Vol. 14 No. 2
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Vol. 14 No. 2 Publisher: Singidunum University E d it o r ia l B o a r d
Professor Milovan Stanišić, Singidunum University mstanisic@singidunum.ac.rs unkovic@singidunum.ac.rs Emeritus Slobodan Unković, Singidunum University frangialli@gmail.com Professor Francesco Frangialli, UNWTO gunther.friedl@wi.tu-muenchen.de Professor Gunther Friedl, Technische Universität München, München karl.ennsfellner@fh-krems.ac.at Professor Karl Ennsfellner, IMC University of Applied Sciences, Krems gyorgy@komaromi.net Professor Gyorgy Komaromi, International Business School, Budapest dinu_cbz@yahoo.com Professor Vasile Dinu, University of Economic Studies, Bucharest ada.mirela.tomescu@gmail.com Professor Ada Mirela Tomescu, University of Oradea, Oradea rlukic@ekof.bg.ac.rs Professor Radojko Lukić, University of Belgrade nstanisic@singidunum.ac.rs Professor Nemanja Stanišić, Singidunum University vjovanovic@singidunum.ac.rs Professor Verka Jovanović, Singidunum University mmilosavljevic@singidunum.ac.rs Professor Milan Milosavljević, Singidunum University onikolic@singidunum.ac.rs Professor Olivera Nikolić, Singidunum University mveinovic@singidunum.ac.rs Professor Mladen Veinović, Singidunum University jpopesku@singidunum.ac.rs Professor Jovan Popesku, Singidunum University zjeremic@singidunum.ac.rs Professor Zoran Jeremić, Singidunum University gknezevic@singidunum.ac.rs Associate Professor Goranka Knežević, Singidunum University Associate Professor Christine Juen, Austrian Agency for International Mobility and Cooperation in Education, Science and Research, Wien chrisine.juen@oead.at Associate Professor Anders Steene, Södertörn University, Stockholm/Hudinge anders.steene@sh.se Associate Professor Ing. Miriam Jankalová, University of Zilina, Prague miriam.jankalova@fpedas.uniza.sk Associate Professor Bálint Molnár,Corvinus University of Budapest, Budapest molnarba@inf.elte.hu Associate Professor Michael Bukohwo Esiefarienrhe, University of Agriculture, Dept. of Maths/Statistics, Markurdi esiefabukohwo@gmail.com Associate Professor Goh Yen Nee, Graduate School of Business, Universiti Sains Malaysia yngoh@usm.my Research Associate Professor Aleksandar Lebl, Research and Development Institute for Telecommunications and Electronics, Belgrade lebl@iritel.com Assistant Professor Patrick Ulrich, University of Bamberg patrick.ulrich@uni-bamberg.de Assistant Professor Konstadinos Kutsikos, University of the Aegean, Chios kutsikos@aegean.gr Assistant Professor Theodoros Stavrinoudis, University of Aegean, Chios tsta@aegean.gr Assistant Professor Marcin Staniewski, University of Finance and Management, Warsaw staniewski@vizja.pl Assistant Professor Gresi Sanje, İstanbul Bilgi Üniversitesi, Istanbul gresi.sanje@bilgi.edu.tr Assistant Professor Michał Biernacki, Wrocław University of Economics, Poland michal.biernacki@ue.wroc.pl piotr.luty@ue.wroc.pl Assistant Professor Piotr Luty, Wrocław University of Economics, Poland E d it o r ia l O f f ice
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CONTENTS
1 - 18
19 - 30
31 - 42
43 - 57 58 - 69 70 - 75
Consumer Protection in Internet Sales– Degree of Harmonization with the European Union Law Dragana Ranđelović, Samir Ljajić
Does SHG Program Alleviate Poverty? Evidence from Four Clusters in Semi-urbana Regions of India Sivagandhi Saravanan
Financial Development and Tax Revenues in Turkey: a Non-linear Cointegration Analysis Yilmaz Bayar, Huseyin Karamelikli
The Option on Electric Energy for the Decrease of Risk on the Example of EEX (European Energy Exchange)
Tatjana Latas, Zoran Jeremić
The Role of Venture Capital in the Development of the Sme Sector
Irena Đalić, Svetlana Terzić, Boris Novarlić
Talent Development and Education in Tourism
Slobodan Unković
III
EJAE 2017, 14(2): 1-18 ISSN 2406-2588 UDK: 340.137:347.44(497.11:4-672EU) 366.542/.543(497.11) 004.738.5:339 DOI: 10.5937/ejae14-12921 Original paper/Originalni naučni rad
CONSUMER PROTECTION IN INTERNET SALES– DEGREE OF HARMONIZATION WITH THE EUROPEAN UNION LAW Dragana Ranđelović*, Samir Ljajić University of Novi Pazar, Novi Pazar, Serbia
Abstract: In this paper the authors will strive to answer some general questions regarding the concept, significance and goals of the harmonization of contract law. Given the actuality and mass state of Internet sales, questions and issues of consumer protection will be set within the boundaries of this narrow field of contract law. In the central part of the paper, the authors will present the most important regulations governing this area both in the European Union and Serbia, as well as the degree of their harmonization. They will also attempt to provide answers to some basic questions and issues which customers face when making on-line purchases. The Republic of Serbia has passed a set of laws which comply with the requirements and standards of the European Union. However, it is necessary to continuously conduct the process of education not only of employees in state services and traders, but also consumers in order to raise awareness about the significance and benefits of e-commerce, and above all, customer protection.
Keywords: Internet sales, European Union, contract, consumer protection.
INTRODUCTION One of the main goals and the most important pillars of the European Union is a unique market promoting four freedoms: free movement of people, free movement of goods, free movement of services and free movement of capital. Free movement of goods has contributed to the development of a unique market from which both the citizens and the business sector benefit daily. Today’s unique EU market, with the population of over 500 million people, makes buying and selling goods easier and enables consumers to choose from a wide range of high-quality products. Not only do big companies benefit from this, but also, primarily, individuals. The open market will enable a richer, more diverse, and above all, a cheaper offer. One of the basic questions posed by the market of over 500 million consumers is the question of customer protection. Therefore, this field encompasses a series of regulations which deal with customer protection. * E-mail: d.randjelovic@uninp.edu.rs
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One of the necessary conditions which Serbia has to meet on its way towards the European Union is the harmonization, i.e. the coordination of its regulations with the EU law. On the one hand, consumer protection is based on the economic principles of the market, and on the other, on the ideas of social justice and responsibility. A high degree of protection is an ideal to which not only consumers, as an economically weaker side, and the state, which is obliged to protect them, strive, but traders as well, given the fact that it ensures them better business results. In addition to a significant change of legal regulations, a successful implementation of the harmonization process includes substantial investments in the development of economic and industrial infrastructure, as well as in the education of citizens and employees in the state administration and other state bodies. The aim of this work is primarily to point out the significance of the harmonization of contract law of the Republic of Serbia with the European Union law. The central part of the paperwork the authors deal with the Internet sales and protection of consumers who buy products and services via numerous Internet platforms and, therefore, the authors present the most important regulations governing this area both in the European Union and Serbia. At the same time, they also strive to provide answers to some basic questions and issues which customers face when making purchases on-line.
HARMONIZATION OF THE CONTRACT LAW OF THE REPUBLIC OF SERBIA WITH THE EUROPEAN UNION LAW – CONCEPT, SIGNIFICANCE AND GOALS The concept of harmonization (Angleichung, Rapprochement) represents a special procedure or a method whose goal is to harmonize national regulations or the essence of their policies (Vukadinović, 1999, p. 43). Harmonization stands for a long process in which the existing regulations are changed or new ones are made in the EU member states, using different techniques and methods. One of the basic goals of the European Union is the introduction and implementation of the harmonized national regulations in all member states. General legal basis for harmonizing national legal systems is contained in the provisions of Act 3 of the Treaty on Establishing. Harmonization serves as a method to complete communitarian objectives limited by the mentioned provision only to “the establishment of the common market”, i.e. resolving or softening differences in national regulations of member states, so that the implementation of such regulations may establish and ensure smooth functioning of the common market. Large differences in national legislations create obstacles to the establishment and existence of the cooperation (Miladinović, 2011, p. 50). Harmonization of legal regulations is one of the necessary conditions for functioning of the common market and better practical application of the fundamental freedoms of the common market. The harmonization process is not only completed in member states, but it also takes place in the states which have difficulty in getting the membership or which are approaching this union, since the harmonization of national regulations of the candidate states for the membership in the EU is a necessary condition for their acceptance. The commitment of the Republic of Serbia to join the European integrations has effectuated the issue of the harmonization of its national law with the law of the European Union. Serbia signed the Stabilisation and Association Agreement in April 2009, which came into effect on September 1st, 2013. In June 2013, The Government of the Republic of Serbia adopted the Action plan for the harmonization of the regulations of the Republic of Serbia with the regulations of the European Union, which represents the starting point for harmonization. Serbia obtained 2
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the status of a candidate state on March 1st, 2012. Its prospects for membership will be calculated by the degree of harmonization of its national law with the law of the European Union. The legal particularism in regulating the matter of contract law represents an obstacle to the integration processes in Europe (Jelinić & Akšamović, 2010, p. 205). By harmonizing legal regulations, all obstacles encountered during signing an agreement between subjects doing business in different legal, economic and social systems will be removed, which will contribute to the development of international trade and legal certainty achievement. Different contractual rights in member states directly or indirectly reduce the functionality of the common market. Especially, the consumers who are not familiar with different systems of contract law may thus be deterred from completing cross-border transactions (Frenjveš, 2016, p. 4). It is because of this that the harmonization of contract law has become a constant tendency on the part of the national legislators and business people, and a legal doctrine. The biggest obstacles in the path of the cross-border trade are related to differences between states in terms of contract law, especially regarding rules on the conclusion and termination of contracts, or the responsibility for the delivery of faulty products. Both dealers and buyers are faced with such obstacles on a daily basis. They expose dealers to additional costs and make the procedure more complicated; on the other hand, they make the purchase process more difficult for buyers, and often divert them from it, especially when it comes to shopping online. By harmonizing contract law, legal certainty during the conclusion of legal affairs would be achieved, the procedure itself simplified, the market expanded, and it would lead to numerous opportunities for arranging legal affairs. It would contribute to the development and improvement of this field of law in many ways. All contracting parties would benefit from it – buyers would receive a more diverse and cheaper offer, whereas dealers would benefit from opening of a new large-scale market in terms of new business opportunities. Due to the aforementioned reasons, but also many more, a set of legal documents has been designed in the European Union with the aim of making a uniform interpretation and implementation of the numerous rules of obligation law, i.e. contract law. The harmonization of contract law is one of the basic tasks of the European Union given the fact that contract law stands for a fundamental assumption in creating a common European market. The European contract law is not embodied in a single codification. Moreover, a whole series of directives, regulations and other acts dealing with certain legal fields of contract law has been introduced. On its way to the European Union Serbia undergoes legislative and harmonization processes in the field of contract law and alters its legislature thereby harmonizing it with the requirements and standards of the European Union. The aim of harmonization is not exhausted by modifying, i.e. introducing regulations which comply with the law of the EU. It is reflected in ensuring social and economic conditions for their complete implementation. The advance in harmonization is calculated not only by introducing harmonized regulations but also by proving that they are fully and appropriately implemented. This requires not only the activity of legislative bodies, but also the professional and independent judiciary, efficient state administration and accompanying social infrastructure (Vukadinović, 2009). In this paper, the harmonization of contract law was discussed only in terms of general issues regarding the concept, significance and objectives. The degree of the harmonization of contract law in our country, regulations introduced, as well as issues arising in practice will be discussed in more detail later in the paper, in the field of consumer protection and only within the range of a narrow field of the contract law – Internet sales. 3
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CUSTOMER PROTECTION IN INTERNET SALES Internet sales – concept and significance E-commerce was developed along with the development of information-communication technologies. E-payment was introduced in 1970s. During the nineties, the concept of e-commerce arose and included making different types of business transactions online (selling goods and services, commercial auctions). In the 21st century, there has been a mass production and distribution of electronic devices and services, purchasing and selling products, services and information via a global computer network known as the Internet. In addition to e-commerce, a new concept “Internet sales” appeared, and it stood for a narrower concept than e-business (Prlja et al., 2012). In a narrower sense, the role of the Internet in contract law is related to the business done online, largely to the contract conclusion and execution. In a broader sense, the role of the Internet refers to all situations in which natural persons and legal entities use the Internet, regardless of whether the contract was concluded or executed via the Internet (Sikirić, 2006). Despite the resistance and suspicion it faces in our country, online shopping is a necessity imposed by the new information era, offering numerous advantages and benefits compared to the traditional sales. Online shopping is the fastest and cheapest way of shopping for products, as well as the most profitable form of commerce due to the simplicity and low expenses. It is possible to order almost any product via the Internet. Internet sales most often include books, consumer goods and electronic devices. According to the statistics data, the citizens of Serbia mostly buy at auctions, pay for advertising and computer services, such as hosting and domain registration, and largely buy plain tickets and travel arrangements. The most popular domestic site for e-commerce is a web site for auction sales “Limundo”, and an online store with fixed prices “Kupindo”. Internet sales have many advantages from the standpoint of the consumers: buying goods from home, quicker delivery, lower price of products, avoiding the pressure of sellers, a greater selection of products and shops, easier access to information, easier price comparison (Stojanović, 2011). According to the Institute of Statistics 2015 data, more than 1.2 million persons in Serbia made their purchases via the Internet, whereas in 2013, 900,000 people in Serbia shopped online, which demonstrates an increase of 30 percent for the period of two years. However, Internet sales in Serbia are still below the European average. 57 percent of the Internet users in our country have never shopped for goods or services online (Kovačević et al., 2015). Some of the main reasons include lack of knowledge of the process and protection mechanisms, fear of losing personal data, misuse and fraud. This poses the questions of legal certainty, consumer protection, and above all, the harmonization of regulations referring to this field, which represents a guarantee for smooth functioning of cross-border trade. The benefits of the Internet are significant and global, and nations should not allow national laws and local regulations to obstruct the thriving of the global Internet (Gillies, 2001). An increasing number of consumers making online purchases and e-payments has imposed the need for a precise definition of numerous material and process rules which regulate the matter of concluding e-contracts, but which will, above all, be harmonized with the law of the European Union. Numerous illegal activities in e-commerce, such as the misuse of electronic data, electronic frauds, phishing on the Internet, as well as other ways of doing harm in the Internet sales, such as undelivered goods, insufficient quality, etc., require a regulation which would enable a 4
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high level of legal certainty and protection (Prlja et al., 2012). Internet contracts, also, pose difficulties caused by the fact that the Internet works on the basis of logical rather than geographical locations and that consequently neither the parties nor the performance of the contract are easy to locate (Schu, 1996, p. 94).
Consumer protection in Internet sales in the European Union The Law on Consumer Protection in the European Union was developed as a by-product of the formation of the common European market (Lazić, 2006, p. 250). Maastricht and Amsterdam agreements had laid the foundation for the European policy of consumer protection, defined its aims, as well as the fundamental rights of consumers. Article 169 of the Treaty on the Functioning of the European Union has set a legal basis for a whole range of activities in the field of consumer protection. The European Union has introduced a series of regulations which guarantee consumer protection, their right to information, education, health protection, safety, protection of economic and legal interests, thereby reaching the highest degree of legal development and consumer protection. Several dozen directives, which, directly or indirectly, regulate consumer rights, represent the most important source of the European consumer law. The E-Commerce Directive addresses new rules and responsibilities on the Internet and also strives to arrive at a uniform regulation of numerous other legal issues on a horizontal basis throughout Europe (Lehamann, 2001, p. 105). One of the most important initiatives of the European Union in the field of consumer protection is The Directive 93/13/EEC on the unfair contract terms. The provisions of this directive limit the dealer’s freedom of contracting, preventing them from imposing contractual provisions which this directive considers unfair for the consumer. The Directive 97/7/EC on the distance contracts regulates consumer agreements concluded without the physical presence of both the dealer and the consumer. The directive sets the obligation of the precontractual information the dealer is required to provide to the consumer prior to the conclusion of the contract. The Directive 99/44/EC on the sales of goods regulates the contractual relationship between the dealer and the consumer in case of the agreement on the sales of goods. The main objective of this directive is to completely legally ensure that the consumer receives the product which fully conforms to the concluded consumer contract from the dealer. The Directive 2011/95/EC on the general product safety provides for a general safety system of products, according to which all products placed on the market have to be in accordance with set norms regarding the information of consumers, measures for preventing safety threats, and product safety monitoring. According to this directive, the manufacturer is obliged to launch only safe products. In case a product poses a serious threat that requires a quick response, a member state must immediately inform the Commission about it via RAPEX, a system for rapid exchange of information between the member states and the Commission. Strict safety standards which apply to products in the common market, owing to which faulty products are quickly withdrawn from the market, guarantee efficient consumer protection. Distant advertising regarding financial services for consumers is regulated by the Directive 2002/ 65/EC. 5
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The Directive 2005/29/EC on unfair business practice (of the dealer with respect to the consumer) prohibits misleading and aggressive practice, “tricks” (such as pressure sales, misleading marketing and unfair advertising). It contains criteria for determining aggressive business practice (harassment, coercion and undue influence). The Directive 2006/114/EC on misleading and comparative advertising prohibits misleading advertising. It also sets conditions under which comparative advertising is permitted. The Directive 2011/83/EU on consumer rights has increased consumer rights, set rules for providing consumers with information, regulated the right to withdraw and harmonized certain contractual provisions. The European Union protects consumer interests particularly in the field of distance contracts. The European Commission has suggested the guidelines for good practice of doing business on the Internet and rules for all kinds of non-cash payment. In 2015, The European Commission announced a strategy for a unique digital market in Europe. It created 16 initiatives aimed at creating a unique and connected digital market and encouraging e-commerce. Even though the majority of legal acts of the European Union in the field of legal protection of consumers is related to material-legal issues, the procedural aspects are not ignored. The Directive 27/98/EU is intended to reach the efficient consumer interest protection. It imposes an obligation on member states to foresee in their legal system the possibility for consumer protection organizations to file a complaint in favour of consumers (Galič, 2005, p. 112). The Regulation No.44/2001 on jurisdiction and enforcement of judgements in civil and commercial matters (The Brussels Regulation) provides for special decisions on the international jurisdiction in consumer disputes. The Brussels Regulation applies only on condition that the defendant in court proceedings is a person with the residence, i.e. base in the European Union (article 4 of the Brussels Regulation). The Brussels Regulation sets a general rule that it does not matter whether the prosecutor has a domicile in the European Union or not. However, in case the Brussels Regulative exceptionally binds jurisdiction to the prosecutor’s state of residence, and if the prosecutor doesn’t have a residence in the European Union, the court of the state in question shall not be able to claim the Brussels Regulation as a source (Galič, 2005, p. 117). The first step in the legal regulation of e-payment was made by the United Nations Commission on the International Trade Law (UNCITRAL) by adopting the Model Law on Electronic Commerce in 1996, and the Model Law on Electronic Signatures in 2001. In 1997, the European Union adopted the European Initiative in the Sector of Electronic Business, followed by the Directive on Electronic Signatures in 1999, and the Directive on Electronic Commerce in 2000. In the late 20th century, leaders and administrators of the European Union noticed problems and a need to deal with numerous issues arising from the intensifying use of the Internet in doing business. The European Parliament adopted the Directive on Electronic Money – Directive 2000/46 EC, as well as the Directive 2007/64 EC. In 2009, the European Parliament adopted a new directive, Directive 2009/110 EC which has eliminated the shortcomings of the first one and now stands for the existing directive which has regulated the issues of electronic money and a regulatory framework for the harmonization of the electronic money market in the EU member states. In case of a dispute, assistance is provided in its rapid and efficient resolution via alternative ways of dispute resolution and European centres for consumer protection. In May 2013, the Directive 2013/11 6
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on the alternative dispute resolution and the EU Regulative No.524/2014 on the online dispute resolution were introduced. They have enabled consumers to take simpler, more efficient, faster and cheaper ways of resolving disputes, i.e. without going to court. Alternative methods of resolving disputes have enabled consumers and dealers to resolve all kinds of disputes via various entities, such as mediators, arbitrators, ombudsman, individuals, appeal committees, which entirely operate online. This highly reduces costs and time regarding disputes between consumers and dealers who are far away from each other, which is often the case in the Internet sales. Since 2016, an Internet service, the European electronic platform, has been available for consumers in the European Union via which they can file a complaint in some of the official languages of the European Union. This platform connects National bodies for alternative dispute resolution and enables fast and efficient resolution of disputes within 90 days. The European small claims procedure has been available since 2009 and it is applied to all civil and trade matters in which the value of claims is less than 2,000 euros (the amount will be increased to 50,000 euros from 2017). No lawyers are needed, and judgements are recognized and enforceable in all EU member states. The European Consumer Centres Network “ECC-Net” was formed to provide citizens with free advice. Two thirds of cases resolved by the centres from the ECC-Net had a positive outcome (ECCNet, 2015). The program of the EU action in the field of consumer protection policy consists of the European strategy for consumers in accordance with the EU’s growth strategy Europa 2020 and the program for consumers 2014-2020. The European strategy for consumers has several objectives: better understanding of consumer rights, better enforcement of regulations in the field of consumer protection, integration of consumer interests in key policy sectors, and strengthening of consumer role. The European Parliament has introduced the Regulation (EU) No.254/2014 on a multiannual program for consumers for the period from 2014 to 2020. The network for consumer cooperation and protection connects competent authorities of all member states to detect, research and stop illegal business practice. It is also used for monitoring the market and for “system checks” of web pages and their compliance with the EU rules on consumer protection. The campaign for raising awareness on the consumer rights organized by the Commission lasted from spring 2014 to early 2016, during which the citizens were being informed about their rights within EU regulations for consumer protection and directed to right places where they could get advice or help in case they had any questions or problems. The aim of the campaign was to raise general knowledge of dealers and consumers about the consumer rights in the European Union. The European Union has organized activities for educating consumers on different levels, such as gradual introduction of consumer education into primary and secondary school curriculums. The European school calendar (Europa Diary), a school diary designed for secondary school students contains, among other things, information on their consumer rights. The Commission has conducted an experimental program to educate teachers and support the establishment of graduate studies of consumer protection policy.
Legal Framework of the consumer protection in Internet sales in Serbia – degree of harmonization with the European Union Law The obligation of the legislature to adopt specific regulations to secure a high level of consumer protection and their safety has its legal basis primarily in the Constitution of the Republic of Serbia. 7
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Article 90 of the Constitution of the Republic of Serbia guarantees consumer protection and explicitly prohibits actions directed against consumer health, safety and privacy, as well as all other dishonest activities in the market. By signing the European Union Stabilization and Association Agreement, Serbia has committed itself to harmonize the standards of consumer protection in Serbia with the EU standards. Therefore, it is obliged to ensure the policy of active consumer protection, harmonization of legislature on consumer protection, efficient consumer protection, control over the implementation of rules by competent authorities, access to justice in case of disputes, as well as the exchange of information on dangerous products (Article 78 of the European Union Stabilization and Association Agreement). The process of harmonization is not limited to the EU member states only, but it is much wider, given that the member states aspiring to gain associate or full membership are obliged to conduct the harmonization of their own national legal system with the legal system of the European Union (Stanivuković, 2001, p. 70). An EU candidate country needs to adopt, implement and enforce all current EU rules and legislation as a necessary condition for acceptance (EU Info Center, 2014, p.11). Directives are binding, as to the result to be achieved, but leave to the national authorities the choice of form and methods. National legislators must adopt a transposing act or national implementing measure to transpose directives and bring national law into line with their objectives (European Commission, 2013, p. 5). The Law on Electronic Signature was passed in 2004 and it represents the first regulation to deal with some of the aspects of e-commerce. It regulates the use of e-signature in legal affairs and actions, business, rights and obligations regarding e-certificates (Article 1 of the Law on Electronic Signature). It guarantees the validity and probative value of an electronic document. The Law on Electronic Signature is in compliance with the EU Directive 1999/93 EC on electronic signatures, which was adopted on December 13th, 1999 and came into effect on January 19th, 2000. The Law on e-Commerce, which was passed in 2009, equalized e-business forms with traditional ones. This law defines the agreement on electronic form as an agreement which is concluded, sent, received, terminated, accessed and displayed electronically using electronic devices (Article 3, Paragraph 7 of the Law on e-Commerce). The law sees electronic trade of goods and services as a form of distance trade in terms of the Trade Law, thereby equalizing it with traditional trade. The Law on e-Commerce is compliant with the EU Directive 2000/31/EC on electronic commerce. The legal framework of consumer protection in Internet sales is represented by the Law on Consumer Protection which provides for the protection of consumers in exercising their rights from distant contracts, i.e. online purchases. The law regulates the rights of the consumers, conditions and means of their protection, rights and obligations of organizations acting in order to achieve protection, out-ofcourt resolution of consumer disputes, and the rights and obligations of the state authorities regarding consumer protection. The Law on the Protection of Financial Service Consumers in distance contracting enhances the protection of the financial service consumers in the Republic of Serbia, and regulates financial consumers’ right to information both in the precontractual stage and the period after the conclusion of the contract, the right to withdraw from distance contracts (as a rule, within 14 days), the right to terminate the contract, the right to protect themselves from services which were not asked for, and other rights of the financial consumers in distance contracting, as well as the protection of rights and interests of those consumers and control over the implementation of the provisions of this law. Its provisions are also related to providing services via the Internet, e-mail, mail or other means of distance communication. The Law on Financial Consumer Protection in distance contracting is compliant with the legal regulative of the European Union – primarily the Directive 2002/65/EU. 8
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The Law on Consumer Protection and its amendments regarding the protection of consumers in exercising rights from the distance contracts, i.e. doing online purchases, is certainly the most significant law in the field of consumer protection in Internet sales. The Law on Consumer Protection defines a distance contract as a contract concluded between the dealer and the buyer within the framework of the organized sales or providing distance services without the presence of dealers and buyers, exclusively by using one or more means of distance communication upon the time of the conclusion of the contract, including the moment of the conclusion itself. The Law protects consumer rights when they make purchases on the basis of their order, via e-mail, the Internet, television sales, as well as other “distance sales”, i.e. its provisions are related to purchasing goods or services from web pages and ordering via e-mail. The provisions of 15 key European directives in this field have been implemented and a legal framework which enables the harmonization of consumer rights in Serbia with the European standards was established. The Law on Consumer Protection is in compliance with the European legislation, primarily the Directive 2011/83/EU on the consumer rights and Directive 2013/11/EU on the alternative resolution of consumer disputes, which is of key importance in enhancing out-of-court dispute resolution. The Rulebook on the activities of the body for out-of-court resolution of the consumer disputes has been adopted. It defines conditions for out-of-court resolution of consumer disputes, with the aim of ensuring that the resolution process is independent, unbiased, transparent, efficient, fast and fair. The adoption of this rulebook was placed under the jurisdiction of the minister. The legal theory reasonably remarks that this is strictly a political body which should not be entrusted with such authority regarding such a delicate issue as consumer protection in relation to out-of-court dispute resolution (Petrović-Tomić, 2014). The solution could be the adoption of a special law which would regulate this matter in an integrated manner. In cases when the purchases are made via the Internet platforms Limundo d.o.o. and Kupindo d.o.o., we should mention the Terms of Use of the Internet platforms of Limundo d.o.o. society, which represent the provisions of the contract between this society and each individual member, and they are primarily aimed at e-commerce. The terms set the rules of the Limundo and Kupindo platform markets, obligations of members, the way of the contract execution, as well as the alternative ways of resolving disputes. The adopted strategy of consumer protection for the period from 2013 to 2018 is in accordance with the requirements of the European Union for creating a better environment for consumers. Therefore, in this respect, objectives and activities of this strategic document were proposed. The main objective set by this document is to ensure a high level of consumer protection in the Republic of Serbia by 2018, as well as to improve the system of consumer protection in line with the standards and practice of the European Union. Having conducted the screening for Chapter 28, which relates to the consumer and health protection, it has been determined that there is a high level of harmonization with the EU regulations in this field. The European Commission uses the screening method to verify whether the regulations of a candidate state are compatible with the requirements of the European Union and to suggest harmonization if necessary (Simović, 2014, p. 466). However, as it was mentioned earlier in the paper, it is not enough just to pass a law and bylaw regulations which enable its implementation. In practice, numerous problems arise during the implementation of these laws, due to the lack of knowledge of the citizens and inadequate education of employees in competent state authorities. 9
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Supported by the European Union, the state authorities have conducted a number of projects with the same aim and have also issued numerous publications. Therefore, The Development of e-Business project, financed by the European Union and implemented in cooperation with the Ministry of Trade, Tourism and Telecommunications and the Ministry of Economy, had an aim to inform consumers making online purchases about their rights. During the project, a total of 66 small and medium enterprises and entrepreneurs, who reached high standards in the field of e-business, received a trust mark (e-Trustmark). e-Trustmark is a label, picture or a logo in e-commerce displayed on the website of an organization confirming that the website is safe for making purchases. The purpose of the eTrustmark label is to enhance the quality of the national Internet stores and establish trust between the Internet dealers and consumers making online purchases. Numerous workshops and training sessions on e-business and e-commerce have been organized for more than 700 representatives of the small and medium enterprises, all with the aim of recognizing the importance of e-business for increasing competitiveness and decreasing operating costs. However, bearing in mind time the young spend on the Internet and the buying scope via numerous Internet platforms, workshops and seminars should be initiated as early as the secondary school in order to get them acquainted with their rights when shopping and warn them about the risks and dangers due to carelessness and lack of information. The young are very active especially when it comes to the social network Facebook and often use it to make online purchases, at the same time being exposed to a myriad of frauds. In order to increase confidence of e-consumers in e-commerce, in cooperation with the Sector for consumer protection and the Ministry of Trade, Tourism and Telecommunications, a specialized Internet platform E-dukator was developed, the first of a kind in Serbia, with the aim of informing and educating the citizens of Serbia about their consumer rights for safer online shopping. The centre for the development of e-commerce and consumer protection on the Internet has also been founded.
COMMON CONCERNS, I.E. FREQUENTLY ASKED QUESTIONS IN INTERNET SALES The study conducted within the project “The Development of e-Business” has showed that 91 percent of the citizens do not know their rights in online shopping. It is exactly one of the key reasons why Serbia still takes the last place in e-commerce. Further in the text, the authors attempt to provide answers to some frequently asked questions and concerns arising during online shopping. All these answers comply with legal regulations, however, due to the diversity of these regulations, only experts can consider them as a whole. Direct participants in online shopping do not understand them, and therefore often violate them accidentally.
Obligations of Internet vendors According to the Law on Consumer Protection, the vendor is obliged to make available “precontractual information of consumers” whereby they have to inform the consumer in a clear and understandable way about their business address, selling price, conditions, time frame and procedure for exercising the right to withdraw from the contract. The Directive 2011/83/EU on consumer rights stipulates the obligation to inform consumers about twenty elements in concluding distance contracts. Since the vendor is obliged to inform the customer about a myriad of circumstances, legal literature often stresses the danger from the so-called 10
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“information overload” which could result in a opposite effect, i.e. customers may lose interest and overlook information that is crucial for them (Petrić, 2015, p. 731). The Directive 97/7/EEC on consumer protection in concluding distant contracts regulates the field of protection of the consumers, goods or distant services starting from the requests for payment of unsolicited goods and aggressive selling methods of dealers. The burden of proof shifts to the dealer or service provider, given the circumstances that the consumer does not control the means of communication (Perinčić, 2014, p. 54). The vendor is obliged to deliver goods within 30 days (Article 32 of the Law on Consumer Protection) and is responsible for the conformity of goods within 2 years. The buyer has the right to file a complaint about goods which the vendor has to respond to within maximum of 8 days and has a deadline of 15 days for removal of any defects (in case of furniture and technical goods the deadline is 30 days). In case the vendor does not respond within this deadline, the buyer has the right to address the market inspection. However, a market inspector can only order the vendor to respond to the buyer’s complaint, but not to affect the content of the complaint itself, i.e. to order them to resolve the complaint. The Law on e-Commerce stipulates that the provider of services in distance contracts is obliged to provide a potential consumer with the data on general terms and conditions, contractual provisions, procedure of concluding these contracts, and the codes of conduct (Article 12 of the Law) in a clear, comprehensible and unambiguous manner. The service provider is obliged to confirm the receipt of an e-mail containing an offer or acceptance without delay, in an electronic form, in a separate e-mail (Article 14, paragraph 1 of the Law). Processing of personal data must be necessary, fair and lawful. It is prohibited to use and transmit them for purposes other than those originally mentioned (Neacsu, 2016, p. 307). The provision on setting activities whose conduction does not require making records of the turnover using fiscal cash register defines that online retailers are not obliged to issue fiscal receipts during sales. In this sense, the opinion of the Ministry of Finances No. 430-00-1436/2011-04 from March 23rd, 2011 was stated.
Return of inappropriate goods The consumer’s right to withdraw from the contract is one of the most significant achievements of the Consumer Law in the European Union. Even though the right to withdraw is against the contract law principle pacta sund servanda, this institute was introduced to protect customers (Jovanović-Zattila, 2015, p. 755). Owing to this institute, the consumer is given the opportunity to reconsider and review the purchased item, to consider all circumstances and reach a final decision. This is particularly important for the products bought online, since, on the one hand, the consumer may reach an irrational decision due to a strong impression created under the influence of advertisements, and on the other, there is no possibility to physically check the quality of the product. The Directive 2011/83/EU on the consumer rights provides for a unique deadline of 14 days to withdraw from contracts concluded outside business premises and distant contracts. It is considered that the dealer has fulfilled the obligation to inform the consumer about the right to withdraw if he has appropriately filled in the standard form with information and has submitted it to the consumer. This institute has also been envisaged by the Law on Consumer Protection and the Law on Financial Consumer Protection. The vendor is obliged to provide the consumer (via e-mail or home address) with a form for cancellation and explain the details of the procedure. The consumer has a deadline of 14 days to change their 11
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mind and cancel the purchase without any explanation. If the consumer wishes to use this right, they are obliged to inform the vendor via the cancellation form within 14 days. The consumer is obliged only to cover the costs of returning goods. The vendor is obliged to make a refund within 3 days. It is not possible to return opened audio and video files, as well as computer software.
Cases when a product is faulty or incomplete The vendor is obliged to deliver goods which are in conformity with the contract. In case the delivered goods do not conform to the contract, the consumer, who has previously informed the vendor on non-conformity, shall be entitled to demand from the vendor to remove the non-conformity, free of charge, by repair or replacement, i.e. to demand corresponding price reduction, or terminate the contract regarding faulty goods if a repair or replacement is not possible. If the non-conformity occurs within 6 months from the date of the purchase, the consumer shall be entitled to choose between demanding the removal of non-conformity, seeking corresponding price reduction or terminating the contract (Article 50 and 52 of the Law on Consumer Protection). In the first six months, the consumer has the right to have the goods replaced or repaired, or the amount paid refunded, regardless of the current price. The repair of goods is possible only with the consent of the consumer. If the vendor refuses to accept the complaint, i.e. if it is not possible to be filed due to distance, the consumer shall send it via registered mail or in the electronic form to the vendor’s email. In case the vendor does not respond to the complaint, the next step is addressing the Regional Counselling for consumer protection. If the consumer fails in exercising their rights this way, they have the right to address the competent court and file a lawsuit. If the non-conformity appears within 6 months from the purchase, it is presumed by the law that the goods were faulty at the time of the delivery. The vendor shoulders the burden to prove the opposite. Trade disputes valued up to RSD 500,000 are not subject to the court fee. The new Law on Consumer Protection is harmonized with the European regulations and practice of the non-intervention of the state in the relation between the vendor and the consumer. It is a civil law relation, and as such, it cancels the role of a market inspector in resolving individual consumer disputes. The citizens of the European Union are more protected from frauds since they can use the Internet platform of the European Commission where they can start a process of resolving disputes with Internet vendors out of court. In case of purchases made via Limundo.com and Kupindo.com platforms, consumers may use additional and modern ways for claiming their rights. The terms and conditions of Limundo d.o.o. Internet platform society define that Limindo d.o.o. may voluntarily mediate in resolving possible issues in case a dissatisfied member files a complaint within a stated deadline. If a product is faulty, the consumer may file a complaint within three days from the payment of funds to the LC account. Limundo d.o.o. is authorized to reach a decision either in favour of the vendor or the buyer. Furthermore, it has the right to make a refund for a purchased item, i.e. make a payment to the buyer’s account, but only if the buyer submits the evidence that the item has been returned to the vendor (Article 14.4 of the Terms and Conditions). Since payment is done via the LC account, and funds remain there for three days prior to being transferred to the vendor’s account, in case the buyer files a complaint about the item not being delivered or not being in the specified state, no later than 3 days from the payment of funds to the LC account, the complaint procedure which allows the buyer to exercise their rights this way, is started. The ultimate sanction which Limundo d.o.o. may apply is the suspension of the vendor membership status if the vendor does not cooperate with the buyer (Article 11.5 of 12
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the Terms and Conditions). The Limundo company has formed a special team composed of lawyers, psychologists and IT experts, whose task is to prevent frauds. Moreover, there is a special system of Limundo protection (protection of buyers and dealers) which represents a form of protection in situations when the buyer did not get a paid item, i.e. the dealer did not receive the money for the item sent to the buyer. In such a case, the Limundo company pays the aggrieved member up to RSD 10,000, and later claims its right for compensation from the person who committed the fraud. During the period from September 2014 to September 2015, Limundo paid its users RSD 138,372 for protection. In cooperation with the police, the Department for High Technology Crime of the Ministry of Interior of the Republic of Serbia and the prosecutor’s office collect evidence and submit criminal charges. Limundo assumes all duties and covers costs regarding writing and filing criminal charges, establishes contacts and holds consultations with competent authorities. This is a very important solution due to the existence of “consumer apathy”, i.e. consumers generally do not initiate court proceedings if the value of a dispute is relatively small, because, from consumers’ point of view, that value does not justify the initiation of court proceedings which could take a long time and cost a lot (Karanikić-Mirić, 2014, p. 60). The first verdict which sentenced the person who committed a fraud via Limundo portal to 6 months in prison suspended for 2 years, was reached in 2016. When the fraud happened in 2014, the company Limundo first paid compensation to all claimants, and then filed a lawsuit against the person who committed a fraud, which resulted in the abovementioned judgement in favour of the company Limundo. The Limundo team analyses each case of fraud in particular and then improves the whole system, thus making it safer and stronger. However, despite positive experiences, the Association for Consumer Protection has recorded a myriad of negative experiences and complaints. The majority of complaints are related to purchases made via Facebook, Kupindo, Limundo and similar websites, i.e. to purchases made between natural persons. Namely, the Law on Consumer Protection is not applied to contractual relations of two natural persons, but when a contract is concluded between the consumer (natural person) and the vendor (legal entity, i.e. entrepreneur). Persons who purchase items via Internet platforms or Facebook may exercise their rights in accordance with the Law on Consumer Protection only if they purchase from vendors registered as legal entities or entrepreneurs, i.e. vendors that have clearly visible labels to prove that.
How to make safe online purchases The first step towards the safe Internet sales is to check the Internet vendor. The Internet vendor is considered safe if their webpage contains their basic information, terms and conditions of sales, detailed data on products, prices, data on the method of payment and applied standards for ensuring the safety of transactions and personal data, information about consumer rights, data on licences for carrying out operations and dealers’ membership in professional associations. If a certain question cannot be answered or the answer is unclear, one should not shop there. If the Internet vendor does not provide the address, it may be the indicator that the vendor is not reliable. If shipping costs are not clearly specified, it may indicate the price will be much higher than expected. One should be very careful when it comes to personal data and leave only those that are necessary for making a purchase. Most problems in online purchases are due to the carelessness of consumers themselves. As for making purchases via websites such as Kupindo, Limundo, as well as via social networks such as Facebook, one should check the person offering items for sale, how long they have been selling items this way, as well as the reviews of other buyers. 13
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Domestic legal entities and entrepreneurs, along with branches of foreign companies, need to be registered in the book of registry of the Business Registers Agency.
Payment in online purchases Online shopping in Serbia had functioned for years prior to the adoption of the Law on Payment Services and introducing the institute of electronic money which enabled the payment of goods and services via mobile phones. The Law on Payment Services was passed on October 1st, 2015 and it has regulated the use of electronic money and new organization of the payment system, hence modernizing and enhancing the payment services not only in the country, but also with countries abroad. It has also regulated online payment, and primarily, the implementation of the EU Directive 2000/46/EC on taking-up, pursuit and prudential supervision of institutions issuing e-money was carried out. This law has enabled Serbia to be easily included in the European payment system after the accession to the European Union. Amendments to the Law on Foreign Exchange Operations have allowed the citizens to make payment transactions with foreign countries via domestic e-money and payment institutions, not only via foreign ones, such as PayPal. The law stipulates that the citizens of Serbia may make payment transactions with foreign countries either via a payment institution or an authorized public postal operator. The Law on Foreign Exchange Operations could be improved in order to introduce mechanisms to enable local traders to sell to the buyers outside of Serbia, with payment in foreign currency. This change would have a positive impact on the growth of the foreign exchange inflow in the country. There are multiple methods of payment in online shopping. In domestic online shops, payment can be done via standard payment orders which are debited against clients’ current accounts, or in cash upon delivery. In foreign online shops, it is possible to pay using wire accounts or credit cards. They are designed exclusively for online shopping and people make payments to these cards when they intend to make online purchases. The most common method of online payment is by credit and debit cards. Almost all banks operating on the territory of Serbia offer their clients cards which are designed exclusively for shopping on domestic and foreign websites (for instance, VISA VIRTUON). The PayPal payment system was introduced in April 2014. As a mediator between the bank and the vendor making transactions without issuing data on the card, it reduces the risk of misuse and increases the safety of online shopping. PayPal is a system for electronic payment which enables a fast and secure money transaction online (receiving and payment), via mobile phones and in stores. The advantage of this system is that the buyer adds money to their account using their banking cards, then makes payments through it, without revealing data (such as the card number) to the vendor. PayPal turns the email address into an electronic wallet and enables its users to receive or send money to any PayPal user. All they need to do is specify the address and the amount, and the money transfer is done in a few minutes. In Serbia, the option of receiving money has officially been available since 2015, therefore enabling small stores and individuals to do business with 165 million active PayPal users in 203 countries worldwide. However, using PayPal to shop for items on domestic websites is not possible, since the National Bank of Serbia does not allow domestic payments in foreign currency, and PayPal does not have the option for payments in dinars. In case of purchases made via Internet platforms Limundo.com and Kupindo.com, there is a special payment system known as Limundo Cash (LC). It serves as a mediator for transferring money 14
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from the buyer to the vendor for purchases made via these platforms. By transferring funds to a special account created by Limundo d.o.o. for LC purposes only, the buyer authorises Limundo d.o.o. to transfer the paid amount for a purchased item to the vendor’s account, no later than three working days from the payment.
CONCLUSION In Serbia, in the field of contract law, the process of harmonization is going in good direction. A series of laws and other bylaw regulations regarding the requirements and standards of the European Union have been passed. Naturally, it is still necessary to change a large number of regulations, such as regulations on the customs, tax, republic administrative fees, information safety, and electronic archives. Furthermore, considering the Law on Obligation, as the fundamental legal source for editing contract law, when reaching the new Civil Code, it should undergo certain changes in order to be harmonized with the international sources in this field (the concept of fundamental breach of contract, periods of prescription, etc.) (Ćirić & Cvetković, 2006, p. 271). The European Commission accepts the principle of a “targeted” harmonization whose degree will differ from case to case and the benefit of the consumer, without the application of the automatic and unconditional harmonization. Regarding the policy of the European contract law for the protection of consumers, it used to be characterized by the requirements for minimal harmonization for a long time. With the exception of the Directive on liability of the manufacturer for faulty products, all other directives in the field of the consumer protection were based on the requirements for minimal harmonization. However, the last decade of the development of the European law for consumer protection has been marked by a radical shift from the requirements for a minimal to the requirements for a maximal harmonization (Gomez & Ganusa, 2011). In distance contracts, especially in online shopping, a complete harmonization is necessary to enhance the creation of a unique market. A series of regulations has been reached in the European Union guaranteeing consumer rights and protection of their legal and economic interests, thereby reaching the highest degree of law development and legal consumer protection. That is why it is essential to conduct a rapid and efficient harmonization with the regulations of the European Union. The Republic of Serbia has passed a set of laws and other bylaw regulations which comply with the requirements and standards of the European Union in the field of e-business and consumer protection. Despite a tremendous potential for the development of economy, the increase of employment and competition, as well as for facilitating everyday life, e-business is still in its infancy. The “Global ecommerce development index for 2015” study states that Serbia ranks last, since as a country it does not have a prepared plan for a further development of e-commerce. Successful business in modern economy is determined by the ability of an enterprise to meet the demands of the market, to track changes which are becoming more and more frequent and dynamic (Stanisavljev et al., 2012, p. 1). On the one hand, e-commerce allows a fast track of those changes, but on the other, it is one of those demands. Naturally, the efforts of state authorities and political elite cannot be argued. The Internet platform named “E-dukator”, which enables citizens to find answers to all queries related to online shopping, arose within the “Development of e-business” project, which is supported by the European Union. However, consumers still regard e-commerce with suspicion and resistance, and traders do not have a clear digital strategy and developed approaches to e-commerce. 15
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As already stated in the paper, introducing legal regulations is just not enough, but it is their efficient implementation and application by citizens and authorities that is of great importance. The aim of harmonization does not imply only formal harmonization of the national regulations with the European Union Law (formal harmonization), but above all, the creation of the appropriate conditions for their implementation, which can be achieved by the independent and authoritarian judiciary and state administration (substantive, functional harmonization) (Vasiljević, 2009, p. 372). It is necessary to work on the strengthening and affirmation of alternative mechanisms for dispute resolution, which cannot “come to life” overnight. The development of the system for out-of-court resolution of disputes in this field disburdens courts, and the work of associations for consumer protection contributes to strengthening the consumer impact. By joining the RAPEX system for rapid exchange of warnings and information on dangerous and unsafe products, the general safety level of products has increased, thereby reducing costs in the health sector, i.e. costs of treating injuries and illnesses caused by using unsafe products. At the same time, bigger and more systematic investments in the development of the non-governmental organizations are necessary, primarily associations and unions for consumer protection, especially regional consumer centres, both in terms of enhancing their material and human capacities, and in their affirmation as the address for filing consumer complaints (Lazarević et al., 2013). There is a problem with law enforcement, especially by the government due to the lack of the professional staff. In addition to passing laws, it is necessary to conduct an equally long and tiresome process – the process of education of employees in state services, traders, but also consumers in order to foster awareness of the significance and benefits of e-commerce, and above all, customer protection. The implementation and enforcement of the consumer and health protection policies require adequate administrative capacities and infrastructure on a national, regional and local level. The Republic of Serbia will have to educate independent administrative structures with executive authority which will further enable the efficient monitoring of the market and enforcement of regulations. Harmonization is an extremely long and complicated process, and Serbia is not even close to its termination. The European Union law is not a completely built and integrated system, but the legal system still under construction, which includes, in addition to 20,000 different regulations of secondary legislature, a few thousand decisions of the Court of Justice and the Court of First Instance (Vukadinović, 2009). According to the experience of the member states, harmonization has proven to be a very complex task because the European Union Law shows, to a certain extent, the characteristics of the Case (Kovačević-Kuštrimović & Lazić, 2007). However, the issue of full harmonization with the EU law is not a burning issue to the extent the issue of ensuring functional mechanisms for the implementation of the harmonized norms is, since otherwise, well-harmonized legislation remains only on paper.
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REFERENCES Ćirić, A., & Cvetković, P. (2006). Usaglašavanje poslovnog ugovornog prava Srbije sa međunarodnim izvorima. Sa naučne konferencije Funkcionisanje pravnog sistema Republike Srbije, May 18, 2006 (pp. 262-274). Niš: Pravni fakultet u Nišu. In Serbian. European Commission. (2013). The European Union explained – How the European Union works. Luxembourg: Publication office of the European Union. European Union Information Centre. (2014). 35 Steps towards the European Union. Belgrade: EU Information Centre. Frenjveš, A. (2006). O stanju harmonizacije ugovornog prava u Evropskoj uniji. Revija za pravo osiguranja, 1-2, 1-9. In Serbian. Galič, A. (2005). Procesnopravna zaštita potrošača u pravu Evropske unije. Sa naučne konferencije Pravni sistem Republike Srbije – usaglašavanje sa pravom Evropske unije, May 17, 2006 (pp. 111-124). Niš: Pravni fakultet u Nišu. In Serbian. Gillies, L. (2001). A review of the new jurisdiction rules for electronic consumer contracts within the European Union. Journal of Information, Law & Technology. Retrieved April 19, 2017, from https://www2.warwick. ac.uk/fac/soc/law/elj/jilt/2001_1/gillies/. Gomez, F., & Ganusa, J. (2011). An Economic analysis of harmonization regimes: full harmonization, minimum harmonization or optional instrument. European Review of Contract Law, 7(2), 275-294. Jelinić, S., & Akšamović, D. (2010). Ugovorno pravo Evropske unije na prekretnici. Zbornik Pravnog fakulteta u Zagrebu, 60(1), 203-254. In Croatian. Jovanović-Zattila, M. (2015). Pravo potrošača na povlačenje iz ugovora. Zbornik radova Pravnog fakulteta u Nišu, 70, 755 -765. In Serbian. Karanikić-Mirić, M. (2014). Kolektivna zaštita potrošača u srpskom pravu. Anali Pravnog fakulteta Univerziteta u Zenici, 14, 57-83. In Serbian. Kovačević, V., Pavlovć, K., & Šutić, V. (2015). Upotreba informaciono-komunikacionih tehnologija u Republici Srbiji, 2015. Beograd: Republički zavod za statistiku. In Serbian. Kovačević-Kuštrimović, R., & Lazić, M. (2007). Građanski zakonik Srbije i pravo Evropske unije. Pravni život, 11, 409-428. In Serbian. Lazarević, N., Đurović, M., Lazarević, M., & Đinđić, M. (2013). Studija potrošačke politike u Srbiji: ka evropskom nivou zaštite potrošača u Srbiji. Beograd: Centar za evropske politike. In Serbian. Lazić, M. (2006). Harmonizacija evropskog građanskog prava i prava Republike Srbije. Sa naučne konferencije Funkcionisanje pravnog sistema Republike Srbije, May 18, 2006 (pp. 246-260). Niš: Pravni fakultet u Nišu. In Serbian. Lehamann, M. (2001). Electronic commerce and consumer protection in Europe. Santa Clara High Technology Law Journal, 17(1), 101-114. Miladinović, S. (2011). Pravo na razliku i organizovana harmonizacija ugovornog prava. Strani pravni život, 3, 46-57. In Serbian. Neacsu, N. (2016). Consumer protection in electronic commerce. Bulletin of the Transilvania University of Brasov, 9(58), 301-308. Retrieved April 20, 2017, from http://webbut.unitbv.ro/Bulletin/Series%20V/2016/ BULETIN%20I%20PDF/34_Neacsu.pdf. Petrović-Tomić, N. (2014). Rešavanje potrošačkih sporova pred arbitražom. Anali Pravnog fakulteta u Beogradu, 62(2), 86-114. DOI:10.5937/AnaliPFB1402086T In Serbian. Perinčić, D. (2014). Ostvarivanje prava potrošača. Beograd: Zadužbina Andrejević. In Serbian. Prlja, D., Reljanović, M., & Ivanović, Z. (2012). Internet pravo. Beograd: Institut za uporedno pravo. In Serbian.
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RANĐELOVIĆ, D., LJAJIĆ, S. CONSUMER PROTECTION IN INTERNET SALES – DEGREE OF HARMONIZATION WITH THE EUROPEAN UNION LAW
Petrić, S. (2015). Temeljna obilježja prava zaštite potrošača Republike Hrvatske u svjetlu novog Zakona o zaštiti potrošača. Zbornik radova Pravnog fakulteta u Nišu, 70, 719-736. In Serbian. Schu, R. (1996). Consumer protection in private international law in Internet contracts. Arelano Law and Policy Review, 8(2), 31-98. Retrieved April 21, 2017, from http://www.arellanolaw.edu/alpr/v8n2c.pdf. Sikirić, H. (2006). Mjerodavno pravo za ugovore u elektroničkoj trgovini u hrvatskom i međunarodnom privatnom pravu. Zbornik Pravnog fakulteta u Zagrebu, 56, 739-789. In Croatian. Simović, K. (2014). Slobodno kretanje robe u kontekstu pregovora o pristupanju Evropskoj uniji: praktična pitanja, prilike, i izazovi efikasne integracije Republike Srbije u Jedinstveno tržište. Beograd: Centar za evropske politike. In Serbian. Stanisavljev, S., Đorđević, D., & Ćoćkalo, D. (2012). Analysis of competitiveness of domestic enterprises on the global market. Singidunum Journal of Applied Sciences, 9(1), 1-8. Retrieved April 15, 2017, from http://journal. singidunum.ac.rs/files/2012-9-1/analysis-of-competitiveness-of-domestic-enterprises-on-the-global-market. pdf. Stanivuković, M. (2001). Instrumenti unifikacije i harmonizacije prava i njihov odnos prema kolizionim normama s posebnim osvrtom na Načela evropskog ugovornog prava. Zbornik referata sa savetovanja održanog na Pravnom fakultetu u Kragujevcu, November 15-16, 2001 (pp. 57-93). Kragujevac: Pravni fakultet u Kragujevcu. In Serbian. Stojanović, I. (2011). Elektronska trgovina i kupovina putem Interneta u Srbiji. Beograd: Univerzitet Singidunum. Retrieved March 15, 2017 from https://singipedia.singidunum.ac.rs/izdanje/41837-elektronska-trgovina-ikupovina-putem-interneta-u-srbiji. In Serbian. The European Consumer Centres Network. (2015). Anniversary Report 2005-2015. Retrieved March 16, 2017, from http://ec.europa.eu/consumers/solving_consumer_disputes/non-judicial_redress/ecc-net/docs/ecc_net_-_anniversary_report_2015_en.pdf doi: 102772/47086. Vasiljević, M. (2009). Poslovno pravo Srbije i Evropska unija. Pravo i privreda, 46(1-4), 11-46. In Serbian. Vukadinović, R. (1999). Pojam i značaj usklađivanja (harmonizacije) domaćeg prava sa pravom Evropske unije. Sa naučno-stručnog skupa, 24-25 December 1998 (pp. 35-50). Niš: Pravni fakultet u Nišu. In Serbian. Vukadinović, R. (2009). Upotreba i zloupotreba harmonizacije domaćeg prava sa pravom Evropske unije. Zbornik radova Pravo Republike Srbije i pravo Evropske unije – stanje i perspektive, 1(1), 1-19. In Serbian.
ZAŠTITA POTROŠAČA U INTERNET PRODAJI – STEPEN HARMONIZACIJE SA PRAVOM EVROPSKE UNIJE Rezime: U ovom radu autori će nastojati da daju odgovor na neka opšta pitanja koja se tiču pojma, značaja i ciljeva harmonizacije ugovornog prava. S obzirom na aktuelnost i masovnost internet prodaje, pitanje zaštite potrošača autori će postaviti u granicama ove uske oblasti ugovornog prava. U centralnom delu rada autori će prikazati najznačajnije propise kojima se reguliše ova oblast u Evropskoj uniji i Srbiji, kao i stepen njihove harmonizacije. Takođe, nastojaće da daju odgovore na neka osnovna pitanja i probleme sa kojima se potrošači susreću prilikom internet kupovine. U Srbiji je donet niz zakona koji prate zahteve i standarde Evropske unije. Međutim, neophodno je stalno sprovoditi i proces edukacije zaposlenih u državnim službama, trgovaca, ali i samih potrošača, radi širenja svesti o značaju i koristima elektronske trgovine, pre svega zbog zaštite potrošača.
Ključne reči: internet prodaja, Evropska unija, ugovor, zaštita potrošača. Received: January 13, 2017 Correction: February 24, 2017 Accepted: October 2, 2017
18
EJAE 2017, 14(2): 19-30 ISSN 2406-2588 UDK: 330.101.54 336.563:331.5(540) DOI: 10.5937/ejae14-14311 Original paper/Originalni naučni rad
DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBAN REGIONS OF INDIA Sivagandhi Saravanan* Madras School of Economics, Chennai, Tamil Nadu, India
Abstract: The paper suggests that microfinance program has significantly improved the standard of living of the poor people. The datasets from 367 SHG members and 178 non-SHG members are taken into analysis. Simultaneous equation method is applied to observe the effect of exogenous variables on the endogenous variable. Income and asset are endogenous variables, which have significant impacts on each other. Age, education and village infrastructure have positive impacts on both income and asset.
Keywords: poverty, microfinance, control, treatment, simultaneous equation.
INTRODUCTION According to the World Bank, out of five Indians one is poor i.e. 270 million people are below the poverty line. The India’s Poverty Profile released by the World Bank highlights that 80% of India’s poor people live in rural areas (World Bank, 2016). Generally, the section of population that is economically or socially underprivileged cannot meet the basic needs. This in turn results in higher unemployment, poor health standards, and lesser labour productivity that results in lesser economic development and creates social unrest. Microfinance, which came into existence in the 1970s and emerged as a panacea to the poor, provided access of credit facilities to the population in target. It is broadly defined as the provision of credit and other financial services to the underprivileged, who are usually low-income individuals working in the informal economy and unbankables (Armendariz & Morduch, 2005; Ledgerwood & Gibson, 2013). MFIs are operating at large level in the third world countries where the financial penetration rates are low compared to developed economies, and are low and middle income communities (Chiu, 2017). Microfinance flows into emerging economies through various channels: MFIs, NBFIs, SHGs, the cooperatives and state level banks (Ledgerwood & Gibson, 2013). The practice of microfinance dates back to the rural financial scenario without popularity and became popular after the commercialization of the sector (Fuchs, 2006; Maes & Reed, 2012). By involving in formal banking activities, MFIs do not depend on donations and subsidies (Cull et al, 2009; Earne & Sherk, 2013). On the beneficiary’s part, microfinance helps them start up or enhance microenterprise * E-mail: saravanan@mse.ac.in
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
activities, consumption smoothing, empowerment and financial systems development through collateral support (Dunford, 2006; Van Rooyen, Stewart & De Wet, 2012). According to Simanotwitz & Walter (2002), conventional banks are reluctant to provide small loans to the unbankables based on the assumption that the repayment capacity and collateral security of the unbankables are either minimal or zero. Today, microfinance is not limited to the provision of microcredit but is also inclusive of short term financial service for those who are excluded by the traditional formal sources. It is disheartening to note that about 4.5 billion of the world’s population, having low and lower incomes, does not have access to formal financial services (Dichter & Harper, 2007). Microfinance plays a critical role in overcoming unexpected shocks such as illness or death of a wage earner(s), climate shocks which cause considerable losses to poor and large indebtedness. The effects of microcredit programs on poverty alleviation are still a debatable issue, but the world development organization acclaim microfinance as a major solution for the eradication of the world’s poverty. It is really important to carry out a detailed and in-depth analysis of the impact of microfinance programs in the developing countries. Similarly, it is also important to provide answers to the controversy. The present study examines the effects of microfinance on the socio-economic variables and poverty alleviation on the sample of population from a semi-urban region of India, in the state of Tamil Nadu. We have selected clusters of villages of district Tiruvallur as a case study to determine whether enrolment in microfinance activities enhances the income level of the sample. This work follows a control-treatment approach for a comparison purpose. The empirical result of this work indicates that microfinance can help in enhancing the income level of the sample in particular and hence the population in general.
REVIEW OF THE SELECT LITERATURE After the advent of the Microfinance concept, numerous studies were carried out and two interesting and surprising findings emerged. One group of researchers found that microfinance is a powerful weapon on poverty indicators and other group denied the fact. The outcomes of microfinance are many: some authors found that microfinance alleviates poverty (Hulme & Mosley, 1996; Pitt & Khandker, 1998; Copestake, 2002; Galab & Chandrasekhar Rao, 2003; Khandker, 2005; Tedeschi, 2010); women empowerment (Hashemi et al, 1996; Goetz & Sengupta, 1996; Steele et al, 1998; Morduch, 1999; Rahman et al, 2009; Pitt et al, 2006; Garikipati, 2012; Saravanan & Prasad, 2017) and impact on education, health, nutrition, consumption level and assets creation (Hazarkia & Sarangi, 2008; Gertler et al, 2006; Jacobsen, 2009; Kouassi, 2008; Leatherman et al, 2012; Deloach & Lamanna, 2011). A significant contribution of the study is that it includes the variable village infrastructure as one of parameters to examine the impact of microfinance. Village infrastructure does not play a decisive role in the context that the members’ accruing income may be the result of economic growth rather than microfinance. Therefore, the variable has been taken into account in the 2SLS technique. The village infrastructure index is composed of the road-railway connectivity, presence of Primary Health Care Centre (PHC), Higher Education Institutions, and industries. The literature review provides a clear insight into the impact of microfinance on indicators of poverty. The study examines income and asset creation. Furthermore, the study tries to find out the answers to the following questions: (1) Does microfinance through SHGs really have positive impacts on poverty indicators, and (2) whether microfinance is really a cause of income change or overall economic growth of the region.
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
SAMPLE SELECTION AND METHOD The NABARD (National Bank for Agriculture and Rural Development), an apex bank for rural development, framed detailed guidelines for starting and nurturing up of SHGs. The guideline clearly stated that an SHG can be linked to bank loans only after a group has actively existed for about six months (NABARD, 1999). Following the NABARD norms, we adopt multistage random sampling technique for sample selection survey. This study compares the impact of microfinance on Self-Help Group (SHG) members vis-a-vis non-members. The non-members of this study are those who never self-select to participate in the self-help group, but belong to same locality. Tiruvallur district was randomly chosen for the evaluation study, a cluster of four blocks namely Tiruvallur, Tiruttani, Gummudipoondi and Ponneri which fall under Tiruvallur District has been selected. They comprise more than 1,500 SHG members. The sample respondents have been chosen at random from the list of members available from Tamil Nadu Women Development Corporation office at the headquarters of Tiruvallur District. The non-members data have been collected from the same cohort to make an absolute comparison. The dataset for the study has been collected through a primary survey of 545 respondents, by using a semi-structured questionnaire during 2010. The questionnaire comprises questions related to social, economic parameters of households along with the microfinance activities. From the sample, 367 respondents were members of SHGs and 178 respondents were non-members. The primary data collected were processed for data analysis using standard statistical tools such as percentage, test of equality of mean. Furthermore, an econometric tool such as the two stage least square method (2SLS) is applied to arrive at the determinants of income and asset at the household level.
EMPIRICAL FINDINGS Descriptive Analysis To measure the level of poverty, different indicators are used. Some economists argued that income is the best indicator to measure. Others negated it and asserted that consumption expenditure is an alternative measurement of poverty. Poverty was traditionally viewed as a lack of income to acquire basic necessities of life. Now, poverty has been measured through various indicators such as, consumption expenditure, nutritional status, capability etc. In the study, income is considered to be one of the main determinants of poverty, since income is an immediate result of economic activity. The increasing level of income would lead to more consumption expenditures which result in a better standard of living. The Microfinance program makes the beneficiaries economically more powerful; SHGs program turns the members to possess productive assets that leads to incremented income and employment which helps them to overcome the clutches of poverty and vulnerable situation. The study discusses the differences in the individual and household earnings of the members. We discuss the impact of microfinance through change in income level between treatment and control groups, age of the groups and the impact of credit on income and productive asset created at the household level. Impact of SHGs on Individual Income: The members of the SHGs are supposed to make use of small loans for productive activities, which would increase their income. To identify the increase in the level of income, as stated earlier we have created two groups; one for the households with SHG and the other with no participation in the program. The results from Table 1 explain the increase in income for the households that participated in the program. For instance, a closer look at the table 21
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
explains average income of the members to be Rs.1492 after joining SHG compared to Rs.647 before joining SHG, i.e. income increased about 1.3 times. This increment in income is found to be 41 percent, 151 percent, 329 percent and 320 percent for the SHG members of Tiruvallur, Tiruttani, Gummudipoondi and Ponneri blocks respectively. It is clear from the analysis that the increased income is highest in case of Gummudipoondi and Ponneriblocks.
Average Income of the Respondents Clusters
Before membership
After membership
Changes in income (%)
‘t’ value
Tiruvallur
1514
2148
41.87
4.49*
Tiruttani
663
1670
151.89
6.64*
Gummudipoondi
304
1243
329.93
8.26*
Ponneri
253
1064
320.55
7.43*
Total
647
1492
130.60
6.79*
Table 1. Change in Income (in Rs) Source: Computed from the Primary Data collected by the researcher in 2010.
Variations in Income of the SHG-Members and Non-SHG members: The income level of the members has been significantly greater compared to the non-members. The statistical analysis provided in Table 2 reveals that average income of the non-members is Rs.998 compared to Rs.1492 of the members of SHG. It proves that the income of the members has increased substantially. The average income of the members is 0.7 times higher than the average income of non-members. The percentage increase in the income of the members over the income of the non-members is the highest for Tiruvallur block, i.e. 80 percent followed by Tiruttani (77 percent), Gummudipoondi (19 percent) and Ponneri (29 percent) blocks.
Average Income Clusters
Control Group
Treatment Group
Changes in income (%)
‘t’ value
Tiruvallur
1193
2148
80.05
7.24*
Tiruttani
942
1670
77.28
6.82*
Gummudipoondi
1042
1243
19.28
2.69*
Ponneri
823
1064
29.28
4.98*
Total
998
1492
49.49
5.97*
Table 2. Income of the Members and Non-Members (per month) Source: Computed from the Primary Data collected by the researcher in 2010.
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The fundamental principle of SHG is to nurture savings habit among poor households, so that savings is a compulsory component of SHG activities. The amount of savings may vary from member to member but every member should maintain a minimum of savings Rs.25 per week. To verify whether income and savings are related we use the correlation coefficient between income and savings using the following approach:
n ( γ − p ) ⇒ N (0, (1 − p 2 ) 2 under H= 0, ρ 0, n γ ∼ N ( 0,1)
1 1− r 1 1− ρ using , n log − log ⇒ N ( 0,1) , 1+ r 2 1+ ρ 2
(1)
we obtain a 95% CI for ρ as (0.53, 0.66). The computed ‘r’ value is 0.60 that implies a positive correlation between savings and income. Therefore, if income potentials of a household increases there is a possibility of increase in the saving potential as well. As explained earlier, the income potentials of the SHG members are greater than that of the non-members. Therefore, we may conclude that the income and savings of the members are higher compared to the non-members due to the microfinance activities in the form of SHG participation. Groups’ Age on Income: As mentioned earlier, the SHGs are successfully linked with banks for credit after six months have successfully elapsed. The methodology adopted by the banks for credit provision to SHG is that a group can obtain a fresh loan once they successfully pay off the existing loans. In this context, the age of the group becomes an important parameter in getting a credit. Matured groups may have higher chances of obtaining credits than other groups. The banks are providing credit only for development and acquisition of productive assets. Along these lines, the age of a group plays a considerable role in escalating the earnings of the group members. In order to analyse the impact of group’s age on the income of members, the SHGs are categorized into 3-5 years old (Young Groups); 5-7 years old (Middle Groups) and more than 7 years old (Matured Groups). Table 3 explains the income earned by the members of SHGs of Tiruvallur, Tiruttani, Ponneri and Gummudipoondi blocks according to the age of the group. The average increase in income after joining SHG is significant and highest for the members of the Matured Group followed by the Middle age and Young Group members. The addition to income, over the pre-SHGs situation for the Young, Middle age and Matured group members is noticed to be Rs.647, Rs.652 and Rs.609 per month for Tiruvallur Rs.905, Rs.1131 and Rs.963 for Tiruttani and Rs.888, Rs.856 and Rs.997 for Gummudipoondi and Rs.795, Rs.747 and Rs.1069 for Ponneri blocks, respectively. In addition, the analysis also reports that the addition of average income of the Young Group members after participating in the SHGs program is Rs.817 and with the Middle age Group members it is Rs.817, and with the Matured Group members it is Rs.897. It has also been established from the study that as a group age increases, the possibility of disposable income is higher.
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
Clusters
Tiruvallur
Tiruttani
Gummudipoondi
Ponneri
Total
Group’s Age
N
Avg. income pre-membership
Avg. income Changes in post-membership income (%)
Young
15
2186
2833
29.60
2.62*
Middle
36
1281
1933
50.90
4.84*
Mature
33
1462
2071
41.66
4.32*
Total
84
1514
2148
41.88
4.49*
Young
20
745
1650
121.48
6.33*
Middle
29
517
1648
218.76
7.12*
Mature
35
737
1700
130.66
6.31*
Total
84
663
1670
151.89
6.64*
Young
25
372
1260
238.71
7.66*
Middle
16
162
1018
528.40
8.92*
Mature
44
318
1315
313.52
8.11*
Total
85
304
1243
308.88
8.26*
Young
44
345
1140
230.43
6.84*
Middle
54
208
955
359.13
8.87*
Mature
16
156
1225
685.26
8.96*
Total
114
253
1064
320.55
7.43*
Young
104
694
1511
117.72
6.23*
Middle
135
555
1372
147.21
6.61*
Mature
128
707
1604
126.87
6.04*
Total
367
647
1492
130.60
6.79*
‘t’ value
Table 3. Group’s Age on Income of the Member (in Rs.) (per month) Source: Computed from the Primary Data collected by the researcher in 2010.
Changes in Household Income: The SHGs programs boost up the individual’s income, which subsequently add up to the total household’s income. In some cases, SHGs activities are primary source of household income. The SHG members do invest their loans in income promoting activities i.e. starting-up a new business or expanding their existing business, which leads to the generation of income, enables the members to support their families in a better way. The household monthly income of the members and the non-members is shown in Table 4. The table reflects that the increase in the household income is the highest in Tiruttani block (81 percent) followed by Tiruvallur (62 percent) and Ponneri (29 percent) blocks. The average household income of the members is Rs.5539 which is higher than that of the non-members by 41 percent i.e. Rs.1614. The SHGs programs enable the beneficiaries to better contribute to their household revenue. Table 5 shows the level of income of both member and non-member households. The table reveals that the majority of the member households, i.e. 37.05 percent belong to the income group of Rs. 4,000-6,000 per month, whereas the majority of the nonmembers i.e. 62.35 per cent fall into the income group of Rs. 2,000-4,000 per month. 4.35 percent of the members’ and 4.49 percent of the non-members’ household income drops below Rs. 2,000. The study underscored that 32.15 percent of the member households earn above Rs. 6,000 per month compared 24
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
to 6.18 percent of the non-member households. It is crystal clear from the analysis that the household income level of the members is higher than that of the non-members.
Household’s Income (in Rs) Blocks
Treatment Group
Control Group
Increment (%)
‘t’ value
Tiruvallur
5942
3668
38.27
3.82*
Tiruttani
5848
3217
44.99
2.69*
Gummudipoondi
5067
4180
17.51
5.23*
Ponneri
5368
4155
22.60
4.21*
Total
5539
3925
29.14
5.11*
Table 4. Household Income of the Treatment Group and Control Group (per month) Source: Computed from the Primary Data collected by the researcher in 2010.
Income level (In Rs.) (per month)
Treatment Group (in numbers)
Control Group (in numbers)
Villi
Minj
GP
Ponneri
Total
Villi
Minj
GP
Ponneri
Total
>Rs.2000
4
2
7
3
16
3
1
1
3
8
Rs.2000-4000
25
18
25
29
97
33
17
28
33
111
Rs.4000-6000
21
35
25
55
136
9
2
16
21
48
Rs.6000-8000
18
17
22
19
76
3
-
5
3
11
Rs.8000-10000
11
9
4
5
29
0
0
0
0
0
< Rs.10000
5
3
2
3
13
0
0
0
0
0
Total
84
84
85
114
367
48
2
50
60
178
Table 5. Household Income classification Source: Computed from the Primary Data collected by the researcher in 2010.
This statistical analysis confirms that the income and saving potential of the household that are participating in the programme are better off compared to the non-members. Furthermore, involvement in the program for a longer time allows members to get higher loans, and hence increases their income at a household level. In addition, all sections of the society benefitted by this program. Therefore the next step in this analysis is to examine the impact of SHGs credit on outcomes related to income and asset which is explained in the next section.
Impact of SHGs loans on Income and Assets The study has applied simultaneous equation models to determine the impacts of borrowing on income and assets using two-stage least square (2SLS) estimation system of equation as follows:
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
Cij =∝ + β c X ij + γ cVij + π Z ij + ε ij c
(2)
yij =∝ + β y X ij + γ yVij + δ Cij + ε ijy
(3)
Xij – Vector of the exogenous household characteristics Vij – Vector of the village infrastructure characteristics Zij -Vector set of the household or Village characteristics that affect Cij β c ,γ c , β y , γ y and δ – Unknown parameters
Σijc , Σijy – Random Errors The above equation indicates that the amount of borrowing loan is a function of household characteristics, village specific and other related variables. Furthermore, the next empirical specification shows that the dependent variable depends on the same village specific, demographic and also amount of borrowing. Table 6 displays the number of household outcomes being the function of amount of borrowing, age related characteristics, education, gender and village household. In the following cases, income and assets are taken as the major explained variables of the model, mostly taken as a proxy for the household outcomes in two different specifications. Our empirical estimates show that households play a crucial role in determining the level of borrowing compared to the income. Our empirical estimate shows that every 1% increase in borrowing leads to 1.94% increase in household assets, compared to the 0.95% increase in borrowing rate out of income source (see columns I and II). Furthermore, we find positive impact of age, education and gender of the household in determining the income level (Table 6, row 3 & 4). It implies that incomes of households are affected positively by the amount of credit. In order to examine the effect of age, we further examined the equation using age-square. The study has shown negative and significant coefficient of age-square, implying that as age increases, income of household also increases but at a certain level it starts dropping. We discovered that there is a positive coefficient of education level of the respondents. Thus, it is beneficial to gain more education. The study has found that most households are headed by male and the estimation shows that the male headed households have a larger income for the family. Table 7 shows 2SLS estimation result of simultaneous equation model using asset as one of the dependent variables. In this model, the researcher has used log transformed assets and credit for estimation. The study has found that SHGs credit makes changes in the household assets significantly to enhance household assets. Positive coefficient of age shows that as age increases household assets also increase. It can also be concluded that education contributes to a better quality of life through enhancing household possessions. Gender of household head is also found to be positive and significant. The positive and significant coefficient of village infrastructure implies that better infrastructure of the village may facilitate household assets.
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Variables Intercept Log of Amount of borrowing Age Age- squared Education
Log of income Equation-1
Equation-2
4.34**
3.73***
(2.58)
(2.12)
0.94**
1.93***
(3.74)
(3.66)
0.50*** (2.07) -0.28*** (-2.58) 0.48* (1.92)
-
0.61***
0.29
(4.87)
(3.41)
0.001
-0.001
(-0.73)
(-0.71)
-0.03
0.008
(-0.62)
(0.16)
R-sq
0.25
0.14
F value Prob> F
23.33
22.14
(0.00)
(0.00)
367
367
Gender of the household Proportionate of male in the Family Size Village infrastructure
Sample Size
Table 6. Estimation of Amount of loans borrowing on Household Outcome: Log of Income Source: Computed from the Primary Data collected by the researcher in 2010.
CONCLUDING OBSERVATIONS The results illustrate that microfinance has significantly improved the living standards of the members in general and the female members in particular. The study highlights that a significant proportion of the SHG members have increased the income potential in the post SHG participation. The benefit of enrollment in the SHG program is directly linked with income generation, savings potential and ability to borrow loans from the SHGs. Microfinance in the form of SHG has also helped different age classification of the sample, therefore the positive impact of the program is that it is equally beneficial for different age groups. Credits from the SHG have also helped households to arrive at productive asset, which can be used by the household for any immediate purpose. Educated households are better at achieving higher benefits of the program. The study concludes that female headed households also benefit from the program and it makes them independent, in the long run these kinds of programs reduce a gender gap in employment and income generating activities. Therefore, to eradicate poverty and make a sustainable development for the underprivileged section of the society, microfinance (SHG) can be a better policy instrument along with a program related to improving higher education at a village level. 27
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SARAVANAN, S. DOES SHG PROGRAM ALLEVIATE POVERTY? EVIDENCE FROM FOUR CLUSTERS IN SEMI-URBANA REGIONS OF INDIA
Variable (s) Intercept Log of amount of borrowing Age Education
Log of Assets Equation-1
Equation-2
-3.73**
-7.30
(-2.12)
(-1.68)
1.42***
1.52***
(2.72)
(2.74)
0.01** (2.05) 0.02** (2.28)
-
0.41
0.48*
(1.72)
(1.69)
0.003
0.003
(0.52)
(0.54)
-0.12
-0.07
(-0.90)
(-0.52)
R-sq
0.16
0.17
F value Prob> F
25.52
22.29
(0.0001)
(0.0001)
367
367
Gender of Household Proportion of male in family size Village infrastructure
Sample Size
Table 7. Estimation of Amount of loans borrowing on Household outcome: Log of Assets Source: Computed from the Primary Data collected by the researcher in 2010.
REFERENCES Armendáriz, B., & Morduch, J. (2005). The economics of microfinance. MIT Press: Cambridge, MA. Copestake et al. (2005). Monitoring the diversity of the poverty outreach and impact of microfinance: A comparison of methods using data from Peru. Development Policy Review, 23 (6), 703-23. DOI: 10.1111/j.14677679.2005.00309.x. Copestake, J. (2002). Poverty, inequality and the polarising impact of microcredit: evidence from Zambia’s Copperbelt. Journal of International Development, 14(6), 743-755. DOI: 10.1002/jid.921. Cull, R., Demirgüc-Kunt, A., & Morduch, J. (2009). Microfinance meets the market. Journal of Economic Perspectives, 23(1), 167-192. DOI: 10.1257/jep.23.1.167. Deloach, S. B., & Lamanna, E. (2011). Measuring the Impact of Microfinance on Child Health Outcomes in Indonesia. World Development, 39(10), 1808-1819. DOI: 10.1016/j.worlddev.2011.04.009. Dichter, T., & Malcolm, H. (2007) What’s wrong with Microfinance? London: Practical Action Publishers. Dunford, C. (2006). Evidence of microfinance’s contribution to achieving the millennium development goals. Retrieved May 5, 2017, from http://communitywealth.org/sites/clone.community-wealth.org/files/downloads/ paper-dumford.pdf. Earne, J., & Sherk, J. (2013). Funding. In J. Ledgerwood (Ed.), The new microfinance handbook (pp. 379–412). Washington, DC: The World Bank. Fuchs, Z. (2006). Microfinance beyond philanthropy. Euromoney, 394–396. 28
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Galab, S., & N. Chandrasekhar Rao. (2003). Women’s Self-Help Groups, Poverty Alleviation and Women Empowerment. Economic & Political Weekly, 38(12/13), 1274-1283. Garikipati, S. (2012). Microcredit and women’s empowerment: through the lens of time use data from rural India. Development and Change, 43(3), 719-750. DOI: 10.1111/j.1467-7660.2012.01780.x. Gertler, P., Levine, D., & Moretti, E. (2006). Do Microfinance Programs Help Families Insure Consumption Against Illness? Health Economics, 18(3):257-73. DOI: 10.1002/hec.1372. Goetz, A.M., & Sen Gupta, R. (1996). Who takes the credit? Gender, power and control over loan use in rural credit programmes in Bangladesh. World Development, 24(1), 45-63. DOI: 10.1016/0305-750X(95)00124-U. Hashemi, S., Schuler, S. R., & Riley, A. (1996). Rural credit programs and women’s empowerment in Bangladesh. World Development, 24, 635-653. Hazarkia, G. & Sarangi, S. (2008). Household Access to Microcredit and Child Work in Rural Malawi. World Development, 24(4), 635-653. DOI: 10.1016/0305-750X(95)00159-A. Hulme, D., & Mosley, P. (1996). Finance against Poverty. London: Routledge. Jacobsen, G. (2009). Health and Death Risk and Income Decisions: Evidence from Microfinance. Journal of Development Studies, 45, 934-946. Khandker, S.R. (2005). Microfinance and poverty: Evidence using panel data from Bangladesh. The World Bank Economic Review, 19(2), 263-86. Kouassi, M.J. (2008). Microfinance and Health: A Study of Selected Countries. Ph.D., Howard University. Leatherman. S., Metcalfe, M., Geissler, K., & Duford, C. (2012). Integrating Microfinance and Health Strategies: Examining the Evidence to Inform Policy and Practice. Health Policy and Planning, 27(2), 85-101. DOI: 10.1093/heapol/czr014. Ledgerwood, J., & Gibson, A. (2013). The evolving financial landscape. In J. Ledgerwood (Ed.), The new microfinance handbook: a financial market system perspective. Washington, DC: World Bank. Maes, J., & Reed, L. (2012). State of the microcredit summit campaign report 2012. Washington, DC: Microcredit Summit Campaign. Morduch, J. (1999). The microfinance promise. Journal of Economic Literature, 37(4), 1569-1614. DOI: 10.1257/ jel.37.4.1569. NABARD. (1999). Task Force on Supportive Policy and Regulatory Framework for Micro Finance: Summary and Recommendations. Retrieved May 5, 2017, from http://www.gdrc.org/icm/country/india-mftaskforce.html. Pitt, M. M., & Khandker, S.R. (1998). The impact of group-based credit programs on poor households in Bangladesh: Does the gender of participants matter? Journal of Political Economy, 106(5), 958-96. Pitt, M.M., Khandker, J., & Cartwright, J. (2006). Empowering Women with Micro Finance: Evidence from Bangladesh. Economic Development and Cultural Change, 54 (4), 791-831. Rahman, S., Junankar, P. N., & Mallik, G. (2009). Factors influencing women’s empowerment on microcredit borrowers: a case study in Bangladesh. Journal of the Asia Pacific Economy, 14(3), 287–303. DOI: 10.1080 /13547860902975648. Saravanan, S., & Dash, D. P. (2017). Microfinance and Women Empowerment- Empirical Evidence from the Indian States. Regional and Sectoral Economic Studies, 17-2(2017),61-74. Simanowitz, A. & Walter, A. (2002). Ensuring Impact: Reaching the Poorest while Building Financially SelfSufficient Institutions, and Showing Improvement in the Lives of the Poorest Women and Their Families. In Sam Daley-Harris, Ed. Microcredit Summit Campaign. Pathways Out of Poverty. Kumarian: Bloomfield, CT. Steele, F., Amin, S., & Naved, R. (1998). The Impact of an Integrated Micro-credit Program on Women’s Empowerment and Fertility Behavior in Rural Bangladesh. Population Council Policy Research Division Working Paper No. 115. Retrieved May 5, 2017, from www.popline.org/node/279519. Tedeschi, G. (2010). Microfinance: Assessing Its Impact on Microenterprises. In: Munoz, J. M. S. (Ed.) Contemporary Microenterprise: Concepts and Cases. Cheltenham : Edward Elgar. 29
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Chiu, TK. (2017). Factors Influencing Microfinance Engagements by Formal Financial Institutions. Journal of Business Ethics, 143(3). 565-587. DOI: 10.1007/s10551-015-2811-1. Van Rooyen, C., Stewart, R., de Wet, T. (2012). The impact of microfinance in Sub-Saharan Africa: A systematic review of the evidence. World Development, 40(11). 2249-2262. DOI: 10.1016/j.worlddev.2012.03.012. World Bank. (2016). India’s Poverty Profile. Retrieved May 5, 2017, from www.worldbank.org/en/news/infographic/2016/05/27/india-s-poverty-profile.
DA LI PROGRAM GRUPE SAMOISPOMOĆI (SHG) SMANJUJE SIROMAŠTVO NA PRIMERU ČETIRI GRUPE IZ POLUURBANIH PODRUČJA INDIJE? Rezime: U ovom radu se izražava mišljenje da program mikrofinansija značajno poboljšava životni standard siromašnih. Podaci su uzeti u analizu na osnovu uzorka od 367 članova Programa grupe samoispomoći, kao i 178 pripadnika koji to nisu. Metod simultane jednačine je primenjen u cilju analize efekta egzogenih varijabli na endogenu varijablu. Dohodak i imovina su endogene varijable koje imaju značajan uticaj jedna na drugu. Uzrast, stepen obrazovanja i seoska infrastruktura imaju pozitivan uticaj i na dohodak i na imovinu.
Ključne reči: siromaštvo, mikrofinansije, kontrola, tretiranje, simultane jednačine. Received: June 19, 2017 Correction: / Accepted: October 2, 2017
30
EJAE 2017, 14(2): 31-42 ISSN 2406-2588 UDK: 336.76(560) 336.2 DOI: 10.5937/ejae14-14838 Original paper/Originalni nauÄ?ni rad
FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS Yilmaz Bayar1*, Huseyin Karamelikli2 1 Usak University, Turkey 2 Karabuk University, Turkey
Abstract: In this study, we investigated the interaction between tax revenue and major indicators of financial development including banking sector development and stock market development in Turkey using monthly data during the period January 2006 â&#x20AC;&#x201C; January 2016 by employing the asymmetric ARDL cointegration method by Shin, Yu and GreenwoodNimmo (2014). Our findings suggested that development levels of both stock market and banking sector affected total tax revenues positively when nonlinearities were considered. However, we found that there was no relationship between financial development indicators and tax revenue when nonlinearities were ignored. So, our findings demonstrated that the appropriate modelling method considering the characteristics of the dataset is important to get the right results.
Keywords: stock market development, banking sector development, tax revenue, non-linear cointegration.
INTRODUCTION The main income sources of the public sector are the taxes obtained from corporations and individuals and the income of public economic enterprises. But the share of the public sector in the overall economy has decreased in most countries due to privatization in recent years. So tax revenues have become a crucial financial instrument of the governments. Turkey has belatedly followed the same privatization trend in the world and privatized most of the public economic enterprises since 2001. As a result of privatization, tax revenues have also become very important for the government to implement the main public services. In this regard, predicting tax revenues and determining major determinants of tax revenues have become a very important issue in the economic policy planning and are very critical for the policymakers to plan the economic policies more effectively. In this regard, most countries have begun to implement various policies in order to reduce the share of the shadow economy and in turn raise their total tax revenues. In this context, improvements in the financial sector have a potential to affect the * E-mail: yilmaz.bayar@usak.edu.tr
31
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
tax collection positively by affecting the economic activity positively (See Shahbaz et al., 2015; Caporale et al., 2015; and Peia and Roszbach, 2015) and decreasing the shadow economy. In this paper, we investigated the impact of improvements in both the banking sector and stock market on tax revenues. The main objective of the paper was to research the short term and long term interaction between total tax revenues, banking sector and stock market in Turkey based on monthly data during 2006–2016 period employing asymmetric cointegration. The rest of the paper is formed as follows: the next section overviews the limited empirical literature about the relationship between total tax revenue, banking sector development and stock market development, while Section 3 introduces data and econometric method. Section 4 presents the results of the empirical analysis and the paper ends with Section 5.
LITERATURE REVIEW There have been few empirical studies about the interaction between tax revenues and the financial sector development. The limited number of empirical studies have generally performed the panel data analysis and revealed that financial development affected indirect and direct tax revenues positively (see Ilievski, 2012; Petrescu, 2013; Capasso and Jappelli, 2013; Taha et al., 2013; Bittencourt et al., 2014; Akçay et al., 2016). In one of the early studies, Ilievski (2012) investigated the impact of the banking sector, stock market and financial liberalization on tax revenues in more than 100 countries during 1990-2008 period using the panel data analysis. He found that both the banking sector and stock market had positive impact on tax revenue and the impact of the banking sector development on tax collection was higher relative to the one of the stock market. Moreover, he also found that financial openness had positive impact on tax revenue and the effect of financial openness on tax revenue increased in the countries with higher development level of the banking sector. In another study, Blackburn et al. (2012) investigated the interaction between financial development and the shadow economy in the model including banking intermediation and tax evasion and found that the tax evasion level and shadow economy rose, as long as the financial sector development reduced. On the other hand, Petrescu (2013) examined the influence of the financial sector development on diverse taxes in 72 countries during 1990-2003 period employing panel regression and discovered that financial sector development had a positive impact on the total income tax revenue, but had no significant impact on the sales taxes, property taxes and gift taxes. Capasso and Jappelli (2013) also investigated the interaction between the shadow economy and financial development theoretically and empirically. Their theoretical model showed that financial development decreased the tax evasion level and shadow economy. However, they also conducted an empirical study by using Italian microeconomic data set and found that financial development decreased the size of the shadow economy. Taha et al. (2013) analyzed the interaction between direct tax and financial sector development in Malaysia during 1997–2008 period employing ARDL (autoregressive distributive lag) bounds testing and Granger causality test and found a long run relationship between the financial system development and tax revenue and also a one-way causality between the stock market and direct tax revenue. In another study, Bittencourt et al. (2014) examined the interaction between the financial development, tax evasion and inflation theoretically and empirically. Their theoretical model demonstrated that higher level of financial sector development led to lower shadow economy. They also conducted an empirical study by using a data set from 150 countries during 1980-2009 period and their empirical findings supported the predictions made in the theoretical model. Finally, Akçay et al. (2016) researched the interaction between tax revenues and financial development in Turkey during 2006-2014 period 32
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
applying cointegration tests of Johansen and Juselius (1990), and causality analysis and discovered a unilateral causality between financial development and tax revenues.
DATA, MODEL AND ECONOMETRIC METHODOLOGY Data We employed the total tax revenue as the dependent variable in the study, and we used domestic credits to the private sector, stock market capitalization and industrial production as independent variables. Tax revenue is represented by a total of direct taxes and indirect taxes. The domestic credit to the private sector is composed of the credits provided by deposit banks, development and investment banks and participation banks and this variable represents the banking sector development. On the other hand, stock market development is proxied by stock market capitalization. Since the banking sector and stock market are major parts of the financial system, these variables together represent financial development in our study. Finally, industrial production index is preferred as a proxy for the economic activity which has a deep impact on tax revenues. The data summary is presented in Table 1. Monthly data of tax revenue and domestic credit to private sector were acquired from the database of the Central Bank of the Republic of Turkey (CBRT), monthly data of stock market capitalization were obtained from Borsa Istanbul (BIST) and lastly the industrial production index was obtained from the Turkish Statistical Institute. Variables
Symbol of variables
Source
TAXREV
CBRT (2015a)
Stock market capitalization
SMC
BIST (2015)
Domestic credit to private sector
PCRD
CBRT (2015b)
IND
CBRT (2015c)
Tax revenue
Industrial production index (base year: 2010) Table 1. Data description
Taxes are paid in February, May, August and November in Turkey (see Law No. 5615). Therefore, a dummy variable was employed to represent the months in question. Under the Turkish Tax Law, all tax statements must be issued on 14th of the mentioned months and be paid on 17th of a particular month. Due to the nature of our dataset, impact of changes in domestic credit to private sector and stock market capitalization on tax revenues occurred during these four months. Any changes in the shareholders’ wealth must be reflected in their tax statements and any changes that occur between 14th and 30th day of month are reflected in the next statement. Therefore, a maximum of four months should be a suitable lag for our model. So we used 4 as a max lag for the ECM model in the paper.
Model Total tax revenue is the sum of direct and indirect taxes. So the total tax revenues (TAXREV) can be represented as follows: = TAXREV Direct Taxes + Indirect Taxes (1) 33
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
One of the main determinants of tax revenues is the economic activity. In our model industrial production represents the economic activity. On the other hand, the shadow economy has a significant impact on tax revenues. Higher level of shadow economy means lower tax revenues. In this context, we included the financial development indicators in Table 1 as possible determinants of tax revenues in the model, because they have a potential to affect tax revenues by reducing the shadow economy and also affecting economic activity positively. So our model can be expressed as follows:
TAXREV = f ( SMC , PCRD, IND )
(2)
The asymmetric approach of gains and losses is a common characteristic of income tax systems. Corporations will have tax liabilities if they return profit, but generally they are not paid an equivalent refund when they experience a tax loss (Cooper & Knittel, 2010). While corporations can reduce future tax liabilities on the basis of prior losses, individual tax payers are not allowed to reduce their future tax liabilities based on their personal financial losses. Therefore, any increase in personal income must be reflected on tax statements where a decrease or loss of personal income is not refundable. Consequently, there is an obvious asymmetric behavior in the tax system and modeling without asymmetry would provide misleading estimation results.
Econometric methodology Balke and Fomby (1997) improved threshold cointegration method that is an asymmetric and nonlinear cointegration. On the other hand, Granger and Yoon (2002) pointed out that there was possibly a hidden cointegration risk when the negative and positive components are cointegrated. Then, Schorderet (2002, 2003) improved the study of Granger and Yoon (2002) by considering a hidden cointegration asymmetric effect. Despite the well-known fact that macroeconomic variables exhibit nonlinear and asymmetric characteristics, extensive studies only regard the linearity and symmetrics. However, the nonlinearity characteristics of many economic variables have indicated that nonlinearity and asymmetry are frequent features of the social sciences (Shin et al., 2014). Moreover, many researchers proposed nonlinear models (see Kahneman and Tversky, 1979; Shiller, 1993, 2005). Therefore, in this paper a non-linear autoregressive distributed lag (NARDL) model is employed to research the asymmetrical relations in the long term. Shin et al. (2014) derived the NARDL estimator from ARDL model of Pesaran et al. (2001). The asymmetric ARDL model demonstrates nonlinear long term relationship and nonlinear error correction through partial sum decompositions and asymmetric long term relationship can be expressed as follows:
yt = β + xt+ + β - xt- + ut
(3)
Where xt is a k×1 vector of regressors and separated as x t = x 0 + x +t + x -t . and in this formulation x + and x - are partial sums of positive and negative changes in x t . In this paper, we assume that tax revenue has a long term relationship with the variables representing development of the banking sector and stock market, and economic activity:
TAXREVt =α 0 +α1SMC t +α 2 PCRDt +α 3INDt + ε t 34
(4)
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
Error correction model (ECM) is represented as follows:
(5)
In this formulation, ∆ indicates the first differenced values of the variables and ε is an error-correction term that is the OLS residuals from long-term cointegrating regression in Equation (4). Finally, DUM represents a seasonal dummy variable. We will estimate the linear relationship among the variables by the following ECM considering Shin et al. (2014): p
ΔTAXREVt = ψ + η0 TAXREVt −1 + η1SMCt −1 + η2 PCRDt −1 + η3 INDt −1 + ∑ β1 j ΔTAXREVt − j j=1
q
m
n
j=0
j=0
j=0
+ ∑ β 2 j ΔSMCt − j + ∑ β 3 j ΔPCRDt − j + ∑ β 4 j ΔINDt − j + γ1DUM t + et η
η
(6)
η
− 1 − 2 − 3 are coHere On the other hand η0 , , , θ θ θ integrating coefficients of TAXREV, SMC, PCRD and IND variables respectively, while β1, β2, β3, β4 are short term coefficients.
We employed the approach suggested by Schorderet (2002, 2003) and Shin et al. (2014) to see asymmetric pass-through of PCRD and SMC on tax revenue. SMC and PCRD variables are separated to positive and negative shocks according to the approach. So SMC + and SMC- are partial sums of positive and negative changes in SMC variable. The same is also valid for PCRD variable. They are calculated as follows:
(7)
(8)
Equation (4) can be expressed as follows by regarding equations (7) and (8) (9)
35
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
Also equation (6) can be rewritten as follows by distinguishing long and short run asymmetric relationships:
(10)
Where +
η+ θ
η− θ
1 − , , − 1 ψ 1− = and ψ 1+ =
η η− ψ 2+ = − 2 ,ψ 2− = − 2 are positive and negative long term coefficients of SMC and PCRD respectively, θ θ while − η3 is a long term cointegrating coefficient of IND. θ
We can express equation (10) in terms of long asymmetry and short run symmetry or long-run symmetry and short-run asymmetry by employing Shin et al. (2014) as follows: If the asymmetries exist only in the long term:
(11)
If the asymmetries exist only in the short term:
(12)
(10), (11) and (12) numbered equations present the cointegrating relationship between tax revenues and negative and positive components of the variables SMC, PCRD and symmetric components of IND. Shin et al. (2014) used a similar bounds test of linear ARDL approach by Pesaran et al. (2001) to determine the asymmetric cointegrating relationship. The cointegrating relationship can be tested by t-statistics of Banerjee et al. (1998) and F-statistics of Pesaran et al. (2001). The null hypothesis can be defined as η0=0 against alternative hypothesis η0<0 in the use of t-statistics approach. On the other hand null hypothesis can be defined as η0 =η1 =η2 =η3 = 0 against alternative hypothesis η0≠ 0 orη1≠ 0 orη2≠ 0 orη3≠ 0 in the use of F statistics approach. If there is a long term asymmetry, null hypothesis would + − − + η1= η1= η 2= η 2= η= 0 . Finally, calculated F values must be compared with the tabulated be η= 0 3 F values of Pesaran et al. (2001). The presence of a long term symmetry is investigated by the Wald test (H0: α1+ = α1− also α +2 = α 2− ). m q q m The null hypothesis of ∑ β 2+i = ∑ β 2−i and ∑ β3+i = ∑ β3−i should be used in tests of short-run asymmetry. i =0 =i 0=i 0 i =0 The model allows for an asymmetric effect, if the null hypothesis of symmetry is rejected. Asymmetric dynamic multiplier of change of TAXREV+ and TAXREV- could be found respectively with rejection of the null hypothesis of symmetry: 36
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS h
mh+ = ∑ i= 0 h
mh− = ∑ i= 0
h
nh+ = ∑ i= 0 h
nh− = ∑ i= 0
∂TAXREVt+i ; ∂SMCt+ ∂TAXREVt+i ∂SMCt−
∂TAXREVt+i ; ∂PCRDt+ ∂TAXREVt+i ∂PCRDt−
(13)
(14)
Note that as h → ∞ then mh+ →ψ 1+ , mh- →ψ 1− , nh+ →ψ 2+ , nh- →ψ 2− . In this formulation ψ 1+ ,ψ 1− ,ψ 2+ and ψ 2− are the asymmetric cointegrating coefficients. The dynamic multipliers could capture the positive and negative shocks of stock market capitalization and domestic credit on the tax revenues from an initial equilibrium to the new equilibrium (Shin et al., 2014).
EMPIRICAL ANALYSIS Unit Root Test All the variables in the ARDL model should be I(0) or I(1) for the use of the cointegration model (Pesaran et al., 2001). Therefore, the stationarity of the variables should be checked before estimating the ARDL model. At the first stage, the stationarity of the variables were analyzed with the Augmented Dickey Fuller (1981) (ADF) and Phillips and Perron (1988) (PP) test and the results were presented in Table 2. We also performed a unit root analysis with the seasonal adjusted data due to the existence of the seasonality. Consequently, we discovered that none of the variables were integrated with I(2) or greater. Because ADF test and PP tests yielded very conflicting results for IND variable, the stationarity of the variables were also analyzed with the unit root test of Zivot and Andrews (1992) (ZA) considering a structural break. The test revealed a structural break in 2008 and IND variable was I(1). Furthermore, the stationarity of the remaining variables was also analyzed with ZA test and the results obtained were the same as those of PP and ADF tests.
Model Estimation The data on tax revenue were seasonally adjusted only for the unit root tests. The original data of tax revenues were employed in the ARDL model and a dummy variable was inserted into the model as an exogenous variable in order to avoid possible seasonality in model. Finally, (6), (11), and (12) numbered equations were estimated and the results were given in Table 3. The results in the first column showed that the null hypothesis (there was no cointegration) for symmetric model could not be rejected. This can be derived from the possible nonlinearities among the variables. Therefore, we also made an estimate using nonlinear model in equation (11) and the results were presented in the second column of Table 3. Finally, the estimation results of the model in equation (12) were presented in the third column of Table 3 and verified that there was a long run asymmetric relationship between the variables. 37
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BAYAR, Y., KARAMELIKLI, H. FINANCIAL DEVELOPMENT AND TAX REVENUES IN TURKEY: A NON-LINEAR COINTEGRATION ANALYSIS
Variable
Model
ADF (1981)
PP (1988)
t-Statistic
Prob.
Adj. t-Stat
Prob.
TAXREV
Const.
2.037016
0.999900
-2.665157***
0.083300
ΔTAXREV
Const.
-6.358433*
0.000000
-65.18686*
0.000100
TAXREV
Const.+Trend
-1.417076
0.850300
-11.32008*
0.000000
ΔTAXREV
Const.+Trend
-6.940846*
0.000000
-64.71191*
0.000100
SMC
Const.
-0.783021
0.819800
-0.722744
0.835900
ΔSMC
Const.
-10.4345*
0.000000
-10.44619*
0.000000
SMC
Const.+Trend
-2.850168
0.182900
-2.924555
0.158900
ΔSMC
Const.+Trend
-10.40337*
0.000000
-10.41523*
0.000000
PCRD
Const.
-2.416755
0.139500
-6.603355*
0.000000
ΔPCRD
Const.
-8.752788*
0.000000
-58.7093*
0.000100
PCRD
Const.+Trend
-8.366494*
0.000000
-8.492976*
0.000000
ΔPCRD
Const.+Trend
-8.778447*
0.000000
-61.73798*
0.000100
IND
Const.
-0.539415
0.877800
-3.657225*
0.006100
ΔIND
Const.
-2.121721
0.236700
-44.48591*
0.000100
IND
Const.+Trend
-1.90561
0.644200
-6.805703*
0.000000
ΔIND
Const.+Trend
-2.140849
0.516600
-42.35916*
0.000100
*- stationary at 1% , **-stationary at 5% , ***-stationary at 10%
Table 2. Results of ADF and PP unit root tests
We applied the Wald test for both long-run (WLR) and short-run (WSR) symmetries and determined that there was a long run relation between the variables. We can reject the asymmetric model if the long term symmetry hypothesis ( H 01: α1+ q= α1− and H 02 : α +2 = α 2− ) is accepted. On the other hand, null q m m hypotheses of short-run asymmetry are ∑ β 2+i = ∑ β 2−i and ∑ β3+i = ∑ β3−i . =i 0=i 0
=i 0=i 0
The estimation results of the symmetric model including short and long run asymmetric models were presented in Table 3. Our findings suggest that a cointegrating relationship exists in all models. The estimations of asymmetric model reveal that asymmetry exists only in the long run. Therefore, absence of a long run asymmetry has been rejected and we should accept a long run asymmetry for SMC and PCRD variables. Also, we can say that negative changes of SMC did not have statistically significant effect on tax revenues, while positive changes in the variables had significant positive impact on TAXREV. But IND and positive changes of PCRD had positive long run relationship at 1% significance level, while negative changes of PCRD and positive changes of SMC were significant at 5% significance level. On the other hand, we found that the dummy variable was statistically significant and this finding verified that there was seasonality in our model. The significant ECM means that error correction model works in order to reach long run adjustment. Finally, the estimated long run coefficients of IND, SMC-, SMC+, PCRD- and PCRD+ are 127483, -0.001, 0.006, 0.053 and 0.073 respectively. In other words, positive changes in domestic credit to private sector (PCRD) had relatively higher positive impact on the tax revenue when compared with 38
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Symmetric TAXREV(-1) IND(-1) SMC(-1) PCRD(-1) SMC-(-1) SMC+(-1) PCRD-(-1) PCRD+(-1) ΔTAXREV(-1) ΔTAXREV(-2) ΔTAXREV(-3) ΔTAXREV(-4) ΔTAXREV(-5) ΔTAXREV(-6) ΔTAXREV(-7) ΔTAXREV(-8) ΔTAXREV(-9) ΔTAXREV(-10) ΔTAXREV(-11) ΔTAXREV(-12) ΔIND ΔIND(-1) ΔSMC ΔPCRD ΔPCRD (-1) ΔSMCΔSMC+ ΔPCRDΔPCRD+ ΔPCRD-(-1) ΔPCRD+(-1) DUM INTERSECT ECM(-1) F-statistic 95% lower bound 95% upper bound WLR SMC WSR WLR PCRD WSR
Short run and long run Asymmetry
Only long run asymmetry
-1.452996* 190398.1*
-1.467812* 187121.5*
-0.002479 0.008250** 0.083989** 0.113023* 0.129598
-0.001679 0.009495** 0.077938** 0.107314* 0.108266
-38961.59 -122304.4*
-55312.01** -149861.6* 0.002782 0.058162**
-0.245534* 37451.60 0.008783** 0.130206*
-1.017891* -0.980779* -0.816278* -0.745341* -0.626114* -0.546558* -0.554182* -0.600180* -0.759895* -0.951280* -0.938792* -0.317984* 25637.65 0.007255 0.044361 -0.049629**
1898940** -2730601 -0.232312* 10.75275 3.23 4.35
0.005896 -0.006631 0.097192** 0.022185 -0.062313*** 0.061716 2986359* -3780531 -0.450646* 23.2456 2.62 3.79 16.30835* 0.379469 9.398457* 0.424923
3093224* -1578006 -0.405402* 22.36058 2.62 3.79 14.69258* 8.748549*
Table 3. Results of symmetric and asymmetric ARDL tests 39
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their negative changes. Also negative changes in the stock market capitalization (SMC) did not have significant impact on tax revenue, but the positive changes in SMC had positive impact on tax revenue. Our findings indicated that there was a positive relationship between tax revenues (TAXREV) and stock market capitalization (SMC), domestic credit and private sector (PCRD) in the long term, while there was no statistically significant interaction between tax revenues and industrial production index (IND) in the long run. We can see the difference when the results of symmetrical and asymmetrical models are compared. In this context, SMC and PCRD variables were decomposed in terms of positive and negative shocks to estimate the model asymmetrically and in this case, different results were obtained. The increase in the SMC had positive impact on TAXREV in the long run, but this is not valid for the decrease in the SMC. Furthermore, a decrease in the SMC also had statistically insignificant positive impact on TAXREV in the long run. We found a statistically significant long run PCRD coefficient in both symmetric and asymmetric model. However, decomposition of the variable in terms of increase and decrease enables us to see the detailed results. Thus, the results of asymmetric model suggest that decrease and increase in PCRD variable had the same impact on tax revenues, but the impact of increase in the PCRD on tax revenues was found to be higher when compared to the impact of decrease in the PCRD on tax revenues. On the other hand, the symmetric model suggests that industrial production did not have significant effect on tax revenue, while the asymmetric model conveyed the exact opposite. In other words, industrial production had significant positive impact on tax revenue. In this case, the results of asymmetric model are consistent with the predictions of the economic theory which suggests that there is a relationship between economic activity and tax revenue. So, the use of traditional cointegration models may be misleading us into establishing wrong relations. The short run dynamics revealed that the lagged values of the dependent variable in the symmetric model were statistically significant, while the coefficients of the independent variables were found to be insignificant. However, the coefficients of the independent variables were also found to be significant in the short run according to the results of the model which exhibited a long run asymmetry and short run symmetry. Consequently, the use of nonlinear model will be more useful considering short run and long run dynamics.
CONCLUSIONS We investigated the interaction between banking sector development, stock market development and tax revenues in Turkey during the period January 2006 – January 2016 by using both ARDL and the asymmetric ARDL cointegration. We found that there was no cointegrating relationship between the series in our study, when we conducted only the symmetric ARDL model. Then, we wondered whether possible nonlinearities may be misleading us and conducted the estimation with the models considering nonlinearities developed by Shin et al. (2013). In this regard, we simultaneously used symmetric forms of domestic credit to private sector and stock market capitalization in the model and used the dummy variable for the elimination of a possible seasonality. Furthermore, we took the symmetric form of industrial production proxy for economic activity as a control variable. We discovered that there was a cointegrating relationship between the series when NARDL model was employed. The results of the NARDL model estimation showed that negative changes in the variables of domestic credit to private sector and stock market capitalization did not have statistically significant impact on 40
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tax revenue, while positive changes in these variables had statistically positive impact on tax revenue. Also, industrial production variable had positive impact on tax revenue. This study verifies that the appropriate modelling method considering the characteristics of the dataset is important. We can get misleading results which may not be consistent with the theoretical expectations when the model is estimated symmetrically by a dataset with asymmetric features. In this case, we can get more realistic results with the use of asymmetric modelling which considers the nonlinearity in the economics. In this study, when we employed traditional ARDL model, we found that industrial production representing economic activity had no significant impact on tax revenues. But we saw that industrial production had positive impact on tax revenue when asymmetric modelling was used. So, we concluded that tax revenues had no linear relationship and verified the nonlinearity. Consequently, both the banking sector development and stock market development had significant positive impact on tax revenue. Therefore, policymakers should consider policies which contribute to the financial sector development.
REFERENCES Akçay, S., Sağbaş, İ., & Demirtaş, G.(2016). Financial development and tax revenue nexus in Turkey. Journal of Economics and Development Studies, 4(1), 627–645. DOI:10.15640/jeds.v4n1a10. Balke, N.S., Fomby, T.B. (1997). Threshold cointegration. International Economic Review, 38(3), 627–645. DOI:10.2307/2527284. Banerjee, A., Dolado, J., & Mestre, R. (1998). Error-correction mechanism tests for cointegration in a singleequation framework. Journal of Time Series Analysis, 19(3), 267–283. DOI:10.1111/1467-9892.00091. Bittencourt, M., Gupta, R., & Stander, L. (2014). Tax evasion, financial development and inflation: Theory and empirical evidence. Journal of Banking & Finance, 41, 194–208. DOI:10.1016/j.jbankfin.2014.01.009. Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization, 83(2), 243–253. DOI:10.1016/j.jebo.2012.05.019. Capasso, S., & Jappelli, T. (2013). Financial development and the underground economy. Journal of Development Economics, 101, 167–178. DOI:10.1016/j.jdeveco.2012.10.005. Caporale, G.M., Rault, C., Sova, A.D., & Sova, R. (2015). Financial Development and Economic Growth: Evidence from 10 New European Union Members. International Journal of Finance and Economics, 20(1), 48–60. DOI:10.1002/ijfe.1498. Cooper, M.G., & Knittel, M.J. (2010). The implications of tax asymmetry for U.S. corporations. National Tax Journal, 63(1), 33–62. DOI: 10.17310/ntj.2010.1.02. Dickey, D., & Fuller, W. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057–1072. DOI: 10.2307/1912517. Granger, C., & Yoon, G. (2002). Hidden cointegration. Economics Working Paper No. 2002-02. DOI:10.2139/ ssrn.313831. Ilievski, B. (2012). Tax revenue and financial development: Theory and evidence. Doctoral dissertation, Southern Illinois University, Carbondale, U.S. Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration - With Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. DOI: 10.1111/j.1468-0084.1990.mp52002003.x. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292. DOI:10.1111/j.1536-7150.2011.00774.x. Peia, O., & Roszbach, K. (2015). Finance and growth: Time series evidence on causality. Journal of Financial Stability, 19, 105–118. DOI:10.1016/j.jfs.2014.11.005. 41
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Pesaran, M.H., Shin, Y., & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. DOI:10.1002/jae.616. Petrescu, I. (2013). Financial Sector Quality and Tax Revenue: Panel Evidence. Mimeo, University of Maryland. Phillips, P.C.B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. DOI:10.1093/biomet/75.2.335. Schorderet, Y. (2003). Asymmetric cointegration. Cahiers du département d’économétrie, Faculté des sciences économiques et sociales, Université de Genève. Retrieved Jun 15, 2017, from https://www.researchgate.net/ publication/5079336_Asymmetric_Cointegration. Schorderet, Y. (2002). A nonlinear generalization of cointegration: A note on hidden cointegration. Retrieved Jun 15, 2017, from http://www.unige.ch/ses/metri/cahiers/2002_03.pdf. Shahbaz, M., Rehman, I.U., & Muzaffar, A.T. (2015). Re-visiting financial development and economic growth nexus: The role of capitalization in Bangladesh. South African Journal of Economics, 83(3), 452–471. DOI:10.1111/ saje.12063. Shiller, R.J. (2005). Irrational Exuberance. New Jersey: Princeton University Press. Shiller, R.J. (1993). Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks. Gloucestershire: Clarendon Press. Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R.C. Sickles, & W.C. Horrace (Ed.), Festschrift in Honor of Peter Schmidt Econometric Methods and Applications (pp. 281–314). DOI:10.1007/978-1-4899-8008-3. Taha, R., Colombage, S.R.N., Maslyuk, S., & Nanthakumar, L. (2013). Does financial system activity affect tax revenue in Malaysia? Bounds testing and causality approach. Journal of Asian Economics, 24, 147–157. DOI:10.1016/j.asieco.2012.11.001. Zivot, E., & Andrews, D.W.K. (1992). Further evidence on the Great Crash, the oil price shock, and the unit root hypothesis. Journal of Business & Economic Statistics, 10(3), 251–270. DOI:10.1198/073500102753410372.
FINANSIJSKI RAZVOJ I PORESKI PRIHODI U TURSKOJ: ANALIZA NELINEARNE KOINTEGRACIJE Rezime: U ovoj studiji smo ispitivali međusobni uticaj između poreskih prihoda i glavnih pokazatelja finansijskog razvoja, uključujući i razvoj bankarskog sektora, kao i razvoj tržišta akcija u Turskoj na osnovu mesečnih podataka u periodu od januara 2006. do januara 2016. godine uz primenu metoda asimetrične kointegracije ,,autoregresivno-raspoređenog zaostanka’’ (ARDL) koji su razvili Šin, Ju i Grinvud-Nimo (2014.). Rezultati koje smo dobili su nagovestili da stepen razvoja i tržišta akcija i bankarskog sektora imaju pozitivan uticaj na ukupne poreske prihode kada se u obzir uzmu nelinearnosti. Međutim, otkrili smo da ne postoji veza između pokazatelja finansijskog razvoja i poreskih prihoda kada se nelinearnosti zanemare. Dakle, rezultati našeg istraživanja potvrđuju da je važna primena odgovarajućeg metoda koji uzima u obzir karakteristike skupa podataka, kako bi se dobili pravi rezultati.
Ključne reči: razvoj tržišta akcija, razvoj bankarskog sektora, poreski prihodi, nelinearna kointegracija. Received: August 21, 2017 Correction: / Accepted: September 29, 2017
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EJAE 2017, 14(2): 43-57 ISSN 2406-2588 UDK: 339.13:621.311(4-12) 338.5:621.31 005.334:621.31 DOI: 10.5937/ejae14-14849 Original paper/Originalni nauÄ?ni rad
THE OPTION ON ELECTRIC ENERGY FOR THE DECREASE OF RISK ON THE EXAMPLE OF EEX (EUROPEAN ENERGY EXCHANGE) Tatjana Latas1*, Zoran JeremiÄ&#x2021;2 1 Somborelektro, Sombor, Serbia 2 Singidunum University, Belgrade, Serbia
Abstract: Electricity market deregulation and liberalization have led to high volatility on power exchanges, which require the use of derivatives in energy markets for more efficient risk management which the participants at the market are exposed to. The available options are one of the derivatives that have entered liquid markets. Therefore, this paper presents an example from the most developed energy exchange EEX (European Energy Exchange), with the aim of applying verified scientific methods to check the practice of functioning of liquid energy market, by using options to reduce the risk. The most frequently used models for hedging future open positions and evaluation of premium on options in practice are the Black - Scholes and Black 76 model, which are therefore presented in the text. South East European Power Exchange (SEEPEX) has started operating in Serbia. Its development is going to be via integration with regional markets in the direction of integration of the total electric energy market in Europe. That path will be long, but it has already required the knowledge of market instruments used in trading and risk management at the power exchanges. Presented results refer to the essential knowledge of dynamic variables that options bring into the energy market in order to reduce the risk.
Keywords: electric energy exchange, derivatives, options.
INTRODUCTION By passing the Law and Bylaws on Energetics in 2015 and 2016, the legal and regulatory frame for the development of the electric energy market in Serbia was designed. In February 2016 the electric energy exchange SEEPEX was put in operation and it was formed on the basis of the partnership between Elektromreze Srbije (EMS a.d.) and EPEX SPOT (European Power Exchange) as a shareholder company (EMS, 2016). SEEPEX manages organized market with standardized products and delivery within a-day-in-advance time frame. Trading at this exchange is in the initial stage and for now, it has operated on the spot market only. Further development of the exchange may lead to the connections * E-mail: tatjana.latas@somborelektro.rs
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of regional exchanges and their integration into European exchanges where the trading with derivatives is conducted: futures, forwards, and options. Due to that fact, it is useful to expand the knowledge and research related to trading with derivatives on electric energy in Serbia. In this paper, the subject of study will be trading with options on electric energy. It will conclude with an example of options trading at the European Energy Exchange – EEX as one of the most developed and liquid power exchanges. In this paper, we would like to present the alternative to the scientific truth, by analyzing options trade on EEX in order to find out complex responses (social, economic, financial, and legal) to the question of how they do it successfully in relation to us. The main objective is to present the best practice in trading options, having in mind that SEEPEX is at an early stage of development and that derivatives market still does not exist. Electric energy is goods impossible to store and it is consumed in continuity from second to second. The demand for electric energy in a short period is inelastic in terms of price. Empirical research studies indicate that the demand declines when the price within a short period increases, but the effects of price increase are minimal. If the costs of electric energy have no significant influence on the total costs of a consumer (whether households or industrial consumers), they will not reduce the consumption owing to sudden price changes but will accommodate the demand in the long term. Due to the lack of economically sensible storage possibilities, supply and demand need to be in balance at any moment in time. Futures markets behave according to the expectation theory since they have to anticipate supply and demand during the period of delivery of future contract (Fritz, 2012). The participants of the electric energy market such as producers, suppliers, deliverers, and other participants capable of managing risks use different financial tools. Among others, there are future and forward contracts, swaps, and options. The stated contracts are different with respect to obligations which are imposed on the participants of the market and the manner of offset of receivables and payables. While the contract on futures and forwards obliges the buyer and seller to execute it, the option is in this respect obligatory only for its holder (seller). The most important goal of the spot market at each exchange is to enable trading of standardized product and provision of market information, competition, and liquidity. Power exchanges (in an ideal case) also provide other benefits, such as neutral trading place, referential prices, easy access to trading, low transaction costs, safe balancing (Madlener & Kaufmann, 2002). Apart from that, spot markets are an important reference for bilateral trading and “over the counter” market but also the basis for the establishment of the derivative market. In order to establish the trading with futures, forwards and options, a liquid market of satisfactory performances must be established. It is very difficult for the power exchanges to reach these ideal performances of spot markets, primarily due to the nature of electric energy as a very specific trading object (storage impossibility, transmission problem, network congestion, season character, peak load…). These characteristics, especially storage impossibility, create a volatile day to day behavior of varying degrees (Pilipovic, 2007). The use of options at the electric energy market as a type of derivative is not as widespread as it is the case with options on other goods markets. One of the power exchanges where the options market is present is EEX Leipzig. This exchange is highly liquid, which is one of the most important conditions for the establishment of the options market. The paper analyzes the use of options on electric energy and provides an example of how they are exercised at the biggest mid-European exchange of electric energy EEX.
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OPTIONS TYPES AND WAYS OF THEIR EXERCISE The option, as a financial tool, gives its holder a right to buy or sell a certain amount of underlying assets until the exercise day or on the exercise day per fixed, in advance determined price (strike price). The strike price is the price fixed in the option according to which its owner may purchase or sell securities or other related assets which is the subject of the option. This is the price that the holder of the option uses to speculate about the increase or decrease of the securities prices (Orsag, 2006). The basic characteristic of options is that the option buyer (option holder) is not obliged to complete the transaction unlike the option seller (option writer) who is obliged to respond to the request of the option seller. Therefore, the option buyer pays the price of the option which is called premium. The value of the right of the options holder stems from the value of the underlying assets (shares, exchange index, foreign currencies, debt tools, goods and future contracts), while on the electric energy market they are exercised based on the future price which is designated based on the concluded future contract. The buyer of the option, i.e. option holder may exercise the stated option until its exercise day. The seller of the option, i.e. option writer is obliged to take into consideration all the items from the contract on the stated option (Tešnjak et al., 2009). There are two basic types of options on the derivatives market (Eydeland & Wolyniec, 2003) namely (Hull, 2005): call and put. A call option gives its holder the right to buy underlying assets based on the price determined in advance (fixed price) until the exercise day or on the exercise day. A put option gives its holder the right to sell underlying assets at the price determined in advance (fixed price) until the exercise day or on the exercise day. The option holder, for the acquisition of the right to buy or sell certain assets, pays the premium to the option writer. During the trade with options, the option holder always takes a long position and the option writer takes a short position. Continuing from the long and short position, different relations between the option writer and holder are possible. Option Call (Buy option)
Put (Sell Option)
Long position – to buy call option
Short position – to sell call option
Long position – to buy put option
Short position – to sell put option
The right to buy per strike price
Must be delivered per strike price in case of option exercise
The right to sell per strike price
Must accept the delivery per strike price in case of option exercise
Table 1. Review of positions of option holders
The option holder takes the long call or long put position. Purchasing protects the holder from an increase, i.e. long call and decrease, i.e. long put of the prices of the subject asset with keeping the possibility of purchase per lower price, i.e. long call and selling per higher price i.e. long put in case of the change of the price of the subject asset. In case of buying of the option, the loss is limited to the price of the option and the amount of the premium. The option writer assumes short call or short put position. The writer writes the call option when it is expected that the prices of the subject asset will remain at the same level or decrease (short call) or 45
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grow (short put). In case of the price change to higher (in case of call option) or lower (in case of the put option), their loss is potentially limitless. The profit of the option writer equals to the loss of the option holder and vice versa – zero sum game (Jeremić, 2012). There is a standard set of assumptions which determine the most frequently traded plain vanilla options. Plain vanilla is a colloquial expression of the derivative market for labelling typical options from the standpoint of their basic investment features. Thus, plain vanilla is comprised according to related assets, the standard manner of determination of the strike price and the manner of exercise as well as the standard time until the validity expiration (Orsag, 2006). The options which use non-standard assumptions are usually called exotic options. In order to use an exotic option, it is necessary to know what is going on in real life. The basic formula of these options is: “I can be used if x, y, and z are true”. It is up to the user to evaluate whether x, y, and z are true in their case (Edwards, 2010). Exotic options, actually, represent non-standard American and European options. Exotic options comprise LEAPS as long-term options, Bermuda options because of the modification of the exercise possibility, border and binary options as well as many other modifications of basic features of options (Orsag, 2006). Usually, standard and plain vanilla options are included in the options exchanges and have developed a secondary market. Exotic options are most frequently trade subjects at agreed markets and they represent certain financial innovations which are produced by different financial institutions in order to satisfy the requests of their customers for specific financial services (Orsag, 2006). Apart from the plain vanilla option at EEX exchange, the spread options are also traded with. EEX offers locations spread products for selected financially established futures for electric energy. Spread options enable participants to efficiently trade with the differences in price between different areas of delivery. In order to determine the value of options primarily, it is necessary to determine the following parameters: 1. Underlying assets (assets traded on spot markets (securities, goods, currencies), futures contracts, indexes) 2. Option type according to the right it offers (call or put) 3. Taken position (long or short) 4. Manner of option exercise (American, European, Asian) 5. Option class – according to calendar (annual, trimester, monthly), payoffs manner (financial or physical), spot goods (option with fixed price of underlying assets, daily option, and option with floating price of the underlying assets that is index and monetary option) 6. Execution price (different from the price on the spot or futures market) 7. Quantity of the related assets (quantity used for trading within one contract). Mathematical models for determining the option value have been developed for more than a hundred years, but they experienced the boom in 1970s due to the Black-Scholes formula which designates the theoretical value of options. After that, other mathematical models such as the bionomic tree model and later the Monte Carlo model were developed. The aim is to determine values of the options at the level that is as realistic as possible (Hull, 2005).
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DEVELOPMENT OF OPTION PRICING MODELS According to Salvatore (1994), the risk refers to the situation where the decision has more than one possible outcome and where the probability of each specific risk is known or can be estimated. Therefore, the risk requires that the decision maker knows all possible outcomes and has some idea of the likelihood of each of them, as the greater the number and range of possible outcomes, the greater is the risk of making a decision. Trading with options involves high risks, both for the option writer and option holder and they are specific compared to risks of options whose basis is in other trading objects, such as shares or exchange goods. If the option is not realized on time, its value may decrease immediately, which means that loss has been incurred. Depending on the increasing or decreasing value of the option, options can be in-the-money, at-the-money or out-of-the-money. In-the-money call option is the option whose exercise leads to profit, which means that the value in the case of the call option is lower and in the case of put option higher than the price of current assets. This type of option should be exercised. Value of at-the-money option is equal to the current value of underlying assets. Opposite to in-the-money option is the out-of-the-money option, where the option has higher value in case of call option and lower value in case of put option than the current price of underlying asset. The risk impact is therefore very prominent in the determination of option value. Modern techniques for evaluation of options based on stochastic calculation are frequently considered one of the most complex mathematical forms applied in finances. The stochastic process used to model a commodity price, should capture all specific characteristics of the commodity (seasonal variation in volatility, occasional price spikes, and tendency to quickly revert to the average cost of production) (Blanco et al., 2001). Contemporary mathematical models stem from the 19th century when Charles Castelli published the book “The Theory of Options in Stocks and Shares” in 1877, in which he presented concepts of hedging and speculating with options. Twenty-three years later Louis Bachelier in his dissertation from 1900 entitled “Theorie de la Speculation” presented first mathematical solutions for analytic evaluation of options (Mishra & Debasish, 2007). Bachelier’s paper was ahead of its time for years and in some aspects even for decades. He was the first one to apply Brownian motion as the model for calculation of share price (Davis, 2001), even 5 years prior to Einstein’s application of Brownian motion in physics. Intrigued by Bachelier’s work, Paul A. Samuelson wrote an unpublished paper entitled “Brownian Motion in the Stock Market” in 1955. Also, in the same year, Samuelson’s student Richard Kruizenga quoted Bachelier’s work in his dissertation entitled “Put and Call Options - A Theoretical and Market Analysis”. In 1962 A. James Boness in his dissertation, “A Theory and Measurement of Stock Option Value” presented the model for option evaluation, which represents an important theoretical contribution to the determination of theoretical option values (Mishra & Debasish, 2007). Fischer Black and Myron Scholes presented their mathematical model for designation of option values in 1973. Their model is based on certain assumptions among which the most important is the one that the price of the basic assets follows geometric Brownian motion. This model is applicable only to the spot price of basic assets. Only a few years later, in 1976 Fischer Black developed the modified version of the BlackScholes formula and produced the formula known as Black 76 which is used to calculate the option value on the basis of forwarding price of the subject assets. The Black-Scholes and Black 76 formulae are suitable for those options which can be exercised only on their exercise day (such as the European type of options). However, when options are exercised on some other day before their exercise day (American type of options), another model for determination 47
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of option value has to be applied. One of these models is the model of binomial tree which was presented for the first time in 1979 by Cox, Ross & Rubinstein in the paper entitled “Option Pricing - A Simplified Approach” (Mishra & Debasish, 2007). The values of an option which consists of more complex elements are calculated using the Monte Carlo method which includes the simulation of accidental variables. Today this method is frequently used and popular among mathematicians.
THE BLACK-SCHOLES AND BLACK 76 MODELS The Black-Scholes model is a theoretical base for European put and call option on non-dividend paying stocks. The major argument is that long position could be riskless hedged with the short position in the stock and that hedged ratio could be adjusted continuously (Mishra & Debasish, 2007). The Black-Scholes model provides non-risky interest in the form of discount factor. The Black-Scholes model is based on the following assumptions (Black & Sholes, 1973): ◆◆ The price of the subject asset follows geometric Brownian motion, ◆◆ There is a possibility of sale of the subject asset, ◆◆ There is no possibility for arbitrage, ◆◆ Exchange trading is continuous, ◆◆ There are no transaction costs or taxes, ◆◆ There is non-risky interest rate and it is constant during the period of trading with options. The Black-Scholes formula based on presented assumptions provides the value of call option for the subject asset per spot price S, and agreed price for the specified option K, i.e. the price per which the subject asset will be bought in future time period T. The non-risky interest rate r and volatility which is the reflection of spot price of the subject asset are constant. The Black-Scholes formula for the call option is (Black & Scholes, 1973): C ( S,T ) =S ⋅ N ( d1) -K ⋅ e-rT ⋅ N ( d2 )
(1)
And for put option: P ( S,T ) = K ⋅ e-rT ⋅ N ( -d2 ) - S ⋅ N ( -d1)
(2)
where:
d1=ln ( S/K ) + ( r+σ2/2 ) ×T/σ T
(3)
d2= d1-σ T
(4)
N stands for the cumulative function of probability for standard normal distribution. According to the Black-Scholes formula, the realistic market value of the call option is the difference between an expected value obtained from the direct purchase (SxN(d1) and a present value of the option price at the moment of its exercise ( K ⋅ e - r ⋅ T ⋅ N ( d2 ) ) . The same analogy is to be applied to the put option. In 1976 Fischer Black created his own model for evaluating options which instead of spot price uses the forward price of the subject asset for calculating the option value. The following formulas for determining the value of call emerge from that (Black, 1976): 48
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C ( F,T ) =e-rT ⋅ ( F ⋅ N ( d1) -K ⋅ N ( d2 ) )
(5)
And put option (Black, 1976): P ( F,T ) = e-rT ⋅ ( K ⋅ N ( -d2 ) - F ⋅ N ( -d1) )
(6)
where: r – stands for non-risky interest rate, F – stands for the forward price of the subject asset on the exercise day of the option, σ - stands for the volatility of the forward price and N(...) – stands for the function of the normal cumulative distribution. The assumptions and manners of application of the Black 76 formula are the same as those of the use of the Black-Scholes formula, except for the replacement of the spot price of the subject asset with the forward price which represents the expected future value discounted for a non-risky rate.
REALIZATION OF OPTION AT EEX The options were introduced to the electric energy trading for the first time at NYMEX (New York Mercantile Exchange) in 1996 (Pavlatka, 2010). In Europe, however, they are mostly traded within EEX. EEX is the exchange situated in Leipzig, which is one of the rare markets of electric energy on which the trading with options may be done, primarily because the precondition for trading with options is the high liquidity of the market. Also, high volatility at futures market and expanded offer of options lead to the 180% growth in comparison to 2015 in trading with options (EEX, 2017a). EEX exchange offers trading with European type options, exercise in monthly, quarterly and annual futures contracts for the delivery of base electric energy. The options at this exchange may be exercised in a way that participants of the market assume a certain future position, which means that the basis of the option is the forward price of electric energy and joined futures contract. The advantage in comparison with the futures contract is that the holder of call or put futures option keeps the possibility of unlimited profit with the restriction of potential losses due to unfavorable movement of base assets, in this case, electric energy. Options on futures contracts for electric energy will be delivered are traded with at EEX exchange. The options that are traded with are of the European type (may be exercised only on the last day of trading). The premium must be fully paid one day after trading. The options are exercised on the basis of monthly, quarterly and annual futures contracts for electric energy. The options that are traded with are options on Phelix Base Futures (Phelix – index of prices at hourly auction for German/Austrian delivery zone), Options on French Base Futures, Options on Italian Base Futures and Options on Spanish Base Futures. Options on Phelix Base Futures are available for different delivery periods as follows: 5 monthly (Phelix Base Month type), 6 quarterly (Phelix Base Quarter type) and 3 annual (Phelix Base Year type) delivery periods (EEX, 2017b). For Phelix Base Year Options EEX also established the options with short-dated options with quarterly expires (Phelix Base Year Future Short Dated type). The rules of EEX exchange stipulate that options are due the moment when trading with them is conducted for the last time. Therefore, the last day of trading for the option of the Phelix Base Year Option type is on the second Thursday in December. For the options of Phelix Base Month Future for January type according to which the delivery of electric energy is in January and Phelix Base Quarter Future for the delivery in the first quarter of the year the last day of trading is on the third Thursday in December. The last day of trading for all other 49
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LATAS, T., JEREMIĆ, Z. THE OPTION ON ELECTRIC ENERGY FOR THE DECREASE OF RISK ON THE EXAMPLE OF EEX (EUROPEAN ENERGY EXCHANGE)
options of the Phelix Base Quarter Future, Phelix Base Month Future and Phelix Base Year Future Short Dated types is four days before the beginning of delivery of electric energy. The options established for the new markets, Options on French Base Futures, Options on Italian Base Futures and Options on Spanish Base Futures are available for 2 monthly, 2 quarterly and 2 annual delivery periods. Their exercise is the same as with the Option to Phelix Base Futures contracts. For new markets, there are still no available options with short-dated options with quarterly expires. The minimum unit for trading is one contract. The contract may be monthly, quarterly and annual. The monthly contract is calculated by multiplying the number of days in the month with 24 hours and adjusted to daylight saving time. The quarterly contract is calculated by multiplying the number of days in the quarter with 24 hours and adjusted to daylight saving time. The annual contract is obtained by multiplying 365 days with 24 hours. The prices are expressed in EUR/kWh, calculated to no more than three decimals, with the least possible change of 0.001 EUR/kWh. The value of the contract is the product of the contracted volume of trading and option price. For instance: if the premium for annual option is 1,000 EUR/MWh, the contracted value amount is 8,760 (24*365) MWh x 1,000 EUR/MWh = EUR 8,760.00. The value of the position is obtained by multiplying the value of the contract with the number of contracts. In this case, if there are, for example, 10 contracts, the value of the position would be 10 x EUR 8.7600,00 = EUR 87,600.00 (EEX, 2016). For the evaluation of options at EEX exchange, the Black model (Black 76) is used. The main influencing parameters are underlying future price, exercise price, the residual term, the short-term risk-free interest rate and the implied volatility of the underlying security. The implied volatility is established by EEX and is based on other price sources, historical data or is specified by the chief trader procedure (EEX, 2017c). The table presents the parameters used for the evaluation of options and their influence on the option price (EEX, 2016).
Parameters
Variables
Call
Put
F(t) ↑
↑
↓
Strike price
K↑
↓
↑
Interest rate
r↑
↓
↓
Expected volatility
σ↑
↑
↑
Time until expiration
t↓
↓
↓
Underlying price
Table 2. Parameters for options evaluations and their influence of the option price (EEX, 2016)
The intrinsic value of the call option represents the difference between the forward price (F(t)) and strike price (K). If the difference between the term and strike price is less than zero, the option value is zero. The intrinsic value of the option represents the difference between the strike price (K) and forward price F(t). Also, if this difference is less than zero, the value of the option is zero. The intrinsic value of the option cannot be less than zero. The time value of the option is equal to the difference between valid premium and valid actual value. It is determined by time, interest rate and volatility (EEX, 2016) The increase in price of the base futures contract leads to increase of the price of call option and decrease of the price of put option. The situation with the increase of strike price is opposite, higher strike price results in the lower price of call option and higher price of put option. The increase of interest rate 50
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influences the decrease of the option price, while the higher volatility of the price of underlying assets influences the increase of the option price. The shorter the exercise day, the lower is the option price. The rules of trading oblige the option holder to pay the premium in order to gain the right to exercise the option. The option holder protects himself from the market risk. The option writer is obliged to cover the margins, while in the case of futures contracts buyer and seller are obliged to cover the margins to ensure the exchange liquidity. In options trading, only the option writer is obliged to cover some margins, while the option holder pays the premium to the option writer. Upon the request of the clearing company which represents an individual member of the exchange in charge of the collection of assets for covering margins, the option writer is obliged to cover the premium margin and additional margin. The premium margin covers for the losses which are the result of insufficiently paid premium and the additional margin losses which are the result of the changeable value of that premium. The volume of these margins depends on the current position of the option holder. If the option writer is forced to step away from the position, on that occasion during the sale of the option they must cover the premium margin which is then adjusted to the new price of the option on the daily basis. These margins are calculated based on the mark-to-market method, i.e. the method of adjustment of premium values to the market value of the option. This means that daily reevaluation and settlement of profits and losses (settlement price yesterday vs settlement price today) is made (Eurexchange, 2017). Due to this method, the exchange secures its further liquidity. Premium margin corresponds to the premium for buying the option so it is calculated in the following manner (EEX, 2016): Premium margin = Position x contracted quantity ( MWh ) x Calculated price ( EUR/MWh )
(7)
The premium margin is used in the final calculation of the position which refers to the current market price of electric energy. The additional margin is the reflection of the most unfavorable price movement so in accordance with that, it is calculated in the following manner (EEX, 2016):
Additional margin = Position x contracted quantity ( MWh ) x the most unfavorable option price movement ( EUR/MWh )
(8)
With this margin, it is possible to establish the upper and lower limit of the expected future price of electric energy. The designed value of the option is designated using the Black 76 formula. An example of the calculation of the premium and the additional margin is presented in Table 3. The model of calculation of margins from Table 3 cannot be adopted if the option value is significantly lower than its realistic value, i.e. out-of-the-money. In that case, the EEX exchange adjusts the values of short option.
51
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Contract
C (CALL) O1BY (Phelix Base Year Option JAN13 EUR 61.00
Contract volume
365 days x 24 hours x 1MW = 8,760 MWh
Additional margin parameter
2.7
Position
50 L or 50 S
Daily settlement price of option
0.802
Daily settlement price of electricity
53.70 Premium margin
Long position
Short position
Premium margin =-50x8,760MWhx0.802EUR/MWh = EUR -351,276.00 (profit)
Premium margin = 50x8,760 MWhx0.802EUR/MWh = EUR 351,276.00 (loss) Additional margin
Long position
Short position Future underlying asset
Projection
Daily settlement price
Projection
51.00 EUR/MWh
53.70 EUR/MWh
56.40EUR/MWh
Option Projection
Daily settlement price
Projection
0.670
0.802
1.489
Worst case: Option price falls from 0.802 to 0.670 (for 0.132)
Worst case: Option price rises from 0.802 to 1.489 (for 0.687)
Additional margin =50x0.132EUR/MWhx8,760MWh = EUR 57,816 (loss)
Additional margin = 50x0.687EUR/MWhx8,760MWh = EUR 300,906(loss) Total margin
Long position
Short position
Premium margin
EUR -351,276.00
Premium margin
EUR 351,276.00
Additional margin
EUR 57,816.00
Additional margin
EUR 300,906.00
Margin loan
EUR -293,460.00
Total margin to be furnished
EUR 652,182.00
The margin loan can be set off against margin for same margin class
The seller has to deposit for margin in the amount of EUR 652,182.00
Table 3. An example of calculation of the premium and additional margin (EEX, 2016)
Since the option of the forward price of electric energy represents the subject of trade, it means that the option is added to the futures contract. The holder of the option and futures contract takes two assigned positions. The only difference is in obligations emerging from trading with options and futures contracts. The holder of the option and futures contract may compensate these margins summing them up mutually so as not to cover margins for each individual position. The margin emerged 52
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from the trading with option and margin emerged from trading with futures contract belong to the same margin class. The profit and loss emerged from the trading position per futures contract are calculated in the following manner: Profit/loss ( EUR ) = Position x Contracted quantity ( MWh ) x
(9)
(Designed forward price – Contracted forward price ( EUR/MWh )
While the profit and loss emerged from the position of trading with option is calculated as: Profit/loss ( EUR ) = Position x Contracted quantity ( MWh ) x
(10)
Designed option price ( EUR/MWh ) .
Underlying asset of the margin class (Phelix Base Year Future for year 2013)
F1BYJAN13
1st position (Short Call Phelix Base Year Option for year 2013)
50S CO1BY JAN13 €61.00
2nd position (Long Phelix Base Year Option for year 2013)
10L F1BY JAN13 €53.70 / MWh
Contract volume (365 days x 24 hours x 1 MW)
8,760 MWh
Additional margin parameter
2.7 EUR/MWh
Daily settlement price of the underlying asset
53.70
Daily settlement of 1st position
0.802
Daily settlement price of 2nd position
53.70
Scanning range
50S CO1BY JAN13 €61.00
10L F1BY JAN13 €53.70 / MWh
Portfolio
Price in EUR/MWh
Amount for closing
Change in €
P&L
Loss when closing
56.40€/MWh
1.489
652,182
2.7
-236,520
415,662
53.70€/MWh
0.802
351,276
0
0
351,276
51.00€/MWh
0.670
293,460
-2.7
236,520
529,980
Table 4. The overview of margin calculation of the same margin class (EEX, 2016)
Considering the example provided in Table 4 it is evident that the margin which is necessary to provide for options is EUR 652,182 and for futures contracts EUR 236,520 which would mean that the total requested margin is EUR 888,702. However, when the credit is transferred in between the margins which belong to the same margin class, it is obvious that the margin that covers the price increase risk is EUR 415,662 and it is less than the margin that covers the price reduction risk and amounts to EUR 529,980 which means that the total premium for contracts belonging to the same margin class is EUR 529,980. In this case, also, the EEX exchange uses the Black 76 formula for the calculation of the option value taking into consideration the implied volatility which results from the current contracted option prices. Table 4 indicates an example of the calculation of margins which belong to the same margin class. 53
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Market liquidity, defined as a proportion of the total trading volume and energy consumption, called churn ratio, is highest in German Power Derivatives Market that significantly increased in the past, and it reached a level of 18. All other European power derivatives market areas have a churn rate of 5, at a maximum. This parameter indicates how often a megawatt-hour of power is traded on the markets before it is actually physically delivered. The higher the churn rate, the higher the total trading volume and the liquidity of the market is. Trade through SEEPEX is voluntary and no regulatory measures that would protect liquidity have been taken. In its first year of activity, 0.6 TWh has been traded on the SEEPEX Day-Ahead market. In May 2017, SEEPEX reached the highest traded volume, amounting to 107,222.7 MWh (SEEPEX, 2017a). Maximum traded volume per day was, also reached on 5th May 2017, when the traded volume was 8,270.6 MWh (SEEPEX, 2017b). If we analyze liquidity of SEEPEX throughout three dimensions of liquidity of electricity market: volume, costs and time, we can easily conclude that it is not a liquid market. In terms of volume, the traded volume is small, market cannot absorb volume without having major impact on the price, the number of registered companies is also very small (by today there have been registered 14 companies, 2 are in the process of registration and 5 new participants are expected to be registered by the end of 2017, although, 6 other companies showed their interest in registering on SEEPEX during 2018) and there is almost no diversity between the parties present. In terms of cost, there is high price volatility, in its first year of activity, the average monthly reference price was between EUR 25.01 and EUR 82.88 (EPEX, 2017), trading costs were significant. Regarding the time, we should take the number of transactions into consideration, which show how quickly transaction can be made at any time and percentage of days transactions were handled on. It is noticeable that during weekends just a few companies participated, which reflected on traded volume. Price and quantity depended on the season and situation throughout the region. Prices follow the tariff and consumption trends in Europe, mostly on HUPX, which is not the case with Serbia. The national market is insufficient to achieve liquidity. Measures that could impact positively on increasing market liquidity are: 1. Increasing the number of participants and business energy users on organized market, 2. Market coupling initiatives, 3. Investments in interconnection capacities, 4. Harmonization of market rules relating to network access, balancing and incentives for new network investments, 5. Removal of regulated end-user prices, 6. Improving transparency. This example demonstrates the multi-dimensionality of the process of calculating the value of options using recognized scientific methods in this field. Recognizing the essence of these processes is the quality that extends the scopes of scientific truth.
CONCLUSIONS The process of globalization on the world markets for electric energy systems primarily involves restructuring and liberalization of the electricity and energy markets. Serbia is included in that process through changes which occur in the electrical industry and energy sector in the region and the European Union (Jeremić, 2006). As a part of these changes, the Serbian exchange of electric energy SEEPEX 54
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in partially ownership of EPEX, which has the leading role in joining markets of electric energy in Europe, was put in operation in the early 2016. It is a spot market with numerous obstacles in the path of its development, taking into consideration the specific and complex features of the electric energy market. This market is very risky, with high volatility and numerous risks due to which the participants may suffer losses. Therefore, on the developed markets and in the sphere of electric energy trading the development of derivatives which, like in other financial and goods exchanges, have the function of risk management, takes place. This paper deals with the use of one type of derivatives, the option on electric energy. This role is possible to be explained only by the example of the most developed markets, such as EEX, Leipzig since this market is liquid and all types of derivatives are used there. Experience of developed power exchanges should be used in the process of developing the SEEPEX. We have explained one segment of the liquid market that could be used as a future model of development, as a model of good practice. Analyzing the results, using one type of derivatives (options on electric energy) must be understood as an analysis of a part belonging to the system where all types of derivatives are present. It is dangerous to draw conclusions about the whole, by observing the part. Awareness of the essence that influence a part is useful. The results provided in this work have this purpose, especially since the applied method of part (the option-risk) is verified on the market where all derivatives are used. Future prices are directly linked with the movement of spot prices so while using the instruments such as futures, forwards and options the starting point is the spot market. The prediction done in a quality manner related to future price movements based on the current prices and all risk factors which exist with these trading objects are the basis for successful trading. Although the model for creating prices may be sophisticated, if the curve of the future price movement is not adequate, error in price creation will outweigh all benefits which a sophisticated model may offer. With options for the hedging of future open positions and evaluation of premiums to options, the most frequently used models in practice are the Black-Scholes and Black 76 models, which are therefore the subject of this research. The use of all types of derivatives in trading with electric energy is necessary for the purpose of protection from risk and optimization of exposure. So the knowledge on the use of derivatives on the electric energy markets is indispensable for the participants in less-developed markets as well. Hedging of the market risk is a way to reduce and eliminate the risk of price change, although it is necessary to be aware of numerous limitations which reduce the usage value of existing models which are applied in practice for the purposes of reducing the risk during the trading with options.
REFERENCES Black, F. (1976). The Pricing of Commodity Contracts. Journal of Financial Economics, 3(1-2), 167-179. DOI: 10.1016/0304-405X(76)90024-6. Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637-654. Blanco, C., Choi, S., & Soronow, D. (2001). Energy Price Processes Used for Derivatives Pricing & Risk Management. Retrieved August 6, 2017, from http://web2.uwindsor.ca/courses/business/assaf/a_brownian.pdf. Davis, M. (2001). Mathematics of Financial Markets. Retrieved August 6, 2017, from http://wwwf.imperial. ac.uk/~mdavis/docs/math2001.pdf. Edwards, D. (2010). Energy Trading and Investing. New York: McGraw Hill. 55
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EEX. (2017a). At the Heart of Energy and Commodity Trading: Markets and Products 2017. Retrieved August 01, 2017, from https://www.eex.com/blob/63998/e18188dc9db9943679977aa4a78d943e/neu-e-eex-broschuere2017-web-data.pdf. EEX. (2016). Trading Power Options at European Energy Exchange. Retrieved August 01, 2017, from https://www. eex.com/blob/9168/f4acb98587096346ecabc6af86bbc8fd/trading-power-options-at-eex-data.pdf. EEX. (2017b). Power Derivatives Market. Retrived July 31, 2017,from https://www.eex.com/en/products/power/ power-derivatives-market. EEX. (2017c). Settlement Pricing Procedure. Retrieved August 05, 2017, from https://www.eex.com/blob/61950/ 901173f518c73dbe63d31b146fcf6e50/settlement-pricing-procedure-data.pdf. EMS. (2016). SEEPEX uspešno pokrenuo srpsko Dan-unapred tržište. Retrieved August 01 from http://www.ems. rs/news_more.php?id=260. In Serbian. EPEX. (2017). SEEPEX Power Market Forms Bridge between Regions. Retrieved August 01 2017 from https:// www.epexspot.com/en/. Eurexchange. (2017). Glossary. Retrieved August 15, 2017, from http://www.eurexchange.com/exchange-en/ education/glossary. Eydeland, A., & Wolyniec, K. (2003). Energy and power risk management: New developments in modeling, pricing, and hedging. Hoboken, NJ: Wiley. Fritz, A. (2012). European electricity and Interrelated Futures Market: A cointegrated Vector Autoregressive Analisis. Retrieved August 6, 2017, from http://www.ewl.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/ Arbeitspapiere/RePEc/pdf/wp1205_EuropeanElectricityAndInterrelatedFuturesMarketsACointegratedVectorAutoregressiveAnalysis.pdf. Hull, J. (2005). Options, Futures and Other Derivates. Upper Saddle River, NJ: Prentice Hall. Jeremić, Z. (2006). Energetski sektor: šansa za razvoj finansijskog tržišta u Srbiji. Ekonomski anali, No. 51, 61-71. In Serbian. Jeremić, Z. (2012). Finansijska tržišta i finansijski posrednici. Beograd: Univerzitet Singidunum. In Serbian. Madlener, R., & Kaufmann, M. (2002). Power exchange spot market trading in Europe: theoretical considerations and empirical evidence. Retrieved May 6, 2017, from http://www.oscogen.ethz.ch/reports/oscogen_dp5_010702.pdf. Mishra, B., & Debasish, S.S. (2007). Financial Derivatives. New Delhi: Excel Books. Orsag, S. (2006). Izvedenice. Zagreb: Hufa. Pavlatka, P. (2010). Option Derivatives in Electricity Hedging. Acta Polytechnica, 50(4), 65-69. Pilipovic, D. (2007). Energy Risk: Valuing and Modeling Energy Derivatives. New York: McGrow-Hill Professional. Salvatore, D. (1994). Ekonomija za menadžere u svjetskoj privredi. Zagreb: Mate. In Croatian. SEEPEX. (2017b). 05.05.2017. – SEEPEX ostvario najveću dnevnu količinu trgovine. Retrived August 10, 2017, from http://seepex-spot.rs/sr/novosti/05-05-2017-SEEPEX-ostvario-najvecu-dnevnu-kolicinu-trgovine. In Serbian. SEEPEX. (2017a). 107.222,7 MWh – Novi mesečni rekord! Retrieved August 10, 2017, from http://seepex-spot. rs/sr/novosti/u-maju-novi-mesecni-rekord-trgovine. In Serbian. Tešnjak, S., Banovec, E., & Kuzle, I. (2009). Tržište električne energije. Zagreb: Graphis. In Croatian.
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OPCIJE NA ELEKTRIČNU ENERGIJU RADI SMANJENJA RIZIKA NA PRIMERU EEX (EUROPEAN ENERGY EXCHANGE) Rezime: Deregulacija i liberalizacija tržišta električne energije dovele su do visoke volatilnosti na berzama električne energije, što zahteva upotrebu derivata na energetskim tržištima radi efikasnijeg upravljanja rizikom kojem su izloženi učesnici na tržištu. Opcije su jedan od derivata koji se primenjuju na likvidnim tržištima, pa je stoga u tekstu obrađen primer sa najrazvijenije energetske berze EEX (European Energy Exchange) sa ciljem da se primenom verifikovanih naučnih metoda proveri praksa funkcionisanja likvidnog energetskog tržišta primenom opcija radi smanjenja rizika. Kod opcija je za hedžovanje budućih otvorenih pozicija i evaluaciju premija na opcije u praksi najkorišćeniji modeli Black-Schols model i Black 76, koji su stoga i obrađeni u tekstu. U Srbiji je počela sa radom berza električne energije SEEPEX (South East European Exchange). Njen razvoj vodiće preko integracije sa regionalnim tržištima u pravcu integrisanja ukupnog tržišta električne energije u Evropi. Taj put biće dug, ali, već sada, on zahteva i poznavanje tržišnih instrumenata koji se koriste u trgovanju i upravljanju rizikom na berzama električne energije. Prikazani rezultati se odnose na suštinsku spoznaju dinamičnih varijabli koje opcije unose na tržište energenata radi smanjenja rizika.
Ključne reči: berza električne energije, derivati, opcije. Received: August 23, 2017 Correction: / Accepted: October 5, 2017
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EJAE 2017, 14(2): 58-69 ISSN 2406-2588 UDK: 658.14 334.72:330.14 DOI: 10.5937/ejae14-14391 Original paper/Originalni naučni rad
THE ROLE OF VENTURE CAPITAL IN THE DEVELOPMENT OF THE SME SECTOR Irena Đalić1*, Svetlana Terzić1, Boris Novarlić2 University of East Sarajevo, Faculty of Transport and Traffic Engineering Doboj, Doboj, Bosnia and Herzegovina KP„Progres“ a.d. Doboj, Doboj, Bosnia and Herzegovina 1
Abstract: Entrepreneurs as well as SMEs, regularly face the problem concerning access to finance. Entrepreneurial firms face two major problems. The first concerns access to finance, which places particular restraint on a firm’s ability to increase the level of technology in their business. The second problem is access to know-how. The subject of this survey is the role of venture capital funds in the development of newly established companies and its potential application in the Republic of Srpska. In the Anglo-Saxon countries, newly emerged enterprises that start their business from scratch are called start-up companies. The assumption that venture capital financing can give newly established companies bigger chances of succeeding in their start-up stage is made. It is known that our companies provide capital through bank loans which have lately become less available especially to early stage businesses. Therefore, in order for companies to achieve their goals and develop their projects they must finance their business through venture capital funds that are willing to invest in start-up companies.
Keywords: venture capital, SMEs, entrepreneurship, employment, innovation.
INTRODUCTION The SME (small and medium-sized enterprises) sector is important for the global economy mainly because SMEs are relatively flexible; they easily adapt to the changing business environment, and these businesses, when compared with big corporate entities, require less financial support. Starting a small and medium-sized business is relatively cheap and simple when compared to starting a big company (Steingold, 2006). SMEs are also significant sources of work. Thus, they help in the fight against the unemployment. Because of all these mentioned qualities, high-income countries are providing considerable support to the SMEs sector. This is seen through the SMEs share in the total enterprise population which ranges from 99.5% in Japan to 99.8% in the EU and the USA. In the EU, SMEs account of total employment in the non-financial sector is 67.0%, in the USA 52.4%, and in Japan 86.6% (European Commission, 2015). 58
* E-mail: i.naric@yahoo.com
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ĐALIĆ, I., TERZIĆ, S., NOVARLIĆ, B. THE ROLE OF VENTURE CAPITAL IN THE DEVELOPMENT OF THE SME SECTOR
Young firms in particular are faced with this problem in the early stage of business. Venture capital funds differ from another fundings in the way that venture capitalists support risky start-up businesses that deal with some sorts of new technologies. Venture capital can be defined simply as risk-equity investments in newly established entrepreneurial firms (Klonowski, 2010). When it comes to SMEs, it is crucial to find a way to improve access to the wide range of external sources of finance. Venture capital funds give entrepreneurial companies the opportunity to finance their development projects, which leads to the increase in competitiveness, economic growth and total employment. Therefore, the aim of this research is to give the answer to the following question: Do newly established firms in the Republic of Srpska have the support of venture capital funds in their early stages of business? To be more precise, the following question should be asked: Has SMEs managers’ perception of development projects funding by venture capital in the Republic of Srpska changed since the previous survey conducted in 2013?
LITERATURE REVIEW Entrepreneurs and SMEs are crucial factors affecting economic growth in both developed countries and those in transition. Peter Drucker and George Gilder both believe it is important not only to combine resources in a new way, but also to create new ones (Drucker, 1991; Gilder, 1986). Entrepreneurship, according to the traditional definition, is the set of activities carried out to combine resources with the intent of profiting. Thus, to maintain and earn profit it is neccessary to find the most favorable combination of resources – the one that saves scarce resources and increases the volume of production (Vukmirović, 2006). The term enterpreneurship also includes a person who creates a new product or offers service under conditions of extreme uncertainty (Ries, 2011). In developed countries SMEs are the sources of economic growth. Entrepreneurial firms provide many new jobs every year. Joseph Shumpeter, as well, thought that innovation and entrepreneurship occupy a decisive role in economic development. He believed that economic growth occurs when a critical mass of entrepreneurs start new business activities. (Shumpeter, 1975). The state and entrepreneurships as well need to realise how entrepreneurship is important for development and, therefore, they need to create programs that motivate entrepreneurs to create innovative projects spurring their business growth as well as economy (Estay et al., 2013). When selecting start-ups to fund, venture capitalists analyze the ability of the founding team, their managerial abilities, staying power and familiarity with the market. Naturally, venture capitalists tend to fund entrepreneurs that appear to have more skills (Zhang, 2011). To be a successful entrepreneur, the key is to have a business idea. Future entrepreneurs need to be truly creative, understand the market and, most importantly, be self-confident. Their willpower must be stronger than any risk. It is neccessary to work hard and enjoy the job in order to become a great entrepreneur (Tobin, 2012). The business “rewards” for these entrepreneurs are primarily in the form of personal independence and the business cash flow (Aulet, 2013). The common problem that entrepreneurs face is raising money that will ensure the greatest success in business compared to the costs that these sources require. In developed countries micro, small and middle-sized companies fixate on numerous funding sources such as bank loans, leasing, factoring, mezzanine financing, stock exchanges, and venture capital (Petković & Berberović, 2013). Venture capital funds are types of funds that are internationally known as “Private Equity Fund” and “Venture 59
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Capital Fund”. However, it is important to distinguish between these two terms. Equity Fund is a broader term than Venture Capital Fund. Venture Capital Fund is, by default, regarded as investments made during the launch stages of a business, while Private Equity Fund includes Venture Capital and takeover. Venture capital funds are defined as funds that invest in companies in exchange for a share in the property. Those are firms that pool money from private investors and expect a high annual return (typically 20% to 40%) on their investment (Awe, 2006). Many venture capital firms will not consider a deal that involves less than $3 million (Harper, 2005). Venture capital investments are directed at companies that are not able to pay interests on debts or dividends on equity, and their capital gains are used for further business transactions (Cumming & Johan, 2014). Once VCs invest in a successful company, they usually continue their investing in the company’s later stages of development. In modern developed markets, such as the US and the EU market, there is a large number of venture capital funds that are willing to invest in high-risk enterprises. Because of this, companies are willing to pay 10% to 14% of the premium in the form of a discount on the assessment in order to receive money from renowned venture capital funds giving up less prominent VCs investment proposals (Park & Steensma, 2012). Venture Capital Fund usually consists of at least 10 to 20 partners, so the capital collection is a long and difficult process (Romans, 2013). Venture capital funds operate in a cycle (Keuschnigg & Nielsen, 2001). VCs collect private investors’ capital and invest in businesses expecting high annual returns. When they get the returns, that capital is invested again in new businesses. The VC context has four different attributes. First, VCs invest in newly-established companies and these investments are highly uncertain. Second, VC firms primarily rely on applying knowledge resources which they use to select and coach portfolio companies. Third, VCs are not necessarily diversified, which means they are typically single unit firms. And fourth, despite the fact that the research indicates that VCs prefer low levels of diversification in the context of uncertainty, not much about the actual relationship between these diversification levels and performance is known (Matusik & Fitza, 2012). Depending on the company’s stage of development, there are a few types of VCs investments. In literature, different interpretations of business development stages can be found. The three most frequently mentioned stages are: early stage, expansion stage and later stage (Schertler, 2006). However, according to Mathonet and Meyer there are four stages of development and those are: seed stage or start-up stage, early stage, balance stage and later stage (Mathonet & Meyer, 2007). According to Golis, Mooney and Richardson, the type and the availability of funds depend also on the stage of development (Golis et al., 2009). When investing in companies, VCs analyze several factors, such as: the market characteristics, financial return potential, the new venture’s business plan and the ability of management (Grünhagen, 2008). Many studies show that VC funding has proven successful in developed countries. Venture capital funds have managed to fill the gap in the financial marketplace since they are willing to invest in risky ventures in their start-up stage (Harper, 2005). Professor Christian Keuschnigg proved in his work Venture Capital Backed Growth that VCs contribute to rapid growth of emerging businesses (Кеuschingg, 2002). Also, Astrid Romain and Bruno van Pottelsberghe de la Potterie, who dealt with the macroeconomic impact on venture capital funds (Romain & Van Pottelsberghe de la Potterie, 2004), proved that VCs have a positive impact on macroeconomic indicators. Studies have shown that venture capitalists mostly invest in small countries in which some renowned companies are founded. These funds invest more in companies dealing with IT, mechanical engineering and biotechnology than in other industries (Schertler & Tykvová, 2009). There are about 800 venture capital funds in the US. 60
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In 2010 these funds invested about $179 billion in 3,276 companies (Barringer & Ireland, 2011). Alexander Popov and Peter Roosenboom explored the relationship between venture capital and innovation in the period from 1990 to 2005 in the whole Europe. They have documented an increase of 10% of patented innovations under the influence of venture capital investments (Popov & Roosenboom, 2012). The role of venture capital in the development of entrepreneurship and the economy in general has been seen during the mid 70s in Germany when the country provided a considerable support to the development of venture capital market, which was the reason why it has been criticized by major banks. Also, Scotland and Israel are examples of how venture capital is crucial for the economy. These countries have developed venture capital policies that differ from the traditional approach to this way of funding (Rosiello et al., 2011). According to Scherlter’s survey VCs affect GDP and its increase. Scherlter’s research included 16 European countries. In all of these countries, a significant innovative business growth rate has been achieved as a consequence of the development of venture capital funds, which allowed companies dealing with high-risk technologies to rapidly develop and employ more workers. According to the survey, mainly the government support contributed to the formation of venture capital funds in these European countries. This support had a great influence on the conditions in which emerging businesses or start-ups dealing with high-tech, operated (Scherlter, 2006). According to Metrick and Yasuda, half of total US venture capital is invested in companies operating in the Silicon Valley and in the area around Boston. This is understandable because many companies dealing with the development of new technologies are operating in these two regions, which is a high-risk job for investors considering the high degree of uncertainty surrounding the process of commercialization of such new technologies (Metrick & Yasuda, 2011). In 2002, a record in venture capital investments has been set when venture capitalists invested $120 billion. That amount dropped in the following years, but it is still at the highest level in the world and is about $40 to $50 billion per year (Erić et al., 2012). In addition to innovation and clever ideas, start-up entrepreneurs need to have access to external sources of financing. When the business environment supports creativity, innovation and commercialization, companies have bigger chances of success (Hisrich et al., 2016).
RESEARCH In this paper, the role of venture capital in the early stage of start-up businesses, as well as the interest and readiness of SMEs for VC investments in the Republic of Srpska, has been studied. The topic of the research is theoretical and empirical analysis of the role of VC in the new companies’ early business stages in developed countries, and the possibility of applying the results of the research about VC investment to companies in the Republic of Srpska. The research was conducted by simple random sampling, collecting responses to the questionnaires with close-ended questions, multiple choice questions as well as open-ended questions. Quantitative research was conducted in the period from mid-January 2016 to mid-April 2016. It included 106 companies from the whole territory of the Republic of Srpska and was conducted in 27 municipalities: Banja Luka (20), Derventa (15), Doboj (12), Modriča (8), Prnjavor (6), Bijeljina (6), Laktaši (6), Prijedor (4), Čelinac (3), Trebinje (3), Novi Grad (3), Gradiška (2), Brod (2), Teslić (2), Pale (2), Šamac (1), Istočna Ilidža (1), Istočno Sarajevo (1), Kozarska Dubica (1), Ljubinje (1), Mrkonjić Grad (1), Pelagićevo (1), Srbac (1), Donji Žabar (1), Istočno Novo Sarajevo (1), Ribnik (1), Obudovac (1). The research included 32 micro, 72 small and medium-sized enterprises and 2 big companies. 61
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Similar research was conducted in 2013 (Petković et al., 2016; Hisrich, 2016) and these two surveys are compared to see if the situation has improved.
Limitations of the reserach During the research we came across a number of limitations. We have to state that one of the biggest limitations of this research are very modest financial abilities, which is why we were unable to conduct a larger and more detailed research on the whole territory of the Republic of Srpska. The research was conducted on a small scale in relation to the size of the statistical weight (9,325 companies). According to the Intermediary Agency for IT and financial services (APIF) at the end of 2014, 9,325 companies have submitted required financial statements and we will take this information as relevant to the size of the statistical weight. At the same time, this is the latest data we were able to reach (APIF, 2014). Perhaps the biggest problem we faced during the course of this research was acquiring data held by the institutions in charge of monitoring the economic situation in the Republic of Srpska. This data may vary depending on the source. The companies poorly responded to invitations to take part in this research. Was it because the topic of the research was still new here, or maybe, people just did not want to participate in studies? The thing that we can conclude is that company owners and managers do not show a great desire for cooperation with the academic community conducting researches.
Research Results The questionnaire we based our research on consists of three parts. The first part refers to some general information about the companies that participated in the research. The second part represents the information on venture capital funds, and in this section we tried to find out how our companies, in general, are familiar with VCs and the methods of approaching them. Finally, the third part refers to the willingness of the companies to be funded by venture capital funds.
General information about the companies Given the fact that the territory of the Republic of Srpska was the subject of our research, we managed to encompass the whole mentioned territory. We chose random companies by sending a questionnaire to their e-mail addresses we found in address books. Most companies that took part in the research are form the Banja Luka and Doboj region. These data are shown in Table 1.
62
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No.
Head Office
Number of units
1.
Banja Luka
20
2.
Derventa
15
3.
Doboj
13
4.
Modriča
8
5.
Prnjavor
6
6.
Bijeljina
6
7.
Laktaši
6
8.
Prijedor
3
9.
Čelinac
3
10.
Trebinje
3
11.
Novi Grad
3
12.
Gradiška
2
13.
Teslić
2
14.
Pale
2
15.
Brod
1
16.
Šamac
1
17.
Istočna Ilidža
1
18.
Istočno Sarajevo
1
19.
Kozarska Dubica
1
20.
Ljubinje
1
21.
Mrkonjić Grad
1
22.
Pelagićevo
1
23.
Srbac
1
24.
Donji Žabar
1
25.
Istočno Novo Sarajevo
1
26.
Ribnik
1
27.
Obudovac
1
28.
Gacko
1
TOTAL:
106
Table 1. Classifying the companies from the sample according to their head offices
If we look at the sample, taking into consideration the years when the companies were established, we can conclude that the “average age” of selected companies is 15 years, as well as that 50% of them were established prior to 1998 and vice versa. Most of the companies were established in 2001 (9 of them). The oldest company was founded in 1950, while the youngest was founded in 2013. 63
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According to the form of organization, most common are companies that are registered as limited companies (hereinafter Ltd.). They are followed by joint-stock companies and sole proprietors. This is provided in detail in Table 2. No.
Form of organization
No. of companies
% of the total sample
1.
Ltd.
85
80.19%
2.
Joint-stock company
10
9.43%
3.
Sole proprietor
4
3.77%
4.
General partnership
1
0.94%
5.
Co-op
2
1.89%
6.
State-owned enterprise
4
3.77%
106
100%
TOTAL: Table 2. Form of organization
Therefore, Table 2 shows the companies’ form of organization. Here we can see that 85 companies are registered as limited companies. These companies accounted for 80.19% of the sample that included 106 companies all together. Joint-stock companies accounted for 9.43% of the companies that participated in the research, and sole proprietors accounted for 3.77% of the sample, while co-ops and state-owned enterprises accounted for 1.89% and 3.77%, respectively. When looking at the ownership structure, it can be noticed that almost all companies from the sample are privately held, because 94 out of 106 companies (88.68%) are 100% privately held. Moreover, another 4 companies are partially private, while 8 companies are fully or partially state-owned. When we talk about the type of businesses that the companies from our research do, statistically, over 41.51% of the companies are trading and food companies, while other business activities are less seen in the sample. Professional, scientific and technical services are provided by only 4 companies (3.77%), while another 10 companies (9.43%) are dealing with some kind of high technology, such as communications, renewable energy or computer engineering. Our research included 3,178 employees. The number of employees in a certain company ranges from 1 to 250. Out of 106 companies, 32 companies are micro entreprises meaning they employ less that ten people; 56 companies are small enterprises employing less than fifty people; 16 companies are medium-sized enterprises employing less that two hundred and fifty people; while 2 companies are in the group of large enterprises. These data are shown in Table 3. Company size
No. of units
% of the sample
MICRO
32
30.19%
SMALL
56
52.83%
MEDIUM-SIZED
16
15.09%
BIG
2
1.89%
106
100%
TOTAL: Table 3. Company size and number of employees 64
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Table 3 shows that companies from the sample are mostly micro, small and medium-sized enterprises (98.11%). The number of companies that have a website is 69, while 37 companies do not own an active website. That means that the number of companies that have a web page is much higher (65.09%) than the number of companies that do not have a website (34.91%). When we compare these data with the survey which covered the same ground in 2013, we can see that the number of companies that have a web site has significantly increased (Hisrich et al., 2016). The research shows that slightly less than half of the companies that own a website receive orders via the internet (32 out of 69 enterprises), while 79.71% of them regularly update their website.
Awareness levels on venture capital funds Prior to the research, most of the companies did not know what venture capital funds were. However, compared to a similar study from 2013, when 87.1% of the sample did not know what these funds were (Petković et al., 2016), this number has decreased. The present research shows that the percentage has decreased to 65.99%. In addition to this, many companies do not know how VCs work (80 enterprises, or 75.47%). Thus, there is a large number of companies that do not know how they can access them (97 enterprises, or 91.51%). However, we must note that the numbers concerning awareness levels have changed for the better since the research conducted in 2013 when almost 90% of respondents stated they did not know how VCs worked (Petković et al., 2016). The fact that only 5 enterprises (4.72%) know some of VCs operating in the Balkans or worldwide proves that venture capital investments are here still unknown as sources of funding, while 101 enterprises (95.28%) have never heard of a single venture capital fund. The companies mostly fund their business through bank loans or loans in combination with other sources (88 enterprises, or 83.02%). The second most common source of funding is friends and family funding alone, or in combination with other sources of financing (23 enterprises, or 21.70%). The third most common source of finance is leasing (22 enterprises). It should be noted that none of the companies that participated in our research provided their capital through venture capital funds. There is only 1 enterprise in the sample that financed its business activities through angel investments. Our respondents’ opinion is that VCs in the Republic of Srpska should be supported by the government (Ministry of Science and Technology and Ministry of Industry, Energy and Mining), while a much smaller number of respondents believe they should be supported by the universities. These opinions should be cautiously taken into account since respondents’ awareness levels on venture capital funds are significantly low.
Companies’ readiness to access venture capital funds When we talk about technological equipment, we have noted that the companies have started to pay more attention to new technologies in their business ventures. The results form the 2013 survey show that 51.61% of the then-respondents used new technologies in their business ventures (Hisrich et al., 2016). This number has significantly increased since then as Table 4 shows. Table 4 shows that 83.96%, or 89 enterprises from the sample, are introducing new technologies; 15 enterprises responded that they do not introduce new technologies into their business ventures, 65
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ĐALIĆ, I., TERZIĆ, S., NOVARLIĆ, B. THE ROLE OF VENTURE CAPITAL IN THE DEVELOPMENT OF THE SME SECTOR
while 2 enterprises did not provide an answer to this question. If these are the actual data, we have a good starting point for the formation of venture capital funds.
Do you regularly introduce new technologies?
Number
%
Valid %
Yes
89
83.96%
85.58%
No
15
14.15%
14.42%
TOTAL
104
98.11%
100%
No data
2
1.89%
TOTAL
106
100%
Table 4. The introduction of new techology
Of all the companies that participated in the research only one company has applied for venture capital investment. The thing we considered the most important was to examine whether the companies in the Republic of Srpska were willing to finance their business activities through VCs. This research shows that 82 enterprises, or 77.36%, are willing to fund their ventures through VCs, while 22 companies, or 20.75% are not willing to do that. There are 2 companies that gave no answer relating to the issue. Finally, there has been a positive response to the following question: Are you going to show more interest in venture capital funding upon completing this questionnaire? Half of the respondents (51.89%) said yes, however, a great many of them were uncertain (38.68%) as Table 5 shows. Answer
No.
%
Yes
55
51.89%
No
10
9.43%
I do not know
41
38.68%
Total
106
100%
Table 5. Did the questionnaire arouse your interest in venture capital funds
We believe our research was successful, given that we were able to raise our participants’ interest in venture capital funds. According to this we can conclude that it would be useful to establish venture capital funds in the Republic of Srpska.
CONCLUSIONS The SMEs are important for the global economy mainly because they are relatively flexible, they easily adapt to the changing business environment, and these businesses, when compared with big corporate entities, require much less financial support. SMEs are also significant sources of work. Thus, they help in the fight against the unemployment. Because of all these mentioned qualities, high-income countries are providing considerable support to the SMEs sector. 66
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ĐALIĆ, I., TERZIĆ, S., NOVARLIĆ, B. THE ROLE OF VENTURE CAPITAL IN THE DEVELOPMENT OF THE SME SECTOR
According to the points discussed in this paper, we see that entrepreneurs alone, without the access to external sources of finance, are not able to accomplish their projects. In order for a project to be implemented, it is necessary to find the best sources of funding. There is a wide range of sources from bank loans, microfinance, through credit guarantee funds, and finally, there are venture capital funds. We have seen that predominant source of funding here are bank loans (in our research 83.02% of the companies finance their business activities through the bank loans). Still, these sources of funding are becoming less favorable, especially for companies that are at the beginning of their development. Even when banks approve such loans, the return is very expensive for start-up companies. The conditions when applying for a loan are the same whether you apply as an already developed company or as a start-up. The most common sources of early-stage businesses financing are venture capital funds. Unlike banks, venture capitalists are willing to invest in ventures during their start-up phase. VCs, of course, invest their money in such business ventures because they expect to achieve above-average high returns on their investments. VCs usually invest in enterprises operating in rapidly-growing industries, such as information technology. Companies that are funded by VCs receive other kinds of support mainly in the domain of marketing, human resources management, business strategy, which means that venture capitalists offer entrepreneurs technical assistance in addition to capital. This way, companies can rapidly develop, employ workers, thus contributing to the global economic growth. We analyzed some previously conducted studies, as well as data we collected in our own research, to test the hypothesis we set at the beginning of the research. Our research shows that the companies (83.96% of the sample) regularly introduce new technology which is a good sign of the willingness to keep pace with the economy trends. Also, the research shows that they are willing to fund their ventures through VCs (77.36% of the sample). Half of the companies (51.89% of the sample) are going to focus more of their attention on venture capital funds. According to this research and some previous studies, we can confirm our initial hypothesis, and conclude that newly-established companies that fund their early-stage business ventures through venture capital investments have greater chances of success. In order to attract foreign and domestic investors, or newly-emerged venture capital funds, it is crucial to create a favorable business environment. In order for VCs to function, in the first place, we need to create a favorable tax system, which means that the state should have a role in the development of venture capital marketplace. Our research respondents belive that the government, and its ministries should provide the greatest support in the formation of venture capital funds in the Republic of Srpska. Therefore, there are many things that need to be done in order to create favorable conditions for the formation of venture capital funds in the Republic of Srpska.
REFERENCES APIF. (2014). Registar finansijskih izveštaja. Retrieved June 08, 2017, from http://www.apif.net/index.php/registri/ registar-finansijskih-izvjestaja/rfi-wb-god-2014.html. In Serbian. Aulet, B. (2013). Disciplined entrepreneurship: 24 steps to help entrepreneurs launch successful new ventures. Hoboken, New Jersey: John Wiley & Sons. Awe, S. C. (2006). The entrepreneur’s information sourcebook: Charting the path to small business success. Westport, Conn: Libraries Unlimited. 67
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Barringer, B. R., & Ireland, R. D. (2011). Entrepreneurship: Successfully launching new ventures. Upper Saddle River, N. J: Prentice Hall. Cumming, D. J., & Johan, S. A. (2014). Venture capital and private equity contracting: An international perspective. Amsterdam: Elsevier. Drucker, P. (1991). Inovacije i preduzetništvo: praksa i principi. Beograd: Privredni pregled. In Serbian. Erić, D., Beraha, I., Đuričin, S., Kecman, N., & Jakišić, B. (2012). Finansiranje malih i srednjih preduzeća u Srbiji. Beograd: Institut ekonomskih nauka, Privredna komora Srbije. In Serbian. Estay, C., Durrieu, F., & Akhter, M. (2013). Entrepreneurship: From motivation to start-up. Journal of International Entrepreneurship, 11(3), 243-267. European Commission. (2015). Annual report on European SMEs 2014/2015, SMEs start hiring again. Retrieved April 25, 2017, from https://publications.europa.eu/en/publication-detail/-/publication/7c9fbfe0-e044-11e58fea-01aa75ed71a1. Gilder, G. F. (1986). The spirit of enterprise. Harmondsworth: Penguin. Golis, C. C., Mooney, P. D., & Richardson, T. F. (2009). Enterprise and venture capital: A business builder’s and investor’s handbook. Crows Nest, N.S.W: Allen & Unwin. Grünhagen, M. (2008). The evolution of entrepreneurs’ fundraising intentions: A multiple case study of financing processes in new ventures. Wiesbaden: Gabler. Harper, S. C. (2005). Extraordinary entrepreneurship: The professional’s guide to starting an exceptional enterprise. Hoboken: John Wiley & Sons. Hisrich R. D., Petković, S., Ramadani, V., & Dana, L. (2016). Venture capital funds in transition countries: Insights from Bosnia and Herzegovina and Macedonia. Journal of Small Business and Enterprise Development, 23(2), 296-315. DOI: 10.1108/JSBED-06-2015-0078. Keuschnigg, C. (2002). Venture capital backed growth. München: CESifo. Keuschnigg, C., & Nielsen, S. (2001). Public policy for venture capital. International Tax and Public Finance, 8(4), 557-572. Klonowski, D. (2010). The venture capital investment process: Principles and practice. New York: Palgrave Macmillan. Mathonet, P.Y., & Meyer, T. (2007). J-curve exposure: Managing a portfolio of venture capital and private equity funds. Chichester, England: Wiley & Sons. Matusik, S. F., Fitza, M. A. (2012). Diversification in the venture capital industry: leveraging knowledge under uncertainty. Strategic Management Journal, 33(4), 407-426. DOI: 10.1002/smj.1942. Metrick, A., & Yasuda, A. (2011). Venture capital and the finance of innovation. New York: Wiley. Park, D. H., & Steensma, K.H. (2012). When Does Corporate Venture Capital Add Value for New Ventures? Strategic Management Journal, 33(1), 1-22. DOI: 10.1002/smj.937. Petković, S., Ateljević, J., & Narić, I. (2016). Venture Capital Funds in Transition Countries: An Empirical Study of Bosnia and Herzegovina. In J. Ateljević & J. Trivić (Ed.), Economic Development and Entrepreneurship in Transition Economies (pp. 233-252). Switzerland: Springer. Petković, S., & Berberović, Š. (2013). Ekonomika i upravljanje malim i srednjim preduzećima: principi i politike. Banja Luka: Ekonomski fakultet. In Serbian. Popov, A., & Roosenboom, P. (2012). Venture capital and patented innovation: Evidence from Europe. Economic Policy, 27(71), 447-482. DOI: 10.1111/j.1468-0327.2012.00290.x. Ries, E. (2011). The lean startup. United States: Random House. Romain, A., & Van Pottelsberghe, B. (2004). The economic impact of venture capital. Retrieved March 5, 2017, from https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2004/2004_08_02_ dkp_18.pdf?__blob=publicationFile. Romans, A. (2013). The entrepreneurial bible to venture capital: Inside secrets from the leaders in the startup game. New York: McGraw-Hill Education. 68
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Rosiello, A., Avnimelech, G., & Teubal, M. (2011). Towards a Systemic and Evolutionary Framework for Venture Capital Policy. In A. Pyka & M. Derengowski Fonseca (Ed.), Catching Up, Spillovers and Innovation Networks in a Schumpeterian Perspective. Berlin: Springer. DOI: 10.1007/978-3-642-15886-5_9. Schertler, A. (2006). The venture capital industry in Europe. Basingstoke: Palgrave Macmillan. Schertler, A., & Tykvová, T. (2009). Venture capital and internationalization. Mannheim: ZEW. Schumpeter, J. A. (1975). Capitalism, socialism and democracy. New York: Harper Colophon. Steingold, F. S. (2006). Legal guide for starting & running a small business. US: Consolidated printers. Tobin, L. (2012). Entrepreneur: How to start up your online business. Chichester: Capstone. Vukmirović, N. (2006). Savremeno preduzetništvo. Banja Luka: Ekonomski fakultet. In Serbian. Zhang, J. (2007). The advantage of experienced start up founders in venture capital acquisition: Evidence from serial entrepreneurs. Bonn: IZA.
ULOGA POČETNOG KAPITALA U RAZVOJU SEKTORA MALIH I SREDNJIH PREDUZEĆA Rezime: Preduzetnici, kao i mala i srednja preduzeća, stalno se susreću sa problemom koji se tiče pristupa finansijskim sredstvima. Preduzetničke firme su suočene sa dva glavna problema. Prvi se odnosi na pristup finansijskim sredstvima, što predstavlja dodatno ograničenje na sposobnost date firme da poveća nivo upotrebe tehnologija u svom poslovanju. Drugi problem čini pristup potrebnom tehničkom znanju i veštinama. Predmet ovog istraživanja je uloga fondova početnog kapitala u razvoju novoosnovanih kompanija i njegova potencijalna primena u Republici Srpskoj. U zemljama engleskog govornog područja, novoosnovana preduzeća koja započinju svoje poslovanje od nule nazivaju se startap kompanijama. Izložena je pretpostavka da finansiranje početnim kapitalom može da pruži novoosnovanim kompanijama veće mogućnosti da uspeju u svojoj početnoj etapi. Poznato je da naše kompanije nabavljaju kapital putem bankarskih kredita koji su u poslednje vreme sve manje dostupni, naročito preduzećima u ranoj etapi razvoja. Stoga, kako bi kompanije dostigle svoje ciljeve i razvile svoje projekte, prinuđene su da finansiraju svoje poslove putem fondova početnog kapitala koji su voljni da investiraju u startap kompanije.
Ključne reči: početni kapital, mala i srednja preduzeća, preduzetništvo, zaposlenje, inovacija. Received: June 29, 2017 Correction: October 27, 2017 Accepted: October 31, 2017
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EJAE 2017, 14(2): 70-75 ISSN 2406-2588 UDK: 378.147::338.48(497.11) 37.033-057.875(497.11) DOI: 10.5937/ejae14-15571 Original paper/Originalni naučni rad
TALENT DEVELOPMENT AND EDUCATION IN TOURISM Slobodan Unković Singidunum University, Belgrade, Serbia
Abstract: Tourism, both international and domestic, has become one of the most important factors of social and economic development throughout the world. For that reason, quality of education in the field of tourism and strategies for talent development should be considered matters of utmost importance. In this paper, I present my views on primary, secondary and higher education in the field of tourism, as well as on education of tourist guides. I also present a brief case study of Singidunum University, as an example of good practice in higher education in the field of tourism.
Keywords: education, tourism and hospitality, higher education, secondary education, professional education.
PRIMARY EDUCATION IN TOURISM Education for the field of tourism is a part of the comprehensive education system of a country. Consequently, there are some common elements that apply to all students. This is primarily the case with eight-or nine-year primary education. It is important that measures for stimulating and preparing talent for future professional orientation should be taken at this level of education. This is particularly important for countries and tourist destinations whose development is largely dependent on tourism (Hsu, Xiao & Chen, 2017). This means that at this stage of education young people, and young talent in particular, should be prepared for inclusion in various activities that successful development of tourism in those tourist locations and/or countries depends on. The quality of tourism education at higher educational levels largely depends on the level of knowledge acquired during this first level of education (Unković, 1990). It is vital that special importance in the curricula of this educational level, in addition to standard subjects, be attached to the learning of international languages as well as elementary knowledge in the field of Information Science (Sheldon, Fesenmaier & Tribe, 2011).
SECONDARY EDUCATION IN TOURISM The three-or four-year secondary education is of particular importance for tourism. The size of the network of schools specializing in Tourism and Hospitality depends to a great extent on the importance of tourism for the economic development of a given country or a tourist location (Benckendorff 70
* E-mail: unkovic@singidunum.ac.rs
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& Zehrer, 2015). The characteristics of tourism as an economic activity, particularly with respect to the provision of accommodation, food and other areas that cater for the needs of tourists influence the demand for such job profiles. These job profiles include professions such as waiters, bartenders, chefs, pastry chefs, receptionists, masseurs in wellness centers and other professions learnt at this level of education (Inui, Wheeler, & Lankford, 2006). The quality of services in hotels, restaurants, and various organizations that provide services to tourists, depends to a large extent on the quality of these professionals. These professionals are educated in specialized secondary schools. Their curriculum needs to find the right balance between general knowledge and applied practice in school workshops, school-owned hotels and restaurants and numerous organizations in this field with which a permanent cooperation has been established. It is important for professionals at this level of education to constantly improve their knowledge and skills through the organization of brief innovation programmes. In this respect, hotel and restaurant chains have been particularly successful. This is a good opportunity for both selection and encouragement of talent to acquire new knowledge, as well as preparation for continued education at higher levels. Tourism and educational policies need to stimulate young people, especially the talented ones, to choose to learn in these educational institutions with the option of continuing and studying at a higher level (Belhassen & Caton, 2011). It is important that the curricula of these specialized secondary schools, in addition to general educational and professional subjects, should emphasise the learning of global languages at higher levels, as well as application of modern information technologies.
HIGHER EDUCATION IN TOURISM The higher education system for tourism purposes plays an important role. There is a wide network of quality vocational higher education schools and academic university schools in the field of tourism. Most of them are related to hotel management or hospitality management (Barrows & Bosselman, 1999). The area of higher education, and by extension higher education in the field of tourism, is based on the application of the so-called Bologna Declaration signed by all European countries (Munar, 2007). Pursuant to this document, all European countries are attempting to apply the principles laid down as the basis for accreditation of curricula and study programmes, as well as relevant higher education institutions that implement these programmes. A monitoring system has also been implemented at the European level, which regulates the implementation of what constitutes the basis for the application of this system in the organization of higher education. National legislation specifies the institutions responsible for the accreditation of curricula of vocational higher education schools, faculties and universities. From the standpoint of conditions required for the successful development of tourism in a given country and the creation of an appropriate network of higher education institutions, one should bear in mind the multidisciplinary nature of tourism as a business activity (Dredge & Schott, 2013). This means that there is a demand for higher-educated professionals from various scientific fields and disciplines. The demand for professionals in the fields of Economics and Management is dominant, since there is a large number of companies and organizations that participate in the provision of services to tourists, whilst applying the principles of rational economic business operation and answering to market demands. However, this also means that the following higher-educated professionals are also needed: ecologists, geographers and spatial planners, psychologists, lawyers, sociologists, financial experts, marketing and public relations specialists, different profiles of technical intelligence, especially architects, electrical engineers, information technology specialists and other profiles of experts (Sheldon & Hsu, 2015). The majority of such professionals at the higher education level are educated 71
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at the vocational higher education schools, faculties and universities in the fields mentioned. Those interested in the field of tourism may opt for specialization in the form of one-year or two-year Master’s programmes or specialist studies in educational institutions with accredited programmes for the field of tourism and hotel management at this level (60 or 120 ECTS). This indicates that they have previously completed either regular vocational or academic studies with 180 or 240 ECTS. As already mentioned, in most countries the education of tourism professionals at the vocational and academic level is implemented through special institutions which are focused on Economics and Management (Bachelor and MBA Graduate Studies). The three-year PhD studies (180 ECTS), with previously acquired 300 ECTS during academic university studies, are primarily organized as multi-disciplinary, with an emphasis on Economics, Management, Methodology of Scientific Research and Information Science. These studies can only be implemented by university institutions which satisfy the rigorous criteria for the quality of teachers with respect to their results in the field of science. At the higher education level, whether vocational or academic, the talent selection system is considered vital for the successful development of tourism at the country level, tourist destinations and companies in the tourism industry (Law & Chon, 2007). It is necessary to establish a permanent system of talent selection through educational and tourism policy. This should be realized through the granting of scholarships and various types of awards for the best participants at various international and national academic and research conferences. Talent is important not only for the successful development of the tourism industry, but also for effective measures for advancing the development of tourism at the country level and priority tourist destinations. The quality of this level of professional education for the purposes of tourism, from undergraduate studies to the acquirement of a PhD, largely depends on the institutions that make decisions on the accreditation of study programmes, educational institutions, as well as constant quality control. This applies to both state and private higher education institutions (Prebežac, Schott & Sheldon, 2014).
EDUCATION OF TOURIST GUIDES The education of tourist guides is of special significance for the successful development of tourism in a particular country. The implementation of programmes for the issuance of tourist guide licenses differs from country to country (Zagonari, 2009). Considering the importance of the quality of tourist guides, it is suggested that the competent state authority for tourism in a country cooperate with higher education institutions in the field of tourism on the preparation of a programme for tourist guides. Such programmes can be implemented within the competent state authority for tourism or the National Tourism Organization in cooperation with higher education and scientific institutions. There is no need to establish dedicated higher education institutions for the education of these profiles. The programme should last about six months and be based on a multidisciplinary principle. The final exam should be taken over several days and be realized in specific tourist destinations in the country or abroad. The admission exam for candidates with previously obtained degrees from higher education institutions should facilitate the selection of the best candidates with flawless knowledge of the global languages for which they will be licensed. This license should be issued by the competent national authority for tourism. At the same time, it is necessary to implement rigorous control of the persons performing the tasks of a tourist guide. The practice in some countries indicates that these jobs are often performed by people without a tourist guide license and the abilities required to do them. 72
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THE CASE STUDY OF SINGIDUNUM UNIVERSITY The Singidunum University in Belgrade was established 18 years ago as a private university by renowned academics and professors of state universities. The university began with the establishment of the Faculty of Financial Management and Insurance with 65 students 18 years ago. In 2017, Singidunum University enrolls approximately 9,000 students attending academic four-year studies, Master’s studies and PhD studies. It covers the following scientific fields: social sciences and humanities, engineering and natural and mathematical sciences. This was a pre-condition for obtaining the accreditation for research and academic university education. The University includes the following faculties: the Faculty of Business, the Faculty of Tourism and Hospitality Management, the Faculty of Technical Sciences, which encompasses Electrical Engineering, Engineering Management and Software Engineering, Faculty of Informatics and Computing, the Faculty of Physical Culture and Sports Management, and the Faculty of Media and Communications, which comprises Psychology and the Faculty of Applied Ecology. Teaching activities are carried out in Belgrade, as the University centre, as well as three other cities in Serbia – Novi Sad, Niš and Valjevo. The University owns high-quality teaching premises about 15,000 m2 and the latest IT equipment and other resources needed for quality teaching at all levels. Thus far, 20 programmes of undergraduate academic studies (240 ECTS), 10 Master’s study programmes (60 ECTS) and 6 PhD programmes (180 ECTS) have been accredited. There are over 350 teachers and associates in permanent employment, as well as a number of domestic and foreign visiting professors. The University has developed partnerships with over 50 foreign universities from Europe, USA, China and other parts of the world. It is also a member of a number of well-known research and professional associations, among which UNWTO is particularly prominent. Cooperation with the business sector and relevant state institutions and chambers of commerce is a regular practice at this university. There are about 500 active agreements with companies and institutions where a part of the teaching process and professional practice is implemented, which is an integral part of the realization of the curriculum. At all levels of education, lectures are held in Serbian and English. The Faculty of Tourism and Hospitality Management has been a part of Singidunum University since 2003. Each year, 300 students are enrolled in undergraduate four-year academic studies (240 ECTS), 50 students in the Master’s level programme Tourism Management (60 ECTS) and 5 students in the PhD programme Tourism Management (180 ECTS). These study programmes were accredited by the competent national institution, and the undergraduate and Master’s studies have also been accredited by the UNWTO TEdQual Certificate Programme for a number of years. On all programmes, lectures are held in the native Serbian as well as English language. Students come from all parts of Serbia, as well as countries of the former Yugoslavia. There is also a considerable number of students from other countries at the Master’s and doctoral level. It is important to note that for many years University organized an undergraduate programme in English, in cooperation with the Krems University of Austria. In addition, a joint MBA-level programme was organized together with Lincoln University from the United States. The core of curricula at all levels is within social sciences and humanities, i.e. within economics and management as fields of academic expertise. This means that this constitutes the base for acquiring knowledge in these areas as applied to tourism. At the same time, taking into account the multidisciplinary nature of tourism, the curricula also include subjects from the following disciplines: Information Science, Quantitative Methods, Methodology of Scientific Research, Psychology, Geography and Spatial Planning and History of Art and Culture. In addition, emphasis is also placed on the learning 73
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of international languages at an advanced level for four years. The English language is intensively learned for four years at an advanced level with a view to application to the field of Tourism and Hospitality. One of the requirements of the entrance exam for undergraduate studies is an advanced level of use of the English language. Only the textbooks of Oxford and Cambridge universities are used, and there is a permanent cooperation with the British Council, which is also important for obtaining special certificates. In addition to the English language, students choose at least one of the following international languages, which are learned for four years: German, French, Russian, Spanish, Italian and Chinese. During the third and fourth year of undergraduate studies, students are required to do practical work for at least six months. Most of them do this part of their training in hotels, travel agencies and national and regional tourist organizations. In addition to the teachers, the realization of this programme requires employing experts from these companies and institutions. A sizable number of students who showed good results in their studies and practical work received scholarships, and a number of graduates obtained permanent employment. This constitutes one part of the well-implemented university practice for stimulating young talent and monitoring their professional development. This practice is also applied at the master and doctoral level. All PhD students are already employed in research and educational institutions or in the business sector. A number of them are also employed as regular associates of the University and this Faculty.
REFERENCES Barrows, C. & Bosselman, R. (1999). Hospitality Management Education. Haworth, Binghamton, NY. Belhassen, Y. & Caton, K. (2011). On the need for critical pedagogy in tourism education. Tourism Management, 32 (6), 1389-1396 Benckendorff, P. & Zehrer, A. (Eds) (2015). International Handbook of Teaching and Learning in Tourism. Edward Elgar, Cheltenham. Dredge, D. & Schott, C. (2013). Academic agency and leadership in tourism higher education. Journal of Teaching in Travel & Tourism, 13 (2), 105-129 Hsu, C., Xiao, H. & Chen, N. (2017). Hospitality and tourism education research from 2005 to 2014: “Is the past a prologue to the future?” International Journal of Contemporary Hospitality Management, 29 (1), 141-160 Inui, Y., Wheeler, D. & Lankford, S. (2006). Rethinking tourism education: what should schools teach? Journal of Hospitality, Leisure, Sport & Tourism Education, 5 (2), 25-35 Law, R. & Chon, K. (2007). Evaluating research performance in tourism and hospitality. Tourism Management. 28 (5), 1203-1211 Munar, A. (2007). Is the Bologna process globalizing tourism education? Journal of Hospitality, Leisure, Sport & Tourism Education. 6 (2), 68-82 Prebežac, D., Schott, C. & Sheldon, P. (2014). The Tourism Education Futures Initiative. Routledge, Milton Park Sheldon, P. & Hsu, C. (Eds) (2015). Tourism Education: Global Issues and Trends. Emerald, Bingley Sheldon, P., Fesenmaier, D. & Tribe, J. (2011). The Tourism Education Futures Initiative (TEFI): activating change in tourism education. Journal of Teaching in Travel & Tourism. 11 (1), 2-23 Unković, S. (1990). Yugoslav Universities and Inter‐University International Co‐Operation. Higher Education in Europe. 15 (1), 8-11 Zagonari, F. (2009). Balancing tourism education and training. International Journal of Hospitality Management. 28 (1), 2-9
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RAZVOJ TALENATA I OBRAZOVNI SISTEM U OBLASTI TURIZMA Rezime: I međunarodni i domaći turizam su postali jedan od najvažnijih faktora društvenog i privrednog razvoja u svetu. Iz tog razloga, kvalitetno obrazovanje u oblasti turizma, kao i unapređenje strategija za razvoj talenata trebalo bi da se smatraju pitanjima od najveće važnosti. U ovom radu izlažem svoj stav po pitanju osnovnog, srednjeg i visokog obrazovanja u oblasti turizma, kao i obrazovanja turističkih vodiča. Takođe ću predstaviti kratku studiju slučaja Univerziteta Singidunum, kao primera dobre prakse u visokom obrazovanju u oblasti turizma.
Ključne reči: obrazovanje, turizam i hotelijerstvo, visoko obrazovanje, srednje obrazovanje, stručno obrazovanje. Received: November 3, 2017 Correction: / Accepted: November 4, 2017
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CIP - Каталогизација у публикацији Народна библиотека Србије, Београд 33 The EUROPEAN Journal of Applied Economics / editor-in-chief Nemanja Stanišić. Vol. 12, No. 1 (2015)- . - Belgrade : Singidunum University, 2015- (Loznica : Mobid). - 28 cm Dva puta godišnje. - Је наставак: Singidunum Journal of Applied Sciences = ISSN 2217-8090 ISSN 2406-2588 = The European Journal of Applied Economics COBISS.SR-ID 214758924