Economic Performance [1 ed.] 9781613248188, 9781613247020

Citation preview

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook Central,

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

ECONOMIC PERFORMANCE

No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES Additional books in this series can be found on Nova‟s website under the Series tab.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Additional E-books in this series can be found on Nova‟s website under the E-books tab.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

ECONOMIC PERFORMANCE

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

RICHARD K. BENSON EDITOR

Nova Science Publishers, Inc. New York Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2012 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com

NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers‟ use of, or reliance upon, this material. Any parts of this book based on government reports are so indicated and copyright is claimed for those parts to the extent applicable to compilations of such works.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. Additional color graphics may be available in the e-book version of this book.

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Economic performance / editors, Richard K. Benson. p. cm. Includes index. ISBN 978-1-61324-818-8 (eBook) 1. European Union countries--Economic conditions. 2. Developing countries--Economic conditions. I. Benson, Richard K. HC240.E2753 2011 330--dc23 2011016746

Published by Nova Science Publishers, Inc. † New York Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

CONTENTS Preface

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

vii The Adjustment Capacity of the European Economy Examined with an Input-Output Based Key Sector Analysis José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado Social Preference, Financial and Economic Performance of Local Authorities Asher Vaturi An Evaluation of the ECB Policy Response to Changing Economic Conditions in Euro Area Member States Jim Lee and Patrick M. Crowley Environmental Management Accounting to Support Economic and Environment Improvement in a Made-to-Order Production Anna Mazzi, Enrico Confente and Antonio Scipioni World Economic Crisis of 2008 and its Impact on Housing Development and Livelihoods of the Poor: An Account for Urban Space Use in Sub-Saharan Africa Cities W. Magigi, A. Mbeiyererwa and F. Bee

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

1

45

77

111

131

vi Chapter 6

Chapter 7

Contents Transport and Economic Performance: A VES Production Function Approach for the Case of Mauritius Boopen Seetanah The Effect of Information on the Performance of Negotiation Models Luca Barzanti and Marcello Mastroleo

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Index

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

149

167 207

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

PREFACE In this book, the authors present current research from across the globe in the study of economic performance. Topics discussed include systematic monitoring of the functioning of key goods and services markets; the links between internal migration and financial performance of local authorities; an evaluation of the ECB policy response to changing economic conditions in Euro area member states; environmental management accounting to support economic and environmental improvement; the world economic crisis of 2008 and its impact on housing development in sub-Saharan Africa and transportation as an integrative part of market growth economies. Chapter 1 - The Single Market is a pillar of the European Union (EU) and has been essential in the last twenty-five years for the smooth functioning of Europe's economic and monetary policies. Besides, it is also the heart of a range of EU policies such as the Lisbon Strategy on growth and jobs. Despite these achievements, the Single Market still has untapped potential and needs to adapt to new realities. Subsequently, the European Commission set out its reviewed vision for the 21st century Single Market providing a response to the challenges of globalisation. As part of this report, the Commission's services developed a new approach for a more systematic monitoring of the functioning of key goods and services markets, which was presented at the informal European Council in October 2007. Within this context, this paper screens all the industries of the European economy to identify those key markets and sectors that are most important for growth and adjustment in the EU in terms of production, employment and income. It contributes to the literature by making a sensitivity analysis of the backward and forward impact indicators to identify the key sectors and eventually provides results for the EU as a whole

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

viii

Richard K. Benson

and for individual countries for selected sectors: chemicals, fabrication of motor vehicles, food industry, construction work and pulp and paper industry. Chapter 2 - Social and economic transition of people, goods, and services constantly appears within metropolitan areas. It's also appears between the metropolitan center and peripheral localities (Blair, 1995; Wegener, 1995; Lucas, 2001; Storperand & Manville, 2006). The migration of residents and businesses affects both the „migrant-exporting‟ and „migrant-importing‟ municipalities. In many cases, intra-metropolitan migration flows from urban centers to suburbs and has a detrimental effect on the financial sustainability of central municipalities through the erosion of their tax base (Katz, 2000; Vaturi et al, 2004). Chapter 3 - This paper empirically investigates the extent to which the European Central Bank has responded to evolving economic conditions in its member states as opposed to the euro area as a whole. Based on a forwardlooking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behavior of the ECB with the alternative hypothetical scenarios (1) were the euro member states to make individual policy decisions, and (2) were the ECB to respond to the economic conditions of individual members. The results reflect the extent of heterogeneity among the national economies in the monetary union, indicating that the ECB's monetary policy rates have been particularly close to the “counterfactual” interest rates of its largest euro members, as well as countries with similar economic conditions, which includes Germany, Austria, Belgium and France. Chapter 4 - Environmental Management Accounting (EMA) is a methodology to help organisations identify and quantify the environmental costs of their production processes and analyse the economic benefits that result from improving their environmental performance. To do this, EMA uses appropriate accounting systems that translate the environmental impacts of industrial activity into monetary terms. The international scientific community unanimously agrees that EMA is a powerful tool to improve the environmental and economic performances of organisations, and the literature review verifies that EMA is a valid tool that improves decision making and budgeting, which results in comprehensive information and direction about the significant economic costs that are due to the environmental aspects/impacts of the organisation. However, to date, studies have only applied EMA to companies that mass produce. EMA has not been validated for companies where production is made to order.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Preface

ix

This study investigated the applicability and validity of using the EMA methodology for companies where production is made to order. To this end, we present the research conducted in 2009 by the Environmental Quality Research Centre at the University of Padua in collaboration with an Italian manufacturing company that allowed the EMA methodology, with the necessary assumptions and amendments, to be applied to its made-to-order production. From the case study, this article highlights the potential use and limitations of applying EMA in a made-to-order production company, confirming that EMA is able to identify and quantify the environmental cost and support management in decision making regarding environmental and economic performance improvements. This article also distinguishes the similarities and differences between the chosen case study and other case studies from literature that have studied companies that mass produce, i.e., comparing the methodology followed, results, validity and limitations of the results. Chapter 5 - The World Economic Crisis of 2008 appears to affect urban development systems and growth in Sub-Saharan African Cities. Particular contribution in this paper focuses on documenting physical development system in urban space in view to housing construction, changes in housing rent, space use and life style changes resulted from the crisis. This paper highlights also the housing construction habit, changes of price for building materials and urban space restoration needs in Moshi Municipality-Tanzania, one of the rapidly developing cities in Southern of Sub-Saharan African region. The question is what a take home message to be learned by different actors in urban development and growth systems for sustainable housing development and governance systems within the world economic crisis occurrence at present and in future by having fact on past implications of the crisis. Likely, roles of different actors, impacts of the crisis and country investment policy reflections are discussed, which pave the way for highlight viable strategic options for improvement in countries with unstable economy in Sub-Saharan Africa Regions, Tanzania inclusively. Chapter 6 - This study employs a VES functional form of the production function to capture both the direct and indirect effects from transport capital on growth for the small island economy case of Mauritius. Results from the analysis yield a positive contribution of such type of capital. Further analysis based on marginal productivities of inputs tend to suggest that there exists complementarity between transport capital and private capital and thus suggests that they impact on aggregate output indirectly as well. Same is observed with the total level of public capital.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

x

Richard K. Benson

Chapter 7 - Negotiation is an every day task in economic processes; ranging form corporations to markets, from agents to nations, always there is the need to mediate between conflicting intents or expectations. Therefore, in the scientific literature and in practice, several negotiation procedures have been developed, each one elaborated to perform in a specific context and under particular assumptions, as, for example, voting systems, auction and fair division mechanisms, negotiation protocols, and so on. All these may seem disjoined from each other, as their contexts are; nevertheless they all share the same assumption that each subject pursues his own best utility. Moreover, despite their specialization, they all have some problems in practical use like, for example, the presence of a dictator, the lackof truthfulness, or the possibility of being manipulated by fictitious declarations. In this contribution we focus on the negotiation over continuous issues and in particular we analyze the jointly Improving Direction Method (IDM), which is known for its generality, since different other negotiation protocols can be seen as an its particular subclass, and also because it has the nice theoretical property of being Pareto efficient. Nevertheless it is easy to implement, which makes IDM the perfect candidate for an automated negotiation support system. Despite its theoretical properties, we show the practical inefficiency of this method (even in the simple case of just two negotiating parties), which reduces significantly its performance in the operative context. In particular we show that the main drawback of IDM is due to the possibility to retrieve information about other ones utilities during the negotiation steps and to exploit it to manipulate the negotiation itself. For better explaining this phenomenon we show the deep connection between negotiation and the social choice problem. The bridge we build allows to carry in this context the Arrow‟s Impossibility Theorem and the Gibbard–Satterthwaite Theorem, thus implying that each step of IDM (and of all the methods which it generalizes) may be affected by a dictatorial or a manipulatory party who can deviate the efficient Pareto frontier to get a better gain during the negotiation. In order to avoid the operative inefficiency of IDM, we propose a different negotiation paradigm, where the hypothesis that agents maximize their own utility is not modified, while the way they pursuit maximum satisfaction is substantially different, since each agent has to express a sub optimal choice, rather than his optimal one. In this context, the constraint of a sub optimal declaration by one side protects from information retrieval and by the other side it forces each party to leave to the others the possibility to improve their own gains in order to pursue his own best. The comparison of the performances with the IDM ones in different negotiation

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Preface

xi

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

domains, both in terms of Pareto efficiency and manipulation resistance, shows the effectiveness of the proposed approach.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 1

THE ADJUSTMENT CAPACITY OF THE EUROPEAN ECONOMY EXAMINED WITH AN INPUT-OUTPUT BASED KEY SECTOR ANALYSIS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

José M. Rueda-Cantuche1, Frederik Neuwahl2 and Luis Delgado2 1

European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS) and Pablo de Olavide University at Seville 2 European Commission, Joint Research Centre, Institute for Prospective Technological Studies (IPTS)

ABSTRACT The Single Market is a pillar of the European Union (EU) and has been essential in the last twenty-five years for the smooth functioning of Europe's economic and monetary policies. Besides, it is also the heart of a range of EU policies such as the Lisbon Strategy on growth and jobs. Despite these achievements, the Single Market still has untapped potential and needs to adapt to new realities. Subsequently, the European 

E-mail address: [email protected]

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

2

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado Commission set out its reviewed vision for the 21st century Single Market providing a response to the challenges of globalisation. As part of this report, the Commission's services developed a new approach for a more systematic monitoring of the functioning of key goods and services markets, which was presented at the informal European Council in October 2007. Within this context, this paper screens all the industries of the European economy to identify those key markets and sectors that are most important for growth and adjustment in the EU in terms of production, employment and income. It contributes to the literature by making a sensitivity analysis of the backward and forward impact indicators to identify the key sectors and eventually provides results for the EU as a whole and for individual countries for selected sectors: chemicals, fabrication of motor vehicles, food industry, construction work and pulp and paper industry. Keywords: Single Market, Input-output analysis, Key sector analysis, European Union.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

JEL Codes: C67; O52.

1. BACKGROUND The Single Market (EC, 2007a) is a pillar of the European Union (EU). It has turned the free movement of people, goods, services and capital into a tangible reality, delivering real benefits for Europeans. The single market has been essential for the smooth functioning of Europe‟s economic and monetary policies and served as a strong base for the launch of the Euro. The enlarged single market has made Europe more open, more diverse and more competitive -creating new opportunities, respecting social rights, and promoting high standards for health, safety and the environment. Besides, the single market is at the heart of a range of EU policies such as the Economic Monetary Union and the Lisbon Strategy on growth and jobs. Despite these achievements, the single market still has untapped potential and needs to adapt to new realities. In February 2007, the Commission set out its vision for the 21st century single market: a strong, innovative and competitive market, which maximises the potential of services, directly benefits consumers and entrepreneurs and positions Europe to better respond to and shape globalisation. Also, now that the EU has become bigger and more

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The Adjustment Capacity of the European Economy …

3

diverse the single market needs to: (a) deliver more results for citizens, consumers and small and medium enterprises; (b) take better advantage of globalisation; (c) open new frontiers of knowledge and innovation; and (d) encompass a strong social and environmental dimension. All of this calls for new working methods and the use of a diverse set of instruments. Efforts have focused on removing cross border barriers, mainly through legal measures. Efforts should now be made to develop a more varied set of tools and a more impact-driven approach: making markets deliver more effectively in areas which will bring the best return for consumers, growth and job creation. To that purpose, the Review sets out a new approach to the single market. It does not include a classic legislative action programme but rather fostering flexibility and adaptability while maintaining the legal and regulatory certainty necessary to preserve a well-functioning single market. This new approach is described in the documents on market monitoring, single market instruments and trade instruments which accompany the Review (EC, 2007a). Along with other related documents including a summary of achievements of the single market, they represent an important part of the Commission's response to the challenges of globalisation “The European interest - succeeding in an era of globalization” (EC, 2007b) which was presented at the informal European Council in October 2007. As part of these documents, the Commission's services have developed a methodology for a more systematic monitoring of the functioning of key goods and services markets. The first stage of this methodology consisted in screening sectors offering the greatest potential benefits in terms of growth, job creation and consumer welfare. In the second stage, selected sectors will be examined in more detail in order to determine why markets are functioning poorly (lack of openness/integration, lack of choice and transparency for consumers, low degree of competition, poor regulatory environment and lack of innovation). This will give crucial insights to address the specific challenges faced in the sector(s) concerned. The Commission intends to work closely with national authorities to develop this new approach. A staff working paper (EC, 2007c) was presented alongside the Review (EC, 2007a) to present the first findings of the first stage, which are based on the recent methodology published in the “Guiding principles for product and market monitoring” (EC, 2007d). The screening and analysis carried out allowed to: (a) identify markets and sectors which are important for growth and adjustment in the EU; (b) identify the existence of market malfunctioning within the Internal Market; and (c) offer some insights into the causes of markets malfunctioning. The sector screening could contribute to improve

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

efficiency and consistency in the future design of horizontal policy instruments and help address Single Market problems affecting the EU. In the staff working paper (EC, 2007c), all sectors of the economy were screened on the basis of their economic importance, their contribution to the adjustment capacity of the EU and signs of market malfunctioning. Within this context, the JRC/IPTS and the European Commission's Directorate General for Economic and Financial Affairs (DG ECFIN) have cooperated closely in the screening of the most important sectors in each of the individual euro area and EU27 Member States by means of input-output analysis in order to assess the challenges for market based economic adjustment in the framework of the European Monetary Union and the European Union. The Communication „A Single Market for the 21st century Europe‟ (EC, 2007a) and to the accompanying Commission Staff working document “Implementation of the new methodology for product market and sector monitoring” have drawn extensively on the work carried out by JRC/IPTS on behalf of DG ECFIN on the identification of the sectors that most contribute to the adjustment capacity of the EU economy. The work of the JRC/IPTS on methodology development and the results obtained are explicitly reflected in many places of the latter document (cf. pages 12 to 18 in EC, 2007c) and in the Communication. Eventually, the complete analysis, initiated as a policy support study, was subsequently generalised and extended into this paper.

2. LAYOUT, DATA AND METHODS This paper identifies the sectors that most contribute to the adjustment capacity of the EU economy, regarding the supply of essential inputs to the rest of the economy. The objective is to assess the extent to which the functioning of markets is sufficiently flexible to allow an endogenous and smooth adjustment to changing economic conditions (EC, 2007c). This is done on the basis of a key sector analysis by using interlinkages of sectors with the rest of the economy, since the stronger these linkages, the more important are the repercussions of the performance of the sector on the rest of the economy. Complementarily, the EC (2007c) also includes in the study an analysis of (a) the contribution of the sectors to the development, absorption and diffusion of new technologies, as this helps to promote greater economic efficiency and competitiveness; and (b) the contribution of the sectors to price adjustment, as price stickiness hampers the reallocation of resources across activities and

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The Adjustment Capacity of the European Economy …

5

reduces the pass through of cost reductions to consumers. Nonetheless, the discussion of the latter two issues would go beyond this paper and therefore it is not included. The identification of key sectors can be addressed from the demand side, the supply side or from both angles. From the demand side, we can identify those sectors for which a one-unit increase in the final demand of their primary outputs would drive other sectors either in terms of total output, employment or income, by increasing their corresponding intermediate inputs, i.e.: backward oriented sectors. The analysis from the supply side reveals those sectors providing the inputs supplied to other sectors as a result of one-unit increase in their gross value added or, generally speaking, gross domestic product, i.e.: forward oriented sectors. The identification of key sectors is a well-known subject in the literature* and it can be addressed with input-output analysis using a single symmetric input-output table† (SIOT). The JRC/IPTS has recently estimated a SIOT of the EU27 for the year 2000 (Rueda-Cantuche et al., 2009), which is adequate to apply standard input-output analysis with that purpose. By taking the two impact multipliers together, the key sectors can be identified as those with highest backward and forward multipliers. To this purpose, the analysis will be developed for output, employment and income multipliers. All primary data is from Eurostat (Eurostat, 2010); further estimations, where necessary, were developed by JRC/IPTS‡. The analysis is made at a fairly aggregated level, at the two-digit level of the NACE industrial classification. However, the key sector analysis is not a straightforward task. Firstly, the analysis shall account for domestic intermediate uses. Otherwise, policyoriented impacts in final demand may lead to output growth in the exporting countries rather than in domestic industries. Secondly, forward and backward multipliers shall be weighted according to gross value added and final demand *

The key sector analysis has prompted out a huge literature. To mention some examples: Beyers (1976), Bon (1986), Cella (1984), Chenery and Watanabe (1958), Dietzenbacher (1997, 2002), Ghosh (1958), Hazari (1970), Hirschman (1958), Jones (1976), Laumas (1975, 1976), McGilvray (1977), Oosterhaven (1988, 1989), Oosterhaven and Stelder (2002), Rasmussen (1956) and Sonis, Hewings and Guo (2000). † For simplicity, we will use “sectors” throughout the document albeit the EU27 SIOT is on a product by product basis. Roughly speaking, results would not be significantly different as long as the amount of secondary outputs was not comparable to the primary outputs. ‡ Since the main interest of this paper relies on the Single Market Review, the discussion hereafter will be focused on primarily market based sectors. That is, all industries except the primary sectors and mining (1 to 8); real estate (47); public administration and defence (52); education (53); and health and social work (54). This distinction is taken from the EUKLEMS consortium: www.euklems.net.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

6

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

shares of sectors, respectively, in order to discriminate against sectors that are too small, in the EU, to ever have any relevance on macroeconomic observations. Finally, one should take into consideration that the total effects on the whole system as a result of variations in the final demand of a product might be spread throughout many sectors or just be concentrated on a single one. In addition, it might be interesting to account for the shares of intermediate uses over both the total intermediate inputs and the total intermediate outputs. Their average would serve as a measure of the direct relationship between buying and supplying sectors. Accordingly, this report will map the production networks of the EU economy on the basis of the aggregate symmetric input-output table for 2000, and thus providing the main direct sectoral interlinkages within the EU. In the next section, we present a brief description of the EU economy in terms of output, income and employment; Section 4 maps the production networks on the basis of direct linkages while Section 5 introduces the key sector analysis and identifies the sectors that most contribute to the adjustment capacity of the EU economy through total linkages. Subsequently (Section 6), we compare the results taking into account their contribution to output, employment and income and made a sensitivity analysis (Section 7) to check the robustness of the results. There, the threshold used to identify key sectors (average vs. median) together with the choice of either including or excluding from the analysis the corresponding main diagonals of each matrix of backward and forward linkages will be discussed. In Section 8, we have selected five key sectors considered with the greatest environmental impact (JRC/IPTS and ESTO, 2006) and we explore where in Europe these sectors are so crucial in terms of growth, income and jobs. Finally, Section 9 concludes. The formal aspects of the methodology used are reported in the Appendix.

3. DESCRIPTIVE ANALYSIS Figure 1 shows six of the top eight sectors in terms of output, gross value added and employment in the EU for the year 2000. Public administration and health and social work would complete the list but they are not considered here since they are not primarily market based sectors. Percentages stand for the shares of output, gross value added or employment over their totals in the whole economy.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

7

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

As shown in Figure 1, construction work and other business services (i.e. accounting and law activity services, engineering and architecture technical services, marketing services, among others) represent each one nearly 7% of total output, followed by wholesale trade and the food manufacturing industry with 4.6% and 4.2%, respectively. In terms of gross value added, other business services goes up to 8.5% while construction work and wholesale trade only reach 5.7% and 5.2%, respectively. As for employment, construction work represents 7.6%, followed by wholesale and retail trade services with 6.1% and 5.6%, respectively.

4. MAPPING DIRECT LINKAGES Figure 2 depicts the main links of the production structure network in the EU for the year 2000. By taking the average of the shares of intermediate uses over the total intermediate inputs and over the total intermediate outputs, a flow index was defined in order to measure the degree of direct relationship between sectors (see the Appendix for a formal definition).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

8

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

For instance, on the one hand 71.32% of total intermediate outputs of agriculture are delivered to the food industry while 33.19% of total intermediate inputs of the food industry correspond to agricultural products. Then, this would yield a flow index given by the average of the two latter figures, i.e. 52.26% (0.5226). On the other hand, 18.78% of total intermediate outputs of food products (mainly animal feed) are conveyed to the agriculture sector whilst 10.21% of total intermediate inputs of agricultural activities correspond to products supplied by the food industry. Hence, the average would be 14.49% (0.1449) in this case. The relationships depicted in Figure 2 cover around 45% of the total intermediate transactions. They represent average of the shares greater or equal to 0.1 in all cases. The following considerations might be drawn from Figure 2: a) The whole production network is pivoting on the construction work activities, wholesale trade and other business services, which are three of the most important sectors in terms of total gross value added, output and employment (see Figure 1). b) Other business services is highly forward interrelated with computer services; sewage and refuse disposal, sanitation and similar activities; wholesale trade; the manufacture of tobacco products; insurance; and real estate activities. c) Supporting and auxiliary transport activities (including travel agencies) are also highly forward interrelated with land, water and air transport activities; and wholesale trade. d) Construction work is highly backward interrelated with the manufacture of wood, products of wood and cork; fabricated metal products; other non-metallic mineral products (quite strong); electrical machinery and apparatuses; and other mining and quarrying. e) Land transport activities are also highly backward interrelated with the manufacture of refined petroleum products§; the sale, maintenance and repair of motor vehicles and motorcycles, and retail sale services of automotive fuel; and auxiliary transport activities.

§

Sector 17 actually includes also the manufacture of coke and nuclear fuels; the interpretation of the link is however evident.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

9

7.- Metal ores 7.- Metal ores

31.- Recycling 31.- Recycling

0.3527 0.3527

0.3601 0.3601 0.1089 0.1089

21.- Basic metals 21.- Basic metals

From 0.25 to 0.35 From 0.25 to 0.35 From 0.35 to 0.55 From 0.35 to 0.55

0.2523 0.2523 0.1563 22.-Fab. metals 0.1563 22.-Fab. metals

23.- Mch & Eq 23.- Mch & Eq

0.1228 0.1228 0.1634 14.- Wood & 0.1634 14.- Wood Cork& Cork

0.3215 0.3215

2.- Forestry 2.- Forestry

34.- Construct 34.- Construct 0.252 0.252

0.1982 0.1982 0.1253 0.1253

30.- Furniture 30.- Furniture

37.- Retailers 37.- Retailers 16.- Editing 16.-and Editing printing and printing

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

5.- Crude and 5.-natural Crude and gas natural gas

0.1995 0.1766 0.1995 0.1766 8.- Other 8.- Other mining mining

0.1641 0.1641

0.1874 0.1874

0.3592 0.3592 32.- Electricity 32.- Electricity 0.1697 0.1697

20.- Other non 20.- Other non metallic metallic

0.1114 0.1114 25.- Electrical 25.- Electrical machinery machinery

47.- Real Est 47.- Real Est

15.- Pulp and 15.- Pulp paperand paper

4.- Coal mining 4.- Coal mining

0.3584 0.3584

0.1227 0.1227

51.- Other 51.-business Other serv business serv 0.1565 57.- Recreat. 0.1565 57.-cult Recreat. & sport cult & sport 0.1078 0.1078 55.- Sewage 0.1535 55.- Sewage 0.1535

0.1026 0.1026

0.1475 0.1475

0.1274 0.1274

46.- Auxiliary 46.-financial Auxiliaryserv financial serv

0.155 0.155 44.- Finance 44.- Finance 0.151 0.151

0.1075 0.1075 10.- Tobacco 10.- Tobacco

49.- Computer 49.- Computer services services

0.1298 0.1298

0.5183 0.1223 0.5226 0.5183 0.1223 0.5226 17.- Petroleum 0.1223 9.Food 17.- Petroleum refining 0.1223 9.- Food refining 39.- Land 36.- Wholesale 39.- Land 36.- Wholesale transport trade 0.1106 0.3414 transport trade 0.4041 0.1106 0.3414 0.4041 6.- Uranium 38.- Hotels & 0.1009 0.1077 6.- Uranium 38.-Restaurants Hotels & 0.1516 0.1009 0.1077 Restaurants 0.1516 35.- Sales of 42.- Auxiliary 35.Sales offuel vehicles, 42.Auxiliaryserv transport 0.1351 vehicles, fuel 0.1388 transport serv 0.1351 0.1388 28.- Motor 0.2363 0.1746 40.- Water 28.- Motor 0.2363 vehicles 0.1041 0.1746 40.- Water transport vehicles 0.1041 transport 19.- Rubber 41.- Air 19.-and Rubber 41.- Air plastics transport 0.1066 and plastics transport 0.1066 18.- Chemicals 18.- Chemicals

0.2336 0.2336

0.1047 0.1047

29.- Other 29.Other eq. transport transport eq.

0.1123 0.1123 27.- Medical 27.- instruments Medical instruments

54.- Health & 54.Health social work& 0.1686 social work 0.1686

0.2832 0.2832

45.- Insurance 45.- Insurance

0.1167 0.1167 52.- Public 52.Public Administration Administration

59.- Private 59.-households Private households

0.112 0.112

1.- Agriculture 1.- Agriculture 0.1449 0.1449 0.3065 0.3065 3.- Fishing 3.- Fishing 0.1527 0.1527 11.- Textiles 11.- Textiles 0.3681 0.3681

12.- Clothing 12.- Clothing 26.- Radio, 26.-TVRadio, equipm. TV equipm. 0.1147 0.1147 24.- Office mch. 24.-& Office mch. computers & computers

  Figure 2. Mapping direct relationships in the EU (2000). Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

10

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

f) The manufacture of food products and beverages presents a quite strong interrelationship with agriculture and fishing (backward oriented) and with agriculture and hotel and restaurant services (forward oriented). g) The manufacture of basic metals shows strong direct (backward) linkages with recycling and mining of metal ores as well as relevant direct (forward) effects on the manufacture of fabricated metal products. h) The strongest linkages are found in: h.1) Energy sectors, i.e. uranium and crude and natural gas providing inputs to the petroleum refining and nuclear fuels sector; and coal mining supplying inputs to the electricity, gas, steam and hot water sector. h.2) Food industry and related services, i.e. agriculture and fishing providing inputs to the food industry; and food industry supplying inputs to hotels and restaurants. h.3) Textiles and clothing, i.e. the manufacture of textiles providing inputs to the manufacture of wearing apparel; dressing and dyeing of fur. h.4) Metallurgy, i.e. mining of metal ores and recycling providing inputs to the manufacture of basic metals; and metallurgy supplying inputs to the manufacture of fabricated metal products. h.5) Construction work and related services, i.e. the manufacture of other non-metallic mineral products providing inputs to construction activities; and construction supplying inputs to real estate activities. For ease of visualisation, in Figure 2 different colours have been assigned to different clusters of related sectors, which might be seen as crucial sector clusters in the economy. The denomination of the clusters will refer to each pivotal sector and does not imply any omission of other related activities within the cluster. These are the following**: a) Manufacture of basic metals and fabricated metal products; b) Construction work; c) Retail trade; d) Pulp, paper and paper products; editing; e) Other business services; f) Finance and insurance; g) Food industry; hotels and restaurants; h) Wholesale trade; i) Land transport; j) Energy; k) Chemicals; motor vehicles; l) Auxiliary transport activities; m) Textiles and clothing; n) Office machinery and computers. Figure 3 summarizes the interrelationships between the clusters.

**

Notice that forestry and health and social work clusters are not included since they are not primarily market based sectors. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

Manufacture of basic metals and fabricated metal products

Construction work

Retail trade

Finance and Insurance Pulp, paper and paper products; Editing

Other business services Food industry; Hotels and Restaurants

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Land transport

Auxiliary transport activities

Wholesale trade

Chemicals; Motor vehicles

Energy

Textiles and clothing

Office machinery and computers

Figure 3. Mapping direct relationships in the EU (2000) – Summary.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

11

12

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

5. KEY SECTOR ANALYSIS The activity of a particular sector has two kinds of economic effects on other sectors in the economy: the so-called demand and supply driven effects (see for instance: Miller and Blair, 2009). If the electricity sector increases its output, then there will be increased demand from electrical power stations (as purchasers) on the sectors whose products are used as inputs to produce electricity (e.g. coal, crude petroleum or natural gas). These demand driven effects are captured in standard input-output models or demand-side models by the backward multipliers, which indicate the interconnection of a particular sector to those sectors from which it purchases inputs. On the other hand, increased output in the electricity sector also means additional amounts of electricity available to be used as input to other sectors for their own production. That is, there will be increased supplies from the electricity sector (as a seller) to the sectors which use electricity in their production. The impact of the increased supply is captured by the supply-side model, which relates gross value added to total output by means of the socalled forward multipliers. This term is used to indicate the interrelationship of a particular sector with those sectors to which it sells its outputs and it is usually interpreted as a meaningful indicator of production only for those sectors where there is shortage of supply††. Key sectors in an economy are identified by comparing the magnitude of their backward and forward multipliers, scaled by the overall prominence of the sector in the economy (see considerations on the weighting of sectors). If the backward multiplier of the manufacture of chemicals and chemical products is larger than that of the manufacture of rubber and plastics, one might conclude that an euro worth of expansion of the former sector output would be more beneficial to the economy than would an equal expansion in the latter sector's, in terms of generating more productive activity throughout the economy. Similarly, if the forward multiplier of wholesale trade is larger than that of insurance services, it could be said that a euro worth of expansion of the output of wholesalers has a higher impact on the overall productive activity than a similar expansion in the output of insurers. The rationale to identify key sectors is that the greater a sector's interlinkages of the EU economy, the greater the need to ensure that markets in that sector are functioning well and the greater returns of policy intervention to remedy ††

Forward multipliers can also be interpreted in terms of unitary price changes by means of input-output analysis. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

13

possible problems in the Single Market. Nevertheless, policy decisions addressing specific sectors based on their impact on the whole economy cannot be taken on the basis of one single criterion and/or approach; other factors, such as for instance production capacities, may play a relevant role in total effects. Table 1. Identification of key sectors

Spread

Concentrated

Backward oriented

Key sectors but with Key sectors Backward oriented sectors backward without widely without widely spread effects spread effects effects concentrated

No relevant backward effects

No relevant backward effects

Concentrated

Spread

Concentrated

Concentrated

Spread

No relevant No relevant forward forward effects effects

Spread

Forward oriented

Key sectors but Key sectors with forward Backward oriented sectors with widely effects with widely spread effects spread effects concentrated

Backward oriented

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Forward oriented

Forward Forward oriented oriented sectors with sectors without widely spread widely spread effects effects

Weakly linked sectors

The measures of backward and forward multipliers presented here include both direct and indirect connections between sectors, which differs from the last section where we addressed only direct relationships. By taking the two impact multipliers together, the key sectors shall be identified as those with highest backward and forward multipliers. To this purpose, the analysis will be developed for output, employment and income.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

14

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

However, the key sector analysis is not a straightforward task. Firstly, the analysis shall account for domestic intermediate uses because otherwise total estimated effects might be found to be transferred outside the EU through intermediate imports. Secondly, forward and backward multipliers shall be weighted according to gross value added and final demand shares of sectors, respectively. The purpose is to avoid giving the same importance to every sector independently of their relevance in terms of gross value added (for forward effects) and final demand (for backward effects). Finally, one should take into consideration that the total effects on the whole system as a result of variations in the final demand of a product might be spread throughout many sectors or just be concentrated on a single one. In this sense, different implications may in fact arise if a sector channels its external effects to a wide variety of other producing industries or essentially to a single one. For instance, if the building industry crashes it will bring down all those services sectors that depend exclusively on building and real estate; an industry that serves more diverse customers is better able to come out relatively unaffected from a sectoral crisis. To recap, we will identify key sectors according to the typology shown in Table 1.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Output multipliers Table 2 shows the results regarding output multipliers. To simplify the visualisation, numbers have been assigned to each sector following the NACE scheme (see the Appendix for detail). From the multipliers analysis described above, the following sectors emerge by all parameters as key sectors in the European economy for the year 2000: a) Manufacture of chemicals and chemical products (18) b) Construction (34) c) Wholesale trade and commission trade, except of motor vehicles and motorcycles (36) d) Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods (37) e) Real estate activities (47) f) Recreational, cultural and sporting activities (57) In particular, the forward effects of key sectors are not spread throughout the economy whilst their backward impacts can be more or less spread. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

15

Notice also that those sectors with relevant spread forward effects on output are mainly related to energy inputs, certain manufacturing industries, transport, telecommunications, and financial, renting, and computer services; and those with important spread backward impacts consists of the food industry, the manufacture of machinery and equipment, the manufacturing, sale, maintenance and repairing of motor vehicles, hotels and restaurants and insurance services.

Backward oriented

Spread

Backward oriented

Concentrated

No relevant backward effects

Spread

No relevant backward effects

Concentrated

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table 2. Key sectors in terms of outputs Forward oriented

Forward oriented

No relevant forward effects

No relevant forward effects

Spread

Concentrated

Spread

Concentrated

18, 34, 36

9, 23, 28, 35, 38, 45

37, 57

14, 15, 16, 19, 21, 22, 31, 32, 39, 42, 43, 44, 46, 48, 49

20, 51

10, 11, 12, 13, 17, 24, 25, 26, 27, 29, 30, 33, 40, 41, 50, 55, 56, 58, 59

Source: own elaboration.

The manufacture of other non-metallic mineral products as well as other business activities do not have relevant backward effects while having a prominent role in terms of forward output effects, albeit not so spread.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

16

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

Employment multipliers Table 3 depicts results for employment multipliers, with sector numbering in accordance with the NACE classification (see Appendix). In this case, the following sectors emerge as key sectors (although the effects are not very spread) in terms of employment: a) Construction (34) b) Sale, maintenance and repair of motor vehicles and motorcycles; retail sale services of automotive fuel (35) c) Wholesale trade and commission trade, except of motor vehicles and motorcycles (36) d) Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods (37) e) Hotels and restaurants (38) f) Recreation, cultural and sporting activities (57)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Generally speaking, construction activities, trade and hotel and restaurant services emerge as key sectors regarding employment impacts. It emerges from this analysis that energy sectors have no significant effects on employment in contrast with certain manufacturing activities (pulp and paper (15), chemicals (18), fabricated metal products and publishing and editing (22)); telecommunications; land transport and related supporting and auxiliary transport services; and other business services such as renting, computer services and finance, which have relevant forward effects on employment. Concerning backward impacts, the food industry; the manufacture of machinery and equipment and the manufacturing of motor vehicles emerged again with spread relevant employment impacts, in this case along with real estate activities.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

17

Backward oriented

Spread

Backward oriented

Concentrated

No relevant backward effects

Spread

No relevant backward effects

Concentrated

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table 3. Key sectors in terms of employment Forward oriented

Forward oriented

No relevant forward effects

No relevant forward effects

Spread

Concentrated

Spread

Concentrated

9, 23, 28

34, 35, 36, 37, 38, 57

15, 16, 18, 22, 39, 42, 43, 44, 48, 49

14, 20, 51

10, 11, 12, 13, 17, 19, 21, 24, 25, 26, 27, 29, 30, 31, 32, 33, 40, 41, 45, 46, 50, 55, 56, 58, 59

Source: own elaboration.

Income multipliers Income multipliers provide the categorization represented in Table 4. Again the numbering follows the NACE classification (see Appendix). In this case, the following sectors can be considered key sectors in terms of income effects: a) Construction (34) b) Wholesale trade and commission trade, except of motor vehicles and motorcycles (36) c) Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods (37) d) Real estate activities (47)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

18

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado e) Other business activities (51) f) Recreational, cultural and sporting activities (57)

Additionally, the sectors with prominent forward effects more or less spread throughout the system refer to certain manufacturing industries (other non-metallic mineral products; pulp and paper; publishing and editing; and fabricated metal products), land transport and related supporting and auxiliary transport activities, energy inputs, telecommunications, finance, renting and computer services. Concerning relevant spread backward effects, the food industry, the manufacturing of machinery and equipment and of motor vehicles show up again, in this case accompanied by the chemical industry.

No relevant forward effects

Spread

Concentrated

Spread

Concentrated

36, 37, 51, 57

35, 38

20, 39

10, 11, 12, 13, 14, 17, 19, 21, 24, 25, 26, 27, 29, 30, 31, 33, 40, 41, 45, 50, 55, 56, 58, 59

No relevant backward effects

Spread

Spread

No relevant forward effects

Concentrated

Forward oriented

9, 18, 23, 28

Backward oriented

No relevant backward effects

Forward oriented

34

Backward oriented

Concentrated

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table 4. Key sectors in terms of income

15, 16, 22, 32, 42, 43, 44, 46, 48, 49

Source: own elaboration.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

19

Some further considerations on investment goods In the analysis presented in the previous sections, forward and backward multipliers are weighted according to final demand shares of sectors in order to avoid giving the same importance to gas extraction and to the mining of uranium (which is a tiny sector in the EU economy), for instance. Backward multipliers can also be weighted by using shares of final demand for investment goods rather than for total final demand, which will produce a measure of relevant investment goods producing sectors. The following additional elements emerged from this complementary analysis:

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

a) The manufactures of fabricated metal products; electrical machinery and apparatuses; radio, television and communication equipments; medical, precision and optical instruments, watches and clocks; other transport equipment; furniture and other manufactured products; and computer and related activities, emerged with relevant backward multipliers both in terms of output, income and employment. b) The manufacture of office machinery and computers emerged with output and income-only relevant backward effects whilst other business activities had only output and employment relevant backward multipliers. It may seem odd that the ICT sectors are not identified as key sectors throughout the analysis reported in the preceding sections. However, we argue that this should be expected (and is actually the only possible outcome) if ICT expenditures are recorded as capital formation rather than intermediate inputs to production. Indeed, when backward multipliers are weighed by the investment column vector (instead of the total final demand vector), some ICT producing sectors turned out to have relevant backward effects. Particularly, ICT producing sectors (codes 24, 25, 26 and 27) are included within the top ten sectors with highest share of investment over their total commodity outputs. Furthermore, the high share of imported ICT products may yield a reduction of the measured volume of ICT products in the domestic inputoutput table, i.e.: ICT producing sectors (codes 24, 26 and 27) are included within the top ten sectors with highest volume of imported share of their total commodity outputs. Then, the extent to which a one-unit-increase in ICT capital in industry i is embodied in a particular industry or in the overall industry (impact effects) may not be well captured by the (intermediate and domestic input based) key

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

20

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

sector analysis and may be better quantified as in Myung-Hwan Rim et al (2005), where ICT purchases are treated as capital increase and from a dynamic perspective rather than as intermediate inputs. Verspagen (2002) also considers ICT purchases as a capital good increase and uses a known capital flow matrix (column vector of investment broken down by purchasing sectors) that is summed along with the intermediate matrix. Then, the standard key sector analysis would apply to the new modified "technical" and "delivery" coefficient matrices. Alas, the data that would be necessary for this analytical exercise is currently not available with sufficient coverage of the EU and with sufficient quality.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

6. COMPARATIVE ANALYSIS OF MULTIPLIERS Table 5 shows a comparative analysis of multipliers according to their relevance in terms of output, employment and income. In this sense, construction activities (34), wholesale (36) and retail (37) trade and recreational, cultural and sporting activities (57) emerged by all parameters as key sectors while real estate activities (47) do for output and income. On the other hand, the manufacture of chemicals and chemical products (18) emerged as key sector in terms of output while other business activities (51) do in terms of income. With regards to employment, the sale, maintenance and repair of motor vehicles and motorcycles (35); and the hotel and restaurant services (38) emerged as key sectors in terms of employment. In addition, there are sectors clearly forwardly oriented and with slightly relevant backward effects. The manufacture of pulp, paper and paper products (15); publishing, printing and reproduction of recorded media (16); the manufacture of other non-metallic products (20); the manufacture of fabricated metal products (22); land transport services (39); supporting and auxiliary transport activities (42); post and telecommunications (43); financial intermediation (44); renting of machinery and equipment (48); and computer and related services (49), present highly relevant forward effects in all parameters (output, employment and income). The manufacture of wood and of products of wood and cork (14) and other business activities (51) played relevant roles in terms of output and employment while the electricity, gas, steam and hot water supply sector (32) and the activities auxiliary to financial intermediation (46) did it in terms of output and income. Relevant output forward effects are shown in the manufacture of rubber and plastic products (19), the manufacture of basic metals (21) and the recycling (31), among

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

21

others. The manufacture of chemicals and chemical products (18) is also a forwardly oriented sector in terms of employment effects. With regard to backward oriented sectors, the food and beverages industry (9), the manufacture of machinery and other equipment (23) and the manufacture of motor vehicles, trailers and semi-trailers (28) have relevant backward effects in all parameters. The sale, maintenance and repair of motor vehicles and motorcycles (35); and the hotel and restaurant services (38) emerged as mainly backward oriented sectors in terms of output and income. Finally, insurance and pension funding (45), real estate activities (47) and the manufacture of chemicals and chemical products (18) have relevant backward effects in terms of output, employment and income, respectively. Table 5. Comparative analysis of multipliers

O–E– I

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Key Sectors

O–I

O

E

I

18

35, 38

51

32, 46

19, 21, 31

18

35, 38

45

34, 36, 37, 57

15, 16, 20, Forward 22, 39, 42, oriented 43, 44, 48, 49 Backward oriented

O–E

9, 23, 28

14, 51

18

Legend: O = Output; E = Employment; I = Income Source: own elaboration NOTE: No single sector emerged as relevant only in terms of employment and income.

7. SENSITIVITY ANALYSIS On the one hand, the key sector analysis presented so far seems to overestimate the relevance of several sectors for which either their share of gross value added and/or their share of final demand over the total economy output is large; see, for instance: construction, wholesale and retail trade,

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

22

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

public administration, health and social work, education, real estate and recreational, cultural and sporting activities. Moreover, forward multipliers of certain sectors may well not generate additional output in other sectors but almost exclusively on their own outputs. This is the case when own intermediate consumption represents a large amount of all intermediate input requirements. This particularity can be addressed by removing the main diagonal from the backward and forward multipliers matrices in order to avoid giving extra relevance to own effects. On the other hand, the identification of key sectors depends to a great extent on the threshold used for discrimination, i.e. the mean. The mean is the standard threshold throughout the literature although it is not robust in the presence of outlier values. The median is a different kind of average. It is the value that is greater than or equal to half of the values in the data set. It is the middle point of the data set and easy to determine if you first order the data from low to high‡‡. Therefore, it can be interesting to address the key sector analysis by using the median as threshold instead of the mean. Bearing these considerations in mind, the sensitivity analysis of key sectors was carried out with three different variants: a) by removing the main diagonals from each matrix of backward and forward multipliers; b) by using the median as threshold instead of the mean; c) by using unweighted backward and forward multipliers. Removing main diagonals of each matrix of multipliers The removal of the main diagonal from each matrix of backward and forward multipliers affected mainly those sectors with large amounts of own intermediate consumption, in relative terms. These sectors are: public administration, wholesale trade, retail trade, construction, health and social work services, real estate, education and recreational, cultural and sporting services. These sectors came out now mainly as backward oriented sectors rather than as key sectors, which indicates that the formerly larger forward multipliers were related to additional amounts of their own primary output rather than of other different sectors. This makes a difference when addressing interlinkages.

‡‡

See a numerical example in http://en.wikipedia.org/wiki/Median

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

23

The median as threshold Using the median as threshold produced additional key sectors. Either including or excluding the main diagonals of each matrix of backward and forward multipliers, mostly the same sectors turned out to be key sectors by all parameters: output, employment and income (see Table 6). These sectors were the following:

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

a) b) c) d) e) f) g) h)

Publishing, printing and reproduction of recorded media (16); Manufacture of chemicals and chemical products (18); Manufacture of fabricated metal products (22); Electricity, gas, steam and hot water supply sector (32); Land transport services (39); Post and telecommunications (43); Financial intermediation (44); Other business services (51);

Particularly, the manufacture of electrical machinery and other apparatuses (25) became a key sector only when the main diagonal was excluded from each matrix of multipliers. Conversely, computer and related services (49) turned out to be a key sector only when including the main diagonals (see Table 6). Table 6. Additional key sectors. Including main diagonal Output Employment Income

1, 16, 22, 32, 39, 42, 43, 44, 49 16, 18, 22, 39, 43, 44, 49, 51 16, 18, 22, 32, 35, 38, 39, 43, 44, 49, 51

Excluding main diagonal 16, 22, 25, 32, 39, 43, 44, 51 16, 18, 22, 25, 32, 39, 43, 44, 51 16, 18, 22, 25, 32, 39, 43, 44, 51

Source: own elaboration Nevertheless, there is no way to determine the best threshold for the purpose of identifying key sectors in an economy. At least, by using the median we don't let outlier values affect the outcome, which is desirable. In

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

24

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

this way the list of key sectors can be refined as shown in Figures 4 to 9 (see Appendix). ICT producing sectors such as post and telecommunications (43) and the manufacture of electrical machinery and other apparatuses (25) emerged with relevant backward and forward effects. The manufacture of radio, television and communication equipment and other apparatuses (26) and the manufacture of medical, precision and optical instruments, watches and clocks (27) only emerged as backward oriented sectors. Similarly, ICT user sectors such as publishing, printing and reproduction of recorded media (16), financial intermediation (44), other business services (51) and computer related services (49) became visible as additional key sectors. In addition, activities auxiliary to financial intermediation (46), renting of machinery and equipment (48) and research and development (50) presented relevant forward multipliers whilst other ICT users emerged as backward oriented sectors, i.e.: manufacture of wearing apparel; dressing and dyeing of fur (12); the manufacture of machinery and other equipment (23); the manufacture of other transport equipment (29); the manufacture of furniture; and other manufacturing products (30); wholesale trade (36); retail trade (37); and insurance and pension funding except compulsory social security (45). However, the emergence of some ICT sectors as crucial for growth, jobs and income by using the median instead of the mean should not lead us to think of this method as an alternative to that of Myung-Hwan Rim (2005) and/or Verspagen (2002). Unweighted backward and forward multipliers As expected, the results obtained by identifying key sectors without applying any kind of weighting scheme resulted in a plethora of tiny sectors having relevant backward and forward multipliers (key sectors) mostly by all parameters, e.g.: the mining of coal and lignite; extraction of peat (4), the mining of uranium and thorium ores (6), other mining and quarrying (8) and secondary raw materials (31). Hence, unweighted multipliers were disregarded for the same reasons already given in the introductory section.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

25

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

8. ANALYSIS OF SELECTED SECTORS BY MEMBER STATE The JRC/IPTS and the European Science and Technology Observatory (JRC/IPTS and ESTO, 2006) singled out the products that have the greatest environmental impact from a life cycle perspective in the EU25 (2000). Consumption categories such as "food and beverages; tobacco", "housing, furniture, equipment and utility use" and "transport" emerged in most of the parameters (global warming, eutrophication, photochemical oxidation and acidification) as main contributors to the total environmental impacts. Not surprisingly, some product groups under the above mentioned consumption categories have been identified in this paper with relevant backward and/or forward impacts. For instance, the food industry (9) and the manufacturing of motor vehicles, trailers and semi-trailers (28) emerged as backward oriented sectors by all parameters (output, employment and income) and construction work (34) activities are identified as a key sector also by all parameters. In addition, we have selected the chemical industry (18), a key sector in terms of output while a forward oriented sector in terms of employment and a backward oriented sector concerning income; and the pulp and paper industry (15), which has relevant forward effects by all parameters. In this section, we explore which are the best performing Member States in the selected sectors in terms of output, employment and income. To that purpose, we replicated the key sector analysis for each one of the 27 Member States. The main conclusions derived from this follow-up study on some selected sectors have been summarized here and illustrated with maps (see the Appendix) in order to help the reader to grasp the various outcomes. Food industry By taking into consideration the European Union as a whole, the food industry has strong backward linkages. In other words, an increase in the final demand of food products may lead to growth of output, jobs and income throughout the European economy. Particularly, Austria, Belgium, Denmark, Estonia, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Slovakia, Sweden and the UK have predominantly backward relevant impacts in output. As regard the growth of jobs, the former list of countries extends to Cyprus, the Czech Republic, Hungary, Ireland, Latvia, Lithuania and Spain, too. In terms of growth of income, all Member States have relevant backward effects except Malta, Romania and Slovenia, in

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

26

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

which the food industry is considered key sector (with both backward and forward relevant effects). Motor vehicles, trailers and semi-trailers As for the food industry, variations in final demand of motor vehicles, trailers and semi-trailers may cause relevant backward effects in the growth of output, jobs and income throughout the European economy. Precisely, Belgium, the Czech Republic, France, Germany, Hungary, Italy, Slovenia, Spain, Sweden and UK are responsible for the remarkable employment impacts while Poland and Romania would complete the list when accounting for income effects. If still we add Austria, Portugal and Slovakia then we would have the full list of Member States with high relevant backward impacts on output growth.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Construction work Construction activities are particularly interesting since they emerge as key sector almost in all the Member States of the EU. Except for Luxembourg, all the countries have backward and forward relevant impacts on their whole national economies in terms of output and income. Regarding employment, Romania is the only exception. Chemicals The chemical industry performs in a peculiar way. Indeed, it has a different type of relevance impact (backward, forward or both) depending on the parameter (output, employment and income) at the aggregate EU level. Concerning the growth of output, the chemical industry in Belgium, Bulgaria, Hungary, Ireland and Romania emerged as key sector; while in the case of employment effects, the Greek, Romanian and British chemical sectors have strong forward impacts. Finally, this sector in Belgium, Bulgaria, Denmark, France, Germany, Hungary, Ireland, the Netherlands, Romania, Slovakia, Slovenia, Sweden and the UK has important backward income effects. Pulp and paper The pulp and paper industry emerged as a forward oriented sector at the aggregate EU level with relevant multiplier effects on output, employment and income. At the national level, it is remarkable that Cyprus, Denmark, France, Greece, Italy, Lithuania, Romania, Spain and UK emerged with relevant

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

27

forward effect as regard the growth of output. However, we must drop Denmark, Greece, Italy, Lithuania and Romania from that list to keep the right countries with important employment impacts. In terms of income, Denmark, France, Romania, Spain and UK present the highest effects at the national levels.

9. CONCLUDING REMARKS Bearing in mind the results of the descriptive analysis developed in the third section, the mapping of the production network of the economy as a whole given in the fourth section and the key sector analysis carried out both for the EU27 and the Member States in terms of output, employment and income, the following conclusions might be drawn for manufacturing industries and for construction, trade and services.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Manufacturing industries The manufacturing industries (covering sectors 9 to 33) are mainly forwardly oriented sectors (see Table 5). In particular, further detailed considerations can be drawn on the following sectors: a) The manufacture of chemicals and chemical products is a key activity in terms of output, a forward oriented sector in terms of employment and a backward oriented sector in terms of income, with both relevant spread backward and forward effects. This sector amounts to 3% of total output, and nearly 2% of total gross value added and of total employment. b) The manufacture of pulp, paper and paper products, the publishing, printing and reproduction of recorded media industry and the manufacture of fabricated metal products, are mainly forward oriented sectors by all parameters, with spread effects across industries. These industries represent 4.4% of total output and around 3.5% of total gross value added and of total employment. c) The manufacture of other non-metallic mineral products has relevant (only) forward impacts on income, output and employment. However, these products are supplied mainly to construction activities, thus having strong concentrated effects. This sector amounts to around 1% of total output, total employment and of total gross value added.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

28

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

d) The manufacture of wood and of products of wood and cork is a mainly forward oriented sector by all parameters except for income, having spread effects only in the case of output. This sector stands for 0.7% of total output and around 0.5% of total employment and of total gross value added. e) The electricity, gas, steam and hot water supply industry is a mainly forward oriented sector with spread effects by all parameters except for employment. This sector represents 2% of total output, 1.7% of total gross value added and 0.8% of total employment. It also has a strong dependence on coal mining as a relevant supplying input. f) The manufacture of rubber and plastic products, metallurgy and recycling are mainly forward oriented sectors only in terms of output (with spread effects). They altogether amount to nearly 3% of total output and around 1.7% of total employment and of total gross value added. Particularly, the two latter sectors present strong interconnections, particularly recycling providing inputs to metallurgy. g) The manufacture of food products and beverages, the manufacture of machinery and other equipments and the manufacture of motor vehicles, trailers and semi-trailers are mainly backward oriented sectors by all parameters, with spread effects across industries. These industries reach up to 10% of total output and around 6% of total gross value added and of total employment. In particular, the food products and beverages industry presents quite strong backward direct linkages with agriculture and fishing. h) The manufactures of textiles and of wearing apparel; dressing and dyeing of fur, have a quite strong direct interrelationship, albeit the two sectors are weakly interconnected to the rest of the economy. They seem to function as an isolated cluster. Construction, trade and services a) Construction is a key sector with regards to output, employment and income, with more or less spread effects. It is one of the sectors on which the production network pivots in terms of direct relationships. In addition, construction activities and their related services present strong linkages with other inputs-supplying industries. This sector represents nearly 7% of total output, 5.7% of total gross value added and 7.6% of total employment. b) Wholesale trade and commission trade, excluding motor vehicles and motorcycles, similarly is a key sector regarding output, employment and income, with variably spread impacts. It is mainly backward oriented while being in a central position within the production network. It reaches 4.6% of

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The Adjustment Capacity of the European Economy …

29

total output, slightly more than 5% of total gross value added and 6.1% of total employment. c) Retail trade, excluding motor vehicles and motorcycles, also emerged as key sector in terms of output, income and employment, with more or less spread effects, albeit direct interrelations within the production network is weak. It stands for 3.7% of total output, nearly 5% of total gross value added and 5.6% of total employment. d) Recreational, cultural and sporting activities can be considered as well key sector by all parameters. However, the resulting forward and backward effects are quite concentrated on a few sectors. This sector amounts to 1.7% of total output, nearly 2% of total gross value added and 2.2% of total employment. e) The sale, maintenance and repair of motor vehicles and motorcycles; retail sale services of automotive fuel and the hotel and restaurant services emerged as key sectors only in terms of employment. However, they are mainly backward oriented sectors when considering output and gross value added, with more or less spread effects. Notice the strong direct backward linkage of hotel and restaurant services with respect to the food industry as main supplier. Finally, these two sectors amount to nearly 5% of total output, slightly more than 5% of total gross value added and 6.4% of total employment. f) Other business activities emerged as key sector only in terms of gross value added, with concentrated effects on industries. In turn, they are mainly forward oriented sectors regarding output and employment, with concentrated effects too. They play a central role in supplying inputs to other sectors (e.g. wholesale and retail trade, food industry, etc.), representing 6.9% of total output, 8.5% of total gross value added and 4.5% of total employment. g) Land transport and supporting and auxiliary transport activities have generally widely spread relevant (only) forward effects in terms of gross value added, output and employment. They represent around 4% of total output and of total gross value added and 3.8% of total employment. h) Post and telecommunications, financial intermediation services, renting services of machinery and equipment and computer related services, are mainly forward oriented sectors by all parameters. They amount to 7.7% of total output, 6% of total gross value added and 5.3% of total employment. i) Activities auxiliary to financial intermediation are mainly forward oriented services by all parameters except for employment. It has a strong

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

30

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

direct forward interconnection with insurance and pension funding. This activities stand for around 0.75% of total output and of total gross value added and 0.4% of total employment. j) Insurance and pension funding is a mainly a backward oriented sector only in terms of output. It is strongly direct backward linked to those activities auxiliary to financial intermediation. This sector represents 1.2% of total output, nearly 1% of total gross value added and 0.6% of total employment. Besides, the sensitivity analysis showed that sectors with large shares of own consumption have also large forward impacts on themselves rather than on other different sectors. Also, backward multipliers are heavily affected by outlier values and results may differ once we take as threshold the median instead of the mean to identify key sectors. In this sense, most ICT producing and ICT user sectors now would emerge with relevant backward and forward multipliers. However, in order to analyse the effects of ICT producing sectors in the economy explicitly as forward links we should refer to either MyungHwan Rim et al (2005) and/or Verspagen (2002). Finally, this paper also shed light on the distribution of the backward and forward effects within the Member States, which have been illustrated with maps. It is also particularly interesting to find that some of the sectors identified by the JRC/IPTS and the ESTO as those having the largest environmental impacts emerged in this analysis with relevant impact effects in economic terms. Indeed, the necessity to de-link the growth of output, jobs and income from the environmental impact has been a topic of importance in the political arena and in the civil society for the last years.

ACKNOWLEDGMENTS We would like to thank Fabienne Ilzkovitz and Adriaan Dierx from the European Commission's Directorate General of Economic and Financial Affairs and Nuno Sousa, currently from Directorate General of Trade; and Jean Jacques Vanhaelen and Jean Yves Jaucot from the Federal Public Service Economy of the Belgian Government for their valuable comments and suggestions. Also, this work benefited from the comments made by the attendants to the First Workshop on Regional Analysis and Input-Output Models and the 3rd Spanish Conference on Input-Output Analysis, both organized by the Hispanic-American Input-Output Society; and the 17th

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

31

International Input-Output Conference organized by the International InputOutput Association.

REFERENCES Beyers, W. B. (1976): «Empirical identification of Key Sectors: Some Further Evidence», Environment and Planning, vol. 8, pp. 231-236. Bon, R. (1986): «Comparative stability analysis of demand-side and supplyside input-output models», International Journal of Forecasting, vol. 2, nº 2, pp. 231-235. Cella, G. (1984): «The Input-Output Measurement of Inter-industry Linkages», Oxford Bulletin of Economics and Statistics, vol. 46, nº 1, pp. 73-83.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Chenery, H. B. & Watanabe, T. (1958): «International comparison of the structure of production», Econometrica, vol. XXVI, nº 26, pp. 487-521. European Commission (2007a): «A single market for 21st century Europe», Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, COM(2007) 724 final, Commission of the European Communities, Brussels. European Commission (2007b): «The European interest – succeeding in an era of globalisation», COM(2007) 581, Commission of the European Communities, Brussels. European Commission (2007c): «Implementing the new methodology for product market and sector monitoring: results of a first sector screening», SEC(2007) 1517, Commission of the European Communities, Brussels. European Commission (2007d): «Guiding principles for product market and sector monitoring», European Economy, Occasional Papers number 34, June. EUROSTAT (2010): Website database. Theme: Economy and Finance\ ESA95 Supply, Use and Input-Output Tables. Luxembourg. Dietzenbacher, E. (1997): «In vindication of the Ghosh model: a reinterpretation as a price model», Journal of Regional Science, vol. 37, nº 4, pp. 629-651.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

32

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

Dietzenbacher, E. (2002): «Interregional Multipliers: Looking Backward, Looking Forward», Regional Studies, vol. 36, nº 2, pp. 125-136. Ghosh, A. (1958): «Input-Output approach in an allocation system», Economica, vol. 25, nº 97, pp. 58-64. Hazari, B. R. (1970): «Empirical identification of key sectors in the Indian economy», Review of Economics and Statistics, vol. 52, nº 3, pp. 301-305. Hirschman. A. O. (1958): The Strategy of Economic Development, Yale University Press, New Haven. Joint Research Centre‟s Institute for Prospective Technological Studies & European Science and Technology Observatory (2006): «Environmental impact of products (EIPRO). Analysis of the life cycle environmental impacts related to the final consumption of the EU-25», European Commission's Technical Report EUR 22284 EN, Commission of the European Communities. Jones, L. P. (1976): «The measurement of Hirschmanian Linkages», Quarterly Journal of Economics, vol. XC, nº 2, pp. 323-333.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Laumas, P. S. (1975): «Key sector in some underdeveloped countries» Kiklos, vol. 28, nº 1, pp. 62-79. Laumas, P. S. (1976): «Key sector in some underdeveloped countries: A reply», Kiklos, vol. 29, nº 4, pp. 767-769. McGilvray, J. W. (1977): «Linkages, key sectors and development strategy», Structure, system and economic policy, Leontief, W. W., Cambridge University Press, Cambridge. Miller, R. E. & Blair, P. D. (2009): «Input-Output Analysis: Foundations and Extensions», Cambridge University Press (2nd edition), Cambridge. Oosterhaven, J. (1988): «On the plausibility of the supply-driven input-output model», Journal of Regional Science, vol. 28, pp. 203-217. Oosterhaven, J. (1989): «The supply-driven input-output model; a new interpretation but still implausible», Journal of Regional Science, vol. 29, nr. 3, pp. 459-465. Oosterhaven, J. & Stelder, D. (2002): «Net Multipliers Avoid Exaggerating Impacts: With A Bi-Regional Illustration for the Dutch Transportation Sector», Journal of Regional Science, vol. 42, nr. 3, pp. 533-543. Rasmussen, N. P. (1956): «Studies in inter-sectoral relations», North Holland Publishing Company, Amsterdam.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

33

Rim, M. H., Cho, S. S. & Moon, C. G. (2005): «Measuring economic externalities of IT and R&D», ETRI Journal, vol. 27, nr. 2, pp. 206-218. Rueda-Cantuche, J. M., Beutel, J., Neuwahl, F., Loeschel, A. & Mongelli, I. (2009): «A Symmetric Input-Output Table for EU27: Latest Progress», Economic Systems Research, vol. 21, nr. 1, pp. 59-79. Sonis, M., Hewings, G. J. D. & Guo, J. (2000): «A New Image of Classical Key Sector Analysis: Minimum Information Decomposition of the Leontief Inverse», Economic Systems Research, vol. 12, nr. 3, pp. 401423. Verspagen, B. (2002): «Structural change and technology. A long view», Eindhoven Centre of Innovation Studies – Working paper 02.13, Eindhoven University of Technology, Eindhoven.

APPENDIX

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Methodological approach To start with, we shall use the following notation: Z = domestic intermediate input-output matrix (order 59 x 59) I = identity matrix (order 59 x 59) x = output column vector (59) e = column vector of ones (59) m = column vector of employment (59) w = column vector of compensation of employees (59) y = final demand column vector (59) g = gross value added row vector (59) n = number of sectors and commodities (59) Next, we will define the following coefficients: Input-coefficients

A  Z * diag (x) 1 . Delivery-coefficients

A*  diag (x) 1 * Z .

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

34

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado Labour coefficients

l t  m t * diag (x) 1 . Employees’ compensation coefficients

wt  w t * diag (x) 1 . Leontief inverse of input-coefficients

L  (I  A) 1 . Ghosh inverse of delivery-coefficients

L*  (I  A* ) 1 . According to the literature, backward multipliers are recommended to be computed using L while forward multipliers using L*. These multipliers are defined as follows:

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table A.1. Input-Output Multipliers. Backward

Forward

Output effects

et L

L*e

Employment effects

ltL

L*l

Income effects

wt L

L*w

As said in the text, backward and forward multipliers shall be modified to account for the different shares of each sector‟s final demand or gross value added, respectively. To that purpose, these multipliers will be redefined and weighted using the following final demand (f) and gross value added (v) coefficients: 1

f  y * et y/n  , v   g e/n g 1

being f a column vector and v a row vector, both of order 59. Then, we define new modified Leontief and Ghosh inverses. That is: Weighted Leontief inverse of input-coefficients

Lw  (I  A)1 * diag ( f ) .

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

35

Weighted Ghosh inverse of delivery-coefficients

L*w  (I  A* )1 * diag (v) . As a result, we construct another table with the corresponding weighted formulas:

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table A.2. Weighted Input-Output Multipliers Backward

Forward

Output effects

et Lw

L*w e

Employment effects

l t Lw

L*w l

Income effects

wt Lw

L*w w

Notice that in Table A.2, e.g. backward effects would represent variations in the total e.g. output of the system produced as a result of one-unit increase in the final demand of a product. However, these effects do not make any distinction about their origin, i.e. can all the effects be ascribed to one single sector or are they spread all throughout the economy? Thus, it would be also interesting to account for individual effects on sectors as well as with a relative dispersion measure, i.e. the Pearson coefficient of variation (given by the ratio between the standard deviation of the corresponding effects and their average). It would be clear now that lower coefficients of variation would represent highly spread effects. Finally, Table A.3 shows accordingly the three different kinds of multipliers to be estimated for the EU27 in the year 2000. Table A.3. Input-Output Multipliers Matrices Backward

Forward

Output effects

Lw

L*w

Employment effects

diag(l) Lw

L*w diag(l)

Income effects

diag(w) Lw

L*w diag(w)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

36

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado

Identification of key sectors Let bij be the (i,j)-th element of any of the backward multipliers matrices (output, employment or income) presented in Table A.3. Hence, backward multipliers will be defined as:

b j   bij i

and the so-called normalized backward multiplier as:

b  b

ij

N

bj

n,

i

j

j

where those sectors with b j  1 will be said backward oriented sectors. N

Additionally, let cj be the j-th coefficient of variation, calculated by: 1 n

cj 

 (b  b ) b ij

2

j

i

1 n

ij

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

i

and analogously, we derive the normalized backward coefficient of variation as:

c Nj 

cj

c

n, j

j

where those sectors with c j  1 will be said to have backward effects widely N

spread throughout the whole system. The analysis follows the same structure for forward multipliers. Calculation of direct forward and backward linkages; and the flow index Let us define S as a matrix (59x59) of shares of intermediate uses over the total intermediate outputs for each product (row). This matrix depicts the socalled forward linkages and can be expressed as:

S   diag (Ze) * Z . 1

On the other hand, let us define D as another matrix (59x59) of shares of intermediate uses over the total intermediate inputs for each sector (column).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Adjustment Capacity of the European Economy …

37

This matrix includes the so-called backward linkages and can be written as follows: 1

D  Z * diag (et Z)  . Eventually, let us define the flow index as the average of forward and backward linkages for each element of matrices S and D. That is:

FI 

(S + D) . 2

NACE A60 Classification Nr

Sector

1 2 3

Agriculture, hunting and related service activities Forestry, logging and related service activities Fishing, operating of fish hatcheries and fish farms; service activities incidental to fishing Mining of coal and lignite; extraction of peat Extraction of crude petroleum and natural gas; service activities incidental to oil and gas extraction excluding surveying Mining of uranium and thorium ores Mining of metal ores Other mining and quarrying Manufacture of food products and beverages Manufacture of tobacco products Manufacture of textiles Manufacture of wearing apparel; dressing and dyeing of fur Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear Manuf. of wood & of products of wood and cork, exc. furniture; manuf. of articles of straw & plaiting materials Manufacture of pulp, paper and paper products Publishing, printing and reproduction of recorded media Manufacture of coke, refined petroleum products and nuclear fuels Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products, except machinery and equipment Manufacture of machinery and equipment n.e.c. Manufacture of office machinery and computers Manufacture of electrical machinery and apparatus n.e.c.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

38

José M. Rueda-Cantuche, Frederik Neuwahl and Luis Delgado NACE A60 Classification (Continued)

Nr

Sector

26 27 28 29 30 31 32 33 34 35

Manufacture of radio, television and communication equipment and apparatus Manufacture of medical, precision and optical instruments, watches and clocks Manufacture of motor vehicles, trailers and semi-trailers Manufacture of other transport equipment Manufacture of furniture; manufacturing n.e.c. Recycling Electricity, gas, steam and hot water supply Collection, purification and distribution of water Construction Sale, maintenance and repair of motor vehicles and motorcycles; retail sale services of automotive fuel Wholesale trade and commission trade, except of motor vehicles and motorcycles Retail trade, except of motor vehicles and motorcycles; repair of personal and household goods Hotels and restaurants Land transport; transport via pipelines Water transport Air transport Supporting and auxiliary transport activities; activities of travel agencies Post and telecommunications Financial intermediation, except insurance and pension funding Insurance and pension funding, except compulsory social security Activities auxiliary to financial intermediation Real estate activities Renting of machinery and equipment without operator and of personal and household goods Computer and related activities Research and development Other business activities Public administration and defence; compulsory social security Education Health and social work Sewage and refuse disposal, sanitation and similar activities Activities of membership organisation n.e.c. Recreational, cultural and sporting activities Other service activities Private households with employed persons

36

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Output multipliers (with main diagonal) Median (BW)

Average (BW)

8 43.- Post and telecommunications

7.5

47.-Real Estate

7

Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

6.5 6

49.- Computer services

5.5

22.- Fabricated metal products

16.- Printed matter

5 4.5

36.- Wholesale 54.- Health and social work

32.- Electricity energy 37.- Retail

4 39.- Land transport

3.5 44.- Finances

3

34.- Construction

18.- Chemicals

Median (FW)

52.- Public Administration

53.-Education

Average (FW)

2.5 2

38.- Hotels and Restaurants

23.- Machinery and equipment

9.- Food products

1.5 28.- Motor vehicles

1 0.5 0 0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

10.5

Weighted (scaled) backward multipliers

Figure 4. Identification of key sectors by using different thresholds and weighted (scaled) OUTPUT multipliers (I).

11

11.5

12

Median (BW)

Average (BW)

Output multipliers (without main diagonal)

3.75 3.5

16.- Printed matter

3.25 44.- Finances

3 Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

51.- Other business services

2.75

43.- Post and telecommunications

2.5

22.- Fabricated metal products 39.- Land transport

2.25 2

Median (FW)

32.- Electricity energy 25.- Electrical machinery

1.75 1.5

Average (FW)

36.- Wholesale

18.- Chemicals

1.25

47.-Real Estate

34.- Construction

38.- Hotels and Restaurants

1 0.75 37.- Retail

0.5

28.- Motor vehicles

54.- Health and social work

0.25

9.- Food products

52.- Public Administration

0 0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Weighted (scaled) backward multipliers

Figure 5. Identification of key sectors by using different thresholds and weighted (scaled) OUTPUT multipliers (II).

5.5

6

Employment multipliers (with main diagonal) Median (BW)

Average (BW)

90

54.- Health and social work 51.- Other business services 1.- Agriculture

80

53.-Education

52.- Public Administration

36.- Wholesale 16.- Printed matter

Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

70

22.- Fabricated metal products

43.- Post and telecommunications

60

37.- Retail

57.- Recreational, cultural and sporting activities

34.- Construction

39.- Land transport

50 44.- Finances 35.- Trade, maintenance and repair

18.- Chemicals

40

38- Hotels and Restaurants

Average (FW)

30

Median (FW)

47.-Real Estate 23.- Machinery and equipment

20

9.- Food products 28.- Motor vehicles

10

0 0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

Weighted (scaled) backward multipliers

Figure 6. Identification of key sectors by using different thresholds and weighted (scaled) EMPLOYMENT multipliers (I).

150

Employment multipliers (without main diagonal) Median (BW)

Average (BW)

45 16.- Printed matter

51.- Other business services

40 44.- Finances

Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

35

43.- Post and telecommunications

30

39.- Land transport

32.- Electricity energy

18.- Chemicals

25 Median (FW)

25.- Electrical machinery

22.- Fabricated metal products

20 Average (FW)

36.- Wholesale

15

47.-Real Estate

23.- Machinery and equipment

9.- Food products

38- Hotels and Restaurants

10 37.- Retail

34.- Construction

28.- Motor vehicles

5

54.- Health and social work

52.- Public Administration

0 0

5

10

15

20

25

30

35

40

45

50

55

60

65

Weighted (scaled) backward multipliers

Figure 7. Identification of key sectors by using different thresholds and weighted (scaled) EMPLOYMENT multipliers (II).

70

Income multipliers (with main diagonal) Median (BW)

Average (BW)

3 51.- Other business services

Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2.5 43.- Post and telecommunications 49.- Computer services

2

52.- Public Administration

53.-Education

16.- Printed matter

1.5

54.- Health and social work 44.- Finances

36.- Wholesale

39.- Land transport

37.- Retail

57.- Recreational, cultural and sporting activities

1

47.-Real Estate

35.- Trade, maintenance and repair

Average (FW) Median (FW)

38- Hotels and Restaurants

18.- Chemicals

0.5

34.- Construction

23.- Machinery and equipment

9.- Food products

28.- Motor vehicles

0 0

0.5

1

1.5

2

2.5

Weighted (scaled) backward multipliers

Figure 8. Identification of key sectors by using different thresholds and weighted (scaled) INCOME multipliers (I).

3

3.5

Income multipliers (without main diagonal) Median (BW)

Average (BW)

16.- Printed matter

1

43.- Post and telecommunications

0.9

44.- Finances

Weighted (scaled) forward multipliers

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

0.8

51.- Other business services

32.- Electricity energy

0.7

22.- Fabricated metal products

39.- Land transport 25.- Electrical machinery

0.6

Median (FW)

18.- Chemicals

0.5

0.4

Average (FW)

36.- Wholesale 47.-Real Estate

0.3

0.2

34.- Construction

38- Hotels and Restaurants

23.- Machinery and equipment

9.- Food products 37.- Retail

28.- Motor vehicles

0.1 52.- Public Administration

54.- Health and social work

0 0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

Weighted (scaled) backward multipliers

Figure 9. Identification of key sectors by using different thresholds and weighted (scaled) INCOME multipliers (II).

1.4

1.5

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 2

SOCIAL PREFERENCE, FINANCIAL AND ECONOMIC PERFORMANCE OF LOCAL AUTHORITIES Asher Vaturi Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Tel Aviv University, Israel

INTRODUCTION Social and economic transition of people, goods, and services constantly appears within metropolitan areas. It's also appears between the metropolitan center and peripheral localities (Blair, 1995; Wegener, 1995; Lucas, 2001; Storperand & Manville, 2006). The migration of residents and businesses affects both the „migrant-exporting‟ and „migrant-importing‟ municipalities. In many cases, intra-metropolitan migration flows from urban centers to suburbs and has a detrimental effect on the financial sustainability of central municipalities through the erosion of their tax base (Katz, 2000; Vaturi et al, 2004). The goal of the study is twofold: first to examine the links between internal migration and financial performance of local authorities and second, to evaluate the feasibility of different local fiscal policy measures as a possible way of dealing with financial deterioration of local authorities in major metropolitan areas.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

46

Asher Vaturi

Theories that explain causes of internal and external migration trends have been a central of migration studies and have presented a universal relevance. Until late seventies, traditional theories point that the economic motive is the dominant force in producing currents of migration, and generally defined as a mechanism of "push-pull" factors (Lee, 1969). Despite these studies, there is a common understanding that the implications of out-migration for all local authorities (LAs) and mainly for central cities are not uniform (Martin & Schmidt 1983; Smith, 1996; Stein, 2003). In 1970–2000, for example, some central cities (Berlin, Dallas, Huston, San Diego and San Francisco) experienced growth in prosperity in spite of out-migration. By contrast, in many Third World cities, accelerating migration to urban areas was often accompanied by financial distress of local authorities (Savitch & Cantor, 2002). In Europe and North America, metropolitan population loss and deconcentration have had variable outcomes. The implications of metropolitan population loss usually depend on the socioeconomic status of the out-migrants. In some European cities, poor families are often relocated from the inner city to peripheral areas, while the rich, the upwardly mobile, as well as large commercial businesses may stay in the central city, fostering demand for apartments and office space. Thus, central cities experience 'de-densification' accompanied by central business district renewal and high-rise development (Savitch & Cantor, 2002). In contrast, in North America, large and upscale commercial businesses typically move to suburbs, fostering urban sprawl and central city decline. Great Britain tends to exhibit an intermediate pattern, with the central city hosting both poor and rich residents (Judd & Swanstrom, 2002). So, middle class migration enhances the financial performance of migrantrecipient suburban municipalities at the expense of CM, whose tax-base is often eroded (Bailey, 1999; Pastor et al., 2000; Judd & Swanstrom, 2002). The unsuitability between the demographic and financial development in urban areas was a base of large number of studies which tried to evaluate the unique of local public finance and suggested better understanding or sets of solutions (e.g. NPM or fiscal federalism. See Hood, 1995; Brace, 1997; Firman ,2003; Mikelbank et al. 2007). Many of the recent studies are more empirical than theoretical while trying to find a suitable local financial structure for specific areas with specific problems e.g. US, (Pastor et al., 2000; Saidel, 2001), France (Prud'homme', 1996), Italy (Levaggi, 1996), the UK (Else, 1996), Indonesia (Firman, 2003). However, there is no common understanding in both theoretical and empirical

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Social Preference, Financial and Economic Performance …

47

literatures for optimal solutions for the balance between demography and local finance. In attempting to identify how the factors of internal migration have shaped the financial performance of LAs, the contribution of this study falls in line particularly with the conceptual debates of public finance that have taken center stage in the current international discourse on urban changes and choice. The conceptual guidance of such studies is generally taken from the question as to whether the governments' authorities would have shown “convergence” or “divergence” in their development. Proponents of the public finance hypothesis accentuate the powerful factors for which “public goods” and “centralization and decentralization” have been used as “generic” terms to capture the objective force of economic competition and financial markets as well as political, intellectual, and cognitive (“discursive”) current including “neo-liberal” policy positions and New Public Management (NPM). The traditional theory of public finance has made a strong case for a major role for fiscal decentralization. It is based on an improved allocation of resources in the public sector in sense of efficiency. Oates (2007) defined four basic elements for it: Regional or local governments are in a position to adapt outputs of public services to the preferences; in a setting of mobile households, individuals can seek out jurisdictions that provide outputs well suited to their preference, thereby increasing the potential gains from the decentralized provision of public services (Tiebout 1956) (Oates, 2007). Indeed, one of the recent discussions of “public finance” concerns the “voter-choice” model of Charles Tiebout (1956). He described a model of mobile households (the “voter-choice” model) that select a community of residence based on their preferences for local public goods. This classical theory of Tiebout‟s links public resource allocation, local taxation, and migration. According to Tiebout, independent local authorities offer a variety of expenditures and tax policies, while perfectly mobile consumers (“consumer-voters”) reveal their preferences for public goods and services through their choice of local communities. The consumer therefore migrates to those localities that provide the optimal service/tax package at minimal cost. As widely acknowledged (see inter alia Bailey, 1999), the Tiebout model improves understanding of intra-metropolitan processes by specifying the micro-stimulus of migration and financial performance of local authorities. This acknowledgment stimulates empirical research. However, many

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

48

Asher Vaturi

empirical studies (see inter alia Bramley, 1989; Mieszkowski & Zodrow, 1989; Vaturi et al, 2004) criticize the underlying assumptions of Tiebout‟s model on a number of grounds – underestimating the local politics, mobility costs, and housing price differentials across local communities, as well as ignoring the impact of government intervention and property taxation. Another criticism of the Tiebout model came from Oates (2005). Even with immobile individuals, we might still expect there to exist systematic differences in tastes across jurisdictions that would constitute a rationale for the decentralized provision of local public goods. From this perspective, the role of Tiebout sorting is to increase the welfare gains from decentralized finance. The more homogeneous in their demands for local services are local jurisdictions and the greater the variation in these demands across jurisdictions, the larger is the potential welfare gains from decentralized finance. Thus, the Tiebout model strengthens the case for the decentralized provision of relevant services, but it is only part of the story (OATE, 2005, p. 354). As often argued regarding the Tiebout model, potential migrants lack detailed information about local conditions and, in many cases, are not perfectly mobile. Tax and service packages also appear to be more influential in attracting people who are already in the process of relocating, whereas such packages are less important in motivating people to move (Bailey, 1999).

Hypotheses 1. Local authorities‟ financing depends on taxes collected from residents and businesses at varying tax rates. Therefore, the local authorities try to attract more tax payers who pay the maximum tax rates. Regarding the local tax rate system in Israel (arnona), the main source of the locally generated income is businesses (this might differ by metropolitan ring). As a result, local authorities often aim to enlarge their business areas (Heacht 1997;Razin 1998a), underestimate the importance of retaining their residents, preferring immediate tax gains. The most obvious results of this are a reduction of the population base leading to fewer services. This leads to fewer taxes paid by businesses. Less demand for services also leads to reduction of the tax base, etc. 2. The dependency of LA‟s budget on taxes collected from residents and businesses, rather than governmental grants, brings special importance for their financial performances, and especially their self income. There are causal

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Social Preference, Financial and Economic Performance …

49

links between these LA's self-generated income, and expenditures and migration. These links are dependent on some intermediates, such as commuting strictures, tax system, and location, and individual socio-economic structure. Therefore, these links between can vary from one municipality to another and can cause unexpected results. For example, some municipalities might improve their self-generated income with more migrants. Other municipalities, which are located elsewhere (i.e., in the peripheral rings of the metropolis), would decrease their self-generated income. CMs, such as TA, which serve their residents as well as large numbers of non-residents daily, would tend to increase their self-expenditures although losing residents. As a result of this dependent link on intermediates, some migrant-losing municipalities are likely to have more balanced budgets (with incomes surpassing their expenditures) than migrant-attracting municipalities. These trends of migration out flow would lead to a reduction of the population base, leading, in turn, to fewer services etc. 3. There is a need for an alternative financing system of GTAMA services, which should ensure more fairness in the distribution of a municipal tax burden. However public support for any alternative financing system in the GTAMA is unlikely due to a generally low support of the public for any additional taxes and fees. Only the CM‟s residents would expectedly be interested in sharing the heavy local taxes they pay in Tel-Aviv, and in conservation of the city‟s resources in the future.

THEORETICAL FRAMEWORK Looking at the financial performances of local authorities and the way they are impacted by internal migration in a broad spectrum, the study falls in line especially with two conceptual debates that have taken center stage in current international public finance: For one, the conceptual frame is often sought in so-called "fiscal federalism" and its exploration from different point of views, such as in the context of economies of cities; in the context of theory of public finances and local finances; theories of local public goods and also theories of municipal financial management. This theoretical framework fits the main questions of this study regarding implications of local financial systems, local finance, commuting and mobility of households (residents) and firms, distribution of local income and expenditures, and “market failures” of local financial systems. “Fiscal

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

50

Asher Vaturi

federalism” discusses the complex of local financing in the sense of fairness, equalization, democratization, and efficiency of the local systems. Second, the conceptual base of this research is taken from the question of whether the authorities that are responsible for the finance of local governments have shown a “divergence” or “convergence” approach in their system development. Proponents of the “convergence” Hypotheses accentuate as one of the key factors for economic competition and financial markets, currents including “neo-liberal” policy positions and New Public Management (NPM). In both conceptions, country-specific institutional, political, and cultural considerations, as well as historical background and exigencies, have in practice played major roles in shaping their the inter-governmental fiscal impact. The literature of the first conceptual framework, “fiscal federalism”, as one of the main theoretical approaches of public finance, is much more extensive than the literature on NPM. This dimension of “fiscal federalism” was originally developed in Kenneth Arrow (1970), Richard Musgrave, and Paul Sadweh Samuelson's two important papers (1954, 1955) on the theory of public goods and defined by Musgrave‟s study on public finance (1959) and Oats (l972). It concerns the division of public sector functions and finances among different tiers of government. In undertaking this allocation, economics emphasizes the need to focus on the necessity of improving the performance of the public sector and the provision of their services by ensuring a proper alignment of responsibilities and fiscal tools. While economic analysis, as encapsulated in the this theory, seeks to guide this division by focusing on efficiency and welfare maximization (through provision of public goods ) in determining optimal jurisdictional authority, there is a need to recognize that the construction of optimal jurisdictional authority in practice goes beyond purely economic considerations.

Financial sources of local authorities In some countries, such as the UK, local authorities have functional responsibility for important areas of public spending such as education, health and employment services. Moreover, the growth of population in some of these countries, mainly in urban areas, has seen significant increase in the demand for municipal services (Kemp, 1995; Caulfield, 2000).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Social Preference, Financial and Economic Performance …

51

This trend creates a need to provide more and more services by local authorities without additional resources. It also forces them to consider which services to reduce, which to maintain and where to expand needed services at the expense of less desirable programs. Through economic development, local governments have been able to get a “new lease on life” financially by expanding revenues from existing sources, such as sales taxes, property taxes, business licenses, and utility taxes (Kemp, 1995). The differences in local financial sources include variations in the numbers of local taxes and the extent to which particular tax bases are allocated to local government. This diversity is explained, in part, by the basic differences in the context and functions of local government in the different countries. Thus, according to Caulfield (2000), this diversity reflects the balance between the „choice‟ and „agency‟ roles that local government can perform. The first model, the “choice” role, has a bottom-up approach. In this case, local authorities allow local social groups to decide which system matches their needs and preferences better than centralized decisions could. The other model, the „agency‟ role, has a top-down approach. In this model, local authority is seen as a vehicle for implementation of the policies and decisions of a central government that wishes to eliminate conflict with its objectives (Caulfield, 2000). Despite the differences in local financial systems between countries, in general there are two main revenue sources for local authorities: government grants and self-generated income (local revenues). One of the main discussions among the researchers of LA financial systems is the distribution of revenue sources between the two. The system for this transfer of budget from the central government to local authorities changes from one country to another. Some countries (such as Germany) provide such transfers through stable tax-sharing arrangements, while other western countries allocate grants on the basis of discretionary choices by the central government (Smith, 1996). Since the 1990s, intergovernmental transfers constitute at least 30 percent of local budgets in many countries and in some (UK, the Netherlands, and Ireland), more than 70 per cent (OECD, 1999). Belgium, Canada, and Denmark depend on grants for approximately half their revenues, whereas for Norway, Luxembourg and the USA, grant income is around 30 percent. Australia, Austria, New Zealand and Iceland receive less than 20 percent of their revenues in grants (OECD, 1999).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

52

Asher Vaturi

These problems were some of the causes for the development in the 1970s of new local doctrine for the OECD countries, named New Public Management (NPM). NPM is “shorthand for a group of administrative disciplines”. According to the OECD (Kickert, 1997: 733), “a new paradigm for public management” had emerged, with eight characteristic “trends” such as strengthening steering functions at the center; devolving authority, providing flexibility; ensuring financial performance, control tools, accountability; improving the management of human resources; optimizing information technology; developing competition and choice; improving the quality of regulation; and providing responsive service. This accountability paradigm of progressive public administration put heavy pressure on two basic management doctrines. One of those doctrines was to keep the public sector sharply distinct from the private sector in terms of life and continuity, ethos, and practical tools for doing business, organizational planning, demography, wages, and career structure. The other approach to financing of LAs is self-generated income. In most countries, when compared to total revenue, local revenues can indicate the degree of local government dependence on higher levels of government. There is also a common understanding among researchers that local revenues are crucial for local authorities‟ income and impact their ability to provide public services and facilities (Garcia-Milà & McGuire, 2003; Lee, Gook, & Webster, 2006). That is why western governments, such as the EU countries, tend to encourage local governments to adopt an independent local financial policy and to develop independent sources: In Israel, local authorities (LAs), are the set of bodies charged with providing services such as urban planning, and the provision of drinking water as well as educations as per guidelines of the ministry of Interior for communities of all sizes in the country. Most researchers agree that LAs are highly dependent on the central government in many areas of financing, which include not only resources but also (as is common in public finance) the entire budgeting system, the revenue and expenditures system, and the operating, supervising and auditing system (Hecht, 1997; Razin, 1998a). In addition of self income of Israeli LAs, central government funding, including subsidies and assistance, takes three forms (Vaturi et al, 2004):  

Ordinary subsides (equalization grants) for most LAs Specific grants are given to gap the authorities‟ cumulative debt;

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance … 

53

Earmarked budgets, aim to which fund certain national services provided by the municipal authorities, such as welfare, education and environment services

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Links between migration and financial performances The traditional indicators for measuring performance of local government are by economy (inputs) and efficiency (costs), due to the limited ability to measure effectiveness or outcomes in public authorities. However, this approach has received much criticism due to the exclusion of non-financial dimensions of performance from many sets of measures (Osborne and Gaebler, 1993). Kaplan and Norton‟s (1992) balanced scorecard argues for performance measurement over four dimensions of performance: financial, customer satisfaction, internal business processes, and innovation and learning. Kaplan and Norton effectively examined the three dimensions of quality, flexibility, and resource utilization in Fitzgerald et al.‟s 1991 model to be the single dimension of internal business processes. Kaplan and Norton‟s dimensions might also be recognized as results (financial, customer) and determinants (internal business processes and innovation and learning). According to an early study by Tiebout (1956), independent local government offers a variety of expenditures and tax policies, while perfectly mobile consumers („consumer-voters‟) reveal their preferences for local public goods and services through their choice of local communities. Tiebout further assumes „an optimal community size … for which this bundle of services can be produced at the lowest average cost.‟ Thus, communities „below optimal size seek to attract new residents to lower average costs‟ (Ibid.: 419). However, follow-up studies (see, for example, Bramley, 1989; Mieszkowski & Zodrow, 1989; Evans, 1991) criticized the underlying assumptions of Tiebout‟s model on a number of grounds, such as underestimating local policies, mobility costs and housing price differentials across local communities, as well as ignoring the impact of government intervention. From “fiscal federalism” perspective, the role of Tiebout‟s sorting is to increase the welfare received from decentralized finance. The more homogeneous local jurisdictions are in their demands for local services and the greater the variation in these demands across jurisdictions, the greater the potential welfare received from the decentralized finance system.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

54

Asher Vaturi

In sense of economic and urbanization, Hirsch (1984) founded two primordial conditions that can trigger urbanization: the main one is the supply side phenomenon, a integration of comparative cost advantages, production specialization and scale economic. For Aharonovitz (2006), migration depends mainly on economic conditions such as economic growth in specific geographic units. These economic conditions affect the movement of firms in both the home and destination regions. He found differences between migration streams in that the probability of job-related migration is positively affected by the individual‟s level of education. Among some of the better-educated, migration is negatively affected by the origin state's average wage. In contrast, he found that the probability of housing-related migration exhibits the opposite behavior. Some recent studies advocating the concept of 'endogenous growth' indicated that central municipalities (CMs) have this kind of economic competitiveness, which helps them improve the prosperity of their city (Glaeser, Kolko, & Saiz, 2001; Glaeser, & Gottelieb, 2006).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Alternative systems of financing local services Various possibilities for changing financial systems have been examined by studies in various countries such as the US (Pastor et al., 2000), France (Prud'homme', 1996), Italy (Levaggi, 1996), the UK (Else, 1996), Indonesia (Firman, 2003) and Israel (Hecht, 1997) (see Appendix 1). The results of these studies show that. In many ways, tax reform and its implementation owe more to accident than to planning and cannot solve all the CMs‟ financial problems. Moreover, there is no uniform financial solution suitable for all CMs, as the solutions have to fit local conditions. Firman (2003) examined the potential impact of fiscal decentralization reform on urban and regional development in Indonesia. The new general allocation fund and revenue-sharing system may have reduced vertical fiscal disparities. He argues that fiscal decentralization in Indonesia has, in the longer term, profound local and regional impacts. However, over the longer term, regional autonomy policy has the potential to promote development and reduce spatial disparities. Mikelbank et al. (2007) analyzed the Residential Property Tax Abatements program in Cleveland, Ohio, and found that for center cities located in stagnating economies with relatively little population growth,

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Social Preference, Financial and Economic Performance …

55

residential property tax abatement programs can have important positive effects. According to Brace (1997), high taxes harm general growth, but the effects of taxes on growth and expenditure, and the resulting effects of expenditure on long-term performance, should be considered. Electronic Road Pricing (ERP) is another popular financial scheme .ERP is based on a pay-as-you-use principle and designed to be a fair system, as motorists are charged when they use the road during peak hours. It is an electronic system of road pricing used mainly in South-East Asia and in some cities in the US and Western Europe. Its aim is to deal with traffic congestion by use of pricing as an alternative to investment, leading to expensive solutions that might not be efficient or economical (Hau , 1990; Olszewski & Tay, 1996; Tay, 2000). However, the ERP solution is not always effective. As Emmerink et al. (1995) point out, that a cordon system, in which the price is dependent on the time of the day, is currently the most attractive option for pursuing a kind of congestion pricing. Jacobsson, Fujii, & Garling (2000) showed that the public‟s acceptance of this model is negatively affected by perceived infringement on freedom and unfairness, which increases with the intention to reduce car use. A Regional Tax-Base or Revenue Sharing technique is another local financial scheme that attempts to increase the self-reliance of central cities (Martin & Schmidt, 1983; Imbroscio, 1993; Morris, 1996). This kind of scheme requires that each community designate some part of its assessed value base, or stream of tax revenues, for inclusion in a regional pool of assessed values or tax revenues that is then divided among all localities in the pool. This is done by some formula, usually involving total population and perhaps other variables (Braid, 2000; Köthenbürger, 2004). Central government support aiming to balance the anomalous financial burden of central cities is another option to deal with their financial problems. Thus, Warner & Pratt (2005), who examined the role of state policy on local revenue effort in the mid-Atlantic and East North-Central regions of the US in the late 1980s, came to the conclusion that, although the average impact of state aid is negative, for more than half of the counties state aid has a complementary effect – increasing effort. Köthenbürger (2004) also argues that ex-post transfer of federal payments proves to be equivalent to an interstate revenue-sharing system which may render federal intervention in the presence of fiscal externalities, welfare-deteriorating relative to tax competition.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

56

Asher Vaturi

In Israel, following the long financial crises of the LAs, some researchers reexamined the Israeli local tax system and its weaknesses, such as the equity of Israel‟s property tax (Portnov & Erell, 2000), redistributing municipal wealth (Razin, & Hazan, 2006), new perspectives on governmental grants for LAs (Hecht, 1997) or new financial and economic arrangements between LAs in metropolitan areas (Kipnis, 1984).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

RESEARCH CONCEPT AND METHOD Regarding the tax system which receives local taxes from business, rather than resident, taxes, CMs prefer to attract businesses rather than residents. However, the CM needs to be attractive through provision of appropriate services to both residents and non-residents (business clients) in order to contribute to business development. As long as the commuters enjoy CM services free of charge, they continue to live in the suburbs and do not migrate into the CM. National and international data (e.g. OECD, 2007) shows that this interaction's model cannot be applied the same way among all the LAs and all businesses or social groups. In commuting, as well as migration, attractiveness of municipalities might depend on the location of the municipalities and their socioeconomic profile (see Spengler & Myers, 1977). In case of businesses, it depends on their economic specialization and market types. Although the present study builds upon the theoretical framework proposed by Tiebout, it furthers his model in a number of respects. In particular, it assumes that the interaction between internal migration and financial performance of local authorities is indirect and carried out through a number of intermediaries – a ‘black box’ where the inputs from both municipalities and potential residents or businesses are processed and might either be strengthened or weakened (see Figure 1). In this view, such a „black box‟ includes the following four major intermediaries components – 1) local tax system, 2) intra-metropolitan commuting, 3) metropolitan location, and 4) individual preferences. 1. Local tax system – While Tiebout‟s model presumes a fixed relationship between the number of incoming migrants and local income, in this view, this linkage works only if the tax system is uniform across all metropolitan municipalities and if the local tax

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

57

rates for residents and businesses are uniform. When the local tax rate of businesses is much higher than the rate for residents, the local authority has no incentive to attract residents and would focus on the provision of business services in order to convince businesses to settle there. Moreover, the provision of services for residents aims not to attract more residents, but to attract more clients for the business sector, which it regards as the real source of local taxes.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2. Intra-metropolitan commuting – The number of daily commuters who arrive into the metropolitan core for work or pleasure affects local income and expenditures both directly and indirectly, often more than migrants. While daily commuters most often keep using the services and facilities provided by the central cities (market and economic services, infrastructure, public spaces, etc.), they do not pay for them to the municipalities providing them. 3. Metropolitan location – Tiebout‟s model assumes that the interaction between local municipalities and consumer-voters is independent of the municipalities‟ geographic location. In practice, however, migrant attractiveness of places is strongly affected by their location (Portnov & Erell, 2000). In particular, the closer municipalities are located to the metropolitan social and economic center, such as the municipalities of the inner ring, the more social and economic advantages they have over the municipalities located in the middle and outer rings. Moreover, closer location decreases municipal expenditures, because its residents use some of the municipal services, such as commercial and cultural services, in the central city. 4. Individual preferences – Migration streams are not homogeneous (George, 1970; Bogue, 1975; Hornby & Melvyn, 2001). The migration attractiveness of a locality thus depends on the physical and socio-economic background of migrants as well as on its image. When there are dysfunctions in the above „black box‟ (for instance, if the gap between the number of consumers and the number of payers grows), unexpected results could occur, such as fiscal improvement when outmigration increases (Vaturi et al., 2004).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

58

Asher Vaturi

Location

Migration Commuting

Tax Municipal performance

reforms

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Individual preference

Figure 1. Conceptual framework for migration-municipal performance links.

Method This study was carried out in three phases, as outlined below

Examination of the financing sources of local authorities in GTAMA The study examined the local authorities‟ financial reports between 1987 and 2000 and measured LAs‟ income from each source In addition, the study evaluated the local financial system of the LAs in GTAMA.

Investigating the links between inter-urban migration and fiscal performance of local authorities in (GTAMA) In this part, the study compared the outward migration of residents and businesses and the financial performances of LAs in GTAMA between 1987

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

59

and 2002. The data collected from Israel Central Berea for Statistics (ICBS, 1984-2004a) and other national reports, were analyzed using Causal analysis in order to identify the direction of the relationship among time-series variables, in-migration, out-migration, local residents‟ taxes, local business‟ taxes, grants, population size and municipal expenditures.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Examination of the feasibility of alternative financing schemes Specially-designed questionnaires were distributed among 400 residents of GTAMA, in order to establish the degree of public support for the current allocation of LAs' expenditures in GTAMA as well as public support for potential reforms. The questionnaire (was structured so that it first examined the commuting scheme to the CM (Tel-Aviv) and then examined overall satisfaction from the current allocation of Tel-Aviv (TA)'s expenditures between residents and nonresidents. Next it evaluated support for each of six financial alternatives (see Appendix 1) for the current financial system, under which no inter-municipal cost-sharing occurs. The survey was carried out by e-mail and face-to-face interviews in eight central areas of TA , in business centers, cultural centers, health centers, and leisure centers at different times of the day, in order to ensure representation of different social groups . For the data analysis, the study used mainly three methods: first, causality analysis of municipal income sources and its dependence on internal migration and second, T-test was used to compare between the financial results (self-generated income and self-expenditures) and third, a multinomial regression analysis.

RESULTS OF GTAMA CASE Financial sources of LAs The aim of this investigation is to examine to what extent LA's financial performance depends on the taxes collected from residential and business taxpayers. In most countries, such as in the OECD, since the 1980s there has been a growing mismatch between the functional competencies and fiscal responsibility of local government. Regarding the investigation of LAs‟ financial sources in GTAMA, the results indicate that in many cases, there is a significant dependency on

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

60

Asher Vaturi

governmental grants. However, this dependency changes in GTAMA from one ring to another. Thus, during 1987–2005, the core Tel Aviv (TA) had not received any governmental grants except earmarked participation of the government in provision of national services such as large cultural events, education and social services. Since 1999, TA municipality and GTAMA's inner ring have received small grants. Each of them has sustainable flew of high level of local taxes, (see ICBS,1987–2004a) are located. Regarding self revenues of GTAMA, Arnona (property tax) is the single largest source of income of most LAs in Israel. It amounted to 42.0 percent of the total budget income of LAs in 2005 (ICBS, 1987–2004a). Examination of local authorities‟ financial reports between 1987 and 2000 shows that, in most cases, they show a moderate increase of their selfgenerated income, with a decrease in central government grants provision. However, the comparative size of the self-revenues is not equal. While the core and the inner rings manage to take the advantage of their central location and provide sizable taxes and fees, the peripheral rings need to be more dependent on national grants (ICBS 1987–2004a ;Portnov et el, 2001; Vaturi et el 2004). We might assume that the self-generated income of Tel-Aviv is much greater than in any other city as a result of the large number of businesses. In 2002, the self-generated income of Tel-Aviv was 918 nis (New Israeli Shekel) per capita (in 1985 prices), compared to an average of 440 nis per capita (in 1985 prices) in the other metropolitan rings (Vaturi et al, 2004). This is based mainly on the differences between the taxes provided by the residents and the taxes provided by businesses. The tax rates of commercial buildings are much higher than residential buildings. Therefore, the main source of TA municipality income (ca. 75%) comes from business local taxes and fees (Tel-Aviv–Yafo Municipality, 1985-2006).

Links between internal migration and financial performances In order to examine the impacts of out-migration on self-generated income the study used causality analysis (Granger's causality test, see Granger, 1969) of municipal income sources and its dependence on internal migration. This helped to identify the direction of the relationship among time-series variables. The analysis's results of national data (ICBS, 1987–2004b) shows a positive link between the variables. It shows that contrary to our initial

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

61

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

hypotheses that outward migration decreases the self-income of an LA, our findings indicate that it increases them. LAs characterized by net positive migration balances (G-municipalities) tend to have widening gaps between self-generated incomes and expenditures. At the same time, migrant-losing municipalities (L-municipalities) have, at times, balanced budgets, and since roughly 1996 their incomes have surpassed their expenditures. Moreover, since 1994, the average per capita income in the L-municipalities has significantly surpassed that in G-municipalities see (ICBS 1987–2004b). At first glance, this does not sound logical. However, one should take into account that the rate of local property tax (arnona) imposed on businesses is much greater than on residential properties1. Therefore, an LA that enjoys a high demand for office space may only benefit financially from a net outmigration of its residents.

Figure 2. population grow of TA between 1985 to 2005.

For example, between 1985 and 2005, the population of Tel-Aviv increased only fractionally, from 322,770 to 378,600 residents (Figure 2), i.e., some 17 per cent. During the same period, the floor area of commercial 1

In 1999, for example, the average residential arnona rate in TA was 28.85 NIS per m2, while for banks it stood at 726.32 NIS per m2; for the insurance sector, the tax rate was 497.03 NIS per m2, for offices 192.53 NIS, and 79 NIS per m2 for manufacturing industries (Tel-Aviv–Yafo Annual Financial Report, 1999).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

62

Asher Vaturi

establishments in the city rose from 6.4 to 10.7 million m2, some 65 per cent.2 Thus, despite a virtually constant population, the self-generated income of the municipality grew (in 1985 prices) from 620.8 NIS per capita in 1985 to 870.2 NIS in 2005, more than 40 percent (Tel-Aviv–Yafo Municipality, 1985-2006).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Alternative financing of systems in GTAMA While the there was founded in the previous sections that the local tax system which prefer business rather than residents, is one of the main responsible factor for the failure of the basic interlink between migration and local financial performances, there is a need to examine alternative systems and their potential impacts. The discussion includes several local financial schemes that were developed and operated in different parts of the world. One of the first conclusions of the discussion is that success or a failure of one system in one country, do not necessarily operate the same way in other countries. Therefore, any kind of local feasibility assessment is essential. Based on the theoretical discipline of public participation, the goal of this phase of the analysis was to evaluate and examine public support and its spatial variability for different intra-metropolitan cost-sharing measures in the Greater Tel-Aviv Metropolitan Area (GTAMA).

General attitudes towards current system of inter-metropolitan cost allocation Assessment of the current allocation of the CM's expenditures by residents of different GTAMA rings is featured in Figure 3. As the graph shows, most participants think that the current system is allocated equally between the two groups (40–60%) and even favors the residents of TA (10–50%). Only a few interviewees (10–30%; see Figure 3) accept the theory that the burden of the CM's expenditures is carried mostly by the CM's residents. Apparently, this happens because most interviewees find it difficult to determine the value of the free municipal services they get in the CM such as street lightning, maintaining of public areas (e.g., parks and beaches), and other infrastructures 2

The financial reports of the Tel-Aviv–Yafo Municipality list only businesses from which it receives local taxes. Illegal businesses or private flats illegally used for commercial purposes are not included in the business data.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

63

% support

(e.g., roads, and sanitation). On the other hand, they experience the need to pay expensive fees for parking and other services they use daily. 70 60 50 40 30 20 10 0

Core

Inner

Middle Rings

Equal allocation

Outer

Other

Advantage for TA residents

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 3. Public opinion regarding the current allocation of CM's expenditures by survey respondents residing in different GTAMA rings.

The results also indicate wide differences in the responses across the rings, mainly between the Core and the Inner ring, showing the highest support and justification of the current allocation (59%) by the Core residents; most Inner ring residents (49%) demonstrate the opposite: desire to correct the current allocation in a way that reduces the share of the non-residents. These differences may have a simple explanation. The residents of the Inner ring who come to TA very often are wary about any additional burden that may be imposed on them and thus naturally reject any reform which may affect them. The Other ring's residents respond similarly to those of the Inner ring, while the Middle and Outer rings‟ respondents tend to adopt a more moderate stance: to support the current allocation (48%–49%), but, similarly to the residents of the Middle Ring, 33% of the them aim to correct the current allocation in a way that increases the burden on CM residents.

Acceptance of proposed six reforms As shown in Figure 4, the first two options that are based on additional taxes such as additional VAT or labor tax produce a large rejection from all groups. Regarding the option “additional VAT”: the relative objection to it from the residents of TA (core) and the „Other‟3 ring (85%) is slightly less than that of the residents of all the other rings (95%). While the additional VAT option aims to allocate more financial burden on commuters, CM 3

As defined, the 'Other' ring includes all areas in the country outside GTAMA.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

64

Asher Vaturi

residents and 'Other' residents who do not commute much because of the long distance, care less about it. The additional labor tax option also shows a large difference between the support of TA and other rings‟ residents: 17% compared to 7% in all the other rings. Characteristically, the most favored options are those suggesting governmental aid for the CM, cars fee, or distribution of central functions among all the metropolitan rings. Regarding the option of moving and redistributing central functions, the results indicate that this is the only option where the support of TA residents is lower (38%) compared to the other rings (44%), while this option reduces the central role of the CM . These responses reflect the rejection of mainly the Middle and Outer ring residents to sharing the CM expenditures with CM residents and their preference to attract central functions of their own towns. 50

%

40 30 20 10 0 Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Core

Inner

Middle

Outer

Other

Ring additional vat

labor tax

regional tax

cars fee

govermental aid

distribution of function

Figure 4. Tax reforms support by GTAMA ring.

Additional VAT = additional 1% fee for products sold in TA; Labor tax = additional 1% tax levied on employers in TA; LA participation = diverting part of LA revenues for financing central functions in the CM; Cars fee = road tolls on cars entering the CM; Governmental grants = national subsidies for the CM; Moving of functions = decentralization of central functions (e.g., hospitals or courts) to local municipalities The option of car entrance fees receives relatively high support. The reputation of this option as an 'ecological option' can be the explanation of the relatively large public support of 39% for this option – from all social groups (Figure 4) and metropolitan rings.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

65

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

DISCUSSION AND CONCLUSION Taxes paid by residents and businesses are important sources of LA income. In Israel, they provide up to 80 per cent of LAs‟ income (Portnov et al., 2001). As in other developed countries, the role of self-generated income is growing as the state contributes less and less to the funding of LAs. Therefore, it is essential for an LA to attract both migrants and businesses and retain them, to ensure its financial survival. Our preliminary assumption in that there is a basic inerlink between residents and LAs: on the one hand, residents pay local taxes which structured by law. On the other hand, LAs had to provide certain services and facilities which have known in the literature as “public goods”. This preliminary model that was defined by Tiebout on 1956, is one of the basic theories of local public finance till now days. Unlike the traditional theory of Tiebout (1956), the basic approach of this study is that the interlink between internal migration of residents and businesses and the financial performance of LAs is mediated mainly by two variables: commuting process between metropolitan core and peripheral LAs and the local financial system. Two additional variables have additional impact on this interlink, location and social performances. However, this study argues that while these two variables are important, they are not critical for this interlink like the first two variables. While the commuting brings additional consumers to the central city and effect the provision of public goods, the financial system impact the results of the local performances which are the other side of this equation (see Figure 1). Based on this approach, this study had two main goals one was to examine the interlink between internal migration of residents and businesses and the financial performance of LAs, including an empirical study of the causal relations between these variables. This examination was used to identify possible market failure in the process. The other was to evaluate the feasibility of different local fiscal policy measures as a possible way of dealing with financial deterioration of local authorities in major metropolitan areas. The empirical and theoretical analysis of this study, showed that although these variables has some impact on flews of migrants or public goods, this impact is relative small or insignificant compared to the variables of commuting or tax system. All these discussed issues have deep roots in the scientific literature of public finance, migration determinations, public goods, local economic, fiscal federalism, NPM, globalization, and public participation theories. These

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

66

Asher Vaturi

theories gave the study its needed conceptual framework and a wide perspective for the discussed issues in the sense of market orientations, centralism and decentralism, efficiency, democratization, and justice. Our main contribution is the indication of “market failures” by the traditional interlink of the Tiebout theory between migrants and local generation income of LAs, a classification with roots in innovative research that has addressed the paradigms of public finance and NPM. The study shows that mobile residents and firms cannot consider an optimal choice as long as their decisions are determined by external factors such as their socio-economic prototype, their location, size and mainly the commuting options that allow them to use local goods provided by the CM without the need to pay for them. The “fiscal performances” expression was defined in this study in terms of self-income and self-expenditures, similar to its original use in business expressions. The idea was that while the roles of central governments as a sponsor of local service have decreased over the recent years, the role of the self-generation has increased. As a result of that, an LA's strength has started to be evaluated through its financial performance. This evaluation is critical not only for its prestige within the government, but mainly among possible migration of residents and businesses. Indeed, there are many important variables affecting the fiscal performances of LAs, such as politics, management quality, and social structure of the residents and disparity of LAs; all of which were discussed in this study. However, we argued that internal migration of residents and businesses, as one of the recognized major phenomena of our day, has a unique importance for our discussion. This approach has a strong base in the literature of globalization and fiscal federalism theories. This phenomenon is first seen as an important proof for the argument about “global changes” and “the global culture and economic cross borders”. From this point of view the migration is the messenger of this approach. For the other approach of public finance and fiscal federalism, mobilization of residents and firms is one of the causes for the need to decentralize the local responsibilities in order to be able to provide public goods in an efficient and democratic way. According to the proposed model (Figure 1), migration of residents and businesses both affects the financial performance of an LA and is affected by it, directly and indirectly. While in-migration secures LA income, financial performance affects its attractiveness for residents and businesses through provision of local services and facilities. While in this study, the model is only tested for internal migration of residents, the findings appear to contradict the model. In particular, the

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Social Preference, Financial and Economic Performance …

67

relationship between financial performance of LAs and migration seems unidirectional: while past migration helps predict the financial performance of LAs, the evidence for the opposite effect (i.e., incomes and expenditures on migration) is insufficient. Moreover, contrary to initial Hypotheses that outward migration should decrease the self-income of an LA, our findings indicate that the more residents that migrate from a locality, the better off it becomes. This process may continue at least till a minimum size of residents where any decrease of residents would destroy the ability of the LA to function. While LAs characterized by net positive migration of residents (G-municipalities) have wide gaps between incomes and expenditures, migrant-losing municipalities (L-municipalities) often have more balanced budgets, with incomes surpassing their expenditures. Our explanation is that the tax rate on businesses in Israel is much higher than that on residential properties. Thus, an LA enjoying high demand for office space may benefit financially from the net out-migration of its residents. Residential migration is an important source of income for hinterland GTAMA municipalities. As a rule, they are insufficiently attractive for businesses, and heavily dependent on taxes paid by residents. Since the local tax rate on residential properties is rather low, hinterland municipalities are unable to balance their budgets and may be forced to reduce services and facilities. An informed regional policy should focus on attracting more businesses to these areas, establishing new business complexes outside the central cities. At present, the GTAMA core manages to bridge the gap between its high expenditures and self-generated income, mainly through heavy taxation of businesses. However, in view of this study, increasing density, environmental problems and growing land costs, the GTAMA core may be unable to continue funding Services and Facilities (MSFs) for the whole metropolitan area indefinitely. The GTAMA should thus adopt a cost-sharing policy of MSF (public goods) funding, dividing MSF costs among all users, to ensure balanced development in the metropolitan area. In its concluding phase, the study examined the feasibility of changing the current financial scheme of local authorities in a way that shares the tax burden between all users. This examination represents the second conceptual pillar of this research, which indicated in its first part that the local tax system is one of the main factors responsible for the market failure of the interlink between internal migration and fiscal performance.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

68

Asher Vaturi

For the examination, the study used a survey of 400 residents of GTAMA. According to public attitude regarding the possibilities for changing the local financial system, the greatest support was indicated unexpectedly by the residents of the core for the current allocation (59%), compared to only 28% who support the need for cost-sharing with the non-residents. This shows that despite the costs that CM-TA would pay for the current commuting trends in the long term, its residents are currently satisfied with the prosperity that this situation brings to the city‟s economy. The first section of the questionnaire deals with the general question of the need to change the current financial system. This approach helped us identify that Education and Age are the only significant factors that affect public support. Examination of the public response regarding specific cost-sharing options shows that the alternative of Distribution of central functions received the greatest support by most of the residents except those of TA-CM and the Inner Ring. This shows that most of the residents of the metropolis are dissatisfied with the current interrelationship and the cost allocation between the CM and the periphery and would prefer to consume most of the services in their home LA. In contrast, the residents of TA-CM and the Inner Ring reject this option. It is explained that while the residents of the Inner Ring profit from this situation, the residents of TA are afraid of losing the advantages of being CM, such as economic growth. In general, the taxation options that represent support for drastic and demanding steps regarding the metropolitan residents were not popular except for the option of road – congestion tools that was also regarded as a necessary step for the environment. The conclusion is that solutions with added public benefits, such as environmental improvements, have better chances to be accepted by the public. As expected, Inner Ring residency is the dominant significant factor that affects most of the alternative options. This can be explained by the fact that its position is clear and simple: Its residents are profiting from suburbanization trends and their financial situations have improved as a result of the growth of the business sectors, mainly services which replace residential areas of the residents who left. Car fees or road tolls is one of the most popular options and should be treated as the preferred option in GTAMA and similar metropolitan areas. The study suggests implementing this option step-by-step and supporting it with a public campaign that would provide the necessary knowledge to understand this reform. The study shows that the public can support a

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

69

demanding policy measure such as car fees much more easily when they are convinced that it gives them an advantage as well, such as environmental improvement. This is a clear advantage that can be seen in the short term, unlike the goal of just cost-sharing, which is more abstract and its real impact will only be shown in the long term. In this sense, the conclusion of Stern & Richardson (2005) which indicates that since the human cognitive mechanism of transition decision-making is universal, idiosyncratic situations and cultural and societal norms can affect the individual's perception of constraints that will consequently affect the whole decision-making process.

REFERENCES

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Aharonovitz, G. (2006). Migration of Firms, Migration of People and the Geographical - Distribution of Economic Growth, Study submitted for the degree of Doctor of Philosophy, Tel-Aviv University. Arrow, K. (1970). The Organization of Economic Activity: Issues Pertinent to the Choice of Market Versus Non-Market Allocation. In Joint Economic Committee, The Analysis and Evaluation of Public Expenditures: The PPB System, Vol. I. Washington, D.C.: U.S. GPO Bailey, J. S. (1999). Local government Economics – Principles and Practice, McMillan Press, London. Blair, P. J. (1995) Local Economic Development, Analysis and Practice, Sage Publications, Thousand Oaks, London. Bogue, J. D. (1975). A migration‟s – Eye View of the Costs and Benefits of Migration to a Metropolitan. In Heer, D., Society and Population. University of California, Englewood Cliffs. Brace, P. (1997). Taxes and Economic Development in American States: Persistent Issues and Notes for a Model. In Perry, C. D., & Marston, A. S., Dilemmas of Urban Economic Development (pp. 140-162). Urban Affairs Annual Reviews. Braid, R. M. (2000). A Spatial Model of Tax Competition with Multiple Tax Instruments. Journal of Urban Economics, 47(1), 1-16. Bramley, J. (1989). How Far is the Poll Tax a Commuting Charge the Implications of Services Usage Evidence? Policy & Politics 17(3), 1987205.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

70

Asher Vaturi

Caulfield, J. (1997). Finance, Taxation and Equity within Metropolitan Areas. Paper presented to the OECD/Sweden Workshop Governing Metropolitan Areas: Institutions, Finance and Partnerships. Stockholm, 4-6 June. Caulfield, J. (2000). University of New South Wales, paper presented to „Local Government at the Millennium‟ International Seminar February 19, 2000, University of New South Wales). Else, P. (1996). Changing Perceptions of the Role of Local Government With Particular Reference to the United Kingdom. In: Pola, G., France, G., & Levaggi, R., Developments in Local Government Finance, Theory and Policy (pp. 159-178). Edward Elgar, UK. Emmerink, R. H., Nijkamp, P., & Rietveld, P. (1995). Is Congestion Pricing a First-Best Strategy in Transport Policy? A Critical Review of Arguments. Environment and Planning B: Planning and Design, 22(5), 581-602. http://conventions.coe.int/Treaty/EN/Treaties/Html/122.htm

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Evans, A. (1991). Urban and regional economics. Cheshire, P.C., & Alan, W. Eds., Cheltenham UK: Edward Elgar Publishing, International library of critical writings in economics (0.14) Elgar reference collection. Firman, T. (2003). Potential Impacts of Indonesia‟s Fiscal Decentralisation Reform on Urban and Regional Development: Towards a New Pattern of Spatial Disparity, Space & Polity, 7(3), 247-271. Fitzgerald, L., Johnston, R., Brignall, T. J., Sivestro, R., & Voss, C., (1991). Performance Measurement in Service Businesses, London, CIMA. Garcia-Milà, T., & McGuire, T. J. (2003). Solidarity and Fiscal Decentralization, National Tax Association – Tax Institute of America. Proceedings of the Annual Conference on taxation (pp. 152-156). Washington. George, P. (1970). Types of Migration of the Population According to the Professional and Social Composition of Migrants. In Clifford, A., & Jansen, J. (Eds.), Reading in the Sociology of Migration (pp. 39-47), Oxford: Pergamon Press. Glaeser, E. L. & Gottlieb, G. D. (2006). Urban Resurgence and the Consumer City. Urban Studies, 43(8), 1275-1299. Glaeser, E. L., Kolko, J., & Saiz, A. (2001). Consumer City. Journal of Economic Geography, 1, 27-50. Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods, Econometrica, 37, 424-38.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

71

Hau, T. D. (1990). Electronic Road Pricing: Developments in Hong Kong 1983-89. Journal of Transport Economics and Policy, 24(2), 203-214. Hecht, A. (1997). Restructuring Municipal Finance in Israel. Jerusalem, The Floersheimer Institute for Policy Studies. Hirsch, W. Z. (1984). Urban Economics Analysis, Macmillan Publishing, New York. Hornby, F. W. & Melvyn, J. (2001). Processes and Patterns of migration. In An Introduction to Population Geography (pp. 103-128). Cambridge University. ICBS, (1987-2004a). Local Authorities in Israel: Financial Data (Annual), Jerusalem: Israeli Central Bureau of Statistics [Hebrew]. ICBS, (1987–2004b). Local Authorities in Israel: Physical Data (Annual), Jerusalem: Israel Central Bureau of Statistics [Hebrew]. Imbroscio, D. L. (1993). Overcoming the Economic Dependence of Urban America: A Review of Strategies. Journal of Urban Affairs, 15(2), 173190.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Jacobsson, C., Fujii, T., & Garling, T. (2000). Determinants of Private Car Users Acceptance of Road Pricing, Transport Policy, 7, 153-158. Judd, D. & Swanstrom, T. (2002). City Politics: Private Power and Public Policy, 3rd Edition. Boston, MA: Addison-Wesley Publishing Company. Kaplan and Norton (1992). The Balanced Scorecard: Measures That Drive Performance, Harvard Business Review, Jan.-Feb., 71-79. Katz, B. (2000). Moving Beyond Sprawl. The Brooking Review, 18, 6-11. Kemp, L. R. (1995). Raising Revenues Without Increasing Taxes. In Kemp, L.R., Economic development in local government, a handbook for public officials and citizens (pp. 1-12). McFarland & Company, Inc. Kipnis, B. (1984). Metropolitan Processes: Their Impact on Regional Strategies: A Case Study in Israel, Journal of Architectural and Planning Research, 3(1), 191-208. Köthenbürger, M. (2004). Tax Competition in a Fiscal Union With Decentralized Leadership. Journal of Urban Economics, 55(3), 498-513. Lee, E. (1969). A Theory of Migration. In: Jackson, A.J. (Ed.), Sociological Studies of Migration, Reader in Sociology, University of East Anglia.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

72

Asher Vaturi

Lee, S., Gook, S. J., & Webster, C. (2006). The Decentralizing Metropolis: Economic Diversity and Commuting in the US Suburbs. Urban Studies, 43(13), 2525-2549. Levaggi, R. (1996). Local Authorities' expenditure behaviour in Italy and regional differences. In Pola, G., France, G., & Levaggi, R. Developments in local government finance, theory and policy (pp. 115-134). Edward Elgar, UK. Lucas, R. (1977). Internal Migration and Economic Development: an Overview. In Brown, A., & Neuberger, E., Internal Migration: A Comparative Perspective. New York: Academic Press. Martin, D. T. & Schmidt, J. R. (1983). Expenditure Effects of Metropolitan Tax Base Sharing: A Public Choice Analysis. Public Choice, 40(29), 175186.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Mieszkowski, P. & Zodrow, G. R. (1989). Lower case: Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes of Land Rents, and Property Taxes. Journal of Economic Literature, 27(3), 1098146. Mikelbank, M., et al. (2007). Residential Property Tax Abatements and the Rebuilding of a Slow-Growth City: The Fiscal Returns and Lessons from Cleveland‟s 20-Year Experiment. Maxine Goodman Levin College of Urban Affairs. Cleveland, OH: Cleveland State University. Morris, M. (1996). Joint Economic Development Districts and Zones. American Planning Association, Public Investment, June 4. Musgrave, R. A. (1959). The Theory of Public Finance. New York: McGrawHill OECD (Organisation for Economic Cooperation and Development), (1999). Revenue Statistics 1965/1998, Special Feature. Olszewski, P. & Tay, R. (1996). Road Infrastructure Development in Singapore and Malaysia. Asia Pacific Journal of Transport, 1(1), 1-14. Oates, W. E. (2005). Toward A Second-Generation Theory of Fiscal Federalism, International Tax and Public Finance, 12, 349-373. Oates, W. E. (2007). On the Theory and Practice of Fiscal federalism, CREI Working Paper no. 1/2007 , CREI, Centro di Ricerca, Interdipartimentale di Economia delle Istituzioni.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

73

Pastor, M., Dreier, P., Grigsby, J. E. III, & Lopez-Garza, M. (2000). Regions that Work: How Cities and Suburbs can Grow Together. Minneapolis, MN: University of Minnesota Press. Portnov, B. A. & Erell, E. (2000). Urban Clustering, The Benefits and Drawbacks of Location, Hants, UK: Ashgate Publishing. Portnov, B. A., McCluskey, W. J., & Deddis, W. G. (2001). Property taxation in Israel: a non ad valorem approach, Land Use Policy, 18(4), 55-68. Prud'homme‟, R. (1996). Impacts of Economic Change on a Local Business Tax Base: The Case of the French „taxe Professionnelle’. In Pola, G., France, G., & Levaggi, R., Developments in local government finance, theory and policy (pp. 79-96). UK: Edward Elgar. Razin, E. (1998a). Gaps in the Financial Stability of Local Authorities in Israel 1972-1995. Jerusalem: The Floersheimer Institute for Policy Studies. Razin, E. & Hazan, A. (2006). Redistributing Municipal Wealth in Israel: Reducing Inequalities in the Revenues of Local Authorities. Jerusalem: The Floersheimer Institute.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Saidel J. A. (2001). The Tax Structure Analysis Report, the Philadelphia Daily News, the City Paper (November 26). Samuelson, P. A. (1955). Diagrammatic Exposition of a Theory of Public Expenditure, Review of Economicsand Statistics 37, 350-356. Savitch, H. V. & Kantor, P. (2002). Cities in the International Marketplace: The Political Economy of Urban Development in North America and Western Europe. Princeton: Princeton University Press. Smith, S. (1996). European Integration and Local Government Finance. In Pola, G., Developments in Local Government Finance. Northhampton, MA: Edward Elgar Publishing. Spengler, J. & Myers, C. (1977). Migration and Socioeconomic Development: Today and Yesterday. In Brown, A., & Neuberger, E., Internal Migration, a comparative perspective. New York: Academic Press. Stein, R. (2003). Economic Specialization in Metropolitan Areas Revisited: Transactional Occupations in Hamburg, Germany. Urban Studies, 40(11), 2187-2205. Stern, E. & Richardson, H. (2005). Behavioral Modeling of Road Users – Current and Future Research Needs, Transport Reviews, 25(2), 159-180.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

74

Asher Vaturi

Storperand, M. & Manville, M. (2006). Behavior, Preferences and Cities: Urban Theory and Urban Resurgence. Urban Studies, 43(8), 1247-1274. Tay, R. (2000). A Note On the Electronic Road Pricing in Singapore. Road & Transport Research, Singapore. Tel Aviv-Yafo Municipality, (1985-2006). Statistical Yearbook (No. 24-43), TA. Tiebout, C. M. (1956). A Pure theory of Local Expenditures. The Journal of Political Economy, 64(5), 416-24. Vaturi, A., Portnov, B., & Shwazth, M. (2004). Internal Migration and Financial Performance of Local Authorities: A Case Study of the Greater Tel Aviv Metropolitan Area, 1985-1997. Space & Polity, 8(1), 61-85. Warner, M. E. & Pratt, J. E. (2005). Spatial Diversity in Local Government Revenue Effort Under Decentralization: a Neural-network Approach. Environment and Planning C: Government and Policy, 23(5), 657-677.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Wegener, M. (1995). The changing urban hierarchy in Europe. In Brotchie, J., International Council for Building Research Studies and Documentation, Cities in competition, productive and sustainable cities for 21st century (pp. 139-161) Melbourne Australia: Longman.

APPENDIXES Appendix 1. Six local financial alternatives for GTAMA 

Alternative 1 –local VAT: In their analysis of the effects of VAT, indicate that countries with a VAT raise more revenue than those without. This association reflects not an increased demand for government, but rather the greater effectiveness of the VAT in raising revenue.



Alternative 2 – employment tax levies on employees in TA. This alternative is focused mainly on the large number of daily workers in TA as an economic and employment center.



Alternative 3 – regional tax: the option of regional tax is very common in many Western countries such as the UK and France. However, while there is no mediator level between the local and national authorities in the Israeli government system, this option requires a wider reform in the Israeli local authorities system.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Social Preference, Financial and Economic Performance …

75



Alternative 4 – car fees: car fees are generally regarded as one of the most effective solutions to reduce urban congestion and solve part of the air pollution problem of large urban centers, rather than a solution for municipal financial deficits.



Alternative 5 – governmental grants: changes of the governmental subsidy of local authorities are the basis of many local tax reforms in the UK, Italy, US, and Israel in the 1990s. Therefore, support for increasing the current governmental grants to local authorities, especially to CMs, can be judged as a kind of criticism of the reforms that reduced the governmental support.



Alternative 6 – Distribution of central functions such as markets, regional health centers, regional courts, etc. Appendix 2. Selected socioeconomic indicators of GTAMA rings (as of 2004)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Ring/ Locality

A. Core Ring Tel-Aviv B. Inner ring Givatayim Ramat Gan Herzliya Holon Bat-Yam Ramat Hashron Average: C. Middle Ring Hod Hasharon Petah Tiqwa Rishon LeZion Or Yehuda Giva't Shemu'el

Distance from TA (Kilometers)

Average annual rate of population growth (%)

Average income per employee, NIS

Unemployed Population (%)

Cars per 1000 residents

365.4

-

0.8

7,287

6.9

646

47 126.5 83.6 165.8 132 35.6

4 6 14 11 13 12

-0.3 0 0.4 0 - 1.5 -0.1

8,317 7,320 8,116 5,877 4,765 9,871

6.2 6.5 6.8 7.4 7.3 6.1

407 389 473 364 241 509

98.4

10

0.1

7378

6.1

397

40

22

4.2

8,890

6.8

378

173.8 214.6

23 19

0.7 1.4

6,400 6,976

7.3 7.2

507 342

29.4 16.9

16 18

9.2

5,596 8,764

8.2 6.2

304 352

Population, residents (1,000)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

76

Asher Vaturi Appendix 2. (Continued)

Ring/ Locality

Raanana

Distance from TA (Kilometers)

69.7

23

Average annual rate of population growth (%) 1.1

91

20

3

32 26.5

28 23

167.1 100 22.3 78.8 24.3 192 80

33 28 19 23 19 42 27

Average income per employee, NIS

Unemployed Population (%)

Cars per 1000 residents

9,247

6.8

381

7,646

7.0

377

0.4 2.7

7,205 7,667

8.3 6.8

330 346

1.4 1.4 1.5 1.3 1.5 2.4 1.5

5,367 7,051 NA 7,826 8,390 5,479 6,123

9.5 10.7 7.7 6.7 8.3 8.9 8.1

251 293 371 412 393 188 323

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Average: D. Outer Ring Yavne Nes Ziyyona Netanya Rehovot Yehud Kefar Sava Qiryat Ono Ashdod Average:

Population, residents (1,000)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 3

AN EVALUATION OF THE ECB POLICY RESPONSE TO CHANGING ECONOMIC CONDITIONS IN EURO AREA MEMBER STATES

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Jim Lee and Patrick M. Crowley Texas A&M University-Corpus Christi, Texas, US

ABSTRACT This paper empirically investigates the extent to which the European Central Bank has responded to evolving economic conditions in its member states as opposed to the euro area as a whole. Based on a forward-looking Taylor rule-type policy reaction function, we conduct counterfactual exercises that compare the monetary policy behavior of the ECB with the alternative hypothetical scenarios (1) were the euro member states to make individual policy decisions, and (2) were the ECB to respond to the economic conditions of individual members. The results reflect the extent of heterogeneity among the national economies in the monetary union, indicating that the ECB's monetary policy rates have been particularly close to the “counterfactual” interest rates of its largest euro members, as well as countries with similar economic conditions, which includes Germany, Austria, Belgium and France.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

78

Jim Lee and Patrick M. Crowley JEL Classifications: E5, C5.

Keywords: European Central Bank; monetary policy reaction; Taylor rule; counterfactual analysis.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

1. INTRODUCTION In 1999, all but four members of the European Union participated in the third stage of the Economic and Monetary Union (EMU) process by adopting the euro as their national currency and transferring responsibility for monetary policy to the European Central Bank (ECB) – the hub institution of the Eurosystem. The official policy stance of the ECB is that monetary policy decisions are reflective of changing economic conditions of the euro area as a whole, and do not reflect any diversity among the national economies within the region (Duisenberg, 2001). While the establishment of the ECB is necessary for a monetary union among EU member states, the efficacy of a “one size fits all” monetary policy for the EMU has faced criticisms. A growing volume of literature (e.g., Faust et al, 2001; Carstensen, 2006; Arestis and Chortareas, 2006; Fendel and Frenkel, 2006; Sturm and Wollmershäuser, 2008) has attempted to evaluate the performance of the ECB in managing the aggregate economy of the euro area. For instance, Faust et al (2001) rely on the behavior of Germany‟s Bundesbank in the pre-euro period as a benchmark to evaluate the ECB policy behavior. Many of these studies are, however, hampered by the short history of EMU, so the results of these earlier studies appear to be rather fragile and/or anecdotal. The objective of the present paper is to evaluate the performance of the ECB's monetary policy by comparing its historical policy behavior against the hypothetical monetary policies of its members. More specifically, we ask two related questions: (1) What would the policy interest rates have been if the ECB were to make policy decisions based on the economic conditions of individual euro area member states instead of the euro area as a whole?; and (2) What would the interest rates of euro area member states have been if their central banks were given the power to make individual policy decisions? The two questions are addressed using counterfactual exercises with a popular Taylor rule-type policy reaction function. Based on these exercises we can construct aggregate “stress” measures which indicate how divergent economic conditions are within the euro area.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

79

In addition to the counterfactual analysis – an approach different from the traditional regression-based methods in earlier studies – our work contributes to the existing monetary policy literature in three directions. First, our results benefit from nearly a decade of ECB history as opposed to earlier studies with limited data observations. Second, we implement recursive estimation to accommodate observed instability in feedback coefficients of the reaction functions. This method allows us to model evolving monetary policy conduct, particularly in terms of central banks‟ changing weights on individual economic variables. Third, we include monetary aggregates in the Taylor rule as a representation of the ECB‟s “second pillar” of the official ECB monetary policy strategy. The rest of this paper is organized as follows. The second section discusses the methodology and data. The third section presents the estimation results based on a Taylor rule-type reaction function. The fourth section discusses the results of some counterfactual exercises in order to evaluate the monetary policy implications of disparate economic experiences among euro area member states. The fifth section concludes the paper.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2. EMPIRICAL METHODOLOGY 2.1. The Taylor Rule We explore central bank behavior using the Taylor rule, which has become the most popular formulation of a monetary policy reaction function.1 A Taylor rule is a formulation for determining interest rates, and it assumes that interest rates should be related to the rate of inflation and to the output gap (which is calculated as the amount of spare capacity in an economy). As interest rates are not expected to instantaneously adjust to changes in interest rates and the output gap, a dynamic version of the Taylor rule can be used thereby incorporating “interest rate smoothing” so that interest rates are adjusted through time to any new developments in inflation and output. Following Clarida et al (1998) and Faust et al (2001), among others, the baseline specification of a dynamic version of the Taylor rule for a central bank's policy instrument is expressed as:

it   it 1  1    it*   t ,

1

(1)

See Fernandez and Nikolsko-Rzbevskyy (2007) for a recent comparison of different specifications of the Taylor rule.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

80

Jim Lee and Patrick M. Crowley

* where  t is an i.i.d. error term with a zero mean. The term it denotes the

central bank‟s “target” interest rate, and the parameter ρ captures the interestrate smoothing behavior in monetary policy conduct. According to this forward-looking version of the policy reaction function, the central bank responds to (i) the expected rate of inflation between periods t and t+n that is above its targeted rate, and (ii) the contemporaneous expected value of the output gap, which is the difference between expected output level *

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

and the potential output level yt . Price stability and output stabilization are widely considered as the dual objectives of many central banks. From 1999 to 2003 the ECB officially followed a two-pillar strategy (ECB, 2003)2, putting equal emphasis on targeting both inflation and the money supply, but in recent years the emphasis on the money supply (the “second pillar”) has waned, leading to pressure from various quarters to reinstate money supply targeting as an important component of monetary policy. The central objective of ECB monetary policy is price stability, and that is supported by the first pillar of economic analysis of dynamics and shocks (what is traditionally incorporated into a typical Taylor rule). The second pillar reflects developments in monetary growth, particularly in the broad M3 monetary aggregate, that affects changes in the overall price level on a longer-term horizon. Because of this so-called “second pillar” of monetary policy, we augment the conventional Taylor rule with an additional variable, namely the growth rate of a monetary aggregate. From this perspective, the ECB‟s “target” rate might be expressed as:

it*  0  1  E  t  n | t    t*    2  E  yt | t   yt*   3  E  mt | t   mt*  ,

(2)

*

where mt denotes money growth, mt its targeted rate, and E is an expectation operator given the information available to the central bank at time t,  t . To facilitate cross-country comparisons, we compute the target inflation rates that would satisfy EMU memberships for the pre-1999 period. For the post-1999 period, we use a 2% fixed target rate as ECB officials (ECB, 1998; 2003) have explicitly defined price stability as an inflation rate below 2% over the medium term. Similarly, we consider the expected growth rate of M3 in specifying the reaction function. Although the ECB has announced a reference 2

In May 2003, the ECB announced its revised monetary policy strategy that no longer explicitly assigned monetary growth a “prominent role” in its policy conduct (Carstensen, 2006).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

81

value of 4.5% for annual M3 growth (ECB, 1998), Huchet (2000) asserts that it has never attempted to keep monetary growth at that reference value by changing interest rates. Moreover, various studies (e.g., Favero et al, 2000; Svensson, 2000) have shown that monetary growth has never played a leading role in the monetary policy practice of the ECB, but various studies (associated with the ECB) have given credence to the use of the second pillar as a long term indicator of inflationary pressures (Assenmacher-Wesche and Gerlach, 2008a; 2008b). Given the above specification for the policy “target” rate, we consider the following dynamic version of the Taylor rule:



it  it 1  1    0  1  E  t n | t    t*    2  E  yt | t   yt* 

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

 3 E  mt | t    t .

(3)

The policy feedback coefficients and reflect the central bank's respective attention to price stability, economic activity and monetary growth in making monetary policy decisions. Various studies (e.g., Arestis and Chortereas, 2006; Carstensen, 2006; Fendel and Frenkel, 2006; Hayo and Hofmann, 2006; Huchet, 2000) have used the above Taylor-type reaction function with or without the monetary variable to examine monetary policy for the euro area. Clarida et al (1998) also finds that this reaction function specification provides a good representation of monetary policy for major central banks in periods particularly after the early 1980s. An earlier version of the Taylor (1993) rule employs only lagged values of the independent variables, implying a backward-looking monetary policy behavior. However, Clarida et al (1998), Faust et al (2001), and Fernandez and Nikolsko-Rzbevskyy (2007) find that the forward-looking model specification, as captured by equation (2), better reflects monetary policy conduct of major central banks than do its backward-looking counterparts.

2.2. Estimation Issues There are two issues in estimating the policy reaction function captured by equation (3). Both issues arise from the fact that data for the independent variables are not directly observable at the time that monetary policy decisions are made. First, the forward-looking specification of the Taylor rule assumes that policymakers react to their expectations about future inflation and the output gap, not their past realized values. Second, data for the output gap

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

82

Jim Lee and Patrick M. Crowley

require information about the potential output level, which is also not directly observable. For inflation expectations, we consider central banks‟ policy responses to one-period ahead expectations of inflation (n = 1). The central banks' published forecasts serve as reasonable measures for the expected inflation and output gap data, but such forecasts, however, are largely unavailable for countries other than the U.S. and the U.K. Following most studies in the recent literature, including Clarida et al (1998) and Muscatelli et al (2002), we instead adopt the errors-in-variables approach that involves the generalized method of moments (GMM) to estimate ex post realized data along with a set of instrumental variables. To reflect the policymakers‟ information set at the time of an interest rate decision, the instruments include four lagged values of the policy interest rate, inflation and output gap series. GMM estimations are carried out using an optimal weighting matrix that accounts for potential heteroskasticity and serial correlation in the error term. Another estimation issue concerns the data for potential output. A popular method to obtain estimates for potential output is to extract a nonlinear trend from GDP data using the Hodrick-Prescott (HP) filter or a band pass filter. However, Laubach (2003) argue that these univariate filters ignore information from movements in inflation and thus provide a misleading picture of the recent trends in such variables as interest rates and output. These filters are also inappropriate from a conceptual perspective. As Muscatelli et al (2002) point out, they are commonly executed using the full sample of estimation data, meaning that policymakers are assumed to possess information about future GDP data that they in fact do not know in real time. To better model policymakers‟ decision making process, we obtain a measure of the output gap using a structural approach. Following King et al (1995) and Lee (2000), among others, we extract the unobservable trend component of the output series in line of an expectations-augmented Phillips curve model: 4

4

i 1

i 1

 t   i t i    yt  yt*    i oilt i  t ,

(4)

where the variable oil controls for the influence of supply shocks and is measured by the first-difference of the log world crude oil price level. In *

equation (4), potential output yt captures the level of output consistent with stable inflation, ignoring the transitory shocks to aggregate supply. The term

yt* is an unobservable component that is estimated by a recursive Kalman Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

83

filter in state-space form along with the assumption that follows a random walk (plus drift):3

yt*    yt*1  t .

(5)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2.3. Data For empirical work, we examine quarterly data beginning in 1994, when the forerunner of the ECB – European Monetary Institute – was created. Except for M3, the data are available through the OECD‟s Main Economic Indicators database,4 and all variables are collected on a quarterly basis. Today, the euro area consists of 15 member states, including the 11 original stage three members of the EMU, Greece (joining in 2001) and Slovenia (joining in 2007), Cyprus and Malta (both joining in 2008). Because our dataset ends in 2008, the euro area consists of the first 12 member states, excluding Slovenia, Cyprus and Malta. Inflation is measured by the year-over-year percentage change in the Consumer Price Index. To gain some perspective on the extent of heterogeneity across national economies in the euro area, we plot the inflation data for individual member states in Figure 1 along with the area-wide data. Prior to joining the monetary union, inflation declined noticeably in most member states, especially Greece, Italy and Portugal. In the post-euro period, however, the patterns of inflation remained quite different among euro area member states. The output gap is measured by 100 times the log level of real GDP less the log level of potential GDP. Following Clarida et al (1998), among others, the measure of monetary policy instrument is the equivalent of the overnight interbank lending rate. For example, such a rate for Germany before 1999 is its call rate. Interest rate data for the ECB between 1994 and 1998 are taken for all banks included in the calculation of the Euribor.

3

The Kalman filter recursive updating procedure is executed in a state-space representation, in which equation (4) is as the measurement equation and equation (5) the state equation. 4 Euro area data refer to the evolving composition of the euro area. Data for periods prior to 2001 refer to EU11 (Austria, Belgium, Finland, Germany, Ireland, France, Italy, Luxembourg, the Netherlands, Portugal, and Spain). Data for periods between 2001 and 2008 refer to EU12 (EU11 plus Greece).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Note: Vertical gridlines indicate the formation of the ECB. Dotted lines represent inflation targets. Figure 1. Inflation Rates.

Table 1. GMM Estimation and Test Results, 1994-2008 Explanatory Variables Lagged Interest Austria

0.90*** (48.56)

Belgium

0.81*** (30.14)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Finland

0.95*** (44.41)

France

0.84*** (37.09)

Germany

0.79*** (42.37)

Greece

0.84*** (25.50)

Ireland

0.94*** (34.67)

Italy

0.89*** (52.25)

Luxembourg

0.79*** (17.41)

Netherlands

0.97*** (29.19)

Intercept 4.25 *** (5.61) 3.49 *** (5.04) -4.61 *** (2.71) 6.52 *** (7.09) 2.24 *** (4.47) -6.58 *** (4.00) -12.54 *** (2.67) -3.03 *** (4.32) 2.93 *** (2.89) 10.94 ** (2.47)

Inflation Gap 0.28 (0.79) -0.19 (0.76) 2.40* (2.60) -1.14** (2.24) 0.63* (1.78) 2.72*** (4.36) -0.94* (1.69) 2.59*** (5.03) 0.05 (1.58) -1.12** (2.39)

Output Gap 3.21*** (8.14) 2.54*** (8.44) 1.31 ** (2.22) 5.53*** (9.83) 2.38*** (6.09)

M3

SEE

J

-0.32***

0.24

7.72

4.49*

11.51

1.61**

0.29

7.02

4.87**

14.21*

2.37***

0.26

6.24

6.03**

15.15*

2.23**

0.41

7.32

3.37

10.43

1.26*

0.25

7.73

3.29*

10.31

0.82

1.27

5.59

2.98

8.31

1.66**

0.62

6.74

4.59*

11.82

1.83*

0.37

8.43

5.79**

15.21*

1.01

0.36

7.92

7.24***

18.39**

2.70***

0.48

5.86

3.63

12.21

1.74**

MeanF

SupF

Lc

(3.77) -0.06* (1.68) 0.22* (1.73) -0.35*** (4.54) -0.02 (0.66)

1.79* (1.74) -4.70*** (4.44) 2.67*** (5.31)

-0.06 (0.91)

0.86** (2.12) 16.52*** (6.41)

-0.51** (2.23)

Table 1. (Continued) Explanatory Variables

Portugal

Lagged Interest 0.80*** (25.47)

Spain

0.92*** (36.87)

Euro Area

0.85***

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

(21.93)

Intercept -2.64 *** (4.07) -5.45 ** (2.36) 2.98 ** (3.03)

Inflation Gap 1.96*** (3.73) 6.27*** (4.82) -0.39 (1.04)

Output Gap -1.79*** (3.86) 2.00** (2.08) 1.38** (2.38)

M3 0.60***

SEE

J

0.49

7.35

2.36

7.42

1.01*

0.40

8.37

2.93**

9.65*

1.42**

0.33

7.21

2.51

7.72**

1.39*

MeanF

SupF

Lc

(5.55) -0.72*** (4.25) -0.50*** (3.21)

Note: Absolute t-statistics are in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and 1%, respectively.

An Evaluation of the ECB Policy Response …

87

Beginning in 1999, the interest rates for euro area member states are identical to the policy rate of the ECB, as proxied by the one-month Euribor rate.1 The money growth variable is measured by the year-over-year percentage change in M3. Even though the ECB publishes M3 data for the euro area as a whole, corresponding data for individual member states are not publicly available. To deal with this problem, we use Mehrotra‟s (2007) estimates for the national contributions to euro area M3. The data are available only for 9 member states (excluding Greece, Ireland and Luxembourg).

3. ESTIMATION RESULTS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.1. Full Sample Period Results Table 1 reports GMM estimation results for the euro area as well as its member states over the period 1994:1-2008:4. Judging by the standard errors of estimates (SEE) in the sixth column of Table 1, the Taylor rule fits the data of Austria and Germany better than other euro area member states as well as the euro area as a whole. It is also noteworthy that all of the reported Jstatistics (seventh column) for testing overidentifying restrictions indicate that the selected set of instruments in model estimations is relevant. In other words, the statistics support the exogeneity property of the instrumental variables with respect to monetary policy decisions. For most countries except Greece, the estimated coefficient for the lagged policy rate (ρ) is fairly close to one, implying a great deal of “inertia” in monetary policy.2 The intercept term (β0) in the “target” rate equation represents the equilibrium or long-run “target” rate. The respective estimates vary remarkably across countries and some are even negative (Greece, Ireland, Italy, Portugal and Spain).

1

Although the European Overnight Index Average (EONIA) is at first pass the best candidate, there are widely-reported problems with using this variable as a central bank policy rate because of the 4-week reserve averaging in use at the ECB, which led to very volatile rates towards the end of averaging periods. 2 Despite possible non-stationarity in the interest rate series, we follow the majority of the existing literature by specifying the interest rate variables in levels in order to compare our results with those in the literature. Alternatively, for interest rates identified with a unit-root (Finland and Ireland), we followed Judd and Rudebusch (1998) and estimated the Taylor rule with an error-correction approach. The overall results are nevertheless the same as those reported here.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

88

Jim Lee and Patrick M. Crowley

Similarly, the coefficient estimates for the future inflation gap (inflation less inflation target) variable vary widely across member states. The estimate for the euro area as a whole is about -0.4 but not statistically significant. It also differs remarkably from those of individual member states. The estimates for Finland, Greece, Italy and Spain are relatively higher, suggesting aggressive responses to expected inflation from these member states. On the other hand, the estimates for other member states are mostly statistically insignificant, but with negative estimated coefficients for France, Ireland and the Netherlands. Unlike the estimates for inflation, the output gap coefficient estimates are mostly positive, except for the case of Portugal. For the 9 member states that we have M3 data, the reaction function includes M3 growth in addition to inflation and the output gap. For the euro area, the coefficient estimate for the money growth variable enters with a significant and negative sign for Austria, Germany, the Netherlands, and Spain, reflecting the expected relationship between money growth and interest rates but with a significant and positive sign for Portugal. The evidence of such a relationship is, however, much weaker among most member states.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.2. Structural Change Before proceeding further with the estimation results, it makes sense to first test for structural stability in the estimated model parameters. Particularly for euro area member states, handing over monetary policy to the ECB could lead to a change in policy feedback coefficients and thus parameter instability in the estimated policy reaction functions. To explore possible parameter instability, we consider Chow-type tests with a priori unknown break points. Specifically, we compute Andrews and Ploberger‟s (1994) MeanF and SupF, and Hansen‟s (1992) Lc statistics for estimating equation (3) as described in the preceding section. The Andrews-Ploberger tests are primarily for detecting a sudden break, while the Hansen test is for a smooth change. Test results for the estimated Taylor rule are reported in the last three columns of Table 1. The null hypothesis for all tests is constancy in all estimated parameters. Parameter instability is evident for most member states the sample and the euro area, even though not all alternative statistics are significant. The Lc statistics overall provide stronger evidence of structural change than the MeanF or SupF statistics do. In other words, the bulk of euro area member states witnessed a gradual rather than abrupt change in monetary policy reaction over the estimation period.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

89

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.3. Recursive Estimation Results In light of the evidence of structural instability in the estimated policy reaction function, we follow a procedure similar to Boivin (2006) and allow for evolution in parameters by applying recursive estimations. For each country, we first run GMM estimation of equation (3) using data over the period 1994:1-1999:1. Sequentially, we re-estimate the model by adding data one period at a time until the estimation reaches the end of our observation period. Because Greece did not become part of the Eurosystem until 2001, its Taylor rule estimation ends at 2000:4 and the first period for recursive coefficient updating is 2001:1. Figure 2 illustrates over time recursive estimates of the coefficients on the lagged interest rate (ρ), intercept (β0), inflation gap (β1), the output gap (β2), and money growth (β3) for each member state. The time periods shown in the plots refer to the final period of recursive estimation. The solid lines are coefficient estimates, encapsulated by the plus and minus two standard error intervals (shaded bands). To facilitate comparisons, we also superimpose the respective coefficient estimates for the euro area (dotted lines). The plots for the estimated coefficients on the lagged interest rate reflect very little adjustment in monetary policy behavior in the face of changing economic conditions. For the euro area as a whole, the estimate is around 0.8 in the first two years of ECB operation before reaching about 0.9 in 2004. The overall high degree of interest rate smoothing across member states, particularly Germany, is widely observed in the literature of policy reaction functions, e.g., Clarida et al (1998), and Faust et al (2001). The intercept term represents the long-run “target” interest rate. The estimate for the euro area hovers around four percent, but the corresponding estimates for Portugal are negative during much of the observation period and the rate for Finland is close to zero for much of the period. The declining trend in the long-run “target” rate measures across many member states is associated with declining inflation trends over the observation period. For the inflation coefficients, the recursive estimate in the case of the euro area is rather stable at about 1 percent before 2004, after this it declines over time.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 2. Recursive Coefficient Estimates.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 2 (continued).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Note: Dashed lines represent estimates for the euro area. Shaded areas are  two standard error intervals around point estimates.

Figure 2 (continued).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

An Evaluation of the ECB Policy Response …

93

There is evidence of convergence over time between the euro area coefficient estimates and the corresponding estimates for some member states (Belgium, France, Ireland and the Netherlands), but divergence for some others (Finland, Greece, Italy and Spain). At the end of the observation period, however, there is no statistically significant discrepancy between the two coefficient estimates for Austria, Belgium, France and Ireland, but for all the other member states there is a statistically significant discrepancy, indicating divergence in inflation rates. The fourth column of plots shows the output gap coefficient estimates. In contrast to the downward trend in the inflation coefficient estimate, the output gap coefficient estimate for the euro area shows an upward trend, reaching nearly 2.86 by 2007. The ECB‟s output coefficient estimates are higher than the corresponding estimates for most member states, except Spain, although it is interesting that the coefficient for France converges on that of the ECB by the end of 2007. Luxembourg and Portugal have coefficients that are either not significantly different from zero or significantly negative for much of the period. The comparative results highlight the extent of heterogeneity among individual economies within the euro area. As emphasized by ECB officials (Duisenberg, 2001), the ECB responds only to the euro area-wide economic conditions. The estimation results imply that policy might appear to be too tight for some euro area member states while too loose for others. More specifically, the ECB‟s weights on inflation and the output gap are higher than the corresponding weights for some member states while lower than some others. A few studies of European monetary policy have focused on comparing the behavior of the ECB with the Bundesbank. For example, Faust, Rogers, and Wright (2001), and Hayo and Hofmann (2006) assert that the ECB in its early years put a higher weight on the output gap relative to the weight on inflation than the Bundesbank would have. However, our estimations that allow model coefficients to drift over time suggest the opposite for a much longer observation period. The last column of plots in Figure 2 show the coefficient estimates for money growth. For the euro area, the recursive estimates remain negative over the entire observation period, even though they vary noticeably over time. For individual member states, however, the coefficients are positive in the case of Portugal. In addition, the estimates are largely indifferent from zero in the cases of Belgium and Finland, and negative in the cases of Austria, France, Germany and Spain. These findings support that the ECB policy rate reflects

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

94

Jim Lee and Patrick M. Crowley

the monetary conditions of the entire euro area, but not necessarily all its individual member states. The disparities between the coefficient estimates for the euro area and individual member states highlight the difficulty of managing different economies with a single monetary policy. However, it remains difficult from the individual plots in Figure 2 to judge whether the monetary policy might be too tight or too loose at a given period of time. For instance, as argued by Judd (1998), an increase in the coefficient on the output gap may reflect central bank officials' increased emphasis on using developments in the output gap to forecast future inflation. Similarly, monetary growth is widely conceived (e.g. Gerlach and Svensson, 2000) as an indicator of future inflationary pressures.

4. COUNTERFACTUAL ANALYSIS

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4.1. Counterfactual Analysis for Policy Rates Given the estimation results for the Taylor-type reaction function, we ask the following questions: i) What would the policy rates have been if the ECB made decisions based on the economic data of individual member states instead of the euro area as a whole? ii) What would interest rates for a euro area member state have been if its central bank were to make its own policy decisions instead of adopting the ECB policy? To address the first question, we perform a set of counterfactual exercises as follows. For each country, we calculate the path of its interest rate using the estimated coefficients for the ECB but using its own historical values for the explanatory variables. More specifically, we generate "counterfactual" interest rates for each member state as:

it  ˆ ait 1  1  ˆ a   ˆ0a  ˆ1a  t   t*   ˆ2a  yt  yt*   ˆ3a mt  , (6)

where an “a” superscript denotes the corresponding estimate for the euro area and a coefficient with a hat represents a (time-varying) recursive coefficient estimate obtained from the preceding section. Only coefficient estimates that are statistically significant at the 10% level or higher in full-sample estimation (Table 1) are included in generating the “counterfactual” interest rate paths. In addition, the last term is ignored for member states (Greece, Ireland and

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

An Evaluation of the ECB Policy Response …

95

Luxembourg) without M3 data. Equation (6) essentially generates the hypothetical interest rate series for the ECB by assuming that it made monetary policy decisions for each member state individually based on its national data. Alternatively, the second question deals with a hypothetical situation in which central banks in the euro area were to set interest rates individually. We assume that the central banks followed a policy rule established prior to 1999:1, as captured by the same Taylor rule in equation 3 estimated over the period 1994:1-1998:4. In other words, we generate another set of “counterfactual” policy interest rates by replacing the coefficients in equation (6) with the estimates for the pre-1999 subperiod. Because Greece did not become part of the euro area until 2001, the Taylor rule estimation ends at 2000:4 and the first period of simulation is 2001:1. Figure 3 shows the results of the counterfactual exercises. The solid lines are in-sample forecasts of the policy rate using the inflation targeters' own recursive coefficient estimates. The shaded bands are the 95% confidence intervals around the in-sample fitted values, and these are used as “baseline” values to assess the appropriateness of ECB monetary policy. For each country, a dotted line is a “counterfactual” series obtained from fitting equation (6) with the recursive coefficient estimates for the ECB reaction function but the values of the explanatory variables for that member state. A dashed line is a “counterfactual” series obtained from fitting equation (6) with the fixed coefficient estimates for individual member states over the pre-1999 subperiod instead of using the ECB coefficients. The majority of “counterfactual” series implied by the estimated ECB reaction function (dotted lines) mirror the general trend of the fitted interest rates (in-sample fitted values) but they are more volatile. This implies that ECB monetary policy has been more rigid over time than the hypothetical interest rates that responded to the economic conditions of individual euro area member states. In the case of Finland, France, Germany, Ireland, Luxembourg, the Netherlands and Spain, the two series are overall not qualitatively different from each other over the simulation period, as judged by the 95% confidence bands. The two series are the closest for Germany. In comparison with the first set of “counterfactual” series, there appears more disparity among the second set of “counterfactual” series (dashed lines) that are constructed using the estimated Taylor rules of individual member states over the pre-euro subperiod. Except for Austria, Belgium, Italy, the Netherlands, Portugal and Spain, the “counterfactual” series tend to follow the same trends as the fitted series.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Note: Solid lines represent fitted policy rates, encapsulated in 95% confidence bands (shaded areas). Dotted lines represent counterfactual series projected by using the estimated Taylor rule for the ECB but data of individual euro area members. Dashed lines represent counterfactual series projected by using the estimated Taylor rules for the pre-euro sample but historical data for explanatory variables. Figure 3. Counterfactual Results for Fitted Policy Rates.

An Evaluation of the ECB Policy Response …

97

There is no meaningful discrepancy between the “counterfactual” interest rate and the fitted rate over time in the cases of Finland, France, Germany, Ireland and Luxembourg. Similar to the first set of counterfactual exercises, these counterfactual exercises suggest that if the majority of national central banks in the euro area were to follow their own policy rules established prior to joining the monetary union, then their interest rates would have been meaningfully different from those set by the ECB. In particular, the results show that the economic conditions in Greece, Ireland, Portugal and Spain would have dictated higher interest rates than those set by the ECB.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4.2. Counterfactual Analysis for “Target” Rates The results in the above counterfactual analyses are largely affected by the substantial amounts of interest rate smoothing in monetary policy conduct. As with Faust et al (2001), we alternatively perform counterfactual exercises on the “target” interest rates instead of the actual policy rates. To gain some perspective on the importance of focusing on the “target” interest rates, Figure 4 plots the actual interest rates (solid lines) and the fitted “target” values (dotted lines). For each country, the fitted “target” rates are the fitted values using the recursive coefficient estimates in equation (1). These values are essentially predictions of the ECB monetary policy rate as a function of the inflation and the output gap variables. In most cases, the fitted “target” series is less smooth than the actual interest series and any deviation between the two appears temporary over time. In light of the observed differences between the actual interest rates and the fitted “target” values, we replicate the counterfactual exercises in the previous subsection for the “target” rate instead of the actual policy rate. To do *

so, we generate a counterfactual “target” rate ( it ) path for each country using a procedure analogous to that captured by equation (6):

it*  ˆ0a  ˆ1a  t   t*   ˆ2a  yt  yt*   ˆ3a mt .

(7)

Analogous to the results for actual policy rates in Figure 4, Figure 5 shows the counterfactual results for the “target” rates. Again, the solid lines are insample forecasts using the member states‟ own estimated coefficients, the dotted lines are “counterfactual” series using the ECB‟s reaction function, and the dashed lines are “counterfactual” series using the individual member states' pre-euro reaction function.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Note: Solid lines represent actual policy rates. Dotted lines represent fitted “target” rates. Figure 4. Policy Rates and Fitted “Target” Rates.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Note: Solid lines represent fitted “target” rates, encapsulated in 95% confidence bands. Dotted lines represent counterfactual series projected by using the estimated Taylor rule for the ECB but data of individual euro area members. Dashed lines represent counterfactual series projected by using the estimated Taylor rules for the pre-euro sample but historical data for explanatory variables. Figure 5. Counterfactual Results for Fitted “Target” Rates.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

100

Jim Lee and Patrick M. Crowley

The overall findings in Figure 5 stand in contrast to those observed in Figure 4. For the counterfactual exercises under the hypothetical scenario that the ECB responded to the economic data of individual member states, there is some discrepancy between the fitted interest rates and the "counterfactual" path (dotted line) for every country. The “counterfactual” path follows most closely the fitted “target” rates in the cases of Austria, Belgium, France, Germany and the Netherlands. Overall, the two interest rate paths tend to be much closer in the second half of the observation period than the earlier years of ECB history. This reflects convergence of the euro member states. Under the alternative hypothetical scenario that central banks were able to pursue individual monetary policy, the counterfactual “target” rate path (dashed line) follows the fitted “target” rates most closely in the cases of France and Germany. In those cases, the discrepancy between the two series is virtually nonexistent, implying that the ECB policy conduct is a natural extension of the policy of the Bundesbank and the Banque de France. Other than France and Germany, the counterfactual series and fitted “target” rate series are quite close in the cases of Luxembourg and the Netherlands. On the contrary, the counterfactual “target” rate paths for other members are persistently higher than their fitted “target” rates over much of simulation period. This is attributable to the fact that those member states had experienced relatively high inflation prior to joining the monetary union. Overall, the counterfactual results for the “target” rates clearly reveal that the ECB monetary policy best reflects the economic conditions of the larger members, and most notably Germany and France. The divergence between the fitted ECB “target” rate and the rate implied by a country‟s economic conditions is more pronounced for smaller euro area members. The results are supported by Huchet (2000), who finds asymmetric ECB policy effects among euro area members. Moreover, the findings in this subsection, which stand in contrast to the results for the observed policy rates in the preceding subsection, highlight the role of the interest rate smoothing behavior in monetary policy conduct.

4.3.Policy Stress The results of the counterfactual exercises in Figure 5 could be considered as a reflection of policy “stress” for a monetary union like the euro area, as emphasized by Clarida et al (1998) and as implemented by Sturm and Wallmershäuser (2008) and Flaig (2007). Figure 6 plots the gaps between the

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

An Evaluation of the ECB Policy Response …

101

fitted “target” rate series and the counterfactual series constructed using equation (7). In particular, the point estimates in Figure 6 equal the fitted “target” rates for each country (solid lines in Figure 5) minus the counterfactual “target” rates using the ECB feedback coefficients (dotted lines in Figure 5). A positive value implies that the ECB target rate was higher than what would be expected by a euro area country using its country-specific data, while a negative value, on the contrary, implies that the ECB policy was more accommodative than expected. The shaded areas represent the 95% confidence bands using the bootstrap method with 1,000 replications. Even though the results in Figure 6 vary markedly across member states as well as over time, it is apparent that the extent of monetary policy stress is overall not qualitatively significant for Austria, Belgium, France, Germany and the Netherlands. The results for some of these member states are consistent with the argument of Sturm and Wallmershäuser (2008) that small euro area members have received more than proportional weights in ECB monetary policy decisions. On the other hand, the ECB “target” rates beginning 2003 were more accommodative for such member states as Portugal and Greece, than the target rates warranted by the economic conditions of these individual member states. Figure 7 illustrates the extent of policy stress of different member states, as measured alternatively by taking the difference between the fitted “target” rates (solid lines in Figure 5) minus the counterfactual “target” rates using the pre-euro coefficients of those member states (dashed lines in Figure 5). For three member states (France, Germany and Luxembourg), the point estimates are not qualitatively different from zero, meaning that the ECB “target” rates were no different from the target rates implied by their policy rules adopted in the pre-euro period. By contrast, the estimates are overall negative for six member states (Austria, Greece, Italy, Portugal and Spain), meaning that the ECB “target” rates tended to be more accommodative than if these member states were to set their own “target” rates according to their individual policy rules established before joining the euro area. Taken together, Figures 6 and 7 suggest that the ECB “target” rates might have been consistent with the rates preferred by some member states, but they have appeared too loose for some other members. To gain some perspective about the “stress” of using a single ECB monetary policy on the national economies of the euro area, Figure 8 plots the weighted sums of the respective policy stress indicators of individual members where the member states‟ annual GDP data are used to calculate the weights.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 6. Difference between Fitted “Target” Rate Series and Counterfactual Series with ECB Coefficients (Exercise 1).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 7. Difference between Fitted “Target” Rate Series and Counterfactual Series with Pre-Euro Coefficients (Exercise 2).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 8. Area-Wide Policy Stress Measures.

An Evaluation of the ECB Policy Response …

105

The absolute value of a member state‟s policy stress data is used so that an ECB monetary policy decision that is tighter than optimal for an individual member state is treated equally to an ECB target rate that is too loose. The upper panel (Exercise 1) of Figure 8 corresponds to the first counterfactual exercise with the ECB coefficients. The plot reveals that the overall monetary policy stress in the euro area declined gradually in the first two years of the ECB operation and hovered around 2% over the rest of the observation period. The pattern in the early years of the ECB can be interpreted as evidence of convergence among EMU members. The lower panel (Exercise 2) of Figure 8 corresponds to the counterfactual exercises with the pre-euro coefficients. In contrast to the pattern in the upper panel, this ECB policy stress indicator appears more stable and its size is overall lower at around 1.5%. The noticeable exception is the nearly zero policy stress in 2001 when most euro area members experienced an economic slowdown. Taken together, the plots in Figure 8 indicate that the ECB policy rates were on average 1% to 2% different from what would be optimal for its participating member countries.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4.4. Robustness Check How robust are our empirical findings? To answer this question, we have replicated the estimation and counterfactual exercises with several modifications. First, instead of the Kalman filter, we have employed the standard HP filter and band pass filter to extract the trend component in the GDP series. In either case, the output gap is measured as the deviation of actual output from a nonlinear low-frequency trend component. Second, instead of a fixed window, we have performed recursive estimations using a rolling window of five years. Third, we have alternatively estimated the Taylor rule equation using contemporaneous and two-period-ahead data instead of one-period-ahead data for inflation. Overall, these alternative specifications have no appreciable qualitative effect on the results presented above.1

1

Detailed results in this subsection are not reported here for brevity, but are available upon request.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

106

Jim Lee and Patrick M. Crowley

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

5. CONCLUSIONS ECB officials claim that monetary policy decisions take into consideration the aggregate economic conditions of the euro area and disregard divergent national developments. Against this background, this paper has investigated the extent to which the ECB has responded to changing economic conditions of individual euro area member states versus the euro area as a whole. To this end, we first estimated a Taylor-type policy reaction function for euro area member states as well as for the euro area as a whole. The estimation results exhibit substantial disparities across member states, reflecting the extent of heterogeneity among the national economies inside the euro area. We also conducted counterfactual exercises based on the estimated reaction functions to explore two alternative hypothetical scenarios. Under the hypothetical condition that the ECB responded to the economic conditions of individual euro area members, the “target” interest rates for most member states except Germany would have been quite different from those predicted by the area-wide data. This implies that the ECB policy rule best fits the economic conditions of certain member states. Similar results for Germany and other contiguous member states (such as Austria and Belgium) hold in the counterfactual exercises under an alternative hypothetical scenario that individual euro area member states were able to set their own policy rates. On the other hand, had other euro area member states followed their own policy rule, their interest rates would have been quite different from those predicted by the ECB policy rule. The extent of heterogeneity across national economies within the euro area entails a challenge for delegating the responsibility of monetary policy to the ECB. Our empirical findings prompt concerns about the efficacy of a single monetary policy in reacting to changing economic conditions of individual euro area member states. Because economies of euro area member states have been quite unsynchronized, ECB policy actions, which might be adequate for the euro area as a whole, might have been too loose for such faster growing member states as Greece and Ireland but too tight for slower growing member states, such as Italy.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

107

REFERENCES Andrews, Donald W. K., and Werner Ploberger. Optimal Tests When a Nuisance Parameter is Present Only Under the Alternative, Econometrica, 1994, 62(6), 1383-1414. Arestis, Philip, and Georgios Chortareas. Monetary Policy in the Euro Area, Journal of Post Keynesian Economics, 2006, 28(3), 371-394. Assenmacher-Wesche, Katrin, and Stefan Gerlach. Interpreting Euro Area Inflation at High and Low Frequencies, European Economic Review, 2008, 52(6), 964-986. Assenmacher-Wesche, Katrin. and Stefan Gerlach. Money at Low Frequencies, Journal of the European Economic Association, 2008, 5, 534-542. Boivin, Jean. How U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data, Journal of Money, Credit, and Banking, 2006, 38(5), 1149-1173.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Carstensen, Kai. Estimating the ECB Policy Reaction Function, Germany Economic Review, 2006, 7(1), 1-34. Clarida, Richard, Jordi Gali, and Mark Gertler. Monetary Policy Rules in Practice: Some International Evidence, European Economic Review, 1998, 42, 1033-1067. Duisenberg,Willem. Some Remarks on the Euro in a U.S. Context, Speech by Dr. Willem F. Duisenberg, President of the European Central Bank, at a breakfast meeting of the Council on Foreign Relations, New York, April 19, 2001. (Accessed at www.ecb.int) European Central Bank. A Stability-Oriented Monetary Policy Strategy for the ESCB, European Central Bank Press Release, October 13, 1998. (Accessed at www.ecb.int) _____. The ECB‟s Monetary Policy Strategy, European Central Bank Press Release, May 8, 2003. (Accessed at www.ecb.int) Faust, Jon, John H. Rogers, and Jonathan H. Wright. An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, 2001, No. 705.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

108

Jim Lee and Patrick M. Crowley

Favero, Carlo, Xavier Freixas, Torsten Persson, and Charles Wyplosz. One Money, Many Countries: Monitoring the European Central Bank No. 2, Centre for Economic Policy Research: London, 2000. Fendel, Ralf M., and Michael R. Frenkel. Five Years of Single European Monetary Policy in Practice: Is the ECB Rule-Based? Contemporary Economic Policy, 2006, 24(1), 106-115. Fernandez, Adriana Z., and Alex Nikolsko-Rzbevskyy. Measuring the Taylor Rule‟s Performance, Federal Reserve Bank of Dallas Economic Letter, 2007, 2(6). Gerlach, Stefan, and Lars Svensson, Money and Inflation in the Euro Area: A Case for a Monetary Indicator? NBER Working Paper No. 8025, 2000. Hansen, Bruce E. Approximate Asymptotic P-Values for Structural Change Tests, Journal of Business and Economic Statistics, 1997, 60-67. Hayo, Bernd, and Boris Hofmann. Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank, Empirical Economics, 2006, 31, 645662.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Huchet, Marilyne. Does Single Monetary Policy Have Asymmetric Real Effects in EMU, Journal of Policy Modeling, 2000, 25, 151-178. Judd, John P., and Glenn Rudebusch. Taylor‟s Rule and the Fed: 1970-1997, Federal Reserve Bank of San Francisco Economic Review, 1998, 3, 3-16. King, Robert G., James H. Stock, and Mark Watson. Temporal Instability of the Unemployment-Inflation Relationship, Federal Reserve Bank of Chicago Economic Perspectives, 1995, 19(3), 2-12. Laubach, Thomas, and John C. Williams. Measuring the Natural Rate of Interest, Review of Economics and Statistics, 85(4), 1063-1070. Lee, Jim. The Robustness of Okun‟s Law: Evidence from OECD Countries, Journal of Macroeconomics, 2000, 22(2), 331-356. Mehrotra, Aaron. A Note on the National Contributions to Euro Area M3, Bank of Finland, Discussion Papers No. 2/2007, 2007. Muscatelli, V. Anton, Patrizio Tirelli, and Carmine Trecroci. Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OCED Countries, The Manchester School, 2002, 70(4), 487-527. Sturm, Jan-Egbert and Timo Wollmershäuser, The Stress of Having a Single Monetary Policy in Europe, CESIFO Working Paper No. 2251, University of Munich, Munich, Germany. March 2008.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

An Evaluation of the ECB Policy Response …

109

Svensson, Lars E.O. The First Year of the Eurosystem: Inflation Targeting or Not? American Economic Review, 2000, 90, 95-99.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Taylor, John B. Discretion versus Policy Rules in Practice, CarnegieRochester Conference Series on Public Policy, 1993, 39, 195-214.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 4

ENVIRONMENTAL MANAGEMENT ACCOUNTING TO SUPPORT ECONOMIC AND ENVIRONMENT IMPROVEMENT IN A MADE-TO-ORDER PRODUCTION

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Anna Mazzi, Enrico Confente and Antonio Scipioni University of Padua Quality Environment Research Center (CESQA) Padua, Italy

ABSTRACT Environmental Management Accounting (EMA) is a methodology to help organisations identify and quantify the environmental costs of their production processes and analyse the economic benefits that result from improving their environmental performance. To do this, EMA uses appropriate accounting systems that translate the environmental impacts of industrial activity into monetary terms. The international scientific community unanimously agrees that EMA is a powerful tool to improve the environmental and economic performances of organisations, and the literature review verifies that EMA is a valid tool that improves decision making and budgeting, which results in comprehensive information and direction about the significant economic costs that are due to the environmental aspects/impacts of the organisation.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

112

Anna Mazzi, Enrico Confente and Antonio Scipioni However, to date, studies have only applied EMA to companies that mass produce. EMA has not been validated for companies where production is made to order. This study investigated the applicability and validity of using the EMA methodology for companies where production is made to order. To this end, we present the research conducted in 2009 by the Environmental Quality Research Centre at the University of Padua in collaboration with an Italian manufacturing company that allowed the EMA methodology, with the necessary assumptions and amendments, to be applied to its made-to-order production. From the case study, this article highlights the potential use and limitations of applying EMA in a made-to-order production company, confirming that EMA is able to identify and quantify the environmental cost and support management in decision making regarding environmental and economic performance improvements. This article also distinguishes the similarities and differences between the chosen case study and other case studies from literature that have studied companies that mass produce, i.e., comparing the methodology followed, results, validity and limitations of the results.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Keywords: Environmental Management Accounting, made-to-order production, environmental costs, performance improvement.

1. INTRODUCTION Environmental Management Accounting (EMA) is a management tool that uses an appropriate environmental accounting system to improve the environmental and economic performance of an organisation [1], [2]. EMA is a tool that derives from conventional accounting, combining accounting both in physical and monetary units. The initial phase of EMA is a business analysis, where inputs and outputs are used to measure the positive and negative impacts that activities have on the environment, not only in environmental terms but also from an economic point of view. The EMA approach combines data from the monetary accounts and physical accounts (Table 1) to improve the efficiency of material use, reduce the environmental impacts and minimise costs due to reducing the effect of the impacts. EMA can be combined with other environmental management tools and in general, can be combined with corporate management tools already used by

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

113

the organisation. To support this statement, EMA can be seen as a network of sixteen different management tools, each of which can give valuable information that complements the company management (Table 2), which makes EMA extremely flexible and allows companies from different sectors to use EMA [3]. Table 1. EMA, where the monetary and physical accounting are combined (UNDSD, 2001) Accounting in monetary units

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Conventional accounting

Accounting in physical units

Environmental Management Accounting Monetary EMA

Physical EMA

Other assessment tools

EMA proposes an effective methodology to identify and quantify the environmental costs of business processes and the economic benefits of pollution prevention and the benefits of using less impactful processes. The methodology allows traditional enterprise budget items to be integrated with environmental costs and benefits, creating a fair and effective way to incorporate the environmental dimension into the business strategies [4]. The environmental costs analysed by EMA can be divided into four categories (Table 3): waste and emission treatment costs, prevention and environmental management costs, material purchase value of Non-Product Output (NPO) and processing costs of NPO. Moreover, environmental revenues are taken into account by EMA in a dedicated voice (Table 3) [4]. The adoption of EMA has spread over the years in different sectors and production contexts. After reviewing the scientific literature, six key elements that distinguish EMA applications in different industrial contexts have been identified. 

First, different authors have agreed that EMA, unlike other accountability tools, focuses only on the environmental issues and is intended solely for internal stakeholders [5]. Furthermore, compared with conventional accounting and management methods, EMA highlights the major significance of the NPOs as a corporate, ecoefficiency measure, as they are the percentage of the purchased material that becomes a non-tradable output. If their percentage is

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

114

Anna Mazzi, Enrico Confente and Antonio Scipioni



reduced, the production efficiency of the company increases, which helps to increase their competitiveness in the market [6], [7], [8], [9]. A second distinctive element between EMA studies in literature is the different objectives of the organisations. For the majority of the cases, the goal for developing an environmental accounting and management system is to improve the eco-efficiency of the organisation, i.e., to reduce both the environmental impacts and the environmental costs [2], [10], [11], [12]. Differently, in other cases, the goal is to better assess the environmental costs so that decision making and budgeting can be improved [3], [13], [14]. Table 2. EMA as a combination of different company management tools [3]

Long-term

Short-term

Long-term

Routinely generated

Env. cost accounting

Env.-induced capital expenditure and revenues

Material and energy flow accounting

Env. capital impact accounting

Ad hoc

Ex-post assessment of relevant env. cost decisions

Postinvestment assessment of individual projects

Ex-post assessment of short-term env. impacts

Postinvestment appraisal of physical env. investment

Routinely generated

Physical EMA

Shortterm

Monetary env. budgeting

Env. longterm financial planning

Physical env. budgeting

Long-term physical env. planning

Relevant env. costs

Monetary env. investment appraisal

Tools designed to predict relevant env. impacts

Physical env. investment appraisal

Ad hoc

Past or present oriented Future oriented

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Monetary EMA

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

115

Table 3. Reference table for EMA [4]

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

1

WASTE AND EMISSION TREATMENT

1.1 Depreciation of related equipment Maintenance and operating materials and 1.2 services 1.3 Related personnel 1.4 Fees, taxes, charges 1.5 Fines and penalties 1.6 Insurance for environmental liabilities 1.7 Provisions for clean-up costs, remediation PREVENTION AND ENVIRONMENTAL 2 MANAGEMENT External services for environmental 2.1 management Personnel for general environmental 2.2 management activities 2.3 Research and development 2.4 Extra expenditure for cleaner technologies 2.5 Other environmental management costs MATERIAL PURCHASE VALUE OF 3 NON-PRODUCT OUTPUT 3.1 Raw materials 3.2 Auxiliary materials 3.3 Packaging 3.4 Operating materials 3.5 Energy 3.6 Water PROCESSING COST OF NON-PRODUCT 4 OUTPUT 5

ENVIRONMENTAL REVENUES 5.1 Subsidies, awards 5.2 Other earnings

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Noise/Vibration Biodiversity/ Landscape Radiation Other

Soli/ Groundwater

Waste

Wastewater

ENVIRONMENTAL COST EXPENDITURE CATEGORIES

Air/Climate

ENVIRONMENTAL MEDIA

116

Anna Mazzi, Enrico Confente and Antonio Scipioni 



Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.





A third element that distinguishes the different EMA applications in literature is the reference context. Primarily, the case studies represent industrial contexts, both small to medium enterprises and multinational companies [15], [13], [2], [10], [14]. However, EMA has also been applied in different sectors, such as the service sector [16], [17], [12] and the agriculture sector [3]. Also, the companies in all the case studies were characterised by their mass production. A fourth element of comparison is the different sources used for the data collection and how the EMA study was conducted. EMA results in an in-depth analysis that requires significant information regarding the company, production processes, products and customers/suppliers, and this information must be robust and reliable. There are several key documents, such as financial reports and budget statements [16], [14] and a number of key support tools, such as input/output analysis, mass balance, flow cost accounting, life cycle assessment and activity-based cost estimates [13], [11], [18], [2]. Generally, each case study that applied the EMA methodology was consistent with the methodology proposed and described by UNDSD [4], which consists of a classification table with four costs categories and an environmental revenue category (Table 1). In all the considered case studies, the EMA methodology was useful for both the planning and the implementation phases of the survey. Additionally, the methodology greatly supported the analysis and results discussion phase because it allowed efficient data collection and summarised the results in a convenient manner, pinpointing what action should be taken immediately to improve the environmental and economic efficiency of the company [16], [6], [7], [10], [13]. In the different EMA case studies, the results improved the business performance. For the majority of the applications, the EMA was able to estimate the environmental costs, assessing their actual amount and allocating the costs along the production line, which is an advantage primarily for the business managers who can then intervene with effective management and decide between operating choices [16], [10], [2], [13], [12], [3], [18].

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

117

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2. OBJECTIVES AND THE CONDUCTION OF THE RESEARCH In the literature, there have been many companies from different economic sectors (i.e., companies in the automotive, information technology, pharmaceuticals, ceramics, paper mills, rice mills and the utility sector) where EMA has been applied. However, all the aforementioned case studies share a common aspect: all are companies that produce their goods or services “in series”, where their production activities can be defined as “steady”, i.e., always the same shortterm activities, and unless scheduled, minor variations occur, the activities remain unchanged, even in the long term. There are no examples in literature where EMA is applied to companies where production is “made to order”, i.e., production that varies according to the customer, the purpose of the product/service and where the product/service must be delivered/used. In response to this literature gap, this research study was designed and conducted in 2010, where EMA was applied to a company where production is made to order. The objectives of the research were the following:  first, to verify if EMA is still applicable in a company with mass production, i.e., to determine if the reference methodology [4] is still valid in this context, to verify that the calculations can be completed and that the results are useful in improving the environmental and economic performance of the enterprise;  second, to determine if the results obtained from an EMA analysis applied to a company where production is made to order are consistent or different from the results obtained from the other studies on companies with mass production. To pursue these objectives, the research was performed on a single case study. The company chosen was an Italian SME operating in the field of mechanical, electromechanical, hydraulic and civil engineering that designs, manufactures and installs its products on commission. The projects commissioned by the company are potentially always different because different projects will have different requirements, which consequently means the activities and materials used will vary from contract to contract. Therefore, the company‟s business is neither uniform nor constant with time, both in the product output and in the inputs (raw materials, energy, labour, etc.), which can vary greatly in terms of the type, quality and quantity of materials used.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

118

Anna Mazzi, Enrico Confente and Antonio Scipioni

The research was conducted in 2010, and the data in the analysis is from the previous calendar year (2009). The choice of the reference time period was crucial. One element that most characterises a company where production is made to order is the year of operation. Production from year to year can greatly vary due to the variation of the orders, which can differ by the type of work performed, the materials used and the context of the manufacturer. In addition, orders will consume different durations of time and do not generally coincide with a year of operation. Consequently, the study was conducted in a given period of operation of a specific manufacturer, aware that the subsequent results may not be directly generalised. However, the single case study permitted an adequate response to the research objectives, allowing us to determine if and how EMA can be applied to a company where production is made to order and whether the chosen case study can confirm, from a numerical point of view, the conclusions from the literature for a mass production company.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3. MATERIALS AND METHODS The methodology applied to this case study consisted of three phases: the definition of the scope, the preparation and completion of the reference checklist and the analysis of the results [4], [11], [19].

3.1. Definition of the scope Defining the scope was the most important decision. According to the literature, EMA can be performed on a single machine, processing line or department or throughout a plant, which would include the design, production and administration [19]. Translating these alternatives to a made-to-order production, two alternative scopes can be identified: a single contract, where the EMA would analyse a single contract, which would include a type of standard product that is produced consistently over time or all the contracts of the company in a given period of operation, where the EMA would analyse all the activities undertaken by the company during a period of time. The first option allows a simpler EMA study, which would encompass a more narrow research field, a rapid recovery of useful information and a table of costs that is more easily compiled. However, given the chosen company's

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Environmental Management Accounting …

119

particular variation of their production system and how orders are completed according to customer specifications, the first definition of the scope would not be effective for the company because the results would be unhelpful to the business management in improving the overall environmental and economic performance. In fact, because the company operates under conditions of constant and extreme variability, an accounting tool should exist that supports this variability. Differently, the second alternative allows for different types of contracts at different design/construction/installation steps, which better describes the actual made-to-order production as the company under study. However, gathering and processing data is more difficult, which limits the conclusions of the analysis to the time period taken as the reference as a result of the variable nature of the operating conditions (rarely are the conditions the same from year to year). The scope chosen included all the activities in the business year from January 1 to December 31, 2009. To proceed with the next steps of the EMA analysis, a comprehensive study of the company was first conducted to understand the most distinctive features, such was the type of work that is typically performed or is feasible to perform, the company's organisational structure and the organisation of the work in different areas of production and installation, design and project management. Thus, all the orders made in the reference year were studied indepth, various documents and corporate sources were consulted, appropriate inspections were performed in the company (in particular, the production and installation inspections) and individual interviews of company figures were conducted (in particular, the production manager, the technical director, who is responsible for the environmental management system, and the chief executive officer). When applying EMA to this specific case study, it was necessary to collect information and data from different sources, which were characterised by extreme variability in language and methods of collection.

3.2. Check-list preparation and NPO calculation Using the table given by the UNDSD [4] (Table 3), a checklist of the environmental costs was prepared, which served as a reference for the following stages of data collection: calculation/estimation and allocation of costs per cost category and the environmental aspect costs.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

120

Anna Mazzi, Enrico Confente and Antonio Scipioni

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The primary difficulty was encountered in the calculation/estimation of the many types of environmental costs that were not considered as such by the company and were not registered either explicitly or even accounted for (i.e., the amount of material not properly used and the estimated working hour loss due to management and environmental cost items related to the NPO). The work has resulted in a quantification and classification of all cost items consistent with the model by UNSDS (2001). 1. Waste treatment and emission costs: the costs included in this category are the costs typically classified by the company as environmental costs, such as depreciation of machinery of environmental relevance and their maintenance cost, the cost of performing an analysis to characterise the atmospheric, liquid, noise emissions and solid waste and fees for the disposal. 2. Prevention and environmental management costs: the company under study, having an environmental management system, provided a different classification of the costs of the environmental management. Consequently, assessing this category was easy, and the most important costs were due to the consultants and external audits, the cost of internal staff, which during the reporting period, was involved in environmental activities and the extra fee associated with obtaining electricity from renewable sources. 3. Material purchase value of the Non-Product Output (NPO): the estimated percentage of the purchase price of the non-tradable output was the most complex phase of this study. Because it is a proportion of the purchased material that is converted to scrap and waste, it has been estimated as a percentage of the NPOs, which was different for each identified cost.  Raw materials: raw materials used in the company were essentially metallic materials (iron, stainless steel, aluminium and bronze) and plastic (neoprene and polyzene). Therefore, the percentage of the NPOs was calculated by dividing the amount of metal and plastic waste generated from the amount of the metal and plastic raw materials purchased (Eq. 1).

NPO Raw materials



Metal and plastic waste disposed  Metal waste sold . (1) Metal and plastic materials purchased

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …



Once the percentage was obtained in quantitative terms, it was applied to the purchase cost of the raw materials, estimating the share of the expenditure for those materials that will not constitute the finished product. Auxiliary materials: the most relevant auxiliary material found in the company was the combustive gas used during the initial cutting of the raw materials; the calculation of the percentage of the NPOs was performed in the following manner. Due to its nature, all the gas oxidised, escaping into the air. An indirect calculation was then used to find its percentage of the NPOs by weighing the scrap metal produced in the working phase. The estimate was then obtained by dividing the amount of the waste generated (dust and metal particles) by the amount of the metallic raw materials purchased (Eq. 2).

NPOoxy-cutting gas 

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.1.

3.2.

3.3.

121

Metal dust and metal particles . Metal materials purchased

(2)

This percentage was then applied to the purchase cost of gas. Packaging: this category includes all the containers used for the liquid and solid waste. Because packaging had to be included in the analysis, it was decided to use a percentage of 100% as their NPO. Even though they are necessary, they are, by definition, not part of the Product Output because they are not part of the finished work and do not generate a profit, only an additional disposal cost. Operating materials: these materials are essential in the production; the main products used within the company include materials for welding, personal protective equipment, lubricants and solvents. Again, it was decided to estimate an NPO of 100% because the operating materials were purchased goods, and at the end of their useful life, they must be disposed. For this reason, despite being essential, they are paid for twice: during holding and during the purchase phase and final disposal. Therefore, the materials fall entirely within the definition of a Non-Product Output. Energy: the NPO of the energy was estimated by evaluating the electricity and fuel used during the production phase, where the department, including the offices, was deliberately excluded because it generated production waste. The same percentage of NPO as the raw materials (Eq. 1) was applied to the purchase cost of energy and fuel because they are, in quantitative terms, the most

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

122

Anna Mazzi, Enrico Confente and Antonio Scipioni important material flows within the company. For this reason, it was considered that they consumed most of the energy resources of the company. 3.4. Water: a percentage of 100% for the NPO was assumed for water because all of the purchased water and the sewer water were disposed, especially if it came in contact with parts of the finished or semi-finished products and thus, not part of the finished product. 4. Processing costs of NPO: this category considers the cost of NPOs in terms of the cost of production, i.e., the estimated percentage of the time “lost” to manage waste and scrap. In general, the costs of personnel, maintenance, transportation, depreciation, inventory, etc., were included. In our case, it was decided to consider only the cost due to the staff, given the greater importance of this component of the expenditure in the production department. In particular, the staff dedicated to the production were divided according to their task, and for every position, it was considered a certain percentage of the hours devoted to the NPOs (i.e., for the first machining operations, the same percentage of the NPO as the raw materials were applied (Eq. 1), whereas for the other types of operations, a lower rejection rate was applied. The percentages of the NPOs by type of job were multiplied by the hours performed by each worker during the reference period and were then multiplied by the hourly cost incurred by the company for each employee. 5. Environmental revenues: this category includes those items that cause a cash flow input to the company obtained as a result of particular environmental choices and aspects. Specifically, funding received for obtaining an ISO 14001 certification, the EMAS registration by the company and all the proceeds from the sale as part of the waste generated belong to this group.

4. RESULTS AND DISCUSSION Table 4 summarises the environmental costs incurred by the company, highlighting where actions can be taken to improve the environmental and economic performance. From a general point of view, several environmental costs were unavoidable due to the production and therefore, it was less feasible to take

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

123

action on those to try and improve the environmental performance of the organisation. Otherwise, if an improvement was feasible, there was an attempt to devise different management alternatives and approaches towards reducing the environmental cost, where the ultimate goal was to completely eliminate or at least to reduce the item in question. It is possible to analyse the results obtained from this case study, where production is made to order, and compare them with the results reported in the literature for case studies related to mass production. Tabla 4. Summary table of environmental costs in the case study of a company with made-to-order production ENVIRONMENTAL COST/ EXPENDITURE CATEGORIES

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

1

Percentage by category

Percentage of total gross

Percentage of total net

5,22 %

5,78 %

8,31 %

9,20 %

71,10 %

78,66 %

WASTE AND EMISSION TREATMENT

1.1 Depreciation for related equipment 0,00 % Maintenance and operating materials and 1.2 48,40% services 1.3 Related personnel 0,00 % 1.4 Fees, taxes, charges 51,60% 1.5 Fines and penalties 0,00 % 1.6 Insurance for environmental liabilities 0,00 % 1.7 Provisions for clean-up costs, remediation 0,00 % Subtotal 100 % PREVENTION AND ENVIRONMENTAL 2 MANAGEMENT External services for environmental 2.1 31,04% management Personnel for general environmental 2.2 55,63% management activities 2.3 Research and development 0,00% 2.4 Extra expenditure for cleaner technologies 1,73% 2.5 Other environmental management costs 11,60% Subtotal 100 % MATERIAL PURCHASE VALUE OF NON3 PRODUCT OUTPUT 3.1 Raw materials 75,90% 3.2 Auxiliary materials 0,16% 3.3 Packaging 0,05% 3.4 Operating materials 21,84% 3.5 Energy 1,96% 3.6 Water 0,09% Subtotal 100 %

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

124

Anna Mazzi, Enrico Confente and Antonio Scipioni Table 4. (Continued) Percentage of total gross

Percentage of total net

PROCESSING COST OF NON-PRODUCT OUTPUT

15,37 %

17,00 %

Gross environmental costs

100 %

110,63 %

//

- 10,63 %

//

100 %

ENVIRONMENTAL COST/ EXPENDITURE CATEGORIES 4

5

Percentage by category

ENVIRONMENTAL REVENUES 5.1 Subsidies, awards 5.2 Other earnings Subtotal

28,98% 71,02% 100 % Net environmental costs

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

With regard to the research conducted in Austria, the distribution of the environmental costs for companies with mass production is summarised in Table 5 [16]. These values are confirmed by other surveys of companies in Germany and Austria, where the costs of waste disposal (category 1) ranged from 1 to 10% of the full environmental costs, whereas the costs of the NPO typically ranged from 40 to 85% [4]. Table 5. Distribution of the environmental costs in case studies conducted in Austria [16] Min

Average

Max

WASTE AND EMISSION TREATMENT

13%

29%

52%

PREVENTION AND ENVIRONMENTAL MANAGEMENT MATERIAL PURCHASE VALUE OF NON-PRODUCT OUTPUT PROCESSING COST OF NONPRODUCT OUTPUT

1%

6%

14%

39%

64%

85%

0%

5%

17%

ENVIRONMENTAL REVENUES

0%

-3%

-9%

The values from the literature (Table 5) are essentially confirmed by this case study (Table 4). For the company under study, most of the environmental costs are represented by the purchase value of the NPO (78.66%) category,

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

125

followed by the cost of production of the NPO (17%) and the operating and environmental protection costs (9.2%). However, the environmental revenues (-10.63%) conflict slightly with literature, and the costs due to the processing of waste and emissions (5.78%) conflict even further, which is likely a result of the successful recycling policy adopted by the analysed company. Due to the great ease in re-using the ferrous materials, the company sold the majority of the metal waste produced (approximately 88% of the total waste). This ability resulted in a larger percentage of the environmental revenues than average and significantly limits the first category because of the reduction in disposal (subcategory 1.4), which is due solely to the non-recyclable waste (12%). In addition, farm workers exclusively devoted to processing the waste and emissions (1.3 sub-zero) were not present, and the environmentally significant machinery in the company had already been amortised (subcategory 1.1 equal to zero). With reference to the most significant cost category, the most relevant materials that make up the purchase cost of the NPO is the raw materials (Figure 1), which is confirmed by the cases from the literature. Water 0,09%

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Energy 1,96%

Operating materials 21,84% Packaging 0,05% Auxiliary materials 0,16%

Raw materials 75,90%

Figure 1. Composition of the 3rd category: material purchase value of the NPO (Percentage = € / €). Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

126

Anna Mazzi, Enrico Confente and Antonio Scipioni

The raw materials, which are the major components of the finished product, are also the dominant component of the scrap and waste. Therefore, the raw materials are the most important item of the environmental cost within the company and where intervention is first needed to improve the economic and environmental efficiency of the company. However, in this category, there is a slight conflict with literature; the cost of the energy relative to the NPO differed. In this case study, this value represented only 2% of the third category (Table 4), but it is typically a much larger value, corresponding to 15-30% of the total environmental costs [14], [6], [7], [13]. The reasons may be due to the estimation method, which excludes the energy consumed in the department offices, which reduced the offset by approximately 30% of the energy cost of the company. For the percentage of the NPOs of the energy, it was decided to use the same estimate of the raw materials for the reasons already mentioned. In addition, the analysed company performed carpentry, whose energy consumption can be much lower than companies considered by the other bibliographic studies, which vary by type and size. The analysis of both the EMA results and the five categories of the environmental costs and revenues can also be related with their relative environmental impact from the production activities of the company (Figure 2). Air / Climate 5,60%

Wastewater 2,07%

Landscape 1,07% Other 23,59%

Noise / Vibration 0,22%

Waste 67,36% Soil / Groundwater 0,08%

Figure 2. Subdivision of costs according to the involved environmental media (Percentage = € / €).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

127

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 2 shows that the solid waste is dominant and demonstrates that the impact on the environment is primarily a result of the waste disposal and containment of their impacts. When dealing with carpentry that uses mostly metal material, there are not significant potential environmental impacts, such as groundwater pollution, subsoil or atmospheric pollution. Furthermore, because the operational headquarters is located in an industrial area, there are no specific impacts relating to noise or visual appearance. Therefore, the focus should be on the prevention and proper management of the solid waste. The types of environmental aspect in literature vary widely, depending mostly on the type of industrial production of the company. Overall, however, the cases discussed in the literature highlight three main environmental aspects: air emissions, wastewater and solid waste. These aspects are essentially the same, approximately 30%, in manufacturing companies [16]. In the food industry and paper mills, the wastewater dominates [6], [13]. On farms, air pollution, which includes highly volatile substances, odour or airborne particulate matter, may be even more significant [7]. However, the results obtained for this company show that the most influential environmental aspect is the waste management.

5. CONCLUSION Although it is a new methodology, EMA has experienced a strong growth in possible applications in recent years. EMA is an evolving and continually updated tool, especially with regard to the standards. The literature shows that EMA is an important tool for sustainable management of enterprises because it allows a company to know in detail, the value and composition of the environmental costs within an organisation, which enables companies to intervene and reduce the costs. Thus, the environmental performance of economic activities is improved. To date, no study exists where EMA is applied to a company where production is made to order. Thus, this research study conducted by the Environmental Quality Research Centre of the University of Padua in 2010 on an Italian company was an opportunity to test the applicability of this approach where production varies according to customer orders. The case study also allowed us to verify if the results reflect previous results from the literature in terms of types of environmental costs and the prevailing type of related environmental aspects.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

128

Anna Mazzi, Enrico Confente and Antonio Scipioni

The case study chosen was an Italian SME operating in the field of structural steel. The results demonstrated that EMA can be applied to a company where production is made to order, but special working conditions must be taken into account. In particular, the analysis required the unit of analysis, which could be for a period of time or a specific order, to be chosen. This choice is crucial as it inevitably affects the conditions throughout the study. The results from this case study demonstrated how the EMA methodology can be applied to an organisation that works on commission. The EMA calculations revealed both the environmental costs of the organisation for the chosen unit of analysis and their cost breakdown by type and origin. Furthermore, the analysis highlighted the options that would effectively and sustainably reduced those costs. From the results obtained from the EMA calculation, the case study largely confirmed the results from literature, where EMA was applied to companies with mass production. In particular, the environmental costs related to the NPO and the purchase of raw materials were the dominant categories, whereas waste management was the most significant environmental aspect. This study is an analysis performed on a single company and applied over a single year of work. It is therefore not possible to generalise the results; however, the results can confirm the feasibility of applying the tool to madeto-order companies. It is possible to generalise the hypothesis confirmed by this study: EMA can be effectively used as a tool to support environmental and economic management of businesses that operate on commission. Hence, further research is needed to apply EMA to other economic activities operating with made-to-order production. It would be interesting to apply EMA to companies with completely different activities from the one analysed. In addition to the various industrial sectors, EMA could be considered for companies with different sizes (turnover, number of employees, offices, etc.) or geographical context (Italy, Europe or the rest of the world). Another interesting idea is to apply EMA to companies that do not have a certified environmental management system to see if environmental management according to the international standards can support the application of EMA (i.e., in obtaining and properly allocating data) and whether the results of this application would result in a better environmental performance in EMS organisations with respect to other organisations without EMS.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Environmental Management Accounting …

129

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

REFERENCES [1]

IFAC, (2005). Environmental Management Accounting. International Federation of Accounting, New York.

[2]

Burritt, R. L., Saka, C. (2006). Environmental management accounting applications and eco-efficiency: case studies from Japan. Journal of Cleaner Production, 14, 1262-1275.

[3]

Burritt, R. L., Herzig, C., Tadeo, B. D. (2009). Environmental management accounting for cleaner production: The case of Philippine rice mill. Journal of Cleaner Production, 17, 431-439.

[4]

UNDSD, (2001). Environmental Mangement Accounting, Procedure and Principles. United Nations Departement of Sustainable Development, New York.

[5]

Burritt, R. L., Hahn, T., Schaltegger, S. (2002). Towards a comprehensive framework for environmental management accounting – links between business actors and EMA tools. Australian Accounting Review, 12, 39-50.

[6]

Jasch, C. (2003). The use of Environmental Management Accounting (EMA) for identifying environmental costs. Journal of Cleaner Production, 11, 667-676.

[7]

Jasch, C. (2006). How to perform an environmental management cost assessment in one day. Journal of Cleaner Production, 14, 1194-1213.

[8]

Gale, R. (2006). Environmental management accounting as a reflexive modernization strategy in cleaner production. Journal of Cleaner Production, 14, 1228-1236.

[9]

Dunk, A. S. (2007). Assessing the effect of Product Quality and Environmental Management Accounting on the Competitive Advantage of firms. Australasian Accounting Business and Finance Journal, 1, 2838.

[10] Jasch, C., Lavicka, A. (2006). Pilot project on sustainability management accounting with the Styrian automobile cluster. Journal of Cleaner Production, 14, 1214-1227. [11] Staniskis, J. K., Stasiskiene, Z. (2006). Environmental management accounting in Lithuania: exploratory study of current practice, opportunities and strategic intents. Journal of Cleaner Production, 14, 1252-1261.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

130

Anna Mazzi, Enrico Confente and Antonio Scipioni

[12] Sutherland, M., Lord, B., Ball, A. (2008). Environmental Management Accounting in a University. University of South Australia, Paper submitted to the 7th Australasian Conference on Social and Environmental Accounting Research. [13] Gale, R. (2006). Environmental costs at a Canadian paper mill: a case study of Environmental Management Accounting (EMA). Journal of Cleaner Production, 14, 1237-1251. [14] Masanet-Llodra, M. J. (2006). Environmental Management Accounting: a case study research on innovative strategy. Journal of Business Ethics, 68, 393-408. [15] Naseer, N. (2005). Mitigating environmental risk through environmental management accounting? Journal of Applied Sciences, 5, 24-27. [16] Jasch, C., Schnitzer, H. (2002). Environmental Management Accounting – How to profit from environmental protection. IOW Project report EMA pilot testing, Vienna.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

[17] Bartolomew, M., Bennet, M., Bouma, J. J., Heydkamp, P., James, P., Wolters, T. (2000). Environmental management accounting in Europe: current practice and future potential. The European Accounting Review, 9, 31-52. [18] Şendroiu, C., Roman, A.G., Roman, C., Manole, A. (2006). Environmental Management Accounting (EMA): Reflection of Environmental Factors in the Accounting Process through the Identification of the Environmental Costs Attached to Products, Process and Services. Economie teoretică şi aplicată, 81-86. [19] De Palma, R., Csutora, M. (2003). Introducing Environmental Management Accounting (EMA) at enterprise level. United Nations Industrial Development Organization.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 5

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

WORLD ECONOMIC CRISIS OF 2008 AND ITS IMPACT ON HOUSING DEVELOPMENT AND LIVELIHOODS OF THE POOR: AN ACCOUNT FOR URBAN SPACE USE IN SUB-SAHARAN AFRICA CITIES W. Magigi*, A. Mbeiyererwa and F. Bee Moshi University College of Cooperative and Business Studies (A Constituent College of Sokoine University of Agriculture) Faculty of Cooperative and Community Development P.O.Box 474, Moshi-Kilimanjaro – Tanzania

ABSTRACT The World Economic Crisis of 2008 appears to affect urban development systems and growth in Sub-Saharan African Cities. Particular contribution in this paper focuses on documenting physical development system in urban space in view to housing construction, changes in housing rent, space use and life style changes resulted from the crisis. This paper highlights also the housing construction habit, changes of price for building materials and urban space restoration needs *

E-mail address: [email protected]

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

132

W. Magigi, A. Mbeiyererwa and F. Bee in Moshi Municipality-Tanzania, one of the rapidly developing cities in Southern of Sub-Saharan African region. The question is what a take home message to be learned by different actors in urban development and growth systems for sustainable housing development and governance systems within the world economic crisis occurrence at present and in future by having fact on past implications of the crisis. Likely, roles of different actors, impacts of the crisis and country investment policy reflections are discussed, which pave the way for highlight viable strategic options for improvement in countries with unstable economy in Sub-Saharan Africa Regions, Tanzania inclusively.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

1. INTRODUCTION The world economic crisis began in 2007, in the wake of financial and real estate speculation in the United States, but it came after a long period of international financial instability trade imbalances and several local or regional economic crises (Peiris 2009). By late 2008, the economic crisis had spread too many countries of the world, Tanzania inclusively. It appears that the root causes of the world economic crisis are complex and may require multitude of actors and economic approaches to redress. Among the causes established by different scholars include consequences of the food crisis, continued instability in fuel prices, complexities associated with increased globalization, constraints in access to financing (Peiris 2009). Other factors may be due to failure of regulatory and early economic warning systems and the challenges posed by climatic change (OECD 2009). Tanzania is one of the developing Countries found in Southern of SubSaharan African region experiencing negative consequences of the world economic downturn. Price of commodities fallen down, also the country noticed a decline in the demand for exports. For example, the price of cotton, which is one of the major traditional exports have dropped from US cents 82 per pound between March and July 2008 to US cents 45 per pound in March 2009. The tourist arrivals especially at Mt. Kilimanjaro declined, this goes together with the witness of withdrawal or postponement of investment commitment made earlier. Among such examples are the postponement to later dates of US dollar 3.5 billion investments in aluminum smelting and a rescheduled US dollar 165 million nickel mining and extraction project. These are among the notable effect of the world economic crisis to Tanzania economy over 2008/2009 (President Kikwete, 2009). The current crisis has

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

133

seriously undermined the development prospects of many vulnerable countries and the poor in different aspects of financial institutions including Banks, which prices of stock slumped down and there has been an unprecedented decline in economic activities and mortgage provisions for housing development. The dramatic changes of building materials in the Municipality appears to affect buth the housing construction and the urban environmental. People during the economic crisis seem opting cheap building materials including mining bricks from stones as well as soil motor in their construction. In these regards, uncontrolled environmental degradation becomes a common feature in the city resources use and degradation (Plate 1).

2. STUDY APPROACH

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2.1. Case study description and selection criteria This study was carried out in Moshi Municipality. The Municipality is located on the fertile land in Southern part along the slope of Mt. Kilimanjaro. It lies at an altitude of 950 meters above sea level in the North to 700 meters above sea level in the South in Kilimanjaro region. The Municipality occupies a total areas amounting to 58 square kilometer. The mean annual temperature is 25 degree Celsius, and the coldest month being July with an average of 17 degree Celsius and the warmest month is December with an average of 34 degree Celsius. The Municpality is virtually divided into 15 smaller administrative wards of Bondeni, Kaloleni, Karanga, Kiboroloni, Kilimanjaro, Kiusa, Korongoni, Longuo, Majengo, Mawenzi, Mji Mpya, Msaranga, Njoro, Pasua and Rau (Figure 1). According to the 2002 Human Settlement and Population census report, the Municipal population merited to 143,799, which was 10.4% of the regional population (1,376,702). The growth rate is 2.8% per annum (Moshi Municipality, 2008). However, being the grown-up Municipal council in Tanzania, with all the institutions and authorities the housing development control, and building materials price increases and its impact to life of urbanities and the urban ecosystems was a direction of this paper. The tremendously rise in the price of building materials have noted not only in Kilimanjaro Region but the whole Tanzania.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

134

W. Magigi, A. Mbeiyererwa and F. Bee

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 1. Study setting administrative locations in Kilimanjaro-Tanzania.

Moshi Municipality as a Case study different institution with interest in housing development or those affected with the sector was identified and becomes respondents. These includes but not limited to National Housing Corporation (NHC-Moshi Branch), Tanzania Building Agency (TBARegional Office), Moshi Municipal Council (Department of Town Planning and Environment and Department of Works and Fire). Others include land owners holding Housing in the Municipality.

2.2. Data collection During the data collection both structured and semi-structured interview methods deployed. These were administered using open-ended questionnaire. The other methods that were used during data collection include reviewing the Moshi Municipality Master Plan. This helps to convey the message towards understanding the trends of housing development in the city and the impacts of underlying economic crisis. House owners and tenants were selected and interviewed to narrate the effects of the world economic crisis to housing construction and changes of the life style of people in the city. The data were analyzed using both qualitative and quantitative tools. These include qualitative nature outcomes which derived from the qualitative analysis. The

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

135

later establish the extent and magnitude of the problems where frequency and percentage were used to qualify the data.

3. RESULTS AND DISCUSSION 3.1. Housing development in Moshi Municipality

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

African cities are experiencing poor housing development control, mushrooming of informal settlements and haphazard housing development. Financial accessibility to majority of the poor from financial institutions depicts an increasing housing fragmentation in Moshi. In addition, tied capital is a common feature which increases appears to increase unfinished and unoccupied buildings and therefore creates unsafe city. The study shows that Moshi Municipality consists of both planned and unplanned settlements. The 1995 Moshi Municipality Master Plan review team indicated that 30% of the total area devoted to housing (8.74 km square out of 29.12 km square) was in planned areas, while 70% (20.38 km square) was in unplanned areas. There are 18,200 houses out of which 9,300 have been constructed in planned areas and 8,900 have been constructed in unplanned areas.

3.2. The Main Actors and their roles in Housing Development in Moshi Municipality The study noted different actors praying a big role in city housing development. The remarkable ones and their functions provides finance, building materials, land and infrastructure services, technical services in construction and overall housing development management. The actors include government institutions, the private sector, civil society organizations and donors as follows; National Housing Corporation (NHC) NHC is one among the actors involving in housing provision in the city. Its main activity is to construct houses that are constructed and hired to individuals and groups according to their level of income. Build, operate and own is one modalities implemented by the organization. The study shows that NHC normally construct houses that depict different level of affordability and

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

136

W. Magigi, A. Mbeiyererwa and F. Bee

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

income level of individuals with different renting price. The houses built are hired to different individual in whom they are supposed to pay rent to the NHC. It was found that the National Housing Corporation (NHC) has 120 houses by the year 2010 for renting. The renting price is determined per meter square. The renting price differs based on the location in the city from the central Business District to the peri-urban zones of the city.  Residential renting price rate to Central Building District (CBD) site allocated in town is charged between 10-20 USD per meter square. But for the areas that are peripheral the rate is charged between 5-10 per meter square depending on the nature of the area, safetynets and services provided in the area and the house itself. The central Business centre in Moshi Comprises Kiusa and Mawenzi (Figure 1). The Central Business District comprise the areas with the highest concentration of administrative and commercial activities such as government, banking, import export business, wholesales, hotels and tourism etc. Likely, the area has a very high population density and that is why its residential renting is high compared to other areas in the per-urban areas of the city.  Commercial housing renting price rate in the Central Building District (CBD) is charged between 40-70 USD per meter square. And for the commercial site that are allocated at peripheral the rate is between 25-30 USD per meter square. But in real practice and as the way towards raising the revenue of the government these rates are still low and they are not in the market rates. Local government authorities Moshi Municipality is one of the local government authorities under the Prime Minister Office within Regional Administration and Local Government jurisdiction in Tanzania. The Municipality Council has different departments, which are responsible in ensuring that Moshi Town is developed. Among these departments include the department of Environment and Town Planning, which comprises three sections namely Town Planning, Land Surveying and Land valuations.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

137

The functions of each department, which among others is to ensure sustainable housing development include;  Town Planners: This involves in site planning for residential, commercial and industrial sites development and land use planning activities, where site for housing development is among the functions. Other function include control and coordinate housing development  Land surveying: This involves cadastral surveying. This ensures the urban land is planned and beacons are established and thus, control urban housing development.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

 Land Valuation. This among others involves in land allocation especially to the land already surveyed and planned. Also they are responsible for laying down procedures of allocating land to local and national level by ensuring inter-alias that there is transparent in the allocation system. The study shows that these functions are hardly enforced and implemented in the city. This has resulted increasing perception that there is no government, which control housing development in the city. This characteristic is common to different African cities, where people develop their housing the way they want and think. In developed countries including Germany where lived for a while, the situation is different. For example, building regulation and offering such permit for development is prohibited and only companies can build what proposed. However, in African cities few construction companies exists and if present experiences low capital and face challenges and haphazard building construction in African cities. The price changes also noted to encourage people to build their houses as they can funds, which in most cases are tied capital Individual Housing Developers Tanzania has home ownership policy of 1981. This policy among others encourages residents to own houses as part of valuable assets. Principally, little have been done by the government in partnership with other stakeholders to put in place mechanism to control such development, which is a basic necessity of life. In most countries individual housing contributes a big portion of the available housing stock. The study shows that 80% of houses developed in urban areas is constructed with little or no intervention from the public sector (i.e. in the government). This implies that residents in the city normally

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

138

W. Magigi, A. Mbeiyererwa and F. Bee

devote time and other resources in their housing construction. This observed to be a reason why the economic crisis has affected individual liquidity and therefore the housing development in the Municipality.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.3. Price of land in Moshi Municipality according to location In Moshi Municipality, people access land for housing construction through buying, inheritance and granted right of occupancy. The study showed that 56% of the respondents interviewed are not aware of official procedure requirements for getting land for urban development including housing. This is because they have little contact with government agencies and the English language is used for these policy and legal documents, which are more. For example, planning regulations, standards and administrative procedures are published in English while the majority* of householders and tenants respondents cannot read or speak English (92%) in the city. Only 8% of house owners and tenants‟ respondents could speak and write English. In this regard use of the Swahili language to communicate these procedures in Tanzania would be preferable. The granted right of occupancy has built confidence for the householders in terms of housing development in the city. These landholders who are also house owners understand that they are secure in terms of not being evicted by the local authority, or must receive high compensation value in case of eviction or compulsory land acquisition for public interests. 80% 0f respondents in this category are aware of the by-laws guiding housing development. The problem facing the city is how to ensure, coordinate and control the type of housing, which is not properly coordinated. The price of land for housing is determined and tenants‟ price is influenced by the land marker and locations in the city. Based on urban planning practice, the zoning regulation where we have high, low and medium density are the factors. The study shows that in high density plots with land coverage of (300-599) square meter in Njoro, Pasua, Majengo and some part of Soweto (Figure 1), land is sold at 8000-15,000 USD per plots. The housing rent prices in these areas are 15-30 for residential building privately owned per month. Medium density plots of with plot coverage ranging from 600-1000 Square meter in the same area were sold at 20,000 USD and during and after * These include smallholder farmers in the case study explored and the city as a whole. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

139

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

the economic crisis, the same plot is sold between Tsh 35,000USD to 45,000USD per plots. This shows the impact of the economic crisis in land development in the city. Similarly, low density plots with land coverage of 1000-3000 square meter before the 2008 crisis, was sold at 150,000 USD. After the crisis, the price amounted to 200,000 USD. It should be noted that low density plots acquire the large space of land such as Shunt-Town, KCMC and some part of Soweto, which observed to be areas for elite people with economic integrity in the city. The housing and land price as highlighted appears to be influenced by the forces of demand and supply together with the local authority policy in land demarcation and zoning. The study reveals that Msaranga settlement, which is located near KDC area in the city on the way to Kiboroloni is developing faster. The availability of land and affordable prices has influenced such development. At the beginning in Msaranga area, by the year 2005 plots of one acre was sold at the 300USD and today has rose to 4000USD. However the price of land for the year 2011 seems to be affordable in the area when you compare with other areas in the city.

3.4. Price of Building Materials: A reflection on World economic crisis impacts The price of building materials in Moshi Municipality have changed over time since the world economic crisis of the year 2008. These among others seem caused by the rise in the cost of production due to increased crude oil prices, which is important ingredient in industry development. This resulted to the rise in the budget to financing different construction project against the budget set by the respective authority for instance the Tanzania Building Agency. This accompanied with rise of the cost of building materials including corrugated iron sheet, cements and blocks overtime (Table 1). The government due unstable economy fails to control such price changes and therefore the poor livelihoods strategies affected much and land degradation (Plate1). The impact associated with these changes is the increase of life cost, crime increase in the city and increased prices of basic materials such as clothes. The rise of cost of building materials affected the Tanzania Building Agency and other construction industry, who are responsible for housing construction and in the region. Moreover, institutions dealing with housing development in the city argues that, the crisis has resulted to the delay of project completion due to deficit budget of the government to cover the extra

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

140

W. Magigi, A. Mbeiyererwa and F. Bee

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

cost resulted from the rise in the price of building materials, the situation which required an extra financing to ensure timely completion of the already started project. The following are some of the important building materials and their relative price changes over time, and this is according to the survey done by the investigators from September 2008 and July 2009 (Note 1USD = 1500Tshs). The spiral over effects of the world economic crisis affected a lot the price of cement industry in Tanzania as it rises up to Tsh 20,000 being the increase in the demand of cement in South Africa. South Africa imports cement from Tanzania to a large extent. The major claim of the South African investors and importers is that cement from Tanzania is of good quality. Likely, more cement was demanded due to the preparation for the World Cup stadiums, the game which held in June, 2010.

reased Environmental Degradation Plate 1. Environmental degradation and loss of livelihoods strategies caused by world economic crisis on the impacts of the need for housing construction.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

141

Table 1. Price of building materials for 2008/2009 Type of Building Materials

Description

1.

Cement

2.

Iron Bar

S/no

3.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4.

5.

6.

7.

Painting

Corrugated Iron Sheet(Gage 28) from Allaf Union Ex.Uk Wood( from Souo HillIringa)

Ceiling board

Price Change (Tsh) 2008

2009

NIL

12,000

20,000

8 mm

5,200

6,500

10mm

8,500

12,000

12mm

10,000

13,000

16mm

13,000

15,000

Weather Guard per 20 litre

80,000

110,000

Water per 20 litre

16,000

28,000

Per 4 litre

12,000

13,000

2m

10,000

14,000

3m

12,500

17,000

2 Livers

50,000

60,000

3 Livers

65,000

80,000

Softwood treated per feet

900-1000

1400

Hardwood

1,400-1500

2500

Gypsum board per sheet

8000

13,000

Chip board 8mm per sheet

14,000

16,000

Ceiling board 4mm per sheet from Tanzania

5000

7000

Ceiling board 4mm per sheet from South Africa

7,000

8,000

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

142

W. Magigi, A. Mbeiyererwa and F. Bee Table 1. (Continued)

8.

Fine Aggregate

4.5 cubic meters

80,000

130,000

9.

Course Aggregate

4.5 cubic meters

130,000

180,000

10.

Hard Core

4.5 cubic meters

50,000

100,000

11.

Tiles(Granite in nature)

Wall tiles(best from Italy/Spain) per box

18,000

25,000

Floor tiles per box

30,000

42,000

Source: Field survey in Moshi Municipality, September 2008-July 2009

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

But from August, 2009 the price for cement declined to Tsh.12,000/= this is due to the completion of the final preparation of the stadium hence its demand falls and supply rise as the result, decline in its price, that make individual at least afford the price for cement. This also was another driving factor in the rise and fall of the building materials in the country during the crisis.

3.5. Perception of different stakeholders in housing construction and development Urbanization process is inevitable in African countries including Tanzania where urbanization process in terms of physical development hardly controlled. The Country has policy and legislation which guide both urban and rural development including investment needs, but these entire fall short if enforcement. The same applies to the housing constructions, where haphazard housing development seems to be a permanent feature in African cities development and growth phenomena. With this trends in housing development and world economic crisis, different perceptions was traced to capture what are the feelings so that can facilitate to design viable strategies for improvement. The remarkable feeling from respondents includes:  The process of acquiring a building plot and a building permit takes very long time and in most cases are discouraging housing investment  Once landholder wants to develop a house formally, long procedure involved as well as getting a title deed is costly and tiresome.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

World Economic Crisis of 2008 and its Impact …

143

 High cost of building materials over time have highly contributed largely to the high cost of housing construction to individuals especially people with low-income. The notable reasons include high cost involving in transportation of different materials used for construction.  Availability of land/space for utilization is still a problem in Moshi Municipal this is due to the increase in the demand of land compared to the capacity of land available. It was discussed previously that Moshi Municipality covers an area of 58 square kilometer of land coverage and up to now the population of Moshi Municipality exceeds 153, 799. Also the nature of ownership of land in Moshi is still a problem, there is traditional ownership (Implied deed) where by people own land under customary rights. Residents are not are not ready to offer their lands for public interest. One wonders, how such ownership can be enforced at the sometimes is recognized by land law in the Country.  Price of land in Moshi Municipality is high, these have led to the difficulties of individual to obtain land for housing construction or even to a group of people to obtain land for both commercial and residential purposes.  The increased land prices in the city shows that fewer residents with economic integrity can afford to buy.  There is extremely a low chance for an individual to improve their built environment. Most of the available areas are unplanned as the result outbreak of poor environment management arises due to an individual to construct houses in hazardous area, wet areas and mining sand and stone brick. These practices have resulted to emergency of pollution, especially in areas with high density plots like Pasua, Njoro and Uchira settlements especially during and after the world economic crisi. The only alternative for construction after raised building materials prices is the use of brick stones which found to be affordable and durable.

3.6. Impact of World economic crisis on city life changes The rise in the cost of building materials does not accompany the rise in the per capita income of an individual, as the result the constant income of an

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

144

W. Magigi, A. Mbeiyererwa and F. Bee

individual is affected by the price changes of different products in the market. Therefore this has led to inability of most people in Moshi Town to engage in housing construction hence its development obstructed. The increased land prices in the city shows that fewer residents with economic integrity can afford to buy. The low income earners found difficulties to maintain the land and housing in the city, to pay tax as well as increasing income through housing. This seems also to affect city life after the world economic crisis of 2008

3.7. Obstruct in ensuring sustainable housing development in the Municipality

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Sustainable housing development in Moshi Municipality is one of the strategic dreams of the Municipal council. But there are some shortcomings that hinder its success. The study shows among others, despite of world economic crisis, there are some challenges noted that hinders housing development and therefore affects life of local people in the city. These include;  Political interference: it might happen that political leaders promise to the community to develop their housing. But the area promised by the leaders to be developed are not planned to be developed or the area is for housing construction but what is insisted is commercial development purposes. Therefore political leaders are there just to fulfill their desire but planners are there to ensure better housing development according to the Municipal planning policy. It was noted that in most cases politicians are reluctant to act on immediate things because to them seem to be disincentive to voters. In addition, most of them knows that they spend less time in office and the motivation for hardworking for longer time seems to be difficulty goal  Lack of cooperation between housing developers and local authority: To ensure housing development there are must be better cooperation among the actors that involve in the development of housing. The unconformity of the land use zoning and construction needs in each zone include site and plot coverage ratios observed to be a proble in the city.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

145

 Budget. The budget set towards housing development within the Municipal council appears have no budget set aside for enhancing housing construction to cater for the growing needs of housing needs and requirements in the city. The construction of houses appears to be a one hand responsibility of National Housing Corporation, which in most cases falls short in its budget  Lack of formal mortgage housing finance facilities in the country and this has made house construction a difficult process for many households especially those in the low income categories. Housing is financed from personal savings over a long period of time. This curtails the supply of housing, since personal saving is not sufficient to afford housing construction costs.  Price of land in Moshi Municipality is high very high for the poor to afford: In areas of low density plots and medium, people with low income level they can‟t afford to access such costs.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.8. Building control in Moshi Municipality It should be noted that Human settlement development involves an agglomeration of actors with same interest. An effective land administration system requires a defined statutory code to effect compliance and control. Planning and building regulations and standards are therefore, essential in development control and guiding construction. In Moshi Municipality, the department of town planning and environment and department of works and fire is the one which responsible with coordination and building control. In the process of housing development control and coordination in the city in practise, the process starts by the town planners to oversee the land use planning process. The allocation of land is done by other department, which is land valuation section. Similarly, the offering of the building permit and development control falls under engineering department, who in most cases are not trained in urban development and growth. The Municipal Health Officer have a task to inspect and recommend the setting of the environment that surround the building, does it allow and favor habitation. The urban planning committee use to endorse and approve the site to be developed after consultation done by engineer. These practice and institutions dichotomies dismantle the housing coordination as the roles are not clear based on the professional merit. This institutional division appears to be a disincentive to

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

146

W. Magigi, A. Mbeiyererwa and F. Bee

planners and valueres who want to control land development in the city. This calls for institutional restructuring and reforms to redress the gap.

4. RECOMMENDATION It is recommended that in order to improve urban systems through housing construction under the world economic crisis, strategies and different issues and strategies should be taken on board.THE possible strategy include: Strategy1 There should be an introduction to an alternative reserve asset to provide liquidity support as and when needed to ensure smooth functioning of the world trade and payments become apparent. This will enable countries to have reserve in order to curb the crisis.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Strategy 2 Liquidity issues have been an important part of the crisis, and the buyers strike for wide classes of financial instruments has led to a spate of emergency measures. The removal of these measures requires reducing uncertainty in two ways: First, through an improved and globally coordinated central bank liquidity support function that works in crisis situations and secondly, use of open investment principles by improving transparency of the collateral underlying securities, global infrastructure, reporting and clearing mechanisms. Strategy 3 There is a need to restore private public partnership; this will help to enhance financial mobilization and effective resource use for the betterment of our communities. Together with increasing local production and regional economic integration may be a viable strategy to cub the gap and crisi of economic criss. This will enable the nations to enhance enough and sound reserve among the bilateral countries. Strategy 4 Government should endeavor to allocate a national budget to support housing development. This is due to the fact that from the study conducted local government authority (Moshi Municipality) does not have budget set for

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

World Economic Crisis of 2008 and its Impact …

147

housing construction. As the result housing construction is performed by individual household, private institutions and some government agencies like NHC and TBA. But it is surprisingly that these agencies their outreaches are limited hence, the need for local government authorities to be empowered in terms of capital to have the capacity to construct houses by itself.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

5. CONCLUSION The paper argues that for effective and sustainable urban development which aims to improve housing development for improved livelihood of the poor, social capital and networking is important under eventual and substantial ongoing world economic crisis impacts. This appears also to improve urban environment and reduce poverty and therefore Millennium Development Goals (MDGs), otherwise it will be difficulty to be achieved by the year 2015. Similarly, balancing voices of different actors, improving land use planning practices, resolve land conflicts, and enhance ethnical and relation ties of people within and outside the local authority, and price control mechanism are important ingredients in improving urban livelihood, environment and housing construction in MOSHI Municipality specifically and in cities of Sub-Saharan Africa countries of the same context under world economic crisis.

REFERENCES Peiris, G. L. (2009). Minister of Export Development and International Trade, Sri Lanka, United Nations Conference on the World Financial Crisis and its Impact on Development. OECD (2009). The Road to Recovery: Up date on the s. Strategic Response to the Financial and Economic Crisis. Accessed on 27TH March, 2009 from http:www.Oecd.Org|document. Kikwete, J. M. (2009). President of United Republic of Tanzania, Africa_IMF High level Conference on Changes Successfully Partnership for African Growth. Moshi (2008). Managing the Sustainable Growth and Development of Moshi, Environmental Profile of Moshi Municipality.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISBN: 978-1-61324-702-0 © 2012 Nova Science Publishers, Inc.

Chapter 6

TRANSPORT AND ECONOMIC PERFORMANCE: A VES PRODUCTION FUNCTION APPROACH FOR THE CASE OF MAURITIUS Boopen Seetanah* Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

University of Mauritius, Reduit, Mauritius

ABSTRACT This study employs a VES functional form of the production function to capture both the direct and indirect effects from transport capital on growth for the small island economy case of Mauritius. Results from the analysis yield a positive contribution of such type of capital. Further analysis based on marginal productivities of inputs tend to suggest that there exists complementarity between transport capital and private capital and thus suggests that they impact on aggregate output indirectly as well. Same is observed with the total level of public capital. Keywords: Translog, Transport capital, economic growth.

*

E-mail address: [email protected]

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

150

Boopen Seetanah

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

1. INTRODUCTION Capital formation originates from both the private and public sectors of the economy. Economic studies have mostly concentrated on the link between private and total capital accumulation and economic growth. The contribution of public capital in the above context has not received good focus in the literature. An even more scarce number of studies (example Fischer (1997), Fernald (1999), and Stephane (2001)) is available on the link between the disaggregated components of the public capital, particularly transport capital which is often one of the major government‟s capital expenditure, and economic performance. In fact, all too often, we neglect or take for granted the role of public capital, particularly transportation as an integrative part in the market economy, perhaps because of the very banality of efficient transport in most of the developed world today. Yet without well-maintained roads, lowcost water transport and rapid air service, our complex economy would quickly collapse. The majority of the researches attempting to actually support the public and transport capital-growth hypothesis, focused on developed countries cases such as US and Western Europe. Very few studies (for instance Looney (1997) and Ghali (1998)), have been identified for developing countries, including Africa and cases. Very importantly as well is the fact that most of existing research has used an extended Cobb-Douglas production as their preferred specification. However the constraint with this type of specification is that is limited to the assumption of an elasticity of substitution of unity. It is believed that it might be more interesting to analyse the contribution of public and transport capital in a Variable Elasticity of Substitution (VES) production function framework. In fact there are very valuable reasons as to why the elasticity of substitution should vary. For example, it might be expected to vary with the capital/labour ratio (K/L). The greater the capital intensity of production, the harder it is likely to be to substitute further capital for labour and the lower the elasticity of substitution is likely to be. Alternatively, even with constant K/L ratio, the elasticity of substitution may simply change over time if technical progress affects the ease with which factors may be substituted for each other. Moreover most attention in measuring the contribution of public capital to economic growth have been based on the premise that the public capital input enters as an „unpaid factor of production‟, that is public capital raises output directly. However Meade (1952) suggested another channel through which

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Transport and Economic Performance

151

public input can impact on a country‟s output. He argued that public input may also indirectly act as what he denoted as „environmental factor‟ or „atmosphere goods‟*. Delgado and Alvarez (2000) indicated that the indirect effect arises from the assumption that public capital and private capital services are „complements‟ in production. An increase in public capital raises the marginal productivity of private capital and this might lead to an increase in demand for private capital and stock of private assets†. Less attention (except Stephane (1997), Delgado and Alvarez (2000), Canning and Bennethan (2000)) has in fact been devoted to this channel and to the technological relationship between public and transport capital and the other inputs. This research is two-folded and focuses, in the first instance, on a study of the relationship between, public capital and subsequently and particularly between transport capital and the Mauritian economy‟s output using a uniquely constructed time series dataset dating back since 1950. It also attempts to address all the above specification issues by employing a more general and flexible functional form of the production function which takes into account the VES type of technical relationship and the „creation of atmosphere‟ effect from public and transport capital. The structure of this paper is as follows Section 2 discusses very briefly the theoretical underpinnings of the link between transport capital and economic growth and the relevant empirical literature. Section 3 describes the preferred modelling function used and elaborates on the proxies used and the data set construction. Section 4 investigates the empirical link between i) public capital and economic growth and ii) transport capital and economic growth for the case of Mauritius and section 5 concludes and deals with policy implications.

II. LITERATURE REVIEW In fact it has been mostly argued throughout the literature that transport capital improvement primarily reduces transport costs for both the movement of goods and people. It also increases accessibility and attractiveness to regions with impact on aggregate productivity and thus economic growth. It is *

In this case he made a parallel with the way technical progress entering a production function It should be noted that this indirect effect of a rise in infrastructure capital on output, however, is not necessarily positive. In fact the effect can be negative if infrastructure and private capital are substitutes. On balance thus there exists a final effect. †

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

152

Boopen Seetanah

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

also believed that transport capital investment, via its primary benefits, will positively affect productivity and output through the following ways 

Reorganization and rationalization of production, distribution and land use.



Better productivity and higher level of private investment (inwards and foreign direct).



Wider markers, increased specialization and economies of scale.



Effects on labour market supply ( on labour costs) and labour productivity.

Most of the existing country cases researches on the debate were based on an extended Cobb-Douglas specification for developed economies cases. They treated public input as an unpaid factor and have reported on the overall a positive and significant effect of public capital on the economic growth(see Aschauer (1989),Munnell (1990,1992), Pereira and De Fructos (1999), Lighhart (2000),Pereira (2000), Pereira and Andraz (2001) among others). There has also been a few exceptions which reported insignificant effects (see Tatom(1991)),C Hulten and Schwab (1993) and Holz-Eakin (1994)). Among the very scarce studies on developing countries based on the above specification features Looney (1997) who studied the link for the case of Pakistan and Ghali (1998) for the case of Tunisia. In the first case public capital was reported not to have been instigating private sector expansion while in the second case public capital were even seen to have a negative effect on private investment and thus output. A couple of work that come closer to this one and which merit a brief review are that of Stephan (1997,2001) and M J Delgado and I Alvarez (2000) who both used a Transcendental Logarithmic production function(Tranlog) framework to analyse the effect of public capital and transport capital on economic growth. Stephan (1997) used a time series cross section data from the manufacturing sector for 11 states from 1970 to 1993 in the German manufacturing sector to examine the impact of road infrastructure on private production. He found that road infrastructure played a significant role in the productivity and output of the manufacturing sector. He also concluded that differences in road infrastructure might explain a part of the existing productivity gap between manufacturing in East and West German regions.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

153

In a subsequent study Stephane (2001) investigated the effects of public infrastructure on private productivity in both Germany and France based on a total sample was 596 observations(281 for Germany and 315 for France). Results obtained confirmed a significant coefficient for infrastructure with a magnitude of 0.740. Though his specification circumvents the question of elasticity of substitution in both cases however, the reported figures seem too large to be plausible. Delgado and Alvarez (2000) also investigated the technical relationship between public infrastructure and its effect on private productivity. They used physical units as a measure of productive infrastructure over the period 19801995 for 17 Spanish regions. Their results showed that infrastructure capital formation had a positive link with private investment, estimated to be complements, thus providing an indirect effect on economic growth.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

III. METHODOLOGY AND DATA SOURCE We follow Christensen et al (1973), Stephane (1997) and Delgado and Alvarez (2000) by specifying a production function which does not impose any a priori restriction on elasticity of substitution and which takes into account the „atmosphere effect‟ from public and transport capital as well. The approach is based on a Transcendental logarithmic (Translog) production function* and in its basic form (for a two variables model) is as follows

log Q  a0  a1 log K  a2 log L  a11  log K 

2

 a12  log K  log L   a22  log L    , 2

(1)

where K is the capital stock, L is Labour, a0 the constant term and the aii denote the respective coefficient of the parameters. The framework is extended to firstly analyse contribution of public capital and secondly transportation capital on the economy‟s output.

*

see appendix for a derivation of the simple two variable case with overall capital and labour.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

154

Boopen Seetanah

Extension of the translog framework: Decoupling public capital To analyse the case of public capital we can extend equation (1) to obtain

y  a0  a11k  a2 g  a3g  a12 k l  a13k g  a23l g

a11k 2  a22 g 2  a33l 2   ,

(2)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

where a 0 is the constant, k is now the private capital stock, g is the public capital stock and l is the labour force and the small cap letters denotes variables in logarithmic terms and  denotes that variables are in first difference In this specification, cross terms represent relations of complementarity and substitutability between factors when they are positive or negative respectively. The quadratic coefficients characterise denotes returns to scale. As pointed earlier, this model differs from the Cobb-Douglas model in that it relaxes the Cobb-Douglas‟s assumption of a unitary elasticity of substitution. The Cobb-Douglas model is obtained by the restriction a12, a13, a23, a11, a22 and a33 = 0 (null hypothesis) and can be tested by the use of an FTest * (Garcia Mila, McGuire and Porter(1996). Note that the coefficient of variables can be negative and that one might conclude that the estimated output elasticity with respect to capital has the wrong sign. However we should be careful in the interpretation as in the Translog model as the respective capital elasticity of output is computed as shown by equations below. In fact to analyse the elasticities of the private inputs and productive capital it is necessary to differentiate the production function (equation (1)) partially with regard to these factors, obtaining the following expressions: Eyl = d y/ d l = a2+ a12 k + a23 g + 2a22 l,

(3)

Eyk = d y /d k = a1+ a12 l + a13 g + 2a11 k,

(4)

E yg = d y /d g = a3+ a13 k + a23 l + 2a33 g.

(5)

Where the small caps letters indicates that the variables are in log terms and Eyl ,Eyk and Eyg are the output elasticities with respect to labour, private and public capital respectively.

*

The computed value (5.34) turned out to me more than the critical and we thus reject the null hypothesis of a Cobb-Douglas model in favour of the Translog model. Same is also observed with the specification including transport capital.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

155

Extension of the translog framework: Disaggregating transport capital from public capital To analyse the importance of transport capital we further decouple the public capital into transport and non-transport capital and specify the following extended translog model

y  a0  a1k  a2 l  a3trans  a4 nontran

 a12 k l  a13k trans  a14 k nontrans  a23l trans  a24 l nontrans  a34 transnontran

a11k 2  a22 l 2  a33trans 2  a44 nontran2 ,

(6)

where y is output of the country, a 0 is the constant, k is private capital, trans

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

is transport capital, nontran is nontransport capital and l is the employment level. Δ denotes that the variables are in first difference and small letters the variables are in natural logarithm. The respective output elasticities are given by the following equations Eyl = d y/d l = a2+ a12k + a23 trans + a24 nontrans + 2a22 l,

(7)

Eyk = d y/d k = a1+ a12l + a13 trans + a14 nontrans + 2a11k,

(8)

E ytrans = d y/d trans = a3+ a13k + a23l + a34 nontrans + 2a33 trans,

(9)

E ynontrans = d y/d nontrans = a4+ a14k + a24 l + a34 trans + 2a44 nontran, (10) Where Eyl ,Eyk, Eytrans and Eynontran are the output elasticities with respect to labour, private and public capital Data construction and sources Since the disaggregated capital stock figures for the country were unavailable, they had to be constructed using the Perpetual Inventory Method (PIM) as recommended by OECD (2001) and the US Bureau of Economic Analysis (1999). This approach has been widely used in the literature*. The construction of these capital stocks required disaggregated investment data series to feed the above methodology. The Penn-World Table (6.1) only provided total investment figures since the *

This methodology has also been widely used in both classical and recent literature for instance by, Munnell (1990), Sturm and de Haan (1995). More recently Jacob et al (1997), Barbara Fraumeni (1999), Lighhart (2000), Canning and Bennathan (2000), Delgado and Alvarez (2000), and Kamps (2003) among others.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

156

Boopen Seetanah

1950. In an attempt to separate the total investment into the various components we gathered data on total government capital investment and also on transport capital investment over the whole period under study (19502005). These were available from the various individual Accountant General Annual Reports of the country and also from the Financial Accounts of the Colony for period before independence (pre-1968). To measure labour we used employment level figures and these were available from the Central Statistical Office (CSO) and the Bi-annual Digest of Statistics (various issues). The dependent variable output was proxied by the real Gross Domestic Product at constant price and was generated from the Penn World Table (6.1)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

IV. EMPIRICS Before the annual data over the period 1950-2000 are applied to equation (2) and subsequently to equation (6), it is important to investigate the univariate properties of the all data series and to determine the degree to which they are integrated. We employ both the augmented Dickey-Fuller (ADF) (1979) and Phillips-Perron(PP)(1988) unit-roots tests for that purpose and the results are summarised in Table 1 and below. Table 1. Summary results of Unit Root Tests in level form: Dickey-Fuller and Phillips/Perron Test

Aug. Dickey Fuller

Phillips Perron

Critical Value

Variable Type

1

+1.43

+2.55

-2.924

I(1)

Aug Dickey Fuller (time trend (t) -2.22

1

+1.16

-2.283

-2.924

I(1)

1

-0.08

+0.22

-2.924

I(1)

Variables (in log)

Lag selection

y

k g l trans nontran

Critical Value

Variable Type

-3.51

I(1)

-1.37

-3.51

I(1)

-1.44

-3.51

I(1)

1

-1.10

-0.87

-2.924

I(1)

-2.12

-3.51

I(1)

1

+0.94

+2.93

-2.924

I(1)

-1.17

-3.51

I(1)

1

-1.28

-0.57

-2.924

I(1)

-0.72

-3.51

I(1)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

157

Table 2. Summary results of Unit Root Tests in first difference: D/F and Phillips/Perron Test

Variable Type

Aug Dickey Fuller (with time trend (t) )

Critical Value

Variable Type

-2.936

I(0)

-8.92

-3.508

I(0)

-5.21

-2.936

I(0)

-8.63

-3.508

I(0)

-4.06

4.92

-2.936

I(0)

-4.06

-3.508

I(0)

0

-5.02

-3.46

-2.936

I(0)

-5.17

-3.508

I(0)

0

-4.26

+3.72

-2.936

I(0)

-4.48

-3.508

I(0)

nontran 0

+4.77

-2.93

-2.936

I(0)

-5.05

-3.508

I(0)

Variables (in log)

y k g l trans

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Δ

Lag selection

Aug. Dickey Fuller

Phillips Perron

Critical Value

0

-8.53

-8.76

0

-8.75

0

From the above tables, all of our variables are observed to be nonstationary but integrated of order one. We thus estimate a first difference specification to control for that fact. First differencing typically renders I(1) variables stationary and removes the problem of justifying or explaining the existence of trends. Note that by first differencing the variables, the long run parameters are unaffected (see Tatom (1991), Stephane(2002))

The Public capital-growth hypothesis The analysis provides both the direct and the indirect effect of the private and public inputs. We run the following translog function

y  a0  a11k  a2 g  a3g  a12 k l  a13k g  a23l g

a11k 2  a22 g 2  a33l 2   ,

(2)

where the small cap letters denotes variables in logarithmic terms and  denotes that variables are in first difference

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

158

Boopen Seetanah

Direct effects The estimates of the translog model as specified in equation (2) is shown below and these figures are subsequently used to generate the direct effects from the expressions derived above (that is equation (3), (4) and (5)) It should be noted that the model was estimated originally without any dummy (for both specifications). However the residuals were showed not to be random and depicted a marked drop in the year 1960. Upon investigation we realised that this was due to cyclone Carol, the most devastating cyclone of all time. Thus a dummy variable was included to take this into account*.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table 3. OLS Estimates of the Translog function with public infrastructure capital Regressor Constant Δk Δl Δg ΔkΔl ΔkΔg ΔlΔg Δk2 Δl2 Δg2 Dum

Coefficient 60.12 -28.61 3.14** -17.81 -0.126 0.47** -1.52 0.421* 0.27* 0.663* -0.301***

T-ratio 0.96 -1.23 2.07 -2.42 -0.137 2.11 -1.18 1.86 1.68 1.83 -6.78

*significant at 10%, ** significant at 5%, ***significant at 1%

The respective elaticities are then computed to be Eyl = 0.349, Eyk = 0.71 and Eyg = 0.25. The results are clear and conclusive. The output elasticity of public capital reveals that the latter has a positive effect on the country‟s output and further indicates that a 10% increase in public capital increases output by about 3.5%. As expected private capital‟s contribution to overall output is highest and labour is also reported to positively affect output. *

Moreover the regression was also run including a time trend, dummy for other major cyclones and with a post independent dummy (independently and together). However their respective coefficients proved to be statistically insignificant and were judged not appropriate in our analysis. In any case the results obtained were not too different from the actual ones.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

159

Indirect effects When coming to the analysis of the marginal productivities of inputs, the single cross terms with labour and public capital appears not to be significant. Therefore since this estimate is rather imprecise, it is not possible to conclude whether or not public capital creates an „atmosphere‟ and thereby enhances productivity of labour. On the other hand the cross term involving private and public capital is positive and significant and appear thus to be complementary. However it should be mentioned that the results of the translog production function should be interpreted with caution due to the high correlation of the single with the quadratic and cross terms.

Transport capital-growth hypothesis Direct effects Regressing equation (6) using our data set yields the following estimates

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Table 4. Estimates of the Trans-log function with transport infrastructure capital Regressor

Coefficient

t-ratio

Constant Δk Δl Δtrans Δnontran ΔkΔl ΔkΔtrans ΔkΔnontrans ΔlΔtrans ΔlΔnontran ΔtranΔnontran Δk2 Δl2 Δtrans2 Δnontran2 Dum

-13.5 -23.23 9.76** 22.12** -0.935 -0.365 1.68** 0.059* -0.61 -0.9 0.062 -0.083 1.19* -1.34 0.234** -0.31***

-0.03 -0.75 2.22 2.351 -0.0025 -0.216 2.557 1.88 -0.209 -0.3650 0.024 -0.813 1.86 -0.472 2.246 -6.36

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

160

Boopen Seetanah

The output elasticity with respect of the inputs are estimated to be Eytran= 0.115, Eynontrans= 0.273, Eyk = 0.561 and Eyl =0.36 respectively. The above results indicate that transport capital has been positively affecting the level of economic growth of the country and that a 10% increase in transport capital will generate around 1% increase in the country‟s output. The other variables have the expected signs as well. It should be noted though that non-transport capital are reported to be more productive with an elasticity of 0.27 and private capital has the highest level of productivity (0.55). Indirect effects Marginal productivities of inputs analysis reveal that transport capital and private capital seems to be complementary (a positive and significant coefficient was reported) and so is non transport and private capital. Any other cross term was reported to be insignificant and we could not thus confirm the complementarity or substitutability relationship between these respective pairs of terms.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

V. SUMMARY OF RESULTS This paper used a flexible functional form of a production function, namely a transcendental logarithmic function (translog), to analyse the effects of public capital and in the subsequently transport capital on economic growth. Results from the analysis tend to confirm a positive contribution of both types of capital. In fact a 10% increase in public capital and transport capital is estimated to bring a 3.5% increase in the country‟ output. Marginal productivities of inputs analysis tend to suggest that there exist complementarity between public and private capital and also between transport capital and private capital. This might thus suggest that public and transport capital impacts on aggregate output indirectly as well. The domestic policy implications are obvious. Adhoc government spending cuts and neglecting infrastructure needs* might have a deliterious effect on private sector investment and economic growth. It is a fact that, especially in developing and newly industrialised country cases, including Mauritius, public finance is particularly limited and sustainable transport *

Empirical Studies (Aschauer(1989) and Munnel l(1991)) have tended to prove that it is precisely the reduction in infrastructure investment that could explain the drop in productivity and growth of many countries over in the 1970‟s and early 1980‟s.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Transport and Economic Performance

161

improvement usually comes at the expense of other investment projects which could be forgone as for instance, education or defence or social projects among others. Officials and planners have often been unable to make decisions regarding the use of limited public funds in transport and public infrastructure investment in the absence on solid empirical grounds. This is particularly true as in times of budget crises where it has often observed that government adjust very often by cutting expenditures particularly on transportation capital. In fact, the Government of Mauritius has been trying its best to develop the transport system to meet the country‟s present and future requirements. These can be witnessed by the fact that in most of the national plans, policies address many of the inadequacy of transport capital. However during implantation it has often been observed that these plans were not adhered to. As a result transport development in Mauritius has been driven mostly by ad hoc considerations having no explicit focus on long term requirements. This can explain the high volatility and the erratic pattern of investment expenditures in these types of investment along years. One can deduce that this unguided nature of present development efforts is rooted in the absence of a vision for future plan. The results from the study might thus guide in better and more efficient government budget allocation instead of ad-hoc spending in transport capital. It is recommended above all that government refrains itself in undergoing drastic cuts in public capital expenditure, even in difficult times. This is even more important in the case of transport capital projects. It is believed that the government would be better off in taking advantage of World Bank‟s and other international institutions infrastructural and developmental loans instead of capital expenditure cuts from the budget. It is believed that government needs to take immediate action to formulate and adopt a long term vision and spell out integrated transport policies involving all stake holders. Broad participation of different interest groups and consumers is essential for the effectiveness of such planning. The long term plan should also incorporate the development of a land management regime to avoid misuse of land. This will regulate the physical framework in which transport infrastructure, particularly future road development and improvement. Given government‟s budget constraint and in the light of our empirical analysis, the case of private financing and joint public/private financing arrangements should be less ambiguous so long there is addition to the country‟s stock of transport capital, no matter who is financing it. Government should ensure that the private sector have sufficient incentive to invest in

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

162

Boopen Seetanah

transport capital and in its services as well. To this end, the government needs to develop a efficient institutional framework and further improvements are also required in a number of areas to create a conductive environment: These include improving the legislative and regulatory environment, including the formulation of a BOT law, removing unnecessary bureaucratic procedures and practices, marketing the potential of Mauritius to the international investor community. As an ending note, the support of the political leadership for the implementation of the recommendations is judged to be crucial.

REFERENCES Aschauer, D. (1989). Is public expenditure productive? Journal of Monetary Economics, Vol. 23, pp. 167-200.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Christensen, L. R., Jorgenson, D. W. and Lau, L. J. (1971). Conjugate duality and Transcendental Logarithmic Production Frontiers, Review of Economics and Statistics, LV, pp. 28-45. Delgado, M. J. and Alvarez, I. (2000). The effect of public infrastructure on private activity: Evidence from the Spanish regions, Revista Asturiana de Economia, No. 19, pp. 155-191. Dickey, D. A. and Fuller, W. A. (1979). Distributions of the estimators for autoregressive time series with a unit root, Journal of the American Statistical Association. Fernald, G. J. (1999). Roads to prosperity? Assessing the link between public capital and Productivity, The American Economic Review, June 1999, pp. 619-637. Garcia-Mila, T., McGuire, T. J. and Porter, R. H. (1996). The effect of public capital in state level production functions reconsidered, Review of Economics and Statistics, Vol. 78, pp. 177-180. Ghali, K. H. (1998). Public investment and private capital formation in a vector-error-correction model of growth, Applied Economics, Vol. 30, pp. 837-844. Gramlich, E. (1994). Infrastructure investment: A review essay, Journal of Economic Literature, XXXII, pp. 1176-1196. Greene, W. H. (1997). Econometric Analysis, Prentice Hall.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

163

Heston, A., Summers, R. and Aten, B. (2002). Penn World Table Version 6.1, Center for International Comparisons at the University of Pennsylvania (CICUP). Holtz-Eakin, D. (1994). Public sector capital and the productivity puzzle, The Review of Economics and Statistics, LXXVI, pp. 12-21. Hulten, C. and Schwab, R. (1993). Public capital formation and the growth of regional manufacturing industries, National Tax Journal, XLVI, pp. 261274. Kmenta, J. (1967). On estimation of the CES production function, International Economic Review,Vol. 43(3), pp. 579-592. Lighthart, J. E. (2000). Public Capital and output growth in Portugal: An Empirical Analysis, IMF working paper WP/00/11. Looney, R. E. (1997). Infrastructure and Private Sector Investment in Pakistan, Journal of Asian Economics. Meade, J. E (1952). External Economies and diseconomies in a competitive situation, Economic Journal, 62, pp. 54-67.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Munnell, A. (1990). Why has productivity declined? Productivity and public investment, New England Economic Review, Vol. Jan/Feb, pp. 2-22. OECD(2001a), A manual on the measurement of capital stocks, Consumption of fixed Capital and Capital Services, Paris. Available at www.oecd.org/pdf/M00009324.pdf Pereira, A. M. and De Frutos, R. F. (1999). Public Capital Accumulation and private sector Performance, Journal of Urban Economics, Vol. 46, pp. 300-322. Pereira, A. M. (2000). Is All public capital equal? The review of Economics and Statistics, Vol. 82(3), pp. 513-518. Pesaran, M. H. and Pesaran, B. (1997). Working with Microfit 4.3: Interactive Econometric Analysis, Oxford University Press. Phillips, P. C. B and Perron, P. (1988) Testing for a unit root in time series regression, Biometrica, Vol.75, pp. 335-46. Stephan, A. (1997). The Impact of Road Infrastructure on Productivity and Growth: Some Preliminary Results for the German Manufacturing Sector, Social Science Research Center, Berlin.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

164

Boopen Seetanah

Stephan, A. (2001). Regional Infrastructure Policy and Its Impact on Productivity: A Comparison of Germany and France, German Institute for Economic Research. Tatom, J. (1991). Public capital and private sector performance, Review of the Federal Reserve Bank of St Louis, pp. 3-15.

APPENDIX Model Derivation: The Translog model We use the approximation proposed by Kmenta (1967) to derive the Translog function. The derivation is adapted from Delgado and Alvarez (2000) and is based on writing initially a CES function as Q = a [b K-c + (1-b) L-c]-d/c,

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Log Q = log a – d/c f(c) .

(A.1) (A.2)

Where f(c) = [b K-c + (1-b) L-c]. Taking a Taylor series expansion of f(c) around the value c = 0 (which correspond to the value elasticity =1), the general expansion is f(c) – f(0) = c f '(0) + ½ c2 f ' '(0) and the first and second derivatives evaluated at c = 0 are: f ' (0) = - [ b log K + (1-b) log L),

(A.3)

f ''(0) = b(1-b)[log K –log L]2

(A.4)

so the general expansion can be written as follows : f(c) – f(0) = -c [ b log K + (1-b)log L] + ½ c2{b(1-b)(log K-log L)2 = -c b log K -c (1-b) log L + ½ c2 {b(1-b)(log K-log L)2. (A.5) Then we have the approximation: log Q = log a- d/c f(c) = log a – d/c[-c b log K – c (1-b) log L + ½ c2{b(1-b)(log K-log L)2}], (A.6) log Q = log a + d b log K + d(1-b)log L – ½ c d{b(1-b)(log (K/L)2. ( A.7)

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Transport and Economic Performance

165

Hence the estimates of a, b, c and d can be obtained directly by regressing log Q on log K, log L and log (K/L)2.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The Translog function: Variable Elasticity of Substitution (VES) However it would be more interesting to analyse the contribution of public capital and subsequently transport infrastructure in a Variable Elasticity of Substitution (VES) production function framework. In fact there are very valuable reasons as to why the elasticity of substitution (σ) should vary. For example, σ might be expected to vary with the capital/labour ratio K/L. The greater the capital intensity of production, the harder it is likely to be to substitute further capital for labour and the lower σ is likely to be. Alternatively, even with constant K/L ratio, the elasticity of substitution may simply change over time if technical progress affects the ease with which factors may be substituted for each other. Revankar(1971) developed a model in which σ was a linear function of the capital/labour ratio and Sato and Hoffman(1968) presented a series of forms – one similar to Revankar‟s and another in which σ varied over time. However a general form for the VES functions was finally presented by Christensen, Jorgenson and Lau(1973). The problem had always been one of finding a functional form that at the same time allowed for a VES and also easily estimable. We continue on our theoretical derivation and attempt to come with a functional form similar as proposed by Christensen et al (1973). So we continue on the above analysis and refer again to equation below logQ = log a + dblog K + d(1-b)log L – ½ cd{b(1-b)(log (K/L)2 . (A.7) The last term of the equation is added to the Cobb-Douglas log-linear regression and indicates the departure from a unitary elasticity of substitution. Expanding the squared term yields the following logQ = log a + dblog K + d(1-b)log L – ½ cd{b(1-b)( log K-logL)2} , (A.8) logQ = a0+ a1logK + a2logL +a11(log K)2 + a12(logK)(logL) + a22(log L)2,

(A.9)

where a0 = log a , a1 = db , a2 = d(1-b), a11 = -1/2cd(b-b ); a12= -cd(b-b2); a22= -1/2cd(b-b2). 2

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

166

Boopen Seetanah

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Equation (A.9) is the translog production function and is used for our estimations.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

In: Economic Performance Editor: Richard K. Benson

ISSN 978-1-61324-702-0 c 2012 Nova Science Publishers, Inc.

Chapter 7

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

T HE E FFECT OF I NFORMATION ON THE P ERFORMANCE OF N EGOTIATION M ODELS Luca Barzanti∗ and Marcello Mastroleo† Department of Mathematics for Economic and Social Sciences University of Bologna Italy

Abstract Negotiation is an every day task in economic processes; ranging form corporations to markets, from agents to nations, always there is the need to mediate between conflicting intents or expectations. Therefore, in the scientific literature and in practice, several negotiation procedures have been developed, each one elaborated to perform in a specific context and under particular assumptions, as, for example, voting systems, auction and fair division mechanisms, negotiation protocols, and so on. All these may seem disjoined from each other, as their contexts are; nevertheless they all share the same assumption that each subject pursues his own best utility. Moreover, despite their specialization, they all have some problems in practical use like, for example, the presence of a dictator, the lack ∗ E-mail

address: [email protected] address: [email protected] Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook † E-mail

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

168

Luca Barzanti and Marcello Mastroleo of truthfulness, or the possibility of being manipulated by fictitious declarations. In this contribution we focus on the negotiation over continuous issues and in particular we analyze the jointly Improving Direction Method (IDM), which is known for its generality, since different other negotiation protocols can be seen as an its particular subclass, and also because it has the nice theoretical property of being Pareto efficient. Nevertheless it is easy to implement, which makes IDM the perfect candidate for an automated negotiation support system. Despite its theoretical properties, we show the practical inefficiency of this method (even in the simple case of just two negotiating parties), which reduces significantly its performance in the operative context. In particular we show that the main drawback of IDM is due to the possibility to retrieve information about other ones utilities during the negotiation steps and to exploit it to manipulate the negotiation itself. For better explaining this phenomenon we show the deep connection between negotiation and the social choice problem. The bridge we build allows to carry in this context the Arrow’s Impossibility Theorem and the Gibbard–Satterthwaite Theorem, thus implying that each step of IDM (and of all the methods which it generalizes) may be affected by a dictatorial or a manipulatory party who can deviate the efficient Pareto frontier to get a better gain during the negotiation. In order to avoid the operative inefficiency of IDM, we propose a different negotiation paradigm, where the hypothesis that agents maximize their own utility is not modified, while the way they pursuit maximum satisfaction is substantially different, since each agent has to express a sub optimal choice, rather than his optimal one. In this context, the constraint of a sub optimal declaration by one side protects from information retrieval and by the other side it forces each party to leave to the others the possibility to improve their own gains in order to pursue his own best. The comparison of the performances with the IDM ones in different negotiation domains, both in terms of Pareto efficiency and manipulation resistance, shows the effectiveness of the proposed approach. Keywords: Negotiation Models, Joint Improving Direction Method, Information, Strategic Behavior, Game Theory, Social Choice Theory.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

1.

169

Introduction

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The rise of efficiency by rationality is not trivial when the interaction between two or more Decision Makers (DM’s) is considered. In fact rationality is a local property that is owned by each DM which does all his best to pursuit his own good, whereas efficiency is a global property in the sense that it is referred to the outcome of their interaction. It is not difficult to see that fully rational DM’s often fail to reach an efficient interaction. Thus several mathematical theories arose exploring this implication by formalizing interaction in different ways. Masterpieces are for example Game Theory and Social Choice Theory. Game theory, at least in its easier formulations, assume a full knowledge about each player’s utility by codifying it into a game structure. Here the interaction, called game, presupposing full mutual knowledge, forces the DM to reason not only about his strategy but also about the strategies of the others. The game is solved when an equilibrium among players personal strategy profiles is found so that there is no incentive for each player to break that equilibrium by playing a different strategy. Nevertheless the Nash equilibrium is not always composed by dominant strategies so the solution of a game often is not efficient, for example in the famous Prisoner Dilemma game. The persistence of inefficient game solutions has not been eliminated even in the sequent developments of game theory when, for example, not complete information have been introduced to put some shadow about players best utilities. In social choice theory, differently, interaction assumes secrecy about each voter’s best utility, so by looking at mutual knowledge this theory can be seen as the game theory’s opposite interacting scheme. Here in absence of mutual information each voter has to express his own best preference and the interaction, which is called voting system, aggregate all personal bests to produce a global efficient preference structure. Nevertheless Arrow in [1] proved that it is impossible to efficiently aggregate personal utility if the absence of a dictatorial voter is assumed. With his impossibility theorem, Arrows stated that efficiency must presuppose a dictator who decides for all the others so efficiency is not compatible with democracy. This result can be interpreted as the impossibility of efficiently aggregate more than one personal preference. Later Gibbard, in [12], and Satterthwaite showed that if at least three candidates are running for the election Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

170

Luca Barzanti and Marcello Mastroleo

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

then there is also the possibility that by acquiring prior information about others preferences a voter can manipulate the election’s result. In this contribution we analyze another kind of interaction among DM’s which is somewhere in between: the negotiation problem. Like in the other theories, also here reaching Pareto efficiency in agreements is a difficult task in practice even assuming rationality, see [4] for a wide analysis of negotiation techniques, but the improvement of an already existing accord could seem easier. In particular we start focusing on the Improved Direction Method (IDM), as proposed in [8, 7], which seemed to confirm this thesis owing to its nice analytical properties. What motivate us was that if, by one side, the possibility to improve an accord presupposes that parties already agreed on it, by the other, the existence of a refinement method reshapes the difficulty of the starting point choice because parties are less reluctant to agree on something knowing that the received utility will grow during the joint gain additional stage of negotiation. IDM gives the impression that in the negotiation problem decision makers have the possibility to reach efficiency, which is not in the aforementioned theories. IDM is also elegant since it exploits the concavity property of utility functions to isolate a negotiation path which is convenient for all parties, so at each stage the mediator proposes a new settlement that rational parties have to prefer to the previous one. In order to jointly improve a settlement, as authors state in [8], “decision makers reveal minimal private information to the mediator”. This minimal amount of information about decision makers own utilities is then elaborated by the mediator to choose, in the whole cone of Fair Improvement Directions (FID’s), the one that negotiation’s path will follow till the next step. Moreover IDM is wide general and at the same time very easy to implement, see [6]. It is then suitable to be used in electronic negotiation where the negotiator is a software that implement the joint gain algorithm. Thus, due to the flourish of electronic transactions in the last decade, the idea of having an automated platform that can be used to improve negotiation efficiency is really fascinating and at the same time it has a wide range of applicability, see [16] for a report on the development of interactive electronic negotiations in the supply chain or [11] for an artificial intelligence perspective of negotiating techniques. Since all these theories are connected then IDM constitutes an evident asymmetry in the global picture so we studied it in order clarify this gap, motivated by the assumption that the more accessible computational power Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

171

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

becomes the more seriously should be taken into account the possibility that a decision maker can found and exploit a breakthrough into a theoretically perfect mechanism. In fact to not exploit the possibility to take an advantage from a fault is not rational for a decision maker, especially if its deviation is not detectable and so not punishable. Clearly a crucial role is always played by mutual information for example, in [13] authors shows by means of the straightforward illustration of the “orange” how knowing mutual utilities allows to reach efficiency and in [18] propose a volume based method to learn mutual information during the negotiation so to reach efficient settlements. Differently from them IDM ensures that efficiency is gained but neither it requires any a prior knowledge about others’ preferences nor it acquires information during negotiation. Under this point of view IDM seems to achieve also another important goal which is privacy preservation. For these reasons, information is the starting point of our analyses. If no collusion among some parties and the mediator is assumed, then the only mutual information that decision makers receive is the FID which clearly depends on their own local preferences. The mediator does not reveal any private information but only the result of an algorithm based on such private information. As a consequence, the possibility of learning mutual preferences is directly correlated to the ability of one party to deduce others’ utility functions by knowing only his own private declarations and the resulting FID’s announced by the mediator. In the first part of Section 2. the joint gain method is presented; then by using examples taken form the original literature some productive critiques are done to the FID choice proposed in the literature, by showing how simply a party can manipulate the negotiation path. Then in subsection 2.3., by formalizing what observed in the examples, we present theoretical results those radically change the actual applicability of IDM since we show how easily a party can detect others’ utilities and manipulate the negotiation. Thus, since the secrecy of information is compromised by the method, a game theory analysis of the new scenario is done in subsection 2.4. which leads to the actual inefficiency of the method, by looking at the arising equilibria. Once showed that there is no lack of symmetry in the global picture, since there is no possibility to reach efficiency thanks to the manipulation opportunity, we contribute to draft it better in Section 3., where we show Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

172

Luca Barzanti and Marcello Mastroleo

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

the equivalence between negotiation and social choice problems; so we extend the aforementioned social choice theorems in the context of negotiation thus reaching the impossibility to negotiate efficiently without the existence of an authoritarian party which imposes his personal good to the others or to negotiate everywhere in the domain without impositions so to exclude manipulations. In Section 4. we propose a modified IDM which is resistant to information leaks since in each of its steps DM’s declare sub optimal preferences and the degree of sub optimality is a secret parameter that each party dose not reveal during the negotiation. Moreover we show by examples that this sub optimal negotiation protocol leads to settlements which are closer to the efficient frontier than the original IDM when negotiation paths are affected by strategical behavior. In Section 5. concluding remarks and future working proposals are presented.

2.

Analysis of the Improving Direction Method

IDM is an algorithm [8, 7, 6] that allows n ≥ 2 different parties to reach a Pareto efficient settlement while negotiating in several continuous contexts. In particular IDM is thought in relation to the concept of single negotiating text (SNT) which was proposed by R. Fisher during the Camp David negotiations in 1978 (see [9, 10, 15]). In SNT the mediator proposes a settlement text and then collects all the parties critiques, then the mediator uses those critiques to improve the text in such a away all parties agree that the new proposal is better than the previous one. This process is iterated until parties do not want to change the text anymore because they are all satisfied. Hence IDM works exactly in this way but in a real domain. Moreover IDM can be easily generalized to perform negotiation in a discrete background with the only condition that the negotiation space should be a subset of continuous metric space. Before getting into details, we are going to spent few words on the surrounding notations. In what follows D represents the negotiation domain which is assumed to be convex and continuous. In the case we are going mostly to refer, which is the dominant one in specific literature, there is a single continuous resource which has to be split among parties, so Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

173

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

D = {x ∈ IRn|0 ≤ ∑ xi ≤ G}, where G is the maximum amount of the resource and xi is the amount received by the i-th party. No importance is given to the physical nature of decision makers, they could be persons, corporations, nations, expert systems and so on. The only requirement is that each of them should be fully rational in D , which means that each party has a non-contradicting preference among points of D together with the ability to understand how to act in order to pursue the best personal good. We stress on the second rationality requirement because in subsection 2.3. we show that IDM is manipulable and in subsection 2.4. we also prove that parties are induced to manipulate the negotiation because this is rationally convenient. Notice also that requiring non-contradiction is the minimal hypothesis to ensure that a preference system can be represented by a continuous, in particular differentiable, utility function. In what follows we call ui : D → IR the continuously differentiable utility function of the i-th party. In order to perform, IDM needs a commonly agreed starting point x0 ∈ D . With xt we indicate the commonly agreed point of D after t negotiation steps and with {xt }t∈IN we indicate the negotiation path, i.e. the trajectory that the negotiation follows during IDM. With Ft = {x ∈ D |ui (x) ≥ ui (xt ), ∀i} we indicate the feasible region of D at t, i.e. the subset of D whose points have at least the same utility as xt for all parties. Clearly there is the possibility to improve the settlement at time t if and only if Ft ) {xt } and a settlement x∗ is Pareto efficient if and only if Fx∗ = {xt } since any variation from xt penalizes at least one party. IDM is an SNT like negotiation protocol, thus it is an iterative algorithm that creates, starting by x0 , a strictly decreasing chain of feasible regions F0 ⊃ F1 ⊃ F2 . . . ⊃ Ft . . . whose limit for t → +∞ is the singleton Fx∗ = {x∗ }, by well known topological properties of compact sets in measurable spaces.

2.1.

The Improving Direction Method

Once understood the easy underlaying mechanism, we can focus on the innovative character of IDM consisting in the way mediator is able to recognize the feasible region and so to target the negotiation path in that direction. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

174

Luca Barzanti and Marcello Mastroleo

The IDM negotiation alternates a neighborhood exploring step G and a straight going step L , where the aim of G is to address the negotiation in the right direction whereas the aim of L is to exploit the previously identified direction as far as possible. If u1 , . . ., un are the utility functions of the n parties and x0 is the preagreed starting point, then IDM can be summarized as follows: 1. Start the algorithm at x0 and set t = 0; 2. while L (u1 , . . ., un , G (u1, . . ., un , xt ), xt ) 6= xt do (a) xt+1 ← L (u1, . . ., un , G (u1, . . ., un , xt ), xt ); (b) t ← t + 1; 3. return x∗ ≡ xt .

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

If there is no ambiguity about parties’ utility then it is possible to omit u1 , . . ., un by the arguments of both G and L . In this way IDM is recognizable to be a fixed point algorithm that iterates the map L ◦ G : D → D . The Neighborhood Exploring Step G The target of this step is to identify a direction along which all parties are interested to move so G (xt ) is a vector dt ∈ IRn for which λi > 0 exists such that ui (xt + λi · dt ) > ui (xt ), for each party i. Formally G : D → Bnε maps each point of the negotiation domain D to a point in the n-dimensional ε radius ball Bnε = {x ∈ IRn | |x| ≤ ε}1 . To compute G (xt ) the mediator asks to the parties to specify their preferred point B¯ nε (xt ) = {x ∈ IRn | |x − xt | = ε}, i.e. the space of points which are distant ε from the current settlement xt . Note that each party i uniquely finds a point xt + di (xt ) ∈ B¯ nε (xt ) which is preferred among all the others. Moreover di (xt ) ≈ ∇ui (xt ) for ε small enough. This is the only information parties provide to the mediator during an execution of a G step. Hence the mediator privately collects all the answers xt + di (xt ) and his next task is to compute G (xt ) ∈ B n such that xt + G (xt ) ∈ Ft .

1 See [7] for details on how to select a right ε so let points be distinguishable by human DM’s or to see how consider an n-dimensional ellipsoid with given eccentricity coefficients in place of Bεn .Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook Economic Performance, edited by

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The Effect of Information . . .

175

Figure 1. Example of the vector field generated by IDM in a triangular domain. The dashed line is the Pareto efficient frontier.

If the number of parties n is exactly 2 then there is only one possible way to compute dt that ensures xt + G (xt ) ∈ Ft which is the bisector of the inner angle between d1 (xt ) and d2 (xt ); formally, if |d1 (xt )| = |d2 (xt )| then 1 2

1 2

G (xt ) = d1(xt ) + d2 (xt ).

(1)

Figure 1 shows the vector field G in the triangular domain considered in Subsection 2.2.1..

If there are at least 3 parties negotiating, then the simple extension of the arithmetic mean of vectors with the same norm is not sufficient to guarantee that xt + G (xt ) ∈ Ft . For this reason in [7] authors propose a Product Maximization Problem (PMP) as generalization Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

176

Luca Barzanti and Marcello Mastroleo of equation 1 to suit multi-party contexts:  n   max  ∏ di(xt ) · d   d i=1   1≤i≤n . G (xt ) = di (xt ) · d ≥ 0     d ∈ Ft    kdk2 = 1

(2)

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The PMP expressed in Equation 2 finds the unitary vector d such that the geometric mean of its projection over parties’ preferred direction is maximum.

The Straight Directional Step L Once the mediator calculate G (xt ) he asks parties on how deep they want to go along it. In other words he asks them to choose the most preferred point in the segment [xt , xt + λmax · G (xt )] where λmax is a control parameter that can be either chosen and published by the mediator at the beginning of the negotiation or it can be derived from the shape of D . Once all parties returned privately their answer to the mediator, he can compute ¯ t = min λi λ (3) i≤n

and so he can announce ¯ t · G (xt ). xt+1 = L (xt , G (xt )) = xt + λ

(4)

¯ t as the minimum of the λi ’s corresponds to chose Note that to chose λ the maximum step length that is convenient for all parties. In fact if, ¯ t for some i’s, then for example, λi > λ ¯ t · G (xt )) > ui (xt ) ui (xt + λi · G (xt )) > ui (xt + λ follows by the concavity of ui . Hence party i prefers a move of length ¯ t along G (xt ) to stay in xt . λ

In [8] and [7] IDM is proved to be Pareto efficient both in 2-party and multi-party negotiation with G according to equations 1 and 2 respectively. Authors actually proved that in both cases the map L ◦ G converges to Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

177

the Pareto frontier so, provided a starting point x0 , IDM can improve the performance gaining efficiency. Note that despite the theoretical Pareto efficiency of IDM and its generality (see [6]), DM’s intelligence about their mutual utility functions rise a lot of question about the strategies they can put into effect to deviate the negotiation toward a more convenient result. Nevertheless authors expressly discard the possibility DM’s give false responses to the mediator without giving any evidence that this is the rational behavior. Moreover, even under the realistic assumption of vagueness about mutual preferences, the possibility that DM’s get information by just observing the process itself can not be excluded and, if this is the case, they will strategically try to exploit it.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

2.2.

Negotiation Examples

In what follows we propose some examples of IDM application in order to show how its procedure works. The two examples share the same domain, while the last one shows IDM in a non strictly competitive environment. 2.2.1.

Example 1: Negotiation over Fishing Rights.

At first we consider the negotiation over fishing rights in which two or more nations wish to exploit the same fish stock. This problem has been approached at an early stage using game theory, for instance as a bargaining problem in [5] where the goal is to find a Nash equilibrium among countries strategies. Later in [8] and [7], this example has been revisited to show how the joint gain produced by IDM technique improve the Nash equilibrium solution given by the bargaining approach and consequently it promotes a more rational environmental usage since the amount of fish population to be harvested is considerably decreased. We chose to replicate this example for two main reasons. The first one is the same authors express in the aforementioned IDM papers, i.e. parties’ utilities have a well known analytical expression derived directly from the particular nature of the problem at hand. The second one is that, by the first reason, each party has complete information on the space in which others utilities lie. This gives us the possibility to show the impact that this kind of mutual information has on performance of IDM. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

178

Luca Barzanti and Marcello Mastroleo

Hence the 2-party negotiation over fishing right can be expressed as it follows (see[14]): 1. there are two countries, namely C1 and C2 , which take part to the negotiation, 2. the negotiation domain is D = {(x1 , x2 ) ∈ IR2 |x1 , x2 ≥ 0 ∧ x1 + x2 ≤ Q}, where Q is the initial fish stock. 3. the utility function of the party Ci are logarithmic with the form  
α 1 ui (x) = log(xi ) − βi · log , (5) Q − ∑ xi 2

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

where α ∈ [0, 1] is the growing factor of fish population and βi is the discount factor of country i.

We set parameters according to [8], so (Q, α, β1 β2 ) = (1.259, 0.2852, 0.9,0.4). Figure 2 shows the IDM negotiation by starting form x0 = {0.6, 0.6} and Figure 3 shows that IDM improves the efficiency of the Nash solution x0 = {0.3589, 0.8079}. In both Figures, the dashed line is the Pareto optimal frontier and the iso-curves in the ending point show in both cases the optimality gained by hitting it at x∗ = {0.5067, 0.5585} and x∗ = {0.3206, 0.7684} respectively. In both cases the iso-curves of the final agreement show that within the feasible region there is space to improve the ending performance of one country. In Figure 4 and 5 the negotiation path of the previous situations is compared with the one associated to a β01 = 0.42. As graphically is immediate to see, in both Figure 4 and Figure 5 the ending settlement (x∗ = {0.5344, 0.5604} and x∗ = {0.3394, 0.7730} respectively) is better for C1 . This rise a lot of questions about the truthful behavior that C1 can have during negotiation. 2.2.2.

Example 2: Non Profit Funding Allocation

Other kinds of resource allocation problems include funding decisions by a nonprofit organization, Research & Development projects, Portfolio composition, ... . All these problems share the existence of a budget B that has to be split among different alternatives. Thus IDM finds naturally application in all these contexts. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

179

0.64

0.62

0.6

0.58

x2

0.56

0.54

0.52

0.5

0.48

0.46 0.35

0.4

0.45

0.5

0.55

0.6

x1

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 2. Negotiation path starting by x0 = {0.6, 0.6}.

In particular we present here a possible use of IDM in the nonprofit field. This example is formally equivalent to the one of the budget splitting among departments in a Finnish university presented in [17]. In [2, 3] the problem of maximize the income of a fund raising campaign has been widely examined. Nevertheless even if fund raising is the core of a nonprofit organization self-sustainability, to invest all the budget in raising money is clearly not the mission of an organization that wants to be considered not for profits. By assuming that the organization has fixed inner expenses so the budget B can be considered the net after deducting the inner needs, then the main actions that an organization usually is called to settle on are: 1. A1 = “the mission”; 2. A2 = “fund raising”; 3. A3 = “people raising”.

Note that A1 is the aim for which the organization was born thus A1 always receives a share of the budget, otherwise the organization has no more reason to exist. Nevertheless economically speaking fund raising is the only action that produces actual money while the economic return of Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

180

Luca Barzanti and Marcello Mastroleo 0.95

0.9

x2

0.85

0.8

0.75

0.7

0.65 0.2

0.25

0.3

0.35

0.4

0.45

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

x1

Figure 3. Negotiation path starting by the Nash solution x0 = {0.3589, 0.8079}.

the mission is in term of image that can be used to rise money, and people raising gives the organization practical efficiency to pursue its mission. Hence the balance, in terms of budget investing, among the three actions can produce the success or the failure of the whole organization. A large sized organization usually has a fund raising executive E1 and an administrative executive E2 which interact to envision its future developing. Thus there are two different ideas those need to be mediated to make the organization effective. We assume that B has to be all invested, thus, by indicating with xi the share of budget to spend in the action i, the negotiation domain is

D = {(x1 , x2, x3 ) ∈ IR3|x1 , x2, x3 ≥ 0, x1 + x2 + x3 = B}.

Moreover none between E1 and E2 thinks to allocate zero budget to one action, but they can have very different points of view on how much money to invest in each on them. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

181

0.64

0.62

0.6

0.58

x2

0.56

0.54

0.52

0.5

0.48

0.46 0.35

0.4

0.45

0.5

0.55

0.6

x1

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 4. Negotiation path starting by x0 = {0.6, 0.6} with β01 = 0.42.

We present this IDM application example because, due to the last consideration, there is not full competition between E1 and E2 like there was between C1 and C2 in the fishing rights example. Formally if u1 is the utility function of E1 and u2 is the utility function E2 , the not full competition means that ui (arg max u j (x)) ≥ min ui (x), x∈D

x∈D

for i 6= j. By exploiting the linear relation x3 = B − x1 − x2 , D can be simplified as D = {(x1, x2 ) ∈ IR2 |x1, x2 ≥ 0, x1 + x2 ≤ B}. Thus it formally coincides with the fishing right example. We assume that each Ei has a Cobb-Douglas utility function ui on D , i.e. αi αi

i

ui (x1 , x2 ) = x1 1 x2 2 (B − x1 − x2 )α3 ,

where αij reflects the relative importance that the action j has for the Ei and αi1 + αi2 + αi3 = 1. The not full competition, instead, means that αi1 , αi2 , αi3 0. By assuming that B = 5 (×1.000.000, 00$), (α11 , α13 , α13 ) = (0.5, 0.4, 0.1) and (α21 , αby23 ,Richard α23 ) = (0.55, 0.2, 0.25), then the Pareto efficient frontier is the Economic Performance, edited K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

182

Luca Barzanti and Marcello Mastroleo

0.95

0.9

0.85

x2

0.8

0.75

0.7

0.65

0.6

0.15

0.2

0.25

0.3

0.35

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

x

0.4

0.45

0.5

1

Figure 5. Negotiation path starting by the Nash solution x0 = {0.3589, 0.8079} with β01 = 0.42.

segment P = {(x1 , x2 ) ∈ IR2 |(x1 , x2 ) = β · (2.5, 2)+(1−β) · (2, 75, 1), with β ∈ [0, 1]}, where (2.5, 2) and (2.75, 1) are the best choice of E1 and E2respectively. If E1 and E2 concord to start the negotiation in x0 = 35 , 53 , which corresponds to a fair division of B among the three actions, then Figure 6 shows the optimality of negotiation path and Figure 7 shows instead that negotiating in accord to (α11 , α13 , α13 ) = (0.46, 0.5,0.04) is more convenient for E1 than using his real parameters since it improves the budget for the fund raising of almost 200.000,00$.

2.3.

Manipulation of the Negotiation’s Path

We already saw in the previous examples that there is the possibility to improve the final gain by making false declaration to the mediator. About this authors in [8] says that “. . . The DM’s want to search for Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

183

3.5

3

2.5

x2

2

1.5

1

0.5

1

1.5

2

2.5 x1

3

3.5

Figure 6. Negotiation path starting by x0 =

4

5

5 3, 3

.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

joint gains. In order to do this they are willing to give the mediator truthful answers. . .”. Are we sure that this is what DM’s are really willing to do? To answer this question let us consider the real common situation in which DM’s have only rough ideas about mutual utility functions, in particular they can not have a priori any certainty apart from information that is possible to deduce by observing actual actions. Hence to study which kind of mutual information is possible to gain during IDM is peculiar to evaluate its efficiency and applicability. Under this realistic assumption, before IDM negotiation begins, a DM can think some constrains to hold about others’ utilities by a prior analysis of the particularities of the problem at hand, like for example in the negotiation over fishing rights. Hence we can assume that, as a consequence of his analysis, a DM can draft a parametric class Uφ1 ,...,φl of utility functions and that he is theoretically justified to believe that others’ utilities belong to this class. If during the negotiation he is able to approximate the utilities of the others with utilities in Uφ1 ,...,φl , then he is potentially able to know before the end of the negotiation process the final agreement, giving him the possibility to know if a false declaration would improved is true utility. Clearly the number of information about each others’ preferences that he needs to uniquely find an approximation is l which is the degree of freeEconomic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

184

Luca Barzanti and Marcello Mastroleo 3.5

3

2.5

x2

2

1.5

1

0.5

1

1.5

2

2.5 x1

3

3.5

4

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 7. Manipulation of the negotiation path made by E1 .

dom of the class Uφ1 ,...,φl . Even when l is a big number a DM can be sure that the negotiation takes more than l steps to end as the next Proposition shows. Proposition 2..1. Any party can slow the IDM convergence as down as he wants. Proof. At each t, during the L step, the party that declares the smallest λi is the one deciding the actual depth of the straight move, so the DM only ˜ to be sure that |xt+1 − xt | ≤ λ. ˜ has to chose a small enough λ The previous Proposition shows that a DM can manipulate L , now we are going to show how a DM can exploit G to recover others’ utilities and manipulate the negotiation path. For the sake of simplicity, from now on we assume that at each G step parties declare as preferred direction the gradient of their utility functions. In the first result we show that, without loss of generality, the 1st party is able to approximate in just l · (n − 1) IDM steps everyone else’s utilities when Uφ1 ,...,φl is a linear space with respect to φ j ’s.

Proposition 2..2. In 2-party negotiation, if Uφ1 ,...,φl is a linear space with respect to φ j ’s, then, knowing u1 , to retrieve u˜2 ∈ Uφ1 ,...,φl such that u˜2 ≈ u2 require at most l − nl IDM steps. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

185

Proof. If U1 , . . .,Ul is a base of the linear space Uφ1 ,...,φl , then any u˜i ’s has a unique representation as l

u˜i =

∑ φij ·U j

j=1

for opportune unknown φi1 , . . ., φil . Moreover l

∇u˜i =

∑ φij · ∇U j. j=1

In the simpler case of just two negotiating party, G is driven by equation 1, so at each xt , party 1 observes that   ∇u2 (xt ) ∇u1 (xt ) ∇u1 (xt ) Ot = · G (xt ) − = 2 · G (xt ) · (6) k∇u2 (xt )k k∇u1 (xt )k k∇u1 (xt )k by simply inverting G , thus his problem is to find (φi, . . ., φl ) such that Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

l

∑ φ j · ∇U j (xt ) j=1

l

∑ φ j · ∇U j (xt )

= Ot

(7)

j=1

This equation is homogeneous of degree 0, so if (φ˜ i , . . ., φ˜ l ) is a solution, then µ · (φ˜ i, . . ., φ˜ l ) is a solution too, for any µ > 0. Thus we can consider the following simplification l

∑ φ j · ∇U j (xt ) = Ot

(8)

j=1

which is a linear system of 2 equations and l unknowns. Without loss of generality let (φ˜ 1 (φ3 , . . ., φl ), φ˜ 1 (φ3 , . . ., φl )) be its solution, which is linear in (φ3 , . . ., φl ). Now at time t + 1 party 1 observes   ∇u1 (xt+1 ) ∇u1 (xt+1 ) Ot+1 = 2 · G (xt+1 ) · · G (xt+1 ) − (9) k∇u1 (xt+1 )k k∇u1 (xt+1 )k which again corresponds to a 2 equations linear system l

∑ φ j · ∇U j (xt+1 ) = Ot+1 .

j=1 Science Publishers, Incorporated, 2011. ProQuest Ebook Economic Performance, edited by Richard K. Benson, Nova

(10)

186

Luca Barzanti and Marcello Mastroleo

This time instead, by imposing the solution found at time t, there are l − 2 unknowns, since φ˜ 1 and φ˜ 2 are constrained.   Thus he can calculate (φ˜ 3 (φ5 , . . ., φl ), φ˜ 4(φ5 , . . ., φl )). After l − nl steps, party 1 can finally found numeric values for either φ˜ l−1 , φ˜ l or just φ˜ l depending on l ≡ 0 mod 2 or not. Now u˜2 can be builded by back substitutions. Remark. The procedure used in proving Proposition 2..2 is a successive kernel projection and it is suitable to allow the simplification of the normalization term of Ot

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Remark. Clearly if l ≡ 1 mod 2 then the 2 equations of the last system are not necessarily linearly dependent one each other and any choice leads to different approximations which are exact on previous points. To avoid this drawback, a different strategy consists in collecting all the informations and resolving the system in the same way but starting by the earlier two equations. In this way the computed approximation is exact on the earlier points and approximated only in the oldest one. The following Proposition extends Proposition 2..2 to multi-party negotiation. Proposition 2..3. In multi-party negotiation, if Uφ1 ,...,φl is linear space with respect to φ j ’s, then, knowing u1 , to retrieve   u˜i ∈ Uφ1 ,...,φl such that u˜i ≈ ui for all i ∈ {2, . . ., n} requires at most l − nl IDM steps.

The main difficulty in this result is represented by the non-linearity of Equation 2 which apparently makes more complicate the extraction of information than the 2-party negotiation. The following preliminary remark exceeds this problem. Remark. If x = (x1 , . . ., xn ) ∈ IRn then the gradient of the objective function of PMP with respect to the components of x ! n

∇x

∏ di · x

(11)

i=1

is 0¯ if and only if it is evaluated in any vector proportional to the solution n o j=1,...,l j d. Thus by observing d, the parameters φi can be retrieved by i=1,...,n

imposing that the gradient in equation 11 evaluated in d is null as a vector j function in φi ’s. K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook Economic Performance, edited by Richard

The Effect of Information . . .

187 j

With this procedure, each IDM step constrains n variable among φi ’s and it induces the same kernel projection mechanism as in the two-party negotiaiton.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Proof of Proposition 2..3. Party 1 has to acquire l · (n − 1) constrains to uniquely approximate u2 , . . ., un . By the previous remark, at each of IDM steps party 1 collects n constrains. Thus, by following the same procedure which proved  l  Proposition 2..2, he reached a sufficient number of constrains after l − n steps.

During the negotiation steps, since G is public and a well posed, the DM acquire information about others’ preferences by inverting   the function G according to Propositions 2..2 and 2..3. After l − nl steps he collects a sufficient number of values so to uniquely approximate all the others’ utilities, then he is capable of simulating the negotiation path with a certain accuracy and by this to calculate the utility function to locally declare in order to maximize his real utility at the end of the negotiation. Clearly, a prevision about other DM’s next preferred directions is more precise as long as the class Uφ1 ,...,φl is suitable to interpolate others’ real utilities and this is not ensured. A way to overcome this drawback is given by the continuity of the map L ◦ G so, since the DM has the possibility to reduce the amplitude of each step by Proposition 2..1, he can contain the approximation error under any security bound.

2.4.

A Game Theory Analysis of IDM

To retrieve information during negotiation is possible by previous results, hence we can study what actually happens when all parties try to exploit this IDM breakthrough. The natural setting to study strategical behaviors is offered by game theory, and the following results help to translate in game theory language the IDM problem. Lemma 2..4. If u1 , . . ., ui, . . ., un and u1 , . . ., u0i, . . ., un are two profiles of utility functions which differ only in the i-th entry then for any x ∈ D and for any α ∈ [0, 1] there exists β ∈ [0, 1] such that

G (u1, . . ., α · ui + (1 − α) · u0i , . . ., un, x) = β · G (u1 , . . ., ui , . . ., un , x) + (1 − β) · G (u1, . . ., u0i , . . ., un , x).

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

188

Luca Barzanti and Marcello Mastroleo

α·|∇ui (x)| Proof. By choosing β = α·|∇ui (x)|+(1−α)·|∇u 0(x)| , the result follows if n = 2 i by the linearity of the operator in Equation 1 and if n ≥ 3 by the linearity of the inner product in Equation 2.

Proposition 2..5. If u = (u1 , . . ., un ) and u0 = (u01 , . . ., u0n ) are two different profiles of utility functions, then for any starting point x0 ∈ D and for any α ∈ [0, 1] there exists a β ∈ [0, 1] such that x∗ (α · u + (1 − α) · u0 ) = β · x∗ (u) + (1 − β) · x∗ (u0 ). Proof. That G (α · u + (1 − α) · u0, x) = β · G (u, x) + (1 − β) · G (u0, x) follows by the iteration of Lemma 2..4 to all n parties, and the Proposition by induction over IDM steps t.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The following proposition shows that IDM transforms lines into the space of parameters in line into the domain D . Theorem 2..6. IDM transforms vertices and edges of an n-dimensional hypercube in Uφn1 ,...,φl space into vertices and edges of a domain in D . Proof. The result is purely a consequence of the linearity of IDM in the sense of Proposition 2..5. Once mutual information extrapolated by previous negotiation steps is sufficient to understand parties’ preferences, Theorem 2..6 allows to consider the edge of the domain of possible IDM endings as a normal form game where each party i has two possible strategies T and U, namely “be truthful” or “be untruthful” and whose payoffs are given by the evaluations of real utilities in all the possible combinations of parties’ strategies. In fact if, for all i, Ti = (φi1 , . . ., φl ) is the set of parameters of the real utility of i and Ui = (φ¯ i1 , . . ., φ¯ l ) is the set of parameters of the utility that maximizes i’s ending payoffs, then he hypercube of vertices {S1 , . . ., Sn } with Si ∈ {Ti ,Ui } is mapped into an hypercube in D whose vertex represent the possible negotiation endings. Finally if utilities are in a linear space Uφ1 ,...,φl then the following Theorem holds. Theorem 2..7. IDM is actual inefficient.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

189

0.63

0.62

0.61

0.6

0.59

x

2

0.58

0.57

0.56

0.55

0.54

0.53

0.45

0.5

0.55

0.6

x1

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

(a) U2 T2

T1 (0.1174, 0.0798) (0.1363, 0.0640)

U1 (0.1266, 0.0603) (0.1471, 0.0484)

(b) Figure 8. Strategic form game (b) associated to negotiation paths in (a) for the Fishing Rights domain. The spatial disposition of table entries in (b) reflects the one of ending settlements in (a).

Proof. The result is a consequence of the fact that truthfulness is not a dominant strategy for any party. This can be easily seen since the payoff that party i gets being the only one to exploit IDM breakthrough is always higher than the one he gets if no one does thus not exploiting information retrieval (i.e Ti ) is not the dominant strategy and hence the Pareto optimal frontier is not reached in practice.

Remark. Paradoxically the actual inefficiency of IDM is due to its efficiency. In fact IDM always converges to the Pareto efficient frontier even when a party is not truthful. What really happens is that by making false statements that party is at all effects “moving” the frontier. Hence IDM Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

190

Luca Barzanti and Marcello Mastroleo

converges efficiently to a new frontier which is different from the true one, thus inefficient. Remark. The linear dependence of the approximating utility class Uφ1 ,...,φl on its parameters is not fundamental to Theorem 2..7. Indeed the only thing that matter to prove the actual inefficiency of IDM is that Uφ1 ,...,φl is continuous on its parameters, thus the Theorem holds even for the CobbGouglas utility space in the fund raising example. We choose to present it in this way only due to the immediate visualization of the strategic form game associated to IDM manipulations (see Figure 8).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Theorems 2..6 and 2..7 together show the actual Pareto inefficiency of IDM because reaching the Paretian frontier is not the solution of the associated game. Figure 8 shows that in the Fishing Rights domain starting by x0 = {0.6, 0.6} a Prisoner Dilemma game is produced whose solution is the profile of strategies {U1 ,U2 }. Note that, the solution of the game associated to the IDM negotiation is sensible to the starting point x0 which determines the feasible region F0 . The surface points in Figure 9 codify the possible equilibria of the fishing over rights domain according to an additive system for which at each single strategy profile is associated a power of 2. In particular the value 1 ia associated to {T1 , T2 }, i.e. the efficient solution, value 2 corresponds to {U1 , T2 }, 4 to {T1 ,U2}, 8 to {U1,U2 }. Thus a value of 6 means that the IDM game is equivalent to Dare or Chicken and the value 8 corresponds to a Prisoner’s Dilemma. Remark. By means of Figure 9 is immediate to see that IDM never incentives the truthful behavior and in this example it corresponds to a Prisoner’s Dilemma game in the almost 80% of D .

Despite that negative result expressed by Theorem 2..7, the linkage between IDM and game theory gives the possibility to improve actual efficiency of the former. In fact by giving to the mediator the active rule as trusted party, he can compute the correlated equilibrium strategy, then he can suggest to each party i the strategy to follow in the remaining negotiation steps thus increasing each one the expected utility at the end of IDM. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

191

Prisoner’s Dilemma

IDM game solution

Dare or Chicken

(T1,U2)

(U1,T1) (T1,T2)

0 0.2 0.4 0.6 1.2 0.8

1 0.8 1

0.6 0.4 1.2

0.2 0

x1

x2

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 9. The different equilibria in the fishing rights domain depending on the starting point x0 .

3.

Efficiency, Non-Authoritarianism and Manipulability of Negotiation

In this Section we analyze the Negotiation Problem by relating it to Social Choice Theory and we show the impossibility of negotiating efficiently into a convex bounded domain in a non-Authoritarian way and also that every non-Authoritarian and efficient negotiation protocol can be manipulated. Differently than the previous Section, here we do not focus on a particular protocol but we approach negotiation axiomatically. We assume that D ( IRm is a convex bounded negotiation domain and that there are n DM’s taking part to the negotiation. We also assume that each party i has a strictly concave continuous utility function ui : D → IR. We call U the set of all possible functions on D satisfying the aforementioned properties. In this setting, a negotiation protocol M is a map from U n to U and the final settlement of a negotiation implementing M is

S (M , u1, . . ., un) = arg max M (u1, . . ., un)(s),

s∈D Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

(12)

192

Luca Barzanti and Marcello Mastroleo

where M (u1 , . . ., un ) is the mediated utility function. Clearly S is well defined since M (u1 , . . ., un ) is in U and D is bounded, closed and convex.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3.1.

The Inefficiency of non-Authoritarianism

The first result connects Pareto efficiency with non-Authoritarianism. The latter is an important property that a protocol needs to have otherwise the meaning of the word negotiation is totally compromised. In real life that interaction among people is not always in favor of only one of them is commendatory and usually there is some problem when this is not true. An easily understandable example can be a market, in the economic sense, such that a specific agent always decides everything included the prices that the concurrent ones have to apply to their costumers. Clearly a market like this violate the free competition principle because there is only one authoritarian agent which is actually free and all the others have no influence on the market whatever they do. Let us introduce now the axioms which we are going to use. The first one codifies Paterian efficiency which is the property we want to investigate on. Unanimity or Axiom of Pareto (U): For any a, b ∈ D , if ui (a) ≥ ui (b) for all i ∈ {1, . . ., n} then M (u1 , . . ., un )(a) ≥ M (u1 , . . ., un )(b). (U) states that the negotiation protocol always prefer a settlement a to another b if each single party does so. The second axiom is a bit more technical and it refers to the property that negotiation should not be affected by things that are irrelevant to the negotiation matter. Independence of Irrelevant Alternatives (IIA): Let u1 , . . ., un ∈ U and u01 , . . ., u0n ∈ U then M (u1 , . . ., un )(a) ≥ M (u1 , . . ., un )(b) ⇔ M (u01, . . ., u0n)(a) ≥ M (u01, . . ., u0n)(b) for all a, b ∈ D such that ui (a) ≥ ui (b) ⇔ u0i (a) ≥ u0i (b) with i ∈ {1, . . ., n} .

If a negotiation protocol M satisfies (IIA), then it does not alter the relative position of settlement pairs, which means that whenever two different utility profiles are such that they concord component by component Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

193

on a couple of alternatives, then the protocol returns the same result on that alternatives regardless which particular profile parties actually choose. In particular this axiom is helpful to circumscribe the negotiation domain to the only things that really matter. The third and last axioms codifies non-Authoritarianism. non-Authoritarianism (nA): There exists no i ∈ {1, . . ., n} such that for any u1 , . . ., un ∈ U and all a, b ∈ D , if ui (a) ≥ ui (b) then M (u1, . . ., un)(a) ≥ M (u1, . . ., un)(b). We will use the notation M (u1 , . . ., un ) ≡ ui to indicate that a mediated utility is equivalent to its i-th entry, so with this notation (nA) becomes M (u1, . . ., un) 6≡ ui for all i ∈ {1, . . ., n}.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Theorem 3..1. If the negotiation domain D ⊂ IRm is closed, convex and bounded then the only negotiation protocol M that satisfies both (U) and (IIA) is the Authoritarian one. Before we demonstrate this Theorem, some preliminary definitions and useful results need to be introduced so to easily connect it to the Arrow’s Impossibility Theorem (see [1]). Definition 3..1. Given P = {pi ∈ D |i ∈ {0, . . ., m}} a finite number of points of D , we call reduced domain DP the coverage of D made by closed circular neighborhoods of points of P all with the same radius of minimal coverage ( ) [ ¯ i , ε) . ε¯ = arg inf D ⊆ B(p ε

i

For any reduced domain DP the following properties hold trivially 1. if {p j } j∈IN is a succession of point which is dense in D then the succession of reduced domains {DP( j≤k) }k∈IN is such that ε¯ k → 0 as k increases; ¯ i , ε)) = u(pi ); 2. for any u ∈ U is well defined uP (B(p 3. p  p if and only if p 

p for any u ∈ U .

i byu Richard j K. Benson, Nova Science i Publishers, uP j Incorporated, 2011. ProQuest Ebook Economic Performance, edited

194

Luca Barzanti and Marcello Mastroleo

While property 1. is nothing more than a topological well known fact of closed sets in IRm , properties 2. and 3. allow instead to consider the restriction UP over a finite cover of D such that the preference structure of any u ∈ U is preserved. In particular the following definition is well posed. Definition 3..2. We call reduced negotiation protocol MP : UPn → UP the protocol M applied to the reduced domain DP . Any reduced version of a negotiation protocol inherits fundamental properties regardless the specific reduced domain as the following easily to prove lemma states. Lemma 3..2. If M is a negotiation protocol satisfying (U) or (IIA) on D then for any reduced domain DP , its reduction MP satisfies (U) or (IIA) respectively.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

The background is now ready to prove Theorem 3..1 by linking a negotiation protocol over a convex, closed and bounded domain to its reduced versions. Proof of Theorem 3..1. Let M be a negotiation protocol holding (U) and (IIA) on D and let {p j } j∈IN be a succession of point which is dense in D . Let now, for any k ∈ IN, DPk be the reduced domains composed by Pk = {p j } j≤k , then εk → 0 as k grows by the denseness of {p j }’s. Moreover, by Lemma 3..2, all reduced negotiation protocols MPk ’s hold (U) and (IIA) on their respective DPk ’s. Since MPk is a negotiation protocol which is (U) and (IIA) in a space of just k different alternatives, for any k ≥ 3, it satisfies the hypothesis of Arrow’s impossibility Theorem so a party i∗k ∈ {1, . . ., n} exists such that MPk (u1, . . ., ui∗k , . . ., un) ≡ ui∗k for any u1, . . ., un ∈ U . What remains to prove is that the MPk ’s authoritarian party is the same i∗ regardless k, i.e. i∗k1 = i∗k2 for all k1 , k2 ∈ IN, and then the result follows by M (u1 , . . ., un ) ≡ ui∗ in a dense subset of D . Let then i∗ be the authoritarian party of MPk , so MPk ≡ ui∗ |Pk for every utility profiles (u1 , . . ., un ) ∈ U n . Let us then consider DPk+1 ; MPk+1 results to be equivalent to ui∗ |Pk+1 for every p j with j ≤ k since M is (IIA) and the point pk+1 is irrelevant for the relative order between the others because uPk+1 (p j ) = uPk (p j ) = u(p j ) for all j ≤ k. Thus the only possibility that be authoritarian is that it coincides with ui∗ |Pk+1 also on pk+1 MPk+1 edited hasbytoRichard Economic Performance, K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

195

and its authoritarian party is exactly i∗ . The results follows by the arbitrary of k. Remark. By this Theorem, if we want to preserve efficiency, then the only possible axiom that can be falsified is (IIA) but, as already said, (IIA) allows to exclude useless things to the negotiation domain and its lack can generate other kind of problems as shown in the what follows.

3.2.

Efficiency and Manipulability

Here we show what happens by assuming that the negotiation protocol is (U) but not (IIA). In doing so, let us introduce a couple more axioms. Universal Domain (UD): For all p ∈ D , u1 , . . ., un ∈ U exist such that S (M , u1, . . ., un ) = p.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

If M is (UD), then every point of the domain can be the final settlement of M for at least a preference profile. Lemma 3..3. M is (U) implies M is (UD). Proof. For every p ∈ D consider the utility function u p (x) = −kx − pk2 which has maximum utility in p. Then M (u p , . . ., u p ) ≡ u p results by M being (U) and the Lemma by S (M , u p , . . ., u p ) = p. Strategy-proof (SP): ui (S (M , u1 , . . ., ui, . . ., un )) ≥ ui (S (M , u1 , . . ., u0i , . . ., un )), for all u1 , . . ., ui , u0i , . . ., un ∈ U and for all i ∈ {1, . . ., n}. If a protocol M is (SP), then no party takes advantage in manipulating the negotiation by declaring another utility different from their real one. The following Lemma links authoritarianism to (SP). Lemma 3..4. If M is authoritarian then M is (SP).

Proof. This is trivial because the only authoritarian party of M always gets his best choice thus he takes no advantage of declaring something different from his real utility and, at the same time, all the other parties take no advantage too, since whatever they prefer has no influence on the negotiation outcome. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

196

Luca Barzanti and Marcello Mastroleo Now we can prove the relation between efficiency and manipulability.

Theorem 3..5. The only negotiation protocol which is both (U) and (SP) is the authoritarian one. Proof. We already know by means of Theorem 3..1 and Lemma 3..4 that an authoritarian negotiation protocol is respectively both (U) and (SP). Thus what remains to prove is the unicity. Let us firstly consider the simple case of n = 2. Thus M is both (U) and (SP), and by assuming that the 2nd party is non-authoritarian we are going to prove that the 1st one is instead authoritarian. In order to do so, let u1 and u2 be the utilities of party 1 and 2 respectively and, since party 2 is not authoritarian u2 can be chosen in such a way that u2 (S (M , u1 , u2 )) max u2 (x). x∈D

Let now Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

F (u, p) = {x ∈ D |u(x) > u(p)}, I (u, p) = {x ∈ D |u(x) = u(p)} and

S (M , u1) = {x ∈ D |x = S (M , u1, u) with u ∈ U }, then M being strategy-proof implies that

S (M , u1) ⊂ D \ F (u, S (M , u1, u)), for all u ∈ U , in particular

S (M , u1, u) ˜ ∈ D \ F (u2 , S (M , u1 , u2 ), for all u˜ such that arg max u˜ ∈ F (u2 , S (M , u1 , u2 )). x

Moreover

S (M , u1 ) ⊂ D \

[

F (u, S (M , u1, u)),

u∈U

and s∗ = S (M , u1 , u1 ) = arg max u1 (x) ∈ S (M , u1 ),

Economic Performance, edited by Richard K. Benson, Nova Science Publishers,xIncorporated, 2011. ProQuest Ebook

The Effect of Information . . .

197

where the last equality holds by M being (U), thus S (M , u1 ) is non-empty. Clearly S (M , u1 ) is the border of an open and convex set S ∈ D because

S (M , u1) ∩ I (u, S (M , u1, u)) = {S(M , u1, u)}, ∀u ∈ U , otherwise there exists at least a situation in which party 2 can manipulate the negotiation, and max u2 (x) ∈ D \ (S ∪ S (M , u1 , u)).

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

x∈D

We are going to prove that S = 0/ thus that s∗ is the only point in S (M , u1). Let us assume that S 6= 0/ and, for any fixed u02 for the party 2, let us vary the utility of the party 1. With the same argumentation then before S (M , u02) is the frontier of a convex set which is tangent to S (M , u1) so  S (M , u02) ∩ S (M , u1) = S (M , u1, u02) . Moreover

S (M , u02 ) ⊂ D \ (S ∪ S (M , u1, u)) because

S (M , u2 , u2 ) ∈ S (M , u2 ) and

S (M , u2, u2) 6∈ (S ∪ S (M , u1, u)). This implies that there is no couple of utility for which M returns a point within S, thus to do not contradict that M is (U), which implies the universal domain property, the only possibility is that S = 0/ thus that S (M , u1 ) = {s∗ }. In the case n ≥ 3 the proof follows by proving, with the same argumentation, that if parties from 2 to n are not authoritarian then party 1 is authoritarian whenever all the other have the same utility function. Thus by applying (SP) definition that party 1 is always authoritarian easily follows.

Remark. Theorem 3..5 assumes stronger hypotheses than the Gibbard–Satterthwaite Theorem ([12]), because (U) implies (UD), but this formulation Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

198

Luca Barzanti and Marcello Mastroleo

is enough to point out that to negotiate efficiently is not possible in a deterministic context without either the drawback of authoritarianism or the drawback of been exposed to possible manipulations. Theorem 3..5 has the important implication that whenever the negotiation is done with an efficient protocol and a party is aware about others’ utilities then that party can makeup his declarations to manipulate the negotiation so to obtain better results. Note that in this context the mutual information is assumed to be a priori known by the manipulator party and that a priori knowledge is a factor that no negotiation protocol can control, whereas IDM is manipulable even when no one know anythings about the others because, as we saw in the previous Section, IDM is information leaking.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

4.

Sub-Optimal Negotiation Method

In the previous Sections we analyzed the impact that information has in negotiation. In particular the focus of Section 2. was the information that can be obtained during the negotiation process, while the one of Section 3. was the impact that a priori information has on the design of negotiation protocols. If by one side that a party knows something about the others can not be excluded, thus is not possible to assume that mutual a priori information is null, on the other side making a negotiation protocol less information retrieval constitutes an important point. In fact the main drawback of IDM is that even when parties start negotiating without a priori mutual knowledge, the IDM itself, after a considerably small number of iterations, conveys parties all the mutual information they need to manipulate the remaining steps. In this spirit we present a modification of IDM that add some sort of “noise” to the information that the mediator gives back to parties. Let us start by the following consideration. Proposition 4..1. If at time t parties know that this is going to be the last IDM iteration, then making false declarations to contain the straight step L is not rational.

Proof. We know that the smallest declared amplitude is the one that the mediator will announce to parties, so if t is the last IDM iteration and Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

199

λ∗i < λi , with λi the true answer of party i, then declaring λ∗i concords with a final utility which is strictly less than the one corresponding to declare λi .

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Remark. A consequence of this Proposition is that in one step IDM, i.e. the IDM which does not iterate, to contain the straight move is not rational. Thus one step IDM suffers the a priori mutual knowledge drawback, like all deterministic negotiation protocols, but it does not give time to parties to use the information retrieved within the negotiation process, in fact the mutual information, which is gained at time t = 0, is spendable at time t = 1. In this sense one step IDM is better than IDM even if it is not efficient. According to this property, one step IDM is suitable to be used in practice but it is clearly not efficient. Thus the need to improve the efficiency of the starting point x0 in such a way that to retrieve information during this process is hard and, at the same time, starting by the new point x p increase the efficiency of the one step IDM than starting by the original x0 . To accomplish these two targets we propose a methodology that applied to classical IDM allows parties to hide their gradients in the first iterations until the mediator declares that there is only one step less in which parties declare their true gradient and the one step IDM is performed. Hence the proposed method consists in a two steps negotiation protocol where in the first steps a sub-optimal negotiation is performed and in the latter the one step IDM is used to refine the last settlement.

4.1.

Suboptimal Negotiation

This part of the negotiation process is done using the classical IDM where the parties do not declare their true gradient. Indeed at the t-th step, each party i chooses (and keeps it secret) a rotation matrix ρti and when in the neighborhood exploring step he is questioned about the preferred direction he declares ρti · ∇ui (xt ) in place of ∇ui (xt ). The rotation matrix ρti can be chosen so to correspond to a a certain percent k of the gradient utility by solving the following equation

ui (xt + ρti · ∇ui (xt )) − u(xt ) = k. u(xt ) 2011. ProQuest Ebook ∇uiPublishers, (xt )) −Incorporated, Economic Performance, edited by Richard K. Benson,u(x Nova Science t+

(13)

200

Luca Barzanti and Marcello Mastroleo

In this way party i can be sure to not exceed a security bound that he prefixes himself. Once obtained all the answers, the mediator computes the joint improving direction according to Equations 1 or 2 depending on n and declares G (ρt1 · u1, . . ., ρtn · un , xt ). Then the straight step L is performed according to the real utilities. Whenever one of the following two conditions is satisfied ¯ 1. G (ρt1 · u1 , . . ., ρtn · un , xt ) = 0; 2. L (u1, . . ., un , G (ρt1 · u1 , . . ., ρtn · un , xt ), xt ) = xt ; the mediator announces that the next is the last negotiation step, thus the one step IDM. 0.64

0.62

0.58

0.56

x2

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

0.6

0.54

0.52

0.5

0.48

0.46 0.35

0.4

0.45

0.5

0.55

0.6

x1

Figure 10. Possible negotiation paths with fixed rotations ρ1 and ρ2 .

Remark. Note that if condition 2. is not satisfied then the direction G (ρt1 · u1 , . . ., ρtn · un , xt ) lies in the feasible region Ft , while if condition 1. is satisfied does not imply that the Pareto frontier has been reached due to the sub-optimality of the declarations which interferes with the natural IDM paths.

Clearly during this suboptimal steps if a party try to retrieve information then he gets inconsistent results because he is not able to argue about Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

201

0.64

0.62

0.6

0.58

x2

0.56

0.54

0.52

0.5

0.48

0.46 0.35

0.4

0.45

0.5

0.55

0.6

x1

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 11. Possible negotiation paths with decreasing rotations amplitudes ρ1 and ρ2 .

the rotation applied by the other parties. Moreover knowing that declaring the truth gives to opponent parties the possibility to manipulate the negotiation, forces each single rational party to hide his true gradient during the sub-optimal part of negotiation. The sequent negotiation protocol can be summarized as it follows: 1. Start the algorithm at x0 and set t = 0;  Suboptimal Negotiation: 2. while L (u1 , . . ., un , G (ρt1 · u1 , . . ., ρtn · un , xt ), xt ) 6= xt do (a) xt+1 ← L (u1, . . ., un , G (ρt1 · u1 , . . ., ρtn · un , xt ), xt ); (b) t ← t + 1;  One Step IDM: 3. x∗ ← L (u1 , . . ., un , G (u1, . . ., un , xt ), xt ) 4. return x∗ .

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

202

Luca Barzanti and Marcello Mastroleo 0.64

0.62

0.6

0.58

x2

0.56

0.54

0.52

0.5

0.48

0.46 0.35

0.4

0.45

0.5

0.55

0.6

x1

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

Figure 12. 100 negotiation paths with random rotations amplitudes ρ1 and ρ2 .

Remark. Even if a party has a priori complete information about others’ preferences the only part of the negotiation in which he can exploit them is the final one step IDM because within the sub-optimal negotiation part there is no correspondence between utilities and improving detections thus to manipulate the latter is not possible in general. Furthermore the following Theorem relating sub-optimal negotiation to IDM is of immediate proof. Theorem 4..2. The sub-optimal negotiation protocol is a generalization of IDM. Proof. If all parties simply choose to answer according to their gradients, i.e. without rotating them, then the negotiation protocol is exactly the IDM.

Remark. This Theorem shows that sub-optimal negotiation generalizes IDM and by previous considerations the generalization is done in such a way that corrects the IDM information leaks. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

4.2.

203

Examples of sub-optimal negotiaiton

In this part we test the Sub-Optimal Negotiation on the fishing right domain. In particular we assume three different situations: 1. parties have fixed rotation matrices; 2. parties start negotiating with high rotations, i.e. low percents of optimality, and step by step they reduce the rotation amplitudes;

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

3. parties randomly choose at each step different rotation amplitudes. The possible paths that negotiation can follows in the first situation are represented in Figure 10 where ρ1 vary from −1 to 0 radiants and ρ2 from 0 to 1 radiants. The gray paths are the sub-optimal negotiation while the black lines are the following one step IDM’s. The same parameters have been used in Figure 11 which instead represents the negotiation paths in the second situation. Figure 12 shows 100 negotiation paths when each party randomly chooses at each step a different rotation amplitude, i.e. the last situation. Remark. In all the three tested situations the worst solution in terms of efficiency, i.e. the distance between the ending settlement and the Pareto efficient frontier, is considerably better than the ending settlement which is gained by the solution of the strategic form game associated to classical IDM, as the reader can immediately grasps by comparing Figures 10, 11 and 12 with the {U1 ,U2} path in Figure 8 (a).

We get similar comparative results also for the domain of the fund raising problem (see subsection 2.2.2.). Furthermore in the three Figures there is one path that end exactly as IDM; this gives empirical evidence of Theorem 4..2. Moreover, even if this path is unique, it is not uniquely identified, in fact whenever the parties choose opposite rotations of the same amplitude the bisector is the same as the one associated to real gradients, thus the actual negotiation path is the IDM one. The same result holds in multi-party negotiation by looking at the rotations which do not alter the solution of the PMP. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

204

5.

Luca Barzanti and Marcello Mastroleo

Conclusion and Future Works

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

In this work we analyzed the impact that information has on the performances of a negotiation process. In particular we focused on the IDM due to its generality and its nice theoretical properties. The choice of IDM was also dictated by the evident asymmetry it represent in the comparison between negotiation and game theory or social choice theory. The difficulty to gain efficiency in this last two is well known, so the possibility offered by IDM to iteratively gain Pareto optimality is in itself worthy of further attentions. Hence we started by observing that each party can easily improve his own satisfaction getting a better final settlement by declaring a different utility than his real one. To do so the only requirement is that the party needs to have information about others’ utility, so we focus on the analysis of what kind of information can be actually retrieved during IDM. We showed that inverting IDM negotiator algorithm is possible by knowing only proper private declarations and mediator announcements. Thus if a party has even a rough idea about others’ utilities space, he can interpolate in that space what he observes so to obtain, after a relative small number of iterations, others’ utilities approximations. We then analyzed the actual performance of IDM in the realistic scenario in which each party tries to retrieve and to exploit information by linking it to a strategic form game whose resulting equilibrium strategy induces an inefficient end of the negotiation. Thus the possibility to gain efficiency given by the IDM is only theoretical because each single party can retrieve information about others’ preferences and hence he can manipulate the negotiation path to obtain a better finial settlement. We then connected negotiation to social choice theory by means of both Arrow’s impossibility theorem and Gibbard–Satterthwaite theorem in continuous issue negotiation problems. The implications of this bridge have a deep impact on negotiation performance because deterministic negotiation mechanism can not gain Pareto efficiency without being either authoritarian or manipulable. Finally we propose a different negotiation paradigm in which parties declare sub-optimal preferences and the degree of sub-optimality is a private information that can not be deduced by observing the path of the negotiation. Hence negotiating with suboptimal declarations protects personal Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

The Effect of Information . . .

205

utility and so it dissuades deviations from the truthful behavior. The comparison between this negotiation protocol with IDM shows the effectiveness of its performance. In future works we are going to systematically examine the sub-optimal negotiation protocol in different negotiation domains and under different rotation matrix settings.

References [1] K. J. Arrow. A difficulty in the concept of social welfare. Journal of Political Economy, 58(4):328–346, August 1950.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

[2] L. Barzanti, M. Gaspari, and D. Saletti. Modelling decision making in fund raising management by a fuzzy knowledge system. Expert Systems with Applications, 36(5):9466–9478, 2009. [3] L. Barzanti and M. Mastroleo. An Enhanced Approach for Developing an Expert System for Fund Raising Management. Nova Science Publischers (NYC), forthcoming in. [4] S. J. Brams. Negotiation Games: Applying Game Theory to Bargaining and Arbitration Procedures. New York: Routledge, 1990. [5] D. B. H. Denoon and S. J. Brams. Fair division: A new approach to the spratly islands controversy. International Negotiation, 2(2):303– 329, 1997. [6] H. Ehtamo and R.P. Hamalainen. Interactive multiple-criteria methods for reaching pareto optimal agreements in negotiations. Group Decision and Negotiation, 10(6):475–491, 11 2001. [7] H. Ehtamo, E. Kettunen, and R. P. H¨am¨al¨ainen. Searching for joint gains in multi-party negotiations. European Journal of Operational Research, 130(1):54 – 69, 2001.

[8] H. Ehtamo, M. Verkama, and R.P. H¨am¨al¨ainen. How to select fair improving directions in a negotiation model over continuous issues. Systems, Man, and Cybernetics, Part C: Applications and Reviews, IEEE Transactions on, 29(1):26–33, Feb 1999. Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

206

Luca Barzanti and Marcello Mastroleo

[9] R. Fisher. International negotiation: A working guide. International Peace Academy, New York, 1978. [10] R. Fisher and W. Ury. Getting to yes. Arrow, London, 1987. [11] Enrico H. Gerding, David D.B. Bragt, and J. A. L Poutre. Scientific approaches and techniques for negotiation. a game theoretic and artificial intelligence perspective. Technical report, CWI (Centre for Mathematics and Computer Science), Amsterdam, The Netherlands, The Netherlands, 2000. [12] A. Gibbard. Manipulation of voting schemes. a general result. Econometrica, 41(4), 1973.

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

[13] Gregory E. Kersten. Modeling distributive and integrative negotiations. preview and revisited characterization. Group Decision and Negotiation, 10(6):493–514, 11 2001. [14] David Levhari and Leonard J. Mirman. The great fish war: An example using a dynamic cournot-nash solution. The Bell Journal of Economics, 11(1):322–334, 1980. [15] H. Raiffa. The art and science of negotiation. Harvard University Press, 1982. [16] M. Rebstock and T. Thun. Interactive multi-attribute electronic negotiations in the supply chain: design issues and an application prototype. System Sciences, 2003. Proceedings of the 36th Annual Hawaii International Conference on, pages 10 pp.–, Jan. 2003. [17] Jeffrey E. Teich, Hannele Wallenius, Jyrki Wallenius, and Stanley Zionts. Identifying pareto-optimal settlements for two-party resource allocation negotiations. European Journal of Operational Research, 93(3):536–549, September 1996. [18] Rudolf Vetschera. Learning about preferences in electronic negotiations - a volume-based measurement method. European Journal of Operational Research, 194(2):452–463, April 2009.

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

INDEX

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

A abatement, 55 access, 132, 138, 145 accessibility, 135, 151 accountability, 52, 113 accounting, vii, viii, 7, 26, 111, 112, 113, 114, 119, 129, 130 actual output, 105 adaptability, 3 adjustment, vii, 2, 3, 4, 6, 89 Africa, v, ix, 131, 132, 140, 147, 150 agencies, 8, 38, 138, 147 aggregate supply, 82 agriculture, 8, 10, 28, 116 air emissions, 127 algorithm, 170, 171, 172, 174, 201, 204 aluminium, 120 amplitude, 187, 198, 203 annual rate, 75, 76 arithmetic, 175 artificial intelligence, 170 Asia, 72 assessment, 62, 113, 114, 116, 129 assessment tools, 113 assets, 137, 151 asymmetry, 170, 204 atmosphere, 151, 153, 159 audits, 52, 120

Austria, viii, 25, 26, 51, 77, 83, 85, 87, 88, 93, 95, 100, 101, 106, 124 authoritarianism, 195, 198 authorities, 3, 45, 46, 47, 48, 50, 52, 53, 74, 75, 133, 136, 147 authority, 50, 51, 52, 57, 138, 139, 144, 146, 147 autonomy, 54 average costs, 53

B balanced budget, 49, 61, 67 banking, 136 banks, 61, 80, 81, 82, 83, 95 bargaining, 177 barriers, 3 base, 2, 46, 48, 49, 50, 55, 66, 185 behaviors, 187 Belgium, viii, 25, 26, 51, 77, 83, 85, 93, 95, 100, 101, 106 benefits, viii, 2, 68, 111, 113, 152 beverages, 10, 21, 25, 28, 37 breakdown, 128 Bulgaria, 26 business management, 119 business processes, 53, 113 businesses, viii, 45, 46, 48, 56, 57, 58, 60, 61, 62, 65, 66, 67, 128 buyers, 146

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

208

Index

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

C Camp David, 172 candidates, 169 capital accumulation, 150 capital expenditure, 114, 150, 161 capital input, 150 capital projects, 161 case studies, ix, 112, 116, 117, 123, 129 case study, ix, 112, 116, 117, 118, 119, 123, 124, 126, 127, 128, 130, 138 cash, 122 cash flow, 122 categorization, 17 category a, 119, 120, 138 category b, 125 causality, 59, 60 central bank, 78, 79, 80, 81, 82, 87, 94, 95, 97, 100, 146 certification, 122 challenges, vii, 2, 3, 4, 132, 137, 144 chemical, 12, 14, 18, 20, 21, 23, 25, 26, 27, 37 chemical industry, 18, 25, 26 chemicals, viii, 2, 12, 14, 16, 20, 21, 23, 27, 37 Chicago, 108 cities, ix, 46, 49, 54, 55, 57, 67, 74, 132, 135, 137, 142, 147 citizens, 71 City, 70, 71, 72, 73 civil society, 30, 135 classes, 146 classification, 5, 16, 17, 66, 116, 120 clients, 56, 57 clothing, 10 clusters, 10 coal, 10, 12, 24, 28, 37 coefficient of variation, 35, 36 coke, 8, 37 collaboration, ix, 112 collateral, 146 collusion, 171 commercial, 46, 57, 60, 61, 62, 136, 137, 143, 144

commodity, 19 communication, 19, 24, 38 communities, 47, 48, 52, 53, 146 community, viii, 47, 53, 55, 111, 144, 162 comparative analysis, 20 compensation, 33, 34, 138 competition, 3, 47, 50, 52, 55, 74, 181, 192 competitiveness, 4, 114 complementarity, ix, 149, 154, 160 compliance, 145 composition, 83, 127 computer, 8, 15, 16, 18, 19, 20, 23, 24, 29 conflict, 51, 125, 126 conservation, 49 construction, viii, ix, 2, 7, 8, 10, 16, 20, 21, 22, 25, 27, 28, 50, 119, 131, 133, 134, 135, 137, 138, 139, 140, 142, 143, 144, 145, 146, 147, 151, 155 Consumer Price Index, 83 consumers, 2, 3, 5, 47, 53, 57, 65, 161 consumption, 22, 25, 30, 32 containers, 121 contradiction, 173 convergence, 47, 50, 93, 100, 105, 184 cooperation, 144 coordination, 145 correlation, 82, 159 cost, ix, 5, 47, 53, 54, 59, 62, 67, 68, 69, 112, 114, 116, 119, 120, 121, 122, 123, 125, 126, 128, 129, 139, 143, 150 cost accounting, 114, 116 cotton, 132 covering, 27 crises, 56, 132, 161 criticism, 48, 53, 75 crude oil, 82, 139 culture, 66 currency, 78 customers, 14, 116 cyclones, 158

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Index Cyprus, 25, 26, 83 Czech Republic, 25, 26

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

D data analysis, 59 data collection, 116, 119, 134 data set, 22, 151, 159 database, 31, 83 decentralization, 47, 54, 64 decision makers, 170, 171, 173 decision-making process, 69 deconcentration, 46 defence, 5, 38, 161 deficit, 139 degradation, 133, 139, 140 democracy, 169 democratization, 50, 66 demography, 47, 52 Denmark, 25, 26, 51 dependent variable, 156 depreciation, 120, 122 depth, 116, 119, 184 derivatives, 164 detectable, 171 developed countries, 65, 137, 150 developing countries, 150, 152 deviation, 97, 105, 171 diffusion, 4 discrimination, 22 dispersion, 35 disposition, 189 distribution, 30, 38, 49, 51, 64, 124, 152 divergence, 47, 50, 93, 100 diversity, 51, 78 domestic policy, 160 dominant strategy, 189 donors, 135 draft, 171, 183 drinking water, 52 duality, 162 dyeing, 10, 24, 28, 37

209

E earnings, 115, 124 East Asia, 55 economic activity, 81 Economic and Monetary Union, 78 economic competitiveness, 54 economic crisis, vii, ix, 132, 133, 134, 138, 139, 140, 142, 143, 144, 146, 147 economic development, 51 economic downturn, 132 economic efficiency, 4, 116 economic growth, 54, 68, 149, 150, 151, 152, 153, 160 economic integration, 146 economic performance, vii, viii, ix, 111, 112, 117, 119, 122, 150 economic policy, 32 economics, 50, 70 economies of scale, 152 editors, iv education, 5, 22, 50, 53, 60, 161 elaboration, 15, 17, 18, 21, 23 election, 169, 170 electricity, 10, 12, 20, 28, 120, 121 e-mail, 59 emergency, 143, 146 emission, 113, 120 empirical studies, 48 employees, 33, 74, 128 employers, 64 employment, vii, 2, 5, 6, 7, 8, 13, 16, 17, 19, 20, 21, 23, 25, 26, 27, 28, 29, 30, 33, 36, 50, 74, 155, 156 EMS, 128 EMU, 78, 80, 83, 105, 108 energy, 15, 16, 18, 114, 117, 121, 126 energy consumption, 126 energy input, 15, 18 enforcement, 142 engineering, 7, 117, 145 entrepreneurs, 2 environment, 2, 3, 53, 68, 112, 127, 143, 145, 147, 162, 177

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

210

Index

environmental aspects, viii, 111, 127 environmental degradation, 133 environmental impact, viii, 6, 25, 30, 32, 111, 112, 114, 126, 127 environmental issues, 113 environmental management, vii, 112, 113, 115, 119, 120, 123, 128, 129, 130 environmental protection, 125, 130 equality, 197 equilibrium, 87, 169, 190, 204 equipment, 15, 16, 18, 19, 20, 21, 24, 25, 29, 37, 38, 115, 121, 123 equity, 56 erosion, viii, 45 Estonia, 25 Europe, vii, 1, 2, 4, 6, 31, 46, 74, 108, 128, 130 European Central Bank, viii, 77, 78, 107, 108 European Commission, vii, 2, 4, 30, 31, 32 European Monetary Institute, 83 European Monetary Union, 4 European Parliament, 31 European Union, iv, vii, 1, 2, 4, 25, 78 EUROSTAT, 31 evidence, 67, 88, 89, 93, 105, 177, 203 evolution, 89 exclusion, 53 execution, 174 exercise, 20, 105 expectations-augmented Phillips curve, 82 expenditures, 19, 47, 49, 52, 53, 57, 59, 61, 62, 63, 64, 66, 67, 161 expert systems, 173 externalities, 33, 55 extraction, 19, 24, 37, 132, 186

F fabrication, viii, 2 fairness, 49, 50 families, 46

farmers, 138 farms, 37, 127 federalism, 46, 49, 50, 53, 65, 66, 72 feelings, 142 filters, 82 financial, vii, viii, 15, 20, 24, 29, 30, 38, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 58, 59, 60, 62, 63, 65, 66, 67, 68, 74, 75, 114, 116, 132, 133, 135, 146 financial development, 46 financial distress, 46 financial instability, 132 financial institutions, 133, 135 financial markets, 47, 50 financial performance, vii, 45, 46, 47, 48, 49, 52, 53, 56, 58, 59, 60, 62, 65, 66, 67 financial planning, 114 financial reports, 58, 60, 62, 116 financial system, 49, 51, 54, 58, 59, 65, 68 Finland, 25, 83, 85, 87, 88, 89, 93, 95, 97, 108 fiscal policy, 45, 65 fish, 37, 177, 178, 206 fishing, 10, 28, 37, 177, 178, 181, 183, 190, 191, 203 flexibility, 3, 52, 53 food, viii, 2, 7, 8, 10, 15, 16, 18, 21, 25, 26, 28, 29, 37, 127, 132 food industry, viii, 2, 8, 10, 15, 16, 18, 25, 26, 29, 127 food products, 8, 10, 25, 28, 37 footwear, 37 force, 46, 47 formation, 19, 84, 150, 153, 162, 163, 186 formula, 55 France, viii, 25, 26, 46, 54, 70, 72, 73, 74, 77, 83, 85, 88, 93, 95, 97, 100, 101, 153, 164 freedom, 55 fuel prices, 132

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Index funding, 21, 24, 30, 38, 52, 65, 67, 122, 178 funds, 137, 161

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

G game theory, 169, 171, 177, 187, 190, 204 Germany, viii, 25, 26, 51, 73, 77, 78, 83, 85, 87, 88, 89, 93, 95, 97, 100, 101, 106, 107, 108, 124, 137, 153, 164 global warming, 25 globalization, 3, 65, 66, 132 goods and services, vii, 2, 3 governance, ix, 132 government budget, 161 government intervention, 48, 53 government spending, 160 grants, 48, 51, 52, 56, 59, 60, 64, 75 graph, 62 Great Britain, 46 Greece, 25, 26, 83, 85, 87, 88, 89, 93, 94, 95, 97, 101, 106 gross domestic product, 5 Gross Domestic Product (GDP), 82, 83, 101, 105, 156 groundwater, 127 growth, vii, ix, 1, 2, 3, 5, 6, 24, 25, 26, 27, 30, 46, 50, 54, 55, 68, 80, 81, 87, 88, 89, 93, 94, 127, 131, 133, 142, 145, 149, 150, 151, 157, 159, 160, 162, 163 growth rate, 80, 133 guidance, 47 guidelines, 52

H handbags, 37 Hawaii, 206 health, 2, 5, 6, 10, 22, 50, 59, 75 heterogeneity, viii, 77, 83, 93, 106 history, 78, 79, 100 home ownership, 137

211 Hong Kong, 71 hotel, 10, 16, 20, 21, 29 hotels, 10, 15, 136 House, 134 housing, vii, ix, 25, 48, 53, 54, 131, 133, 134, 135, 136, 137, 138, 139, 140, 142, 143, 144, 145, 146, 147 hub, 78 human, 52, 69, 174 human resources, 52 Hungary, 25, 26 hunting, 37 hypercube, 188 hypothesis, x, 47, 128, 150, 157, 159, 168, 173, 194

I Iceland, 51 identification, 4, 5, 22, 31, 32 identity, 33 idiosyncratic, 69 image, 57, 180 imbalances, 132 IMF, 147, 163 imports, 14, 140 improvements, ix, 68, 162 income, vii, 2, 5, 6, 13, 17, 18, 19, 20, 21, 23, 24, 25, 26, 27, 28, 29, 30, 36, 48, 49, 51, 52, 56, 57, 58, 59, 60, 61, 62, 65, 66, 67, 75, 76, 135, 143, 144, 145, 179 income effects, 17, 26 independence, 156 Independence, 192 independent variable, 81 indirect effect, ix, 149, 151, 153, 157 individuals, 47, 48, 135, 143 Indonesia, 46, 54, 70 induction, 188 industrial sectors, 128 industries, vii, 2, 5, 14, 15, 18, 27, 28, 29, 61, 163 industry, viii, 2, 7, 8, 10, 14, 19, 21, 25, 26, 27, 28, 31, 139, 140

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

212 inefficiency, x, 168, 171, 189, 190 inertia, 87 inflation, 79, 80, 81, 82, 83, 84, 88, 89, 93, 94, 95, 97, 100, 105 inflation target, 84, 88, 95 information retrieval, x, 168 information technology, 52, 117 infrastructure, 57, 135, 146, 151, 152, 153, 158, 159, 160, 161, 162, 165 ingredients, 147 inheritance, 138 inspections, 119 institutions, 133, 135, 139, 145, 147, 161 integration, 3, 54 integrity, 139, 143, 144 intelligence, 177, 206 interest groups, 161 interest rates, viii, 77, 78, 79, 81, 82, 87, 88, 94, 95, 97, 100, 106 interference, 144 intermediaries, 56 intermediate outputs, 6, 7, 8, 36 international standards, 128 interrelations, 29 intervention, 12, 55, 126, 137 investment, ix, 19, 20, 55, 114, 132, 142, 146, 152, 155, 160, 161, 162 investment appraisal, 114 investments, 132 investors, 140 Ireland, 25, 26, 51, 83, 85, 87, 88, 93, 94, 95, 97, 106 iron, 120, 139 islands, 205 Israel, 45, 48, 52, 54, 56, 59, 60, 65, 67, 71, 73, 75 issues, x, 5, 65, 81, 146, 151, 156, 168, 205, 206 Italy, 25, 26, 46, 54, 72, 75, 83, 85, 87, 88, 93, 95, 101, 106, 111, 128, 142, 167 iteration, 188, 198

Index

J Japan, 129 job creation, 3 Joint Economic Committee, 69 jurisdiction, 136 justification, 63

K Keynesian, 107

L labour force, 154 labour market, 152 land acquisition, 138 Land Use Policy, 73 Latvia, 25 laws, 138 lead, 5, 24, 25, 49, 88, 151 leaks, 172, 202 learning, 53, 171 legislation, 142 leisure, 59 lending, 83 level of education, 54 life changes, 143 life cycle, 25, 32, 116 light, 30, 89, 97, 161 linear dependence, 190 linear function, 165 liquidity, 138, 146 Lisbon Strategy, vii, 1, 2 Lithuania, 25, 26, 129 loans, 161 local authorities, vii, 45, 46, 47, 48, 49, 50, 51, 52, 56, 58, 60, 65, 67, 74, 75 local conditions, 48, 54 local government, 47, 50, 51, 52, 53, 59, 71, 72, 73, 136, 146 logging, 37

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Index lubricants, 121 luggage, 37 lying, 146

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

M machinery, 8, 10, 15, 16, 18, 19, 20, 21, 23, 24, 28, 29, 37, 38, 120, 125 magnitude, 12, 135, 153 majority, 87, 95, 97, 114, 116, 125, 135, 138, 150 Malaysia, 72 management, ix, 49, 52, 66, 112, 113, 114, 116, 119, 120, 123, 127, 128, 129, 130, 135, 143, 161, 205 manipulation, xi, 168, 171 manufacturing, ix, 7, 15, 16, 18, 24, 25, 27, 38, 61, 112, 127, 152 manufacturing companies, 127 mapping, 27 marginal product, ix, 149, 151, 159 market economy, 150 market failure, 49, 65, 66, 67 marketing, 7, 162 mass, viii, ix, 112, 116, 117, 118, 123, 124, 128 materials, ix, 37, 115, 117, 118, 120, 121, 123, 125, 126, 131, 133, 135, 139, 141, 142, 143 matrix, 6, 20, 22, 23, 33, 36, 82, 199, 205 matter, iv, 127, 161, 190, 192, 193 Mauritius, vi, ix, 149, 151, 160, 161, 162 measurement, 32, 83, 163, 206 media, 20, 23, 24, 27, 37, 126 median, 6, 22, 23, 24, 30 medical, 19, 24, 38 membership, 38 metallurgy, 10, 28 metals, 10, 20, 37 meter, 136, 138 methodology, viii, ix, 3, 4, 6, 31, 79, 111, 112, 113, 116, 117, 118, 127, 128, 155, 199 metropolitan areas, viii, 45, 56, 65, 68

213 middle class, 46 migrants, 46, 48, 49, 56, 57, 65, 66 migration, vii, viii, 45, 46, 47, 49, 53, 54, 56, 57, 58, 59, 60, 61, 62, 65, 66, 67, 69, 71 Minneapolis, 73 mission, 179, 180 misuse, 161 model specification, 81 modelling, 151 models, 12, 31, 70 modernization, 129 modifications, 105 monetary aggregates, 79 monetary policy, viii, 77, 78, 79, 80, 81, 83, 87, 88, 89, 93, 94, 95, 97, 100, 101, 105, 106 monetary union, viii, 77, 78, 83, 97, 100 money supply, 80 Moon, 33 motivation, 144 MSF, 67 multiplier, 12, 26, 36 multiplier effect, 26

N Nash equilibrium, 169, 177 natural gas, 10, 12, 37 negative consequences, 132 neglect, 150 negotiating, x, 170, 172, 175, 182, 185, 191, 198, 203, 204 Netherlands, 25, 26, 51, 83, 85, 88, 93, 95, 100, 101, 206 networking, 147 New England, 163 New South Wales, 70 New Zealand, 51 nickel, 132 North America, 46, 73 Norway, 51 null, 88, 154, 186, 198 null hypothesis, 88, 154

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

214

Index

O officials, 80, 93, 94, 106 oil, 37, 82 omission, 10 openness, 3 operations, 122 opportunities, 2, 129 ores, 10, 24, 37 output gap, 79, 80, 81, 82, 83, 88, 89, 93, 94, 97, 105 overtime, 139 ownership, 143 oxidation, 25

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

P Pacific, 72 Pakistan, 152, 163 parallel, 151 Pareto, x, 168, 170, 172, 173, 175, 176, 177, 178, 181, 189, 190, 192, 200, 203, 204 Pareto optimal, 178, 189, 204 participants, 62 peat, 24, 37 penalties, 115, 123 per capita income, 61, 143 performance measurement, 53 peri-urban, 136 permit, 137, 142, 145 petroleum, 8, 10, 12, 37 pharmaceuticals, 117 Philadelphia, 73 plastic products, 20, 28, 37 plastics, 12 platform, 170 plausibility, 32 playing, 169 pleasure, 57 Poland, 26 policy, vii, viii, ix, 4, 5, 12, 47, 50, 52, 54, 55, 67, 69, 72, 73, 77, 78, 79, 80, 81, 82, 87, 88, 89, 93, 94, 95,

97, 100, 101, 105, 106, 125, 132, 137, 138, 139, 142, 144, 151 policy instruments, 4 policy rate, viii, 77, 87, 93, 94, 95, 97, 100, 105, 106 policy responses, 82 policymakers, 81, 82 political leaders, 144, 162 politics, 48, 66 pollution, 75, 113, 127, 143 population, 46, 48, 49, 50, 54, 55, 59, 61, 75, 76, 133, 136, 143, 177, 178 population density, 136 population growth, 54, 75, 76 population size, 59 Portugal, 25, 26, 83, 86, 87, 88, 89, 93, 95, 97, 101, 163 potential benefits, 3 potential output, 80, 82 poverty, 147 preparation, iv, 118, 119, 140, 142 preservation, 171 President, 107, 132, 147 prestige, 66 prevention, 113, 127 price changes, 12, 137, 139, 140, 144 price stability, 80, 81 primary data, 5 primary sector, 5 principles, 3, 31, 146 private information, 171 private investment, 152, 153 private sector investment, 160 probability, 54 product market, 4, 31 production function, ix, 149, 150, 151, 152, 153, 154, 159, 160, 162, 163, 165, 166 production networks, 6 profit, 68, 121, 130 project, 119, 129, 132, 139 property taxes, 51 proposition, 188 prosperity, 46, 54, 68, 162 prototype, 66

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Index public administration, 5, 22, 52 public capital, ix, 149, 150, 151, 152, 153, 154, 155, 158, 159, 160, 161, 162, 163, 165 public finance, 46, 47, 49, 50, 52, 65, 66, 160 public goods, 47, 48, 49, 50, 53, 65, 66, 67 public interest, 138, 143 public investment, 163 public officials, 71 public sector, 47, 50, 52, 137, 150 public service, 47, 52 public support, 49, 59, 62, 64, 68 publishing, 16, 18, 20, 24, 27 pulp, viii, 2, 16, 18, 20, 25, 26, 27, 37 purification, 38

Q

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

quantification, 120 questionnaire, 59, 68, 134

R Radiation, 115 radio, 19, 24, 38 radius, 174, 193 random walk, 83 rationality, 169, 170, 173 raw materials, 24, 117, 120, 121, 122, 125, 126, 128 real estate, 5, 8, 10, 14, 16, 20, 21, 22, 132 real time, 82 reality, 2 reallocation of resources, 4 recommendations, iv, 162 recovery, 118 recreational, 20, 22 recycling, 10, 20, 28, 125 reforms, 59, 63, 64, 75, 146 regional manufacturing, 163 regional policy, 67

215 regression, 59, 79, 158, 163, 165 regression analysis, 59 regulations, 138, 145 rejection, 63, 64, 122 relevance, 6, 14, 20, 21, 22, 26, 46, 120 remediation, 115, 123 rent, ix, 131, 136, 138 repair, 8, 14, 16, 17, 20, 21, 29, 38 reproduction, 20, 23, 24, 27, 37 reputation, 64 requirements, 22, 117, 138, 145, 161 researchers, 51, 52, 56 residuals, 158 resistance, xi, 168 resource allocation, 47, 178 resource utilization, 53 resources, 47, 49, 51, 52, 122, 133, 138 response, vii, 2, 3, 68, 117, 118 restaurants, 10, 15, 16, 38 restoration, ix, 131 restrictions, 87 restructuring, 146 retail, 7, 8, 16, 20, 21, 22, 24, 29, 38 returns to scale, 154 revenue, 51, 52, 54, 55, 74, 116, 136 rings, 49, 57, 60, 62, 63, 64, 75 risk, 130 Romania, 25, 26 root, 87, 132, 162, 163 roots, 65, 66, 156 rotations, 200, 201, 202, 203 rubber, 12, 20, 28, 37 rules, 95, 97, 101 rural development, 142

S safety, 2 savings, 145 science, 206 scope, 118, 119 sea level, 133 securities, 146 security, 187, 200 sensitivity, vii, 2, 6, 22, 30

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

216 settlements, 135, 143, 171, 172, 189, 206 sewage, 8 shape, 2, 176 shortage, 12 showing, 63, 171 signs, 4, 160 simulation, 95, 100 Singapore, 72, 74 single market, 2, 3, 31 Slovakia, 25, 26 smoothing, 79, 80, 89, 97, 100 social capital, 147 social choice theory, 169, 204 social group, 51, 56, 59, 64 social security, 24, 38 social services, 60 social structure, 66 social welfare, 205 socioeconomic status, 46 software, 170 solid waste, 120, 121, 127 solution, 54, 55, 75, 169, 177, 178, 180, 182, 185, 186, 190, 203, 206 solvents, 121 South Africa, 140, 141 Spain, 25, 26, 83, 86, 87, 88, 93, 95, 97, 101, 142 spare capacity, 79 specialization, x, 54, 56, 152, 167 specifications, 79, 105, 119, 158 speculation, 132 spending, 50, 161 Sri Lanka, 147 stabilization, 80 stakeholders, 113, 137, 142 standard deviation, 35 standard error, 87, 89 states, vii, viii, 77, 78, 79, 83, 87, 88, 89, 93, 94, 95, 97, 100, 101, 106, 152, 192, 194 statistics, 86, 87, 88 steel, 120, 128 stimulus, 47 stress, 78, 100, 101, 105, 173

Index strictures, 49 structure, 7, 31, 36, 46, 49, 52, 119, 151, 169, 194 style, ix, 131, 134 sub-Saharan Africa, vii subsidy, 75 substitutes, 151 substitution, 150, 153, 154, 165 substitutions, 186 succession, 193, 194 supplier, 29 suppliers, 116 supply chain, 170, 206 supply shock, 82 survival, 65 sustainability, viii, 45, 129, 179 Swahili, 138 Sweden, 25, 26, 70 symmetry, 171

T Tanzania, ix, 131, 132, 133, 134, 136, 137, 138, 139, 140, 141, 142, 147 target, 80, 81, 87, 89, 97, 100, 101, 105, 106, 173, 174 tax base, viii, 45, 48, 51 tax rates, 48, 57, 60 tax reform, 54, 75 tax system, 49, 56, 62, 65, 67 taxation, 47, 48, 67, 68, 70, 73 taxes, 48, 49, 51, 55, 56, 57, 59, 60, 62, 63, 65, 67, 115, 123 techniques, 170, 206 technology, 33 telecommunications, 15, 16, 18, 20, 23, 24, 29, 38 temperature, 133 tenants, 134, 138 testing, 87, 130 textiles, 10, 28, 37 theoretical approaches, 50 Third World, 46 thorium, 24, 37 time periods, 89

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook

Index time series, 151, 152, 162, 163 tobacco, 8, 25, 37 total revenue, 52 trade, 3, 7, 8, 10, 12, 14, 16, 17, 20, 21, 22, 24, 27, 28, 29, 38, 132, 146 trajectory, 173 transactions, 8, 170 transparency, 3, 146 transport, ix, 8, 10, 15, 16, 18, 19, 20, 23, 24, 25, 29, 38, 149, 150, 151, 152, 153, 154, 155, 156, 159, 160, 161, 165 transport costs, 151 transportation, vii, 122, 143, 150, 153, 161 treatment, 113, 120

Copyright © 2011. Nova Science Publishers, Incorporated. All rights reserved.

U United, 70, 129, 130, 132, 147 United Kingdom (UK), 25, 26, 46, 50, 51, 54, 70, 72, 73, 74, 75 United Nations, 129, 130, 147 United Nations Industrial Development Organization, 130 United States, 132 updating, 83, 89 uranium, 10, 19, 24, 37 urban, viii, ix, 45, 46, 47, 50, 52, 54, 58, 74, 75, 131, 133, 136, 137, 138, 142, 145, 146, 147 urban areas, 46, 50, 136, 137 urban hierarchy, 74 urbanization, 54, 142 USA, 51

217 variations, 6, 14, 26, 35, 51, 117 VAT, 63, 64, 74 vector, 19, 20, 33, 34, 162, 174, 175, 176, 186 vehicles, viii, 2, 8, 10, 14, 15, 16, 17, 18, 20, 21, 25, 26, 28, 29, 38 vision, vii, 2, 161 visualization, 190 volatility, 161 voters, 47, 53, 57, 144 voting, x, 167, 169, 206

W Wales, 70 war, 133, 206 warning systems, 132 Washington, 69, 70 waste, 113, 120, 121, 122, 124, 125, 126, 127, 128 waste disposal, 124, 127 waste management, 127, 128 wastewater, 127 water, 8, 10, 20, 23, 28, 38, 122, 150 wealth, 56 wearing apparel, 10, 24, 28, 37 welfare, 3, 48, 50, 53, 55 Western countries, 74 Western Europe, 55, 73, 150 wholesale, 7, 8, 12, 20, 21, 22, 24, 29 withdrawal, 132 wood, 8, 20, 28, 37 work activities, 8 workers, 74, 125 working conditions, 128 World Bank, 161

V valuation, 145 variables, 55, 59, 60, 65, 66, 79, 82, 83, 87, 94, 95, 97, 153, 154, 155, 157, 160

Y Yale University, 32 yield, ix, 8, 19, 149

Economic Performance, edited by Richard K. Benson, Nova Science Publishers, Incorporated, 2011. ProQuest Ebook