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Annals of the University of Petroşani, Economics, 9(2), 2009
3
Contents
Hirghiduş, I. - Ethical Implications in the Socio-Economical Life
Holt, A.G. - Risks Associated to Public Governmental Debt and Their
Management
Holt, Ghe.; Holt, A.G. - Revaluation of Assets - Accounting and Fiscal
Implications
Hulea, L. - The Influence of Certain Factors upon Business Communication
Iloiu, M.; Csiminga, D. - Project Risk Evaluation Methods - Sensitivity
Analysis
Ioneci, M. - Innovation - The Positive Effect of the Crisis
Isac, A.; Belu, M.; Drigă, I. - Risk Management in Electronic Data
Transmission
Isac, N. - Competitiveness and Strategy for Automobile Industry in Europe
Ispas, R. - Money Laundering Through Offshore Areas
Ivănuş, L.; Isac, C.; Răscolean, I. - Development of Privately Managed
Pension Funds in the Context of Pension Reform
Kar, J.; Dash, P. - Formal Financial Services for Rural Small Savers: A Case
Study of Orissa, India
Kumar, G.; Dhingra, N. - Growth and Forecasts of FDI Inflows to North and
West Africa - An Empirical Analysis
Măcriş, A.; Măcriş, M. - Strategies for Financing of the Romanian Higher
Education in the Context of Performance Increment in Education
Măcriş, M.; Slusariuc, G.; Hohoi, F. - Characteristic Features of the System
of Health Social Insurances in Romania after 1990
Man, M.; Vasile, E. - Economic Value Added - Index of Companies’ Internal
Performance
Mazilu, M. - The Inconsistency and the Imperative Change in Romanian
Tourism
Megan, O.; Haţegan, C.; Caciuc, L.; Cotleţ, B. - The Cash-Flow Statement Between True and Manipulation
Monea, M. - Financial Ratios - Reveal How a Business Is Doing?
Mungiu-Pupăzan, C. - The Demand for Economic Goods
Nicolau, C.M. - Exploratory Study on Romanian Educational Services in the
Context of UE Postintegration. The Needs for Professional
Development of the Staff of the Faculty of Economics and Business
Administration
Njanike, K.; Katsuro, P.; Mudzura, M. - Factors Influencing the Zimbabwe
Stock Exchange Performance (2002-2007)
5
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57
67
73
83
103
107
115
121
127
137
145
153
161
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Annals of the University of Petroşani, Economics, 9(2), 2009
Njanike, K. - The Impact of Effective Credit Risk Management on Bank
Survival
Paliu-Popa, L. - Tax Treatments Specific to Intra-Community Commercial
Transactions - Triangular Operations
Panait, N.G. - The Development Premises of the Banking System in Romania
Pârvulescu, I.; Ridzi, R.; Ghiţă-Pleşa, R.; Dobre-Baron, O. - SocialEconomic Aspects Related to the Contemporary Village within
Sarmizegetusa Area
Petrini, M. - Distributed Databases Management Using Remote Access
Method
Răbonţu, C.I.; Niculescu, G. - Boutique Hotels - New Appearances in Hotel
Industry in Romania
Răbonţu, C.I.; Boncea, A.G. - The Migration of the Work Force from
Romania Abroad: Reasons, Possibilities, Chances, Implications
Radneantu, N. - Making the Invisible Visible: the Intangible Assets
Recognition, the Valuation and Reporting in Romania
Răscolean, I.; Ivănuş, L.; Szabo, R. - Derivatives on the Capital Market in
Romania
Răvaş, O.C. - Free Movement within the EU - A Fundamental Right
Rizescu, S.; Stanciu, C.; Spulbăr, C.; Drăcea, R. - Considerations Regarding
the Ways to Reduce the US Trade Deficit
Sav, S.M. - About Increasing Our System Performance in Economical
Application by Speeding up the System Boot with Windows XP
Škoda, M. - The Importance of ABC Models in Cost Management
Socol, A. - Understanding Accounting Practices on Card Based Banking
Operations
Stanciu, C.; Rizescu, S.; Spulbăr, C.; Mitu, N. - Will Eastern European
Countries Join the Single European Currency Rapidly?
Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O. - Adjusting Economic of the
Romania’s GDP Using Econometric Model of the System: Budget
Expenditure - GDP
Stuparu, D.; Vasile, T. - The Electronic Commerce in the Globalisation Era
Ţarcă, N.; Vătuiu, T.; Popa, A. - The Importance of the Web Technologies
During the Communication Process between a Company and its Clients
Teiuşan, S.C. - Computer - Assisted Accounting
Udrică, M.; Vătuiu, T. - Overview by Formal and Informal Learning in the
Computer World
Văduva, M. - Life Insurances and their Influences on Reinsurances
Vasile, T.; Stuparu, D. - Globalisation and e-Europe Programs
Ziolkowska, J. - Environmental Indicators for Rural Areas Sustainable Potential in the New and Old EU Member States
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227
237
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287
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Annals of the University of Petroşani, Economics, 9(2), 2009, 5-12
5
ETHICAL IMPLICATIONS IN THE SOCIOECONOMICAL LIFE
ION HIRGHIDUŞ *
ABSTRACT: Concern for the morality of economic life is relatively recent and
involves the need to implement ethical codes that prevent violation of rules of conduct. The
Socio-economical sphere is marked by profound transformations that shape a particular kind of
rationality. The ethical rules can also be found under this kind of rationality. Apparently these
rules hinder the economical processes, but in reality respecting the economical rule, leads to
the increase of trust between economical actors. Hence, these actors are required to be aware
of the ethical rules according to which their activity needs to be guided. These rules constitute
mere moral determinations in public life.
KEY WORDS: ethics, economical ethics, socio-economical life, public life, public
welfare, clients’ welfare, personal welfare, profession, professionalism
1. INTRODUCTION
The economical and social ethics is a component of applied ethics, dealing
with the problems of specific to the economical and social life, public life, public
interest activities (Adrian Paul Iliescu). There is a strong correlation between the
economical and the social, but the economical constitutes most of the times the
fundament of the social. Hence, it is necessary to understand what economical ethics
means. This is often called business ethics or corporate ethics, and comprises, as
Adrian Paul Iliescu says, the moral problems the modern economical life, of the
relationship of enterprises and community, enterprises and employees, enterprises and
State, suppliers and clients, etc. Economical ethics, if seen as a science, may represent
an important landmark, not only for some individuals in the society but also for
economical actors.
One of the most frequent stereotypes in economics is that in this field, morality
is not something ordinary. The larger part of the managers may say that ethical aspects
do not have to be involved in economical decision taking. Moreover, during the last
decades, considerable efforts have been made by some companies in order to make and
*
Lecturer, Ph.D., University of Petrosani, Romania, ihirghidus@yahoo.com
6
Hirghiduş, I.
implement their own business ethical conduct programmes. In a world where there is
the risk to lose one’s respect if you do not drive the correct type of car, or if you wear a
cheap suit, imitation (being like everybody else) doesn’t need to be underestimated as a
motivational factor. Only it is far from enough for an explanation. Both the elaboration
as well as the implementation of ethical codes is costing. Companies, often call an
external consultant who will help draft it, to employ trainers and come up with an
implementation mechanism which will be a part of the job of several employees, time
which could have been used for directly productive activities. Costs seem to be
unbalanced related to the simple satisfaction of the desire of being trendy.
Not even the mere observation that some of the procedures are imposed by
rules is satisfactory, when ethical programmes of some companies go beyond the
provisions of normative acts. Hence, it is unworldly to lay it all on the moral
consciousness of managers. A plausible explanation should consider several complex
considerations.
We could also start from common traditional idea of ethic thoughts, that our
moral conduct is motivated by non-moral considerations. The fear of being stigmatised
or excluded, the desire to build a certain type of reputation or simply the incertitude
regarding the reactions of others, are factors which are able to guide people towards the
adopting a moral conduct code more efficiently than adhering to a set of abstract
principles. It is a common place of our professional experience, that, we avoid as much
as possible the interactions with unpredictable individuals. Respecting as much as
possible a set of norms sends out the signal that you are mainly a predictable
individual. In other words, you are seen as a cooperating fellow.
What makes these ethical programmes investments profitable? Traditionally,
authors from the sphere of business ethics have two main answers. First of all, the good
reputation is a delicate capital, both for individuals as well as for the company. It is
difficultly constructed, with a lot of effort, and disappears quickly with the slightest
mistake. The reputation of being immoral in business may lead to the loss of clients, to
collaborator’s reticence in cooperating with the company, massive increase of
production costs or even a decrease of the value of capital. The second classical answer
visualises the situations where the immoral actions are illegal, this being the case, costs
may be dramatically.
Recent literature highlights a third answer, next to the considerations related to
image or risks derived from breaking the law. Companies do not compete just for
clients, but also on the labour market. Having more performant employees, they are
able to better and faster complete their tasks, means having an advantage with the other
companies. These kinds of employees are a rare resource, justifying the needs for a
trustworthy programme. Salary increase may be, up to a point an efficient method of
repaying the trustworthy employees and decrease their temptation of leaving the
company for other competing companies. But, from a certain degree they seize having
the same considerable effect.
What matters, in fact, is the global satisfaction related to a working place. Here
we might consider the money (both salaries as well as other collateral benefits), but
also a large spectrum of non-monetary income, starting with professional pride to
office atmosphere. The ethic climate is a vital component of this spectrum. A boss who
Ethical Implications in the Socio-Economical Life
7
likes to use his power arbitrarily and discreetly, ambiguous promotion procedures, the
incertitude of professional trajectory or the risk of becoming a collateral victim of an
inter-departmental war works as efficient as the stimuli for looking for a new job as
well as a small salary. A larger number of empirical studies suggests that the wise
implementation of ethical programmes has a significant role in discouraging migration.
Hence, at least in the fields where economical results directly depend on the quality
and stability of the labour force, the companies have an immediate interest to adopt
strategies to realize an ethical climate, at least related to its own employees. In other
domains, where performance is less dependent on the quality of the labour force, or
where migration or instability do not have a massive impact over the costs, this kind of
programmes have a less important value.
2. CONCEPT SIGNIFICANCE
The term “Ethics” comes from the Greek ethos, meaning “mores”, “custom”,
and “character”. The term “moral”, has the same significance as ethics, but the
etymological stem can be found in Latin, in mores. The acceptions give to ethics are
the following: philosophical science dealing with the study of practical and theoretical
problems of moral; systematized and coherent conception, be it personal, of a
philosophic movement, or representing the commandments of a society regarding the
development norms of moral life; moral.
Ethics is the science of moral. The definition of ethics is a complex problem,
regarding the pluralism of society, the multitude of opinions and the variety of moral
norms, legal, cultural and social, which are included in this concept. Even if ethical
standards are created and followed on a professional level, they have a great impact
over the entire society, the attributions and customs of which may differ from the
individual ones. The personal values don’t always correspond to the professional moral
code or/and to the social values, as social justice is not equivalent to the legal one.
There are also some situations where a person with moral integrity, or at least socially
acceptable, does not have the motivation to or does not have the moral value to
motivate moral action.
For example, society, considers homicide or imprisonment as repugnant, but
justifies them as self-defence and belonging to the judicial system. Thus, the principles
and ethical theories will help with taking a moral decision when the situation is
ambiguous, and the values are in controversy. In a reductionist way, ethics may be
resumed in the determination if an action or behaviour goes on according to the social
norms. An action may be either correct or incorrect, if it is legally, communitarly,
religiously accepted. When the things ought to be made, overlap the things which need
to be made, and over the things which may be made then the ethical dilemma is solved.
But, until we arrive to this perfect correlation, the application of ethical principles
follows a very curved road, dominated by tradition, controversy, and prejudice.
There have been made some distinctions between ethics and moral, as follows:
1. Ethics is a science of behaviour, mores, and principles, which govern the practical
problems; moral represents the totality of means we use to live within the society,
8
Hirghiduş, I.
it, being made of concrete prescriptions which the individuals and the society in
their whole.
2. Ethics is the ensemble of conduct rules resulted based on the distinction between
good and evil, which a given community may accept; moral is an ensemble of
principles of a universal-normative dimension, based on the distinction between
good and evil.
Deontology comes from the Greek deon, deontos (“what is necessary”) and
logos (science). The significances given today to the term are the following:
1. Code of professional conduct, specific moral principles and norms, implied by a
certain profession. This may be a written code or orally transmitted and accepted
by all the probationers of a profession, e.g. Hippocrates Oath.
2. The meaning given by J. Bentham, who used for the first time the term deontology,
is the following: it is a discipline, the scope of which would be the primary
evaluation of the consequences of an action, in order to establish, depending on the
quantity of pain or pleasure the action implies, is it deserves or not to be fulfilled (a
utilitarian sense).
3. In a wider sense, deontology is the part of ethics which deals with the study of
moral duty, origin of nature, nature and its forms, as a basic component of the
moral consciousness.”
4. In a smaller sense, deontology represents the ensemble or rules of an organisation,
institution, profession or a part of it, by the professional organisations which
become the reference of elaboration, application and supervision of the application
of these rules. Related to this definition of deontology, morality expresses what we
should do if we were rational, benevolent, impartial, well intentioned.
3. MORAL DETERMINATIONS OF PUBLIC LIFE
Ethical implications in public life are extremely diverse and of great
importance. After Miroiu Mihaela & Gabriela Blebea Nicolae main ethical
implications for public life would be: defining rational criteria for moral evaluation for:
institutions, rules, laws, collective elections, behaviour of rulers and politicians, of
public officials (more generally, of public managers), professional behaviour, or
simply of the citizen; evaluation of the law’s justice (for whom the laws are right);
revealing how the institutions and organizations can help people’s freedom and
fulfilment. In the public sphere there is a confrontation of the participants who give life
to it. Freedom and personal fulfilment do not occur absolutely, because they are
connected to the numerous situations that we are in.
According to the two authors, the major factors that determine people wonder
about ethical aspects of the professional, civic and political life are:
1. Individual resistance to common rules, rules that are restrictive and may be
contrary to personal desires.
2. Conflicts of roles that require determination of what prevails at a time. For
example, the role of husband to that of the judge.
3. The choice between ways of life involves moral dilemmas relating to
accountability.
Ethical Implications in the Socio-Economical Life
9
4. The attitude towards social change, whether they happen in along period of time,
such as the sequence of historical periods, whether they happen in a shorter period
of time, such as transitions from one period to another.
5. Social pluralism involves legitimate influence from several factors, such as:
family, interest groups, local communities, traditional culture, the political sphere.
Social pluralism is specifically for open societies, in which the democratic freedom
exists.
6. Responsibility for standards that are imposed in the society, the group requires a
response of the individuals to the rules and not just their acceptance.
7. In this pluralist and democratic society the standards have to be just. There is a
tendency for people to follow rules that are objective and correspond to most of
them. It has to be solved the conflict between personal freedom and interests of
the group, and this thing can be achieved by the fact that people need the social
recognition only to strengthen their self-esteem.
4. THE STATUS OF ETHICS AS A GENRE
Since its beginnings as a discipline, even though it was incorporated to
philosophy, ethics had a certain status that it strengthened over time. On one hand,
ethics proved that it is a philosophic discipline, philosophy always being the queen to
whom the ethic discourse always came back, and on the other hand ethics developed as
a science about the moral norms.
Scientific Ethics involves moral psychology, moral sociology, moral
anthropology, ethology, etc. It is theological (if Christian ethics) and normative, being
of first order (utilitarismu, Kantianism). Practical aspects of scientific ethics are the
applied ethics (for example, that dealing with moral issues of abortion, euthanasia,
etc.). Philosophical Ethics is a meta-ethics and is dealing with ethical theories, being
considered by some people an ethic of II order.
R.M. Hare (1930-1940) thinks, as well as Kant, that ethics is equivalent to a
moral philosophy and morality is equivalent to moral action, moral language, moral
philosophy, moral thinking, moral beliefs, moral decisions. Pure ethics creates the
empirical ethics, namely the "ethical substance" (normative). After R. M. Hare, ethics
is divided into:
Theoretical ethics is a branch of modal logic (deontic): „I understand by the
ethical theory (of the 2nd order) the study of moral concepts, that is, if you want the
study of how the use moral words, their meaning in the broad sense, or what we do
when we ask moral questions.... One of the most important things that are required
from moral philosophy is for him to do something to help us to discuss rationally the
moral questions; and this means for us to obey the logical rules governing these
concepts. If we do not follow these rules we will never be able to rationally argue on
moral problems. From Socrates onwards, the first task of philosophy was the study of
arguments; and the first task of moral philosophy is the study of moral arguments, to
distinguish the good ones from the bad ones. Ethical Theory is an essential tool in
completing this task by revealing the logic of moral concepts”.
10
Hirghiduş, I.
Normative ethics is a canon of moral reasoning derived from its meta-ethics:
“Moral philosophy is an exercise in the study of such misleading words (moral words
"right", "should", "good") and their logical properties to establish canons of argument
or valid reasoning (moral) thus to make those who command them able to avoid
mistakes in reasoning (confusion or logical errors) and to answer the moral questions
(practical, applied ethics) with eyes open.”
R. M. Hare proposes a unifying project, about which A. W. Pirce says: “Him
ambition to unite elements from Aristotel, Kant and Mill in a logical manner that is
intelligible to resolve fundamental issues of ethics; he always thought that he achieved
this goal”.
5. THEORETICAL ASPECTS OF PROFESSIONALISM AND
PROFESSIONAL ETHIC
Since her modern time, society has increasingly emphasis on professionalism,
because the society changed into a professional one. The main reasons that caused this
major change are represented by the transforming of natural economy, specific to the
Middle Ages, into the market economy which is dominated by objective laws. This
would not have been possible without the industrial revolution which began in England
in the seventeenth century, and which brought the greatest benefits for some European
countries. People who want to pursue a certain career is because they hope to gain
some satisfaction from practicing a profession. Those who come to master one or more
professions are the proof of professionalism. It is understood that not only mastering a
profession means also professionalism, it has to be also practiced under the imposed
rules.
5.1. Profession
There are several definitions given to profession:
1. Profession is a form of work organization, a kind of orientation in employment (a
subjective experience of work) and a very effective control process performed by a
group of interest. In an organized way, profession includes: a certain central
control body which ensures a performance standard form the members as
individuals; a code of conduct; careful knowledge management towards the
competence which forms the foundation for those professional activities; herd
control, selecting and training new entrants.
2. „A profession is an occupation that many people who are voluntarily organized
have it, in order to earn a livelihood through direct service of a certain ideal in a
morally permissible way beyond what the law requires them directly, market and
common morality”. The profession should not be confused with the occupation
which is limited by some sociologists to the concept of work from the market
economy.
Professions have experienced and are experiencing ongoing dynamic which is
the development of society as a whole. Any occupation involves the need for an ethical
Ethical Implications in the Socio-Economical Life
11
code that can be achieved by explicit or tacit consent of those who practice that
profession. In general the ideal characteristics of the profession are:
1. Any profession requires a basic education, more or less permanent, with a
corresponding adjustment in terms of theory.
2. Initiating, maintaining and advancing a person in the professional competence is
determined by the professional body.
3. Professional offenses are punished according to their seriousness, going as in
extremely severe cases to removal from the professional community (withdrawal
of right to practice that profession).
4. The purpose of professions is to satisfy certain social needs.
5. Members of a professional group are bound by a code of ethics that requires
among other things the selfless service to society.
6. Practitioners of a profession must have normal collegial relationships in terms of
professional and civilized behaviour between them.
7. Professional altruism requires, ultimately, in the event of disasters, even the
maximum sacrifice for the common good.
Every profession also requires professionalism. It is considered as an ideology
relevant to those who practice a profession. Professionalism is characterised as it
follows.
1. Expertise in the performance of a profession (epistemic authority).
2. Belief in autonomy professional decision and occupation (protection from
amateurism and dilettantism).
3. Identification with the profession and with those in the same field (profession
comes part of professional identity).
4. One decides for a long part of its life the chosen profession (recognition and
prestige is acquired over time).
5. Moral obligation to work in customer service, avoiding excessive emotional
involvement (but not empathy), the arbitrary and unwarranted preferential
treatment by policy area.
6. Faith in the ability of self-control and peer maintaining professional standards.
5.2. General aspects of professional ethics
“Professional Ethics states practices, rights and duties of a professional group,
critical and sanctioned professional mal-practice”. Although there is no clear consensus
on all ethical rules to be observed by those who practice a profession, however, certain
principles of professional ethics are accepted as the core of a norm.
Professional ethics implies some principles as:
1. The need to protect, under normal conditions, the privacy of subjects through the
practice of informed consent.
2. Subjects involved in the practice of a profession should not be subjected to
unnecessary stress, manipulation or risk.
3. Professional practitioner is responsible for the confidentiality of any information
which may lead to identification of subjects.
4. Protection and use of the data is subject to legal requirements.
12
Hirghiduş, I.
The practice of a profession requires in most cases, in addition to compliance
with legal standards, certain ethical standards too, with issues as: the professional
authority, paternalistic practices, and customer rights. Professional ethics is a species of
general ethics, but ethics is gender specific for each and every occupation. The need for
introducing ethical standards in the practice of professions is required by the fact that
there is a tendency for non-compliance with statutory law for which the law usually
takes actions rather late. The purpose of professional ethics is to prevent and to warn.
Two types of professional ethics are frequently mentioned:
1. Ethics for the entangled case focuses on the negative cases, on what can be
dramatic in practice of a profession (e.g. corruption of government, the neglect of
patients in medicine, business customers’ deception, abuse of authority and trust in
education, cynicism and compromise in politics, misinformation in journalism,
etc.). This kind of ethics does not focus on formal ethical codes and neglects the
fact that ethics must be oriented primarily positive.
2. Standard ethical approach focuses on features that define a profession, through
the rights and duties (e.g.. doctors have greater duties than other people, i.e. to
help others, police have the right to make use of violence, etc.).
Professionals follow the accomplishment of three major objectives that bear
the mark of good: the public good, the customers’ good, their own good.
Following the need to achieve these objectives, professional ethics is a
contractual nature, with vibrant utilitarian marked. This requires an agreement which
will govern the relations between professional and customer. The contract involves the
adjustment of the two perspectives: that of professional and that of the customer. Every
professional thinks that his profession is useful, while the customer claims that
professional obligation includes altruist and moral aspects too. Meaning that the
professional should always give up his personal interest in favour of customers’
interests. The contract has to be followed by a mutual agreement for the benefit of both
sides involved.
REFERENCES:
[1]. Davis, M., in Miroiu, M.; Blebea Nicolae, G., Introducere în etica profesională, Trei,
Bucureşti, 2001, p.51
[2]. Gortner, H., in Miroiu, M.; Blebea Nicolae, G., Introducere în etica profesională, Trei,
Bucureşti, 2001, pp.51-54
[3]. Hare, R.M. - Sorting Out Ethics, Clarendon, 1997, p.44
[4]. Marshall, G. (editor) - Dictionary of Sociology, Universul Enciclopedic, Bucureşti, 2003,
pp.446-447
[5]. Miroiu, M.; Blebea Nicolae, G. - Introducere în etica profesională, Trei, Bucureşti, 2001,
p.11, 16-18
[6]. Price, A.W. - Bigraphical Memoirs of Fellows
[7]. Wunenburger, J.J. - Questions ď éthique, Presses Universitaires France, 1993, p.XIV, in
Mihaela Miroiu, Gabriela Blebea Nicolae, Introducere în etica profesională, Trei,
Bucureşti, 2001, p.11
[8]. *** - Dictionary of Philosophy, Political Printing house, Bucureşti, 1978, p.189, 246
Annals of the University of Petroşani, Economics, 9(2), 2009, 13-20
13
RISKS ASSOCIATED TO PUBLIC GOVERNMENTAL
DEBT AND THEIR MANAGEMENT
ALINA GEORGIANA HOLT
*
ABSTRACT: Public debt portfolio is the most important financial portfolio of a
country, reflecting the complex and risky financial structures that can generate substantial risks
on the patrimony of state and on its financial stability. Recent crises have highlighted the need
to limit exposure to liquidity risk and other risks which make economies of states to become
vulnerable to some external shocks. A viable and prudent management of public debt structures
and strategies aimed at avoiding dangerous loan becomes crucial because the consequences it
causes serious macroeconomic failure to pay debts, heavy losses of production and high costs
associated with them.
KEY WORDS: public financial balance, public governmental debt, risks, public debt
portfolio, debt management
1. INTRODUCTION
In the current period, characteristic feature of most countries with market
economies is that it shows a trend of faster growth in public spending compared to
current income (ordinary). In these circumstances, the state procurement of additional
cash resources can be achieved either by increasing and/or imposition of new taxes or
by borrowing state.
Public financial balance, to the existence conditions of imbalance in the public
sector is achieved by identifying potential lending sources that can use the state. So, the
state is able to ensure financial balance by financing and refinancing public deficit and
debts based on special laws on account of debt, the domestic and foreign capital, both
from individuals and legal entities.
The need to achieve public financial balance is given the respect even one
designed to meet the needs of the general functions of the state of society. Following
public authorities contracted loans to restore the balance between receipts and
payments taking place in the public sector.
*
Assist.Prof., Ph.D. Student, „Constantin Brâncuşi” University of Tg.-Jiu, Romania,
alinaholt@yahoo.com
14
Holt, A.G.
The public financial balance is achieved through state borrowing/loans in order
to finance budget deficits and debts taken over by the state based on special laws.
These loans are found in public debt of the country since they are components of it.
Public debt is established and managed separately by its two forms: government debt
and local debt.
Government debt incorporate all financial obligations of the state from loans
contracted directly or guaranteed by the Government, by the Ministry of Finance , on
behalf of Romania, from domestic and foreign financial markets, and remaining to be
repaid at some point.
Debt management strategy is the establishment of the state debt management in
the mobilization of resources needed to finance it, and in the implementation risk and
cost objectives established by the authorities.
In the context of national economic policies, states must ensure that both the
level and growth of public debt to be sustainable, and debt service 1 can be provided in
various situations respecting the cost and risk objectives.
The public debt must be properly structured in terms of interest rates, maturities
and currencies in which loans are contracted to eliminate the risk of outbreak or spread
negative effects on the finances of the state.
2. EVOLUTION ON PUBLIC GOVERNMENT DEBT
In 2002, through monetary policy has given priority to reducing inflation and
fiscal policy has resulted in controlling the consolidated budget deficit (2.6% of GDP)
and its funding mainly from external sources ( equivalent to 1.4% of GDP) given the
large interest differential between yields on government securities issued by domestic
and external conditions for the loan to a loan. And in 2003 continued the policy of
financing the budget deficit in 2002, funding is mainly accomplished by external
sources. In 2004, the budget deficit originally scheduled at 3% of GDP was corrected
in July to 2.1% of GDP and again in August to 1.6% of GDP, while actual
implementation was done with a consolidated budget deficit of 1.1% of GDP. The
budget deficit in 2004 was achieved in a balanced proportion of external sources (about
57.2% of deficit) and from internal sources (42.8%).
Romanian Government policy to reduce the budget deficit, similar to the
previous year, helped temper inflation in 2005 (inflation has declined to around 8.6%),
while limiting further deterioration of current account deficit. Problem areas were,
however, this year, uneven implementation of budget expenditure, virtually the entire
accumulated deficit in the last month of the year, falling to the level of 0.8% of GDP,
well below the initial target level, 1.5 %. Even if in 2006 there was a relaxation of
fiscal policy, reflected in an increase in the consolidated budget deficit to 1.7% of GDP
to 0.8% of GDP in the previous year, it occurred in late , registering the same budget
implementation asymmetric. In fact, it was the lack of government securities issues,
1
Annual public financial effort that includes all costs covering the actual debt repayment and interest
payments and fees
Risks Associated to Public Governmental Debt and Their Management
15
preferring to use temporary funding availability of the Treasury General Account
(approx. 84.3% of the budget deficit was financed from internal sources.
International financial market turmoil, triggered since the fall of 2007 financial
crisis appeared on the U.S. mortgage market with high-risk (subprime mortgage loan
market), have widened in the first months of 2008, registering developments with
adverse market conditions to worsen in all developed economies. Towards the end of
2008, the government public debt climbed by 1.3 percentage points from 91.58% to
92.88%.
The increase or the decrease of government debt to GDP reflects a variety of
factors influence the Romanian economy. Macroeconomic indicators and impact on
debt indicators (economic growth, budget deficit) are:
Table 1. Development of main macroeconomic indicators and the impact
on government debt indicators
Indicators
Nominal GDP (bilions ron)
GDP growth (%)
General consolidated budget
deficit (% of GDP)
Government debt (billion.lei)
Share of government debt to
GDP
Government debt service
The share of government debt
service to GDP (%)
2002
151.5
5.1
-2.4
2003
197.6
5.2
-2.0
2004
246.4
8.4
-1.5
2005
288.0
4.1
-0.8
2006
342.4
7.7
-1.5
2007
404.7
6.0
-2.3
2008
475
6.5
-2.2
2009
531.2
6.1
-2.3
43.6
28.81
51.1
25.9
55.1
22.4
56.4
19.6
59.9
17.5
76.2
18.8
87.6
18.4
101.8
18.6
14.6
9.6
16.2
8.2
13.2
5.3
13.4
4.7
8.5
2.5
10.4
2.6
15.7
3.4
11.7
2.4
Thus, foreign government debt increased from 2002-2005 to EUR 1.8 billion
reflecting Romania access to financing in foreign markets, while in 2005-2007 it
reduced debt by 1.5 billion EUR due to changing the default strategy of the Ministry
Economy and Finance to finance the budget deficit mainly from domestic sources.
Foreign government debt share in GDP has declined significantly over the period
2002-2007 to 12.6% as a result of strong economic growth and currency appreciation
in the period 2003-2006 and in 2007 RON depreciation partially diminished the effect
of economic growth. Domestic government debt even though it increased between
2002-2007 to 30.2 billion lei, as a share of GDP it declined from 2002-2005 by 2.1%
and in 2006 and 2007 saw a significant increase of 4.7% of GDP due to deficit
financing from domestic sources.
3. RISKS RELATED TO GOVERNMENT PUBLIC DEBT MANAGEMENT
Debt public management involves the financing needs of the State and its
liability at a cost as low medium and long term, provided a continuing risk to tolerable
level. Debt Management is a process closely related and dependent on monetary and
budgetary policy.
In this context, the analysis of government debt portfolio should be made taking
into account developments and macroeconomic forecasts (growth, inflation, monetary
16
Holt, A.G.
policy rates, budget revenues and the budgetary deficit), the internal capital market
efficiency, but also for economic change worldwide. An important component of
government debt management is to manage risks associated with debt portfolio, which
involves activities to identify, assess and insurance against various categories of risk.
a) refinancing risk (the inability to refinance its debt or refinance it to very high
cost) - which depends on the development of domestic capital market (liquidity and
interest rate changes in lei, which depend on macroeconomic developments and thus ,
the market expectations on progress), the international financial market developments,
and can be reduced by avoiding payment of tips generated by the agglomeration of
service maturity of loans or a great big share of short-term government debt
denominated variable rate debt in total. In this regard we will consider a uniform
distribution of government debt service and an appropriate duration of government
debt portfolio, using the specific financial transactions, including repurchase in
advance (buy back) or other securities exchange of securities in advance with longer
maturity (bond exchanges) and active management of liabilities and liquidity,
including here, and derivatives (swaps, interest rate, forward rate agreement or futures)
b) market risk with two components:
- foreign exchange rate (appreciation of foreign currency debt as a result of currency
depreciation against the euro and the USD, given that state revenue is collected in
local currency)-which is influenced by volatility in exchange rates as Following
developments on international markets and domestic issues that are of such as
monetary policy. Since assets (proceeds of revenues) are denominated in local
currency to avoid currency risk the strategy would be recommended that the
government debt ratio in lei in total to increase. The exception is given by estimates
about Romania's accession to the euro area (2012-2014) which would, in after
accession to the euro, state assets (revenue budget) be denominated in euro, which
increases the desirability of contracting long-term loans denominated in euro. This
type of strategy can be implemented mainly by contracting new loans in lei and
gradually increase the share of debt in lei in total debt, coupled with active
management of existing portfolio, depending on the existing opportunities in the
financial markets by using derivative financial instruments ( foreign exchange
swaps, currency forward contracts). Also, external funding, contracting loans in
euros and very long term, provided the use of bullet-type instruments (Eurobonds
issues) is appropriate, depending on market conditions and existing;
- interest rate risk (increases in domestic interest rates or foreign capital) - which is
influenced by volatility in interest rates, monetary policy and budgetary
developments in international financial markets, and may be offset by using
financial derivatives: swaps interest rate, swaptions (combination of interest rate
swaps and options), futures.
c) liquidity risk can be seen both in terms of cost to investors who want to close
a position taken on debt state by selling them, and in terms of the state, when one takes
into account the possibility of substantial reduction in the volume of liquid assets
available to the authorities;
d) credit risk refers to the possibility of non-execution by state or by the
guarantor, of the contractual obligations with financial assets;
Risks Associated to Public Governmental Debt and Their Management
17
e) operational risk groups different types of risks such as trading errors in
various stages of implementation and registration of operations, internal control
insufucienţe or misconduct, legal problems, etc.
Developed countries, where government securities markets are very active and
liquid, are especially concerned about market risk. However, developing states that
have not access foreign capital markets and securities whose markets are relatively
underdeveloped state, should pay attention to refinancing risk. For the analysis of main
risks associated with debt portfolio shall have regard to following indicators: - the risk
of refinancing, the repayment schedule determined by the absolute value and period of
repayment / redemption of the debt indicator analysis to be used is the percentage of
government debt maturing in a time horizon (degree of refinancing at 1 year and 5
years)
• for foreign exchange caused by the absolute value of the debt and currency, the
analyze indicator to be used is the share debt in foreign currency, foreign currency
debt being detailed for each currency;
• for the interest rate risk, the indicators used are:
- share of variable interest rate debt in total government debt versus debt ratio;
- fixed rate of interest;
- refixing percentage, that percentage of government debt for which interest
rate is changes in a chosen time horizon (indicator refixing 1 year and 5
years);
- average maturity until the next change in interest rate variable, that the
average time until the variable interest rate changes (average time to next
refixing).
In order to assess the risks to the stock of government debt are needed on: the
budget deficit and surplus / deficit primary projections of government debt service
(detailed on the rates of capital and interest payments and the type of interest rate
(fixed or variable), scenarios of deficit financing and refinancing of debt (securities
issues program) selected horizon analysis, projections of financial variables (exchange
rates and interest rates on domestic and international) and data key interest rates related
to loans in RON, EUR, USD and CAD and exchange rates, to calculate their volatility
for extrapolation of these variables for the period of analysis.
4. THE MAIN DIRECTION FOR GOVERNMENT DEBT MANAGEMENT
STRATEGY AND INSTRUMENTS WHICH ARE CONSIDERED FOR
IMPLEMENTATION
The main objective of government public debt management in the current period
is:
a. Controlled growth of government debt so that its level to maintain reasonable
limits set by the Maastricht Treaty. In the management of government debt will have
regard to the maintenance of government debt indicators to sustainable levels, with
their classification in limits set by the Maastricht Treaty.
b. Government bonds market development. Government securities market
development strategy for financing the budget deficit and debt refinancing will be on
18
Holt, A.G.
loan contraction of domestic issues with the launch of government bonds in order to
develop domestic market for government securities. As another option, where
conditions are favourable and depending on funding opportunities and, in particular to
refinance loans in foreign exchange or early redemption of such loans, seek to finance
the foreign currency by issuing Eurobonds, taking into account liquidity conditions in
these secondary markets and the benefits of consolidation and expansion of the yield
curve for Romanian Eurobonds and the objective of increasing market instruments
denominated debt (debt is negotiable). Such a strategy has paid increasingly higher
internal market as a source of financing has the advantage of adopting an optimal mix
of macroeconomic policies to the existence of excess liquidity in the system, in the
context of any significant inflows of foreign capital in Romania and the reduction of
currency risk, negotiable debt growth and a reduction of government debt transactions.
One of the objectives related to market development for government securities is that
of strengthening the yield curve and its extension, is well known that yield securities
sovereign liquidity conditions their growth on a wide range of maturity as the
investment environment and create references for corporate and sovereign issuers in
U.S. dollars. However, it should maintain regular consultation with participants on the
domestic market (primary dealers, investors, etc.) to ensure transparency and
predictability of how the contracting and management of government debt in lei and
for regular evaluation of investment needs in the market and expectations for market
conditions.
c. Reduce costs with government public debt and budgetary risk caused by the
granting of state guarantees and submitted loans. The costs of government debt in
GDP will be reduced gradually by improving conditions for domestic financing and
contracting of government debt to yield more low to come their downward trend of
inflation, but also by reducing the share of the debt contracted by state or economic
agents to guarantee their submitted loans since the state guarantees / submitted loans
will give only a special law issued for this purpose.
To improve the structure government debt portfolio will consider the following
measures:
- the increasing share of government debt denominated in national currency in total
government debt. This will seek to limit currency risk and domestic market
development for government securities. Given that the budget revenue collection is
done in national currency, contracting government debt in the same currency would
eliminate currency risk;
- the increasing share of government debt denominated in Euros in total government
debt in foreign currency. Increase the share of financing in the euro will have regard,
on the one hand, minimize the costs of new foreign loans, given the conditions
enjoyed by Romania in the European financial markets, and, secondly, to limit
currency risk, given the structure of exchange reserves managed by the National
Bank of Romania and currency composition of exports and imports;
- reducing the debt refinancing for the government, denominated in national currency
and the euro denominated. This will aim to reduce the risk of refinancing at high
levels of interest rates. By contracting for long-term loans, refinancing risk at high
interest rates in the European market will be limited;
Risks Associated to Public Governmental Debt and Their Management
19
- increase the share of fixed-rate debt in total government debt. By increasing the
share of fixed-rate debt will be considered on the one hand, limiting the risk for
increased key interest rates in particular for government debt in foreign currency;
- contracting debt mainly denominated in foreign currency bond issue by launching
international capital markets while reducing borrowing from international financial
institutions in total government debt in foreign currency. It will consider increasing
the share of government debt in foreign currency by the issue of market instruments,
namely the issue of bonds on international capital markets. It intends to diversify the
investment base and strengthen and extend the yield curve for government securities
on foreign capital markets, with positive effects on costs associated with government
debt in foreign currency. The issuance of bonds on foreign markets will provide a
diversified investment base and portfolio restructuring to increase flexibility, since
these instruments are traded permanently on secondary international markets;
- as uniform distribution of government debt service, by establishing new loan
maturity, trying to avoid the formation of peaks of payment to not increase the risk
of liquidity and refinancing.
Government public debt instruments used are:
- issues securities on the domestic issues that benchmark securities issued with
maturities of 3, 5, 10 and 15 years, and issues of Treasury bills will be issued with a
maturity of 6 months and 1 year (364 days)
- issues securities on the foreign capital market, that shows the long-term securities
with maturities of 10 years and even 15 years, depending on the evolving financial
markets and financing needs of the budget deficit;
- loans from international financial institutions to finance the budget deficit, only the
comparative cost analysis tools provided by international financial institutions.
- the state guarantees and submitted loans for national projects, but for this type of
instrument is absolutely necessary in a certain context, the case of very large
strategic projects of national importance in the granting of a special law for that
purpose, with requirements for state aid under the relevant legislation and following
an analysis rigorous risk under the law.
In order to achieve a structure deemed optimal currency portfolio of government
debt to maintain reasonable interest rate risk and refinancing and to reduce / relax the
government debt service, it must be made regular scenario analysis and sensitivity and
should maintained an ongoing dialogue with financial institutions, so depending on the
opportunities offered by developments in international financial markets are used
derivatives (currency swaps and interest rate) and other specific risk management
instruments (futures, options).
In conditions in which such operations prove successful in terms of the
objectives of government debt management has referred to the possibility of early
repayment of existing loans in the portfolio of government debt, endeavouring to
reduce the fragmentation of the stock portfolio and bring costs current levels by issuing
government securities market conditions.
Moreover, to reduce refinancing risk over the medium term will be examined
whether the use of bond exchange transactions (exchange of government securities
with the remainder in the medium to long-term securities with maturities) or buyback
20
Holt, A.G.
transaction type (redemption in advance government securities). Along with
sustainable management practices of debt, it said, with the many crises occurring on
the debt markets, the need for efficient and prudent capital market.
A viable management of public debt depends on the risk that authorities are
willing to accept. This risk can change over time, depending on the size of the debt
portfolio and the vulnerability of economic and financial shocks. In general, the
country is more indebted and more vulnerable to external shocks, the losses are greater
if a financial crisis or the entry in default of debt. In this case is very important to
choose the loan conditions that limit the risks and caps loans, this approach is only
likely to be followed by countries that are financially dependent on bilateral and
multilateral creditors.
REFERENCES:
[1]. Moşteanu, T. - Budget and public treasury, University Publishing House, Bucharest, 2004
[2]. Moşteanu, T. (coord.) - Finance - Budget Summaries theoretical and practical
applications , Economic Publishing House, Bucharest, 2004
[3]. Văcărel, I. - Public finance, Editura Didactic and Pedagogical Publishing House,
Bucharest, 2007
[4]. *** - Government Emergency Ordinance No 64 of June 27, 2007 on public debt
[5]. www.mfinante.ro
[6]. www.imf.org
Annals of the University of Petroşani, Economics, 9(2), 2009, 21-28
21
REVALUATION OF ASSETS - ACCOUNTING AND
FISCAL IMPLICATIONS
GHEORGHE HOLT, ALINA GEORGIANA HOLT
*
ABSTRACT: Starting May 2009, revaluation reverts unknown for taxation, in terms
of tax the profit. This new tax rule shapes again the accounting behaviour. Thus, it is likely that
most firms with revalued assets to choose for transfer from revaluation reserve from account
105 “Revaluation Reserves “into account 1065 “Reserves representing surplus achieved in the
revaluation reserve“ as damping assessed property depreciation, and not to remove it from
book-keeping.
KEY WORDS: revaluation of fixed assets, current accounting, fiscal applications
1. THEORETICAL ISSUES RELATED TO THE REVALUATION OF FIXED
ASSETS
Revaluation issues represent the difference between the actual value or fair value
accounting and the accounting value of items submitted for review, except tangible
assets that have an important share of the patrimony active.
• Further evaluation to initial recognition
After the initially accounting as asset, tangible assets must be accounted to his
cost decreased by accumulated depreciation. IAS 16 standard makes from the
assessment processing the reference (base). Alternative processing (other processing
allowed) is revaluation, in which tangible assets must be charged to the value
reassessed (revalued amount), of its fair value on revaluation, less subsequent
accumulated depreciation and subsequent accumulated losses of value. Revaluations
must be made with sufficient regularity so that the accounting value does not differ
significant from those which were determined using the fair value on the closure of
financial year.
The fair value of land and construction is naturally determined by qualified
experts. This fair value is generally the market value.
*
Prof., Ph.D., „Constantin Brâncuşi” University of Tg.-Jiu, Romania
Assist.Prof., Ph.D. Student, „Constantin Brâncuşi” University of Tg.-Jiu, Romania,
alinaholt@yahoo.com
22
Holt, Ghe.; Holt, A.G.
The fair value of the production facilities is usually determined by their market
value estimated. For strictly specialized tangible assets species which are not subject to
regular transactions, fair value is identified, most times, with replacement cost, less
depreciation.
Frequency of revaluation depends on fluctuations in fair value of tangible assets
were assessed. When the fair value of a revalued asset differs significantly from its
accounting value, it is necessary a new review. Some tangible assets could know
important developments and unsteady of their fair values, reason for requesting an
annual review, clearly such frequent reassessment are not required for minor
developments tangible recording of their fair value, in this case is sufficient/enough
review every three to five years.
An asset can' be revaluated in isolation. Reassessment should apply to all goods
of the same class, in the other hand, on all such assets and use the same. Land,
buildings, machinery, equipment, vessels, aircraft, motor vehicles, office fixed assets
represent different categories of assets which can be revalued independently of one
another.
In principle, all the goods of that class must be reassessed simultaneously in
order to avoid too great a disparity in the assessment of various items in the financial
statements. When the carrying amount of an asset increases, following a revaluation,
the increase has the effect of increase equity in case of revaluation reserves in extent
offset a positive revaluation of that asset a negative review previously charged to
expense positive revaluation should be charged to income. When the
carrying/accounting amount of any asset is reduced, following a revaluation, the
revaluation must be accounted as expense. However, it is a negative revaluation reserve
is directly attributable to the revaluation corresponding to the extent such reduction
does not exceed the size of the revaluation reserve relating to the same asset.
Revaluation reserve included in equity may be transferred directly to other
retained earnings when the revaluation reserve is done the entire revaluation reserve is
undertaken during decommissioning of the asset or transfer. However, some of the
revaluation can be implemented, as the asset is used by the enterprise, in this case, the
size of the revaluation reserves made the difference between depreciation based on
revalued carrying amount of the asset and depreciation based on cost entry of the asset.
Transfer from revaluation reserve to retained earnings does not pass through the income
statement.
In order to account revaluations of tangible assets are using one of two processes:
the process no.1: simultaneous re-evaluation of gross values and accumulated
depreciation; the process no. 2: a reassessment only to net accounting value, determined
by deducting depreciation from the cost of property.
2. EXAMPLES OF FISCAL AND ACCOUNTING MECHANISMS OF
RECOGNITION THE CURRENT PROPERTY/ASSETS REVALUATION
We assume that in December 2004, the company operates a device whose input
value is 360,000 lei and is amortized linearly to 10 years (annual depreciation is thus of
36,000 lei). According to accepted tax and accounting rules, depreciation is calculated from
Revaluation of Assets - Accounting and Fiscal Implications
23
January 2005. Assume that at the end of 2007 (after the entry into force of OMFP no.
L.752/2005), the company decided to apply the fair value model for equipment with due
and that on that date, the fair value amounts to 311,500 lei.
In this example we opt for the procedure to cancel the yearly accumulated
depreciation and adding the difference in net book value before revaluation.
The calculations necessary for accounting revaluation are:
• the recording value (balance account of equipment): 360,000 RON;
• accumulated depreciation for the financial years 2005, 2006 and 2007: 36,000 x 3 =
108,000 Ron;
• net accounting value: 360,000 to 108,000 = 252,000 Ron;
• fair value was set at 311,500 Ron;
• clear difference in revaluation: 311,500 to 252,000 = 59,500 Ron.
The accounting record is easy to achieve:
- Cancellation of existing depreciation:
2813
=
213
108,000
“Depreciation of plant, motor vehicles,
“Technical installations, vehicles,
animals and plantations”
animals and plantations”
- Adding the net difference from revaluation to net accounting value :
213
=
105
59,500
“Technical installations, vehicles,
“Revaluation reserve”
animals and plantations”
After these records, the account balance, that interest us are:
• Account balance 213 “Technical installations, vehicles, animals and plantations”
311,500 Ron (equal to fair value)
• Account balance 2813 “Depreciation of facilities, vehicles, animals and plantations”
0 (it cancelled the review)
• Account balance 105” Revaluation Reserves” 59,500 Ron
After re-evaluation, the depreciation is calculate again for the following year, like
ratio between the amount remaining and the period remained (311,500 - 0) / 7 =
44,500 lei / year in 2008, the deductible depreciation expense of such equipment is
44,500 lei, equal to the expense accounts (we consider the fiscal rules described
above). We simplify the example considering that we record only once the depreciation
in 2008:
6811
=
2813
44,500
“Operating expenditure
“Depreciation of facilities, vehicles,
of depreciation”
animals and plantations”
However, we opt for the disposal of revaluation reserve on depreciation
measure, which means that virtually assigned revaluation reserve on the remaining
seven years of life: 59,500 / 7 = 8500 lei/year:
105
=
1065
8,500
“Revaluation reserves “
“Reserves representing surplus
achieved in the revaluation reserve “
The amount made available in 2008 is not taxable (is not changed, in fiscal
mean, the purpose reserve), which means that the revaluation has the fiscal advantage
24
Holt, Ghe.; Holt, A.G.
of additional expenditure deduction with depreciation exactly equal with 8,500 Ron
(44,500 -36,000 = 8,500 Ron).
We further suppose that the company take the revaluation and that on
31.12.2008, the fair value is 299,520 Ron:
• the value registration (account balance of equipment): 311,500 Ron;
• accumulated depreciation: 44,500 Ron;
• net accounting value: 311,500 – 44,500 = 267,000 Ron;
• fair value: 299.520 Ron;
• clear difference in revaluation: 299,520 – 267,000 = 32,520 Ron.
The account registrations are:
• Remove the existing depreciation:
2813
=
105
44,500
“Depreciation of facilities, vehicles,
“Revaluation reserves”
animals and plantations”
• Adding the net difference in net value accounting review
213
=
105
32,520
“Thermal installations, vehicles,
“Revaluation reserves”
animals and plantations”
Thus, after the revaluation of 31.12.2008, account balances are:
• Account balance 213 “Plant, vehicles, animals and plantations” 299,520 Ron
(again equal to fair value)
• Account balance 2813 “Depreciation of plant, vehicles, animals and
plantations” 0;
• Account balance 105 “Revaluation Reserves” from 59,500 – 8,500 + 32,520 =
83,520 Ron.
Depreciation expense in 2009 is (299,520 - 0) / 6 = 49,920 lei (49,920/12 =
4,160 lei per month), expenditure deductible under normal conditions, while the
difference from revaluation will be made available and it will be 83,520/6 = 13,920
Ron (1,160lei/ month).
However, in 2009, starting from May, revaluation reserve becomes taxable,
which means that we have two periods in 2009 for tax purposes:
• until April including:
- deductible depreciation expense: 4,160 x 4 = 16,640 Ron;
- revaluation difference dismissed: 1,160 x 4 = 4,640 lei allowance;
• from May until December:
- deductible depreciation expense: 4,160 x 8 = 33,280 Ron;
- revaluation difference dismissed: 1,160 x 8 = 9,280 lei, taxable amount.
Thus, in the aftermath of the fiscal code changes, the net deduction is 33,2809,280 = 24,000 lei, exactly how it was if there were no revaluated: 36,000 x (8/12) =
24,000 lei. To facilitate registration, is very useful that in the account 1065 “Reserves
representing surplus achieved in the revaluation reserve “to go on the analytical
accounts, in which is separate the taxable amounts from the untaxed amount of tax so
that when change the reserve destination is known easily how must be taxed and which
part must not to be taxed.
Revaluation of Assets - Accounting and Fiscal Implications
25
We continue the example, in order to highlight other aspects of accounting and
fiscal aspects of revaluation, such us what would happen if the fair value would
become smaller than the net accounting value before revaluation. For this, we suppose
that the fair value at 31.12.2009 reaches 222,000 lei, so that:
• recording value (equipment account balance): 299,520 Ron;
• accumulated depreciation/amortization: 49,920 Ron;
• net accounting value: 299,520 - 49,920 = 249,600 Ron;
• fair value: 222,000 Ron;
• net difference in revaluation: 222,000 – 249,600 = -27,600 Ron
Revaluation difference is negative and is in fact an impairment. For accounting
depreciation balance we need to check what balance we have to 105 account
“Revaluation reserves” 83,520 -13,920 = 69,600 Ron. This balance is sufficient to
cover depreciation found at 31.12.2009:
- Cancelling the existing depreciation:
2813
=
213
49,920
“Depreciation of facilities, vehicles, “Technical installations, vehicles,
animals and plantations”
animals and plantations”
- Decreased net revaluation difference from net accounting value:
105
“Revaluation reserves”
=
213
“Technical installations, vehicles,
animals and plantations”
27,600
Account balances reach to:
• Account balance 213 “Plant, vehicles, animals and plantations” 222,000 lei;
• Account balance in 2813 “Depreciation of facilities, vehicles, animals and
plantations” 0;
• Account balance 105 “Revaluation reserves” from 83,520 – 13,920 – 27,600 = 42,000
Ron.
For 2010, the depreciation expense amounted to the level of (222,000 - 0) / 5 =
44,400 lei - deductible expense, while the stocks last taxable amount reached 42,000 /
5 = 8,400 lei. Once again is verified that the net deduction is at the depreciation level
that would be calculated if there was no revaluation: 44,400 – 8,400 = 36,000 lei.
Assume at 31.12.2010 a fair value in amount of 127.000 Ron :
• recording value (account balance of equipment): 222,000 Ron;
• accumulated depreciation: 44,400 Ron;
• net accounting value: 222,000 – 44,400 = 177,600 Ron;
• fair value: 127,000 Ron;
• clear difference in revaluation: 127,000 – 176,600 = -50,600 Ron;
• differences from revaluation account balance: 42,000 – 8,400 = 33,600 Ron.
Impairment is greater than the revaluation of difference remained in balance, which
means that if exhaustion revaluation difference will remain a part of depreciation that
will be registered on expenses:
• Cancellation of the existing depreciation:
2813
=
213
44,400
“Depreciation of facilities, vehicles, “Technical installations, vehicles,
26
Holt, Ghe.; Holt, A.G.
animals and plantations”
animals and plantations”
- Decreased net revaluation difference from net accounting value:
105
=
213
33,600
“Revaluation reserves”
“Technical installations, vehicles,
animals and plantations”
• Switching on expense the part of depreciation not covered by existing revaluation
difference: 50.600 – 33.600 = 17.000 lei:
6813
=
2913
17,000
“Operating expenses for depreciation
“Adjustments for depreciation
adjustment assets”
of facilities, vehicles,
animals and plantations”
Balance accounts, after the records from 31.12.2010, are as follows:
• Account balance 213 “Plant, vehicles, animals and plantations”: 222,000 –
44.400 -33.600 = 144.000 Ron;
• Account balance 2813 “Depreciation of installations, facilities transport,
animals and plantations“: 0,
• Account balance 105 “Revaluation reserves” 0;
• Account balance 2913 “Adjustments for depreciation facilities, vehicles,
animals and plantations”: 17,000 Ron.
As the tax point of view, depreciation expense adjustment for property is not
deductible when is calculate the income tax. This recognition of the depreciation of
property tax is therefore interesting. We take again a new rule established in the fiscal
code: if following the revaluation net new accounts that fall below the value would be
reached only through depreciation of cost of acquisition or production, then the fiscal
amount remaining outstanding shall be recalculated depreciation of fixed assets to the
level of value based on initial input.
Translation of this rule is: in the event of a depreciation of fixed assets,
depreciation expense after tax is equal to the depreciation would be calculated if there
is any impairment. This is exactly the depreciation tax depreciation calculated on the
basis of input (in our case, the acquisition cost of 360,000 lei), in these conditions, the
calculations for depreciation in 2011 may be presented as follows:
• tax depreciation: 360,000/10 = 36,000 lei,or remaining fiscal amount reported
in the remainder period (360,000-6 x 36,000)74 = 36,000 lei;
• calculate depreciation expense reporting accounting book value remaining to
the remainder period (DR):
sold 213-sold 2813-sold 2913 144.000-0-17.000 127.000
= 31.750
=
=
DR
4
4
Once you can see that if by the end depreciation would not record any review
(positive or negative), then the accumulated depreciation account balance in 2813
“Depreciation of facilities, vehicles, animals and plantations “ would reach 4 x 31,750
= 127,000 lei, the account balance amount less than 213 “Plant, vehicles, animals and
plantations “ (144,000 lei). However, Romania does not support the retention of
residual values for depreciable property, which means that at the end of the
depreciation, accumulated depreciation (account balance in 2813 “Depreciation of
facilities, vehicles, animals and plantations”) must equals record value (account
Revaluation of Assets - Accounting and Fiscal Implications
27
balance 213 “Plant, vehicles, animals and plantations”). To ensure that equality is
necessary, since 2011, the credit in 2813 “Depreciation of facilities, vehicles, animals
and plantations” to record 144,000/4 = 36,000 lei, and not 31,750 lei, as we saw that
accounting expense amortization is.
The accounting article for depreciation record will appear as so:
%
=
2813
36,000
6811
“Depreciation of facilities, vehicles,
31,750
“Operating expenditure
animals and plantations”
of depreciation”
2913
4,250
“Adjustments for depreciation
of facilities, vehicles, animals
and plantations”
The amount of 4,250 lei that we fell for the impairment adjustment resulting
from the distribution just on four years of adjustment recognized in late 2010: 17,000/4
= 4,250 lei. Summarize the situation in year 2011:
• accounting depreciation expense is 31,750 lei;
• tax depreciation expense is 36,000 lei;
• the amount recorded as depreciation is credited to the specific account of
36,000 lei.
3. CURRENT ACCOUNTING AND FISCAL APPLICATIONS IN ASSETS
REVALUATION
Revaluation of assets is an option with significant accounting and fiscal
implications. Revaluations that were required or which companies may wished to be
recognized in 2003 were fiscal recognized and thanks to the obvious connection of
Romanian accounting with the fiscal system, in present Romanian accounting rules are
no longer aligned, at the level of principle, after the fiscal ones. This raises the
possibility of depreciation accounts differ from tax records of it. When we say that
differences arise, we refer to all three elements necessary to establish depreciation: the
amortized amount, period of depreciation, amortization schedule. Moreover, current
fiscal code is clear in this respect: the accounting expense depreciation is entirely nondeductible, following that fiscal deduction will be recognized on fiscal deductions. In
this general framework of depreciation of assets, the revaluation is also located.
However, we allow ourselves to suppose (without empirical confirmation) that to many
Romanian enterprises (especially SMEs) accounting and fiscal evidence of
depreciation are often identical.
This is due to the need for simplification. Some accountants believes - rightly,
we tell- that there would always justify keeping different records regarding property, so
they are retained in the accounts those elements valid for fiscal purposes in respect of
revaluation, fiscal implications arise not only from income tax but also, for example,
the tax on buildings: we know that local authorities require a much higher tax rate for
those buildings which have not been revalued in the last three years, so that option
revaluation of buildings is particularly timely. Revaluation accounts, as it is previewed
28
Holt, Ghe.; Holt, A.G.
in OMFP no.752/2005 it, takes many of general rules available in IAS / IFRS. This
takeover is complete, which may lead to less bizarre situations such as the revaluation
of fully depreciated fixed assets.
Another consequence of the revaluation is that if fair value falls below the net
value that would be reached without revaluation, then the calculation of depreciation
becomes more difficult, in that we have at least two rows of sums: amortization
expense, calculated as relation between remaining value and the left duration on the
one hand, and amortization of past credit amending account, set up so that at the end of
depreciation, account balance restraining is equal to account balance of accumulated
depreciation.
In terms of tax, in 2009 there are two periods:
• up to April 2009 inclusive, during which the revaluation is recognized for tax
purposes, provided they have been made under the law and without obligation to
tax revaluation reserve until the next change of it’s destination;
• in May 2009, depreciation expense from revaluation results is further fiscal
recognized, but the revaluation reserve becomes assimilated to taxable income as
recognition of that respective depreciation/amortization.
REFERENCES:
[1]. Dumitrean, E. - Financial Accounting, Sedcom Libris Publishing House, Iasi, 2008
[2]. Feleaga, N.; Feleaga, L. - Financial Accounting - an European and international
approach, vol.l, Publishing House, Bucharest, 2007
[3]. Feleaga, N.; Malciu, L. - Recognition, evaluation and assessment in international
accounting, CECCAR Publisher, Bucharest, 2004
[4]. Gîrbină, M.M. - Volume III, Case studies and multiple choice question on the application
of IAS (revised) - IFRS, vol.l-2, CECCAR Publisher, Bucharest, 2005
[5]. Paraschivescu, M.D.; Păvăloaia, W.; Roger, F.; Olaru, G.D. - Financial Accounting applications and case studies, Publisher Tehnopress, Iasi, 2007
[6]. Ristea, M.; Dumitru, C.G.; Curpăn, A.; Manea, L.; Nikita, M.; Sahlian, D. - Policies
and accounting treatments of assets, Tribune Publishing House, Bucharest, 2007
[7]. *** - Normes IAS / IFRS - Que faut-il faire, prendre Comments'y, 2 ™ s Edition, Editions
d'Organization, Paris, 2005
Annals of the University of Petroşani, Economics, 9(2), 2009, 29-32
29
THE INFLUENCE OF CERTAIN FACTORS UPON
BUSINESS COMMUNICATION
LAVINIA HULEA *
ABSTRACT: Communication is a complex process of transmitting messages,
according to which the emitter encodes the information transmitted through a specific channel
to a receiver who ultimately is going to decode it. At an ordinary level, communication as a
message exchange between individuals is understood as a verbal or written transmission of
information. The success of any communication is dependent on several factors that exert their
influence both upon the emitter and the receiver. Business communication obeys the general
rules of communication being influenced by certain factors.
KEY WORDS: business communication, language, environment, motivation,
objectives, communication channels
Language, environment, beliefs or convictions, individual competence, the
specific accumulations of the marketing environments, motivation that determines
message’s enunciation, the objective of the message, the choice of communication
channels, the malfunctioning of communication channels are all factors that influence
communication and implicitly business communication.
Linguists and psychologists have defined language as a system of signs and
symbols. In order to communicate, individuals can employ certain codes. The choice of
a specific code is nevertheless determined by the language of communication. Certain
theories set forth the fact that experience and knowledge are dependent on language
while other theories start from the premises that language is a reflection of social and
economical relations.
According to linguistic relativism, language determines the interpretation of
primary reality by the individual. Consequently, the individual perceives and decodes
primary reality due to the linguistic code he/she handles. Individuals live different
experiences depending on the linguistic customs of the community they belong to
which determine their interpretative options. During the process of communication the
code generates a means of classifying individual experience.
*
Assist.Prof., University of Petroşani, Romania, laviniahulea@yahoo.com
30
Hulea, L.
An object belonging to the external environment is identified according to the
previous experience and to language. This fact leads to the conclusion that
environment is mainly organized and mentally divided according to resembling
features and less according to different characteristics.
The idea largely explains language’s restrictive capacity as well as the
impossibility of the complete use of any language. Further, the relativity of reporting
language to surrounding reality can explain the conventional character of any
communication, including business communication.
Environment includes all linguistic, social, economic, cultural, and ethnical
factors that have an influence upon the development and the evolution of an individual.
The part played by the environment is quite complex, yet, most often, underestimated.
Environment factors play different parts and might have a dominant or less important
influence determining the orientation of individual behavior towards a certain
objective.
Beliefs or convictions exhibit an important resistance to change. Environment
factors determine an important resistance to change. Environment factors determine a
process of permanent learning that implies the modification of human behavior
according to experience. Subsequently, a formal system is acquired generally having as
a basis religious beliefs; such a system determines a certain behavior as well as a series
of social barriers. Often the individual can be in contradiction with his/her environment
or with himself/herself due to the fact that social barriers prevent the free expression of
an individual.
It was Noam Chomsky that employed for the first time the term “competence”
in order to designate the capacity of a speaker to produce and understand numberless
enunciations (verbal messages). In order to communicate it is necessary to easily
handle language or languages - and business communication does not depart from such
a rule - with a view, under certain circumstances, of getting the interlocutor’s
maximum reaction.
This is what one usually calls communication competence. It includes a series
of rules regarding the identification and use of the most adequate words within a
certain context, and the capacity of transmitting a message that would not determine
the adverse reactions of the receiver. Communication competence permanently
changes according to individual experience. In other words, an individual is going to
display a mixture of communication competences as a result of his/her contact with
various communities.
The capacity of an individual to communicate is largely the result of external
environment. The two key elements of the process of communication, namely the
emitter and the receiver, are constantly influenced by a series of well-determined
environments: educational, economic, demographic, political, legislative, cultural,
religious, institutional, ecological, technological, and social. The tremendous
development of the technological environment during the last decades has determined
new communication ways that facilitate the exchange of ideas among individuals.
Motivation appears before a message is sent under the influence of external
stimuli. It is exactly the reason of communication. At a human level, the complexity of
cognitive structures determines, as a result of learning processes, the existence of
The Influence of Certain Factors upon Business Communication
31
certain abstract specific motivations which develop beside the psychological ones.
Among the numberless classifications and theories of motivation, the one belonging to
Maslow is widely known. According to Maslow human needs can be distributed on
five levels, as follows: the first level includes psychological needs, the second one is
the level of security needs, the third level includes recognition needs, the fourth one is
the level of esteem needs, and the fifth level includes self-accomplishment.
The objective of a message is the consequence of the motivation that
determines the process of communication. When initiating a message, the emitter
strives to get a certain effect over the receiver. It is exactly this effect that represents
the objective of enunciation. A message exerts a significant influence upon the ideas,
opinions, and behavior of the receiver, according to the emitter’s communication
objective. The emitter has in view a final goal: the enunciation of the message;
nevertheless, side effects - intended or not by the emitter - can co-exist with the final,
unique objective.
A message should be synchronic with the communication channel that enables
its transmission in order to get a maximum impact over the receiver. People are
generally accustomed to recognize five senses. Yet, such an approach seems to be far
from reality as human body is nothing but a sum, of receivers or “detection devices”.
Sensitivity grows with the increased number of sensorial centers.
Accordingly, the choice of the communication channel - tangible or not should be done with a view of getting the receiver’s maximum sensitivity. The choice
of the communication channel should also observe the receiver’s needs, aspirations,
desires, and expectations while, at the level of the impact of the message over the
receiver, it increases when honesty, conciseness, clarity, and a positive tone are
employed.
Interferences with the communication channel, generally spoken about as
“noises”, can appear in the very moment of the encoding of the message and reach the
receiver who decodes the message. Interferences may be audible, tactile or odorous;
they occur in whatever system of communication and a consequence of this fact is that
messages are unique; even under the circumstances of transmitting the same items of
information there are no identical messages. Interferences are perceived as irrelevant
information. The success of a process of communication appears when the receiver
gives the message an almost identical signification as the one of the emitter’s,
neglecting interferences.
The process of business communication is governed by a series of rules that
are representative for communication in general. Business communication implies two
“protagonists” - the emitter and the receiver – who admit their own right to
communicate as well as the other’s right to do so. Nevertheless, both the emitter and
the receiver are influenced by the factors exhibited above.
32
Hulea, L.
REFERENCES:
[1]. Baddeley, A. - Memoria umană, Teora Publishing House, Bucharest, 1999
[2]. Coates, Ch. - Managerul total, Teora Publishing House, Bucharest, 1999
[3]. Ceauşu, I. - Strategii manageriale - Management performant, the Management Academic
Publishing House, Bucharest, 2005
[4]. Gorg, B. - Managerii viitorului. Viitorul managerilor, the Publishing House of the
European Institute for Cultural and Scientific Cooperation, Iasi, 1997
[5]. Hulea, L. - Business Communication Strategies, Annals of the University of Petrosani,
Economics, vol.5, Universitas Publishing House, Petrosani, 2005
[6]. Niţă M.A. - Tehnici de comunicare şi negociere, course of lectures, SNSPA, Bucharest,
1995-1996
[7]. Niţă, M.A. - Comunicarea în afaceri, course of lectures, “David Ogilvy” Faculty of
Communication and Public Relations, Bucharest, 1999-2000
Annals of the University of Petroşani, Economics, 9(2), 2009, 33-38
33
PROJECT RISK EVALUATION METHODS - SENSITIVITY
ANALYSIS
MIRELA ILOIU, DIANA CSIMINGA *
ABSTRACT: The viability of investment projects is based on IRR and NPV criteria.
In the economic analysis of the projects there are some aspects of project feasibility which may
require sensitivity and risk analysis. Sensitivity analysis estimates the effect on achieving
project objectives if certain assumptions materialize or not. This paper presents the purpose of
sensitivity analysis and the steps that must be followed in order to perform a sensitivity analysis
as well as a numeric example.
KEY WORDS: investment project, NPV, IRR, sensitivity analysis, base-case, key
variables, sensitivity indicator, switching value
1. INTRODUCTION
The financial and economic benefit-cost analysis of investment projects is
based on forecast of quantifiable variables. The values of these variables are estimated
based on the most probable forecasts, which cover a long period of time. The values of
these variables for the most probable outcome scenario are influenced by a great
number of factors, and the actual values may differ considerably from the forecasted
values, depending on future developments. It is therefore useful to consider the effects
of likely changes in the key variables on the viability (EIRR - economic internal rate of
return and FIRR - financial rate of return). We can do this performing sensitivity
analysis.
The viability of projects is evaluated based on a comparison of its internal rate
of return (FIRR and EIRR) to the financial or economic opportunity cost of capital.
Alternatively, the project is considered to be viable when the Net Present Value (NPV)
is positive, using the selected EOCC or FOCC as discount rate. Sensitivity analysis
focuses analyzing the effects of changes in key variables on the project’s IRR or NPV,
the two most widely used measures of project worth.
*
Lecturer, Ph.D., University of Petroşani, Romania, mirelailoiu@yahoo.com
Lecturer, Ph.D., University of Petroşani, Romania, diana_csiminga@yahoo.com
34
Iloiu, M.; Csiminga, D.
In the economic analysis of the projects, there are also other aspects of project
feasibility which may require sensitivity analysis. These include:
1. demand analysis: to assess the sensitivity of the demand forecast to changes in
population growth, per capita consumption, prices, etc.
2. least cost analysis: to verify whether the selected least-cost alternative remains the
preferred option under adverse conditions
3. sustainability analysis: to assess possible threats to the sustainability of the project
4. distributional analysis: to analyse whether the project will actually benefit the poor.
Sensitivity analysis is particularly concerned with factors and combinations of
factors that may lead to unfavourable consequences. These factors would normally
have been identified in the project (logical) framework as „project risks” or “project
assumptions”. Sensitivity analysis tries to estimate the effect of achieving project
objectives if certain assumptions do not, or only partly, occur.
2. THE PURPOSE OF SENSITIVITY ANALYSIS
Sensitivity analysis is a technique for investigating the impact of changes in
project variables on the base-case (most probable outcome scenario). Typically, only
adverse changes are considered in sensitivity analysis. The purpose of sensitivity
analysis is:
1. to help identify the key variables which influence the project cost and benefit
streams
2. to investigate the consequences of likely adverse changes in these key variables
3. to assess whether project decisions are likely to be affected by such changes
4. to identify actions that could mitigate possible adverse effects on the project.
3. PERFORMANCE OF SENSITIVITY ANALYSIS
Sensitivity analysis needs to be realized in a systematic manner. To meet the
above purposes, the following steps are recommended to be followed:
1. identify key variables to which the project decision may be sensitive
2. calculate the effect of likely changes in these variables on the base-case IRR or
NPV, and calculate a sensitivity indicator and/or switching value
3. consider possible combinations of variables that may change simultaneously in an
adverse direction
4. analyze the direction and scale of likely changes for the key variables identified,
involving identification of the sources of change.
Step 1: Identifying the key variables. The base case project economic
analysis incorporates many variables: quantities and their inter-relationships, prices or
economic values and the timing of project effects. Some of these variables will be
predictable or relatively small in value in the project context. It is not necessary to
investigate the sensitivity of the measures of project worth to such variables. Other
variables may be less predictable or larger in value. Variables related to sectorial policy
and capacity building may also be important. As they are more difficult to quantify,
they are not further considered hereafter but should be assessed in a qualitative manner.
Project Risk Evaluation Methods - Sensitivity Analysis
35
As a result of previous experience (from post-evaluation studies) and analysis of the
project context, a preliminary set of likely key variables can be chosen on the
following basis:
1. variables which are numerically large, ex. investment cost
2. essential variables, which may be small, but the value of which is very important
for the design of the project
3. variables occurring early in the project life, ex. investment costs and initial fixed
operating costs, which will be relatively unaffected by discounting
4. variables affected by economic changes, such as, changes in real income.
Table 1. Base Case of an Investment Project
Economic
statement
Benefits
Costs:
-Investment
-O&M
Net cash
flow
PV
@12%
2,104
1,978
1,687
291
126
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0
1,889
1,889
0
-1,889
283
61
0
61
222
339
61
0
61
278
396
61
0
61
335
453
61
0
61
391
509
61
0
61
448
566
61
0
61
505
566
61
0
61
505
566
61
0
61
505
566
61
0
61
505
Step 2 and 3: Calculation of effects of changing variables. The values of the
basic indicators of project viability (EIRR and ENPV) should be recalculated for
different values of key variables. This is preferably done by calculating sensitivity
indicators and switching values. The meaning of these concepts is presented in table 2
as well as a sample calculation.
Table 2. Use of Sensitivity Indicators and Switching Values
Definition
Expression
Sensitivity Indicators
1.Towards the Net Present Value
Compares percentage change in NPV with
percentage change in a variable or
combination of variables.
Switching Value
1. Towards the Net Present Value The
percentage change in a variable or
combination of variables to reduce the NPV
to zero.
2. Towards the Internal Rate of Return.
Compares percentage change in IRR
above the cut-off rate with percentage
change in a variable or combination of
variables.
1.Towards the Net Present Value
(NPVb – NPV1) / NPVb
SI = --------------------------------(Xb – X1) / Xb
where:
Xb – value of variable in the base case
X1 – value of the variable in the sensitivity
test
NPVb – value of NPV in the base case
NPV1 – value of the variable in the
sensitivity test
2. Towards the Internal Rate of Return.
The percentage change in a variable or
combination of variables to reduce the IRR to
the cut-off rate (=discount rate).
1.Towards the Net Present Value
(100 x NPVb)
(Xb – X1)
SV = ---------------------- x ------------(NPVb – NPV1)
Xb
where:
Xb – value of variable in the base case
X1 – value of the variable in the sensitivity
test
NPVb – value of NPV in the base case
NPV1 – value of the variable in the sensitivity
test
36
Calculation
example
Interpretation
Characteristic
Iloiu, M.; Csiminga, D.
2.Towards the Internal Rate of Return
2.Towards the Internal Rate of Return
(IRRb – IRR1) / (IRRb – d)
SI = ---------------------------------(Xb – X1) / Xb
(100 x NPVb)
(Xb – X1)
SV = ---------------------- x ------------Xb
(NPVb – NPV1)
where:
Xb – value of the variable in the base case
X1 – value of the variable in the sensitivity
test
IRRb – value of IRR in the base case
IRR1 – value of the variable in the
sensitivity test
d – discount rate
1.Towards the Net Present Value
Base Case:
Price = Pb = 300
NPVb = 20,912
Scenario 1:
P1 = 270 (10% change)
NPV1 = 6,895
where:
Xb – value of variable in the base case
X1 – value of the variable in the sensitivity
test
IRRb – value of IRR in the base case
IRR1 – value of the variable in the sensitivity
test
d – discount rate
1.Towards the Net Present Value
Base Case:
Price = Pb = 300
NPVb = 20,912
Scenario 1:
P1 = 270 (10% change)
NPV1 = 6,895
(20,912 – 6,895) / 20,912
SI = --------------------------------- = 6.70
(300 – 270) / 300
(100 x 20,912) (300 – 270)
SV = ------------------- x -------------- = 14.9%
(20,912 – 6,895)
300
2.Towards the Internal Rate of Return
Base Case:
Price = Pb = 300
IRRb = 15,87%
Scenario 1:
P1 = 270 (10% change)
IRR1 = 13,31%
d = 12%
2.Towards the Internal Rate of Return
Base Case:
Price = Pb = 300
IRRb = 15,87%
Scenario 1:
P1 = 270 (10% change)
IRR1 = 13,31%
d = 12%
(0,1587 – 0,1331) / (0,1587 – 0,12)
SI = -------------------------------------------(300 – 270) / 300
(100 x (0,1587 – 0,12) (300 – 270)
SV = ----------------------------- x --------------(0,1587 – 0,1331)
300
= 6,61
a)
percentage change in NPV
respectively
b)
percentage change in IRR above
the cut-off rate (12%) is larger than
percentage change in variable: price is a
key variable for the project
Indicates to which variables the project
result is or is not sensitive. Suggests
further examination of change in variable.
= 15,1%
A change of approximately 15% in the price
variable is necessary before the NPV
becomes zero or before the IRR equals the
cut-off rate.
Measures extent of change for a variable
which will leave the project decision
unchanged.
The switching value is, by definition, the reciprocal of the sensitivity indicator.
Sensitivity indicators and switching values calculated towards the IRR yield slightly
different results if compared to Sis and SVs calculated towards the NPV. This is
Project Risk Evaluation Methods - Sensitivity Analysis
37
because IRR approach discounts all future net benefits at the IRR value and the NPV
approach at the discount rate d.
In the base case, the ENPV is 126 and the EIRR is 13.7 percent. The sensitivity
of the base case ENPV has been analyzed for (adverse) changes in several key
variables, as follows:
1. an increase in investment cost by 20 percent
2. a decrease in economic benefits by 20 percent
3. an increase in costs of operation and maintenance by 20 percent
4. a delay in the period of construction, causing a delay in revenue generation by one
year
Proposed changes in key variables should be well explained. The sensitivity
analysis should be based on the most likely changes. The effects of the above changes
are summarized in table 3.
Table 3. Sensitivity Analysis – Numerical Example
Item
Change
NPV
Base Case
126
Investment
+20%
-211
Benefits
-20%
-294
O&M costs
+20%
68
Construction
one year
-99
delays
SI = sensitivity indicator, SV = switching value
IRR %
13.7
9.6
7.8
12.9
10.8
SI (NPV)
SV(NPV)
13.3
16.6
2.3
NPV 178%
lower
7.5%
6%
43.4%
Combinations of variables can also be considered. For example, the effect on
the ENPV or EIRR of a simultaneous decline in economic benefits and an increase in
investment cost can be computed.
Step 4: Analysis of effects of changes in key variables. In the case of an
increase in investment costs of 20 percent, the sensitivity indicator is 13.34. This
means that the change of 20 percent in the variable (investment cost) results in a
change of 266 percent in the ENPV. It follows that the higher the SI, the more sensitive
the NPV is th change in the concerned variable.
In the same example, the switching value is 7.5 percent which is the reciprocal
value of the SI x 100. This means that a change (increase) of 7.5 percent in the key
variable (investment cost) will cause the ENPV to become zero. The lower the SV, the
more sensitive the NPV is to the change in the variable concerned and the higher the
risk with the project.
At this point the results of the sensitivity analysis should be reviewed. It should
be asked: 1. Which are the variables with high sensitivity indicators; 2. How likely are
the (adverse) changes (as indicated by the switching value) in the values of the
variables that would alter the project decision?
38
Iloiu, M.; Csiminga, D.
4. CONCLUSIONS
The paper presents two concepts: sensitivity indicator and switching value,
used to perform a sensitivity analysis as well as the meaning of them. Sensitivity
indicators and switching values are calculated for the NPV and IRR, as we can see in
the numerical example, so we can analyze the effects of changes in key variable and
minimize the project risk.
REFERENCES:
[1]. Bârsan, I. - Management investiţional - fezabilitatea proiectelor de investi ii, Editura
Universităţii „Lucian Blaga”, Sibiu, 2003
[2]. Ciutac (Cismaşu), E. - Analiza de sensitivitate. Concept şi aplicaţie în diagnosticul
strategic al întreprinderii, Teză de doctorat, ASE Bucureşti
[3]. Masse, P. - Le choix des investissements, Editura Dunod, Paris, 1964
[4]. Raţiu-Suciu, C. - Modelarea şi simularea proceselor economice, Editura Didactică şi
Pedagogică, Bucureşti, 1995
[5]. Stoica, M.; Ioniţă, I.; Botezatu, M. - Modelarea şi simularea proceselor economice,
Editura Economica, Bucureşti, 1997
[6]. Stoina, C.N. - Risc şi incertitudine în investiţii, Editura Teora, Bucureşti, 2008
Annals of the University of Petroşani, Economics, 9(2), 2009, 39-42
39
INNOVATION - THE POSITIVE EFFECT OF THE CRISIS
MIHAELA IONECI *
ABSTRACT: The current crisis has reopened the discussions about the state’s
intervention in the economy and about the possibility of replacing the capitalist system, because
the role played by the state is no longer consistent with the characteristics of this system. The
state’s intervention in the economy could be directed towards other aspects, regardless of the
accepted economic system. A state that truly favours innovation represents the desired result.
KEY WORDS: crisis, state, capitalism, change, innovation
The current crisis which occurred in the U.S., considered as an example of
capitalism, has also reached in a relatively short period of time and the economies in
the most developed capitalist countries because of the interdependencies between them
and the U.S. economy.
The crisis was the moment in which voices were heard portending the end of
the capitalist system. Giving up this system would imply the existence of another one
which, at least in theory would seem better. The superiority of capitalism over
socialism has already been demonstrated, thus a substitution between them would not
make sense.
Paul Samuelson said: “The mechanism of the market economy has emerged
victorious from the fight with the mechanism of command economy, based on the
bureaucratic leadership of the centre. But the communist societies were not defeated by
the pure capitalism, based on a liberal conception and on the absence of the state from
the economy, but by the mixed economy: the market economy with the changes it has
undergone as a consequence of the application of the monetary and fiscal policies
designed to control the crisis and the inflationary phenomena” [4].
The recent events have led to a new approach to the role of the state. Currently,
the way in which the state intervenes in the economy is much wider than the
interventions to reduce the imbalances generated by the free market.
However, during the current period “the state will count less as an economic
agent, but it will enhance its functions regarding the prudential regulation of markets
*
Lecturer, Ph.D., “Constantin Brâncoveanu” University of Piteşti, Romania,
ioneci_mihaela@yahoo.com
40
Ioneci, M.
and the protection of the free competition. The state will become a free state.
Reconsidering the state’s role in the economy does not mean a weakening of power,
but an increase of its efficiency and authority” [5].
Before this crisis, in the specialized literature there were different
classifications of the types of states according to their involvement in the economy.
One of these classifications is presented in the following table.
Table 1. Types of state in terms of its involvement in the economy
Type of stat
Protector
Productive
Negotiator or corporate
Bureaucratic or exploiter
Predominant feature
Creates and protects the legal framework and the market
institutions
Counteracts the shortcomings of the market mechanisms
Mediates the concessions within the economic policies
Engages directly in the management of the economy, gaining
autonomy by achieving certain own economic targets in
favour of bureaucracy
Source: Ciucur, D.; Popescu, C.; Popescu, I.; Popescu Fundulea, A.M. - „Fundamente ale planificării
strategice”, Editura Economică, Bucureşti, 2003, p. 12
The multitude of views on the role of the state does not change with anything
the importance it holds, in particular in the economic field. The State performs the
following functions [1]:
• The allocative function
• The distributive function
• The regulative function
• The stabilizing function
We can thus say that the state has an important role in the economic and social
life, its interventions, as well as its public goods that it provides for the collective
consumption are important in the economic development of any country.
The functions performed by the state, as well as other interventions made in the
economy should be designed in such a way as to lead to development, to stimulate
progress in all areas.
According to the American economist Paul Samuelson the four wheels of the
locomotive of progress are:
• Human resources (job offer, education, discipline, motivation);
• Natural resources (land, minerals, fuels, quality of the natural
environment);
• Formation of capital (machines, factories, roads);
• Technology (science, engineering, management, entrepreneurship).
Although not diminishing the importance of other elements necessary to
progress, nonetheless Samuelson pays more attention to technological innovation. The
discovery of a new way to produce when everything is changing gives an opportunity
in the economic environment. Edmund Phelps, Nobel Prize laureate, completes
Innovation - The Positive Effect of the Crisis
41
Samuleson’s idea by stating: “The worst thing is to stop innovation in a period of deep
recession.”
Usually, in periods of crisis, changes occur in all areas, but by exploiting them
one may reach advantageous developments. Trying to overcome the crisis leads to
changes in the technologies used so far, to trying to increase productivity with a
smaller amount of labour force.
To better illustrate the relationship between diversity, change and technology I
propose the following figure.
Diversity
Change
New
technology
Explosion of
information
Figure 1. The virtuous circle: diversity - change - technology
The State’s intervention in the economy should aim at favouring the creation of
this new technology and not only to infuse huge amounts of money in order to avoid
bankruptcies (the most convincing example being that of the U.S.A.). This intervention
of the U.S. in order to avoid bankruptcies excludes free market, competition, some of
the characteristics of capitalism. Giving up capitalism is not the best idea, even if it is
not a perfect model, but a perfectible one, with certain limitations: inflation and
unemployment, but which are not specific only to this model; increasing the number of
the poor; social equity appears only as desideratum, profit being the key word; the rich
have power and thus can decide.
Thus, together with the other existing types of state, I consider opportune the
existence of the innovative state, which supports through its interventions the virtuous
circle: diversity - change - technology.
42
Ioneci, M.
REFERENCES:
[1]. Basno, C. - Introducere în teoria finanţelor publice, Editura Didactică şi Pedagogică,
Bucureşti, 1997
[2]. Colectiv ASE - Economie, Ediţia a şasea, Editura Economică, Bucureşti, 2003
[3]. Ciucur, D.; Popescu, C.; Popescu, I.; Popescu Fundulea, A.M. - Fundamente ale
planificării strategice, Editura Economică, Bucureşti, 2003
[4]. Samuelson, P.; Nordhaus, W. - Economie politică, Editura Teora, Bucureşti, 2000
[5]. Vosganian, V. - Reforma pieţelor financiare din România, Editura Polirom, Iaşi, 1999
Annals of the University of Petroşani, Economics, 9(2), 2009, 43-50
43
RISK MANAGEMENT IN ELECTRONIC DATA
TRANSMISSION
ALIN ISAC, MIHAELA BELU, IMOLA DRIGĂ *
ABSTRACT: Information society development is possible using advanced computer
infrastructure but also software such systems, particularly the Internet. The content of the work
we have addressed some key elements for implementation of risk management in electronic data
transmission operations of legal persons and / or individuals using the Internet, from the few
elements that disrupt the activities of information such as computer viruses or attacks. An
important part presents the necessity and effects of operations on the Internet standardization,
the use of digital certificates and electronic signatures by default.
KEY WORDS: risk management, electronic data transmission, computer viruses,
electronic signature, digital certificate
1. RISK CONCEPT
In a competitive economy, any legal entity subscribes to the idea that risk and
uncertainty are always present in all economic activities. The difference between the
two concepts is important mainly in the process of decision making, because the set of
economic factors and phenomena that affect the results of the system functioning can
have different degrees of uncertainty or risk.
Uncertainty implies an ambiguous anticipation of elements so that a forecast of
what might happen cannot be made. Thus, in case of uncertainty, ulterior evolutions of
processes and probabilities are unknown, unlike in the case of risky situations which
derive from uncertainty and which can anticipate events that might happen without
providing an exact forecast of possible results.
Studying the economic literature regarding the risk reveals the lack of a unique
opinion concerning the definition of the risk in favour of several senses of this notion.
The term of risk (periculum, risk, riesiko, rischio) can be found in any language and it
*
Lecturer, Ph.D. Student, University of Petroşani, Romania, isacalin@gmail.com
Assist.Prof., Ph.D., Academy of Economic Studies, Bucharest, Romania
Lecturer, Ph.D., University of Petroşani, Romania, imola.driga@gmail.com
44
Isac, A.; Belu, M.; Drigă, I.
is defined by the Romanian Explanatory Dictionary as “a possibility to find oneself in a
dangerous situation, having to face a difficulty or to suffer a loss.”
Thus, the first independent approach regarding risk can be found in the classic
theory of economists like Rastrighin and Raisberg; in their opinion the risk is limited to
a mathematical expectation of the losses which can occur when choosing one of the
possible variants, known as a “possible loss”. The neoclassical theory of the risk
promoted by economists like Marshal and Pigon in the 30s shows that the purpose of
the managerial activity of a company is “the amount of expected profit and the variable
degree of the possible risk”.
In specialized literature there are a great number of definitions for the term risk
in which the authors try to find new equivalents in the investment activity. In the
Management Dictionary published in Paris in 2001 it is mentioned that the risk
comprises four essential ideas such as: the idea of menace or danger, the idea of cost,
the idea of possible degree of the situation and the idea of intended presentation of a
danger determined in order to get an advantage. In 1983, in the definition given for the
country risk, the Organization for Economic Co-operation and Development asserts
that the risk reflects the possibility that an event forecasted with a certain probability
can materialize and influence negatively the economic processes of investments.
The complexity of the risk category has challenged a series of well known
Romanian specialists to define this term. Starting from a direct connection between
investment and risk, academician Emilian M. Dobrescu defines the risk as a probable
analysis of the possibility to obtain favourable or unfavourable results in a business, of
a future event which is likely to happen and can bring about certain losses, while in
specialized dictionaries, the authors consider the risk as being a future event which
might result in losses.
In economy, the risk can be characterized according to the factors which
produce it and according to its degree, having in view the company’s ability to adapt
itself and to respond efficiently to any changes that occur in the company’s
environment. Transposing the science of management and the valuable elements
specific to management in the field of pragmatic management activity implies a
classification of the economic risk in several categories.
The classification starts from the possibility of the forecasting degree of the
risk and it points out two important types, such as predictable risks, which are
determined by factors that can be predicated so that their effects would be eliminated
or reduced through appropriate measures and unpredictable risks which, unlike the first
category, are determined by factors that cannot be forecasted and reducing their effects
is very difficult, expensive and most of the times impossible.
The types of risk are various and their occurrence is related to the type of
activities, therefore risks can fall into the following categories:
• economic risks, determined both by the evolution of the company’s
environment and by the quality of the economic activity carried out within the
company (the risk of increasing inflation, the economic risk or the exploitation
risk, the investment risk, etc.);
Risk Management in Electronic Data Transmission
•
45
financial risks due to accessing and using financial resources (insolvency risk,
the risk of reducing profitableness, the risk of running into heavy debts and
losing autonomy);
• commercial risks associated with purchase and selling operations of the
company on the domestic and foreign market (the price risk, the transportation
risk, the sale risk);
• production risks, generated by technological and organizational malfunctions
which occur during production processes (the risk of not meeting the expected
quality indicators, the risk of not turning out expected quantity of products, the
risk of exceeding the allowed quantity of consumables, the risk of rejected
products, the risk of industrial accidents, etc.);
• political risks which derive from changing the strategy, the tactics and the
current actions of political factors in that particular country, in countries with
whom the company has direct connections and in great international
corporations (the risk of reducing imports/exports, the risk of limiting currency
transfers, the risk of forbidding the product in certain states, etc.);
• social risks, determined by the relationship with the company’s employees and
their behaviour (the risk of disappointing the employees, the risk of enormous
expenses with the labour force, etc.);
• judicial risks related to the effect of national and sometimes international
legislation upon the activities of the company (the risk of losing of damaging
the products, the risk of not cashing in the amounts of money corresponding to
the economic operations, the risk of losing the property, the risk of paying
additional taxes);
• natural risks owing to natural disasters or to other major causes where the
natural factors have a decisive weight (fire risks, earthquake risk, flood risk,
etc.).
Many specialists believe that according to their content and nature, risks can
be divided into commercial and non-commercial risks. The first category is based
mainly on the price risk, the currency risk, the inflation risk, credit sale risk, the risk of
not meeting the contract clauses, etc, while non-commercial risks refer to different
natural disasters, the state of war, political and legislative instability, etc.
According to their location, risks can structured as internal risks, located
within the company and related to its functions, the most important of them being the
risks of the human capacity factor, the production risks, product logistics risks and
external risks which can be found within the outside environment of the company that
is involved in international transactions and they materialize in contract risks,
conjuncture risks and political risks.
Regardless of the type of risk, in order to avoid the negative effects which may
occur, the manager must consider all action modalities, among which the most
significant are:
• avoiding risks - it implies giving up the decision options for which a
materialization looks uncertain;
• reducing risks - by laying good foundations for decisions and for the decisional
process, avoiding thus foolish decisions based on insufficient information;
46
Isac, A.; Belu, M.; Drigă, I.
•
•
standing/assuming the risks - is recommended when the potential loss is too
small to have unfavourable consequences upon the company’s activity;
transferring the risks - in the charge of an insurance company.
2. E-GOVERNMENT SERVICES RISK MANAGEMENT
Risk management seeks, on the one hand, the monitoring and the management
of all risks and of risk factors which can be identified, and on the other hand, the
extent of the use of risk management techniques on all risk types, starting from those
likely or recurring, to catastrophic ones. Risk management has gained new meanings
during the last decade due to the transition towards information society and to the use
of Internet.
The original purpose of Internet was to provide a communication environment
and a free exchange of information, therefore it cannot be stated that this operating
environment is safe and without risks for users. From this perspective, even if the
implementation of information technologies in public sector organizations is
considered an opportunity for governmental services, the process is comprehensive and
it involves a complex diagnostic and identification of risks which occur while using
these technologies.
Thus, the implementation of risk management in public administration should
be based on achieving the objectives of supporting the development and distribution of
e-Government services, namely: the development of information and digital content
infrastructure necessary to implement electronic governance at the national level and
the coordination of National e-Government projects with pan-European or regional
projects and also the improvement of the quality and efficiency in supplying electronic
public services, based on the simplification of administrative procedures and on
transposing them into electronic format.
Specialists consider that, regardless of the methodology chosen for good risk
management in e-Government services, there are several elements that should be taken
into account and that must be obeyed such as: the implementation of national
electronic registers, the increase of the performances of employees from public
administration in information and communication technology, and the auditing and
certification of quality and general performance of all e-Government services.
3. RISK FACTORS IN E-GOVERNMENT SERVICES
3.1. Computer Viruses
Most of information technology users face the harmful computer viruses,
which represent different types of attack on computers. A computer virus is a program
that can reproduce itself and it can spread from one computer to another. Computer
viruses are micro-programs, difficult to detect, hidden in other programs, lying in wait
to cause system failure (blocking the system, unexpected messages or commands, other
destructive actions).
Risk Management in Electronic Data Transmission
47
If in 1990 there were only 300 known viruses, today the number has reached
around 80,000; further estimations show an impressive growth of their number. Thus,
due to their increased number and to the technological possibilities of creating others
viruses, this is a serious risk for Internet users from any field.
3.2. Computer Attacks
As computer networks have evolved in more complex and more accessible
structures, security threats have increased dramatically. New problems of security
occur every day in currently used applications, in operating systems or for the network
equipment that allows hackers to commit attacks. Along with emphasis on the
dependence on information technology, the consequences of these attacks are more and
more disastrous - from stopping production and negative publicity to the disclosure of
confidential information.
The report "Managed Security in the Enterprise", published in March 2009 by
Symantec Corporation, an American company, has highlighted the need for additional
protection from cyber attacks, which are constantly increasing and intensifying (figure
no.1). This report shows that 88% of 1,000 interviewed subjects said they had been the
target of a cybernetic attack in the past 2 years, and 30% of these attacks were
successful.
Figure 1. New malicios code signatures
48
Isac, A.; Belu, M.; Drigă, I.
Almost all subjects (97%) have suffered various forms of losses including
downtime (46%), theft of data related to customers or employees (31%) and theft of
confidential data of the company (25%).
Regardless of the computer threat, of the field of activity or of the type of
information technology used, it is necessary that each company is protected by
updating antivirus software, updating the firewall, implementing technologies for
detecting interferences and by implementing management vulnerability systems within
networks.
4. INTERNET STANDARDIZATION AND SECURITY
Given that over 90% of a business activity is dependent on information
technology, it is very important to be aware of the risks that occur in operating or
managing information systems. Within the information society, information means
power, therefore it must be protected by appropriate means, that is to say by optimum
security solutions.
The Romanian market for security solutions increased last year by 55.9%,
reaching 19.92 million dollars, mainly due to the development of the hardware market,
to the appearance of several computer threats and viruses, and also because the
population became aware of the information security. However, more than 64% of
Romanian companies spend annually less than 1000 dollars for the purchase and
implementation of IT security solutions and only between 15 and 20% of the
companies really invest in virtual protection. Worldwide, the importance of IT security
systems is much greater, especially with regard to data security.
In a study conducted by International Data Corporation (IDC) it is shown that
worldwide, the largest weight of 75.5% of the total of security expenditures, has been
attributed to data security solutions and to threat management. In this context, the
following standard, SR ISO / IEC 17799:2006 “Information technology. Security
techniques. Information security management system”, has been published in order to
stand as a model for establishing, implementing and improving security management in
a company and also to serve as a practical guide for the development of some
organizational security standards and effective security management procedures.
Therefore, any company that uses computers should apply this standard and it
should develop an IT security strategy, starting from the following objectives:
• ensuring that the Internet and local networks are protected;
• there are effective techniques of managing security techniques and updating
them;
• information - the undisclosed capital of the company - must be protected from
both unauthorized internal or external use and against modifications;
• the process of receiving information from external sources must be done
through decryption and authentication;
• the access rights of users must be defined;
• the email system, the management of encryption keys must be easily and
securely managed, etc.
Risk Management in Electronic Data Transmission
49
5. LEVERAGE RISK MITIGATION - REQUISITE FOR INCREASING THE
EFFECTIVENESS OF E-GOVERNMENT
For the Management of companies that operate in unstable environments with
a strong random characteristic, the principles for making decisions must be
encompassing; therefore, refining data structures and the methodology for managing
them requires the use of the newest developments in computer technology. In this
context and under the conditions of globalization and intensive use of the Internet,
especially in relations with customers - suppliers or other business partners – it is
necessary to find the appropriate tools for ensuring an information security
management. As far as risk management within e-government is concerned, two of the
modern features that characterize the security of Internet communications are the
electronic signature and the digital certificate.
5.1. The Electronic Signature
Generally, an electronic signature is a piece of information that identifies the
sender of a document and it is stored on a secure magnetic device. According to Law
no. 455 of 18 July 2001 regarding electronic signatures, it refers to electronic data
which is attached to or logically associated with other data in electronic form and it
serves as a method of identification. According to this law and to other European
regulations, an electronic signature can be valid only if it meets the following
requirements: it authenticates the person who signs the message or the record, thus it is
unique to the person making the signature; it associates the document with a person,
thus making it impossible for anyone to forge; it should be an affirmative act that
which states that the electronic transaction was legal.
An electronic signature is applied to a document which was sent using
computers and software, such as:
• MS Word for contracts, documents, notifications, etc.;
• MS Excel for financial statements, salaries, etc.;
• Adobe Acrobat for modified Word documents of higher quality and greater
security of information;
• expert data base programs used for documents from the public and local
administration sector;
• documents resulting from processing tax and accounting data such as annual
financial statements, tax returns, etc.).
5.2. The Digital Certificate
A digital certificate is a file protected by a password, which includes a variety
of information such as: name and e-mail address of the holder of the digital certificate,
a public key that can be used to verify the digital signature of the owner and the
validity of the digital certificates. Certification Authorities (CA) collect information on
a particular company or person, and later they release a new digital certificate.
50
Isac, A.; Belu, M.; Drigă, I.
Digital certificates are used for online authentication, and they are similar to
the way people identify themselves with the driving license or the birth certificate.
Some technologies (SET, SSL and Authenticode) have entered the competition for the
digital certificates.
6. CONCLUSIONS
As a European country Romania is required to align the objectives of the
Lisbon strategy and the i2010 initiative "An European Information Society for
economic growth and employment" in which one of the priorities is to promote an
information society through a comprehensive set of online data transmission services.
Thus, trends that are evident for the time period immediately following have the jump
from static web to dynamic and interactive web development methodologies to target
and streamline internal processes to determine efficiency and shared services,
standards for consistent use of information technologies and communication.
REFERENCES:
[1]. Belu, M.; Paraschiv, D.; Comănescu, A.M. - Tranzacţii pe Internet, Editura Economiă,
Bucureşti, 2004
[2]. Ghilic-Micu, B.; Stoica, M. - Economia digitală şi societatea bazată pe informaţie şi
cunoaştere, în volumul Societatea cunoaşterii, coord. Roşca Gh.I., Editura Economică,
Bucureşti, 2006, pp.119-121
[3]. Lucey, T. - Management Information Systems, Published by Cengage Learning EMEA,
2005
[4]. Todoran, H.; Mişcoiu, S.; Gongola, L.H.; Rotar, C.; Moldovan, R.; Andrei, S.;
Cramarenco, R. - Societatea Informaţională Europeană, Editura Efes, Cluj-Napoca,
2005
Annals of the University of Petroşani, Economics, 9(2), 2009, 51-56
51
COMPETITIVENESS AND STRATEGY FOR AUTOMOBILE
INDUSTRY IN EUROPE
NICOLETA ISAC *
ABSTRACT: The auto sector is often credited as the engine room of Europe. The
European Union is the homeland to a competitive and innovative automotive industry that
generates activity throughout the economy - from materials and parts supply, to R&D and
manufacturing, to sales and after-sales services. In the second half of 2008, against the
backdrop of fierce competitiveness and progress on sustainability, the economic downturn hit
the industry. The banking crisis stalled economies; consumers and businesses struggled to
access credit. Private individuals held off purchasing new cars and businesses began to fight
for survival. Commercial vehicles continued their sharp downturn in the first quarter of 2009.
The drop in passenger car registrations recovered somewhat to a still formidable minus 15%,
supported by the introduction of fleet renewal incentives in a number of EU member state.
KEY WORDS: competitiveness, management, strategy, automobile industry, market
1. INTRODUCTION
For the past five years the automotive industry has focused on scale strategies
and sizing to survive. Vehicle manufacturers and suppliers have consolidated
significantly. Manufacturers now manage a collection of brands. Managing those
multiple and unique brands will command more of their effort as they shift production
and assembly assets into the supply community.
Today the industry is dominated by a group of nine global VBEs, which
together represent over 90% of global light vehicle output. The top six accounts for
more than 80% of this output, as shown in Figure 1.
Consolidation has created global supply networks and integrator capabilities in
the quest for competitive advantage. The consolidation among automakers, however,
pales in comparison to the pending consolidation of suppliers. By 2010, there will be
no more than 20 to 30 major systems suppliers globally. Yet as other sectors have
already demonstrated, shareholder value has not been, and will not be, assured on the
basis of globalism - or on any notion that bigger is automatically better.
*
Assist.Prof., Ph.D. Student, University of Piteşti, Romania, nicoleta_isac2004@yahoo.com
52
Isac, N.
Source: PricewatherhouseCoopers AUTOFACTS
Figure 1. Consolidation: Creation of „Vehicle Brand Enterprises”
But Europe relies on a strong automotive sector. Further financial and
economic pressure on the sector will affect the European economy as a whole; 2.2
million people are employed directly in automotive manufacturing; an additional 9.8
million rely on it for their jobs in closely related sectors. The real multiplier, in terms
of employment in the wider economy, is still higher. ACEA members generate a
turnover of €551 billion, and total industry exports are worth €77 billion. Around €378
billion in taxes come from vehicles, reinforcing the sector’s reputation as the engine
room of Europe.
Prospects for 2009 and 2010 are still unclear, but signs are not positive. More
than 1,000 plant stoppage days had been planned for the first quarter of 2009 and
pressure on employment is mounting. Overall, 2009 vehicle production may drop by as
much as a quarter and commercial vehicle production by at least 50%.
2. MARKET DEMAND
In Western Europe, only five countries posted new car growth, Finland
(+11.2%), Portugal (+5.7%), Belgium (+2.1%), Luxembourg (+2.0%) and Switzerland
(+1.0%). Among the five major markets, Spain reported the steepest fall in demand in
its history (-28.1%), while Italy (-13.4%) and the UK (-11.3%) fell by more than 10%.
Across Europe, new car demand fell 7.8% to 14.7 million units. In the final quarter it
crashed 19.3%.
Competitiveness and Strategy for Automobile Industry in Europe
53
Consumer choices reflected concerns about the economy. Market penetration
of small cars was the highest ever at 38.8%; SUVs penetration which had peaked in
2007 at 9.9.% fell back to 9%, with the most dramatic fall in France from 7.2 to 4.6%.
Average engine size fell to 1706cc, from 1740cc a year earlier, while average power
output, which had risen steadily since 1990, fell to 86 from 87 KW. More than half of
all new cars sold were diesel models (52.7%).
Commercial vehicle registrations were down 9% across Europe, the sharpest
downturn since 1993. Truck registrations, down 4% overall, suffered most in new
member states (-21.1%). Light commercial vehicle demand (LCVs), up 5.1% in new
member states, was dragged down by performance in Western Europe (-12%) to end
10.4% down overall. Bus and coach registrations rose 12.1% over the year, but in
December they fell 7.5%.
By March 2009, government fleet renewal schemes had been introduced in 11
countries to boost flagging markets and help sustain the transition to ‘greener’ cars. In
Germany, new car sales rose by an encouraging 21.5% in February. Effects were also
notable in other markets, such as France, Italy and Slovakia.
Upper-Medium
17%
Lower-Medium
31.7%
Executive
12.3%
Small
38.8%
Others
0.1%
Source: European Automobile Industry Report, www.acea.be based on Global Insight Data
Figure 2. The car market in segments I 2008
3. VEHICLES IN USE
According to the latest ANFAC (Spanish automobile association) report, there
were 251.5 million vehicles on the roads in the enlarged EU at the end of 2007. Of
these, almost 220 million (87%) were cars. That reflected a 0.5% drop on 2006 figures,
primarily due to an 11.6% decrease in the German fleet from 46.6 to 41.2 million cars.
The European car fleet is concentrated in five main markets (Germany, Italy,
France, UK and Spain) in which diesel penetration is now around 30%. Across the
enlarged EU, there is a high proportion of older cars on Europe’s roads. According to
ANFAC, 30% of cars are older than 10 years. In some new member states, the average
54
Isac, N.
age of a car is up to 14 years, emphasising the importance - economic, environmental
and safety - of strong measures to encourage fleet renewal
4. ECONOMIC BACKGROUND
Table 1. GDP Growth Forecasts
The Eurozone is now officially in recession following two successive quarters
of negative growth. The trade deficit is rising and positive employment trends are not
reflected in auto manufacturing which has started to report significant job losses. The
overall situation in financial markets remains uncertain, despite massive injections of
liquidity from governments and central banks. Endorsed in November, the
Commission’s European Economic Recovery Plan aims to prevent a downward spiral.
However, economic forecasts for 2009 have been revised downwards with
GDP expected to drop in the Eurozone by 1.9% and in the EU27 by 1.8%. Modest
growth of 0.4% and 0.5% is expected in 2010. Despite interest rate cuts, falling oil
prices ($146 a barrel in July 2008 to $44.5 in January 2009) lower commodity prices
and inflation which is now 1.1% from a high of 4% in July 2008, business and
consumer confidence remains low. Since mid-2007, the Commission’s business and
industrial confidence indicators have been falling while its December 2008 consumer
confidence indicator was the lowest it had been since reporting began in 1985.
5. FORECASTS
Production and sales figures from the final quarter of 2008 reveal the scale and
speed with which the industry has been affected by the economic downturn. Markets
across Europe suffered, forcing a slowdown in production and job losses at vehicle
manufacturing plants and across the component supply chain. Forecasts in this
uncertain time are very difficult, albeit both consumer and business confidence is low.
Most manufacturers do not expect the situation to improve until 2010. If trends seen in
the final quarter of 2008 and into the first few months of 2009 continue, passenger car
production could decline by a quarter and commercial vehicle production by at least
50%, reflecting a dramatic drop in orders from business customers. The next figure
presents which one of these potential opportunities for business growth as the main
opportunity to grow business in he next 12 month.
Competitiveness and Strategy for Automobile Industry in Europe
37
Better penetration of existing markets
15
24
New product development
34
19
19
New geographic markets
Mergers and acquisitions
New joint ventures and/or strategic alliances
55
10
14
7
15
Don’t know/Refused 2
3
Other 2
0
0%
2009
2008
Source: PricewatherhouseCoopers 12th Annual Global CEO Survey 2009
Figure 3. Automotive CEOs concentrate on existing markets to grow
6. CONCLUSIONS
The future viability of the global automotive sector hinges on its ability to
secure sources of credit and to "right-size" its operations, while being responsive to the
evolving preferences of its customers.
A number of big vehicle manufacturers have been forced to seek government
assistance-a move that has generated considerable controversy. Proponents argued that
the economic fallout from allowing the industry to fail would be catastrophic; critics
maintained that the industry operates with an outdated business model, and that any
government support would only postpone their inevitable insolvency.
More industry consolidation and collaboration may be down the road. A
number of automotive CEOs are considering more collaborative arrangements. Forty
percent of those surveyed say they favour joint ventures and strategic alliances over
other routes to growth.
Managing your supply chain: The key to competitive advantage. Eighty-one
percent of CEOs think that efficient sourcing and supply chain management is a key
source of competitive advantage.
Re-evaluating the business model. Most automotive CEOs have also been
cutting costs and re-evaluating their business models, as they struggle to balance the
immediate demands of survival with the need to develop an approach that will position
them to take advantage of the economic recovery.
As they work to differentiate themselves in a changing industry, automotive
companies face continuous business challenges. Some of these challenges can be
56
Isac, N.
opportunistic, such as globalizing the business, which can position them to capture new,
emerging markets. Others, such as meeting regulatory requirements, can be costly and
time consuming and may or may not add value to the products and services.
Current challenges can be grouped into three major areas with specific
challenges in each area:
• Growth/innovation: To improve the customer experience, optimize the value
net, globalize the business, drive product differentiation, and drive
organization change;
• Productivity: To improve quality and reduce warranty, meet regulatory
requirements, increase employee productivity, leverage information insights,
and increase business flexibility;
• IT/business resilience: To optimize the IT environment, enhance business
resilience and security, and manage risk and compliance. An automotive
company’s ability to analyze and respond to these challenges without losing
sight of its strategic priorities will have a significant impact on its success in
this industry.
REFERENCES:
[1]. Lynn, B. - Automotive solution: Technology that Matter, 2005
[2]. *** - 12th Annual Global CEO Survey Redefining success - Future proof plans Automotive industry summary, www.pwc.com/automotive, 2009
[3]. *** - European Automobile Industry Report 09/10, 2009 - www.acea.be
[4]. *** - Now or Never - The Automotive Collaboration Imperative,
http://www.ibm.com/services/strategy/industries.automotive.html, 2008
[5]. http://www.redbooks.ibm.com
Annals of the University of Petroşani, Economics, 9(2), 2009, 57-66
57
MONEY LAUNDERING THROUGH OFFSHORE AREAS
ROXANA ISPAS *
ABSTRACT: In the present study we have started from the premise that from the
analysis of the "money laundering", the money resulted from this is circulating in the whole
world, through some geographical and institutional channels. Starting from the characteristics
of "tax haven", we have made a parallel between it and the financial paradise. In the second
part of the work we have explored offshore areas, adding the methods for placement of revenue
in those countries and the necessary conclusions.
KEY WORDS: shadow economy, illegal economy, the legal economy, the latent
economy, evasion from payment of taxes, manual labour, the fiscal method, criminal business,
money-laundering, legalization of the means acquired in the illegal way, investment of money
resources , stratification of money resources, integration of money resources, the prevention of
shadow economy and money-laundering, fight against money-laundering
If we look at the phenomenon of money laundering, there results that whatever
the criminal nature of the source of origin, the "dirty" money move through certain
geographical and institutional channels worldwide open to crime. Clearly there are
privileged areas in this financial universe, where large transactions can be performed
without any possibility of control. Using banks, the criminal appeals most times to
those located in the so-called "tax havens". In a strict sense, almost every country in
the world can be considered a tax haven because, in one form or another, the
companies and the foreign individuals are given various incentives to encourage
investment and promote the economic growth. The term "tax haven" is often
incorrectly used.
To describe a country in this regard, the term financial secrecy jurisdiction
should be used. A certain degree of financial and banking secrecy is characteristic of
all the states. Almost all the states require a certain level of protection for banking and
commercial information, but most of them will not preserve this information in case of
an investigation conducted by statutory bodies from a foreign country. A banking and
financial secrecy jurisdiction will almost always refuse the violation of its own laws on
*
Lecturer, Ph.D., University of Craiova, University Centre of Drobeta Turnu Severin,
Romania, roxispas1972@yahoo.com
58
Ispas, R.
banking secrecy, even when it could be about a serious violation of the laws of a
country.
The following are considered tax havens: Panama, Cayman Islands, and The
Common Wealth of the Bahamas, Bermuda, The Channel Island, The Island of Man,
1
Liechtenstein, Montserrat, and The Netherlands Antilles .
Gheorghe Nistoreanu and Costica Paun add to the tax havens Singapore, Hong
2
Kong and Switzerland . The major financial scandals emerged in recent years are
marked by the same feature:
• the criminal formations take full advantage of all the facilities offered by
financial havens and offshore banking centres (outside the country of
residence) to launder illicit profits, something which impedes the criminal
investigation in this area;
• the emergence of tax havens has been determined in some cases by the lack of
internal resources, which has been compensated by the state by providing tax
incentives to companies and financial institutions in order for them to establish
their headquarters in that country.
Thus, it has come to a situation where almost half of the global financial flows
are developed through offshore channels: banks, insurance companies, mutual funds,
3
foundations and holdings .
An ideal financial haven has the following features:
• there are no arrangements to exchange information with other countries;
international corporations can be created with minimum formalities;
• providing bank secrecy for these corporations;
• very harsh laws for the breach of bank secrecy;
• a highly developed tourist activity which may justify cash inflows;
• use a universal currency, preferably U.S. dollars, as the local currency;
• a government relatively invulnerable to external pressures;
• a high degree of economic dependence in financial services;
• availability of modern communication systems (telephone cable, telex) that
bind them to other countries;
• a favourable geographical location for business trips to rich neighbouring
4
countries .
Tax havens are ultimately an important component of organized crime. They
are used for laundering money from a variety of illegal activities (drug trafficking, tax
5
evasion, smuggling ).
The financial havens place at the disposal of the foreign investors a wide range
of services, without being obligated to disclose the origin of the money, from
international corporations registration and ending with banking operations that are not
subjected to the authorities. Although bank secrecy and financial paradise are two
1
Voicu Costica, op. cit., p.171-173
Nistoreanu Gheorghe, Paun Costica, op. cit., p.251
3
Ciobanu Petrut, op. cit., p.41
4
The Narcotics Police officer’s Manual, Bucharest, Ministry of Internal Affaires, 1993, p.100
5
Bujor Valeriu, Pop Octavian, op. cit., p.17-19
2
Money Laundering Through Offshore Areas
59
distinct concepts, they share the legitimate purposes and commercial reasons. At the
same time, they offer unlimited protection to criminals willing to do business at any
price. It should be added that the country is considered a tax haven by foreign
companies and individuals who are offered incentives for their investments, but the
local people will not perceive the state policy in the same way because the government
levy taxes on personal income, taxes on imports and exports, taxes on inheritances and
donations, taxes on property, etc.
6
Petruţ Ciobanu underlines within the financial havens the so-called “bank
heavens”, i.e. those countries more interested in banking secrecy than tax reduction.
These "bank heavens" are in fact countries with strong economic potential which
provides various facilities for substantial capital contributions from other countries.
The characteristics of these tax havens are especially attractive to recyclers of
funds because they provide a wall of secrecy on transactions, so that the owner of a
company incorporated in the tax haven may not be associated with the flow of funds.
Moreover, modern communications and banking systems of the countries that have tax
havens allow the rapid movement of funds. All the types of corporations registered in
the tax havens - generic companies, offshore banks, captive insurance companies, etc. can be used to recycle the funds in all the stages of money laundering: placement,
stratification and integration.
In Eastern Europe one of the most common schemes is the money laundering
through offshore areas. For example, the illegal income is placed in an account of a
bank. The depositor, concluding a fictitious loan agreement with an operator of the
offshore area, transfers this money to the borrower’s account. The latter, in turn,
concludes a loan agreement with a third operator. The assignment of claim is
performed, the third party transferring the money in a bank, for example in Switzerland
or Austria into the account of the “money launderer”.
The offshore territory is dedicated to international financial centres and to
some banking transactions. Offshore areas are a powerful source that absorbs
international organized crime, operating as a channel of capital exploitation in the
country, money laundering and tax evasion. They have a dominant role in the
laundering process, being widely used.
Offshore areas are characterized primarily by the absence of records relating to
the de facto rulers of companies, the legislative prohibition on disclosure of
information on these areas, their obvious reluctance to cooperate, on the grounds that
in most areas the tax evasion is not an offence of money laundering. In some states,
internal laws prohibit operations through the financial institutions in the offshore areas;
in others the law does not prohibit such operations. In the states where the national
currency is always subject to inflation, the legislature may establish limitations on the
currency exchange in order to impede the achievement of its stronger currency.
Offshore areas are usually the ones providing services for foreign currency conversion.
In the states with a stable currency, the participation in offshore banking is usually
allowed.
6
Ciobanu Petrut, op. cit., p.41
60
Ispas, R.
The distinctive feature of the offshore is the privacy. Moreover, most offshore
areas do not recognize judgments of foreign courts. The placement of the revenues in
these areas is carried out through various methods, such as:
• the physical transportation - illegally obtained currency may be placed in
offshore areas through luggage, intermediaries, etc.;
• bank transfers;
• checks sent by mail or handed personally;
• trustworthy persons, the accountant - transferring money from the trust
account, and then another person transfers it to the offshore area;
• telegraph services (Western Union, American Express, etc.) - can be made
through transfers without requiring precise identification of the consignor
and through the application of passwords the identity of the beneficiary can
be avoided.
Once arrived in the offshore areas, the revenues are layered and are to be
subjected to reinstatement.
The most common methods for replacing the income in the country of origin
7
are :
• fictitious loans - fictitious corporations can open bank accounts abroad,
and then the checks are sent by post to the original state as fictitious credits
from these companies;
• fictitious investors - illegal business is organized in the state of origin and
fictitious investors usually located abroad are used for capital granting;
• fees - are paid for finding investors for the pursuit of business, negotiations
for the purchase of buildings etc.;
• checks and transfers; physical transfer.
These methods can be applied both separately and in aggregation. At the same
time, other methods can be highlighted, such as:
• customers presented by a subsidiary, branch or other foreign bank,
established in the country where the manufacturing activity or the drug
trafficking is an important component of the economy;
• the use of letters of credit or other financial methods to transfer money to
countries that do not meet the customer's usual business;
• customers that carry out large and systematic transactions, including
electronic transfer, which can not be clearly identified as good faith or
customers receiving large and systematic payments from countries that are
normally associated with the production, processing and manufacturing
drugs, with terrorist organizations prescribed "tax havens", the
composition of large balances that do not meet the normal turnover of the
client and subsequent transfers to accounts held abroad;
• unexplained electronic transfers of funds on an inner or outer basis or
without passing through an account;
7
Mutu, Maria, Off-shore - between Legal and Illegal / / National Law Magazine, no.7/2003, p.36-37
Money Laundering Through Offshore Areas
61
•
frequent requests for issuing travelling checks, foreign currency drafts or
other negotiable instruments;
• payment frequency of the travelling checks and other negotiable
instruments, especially if they come from abroad.
The countries, the territories, the cities or the areas with typical features of
8
financial havens are :
• Europe: Andorra, Cyprus, Gibraltar, Isle of Man, Channel Islands,
Liechtenstein, Luxembourg, Malta, Monaco;
• Asia and Pacific: Cook Islands, Hong Kong, Macao, Marshall Islands,
Nauru, Samoa, Singapore, Bahrain, Lebanon;
• Africa: Liberia, Mauritius, Seychelles;
• Caribbean Sea and Central America: Antigua, Bahamas, Barbados, Belize,
Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Panama.
We will make a short presentation of the most representative tax havens as
9
they are catalogued by a UN report from 1999 .
Panama quickly became an important international tax haven and banking
centre. By adopting a very least demanding law on corporate establishment in recent
years more corporations have been established in Panama (about 50,000) than all other
tax havens in the Caribbean / Central America together. Except for an annual fee of $
100 there is no tax on foreign entities, no requirement to declare income and no
supervision by the government. There is no minimum requirement on capital invested,
no requirement to maintain records and no stipulation on the frequency and scheduling
corporation appointments, as there is no need to indicate the location of any corporate
records that someone may keep. To these, a banking law which allows numbered and
10
coded bank accounts is added . According to several experts in tax planning and
consulting, offering advice on selection and use of tax havens, bank and corporate
secrecy laws in Panama make it an ideal haven.
The Bahamas Islands form an independent British colony located in the
Caribbean Sea about 30 minutes flight from the U.S. east coast. In the Bahamas there
are over 350 different banks, including most of the major banks around the world.
About 95% of the total volume of financial transactions that take place here is related
to international transactions for foreigners. Bank accounts are easily opened and can be
created even by post.
There are no constraints on the currency or the currency exchange for the
11
foreign funds that can be transferred easily to and from the country . The bank
secrecy is strictly applied by banks and governments that depend on them.
Liechtenstein is an independent country located between Switzerland and
Austria. The bank secrecy is applied more strictly than the one in Switzerland. Until
recently trusts could be set up to protect the assets. Unlike most trusts, Liechtenstein's
8
United Nations Organization Report / Synthesis Documentation no.1/2000, Bucharest, Ministry of
Internal Affaires, 2000, p.57
9
Ibid
10
Floricel Constantin, International Financial-Monetary Relations and Techniques, Bucharest, Didactica si
Pedagogica Publishing House R.A., 1995, p.186
11
Floricel Constantin, op. cit., p.187
62
Ispas, R.
"Anstalt" is a trade body able to perform various activities, which can ensure the
person who transfers his ownership of assets to the trust the revocability of the transfer.
12
Most experts consider Liechtenstein and Switzerland interchangeable in terms of tax
havens.
But it is acknowledged the fact that corporate traditions of secrecy in
Liechtenstein provide probably the superiority of Swiss banking. Sophisticated foreign
investors have created a financial nightmare by using secret bank accounts in
Switzerland, on behalf of the corporations incorporated in Liechtenstein.
While some small states have certainly attracted the “dirty money”, the defiant
attempt to attract illegal profits was initiated by the Seychelles, which, in the '90s,
recorded an economic growth by unconditionally offering citizenship to all those who
deposited at least 10 million dollars in the banks of these islands. Under the pressure
from the United States and other members of the international community, the
Seychelles gave up selling its sovereignty.
One of the tax havens criticized for the lack of any discrimination related to its
customers is Antigua. In 1996, an American Senate report commented that nobody
drew more “dirty” money than Antigua, with a banking industry lacking regulations,
which did not apply the reporting requirements, but penalized the disclosure of bank
secrecy. The number of banks in Antigua increased by 75% in 1995, any person having
a capital of $ 1 million could open a bank, and many of them were nothing more than a
13
simple room with a fax .
The authorities in Antigua tried to downplay the European Union Bank when
the bank managers 'disappeared' with the amount of 8 million U.S. dollars, suggesting
that they had taken steps to prevent the occurrence of such situations. However, they
failed to explain convincingly how a country with a population of about 70,000
inhabitants could ensure adequate supervision of the many existing institutions and
financial services on the island.
Until there will be such a capacity, the changes in Antigua will be purely
cosmetic. A clear example of how bank secrecy laws encourage this practice is the rule
whereby an officer, director, shareholder, agent or attorney of a bank may provide
information relating to the affairs of a client only when there is a written order of the
court Justice of Antigua. What is quite interesting is that this order may be issued only
in connection with a proven offence.
Bermuda is another tax haven - a former British colony, with long traditions of
international financial centre. It boasts with a large community of professionals in the
financial business (lawyers, accountants, bankers, insurance agents), with experience in
the field of relations with foreign investors. The Bermuda's financial system is old,
stable and respected throughout the world and the telecommunications network is
modern and efficient. The Group of Bermuda Islands is located just 350 miles off
North Carolina, and enjoys good air links with the United States and Europe. Here
there is no control over the foreign exchange and any amount of money can be placed
or removed from the country. The Banks of Bermuda offer a wide variety of accounts
12
See: Voicu, Costica, op. cit., p. 180; Popa, Stefan, Cucu, Adrian, op. cit., p.53, etc.
Information and Documentation Bulletin, no.4/2000, Bucharest, Ministry of Internal Affairs Publishing
House, 2000, p.24
13
Money Laundering Through Offshore Areas
63
and services (current accounts, savings, trust and custody, trust accounts, investment
management, brokerage services, enforcement services, management and corporate
administration, management of real estate properties and real estate credit services).
There is no code of laws governing banking secrecy. But the existing bank
secrecy acts as a consequence of the British common law, which is strictly observed by
the banking community.
Banks in Bermuda are somewhat restrictive in terms of acceptance of new
customers, at least compared to other tax havens in the Caribbean basin. In general,
they prefer that new clients are recommended by a professional community member
(not necessarily local professionals). However, with bank references and proper
identity documents, anyone can open an account in his/her own name. Bermuda law
allows the easy creation and operation of the so-called captive insurance companies.
It is interesting to note that in Bermuda there are only four banks (The Bank of
Bermuda, the National Bank, Bermuda Provident Bank and The Bank of NT
Butterfield and Son) and two major firms of lawyers who handle all or almost all
financial transactions on the island. All these entities have their headquarters in the
capital city.
The Channel Islands are a group of islands located in the Channel between
Britain and France. They form an independent country and govern. Because of their
unique position in relation to UK and EU, they have become an important offshore
banking centre for customers in Europe and worldwide. Many major international
banks have branches here. Only two of the eight islands are on the list of tax havens:
Jersey and Guensay.
Bank accounts are easily opened, personally, by proxy or by post. For
foreigners there are no monetary or currency exchange restrictions. The
telecommunication installations of the islands are absolutely modern, but all air routes
to the islands should pass through London or Paris.
Isle of Man is a small island (227 square miles), situated in the Irish Sea
between Great Britain and Ireland, under British possession, which enjoys a high
degree of autonomy which allows it to operate as tax haven. There is no monetary
control and, like any other tax haven, the telecommunications equipment and
capabilities of the Isle of Man are excellent.
Air traffic is conducted by England and Ireland. Like Bermuda, the Isle of Man
law is particularly interesting for the establishment and operation of captive insurance
companies. On the island there are 45 different banks. By contrast, a recent report
states that there is only one hotel which offers rooms with private bathrooms. The
purchase of corporations in the Isle of Man (Man) is easy and cheap and, thus, is a
means often used only for opening accounts elsewhere in the world, in the name of a
company offered by the corporation from Man.
Cayman Islands (Grand Cayman, Little Cayman and Cayman Brac) are located
south of Cuba and are served by several major airlines that offer systematic voyages
from Miami, Houston and other cities in the United States whose number is rapidly
growing. The main activity on the island of Grand Cayman is the international banking
activity, the island having approx. a bank for every 30 inhabitants. The image of
Cayman as a "tax haven" state is vigorously promoted by governments and private
64
Ispas, R.
economic sector. The legislation and the regulations in force have been deliberately
designed to ensure and enhance the country's financial and corporate reputation. The
law of banks and trusts and the law of confidential relations are among the most severe
and restrictive in the world. Not only that disclosure is a crime, but the request for
information is against the law.
Cayman has all the other feature of a successful tax haven, including: a
superior telecommunications system, no currency or foreign exchange restrictions,
representation of all major international banks and local specialists in international tax.
Cayman boasts, also, with its specialized trusts in the establishment and administration
of foreign corporations. In 1992, 2930 new corporations were constituted in the
Cayman Islands, bringing to 16,712 the number of existing corporations, while the
Cayman Islands population amounts to 17,000 people.
Montserrat is an island with an area of 40 square miles located in the Leeward
archipelago, situated in the eastern Caribbean, about 250 miles from Puerto Rico. It is a
self-governing British colony. While the telecommunications system is modern, there
are no direct air flights to the United States, thus, links with the neighbouring islands
are necessary. The main activity of the tax haven of Montserrat is financial of the Class
B banks, which are very easy to open and to keep secret due to local banking laws,
carefully prepared for this purpose. Although there are superficial rules in monetary
and foreign exchange field, their application is very vague, if not ignored, so that
import or export of funds is made easy.
Some promoters / experts in tax havens have complained of the relatively
higher cost of Class B banks established in Montserrat, a situation which is due at least
in part to the new fees recently introduced by the government. Another complaint
concerns the presence of only two major Class A banks in the island (Barclays Bank
International and Royal Bank of Canada). In May 1984, Montserrat revoked the
operating licenses of 22 banks of class B. This decision was considered to be the result
of non-payment of the license fee, following the recent increase imposed by the
government. In all probability, the same banks have moved elsewhere.
The Netherlands Antilles stretch along the Caribbean Sea, with two groups of
three islands each, placed at a great distance between them (St. Martin, St. Eustatus and
Saba), located about 50 miles east of Puerto Rico (Curacao, Aruba and Bonaire) and
about 50 miles off the coast of Venezuela. The Netherlands Antilles is a Member State/
partner of the Kingdom of the Netherlands (together with the Netherlands and
Suriname), but exercises full autonomy in the internal affairs of the state.
More important as tax havens are Curacao, where the capital of the
Netherlands Antilles is located, Willemstad and St. Martin, half being under French
possession. For many years, the Netherlands Antilles enjoyed an advantage over other
financial secrecy jurisdictions, due to an old tax treaty concluded by the Netherlands
with the United States and the United Kingdom. Simply put, this treaty provides that
corporations in the Netherlands Antilles, which have investments in the United States
are either tax exempt or pay lower taxes than those imposed on profits earned by the
companies of other countries.
This preference explains the dominance of corporations in the Netherlands
Antilles (2544 new companies were created in 1983), which own real estates and other
Money Laundering Through Offshore Areas
65
assets or investments generating profits in the United States. This also explains why a
corporation NV (Naamzloe Vennootshappen, the name of the insurance company with
limited liability of the Netherlands Antilles) is usually part of a well-thought plan of
tax evasion in a tax haven.
Agreements resulting from the recent negotiations between the United States
and the Netherlands Antilles on the treaty will effectively put an end to the position of
advantage gained through the Treaty by the Netherlands Antilles. The Netherlands
Antilles offers modern and efficient services of telex, telephone and mail, a large
network of international banks and direct air flights to New York and Miami. A wide
variety of entities can be created with lower costs within a short time (2-4 weeks).
Corporate Confidentiality is ensured by applying the Dutch civil law system
and the use of "bearer shares" in case of corporate ownership. Bank secrecy is strictly
observed even in the absence of specific legislation in this area. Exemptions from any
monetary and foreign exchange restrictions are normally granted to any corporation set
up by foreigners. Like their great rival, the Cayman Islands, the Netherlands Antilles
has developed laws and regulations to attract investors in the market of tax havens
because the position obtained through the Treaty has provided a significant sector of
this market.
Switzerland is not a "tax haven". Although the words "bank account in
Switzerland" have become synonymous with "secret bank account” and although
Switzerland is undoubtedly the most stable, secure and picturesque place to keep the
money in secret, the fact is that it is not a "tax haven". The taxes for the Swiss people
are high and the taxes on the income earned by foreigners in Switzerland amounts to
35%.
Of course, through the Swiss banks arrangements for investment abroad can be
made to avoid the high taxes in Switzerland, such profits are transferred again in safe
Swiss bank accounts.
Swiss banks offer an incredible range of services in addition to the regular banking
services, including that of acting as agents of brokerage, traders in precious metals,
investment managers and even travel agents for their clients. Banking secrecy and all
commercial or economic transactions are a normal state of affairs in Switzerland.
Laws relating to banking are part of the country's constitution and are taken very
seriously.
Swiss make every effort to ensure the confidentiality of their customers'
banking operations, down to the use of envelopes without heading; mailbox addresses
that change frequently, personal messaging and sending the mail from France, Italy or
Germany to foreign customers, to avoid the Swiss postmark.
Although the Swiss corporate law provides sufficient privacy to meet the needs
of any foreign investor, there are too many other cheaper, more accessible and quicker
places to set up corporations. Recently, by applying a mutual assistance US-Swiss
treaty, the investigators who have worked using the appropriate channels of the
Ministry of Justice and the State Department have been able to acquire data and
documentation on accounts in Switzerland of American criminals.
The Swiss themselves feel disappointed and embarrassed by the abuses
committed by foreign criminals through their banking system. They fear the potential
66
Ispas, R.
threat posed on the integrity of the system by the millions of dollars of "easy money",
which might tempt the employees, otherwise reliable, from the Swiss banking network.
In May 1984, a national referendum was held which proposed mitigation bank
secrecy to allow the foreign law enforcement officials the access to documents related
to foreign offenders. The referendum was not approved, but the mere fact that such a
proposal was made and put to vote was a step forward to the right direction.
REFERENCES:
[1]. Bari, J. - Contemporary Global Issues, Bucharest, Economica Publishing House, 2003
[2]. Bujor, V.; Pop, O. - The Use of Banking Channels for Money Laundering Activities,
Timisoara, Mirton Publishing House, 2002
[3]. Coşea, M. - Underground Romania, Economica Publishing House, Bucharest, 2004
[4]. Craiu, N. - Underground Economy between "Yes" and "No", Economica Publishing House,
Bucharest, 2004
[5]. Sandu, F.; Voicu, C.; Dascalu, I. - Fraud in financial, banking and capital market fields,
Trei Publishing House, 1998
Annals of the University of Petroşani, Economics, 9(2), 2009, 67-72
67
DEVELOPMENT OF PRIVATELY MANAGED
PENSION FUNDS IN THE CONTEXT
OF PENSION REFORM
LILIANA IVĂNUŞ, CLAUDIA ISAC,
ILIE RĂSCOLEAN *
ABSTRACT: The development of privately managed funded pension provision
reflects some trends in societies, like for instance richer societies which might favour more
responsibility and choice for individuals, or the expectation that diversifying risks through
funded pension might achieve higher returns than GDP growth, while it also means inevitably
higher risks. With the development of privately managed funded pensions, the question of the
sharing and regulation of risks becomes relevant due to the fact that such schemes may also be
expected to provide pension adequacy for lower income groups.
KEYWORDS: private funded pensions; pensions reform; pensions schemes;
mandatory private pension; voluntary private pension
1. INTRODUCTION
The role and development of private funded pension provision is very diverse
and some important decisions remain to be made, notably regarding the organization of
the pay-out phase.
Further analysis appears necessary, on the basis of indicators, to assess the
impact of the development of these schemes on future pension levels. In particular in
the later two types of schemes private provision (be it mandatory or not) need to be
analyzed in terms of coverage and amount of contribution to better understand the
impact on adequacy and indirectly on sustainability. Moreover financial risks and
security might also impact on future benefits. Coverage might be less of an issue in
mandatory schemes but this also need to be analyzed in a context of evolving labour
markets and changing societal risks leading to longer periods of non-contribution to
pension schemes.
*
Lecturer, Ph.D., Student, University of Petroşani, Romania, liliivanus@yahoo.com
Assoc.Prof., Ph.D., University of Petroşani, Romania, isacclaudia@gmail.com
Assoc.Prof., Ph.D., University of Petroşani, Romania, rascolean@upet.ro
68
Ivănuş, L.; Isac, C.; Răscolean, I.
Such reforms need to develop a comprehensive approach covering all types of
pension schemes, since the ageing challenge is common to all pension systems: all
pension systems need to compensate for the decline in employment of older workers
and the continuous increase in life expectancy. Pay as you go systems are directly
affected by population ageing as their future contribution base is shrinking while the
number of beneficiaries is increasing. In funded systems, the increase in life
expectancy also implies some imbalance: if contributions are not increased and/or
people do not retire later, benefits would also be lower.
Further analysis appears necessary, on the basis of indicators, to assess the
impact of the development of these schemes on future pension levels. In particular in
the later two types of schemes private provision (be it mandatory or not) need to be
analyzed in terms of coverage and amount of contribution to better understand the
impact on adequacy and indirectly on sustainability. Moreover financial risks and
security might also impact on future benefits. Coverage might be less of an issue in
mandatory schemes but this also need to be analyzed in a context of evolving labour
markets and changing societal risks leading to longer periods of non-contribution to
pension schemes.
2. THE IMPACT OF THE MANDATORY PRIVATE PENSIONS
DEVELOPMENT
Financial security upon retirement can be supported through diversification of
obtaining pensions, a pension scheme that is based on several components. Reform of
pension system in Romania allowed besides the public pension system, called Pillar I,
which is a distributive system based on solidarity between generations (regulated by
Law 19/2000 on public pension system and other social insurance rights, with
subsequent amendments and supplements) to implement a private pension system that
records the contributions of participants in individual accounts, based on capitalization,
investment and accumulation of these contributions. Private pension system is
implemented in two forms:
• mandatory private pension (pillar II) regulated by Law 411/2004 on privately
managed pensions, as republished;
• voluntary private pension (pillar III) regulated by Law 204/2006 on voluntary
pensions.
Table 1. Characteristics of pensions types in Romania
Pension type
Contribution
type
Compulsory
Type of fund
management
Public
Mandatory private
pension (Pillar II)
Compulsory
Private
Voluntary private
pension (Pillar III)
Voluntary
Private
Public pension
(Pillar I)
Age of persons participating in the
system
All employees aged over 45 years old,
and optionally those aged between 35
and 45 years old
All employees aged under 35 years old
and optional ones aged between 35 and
45 years old
Employees aged up to 60 years old
Development of Privately Managed Pension Funds in the Context …
69
In May 2009, 4,325,094 participants contributed to private pension funds and
the number of participants enrolled in the Registry of participants was 4,752,942
persons (table no. 2). The number of participants increased in May 2009 by 0.8% from
the previous month and 35.4% compared to May 2008, representing 86% of the total
employees in Romania. Degree of concentration retains the same values recorded in
previous months, the weights of the first three privately managed pension funds -69%
of participants and funds within the first 5 - 82% (figure 1).
Table 2. Pillar II Number of participants enrolled in the Registry of participants
Mandatory
private
pension fund
AIG
ARIPI
AZT
VIITORUL
TAU
BCR
BRD
EUREKO
ING
KD
OTP
PENSIA VIVA
PRIMA
PENSIE
VITAL
TOTAL
31.05.
2008
31.12.
2008
31.01.
2009
28.02.
2009
31.03.
2009
30.04.
2009
31.05.
2009
261,47
389,95
282,54
427,16
285,12
431,88
288,65
438,07
291,70
443,37
293,93
447,05
295,22
449,59
1.065,87
124,17
99,32
264,33
1.380,56
7,58
20,61
306,20
1.158,21
145,03
107,41
287,04
1.504,29
8,11
22,12
332,53
1.170,68
148,12
108,46
289,87
1.520,21
8,19
22,33
335,84
1.185,62
151,14
109,78
293,10
1.541,66
8,26
22,52
339,88
1.199,06
153,68
110,98
296,23
1.558,86
8,35
22,75
343,71
1.208,81
155,93
111,87
298,48
1.571,17
8,41
22,92
346,42
1.213,56
157,59
112,42
299,46
1.578,84
8,28
22,83
347,61
17,42
131,60
4.156,32
20,69
141,99
4.531,86
21,04
143,37
4.580,79
21,33
145,20
4.642,00
21,62
146,76
4.693,93
21,81
147,89
4.731,54
22,04
148,93
4.752,94
Net assets of the 14 pension funds, administered by the 14 directors authorized
by CSSPP in Pillar II, was in May 1.437.225.124 Lei, 8% higher than April 2009 and
approximately 17 times higher than May 2008.
Also regarding the net assets, the degree of concentration was maintained in
May 2009, top three funds have recorded 70% of the total, and the top five funds 84%.
In May 2009, transferred contributions worth about 113 million lei to 3.413
million participants. In these months contributions were transferred to 28% of total
participants in the Registry of participants. Maintaining the last year and the first
months of this year trend, the number of empty accounts in Pillar II continued to
decline in May representing 9% of total registered participants accounts.
Average contribution / participant were in May 2009, as the previous months,
26 lei. If we relate to the number of participants for which contributions were paid in
May 2009 average contribution was 33 RON, which represented approximately 1.72%
of gross wages in March 2009.
70
Ivănuş, L.; Isac, C.; Răscolean, I.
Figure 1. Pillar II Participants % of total-May 2009
Figure 2. Pillar II % of total net assets-May 2009
In May, of all participants registered in the Register of Participants - 4,752,942
people, 64% were aged up to 35 years and 36% aged over 35 years old (table 3).
Regarding the gender structure, 52% of the participants were male and 48% female, in
both cases, gender and age, maintaining the values recorded in previous months (table
4).
Contribution to private pension funds, currently 2%, is deducted from monthly
gross income, which represents the basis for individual social security contribution.
During May 2009, private pension fund managers continued to invest mainly
in low-risk assets, as in 2008 and the first months of 2009. Thus, 53.39% of the assets
Development of Privately Managed Pension Funds in the Context …
71
of privately managed pension funds were government securities, in constant decline
over the previous months.
Table 3. Pillar II Participants in the register-age structure-May 2009
Mandatory
private
pension
fund
AIG
ARIPI
AZT
VIITORUL
TAU
BCR
BRD
EUREKO
ING
KD
OTP
PENSIA
VIVA
PRIMA
PENSIE
VITAL
TOTAL
31.05.08
until 35
years
31.12.08
over 35
years
until 35
years
31.01.09
over 35
years
until 35
years
31.05.09
over 35
years
until 35
years
over 35
years
162,33
201,48
99,14
104,72
177,18
281,75
105,36
145,42
178,83
284,89
106,28
146,99
184,94
295,97
110,28
153,62
691,11
13,92
62,29
255,31
86,31
171,15
4,75
374,76
9,72
37,03
134,64
45,29
93,17
2,83
753,96
86,93
67,92
187,56
966,68
5,13
14,21
404,25
58,10
39,50
99,48
537,61
2,98
7,91
761,39
89,00
68,59
189,47
974,97
5,19
14,36
409,29
59,12
39,87
100,40
545,25
3,00
7,97
783,35
94,68
71,04
195,66
1.000,37
5,26
14,67
430,20
62,91
41,38
103,80
578,47
3,02
8,16
40,44
23,17
220,76
111,77
222,99
112,86
230,46
117,15
13,12
11,21
2.683,42
7,49
6,20
1.472,90
13,59
93,74
2.929,04
7,10
48,25
1.602,82
13,85
94,64
2.958,45
7,19
48,73
1.622,34
14,48
97,93
3.048,96
7,55
51,00
1.703,99
Table 4. Pillar II Participants in the register-gender structure-May 2009
Mandatory
private
pension fund
AIG
ARIPI
AZT
VIITORUL
TAU
BCR
BRD
EUREKO
ING
KD
OTP
PENSIA
VIVA
PRIMA
PENSIE
VITAL
TOTAL
31.05.08
31.12.08
31.01.09
31.05.09
Female
128,80
186,61
Male
132,67
203,35
Female
137,48
202,41
Male
145,06
224,75
Female
138,63
204,58
Male
146,49
227,30
Female
143,63
213,24
Male
151,59
236,36
515,78
58,60
46,72
126,78
701,46
3,43
9,30
550,09
65,56
52,60
137,55
679,10
4,15
11,30
554,46
67,97
50,06
136,12
754,09
3,63
9,92
603,75
77,06
57,35
150,92
750,20
4,48
12,20
560,13
69,46
50,54
137,38
761,36
3,66
10,01
610,55
78,66
57,91
152,48
758,85
4,52
12,32
581,21
74,17
52,52
142,08
790,73
3,70
10,29
632,35
83,42
59,90
157,39
788,12
4,58
12,54
148,89
157,31
159,73
172,79
161,21
174,63
166,85
180,76
8,01
61,89
2.037,88
9,40
69,71
2.118,43
9,63
66,18
2.196,37
11,06
75,81
2.335,49
9,79
66,82
2.218,69
11,25
76,56
2.362,09
10,30
69,55
2.303,82
11,74
79,38
2.449,13
72
Ivănuş, L.; Isac, C.; Răscolean, I.
In May 2009, approximately 73.7% of the assets of privately managed pension
funds were placed in the country, and the remaining approximately 26.7% were foreign
investments.
3. CONCLUSIONS
The role and development of private funded pension provision is very diverse
and some important decisions remain to be made, notably regarding the organization of
the pay-out phase.
Pensions’ reforms need to develop a comprehensive approach covering all
types of pension schemes, since the ageing challenge is common to all pension
systems: all pension systems need to compensate for the decline in employment of
older workers and the continuous increase in life expectancy. Pay as you go systems
are directly affected by population ageing as their future contribution base is shrinking
while the number of beneficiaries is increasing. In funded systems, the increase in life
expectancy also implies some imbalance: if contributions are not increased and/or
people do not retire later, benefits would also be lower.
REFERENCES:
[1]. Ambachtsheer, K. - Pension revolution: a solution to the pensions crisis, John Wiley and
Sons, United Kingdom, 2007
[2]. Frunzaru, V. - Sistemul românesc de pensii. O evaluare din perspectivă europeană, Ed.
Economică, Bucureşti, 2007
[3]. *** - Organisation for Economic Co-operation and Development (OECD) - Reforming
public pensions: sharing the experience of transition in OECD countries, OECD
Publishing, 2007
[4]. www.csspp.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 73-82
73
FORMAL FINANCIAL SERVICES FOR RURAL SMALL
SAVERS: A CASE STUDY OF ORISSA, INDIA
JYOTIRMAYEE KAR, PRAFULLA K. DASH *
ABSTRACT: Preference of the small savers varies across the markets. Yet, generally
they opt for easily accessible and security of funds. Informal financial services appear to be
much ahead the formal ones both in terms of accessibility and security in catering to the needs
of the rural small savers. What constrains them in going for formal small saving? Some issues
are examined in this article.
KEY WORDS: financial services, rural India, rural savers
1. INTRODUCTION
Rural India is a paradox. This encompasses a total population of 740 million,
inhabiting in 7,000,000 villages, in a variety of regions and consumer groups. There
are a vast number of villages that are rapidly being engulfed via sub-urbanization, with
a sizeable proportion of the rural population engaged in non-agricultural activities.
With the advent of technological development, a large number of villages are reaping
the fruits of an agricultural revolution, through improved methods of cultivation and
diversified farming practices, and as a result are experiencing near urban income level.
On the other hand, there are also thousands of villages that still remain inaccessible,
without electricity or basic sanitation facilities, where the population enjoy no steady
source of income and are regularly exposed to the perils of famine, flood or cyclone.
On the whole rural poverty in India has alerted the world. It is generally
believed that rural India is poverty stricken. The ruralites, after meeting their
subsistence are left with very little income to save. But records reveal that that rural
saving to income ratio at 30 per cent is quite high, even higher than their urban
counterparts. A study carried out by Forte, a research agency in India set up by the
Dutch insurance and banking group, ING, reveals that rural awareness for some variety
of saving and insurance schemes are quite high. Mostly, rural people go for life
insurance as a means of long term saving to meet long term goals like purchasing land,
*
Prof., Ph.D., ICFAI Business School, Bhubaneswar, Orissa, India, jyotirmayee.k@gmail.com
Prof., Ph.D., ICFAI Business School, Bhubaneswar, Orissa, India
74
Kar, J.; Dash, P.
consumer durables or for family functions like marriage of a daughter. In contrast their
urban counterparts save in life insurance schemes for availing tax rebate. This contrast
reveals that the rural people go for long term savings primarily for asset building or
consumption expenditure. The first is for securing the future income risk while the
second is a status symbol.
Status symbol is optional. But income risk is an unavoidable part of
development. This may be resulted by external shocks like economic fluctuations and
climatic change or internal, individual specific shocks like illness and cause severe
hardship. Rural households are more vulnerable to these. They are exposed to a variety
of risks like crop failure resulted by drought, flood and cyclone, death or illness of the
livestock, policy shocks like fluctuating prices of agricultural produce, labour problem
and land related issues.
Rural households adopt different type of strategies to avoid severe income and
consumption shortfalls caused by risk. Asset building like purchase of land, draught
animals and other livestock and cash in hand are the primary ones. Often they go for
small savings. This article examines the constraints the households face in adopting
these strategies and suggest policy framework to expand the ability of the households
and communities to cope with severe income and consumption vulnerability caused by
risk in the rural economy of India. It has taken a sample of rural households from
Mayurbhanj, a tribal dominated district of Orissa to examine the issue. Present exercise
contains eight major sections. After the introductory note the second section highlights
savings in rural India. The third focuses on network of the formal financial institutions,
especially banks, in India. The fourth section assesses whether formal financial
institutions are averse to rural savers while the fifth one examines the response of the
rural small savers to formal financial institutions. The sixth one contains an empirical
study and the seventh part discusses findings of the same and comes up with certain
policy suggestions based on that. The last one is the conclusion.
2. SAVINGS IN RURAL INDIA
Nearly 70 per cent of the ruralites are able to save, but more than 50 per cent
save in the form of assets like land, livestock or utensils. In many poor countries poor
people value savings so much that they are willing to pay to save. Roving deposit
collectors in many countries charge a fee to accept cash from the clients- typically 6
per cent of the average money balances. (CGAP, Portfolio, 12/2007)
Financial services to the poor have always remained supply driven, rather,
credit driven. Savings has always played a second fiddle. The beginning was the
agricultural credit. The image of the poor was small and marginal farmers and they
were given soft loans. Then came the era of micro-enterprises and view of the poor was
changed to women entrepreneurs who were given large sums of working capital in
groups with joint liability of repayment. But it remains unclear how well formal
financial institutions cater to the needs of the poor. So far as saving is concerned, these
institutions have a perception that poor do not save. This may be inferred from the low
prevalence of saving mechanisms like accounts in the financial institutions and because
demand data for saving remains highly suppressed. The most compelling evidence of
Formal Financial Services for Rural Small Savers: A Case Study…
75
demand for saving services comes from the prevalence of deposit collectors to whom
clients regularly pay some premium to hold their money. Just as the existence of a
moneylender reflects demand for credit among the poor, widespread use of informal
saving services and physical assets signal demand for formal savings mechanism.
However, this demand could be tapped only when the formal service providers can
offer the clients a more attractive value propositions than they can obtain informally.
SHG movement in India has been harnessing the ability of the poor to save.
Yet they have not succeeded in catering to the saving needs of the poor. In a survey of
SHGs in the tribal dominated district of Mayurbhanj in Orissa, it was observed that the
group members of SHGs prefer to contribute only the stipulated amount to the SHG
fund. They are not willing to offer larger amount to be saved in the fund, firstly
because all the members are not capable of doing so, and secondly, they doubt the
ability of the team leaders to manage funds and felt that large unmanageable funds may
lead to difference among the group members and ultimate break-up of the group.
Therefore, demand for saving services continues to remain unheeded.
3. BANKING NETWORK IN INDIA
Indian banking sector is gradually moving away from rural to the urban area.
Over the last six to seven years rural bank branches have exhibited a declining trend.
But this is not very disheartening. Even though branch networking has grown urban
centric the few ones operating in the rural areas have been performing remarkably with
magnifying volumes of business. Share of the rural bank branches which was nearly 50
per cent in June 2000 has come down to 44.60 per cent in 2006, with an absolute
number of 32,709 and 30,754 in the respective years. This speaks of growing aversion
of the banks towards rural set up and much against the dictates of the RBI they are
closing down rural branches to move to the urban areas.
The actual scenario is somewhat different. There could be two possible
explanations for this. Firstly, due to increased urbanization rural areas are being
submerged in the urban township or being transformed into urban areas with
diversified socio-economic scenario. Secondly, bank branches when located in areas
with a population below 10,000 were categorized as rural branches. With increased
immigration of workforce in response to the development needs, population volume is
increasing in the rural areas and rural branches are being rechristened as urban ones.
Despite such branch shifting the banks are growing pro-ruralite. Credit
deployment in the farm sector over a two year time of 2004-06 has increased from Rs
90,541 crore to Rs 1,72,292 crore, almost by 90 percent. But this does not speak of
increased encompassing of the ruralites because branch networking as well as credit
deployment is much less than the demand for the same. In a recent speech RBI Deputy
Governor, Ms Usha Thorat, observed that, on an average, population served by a bank
branch has increased from 13,711 persons in 1991 to 15,209 in 2001 and subsequently
to 15,680 in 2005.In March 2007, each bank branch in India , on an average, was
serving 15,900 persons and the figure in case of Orissa is 16,500 (Economic Survey of
Orissa, 2007) While the branches in the rural areas have been serving 13,462 persons
in 1991, 15,667 in 2001 and 16,650 in 2005, the figures for the urban branches are
76
Kar, J.; Dash, P.
14,484 in 1991, 14,137 in 2001 and 13,619 in 2005. This speaks of increased demand
for bank branches in rural areas (Data Source: Business Line, an e-paper from Hindu
group of Publications, May, 04, 2007).
The rural economy is prospering. With increased remittances from the urban
dwellers and shift of agriculture from subsistence crops to cash crops and commercial
crops like horticulture and floriculture, savings from rural India has escalated by 30 per
cent over these years. Booming economic activities has also attracted private sector
banks as well as non-banking financial companies. They have eyed the rural economy
to mobilize savings and strengthen their capital base.
4. ARE FORMAL FINANCIAL INSTITUTIONS AVERSE TO RURAL
SAVERS?
Saving Assessments conducted by the Consultative Group to Assist the Poor
(CGAP) has probed the problems faced by the formal financial institutions in
extending saving services to the rural poor. These features are more or less prevalent
world wide. Firstly, saving programmes need a more sophisticated managerial acumen
than credit services. Mobilization of saving requires more capable staff and a well
knitted system. These inputs often increase the cost of the saving services as an
efficient management demands higher remuneration. No doubt, supervision of small
funds may pose a problem. Formal institutions could go beyond the existing norms and
design supervision accordingly. Extension of financial services at a lower cost could be
achieved by opening up branches in grocery stores, medicine stores or even with grain
dealers. Such a step has been successful in Mexico and Philippines.
Secondly, formal financial institutions often face the problem of excess
liquidity. This makes them disinterested for mobilizing savings, especially poor
people’s saving which is short term, unstable and costly. In Orissa credit-deposit ratio
is very low (64 on March 2007), in comparison to the all-India average (75). This is
caused by lack of suitable lending opportunities which also causes excess funds with
the Micro-Finance Institutions. Less developed countries like Uganda also experience
such problems (CGAP Survey).
In the third case, formal financial bodies, when in need, are able to get funds
from the apex bodies like the RBI. Resource crunch is met by borrowing from other
source which is more convenient. These funds crowd out deposits, more so from the
poor depositors. Another important limitation which restricts saving mobilization is the
payment system. The formal institutions often lack accessible locations to extend
payment services and accept deposits. Practice of swiping cards in machines installed
in retail shops and access to banking services like deposits and withdrawal has been
successful in many countries (Ivatury, 2006).
It has also been observed that banking regulations that necessitate expensive
infrastructure requirement discourage rural branch networking. This increased cost
limits operation of the units in the rural areas. Moreover, the worldwide effort to
combat money laundering and financing terrorism are making small transactions
unviable for the financial institutions (Isern et al, 2005). Public private partnership,
which could broaden outreach of the banks is severely restricted and regulated under
Formal Financial Services for Rural Small Savers: A Case Study…
77
the coverage of safety. In the Indian financial system there is no institution which
concentrates on acceptance of deposits only. When two jobs, deposit mobilization and
credit supply are to be taken up by the same institution, the former gets marginalized.
5. ARE RURAL SMALL SAVERS AVERSE TO FORMAL FINANCIAL
INSTITUTIONS?
Preference of the small savers varies across the markets. Yet, generally they
opt for easily accessible and secured of funds. Accessibility can be two dimensional:
physical accessibility or proximity and financial accessibility or affordability. In this
sense affordability also reflects liquidity.
If a bank branch is located within five kilometers of a saver’s residence it is
said to be close proximity. On an average, in 2007, there are 0.015 bank branches per
square kilometre in the district of Mayurbhanj and for the state of Orissa the figure is
0.018. These branches comprise the totality of commercial banks, both public sector
and private sector, cooperative, and regional rural banks. Moreover, each bank branch
serves nearly 13457 persons in the state while the district figure is quite encouraging,
4182. This, however, is not surprising. This poverty stricken and tribal dominated
district has large number of bank branches. A research finding has observed that in
Philippines the correlation between the number of subsistence poor and the number of
people per branch of deposit taking institutes in different groups across the regions was
0.68. In Mexico, the correlation between the number of people per branch and the level
of marginalization across the states was 0.62 (CGAP Focus Note No 37, September,
2006). Across the districts of Orissa as well the correlation between percentage of poor
people below the poverty line and the number of people served by a bank branch is
0.59. In proximity aspect informal sources of saving far out-compete the formal
institutions. Small savers have found no substitute for saving at home like cash in
earthen piggy banks or wooden box. They also prefer to keep cash with a relative or a
well known villager. Saving in this form is always liquid. With easy access it carries no
extra cost to the saver in terms of time or travel.
Affordability measures transaction cost of saving. This comprises travel cost
plus wages sacrificed during the visit to a bank branch. Small savers pay some service
fee to the deposit collector to hold their money or save the same in the bank. At times
this amount converts the interest proceeds to around a negative 5 per cent. All these
costs taken together make formal saving unaffordable by the poor, who ultimately opt
for informal saving. This apart the threshold cost of deposit like the amount needed for
opening an account, the minimum balance etc. are often much excess of what the poor
can afford. A CGAP study reveals that the threshold cost decrease as branch density,
i.e., number of branches per population increases. So widening the branch network
could be a possible option. In the affordability aspect also small savers prefer low cost
informal saving.
Informal saving is risky. There is loss due to fire, theft or other hazards. Money
saved in the form of livestock or land may face value reduction. Formal banking is also
not free of risk so far as bank failure or absconding of the depositor along with
people’s money is concerned. Studies have observed that informal saving is far riskier
78
Kar, J.; Dash, P.
than the formal ones (Wright and Mutesasira, 2002). Even though risky, informal
saving outweighs formal saving. It is a common notion in behavioural finance that
individuals underestimate familiar risks or those risks they perceive to be under
control, while unfamiliar risks which are not perceived to be under their control are
treated as high risks. Therefore, poor undermine the risks associated with cash at home,
savings in the form of utensils or livestock, which they are well acquainted with since
childhood. These risks seem to be less when compared with saving in an unknown
institution with unfamiliar system. In this aspect also small savers prefer informal
saving. ‘Insecurity’ in formal saving arises because of many instances. The much
accepted ‘Peerless’ failed at one time. There are also instances where companies come
up with a wide range of products, varying from utensils and decorative items to TV
sets and motorbikes, collect savings from the people with the assurance that the
product will be given to them when their saving will accumulate after 6 to 7 months.
These agencies often fly by midnight and the small savers in rural areas, who are not
very knowledgeable about banking practices, lose faith in the practice of deposit
collection. True, this is deliberately malicious. The rural small savers are ignorant
about the reputation of the FIs. Even if they know they find it difficult to access them.
They are averse to the procedural delay and documentation involved in creating a
savings account and withdrawing money from the same.
6. MODEL SPECIFICATION
The small savers save to cope with future risk. Formal markets are not
interested in insuring high risk small savers. The reasons are both theoretical as well as
policy specific. Bell (1998) and Besley (1994, 1995) have investigated details of these
reasons. Informal saving, in the form of assets, is readily responsive to high risk
conditions. But a common adverse shock reduces the value and makes the terms of
trade adverse for these. Secondly, lumpiness of assets restricts marketability, for which
the poor cannot protect themselves easily against adverse shocks. Holding saving as
cash in hand or with some trusted person are also not risk free. In this event small
saving come up as self insurance and help in smoothening income in the advent of
shock. Then what constrains them in going for formal small savings?
6.1. Data Specification
A survey was conducted by the present researcher to assess the impact of
microfinance on the economic position of the poor in Baripada. Data were also
collected on saving along with credit position of the household. A sample of 200
households, comprising SHG members (62%) and non-members (38%) were included.
It was observed that, on an average, the sample households were saving nearly 39
percent of their income. It was also observed that almost all the sample respondents
were more interested in informal saving like, saving cash or in kind like livestock,
utensils or land. The survey encompassed only female respondents as primarily, they
are the members of SHG. They were asked about the family particulars and other
details, enlisted in Table 1.
Formal Financial Services for Rural Small Savers: A Case Study…
79
Table 1. Mean Values for Demographic and Economic Characteristics of the Sample
Sl
No
1
2
3
4
5
6
7
8
Variables
Total Annual Income (Rs)
i. Primary Income (Rs)
ii. Secondary Income (Rs)
Annual Saving (Rs)
Asset Position (Rs)
Indebtedness (Rs)
Dependents
Earners
Education (Years of Schooling)
Transaction Cost of Saving (per cent)
SHG
Members
43,000
34,000
9,000
18,000
23,500
20,500
6
3
9
12
NonMembers
36,000
33,000
3,000
15,500
25,000
14,000
5
3
9
18
Total
41,000
33,050
7,250
16,700
23,700
18,700
4
3
9
14
The sample households, on an average, had an annual income of Rs 41,000.
Families with SHG membership were able to earn some more income from the
productive activities undertaken by some of the SHGs but this income was highly
fluctuating. Most of the sample households had agriculture as their primary occupation
and their proportion with SHG membership was 65% and for non-members it is 70%.
The rest were daily wage earners or small shop owners, mainly with family business.
Almost all the sample households had some secondary occupation like working as
wage earner or doing small businesses. But income from all these sources was highly
fluctuating.
Dependency load is almost equal for both SHG members and non-members.
This indicates that apart from him each earner has to support at least two more persons.
Average education measured as years of schooling is equal for both the groups, 9
years. Asset position which has taken into account homestead land, agricultural land,
livestock and other agricultural implements was marginally higher (Rs 25,000) for the
non- members than for the SHG members (Rs 23, 500). It was also observed that
among the SHG members 32 per cent expressed their preference for formal saving
while for the non-members the percentage was 24. When enquired about the reason,
the members expressed distance, high transaction cost, and low accessibility to be the
major reasons for not going for formal savings.
6.2. The Model
In formal institutional saving restraints, like high transaction cost, security of
funds, and distance of the formal institutions etc., to be encountered are many. Low
access and less perceived safety in formal saving make the small savers averse to
formal saving and substitute informal saving for this. To test the hypothesis a saving
model is build up. Transaction cost of saving incorporates all the three aspects:
affordability, accessibility and safety. It also considers the interest earnings and
payment to the deposit collector. Various socio-economic parameters along with
transaction cost are taken as the independent variables. Amount of informal saving is
regressed on these factors. Formal saving is not considered as very few respondents
80
Kar, J.; Dash, P.
had this. Compulsory contribution to SHG groups was also not included as these are
equal for all. The model is:
Si = α + β 1Y+ β 2A+ β 3Edn+ β 4Indbt+ β 5E/D+ β 6Os+ β 7TC+ ε 1
(1)
Details of the parameters are enlisted in Table 2.
TABLE 2. Variables in the Study
Sl
No
1
2
3
4
5
6
7
Variables
Denotation
Income
Asset
Education
Indebtedness
Dependent Earner Ratio
Y
A
Edn
Indebt
D /E
Secondary Occupation
Transaction cost of
Deposit
Os
TC
Definition
Annual Income
Family Investment plus Real Estate
Highest Education in the household
Amount of Loan plus Interest
Number of dependents each earner has to
support
Income from Secondary Occupation
Amount spent for moving to the bank for a
deposit
6.3. Empirical Results
Details of the regression results are given in Table 3.
Table 3. Regression Coefficients with Saving as the Dependent Variable
Variables
Intercept
Income
Asset
Education
Indebtedness
Dependent Earner Ratio
Secondary Occupation
Transaction cost of Deposit
R2
Number of cases
Model I (SHG)
31.23
48.31*
36.33*
6.38
8.94*
- 6.57
9.54*
22.54*
0.78
Model II (Non-SHG)
26.11
56.14*
47.24*
4.93
7.55*
-9.85
8.56
17.93*
0.82
124
76
* stands for statistical significance maximum up to 10 per cent
In the sample survey income and asset possession bears positively significant
correlation with informal saving. Education coefficient is not significant for saving by
the sample household. A nationwide survey in Mexico revealed that the level of usage
of informal instruments for saving decreases with increase in education and income
level (Bolano, 2005). Present survey evidenced that increased income level induces
increased possession of landed property and livestock like cows and goats. Moreover
it was also observed that with larger asset possession they go for more assets as they
Formal Financial Services for Rural Small Savers: A Case Study…
81
consider these to be more income earning and valuable than bank deposits.
Indebtedness forces the respondents to save more. Those with increased loan were also
going for larger informal saving like cash in hand as they can use it for immediate
repayment. As expected, transaction cost of formal deposit encourages small savers to
opt for more informal saving. On observation, it was observed that interest earning was
not that very alluring to the small savers. On adjustment with transaction cost the
amount accrued often became negative.
7. ANALYSIS AND POLICY SUGGESTIONS
This exercise has underlined income, asset possession, indebtedness and
transaction cost of formal saving to be statistically significant factors to influence
savings in the informal form. But the formal financial institutions have to out-compete
the informal ones to extend the web of saving facility. Undoubtedly, increase in
income and indebtedness increases savings. Improved asset position also induces the
small savers to increase saving for debt repayment. But apart from these economic
parameters the formal financial institutions could reduce transaction cost of deposit to
broaden the reach. Members of SHGs could save because they are able to earn some
income out of the productive activities of the SHGs. The financial institutions, due to
their inherent features, are not able to serve the small savers in rural area. Small savers,
on the contrary opt for informal saving as they perceive it to be less costly. Considering
the demand supply constraints and opinion of the small savers in one of the lagged
areas in Orissa some policy suggestions could be made for encompassing the savers in
the out reach of the formal financial bodies.
Small savers, not only in the district but in the state as a whole, are not very
much acquainted with formal banking services. The banking professionals have to take
care of this. Incorporation of Microfinance institutions (MFIs), NGOs and SHGs in the
process of deposit mobilization could be of much benefit to both the savers as well as
bankers. Earlier MFIs in India were functioning primarily as credit institutions and
were not permitted to collect savings. In January 2006, RBI, recognizing the gap
between the demand for and supply of saving services, permitted deposit mobilization
by the MFIs and christened them as ‘banking correspondents’. This has opened up a
new avenue of collaboration between formal financial institutions and MFIs/NGOs.
Even the rural moneylenders, with detailed information about rural clientele could be
appointed as banking correspondents. Such a step, while meeting savings needs of the
poor, will be advantageous for both the parties; as the financial institutions can broaden
their resource base with access to new markets by incurring a little transaction cost and
MFIs, NGOs and even rural moneylenders could have a broadened portfolio with a
variety of financial products and gain a new source of income. And the rural poor will
have a varied and robust channel of saving which will help them in coping with income
risk and consumption risks with ease. Companies like ‘Sahara India’ have been a great
success in this aspect. This model of deposit mobilization which collects daily savings
from the small shop owners could be encouraged to encompass small savers as well.
Existing customers could install confidence among the new ones.
82
Kar, J.; Dash, P.
Very often the small savers find opening of a bank account and operating the
same to be an uphill task. They are also not able to judge the financial risks involved in
different saving instruments. Some of the members even requested me to open the
account on their behalf. The benefit would be they could hand over their savings to me
and take it back when they are in need and thus avoid going to the bank. Banks could
adopt a public education campaign in general and a client education programme in
particular to familiarize them with the variety of saving instruments.
To out-compete informal saving formal institutions should offer affordable and
secured saving services. Practice of interest slabs on the basis of income and asset
position of the households could be adopted. Such a scheme is already there in the
credit market and these could be modified on the basis of client preference and client
needs. Mostly small savers are agriculturists or daily wage earners. Monthly saving
schemes practiced by the banks do not fit into their earning pattern. They would rather
prefer a daily or annual saving scheme and formal institutions should look into their
choice. A credit linked small saving scheme in which the small savers could be able to
borrow after depositing some amount could favour them.
8. CONCLUSION
Small savers do not find formal financial institutions to be comfortable to deal
with. They prefer informal saving which is not able to meet their demand in the event
of risk. This group, with their special requirement, needs special treatment from the
formal bodies. If the latter could look into the intricacies and design saving mechanism
accordingly, it could not only extend risk coverage to the small savers but also extend a
broadened financial base to the formal institutions and the numerous banking
correspondents.
REFERENCES:
[1]. Bell, C. - Credit Markets, Contracts and Interlinked Transactions, in H.Chenery and
T.N.Srinivasan, eds., Handbook of Development Economics, vol.1, Amsterdam:North
Holland, 1998
[2]. Besley, T. - Saving,Credit and Insurance, in J.Behrman, T.N. Srinivasan, eds Handbook of
Development Economics. Vol. 3A. Amsterdam: North Holland (1995), Non-market
Institutions for Credit and Risk Sharing in Low-income Countries, Journal of Economic
Perspectives 9(3): 1994, 115-27
[3]. Bolano, P.C. - El Ahorro Popular en Mexico: Accumulando Activos pare Superar la
Pobreza, CIDAC and Miguel Angel Por, 2005
[4]. Deshpande, R. - Safe and Accessible: Bringing Poor Savers into the Formal Financial
System, CGAP Focus Note 37, Washington DC, 2006
[5]. Isern, J., Portcous, D.; Hernandez-Crossand, R.; Egwuagu, C. - AML/CFT Regulations:
Implications for Financial Service Providers That Serve Low Income People, CGAP
Focus Note 29, Washington DC, 2005
[6]. Ivatury, G. - Using Technology to Build Inclusive Financial System, CGAP Focus Note 32,
Washington DC, 2006
[7]. Wright, G.; Mutesasira, L. - The Relative Risk to the Savings of Poor People, Nairobi,
Microsave, 2002
Annals of the University of Petroşani, Economics, 9(2), 2009, 83-102
83
GROWTH AND FORECASTS OF FDI INFLOWS TO
NORTH AND WEST AFRICA - AN EMPIRICAL ANALYSIS
GULSHAN KUMAR, NEERJA DHINGRA *
ABSTRACT: The developing countries of Africa are in severe hunger of FDI inflows
as these are receiving a meager 2.8 percent share of global FDI inflows and just 10 percent of
aggregate FDI inflows to the developing world. The present study is an effort to examine the
growth of FDI inflows to the two largest recipient regions of Africa, through the computation of
compound annual growth rates by fitting an exponential function estimated by ordinary least
square method. The study detected that during the last three decades, the growth of FDI inflows
remained highest for Algeria and Cape Verde, in Northern Africa and West Africa respectively.
Both these countries also remained ahead of the others, in their respective regions in growth of
FDI as percentage of gross fixed capital formation. The forecasts of FDI inflows to the
representative countries of North and West Africa have been generated by using Double
Exponential Smoothing model for the period 2009 to 2020. The adequacy of the model is tested
by computing autocorrelation coefficients and Ljung-Box Q statistics. The study revealed that
in the ensuing decade, Egypt is expected to grow at the fastest pace as far as FDI inflows are
concerned.
KEY WORDS: double exponential smoothing, compound growth rates, forecasts,
auto correlation coefficients, Ljung-Box Q-Statistics
JEL Classification: F21, F47
1. INTRODUCTION
African countries, eager to achieve high rate of economic growth, are trying
their level best to accelerate the rate of capital formation. An increase in investment is
no doubt, crucial for the attainment of sustained growth and development in the region.
But the levels of income in these countries are so low that additional saving and
investment are hard to be generated domestically and this requires mobilization of
international financial resources. Given the unpredictability of aid inflows, low share
*
Senior Lecturer, Ph.D., D.A.V. College, Hoshiarpur, Punjab, India, jsgsass40@rediffmail.com
Senior Lecturer, Ph.D., B.D. Arya Girls College, Jalandhar Cantt , Punjab, India,
neerja.dhingra@yahoo.in
84
Kumar, G.; Dhingra, N.
of Africa in world trade (2.34 percent of world exports and 2.22 percent of world
imports in the year 2003), high volatility of short-term capital flows, and the low
savings rate of African countries (less than 20 percent), the desired increase in
investment has to be achieved through an increase in FDI inflows (Dupasquier and
Osakwe, 2005). FDI is viewed as a major stimulus to economic growth in developing
countries because of its perceived ability to deal with major obstacles such as shortages
of financial resources, technology and skills (Mwilima, 2003). FDI is welcomed and
indeed actively sought by virtually all the African countries. For this reason they have
made considerable efforts over the past decades to improve their investment climate.
They have liberalized their investment regulations and have offered incentives to
foreign investors. However, the expected surge of FDI into Africa as a whole has not
occurred (Odenthal and Zimny, 1999). Africa received FDI inflows to the tune of US$
1953 million in the year 1981 which was just 2.88 percent of global inflows and 8.12
percent of the aggregate inflows of developing countries. In the year 2008, with an
amount of the order of US$ 52982 million, although Africa’s share in the FDI inflows
of developing countries rose marginally to 10 percent but the share in the global
inflows remained restricted to 2.88 percent only (World Investment Report 2008).
Present study is an effort to access the trends in growth and ascertain the prospects of
FDI in the North Africa and West Africa, the regions which have garnered the
maximum share of FDI inflows to Africa during the last few decades.
2. OBJECTIVES
The study has been conducted keeping in mind the following objectives:
1. To examine the trends in growth of FDI inflows to North Africa and West Africa.
2. To detect the share of FDI inflows in the gross fixed capital formation in North and
West Africa.
3. To generate the forecasts of FDI inflows to the major recipient countries of North
Africa and West Africa.
3. DATABASE AND METHODOLOGY
The present study is based on secondary data and is confined to the period of
twenty seven years i.e. 1981-1982 to 2007-2008. The required data have been extracted
from World Investment Report UNCTAD (2008). For the purpose of analysis, whole
developing Africa has been divided into five regions viz. North Africa, West Africa,
Central Africa, East Africa and Southern Africa. Out of these five regions, two major
recipient regions have been selected by adopting percentage share approach. To
calculate the compound annual growth rates (CAGRs), first of all, an exponential
function has been fitted as shown below:
Yt =
t
0 1
e ut
(1)
Growth and Forecasts of FDI Inflows to North and West Africa …
85
Here Yt is dependent variable, 0 and 1 are the unknown parameters and Ut
is the disturbance term. If we present equation (1) in the logarithmic manner it assumes
the following form:
logYt = log
0
+ log
1
+ Ut
(2)
Equation (2) makes use of Ordinary Least Square Method of regression. The
compound rate of growth ( grc ) has been computed by taking antilog of estimated
regression coefficient, subtracting 1 from it and multiplying by 100, as shown below:
∧
Where
∧
1
∧
grc =(A.L. 1 - 1) × 100
is a regression estimate for
1.
(3)
To check whether the growth rates
are significant or not Student’s t-test has been applied which is as follows:
∧
∧
t=
∧
∧
1
∧∧ : t(n-2) d.f
s(
s(
1
1
)
)
∧
∧
s( 1 )
(4)
Where 1 is the regression estimate,
the respective standard error
(Gupta and Kumar, 2006, p.297; Sidhu and Kumar, 2006, p.124). The forecasts have
been generated by applying Double Exponential Smoothing - also known as Holt
Exponential Smoothing model. Since Double Exponential Smoothing model is best
suited to address the type of data which exhibits either an increasing or decreasing
trend over time. Moreover, in Double Exponential Smoothing model past observations
are given exponentially smaller weights as the observations get older. In other words,
recent observations are given relatively more weight in forecasting than the older
observations. Exponential smoothing is frequently the only reasonable time series
methodology in large forecasting systems (Gardner, 1985, p.23). Two equations
associated with Double Exponential Smoothing are as follows (http://www.itl.nist.
gov/div898/handbook/pmc/section4/pmc434.htm).
ft= α .Yt+(1- α )(ft-1+bt-1)
bt = γ .(ft-ft-1)+(1- γ ).bt-1
(5)
(6)
where: Yt is the observed value at time t, ft is the forecast at time t, bt is the estimated
slope at time t, α (Alpha) is the first smoothing constant, used to smooth the
observations, γ (Gamma) is the second smoothing constant, used to smooth the trend.
To adjust level at time t, the trend of the previous period b t-1, is added to the
last smoothed value of level component as shown by equation (5). Then equation (6) is
used to update the trend component, which is expressed as the difference between the
86
Kumar, G.; Dhingra, N.
last two smoothed values. Since there might be some randomness remaining, the trend
is modified by multiplying the trend in the past period (ft-ft-1) with γ and adding that to
the previous estimate of the trend multiplied by (1-γ ) (Gupta and Kumar, 2008, p.30;
http://www.itl.nist.gov/div898/handbook/pmc/section4/pmc434.htm).
The one-period-ahead forecast is given by:
Ft+1 = ft + bt
(7)
The m-periods-ahead forecast is given by:
Ft+m = ft + mbt
(8)
Equation (7) is used to forecast the value for one period ahead and finally
equation (8) was used to forecast ahead. For initialization process, grid search
procedure was used on the software SPSS (version 7.5) and the values of two
smoothing parameters α and γ were obtained. Only those values of α and γ were
selected which corresponded to the lowest figure of accuracy measure used. The best
value for the smoothing constant is the one that results in the smallest sum of the
squared errors given by the following equation:
Sum of Square of Errors (SSE) =
2
et =
∧
2
(Yt -Yt (
(9)
4. ADEQUACY OF THE DOUBLE EXPONENTIAL SMOOTHING
Before generating forecasts it is imperative to check the adequacy of the
forecasting technique used. Present study confirms the appropriateness of DES model
to generate forecasts by making use of two identification techniques namely
autocorrelation function and Ljung-Box Test. Exponential smoothing when allied to
appropriate identification technique constitute an even stronger competitor method to
alternative univariate forecasting procedures (Chatfield, Koehler, Ord, Synder, 2001).
To test the hypothesis of randomness as a measure to confirm the adequacy of the
model used, autocorrelation coefficients and Ljung-Box Q statistic of residuals have
been calculated.
5. AUTOCORRELATION COEFFICIENT
The autocorrelation (Box and Jenkins, 1976) function has been used for the
purpose of detecting non-randomness in data. Autocorrelations of residuals were
worked out as under:
Growth and Forecasts of FDI Inflows to North and West Africa …
87
n-k
Σ e t . e t+k
rk (e) =
t=1
n
; k=1,2.......l
Σ et 2
t=1
(10)
Computed values of auto correlation coefficient, rk(e) and the lag k were
displayed graphically to depict autocorrelation function (ACF) also known as
correlogram. The 95% confidence interval for residual ACF was obtained by using
Bartlett’s approximation while calculating standard errors (Bartlett, 1946; Gupta,
Kumar, 2008, p.31; and http://www.itl.nist.gov/div898/handbook/pmc/section4/pmc
434.htm). Residual ACF, which lies within the 95% interval taken as insignificant and
insignificance of ACF, implies adequacy of DES to generated forecasts.
6. LJUNG-BOX TEST
Out of a large number of tests of randomness we have selected Ljung-Box test
which can be used to test multiple autocorrelation coefficients and instead of testing
randomness at each distinct lag, tests the overall randomness based on a number of
lags. For this reason, it is often referred as portmanteau (French word which refers to a
coat rack that can hold many items of clothing on its hook) test. In this test we have
considered the whole set of the values all at a time to see whether they are significantly
different from zero. Ljung-Box Q statistics was computed from the model’s residuals
by using the following equation:
(11)
Where Q is Portmanteau test statistic, n is the sample size, L is the number of
lags being tested. Non-significance of Q test is taken to imply that the generated
residuals could be considered as white noise, thereby indicating the adequacy of
estimated model (Gupta and Kumar, 2008, p.31; http://www.itl.nist.gov/div898
/handbook/pmc/section4/pmc434.htm).
7. LIMITATIONS OF THE STUDY
Present study is limited to FDI inflows to two major recipient regions of
Africa. However, the outflows from these regions are not the part or parcel of this
study. While assessing the growth and generating the forecasts, the negative inflows
where ever detected, were taken as zero. Moreover, the study compares the position of
only two largest recipient regions.
88
Kumar, G.; Dhingra, N.
8. DISCUSSION AND RESULTS
The discussion has been divided in to three sections. Section I examines the
growth of FDI inflows to the largest recipient regions in Africa and detects the relative
position of their respective countries. Section II traces the share of FDI inflows in the
gross fixed capital formation in the countries of largest recipient regions. Section III is
devoted to the generation of forecasts of FDI inflows to the major recipient countries of
North Africa and West Africa.
The tides of FDI fluctuated up and down through the African countries over
the last three decades with no distinct tendency to rise or fall. Another interesting fact
is that the FDI inflows received by the continent have not been spread evenly among
all the regions. In the year 2007-08, Africa received FDI to the tune of US $ 52982
million and out of this, the largest chunk of 42.30 percent has been garnered by North
Africa only and second largest share of the order of 29.35 percent has been attracted by
West Africa. (Refer Table 1). The aforementioned trend can be observed even when
the average for the last twenty seven years is taken. The perusal of Table 1 clearly
indicates that on the average, North Africa shared 36 percent of aggregate inflows
received by Africa and West Africa was successful in attracting 30.27 percent.
Southern Africa garnered a share of the order of 21.64 percent whereas Central Africa
and East Africa have attracted meager share to the tune of 7.51 percent and 4.82
percent respectively. This shows that the major recipients of FDI in the continent in the
last three decades have been two regions- North Africa and West Africa. A detailed
comparative study of FDI growth in the respective countries of these two regions has
been exercised in the subsequent analysis.
North African countries which are more or less taken as Arab countries have
witnessed enormous rise in the FDI inflows although there has been severe fluctuations
in FDI inflows received by some of them. On conspicuous observation of Table 2, we
find that in North African region, during the period 1981-82 to 2007-08 the highest
growth in FDI inflows has been experienced by Algeria, to the tune of 31.89 percent. It
is followed by Sudan which has experienced FDI growth of 29.19 percent. The FDI
growth in case of Morocco has also been quite significant i.e. 20.45 percent. Libya and
Tunisia had moderate growth rates of 12.29 percent and 9.47 percent respectively. It is
interesting to note that Egypt, which is otherwise garnering the lion’s share in this
region, in absolute sense has least compound annual growth rate to the tune of 6.03
percent only.
In West African region the picture is quite different from that in North African
region as here some countries have experienced nil or even negative growth. It is
obvious from Table 3 that in West Africa, Cape Verde witnessed the highest compound
annual growth in FDI inflows during the period 1981-82 to 2007-08, to the tune of
26.23 percent followed by Ghana and Mauritania with 20.46 and 20.02 percent
respectively. Nigeria, the largest recipient of this region had a compound annual
growth in FDI inflows of the order of 11.67 percent. Mali experienced a significant
growth in FDI inflows to the tune of 19.52 percent during the period of last twenty
seven years.
Table 1. FDI inflows to Different Regions of Africa
Year
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Average
North Africa
Inflows
Percent
in
Share
million
in
US $
Aggregate
427
21.85
315
15.20
425
32.16
911
48.31
1 453
59.47
1 124
63.49
1 028
42.07
1 464
48.28
1 650
35.15
1 116
39.77
914
25.81
1 596
41.56
2 412
44.31
2 277
37.30
1 228
21.72
1 468
24.65
2 749
24.92
2 973
30.94
3 332
27.62
3 408
35.24
5 461
27.44
3 873
26.54
5 262
28.11
6 441
35.74
12 235
41.53
23 155
50.61
22 415
42.31
36.00
West Africa
Inflows
Percent
in
Share
million
in
US $
Aggregate
947
48.48
903
43.52
430
32.47
297
15.76
472
19.30
139
7.85
815
33.35
754
24.88
2 730
58.16
1 553
55.37
1 367
38.60
1 401
36.50
2 122
38.98
2 787
45.66
1 861
32.90
2 615
43.90
2 718
24.64
2 127
22.13
2 427
20.12
2 182
22.56
2 075
10.42
2 913
19.96
3 364
17.97
3 790
21.03
5 652
19.19
15 766
34.46
15 553
29.35
30.28
Central Africa
Inflows
Percent
in
Share
million
in
US $
Aggregate
325
16.64
307
14.81
208
15.72
61
3.24
488
19.99
109
6.14
235
9.62
250
8.26
- 93
-1.98
-1
0.00
22
0.62
161
4.20
218
4.00
- 59
-0.96
- 104
-1.84
1
0.01
- 103
-0.93
742
7.72
585
4.85
552
5.71
1 565
7.86
2 143
14.69
3 244
17.33
2 685
14.90
3 466
11.77
3 232
7.06
4 084
7.71
7.51
East Africa
Inflows
Percent
in
Share
million
in
US $
Aggregate
43
2.21
45
2.19
29
2.18
16
0.85
58
2.39
65
3.65
149
6.09
21
0.71
99
2.11
133
4.74
90
2.55
99
2.57
133
2.44
219
3.58
401
7.09
338
5.68
808
7.32
811
8.44
972
8.06
1 058
10.94
1 044
5.24
1 020
6.99
1 309
6.99
1 388
7.70
1 535
5.21
2 324
5.08
3 867
7.30
4.83
Southern Africa
Inflows
Percent
in
Share
million
in
US $
Aggregate
211
10.81
504
24.29
231
17.47
600
31.84
- 28
-1.15
334
18.87
217
8.87
542
17.88
307
6.55
4
0.15
1 148
32.42
582
15.17
560
10.28
881
14.43
2 269
40.13
1 535
25.76
4 861
44.06
2 957
30.77
4 749
39.36
2 471
25.55
9 760
49.03
4 643
31.82
5 541
29.60
3 715
20.62
6 571
22.31
1 278
2.79
7 063
13.33
21.64
Africa aggregate
Inflows
Percent
in
Share
million
in
US $
Aggregate
1 953
100
2 074
100
1 323
100
1 885
100
2 443
100
1 770
100
2 443
100
3 032
100
4 693
100
2 805
100
3 542
100
3 840
100
5 443
100
6 105
100
5 655
100
5 957
100
11 033
100
9 611
100
12 064
100
9 671
100
19 905
100
14 592
100
18 719
100
18 020
100
29 459
100
45 754
100
52 982
100
Source: 1. World Investment Report, (UNCTAD) 2008. 2. Author’s own calculations on the basis of World Investment Report (UNCTAD) data
90
Kumar, G.; Dhingra, N.
Table 2. FDI inflows to North Africa
Year
Algeria
Egypt
Libya
Morocco
Sudan
Tunisia
1981-82
13
753
0
59
19
327
1982-83
0
294
0
80
17
371
1983-84
0
490
0
46
6
209
1984-85
1
729
0
47
9
141
1985-86
0
1 178
119
20
0
139
1986-87
5
1 217
0
1
0
86
1987-88
4
948
0
60
12
103
1988-89
13
1 190
98
85
2
76
1989-90
12
1 250
125
167
3
92
1990-91
0
734
159
165
0
89
1991-92
80
253
92
317
0
173
1992-93
30
459
99
424
0
584
1993-94
0
1 207
58
491
0
656
1994-95
0
1 133
0
551
99
566
1995-96
0
595
0
332
12
378
1996-97
270
636
0
322
0
351
1997-98
260
887
0
1 207
98
365
1998-99
607
1 076
0
400
371
668
1999-00
292
1 065
0
1 364
371
368
2000-01
438
1 235
141
422
392
779
2001-02
1196
510
0
2 808
574
486
2002-03
1065
647
145
481
713
821
2003-04
634
237
143
2 314
1 349
584
2004-05
882
2 157
357
895
1 511
639
2005-06
1081
5 376
1 038
1 653
2 305
782
2006-07
1795
10 043
2 013
2 450
3 541
3 312
2007-08
1665
11 578
2 541
2 577
2 436
1 618
CAGR
(1981-2008)
31.89*
6.03*
12.29*
20.45*
29.19*
9.47*
Rank of CAGR
(1)
(6)
(4)
(3)
(2)
(5)
Source: 1. World Investment Report UNCTAD (2008), 2. Author's own calculations on the basis of World
Investment Report (UNCTAD) data
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and
relatively lower figures are given ascending ranks. * Significant at 5 percent level of significance.
Burkina Faso, Gambia and Guinea witnessed the CAGR of the order of 15.22,
15.21 and 14.49 percent respectively. Togo, Senegal, Sierra Leon and Cote d’Ivoire
also saw moderate growth. But a striking feature is that, in case of Liberia there are
wild fluctuations in FDI inflows during this period and the growth rate was negative of
the order of -4.46 percent. Another astonishing feature is that, in West Africa, Saint
Helena is the country which is totally untouched by FDI till now.
The study indicates that the FDI inflows growth in both North and West
regions have not been satisfactory. African countries have still a long way to as far as
FDI inflows are concerned. Even when we look at the potential and performance
indices of inward FDI prepared by UNCTAD, these countries do not show positive
picture. A two by two matrix formed to compare FDI potential and performance scores
depict four quadrants. The position of various countries of North Africa and West
Africa has been shown in Table 4.
Table 3. FDI inflows to West Africa
Amount in US $ million
2
0
0
0
0
1
0
0
62
62
121
78
1
14
8
13
14
33
39
60
44
14
45
64
53
53
48
Burkina
Faso
2
2
2
2
0
3
1
4
6
0
1
3
3
18
10
16
10
4
8
23
6
15
29
14
34
34
600
Cape
Verde
0
0
0
0
0
0
3
1
0
0
2
0
4
2
26
29
12
9
62
43
13
39
34
68
82
131
177
Côte d'
Ivoire
33
47
38
22
29
71
88
52
18
48
19
69
175
118
212
269
415
380
324
235
273
213
165
283
312
319
427
10.52*
15.22*
26.33*
(11)
(5)
(1)
Year
Benin
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
CAGR
(19812008)
Rank of
CAGR
Gambia
Ghana
Guinea
2
0
0
0
0
0
1
1
15
14
8
13
11
9
15
18
21
24
49
44
35
43
15
49
45
71
64
16
16
2
2
6
4
5
5
15
15
20
23
125
233
107
120
82
167
244
166
89
59
105
139
145
636
855
0
0
0
1
1
8
13
16
12
18
39
20
3
0
1
24
17
18
63
10
2
30
83
98
105
108
111
GuineaBissau
0
0
0
2
1
1
0
1
0
2
2
6
3
0
0
1
11
4
1
1
0
4
4
2
9
18
7
11.70*
15.21*
20.46*
14.49*
7.32*
(8)
(6)
(2)
(7)
(13)
Liberia
Mali
288
313
49
36
0
0
39
290
656
225
8
0
0
17
5
0
214
190
256
21
8
3
372
237
0
0
42
4
2
3
10
3
0
0
7
6
6
1
0
4
17
111
43
70
9
2
82
122
244
132
101
224
83
360
Mauritania
12
15
1
9
7
4
2
2
3
7
2
7
17
3
7
0
0
0
15
40
77
67
102
392
814
155
153
4.46*
19.52*
(16)
(4)
_
Niger
Nigeria
0
28
1
1
0
18
15
7
1
41
15
56
0
0
14
2
17
0
0
8
23
2
11
20
30
51
27
542
431
364
189
486
193
611
379
1 884
1 003
1 124
1 157
1 878
2 287
1 271
2 191
1 642
1 210
1 178
1 310
1 277
2 040
2 171
2 127
4 978
13 956
12 454
Saint
Helena
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
20.02*
5.67*
11.67*
0
(3)
(15)
(9)
34
28
0
29
0
0
0
1
18
57
0
22
0
67
35
5
177
60
153
63
32
78
52
77
45
220
78
Sierra
Leone
8
5
2
6
0
0
39
0
22
32
8
0
0
0
7
1
2
0
1
39
10
10
9
61
83
59
81
7.47*
6.55*
10.91*
(12)
(14)
(10)
Senegal
Source: 1. World Investment Report UNCTAD (2008). 2. Author's own calculations on the basis of World Investment Report (UNCTAD) data
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and relatively lower figures are given ascending ranks. *
Significant at 5 percent level of significance
Togo
10
16
1
0
16
6
7
13
9
23
6
0
0
16
32
14
19
19
32
41
64
53
34
59
77
77
69
92
Kumar, G.; Dhingra, N.
Table 4. Position of North African and West African Countries in Inward FDI Potential
and Performance Matrix
Country
1988-90
1999-01
2000-02
2001-03
2002-04
2003-05
2004-06
Algeria
3rd
4th
4th
4th
3rd
3rd
3rd
Egypt
2nd
3rd
3rd
4th
4th
2nd
2nd
Libya
3rd
3rd
3rd
3rd
3rd
3rd
3rd
Morocco
4th
2nd
2nd
2nd
2nd
2nd
4th
Sudan
4th
2nd
2nd
2nd
2nd
2nd
2nd
Tunisia
3rd
4th
2nd
1st
3rd
3rd
1st
Benin
2nd
4th
4th
4th
4th
4th
4th
Burkina
Faso
4th
4th
4th
4th
4th
4th
4th
Cape
Verde
Côte d'
Ivoire
4th
4th
4th
4th
4th
4th
4th
Gambia
4th
2nd
2nd
2nd
2nd
2nd
2nd
Ghana
4th
4th
4th
4th
4th
4th
4th
Guinea
4th
4th
4th
4th
4th
2nd
GuineaBissau
Liberia
Mali
4th
2nd
2nd
2nd
2nd
2nd
4th
Mauritania
Niger
3rd
4th
4th
4th
4th
4th
4th
Nigeria
3rd
4th
4th
2nd
2nd
4th
2nd
Saint
Helena
Senegal
4th
4th
4th
4th
4th
4th
4th
Sierra
Leone
2nd
4th
4th
4th
4th
2nd
2nd
Togo
3rd
2nd
2nd
2nd
4th
4th
2nd
Source: FDI Indices, World Investment report, (UNCTAD)
Note: 1st Quadrant: Front runners (country with high FDI Potential and High Performance), 2nd
Quadrant: Above Potential (country with Low FDI Potential and high Performance), 3rd Quadrant:
Below Potential (country with High FDI Potential and low Performance), 4th Quadrant: Under
Performance (country with Low FDI Potential and low Performance), ( - ) Not Available
The table elucidates that almost all the countries of North Africa and West
Africa fall in 4th quadrant indicating poor potential as well as poor performance in
attracting FDI. Some countries like Morocco, Sudan, Gambia, Mali, Sierra Leone and
Togo have found place in 2nd quadrant showing high performance despite their low
potential. Tunisia is the only country which has twice figured amongst the front
runners indicating high potential as well as high performance. Even the largest
recipients in absolute sense like Egypt and Nigeria have not fared satisfactorily as
regards as potential and performance of FDI inflows.
Various reasons have been accounted for poor performance and potential of
FDI inflows in Africa. A major reason which deters foreign investors to invest in
Africa is the high degree of uncertainty which is manifested in terms of political
instability and lack of policy transparency. Macro economic instability like incidence
Growth and Forecasts of FDI Inflows to North and West Africa …
93
of currency crashes, double digit inflation and excessive budgetary deficit discourage
FDI to a great extent (Onyeiwu, Shrestha, 2004). Inhospitable regulatory environment
has led to high cost of entry. Low GDP growth rate and the resultant small markets
make it difficult for foreign investors to exploit economies of scale. The absence of
adequate supporting infrastructure such as power supply, transport, telecommunication
also has discouraging impact. High degree of protectionism, ineffective marketing
strategy combined with weak governance and high level of corruption put strong
constraints in the way of global investors (Dupasquier, Osakwe 2005).
Gross fixed capital formation (GFCF) is like life blood for the growth and
development of an economy. Higher percentage of FDI in GFCF is a signal of its
importance as a potent stimulator of capital formation. The growing importance of FDI
inflows in African economy can be judged from rising ratios of FDI inflows as a
proportion of GFCF from 1.7 percent in the year 1981-82 to as high as 21.3 percent in
the year 2007-08, showing a CAGR to the tune of 10.46 percent (Refer Table 5). North
Africa is not behind aggregate Africa as here also, FDI as percentage of gross fixed
capital formation escalated from 1 percent in 1981-82 to 20.4 percent in 2007-08,
showing a CAGR equal to 10.33 percent. A glance at Table 5 conveys that in Algeria,
FDI has assumed importance in gross fixed capital formation (GFCF) in recent years as
the percentage of FDI to GFCF has soared from .1 percent in 1981-82 to 5.1 percent in
2007-08, showing a CAGR of 22.44 percent, the highest in the region. In case of
Sudan, FDI is playing a great role in formation of capital as its percentage has risen
from 1.0 percent in 1981-82 to 22.9 percent in 2007-08, registering a CAGR of 22.29
percent. It is interesting to note that Egypt has the highest percentage of FDI in GFCF
in absolute sense, it was 15.8 percent in 1981-82 and became 42.7 in 2007-08.
However, this percentage has been wildly fluctuating during the whole period and as
such the growth has taken place by .92 percent only.
As far as the importance of FDI inflows in GFCF of West Africa is concerned
with the perusal of Table 6, it can be observed that in 1981-82 at aggregate level in
West Africa, FDI inflows contributed just 2.5 percent to GFCF, but with passage of
time this share grew to a considerable figure of 45.2 percent in 2007-08. The CAGR
for the study period found to be 10.59 percent which is almost equal to the CAGR
registered by North Africa and even whole Africa. The highest CAGR, 25.90 percent
was found in the case of Cape Verde in which the share of FDI in GFCF escalated
from nil in 1981-82 to 33.8 percent in 2007-08, showing a CAGR of 25.90 percent.
Nigeria and Gambia had considerable high percentage of FDI to GFCF in the year
2007-08 and the CAGR in case of both the countries in the last twenty seven years was
12.73 percent and 10.93 percent respectively. Mali and Mauritania also had significant
FDI as percentage of GFCF and experienced CAGR of 13.31 percent and 13.25
percent respectively. Sierra Leone and Liberia proved inconsistent as far as the ratio of
FDI as proportion of GFCF is concerned. With wild fluctuations in the ratio of FDI as
a proportion of GFCF, the CAGR in these countries has been 9.44 percent and1.86
percent respectively. The whole analysis reveals that the importance of FDI as a
contributor to Gross fixed capital formation has certainly increased in case of aggregate
Africa, North Africa and West Africa.
94
Kumar, G.; Dhingra, N.
Table 5. Inwards FDI inflows as percentage of Gross Fixed Capital Formation in North
Africa
North
Africa
Aggregate
Africa
Aggregate
12.5
1
1.7
13.4
0.8
2
0.5
8.1
1.1
1.4
1.3
0.7
5.7
2.4
2.4
0.6
0.0
5.9
3.8
3.3
0.0
0.0
0.0
3.8
2.7
2.3
9.4
0.0
1.3
0.7
4.9
2.5
3.1
0.1
12.6
3.1
1.6
0.1
3.7
3.9
3.8
1989-90
0.1
13.3
3.6
2.7
0.3
4.0
4.4
5.8
1990-91
0.0
8.2
4.0
2.2
0.0
3.0
2.8
3.1
1991-92
0.7
3.2
2.5
4.3
0.0
5.5
2.7
4.1
1992-93
0.2
5.9
2.8
5.6
0.0
13.8
4.3
4.2
1993-94
0.0
13.7
1.2
6.8
0.0
16.0
6
6.1
1994-95
0.0
11.4
0.0
7.4
7.0
13.4
5.8
7.1
1995-96
0.0
5.4
0.0
4.0
0.9
8.7
3.1
6.2
1996-97
2.3
4.5
0.0
3.8
0.0
7.7
3.4
6.1
1997-98
2.4
5.9
0.0
14.7
7.5
7.8
6.3
10.9
1998-99
4.9
6.4
0.0
4.3
21.1
13.6
6.2
9.2
1999-00
2.5
6.2
0.0
13.7
22.7
7.0
6.8
11.8
2000-01
3.9
7.3
3.3
4.4
18.6
15.4
6.9
9.6
2001-02
9.6
3.4
0.0
30.0
25.1
9.3
11.4
20.3
2002-03
7.6
4.4
5.5
4.7
25.0
15.3
7.8
14.5
2003-04
3.9
1.8
6.2
18.4
42.2
10.0
9.8
15.2
2004-05
4.3
16.9
7.1
5.9
35.4
9.9
10.1
11.8
2005-06
4.7
32.2
14.4
9.8
41.3
12.1
16.2
16.3
2006-07
6.3
49.8
23.0
13.0
42.2
45.5
25.1
21.4
2007-08
5.1
42.7
25.3
12.2
22.9
19.6
20.4
21.3
CAGR(1981-2008)
22.44*
.92**
9.76*
11.22*
22.29*
4.21*
10.33*
10.46*
(1)
(6)
(4)
(3)
(2)
(5)
Year
Algeria
Egypt
Libya
Morocco
Sudan
Tunisia
1981-82
0.1
15.8
0.0
1.2
1.0
1982-83
0.0
5.1
0.0
1.6
1.1
1983-84
0.0
8.1
0.0
1.1
1984-85
0.0
11.0
0.0
1985-86
0.0
16.2
2.2
1986-87
0.0
15.7
1987-88
0.0
1988-89
Rank of
CAGR
Source: 1. World Investment Report UNCTAD (2008). 2. Author's own calculations on the basis of World
Investment Report (UNCTAD) data.
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and
relatively lower figures are given ascending ranks. * Significant at 5 percent level of significance. **
Insignificant at 5 percent level of significance.
Table 6. Inwards FDI inflows as percentage of Gross Fixed Capital Formation in West Africa
Year
Benin
Burkina
Faso
Cape
Verde
Côte d'
Ivoire
Gambia
Ghana
Guinea
GuineaBissau
Liberia
Mali
Mauritania
Niger
Nigeria
Senegal
Sierra
Leone
Togo
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
CAGR (1981 2008)
Rank of
CAGR
0.8
0
0
0
0
0.6
0
0
33.2
25.2
46.9
25.7
0.4
5.3
2.1
3.5
3.5
7.7
8.8
14
9.6
2.5
6.4
8.1
6.3
5.8
4.6
0.9
0.8
0.8
0.8
0
0.7
0.3
0.7
1.1
0.1
0.1
0.5
0.5
3.8
1.8
2.8
1.6
0.7
1.3
3.5
0.9
2.1
3.1
1.2
2.7
2.4
37
0
0
0
0
0
0
2.9
0.6
0.2
0.2
1.4
0.3
2.5
1.2
13.8
15
6.1
5.3
30
26.5
7.1
17.3
13.2
20
21.9
30.3
33.8
1.6
2.9
3.1
2.5
3.5
6.5
7.4
4.4
1.8
5.3
2.1
7.3
20
13.8
15.6
16.3
25.5
21
17.7
17.9
26.3
18.3
12.8
19.1
18.3
17.9
21.2
7
1.9
0
0
0
0
8.3
2.3
23.9
23.7
13.3
16.7
11.6
13.4
14.9
17.8
25.2
30
62.6
58.9
35.1
55.2
21.1
44.6
37.3
57.8
40.2
10
13.6
1.9
0.8
1.4
1
1
0.9
2.1
1.9
2.3
2.5
8.8
19
7.8
8.4
5
10
15.3
13.8
6.3
4.8
6
5.6
4.6
19.4
22.3
0
0
0.2
0.3
0.5
2.8
3.6
3.8
3
4
6
3.6
0.5
0
0.2
4.6
3.5
3.7
8.7
1.6
0.3
6
19.3
18.5
23.4
20
13.7
0
0
0
3.8
2.8
2.7
0.3
1.5
1.3
6.3
8.6
10
4.5
0.8
0.1
1.7
19.7
34.7
3
2.2
1.2
7.7
8.7
4.7
19.8
35.1
12.4
160.3
162
26.8
21.4
0
0
32
251.6
677.7
558.8
27.1
0
0
125.9
32.7
0
707.8
506.6
673.4
54.7
30.9
10.6
967.9
390.2
0
0
41.6
1.1
0.7
1.6
5.2
1.3
0
0
1.8
1.6
1.1
0.2
0
0.8
3.3
14.7
7
11.7
1.7
0.4
16.5
21.2
38.7
17.4
11.9
26.4
7.6
30.1
6.3
7.3
0.7
3.7
3.6
2.5
0.9
1.2
1.9
4.9
1.3
2.2
6.5
1.3
3.2
0
0
0
7.9
16.7
31.3
26.6
28.8
56.2
97.8
19.5
19
0
6
0.4
1.2
0
7.2
4.7
2.5
0.3
13.9
6
23.7
0
0
7.3
1
7.5
0
0.1
3.8
8.8
0.8
3
4.3
5.6
7.7
3.5
1.6
1.7
2.4
2.2
6.4
3.6
19
11.3
68.6
21.5
25.2
28.2
41.5
80.1
50
77.2
39.7
35.7
32.4
27.7
38.2
49.2
32.3
20.3
36.7
88.5
69.6
8.4
6.8
0
7.7
0
0
0
0.1
2.3
5.9
0
1.9
0
9.5
3.9
0.5
19.4
5.2
13.3
6
2.9
5.9
3.6
4.2
2
9.1
2.7
4.7
2.8
1.1
3.9
0
0
65.8
0
13.3
36.1
7.8
0
0
0
10.3
0.5
2.9
0.2
1.2
384.9
17.8
13.2
10.5
74.7
104.8
69.2
81.7
4.1
8.3
1
0
9.6
2.4
3.1
5.3
2.6
5.5
2.2
0
0
17.4
18.5
8.5
14.7
8.1
14.5
19
29.5
19.6
10.7
15.7
18.8
16.7
13.3
West
Africa
Aggregate
2.5
3
2.2
2.6
4.3
1.4
10
8.8
33.9
15.2
13.3
13.7
19.6
33.5
20
25.8
23.9
19.1
21
19
20.1
25.3
21.6
17.5
21.3
52.7
45.2
3.0*
9.13*
25.90*
10.15*
10.93*
7.60*
12.81*
9.0*
1.86*
13.31*
13.25*
1.0*
12.73*
.90*
9.44*
8.19*
10.59*
(13)
(9)
(1)
(7)
(6)
(12)
(4)
(10)
(14)
(2)
(3)
(15)
(5)
(16)
(8)
(11)
Source: 1. World Investment Report UNCTAD (2008). 2. Author's own calculations on the basis of WIR (UNCTAD) data.
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and relatively lower figures are given ascending ranks. *
Significant at 5 percent level of significance
Africa
Aggregate
1.7
2
1.4
2.4
3.3
2.3
3.1
3.8
5.8
3.1
4.1
4.2
6.1
7.1
6.2
6.1
10.9
9.2
11.8
9.6
20.3
14.5
15.2
11.8
16.3
21.4
21.3
10.46*
96
Kumar, G.; Dhingra, N.
Uncertainty and ambiguity are the parents of failure. Any economic policy
which is not based on predicted or forecasted estimates may prove catastrophic because
of its non-compliance to the situation in hand. Forecasting is a necessary input to
planning. It can empower the planners because its use implies that they can modify the
variable, now, to alter or to be prepared for future. This enables them to formulate the
economic policy which can affect the future value of variable the way, they wish it to
be. A prediction is an invitation to introduce the best desirable changes in the existing
system (Walonick, 1993). Present study endeavors to generate the forecasts of FDI
inflows to the major recipient countries of North Africa and West Africa for the period
2009-2020 and in order to detect the major recipient countries, percentage share of
different countries in their respective region has been used.
Table 7. Percentage Share of Different Countries in Aggregate FDI Inflows to North
Africa
Year
Algeria
Egypt
Libya
Morocco
Sudan
Tunisia
North
Africa
Aggregate
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
1981-82
1.13
64.27
0.00
5.00
1.65
27.95
1982-83
0.00
38.60
0.00
10.46
2.21
48.74
1983-84
0.06
65.15
0.00
6.13
0.84
27.82
1984-85
0.09
78.61
0.00
5.07
0.98
15.25
1985-86
0.03
80.87
8.19
1.37
0.00
9.54
1986-87
0.41
92.99
0.00
0.04
0.00
6.56
1987-88
0.33
84.21
0.00
5.29
1.04
9.13
1988-89
0.89
81.30
6.69
5.78
0.14
5.20
1989-90
0.73
75.78
7.59
10.13
0.21
5.57
1990-91
0.03
64.00
13.86
14.39
0.00
7.73
1991-92
8.75
27.66
10.05
34.66
0.00
18.89
1992-93
1.88
28.76
6.21
26.57
0.01
36.57
1993-94
0.00
50.02
2.41
20.36
0.00
27.21
1994-95
0.00
48.23
0.00
23.45
4.22
24.10
1995-96
0.00
45.20
0.00
25.21
0.91
28.67
1996-97
17.09
40.28
0.00
20.38
0.03
22.22
1997-98
9.23
31.48
0.00
42.85
3.47
12.97
1998-99
19.43
34.46
0.00
12.82
11.88
21.41
1999-00
8.43
30.79
0.00
39.42
10.72
10.63
2000-01
12.85
36.25
4.14
12.39
11.51
22.85
2001-02
21.46
9.15
0.00
50.37
10.30
8.73
2002-03
27.50
16.70
3.74
12.43
18.42
21.21
2003-04
12.05
4.51
2.72
43.99
25.64
11.10
2004-05
13.69
33.49
5.54
13.89
23.46
9.92
2005-06
8.84
43.94
8.48
13.51
18.84
6.39
2006-07
7.75
43.37
8.69
10.58
15.29
14.30
2007-08
7.43
51.65
11.34
11.50
10.87
7.22
Average
6.66
48.21
3.69
17.70
6.39
17.39
Rank
(5)
(1)
(6)
(2)
(4)
(3)
Source: Author’s own calculations on the basis of World Investment Report (UNCTAD) data.
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and
relatively lower figures are given ascending ranks.
Table 8. Percent Share of Different Countries in Aggregate FDI Inflows to West Africa
Year
Benin
Burkina
Faso
Cape
Verde
Côte
d'
Ivoire
Gambia
Ghana
Guinea
GuineaBissau
Liberia
Mali
Mauritania
Niger
Nigeria
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Average
Rank
0.22
0.00
0.00
0.00
0.00
0.35
0.01
0.00
2.27
4.02
8.79
5.34
0.06
0.49
0.43
0.49
0.50
1.54
1.62
2.73
2.11
0.46
1.33
1.68
0.75
0.33
0.31
2.56
(5)
0.25
0.22
0.43
0.54
0.00
1.01
0.16
0.48
0.21
0.03
0.04
0.21
0.14
0.66
0.53
0.59
0.36
0.21
0.33
1.06
0.30
0.52
0.87
0.38
0.49
0.21
3.86
0.52
(15)
0.00
0.00
0.00
0.00
0.00
0.00
0.34
0.08
0.01
0.02
0.13
0.03
0.16
0.08
1.41
1.04
0.43
0.41
2.54
1.99
0.61
1.32
1.00
1.79
1.16
0.82
1.14
0.61
(14)
3.43
5.26
8.08
7.04
5.31
22.83
10.63
6.65
0.68
3.12
1.35
4.75
7.87
4.20
11.38
9.80
15.27
17.86
13.34
10.74
13.14
7.30
4.92
7.46
4.43
2.00
2.74
7.80
(3)
0.24
0.03
0.00
0.00
0.00
0.00
0.18
0.15
0.54
0.91
0.58
0.89
0.50
0.31
0.81
0.67
0.76
1.11
2.04
1.99
1.71
1.47
0.44
1.30
0.64
0.45
0.41
0.67
(12)
1.70
1.81
0.52
0.65
1.02
1.39
0.57
0.64
0.55
0.95
1.45
1.55
5.62
8.32
5.72
4.37
3.01
7.87
10.04
7.59
4.30
2.02
3.13
3.67
2.06
3.98
5.50
3.33
(4)
0.00
0.00
0.08
0.23
0.20
2.71
1.56
2.02
0.45
1.15
2.82
1.36
0.12
0.01
0.04
0.87
0.64
0.84
2.61
0.45
0.08
1.03
2.46
2.58
1.49
0.68
0.71
1.01
(10)
0.00
0.00
0.00
0.74
0.26
0.26
0.01
0.09
0.02
0.13
0.15
0.40
0.15
0.02
0.00
0.04
0.42
0.21
0.03
0.03
0.02
0.12
0.12
0.04
0.12
0.11
0.05
0.13
(16)
30.18
34.66
10.57
11.72
0.00
0.00
4.68
37.32
24.03
14.50
0.61
0.00
0.00
0.62
0.25
0.00
7.86
8.94
10.56
0.95
0.40
0.10
11.07
6.25
0.00
0.00
0.27
7.98
(2)
0.39
0.17
0.68
3.26
0.53
0.00
0.00
0.91
0.23
0.37
0.09
0.00
0.19
0.62
5.99
1.58
2.56
0.42
0.09
3.77
5.87
8.37
3.93
2.66
3.18
0.52
2.31
1.80
(7)
1.30
1.66
0.30
2.76
1.27
1.45
0.20
0.25
0.13
0.43
0.17
0.48
0.76
0.10
0.37
0.00
0.00
0.00
0.62
1.83
3.70
2.31
3.03
10.33
11.57
0.97
0.98
1.73
(8)
0.00
3.13
0.26
0.47
0.00
5.68
1.80
0.89
0.03
2.63
1.10
3.88
0.00
0.00
0.78
0.09
0.61
0.00
0.01
0.39
1.10
0.08
0.34
0.52
0.43
0.32
0.17
0.91
(11)
56.84
47.71
78.49
61.26
88.46
62.34
74.19
48.71
69.02
64.53
81.76
79.62
84.42
81.65
68.31
79.74
60.35
56.86
48.53
59.92
61.56
70.03
64.55
56.11
70.76
87.39
80.07
68.26
(1)
Saint
Helena
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Senegal
Sierra
Leone
Togo
3.60
3.11
0.00
9.42
0.00
0.00
0.00
0.15
0.67
3.66
0.00
1.48
0.00
2.39
1.88
0.20
6.50
2.84
6.31
2.88
1.54
2.68
1.56
2.03
0.63
1.38
0.50
2.05
(6)
0.79
0.52
0.37
1.90
0.00
0.00
4.79
0.00
0.82
2.09
0.55
0.00
0.00
0.00
0.39
0.02
0.07
0.00
0.02
1.78
0.47
0.36
0.26
1.61
1.18
0.37
0.52
0.70
(13)
1.05
1.79
0.31
0.00
2.97
1.97
0.87
1.67
0.34
1.46
0.41
0.00
0.00
0.55
1.72
0.53
0.68
0.92
1.31
1.90
3.06
1.83
1.00
1.57
1.09
0.48
0.44
1.11
(9)
Source: Author’s own calculations on the basis of World Investment Report (UNCTAD) data.
Note: 1. Figures in parentheses show the ranks. 2. Highest numeric figure has been assigned rank 1 and relatively lower figures are given ascending ranks.
West
Africa
Aggregate
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
98
Kumar, G.; Dhingra, N.
The FDI inflows to North Africa have escalated manifolds since 1981-82.
(Refer Table 1) However the increased FDI has not flown in equal magnitudes to
various countries of the region. A glance at Table No.7 illustrates that in North Africa,
during the last twenty seven years, Egypt has been successful in garnering 48.21
percent (on the average) of aggregate inflows received by North Africa. On the second
place both Morocco and Tunisia emerge with 17.70 percent and 17.39 percent share in
the aggregate inflows to North Africa. Algeria, Sudan and Libya account for meager
share of 6.66 percent, 6.39 percent and 3.69 percent respectively. It is quite clear that
Egypt, Morocco and Tunisia can represent the whole North Africa as far as FDI
inflows are concerned because these together account for more than two third shares
(83.30 percent) of its FDI inflows.
Regional disparities of FDI inflows are all the more acute in case of West
African countries. The perusal of Table 8 confirms Nigeria’s strongest position as the
major recipient among the West African countries. It alone attracted 68.26 percent (on
the average) of aggregate FDI inflows received by West Africa during the period 198182 to 2007-08. Liberia and Cote d’ Ivoire which received 7.98 percent and 7.8 percent
of the aggregate inflows of West Africa are no where near to Nigeria in receiving the
FDI inflows. Hence, only Nigeria represents the West Africa as far as FDI inflows are
concerned because it accounts for more than two third shares.
Present study generates the forecasts of FDI inflows to the leading four
countries namely Egypt, Morocco, Tunisia and Nigeria on the assumption that
forecasting for these countries implies forecasting for whole North and West Africa.
Before applying Double Exponential Smoothing (DES) model to generate the
forecasts of the four major recipient countries, its adequacy has been tested and the
results have been highlighted in Table 9.
Table 9. Initial Values and Optimum Smoothing Parameters for Level and Growth
Components
Country
Egypt
Morocco
Tunisia
Nigeria
f0
544.82692
10.57692
302.17308
312.92308
b0
416.34615
96.84615
49.65385
458.15385
α
1.000000
1.000000
0.300000
1.000000
γ
0.800000
1.000000
0.000000
0.000000
SSE
24246986.8
8081173.914
7131433.9
92765199.62
Source: Author’s calculations on the basis of UNCTAD data using the software SPSS version 7.5
Note: f0- Initial value for level component, b0 - Initial value for growth component, α - Optimum value for
smoothing parameter for trend, g - Optimum value of smoothing parameter for growth, SSE – Sum of
square of errors
9. SMOOTHING PARAMETERS
Initial values and optimum smoothing parameters for level and growth
components in case of all the four countries under study have been computed. Only
those values of α and γ are considered optimal which ensure the lowest error. The
optimum values of smoothing parameters α (alpha), is equal to 1.0 in case of Egypt,
Morocco and Nigeria and it is less than 1 in case of Tunisia i.e. 0.3. The value of γ
Growth and Forecasts of FDI Inflows to North and West Africa …
99
(gamma), is .8 in case of Egypt, 1.0 in case of morocco. For Nigeria and Tunisia it has
come out to be zero.
10. ADEQUACY OF THE MODEL
The adequacy of DES model is ensured by computing auto correlation
functions (ACF) of residuals and by applying Ljung-Box Q statistics. Figure -1 depicts
ACF among all the residuals and the values of Q-statistics for all the representative
countries.
Figure - 1
Morocco
Q= 25.969
VAR00002
Egypt
VAR00001Q = 13.03
1.0
1.0
.5
.5
0.0
0.0
-.5
-.5
-1.0
Coefficient
1
3
2
5
4
7
6
9
8
11
10
13
12
Confidence Limits
ACF
ACF
Confidence Limits
Coefficient
-1.0
15
14
1
3
16
5
2
Lag Number
7
4
9
6
8
11
10
13
12
15
14
16
Lag Number
Nigeria
Tunisia
VAR00003 Q=3.469
VAR00004
1.0
1.0
.5
.5
0.0
0.0
1.672
-.5
-.5
Confidence Limits
Coefficient
-1.0
1
3
2
5
4
7
6
9
8
11
10
13
12
ACF
ACF
Confidence Limits
14
Coefficient
-1.0
1
15
3
2
16
5
4
7
6
9
8
11
10
13
12
15
14
16
Lag Number
Lag Number
Figure 1.
The values of Q- statistics in case of all the countries are found to be
insignificant at 5 percent level of significance. The non-significant of Q- statistics
ensures the adequacy of DES model used to generate the forecasts. A careful glance of
Figure 1. reveals that in case of all the countries, these were all (as a group) with in
100
Kumar, G.; Dhingra, N.
specified limits. This confirms the adequacy of DES model to make prediction
regarding future prospects of FDI inflows to the representative countries of North
Africa and West Africa.
Table 10. Forecasts of Foreign Direct Investment in Representative
Countries of North and West Africa
in US $ million
Year
Egypt
Morocco
Tunisia
Nigeria
2008-2009
13667.49
2456.11
1672.43
12912.15
2009-10
15756.98
2641.45
1722.08
13370.31
2010-11
17846.47
2826.79
1771.74
13828.46
2011-12
19935.96
3012.13
1821.39
14286.62
2012-13
22025.45
3197.47
1871.04
14744.77
2013-14
24114.95
3382.81
1920.70
15202.92
2014-15
26204.44
3568.15
1970.35
15661.08
2015-16
28293.93
3753.49
2020.01
16119.23
2016-17
30383.42
3938.83
2069.66
16577.38
2017-18
32472.91
4124.17
2119.31
17035.54
2018-19
34562.40
4309.51
2168.97
17493.69
2019-2020
36651.89
4494.85
2218.62
17951.85
CAGR (2008-2020)
9.15*
5.60*
2.60*
3.03*
Source: Author’s calculations on the basis of UNCTAD data using the software SPSS version 7.5
Note: * Significant at 5 percent level of significance.
The forecasts of FDI inflows to the representative countries for the period
2009-10 to 2019-20 are depicted in Table No. 10. Perusal of this table, confirms that
by the year 2020, Egypt may maintain its top position in North Africa as it expected to
receive FDI inflows to the tune of US $ 36651.89 million, anticipated to rise from the
expected amount of US $ 13667.49 million in the year 2009, showing a CAGR of 9.15
percent, significant at five percent level of significance. In Morocco, the amount of
FDI anticipated in the year 2009 is US $ 2456.11 million and is expected to touch the
amount of US $ 4494.85 million in 2020 with a CAGR of 5.60 percent, significant at
five percent level of significance. FDI inflows to Tunisia are expected to grow at the
rate of 2.60 percent during the period 2009-2020, reaching the amount US $ 2218.62
million in the year 2020. Nigeria stands good chance of receiving an amount of FDI
inflows of the order of US $ 17951.85 million in 2020, with the CAGR equal to 3.03
percent for the ensuing decade.
The analysis suggests that prospects for FDI in North Africa and West Africa
appear to be positive as the projections indicate. Improvements in the regulatory
framework for FDI can certainly brighten the prospects of FDI inflows in the countries
of Africa. Most African countries have concluded bilateral investment treaties (BITs)
and double taxation treaties (DTTs) with other countries. For instance Egypt has signed
as many as 50 BITs and Tunisia has concluded maximum number of DTTs (Odenthal,
Zimny, 1999). However, because of the negative image of Africa as a whole, it may
not be sufficient to make bilateral and multilateral agreements only.
The African countries seriously require improvements in governance,
development of infrastructure, rationalization of macro economic management to
Growth and Forecasts of FDI Inflows to North and West Africa …
101
enhance their positive image. At the same time they must strongly combat negative
forces like political unrests, uncertainty of policies, currency volatility, debt overhang
and capricious regulatory environment so that the competitiveness and FDI potential
are not undermined.
11. CONCLUSION
African countries have before them an important task of reversing the dismal
FDI trend which they are facing currently. Africa is receiving a meager 2.8 percent of
global FDI inflows and just 10 percent of aggregate FDI inflows to the developing
countries. Present study concludes that out of five regions of Africa, only North Africa
and West Africa have better standing in receiving FDI and these two account for one
third share each, of the aggregate inflows attracted by aggregate Africa. During the last
three decades, in North Africa highest growth in FDI inflows was experienced by
Algeria followed by Sudan and Morocco. In West Africa, Cape Verde witnessed
highest growth followed by Ghana and Mauritania. It is interesting to note that in case
of growth of FDI as percentage of gross fixed capital formation; again Algeria and
Cape Verde have attained first rank in their respective regions. The leaders in quantum
of FDI inflows in Northern and Western regions during the last three decades have
been Egypt, Morocco, Tunisia and Nigeria. Out of these Egypt is expected to grow in
FDI inflows at the fastest pace during the ensuing decade.
REFERENCES:
[1]. Bagchi, A.K. - The Other Side of Foreign Investments by Imperial Powers - Transfer of
Surplus from Colonies, Economic and Political Weekly, vol.37, no.23, 2002, pp.22292235,
[2]. Bartlett, M.S. - On the Theoretical Specification of Sampling properties of Auto correlated
Time Series, Journal of Royal Statistical Society, vol.8, no.27, 1946
[3]. Box, G.E.P.; Jenkins, G.M. - Time Series Analysis, Forecasting and Control, 2nd ed.
Holden-Day, San Francisco, 1976
[4]. Chantal, D.; Osakwe, P.N. - Foreign Direct Investment in Africa: Performance,
Challenges and Responsibilities, Work in Progress no.21, African Trade Policy Centre,
2005
[5]. Chatfield, C.; Koehler, A.B.; Ord, J.K.; Synder, R.D. - A New Look at Model for
Exponential Smoothing, Journal of the Royal Statistical Society, Series D (The
Statistician), vol.50, no.2, 2001, pp.147-159
[6]. Clairmonte, F. - Foreign Investment and Economic Growth, Indian Journal of Economics,
vol.40, no.156, 1959, pp.1-14
[7]. DeLurgio - Forecasting Principles and Applications, McGraw-Hill International Edition,
1998
[8]. Gardner, E.S. Jr. - Exponential Smoothing: The State of the Art- Part II, International
Journal of Forecasting, vol.22, 2006, pp.637-666
[9]. Gardner, E.S. Jr. - Exponential Smoothing: The State of the Art, Journal of Forecasting,
vol.4, 1985, pp.1-28
[10]. Goldar, B.; Ishigami, E. - Foreign Direct Investment in Asia, Economic and Political
Weekly, vol.34, no.22, 1999, pp. M 50-M 59
102
Kumar, G.; Dhingra, N.
[11]. Gupta, S.; Kumar, G. - Growth Performance and Forecasts of exports of Leather
Industry in Punjab, Foreign Trade Review, vol.43, no.1, 2008, pp.27-41
[12]. Gupta, S.; Kumar, G. - Growth Performance and Productivity of Leather Industry in
Punjab, Productivity, vol.47, no.3, 2006, pp.295-303
[13]. Humphrey, D. - Direct Foreign Investment and Economic Growth, The Economic
Weekly, vol.12, no.23-25, 1960, pp.925-930
[14]. Koehler, A.B.; Synder, R.D.; Ord, K.J. - Forecasting Models and Predication Intervals
for the multiplicative Holt-Winters Method, International Journal of Forecasting, vol.17,
2001, pp.269-286
[15]. Kumar, G.; Singh, A. - Growth and Forecasts of Foreign Direct Investment Inflows to
South and East Asia - An Empirical Analysis, Asian Economic Review, vol.50, no.1,
2008, pp.17-31
[16]. Ludger, O.; Zimny, Z. - Foreign Direct Investment in Africa: Performance and
Potential, http://www.unctad.org, 1999
[17]. Mwilima, N. - Foreign Direct Investment in Africa, Final Draft Report, Africa Labour
Research Network, 2003
[18]. Onyeiwu, S.; Shrestha, H. - Determinants of Foreign Direct Investment in Africa,
Journal of Developing Societies, vol.20, 2004, pp.89-106
[19]. Pankratz, A. - Forecasting with univariate Box-Jenkins Models: Concepts and Cases,
John Wiley & Sons, New York, 1983
[20]. Sidhu, H.S.; Kumar, G. - Growth, Performance and Prospects of Sports Goods Industry
in Punjab, Indian Journal of Applied Economics, vol.3, no.1, 2006, pp.122-135
[21]. Walonick, D.S. - An Overview of Forecasting Methodology, 1993, www.statpac. Com.
assessed on 30-3-2009
[22]. *** - FDI Confidence Index, The Global Business Policy, 2004, www.atkearney.com
accessed on 11-3-2008
[23]. *** - World Investment Report, UNCTAD, 2008
[24]. www.itl.nist.gov/div898/handbook/pmc/section4/pmc434.htm
Annals of the University of Petroşani, Economics, 9(2), 2009, 103-106
103
STRATEGIES FOR FINANCING OF THE ROMANIAN
HIGHER EDUCATION IN THE CONTEXT OF
PERFORMANCE INCREMENT IN EDUCATION
ADRIAN MĂCRIŞ, MARIA MĂCRIŞ ∗
ABSTRACT: Romanian system of education is confronted today, and even more in
the future, with real challenges that regard quality, performance and competitiveness. In this
way, through this paper, an analysis was made regarding the improvement of the financing
strategies for the higher education, starting from a series of methodological aspects proposed
by CNFIS for years 2008 and 2009. Thereby, premises were shaped for the elaboration of a
future methodological version that can be applied in 2010.
KEY WORDS: university autonomy, financing sources, quality indicators in higher
education, financing algorithm
The statement of the European Commission named “The Role of Universities
in a Europe of Knowledge” emphasizes the fact that “the universities are unique” as
they are part of all the three processes that the society of knowledge depends on in
order to develop: “the production of new knowledge, its transmission through
education and training, its dissemination through technologies of information and
communication”. On the other hand, the Council of Europe Parliamentary Assembly
through the Recommendation 1762 (2006) restates the importance of the Magna Charta
Universitatum and analyses the role of universities in nowadays Europe, considering
academic freedom and university autonomy to be fundamental requirements of any
democratic society. The Assembly invited the Ministers Committee to demand the
recognition of academic freedom and university autonomy as conditions for obtaining
the right to become a member of the Council of Europe. University autonomy is a
fundamental concept that is extremely complex and rich in meanings and it cannot be
materialized in just a simple legislative article. The National Council for the Financing
of Higher Education (CNFIS) sustained this process through demarches made in the
direction of modernizing the financing strategy of the system of Romanian higher
education, starting from the premises that a real autonomy cannot be built in the
∗
Chief Accountant, Ph.D. Student, University of Petroşani, Romania
Lecturer, Ph.D., University of Petroşani, Romania, andradamacris@yahoo.com
104
Măcriş, A.; Măcriş, M.
absence of a genuine transfer of responsibilities on the use of financial resources,
demarche that is doubled by a permanent concern for the rise in quality of the
educational process and in the stability of the whole education system.
The financing of the universities is done considering their effective activity,
which is expressed in the most direct way, through the performances in the students
training and research. The responsibilities for using the funds, as well as the liberty to
elaborate own strategies for optimizing the expenses, belong to the universities
management. Each year CNFIS completes a proposal regarding the budget for the
following year, using for this a large range of estimation methods. For year 2008, one
of these estimations had in view the perspective of gradually reaching the average
European level of financing of the higher education for the years to come. At the same
time, CNSIF pointed out with consistency the importance of sustaining a mixed
financing (one of “multisource” type) for the higher education system. This strategic
direction is one of the main orientations today at the level of European Union,
emphasizing the fact that it is important for “the public authorities to acknowledge the
higher education and the research as strategic investments, and the public financing
must be a major source for their sustaining.” Since the Romanian higher education
system must integrate in the European space of higher education, on the terms of a
European and global competition, further financial efforts are necessary for its support.
In order to ensure the objectivity and transparency of the process of yearly
distribution of the budgetary allocations to universities, it is used a mathematical
formula that in the most direct way derives from the fundamental principle that the
resources follow the student. This is a rigorous formula that allows the universities to
estimate their available resources, but it is also flexible enough to facilitate the
supporting of the strategic imperatives of the higher education through successive
adjustments of the values of the entrance amounts and those of other system
parameters. Introduced in 2002, the quality component of the financing algorithm met
a fast development both regarding the weight in the total amount of financing, and the
complexity of the system of indicators that was used. The two main pillars of the
algorithm, that create the conceptual premises in which the new strategy of financing
the Romanian higher education develops, are the allocation of a part of the funds to
universities taking into consideration the number of students, the differentiate
allocation, respectively, generated by the quality component. The value of the
financing algorithm is given not only by the conceptual dimension or by the refinement
of the adopted solutions, but also by the fact that the modernizing of the financing
strategy is done without introducing major interferences in the system.
The methodology adopted by CNFIS for year 2008 was part of a gradual and
permanent modernizing process of the financing strategy, of implementation of
strategic directions from a national and European level, with the mention of a stability
of the system. The periodical updating of the distribution methodology brought some
important changes through the objectivity of the used information and the adjustment
of some quality indicators, taking into consideration the strategic requirements of the
moment. On the other hand, some of the formulated options considered separately or
together, can offer solutions for the application of new legislative requirements, but
keeping the fundamental principle previously stated, namely that the resources follow
Strategies for Financing of the Romanian Higher Education in the …
105
the student. The proposals stated by CNFIS, during the plenary meeting of the Council
on December 14th, 2007, validated the necessity of maintaining a certain stability of the
financing system by keeping the value of the equivalency coefficients and that of the
cost coefficients, as follows: a) at the same level as in 2007, as well as the growth of
the weight of the quality component from 25% (2007) to 30% (2008) as a result of the
growing requirements regarding the quality and competitiveness of the Romanian
universities after January 1st, 2007. This growth has in view: the stimulation of the
development of the teaching staff from the point of view of educational process, by the
rise with 1% of the percentage allocated to the group of Teaching staff (distributed in
the total of quality indicator IC-3, the number of assigned lecturers compared to the
unitary equivalent number of students, as to support the performance potential of the
teaching staff); b) the growth with 2,5% of the share allocated to the group of Impact of
scientific research regarding the educational process (distributed to IC6 indicator, the
level of performance in the scientific research, through an extra percentage of 2%, this
way offering the greatest share to this indicator, and to IC8 indicator, the Percentage
ratio between the value of the research-designing contracts and the total of university
incomes), emphasizing the part regarding the results of the research which affects the
education process, especially the last two study cycles, namely those of MA and PhD);
c) equivalency coefficients as well as cost coefficients should remain constant, in order
to maintain a stability of the increase with 0.5% of the share held by the Material base,
distributed for the importance of the expenses for IC11 indicator, Amount of the
expenses for acquisition of books, magazines and textbooks per number of students
(budgeted and fee payers), in order to stimulate and support the universities in using elearning instruments and virtual libraries; d) at the level of the group of indicators
regarding University Management it is introduced an increase with 1% distributed for
the stimulation and support of the achievement of extra budgetary incomes that could
be used for development (for IC15 indicator, the share of the extra budgetary incomes
spent for development in the total amount of the university incomes); e) the indicator
regarding the Total quality of academic and administrative management, an incentivetype quality indicator, for development purposes, remained constant for year 2008, its
impact still being low. So we can consider that the financing methodology for 2008
brings a plus of coherence and stability when it comes to the quality component,
leaving important directions regarding the improvement for the years to come, opened,
especially when it comes to the development component.
The methodology submitted by CNFIS for 2009 represents a new stage in the
process of gradual and permanent modernizing of the financing strategy, of
implementation of the strategic national and European directions, with the keeping of a
certain stability of the system. There is no final change conceptually speaking, and the
total share of the component allotted considering the quality aspects remains
unchanged. The discussions that took place during the CNFIS plenary meeting on
November 17th, 2008, on the basis of the initial analysis which were done at the level
of the commissions of the Council but also that of the signals received from some
institutional partners (MECI, universities), led to the elaboration and approval of some
changing proposals regarding the version applied in the previous year, these becoming
a unitary proposal for financing methodology regarding universities for 2009, which
106
Măcriş, A.; Măcriş, M.
are presented below. As a starting point we make reference to the fact that for the
established professions the students registered in the finishing years (V, VI) are
assigned, starting with academic year 2009-2010, equivalency coefficients correlated
with those used for the students in the second cycle of study, registered in the other
fields. This change affects in an attenuate manner the financing during this financial
year, the effect appearing only for the last three calendar years. At the same time, when
it comes to the medical field, this measure is doubled with the extension of resident
studies financing to the entire period. The main changes regard the assembly of quality
indicators through the transformation of some weights among groups or inside the
same group, but also through the introduction of some indicators previously used or
even the introduction of new indicators. Thereby, even if the total weight of the first
group (teaching staff) remains the same, in which it appears a first change by the
reintroduction of the indicator regarding the balance between the number of teachers
and the unitary equal number of students (budgetary and fee payers), the role of the
university teachers being underlined when it comes to the assurance of a high quality
degree of the education process. The second group (the impact of scientific research) is
reinforced by the increase with one percentage of the weight (to the detriment of the
fourth group which still has the highest weight). The third group (material base) only
knows some clarifications through the reformulation of the first indicators in the group
and the confirmation of the complete renunciation to the final indicator (regarding the
number of computers in the property of the university, with 0 weight for a few years).
But the latter is integrated in the fourth group (university management) and has in view
the ability of the universities to use the funds received from the budget for investments,
having a weight of 0.5% in the total of Primary Financing. It overtakes some of the
effects regarding the ability of the universities to direct the extra budgetary funds
towards development, its weight being halved when the funds allocated from the
budget for this purpose had lately a higher weight.
One of the important changes of the set of indicators is the introduction of a
group dedicated to permanent education, having a complex indicator (IC 17), even
though it appears this year in a temporary form (with 0 weight, without influencing the
financing). Without offering a practical proposal regarding the indicator definition, the
present methodology indicates the main directions had in view for future development
of the indicator. This step also represents a link with the future version of the
methodology, which begins to shape, even though it can only be applied in 2010.
REFERENCES:
[1]. Panaite, N. - Quality Management and the Classification of Romanian Universities,
Paideia Publishing House, Bucureşti, 2000
[2]. Popescu, S.; Brătianu, C. - Quality Guide for Higher Education, Calistro Peoject,
Bucharest University Publishing House, Bucureşti, 2004
[3]. *** - National Council for the Financing of Higher Education, Higher Education Financing
in Romania, Informative Document, June 27th, 2007
[4]. *** - Romanian Government, National Development Plan 2007-2013
[5]. *** - Aspects of Global Financing of Higher Education, PHARE Universitas, 2006
[6]. www.cnfis.ro, www.edu.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 107-114
107
CHARACTERISTIC FEATURES OF THE SYSTEM OF
HEALTH SOCIAL INSURANCES IN
ROMANIA AFTER 1990
MARIA MĂCRIŞ, GABRIELA SLUSARIUC,
FLAVIUS HOHOI ∗
ABSTRACT: The topic approached by this paper targets in its first part a short
history of health social insurances in Romania after 1990 as well as the implementation of this
system according to the new demands. Further a series of aspects specific for the organization
and functioning of the Health Insurances Center of the district of Hunedoara are analyzed;
among them we should mention the following ones: the main responsibilities of this institution,
the specific objectives, and the elements of the system of health insurances system. At the same
time, an analysis of the evolution of the incomes and expenditures of the institution during the
period 2001-2008 is done as well as a structure of the expenditures for medical services
financed by FNUASS in 2008.
KEY WORDS: system of health social insurances, sanitary reform, insured persons,
medical services, unique national fund of health social insurances
1. HISTORY OF ROMANIA’S HEALTH SOCIAL INSURANCES
Until the issuing of the Law of health social insurances no. 145/1997, the
system of health protection was centrally coordinated by the Health Ministry owing to
the 41 District Sanitary Directions and the Sanitary Direction of the Municipality of
Bucharest; it included a network of hospitals, polyclinics, medical units, and other
sanitary units. At the same time, there were a series a hospitals, institutes, and national
highly specialized centers directly subordinated to the Health Ministry, as well as
parallel medical networks subordinated to the Ministry of Transports, The Ministry a
National Defense, The Ministry of Internal Affairs, the Ministry of Labor and Social
Protection, and the Romanian Intelligence Service, that provided medical services and
had as a responsibility the care taking of a certain category of the population.
∗
Lecturer, Ph.D., University of Petroşani, Romania, andradamacris@yahoo.com
Lecturer, Ph.D., University of Petroşani, Romania, ellas7275@yahoo.com
Masters Student, University of Petrosani, Romania
108
Măcriş, M.; Slusariuc, G.; Hohoi, F.
During the period 1990-1998 a dualist system was used: financing from the
State budget and complementary financing owing to a special health fund (the
Government’s Order no. 22/1992), as well as external financing – loans from the
World Bank (Law no.79/1991), PHARE funds, and donations. The beginning of the
sanitary reform in Romania has implied the re-organization of the health services and
of the system of health services financing. In July 1997 the Law of Health Social
Insurances no. 145 was adopted by Romania’s Parliament and promulgated by the
President of the country. It took into consideration Bismarck insurances model
comprising compulsory health insurances, based upon the principle of solidarity, and
functioning within a decentralized system. The law was in force beginning with
January the 1st, 1999; yet, it witnessed a period of transition during 1998 when the
District Sanitary Directions and the Health Ministry administrated insurance funds.
Consequently, beginning with January the 1st, 1999, and according to the law, the
health insurances centers also began to function as autonomous public institutions
administrated by the representatives of the insured persons and the employers through
the Administration Councils.
2. IMPLEMENTATION OF THE SYSTEM OF HEALTH SOCIAL
INSURANCES
Law no.145/1997 of the health social insurances, the first norm act that has
introduced the principles of health social insurances, brought a series of new data
having a democratic character (compulsory inclusiveness of the population in a unitary
system of social protection, free choice of one’s doctor, of one’s sanitary unit, and of
the health insurances center, offer of a definite package of medical services stipulated
by the basic contract, financing through contributions and State subsidies, financial
balance, decentralized functioning, and solidarity, in collecting and using the funds,
equity, easiness in getting medical services). From an administrative point of view,
“health insurances are organized by the National Center of Health Insurances - CNAS,
by the district health insurances centers, and the center of the Municipality of
Bucharest, and by territory offices”; the management level was represented by CNAS –
the general assembly of the representatives and the administration council, chosen by
the general assembly of the representatives, having a president and a vice-president
chosen among its members; in case of the district centers we dealt with the
representatives assembly and the administration council.
The health social insurances centers should have, according to Law
no.145/1997, their own management level chosen according to a secret vote for 5 years
and should have included the representatives of the insured persons and of the
employers. The insured persons and the employers used to chose 2 representatives for
each 10 000 insured persons, according to representative groups as follows: employees,
professionals, farmers, retired persons, unemployed persons, pupils and students, and
household persons. The law also stipulated elections for the general assembly of the
representatives according to a set of electoral rules elaborated by the central electoral
board; at the level of the districts and of the Municipality of Bucharest, on the basis of
Characteristic Features of the System of Health Social Insurances in …
109
the electoral set of rules, district electoral boards would have functioned approved by
the central electoral board and having similar components.
3. CHARACTERISTIC FEATURES OF THE ORGANIZATION AND
FUNCTIONING OF THE HEALTH SOCIAL INSURANCES CENTER OF THE
DISTRICT OF HUNEDOARA
The system of health social insurances represents the main system of financing
the protection of population’s health that enables the access to a package of basic
services for those who are insured. Under the circumstances of the sanitary policy
initiated by the Government through the Ministry of Public Health, the National Center
of Health Insurances has planned to settle the problems of the system of health social
insurances starting a real reform of the system integrated within the sanitary reform.
The Health Insurances Center of the District of Hunedoara is a public,
autonomous and juridical institution, of local interest, without any lucrative purpose; it
has its own budget and is subordinated to CNAS; it administrates the unique national
fund of the health social insurances observing the norms elaborated by the National
Health Insurances Center and providing the functioning of the system of health
insurances at a district level. The Health Insurances Center of the District of
Hunedoara, when exerting its responsibilities given by the law and the Statute,
implements and observes the general policy and strategy settled by the National Health
Insurances Center for the system of health social insurances system within the margins
of its competence. The Health Insurances Center of the District of Hunedoara was
founded on February the 1st, 1999, according to Law no.145/1997. The Health
Insurances Center of the District of Hunedoara includes 436 881 insured persons, a
number that, when compared with the total number of the district’s population of 472
284 inhabitants, represents 92.50%; out of it 325 059 inhabitants belong to the urban
environment – 74.40%, and 111 822 inhabitants to the rural environment - 25.60%.
CAS Hunedoara has begun its activity with 30 employees whose number has
increased due to the diversification of the services offered to the insured persons; today
it counts 85 employees.
The main responsibilities of CAS Hunedoara are the following ones: it
administrates, together with CNAS, the Unique National Fund of Health Social
Insurances (FNUASS); it controls the observation of the right of the insured persons to
medical services, medicines, and sanitary stuff, non-discriminatorily, under the
stipulations of the law; it takes part in the evaluation of the doctors and of the sanitary
staff that can be admitted to work within the system of health social insurances; it
collects FNUASS’ s contributions for the natural persons others than those for which
the incomes’ collecting is done by ANAF; it administrates its own budget; it registers,
up-dates, and reports the data regarding the insured persons towards CNAS; it
elaborates and publishes the yearly report and the activity plan for the year to come; it
makes use of all legal means in order to improve contributions’ collecting for
FNUASS; it freely provides data, consultancy, and assistance regarding the health
social insurances and the medical services to the insured persons, employers, and the
medical services suppliers; it administrates the assets of the insurances center,
110
Măcriş, M.; Slusariuc, G.; Hohoi, F.
according to the legal stipulations; it negotiates, contracts, and discounts the medical
services contracted with the medical services suppliers according to the basic contract
and to the implementation methodological norms; it discounts the cost of the services
contracted and provided to the insured persons in the benefit of the medical services,
pharmaceutical services, and medical devices meant to correct and recover organic or
functional deficiencies or to correct certain physical deficiencies, according to
reporting forms settled on the basis of the Order of the President of the National Health
Insurances Center; it monitors the number of medical services provided and the level
of their cost; it can organize auctions with a view of contracting certain services
belonging to the package of services according to the basic contract; it questions the
insured persons in order to evaluate their degree of satisfaction and the interest they
show for the quality of the medical services; it provides according to its competence
the implementation of the international documents regarding the health field agreed by
Romania with other countries; it provides the confidentiality of the data according to
the legal acts in force; it has other responsibilities stipulated by the acts in the health
field.
Nowadays, the Health Insurances Center of the District of Hunedoara has as a
responsibility the providing of the equality of chances of the citizens guaranteeing the
non-discriminatory access to basic medical care. With a view of improving the quality
of medical care, the institution encourages competition among medical services
suppliers looking to provide a proper financing of all the fields of medical assistance
within the margins of the approved budget in order to meet to a larger extent the needs
of the district’s insured persons; this preoccupation represents the main objective of
CAS Hunedoara.
The specific objectives of the Health Insurances Center of the District of
Hunedoara have targeted the following aspects: a) the increase of the degree of
collecting the incomes of FNUASS according to the stipulations approved in case of
natural persons; b) the increase of the degree of collecting the debts in case of natural
persons; c) the share of expenditures as compared with the approved stipulations; d)
the diminishing of the share of administration, functioning, and capital expenditures
within the total sums collected at the district level; e) the implementation of a system
of evaluating the degree of satisfaction through sociological enquiries; f) the strict
selection, according to performance and professional fame, of the medical services
suppliers noticing the existence of the criteria of access of the insured persons to the
medical services suppliers and medical products suppliers; g) the control of the
reported data for medical services with a view of discounting them within the strict
margins of the legal stipulations; h) observation of paying terms stipulated by the
contracts of services supplying according to assistance fields; i) monthly and quarterly
monitoring of the expenditures in order to remain within the limits of the budget
allocated sums both regarding medical services and the budget for its own activity;
j) intensifying the evaluation of efficiency and efficacy of the decisional and execution
factors of the institution at the level of certain programs, activities, and actions, in
using financial, material, and human resources in order to accomplish the objectives
and to get envisaged results.
Characteristic Features of the System of Health Social Insurances in …
111
The elements of the health insurances system that represent a permanent
preoccupation of CAS Hunedoara are mainly the following ones:
• Insured persons - towards whom all the efforts of those who work within the
system of health insurances target. The insured person is the one who pays,
consequently that person is the main beneficiary.
• Medical and pharmaceutical services suppliers. The doctors and the pharmacists
are the engine of the whole system. The reform’s entire activity and success
depends on them. The bridge between the insured person and the medical system is
represented by the family doctor. He/she is the insured person’s „lawyer” in
whatever health matter.
• The Health Insurances Center. The main task of the insurances centers is to
distribute the funds so that each insured person, irrespective of his/her possibilities,
can benefit from the medical assistance required in order to maintain his/her health.
In fact, the insurances centers buy the services required by the insured persons.
During 2008 the incomes of FNUASS represented 186 905 461 lei, the percent
of gathering the incomes as compared with the budget stipulations representing 66.7%.
The analysis of the last years dynamics of the incomes’ evolution one can
notice an ascendant trend as follows:
Table 1. The evolution of the incomes of CAS Hunedoara during the
period 2001-2008
Total incomes
(million lei)
2001
2002
2003
2004
2005
2006
2007
2008
75.57
99.31
102.24 122.14 130.95 139.42 153.28 186.91
Million lei
186.91
200
180
160
140
120
100
80
60
40
20
0
153.28
122.14
99.31 102.24
130.95 139.42
75.57
2001
2002
2003
2004
2005
2006
2007
2008
Year
Figure 1. Evolution of the incomes of CAS Hunedoara during the
period 2001 – 2008
Analyzing the expenditures’ evolution of the last years dynamics one can
notice an ascendant trend from 94.48 million lei in 2001 to 355.21 million lei in 2008,
and the administration expenditures of the fund from 1.8 million lei to 3.52 million lei
as follows:
112
Măcriş, M.; Slusariuc, G.; Hohoi, F.
Table 2. Evolution of the total expenditures of CAS Hunedoara out of which
administration expenditures during the period 2001 - 2008
Total expenditures
(million lei)
Administration
expenditures
(million lei)
2001
2002
2003
2004
2005
2006
2007
2008
94.48
118.80
140.67
164.34
206.07
208.45
272.58
350.28
1.8
1.85
1.93
2.15
2.26
2.75
3.51
3.52
millione lei
400
3.52
350
3.51
300
2.26
250
2.15
200
1.85
150
0
350.28
1.93
1.8
100
50
2.75
272.58
94.48
164.34
118.8 140.67
2001
2002
2003
2004
206.07 208.45
2005
2006
2007
2008
year
Figure 2. Evolution of the total expenditures out of which administration expenditures
of CAS Hunedoara during the period 2001 - 2008
In 2008 the structure of the medical services financed by the Unique National
Fund of Health Social Insurances is displayed in the figure below. One can notice that
the hospital remains the place where the most important amount of resources is used
while providing the most expensive medical services; such facts determine a modern
management approach capable of allowing the increase of efficiency and of the quality
of the supplied services. At the same time primary medical assistance and medicines
assistance at home witness an ascendant trend being a priority of the health services
reform. As compared with 2001 new medical services have emerged: home medical
care in 2006 and medical assistance given in a state member of the European Union in
2007 which play an increasing part.
In order to improve the quality of the medical act with a view of a better use of
human resources and in order to gain doctors’ interest for the activity supplied and the
relation with the patients, in order to increase the insured persons’ degree of content
and to improve population’s access to medical services, it is necessary to have financial
support, to know legislation in force, and to observe financial discipline and medical
deontology. The whole activity of CAS Hunedoara has been based upon the
quantitative and qualitative efficiency of the medical, pharmaceutical, and devices
services given to the insured persons in order to improve the health condition of the
population living in the district of Hunedoara, to facilitate the access to health services
Characteristic Features of the System of Health Social Insurances in …
113
through a better discovery of less favored social groups, the improvement of the
mutual relations with all the “actors” of the system in order to better know the field of
health social insurances in Romania.
Home medical care
assistance, 0.03%
Social insurances and
assistance , 3,38%
-Medical assistance given in a
state member of the EU, 0,13 %
Medical equipements and
devices, 0,75%
Home used medicines,
16,81%
Stuff used by healt
programs, 0,08%
Medicines used by healt
programs care, 5,97%
Hospital medica, 46,81%
Medical services of
dialyze, 3,31%
Dental medical
assistance, 0,34%
Para –clinical specializations
medical assistance, 3,39%
Clinical specialization medical
assistance, 2,05%
Primary medical
assistance, 9,37%
Recovery and rehabilitation
Services, 3,12%
Before hospitalization
emergency service,
sanitary transport, 4,46%
Figure 3. Structure of the expenditures of medical services financed by FNUASS, the
district of Hunedoara during 2008
Table 3. Structure of the expenditures of medical services financed by FNUASS
during 2008
Medical and social assistance services in case of
illnesses and invalidity given in 2008
Hospital medical assistance
Before hospitalization emergency services and sanitary
transport
Recovery and rehabilitation services
Primary medical assistance
Clinical specializations medical assistance
Para-clinical specializations medical assistance
Dental medical assistance
Dialyze medical services
Medicines used by the health programs
Stuff used by the health programs
Medicines used at home
Medical devices and equipments
Home medical care
Medical assistance given in a state member of the EU
Social insurances and assistance
Total expenditures for medical services in 2008
Sum
million lei
%
164.05
46.81%
15.63
10.93
32.84
7.17
11.89
1.2
11.6
20.92
0.297
58.91
2.64
0.12
0.46
11.83
350.487
4.46%
3.12%
9.37%
2.05%
3.39%
0.34%
3.31%
5.97%
0.08%
16.81%
0.75%
0.03%
0.13%
3.38%
114
Măcriş, M.; Slusariuc, G.; Hohoi, F.
The Health Insurances Center of the District of Hunedoara has given clear and
specific messages regarding population’s health insurances targeting general
information and a favorable opinion regarding the institution’s image as well as the
implication of the decisional factors in attracting funds in the system in the benefit of
the insured persons; the specific objectives of the organization have had as a goal the
increase of the performance of medical services suppliers and the access to medical
services of all the insured persons; the objectives have targeted:
• The increase of technical efficiency through properly using the limited
resources, waste elimination, and the decrease of the costs of supplied services;
• The increase of allocation efficiency through maximizing the value given by
the resources that have been spent, resources allocation depending on results
and the impact upon the health condition expressed in life years gained, the
improvement of life quality, the improvement of the access to priority services;
• The increase of the access of less favored groups through a resources
distribution centered on those who mostly need services and have limited
access;
• The adaptation of the structure of medical services to the demands and
expectations of their users so that public services should meet patients’
expectations.
During the next period we consider that the main acting directions are the
following ones:
• Improvement of acute patients’ hospitals and setting up hospital integrated
ambulatories. Such an objective can be implemented through: the diminishing
of the number of hospital beds, the diminishing of the number of externalized
cases, and the increase of the number of cases cured in ambulatory and the
increase of the rate of surgery activities in surgical departments up to about 80
%;
• Development of home medical care services;
• Development of multifunctional rural centers.
REFERENCES:
[1]. Blaga, E. - Politici de sănătate în cadrul Uniunii Europene, Publishing House of the
University of Bucharest, 2004
[2]. Luchian, M. - Management sanitar, Publishing House of the Faculty of Medicine and
Pharmacy, Iasi, 2005
[3]. *** - Law 95/14.04.2006 regarding the reform in the sanitary field, the Official Monitor
no. 372/2006
[4]. *** - Law no.145/2007 of health social insurances, the Official Monitor no.178/1997
[5]. www.cnas.ro
[6]. www.cjashd.ro
[7]. www.ms.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 115-120
115
ECONOMIC VALUE ADDED – INDEX OF COMPANIES’
INTERNAL PERFORMANCE
MARIANA MAN, EMILIA VASILE *
ABSTRACT: Value added displays various opportunities for measuring and
evaluating performance; it is the key element in determining certain indices that create value
having a major significance within a company’s activity, either quoted or not on capital market.
In case of quoted companies, value creation is the main criterion of performance evaluation by
shareholders whose strategic objective is maximizing present and future profits. In order to
carry out such an objective, the value created for shareholders can be measured through a
system of indices that allow the determination of the value created during a financial exception
or as compared with a certain reference period. The economic index Value Added (EVA) is
relevant in quantifying a company’s capacity of creating value for capital suppliers.
KEY WORDS: performance, economic value added, invested capital, capital cost, net
operating profit after taxes, weighed average cost of capital, real economic profit
1. INTRODUCTION
EVA is the mostly encountered index of measuring economic profit. It is an
index of measuring internal performance of companies being promoted by Stern
Steward American consulting company. Eva index is relevant in quantifying the
capacity of a company of creating value for capital suppliers; capital cost represents
the index of the average efficiency expected by investors under similar risk
circumstances.
EVA can be determined both at the global level of a company and at the level
of various organizational sub-divisions, irrespective of the fact that the company is
quoted or not on the capital market. The index allows the calculation of a company’s
performance during periods shorter than a year as it is expressed according to the
accounting exploitation result.
Capital owners and potential investors are not interested in getting a positive
EVA during short periods or yearly, but in constantly maintaining or even in
*
Prof., Ph.D., University of Petroşani, Romania, man_mariana2006@yahoo.com
Prof., Ph.D., „Athenaeum” University of Bucharest, Romania
116
Man, M.; Vasile, E.
increasing economic profit. EVA has a predictive importance as its evolution reflects
the growth or not of the shareholders’ wealth.
2. CALCULATION OF EVA
The index can be easily determined in case the following data are known: net
operating profit after taxes, capital employed, and capital cost. EVA is also called
“economic income”. As compared with “accounting income”, EVA has a higher
informational value as it not only considers the profits generated by the use of the
company’s active assets but also the associated cost of invested capital.
• The most employed EVA formula is the following one:
EVA = NETOPERATI NGPROFITAFTERTAXES −
(EMPLOYEDCAPITAL × CAPITALCOST )
( )
Net operating profit after taxes NOP is determined by subtracting profit taxes
Tp from exploitation result ( R exp ) :
(
)
Exploitation result
NOP = R exp − Tp
(R exp )
( )
is determined by subtracting exploitation
expenditures Ex exp from exploitation incomes I exp :
R exp = I exp − Ex exp
Capital cost includes the cost of the company’s own capital and the debt’s cost.
It is a weighed average cost (Cwa ) of the costs of employed financing sources. It is
determined as a weighed arithmetic mean of the cost of the company’s own capital
and of the cost of loaned capital:
C
D
C wa = o × Pf +
× i × (1 − t )
Ci
Ci
Where:
Co = Company’s own capital;
Ci = Invested capital;
Pf = Rate of financial profitableness;
D = Long term debts;
i = Interest rate;
t = Taxes.
•
Another formula employed when calculating EVA starts with the fact
that this index represents real economic profit as it regards the whole capital used for
financing:
EVA = (Pi − C wa ) × C i
Where:
Economic Value Added - Index of Companies’ Internal Performance
117
Pi = rate of profitableness of total invested capital.
The following idea emerges out of this formula: the investor is going to require
a profitableness of invested capital able to overpass its cost in order to get economic
value added.
• In case one decomposes the above formula in order to see the factors it
depends on, the result is the following one:
1
⎞
⎛
EVA = ⎜ Pi × N a ×
− C mp ⎟ × C i
Ra
⎠
⎝
where:
Pi = Rate of incomes profitableness;
N a = Number of rotations of total active assets;
Ra = Accounting structure rate that reflects the share of invested capital within total
assets.
Accordingly, economic value added is not an independent index; it can be the
result of other rates calculated within a company’s economic and financial analysis.
3. EXAMPLE REGARDING THE CALCULATION OF EVA ACCORDING TO
THE DATA SUPPLIED BY YEARLY FINANCIAL SITUATIONS
In order to exemplify we are going to focus upon a company that displays the
following simplified accounting balance sheet and profit and loss account:
Table 1. Simplified accounting balance sheet:
Indices
Amount (Lei)
775 000
A.
Fixed assets
B.
Circulating assets
400 000
C.
Advance payments
-
D.
Short term debts
283 000
E.
Net circulating assets, namely net current debts
117 000
F.
Total assets minus current debts
892 000
G.
Long term debts
380 000
H.
Provisions
-
I.
Advance incomes
-
J.
Capital and reserves
512 000
I Subscribed given capital
150 000
IV Reserves
215 000
VI Result of exercice
147 000
118
Man, M.; Vasile, E.
Table 2. Simplified profit and loss account:
Indices
Amount (Lei)
1 300 000
1.
Financial result ( Vexp )
2.
Exploitation expenditures ( E exp )
3.
Exploitation result ( Rexp )
4.
Financial incomes
5.
6.
Financial expenditures
- interest expenditures
Extraordinary incomes
7.
Extraordinary expenditures
8.
Gross result
175 000
9.
Taxes (16%)
28 000
10.
Net result
1 025 000
275 000
100 000
100 000
-
147 000
Further we are going to determine the indices required in order to calculate EVA:
1. Exploitation result ( R exp ):
2. Profit taxes ( Tp ):
R exp = 275.000 Lei
Tp = 28.000 Lei
NOP = R exp - Tp = 247000 Lei
3. Net operational profit ( NOP ):
4. Tax share (t):
t=
Tp
R exp
5. Invested capital ( Ci ):
= 0.10
C i =C o + D = 512000 + 380000 = 892000 Lei
6. Profitableness of invested capital ( Pi ):
Pi =
NOP 247.000
=
= 27.69%
Ci
892.000
7. Company’s own capital ( Co ):
C o = 512000 Lei
Share within total invested capital = 57.40%
8. Profitableness of the company’s own capital ( Pf ):
Pf =
NOP 247000
=
= 48.24%
Co
512000
Economic Value Added - Index of Companies’ Internal Performance
119
9. Long term debts (D): D = 380000 Lei
Share within total invested capital = 42.60%
10. Interests expenditures ( Exp int ):
11. Interest rate (i):
i=
Expint = 100000 Lei
Expint 100000
=
= 26.31%
380000
D
12. Weighed average cost of capital ( C wa ):
512000
D
Co
× Pf +
× i × (1 − t ) =
× 48.24% +
Cwa =
892000
Ci
Ci
+
380000
× 26.31% × (1 − 0.10 ) = 37.77%
892000
13. Economic Value Added (EVA):
EVA = (Pi − Cwa ) × C i = (27.69% − 37.77% ) × 892000 = −89913 .6 Lei
4. CONCLUSIONS
Economic Value Added is not an independent index. It can be the result of
other rates calculated within a company’s economic and financial analysis.
The main advantages of this index are the following ones:
• It is an index measuring a company’s internal performance relying upon
value;
• It reflects in absolute manner the value yearly added or destroyed according
to the point of view of the investor;
• It a manner of choosing the most promising financial investment;
• It is a manner of protecting investors against the destruction of the value
they detain;
• It is an index that tends towards maximizing.
EVA can be chosen in order to analyze the performance of a company as it
matches the principle according to which value can be created only in case an
investment brings to its investors not only a positive result but a result superior to the
one expected by the investors. EVA intends to be a performance index of management.
Under such circumstances, a company can get a profit when destroying value in case
such a profit is inferior to the one it should achieve.
EVA is a measuring device of the value created by a company for its
shareholders, calculated a posteriori according to ascertained data, easily being
considered as an index of a company’s internal performance. This is one of the
shortcomings of the index as the value of a company also depends on its future
development abilities.
120
Man, M.; Vasile, E.
Consequently, certain authors recommend the calculation of Eva according to
the following relation:
PERFORMANCE= GLOBAL RESULT – COST OF COMPANY’S OWN
CAPITAL
Theoretically, they have reached the notion of global result of the exercise
according to the relation:
GLOBAL
RESULT OF
THE
EXERCICE
=
NET
RESULT
OF THE
PROFIT
AND LOSS
ACCOUNT
+/- ADJUSTMENTS +/- OTHER
VARIATIONS OF
IN ORDER TO
COMPANY’S
MAINTAIN
OWN CAPITAL
CAPITAL
NOT
ASCERTAINED
IN THE RESULT
OF THE
EXERCICE
Defining performance through the net result of the exercise or through global
result is a matter of vision. Global result reflects performance only to the extent to
which it notices the incomes and the losses that comprise economic benefits and does
not consider the surplus resulting out of increasing active assets’ prices.
Global result is future directed as it considers not only achieved incomes but
also possible future ones. Global result already includes the cost of financing the
company by third parties. Consequently, in order to determine performance from the
point of view of the shareholders (as EVA shows) one should subtract the cost of a
company’s own capital from global result.
REFERENCES:
[1]. Black, G. - Applied Financial Accounting and Reporting, Oxford University Press Inc.,
New York, 2004
[2]. De Ronge, Y.; Cerrada, K. - Contrôle de gestion, Pearson Education France, 2005
[3]. Jianu, I. - Evaluarea, prezentarea şi analiza performanţei întreprinderii, CECCAR
Publishing House, Bucharest, 2007
[4]. Petrescu, S. - Analiză şi diagnostic financiar-contabil, CECCAR Publishing House,
Bucharest, 2008
Annals of the University of Petroşani, Economics, 9(2), 2009, 121-126
121
THE INCONSISTENCY AND THE IMPERATIVE CHANGE
IN ROMANIAN TOURISM
MIRELA MAZILU *
ABSTRACT: The inconsistency and even the lack of a strategy in tourism, the lack of
promotion for Romania abroad, and the expensive and poor services are some of the problems
which managers present within the “Private Government” meeting on tourism have identified
as needing immediate rehabilitation for the re-launching of the market in Romania.
Motto: “Give me the peace to accept the things I cannot change, the courage to change the
ones I can, and the wisdom to be able to distinguish among them.” - Marcus Aurelius.
KEY WORDS: Romanian tourism, current situation, expected results
The inconsistency and even the lack of a strategy in tourism, the lack of
promotion for Romania abroad, and the expensive and poor services are some of the
problems which managers present within the “Private Government” meeting on
tourism have identified as needing immediate rehabilitation for the re-launching of the
market in Romania. But, unfortunately, without a “strategy nothing happens. We suffer
from inconsistency, because, each time when ministers change, what was started
before, it was changed”, declared Nicolae Demetriade, the former owner of Happy
Tour, the biggest travel agency at a local level and the president of World Travel. The
change and the inconsistency of a plan for the re-launching of tourism are observed by
more and more actors involved in the development of tourism.
We talk about tourism as we have talked about agriculture for 15 years as
being a priority, but we have to admit, tourism has never been a priority either for the
central, local authorities or for the governments. If we take a look at the political
platforms of the parties, we will always see three lines about tourism. There is a
strategy, but it is not applied.
According to the representatives in tourism, the re-founding of the former
National Agency for Tourism (ONT) on a structured based on the partnership between
the public and the private and the adoption of the Master Plan for tourism as a law of
tourism would ensure the maintenance and the application of the strategy on a long
*
Prof., Ph.D., University of Craiova, University Centre of Drobeta Turnu Severin, Romania,
mirelamazilu2004@yahoo.com
122
Mazilu, M.
term, regardless of the political affiliation of the Government. “I have said even since
then that the Master Plan which all of us have elaborated for two years will remain
somewhere in a drawer, if it was not turned into a law of tourism. This agency of
tourism should lobby for it and change this Master Plan into a law of tourism, because
it is the only way in which it can be implemented, and a law survives the electoral
cycles. As long as it is voted in Parliament, we understand that all the parties involved
have agreed to it, so, any government would there be, this medium and long term
Master Plan would be continued, and we need this continuity.”
The re-launching of tourism in Romania and the attraction of a larger number
of foreign tourists would bring supplementary benefits, in the opinion of many tourism
managers, but with many and necessary changes.
According to the National Institute of Statistics (INS), 45.5% of the number of
arrivals and 29.9% of the tourists spending the night within the tourist accommodation
structures, from January to September 2007, were recorded in Bucharest and in the
county residence cities, except Tulcea. On a second place, there are the treatment
resorts with 25.5% tourists spending the night and 10.6% arrivals, followed by the
seaside resorts, except for Constanta, with 24.1% tourists spending the night and
14.2% arrivals, and the mountain resorts with 10.2% tourists spending the night and
13.9% arrivals. For example, Bucharest and the county residencies represented, in the
first months of 2008, 45.5% of arrivals in the tourist accommodation structures, on the
second place being the other resorts and tourist circuits (14.7%), followed by the
seaside area (14.2%), the mountain resorts (13.9%), the treatment resorts (10.6%) and
the Danube Delta (1.1%).
The total of the arrivals recorded in the tourist accommodation structures
within the first nine months of the year was of 5418.2 thousands, rising with 12.6% in
comparison with the similar period of 2007.
The Romanian tourists’ arrivals in the tourist accommodation units represented
77.3% of the total number of arrivals, while the foreign tourists represented 22.7% of
the total number of arrivals, almost equal proportions with the ones from the period
January-September 2007, as shown by an INS statement.
According to the Institute’s data, the increasing percentages were recorded in
all types of tourist accommodation structures, except for inns, pupils’ camps and the
tourist halting places.
The number of tourists spending the night recorded within this period in the
accommodation structures was of 16472.2 thousands, 8.7% more than in the first nine
months of 2007.
The Romanian tourists spending the night in the accommodation structures
represented 82.5% from the total number of tourists spending the night, while the
foreign tourists represented 17.5% from this total number.
Significant risings of the number of tourists spending the night in the accommodation
structures were recorded in the following types: tourist houses, hostels, youth hotels,
urban tourist hostels, rural tourist hostels.
At the same time, INS states that there were recorded reductions in comparison
with the similar period of the previous year in pupils’ camps, camping facilities and
bungalows.
The Inconsistency and the Imperative Change in Romanian Tourism
123
The index of net use of the accommodation places was 37.1% on the total
structures for the period January-September 2007, increasing with 2.8% in comparison
with the corresponding period of the previous year. The high indexes of the
accommodation unit usage for the first nine months of 2007 were recorded in the cruise
ships accommodations (90.9%) and hotels (44.5%).
The arrivals of foreign tourists in Romania, recorded at the customs checkpoints, were of 5738.2 thousands for the period January-September, increasing with
27.3% in comparison with the corresponding period of the previous year.
The majority of the foreign visitors comes from countries situated in Europe
(90.4%). 61.7% of the foreign visitors total in Romania come from the countries of the
European Union.
The departures of Romanian visitors abroad, recorded at the customs checkpoints, were 8458.6 thousands in the first nine months of the year, increasing with
23.6% as opposed to the corresponding period of the previous year. The means of road
transportation were preferred by the Romanian visitors for travelling abroad (80.1% of
the total number of departures).
In September 2007, as opposed to September 2006, the arrivals as well as the
number of tourists spending the night in the accommodation structures recorded an
increase with 11.4% and 7.2%.
The management of change represents the way in which we have to approach
the process of change so that this should have the best results.
Change is a continuous process, and many changes take place without our
intervention (the wear, the aging etc.). There are defined changes, which can be
achieved or not, from various reasons.
In order to understand the change, we must understand the factors that
influence it. Generally, there are 6 categories of factors which produce changes at the
level of tourism policies: workforce, technology, the political world, the social trends,
the competition, the economic “shocks”.
The change is a process which needs the involvement of all the employees and
its assumption.
The underestimation of the human potential, of the creativity and of the
competencies of the employees can turn out to be an impediment for change.
What are the stages of the change process?
Generically speaking, the stages are the following:
• the establishment of the purposes and of the expected results in tourism after
the change;
• the comparison between the current situation and the expected results;
• the definition of the necessary activities for the realisation of the future status;
• the elaboration of the strategy for the administration of the transition.
We must draw the attention towards the fact that the change in tourism needs
another strategy than the incremental one (the continuous improvement), because the
success from the past can be the greatest obstacle of all sometimes. But, is there a need
of foreign investors, of a new strategy and of trained people for this change, but
especially for the acceptance of the new and of the sustainable things in Romanian
tourism? Or do we wait again for the helpful interventions of the state?
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In the study “Critical Issues in Tourism”, the American specialists, as well as
other authors, consider that there are 7 main forms of state intervention in tourism:
coordination, planning, legislation, investment, stimulation, socialising and protection.
Youell Ray states in his study that the national authority’s functions, from an English
point of view, would be to: establish, promote, achieve, ease, inform, legislate, finance,
consult and classify. All these forms and functions allow a wide range of actions
through which the tourist industry can be encouraged, supported and developed, using
various tools and specific strategies.
The development of tourism, like any other economic activity, means also
uncertainty, especially because of the rapid and profound changes in the business
sector. Extremely serious negative consequences can be avoided through a rigorous
planning of tourism, but this process is extremely difficult and complex. However,
there are many barriers in the achievement of the tourist planning, among which there
are the complexity and the diversity of the industry and of the governmental
organisations in direct and indirect connection with the tourist activity (for instance,
banks, shops etc.), the seasonal character of the tourist activity, the high cost due to the
detailed analysis of resources and researches of the market which must be performed,
and last but not least the people’s mentality, especially of those in the private sector,
who are mainly against the planning.
The most efficient way of planning is through the involvement of the public
sector (the government) as well as of the private sector in this process, the
democratisation of the planning process facing two major obstacles: the inability of the
local organisations to offer a viable model of planning and the impossibility of
ensuring a high rate of consultancy for the local community members.
The tourist policy, which should be consistent and imperative, for the
Romanian tourism medium and long term revival will have to aim the following
priority objectives:
• the reduction of taxation;
• the continuous treatment of the international tourism as an export activity;
• the exemption from taxation of the reinvested profit on a certain period;
• the continuous perfection of the legislation and of the institutional frame in
order to harmonise it with the dispositions of the World Organisation of
Tourism and with the ones of the European Union;
• the involvement of the state in supporting financially the investments in
tourism, especially of those of public interest (infrastructure), as well as in the
international and internal promotion;
• the development of the specialised professional education system and of the
professional reorientation of the unemployed workforce from the other
economic sectors; the constitution of a network of education institutions
integrated in the European network of tourism and hotels educational
institutions;
• the correlation of the tourism development programs and projects with the
regional development programs (transportation, telecommunications, the
landscape design etc.);
The Inconsistency and the Imperative Change in Romanian Tourism
•
125
the special attention regarding the surveys – a useful tool for the hotels
managers in order to maintain and increase the quality of the services.
• The enforcement of quality brands, in order to increase the competitiveness on
the tourist market and in order to acknowledge the quality of the tourism
services.
In short, the following represent an imperative necessity for Romania:
• To urgent the creation of the “Tourist Brand of Romania”, program for which
20-30 millions of euros are available, its elaboration having started in April of
2008;
• The World Organisation for Tourism has criticised the current slogan of
Romanian tourism, because it does not transmit the essence of Romania for its
potential visitors. These are surprised by the fact that their expectations about
this country have been exceeded. The challenge with which Romanian tourism
is struggling is to show the whole world, before they come to our country, how
many beautiful things and experiences it can offer. Romania will benefit, until
2013, from European funds of 50 million euros for tourist promotion and
information programs, through the Regional Operational Program.
• The purpose of the Master Plan is to identify the vulnerable points of the
Romanian tourism, and then to elaborate restructuring plans through the
identification of the financial resources and through the formation of a tourist
market which can efficiently compete on the world market.
• In the next 10 years, the Romanian tourism will generate services of over 11
billiard euros, as it is estimated by the World Council of Tourism. According to
the study performed by the Peacock Hotels Company, in the capital of our
country new hotel projects with a total of 6200 rooms will be built in the
following years. Bucharest is an attractive target and represents a great
potential of development in comparison with the other cities in Europe
regarding the level of occupation as well as the level of the net tariff obtained,
as it is estimated by the World Council of Tourism. The preliminary data
reveal that, in 2007, 500 new rooms were inaugurated, in 2008, 2000 were
expected to be inaugurated, and by 2011 other 5000.
An important component of planning is the tourist prognosis. This has many
types and can consist of three possible scenarios: optimistic, intermediary and
pessimistic. Under the name of “Tourism 2020”, OMT has elaborated a long term
quantity prognosis for the tourist demand, evaluating its development until 2020.
Also, in a report of the National Council of Tourism in France, presented in 2000, there
is a prognosis of the macroeconomic tendencies in the evolution of the French tourist
offer until 2020.
In conclusion, the change affects any kind of company including the
multinational ones. It is a mistake to start from the premise that if one is extremely
organised and is already on a high position, one will not be affected. On the contrary,
there are more things to do and more often, because it is not difficult to reach the top,
but it is harder to keep that place!
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Mazilu, M.
REFERENCES:
[1]. Baker, S.; Bradley, P.; Huyton, J. - The Principles of the Operations at the Hotel
Reception, ALL Beck Publishing House, Bucharest, 2002
[2]. Bavoux, J.; Bavoux, D. - Géographie humaines des littoraux maritimes, A, Collin, 1998
[3]. Ioncică, M. -The Economy of services, Uranus Publishing House, Bucharest, 2000
[4]. Lupu, N. - The Hotel - Economy and management, the 4th edition, All Beck Publishing
House, Bucharest, 2003
[5]. Mazilu, M. - Le tourisme roumain dans le contexte du tourisme europeen, Universitaria
Publishing House, Craiova, 2007
[6]. Mazilu, M. - Tourist Geography, Didactical and Pedagogical Publishing House,
Bucharest, 2007
[7]. Mazilu, M. - Ecotourism and tourist arrangements, Scrisul Românesc Publishing House,
Craiova, 2004
[8]. Mazilu, M.; Marinescu, R. - Perceiving Romania as a Sustainable Tourism Destination,
published in the vol. Proceedings Book of the 4th World Conference for Graduate
Research in Tourism, Hospitality and Leisure, organised by Anatolia Journal: An
International Journal of Tourism and Hospitality Research, 22nd-27th April 2008,
Antalya, Turkey, pp.320-330
[9]. Mazilu, M.; Marinescu, R. - Sustainable Tourism in Protected Areas - Case Study of the
Iron Gates Natural Park, Rural Futures Conference, organized by University of
Plymouth and School of Geography, 2nd-4th April 2008, Plymouth, the Great Britain,
pp.1-7
[10]. Mazilu, M.; Marinescu, R. - The Globalisation Impact on the Romanian Tourism, article
defended and published on the site of the IASK Conference (International Association
for the Scientific Knowledge) - Advances in Tourism Research, Portugal, 26-28 May
2008, http://www.iask-web.org/atr08/programme.html, www.iask-web-org/publications.
html
[11]. Minciu, R. - The Economy of tourism, Uranus Publishing House, Bucharest, 2000
[12]. Mitroi, M., - The Predictions of the World Organization of Tourism: 2000-2010, Tribuna
Economică Magazine, Bucharest, no.27/2000
[13]. Niţă, I.; Niţă, C. - The Tourism market of Romania, Ecran Magazin Publishing House,
Braşov, 2000
[14]. Snak, O. - Services and Quality Management, Romanian Academy of Management,
Bucharest, 2000
[15]. Stăncioiu, A.F.; Mazilu, M.; Căescu, Şt.C.; Constantinescu, M. - Considerations
regarding the strategic thinking in the marketing of the regional identity, article
published in ,,Economica” magazine, year XIV no.4 (December) (56)/2006, ASEM,
Chişinău, 2006
[16]. Stăncioiu, A.F.; Arsene, O.; Teodorescu, N.; Mazilu, M. - The SWOT Analysis of the
tourist destination – conceptual aspects - methodology. Case Study: Northern Oltenia or
Oltenia at the bottom of the Mountain, published in the vol. The International conference
Competitiveness and stability in Knowledge - Based Economy, 30th-31st May 2008,
Craiova, pp.600-607, Universitaria Publishing House, Craiova
[17]. Stănciulescu, G. - The Sustainable Tourism Management in the urban centres, The
Economic Publishing House, Bucharest, 2004
[18]. Vellas, F. - Tourism - tendencies and predictions, Walforth Publishing House, Bucharest,
1998
[19]. *** - The National Institute of Statistics, 2006-2008
Annals of the University of Petroşani, Economics, 9(2), 2009, 127-136
127
THE CASH-FLOW STATEMENT –
BETWEEN TRUE AND MANIPULATION
OVIDIU MEGAN, CAMELIA HAŢEGAN, LEONORA CACIUC,
BOGDAN COTLEŢ *
ABSTRACT: Financial statements aim is to assure an efficient dialogue between the
company and the external operators interested in having a good perspective of the entity.
Information about the cash flows, as component of financial statements, is useful in providing
users of financial statements with a basis to assess the ability of the entity to generate cash and
cash equivalents and the needs of the entity to utilize those cash flows. The objective of our
paper is to present the main informational valences of cash-flow statement for investors and
also to show the potential “make-up actions” made to give wrong information about a company
for the decision makers. For this purpose we will use a research methodology based on a
research study by questionnaire on a sample of small and medium enterprises.
KEYWORDS: cash-flow, financial statements, decisions, manipulation
1. INTRODUCTION
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an enterprise that
is useful to a wide range of users in making economic decisions. Financial statements
should be understandable, relevant, reliable and comparable. Reported assets, liabilities
and equity are directly related to an organization's financial position. Reported income
and expenses are directly related to an organization's financial performance.
Financial statements are intended to be understandable by readers who have "a
reasonable knowledge of business and economic activities and accounting and who are
willing to study the information diligently. Financial statements of companies provide
a representative overview of a business' financial condition in short and long term. The
financial statements present the relevant information of a business company, presented
*
Lecturer, Ph.D., West University of Timisoara, Romania, ovidiu.megan@feaa.uvt.ro
Assoc.Prof., Ph.D., West University of Timisoara, Romania, camelia.hategan@feaa.uvt.ro
Prof., Ph.D., West University of Timisoara, Romania
Ph.D. Student, West University of Timisoara, Romania
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in a manner or form easy to understand. There are four basic financial statements
presented by all Romanian companies as well like European Union companies: balance
sheet, income statement, statement of cash flow, equity statement and a set of notes to
the financial statements.
One of the most important components of financial statements is the Cash
Flow Statements (CFS). The CFS allows investors to understand how a company's
operations are running, where its money is coming from, and how it is being spent.
Here you will learn how the CFS is structured and how to use it as part of your analysis
of a company. A company can use a cash flow statement to predict future cash flow,
which helps with matters in budgeting future activities. For investors, the cash flow
reflects a company's financial health: basically is better to have more cash available for
business operations. However, this is not a hard and fast rule. Sometimes a negative
cash flow results from a company's growth strategy in the form of expanding its
operations.
By adjusting earnings, assets and liabilities, the investors can get a very clear
picture of what some people consider the most important aspect of a company: how
much cash it generates by the company and, particularly, how much of that cash stems
from main operations of this enterprise. It seems that every year another top athlete is
exposed in a doping scandal. But these are people who are trained since birth to believe
that all that matters is their performance, so they naturally take a risk on anything likely
to increase their chances of winning. Companies similarly indoctrinated to perform
well at all costs, also have a way to inflate or artificially "pump up" their earnings - it's
called cash flow manipulation.
Our paper purpose is to present the main informational valences of cash-flow
statement for investors and also to show the potential “make-up actions” made to give
wrong information about a company for the decision makers.
2. THEORETICAL BACKGROUND
Businesses are all about trade, the exchange of value between two or more
parties, and cash is the asset needed for participation in the economic system. For this
reason, while some industries are more cash intensive than others, no business can
survive in the long run without generating positive cash flow per share for its
shareholders. To have a positive cash flow, the company's long-term cash inflows need
to exceed its long-term cash outflows. An outflow of cash occurs when a company
transfers funds to another party. Such a transfer could be made to pay for suppliers and
creditors, employees, or to purchase long-term assets and investments, or even pay for
legal expenses and lawsuit settlements. It is important to note that legal transfers of
value through debt, like a purchase made on credit, is not recorded as a cash outflow
until the money actually leaves the company. A cash inflow is of course the exact
opposite; it is any transfer of money that comes into the company's possession.
Typically, the majority of a company's cash inflows are from customers, banks and
investors who purchase company equity from the company. Occasionally cash flows
come from sources like legal settlements or the sale of company real estate or
equipment.
The Cash-Flow Statement - Between True and Manipulation
129
Also it’s very important to note the distinction between profit and positive cash
flow just because a company is bringing in cash does not mean it is making a profit and
vice-versa. For all Romanian companies there are two important parts of a company's
financial statements: the balance sheet and the income statement. The balance sheet
gives a one-time snapshot of a company's assets and liabilities and the income
statement indicates the business's profitability during a certain period. Over that the big
enterprises (with more of 50 employees, 7.300.000 euro value of assets or turnover
bigger than 3.750.000 euro) have to elaborate other two important parts of financial
statements: cash flow statement and statement of changes in equity.
Cash flow statement is determined by looking at three components by which
cash enters and leaves a company: core operations, investing and financing.
Calculating the cash inflows and outflows caused by core business operations, the
operations component of cash flow reflects how much cash is generated from a
company's products or services. Generally, changes made in cash depreciation,
inventory, accounts receivable and accounts payable are reflected in cash from
operations. That’s why cash flow is calculated by making certain adjustments to net
income by adding or subtracting differences in revenue, expenses and credit
transactions resulting from transactions that occur from one period to the next. These
adjustments are made because non-cash items are calculated into net income of
companies and total assets and liabilities. So, because not all transactions involve
actual cash items, many items have to be re-evaluated when calculating cash flow from
operations. That’s why, depreciation which is not really a cash expense; it is an amount
that is deducted from the total value of an asset that has previously been accounted for.
That is why it is added back into net sales for calculating cash flow. The only time
income from an asset is accounted for in CFS calculations is when the asset is sold.
Changes in accounts receivable on the balance sheet from the beginning of the
year to the final of the year must also be reflected in cash flow. If accounts receivable
increase from one accounting period to the next, the amount of the increase must be
deducted from net sales because, although the amounts are considered revenue, not
cash. If accounts receivable decreases, this implies that more cash has entered the
company from customers paying off their credit accounts.
An increase in inventory, on the other hand, signals that a company has spent
more money to purchase more raw materials. If the inventory was paid with cash, the
increase in the value of inventory is deducted from net sales. A decrease in inventory
would be added to net sales. If inventory was purchased on credit, an increase in
accounts payable would occur on the balance sheet, and the amount of the increase
from one year to the other would be added to net sales.
The same logic holds true for taxes payable, salaries payable and prepaid
insurance. If something has been paid off, then the difference in the value owed from
one year to the next has to be subtracted from net income. If there is an amount that is
still owed, then any differences will have to be added to net earnings. Cash changes
from investing are usually cash out item, because cash is used to buy new equipment,
buildings or short-term assets such as marketable securities. However, when a
company divests of an asset, the transaction is considered cash from investing.
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Changes in debt, loans or dividends are accounted for in cash from financing.
Changes in cash from financing are considered cash in when capital is raised, and
they're considered cash out when dividends are paid. On the other hand, if a company
issues a bond to the public, the company receives cash financing; however, when
interest is paid to bondholders, the company is reducing its cash for calculating cash in
financing.
Cash flow is often considered to be one of the cleaner figures in the financial
statements. Companies benefit from strong cash flow means being more attractive and
getting a stronger rating. After all, companies that have to use financing to raise
capital, be it debt or equity, can't keep it up without exhausting themselves.
Always we can compare the situation of some companies with an athlete or
weight lifter. Every year another top weight lifter is exposed in a doping scandal. But
these are people who are trained since birth to believe that all that matters is their
performance, so they naturally take a risk on anything likely to increase their chances
of winning. Romanian enterprises, similarly indoctrinated to perform well, also have a
way to inflate or artificially "pump up" their earnings - it's called cash flow
manipulation. Here we look at how it's done, so you are better prepared to identify it.
The corporate muscle that would receive the cash flow accounting injection is
operating cash flow (OCF). It is found in the cash flow statement, which comes after
the income statement and balance sheet.
Companies can bulk up their statements simply by changing the way they deal
with the accounting recognition of their outstanding payments, or their accounts
payable. When a company has written a check and sent it to make an outstanding
payment, the company should deduct its accounts payable. While the check is on the
way, a cash-manipulating company will not deduct the accounts payable with complete
honesty and claim the amount in the operating cash flow as cash on hand.
Companies can also get a huge boost by writing all their checks late and using
overdrafts. This boost, is a result of how generally accepted accounting principles treat
overdrafts: they allow, among other things, for overdrafts to be lumped into accounts
payable, which are then added to operating cash flow. This allowance has been seen as
a weakness of IFRS, but until the accounting rules change, you'd be wise to scrutinize
the numbers and footnotes to catch any such manipulation.
Another way a company might increase operating cash flow is by selling its
accounts receivable. The agency buying the accounts receivable pays the company a
certain amount of money, and the company passes off to this agency the entitlement to
receive the money that customers owe. The company therefore secures the cash from
their outstanding receivables sooner than the customers pay for it. The time between
sales and collection is shortened, but the company actually receives less money than if
it had just waited for the customers to pay. So, it really doesn't make sense for the
company to sell its receivables just to receive the cash a little sooner - unless it is
having cash troubles, and has a reason to cover up a negative performance in the
operating cash flow column. Also a subtle form of increasing operating cash-flow
performance is capitalization of expenses.
A company has to spend money to make products. The costs of production
come out of net income and therefore operating cash flow. Instead of taking the hit of
The Cash-Flow Statement - Between True and Manipulation
131
an expense all at once, companies capitalize the expense, creating an asset on the
balance sheet, in order to spread the expense out over time - meaning the company can
write off the costs gradually. This type of transaction is still recorded as a negative cash
flow on the cash flow statement, but it is important to note that when it is recorded it is
classified as a deduction from cash flow from investing activities, not from operating
cash flow. Certain types of expenditures - such as purchases of long-term
manufacturing equipment - do warrant capitalization because they are a kind of
investing activity.
The capitalization is questionable if the expenses are regular production
expenses, which are part of the operating cash flow performance of the company. If the
regular operating expenses are capitalized, they are recorded not as regular production
expenses but as negative cash flows from investment activities. While it is true that the
total of these figures - operating cash flow and investing cash flow - remain the same,
the operating cash flow seems more muscular than that of companies who deducted
their expenses in a timely fashion. Basically, companies engaging in this practice of
capitalizing operating expenses are merely juggling an expense out of one column and
into another for the purpose of being perceived as a company with strong core
operating cash flow. But when a company capitalizes expenses, it can't hide the truth
forever. Today's expenses will show up in tomorrow's financial statements, at which
time the stock will suffer the consequences.
3. METHODS AND RESULTS
In order to discover and confirm the hypothesis regarding the elaboration and
manipulation of cash flow statement, during the year 2009 we performed a survey on a
representative sample of 70 companies in Timis County, which in 2008 applied
European Accounting Directives.
Based on this survey we received answers from the heads of financial-accounting
departments regarding a series of questions about Romania applying the European
Directives in the field of financial statements in general and cash flow statement in
particular.
The main questions where: Do you elaborate the cash flow statement for the
last year? Do you think the fulfil of cash flow statement is useful for your company or
not? Which are the main users for your cash flow statement? Which are the main
raisons for bad cash flow in your company? Which are the main methods to manipulate
the cash flows presented in your financial statements? Do you think the forecast of
cash flow statement will be useful for your company?
By these questions we tried to question financial controllers from Timis
County about their experience about elaborating and used the cash flow statement in
improving managerial performance.
We examined also some particular aspect or technique of manipulate the cash
flow presented by Romanian companies.
Based on our survey, we registered the following results:
1. Do you elaborate the cash flow statement for the last year?
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Table 1. Presentation of cash-flow by financial statements
As we can see there are a large number of companies (77%) which elaborate
every year the cash flow statement. This sector is represented by large enterprises from
Timis County which is obliged by Romanian low to elaborate and present the cash
flow statement and a small part of SMEs which are subsidies of multinational
companies. A smaller part of respondents (23%) represented by SMEs don’t elaborate
cash flow statements for their activity because they don’t see the advantages of this
statement for the future of their company.
2. Do you think the presentation of cash flow statement is useful for your
company or not?
Table 2. The utility of cash flow statement
As we can see from our research almost half from our respondents don’t
realize the importance of cash flow statement for the good way of their company. The
main reason can be the lack of tradition in presentation of this component of financial
statements. Romanian companies elaborated cash flow statement since 2001 when
Romania applied accounting regulation in compliance with International Accounting
Standards. This point of view can be wrong seeing the actual conditions of
international financial crisis when the liquidity of companies is very low.
The Cash-Flow Statement - Between True and Manipulation
133
3. Which are the main users for your cash flow statement?
Table 3. Users of cash flow statement
As we can see from our empirical study the main important users of the cash
flow statement are the manager’s stakeholders and investors.
The managers want to know which the status of the company cash is in order to
organize the future payments to suppliers and the future acquisitions or long time
investments.
The stakeholders of companies want to see the actual situation of cash-flow in
order to evaluate the different ways for the distribution of company’s profit.
One of the main index for investors and creditors is the situation of cash-flow. The
cash flow information should enable investors to predict the dividends or interest they
want to distribute in the future and to evaluate the potential risk of a given investment.
The presentation of cash flow is also important to evaluate the liquidity, solvency and
financial flexibility of companies. In this way the investors and creditors will make
rational decision regarding a company.
4. Which are the main raisons for bad cash flow in your company?
Table 4. Raisons for bad cash flow
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The main reason for bad cash flow reported by a company is often represented
by the inadequate management of receivables. These problems can also conduct to
insolvability or to the fail of companies. For the companies which are in development
some periods can show a negative cash flow because of the equipment acquisitions
which can be very expensive. But if these equipments are productive in the near future
they will generate positive cash flow for these companies. The company loss in crisis
periods has also a direct negative influence on cash flow reported by companies and
the relation between company loss and negative cash flow is stronger than the relation
between the profit and positive cash-flow.
5. Which are the main methods to manipulate the cash flows presented in your
financial statements?
Table 5. Methods to manipulate the cash flows statement
The management of companies whose are on the market to sell wants to
provide usually positive cash flow from operating activity. That’s why a big number of
companies (33%) try to “manage the expenses” and capitalize them in order to transfer
cash out from operating activity to investing activity. Also to positives the general cash
flow of companies the owners can landing their own company in a fictitious way at the
end of the year, in order to report positive cash flow for that financial year.
6. Do you think the forecast of cash flow statement will be useful for your
company?
The objective of projections is to make a reasonable forecast of a firm’s future
cash flow performance and probable financial condition that will allow you to answer
questions such as: will the firm be able to pay back its current debt obligations out of
future cash flow?, how much additional financing will the firm need to finance its
future growth?, what is the firm’s future debt capacity?, What is the maximum amount
of debt that can be serviced out of cash flow, given the firm’s other needs, such as
working capital, plant expenditures, and so on?
That’s why a big number of companies (63%) answered that the forecast of the
cash-flow statement is a very important tool for the decision-makers.
The Cash-Flow Statement - Between True and Manipulation
135
Table 6. The utility of cash flows statement forecast
4. CONCLUSIONS
The advantage of a cash flow statement, when used in conjunction with the rest
of the financial statement, is that it provides information that enables users to evaluate
the changes in the net assets of an enterprise, its financial structure (including its
liquidity and solvency) and its ability to affect the amounts and timing of cash flows in
order to adapt to changing circumstances and opportunities. Cash flow information is
useful for assessing the ability of an enterprise to generate cash and cash equivalents
and it also enables users to develop models to assess and compare the present value of
future cash flows of different entities. It also enhances the comparability of the
reporting of operating performance by different entities because it eliminates the
effects of applying different accounting criteria for the same transactions and events.
Historical cash flow information is often used as an indicator of the amount, timing and
certainty of future cash flows. It is also useful in checking the accuracy of past
assessments of future cash flows and for examining the relationship between
profitability and net cash flow and the impact of changing prices.
Cash is one of the major lubricants of business activity, but there are certain
things that cash flow doesn't tell us. It doesn't tell us the profit earned or lost during a
particular period: profitability is composed also of things that are not cash based. This
is true even for numbers on the cash flow statement like "cash increase from sales
minus expenses", which may sound like they are indication of profit but are not.
As it doesn't tell the whole profitability story, cash flow doesn't do a very good
job of indicating the overall financial well-being of the company. Sure, the statement of
cash flow indicates what the company is doing with its cash and where cash is being
generated, but these do not reflect the company's entire financial condition. The cash
flow statement does not account for liabilities and assets, which are recorded on the
balance sheet. Furthermore accounts receivable and accounts payable, each of which
can be very large for a company, are also not reflected in the cash flow statement.
On the other hand, the cash flow statement is a compressed version of the
company's checkbook that includes a few other items that affect cash, which shows
how much the company spent or collected from the repurchase or sale of stock, the
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amount of issuance or retirement of debt and the amount the company paid out in
dividends. Being considered to be one of the cleaner figures in the financial statements
cash flow statement is sometime the object of manipulation. Companies try to report
big positive cash flow and the benefit from strong cash flow means being more
attractive and getting a stronger rating. After all, companies that have to use financing
to raise capital, be it debt or equity, can't keep it up without exhausting themselves.
Respected financial professionals, demonstrate that it’s a lot harder to
manipulate cash flow from operations than it is earnings per share, but the interest of
management can be very strong in that manners to “make-up” other face for their
company.
Over all cash flow statement is very necessary for decision makers because it
measures the actual money paid out or received by a company over a certain period of
time. This measure excludes non-cash accounting charges like depreciation. And, more
importantly, cash flows are objective. There is no value judgment about when and how
revenues are recognized, the cash flow statement only recognizes the actual cash that
passes into or out of a business. To this point we have looked at past and present
performance, evaluating existing financial statements and existing cash flows. In our
days it is time to look to the future. Forecasting cash flows is notoriously difficult, but
it is still an extremely valuable exercise to prepare a prediction of what a company’s
financial statements may look like in the future in order to prepare the competition with
the concurrence.
REFERENCES:
[1]. Beattie, A. - The Value Investor's Handbook, Investopedia Forbes Digital Company, 2008
[2]. Christy, G.C. - Free Cash Flow: A Two-Hour Primer for Management and the Board,
Booklocker Publishing, 2006
[3]. Heakal, R. - What Is A Cash Flow Statement? Investopedia Forbes Digital Company, 2008
[4]. Megan, O.; Cotleţ, D. - Financial statements - Theory and practice, Mirton Printing,
Timisoara, 2008
[5]. Mulford, C.W.; Comiskey, E. - Creative Cash Flow Reporting: Uncovering Sustainable
Financial Performance, Wiley Printing, 2005
[6]. Plewa, F.Jr.; Friedlob, G.T. - Understanding Cash Flow (Finance Fundamentals for the
Non-financial Manager), John Wiley & Sons Publishing, 1995
Annals of the University of Petroşani, Economics, 9(2), 2009, 137-144
137
FINANCIAL RATIOS – REVEAL HOW A BUSINESS IS
DOING?
MIRELA MONEA
∗
ABSTRACT: The paper aims to present the main financial ratios which provide a
picture about company’s profitability, its financial position, use of its assets efficiency, its longterm debt financing. Discussion is focused on: profitability ratios, short-term financial ratios,
activity ratios, long-term debt ratios or dividend policy ratios. Also, will try to answer at the
following main questions: What financial ratios analysis tells us? What the users of these needs
to know?
KEY WORDS: ratios, financial analysis, financial statement, financial ratios,
profitability, liquidity, activity ratios
1. INTRODUCTION
Accounting is the process of collecting, analyzing and reporting financial
information.
The raw material of financial analysis is considered financial statement and
with help of ratios analysis can be revealed profitability, liquidity, activity ratios or
financing and debts burden ratios of one company.
Financial statement analysis it is an helpful techniques which have no
significance only by reading the financial statement, being necessarily to calculate
financial ratios, interpreting those financial ratios, and also, by using other techniques
of financial analysis, such us horizontal analysis which reveals additional information
about financial strengths and weaknesses, or vertical analysis which shows financial
situation within a single accounting period.
The information contained in the financial statements is used and presents
interest for different categories of users like: managers, investors, suppliers and other
trade creditors, stockholders, financial analysts, government agencies. A number of
financial ratios can be computed from the information contained in the financial
statements.
∗
Lecturer, Ph.D., University of Petroşani, Romania, moneamirela@gmail.com
138
Monea, M.
Financial ratios show financial relationship by dividing one financial item by
another, and are an important tool for management, permitting a space comparison to
place the company in her environment.
It is recommended that after financial ratios calculation to compare those ratios
with a standard.
Financial ratios analysis is used to find an answer of the following main
questions: is activity profitable, has the company enough money to pay its obligations,
how higher is wages level of its employees, company use its assets efficiently, has
company a gearing problem.
2. PROFITABILITY RATIOS
Profitability ratios measure income relative to sales and resources, determining
the ability of a company to generate earnings and effective employment of resources. It
is considered that a company is doing well when a profitability ratio has a higher value
relative to the same ratio from a previous period.
The main profitability ratios to which have to be considered are the following:
• Gross Profit Margin;
• Net Profit Margin;
• Operating Profit Margin;
• Return on Assets;
• Return on Equity.
Gross profit margin measures the gross profit earned on sales taking into
consideration company’s costs of goods sold, excepting other costs. Gross profit is the
profit we earn before we take off any administration costs, and this has a higher value
than net profit.
Gross Pr ofit M arg in =
Gross Pr ofit
×100
Turnover
(1)
Turnover = Sales
Gross Profit = Sales – Cost of Sales
An average value of gross profit margins vary from industry to industry, or
type of company within an industry.
Net profit margin shows what percent of profit is made from sales. Similarly
with the gross profit margin, net profit margin varies from business to business, or type
of company within an industry. Net Profit = Gross Profit - Expenses
Net Pr ofit M arg in =
Net Pr ofit
×100
Turnover
(2)
Operating profit margin reveals the return from standard operations, excluding
the impact of extraordinary items, or how much profit earned a company from standard
operations, being defined by dividing operating profit to turnover. Operating profit =
sales – costs of goods sold.
Financial Ratios - Reveal How a Business Is Doing?
Operating Pr ofit M arg in =
Operating Pr ofit
×100
Turnover
139
(3)
Return on assets is a measure of how effectively the company’s assets are
being used to generate profit.
Re turn on Assets =
Net Pr ofit
×100
Total Assets
(4)
Return on assets indicates the capital intensity of the company, being useful to
take into consideration the idea of trying to convert assets into profit.
Return on Equity measures the rate of return on the ownership investments. It
measure company’s efficiency at generating profits from each monetary unit or net
assets, being one of the most financial ratio, showing how well a company uses
investments to generate earnings growth. It is an important ratio for owners and
potential investors.
Re turn on Equity =
Net Pr ofit
×100
Shareholder Equity
(5)
3. LIQUIDITY AND SOLVENCY RATIOS
Liquidity ratios shows company’s ability to pay off short term obligations as
they come due, to convert short term assets into cash to cover debts.
The main ratios which have to be considered are: general liquidity;
intermediate liquidity; immediate liquidity; solvency ratio.
General liquidity is in accordance with working capital being considered a well
indicator of company’s ability to pay off her bills and debts. Liquidity ratios are of
particular interest to those extending short term credit to the company. This ratio is
known like current ratio or working capital ratio.
General liquidity =
Current Assets
Current Liabilities
(6)
The current assets used in the general liquidity ratio are inventories, accounts
receivable, short term investments, cash. In the industrial field where there is a long
production life cycle, this ratio has to be almost 2 (or 200%). A value under unit (<1)
indicates that short term debts are not cover by current assets and working capital has a
negative value. Short term creditors prefer a higher value of this ratio since it reduce
their risk, and shareholders prefer a lower value so that more of the company’s assets
are working to grow the business.
Intermediate liquidity - the normal level is almost 0.8-1 (or 80% - 100%) and
show company’s ability to cover short term debts. The higher this ratio is, the better is
the position of the company. This ratio is known like quick ratio.
140
Monea, M.
Intermediate liquidity =
Current Assets − Inventory
Current Liabilities
(7)
Immediate liquidity reveals company’s ability to pay off current obligations
with cash (including short term investments). A normal level of this ratio is 0.2-0.3 (or
20% - 30%). This ratio is known like cash ratio.
Im mediate liquidity =
Cash + Short term Investments
Current Liabilities
(8)
Immediate liquidity ratio excludes all current assets except the most liquid
cash and short term investments, and it is considered the most conservative liquidity
ratio.
Solvency ratio shows company’s ability to face with medium and long term
liabilities. This ratio measures company’s financial security relative to its creditors and
financial institutions. The normal value of this ratio has to be higher than 1.5.
Solvency ratio =
Total Assets
Total Liabilities
(9)
4. ACTIVITY RATIOS
Activity ratios tell us how well a company is managing its assets, and help
financial statement users to evaluate levels of output generated by assets. The
assessment of activity ratios helps us to understand the overall level of efficiency at
which a business is performing.
The activity ratios are useful, especially when these are compared with
standards taking into account industry averages.
The main ratios which have to be considered are:
• Total Assets Turnover;
• Fixed Assets Turnover;
• Current Assets Turnover;
• Inventory Turnover and Inventory Period;
• Receivables Turnover and Average Collection Period;
• Working Capital Turnover.
Generally, all these activity ratios can be express in number of rotation of one
item through turnover (how quickly an item is generated sales), or in terms of the
number of days needed by one item to generate sales.
Total assets turnover compares the turnover with the assets that the company
has used to generate that turnover, reflecting the efficiency of assets utilization, or
otherwise how well the company management is using its total assets to generate sales.
Total assets are split in fixed assets and current assets, so we can toke about the
ratios which take into consideration that element, and could be built others two activity
ratios, as follow: fixed assets turnover and current assets turnover.
Financial Ratios - Reveal How a Business Is Doing?
Total Assets Turnover =
Turnover
Total Assets
141
(10)
Fixed assets turnover show how well the company is using its fixed assets to
generate sales, and it is calculate by dividing turnover to fixed assets (11). The higher
is the value of the fixed assets ratio turnover the better.
Fixed Assets Turnover =
Turnover
Fixed assets
(11)
Current assets turnover show how well the company is using its current assets
to generate sales, and it is calculate by dividing turnover to current assets (12). Also,
regarding the current assets there can be split, and we can calculate similar ratio such
as inventory turnover, or receivable turnover.
Current Assets Turnover =
Turnover
Current Assets
(12)
Inventory is a very important asset that must to be managed. The inventory
turnover ratio shows how effective the company management is managing inventory.
This activity ratio could be express also through cost of goods sold in a time period
divided by the average inventory level during a period. Inventory period (14) is defined
by dividing average inventory level to turnover, being expressed in days (15).
Inventory Turnover =
Turnover
Average Inventory
or Inventory Turnover =
Inventory Period =
Cost of Goods Sold
Average Inventory
Average Inventory
× 365
Turnover
(13)
(14)
(15)
Receivable turnover indicates how quickly the company collects his accounts
receivables being defined by dividing annual credit sales to accounts receivable (16).
Often, the receivable turnover is expressed in terms of the number of days that credit
sales remain in accounts receivable before they are collected. This number of days is
known as the average collection period (17).
Re ceivable Turnover =
Annual Credit Sales
Accounts Re ceivable
Average Collection Period =
Accounts Re ceivable
× 365
Annual Credit Sales
(16)
(17)
142
Monea, M.
These ratios can be used to determine whether the company is having trouble
collecting on sales it provided customers on credit. Average collection period helps
monitor the effectiveness of credit management policy and also, helps the company
budget for cash flows.
Working capital turnover ratio - the relationship between turnover and working
capital, show how effectively working capital is being used in terms of the turnover.
There is no ideal values regarding this ratio, but the higher is the better.
Working Capital Turnover =
Turnover
Working Capital
(18)
5. DEBT RATIOS
Debt ratios show how company is using long term debt, providing to the users
indication of the long term solvency of the company, and how debt are used to finance
the company, and how well these debt are managed.
The main debt ratios which have to be considered are: Debt to Total Assets;
Debt to Equity; Interest Coverage.
Debt to total assets shows the proportion of assets finance by debt, and is
express as a percentage, being calculated by dividing total debt to total assets. A debt
to total assets ratio of 50 percent expressing that half of the assets are financed with
debt.
Debt to Total Assets =
Total Debt
×100
Total Assets
(19)
Debt to equity ratio is defined dividing total debt to total equity.
Debt to Equity =
Total Debt
Equity
(20)
Interest coverage ratios reveal how well company’s earnings can cover the
interest payments on its debt, and express a measure of safety, being expressed as a
multiplier.
Interest Coverage =
Earnings Before Interest and Taxes
Interest Expenses
(21)
6. DIVIDEND POLICY RATIOS
Dividend policy ratios are useful for investors, and these ratios are relatively
simple both to use and to understand. Investors, especially, are concerned with the
return provided by their investments. They need information to help them to assess the
ability of the company to pay dividends. The basic dividend policy ratios which
Financial Ratios - Reveal How a Business Is Doing?
143
investors are interested in are the following: Earnings per Share; Dividends per Share;
Dividend Yield; Dividend Cover; Price/Earning Ratio.
Earning per share is one of the fundamental dividend policy ratios, expressing
the average amount of profits earned per ordinary share issued, being calculated
as follow:
Earnings per Share =
Pr ofit available to equity shareholders
Average number of issued equity shares
(22)
Dividend per share ratio is similar with first one and shows how much the
shareholders were actually paid by way of dividends, and is calculated by dividing total
amount of dividends paid to equity shareholders to the average number of issued equity
shares.
Dividends per Share =
Dividends paid to equity shareholders
Average number of issued equity shares
(23)
Dividend yield ratio allows investors to compare the latest dividend they
received with the current market value of the share as an indictor of the return they are
earning on their shares.
Dividend Yield =
Dividends per Share
Share Pr ice
(24)
Dividend cover ratio tells us how easily a business can pay its dividend from
profits. A high dividend cover means that the company can easily afford to pay the
dividend and a low value means that the business might have difficulty paying a
dividend.
Dividend Cover =
Net profit available to equity shareholders
Dividends paid to equity shareholders
(25)
Price/Earning Ratio is a vital ratio for investors, which gives us an indication
of the confidence that investors have in the future prosperity of the business.
Pr ice / Earnings Ratio =
Share price
Earnings per share
(26)
7. CONCLUSIONS
Financial ratios are useful to indicate company’s performance and financial
situation. To be significant most of the financial ratios must to be compared to
company’s forecast, to historical values of the same company, to a value which is
considered an optimum value for the company’s activity sector, or ratios of similar
companies. Some ratios by themselves may not be representative, and should be
144
Monea, M.
viewed as indicators or combined with others ratios to give us a picture about
company’s situation. Financial ratios have to satisfy different needs for information for
the different users. Users are interested by information that focuses on the financial
position, performance, activity assets utilization, company’s financial structure, its
liquidity and solvency, and its capacity to adapt to changes in the environment in
which it operates. Financial ratio analysis can also help users to check whether a
business is doing better in one period (current financial exercise) than it was last
period, and it can tell them if one business is doing better or worse than other
businesses doing and selling the same things.
REFERENCES:
[1]. Bragg, S.M. - Business Ratios and Formulas. A Comprehensive Guide, John Wiley & Sons
Inc, USA, 2007
[2]. Brezeanu, P. - Management financiar, Editura Universităţii Româno-Britanice, Bucureşti,
2008
[3]. Cohen, E. - Analyse financiare, 5e edition, Economica, Paris, 2004
[4]. Dinu, E. - Rentabilitatea firmei în practică, Editura AllBeck, Bucureşti, 2004
[5]. Ebbers, G.; Flower, J. - Global Financial Reporting, Palgrave, New York, 2002
[6]. Gheorghiu, A. - Analiza economico-financiară la nivel microeconomic, Editura
Economică, Bucureşti, 2004
[7]. Griffin, M.P. - MBA Fundamentals. Accounting and Finance, Kaplan Publishing, New
York, 2009
[8]. Helfert, E. - Tehnici de analiză financiară, BMT Publishing House, Bucureşti, 2006
[9]. Needles, B.E.Jr.; Powers, M.; Crosson, S.V. - Financial and Managerial Accounting,
Houghton Mifflin College, USA, 2007
[10]. Walsh, C. - Key management ratios, Pitman Publishing, 1996
Annals of the University of Petroşani, Economics, 9(2), 2009, 145-152
145
THE DEMAND FOR ECONOMIC GOODS
CLAUDIA MUNGIU-PUPĂZAN *
ABSTRACT: Satisfying the most needs of the consumer is done/achieved with
economic assets. Each good has substitutes: using other goods where the original cost of using
asset increases. The needs are desires. If needs are analyzed carefully, it is found to have
various emergencies. People buy more or less a good since the price they have to pay reduced
or increased. The concept of needs projects the concept of demand in the application that links
quantities that are purchased by the sacrifices made to achieve these quantities [7]. While
human needs seem to be limitless, a desire can be satisfied only at a certain price, which means
that people moderate their demands. This phenomenon is not surface and superficial. Rather it
is deep and usually is given the status of law: law of demand.
KEY WORDS: the demand, the individual demanding, the market demand, income
change, the prices, consumer preferences
1. INTRODUCTION
The law of demand expresses the existence of inverse relationship between the
quantity purchased by people from a particular economic good and the price must pay.
At higher prices it buys less, at lower prices will purchase greater quantities of a
particular economic good. Usually, the explanation given to inverse relationship
between the quantity required and the price is the following: when the price of the
good increases, the buyer seeking to save it and use the substitution with other goods
cheaper. If the price falls, effort-saving move to other property and the product is used
to substitute goods more expensive [8].
2. THE DEMAND AND THE QUANTITY ASKED
Although, in general, changes in demand based on price change are reversed,
there is the possibility of a positive influence of price on demand, which seems to
*
Lecturer, Ph.D. Student, „Constantin Brâncuşi” University of Tg.-Jiu, Romania,
claudia.mungiu@gmail.com
146
Mungiu-Pupăzan, C.
express exceptions to the law of demand. Atypical behaviour of the demand occurs in
several situations:
a) the effect of anticipation. When an asset price increases and this
causes an increase in the quantity purchased of that good in
anticipation of further price increases. But this is not an exception to
the law of demand. Anticipation of higher prices, due to first increase
in price, increased demand for that product. Consumers buy more
today to be able to buy less in future. No higher price, but changing
expectations is the leading consumers to buy more today. They are
guided by the idea to make reservations before the price increase
further. Price drop may be accompanied by decreasing demand,
consumers prefer to buy at lower prices also in the next period.
b) the effect of income. Sometimes, it believes that the law od demand
checks only for normal goods and luxury goods (luxury goods) are
exceptions. A decrease in the price of luxury goods does not result in
an increase in demand since these goods remain accessible only to
certain categories of buyers;
c) the effect of snobbery that is manifested in the case of buyers who
want to show the consumer that belong of a higher social class and
purchase goods becoming more expensive. In this case, it buys some
goods for their price high, not low, in order to impress with high
purchasing power;
d) the effect of incomplete information. In the absence of better
information, quality of products is determined by price. A higher price
seems to indicate a higher quality. But there are situations where the
same quality goods have different prices and demand is greater for the
more expensive;
e) a demand form are manifests atypical for "Giffen paradox”. Poor
families allocate most of their income to purchase the basic foodstuffs.
Price increases for these products has the effect of the increase and not
decrease the demand for them. Demand drops for other goods.
Corresponding to this situation, Giffen named the paradox that bears his name:
"In these given circumstances, usually after a commodity price increases lead to
decreasing demand manifests its inverse, ie the price increase may be accompanied by
increased demand.
"Giffen paradox" can be explained based on two general effects of increasing
the price of a good: on the one hand, there is increasing the amount required of other
goods whose prices have not increased (substitution effect), and on the other hand, it
manifests the reduced of real income (income effect). If the price of a lower good
increases, and the effect of income is greater than the effect of substitution, the quantity
required increases.
Depending on the level to which expresses a demand for a good can be seen in
several ways: the individual demanding expressing the relationship between the
amount requested by a consumer and its price of the product; the market demand
expresses the relationship between the amount requested from a good to the market
The Demand for Economic Goods
147
level and its product price. The market demand is obtained by adding "horizontal" the
quantities required by consumers in each price level.
It is assumed that product market X is represented by three consumers: A; B;
C. The quantities purchased by each consumer every day, in relation to price, are
shown in Table 1, and the market demand in Table 2.
Table 1. Individual demand of consumption
Quantities from good X
acquired by consumers
A, B, C.
QA
12
10
8
4
2
1
0
5
10
20
25
30
QB
0
12,5
25
50
62,5
75
QC
0
2,5
5
10
12,5
15
B
Sale price (u.m. / Q)
Table 2. Market demand
p
Qp=QA+QB+QC
Qp
12
0+0 +0
0
10
5 + 12,5 + 2,5
20
8
10 + 25 + 5
40
4
20 + 50 + 10
80
2
25 + 62,5 + 12,5
100
1
30 + 75 + 15
120
B
The demand for a particular company. This demand directly affects the
production of selling company and shows the production that respective firm can sell at
various possible prices and is expressed as income obtained.
3. THE DEMAND AND QUANTITY ASKED SHOULD NOT BE CONFUSED.
In economic theory, the demand is a specific relationship between two
variables, price and quantity. The demand is always a range of prices and a range of
amounts that people would like to buy at those prices.
A movement along the string (line/curve) represents a change in the quantity
required and no a change in demand. The amount requested increases or decreases as
the price - decreases or increases, but demand remains unchanged, since the demand is
the entire curve. In order to increase demand, should something happen to enable
consumers to buy at any price a larger quantity of goods, ie to move right and up the
entire demand curve.
148
Mungiu-Pupăzan, C.
Table 3. The scale demand for good “X”
Unit price of good (P)
Required quantity (D)
350
200
300
300
250
400
200
500
150
600
100
700
The shift of the demand curve shows that a larger amount or less will be
required at each possible price. The phenomenon of increase or decrease the demand
can be represented by a scale and a graphic.
p
Decrease
of quantities required
Extent
of quantities required
Q
Figure 1. Increase and decrease of quantities required
Tabel 4. Increse and decrease of demand for good “X”
Unit price
Initially demand
Increase demand
Decrease demand
(P)
(D0)
(D1)
(D2)
350
200
300
100
300
300
400
200
250
400
500
300
200
500
600
400
150
600
700
500
100
700
800
600
The Demand for Economic Goods
149
p
350D2
D0
D1
30025020015010050150 300
450
600
750
900
Q
Figure 2. Demand modified
Modification of demand pressures in the same direction simultaneously both
the price and quantity required. Moving the plane of the demand curve, right or left is
the result of changing some economic factors and outside economy factors named
demand conditions, such as:
• modify the money income of consumers;
• adjust the price of other goods;
• changes in the number of customers;
• changes tastes (preferences) of consumers;
• forecast on the evolution of prices and income opportunities for substitution
of goods;
• feature of the need to satisfy.
All these factors combine to determine the demand for a particular good, and
the relationship that is established between the change in price and the quantity
required.
Normally, income change entails moving the demand curve to the right or left
as income increases or decreases.
In turn, a change in the prices of other goods is a source of change in demand.
In this case however, the situation is different, as goods are substitutable or
complementary. If goods are interchangeable between asset price changes and
developments demand a good B, there is a positive relationship. If additional goods,
the relationship is negative.
Evolution of demand by income and price changes in goods substitutes is
represented in Figure 3. By increasing income or reducing the price of other goods has
been a shift in demand curve from D0 to D1 and above the price p0, the amount
purchased increases from q0 to q1.
150
Mungiu-Pupăzan, C.
If the income is reduced or increased prices of other goods, the demand curve
moves to D2 and the amount purchased at the same price p0, is q2, unchanged for the
good considered.
p
D2
D0
A2
A0
D1
A1
p0
q2
q0
q1
Q
Figure 3. Evolution of demand to substitutable goods.
As long as demand does not change, the price and quantity required are
moving in opposite directions. The only changes that not lead to the change in demand
for a good price is the good price.
If a combination of the above factors determines the more people to want the
respective good, the demand for it will grow. An increase in demand increases the
required quantity and the price, in this case "so when demand is high and when
demand is declining will be a lesser amount required by higher prices and not lower
prices” [7].
The demand is resulting from the interaction of several factors: consumer
needs, prices of goods, disposable income of consumers. The consumption need, or
wish to receive a good utility, is the first factor which causes the appearance of
demand.
Consumer need makes the demand to be a rational act, the result of a
calculation, and one conditioning. The demand is directly proportionate to the needs
existing in society and is influenced by the environment in which it manifests
(imitating other consumer demand or is stimulated by the manufacturer by advertising).
In most cases the needs exceed the possibilities to satisfy needs. The demand
usually falls below consumption needs. The situation is caused by the limited nature of
resources that determine the possibilities of production and limited level of buyers
incomes, leading to some needs remain unsatisfied.
The disparity that exists between need and demand derives from the fact that
demand is a market category (it satisfy the provisions of sale - purchase involving
bilateral transactions), while consumption needs can occur and cover in a certain
proportion also outside the market, through self-consumption.
The Demand for Economic Goods
151
Although the needs and demand is a direct connection, the need is the source
of demand, she automatically not becomes demand. For the need to turn into demand
are necessary appropriate available revenues. In addition, the individual must be
willing to pay the price demanded by the seller.
It is recognized generally that demand is decreasing function of price. This
derives from the rational consumer behaviour that seeks to maximize utility, in order to
obtain maximum utility allowed level from his income.
Consumer needs no matter how intense it is, can be satisfied only when is the
corresponding income. In the absence of revenue, need not turn in demand. Being
ignored the other factors, the demand varies with income level in the same direction. In
addition to factors previously analyzed, the demand is influenced by other factors
including tastes (preferences) to consumers, the economic situation, consumer
expectations and demographic variables.
4. CONCLUSIONS
The demand depends on consumer preferences considerable extent formed
under the influence of various factors:
• age;
• gender;
• family structure;
• occupation;
• tradition, etc.
Consumer behaviour studies, conducted in terms of tastes, have revealed, first,
that human desires are insatiable no matter how practical it would increase disposable
income and, on the other hand, tastes are extremely diverse. If the first part determines
the increase in demand for good, the second issue determines the diversification of
goods.
In relation to consumer tastes two events occurs:
• the tendency to imitate;
• snobbery.
The first issue is that some consumers are shaping their demand for some
goods according to the request of others persons. Such behaviour is known as the effect
of imitation.
The snobbery effect is found at that category of consumers to witch quantity
required is inversely proportional to the amount required by others. It represents the
expression of the desire of consumers to distinguish themselves from other consumers.
There are products whose demand is influenced by the economic situation. The
intermediate goods and final goods belong to durable goods category which has
sensitive demands to the change of temporary factors.
In addition, consumer demand is influenced by consumer expectations about
price trends. A prediction of inflation will lead to purchases made in advance, also an
anticipation of some reduction in income encourages the savings and current demand
decreases.
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Mungiu-Pupăzan, C.
REFERENCE:
[1]. Angelescu, C. (coord) - Economy, the V th tome, Economic Publishing House, Bucharest,
2000
[2]. Băbăiţă, I.; Duţă, A. - Markets and prices, Western Publishing House, Timişoara, 1995
[3]. Băbăiţă, I. (coord) - Microeconomics. Applications, Mirton Publishing House, Timişoara,
2000
[4]. Băbăiţă, I.; Duţă, A. - Introduction to microeconomics, Western Publishing House,
Timişoara, 1996
[5]. Băbăiţă, I.; Duţă, A.; Imbrescu, I. - Microeconomics, Mirton Publishing House,
Timişoara, 2000
[6]. Georgescu-Roegen, N. - Analytical Economics, Expert Publishing House, Bucharest, 2000
[7]. Heyne, P. - The economic mode of thought, Teaching and Pedagogical Publishing House,
Bucharest, 1991
[8]. Iancu, A. - Economy Treaty, tome 3, Expert Publishing House, Bucharest, 1992
Annals of the University of Petroşani, Economics, 9(2), 2009, 153-160
153
EXPLORATORY STUDY ON ROMANIAN EDUCATIONAL
SERVICES IN THE CONTEXT OF UE POSTINTEGRATION.
THE NEEDS FOR PROFESSIONAL DEVELOPMENT OF
THE STAFF OF THE FACULTY OF ECONOMICS AND
BUSINESS ADMINISTRATION
CLAUDIA-MIHAELA NICOLAU *
ABSTRACT: The interest that triggered this paper came from the will to identify the
most stringent needs for professional development that human resources (didactic staff)
working in educational services in universities have to face, following the legal, institutional,
and functional changes that took place in the recent years in the Romanian system of higher
education.
KEY WORDS: educational services; needs for professional development;
professional development
1. INTRODUCTION
Universities give special attention to the training programs for their staff, in
order to ensure both a high standard for the level of their educational services and that
the new staff will adopt the values of the organization.
In the present stage of development of Romanian society, several changes and
challenges have emerged in what concerns educational services, and staff management
started to focus more and more on developing its resources - the didactic staff. “The
consequences are clear: the training programs will not be aimed only at pedagogical,
didactic or technical development.
Besides improving their didactic performance, teachers will have to become
better colleagues, good team members and, if possible, even “happy workers”,
meaning employees that work for pleasure and professional satisfaction. The report
sent to UNESCO by the International Education Commission in the 21st century stated
in this respect that the piers of education in this new millennium will be “learning to
know, learning to be, learning to act, and learning to live with the others”.
*
Ph.D. Student, “Alexandru Ioan Cuza” University of Iaşi, Romania, clau_n2004@yahoo.com
154
Nicolau, C.M.
2. METHODOLOGY
2.1. Scope and objectives of the study
In this exploratory study as a case study/ monograph, the analysis will focus
on the university educational services provided by the Faculty of Economics and
Business Administration (FEEA) of “Alexandru Ioan Cuza” University of Iaşi.
An important aspect that directly concerns and affects the didactic staff of
FEEA is represented by the implementation of the Bologna system. This moment has
already had and will still have a high impact on the activity of the didactic staff of
FEEA. Like any implemented change, it brought several modifications in the activity
plan and in the attributions of each teacher. One of the most important changes was
aimed at re-organizing the chairs as functional units/ the two departments and
reformulating the curricula by eliminating some disciplines that no longer create skills
and habits useful for the labor market.
In order to meet its declared purpose, this research is directed at the following
specific objectives:
• To identify the needs for professional development of the investigated
population;
• To classify the needs according to the typologies presented in literature;
• To create and apply a questionnaire whose items allow the classification of the
investigated population according to general criteria (e.g. age, gender) as well
as to specific criteria (e.g. academic title of the subject, connected
responsibilities fulfilled, didactic experience, department in which the subject
activates etc.), and also to support the mentioned objectives.
The study has an exploratory nature and is aimed at analyzing the needs for
professional development of the didactic staff of FEEA; the methodology used is
quantitative analysis, with research techniques such as systematization, simple
grouping (using a single characteristic), tabling, and graphic representation.
2.2. Presentation of the studied population
The subjects of this exploratory study have been selected randomly from the
didactic staff of the Faculty of Economics and Business Administration of Iaşi. In order
to obtain a representative sample, “stratified sampling” has been used; the research
instrument (in this study – the questionnaire) has been applied to: 10 junior assistants,
10 university assistants, 10 readers, 10 lecturers and 10 professors; in total - 50
members of the didactic staff. The final sample was made up of 34 members of the
didactic staff of FEEA, because of the difficulties encountered during the application
of the questionnaires.
Exploratory Study on Romanian Educational Services in the …
155
Figure 1. Graphic representation of the sample according to the subject category given by
the academic title
Figure 2. Graphical representation of the studied population (criterion - belonging to a
specific department)
For this research, the sample used has been random, stratified and simple, and
the selected collectivity was structured in homogenous sub-groups according to a
single characteristic – the academic title of the subjects. The technique used for
collecting the data for this research was the questionnaire, applied through direct
contact with the subjects classified in the investigated reality.
2.3. The methodology for data collection
The current research is difficult to include in a single economic or business
administration discipline, as it is an interdisciplinary research, between the
156
Nicolau, C.M.
management of human resources (the monograph is based on the human resources of
FEEA) and service management (the monograph is centred on higher educational
services). The analytic research of the professional development of the didactic staff of
FEEA is an applied management research, using a combined inductive – deductive
approach.
The research strategy used by the exploratory study is the casual quantitative
analysis (the monograph is based on a sample of members of the didactic staff of
FEEA) in order to collect the data. The stages of this scientific approach are the
following:
• Collecting the data by applying the research instrument – a questionnaire made
up of 24 questions, applied to the 34 subjects in the final sample;
• Processing the data resulted from the quantitative analysis through
systematization, tabling, graphical representations of the data obtained, etc.;
• The preliminary/final analysis (correlating the data obtained with the objectives
set prior to the research) and generalizing the resulting data.
This analytical research method for data collection has been chosen because it
allows a better measurement, quantification and systematization of the data obtained,
and because of the population analyzed in this study, the time economy in
implementing the research instrument has been an advantage.
The research instrument used in this explanatory analytical study has been
complex, combining the real data questionnaire (the first part) and the opinion
questionnaire, which had the role to investigate the subjects’ opinion on the given topic
- the needs for professional development, as well as the attitudes towards the Romanian
educational system as a whole, the subjects’ motivation and interest in taking part in
professional development programs (in order to meet the needs for professional
development), etc.
The research instrument applied – the questionnaire – can be included in the
general category of the opinion questionnaire, self-administered (by the investigated
subject) and includes both semi-open and semi-closed questions.
Questionnaires have been applied and filled in individually by the didactic staff
of the university. The subjects have been told about the scientific and anonymous
nature of the research; participation in the study has had a voluntary basis. After the
subjects agreed to participate, they have been informed about the need to fill in the
blanks in the questionnaire in a personal manner. Questionnaires have been applied
between June 2-9, 2008, in two ways: the questionnaire was filled in either instantly, or
left with the subject and taken back the following day.
The body of the questionnaire regarding the analysis of the needs for
professional training of the didactic staff involved in educational services included, for
complexity purposes, the following question categories: introductory questions;
intermediary questions; filter questions; open questions; factual (identification)
questions: items referring to general criteria such as gender and age; ordering scales
(quantitative; qualitative; on intervals: the item referring to the age criterion).
When drawing the questionnaire, which included 24 items, the objectives set
prior to the research have been taken into account, which can be expanded directionally
as follows:
Exploratory Study on Romanian Educational Services in the …
157
I. The built profile of the investigated population:
- Tracing the profile of the investigated population:
• According to general criteria such as gender and age;
• According to specific criteria such as: academic title of the subject,
responsibilities connected to the didactic activity, didactic experience
(measured in number of years of didactic activity), the department in which the
subject activates, and the importance of the job for each subject;
II. The needs for professional development of the didactic staff:
- Tracing the needs for professional development inclusion in the typology;
• Needs for professional development at an organizational level;
• Needs for professional development required by the job: multiple choice;
• Needs for professional development at an individual level: multiple choice.
2.4. Presentation of the results
In order to identify and present the requirements/ needs that determine the
application of methods of professional development, items 6 and 7 (Item 6: Which of
the following competences are the most useful to you in your teaching activity?; Item
7: In what field have been included the development programs in which you
participated?) of the corpus of the research instrument have been used. In completing
this stage of the exploratory study, the typology mentioned in the specialized literature
will be used (Bogáthy, 2004: 117 – 119), as follows:
• Needs for professional development at an organizational level: general
competences such as professional ethics and the ability to work in an
interdisciplinary team;
• Needs for professional development required by the job: basic knowledge in
the taught field, pedagogical/ didactic methodology and the ability to evaluate
students;
• Needs for professional development at an individual level: the ability to apply
the theoretical knowledge and to adapt it to various contexts.
The fast rhythm of the changes – due to the implementation, in 2005, of the
Bologna system, and to the attempt of the educational offer to align to the standards of
the European Union or to the transformations that take place on the present labour
market, to the appearance of new teaching methods, procedures and techniques,
imposes more and more the concept of professional training.
Another way of looking at the needs for professional training of the teaching
staff of FEEA refers to the object of the report: individual, organizational, or related to
the job/ function.
From the graphical representation above it results that the subjects questioned
(the didactic staff of FEEA) feel, while performing their job, the need to develop at an
individual level in a proportion of 39%, 37% of the subjects face needs related to their
job and only 24% face organizational needs.
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Nicolau, C.M.
Figure 3. Graphical representation of the typology of the needs for professional
development of the subjects
10
5
0
Jun.As
Lectur
Profes
Asist.
Reader
sist.
er
sor
Organisational needs
3
1
4
4
3
Job-related needs
4
2
6
4
7
Individual needs
2
2
5
8
7
Figure 4. Graphical representation of the needs for professional training of the subjects,
according to their academic title
The percentages reported by the didactic staff according to the criterion of the
academic title reveals mostly the same situation:
• Organizational needs have the lowest frequency of occurrence with the
respondents, irrespective of their academic title, but more predominant with
university assistants;
• Job-related needs have the highest frequency in the total of 39% in the case of
university professors;
• Individual needs have the highest frequency in the total of 37% in the case of
lecturers.
Exploratory Study on Romanian Educational Services in the …
159
3. CONCLUSIONS AND LIMITATIONS OF THE RESEARCH
“Alexandru Ioan Cuza” University of Iaşi, as a promoter of socio-cultural
values, has been subject to a series of transformations (the Bologna system, the reform
system inspired by the educational policy of the governments in the last 19 years, etc.),
and FEEA has followed closely the steps towards ensuring and improving the quality
of the entire educational process.
In this context of institutional/ functional transformations, the necessities/
needs for professional training of the didactic staff of FEBA come from three
directions:
• Needs for professional development at an organizational level (general
competences such as professional ethics and the ability to work in an
interdisciplinary team): felt by 24% of the subjects questioned during the
research, especially by the readers and lecturers;
• Needs for professional development required by the job (basic knowledge in
the taught field, pedagogical/ didactic methodology and the ability to evaluate
students): felt by 37% of the subjects questioned during the research, especially
by the university professors;
• Needs for professional development at an individual level (the ability to apply
the theoretical knowledge and to adapt it to various contexts): felt by 39% din
of the subjects questioned during the research, especially by the lecturers.
This study also faced a series of limitations that we will present in what
follows. First of all, limited access to the subjects (especially to assistants and junior
assistants) because of their busy schedule, of the large amount of work per subject
(because the academic year 2007 – 2008 has combined the graduation of two
generations of students), and of the refuse to collaborate, which has lead to applying
the content analysis on a smaller number of teachers than the one initially established
(the sample initially established was made up of 50 staff members, while the final one
included only 39 members).
The limitations of the research were also determined by the methodology used,
as follows:
• The exclusive use of quantitative analysis methods (a more efficient
presentation of this exploratory study would have meant using more
qualitative methods – e.g. applying an interview guide on the analyzed
population);
• The research instrument used – the questionnaire (limited in length), used
because of the limited access in time to the subjects.
REFERENCES:
[1]. Birzea, C.; Neacşu, I.; Potolea, D. - Educaţia şi formarea profesională a cadrelor
didactice din România, research project Improving the professional development of the
didactic staff and of the teaching practices - learning in south-eastern European
countries, Open Society Institute, Bucharest, 2006
[2]. Bogáthy, Z. (coord.) - Manual de psihologie a muncii şi organizaţională, Polirom
Publishing House, Iaşi, 2004
160
Nicolau, C.M.
[3]. Curelaru, M. - Metode şi tehnici de cercetare în câmpul social, course support for distance
learning, the Faculty of Psychology and Educational Sciences, Iasi, 2005
[4]. Gavrilovici, O.; Iosifescu, Ş.; Prodan, A. (coord.) - Management educaţional, vol.II, The
Romanian Institute for Education Management, 2004
[5]. Gherguţ, A. - Managementul general şi strategic în educaţie, Polirom Publishing House,
Iaşi, 2007
[6]. Macdonald, R.; Wisdom, J. - Academic and educational development: research,
evaluation and changing practice in higher education, Kogan Page Publishing House,
London, 2002
[7]. Novak, C.; Jigău, M.; Brâncoveanu, R.; Iosifescu, Ş.; Bădescu, M. - Cartea Albă a
Reformei Învăţământului, The Ministry of National Education, 1998
[8]. Tudorică, R. - Dimensiunea europeană a învăţământului românesc, The European
Institute, Iaşi, 2004
[9]. *** - The Governmental decision regarding the organization of undergraduate studies, no.
88/February 10, 2005, published in Monitorul Oficial no.150/February 21, 2005
[10]. *** - Regulation no.287/24.06.2004 regarding university consortia and Regulation no.
288/24.06.2004 regarding the organization of university studies, published in Monitorul
Oficial on 7.07.2004
[11]. *** - UNESCO, World Declaration on Higher Education for the Twenty-first Century:
Vision and Action and Framework for Priority Action for Change and Development in
Higher Education, adopted by the World Conference on Higher Education, October 9,
2000
Annals of the University of Petroşani, Economics, 9(2), 2009, 161-172
161
FACTORS INFLUENCING THE ZIMBABWE STOCK
EXCHANGE PERFORMANCE (2002-2007)
KOSMAS NJANIKE, PENSION KATSURO,
MICHAEL MUDZURA *
ABSTRACT: This paper assesses the factors that influenced the Zimbabwe Stock
Exchange’s performance from 2002 to 2007. The study seeks to identify and define the major
drivers of the bourse during this period and use them to guide an investor on the ZSE or any
other stock exchange in a developing economy. Despite the shrinking of the economy since
2000, the stock market inversely reacted to the factors that affected the economy negatively. The
ZSE was driven mainly by speculation as investors sought to hedge against hyperinflation. The
decline of the Zimbabwe economy during that period caused capital flight to the stock market
pushing prices up hence huge profits. The real factors that affect share investment and the stock
market in general were addressed, giving insight to the stock investors. The study recommends
that stock investors should keep track of the general and unique factors that have an impact on
their investments.
KEY WORDS: ZSE Performance, Speculation, Hedging, Investment, Inflation
1. INTRODUCTION
The ZSE performed extra ordinarily well despite the expectations of the
economist and stock market analysts who perceived it to crumble together with the
economy. The stock market actually outperformed any of its previous achievements in
the economy even though many investors were sceptical. The stock market’s unusual
performance was beyond the economist and analyst predictions whose perception was
that it would go down with the economy. Factors such as speculation and the need to
hedge investments against inflation have played a bigger role to upgrade the
performance of the ZSE. The hyper inflationary conditions discouraged many investors
without a deeper technical knowledge as to whether investing in such an economy can
*
Lecturer, Bindura University, Zimbabwe, kosmasnjanike@gmail.com
Lecturer, Bindura University, Zimbabwe, pkatsuro@yahoo.com
Lecturer, Bindura University, Zimbabwe, mmudzura@buse.ac.zw
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Njanike, K.; Katsuro, P.; Mudzura, M.
yield anything tangible. Fear and greed influenced the decision made by other investors
in disposing and acquiring stocks on the bourse.
The fact that investment on its own needs critical understanding of the major
drivers of the ZSE performance creates the need to clarify how and why these factors
should be considered. A lot of investors do not know how to interpret prevailing
factors that constantly arise in the stock market. Many end up making impulse
decisions due to panic after hearing information that they do not know its significance
to the stock market. The research gives informative literature for insight to investors on
factors and drivers to be considered in their dealings on the any stock exchange in the
world. The study is set to clarify major factors driving the ZSE performance, thus
giving investors the most needed information on the effects of such drivers. It may act
as a guideline to those investors who do not know when to sell and buy shares. The
paper also gives information on the benefits of the stock exchange investment in any
economy and hence potential investors making informed decisions to produce optimal
results. The research identified and defines the major drivers of the ZSE. It then
assesses the effects brought about by these drivers on the performance of the bourse.
2. RESEARCH QUESTIONS
•
•
The paper thus strives to provide answers to the following questions:
What are the main factors that affect the stock market performance?
Why was the ZSE performing extra ordinarily well in an economy that was
melting down?
3. METHODOLOGY
To answer the research questions, case study research was conducted. This
paper used direct observation, questionnaires, unstructured interviews, and document
review to gather data. Data for the research was gathered from financial consultants,
economists and bank managers based in Harare, Zimbabwe. The research is a study
designed to explore the problems bedevilling the stock exchanges in developing
markets with ZSE as the case study. Questionnaires, personal interviews and
document review were used to obtain data for this study. A sample of six asset
managers, ten stockbrokers and four research analysts was used to gather information
for this research. Five volunteer stockbrokers reviewed the questionnaire for
readability, clarity, and completeness. In addition, a faculty member specializing in
banking issues examined the questionnaire.
4. LITERATURE REVIEW
A stock exchange is essentially a market place for stocks and bonds; with
stockbrokers earning a small commission on each transaction they make (Farlex,
2003). According to Ibrahim and Aziz (2003) the performance of a stock market can be
affected by influence. Influence can be defined as a power to affect persons or events
based on prestige thus causing something without any direct or apparent effort.
Factors Influencing the Zimbabwe Stock Exchange Performance …
163
Influence is basically causative factor that exert pressure on a person or events to drive
them to perform in a certain way (Seyhun, 1998). A factor is anything that contributes
casually to a result and drives a certain performance in an event (Wikipedia, 2008).
Asquith and Mullins (1983) maintain that the payment of a liberal portion of
earnings in dividends adds the attractiveness of a stock. Shriller (1991) also recognized
that this involves a curious paradox: Stock value increases when taking away value
from the capital and surplus fund, i.e the more the shareholders subtract the larger is
the value placed upon what is left. Shriller further argues that it is safe to purchase
stocks, not only because of their intrinsic value or expected future dividends but
because they can be sold to someone else at a higher price. A significant stream of
prior research in the United States of America has empirically documented that
unexpected increases (decreases) in regular cash dividends generally elicit a
significantly positive (negative) stock market reaction (Fama , 1981 and Petit, 1992).
Since managers have some information that outside investors do not have, dividend
policy is a costly-to–replicate vehicle for conveying positive private information to the
market players (Miller and Rock, 1985). Bhattacharya (1979) stated that dividend
increases convey information about the firm’s current and future cash flows that has an
impact on the stock market performance. Serletis (1993) documented that dividend cuts
are followed by earnings increases, consistent with dividend cuts marking the end of a
firm’s financial decline and beginning of its re-structuring. Stock dividends or bonus
issues effectively award existing shareholders a free share of common stock for all
shares currently owned. Bonus issues constitute a finer slicing of a given value and
should have no direct wealth effects to shareholders if they do not have cash flow
implications (Seyhun, 1986). Petit (1992) found that there is a positive stock price
response to stock dividend (and stock split) announcements. Dhakal et al (1993),
provide empirical evidence that is consistent with firms employing stock dividends and
stock splits in order to shift share prices to an optimal trading level. Shriller (1991)
states that dividend movement is not nearly enough to rationalize stock price volatility,
this therefore means that expectations about future dividends can not be responsible for
stock price movement.
According to Serletis (1993) there are two competing hypothesis on the effect
of money supply on stock prices. The monetary portfolio hypothesis suggests that as a
result of changes in the money supply, investors adjust the proportion of their asset
portfolios represented by the money balances to establish new equilibrium positions
with respect to their other various assets. These new equilibrium positions are
established through changes in the prices of other various assets. The second
hypothesis is the efficient market hypothesis. The quantity theory of money assumes
that an increase in the money supply is expected to create excess supply of money
balances and, in turn, excess demand for shares (Dhakal et al, 1993). This in turn,
would result in an increase in the price of shares. Reisman (1999) stated that the
increase in demand for stocks is a result of repeated pouring into the market of large
sums of new and additional money. According to Farma (1981), this implies that
monetary changes lead to stock prices based on the assumption that all relevant
information known about the money supply is fully reflected in the share prices.
Empirical evidence supports this theory that there is a direct casual relationship
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Njanike, K.; Katsuro, P.; Mudzura, M.
between money supply and stock prices (Ibraham and Aziz, 2003). Jensen and
Runback (1983) documented that an increase in the quantity of money exerts its
positive effect on stock prices only when the increase is concentrated in the stock
market and has not yet sufficiently spread throughout the rest of the economic system.
Inflation has been described by Lee (1992) as not the rise of prices but rather is
the undue increase in the quantity of money, which operates ultimately to cause a rise
in prices. Research into inflation and stock market returns has mostly documented a
negative casual relationship between the two, especially for developed economies, due
to the theory that high and variable inflation rates add to uncertainty which directly
effects investment through reduced confidence and thus lowers stock prices (Fama,
1981; Lee, 1992). Choudhry (2001) has investigated the relationship in India a
developing country and documented that a positive relationship between current stock
market returns and current inflation is possible during short horizons under conditions
of high inflation. Caporale and Jung (1997) reject Fama’s hypothesis for the negative
relationship and deemed that the relationship remains a puzzle. According to Caporale
and Jung (1997), financial economies hold that stock represents a hedge against
inflation. This was backed up by Fisher and Statman (1997) who suggest that
identifying macro variables that influence aggregate equity returns may indicate
hedging opportunities for investors. Taylor and Allen (1992) argued that once inflation
begins to substantially raise prices, it would undermine the capital formation and result
in a badly depressed stock market.
Fama (1981) explained Efficient Market Hypothesis (EMH) as the reflection of
information in security prices. The EMH asserts that financial markets are
“informationally efficient” and stocks already reflect all known information and
therefore are unbiased in the sense that they reflect the collective beliefs of all investors
about future prospects. The strong form suggests that securities prices reflect all
available information, even private information. Seyhun (1998) provides sufficient
evidence that insiders profit from trading on information not already incorporated in
prices. The semi-strong form asserts that security prices reflect all publicly available
information. The availability of intraday data enabled tests which offer evidence of
public information impacting on stock prices within minutes (Lease et al, 19994). The
weak form of the hypothesis suggests that past prices or returns reflect future prices or
returns which is consistent with technical analysis. Fama (1981) expanded the concept
of the weak form to include predicting future returns with the use of accounting or
macroeconomic variables. The reaction of stock market to announcement of various
events such as earnings, stock splits and takeovers has been evidenced to be consistent
with EMH (Jensen and Runback, 1983). Fisher and Statman(1997) in their analysis of
the aggregate stock market argued that there is little, if any, correlation between the
greatest aggregate market movements and public release of important information.
Shleifer and Summers (1990) came up with two types of investors in the
market; 1) Rational speculators or arbitrageurs who trade on the basis of information
and 2) Noise traders who trade on the basis of imperfect information. Since noise
traders act on the imperfect information, they will cause prices to deviate from their
equilibrium values. Edwards (1993) also investigated investor behaviour and
discovered that most investors traded because of price changes rather than due to news
Factors Influencing the Zimbabwe Stock Exchange Performance …
165
about fundamentals. Lease et al (1994) stated that high prices are sustained,
temporarily, by investor enthusiasm rather than real fundamental factors. He further
argues that stock prices are driven by self-fulfilling prophecy based on the similar
beliefs of a large cross-section of investors.
Technical factors are a mix of external conditions that alters the supply and
demand of company’s stock (Coperale and Jung, 1997). These play a major role in
determining the stock market performance. In financial theory interest rate as a
measurement of time value of money is one of the determinants in stock returns.
Titman and Warga (1989) state that changes in interest rates have earnings effects on
firms. They maintain that the interest rates lead available cash to borrow to be less
which in turn, decreases spending. When spending is getting less, earnings for the
companies go down and their prices drop. Carter and Van Auken (1990) in their
research concluded that when interest rate falls stock returns become more attractive
and a shift from fixed –term investment instruments to shares was observed, leading
market value of the shares to increase. They have discovered that expectations can
reflect the prices of the futures and options written in equities.
In viewing the stock market performance, there are several other factors that
mainly affect individual investors to invest and whose reaction also has great impact on
the overall performance of the stock market. Potter (1991) identifies six factors:
dividends, rapid growth, and investment for saving purposes, quick profits through
trading, professional investment management and long term growth, as main factors
that influence investors’ decision to trade. Wong and Cheung (1999) argue that
investors are primarily concerned with expectations about the future, considering
earnings projections and historical data to be of high interest to investors. Many
researchers have illustrated that the impact of the inflation, money supply, interest rates
and speculation in conjunction with efficient market hypothesis are of paramount
importance in determining the stock market performance.
5. RESULTS
The data was acquired from fifteen questionnaires and five interviews from
research analysts, stockbrokers and asset managers. Document review was also used to
obtain data for this research. On the extent some factors contributed to the ZSE
performance respondents were to mark on the given factors in a table, the factors that
they think where of much influence to the stock market performance. The main
objective was to enable the collection of data that would give the researcher a greater
understanding on the extent of the impact that certain factors posed on the stock
market. Respondents were supposed to rate the factors using rates that started from
5(five) –very strong to 1(one)-very weak. Majority of the respondents (67%) rated
speculation 5(five) and inflation received 100% rating five and the same with
depreciation of the Zimbabwean dollar. Money supply was rated five 58% of the
respondents and 42% of the respondents rated the intensity of its impact 4(four).
Government policies received a 41% for rating three and the remaining 16% rated it
two. Individual firm performance received 50% for rating four and 41% for rating three
and the last 9% for rating two.
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Njanike, K.; Katsuro, P.; Mudzura, M.
The research found that public announcements also had an influence on the
ZSE performance. When the government announced on the 29th of June 2007 that all
prices were to revert to those prevailing on the 18th of June, the stock market plunged a
massive 37% in two weeks. Price controls had negative effects on the stock
performance. Retail and wholesale companies were heavily hit by these price slashes
which then translated to their dismal performance during that period, hence the
resultant effect on the whole stock market was unavoidable. The most affected stocks
include OK Zimbabwe, Truworth, Edgars, Redstar and CFI.
On other factors that influenced the performance of ZSE the respondents
suggested a number of them. Capital adequacy of listed companies was found to be
influential on the ZSE. Majority of the respondents agreed that share repurchase by
firms due to excess funds has an effect of souring up share price of that certain counter.
Unavailability of other sources of finance or inability to access funds from the formal
sector (banks) leading to many resorting their funds to the stock market has influence
on the stock market. All respondents agreed that the need to store value of funds also
drives the market.
Majority of respondents (90%) indicated that profit making is the major factor
that influenced investors to buy stocks. Hedging against inflation has also been given
much credit as one of the major drivers of investment in stock market. A few pointed
that the need to invest for the future is also one of the main drivers to buy stocks.
Most response have shown that the selling of stocks is mainly stimulated by
the need for profit realization, managing liquidity, having a bearish opinion, that is,
expectations that prices would fall. Refocusing or redirecting investment due to poor
performance of such stocks and also negative sentiments about the stock or economic
outlook are some of the reasons given for the need to sell stocks.
Sixty seven percent of the respondents indicated that the liquidity nature of the
stock market securities and their less risky nature to be one of the reasons why they
find the stock market more viable than other forms of investment. The research found
out that companies found it easier to use the stock market to meet the tax obligations
and other commitments faster than if they had invested in other markets like the
property market. It was said to be an investment option that provides a real rate of
return at investor’s disposal in a shorter space of time as compared to other investment
options.
All interviewees have outlined global and regional trends to have an effect on
the stock market. Global trends were found to be of greater effect on the general stock
market performance of our own local stock market. Regional trends are also of
paramount importance as they directly affect the stock market just as the global trends.
6. EFFECTS OF DIVIDEND ON ZSE
Fifty eight percent of the respondents stated that dividend payment had an
impact on the value of stocks as far as the investors were concerned. The research
established that the dividend that had the greatest impact is the stock dividend, where
the investor receives additional shares to the already held as per scrip offer, and yields
positive returns for the investor. All respondents agreed that dividends boost investor
Factors Influencing the Zimbabwe Stock Exchange Performance …
167
confidence in the counter as payment of such may indicate a sound financial and cash
flow position of that company. It was also established that investors would want to
associate with companies that guarantee profitability.
Contrary to what others felt others differed mainly because of the hyperinflationary
environment that prevailed. It was ascertained that the inflationary environment
frustrated most investors, as the cash dividends were too insignificant that they could
not buy anything with such amounts. It was made clear that as the dividend is declared,
it is normally paid three months after declaration which leaves it more vulnerable to the
effects of hyper inflation. Therefore, dividends were less attractive to investors who
think that stock dividends are worthwhile. It was also indicated that the impact of
dividend payment is insignificant and do not show a direct relationship with the stock
values. Many respondents indicated that investment on the bourse was not because
they want to benefit from the dividends paid out but for capital gains.
7. MERGERS AND TAKEOVERS
All respondents indicated that in mergers involving listed companies on the
ZSE speculation drove the prices of share prices higher despite the performance of the
new company formed. Majority of respondents (90%) concurred that takeovers enable
the reduction of competition and operational overhead hence increase financial returns.
The anticipated improvements in the operations of the resultant entity will contribute,
among other factors, to increase the value of the share price in question. This applied to
the merger of Kingdom Financial Holdings, Meikles Africa and Tanganda in 2007,
where the share price for Kingdom-Meikles (resultant entity) increased significantly
after the merger.
8. MONETARY AND FISCAL POLICIES
All respondents agreed that monetary policy had a huge influence on the ZSE
in the determination of money market rates. The interest rates marked on money
market instruments have an effect of increasing or decreasing demand for the stock
market securities, where this demand and supply is also the determinant of the stock
prices. As observed in the literature review, a fall in interest rates causes a shift from
fixed term investments to shares hence boosting the performance on the stock market
in general. It was also highlighted that the increase in money supply in circulation can
pose excess liquidity in the market that would obviously affect the ZSE performance
positively as rates tumble. The increased injection of cash was of great effect in
Zimbabwe combined with hyperinflation where most investors felt the need to store
value of their money in stocks. Fiscal policy also had an impact on the ZSE. Many
respondents (89%) concurred that Gross Domestic Product (GDP), Balance of
Payments (BOP), Budget deficit and government expenditure would swing the stock
index over the period under review. Tax implications also had influence on the
performance of the stock market. One of the interviewees gave an example when
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capital gains tax was first introduced in the stock market, trading volumes reduced
significantly.
9. ZSE EXTRAORDINARY PERFORMANCE
For the extra ordinary performance of the ZSE against the odds respondents
gave a number of reasons. In a hyperinflationary environment, investors have seen the
need to hedge against inflation, hence the positive correlation. On the other hand,
uncertainty has contributed to some negative relationship being portrayed on the stock
market. Respondents noted that the depreciation of the Zimbabwean local currency
influenced the positive performance on the ZSE. In response to the skyrocketing
inflation, depreciation of the local currency has seen most investors seeking to store
value of their money in stocks.
Majority of respondents pointed out that the stock market remained free from
severe government regulations made it be at full swing in most of its activities as it has
remained uninterrupted unlike the banking sector. Investors gained confidence in the
stock market since the banking sector long ceased to be a viable investment option due
to regulatory and other monitory policy instruments that have a tendency to erode
one’s funds instead of yielding interest.
The research found out that investors saw the stock market as a viable
investment option that would at least store value of money which the banking sector
could not do. With the constant phasing out and introduction of new bearer cheques
from the Zimbabwean economy, the stock market was very active especially during the
month of November and December 2007. Respondents concurred that many investors
did not want to lose out completely and the same time they could not go with the
money to the bank as there were tight controls upon banking such funds at that
particular time. The stock market was the way out as they would gain rather than lose
out.
In favour of the stock markets, most respondents indicated that the stock
market has been able to keep abreast with inflation unlike the other investment options.
The foreign exchange market was also suggested as one possible investment option
which yielded better results than the stock market. Due to the stringent regulations in
the forex market with prevailing illegal parallel market it has been very risky for
investors to take that as an investment option. The respondents also rated the property
market lower than the stock market. This was mainly due to the liquidity nature of that
type of investment as compared to the stock market. The ZSE was floating above the
inflation rate as given by the interviewees but in USD terms the return for the stock
market is not real.
10. DISCUSSION
The majority of the respondents have made it clear that inflation and
depreciation of the Zimbabwean dollar has had a greater impact on the stock market
performance. This has been evidenced in the researches made by Choudhry (2001)
who have deduced that inflation have a positive relationship with the stock market
Factors Influencing the Zimbabwe Stock Exchange Performance …
169
returns in a hyperinflationary condition within short horizons. Although Fama (1981)
have documented a negative relationship between inflation and stock market returns.
Zimbabwe has proved to go along with Choudhry’s findings where the inflation rate is
escalating together with the stock prices. The main reason for all this could be the need
to hedge against inflation as there has not been any other liquid means to store value in
since 2000, where on the other hand banks have proved to be vulnerable to the threats
posed by inflation.
Money supply on the other hand has been influencing the stock market
performance in a rather similar manner as the inflation factor has been. This has been
supported by many researchers who have documented that increased injections of
money supply (M3) into the economy has an effect of rising stock prices as demand
increase. Dhakal et al (1993) in his Quantity Theory assumes that an increase in money
supply is expected to create excess supply of money balances and, in turn, excess
demand for shares. The ZSE has benefited more from these huge cash injections.
The effect of price controls can also explain the rating for company
performance 3(three), as it has also influenced the performance of the stock market as a
result of these policies put in place during the year 2007. The effect brought about by
company performance was felt within the market to an extent as production levels
reduced to the government policies. The aspect of company performance though, has
failed to completely dominate the ZSE performance on the affected counters due to
speculative behaviour by other investors and different perceptions about the future of
those particular counters.
The monetary policy had an effect of putting in regulations that would
influence the activities of the stock market; these include the regulation put on the
banking industry that barred the banking sector from stock trading. This meant they
could not invest in shares as they used to, giving a negative impact on the overall
performance of ZSE as demand for shares is reduced, hence the decline in prices.
The restrictions put across by the monetary policy authority that duel listed
counters on ZSE were not tradable on any other stock market unless they were initially
transferred to the ZSE from foreign stock markets. This made it rather unattractive to
foreign investors who may be having arbitrage intentions. This has an effect of
reducing activity on stock market which probably meant demand for shares was
reduced with a certain percentage which would obviously affect share prices.
Share consolidation also has an effect on stock market performance as it
reduces shares in circulation and provides convenience in the maintenance of the
register. It also influences share price as it increases the price of that particular stock by
a certain ratio of consolidation. Consolidation may frustrate the current holders of the
stock if they are not all that informed about the meaning of the reduction in the number
of shares and on the other hand, the increase in price may attract more investors to
invest in the counter as it may appear that its performance has improved.
Speculation has been said to affect the ZSE performance in that it is
responsible for price discovery. It also has been said to smoothen disparities in the
market and hence they have an impact in the overall stock market performance. The
performance of the related companies in the region, country or sector may as well
determine the price of shares of the listed companies in that same industry. The effect
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Njanike, K.; Katsuro, P.; Mudzura, M.
of the global, regional or sectorial trends can be constituted in the share prices of the
locally listed shares through the EMH concept, where all the information in circulation
is absorbed into the price. This also gives room for the speculative behaviour of
investors as they will start to perceive the positive or negative returns upon the
information received.
Profit making is of paramount importance to most investors as evidenced by
Potter (1991) who said that investors need quick profits from their trading. In order for
companies to meet their various obligations, including the payment of corporate taxes,
the stock market normally slightly fall during such a period of tax payments by firms.
Dividends declared became insignificant due to value eroded by inflation.
Cash dividend payments were found to be of little effect on price movements on ZSE
unless it is stock dividend. Stock dividends are immune to inflationary pressures and
insure growth and value to the respective shareholders. Counters known to offer scrip
dividends are most likely to perform well especially when trading ex-div. The mergers
and takeovers of listed companies on the ZSE influenced the performance of the
bourse.
11. CONCLUSION
The ZSE performance has been influenced largely by the monetary policies put
forward by the Reserve Bank of Zimbabwe. Money supply played a major role in
determining the stock market performance in many ways. The increase in money
supply or liquidity in the economy would increase demand for stocks and attract more
players. High inflation rates as documented by various researchers had a positive
relationship with the stock market performance.
From the research conducted it shows that there is much credit given to the
inflationary influence among others. Interest rates showed a significant impact on the
price fluctuation on the ZSE as it has an effect of reducing or increasing price of
stocks. An increase in interest rates showed a negative relationship with the stock
market prices and vice versa. As interest rates in the money market increased, the stock
market is negatively affected making the money market more attractive than the stock
market.
The ZSE was also affected by information announcements and other various
activities taking place. This included political news, monetary and fiscal policies that
saw the stock marketing reacting to such. These announcements also caused volatility
on the bourse. Speculators and noise traders abused and manipulated the stock market
to profiteer or gain from the fact that they knew some information before it was made
public. It is worthwhile for shareholders and investors to consider various factors and
their effects on the value of stocks.
In as much as the Zimbabwe Stock Exchange is concerned, investors should
always take the responsibility to determine whether they are really hedging against
inflation or their investment is being eroded by the inflation. It is advisable to always
follow up on the information circulating, establishing its effects on the stocks and
taking necessary action to safe guard their investment.
Factors Influencing the Zimbabwe Stock Exchange Performance …
171
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Annals of the University of Petroşani, Economics, 9(2), 2009, 173-184
173
THE IMPACT OF EFFECTIVE CREDIT RISK
MANAGEMENT ON BANK SURVIVAL
KOSMAS NJANIKE
*
ABSTRACT: A number of financial institutions have collapsed or experienced
financial problems due to inefficient credit risk management systems. The study seeks to
evaluate the extent to which failure to effectively manage credit risk led to Zimbabwe’s banks’
demise in 2003/2004 bank crisis. It also seeks to establish other factors that led to the banking
crisis and to outline the components of an effective credit risk management system. The study
found that the failure to effectively manage credit risk contributed to a greater extent to the
banking crisis. The research also identified poor corporate governance, inadequate risk
management systems, ill planned expansion drives, chronic liquidity challenges, foreign
currency shortages and diversion from core business to speculative non-banking activities as
other factors that caused the crisis. There is also need for banks to develop and implement
credit scoring and assessment methodologies, review and update the insider lending policies
and adopt prudential corporate governance practices.
KEY WORDS: credit, risk management, bank failure, bank survival
1. BACKGROUND
The year period 2003 to 2004 saw a number of banks being forced to close
down in what was termed the Zimbabwean Banking Crisis and the main cause being
poor credit risk management. In Zimbabwe the number of financial institutions
declined from forty as at 31 December 2003 to twenty nine (29) as at 31 December
2004 and the impact of effective credit risk management on bank survival cannot be
overemphasized. Some financial institutions were forced to close down and others
were placed under curatorship.
The main cause of the banking crisis was poor credit risk management
practices typified by high levels of insider loans, speculative lending, and high
concentration of credit in certain sectors among other issues. The failure to effectively
manage credit risk created similar problems in counties such as Mexico and Venezuela.
*
Lecturer, Bindura University, Zimbabwe, kosmasnjanike@gmail.com
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Njanike, K.
This situation tends to be exacerbated by the failure of institutions to properly
implement an effective credit risk management framework.
Financial institutions have faced difficulties over the years for a multitude of
reasons, the major cause of serious banking problems continues to be directly related to
lax credit standards for borrowers and counterparties, poor portfolio risk management,
or lack of attention to changes in economic or other circumstances that can lead to a
deterioration in the credit standing of a bank’s counterparties (Gil Diaz, 1994).
The traditional role of a bank is lending and loans make up the bulk of their
assets. In unstable economic environments interest rates charged by banks are fast
overtaken by inflation and borrowers find it difficult to repay loans as real incomes
fall, insider loans increase and over concentration in certain portfolios increases giving
a rise to credit risk. Bank failures in Mexico were attributed to improper lending
practices, lack of experience, organizational and informational systems to adequately
assess credit risk in the falling economy (Gil Diaz, 1994). The same can be said about
of banking crisis in Kenya in the 1980s and in Spain in the 1990s.
The study evaluates the extent to which failure to effectively manage credit
risk led to bank’ demise in the Zimbabwean banking crisis of 2004. Factors that led to
bank failures in Zimbabwe are established in this study. The research will be limited to
the analysis of the impact of effective credit risk management on bank survival.
2. RESEARCH QUESTIONS
This study seeks answer the following questions: How did the failure to
effectively manage credit risk lead to banks’ failure in the Zimbabwe Banking crisis of
2004? What other factors led to bank failures in Zimbabwe? What are the components
of an effective credit risk management system?
3. METHODOLOGY
In order to find answers to the research questions useful different methods and
instruments were used to collect data. The research data was collected over six months
to June 2009. The researcher chose the survey as the appropriate research design for
the study, and as such, questionnaires and interviews were used as research
instruments. Some unclear or hanging issues in the questionnaires were clarified in
interviews. A sample of 10 commercial banks randomly chosen was used in this
analysis. Twenty questionnaires were used to gather data with two for each commercial
bank chosen. A total of 10 interviews were held with the heads of credit or senior
managers from those banks.
The questionnaire had 12 short questions designed for the bankers and or
senior managers from those banks so that they would not have a difficulty in answering
questions. The first two questions constituted the respondent profile. The two questions
that followed formed the administrative section where the research was obtaining
information about the financial institution. Question five up to the end of the
questionnaire formed the main body from which the crucial data for the research was
The Impact of Effective Credit Risk Management on Bank Survival
175
obtained. Document review was also used to obtain as much data as possible for a
comprehensive, detailed and informed analysis of the study.
4. LITERATURE REVIEW
According to the Reserve bank of Zimbabwe (RBZ) risk management
operating document (2004), credit risk or default risk involves inability or
unwillingness of a customer or counterparty to meet commitments in relation to
lending, trading, hedging, settlement and other financial transactions.
Credit risk arises from uncertainty in counterparty’s ability or willingness to
meet its contractual obligations. Bessis (1998) also includes a decline in the credit
standing of counterparty as part of credit risk. Credit risk management covers both the
decision making process, before the credit decision is made, and the follow-up of credit
commitments, plus all monitoring and reporting processes (Miller, 1996).
5. CAUSES OF BANK CRISES
Bank failures have been experienced in a number of countries that include
Mexico, Venezuela, Spain, Kenya, United Kingdom, Sweden and Norway. Analysts’
concurred that bank failures are caused by a combination of factors. Herrero (2003)
identifies poor bank profitability, low net interest margins and low GDP as some of the
causes of bank failure. He categorizes these factors into bank specific and
macroeconomic factors. Among the bank specific factors are asset quality,
management quality, earnings and liquidity as the key factors. As for the
macroeconomic factors, high interest rates, low economic growth, adverse trade
shocks, exchange rate movements and foreign liabilities are cited.
Hooks (1994) points out that deteriorating local economic condition for
example inflation, interest and exchange rates cause bank failure. Hefferman (1996)
asserts that macroeconomic factors worsened by regulations that are imposed on banks
lead to bank failures.
Kane and Rice (1998) state that government intervention causes bank distress.
They argue that when governments intervene in saving banks from failing, creditors
and customers tend to rely on the government to protect their interest. This intervention
is a disincentive for other institutions, creditors and customers to effectively monitor
their interests in banks in an independent way.
Miller (1996) identifies the following situations, which can lead to bank
failures: too many stringent rules causes bank to disregard the measures as superfluous;
some dangers bank are exposed to may not be addressed properly in general laws; and
a rigid system of rules can inhibit banks from selecting the most efficient means of
achieving regulatory goals set for them and may serve as a disincentive for
improvement.
The lower the bank’s capital, the higher the probability of its failure (Goodhart
1998). As a bank’s capital decreases, the higher its motivation for actions towards
survival and this leads to more dangerous risk taking operations. Friedman (Hooks,
1994:37), postulates that bank failures arise because banks do not keep all their
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Njanike, K.
deposits in statutory reserve funds. Some regulatory bodies exercise forbearance;
however, this contributes to bank failures by permitting distressed banks to continue
operating instead of liquidating them. The distressed banks, who are allowed to
operate, face deterioration in their capital situation as they lack adequate funds.
Banking crisis mostly come from the absence of good managerial ideas in
management decision making (Tay, 1991). Therefore, competence and focus play a
major role in banking. Mismanagement, especially excessive risk taking, is the main
cause of bank failure (Lepus, 2004).
Tay (1991) observes that even though bankers are accused of misconduct, it is
difficult to prove that the negligence of management is the only cause of bank failure.
Smith and Walter (1997, cited by Apea and Sezibera, 2002) states that fraud causes
banks to fail as happened in the case of Banco Ambrosiano and Hersatt. They add that
corruption and fraud have been the general causes of bank failure. Tay also argues that
deregulation and mismanagement to fraud and corruption are the major causes of bank
failure.
Marrison (2002) articulate that the main activity of bank management is not
deposit mobilization and giving credit. Effective credit risk management reduces the
risk of customer default. They add that the competitive advantage of a bank is
dependent on its capability to handle credit valuably. Bad loans cause bank failure as
the failure of a bank is seen mainly as the result of mismanagement because of bad
lending decisions made with wrong appraisals of credit status or the repayment of non
performing loans and excessive focus on giving loans to certain customers. Goodhart
(1998) states that poor credit risk management which results in undue credit risk causes
bank failure. Chimerine(1998) concurs with Goodhart, but he goes on to suggest that a
bad lending tradition leads to a large portfolio of unpaid loans.
This results in insolvency of banks and reduces funds available for fresh
advances, which eventually leads to bank failure. Goodhart et al add connected lending
to the causes of bank failure. Irregular meetings of loan committees, false loans, large
treasury losses, high sums of unrecorded deposits and money laundering in large
amounts, contribute to bank failure.
Kolb (1992) states that the failure of banks is mainly due to the risky credits
they give. Irrespective of the extent of risk involved, effective credit risky loans they
give. Irrespective of the extent of risk involved, effective credit risk management can
reduce bank failures.
Herrero (2003) in his paper, The determinants of the Venezuela Banking Crisis
argued that among the reasons for Bank Latino’s failure was inappropriate lending
practices, which allowed collateral to be used for multiple loans, poor loan quality and
a high concentration of loans in one sector. De Juan (2004), argues that banking
failures in Spain were caused by poor risk management especially credit risk which
was aggravated by the concentration of the loan portfolio in the group to which the
bank itself belonged.
High inflation and high interest rates cause economic activity to collapse, and
resultantly the burden of serving debts denominated in domestic and foreign currency
increases and banks’ capitalization ratios fall (Gil-Diaz, 1994). Gil-Diaz asserts that
poor borrower screening, credit volume excesses and the slowdown of economic
The Impact of Effective Credit Risk Management on Bank Survival
177
growth in 1993 in Mexico turned the debt of many into an excessive burden. As such
non performing loans, which carry high risk started to increase rapidly. Kolb (1992) is
of the opinion that unsound banks, that is, those with poor credit risk management
systems become captive to insolvent debtors or carry a portfolio of loans to related
borrowers, who have no intention of repaying their debts.
Politically directed lending leads to bank failures as dishonest and greedy
leaders exploit the funds of banks as happened in the Philippines in the 1980s (Hussey
and Hussey, 1997). In most cases governments direct banks to give loans to certain
borrowers, thus discouraging banks to fully make their credit appraisals. The
implication is that such loans are not paid off.
It is said if you cannot measure credit risk, then you cannot manage risk
(Monetary Authority Singapore, 2003). The measurement of credit risk is of paramount
importance in credit risk management. Davies and Kearns (1992) emphasizes that
institutions should have procedures for measuring their overall exposure to credit risk
as well as exposure to connected parties, products, customers and economic sectors.
Bhatia (2005) emphasizes that a well structured Internal Risk Rating system facilitates
determination of the obligor’s risk profile and likely loan loss. Internal risk rating is an
important tool for monitoring and controlling risk inherent in individual and portfolio
credits of a bank or a business line.
The Central Bank of Kenya (2005) suggests that banks need to establish a
system that enables them to monitor quality of the credit portfolio on a day to day basis
and take corrective steps as and when deterioration occurs. The Authority stated that
the bank’s credit policy should explicitly provide procedural guidelines regarding
credit risk monitoring.
At the minimum it should lay down procedure relating to the following:
• the risks and responsibilities of individuals responsible for credit risk
monitoring;
• the assessment of procedures and analysis techniques;
• the frequency of monitoring;
• the periodic examination of collaterals and loan covenants;
• the frequency of site visits;
• and the identification of any deterioration in any loan.
6. RESULTS
Responses were obtained from ten interviews held and twenty questionnaires
distributed to different banking institutions. Majority of respondents (90%) agreed that
the failure to effectively manage credit risk contributed to banks’ demise in the
Zimbabwe Banking Crisis of 2004. The remainder (10%) was of a different opinion as
they cited poor corporate governance as the chief causal factor of the crisis. On how
the crisis came to being respondents were asked why credit risk was high during the
period in question. All mentioned that difficult macro economic environment had led
to the chaos. Half (50%) mentioned incompetence of Board and senior management;
30% stated lack of adequate regulatory guidelines on credit risk; and 90% were of the
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Njanike, K.
opinion that preoccupation with speculative activities by banks contributed to the
closure of those institutions.
On whether the board of directors and senior management of many banks were
aware of the credit risk their banks faced prior to the crisis. Seventy percent of the
respondents agreed that the board and senior management were aware of the credit
risks. They attributed their failure to effectively manage it to the following factors:
preoccupation with speculative activities as the earnings in such activities was above
the Return on Assets (ROA) of proper banking activities as the economic environment
was deteriorating.
Other cited incompetence of these boards as they sometimes engaged in
activities they had no previous experience before, for example derivatives trading.
Thus, the boards and senior management of many banks were worried about surviving
the challenging economic difficulties at the expense of proper risk management, hence
poor corporate governance activities were rife. Thirty percent of respondents argued
that the board and senior management were not aware of the credit risk they faced
attributing it to incompetence.
All respondents agreed that effective credit risk management was very
important to the survival of a bank. By adhering to the set guidelines on credit risk
management by the regulatory bodies a bank reduces its compliance risk and as such it
will be compelled to set aside adequate capital for its credit risk. A bank gains a
competitive advantage if it manages its credit risk effectively achieved through
diversified lending and the higher market share this is most likely to yield. On whether
credit risk management has improved since the crisis, 60% of the respondents reported
that the crisis had awakened banking institutions and risk management is now highly
rated.
The remainder, 40% argued that banks have always been giving credit risk
priority as the inherent risk and the most popular type of risk. They went on to suggest
that banks, however, were now lax in their credit risk management, thus the high credit
risk prior to the crisis. As the Reserve Bank of Zimbabwe (RBZ) had accused banks of
improperly writing off bad loans respondents were asked about it. Majority (60%) of
the respondents agreed that bad loans were written off without following the properly
laid down procedures for doing so. These loans we usually of insiders and those of
their related parties and/or sister companies, especially those denominated in foreign
currency. Only 40% disagreed with the central bank arguing that the hyperinflationary
environment caused loans to lose their real value and thus, their repayment was not a
problem and as such writing off was not a problem.
On why indigenous banks were the only ones affected many respondents cited
poor corporate governance as they argued that locally owned banks had shareholders as
board members and this usually led to conflict of interest. This was very common
among many locally controlled banks and this is against international corporate
governance practices. It was also argued that indigenous banks lacked corporate ethics,
norms and values that are the pillars of banking. Insufficient capital bases also
contributed to this trend according to the respondents. As locally controlled banks
faced difficulties they had no adequate capital to act as shock absorbers or buffers.
Incompetence of board and senior management of many banks was also highlighted;
The Impact of Effective Credit Risk Management on Bank Survival
179
many banks had improperly constituted boards and senior management who were
incapable of steering the banks. As such they ended up engaging in non banking
activities in a bid to make short term, supernormal profits as they lacked oversight.
Besides an ineffective credit risk system of banks there are many other factors
that contributed to the collapse of banks.
The following factors were mentioned:
• difficult macro economic environment;
• inadequate risk management systems;
• poor corporate governance;
• non performing insider loans;
• chronic liquidity challenges;
• diversion from core banking to speculative activities;
• foreign exchange shortages;
• rapid expansion drives;
• unsustainable earnings;
• creative accounting;
• insufficient regulatory framework.
All respondents agreed that effective credit risk management improve a
banking institution’s performance. They stated that a bank that manages its credit risk
well is likely to lend too many sectors of the economy, thus it will have a diversified
lending base and this will reduce its concentration risk. Moreover, a bank gains
competitive advantage through proper credit risk management. The pricing of credit
products is made easier by effective credit risk management as the bank is able to
assess the client’s risk profile. It was mentioned that effective credit risk management
can lead to business growth through gaining of a larger market share by the bank and
high profits and stability realized by the bank.
On the proper Credit Risk Management all banks stated that they had a well
documented Credit Risk Management Policy as required by the central bank. The key
areas covered in the credit risk management policies of many banks were similar with
variations in terminology.
These areas are as follows:
• lending criteria;
• portfolio grading;
• management information systems;
• types of facilities, credit products and borrowers;
• identification, measurement, monitoring and control of credit risk;
• management of problem credits;
• organizational structure;
• concentration of lending;
• credit risk mitigation techniques;
• processes, policies and procedures;
• insider lending policies;
• pricing;
• security;
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Njanike, K.
• approval processes and delegated limits;
• high risk areas;
• administration provisioning policy and grading system;
• measurement methodologies;
• credit risk modelling and scoring;
• key risk factors;
• risk reward;
• writing off policy;
• new products policy;
• risk assessment;
• Know Your Customer (KYC);
• periodic reviews; breach of limits;
• Chinese walls;
• delegation of authority;
• international exposure and controlling facility.
These areas allow for the wholesome management of credit risk by a bank,
they address the critical areas in credit risk management. Banks are continuously
developing new products in this sophisticated banking world in a bid to gain leverage
over others and as such there is need for the continual development of strategies to
manage credit inherent in these products. The study established that the most popular
among these is the derivatives market which comprises of swaps, futures, forwards and
options.
On the potential obstacles to the successful implementation of effective credit
risk management systems by banks a number of them were highlighted.
These are as follows:
• lack of resources;
• disintegration of systems across departments;
• inconsistency of risk rating approaches;
• data management;
• stringent regulatory requirements.
Respondents agreed that many lessons were learnt from the banking woes.
Poor credit risk management can lead to bank failure, thus effective credit risk
management is very crucial for bank survival. Other respondents suggested that there is
need for banks to manage risks in an integrated approach as one type of risk gives rise
to another. It was also highlighted that credit risk management must go hand in hand
with good corporate governance; and there is need for the Board and senior
management of banking institutions to be independent from the shareholders.
During the period prior to the banking crisis the level of inflation was very
high, interest rates unfavourable, economic was negative and the local currency
depreciated on a daily basis. This alone presented banks with a challenging
environment under which to survive, let alone make profits. Banks could not access
cheaper funds from the central bank due to the liquidity shortages and/or Treasury bill
holdings by the market. This shortage of funds from the central bank meant that banks
had to source for open market funds which was costly. This increased competition for
The Impact of Effective Credit Risk Management on Bank Survival
181
funds on the money market which pushed rates up and the increase had systemic
effects. By the end of 2004, ten banking institutions had been placed under curatorship
and two were under liquidation.
7. DISCUSSION
According to the Reserve Bank of Zimbabwe banks had weak underwriting
and credit monitoring standards. This led to many credits turning bad, not only due to
the obligors’ unwillingness and inability to pay, but also the failure by banks to
identify a decline in the credit standing of counterparty. Ill planned growth strategies
contributed to excessive levels of non performing insider loans. These loans were
given to sister companies locally, regionally and/or internationally. An investigation by
Camelsa Chartered Accountants revealed that Trust Bank (still under curatorship) bank
had significant non performing insider loans granted without formal loan
agreements/facility letters and/or proper due diligence. The non performing insider
loans led to the bank having liquidity challenges and exposed to higher default risk.
One of the affected banks Royal Bank’s directors spearheaded the approval of credits
to companies in which they had interests.
In the case of Gemtree Investments two directors of Royal bank were also
directors of the company; and Panalla Investments where two spouses of two Royal
bank directors were directors of the firm. As a result of these insider dealings the bank
realized operational losses which consequently led to the bank failing to meet the
prescribed prudential capital adequacy ratios. Other failed financial institutions had
similar problems. The liquidity gap widened due to the failure by the bank to attract
significant deposits due to a bruised reputation. This was compounded by massive
withdrawals, and speculation restricted maturity rollovers which worsened the banks’
problems and ultimately leading to their failures.
Some banks disregarded set prudential lending limits to insiders and other
related parties. In some cases interests was not even charged on insider loans and were
eventually written off without Board approval. This led to problems as set rules were
violated and regulations not followed thus giving rise to compliance risk and loan
losses. The policies and procedures of proper credit risk management stipulate that
credit must be made on an arms length basis irregardless of who the counterparty is.
The central bank articulates that directors and/or senior management with potential
conflict of interest should not be involved the approval of credits to related parties.
This over concentration of risk was usually to related parties and this increased default,
as well as hampering a wider positive credit impact on other economic activities for
achievement of a broad based supply response.
The Reserve Bank of Zimbabwe (RBZ) pointed out what it terms “imprudent
credit risk management practices” as being one of the major causes of the banking
crisis of 2004. As many writers concurred with the RBZ on some of the causes bank
failures many factors were highlighted. The most common of these were difficult
macroeconomic environment, inadequate risk management systems, poor corporate
governance, diversion from core business to speculative activities, rapid expansion,
creative accounting, overstatement of capital, high levels of insider loans,
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Njanike, K.
unsustainable earnings, chronic liquidity challenges, foreign currency shortages and
imprudent credit risk management frameworks.
The skyrocketing level of inflation, unfavourable interest rates, negative
economic growth, collapsing infrastructure, the closing down of factories and industry,
depreciating local currency, and a tough political environment made life difficult, not
only for the banks to survive, but for the economy at large. The income levels for
banks were failing and so was the purchasing power of the populace. Hyperinflation
swept away the interest rates that were charged by banks for loans and advances; hence
the real income for banks was low if not negative in some cases.
The money market shortages in the last quarter of 2003 also catalyzed the
banking crisis. Diversion from core business to speculative activities also caused chaos
in the banking sector. Holding companies were being used to evade regulation as
depositors’ funds were being used to fund associate companies such as asset
management companies or investment vehicles, which were not regulated. In some
cases, notes the central bank, banks abused liquidity support from the central bank to
fund non banking subsidiaries and associates’ requirements. This meant that economic
activity in the real sector was limited and in instances bank failure was inevitable.
Also a strong appetite for rapid expansion without proper systems and controls
exposed many banks to greater risk of loss. Resultantly, the capital levels of these
institutions could not sustain the excessive expansion programs. In some instances
depositor’s funds were being used to fund these expansion drives, against good
corporate governance standards. Misrepresentation of the institution’s financial
condition was now popular. This was done through tampering with the information
systems so as to conceal liabilities and losses by creating fictitious assets and
understating expenses and liabilities.
Some banking institutions were overstating their capital levels by under
providing for non performing loans, while others falsified transactions to conceal
undercapitalization. In some cases, banks were involved in unethical practices
involving use of depositors’ and borrowed funds to create an illusion of adequate
capitalization, thereby violating the Banking and Companies Acts. Financial
institutions recorded high paper profits prior to the crisis.
This was as a result of revaluation of assets in line with inflation and exchange
rate developments in the market. Some institutions engaged in non core activities
which were unsustainable and non permissible due to increased competition and high
operational costs in a bid to survive. The other issue was to do with foreign currency
shortages in the economy. Some banks engaged in speculative activities in the foreign
exchange ‘black’ market. This compounded the already fragile liquidity situation at
these banks, hence exposing them to high liquidity risk.
As with all other areas of an institution’s activities, the Board of Directors has
a critical role to play in overseeing the credit management functions of the bank. The
Basel Committee on Banking Supervision (1999) stipulates that the Board should
develop a credit risk strategy or plan that establishes the objectives guiding the bank’s
credit granting activities and adopt the necessary policies and procedures for
conducting such. The credit risk strategy and credit risk policies should be approved
and periodically reviewed by the Board. The Board needs to recognize that the strategy
The Impact of Effective Credit Risk Management on Bank Survival
183
and policies must cover the many activities of the bank in which the credit exposure is
a significant risk.
8. CONCLUSION
The results obtained from the research clearly support the assertion that poor
credit risk management contributed to a greater extent to the bank failures in
Zimbabwe. Therefore effective credit risk management is important in banks and
allows them to improve their performance and prevent bank distress. The success of
the systems depends critically upon a positive risk culture. Banks should have in place
a comprehensive credit risk management process to identify, measure, monitor and
control credit risk and all material risks and where appropriate, hold capital against
these risks. Establishment of a comprehensive credit risk management system in banks
should be a prerequisite as it contributes to the overall risk management system of the
bank. There is also need for banks to adopt sound corporate governance practices,
manage their risks in an integrated approach, focus on core banking activities and
adhere to prudential banking practices.
REFERENCES:
[1]. Apea, C.; Sezibera, J. - Some Causes of Bank Failure: A case study of Ghana Cooperative
Bank Ltd, Elanders Movum, Goteburg, 2002
[2]. Bessis, J. - Risk Management in Banking, New York, John Wiley and Sons, 1998
[3]. Bhatia, M. - A Portfolio View of Credit Risk, 2005, downloaded from http://www.gtnews.
com/article/5909.cfm accessed on 20 September 2008
[4]. Chimerine, L. - The Economic and Financial Crisis in Asia, 1998, downloaded from
http://www.econstrat.org/lcifas.htm on 28 December 2008
[5]. Davies, A.; Kearns, M. - Banking Operations: UK Lending and International Business,
New York, Pitman, 1992
[6]. de Juan, A. - Does Bank Insolvency Matter? And How to go About it, downloaded from
http://www.worldbank/org/finance/cd-rom/library/docs/dejuan6/deju600d.htm on 1
November 2008
[7]. Gil-Diaz, F. - The Origin of Mexico’s 1994 Financial Crisis, The Cato Journal, vol.17,
No.3, http://www.cato.org/pubs/journal/cj, on 28 November 2008
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1998
[9]. Hefferman, S. - Modern Banking in Theory and Practice, John Wiley and Sons Ltd,
England, 1996
[10]. Herrero, A.G. - Determinants of the Venezuelan Banking Crisis of the Mid 1990s: An
Event History Analysis, Banco de Espana, 2003
[11]. Hooks, L.M. - Bank Failures and Deregulation in the 1980s, Garland Publishing Inc,
New York and London, 1994
[12]. Hussey, J.; Hussey, R. - Business Research: A Practical Guide for Undergraduate and
Post Graduate Students, New York, McMillan Press, 1997
[13]. Kane, E.J.; Rice, T. - Bank Runs and Banking Policies: Lessons for African Policymaker,
Draft of December 15, 1998
[14]. Kolb, R.W. - The Commercial Bank Management Reader, Florida, Kolb publishing
Company, 1992
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[15]. Lepus, S. - Bets Practices in Strategic Credit Risk Management, SAS, USA, 2004
[16]. Marrison, C. - Fundamentals of Risk Management, New York, Mcmilan Press, 2002
[17]. Miller, R. - The Importance of Credit Risk Management, downloaded from http://www.
riskglossary.com on 28 December 2008
[18]. Tay, L.T. - Methods of Optimal Risk Management, New York, Pitman, 1991
[19]. *** - Basel Committee on Banking Supervision, Principles for the Management of Credit
Risk, Bank for International Settlements, 2000
[20]. *** - Central Bank of Kenya. Risk Management Guidelines, 2005, http://www.
centralbank.org.ke/publications/pguides/index.html, downloaded on 2 November 2008
[21]. *** - Monetary Authority of Singapore, Guidelines on Sound Risk Management Practices,
MAS, Singapore, 2002
[22]. *** - Reserve Bank of Zimbabwe, Bank Licensing. Supervision and Surveillance Risk
Management Guidelines, 2006
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2001
[24]. *** - Reserve Bank of Zimbabwe, Guidelines on Risk Management Manual, Harare, 2006
Annals of the University of Petroşani, Economics, 9(2), 2009, 185-190
185
TAX TREATMENTS SPECIFIC TO INTRA-COMMUNITY
COMMERCIAL TRANSACTIONS - TRIANGULAR
OPERATIONS
LUCIA PALIU-POPA
*
ABSTRACT: Romania's EU accession made significant changes in the tax area
imposed by the harmonization of national laws system of member countries. Thus it
disappeared the concepts of export and import in the relationship between Member States,
which are replaced by new notions, such as: intra-community acquisition (instead of import)
and intra-community supply (instead of export). Given the changes occurring in the tax laws
and their complexity, in this paper/work I proposed to approach the specific tax treatment
inside-community with reference to triangular transactions.
KEY WORDS: tranzactions, tax treatment, triangular operations, intra-community
delivery, inside-community acquisition, member state
1. INTRODUCTION
Taxation is the area that suffered most changes after Romania's EU adhere, the
Tax Code matches up entirely after January 1, 2007 with the European legislation.
Significant changes were made to value added tax, due both the abolition of customs
duties owed and the need to harmonize national legislation with that legislation of
Member States. Thus, controlling the movement of goods within the Community shall
be carried out via the VIES electronically system, reporting intra-Community
acquisitions in Romania shall be carried out after checking in advance the number of
valid assigned numbere for value added tax of the supplier, in its Member State and if
the operation was stated by the fiscal authorities, same procedure being applied for
reporting intra-Community deliveries from Romania.
Economic operators registered for value added tax fails to pay VAT on intraCommunity acquisitions by applying the reverse charge, that meaning the payment
through the value added statement. The european rules have required the removal of
value added tax exemption incompatible with the acquis communautaire, such as:
*
Prof., Ph.D., „Constantin Brâncuşi” University of Tg.-Jiu, Romania,
univers_cont@yahoo.com
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Paliu-Popa, L.
elimination of value-added exemption on research and development, the commission
for transactions on the commodity exchanges and for revenue securities companies for
management and disposal of shares, equity, debt securities, the operations funded by
grants provided by foreign governments and international organizations for veterinary
medical care. From January 1, 2007 shall apply special arrangements for value added
tax: small companies, travel agencies, gold of investments, second-hand goods,
household services rendered by persons not established in the Community, as well as
non-taxable persons established within the community.
We conclude that Romania's accession to the European Union imposed
harmonize the national legislation with Community law, significant changes, as I said,
registering in the tax area. At first glance the new procedures have a positive impact on
businesses due to intra-community simplify transactions in goods, the elimination of
customs issues and customs agents fees implicitly, by streamlining the logistics flow
and by eliminating costs associated with cash flows as tax value added need not be
paid to customs. However there are costs arising from the new legislation, concerning
the implementation of its unit, primarily costs relating to costs incurred by changing
accounting and information system, changes required to complete declarations required
by the new legislative provisions relating to indirect taxes, expenses for book-keeping
performed with complete, accurate and precise characters of all transactions in the
pursuit, but also costs arising from fast adaptation to new regulations, finalized in
increased costs of bookkeeping and tax services or staff training.
Main advantage retain the overall modernization of Romanian fiscal system
and connect it to the European tax system and as disadvantage we talk about the
transition costs incurred. Given the changes occurring in the tax laws and their
complexity, in this paper I proposed to approach the specific tax treatment of intracommunity transactions with reference to triangular transactions.
2. THE TAX TREATMENT OF TRIANGULAR OPERATIONS
Given the complexity of intra-community commercial transactions and tax
laws, in this paper I proposed to approach the specific tax treatment of triangle
transactions. In order to determine the tax treatment of these transactions, in terms of
value added tax, we must answer the following questions: Is the operation made by a
taxable person? Operation is in the area of value added tax? Where is the place of
delivery/acquisition? Is the operation an exempt one ? Which is the person who must
pay the value added tax? The triangular operation is possible only if the three people
involved in the transaction are recorded in taxable value added tax purposes in three
different Member States, representing a sale from a trader in the Member State 1 for an
entity in the State 2, which resell these goods further to a trader in Member State 3, the
transport of goods directly from the State 1 in the State 3.
There are about three different taxable persons registered in three different
Member States between take place two transactions, namely: the first delivery is made
by a taxable person from Member State 1 to a taxable person registered in value added
tax purposes in Member State 2, as buyer-reseller; the second delivery is made by the
buyer-reseller from Member State 2 to a beneficiary person registered in value added
Tax Treatments Specific to Intra-Community Commercial …
187
tax purposes in Member State 3. The transport of goods is made from din Member
State 1 în Member State 3. Schematically, a triangular operation, which takes place
between the three taxable persons A, B, C, located in three different Member States is
represented in Figure 1:
B
Member stat 2
SALE 1
A
SALE 2
TRANSPORT
Member stat 1
C
Member stat 3
Figure 1. Triangular operation
To determine where each transaction takes place is necessary to determine the
taxable persons involved, responsible for transportation to be carried out under
contracts between the parties and other documents. The transport contract relationship
can be settled between A and B or between B şi C, relationship which implies a tax
treatment different through value added tax.
Situation I: The transport contract relationship is between A and B
a). Without applying the simplify measures: In this case the triangular
operation has the following tax features: delivery from the supplier (A) the buyerreseller (B) is an intra-Community supply with transport, which takes place in the
Member State 1, where transport begins, exempt from value added tax; delivery from
the buyer-reseller (B) to the final beneficiary of the property (C) is a delivery without
transport, taking place in Member State 3, where ending the transportation of goods;
the buyer-reseller (B) conduct an intra-Community acquisition in the Member State 3,
which is why it is required for value added tax in Member State 3, acquisition is
followed by a local delivery to the final beneficiary (C), in Member State 3. It follows
that Company B (buyer-reseller) must register for value added tax purposes in Member
State 3 to make intra-Community acquisition in that Member State and to pay valueadded tax for this delivery.
b). By applying the simplification measures: Simplification measures apply
to prevent company B (buyer-reseller) to register for value added tax purposes in
Member State 3. Thus, the triangular operation by applying the simplification
measures in terms of the three taxable, considering Romania in each of the three
Member States, require that certain conditions:
b1). From supplier (A point of view), registered in value added tax purposes in
Romania (member state 1)
Intra-community delivery carried provider (A) in Romania is exempt from
value added tax if it meet the following conditions: goods are transported from the
Romania in another Member State (State 3) by the supplier (A) or the buyer-reseller
(B); buyer-reseller (B) notify the provider his registration code for value added tax in
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Paliu-Popa, L.
that other Member State (State 2); supplier (A) issues an invoice without value added
tax to the buyer-reseller (B) and enter in the invoice this registration code for the
company's value added tax B from Member State 2; supplier (A) records the delivery
in the value added statement in Romania (Member State 1); buyer-reseller (B) is
mentioned as a buyer of goods, on intra-Community summary statement submitted by
the supplier (A), given the registration code for value added tax of the buyer-reseller
(B) from Member State 2.
The tax treatment of this operation: 1. The taxable persons: Yes, romanian
sailer; 2. The taxable operations: Yes, intra-comunity delivery of goods; 3. Delivery
place: Romania (the place to start the transport, member state 1); 4. Exemptions:Yes, if
are fulfilled the two conditions (it can be demonstrated the transport and
communication the registration code for value added tax purposes of the purchaser of
the other Member State; 5. Tax obligation to pay: Don’t exist a person obliged to pay
the value added tax, the operation beeing exempt.
b2). In terms of buyer-reseller (B), registered for value added tax purposes in
Romania (Member State 2). The acquisition made by the buyer-reseller (B) in Romania
is normally an intra-Community acquisition, but through the application of
simplification measures for intra-Community acquisitions is not taxable in Romania,
where the buyer-reseller (B) proves that his acquisition intra-community was subject to
value added tax in Member State 3, where transport ends, and the buyer-reseller (B)
meet the following requirements: not include the acquisition made in the Member State
1 in the chapter 'intra-Community acquisitions " of the statement of value added tax in
the summary statement of intra-Community acquisitions; register the delivery made to
the beneficiary of delivery (C) in the 'intra-Community supply exempt " chapter of
statement of value added; mention in the summary statement for intra-Community
deliveries supply exempt from tax the following data: registration code for value
added tax purposes of the recipient of delivery (C) from the Member State 3; codul T
în rubrica corespunzătoare pentru operaţiuni triunghiulare; T code in the appropriate
box for triangular operations; value of deliveries made; issue the invoice which will
register: registration code for value added tax purposes of the buyer-reseller (B) in
Romania; name, address and registration code for value added tax purposes of the
recipient delivery (C) from the State 3; to specify in the frame of invoice of the fact
that the beneficiary of delivery (C), from the Member State 3, is the person liable to
pay VAT on the supply of goods made in other Member State and a reference to art.
28c (E) (3) of Directive 6th. Given the fact that under the rules to simplify the place of
acquisition the property is in the Member State 3 (where transport ends), the Member
State 2 will not approach the tax treatment, in terms of value added, of acquisition.
b3). The delivery point of view (C) registered for value added tax in Romania
(the member state 3). Intra-Community acquisition made by the buyer-reseller (C) in
Romania is not subject to VAT if the following conditions are met: the buyer-reseller
(B) in settled in member state 2; the acquisition of goods is made by the buyer-reseller
(B) in order to carry out a subsequent delivery of these goods; the recipient delivery
(C) is a taxable or a non-taxable legal person registered for value added tax in
Romania, according to art. 153 or art. 1531 of Law no. 571/2003 regarding the Fiscal
Code, with subsequent modifications and additions; recipient delivery (C) is required
Tax Treatments Specific to Intra-Community Commercial …
189
to pay VAT on supplies made by the buyer-reseller (B), which is not registered for
value added tax purposes in Romania (Member State 3); recipient delivery (C) include
the acquisition made in the 'intra-Community acquisitions " chapter in the statement of
value added, by applying the reverse charge mechanism, and summary statement for
intra-community acquisitions of goods.
Tax treatment of this operation: 1. The taxable persons: Yes, final recipient; 2.
Taxable operations: Yes, intra-community acquisition of goods; 3. Acquisition place:
Romania (place to finish the transport); 4. Exemptions: No, operation is taxable; 5. Tax
obligation to pay: Final recipient, it aplies reverse taxation.
Situation II: Relaţia Contract transport relationship is between B and C
a) Without applying the simplification measures: In this case are meet the
following tax features: the delivery from the supplier (A) to the buyer-reseller (B) is a
delivery without transport, taking place in the Member State 1, where goods are made
available to the buyer-reseller (B). This operation is a local delivery made by the
supplier (A) in the Member State 1. Buyer-reseller (B) may deduct VAT, charged by
the supplier (A) only if it is registered for value added tax in Member State 1
(compulsory situation since made an intra-Community delivery in the State Member
1); supplies made by the buyer-reseller (B) to the final beneficiary of the property (C)
is an intra-Community supply with transport which takes place in the Member State 1
(where transport begins). Delivery shall be exempt from value added tax if they meet
two conditions: the final recipient (C) must hold a registration code for value added tax
and the goods are delivered outside the State 1; the final beneficiary of the property (C)
conduct an intra-Community acquisition in the Member State 3 (where transport ends),
which is liable for VAT (reverse charge). If the final beneficiary (C) is not a taxable
person or has not a registration code for valid value added tax in Member State 3, then
the buyer-reseller (B) must to issue VAT invoice from the Member State 1 to the
beneficiary (C). It follows that company B (buyer-reseller) is always required to
register for value added tax in Member State 1 where it done a local purchase with
value added tax and intra-Community supply of goods exempted from tax value added.
b). The simplification measures not apply where transport is a contractual
relationship between B and C. The taxable persons involved in this triangular
operation have the following reporting obligations: the supplier (A) shall report the
transaction in its statement of value added tax as a local delivery to whom the supplier
is the person liable to pay VAT in Member State 1; buyer-reseller (B) is required to
register for value added tax in Member State 1; buyer-reseller (B) will report in value
added tax bill a local purchase for he paid the value added tax to the supplier (A) in
the Member State 1, value added tax which can be inferred, and an intra-Community
supply exempt from value added tax to the final beneficiary (C); buyer-reseller (B) will
report exempt intra-Community delivery to the final beneficiary (C) inthe summary
statement on intra-Community supplies of goods from Member State 1; final
beneficiary (C) beeing the person liable to pay VAT for intra-Community acquisition
made in Member State 3, shall report such acquisition in the statement of value added
(reverse charge) and in the summary statement on intra-Community acquisitions. In the
practical work may be encountered situations where delivery of goods to be made
between three different people but they do not fall within the triangular operations
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Paliu-Popa, L.
because of a taxable person established outside the European Union, for which their tax
treatment is different.
3. CONCLUSIONS
The abolition of customs barriers between European Union Member States had
the effect of the elimination of customs control of goods movement within the
Community, putting his mark on international trade which no longer includes, from
January 01, 2007, intra-Community transactions. Due to the complexity of intracommunity commercial transactions in order to determine the tax treatment of these
transactions, in terms of value added tax, must answer the following questions: Is the
operation made by a taxable person? Operation is in the area of value added tax?
Where is the place of delivery/acquisition? Is the operation an exempt one ? Which is
the person who must pay the value added tax? Since the triangular operation is
possible only when the transaction involved three registered taxable persons for value
added tax, in three different Member States to consider the situations where the supply
of goods is made between three different people this operation is not under triangular
operations because of a taxable person established outside the European Union, for
which tax treatment is different. Assessment of the specific tax treatment of business
transactions and intra-triangular default operations is particularly important in
determining the liabilities and reporting on value added to the entities from different
EU Member States.
REFERENCES:
[1]. Popa, A.F. (association) - The tax code in the context of European integration. Guide to
Understanding and application, Contaplus, Ploiesti, 2007
[2]. Popa, I. - Engineering operations in foreign trade, Economic Publishing House, Bucharest,
2008
[3]. *** - Law no.571/2003 regarding the Fiscal Code, with subsequent modifications and
additions
[4]. *** - Guide on VAT
[5]. www.mfinante.ro
[6]. www.infotva.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 191-194
191
THE DEVELOPMENT PREMISES OF THE BANKING
SYSTEM IN ROMANIA
NICOLETA-GEORGETA PANAIT *
ABSTRACT: The actual world economic crisis has proven once more that the banks
are the primary force for an economic growth or for a recession. This major economic crisis
has begun, in the first instance, at the banks level, there for in the banking system has developed
a great void of banking liquidities. Many payments are done through banks and the lack of
funds has slow down the payments, the loans, which led to a reduction of activity in the real
economy for the companies, or even led to bankruptcy for one of them. The Romanian banks
have their own liquidity strategies. Of course that the objective of all banks is maintaining and
achieving a ratio and an optimum structure of assets and liabilities, so it may obtain a
maximum value of incomes and a minimum value of negative effects of payments during rough
situations.
KEY WORDS: resources, bank, liquidities, management, crisis
1. THE RESOURCES MANAGEMENT IN THE ROMANIAN BANKING
SYSTEM
The banking resources management shows some particularities depending of
the level of economic growth, the geographical area, the level of culture and
civilization. The banking resources management depends also, by the knowledge of the
first steps in development of banks and knowing the primary bearings of integration in
the European banking system. The close-up view of the resources takes in
consideration the essential element that the banks are first of all financial
intermediates. So, most of the resources are drawn from the banks costumers, from
depositors and from financial market. The actual world economic crisis, who affected
specially the banks, made the specialists to discover the credits offered by the
international finance and banking institutions. With the help of these loans can be set in
motion and also relax the credit market, which is on the one hand the primary form of
financing the economy and on the other hand a form of financing the companies.
*
Assist.Prof., Ph.D., Romanian-American University of Bucharest, Romania,
nico.panait@gmail.com
192
Panait, N.G.
In the year 2009 Romania receives from the International Monetary Fund a
loan of about 20 billion Euros, from which 6 billion are for National Bank of Romania
to support the banks with funds, and then, the banks can finance the companies
especially for achieving the investments objective. In Romania, the banking resources
management starts also with the idea that these resources are created and used on two
types of financing: • The direct financing, which implies bilateral transaction of funds
between the companies that have a capital surplus and the companies that are in need
of that capital. This type of financing is rarely used in Romania. The main cause is the
small capital transacted on the stock exchange market. The bearer securities are not
used for financing but for speculative means. Few companies buy shares, the bonds are
transacted rarely, that’s because there is a lack of resources in economy. So, this type
of direct financing of companies through shares is very less used in Romania. • The
indirect financing is used much more, that is to say a financial intermediary - more
over banks - is interposing between the debtor and creditor. It can be told that trough
an efficient management, the banks succeed in transferring the debts and claims
between companies. The banks can best manage to transform the due dates (financing
on a large period of time started with liquidities) or to transfer the risk from
investments to firms that have due resources and with a low level of risk, or even
without risk.
The Romanian banking management pays attention to reduce the cost of
transaction, because only in this way it may reach a low level of cost of the entire
financing, so much at the bank level and at the credited company level also. This
charge can be minimized mostly with having permanent banking liquidities in the
banks (it is known that these have a low cost, because are drawn from resources on
short term, actually from the companies’ current bank accounts). The main objective of
the management in the Romanian banking system is maintaining a good long term
relationship with the costumers. To obtain this purpose, the banks must assure a
heightened banking liquidity. The companies want to have business relations with
banks, who would hold a high volume of liquid assets, which can be transformed into
money rapidly. The banks achieve these liquidities primarily through money creation
that can easily done through currency. This way the banks transform their debts into
universal means of payment. The process of transforming assets into money has started
in Romania also. In real terms, the banks convert claims, which have a low risk into
means of payment with a high liquidity. This way, the banks have proven the ability of
banking intermediary. The previous statement reckons on the fact that from one year to
another the expenses with the means of payments grow in Romanian banks. So, these
expenses were in the second place with the ratios: 11.6 % in 1995, 14.7 % in 2000 and
17.3 % in 2005, in the first place were the credit managing expenses. It could also be
told that the banks succeed to diversify their activity, their products and services and
the provenience of their incomes. Because of the new ways of financial intermediation
development the banks’ resources can be increased and managed more efficiently.
Hereby, the banks carefully started transactions in the stock exchange. There for in
Romania, the banks have started the process of training in banking intermediation.
During the last years the transactions and the investments made by banks in securities
have increased. Within this context the management of banking resources becomes
The Development Premises of the Banking System in Romania
193
more complex considering that the banks’ results become more unstable (the price
fluctuation of shares in the stock exchange and interest ratio). The resources
management in Romanian banks is strong influenced by the capital structure. In 1991,
when the banking reform started, the State of Romania was the only shareholder off all
Romanian banks’ authorised capital, in 2007, the first year after the Romania’s
adhesion to Europe Union, 88.2 % of the shares was own by investors, and not by the
Romanian State, it also has a grow tendency. Obviously, because the authorised capital
is the investors’ hands, the Romanian banks have a large managing self-sufficiency, so
the managing performance has increased. First of all the banking capital achieved a
focusing unknown till nowadays. So, for a country with few financial resources like
Romania, there are already two banks that each has the authorised capital bigger than
500 million USD.
The Romanian banks reduced the subprime credits so they achieved better
performance in the resource management. There for, until the expansion of the actual
economic crisis, non-prime loans achieved a value of 2.3 % from all the banking
system, which sets Romania between the countries with a solid banking system.
Considering that many of banks’ resources are not “delivered” to Central Bank as Bank
Reserves. This way, the non-prime loans ratio dropped and automatically it could start
growing the loans given by banks, simultaneously, the banking assets ratio and
solvability ratios has increased, and in the same time the general risk multiplier has
been reduced. Regarding the risk issue, the management of Romanian banks has the
primarily objective to assure the liquidity of resources of all types. In the banking
resources management the first component of these resources must be the costumers’
deposits. These deposits have increased 2.7 times in last 10 years, sometimes the
growth from one year to another was spectacular., because of the incomes growing
during the years 2007-2008 (they have doubled) taking to consideration that the
investments made by the public didn’t have the same trend of development.
The management of Romanian banking resources makes sizable efforts to draw
the intermediate management balances in the active circuit and first of all it wants to
draw the Earnings before Interest, Taxes, Depreciation, and Amortization and the
Gross Profit also. From one year to another the banks’ Net Income increased from
242.7 million RON (the home currency of Romania) in 2003 to 1.2 billion RON in
2007, almost 6 times. Also in the same period of time the banks’ Net Profit increased
from 21 million RON to 319.6 million RON. We are aware that in that period of time
the Romanian banks made only profit, so without losses. The Return on-assets ratio
increased from 0.6 % in 2003 to 2.0 % in 2007.
( ROA =
Net Pr ofit
Total Asset
× 100 )
(1)
The Return on equity ratio was 22.7 (in 2007) towards 9.1 % in the year 2003.
( ROE =
Net Pr ofit
Total Capital
× 100 )
(2)
194
Panait, N.G.
2. THE ROMANIAN BANKING SYSTEM
The financial resources of banks were sizable reduced, which in the market
economy could mean sometimes a disaster, considering that the banks have always
been the main paymaster for the industry, services, agriculture, construction. The
banking system, in Romania, had a positive evolution in the last years, the banking
system advance rapidly to the standards required by The World Bank, by The Basel II
Agreement (2004) and by The Europe Union adhesion. Could be told that the
Romania had rigorous fulfilled the international financial standards, there for the
Romanian banking system supported better the country economy, but couldn’t avoid
the world economy crisis. The adhesion of Romania at the Europe Union had
developed an intense training for the Romanian banking system regarding the exigent
standards of the European banking system. First of all the Romanian banks had to
apply the capital allocation coefficient. So, there is not even a single Romanian bank
that has a ratio between the authorized capital and total assets lower than 16 %, this
value is double from the one from Basel II Agreement.
Also, there are Romanian banks that have a capital allocation coefficient
between 28 and 32 percent. In this case are the first two Romanian banks that, together,
hold over 40 % of the total assets in the banking system. Another opportunity for the
Romanian banks, in the last decade, is that other powerful foreign banks bought-out the
stock holdings. So, the first Romanian bank, The Commercial Bank of Romania, was
bought thought acquisition by the Austrian bank ERSTE BANK, and the second
Romanian bank, Romanian Bank for development, was bought by the French group
Groupe Société Générale. Overall, the Romanian bank system is owned 80 % by the
foreign banks.
The third favourable premise (that slows down the economic crisis) was the
heedful policy of the National Bank of Romania. This central bank operated, not only
with a prudent surveillance of commercial banks, but through many ways like
maintaining a high level (10 %) of the monetary policy rate, and the required minimal
reserves for the non-governmental loans offered by the banks were also risen (between
20 and 30 percent), all of these measures taken hold down the credit. A major and final
premise that must be taken in consideration underneath the financial resources of
banking management is the granting of the 20 billion Euros credit by the International
Monetary Fund and Europe Union. With this occasion, the International Monetary
Fund representative, whom negotiated the loan (between March and May 2009) said:
“fortunately, Romania has a relative healthy and well capitalized banking system”.
REFERENCES:
[1]. Aspinwall, E. - Handbook for banking strategy, A. Wiley - Interscience, Publication, 2007
[2]. Charreaux, G. - Finance d’entreprises, LITEC, 2005
[3]. Dardac, N.; Barbu, T. - Monedă, bănci şi politici monetare, Editura Didactică şi
Pedagogică, Bucureşti, 2005
[4]. Obstfeld, M.; Taylor, A.M. - Global Capital Market Integration, Crisis and Growth,
Cambridge University Press, Cambridge, 2004
Annals of the University of Petroşani, Economics, 9(2), 2009, 195-202
195
SOCIAL - ECONOMIC ASPECTS RELATED TO THE
CONTEMPORARY VILLAGE WITHIN
SARMIZEGETUSA AREA
ION PÂRVULESCU, RALUCA RIDZI,
ROXANA GHIŢĂ-PLEŞA, OANA DOBRE-BARON *
ABSTRACT: The sociological research whose results are given in this paper was
conducted in the month of July 2009 in the rural community of Sarmizegetusa, located in
Hunedoara County on the border with Caras-Severin County. There has been investigated a
total of 174 households and the main issues addressed are the following ones: house and living
conditions, family structure, household income, the comfort of the house.
KEY WORDS: income, house, family, conveniences, issues that make people worried
The issues that stir currently the people living in the rural community of
Sarmizegetusa are generally the same which worry the entire Romanian society. The
main problems that trouble the vast majority of people are the raising prices and health
related issues (Figure 1).
Slightly more than half of them are concerned about instability / economic
crisis, linked of course to the subsequent price increase. A quarter of respondents
perceive also the political instability, although this is more a distinct phenomenon in
the case of Romania. Almost the same percentage holds the unemployment rate, but
even though its proportions are increasing, we speak here about a rural community
where the effects are felt to a lesser extent compared to the urban community; the
villagers have other options related to agricultural activities which can ensure a
minimum subsistence conditions.
A positive aspect would be that people are optimistic about the future of the
village and of youth, the percentage of those who are concerned about these issues is
below 10%. While future related issues concern most of the people, present life in the
village is considered as being generally satisfying (Figure 2); only an insignificant
*
Assoc.Prof., Ph.D., University of Petroşani, Romania, iparvulescu@upet.ro
Lecturer, Ph.D. Student, University of Petroşani, Romania, ridziraluca@yahoo.com
Assist.Prof., Ph.D. Student, University of Petroşani, Romania, rpmita@yahoo.com
Lecturer, Ph.D., University of Petroşani, Romania, oanabaron@yahoo.com
196
Pârvulescu, I.; Ridzi, R.; Ghiţă-Pleşa, R.; Baron-Dobre, O.
percentage sees it as unsatisfying (6.3%) and most of the villagers consider it very
pleasant and enjoyable (55%) and over a third doesn’t consider life pleasant or
unpleasant.
100
90
80
70,1
70
63,8
60
51,2
50
40
27,6
26,5
30
20
10,9
9,8
6,9
10
2,9
0,6
I
J
0
A
B
C
A – price increase
B – health problems
C – economic instability
D – political instability
E – unemployment
D
E
F
G
H
F – juvenile offences / crimes
G – problems related to the youth living in the village
H – problems related to the future of the vilage
I – problems related to property right
J – others
Figure 1. The problems which most concerned about the people (%)
100
90
80
70
60
50
40
30
20
10
0
47,7
38,5
7,5
4
2,3
very unpleasant
unpleasant
neither pleasant
nor unpleasant
pleasant
very pleasant
Figure 2. Assessment of life today (%)
The degree of satisfaction on life today is significantly correlated with how the
society looks and over two thirds of respondents are satisfied with the appearance of
the village (Figure 3).
Social-Economic Aspects Related to the Contemporary Village …
197
100
90
80
70
60
52,3
50
40
24,7
30
20
13,8
6,3
2,9
10
0
in foarte mare in mare masura
masura
asa si asa
in mica masura in foarte mica
masura
Figure 3. The degree of satisfaction on the look of the locality (%)
The main reasons for discontent are related primarily to infrastructure, low
income and lack of jobs (Figure 4).
100
90
80
70
60
50
40
30
20
10
0
39
31
24
6
infrastructură
venituri mici
lipsa locurilor de
muncă
altele
Figure 4. The reasons why people are not satisfied with the life they are having in the
village
Figure 5 illustrates that infrastructure is by far the most pressing problem, the
measures to be taken so as life of local inhabitants becomes more enjoyable point to
infrastructure, i.e.: the arrangement and lay asphalt on roads; the drinking water
network; the sewerage system.
The responsible persons for what has not been achieved so far are mainly the
former local leaders, and, to a lesser extent, the political class (Figure 6).
198
Pârvulescu, I.; Ridzi, R.; Ghiţă-Pleşa, R.; Baron-Dobre, O.
100
90
80
70
45
60
50
33
40
22
30
20
10
0
asphalt
water network
sewerage system
Figure 5. Measures to be taken so as the local life becomes more pleasant (%)
100
90
80
70
54,6
60
50
40
16,7
30
16,1
12,6
20
10
0
former leaders
present politicians
others
no answers
Figure 6. Responsible persons for what has not been achieved in the village (%)
Of course, there shall always be problems be solved but, nevertheless, as
suggested by data in Figure. 2, the degree of satisfaction with the settlement is high, the
reasons for this state of gratitude are the good living conditions but also the ancestral
feeling displayed towards the birthplace and the beauty of the area (Figure 7.).
100
90
80
70
60
50
36,2
40
29,3
30
20,1
11,5
20
2,9
10
0
suitable living
conditions
place of birth
beauty and
traquility
others
no answers
Figure 7. The reasons why people are satisfied with their life in the village (%)
Social-Economic Aspects Related to the Contemporary Village …
199
In general, family incomes are relatively high in Sarmizegetusa rural
community, over one third having over 2000 lei and more than half above 1500 lei,
while 14.3% of the families situate within the ranges of up to 700 lei (Figure 8).
100
90
80
70
60
50
40
30
20
10
0
39,1
6,9
6,3
13,8
14,4
15,5
2,9
1,1
up to
100 lei
101300
301500
501700
7011000
10011500
15012000
over
2000
no
answers
Figure 8. Household income (%)
Figure 9 shows the structure of the household in relation to the number of
members; consequently, there can be noticed that most families consist of 3-4 persons
(43%). One can say that the families of Sarmizegetusa are relatively numerous,
although 38% of them have less than three persons. However, almost one fifth of them
is made of more than four persons and those with more than two persons hold 62%.
Compared to traditional rural family, the normal family living in Sarmizegetusa
community, on average, is made of fewer members but, compared to other rural
communities, it is higher than average.
100
90
80
70
60
50
40
30
20
10
0
43,1
17,3
17,2
20,7
1,7
one person
2 persons
3-4 persons
5-6 persons
more than 6
persons
Figure 9. Number of persons per household (%)
200
Pârvulescu, I.; Ridzi, R.; Ghiţă-Pleşa, R.; Baron-Dobre, O.
Due to social and economic reasons, the tradition that says that young couples
should have more children has been affected during the transition period, both in the
whole Romanian society and, therefore, in the rural community.
Figures 10 and 11 show the situation of siblings in the family of origin and the
number of children of respondents. After comparing the data from the two figures, it is
quite clear that there is a downward trend in the number of children in families.
Consequently, if the percentage of couples with more than two children (brothers Figure. 10) in the family of origin more than is about 40%, the percentage of families
own more than two children is nearly four times lower (about 10% - Figure 11).
100
90
80
70
60
50
40
30
20
10
0
42,5
27,6
18,4
11,5
alone
two siblings
three - four
siblings
more than four
siblings
Figure 10. Number of siblings in family home (%)
100
90
80
70
60
50
40
30
20
10
0
23,6
34,5
31,6
9,2
1,1
none
one
two
three / four
more than 4
Figure 11. Number of children in their own family (%)
Also, the percentage of families of origin with two siblings, is 10% higher than
that of their own families with two children and the percentage of families with one
child is almost half that of their own families with a child.
Social-Economic Aspects Related to the Contemporary Village …
201
It is undeniable that the comfort of country house increased after 1989 and this
is quite normal, but today the village still faces some major problems that affect the life
of villagers, the most acute being the infrastructure. The origin of the dwelling / house
of those interviewed is mostly the heritage - the rate of two-thirds - and the actual
contribution rate of one third (built or purchased by the owner) of those who hold them
(Figure 12).
100
90
80
66,1
70
60
50
40
19.0
30
13,2
20
10
1,1
0,6
0
inherited
built by the
owner
bought
rented housse other situations
Figure 12. Where the house comes from (%)
The age of house (Figure 13) correlates with its origin, that is legacy; the
overwhelming majority of houses are more than 20 years old and only a negligible
percentage of houses are younger, aspect that shows that in the past 19 years there has
been built very little. Of course, this situation can be explained to a certain extent and
trend of young people to migrate to the city.
100
90
80
70
60
50
40
30
20
10
0
94,8
3,5
1,2
5-10 years
11-15 years
0,5
16-20 years
more than 20 years
Figure 13. House age (%)
Housing in terms of floor space is very good; only 14% of houses having only
two rooms and just more than half are with 3 - 4 rooms and one third are with more
than 4 rooms (Figure 14).
202
Pârvulescu, I.; Ridzi, R.; Ghiţă-Pleşa, R.; Baron-Dobre, O.
100
90
80
70
60
50
40
30
20
10
0
52,3
33,3
14,4
0
one room
2 rooms
3-4 rooms
more than 4 rooms
Figure 14. Housing (%)
The material used for the building of houses is brick walling for the
overwhelming majority of cases and roof is fully of tile, covering specific for mountain
areas. The houses are floored, in almost equal proportions, with floor board and with
parquet and only a negligible proportion has another structure.
The main heating source in the house is the tiled stove in most cases; only 6%
of houses have their own heating system and, of course, the fuel that is being used is
wood in all situations. The facilities of the household / dwelling show a high degree of
comfort. Almost all houses have furniture, stove, refrigerator, colour TV, washing
machine. Relatively high rates have also registered the radio, the phone, the radio cassette, the vacuum cleaner, and other more.
For rural areas, the personal computer and the car display important figures
(each of one 37% of households) and satellite antenna meet the needs for information
and entertainment in 29% of households.
With regard to other facilities such as the kitchen, the bathroom, the toilet, the
drinking water or sewerage network, there is still enough room for the normal demands
of the early XXI century. Except the issues related to infrastructure and which have
been mentioned above, Sarmizegetusa community displays a developed social and
economical level, largely holding conditions for rural tourism, the Dacian vestiges
being essential in this respect.
REFERENCES:
[1]. Druţă, F. - Motivaţia economică, Editura Economică, Bucureşti, 1999
[2]. Hoffman, O. - Management. Fundamente socioumane, Editura Victor, Bucureşti, 1999
[3]. Mihăilescu, I. - Familia în societăţile europene, Editura Universităţii din Bucureşti, 1999
[4]. Rotariu, T. - Demografia şi sociologia populaţiei, Editura Polirom, Iaşi, 2009
[5]. Zamfir, C.; Stănescu, S. (coord.) - Enciclopedia dezvoltării sociale, Editura Polirom, Iaşi,
2007
Annals of the University of Petroşani, Economics, 9(2), 2009, 203-208
203
DISTRIBUTED DATABASES MANAGEMENT USING
REMOTE ACCESS METHOD
MIRCEA PETRINI
*
ABSTACT: Because of the formidable obstacles to realizing the ideal distributed
database, DBMS vendors have taken a step-by-step approach to databases and networking.
They have focused on specific forms of network database access, data distribution, and
distributed data management that are appropriate for particular application scenarios. This
paper studies the remote access method as a component of the distributed databases
management.
KEY WORDS: Distributed databases, Remote Access, Oracle
1. DISTRIBUTED DATA
Commercial data processing in a modern corporation has evolved a long way
from the centralized environment of the 1970s. Figure 1 shows a portion of a computer
network that you might find in a manufacturing company, a financial services firm, or
in a distribution company today. Data is stored on a variety of computer systems in the
network:
• Mainframes;
• Workstations and UNIX and Linux-based servers;
• LAN server;
• Desktop personal computers;
• Mobile laptop PC’s;
• Handheld device;
• Internet connections.
With data spread over many different systems, it’s easy to imagine requests that span
more than one database, and the possibility for conflicting data among the databases:
• An engineer needs to combine lab test results (on an engineering workstation)
with production forecasts (on the mainframe) to choose among three
alternative technologies.
*
Lecturer, Ph.D. Student, University of Petroşani, Romania, petrini_mircea@yahoo.com
204
Petrini, M.
•
•
•
•
•
•
•
A financial planner needs to link financial forecasts (in an Informix database)
to historical financial data (on the mainframe).
A product manager needs to know how much inventory of a particular product
is in each distribution center (data stored on six Linux servers) to plan product
obsolescence.
Current pricing data needs to be downloaded daily from the mainframe to the
distribution center servers, and also to all of the sales force’s laptop computers.
Orders need to be uploaded daily from the laptop systems and parceled out to
the distribution centers; aggregate order data from the distribution centers must
be uploaded to the mainframe so that the manufacturing plan can be adjusted.
Salespeople may accept customer orders and make shipment date estimates for
popular products based on their local databases, without knowing that other
salespeople have made similar commitments. Orders must be reconciled and
prioritized, and revised shipment estimates provided to customers.
Engineering changes made in the workstation databases may affect product
costs and pricing. These changes must be propagated through the mainframe
systems and out to the web site, the distribution centers, and the sales force
laptops.
Managers throughout the company want to query the various shared databases
using the PCs on their desktops.
Figure 1. DBMS usage in a typical corporate network
Distributed Databases Management Using Remote Access Method
205
As these examples suggest, effective ways of distributing data, managing
distributed data, and providing access to distributed data have become critical as data
processing has moved to a distributed computing model. The leading DBMS vendors
are committed to delivering distributed database management and currently offer a
variety of products that solve some of the distributed data.
2. REMOTE DATABASE ACCESS
One of the simplest approaches to managing data stored in multiple locations is
remote data access. With this capability, a user of one database is given the ability to
reach out across a network and retrieve information from a different database. In its
simplest form, this may involve carrying out a single query against the remote
database, as shown in figure 2. It may also involve performing an INSERT, UPDATE,
or DELETE statement to modify the remote database contents. This type of
requirement often arises when the local database is a satellite database (such as a
database in a local sales office or distribution center) and the remote database is a
central, corporate database.
In addition to the remote data access request, figure 2 also shows a
client/server request to the remote database from a (different) PC user. From the
standpoint of the remote database, there is very little difference between processing the
request from the PC client and processing the remote database access request. In both
cases, a SQL request arrives across the network, and the remote database determines
that the user making the request has appropriate privileges and then carries out the
request. In both cases, the status of the SQL processing is reported back across the
network.
Figure 2. A remote database server access request
206
Petrini, M.
The local database in figure 2 must do some very different work than the
process it normally uses to process local database requests, however. There are several
complications for the local DBMS:
• It must determine which remote database the user wants to access, and how it
can be accessed on the network.
• It must establish a connection to the remote database for carrying out remote
requests.
• It must determine how the local user authentication and privilege scheme maps
to the remote database. That is, does it simply pass the user name/password
supplied for local database access to the remote database, or is a different
remote user name/ password supplied, or should some kind of automatic
mapping be performed?
Several of the leading enterprise DBMS vendors offer the kind of remote
database access capability shown in figure 2. They differ in the specific way that
remote access is presented to the user and to the database administrator. In some cases,
they involve extensions to the SQL language accepted by the DBMS. In others, the
extra mechanisms for establishing remote access are mostly external to the SQL
language.
Sybase Adaptive Server Enterprise (ASE) offers a simple entry-level remote
database access capability. While connected to a local Sybase installation, the user can
issue a CONNECT TO SQL statement, naming a remote server that is known to the
local server. For example, if a remote server named CENTRALHOST contains a copy
of the sample database, then this statement:
CONNECT TO CENTRALHOST
makes that remote server the current server for the session. The local server in effect
enters a pass-through mode, sending all SQL statements to the remote server. The
remote database can now be processed directly over the connection, with standard,
unmodified queries and data manipulation statements:
Get the names and sales numbers of all salespeople who are already over
quota.
SELECT NAME, QUOTA, SALES
FROM SALESREPS
WHERE SALES > QUOTA;
Oracle takes an approach to remote database access similar to the capabilities
provided by other DBMS brands. It requires that Oracle’s SQL*Net networking
software be installed along with the Oracle DBMS on both the local and the remote
system. The database administrator is responsible for establishing one or more named
database links from the local database to remote databases. Each database link
specifies:
• Network location of the target remote computer system.
• Communications protocol to use.
• Name of the Oracle database on the remote server.
• Remote database user name and password.
To access a remote database over a database link, the local system user uses
standard SQL statements. The name of the database link is appended to the remote
Distributed Databases Management Using Remote Access Method
207
table and view names, following an “at” sign (@). For example, assume you are on a
local computer system that is connected to a copy of the sample database on a remote
system over a database link called CENTRALHOST. This SQL statement retrieves
information from the remote SALESREPS table:
Get the names and sales numbers of all salespeople who are already over
quota.
SELECT NAME, QUOTA, SALES
FROM SALESREPS@CENTRALHOST
WHERE SALES > QUOTA;
Oracle supports nearly all of the query capabilities that are available for the
local database against remote databases. The only restriction is that every remote
database entity (table, view, etc.) must be suffixed with the database link name. Also,
Oracle does not support DDL or database updates via a database link. Here is a twotable join, executed on the remote Oracle database:
Get the names and office cities of all salespeople who are already over quota.
SELECT NAME, CITY, QUOTA, SALES
FROM SALESREPS@CENTRALHOST, OFFICES@CENTRALHOST
WHERE SALES > QUOTA AND REP_OFFICE = OFFICE;
3. REMOTE DATA TRANSPARENCY
With any of the remote database naming conventions that extend the usual
SQL table and view names, the additional qualifiers can quickly become annoying or
confusing. For example, if two tables in the remote database have columns with the
same names, any query involving both tables must use qualified column names - and
the table name qualifiers now have the remote database qualification as well.
A single column reference has grown to half a line of SQL text. For this
reason, table aliases are frequently used in SQL statements involving remote database
access. Synonyms and aliases are also very useful for providing more transparent
access to remote databases. Here’s an Informix synonym definition that could be
established by a user or a database administrator:
CREATE SYNONYM REMOTE_REPS
FOR SAMPLE@CENTRALHOST.JOE.SALESREPS;
The equivalent Oracle synonym definition is
CREATE SYNONYM REMOTE_REPS FOR JOE.SALESREPS@CENTRALHOST;
With this synonym in place, the preceding qualified column name becomes simply:
REMOTE_REPS.NAME
Several DBMS brands take the synonym capability for transparent database
access one step further and permit views in the local database that are defined in terms
of remote database tables. Here is an Oracle view definition that creates a view called
EAST_REPS in the local database. The view is a subset of information from the
remote sample database:
Create a local view defined in terms of two remote tables.
CREATE VIEW EAST_REPS AS
SELECT EMPL_NUM, NAME, AGE, CITY
208
Petrini, M.
FROM SALESREPS@CENTRALHOST, OFFICES@CENTRALHOST
WHERE REP_OFFICE = OFFICE
AND REP_OFFICE BETWEEN 11 AND 19;
After this view has been defined, a user can pose queries in terms of the
EAST_REPS view, without worrying about database links or remote table names. The
view not only provides transparent remote access, but also hides from the user the
remote join operation between the OFFICES and SALESREPS tables.
Transparent access to remote data, provided by views and synonyms, is usually
considered a very desirable characteristic. It does have one drawback, however.
Because the remote aspect of the database access is now hidden, the network overhead
created by the access is also hidden. Therefore, the possibility of a user or programmer
inadvertently creating a great deal of network traffic through very large queries is
increased. The database administrator must make this trade-off when deciding whether
to permit remote transparent synonyms and views.
4. CONCLUSIONS
Supporting such distributed queries and transactions adds a major new level of
complexity (and potentially huge network data transmission overhead) to the remote
access. Because of this, although several commercial DBMS systems support
distributed queries and transactions, they are not heavily used in practice.
REFERENCES:
[1]. Fotache, M.; Strîmbei, C.; Cretu, L. - ORACLE 9i2 - Ghidul dezvoltării aplicaţiilor
profesionale, Editura Teora, Bucureşti, 2005
[2]. Fotache, M. - Dialecte SQL, Editura Gh. Asachi, Iaşi, 2002
[3]. Oracle Co. - Oracle Database, Administrator’s Guide, 11g
[4]. Oszu, T.; Valduriez, P. - Principles of Distributed Database Systems, 2nd Edition, Editura
Pretince Hall, 1999
[5]. Petrini, M. - Aplicaţii în SQL, Editura Focus, Petroşani, 2007
Annals of the University of Petroşani, Economics, 9(2), 2009, 209-214
209
BOUTIQUE HOTELS - NEW APPEARANCES IN HOTEL
INDUSTRY IN ROMANIA
CECILIA IRINA RĂBONŢU, GEORGE NICULESCU *
ABSTRACT: The appearance in Romania of new forms of accommodation, with a
unique specificity, has determined us to explore the boutique hotels in terms of the concept, the
specificity, their typology, employment and the possibility for development in the still early
market in our existing country. As recent studies in the field illustrate, the hotel market will
meet a strong emerging development on share of small hotels, boutique-type. Increasingly
popular in recent years, boutique hotels have emerged as an alternative to "mammoths" with
hundreds of rooms and impersonal atmosphere.
KEY WORDS: tourism, boutique hotel, Small Luxury Hotels, boutique hotel market,
trends
1. INTRODUCTION
We witnessing today to the emergence of new forms of hosting demanding
tourists with high attention to the finest/slender details, and we will not hesitate to refer
here to Boutique Hotel which excel by design and the special attention to refinement
and personalized services, which are translated by retention of demanding customers.
As recent studies in the field illustrate, the hotel market will meet a strong emerging
development on share of small hotels, boutique-type. Increasingly popular in recent
years, boutique hotels have emerged as an alternative to "mammoths" with hundreds of
rooms and impersonal atmosphere.
2. DEFINING THE CONCEPT OF BOUTIQUE HOTEL
In order to define the concept of Boutique Hotel we proposed to define these
two separate terms. Thus, boutique is the name given to small and luxurious stores that
sell goods on small series and the hotel is the building with more furnished rooms that
offers the possibility of hiring on short-term, by day, especially to travelers.
*
Assoc.Prof., Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania, cecilia@utgjiu.ro
Prof., Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania
210
Răbonţu, C.I.; Niculescu, G.
Jointed these two definitions of two different concepts, in an attempt to define
the concept be discussed, we can say that Boutique Hotel is a small hotel, offering
luxurious rooms furnished to hire on short-term periods to tourists in particular. But it
does not stop here, but in trying to clear up this new concept on hotel market in
Romania, I continued my search and I found that Boutique Hotel is a word that
encompasses a new world of meanings. It means a new way of looking at hospitality: a
friendly reception and personalized services.
The word comes from the United States of America, the huge hotels with
thousands of rooms which do not differ in appearance to one another, being furnish in
the same manner all over the world. In 1984, watching vision Ian Schrager has created
a hotel so avant-garde thus beeing uprised the hotel industry. By separation by the
traditional and the revolution of inside it enshrined the term of "boutique hotel" and
then hotels around the world have approached this concept.
The concept of boutique hotel is strongly opposed to big chains hotel that is
supposed to be reduced size, located in a prestigious area, furnished with unusual
furniture, intimate, family atmosphere. It is appreciated that boutique hotels have a
unique design, but notes with a great personality. Certainly these hotels are smaller in
size and can offer customers privacy and discretion. Boutique hotels get to know
customers well and offer very personalized service that large hotels can not ensure to
its guests. In North America, where came from the concept of "boutique hotel", so
these type of hotel offers more then services luxury five-star, winning through the
intimacy and design, hence the reduced number of rooms and the ability to serve more
closely customers. Boutique hotels are aimed primarily to businessmen representing
approximately 80% of customers and tourists.
Thus, it appears from the above said that the ace of boutique hotel lies in the
personality of its own, attracting demanding customers or familiar with the unique
atmosphere of some places that re-create the aristocratic style of past times or import
items from other cultures.
3. BOUTIQUE HOTELS TYPOLOGY
It was carried out a typology of this type of hotel and it arrived at dividing their
style in modern and classical, as the establishment of country or metropolitan area, but
regardless of category, all ensure safety and quality of service, peerless charm and
easily accessible location, a warm, impeccable receiving. These hotels are often unique
in terms of design and are designed with great care for the framework and with the
central theme, which are visible from the scene until the general environments. We
also found in the materials studied that the hotel's type name differs depending on the
design, namely whether we are dealing with a contemporary design these hotels are
called "design hotels" and those with a classic design / modern bears the name of
"boutique hotels".
Most times, some boutique hotels are hidden from the public eye, both
physically and in terms of trade. They can be found only in specialized guides or
offices of luxury tourism. Not everyone has access to these hotels, in order to know
them is the need for sufficient financial means to enable a luxury travel, you have to
Boutique Hotels - New Appearances in Hotel Industry in Romania
211
find this type of hotel, known and experienced in terms of benefits, but also
appreciated as a whole.It notes that it is necessary to promote towards a mass market,
because advertising used by the major luxury hotel chains has not its purpose and
finality.
In Romania can not talk about a market at this time, however, there are such
units reception in Bucharest occurred in the last eight years and as such example can
give the Parliament, Carol Park Hotel, Le Boutique Moxa Hotel, Rembrandt, El Greco,
Duke, Opera, Central, Palas or Venezia, who borrowed elements of classical style
Baroque and Venetian. A possible explanation for the early development of boutique
hotels in Romania, particularly in Bucharest city, is the closed circuit itself where is
working the niche target. Here, the average occupancy degree is between 75% and
80%. Also in Oradea town there is still a small luxury hotel named Black Eagle.
Certain is the fact that they are part of the luxurious market of this industry and
a decisive importance is the direction of decoration, quality of architects and
designers, importing materials and luxury furniture in classic style. It says that
boutique hotels are par excellence, synonymous with the wealthy design.
For example Carol Parc Hotel is a restored palace on the old walls, spaces are
different, have different sizes, are high ceilings and an attic, and every space in the
hotel create a personalized design. To better understand what it means these luxury
tourist locations must point out that the design belongs to a company in Italy, the
bathrooms bears the signature of Laura Biagotti, cosmetics are provided by designers
like Bogner or Bvlgari, silk or wood are the best quality, persian carpets, and Murano
lamps, all this items however creating a special world in the hotel industry
In another building in old Bucharest, more precisely in a high-block and oval
facade next to Cismigiu, opened Hotel Opera, arranged in the style of early''20. From
furniture and finishing with room maids skirts, everything has turned us back in time
while the George Enescu delighted the Bucharestian salons with the music of Wagner.
Additional services offered by these receiving units consist in the permanent
room-service, at the reception which does not form any tails, cleaning services twice a
day, books on the shelves of the room and found flowers on future customer taste,
luxury cosmetics, all these however justifying the higher price of nights in a hotel
boutique. The rooms are notes by the unique design and combining history with
elements of modern technology, which gives a note of originality of such a boutique
hotel. Boutique hotels in the country are still between admiration and skepticism,
maybe because the market is just in training, and tastes of Romanians with money
should be educated towards this direction, where less may mean more. In Romanian
country, luxury is still associated with size, think most part of field specialists.
4. INCLUDING BOUTIQUE HOTEL IN SMALL LUXURY HOTELS
In the richmen's world has issued a new fashion in terms of holidays. It seems
that times when Las Vegas, Monte Carlo, New Zealand, Dubai or "classic" Honolulu
were considered luxury destinations for those with money are to sunset. In 2008 was at
great search exclusive destinations, places at the end of the earth, holidays without
paparazzi and without neighbors.
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Răbonţu, C.I.; Niculescu, G.
NetworkSmall Luxury Hotels (SLH) includes 360 hotels for the persons which
category 5 stars means too little and is considered by international media tourism as the
most wanted holiday location. This network can be seen by some significant attributes,
namely: secret, discreet, luxury dazzling, at the end of the world, issues which have
raised the network of villas developed by a group of American investors in the most
hidden areas around the world, to the degree of "holiday destination of 2008”.
Given these circumstances, it is not difficult to understand why SLH has
chosen to integrate a wide range of locations: from buildings in the medieval style in
full center of American metropolises, to the podgorene French castles, Austrian huts
and bungalow sites in Seychelles. This choice depends in large part by the two major
requirements of consumers of luxury: a business trip or relaxing trip. For business
travel, there are locations in central city, but very small number of rooms (boutique
hotel), or placed at a strategic distance to the city, so customers can enjoy peace and a
specific holiday, and could reach quick to meetings of the center. So in this case appear
boutique hotel as part of the SLM.
If we talk about vacations situation is quite different in the sense that real
castles, equipped with a whole army of cooks, waiters, housekeepers and sommelier,
all educated to be "invisible", are widespread in the most unexpected locations. There
is, obviously, on the traditional countries from tourism map (France, Italy, Greece,
USA, Austria, etc.). But there are more exotic locations (India, Laos, Tanzania, Kenya,
Cook Islands or the Channel Islands, Dominican Republic , Czech Republic, Slovakia,
Mauritius, Taiwan, West Indies, Vietnam, South Korea, but China and Russia), but
also locations in all archipelagoes and heaven islands (Fiji, Indonesia, Maldives,
Bahamas, Greece, Sri Lanka or New Zealand).
A hotel can shelter from 20 people (most expensive) to 100-150 guests, the
most popular, although they are few places where get groups on the one hand because
to the high luxury is not much place from the "discount" and because on the other hand
services tend to stop inside the property. It is people who gathered the same complex
tailors, fashion houses, jewellers, profesional masseur, professional cosmetic schools,
cooks from which fight all the restaurants and sommelier who has taught every wine at
his home and that, together, provide a few days away the world. It is known that the
emergence of these new standards, hotel stocks were inovate: five stars is the lowest
rank of the category, followed by “education”, “deluxe”, “apartment/flat junior” and
senior apartment/flat”, the finally degree means even a whole castle to rent for a few
days. Beyond the settlement, it is essential that the villas are located in places
extremely well guarded, in locations where access is only by special means of
transport, as jeep to the helicopters and water planes.
The easier way to gain access to your network is to entry site SLH, which
brings to the forefront as a picture as clear about what gives such accommodation
units. It requires filling out a questionnaire in which questions range from flat pillows
the way in which it enters the room (to descend, ascend at the same level) or distance
from the elevator, from what kind of spare time attract the more (golf, kayaking,
windsurfing, sailing, etc..) pending the completion of the sections about what it wants
to the destination conditions for a particular sport, total silence, lapon kitchen or
whatever it may think.
Boutique Hotels - New Appearances in Hotel Industry in Romania
213
5. TRENDS IN THE BOUTIQUE HOTEL EVOLUTION
It considers by the study conducted by consulting company Jones Lang
LASalle, regarding the investments in regional real estate market, that by the end of
2009, at least 2830 new rooms will be put into service, particularly in accommodation
units' boutique hotel', which become increasing in demand on the local market. It also
specifies that at present the hotel market includes approximately 9.000 rooms, divided
between 3 and 5 stars being dominated by four-star hotels, in response the demand of
business tourism.It awarded almost 80% of the number of tourists stayed in hotels,
Bucharest beeing the most appropriate example of this kind.
It considers that there is a shortage of accommodation places, and in the future
will become interesting hotels with a small number of rooms, but with personality.
This will be the trend: small hotels, but not necessarily luxury or boutique, which in
fact involves investements high enough. Also in the opinion of specialists in the field is
the idea that the number of units "three-star with four stars services" will progress
faster, even if there is still room in the market for 4-5 star hotels.
According to the study mentioned above, concluded that the yield in the hotel
industry is currently stable, as the decrease in employment is offset by higher prices of
accommodation, a situation common in units of 4-5 stars, where the rate of occupation
decreased in early 2008, from 80% to an average of 60-65%.
By contrast, hotels of small luxury type or boutique are occupied in the
proportion of 75-80% annually, and the percentage exceeding 90% in peak months,
given the small number of rooms available in these locations.
It is clear that there is interest in boutique hotels in Romania, this issue beeing
demonstrated by the occupation degree of which enjoy these hotels and the growing
number of such locations. For example Opera hotel, located in the historic center of the
capital, has 33 rooms and 22 employees, had revenue of 405.000 euros in the first half
of 2008 and an employment of 78%. Estimated turnover for 2008 is approximately
820.000 euros, representing an increase of 5% from 2007. However, it was noted that
during 2008, business target has changed, boutique hotels getting more and more
tourists from many countries such as Holland or America, but very few tourists from
Romania.
For smaller hotels or small luxury location remains an important item, also
historic center of Bucharest, in renovation, will still remain a target for the small hotel
which may be in a more isolated area, very special. For example, Carol Parc Hotel,
located in the area of Carol Park in Bucharest, the hotel's architecture reflects the
quality, elegance and style of aristocratic life in Romania of the last century, as I stated
before. Employment degree of a boutique hotel reaches the peak season, similar to the
luxury hotel in the Capital, 70-80%, although it is considered improper a comparison
between an exclusive hotel with a small number of rooms and large luxury hotel units
in the country with hundreds of apartments. In general, exclusive hotels will always
have an occupation rate of similar to industry, accordingly to the active periods.
Demand for accommodation spaces could boost the development of small
hotels, especially by foreign investors, who will work mainly in Bucharest, especially
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Răbonţu, C.I.; Niculescu, G.
after "during 2006 and 2007 have seen a moderate increase of yield in hotel industry”
under study Jones Lang LaSalle regarding real estate investment in Bucharest
6. CONCLUSIONS
Given the above said we can conclude that the boutique hotel market in
Romania, even if in the beginning, has clear prospects for development, as a segment
of the hotel industry in which foreign investors want to get involved considering that
not do in vain. And it is sure that Romania offers many possibilities for developing this
new segment created, given that tourism business is growing rapidly. Forecasts made
by various institutes and authorities concerned in this regard clearly shows that the
trend is upwards, which was helped somewhat, after our opinion, by the crisis on the
real estate market that allows the purchase of buildings that are suitable for conversion
into a hotel at prices much lower then in 2008.
REFERENCES:
[1]. Lupu, N. - Luxury Hotel - Equipment and employees, www.biblioteca-digitala.ase.ro/
biblioteca/ carte2.asp?id=61&idb=9
[2]. Stancu, I. - http://www.zf.ro/dupa-afaceri/boutique-hotel-made-in-romania
[3]. Taylor, R.; Davies, D. - Aspects of training and remuneration in the accommodation
industry, Journal of European Industrial Training, vol.28, Issue 6, 2004, pp.466-473
[4]. Victorino, L.; Verma, R.; Plaschka, G.; Dev, D. - Service innovation and customer
choices in the hospitality industry, Managing Service Quality, vol.15, Issue 6, 2005,
pp.555-576
[5]. www.en.wikipedia.org/wiki/Boutique_hotel
[6]. www.wall-street.ro/articol/Start-Up/48234/De-ce-sa-investesti-intr-un-boutique-hotel.html
[7]. www.hotelmoxa.ro
[8]. www.fivestar-hospitality.ro/ro/boutique-hotel-urile--o-afacere-de-succes-si-in-romania
[9]. www.businessmagazin.ro/actualitate/turism-boutique-sau-hotel.html
Annals of the University of Petroşani, Economics, 9(2), 2009, 215-220
215
THE MIGRATION OF THE WORK FORCE FROM
ROMANIA ABROAD: REASONS, POSSIBILITIES,
CHANCES, IMPLICATIONS
CECILIA IRINA RABONTU, AMELIA GEORGIANA BONCEA
*
ABSTRACT: Even though in Romania there are a few social categories with incomes
comparable to those of the Occidentals: enterprisers, notaries, the wage earners working in
banks and communications, peasants that sold their lands for millions of Euros, but also
enough budgetary people and, as well, all kinds of dodgers, corrupt civil servants or
combinatory people. All of them have monthly incomes of at least 2.000 Euros, their wage being
the only thing they have in common. However their number is not negligeable.
KEY WORDS: migration, work force, incomes comparable
They are the ones that pay enormous amounts of money for an apartment or
that buy the most expensive cars. Those are the ones that not even consider the fact of
going to work or doing businesses abroad. They have here almost everything the West
could offer them.
However, next to them, and in a considerable number, are the ones that have
insufficient incomes. The small incomes have multiple justifications: not too much
school, negative attitude, shiftlessness, trouble integrating, training in domains that
offer small incomes or just bad luck and lack of chance. They are the ones that try to
get something out of their chance of being able to work in other countries, looking for
salaries of 1,000-1,500 Euros. Their number seems to be somewhere between two and
three millions.
These aspects leaded to the situation in which our country finds itself today,
namely the existence of a considerable deficit of work force. Some officials speak of a
deficit of over half a million wage earners. The trade union leaders, but also
government representatives found a solution rapidly: the Romanian employers should
pay those incomes of 1,000-1,500 Euros and that’s it, the ones that are away will come
back, others won’t consider leaving. The problem is just one: the Romanian economy
can not offer a medium wage, abruptly, four or five times bigger than it is at the
*
Assoc.Prof., Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania, cecilia@utgjiu.ro
Prof., Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania
216
Răbonţu, C.I.; Boncea, A.G.
present time. This thing is practically impossible, because is also necessary for the
productivity of work and the prices to increase correlatively with this medium wage
increase. Consequently, the actual work force deficit can not be covered bringing back
the Romanians from Italy and Spain that however don’t even want to come back.
In Romania, the firms need employees that accept incomes of 300-400 Euros,
salaries that for a Romanian are small but, for a Chinese or an Indian are dream
salaries. The work force market from Romania is less and less concurrential: with an
almost inexistent unemployment, the employer has less and less chances of choosing.
The only chance is the opening of this market, aspect taken into consideration by some
enterprisers that considered the problem already resolved by bringing hundreds of
Chinese. The Asians’ concurrence won’t be welcomed by the trade unions; the same
happened with the countries where the Romanians went to work.
Where it appears a too big gap between the employees’ wishes and the
employers’ offer massive migrations to and from that country happen. Thus in
Romania two aspects appear worth taking into account, namely: the first the
Romanians’ emigration, followed by the foreigners’ immigration. Thus, the
Romanians’ degree of motivation of finding a job abroad is a very important aspect
when taking in consideration the emigration. The problem of ensuring a decent
existence and a better life is the most triggering argument of emigration.
The expression of the intention of going to work abroad is influenced by the
acquaintances abroad, there is a high probability for these ones to use these
acquaintances for getting the information they need and for actually getting there.
There are also reasons because of which the Romanians hesitate leaving and
those first and foremost refer to the fact that they are afraid their family will fall apart
after they leave, but they are also afraid that it won’t be easy to find a job abroad either.
The ones that look for a job in one of the countries members of the European
Union are based on the informal networks (77.4%) – relatives, friends, acquaintances,
etc., in the detriment of the institutions specially designed with the administration of
emigration. According to the ANBCC study, the ones that intend to work outwards are
preponderantly young, unmarried persons, with incomes slightly over the medium,
active on the Romanian work force market.
Coming to face up these realities without an immediate remedy, EQF or The
European Qualification Framework will simplify the access on the work market in the
European Union. Practically, this one will tie the individual systems of qualification
from the states that are members, functioning as a translation apparatus. In this way,
the qualifications obtained in a communitary country will become easier to understand
for both the employers and the employees.
EQF is a promotion instrument of the permanent education. The European
Qualification Framework makes reference to the general education, but also to adult
education, to vocational education and superior studies. It is applied from the most
elementary preparation to the academic level. The European Qualification Framework
will contain all kinds of professions, aptitudes etc. According to www.euroconcurs.ro,
the EQF basis is formed of eight reference levels that describe what the person knows,
understands and what he or she can do - practically, is a synthesis of the results of
education – irrespective of the place where the respective qualification was obtained.
The Migration of the Work Force from Romania Abroad …
217
Until 2010, the European Union states must relate their national systems of education
to the EQF system. And starting with 2012 all the employment will have this means of
understanding as their basis.
The named instrument permits both the employers and the persons who want
to find a job in another state of the communitary space to compare the qualifications
obtained in different member countries, but also the education and training systems.
The net medium wage in Romania increased – in nominal terms - in the
interval October 2006-October 2007 with 25.2% reaching 1,084 lei (323 Euros),
according to the data published at the beginning of December by the National Statistics
Institute (INS). In real terms, taking into account the inflation, the increase of the net
medium wage was of 17.2% in the mentioned interval.
The productivity of work in industry increased in the first ten months of 2007
with 10.3%, show the data published by The National Statistics Institute (INS). As
compared to October 2006, the productivity of work went up in the tenth month of this
year to 10.5%.
According to some recent Eurostat statistics, Romania is the second EU
country if we take into consideration the increase of the hourly costs with the work
force, with an annual advance of 23% in the third trimester of 2007, outbalanced only
by Livonia where this one increased with 30%.
The most considerable increases of the hourly costs of the work force in the
third trimester of this year were registered in Livonia (with 30%), Romania (23.2%),
Estonia (20.6%) and Lithuania (20.1%), and the lowest costs were registered in
Germany (0.9%) and Finland (1.9%). At the same time, the increase of the unsalarial
costs with the work force oscillated between -1%, in Germany, and 28.9% in Livonia,
according to Eurostat.
The statistics office of the European Union (EU) mentions that the total hourly
costs with the work force in the euro zone (EU 13) registered an annual increase of
2.5% in the third trimester of this year as compared with 2.4% in the second trimester.
In EU27, the annual costs increased with 3.7 % in the third trimester, as compared with
the 3.3% increase in the second trimester.
The two major components of the work force costs are the salaries and other
incomes that are given to the employees (primes, bonuses) and other costs that don’t
imply the payment of the salaries.
In the euro zone, the salarial incomes had a rate of annual increase of 2.5 % in
the third trimester of this year, as compared to 2.5 % in the anterior trimester, and the
non-salarial costs with 2.2%, as compared to 1.8%, in the second trimester of 2007.
In EU 27, the expenses with salaries increased with 3.8%, and the expenses
that don’t have anything to do with salary payment increased with 3.1%, in the third
trimester of this year. For the precedent trimester, the increases were of 3.5%,
respectively 2.6% a year.
On economic sectors, the costs with the work force increased in the euro zone
with 2.5% in industry, 3% in constructions and 2.4% in services, in the third trimester
of this year. In EU 27, the costs with the work force increased with 3.4% in industry,
5.3% in constructions and 3.6% in services, during the same interval.
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Răbonţu, C.I.; Boncea, A.G.
At the beginning of 2006, on the territory of the states members of EU, of
Romania and Bulgaria, there were circa 28 millions immigrants, representing 5.6% of
the total population. Two thirds of the immigrant population was constituted of extracomunitar citizens: 32% of the Europeans whose origin countries were not members of
EU (most of them Russians, Turks and Balkans), 22% of Africans, 16% of Asians and
15% of Americans.
In the biggest immigration EU countries top, Italy is situated on the second
place next to Spain, being only advanced by Germany. From the point of view of the
annual increase rate, the two countries have no equal in Europe, advancing, in
proportion, even USA. Thus, even though USA’s population is five times more
numerous than the one of Italy, it only registers annual entrances of a million new
immigrants, as compared to Italy, that registered 700 thousand new immigrants in
2006. The foreigners that work in Italy sent in 2006 4.3 milliards Euros to their origin
countries, on the first place being situated Romania, where the immigrant workers sent
approximately 777 millions Euros, shows the “2007 Immigration” rapport, that was
made public in Italy in October.
The destination work countries preferred by the Romanians are: Italy (23%),
Spain (20%) and Great Britain (18%).
If until 1999-2001 the destination countries palette was large enough, in the
last period five important destinations in the Romanians’ preferences were contoured:
Italy, Spain, Great Britain, Germany and France. The positioning of Great Britain
among the first three European countries preferred is a new element and probably
contours a new type of migrant. It is about the young persons, with education and
really high incomes and, pre-eminently, women, that more pregnantly express their
desire of going to Great Britain.
The ones that go to Italy and Spain have incomes that are slightly lower than
the incomes of the persons that want to immigrate in France and Germany, and also
than the ones that want to go to Great Britain.
In what concerns Holland as a destination country, until 2009, the Romanians
must first obtain a work permit from the authorities. Initially, the social businesses’
minister Piet Hein Donner wanted to start the debate on an opening of the frontiers in
May next year, with the occasion of publishing a rapport that evaluates the needs in
what concerns the work force and the actual situation of immigration on the work
market. Numerous Hollander communes recently complained about the lack of
integration of the East-European workers, phenomenon aggravated by a big
geographical concentration, frequently in the vicinity of the work place.
Amsterdam even announced plans to encourage the East-European immigrants
to move from the neighbourhood in which they live and to find diffused
accommodations in the capital. Approximately 100,000 workers coming from EU
members East-European countries, the vast majority from Poland, presently work in
Holland.
Over 80% of the Romanians who went to work abroad, through the Occupancy
Agency, in the first half of the year, preferred Germany, for a maximum wage of 1,200
Euros, and of the other 12,000 Romanians who used private agencies, half went to
work in the United States.
The Migration of the Work Force from Romania Abroad …
219
According to the data furnished by the National Agency for the Occupancy of
Work Force (NAOWF), over 80% of the work contracts obtained by the Romanians
through the agency of the state institution, in the first six months of this year, were for
Germany. Thus, NAOWF intermediated the departure of over 20.000 workers in
Germany, where these ones work in the sanitary or gastronomic domains, in agriculture
or they do housekeeping. The biggest wage gained in Germany is of 1,200 Euros, the
lowest being of 850 Euros, in agriculture.
The other countries in which NAOWF also intermediated the Romanians’
going to work were Spain (3,755 work contracts), France (54) and Switzerland. Spain
has the richest offer of work places for the Romanians (agriculture, transports,
alimentary industry, gastronomy, commerce or constructions), but also the lowest
wages when compared with the other countries, these ones being comprised between
730 Euros, in agriculture and 1,600 Euros, in constructions. The Romanians who left
for France work in agriculture, constructions and in the gastronomic domain, for a
salary of maximum 1,250 Euros.
Even though Switzerland is a country in which the Romanians gain the biggest
salaries, comprised between 2,000 and 3,000 Euros, from the beginning of the year
only 27 Romanians obtained work contracts in this country. The domains in which the
Romanian labourers work in Switzerland are gastronomic, sanitary and in agriculture.
NAOWF also informs that, through private agents of recruitment and work
force placement, approximately 12,000 Romanians went to work abroad, half of them
preferring the United States of America. The rest of the countries in which the
Romanians obtained contracts through the agency of private firms were Italy (1,461),
Cyprus (1,335), Germany (522) and Portugal (344).
According to NAOWF, the Romanians abroad that left through the agency of
the state institution sent back in the country, in the first semester of the year,
approximately 81 million Euros. At the same time, those 53,000 Romanians that left
through the agency of the Migration Office last year gained a total of 157,000,000
Euros, out of which almost a hundred millions being gained by the ones that worked in
Germany. Thus some economic implications, seen as positive, and some demographic
ones, with negative repercussions on Romania’s situation, appear.
If it hadn’t been for this movement of incredible ampleness, Romania would
have been confronted with an economic and social crisis, whose proportions are hard to
imagine, that would have been recoiled on the entire state of the Romanian society and
even on the calendar of Romania’s adherence to EU. The Euro-commutators left open
work places reduced the rate of unemployment at a very low level for the economic
and social situation in Romania. The 4-5 milliard Euros that annually entered in the
country, coming from the ones that left to work abroad, were a source capital (in a lot
of cases, the only one) for other millions of Romanians whose standard of life they
ameliorated, leaded to the explosion of dwelling constructions and of the sales of
equipments and goods meant to appoint them, of the number of cars, created work
places, stimulated the consumption. In another benefic measure of migration, it can be
noticed that the migrant Romanians, living in countries with a high standard of
civilization, see and learn the civic spirit around them, the respect of laws, the order,
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Răbonţu, C.I.; Boncea, A.G.
the cleanliness, the attitude towards work, all these representing a great benefit for
Romania.
If the economic, social and cultural perspective of migration for work is
predominantly positive, we can’t say the same about the demographic perspective of
the phenomenon. The demographic perspective has more negative aspects and is
constituted of a price that has to be paid. Statistically speaking, the Euro-commutators,
are young persons: approximately 40% leaving in the period 1996-2006 and
approximately 50% leaving in the years of massive exodus 2002-2006. The proportion
of the ones that are not married is of 82% of the ones between 15-24 years old and of
23% of the ones between 25-39 years old. Leaving abroad, many of them postpone
their marriage and, implicitly, bringing forth children. The biggest danger is that once
they get abroad, part of the ones that left don’t want to come back, making everything
possible to regularize their stay there and to obtain unlimited stay permits ( by even
appealing to mixed marriages, of convenience).
REFERENCES:
[1]. Gheţău, V. - Declinul demografic şi viitorul populaţiei României. O perspectivă din anul
2007 asupra populaţiei Romaniei în secolul 21”; Institutul Naţional de Cercetări
Economice Centrul de Cercetări Demografice „Vladimir Trebici”, Editura Alpha MDN,
2007
[2]. *** - Cartea Verde a Populaţiei (2006); Comisia Naţională pentru Populaţie şi Dezvoltare,
Editia a XVII-a a Anuarului Satistic "Imigrare 2007"
[3]. www.muncainstrainatate.anofm.ro
[4]. www.sfin.ro
[5]. www.capital.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 221-226
221
MAKING THE INVISIBLE VISIBLE: THE INTANGIBLE
ASSETS RECOGNITION, THE VALUATION AND
REPORTING IN ROMANIA
NICOLETA RADNEANTU
*
ABSTRACT: The emergence of knowledge-based companies increased the
importance of intangible assets, assets that were considered the most competitive advantages of
companies. So, in this paper I tried to answer the following question: Which is the Romanian
accounting reality about the intangible assets recognition, evaluation and reporting? What can
we do that traditional financial statements do not become mostly useless for their end users?
KEY WORDS: intangible assets, knowledge based organizations, recognition,
valuation, reporting
1. INTRODUCTION
Throughout time, accountancy in Romania has been oriented moreover on
providing financial information to the state and fiscal authorities. The evolution of the
Romanian accounting regulations is closely related to the changes of the economic,
social and political environment [1]. Currently Romania applies OMF (Order of the
Ministry of Finance) No. 1752/2005 regarding the financial statements of commercial
companies. This accounting regulation implements the 4th Directive as well as the 7th
Directive of the European Economic Community.
The 4th Directive of the European Economic Community establishes the form
and contents of annual financial statements, accounting principles and evaluation rules,
as well as regulations regarding the preparation, approval, auditing and publication of
financial statements; meanwhile the 7th Directive of the European Economic
Community establishes and regulates the form and contents of annual financial
consolidated statements, as well as the rules to be respected when creating, approving,
auditing and publishing annual consolidated financial statements.
*
Assist.Prof., Romanian-American University of Bucharest, Romania,
nicoleta.radneantu@yahoo.com
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Radneantu, N.
2. THE INTANGIBLE ASSETS RECOGNITION, EVALUATION AND
REPOTTING IN ROMANIA
Further, on we shall try to identify the accounting treatment for intangible
assets based on different types of financial statements commercial companies must
prepare - enclosed in table 1.
Table 1. Regulations regarding the recognition, evaluation and reporting of
intangible assets in Romania
OMF no. 1752/2005
IAS 38 – Intangible
assets
IFRS 3 – Mergers
GN 4 – Evaluation
of intangible assets
Regulates the treatment for the accounting recognition of intangible
assets in individual financial statements of companies in Romania.
Regulates the accounting treatment of recognition of intangible
assets in financial statements
Prescribes the accounting treatment for intangible assets that can be
segregated and have their origin in contractual rights or other legal
rights, as well as intangible assets that meet the segregation
character of the definition.
Concentrates on explaining the approaches, principles and different
values that should be taken into consideration when evaluating
intangible assets.
Source: The author of the paper
According to OMF No. 1752/2005, intangible assets are in fact identifiable
non-monetary assets that have no material support, utilized in production or supply of
goods and services that can be rented to third parties or used in administrative
purposes. The present classification [6] used in Romania is based on the conception
that the assets of a company consist of tangible and intangible assets. You will find
further classification of intangible assets in Romanian legislation enclosed in table 2.
The International Accounting Standards Committee (IASC) proposes as solution for
the controversial issue of intangible assets evaluation the regulations under the
International Standard of Evaluation Practice GN4 - The evaluation of intangible
goods. IASC provides accountants with recommendations and counseling regarding
evaluation; it seeks to coordinate its standards and programs or disciplines related to
accounting as well as cooperate with international organisms to elaborate and
promulgate new standards.
In order to have a match between IASC standards - International Evaluation
Standards, International Standards of Applying Evaluation, International Standards of
Practice in Evaluation; Financial Reporting Standards (IAS/IFRS), IASC cooperates
with The International Accounting Standards Board (IASB) as well as with
independent standard committees of the International Federation of Accountants
(IFAC) - The Committee for Accounting Standards for the Public Sector and the
International Committee for Audit and Insurance. International Evaluation Standards
are considered the permanent grounds for the other. These are IVSC 1(market value Type of value), IVSC 2 (Types of Values other than market value), and IVSC 3
(reporting evaluation). The International Standards for Applying Evaluation describe
the means of evaluating assets so as to further use them in financial reports or taking
Making the Invisible Visible: the Intangible Assets Recognition …
223
decisions of granting loans, while International Standards of Practice in Evaluation
give instructions on specific problems that appear during the evaluation process and the
means of applying standards in different situations or particular domains.
Table 2. Classification of Intangible Assets regulated by nowadays laws in Romania
OMF no. 1752/2005
- Foundation expenses
- Development expenditure
- Concessions, patents, licenses, trademarks,
rights and similar assets, if they were acquired for
consideration
- Goodwill, since it was acquired for
consideration
- Other intangible assets
- Advances and intangible assets in progress
GN 4
1. Rights :
- Lease contracts
- Distribution agreements
- Employment contracts
- Conventions
- Financing agreements
- Supply contracts
- Licenses / permits /authorizations
- Certificates / attestations
- Franchise agreements
2. Relations
- Trained workforce
- Relationships with consumers and dealers
3. Intangible assets grouped (goodwill)
4. Intellectual property
- Inventions
- Copyright
- Trademarks
- Used Technology (formulas, recipes,
specifications, databases, trade secrets, knowhow, customer lists, etc.)
- Research projects - ongoing development
IFRS 3
- Intangible assets related to marketing
- Customer related intangible assets
- Intangible assets from the artistic field
- Intangible assets such as contractual
- Intangible assets such as technological
IAS 38
- Software
- Patents
- Copyright
- Movies
- Client Lists
- Rights regarding mortgage
- Licenses
- Import quotas
- Franchise
- Relations with customers and suppliers
- Market share
- Marketing Rights
Source: The author of the paper
The International Standards of Practice in Evaluation GN4 address the problem
of measuring intangible goods using different approaches, principles, methods and
evaluation procedures in concordance with the market reality. Intangible goods have no
physical substance; they grant rights and privileges to their owner and usually produce
income for their owners [5]. GN 4 Standard [7] provides the following approaches
regarding the evaluation of intangible assets: the market approach (the comparison of
sales), the capitalization of income and the cost approach.
224
Radneantu, N.
The market approach determines the market value of an intangible asset by
referring to: either the traded prices of identical or similar intangible assets on an active
market, or by the multiple evaluation involved in the transaction prices of some
intangible identical or similar assets on an active market. Market multiples represent a
way of standardizing the analysis of comparable elements. These are evaluation
elements that represent the multiples of some elements which are usually accounting
concepts (turnover, current gross profit - EBIT, gross operating profit before deducting
depreciation - EBITDA) [2].When about market approach there must be a reasonable
basis for the comparison of similar intangible assets. The latter must function in the
same field or in a field that responds to the same economic variables as those of the
evaluated element [7].
The capitalization of income approach refers tot the estimation of the value of
an intangible asset or ownership rights over it by calculating the present value of
anticipated benefice [2]. The two common methods within this approach are the direct
capitalization of income, the discounted cash flow analysis (DCF). Direct
Capitalization of income is calculated as a ratio between a representative level of
income and a rate of capitalization; or a multiple between of the representative level of
income and an income multiple (a capitalization factor). The discounted cash flow
analysis presupposes the estimation of future cash receipts. These receipts are
converted into value by applying a discount rate. The present value of cash flow for a
certain period projected into the future can be found out by using the following
formula: PV = C1 / 1+r1 , where: PV - Present Value, C1 – Cash flow during the first
period, r1 – The discount rate during the first period. The most popular methods of
determining the discount rate are: the Capital Asset Pricing Model (CAPM), the
arbitrage pricing theory – APT, the Fama-Fench Three Factor Evaluation Model.
The cost wise approach presupposes the estimation of cost for each element
involved in the creation of assets, including profit promoter, using in our evaluation
data we hold at the present
3. CONCLUSIONS AND SUGGESTIONS
Challenges brought by the new knowledge economy have led to a higher
awareness when about the necessity and importance of information in the process of
the survival, performance and continuity of knowledge based companies. The difficulty
to asses what are the operations generated by the continuous development of
companies determined the reconsideration of the financial information systems and
further generated the use of terms such as: intensive knowledge-based company,
intellectual capital, structural capital, organizational capital [4]. In our vision the most
appropriate definition of intangible assets fitted to nowadays social, financial and
political environment in Romania would sound like this: intangible assets are economic
goods that have no material substance, a lifetime longer than one year, generate both
future benefices for the company in its relationship with the stakeholders, as well as
resources the company generates for internal use.
We consider the notion of intellectual capital is not synonymous to that of
intangible assets, as it can be considered a subcategory of the latter, because elements
Making the Invisible Visible: the Intangible Assets Recognition …
225
such as foundation expenses, licenses, and research and development costs cannot be
treated as intellectual capital. This perception is also reflected in the research of
economists and such as Bontis, Black, Carns, Richardson, and Epingard. We believe
the structure of the balance sheet presented in table 3 is the best response to the
demands of this kind of companies.
Table 3. The balance sheet of a knowledge-based company
Financing resources for tangible and intangible
assets included in annual financial statements
• Stocks
• Claims
• Cash
• Cash Equivalents
• Land and land arrangements
• Construction
• Plant and machinery
• Other plant, machinery and furniture
• Advances and tangible assets in progress
• Formation expenses
Intangible assets recognized in financial statements and registered in
annual financial statements (intangible assets)
• Formation expenses
• Patents, licenses, trademarks and other commercial rights
•
Concessions
• Expenditure on Research Development
• Commercial Fund
• Other intangible assets
Intangible assets unacknowledged and unregistered in annual financial
statements
• Knowledge and skills of employees
• Experience of staff
• Skills
• Customer Loyalty
• Alliances
• Company image
• Emotional Intelligence
• Formal relations
• Informal relations
• Social networks
• Partnerships, etc
Equity +
Debt
Financing resources for intangible
unacknowledged intangible assets
not included in annual financial
statements
Intangible assets
Immobilized
assets
Current
assets
Assets
Source: The author of the paper
Given the characteristics of knowledge based companies (innovation,
increasing importance of intangible assets inside companies, investment in training and
workforce, continuous learning, protection and exploitation of intellectual capital,
development of an open culture, internal development of a knowledge data base and
continuous growth of network of clients, suppliers and external human resources,
externalization of activities that are not essential to the company, strategic
226
Radneantu, N.
development of the company based on the depth or solidity of the company’s
knowledge force. etc.) we consider that their financial situations must comprise the
following elements that generate added value: knowledge and skills of employees,
employee experience, skills, clients ’loyalty, alliances, company image, emotional
intelligence, formal relationships, informal relationships, social networks, formal
processes, informal/ tacit routines, management process, partnerships.
The emergence of knowledge-based companies increased the importance of
intangible assets, assets that were considered the most competitive advantages of
companies, which lead to situations where the market value of companies became
much higher than their accounting value. This tendency will amplify in the near future
and there is great danger that traditional financial statements become mostly useless for
their end users. The problem of revising accounting regulations regarding the
evaluation of intangible assets had been emphasized by the international authority that
regulates accounting standards – IASB ever since with 2007. The context of
convergence between IFRS and US GAAP, offers the opportunity of substantial
improvement regarding the recognition, evaluation and reporting of intangible assets in
concordance with the demands of the present economy. Due to a lack of resources,
IASB decided that the project should not be included on the active debate agenda [8].
Therefore, this paper is trying to make a first step in recognizing intangible
assets generated by the knowledge-based organizations. In order to achieve a
considerable improvement of the accounting information, an important volume of work
will be necessary for the construction of concepts and methods of intangible assets
recognition, evaluation and reporting. We really took a step forward in understanding
the place of information in the life of enterprises by making a revision of traditional
approaches concerning accounting and by accepting that a change in the principles and
accounting practices of intangible assets must be made.
REFERENCES:
[1]. Bertoni, M.; Cristea, S.; De Rosa, B. - Provocări în procesul de armonizare din România
i Italia, Revista Contabiliatea, Expertiza
i Auditul Afacerilor, nr.3, Editura
CECCAR, Martie 2007, p.36
[2]. Cohen, J.A. - Imobilizări necorporale. Evaluare i beneficii economice, Editura Irecson,
2008, p.140
[3]. Felega, N.; Manciu, L. - Provocarile contabilită ii interna ionale la cumpana dintre
milenii, Ed. Economică, Bucure ti, 2004, p.130
[4].. Potecea, O.; Gabroveanu, E.; Radneantu, N. - Accounting Information - Power
Instrument for Advanced Management. In: Knowledge Based Organizations”, The
Journal of the Faculty of Economics - Economic Science Series, vol.III, tom XVII, 2008,
pp.1463-1469
[5]. Stan, S.V. - Evaluarea activelor necorporale. Ghid de interpretare i aplicare a GN 4,
Editura IROVAL, 2008, p.21
[6]. *** - OMF nr. 1752/2005 i modificările prin OMF nr. 2001/2006 publicat în M. Of. Nr.
994 din 13.12.2006, OMF nr. 2374/2007 publicat în O. Mf. Nr. 25 din 14.01.2008
[7]. *** - Standarde Interna ionale de Evaluare GN 4, Paragraful 3.14, p.204, Paragraful
58121, p.209, Editura IROVAL, 2007
[8]. www.iasb.org, accessed on 5.sept.2009
Annals of the University of Petroşani, Economics, 9(2), 2009, 227-236
227
DERIVATIVES ON THE CAPITAL MARKET IN ROMANIA
ILIE RĂSCOLEAN, LILIANA IVĂNUŞ
ROBERT SZABO *
ABSTRACT: The capital market is to supply and demand of medium and long term
capital, with the same role as the financial market in general with the feature length greater
maturity. Institution typical secondary capital market is the stock market. The secondary market
securities can, in principle an auction market or a market negotiation. In Romania there are
two regulated markets of securities i.e. BSE and RASDAQ as separate entities. The coverage of
financial instruments, according to EU directives in force, is wide, including both tradable
capital market instruments and money market instruments. Futures contract is an
understanding between two parts to sell or purchase a particular asset at a predetermined
price, the performance of the contract at a future date. Options are contracts between a buyer
and a seller and giving the latter the right but not the obligation, to sell or buy any particular
asset at a future date, as obtained on payment of a premium to the seller. The options may be
for sale when the buyer acquires the right to sell the asset, or may be purchasing, when given
the right to purchase the asset. In our country options contracts were introduced for the first
time SIBEX, which is currently the only market in Romania where he traded options. This gives
the buyer the right but not the obligation to buy or sell a futures contract at a predetermined
price, the duration of the contract.
KEY WORDS: capital market, stock exchange, financial instruments, derivatives,
futures, options, transactions
Thus the category of financial instruments included: securities, fund units of
collective investment undertakings, money market instruments, including futures
contracts involving payment of cash differences, forward contracts, interest rate,
interest rate swaps, exchange rates and actions, options on any financial instrument,
derivatives on commodities, any other instrument admitted to trading on a regulated
market in a Member State or for which it has been made an application for admission
to trading on such market.
*
Assoc.Prof., Ph.D., University of Petroşani, Romania, rascolean@upet.ro
Lecturer, Ph.D. Student, University of Petroşani, Romania, liliivanus@yahoo.com
Economist, MSc Student, University of Petroşani, Romania, robert.szabo@yahoo.com
228
Răscolean, I.; Ivănuş, L.; Szabo, R.
The capital market is to supply and demand of medium and long term capital,
with the same role as the financial market in general with the feature length greater
maturity.
In terms of the agents involved two types of markets that is the primary
market, which are negotiated in the presence of primary and secondary securities
issuer, that and his participation, and a secondary market investor market, being
targeted by financial flows of a investor to another. In terms of the duration for which
they are deployed / fixed resources we have: money market for short-term transactions
and capital market transactions in the medium and long term.
Institution typical secondary capital market is the stock market. The secondary
market securities can, in principle an auction market or a market negotiation. In
Romania there are two regulated markets of securities is BSE and RASDAQ as
separate entities. Bucharest Stock Exchange (BSE) is a market where goods and
securities unwind after a specific procedure. The operation and its organization is made
according to legal regulations, including oversight by the state. The objects of the
B.V.B. include securities, currencies and precious metal.
Function of the Bucharest Stock Exchange is to concentrate supply and
demand of securities, to ensure their trading stock, to record and publish courses for
sale / purchase.
The role is to mobilize financial capital, its redistribution, public information
on the status and market trends. In our country operates Bucharest Stock Exchange and
Stock Exchange Sibiu Monetary Financial and Commodities and Electronic Exchange
RASDAQ. BVB features stock indices: BET, which includes the top 10 companies
listed in Category I, BET-C All companies in Category I and II, except for financial
investment companies, BET-FI index is a sector that includes only investment funds
listed to BSE
The purpose is to stock exchange trading securities, which are documents
certifying that their owner holds a right to a certain value. They are also called
securities. Moreover, financial instruments traded on the capital market can be divided
into primary securities and derivatives. Primary products of the capital market are
shares, bonds and specific products arising from the rights conferred by shares (rights
by appropriate award and warrants). Derivatives are represented by: futures, including
similar contracts with final settlement funds, options with the underlying securities,
equity, money market instruments.
The coverage of financial instruments, according to EU directives in force, is
wide, including both tradable capital market instruments and money market
instruments.
Thus the category of financial instruments included: securities, fund units of
collective investment undertakings, money market instruments, including futures
contracts involving payment of cash differences, forward contracts, interest rate,
interest rate swaps, exchange rates and actions, options on any financial instrument,
derivatives on commodities, any other instrument admitted to trading on a regulated
market in a Member State or for which it has been made an application for admission
to trading on such market. Save money market instruments, short-term securities that
Derivatives on the Capital Market in Romania
229
are traded in the money market, all other types of financial instruments circumscribes
capital market, are issued or traded therein.
Moreover, financial instruments traded on the capital market can be divided
into primary securities and derivatives.
The securities are the shares bonds and special products generated from the
rights conferred by shares.
Derivatives are represented by futures contracts, including contracts similar to
the final settlement funds for contracts with the support options. Equity securities,
money market instruments, futures contracts, including contracts similar to the final
settlement funds, exchange rates, interest rates and commodities and other instruments
qualifying as regulations of the NSC. Instruments such as futures and options contracts
are forward contracts whose elements are standardized by the market operator that is
traded.
Futures contract is an understanding between two parts to sell or purchase a
particular asset at a predetermined price, the performance of the contract at a future
date. Options are contracts between a buyer and a seller, giving the seller the right but
not the obligation, to sell or buy any particular asset at a future date, as obtained on
payment of a premium to the seller. The options may be for sale when the buyer
acquires the right to sell the asset, or may be purchasing, when given the right to
purchase the asset.
Components of capital market financial instruments by category are: market
shares, bonds, government securities, derivatives market, market repo and reverse
transaction market synthetic financial instruments. Synthetic financial instruments
resulting from combining the characteristics of different types of financial instruments
and creating a new investment tool. This category includes financial instruments by
type basket ( "Basket Securities"), based on a selection of primary securities, combined
so that the following standardized items.
The securities are equity or debt that gives the holder certain rights established
on some of the company issuing entity. The securities are inscriptions (Document
value) negotiable, which can be converted into cash whenever the capital market.
The narrow, shares and bonds are securities issued by a company. Mobile
assets are financial instruments include shares issued by companies, and other
securities equivalent to them, traded on capital markets, bonds and other debt including
securities with maturities greater than 12 months, negotiable on the capital market and
also any negotiated other titles, usually giving the right to purchase those securities by
subscription or exchange, giving place to a cash settlement, excluding payment
instruments.
Specific securities are instruments of a market economy, capitalist, the heart of
the capital markets. Legal term securities that were reintroduced recently, in the
Romanian legal circuit. Consecration of the concept of securities, occurred by Law no.
52/1994 on securities and stock exchanges, the securities defined as "negotiable
instruments issued in physical form or evidenced by entries in the account, which gives
their holders property rights, the issuer, the law and under specific conditions, the issue
of them.
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Răscolean, I.; Ivănuş, L.; Szabo, R.
Law no. 52/1994, were considered the following securities: shares, bonds and
derivatives or any other debt securities, classified by the National Securities
Commission in this category. Romanian Civil Code in Article 474 (taking the
provisions of Article 529 of the French Civil Code), defined as movable property by
determining the law, shares or interests in companies to finance, commerce or industry,
even when their capital is in real estate.
The Romanian doctrine was shown that only when limited companies and
partnership companies stock can be said that shares and bonds are, in principle, and
securities.
But not every action can be classified and security. Dematerialized shares,
being established by a written with commercial value, which are securities, not
essential characteristics of securities and does not incorporate rights claim, the claim
can not give autonomy to the fundamental legal relationship and no certainty that he
would give it a literalness.
The definition of securities in the current Romanian law starts from the
premise that the securities are a species of financial instruments, premise set out in art.
2 (1) section 11 letter. a) of Law No 297/2004 on the capital market, it is also
applicable law currently governing the capital market are considered securities under
Article 2 of Law No 297/2004 following pct.33: Shares issued by companies and other
securities equivalent to them, traded on capital markets, bonds and other debt
instruments including government securities with a maturity of more than 12 months,
negotiable on the capital market; Any other securities normally giving the right to
purchase those securities by subscription or exchange giving place to a cash settlement,
excluding instruments of payment. The definitions in art. 2 sections 33-34, Law No.
297/2004, divides securities into equity securities and securities other than those
related to equity securities.
Equity securities are shares or other securities equivalent to shares, and any
other securities giving the right to acquire as a result of a conversion or exercise of this
right, to the extent that the values of the latter type are issued by the same issuer or by
an entity belonging to the group he belongs to that issue.
Securities not falling into this first category, the capital securities are part of
the second category. One can appreciate that equity securities are securities such as
shares, while the securities in the second category are the type of non-convertible
bonds into shares. The common feature of all these titles represent, as you can see,
negotiability. Equity securities or securities other than equity securities are securities
that are traded either for or because they are tradable capital. Mobile assets market
securities are traded on regulated markets, stock exchange or OTC, only after, in
advance, have been registered as such by the NSC, the Office of Securities records
from there.
The securities have a complex legal nature. Originally securities are contracts
between an issuer and subscribers. But this gives rise to rights which detaches itself
from the contract, getting the consistency of property whose existence is independent
of the contract. In some cases, some financial products are underwritten for a single
holder but reserves the power to fractionate them, if appropriate, between several
Derivatives on the Capital Market in Romania
231
carriers. The product is a commercial in origin but with the vocation to become a
security.
The principle of harmonizing the relevant national laws, a principle which is
based on the Treaty of Rome, has as its starting point the essential concepts of
harmonization of capital market. The concept of security has a broad imposed by
Directive. 79/279 concerning the conditions of admission to official listing on a stock
exchange and the European code conduct in securities transactions, account appears
"any way negotiable or likely to be negotiated on an organized market.
European doctrine considers that the securities are shares or other securities
equivalent to shares, certificates representing the shares, bonds issued by public or
private entities, other securities to capital markets and "any other negotiable securities
which would normally acquisition of such securities by public subscription or by
exchange or cash.
Union Council Directive 93/22/EEC of 10 May 1993 on investment services in
the securities field (DIS), the Directive entered into French law by Law no. 96-597 of
July 2, 1996 on the modernization of financial activities, the directive considers that by
the value of securities we understand "categories of securities typically capital markets,
for example, government securities, shares, negotiable securities allowing the purchase
of shares by subscription or exchange, certificates of shares, shares issued in series,
index warrants and allowing the purchase of such debt securities by subscription".
Articles 1 of this Directive shall deem securities: shares and other securities equivalent
to shares, bonds and other negotiable debt capital markets and any other securities
normally dealt in, allowing the purchase of such real property by subscription or
exchange or giving entitlement to a cash payment. European courts have decided,
however, that the proposed definition does not affect the various definitions of
financial instruments held in national legislation for other purposes, especially for tax
purposes. As such, the definition has only indicative value.
The securities are incorporated into Community law securities claims or
personal-patrimonial rights (sometimes referred to as political rights, whereas it some
securities carry a right to vote at general meetings of shareholders and members of the
bondholder or issuer, and, under certain conditions control of the issuer). For securities
traded on regulated markets must be made in advance subject to initial public offerings
and have been registered in advance to share exchange or regulated market.
The first grant approved in Romania to organize and manage the market for
trading derivatives is Scholarship Monetary Financial and Commodities Sibiu.
Derivatives exchanges, including those with the underlying goods are regulated,
approved, monitored and controlled, like all other grants by the National Securities
Commission. Financial market derivatives exchange company managed by SC SCE
S.A. developed continuously, so that in 2004 the market traded within 16 futures and
16 options contracts by type with the underlying futures contracts.
Futures and options investors are addressed both as a hedging tool for the
unfavourable evolution of asset price-support and to obtain profits through speculation
in asset prices available for trading. Derivatives are traded in an electronic platform
that allows remote trading and offers risk assessment of compensation and position of
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the investors in real time. Also have direct access to qualified investors, seeking realtime price developments.
Scholarship Monetary Financial and Commodities Sibiu Romania is the only
stock exchange where futures and options contracts traded with shares listed on the
underlying spot market. Particular interest to these tools has materialized in a volume
of over 3,000,000 contracts registered in the first 10 months of 2006.
This has led to diversification of existing instruments and creating new
opportunities through new products of the exchange, which can be used successfully in
their trading strategies. SC B.M.F.M. SA SIBIU was established as a private legal
person and functions as joint stock company under Law 31/1990 with the object of
"administration of financial markets" - CAEN code 6711. SC BMFM SA SIBIU
market operator is authorized by the National Securities Commission of Romania in
the decision being entered in the register 356/31.01.2006 NSC, Section 11 - Operators
of the market with no. PJR11OPPR/320002. Regulations SC BMFM SA Sibiu and the
SCE are approved by the NSC by Decision no. 357/31.01.2006 and 358/31.01.2006.
Regulatory framework applicable to SC BMFM SA Sibiu and SCE includes Law
31/1990 on commercial companies, Law 297/2004 on capital market regulations and
regulations NSC's own SC BMFM SA Sibiu and SCE. Capital of SC BMFM SA
SIBIU is distributed 3,254,000 USD 16,270 shares of nominal value EUR 200 per
share.
A shareholder may not, directly or through affiliated persons involved or more
than 5% of the total voting rights in the General Assembly of Shareholders.
Specific element is the organization of capital to "exchange cards" (or
membership card) the same system can be met in the United States to the major
derivatives exchanges (Chicago Mercantile Exchange and Chicago Board of Trade).
Currently the share capital of SC BMFM SA SIBIU is divided into 373 cards from the
stock 81 small cards (package of 20 shares) and 293 large cards (package of 50 shares)
that gives the holder of trading as markets developed by SC SCE and free access to
electronic trading platform ELTRANS.
The most common derivative securities in our country now are futures
contracts. A futures contract is an obligation to sell or buy at a future time (called
maturity) a specified quantity of a commodity, a financial asset or currency (called the
underlying) at a price and according to standard specifications set when concluding the
contract (currently).
At maturity there is a reverse of the initial operation (buy or sell), earned or
losing is the difference between the prices of the two operations. Underlying asset may
be: a commodity whose characteristics are standardized (oil, grains, cocoa, etc.), a
currency, a stock ticker, interest rates, etc.. Goods or currency futures can run either
with or without physical delivery of the assets concerned. In our country it is
developing all futures contracts without physical delivery of the asset. By trading the
stock, futures contracts have a course on the market, resulting from supply and
demand.
Specifically, we take the example of the futures contract on the leu / dollar
exchange traded Monetary Financial and Commodities Sibiu - Sibex. The aim of the
ends (traded) contracts is to obtain a gain in future money. Contracting Parties are any
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233
natural or legal persons who have an account at a brokerage firm trading companies
(like companies who trade securities on the Stock Exchange, but different from them).
The market rate of U.S. dollar futures contract today (today) is the estimate
made by those who traded him on the value rate of the NBR the day due date (at the
end of the month, for example). Thus, the futures rate is influenced by the evolution of
official lei / dollar but also the supply and demand for these futures.
Example, an investor's official estimate growth rate (NBR) of the dollar in the
coming weeks and appreciate the price of futures trading in U.S. dollars Sibex is
reduced compared with its expectations. He buys futures contracts today at market rate
if the forecast futures. In were true and the official exchange rate rose, it means that the
futures of the market increased. Now he has two choices: 1. market to sell futures
contracts purchased, the sale being carried out at a rate higher than the purchase. In this
case he wins the difference: (selling rate - the process of buying) x multiplier x number
of contracts.
Multiplier is 1000 for this type of contract, 2. to wait until maturity (end),
when there is compulsory liquidation contracts through a sale. In this case he wins the
difference: (BNR course in late - being bought) x multiplier x number of contracts.
If that forecast does not come true and the falls, then the investor register a loss
caused by the negative difference between the futures purchase and sell (or purchase of
the futures and the current exchange rate at maturity, if the expected until maturity). If
investors expected a decline from the beginning of the course and not an increase, as
we detailed in the above example, it could start with a sale, following that later, when
the rate fell, to perform the reverse operation Purchase, winning difference.
The purpose of these transactions is either getting some hedge gains or
economic agents to cover depreciation of the leu. For the latter case, take the example
of an importer: he enters into a contract to import and pay $ 1000 today at a rate of
3.0000 RON / USD (for example), but loads them arriving over 2 months, when the
course is 3, 4000 GBP / USD (for example), and it records a loss (charging the same
goods less money, in dollars, than he paid). In this case, to cover, at the contracting
import it buy futures contracts, and after 2 months he sells them and register a win in
the futures, gain what diminishes the loss of import.
U.S. dollar futures contract price is called margin and is only a fraction of the value of
the futures contract. Thus, the price of a futures contract by $ 1,000 (worth 1000 $ x
approx. 3.0000 USD / $ = approx. 3000 USD) is only 187.5 USD. Basically it is a
price (not lost) but only a deposit where you can fall any losses. If we achieve a win,
money is conserved.
The validity of a contract (the Stock Exchange in Sibiu) is 3 months and 6
months. For each transaction is paid a brokerage commission agency. Similarly is
running and futures contracts or stock BET. Contracts options. A contract options are a
right (but not the obligation) to buy (CALL type option) or sell (PUT-type option) a
financial asset (a share, a futures contract, etc.) in a future time and at a predetermined
price at present (called the exercise price).
The buyer can decide if their contract options be exercised or not his option to
buy or sale the assets, depending on their interests and forecasts. To the right of option
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buyer pays the seller on completion of the transaction an amount of money called first.
The premium is what is negotiated at exchange and be subject to supply and demand.
Thus, the loss is limited to the first buyer that the seller pays the contract. If his
predictions are not confirmed, the buyer is not obliged to exercise the option, losing
only the first. If the forecast is confirmed, the buyer will exercise the option. In terms
of vendor earnings or premium received from the buyer, the seller has no decision
power on option exercise, he waiting for buyer decision in this regard.
In our country options contracts were introduced for the first time SIBEX,
which is currently the only market in Romania where he traded options. This gives the
buyer the right but not the obligation to buy or sell a futures contract at a
predetermined price, the duration of the contract.
In conclusion, the risk of derivative transactions is very high, because working
on the margin (do not pay full value of the contract, but only a fraction of it, as I
mentioned in previous chapters).
Working on margin is not necessarily a disadvantage for this type of operation,
because gains can be obtained also very large: Suppose an operation by purchasing a
futures contract on the exchange rate EUR / USD. The value of such a contract is USD
1,000, so 1,000 x 3.0000 GBP / USD (for example) = 3000 USD. Working on margin
will not pay full value of the contract, but only an initial margin of EUR 187.5. If
predictions come true and bring a transaction gain of EUR 25, then return operation
will be 25/187, 5 = 13.33%, much higher than 25/3.000 = 0.83%, obtained for that
would have paid full value of the contract. This reasoning is valid, but in reverse. If
you would have lost 25 USD, then the loss would have been 33% of the amount
invested.
For transactions that are intended to obtain some gains speculation, we give
below an example on futures contracts maturing in December 2008, with the
underlying shares of SIF Moldova (SIF2).
The value of such a contract to market is 1000 shares * 0.61 USD = 610 USD.
Working on margin will not pay full value of the contract, with a margin of only 150
USD. An investor decides to sell (to open "short" positions) in 10 contracts DESIF2DEC08 price of 0.61 RON / share. At maturity Quote DESIF2-DEC08 contract was
0.55 lei and liquidity positions were automatically, but the investor with the right to
close positions held and before maturity. The profit earned by it was 600 lei (60 lei /
contract). The yield obtained was 60/150 = 40%, much higher than 60/610 = 9.83%,
obtained in case that would have paid full value of the contract.
Trading in futures contracts can make spectacular gains, provided that these
operations take place following a careful study and rigorous analysis. Note that the
degree of risk is very high - you can lose all money invested in only a few days, there
are cases in which the loss may exceed the amount invested. Trading in options
contracts can limit these risks, however, the liquidity of this type of contract is very
small now. Diversification in the future of this operation (by introducing stock options,
for example) will increase their attractiveness to them.
Interest in options transactions on SCE increased in recent years. An
interesting feature advantages, as it entitles an investor to buy or sell an underlying
asset (futures contract, if SCE) at a pre-determined price at the time of the transaction,
Derivatives on the Capital Market in Romania
235
but without creating an obligation to do so. Thus, an investor who wants to risk too
much, but anticipates an increase in the exchange, will buy CALL options, paying the
price not too high a sum called first. In this way the investor is entitled to maturity
options, to buy the underlying asset at a price set when the transaction, with the growth
of (exerting option, the investor buys the futures contract at a lower price and sells at
market prices, higher , recorded profits).
If the market is evolving not in the sense expected, then the investor does not
exercise the option and loses only the price paid for first, accounting for a much
smaller loss than if they bought directly futures contract and the market would be low.
The situation is similar to an investor who anticipates a fall in the exchange. This type
will buy PUT options, paying them a first seller.
If the market falls, according to predictions, then the investor has the right to
sell futures contract at a price fixed when the deal with the options and buy it, then, to
market, a profit, if the market does not decrease, then the investor does not exercise the
option and loses only the first.
Therefore, things are clear and quite interesting for buyers of options. They
have a limited risk to the premium paid, but a potential big win. How are things for
sellers of options? They rely on a market development contrary to those amend a
buyers options. Therefore, if a buyer of options CALL (for Purchase) rely on market
growth, the seller anticipates a decline same options. If the market drops, the seller
remains the options premium received and the buyer does not exercise option and
things stop there.
But if the market grows, things get complicated for the seller CALL options.
He collected first from the buyer (but, as we have seen, this is not very high). The
buyer will exercise the options held and will begin to accumulate profits so long as the
market grows.
The seller of the same options will start to accumulate losses as long as the
market grows, moreover, the latter has no way to get out of it transaction. The seller of
the CALL options at your disposal is their customer, so that its losses are theoretically
unlimited. PUT an option seller has the same problem if the market falls. In this case,
the buyer exercises the option and the seller accumulates losses as long as the market
falls.
It is very sad scenario for sellers of options, provided that the losses which
they may accumulate are theoretically unlimited (and may exceed, without problems,
the amounts originally invested). The sellers of options have an initial moment of joy
at receiving the first, but if their projections do not come true, they lose control over
transactions and are unable to get out of it than when buyers decide.
These are things that are not being discussed when promoting the benefits of
the options. These benefits exist, but when you do not know all the information related
to their function, the options can be dangerous, especially for beginner investors.
Of course, the risks I have mentioned above can be covered: a seller of options
should CALL buy futures contracts that represent the underlying assets of options, so if
the market grows and seller of options begin to accumulate losses (theoretically
unlimited) of options These losses will be covered by earnings futures, similarly, a
seller of PUT options would be to sell futures contracts that are underlying of the
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options. Unfortunately, these things are little known, especially by investors’
beginners.
Therefore, when an investor discovers with great enthusiasm options, it is
better that they take into account all the risks involved. Otherwise, a seller of options,
the joy of the collection of the first page can turn very quickly into despair when losses
accumulate, without the possibility of being terminated.
REFERENCES:
[1]. Voicu, E.; Pasol, R. - Ghid de investitii personale, Editura Meronia, Bucureşti, 2004
[2]. Stoica, V.; Gruia, A.I. - Pieţe de capital şi produse bursiere, Editura Universitară,
Bucureşti, 2006
[3]. Piperea, G. - Societăţi comerciale, Piaţă de capital, Acquis comunitar, Editura All Beck,
Bucureşti, 2005
[4]. www.cnvmr.ro, pagina Comisiei Naţionale a Valorilor Mobiliare
[5]. www.sibex.ro, pagina Bursei Monetar Financiare si de Marfuri, din Sibiu (BMFMS)
[6]. www.kmarket.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 237-244
237
FREE MOVEMENT WITHIN THE EU - A FUNDAMENTAL
RIGHT
OANA-CARMEN RĂVAŞ ∗
ABSTRACT: Free movement of people is a basic pillar of the single area the
European Union (EU) has been building since its creation. It is acknowledged as a fundamental
right for EU citizens. A right of free movement across the EU was originally envisaged only for
the working population, as a single market could not be achieved while limitations to workforce
mobility remained in existence. The Schengen Convention was the first agreement to abolish
controls on people at the internal borders of the signatories, to harmonise controls at the
external frontiers of the 'Schengen area' and to introduce a common policy on visas and other
accompanying measures like police and judicial cooperation. The Schengen signatories agreed
that each country could only reintroduce controls on their mutual borders in certain wellspecified circumstances. The right of every European citizen to move and reside freely within
the territory of the Member States is enshrined in the Charter of Fundamental Rights of the EU,
adopted in December 2000. The charter also states that these rights 'may' be granted to thirdcountry nationals.
KEY WORDS: movement of people, European citizen, European Union, acquis,
principle of non-discrimination
Free movement of people is a basic pillar of the single area the European
Union (EU) has been building since its creation. It is acknowledged as a fundamental
right for EU citizens. Yet, implementing this principle by abolishing border controls at
internal borders has been more difficult than for those underpinning the free circulation
of capital, goods and services. Further steps are being taken to ensure that free
movement is applied in a coherent and simplified way throughout the EU Member
States, and that checks and controls at the EU's external frontiers are reinforced to a
level that will guarantee the Union's internal peace and security.
The free movement of persons between the Member States of the EU is one of
the basic aims of the Union. What has become true for capital, goods and services has
to be a reality for people too. A right of free movement across the EU was originally
envisaged only for the working population, as a single market could not be achieved
∗
Assist.Prof., University of Petroşani, Romania, oana_dumitrescu13@yahoo.com
238
Răvaş, O.C.
while limitations to workforce mobility remained in existence. Yet, thanks to the rising
social and human dimension of the European area, the right to free movement has since
been extended to include all categories of citizens, to dependants, to students and to
those who are no longer economically active. Since the integration of the Schengen
Acquis into Community law, the notion of "free movement" is used in two senses.
First, in the traditional sense of free movement and secondly in the sense of being able
to cross the internal borders without undergoing checks.
What does the traditional right to free movement for EU citizens entail? The
right to free movement means that every EU citizen is entitled to travel freely around
the Member States of the European Union, and settle anywhere within its territory. No
special formalities are required to enter an EU country. This fundamental right extends
to members of the EU citizen's family, and applies regardless of their situation or the
reason for travel or residence.
Free movement stemming from the abolition of internal border controls.
Although free movement was already enshrined in the EEC Treaty, not all the Member
States went as far as abolishing internal border checks. The effective application of free
movement was given a boost in 1985 when Germany, France and the Benelux
countries (Belgium, the Netherlands and Luxembourg) signed an inter-governmental
agreement on this issue of gradually abolishing internal border checks, in the small
Luxembourg border town of Schengen. The Schengen Agreement was followed in
1990 by the Schengen Convention, which finally came into force in 1995.
The Schengen Convention was the first agreement to abolish controls on
people at the internal borders of the signatories, to harmonise controls at the external
frontiers of the 'Schengen area' and to introduce a common policy on visas and other
accompanying measures like police and judicial cooperation. The Schengen signatories
agreed that each country could only reintroduce controls on their mutual borders in
certain well-specified circumstances. The Schengen Convention, however, did not aim
at regulating the right to long-term residence and work, neither for EU citizens nor for
third-country nationals. Today, the Schengen Convention has been incorporated into
the EU's Treaties. As of March 2001, 13 EU Member States have signed up to
Schengen. They are Belgium, Denmark, Germany, Greece, Spain, France, Italy,
Luxembourg, Netherlands, Austria, Portugal, Finland and Sweden. Ireland and the
United Kingdom - which never signed up to the Schengen Convention - will take part,
in the future, in those aspects of the Schengen acquis that deal with cooperation
between police forces and judicial cooperation, but they will not end border controls
with other Schengen States. Two other non-EU Member States, Norway and Iceland,
apply the Schengen provisions completely on the basis of a specific agreement.
The right of every European citizen to move and reside freely within the
territory of the Member States is enshrined in the Charter of Fundamental Rights of the
EU, adopted in December 2000. The charter also states that these rights 'may' be
granted to third-country nationals.
How does the EU maintain its internal security? The Schengen Convention,
now integrated in the EU framework, includes a detailed series of measures designed to
compensate for a lack of internal border controls by reinforcing security at the Union's
external frontiers. Key among these measures is the requirement that Member States
Free Movement within the EU - A Fundamental Right
239
with an external EU frontier have a responsibility to ensure that proper checks and
effective surveillance are carried out at the EU's external frontiers. Once a person is
inside the Schengen area, he or she is free to move around wherever he or she wants
for a short time period. It is therefore vital that checks and controls at the EU's external
frontiers be rigorous enough to stop illegal immigration, drug smuggling and other
unlawful activities. Schengen also provides for better cooperation and coordination
between police services and judicial authorities as an aid to Member States' internal
security, and in particular to fight effectively against organised crime. This is the
context for the creation of the Schengen information system (SIS). The SIS is a
complex database that enables the law-enforcement, judicial and consular authorities of
EU Member States to exchange data on certain categories of persons and on lost or
stolen goods.
The European Commission shares the right to initiate proposals with Member
States in this area. This means that the Commission is partly responsible for proposing
policies and actions, as well as implementing and executing them.
What accompanying measures have been taken? Beyond recognising
freedom of movement as a fundamental right, the EU has taken several accompanying
measures in order to facilitate its implementation, including: simplified formalities for
EU nationals; harmonised entry conditions for non EU nationals; harmonised visa
policy; improved documents security.
On the security perspective, a new image archiving system called FADO is to
be set up, allowing EU Member States to exchange information on EU official
documents and help detect any papers that may be counterfeit.
European Union citizenship, a wide set of rights and obligations. Every
person holding the nationality of a Member State of the European Union is, as a result,
a citizen of the Union. Citizenship of the Union supplements national citizenship
without replacing it. It is made up of a set of fundamental rights and obligations
enshrined in the EC Treaty among which it is worth underlining the right not to be
discriminated on the basis of the nationality.
An evolving concept. Since the treaty of Maastricht, the concept of European
citizenship is enshrined in the Treaty establishing the European Community (Articles
17- 22 and 255). It has evolved as the European integration moved on as creating an
ever closer Union among the peoples of Europe became the first aim of the European
Union to be mentioned in the EU Treaties completed with the objective of
strengthening the protection of the rights and interests of the nationals of its Member
States through the introduction of a citizenship of the Union.
The Maastricht Treaty, signed in 1992, aimed to strengthen the protection of
the rights and interests of the nationals of its Member States through the introduction of
a citizenship of the Union. The European citizenship confers, notably, on every
European citizen a fundamental and personal right to move and reside freely without
reference to an economic activity. With this Treaty also came additional voting active
and passive rights in European and local elections. It enhanced as well diplomatic and
consular protection by giving the right to EU citizens to ask for the help of any
Member State represented in a third Country if his/her own Member State is not
represented there.
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Răvaş, O.C.
The Treaty of Amsterdam, which entered into force on 1rst May 1999,
extended citizens rights/obligations by introducing a clause allowing EU institutions to
take measures against discrimination on the grounds of sex, racial or ethnic origin,
religion or belief, disability, age or sexual orientation to the Treaty. Amsterdam also
reinforced the free movement of people by integrating the Schengen Convention into
the Treaty. Furthermore, it affirmed the commitment of each Member State to raise the
quality and free access to education at national level to the highest level of knowledge
possible with, in particular, the view to tackling unemployment.
The Treaty of Nice, signed in 2001 facilitated legislating relating to free
movement and residence by introducing qualified majority for the decision-making in
Council.
A definition opening the access to specific rights:
• The legal definition for the European citizenship can be found in Article 17 of the
Treaty establishing the European Community: “Citizenship of the Union is hereby
established. Every person holding the nationality of a Member State shall be a
citizen of the Union . Citizenship of the Union shall complement and not replace
national citizenship.”
• In practice, it means that any person who holds the nationality of an EU Member
State is automatically a European citizen. The question of whether an individual
possesses the nationality of a Member State is settled solely by reference to the
national law of the Member State concerned. Thus it is for each Member State to
lay down the conditions for the acquisition and loss of nationality.
• As for any legal system dealing with rights and liberties, it must be of course well
understood that the EC treaty construction also encompasses all the obligations
related to the rights mentioned.
• A specific set of rights is attached in the treaty to the European citizenship,
namely: the right to move and reside freely within the EU (article 18 of the TEC) –
subject to certain limitations introduced by community law; the right to vote for
and stand as a candidate at municipal and European Parliament elections in
whichever Member State an EU citizen resides (article 19 of the TEC); access to
the diplomatic and consular protection of another Member State outside the EU
(article 20 of the TEC) if his/her Member State is not represented there; the right to
petition the European Parliament and to complain to the European Ombudsman
(article 21 of the TEC).
This list should not be considered as exhaustive. Moreover, those rights an
expression of the right to considered as a national in any EU Member State and
therefore not to be discriminated on the basis of the nationality (Article 12 TEC). The
principle of Non–discrimination should be considered as a cornerstone of the whole
construction. In addition to the rights specifically attached to the citizenship of the
European Union that are explicitly mentioned in the Treaties, there is a whole series of
fundamental rights and obligations which stem from the EU Treaties, the case-law of
the Court of Justice of the European Communities, the Council of Europe’s
Convention on Human Rights and the constitutional traditions of the Member States.
Other rights such as for instance, the right to contact and receive a response from any
EU institution in one of the EU official languages, the right to access European
Free Movement within the EU - A Fundamental Right
241
Parliament, European Commission, and Council documents under certain conditions or
the right of equal access to the Community civil service find their place here.
The treaty gives the European Commission the right to put forward proposals
to strengthen or to add to the rights specifically attached to the EU Citizenship. On this
basis, the Council after consulting the European Parliament may adopt unanimously
provisions that it shall recommend to the Member States for adoption in accordance
with their respective constitutional system (Article 22 TEC).
A regularly monitored application of the concept. Article 22 of Tec requires
the EC Commission to report every three years on the application of the treaty
provisions related to EU Citizenship. The fourth Commission report – ( COM (2004)
695 – was issued on 26 April 2004 and covers the period from May 2001 to April 2004
report.
The Charter of fundamental Rights. Fundamental rights as respected by the EU
have been assembled into a single, simple text called the Charter of Fundamental
Rights of the European Union, which was proclaimed by the European Parliament, the
European Commission, and the EU Council of ministers in Nice in December 2000.
The Charter was then incorporated in the Treaty establishing a Constitution for Europe
signed in October 2004 and under process of ratification.
By now, the Charter commits the European institutions and the Member States
when applying the EU legislation. The Court of First instance, in January 2002,
referred to the Charter as the expression of t he constitutional traditions common to the
Member States mentioned in Article 6 §2 of the TUE. New legislation will simplify
conditions and administrative formalities for applying EU citizens' right to move and
reside freely throughout the European Union. The Directive 2004/38/EC on the right
of citizens of the European Union and their family members to move and reside freely
within the territory of the EU has been adopted by the European Parliament and the
Council on 29 April 2004 (JOL 158 du 30 04 2003). It brings together the complex
body of legislation that existed in this area. It introduces more flexibility by eliminating
the need for EU citizens to obtain a residence card, introducing a permanent right of
residence, defining more broadly the situation of family members and restricting the
scope for the authorities to refuse or terminate residence of non national EU citizens.
Latest developments. The Member States are currently transposing the
Directive 2004/38/EG on the right of citizens of the European Union and their family
members to move and reside freely within the territory of the EU. They have until 30
April 2006, to achieve the complete and correct transposition of the directive. To that
end, the EU Commission has been organising meetings with Member States from June
2005 to January 2006. The EU Commission is preparing the third report on the
implementation of the three Directives on the right of residence of Union citizens and
their family members, of whatever nationality, who are not economically active in the
host Member State, covering the period 2003-2006.
Four major judgments were given by the EU Court of Justice on the
interpretation of directives 93/96, 90/364 et 90/365. (Cases C-456/02; C-200/02; C209/03 and C-157/03). On these occasions, the Court recalled that the right to reside in
the territory of a EU Member State is conferred directly on every citizen of the Union
by article 18(1) EC and that citizenship of the Union is destined to be a fundamental
242
Răvaş, O.C.
status of nationals of EU Member States, enabling those who find themselves in the
same situation to receive the same treatment in law irrespective of their nationality.
The Court also underlined the need to interpret the right of free movement in the light
of fundamental rights with particular regard for the right to protection of family life
and the principle of proportionality.
Historical developments:
• Free movement of persons has existed since the foundation of the European
Community in 1957. It was introduced from an economic point of view, since the
right was linked to a person's status as a salaried worker and it was part of the
broader project of realising a common market with free movement of capital,
goods and services. The right was then extended to self-employed persons and
service providers. Family members were entitled to the same rights. […] Then, this
right has been progressively extended to encompass all categories of citizens.
• In years 90’s, three directives were adopted, which guarantee the rights of
residence to categories of persons other than workers: retired persons, students, and
inactive people.
• In 1992, the Maastricht Treaty introduced the concept of citizenship of the
European Union which confers on every European citizen a fundamental and
personal right to move and reside freely without reference to an economic activity.
The Amsterdam Treaty, which came into force in 1999, further strengthened the
rights linked to European Union citizenship by integrating the Schengen
Convention into the Treaty.
• The European Court of Justice recognised the direct applicability of Article “18”of
the TEC [or 12 ex 6?] , giving thus each EU citizen the right to ask for the respect
of that article , subject to limitations- Arrêt 12 Mai 1998, Martinez Sala, affaire C85/96, rec.I-2691 et Arrêt 24 Novembre 1998, Bickel et Franz, affaire C-274/96,
rec.I-7637.
• The Treaty of Nice which entered into force on 15 February 2003 facilitated the
legislative process by introducing qualified majority voting in the EU decision
making process in the field of free movement and residence.
Free movement and right of residence. The new legal and political
environment entailed by EU citizenship has allowed for a fresh look to be taken at
arrangements for European citizens to exercise their rights, and fulfil their obligations
in this regards through the creation of a single set of rules governing freedom of
movement. European citizens can, mutatis mutandis, move between Member States on
similar terms as nationals of a Member State moving around or changing their place of
residence inside their own country. European citizens have the right to enter, reside and
remain in the territory of any other Member State for a period of up to three months
simply by presenting a valid passport or national identity card: no other formality is
required. If they intend to remain for a period exceeding three months, a residence
permit must be obtained. The conditions for granting a residence permit depend on the
status of the citizen (employed or self-employed person, student, retired or inactive
person).
Any EU citizen can take up an economic activity in another Member State
either as an employed or self-employed person. In this case, he/she will be issued a
Free Movement within the EU - A Fundamental Right
243
residence permit by simply presenting an identity document (passport or ID) and proof
of employment or self-employment. If a citizen wants to reside in another Member
State without exercising any activity or to study, he/she can do so provided he/she can
prove (and in the case of students, declare) that he/she has sufficient financial resources
not to become a burden for the host Member State's social assistance system and that
he/she is covered by a sickness insurance policy. He/she must also prove that he/she
has sufficient financial resources and sickness insurance for each member of his/her
family who is entitled to reside with him/her.
Family members, irrespective of their nationality, have the right to accompany
and establish themselves with a European citizen who is residing in the territory of
another Member State. Family members who can enjoy rights under Community law
include the spouse, minor (under 21) or dependent children, and dependent ascendants,
though in the case of students only the spouse and dependent children enjoy this right.
If the family members are not EU citizens, they may be required to hold an entry visa
by the Member State where they intend accompany the EU citizen. They shall be
granted this visa free of charge and with all facilities by that Member State. More
information about your precise rights when you move to another country can be
obtained at: Dialogue with citizens and business site.
Flanking measures to strengthen the freedom of movement and right of
residence. Over the years, the Commission has initiated a wide range of measures
designed to make the right to free movement a practical reality. For example, laws
relating to the recognition of academic and professional qualifications across the EU
are now in place. The employment web site, EURES, offers job-seekers and employers
EU-wide information and advisory service in order to facilitate labour mobility.
Country guides for people wishing to enter and/or live in another Member State are
also available.
The Directive 2004/38/EC on the right of the EU citizens and their family
members to move and reside freely within the territory of the Member States. Despite
impressive advances, EU citizens could still face problems when they moved to
another Member State. Common difficulties concerned notably the lack of information
about the extent of their rights, lengthy administrative procedures in obtaining
residence documents and the precise definition of the rights of family members. The
Directive adopted by the Parliament and Council on 29 April 2004, on a Commission’s
proposal (COM (2001) 257 in JOC 270 E of 25 09 2001) was meant to overcome these
difficulties.
The main objectives of the Directive are:
• To replace all the previous EC legislation in this field by a single text instead of
Regulation (EEC) n° 1612/68 and the Directives 64/221/EEC, 68/360/EEC,
72/194/EEC, 73/148/EEC, 75/34/EEC, 75/35/EEC, 90/364/EEC, 90/365/EEC et
93/96/EEC.
• To give the rights to move and to reside to EU citizens as such and not anymore to
categories of people identified as workers, students, self-employed and so on.
• To simplify the conditions and administrative formalities associated with the
exercise of the right of free movement and residence in the Member States. For
residence of less than three months, the only requirement is the possession of a
244
•
•
•
Răvaş, O.C.
valid identity document. For residence of more than three months, the need to hold
a residence card for citizens of the Union is abolished and replaced, if provided by
national legislation, by registration in the population register of the place of
residence, validated by a certificate issued immediately on presentation of proof
that the conditions attached to the right of residence are complied with. EU citizens
must be either workers or self-employed persons or else dispose of sufficient
resources not to become a burden on the social assistance system of the host
Member State and a comprehensive sickness insurance. Members of the family
must provide proof of identity and of the family link to an EU citizen.
To introduce the right of permanent residence for EU citizens after five years of
continuous residence. They will no longer be subject to any conditions on the
exercise of their right of residence, with virtually complete equality of treatment
with nationals.
To facilitate the movement of family members irrespective of whether they are EU
nationals or not. The definition of 'family members' covers for the first time
registered partners under the legislation of a Member State, if the legislation of the
host Member State treats registered partners as equivalent to marriage. Other
partners of EU citizens will not have an automatic right to entry and residence in
the host Member State. However, the host Member State will have to "facilitate"
the entry and residence of the partners with whom the EU citizen has a "durable
relationship duly attested", taking into consideration their relationship with the EU
citizen. Family members who are nationals of third countries also enjoy greater
legal protection, for example in the event of death of the EU citizen on whom they
depend, or the dissolution of the marriage under certain circumstances.
To clarify the limitations to the right of residence on grounds of public policy,
public security and public health in order to ensure that citizens of the European
Union enjoy better administrative and legal protection in the context of measures
restricting their right of residence, and to guarantee strong protection against
expulsion for minors and persons who have resided in the host Member State for a
long period of time.
REFERENCES:
[1]. Alexandru, I. - Drept administrativ european, Editura: Universul Juridic, 2008
[2]. Bercea, R. - Drept comunitar. Principii, Editura: Universul Juridic, 2007
[3]. Cotea, F. - Drept comunitar european, Editura: Wolters Kluwer, 2009
[4]. Fuerea, A. - Manualul uniunii europene. Editia a III-a, Editura: Universul Juridic, 2008
[5]. Gyula, F. - Drept institutional comunitar, Editura: Sfera Juridica, 2008
[6]. Groza, A. - Comunitatile europene si cooperarea politica europeana. Emergenta unei
identitati europene, Editura: Universul Juridic, 2008
[7]. Morariu, C.D. - Adaptarea legislatiei romanesti la acquis-ul comunitar. Aspecte speciale
privind acquis-ul relatiilor externe, Editura: Universul Juridic, 2008
[8]. Manolache, O. - Tratat de drept comunitar, Editura CH Beck, 2006
[9]. Renucci, J.F. - Tratat de drept european al drepturilor omului, Editura: Hamangiu, 2009
[10]. *** - Dreptul comunitar si dreptul intern. Aspecte privind legislatia si practica judiciara,
Editura Hamangiu, 2009
Annals of the University of Petroşani, Economics, 9(2), 2009, 245-254
245
CONSIDERATIONS REGARDING THE WAYS TO REDUCE
THE US TRADE DEFICIT
SABIN RIZESCU, CRISTIAN STANCIU,
CRISTI SPULBĂR, RALUCA DRĂCEA *
ABSTRACT: In a recently published (Business Week, November 2, 2008) article, the
distinguished columnist, Michael Mandel, pointed out some interesting issues concerning the
US trade gap and the consequences it has on the entire global economy and economic system.
In this kind of respect, he finds three possible ways for America to reduce this trade deficit and
to relaunch its own economy on (new!)a good track. The three scenarios he finds out as being
really possible for US to narrow its trade gap, actually, are: a) the so-called “business as
usual” scenario that assumes the actual US trade gap will remain pretty much unchanged or
rise slightly; b) the so-called “global restructuring” scenario that assumes the US government
will not assure enough stimulus package or the US dollar will drop further or both; c)the socalled “innovative growth scenario that assumes the US will manage to export more innovative
and knowledge-based goods and services and the US trade gap will go down smoothly without
affecting the global growth. Far from trying to make any kind of polemic with the article’s
author we still have to add that – and this is a point of view being a little bit different from the
author’s – the US trade deficit is the cause as well as the main symptom of the global economic
imbalances.
KEY WORDS: trade gap, scenarios, new technologies-based products
1. INTRODUCTION
In a recently published (Business Week, November 2, 2008) article, the
distinguished columnist, Michael Mandel, pointed out some interesting issues
*
Lecturer, Ph.D., University of Craiova, Romania
Lecturer, Ph.D., University of Craiova, Romania, valeriu.stanciu@gmail.com
Prof., Ph.D., University of Craiova, Romania
Assist.Prof, Ph.D., University of Craiova, Romania
This paper is part of the research project” “A model dedicated to forecast the evolution of the real
economy and financial markets system from Romania using concepts from open systems
thermodynamics”, project CNCSIS, type IDEAS, no. 952/16.01.2009 (project manager: Lecturer Ph.D.
Cristian Valeriu Stanciu).
246
Rizescu, S.; Stanciu, C.; Spulbăr, C.; Drăcea, R.
concerning the US trade gap and the consequences it has on the entire global economy
and economic system. In this kind of respect, he finds three possible ways for America
to reduce this trade deficit and to re-launch its own economy on (new!)a good track.
There is no question that the ongoing situation has become a real burden to US
itself as well as to the rest of the world economy. As we’ve just said, Michael Mandel
identifies three possible ways for US to cut down its trade gap. He also analyzes and
makes some predictions on how and by how much the world economic system could
be affected in case of each and everyone of those three scenarios.
The three scenarios he finds out as being really possible for US to narrow its
trade gap actually are:
• the so-called “business as usual” scenario that assumes the actual US trade gap will
remain pretty much unchanged or rise slightly. In this case US will continue to be
the main market for the world consumption-designed products while the world
itself will continue to lend US the money they need in order to finance this
consumption-based kind of growth.
• the so-called “global restructuring” scenario that assumes the US government will
not assure enough stimulus package or the US dollar will drop further or both. All
that could mean the living standards in both US and the rest of the world will drop
as the cheap stuff made in emerging economies like China will not be sold in US
the way and in the amounts it has done until now and the knowledge-based US
exports will not be accessed by emerging markets the way they’ve done until now.
The world economic growth will be jeopardized.
• the so-called “innovative growth” scenario that assumes the US will manage to
export more innovative and knowledge-based goods and services and the US trade
gap will go down smoothly without affecting the global growth.
Far from trying to make any kind of polemic with the article’s author, we still
have to add that – and this is a point of view being a little bit different from the
author’s – the US trade deficit is the cause as well as the main symptom of the global
economic imbalances.
Elsewhere, we have to add that the US trade gap will not go down following a
single scenario but following some kind of “mix” of those mentioned by the columnist.
US is already trying to make a spectacular come-back as world significant creditor
(lender) even that this country is, still, the world’s main debtor. The last “quantitative
easing” actions taken by FED are, in a very discreet way, designed mainly for that.
More else, a sudden stop in borrowing money from overseas and in importing goods
and services will simply mean to add a further burden on the global access to cash that
is already scarce. A global economic restructuring is already coming. We have to
notice that US imports too much but a significant majority of goods imported have
very small added-value. Maybe US hasn’t generated too high added-value in recent
years but this country is far from being in a position to be dependent on added-value
created overseas. So, the real costs of its big trade gap are not as high as they look like
at a first glance.
We have to add also that the US hasn’t accumulated this huge existing trade
gap only due to its “consumerism” behaviour. Without importing heavily from Japan in
early 90es, for example, the still struggling Japanese banking system would have been
Considerations Regarding the Ways to Reduce the US Trade Deficit
247
a mess. And examples could easily go on. The future of the global economic
development is already designed. It’s called BIOTECHONOLOGIES and
NANOTECHNOLOGIES. And it’s all made in US. The real issue here consists in how
to finance the production on large scale for these new technologies-based products.
This question has nothing but a single answer: outsourcing. But this has to be done
wisely, the way that it will put the world back on track in terms of growth without
jeopardizing the US international trade position.
How is that supposed to be done? Nobody knows at this time. Analogies are
dangerous things in making economic predictions, but we have to analyze the last two
big US recessions (1974 and early 90es) in terms of trade deficit, the evolution of the
US dollar on currency markets and the impact on the global economy. Any analogy
with the Great Depression seems - in our view - to be inappropriate.
2. OVERVIEW
We have to point out that US is a net exporter in terms of services. In times of
recession the US dollar usually depreciates but is a proven issue that a weak US Dollar
doesn’t affect significantly the amount of services exported by US. Those services are
high added-value products and – of course – they address to rich countries. A key issue
here could be the ability of the US economy to create services “dedicated” to less rich
countries and especially to emerging economies. This kind of services should be less
expansive and so, affordable for emerging economies and this does not necessarily
mean they have to lose in terms of added-value. US has to adapt some of its services
production capacities to the purchasing power existing in each country US does make
commerce with. And that does not necessarily mean to cut costs. But it could mean to
accurately assess the existing and potential needs of each existing or potential trade
partner. The emerging economies are usually developing countries that need foreign
investments and especially green field investments.
A wise trade strategy could consist in moving the production of goods a
partner like this does need in the partner’s country and, in order to produce the goods,
the partner will start to import production and distribution related services from US.
Even more, the US could easily import goods produced at lower costs (due to the
cheap labour force) in emerging countries while exporting production and distribution
related services as long as US keeps a trade surplus. But this kind of trade surpluses
have to be small, the way that they will not become burdens for any emerging economy
and that could be done by spreading (diversifying) the green field investments to as
many as possible emerging economies. The ideal “targets” for such kind of
investments are – for example – the Central and Eastern European countries due to
their friendly attitude they have to US. In other words, US could create a development
strategy for these countries very much like the so-called “Marshall Plan” that was
designed for Western Europe in late 40s. We also may add to the picture that US could
as well encourage some of these emerging countries to export further in terms of goods
(in fact, some of these countries could start to accumulate trade surpluses) to US while
US does continue to spread this kind of trade policies to other “targets” like these.
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Rizescu, S.; Stanciu, C.; Spulbăr, C.; Drăcea, R.
The scenario described here up is, basically, a kind of “business as usual”
scenario with some remarks: there will not be a one or two countries US will import
cheap-made goods from (like China today or kike Japan in the 80s); US will benefit of
fair trade policies from its “new” partners because they really are democratic countries
with free-market oriented economies that will not artificially keep their currencies at
low levels in order to promote their exports.
What, exactly, this “new” situation does mean? It could mean that US will
start, still using the “business as usual” scenario, to restructure its international trade
as well as its international debt and the first step in doing this could consist in
diversifying both of them. It could be a win-win kind of strategy for US on one hand
and the emerging economies on the other hand and that because, even the fact that
Eastern European Countries have their currencies tied to Euro (in fact, some of them,
already adopted the Euro) their central banks do continue to buy US treasuries in order
to consolidate their international reserves – in other words to buy US debt. This way
US could diversify its exposure on its own capital account and could start to make
repairs on its current account.
Of course that would (and should!) be only a short term strategy and that
because this strategy is not consistent with itself in the long run due to the fact that,
obviously, for whatever country in this world including these Eastern European
Countries, US is not the only investing and trade partner. In the long run, this action
will, probably reduce the US dependence of China imports and decrease the exposure
on one (and, almost, single!) creditor like China, but the chances to accumulate trade
deficits with these “new” partners are really high indeed. So, based on a “business as
usual” scenario, this “diversifying strategy” must be applied only on short term in
order to become an “investment strategy” and create healthy growth for every partner
while reducing the US trade gap. In other words US will do better off if it will extend
its internal economic dynamism and flexibility to its international economic behaviour.
Maybe the so-called “Asian option” could be it but that’s not all for US in order to
restructure its economy both nationally and internationally.
In order to support our arguments we think as being appropriate the example of
the recession that started in US in the last quarter of 1973 and brought the US GDP
down from US$4,917.0 in 1973 to US$4,879.5 in 1975the US$/DEM exchange rate
was decreasing at some slow pace during 1974 based especially on expectations on
FED rate cuts. When FED effectively started to cut interest rates (December 1974) the
US$/DEM exchange rate started to decrease further and that could be considered today
as being a fundamental reason for the trade surplus US achieved in 1975 (Tab. 1,
source: www.census.gov). But we have to add that in this period of time the Japanese
yen didn’t make any spectacular move versus US$ and, in spite of that, the year 1975
was the very beginning of big increases in US/Japan trade deficit. In this kind of
respect there is appropriate to mention that, during 1974 – 1975 period of time, the
Vietnam war had been already over and (excepting the Cambodia situation), the
Eastern Asia small economies were at their start to become modern emerging
economies under the US “coverage” and US took a good opportunity by trading with
this new and dynamic partners. There was kind of “innovative growth” scenario in
terms of trade for US due to the strong demand for modern technologies and capital
Considerations Regarding the Ways to Reduce the US Trade Deficit
249
goods “made in USA” those Asian emerging countries experienced. US made, at that
time some quite significant investments in this region. In fact, this was a smart move
mainly because the Japanese yen was too weak at that time (so, Japan wasn’t, at that
time, in a position to be a big investor in the aria) and the Dollar had been to retreat
against all region’s currencies. US was smart enough by not becoming a too big
investor in this region, but they did invest while importing cheap manufactured goods
from the region and exporting strong added-value goods and, especially, services to the
region. It wasn’t to last because the Dollar has had been to become again too strong
versus Asian currencies and US had, at this time, to deal with the arising tensions in
Iran and in the entire Mideast – so the US economic attention was refocused (again!)
on defence issues rather on creating high added-value in its civil industries.
Table 1.
We didn’t make any mention regarding the 1971 (the total drop of the Gold
Standard) and the 1973 (the first “oil crisis”) moments. Without making any other
comments we have to mention that, in our opinion, US did manage quite well both
“events”. In the 70s the world economy was less globalized than it is today, China had
been, in fact, no present on the international arena and, as consequence, the
international trade was more responsive to the exchange rates than it is today. In this
kind of respect we find that the US – Germany trade relationship improved quite well
during 1975 due to a stronger Deutsche Mark. But this, also, wasn’t to remain: the
continuous deterioration in the global security made investors to view the US Dollar as
a save heaven and it was to come strong, again. Of course, the world we’re living now
is very different of the 1975’s world, but we do consider that the policies adopted then
by US were wise and did make sense because they were economically correct. That’s
why we assume that measures like these could be taken any time.
We are not taking into consideration any forced “global restructuring” scenario
like increases of tariffs or protectionism of any kind. In fact what we are experiencing
now is some sort of “business as usual” combined with US unilateral “monetary global
restructuring” scenarios. And that’s because of the key role the US Dollar still keeps on
the international trade arena. In fact, both Federal Reserve and US Treasury have been
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realized that the financial crisis the world is still facing is a cheap money crisis. Cheap
money does not create high added-value and does not prize the work. In fact, cheap
money prizes only the risk. The mercantilism that helped US to achieve high rates of
growth in the last 20 years did work only because of the special status of the US Dollar
and resisted only until the US economy did consume even the last trace of added-value
it created in the 80s and early 90s on the civil front (high performance pharmaceuticals,
computing and internet related technologies. After September 2001, while US invested
almost only in defence related industries and research the remaining surpluses in the
capital account had nowhere to go but in assets like houses and real estate and in cheap
China-made goods – most of them dedicated to satisfy this strange “buy a house and
stay at home – your house does work for yourself” kind of culture. But the economic
laws are tough indeed. With poor added-value non-military goods produced on highscale due to migration of the high-skilled workforce from the industrial research,
engineering and high-tech economic branches to the investment banking sector(cheap
money is for risk, not for work) US has lost dramatically in terms of competitiveness
compared with late 80s and early 90s situations. In this kind of economic environment
is no wonder that US have experienced a housing bubble and a ballooning US trade
gap (Tab. 2, source: www.census.gov).
Table 2.
(1) Data presented on a Balance of Payments (BOP) Basis.
Source: U.S. Census Bureau, Foreign Trade Division.
Considerations Regarding the Ways to Reduce the US Trade Deficit
251
But US seems it have learned its lesson. US realized that a weak dollar doesn’t
necessarily mean reducing the trade deficits. Cheap money can buy only cheap things.
The only thing we have to add is that – because the US Dollar current international
status as world’s reserve currency – US Federal Reserve has been afforded to print
tremendous amounts of fiat money, and that’s what created both the housing bubble
and the huge trade gaps. In spring this year we’ve been noticing some smart moves
made by US. First, both FED and US Treasury have realized that US simply could not
(and should not) a new China, hence, as first step, it has, someway-somehow, to invest
overseas while continue to ease tensions on its own credit and capital markets. And it
seems it has found some kind of solution to this problem.
FED have started some significant “quantitative easing” actions designed to
inject some significant amounts of cash on the markets in order to revive the credit
markets and the lending activity. Meanwhile the IMF (in which US is the main
shareholder!) decided to lend money, especially to the Eastern Europe emerging
economies but not only. Great investors like Warren Buffet and George Soros heavily
criticized the FED action but they really meant what they said?! Among other issues
they raised they were saying that, far from resuming the lending activity in the business
sector, this move will only artificially and temporarily revamp the price of assets and
of goods and services – finally conducting to inflation without gains in productivity
(stagflation).
We argue that, at least for the time being, inflation is out question in US. We
have only to remind that both values of PPI (Producer Price Index) and CPI (Consumer
Price Index) were showing in recent months that inflation is well contained. More else,
PPI has known its first Y/Y decline since 1955. Also, we have to add to the picture that
for the month of April 2009 we’ve just seen a monthly decline in the CPI number (0.1%M/M) and only a modest increase in the PPI number (+0.1M/M) while in their
Y/Y dynamics both numbers have shown sharp year/year declines (source:
www.money/cnn.com ):
• April PPI Y/Y:
- 3.6%
• April CPI Y/Y:
- 0.4%
• August PPI Y/Y: - 6.4%
• August CPI Y/Y: - 1.9%
Also, we have to say that the recent monthly job losses in US were huge
indeed and that could mean everything (anything!) but inflation. In the last three
months we’ve seen dramatic declines in the non-farm payrolls number as well as well
as in the jobless rate number (source: www.money/cnn.com ):
• August non-farm payrolls M/M: actual: - 247.000; consensus forecast: - 247.000;
• August jobless rate: actual: 9.4%;consensus forecast: - 300.000;
• April non-farm payrolls M/M: actual: - 663,000; consensus forecast: - 650,000 ;
• April jobless rate: actual: 8.5% in line with expectations;
• March non-farm payrolls M/M: actual: - 651,000; consensus forecast: - 648,000;
• March jobless rate: actual: 8.1%; consensus forecast: 7.9%.
So, assuming that all money released by FED is to have the US economy as
destination, still we don’t see any inflationary pressures to develop at least for the next
6 to 12 months ahead. But, the key issue here is the money resulting from this
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Rizescu, S.; Stanciu, C.; Spulbăr, C.; Drăcea, R.
quantitative easing action taken by FED has not US economy as main destination! The
last G20 meeting (April the 2nd 2009) has given free way for 500 billion dollars at the
IMF disposal in order to help emerging economies.
We did notice that the main contributor - as a sovereign country – to this kind
of “world stimulus package” is, actually, the United States of America (100 billion
dollars)! So, US are due to become the main creditor of the world, but in a very strange
way – and that because US is also the main debtor of the world. So, some third of those
300 billion dollars released by FED by purchasing long term T bonds are actually
designed to finance emerging economies.
3. CONCLUSIONS
At the last G20 meeting, the status of the US Dollar as world’s reserve
currency was subject of serious discussion actually for the first time in the post World
War II era. It seems, in the aftermath, that America has learned its lesson in
recognizing that the “laissez-fair economic policy” and excessive deregulation in the
banking system were mistakes. US wants to puts an end to the “consumerism era” and
to put its economy back on track by regaining in terms of productivity in order
generate a new kind of growth based more on added-value and less on assets. The
ignition of such a process seems to be this main contribution it made to the IMF efforts
in assisting emerging economies. These economies will restart to re-think their own
kind of growth and are suppose to buy more capital goods “made in USA” and, so,
lifting more pressure of its already 6 months sharp narrowing trade deficit.
Growing demand overseas for US made goods and services will stimulate the
entire business sector and the US economy will start to generate some new and fresh
liquidities. We also have to add to the picture that the average American homeowner
will never-ever spend (especially on imported goods) the way he or she has done in the
last decade. The US dollar is due to remain weak, at least for a while, and that will also
be a “plus” for the American international trade position. As the US international trade
will improve, this country will start to pay down its national debt. The US economic
growth engine will never be the same it was in the last four decades. The work will be
re-priced (and re-prized!) as well as capital gains. Last numbers, showing sharp
declining US trade gap this year, seem to confirm this trend (Tab. 3, source:
www.money/cnn.com):
Table 3. US trade deficit
Month
June 2009
May 2009
April 2009
March 2009
February 2009
January 2009
US trade deficit
(Billions of US Dollars)
- 27.00B
- 26.00B
- 28.50B
- 27.50B
- 26.00B
- 36.00B
Considerations Regarding the Ways to Reduce the US Trade Deficit
253
Our guess is that “easy money policy” will reach its end sooner rather than
later and that because the US economy has an enormous potential of growth. In this
kind of respect we have to remind that this economy produced reasonable growth at
140 – 150 dollars/oil barrel and the recent sharp decline in oil prices has created a huge
“productivity reserve” by diminishing energy costs in the entire US business sector.
So, the profit margins will benefit, too.
On the other hand, we have to notice that US is actually the only country being
in a position to lend money to the world (and so, being an important world investor),
directly or via IMF, with no bad effects on its own economy. That could happened
because any other big dollars detainer (big exporters like China, for example, that has
the US dollar as main currency in its reserves and continues to buy US debt) that
eventually has intended or do intend to lend US dollars to the world will reach nothing
but undermine its own economy by putting down the value of the dollar and
diminishing its own reserves. As many analysts already noticed, big exporters like
China have created economic engines for nothing!
Also, we have to add that the US capital markets are the most liquid, the
largest and the deepest in the world. These capital markets assure large doors for good
capital coming to US as well as large doors for insane capital leaving US. In this kind
of respect we have to notice that US Treasury made its moves by using market
instruments while the FED’s quantitative easing measure is, basically, an open market
action. The US economy is an innovation-based, versatile, and very dynamic one. Its
workforce is the most flexible and mobile in the world. By re-thinking the capital
distribution and re-pricing work, the US government will encourage the development
of new products (goods and services) with good outcomes in terms of productivity
gains. As we’ve noticed earlier, the average American consumer’s behaviour has
changed dramatically in recent months and is due to continue this way. As the
Americans will start to leave the consume-on-debt behaviour by dropping down their
credit cards and to save more, the behaviour of the banking system will also change by
switching from finance consumption to finance investment-based activities.
It’s time to remind that US still has the most powerful and prestigious
academic system in the world. Its well-known universities (MIT, Harvard) are still the
places where the world top researches do work and put out their results. It is to expect
that some of those results will soon reach some interests in the economy and will
attract investments in order to create those new products we were talking about.
At the last G20 meeting the American voice was a little bit milder than usually,
but, while the US dollar is contested indeed but nobody sees a valuable replacement for
it, US is to remain the largest and the most powerful economy in the world and, of
course, it will use the power of the dollar as the single world reserve currency.
The last FED action will relieve the world economic tensions and will be a
support for growth to the developing countries (like Romania!). Those countries will
start to consume more than they do now and the IMF will watch closely to their
economic policies, avoiding mistakes made in the past. The world has changed
dramatically in recent months but the economic laws remain, basically, the same.
The economic war will (call it “global restructuring” scenario!) continue in
reaching worldwide dimensions that world has never seen before. The US economy
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will face fierce challenges in fighting with its deficits but exporters like China and –
why not ?! - Germany will face even tougher tasks. These big exporters have built their
economic policies on the assumption that the US consumption market is kind of “black
hole” and is to remain this way forever. They were deadly wrong – Germany output
has already fallen 6% Y/Y and China’s recent slowdown has never been seen in the
last two decades. Oil exporters like Russia and Arabic countries that built their
economic plans and budgets assuming the oil price will remain above 100 US
dollars/barrel will also be in trouble. The US mood to consume-on-debt has change
dramatically. The world economy itself is about to experience dramatic changes. One
thing will remain in place, at least for the foreseeable future: the US Dollar will remain
the world reserve currency.
REFERENCES:
[1]. Fota, C. - International Economics, Universitaria, 2006
[2]. Krugman, P.; Obstfeld, M. - International Economics. Theory and Policy., AddisonWesley, 2008
[3]. Parkin, M. - Economics, Prentice Hall, 2007
Annals of the University of Petroşani, Economics, 9(2), 2009, 255-262
255
ABOUT INCREASING OUR SYSTEM PERFORMANCE IN
ECONOMICAL APPLICATION BY SPEEDING UP THE
SYSTEM BOOT WITH WINDOWS XP
SORIN MIHAIL SAV
∗
ABSTRACT: Do we ever wonder how fast our computer actually is? Of course, it
says that it is a Pentium at 3.0 Ghz on the box in which the system came but the speed of the
CPU is not the only factor in determining how fast our system actually is. The true speed of our
computer is determined by the speed of all of our hardware, such as the speed of data written
and read from the hard drive, the speed of the RAM, and the speed of the front side bus of the
motherboard.
KEY WORDS: Boot, Bios, Post, Windows, Device, Service
1. INTRODUCTION
We’ll analyze the system to determine exactly how fast it is and how we can
make it faster. We need to understand the limitations of our hardware and also to be
able to identify possible bottlenecks in our system, before starting to make our
computer run faster. Windows XP has a lot of great features and visual enhancements
that makes it attractive. However, with all of the new features and attractive effects, the
operating system has a higher system overhead, which means our hardware has to work
even harder. If we do not always have the fastest hardware, this will help us to get the
most out of our current hardware by reducing the heavy workload put on it during the
boot up process.
Every personal computer has a system basic input/output system, or BIOS,
which is what takes control of our computer the moment we turn it on. The screen that
we first see when we turn on our computer is called the power on self-test screen,
better known as the POST screen. If we purchased our computer from one of the major
computer manufacturers, this screen is often hidden by the manufacturer’s logo. To get
rid of this logo from the screen, just press the ESC button on our keyboard; we’ll then
see what is going on in the background. At this stage in the system boot, the BIOS is
probing the hardware to test the system memory and other device connections. Once
∗
Lecturer, Ph.D. Student, University of Petroşani, Romania, savsorinmihail@yahoo.co.uk
256
Sav, S.M.
the POST is completed, the BIOS proceeds to look for a device to boot from. Once it
finds our hard drive, it will begin to load Windows.
The BIOS also acts as a main system component control panel, where low
level settings for all of our hardware devices are made. The device boot order, port
addresses, and feature settings such as plug and play are all found in the BIOS setup
screens. For example, if we want to change the order of the drives that our computer
checks to boot from, then we will want to modify the device boot order. I have to
modify this setting almost every time I install Windows because I want my computer to
boot off of the CD-ROM to launch the Windows XP setup application instead of
booting off of the operating system on my hard drive.
BIOSs on each and every PC may be made by different companies or accessed
in different ways. Nevertheless, the most common way to access the setup screen is to
press F2 or the Delete key when the POST screen is displayed. If our PC doesn’t allow
we to access the setup screen in this way, consult our computer documentation or
contact our computer manufacturer for instructions. While we are making changes in
the BIOS, we have to make sure do not accidentally change any other settings. If we
accidentally change a value of a setting and do not know what to change it back to,
simply exit the BIOS setup screen as the on-screen directions indicate and select Do
NOT Save Changes.
2. CHANGING THE BOOT ORDER OF OUR DRIVES [2]
Most computers are set up so that when we first turn on our computer, it will
check to see if we want to boot from other drives besides our hard drive. It will
automatically check to see if we have a bootable CD in our CD drive. If our computer
has a floppy drive, it will check to see if we have a boot disk in the floppy drive. Then,
once it has checked all possible locations for a boot disk, the system will default to our
hard drive and start booting Windows. What are the benefits of changing the boot order
of our system devices? If we modify the order of the boot devices so that the hard disk
is placed at the top of the list, the system does not have to waste time checking other
devices for boot records. Just by changing the order of the devices, we can save
anywhere from one to several seconds off of our boot time, depending on the speed of
our hardware. What are the consequences of changing the boot order? Changing the
boot order will not hurt our system in any way if we do it correctly. If we remove our
hard drive from the list and save the BIOS settings, we will get a pleasant surprise
when our computer reboots – a statement that the computer cannot find any operating
system. If we happen to get that message, then just reboot by pressing Ctrl+Alt+Delete
and go back into the BIOS settings and make sure that we select our hard drive as a
boot device. Once we have done that, our system will be back to normal.
Another possible issue that we may encounter is simply a matter of
inconvenience. Once we change the boot order of the system devices so that the hard
drive is listed first, we will no longer be able to use system restore CDs or floppy boot
disks. If something has happened to our computer and we need to boot off of those
drives to restore our system or run diagnostics, just go back to the BIOS and lower or
remove the hard disk from the first boot device.
About Increasing Our System Performance in Economical …
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3. USING THE QUICK BOOT FEATURE OF THE BIOS [2]
All systems initialize in more or less the same way. During the power on selftest mentioned earlier, the BIOS checks the hardware devices and counts the system
memory. Out of all of the different types of system memory, the random access
memory, better known as RAM, takes the longest to be counted. Counting the RAM
takes time, and on a machine that has large amounts of RAM, this calculation can take
several seconds. For example, a machine that has 2048MB of RAM may take up to 1011 seconds just to count the memory. On top of the RAM counting, a few other tests
need to be done because our computer wants to make sure that all of the hardware in
our computer is working properly. All of these system tests are not needed every time
we boot, and can be turned off to save time. Most BIOS’s offer a feature called quick
boot. This feature will allow the user to turn off these tests. Other BIOSs only allow us
to turn off the memory check, which will still cut down on a lot of time. Use of the
quick boot feature or the disabling of the memory check will not harm wer system. In
fact, there are even some computer manufacturers that ship their computers with these
settings alread1y optimized for performance. The only downside to disabling the tests
is the rare situation in which our RAM self-destructs; the BIOS will not catch it and we
may receive errors from the operating system or our system could become unstable. If
we notice that our system becomes unstable and crashes frequently or will not even
boot, try going back into the BIOS and re-enable the tests to find out if our system’s
memory is causing the problems.
3.1. Modifying the operating system boot
Other hacking methods are still available that will shave a few more seconds
off the boot time. For example, we can cut timeout values and slim down the system to
get rid of all of the extra features and services that we do not use or need. We have the
following ways to do so:
Lowering OS timeout values. If we have more than one operating system
installed on our computer, we’ll have to deal with the OS Selector that the Microsoft
installer configures during installation of another operating system. By default, the OS
Selector gives us 30 seconds to select an operating system before it reverts to the
default operating system. The only way not to wait 30 seconds is to select the operating
system we want to use right away. If we use one operating system most of the time, we
would definitely save time if we set that operating system as the default and lowered
the timeout value to 1 or 2 seconds. That way, we should not have to select an
operating system every time we turned on our system or wait 30 seconds before doing
so. With Windows XP, both Professional and Home, changing the timeout value is
simple if the operating system that we use primarily is already the default.
3.2. Disabling the system boot screen
So, are we enjoying the fun blue bars moving across our screen when our
system starts up? Not? Are we finding that we can live without the daily reminder that
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Sav, S.M.
we are running Windows XP? If so, then we might want to consider removing the boot
screen. One added advantage to doing so: We shall be getting a boost of performance
in return. Disabling the boot screen might only save a fraction of a second off our boot
time. But keep in mind, every fraction of a second counts. This performance
improvement works on a very simple principle. It takes time for the computer to do
anything. Taking away some work that it has to do, such as loading the boot screen,
will free time that it can spend loading our system files instead. The process for
disabling the system boot screen is similar to the process for modifying the default
operating system in the boot file. If we do not have any other operating systems
installed on our system, then we will have to create our own boot.ini file to place in our
drive root (that is, the c:\ drive). I am going to show how to create a file first, and will
then show how to modify the boot.ini file if we already have one in our drive root or
have multiple operating systems installed.
3.2.1. Creating the boot.ini file [1]
This section will show us, how to create a boot.ini file for our computer if we
have just one operating system installed and we do not already have a boot.ini file in
our drive root. To get started, let’s go over what the boot.ini file looks like.
The boot.ini file that disables the boot screen looks like the following:
[boot loader]
timeout_0
default_multi(0)disk(0)rdisk(0)partition(1)\WINDOWS
[operating systems]multi(0)disk(0)rdisk(0)partition(1)\WINDOWS_
"Microsoft Windows XP Professional" /fastdetect /noguiboot
The above boot.ini file is pretty standard except for the addition of the
/noguiboot to the last line of the file. That is the parameter that tells Windows to start
up without using the graphical user interface boot screen. To get started, open up a
copy of Notepad, found in the Accessories menu of the All Programs entry, in the Start
Menu and follow these steps:
1. On the first line of the file, type in [boot loader].
2. On line 2 of the file, key in timeout_0 so Windows does not show the boot selection
screen at all. We don’t want this anyways because we only have one operating system
installed on our computer.
3. On line 3 of the file, type in default_multi(0)disk(0)rdisk(0)partition(1)\WIN-DOWS
so that Windows knows where to look on our hard drive to start the operating system.
4. On line 4, type in [operating systems].
5. On line 5, type in multi(0)disk(0)rdisk(0)partition(1)\WINDOWS_”Microsoft
Windows XP Professional” /fastdetect /noguiboot to start up Windows with the
/noguiboot parameter to disable the boot screen.
6. Click the File menu bar item and select Save As.
7. Type Boot.ini in the File name box and change the Save as type to All Files.
8. Then, change the Save in directory to our drive root, which is usually Local Disk
(C:).
9. Click the Save button and we are now finished.
About Increasing Our System Performance in Economical …
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We can now close Notepad. The next time we reboot our computer, we will
not see the boot screen.
3.2.2. Modifying an existing boot.ini file
If we have a multi-boot system or already have a boot.ini file, then all we have
to do is open up our boot.ini file in Notepad and follow these steps:
1. Locate the Windows XP line in our boot.ini file that will look similar to
“multi(0)disk(0)rdisk(0)partition(1)\WINDOWS_“Microsoft
Windows
XP
Professional” /fastdetect”.
2. Type /noguiboot at the end of the line one space after /fastdetect.
3. Click File and select Save.
These instructions will remove our boot screen. But should we change our
mind after we made the change, it is very easy to get the boot screen back. Simply
remove the /noguiboot from the boot.ini file. If we are working from the file that we
created or copied from the CD-ROM, just delete it.
4. DISABLING UNNEEDED HARDWARE DEVICES
Every time we turn on our computer, it has to load and initialize all of our
computer hardware. Keep in mind: Our computer has a lot of devices that we do not
always use. These extra devices are loaded and initialized during every boot. When it
does so, our computer’s performance is slowed down. Windows XP is now a lot more
efficient and smarter during the boot-up cycle. In previous versions of Windows, the
system would load one hardware device driver and then load another device driver in a
series. The only problem with loading the hardware this way was that it could slow
down the boot dramatically if one hardware device was taking a long time to initialize.
One well-known culprit of this is the network card which pauses to wait to get
an IP from a DHCP server. Windows XP has a new way of initializing the hardware
devices when the system boots up. Instead of loading the hardware device drivers in
series, it now loads some of them in parallel. This allows the boot to be much faster.
Although the hardware devices are loaded in parallel instead of series, the addition of
more devices that the system has to load drivers for will probably still slow down the
boot. To disable hardware devices, we will want to use the Device Manager.
4.1. What hardware devices should i disable?
Each user uses (or doesn’t use) devices differently, depending on the system
setup. Nonetheless, some classes of devices are more commonly disabled than others.
Knowing which ones will help, we make a decision as to what devices we should
disable. The following classes of devices are frequently disabled:
• Network Adapters: Especially on Notebook computers, there are often more than
one network device. Disabling the network devices that we do not use will
definitely save we some booting time.
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•
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Sav, S.M.
Fire wire: If we have 1394 connections, otherwise known as fire wire, we might
consider disabling them. Unless we are using our fire wire port to connect our
digital video recorder to our computer, or have other external fire wire devices, we
have no need to have this device enabled.
Modems: Do we have a broadband connection? If so, then consider disabling our
modem. If we rarely use it, disable it. If we ever need to use it again, just re-enable
it. - Multimedia devices: Our computer has lots of multimedia devices. Take a look
at the “Sound, video, and game controllers” section in Device Manager. We will
find a lot of device drivers that are loaded during our boot. Some are used by all
users, but others will find a few that they do not use. For example, I do not use my
game port or my MIDI device, so I disabled both of those.
PCMCIA: If we are a laptop user, consider disabling our PCMCIA card controller,
located under “PCMCIA adapters.” The PCMCIA (Personal Computer Memory
Card International Association ) slot is a special expansion slot that is rarely used
today on laptops except for wireless and wired network cards and card reader
attachments for compact flash and other solid state memory cards. Most laptops
now have built-in network adapters and some even have built-in wireless adapters.
If we do not use our PCMCIA adapter, it is yet another device that can be safely
disabled.
5. REMOVING EXTRA FONTS FOR SPEED [4]
Windows XP has over 250 different font variations that it loads for use when
the system boots up. Of these 250 variations, only a handful are used on a regular
basis. Most likely, we really only use the core Windows fonts, such as Tahoma, Times
New Roman, Arial, Verdana, Trebuchet, and MS Sans Serif. All of the other fonts can
be removed form the fonts folder. As we can imagine, loading over 250 fonts is
something that will take the system more time to do. Users who have installed a fonts
CD, which usually has hundreds of fonts, on their systems are increasing the amount of
work their computer has to do during startup. Simply put, loading a lot of fonts will
take more time, because the system has to load and index each font. Thankfully, there
is a very simple answer to this: Just remove the fonts that we do not use from our font
directory. We can go about removing the unneeded fonts from our font directory in a
number of different ways. The best way is to move the unused fonts to a separate
folder on our system so that if we ever want to use one of those extra fonts again, we
just have to copy it back to the fonts folder.
6. DISABLING UNNEEDED SERVICES [1]
A service is a software application that runs continuously in the background
while our computer is on. The Windows operating system has numerous services that
run in the background that provide basic functions to the system. Network
connectivity, visual support, and external device connectivity such as printer services
are all examples of the types of services that the Windows services provide. Each of
the services running in the background take up system resources, such as memory and
About Increasing Our System Performance in Economical …
261
CPU time. Also, during the booting of the operating system, the service has to be
loaded. On most computers, there are nearly 20 services that are loaded upon startup.
Of these 20 services, only a handful are system-critical services. All of the others can
be disabled. In order to disable a service, first we will need to know more about what
the most common services do. We have to notice that before we begin changing our
service setup, set a System Restore Point to easily restore our system to an earlier
configuration. However, be careful when we restore from restore points. Any
applications or files that were created after the system restore point will be deleted
when reverting to an earlier restore point. To get the maximum amount of performance
out of our system, we have the option of disabling all of the services on our computer
that are not critical to the system. This would take away a lot of the nice features and
conveniences of Windows, but we should have a much faster machine. The following
is a list of system-critical services that should not be disabled. Feel free to disable all
other services: Com+ Event System, Cryptographic Services, DCOM Server Process
Launcher, DHCP Client, DNS Client, Event Log, IPSEC Services, Workstation, Shell
Hardware Detection System Event Notification, Protected Storage, Network
Connections, Plug _ Play, Print Spooler, Remote Procedure Call, Secondary Logon,
Security Accounts Manager.
Recommended service setup [ 1]. The bare-bones system service setup is a good
setup for optimal performance. However, don’t we want to have some of the
conveniences of Windows XP? Check out the recommended services to disable shown
in the following list. If we follow these recommendations, we will cut down on our
boot time but we will also have the nice features and conveniences of Windows XP.
Disable the following services: Background Intelligent Transfer Service, Distributed
Link Tracking Client, Error Reporting Service, Fast User Switching Compatibility,
Help and Support, Indexing Service, Messenger, Machine Debug Manager, Network
Location Awareness (NLA), Portable Media Serial Number Service, Remote Registry
(Only included with Windows XP Pro), SSDP Discovery Service, Terminal Services,
Windows Image Acquisition (WIA), Wireless Zero Configuration (If we have a
wireless network card, do not disable this one), Windows Time, WebClient, Task
Scheduler.
7. OPTIMIZING THE LOCATION OF THE BOOT FILES [3]
The speed at which our files are read depends on where the files are located on
our hard drive. Also, when a file is fragmented (which is when one file is scattered all
over the disk), it takes more time to access that file than if all of the pieces of the files
oure side by side. Using tools that are available in Windows and other third-party
utilities, we can defragment and place the Windows boot files on the disk where they
will be accessed faster. Windows XP has a new feature called the Prefetcher, which
determines what files on the hard drive are used during the boot process and where
they should be placed on the disk for optimal speed. Although this is not the only
benefit that the Prefetcher provides, it makes optimizing the location of the boot files
easy.
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Sav, S.M.
Using disk defragmenter [4]. Windows XP includes a boot defragmenter, but it
is a little tricky to get it to run. By default, it is run only in the background and cannot
be started directly by a user. After our computer has been idle for some time, between
5 and 30 minutes, the system will read the Prefetcher’s boot data and start the defrag.
The system defrag is run in the background and is invisible to the user. Eventually, if
we leave our computer on long enough, it will defragment the boot files. Windows is
getting smarter and smarter. However, there is still one problem: There is no possible
way to directly initiate a boot defrag. The only way is to leave our computer on for a
little while without using it at all. If we are impatient and do not want to wait, then I
have a solution for us. As I mentioned earlier, the system will only initiate the boot
defrag when the system is idle. Typing in a command that will start the boot is not
possible. However, we can tell our computer, even when it is not idle, to process the
idle tasks. This will indirectly start the boot defrag. Although because the boot defrag
is most likely not the only idle task waiting to be run, there will be other processes run
as well, which can cause our computer to appear to be doing a lot of hard work as it
completes all tasks. During this time, our computer should not be used for any
intensive activities, such as playing games. If we try to use our computer while the idle
tasks are being processed, we will notice slow performance until the tasks are
completed.
8. SUMMARY
Throughout this paper, we discovered many ways to lower the amount of time
it takes our computer to boot up. First, we saw how to change some of the BIOS
settings that can optimize our computer for maximum boot speed. Then, we discovered
how we can remove our boot screen to shave off some more time. After that, we saw
how we can disable other parts of Windows, such as hardware, fonts, and services, that
we may never use, all of which take up time when our computer starts up. We found
out how we can optimize the placement of the files used when our computer boots up,
using the Prefetcher and other disk defragment tools.
REFERENCES:
[1]. Tanenbaum, A.S.; Woodhull, A.S. - Operating Systems, Design and Implementation, 2nd
Edition, Prentice Hall, 2003
[2]. http://helpdeskgeek.com/how-to/change-boot-order-xp-vista/
[3]. http://www.extremetech.com/0,2845,1785998,00.asp
[4]. http://www.theeldergeek.com/disk_defragmenter_utility.htm
Annals of the University of Petroşani, Economics, 9(2), 2009, 263-274
263
THE IMPORTANCE OF ABC MODELS IN COST
MANAGEMENT
MIROSLAV ŠKODA *
ABSTRACT: The end of the 1980’s marked the beginning of new management era.
Organizations such as CAM-I (Computer Aided Manufacturing-International, later renamed to
Consortium for Advanced Management-International) and the National Association of
Accountants had introduced Activity-based costing - a cost accounting technique which charges
organization’s indirect costs to the activities that cause the costs to be incurred and then
distributes costs of activities to the products that cause the activities to be performed. Activitybased costing as a management tool has proved its relevance and found its proponents among
academics and managers. Introduction of the time aspect into Activity-based costing proved
that it is still attracting attention and undergoing development in order to become more
accurate. The paramount goal of the implementation is to prove the increased effectiveness and
superiority of cost management when using Activity-based costing. It will be achieved by
allocation of overhead costs to products with the intention to determine unit costs. This process
of allocation will increase the reliability of cost information and improve the information base
for product decisions. Moreover, we expect that this approach will more or less alter the profit
margin of individual products. This kind of information is very useful when evaluating pricerelated or keep/drop decisions.
KEY WORDS: ABC model, cost management, cost driver, implementation, overhead
costs, direct costs, indirect costs
1. IMPORTANCE OF MANAGEMENT COST ACCOUNTING
Management accounting is defined as a system that is concerned with the
provision of information to people within the organization to help them make better
decisions and improve the efficiency and the effectiveness of existing operations
(Drury, 2005). Management accounting as one of the subsystems of accounting was
quite underdeveloped throughout the 20th century, but regained its position back in
1980’s when professionals and academics started to criticize its lack of innovation and
relevance of its methods in rapidly changing environment. One of the most important
*
Ph.D., Matej Bel University, Slovakia, miroslav.skoda@umb.sk
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and pioneering title was the Johnson and Kaplan’s book called Relevance Lost: The
Rise and Fall of Management accounting published in 1987.
This underdevelopment can be attributed mainly to the demand for product
cost information for external users and simple and inaccurate methods that were used
for allocation of costs to products (Johnson and Kaplan, 1987). These product costs
designed primarily for financial accounting purposes were then used in day-to-day
decision making. Unlike financial and tax accounting, which serve to keep the
organization in compliance with laws and regulations, an organization’s management
accounting system can actually make or break an otherwise sound business (Hicks,
1992). This statement is supported by the following simple ranking of users of
management information.
It is apparent that managers use the vast majority of cost information for
decision making in day to day business. Shareholders, creditors and tax offices that
belong to external users care most of the time about income that is derived from their
shareholdings, ability to meet financial obligation, tax liabilities and receivables,
respectively.
Table 1. Users of cost information
Use
Revenues and overall inventory valuation,
costs of goods sold used for profit
computation
Compliance with GAAP
Strategic planning
Capital budgeting
Operational planning
Operational budgeting
Process cost control
Product pricing and profitability
Product cost control
Financial analysis
User
External users
External users
Management
Management
Management
Management
Management
Management
Management
Management
Source: Hicks D. (1992): Activity-Based Costing for Small and Mid-sized Businesses: An Implementation
Guide
Apart from the provision of information to managers, management accounting
has also other functions. Namely, provision of relevant information for planning,
control and performance measurement and allocation of costs between costs of goods
sold and inventories for internal and external profit reporting and inventory valuation.
Some authors exempt the allocation function from the definition of management
accounting and define so called cost accounting that deals only with this issue.
Cost accounting is defined as a system that measures and reports information
that relate to the organization acquiring and/or consuming resources. Furthermore, it
provides information for management as well as financial accounting (Horngren, Datar
and Foster, 2003). Cost accounting, from a different point of view, is also concerned
with cost accumulation for inventory valuation to meet the requirements of external
reporting and internal profit measurement, but on the other hand the distinction
The Importance of ABC Models in Cost Management
265
between management and cost accounting is extremely vague (Drury C., 2005). For
purposes of this thesis, we will prefer the aforementioned definition of management
accounting comprising the allocation function.
There is a need to mention different types of costing systems and describe the
basic terminology. There are 3 main costing systems differing in terms of
methodology, accuracy and relevancy for decision making:
1. Direct costing system
2. Traditional absorption costing system
3. Activity-based costing system
Direct costing system is the simplest system in terms of cost assignment
because it allocates only direct costs to cost object. It is obvious that the biggest
disadvantage is that it does not allocate indirect costs (overheads). It is only a partial
system useful for business with small or negligible share of overheads on total costs.
This system would not work for businesses with high share of overheads because the
process of assignment would be arbitrary and lead to faulty and misleading decisions.
Traditional absorption costing system and activity based costing system
allocate indirect costs to cost object. The purpose of cost allocation technique is to find
an indirect measure how to allocate indirect costs to cost object. This can be done using
measures such as allocation base and cost driver. These are measures that establish
some kind of consumption pattern among indirect cost and cost object.
When the allocation base significantly captures the relationship between the
indirect cost and the cost object then the term cause-and-effect allocation is used. In
case that the allocation base is rather a weak measure then arbitrary allocation is the
appropriate expression. An example of arbitrary allocation is the usage of direct labor
costs/hours as an allocation base for allocating indirect costs to cost object. As direct
labor costs/hours do not determine the amount of indirect costs incurred, this would
likely lead to inaccurate allocation of indirect costs.
Direct
costs
Allocation
base
Cost
objects
Indirect
costs
Cost
driver
Source: Drury C. (2005): Management accounting for business decisions
Figure 1. Process of cost allocation and cost tracing
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Škoda, M.
The suitability of traditional absorption costing system may be questionable
and managers may start to feel concerned whether it is the right moment to revise this
kind of costing system. We picked up eight points set by Hicks D. (1992) that can
serve as one out of approaches how to evaluate the costing system and discover the
need for change:
1. Direct labor operations have been replaced with automated equipment since
the costing system was lastly revised. This is a very crucial point because it
reveals a considerable deficiency of the traditional costing system. When direct
labor remains the allocation base for indirect costs it may distort the process of
allocation of indirect costs to cost object because it no longer determines the
relationship between consumption of resources and cost objects.
2. Indirect costs are becoming a much larger percentage of total costs or
overhead rates have been increasing during recent years. Nowadays,
manufacturing companies substitute labor with capital, mainly machinery,
what in turn increases the importance of indirect costs. This proves that direct
labor as a base for allocating indirect costs is irrelevant as it is substantially
less than indirect costs and as it was mentioned in the first point there is no
direct relationship. That’s why there is a need to revise this allocation base by
finding a better cause and effect relationship.
3. All overhead is applied to cost object on the basis of direct labor costs/hours.
4. Only a few overhead application rates or only one plant-wide rate is in use.
When the company fails to recognize that processes in the manufacturing
process consist of different activities that consume different proportions of
indirect costs, it will lead again to distortion of product costs. The main reason
is that one plant-wide rate assumes that all processes are equal and can be
justified only in case that company’s products consume indirect costs in
approximately the same proportions. This kind of assumption is rather
unrealistic and that’s why sufficient number of overhead rates should be used.
5. The organization appears to be competitive on one end of its product line, but
not on the other end. Let’s assume that a company manufactures products A
and B. Product A is a high volume product B is a low volume product. If the
company applied the aforementioned direct labor allocation base for overhead
allocation then product A would be overpriced and costs of product B would
be understated.
6. Operations exist that do not require the same number of operators. Let’s
assume that there are two crews staffed by 2 and 1 worker, respectively, and
that cost of one working hour is the same. After using direct labor allocation
base, product costs would be distorted. This kind of situation could happen in
any organization with heavy machinery that is operated by varying number of
workers.
7. Many operations are set up, started and then run with little or no human
intervention. Operations that are automated and run irrespectively of direct
labor intervention consume the largest part of indirect costs. If the distribution
of indirect costs is based on direct labor allocation base then it will result in
distortion of product costs.
The Importance of ABC Models in Cost Management
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8. Accounting personnel spend a great deal of time doing special studies to
develop answers to fundamental questions. If special studies have to be
conducted to determine the product/product line and customer profitability
then the costing system is not able to provide relevant information for day-today decision making.
2. RISE OF ACTIVITY BASED COSTING
It is important to raise the following question in the beginning: What gave rise
to activity based costing? Figure 2 provides a figurative answer.
Source: own processing
Figure 2. Change in the structure of costs after 1950s
Recall that during the 2nd half of the 20th century overheads gained on
importance because of their mounting share on the product’s total costs. Before this
moment direct labor represented a substantial cost item and it was believed that direct
labor costs and overhead costs were very strongly correlated. Over the years as a
percentage of total costs, direct labor and direct material costs were shrinking due to
technological advancements and the strong correlation between direct labor and
overhead costs became implausible.
In other words, product’s total costs were significantly distorted, if using the
outdated assumption of traditional costing system. Furthermore, business conditions
changed dramatically as companies were no longer producing few products in massive
volumes. Most companies produce and sell large variety of products that consume
different amounts of overheads. This indicates that only little space is left to major
simplifications concerning the determination of product’s total costs.
Moreover, information and communication technology overcame the barriers
of data gathering long ago, thus facilitating the rise of a more sophisticated costing
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system called activity-based costing. It is very important to accentuate that traditional
costing system provides inappropriate data for decision making. Afterwards, when
managers and other employees are provided with reports with accounting data in them,
they use that data regardless of its validity. On the other hand, existing data are not
necessarily bad as much as they are somewhat distorted, incomplete and unprocessed.
Table 2. General ledger and ABC data
Source: Gary C. (2002): Activity based Costing: Optional or Required? : AACE International transactions
The chart of accounts view provides information that is summarized in a
monthly report of single responsibility center (claim processing department). Manager
is not able to estimate the amount of controllable costs as well as has no insight into the
content of work of employees from this point of view. Biggest disadvantage is that
manager sees costs reported as lump sums. Activity-based costing resolves this
problem by focusing on activities, that’s why general ledger account balances are
converted into activity costs. This new, converted ABC cost data can be used in
making product, market or customer-oriented decisions.
Another difference is that activity based costing uses verbs and nouns in the so
called Bill of Activities to denote individual activities. This wording gives certain
flexibility because managers gain new insights into the work of employees and
activities can be favorably impacted, changed, improved or eliminated.
To be further critical about chart of accounts, it represents accounting policy of
the company and it serves more as a command and control tool. Managers are able to
control the overspending of budget target and impose tighter budget restrictions if
needed.
Apparently, activity-based costing is superior to traditional costing system, but
it does not replace the traditional accounting system. It restates the same data and adds
operating relationships to more effectively support decision making. Activity-based
costing is not an accounting system, although it uses past information. Some opponents
may criticize the relevance of past costs. But the opposite is true. The analysis of past
The Importance of ABC Models in Cost Management
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costs and profits reveal inefficiencies and repeatable causes of defects that cause some
activities are unexpectedly costly and why specific products and customers are
profitable while others are unprofitable. These conditions, if repeated, are likely to
cause the same inefficiencies today or in the future. This means that knowledge of past
inefficiencies can be an incentive to corrective actions towards efficiency.
Activity-based costing is an economic model designed to inform management
about economics of its past, current and future operations. This is the reason why ABC
cannot be referred to as accounting model because its utilization is not limited to past
financial information. Budgeted, forecasted or even targeted expenses or quantity data
can be the input for this model. This enables to predict the activity expenses and
activity driver information to obtain estimated spending for future activities and
resources. Used in this way, ABC becomes a powerful tool for budgeting future
expenses. Using forecasted activity expenses, presuming efficient operations, ABC can
be used as a target costing mechanism. Budgeted information can also be helpful in
eliminating inefficient, non-value adding activities from operations. ABC model based
on current and forecasted information can reveal whether patterns of past will persist in
current or future periods.
Today the margin for error is slimmer. Companies cannot make as many
mistakes as in the past and remain competitive at the same time. Price quotations,
capital investment decisions, product mix, technology choices, outsourcing and make
versus buy decision today all require keeping a closer look at. As more competitors
understand better the cause and effect connection that drive costs and are fine tuning
their processes and prices, the resulting price squeeze resulting from intense
competition is making life for businesses much more difficult relative to the past.
Knowing the real product costs, customer related costs and profitability is becoming
vital. With ABC, companies can identify where to remove waste, low value adding
costs and unused capacity plus understand what drives their costs.
3. ABC CROSS
ABC Cross was originally designed to provide image for ABC by capturing
both the process and cost view of the company. This was done as simply as possible
but the simplified ABC Cross does not capture the real value of cost accounting that
emerged after 1980’s (Euske, Vercio, 2007). The classical as well as the enhanced
ABC Cross, which displays better the interaction of process and costing is going to be
presented.
Original ABC Cross, called also CAM-I Cross (developed by Consortium for
Advanced Management – International), was designed for two purposes. The first was
to display the relationship among process and cost. The second was to design a graphic
so that ABC teams could use it when selling the ABC concept to top management.
Owing to the intended simplicity, designers did not include the whole inputtransformation-output process and related resource flows. This means that if the
original model is not used for the intended purposes, it can be a step backwards for the
company. Inappropriate use of the model leads to large variety of cost accounting
methods. Too much variability in measurement of customer and product processes
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drives cost up, drives quality down and results in frustrated users of data (Euske,
Vercio, 2007).
Explanation of the original ABC Cross is that products consume activities and
in turn activities consume resources. Horizontal axis shows why costs are generated.
Vertical axis depicts the flow of resources to products through activities but it can be
misleading. When resources are on the top of this model, it may create an impression
of resources driving products. It is useful to put products on the top of the diagram with
the idea of products driving the need for activities that consume resources. This
provides a more meaningful approach.
Source: Euske K.J., Vercio A. (2007): Enhancing the ABC Cross: Management Accounting Quarterly
Figure 3. Original ABC Cross
Peter Drucker’s statement gives the best explanation for the next modification.
He states that the organization’s purpose is to create and maintain profitable customer.
Majority of revenues originate from customers and therefore they are the most
legitimate profit centers. If the customer satisfaction fails to produce sufficient amount
of revenues, all other goals pertaining to shareholders, employees and wide public will
not probably be achieved. Adding supplier as a crucial element in the process of
delivering the product or service to customer will create a simplified value chain from
customer to supplier.
As was stated previously, customer related decisions are one of the most
important decisions. Strategy and planning decisions (regarding customers) work their
way through to suppliers. These decisions, flowing to supplier, relate to balancing of
capacity and resource demand and supply. Decisions, flowing back to customers, focus
on the supply side of balancing capacity and resource demand and supply. Capacity
related decisions are mostly undertaken in the process of acquiring and delivering the
product or service to the customer. This includes the execution and control of
management processes.
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Moreover, products and services should not be looked at only as tangible
products but also other features important for customer should be taken into
consideration e.g. response, channel time. If the paramount goal of the company is to
respond to customer’s requirements, so called end to end process should be introduced
for further explanation. A process can be identified as end to end process if it starts and
ends with the customer.
End to end processes are of great importance because they include support and
enabling processes (e.g. finance services, human resource services, technology
services, supply chain management and business sustaining) that would otherwise pose
major barrier for product delivery.
The most important contributions of cost measurement systems are providing
relevant cost data to the management and providing that data sorted by driver (unit,
batch, product, customer, idle). Providing cost data by driver requires it to be based on
data used to manage capacity and resource demand and supply. Capacity measurement
includes measurement of resources, activities and end to end processes at idle,
nonproductive and productive level.
ABC hierarchy of activity drivers is very important because it minimizes the
distortion of product costs. Recognizing the impact of costs driven by units of product,
the number and type of batch requirements, the product itself, the customer, and the
organization’s administration is probably one of the most important contributions
Robin Cooper has made to management accounting. Unit level activities are performed
each time a product is manufactured. Cost drivers such as labor hours, machine hours
and quantity of material processed are also used by traditional cost accounting. Batch
level activities such as machine set up, processing a purchase order, production
scheduling are performed each time a batch of products is produced. Traditional
accounting treats them as fixed costs.
Product/customer sustaining activities such as maintaining and updating
product specification and the provided support are enabling the production and sale of
individual products.
Facility sustaining activities that support the facility’s general manufacturing
process and are unlikely to change (general administrative staff, plant management,
property costs) are treated by ABC as irrelevant for decision making and unavoidable
costs and should not be assigned to products.
If the ABC cross does not present the hierarchy of these activities and their
cost drivers, ABC teams will remain focused on the unit level (Euske, Vercio, 2007).
Furthermore, such ABC teams will add unit level activities and drivers to cost
measurement system and the result will not be materially different from traditional unit
based cost measurement system (Euske, Vercio, 2007).
Furthermore, to use the original definition of cost driver as anything that drives
costs is very simplistic (Euske, Vercio, 2007). Three requirements for productivity
management –work, working and worker are better source of cost drivers and
managing them in the appropriate order results in better process improvement (Euske,
Vercio, 2007). The process begins with the identification of products and services sold
to customers. It further continues with process design determined to deliver that
particular product or service at desired quality, cost and time.
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Škoda, M.
If we want to balance the demand for and supply of capacity, we need to
establish a common driver. Time fits this requirement because it ensures
interconnection of staffing and capacity requirements. Companies that have a very
complicated and differentiated manufacturing process, using time is the best way how
to reduce cost subsidies of high volume products and customers to low volume
products and customers. The time that will be demanded for activities will be included
in the work standards. The supply of time to fulfill production requirements will be
available in staffing or capacity data and will include time unavailable for work
(meetings, trainings, idle time).
Source: Euske K.J., Vercio A. (2007): Enhancing the ABC Cross: Management Accounting Quarterly
Figure 4. ABC Cross after several modifications
A model without control is not a model. That’s why comparing actual to
standard figure is very useful. Therefore control systems should be introduced to
monitor monthly volumes and related process time and resources compared to values
computed by ABC. The ABC version of control systems is the ABC spending and
volume variance analysis. Control systems, if constructed correctly, can assist the ABC
teams to do the following: avoid chasing normal month to month variation, identify
variances that require investigation and provide early warning signs that the ABC cost
used in decisions may need an update in the near future (Euske, Vercio, 2007).
The Importance of ABC Models in Cost Management
273
4. CONCLUSION
In conclusion, the paramount goal, to prove the increased effectiveness and
superiority of cost management when using Activity-based costing, is regarded as
accomplished. The application part proved the superiority of activity-based costing
system over traditional absorption costing system. The demonstration of distinctions
among unit costs calculated by the traditional costing system and activity-based costing
system was also accomplished. Moreover, a shift in the profitability of chosen products
was pointed out. This shift showed that the information provided by the traditional
allocation lacked reliability and led to arbitrary product related decisions.
Customer profitability analysis under ABC model shows that not every
customer is a good customer and not all revenue is good revenue. Moreover, it
emphasized the necessity of cautious approach to incurrence of customer-specific
expenses. It also confirms the validity of the statement that customer specific expenses
can have a very negative influence on the sales profitability, if not managed properly.
In addition, the structure of ABC model offered a different vantage point on
the costliness of individual positions and proved that gross salary is not the ultimate
factor to be considered. IT equipment, telecom expenses, position specific assets and
other costs related thereto etc. changed the ranking of the costliness of individual
position.
Finally, there is a need to point out that activity-based costing system is not a
single shot costing system which requires only regular update of cost drivers and
activities when implemented. Changes in the employee’s estimations of the percentage
of work fund dedicated to activities, acquisition/divestiture of equipment together with
changes in incurrence of other overhead costs have to be recorded so that the costing
system is not a step backwards for the company.
Further issue that should be tackled in the foreseeable future is the cost of
unused capacity that the conventional activity-based costing does not take into
consideration. If management of the companies perceives this fact as a barrier
hindering the quality of provided information then activity-based costing should be
regarded as the option that overcomes this deficiency.
REFERENCES:
[1]. Barrett, R. - Why there are no longer valid excuses to avoid ABC, The Journal of
Corporate Accounting & Finance, New York, 2004
[2]. Cokins, G. - Activity based costing: Optional or required?, AACE International
Transactions, New Orleans, 2007
[3]. Drury, C. - Management Accounting for Business Decisions 3 ed., Thomson Learning,
New Hampshire, 2005
[4]. Euske, K.J.; Vercio A. - Enhancing the ABC Cross, Management accounting quarterly,
London, 2007
[5]. Glad, E.; Becker, H. - Activity-Based Costing and Management Rev Sub., Wiley, Ontario,
1996
[6]. Gejdoš, P.; Potkány, M. - The proposal of methodic suppliers evaluation need for quality
management, Improvement of quality regarding processes and materials, Wydawnictwo
Menedzerskie, Warszawa, 2007
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[7]. Hicks, D.T. - Activity-Based Costing for Small and Mid-Sized Businesses: An
Implementation Guide, Wiley, Ontario, 1996
[8]. Hicks, D.T. - Activity-Based Costing: Making It Work for Small and Mid-Sized Companies
2 ed., Wiley, Ontario, 2002
[9]. Charles, H.; George, F. - Cost Accounting: A Managerial Emphasis 13 ed., Prentice Hall
of India, New Heaven, 2007
[10]. Kaplan, R.S. - In defense of activity based cost management, Management accounting,
pg.58, 1992
[11]. Kaplan, R.S.; Anderson R.S. - The innovation of time driven activity based costing,
Wiley, Ontario, 2007
[12]. Stenzel, J.; Stenzel, C. - ABC: All that it can be, Turney, Cost Management, Toronto,
2004
[13]. Šatanová, A.; Potkány, M.; Gejdoš, P. - Models of cost quality management, Quality
2007, Geaforad, Zenica, 2007
[14]. Zimmerman, J.L. - Accounting for Decision Making and Control 6 ed., McGraw Hill,
Ontario, 2006
Annals of the University of Petroşani, Economics, 9(2), 2009, 275-286
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UNDERSTANDING ACCOUNTING PRACTICES ON CARD
BASED BANKING OPERATIONS
ADELA SOCOL *
ABSTRACT: The purpose of this study is to survey the accounting of the on-line
banking cards operations, based on Romanian experience. Our paper belongs to the technical
studies that analyse the concrete way to reflect the cards operations at the level of the banking
societies from Romania. The paper contains a study cases part, which presents the concrete
methods of accounting reflection based on banking cards operations. We try to underline the
importance of a flexible banking accounting system, which should provide the users with the
information needed.
KEY WORDS: cashless payments instruments, accounting banking settlements,
flexible banking accounting system
1. AIM AND RESEARCH METHODOLOGY
We choose the banking cards as the object of the study based our approach on
the importance of the cards in banking field. The cards payments book the attention of
the banking customers and of the various authorities, particular central banks. The
importance of the cards’ utilization in an economy is based on the main characteristic
of the cards as a potential substitute for cash. Cards demand central banks to settle
monetary policies concerning e-money and to establish the general legal framework of
the cards’ payment system and their evidence in banks, inclusive the accounting.
In many countries, payments by card represent the vast majority of crossborder retail transactions and are the most common means of effecting payments over
the Internet. As for the card market in the euro area, ever since early 2008 card systems
in euro were brought into line with SEPA Single Euro Payment Area framework for
such payments, whereas the banks that joined SEPA and participate in national card
schemes are expected to finalize this process by end-2010. Thus, any cardholder will
be able to make payments and withdraw cash in euro across SEPA, in conditions
similar to those on national markets.
*
Assoc.Prof., Ph.D., “1 Decembrie 1918” University of Alba Iulia, Romania,
adelasocol@yahoo.com
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Socol, A.
Since banking accounting must timely yield the necessary information to make
management decisions the preparation of accounting structures should emphasize the
economic and financial contents of information rather than keeping a traditional
approach where the aim is limited to safeguarding assets and registering liabilities. We
underline the need of flexibility in the banking accounting information systems, based
our considerations on the specific features of the banks by comparison with the nonbanking entities.
The study is structured on chapters that present the theoretical background in
the accounting banking cards operations and new trends in the banking accounting.
Also, the paper contains a technical part, which presents the concrete methods of
accounting reflection based on on-line banking cards operation. All these mentioned
structures allow us to draw the conclusions in the final part of the paper.
In order to support the relevance of our scientific research we will describe the
actual stage of knowledge in the area related to the subject proposed, based on concrete
references to publications - quoted magazines, international conferences volumes,
specialized books etc. - accompanied by the reference bibliography specification.
The direct documentation tasked to assure the information and the knowledge
of the related theme were realized at the level of several banks and their accounting
experiences in banking cards operations. The paper interprets the accounting of
banking cards operations and attempts to identify and analyze the challenges of the
banks in bookkeeping of cards operations.
The results based on data for Romanian banks reveal that the accounting of
banks in the domain of the cards operations has been improve in the last years,
according to the development of the on-line operations with cards. This paper provides
specific current information and recommendations regarding the on-line operations
with cards and their accounting, that is of interest to a wide audience for a banks,
customers and analysts.
2. THEORETICAL BACKGROUND
Studies on accounting of banking cards operations are relatively limited; the
specialized papers prefer the descriptive or much too technological approach of
banking cards operations or infrastructures. The research papers describe the banking
accounting in the context of the e-banking accounting systems (Lin et al., 2005),
presented a prototype bank accounting system based on the e-bank framework. The
successful implementation of this system will provide banks/customers an increased
level of comfort allowing transaction processing to be continued in an accurate,
complete and highly controlled environment.
General approaches of the banks’ accounting dwell on the harmonization in the
banking accounting field (Anagnostopoulos and Buckland, 2007), insisted on the
potential behavioural implications of the new economic measurement attributes
initiated by the International Accounting Standard Board (IASB) in their efforts to
reflect more relevant, “true” underlying economic values as opposed to historical. The
study captures perceptions and attitudes as to the future “behavioural” direction of
Understanding Accounting Practices on Card Based Banking Operations
277
banks and provides a balanced argument between the rigours of historical cost
accounting and fair value accounting.
Another general approach in the domain of the banking accounting refers to
relationship between management accounting and organisational strategy, based on the
study case of the recent deregulation of the banking industry (Hong Kong example)
and the expansion of products that have been offered by banks during the last five
years (O’Connor and Cheung, 2007).
Also, without talking in different ways, ignoring the problems of the
accounting of the banking cards operations, the specialized literature in the banking
cards’ domain tends to focus on card frauds and electronic payments. In the ’90 years,
the cashless society has been described as the place where clumsy and expensive-to
handle coins and notes are replaced by efficient an electronic payment initiated by
various types of plastic cards is a tantalizing prospect for the twenty-first century
(Worthington, 1995).
Others authors focuses on factors influencing satisfaction with Automated
Teller Machines (ATMs). Their analysis has shown clear divisions between four
different attitudinal types of ATM consumer (disaffected youth, pro-technology,
technophobic and cost conscious), only one of which (pro-technology) appears fully
satisfied with ATM services. Banks need to use different methods to address the
concerns of the other segments (Davies et al., 1996).
The transformation from traditional, “brick and mortar” banking to electronic
banking (e-banking) has been momentous (Power, 2000; Weitzman, 2000). Similarly,
Chou and Chou (2000) identified five basic services associated with online banking:
view account balances and transaction histories; paying bills; transferring funds
between accounts; requesting credit card advances and ordering checks.
Prepaid cards (sometimes referred to as stored value cards) are considered as
an alternative means of exchange, rapidly supplanting traveller checks, money orders,
and even currency (Linn, 2008). The paper recognizes the potential for money
launderers to exploit prepaid card products.
The technical solution, networks and security have recently been the dominant
themes in the development of payment systems. For example, TARGET is considered
the main instrument in serving the monetary policy needs of the Eurosystem and in
promoting the integration of the euro money market (Driga and Nita, 2008). Matthews
M. analyze the behavior of the banks’ customers to view all their online banking
accounts. It is examining the progress of account aggregation, the means by which
consumers can view all their online banking accounts on the same PC screen
(Matthews, 2006).
A study realized by Lassar explore the relationships between banking
consumer innovativeness, self-efficacy on the Internet, Internet attitudes and online
banking adoption, while controlling for personal characteristics (Lassar et al., 2005).
The study examines the adoption of e-banking and how personal innovation attitudes,
internet-related self-efficacy, type of web use, and demographic characteristics affect
adoption.
Others authors examine reinstated or re-aged credit card accounts are likely to
default again. Their findings have some important implications for lenders, consumers,
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and investors in credit card securities. Lenders managing post default payment
performance of re-aged credit card accounts must anticipate additional defaults and
corresponding losses when gauging the potential success and failure of the program.
Lenders can use the results of mentioned study to encourage account specific re-aging
programs since a large portion of the accounts do cure and in turn, can avoid chargeoff, providing significant savings to the lender. Additionally, the lenders should rely on
public information in managing re-aged accounts as opposed to private information
(Agarwal et al., 2008).
Recent studies used peer group analysis to find anomalous transactions, in the
context of plastic card fraud detection. They have demonstrated there are plastic card
transaction accounts that evolve sufficiently closely to enable fraudulent behaviour to
be detected. Using real world data consisting of high transaction volume accounts, they
showed three months of transaction history was adequate to produce peer groups that
could usefully track a target for at least one further month. They have also shown that
they can screen accounts to determine which are more likely to be amenable to peer
groups analysis (Weston et al., 2008).
In a study made by Whitrow card fraud is considered, however, a notoriously
fast-changing phenomenon, which responds to market conditions as well as to the
measures taken by financial institutions against it. They consider the problem of
identifying whether a credit or debit card account has been compromised by fraud.
That is, we are interested in whether the account has been subject to fraudulent activity.
There are two main levels on which we may approach this question:
transaction level and account level. The most important conclusion to draw from this
work is that the aggregation period has a major impact upon the performance of
classifiers for fraud detection. The lesson for practitioners is that they should pay at
least as much attention and care to selecting appropriate aggregation periods as they do
to selecting the best modelling techniques (and fine tuning their parameters) (Whitrow
et al., 2009).
At the national level, the majority of the references to the accounting of the
banking cards operations belong to some authors, that emphasize the main stroke of the
banking accounting – the banking accounting follows and reflects the money flows
between entities account holders, through payment documents (Cristea, 2007: 88),
(Mureşan et al., 2002: 23), (Zaharciuc, 2000: 128).
The mentioned papers present theoretical descriptions of the accounting of the
banking cards operations and a few case studies on cards operations at the ATMs,
without analyse the accounting of the cards used at EFTPOS or on-line, based on
payment through Internet. In the beginning of the new banking accounting system, in
1998, the fundamental approach in the field (Temeş and Mureşan, 1998) do not make
mention about the accounting of the banking cards operations. The reason of this
behaviour was very simply - the regulations on accounting in banks from that period do
not stipulate any account regarding to the cards operations (Chart of accounts for the
banking societies, Order of Ministry of Public Finance and of NBR no. 1418/344,
1997).
The banking field was not enough developed in such a way as to be required a
distinct method to reflect the cards operations in the banks’ accounting. Subsequent,
Understanding Accounting Practices on Card Based Banking Operations
279
the development the banking activities in Romania implied the establishment of the
distinct accounts to reflect the current account of a banking card. It was configured an
analytical account of the account 2511 “Current accounts” to reflect the operations of
the card holder (Chart of accounts for the credit institutions, Order of Ministry of
Public Finance and of NBR no. 1282/4, 2002).
3. NEW TRENDS IN THE BANKING ACCOUNTING
Accounting did not appear to play any role in the recent bank failures
(example, in the United States during 2008 and the beginning of 2009, which are
possible to be the results of growing probable credit losses and concerns about assets
quality). There are suspicions that reveal the accounting manipulations employed by
banks to engage in speculative activities and hide risks.
Nevertheless accounting remains an artificial construct designed to ensure
some measure of uniformity in financial reporting of the banks and in this way, it
offers confidence for the investors and for all the users of the financial statements. The
accounting of the banks is important and it protects the users of the financial reporting
and supports their future decision regarding the bank.
Fortunately, there are specific rules in banks’ accounting, derived from the
particular statute of the banks in an economy; banks can be recognized as the public
interest entities. Once established the situation of banking cards operations, we
approach the importance that accounting has at the level of Romanian banking
societies.
All the banks and the national banking supervisor - National Bank of Romania
- have an interest in the quality of banking accounting, including the accounting of
banking cards operations. The interest of National Bank of Romania in the
development of an accounting reporting system of quality at the level of the bank
societies is resulting also from the obliged settled to the bank to make starting with the
financial situations on the year 2006, the financial situations according with the
International Financial Reporting Standards IFRS. Those situations were necessary for
the information of different categories of users others then the State institutions (Order
of Ministry of Public Finance no. 907, 2005). This regulation refers to the credit
institutions that are required to apply IFRS, without mentioning about the preparation
of the financial statements compliant with EU Directives.
In 2006, a new Order presents the statutory obligation to prepare financial
statements compliant with the EU Directives for all the companies in addition to the
preparation of the IFRS financial statements (Order of Ministry of Public Finance no.
1121, 2006). In Romania, the banks apply International Financial Reporting Standards
IFRS when making the consolidated annual financial situations. In the relation with the
State institutions the banks prepare the annual financial situations according with the
EU Directives. Banks may prepare the annual financial statements according to IFRS
for their own information needs or for the need of the others users, excepting the State
institutions.
The actual stage of development in the Romanian banking system reveals a
banking system that needs to follow a complex transformation process for the premises
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Socol, A.
of the Basel II Agreement’s and EU Directives’ efficient application to be guaranteed.
The first element that had to be configured was the specific national legislation.
The National Romanian Bank is given an important part in this standardizing
measure. The harmonization of the national legislation in the field with the European
one means transposition into the National Bank of Romania regulations of the
guidelines issued by European System of Central Banks. The last main issued
settlement regarding the accounting in the banking field is Regulation No. 13/2008 of
National Bank of Romania regarding the conformity of the accounting regulations with
EU Directives for the credit institutions, non-bank financial institutions and Deposit
Guarantee Fund in the Banking System – Romania. This is significant settlement in the
banking accounting area, compulsory regulation for banks since the beginning of 2009
year.
So, for the moment, in Romania, the banking societies prepare their financial
statements according to the EU Directives and the IFRS are used only for the
preparation of the consolidated annual financial statements. Also, the banks are free to
adopt the IFRS for their own information needs (or for the others users’ needs,
excepting the financial institution which represent the State). Recent events in the
banking filed suggest that reporting under IFRS will be allowed or required for the
public entities around the globe within the next few years.
The banks’ choose (or compulsory way) to adopt IFRS will generate a
predominate effort to conversion the actual national settlements according to EU
Directives. The national accounting regulations differ in key ways comparatively with
IFRS, including their fundamental premise. The national regulations are more the
rules-based settlements, whereas IFRS are more principles-based. IFRS will affect the
banks’ financial statements and IFRS is expected to have effects at levels of the IT
infrastructure system, including accounting. And, not in the last time, the resource
needs may be significant.
4. THE ACCOUNTING OF THE VIRTUAL CARD DISCOUNTS FOR PAYING
THE SHOPPING ON THE INTERNET
We present the concrete methods of reflection in the accounting field of the
banking cards operations. In this sense, in the bank accounting field, we analyze
concrete methods of reflection based on on-line banking cards operations.
The unprecedented development of the Internet in the last years determined the
emergence of numerous websites of the companies that offer products and services,
organize on-line auctions, provides information pages for money etc. Paying ways for
the goods and services contracted on-line by Romanians are connected directly with
the virtual cards designed for the Internet payments, whereas for now, Romanians have
limited access to other paying systems.
As a rule, in order to effectuate a purchase on the Internet on the basis of a
virtual card, at first a natural or legal person must be in the possession of a classic card
(generally a debit card), which also has associated a virtual card.
The person who wants to buy a virtual card from a banking unit will ask the
bank for a real card, associated to the virtual one. He will pay the bank in cash, on the
Understanding Accounting Practices on Card Based Banking Operations
281
basis of a cashing order, a minimum sum for opening the card account and the fee for
issuing the classic card. The banking unit will register the cash deposit of a minimum
sum in the client’s card account and cashing an issuing fee of the classic card. In a few
days, the client will be the holder of a classic card and, if the client asks it, the banking
unit will also give him the associated virtual card, designed for shopping on the
Internet. An important aspect is that each of the two cards has its own account: the
account of the physical card and the account of the associated virtual card.
When possessing the real card and the afferent PIN, in order to shop from the
Internet, the client will firstly feed the card physical (generally through a transfer from
the current account opened at the bank) on the basis of the order given by the account
manager. The banking unit will register the transfer of the funds from the current
account in the real classic card account. After the real card account is fed, the client
will carry on the feeding of the associated virtual card through any ATM of the bank.
The feeding procedure of the virtual card implies: the introduction of the
physical card into the ATM, pressing its PIN, choosing option to transfer the virtual
card. After these operations are performed in the account of the virtual card, which the
bank initially delivered it with zero balance, there will be a balance transferred by the
client from its classical card. The banking unit will register the sums transfer from the
classic card account into the virtual card account: 2511.C “Current accounts”, analytic
available in the client’s card account = 2511.V “Current accounts”, analytic available
in the virtual card account of the client.
Once the card was fed, the client will then resort to accessing a virtual shop
from a computer connected to the Internet. In order to make an order in the accessed
virtual shop there are more steps to be done. First, with a view to make an on-line
order, the desired product is selected by pushing a button like buy/add into the basket
etc., which is placed in the right side of every product, thus sending the selected
product into a virtual shopping basket. With a view to complete the order, the client
must be previously authorized.
The authorization consists in introducing the e-mail address and the password.
After the authorization, a button will be accessed to complete the order, and then an
order page will be opened, from which will be selected an option to continue. Then
another page will open from which will be selected the way in which the chosen
product should be delivered (courier, post-office etc.), the city where the package will
be received and the paying modality.
Second, the chosen paying modality is the one done with the help of the virtual
card. Now, the client will be connected to the on-line ISP (Internet Suppliers Payment),
to which is connected the web dealer who will ask the necessary information in order
to process the payment: the mark of the respective virtual card (MasterCard, VISA
etc.), the name of the owner: client, expiration date, the code of the virtual basket.
Once this information is obtained, the ISP e-commerce platform will transmit
it to the card agency they are working with, together with the sum to be paid, the
transaction fee (% from the shopping value), and the dealer’s account number. All the
transmitted information are encrypted and sent by the paying processor through a
secured communication line to Interchange Network Processor (INP), afferent to the
virtual card’s mark.
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Socol, A.
The INP communicates with the dealer’s bank on a secured line; in its turn, the
dealer’s bank makes contact with the bank of the buying client, with a view to check if
the necessary funds are available. If the answer is affirmative the transaction is
completed and the dealer’s bank sends a resulted code, like a verification number, to
ISP. ISP forwards this code to the soft that intercedes the shopping (shopping card
software), who process the data and then announces the client that the transaction is
successfully completed. After the payment is done, the buyer presses the “place the
order” button. After this final command, the Internet buying procedure is over, and the
client waits to receive the package containing the product he ordered.
The counter value of the goods and services bought on-line, either in RON
Romanian currency or foreign currency, is discounted from the RON account attached
to the virtual card. For the foreign currency payments, based on the international
discounting day, the bank of the paying client will participate in buying foreign
currency by auction, discounting the operation at the bank’s auction rate of exchange,
from the holder’s card account.
If the payment is effectuated in RON, the banking unit of the buying client will
register the transfer of the sum owed to a banking unit of another bank / to another
banking company in the country. If the owed sum is ought to the dealer who has an
account opened at another banking unit of the same bank: 2511.V “Current accounts”,
analytic available in the virtual card account of the client = 314 “Inter-banking
discounts”, analytic another banking unit of the same bank.
If the owed sum is ought to the dealer who has an account opened at a banking
unit of another bank, the owed sum will be inter-banking registered: 2511.V “Current
accounts”, analytic available in the virtual card account of the client = 1621 “Other
owed sums”, analytic to the on-line dealer’s bank. The banking unit of the payer will
reflect the transfer of the sum owed to the dealer’s bank: 1621 “Other owed sums”,
analytic to the on-line dealer’s bank = 111 “BNR Current account”.
If the payment is done in foreign currency, the banking unit of the paying
client will register the conversion of the foreign currency sum to be paid, after the
auction of the sum from the virtual card account of the client: 2511.V “Current
accounts”, analytic available in the virtual card account of the client = 3722 “The
counter value of the exchange position” (The sum owed to the on-line dealer RON). In
the same time, is registered the obligation towards the bank from abroad: 3721
“Exchanging position” = 1621 “Other owed sums”, analytic to the on-line dealer (The
sum owed to the on-line dealer in foreign currency).
The payment of the obligation towards the foreign bank is registered through
correspondent accounts: 1621 “Other owed sums”, analytic to the on-line dealer =
121“Account correspondent to banks – nostro” (The sum owed to the on-line dealer in
foreign currency). The banking unit of the payer will hold from the current account or
from the reserve account into classic or virtual card account of the payer client the
commission afferent to the payment effectuated by the on-line dealer: 2511/C/V
“Current accounts”, analytic available in the current account of classic / virtual card of
the client = 7085 “Incomes regarding the payment modalities”.
Understanding Accounting Practices on Card Based Banking Operations
283
5. DISCUSSION AND CONCLUSIONS
Our detailed study identifies the specific rules in banks’ Romanian accounting,
including in the book-keeping of the banking cards transactions. For the information to
be reliable, the banking accounting has to base on generally implemented principles,
norms and technical procedures. The role of the National Bank of Romania in this
building is major. Its rules include specifications regarding to accounting practice. The
banking cards operations do not make exception from this approach. We identify the
disparities between the banks in the accounting of the banking cards operations, but
only in the analytical ways to reflect the transactions. The concrete methods of
reflection in the accounting field of the banking cards operations at the ATMs,
EFTPOS and on-line allow us to say that the Romanian banks apply the compulsory
accounting standards, established by National Bank of Romania.
Nowadays, the development of the cashless payment system is obvious and the
cards play a prominent part in the future viability of the cashless society. We presented
the major reference points of the actual status of the national card payment market. We
underlined the challenges regarding the frauds with cards and the means to eliminate or
reduce them (example 3-D Secure Standards). Also, we described the implications for
Romania of the SEPA Card Framework (Single Euro Payments Area). SEPA meant to
ensure an adequate level of efficiency and competition on the national card markets,
capable of fostering important economies of scale and secure high competitiveness to
the European economy.
Considering that the cards are an issue of great interest for banks and
customers alike, we recognize the importance of a flexible banking accounting system,
which should provide the users with the information needed. The real study of the
accounting registrations of the banking cards operations gives us the possibility to
sustain the importance of the analytical banking accounts. To reflect the cards
transactions, banks have to open an analytical accounts on the basis of synthetic
account (as in accordance with the Chart of Accounts for the credit institutions, issued
by the National Bank of Romania).
Every bank shall decide the structure and parameters of analytical accounts
individually, depending on general criteria and own needs. Regarding banks
transparency and disclosure of accounting information banks abide by the national
banking legislation and their settlements regarding the accounting of the banking cards
operations. We remark the current trend and the compulsory requirements for
Romanian banks to comply with the national legislation in the banking field.
The banks may use an analytical account to reflect the banking transactions by
cards - an analytical account for the current account of the banking client, called 2511
“Current accounts”. At the first examination, there is not anything uncommon in this
approach, but if we analyse the substance of the “Current account”, we will discover
that it reflect all clients’ transactions realized by the opened current account payments, cashing, receipts, funds transfers between the accounts etc. So, in the
banking accounting is very difficult to identify the real matter of this account, without
an adequate way to symbolize and evidence the current account of the banking
customer.
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Banks have to settle the proper automatically accounting methods to establish
the analytical account of a current account, their symbols and meanings. Banking
accounting system is almost fully automatized and technology allows identification of
all the transaction and their substance. There is essential just to make an algorithm to
fix the details of a current account in order to reflect the operations with banking cards.
We point out the limits of our research of the accounting of the banking cards
operations (at ATMs, EFTPOS and on-line), studied only conformable to the national
regulations according to the European Union Directives. Also, we suggest future
directions of studying, based on the accounting approach of this theme according to
IFRS International Financial Reporting Standards.
The questions that remain are if IFRS offers an opportunity to use principlebased accounting and what are the differences in comparison with the actual
voluminous accounting banking rules.
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287
WILL EASTERN EUROPEAN COUNTRIES JOIN THE
SINGLE EUROPEAN CURRENCY RAPIDLY?
CRISTIAN STANCIU, SABIN RIZESCU,
CRISTI SPULBĂR, NARCIS MITU *
ABSTRACT: Just before the last G20 meeting in London and following the
quantitative easing measures taken by FED it has broken into the news that, during an internal
discussion, IMF raised a really provocative issue: should the non-Euro EU members join the
Euro very rapidly?! Considering the developing international economic situation we plead that
adopting the Euro at a fast pace will be benefic for both sides of Europe: the Western developed
countries and the Eastern emerging economies.
KEY WORDS: European currency, convergence, budget deficit, current account deficit
1. INTRODUCTION
Just before the last G20 meeting in London and following the quantitative
easing measures taken by FED it has broken into the news that, during an internal
discussion, IMF raised a really provocative issue: should the non-Euro EU members
join the Euro very rapidly?!
At a first glance, the selected G20 members dismissed or at least played down
such kind of action. But the question still remains: will be such an action a bad one or a
good one?!
Considering the developing international economic situation we plead that
adopting the Euro at a fast pace will be benefic for both sides of Europe: the Western
developed countries and the Eastern emerging economies.
*
Lecturer, Ph.D., University of Craiova, Romania, valeriu.stanciu@gmail.com
Lecturer, Ph.D., University of Craiova, Romania
Prof., Ph.D., University of Craiova, Romania
Assist.Prof, Ph.D., University of Craiova, Romania
This paper is part of the research project” “A model dedicated to forecast the evolution of the real
economy and financial markets system from Romania using concepts from open systems
thermodynamics”, project CNCSIS, type IDEAS, no. 952/16.01.2009 (project manager: Lecturer Ph.D.
Cristian Valeriu Stanciu).
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Stanciu, C.; Rizescu, S.; Spulbăr, C.; Mitu, N.
2. OVERVIEW
We have to mention first that no one of those emerging economies is in a
position to join the Euro according on the existing criteria. That means that the rules
for joining the Euro should be relaxed. No need to say that the ECB (that was built on
Bundesbank old tradition) and a good part of the developed Western countries,
especially Germany, strongly rejected such kind of action saying that growing budget
deficits in some of those countries have already damaged the Euro credibility and
adding new struggling economies to the Euro zone will further put pressure on the
European single currency.
In favour of faster introducing the Euro in the Eastern developing countries we
have to remind the great exposure banking systems like those of Sweden or Austria or
Greece have on the Eastern Europe. For example loans made to Baltic states by
Swedish banks left them exposed to almost 30% percent of the Sweden GDP. A sharp
decline in these countries’ currencies would cause huge trouble for the Swedish
economy. The same kind of situation are experiencing banks in Austria that have lend
large amounts of money to Romania as well as banks in Greece have done. A currency
crisis in Romania could lead to a disastrous economic situation in Austria and in
Greece, too. In this kind of respect, we have to add that, as authors rightfully do remark
in when a lender (a bank, for example) is exposed to a certain group of emerging
countries, when a country of this group might encounter financial problems, those
problems could easily spread to the entire group despite the fact that all the other
members of the group are economically healthy and stabile. Such kind of situations
could far easier be managed if those countries already have been using Euro.
In order to avoid such kind of situations adopting the Euro in Romania as well
as in Baltic states seems to be a good solution. And such kind of solution is not
impossible to reach. Emerging economies could very well introduce the Euro without
being “de facto” members of the Eurozone meaning that they will not have sits - yet at the ECB board.
More else, countries like Bulgaria or even Romania that are running significant
current account deficits could benefit nicely by introducing the Euro. In this kind of
respect, on one hand, any currency collapse will be avoided and, on the other hand,
those current account deficits will not worsen by adopting the Euro because their
economies are contracting, jobs are lost and wages are diminishing. In case of
Romania, for example, the latest economic developments put this country on the verge
of a rapidly contracting of its current account deficit as GDP ratio. It could mean a lot
in terms of the competitiveness of this country as well as in terms of enforcing its
financial discipline. More else, this ongoing situation could as well encourage foreign
investments flowing into to Romania both as green field investments and investments
on capital markets.
The legislation in emerging economies is still far from what it has to be.
Adopting Euro sooner rather than later will push these countries to fulfil the so-called
“EU community acquis” and to promote more social justice in their legislation (and we
are talking here especially about Romania and Bulgaria). That will ease the wage
Will Eastern European Countries Join the Single European …
289
pressures with good outcome in terms of productivity, competitiveness and will also
ease pressure on their budget deficits
We have to add to the picture that Europe of our days is a Europe of regional
random financial interconnections. And these interconnections do concern especially
the Eastern European Countries and that mainly due to the huge increase in foreign
ownership of the banking systems of these countries we’ve seen in the last ten year or
so. In this kind of respect we have to notice that the financial and real economic
connections between Western and Eastern Europe are now stronger and more
diversified than ever. And there is no secret that even the IMF has been encouraged
and is still encouraging this ongoing situation. The banking systems of Eastern
European countries are now far from what they were used to be in late 90s. And what
makes them so different from they were, is that foreign ownership are among the
highest in the world (almost 100% in Estonia, almost 90% in Romania and examples
could easily go on). In fact, due to this situation, the banking sectors of those countries
are quite unique. We don’t have to forget that those emerging economies had
practically no financial intermediation when they started their roads as marketorientated economies in early 90s.
With no internal capital resources, the main engine of growth in their GDPs
was, of course, the consumption that leaded to current account deficits in almost all
these countries. The most advanced of them in terms of democracy and economic
transparency (Poland, Hungary, Czech Republic, etc.) received, during the 90s, quite
nice amounts of western investments, so, they enjoyed smooth and sustainable growth.
This situation leaded to a smooth and gradual credit growth in this group of
“advanced” countries. No wonder that, when the credit bubble had exploded in late
90s, these countries were less exposed to economic excesses than their poorer
colleagues coming “from behind” (Bulgaria, Romania, etc.).
These countries were, actually, attracted, in the credit bubble in a very
irresistible way. Europe, as an economic entity has to face a very provocative and,
somehow, dangerous situation: its poorest members that joined the EU in the last wave
have the highest levels of average growth in private sector credit as ratio of GDP
(Estonia 46%, Bulgaria 32.5%, Romania 39.4% versus some of their “advanced”
colleagues like Poland 16.1% or Hungary 12.1%) during the 2004 - 2007 period of
time. We have to consider that almost all this credit was driven to consumption. And
we also have to consider that almost all this credit was financed by Western European
banks directly or thru their fresh-acquired local branches. So, no need to add that the
largest current account deficits are to be found in these countries having the highest
private credit growth/GDP ratios. Most of credit, in these countries, is Eurodenominated. So, the Western European banking system - or at least a significant part
of it - is directly or via its local branches exposed to those current account deficits. We
consider that, introducing Euro sooner rather than later, this exposure could suffer
smooth and well controlled decrease without “currency accidents” and without
affecting too much the investing activities.
More else, the private credit growth in these emerging economies is still high
and has to remain high in order to reach some kind of natural saturation in
consumption as well as to reach a new quality in their investment-related activities:
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Stanciu, C.; Rizescu, S.; Spulbăr, C.; Mitu, N.
diminishing the role of governments in the investment expenditures as part of their
GDPs. In this kind of respect, we have to mention that the dependence of non-deposit
funding has increased significantly almost in all countries of emerging Europe the way
that loan-to-deposit ratios have also increased as well ratio between bank credit-toGDP ratio and bank deposits-to-GDP ratio. And, as we mentioned, before, most of
those credits are Euro-denominated.
This situation requires a truly reliable foreign financing. And this financing
must be a market-related one. In order to reach such an important but sensible goal the
emerging economies branches of Western European banking system must to develop
their own independence and must be helped to develop their own relationships with the
ECB. The fact that not all the Western Europe countries have really big exposures to
the eastern emerging countries could be helpful in order re-think and re-built Europe
financially. In fact, only Austria, Belgium, Sweden and, maybe, Greece are heavily
exposed but their banking sectors are nicely integrated in the Western Europe banking
sector as well in the world banking sector, while countries like Germany, France, Italy
or even Netherlands have exposures that can be actually neglected.
We strongly believe that for each an every western bank heavy exposed to the
Eastern European region the first step could consist in diversifying its portfolio as well
as its assets, in other words restructuring its activity. And this step has to be made by
remaining in the region and not by leaving the region. And a quick adoption of the
Euro in these emerging countries could be helpful in dealing with these challenges.
Of course, skeptics might argue: “… okay, but how about the budget deficits
target established at the Maastricht Treaty?!”. In this kind of respect we have to remind
to those skeptics that even Germany and France brought this target. The Maastricht
treaty was held in 1993 in a reviving world economic environment and we are now in
2007 and (still) experiencing the worst financial and economic crisis after the Great
Depression of the 30s.
Last but not least we have to add that the faster Eastern emerging economies
will introduce the Euro, the greater are the chances for a rapid EU budget convergence.
3. CONCLUSIONS
Maybe some kind of “road map” approved by both ECB and European
Commission for the Eastern European countries having as target quickly joining the
Euro by these counties could be nothing but helpful.
REFERENCES:
[1]. Fota, C. - International Economics, Universitaria, 2006
[2]. Krugman, P., Obstfeld, M. - International Economics. Theory and Policy., AddisonWesley, 2008
[3]. Parkin, M. - Economics, Prentice Hall, 2007
Annals of the University of Petroşani, Economics, 9(2), 2009, 291-300
291
ADJUSTING ECONOMIC OF THE ROMANIA’S GDP
USING ECONOMETRIC MODEL OF THE SYSTEM:
BUDGET EXPENDITURE-GDP
NADIA STOICUŢA, ANA MARIA GIURGIULESCU,
OLIMPIU STOICUŢA *
ABSTRACT: The paper presents a model of economic adjustment Romania’s GDP
using econometric model which has the budgetary input and output as Romania's GDP.
Adjustment shall be based on a square linear regulator by type discrete.
KEY WORDS: Gross domestic product (GDP), method of least squares (MCMMP)
1. INTRODUCTION
The paper addresses a difficult problem that is the optimal management of the
economic system: budgetary expenditure- GDP. Under this system of regulating the
size of command is represented by the budget expenditure to be chosen so that the
gross domestic product to reach a desired level. Block scheme of this adjustment
system is shown in the figure below. To achieve the synthesis of the automat regulator
by the adjusting system presented outlined above, as we need to know mathematical
model of economic system (IS) to be conducted. In this respect, to determine the
mathematical model we use to identify parametric offline using the data entry budget
expenditure (CB) and Romania's GDP.
2. THE PARAMETRICAL IDENTIFICATION OF ECONOMIC SYSTEMS
In these models, the main issues that arise in the identification process based
on experimental results are: the choice of the variables and the structure of model;
designing experiments to ensure the optimal level of the variables excitation and to
highlight all the regimes operating in an exogenous context given.
*
Assist.Prof., Ph.D. Student, University of Petroşani, Romania, andnadia@yahoo.com
Lecturer., Ph.D. Student, University of Petroşani, Romania, amig74@yahoo.com
Assist.Prof., Ph.D. Student, University of Petroşani, Romania, stoicuta_olimpiu@yahoo.com
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Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O.
In these models, the main issues that arise in the identification process based
on experimental results are:
• the choice of the variables and the structure of model;
• designing experiments to ensure the optimal level of the variables excitation
and to highlight all the regimes operating in an exogenous context given;
• the elimination of no stationary disturbances and the errors reducing for the
variables input;
• the choice of the optimum period to acquire information and of the duration of
the experiment;
• choosing of the optimum method to processing the data, taking into account
the characteristics of the model;
• the model validation, aiming at ensuring an adequate maximum of the reality.
In this paper we will use the stochastic models by THETA form, namely that
form which contains general information by the models with multiple inputs and the
single output, models that look like this:
A( q −1 ) y (t ) =
B ( q −1 )
C ( q −1 )
(
)
−
+
u
t
nk
e(t )
F ( q −1 )
D ( q −1 )
(1)
where A, B, C, D, F, D are the polynomial by the variable q and by order na, nb, nc, nd
and nf, and q are the delay operator.
The vectors nb, nf and nk have the dimension equal to the number of the
entries.
To achieve mathematical model of economic system chosen, we use a
parametric identification method based on the method of least squares.
In the method of least squares (MCMMP), the system is considered described
by the next equation with differences
A(q -1 ) y (t ) = B (q -1 )u (t ) + e(t )
(2)
where: u(t) – input size; y (t) – output size; e(t) - white noise of zero average and
dispersion λ2 ; q-1 - the delay operator.
In this cases, the model of the economic system is considered described by an
equation of differences with the same structure with the equation above.
A(q-1 ) y (t ) = B(q-1 )u(t ) + e(t )
(3)
The polynomial A and B have the following form:
AT (q−1) =1+ a1T q−1 + ... + anaT q−na
BT (q−1) = b1T q−1 + ... + bnbT q−nb
(4)
Adjusting Economic of the Romania’s GDP Using Econometric Model …
293
where a i ;i = 1, na and b j ; j = 1, nb are the parameters of the ARX model are to be
determined.
Are doing the following notations:
θ = [ a1...ana
b1...bnb ]
T
ϕ (t ) = [ − y (t − 1)... − y (t − na) u (t − 1)...u (t − nb)]
T
(5)
With these notations, the output size given by the model is:
y (t ) = ϕ −T (t )θ + e(t )
(6)
Given the model structure, should be imposed the condition as the squared
average of the error of the prediction should be minimum. The estimation of the
parameters of ARX model based on an input n data and output, is as follows:
)
θ = arg min V (θ )
(7)
θ
V (θ ) = ∑ ⎡⎣ y (t ) − ϕ −T (t )θ ⎤⎦
n
where
2
(8)
t =1
From the above condition results:
⎛N
⎞
θ = ⎜ ∑ ϕ (t )ϕ T (t ) ⎟
⎝ t =1
⎠
)
•
•
−1
∑ ϕ (t ) y (t )
N
(9)
t =1
θ = [ a1T ......anaT , b1T ......bnbT ] -the model parameter
If introduce the following notation:
T
ρ(t ) = [ − y (t − 1)...... − y (t − na) u (t − 1)......u (t − nb)]
the vector
which
contain the history of the process (past inputs and outputs), the above equation
becomes
T
y(t ) = ϕT (t )θ + e(t )
(10)
The model will be described by an equation of the form
ym(t) =ϕT (t)θ+e(t)
(11)
Estimating model parameters ( θ ) involves first determining the degrees na and
nB, and the vector θ on the basis of experimental data entry.
B
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Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O.
In fact, the essence of the method is that the model is deterministic
ym (t ) = ϕ T (t )θ
(12)
situation that θ is calculated imposing following condition:
)
θ = arg min
)
θ
1
N
∑ ( y (t ) − ym (t ) )
N
2
t =1
= arg min
θ
1
N
∑ ( y (t ) − ϕ T (t )θ )
N
t =1
2
(13)
)
The explicit expression of the θ is obtained from the condition for cancellation
of gradient criterion function:
( )
∂V
Vθ θˆ = 0 ,
∂θ
writen or otherwise
θ=θˆ
= −2
(
T
1 N
ϕ ( t ) y ( t ) − ϕ ( t ) θˆ
∑
N t =1
∑ ϕ ( t ) y ( t ) = θˆ ∑ ϕ ( t ) ϕ ( t )
N
N
t =1
t =1
T
)
2
=0
(14)
(15)
Within this system can achieve very simple solution:
T
⎡N
⎤
θˆ = ⎢∑φ ( t )φ ( t ) ⎥
⎣ t =1
⎦
Noting
∑φ ( t ) y ( t ) .
−1 N
t =1
Y = ⎡⎣ y (1 )K y ( N ) ⎤⎦ , Φ = ⎡⎣φ (1)K φ ( N ) ⎤⎦ ,
T
the are obtained
T
Φ T Φ = ∑ ϕ (t )ϕ T ( t )
(16)
(17)
N
t =1
and
⎡ y (1) ⎤
⎢
⎥ N
Φ Y = ⎡⎣φ (1)K φ ( N ) ⎤⎦ ⎢ M ⎥ = ∑φ ( t ) y ( t )
⎢⎣ y ( N ) ⎥⎦ t =1
T
Of the above:
Y = Φθ + e .
With these notation estimator can be written as:
(18)
(19)
(20)
Adjusting Economic of the Romania’s GDP Using Econometric Model …
θ = ⎡⎣Φ T Φ ⎤⎦ Φ T Y
)
−1
295
(21)
The estimator given by the relation above represents the least squares
estimator, which has been obtained based on the entry data u(1),…,u(N) and of the
output data y (1),…, y (N).
2. ECONOMETRIC MODELING OF THE SYSTEM: BUDGET
EXPENDITURE – GDP
To achieve this model, we use data on budgetary and Romania's GDP, data
taken from National Statistics Institute for a period of 15 years, between 1991-2005.
These data are presented in the table below:
Table 1. Romania’s budget expenditures and GDP
1991
Budget expenditures
[bil. lei]
0,05379
1992
0,1627
0,6
1993
0,41288
2
1994
1,09303
4,97
1995
1,5858
7,21
1996
2,3732
10,9
1997
5,28966
25,2
1998
7,76166
33,8
1999
10,68867
54,5
2000
14,9168
80,3
2001
18,4012
116,7
2002
22,6824
151,4
2003
28,1451
189,1
2004
34,0735
238,7
2005
38,7824
287,2
Years
GDP [bil. lei]
0,22
For a better understanding of the above, we represent the variation in time of
budget expenditure and the variation in time of Romania’s GDP.
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Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O.
Figure 1. Variation in time of budget expenditure
Figure 2. Variation in time of Romania’s GDP
These data, presented above will be processed on the following Matlab
program:
Adjusting Economic of the Romania’s GDP Using Econometric Model …
297
t=data1(:,1);
u=data1(:,2);
y=data1(:,3);
na=2;
nb=2;
nk=1;
ORDERS=[na nb nk];
z=[y,u];
m =arx(z,ORDERS);
present(m);
e1=0.01*rand(length(y),1);
sys=ss(m);
Ad=sys.a;
Bd=sys.b;
Cd=sys.c;
Dd=sys.d;
y1=idsim([u,e1],m);
plot(t,y,'r',t,y1,'k');grid
In the program outlined above was noted with data1 the table imported from
Microsoft Office Excel in Workspace in Matlab.
After running this program can be obtain two types of models:
A. The ARX model
AT (q -1 ) y (t ) = BT (q -1 )u (t ) + e(t )
where
(22)
AT (q −1 ) = 1 − 0,103 ( ±0,3512 ) q −1 − 0,1549 ( ±0, 2772 ) q −2
BT (q −1 ) = 4,504 ( ±1,352 ) q −1 + 2,917 ( ±2,351) q −2
B. The canonical equations of state model
⎧ x(k + 1) = F ⋅ x( k ) + H ⋅ u ( k )
⎨
⎩ y ( k ) = C ⋅ x( k ) + D ⋅ u (k )
where
(23)
⎡ 0,103 1 ⎤
⎡ 4,504 0,3367 ⎤
F =⎢
;H = ⎢
⎥
⎥ ; C = [1 0] ; D = [ 0 3, 268].
⎣ 0,1549 0 ⎦
⎣ 2,917 0,5061⎦
New models were created using as input simulated variation in time of budget
expenditure. Result of the simulation was superimposed over the real result, so what
follows we present graphs obtained from the simulation model ARX.
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Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O.
Figure 3. Variation in time of Romania's GDP real / simulated
3. LINEAR QUADRATIC REGULATOR (LQR) DESING USING THE
KALMAN-LETOV METHOD
Mathematical model of the economic system used in the LQR regulator design
is the model based on the canonical equations of state (1.22). Question is therefore to
determine a driving circuit closed after the state vector of the form u (k ) = f [ x(k ), k ]
which to minimize the performance index
J = S ( x( N ), N ) +
∑ M ( x(k ), u (k ), k )
N −1
k =0
(1.24)
on lot command accepted.
In (24), the relation of the S and M are:
S ( x ( N ), N ) = 2 ⋅ x T ( N ) ⋅ S ⋅ x ( N )
M ( x(k ), u (k ), k ) = xT (k ) ⋅ Q ⋅ x(k ) + uT (k ) ⋅ R ⋅ u (k )
(1.25)
(1.26)
where S is a constant; Q and R are symmetric positive semi defined matrices,
respectively positive defined.
From the above notes that the regulator LQR design we solved a problem of
variational type optimization Boltza with semi-infinite range, with performance index
Adjusting Economic of the Romania’s GDP Using Econometric Model …
299
(24), subject to restrictions (23). The initial condition are x(0) = x0 , and the final
condition is free, with restriction by type Mayer.
In this condition, the hamiltonian of the problem are:
Ha(k ) = xT (k ) ⋅ Q(k ) ⋅ x(k ) + u T (k ) ⋅ R ⋅ u (k ) + λT (k + 1) ⋅ ( F ⋅ x(k ) + H ⋅ u (k ))
(27)
Following the application of extreme conditions, the optimum is:
u (k ) = − K c (k ) ⋅ x(k )
where: K c (k ) = ( R + H T ⋅ Pc ( k + 1) ⋅ H ) −1 ⋅ H T ⋅ Pc (k + 1) ⋅ F
Pc (k ) = F T ⋅ Pc ( k + 1) ⋅ ( I + H ⋅ R −1 ⋅ H T ⋅ Pc (k + 1)) −1 ⋅ F + Q; P ( N ) = S ; P( N ) = S .
The matrix command for example considered is very easy to obtain by using
the following Matlab program:
t=data1(:,1);u=data1(:,2);y=data1(:,3);
na=3;nb=3;nk=1;
ORDERS=[na nb nk];
z=[y,u];
m =arx(z,ORDERS);
present(m);
e1=0.01*rand(length(y),1);
sys=ss(m);
A=sys.a;
B=sys.b;
C=sys.c;
D=sys.d;
y1=idsim([u,e1],m);
Q=eye(na);
R=eye(2);
[K,S,E]=dlqr(A,B,Q,R)
x0=zeros(na,1);
[ya1,t,x]=lsim(sys,[u,e1],t,x0);
uc=-K*x';
plot(t,y,'r',t,ya1,'k');grid
After running this program to obtain the following matrix command:
⎡ − 0, 0074
K =⎢
⎣ 0, 0807
0, 0847
− 0, 2587
0, 0482 ⎤
0, 4262 ⎥⎦
In these circumstances, the command optimum expenditure is completely
defined.
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Stoicuţa, N.; Giurgiulescu, A.M.; Stoicuţa, O.
4. CONCLUSIONS
Control system of the economical model presented in this paper can be used
successfully in practice, based on his could take optimal decisions on budget
expenditure, so that Romania’s GDP to reach an imposed value.
REFERENCES:
[1]. Ghinea, M.; Fireţeanu, V. - Matlab. Calcul numeric. Grafică. Aplicaţii, Editura Teora,
Bucureşti, 1997
[2]. Greene, W.H. - Econometric Analysis, 5th edition, Prentice Hall Inc, 2000
[3]. Stoicuţa, N. - Econometric modeling of the energy system of the European Union,
International Scientific Conference XXIII. microCAD, 2009
[4]. Tertisco, M.; Stoica, P. - Identificarea si estimarea parametrilor sistemelor, Editura
Academiei, Bucuresti, 1980
[5]. Tertisco, M.; Stoica, P. - Identification aided by computer system, Publishing Tehnical,
1987
[6]. http://epp.eurostat.ec.europa.eu
Annals of the University of Petroşani, Economics, 9(2), 2009, 301-306
301
THE ELECTRONIC COMMERCE IN THE
GLOBALISATION ERA
DRAGOŞ STUPARU, TOMIŢĂ VASILE *
ABSTRACT: Globalisation, the unavoidable process which the world entered, is
affecting everyone of us in different ways. Globalization means growing permeability of all the
boundaries such as time and space, national and state borders, borders of economy, branches
and organizations and less tangible boundaries such as cultural standards and their
assumptions. The advent of Internet has also a large effect on the acceleration of globalisation
and the commerce in special. Electronic commerce (e-commerce) refers to forms of
transactions which are based on electronic data processing, among other things text, sound and
picture, with the participation of organizations and individuals, on the Internet. Goods sold
through the internet are: travel, clothes, groceries, consumer electronics and the pay of the
invoices This paper present some aspects of the e-commerce process in Europe and Romania in
2006-2011 periods.
KEY WORDS: globalisation, computer network, Internet, e-business, e-commerce
1. THE E-COMMERCE AND THE GLOBAL ECONOMIC INTEGRATION
Globalisation describes an ongoing process by which regional economies,
societies and cultures have become integrated through globe-spanning network of
exchange. The term is sometimes used to refer specifically to economic globalization:
the integration of national economies into the international economy through trade,
foreign direct investment, capital flows, migration, and the spread of technology.
However, globalization is usually recognized as being driven by a combination of
economic, technological, socio-cultural, political and biological factors. The term can
also refer to the transnational dissemination of ideas, languages, or popular culture.
Globalisation has spread in a huge way since the end of the Second World War and
will continue to do so as technology and communication improve between nations.
*
Lecturer, Ph.D., University of Craiova, Romania, d_stuparu@yahoo.com
Assoc.Prof., Ph.D., University of Craiova, Romania, vasiletomita@yahoo.com
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Stuparu, D.; Vasile, T.
The emergence of a global marketplace is a fairly recent phenomenon that is
having huge effects on both developed and developing nations. There are many people
and organizations that are all for this economic integration and also those who stand
defiantly against it. Technology is playing a big part in this global dialogue by altering
the scope of these economic transactions.
Global economic integration generally speeds up when trade restrictions have
been lifted between nations, allowing a freedom of trading opportunity that may not
have been previously there. Those on the pro side of the globalisation divide argue that
this can increase economic prosperity in all countries and leads to more opportunity
among developing nations.
Because opportunity costs can be assessed in any terms, technology differences
between countries must be considered when analyzing these transactions. For example,
a person who is doing a calculation on a pen and paper can only perform one at time.
Whereas a person using a computer can perform multiple calculations in the same time
frame and therefore will have more opportunity to do other things when they are
finished, the person with the pen and paper is at a disadvantage as they will be busy for
some time and thus foregoing the opportunity to do other potentially profitable things.
The true cost of any action involves not just the economic cost but also
involves the opportunity that is lost in performing the transaction. Technology
differentials are the biggest factor involved in the manipulation of global economic
transactions. These differences must be taken into consideration when analyzing the
potential advantage that one nation may have over another.
Electronic commerce (e-commerce) usually refers to forms of transactions
which are based on electronic data processing, among other things text, sound and
picture, with the participation of organizations and individuals. It is a process of mutual
sharing of information with the use of different, available information technologies among organizations and individuals which exchange goods and services. Electronic
commerce means also the influence exerted by electronic information exchange on
companies and processes connected with business. The idea is widely understood and
covers definitions of e-business and electronic commerce. Some writers assume that ebusiness is a wider term and is defined as “safe, integrated and flexible approach to
delivering different business values through the combination of systems and processes
leading to appropriate business operations (transactions) with the use of Internet
technology” [1].
E-commerce can be described as an area of electronic commercial activity
covering all possible forms of economic activity which, partially or wholly, takes place
by electronic, interactive network data exchange. Such exchange substitutes 'physical'
exchange of information or products and personal human contacts. It covers electronic
trading which is usually associated with Internet area in business, exchange of
correspondence and documents, tele-working or tele-conferences. Electronic trading is
described as an activity in which the supplier shows and sells their products and
services through electronic media. If the final recipient and not a company (e.g. trading
company) is the consumer, then the supplier does electronic retailing. The most
characteristic feature of presented here electronic trading is its global (supranational)
character, which originates from the features of computer networks. This feature is
The Electronic Commerce in the Globalisation Era
303
very important for both suppliers and potential consumers. Possible advantages of
electronic commerce can be, for example, increase of competitiveness, lower costs,
individualization of products and servicing, etc.
2. SPECIFIC CHARACTER OF GOODS SOLD THROUGH THE INTERNET
After business was introduced in the Internet on a large scale in March 1996,
the turnover and profits generally began to grow. At present, on the Internet (also,
using other multimedia) nearly everything is sold. But, there is a group of goods which
is especially preferred at on-line shopping - it also depends on a consumers group,
country or region. Generally, the best sold goods on the Internet throughout the world
are books, CDs, computers, electronic goods, VHS equipment, women's clothes,
investments, plane tickets, hotel reservations, etc. In Romania people most often buy
that way books and CDs. It all depends on consumers' preferences and those
preferences depend also on the country. Thus, 53% of Belgian Internet users and 52%
of German Internet users buy books on-line, the Dutch have the largest share in CD
buyers (40%), the French are next in turn (39%). Hong Kong consumers have the
largest share in buying food products (32%) and furniture (21%). France has the largest
share in buying holidays (44%). The Japanese are the largest group of consumers
buying cosmetics and toilet accessories (12%) [4].
It can be stated that nearly everything, even more than in supermarkets can be
bought on-line. There is only one condition: the product must exist. More hopes for the
increase of turnover and profits from on-line shopping are connected with the trade
between the companies (business-to-business) rather than with standard retail
consumer trading (business-to-customer). Net business platforms contact companies
exchanging products. Consumers of products and services have the possibility of a
quick glance at offers from all over the world and making the best possible choice
without the necessity of several phone call, faxes or letters.
It is foreseen that in future the largest net turnover will be generated by energy
distributors, chemical industry and producers and distributors of food products,
computer and electronic goods. Costs in firms using e-business solutions are, on an
average, lower by several percent than those of firms operating in a traditional way.
However, for the mass service of consumers and companies, on countries and world
scale, it is necessary to develop computer networks, improve them and protect them
better. It is necessary to build the so-called information highways which will be fast
and reliable.
It has been generally assumed that there are three kinds of products in on-line
commerce: the so-called search goods, experience goods and credence goods.
Search goods are products which can be tested with senses: touch, taste and
smell (e.g. food, perfumes, etc.). The next group is the so-called experience goods.
These are the products the quality of which can be tested after the first buy (e.g. books,
CDs, etc.). On the other hand, credence goods are these products the quality of which
is difficult to be tested even after many buys (or uses).
Another division of on-line products covers; indirect electronic commerce, i.e.
ordering material goods on the Internet and then delivering them to the client using
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Stuparu, D.; Vasile, T.
traditional channels (mail, delivery services) and direct electronic commerce which
covers ordering non-material goods and services on the Internet and where payment
and delivery are also made on-line, (i.e. instructions, advice, elaborations, works of art,
software, etc.).
Another, very important function of computer networks and other multimedia
is advertising and public relations which works in such a way that the product exists
not only physically and medially but also in the psychology of potential consumers
which can induce specific activities in future, namely the wish to buy the advertised
product. The conditions created by new technologies have made it necessary to use
new economy not only in a given country but also around the world, within the
framework of globalization processes and free exchange of goods, services and
information
3. PROSPECTS FOR E-BUSINESS IN EUROPE AND ROMANIA
In the coming years, the number of Europeans shopping online will grow from
100 million to 174 million. Their average yearly Net retail spending will grow from
around €1,000 to €1,500, as UK Net consumers outspend even their US counterparts
online. Overall, this will cause European eCommerce to surge to €263 billion in 2011,
with travel, clothes, groceries, and consumer electronics all above the €10 billion per
year mark. [5]
European business-to-consumer (B2C) e-commerce sales totalled 106 billion
Euros ($133 billion) in 2006 and will grow at an annual growth rate of 25 percent over
the next 5 years, tripling in amount to reach nearly 323 billion Euros ($407 billion)
(table 1).
Table 1. E-commerce in Europe* in 2006-2011
Year
2006
2007
2008
2009
2010
2011
E-commerce sales in
Europe (billions $)
132.9
196.9
255.7
307.1
357.4
406.8
% increase vs. prior
year
37.2
28.0
25.6
20.0
15.6
Note: * includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the UK
Source: eMarketer, July, 2007
At present, leading roles in Europe are played by e-businesses of England,
Germany and France (Table 2). The three countries together now account for 72
percent of Europe's online sales:
• The UK is by far the largest of the three major markets, with 2007 sales of 42
billion pounds ($84 billion).
• Germany, however, has the most online buyers, with 27.2 million, but
produces less than half the online sales volume of the UK.
The Electronic Commerce in the Globalisation Era
•
305
France, in turn, produces less than half Germany's e-commerce sales volume
and has 14.5 million online buyers.
Table 2. B2C E-commerce Metrics for the Top Three Markets in Europe in 2006
Sales*
(billions $)
55.6
27.1
12.5
Country
UK
Germany
France
CAGR** 2006-2011
(%)
22.7
24.1
27.4
Online buyers
(millions)
24.8
27.2
14.5
Note: * includes online travel, event ticket and digital download sales
** CAGR – Compound Annual Growth Rate
Source: eMarketer, July, 2007
On average, German and French buyers are spending considerably less online
per person than their UK counterparts.
Table 3 shows the percentage of e-commerce in total retail sales in selected
countries of Europe.
Table 3. E-commerce in total retail sales in 2008
Country
1
2
3
4
5
6
7
8
9
Sweden
UKs
Netherlands
Germany
Belgium
France
Italy
Spain
Portugal
E-commerce as % of
total retail sales
0.68
0.37
0.34
0.30
0.16
0.14
0.09
0.06
0.06
Source: eMarketer, 2009
The first European e-commerce wave began with the UK, Germany and
France, and the next wave, over the next years, will begin in smaller markets - Italy,
the Netherlands and Spain - eMarketer forecasts. The third wave will follow early in
the next decade, as Eastern European states - Russia, Poland, and the Czech Republic begin to embrace e-commerce, it said.
In Romania, the first online shop was CyberShop.ro in 1997 who sale music
CD’s but hardly in 2004 is implemented the standard of security 3D Secure - moment
from which the owners of cards can pay online. Thus, in 2004 they accomplished a
total of 19,410 transactions in the online shops with sales of approximate 3, 5 millions
USD.
The year 2008 finished with approximate 100,000 online transactions and 60 of
millions Euro results from the online pay with the card [6]. The areas which generate
most big volumes on sale in Romanian electronic commerce are in order: touring
306
Stuparu, D.; Vasile, T.
services and reservations of air-travel tickets, the pay of the invoices of mobile
telephony and IT&C and electronic products, consumer electronics.
4. CONCLUSION
The use of e-business, of course, brings many new possibilities or changes in
economy and management, but requires modern, technological infrastructure - this
requirement is connected with large, financial investments. As it can be seen from the
data presented, e-business develops fastest in rich areas, such as the USA and EU,
where 2/3 of the world's GDP (Gross Domestic Product) is produced, causing and
additional large economic growth using multimedia (like the loop of positive feedback)
in spite of the fact that in rich, developed countries the growth dynamics of GDP is
very small (0.1-3%) per year. However, non-material values, like in a typical
information society, begin to dominate. Although American and EU goals are similar
(information society) the way to their achievement is different. The Americans believe
more in market self-regulation and business profits, the EU also stresses state
regulations and social values - hence the program e-Europe. Probably, a certain
compromise to achieve mutual goals (within the frames of globalization) and fulfil the
rowing needs of the population can be made.
The basic rule of on-line services 24/7/365 means constant access of the client
to the Internet, 24 hours, 7 days a week and 365 days a year. It ensures constant access
to information, possibility of choice, comfort of use, individuality of use, relative
savings, social integration, entertainment, possible confidence guarantee, etc.
It is worth noticing that Romania is trying to catch up with the developed
countries in e-business, therefore the strategy e-Romania, based on e-Europe program,
was made. Still, the Romanian share is still small and requires large investments. From
this point of view, Romania is at the beginning of its way to information society and ebusiness on a large scale, which however gives some advantages because old mistakes
should not be repeated.
REFERENCES:
[1]. Bucur, C.M. - Comerţul electronic, Bucureşti, Editura ASE, 2002
[2]. Cable, V. - Globalisation and Global Governance, Royal Institute for International Affairs,
1999
[3]. Wachol, J. - E-business in the View of Globalisation Process, microCAD 2004,
International Scientific Conference, Miskolc, Hungary, 18-19 March 2004, pp.151-156
[4]. Westland, J., Clark, T. - Global Electronic Commerce, Cambridge, MA: MIT Press, 1999
[5]. http://www.emarketer.com
[6]. http://www.ancom.ro
Annals of the University of Petroşani, Economics, 9(2), 2009, 307-312
307
THE IMPORTANCE OF THE WEB TECHNOLOGIES
DURING THE COMMUNICATION PROCESS BETWEEN A
COMPANY AND ITS CLIENTS
NAIANA ŢARCĂ, TEODORA VĂTUIU,
ADELA POPA *
ABSTRACT: In order to face the new market environment which is in constant
change, the company must place the customer in the centre of its attention. As a result, the
company will not follow, first of all, the benefit brought by a certain successful business, but to
develop long-term business relationships with the same customers. The integration of Web
technologies has an important place into the process of accomplishing companies’ objectives to
increase the competitiveness degree on the market by generating customers’ loyalty.
Developing a web-site makes it possible a very good communication with the clients, and this
leads, finally, to a constant adaptation of the company’s offer to the continuously changing
customers’ requests.
KEY WORDS: client-oriented marketing, website,
management, performance through quality, centralized databases
customer
relationship
1. ORIENTATION OF COMPANIES’ ACTIVITY TO PERFORMANCE
THROUGH QUALITY
In the terms of globalized ways of satisfying people’ needs, there is a trend of
gradual replacement of the companies’ market-orientation with the customerorientation.
In order to face the new market environment which is in constant change, the
company must place the customer in the centre of its attention. As a result, the
company will not follow, first of all, the benefit brought by a certain successful
business, but to develop long-term business relationships with the same customers.
*
Assoc.Prof., Ph.D., University of Oradea, Romania, ntarca@uoradea.ro
Lecturer, Ph.D.,“Constantin Brâncuşi” University of Tg.-Jiu, Romania,
v_teodora@yahoo.com
Assist.Prof., Ph.D. Student, University of Oradea, Romania, apopa@uoradea.ro
308
arcă, N.; Vătuiu, T.; Popa, A.
Companies’ customer-orientation implies a continuous and detailed process of
analysis regarding the potential clients’ expectations, in this way, a strong connection
between customers’ needs and the quality of offered products and services being
assured.
In order to generate performance through quality, a company has to:
• develop interacting long-time relations with the customers;
• generate customers' loyalty regarding company’s products by creating
those kind of relationships which are based on knowing each-other and
mutual trust;
• involve customers in the process of developing products, by taking into
account their suggestions;
• involve customers into the process of solving complaints;
• create databases about actual and potential customers, based on a
systematic activity that implies the processes of gathering, organizing,
classifying, storing, analyzing, and interpreting the data referring to
customers’ needs and expectations.
2. USING WEB TECHNOLOGIES INTO THE COMPANY-CUSTOMERS
RELATIONSHIPS
The importance and the complexity of the relations created by a company with
its clients imply a good management of them.
By managing the relations with the clients, a company keep in mind the
following issues:
• to identify new customers and then to generate their loyalty;
• to understand customers' buying behaviour;
• to determine and to improve the customers’ degree of satisfaction;
• to identify customers’ dissatisfaction and to find the appropriate
solutions for resolving them.
An efficient customer relationship management implies the process of
developing an e-business. By using the information technology, the activity of each
department of a company can be continuously improved and the company’s behaviour
can be permanently adapted to market changes.
Nowadays, there are few companies which, if having a traditional business, did not
develop an online version of it. The Internet environment is not only a simple tool to
promote a business, but it also offers opportunities to supply information; it is an
efficient platform to communicate with the clients.
The integration of Web technologies has an important place into the process of
accomplishing companies’ objectives to increase the competitiveness degree on the
market by generating customers’ loyalty.
Developing a web-site makes it possible a very good communication with the
clients (Figure 1), and this leads, finally, to a constant adaptation of the company’s
offer to the continuously changing customers’ requests. The most efficient web-site is
the one that is integrated into company’s informatics system.
The Importance of the Web Technologies During the Communication …
Customers
309
Potential
customers
Company’s
Website
Marketing
Department
Customers
Database
Sales
Department
Figure 1. Using a web site in the process of communication between a company and its
clients
The information acquired by the company in the online environment, about the
customers, about their needs and expectations, about their buying behaviour, are
centralized in customers’ databases. The data stored in databases about customers can
also be used to adapt company’s offer to customers’ needs.
A database referring to the clients, in order to be efficient, has to include
current and detailed information about them and about their buying behaviour. For this
purpose, the website makes possible a very good communication with the customers by
using electronic forms, chat channels, voice applications, etc.
A centralized database containing customers’ data, offers the possibility to
create working groups, in order to make efficient decisions. Company’s employees can
work together even if they are not in the same place and at the same time.
By analyzing and interpreting the data stored in databases, important
information can result and this information will lead to decisions that will adapt the
company’s offer to the customers’ requests, needs and expectations.
By measuring and analyzing the information regarding customers’ complains,
the company can find the most appropriate solutions to resolve the situation. An
efficient solving of customers’ complaints will lead to regaining customers’ trust in the
company and its potential to react.
310
arcă, N.; Vătuiu, T.; Popa, A.
The information technology offers to companies the possibility to use
specialized software applications that have the role to merge sinergically the marketing
activity, the sales and the technical assistance, in order to determine new customers and
to generate their loyalty.
Software applications specially developed to manage customers relationships
allow the marketing department, sales department and technical department to cooperate so that to not lose any sale opportunity and each client to be satisfied about the
way its complaint was solved (Figure 2).
Customers
Website
Customers databases
Marketing
Department
e-mail
Sales
Department
fax;telephone
Technical
Department
Figure 2. Using a specialized software application in the process of communication
between a company and its clients
Marketing department focuses its attention on attracting new clients and
generating loyalty for the existing ones.
In order to attract and develop long term relationships with the customers, the
Marketing Department of a company may use individualized information items,
specially tailored to the needs of each buyer. These items can be simple promotional
texts or they may involve interactivity from clients. PDF file format brochures can be
used, containing suggestive images are meant to attract attention. At the same time,
these items can take the form of demos of product functionality, useful because they
allow the customer to see the product “in action".
Advertisings containing graphics and animation are individualized based on
age, occupation, geographic area, and they lead customers to a particular page of the
site which is addressed to them.
The Importance of the Web Technologies During the Communication …
311
Based on the customers information stored in databases, e-mails containing
advertisements are regularly sent to a very well defined targeted audience. Thus, it is
taken into consideration that each client has its own needs, preferences and
expectations. The received responses, containing customers’ opinions are very useful
in adjusting the company’s offer to the demands of the buyers. The informational
content of the received responses is stored in the clients’ databases, updating and
enriching it.
Further, comprehensive and correct analysis of the stored data, creates the
necessary conditions for the development of those products and services that will meet
the expectations of every individual. At the same time, knowing the needs and areas of
interest of the customers, the promotion of products and services will be more efficient.
The Sales Department can take orders and sell products in the online
environment, using an automated tool for sales.
Also, the Technical Department has the possibility to provide real-time
technical assistance for clients.
3. CONCLUSIONS
By creating its own website, a company gets the possibility to influence in a
positive way, the evolution of its activity. This way, the company becomes more
efficient, with a more flexible internal functionality, more careful with the customers’
needs and expectations.
Web technologies allow companies to design a certain image and to attract and
generate customers’ loyalty.
Software applications specialized in customer relationship management assure
an improved relationship with the customers. This way, the customers will feel to be
treated with more consideration, and that they are granted with more attention, they
become more content about the company’s products and services and also about the
employees’ professionalism.
REFERENCES:
[1]. Bruhn, M. - Orientarea spre clienţi. Temelia afacerii de scces, Editura Economică,
Bucureşti, 2001
[2]. Baltac, V. - Managementul relaţiilor cu clienţii - CRM, http://www.softnet.ro/library/files/
papers/crm.pdf, 2004
[3]. Berry, J. - Database marketing, Business Week, September 5, 2004
[4]. Buruga, S.; Alboaie, L. - Servicii web. Concepte de bază şi implementare, Editura
Polirom, 2006
[5]. Feher, A.; Towell, E. - Business use of the Internet, Internet Research: Electronic
Networking Applications and Policy, 1997
[6]. Granger, M.J.; Schroeder, D.L. - Integrating the Internet into the business environment,
Internet Research: Electronic Networking Applications and Policy, 1996
[7]. Haig, M. - Manual de e-marketing, Editura Rentrop&Straton, Bucureşti, 2005
[8]. Popescu, G. - Webmarketing în România, Editura Teora, Bucureşti, 2007
312
arcă, N.; Vătuiu, T.; Popa, A.
[9]. Pop, N. - Managementul relaţiilor cu clientul - Direcţie majoră a orientării activităţii de
piaţă a întreprinderii, Revista de Management şi Inginerie Economică, vol.3, 2004, p.7
[10]. Snell, N. - Internet şi Web. Ghid complet, Editura All, 2005
[11]. *** - PC Magazin, 2005-2009
[12]. *** - PC World, 2005-2009
Annals of the University of Petroşani, Economics, 9(2), 2009, 313-318
313
COMPUTER-ASSISTED ACCOUNTING
SORIN-CIPRIAN TEIUŞAN ∗
ABSTRACT: What is computer-assisted accounting? Where is the place and what is
the role of the computer in the financial-accounting activity? What is the position and
importance of the computer in the accountant’s activity? All these are questions that require
scientific research in order to find the answers. The paper approaches the issue of the support
granted to the accountant to organize and manage the accounting activity by the computer.
Starting from the notions of accounting and computer, the concept of computer-assisted
accounting is introduced, it has a general character and it refers to the accounting performed
with the help of the computer or using the computer to automate the procedures performed by
the person who is doing the accounting activity; this is a concept used to define the computer
applications of the accounting activity. The arguments regarding the use of the computer to
assist accounting targets the accounting informatization, the automating of the financialaccounting activities and the endowment with modern technology of the contemporary
accounting.
KEY WORDS: accounting, accountant, informatization, computing, automation,
computer applications
1. INTRODUCTION
The computer is currently used in many areas and every day it gains ground by
breaking in other fields or subfields in order to prove its helping ability and the offered
advantages. Computers are more efficient than people in the areas where there is a
large volume of calculus because of the speed and the precision this calculus is done.
In accounting computer is very useful, because with its help can be achieved much
faster different calculations and results may be obtained in an acceptable format. Dulu
(2006) says the following: computer-based accounting can be done to a company in a
few days, while a man does the same accounting in a few weeks. Thus, the computer
was transformed in an indispensable instrument for the daily activity of the
contemporary individual. Popovici and Scheau (2005) tell us that today only Nobody
∗
Lecturer, Ph.D., “1 Decembrie 1918” University of Alba Iulia, Romania,
ciprian.teiusan@uab.ro
314
Teiuşan, S.C.
can doubt the computer’s usefulness, its capacity to speed the solving of problems, to
ease the work of man and to facilitate the human relationships.
The invention of the computer has determined a powerful change in all the
social life, with society stepping on a new path: the path of informatization, entering
the age of informatization. At first, in most units the computers were used for three
types of works: general accounting, collecting-disbursing bills and personnel
remuneration, three areas with specific features, fostering the automation through: an
important volume of procedures of the same type, with a repetitive character and a
feature to lay-out the specific tasks. The informatization of the enterprises started in the
1960’s with billing and payments, continuing with accounting.
The strong economic rise of the western economies involved a large work
volume in the big enterprises. Because the growing number of employees and the
purchasing of mechanical-graphical equipments (machines that preceded computers
and that allowed billing and keeping the books through calculus of the data, but they
weren’t programmable or parametric) didn’t prove efficient, Bocksenbaum (2002) said
that the only solution to solve the problem was the computer, regardless of its cost.
Going from manual labour to automatic labour by using the computer was
fundamental. In a French food company, the accounting department reduced its
personnel from 150 people to 5 people between 1965 and 1980; the management of the
organization became aware of the computer’s importance and placed the informatics
department above the administrative departments.
For a long period of time the improvement of the payment, billing and
accounting information instruments was the priority, the computer entered the territory
of other functions only later and in a progressive manner (text processing started only
in the beginning of the 1980’s). The transition was made from the accounting done
completely by hand to an informatized accounting. The computerization of accounting
occurred. In the dictionary (DEX, 1998) to computerize means to process with the help
of the computer; to introduce the computer in various areas of activity.
2. PRESENTING THE CONCEPT. DISCUSSIONS
Before approaching the concept of computer-assisted accounting, we will
discuss about the terms of computer and accounting.
According to the dictionary, the term of calculator (electronic) is synonym
with digital computer, namely computer, the digital computer being defined as follows:
universal digital computer, consisting of a variable number of units specialized and
commanded by the same recorded program, which allows the performance of
arithmetical and logical operations without the human intervention, and solves
problems of scientific calculus and of management for the commercial or industrial
enterprises.
For Oprean et al. (2007), an electronic calculator is a set of integrated circuits
that can ensure the satisfaction of the informing demands at superior technical and
qualitative parameters by connecting it to power energy and by programming it.
Computer - Assisted Accounting
315
The computer dictionary (Microsoft Press, 1997) sees the computer as any type
of machine capable to achieve three things: to accept structured entries, to process
according to the pre-established rules and to supply the results as exists.
Another dictionary (for computers, 1994) defines it as equipment for the
systematic processing of the signs and series of signs based on algorithms. The authors
of this paper assess that the name of “calculator” is not adequate, because it only
renders one of its use possibilities, meaning the calculus of complicated operations
with big numbers in a short period of time (with an high processing speed). Looking
from an abstract angle, the computer represents a universal machine that stimulates all
the specialized machines. In practice, the specialized machines are represented with the
help of the programs and the computer represents the machine at the time of the
execution.
According to the dictionary, accounting is explained as the set of recording
operations based on special norms and rules, of the movements of funds and materials
in an institution, reflecting its practical side. On the other hand, accounting is the
science that manages the theory of these operations, emphasizing the conceptual side.
Accounting is defined by Meigs et. al (1996) in a simple manner as being the
mean through which we measure and describe the results of the economic activities.
Another congregate of authors (Economy dictionary, 1999) considers
accounting a field and a knowledge instrument of the economic reality, regarding the
economic resources separated in a patrimonial manner.
As a specialized activity in measuring, assessing, knowing, managing and
controlling the assets, debts, and equity capitals, as well as the obtained results,
according to the Accounting Law no. 82/1991 (2008), accounting must ensure the
chronological and systematic recording, processing, publishing and keeping of the
information regarding the financial position, the financial performance and the treasury
flows for their internal demands and for the relationships with the current and potential
investors, financial and commercial creditors, clients, public institutions and other
users.
According to article 1 in the Accounting Law no. 82/1991, republished, the
business enterprises, the national enterprises/companies, the autonomous
administration, the national research-development institutes, the cooperative businesses
and other corporate bodies have the obligation to organize and manage their own
accounting, namely the financial accounting, according to the mentioned normative
document, as well as the management accounting adapted to the specific of the
activity.
Public institutions, associations and other corporate bodies with or without
patrimonial purpose, as well as the corporate bodies that run activities resulting in
incomes, have the obligation to organize and manage their own accounting, namely the
financial accounting and, if needed, the management accounting. The subunits without
legal personality, with business offices abroad, which belong to the mentioned entities
that have headquarters in Romania, as well as the subunits without legal personality
that are in Romania and belong to units abroad have the obligation to organize and
manage their own accounting.
316
Teiuşan, S.C.
From the point of view of the used instruments, the management of the
accounting in any patrimonial entity is done through two methods: either manually,
using a paper and a pen, or with the help of the computer, where filling the documents
and processing the accounting data is done with the help of the informational
equipments, therefore the accounting is automatic. Currently, accounting is done in a
manual or an automatic manner, but the tendency is to give up the pen used to fill the
documents because of the substantial contribution of the computer in the financialaccounting field, through the indisputable advantages it brings.
We have seen what accounting does and what a computer is. But what is
computer-assisted accounting?
The definition in the dictionary (DEX, 1998) writes that to assist means to be
at the site, to take a part (in...), to stand by somebody in order to help him, to defend
him, etc. In our case, it is about accounting and the computer, namely the practical
activity run by the person responsible about it: the accountant; and an ingenious
machine that automates this activity and gives support for an easier achievement of the
objectives and tasks of this science.
In our opinion, computer-assisted accounting is a term with a general
character; it refers to the accounting kept with the help of the computer or to the use of
the computer to automate the operations in the activity of the person in charge of
accounting, the accountant; it is a concept used to define the computer applications in
the accounting activity. It’s about a calculus system (electronic calculator) which is
used for the partial or full management of accounting. The computer-assisted
accounting systems are interactive and serve to keep the financial books and are
represented by general programs (office packages), but also by special programs
(packages with economic programs, with an accounting application) and the
information application can be simple, such as the cash order application, but it can
also be complex.
In general (Ban et. al, 1994), the application is a program or a set of programs
that uses the operating system and manipulates files of data, allowing the user to solve
a certain problem. It can be a program for text processing, for tabular calculus or
graphical presentations, and the software applications designates the general term
regarding all the programs that are not part of the operating system. With the help of
these programs, the user can solve his problems. According to Ursăcescu (2002), the
information application represents a correlated set of software programs, which works
to automate the processing operations of the information in a certain area.
At its base are two essential features:
• an applicability area, which is defined structurally (a service, a department)
and functionally (the management of the materials, of the clients, the costs’
calculus, etc.);
• a certain number of functionalities (general, specific), meaning a set of tasks to
be executed (manually, automatically, mixed) within an area.
The informatization of the financial-accounting activities in an organization
needs to revise the organization method of the system, so that the necessary
environment for the transition from the manual approach to the automatic approach of
the data, by benefiting from the opportunities of the calculus systems. Through
Computer - Assisted Accounting
317
informatization, accounting is on a road with no return. Today nobody conceives
managing the accounting of any unit without using the financial-accounting
information applications and other programs meant to provide a modern technical
support to this science.
3. CONCLUSIONS
Accounting, as an applied science, implies its organization and management
for all the corporate bodies, who, according to the law, must run it. At the present time,
the accounting management of the patrimonial units has become dependent on the
computer, the electronic calculator is assisting the practical accounting and the
accountants step by step, from entering the data about the economic-financial
operations, which determine changes in the patrimony of that unit, to the drawing-up of
the synthesis documents, from the opening to the closing of the accounting cycle, from
the start till the end of the financial exercise, from the founding of the unit to the
ceasing of its activity.
The informatization of accounting doesn’t mean that the financial books are
monopolized by the computer. We must understand that organizing and managing the
accounting activity requires a series of tasks, and they can be accomplished in different
ways, among which is the use of the computer. Currently, the computer has become a
component of running the entire accounting cycle, used by economists-accountants as a
result of its superior outcomes in comparison to the classic method.
Pântea (1998) thinks that in the present conditions, with all the progress made
in the area of computers, the economy of a country can’t spare accounting; it remains
the most exact form of keeping the financial books. Pântea says the following: until
now, nor is foreseen in the close future, another mean to replace accounting at the level
of the economic agents was not found. Only accounting can provide precise
information for the decisions of the manager. He must have this “control panel” with
multiple dials that represents modern accounting.
We agree and we don’t challenge the place and the role held by accounting in
the economic life, regardless of the level we refer to: government, patrimonial units,
etc. But just as indisputable are the place and the role held by the computer in the
modern society, in accounting and in the work of the accountant. The computer makes
the life of the accountant easier. We believe that a modern accounting is the only one
that fulfils its tasks by using modern instruments, information equipments, among
which the central position is held by the electronic calculator.
REFERENCES:
[1]. Ban, M.T.; Miclea, M.; Mireştean, A.T.; Miclea, C. - Dicţionar explicativ de
calculatoare, Englez-Român şi Român-Englez, Editura Tehnică, Bucureşti, 1994, pp.1617, 33
[2]. Boksenbaum, L. - Informatică de gestiune, Editura Economică, Bucureşti, 2002, pp.227228
318
Teiuşan, S.C.
[3]. Coteanu, I.; Seche, L.; Seche, M. (coord.) - Dicţionarul explicativ al limbii române
(DEX), Institutul de Lingvistică „Iorgu Iordan”, Academia Română, Editura Univers
Enciclopedic, Bucureşti, 1998, p.127, 205, 217, 726
[4]. Dulu, A. - ECDL modulul 1 - Concepte de bază ale tehnologiei informaţiei, Casa de
Editură Andreco Educational, Bucureşti, 2006, p.32
[5]. Meigs, R.E.; Meigs, M.A.; Bettner, M.; Whittington, R. - Accounting: The Basis for
Business Decisions, Tenth Edition, The McGraw-Hill Companies, Inc., 1996, p.3
[6]. Oprean, D.; Racoviţan, D.M.; Oprean, V.; Rusu, L. - Managementul afacerilor pe
internet, Editura Risoprint, Cluj-Napoca, 2007, p.16
[7]. Pântea, I.P. (coord.) - Contabilitatea financiară a agenţilor economici din România,
Editura Intelcredo, Deva, 1995, p.24
[8]. Pântea, I.P. - Managementul contabilităţii româneşti, vol.I, Editura Intelcredo, Deva,
1998, p.19
[9]. Popovici, D.; Scheau, I. - Tehnologia informaţiei şi comunicării. Instruire asistată de
calculator, Curs, Seria Didactică, Alba Iulia, 2005, p.63
[10]. Ursăcescu, M. - Sisteme informatice: o abordare între clasic şi modern, Editura
Economică, Bucureşti, 2002, p.57
[11]. *** - Colectiv de autori ai Catedrei de Economie şi Politici Economice de la Academia de
Studii Economice din Bucureşti - Dicţionar de economie, Editura Economică, Bucureşti,
1999, p.118
[12]. *** - Dicţionar de calculatoare, Microsoft Press, Editura Teora, Bucureşti, 1997, p.118
[13]. *** - Legea contabilităţii nr. 82/1991 republicată în Monitorul Oficial al României
nr.454/2008, art.2, alin.(1)
Annals of the University of Petroşani, Economics, 9(2), 2009, 319-324
319
OVERVIEW BY FORMAL AND INFORMAL LEARNING IN
THE COMPUTER WORLD
MIOARA UDRICĂ, TEODORA VĂTUIU *
ABSTRACT: The advancement of information and communication technologies,
offers the training sector the promise that the latest generation of network applications will
induce qualitative changes in education and training. In the present European context,
Romania plans the strategically goals assumed in the process of integration to became reality
an established strategic goals for the transition to a competitive and dynamic economy, to a
high quality educational system, based on need to assuring the independence and autonomy
context and ensure that higher education and research systems.
KEY WORDS: learning process, formal learning, informal learning
1. GENERAL CONSIDERATION
In the present European context, Romania, as a recently accepted country into
The European Community, plans the strategically goals assumed in the process of
adhering to became reality and has established strategic goals for the transition to a
competitive and dynamic economy, to a high quality educational system, based on:
Lisbon European Council 23 and 24 March 2000, stating that “Europe's education
and training systems need to adapt both to the demands of the knowledge society
and to the need for an improved level and quality of employment”;
The Bologna Declaration of 19 June 1999, affirming that “Universities'
independence and autonomy ensure that higher education and research systems
continuously adapt to changing needs, society's demands and advances in scientific
knowledge”.
Romanian Post adhering strategy 2007-2013 stipulates, through specific
objectives, the requirement, that the education should be concentrated on development
of a set of key competences, which have to ensure a performances achieved at the
individual level, both on personal and socio-professional field. These key competences,
*
Prof., Ph.D., “Titu Maiorescu” University of Bucharest, Romania
Lecturer, Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania,
v_teodora@yahoo.com
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Udrică, M.; Vătuiu, T.
endorsed at the European level, are: communication in the mother tongue,
communication in foreign languages, custom of mathematical calculation and basic
competences in science and technology, TIC abilities, to learn for learning, civically
and inter- personal components, enterprising and cultural conscience.
Development of key competences assumes an optimal correlation between the
two forms of learning: formal learning and informal learning. Both formal and
informal learning offer different strengths to the learning process, serve learners, may
be useful to educators, to parents at home with their kids or to adult learners who are
looking to expand their knowledge, either for their own enrichment or to increase their
career options.
With regard to the connection among the participants of process and the way in
which the transfer is made, (1) formal learning is defined as knowledge that can be
captured in any format (written, video, audio) and can be accessed anytime and
anywhere, independent of the person who originally had it; (2) informal learning is
defined as what happens when knowledge has not been externalized or captured and
exists only inside someone’s head. To get the knowledge, you must locate and talk to
the person. (1)The formal knowledge transfer includes live virtual-classroom courses
with prepared slides, books, video and audio tapes, digital libraries and repositories, a
real-time seminar on the Web, electronic performance-support tools, programs
accessed during a job or task, instructor- led courses that follow an outline, a recorded
Web-based meeting. (2)The informal knowledge transfer includes instant messaging, a
spontaneous meeting on the Internet, a phone call to someone who has information you
need, a live one-time-only sales meeting introducing a new product, a chat-room in real
time, a scheduled Web-based meeting with a real-time agenda, or a meeting with your
assigned mentor or manager.
These different learning environments are significantly connected to the
individual performances in the personal and professional field, are more and more
influenced by the computer technology. The use of Internet, on-line resources, virtual
libraries, on-line communication, have implications in the society we live in,
stimulating and developing multiple cognitive potential of those involved in the
educational process. More, the digital world becomes a “real” component in a society
based on information and knowledge where individual find unlimited resources,
favorable to develop his own personality, the digital world becomes a present partner
for the challenged person involved in the business environment.
The major change brought by computer technology is networking, realized by
Internet global network. Most organizations, which were before of a hierarchical type,
are now moving to networks and change information using Internet. Internet links
people with people, people with information, and information with other information.
Internet is mainly a network of information. But education needs a network of
knowledge, which is coherent information, linked to issues or questions, linked to
possible uses. Knowledge, which is more elaborate, changes the role of educator, who
has to create such networks, and to give the students the way to access knowledge.
Below are the conclusions of an analysis of the performances obtained in
business environment by those who gained particular competences in the context of
formal and informal environment.
Overview by Formal and Informal Learning in the Computer World
321
2. FORMAL LEARNING
In the new context, school has to change similarly to society. The teachers
have to try to eliminate some weaknesses of educational system: technological support
is still limited; curriculum does not integrate the use of technology computer; there are
not enough credit hours of instruction with CT; old-fashioned methods are still in use;
teachers (others than those who teach informatics) have low-level training in
informatics; evaluation systems test only acquired information; students want to have
short-term benefits; there is a lack of motivation in acquiring long-term competences.
The school needs to understand the evolution of the external world and to
change its curriculum areas, ways of learning, school structure and resources, in order
to match its aims to social evolution. Because the computer technology profoundly
transforms society, education and the way the teacher interacts with students have to
take into account that: (1) students can search, evaluate and communicate their own
results in the classroom settings or in informal settings, out of the classroom; (2) the
teacher has the instruments to develop the ability of each student to intelligently
process. For students with different background and competences, the teacher becomes
the facilitator of learning, offering strategies to guide learners; (3) universities and
other public institutions take part in the development of international projects.
Until now, the Romanian university system has been characterized by strong
inertia and focused on teaching. From now on, we think that: the curriculum has to be
based on the following assumptions: (1) students live in a global, knowledge-based age
and learn in an online world; (2) the teacher should have the knowledge, skills,
understanding and positive attitude, to make effective use of the computer technology
in their teaching practice; the curriculum has to aims at developing individual
competencies which lead individuals to success, institutional competencies which lead
society to success and application of individual competencies to contribute to
collective goals.
In today’s Romania, in private universities, there is a large opportunity for
applying strategies to define the curriculum areas, to use new methods. We consider
that in the economic field, the curriculum has to include the following courses:
1). Information and Communication Technology (ICT) - a course that:
develops the basic concepts in ICT and familiarizes students with the standards and
protocols in ICT; gives the students skills in communication on Internet and Intranet;
helps students to share their knowledge and experience, developing the ability to
access new information regarding their fields; includes the students in projects initiated
by other future teachers, in order to extrapolate the experience to other situations.
2). Relational Databases Management Systems - a course that: familiarizes
students with design models and use simulation process in systemic methodology for
Information Systems; helps students in designing relational data bases and defining
interface with the users; teaches students to use information resulting from a data base
in order to understand the real system environment.
3). Multidimensional Analysis in Data Warehouses Collection - a course that:
helps students to work in client-server architecture, give them initial knowledge in
Standard Query Language; guides the students to reach the basic level in designing
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Udrică, M.; Vătuiu, T.
data warehouses collections; familiarizes students with multidimensional analysis of
the data storage in data warehouses; familiarizes students with the different business
functions that lead to effective decision-making.
4). Object Oriented Modeling in Information Systems - a course that: shifts
attention from symptoms to causes, from assertions to justifications and from the
specific to the general; familiarizes students with the analysis, design and
implementation fazes used in object oriented methodology; prepares students to apply
conclusion from the analysis process, in order to develop an existing model, by adding
new components; helps students to develop network between objects, to define and
reuse components in different environment programming. By similarity, students can
understand educational models based on “learning objects”.
Regarding the new methods, in order to develop competencies in computer
technology, teachers have to:
• guide the students to reach the basic level in information and communication
technology, using the digital library which provides documentation;
• create new and challenging situations so that students can understand data security,
ethical issues and how important co-operation is;
• guide the students in understanding the network of knowledge and in designing
data bases of knowledge and
• use multiple-choice questionnaires in order to evaluate the students’ progress and
for self-assessment.
To develop key competencies of business or management graduates, it
necessary to develop an environment where the students can apply knowledge on
business or management issues, with a view to improving their decision-making ability
at work. Teachers also have to: direct students towards the acquisition of learning skills
that will help them operate in a continuously evolving business environment and
prepare them to undertake progressively the professional duties required in the real
world; help students to understand how organizations use information to create
knowledge and make decisions and to analyze the effect of computer technology on
business and integrate CT to strategic business plans.
3. INFORMAL LEARNING
If until now the interest of researchers was concentrated on the analysis of
formal learning, it is now detected a change of emphasis towards a reconsideration of
the importance and weight of informal learning, together with the other forms of
learning. In addition, the success in an informal setting can lead to greater confidence
in the formal classroom. Coffield F., in “The Necessity of Informal Learning” said:
“Informal learning should no longer be regarded as an inferior form of learning whose
main purpose is to act as the precursor of formal learning; it needs to be seen as
fundamental, necessary and valuable in its own right”.
The informal learning is an outstanding factor in the development of human
personality, meant to ensure the necessary training of the individual for assuming
different specific social roles in the context of globalization. By its multidisciplinary
and spontaneous character, as well as its accessibility, ensures a vast development of
Overview by Formal and Informal Learning in the Computer World
323
individual personality best correlated with his needs, increases the odds of the
individual to best and efficiently adapt to the demands of the environment.
Table 1. Michael Eraut’s typology of non-formal learning (2000, p.129)
Informal learning is natural: no curriculum, no classrooms, no grades or
certificates, and no schedule in advance. Experience indicates that:
People learn to do their jobs largely by observing others, asking colleagues, and
trial-and-error;
at least 80 percent of how people learn their jobs are informal and the 75 percent of
learning happens as the learner creatively adopts and adapts to ever changing
circumstances (A study of time-to-performance done by Sally Anne Moore at
Digital Equipment Corporation in the early 1990s, Moore, Sally-Ann, "Time-toLearning", Digital Equipment Corporation, 1998);
Almost all real learning for performance is informal, and the people from whom
we learn informally are usually present in real time. (The Institute for Research on
Learning, 2000, Menlo Park).
In terms of learning in the workplace, everything is focused on performance
and performance is everything. Into viewing them as creators and constructors of
learning, the informal learning approach people as both learners and educators, moving
away from seeing learners as consumers of different packages and opportunities. This
means needs skills for learners and educators, offers the conceptual framework for the
development of key competences:
for learners the skills include: forming, expressing, justifying, defending an
opinion; supporting opinions of others; challenging others’ opinions; questioning
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Udrică, M.; Vătuiu, T.
others; seeking clarification; representing others’ opinions; building on others’
opinions;
for educators the skills include: facilitator skills; active listening skills; feedback
skills; intervention skills; evaluation skills.
Taking into account all these reasons, we consider that those who learn in the
informal learning environment can easier develop key competences, which are needed
to achieve professional performances. Consequently, formal classroom and companies
have to accept informal moments of knowledge transfer, should add these accidental,
informal intersections of learning and performance into their management.
4. CONCLUDING COMMENTS AND INVITATION TO FURTHER
RESEARCH
Formal learning, along with informal learning, provides powerful learning
opportunities which can strengthen and support one another. Responsibility for
learning is shared among educators and learners. The differences are more a matter of
degree in each of these types of education. We hope that the generous issue of formal
and informal learning will raise a major interest among the specialists and will bring
together valuable individual efforts and experiences. At the same time, we would like
to be joined by specialists from different fields and geographical areas of the world, in
order to build up a unitary vision, coherently connected to the learning environment, as
a relevant factor in the development of human personality.
REFERENCES:
[1]. Coffield, F. - The Necessity of Informal Learning, Bristol: The Policy Press, 2000
[2]. Rogers, A. - Looking again at non-formal and informal education - towards a new
paradigm 2004. Available from: http://www.infed.org/biblio/non_formal_paradigm.htm
[Accessed 30th July, 2009]
[3]. Vătuiu, T.; Popeangă, V. - Economia digitală şi impactul ei asupra managementului
educaţional, CNIV, Bucureşti, 2005
[4]. Udrică, M.; Martinov, D. - Managementul bibliotecilor virtuale in sistemul de instruire
asistata de calculator. Principii, metode, instrumente. Simpozionul internaţional
“Economia româneasca. Prezent si viitor”, Bucureşti, 2006
[5]. Udrică, M.; Dumitrescu, A. - New Directions in Teacher Education in Today’s Romania,
27th Annual International Seminar of the International Society for Teacher Education The Future of Teacher Education and Professional Development, University of Stirling,
Anglia, 2007
[6]. www.pz.harvard.edu
[7]. www.nationalacademies.org/
[8]. www.teamsoft.ro/weblog/index.php?blog=1&
[9]. www.informallearning.com/archive/Russell-77.html
[10]. www.howardgardner.com
[11]. www.infed.org
[12]. www.1educat.ro/resurse/ise/reflectii_teoretice
[13]. www.ilinet.org
[14]. www.jaycross.com/informal book/poster.htm
Annals of the University of Petroşani, Economics, 9(2), 2009, 325-328
325
LIFE INSURANCES AND THEIR INFLUENCES ON
REINSURANCES
MARIA VĂDUVA *
ABSTRACT: Life insurance is an insurance concluded for a long period of time and
reinsurance shall have to be a long-term reinsurance, otherwise the direct insurer may lose its
hedge through reinsurance before the insurance agreement expires or pay an inadequate sum
for the reinsurance with the insurance premiums it receives. In the case of life insurances,
reinsurance agreements include provisions answering to the direct insurer’s need to benefit
from long-term protection. In life insurances, almost all reinsurance agreements are
proportional agreements, the greatest weight being held by surplus agreements.
KEY WORDS: life insurance, reinsurance, portfolio, protection
Life insurances have characteristics that influence reinsurances. These
characteristics are:
• Long period of insurance;
• The insurance shall be concluded for a fixed amount;
• Accumulation of capital.
1. LONG PERIOD OF INSURANCE
Assignor’s portfolio adjustment depending on these alterations of the
reinsurance agreement demanded by the reinsurer can only be made through the
termination of insurance agreements.
Therefore, in the case of life insurances, reinsurance agreements include
provisions answering to the direct insurer’s need to benefit from long-term protection.
Not all types of insurances are adequate for a long-term protection. Excessive
damages disproportional agreements for protection against risk accumulations cannot
be concluded for long periods because their provisions depend on the structure of
portfolio, which shall be altered in time.
Proportional reinsurance is not usual for life insurances and occurs only in
filling-in standard reinsurance forms.
*
Assoc.Prof., Ph.D., “Constantin Brâncuşi” University of Tg.-Jiu, Romania
326
Văduva, M.
2. INSURANCE FOR A FIXED AMOUNT
Life insurances are concluded for a fixed amount without partial damages.
Life insurance covering the risk of invalidity and paying the pension includes
reinsurance agreement that may be similar to an excessive damage protection.
3. ACCUMULATION OF CAPITAL
The sum that has to be initially reinsured does not depend on the insured sum
but on the risk sum.
If this difference is not significant in the case of risk insurance with premiums
periodical payment when the insured amount equal to the risk sum at the beginning of
the insurance, the situation changes when it equals the payment of a sole premium. The
risk amount is smaller than the insured sum requiring a bigger initial reserve.
4. PROPORTIONAL REINSURANCE
In life insurances, almost all reinsurance agreements are proportional
agreements, the greatest weight being held by Surplus agreements.
Proportional agreements guarantee the covering period, the insurance
agreement and the division of luck between insurer and reinsurer because risk division,
established at the beginning of the agreement between insurer and reinsurer remains
unaltered until the insurance agreement expires, making it easier to equitably establish
the reinsurance premium.
In the case of proportional reinsurance, reinsurer takes part in the alterations
and amendments made to initial insurance. This applies also to the increases of insured
sum due to the application of dynamic adjustment cause with a great importance in the
circumstances of a high inflation rate.
Proportional agreement stipulates a minimum amount below which reinsurance
does not work anymore. Such solutions serve to the simplification of management with
limited effect on the reinsurance relation.
5. WITHHOLD FOR EVERY RISK SEPARATELY
In life insurances, in establish withholding the size of the risk amount is
important that the insurer may withhold in case of an insured event. In order to be able
to calculate exactly the withholding, actuarial patterns have been used with various
degrees of complexity.
Mathematic theory has to operate with simplified patterns that would follow
simple objectives and multifunctional influence factors have to be analyzed only to the
extent it is necessary.
All actuarial patterns have the same objective: establishing the results of the
portfolio retained by the direct insurer. Simple patterns generally suppose that damages
be independent excluding accumulation of occurred risks - for instance, an accident.
Life Insurances and their Influences on Reinsurances
327
Therefore, in establishing the withholding, one shall consider several
commercial reasons and its own experience rather than actuarial calculations.
When reinsurance seeks other purposes beside the homogenization of
portfolio, other criteria are considered in order to establish the withholding.
If reinsurance is seen as a financing source, the following requirements have to
be considered:
• The reinsurer has to be able along with the reinsurance to solve the
current financing problems
• The amount of premiums withheld by the insurer has to give it the
possibility to cover its current and anticipated expenses.
In this case, an adequate solution is establishing an initial withholding at a low
level and fast increasing it in order to reach an adequate level for the financial
possibilities of the insurer.
In case of major standard risks from the medical field, compound risks, the
ones due to age and insured person at the conclusion of the insurance, the insurer shall
want to withhold as less as possible because these are the bad risks leading to big
fluctuations of results.
In case of insurances giving the insured person the opportunity to increase the
insured amount, the insurer shall establish the initial withholding to such a level that
after the increase of the insured amount, the maximum limit of the sum it may withhold
is not exceeded.
One may consider the supposes decrease of the risk sum for the main insurance
and the increase of its own withholding value in time.
Additional services leading to the increase of the risk sum in case of death like
for example - accidents additional insurance, have to be considered when establishing
the withholding.
If both the death risk and the invalidity risk appear in an insurance agreement,
separate withholdings have to be established for the two risks. In practice both risks are
insured to the same extent, the assigned sum being established depending on the risk
that requires a higher degree of reinsurance.
In case of insured person’s death, all the policies concluded for it become
outstanding. In order to establish withholding in such cases, the insurer has to consider
all the insurance agreements concluded for the same insured person with their related
death insurances.
This shall be made with the help of the database, such risk accumulations
being able to be determined under the name of risk accumulation control.
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Văduva, M.
REFERENCES:
[1]. Alexa, C.; Ciurec, V. - Insurances and Reinsurances in International Trade, All Beck
Press, Bucharest, 2005
[2]. Văcărel, I.; Bercea, F. - Insurances and Reinsurances, Expert Press, Bucharest, 2006
[3]. Văduva, M. - Reinsurances, Mirton PressTimisoara, 2006
[4]. Văduva, M. - Insurances, Mirton PressTimisoara, 2006
Annals of the University of Petroşani, Economics, 9(2), 2009, 329-334
329
GLOBALISATION AND e-EUROPE PROGRAMS
TOMIŢĂ VASILE, DRAGOŞ STUPARU *
ABSTRACT: Globalisation is a fairly broad term that describes the phenomena of the
'local' turning into the 'global', or the coming together of different aspects of the world into a
single and identifiable state. While the term globalisation may have at first been strictly applied
to the international financial marketplace and its deregulation, what it means for many today
has as much to do with cultural and political realities as economic ones. Globalisation involves
economies, cultures and political movements in all of the different parts of the world. There is
nothing new about different countries and cultures becoming integrated and working together,
what is new though is the speed that it is now taking place. The Internet has also had a large
effect on the acceleration of globalisation and can potentially act as a common cultural
denominator. Broadcasting and the Internet are still economically and culturally dependent on
other issues however and are not ubiquotous everywhere. From this point of view the e-Europe
idea are the European vision of an information society these are the ways of implementing the
same goal - with the use of computer networks and other multimedia.
KEY WORDS: globalisation, computer network, Internet, communication, e-Europe
program
1. THE INTERNET AND THE GLOBALISATION
Globalisation, the unavoidable process which the world entered, is affecting
every one of us in different ways, sometimes right, other times not so right.
There are many different definitions of globalisation, but most acknowledge
the greater movement of people, goods, capital and ideas due to increased economic
integration which in turn is propelled by increased trade and investment. It is like
moving towards living in a borderless world.
Globalization means growing permeability of all the boundaries such as time
and space, national and state borders, borders of economy, branches and organizations
and less tangible boundaries such as cultural standards and their assumptions [1].
Globalization is an octopus whose international tentacles touch practically all
aspects of the state's activity. This expansion is seen mostly in political, economical,
*
Assoc.Prof., Ph.D., University of Craiova, Romania, vasiletomita@yahoo.com
Lecturer, Ph.D., University of Craiova, Romania, d_stuparu@yahoo.com
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Vasile, T.; Stuparu, D.
military and financial areas. The activity of a global company exceeds the state borders
and is not attached to the country of origin.
There has always been a sharing of goods, services, knowledge and cultures
between people and countries, but in recent years improved technologies and a
reduction of barriers means the speed of exchange is much faster.
Global economy conditions and they concern: acceleration of technological
changes, shorter life cycle of products, availability of production factors of similar
quality and price in the world, progressive globalization of new industrial branches,
etc.
On the other hand, global ideas cover globalization of: finances and own
capitals; markets and strategies; technology, research and development, lifestyles and
consumption models; governments and legal regulations; globalization as political
unification of the world and globalization of awareness.
Conditions of the present globalization process create, of course, many old and
new problems concerning, among others, social, economical, technical, technological,
legal, organization, cultural, awareness and ecological areas. Polarization and
differentiation of the world, e.g. into richer and poorer is growing, migrations, capital
and culture flows are becoming more intensive. The control of the state over
multinationals is usually limited. Supranational computerization and communication
standards structure is being built. It creates both opportunities and threats form the
point of view of states, nations, business groups and ordinary people. The question
arises: how will the globalization process be conducted and who will benefit from it?
It is probably necessary to change business philosophy for the so-called
sustainable development, put stress not only on economical values but also social and
ecological in the whole world. A company should generate also social values (e.g. for
the creation of new workplaces, demand and fulfilling people's needs) and ecological
values for the protection of environment where the company also operates. It is really
in its long-term need, not just egoistic maximizing its financial value [2].
The reality of globalisation is such that its implications are both impossible to
ignore and equally impossible to comprehend. Governments are unable to forecast and
deal with the realities of globalisation because in reality and by definition its force lies
beyond the scope of any local government body. International corporations have the
ability to expand more than the government of any one country and so are forcing the
entire global political landscape to re-evaluate and redefine itself.
The Internet is a worldwide network of computers that communicate using a
particular protocol. This is known as the Internet protocol and refers to the way that
information is grouped together into packets and how these packets are addressed. The
origins of Internet date back to 1960’s but he has a powerful development beyond 1991
when The World Wide Web became public.
The Internet is so big and all encompassing that it does require this fairly
abstract and vague definition. In 2008 the Internet is accessed by almost 22% of the
world population; however this number is highly skewed towards particular countries
and particular socio-economic groups.
Countries like those in Western Europe, North America and Oceania have a
much bigger percentage of their populations who are able to go online. In North
Globalisation and e-Europe Programs
331
America 73.6% of the total population have access to the Internet, and this is by far the
highest amount worldwide. The next biggest numbers are fairly far off with 59.5% for
Oceania and 48.1% for Europe. With the Internet meaning so much in terms of
networking and connectivity between industries, the lack of its relative availability in
certain regions of the Earth could lead to problems with future global economic
equality.
There are way more people in Asia than anywhere else on Earth, and so their
total Internet presence is still the biggest at 39.5% of world usage. However this pales
in relation to less populated areas when looked at in terms of relative population, as
here the Asian usage only accounts for 15.3% of the total. The difference in these two
figures gives us a worrying statistical insight into the global inequality of information
access. It really is a staggering difference when the top 20 countries in terms of Internet
availability account for over three quarters of total world usage, while the rest of the
world lies at a little less that one quarter, or only 23.8%. [2]
Exactly what these differences in Internet availability across the world mean is
a very interesting topic but not a very clear cut one. The Internet means different things
to different people and is used in unique ways depending on a number of
circumstances. The Internet has made new forms of social interaction possible while
also having a large impact on the existing economic and political spheres. Especially in
democratic nations the Internet has been used as a political tool that has a huge degree
of influence and an enormous scope. Other governments like those of China, North
Korea and Iran have restricted the free access to some parts of the Internet and have
thus restricted its scope and therefore its influence.
The Internet is growing at a rapid rate all across the world, and will continue to
do so for the foreseeable future. The rate that it spreads into particular countries will
have a big impact on the future of those nations both socially and economically. While
it seems doubtful at times, hopefully the global digital divide does not get bigger but
rather decreases and brings nations closer together in terms of both information
availability and economic prosperity.
2. e-EUROPE - AN INFORMATION SOCIETY FOR ALL
For the development of the globalization and world information processes, new
technologies and their constant implementation are needed. From this point of view in
the new reality - e-Europe idea are worth considering. Although in general, European
vision of an information society (more legal, state regulations, stressing also social
values, cultural differences, etc.) differs from American vision (more commercial,
technological information highways, market self-regulation), these are the ways of
implementing the same goal - with the use of computer networks and other
multimedia.
In connection with globalization processes, a possibility of creating new
workplaces, for the economic development and being competitive with American
economy, in December 1999 EU presented the program “e-Europe - information
society for everybody”. Its aim is to create the most competitive and dynamic market in
Europe before 2001.
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Vasile, T.; Stuparu, D.
e-Europe was launched to ensure the EU fully benefits from the changes
the Information Society is bringing. e-Europe's key objectives are to bringing
every citizen, home and school, every business and administration, into the
digital age and online. It plans to create a digitally literate Europe, supported by
an entrepreneurial culture ready to finance and develop new ideas. e-Europe
also wants to ensure the whole process is socially inclusive, builds consumer trust and
contributes to social cohesion.
The first plan, e-Europe 2002, foreseen for 2 years was accepted at the meeting
of the European Council in Lisbon, in March 2000, the second one, e-Europe 2005 was
accepted by the European Council in Seville in June 2002. Activities of e-Europe
program are based on initiatives of EU member countries which generally aim at
broadening access to the Internet, creating better and faster WWW sites, on-line
services and software and developing Internet structure, remembering about net safety.
These aims are to be achieved by mainly legal regulations (and not by self-controlled
market - as it is assumed in the USA). These regulations should strengthen activities
towards the development of the Internet in Europe, make EU firms more competitive
and lower the costs - through direct UE financial support, coming form special funds
[3].
The final shape of e-Europe initiatives was expressed in three thematic groups,
developed into 11 detailed points: cheaper, quicker and safe Internet (cheaper and
quicker access to the Internet, quick Internet for research and students, safe nets and
smart cards), investing in people and abilities (European young people in the digital
era, work in knowledge-based economy, general use of knowledge-based economy),
stimulating use of the Internet (acceleration of electronic economy, government and
authorities on-line, electronic access to public services, health service on-line, smart
transport system).
To achieve the above objectives the e-Europe action plan has set out a set of
key action lines:
Broadband: providing fast access to the internet at cheap prices, mainly
through telephone lines (DSL) or cable but also using wireless technologies (3G
mobile phones, WI-FI) and even satellite. Cheaper prices are to be guaranteed by a
proper implementation of last batch of EU legislation;
Security: making sure electronic networks are free from hackers and viruses
and safe enough to build consumer confidence in electronic payments. However, these
security concerns have to be balanced with potential intrusion in to citizen's right to
privacy;
e-Inclusion: making sure the information society is accessible to the largest
number of citizens, overcoming geographical and social differences;
e-Government: bringing public administrations closer to citizens and
businesses by providing modern online public services by 2005 - mainly through highspeed internet connections (broadband). e-Government plan was largely implemented
till the end of 2002. Until 2005, the whole country administration system should be
accessible on-line and the citizen will be able to contact the authorities on the Internet;
e-Learning: adapting the EU's education and training systems to the
knowledge economy and digital culture. The plan assumes that until the end of 2005 all
Globalisation and e-Europe Programs
333
UE schools, universities, museums, libraries and archives will be directly connected to
the Internet. The plan also ensures on-line studies;
e-Health: providing user-friendly electronic health services and information for
both patients and health professionals across Europe. The main issue under this action
line is the implementation of an infrastructure to provide for medical care, disease
prevention, and health education on-line. The plan assumes that until 2005 electronic
health cards will be introduced. They will enable the transmission of all necessary data
about the patient on the Internet. Until this time, all UE medical centers will have to be
directly connected to the Internet. Creating on-line medical services on a large scale is
also planned;
e-Business: stimulating the growth of e-commerce (buying and selling online)
and the inherent re-organisation of business processes to digital technologies. e-Europe
proposes to adopt e-commerce legislation and promote self-regulation, establish
electronic marketplaces for public procurement and encourage SME’s to "Go Digital".
For the development of e-business, EU wants to create legal facilities for the
companies using the Internet by removing those regulations which prevent e-business
from developing. These solutions will make the Internet a safer and easier place for
economic activity. Within the frames of e-Europe there is a tendency to lower the
prices for telecommunication services.
The first two years of implementing e-Europe programme were quite
successful. The number of households having the connection to the Internet increased
from 18% in March 2000 to 38% in December 2001, the number of school to 80%. As
a result of legal regulations and free competition process for telecommunication and
Internet services dropped. More and more companies sells and buys through the
Internet and works at home using a computer. The largest number of population (28%)
use tele-working in Denmark.
European funds helped to create the largest European educational network
GEANT which connects 27 national research and educational centres. At present, it is
the fastest net in the world, because it enables to send up to 10 gigabytes per second.
Further tasks implementing the assumptions of e-Europe are planned until 2005,
especially as far as on-line portals are concerned, e.g. government, educational, health,
economic and e-business with fast connection at low prices. Beyond the end of 2003
EU have their own cyber-police (Cyber Security Task Force) which take care of the
safety of information flow in computer networks, protection against hackers and
terrorists' attacks on the net.
In June 2005 The European Commission presented the program “i2010 - A
European information society for growth and employment” - the new initiative for the
years up to 2010. The i2010 strategy is the EU policy framework for the information
society and media. It promotes the positive contribution that information and
communication technologies (ICT) can make to the economy, society and personal
quality of life.
The i2010 strategy has three aims:
• to create a Single European Information Space, which promotes an open
and competitive internal market for information society and media
services;
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Vasile, T.; Stuparu, D.
•
•
to strengthen investment and innovation in ICT research;
to support inclusion, better public services and quality of life through the
use of ICT.
To achieve those aims there are various actions such as regulation, funding for
research and pilot projects, promotion activities and partnerships with stakeholders.
The strategy and actions, presented in the i2010 Communication of 2005, are
reviewed and updated through i2010 Annual Reports. The annual report also analyses
developments in the ICT sector and assesses the Member States' progress in
implementing their ICT objectives.
Moreover, i2010 has undergone a mid-term review to make sure that it remains
up to date with the rapidly changing ICT environment. The updated strategy was
presented in September 2009.
3. CONCLUSIONS
Globalization refers to increasing global connectivity, integration and
interdependence in the economic, social, technological, cultural, political, and
ecological spheres. Globalization is an umbrella term and is perhaps best understood as
a unitary process inclusive of many sub-processes (such as enhanced economic
interdependence, increased cultural influence, rapid advances of information
technology, and novel governance and geopolitical challenges) that are increasingly
binding people and the biosphere more tightly into one global system.
The Internet increase information flows between geographically remote
locations with the advent of fiber optic communications and satellites. The Web is the
most used component of the Internet.
In December 1999 the European Commission launched the e-Europe initiative
to bring the benefits of the Information Society to all Europeans. This was followed in
June 2000 by the e-Europe 2002 Action Plan, setting out a roadmap to achieve eEurope's targets, in June 2002, by the Action Plan for e-Europe 2005 as an important
contribution to the EU's efforts towards a competitive, knowledge-based economy, and
in June 2005 by “i2010 - A European information society for growth and employment”
a new strategy for the information society and media.
From 2005, Europe has:
• a modern online public services (e-government, e-learning and e-health services);
• a dynamic e-business environment relying on widespread availability of
broadband internet access at competitive prices;
• a secure information infrastructure.
REFERENCES:
[1]. Cable, V. - Globalisation and Global Governance, Royal Institute for International Affairs,
1999
[2]. Wachol, J. - E-business in the View of Globalisation Process, microCAD 2004,
International Scientific Conference, Miskolc, Hungary, 18-19 March 2004, pp.151-156
[3]. http://ec.europa.eu/information_society/eeurope/2005/
[4]. http://ec.europa.eu/i2010/
Annals of the University of Petroşani, Economics, 9(2), 2009, 335-346
335
ENVIRONMENTAL INDICATORS FOR RURAL AREAS SUSTAINABLE POTENTIAL IN THE NEW AND
OLD EU MEMBER STATES
JADWIGA ZIOLKOWSKA *
ABSTRACT: Environmental indicators are new instruments in the European Union
to assess the impact of agriculture on the environment in rural areas. Using these indicators in
the EU member states, changes in rural areas can be analysed and compared. Thus, strong and
weak points in rural areas in terms of environmental protection can be investigated. The aim of
the paper is to discus environmental indicators, recommended by the European Commission in
2006, for chosen new and old EU member countries. This indicator analysis can help to state
about potentials in rural areas to protect natural resources. Thereby, fields and countries can
be specified requiring higher potential of environmental protection.
KEY WORDS: Agri-environmental indicators, rural development, sustainability,
environmental protection, European Union
1. INTRODUCTION
Agri-environmental indicators and environmental indicators for rural areas are
new evaluation instruments for the policy for rural areas in the European Union since
the last few years.
Best known indicator sets for analysing changes of natural resources in rural
areas were developed by the European Environment Agency (EEA, 2005), the
European Union (EUROPÄISCHE KOMMISSION, 2001) and the OECD (OECD, 1997).
The very first indicators for rural areas and agri-environmental indicators were
developed within the Agenda 21 during the United Nations Conference on
Environment and Development in Rio de Janeiro in 1992. These indicators were based
on sustainability indicators initiated with the Brundtland report “Our common future”
in which the aim of sustainable development was defined as follows: “to meet the
needs of the present generation without compromising the ability of future generations
to meet their own needs”.
*
Assist.Prof., Ph.D., Humboldt University of Berlin, Germany,
jadwiga.ziolkowska@agrar.hu-berlin.de
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Ziolkowska, J.
The new indicators for integration of environmental issues in the Common
Agricultural Policy were defined by the European Commission in the strategic
document „Wegweiser zur nachhaltigen Landwirtschaft“ (KEG, 1999: 31). According
to this document and other recommendations of the European Commission, the
indicators for rural areas and agri-environmental indicators should cover ecological,
economical and social aspects.
In September 2000 a new project IRENA (“Indicator Reporting on the
Integration of Environmental Concerns into Agricultural Policy”) was established by
the General Direction for Agriculture and Environment, Eurostat, the Common
Research Unit and the European Environment Agency. The basis for these indicators
was DPSIR-Modell 1 developed by the European Environment Agency (EEA, 2006;
EUROPÄISCHE KOMMISSION, n.d.).
In March 2001 the European Commission presented new indicators in the
report „Statistical Information Needed for Indicators to Monitor the Integration of
Environmental Concerns into the Common Agricultural Policy“ (CEC, 2001).
Despite the intensive development of indicator methodology for rural areas,
any coherent definition of environmental indicators is known. Both EEA and EU and
OECD set different criteria and definitions for successful indicators. Irrespective of this
fact, the objectives of environmental indicators for rural areas are the same: to evaluate
the impact of agriculture on the environment and to reflect sustainable potential in rural
areas. By means of indicators successfully proved in the most EU-15 countries the use
of environmental resources can be planed and possible environmental threats for rural
areas in the respective EU-member states can be predicted.
2. RESEARCH OBJECTIVE
The main objective of the paper is to discuss the question of sustainable
environmental potentials in rural areas in the old (EU-15) and new EU member states
(EU-10). Special attention should be paid to the new EU member states which are
characterised by valuable and well maintained natural resources.
In this paper chosen environmental indicators recommended by the EUROPEAN
COMMISSION (2006) in the report “Rural Development in the European Union” were
analysed. The goal of the analysis is to compare available natural potentials in rural
areas in the new and old EU member states, as expressed with discussed indicators. In
the paper following environmental indicators for rural areas were considered: land
cover, areas under organic farming, utilised agricultural area (UAA) under less
favoured areas, areas of extensive agriculture, Natura 2000 areas, biodiversity,
development of forest areas, areas at risk of soil erosion, and climate changes.
Basing on the comparison analysis between the respective EU countries
conclusions on the existing environmental needs with regard to environmental
protection in rural areas can be drawn. Additionally, development possibilities and
directions in the respective countries in this term can be stated. Therefore, the fields
and countries can be indicated in which environmental protection requires more
1
DPSIR (Driving force – Pressure – State – Impact – Response)
Environmental Indicators for Rural Areas - Sustainable Potential …
337
support. Thereby, higher competitiveness with regard to environmental resources and
sustainability in agriculture can be projected in the respective EU member states.
3. METHODOLOGY AND RESULTS
With this study environmental indicators for rural areas, recommended by the
EUROPEAN COMMISSION (2006), were analysed for chosen EU member states. For the
research purpose following indicators from the group of ‘indicators improving the
environment and the countryside through land management’ were chosen:
1. Land cover
2. Less Favoured Areas
3. Areas of extensive agriculture
4. Natura 2000 area
5. Development of forest area
6. Biodiversity
7. Areas at risk of soil erosion
8. Organic farming
9. Climate change
In the following, the listed indicators for chosen EU member states will be
analysed and compared. For the current research, countries with a highest or lowest
index of the analysed indicators, both in the group of the new and in the group of the
old EU member states were selected. Additionally, the average for the EU-10 and EU15 was analysed and discussed. Thus, potentials in natural environment and
consequently sustainability of natural resources in the respective EU member states
were investigated.
Due to the missing statistical data the analysis does not include Romania and
Bulgaria which assessed the European Union in January 2007.
Land cover. The indicator ‘land cover’ is defined as the percentage of area in
agricultural/ forest and natural classes. According to the EUROPEAN COMMISSION
(2006) land cover is defined as distribution of forests, water, desert, grassland and
other physical features of the land, including those created by human activities. For
estimation of land cover in the European Union the CORINE Land Cover (CLC)
database, relating on the computer assisted interpretation of satellite images acquired in
1990 and 2000 was used. The CLC is a uniform methodology and nomenclature across
Europe, highly consistent and the only complete dataset for EU-27.
The indicator index for the named classes in all EU member states is displayed
in figure 1.
According to the CORINE Land Cover database the highest percentage of
agricultural area in the whole country area is to find in Denmark (almost 80 %) and the
Netherlands (more than 70 %) followed by Hungary, Ireland, Poland and Latvia
(between 60 and 70 %). The lowest percentage of agricultural areas is to find in
Finland and Sweden (less than 10 %).
The CORINE Land Cover data show that the agricultural areas cover the
largest area of almost all of the EU member countries. As an exception Estonia,
Austria, Slovenia, Finland and Sweden can be named. In these countries the largest
338
Ziolkowska, J.
in %
area is covered by forest. Furthermore, the natural area covers the lowest percentage of
the whole area of all EU member states. The highest percentage between all member
states indicates Greece (38.5 %) and Spain (29 %) followed by Cyprus, Ireland,
Sweden, United Kingdom and Finland (between 20 and 30 %); the lowest percentage
indicate again Luxembourg, Belgium, Denmark, Poland and the Netherlands.
80
70
60
50
40
30
20
10
0
BECZDKDEEEGRESFR IE IT CYLVLTLUHU M NLATPL PT SI SK FI SEUK
% agricultural area
% forest area
% natural area
Source: Own performance according to EUROPEAN COMMISSION (2006)
Figure 1. Area in different categories of land cover in the EU-15 in 2000
The presented indicators of different categories of land cover confirm
differentiated natural conditions in each EU member state. These conditions influence
and determine further the potentials in rural areas in terms of the sustainable use of
natural resources. The presented categories of land cover in the EU member countries
give a background of possibilities and potentials which will be discussed in the
following.
Less Favoured Areas (LFA). Less favoured areas are defined in the European
Union as areas under particular difficult conditions which, in the most cases, depend on
natural conditions. To improve the competitiveness of farmers in these areas, less
favoured areas are supported from the European Agricultural Guidance and Guarantee
Fund (EAGGF).
According to the Council regulation (EC) No 1698/2005 (COUNCIL OF THE
EUROPEAN UNION, 2005) following areas are eligible for financial support:
• Mountain areas or regarded as areas north of the 62nd parallel and certain
adjacent areas,
• Areas affected by significant natural handicaps and
• Areas affected by specific handicaps.
Problematic is the collection of the information, particularly at regional level
and for the areas affected by specific handicaps. Furthermore, the information is not
systematically reported in Rural Development programmes and the only survey
collecting this information at community level is the Farm Structure Survey. Moreover,
Environmental Indicators for Rural Areas - Sustainable Potential …
339
a part of the utilised agricultural areas (UAA) may not be covered by this survey (very
small farms and common land) and there is no distinction between areas with
significant or with specific handicaps (EUROPEAN COMMISSION, 2006: 192).
The cover of LFA in the UAA can be analysed according to following
categories: Non Less Favoured Areas; Less Favoured Areas Mountain; other Less
Favoured Areas/ Less Favoured Areas with significant handicaps; Areas with specific
handicaps.
In the following the first category was discussed. Analysing the land cover in
non less favoured areas, regions with very good and good farming and environmental
conditions can be found. According to the EU survey (EUROPEAN COMMISSION, 2006)
the whole country area of Luxembourg, Malta and Finland can be classified as less
favoured. Other countries are characterised by different percentage of less or non less
favoured areas. The results for this indicator are displayed in figure 2.
in %
120
98,9
100
80,8
80
60
40
51,6
42,9
EU-15
EU-10
13,4
9,5
20
0
Denmark
Portugal
Hungary
Cyprus
Source: Own performance according to EUROPEAN COMMISSION (2006: 94)
Figure 2. Percentage of UUA in non less favoured areas
The figure shows that in the EU-15 most favourable environmental conditions
are in Denmark (99 % non less favoured areas) and in the EU-10 – in Hungary
(80.8 %). Similarly, the lowest percentage of non less favoured areas is in Portugal (for
the EU-15) and in Cyprus (for the EU-10). Comparing the indicators in the EU-15
(51.6 %) and EU-10 (42.9 %) marginal differences can be stated. However, the
conditions in the EU-15 are visible more favourable. Rural areas in the EU-10 are more
disadvantaged and have, therefore, less natural resources with high environmental
potentials.
Areas of extensive agriculture. The extensive agriculture is defined as: area
under arable crops production (except forage crops), when the regional yield for
cereals (excluding rice) is less than 60 % of the EU-27 average; area for grazing
livestock production (cattle, sheep & goats), when the stocking density does not exceed
1 Livestock Unit per hectare of forage area (forage crops, permanent pastures and
meadows). The evaluation of the extensive character of agriculture should be made at
the most detailed geographical level possible.
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Ziolkowska, J.
In this paper the percentage of UAA for extensive arable crops is discussed as
a characteristic for the areas of extensive agriculture. According to the EU data, visible
differences between the respective EU member countries in terms of this indicator can
be stated (figure 3).
in %
70
58,4
60
50
40
26,1
26,0
30
18,7
20
6,3
10
2,0
0
Portugal
Greece
Cyprus
Slovakia
EU-15
EU-10
Source: Own performance according to EUROPEAN COMMISSION (2006: 94)
Figure 3. % UAA for extensive arable crops
The analysis shows that agricultural production is more extensive in the new
EU member states. The highest percentage of UAA for extensive arable crops in the
EU-10 is in Cyprus (58.4 %) and the lowest in Slovakia (18.7 %). The latter value is,
however, higher than the lowest level for the EU-15 and similarly high compared to the
highest level in the EU-15. Moreover, for the countries Belgium, Czech Republic,
Denmark, Germany, France, Ireland, Luxembourg, Hungary, the Netherlands, Austria,
Finland and United Kingdom the indicator takes the value of zero. This denotes
intensive crop production in these countries. Thus, countries with more favourable
conditions for environmental protection can be selected (see figure 3).
Natura 2000 area. This indicator provides information on the preservation of
natural environment and landscape and the protection and improvement of natural
resources. Natura 2000 is a network of areas with the aim to conserve natural habitats
and species of wildlife which are rare, endangered or vulnerable in the European
Community.
Analysing the territory under Natura 2000 great differences between the old
and new EU member states can be found. In the EU-15 the largest territory under
Natura 2000 is to find in Spain (24.7 %) which is only less than a half of the territory
in Slovenia - the country with the largest protected area under Natura 2000 in the EU10 (Figure 4). The United Kingdom and Cyprus are the countries with the lowest
percentage of area under Natura 2000 (6.2 % and 5 % respectively). The comparison of
the average in the EU-15 and EU-10 shows that in the new EU member states more
valuable natural resources exist. This denotes that the new EU member states have
more sustainable potentials in terms of environmental benefit than the old EU member
states.
Environmental Indicators for Rural Areas - Sustainable Potential …
in %
60
341
54,3
50
40
24,7
30
20
16,4
13,2
6,2
5,0
10
0
Spain
UK
Slovenia
Cyprus
EU-15
EU-10
Source: Own performance according to EUROPEAN COMMISSION (2006: 98)
Figure 4. % Territory under Natura 2000
Development of forest area. The development of forest area is measured as an
average annual increase of forest and other wooded land areas over a certain number of
years. As applied for the Global Forest Resources Assessment Update in 2005, the
forest is defined as land spanning more than 0.5 hectares with trees higher than 5
meters and a canopy cover of more than 10 percent, or trees able to reach these
thresholds in situ. It does not include land that is predominantly under agricultural or
urban land use. Figure 5 shows that countries of the EU-15 indicate almost five times
higher average annual increase of forest area than the new EU member states. The
leading country in the EU-15 is Spain with 152.4 thous. ha average annual increase of
forest area and in the EU-10 Poland (26.6 thous. ha/ year). In these countries more
chances for sustainable development of natural resources are given.
1000 ha/ year
400
374,2
300
200
152,4
79,8
100
26,6
1,6
0
Spain
Finland
Poland
Slovakia
Source: Own performance according to EUROPEAN COMMISSION (2006: 110)
Figure 5. Development of forest area
EU-15
EU-10
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Ziolkowska, J.
Biodiversity: High Nature Value farmland and forestry. According to the
European Commission the High Nature Value farmland (HNV) and forestry are
associated with high grade of biodiversity. The HNV farmland indicator distinguishes
following types of high nature value farmland:
• Farmland with a high proportion of semi-natural vegetation,
• Farmland dominated by low intensity agriculture or a mosaic of semi-natural
and cultivated land and small-scale features,
• Farmland supporting rare species or a high proportion of European or World
population.
The indicators can be estimated on the basis of land cover data (CORINE
database) and agronomic farm level data (in particular FADN) and are expressed as a
percentage of UAA of High Nature Value farmland.
The indicators for the new and old EU member states are displayed in figure 6.
in Mio. ha
30
26,5
25
20
15
8,9
10
4,2
5
0,0
2,0
0,0
0
Spain
Belgium
Poland
Lithuania
EU-15
EU-10
Source: Own performance according to EUROPEAN COMMISSION (2006: 104)
Figure 6. High Nature Value Farmland
The analysis shows that the largest areas of High Nature Value farmland and
forestry in the EU-15 is to find in Spain (almost 9 Mio. ha) while in the EU-10 – in
Poland (2 Mio. ha). The lowest coefficient indicate Belgium (0.01 Mio. ha) and
Lithuania (0.02 Mio. ha). Comparing the old and new EU member countries great
differences can be stated. In the EU-15 almost 26.5 Mio. ha of High Nature Value
farmland are registered while in the EU-10 only 4.2 Mio. ha. The analysis confirms
that with respect to the biodiversity great differences between the member states exist.
However, in the new EU member states the most valuable natural areas are
maintained as protected areas and are not used for farming. On the other hand, the
farming areas are rather used for production purposes without any attention to natural
resources. To get to the average of the EU-15 member states with regard to the areas of
High Nature Value farmland a lot of afford has to be made in the new member states.
This, however, is possible in a long term period also by means of agri-environmental
programmes as obligatory political measures for policy of rural areas in all EU member
states.
Environmental Indicators for Rural Areas - Sustainable Potential …
343
Areas at risk of soil erosion. The indicator can be used to measure the level of
sustainability in agricultural production. On the one hand soil erosion is determined by
natural conditions, on the other, however, farming practices influence the risk of soil
erosion. Sustainable management contributes to less soil erosion. The higher
coefficients of this indicator reflect, therefore, that farming in the analysed region
(country) can not be called sustainable. The effects of the sustainable management can
be measured by means of the Pan-European Soil Erosion Risk Assessment model in
Tons/ha/year.
According to statistical data for Europe (Figure 7) Greece is the country with
the highest soil erosion risk in the EU-15 (5.8 Tons/ha/year) which can be explained
with natural conditions in this country. In the EU-10 the highest coefficient of soil
erosion was found for Czech Republic while the lowest for Estonia. Comparing the
EU-15 and EU-10 one can state that in the EU-15 higher risk at soil erosion exists.
This indicates less favourable natural conditions, more intensive farming practices, and
consequently lower potentials for sustainable development of rural areas in the EU-15
member states.
Ton/ha/year
7
6
5,8
5
4
3
1,9
0,6
1,3
2
1
0,1
0,1
0
Greece
Netherlands
Czech
Republic
Estonia
EU-15
EU-10
Source: Own performance according to EUROPEAN COMMISSION (2006: 118)
Figure 7. Areas at risk of soil erosion
UAA under organic farming. The indicator of UAA under organic farming is
based on statistical data for national and regional levels. According to statistical data
from Eurostat, Sweden is the country with the highest share of Utilised Agricultural
Area under organic farming (13 %). The lowest indicator in the EU-15 was found for
Ireland (0.7 %). In the EU-10 the largest area under organic farming is in Czech
Republic while the lowest in Cyprus.
In general, the EU-15 member states are characterised by more UAA under
organic farming (4.2 %) than the EU-10 (2 %) (Figure 8). This indicates that currently
the EU-15 member states contribute to a greater extent to environmental protection
than the new EU member states.
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Ziolkowska, J.
in %
14
13,0
12
10
8
6
4
7,0
4,2
2,0
0,7
2
0
Sweden
Ireland
0,1
Czech
Republic
Cyprus
EU-15
EU-10
Source: Own performance according to EUROPEAN COMMISSION (2006: 118)
Figure 8. Share of Utilised Agricultural Area under organic farming
Climate change: Production of renewable energy from agriculture and
forestry. The climate change can be measured with several indicators such as:
‘Production of renewable energy from agriculture and forestry’, ‘UAA devoted to
renewable energy’ and ‘greenhouse gas emissions from agriculture’. As renewable
energy is one of the most important questions in the European Commission the first
indicator will be analysed in this paper. For this indicator, data regarding biodisel from
oilseeds crops and ethanol from starch/ sugar crops are considered. Any other energy
sources like energy from short rotation forestry, energy from agricultural biogas
(livestock manure) or energy from cereal straw are included.
According to the EUROPEAN COMMISSION (2006: 181) production of
renewable energy from forestry covers:
• Purpose-grown energy crops (poplar, willow, etc.),
• Woody material generated by an industrial process (wood/ paper industry) or
provided directly by forestry and agriculture (firewood, wood chips, bark,
sawdust, shavings, chips, black liquor etc.),
• Wastes such as straw, rice husks, nut shells, poultry litter, crushed grape dregs
etc.
While the indicator for agriculture is based on indicators-set IRENA 27 (EEA,
2003), the analysis for the renewable energy from forestry is based on Eurostat –
Energy Statistics.
Figure 9 shows that the production of renewable energy from agriculture is
high differentiated in the EU. According to the available data the highest production of
renewable energy from agriculture is to find in Germany (946.3 KToe 1000 tons of oil
equivalent) while the lowest in the EU-15 in the United Kingdom (8.1 KToe). In the
new EU member states the highest coefficient can be found for Czech Republic
(54 KToe) and the lowest for Lithuania (4.5 KToe). Due to the lack of data for all EU
member states a comparison between the EU-15 and EU-10 is not possible at the
current time.
Environmental Indicators for Rural Areas - Sustainable Potential …
946,3
1000
kToe
345
800
600
400
200
8,1
54,0
4,5
0
Germany
United Kingdom
Czech Republic
Lithuania
Source: Own performance according to EUROPEAN COMMISSION (2006: 122)
Figure 9. Production of renewable energy from agriculture
4. CONCLUSIONS
In this paper, environmental indicators for rural areas in the old and new EU
member states were analysed and discussed. The indicators were investigated for
chosen member states which are characterised by the highest or lowest indicator
indexes.
The analysis of the land cover shows that agricultural areas make the highest
percentage of the total area in all EU member states. This indicates that environmental
issues have a great importance while analysing sustainable changes in economies of the
EU member countries.
In terms of the chosen indicators the analysis confirms great differences in
environmental conditions which influence sustainable potential in the respective EU
member states. However, no clear tendency between the respective EU member states
can be found.
Undoubtedly, the EU-15 member states have more sustainable potential with
respect to the following indicators: ‘Less favoured areas’, ‘Development of forest
area’, ‘Biodiversity: High Nature Value farmland and forestry’, and ‘UAA under
organic farming’.
With respect to other indicators such as: ‘Areas of extensive agriculture’,
‘Natura 2000 area’, and ‘Areas at risk of soil erosion’ the new EU member countries
indicate more advantages. This means that information exchange and cooperation
between countries in terms of experience in implementation environmental measures,
is highly necessary to improve and accelerate the process of making rural areas more
sustainable for the future.
346
Ziolkowska, J.
REFERENCES:
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Indicators to monitor the Integration of Environmental concerns into the Common
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[2]. *** - Council of the European Union - Council Regulation (EC) No 1698/2005 of 20
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[3]. *** - EEA (European Environment Agency) - Annual report 2002. Office for Official
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[6]. *** - Europäische Kommission - Ein Konzept für Indikatoren der wirtschaftlichen und
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[7]. *** - Europäische Kommission - Landwirtschaft und Umwelt: Einleitung.
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Annals of the University of Petroşani, Economics, 9(2), 2009
347
Index of Authors
B
BELU, M. (43)
BONCEA, A.G. (215)
C
CACIUC, L. (127)
COTLEŢ, B. (127)
CSIMINGA, D. (33)
D
DASH, P. (73)
DHINGRA, N. (83)
DOBRE-BARON, O. (195)
DR CEA, R. (245)
DRIG , I. (43)
G
GHIŢ -PLEŞA, R. (195)
GIURGIULESCU, A.M. (291)
H
HAŢEGAN, C. (127)
HIRGHIDUŞ, I. (5)
HOHOI, F. (107)
HOLT, A.G. (13, 21)
HOLT, GHE. (21)
HULEA, L. (29)
I
ILOIU, M. (33)
IONECI, M. (39)
ISAC, A. (43)
ISAC, C. (67)
ISAC, N. (51)
ISPAS, R. (57)
IV NUŞ, L. (67, 227)
K
KAR, J. (73)
KATSURO, P. (161)
KUMAR, G. (83)
M
MAN, M. (115)
MAZILU, M. (121)
M CRIŞ, A. (103)
M CRIŞ, M. (103, 107)
MEGAN, O. (127)
MITU, N. (287)
MONEA, M. (137)
MUDZURA, M. (161)
MUNGIU-PUP ZAN, C. (145)
N
NICOLAU, C.M. (153)
NICULESCU, G. (209)
NJANIKE, K. (161, 173)
P
PALIU-POPA, L. (185)
PANAIT, N.G. (191)
PÂRVULESCU, I. (195)
PETRINI, M. (203)
POPA, A. (307)
348
Annals of the University of Petroşani, Economics, 9(2), 2009
R
R BONŢU, C.I. (209, 215)
RADNEANTU, N. (221)
R SCOLEAN, I. (67, 227)
R VAŞ, O.C. (237)
RIDZI, R. (195)
RIZESCU, S. (245, 287)
S
SAV, S.M. (255)
ŠKODA, M. (263)
SLUSARIUC, G. (107)
SOCOL, A. (275)
SPULB R, C. (245, 287)
STANCIU, C. (245, 287)
STOICUŢA, N. (291)
STOICUŢA, O. (291)
STUPARU, D. (301, 329)
SZABO, R. (227)
T
TEIUŞAN, S.C. (313)
ŢARC , N. (307)
U
UDRIC , M. (319)
V
V DUVA, M. (325)
VASILE, E. (115)
VASILE, T. (301, 329)
V TUIU, T. (307, 319)
Z
ZIOLKOWSKA, J. (335)
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[1]. Anagnostopoulos, I.; Buckland, R. (2007) Bank accounting and bank value: harmonising
(d)effects of a common accounting culture?, Journal of Financial Regulation and
Compliance, 15(4), pp.29-44
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Quarterly, [Online], 42(6), Available at: http://www.pol.upenn/articles, [Accessed 20
January 2010]
[3]. Dardac, N.; Barbu, T. (2005) Monedă, bănci şi politici monetare, Editura Didactică şi
Pedagogică, Bucureşti
[4]. Koch, T.; McDonald, S. (2000) Bank management, Harcourt Brace & Company, Orlando
[5]. Greuning, H.; Bratanovic, S. (2003) Analyzing and Managing Banking Risk, The World
Bank, Washington
[6]. Russell-Walling, E. (2009) Rethinking bankers' pay, The Banker, 5 October, p.4
[7]. Weitzman, J. (2000) Cendant unit helps banks offer internet access, American Banker,
165(2), pp.9-20
[8]. European Private Equity & Venture Capital Association (2007) Annual Survey of PanEuropean Private Equity & Venture Capital Activity, Yearbook
[9]. National Bank of Romania (2009) Statistics report - Cards and numbers of terminals
Indicators, [Online], Available at: http://www.bnr.ro/Statistics-report-1124.aspx,
[Accessed 20 January 2010]