mocetti, who have studied the Italian case. Hence, we will use the Survey of Household Income and Wealth (SHIW) and, since this survey is too much undersized to obtain consistent results, we will create two different samples and proceed following the TS2SLS estimator (two-sample two-stage least squares).

29

The objective of this variable is to assess the respondent's feeling about the financial situation of the household in which the respondent was living when he/she was around 14 years old.

30 Nolan, 2012

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Since the observation made by Francesconi and Nicoletti31 about the weakness of the results using undersized panel data set, several Italian researchers – Piraino32, Mocetti33, Peragine and Serlenga34– had experimented with good result the method of TS2SLS to study Italian panel. The most important studies based on this approach are made by Angrist and Krueger35 and Arelano and Meghir36. This kind of estimation has been already applied to study intergenerational mobility where there were few variables available37.

So we can start following the TS2SLS procedure.

We have to construct a sample with the information on our pseudo – fathers: income, study level, occupation, geographical area. On this first sample we run a regression: (5)

Where is the current income of our pseudo-fathers that derives from all our information: is a matrix with the time-invariant determinants (geographical area, study level, occupation, income)38, contain the time-variant determinants (age), and are respectively the time –invariant disturbances and the usual disturbances.

The second sample will comprehend the variables set of pseudo-son in relation to which one of pseudo-father. Our regression will be: (6)

Where is the result of the first sample that allows us to replace in the second sample missing fathers’ income with their best linear predictions39.

We can synthetize all the disturbances and rewrite:

(7)

31

Francesconi M, Nicoletti C., 2006 Piraino P., 2006 33 Mocetti, 2011 34 Peragine V., Serlenga L., 2008 35 Angrist, Krueger, 1992 36 Arellano, Meghir, 1992 37 It was the case of Sweden (Björklund, Jäntti, 2007), Canada(Fortin N., Lefebvre S., 1998), Ecuador Nepal, Pakistan and Peru (Grawe N.D., 2004), and France (Lefranc A., Trannoy A., 2005).

38 It’s important to underline that we don’t consider gender information because in our model we’ll not consider the income of the breadwinner but just the income of fathers.

39 Mocetti, 2007 32

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The

that we will obtain is our intergenerational income elasticity estimates with TS2SLS.

In both sample the matrix with time-invariant characteristics is very important because we know that the geographical area of life can influences the possibility of earnings as well as incomes vary during a life of an individuals. Particularly about this last question Haider and Solon affirmed that the decision of the age to consider for the pseudo-father could generate several measurements errors: the best way to overcome this kind of problem is to consider a mean age of 40 for both pseudo-father (in the first sample) and pseudo-son (in the second sample)40.

This approach now is usually preferred when researchers have matched information on sons’ earnings and fathers’ characteristics (such as education and occupation) but no information on fathers’ earnings: Fathers’ earnings during the child’s teenage years are predicted using information on the relationship between earnings and education from other data from that period41.

The last property that we have to respect is related to the nature of variables: we must be sure that the variables are identically and independently distributed for both the two samples. Automatically it is possible to compare the results only with studies adopting the same methodology and same variables. That is what we are going to do in the next chapter.

3.1. Empirical results To analyze the intergenerational mobility in Italy we proceed with the construction of our samples.

For the first sample, which one of the fathers, we must consider all males between the ages of 35 and 47 years – just to have the optimal average age of 41 – in the temporal range 1986-1991.

Remembering equation 5, our variables will be: -

Region (NUTS1) Study Occupation Income

In the second sample we will include all males between the ages of 35 and 47 years from 2004 to 2010.

Tab. 5 Descriptive statistics for selected fathers and sons

Num Mean Age

40 41

Pseudo-Fathers (years 1984-1986) 3.224 41.99

Haider S.J., Solon G., 2006 Blanden, 2013

Sons’ report of fathers characteristics (years 2008-2010) 786 41.22

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Mean LogWage Mean Study Mean worksec

9.78 3.11 3.98

-2.54 2.79

Mean Workqual

2.65

3.15

Tab 6: First-stage regression of pseudo-fathers income on four variables N=3203 R2=0.1989 Variables coefficient Robust st. error t 0.106 0.061 1.75 Study 0.014 1.72 YearsEducation 0.025 -0.030 0.004 -7.30 WorkSect 0.034 0.004 8.31 WorkQual 9.387 0.068 138.55 Cons

Let us start with the data analysis doing the first stage regression of our model. As reported in table 5 we consider the level of study, the year of study, the work sector and the work qualification42 of the pseudo-father sample.

After this, we can use the log wage hat of the pseudo father to analyze the relation between this and the economic and professional status of the son sample. To do that, we go to the second stage of our regression.

Proceeding with the third stage we have to select the pseudo father of our first sample that has similar professional condition to real father of sample 2. After this selection we can compare the â&#x20AC;&#x153;log wage hatâ&#x20AC;? of regression made before and finally have the generational mobility ratio.

Tab 7: Second-stage regression with instrumental variables (2SLS) : logwagehatpd= studydad worksecdad workqualdad N=766 R2= 0,11 Variables coefficient Std. Error t 42

Study : 1= no school 2= elementary school 3=lower secondary school 4= high school 5=bachelor 6=specialization; Work Sec: 1= agriculture 2= industry 3= P.A. 4= commerce, handcraft, services; Work Qual: 1= factory worker 2=employee 3=teacher 4=official 5=executive 6= freelancer 7=entrepreneur 8=self-employee 9=unoccupied

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logwagehatpd Study WorkSec WorkQual Areageo Cons.

0.57 0.169 0.005 -0.038 -0.091 4.125

2.067 0.024 0.007 0.007 0.032 2.,255

0.27 7.03 -5.18 -2.86 -2.86 0.20

From this elaboration we have the level of intergenerational mobility in Italy is 0.44. Italy emerges as a country where parental status can influence very strongly the economic status of young people.

Also if we have a different methodology, following the Piraino and Mocetti papers, we can try to make a comparison between this rates and which one reported in table 3 we can suppose that Italy is less mobile than Norway or the other north European countries.

Tab 7: Summary Mocetti (2007) Piraino (2006) Our elaboration (2013)

SHIW (2004 – 1977) SHIW (2002 – 1977) SHIW (2010 – 1984)

β = 0.50 β = 0.47 β = 0.44

If we make a comparison with our study and the studies made by Piraino and Mocetti (table 8), we can say that in the last decade the rate of β has not relevant change evolving from a minimum level of 0.44 to a maximum level of 0.50.

This situation could be related to a lot of factor: the rigidity of the labor market with a very high level of unemployment, the persistence of the transmission of educational level, the low level of meritocracy, etc… For us it is important to underline how the international financial situation and the high level of Italian public debt and so the decrease of opportunity for the young could aggravate the situation.

4.

Concluding remarks

In this paper we have tried to describe the situation of young people in Italy, considering in the first paragraph the intergenerational transmission of poverty, and so the perception of teenagers about the financial situation of their family, while in the core of the paper we deepen the issue of intergenerational mobility.

The conclusion is that to analyze the Italian situation is not easy because of the lack of data and the difficulty to work on a survey that includes information from two generations of the same family, like we have in the British Cohort Study or the Panel Study of Income Dynamics of US. These differences make also difficult to compare the intergenerational mobility rate of Italy with that of other countries.

Anyway we have tried to minimize the disparity and to have a much more complete description of the Italian case, we have compared our results with thst of Mocetti’s and Piraino’s that in the last years have made a similar analysis of the Italian case. From this comparison we can say that Italy is not a mobile society and that may intervene to prevent the pauperization of the young people.

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5.

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Blanden J. Gregg P., Machin S., Intergenerational Mobility in Europe and North America. A report supported by the Sutton Trust, Centre for Economic Performance, London 2005

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Blanden J., Cross‐Country Rankings in Intergenerational Mobility: A Comparison of Approaches from Economics and Sociology, Journal of Economic Surveys, 2013

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Blau, P. M. and O.D. Duncan. The American Occupational Structure. New York: Wiley, 1967

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Collard, D. Generational transfers and the generational bargain. Journal of International Development 12/4, 1999

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Corak M., Generational income mobility in North America and Europe, Cambridge University Press, 2004

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Costa D., The Evolution of Retirement. University of Chicago Press, Chicago, 1998

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Emery T., Intergenerational Conflict: evidence from Europe, in Journal of Population Ageing, Springer Netherlands Volume 5, 2012

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Esping Andersen, Oltre lo Stato Assistenziale, per un nuovo “patto tra generazioni”, Garzanti, Milano 2010

[19]

Featherman, D. L. and R. M. Hauser. Opportunity and Change. New York: Academic Press, 1978

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Fortin N., Lefebvre S., Intergenerational income mobility in Canada, in M. Corak (ed.), Labour Market, Social Institutions and the Future of Canada’s Children, Statistics of Canada, Ottawa, 1998

[21]

Francesconi M, Nicoletti C., Intergenerational Mobility and sample selection in short panels, Journal of Applied Econometrics, n°21, 2006

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[22]

Grawe N.D., Intergenerational mobility for whom? The experience of high- and low earning sons in international perspective, in M. Corak (ed.), Generational Income Mobility in North America and Europe, Cambridge University Press, Cambridge 2004,

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Haider S.J., Solon G., Life Cycle variation in the association between current and lifetime earnings, American Economic Review, n°96, 2006

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Mocetti S., Mutamenti nella trasmissione intergenerazionale dei redditi dal 1950 al 1990, in Generazioni disuguali. Le condizioni di vita dei giovani di ieri e di oggi: un confronto, a cura di A. Schizzerotto, U. Trivellato, N. Sartor, Il Mulino, Bologna, 2011

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Nolan B., Analysing Intergenerational Influences on Income Poverty and Economic Vulnerability with EU-SILC, Gini Discussion Papers, 2012

[34]

Peragine V., Serlenga L., Mobilità sociale e uguaglianza delle opportunità in Puglia, in Primo Rapporto sulla povertà e l’esclusione sociale in Puglia a cura di Peragine V. e Chiarello F., Pagina Soc, Bari, 2008

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Piraino P., Comparable estimates of intergenerational income mobility in Italy, Working Paper, University of Siena, 2006

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Empowering youth leadership for democracy sustainability Manuela Epure 1  1

Member of the Academy of Romanian Scientists Professor at Spiru Haret University, Bucharest, Romania

Abstract. For the young generation it is important to learn about democracy and participation and project RO13-E9-2013-R1 “Empowering youth leadership for sustainable democracy“ developed by Pro Global Science Association played an important role in this direction. A special attention was paid to evaluate the learning outcomes, the effectiveness of methods used during the seminars and the potential of each “actors” involved to disseminate the project’ results. The paper is presenting the results of the feedback survey among participants and the main observations on participants experience, perception and opinions, their overall perception of their own informal learning experience. The results are important for further developments in the area of informal learning, learning retention rates and learning tools employed.

Keywords: youth, participatory democracy, leadership, informal learning, learning retention rate JEL Codes: Y80 1.

Introduction

Learning about democracy and participation is an imperative for young generation. Being part of an EUfinanced project it is always a challenging experience. The project RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability”(EYLDS) created the most suitable framework for both: learning and experiencing leadership and other more such as: participation, team building, multiculturalism, improving communication skills and self confidence etc. The project RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability” was possible due to the financial support of Youth in Action program and the Romanian Agency for Community Programs for Education and Professional Development.

The aim was to create an identification and training program for prospective young leaders and to have as a final result a system of recognition, motivation and rewarding of the active involvement of the youth in their local communities.

The current article comes out from the examination of a feedback survey results. The survey was run among project participants, young people between 15-30 years old. Short interviews were also taken with representatives of the host organisation (Pro Global Science Association) and its project partners.

A special attention was paid to evaluate the learning outcomes, the effectiveness of the methods used during the seminars and the potential of each “actor” involved in the dissemination of the project results.

Prof PhD, corresponding author. Tel.: + 40744173151, fax: +40 213698355 E-mail address: mepure@yahoo.com

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2.

The future starts today!

Democracy and youth involvement

2.1.

Participatory democracy is beneficial not only for those who have chosen to get involved, but also for the society as a whole. The participation and involvement of citizens is a must in any decision –making process and it is a prerequisite of the democracy’s functioning and consolidation. At the same time, a better adjustment of decisions and implementation plans means that the real social need is met. Getting citizens involved in the decision-making process means a better understanding of their needs and a bigger support to bring them in the public policies.

Being informed and involved, the young person will find answers more easily to some specific problems such as: choosing a career path, spending free time, socializing with people sharing the same ideals and interests, or finding a job.

An effective participation should mix the efforts of the youth and of the mature generation along with the authorities’ efforts. The ideal is to be articulated in a common strategy and a set of coordinated measures.

Having all these in mind, a project proposal was written and it turns that it was a successful proposal in the Youth in Action grant competition 2013, being funded for many reasons: conception, objectives, management and structure etc.

The project RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability aims and objectives were: -

to inform the youth about the democratic processes at the European level and to promote active participation in democratic processes at the local community level;

-

to prepare the most suitable candidates for all kind off election processes at nationa/European level;

-

to stimulate the youth interest for the development of associative structures;

-

to promote creativity and entrepreneurship and to help youngsters in developing skills to use in their fight against unemployment, marginalization and poverty;

-

to explore the leadership potential of the target group ;

-

to define the leader’s profile and to list the motivational determinants which can generate performance and long-term involvement;

-

to use informal education tools (simulation, debate, experiment, role-play etc) and to improve/measure the effectivness of these tools.

The international concern about the involvement of youth in the public decision emerged in early `90s. In 1992 the European Charter was adopted on the Participation of Young People in Local and Regional Life document of the European Council. 1 The main principles stated in this document are: -

1

the participation of young people to the local and regional life should be part of global politics of citizens’ participation at the public life;

Ilie S, Petrescu C(2005),– Tinerii şi participarea la decizie, CALITATEA VIEŢII, XVI, nr. 3–4,

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-

setting up the youth components of the sectoral politics, the local and regional authorities follow the implementation of different forms of youth participation, through consultation and cooperation with them or their leaders;

-

different forms of participations, specified in the Charter, are for all and a special attention will be paid to disadvantged groups, no matter the nature of this disadvantage (CE, 2003)

A recent report, commisioned by the European Knowledge Center for Youth Policy (EKCYP), is making a synthesis of the data provided by 35 national corespondents from the affiliated countries, regarding the youth participation. The study is trying to find an answer and to draw a global picture of Europe on2 : 1. legislation regarding youth participation; 2. the involvement of young people in the democratic representative system; 3. learning participation and rise awareness.According to Morlino, participation is “the entire set of behaviours, either conventional or unconventional, legal or borderline in relation with legality, that allows women and men, as individuals or group, to create, revive or strengthen a group identification or try to influence the recruitment of and decisions by political authorities (the representative and/ or governmental ones) in order to maintain or change the allocation of existing values.” (Morlino 2009: 39). Participation refers, therefore, to the citizens’ capacity and possibilities to take part in a democracy. For Dahl (1989, 2000: 37), effective participation is one of five criteria to be fulfilled by democracies: ‘Before a policy is adopted...., all the members must have equal and effective opportunities for making their views known to the other members as to what the policy should be’. ‘Inclusion of all adults’ is another one of these criteria for Dahl (1989, 2000: 38): „All, or at any rate most, adult permanent residents should have the full rights of citizens that are implied by the first four criteria”.

At the European level, young people are institutionally represented by the European Youth Forum. The importance of this institution’s aspirations are recognised by representatives across the continent. This is perhaps most clearly put by the motto ‘nothing should be done about young people without young people’, as quoted by a member of the Slovene Youth Council.

Encouraging volunteering as a key aspect of civic consciousness amongst young people has been one of the EU and Council of Europe’s foremost strategic goals in the past five years.

2.2.

Survey design

The RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability” was possible due to the cooperation of several partners as follows: Romania  Pro Global Science Association -Bucharest  Support for Youth Development Association- Cluj-Napoca

2

Manfred Zetner, (2011) Youth Participation in Policy Matching. Finding of a summary analysis of the information templates in participarea in the EKCYP, Viena

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Italy  Informamentis Europa- Santa Maria di Capua Vetere, Caserta  Work in Progress- Galatone, Lecce Latvia  Social Innovation Centre -Daugmale The expected impact of the project reffers to : - A better understanding of the leader concept and his/her traits.

- Raising awareness of decision makers of the importance of youth active involvement.

- Raising awareness of decision makers to the problems of youth in the community, acceptance of dialogue with youth leader.

- Changing attitudes of young people from passive to active, stimulating creativity, their awareness of the problems of their peers.

- Better communication of expectations, ideals and needs of young people.

- Awareness of the process of "granting the vote " - young people understand the responsibility of voting.

In order to evaluate the project accomplishements, a survey was designed and conducted among all the participants (40 persons) immediately after the project’s main activities were over. For this purpose a set of questions were developed and an online questionnaire was available, in a controlled environment, for a month . The access to questions was possible only for the participants and the response rate was 51.5%, which can be considered good compared with the average response rate in other similar online surveys. The technical support for running the survey was provided by SurveyAnalitics (www.surveyanalytics.com ).

Fig. 1: Survey participation statistics

From 40 persons, the questionnaire was opened by 32 using mainly the computer as an access device and mobile phone in a small percentage. The browser most frequently used to access the questionnaire was

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Chrome. The questionnaire completion rate was 94.74% , which is high and the average completion time was 3 minute.

2.3.

Variables and hypothesis

The survey variables were established according to the main aspects subject of evaluation: a. first attendance at a seminar on leadership and participation; H1: the majority of participants attended for the first time a program on leadership and participation.

Fig. 2 First time attendance

The responses confirmed the hypothesis H1, and we can conclude that the project had an important informative role for the majority of participants.

b. Previously involvement in Youth projects H2: The majority of participants have low or no similar experience in Youth projects

Fig.3. Previous involvement in Youth projects

c. The results show us a relatively balanced composition of participants: 44.4 % have previous experience in Youth in Action projects, and 55.6% have none. The balance indicates the fact that a mutual learning process took place during seminars, the exchange of information on youth projects generated the opportunity to explore other projects results, to learn from each otherâ&#x20AC;&#x2122;s experience.Level of knowledge on leadership and active participation

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H3: The participants have a moderate/low level of knowledge on leadership and democratic participation.

In order to measure the level of knowledge a scale with 5 levels was used, from 1 = very low to 5= excellent.

Looking at the responses distribution, one can appreciate that overall level of knowledge is moderate, average 3.37 on the scale.

Fig. 4 Participantsâ&#x20AC;&#x2122; level of knowledge on the three major project topics

d. Level of learning The respondents were asked to formulate an opinion about the learning process that they were subjects of. The participants appreciated that the learning process was effective in terms of the quantity of information they received and how much they learned on the major themes.

The responses show an average of 3.704 on the considered scale (the same as that described above), and that reflects a good perception of participants about the effectiveness of the learning process.

Fig. 5 Perception on the learning experience

e. Effectiveness of learning methods employed during the seminars The respondents were asked about their perception on learning tools effectiveness, in general, having the intention to compare the results with those provided by the scientific and systematic research in the field3. Recent research shows that the learning retention is highly dependent on 3

NTL Institute for Applied Behavioural Sciences, Alexandria, USA

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the usage of various learning tools (group discussion 50%, practice by doing 75%, teaching others 90%). Looking at the pyramid from Fig.6, we can easily realize that the most effective learning occurs when interactive methods are used and the learnersâ&#x20AC;&#x2122; level of involvement is high.

Fig. 6 The learning pyramid (source NTL Institute for Applied a Behavioural Sciences, USA)

The overall matrix scorecard shows the participantsâ&#x20AC;&#x2122; capacity to identify the most effective learning method and their opinion matches in great extent the scientific results.

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Fig.7 Participants’ opinion on learning tools effectiveness

f. Identification of the main learning tools used during EYLDS seminars Subjects were asked to nominate the learning tools employed during the EYLDS seminars.

The purpose was to evaluate the participants’ capacity to distinguish various learning tools and to make the difference in terms of learning outcomes.

Fig. 8 Identification of learning tools employed during EYLDS seminars

The survey results reflect the participants’ capacity to identify learning tools employed and as one can see a wide range of them were used for the only reason to increase the learning retention rate and to make the informal learning experience as effective as possible. The responses confirmed our hypothesis that diversifying the learning tools will increase the impact of the learning process and of the project as a whole.

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g. Participants’ overall satisfaction level Survey respondents were asked their satisfaction level on four different variables: - learning experience - interaction with peers - multicultural experience - networking The selection of the above-mentioned variables was constructed based on the EYLDS project objectives regarding learning, participation, networking etc. On a scale from 1=unsatisfied to 5= very satisfied, the overall average score of participants’ opinion is 4.017 which means “satisfied”.

As a final evaluation of the EYLDS organizers’ efforts, the above-mentioned overall score is good and reflects a powerful feedback and the proof of a good managerial and scientific work.

Fig. 9 Participants’ perception of satisfaction

h. Opinion on overall experience as a participant The EYLDS project management team considered important to evaluate the participants’ level of satisfaction quantify as overall experience and the results shown the high percentage of satisfaction of 88.24% of total number of participants.

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Fig. 10 Overall experience as EYLDS participant

i. The age structure of respondents The responses synthesis reveals a diverse age structure which is good in terms of sharing experience, learning from others, and it is a confirmation that EYLDS management team complied with the participants selection rules.

Fig.11. Participants age structure

Fig. 12 Gender structure of participants

The graph indicates a gender balanced composition of the participants group and confirmed that the gender balance condition of the funding body was respected.

3.

Conclusions

The EYLDS project was an interesting and challenging experience for participants as much as for organizers. The results confirm the formulated hypothesis and are in line with the expectations of the project promoter, Pro Global Science Association and its partners. The results are important

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for further developments in the area of informal learning, learning retention rates and learning tools employed. The main suggested developments were:     4.

Replication of the workshop series among other youngsters.

Create a national network of such educational programs, summer-school type.

Publication of the Youth Leadership Guide so that the workshop can be multreplicated in other communities.

Create a network of graduates of the program and develop this idea into a Network project.

Acknowledgements

The article was possible due to the financial support of Youth in Action program and Romanian Agency for Community Programs for Education and Professional Development for the project RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability”(EYLDS).

5.

References

[1] Ilie, S., Petrescu, C. (2005) – Tinerii şi participarea la decizie, in Calitatea Vietii, XVI, nr. 3–4, [2] Morlino, L, (2009) Review, 1(2): 273-96

Are there Hybrid Regimes? Or is it an Optical Illusion , in European Political

[3] EACEA (2013) - Youth Participation in Democratic Life, Final Report, LSE Enterprise, http://ec.europa.eu/youth/documents/lse_study_on_youth_participation_-_2013.pdf [4] Dahl, R.A. (2000) - Democracy and its critics, Yale University Press, 1989, second edition [5] NTL Institute for Applied Behavioural Sciences, Alexandria, USA. https://ntprimaryconnections.wikispaces.com/file/view/Learning+pyramid.pdf– Learning pyramid [6] al Geometry. CRE Press, 1998.

Science

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Semiotics and leadership: making meaning for the young generation Ruxandra Vasilescu 1+, 1

Pro Global Science Association, Bucharest, Romania

Abstract. Any research is actually performed with a view to the future and has a predictive nature. We study the past and the present in order to be prepared for the future. So we study for the generations to come; it is therefore important to know their expectations, worldview, interpretation of reality. Specialized literature has defined leadership and made the profile of the various types of leaders according to our experiences. What would be the profile of a good leader according to the criteria of the young? Do they correspond to our criteria? Semiotic investigation covers nowadays a wider cultural area and a wider range of domains and may help in getting an insight in the young construction of reality.

Keywords: semiotics, leadership, worldview, cultural specificity, universal leadership traits, leadership styles, empowerment.

JEL Codes: M54.

1. Introduction Numerous studies, both empirical and theoretical, have been dedicated to the study of leadership, the leader’s profile, types of leaders and the influence of cultural specificity on the leadership style. Debates have been led for or against universal leadership traits. The globalization turmoil has caught us somewhat unprepared and while attempting to adapt to the new, unforeseen circumstances, we are concerned with the change brought about by this powerful process in our lives and worldview. Multiculturalism has raised issues never before experienced and the need of adapting processes to the specifics of a country (glocalization) is obvious. Sustainable development and looking into the future by decoding the symbols that are meaningful for the younger generation is a more recent concern which needs further and more in-depth study.

2. The ‘Young and the Restless’ With so many challenges we are facing today and our preference for labeling, we sometimes take for granted the authority given by life experience. Any other views that we have not get to define may easily be labeled as ‘valueless’, just like we label the new generation – a generation ‘growing without values’. ‘Every generation imagines itself to be more intelligent than the one that went before it and wiser than the one that comes after it’ rightfully asserted George Orwell. But everything is moving too fast for us to afford the luxury to think that the world is changing only under the technological impact while the humans preserve +

Assoc.Prof. PhD, e-mail: vasilescu_ruxandra@yahoo.com .

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e-mail: editors@reaser.eu their ancestral features. Therefore, when studying phenomena and processes, the variable ‘age’ should be equally considered.

The young generation has been defined in various ways, mostly with condescendence. It is, obviously, the digital generation, with different thinking, interpreting and communicating patterns. Their motivation and expectations are different. In a previous article (Vasilescu, R, The Romanian Generation Y, 2010), we attempted a classification of the common characteristics, with a few culturally-specific and technologyconditioned features: 

Familiar with and reliant on communication technologies (technosavvy) – use and integrate technology in all forms into their lives



Short attention spans – the instant click of a mouse is the info rate they are ready to accept, every topic should be short and to the point



Multitaskers – while listening to a topic, they may send an e-mail or an SMS or look up something on the mobile net at the same time, which does not mean they are not interested in the topic under discussion; but time is too precious not to make the best of it



Filter and consume info quickly – easily select information and are able to process it immediately and apparently, effortless.



Information must apply directly and be relevant for them – Skype, ICQ, MySpace, Facebook are the channel of communication for them, where they select the information they need at a high-speed rate, any background or general information is irrelevant, therefore, useless and left aside.2

The younger generation seems more ‘equipped’ to cope faster with external stimuli of any nature. In order to find out the young expectations from a leader, we should first consider their attitude towards work, which is best described by Jordan Kaplan, an associate managerial science professor at Long Island UniversityBrooklyn in New York.: "[They are] much less likely to respond to the traditional command-and-control type of management still popular in much of today's workforce… They've grown up questioning their parents, and now they're questioning their employers. They don't know how to shut up, which is great, but that's aggravating to the 50-year-old manager who says, 'Do it and do it now.'

They are both high-performance and high-maintenance, say the employers. They want to work but they do not work to be their life. They are taking their place in an increasingly multigenerational workplace. Is that speak-your-mind philosophy uncomfortable for today’s employers?”

Today's youngest workers put a high priority on career, but they want jobs with flexibility, telecommuting options and the ability to go part time or leave the workforce temporarily. They walk in with high expectations for themselves, their employer, their boss/leader, the employers say.

3. Semiotics and leadership According to Umberto Eco: ‘Semiotics has to do with anything that may be considered a sign. Anything that may be considered a significant substitute to anything else is a sign.’

2

Vasilescu R., The Romanian Generation Y: preparing today’s students for tomorrow’s job market, in Analele Universităţii “ Spiru Haret” (Seria Economie), Vol. 2(11) nr. 1, 2011

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The ‘general theory of signs’ or ‘doctrina signorum’ (St. Augustin) is an effective instrument in our endeavour of understanding and interpreting the world. The human being is a ‘signified’ being, a ‘homo significans’ (Henri Wald) able to ‘produce and understand signs’ (Thomas A. Sebeok, Signs. An Introduction to Semiotics). Producing and understanding signs and symbols is at the basis of human communication and semiotics (semiology) is the study of signs and symbols and of how meaning is constructed and understood.

In linguistics, Ferdinand de Sausurre talked about the ‘signifier’ as the physical representation (written word or picture- e.g. the word leader) of the sign and ‘signified’ (the concept, the idea – e.g. what comes to mind when we read or hear the word leader). But this interpretation of the word differs from a cultural area to another, as the GLOBE research program about national culture and leadership profiles in 61 countries showed (2002), where culture is defined as a system of symbols in which ‘the individuals, assign significance to their own reality starting from a referential meaning” (Onea A-N, Tatarusanu M, 2012). It also differs from one generation to another, according to their specific characteristics. So far, the crosscultural literature has emphasized on the connection between culture and leadership styles. Studies have also considered other variables such as: religion, language, ethnic background, history, political systems (Dorfman, 1996). This article is pleading for the need of introducing age as another variable which may complete the range. As ‘there is a need for leadership and organizational theories that transcend cultures to understand what works and what does not work in different cultural settings ‘ (Triandis, 1993), there is also a need to consider the above-mentioned common characteristics of the young generation and their system of values and expectations in the attempt to draw the profile of the leader for the 21st century.

The GLOBE study defined leadership as: ‘the ability of an individual to influence, motivate and enable others to contribute toward the effectiveness and success of the organizations of which they are members’ (House et al., 2004, p. 15). While semiotics provides ‘the theoretical, methodological and practical elements related to culture.... General theories that refer to the style of leadership must be reviewed and adapted to the context. The meaning considered by the group, on the acts developed by the leader-aspirant may differ from the one assigned by the leader-aspirant, as social codes are the ones which govern’ (Onea A-N, Tatarusanu M, 2012).

4. Universal leadership traits, leadership styles and young values Is there such a thing as ‘universal leadership traits’ when cultural specificity has such a strong influence on worldview, values and expectations? The GLOBE project while showing the culturally-dependent view of leadership, found that we also have universal views on it. Several attributes are seen as universal for ‘good leadership’: 

Demonstrating trustworthiness, a sense of justice and honesty



Having foresight and planning ahead



Encouraging, motivating and building confidence



Being positive and dynamic



Being communicative, informed, a coordinator, a team integrator and builder

while the following are universally deemed as against good leadership practice: 

Being a loner and asocial

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e-mail: editors@reaser.eu 

Being irritable and uncooperative



Imposing your views upon other

(Source: Dorfman, duLuque & House, In the eye of the beholder: Cross cultural lessons in leadership from project GLOBE. Academy of Management Perspectives.)

The above traits are common sense and applicable worldwide, which is important due to current labour mobility of the young, in particular. Understanding universal and culturally-determined traits is helpful for local or global effective leadership.

Leadership styles as we know them so far were detailed by Carol Zevas and David Lassiter in Leadership Styles: Is There ‘One Best’ or is Flexibility Worth Developing (2007), according to attitudes and behaviours which have a specific meaning and interpretation depending on culture, with the specification that some of them may be obsolete styles and that this classification of stereotypical profiles is not made in terms of ‘good’ or ‘bad’. Every style is ‘decoded’ just like in a semiotic analysis and labelled for us to enable recognition and understanding. The classification below follows two main worldviews in point of leadership: the traditional and the contemporary views:  Coercive – a control-oriented leader, who demands obedience and reporting back to the leader.  Task-oriented – a leader concerned with work effectiveness and job outcome.  Authoritarian/authoritative - a compelling vision, clear directions, progress monitoring, concentration of power and decision-making authority.  Bureaucratic – a rule-oriented leader, having similar traits as the authoritarian style.  Affiliative - an interest in the subordinates’ job satisfaction, own popularity, recognition of work outcome, good communicator, but a possible danger of ‘laisser-faire’ due to lower level of priority for task outcome.  Laisser-faire - avoids influencing subordinates, who have a greater autonomy and authority. No systematic approach to problem-solving; it may be successful with a highly qualified and educated workforce and clear goals.  Empowering – a new, possibly effective style characterised by delegation of responsibility to subordinates.  Democratic/Participative - a teamwork supporter, subordinates take part in the decision-making process, decisions result from a group consensus. Leader-subordinates relationship is based on trust.  Charismatic/Pacesetter – an example-setter, establishing high standards and imparting enthusiasm.

It is about what he/she can do rather than due to his/her leadership skills. This is a leadership style that may be perceived in a completely different way depending on the country. The charismatic leader may become coercive when disappointed by a subordinate performance.  Coaching – in his/her views, success depends on developing the subordinates’ and his/her own capabilities. They help the subordinates identify their strengths and weaknesses.  Transactional - allocates work to subordinates, who become fully responsible for it; works according to the principle ‘management by exception’, paying attention more to what is not meeting performance standards, and therefore associated more to management than to leadership.

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e-mail: editors@reaser.eu  Transformational – an inspirational figure, making people to follow him/her, a person with vision and passion. Highly visible, in constant communication with their teams, full of energy and enthusiasm. He/she delegates responsibilities and relies on the expertise of the team to achieve results. High levels of communication, high commitment to self-observation and development.

Transactional and Transformational styles have been defined 20 years ago and are paid more attention: the transactional style is associated more to management and transformation style has been considered as a result of intensive research, as the ‘leadership’ style and its definition has undergone many revisions and adding.

Robert Greenleaf (1977) introduced the concept of ‘servant leadership’ and defined the servantleader as making a deliberate choice of serving others, putting the needs and interests of others above his/her own, a strong self-image, moral conviction and emotional stability, empowerment. The servant leader combines traits from several leadership styles listed above, e.g. vision, trust, appreciation of others, empowerment, pioneering, communicator, competent, good listener, reliable, supportive, sympathetic and seems to be the ideal figure of a leader. One important characteristic of this type of leader is empowerment, defined by Gibson, Ivancevich, Donelly and Konopaske (2006, p. 500) as: granting individuals the permission to utilize their talents, skills and resources and experience to make decisions to compete their workloads in a timely manner. This concept is gaining more and more ground nowadays and with good reason too. Comparing the young generation characteristics listed above with the leadership styles, the servant leader is the closest to their worldview.

Romania has long experienced the traditional authoritarian leadership style, and it is now searching for a style that might meet the people’s new expectations. According to the GLOBE study, current Romanian values are similar to other countries from Eastern Europe, where the profile of a good leader is: charismatic, value-based, team-oriented (also in Kreitner, 2009, p. 104). While the elder generation would rather have a leader who takes responsibility for them, with a protective attitude, the younger generation appreciates an inspiring personality, with a vision, a team worker, a good communicator and listener, getting them to acknowledge their strengths and weaknesses, motivating and stimulating them, delegating them responsibilities according to their talents and skills and leading them to successful, rewarding careers. Obedience, modesty, self-sacrifice are not an option for the young. They are more mobile, more participative, more competitive, more demanding. One leadership style may not cover all these expectations, but a combination of traits or an integrative style.

5. Conclusion The concept of leadership and the leadership styles have been the subject of extensive research (e.g. the GLOBE intercultural study). Leadership was studied with the help of such variables as religion, language, ethnic background, history, political systems and cultural specificity. Semiotics as the science of signs and symbols is an important instrument in approaching this concept because it deals mainly with interpretation and making meaning. A leader is supposed to be able to interpret and understand a person’s worldview and what he/she values the most in order to motivate and influence that person (subordinate) effectively. Values and worldviews, on the other hand, differ not only according to the variables stated above, but also in point of the age of the person. Understanding and decoding the expectations and views of the young generation is essential for a sustainable development.

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6. Acknowledgements The article was possible due to the financial support of Youth in Action program and Romanian Agency for Community Programs for Education and Professional Development for the project RO-13-E9- 2013-E1 “Empowering youth leadership for democracy sustainability”(EYLDS).

7. References [1] *** The GLOBE study, http://mgmt3.ucalgary.ca/web/globe.nsf/index [2] Dorfman, P.W. (1996), International and cross-cultural leadership research, in B.J. Punnett & O. Schenkar (Eds.), Handbook for international management research, Oxford, UK: Blackwell [3] Hofstede, G. (1996), Managementul structurilor multiculturale, Ed. EWconomica, Bucuresti.

[4] House, R., Hanges, M., Javidan, M., Dorfman, P.J., (2002), Understanding cultures and implicit leadership theories across the globe: an introduction to project GLOBE, in Journal of World Buisiness 37, 3-10.

[5] House, R., Hanges, M., Javidan, M., Dorfman, P.J., Gupta, V., (2004), Culture, Leadership and Organizations. The GLOBE Srudy of 62 socieities, SAGE Publications, Thousand Oaks.

[6] Kreitner, R., (2009), Management, Houghton Mifflin Harcourt Publishing Company, Boston.

[7] Onea, A-N, Tatarusanu, M., (2012), Cultural specificity and leadership, in Elsevier Ltd., Procedia Economics and Finance 3 (2012) 746-751.

[8] Triandis, H.C. (1993), The contingency model in cross-cultural perspective. In M.M. Chemers & R. Ayman (Eds.), Leadership theory and research: Perspectives and directions. San Diego: Academic Press.

[9] Vasilescu R., The Romanian Generation Y: preparing today’s students for tomorrow’s job market, in Analele Universităţii “ Spiru Haret” (Seria Economie), Vol. 2(11) nr. 1, 2011.

[10] Zervas, C., Lassiter, D., (2007), Leadership Style: Is There ‘One Best’, Or Is Flexibility Worth Developing?, in Leadership Advantage LLC.

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Education for active citizenship in national and European context Cristina Barna1 1

Pro Global Science Association, Romania

Abstract. Why 2013 European Year of Citizens? Not only because we celebrate the 20 th birthday of EU citizenship from when it was launched by the Maastricht Treaty. The people have to know the rights of EU citizens that are enshrined in the Treaty of European Union and complement national rights. If people know about these rights and use them, they benefit as an individual. We focus in this paper on the active component of citizenship (in terms of participation, interaction, accountability and leadership) and on the imperative of education for active citizenship as part of the paradigm of participatory culture that we face nowadays. The paper presents European context, a conceptual approach of active citizenship and education for active citizenship, focusing also on Romanian specific context. We mention that a significant part of the information from this paper was used and enriched during the project “Empowering youth Leadership for Democracy Sustainability” RO-13-E9-2013-R1, financed by Youth in Action, and developed as main applicant by Pro Global Science Association, Romania.

Keywords: education, citizenship, active citizenship, education for active citizenship JEL Codes: I00, I29

1. European context The year 2013 was designated as the ‘European Year of Citizens’ on the occasion of the 20th anniversary of establishing the citizenship of the European Union by the Treaty of Maastricht on 1st November 1993. The objective of the European Year of Citizens is to facilitate the exercise of the right of the EU citizens to free movement and stay in the UE, making sure that they may easily refer to the information on their rights. The citizens should be aware of their right to free stay in the EU, of how they can benefit from the EU rights and policies; their active participation in the process of EU policy making should be stimulated, the debates on the impact and potential right of free movement should be encouraged, in particular in relation with the consolidation of the cohesion and mutual understanding between people.

According to the 2010 research surveys on European citizenship, 43% of the respondents in the 27 member states of the EU are familiar with the term ‘citizen of the EU’ and know what that means, 36% are familiar with the term but ignore its meaning, and 22% have never heard of this term. So, over 50% of the respondents ignore the meaning of the term ‘citizen of the European Union’! Moreover, over 60% of the respondents do not consider themselves well informed or informed at all in relation with the rights of a European citizen (only 3% deem that they are well informed on their rights, 29% consider themselves well informed, 48% consider they are not so well informed and 19% consider they are not at all informed. 

Corresponding author: Assoc. Prof. PhD Cristina Barna Tel.: + (4-0723263677); E-mail address: (cristina_barna1412@yahoo.com).

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e-mail: editors@reaser.eu Under such circumstances, education for active citizenship becomes an imperative, both European and Romanian.

2. Active citizenship – conceptual approach With the end of the Cold War, the fast processes of modernization, the various events and changes occurred in Europe, have changed the traditional citizenship model. New forms of citizenship appeared to cope with the challenges. Now the citizens should be not only informed and understand their formal responsibilities as citizens, but also be active – capable and willing to contribute to the life of their community, country and of the whole world, should actively participate expressing their individuality and supporting the problem-solving endeavors. Change and great challenges required strong societies, with informed and competent leaders and citizens.

According to the study ‘Study on Active Citizenship Education’, European Commission, DG Education and Culture 2007, active citizenship refers not only to the exercise of civil rights and to democracy.

Education for active citizenship is important also from the point of view of the socio-cultural aspects, including the integration of the new-comers and ethnic minorities, and multiculturalism. Moreover, active citizenship should empower, as a first step in providing people with voice and courage to support themselves and the group they represent. The active component of citizenship is mostly understood in terms of participation, interaction, accountability and leadership. According to the above-mentioned study, the thematic priorities of active citizenship are the following: democratic participation (63% of the respondents), social cohesion/integration (46% of the respondents), empowering (46%) of the respondents), multiculturalism (39% of the respondents), civil rights (18% of the respondents), peace and resolving conflicts (18% of the respondents), human rights (16% of the respondents), children rights (12% of the respondents), prevention (12% of the respondents), consumer rights (7% of the respondents). The interviews conducted during this study resulted in the following specific interpretations of active citizenship1: -

understanding all the facets of democracy;

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observing the rights of the peers and of diversity; being aware of the gender issues, being open to various points of view and traditions that may be different from the usual ones;

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being informed beyond the official points of view and open to discussion;

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being autonomous and assuming responsibility for one’s own actions;

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being able to work together with the peers to attain a common objective;

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being aware of someone’s rights and of the way in which they can be used to the benefit of a group or of a wider community;

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working for a consensus and decision-making by dialogue and cooperation;

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confidence in acting and fighting for change;

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improving the quality of community life and environment.

These interpretations are present to a great extent also in the approaches on active citizenship in Romania. In the recent paper entitled ‘Introduction to extracurricular education for active citizenship’ (ARDR, FPDL, 2012) it is set out that an active citizen has the following characteristics, to be referred to also in the line of education: 1

European Commission, DG Education and Culture, Study on Active Citizenship Education, Final Report submitted by GHK, February 2007, pp. 26-27.

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e-mail: editors@reaser.eu -

being aware of the rights and liabilities as a citizen;

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being informed in relation with political and social life and the European, national and local issues and events ;

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being concerned with the welfare of the peers, in particular of the members of the community they belong to;

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boldly expressing opinions and arguments and doing it as clearly as possible;

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being active in the group/community and aware of the potential contribution and capacity of influencing change: problem-solving or group or community objectives attainment;

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being responsible in the actions performed as a citizen.

The agreed indicators related to active citizenship and monitored by European Social Survey, World Values Studies and Euro-barometer are: 1. Social participation -

Voluntary work for the organizations

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Organization for the community

2. Political participation -

Participation in voting

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Participation in peaceful protest

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Participation in public debate

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Membership in political party

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Membership in group of interests.

3. Education for active citizenship The education for active citizenship (often known also under other names, such as: education for democratic citizenship, civic education, education for citizenship, education for human rights etc.) refers in general to encouraging the young people training for the roles and responsibilities of citizens and, in particular, the role of education (by teaching – learning) in this preparation process. Simona Velea, a researcher at the Institute of Education Sciences from Bucharest, sets forth that in the context of education for citizenship, the relationship teacher – student involves certain characteristics deriving from the specific nature of this type of education and from the following key concepts: accountability, human rights, participatory democracy, empowerment. The education for citizenship belongs to the paradigm according to which the teacher’s role should not limit itself to conveying knowledge, and the student’s to listen and acquire information. The teacher should be more than an organizer of the learning situations and a connection element between the student and the society, mediating and enabling the access to information.

The students’ involvement in the decision-making process starts in the very context of the teaching process, under all its aspects: teaching-learning-assessment. The modification of the teacher’s role is reflected in: interdisciplinary knowledge vs. mono-disciplinary knowledge, linear, static teaching-learning process vs. dynamic, interactive educational process (class management, teaching methods, learning by cooperation, assessment etc)2.

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Velea S., Educatie pentru cetatenie democratica. Concepte si competente cheie (Education for democrastiv citizenship. Key concepts and competencies), Institute of Education Sciences, extract in 08.02.2013 in http://civicaonline.ro/competente/competente.html

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e-mail: editors@reaser.eu Therefore, active citizenship may be better understood by the student/adult-centered type of instruction and not by passive learning. The experts in education deem that a proper education may facilitate for the young people and the adults choosing long life learning the acquisition and understanding of the ways in which they can influence the development of their communities and of the planet.

According to the European approach, the education for active citizenship3: - includes any formal, non-formal or informal educational activity which prepares an individual to act all his/her life as an active and responsible citizen, who respects the peers rights; - attempts to contribute to social cohesion, mutual understanding, intercultural and inter-religious dialogue, and to solidarity, promoting the equality between men and women and fostering peaceful relationships between peoples; - represents an innovation factor both in point of the organization and management of the learning systems in general, and of the curriculum and teaching methods.

The usual types of adequate educational methods for active citizenship are the following: cognitive methods/providing information, discussion/debates, peer learning), simulation, applications to real problems/aspects, new media technologies use, role play, interactive learning, facilitation/mediation.

With reference to the ways in which the young people learn to be active citizens and ‘participate in the governing process’, a more and more important aspect in current European societies, it is worth mentioning the results of the research report submitted by the Institute of Education Sciences4, whose authors conclude after the due research and comparative studies performed that at the European level the circumstances differ from one country to another even if almost in any country, the curricula of the European education institutions include information (knowledge) on the electoral systems, constitutional provisions, political institutions and voting habits. A seemingly almost general issue is that such knowledge is provided at ages when the components of the generation abandoned school and passed already to the employment world and in so doing were deprived of the elementary civic knowledge. It is also in schools that students are taught about participation, by organizing internal elections for class representatives, of the year or school or organizing meetings with politicians, with researchers or involving the schools in the community life.

4. Conclusions The education for active citizenship belongs to the paradigm of participatory culture, which should be induced to the young people since high school or college. The young people of nowadays Europe should participate, be active citizens who have a say about the issues that are relevant for them. The European Union devised the participatory instruments (The European Citizens’ Initiative, Structured Dialogue, European Youth Portal), but the education for active citizenship is still necessary. The European Citizens’ Initiative (see http://ec.europa.eu//citizens-initiative/public/welcome) allows to one million EU citizens to participate directly in the development of EU policies, requesting the European Commission to submit a legislative proposal. The EU structured dialogue implies consultation with young people and youth organizations at all the levels of the member states, in the EU youth conferences and during the European Youth Week, the European Youth Portal (see http://ec.europa.eu/youth/index_en.htm) provides for a lot of information related to the Youth in Action Programme, the European Volunteering Services, youth 3

Pasatoiu C, Rata N., Plugaru D., Petcu R., Bularda D., Pasatoiu F., Introducere in educatia extracuriculara pentru cetatenie activa (Introduction to extracurricular education for active citizenship), ARDR, FPDL, Targu Jiu, Gorj, March 2012, p. 8.

4 Plaesu A. (coord.), Mitulescu S., Dalu A.M., Lazar M., Iftode O., Manu M., Stefanescu I, Tuca C., Cetatenia si participarea politica a tinerilor din Romania (Citizenship and political participation of young people of Romania), research report, Institute of Education Sciences, 2011, p. 62.

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e-mail: editors@reaser.eu conferences etc. and allows the young people to address questions and exchange experiences. It is worth mentioning the ‘Youth on the Move’ Initiative launched by the European Union as a part of ‘Europa 2020’ Strategy (also present in Romania in 28.09.2012) which enabled the young people, their families, the teachers to get informed and know the opportunities to improve their education, competencies, qualifications and employability.

Active citizenship is therefore a matter of getting informed and of education that the societies should assume. In the section Active Citizenship – European (EU), the European Youth Portal provide for useful documents, links to projects and organizations which may be actual instruments in promoting participation in society and should be made known to young people through education: Association of Voluntary Service Organisations, Decide for Europe, Education for Democratic Citizenship and Human Rights, Election processes in detail, Euractiv, European Ombudsman, European Parliament – Citizens’ enquiry service, European Women’s Lobby, European Youth Forum, European Youth Parliament, Examples of Youth Initiatives and Youth Democracy projects, Office for Democratic Institutions and Human Rights, Pan-EU Youth: A place for expression for Young European Citizens, Politeia, Taking it Global: Inspire - Inform – Involve etc.

5. Acknowledgements We acknowledge all the team (Romanian, Italian and Latvian promoters and young participants) of the project “Empowering Youth Leadership for Democracy Sustainability” RO-13-E9-2013-R1, financed by Youth in Action, and especially our colleagues from Pro Global Science Association, Manuela Epure and Raluca Niculae who developed and coordinated the project. A significant part of the information from this paper was used and enriched during the international workshop “Empowering youth Leadership for Democracy Sustainability” organized in the framework of the above RO-13-E9-2013-R1 project in October 2013, in Bucharest, Romania. More information about the project’s objectives and outcomes could be find at www.reaser.eu/youthlead.

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References [1] Gollob R., Krapf P., Weidinger W. (editors), Educating for democracy, Publishing Editions Council of Europe, December 2010 [2] Kerr D., Educatia pentru cetatenie reflectata în curriculum: o analiza internationala (Education for citizenship in the curriculum: an international review), National Foundation for Educational Research, UK, extract in 8.02.2012 in http://www.civica-online.ro/resurse/cetatenie_in_curriculum.pdf [3] de Weerd Marga, Gemmeke Mireille, Rigter Josin, van Rij Coen, Indicators for monitoring active citizenship and citizenship education, final report, Regioplan, research report for European Commission, DG EAC, 2005 [4] Pasatoiu C., Rata N., Plugaru D., Petcu R., Bularda D., Pasatoiu F., Introducere în educatie extracuriculara pentru cetatenie activa (Introduction to extracurricular education for active citizenship), ARDR, FPDL, Târgu-Jiu, Gorj, March 2012 [5] Plaesu A. (coord.), Mitulescu S., Dalu A.M., Lazar M., Iftode O., Manu M., Stefanescu I., Tuca C., Cetatenia şi participarea politica a tinerilor din România (Citizenship and political participation of young people of Romania), raport de cercetare, Institutul de Ştiinte ale Educatiei, 2011

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e-mail: editors@reaser.eu [6] European Commission, DG Education and Culture, Study on Active Citizenship Education, Final Report submitted by GHK, February 2007 [7] Velea S., Educatie pentru cetatenie democratica. Concepte şi competente cheie (Education for democratic citizenship. Key concepts and competencies) , Institutul de Stiinte ale Educatiei, extract in 08.02.2013 in http://www.civicaonline.ro/competente/competente.html [8] *** - Comisia Europeana propune ca 2013 sa fie desemnat drept „Anul european al cetatenilor” (The European Commission proposes 2013 to be designated as the ‚European Year of Citizenship’), extract in 7.02.2013, din http://ec.europa.eu/romania/news/110811_2013_anul_cetatenilor_ro.htm [9] *** Active citizenship – European http://europa.eu/youth/active_citizenship/index_eu_en.html

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Book review: Jana Gašparíková, Jana M. Šafránková, Zdeňka Matoušková – ‘Innovative mission in education and science’ Cristina Barna1 1

Pro Global Science Association, Romania

Abstract. This paper is a review of the book entitled ‘Innovative mission in education and science’, edited in 2013 by Publishing House of Czech Technical University in Prague, Faculty of Engineering. The team of three authors (Jana Gašparíková, Jana M. Šafránková and Zdeňka Matoušková) approached innovation, education and research as being among the most important driving forces of a knowledge-based society. The book includes parts published in the last five years by all three authors and focuses on the situation in the Slovak Republic, and in the Czech Republic too.

Keywords: education, innovation, higher education, lifelong learning, entrepreneurship, unified research area, positive externalities, competencies based management

JEL Codes: Y3

1. Introduction This book has eight chapters, from which the first five are written by Jana Gašparíková, and approach actual themes like innovation as an engine of growth, the climate for innovation at a regional level - Slovakia case, trends in higher education in Slovakia in the international context, the role of entrepreneurship and education in overcoming the crisis, and future position of science in society. The last three chapters of the book are co-authored by Jana M. Šafránková and Zdeňka Matoušková, and enlarge on issues such as positive externalities created by educational structures, education and competitiveness of the enterprise during the crisis, and the importance of competencies in regions.

2. Review of chapters The book begins with a chapter on innovation as an engine of growth. In this chapter, Jana Gašparíková states that innovation plays a key role in a knowledge-based society. She gives a deep conceptual framework of innovation - explaining to the readers the importance of Oslo Manual, the effect of innovation accompanied by socio-economic changes on economic development, the specific of organizational innovations (dividing in internal firm environment and external firm environment), the connection between innovations and global changes. She also debates on the position of innovations in a period of crisis, especially on how to support and measure the innovative environment across Europe in such a period, and focusing on the situation in the Slovak Republic. In the Slovak Republic the main stress has been to spread the development of innovation capacities throughout the country, but without a considerable sum of money from the state budget or from other sources; also, the Slovak Republic faces the imperative of permanent monitoring of the fulfilment of the goals included in the governmental Innovation Strategy.

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Corresponding author. Assoc. Prof. PhD Tel.: + (4-0723263677); E-mail address: (cristina_barna1412@yahoo.com) .

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In the second chapter entitled “Status quo in the climate for innovation at regional level: the case of Slovakia”, the author Jana Gašparíková offers a picture of how innovation is developed in enterprises and describes the climate for innovation in Slovakia. She explains that in Slovakia three generations of innovation policy can be distinguished, and a generalized innovation strategy in Slovakia does not exist. The author points out that a very significant factor that worsened the innovation climate in Slovakia was that during the recent economic crisis the most popular measures overlapped financial fostering of innovation (research and development). She considers that in order to overcome these negative effects it is necessary to use important state measures as for instance various protectionist policies, which will support long-term planning in the field of innovation.

The third chapter of the book is about trends in higher education in Slovakia in the international context.

Here the author Jana Gašparíková raises the iaauea of the role of universities in changing the social networking, and of the relation between entrepreneurship and education. She speaks about entrepreneurial universities and University-Business Forum. In the same context of a new type of education oriented towards enterprises she points out the bottom-up relation between SMEs and the university, and the importance of lifelong learning which facilitates innovation and promotes a more entrepreneurial culture. She concludes this interesting chapter stating that knowledge society changes also mission and position of education in the actual globalized world.

The fourth chapter is a deep analysis of the role of entrepreneurship and education as a way out of the crisis. In this chapter Jana Gašparíková explains the factors that have influenced the course of the recent global economic crisis - starting first as a financial crisis and leading into a global downturn in the economic activity. She considers that these economic problems were caused by moral hazard and by other significant economic abnormalities that must be overcome by various reforms: healthy public finance and continuous improvement in entrepreneurship and education. Entrepreneurship must be stimulated by new educational strategies, and the new mission of education must promote creativity in multiple aspects of economic and social life. The chapter is also about challenges as innovation and competitiveness, employment and skills, new jobs, and the new, modern type of education linked with diversity which announces the future human and social development.

In the fifth chapter Jana Gašparíková approaches the position of science in society and its future in the context of unified European research area. She analyses very important issues such as public and science temporality in scientific development, the importance of deciphering the various influences in science and technology policy and decision making processes, competitiveness in unified research area, the problems with funding, and new position of science and globalization. The last part of this chapter is about science and technology in the Slovak Republic, which has formulated its own science and technology policy framework in the document The Long-Term Intention of Governmental Strategy of Science and Technology Policy up 2015. The author shows there exist a low share of financial subsidies for research and development in Slovak Republic - for instance in 2008 only 0.27% of the GDP was allotted to research and development. There is a tendency to upgrade the allocation, the author presenting a trend estimation of intensity growth of expenses for science and technology from state budget, entrepreneurial sources and foreign sources (% in GDP) until 2015. Comparing OECD countries situation with the situation in the Slovak Republic, the author points out the negative aspects concerning science and technology policy and the position of science and research; one of the most striking shortages is the neglect of financial support for scientific research.

The sixth chapter entitled “Positive externalities created by educational structures” and written by Jana M. Šafránková and Zdeňka Matoušková is the result of the long term project Sustainable management of buildings industry and regions with a focus on contemporary processes of sustainable education in the Czech 241

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Republic. The chapter is divided into three parts: positive externalities and educational structures, knowledge workers, knowledge spill over, and externalities in company education. As it is known, externalities have a positive or negative effect on many social entities. One of the positive externalities is the effect of education.

Educational institutions, schools and above all universities are important for systematically creating knowledge within the framework of science, research and also education, which has fundamental importance in knowledge-based economics. It is also very important to take into account the technological externalities that support development and shape business. Regarding externalities in company education, the externality consists of individuals increasing their value on the labour market through company education and likewise increasing their knowledge and skills so that they can use them beyond their work performance.

The next chapter written also by the group of authors Jana M. Šafránková and Zdeňka Matoušková is about the problematic of education and competitiveness of enterprise during times of economic crises. It is a study based upon authors’ long-term research and upon experience in education at a technical university and in companies. The study concentrates on two main aspects - education in human resources management in organizations and personal knowledge in the process of life-long learning, considering also the European context.

The last chapter, co-authored by the same authors Jana M. Šafránková and Zdeňka Matoušková focuses on a modern management method: competency based management. It explains the concept of competencies, the method, and the importance of this modern management method in helping development of employees as well as inhabitants in regions.

3. Conclusion This book is a collection of interesting articles covering general issues regarding innovation, education, research. Also, it is presented the controversial position of science in the unified research area. The three authors conduct the readers in the European movements, in the Slovak Republic and the Czech Republic particular situations too, stressing the modifications and changes in the education and research area.

4. Acknowledgements We acknowledge PhDr. Jana Gašparíková, PhD of the School of Economics and Management in Public Administration in Bratislava, Slovakia, also a member in the Editorial Advisory Board of the Review of Applied Socio-Economic Research, who provided us this interesting book for review in the journal.

5. References [1] Jana Gašparíková, Jana M. Šafránková, Zdeňka Matoušková – ‘Innovative mission in education and science’, Publishing House of Czech Technical University in Prague, Faculty of Engineering, Prague 2013, ISBN 978-8001-05207-5.

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