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    the existance of flags of convinience creates a distinct type of dualism in the international maritime transport industry. in this book we will see the economics of flaggin out

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    the existance of flags of convinience creates a distinct type of dualism in the international maritime transport industry. in this book we will see the economics of flaggin out

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    9 views11 pages

    Flaggin Out

    Uploaded by

    ferrad
    the existance of flags of convinience creates a distinct type of dualism in the international maritime transport industry. in this book we will see the economics of flaggin out

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
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    THE ECONOMICS OF ‘‘FLAGGING OUT”’ By G. N. Yannopoulos* 1, OPEN REGISTRIES AND MARKET DUALISM “Flagging-out” — the change of a vessel’s registry from a national flag to a flag of convenience — has become a widespread phenomenon, and now afflicts the merchant fleets of more or less all traditional maritime nations. From a little below 4 per cent in 1948, the share of world tonnage under flags of convenience has increased to 18.1 per cent in 1970, 31.9 per cent in 1980 and 29.1 per cent in 1983 (Commission of the European Communities, 1985). The small decrease in the early 1980s is due to the scrapping of tankers after the depression in the oil transport market, and is mainly in ships registered under the Liberian flag (Kindleberger, 1985). The percentage under flags of convenience of tonnage owned by European Community countries is below the world average, but varies considerably between member states, as Table 1 indicates. Greece, which already has a high share in the flag of convenience sector, is experiencing a new wave of flagging-out (Lloyds List, 2 June 1986). The existence of flags of convenience creates a distinct type of dualism in the international maritime transport industry. The market is split into two distinct segments (or sectors) operating under different labour costs and different con- ditions for efficiency. The first sector, to be called the established flag sector, comprises tonnage under registries of the traditional maritime nations. The second sector of this dual market, to be referred to as the flag of convenience sector, consists of vessels operating under open registry systems. The two sectors are differentiated in crew costs, labour quality, management costs and tax liabilities Before we see how these differences affect the choice of the shipowner between an open and a national flag registry, it is essential to examine how they arise in the first instance. Take crew costs first. The aggregate labour cost of employing one seaman aboard a vessel under the national flag of a traditional maritime country is higher * Department of Economics and Graduate: School of European and International Studies, University of Reading 197 May 1988, JOURNAL OF TRANSPORT ECONOMICS AND POLICY than the cost of employing a similar seaman on a flag of convenience vessel. Even if nominal wages are the same in the two sectors, payments for social security, pensions, and the support of industry training schemes are much lower under a flag of convenience. Thus it is non-wage costs that form the basic source of difference between the two sectors (Goss, 1985). A flag of convenience operator will pay his seaman a “gross remuneration”. Out of this gross remuneration the seaman will make his own provision for pensions, etc. In addition to having this freedom to choose, the seaman can further improve his take-home pay by reducing his income tax payments. This he can do by complying with certain regulations on residence laid down by his national tax authorities. This may be more or less difficult to achieve: it depends on the seaman’s country of origi On the assumption that he can effectively reduce his income tax and social security contributions to the tax authorities of his country of origin, and that he gets compensation from his employer (in the form of a higher gross remuner- ation) for the fact that he has to make his own pension arrangements, his take- home pay will be higher than that of the seaman employed by a national flag operator (Goss and King, 1985). The persistence of differences in crew costs between the two sectors of the market is thus not a manifestation of any differences in the degree of “labour exploitation” between them, but of the fact that the employer in the established flag sector has to absorb the burden of deductions from the seaman’s pay for social security, pension schemes and other related costs. Thus flagging-out reduces the aggregate labour costs per seafarer to the shipping operator and also improves the take-home pay of the seaman. It is obvious that the shipping operator obtains this reduction in crew costs only when the costs incurred by him for social security, pension payments and training, when he uses the flag of a traditional maritime nation, exceed the excess of the “gross remuneration” paid to the seaman of a flag of convenience vessel over the wages negotiated between shipowners and seamen’s unions in the established flag sector. Persistent differences in the level of crew costs are not the only factor that distinguishes one sector of the international maritime transport market from the other. The supply of labour available to the two sectors is also heterogeneous: the average level of skills is expected to differ. If the shipping operator finds it profitable to shift from one segment of the market to the other, and more specifically to “flag-out” to the open registry sector, he may find that he cannot carry with him all his labour force. Difficulties in complying with the residence and other requirements of the national tax authorities may make the move unattractive to seamen from the traditional maritime countries, and they may not find it to their interest to make their own (instead of their union’s) pension arrangements. The shipping operator may then resort to the recruitment of labour from non-traditional maritime countries, where lack of training and unfamiliarity with the sea life will probably result in lower skills. The more difficult it is for native skilled seamen from traditional maritime countries to flag themselves out, the greater will be the reliance on unskilled labour from other countries. Because of this difference in the quality of labour employed in the two market sectors, the efficiency of shipping operations in the flag of convenience sector will be lower — other things being equal. 198 ‘THE ECONOMICS OF “FLAGGING OUT” G.N. Yannopoulos TABLE 1 Percentage of tonnage owned by EC countries under flags of convenience (1983) Germany 36.6 Italy 96 Denmark 133 Netherlands 117 France 58 United Kingdom 118 Greece 318 BC(10) average 227 Source: Commission of the European Communities (1985), Structural differences in management costs have been mentioned as another factor that distinguishes the two segments of the market. Simpler procedures of registration, on-going inspection and controls in the flag of convenience sector ensure the minimum of red tape and similar bureaucratic delays (and of waste of management time or solicitors’ costs), and thus reduce management costs. However, this advantage from the individual operator’s point of view may work out for ower efficiency in the sector. Simple registration procedures and flex- ibility in the implementation of international maritime standards and rules may attract to open registries vessels of older vintages.’ Differences in organisation of the labour market will make for less pressure from rising labour costs, which works out eventually for a lower degree of automation and mechanisation, in the flag of convenience sector. Organisations such as national seamen’s unions and UNCTAD have asserted that other potential attractions of open registries are reduced safety and social standards, and laxity in the implementation of the various international regul- ations on maritime safety and prevention of pollution. However, if port state control systems are efficiently run it is difficult to see how this can be true. It is the nature of the port state control system, and not the economic link between flag state and ship, that ensures the application of the internationally agreed safety and social standards in international shipping. However, the aim of this paper is not to take part in the debate on the costs and benefits of flags of convenience. Its objective is to study the determinants of the mobility between the two types of registry, in order to establish the factors that influence the relative growth (or decline) of the merchant fleet under each registry through “flagging-out” (or “flagging-in”). In doing this the 1 To see whether there is evidence of an association between share of merchant fleet under flags of convenience and age of vessels, we ranked the member states of the EC first according, to the proportion of their tonnage under flags of convenience and then according to the age of their vessels. The Spearman's rank correlation coefficient is both small and statisti non-significant. May 1988 JOURNAL OF TRANSPORT ECONOMICS AND POLICY paper offers its own explanation of how it comes about that both sectors of ‘the maritime transport market exist simultaneously in a balanced equilibrium. A few explanations have already been hinted at in studies purporting to answer the question how a balanced equilibrium is ensured, despite the fact that manning costs of flag of convenience vessels tend to be lower. Without some countervailing cost factors flags of convenience would have become more numerous than established flags. One explanation assigns the existence of balanced equilibrium to non-market = for example, political — reasons (shipowners are prepared to incur higher costs for the prestige of carrying their national flag on their vessels). Another explan- ation suggested is higher insurance costs under flags of convenience. The first is difficult to test empirically; for the second there is no empirical support (Doganis, and Metaxas, 1976, and Tolofari et al, 1986). The approach used in this paper is to show that a balanced equilibrium is possible because, despite lower manning costs, productive efficiency is lower in the open registry sector. As has been explained already, there are two reasons for this: lower quality of the labour inputs used and lower managerial efficiency. The first is the more plausible explanation; the second is less plausible, but not necessarily untrue. Resort to the recruitment of seamen from nations of limited seafaring traditions can account for the assumed differences in the quality of labour inputs used by vessels under flags of convenience. But the conditions under which open registries may operate may also attract entrants with lower quality management inputs. Lower pro- ductive efficiency in the present context does not necessarily imply higher unit costs, because the two sectors of the market face different relative factor prices — as explained above. In this respect the assumptions of the dual market model used in this paper do not contradict empirical findings on relative unit costs such as those reported in Tolofari et al, (1986). 2. AMODEL OF A DUAL MARITIME TRANSPORT MARKET The dual maritime transport market described in the previous section is modelled in this part of the paper by adapting the framework of two-sector general equilibrium models (Jones, 1965) to take into account the special features of the international maritime transport market. In this market, shipowners can register their vessels (and supply their services) either under an open registry (the flag of convenience sector) or under the national flag (the established flag sector). If the shipowner chooses to register his ship under a flag of convenience, then — as was explained in the first section of the paper — he will incur lower labour costs and taxes, as well as lower costs of compliance with the regulatory framework of international shipping; but at the same time he will have to rely on less efficient labour. In order to come to grips with the fundamental features of the dual market model that follows, we assume that the governments of the traditional maritime countries pursue liberal shipping policies and offer no special assistance, fiscal or financial, to their national merchant fleets. As we know, in fact many of these governments practise both cargo reservation and flag discrimination (BOhme, 200 ‘THE ECONOMICS OF “FLAGGING OUT” G.N. Yannopoulos 1978) as well as substantial subsidisation to shipping (Gardner and Marlow, 1983), In both sectors of the market services are provided under constant returns to scale, and the relevant production functions are assumed to be homogeneous of the first degree. This assumption may not be as unrealistic as it sounds. Oi’s earlier work (Oi, 1961) and Svendsen’s subsequent findings (Svendsen, 1977) indicate roughly constant returns over a substantial range of firm sizes. The supply of labour is assumed to be a function of the “net remuneration” paid in the flag of convenience sector, but infinitely elastic at the prevailing (exogenously determined, see below) wage rate in the established flag sector. ‘The model introduces explicitly the differences in efficiency assumed to exist between the two sectors. However, technological differences between the two sectors are assumed in this model to be factor neutral. Thus in the international market maritime transport services are provided under different production functions in each sector, but the sectors have equal factor elasticities. The pro- duction function, under which maritime transport services are provided by each sector are as follows: Me = G*(Ke, Le) a) M, = G°(Ke, Le) Q) where M is the output volume of maritime transport services supplied during a given period of time; K stands for the capital invested in the provision of maritime transport services, and L for the labour employed. The superscripts and subscripts e and c denote the relevant sector: e = established flag sector; ¢ = flag. of conveni- ence sector. On the basis of the assumptions made above on the differing degrees of efficiency of shipping operations in the two sectors, the production function of the flag of convenience sector can be expressed as: Me = pG* @) where p is an efficiency parameter with the property 0

    (Ne/Re We If this condition does not hold, all seamen from the traditional maritime countries will take up employment aboard vessels under flags of convenience. However, it must be noted that the value of fie depends among other factors upon the prob- ability that seamen who flagged themselves out of the established flag sector can successfully comply with the conditions imposed by tax authorities in their countries of origin to relieve them of tax and social security costs. Given the production functions in equations (1) and (2'), and assuming that shipping enterprises maximise profits, the following conditions will apply for linking marginal factor products to prevailing factor rewards: 4G /dL = wt ©) dG" /dKe =r © dG* dL, = welp m dG*/aK, = rlp @ where r is the cost of capital. Using equations (5) to (8), we can determine the equilibrium values of w, and rr as well as the equilibrium capita-labour ratios in both sectors of the industry. Let the equilibrium values for these variables and ratios be W., F Ke and Ke, respectively. Given that dG*/4K. is a decreasing function of the capital-labour ratio and that r/p >r, then E. < Ke. If all available capital and labour resources are fully employed, then K=K,+K, =keLe + hele (9) i= Lethe (10) where K is the sum of the capital stock employed in the two sectors and L the total number of workers employed by both sectors. 2 In practice average crew costs are not the same in all the traditional maritime countries. For ‘our analysis it suffices that these differences are small compared with the difference between the average crew costs in the traditional maritime nations and the average crew costs of oper- ating under flags of convenience, Data from ISF and national collective agreements reported in ‘Tzoannos (1986) indicate that the max/min ratio of the distribution of total monthly earnings of an able seaman employed in merchant fleets under the flags of the memberstates of the EC ‘was 1.77 in 1982, It is interesting that since 1975 (where the max/min ratio stood at 2.58) substantial convergence has taken place. 202 ‘THE ECONOMICS OF “FLAGGING OUT” G.N. Yannopoulos The distribution of capital and labour between the two sectors, under con- ditions of equilibrium in the international market for maritime transport services, is determined from the solution of equations (5) to (10). This system of six equations will give the equilibrium values of the six variables Ke, Ke, Le, Le, 7 and we. Positive solutions for these variables are secured if the production function in (1) is strictly convex and asymptotic to the K and L axes. Since @) Ee

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