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211
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https://eprints.ibu.edu.ba/files/original/9479c736ca79c280407f40ac4e8a695a.pdf
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How Does Lending from Commercial Banks Impact Performance of Small Enterprises: A Case Study of District Hafizabad, Pakistan
Author
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Janjua, Azhar Ali
Hayat, Muhammad Azmat
Aslam, Muhammad
Abstract
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Abstract: This study examines the impact of lending from commercial banks on performance of small enterprises. Financial data of forty business entities of district Hafizabad have been collected from commercial banks, for the period of 2005 to 2013. “Net profit” in the first model and “sales” in the second model are used as dependent variables. Working capital, accumulated profit, net-worth and lending/financing amount are used as independent variables. The study suggests: Firstly, banks’ lending positively affects the performance of small enterprises. Secondly, financing amount illustrates positive effect on net profits of the firms. Thirdly, the preferred amount of lending to small enterprises is less than two million PKR.
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International Burch University
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2018
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PeerReviewed
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doi: "10.14706/JECOSS18811 "
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ISSN 1986-8499,
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/f8472b8b7b1881fbcbaea21b956f811e.pdf
aae69327bc5a08977748904d45d4e79d
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Journal of Economic and Social Studies
Financial Monitoring of Medication Consumption in
Bosnia and Herzegovina
Emira Kozarević, PhD
Faculty of Economics, University of Tuzla
Bosnia and Herzegovina
emira.kozarevic@untz.ba
Sabina Đonlagić Alibegović, PhD
Faculty of Economics, University of Tuzla
Bosnia and Herzegovina
sabina.djonlagic@untz.ba
Tatjana Krdžalić, MA
Institute for Public Health of Tuzla Canton
Bosnia and Herzegovina
tatjana.krdzalic@zjztk.ba
Abstract: Healthcare spending is nowadays one of the key issues of
healthcare system practice as its share in GDP has constantly increased
during past decades, which is now above 10% of GDP in developed
countries. However, very often it is more of an issue related to the
current political and socio-economic situation in a country rather than
the one managed by experts. Although one might expect that the
increase in healthcare spending contributes to better health of the
population, relevant indicators show that high healthcare spending in
Bosnia and Herzegovina (BiH) does not result in better health of its
population. Due to this reason, special attention needs to be paid to the
economic analysis of healthcare spending. Irrational use of medications
is just one of many problems associated with an inefficient health
system, but one that heavily impacts on the health economics. In
situations where it may not be easy to change the existing financing
models, we should explore how to be more effective in spending within
the existing structure. Better control of medication consumption could
be one of the actions that helps improve the effectiveness of the
available budget. Therefore, the general aim of the paper is to
determine the effect that financial monitoring of medication
consumption has on the control of increase in healthcare spending,
which in turn might help establishing a financially sustainable
healthcare system. Bearing in mind that irrational usage of
medications influences the access to healthcare services, destabilizes
country’s budget, and endangers the margin of social sustainability
(endurance), the constant financial monitoring of medication
consumption is important as it can help us recognize those segments
where consumption deviates from standard and where prevention
activities are needed. All this can result in the limitation of further
increase in medication consumption.
Volume 7 | Issue 1 |
Keywords:
healthcare spending,
healthcare spending control,
(irrational) medication
consumption, financial
monitoring
JEL Classification: I-11, I-15,
I-18
Article History
Submitted:
22.1.2018
Resubmitted: 12.2.2018
Accepted: 26.2.2018
http://dx.doi.org/10.14706/JE
COSS17718
5
�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
Introduction
Health is an economic potential, a segment of human capital that increases
productivity and reduces treatment costs. However, in no way is health a free
resource and it cannot be maintained without incurring costs. High quality
healthcare protection is the most cost effective investment into human capital.
The need for healthcare is unpredictable, sudden and unexpected, and it is in
society’s interest to recognize the real need for healthcare services. The characteristic
of healthcare spending is that the consumer of healthcare goods, as a rule, is
incapable of assessing their value. Unlike other goods, healthcare protection is
specific, primarily due to the basic economic laws acting in the field of healthcare.
The laws of demand and supply of healthcare services function in a specific market
that includes several mutually related markets such as the market for various types of
insurance (compulsory, additional) or different levels of treatment (outpatient
clinics, polyclinics, hospitals), labor market for healthcare workers, market for
medications, medical equipment, and so on. On the demand side, there are
indicators of population health while on the supply side there are indicators of
healthcare resources. When establishing the efficiency of healthcare market aimed at
providing efficient healthcare protection for every citizen, the key role is given to the
economic effects of deciding on the rational usage of ever limited financial resources.
From the macroeconomic point of view, the healthcare system creates a significant
burden on any economy – rich or poor, so limiting the increase in healthcare
spending is very important for everyone. Growing costs, irrational behavior, and
dissatisfaction in the healthcare system are self-evident, with the main reasons for
increased spending being: increased share of the elderly persons in the entire
population, increased number of patients with chronic diseases, introduction of new
medications (which, as a rule, are more expensive), influence of the pharmaceutical
industry, growing pressure exerted by patients, and easy access to medications.
Establishing the financial sustainability of healthcare system is by no means an easy
task, which is why the healthcare system needs to be perceived from the economic
perspective (the so called health economics). On the one side, some authors believe
that the financing of healthcare needs to be changed so that the system becomes
sustainable in the long run, while others think that the reduction of healthcare costs
is needed. When it comes to the efficient functioning of the healthcare system, the
economic analysis is given prominence over other types of analysis specific for the
market of healthcare services.
6
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
Health economics always starts with the assumption that healthcare services can be
analyzed as any other market activity. However, the process often ends in the
explanation why the market activity fails to lead to the efficient resource allocation in
healthcare. Economic analyses of healthcare spending in BiH are poorly represented
partly due to the lack of full scale data and their transparency and partly due to a
relative lack of economic experts’ interest in the research on health economics. The
increase of financial resources in the healthcare sector cannot be expected and the
room for savings which will not negatively affect the quality of healthcare protection
needs to be identified. The starting point of discussion in BiH is the aspiration that
the access to healthcare is universal, just, equal for all, and basically “free”. However,
healthcare costs are constantly on the increase and in the last ten years they have
been growing at an unsustainable rate. For example, in 2003, the total per capita
healthcare spending in BiH Federation was BAM 345 while the amount per an
insured person was BAM 417.1 According to the latest available data, in 2012 the
total per capita healthcare spending reached the level of BAM 714 while the amount
per an insured person was BAM 825 (Health Insurance and Reinsurance Fund of
BiH Federation, 2013). The average spending per an insured person in Republic of
Srpska in 2012 was BAM 714 (Health Insurance Fund of Republika Srpska, 2013).
The problem of monitoring healthcare spending in BiH is rather serious as there is
no centralized system of monitoring spending on the state level. Monitoring is
additionally complicated by the current administrative organization of the healthcare
system. The data on healthcare are scarce and they are not systematized and unified.
This is supported by the fact that BiH was first included in the European Health
Consumer Index in 2014 and was positioned last due to an enormous lack of data
on its healthcare protection, receiving 420 out of 1,000 points, less than Albania,
Serbia, and Montenegro (Björnberg, 2015).
Medications are one of important items in the total healthcare spending. With
limited financial resources, increasing medication consumption directly influences
the access to healthcare services, destabilizes country’s budget, and endangers the
margin of social sustainability (endurance). Medication consumption in world’s total
healthcare spending is placed third, with 17%.
This paper brings the analysis of potential control of medication consumption and
the financial aspect of medication consumption monitoring aimed at the reduction
of healthcare spending. The main research hypothesis is postulated as follows:
“Financial monitoring of medication consumption can contribute to the
1
The International Banking Code for BiH currency is BAM.
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
rationalization of medication consumption, reduction of healthcare spending, and
the efficiency of the entire healthcare system.” Although the paper focuses on the
healthcare system in BiH, some results and recommendations can be generalized and
are potentially universal, taking into consideration the recent global socio-economic
events (increased share of the elderly persons in the entire population, increased
number of patients with chronic diseases, increased public expenditure following the
crisis in 2008, slow economic growth, and so on).
Review of Previous Research on Health-Related Spending
Medications are third most common cause of mortality in the USA and Europe,
following heart diseases and cancer. Patients trust their physicians and physicians
trust the pharmaceutical industry although these relations are not free from
difficulties (medication testing is sometimes inadequately conducted, for example). It
is expected that medication allocations are to increase in the comming years. The
USA data indicate that direct costs of cardiovascular diseases would triple between
2010 and 2030, from USD 273 billion to 818 billion, while indirect costs would
increase in the same period by 61%, from USD 172 billion to 276 billion (Vitezić,
2013, p. 246-251). The annual number of deaths in the European Union (EU)
resulting from patients’ not taking medication correctly or not cooperating with
their physicians was 194,500, which costs the EU the amount of EUR 125 billion a
year (Pharmaceutical Group of the European Union, 2012).
Decreased spending in healthcare requires the checks and controls of executed
interventions and diagnostic and therapeutic services as well as the checks of whether
they are really needed. That is why a unified system of expense list needs to be made
that would include five important categories: hospitals, prescription-only medicines,
diagnostic procedures, treatment costs, and home treatment costs (Ott et al., 2000).
Polić-Vižintin, Tripković, Štrban-Štok, Štimac, and Čulig (2006) analyzed
healthcare indicators and non-hospital medication consumption by using the data
gathered from the vital statistics and healthcare-statistics research. They concluded
that in order to rationalize medication consumption, treatment should be focused on
primary healthcare protection, which is why constant education of family doctors
needs to be made regarding proper therapy based on professional guidelines. As
specified by the EU/WHO Working Group (2008), the primary healthcare
protection, as a rule, should be able to solve at least 80% of all health problems.
Gajski (2009), for example, stated that most medications prescribed for the
treatment of cardiovascular diseases in Croatia are actually unnecessary and serve for
the medicalization of the society and the profit of pharmaceutical company with
8
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
pharmaceutical therapy costs in Croatia amounting to some HRK 7 billion, which is
a waste of money.
Vlahović-Palčevski (2000) stated that the analysis of medication consumption gives
us the data on the rationality of their use, indicates the segments where efforts should
be made so as to improve the current situation, and tells us about therapy tradition,
irrationalities, and abuse. Monitoring and analyzing medication consumption was
the main reason for the development of the so called ATC (Anatomical,
Therapeutic, and Chemical)/DDD (Defined Daily Dose) methodology. It was
proved useful for the comparison of medication consumption at a national and
international level as well as for long-term evaluation of consumption. A study
conducted some 20 years ago by the Drug Utilization Research Group (DURG)
showed the lack of universal methodology of medication consumption monitoring,
which preceded the establishment of a unique Anatomical Therapeutic Chemical
(ATC) classification system. This resulted in the introduction of defined daily dose
as a statistical unit for medication consumption monitoring instead of packages,
prescriptions, and financial units, which allowed for a detailed analysis of medication
consumption (Čulig, 2004).
Polypragmasy (i.e. parallel application of three or more medications) is recognized as
an increasingly serious problem in the existing systems of healthcare protection. It
can increase the complexity of healthcare protection and its costs. Apart from the
elderly persons, some groups of patients have a higher risk of polypragmasy, such as
psychiatric patients and patients who constantly take five or more types of
medications, patients treated by several physicians, recently hospitalized patients,
patients with concurrent comorbidity, patients with lower education, visually
impaired patients or those with decreased physical activity and ability in daily
activities. Polypragmasy is indicated as one of the main problems in modern world
pharmacotherapy and its solutions require the education of both physicians and
patients.2 Regular analysis of prescription issuance practice proved to be efficient in
reducing unnecessary medications. A study in which the patients brought all the
medications they use, with their physicians being given directions on polypragmasy,
resulted in 42% of the patients being under the risk of polypragmasy, for 20% of
them the medication use was suspended and for 30% of them the medication dose
was changed. In addition, pharmacists sent the list of medications to the physicians
whose patients use potentially harmful medications, which reduced the issuance of
prescriptions by 12.5%. Furthermore, consulting a clinical pharmacologist reduced
2
http://www.genera.hr/hr/36/propisivanje-lijekova/#.VbN3Z8vsZdg
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
polypragmasy and the number of medications from 7.9 to 4.1/1000 cases (Kašuba
Lazić, 2015).
Monitoring and control of medication consumption is also important from the
aspect of environment protection as medication residues are often found in the
environment in small concentrations. During the procedure of authorization of a
medication, most regulatory agencies specify the assessment of potential risk that a
medication can make on the environment (Čogelja Čajo et al., 2010).
The amount pharmaceutical companies spend on physicians is still not precisely
known. However, according to the financial reports of nine leading US medication
manufacturers, this amount is estimated to be dozens of billions of US dollars a year.
This actually means that the pharmaceutical industry strictly regulates the ways their
medications are prescribed and this includes not only physicians but also university
professors that affect research results, medical practices, and even disease definition
(Angell, 2009). The research conducted by Consumers International, the
international organization for consumer protection, showed that pharmaceutical
companies spend twice as much on persuading physicians to prescribe their
medications than on researching new medications (Republic of Serbia AntiCorruption Agency, 2012).
In 2011, with the assistance of the World Bank (WB), aimed at increasing
transparent prices of medications in BiH, a survey was made into the retail sale prices
at pharmacies for 36 frequently used medications. The selected medications included
essential medications used for frequent diseases (cardiovascular diseases, nerve
diseases, diabetes, and respiratory diseases). The data were collected from 82
pharmacies randomly selected in eight cantons/regions in the entire BiH. It became
evident that brand name medications are not common in BiH as they were
registered in only 27% of the cases, which is why the data refer primarily to generic
medications (WB, 2012).
Good practice in creating and managing sustainable healthcare system is evidenced
by Singapore with excellent results in high quality of its healthcare system and in
control of healthcare protection costs. The per capita cost of healthcare protection in
that country or the cost of healthcare protection presented as the GDP percentage is
lower than in all high income countries in the world. There are three crucial reasons
for achieving available excellence − first of all, long-term political unity, then the
ability to recognize and establish national priorities, and finally constant aspiration
for collective welfare and social harmony in the country (Haseltine, 2013).
10
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
The importance of reliable data and information is confirmed by Benković (2009),
who aimed at checking whether the results of the research conducted by the
Croatian Health Interview Survey (CHIS) were used in planning the resources at the
level of country’s public health institutes. The usage of reliable data and information
that serve as the basis for making fiscal and strategic decisions is the main support in
healthcare management. It is also the key to strategic management that uses
necessary information needed for setting the focus, selecting priorities, and
establishing good “macro policy at the micro level”. The results showed that only
32% of the subjects used the results of the CHIS in their plans, which led to the
conclusion that such a percentage would make efficient local level planning and
planned budget savings difficult to achieve. Recognizing the importance of using
data such as those collected by the CHIS is an extremely important factor in local
and national healthcare planning and the factor that enables significant budget
savings in healthcare.
Ott, Kesner-Škreb, Bajo, Bejaković, and Bubaš (2000) underlined that even though
healthcare and health insurance reform is not easy to implement, potential changes
aimed at the improvement of health and healthcare are multiple while costs would
be significantly lower than potential savings. The reform of the existing health
insurance system directed towards higher reliance on private insurance and
strengthening market elements is required for the long-term sustainability of the
system. Consequently, it might reduce the excessive role of the state, limit its
paternal behavior, and create the conditions for income increase.
Theoretical Framework of Medication Consumption Monitoring and its
Financial Aspect, with the Focus on Bosnia and Herzegovina
Healthcare is one of the most complex systems in every country and it is a sub
system of the entire socio-economic system. Its organization functionally consists of
(Salihbašić, 2009):
• Primary healthcare that includes outpatient clinics;
• Polyclinics, general and specialized hospitals, specialized institutes, medical centers;
• Other institutions including public health institutes, emergency rescue teams, and
pharmacies.
The main problem in this field is financing. Several models of financing are used in
the world, the most known being (Salihbašić, 2009):
• The Bismarck model, which functions on the principle of solidarity and
reciprocity, as is the case with BiH;
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
• The Beveridge model by which healthcare is financed through taxes paid by
citizens (for example, Great Britain, Norway, Sweden, Ireland);
• The Semaškov model emerged in the Soviet Union and was provided for the entire
population. Insurance is financed from the central state budget whereby the
government is responsible for making decision on the rights and obligations of the
insured persons. As a rule, this means that healthcare protection is free although
there is the problem of users having excessive expectations without additional
payments. Nowadays, this model is present is some Asian countries (China,
Mongolia, North Korea, Vietnam) and in Cuba;
• Private financing that includes the basic insurance with the payment of additional
insurance according to individual needs and purchasing power.
The cost assocated with the healthcare sector is significant from the macroeconomic
point of view, so the limitation of increase in healthcare spending is particularly
important as the increasing healthcare spending is a burden to both developing and
developed countries. Growing costs, irrational behaviour, and dissatisfaction within
the healthcare system are self-evident and the main reasons for increased spending
are: increased share of the elderly persons in the entire population, increased number
of patients with chronic diseases, introduction of new medications (which, as a rule,
are more expensive), influence of the pharmaceutical industry, growing pressure
exerted by patients and easy access to medications.
It is important to note that, while medication consumption is one of the main
generators of healthcare spending, it is also the item that could be more easily
controlled and rationalized. The increase in pharmaceutical costs raises the issue of
possibile need for financing healthcare systems in the future. Every country should
be be interested in protecting itself against uncontrolled increase of medication
spending, aiming to reduce it and make it more rational. Providing the population
with high quality, safe, and efficient medications that would be rationally used is
only one of the basic goals of every healthcare system. Hence, one of the measures
for rational spending on medications is a systematic (national) policy of medication
consumption monitoring as well as creation of a unique information system that
would integrate all the data relevant for medication consumption, from both
hospitals and non-hospital institutions, including the data on individual medication
consumption.
However, BiH has a fragmented internal organization with centralized Republic of
Srpska (RS), decentralized BiH Federation (F BiH), and Brčko District, which
further complicates successful conduct of fiscal policy. This leads to an unsatisfactory
level of efficiency in improving country’s economic growth. As reported by the WB
12
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
(2014), the potentials of BiH economy for mid-term growth are limited by poor
business environment that still requires essential reforms and prevents investment
and growth, with the fiscal policy still focused on the distribution of revenue rather
than growth.
Healthcare and health insurance system in F BiH is, pursuant to the Constitution
and legal regulations, based on the principles of shared competence between the
federal and cantonal authorities. Pursuant to the provisions of Law on Healthcare3,
Law on Health Insurance 4 , and other acts based on these laws, the federal
government is in charge of creating the policy and adopting laws while the cantonal
government implements laws and establishes and adapts cantonal healthcare policy
with the policy at the level of F BiH. Cantonal public health institutes function with
difficulties, healthcare spending increases while the structure of the insured persons is
unfavorable.
Similar to other South East European countries, BiH has the model of social
insurance with employees and employers paying contributions to the public health
funds which finance the majority of healthcare services. That is why healthcare
financing heavily relies on salary taxation and the capacities of tax authorities to
collect payments5. The existing model of healthcare financing in BiH is based on
the past times as the remnants of the Bismarck model. Healthcare insurance
contributions were never a part of the state budget but were directly paid to health
insurance funds. The contributions for compulsory health insurance are based on the
taxation of the amounts registered in the pay sheet rather than by health insurance
premium or general taxation.
The healthcare sector in BiH does not function on economic prices but on the
solidarity system that implies that the rich show their solidarity with the poor, the
young with the old, the healthy with the sick, and individuals with the family. This
is what makes the total income of the Health Insurance and Reinsurance Funds
which stand for the main source of funding for healthcare protection in both BiH
entities. What is evident in the healthcare system is a rather non-transparent flow of
resources between different non-budget funds that are supposed to pay contributions
on behalf of their users (pensioners, registered unemployed persons) and the limited
government contributions on behalf of some users exempt from paying
contributions. Consequently, the state invests, or is supposed to invest, extreme
efforts to provide as efficient healthcare protection as possible for its users with the
3
Official Gazette of BiH Federation No. 46/10
Official Gazette of BiH Federation No. 30/97, 07/02, and 70/08
5
http://www.fmoh.gov.ba/index.php/projekt-jacanja-zdravstvenog-sektora
4
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
available resources. Even though it sounds easy, it is very difficult to implement this
in practice.
Looking at the data on some financial indicators in BiH, one can notice a very high
share of healthcare spending in GDP when observed in the context of the economic
development of the state. Healthcare-related public spending is constantly on the
increase; in 2002 it was 62.5% while in 2012 it was 71.1% of the total healthcare
spending. On the other hand, social health insurance has a downward trend while
private health insurance, present since 2009, has a very low percentage of 0.8% to
1% of the total health insurance. The very fact that some ten years ago, per capita
spending was USD 122 and that the number increased to USD 447 in 2012
indicates that healthcare system becomes more expensive year after year.
From the traditional aspect of efficiency, safety, and quality as well as from the
aspect of financial cost effectiveness, medication consumption monitoring in
developed countries started 40 years ago, mainly due to the fact that the funds for
these purposes are always limited and the needs are increasingly higher. A constant
lack in financial resources is registered in all spheres of life and in the healthcare
protection system in particular. New medications, development of medical
technology, new methods of treatment, constant education and training of
healthcare workers, introduction of information systems, and so on, all require
additional resources that are almost always limited. The country is given a serious
task – to provide additional resources when the current ones are insufficient even for
the present costs of healthcare protection.
In addition, increased number of patients suffering from various diseases of modern
times (such as cardiovascular diseases, cancer, diabetes) results in increased need for
medications. Medication consumption has been rapidly growing for years, which is a
problem threatening sustainable and stable financing of the healthcare system. A
systemic approach to this problem is not evident in practice since mentioning
finances in the context of health and treatment is considered inappropriate and
unethical. Besides, the issue of pharmacotherapy has escalated recently, when it
reached the level the society cannot bear. Moreover, medication manufacturers that
are highly influential in the medical science, education, politics along with the media
have no interest in putting this topic in the discussion focus (Gajski, 2009).
Prescribed medications cover 10% to 20% of the total healthcare costs and are the
fastest growing segment of the total spending, which raises concerns over medication
consumption. In order to resolve this issue, we must first discuss the potential causes
of the increase in medication consumption.
14
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
One of the reasons of increased medication consumption is definitely medication
abuse which can cause various side effects, resulting in the need for additional
treatment and reflecting on the increase in healthcare spending. According to the
World Health Organization (WHO, 2008), in some countries the costs of
medication side effects, including hospitalization, surgeries, and lost productivity, are
higher than medication costs.
Also, the studies conducted on the territory of the EU showed that some 200,000
people die every year due to nonadherence (not taking the prescribed therapy or
taking it inappropriately). Annual nonadherence costs in the EU amount to EUR
125 billion and they include the treatment of chronic disease complications as a
consequence of not taking medications. Low adherence for the patients suffering
from hypertension correlates to the increased risk of vascular diseases,
hospitalization, and increased costs of healthcare protection, while a higher level of
adherence for the patients suffering from hypertension results in better health of
individuals and net economic profit (Dragomir, 2010). Adherence reduces the total
annual healthcare spending for the patients with chronic vascular diseases by the
lower number of hospital days and lower hospital costs. The effects of adherence are
more evident for the patients over the age of 65 (Roebuck et al., 2011).
Very often, influenced by marketing activities of the pharmaceutical industry,
patients purchase medications on their own and increasingly use alternative
medicine. Consequently, medication becomes a merchandise article and medication
prescription becomes a routine activity made in silence with very little written or oral
information provided (Stević et al., 2011). Besides, inappropriate package of certain
medications can result in increased financial spending, mainly due to the package
content which does not correlate with the length of treatment. This could be easily
overcome if physicians prescribed the exact quantity needed for therapy treatment
and if pharmacies would supply medications per piece.
One of the specific features of BiH medication market is related to the conditions
under which pharmacies function. The legal regulations, among other things, cover
pharmacy margins – maximum up to 8% for wholesale and up to 25% in retail sale6.
Very often, retail sale margins go above the highest limit and are as much as 30%. It
seems that this is still not enough for pharmacists as they mainly dealt with this issue
at the meeting held at the beginning of 2016. One of the suggestions was that the
margin increases to the record high 40%, which is not in accordance to the legal
regulations.
6
Rulebook on Medication Wholesale and Retail Sale Margin, Official Gazette of BiH Federation No. 40/02, 50/02,
15/06, and 9/08
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
The Rulebook on Price Monitoring, Calculating Medication Prices and Reporting
on Medication Prices in BiH 7 would be an excellent instrument for monitoring
medications in BiH, which seems to be inoperative in practice. As recommended by
the WB, the new rulebook on regulating medication prices is under preparation,
which, if strictly followed, could lead to significant savings. Medications are cheaper
in RS than in F BiH, mainly due to the centralized system of medication
procurement, which allows for lower prices. Although the F BiH Government is
under pressure to reduce medication costs, pharmacists are of the opinion that the
government should “cut the costs” in other segments, such as waiving the valueadded tax (VAT) on medications instead of reducing pharmacy margins. It was
stated that some reductions would amount from 25% to 30%, which, as claimed by
the pharmaceutical chambers, pharmacies would not be able to bear. Major
dissatisfaction was expressed as the representatives of professional associations were
not given the opportunity to comment the proposed wording of the rulebook. They
clearly rejected to support the proposal that Serbia be the reference country for
establishing the prices of pharmaceutical services as the prices in that country are
specified through administrative procedures. The representatives of professional
pharmaceutical associations agree that the medication market needs to be regulated
but not by replicating the experiences of other countries without taking into
consideration the specific characteristics of the medication market in BiH.8
Many European countries introduced a series of measures to combat the growth of
pharmaceutical spending. Some of these measures include reduction of prices of
pharmaceutical products, which can be achieved through negotiations with
pharmaceutical manufacturers, reduction of pharmaceutical margins, introduction of
quotation price, application of obligatory discount, reduction of VAT on
pharmaceutical products, centralized public procurement of pharmaceutical
products, promotion of usage of generic medications, increase of obligatory
contribution for households, and so on. For example, as of 2010 Spain has
introduced a general discount applicable to all the medications prescribed, after
which it introduced the mandate for the reduction of generic medication prices,
which is certainly one of the factors that explains the increase in the consumption of
generic medications in that country. In Germany, the obligatory discounts for
manufacturers were raised in 2011 and the prices were frozen until 2013. As of
2011, pharmaceutical companies are obliged to negotiate with health insurance
7
Official Gazette of BiH No. 82/11
The minutes of the meeting of the presidents of cantonal pharmaceutical chambers, the Pharmaceutical
Association in BiH Federation, and general managers of larger pharmaceutical healthcare institutions in BiH
Federation. Retrieved from http://www.farmaceutisarajevo.ba/index.php/25-obavijesti/89-sastanak-farmaceuta-usarajevu dan posjete
8
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Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
funds about innovative medications, which ended the former free pricing regime.
The reduction of consumption in Italy can be attributed to a rather reduced budget
for pharmaceutical products per Italian regions as well as to the reduced
pharmaceutical wholesale margins and lower prices of generic medications based on
quotation prices. The introduction of new obligatory public offer procedures for
medication procurement in Hungary resulted in reduced costs, while in Denmark, as
in many other countries, the negative trend can be explained partly due to the
expiration of patents for large scale protected medications and very expensive
medications (OECD & the European Commission, 2014).
Methodology of the Empirical Research: The Case of Tuzla Canton,
Bosnia and Herzegovina
The sources used for this paper include the publications and statistical data of the
relevant international and domestic organizations (WHO, WB, EUROSTAT,
OECD, Agency for Medicinal Products and Medical Devices of BiH, Agency for
Statistics of BiH, Health Insurance and Reinsurance Fund of F BiH, Health
Insurance Fund of RS, Health Insurance Fund of Brčko District, Institute for Public
Health of F BiH, Institute for Public Health of RS, and Health Insurance Fund of
Tuzla Canton). Based on these sources, the paper presents selective and relevant
macroeconomic and healthcare indicators for BiH as well as the basic indicators of
healthcare financing and healthcare spending in BiH. More specifically, the focus is
made on the elaboration of detailed parameters of medication related spending in the
most populated BiH canton – Tuzla Canton – so as to obtain a clear view of
medication consumption and its potentially influential factors. In order to achieve
this, we opted for using the ten year period data (2004-2013), which allowed for the
summary of the data and their comparison with the previous periods.
Results and Discussion
The medication market in BiH is worth over BAM 500 million, out of which 18%
belongs to domestic medication manufacturers. The data on the leading medications
in the total turnover cannot be regarded as relevant as it is known that medication
consumption in BiH is not monitored by the standardized ATC/DDD
methodology. Since medication prices vary and are rather different when compared
to the neighboring countries, we do not have the appropriate data on the actual
consumption of medications but rather the amount specified in the budget.
Medication consumption in RS is monitored by the ATC/DDD methodology,
which is not the case in F BiH. For example, “Pantoprazol” is the leading medication
in the total turnover in BiH (some BAM 11 million) and its price in F BiH is
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
around BAM 15 while at the same time its price in the neighboring Serbia is BAM
3.5. The similar situation is with the frequently prescribed medications such as those
for the treatment of cardiovascular diseases.
The WB (2014) also pointed to the unbalanced prices of medications in BiH in
comparison to the neighboring countries, which is particularly evident for the
medications for frequent diseases (see Table 1). For example, the medications for
cardiovascular diseases are up to 200% more expensive than in Croatia and even
more than in Serbia. The main reasons for such situation are the inefficient system of
pricing and purchasing medications, a non-transparent system of pricing for
individual medications as well as rather fragmented system of medication
procurement which results in different prices in cantons. As stated in the report, the
Ministry of Health of F BiH is not able to force the cantons to follow the regulations
when they create the positive lists of medications.
Table 1. Prices of Sampled Medications in FBiH and Serbia in 2016
Price in BAM
Ordinal
number
Medication
Manufacturer
Package
1
Vesicare - symptomatic
treatment of immediate
incontinence
Astelles Pharma Europe
B.V Holland
2
Nimulid – painkiller
3
Letrox -thyroid hormone
4
5
6
7
8
9
10
Atoris -cholesterol lowering
medicine
Pantoprazol - gastric distress
treatment
Tritace - ACE inhibitor
Lorista – hypertension
treatment
Roswera - cholesterol lowering
medicine
Truspot eye drops - ocular
hypertension treatment
Plavix – prevention of
atherothrombotic events
9
10
Price
higher
by %
Serbia
F BiH
5 g (30 pills)
59
79
33.90
100 mg (20 pcs)
3.3
7
112.12
100 mg (100 pcs)
5.2
8.5
63.46
20 mg (30 pills)
8.5
14.6
71.76
40 mg (28 pcs)
3.6
15.5
330.56
5 mg (28 pills)
3.4
10.5
208.82
KRKA dd Slovenia
50 mg (28 pills)
5
11
120.00
KRKA dd Slovenia
40 mg (28 pills)
16
35
118,75
2% (5 ml)
12
20
66.67
75 mg (28 pills)
10.5
32.5
209.52
PANACEA BIOTEC
LTD. India
BERLIN-CHEMIE AG
Germany
KRKA dd Slovenia
Hemofarm doo
Banjaluka
Sanofi-Aventis S.p.A.
Italy
Laboratories Merck
Sharp&Dohme-France
Sanofi Winthrop
Industrie France
9
Prices as indicated in the price list of the pharmacy “Zdravlje 2ˮ, Mali Zvornik, Serbia, May 15-June 15, 2016
Prices as indicated in the price list of the pharmacy “Ibn Sinaˮ, Tuzla, on June 16, 2016
10
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Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
11
Trimetakor –prevention of
angina pectoris attacks
Cipla Limited India
35 mg (60 pcs)
4.5
19.8
340.00
12
Byol – hypertension treatment
Lek dd Slovenia
5 mg (30 pills)
3.5
13.2
277.14
Source: Authors' research based on selected BiH and Serbian pharmacies price lists
There is no unique, state-level system of medication consumption monitoring
(including commercial medications as well as those prescribed in the compulsory
health insurance), except for the health spending data created by the national health
accounts methodology. It is known that in 2013, the costs of medicinal devices for
non-hospital patients (including medications) were BAM 711,221 million, of which
public expenses amount to 43.2% and private expenses amount to 56.68%, which
indicates rather high payments made by citizens for this type of medicinal devices.
Analytically speaking, it is not known how much of this amount is spent on
medications charged to health insurance, be they commercial or those given on
prescription.
Healthcare spending of F BiH makes 10.2% of GDP, out of which a quarter,
somewhat over BAM 416 million, is used for medications. Over BAM 182 million
was spent on medications charged to health insurance, which makes around 11% of
the total healthcare spending. On average, a citizen of F BiH spends around BAM
178, while the insured person spends BAM 90 on prescribed medications, somewhat
less than in RS where an insured person spends BAM 99. The average consumption
of prescribed medications per cantons in F BiH in 2013 ranged from BAM 46 in
Posavina Canton to BAM 167 in Sarajevo Canton, which implies huge cantonal
differences in the rights of insured persons to prescribed medications. The average
consumption of prescribed medications is a relative indicator for F BiH as it is highly
influenced by a huge average consumption in Sarajevo and Tuzla Cantons. Although
the prices of most prescribed medications show a downward trend, the increased
consumption of prescribed medications is partly caused by the facts that cantonal
medication lists are harmonized with the federal essential list of medications and that
some cantons have more medications on their lists than on the one made by F BiH.
Although Sarajevo Canton has by 78% higher consumption of medications per
insured person than Tuzla Canton, when the total healthcare spending per cantons is
observed, consumption of medications as a part of healthcare spending is the highest
in Tuzla Canton as it is the most populated one.
The leading cause of death in Tuzla Canton is essential hypertension (86/100,000
people). Stroke, cardiomyopathy, acute myocardial infarction, essential
hypertension, cardiac arrest, and chronic heart ischemic disease make 71% of the ten
leading causes of death in Tuzla Canton. In total, the population in 2013 suffered
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
from acute infections of upper respiratory tract, hypertension, acute bronchitis and
bronchiolitis, diabetes, and spinal diseases. Diseases in the primary healthcare follow
hospital treatment data in Tuzla Canton, where five leading diseases make for
56.79% of the total number of hospital days. Some of the most often prescribed
medications by the ATC classification are those for cardiovascular diseases, digestive
tract and metabolism, nervous system, and medications for the treatment of system
infections and respiratory system, which indicates that cardiovascular diseases,
metabolic disorders, and respiratory diseases are the major health problems in Tuzla
Canton. In the last ten years, there has been an increase in the number of patients
suffering from circulatory system diseases, diabetes, cancer, and mental disorders
(Table 2). This increased number of patients causes higher healthcare costs and
consequently increased medication consumption. The treatment of these diseases,
except for cardiovascular diseases, requires the medications that belong to a group of
more expensive medications, which is why the growth of financial spending does not
come as a surprise.
Table 2. Types of Diseases and Number of Patients in Tuzla Canton
Year
Number of patients in Tuzla Canton since
Increase in %
2004
2013
Circulatory system diseases
47,705
75,234
57.7
Diabetes
7,488
16,952
126.4
Malignant neoplasms
1,947
4,194
115.4
Mental disorders
11,552
19,207
66.3
Source: Authors' research based on Institute for Public Health of Tuzla Canton database
Generally speaking, medication consumption increases year after year, including
both commercial as well as prescribed medications charged to health insurance. The
increased costs of commercial medications point to the fact that citizens invest more
of their personal resources to purchase medications, even though essential lists of
medications for cantons have been expanded.
Medication consumption monitoring in Tuzla Canton is administered by the Health
Insurance Fund and it includes the data basis that includes the information on
insured person (national ID number), medication, authorized physician, outpatient
clinic where the prescription was issued, prescription, contracting pharmacy where
medication was taken, date of prescription issuance and individual invoice for
20
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
medication/prescription issued by the number and date of invoice,11 but not the
ATC/DDD methodology, as recommended by the WHO.
In the period 2004-2013, health insurance expenditures constantly increased. By
analogy, expenditures grew in all segments of healthcare protection, especially for the
program of medications charged to the Health Insurance Fund of Tuzla Canton
(HIF TC), as it is shown in Table 3. The total health insurance expenditures grew
over the period of ten years by 85.55%, from BAM 244 to BAM 439 per insured
person.
Table 3. Review of Financial Expenditures for the Program of Medications in Compulsory
Health Insurance in the Period 2004-2013
Year
Total
expenditures of
HIF TC
Number of
prescriptions
Expenditures
for the
Program of
medications
charged to the
HIF TC
Expenditures
for the
Program of
other
medications
12
Expenditures for
the Program of
prescribed
medications
(positive
list+other
medications)
Total
medication
expenditures
(including
those paid by
citizens)
2004
105,790,488
1,731,657
13,393,726
355,890
13,749,616
16,664,912
2005
112,669,255
1,852,401
15,095,216
309,165
15,404,381
18,924,608
2006
126,318,607
2,328,082
22,212,764
476,627
22,689,391
28,292,882
2007
148,000,043
2,389,473
24,524,035
789,677
25,313,712
31,712,336
2008
174,941,709
2,521,478
28,227,413
955,415
29,182,828
36,078,863
2009
178,171,804
2,226,677
32,888,217
1,339,930
34,228,146
35,663,778
2010
184,048,334
2,363,402
32,881,082
1,219,381
34,100,463
37,650,112
2011
192,099,520
2,556,079
37,137,026
633,554
37,770,580
44,845,199
2012
195,954,753
2,359,443
37,863,086
869,901
38,732,987
42,403,147
2013
196,299,420
2,377,010
38,768,888
1,109,749
39,878,637
40,150,397
Source: Authors’ research based on HIF TC database
Over the ten year period observed, it is evident that the largest financial expenditures
refer to the medications for cardiovascular diseases (35%), digestive tract and
metabolism medications (26%), and medications affecting the nervous system
(16%). As specified by the second level of the ATC classification, almost 84% of the
11
Report on the Realization of Medication Program for the period January-June 2015 (p. 4), Health Insurance
Fund of Tuzla Canton
12
Program of other medications includes: medications applied within or under the control of hospital, ampoule
medications, special food for children, and priority medication program for pain relief therapy.
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
total expenditures on medications cover the ten leading groups of medications
(Table 4), including those for the treatment of hypertension, diabetes, asthma, and
so on.
Table 4. Financial Costs for Medications in the 10 Leading Groups by ATC Classification in
2013
Year 2013
ATC
Group of medications
C09
A10
R03
N06
A02
Agents acting on the rennin-angiotensin system
Drugs used in diabetes
Drugs for obstructive airway diseases
Psychoanaleptics
Drugs for acid related disorders
J01
C07
N05
C08
N03
Antibacterial drugs
Beta blocking agents
Psycholeptics
Calcium channel blockers
Antiepileptics
Ten leading groups of medications in total
Year total
Amount in BAM
%
8,766,544
7,328,994
3,407,972
3,051,384
2,209,906
22.61
18.90
8.79
7.87
5.70
2,178,272
2,091,092
1,326,363
1,118,142
1,053,397
32,532,066
38,768,888
5.62
5.39
3.42
2.88
2.72
83.91
100.00
Source: Authors' research based on HIF TC database
The ten leading medications in terms of the resources charged to HIF TC make
42% of the total value and 27% of the total number of prescriptions. The most
frequent medication prescribed by family doctors in Tuzla Canton is “Enalapril” for
hypertension treatment with the average value per prescription of BAM 18 (Table
5). Out of ten leading medications in terms of financial expenditure, the most
expensive is “Insulin glargin” (BAM 126 per prescription), which is prescribed for all
types of diabetes. Within all the medications in the positive list, the medication with
the highest financial value per prescription is “Ciklosporin”, prescribed to patients
for the prevention of transplant rejection (BAM 283 per prescription on average).
These facts depend primarily on medication prices which is why the real
consumption cannot be specified.
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Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
Table 5. Ten Leading Medications in 2013 Per Their Total Value Charged to HIF TC
Group
C09
C10
R03
Medication
Enalaprilhidrohlortiazid
Lizinoprilhidrohlortiazid
Salmeterol+flutika
zon
Disease
BAM charged
to HIF TC
%
Number of
prescriptions
%
BAM
/prescription
Hypertension
2,574,774
6.64
140,153
5.90
18
Hypertension
2,076,581
5.36
112,219
4.72
19
1,842,592
4.75
21,715
0.91
85
1,822,633
4.70
18,286
0.77
100
1,402,931
3.62
60,428
2.54
23
1,382,965
3.57
11,011
0.46
126
Obstructive
airway diseases
All types of
diabetes
Gastric and
duodenal ulcers
All types of
diabetes
A10
Inzulin aspart
A02
Pantoprazol
A10
Inzulin glargin
N06
Paroksetin
Depression
1,346,954
3.47
46,563
1.96
29
C07
Karvedilol
Hypertension
1,295,488
3.34
100,546
4.23
13
A10
Inzulin humani
All types of
diabetes
1,214,310
3.13
18,606
0.78
65
A10
Metformin
Diabetes
1,176,392
3.03
119,034
5.01
10
16,135,618
41.62
648,561
27.28
25
38,768,888
100.00
2,377,010
100.00
16
Ten leading
medications
TOTAL
Source: Authors' research based on HIF TC database
In 2013, the medications for the cardiovascular system made somewhat less than a
half (46.81%) of all the prescriptions issued during that year and they cost almost
BAM 14 million. The increased consumption is further confirmed by the fact that
the expenditures for these medications in 2013 were by BAM 400,000 higher that
the expenditures for the entire program of medications charged to HIF TC ten years
ago. Among the ten most often prescribed medications there are seven of them for
the treatment of hypertension. Some 40% of all the prescriptions realized in 2013
were for these medications, which makes 34% of the total value charged to HIF TC.
Medications for the treatment of diabetes are also an important segment of the
financial consumption of medications charged to HIF TC. This is confirmed by the
fact that the value of these medications grew on average by 15.5% in the period
2004-2013. These medications make 10% of the total amount charged to HIF TC
and 19% of the total number of prescriptions realized in 2013. On average, every
patient uses 15 prescriptions a year, with the average value of BAM 470 per patient,
which is significantly higher than in 2004 when this amount was BAM 267 per
patient. On the whole, medication consumption matches the morbidity data for the
territory of Tuzla Canton.
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
Concluding Remarks
Besides a number of problems evident in the inefficient healthcare system and public
spending control, irrational use of medications that directly reflects on the financial
burden of healthcare system economy is one of the burning issues if not the most
important one. When health spending reaches a certain level, it is difficult to return
it to the previous values as it increases year after year. It is difficult to reduce health
spending but it can be constantly monitored and gradually controlled.
The analysis of the data presented in the paper leads to the conclusion that the key
problem of the healthcare sector in BiH is its sustainable financing which is
primarily evident in the lack of appropriate system of collection of financial resources
and in the lack of a transparent system for monitoring health spending. The core of
the problem might be found in the way BiH is organized as a state and in its
fragmentation to centralized RS, decentralized F BiH, and Brčko District, with
various legal regulations that complicate successful conduct of fiscal policy. The
situation is even more complicated by the fact that every entity has its own health
insurance fund that operates with difficulties due to the finance-related problems but
also due to accumulated arrears. In addition, serious problems of BiH healthcare
system are certain inequalities in terms of exercising the right to healthcare. In the
long term, the healthcare system organized in this way shall not survive; the collected
resources are almost always limited while the demand for healthcare services
surpasses the available funds. There are no new sources of financing and the
collection of regular revenue is problematic, which means that the time has come to
implement whole scale reforms aimed at improving the conditions under which the
healthcare system functions. It is not yet known when these changes might happen
but something can be done regardless of the fact that there is no political will at the
moment for any changes. In the situations when we cannot change the existing
financing models, we can start with a better control of the ways in which the
collected resources are spent and medication consumption is precisely the segment of
health spending which can be controlled and rationalized in a simple way.
The rational consumption of medications means giving a patient the appropriate
medication in the dosage defined by the clinical and individual needs so that the
patient and the society as a whole pay the lowest possible price. It is not known to
what extent these principles are followed in terms of dosage specification based on
patient’s clinical and individual needs but the research results indicate that in BiH
both the society and the patients pay medications at a too high price. Sometimes, the
state itself contributes to over consumption of medications through its inactive and
bad decisions in legislation and executive power. Instead of serving solely to limit the
24
Journal of Economic and Social Studies
�Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
unnecessary consumption, the laws regulating manufacture, trade and price of
medications, their additions on health insurance lists, sales regime, patients’
participation in the price, and marketing often stimulate consumption. The
pharmaceutical industry might be seen as one of the main drives of medication
consumption and its constant growth. The role of pharmaceutical industry has
changed over history − while in the past the cure was sought for as many diseases as
possible, it seems as if today the goal is to find as many diseases as possible for the
cure.
Primary healthcare is also the segment where increased medication consumption
emerges. Although the concept of primary healthcare is as a rule devised so as to
unburden secondary healthcare, this seems not to be the case. Physicians in primary
healthcare face crowd at their practices, work under pressure, and so on. Also,
consulting clinical pharmacologists reduces over issuance of medication prescription,
which consequently results in reduced expenditure for medications. Drug abuse
seems to be one of the reasons for the increased medication consumption. Nowadays
every home obviously has certain medications in stock, which are used at one’s own
opinion.
Increased financial expenditure on medication is affected by medication selling
prices. While some of the surrounding countries have zero VAT rate on medications,
with 17% VAT rate BiH is one of the most expensive countries in terms of
medication prices. This is caused by a small market, many levies, rigid law on
medicinal products and medical devices, and high pharmacy margins which directly
affect patients’ budgets. The Rulebook on Price Monitoring, Calculating Medication
Prices and Reporting on Medication Prices in BiH would be an excellent instrument
of medication control in BiH. The VAT rate is not the only reason for expensive
medications in the country as medication prices generally vary in the entities, which
is probably caused by the decentralized system of medication procurement.
However, some medications are as much as 400% more expensive than in the
neighboring Serbia, where many BiH citizens buy medications, which confirms the
allocation of financial resources outside BiH borders and the potential grey market
(medication smuggling). What is equally important is the need for the establishment
of the unique system of medication consumption monitoring on a state level based
on the ATC/DDD methodology, with the aim of gaining the real insight into
medication consumption so as to identify the causes and consequences of irrational
consumption. Also, constant education in the field of health economics is needed as
raising awareness of the budget limitations in the healthcare system is an extremely
long and difficult process for both patients and healthcare workers. This can only be
Volume 7 | Issue 1 |
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�Emira Kozarević, Tatjana Krdžalić and Sabina Đonlagić Alibegović
done by appropriate education of the general public, healthcare workers, creators of
healthcare policies, and so on.
The presented theoretical elaboration of the problem as well as the empirical research
conducted in BiH and Tuzla Canton, as the most populated BiH canton, indicate
that the central research hypothesis is accepted. Future research interest might focus
of monitoring medication consumption within hospital capacities, since it is not
monitored analytically, in order to establish the real consumption and define
potential causes of (non)increase in the use of medications charged to health
insurance. Besides, it would be interesting to conduct a research into the usage of
medications from the aspect of physician habits related to medication prescription,
with a particular emphasis on the problems they face in their practice. One might
find useful to investigate the perception and habits of the patients as those who
consume medications, in order to detect important factors that influence increased
demand for medications and establish the actual financial burden imposed on
citizens by healthcare costs, and so on.
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izdavanja lijekova. Terapijski vodič, Sarajevo: Ministarstvo zdravstva Kantona
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nja%20lijekova.pdf
Vitezić, D. (2013). Važnost smjernica i farmakoekonomike u liječenju arterijske
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28
Journal of Economic and Social Studies
�
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Financial Monitoring of Medication Consumption in Bosnia and Herzegovina
Author
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KOZAREVIĆ, Emira
Đonlagić Alibegović, Sabina
Krdzalic, Tatjana
Abstract
A summary of the resource.
healthcare system practice as its share in GDP has constantly increased during past decades, which is now above 10% of GDP in developed countries. However, very often it is more of an issue related to the current political and socio-economic situation in a country rather than the one managed by experts. Although one might expect that the increase in healthcare spending contributes to better health of the population, relevant indicators show that high healthcare spending in Bosnia and Herzegovina (BiH) does not result in better health of its population. Due to this reason, special attention needs to be paid to the economic analysis of healthcare spending. Irrational use of medications is just one of many problems associated with an inefficient health system, but one that heavily impacts on the health economics. In situations where it may not be easy to change the existing financing models, we should explore how to be more effective in spending within the existing structure. Better control of medication consumption could be one of the actions that helps improve the effectiveness of the available budget. Therefore, the general aim of the paper is to determine the effect that financial monitoring of medication consumption has on the control of increase in healthcare spending, which in turn might help establishing a financially sustainable healthcare system. Bearing in mind that irrational usage of medications influences the access to healthcare services, destabilizes country’s budget, and endangers the margin of social sustainability (endurance), the constant financial monitoring of medication consumption is important as it can help us recognize those segments where consumption deviates from standard and where prevention activities are needed. All this can result in the limitation of further increase in medication consumption.
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International Burch University
Date
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2017
Keywords
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Article
PeerReviewed
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/2e3f08fa2df733c5db8714670a84f351.pdf
a4579d547e3860dc15829c2df629e230
PDF Text
Text
Journal of Economic and Social Studies
The Monetisation of Assets through Concession
and Applicability in the Sector of Energy
in Bosnia and Herzegovina
Izet Bajrambašić
Ministry of the Transport and Communication of Bosnia and Herzegovina
Bosnia and Herzegovina
bajrambasic.izet@bih.net.ba
Abstract: Financial effects of monetisation through concession in the
sector of energy in Bosnia and Herzegovina (B&H) may well
increase the level of domestic investments, production, exports,
employment and general economic growth, without additional higher
borrowings and loss of ownership in these strategically important
industries. These new financial opportunities are necessary for faster
economic development of the country, especially in the transitional
period, as this development process is a great challenge in modern
world economy. It requires significant commitment and coordinated
efforts of the public and private sector.
The case study of Terminal Kakanj Power Plant (KPP) presented in
this paper show that it is possible to implement monetization of assets
through concession in the energy sector in B&H.
Keywords: Monetization,
Concession, Development,
Financial Effects, Energy Sector
JEL Classification: O16, H54
Article History
Submitted:15 May 2015
Resubmitted:11 August 2015
Resubmitted: 23 October 2015
Accepted: 4 December 2015
http://dx.doi.org/10.14706/JECO
SS16612
The empirical results provide evidence of positive correlations
between monetisation through concession process and economic
development in B&H or other transition and development countries.
Volume 6 Number 1 Spring 2015
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�Izet Bajrambašić
Introduction
Due to the lack of investment funds the economies of many countries are often in
unfavorable and seemingly hopeless situations, where incomes are insufficient for
necessary new investment, which slows the growth of capital and production and
finally results in slowing of the income growth. Such economic situation is very
difficult and depressing, and the way out of this situation is not easy and requires
adequate knowledge and hard work.
One of the possible way-outs is through new investments, which can change and
direct a vicious circle of this situation towards the revival and development of the
economy and overall society. The question is how to acquire new investments, i.e.
how to ensure the necessary funds for this purpose?
In this regard, the governments have an important task, especially in providing
funds, which is not easy.
Public infrastructure in many countries, because of their high value, may be the basis
for new investments, because this potential can be exploited so that the existing
resources and assets available in the network industries can provide fresh money.
This can be achieved by monetization of assets through concessions. The
government’s funding source of increased importance is the "monetization" or
insuring the cash flow from existing public assets. Revenues made by the
monetization may be used for: new infrastructure funds directly, or for other
purposes. On the other hand, this process is a good opportunity for the government
to gain the capacity of new technologies, increase production and exports, achieve
stability in the energy system, and to avoid possible risks of worn out and
technologically obsolete capacities or losses, etc. A new concession management
structures, in partnership with the public sector, with an agreed concession fee,
receive infrastructure to manage, which in long-term involves: investment,
exploitation, maintenance, sale of services and all other that is related to the specific
activity and agreement.
The process of monetization has to take in account large interests of stakeholders,
this is especially true for the public sector, concessionaires, financial institutions and
service users. Their interests are different, but they are strongly connected to each
other. The implemented project which presented in this paper (page 4.) and
experiences of countries show different interests of stakeholders and main reason for
44
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
monetization through concessions in network industries. These practical examples of
projects and results of research presented in book “Achievement in Finance of
Infrastructure, PFI/PPP”, Izet Bajrambasic, 2004, (chapter: “Participants and the
interest of the participants in the PPP Projects”) give very clear explanation of
stakeholders different interests.
The interests of the public sector are: new financial resources, continuous provision
of public services, faster development of infrastructure and economy, allocation of
risks, safety in the delivery of public services, quality of services, market competition
and others.
Interests of concessionaires are: long-term investments, an increase in the volume of
business, applying experience and knowledge in the field of work, protection of
property and copyright, freedom of financial transfers and alike.
The interests of financial institutions are: long-term borrowings, safety in money
return (guarantees for the return of money) and to ensure the priorities of payments
compared to other costs in the operational work of the concessionaire.
The interests of service users are: to have developed network industry (infrastructure)
and services, to have adequate service quality and price, to have the option of
investing in these industries and alike.
Interests of all stakeholders must be met, achieved and to be sustainable for a longer
period of time, because it is the greatest guarantee for the success of the project.
This is often politically more acceptable option than the full privatization, since the
government can exercise control of public property operators, and at the end of a
long-term concession contract assets are returned to public ownership. This shows
that there are political, economic and financial reasons for the monetization of assets
through concessions, and therefore it is important to research and study this
financial instrument in B&H.
According to result of the case study presented in this paper, it is clear that there are
great opportunities for the application of this model in the energy sector in B&H.
The study was conducted on the most complex production facility of KPP, Public
Enterprise Elektroprivreda (PEEP). It is possible to apply monetization of public
assets through concessions, where the government would remain the owner and the
Volume 6 Number 1 Spring 2016
45
�Izet Bajrambašić
concessionaire would operatively manage an independent enterprise KPP. Such an
approach will greatly enhance and accelerate investment in the energy sector, while
at the same time create new opportunities for the implementation of other planned
investments, such as revitalization of the relevant coal mines.
Literature review and experience of other countries
One of the important segments of economic development is investing in
infrastructure. Infrastructure of a country is understood as the fundamental service
foundation of the economy, society and overall development. It is well known that,
for the development of the economy, the adequate services are necessary, including
transport, electric power, telecommunications, water and waste water etc.
Larger investment in this sector produces higher market demand, and it implies that
there is an increase in production, which enhances employment and gross domestic
product. These economic relations and results are particularly significant for
developing and transition countries, which in this process see a good opportunity for
economic and social progress.
Large number of authors in economic literature confirms the need to invest for faster
economic growth, and great contribution to that is provided by international trade
and free movement of capital.
The capital investments depend on many factors including the accumulation and
savings. The amount of capital determines the volume of domestic product and
domestic product determines the amount of savings and investment. On this way
domestic product determines the amount of accumulated capital (Blanchard, 2005).
This cycle is very important for each economy and expected capital increase. Public
infrastructure investments in network industries have large investment share and
capital increase. It was pointed out that the investments are planned according to the
assessment of expected cost and benefit, and that relationship, including
amortization which significantly affects the level of investment.
Assessing of investment, interest and risks are important factors that are taken into
account, because refund depends on that. It is especially important to examine this
in public investment, due to the mostly high investment volume and long-term
financial burden, which is not easy for public sector. Public investments are specific
and require special analysis and calculation of costs and benefits, but not for an
46
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
individual or a small group, but for all potential users and entire society. The
realization of these efforts is not simple because financial resources for these
investments determine plans and possibilities. For this analysis, the state employs
large teams in order to prove the need and cost effectiveness of investment (Mankiw,
2004). Government support is mostly expected in terms of new investments and
ensuring the funding. The main problems arise when the accumulation is not
sufficient, and credit debts are not possible or are at risk. This can be partially
avoided, because it is possible to obtain funding in other ways, beside from own
accumulation and no debt.
One of these ways is partnership to private sector with different possibilities to
invest. Financing and development of infrastructure on the basis of the Private
Finance Initiative (PFI) and the Public Private Partnership (PPP) means introducing
the private sector into financing and management of public services and physical
infrastructure aimed to increase financial possibilities, improve the quality of public
sector, develop infrastructure and introduce the business principle into the public
sector. The partnership of the public and private sector in the PFI/PPP systems is,
with the common interest, directed towards long-term contracts for sustainability of
the relationship and the infrastructure system (Bajrambasic, 2004).
Monetization of assets through concession is one of the PPP models, which is very
relevant in recent years. “An increasingly important source of government financing
is from the monetization, or securitization of cash from existing public assets. This is
often a more politically acceptable option than outright privatization, since the
government can exercise a degree of control over the asset operator, and at the end of
the long-term contract the assets will revert back into public ownership. The
proceeds from such transaction can be used to fund new infrastructure directly, or
for other purposes” (Colchester, 2005).
This is why the public sector increasingly desires private investment in public assets.
A finance market is open and private investments have no restrictions and all
investment forms are available: bonds, option, futures, derivatives, real estate and
even fine artwork ... (Armstrong III, 2004). Relate to this large possibilities of private
investment, the public sector may have to prepare an attractive project if they would
like to have private investment in public infrastructure.
Volume 6 Number 1 Spring 2016
47
�Izet Bajrambašić
It is not easy, but practice has shown that many countries need partnerships to
private sectors and monetization of assets through concession. There are many cases
of this monetization model around the world.
The experiences of other countries in terms of monetization through concessions in
network industries are positive, and reasons and interests for these processes are
various.
Examples of projects in the USA and South East Europe region are listed below.
•
The first concession in the USA for already constructed infrastructure facility
was awarded in 2005 for the Chicago Skyway Bridge, which was built in 1958.
The bridge is 12 km long, and the annual number of vehicles is around 19 mils.
The annual income from the collection is approximately $ 45 mils. The bridge
was operated (operations and maintenance) by the City of Chicago Department
of Streets and Sanitation for more than 50 years. The concession was awarded to
the Sky Concession Company, LLC for 99 years, and the company paid $ 1.83
mil. In this case the government justified concession by the fact that they need
funding for new infrastructure projects in Chicago, and that this was the easiest
way to get fresh money. (http://www.chicagoskyway.org/)
•
Indiana is the first US state, which monetized the road Indiana Toll Road by
collection through concession for a period of 75 years, with the offered value of
$ 3.85 bn. The concession was awarded to Spanish investor Macquarie
Infrastructure Group and Cintra. Analyst Richard Beales (Financial Times,
2006) claims that this example could open the door for other financial
constrained countries to invite private investors to roads and bridges for
resources/assets that are traditionally owned and operated by state and local
governments.
This is monetization through concessions of previously constructed motorways.
The state of Indiana has constructed this motorway much earlier with its own
funds and loans and it has already been used for a fee. The reason for such move
by the government was financial problems and high maintenance costs, as a
result
of
the
infrastructure
management
by
the
state.(http://www.governing.com/topics/mgmt/indiana-toll-road-modelprivatization.html)
48
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
•
Road Alligator Alley was constructed in 1964 with two lanes, and enhanced with
two more lanes, which financed from the bonds issued. The owner and operator
was a state-owned company Florida DOT. Due to the high costs and financial
needs, it was decided that the road will be given under concession.
In this concession, revenue collection did not follow the growth of operating
costs (management and maintenance) of the road, and transformation was done
through the concessions, as in the case of Indiana Pay Toll.
(http://inthepublicinterest.org/case/proposed-privatization-alligator-alley)
•
The Government of Macedonia in 2008 awarded concession to the Turkish
company TepeAkfen Ventures (TAV) for two airports in Macedonia: Alexander
the Great - Skopje and St. Paul -Ohrid. The concession period is over 20 years,
and mandatory total investment is Euro 200 mil and the annual concession fee
to the Government of Macedonia is Euro 30 to 40 mil.
The government made this decision due to the need of large investments and
large debts for airports. All these investments and debts were transferred to the
concessionaire by the transformation.(http://www.mtc.gov.mk)
•
The Government of Montenegro in 2008 decided that the Port of Bar is not to
be privatized but to carry out the restructuring, and that the port should be
given under concession. After restructuring, concession agreements to 30 years
were signed, at an annual fixed concession fee in the amount of Euro 27,500
and a variable fee of 1.5% of the annual income of the concessionaire. The
essential decision of the Government is that the infrastructure remains in state
ownership as a national interest, and that it can be given under concession. The
Government’s stake of the operating companies can be sold as well, because it is
not of the national interest. Therefore, the Government of Montenegro sold
majority stake in operating companies related to the port of Bar. This project
combines the privatization in the part of the operational work and monetization
via concessions in the part of infrastructure. (http://www.minsaob.gov.me)
•
The Republic of Croatia Government in 2011 awarded concession for Zagreb
Airport to the French consortium Zagreb Airport International Company (AIC)
for 30 years to construct new passenger terminal and for management of existing
and newly constructed terminal and associated infrastructure. Within three
years’ period the ZAIC should construct a terminal for the capacity of five
Volume 6 Number 1 Spring 2016
49
�Izet Bajrambašić
million passengers per year, the total capital investment in the first phase
amount to Euro 236 mil., with an additional Euro 88 mil for regular
maintenance. (http://www.mmpi.hr)
The ratio of ownership is not changed: 55% of the state, 35% of the city of
Zagreb, 5% of Velika Gorica and 5% of Zagreb County.
The topic of this paper is very specific and it request research methodology which
covers comprehensive area and specific research parts. Research methodology of this
paper is descriptive in next article.
Methodology
The overall aim of this study was to research applicability for the monetization of
assets through concession in the energy sector in Bosnia and Herzegovina. In
particular, the focus of this study is to solve the problem of finance and risk in
investing in public infrastructure, and exploring the possibility to establish a new
financial resource based on the existing public assets.
Research methodology of this paper covers the process of the whole research activity
and essentially is the core component of the research paper itself. It includes the
following parts: descriptive microeconomic and investment status of the countries,
generally; investment and concession approach in theory and practice; the primary
and secondary data capture methods; case study of the monetization of KPP
including mathematic operation (BCR, NPV, IRR, Payback method) and graphic
presentation; discussion and results and conclusion with recommendations. The
contents of this research process were used in order to determine the basis and
assumptions for this paper and achieve the overall aim of the study.
In order to provide the appropriate data, case study and analysis to evidence an
acceptable solution for the current finance problem, the most appropriate methods
for this paper is the data collection method and analysis including case study
method.
There are four main action areas recommended to cover all activities: data capture,
case study, data analysis and result.
Data captured from different resources: internal and external. Internal data used for
this paper are from: books, laws, studies, magazines, etc. (specified on the end of this
50
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
paper). External data used are from: business plan, annual business report, technical
and finance studies, investment plan and the internet, etc. (specified on the end of
this paper).
Case study prepared base on technical and finance studies, published information,
experience of other countries and author's knowledge and experience. Data analysis
is done as narrative description and through result of the case study. The case study
presented main results to achieve the overall aim of the study.
Macroeconomic aspects and assumptions of the study have been described only
partially to the extent necessary, and which is linked to the developing countries and
transition economies. This aspect is not presented comprehensively, because it is a
specific topic of the paper.
The information captured on needs and financial status of these countries clearly
indicates the urgency for investing, but also a great debt and significant difficulties in
repaying debts. Additionally, these countries need new investment and fresh money
for economic development. An analytical approach was used for the main part of the
study, and an example of possible way to address these issues in B&H and other
countries in the region was presented.
Strategic plans for the development of the energy sector in B&H have not been
agreed or operationally synchronized. However, it is known that for planned
investment the accumulation of enterprises is nowhere near enough, and other forms
of investing and plan implementation are considered. A key unresolved question is:
which investment models should be applied and which funding sources should be
used to develop production capacity.
Investment programs and technical study, which are still valid, were used as the basis
for new investment model, and they were prepared for the traditional method of
implementation based on finance borrowing. Predicted method of implementation
was faced with serious financial difficulties, and the project stalled. Besides
traditional modes of investment, it is necessary to consider other known forms as
well. Technical and financial data from the mentioned documents have been used to
model the monetization through concessions as a basis for investment, business plans
and calculation in the concession period of 30 years.
Volume 6 Number 1 Spring 2016
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�Izet Bajrambašić
The presented case study is related to monetization through concession of KPP,
which is belonging to the Public Enterprise Elektroprivreda B&H (PEEP).
Previous business analysis and planned investments of KPP are the basis for assessing
the operations in the concession period, which is analytically, with investment
dynamics, presented in the following four separately business periods: 2015-2019;
2020-2026; 2027-2032 and 2033-2045. These analytical business periods are
operating in continuity, varying according to the level and type of investment, and
different business results. This analytical approach enables to calculate the profit and
net profit, with included cost of concession fees, as well as net present value, which is
essential for the analysis of concession relations between government and the
concessionaire, and the evaluation of overall management transformation of KPP.
Case study: Monetization of KPP
KPP capacities developed in stages, based on the large deposits of coal in this area,
from the initial 32 MW in1947 to 578 MW of total installed capacity, concluding
with block 7 from 1988. In addition to production and selling of electricity KPP
produces and sells thermal energy, slag and ash.
Financial operations of KPP is not individually stated and publicly disclosed, but it is
a part of overall PEEP business, which is a certain limitation for analysis. However,
there is more data on the operations, such as: production volume, costs and resources
of business, so it is possible to calculate the basic business elements and indicators.
New investments in KPP are given in a separate document Investment Program
2010 (Technical Study). Current operations and planned investments provide the
necessary data for evaluation of possibilities of KPP monetization through
concession, and therefore in the continuation of the text separate analysis of these
two important segments are listed.
Business data of KPP
Known elements of KPP business for 2010 are: total costs (207.878 mil KM i), total
assets (964.630 mil KM), number of employees (663), total production (1,831
GWh) and investments (56.041milKM). Other elements of business are not known,
but elements of PEEP business operations are known.
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Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
Detailed and systemized PEEP business results from 2009 and 2010 are suitable for
calculation of the missing elements of KPP business for 2010. KPP participation in
electricity production in total production of PEEP can serve as a key to calculate the
total revenue of KPP. The volume of PEEP production in 2009 is 6926.50 GWh,
out of which KPP produced 1907.97 GWh. In 2010 PEEP production volume was
7181.40 GWh, out of which KPP produced 1831.00 GWh. Participation of KPP in
total production of PEEP in 2009 is 27.55 %, and in 2010 amounts 25.50 %. Basic
calculated elements of KPP business statement, as "independent company" for 2010
would be as shown in the following Table 1.
Table 1: Basic calculated elements of KPP business statement
Description
Amount (mil KM)
Total revenue
235.000
Total costs
210.590
Profit before tax
24.409
Tax 10%
2.440
Netprofit
21.968
Number of employees
663
Source: Authors’ own work and Anual Business Statement of the KPP 2009
Analysis of recent investments in KPP
Significant investments in existing capacity in PEEP are completed in the previous
period. PEEP has invested 1.056 million KM in the development by 2010, and
planned investment for the period 2011 to 2015 is 970 million KM, and for the
period 2016 to 2020.811 million KM.
The first investments according to the overall KPP plan are related to the
construction of Block 8, for which the preliminary Design and Environmental Study
have been completed. Block 8 (300 MW) is the first block in the gradual transition
to the new technology. Continuity of replacing the existing installation is planned
for a longer period, so that full energy stability is achieved in 2030, with the planned
installation of Block 9 (300 MW).
Volume 6 Number 1 Spring 2016
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�Izet Bajrambašić
The completion of construction and commissioning of the regular operation of new
block 8 in power plant Kakanj is planned (the traditional construction approach) for
2018 (Investment Program).
The study envisages total investment and required work resources as well as
operating costs.
The total investment in fixed assets (Block 8) at constant prices amounts to 945.267
mil KM.
Table 2: Business and Investment Forecast in Concession Period
Description
Contracted
concession fee
Total
Profit
Tax 10%
Total
Netprofit
Total
discounted
value
Operative
capacity(MW)
Operative
capacity
(block)
2015.-2019.
-
Business period (mil. KM)
2020.-2026. 2027.-2032.
140.000
130.000
Total
2033.-2045.
390.000
660.000
136.445
163.688
176.666
645.671
1.122.470
13.645
16.366
17.666
64.571
112.248
122.800
147.322
159.000
581.100
1,010.222
97.645
74.573
49.149
88.405
309.772
450
340+300
600
600
_
5,6 and 7
6 ,7 and 8
8 and 9
8 and 9
_
Source: Authors’ own work
In the first year of work required current assets amounts 20.830 mil KM. The cost of
financing the investment amounts 59.948 mil KM, and total investment at constant
prices is 1,035.046 mil KM. Total investment at current prices amounts to
1,106.338 mil KM. Block 9 has same price amounts (investment calculation).
It is important to note the need for rehabilitation and modernization of three
aforementioned mines that production and future of KPP depends on. These mines
are the basis of development and operation of KPP, and it is therefore necessary to
54
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
simultaneously invest in the mines. Investment indicators are satisfactory and the
Technical Study is the basic document for making a decision on the future status
and operation of KPP. Also, this document is a solid source of data for analysis of
monetization possibilities through concessions.
Given the large number of tables and calculations of separately periods of business
and investments, below is the table presenting in the aggregate profit and net profit,
with concession fees according to the calculation and capacity of KPP, for
aforementioned periods of business.
Discussion and Results
The table shows that the aggregate net profit is 1,010.222 mil KM, and the
discounted value of the net profit is 309.772 mil KM, and that the aggregate
contracted installment fee is 660 mil KM, while the immediate fee of 200 mil KM is
not shown in the table. In the part of compulsory investment for the concessionaire
it is important to note that the last two periods of operation is shown with capacities
of new technologies and that it is possible to achieve the goal of replacing old plants
according to the planned schedule.
Net present value according to calculation and immediate concession fee, is positive
and amounts 109.772 mil KM (309.772-200.000), which is an indicator of the
success and feasibility of monetization of assets through concession in KPP. The
calculation of discounted value is per discount rate of 8 %. It is important to note
that the costs include: operating, maintenance, costs for environmental protection
measures, financing costs, a 10% tax (profit/net profit), and costs of concession fees.
We have taken into consideration the conditions of IFI's, ii where the grace period is
five years, the loan repayment period is 20 years and the interest rate up to 4.5 %,
and it would be a financial support to the concessionaire.
Operating of KPP, according to the Technical Study, shows a high amortization,
which exceeds the amount of the (credit) annuity, which is important for the
financial cash flow in the company. Further, the aggregate business results according
to the previous table show significant net profit, as well as the discounted value. It is
good financial framework for the concessionaire, which provides good possibilities
for company reform, investing and making profit. The ratio of net profit and
Volume 6 Number 1 Spring 2016
55
�Izet Bajrambašić
contracted installment concession fees from Table 2 is important, so it is presented
in the following Figure1.
Figure 1: The Ratio of Net Profit and Concession Fees
Source: Authors’ own work
Developments in these two values in concession period (30 years) show that the fees
are stable at certain periods, and that the net profit is stabilized in the last decade.
Presented monetization of KPP shows that there are good assumptions for this
process and that the application is possible and acceptable. The analysis shows
financial and other benefits for the government and the concessionaire and
achievement of a common goal, and that would be the production of electricity.
Besides the benefits, each partner in this process would have to accept important
responsibilities in order to make the project successful. For example, the government
must take on the responsibility of modernization of mines, which are relevant for
KPP and the obligation to secure supplies of coal. In this regard, the government
would use contracted immediate concession fee to modernize the primary mines
Kakanj, Breza and Zenica. On the other hand, the concessionaire would accept an
obligation to deliver electrical energy e.g. priority for B&H. Of course, partners in
this process agree on all details and sign the concession contract on monetization of
KPP.
56
Journal of Economic and Social Studies
�The Monetisation of Assets through Concession
and Applicability in the Sector of Energy in Bosnia and Herzegovina
Conclusion
All defined activities of the research methodology used for this paper have been done
and a final result is very clear and visible. The research results and experience of
other countries shows that it is possible to monetize an existing, constructed
infrastructure asset, i.e. certain capacities as an example of KPP. The research results
with emphasis on KPP indicate that the energy infrastructure in B&H has great
value and is mainly owned by the state and that the monetization of assets through
concessions is possible. The presented case study showed that interests of all
stakeholders had been met and had been achieved. It also showed that was
sustainable for concession period of 30 years, because it was guaranteed by the
financial success of the project.
Resources and needs of B&H are great in all segments of network industries, which
definitely should be used, bearing in mind that, generally, these are complex strategic
industries that require special attention and sustainability of the system. It is the
reason why the monetization process is much better option than privatization,
because it is based on changing the management structure, but not changing of
ownership as well, which remains with state (public).
Monetization of assets through concessions in the strategic industries sector is
possible in the economies of countries, if there are clear benefits and if such model of
monetization is acceptable, with regard to the legal and business environment. In
these national economies that requires significant commitment and coordinated
efforts of public and private sector.
Generally, exploring new financial opportunities is necessary for faster economic
development of the country, especially in the transitional period, as this development
process is a great challenge in the modern world economy.
This monetization process is common job for the public and private sector to have a
mutual interest and risks in realization of long-term contract. There are many
different risks for both partners. The basic risks in this process are: political, legal,
commercial, operational and maintenance risks, then income and financial risks. All
the risks have to be included in the risk analysis. The risks are disadvantage of this
monetization process, because each of them can make implementation problem.
High quality risk management and contracting are requested for successful
monetization process.
Volume 6 Number 1 Spring 2016
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�Izet Bajrambašić
Recommendation: Taking into account results of this study and risks in this process
it is necessary to continue exploring, preparation and implementation projects of the
monetization of public assets through concessions in B&H.
References
Armstrong F. III, 2004, The Informed Investor, USA, American Management
Association, 1601 Broadway, New York.
Bajrambasic, I., 2004, Achievement in Finance of Infrastructure, PFI/PPP, Saran,
Sarajevo
Beales R., 2006, Financial Times, 24. January 2006
Blanchard O., 2005, Macroeconomics, 3rd edition, Mate, Zagreb
Colchester, UK, 2005. Transportation Finance Review, Euromany Institutional
Investor.
Consortium:Economists Institute Hrvoje Požar, Institute from Banja Luka, Mining
Institute from Tuzla nad Soluziona, Spain, 2008, Energy Sector Study in B&H, The
World Bank.
IBE d. d. Ljubljana, 2010. Feasibility Study (Investment Program), book no. 8
TKAKB8-4X/01.
Knox P. J. Agnew & L. McCarthy, 2003. The Geography of the world economy,
London: Hodder Arnold
PFI Intelligence Bulletin 2001, London, UK.
Public Enterprise Elektroprivreda BiH, 2010, Annual Business Report for 2010 and
2009.
Public Private Partnerships News, 2000, Dublin, Ireland.
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and Applicability in the Sector of Energy in Bosnia and Herzegovina
RBS North American Infrastructure Advisory and Finance (Global Banking &
Markets), 2006. Public Private Partnership (PPP) in North America, USA.
Samuelson P.A. & Nordhaus W. D., 2007. Economy, 18th ed., Mate, Zagreb
Saunders M., 2007, The Role of PPPs in Addressing Congestion, U.S. Department of
Transportation Federal Highway Administration.
Skypala P., 2008, Financial Times, 17. November 2008
Stiglitz J.E. & Walsh C.E., 2005, Principles of Macro-Economics, IV edition New
York.
The World Bank Group, 2004, Public Policy for the Private Sector.
UNICITRAL, 2001, Legislative Guide on Privately Financed Infrastructure Projects,
New York.
http://nwfinancial.com/pdf/Indiana-Toll Roads%20Report.pdf
http://scholar.lib.vt.edu/theses/available/etd-01172009-185137/unrestricted/
Final_02_10_09.pdf
https://www.ferrovial.com/memoria2005/EN/08_infrastructure.html
https://www.macquarie.com/dafiles/Internet/mgl/com/mqa/investor-centre/docs/mqa2012-analyst-pack.pdf?v=6
file:///C:/Users/izet.bajrambasic/Downloads/13845_GSY_BGP_Privatization%20and%
20PPP%20Review_June%202007.pdf
i
1,9558 Convertible Mark (KM, ISO CODE: BAM)= 1 EUR (Currency Exchange of the
Central Bank of B&H, No.092)
ii
International Finance Institution (WB, EIB, EBRD)
Volume 6 Number 1 Spring 2016
59
�
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The Monetisation of Assets through Concession and Applicability in the Sector of Energy in Bosnia and Herzegovina
Author
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BAJRAMBAŠIĆ, Izet
Abstract
A summary of the resource.
Financial effects of monetisation through concession in the sector of energy in Bosnia and Herzegovina (BiH) may well increase the level of domestic investments, production, exports, employment and general economic growth, without additional higher borrowings and loss of ownership in these strategically important industries. These new financial opportunities are necessary for faster economic development of the country, especially in the transitional period, as this development process is a great challenge in modern world economy. It requires significant commitment and coordinated efforts of the public and private sector. The case study of Terminal Kakanj Power Plant (KPP) presented in this paper show that it is possible to implement monetization of assets through concession in the energy sector in BiH. The empirical results provide evidence of positive correlations between monetisation through concession process and economic development in BiHor other transition and development countries. Key words: monetization, concession, development, financial effects, energy sector. JEL classification: O–Economic Development
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International Burch University
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2016
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doi: http://dx.doi.org/10.14706/JECOSS16612
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ISSN 1986 – 8502
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/f402bc6aa08ce67b8c60c0f4204e8068.pdf
b7b9fc83db5b0583bb5ce9a9d3e1b758
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Text
Journal of Economic and Social Studies
Contemporary Forms of Supporting Entrepreneurship and
Investments on SMEs: The case of Polog Region in the
Republic of Macedonia
Jeton Mazllami
Faculty of Business and Economics, South East European University-Tetovo,
Republic of Macedonia,
j.mazllami@seeu.edu.mk
Abstract: The world economy is facing a variety of financial and
economic challenges caused by different economic and political crises.
Furthermore, the crises have had a negative impact that has been
reflected on the macroeconomic indicators of each national economy.
In these circumstances the transition economies, especially the
Western Balkan countries needed to cope with the ever growing
international competition, increasing unemployment, lack of private
initiatives and investments, low level of economic growth and
development. As a result, the attention is oriented towards SMEs, the
importance of SMEs as a key pillar to sustainable growth and
competitiveness on national and global market. The focus of this
research is the importance of various contemporary forms which
support entrepreneurship in order to increase investments, such as:
business start-up centres, clusters, business incubators, economic zones
and investment funds. The main objective of this research is to
determine and measure the relationship between the SMEs from
Polog region and contemporary institutions: business development
centre (BDC) and technology park (TP) at SEE University,
Enterprise Support Agency (ESA) as a private company and
economic chamber of Macedonia which support private initiatives
and increase their investments. In order to determine the
relationship, a survey on SMEs in Polog region is conducted. The
methodology used is cross tabulation two-way tables with measures of
association based on data analysis from surveys and processed by
STATA software. The main finding of this research is the positive
impact of BDC, ESA and economic chamber on Polog region SMEs
on the increase of their investments.
Volume 6 Number 1 Spring 2015
Keywords: Investments, SMEs,
Entrepreneurship, BDC, Growth,
Economic Development
JEL Classification: D02, M13,
M21
Article History
Submitted: 01 June 2015
Resubmitted: 07 July 2015
Resubmitted:14 September 2015
Resubmitted:13 December 2015
Accepted: 04 February 2016
http://dx.doi.org/10.14706/JECO
SS16613
81
�Jeton Mazllami
Introduction
The world economy is challenged by different political, economic and financial
issues that impact various negative repercussions on international business and
macroeconomic indicators at the national level. Nowadays, the worldwide economies
are characterized by high competition, declining trend of private initiatives and weak
economic growth and development. The actual economic position of all economies,
especially transition countries, offers an opportunity to develop entrepreneurship and
gives a greater importance to SMEs. Small and medium-sized companies are a key
link of development and economic growth especially for economies with two levels
of government, local or regional level and central government. Supporting the SMEs
provides a key role in increasing investments and increasing employment and overall
well-being at the same time.
What is meant by SMEs? What is included in SMEs will depend on the Company
Law of each country which is object of analysis. The Republic of Macedonia has the
status of a Country candidate to adhere to EU, and in general the Law needed to
adapt to EU law. In this case it will be offer the thresholds related to SMEs in
Republic of Macedonia (Company Law, 2006) and EU (EC, 2005), (Appendix
Table-6).
According to the Macedonian Company Law the category SMEs includes three types
of entities: the micro size commercial entity, the medium size commercial entity and
the small size commercial entity.
A micro size commercial entity shall be a commercial entity that, in each of the
last two accounting years, or in the first year of business activities, has met the first
criteria and at least one of the second or third of the following criteria:
•
•
•
82
The average number of employees, based on the number of their full-time
working hours, is up to 10 employees; and
The gross annual revenue acquired from any source does not exceed EUR
50,000 in Macedonian Denars counter-value; and not more than 80% of
the gross income of the enterprises acquired from one client/consumer
and/or from an individual who is related to this client/consumer; and
All rights to participate in the micro-company are owned by not more than
two natural persons.
Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
A small size commercial entity shall be a commercial entity that, in each of the last
two accounting years, or in the first year of business activities, has met the first
criteria and at least one of the second or third of the following criteria:
•
•
•
The average number of employees, based on the number of their full-time
working hours, is up to 50 employees; and
The annual income is less than EUR 2,000,000 in Macedonian Denar
counter-value, and the total turnover is less than EUR 2,000,000 in
Macedonian Denar counter-value; and/or
The average value (at the beginning and at the end of the accounting year)
of the total assets is less than EUR 2,000,000 in Macedonian Denar
counter-value.
A medium size commercial entity shall be a commercial entity that, in each of the
last two accounting years, or in the first year of business activities, has met the first
criteria and at least one of the second or third of the following criteria:
•
•
•
The average number of employees, based on the number of their full-time
working hours, is up to 250 employees;
The annual income is less than EUR 10,000,000 in Macedonian Denar
counter-value; and/or
The average value (at the beginning and at the end of the accounting year)
of the total assets is less than EUR 10,000,000 in Macedonian Denar
counter-value.
The SMEs from Polog region are characterized by a traditional and contemporary
entrepreneurial approach. The entrepreneurial approach is a very complex process
and composed by the following characteristics: innovation, cooperation with start-up
and business centres, risk-taking, decision making, etc. The stated characteristics
make the contemporary entrepreneurial approach more different compared to the
traditional approach.
The relationship between the business sector and the contemporary forms which
support and develop them are different during the different stages of the economic
development. In this occasion this research paper tends to offer information about
the importance of these forms which have supported the SMEs and would have the
possibility to support the same in the Polog region of Macedonia in the coming
future.
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
Literature Review
Modern economies have devoted great importance to contemporary forms which
support the private initiatives. They developed the business ideas, supporting the
creation of business plans with the final goal to most effectively establish SMEs. In
transition economies the SMEs are supported especially by central and local
institutions sometimes by other state institutions. Unfortunately, in Macedonia and
in other transition economies, the contemporary institutions supporting the
enterprises are developed slower. Every transition economy needed to create a
strategy to develop these forms. The strategies of every transition economy should
utilize the contemporary experiences from developed countries and encourage the
entrepreneurs from SMEs to increase investments and employment. There is a
substantial literature from relevant international institutions, some of which is
mentioned in the following text.
Business start-up centre or business development centre is an entity which assists
individuals to develop their business ideas from their beginning toward formalizing
their real business activities, in other words a new business entity (Mazllami, 2011).
The access to business centers is very specific. The SMEs can take different
consultations related to very important issues such as: how to start doing business or
how to continue business activities, how to implement the business plan as a
condition for a successful business. Founders of such business start-ups or business
development centres are usually higher education institutions such as universities or
faculties, local governments and others.
According to the empirical analysis of the newly established 564 companies in
Yangtze delta area in China, Tao Chen and Zh. Zhue have managed to conclude
that environmental trust has positive effect on the construction of network
relationship and network capacity, while the knowledge acquisition was significantly
and positively correlated to the start-up firm performance (Zhao, Ordóñez and
Tennyson, 2015).
A business incubator is an entity which supports processes that accelerate the
successful development of start-ups and fledgling companies by providing
entrepreneurs with an array of targeted resources and services. These services are
usually developed or orchestrated by incubator management and offered both in the
business incubator and through its network of providers (Oklahoma, 2014).
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�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
According to the EU Centre for Strategy & Evaluation Services (IBRD, 2010), a
business incubator is an entity that accelerates and systematizes the process of
creating successful enterprises by providing them with a comprehensive and
integrated range of support, including: incubator space, business support services,
clustering and networking opportunities; a successful business incubator will
generate a steady flow of new businesses with above average job and wealth creation
potential.
On a world level, the application of incubators in SMEs began as a method of
economic development at federal, regional and local level. Regarding the location
where the incubators function, two types of incubators are known: regional/local
incubator and corporate incubator. According to Davies Mark, the Business
incubator has an important impact during the developing process of the new
enterprise known as start-up of the business cycle (Figure 1).
Figure 1. Business Cycle
MATURITY
Source: Davies Mark: Mixed-use Incubator Handbook a Start-up Guide for Incubator
Developers, author’s design
An economic zone is an entity with a specific specialty to solve problems related to
foreign trade, but gradually the focus of their activities is oriented towards
production industry, scientific and technical innovation goals. The economic zone
can be considered as an independent part of a national economy, but conversley the
economic zone is an important part of the developing economic system. Economic
zones largely contribute to the accomplishment of national interests whether it is in
economic or social plan. The benefits from economic zones are enormous. They
usually provide lower customs and taxes rates or charges on imports of raw materials.
According to the traditional approach to economic zones there are three types of
economic zones: industrial, commercial and service and mixed economic zone.
According to the contemporary approach (IFC, MIGA, and IBRD, Washington
2008) the economic zone is a special economic zone such as: Free Trade Zone
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
(FTZ), Traditional Export Processing Zone (EPZ), Hybrid Export Processing Zone
(EPZ), Freeport, Urban Free Zones, Single Factory Export Processing Zone (EPZ). The
principles incorporated in the basic concept of a special economic zone include:
•
•
•
•
Geographically delimited area, usually physically secured (fenced-in)
Single management/administration
Eligibility for benefits based upon physical location within the zone
Separate customs area (duty-free benefits) and streamlined procedures.
Technology Park is an organization, physical or virtual, managed by a specialized
professional team that provides value-added services, whose main aim is to increase
the competitiveness of its region or territory of influence by stimulating a culture of
quality and innovation among its associated businesses and knowledge-based
institutions, organizing the transfer of knowledge and technology from its sources to
companies and to the market place, and by actively fostering the creation of new and
sustainable innovation-based companies through incubation and spin-off processes;
and provides other value-added services together with high quality premises and
facilities (Bellavista and Sanz, 2009).
Creative cluster is a geographic concentration of interconnected companies,
specialized suppliers, service providers, firms of related industries, and associated
institutions (universities, standards agencies, trade associations) in a particular field
that compete but also cooperate. The geographic scope of a cluster relates to the
distance over which informational, transactional, incentive, and other efficiencies
occur (Porter, 2000). According to Porter’s definition, the cluster stages include
many types of institutions and different actors. In this case we have identified six
main types: firms, financial entity, public institutions, universities, collaboration
organizations and media. (Figure-2)
Some authors from UK explain the very important role of anchor institutions
(university and business school) to develop the SMEs through consultancy, contract
research, professional and human development workshop or seminars, start-ups and
others supporting activities for enterprises (Smallbone, Kitching and Blackburn,
2015).
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Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
Figure 2. Network of Institutions-Creative Clusters
Source: O. Sölvell,: Clusters – Balancing Evolutionary and Constructive Forces, 2008,
author’s design
Wim Naude from Maastricht School of management in the paper Entrepreneurship
and economic development: Theory, evidence and policy (2013), conclude that the
entrepreneurship provides a new perspective to develop economies; entrepreneurship
influences development outcomes positively as well as negatively; and
entrepreneurship is in turn significantly determined by the dynamics of
development.
Overview of Business Entities in the Republic of Macedonia:
The Polog Region Case
The economy of a country or region includes a complex set of all economic activities
as parts of a whole, which are closely related and dependent on one another. All
these branches of economic activities in general represent the economy of a country.
Activities of social life, which form the economic base, financial and material life of
people, and economic reports between people derived from work and satisfaction
from work are included within the economy of a country.
According to the new law on territorial reorganization in the Republic of
Macedonia, the number of municipalities was reduced from 124 to 85. This
regrouping was attempted to achieve an optimal size of municipalities to emphasize
the economic potential in terms of realization of economic activities. According to
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
the reshuffling of regional municipalities in Republic of Macedonia and according to
statistical classification nomenclature-territorial units NUTS-3 have 8 regions:
Vardar, Eastern, North Eastern, Southwest, Southeast, Pelagonija, Polog and Skopje.
The Polog region includes two major cities of Polog valley, Tetovo and Gostivar.
The Polog region is known as a region of private initiatives and the executor of many
successful businesses.
Based on the trend of the enterprise category (micro, small, medium and large) in
the Polog Region during last 5-years (2009-2013) it could be concluded that (Figure
3):
•
•
•
•
The total number of SMEs has increased for 659 entities (from 6.577 to
7236),
The number of micro business entities has significantly increased for
1776 entities (from 3.896 to 5671),
The number of small business entities has significantly decreased for
1130 entities (from 2644 to 1514)
The number of medium and large business entities has shown slower
growth compared to other categories.
Figure 3. The number of SMEs in Polog Region (2009-2013)
Source: State Statistical Office of RM, author’s calculation
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Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
The analysis of participation of Polog SMEs as part of the Macedonian economy
during 2009-2013 is as follows (Figure 4):
•
•
The percentage of total SMS has increased from 9.3% to 10,2%,
The higher percentage from SMEs are micro business entities
Figure 4. The number of Polog Region SMEs as part of RM economy (%), (2009-2013)
Source: State Statistical Office of RM, author’s calculation
There are several contemporary institutions of a high significance to the citizens and
the business sector in the Polog region. There are two higher education institutions:
the State University of Tetova (SUT) and South East European University (SEEU).
In SEEU there are two contemporary institutions which are supporting the SMEs of
Polog region: the Business Development Centre (BDC) and the Technology Park
(TP). There are some private entities which are supporting SMEs in the Polog
region, but of a high relevance and long time experience such as: Enterprise Support
Agency (ESA) and Economic Chamber of North-West Macedonia (ECNWM).
The objective of the research is to measure and test the level of relationship between
the category of companies (micro, small and medium) and contemporary forms
(BDC, TP, ESA, EC) and their impact on them. The focus of the research is the
relationship between categories as follows:
1. Category of companies vs. Institutions which support the entrepreneurship
1.1 Category of companies vs. Institutions which support the
entrepreneurship (Economic chambers, BDC and ESA)
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
2. Category of companies vs. Service satisfaction about services provided by BDC
and ESA
3. Category of companies vs. Increasing the services received by BDC, TP and
ESA
3.1 Category of companies (which increase the investments) vs. Increasing
the services received by BDC, TP and ESA
4. Attendance of seminars, training, workshops for R&D vs. Trend of
investment in the past three years
Data and Methodology
The research data is generated by a questionnaire conducted in 244 SMEs in the
Polog Region, Republic of Macedonia. The questionnaire contains 9 questions
which will transform in 9 variables processed by STATA (Appendix Table 6).
The survey sample for SMEs of Polog region on one hand is dominated mostly by
business trade activity 41.8%, production 29.1% and in the other 87.7% by micro
companies, 9.4% small companies, and only 2.9% by medium companies (Figure 5,
6).
Figure 5. Business Activity
Figure 6. Category of company
The used methodology is cross tabulation two-way tables with measures of
association of the survey conducted in the Polog region SMEs processed by STATA
software. According to this methodology the following hypotheses will be tested:
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Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
The null hypothesis (Ho): No relationship between variables
The alternative hypothesis (Ha): Existing relationship between variables
o
o
The estimation and testing of hypotheses will be realized as follows:
•
•
Cross tabulation two-way tables with measures of association.
Statistic Testing: X2 (chi-square) tests (Wolfe, 1999), Cramer’s V test,
Gamma, Kandall’staub test and Fisher’s exact test (Jann, B. 2008).
Measuring Results and Testing Hypotheses
The focus of this research is testing four main hypotheses and two auxiliary
hypotheses as follows:
Hypothesis-1 No relationship between company category and institution type
which support entrepreneurship.
According to the cross tabulation results between company category and institution
which support entrepreneurship, it could be concluded: (Table 1):
•
•
•
•
31.78% of micro enterprises have declared that local government is
supporting their entrepreneurship activities, Banks 24.77%, BDC & ESA
18.22%, etc.
30.43% of the small enterprises believe that Local Government and
University BDC & ESA Government are supporting their entrepreneurship
activities.
Most medium companies (57.14%) have declared that central government
are supporting their entrepreneurship activities.
In general, according to the sample of Polog region 31.56% of SMEs have
declared that local government is supporting their entrepreneurship
activities, Banks 23.36%, central government 21.72%, BDC & ESA
18.85% and economic chamber 4.51%.
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
Table 1. Category of Companies and Institutions which Support Entrepreneurship
Company category
Institutions which support entrepreneurship
L Banks Central Gov Chambers Com Local Gov BDC&ESA Total
f
53
44
10
68
39
214
R% 24.77
20.56
4.67
31.78
18.22
100
Micro
Co% 92.98
83.02
90.91
88.31
84.78
87.7
Ce% 21.72
18.03
4.1
27.87
15.98
87.7
F
4
5
0
7
7
23
R% 17.39
21.74
0
30.43
30.43
100
Small
Co% 7.02
9.43
0
9.09
15.22
9.43
Ce% 1.64
2.05
0
2.87
2.87
9.43
F
0
4
1
2
0
7
R% 0
57.14
14.29
28.57
0
100
Medium
Co% 0
7.55
9.09
2.6
0
2.87
Ce% 0
1.64
0.41
0.82
0
2.87
F
57
53
11
77
46
244
R% 23.36
21.72
4.51
31.56
18.85
100
Total
Co% 100
100
100
100
100
100
Ce% 23.36
21.72
4.51
31.56
18.85
100
Legend: Frequency (f), Row percentage (R%),Column percentage (Co%), Cells percentage (Ce%)
The testing of correlation between the company category and institution which
support the entrepreneurship is shown as follows:
TESTING:
RESULTS :
Pearson chi2 (8) = 11.9107
Pr = 0.155
Because Pr>0.05 (5%IC) then we accept H(0)
Crammer’s V= 0.1562
Gamma= 1.0000
V: ∈+ or -0.10 to 0.19 then the association is weak
The results from testing hypothesis 1 indicate that in general there is no correlation
between the Company Category (micro, small and medium size company) and the
type of Institution that supports entrepreneurship (Banks, Central Government,
Chambers of Commerce, Local Government, BDC and ESA).
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�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
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Hypothesis-1.1. No relationship between company categories and institution type
which support entrepreneurship with special emphasis on
economic chamber, business development centre (BDC) &
enterprise support agency (ESA).
According to the cross tabulation results between company category and especially
with economic chamber, business development centre (BDC) & enterprise support
agency (ESA) the following can be concluded: (Figure 7, Appendix Table 7)
•
•
•
•
23.4% or 57 of 244 SMEs have declared they have used services provided by
EC, BDC and ESA
20.4% or 10 of 49 micro companies have declared they have used services
provided by economic chamber and 79.6% or 39 of 49 micro companies
that they have used services provided by BDC & ESA.
All 7 of the small companies have declared they have used services only
provided by BDC & ESA.
One medium company has declared it has used services provided only by
the economic chamber.
Figure 7. Relation Between Company Category and Institutions Which Support
Entrepreneurship (Economic Chamber, BDC and ESA)
The testing of correlation between the company category and economic chamber,
BDC and ESA, is as follows:
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
TESTING:
Pearson chi2 (2) = 5.8945
Pr = 0.052
Crammer’s V= 0.3216
Gamma= 1.0000
RESULTS :
Because Pr=0.05 (at 95% confidence) then we accept H(a)
There is a relationship between Company categories vs. EC,
BDC&ESA.
V=0.3216 ∈ (+ or - ) 0.30 or above, this association is strong
G=1.0000 then there is a positive strong relationship
The results from testing hypothesis 1.1 indicate that there is a relationship between
the enterprises category and EC, BDC and ESA. These results confirm the
declarations of SMEs from Polog region that the institution type mentioned above
have supported their entrepreneurship activities and in general have improved the
entrepreneurship climate in Polog region.
Hypothesis-2 No relationship between company category and service satisfaction
of services provided by BDC and ESA.
The most important issue of SMEs in Polog region is the level of satisfaction from
services provided by BDC and ESA. As a result of cross tabulation of SMEs related
to this issue the following results have been obtained (Table 2):
•
•
•
11.2% (24 companies) and 46.3% (99 companies) from all micro
companies have declared that they have been very satisfied and satisfied
with services provided by BDC and ESA.
8.6% (2 companies) and 56.6% (13 companies) of all small companies
have declared they have been very satisfied and satisfied with services
provided by BDC and ESA and
71.4% (5 companies) of medium company have declared they have been
very satisfied and satisfied with services provided by BDC and ESA.
Table 2. Enterprises Category and Service Satisfaction of Services Provided
by BDC and ESA
Company
category
Micro
Small
Medium
Total
94
Service Satisfaction of services provided by BDC and ESA
Very dissatisfied
Dissatisfied
Satisfied
Very satisfied Total
45
44
99
24
214
3
5
13
2
23
0
2
5
0
7
48
51
117
26
244
Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
The testing of correlation between these categories is as follows:
TESTING:
Pearson chi2 (6) = 4.423
Pr = 0.620
Crammer’s V= 0.0952
Gamma= 0.216
RESULTS :
Because Pr>0.05 (at 95% confidence) then we
accept H(0)
No relationship between Enterprise Category
&service satisfaction about services provided by
BDC&ESA
V=0.0952∈ (+ or - ) 0.01 to 0.10 this
association is very weak
G=0.2165<1.0000 then there is a positive weak
relationship
The results from testing hypothesis 2 indicate that there is no relationship between
enterprise categories and service satisfaction about services provided by BDC and
ESA. The results do not confirm the declarations of SMEs from Polog region about
the service satisfactions of the institution type mentioned above. In this case, as a
result of a very poor level of correlation between category types which are the object
of study do not relate to the declaration of SMEs concerning this issue.
Hypothesis-3 No relationship between company categories and increasing services
received by BDC, TP and ESA
One of the goals of this research is to measure the correlation between SMEs and the
process of increasing services received by BDC, TP and ESA. As a results of cross
tabulation of SMEs answers related to this issue, the following results have been
obtained. (Table 3):
•
•
59.8% of micro companies, 21.7% of small companies and 55.3% of
medium companies have declared that the services received by BDC, TP
and ESA will increase in the future.
SMEs of Polog region believe that in the future these institutions should
help and will support more their entrepreneurial activities.
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
Table 3. Company Category and the Increasing of Services Received
by BDC, TP and ESA
Company category
Micro
Small
Medium
Total
F
R%
F
R%
F
R%
F
R%
Increasing the services received by BDC, SEEU Tech Park and ESA
YES
NO
Total
128
86
214
59.81
40.19
100.00
5
18
23
21.74
78.26
100.00
2
5
7
28.57
71.43
100.00
135
109
244
55.33
44.67
100.00
The testing of correlation between these categories is as follows:
TESTING:
Pearson chi2 (2) = 14.2680
Pr = 0.001
likelihood-ratio chi2 (2) = 14.6491
Pr= 0.001
Crammer’s V= 0.2418
Gamma= 0.3928
Fisher's exact = 0.000
RESULTS :
Because Pr=0.001<0.05 (at 95% confidence) then
we accept H(a)
Relationship exists between Enterprise Category &
Inst. which support entrepreneurship
V=0.2418 ∈ (+ or - ) 0.20 to 029, this association is
moderate
G=0.3928<1.0000 then there is a positive moderate
relationship
Here we reject the (H ) and conclude that there is a
0
relationship between variables
The results from testing hypothesis 3 indicate that there is a positive relationship
between enterprise categories and increasing services received by BDC, TP and ESA.
These results confirm the declarations of SMEs from Polog region as a significant
issue that the services received by BDC, TP and ESA will have a positive trend and
will support more their entrepreneurship in the future.
Hypothesis-3.1 No relationship between category of enterprise (which increased the
investments in the last three years) and increasing services received
by BDC, TP and ESA
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�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
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According to the cross tabulation answers of SMEs which increased the investments
in the last three years and increasing services received by BDC, TP and ESA we have
obtained the following results: (Figure 8, Appendix Table 8)
•
•
40.98% or 100 of 244 SMEs have declared that during the last three years
have increased their investments.
54.0% or 47 of 87 micro companies, 1% or 1 of 10 small companies and
33.3% or 1 of 3 medium companies are declared parallel to their
investment increase have increased the services received by BDC, TP and
ESA.
Figure 8. Enterprise Category with Increased Investments in the last 3 Years and BDC,
TP and ESA
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
The testing of correlation between these categories is as follows:
TESTING:
RESULTS :
Because Pr=0.027<0.05 (at 95% confidence) then we
Pearson chi2 (2) = 7.2595
accept H(a)
Pr = 0.027 There is relationship between company category with
likelihood-ratio chi2 (2) = 8.2249 increased investments & institution type BDC, TP,
Pr= 0.016
ESA)
V=0.2694 ∈ (+ or - ) 0.20 to 029, this association is
Crammer’s V= 0.2694
moderate
Gamma= 0.5526
G=0.5526<1.0000 then there is a strong relationship
Kendall's tau-b = 0.1973
Fisher's exact = 0.015 F=0.015 near 0, we conclude that there is a relationship
between variables
The results from testing hypothesis 3.1 indicate that there is a positive relationship
between SMEs which have increased their investments in the last 3-years and
increasing services provided by BDC, TP and ESA. These results confirm the strong
opportunity of SMEs of Polog region to increase their investments being supported
by BDC, TP and ESA. In general, this will improve the investment climate in region
and broader.
Hypothesis-4 No relationship between company categories which have attended
seminars, training, workshops for R&D and trend of their
investments in the last three years.
According to the cross tabulation answers between categories mentioned in
hypothesis 4, we can conclude as follows: (Table 4)
•
•
•
98
56.1% or 137 of 244 SMEs have declared that have attended seminars and
workshop on research and development (R&D).
51.0% or 51 of 100 SMEs which have increased their investments during
last 3 years declared that have attended seminars, training, workshops and
R&D activities.
3.6% or 5 of 137 SMEs which have attended the seminars, training,
workshops and R&D activities have declared that have had significant
increase of investments.
Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
Table 4 Companies which have Attended Seminars, Training, Workshops and the
Trend of Increasing Investments during last 3 years
Attendance of
seminars
training, WSH –
R&D
YES
No
Total
Trend of investment during last three years
K
Decrease
Increase
Sig.Increase
The same
Total
F
R%
F
R%
F
R%
30
21.90
14
13.08
44
18.03
51
37.23
49
45.79
100
40.98
5
3.65
12
11.21
17
6.97
51
37.23
32
29.91
83
34.02
137
100.00
107
100.00
244
100.00
The test results of the relationship between companies which have attended
seminars, training, and workshops for R&D & Trend of investment during last
three years are as a follows:
TESTING:
Pearson chi2 (3) = 9.5457
Pr = 0.023
likelihood-ratio chi2 (3) = 9.6539
Pr= 0.022
RESULTS :
Because Pr=0.023<0.05 (at 95% confidence) then we
accept H(a)
There is relationship between attendance of seminars,
training, WSH –R&D & trend of investments last three
years
Crammer’s V= 0.01978 V=0.01978 ∈ (+ or - ) Less than 0.10, this association is
very low
Gamma= 0.0338
G=0.0338<<1.0000 then there is a strong relationship
Kendall's tau-b = 0.0198
Fisher's exact = 0.023
Here we reject the (H ) and conclude that is a
0
relationship between variables
The results from testing hypothesis 4 indicate that there is a positive relationship
between companies which have attended seminars, training, workshops on R&D
and positive trend of investment in the last three years. SMEs from Polog region
believe that if they attend more training and workshops for R&D in the future, it
will improve their entrepreneurial performance and will impact the overall
entrepreneurial performance of the region.
Volume 6 Number 1 Spring 2016
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�Jeton Mazllami
Conclusion
According to the estimates, results and testing of the answers and feedback from
questionnaires conducted for SMEs of the Polog Region in Republic of Macedonia,
the research leads to the following conclusions:
There are good entrepreneurs in the Polog region who need support especially by
public institutions as well as banks and contemporary forms of business support. In
general, there are insignificant relationships between company categories of Polog
region and all institutions which support entrepreneurship such as: banks, local and
central government, economic chambers, technologic parks, business development
centres and enterprise support agencies.
The economic chamber, BDC and ESA have a positive impact in supporting and
assisting the development of SMEs. But unfortunately, the SMEs of Polog region do
not have an adequate service satisfaction related to the services provided by BDC and
ESA, even though they continue to receive services from them.
SMEs of Polog region which have had increasing investments in the past three years
have received increased the services received by BDC, TP and ESA such as: seminars,
training, and workshops. These activities are conducted in order to research and
develop their company and to achieve a positive trend of their investments.
Universities, BDC, business start-up agencies, technologic parks should provide
services according to the SME needs. This approach will create new opportunities
for entrepreneurs and more chances to develop the existing or new companies. The
entrepreneurs should understand that the relationship with contemporary
institutions is meant to give them more benefits and profit.
References
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The case of Polog Region in the Republic of Macedonia
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IBRD (2010). Global Good Practice in Incubation Policy Development and
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IFC, MIGA, and IBRD (2008). Special Economic Zones Performance, lessons learned,
and implications for Zone Development, Washington.
Jann, B. (2008). Multinomial goodness-of-fit: Large-sample tests with survey design
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Mariotti, S. & Glackin, C. (2015). Entrepreneurship: Starting and Operating a Small
Business (4th Edition), Prentice Hall, New York.
Mazllami, J. (2011). Investments and Local Economic Development in the Tetovo
region, (PhD Dissertation).
Michael E. Porter (2000). Location, Competition, and Economic Development:
Local Clusters in a Global Economy, Economic Development Quarterly, Vol. 1, 15–
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Naude, W. (2013). Entrepreneurship and Economic Development: Theory,
Evidence and policy, IZA Discussion Paper Series, No.7507.
Öksüzoğlu-Güven, G. (2015). Decision Making in SMEs: Insights from Business
Ethics and Entrepreneurship. In Human Rights and Ethics: Concepts, Methodologies,
Tools, and Applications, IRMA.
Oscar Torres-Reyna (2014). Getting Started in Frequencies, Crosstab, Factor and
Regression Analysis, Data & Statistical Services, Princeton University.
Official Gazette "No. 84/05, and 25/07(2006). Company Law in Republic of
Macedonia, SV and Ministry of Economy.
Volume 6 Number 1 Spring 2016
101
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Oklahoma Department of Commerce, (2014). Small business incubator certification
program:
Anual
report,
Oklahoma
Department
of
Commerce,
(http://digitalprairie.ok.gov/cdm/ref/ collection/stgovpub/id/14848)
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developing management and leadership skills in small firms, UKCES,
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/
414390/Anchor_institutions_and_small_firms.pdf.
SME Envoy Report (2005). The activities of the European Union for small and
medium-sized enterprises (SMEs), European Commissions
(http://ec.europa.eu/research/bioeconomy/pdf/ small-and-medium-sizedenterprises_en.pdf).
Todorovic, K. & Smallbone, D. (2014). Advances in Logistics, Operations, and
Management Science (Aloms) Book Series, IGI Global.
Wolfe, R. (1999). Partitions of Pearson’s 2 for analyzing two-way tables that have
ordered columns. Stata Technical Bulletin 51: 37–40. Reprinted in Stata Technical
Bulletin Reprints, vol. 9, pp. 203–207. College Station, TX: Stata Press.
Zhao, J., Ordóñez de Pablos, P., & Tennyson, R. D. (2015). Organizational
Innovation and IT Governance in Emerging Economies, Hershey, PA: IGI Global.
Appendix:
Table 5. Thresholds of Enterprise Category EU/MKD
Country
EU
MKD
Enterprise category
Medium-sized
Small
Micro
Medium-sized
Small
Micro
Headcount
< 250
< 50
< 10
50 → 249
10 → 49
1→9
Turnover
€ 50 million
€ 10 million
€ 2 million
€ 10 million
€ 2 million
€ 50 thousand
Total balance sheet
€ 43 million
€ 10 million
€ 2 million
€ 10 million
€ 2 million
€ 50 thousand
Source: SMEs EU Envoy Report 2005 and Company Law of MKD, author’s design
102
Journal of Economic and Social Studies
�Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs:
The case of Polog Region in the Republic of Macedonia
Table 6. DATA Describe
Variable
var1
var2
var3
var4
var5
var6
var7
var8
Storage
type
str22
str6
str18
str22
str17
str27
Display
format
%22S
%9S
%18S
%22s
%17s
%27s
str3
%9s
str22
%22S
str3
%9S
var9
Variable label
Business Activity
Enterprise category
The reasons for opening of enterprise
Institutions which support your entrepreneurship
Service Satisfaction from Universities and ESA
Associations which needed to protect your interests
Attendance of seminars, trainings, workshops for
R&D
Trend of investment in the past three years
Increasing the services received by BDC, SEEU T.
Park and ESA
Table 7. Category of Companies and Economic Chamber, BDC, ESA
Enterprise
category
Medium
Micro
Small
Total
Institutions which support the entrepreneurship
Economic
BDC&ESA
Total
Chambers
1
0
1
10
39
49
0
7
7
11
46
57
Table 8. Enterprises Category with Increasing Investments last 3 Years
and BDC, TP & ESA
Enterprise category
Medium
Micro
Small
Total
Increasing the Services received by BDC, SEEU Tech Park and
ESA
YES
NO
Total
1
2
3
47
40
87
1
9
10
49
51
100
Volume 6 Number 1 Spring 2016
103
�
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Contemporary Forms of Supporting Entrepreneurship and Investments on SMEs: The case of Polog Region in the Republic of Macedonia
Author
Author
MAZLLAMI, Jeton
Abstract
A summary of the resource.
The world economy is facing a variety of financial and economic challenges caused by different economic and political crises. Furthermore, the crises have had a negative impact that has been reflected on the macroeconomic indicators of each national economy. In these circumstances the transition economies, especially the Western Balkan countries needed to cope with the ever growing international competition, increasing unemployment, lack of private initiatives and investments, low level of economic growth and development. As a result, the attention is oriented towards SMEs, the importance of SMEs as a key pillar to sustainable growth and competitiveness on national and global market. The focus of this research is the importance of various contemporary forms which support entrepreneurship in order to increase investments, such as: business start-up centres, clusters, business incubators, economic zones and investment funds. The main objective of this research is to determine and measure the relationship between the SMEs from Polog region and contemporary institutions: business development centre (BDC) and technology park (TP) at SEE University, Enterprise Support Agency (ESA) as a private company and economic chamber of Macedonia which support private initiatives and increase their investments. In order to determine the relationship, a survey on SMEs in Polog region is conducted. The methodology used is cross tabulation two-way tables with measures of association based on data analysis from surveys and processed by STATA software. The main finding of this research is the positive impact of BDC, ESA and economic chamber on Polog region SMEs on the increase of their investments. Keywords: Investments, SMEs, Entrepreneurship, BDC, Growth, Economic Development
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International Burch University
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2016
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doi: http://dx.doi.org/10.14706/JECOSS16613
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ISSN 1986 – 8502
HB Economic Theory
-
https://eprints.ibu.edu.ba/files/original/18e3b47ae3d84bb5cb5643b0020a06c0.pdf
590b65c732f9a8d17dcb0e6bafe1528e
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Do Size and Origin Matter? Evidence from the Banking Market of Bosnia and Herzegovina
Author
Author
MEMIĆ, Deni
MEMIĆ, Nedim
PAŠIĆ, Sanela
Abstract
A summary of the resource.
This paper supports research activities related to the performances of banks in Bosnia and Herzegovina. Observing diversified, decentralized and inhomogeneous banking market of Bosnia and Herzegovina arises questions such as whether large banks are better than small banks or whether foreign owned banks are better than locally owned banks. The main purpose of this study is to compare banks of different size and ownership origin in Bosnia and Herzegovina. The dataset includes 162 bank-years data and 24 financial ratios. The results show that small banks in Bosnia and Herzegovina have significantly higher net interest margin and are better capitalized than large banks. Large banks, however earn almost double interest revenue per employee compared to small banks. Foreign banks are significantly larger compared to local banks. It is also possible to discriminate between banks of different size and origin based on their financial performance. Keywords: Bosnia and Herzegovina, banking, profitability, efficiency, size and origin
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International Burch University
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2016
Keywords
Keywords.
Article
PeerReviewed
DOI
Digital object identifier
doi:http://dx.doi.org/10.14706/JECOSS16616
Identifier
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ISSN 1986 – 8502,
HB Economic Theory
-
https://eprints.ibu.edu.ba/files/original/a22c8c9d10329ca86d4e6b46bef14e00.pdf
5c57ec5d1b19a37cbf1dfaae87c1a984
PDF Text
Text
Journal of Economic and Social Studies
Personality Characteristics and Emotional Intelligence Levels
of Millenials: A Study in Turkish Context
Guven Ordun
Faculty of Business Administration
Istanbul University
Turkey
guven.ordun@gmail.com
Asli Akun
Faculty of Business Administration
Istanbul University
Turkey
akun.asli@gmail.com
Abstract: The purpose of the study is twofold. The first purpose of the
study is to investigate the relations between personality characteristics
and emotional intelligence of the Millennials. Costa and McCrea’s Big
Five Personality Inventory (IPIP-NEO) is used to measure the
personality characteristics of the millenials. Emotional intelligence
dimensions are measured by Wong and Law emotional intelligence scale
(WLEIS). Secondary purpose of the study is to find self-evaluations of the
Millenials related with their characteristics. Roger’s Q-Sort Scale is used
to find out Millenials self perceptions. An advantage of the Q-Sort Scale
is that it offers straightforward assumptions about the underlying
structure of a concept within demographical segments. Results reveal that
use of emotion is positively correlated with conscientiousness whereas
regulation of emotion is negatively correlated with Neuroticism.
Furthermore, personality characteristics have effects on emotional
intelligence dimensions. The effects are much more significant for
regulation and use of emotions dimensions. These dimensions are
assumed to be important determinants of performance within
organizations so it is important to analyze the personality constructs
associated with them. Depending on their self-perceptions, millienials
evaluate themselves relatively high on positive traits (e.g. honest, outgoing, etc.) and low on negative traits (e.g. unhelpful, dishonest, etc.).
Regarding personality characteristics, they evaluated themselves highest in
openness and lowest in neuroticism. Millenials will be the dominating
workforce for the upcoming years, so if they are willing to establish high
performance relations, managers should better understand Millenial
characteristics and perspective.
Volume 6 Number 1 Spring 2015
Keywords: Millenials, Personality
Characteristics, Emotional
Intelligence
JEL Classification: J13, M14,
Z13
Article History
Submitted: 21 June 2015
Resubmitted: 11 January 2016
Accepted: 04 February 2016
http://dx.doi.org/10.14706/JECO
SS16614
125
�Guven Ordun, Asli Akun
Introduction
Emotions can be explained by psysiological changes in the body, cognitions, learning
processes, personality, social relations, experiences, psychological conditions, cultural
practices, and are grounded in daily life (Strongman, 2003). Emotional intelligence
is described as monitoring and evaluating one’s own emotions, monitoring and
evaluating emotions of others, regulating and using them (Hartel, et al. 2005).
Whereas, cognitive intelligence is associated with the factual information about
people, things, events, time, and place, emotional intelligence deals with the
antecedents and mutual relations between these aspects of life (Terrell & Hughes,
2008). Personality can be defined as distinctive and stable ways of behavior (Ewen,
2010). Emotions and personality are known to be intertwined with each other. Some
researches in the field (e.g. Caruso et al., 2002; Ghiabi & Besharat, 2011) have
revealed that, there are significant relations between personality dimensions and
emotional intelligence dimensions. This study aims to search this relation on
millenials. Twenge (2009) discussed that the generation a person belongs to, can be
slightly more influence on the person than his/her family. She added that it is
essential to recognize the own realities of each and every generation within various
contexts (Twenge, 2009). Millenials in Istanbul, Turkey are subjects of this research.
However; the findings may be relevant in other cultures’s generations within the
limitations of specific historical, social, and economic conditions.
Theoretical Background
Assesment of Personality
Personality has been studied thoroughly throughout the years and researchers have
stated theories about personality. The psychodynamic perspective explains the effect
of the unconscious, below the surface on the structure and development of
personality, whereas the humanistic perspective underlines the positive human
nature and self-actualizing capability on the structure and development of
personality. The trait approach emphasizes the effect of conscious, above the surface
and behavior patterns on the structure and development of personality, whereas the
behaviorist theory focuses on the effect of environment and learning in shaping
personality. Cognitive approach emphasizes the effect of mental processes on the
structure and development of personality (Ewen, 2010). Although these approaches
have some commonalities in themes such as unconscious, psychopathology, etc.,
they explain these themes and personality in different ways which may complement
each other. In this study the contribution of trait approach to personality and
126
Journal of Economic and Social Studies
�Personality Characteristics and Emotional Intelligence Levels of Millenials:
A Study in Turkish Context
Roger’s, one of the well known names of humanistic approach, with his Q-sort test,
and the contribution of behaviorist approach with its emphasis of the environment
on human behavior, specifically from the cohort’s effect on personality characteristics
of millenials can be understood. However, the contributions of psychodynamic
perspective and cognitive perspective are not excluded in the sense that although
they can not be measured in this research, they implicitly exist.
Related with trait approach, many researchers in the field have searched for the
personality factors and their measures. Especially the measure of Big Five that is
composed of five factors, namely, extraversion, agreeableness, conscientiousness,
neuroticism, and openness is accepted as valid and reliable in various cultures
(McCrea and Costa, 1997). Personality dimensions show disposition to coherent
patterns of thoughts, feelings, and actions (McCrae, 2002). Revised Neo Personality
Inventory assesses six specific lower level traits (facets) for each of the five function
spheres or combinations of subset of attributes (domains), has been widely used
(Costa & McCrae, 1995). Extraversion refers to being highly active, social and
having positive feelings. Openness to experience represents the tendency to develop
oneself in intellectual ways and to experience new ideas, things, people, etc.
Agreeableness refers to kind, helping and thoughtful behavior. Conscientiousness is
associated with determination, self-control, and achievement orientation.
Neuroticism can be defined as the tendency to feel nervous, touchy, and badtempered (Furnham et al., 2003). In a study, the relationship between NEO-PI-R
and MBTI that is derived from Jung’s types and developed by Myers was examined.
According to the results, NEO-PI-R’s extraversion was correlated positively with
MBTI’s extraversion and negatively correlated with introversion. MBTI’s sensingintuition type explains how people perceive information and openness was negatively
associated with achieving information through senses and MBTI’ sensing and
positively associated with discovering possibilities that are unobvious and MBTI’s
intuition. MBTI’s thinking-feeling type describes how people judge information.
Agreeableness was found out negatively related with analyzing and MBTI’s thinking
and positively related with experiencing emotions and MBTI’s feeling. MBTI’s
judging-perceiving type signifies how people comprehend and work with
information. Conscientiousness was positively correlated with reaching conclusions
and MBTI’s judging and negatively correlated with becoming aware and MBTI’s
perceiving. MBTI’s extraversion-introversion type describes how mental orientation
toward life is. Neuorticism was negatively related with MBTI’s extraversion and
positively related with MBTI’s introversion (Furnham et al., 2003). Lately, The
Revised Neo, modified in a more readable way, has been called as NEO-PI-3. It was
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found out to be psychometrically better even than sound NEO-PI-R and applicable
to adolescent sample (McCrae, Costa & Martin, 2004). In this study, IPIP-NEO
with 120 statements is used. This short verison of IPIP-NEO has been found out
valid and reliable (Johnson, 2014).
Emotional Intelligence
Emotions and motivation have the same Latin root of “move”. Not suprisingly,
emotions influence people’s behaviors, choices, etc. People generally decide between
moving toward to pleasure, moving away from pain, moving against obstacles, and
stopping as focusing on and giving attention to what one is doing. Stopping is also a
tactic that animals such as rabbits use to survive. Stopping requires a high degree of
emotional intelligence to control automatic responses and impulses. People may
develop stopping through meditation (Terrell & Hughes, 2008). Approaching from
another perspective, deriving from the basics of relational emotive theraphy
emotions are cognitions derived from one’s assessments of social environment that
lead to certain feelings (Strongman, 2003).
Deutschendorf (2009) provided historical background of emotional intelligence
research. Researchers have worked on the types of intelligence since 1900s. BarOn
developed one of the first valid tests in the field. In 1990 John Mayer, Peter Salovey,
and David Caruso developed ability based emotional intelligence test. In 1995
Daniel Goleman published his book “Emotional Intelligence” that gained public
interest and became a bestseller. In 1998, Goleman published his second book
“Emotional Intelligence in the Workplace” which strenghtened the success and
understanding of the concept (Deutschendorf, 2009).
Salovey and Mayer (1990) view emotions as organized responses, crossing the
boundaries of many psychological subsystems, including the physiological, cognitive,
motivational, and experiential systems. Emotions typically arise in response to an
event, either internal or external, that has a positively or negatively valenced meaning
for the individual. Emotions can be distinguished from the closely related concept of
mood in that emotions are shorter and generally more intense. Emotional
intelligence is not about behaving in good manner or behaving accordingly only to
one’s own intentions (Goleman, 1998). Emotional intelligence refers to recognizing
one’s own emotions, emotions of others and managing emotions in social relations
(Goleman, 1998). Goleman mentioned five main emotional and social abilities as
self-awareness, self-regulation, internal motivation, empathy, and social skills
(Goleman, 1998).
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Emotional intelligence has also been researched in Turkish literature. Sahin et.al
(2009) analyzed relations between emotional intelligence, stress tolerance and Type
A Personality. Findings revealed that emotional intelligence is negatively correlated
with Type A personality and positively correlated with stress tolerance. İsmen (2001)
analyzed the relations between emotional intelligence and self evaluated problemsolving skills and specified a positive correlation between these concepts. Erkus and
Gunlu (2008) found positive relations between emotional intelligence and
dimensions of transformational leadership. Karahan and Yalcin (2009) examined the
effect of emotional intelligence skills training program on emotional intelligence
skills improvement by pretest-posttest design. Emotional intelligence was measured
by Hall’s self-evaluation scale including emotional awareness, managing emotions,
self-motivation, empathy, and coaching other people’s emotions dimensions. The
study revealed that the program was indeed useful for developing emotional
intelligence skills both in short and long-terms (Karahan & Yalcin, 2009).
Personality and Emotional Intelligence
In literature, there have been studies that investigated the relationships between
personality dimensions and emotional intelligence. Ghiabi and Besharat (2011)
found that emotional intelligence is positively related with extraversion, openness,
agreeableness, and conscientiousness, negatively related with neuroticisim.
Furthermore, emotional intelligence was positively predicted by extraversion and
negatively predicted by neuroticism. Extraversion is explained as an attribute, which
eases experiencing pleasure and having positive emotions, with the effect of
emotional intelligence, and it will lead to high quality relationships (Ghiabi and
Besharat, 2011). Caruso, Mayer, and Salovey (2002) mentioned that ability based
emotional intelligence measures are distinguishable from the personality measures in
the sense that they measure an ability, a kind of intelligence. In their study they used
multi factor emotional intelligence scale and 16 PF. The results showed that
emotional intelligence positively correlated with sensivity primary factor and
extraversion global factor (Caruso et al., 2002). Sudak and Zehir (2013) analyzed the
relations between emotional intelligence, personality types and job satisfaction. Their
findings have represented significant correlations between all dmiensions of
personality and emotional intelligence. Highest positive correlation was between
agreeableness and other emotional appraisal. Although personality and emotions
have been investigated in literature, integration of the generation cohort to these
dimensions is relatively few. Petrides et al. (2007) investigated the relation between
personality characteristics and emotional intelligence. Their sample mean age was 25
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and considered to be within the millennial cohort. They found significant relations
between personality characteristics and emotional intelligence. Bergman et al. (2011)
analyzed the relation between narcissism and social network usage of the millennial
generation. Narcissism was not found to be as the main predictor of social network
usage and discussed that millennials’ social network usage was not solely about
attention seeking or maintaining self-esteem (a common stereotype for “Generation
Me”), but also a means of connecting and communicating. Despite all common
beliefs a comprehensive investigation is needed for milennial generation.
Millenials as a Generation Cohort
According to researchers, macro-level social, political and economic events that occur
during the pre-adult years of a cohort result in a generational identity comprising a
distinctive set of values, beliefs, expectations and behaviors. These values, beliefs,
expectations and behaviors remain constant throughout a generation’s lifetime
(Jackson et al., 2011).
As generally accepted in the literature four major cohorts exist: Veterans were born
between 1920 and 1945; Baby Boomers between 1946 and 1964; Generation X
members were born between 1965 and 1980 and Generation Y between 1981 and
2000. Each generation has its own characteristics due to different economic, social,
and political world events of their times. Great Depression and World War II in
veteran’s generation, Civil Rights Movements and Cold War in baby boomers’
generation, Challenger explosion and Fall of Berlin Wall in Xers generation, and
intense use of computers and multiculturalism in Y generation are among the
striking events of their times (Zemke, et al., 2000). Regarding the general
characteristics of Millenial generation, the most striking is that they are globally
connected through Internet and social media (Ordun, 2015).
When the literature about millennial cohort is analyzed, it seems that in different
continents different aspects of the millenials’ attributes gained more attention for
studying. In US the researches on millenials have concentrated on topics such as
social media (e.g. Nusair et al., 2013), consumers (e.g. Wolf et al., 2005); in Europe
main topics of research mostly focused on culture (e.g. Mihelcea et al. 2013) and
communication and multilingualism (e.g. Sundberg, 2013); in Asia studies mostly
focused on negotiation (e.g. Vieregge & Quick, 2010) and hospitality management
(e.g. Kong et al., 2015); in Australia, domestic tourism (e.g. Gardiner et al., 2014);
in Africa, technology (e.g. Dlodlo & Mahlangu, 2013).
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Turkey is a transcontinental country between Europe and Asia. According to the
historical perspective, post Republican era in Turkey witnessed important socio
political events. Taking its roots from 1960s onwards, the political crisis and
instability resulted in 1980 military coup (Kaya Ozcelik, 2011). Being sensitive to
changes and developments in the world and specifically in Western societies, Turkish
science and philosophy has also been affected. After 1980s, poverty, development,
diversity and identity have mostly been emphasized. After 1990s globalization and
postmodernity started to determine the sociologic agenda (Ozcan, 2009). Thus, the
desired and undesired effects of the historical conditions on that current generation
and the following generations have become inevitable. Depending on the
problematic situations before 1980s upcoming generations were thought to be not
interested in politics however recent events signified that Y generation university
students have expressed their sociopolitical preferences through social media (Cakar
Mengu, et al., 2015). Yuksekbilgili (2013) investigated the characteristics of
millenials revealed in Turkey. The sample consisted of 603 millenials in Turkey and
the findings revealed that they trust their technological abilities more than listening,
effective communication, teamwork, and time management abilities. Millenails
thought that they don’t have skills for managing communication with difficult
people especially as they define themselves as impatient. Although they were not
highly committed to their organizations they were willing to work more in order to
get an early promotion. They also favor online shopping (Yuksekbilgili, 2013).
Another study with a sample of 1247 people, aimed to identiy the age interval of Y
generation in Turkey. The birth dates have ranged from 1983 to 1995 for millenials
in Turkey, different from the generally accepted 1980-2000 interval. The difference
was explained with the latency in dispersion of technological advances and internet
use in Turkey (Yuksekbilgili, 2015).
The millenials in Bosnia and Herzegovina have had different historic, socio
economic conditions and so experiences than rest of Europe. Röper and Gavranidou
(2003) mentioned that after the Bosnian War (1991-1995), healing trauma,
providing trainings, and counseling for coming generations have become important
issues. Eder (2014) also stated the war’s negative socioeconomic consequences such
as forced migration and financial difficulties and negative effects on youth education.
All in all, Y generation is expected to be involved in a diverse working environment.
Diversity refers to varied attributes regarding demographics, psychological
conditions, knowledge, values, skills, interests, and experiences (Landy and Conte,
2007). Deriving from generational diversity, the clash of values and views are more
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visible in workplaces where multigenerations work together. Being aware of the fact
that people may have different generational backgrounds, this may serve as barriers
regarding stereotypes. Especially when there is uncertainity and crisis, conflict shows
itself as tension and understanding generational differences may bridge the gaps
(Zemke, et al., 2000).
Hypotheses of the Study
The main assumption of the study focuses on the intercorrelations of the
dimensions. Dimensions of Emotional Intelligence and their correlates with Big 5
personality traits are investigated. In addition, millenials’ self-perception is explored
by Roger’s Q-Sort scale. As it was mentioned before, some personality traits (i.e.
extraversion, neuroticism) have been found closely associated with emotional
intelligence. Accordingly, the hypotheses are stated below:
H1. Emotional intelligence dimensions of Millennials are correlated with main
personality attributes.
The main dimensions of emotional intelligence defined as self-emotional appraisal,
other emotional appraisal, regulation of emotions and use of emotions. Regression
analysis has been computed to find out personality determinants of each emotional
intelligence dimension.
H2. Emotional intelligence dimensions are influenced by personality traits.
In addition, Millenials self-perception was explored by Roger’s Q-Sort scale.
Methodology
Sample
The sample consists of 237 undergraduate students in Turkey, Istanbul. Since
Istanbul has a cosmopolit structure, it is to a certain extent representative for Turkey.
According to the demographics 118 females and 119 males answered the
questionnaires. The participants are from three public universities in Istanbul;
Bogazici University, Marmara University, and Istanbul University.
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Measures
Emotional intelligence is measured using the 16 items self-report Wong and Law
(2002) Trait Emotional Intelligence Scale (WLEIS). Emotional intelligence measure
has 4 dimensions and 4 items for each as self emotional appraisal dimension (I have a
good sense of why I have certain feelings most of the time) others’ emotional
appraisal (I am a good observer of others’ emotions), regulation of emotions (I am
able to control my temper and handle difficulties rationally), and use of emotions (I
set goals for myself and then try my best to achieve them) (Wong & Law, 2002).
Personality characteristics were assessed by the IPIP-NEO-120, which is the short
form of IPIP-NEO by Goldberg and based on Costa and McCrea’s NEO-PI-R
(1992) (Johnson, 2014). IPIP-NEO-120 has 5 domains, which consist of 6 facets
with 4 items for each facet. Neuroticism domain includes anxiety, anger, depression,
self-consciousness, immoderation, and vulnerability facets. Extraversion domain
consists of friendliness, gregariousness, assertiveness, activity level, excitement
seeking, and cheerfulness facets. Openness to experience domain includes
imagination, artistic interests, emotionality, adventurousness, intellect, and
liberalism facets. Agreeableness domain consists of trust, morality, altruism,
cooperation, modesty, and sympathy facets. Conscientiousness domain includes selfefficacy, orderliness, dutifulness, achievement-striving, self-discipline, and
cautiousness facets. The scale has showed strong psychometric properties (Johnson,
2014). Q Sort is a test of congruence between perceived and ideal self and Rogers,
one of the well known names of humanistic perspective, (1961) used this test in
psychotheraphy process of their clients. 24 adjectives have been used in order to
reveal out only their self-evaluations. The scales are measured on a 5-point Likerttype scale ranging from 1 (totally disagree) to 5 (totally agree). The short definitions
of the dimensions are presented in the table 1.
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Table 1: Definitions
Emotional Intelligence Dimensions
Self Emotional Appraisal
Other Emotional Appraisal
Regulation of Emotions
Use of Emotions
Big Five Personality Traits
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
Definition
Understanding one’s emotions
Observation & sensitivity to others’ emotions
Control, adjust emotions & soothe oneself
Use emotions in constructive ways
Definition
Have negative feelings & feel threatened
Feel enthusiasm in most relationships
Feel pleasure with various experiences
Have kind & understanding relationships
Be persistent & control impulses
*i
* ii
Analysis and Results
Mean scores and standart deviations are calculated for either of the inventory
dimensions.
Table 2: Mean Scores and Std. Deviations of Emotional Intelligence Dimensions
Emotional Intelligence Dimensions
Self Emotional Appraisal
Other Emotional Appraisal
Regulation of Emotions
Use of Emotions
Mean
3,71
3,72
3,37
3,58
Std. Deviation
0,71
0,68
0,86
0,71
Self-emotional appraisal and other emotional appraisal have the highest mean scores.
While self-emotional appraisal is related with awareness of one’s self-emotions, other
emotional appraisal is related with feeling empathy for others. While regulation of
emotions is mostly related with controlling the urges instead of driven by them, use
of emotions is associated with motivation and self-efficacy. The lowest mean score
that millennials ranked themselves among all dimensions is the regulation of
emotions.
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Table 3: Mean Scores and Std. Deviations of Big Five Personality Traits
Big Five Personality Traits
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
Mean
2,78
3,46
3,57
3,42
3,51
Std. Deviation
0,50
0,44
0,45
0,46
0,52
Neuroticism is related with the tendency to experience unpleasant emotions such as
anger, worry or depression; it also refers to the degree of emotional instability and
impulsivity. Extraversion refers to the positive feelings and good social relations.
Those individuals with high levels of extraversion experience positive emotions and
have high levels of energy, assertiveness and sociability. Openness is associated with
the appreciation of new and unfamiliar. It is also related with the imaginative
capacity of the individidual. Agreeableness is about having the tendency to cooperate
rather than being suspicious towards others. It is also related with one’s trusting and
helping nature. Conscientiousness is associated with self-discipline, dutifulness and
aim for achievement (McCrae & Costa, 1989). In this research, openness has the
highest and neuroticism has the lowest mean score.
Table 4: Mean Scores and Std. Deviations of Personality Facets
Main Traits
Neuroticism
Extraversion
Openness
Facets
Anxiety
Anger
Depression
Self-Consciousness
Immoderation
Vulnerability
Friendliness
Gregariousness
Assertiveness
Activity
Excitement
Cheerfulness
Imagination
Artistic
Emotionality
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Mean
3.07
3.08
2.44
2.72
2.76
2.56
3.50
3.03
3.73
3.28
3.39
3.79
3.96
3.63
3.82
Std. Deviation
0.85
0.97
0.71
0.67
0.73
0.77
0.67
0.87
0.61
0.70
0.80
0.72
0.77
0.77
0.63
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Agreeableness
Conscientiousness
Adventurousness
Intellect
Liberalism
Trust
Morality
Altruism
Cooperation
Modesty
Sympathy
Efficacy
Orderliness
Dutifulness
Achievement
Discipline
Cautiousness
3.16
3.63
3.18
3.28
3.78
3.96
3.13
2.60
3.74
3.74
3.23
3.97
3.47
3.30
3.32
0.69
0.79
0.68
0.86
0.87
0.65
0.75
0.65
0.73
0.64
0.95
0.65
0.75
0.70
0.82
Although anxiety and anger facets are slighty positive, every other facet in
neuroticism domain is under mean score of neuroticism. Among all, depression has
the lowest mean score. Anxiety can be defined as fear for the worst possibility, worry
for things and low resistance to stress. Low resistance to irritation and being quicktempered characterize anger. Depression, which has the lowest mean score, signifies
feeling dislike and uncomfort for self (Johnson, 2014). Cheerfulness has the highest
and gregariousness has the lowest mean scores among extraversion domain. Having
and radiating joy and loving life in a bright perspective describe cheerfulness. The
lowest scored facet gregariousness signifies preferring crowds and talking with many
different people in social gatherings (Johnson, 2014). Imagination has the highest
and adventurousness has the lowest mean score in openness domain. Having new
ideas and enjoying fantasies characterize imagination. Adventurouness signify
orientation to change and variety (Johnson, 2014). Among the domain
agreeableness, altruism has the highest and modesty has the lowest mean score. Low
scorers in modesty believe they are superior and may be considered arrogant by
others. Altruism can be defined as manifest in an active concern for the welfare of
others (Johnson, 2014). Dutifulness has the highest and orderliness has the lowest
mean score in conscientiousness domain. Dutifulness can be described by adherence
to truth, rules, and promises. Orderliness can be characterized by putting things back
in their place and tidying up (Johnson, 2014). In addition, among all facets
dutifulness has the highest and vulnerability has the lowest mean scores.
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Table 5: Correlations between Dimensions of Emotional Intelligence and Big Five
Personality Traits
Correlations
1
1.self
appraisal
2.other
appraisal
emotional
emotional
2
3
4
5
6
1
.157*
.162*
1
.054
.050
.232**
1
5.neuroticism
-.115
.049
-.216**
1
.451**
6.extraversion
.252**
.236**
.255**
.164*
-.304** 1
7.openness
.204**
.170**
.144*
.152*
-.190** .330**
8.agreeableness
-.005
.130*
.053
.323** -.107
9.conscientiousness
.074
.167*
.595**
.334** -.351** .194**
4.regulation
emotions
of
8
9
1
.333**
3.use of emotions
7
.037
1
.370** 1
.308** .389** 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
According to the correlation results, one of the most powerful relations is between
use of emotions and conscientiousness (r=.60, p<.01). The facets of
conscientiousness are self-efficacy, orderliness, dutifulness, achievement striving, selfdiscipline, and cautiousness (Johnson, 2014). Use of emotions refers to the ability to
utilize one’s own emotions to increase one’s performance (Bitmis & Ergeneli, 2014).
Thus, it is understandable that people’s abilities to employ their emotions are
significantly and positively related with their efficacy, goal-attainment, discipline,
and care. Furthermore, one of the other most powerful relations is found between
regulation of emotions and neuroticism. Accordingly, regulation of emotions has
negative and significant correlation with neuroticism (r=-.45, p<.01). The facets of
neuroticism are anxiety, anger, depression, self-consciousness, immoderation, and
vulnerability (Johnson, 2014). Regulation of emotions refers to one’s ability to adjust
one’s emotions (Bitmis & Ergeneli, 2014). It is coherent that people’s abilities to
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�Guven Ordun, Asli Akun
regulate their emotions will be negatively related with their worry, bad-temper,
unbalanced acts, and fragility.
In addition, there are other significant relations between variables however they are
not as strong as the relations that was explained in previous paragraphs. Self
emotional appraisal is related significantly and positively with extraversion (r=.25,
p<.01) and openness (r=.20, p<.01). Other emotional appraisal is correlated with
significantly and positively with extraversion (r=.24, p<.01), openness (r=.17, p<.01),
agreeableness (r=.13, p<.05), and conscientiousness (r=.17, p<.05). Use of emotions
is significantly and negatively associated with neuroticism (r=-.22, p<.01), whereas it
is significantly and positively associated with extraversion (r=.26, p<.01) and
openness (r=.14, p<.05). Regulation of emotions is found to have significant and
positive correlations with extraversion (r=.16, p<.05), openness (r=.15, p<.05),
agreeableness (r=.32, p<.01), and conscientiousness (r=.33, p<.01).
Table 6: The Impact of Big Five Personality Traits on Self Emotional Appraisal by
Regression Analysis
R
Model Summary
R Square
.305
Correlations
(Constant)
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
.093
Adjusted
Square
.073
Unstandardized
Coefficients
B
Std. Error
.027
.063
-.044
.070
.195
.070
.156
.073
-.082
.072
.033
.074
R
ANOVA
F
Sig.
4.606
.001
Standardized
Coefficients
Beta
-.044
.196
.157
-.083
.032
t
.427
-.626
2.788
2.140
-1.136
.439
Sig.
.670
.532
.006
.033
.257
.661
All in all, in addition to the powerful correlations between use of emotions and
conscientiousness and regulation of emotions and neuroticism, extraversion is found
to have significant and positive relations with all dimensions of emotional
intelligence. It is meaningful that people who feel comfortable with people, have
control in relationships, are socially active, and enjoy adventure may also
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comprehend one’s own emotions and emotions of others around and they may
adjust their emotions in social life and make use of them constructively.
The model summary table shows that big five personality traits can explain the % 7
of change in self emotional appraisal significantly (p<.01). From the coefficients
table, it can be seen that only extraversion (p<.01) and openness (p<.05) have
positive and significant effects on self emotional appraisal. It is coherent that
extraverted people, who experience themselves in social situations and people who
are open to experience, being interested in ideas, discussions, and arts, are likely to
realize their emotions much more.
Table 7: The Impact of Big Five Personality Traits on Other Emotional Appraisal by
Regression Analysis
Model Summary
R
.333
Correlations
(Constant)
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
R Square
.111
ANOVA
Adjusted
Square
.091
R
Unstandardized Coefficients
B
Std. Error
.000
.064
.189
.070
.246
.070
.061
.073
.064
.072
.150
.075
F
5.594
Standardized
Coefficients
Beta
.188
.243
.060
.064
.147
Sig.
.000
t
.003
2.711
3.506
.827
.888
2.008
Sig.
.997
.007
.001
.409
.375
.046
The model summary table shows that Big Five Personality traits can explain %9 of
change in other emotional appraisal significantly (p< .001). From the coefficients
table, it can be seen that neuroticisim (p<.01), extraversion (p<.01), and
conscientiousness (p<.05) have significant effects on other emotional appraisal. It is
understandable that neurotic people, who worry about things easily, are likely to be
sensitive to the clues in their social environment such as others’ emotions although
the appraisal of it will probably be negative. In addition, it is meaningful that
extraverted people, who are busy with social contacts and conscientiousness people,
who give importance to integrity and discipline, are likely to be more sensitive to the
emotions of others. The question may come to the mind that agreeableness which is
related with concern and feel sorry for problems of others why not came up as
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�Guven Ordun, Asli Akun
statistically significant for its effect on understanding emotions’s of others. This
might be explained by the meaning, content of agreeableness is related with
sempathy (Johnson, 2014) rather than empathy.
Table 8: The Impact of Big Five Personality Traits on Regulation of Emotions by
Regression Analysis
Model Summary
R
.538
Correlations
(Constant)
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
R Square
.290
ANOVA
Adjusted
Square
.274
Unstandardized Coefficients
B
Std . Error
.000
.056
-.384
.062
.042
.062
-.074
.065
.272
.064
.103
.066
R
F
18.288
Standardized
Coefficients
Beta
-.384
.042
-.074
.273
.102
Sig.
.000
t
.003
-6.211
.670
-1.145
4.246
1.559
Sig.
.998
.000
.504
.253
.000
.120
The model summary table shows that big five personality traits can explain %27 of
change in regulation of emotions significantly (p<.001). From the coefficients table,
it can be understood that neuroticisim (p<.001) and agreeableness (p<.001) have
significant effects on regulation of emotions. Neurotics, who are bad-tempered and
get owerhelmed easily, are less likely to control anger and cope with difficulties
rationally. Agreeable people, who prefer cooperation and modesty, are more likely to
have good control of their emotions and be calm in difficult situations.
The model summary table indicates that big five personality traits can explain % 41
of change in use of emotions significantly (p<.001). From the coefficients table, it
can be seen that only extraversion (p<.01), agreeableness (p<.01), and
conscientiousness (p<.001) have significant effects on use of emotions. It is coherent
that extraverted people who are socially active and take charge and conscientious
people, who strive for achievement, actualize plans, think and decide cautiously, are
likely to be motivated to do the best for their goals. It is also found out that
agreeable people, who trust others and like to help others, are less likely to set selforiented goals and concern more for other-oriented goals.
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Table 9: The Impact of Big Five Personality Traits on Use of Emotions by Regression
Analysis
Model Summary
R
.653
Correlations
R Square
.426
(Constant)
Neuroticism
Extraversion
Openness
Agreeableness
Conscientiousness
ANOVA
Adjusted
Square
.413
R
F
33.278
Unstandardized
Coefficients
B
Std. Error
.003
.051
.031
.056
.165
.056
-.038
.059
-.190
.058
.684
.060
Sig.
.000
Standardized
Coefficients
Beta
.031
.163
-.038
-.189
.672
t
.062
.561
2.920
-.655
-3.266
11.433
Sig.
.951
.575
.004
.513
.001
.000
Table 10: Self-Appraisals of Millennials on Roger’s Q-Sort List of Attributes
Adjective
Anxious
Attractive
Careless
Depressed
Dishonest
Energetic
Funny
Happy
Honest
Intelligent
Kind
Lazy
Mean
3,03
3,24
3,09
2,53
2,19
4,00
3,54
3,54
4,24
4,05
4,03
3,07
Std. Dev.
1,14
1,15
1,44
1,24
1,25
0,94
1,21
1,20
0,78
0,87
0,94
1,35
Rank
18
14
16
21
23
5
11
11
1
3
4
17
Adjective
Optimistic
Organized
Out-Going
Plain
Relaxed
Sad
Serious
Shy
Sloppy
Strong
Unhelpful
Weak
Mean
3,77
3,70
4,06
3,62
3,91
2,65
3,41
3,16
3,01
3,61
1,95
2,24
Std. Dev.
1,09
1,13
0,88
1,19
1,16
1,16
1,10
1,35
1,34
1,03
1,16
1,17
Rank
7
8
2
9
6
20
13
15
19
10
24
22
In Roger’s self assessment inventory, the adjective “honest” has the highest mean
value and “unhelpful” has the lowest mean value that means most millenials perceive
themselves as honest and only some perceive themselves as unhelpful. In addition to
the self-assessment results, as can be seen in the aforementioned paragraphs, the two
hypotheses of the study are supported.
Volume 6 Number 1 Spring 2016
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�Guven Ordun, Asli Akun
Conclusions and Discussion
Early millennials are about to gradute from faculties and this might be the best
chance to identify their characteristics, preferences, needs and values as they are
supposed to have a say on world issues soon. In the scope of this research, the
personality characteristics and their impact on emotional intelligence were studied.
In addition, since every one else seems to say something about them; some with
positive connotations (innovative, smart, well-educated, organized, social, ambitious
etc) and some with negative connotations (lazy, irresponsible, impatient, selfish,
disrespectful, etc), this study aims to understand their self-perception from their
point of views.
According to the correlation results, personality constructs have significant relations
with emotional intelligence dimensions as indicated in the aforementioned analysis
part in detail. By the evaluation of the regression analyses, the prediction capacity of
personality construct especially on regulation and use of emotion dimensions is
identified. As those dimensions are considered to be important on the level of
performance and advancement, the importance of personality assessment in
personnel selection might need to be reevaluated. Both hypotheses proposing
significant relations between the dimensions of emotional intelligence and
personality traits are accepted. Depending on the mean scores of Roger’s Q-sort list
it can also be identified that positive traits are evaluated more than negative traits.
Honest, out-going, intelligent, and kind have the highest mean scores while
unhelpful, dishonest, weak and depressed have the lowest mean scores.
Although there have been studies that have examined the relationship between
personality and emotional intelligence in many contexts, this study has a different
aim, model, and measured the concepts differently. In addition, the results can be
useful for millenials’ retention in work life adaptively, contributing their success to
organizational performance, and decreasing youth unemployment as much as
possible within the limitations of socioeconomic framework.
In further researches, the effect of cultural context on this relationship can also be
taken into consideration. The research topic can be investigated in other geographies
in Turkey rather than Istanbul or in different countries. Also, in further studies when
adequate numbers of millennials have significant roles in work life, relation between
personality characteristics and performance scores need to be investigated with the
mediator role of emotional intelligence.
142
Journal of Economic and Social Studies
�Personality Characteristics and Emotional Intelligence Levels of Millenials:
A Study in Turkish Context
In addition, in one of the interviews that was published in a business and economics
journal, Guler Sabanci, one of the most well-known and successful woman in
Turkey, talked about understanding Y generation. Deriving from her experiences,
she mentioned that it is important for all people to read the changing world
comprehensively. She added that instead of market share millenials care about share
of heart, they give importance to the universal values such as equality, sustainability
and social responsibility and they have the long-term perspective. She stated that
these factors could be important for their loyalty (Capital, 2015). In future, the
researches regarding the practical implications of the values and preferences of
millenials can be examined in social and business context.
It is also crucial to make sense of present and future socioeconomic conditions by
considering history and what it has tought. This is valid not only for countries but
also for individuals and groups as well. In this regard, youth as a sample who is at the
intersection of past and future, who are affected by past, write today, and shape
future conditions although bounded by the world’s circumstances, is a vital source of
research.
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Personality Characteristics and Emotional Intelligence Levels of Millenials: A Study in Turkish Context
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ORDUN, Guven
AKUN, Asli
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The purpose of the study is twofold. The first purpose of the study is to investigate the relations between personality characteristics and emotional intelligence of the Millennials. Costa and McCrea’s Big Five Personality Inventory (IPIP-NEO) is used to measure the personality characteristics of the millenials. Emotional intelligence dimensions are measured by Wong and Law emotional intelligence scale (WLEIS). Secondary purpose of the study is to find self-evaluations of the Millenials related with their characteristics. Roger’s Q-Sort Scale is used to find out Millenials self perceptions. An advantage of the Q-Sort Scale is that it offers straightforward assumptions about the underlying structure of a concept within demographical segments. Results reveal that use of emotion is positively correlated with conscientiousness whereas regulation of emotion is negatively correlated with Neuroticism. Furthermore, personality characteristics have effects on emotional intelligence dimensions. The effects are much more significant for regulation and use of emotions dimensions. These dimensions are assumed to be important determinants of performance within organizations so it is important to analyze the personality constructs associated with them. Depending on their self-perceptions, millienials evaluate themselves relatively high on positive traits (e.g. honest, out-going, etc.) and low on negative traits (e.g. unhelpful, dishonest, etc.). Regarding personality characteristics, they evaluated themselves highest in openness and lowest in neuroticism. Millenials will be the dominating workforce for the upcoming years, so if they are willing to establish high performance relations, managers should better understand Millenial characteristics and perspective. Keywords: Millenials, Personality Characteristics, Emotional Intelligence.
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International Burch University
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2016
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doi:http://dx.doi.org/10.14706/JECOSS16614
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ISSN 1986 – 8502,
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/eab8eafeb8478dda0a2384faea84194b.pdf
9acd76a6ddf14151cddf2f28d9213710
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Text
Journal of Economic and Social Studies
Improved Business Climate and FDI in the Western Balkans
Rufi Osmani
South East European University
Macedonia
rufi.osmani@seeu.edu.mk
Abstract: The process of economical and political transition in the
Western Balkans, up to this point has shown a high correlation
between achieved economical results and the determination of
national authorities for drawing and implementing policies for
economical stabilization and development as well as structural
reforms with the support of the International Monetary Fund, the
World Bank and other relevant international institutions.
The analyzed countries from the Western Balkans region have
managed to achieve appropriate levels of macroeconomic stability
and an improvement of the business climate due to the implemented
reforms, these countries have not been successful enough in attracting
Foreign Direct Investments as a precondition to ensure a more
dynamic economical development and an appropriate fall in the level
of unemployment and poverty.
A comparative analysis of the real economic indicators of the Western
Balkans countries as contracted to the EU average shows that these
countries are well under the real convergence levels of the EU
countries.
Keywords: Busines Climate,
Structural Reforms, Foreign
Direct Investment, Economic
Development, Western Balkan
Countries, Europian Union
JEL Classification: E3, E4, F15,
F21, M21, M48, O10, O11,
O12
Article History
Submitted: 02 June 2015
Resubmitted: 04 September 2015
Resubmitted:19 October 2015
Resubmitted: 10 November 2015
Accepted: 04 December 2015
http://dx.doi.org/10.14706/JECO
SS16611
The main objective of the paper is to provide some additional
arguments regarding the potential positive or negative correlation
between the business climate and the levels of Foreign Direct
Investments in the Western Balkans countries, some of which are
already members of the EU and others aspiring to become members
in the future, having in mind the asymmetric economic positions of
the countries being analyzed.
Volume 6 Number 1 Spring 2015
5
�Rufi Osmani
Introduction
The complex political and economic transition in the countries of the Western
Balkans in the past two decades has been accompanied by numerous economic and
political asymmetrical strokes.
During this complex process the governments of the countries of the Western
Balkans (WB) with the assistance of the IMF and World Bank implemented the
economic policies that aimed to achieve macroeconomic stabilization,
transformation and privatization of state owned enterprises and to reform the
economic system and public institutions.
After two decades of implementation of intensive economic policies the countries of
the Western Balkan have achieved macroeconomic stabilization but the results in
reforming the economy, reforming the public sector and the public institutions are
in insufficient level and continue to remain challenges for these countries in the
future.
In fact, the asymmetric development during the previous system and the low levels
of economical growth in the first decade of the transition followed by increasing
levels of unemployment, poverty, the large informal sector and fiscal evasion were
the main obstacles in implementing deep institutional reforms and establishing a
functional market economy in the Western Balkan’s (Osmani & Mazllami, 2014).
The process of economic and political transition in the Western Balkans due to
achieved asymmetric results do not solve in approriate level three main problems of
economic transition (Commander, 1991).
1) Finding a new balance between private sector and public sector,
2) Finding the balance between profits and wages in the private sector, and
3) Finding the balance between monetary and fiscal policy within the strategy
that aim macroeconomic stabilization and economic development.
Three balances realized at transition countries of the Western Balkans are in
suboptimal levels as a result of numerous deficits and economic and social problems,
lack of voluminous local and foreign investment and significant delays in the
implementation of economic and institutional reforms as a result of lack of national
political consensus.
6
Journal of Economic and Social Studies
�Improved Business Climate and FDI in the Western Balkans
Delays and poor quality of structural reforms still remain as the major obstacles in
attracting foreign investment although as serious progress was made in terms of
creating a more favorable environment business largely of formal nature.
As a consequence, that indicator “Ease of Doing Business” does not include areas
such as: the level of corruption, independence of the judiciary, the size of the market,
political and economic risk and functionality of public institutions, this indicator
does not reflect the full attractiveness of business environement as crutial
precondition in attracting foreign direct investment.
Despite the fact that Macedonia on the basis of the indicator, Doing Business, in the
period 2010-2015 is listed as a leader in the West Balkans, country has realized the
lowest level of foreign direct investment in volume and quality compared to the
West Balkans and EU countries.
Due to the low level of foreign direct investment, the lack of national investment,
the hesitation of the banking sector in financing new investments as a result of the
growth of bad loans and considerable reduction of economic remittances Macedonia
remains as the country with the highes level of unemployment and poverty in
Europe.
The research aims to analyze the correlation between the level of ranking of countries
according to the indicator, Doing Business, and the level of foreign direct
investments in countries such as Croatia and Bulgaria that are part of the EU and the
countries aspiring to join the EU with special emphasis in the case of the Republic of
Macedonia.
The importance of correlation between the quality of business environment and
attraction of foreign direct investment is linked closely with the aspiration of the
countries of West Balkans for integration into the EU as a precondition have the
fulfillment of the Maastricht and Copenhagen criteria.
These criteria aim of improving the business environment, attracting foreign
investment, creating a functional market economy as a prerequisite for a qualitative
integration of the economies of the West Balkans into the largest market of the EU.
Volume 6 Number 1 Spring 2016
7
�Rufi Osmani
Literature Review
Rich literature exists on the field of doing business and on the field of foreign direct
invesment. The "Doing Business" website reports more than 100 academic papers in
50 academic journals, as of December 2014. However, only two papers have
examined the Ease of Doing Business indicator and its correlation with foreign direct
invesment in the ex-socialist countries in Westren Balkan (Petreski &
Jovanovic2014).
Petreski is focused on the growth aspecst of the ease of doing business, in 30 exsocialist countries, for the period 2005-2011. Petreski’s paper titled Regulatory
Environment and Development Outcomes: Empirical Evidence from Transition
Economies, measures the ease of doing business by the aggregate index and by the 10
sub-indices.
The study of Jovanovic “Ease of doing business and FDI in the Ex–socialist
countries” investigates the ease of doing business, measured through the Doing
Business indicators of the World Bank, and aspects of foreign direct investment in
27 ex-socialist countries.
Results point out that there is a lot of uncertainty regarding the effects, with most of
the indicators being either insignificant or lacking robustness. It also seems that
investors are discouraged by bureaucracy, because four of the five indicators that are
significant in either of the estimations refer to bureaucratic impediments, not to
financial cost (Jovanovic & Jovanovic, 2014).
Research Methodology
In order to meet the set objectives of this paper, that is to determine correlation
between the ranking of the countries of the Western Balkans by indicator, Doing
Business, and the level of realized foreign direct investment.
The timeframe for the research is 2007-2013 including the following countries: The
Republic of Macedonia (MKD), The Republic of Albania (ALB), the Republic of
Kosovo (RKS), Montenegro (MNE), Bosnia and Herzegovina (BIH), Serbia (SRB),
Croatia (CR) Bulgaria (BG), the average of West Balkan and the average of
European Union countries (EU27).
8
Journal of Economic and Social Studies
�Improved Business Climate and FDI in the Western Balkans
By using common statistical and descriptive methods we provide a proper empirical
and comparative analysis of the process of improving the business environment, the
realization of foreign direct investment and remittances among these countries and
compared to the EU27 averages.
Structural Elements of the Doing Business Indicator
The Doing Business Indicator of the World Bank includes 11 areas based on
standard methodology with the objective of measuring the attractiveness of the
business environment in 189 countries worldwide.
Table 1: Structural Elements of Doing business,
Structural elements of ,,Doing
business,,
I.Complexity and cost of
regulatory processes
1.Starting a business
2.Dealing
with
permits
3.Getting electricity
construction
4.Registering property
5.Paying taxes
6.Trading across borders
II.Strength of legal institutions
7.Getting credit
8.Protecting minority investors
9.Enforcing contracts
10.Resolving insolvency
11.Labor market regulation
Eleven areas of business regulation
Six areas of business regulation
Procedures, time, cost and paid-in minimum capital to
start a limited liability company
Procedures, time and cost to complete all formalities to
build a warehouse
Procedures, time and cost to get connected to the
electrical grid
Procedures, time and cost to transfer property
Payment, time and total tax rate for a firm to comply
with all tax regulations
Documents, time and cost to export and import by
seaport
Five areas of business regulation
Movable collateral laws and credit information systems
Minority shareholders right in related - party
transactions and in corporate governance
Procedures, time and cost to resolve a commercial
dispute
Time, cost, outcome and recovery rate for a
commercial insolvency and the strength of the
insolvency legal framework
Flexibility in employment regulation, benefits for
works and labor dispute resolution
Source: World Bank group, Doing Business 2015, Going Beyond Efficiency, 12th
edition.
Volume 6 Number 1 Spring 2016
9
�Rufi Osmani
In the framework of the many areas assessed by Doing Business, two are key
structural elements: the complexity of the legislation and the cost of making
business; and the strengthening of legal institutions in the function of doing
business.
Doing Business, integrates 11 business areas that manifest the complexity and cost of
regulatory processes and the area of strengthening the legal institutions in the
function of improving the business environment.
It should be emphasized that despite the fact that indicator “Doing Business”
includes a representative number of regulations of business fields, in different
contries the importance of the specific criteria directly depends on the level of
economic and social development, functionality of institutions and courts in
particular, the level of corruption, organization of trade unions and political and
social stability of the country.
Western Balkan countries with weak public institutions have many institutional
problems that reflect negative effects on the attractiveness of the business
environment and in attracting investment in general and foreign direct investment in
particular.
Within the 11 criteria assessed by the Doing Business indicator, there is a high level
of asymmetry in some structural elements such as: permits for construction,
registration of property, enforcement of contracts, payment of taxes, protection of
the minority shareholders, market regulations, quality of labor force and the
minimum wage paid.
Asymmetric Business Environment in the Capitals of the Western Balkan Countries
Analysis of key criteria of doing business in terms of starting a business, obtaining
the construction permit, registration of property and execution of contracts in the
capitals of the countries of BP argues highly asymmetric business environments of
the analysed countries.
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�Improved Business Climate and FDI in the Western Balkans
Table 2: City Differences: A Comparative Analysis of WB Capitals
Description
Starting a
Business
Dealing
with
constr.
Permits
Register
property
Enforcing
contracts
Procedures
(number)
Time (days)
Cost (% of
income
per capita)
Paid-in min.
capital
(%
of
income per
capita)
Procedures
(number)
Time (days)
Cost (% of
wareh.value)
Procedures
(number)
Time (days)
Cost (% of
property
value)
Time (days)
Cost (% of
claim)
Procedures
(number)
Belgrade
Podgorica
Prishtina
Sarajevo
Skopje
Tirana
7
13
7
10
10
58
12
50
3
3
5
5
8
2
29
15
3
31
6
0
112
30.5
0
21
18
21
19
15
349
1,782
287
2,132
320
856
182
1,166
129
1,792
0
no
practice
no
practice
no
practice
6
91
7
71
8
33
7
33
5
58
6
33
2.7
635
3.1
545
0.6
420
5.3
595
3.1
370
3.4
390
29
26
61.2
40.4
33
36
36
49
53
37
37
39
Source: Author’s own calculations based on World Bank: Doing Business.
The capital of Macedonia (Skopje) is the place where most functional economic
areas are concentrated and represents the most attractive business environment
compared with other capitals of West Balkan countries.
Skopje has an edident administrative advantage of 50% for doing business compared
with other Balkan capitals, Podgorica (Montenegro) is second accompanied by the
Volume 6 Number 1 Spring 2016
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�Rufi Osmani
Kosovo capital Pristina, while Sarajevo (BiH) and Tirana (AL) are capitals which are
characterized by significant administrative barriers and bureaucracy.
Ranking of Countries of the WB and the EU on the Basis of the Indicator of the World
Bank “Doing Business”
Data published by the World Bank for the period 2007-2013 show a business
environment with trends of improvement in all the countries of the Western Balkans
with the exception of Bosnia and Herzegovina, the country in which the business
environment marked a fall in 16 places compared with the previous analysed period.
Table 3. A comparative Analysis of Ranking of Countries of WB (2007-2013)
Countries
2007
2008
2009
2010
2011
2012
2013
Macedonia
93
79
69
32
38
22
23
Montenegro
72
80
77
71
66
56
51
Bulgaria
47
44
42
44
51
59
66
Croatia
116
105
110
103
84
80
84
Albania
132
136
89
82
82
82
85
Serbia
83
91
90
88
89
92
86
Kosovo
Bosna and
Herzegovina
-
-
107
113
119
117
98
110
118
119
116
110
125
126
Average for WB
82
82
88
81
80
79
77
Source: Author’s own calculations based on World Bank, Doing Business.
Analysis of Doing Busness, for the period 2007-2013 shows quite asymmetric
positive trends in the countries analyzed except Bosna and Herzegovina, the country
in which the business environment has deteriorated compared with 2007.
Greater improvement of business environment has highlighted Macedonia
progressing for 70 places and ranging in the position 23rd worldwide. Many
institutional reforms made in terms of reducing the cost of doing business, reducing
the bureaucratic procedures, facilities in the labor market, putting into function of
real estate market, increasing the efficiency of executions in contested proceedings,
the tax cuts and investment in infrastructure funded by the government of the
country in function of attracting FDI contributed to the improvement of the
business environment in the period (2010-2015) in the case of Macedonia.
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Journal of Economic and Social Studies
�Improved Business Climate and FDI in the Western Balkans
Macedonia is accompanied by Montenegro in the 51st, Bulgaria in the 66th and
then followed by other countries of WB; Bosnia and Herzegovina is ranked at the
bottom of the WB countries in terms of business attractiveness.
Two EU member countries of the Western Balkans (Bulgaria and Croatia) have
highlighted asymmetric trends in terms of business attractiveness despite the fact that
during the process of EU integration by fulfilling the Copenhagen criteria the two
countries have implemented deep institutional reforms with the objective of creating
a functioning market economy supported by functioning institutions.
The slow progress of Kosovo in the sense of creating attractive business environment
is addressed mainly to political and security risks as a result of the contestation of
independence from neighboring Serbia and the fact that the local Serb population
has created protected area of the informal economy, smuggling and tax evasion that
is out of control of the legal government of Kosovo.
The reasons for a low ranking of BiH are mainly political in nature as a result of
political instability and numerous political risks and security risks that directly affect
the creation of aversion of investors for investing in the country where institutional
guarantees are minimal for protection and development of business as a result of
permanent conflicts between institutions of local, regional and central levels.
Figure 1. Ease of Doing Business: A Comparative Analysis of some countries of WB
(2105)
76
73,35
74,11
71,8
74
72
70
66,68
66,53
68
66
64
62
EU Average
Macedonia
(WB)
WB Average
Bulgaria (UE)
Croatia (UE)
Source: Author’s own calculations based on World Bank, Doing Business.
Volume 6 Number 1 Spring 2016
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�Rufi Osmani
Assessment made on the basis of Ease of Doing Business by the World Bank and
reflected in Figure 1 highlights a minimal difference of 2.3 points advantage of
Macedonia in relation with Bulgaria despite the fact that based on the same criteria
Macedonia is ranked 43 places higher.
Assessment made on the basis of the Ease of Doing Business criteria, for 2015
substantially cancels ranking based on the indicator, Doing Business, and imposes
the need for a harmonized structure of both indicators in function of objective
reflecting the real attractiveness of the business environment and the ranking of the
countries analyzed.
The particularity of this ranking lies in the fact that there is a substantial difference
in the level of ranking for different countries of the Western Balkans despite the fact
that all governments of the analyzed countries are implementing similar policies with
the objective of attracting foreign direct investment in the sense of tax level, fiscal
facilities, elimination of the of bureaucracy and reducing business costs and other
bareers for foreign investors.
The Trend and the Level of FDI in the Countries of the Western Balkans
There are promising trends in global foreign direct investment (FDI) flows for
developing and transition economies. Each year more and more FDI is flowing not
only from developed into developing economies but also from one developing or
transition economy to another.
Indeed, developing and transition economies’share of global FDI inflows rose from
roughly 19 percent in 2000 to 52 percent in 2010—for the first time exceeding half
the total. And half the top 20 FDI recipients in 2010 were developing or transition
economies (Hornberger et al, 2011).
This improvement in principle addresses the improvement of business environment,
lower business cost and taxes and elimination of administrative and bureaucratic
barriers in countries in transition.
Analysis of the trend and volume of foreign direct investment realized in the period
2007-2013 in the Western Balkan countries shows opposite trends compared to the
trend observed by the report of the World Bank in the period 2000-2010.
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�Improved Business Climate and FDI in the Western Balkans
Table 4: The FDI ($) in the Western Balkan’s (2007-2013) (milions $)
Countries
Croatia
Serbia
Bulgaria
Albania
Montenegro
Bosna&Herzegovina
Kosovo
Macedonia
Average of WB
2007
4947
3432
1387
652
937
1804
603
733
1812
2008
5812
2996
1030
1240
975
1005
537
612
1776
2009
3400
1935
3897
1343
1549
1385
408
259
1772
2010
845
1340
1867
1089
758
444
487
300
891
2011
1242
2700
2124
1049
556
469
546
495
1148
2012
1336
3553
1578
920
618
350
293
283
1116
2013
588
1377
1888
1478
446
322
343
376
852
Source: Author’s own calculations based on IMF and World Bank reports.
Analysis of the trend of foreign investments in the countries of WB has been heavily
influenced by the world financial crisis which consequently produced substantial
decreasing of FDI. In the WB in 2007 were realized in total FDI $ 12.684 million,
while in 2013 the FDI were realized at the level of $ 5.694 million, that represents a
decrease of $ 6.990 million a fact which demonstrates a negative trend and decrease
of the interest of foreigner’s investors for investing in a region identified as high-risk
political with fragile and corrupted institutions.
Table 5. FDI in Countries of Western Balkan (2007-2013) (millions $)
Country
Croatia
Serbia
Bulgaria
Albania
Montenegro
Bosnia and Herzegovina
Kosovo
Macedonia
Average for WB
Total FDI
18.172
17.332
13.832
7.770
5.838
5.775
3.213
3.052
9.373
Average FDI
2.596
2.476
1.976
1.110
834
825
459
436
1.339
Source: Author’s own calculations based on IMF and World Bank reports.
Based on the analysis of the volume of realized FDI in WB countries in the period
2007-2013 Croatia ranked first with a total of 18.172 million US dollars of FDI
accompanied by Serbia and Bulgaria $ 17.332 million with $ 13.832 million.
Volume 6 Number 1 Spring 2016
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�Rufi Osmani
Despite the fact that Croatia has achieved the highest level of cumulative FDI,
investments carried out in this country in 2013 were at level of 10% of FDI realized
in 2008 that argues a very high negative trend which is characteristic for all countries
of WB and it can not be explained only by using the financial crisis as an aliby.
The trend of decreasement of investment is characteristic of all countries of WB
without exception with high negative effects at the countries with the lowest level of
economic development (Kosovo, Bosnia and Herzegovina and Macedonia) ,the
countries that are suffering from the syndrome of low investment , high
unemployment and poverty in WB and in Europe.
Figure 2: Foreign Direct Investment – per capita ($) (2007-2013)
3000
2582
2500
2000
1500
1625
1562
1263
1000
500
0
587
291
581
349
2007
2008
658
343
143
123
2009
2010
927
1030
350
236
328
135
2011
2012
743
277
179
2013
Albania
Bosna
Bulgaria
Croatia
Kosovo
Macedonia
Montenegro
Serbia
Average for WB
Linear (Bosna)
Source: Author’s own calculations based on IMF and World Bank reports.
The comparative analysis of FDI per capita in the countries of WB reflects very low
levels of FDI of all countries with the exception of Montenegro. FDI per capita
despite the negative trend continue to be several times over the average of countries
of WB as a result of the fact that this country has only half a million residents who
live in this country.
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�Improved Business Climate and FDI in the Western Balkans
While in the case of Bosnia & Herzegovina and Kosovo the political and security
reasons that produce large risks for serious foreign direct investment, in the case of
Macedonia we have a paradoxical phenomenon of very high level of ranking of this
country based on indicator, Doing Business, and very low level of FDI.
The Trend and the Level of Remittances in the Countries of the Western Balkans
The level and trend of remittances in the countries of the Western Balkans is in
direct dependency on the number of economic migrants. On the basis of financial
flows leads Serbia with over $ 4.3 billion as a result of the fact that it is the country
with the largest number of population and emigrants in WB.
Table 6: Remittances in the Western Balkan’s (in millions $US)
Country
Albania
Bulgaria
Bosnia and Herzegovina
Croatia
Montenegro
Serbia
Average for WB
2010
779
1.611
1.895
1.500
357
4.357
1.508
2013
1.156
1.331
1.822
1.213
300
4.345
1.558
Source: Author’s own calculations based on IMF and World Bank reports.
The highest level of economic remittances compared to FDI despite the fact that the
authorities of the countries of the WB do not provide economic and fiscal facilities,
needs to be in focus of economic policies in the future as an important opportunity
for investment and economic development.
Low Level of FDI despite Attractive Business Environment in Macedonia
In the analyzed period (2007-2013) Macedonia has had serious progress in
improving the business environment. In 2014 Macedonia was ranked as the leader of
WB countries (23 worldvide), a fact that requires a special analysis having in mind
that this progress did not produce positive trends of FDI.
Volume 6 Number 1 Spring 2016
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�Rufi Osmani
Table 7. WB Ranking: A Comparative Analysis of WB Average, Macedonia and Croatia
Countries
Macedonia
Croatia
WB Average
2007
93
116
82
2008
79
105
82
2009
69
110
88
2010
32
103
81
2011
38
84
80
2012
22
80
79
2013
23
84
77
Source: Author’s own calculations based on World Bank reports.
Analysis of the level of realized FDI in comparison with economic remittances and
set in correlation with ranking of countries of WB based on Doing Business reflects
large discrepancies. The low level of realized FDI in Macedonia denies positive
correlation between FDI and the ranking of attractiveness of the business
environment.
This asymmetry is quite large in the case of Macedonia; this country is ranked as a
leader in terms of business attractiveness while at the level of FDI has realized the
lowest level of FDI.
Table 8. FDI: A Comparative Analysis of WB Average, Macedonia and Croatia
2007
2008
2009
2010
2011
2012
2013
Average
2007-2013
WB
Average
1812
1776
1772
891
1148
1116
852
1339
Macedonia
733
612
259
300
495
283
376
436
Croatia
4947
5812
3400
845
1242
1336
588
2596
Countries
Source: Author’s own calculations based on IFM and World Bank reports.
In a research made by Osmani and Deari (2009) regarding the measurement of
political, economic and financial risk in Macedonia it is concluded that the majority
of businessmen have serious remarks on: poor quality of public administration, huge
policy influence on functioning of the judicial system, high level of corruption and
implementation of fiscal selective controls by fiscal authority.
This low level of FDI reached in Macedonia is quite symptomatic taking into
account the fact that the law for free economic zones in Macedonia ofer numerous
fiscal, administrative and infrastructure convenience for foreigner investitors.
The law on free economic zones of Macedonia provides numerous facilities for
foreign companies that decide to invest in Macedonia. These foreign companies are
18
Journal of Economic and Social Studies
�Improved Business Climate and FDI in the Western Balkans
obligated to the period of 2-10 years to export at least 50-70% of total production
realized in free economic zones as a prerequisite for exploiting the numerous benefits
of fiscal and infrastructure.
Foreign investors in the framework of free economic zones if export 70% of total
production are released in a period of 10 years from the payment of corporate
income tax, property tax and sales tax within the economic zone.
Foreign companies that invest in economic zones can buy the building land or
industrial land with a symbolic price (of 1 euro per m2). A great facility for business
in free economic zones is the fact that at major economic areas of the country the
government has invested in the construction of basic infrastructure for full
functionality of economic free zones.
A survey done by business investment office of the Austria (Schlattl, 2013) in Skopje
pointed out these concerns which directly affect the low level of foreign investments
in Macedonia: Reduction of bureaucracy with 69%, the legal security of investments
by 66%, improved infrastructure with 57%, fighting corruption by 47%, delays in
EU integration and political instability with 45%.
Figure 3: What are Requirements of Business Community from the Macedonian
Government
Reduction of Bureaucracy
Legal Security, Investor Confidence
Improvement of Infrastructure
Fight against Corruption
More Initiatives for the EU Accession
Transparent and simple Tax Laws
Political Stability
Access to Financial Funds
Modernization of Labor Law
Stable Currency
Other, please specify…
69%
66%
53%
47%
44%
38%
38%
28%
25%
22%
6%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Author’s own calculations.
Volume 6 Number 1 Spring 2016
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�Rufi Osmani
The report of EBRD 2014, survey done with managers of 15,500 companies who
work in 29 countries mainly in Eastern Europe emphasizes the main problems as:
the informal economy and tax evasion, difficult access to finance for private
companies, unequal treatment of tax administration and other administrative
bareers.
The transition experience from centrally planned to market economy is an
historically unprecendented process (WB Report), and that process is not finished in
many contries in Eastern Europe and Former Soviet Union.
In the context of an unprecedented process of political and economic transition that
the countries of WB have undergone, it is possible to have unprecedented results, in
one side significantly improving of the business environment and in other side very
low levels of FDI, as is the case of Macedonia.
Conclusions
The Western Balkan countries in a permanent cooperation with the IMF, the World
Bank, and during the integration process in the EU have implemented many
institutional reforms as a function of preserving economic stability and creating
suitable business climate as a precondition for dynamic economic development.
Implementing permanent economic and political reforms by the Western Balkan
countries have resulted to formal improvements of their business climate measured
by the World Bank ”Doing Business” indicator.
Despite the improvement of business climate of the Western Balkan countries, this
positive trend of business climate has not been accompanied by an increase of
investments in general and FDI in particular.
In this direction, Macedonia is a paradoxical case because the country is ranked as
23rd at the global level for suitable business climate but it has the lowest level of FDI
among the Western Balkans countries.
The lack of positive correlation between ”Doing Business” and the level of FDI in
the case of the Western Balkan countries signals the need for structural modification
of this indicator with more qualitative elements concerning the real functionality of
the institutions that directly affect the business climate.
20
Journal of Economic and Social Studies
�Improved Business Climate and FDI in the Western Balkans
Despite the low fiscal burden and numerous investing easiness of doing business
provided to foreign investors there is still a low level of FDI in the Western Balkan
countries which is due to the fact that these countries are characterized by high levels
of informal sector and tax evasion, bureaucratic procedures, politicization of public
institutions and volatility of public institutions. Improvements in this area are the
main investing and developing challenges for all governments of the countries of
Western Balkan without any exclusion.
A faster integration of all Western Balkan countries in NATO and the quality
fulfillment of the criteria of Maastricht and Copenhagen in the process of integration
to EU are substantial prerequisites for minimizing the political and security risks
especially in the case of Kosovo, Bosna and Herzegovina and Macedonia which are
prerequisites for improving the business climate and realizing more FDI in all the
Western Balkan countries as a common economic and investment market.
References
Agency for foreign investment in Macedonia (2010-2014). Invest in Macedonia.
The annual report for period 2010-2014, Skopje
Anderson , J. & Gonzalez, A. (2013). Does Doing Business matter for FDI in
Doing Business: Smarter Regulations for Small and Medium-Size Enterprises, World
Bank Paper, 45-50.
Cass, F. (2007). Attracting FDI to transition countries: The use of incentives and
promotion agencies.Transnational Corporations, Vol.16, No.02, 1-46.
Commander,S (1991). Managing Inflation in Socialist Economies in Transition ,
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Demekas, D.G.,Horvath, B., Elina Ribakova & Wu, Y. (2007). Foreign direct
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Comparative Economics, Vol.35 (2),370-386.
Gerhard Schlattl (2014) ”Business Climate Survey Macedonia”, Austria’s Business
Voice in Macedonia, No.3, Institut Adventage Austria,1-18, Skopje.
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H.J. Blanke, University of Erfurt, Erfurt, Germany; S. Mangiameli, ISSIRFA CNR, The Treaty on European Union (TEU), Rome.
Incentives and Investments (2010). Evidence and Policy Implications. FIAS, DC
McKinsey Global Institute, World Bank Group, Washington DC.
Jane Bogoev, Sultanija Bojceva Terzijan, Balázs Égert and Magdalena Petrovska
(2008). Real Exchange Rate Dynamics in Macedonia: Old Wisdoms and New
Insights. Economics: The Open-Access, Open-Assessment E-Journal, 2, 2008-2018.
Jayasuriya, D. (2011). Improvements in the World Banks Ease of Doing Business
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Jovanovic, B (2014). Easy of doing business and FDI in the Ex–socialist countries,
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Osmani & Deari (2009) Economic Transition and the effects of tax reform on FDI:
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17- 41.
Osmani & Mazllami (2014). A challenging path toward the UE: The fulfillment of
the Maastriht Criteria in the case of Macedonia and Albania in Regional Economic
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Osmani & Mazllami (2014). The impact of fiscal decentralization process in the
local public finance in the Western Balkan countries: A comparative analyzis. Journal
of International Scientific Publications, Vol.9, 730 -741.
Petreski, M (2014). Regulatory Environment and Development Outcomes:
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zones. Sl.V.RM 56/99,41/100, Skopje.
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The National Bank of Republic of Macedonia (2007-2014), Annual report of
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Volume 6 Number 1 Spring 2016
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�
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Improved Business Climate and FDI in the Western Balkans
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OSMANI, Rufi
Abstract
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Abstract: The process of economical and political transition in the Western Balkans, up to this point has shown a high correlation between achieved economical results and the determination of national authorities for drawing and implementing policies for economical stabilization and development as well as structural reforms with the support of the International Monetary Fund, the World Bank and other relevant international institutions. The analyzed countries from the Western Balkans region have managed to achieve appropriate levels of macroeconomic stability and an improvement of the business climate due to the implemented reforms, these countries have not been successful enough in attracting Foreign Direct Investments as a precondition to ensure a more dynamic economical development and an appropriate fall in the level of unemployment and poverty. A comparative analysis of the real economic indicators of the Western Balkans countries as contracted to the EU average shows that these countries are well under the real convergence levels of the EU countries. The main objective of the paper is to provide some additional arguments regarding the potential positive or negative correlation between the business climate and the levels of Foreign Direct Investments in the Western Balkans countries, some of which are already members of the EU and others aspiring to become members in the future, having in mind the asymmetric economic positions of the countries being analyzed. Keywords: Business climate, Structural reforms, Foreign Direct Investment, Economic Development, Western Balkan countries, European Union JEL Classification: E3, E4, F15, F21, M21, M48, O10, O11, O12
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International Burch University
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2016
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doi: http://dx.doi.org/10.14706/JECOSS16611
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ISSN 1986 – 8502,
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/9188a153e2816289591640f79369c77a.pdf
1a30622686998c21c99e6e8c0bd1826f
PDF Text
Text
Journal of Economic and Social Studies
Co-integration Analysis between the Turkish Stock Market
and its Balkan Hinterland Equivalents: Proof from the
2010-2015 Period
Cumhur Şahin
University of Bilecik Seyh Edebali
Turkey
cumhur.sahin@bilecik.edu.tr
Abstract: The purpose of this study is to investigate whether there is a
co-integration amongst (3) three Balkan countries; Bosnia
Herzegovina, Macedonia and Turkey in relation to the German
stock market (important for the Europe scale). For this purpose, the
relevant stock market’s weekly closing values (in the time series) were
analyzed between the periods of September 2010 and August 2015.
The long-term co-integrated relationship is analyzed by the Johansen
Juselius Co-integration Test. The empirical results show that these
three Balkan countries have a meaningful, but moderate relationship
in reference to the stock markets. In addition, the German stock
market has a more powerful effect on the Turkish stock exchange in
comparison to the Bosnia Herzegovinian and Macedonian stock
exchanges. This paper suggests that international investors can
diversify their portfolios in these (3) three Balkan stock markets.
Volume 6 Number 1 Spring 2015
Keywords: The Balkans,
Emerging Stock Markets, Indexes,
Market Linkages, Co-Integration
Analysis
JEL Classification: G15, O16
Article History
Submitted: 7 May 2015
Resubmitted: 21 September 2015
Resubmitted: 19 October 2015
Accepted: 26 October 2015
http://dx.doi.org/10.14706/JECO
SS155210
105
�Cumhur Şahin
Introduction
The Balkans, located in the southeast portion of the European continent, is a region
that has its own unique structure. Though being an important part of Europe, and
having an important international place both historically and culturally,
unfortunately, we cannot say the same from an economic point of view. Most
especially, in financial terms, when compared to other parts of Europe, it has a quite
small share. However, important developments have been observed in terms of the
financial markets in the Balkan nations since 1980’s.
Along with the liberalization process that occurred in these countries, the first and
most important stocks and bonds exchange was established in Turkey in 1986 under
the name of IMKB. Since 2013, it has continued its activities as the Borsa Istanbul.
Another important stock exchange is the Athens Stock Exchange in Greece. Along
with liberalization policies, it has experienced significant progress since the 1990’s.
Also one of the major stock exchanges in the Balkans is Romania's Bucharest Stock
Exchange that experienced an important leap with the destruction of communism.
These three countries both in terms of exchange trading volume and stocks traded
are the most important stock markets in the Balkans.
The historical, cultural and humanistic ties with the Balkans are as important as its
geographical, political and economic ones. Geographically, the Balkans forms the
extension of Turkey to Europe. This has not only influenced the shaping the
Turkish nation historically, but has also influenced its position as being a target for
European Union membership. The common sharing of this aspect with all the
regional countries is of vital importance for Turkey, thus raising its potential
progression.
There are historically strong ties between Turkey and Balkan countries. Minor,
cognate, coreligionist and relative members of society live in the Balkan countries
and people originating from the Balkan countries are living in Turkey. There also are
many important Turkish economic investments in the Balkan countries with respect
to either quantitative aspects or volume. The previously mentioned Balkan countries
have the characteristics of what can be called the “Hinterland of Turkey”. In this
study, we will investigate whether there is financial co-integration between Turkey
with the Balkan hinterland countries and Germany or not. Bosnia Herzegovina and
Macedonia have been chosen for this reason. In fact, the aim of this study was to
investigate Albania and Kosovo, but due to the lack of transparency in their financial
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markets, it was not possible to include them. In addition to these countries,
Germany’s financial market has also been added to this study due to its economic
size and political standing as well as its historical interests in the Balkan countries.
Literature Review
From a literary perspective, there have been many studies documented regarding the
securities exchange in the Balkan countries. Some of them are mentioned below:
In the study by Birau, the co-integration relationship was investigated between the
Romanian Stock Exchange and the Greek Stock Exchange. The daily stock exchange
index closing data for the period of January 2003 and December 2012 was
investigated by the Granger Causation Method. Causation could not be determined
for the first periods of January 2003 and December 2007, even though it was
determined that there was a single direction effect between the Greek stock exchange
and the Romanian stock exchange during the second periods of December 2007 and
December 2012. (Birau, 2013).
In the studies of Birau and Trivedi, co-integration relationships were investigated
between the Bucharest Stock Exchange and the Athens, Paris and Frankfurt Stock
Exchanges. The daily stock exchange index closing data for the periods of January
2003 and December 2012 were investigated by the Granger Causation Method.
Relationship and co-integration could not be found for the first periods of January
2003 and December 2007 between the Bucharest Stock Exchange and the Athens,
Paris and Frankfurt Exchanges, even though it was determined that there was a
single direction effect and co-integration between the Athens Stock Exchange and
the Bucharest Stock Exchange for the second periods of January 2007 and December
2012. Co-integration between the Bucharest Stock Exchange and the Athens, Paris
and Frankfurt Stock Exchanges were observed. (Birau and Trivedi, 2013).
In the study of co-integration between Croatia, Slovenia, Hungary, the Czech
Republic, Poland, Germany and the middle and eastern European countries of Vizek
and Dadic, it was determined that there is no co-integration between Croatia and
the middle and eastern European country markets when determined by the Johansen
Method for daily index data investigation during the periods of 1997 and 2005.
(Vizek and Dadic, 2006).
In the study made by Papavassilou, co-integration between Montenegro, the
European Union, and the USA plus 11 country markets were investigated by
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Granger Causation Tests on data during the periods of March 2003 and September
2008. The existence of long-term balance was proven between the markets of
Montenegro, the European countries and the USA. (Papavassilou, 2014).
In Tudor’s study, the relationship between the stock markets of Central and Eastern
European countries, (consisting of Russia, Poland, the Czech Republic, Hungary,
Romania and Bulgaria) and the US markets were investigated during two periods
including the periods before and after the global crisis. In this study, daily data from
January 2006-March 2009 was analzed by Granger Causality. After the analyses, it
was concluded that there was co-integration between the US market and the markets
of the six Eastern European countries during the crisis, and that this relationship was
stronger in comparison to the periods before and after the crisis. It was also
concluded that co-integration ran in a sole direction from the US to these six
countries. (Tudor, 2011).
Syriopoulos and Roumpis had revealed the relationship between the financial
markets of the Balkan countries, but their correlation with developed countries was
even higher. (Syropoulos and Roumpis, 2009).
In the study by Syriopoulos, the early European Monetary Union was examined. It
was proven that mutual interaction increased between the stock exchanges of the
Balkan countries and the eastern European countries especially after the
establishment of the Monetary Union. The high levels of affiliation between the
stock exchanges were affected by developed countries, the foremost of which was the
USA stock exchange. (Syropoulos, 2007).
Stoica and Diaconașu’s study included the investigation of the interaction between
the Balkan country stock exchanges (such as Bosnia Herzegovina, Bulgaria, Croatia,
Macedonia, Romania, Serbia and Slovenia) with Austria’s stock exchange. It was
observed that there is a long-term and mutually positive interactive relationship
between the stock exchanges of the above-mentioned countries; however, they are
more sensitive to Austria’s Stock exchange. (Stoica and Diaconașu, 622).
In the study by Progonaru and Apostol, it was observed that in the relationship
between the Romanian Stock Exchange and the other middle and eastern European
stock exchanges, that the correlation of the Romanian Stock Exchange to the middle
and eastern European stock exchanges is lower than the higher correlation with the
stock exchanges of developed countries. (Progonaru and Apostol,2000).
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In the study by Drakos and Kutan, the Turkish and Greek Stock Exchanges are
mutually dependent on one other in short and long-terms and their sensitivity to the
stock markets of developed counties was observed as high (Drakos and Kutan,
2001).
Samitas and Kenourgios’s study, in which the exchanges between the Balkan
countries themselves and the integration with the stock markets in the United States,
Britain and Germany for the period including the years 2000/2006 were examined
concluding that the exchanges of the Balkan countries among themselves and those
of three developed countries were long-term based and strong (Samitas and
Kenourgios, 2011).
Syllignakis and Kouretas used Johansen’s Co-integration Tests where mostly Balkan
countries were involved along with the central and eastern European countries. The
relationship between the financial markets and the international markets, were found
to especially increase with the European Union's enlargement process (Syllignakis
and Kouretas, 2010).
In the study by Horvath and Petrovski, the common transactions of country markets
between the developed countries and central European countries including the
Czech Republic, Hungary, Poland and also the western Balkan countries such as
Serbia and Macedonia were examined. By using the multi-variate GARCH models
as analyzing the data exchanges, it was observed that the integration degree of the
stock markets of the central European countries was much higher than the Balkan
countries. On the other hand, the integration degree and correlation of the Serbian
and Macedonian stock exchanges with the developed countries were at almost a zero
level, while, the Croatian Exchange integration and correlation level with the
developed countries markets was much higher than the Macedonian and Serbian
stock markets. (Horvath and Petrovski, February 2012).
Onay’s study of the European Union candidate countries regarding the long-term
financial integration of the U.S. stock market were examined using the Johansen Cointegration Tests. It was determined that Bulgaria and Romania had the highest
integration between the European Union and the U.S. stock markets when
compared with Turkey and Croatia's integration into the European Union and the
U.S. stock markets (Onay, 2006).
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Guidi and Uğur examined the integration of the stock exchanges of the southeastern
European countries with the developed ones evaluating the static and dynamic
analysis of co-integration between the Romanian, Bulgarian, Slovenian, and
Croatian markets with the German, British and U.S. stock market for the period of
2000–2013. It was identified that the new European Union member states tended to
co-integrate with the stock markets of Germany and the U.K. whereas the same
trend was not identified with the U.S. stock market (Guidi and Uğur, 2014).
In the study by Gradojević and Dobardžic, the regional stock market causalities and
stock markets relationships of Serbian, Croatian, Slovena, Hungarian, and Germany
were also examined and daily closing data was used for the related relevant stock
exchange between October 4, 2005 and August 18, 2009. When the data was
analyzed, it was identified that the Serbian exchange had a partial impact on the
Hungarian and Croatian exchanges whereas the Serbian and Slovenian markets had
mutual two-way causation (Gradojević andDobardžić, 2013).
In the study by Dobardžic and others, the financial markets and joint economic
movements of emerging and developed countries were examined. The Serbian
Exchange together with the German, Hungarian, Croatian and Slovenian markets
were also discussed for the periods of 2005 – 2009. Granger Causality Tests were
used in this study and it was concluded that there was a significant relationship
between the Slovenian and Croatian exchanges similar to the Serbian and German
stock markets, with the Serbian and German Stock Exchanges proving to have the
highest correlation (Dobardžic, Dobardžic and Brničanin, 2012).
Patev and Kanaryan’s study examined the behavior of stock exchanges and their
characteristics. The daily values of Greek, Turkish and Romanian stock markets were
also observed for the period between September 22, 1997 and May 31, 2002. As the
data was analyzed in this VAR model study, it was understood that there was neither
a significant relationship nor a proper integration between the stock markets of these
three Balkan nations. A further result indicated that the Turkish stock market had
the highest market risk, while the Greek stock market’s volatility risk was very high
and the Romanian stock exchange indicated the least open-tendency stock market
regarding external influences. It can be assumed that the Turkish and Greek have
the least stock market integration in contrast to the Romanian stock exchange that is
entirely non-integrated, meaning that they are completely closed off from external
influences. This is an interesting situation. (Patev and Kanaryan, 2002).
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In the studies by Samitas and others, the integration of the Balkan countries’ rising
stock markets and the behavioral properties were analyzed along with the
relationship amongst themselves and with advanced markets. In this study, daily
closing data of the Romanian, Bulgarian, Serbian, Macedonian, Turkish, Croatian
and Albanian, Greek, U.S., German and U.K. markets were analyzed. Johansen Cointegration Tests were used. The result of the analysis indicated that there was a
meaningful and positive direction towards a strong relationship between the GreekRomanian, Bulgarian and Serbian-Macedonian exchanges, whereas there was a
strong and positive relationship observed between the German stock exchange and
the Croatian-Turkish stock exchange with Albania (Samitas, Kenourgios and
Paltalidis, 2008).
In the study by Karagöz and Ergun, the integration of the stock markets between the
Balkan countries are discussed for both the Bulgarian, Greek, Turkish, Croatian and
Romanian markets and also for the markets of the developed countries such as the
U.S., Britain and Japan. Daily closing values were observed between the dates of
January 2, 2006 and March 31, 2009 and once again, Johansen Co-integration Tests
were used. When the data was analyzed, it was concluded that there is a two-way
relationship between the stock markets of the Balkan countries. The Turkish stock
exchange had the lowest interaction and the British stock exchange being the most
developed, had the highest effect on these stock exchanges markets (Karagöz and
Ergun, 2010).
Data, Methodology and Scope of Research
In this study, the aim was to determine whether there exists financial co-integration
between Turkey and the Balkan hinterland countries and Germany or not. Bosnia
Herzegovina and Macedonia were specifically chosen for this reason. In fact, Albania
and Kosovo were intended to be investigated, however, for reasons of the lack of
transparency in their financial markets, unfortunately, it was not possible to include
them. In addition to these countries, Germany’s financial market has been added
due to its economic size, its political standing and its important historic interests
with the Balkan countries.
In this context, the indexes used are: for Bosnia Herzegovina the SASE 10 stock
exchange 10 index, for Macedonia the MIB 10 index, for Turkey the BİST 100
index and for Germany the DAX index of the period between September 2010 and
August 2015. Weekly closing data was investigated. The idea of selecting the 2010Volume 6 Number 1 Spring 2016
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2015 period came about because this period reflected the actual current status of last
five years. The data was obtained from Bloomberg and was analyzed with Eviews 7.1
packaged software. In the analysis, serial graphics, a correlation analysis, an ADF unit
root test and Johansen Co-integration Tests were used.
Mentioned time series values were taken. The first issue to be considered for the time
series analysis was the subject of the static variables. Because of economic and
financial variables, time series often consist of trends or seasonality, and this could
lead to the violation of the principles for being stable of series, (Yurdakul, 2003).
Stability can be defined as the independence of the undertaken time series average
and the variances from the time.
In the absence of a stable of time series, estimated econometric models can provide
misleading results. For this reason, in the time-series econometric analysis, a unit
root test (test of stillness) was applied mostly to the time series.
Therefore, in this study, by using the Augmented Dickey-Fuller (ADF) Test (Eviews, with the help of the program), we determined whether the time series
included unit root (stillness) or not.
Table 1: Descriptive Statistics for Indexes
Bosnia
Macedonia
Turkey
Germany
Mini
mum
Maxim
um
Mean
Std.
Deviati
on
Statistic
Variance
Skewness
Kurtosis
Statist
ic
Statisti
c
Statistic
Std.
Error
Statistic
Statis
tic
Std
.
Err
or
Statis
tic
Std
.
Err
or
636.4
0
1556.
96
5018
2.53
1118.
12
2771.
38
9192
4.84
793.25
91
1931.2
657
71011.
7848
7.217
60
18.70
629
617.4
1741
116.60
392
302.20
932
9974.6
8354
13596.4
74
91330.4
73
994943
11.784
1.30
5
1.16
2
.032
.15
1
.15
1
.15
1
.641
.30
0
.30
0
.30
0
5189.
93
1287
4.73
8206.0
667
106.3
3193
1717.8
4483
295099
0.873
.505
.15
1
.333
1.00
6
.631
.30
0
Source: Authors’ own work
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Table 2: Correlation between Germany, Bosnia and Herzegovina, Macedonia and
Turkey Stock Market Indexes
Bosnia
Macedonia
Turkey
Germany
r
p
r
p
r
p
r
p
Bosnia
1
0,911
0,000
-0,448
0,000
-0,534
0,000
Macedonia
0,911
0,000
1
-0,531
0,000
-0,576
0,000
Turkey
-0,448
0,000
-0,531
0,000
1
0,749
0,000
Germany
-0,534
0,000
-0,576
0,000
0,749
0,000
1
Source: Authors’ own work
As seen in the correlation table, there is a positive and strong correlation between
Bosnia Herzegovinian and the Macedonian stock markets (r = 0,911). There is a
negative correlation between the Bosnia Herzegovinian and the Macedonian markets
with the German and Turkish markets. While the degree of correlation between the
German and Bosnia Herzegovinian market closing prices was medium and negative
(r=-0,5345), the correlation between the German and Macedonian market closing
price has a medium level degree (r=-0,576) As for the correlation between the
German and Turkish market closing prices, the correlation is positive and has a high
degree (0,749) All three coefficients of correlation are statistically significant. (p<
0,01)
Figure 1: Graphics of DAX Index
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Figure 2: Graphics of the MIB 10 Index
Figure 3: Graphics of the BIST–100 Index
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Figure 4: Graphics of the Sarajevo 30 Index
When the graphics above were analyzed, it can be said that the German and Turkish
stock exchange values had similar courses. Macedonian and Bosnian markets can be
said to have similar courses as well. When the graphics were generally evaluated,
suspicion that the series may not have been stationary was aroused. Stationarity of
the series were then analyzed with the Dickey-Fuller Method and the test results are
given below.
In time series analyses, the time series used in model must first be tested. A time
series is stationary if it does not change over time and has mutual variance between
the two terms depending only on the distance between the two periods, not on the
period in which this mutual variance is calculated.
Augmented Dickey–Fuller (ADF) Unit Root Test
Dickey-Fuller is a test used to determine whether unit root exists (whether the series
is stationary or not) or not in an observed series. There are three equation types
Dickey-Fuller has propounded;
Dickey–Fuller equation without constant or trend:ΔYt =γY(t-1) +ut
(1)
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Dickey–Fuller equation without constant or trend:ΔYt =a+γY(t-1) +ut
(2)
Dickey–Fuller equation without constant or trend: ΔYt =a+bt+γY(t-1) +ut (3)
There are two hypotheses used to test the existence of unit root. These are;
H1: γ<0 (p<1) (there is no unit root in the series.) (The series is stationary.)
H0 : γ=0 (p=1) (there is a unit root in the series.) (The series is not stationary.)
Empirical Results and Discussion
Table 3: ADF Unit Root Test Results
C
ADF-t
Statistic
-1.07 (1)
%5 Mac
Kinnon
-2.87
-0.96 (1)
Macedonia
Turkey
Bosnia
Herz.
Germany
C+T
0.72
ADF-t
Statistic
-1.82 (1)
%5 Mac
Kinnon
-3.42
-2.87
0.76
-2.30 (1)
-3.42
0.43
-1.37 (1)
-2.87
0.59
-1.93 (1)
-3.42
0.63
-1.95 (0)
-2.87
0.30
-2.49 (0)
-3.42
0.32
Possibility
Possibility
0.69
1. Difference
C
ADF-t
Statistic
-13.90 (0)
%5 Mac
Kinnon
-2.87
-19.13 (0)
Macedonia
Turkey
Bosnia
Herz.
Germany
C+T
0.00
ADF-t
Statistic
-13.87 (0)
%5 Mac
Kinnon
-3.42
-2.87
0.00
-19.10 (0)
-3.42
0.00
-14.06 (0)
-2.87
0.00
-14.03 (0)
-3.42
0.00
-15.88 (0)
-2.87
0.00
-15.85 (0)
-3.42
0.00
Possibility
Possibility
0.00
* Values inside the parentheses state lagged values determined in accordance with
Schwarz criterion
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It can be seen that all variables are not stationary in table values because ADF-t
statistic values are smaller than MacKinnon critical values with a 5 % significance
level in terms of absolute value. According to a new unit root test conducted by first
differenced variables, it has been detected that all series are stationary in the first
difference. The fact that all series are stationary in the first difference indicates the
possibility of a co-integration relationship between the series.
Graphics of Stationary Series
Figure 5: Stationary Series of DAX Index
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Figure 6: Stationary Series of Sarajevo 30 Index
Figure 7: Stationary Series of MIB 10 Index
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Figure 8: Stationary Series of BIST–100 Index
The relationship of co-integration was initiated by Engle and Granger (1987) then
developed by Johansen (1988) and Johansen and Juselius (1990). Engle–Granger
and Johansen’s co-integration methods were applied for investigation of the longterm relations between time serials. Engle and Granger propose that serials should be
integrated on the same level in order to obtain co-integration between the serials. If a
serial is stable without taking the first gap, it is called stable within a serial level. In
other words the integration level of serial is zero. If it is taken as d gap, that serial is
integrated on d level. In this context, if the X and Y two time serials are stable on the
same level, it means there is co-integrative relation. In this environment, the stability
of serials has been investigated by ADF Root Tests as the first phase of Johansen Cointegration Method of this study.
After the necessary pre-tests for co-integration, VAR analysis was conducted to
determine the optimum lagged value, and its results are given below. Optimum
lagged values have been determined within the framework of the Schwarz and
Akanke information criteria.
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Table 4: Optimum Lagged Values
AIC
SC
TURKEY-BOSNIA AND HERZEGOVINA
0
0
TURKEY- MACEDONIA
1
1
TURKEY-GERMANY
0
0
As seen in the table, optimum lagged values in accordance with both information
criteria.
Table 5: Johansen-Juselius Co-integration Test Results
H0
Hypothesis
Maximum
Eigenvalue
TURKEY-BOSNIA AND
HERZEGOVINA
r=0
r≤1
Trace
Statistic
184.26
(0,00)
TURKEY- MACEDONIA
r=0
r≤1
190.08
(0,00)
103.30
(0,00)
TURKEY-GERMANY
r=0
r≤1
213.89
(0,00)
117.86
(0,00)
100.18
(0,00)
Dual co-integration relationships between Turkey and Bosnia, between Macedonia
and Germany can be seen in the table.
The H0 hypothesis that there is no co-integration relationship amongst Turkey and
Bosnia Herzegovina, Macedonia and Germany is rejected. (p< 0,01)
In this regard, it is concluded that there is a co-integration relationship amongst
Turkey and Bosnia Herzegovina, Macedonia and Germany closing prices.
Conclusion
In this study, the relationships of Balkan countries such as Turkey, Bosnia and
Herzegovina and Macedonia were investigated in terms of stock exchanges and their
interaction with each other. Being one of the most important in terms of the
European Union, Germany’s stock exchange DAX index effects on these three
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countries was investigated. For this purpose, time series of the Sarajevo 10 index, the
MIB 10 index and the BIST–100 index data were used and thought to
representative of the stock exchanges of these countries.
The review period of the data was the weekly closing values between September
January 2010 and August 2015. The Johansen Method was used for co-integration
analyzes.
Upon analysis of the data, there is a statistically significant and strong (p < 0.01)
relationship of % 91,1 between the Macedonian and the Bosnia Herzegovinian stock
exchange, if one increases, the other one also increases. There is a statistically
significant (p < 0.01) relationship of % 44,8 between the Turkish stock exchange
and the Bosnia Herzegovinian exchanges. If one increases, the other one decreases.
There is a statistically significant (p < 0.01) relationship of % 53,4 between the
German stock exchange and the Bosnia Herzegovinian exchange. If one increases,
the other one decreases. There is a statistically significant (p < 0.01) relationship of
% 53,1 between the Turkish stock exchange and the Macedonian exchange. If one
increases, the other one decreases. There is a statistically significant (p < 0.01)
relationship of % 57,6 between the German stock exchange and the Macedonian
exchange. If one increases, the other one decreases. There is a statistically significant
(p < 0.01) relationship of % 74,9 between the Turkish stock exchange and the
German exchange. If one increases, the other one also increases. In addition, there is
a co-integrative relationship between the Turkish and Bosnia Herzegovinian,
Macedonian and German closing prices.
As seen, there is a significant relationship between the Balkan countries and Turkish
stock exchange. The Turkish stock exchange has the highest co-interaction with the
German stock exchange. This was actually expected. This is because in terms of
transaction volumes, traded stocks, sophistication and size of the financial markets, it
is clear that the Turkish market has a more mature level in comparison with the
other sister country markets. In addition, German and Turkish investors can hedge
their risks by investing in Macedonia and Bosnia & Herzegovina because of the
negative correlation between their own stock markets and these Balkan stock
markets. Additionally, international investors can diversify their portfolio in these
stock markets.
The loosening of investigation on capital flows, stock buying and selling methods,
the extraordinary speed of telecommunication, varieties on financial instruments and
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the increase in the global investments of multinational companies, are determining
the country’s financial markets relations.
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Co-integration Analysis between the Turkish Stock Market and its Balkan Hinterland Equivalents: Proof From the 2010-2015 Period
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SAHIN, Cumhur
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Abstract: The purpose of this study is to investigate whether there is a co-integration amongst (3) three Balkan countries; Bosnia Herzegovina, Macedonia and Turkey in relation to the German stock market (important for the Europe scale). For this purpose, the relevant stock market’s weekly closing values (in the time series) were analyzed between the periods of September 2010 and August 2015. The long-term co-integrated relationship is analyzed by the Johansen Juselius Co-integration Test. The empirical results show that these three Balkan countries have a meaningful, but moderate relationship in reference to the stock markets. In addition, the German stock market has a more powerful effect on the Turkish stock exchange in comparison to the Bosnia Herzegovinian and Macedonian stock exchanges. This paper suggests that international investors can diversify their portfolios in these (3) three Balkan stock markets. Keywords: the Balkans, emerging stock markets, indexes, market linkages, co-integration analysis
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International Burch University
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2016
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doi: 10.14706/JECOSS155210
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ISSN 1986 – 8502,
HB Economic Theory
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https://eprints.ibu.edu.ba/files/original/77a6b8061fd3b8e1f9f649f36af34637.pdf
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Jecoss, Volume 6, Issue 1
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Teoman, Duman, Editor
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HB Economic Theory
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03c148e18c679765c0ebeebcc008b1da
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Journal of Economic and Social Studies
The Role of Monetary Policy as the Foundation of Economic
Development in Bosnia and Herzegovina
Matej Živković
International Burch University
Bosnia and Herzegovina
mat.zivko@gmail.com
Lejla Hodžić
Sarajevo School of Science and Technology
Bosnia and Herzegovina
lejla.hodzic@stu.ssst.edu.ba
Abstract: Macroeconomic stabilization of every country depends
largely upon the conduct of appropriate economic policy, which
comprises both fiscal and monetary policy; therefore, it is of great
importance to choose the most adequate and productive ones. Many
countries across the board have employed monetary policy in their
attempt to ease the consequences of economic crises in the aftermath
of global financial meltdown, and in the search for sustainable
economic development. This paper was confined to the monetary
policy in Bosnia and Herzegovina specifically, and its aim was to
address the current Currency Board Regime along with the available
monetary policy instruments and to determine whether an
opportunity for the improvement of economic growth and
consequently economic development lies within it. The importance of
Central Bank was stressed out, as it represents the anchor of the
monetary system. The paper comprises the analysis of the
implemented CBR, its brief history, monetary policy instruments
available and its consequences on the economy of B&H and based on
that, the recommendations for exit-strategy which, ceteris paribus,
represent a key to achieving higher levels of development. The
economic indicators suggested that macroeconomic performance
under CBA is not advantageous for B&H; therefore, it is thought
that abandoning the arrangement either by joining the EMU or by
making the Central Bank more independent is necessary.
Volume 6 Number 1 Spring 2015
Keywords: Macroeconomic
Stabilization Monetary Policy
Instruments;B&H Currency
Board Regime; Economic
Development; Monetary Easing
JEL Classification: E52, O160
Article History
Submitted: 11 June 2015
Resubmitted: 22 September 2015
Resubmitted: 20 October 2015
Accepted: 4 November 2015
http://dx.doi.org/10.14706/JECO
SS16615
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�Matej Živković, Lejla Hodžić
Introduction
Every country, in order to achieve macroeconomic stability, full employment and
improved living standards for its citizens, faster economic growth and
consequentially economic developmentneeds to conduct appropriate economic
policy. Government has three instruments to achieve objectives of economic policies
in a certain nation, namely investments, direct government and by state owned
enterprises, as well as fiscal and monetary policy. An important part of every
country’s economic policy is therefore monetary policy, whose aim is, by influencing
the availability of credit and cost, tostabilize the prices, exchange rate and amount of
money in circulation, to control inflation and maintain equilibrium of balance of
payments.
Monetary policy actions need to adjust to changes in the financial systems of
countries, which happen regularly. Therefore, the model of managing the monetary
policy has to be chosen with a lot of care.
The use, influence and objectives of monetary policy have changed in the aftermath
of the global financial crises and consequent global recession. One of the heritages of
the seventies was the fear of high inflation that devours the value of everything in a
single economy. This fear was multiplied in countries of the region by hyperinflation
of the eighties. The terror of inflation has the left much of the world with the
primary concern with general increase of prices for monetary policy. However global
crises caused triggering the concept of easy money through what was later called
monetary easing, with primary goal of revitalizing stumbled economic activities
without any fear of overheating the economy with possible inflation. The paradigm
has hence changed; monetary policy no longer targets levels of price at least not as its
primary concern, but unemployment and other economic malaise produced by
economic crises and attempts to assist together with other instruments of economic
policy in achieving economic development.
The subject of this paper is the monetary policy and its instruments, especially in
Bosnia and Herzegovina, and it being the potential for achieving economic
development. Throughout the paper, the importance of Central Bank will be
highlighted as it represents the pillar of monetary system and is the holder of
monetary policy. The method which will be used to serve the aim of the paper is a
combination of modelling method, inductive method and Delphi method.
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�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
Furthermore, the task of the paper is to address the Currency Board and to present
possible changes in monetary policy that potentially could be the key to achieving
faster growth and enabling the country to become economically stable.
Literature review
The topic of Currency Board Arrangement (CBA) has been used as a main research
topic for many years, since many countries, at either same time or at different points
in time, have experienced currency fluctuations and consequently financial instability
and since currency boards have been existing for more than 150 years. The CBA was
also the cover topic of most prominent economic newspapers, including The
Economist. The most prominent study of currency boards was by Hanke and
Schuler (1994) who provided with a comparison of currency boards versus central
bank regime, highlighting benefits and disadvantages of each. Comparative statistics
and formal econometric analysis of Gosh, Gulde and Wolf (1998) confirmed that,
historically, currency board arrangements have achieved better performance and
better results than any other fixed exchange rate regime (Fabris & Rodić, 2013). In
addition, it has been found, through statistical and econometric analysis of Gulde,
Julia and Keller in 2000, that the performance of inflation has been significantly
better, meaning lower, and higher growth has been achieved under currency boards
than under floating exchange rate regimes (Gulde, Julia, & Keller, 2000). Holger C.
Wolf in his book “Currency Boards in Retrospect and Prospect” gave a synthesis of
many different studies on this topic, focusing on the early forms of currency boards,
the example of Argentina, stating that its disinflation success could be because of the
CBA, but at the same time the CBA, with the lack of fiscal discipline, was the cause
for financial crisis that happened afterwards. The third part of the book was devoted
to explaining the most recent currency boards, including B&H’s CBA as the
youngest, i.e. the last one implemented. It has been argued that despite different
reasons for its implementation, European currency boards had the same objective of
eventually abandoning it in order to be accepted into Eurozone membership (2008).
As regards to the CBA in B&H topic, not much literature is available. The former
Governor of the Central Bank B&H Kemal Kozarić presented an overview of the
monetary policy regimes, with the review of the CBA currently implemented, and
thereby stressing its advantages out (Kozarić, 2007). In addition, both Kovačević
Dragan and Ivona Kristić have the same view on the effects of CBA on B&H’s
economy, thereby emphasizing the stability achieved with the fixation of local
currency. However, other literature, including the paper “Understanding of the
Currency Board System in Bosnia and Herzegovina” by Ferizović Mersud and
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
Ferizović Naida accentuate that CBA has been beneficial in the immediate postwar
period for B&H, but however it needs to be restructured so that the increased
competitiveness of the country can be achieved.
Current Monetary Policy of B&H: The Currency Board Regime (CBR)
Bosnia and Herzegovina has the Currency Board implemented as the monetary
policy regime, and it limits the authorities of the Central Bank.
Currency Board is an arrangement in which the domestic currency is with a fixed
exchange rate tied to another currency which represents the “Anchor”, gold or to a
basket of currencies where all the money in circulation can be freely converted into
reserve currency and where the functioning of the Central Bank is clearly prescribed
by the Law on the Central Bank. Currency Board functions by the rules of passive
monetary policy and it lacks the ability of implementing basic monetary policy
instruments. However, it is known by its simplicity, transparency and precise rules
(Kozarić, 2007).
Brief History of the Currency Board in B&H
Establishment of the Currency Board was built as Annex 4: Constitution into the
Dayton Peace Agreement, which was initiated and concluded in Dayton, Ohio,
United States on 21st November 1995 and it was officially signed 14th December
1995 in Paris (Fabris & Rodić, 2013).
Article VII of the Constitution appointed Central Bank of Bosnia and Herzegovina
(CBBH) as the only authority for conducting monetary policy throughout Bosnia
and Herzegovina and with the approval to issue currency. In addition, it is stated
that only Parliamentary Assembly could give the authority to Central Bank to extend
credit by crating money, but only after six years since the adoption of the
Constitution pass (OHR, 1995).
Main motivation behind the implementation of Currency Board was the complex
political situation in B&H, which made decision-making on political issues, on a
single level, very difficult (Kozarić, 2007). Moreover, other reasons that contributed
for adoption of such regime were: great division of the society, two entities and four
currencies in circulation: Yugoslav Dinar, Croatian Kuna, Bosnian Dinar and
German Mark.
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�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
However, Currency Board, as a model of managing the monetary policy, was not
immediately adopted, because the Bosnia and Herzegovina was in a transition period
from war to peacetime economy, from planned to market economy and from the
status of the former Yugoslav Republic to an independent state with its monetary
sovereignty, territorial integrity and political independence, which took time to
happen (Kovačević, 2003). Therefore, the implementation occurred on 20th June
1997 under the assistance of International Monetary Fund (IMF), when the Central
Bank of Bosnia and Herzegovina was established. In addition, the Convertible Mark
(KM) was formed as a domestic currency, which was convertible on demand first
into Deutsche Mark and after the adoption of Euro, into Euro (Gedeon, 2009). The
fixed exchange rate by which KM was converted into Deutsche Mark and is now
converted into Euro is set by the Law on the Central Bank of B&H. Article 32 of
that Law states that the official exchange rate for the currency of Bosnia and
Herzegovina is going to be one Convertible Mark per Deutsche Mark, or as of 1st
January 2001, KM is pegged to the Euro at the exchange rate: one Convertible Mark
for 0.511292 Euro, or one Euro for 1.955830 Convertible Marks (CBBH, 2002).
The KM exchange rate against its anchor currency has not been altered since when it
was first set by Law in 1997, and it is fixed nominal variable which influences
inflationary expectations of the public (Centralna Banka Bosne i Herzegovine,
2015). The fixed exchange rate was important for the implementation of Currency
Board, since its aim was to ensure economic stability in an extremely disordered
postwar economic environment for Bosnia and Herzegovina, by providing solid
nominal exchange rate of the domestic currency and by establishing the credibility of
the Central Bank.
Main Elements of the Currency Board
Currency Board in B&H is very transparent and is characterized by four main
elements: automatism, convertibility of the domestic currency, political and financial
stability and credibility.
Automatism refers to endogeneity of money supply and the self-regulation of
monetary system. It is thought that domestic money supply is going to endogenously
adjust to changes in the balance of payments (BoP), which represents imitation of
self-regulatory mechanism of the gold standard.
Moreover, convertibility of the domestic currency means that the domestic currency
is always ready to be exchanged for the anchor foreign currency at a fixed exchange
rate, and also for other foreign currencies as well. In addition, KM is fully backed up
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
by foreign assets reserves. Therefore, any increase in the money supply can be solely
provided by increasing reserve currency in the same amount. This means that the
Central Bank needs to hold reserves, which are high-quality, interest-bearing
securities denominated in reserve currency, of at least 100% as set by Law; however,
the Bank usually holds 105-110% as to be protected in the case of interest-bearing
securities losing value.
Figure 1. Coverage of Monetary Liabilities with Net Foreign Exchange Reserves.
Source: CBBH
Figure 1 represents the coverage of monetary liabilities with net foreign exchange
reserves in the period from 2009 to 2013. During the period, the rule that net
foreign exchange reserves, which include foreign currencies, gold or securities issued
abroad and denominated in foreign currency less foreign liabilities of CBBH, need at
all times to fully cover monetary liabilities in Convertible Marks, which include all
bills and coins in circulation, the balances in commercial banks’ reserve accounts and
other deposits with the CBBH, has been respected. The coverage in 2013 was
approximately 106%.
Since the Central Bank under CBR cannot create inflation, is protected from
political pressures, makes interest rates to be lower and provides currency stability,
the Currency Board Arrangement (CBA) establishes political and financial stability
of the country. In the case of Bosnia and Herzegovina, it imports monetary policy
from the European Central Bank, and interest rates as well as inflation closely track
those in the anchor country.
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Journal of Economic and Social Studies
�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
However, Currency Board, although an efficient measure for stabilizing the level of
inflation in short-term, limits monetary authorities to finance budget deficit and
their possibilities to give support to banks that have liquidity problems. Therefore,
the Central Bank of B&H could not and still cannot act as “lender of last resort” and
cannot use the exchange rate as means for recovery from economic shocks (Savić &
Savić, 2011).
Monetary Policy Instruments of CBBH
As stated in the Law on the CBBH a under chapter IV on Monetary Functions and
Operations of the Central Bank, The CBBH is not allowed to engage in any money
market operations which involve securities of any type (Monetary Functions and
Operations of the Central Bank, 1997). In addition, it takes over the monetary
policy of the European Central Bank and acts as a passive agent in order to achieve
its primary task of obtaining the stability of EURO-KM parity. However, the
Central Bank of Bosnia and Herzegovina has one monetaryinstrument available to
carry out economic policy goals and influence monetary movements, and that is the
level of required reserves. The Governing Board of the Central Bank requires that
banks hold the deposits with the Central Bank at minimum level of between ten and
fifteen percent of their deposits and borrowed funds. Required reserves are calculated
as average daily reserves over ten days period. Moreover, the amount of funds in the
reserve account with the CBBH determines the amount of money in circulation.
The first time that CBBH used mandatory reserves as monetary policy instrument
was in June 2003, when it decreased required reserve rate from 10% to 5%.
However, in the next year the CBBH increased the rate up to 7.5% in September
and to 10% in December and kept increasing it in order to eliminate high current
account deficit as well as high credit growth (Kristić, 2007). Furthermore, since the
effects of global financial crisis were also felt in B&H banking sector in 2008 and
2009, especially in terms of banking sector liquidity, the CBBH Governing Board
decreased the required reserve rate from 18% to 14% in late 2008, and again it was
reduced in 2009 to 10% for liabilities with a maturity over one year aiming to
improve overall liquidity and economic activity by encouraging lending (CBBH,
2009). In 2010 the rates did not change; however, in 2011 the required reserve rate
for maturities over one year was reduced to 7% as well as the required reserve rate for
maturities up to one year, which then was set at 10%. From the base for calculating
reserve requirement the value of government deposits for calculating development
projects was excluded. Moreover, during 2011 significant loosening happened,
which created conditions for monetary expansion (CBBH, 2011).
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
Figure 2. Quarterly Changes in Bank Liabilities and Reserve Account with the CBBH.
Source: CBBH
Figure 2 above represents the changes in reserve account, resident deposits and
liabilities to non-resident over the 5 year period. It can be observed that deposits by
residents have increased significantly as an aftermath of the growing public debt,
whereas liabilities to non-resident have been reduced. In 2013, when B&H’s
economy experienced slight recovery from previous shocks, the base for calculating
reserve requirement has been raised, and the surplus funds held with the CBBH that
exceed the required reserve were also increasing (CBBH, 2013).
Selected Economic Indicators in B&H under the CBR
As previously mentioned, Currency Board Arrangement has roots in classical
paradigm and it is assumed that domestic money supply adapts endogenously to
changes in the balance of payments, meaning that maintenance of financial
equilibrium and restoration of full employment and the balance of payments occurs
through self-adjustment of national price level and the free flow of specie. It is
thought that when consumers trade domestic for foreign currencies, the current
account deficit will reduce the monetary base. This further causes an increase in the
interest rates, a decline in the aggregate demand and a depreciation of the real
exchange rate. The contraction in the money supply also reduces labor demand and
the demand for other factors of production and that in turn reduces country’s prices
relative to other prices (Gedeon, 2010). This indicates that macroeconomic
performance under CBR is not beneficial for the development of B&H.
32
Journal of Economic and Social Studies
�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
Recent data suggests that economic activity in B&H modestly continued to increase;
however the growth in 2013 was very low and it counted almost 1 percent, which
can be observed in Figure 3. Because of the limitations of the CBR, and the Central
Banks’ inability to act as a “lender of last resort” and to influence the exchange rate,
the growth in 2014 was projected by the IMF at around 2%, but based on the
unofficial data it is even smaller than in 2013, namely 0.7% (International Monetary
Fund, 2014).
Figure 3: Real GDP Growth (in percent).
Source: IMF
Furthermore, the current account balance remains negative throughout the years,
reflecting the fact that Bosnia and Herzegovina, because being unable to print
money on its own and collect revenues through open market operations, is net
borrower from the rest of the World, especially from the IMF. The negative current
account balance can be seen in the figure below(International Monetary Fund,
2014).
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
Figure 4: Current Account Balance (in percent of GDP).
Source: IMF
Figure 5 is a graphical representation of the official and estimated core inflation,
measured by the consumer price index, in the period from 2006 to 2013. The data
was extracted from CBBH reports, with the cooperation of Bosnian Agency for
Statistics (BHAS). Fluctuations in the official inflation can be observed; however,
from 2011 slowdown trend in inflation is present due to the deflationary pressures.
In 2013, Bosnia and Herzegovina experienced deflation; although, because of the
low purchasing power of consumers, domestic demand was very weak.
Monetary Policy as the Key Foundation for Economic Development in B&H
Although the Currency Board Regime provides financial as well as political stability
to the country by prohibiting the interference of the politicians and by curbing the
inflation, it is at the same time disadvantageous for Bosnia and Herzegovina. Its
benefits and efficiency could be seen in the period since its introduction; however,
after continuous implementation of this arrangement researchers concluded that it is
extremely harmful for the country since it leads to overvaluation of the domestic
currency and the current account deficit is double that of countries with floating
exchange rates (Fabris & Rodić, 2013). In addition, it does not give the authority to
the Central Bank over monetary policy instruments, except for the required reserves.
The present deflation is beneficial neither for the suppliers nor for the consumers,
since it reflects low purchasing power and weak domestic demand and it could even
34
Journal of Economic and Social Studies
�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
lead to the deepening of the recession. Moreover, as previously seen, Bosnia and
Herzegovina is having difficulties in achieving even modest growth rate. Although,
there is widespread understanding that discretionary monetary policy is not the best
sustainable option for countries in transition. Further, CBA mechanism cannot
prevent crisis in the banking sector, so consequences of such event can have
disastrous effects on a country’s economy. Frederic Mishkin (2007) stated that:”The
longer the currency board stays in existence, the greater the likelihood that there will
occur a sufficiently large shock that leads to its collapse.”
Figure 5: Official and Estimated Core Inflation.
Source: BHAS and CBBH
Having this in mind, in order for Bosnia and Herzegovina to achieve economic
growth, and consequently economic development, it should develop exit strategy
from the Currency Board Arrangement.
The CBA is considered as a gold-standard in modern monetary system.
Furthermore, it served as a stabilization device. However, since it was supposed to
remove immediate causes of financial instability, now its abandonment represents
the foundation of economic development in B&H. Delphi method, combined with
previously used method of analysis, were used to present how changing the current
monetary policy regime of B&H could help it achieve better level of economic
development.
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
B&H could theoretically exit from CBA by imposing a central bank regime with
autonomous monetary policy and the ability to conduct open market operations or
by joining European Monetary Union in order to achieve progress in its economic
performance. One has to bear in mind that whatever monetary policy is chosen, in
order to provide positive results, appropriate fiscal policy should as well be
conducted (Avramov, 2000).
Abandoning Currency Board as a monetary policy of B&H could involve two or
three stages, as was the case with Lithuania and Argentina and should be done in
times when things are going well so that the smooth transition is feasible (Kozarić,
2007).
First, it is necessary that the monetary conditions for the monetary reform are
created, and that can be done by intervening in the primary market for securities.
This means that the possibility of transaction of securities between commercial banks
should be introduced, as well as the possibility of issuing notes and Lombard loans
which were not in use (Kozarić, 2007). In addition, money market would be
transparent and the communication between its operations would be prompt.
Improving inter-bank communication, designing money market instruments and
infrastructure represent essential precondition for introducing open market
operations. Open market operations are significant as they steer interest rates, signal
monetary policy viewpoint and manage liquidity.
Second, the Central Bank needs to replace Currency Board system and it has to be
sufficiently independent so to pursue long-run objectives such as price stability and
monetary policy, and instruments other than required reserve have to be introduced.
It is important that the Central Bank is independent and isolated from political
pressures in order to efficiently achieve its goals and conduct its operations (Mishkin,
2007). This aspect of independency from shortterminism by politicians can be
achieved by introducing member in the Board from ECB with veto rights in voting.
Operational decision making would be left to domestic actors. Important advantages
that B&H could have from independent central bank are the possibility of
monetization of deficit and the CBBH having the function of “lender of last resort”.
If B&H’s central bank gains the right to print money, then quantitative easing could
be chosen. Given the assumption that CBBH could print and create money, it could
buy bonds from financial institutions which would reduce the interest rates, further
leading people, as well as businesses to borrow more which means they will spend
more, create more jobs and thereby boost the economy.
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�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
With the independence of the Central Bank, which already is in force, B&H could
choose a somewhat complex way of conducting monetary policy, and that is
inflation targeting. In order to adopt inflation targeting, B&H should develop its
financial markets and establish a reliable system of measuring inflation. Monetary
instruments that would be used in conducting the monetary policy are short-term
interest rates and control of the credit. This would further lead to changing fixed
exchange rate with floating one, so that CBBH would be able to intervene in the
market when it is necessary to ensure stability and avoid inflation (Kozarić, 2007).
Floating exchange rate is more efficient than a peg and more important in
determining the long-term value of the currency and for creation of the equilibrium
in the international market. A gradual move from the almost orthodox CBR to a
central banking system would return full monetary sovereignty to CBBH.
In addition, great importance in the development of financial markets should be
devoted to repurchase agreements. By establishing this money market instrument the
way to a broader market development would be alleviated. Monetary instruments
available to CBBH must be efficient in controlling overall monetary trends and they
must improve, or at least allow, the establishment of market-oriented financial
system. These instruments need to be compatible with the financial system within
which they will work (Savić & Savić, 2011).
For example, CBBH decides to target inflation at a certain low level in order to
achieve sustainable economic growth. This could be done by a monetary policy
decision which lowers interest rates and therefore also lowers the cost of borrowing.
The result of such action would be higher investment activity as well as consumer
spending. The expectation arising from lower interest rates that economic activity
will strengthen, may cause banks to ease lending policies. Stocks become more
attractive for purchase and they raise households’ financial assets. This in turn boosts
household and business spending. In addition, with lower interest rates, domestic
currency depreciates, imports become more expensive so the domestic demand
increases. Combining these factors lead to an increase in output, employment and
consumer spending, helping country to achieve higher level of economic
development.
On the other hand, if the abandonment of CBA is done in order to join the
European Monetary Union, benefits are fewer than when imposing a central bank
regime, yet still significant. By joining the monetary union, B&H would not have to
give up independent monetary policy, since it already has given it up and it imports
Volume 6 Number 1 Spring 2016
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�Matej Živković, Lejla Hodžić
one from the European Central Bank. However, there would be no more exchange
rates between the members of the Union; therefore competition would be higher,
prices would be lower and because of the greater price transparency international
trade and investment would increase, causing B&H to move up on the latter of
economic development. This would in turn lead to greater global status as well as
greater political integration and influence in international affairs (Dolphin, 1995).
If Bosnia and Herzegovina abandons Currency Board Arrangement, it could gain
control over its monetary policy, and by having all monetary instruments at disposal
it could substantially achieve greater level of development.
Conclusion
There is no universal model of monetary policy that could bring benefits and
economic development for all the countries of the world. Monetary policy’s main
goal is to achieve price stability, full employment and to balance the BoP.
In Bosnia and Herzegovina particularly, the monetary policy under the Currency
Board Arrangement has helped the country to achieve price, financial and political
stability; however it seems like in the current stable environment it does not help it
develop. Therefore, the importance of this research lies in the fact that if the
proposals were implemented, B&H could move forward and become more
economically stable country. Current situation of the state of monetary policy seems
much outdated especially since dominant paradigms across the board have changed
targeting economic development. Therefore, the key foundation for B&H’s
development might be the abandonment of the CBA and moving toward central
bank regime with the authority to conduct open market operations.It is very
important for B&H to move away from the currently implemented monetary policy
regime, since it only holds the country back from progressing. In that sense, this
paper can serve as a useful guideline for policy makers when discussing and
forecasting which path and which type of monetary policy to pursue to yield higher
economic prospect.
The process of transformation towards effective use of open market instruments in
policy implementation doesn’t happen overnight and usually involves two or three
stages of market development. The transition to indirect instruments of monetary
policy causes the operational activities of the central bank and the treasury to become
more connected than before.
38
Journal of Economic and Social Studies
�The Role of Monetary Policy as the Foundation of Economic Development
in Bosnia and Herzegovina
Creators of the monetary policy need to closely follow the level of development of
the country’s financial system and to, in a timely manner, adjust their monetary
activities to those changes.
Though it has to be emphasized that transformation of monetary authority into one
that has actual instruments at its disposal, should by no means happen at the expense
of established independence of monetary pillar of the economy.
References
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Volume 6 Number 1 Spring 2016
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2969
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The Role of Monetary Policy as the Foundation of Economic Development in Bosnia and Herzegovina
Author
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ŽIVKOVIĆ, Matej
HODŽIĆ, Lejla
Abstract
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Abstract: Macroeconomic stabilization of every country depends largely upon the conduct of appropriate economic policy, which comprises both fiscal and monetary policy; therefore, it is of great importance to choose the most adequate and productive ones. Many countries across the board have employed monetary policy in their attempt to ease the consequences of economic crises in the aftermath of global financial meltdown, and in the search for sustainable economic development. This paper was confined to the monetary policy in Bosnia and Herzegovina specifically, and its aim was to address the current Currency Board Regime along with the available monetary policy instruments and to determine whether an opportunity for the improvement of economic growth and consequently economic development lies within it. The importance of Central Bank was stressed out, as it represents the anchor of the monetary system. The paper comprises the analysis of the implemented CBR, its brief history, monetary policy instruments available and its consequences on the economy of B&H and based on that, the recommendations for exit-strategy which, ceteris paribus, represent a key to achieving higher levels of development. The economic indicators suggested that macroeconomic performance under CBA is not advantageous for B&H; therefore, it is thought that abandoning the arrangement either by joining the EMU or by making the Central Bank more independent is necessary. Key words: Macroeconomic Stabilization Monetary Policy Instruments;B&H Currency Board Regime; Economic Development; Monetary Easing
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International Burch University
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2016
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DOI
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doi: http://dx.doi.org/10.14706/JECOSS16615
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ISSN 1986 – 8502,
HB Economic Theory