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EUROPEAN JOURNAL OF ECONOMICS

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September-December 2015
Volume 1, Issue 3
ISSN 2411-9571 (Print)

ISSN 2411-4073 (online)
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EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS STUDIES
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Volume 1, Issue 3
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Prof. Dr. Emilian Dobrescu, Academia Romana
Prof Dr. Elena Zamfir, University of West, Timişoara, Romania
Prof Dr. Misu Jan Manolescu, Rector, University of Oradea, Romania
Prof. Dr. Mame S. Sutoko, Rector, Widyatama University, Bandung - Indonesia
Prof. Dr. İsmail Hakki Mirici, President, WCCI, Turkiye
Prof. Dr. Ms. Jurate Baranova, Lithuania
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Dr. Iulian Stanescu, ICCV, Academia Romana
Assoc. Prof. Dr. Norsiah Binti Fauzan, Universiti Malaysia Sarawak, Malaysia
Dr. Sandro Knezovic, Seniour Research Fellow, Institute for Development and International Relations, Zagreb,
Croatia
Dr. Alicja Grześkowiak, Wrocław University of Economics, Poland
Dr. Arumugam Raman, Malaysia
Dr. Simona Maria Stanescu, Research Institute for Quality of Life, Romanian Academy, Romania
Dr. Sc. Rrustem Qehaja, Kosovo
Dr. Edith Dobre, Romanian Academy
Gerhard Berchtold, Universidad Azteca, Mexico
Lawrence Ogbo Ugwuanyi, University of Abuja, Abuja-Nigeria
Santosh Kumar Behera, Department of Education, Sidho-Kanho-Birsha University, Purulia, West Bengal
Oby C. Okonkwor, Nnamdi Azikiwe University, Awka-Nigeria
Murthy CSHN, Tezpur University Napaam Assam India
George Aspridis, Technological Educational Institute (T.E.I.) of Larissa
Timm Albers, University of Education Karlsruhe, Germany
Peter M. Miller, University of Wisconsin-Madison, Usa
Pigga Keskitalo, Saami University College Kautokeino, Norway
Paul Joseph Pace, University of Malta, Msida, Malta / Centre for Environmental Education and Research
Sandro Caruana, University of Malta, Malta
William J. Hunter, University of Ontario Institute of Technology, Canada
Peter Mayo, University of Malta, Malta
Bassey Ubong, Federal College of Education (Technical), Omoku-Nigeria
Marcel Pikhart, University Hradec Kralove, Czech Republic
Eddie Blass, Swinburne University of Technology, Australia
Hanna David, Tel Aviv University, Jerusalem-Israel
Raphael C. Njoku, University of Louisville, USA
Austin N. Nosike, The Granada Management Institute, Spain
Alba Dumi, Ismail Qemali University, Albania
Leah Garner-O'Neale, University of the West Indies, Barbados
Ticuţa Negreanu-Pîrjol, Ovidius” University of Constanţa, Romania
Mihaela Ioana Danetiu, EUSER, European Center for Science Education and Research
Slađana Živković, PhD. College of Applied Technical Studies. Serbia
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ISSN 2411-9571 (Print) European Journal of Economics September-December 2015
ISSN 2411-4073 (online) and Business Studies Volume 1, Issue 3
TABLE OF CONTENTS
PROSPECTS OF USING EARLY NEUTRAL EVALUATION IN CASE MANAGEMENT OF COMPLEX

CIVIL CASES IN MALAYSIA ........................................................................................................... 9
NORMAN ZAKIYY ............................................................................................................................... 9

KAMAL HALILI HASSAN ....................................................................................................................... 9
RELATIONSHIP BETWEEN THE ALTMAN Z-SCORE AND QUICK KRALICEK TEST IN ASSESSING
ECONOMIC UNITS ..................................................................................................................... 20
DOC. DR. ANTONETA POLO .............................................................................................................. 20

ASSOC. PROF. DR. CHRISTOS LADIAS ................................................................................................. 20
ASSOC. PROF. DR. ENKELACACA ....................................................................................................... 20
CORRELATION OF ETHICAL CONDUCT WITHIN AN ORGANISATION WITH THE ABSENCE OF

EMPLOYEES FROM WORK ......................................................................................................... 27
JERNEJ BUZETI ................................................................................................................................. 27

MAJA KLUN .................................................................................................................................... 27
JANEZ STARE ................................................................................................................................... 27
CRUCIAL IMPORTANCE OF WORK PRODUCTIVITY IN THE CONDITIONS OF A-TYPICAL

EMPLOYMENT........................................................................................................................... 36
MAŁGORZATA DOBROWOLSKA ........................................................................................................... 36
FINANCIAL ANALYSIS AND BANKRUPTCY RISK IDENTIFICATION MODEL USED BY COMPANIES

OPERATING IN POLAND – EMPIRICAL STUDY RESULTS .............................................................. 40
PIOTR PREWYSZ-KWINTO, ................................................................................................................. 40

GRAZYNA VOSS, .............................................................................................................................. 40
NPLS — THE SOLUTION RECIPE FOR ALBANIA ........................................................................... 48
ELONA SHEHU, PHD CANDIDATE ...................................................................................................... 48

PROF. ASSOC. DR. ELVIN MEKA ........................................................................................................ 48
KOSOVO’S INTERNATIONAL TRADE: BALANCE OF TRADE ......................................................... 58
GENT JUSUFI ................................................................................................................................... 58

LURA REXHEPI MAHMUTAJ ................................................................................................................ 58
GENTINA JUSUFI .............................................................................................................................. 58
NORA JUSUFI .................................................................................................................................. 58
RECORD-KEEPING AS A FACTOR RELATED TO MEETING THE PERSONAL FINANCIAL RATIOS

GUIDELINE ................................................................................................................................ 70
5
DR. BELINDA XARBA ......................................................................................................................... 70

DR. ALKETA BEJKO ........................................................................................................................... 70
DR. ETLEVA PETA............................................................................................................................. 70
THE IMPACT OF FAMILY INCOME ON STUDENTS FINANCIAL ATTITUDE .................................... 83
DOC. PH. D. DORJANA NANO........................................................................................................... 83

PH. D. TEUTA LLUKANI ................................................................................................................... 83
PH. D. ANTONETA POLO ................................................................................................................... 83
THE ANALYSES OF ALBANIAN BUDGET EXPENDITURE ............................................................... 89
DOC. PH. D. DORJANA NANO ............................................................................................................ 89

PH. D CAND. EDUINA GUGA ............................................................................................................ 89
INCOME INEQUALITY TOLERANCE AND PREFERENCES FOR REDISTRIBUTION IN TURKEY.......... 98
AYFER KARAYEL ............................................................................................................................... 98
COMPETITIVE ANALYSIS OF THE HOTEL INDUSTRY IN KONYA BY USING PORTER’S FIVE FORCES
MODEL .................................................................................................................................... 106
ASST. PROF. DR. RAMAZAN GÖRAL ................................................................................................. 106
INDONESIAN ONLINE TOURISM PROMOTION: A RHETORICAL AND DISCOURSAL LOOK ......... 116
DIAH KRISTINA, PH. D. ................................................................................................................... 116

PROF. TULUS HARYONO .................................................................................................................. 116
LACK OF CREDIT IN ALBANIA; WHO IS TO “BLAME” ANALYZING THE DEMAND ...................... 122
PHD. CAND. EUGEN MUSTA .......................................................................................................... 122

ASSOC. PROF. DR. ELVIN MEKA ....................................................................................................... 122
ECONOMIC DEVELOPMENT ..................................................................................................... 133
TAL SHAHOR ................................................................................................................................. 133
CAREER OPTIONS AND ENTREPRENEURIAL POTENTIAL AMONG FEMALE GRADUATES:

MOTIVATIONS, OBSTACLES AND REALITIES ............................................................................ 143
ANA PAULA MARQUES ................................................................................................................... 143
UNDERSTANDING THE NEUROMECHANISMS OF CONSUMER BEHAVIOR IN ADVERTISING

INDUSTRY ............................................................................................................................... 149
NORSIAH FAUZAN .......................................................................................................................... 149
THE IMPLICATIONS OF THE RECENT ECONOMIC CRISIS ON FERTILITY IN GREECE .................... 154
6
BYRON KOTZAMANIS ...................................................................................................................... 154

ANASTASIA KOSTAKI ....................................................................................................................... 154
THE CONCENTRATION-PROFITABILITY RELATIONSHIP IN TURKISH INDUSTRY ......................... 172
MERAL OZHAN .............................................................................................................................. 172
CASH BENEFITS FOR SICKNESS AND MATERNITY IN SELECTED STATES OF THE EUROPEAN UNION
AND AUSTERITY MEASURES .................................................................................................... 185
PAEDDR. ZUZANA HORVÁTHOVÁ, PH. D. ........................................................................................... 185

ASSOC. PROF. ING. JOSEF ABRHÁM, PH. D. ........................................................................................ 185
ASSOC. PROF. JUDR. IVA CHVÁTALOVÁ, CSC. ..................................................................................... 185
CHARACTERISTICS OF THE LABOR MARKET IN KOSOVO AND EUROPE .................................... 192
ARTAN HAZIRI, PH. D CAND. ........................................................................................................... 192
ENVIRONMENT AND WOMEN ENTREPRENEURS IN ALBANIA ................................................. 199
AZRA ZMIJANEJ ............................................................................................................................. 199
ANALYSIS OF INTEREST RATE IMPACT ON THE PROFITABILITY LEVEL OF THE BANKING SYSTEM
IN ALBANIA DURING THE PERIOD 2005 -2014. ........................................................................ 203
SOKOL NDOKA, PHD CANDIDATE .................................................................................................... 203

PROF. AS. DR. ANILDA BOZDO ....................................................................................................... 203
E-BANKING AS A TOOL FOR COMPETITION ADVANTAGE IN ALBANIA ..................................... 214
PROF. ASSOC. EVELINA BAZINI ......................................................................................................... 214
THE LINK BETWEEN INNOVATION BEHAVIORS AND PRODUCTIVITY STRATEGIES OF

ENTERPRISES IN ALBANIAN ECONOMIC GROWTH .................................................................. 220
GÜNGÖR TURAN............................................................................................................................ 220

IRMA GJANA ................................................................................................................................. 220
PROGRESSIVE INCOME TAXATION AND ECONOMIC GROWTH WITH ENDOGENOUS LABOR

SUPPLY AND PUBLIC GOOD ..................................................................................................... 230
WEI-BIN ZHANG ............................................................................................................................ 230

COMPARISON OF ECONOMIC PERFORMANCE OF THREE TRADE FREE ZONES IN
IRAN (KISH, GHESHM, CHABAHAR) ............................................................................... 248
EZZATOLLAH ASGHARIZADEH ................................................................................................... 248

MEHDI AJALLI ............................................................................................................................ 248
MANSOOR MOMENI................................................................................................................... 248
7
8
Prospects of Using Early Neutral Evaluation in Case Management of Complex Civil Cases in
Malaysia
Norman Zakiyy
Faculty of Law
National University of Malaysia, 43600 UKM Bangi, Selangor, Malaysia
zakiyy@usim. edu. my
Kamal Halili Hassan

Professor of Law, Faculty of Law
National University of Malaysia, 43600 UKM Bangi, Selangor, Malaysia
k. halili@ukm. edu. my
Abstract
In Malaysia, pretrial case management has been made an integral part of the litigation process since it is designed to manage
cases systematically and within strict deadlines. However, dealing with the evaluative value of complex cases might not be
easy, especially for the inexperienced lawyers and some judges who are not familiar with certain areas of law. This study
proposes the use of early neutral evaluation for resolving complex civil cases in Malaysia during pretrial case management.
Thus, this study sought to examine whether early neutral evaluation can be used effectively to identify issues at the earliest
possible time to ensure early disposal or settlement of civil cases. Therefore, the objectives of this study are; first, to explore
the viability of introducing an early neutral evaluation program during case management under Malaysia Rules of Court 2012;
and secondly to evaluate the potential of adopting an early neutral evaluation programme in Malaysia. The finding shows that
early neutral evaluation is consistent to the practice of case management under the Malaysian Rules of Court 2012. Although
the Malaysia Rules of Court 2012 provides an opportunity for the adaptation of Early Neutral Evaluation, the introduction and
sustainability of such programme would depend largely on a more in-depth study relating to financial resources, readiness of
disputants, future goals and expectations of the Malaysian judiciary; and commitment of various stakeholders of the justice
system. This study is expected to enrich present literature relating to civil procedure and also provide an overview on possible
amendments to current procedural court rules particularly in Asian countries.
Keywords: Early neutral evaluation, pretrial case management, complex civil cases, Malaysia
1. Introduction
Modern judicial systems of these days appear to place emphasis on the importance of case management especially in civil
proceedings. Primarily, it assists the court in managing the disposal of cases efficiently. Sharing similar experiences in
other Commonwealth countries, case management is regarded as an integral part of civil litigation in Malaysia. Civil
proceedings under the Malaysian judicial system are regulated by the Malaysia Rules of Court 2012 (“RC 2012”). The RC
2012 is largely based on common law practices. Notably, the Malaysian courts manage cases via the use of pre-trial case
management (“case management”) in line with its effort to uphold the interest of justice under the Order 1A of the RC 2012.
It serves the purpose of narrowing down issues and enable the parties to prepare for trial (Abu Baker (2012a). In case
management, pre-trial conference is held to identify issues early apart from assisting parties to prepare their case for trial.
As indicated by Astor and Chinkin (1992a), the aims of the pre-trial conference are to help the parties to negotiate for a
settlement apart from narrowing down the issues in dispute, thus saving judicial time.
9
Seemingly, the judicial transformation of the civil courts in Malaysia (between the years of 2009-2012) had placed greater
emphasis than before on case management. Joining the list of “paperless courts” in other developed jurisdictions, the
Malaysian civil courts are now better known as “e-courts” and operate on an electronic court system (instead of the manual
system) which comprises of the following:Case Management System (CMS); Queue Management System (QMS); and
Court Recording Transcription (CRT) (Saman & Haider, 2012; Hassan & Mokhtar, 2011). Thus, in the Malaysian context,
case management is also used as a procedural tool to reduce backlog of cases and to expedite the disposal of newly filed
cases.
In order to expedite the disposal of cases, a strict deadline for the courts have been set, namely a normal civil case is
expected to be resolvedwithin nine (9) months at the High Court and Sessions’ Court, and within six (6) months at the
Magistrates’ Court. Apparently, there is clear evidence on the use of case management of the Malaysian civil courts to
effectively manage “clear-cut-cases”. This is evidenced by the use of an electronic court system which expedites the
disposal of this category of cases. Notably, audio conferencing is used in case management (Malaysia Federal Court
Circular No. 216/2010 dated 24 Aug 2010).
Accordingto the National Centre for State Courts in the United States, “complex litigation” demands rigorous judicial
management. According to the Centre, complexity in a case may be determined by the following: “multiple parties, multiple
attorneys, geographically dispersed plaintiffs and defendants, numerous expert witnesses, complex subject matter,
complicated testimony concerning causation, procedural complexity, complex substantive law”. Main obstacles to
managing complex cases are difficulty in understanding and analysing the facts and laws, miscommunication between the
parties, inability of counsels or parties to decide on the main issues of dispute, excessive discovery costs, multiplicity of
parties and agreeable facts. It is generally known that the courts in England and Wales use multi-track system for larger
and complex cases. Such a system allows complex cases to be managed closely by the courts. Be that as it may, there is
little information known about whether the civil courts in Malaysia are efficient enough to manage complex cases and have
them disposed within the strict or more flexible deadline. Despite the fact that audio conferencing dispenses with the need
of counsels of the parties to appear at the case management date, it lacks the face-to-face interaction which allows parties
to discuss openly about important issues in complex cases.
Generally, case management is geared towards early disposal of cases. Alas, the emphasis on case management has
least taken into consideration the need to adopt suitable alternative dispute resolution mechanisms (ADR mechanisms) or
special procedures for managing potentially difficult or protracted litigation. Against this backdrop, it is imperative to consider
the importance of certain ADR mechanisms to ensure that cases are disposed within the aforementioned strict deadlines.
In the light of the above situation, it is observed that the current procedures in the RC 2012 do not address or mitigate the
aforementioned problems. Evidently, many jurisdictions around the globe have promoted the use of the multi - door
courthouse, which introduces a variety of ADR mechanisms. These ADR mechanisms are such as arbitration, mediation,
early neutral evaluation. Mediation is used during case management in civil courts in Malaysia. By way of comparison, ENE
is fairly new ADR mechanism compared to mediation. However, very little information is known about the obstacles to
introducing ENE in Malaysia, taking into consideration that mediation is being promoted domestically.
Scholars generally agree that ENE is a reliable ADR process which involves the identification of core issues in a dispute
prior to trial by a neutral expert (Maycock, 2001; Goss, 1995; and Goldberg, Green & Sanders, 1985). However, ENE is
least known as a form of ADR in Malaysia as well as in many parts of Asia. Although ENE is not a new dispute resolution
mechanism in the United States, very little information is shared by scholars in ADR as to the suitability of ENE to address
complex civil cases during case management. Lande (2008) postulates that the implementation of ENE at the early stage
of the litigation track enables parties to present their respective positions before a neutral expert (i. e. the neutral evaluator).
According to Zakiyy & Hassan (2015), the process of ENE emphasises on the powerful presentation of the neutral evaluator
which can assist in the exchange of information between the evaluator and the parties. The neutral evaluator will provide
an evaluation of the strengths and weaknesses of each party’s case. However, the viability of ENE as a potential dispute
resolution mechanism is as yet to be tested or considered favourably under the RC 2012. This consideration is vital if it is
found that ENE has the potential to assist the court to manage cases effectively.
Being aware of these pressing problems, the authors were motivated to study whether the goals of ENE can assist the
courts in mitigating some of the said problems during case management. . Therefore, this study is significant in determining
the potentials of ENE to resolve complex situations within a prescribed timeline; and the possibility of it being favourably
10
considered in as a part of a “multi-door courthouse” plan in Malaysia or other Commonwealth jurisdictions. Wishfully, it may
also serve as an impetus towards the carrying out of more extensive research to determine whether it is a viable ADR
mechanism to be considered in both the practice and study of civil procedure, particularly in Asian countries.
Based on the above discussion, the main objective of this study is to explore the prospects of integrating early neutral
evaluation in case management of complex civil cases in Malaysia. The general objectives of this study are; first, to explore
the viability of introducing an ENE programme during case management under the Malaysian Rules of Court 2012; and
secondly to evaluate the potential of adopting an ENE programme in Malaysia.
2. Literature Review
Current literature places little emphasis on ENE as a recommended ADR process. This can be contributed by the fact that
mediation and arbitration are, the more preferred ADR mechanisms. Based on the above discussion, it is observed that the
review of literature indicates that very little writings have associated ENE with case management, especially in the modern
civil litigation system which has undergone various kinds of reforms throughout the passage of time.
According to Brazil (2002), a judicial approach to processing civil cases was significantly shown in the study conducted
under the Northern District of California Early Neutral Evaluation (ENE) Programme that was headed by Joshua D.
Rosenberg and H. Jay Folberg. Both scholars find that from the cases filed between mid-1988 and mid-1992, 41% of the
lawyers whose cases were automatically referred to ENE programme strongly agreed that the ENE programme made case
management more efficient. However, extra caution must be taken to rely on these findings because the data was
generated more than 20 years ago. In addition, many jurisdictions around the world have encountered civil litigation reforms
that would have altered the way in case management is conducted. Unfortunately, over the years, hardly any studies were
conducted to reinforce the findings of the study, which was done in the 80s and 90s. In addition, previous studies (including
those in Malaysia) do not provide answers as to whether ENE is suitable to be integrated into the case management stage
involving complex cases.
Engro and Lenihan (2008a) describe ENE as an evaluative process which is not intended for settlement alone, but is
capable of designing better ways to manage cases more efficiently. They based their assumption on the argument that the
purpose of mediation is not similar to ENE. This is because the mediation’s purpose is to encourage disputing parties to
reach a settlement, but ENE’s purpose is not limited to settlement alone, but extends to providing them with a better
understanding of their dispute. Wissler (2004) in her summary of empirical research found that the introduction of ENE
reduces cases from being heard at trial.
Similarly, more recent studies have not emphasized the connection between ENE and case management, but on the
subject of effectiveness. In 2010, for example, Carolyn Hay, Katharine McKenna and Trevor Buck (2010) examined the
cost effectiveness of ENE in the social security and child support tribunal. The aim was to investigate whether it produces
swifter, more proportionate resolution of cases. Apart from that, the research also aimed to establish appellant's satisfaction
with the process and the impact on and views of stakeholders.
Based on the above, none of the studies have dealt with the relationship between ENE and case management in depth.
Under the foregoing, this studyhopes to fill the existing gaps in the literature and also to increase the literature in the areas
of ENE and case management in Malaysia.
3. Methodology
Studies in procedural law generally involve analysis of statutes, reported case laws, court procedural rules and court
practice directions. This study depended largely on secondary data. The major sources of data include journal articles,
reported cases, procedural rules and relevant information retrieved from the internet. The methods employed in this study
were descriptive aimed at fact finding and positive analytical criticisms which were aimed at improving the existing manner
of managing complex cases by using ENE in case management. In carrying out this task, the relevant procedural provisions
in the RC 2012 and relevant documents were analysed to find out whether it is plausible for ENE to be used during the
process of case management.
11
4. Findings and Discussion

This study attempted to gain an understanding of the prospects of ENE in civil procedure in Malaysia by looking atthe
viability of introducing ENE during case management under the Malaysia RC 2012; and secondly to evaluate the potential
of adopting an ENE programme in Malaysia.
4. 1 Findings
4. 1. 1 The study indicates that ENE is an effective tool in case management of complex cases. It is imperative to note the
following findings:
(a) ENE’s goals are quite similar to those stipulated in case management under the RC 2012.
(b) A competent neutral evaluator is capable of assisting the court in managing trial of complex cases by
identifying issues at the case management stage.
(c) The face-to-face interaction between the neutral evaluator on the one part and the parties and lawyers,
on the other part allows complex issues to be analysed in terms of merits, comprehended, resolved or
even planned for trial.
(d) Both ENE and case management under the RC 2012 are held early upon the commencement of legal
action in the court thus allowing ample time for the court to manage and the parties to prepare the case
more efficiently and in a systematic manner.
(e) There are potentials of adopting ENE in Malaysia but subject to certain constraints such as insufficient
financial funds, understanding among the legal fraternity, cost effective and appropriate training.
4. 2 Discussion
4. 2. 1. The discussion below shows how the advantages of introducing ENE in case management:
(a) ENE’s goals are quite similar to those stipulated in case management under the RC 2012.
Practically, the court requires cooperation from attorneys representing the parties to ensure that case management of their
case is managed effectively. In Malaysia, attorneys handling civil cases are commonly referred as “solicitors”, thus the term
“solicitors” would be referred herein from this point onwards). Typically, the goals of the ENE programme are namely, (1)
to enhance communication between the parties; (2) to provide an evaluation of the merits of the case; (3) to provide a
"reality check" for both clients and solicitors; (4) to identify and clarify central issues in dispute; and (5) to assist in settlement
discussions. By way of comparison, it is imperative to highlight that many major goals of ENE are similar to the objectives
of holding the pre-trial conference, especially in terms of enhancing communication among the parties, identifying facts and
issues, assessing strengths and weaknesses of each party, and improved court administration. Astor and Chinkin (1992),
succinctly pointed out the objectives of the pre-trial conference are as follows:
i) Guiding parties to communicate with each other;

ii) Scrutinizing facts and separating issues;
iii) Assessing strengths and weaknesses of a case;
iv) Assessing possible risks and quantum;
v) Decreasing trauma of the adversarial method;
vi) Educating parties in court procedures;
vii) Ensuring plaintiffs are paid earlier;
viii) Ensuring costs as low as conceivable;
ix) Efficient court management; and
x) Trying to ensure that only obstinate cases proceed to trial.
12
Thus, the sharing of a number of similar goals between ENE and pre-trial conference draws the inference that ENE can be
integrated into case management in order to enhance greater communication, participation among the parties and in the
disposal of cases. This is consistent with the view of Abu Baker (2012b) who stressed on determining the issues for trial
during case management. Thus, the inference that can be drawn from this study is that ENE is appropriate to be applied
under case management under the RC 2012 to reduce the complexity of a case.
(b) The neutral evaluator is a skilful manager who can assist the judge in managing complex cases or situations
Scholars generally agree that it is important for a manager to manage complex situation in a competent and efficient
manner. For example, competency is said to include a “combination of knowledge, skills, behaviour and attitudes”
(Hellriegel et. al. , 2000). These profound competency values should be possessed by a judge or judicial officer who
manages the case management of a case. Thus, important matters must be clarified with the parties. The list of important
matters differs from jurisdiction to jurisdiction. However, it can be generally accepted that these important matters include
the particulars of the claim and defence, principal issues that need to be determined at trial, the use of experts, number of
witnesses, agreed and non-agreed facts. It is also generally perceived that competency is a major factor of any
organizational success (Whetton & Cameron, 2002; Lewis et al. , 2004; and Schermerhorn Jr, 2002). This principle is
equally applicable in court management. Therefore, if the judge is incompetent or less competent in resolving complex legal
issues at the case management stage, the engagement of acompetent party in certain areas of law (in this regard, the
neutral evaluator) might assist in managing complexity in civil proceedings. It can be inferred that the views of a highly
respected neutral may also assist in persuading the parties to negotiate. This is because the neutral evaluator is usually
appointed amongst individuals who are former retired judges or senior lawyers. Thus, he can assist the parties in the event
a deadlock takes place in complex cases. Moreover, Engro and Lenihan (2008b) aver that ENE offers better ways to
manage cases efficiently because it does not only emphasise on settlement plan but greater understanding of the case.
(c) ENE ascertains complex issues at the early phase of a case

Under the RC 2012, the civil courts will normally fix the pre-trial case management early. For example, it is fixed
approximately around two (2) weeks upon the commencement of a court action. Similarly, ENE is held early in the litigation
process. Zakiyy & Hassan (2014) and Trendle (2004) postulate that ENE should be introduced into the litigation process at
an early stage and even at the pre-litigation stage or before the referral to any ADR mechanism.
In Malaysia, the majority of the e-courts are depending on effective ways of managing cases. These effective ways are
referred to the e-court system. Under the electronic court system, newly filed cases are now placed under case
management system (CMS) and its sub-modules (namely the e-filing and e-registration) to improve efficiency. At the first
pre-trial case management, many issues are not determined. In such situation, the court’s guidance on future directions is
needed.
In the early phase of a case, the neutral evaluator may assist the court in managing the future directions of the parties
especially to identify complex issues. The evaluator emphasizes on connectivity with her audience during the ENE session.
This is to ensure that her audience receives her message clearly (Zakiyy & Hassan, 2015). Dayton (1991) mentioned that
the neutral evaluator is trained to provide “an early, frank and thoughtful assessment” of the “relative strengths and
weaknesses” of each party. In addition, the holding of ENE at the pre-trial stage is in consistent with the view ofMacfarlanes,
LLP (2014) who explained that in complex cases, ENE provides better discussion on settlement at the early phase of a
case even before the exchange of court documents. Therefore, it is observed that the neutral evaluator may assist the court
to achieve some, if not all of the objectives of the pre-trial conference as specified above.
(d) ENE assists the court and the parties in the clarification and narrowing down of issues
Under Order 34, rule 3 of the RC 2012, the court is empowered to fix the date and time for case management. The parties
must comply with such court order, failing which the action may be dismissed without hearing on the merits. Under Order
34, rule 6 of the RC 2012, the Court is also empowered to dismiss the action or proceedings or strike out the defence or
13
counterclaim or enter judgment or make such other order as deemed fit if any party fails to attend to it (Order 34, rule 6 of
the RC 2012). At the pre-trial case management hearing, the parties can either attend the session personally or, in addition
to their solicitors (Order 34, rule 4 of the RC 2012).
There is a plethora of legal authorities which states that case management orders are to be obeyed and not to be broken,
without proper reason (s). For example, in the case of Nur Ibrahim Masilamani & Anor v. Joseph Lopez (per judgment of
Yeoh Wee Siam J) [2013] 4 CLJ 1202 [HC], the High Court inter alia held that all court orders given in pre-trial case
management must be complied by the parties according to a strict deadline for the purpose of expediting the trial. Thus,
non-compliance by a party with court’s direction in case management is detrimental to his own interest. For example, Order
34 of the RC 2012 stipulates the need of the party to comply to the court’s order in case management, failing which the
action may be dismissed. The importance of this particular order is stressed by the courts by issuing parties with a copy of
instruction pertaining to the responsibilities of the parties in case management. This is exemplified in the recent Kuala
Lumpur High Court case of Perbadanan Pengurusan Palm Spring Damansara v. Muafakat Kekal Sdn Bhd & 2 Ors. [2014]
1 LNS 1633, whereby the parties were issued a copy of “Enclosure A” containing instructions to comply with the directions
of the court during case management and the consequences of non-compliance.
Accordingly, Order 34 of the RC 2012 also specifies that at the pre-trial case management stage, the judge may inter alia
do the following:
a) Direct parties to refer the matter in dispute to mediation in accordance with any practice directions for the time
being issued (O. 34, rule 2 (2) (a) of the RC 2012);
b) Fix the period within which the plaintiff is to file the bundle of pleadings (Order 34, rule 2 (2) (b) of the RC 2012);
c) Fix the period within which the parties are to file the bundle of documents including documents mentioned in the
witness statement of a witness Order 34, rule 2 (c) of the RC 2012);
d) Direct the parties to identify the contents of the bundle of documents and bundle up the documents into agreed
bundle of documents which shall be filed by the plaintiff ( Order 34, rule 2 (d) of the RC 2012) ;
e) Direct the parties to identify certain documents where no agreement can be reached (O. 34, rule 2 (e) of the RC
2012);
f) Direct the filing of statement of agreed facts (Order 34, rule 2 (j) of the RC 2012); and
g) Direct the filing of statement of issues to be tried (Order 34, rule 2 (k) of the RC 2012).
Order 34 of the RC 2012 stipulates that the court can direct the parties to mediation. Based on the expertise of the neutral
evaluator, it can be inferred that the neutral evaluator can similarly assist the court to clarify certain complex issues that
have been raised by the parties or their solicitors as shown in their respective pleadings. Each solicitor may propose a
number of issues which may or may not be accepted by the other side’s solicitor. Thus, the neutral evaluator uses his
expertise in the substantive law relating to the dispute by determining and narrowing down the issues. This saves the court,
judicial time in determining the issues to be tried.
(e) ENE assists the parties in comprehending the reality of each other position
Similarly, under the RC 2012, the parties or their solicitors are required to comply with the court orders, especially in terms
of preparing the bundle of pleadings (Order 34, rule 2 (2) (b) of the RC 2012) and identifying certain documents where no
agreement can be reached (Order 34, rule 2 (e) of the RC 2012). During case management, it is assumed that the solicitors
for each party would have examined thoroughly the statement of claim, defence and other related pleadings (if any), case
law governing a subject matter. However, it is common to find that they would still be required to identify documents which
are mutually agreed or otherwise. In the recent High Court civil appeal case of Malayan Banking Bhd v. Sunlight Seafood
Sdn Bhd [2015] 4 CLJ 272], SM Komathy JC, in her judgment, inter alia cautioned that at the stage of setting down the
action for trial, it is the responsibility of the plaintiff to bring to the court the relevant evidence in support of his case). In a
highly complex case, an expert in a specific area of substantive law may help the parties to check on the prospects of their
case and to simplify evidence by making it comprehensible to the parties. A sound advice from the neutral evaluator might
avoid the parties from being involved in protracted litigation and incur escalating costs. Thus, according to Stradley, Ronon,
Stevens & Young, LLP (2007), the neutral evaluator will usually allow each party to present her claims and defence during
the ENE session. This opportunity enable the parties to achieve some of the major goals of ENE, namely to assess the
strength and weaknesses of each other position. This opportunity essentially allows them to decide on whether it is
worthwhile for their dispute to be heard in a full trial or plan for possible settlement.
14
It is a totally a different experience for the parties (or their solicitors) to discuss about their case before a judicial officer in
pre-trial conferences with the usual formality compared to a neutral evaluator in an ENE session. The involvement of the
neutral evaluator in a different forum (namely the ENE session) would allow her to get the best cooperation from the parties
and their solicitors to communicate effectively with each other freely. This in turn enables the neutral evaluator to render
her advice to them on the merits of their case.
(f) ENE assists the parties in settlement discussion and case planning
Accordingly, at the case management stage, the judge may direct parties to refer the matter in dispute to mediation in
accordance with any practice directions for the time being issued (Order 34, rule 2 (2) (a) of the RC 2012). Mediation often
results in settlement discussion. However, ENE has the potential of extending it to case planning, especially if mediation
fails to convince the parties to reach settlement. Communication is clearly emphasized in the ENE session. This fact is
clearly stated by Brazil (2007) who opines that the neutral evaluator would ensure that each party is made aware of “every
bit of the arguments and evidence brought forth by each other”. With such full and frank disclosure, there is plenty of room
for the parties to discuss about possible settlement at the pre-trial case management stage. As indicated by Engro and
Lenihan (2008), the neutral evaluator may even conduct settlement discussion if the parties agree to do so. In the absence
of such agreement, the neutral evaluator will present his verbal evaluation of the case before her audience (namely, the
parties, their solicitors and witnesses). This evaluation will essentially include the strengths and weaknesses of each party's
case. Since the neutral evaluator can also assist the parties in case planning, the introduction of ENE during case
management may assist the court to manage the progress of the case more efficiently.
5. Potential of Introducing ENE Programme in Malaysia

The court procedures of the Malaysian judicial system are largely based on common law practices. As a Commonwealth
country, there is inclination by the Malaysian Judiciary to refer to the English Civil Procedure Rules 1998 (see Rule 1. 4
Civil Procedure Rules 1998) which include active case management by the court by identifying the issues at an early stage,
controlling case progress and encouraging parties to use appropriate ADR mechanisms. In the Northern District of
California, for example, the court sponsors four (4) major ADR mechanisms: Arbitration, early neutral evaluation, mediation
and settlement conferences. However, as emphasised by Moore (2000), for a new mechanism to be introduced, it often
has to undergo a rigorous test from its users by being recognised as widely supported. It is clear that for every new
programme to be successful, the parties are presumptively required to participate in any of the available court ADR
programme.
Evaluators under the court ENE programme are generally appointed by the court among those who are retired judges or
senior lawyers. It is observed in Malaysia that many senior lawyers (and some former judges) are practicing arbitrators or
mediators. In Malaysia, there are indications that judicial officers with specialized experience in substantive areas of the
law are engaged in the resolution of disputes. This is evidenced by the effort by the Malaysian judiciary in establishing
numerous specialised courts aimed to resolve disputes expeditiously and to reduce the occurrence of case backlog (Arifin
Zakaria, 2012). Some of these specialised courts are namely the New Commercial Court (NCC), the Corruption Court, the
Admiralty Court, the Environmental Court and the Muamalat Court (Islamic Banking Court). Notwithstanding this fact, the
assistance of highly qualified lawyers with similar experience and abilities as that of the judges is crucial if the parties opt
to resolve their disputes by way of ADR instead of the litigation process. In fact, under the RC 2012, there is a provision
pertaining to the appointment of joint expert or assessor (Order 33, rule 1 of the RC 2012). However, the Malaysian courts
hardly utilise thisprovision during the case management stage. This provision is vital in determining the strengths and
weaknesses of a pending case.
Apart from mediation, arbitration has also gained recognition for being known as an efficient dispute resolution mechanism
in dealing with complex technical issues. However, it is noted that not all construction disputes involve technical issues, but
more on the interpretation of a specific clause in the construction contract. According to Onn (2003), there is a clear
distinction between a technically qualified arbitrator and one who is an expert in substantive law. Onn (2003) opines that:
“that a technically qualified arbitrator may not have a real advantage: there is a distinction between an arbitrator using his
15
technical knowledge and expertise to understand and evaluate the evidence before him and to provide or fill the gap of the
evidence himself”.
There are sufficient number of senior lawyers who possess skills and experiences in certain substantive law areas such as
insurance, intellectual property laws and Islamic banking. Based on the general statistics issued by the Malaysian Bar,
there is a steady increase in the number of lawyers throughout the years of 2011 and 2014, notably, in 2011 (13672), 2012
(14517), 2013 (15331), 2014 (16300). There is only a slight decrease in year 2015 (15896 lawyers). In Malaysia, lawyers
who have been in practice for 7 years or more are considered as senior lawyers. Apparently, there are currently more than
8000 senior lawyers who are more than 12 years of experience (Malaysian Bar, 2015). This figure, which stands as of 9
March 2015 is based on the breakdown by number of years of experience which is revealed by the Malaysian Bar. In 2013,
the number of senior lawyers with 7 to12 years of experience is 2352. In 2014, there are 2353 lawyers, whereas in 2015,
there are 2236 lawyers. In 2014, the number of senior lawyers with more than 12 years of experience is 8014. In 2014,
there were 7316 lawyers and in 2015, the figure stands at 8053. Based on these statistics, it can be safely assumed that
the legal profession in Malaysia has a number of senior members who has vast years of experience in various areas of
substantive laws. Many of them have gained sufficient experience in handling a number of complex high profile civil
litigation. Apart from handling litigation, many are practicing mediators and arbitrators. Nonetheless, their expertise is least
known to have been put into worthy use. Nevertheless, none has the opportunity to serve as early neutral evaluators. Under
such foregoing, it remains inconclusive as to whether ENE might be easily accepted as a reliable ADR mechanism in
Malaysia, especially when ENE is as yet to be tested by the Malaysia civil courts. In light of the foregoing, it is suggested
that the introduction of ENE needs to be supported by external organisations. Apart from the Kuala Lumpur Regional Centre
for Arbitration (KLRCA) which promotes itself as an international centre for resolution of disputes via ADR, there is as yet
any centre which emphasises in conducting in-depth research on the use of ADR in Malaysia. Thus, such a centre could
be established by local institutions of higher learning. These local institutions can gain better understanding about the
workability of certain ADR mechanisms by studying the theoretical strength of certain ADR mechanisms. The study may
also be extended to the practical side of certain ADR mechanisms by referring to the courts or private ADR providers in
other countries which have already been offering numerous types of ADR mechanisms (including ENE) for a considerable
number of years.
It is generally assumed that courts around the world encourage parties to consider settlement instead of litigating their
disputes. In Malaysia, it is axiomatic to note that at the case management stage, settlement is the main goal of the Court
(Order 34, rule 2 of the RC 2012). To achieve settlement, the parties are encouraged to use mediation, especially in light
of the existing practice direction on mediation which was issued by the Office of the Chief Registrar of the Federal Court of
Malaysia in 2010 (Practice Direction No. 5 of 2010). It is trite law that practice directions are not rules of court (re Langton
(1960) 1 WLR). In Jayasankaran v. PP (1983) 1 MLJ 379, the Federal Court of Malaysia held that practice directions are
meant for administrative purposes only. Nevertheless, the court may still order parties to adhere to certain practice
directions to reduce backlog of cases. There is a plethora of scholarly views on the drawbacks of mediation. These
drawbacks are due to the following reasons: (i) the mandatory nature of court-connected mediation which hampers the
parties’ intention to reach a settlement (Zakiyy, 2010; Hedeen & Coy, 2000); (ii) the parties mediate without knowing about
its process or how to participate in it (Hedeen, 2012); and (iii) and it is a high risk process if the mediator lacks the skills or
behaves unethically (Sheppard, et. al. , 1993). In addition, the World Bank reported that mediated cases in Malaysia are
comparatively low compared to other countries; and is practically introduced after the case management (World Bank
Report, 2011). Thus, under the prevailing circumstances, it is difficult at this point of time to predict the reception of ENE in
light of the current inclination of the court and solicitors to refer disputes to mediation.
Another obstacle, possibly faced in introducing ENE is costs. A systematic training for evaluators will require a high budget.
Any proposal to recommend the kind of training should take into consideration of entry level, intermediate level or
specialized level affecting the more complex cases. In this regard, it is recommended that both substantive law experts and
professional training organizers should work together to figure out the best form of training.
16
6. Implications of the Study

The insights derived from this study have vital implications for the manner of managing case management as well as the
preparations of effective dispensation of justice in complex cases. Having the assistance from a neutral evaluator with solid
background of a subject matter will definitely be of great assistance to the solicitors to develop rational advice in order to
cater to the needs of their respective clients as to the next logical course of action in the litigation process, namely either to
look forward to a settlement plan or proceed to trial. The traditional approach to case management has been to treat all
cases as the same domain. This means that during case management, the court only manages a case according to its
understanding of the issues, facts and laws of a case. Therefore, the assumption of such practice is that with certain effort
to narrow down the issues and relevant facts of a particular case, the court and solicitors representing the respective parties
will be able to comprehend a case accordingly. However, it is evident that in dealing with a complex case, this is not
sufficient to prepare the parties for their preparation for trial or even possible settlement discussion. The analysis has shown
that it is obvious that complex cases must be treated indifferently for non-complex cases for the sake of efficiency and in
the name of justice.
7. Conclusion
It is assumed that early and efficient disposal of cases is always expected from a world class judicial system. In this context,
ENE should not be left out from the umbrella of reliable ADR mechanisms. Certainly, we have to acknowledge that there
are advantages in exploring and embracing ADR mechanisms which are consistent with the need of the court to dispose
cases efficiently. In this context, It is worthy to consider ENE in managing complex cases, especially at the pre-trial stage.
It only needs more promotion and recognition, especially by countries in Asia. The study has shown that ENE is an effective
ADR mechanism which is capable of identifying complex issues that are not easily identified by the courts, the parties or
their solicitors. It is the answer to many complex situations in civil proceedings such as complex evidence and issues. In
summation, a clear understanding of its goals and mights might enable it to be easily accepted by the courts, the legal
fraternity and the public at large.
8. Limitations of the Study

This study has encountered the usual limitations of time and funds commonly faced by a non-funded study. Thus, this study
can only be considered as a preliminary and a modest contribution to elicit further enquiry on the might of ENE in case
management.
9. Recommendations for Future Study

As hereinbefore mentioned, active case management is an integral part of civil litigation in Malaysia and even in most
Commonwealth countries. In this regard, the use of ADR is an option to increase efficiency in the management of cases
during the case management stage. It is recommended that the courts and the Malaysian Bar must initiate awareness
among the parties about the credibility and effectiveness of ENE in solving complex disputes. In any court sponsored ENE
programme, the parties must be given the liberty to withdraw from the ENE session if the neutrality of the neutral evaluator
is questionable. This is vital for the parties to rely on the advice of the neutral evaluator without the slightest doubt about
his neutrality. It is suggested that a more in-depth study be conducted on the suitability of ENE to resolve a myriads of
disputes and its effectiveness when combined with other ADR mechanism (s).
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19
Relationship between the Altman Z-Score and Quick Kralicek Test in Assessing Economic
Units
Doc. Dr. Antoneta POLO

Lecturer University of Gjirokastra, Albania
neta_polo@yahoo. com
Assoc. Prof. Dr. Christos LADIAS

Lecturer Panteion University of Social and Political Sciences, Athens, Greece
caladias@otenet. gr
Assoc. Prof. Dr. EnkelaCACA

Lecturer University of Gjirokastra, Albania
ebabaramo@yahoo. com
Abstract
The existence of the crisis makes obvious the fact of predicting the financial position in which will be found an economic unit
in the future. This constitutes one of the most important tasks of analysts. Altman Z-Score andQuick Test Kralicek are two
very important cumulative indicators, on the basis of which, the analyst is able to give a judgment on the financial situation in
which an economic unit is, as regard to the risk of bankruptcy (Altman Z -Score) and difficulty paying (Quick Test Kralicek).
By analyzing these two indicators, it was foundthat they are connected with each other and lead us to the same conclusion
for entities taken as a sample in this study. Through a statistical analysis (Pearson correlation coefficient) will be shown this
connection and the conclusions derived from this analysis. Predicting in time unsatisfactory situations avoids the risk of
bankruptcy, which is so much evident nowadays.
Keywords: financial position, economic unit, Altman Z-Score, Quick Test Kralicek, analysts, bankruptcy.
1. Introduction
The processof consideration plays an important role in the field of financial analysis. This process leads the interested
parties in reaching conclusions related to forthcoming perpective, stability and profitability of an economic unit both by
comparing its basic data and by creating standards.
There is no doubt that the consideration process is a necessary tool in judging business events and particularly the effects
that union and sale have on business value. Moreover, the use of consideration techniques is an important mechanism of
dialog between the management of an economic unit, shareholders or analysts about issues affecting its value. It also
constitutes an important tool in considering alternative strategies of the economic unit. In this study, it is intended to analyse
the economic unit from, its performance point of view byapplying two of the most important models of consideration, the
Altman Z-Score and the Quick Test Kralicek. It is also attempted to evident if there is any relation on the proposed
judgement of the economic unit.
2. Altman Z-Score –an important indicator in determining the bankruptcy of an economic unit
Altman Z-Score and Quick Test Kralicek are two important cumulative indicators on which an analyst bases his judgement
about the financial situation of the economic unit, both for the bankruptcy risk (Altman Z-Score) and paying difficulties
20
(Quick Test Kralicek). By analysing these two indicators, noted their connection and arrive at the same conclusion about
the economic units taken as samples in this study.
By applying the Altman Z-Score (graph. 2. 1), was foundthat in 2011, the number of the economies in the “danger zone”
(bankruptcy zone) hold a considerable percentage of 30%, whereas 27% are the economic units (grey zone) and economic
units that hold 43% are not directly threatened with bankruptcy (green zone).
Taking into consideration the results of this model over years, it is clear that the situation about these economic units
becomes somehow clear in favour of those not directly threatened with bankruptcy. As it is clear seen in the graphs (graph.
2. 2, graph. 2. 3) the number of the economies in the “danger zone” reduces (from 30% in 2011 to 25% in 2013) and the
number of the economies in the “safe zone” increases (from 43% in 2011 to 50% in 2013).
30%
43%
27%
Safe zone Grey zone Zone of anxiety
Graph 2. 1. Appliance of the Altman Z-Score model of2011
25%
50%
25%
21
23%
50%
27%
3. Quick Kralicek Test – an important indicator in determining the paying difficulty

Like Altman Z-Score model, the Quick Test Kralicek Test is also an important cumulative indicator which is used to judge
the performance of an economic unit. Through the appliance of this indicator in our sample, it was achieved assessed in
terms of performance, concretely the paying difficulties of the economic units being analyzed. Based on this indicator, were
created the following graphs:
2,20%
18,30% 25%
54,50%
Excellent Very good Good Bad
Graph 3. 1. Appliance of the Quick Test Kralicek of 2011
22
6,80%
13,60%
27,30%
52,30%
6,80%
9%
22,80%
61,40%

As the graph 3. 1, which shows the results of the Quick Test Kralicek, for 2011, clearly indicates, only 2. 2% of the economic
units according to this test belong to the “excellent zone”. 25% of the economic units are lower than the previous belonging
to the “very good zone”, 18. 3% of them belong to “poor zone”. The majority of these economic units belong to “good zone”.
The situation improves somehow in 2012, graph 3. 2, when the specific weight of the economic units belonging to “excellent”
(6. 8%) increases and the specific weight of those belonging to “poor” (13. 6%) decreases. This means a relative
improvement of the situation from one year to the other.
In2013, graph 3. 3, marks again the increase of the specific weight of the number of economic units in the third place in
Quick Test Kralicek. The increase of the percentage of this part means a relative deterioration of the liability situation as it
23
is obvious that the higher the increase of the value average of Quick Test Kralicek the lower the ability of paying liquidation
is.
4. The relation Altman Z-Score – Quick Kralicek Test

In order to judge the relation between these two important indicators of the financial analysis, it will becalculated the
coefficient of correlation which proves the existence or not of this relation.
From the data gathered during this study and from the calculations of each test mentioned previously it is obvious their
relation. In most of the cases they give the same conclusion related to the situation the economic units of our sample are.
The hypothesis raised in this case is about the fact that both indicators are related to each other, strengthening in this way
the reached conclusion about the situation that economic unit is.
The higher the figure of Altman Z-Score indicator, the better the economic unit situation is. While the Quick Test Kralicek
judges as positive its low figure, may be assumed that the coefficient of correlation that expresses the strength of the
relation is different from zero.
We will base our survey on the results extracted from both indicators of 44 economic units under analysis in order to verify
this hypothesis.
In order to find the strength and direction of the relation of these indicators, there was used the Pearson correlation
coefficient. The Pearson correlation coefficient (Healey, 2009) measures the strength and direction of the linear relation
between two variables and describes the direction and level that one variable is related to the other.
This coefficient can range from -1 to 1. The figure 1 of this coefficient indicates that variables are perfectly related to each
other, so the increase/decrease of one variable means the same to the other. The figure -1 of the coefficient means that
variables are related in a perfect linear way but, in this case, the increase of one means the decrease of the other and the
contrary. The figure 0 of this coefficient means that variables are not related in a linear way with each other. The Pearson
correlation is estimated according to the following formula:
∑ (x− ) ( y - )
r=
√[∑ (x− ) ²] [ ∑ (y - )² ]
Taking into consideration the results of these two indicators for each year, through Excel program, it was made possible
the consideration of the Pearson correlation coefficients, as presented below:
In2011:r = - 0. 35
In2012:r = - 0. 4
In2013:r = - 0. 32,
where rindicates the correlation coefficient judged from the choiceinitially made and satisfies the supposition we presented
related to its value different from zero.
In order to judge statistically the importance of the relation of these two indicators, should be estimatedthat even the
correlation coefficient of the popularity is different from zero.
In order to make possible the judgement of our hypothesis, we will base on t-student spread test presented below.
Hypothesis can be presented in statistical way as below:
H0: ρ=0
H1: ρ≠0
24
Where ρ indicates the correlation coefficient of the population related to the case above mentioned. The verification of each
hypothesis will be made for each year been studied.
𝑛−2
Using student testt = 𝑟√ , wherenis the number of economic units we are studying, it results that:
1−𝑟 2
44−2
In 2011 the value of this student test is:t =−0. 35√ =-2. 41
1−0.352
44−2
In 2012the value of this student test is:t = −0. 40√ =-2. 83
1−0.402
44−2
In 2013the value of this student test is:t = −0. 32√ =-2. 18
1−0.322
From the charter of student spread, the critic value of the criteriat = ± 2. 021, with 42 free levels and 0. 025 probability.
Comparing the values for each year with the critic value of the criteria, it is judged that H1 is evidented in three cases, thus
giving the right to defend our assumption about the relation of two indicators of Altman Z-Score and Quick Test Kralicek.
The verification of this hypothesis is very important for the analysis of these indicators and the results extracted from them
related to the financial state of the economic units. Understood in this waythat they strengthen each other in the reached
conclusions.
5. Conclusions
The economic units continually seek ways to remain competitive in market, however, the risk of failure in achieving the
rising requests of economic contemporary activity is present and threatening than ever. The failure of an economic unit
appears in the form of bankruptcy.
In recent decades, the phenomena of economic units bankruptcy or the impossibility to accomplish liabilities, has let the
whole academic world in concern. The bankruptcy of an economic unit is a multidimensional state with chain reactions
about economy and society in general. When the liability problems include some of the financial institutions and economic
units and even the consumer itself, the credit risk is the main threaten of global economy. Through the successfully use of
Altman Z-Score and Quick Test Kralicek, in this study, there is given a clear idea about the financial state of the economic
units taken as samples, the degree of risk and paying impossibility that affects each of them, therefore making a correct
positioning of them in market.
Our hypothesis had to do with two important cumulative indicators in judging the state of an economic unit: the Altman Z-
Score and the Quick Test Kralicek Test. Taking into consideration our sample made up of 44 economic units, through
simultaneous use of Altman Z-Score and Quick Test Kralicek, was reached an important conclusion: both these indicators
give the same opinion about the financial state an economic unit is being, classifying it in this way in groups with different
risk degrees.
Moreover, it is to be emphasized that despite the field an economic unit is operating in, despite the value of its activities,
name and power in market, there exists a factor which plays an important role in determining the final value of the economic
unit, the risk. The lower the risk in economic units is, supposing that all other factors remain unchangeable, the higher the
determined value will be.
In practical aspect, the evidence existing between two important judging models, Altman Z-Score and Quick Test Kralicek,
their role in predicting bankruptcy and paying difficulties is a tool that is given to the runners of economic units. Through
the use of these models, these runners will be able to predict on time the paying difficulties and eliminate bankruptcy.
25
If in Altman Z-Score model there were to be added more economic units, bankrupted or not, will bereached at much more
complete conclusions as we suppose there would be included more financial reports in the model which in turn would raise
the predicting ability of bankruptcy. What is more, the use of a different method of statistical analysis would mean an
identification tool of the results of this model.
6 References:
[1] Altman, E. I. , (2000), “Predicting financial distress of companies : Revisiting the Z score and ZETA Models”.
This paper is adapted and updated from E. Altman, “Financial Ratios, DiscriminantAnalysis and the Prediction
of Corporate Bankruptcy, ” Journal of Finance, September 1968; and E. Altman, R. Haldeman and P.
Narayanan, “Zeta Analysis: A New Model to Identify Bankruptcy Risk of Corporations, ” Journal of Banking &
Finance, 1, 1977.
[2] Altman, E. (2010). “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy”. The
Journal of Finance, Vol. 23, No. 4 (Sep. , 1968), pp. 589-609.
[3] Anderson, K. & Mc Adam, R. (2004)“A critique of benchmarking and performance measurement. Lead or
lag?”. Benchmarking: An International Journal, Vol. 11, No 5 pp. 465-483
[4] Beaver, W. , (1966), “Financial Ratios as Predictors of Failure, Empirical Research in Accounting”: Selected
Studies 1966, Journal of Accounting Research 4, pp. 71-111.
[5] Damodaran, A. ( Spring 2005). “An Introduction to Valuation”, John Wiley and Sons, New York.
[6] Gilson, Stuart C. , Hotchkiss E. S. and Ruback R. S. , (2000), ‘’Valuation of Bankrupt Firms’’, Review of
Financial Studies, Vol. 13, No 1, pp. 43-74.
[7] Healey, J. (2009), “The Essentialof Statistics: A Tool for SocialResearch”, Eighth Edition, Wadsworth,
Cengage Learning.
[8] Kralicek, P. (1993) “Základy finančního hospodaření”. Přeložil Josef Spal. Praha: Linde Praha, ISBN 80-
85647-11-7.
[9] Kralicek, P. (2007). Eine Probe-Excel Auswertung im pdf-Format, Ertrags- und vermögensanalyse (Quicktest),
http://www. kralicek. at/index. php?gr=-302, access: December 12th, 2013.
[10] Kralicek, P. , (2013). Unternehmensberatung Prof. Kralicek [online]. [cit. 2013-03 03]. Availableathttp://www.
kralicek. at/index. php?gr=-301.
[11] Odipo B. K. , A. S. Itati, (2011), “Evaluation of Applicability of ALTMAN'S Revised Model in Prediction of
Financial Distress: A Case of Companies Quoted in the NAIROBI Stock Exchange” , pp. 1-39.
26
Correlation of Ethical Conduct within an Organisation with the Absence of Employees from
Work
Jernej Buzeti
Faculty of Administration, University of Ljubljana, Slovenia
jernej. buzeti@fu. uni-lj. si
Maja Klun
maja. klun@fu. uni-lj. si
Janez Stare
janez. stare@fu. uni-lj. si
Abstract
The working environment of an organization in which employees perform their activities is a social system. It creates certain
employee attitudes that are greatly influenced by the organisational or working culture and norms and the work ethics they
define. The latter is actualised in certain organisational rules and standards and the manners and methods of employee
communication and conduct. All aspects of conduct are relevant to employees, as behaviour directly influences the
development of an (in)appropriate attitude to norms and working culture and, consequentially, also to absence of employees
from work. Ethical conduct of employees is closely linked to the “strength” of the work ethic in an organisation and an analysis
of studies shows that this is important also from the perspective of employee absence. This fact is confirmed by numerous
studies that explain the statistical relationship between work ethics and employee absence. The INODEL study also used
certain questions to establish the moral-ethical relationship of employees in Slovenia to medical absenteeism. On the one
hand, the study checked whether employees ever abused sick leave and to what extent. On the other hand, the study sought
to establish whether employees showed a moral-ethical attitude to work and performed their duties despite the fact that they
could have been absent from work due to illness, injury or care for a family member. This article therefore presents certain
results of the INODEL study that was performed among employees in the Republic of Slovenia.
Keywords: absenteeism, organizational culture, work ethic, ethical conduct
1. Introduction
An organisation is a social formation of persons (employees) and in every social system there are daily relationships
between employees that give rise to various behaviours that can, firstly, influence the workplace mood and motivation of
employees, or secondly, hinder employees in their work or create negative emotions that can result in improper behaviour.
Employee behaviour is influenced by different stimuli occurring in the external environment. Employees detect
environmental influences and respond to them with their organisms. Such employee reactions to environmental stimuli and
resulting behaviour differ widely. It is, however, a fact that the behaviour of an individual is substantially influenced also by
their convictions regarding what is right and wrong (evil), what is allowed and prohibited.
The conduct of employees in a work environment is greatly dependent on personal and organisational values that influence
the culture of behaviour or the (un)ethical conduct of employees. Musek (1993) believes that values serve as »a kid of
signpost for morality and ethics«. Moorhead and Griffin (1998) explain that the ethic of an individual is their personal
27
conviction on what is right and wrong or what is good and what bad. Cummings and Worley (2001) believe that ethics
represent the standards of desired conduct of employees in a certain area.
Rubin et al. (1994) explain that work ethics of employees are an important social stimulus for the creating an in-group. Work
ethics can be defined as a collection of values and behaviour related to the work place that people feel are moral. In general,
work ethics are called strong if they feel that they have to fulfil all the formal responsibilities that come with a job, and called
weak or low if people are more tolerant to the fulfilment of formal responsibilities.
Ethical conduct in an organisation, which also represents the state of affairs and degree of organisational culture, 1 is tightly
linked also to employee behaviour with regard to employee conduct in choosing whether to be absent from work and the
reasons for such an absence.
There are a number of definitions of absence of employees from work or so-called absenteeism and different authors use
different 2 scopes to interpret the dimensions of absenteeism. Savery et al. (1998, p. 315) feel that absenteeism is defined
as the absence of an employee from work. Yet they do not accurately state the type3 of absence in question. A similar
stance is adopted by Eggert (2009), who emphasises that absence from work is linked to the lack of presence of an
employee at work at a time when work is available. Lokke et al. (2007, p. 19) explain absenteeism as »a lack of physical
presence of an employee at a certain location and in a time when social expectations dictate that the employee would be
present at that location and at that time«. Briner (1999, p. 875) sees absenteeism simply as absence of an employee from
work, but believes that it is very difficult to explain such an occurrence due to its complexity.
Employees can be absent from work voluntarily, but also involuntarily, meaning that their reasons for absence may be
made up or wilfully fake. Such a view of absenteeism is linked to »black absenteeism«, which Sanders (2004, p. 138) and
Van Dierendock et al. (2002) see as the form of absence from work that negatively influences the conduct of employees in
an organisation as it is defined as an »anti-cooperative« form of behaviour.
The conduct of employees within an organisation is monitored, seen and felt by other employees, particulary in cases of
unethical conduct. Evans and Palmer (2000) also emphasize certain perspectives that arise from the working environment
and represent a potential cause for the absence of employees from work. Such perspectives include the factor of work
culture and norms and the related aspect of work ethics.
The manner of conduct present in an organisation or among employees in an important factor as it can decisively influence
the behaviour of an entire group. Employees 4 naturally receive certain queues on how to behave and what behaviour is
acceptable in the organisation from their peers. People can quickly establish which rules must be observed in practice and
which can be ignored. Such conduct of employees is also the result of norms and working culture or ethics in an
organisation, and it also influences decisions of employees regarding their absence from work. This is confirmed by Evans
and Palmer (2000) who believe that the influence of norms present in an organisation is linked to the absence of employees
from work. They emphasise that the development of norms or appropriate behaviour is not influenced only by words, but
also by actions, particularly those of the management staff. This is shown also in the case of absence of employees from
work. If certain absences of employees were overlooked in the past and not treated appropriately by the management,
there is a high probability that such absences will continue in the future.
Further confirmation is seen in the study of Prottas (2008, p. 318), who emphasises the importance of the role of leaders
in ethical conduct in organisations or construction of appropriate “standards” of conduct of leaders and employees as it is
clear that the lowering of criteria or level of admissibility and appropriacy influences further conduct of employees.
1 Organisational culture is a pattern of convictions and expectations of the members of an organisation and it sets out the norms that
guide the behaviour of employees and groups within that organization (Fitzgerald and Desjardins, 2004). Organisational culture is a
complete system of norms, values, ideas, convictions and symbols that set out the manner of behaviour and response to the issues of
employees, thereby shaping the incident form of the organisation (Rozman et al., 1993).
2 Allebeck and Mastekaasa (2004, p. 28) explain that employee absence is studied by a number of sciences including medicine,
sociology, psychology, economics and organisation from their respective viewpoints.

3 Definitions can be understood very generally as it is not clearly decided whether absence is a result of annual leave, health issues, etc.
4 We believe that new employees seek rapid acceptance by their colleagues and accordingly adapt their behaviour at least partly, if not
in whole, to the behaviour present among employees in the relevant organisation. Such behaviour depends on the norms and the
organisational and working culture present in the organisation.
28
The role of ethical conduct of employees in an organisation is not important only due to the fact that it showcases the
appropriate level of culture in that organisation and serves as a model of appropriate behaviour, but also due to the fact
that studies 1 show the correlation between the ethical conduct of employees and employee absence.
A study carried out by Van Yperen et al (1994) established that a stronger (more strict) work ethic in an organisation results
in a lower absence of employees from work. A similar result was observed in the study of Sanders (2004, p. 1145-150)
which showed that a stronger (more strict) work ethic 2 in an organisation (group of employees) lowers the rate of short
absences of employees from work. These two variables are also linked to the cohesion of teams in the organisation. Results
therefore show that work ethics are an important determinant in the creation of cohesion among employees and may
influence employees to reduce their absence from work since their high ethical standards may lead them to be
uncomfortable and reduce absences. The study of Guerts (1991, p. 385-398) et al showed that in a group of bus drivers
with strong cohesion and connections between group members perceived absence from work as strongly undesirable and
inappropriate. This was the reason for group members to avoid absence from work as a sign of respect, honesty towards
each other and strong cohesion.
The study of De Boer (2002, p. 181-197) et al focused on the connections between »unfairness«3 at work and absence
from work. The starting premise of the study was that a sense of unfairness at the workplace has an important role in the
conduct of employees at work. Prior to carrying out their own research, the authors reviewed other studies and found that
a detection (sense) of fairness and correctness of employees at work is linked to less frequent absences from work in
comparison to those employees that sense relative unfairness in their workplace. Results of the study showed that
perceived unfairness at the workplace influences the health of employees and has a direct influence on the absence of
employees from work. The study also showed that a sense of unfair treatment at the workplace influences the development
of psychosomatic illnesses.
Employees often look up to their direct superior and in the course of his study, Prottas (2008, p. 313-322) researched
whether there is a link between the absence of employees from work and detection of (un)ethical conduct of the direct
superior4. Results of the study showed that there is a negative correlation between the perception of improper behaviour of
direct superiors and stress, poor health and absence of employees from work. Based on the results of studies of correlations
between ethical conduct in an organisation and the absence of employees from work we can see that if standards of the
culture of conduct and work ethics in an organisation are low, this can be reflected in a high degree of absence of employees
from work which, in the opinion of Gardiner (1992, p. 290), is one of the most common issues management has to deal
with.
The article thus has the following goals: (a) to present the importance of ethical conduct of employees in managing
employee absence; and (b), to present results of the INODEL in the section related to establishing whether employees
have abused absence from work to stay at home even though they were able to work. The fundamental purpose of this
article is to use theoretical and empirical results to show the correlation between ethical conduct of employees and absence
from work.
Two hypotheses were developed from the goals and purpose of the study, as follows:
• H1: Over 20 percent of employees that took part in the study were absent for medical reasons in the last 12
months, even though they could have performed their work.
• H2: In the last 12 months, over 50 percent of employees that took part in the study continued to perform their
work even though they experienced injuries or illnesses that could enable them to gain medical leave, because
they felt and knew that is appropriate for them to continue working.
1 See studies Prottas (2008), Sanders (2004), Fitzgerald and Desjardins (2004), Martoccio and Jimeno (2003), De Boer et al. (2002).
2 Sanders (2004, p. 139) defined work ethics as »the entirety of values and knowledge at the work position where people feel
responsibility, morality and respect. Work ethics are strong if people feel they need to fulfil all formal work related responsibilities. Work
ethics are weak/low if people are more tolerant towards fulfilment of formal work related responsibilities.”
3 Fairness at the workplace was interpreted as a combination of certain convictions and the sense of employees that their benefits
(effects) in the work process are fair and correctly realised with regard to fulfilled criteria (fulfilled work tasks and other obligations).
4 »Perceived Behavioral Integrity« (PBI) was intepreted by Prottas (2008) as a type of employee perception in which the actor (e.g.
leader) behaves in a manner consistent with his/her statements regarding the observation of values, priorities, expectations and style of
leadership.
29
• H3: There is a correlation between a fair attitude of management personnel and the number of days of employee
absence.
The structure of the present article first presents the aspect of the correlation of ethics in the working environment or ethical
behaviour of employees and employee absence. The second section of the article presents the results of the INODEL study
pertaining to the aspect of ethical conduct of employees (abuse of medical leave, assessment of honesty of management
personnel by employees, etc. ). In the final section, the authors provide their view of the impact and role of ethical behaviour
or culture of conduct in a working environment with regard to absence of employees from work.
2. Methods
The INODEL1 project included two studies that researched several2 areas. One of these areas was the area of health
absenteeism with particular emphasis on the aspect of ethical behaviour of employees. The target group of the study
consisted of employees employed in Slovenian organisations. Data collection was performed using the CAWI3 method and
a questionnaire filled out by all subjects invited to participate in the study via an electronic invite. Here we present some of
the results of the first study.
Data collection was carried out from September to October 2011. The final sample consisted of n = 774 respondents with
the following demographic characteristics:
• 47% female and 53% male
• 0. 4 % of the sample completed compulsory education or less, 44% completed high school or vocational school
and 55. 6% completed higher education.
• Over 23% of participating employees were aged between 41 and 45, followed by 22% of participants aged 46
to 50. The smallest group of participants was aged up to 25 (1. 3%), followed by ages 26 to 30 (6. 1%) and over
56 (7%).
• Measurements of health related absenteeism were performed using the same method as Ybema et al. (2010,
p. 113) namely employees were asked two questions:
• how many days over the last 12 months were you absent from work due to health related reasons;
• how many times over the last 12 months were you absent from work due to health related reasons;
Measurements of abuse of medical leave (unethical behaviour) by employees were carried out using a question we
developed ourselves. The question was posed as follows: »Were you absent from work for health related reasons over the
last 12 months although you could have performed your work?« with a possible reply of “yes” or “no”.
Within the scope of ethical behaviour we were also interested whether employees were present at work although they could
have claimed medical leave due to illness or injury. This was established using the question »Have you in the last 12 months
been present at work in spite of injuries or illnesses, because you felt the work had to be done?” with a possible reply of
“yes” or “no”.
1 The main goal of the INODEL project was to “provide recommendations based on a dialog between social partners, actual working
practice and scientific knowledge to provide social partners and policy implementors with an appropriate base for improving the state of
affairs in the studied area. This would create greater awareness on the impact of the studied issues among the internal and external
public, help reduce employee absence, contribute to employment and retaining of good employees, prevention of burnout in the
workplace and aid in raising awareness of the importance and role of the family and its role in maintaining mental and physical health at
work.”
2 The study included the areas of stress and burnout in the workplace, health related absenteeism, fluctuation and coordination of
professional and family life.

3 »Computer assisted web interview«
30
Studying or measuring how employees perceive the honesty of management personnel was carried out using a question
from the JSS (Job Satisfaction Survey) questionnaire of author Paul E. Spector. The original JSS questionnaire includes
36 questions divided into 9 areas (sections) used to establish job satisfaction. In our work on the present article we used a
single question from the “management” section of the JSS questionnaire. The question used was »My superior is unfair
towards me. «
In subsequent sections, the article first presents general data collected by studies within the INODEL project, and then
presents results of the study of (un)ethical employee behaviour in the sense of abuse of medical leave and the correlation
between the assessment of management personnel fairness by employees and absence of said employees.
3. Results and Discussion

The study aimed to verify or establish the state of affairs of employee absence and its correlation with factors that define
the aspect of ethical behaviour of employees in their working environment.
Chart 1 presents the percentage of employees who were absent in the last 12 months. Results show that 48. 5 of employees
participating in the study were not absent from work in the last 12 months. Just over 33 percent of employees were absent
for 1 to 10 days. 6. 6 percent of participating employees were absent for over 30 days. 1 Just over 33 percent of employees
were absent for 10 to 30 days.
In the last 12 months absent from work more

6,6
than 30 days.
In the last 12 months absent from work
11,3
between 10 and 30 days.
In the last 12 months absent from work
33,6
between 1 and 10 days.
48,5
In last 12 months not absent from work
0 10 20 30 40 50 60
%
Percentage of absence from work (%)
Chart 1: Days of absence of employees from work over the last 12 months
Chart 2 shows that the majority of those absent in the last 12 months, were absent once. This accounted for 28 percent of
absences. Just under 13 percent of participants were absent twice. 5. 5 percent of participating employees were absent
four or more times.
1Any absence over 30 days in the Republic of Slovenia means a financial cost for the Health Insurance Institute of Slovenia. Absences
up to 30 days are a cost for the employer. Results of the study show that employers took on the financial cost of remuneration due to
absence from work for just under 45 percent of employees who took part in the study and were absent for between 1 and 30 days.
31
More than eight times 0,4

Six times 1,6
Five times 1,2
Four times 2,3
Three times 5,4
Twice 18,8
Once 27,9
0 5 10 15 20 25 30
%
Percentage of absence from work (%)
Chart 2: Frequency of absence of employees from work over the last 12 months
The study aimed to establish the moral and ethical attitude of employees to absence from work and whether employees
“abused the option of medical leave/absence”. Results in Chart 3 show that 9% of employees were on medical leave in the
last 12 months although they could have performed their work. This result shows that there is a certain percentage of
employees that for various reasons abuse the option of absence from work. On the one hand, such conduct (1) shows
unethical behaviour and sets a poor example, while on the other hand (2) risking that such behaviour will be punished as it
is not in accordance with the ethical attitude of employees.
No 91
Yes 9
0 20 40 60 80 100
%
Were you absent in the last 12 months although you could have done your work?
Chart 3: Abuse of medical leave in employees

The study also sought to establish whether employees performed their work in spite of illnesses or injuries that were in fact
sufficient grounds for medical leave. Results in Chart 4 show that 75% of employees in the last 12 months performed their
work in spite of injuries or illnesses that would warrant medical leave. The result can be interpreted in two ways, firstly as
positive, as it shows moral and ethical responsibility/conduct of employees, and secondly as worrying as it shows signs of
“presentism”. 1
1Presentism is a form of behaviour shown in employees coming to work in spite of illnesses or symptoms (malaise). The poor medical
condition of such employees can in such cases be transferred to their colleagues (other employees), causing them to fall ill. Studies
have shown that presentism is becoming more and more common. In the long term, presentism actually presents a greater financial
cost than absentism.
32
No 24,9
Yes 75,1
0 10 20 30 40 50 60 70 80
%
Have you in the last 12 months been present at work in spite of injuries or illnesses,
because you felt the work had to be done?
Chart 4: Performance of work in spite of illness or injury

The INODEL study researched the correlation between employee absence and their job satisfaction. Employee job
satisfaction was measured using the JSS methodology tool. The “management” section of the study included the question
“My superior is unfair towards me. «Results of this question showed that over 95% of those who were not absent from work
felt that their superior was fair towards them, as did the majority of those absent between 3 and 30 days and even those
absent for over 30 days.
In spite of this, statistical analysis shows that the variables “days of absence due to medical reasons” and “my superior is
unfair towards me« have no correlation. That is why with a 5 percent risk we cannot state that there is a correlation between
a fair attitude of management personnel and the number of days of employee absence. Such results regarding correlation
therefore do not confirm the results of the study of De Boer et al. (2002, p. 181-197) which showed that a honest relationship
with management personnel is reflected in a lower rate of employee absence. Honesty is one of the components of ethical
behaviour.
Verification of hypotheses posed by the study shows the following:
• H1: Over 20 percent of employees that took part in the study were absent for medical reasons in the last 12
months, even though they could have performed their work.
Results of the study show that in a random sample over 20 percent of participants were absent for medical reasons in the
last 12 months, even though they could have performed their work. The hypothesis is therefore not confirmed since
statistical analysis shows 9 percent of such employees.
To test our hypothesis, we set the zero hypothesis H0 : P=0. 2 against alternative hypothesis H1 : P > 0. 2. The sample
share = 9 % (see Chart 3) was used to calculate the value of Z – 3. 84. The appropriate P value is 0. 99994, which is higher
than the risk rate of 0. 05. Accordingly, the zero hypothesis is kept and the alternative hypothesis is not confirmed. With a
5 percent risk we can therefore not state that the share of employees who were absent for medical reasons in the last 12
months, even though they could have performed their work, is greater than 0. 2.
• H2: In the last 12 months, over 50 percent of employees that took part in the study continued to perform their
work even though they experienced injuries or illnesses that could enable them to gain medical leave, because
they felt and knew that is is appropriate for them to continue working.
• To test our hypothesis, we set the zero hypothesis H0 : P=0. 5 against alternative hypothesis H1 : P > 0. 5. The
sample share = 75. 1 % (see Chart 4) was used to calculate the value of Z – 5. 80. The appropriate P value is
3, 2 * 10-9 , which is lower than the risk rate of 0. 05. Accordingly, the zero hypothesis is rejected and the
alternative hypothesis is confirmed. At a 5 percent risk we can therefore state that the share of employees who
in the last 12 months continued to perform their work even though they experienced injuries or illnesses that
could enable them to gain medical leave, is greater than 0. 5.
• H3: There is a correlation between a fair attitude of management personnel and the number of days of employee
absence.
33
• To test our hypothesis, we set a zero hypothesis H0: the variables »days of medical leave« and »my superior is
unfair to me« anre independent towards the alternative H1 between variables »days of medical leave« and »my
superior is unfair to me«.
Sample assessments for Kendalls Correlation and Spearman Correlation (τ = 0. 036, rs = 0. 042) show that there is no
correlation between the variables. Results were verified with statistical tests for both coefficients which showed that the
variables indeed do not have any statistically significant corellation (p values: Kendalls, 249, Spearman, 248). This means
that the zero hypothesis on the lack of correlation between the variables “days of absence due to medical reasons” and
“my superior is unfair towards me« cannot be rejected, so the alternative cannot be confirmed. At a 5 percent risk we
therefore cannot state that there is a correlation between a fair attitude of management personnel and the number of days
of employee absence.
4. Conclusions
Organisational culture and its building blocks of norms and values is one of the most important constructs that influences
the ethical behaviour of employees in an organisation. The latter is important as it provides answers on how to be and how
to act. These issues are not merely external, so the issue of shaping and following work ethics and consequential ethical
conduct of employees in an organisation is very important indeed. Employees in a working environment quickly percieve
and accept a culture of conduct/behaviour and are often quick to adapt to it. For the purpose of this article, such an attitude
is relevant also because if the culture of conduct/behaviour of employees pertaining to absence from work is such, that
employees are often absent without justification or even abuse medical leave, and such behaviour is tolerated (e. g. the
management shows no interest in attempting to reduce employee absence), such behaviour will be adopted by the majority
of employees. Accordingly, it is very important that organisations establish an appropriate work ethic that provides for
sanctions in case of inappropriate employee behaviour.
The influence of work ethics and consequential ethical conduct of employees is a correlate that is through its consequences
shown also in the form of employee absence. Many studies have shown that a stronger (more strict) work ethic in an
organisation results in a lower absence of employees from work. The results presented here are related to the aspect of
(un)ethical conduct of employees in relation to medical absenteeism. Research performed within the INODEL study showed
that at least 9 percent of participating employees have abused medical leave in the sense that they were able to work, but
did not. This shows an (un)ethical attitude of employees and signals organisations that they need to pay more attention to
work ethics and organisational culture. The result was no surprise - quite the opposite. It could be expected and we presume
that many of our participants actually did not dare to answer that they previously abused their medical leave.
Results of the INODEL study also showed that the employees’ perception of their management having an honest attitude
towards them is in fact not reflected in a lower rate of employee absence, since the study did not show any statistically
significant correlation. In spite of that fact, we found that over 95% of employees who were not absent from work in the last
12 months confirmed that their superior was fair to them. This result shows that employees perceive honesty as a positive
thing which in turn results in a lower degree of absence, bringing direct financial gains to the organisation.
Based on the results presented above we can see that work ethics and an appropriate organisational culture do influence
- increase or reduce the rate of employee absence.
References
[1] Allebeck, Peter & Mastekaasa, Arne. (2004). Causes of sickness absence: research approaches and exlanatory
models. Scandinavian Journal Public Health, 32 (63), 36-43.
[2] Briner, Rob B. (1999). Absence from work. BMJ – Education and debate, 15, 873 – 879.
[3] Cummings, G. T. & Worley, G. C. (2001). Organizational Development & Change (7th ed. ). Ohio: South - Western
College Publishing.
34
[4] De Boer, E. M. , Bakker, A. B. , Syroit J. E. & Schaufeli, W. B. (2002). Unfairness at work as a predicator of
absenteeism. Journal of organizational behavior, 23, 181-197.
[5] Eggert, Max A. (2009). Absence Management Pocketbook. Management Pocketbooks LTD, Alresford.
[6] Evans, Alastair & Palmer, Steve (2000). From absence to attendance. Chartered Institute of Personnel and
Development – CIPD House, London.
[7] Fitzgerald, G. A. & Desjardins, N. M. (2004). Organizational Values and their relation to organizational perfomance
outcomes. Atlantic journal of communication, 12 (3), 121-145.
[8] Gardiner, Richard C. (1992). Tracking and Controlling Absenteeism. Public Productivity & Management Review, 15
(3), 289-307.
[9] Guerts, s. , Bunk, A. P. , & Schaufeli, W. B. (1991). Absenteeism seen from a social comparison perspective. Gedrag
& Organisatie, 4, 385-398.
[10] Løkke, Ann-Kristina, Eskildsen, Jacob K. , & Jensen, Troels Wendelboe (2007). Absenteeism in the Nordic countries.
Employee Relations, 29 (1), 16-29.
[11] Martocchio, Joseph J. , Jimeno, Diana I. (2003). Employee absenteeism as an affective event. Human Resource
Management Review, 3, 227 – 241.
[12] Moorhead, G. & Griffin, R. W. (1998). Organizational behavior: managing people and organizations. Boston: New
York: Hougton Mifflin.
[13] Musek, J. (1993). Znanstvena podoba osebnosti. Educy d. o. o. , Ljubljana, 1993.
[14] Prottas, David J. (2008). Perceived Behavioral Integrity: Relationships with Employee Attitudes, Well-Being, and
Absenteeism. Journal of Business Ethics, 81, 313–322.
[15] Rozman, R. , Kovač, J. & Koletik, F. (1993). Management. Gospodarski vestnik, Ljubljana.
[16] Rubin, J. Z. , Pruitt, D. G. & Kim S. H. (1994). Social Conflict: Escolation, Stalemate, and Settlement. McGraw-Hill,
New York, NY.
[17] Sanders, K. (2004). Playing truant within organisations: informal relationships, work ethics and absenteeism. Journal
of managerial psychology, 19 (2), 136-155.
[18] Savery, Lawson K. , Travaglione, Anthony & Firns Ian G. J. (1998). The links between absenteeism and commitment
during downsizing. Personnel Review, 27 (4), 312-324.
[19] Van Dierendonck, D. , Pascale, M. & Van Breukelen, W. (2002). Supervisory behavior, reciprocity and subordinate
absenteeism. Leadership & Organization Development Journal, 23 (2), 84-92.
[20] Van Yperen, N. W. , Hagedoorn, M. & Guerts, S. A. (1994). Withdrawal of employees: leaving and absenteeism as a
raaction to unfairness. Gedrag en Organisatie, 7, 5-19.
[21] Ybema, Jan F. , Smulders, Peter G. W. & Bongers, Paulien M. (2010). Antecedents and consequences of employee
absenteeism: A longitudinal perspective on the role of job satisfaction and burnout. European journal of work and
organizational psychology, 29, 102-124.
35
Crucial Importance of Work Productivity in the Conditions of a-Typical Employment
Małgorzata Dobrowolska
Silesian University, Institute of Psychology, Faculty of Work and Organisational Psychology
malgorzata. dobrowoska@us. edu. pl
Abstract:
Work productivity is of crucial importance to all employers regardless of what solutions they use, traditional or flexible ones.
Most human resource management programs are oriented on HR tools that are favourable for employee efficiency, and hence
on organizational effectiveness and productivity. When examining different psychological variables that are relevant in
psychology of work and organization, popularity and productivity prove to be vital, since this variable correlates with all the
remaining psychological dimensions due to continuous and intensive search for ways to improve efficiency in the work place.
This article presents the results of the research carried out on n=2118 a-typical employees.
Keywords: work productivity, a-typical employment, praxeology
Introduction
Each time in case of assessment of performance, regardless of measurement applied, efficiency, effectiveness,
performance, productivity, or other praxeological differentiators, the intention of management specialists is the same -
improvement of work performance.
Analysis of productivity may concern individual effects of work - an individual employee, a team of employees, that is
employee group, an organizational unit - a section, a department, an organisation as a whole. Work assessment systems
allow for measurement of the above factors taking into account flexible forms of employment (compare: Dobrowolska,
2014), organisational effects are the outcome of actions of specific units, as well as non-organizational factors such as a
modification of legal regulations, crisis, cataclysm. Work effects may be quantitative and qualitative, social, organizational
and may even be analysed from the perspective of an entire company. Undoubtedly organisations that use traditional and
non-traditional employment models face the same problems related to work productivity.
Presentation of the author's research

The respondents were n=2118 people working in 9 flexible forms of employment: substitute work in accordance with Article
25 Point 1 of the Labour Code; temporary employment as understood by the Act on employment of temporary employees
as from 9 July 2003 (Journal of Law 03. 166. 1608); self-employed, self-employment as understood by the Act 2 July 2004
on freedom of economic activity; teleworking in accordance with Article 675 and following of the Labour Code; employment
for a specified period of time in accordance with Article 25 Point 1 of the Labour Code; employment in part-time work in
accordance with Article 292 Point 1 of the Labour Code; work under a civilian-legal agreement on the basis of the freedom
to contract i. e. Article 3531 Point 1 of the Civil Code; seasonal work in accordance with Article 25 Point 1 of the Labour
Code; employment in the social economy, which includes: social co-operatives, cooperatives, cooperatives of the disabled
and the blind, non-governmental organizations and entities listed in Article 3 Section of the Act from 24 April 2003 on public
benefit and voluntary services (Journal of Law dated 29 May 2003 as amended).
Among 2118 respondents, 44% are women and 56% are men. Due to the number o the respondents it can be concluded
that the analyses sample suggests lack of a visible disproportion between men and women with respect to flexible forms
of employment.
Flexible employees have been divided into 9 professional groups, each of them with more than 200 people. The featured
groups were as follows: 12. 1 % working for a specified period of time; 13. 2% working part-time; 10. 7% working on
36
contract; 10. 3% of the self-employed; 10. 4% of teleworkers; 10. 4% working under a substitute work contract; 12. 4% of
temporary workers; 10. 0% of seasonal workers; 10. 5% of the employed in the social economy.
The respondents were adults of different ages, although all the respondents were in the so-called age a professional
activeness, working age from 18 to 60 years for women and up to 65 years for men. 7% of the respondents were 18- 24
years old. The largest group - 42% are persons aged 25-34. 34% of the respondents are 35 to 44 years old. Another 12%
of the respondents are between 35 -44 years, while 5% of the respondents were 55-65 years. An average age in the
analysed group was 36, and the median was 35 years. The youngest respondent was 18 years old, and the oldest 65 years
old. The distribution of results in the Polish sample of the tested fits fully into the European characteristics of flexible
employees, which describes them as rather young, with an average period of employment in an organization - less than
five years (Nollen, 1996).
Flexible employees who took part in the research are well-educated. More than half of the respondents (56 %) holds a
university degree. Quite a large group of the respondents - 34% are people with secondary education. 6% of the
respondents has a vocational education and only 4% of the respondents have primary education. Persons without any
education represent only 0. 3% of the sample. This is an interesting result in view of the fact that a social perception of
flexible employment is related to a stereotypical and pejorative image of this type of employment regarded as " junk one"
for poorly skilled ones. As it turns out, however, in majority of cases people involved in these forms of employment are well-
educated.
Seniority of flexible employees fluctuates between a few months and several decades (maximum 41 years), the average
was 8, 5 years. Seniority of the biggest number of the respondents is up to 5 years - 42. 6 %, the smallest number of the
respondents is of a considerable seniority, which also corresponds to the already mentioned European characteristics of
an average flexible employee (Nollen, 1996). Seniority was divided into 6 categories. The first group, up to 5 years, includes
42. 6% of the respondents and the second one from 6 to 10 years - 29. 8 %, the third from 11 to 15 years - 11. 0 %, in the
group of seniority from 16 to 20 years - 8. 9% of respondents, from 21 to 30 years - 5. 6% of the respondents and in the
last group above 31 years - only 2. 1 %.
In the majority of cases the researched flexible employees has had 2 - 3 employers so far (47 % ). 14. 6% of them have
worked in only 1 place of work. The remaining respondents have changed work more often. 28% of them worked for 4 - 5
employers, and 12% of them had more than 5 employers. The results show a relatively small migration between employers,
which might be expected in flexible employment.
Flexible employees who took part in the survey have worked under their current work contract for 5. 5 years on average. A
detailed distribution of responses with respect to the time categories is show on the chart below. Paradoxically, the highest
percentage are people working not only under short-term contracts, up to one year - 19. 3% and up to two years - 19. 0 %,
but also people with long-term employment relationship, more than 10 years. In the group from 2 to 3 years there is 12. 4%
of the respondents, in the group from 3 to 4 years - 8. 2% of the respondents, from 4 to 6 years 15. 0% of the respondents,
from 6 to 10 years 10. 6% of the respondents.
When it comes to location in the structure, the largest part of the respondents are subordinates (62 %). Flexible employees
are also specialists (29%), but less often managers (7%) or directors (2 %).
More than half of the surveyed flexible employees (54%) works in the private sector. 34% of the respondents is employed
in the public sector, and the remaining part is employed the social sector (12%). The private sector uses flexible employment
solutions much more often than the public one.
The biggest number of the respondents is employed in the public administration (31. 8%) and in the services sector (28. 5
%). The smallest number of the respondents works in health care (2. 3%) and education (9. 3%), 11. 3 % of the respondents
is employed in trade.
The variable work productivity is regarded as a subject-and- organizational determinant of behaviour of employees in non-
traditional employment. It was decided that the variable efficiency should be kept and intuitive measurements should be
applied while adding two questions measured separately by a total sum of results in a given question. The first question is
as follows:"I think that I have been working effectively", the second - "I believe that I am a good employee", which the
respondents answer using a scale from 1 (I do not agree) to 5 (I agree completely). The respondents working under flexible
37
contracts are generally regarded as effective employees. 88% of the respondents agree with the statement "I believe that
I have been working effectively", including 50% of the respondents who agree with it completely. 89% of the responders
consider themselves to be good employees, including 54% who agree with is completely.
While analysing the responses to the above questions, taking into account their forms of employment, one can see a
statistically significant correlation between these variables. Analysis of a correlation using Kramer's V showed a statistically
significant correlation between a form of employment and answers to the question "I believe I am an effective employee".
Value of the factor is 0. 108 and indicates weak correlation. The highest percentage of respondents who consider
themselves to be effective employees was observed in the following groups: the self-employed, individuals working part-
time, teleworkers and individuals working for a specified period of time. Whereas the lowest percentage of people who think
they are effective employees was to be found in the following groups:individuals working under a substitution contract,
individuals working under commission contract and temporary workers. Analysed results may be due to the specific nature
of employment conditions. For self-employment promotes efficiency, which is directly linked with the work results, which
translates into financial gratification. Relatively longer contracts in part-time work, individuals working for a limited period of
time or teleworkers and privileges of the Labour Code may translate into a level of work productivity. Whereas characteristic
for short contracts works without social securities carried out under commission contracts, temporary jobs and substitute
works are not beneficial for work productivity of employees.
Distribution of responses to the statement "I believe that I am a good employee" are similar the one obtained for the first
question. Also here the highest interest of individuals agreeing with this statement occurred in the following
groups:individuals working under a contract for a specified period of time, individuals working part-time and the self-
employed. While the smallest number of individuals who share this point of view was found in the following
groups:individuals working under commission contracts and substitution contracts.
Work productivity significantly correlates with sex, education, occupation, industry and marital status. No correlation was
obtained with the variables of age, sector, seniority, number of employers, duration of contracts, place of residence and
number of children.
Correlation analysis has shown that there is a relationship between a sense of productivity and sex. Kramer's V is 0. 098;
p<0. 01. Percentage of the respondents who consider themselves effective was higher among men (57%) than among
women (50%). Education affects the sense of effectiveness, too; Kramer's V = 0. 158; p<0, 001. In the group of the
respondents with education below secondary school the percentage of individuals claiming to be effective employees is
48. 8%. This is the lowest value in comparison to the remaining groups: among employees with primary education the
percentage was 51. 2 %, and among people holding a university degree it was 56%. Also, age significantly differentiates
responses concerning effectiveness (Kramer's V = 0. 170; p<0. 001). The highest percentage of the respondents convinced
of their productivity was observed in the group of professionals and free-lancers (55. 1%). In the groups of directors, CEOs
and business owners as well as technicians and civil service officials, trade and services workers the results are similar -
51 - 52 % believes that they are productive. The lowest percentage of people who claim that they are effective was found
in the group of workers - 47. 9 %. Statistically significant differences also occurred in the responses after taking into account
specific sectors (Kramer's V = 0. 172; p< 0. 001). The highest percentage of positive responses to the question concerning
productivity was found among heavy industry employees (63. 3%) and other sectors (60. 7%). A group of persons working
in the public administration and services are similar - 52% are considered to be effective. The lowest percentage of people
who think they are the effective employees occurred in the group of trade employees - 48. 6 %. There were also statistically
significant differences in the responses to the question on productivity in terms of the respondents' marital status, Kramer's
V = 0. 125, p<0. 001. The divorced or the widowed (56. 4%) consider themselves effective more often than the interviewed
married males and females (53. 7%) and maidens and bachelors (49. 9%).
Summing up, productive employees are those holding a university degree, holding top positions - CEOs, directors, business
owners, individuals representing industry, the divorced, the widowed and mainly women. Persons who consider themselves
to be good employees are mainly women (correlation with sex), persons holding a university degrees (correlation with
education), senior executives in the organization (correlation with the profession) and residing in big cities (correlation of
the place of residence).
Analysis of correlations shown that there is a relationship between conviction of being a good employee and sex. Kramer's
V is 0. 085; p<0. 05. Percentage of the respondents who consider themselves effective was higher among women (59. 2%)
38
than among men (55. 2%). Education affects significantly the responses of the respondents to the analysed question,
Kramer's V = 0. 155; p<0. 001. The higher education, the higher the rate of responders considering themselves good
employees. In the group of the respondents with education below secondary school the percentage of individuals claiming
to be good employees is 51. 2%. In the group of the respondents with secondary education the percentage is 53. 8%, and
in group of people holding a university degree = 59. 8%. There was also a statistically important correlation between
profession and a sense of being a good employee, Kramer's V = 0. 173; p<0. 001. The lowest percentage of people claiming
they are good employees was in the group of workers (52. 1% ). In the remaining groups this percentage is as follows:
directors, CEOs, business owners: 59. 0%; professionals and professional services (freelancers): 58. 6%; technicians and
civil service officers: 57. 4 %; employees working in trade and services: 55. 1%. The respondents' reaction to the analysed
question differ with respect to their place of residence, Kramer's V = 0. 116; p<0. 05. The biggest number of the respondents
who consider themselves good employees was observed among big city dwellers (60. 3% ). In small towns and villages
this percentage is lower (56. 5% and 52. 1% respectively).
Conclusion
Rapid development of flexible organizational solutions designed to primarily reduce labour costs involves changes in HR
policy and imposes employment of employees in non-traditions employment forms. Employees are therefore subject to
penalties, requirements and rules that are different from those described so far in literature of psychology of work. These
descriptions, as it has already been mentioned, are based on analyses of staff employed in traditional forms of employment,
colloquially referred to as the permanent ones, and therefore become useless in the new conditions. in this context doubts
are risen by every aspect of broadly understood psychology of work (cf. Dobrowolska, 2012).
References:
[1] Dobrowolska M. (2012). Employee and flexible forms of employment – a theoretical analysis and empirical
studies. Poland: Warsaw University Press
[2] Dobrowolska M. (2014). On the issues of employment flexibility. Research and conclusions. Poland: Difin
Press.
[3] Nollen, S. D. (1996). Managing contingent workers: how to reap the benefits and reduce the risks. New York:
American Management Association.
39
Financial Analysis and Bankruptcy Risk Identification Model Used by Companies Operating
in Poland – Empirical Study Results
Piotr Prewysz-Kwinto,
Department of Finance and Accounting, Torun School of Banking, Torun, Poland (e-mail: ppqq@poczta. onet. pl).
Grazyna Voss,
Department of Economics, Organization and Management, Faculty of Management, University of Technology and Life
Sciences, Bydgoszcz, Poland (e-mail: gvoss@wp. pl).
Abstract
Financial analysis and bankruptcy risk assessment models are applied to assess an economic position and to identify risks to
business activity. The assessment is conducted based on data from financial statements which in Poland can be prepared in
accordance with both domestic and international accounting standards. Bankruptcy risk identification models which based on
historical or prospective data allow identifying a probability of such an event started to appear in Poland a few years following
the political changes of 1989. Currently, there are over 15 models developed by different authors and described in detail in
the literature. The aim of this article is to present the results of an empirical study (survey study) on the application of financial
analysis and bankruptcy risk identification models which was conducted among the largest Polish companies. The study
results show that Polish companies apply tools of financial analysis to assess the economic position not only of their own
entity, but also competition and business partners, and bankruptcy risk assessment models developed according to and
adjusted to the Polish economic circumstances.
Keywords: financial analysis, bankruptcy risk identification models, financial statements, survey study,
1. Introduction
Changes in the capital structure and the passing of risk constitute reasons of conflicts between shareholders and other
stakeholders (Swanson, Srinidhi, Seetharaman, 2003). One can imagine a situation, in which shareholders strive to
increase the value of assets and thus influence the increase of unpredictability of company’s future position (Nowak, 2013).
For every entity the building of company values is inherently related to capital structure, and relationships between the two
have been the subject of interest of and studies conducted by many scientists. Such studies were already carried out in
1960s by F. Modigliani, M. H. Miller (Modigliani, Miller, 1958).
Nowadays, in the Polish economic reality one can often see attempts to apply synthetic measures to predict financial
problems. The majority of those attempts are directed at the use of Z-score models prepared and presented in western
countries. Such an approach, however, has limited application as those models have been developed in different economic
circumstances (Holda, Micherda, 2007). Models of financial risk assessment developed in one country cannot be applied
to another country due to differences in (Prusak, 2005):
• economies of specific countries,
• applicable accounting standards,
• access to information.
Similarly to other countries, in Poland there are models based on discriminant function which are useful to assess solvency
as well as bankruptcy risk. One of the first Polish models was developed by E. Maczynska (Maczynska, 1994). Currently,
there are more than 15 models used in Poland which have been developed by different authors.
To assess financial risks of Polish companies, ratio analysis is applied, and one of the first Polish studies in that respect
was conducted by D. Wedzki in 1997 (Wędzki 1997).
40
What is more, the assessment of company’s bankruptcy risk is a process, the objective of which is to determine a probability
of such an event in the future on the basis of historical and prospective data (Dorozik, 2006). The primary source of such
data is a financial statement.
The principles of preparing general purpose financial statements in Poland are stipulated in the Polish Accounting Act of
29 September 1994, with further amendments (The Accounting Act of 29 September 199). It should be indicated, however,
that since 2005 capital groups listed on the Warsaw Stock Exchange must prepare their financial statements in accordance
with IAS/IFRS (IFRS, 2014), which is related to the implementation of Regulation (EC) No 1606/2002 of the European
Parliament and of the Council on the application of international accounting standards to the domestic regulations. A
comparison of domestic and international legal regulations for reporting shows that the structure of financial statements as
well as the scope of data and revaluation method are not identical and thus provide information of different quality.
Nevertheless, financial statements prepared in accordance with both the Accounting Act and IAS/IFRS constitute the
primary source of information used for financial analysis and bankruptcy risk assessment.
The aim of this article is to present the results of an empirical study on the use of financial analysis and bankruptcy risk
identification models by the largest companies in Poland. It should be noted that the study conducted by the authors is the
first study of this sort carried out in Poland.
2. Description and methodology of the study

The largest companies in Poland were invited to participate in the study, and the sampling was purposive, not random.
There were 120 entities participating in the study, eighty of which were the companies listed on the Warsaw Stock Exchange
which composed two major indices, i. e. WIG-301 and WIG-502. The remaining 40 companies were selected from a list of
the largest Polish companies indicated in a summary list entitled Lista 500, prepared by the Polish weekly magazine Polityka
in 2014. The first 40 companies listed in the summary which were not stock-listed were selected for the study.
The study was conducted from 10 May 2014 to 20 June 2014 by means of a mail survey. The survey questionnaire which
was prepared and then sent out to the respondents consisted of two parts:
• the first part, the so called particulars, included first eight questions regarding basic information on respondents,
such as type of business activity, employment rate or capital structure;
• the second part included next nine questions on financial analysis and methods of bankruptcy risk assessment
as well as their application by the studied entities.
Questions in the questionnaire were closed-ended and open-ended. Some of them required only yes or no answer;
however, in most cases respondents were asked to select one answer or more from those available. If applicable and
justified, respondents could express their own opinions. Statistical methods, especially structure ratio, were applied for the
analysis of result.
3. Description of sample
Survey questionnaires were sent to 120 selected companies, thirty four of which returned completed questionnaires, which
constituted the response rate of 27, 5%. Seven questionnaires (20, 6%) were received from companies from WIG-30 index,
fifteen (44, 1%) from companies from WIG-50 index, and twelve (35, 3%) from non-public companies listed in the summary
of the largest Polish companies, Lista 500.
The decisive majority of the companies which returned completed questionnaires were capital groups (67, 6%) which
prepare consolidated financial statements (67, 6%) and which are listed on the stock exchange (64, 7%). There was also
an insignificant dominance of companies with solely Polish capital (58, 8%), employing over 250 people (55, 9%) and
1 WIG-30 – index of thirty largest companies on the Warsaw Stock Exchange. The constituents are selected based on two criteria:
capitalization and turnover.
2 WIG-50 – index of further fifty largest companies on the Warsaw Stock Exchange, following the 30 companies composing WIG-30.
41
conducting production (52, 9%) or (50, 0%) trading activities. Questions were mainly answered by chief accountants or
financial directors. Specific characteristics of companies participating in the study are presented in Table 1.
Table 1. Description of the sample
Characteristic N % Characteristic N %
Production 18 52, 94 Listed 22 64, 71
Stock exchange
Activity* Trade 14 41, 18 not listed 12 35, 29
Services 17 50, 00 solely Polish 14 41, 18
Capital
yes 23 67, 65 with foreign capital 20 58, 82
Capital group
no 11 32, 35 up to 250 people 15 44, 12
Employment
Financial Separate 23 67, 65 more than 250 people 19 55, 88
statements Consolidated 11 32, 35 up to 250 million PLN 14 41, 18
Sales revenue
* more than one answer possible more than 250 million PLN 20 58, 82
Source: author’s compilation based on survey results
While describing the sample, it should be underlined that only some entities which returned completed questionnaires
prepare their financial statements in accordance with international standards (IAS/ IFRS). It is 86, 4% of stock-listed
companies and 8, 3% of the remaining companies, among which capital group entities are dominant. As for the stock-listed
companies, it should be mentioned that they have a long-standing experience in applying international regulations to
prepare their financial statements. On average, the period of eight or nine years was indicated, which is directly related to
the 2005 introduction of obligation to prepare financial statements of companies listed on the WSE in accordance with IAS/
IFRS. Regarding other entities, the period of applying international regulations is much shorter – most often those
companies have prepared their financial statements in accordance with international regulations for two or three years.
4. Study results
The study started with determining what kinds of financial statements the analysed companies prepared. It was possible to
choose an answer from several options including the type of financial statements (separate and consolidated), preparation
standards (domestic and international) and frequency (annual, semi-annual, and quarterly). The results are presented in
Chart 1.
Chart 1. Financial statements prepared by the analysed companies
42
annual separate financial statements in accordance

41,2%
with domestic standards
annual separate financial statements in accordance
58,8%
with IAS/ IFRS
annual consolidated financial statements in
8,8%
accordance with domestic standards
annual consolidated financial statements in
58,8%
accordance with IAS/ IFRS
semi-annual separate financial statements 82,4%
semi-annual consolidated financial statements 64,7%

quarterly financial statements (also for the WSE
73,5%
purposes)
individual monthly financial statements for decision-
73,5%
making purposes
0,0% 20,0% 40,0% 60,0% 80,0% 100,0%
All analysed entities confirmed that they prepared separate statements, and 60% of the entities indicated that they prepared
statements in accordance with IAS/ IRFS. All capital groups (67, 6%) confirmed that they prepared consolidated statements.
What is more, seventy-five per cent of the entities indicated that they also prepared semi-annual and quarterly statements
as well as individual monthly statements for decision-making purposes. It is worth mentioning that semi-annual and
quarterly statements were prepared by all companies listed on the WSE, which results from disclosure requirements.
Further questions regarded the application of financial analysis of financial statements to assess economic position of
company. The first one was to provide information whether a company applied such an analysis, and if so, whether it was
applied only to assess the financial position of their own entity or to assess other entities such as competition or business
partners. The results are presented in Chart 2.
Chart 2. Application of financial analysis for economic assessment
own entity 91,2%
business partners 64,7%
competition 44,1%
not applied 8,8%
0,0% 20,0% 40,0% 60,0% 80,0% 100,0%

Source: author’s compilation based on survey results.
The application of financial analysis of financial statements was confirmed by 91% of the respondents. They were all
companies listed on the WSE and 75% of the remaining entities. All companies applied financial analysis to assess their
43
financial position, almost two-thirds used it to assess economic position of their business partners as well, and more than
half to assess competition. A deeper analysis of the results showed that the percentage rate of the application of financial
analysis to assess business partners and competition was higher for the companies listed on the WSE. The rate was 81,
8% in the case of business partners and 54, 5% in the case of competition. For non-public companies the rates were 33,
3% and 25%, respectively. Similarly, a higher percentage rate of answers was received in the case of capital groups. The
assessment of economic position of business partners was conducted by 73, 9% of them and 36, 4% of the remaining
entities. In the case of competition assessment, the rate was 52, 2% and 27, 3%, respectively.
Next, the companies which applied financial analysis were requested to indicate which groups of ratios they most often
used to assess financial position of entities conducting business activity. The results are presented in Chart 3.
Chart 3 Groups of financial ratios used by the analysed entities
liquidity ratios 100,0%
profitability ratios 100,0%
debt ratios 90,3%
efficiency ratios 77,4%
capital market ratios 74,2%
0,0% 20,0% 40,0% 60,0% 80,0% 100,0%
All analysed entities confirmed that they applied liquidity and profitability ratios while 90% confirmed the use of debt ratios.
It is worth mentioning that in the case of the first four ratio groups the results did not differ for public and private companies,
capital groups and separate entities, companies with solely Polish capital and those with foreign capital when analysed
separately. The only difference appeared in the case of capital market ratios which were applied by all stock-listed
companies and only by 11% of the remaining entities. A similar difference was noted in the case of capital groups (82, 6%)
and separate companies (12, 5%), which directly results from the fact that most of the capital groups participating in the
study are listed on the Warsaw Stock Exchange.
The respondents were also asked about the application of computer software for financial analysis. An affirmative answer
was given by 93, 5% of the respondents. Computer software was used by 95% companies listed on the WSE and by 89,
9% of the remaining entities. Moreover, financial analysis was performed by 38, 7% of the respondents, using possibilities
of their own financial and accounting software (e. g. modules purchased for financial analysis or tools integrated with ERP
software) while the remaining 61, 3% performed financial analysis using spreadsheets. It is worth mentioning that in the
case of companies with foreign capital (47, 3%) the percentage rate of the application of their own financial and accounting
software for financial analysis purposes was slightly higher than in the case of companies with solely Polish capital (25%).
Further questions were related to the use of models of bankruptcy risk assessment developed on the basis of financial
ratios. The aim of the first question was to indicate whether such models had been applied. Only 41% of the respondents
gave an affirmative answer, from which 57, 1% were stock-listed companies and 42, 9% the remaining companies. The
models were also applied by 57, 1% of the capital groups which prepared consolidated financial statements.
44
The next question was to show whether in order to identify bankruptcy risks the respondents used one model or more and
to determine which Polish bankruptcy risk models reviewed in the literature were most frequently applied. The results are
presented in Chart 4 and Table 2.
Chart 4. Number of bankruptcy risk assessment models used by a single entity
 21,4%
3-4 35,7%
1-2 42,9%
0,00% 10,00% 20,00% 30,00% 40,00% 50,00%
Table 2. Models of bankruptcy risk identification used by the respondents
% of % of
Model Model
indications indications
M. Pogodzinska and S. Sojak 57, 14% M. Hamrol, B. Czajka and M. Piechocki 14, 29%
E. Maczynska 35, 71% P. Stepien and D. Strak 14, 29%
A. Holda 35, 71% A. Pogorzelski 7, 14%
D. Wierzba 35, 71% J. Janek and M. Zuchowski 7, 14%
S. Sojak and S. Sawicki 35, 71% B. Prusak 7, 14%
J. Gajdka and D. Stos 21, 43% D. Apprenzeller and K. Szarzec 0, 00%
M. Maczynska and M. Zawadzki 21, 43% Other 21, 43%
In order to assess bankruptcy risk the studied entities usually use one model or two. It was confirmed by almost 43% of the
respondents. The use of at least five models was confirmed by 20% of them. A detailed analysis of the results showed that
entities constituting capital groups and stock-listed companies used a smaller number of models. This might be related to
a better economic position of those entities.
Regarding the type of a model, the analysis of the results showed that only one – Pogodzinska and Sojak’s model – was
most popular, and more than half of the respondents confirmed that they used it. One-third of the respondents applied
Maczynska’s, Holda’s, Wierzba’s and Sojak and Sawicki’s models. The percentage rate of application of another model is
worth attention, in which case all the respondents indicated that they used Altman’s model.
Finally, respondents using bankruptcy risk identification models were asked whether such models could be applied by
companies which prepared their financial statements in accordance with IAS/ IFRS. The results are presented in Chart 5.
45
Chart 5. Application of financial statements prepared in accordance with IAS/ IFRS to assess bankruptcy risk
71,4%
14,3%
14,3%
yes no I don't know
Almost 75% of the respondents gave an affirmative answer, with 90% of them being capital groups which prepared financial
statements in accordance with IAS/ IFRS. Nevertheless, the respondents indicated that financial statements prepared in
accordance with international regulations required adjustments and grouping, so that information included there could be
used to assess company’s bankruptcy risk. It mainly regards items included in the statement of financial position and
statement of comprehensive income.
The respondents were also asked whether models applied to measure individual items presented in the financial statements
influenced the results of models assessing bankruptcy risk. The respondents were of one mind and gave an affirmative
answer.
5. Summary and conclusions

Based on the survey study on the application of financial analysis and models of bankruptcy risk assessment conducted
among the largest Polish companies, the following conclusions may be drawn:
• all entities perform financial analysis of their own economic position, almost two-thirds assess the economic
position of their business partners and nearly half also assess their competition;
• entities use computer software to perform financial analysis. Nevertheless, they usually use separate
spreadsheets rather than software integrated with the currently used financial and accounting software;
• merely 41% of the entities use models of bankruptcy risk identification to assess their financial position; usually
companies listed on the WSE and capital groups use such models;
• almost half of the respondents use one model or two models described in the Polish literature to assess
bankruptcy risk; most often it is Pogodzinska and Sojak’s model;
• the respondents believe that information included in financial statements prepared in accordance with
international standards can be applied to the Polish models of bankruptcy risk assessments provided that
specific adjustments and revaluations are introduced to those statements;
• applied measurement methods influence the results received from models of bankruptcy risk assessment.
The assessment of financial position, and most significantly the assessment of risks to business activity are highly
important, and therefore Polish companies use all tools and methods theoretically available. The use of financial analysis
46
and models of bankruptcy risk assessment allows making reasonable decisions and limiting the level of risk. Nevertheless,
results of performed analyses will always be distorted because of:
• changes in legal regulations, including amendments to the Accounting Act and international standards;
• lack of possibility to compare results of analyses over time due to a lack of unified accounting standards among
business partners;
• change of measurement method, including introduction of goodwill as measurement method.
References
[1] Dorozik L. (2006). Ekonomia i zarzadzanie, Restrukturyzacja ekonomiczna przedsiębiorstw. Warszawa: PWE.
[2] Holda A. , Micherda B. (2007). Kontynuacja dzialalnosci jednostki i modele ostrzegajace przed upadloscia.
Warszawa: KIBR.
[3] Maczynska E. (1994). Ocena kondycji przedsiębiorstwa. Zycie gospodarcze, no. 38.
[4] Modigliani F. , Miller M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment.
The American Economic Review, vol 48, no 3.
[5] IFRS, 2014. Międzynarodowe Standardy Sprawozdawczości Finansowej. Warszawa: SKwP.
[6] Nowak J. (2013). Asymetryczne relacje banku i przedsiebiorstwa wobec zagrozenia upadloscia. Warszawa:
Difin.
[7] Prusak B. (2005), Nowoczesne metody prognozowania zagrozenia finansowego przedsiębiorstwa. Warszawa:
Difin.
[8] Swanson Z. , Srinidhi B. N. , Seetharaman A. (2003). The Capital Structure Paradigm: Evolution of
Debt/Equity Choices. Westport: Praeger Publishers.
[9] The Accounting Act of 29 September 1994, Polish Journal of Law of 2014, items 768 and 1100.
[10] Wedzki D. (2000). Problem wykorzystania analizy wskaźnikowej do przewidywania upadlosci polskich
przedsiebiorstw – studium przypadkow, Bank i Kredyt, no. 5, 54-61.
[11] www. lista500. polityka. pl.
47
NPLs — THE SOLUTION RECIPE FOR ALBANIA
Elona SHEHU, PhD Candidate

Position: Lecturer Assistant / European University of Tirana
Address: Blvd. Gjergj Fishta, ish NPV-2, B301/ Tirana, Albania
Tel: + 355 69 3318680
elona. shehu@uet. edu. al
Prof. Assoc. Dr. Elvin MEKA

Position: Lecturer / Head of Finance Department/ European University of Tirana
Address: Blvd. Gjergj Fishta, ish NPV-2, B308/ Tirana, Albania
Tel: + 355 68 9019443
elvin. meka@uet. edu. al
Abstract
The quality of the loan portfolio in Albanian banking system is facing many obstacles during the last decade. In this paper we
look at possible determinants of assets quality. During the recent financial crisis commercial banks were confronted with
deteriorating asset quality that threatened not only the banking industry, but also the stability of the entire financial system.
This study aims to examine the correlation between non-performing loans and the macroeconomic determinants in Albania
during the last decade. NPLs are considered to be of a high importance as they represent the high risk exposure of banking
system. A solid bank with healthy assets increases the market efficiency. Our approach is based on a panel data regression
analysis technique from 2005-2015. Within this methodology this study finds robust evidence on the existing relationship
between lending interest rate, real GDP growth and NPLs. We expect to find a negative relationship between lending interest
rate and asset quality. Further we assume an inverse relationship between GDP growth and non-performing loans, suggesting
that NPLs decrease if the economy is growing. Furthermore this study proposes a solution platform, which looks deeper into
the possibility of creating a secondary active market for troubled loans, restructuring the banking system or implementing the
Podgorica model. This research paper opens a new lieu of discussion in terms of academic debates and decision-making
policies.
Keywords: Non Performing Loans, Albania, lending interest rate, real GDP growth, bank restructuring, secondary market
Introduction
Non-performing loans are considered to be the one of the biggest obstacles within Albanian banking system and not only.
They induct an issue of high interest from all financial stakeholders all over the world, especially after the global financial
crisis of 2008. Considering recent studies about NPLs, it is visible that they have experienced a significant increase
everywhere in the world, especially in Balkan Region. The deterioration in the loan quality was considered the main cause
of financial crisis for development economies.
Despite all efforts done, it is obvious that NPL problem is still a big obstacle in terms of economic efficiency. Therefore, it
is necessary to develop a solution platform, which can contribute in reducing the risk that derives from troubled assets.
Many studies are done with respect to this problem, but most of them are constrained by only explaining the reasons that
brought the system at this stage by examining the current situation. The inability to address NPLs to a solution is the biggest
hurdle economies are facing nowadays. They are one of the main causes of economic stagnation. Therefore minimizing
48
troubled asset portfolio is a “must-do” in order to increase economic growth. According to Hou (2007) NPL are likely to
hamper economic growth and reduce economic efficiency. This paper aims to analyze non-performing loans in Albanian
banking system. The study gives a clear picture of the situation by not only discussing the main determinants that drive
NPLs and giving a clear overview of the Albanian financial system, but also coming up with a solution package for dealing
with troubled assets. This paper opens a new lieu of discussion in terms of academic debates and future studies related to
banking industry.
The study is focused on two main determinants in explaining the NPLs behavior: real GDP growth and lending interest rate.
On a macroeconomic perspective the study expects to come up with a negative relationship of lending interest rates and
indicating that by increasing lending interest rates, nonperforming loans will decrease; in addition the same relationship
direction stands for real GDP growth, stating that during the periods of economic expansion, the asset portfolio of the
banking system is more healthy, making banking system more solid.
The paper continues as follows: In the following section the paper illustrates a summarized literature review about the
importance of nonperforming loans in the banking system. The third section describes the methodology; the forth section
exhibits the financial situation of Albania, followed by the quantitative analysis of the NPL and macroeconomic factors
during the last ten years and the solution package strategy. The study ends with the conclusion section.
The NPLs importance for banking system

Non-performing loans have been in the spotlight during the recent financial crisis. This paper highlights the reasons that
drive NPLs to an acute threat and also aims to come up with a solution package. According to Barr and Siems (1994) asset
quality is the main reason of bank failure. Richard (2011) states that a rapid growth on non-performing loans in developing
countries causes an increase in inflation, a significant decrease in economic growth and a severe depreciation of the
domestic currency. Meka (2015) highlights that NPLs are of high importance for the top level management of the banking
system, for the following reasons:
Firstly, they cause a decrease in banking profitability. Jassaud & Kang (2015) points that NPLs generate a “negative carry,
” as they do not produce cash interest revenues, yet require funding at market rates. On the other side, this fact keeps an
increasing pressure on interest rates charged on standard and special mention loans, which must compensate losses
coming from problem loans. Furthermore, Murgasova et . al (2015) affirms that elevated levels of NPLs can also pose a
threat to financial stability.
Secondly, Meka (2015) highlights the continuous operational costs, which are mostly related to human resources and other
financial, legal and administrative costs that banks have to face when dealing with NPL portfolio.
Thirdly, high cost of funding; banks facing high levels of non-performing loans have difficulties in attracting new funding
opportunities, which imposes a high pressure for the shareholders of the banks.
Fourthly, higher risk premium coverage; an increase of the NPL portfolio consequently leads to an increase in provision
fund, which creates a direct effect on shareholders profitability and return.
Fifthly, compromised future liquidity difficulties; NPLs occlude the investment fund and also hampers the relationship
between the bank and its clients by not being able to fulfill their liquidity requirements thus putting the bank into liquidity
troubles.
Lastly, according to Murgasova et. al (2015) a high stock of non-performing loans can restrain the economic activity of
overextended borrowers, which leads to a discouragement of the efficient resource allocation towards productive
consumers.
According to Adela and Iulia (2011) unresolved NPLs force economic activity of overextended borrowers and discourage
resources from being allocated to productive uses. They emphasize that an increase of the NPL portfolio in Western Balkan
Countries, will shrink the medium-term investments and economic growth. Further they add that high NPL levels constitute
the biggest constrain in terms of credit supply in Balkan Region.
49
Referring to Murgasova et . al (2015), non-performing loans increased significantly mainly in those economies where the
loan growth during the pre-crisis was strong and where the recession was deep. Albania manifests precisely the same
inclination of rapid growth of NPLs and a sharp decrease of the economic growth, despite the fact that it did not fall off to a
recession. Many studies about the relationship between troubled assets and macroeconomic indicators come up with
different results in line with their economic cycle phase either their state of economy. Further this paper analyses the
relationship of GDP growth and lending interest rate with non-performing loans.
Salas and Saurina (2002), Khemaj and Pasha (2009), Dash and Kabra (2010) have found negative relationship between
troubled assets and real GDP growth. This studies lead to a clear indication that higher GDP growth entails higher level of
income. Referring Guy and Lowe (2012) this increase of GDP growth (decrease of NPLs) improves the capacity of the
borrower to pay its debt and reduces bad debt.
Interest rate is an important indicator in determining asset portfolio. According to Bofondi and Ropele (2011) there should
be a strong correlation between interest rates and rise of NPLs. In addition Fofack (2005) states that economic growth and
real interest rate are significant indicators in determining bad loans. Jimenez and Saurina (2006) find evidence that GDP
growth, real interest rate and credit conditions are the main determinants in explaining the bad loan portfolio of the banks.
Further they find a negative relationship between GDP growth and NPLs. Messai and Jouini (2013) came up with consistent
results with the theory mentioned above about the relationship between troubled assets and real growth. This findings are
consistent with Rajan and Dhal (2003), Fofack (2005), Jimenez and Saurina (2006), Khemraj and Pasha (2009), Dash and
Kabra (2010), Espinoza and Prasad (2010), Greenidge and Grosvenor (2010). In terms of real interest rate Messai et. al
(2013) obtained a positive relationship with NPLs, consistent with Fofack (2005), Jimenez and Saurina (2006), Khemraj
and Pacha (2009), Dash and Kabra (2010).
Financial Market in Albania

The dominant part of the Albanian financial market is constituted
by banks, indicating that more than 90 percent of the financial
system is leaded by banking system. The financial health of this
major part of the system is very important for the country.
According to recent studies, the main threat for this predominant
part of the financial system is attributed to non-performing loans.
Therefore, this paper attempts to address the NPL issue. Even
though Albania dialed relatively well with the recent financial
crisis, the economy is still frail and continually dealing with
economic troubles. Referring to International Monetary Fund
report systematic risk in Albanian financial system has increased
with the recently established investment funds.
Graph 1: Financial System in Albania
Source: IMF Report, 2014
The banking system has faced many problems related to troubled assets, which caused a significant deterioration of bank’s
balance sheets; this consequently caused a decline in profitability level.
The graph below shows the trend of the main categories of quarterly non-performing loans in Albania from 2005 until first
quarter of 2015. In overall the graph shows a significant increase of the NPL, indicating a sovereign threat for the financial
system.
As seen in the graph below, the NPL problem became more evident especially after 2008. Loss loans were mainly stable
until 2008, but increased sharply right after in 2009 getting to its highest value in late 2014. This again affirms that financial
system in Albania is dealing with serious troubled assets and decrease of profitability. This weakens the whole economy,
making the country less able to deal with the possible financial shocks.
50
Graph 2: Non-performing loans in Albanian banking system.

15
10
0
Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I Q III Q I
2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015
Sub-standard loans Doubtful loans Loss loans

Source: Authors
Referring to the literature section above, one of the main indicators affecting troubled loan portfolio is real GDP growth. To
have a better picture of the current situation, the trend line of troubled loans and GDP is displayed. As seen in the graph
below a negative relationship is expected. During the 10 year period taken into analysis the GDP in overall has experienced
a slight constant decline, while in opposition to this is the trend line of NPLs, which have experienced a sharp increase
during the same period of time. The slope of the trend lines points out that the elasticity of NPLs with respect to GDP
change is high.
Graph 2: Real GDP growth and NPL portfolio
30,00
20,00
NPLs
10,00
Real GDP
0,00 Growth
-10,00
Source: Authors
During periods of economic contraction, savings shrink, therefore banks experience a significant decrease in deposits level.
In this type of situations, banks tend to take higher risk in order to increase their loan portfolio and consequently increase
their profits.
Data and Methodology

This study focuses on Albanian financial system, more specifically commercial banks. The time frame taken into
consideration after the adjustments for missing data is 2005 until first quarter of 2015. The data on NPL and lending interest
rate is generated from Bank of Albania, and data on real GDP growth from INSTAT. A detailed approach on data collection
is shown in Table 1.
51
Outliers are considered as numerical values highly shifted from the rest of the data. They usually occur because of extreme
events or measurement error. To identify them a scatter plot and kurtosis computation analysis is made. After computing
the scatter plot, observations that were highly shifted from the rest of the data were identified and deleted (this is known as
a trimming approach).
Table. 1: Variable Description
This table summarizes all variables used in this empirical analysis. Apart from variable description, abbreviation,
expected relationship to the depended variable, literature review is also proved in forth column. These assumption
on expected relationship are based on the literature review summarizes in the second section of the paper. The
expected correlation based on the literature, is also shown in the fifth column.
Variable Description Literature Corr Abbr Source

Non-performing loans refers to the Hou (2007)
troubled assets of the bank. It is
measured as a percentage change on Ropele (2011)
Non quarterly basis. Three main loan
Messai & Jouini Bank of
Performing classifications are included in the NPL NPL
Albania
Loans portfolio (Substandard loans, doubtful Murgasova et . al
loans and loss loans). NPLs are (2015)
considered as the dependent variable in
this linear regression analysis. Meka (2015)
Real GDP growth is an indicator for the

state welfare, and is closely related to Salas & Saurina
saving and consumption. This variable is (2002),
Real GDP also calculated on quarterly basis. World
Khemaj & Pasha − GDP
Growth Literature shows that countries with high Bank
(2009),
NPL portfolio experience a sharp
decrease in economic growth. Therefore Dash & Kabra (2010)
it is considered to be very close to NPLs.
Rajan &Dhal (2003),
The indicator used for Interest Rate in Fofack (2005),
terms of NPLs is lending interest rate in Jimenez Saurina
ALL currency. This is a clear cut (2006), Khemraj
Lending Bank of
indication whether an increase in lending Pasha (2009), Dash & − LIR
Interest Rate Albania
interest rate will disfavor borrowing in an Kabra (2010),
economy, hence reducing troubled asset Espinoza Prasad
portfolio. (2010), Greenidge &
Grosvenor (2010).
The variables mentioned in Table 1, are compiled in a pooled equation. A multi-factorial linear regression analysis is
computed taking NPLs as the explained variable and real GDP growth and interest rate as the explanatory variables. The
study covers a 10 year time frame, where the financial crash is also included.
𝑁𝑃𝐿 = 𝛽0 + 𝛽1 𝑟𝑒𝑎𝑙𝐺𝐷𝑃 + 𝛽2 𝐿𝑒𝑛𝑑𝑖𝑛𝑔 𝐼𝑅 + 𝜀 Where 𝛽𝑖 is the intercept (1)
In the next section an empirical analysis is computed to have a better picture of the current situation of NPLs and its
explanatory factors.
52
Empirical Findings
In this section empirical results and interpretations on the prominence of the research are provided. A descriptive statistics
table is depicted to give a general idea on variables distribution and their correlation to dependent variables. Table 2
summarizes the descriptive statistics of the variables taken into consideration for this analysis.
The correlation matrix gives a better insight on the relationship between variables. The correlation coefficient measures the
strength and direction of a linear relationship between two variables; the closer the coefficient to one, the higher the
correlation between variables and vice versa.
Table 2
This table summarizes the descriptive statistics of the regression analysis. The sample includes 41 observations
from Albanian financial industry. The variables for the multivariate regression analysis are generated mainly from
Bank of Albania, World Bank and Institute of Statistics in Albania (INSTAT). Non-performing loans and l ending
Interest rates are generated from Bank of Albania; real GDP growth is downloaded using INSTAT database. All the
observations are on quarter basis. The correlation matrix gives a clear picture of the relationship and correlation
strength of the variables. The closer the coefficient to 1 the stronger is the correlation and vice versa. The positive
sign indicates that the variables move to the same direction (positively correlated) and a negative one indicates that
the variables move in different directions (i. e if one increases the other decreases). This table is computed after
outliers are deleted.
Descriptive Statistics
Non Performing Loans Correlation matrix

Variable Mea Media Std. Kurtos
Ob Skew. Min Max (1) (2) (3)
n n Dev .
-1, 759 0, 197

(1 NPL 41 12, 11, 46 8, 623 2, 30 24, 8 1. 00
) 46
-0, 550 0, 414

-2, -0.
(2 GDP 41 2, 926 3, 089 11, 3 1. 00
50 67
) 3, 62
-0, 276 -0, 565

-0.
(3 LIR 41 12, 12, 88 1, 837 7, 87 14, 5 0. 52 1. 00
87
) 07
From table 2 it can be said that there is a strong positive correlation between lending interest rate and non-performing
loans. This correlation counts for approximately -87%, stating that variables are negatively correlated, which is in line with
findings of Rajan and Dhal (2003), Fofack (2005), Jimenez and Saurina (2006), Khemraj and Pasha (2009), Dash and
Kabra (2010), Espinoza and Prasad (2010), Greenidge and Grosvenor (2010). Almost the same scenario appears with real
GDP growth, with a negative correlation counting for about 67%, indicating that these variables move in opposite directions
and are moderately correlated.
In terms of distribution shape characteristics, kurtosis and skewness are also showed in the descriptive statistics table.
Kurtosis checks for how small and sharp the central peak is relative to a standard bell curve. Standard normal distribution
53
Table 3
This table indicates the multivariate regression model which stands in support of this article. The regression
is run for non-performing loans and for real GDP growth and lending interest rate, which represent the
dependent variables.
Variable Coefficient Std. Error t-statistics P value
Intercept 56, 72*** 4, 108 13, 420 0. 0001
Real GDP Growth -0, 843** 0, 221 -3, 813 0, 0021
Lending Interest Rate-ALL -3, 358*** 0, 372 -9, 035 0. 0001
Observations 41
Adjusted R Square 0. 82
Standard Error 3. 715
Statistical Significance; coefficients: *significant at 10%; **significant at 5%; ***significant at 1%, two sides.
is called mesocurtic and equals a kurtosis value of 3. Non-performing loans are relatively sharp but still close to normal
distribution, while the independent variables are not very close to normal distribution, regarding its fat tails.
Skewness is an indicator of the asymmetry and deviation from normal distribution. The negative sign for skewness shows
that the distribution of observations is left skewed, and vice versa.
Table 2 shows that skewness value for non performing loans vary within the range of [-0. 5 to +0. 5], closer to 0, meaning
that the distribution is closely symmetric. Real GDP growth skewness indicator in between the range [-0. 5 to +0. 5] states
that GDP observations are moderately skewed. While lending interest rates variation of skewness, indicates that interest
rate distribution is moderately skewed (left skewed).
Table 3 displays the regression output. As shown in the table 3 real GDP growth is negatively related to non-performing
loans. The result is statistically significant at a level 5%. The negative coefficient of 0. 843 indicates that under ceteris
paribus condition, an increase of 1 per cent in real GDP growth, leads to a decrease in almost 0, 84 per cent in NPL. This
is an indication that during positive economic cycles, troubled loan are not a threat. These findings are in line with Salas
and Saurina (2002), Khemaj and Pasha (2009), Dash and Kabra (2010).
The same relationship stands for lending interest rate, which results to a statistically significant negative relationship with a
magnitude of 3. 358. This coefficient means that under ceteris paribus an increase in 1 per cent in lending interest rate for
Albanian lek currency (ALL), leads to a decrease in almost 3. 36 per cent in non-performing loans. This is a clear indication
that an increase in the interest rate discriminates borrowers in the economic system. Therefore, borrowers with high credit
risk will not have incentive to get loans from the banks.
The model displays an adjusted R-Square of 0. 82, which reveals that 82 per cent of the variance is explained by the model.
The impact of both in-depended variables, are considered statistically significant, according to the p-values and t-statistics
values.
54
Solution Strategies
After analyzing the NPL situation in Albanian banking system, this paper comes out with the result that non-performing
loans are a threat for the banking system. In the current situation where the Greek financial crisis is seriously affecting the
stability for all East European Region and especially Albania— because of the expected decrease of the remittances of
Albanian immigrants working in Greece—the stability of the financial system is a necessity. Therefore the system should
be kept out of financial distress. NPLs are a “must deal with” issue. In this point of view this article suggests three main
options as the strategy of dealing with NPLs. The diagram below summarizes the three solution strategies to be taken into
account.
Table 4: Recommended Solution Recipes for NPL problem in Albania
1st
• Creating a secondary active market for non-performing loans;
strategy
2nd • Ristructuring the banking system, by grouping banks into good and bad banks;
strategy
3rd
• Implementing Podgorica Model
strategy
Source: Authors
First strategy is related to creating a secondary active market for troubled loans and developing the securitization process
in Albania. This process would reduce the costs for managing this toxic asset portfolio. Banks would have the opportunity
to trade the risky assets. Creating this market would significantly increase the market efficiency.
Second strategy of solving the NPL problem is a bank restructuring, which consists in dividing the banks in two main groups:
good banks and bad banks. The last one specifically consists in creating a so called “bad bank” which will manage non-
performing loans. This bad bank will bail out the financial system. According to Shehu and Kaci (2014) this strategy
increases the credibility of good banks, and reduces the liquidity risk, which is the main cause of banking failure. Cavallo
and Majnoni (2002) further find supportive empirical evidence and suggest policy implications regarding banking
restructuring. This strategy should be accompanied with a private placed Guarantee Fund, which should monitor and control
the process. In overall this restructuring of the troubled loan portfolio leads to a minimization of the credit risk and improves
the NPL portfolio.
Third strategy is the Podgorica Model. As mentioned in the section above, the main determinants that drive NPLs are
economic growth and lending interest rate; but looks like examining the main determinants is still not enough. Therefore
another solution should be taken into account. According to Impavido et. al (2012), keeping economic growth at the optimal
level is not the best alternative for Eastern Europe Region. Technically Podgorica Model is a multitask approach, which
includes some stakeholder groups such as: banks, central bank, government and businesses in difficulties. Podgorica—
according to Stijepovic (2014) — is based on several approaches.
The first approach is financial and operational restructuring of business on voluntary basis, as the basic issue for
materializing this approach, which facilitates the NPL restructuring process.
The second is approving the Lex Specialis, as a multilateral agreement between government, central bank and commercial
banks. According to Dakovic (2013), all these stakeholders should sacrifice. According to this approach government creates
conditions for fiscal incentives (tax deduction and partial subsidization of the interest rate).
The third approach is compilation of a detailed plan for financial and operational restructuring; this NPL restructuring
considers only the financial administration of the company, but also a reshape of business activity and its operational
structure.
The forth approach is related to the restructuring process which is completely out of the court, as a pure intermediary
process.
55
According to Dokovic (2013) this model creates positive impact in remodeling the economy in long term; it also decreases
the risk of financial instability. Applying Podgorica Model in Albania will come up with a positive result not only regarding
banking industry, but also the whole economy. Referring to Meka (2015), applying Podgorica approach for restructuring
NPL portfolio will lead to the following issues.
• Commercial banks in Albania would cash in more funds and pay less provisions; on the other side this would
lead to relieve lending process;
• The consumption demand would experience a significant increase which would positively impact Albanian
economy;
• Businesses keep them self away from possible failures and still circulate in the economic system, generating
incomes, employment possibilities, contributing in this way to a further improve in credit risk and increasing
liquidity in the economy.
• Government would generate more income from tax, as long as the business climate will improve because of the
decrease of credit risk;
• Central Bank can fulfill its long term financial objective, lowering in this way the liquidity risk.
According to Meka (2015), in substance, the “Podgorica” Approach is rooted on common grounds as the Bank of Albania
actual platform for NPL resolution, but a better addressing of the issue of non-performing loans should aim at more
ambitious objectives and ensuring positive effects for more and more stakeholders.
Conclusion
Financial market in Albania is still narrow and dominated by commercial banks at about 90 per cent. During the last decade
non-performing loans has increased substantially, posing a threat to financial stability.
The study find significant statistical evidence for a negative relationship between lending interest rates and real GDP growth,
ascertaining that real GDP growth and lending interest rates have a negative relationship respectively on loan misbehavior,
indicating that in cases of economic expansion of Albania, the borrower ability to repay loans will increase; on the other
side higher interest rates embed higher pressure on borrowers to deal with their periodic payments. These findings are in
line with Rajan and Dhal (2003), Fofack (2005), Jimenez and Saurina (2006), Khemraj and Pasha (2009), Dash and Kabra
(2010), Espinoza and Prasad (2010), Greenidge and Grosvenor (2010) etc.
The article proposes a triple solution “recipe”. Creating a secondary market for troubled loans, restructuring the banking
system by grouping banks into “good” and “bad” banks and implementing the non-traditional but effective Podgorica
model—are the most convenient pathways to drive non-performing loans to a solution. To make the solution strategy work,
a strict financial supervision is required. Combining these alternatives in time can also be a successful bailout strategy for
Albania. We cannot find the “one model fits all”, but we can take the best experience from the countries to deal with this
issue.
To conclude, it should be emphasized that non-performing loans are not only constrain to banking industry, but to the whole
society because it effects are spread directly into economic growth and social welfare, therefore a special attention should
be paid to them.
References
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57
Kosovo’s International Trade: Balance of Trade
Gent Jusufi
Ph. D. student at Faculty of Economics and Management,
Czech University of Life Science, gentjusufi@gmail. com
Lura Rexhepi Mahmutaj

Faculty of Economics, University of Prishtina Hasan Prishtina, (Corresponding Author)
lura. rexhepi@uni-pr. edu
Gentina Jusufi
Gentina Jusufi, MSc in Economics,
Katholieke Universiteit Leuven, gentina@gmail. com
Nora Jusufi
MA of International Development,
School of International Service, American University, norajusufi@hotmail. com
Abstract
Purpose – The purpose of this paper is to present a review of literature on the composition of exports and imports during
2005-2011 in Kosovo and key findings from secondary research on the reasons for the high trade deficit which affects
economic development within this country. Design/Methodology/Approach – This paper presents secondary data related to
background of the international trade and its increasing importance throughout the years because globalization. Then it is
followed by characteristics of Kosovo’s trade environment, its domination of imports from 2005 to 2011 and its comparison
with EU and non EU countries. Findings – The results of this paper illustrates that Kosovo is facing a major problem with its
negative balance of trade, suffering with excessive volume of imported goods and insufficient exported goods. Kosovo’s trade
marked an increase of its exports with annual average growth rate of 36%, on the other hand imports marked an increase with
annual average growth rate of 13%, while the share of exports and imports of GDP was relatively 60% by the year of 2011.
The reasons of poor export performance are mainly based on social, political, and economical issues that Kosovo is
confronting. Nevertheless, government took important macroeconomic steps, as well as developed comprehensive process
to review, shift the political and economic policies, to sustain the countries balance of trade in long term.
Keywords – International trade, imports, exports, economic growth
Introduction
Kosovo is characterized as an open economy with trade liberalization establishment. When it comes to international trade
restrictions, countries do not have exactly open or closed economy, because through their actions governments tend to
control, regulate and supervise some aspects of economic activities. Governments have self-determination to practice trade
policies of their choice. Kosovo’s economy was ruined during the conflict with Serbia in 1999, where all economic activities
were shutdown, including the international trade linkage. Despite occurrence of this event, Kosovo’s economy has been
compacted and it is oriented toward the free trade market.
58
Kosovo is facing a major problem with its negative trade balance 1, suffering with excessive volume of imported goods in
contrast with exported ones. Trade environment is dominated by imports that result in trade deficit. In general, trade balance
of a country is considered as key aggregate indicator of a country’s economic condition. Kosovo’s international trade
liberalization is characterized with disproportion of exports and imports. Analysis made by this study, investigate the
composition of exports and imports during 2005-2011, which shows that Kosovo’s trade marked an increase of its exports
with annual average growth rate of 36%, in the other hand imports marked an increase with annual average growth rate of
13%, while its share of exports and imports of GDP was relatively 60% by the year of 2011. The negative trade balance is
linked direct to economic development. Since 2007, Kosovo is part of Central European Free Trade Agreement (CEFTA)
that is a free trade agreement signed between South-East Europe countries (SEE). CEFTA is well designed and
harmonized with the principles and policies of World Trade Organization (WTO) and European Union. In Kosovo, the
negative trade balance is mostly related to poor economic policies, poor level of infrastructure, low prices of exports, low
wages, and low level of foreign investments; moreover, it is related also to high prices of inputs, barriers and tariffs in
exchange with trade partners. Furthermore, government authorities are aware for the steps that should be undertaken to
improve trade agreement and trade-related developments policies. Such polices are crucial for country’s trade environment
and must be wisely appraised to achieve trade policy trend.
Literature Review
The importance of the international trade dates back from years between 1776 and 1826, where Adam Smith’s publication
“Wealth of Nations” describes the invention and meaning of a theory of free trade. According to Smith, the low cost of labor
ensures the effective competition among the nations. The main principle of the publication was the absolute advantage that
discusses the capabilities of a nation, firm or individual that uses its resources efficiently to produce more goods or services
than other nation, by using the same volume of resources. However, the new theory of international trade began in late
1970s. According to Krugman (1980) the acceleration of International trade and its patterns had massively changed from
theory of perfect competition, return to scale and comparative advantage predicted from classical trade theories in previous
centuries.
The volume of international trade in 1950 was 380 billion Dollars, while in 2005, it has increased to 21. 2 trillion dollars. This
large expansion of world trade volume marked the globalization of trade due to innovations and advancements of
technology, as well as decreases in trade tariffs and trade agreements signed between countries. Through globalization of
international trade, countries have increased the participation into global market, including human capital, and finance
resources. The country’s integration into global marketplace leads with cross-border investment flows. A major problem to
investigate is the current trade balance of a country, whether its imbalances are justifiable and essentially sustainable over
time. Studies have come to a conclusion that there is no clear definition of an unsustainable trade deficit (Kaminsky et al. ,
1998). However, countries have to consider many factors that influence the trade balance, whether if there is a need for
shifts and reviews of trade policies or to reconstruct the functionality of trade environment. The reasons of influenced factors
are fundamental, because the effects on trade balances vary across countries and time. The survey made by Bahmani-
Oskooee and Ratha (2004), refers to various studies that examine the factors of trade balance including the bilateral trade
balance or aggregate trade balance. Nevertheless, the survey concluded that condition of trade balance does not tell
precisely the size of the effects on trade environment. Essentially trade deficits cannot be judged entirely considering the
economic theory that indicates negative trade balance is not a very uncomfortable situation, implying that negative trade
balance usually improves its negative trend situation over time.
1The trade balance for any country is the difference between the total values of its exports and imports in a given year. When a
country’s total annual exports are lower to its total annual imports, it is said to have a trade deficit.
59
Kosovo’s Trade Environment

Kosovo a newborn country1 is characterized with new and dynamic economic activity. Before 1999, Kosovo’s economy was
focused on such economic system where economic activities were made by the central authorities or government, assumed
that market never intend to work on the interest of citizens; thus, decisions for national economic objectives were set direct
by state rather than by the interaction between buyers and traders. Since the conflict with Serbia ended in 1999, Kosovo’s
economy have been transformed into a modern economy consisting assortments of central economies and free trade
market economies, with governments actions and regulations on supervising and monitoring some aspects of the economic
activities.
Kosovo’s economy was ruined during the conflict; all economic activities were shutdown, including the international trade
linkage. Economy of Kosovo has been solid and it is considered as an open economy, its reconstruction process has been
pushed and supported by many international donors. International trade is dominated by imports that result in negative
trade balance (trade deficit). Hence, negative trade balance is one of the main economic issues for Kosovo economic
environment. Despite, global financial crises the economy has recorded a moderate growth, while its trade balance remains
negative. In regard to international trade, Euro adoption in 2002 has made easier the trade process; its share of exports
and imports of GDP was relatively 60% by the year of 2011. The subject of the study will investigate the trade balance form
2005-2011 (figure 1. negative trade balance of Kosovo). The reasons why this study focuses on this period is the fact that,
after the conflict with Serbia, the reconstruction of country’s economic trade environment linkage can take up to 4 or 5
years, and taking into account the European economic crisis of 2010 - 2011 that impacted the international trade.
3.000.000,00
2.000.000,00
1.000.000,00 Imports
- Export
2005 2006 2007 2008 2009 2010 2011
(1.000.000,00) Trade Deficit
(2.000.000,00)
(3.000.000,00)
Figure 1 Kosovo’s trade balance during 2005 – 2011

Data Source: Kosovo Agency of Statistics (KAS), Author plot.
To improve International trade environment, Kosovo’s government needs to develop the process of its political and
economic policies review and restructure the functionality of international trade, to strengthen its position on global market.
The review of economic policies will help to determine the level of investments and production that are main factors to
increase export sector of the economy. Other challenges in improving the trade deficit are trade liberalization and
international trade agreements. One of the key objectives of Kosovo government is to boost participation in wider trade
facilitating mechanisms, by focusing mainly on trade facilitation that provides various benefits such as release and clearance
of goods, including goods in transit and provisions for expediting the movement 2 and import rationalization and replacement
including export promotion. Based on United Nations Conference on Trade and Development (UNCTAD), trade
environment should be integrated with export strategy that results in mutual importance to competitiveness in national and
international market. In the nutshell trade, liberalization and trade agreements are not sufficient to improve the negative
trade balance. However, the implementation and usage of trade liberalization agreements would support the improvement
of trade development.
1 With international authorities interventions on Balkan during 1999, Kosovo is set free from the conflict with Serbia. In February 18th,
2008 Kosovo declares its independence.
2 Trade Facilitation of World Trade Organization
60
As Kosovo is comprehensively dependent on its imports (around 60% of GDP), important key macroeconomic steps were
taken to improve the negative trade balance. According to Medium Term Expenditure Framework (MTEF, 2012) negative
trade balance will be enhanced through improvements of domestic efficiency, including real exchange rate depreciation1
and reduction on wages.
Essentially in economic theory, negative trade balance is not a very uncomfortable situation, implying that negative trade
balance usually improves its negative trend situation over time. However, in Kosovo’s case, trade deficit is not expected to
improve in short-term, since the trend is consistently increasing. Table 1, shows the negative trades balance among the
countries where Kosovo’s main imports and exports is based. Countries have been grouped into European Union Countries
(EU), and non EU Countries.
Table 1 Trade Deficit of flow goods and International trade (‘000 Euro)
EU Non EU
Period Exports Imports Trade Deficit Exports Imports Trade Deficit
2005 21, 621 431, 977 -410, 356 34, 662 725, 515 -690, 853
2006 42, 108 449, 833 -407, 725 68, 666 856, 046 -787, 380
2007 69, 370 572, 904 -503, 534 95, 742 1, 003, 282 -907, 540
2008 93, 974 701, 982 -608, 008 104, 489 1, 226, 254 -1, 121, 765
2009 71, 275 755, 004 -683, 729 94, 053 1, 180, 537 -1, 086, 484
2010 131, 811 825, 745 -693, 934 164, 146 1, 331, 980 -1, 167, 834
2011 136, 648 946, 557 -809, 909 182, 517 1, 545, 791 -1, 363, 274
Total 566, 807 4, 684, 002 -4, 117, 195 744, 275 7, 869, 405 -7, 125, 130
Source: KAS, Authors’ computation.
Table 1 analysis shows Kosovo’s exports for goods and services within EU countries during the period 2005 – 2011 that
constitute 566, 807 million Euros, while the imports for goods and services for the same period constitute 4, 684, 002 billion
Euros. It is important to emphasize that Kosovo has been part of the CEFTA zone since 2007 and during global financial
crisis around 2008, where prices decreased in global market. Thus, Kosovo’s economy has been impacted. Table 1 shows
a significant decline of 24. 2% on total exports in 2009, while total imports continue to increase of 7. 6% for EU countries.
Based on the analysis, a positive significant sign is evident for Kosovo’s trade environment in relation to EU countries, total
exports of goods and services in average per annum have been increased of 43. 2%, while total imports of goods and
services indicates a gradual increase in average per annum of 14. 3%. Nevertheless, the expansion in total exports and
total imports does not imply improvements on negative trade balance of Kosovo’s trade environment. The negative trade
balance is estimated to be -4, 117, 195 billion Euros in respect to EU countries. Similarly, the trend follows for non EU
countries, exports of goods and services over the period of 2005-2011 constitute 744, 275 million Euros, while the imports
of goods and services over the same period constitute 7, 869, 405 billion Euros. Analysis of trade environment for non EU
countries for the year 2009 shows a decline for both exports and imports. Significant decline is evident for total exports
around 10%, while total imports resulted with moderate decline around 3. 7% for the year 2009 in respect to non EU
countries. Furthermore, trade environment of total exports in respect to non EU countries have been increased in average
per annum of 37. 1%, while total imports have been increased in average per annum of 13. 8%. According to analysis from
Table 1, Kosovo’s trade environment is focused more on non EU countries and its negative trade balance in respect to non
EU countries is -7, 125, 130 billion Euros. Kosovo’s export of goods and services for non EU countries is 31% larger in
comparison to EU countries, while the imports of goods and services for non EU countries are 63% larger in comparison to
EU countries. The negative trade balance of Kosovo’s trade environment of non EU countries in comparison with EU
countries is larger about 73%. In respect to Kosovo’s international trade gap (trade deficit), it can be concluded that, the
1 Lowering the relative prices among buyers and sellers or trading partners could imply the real exchange rate deprecations
61
growth in the market value for exchanging goods and services produced by country’s economy over time is very low. Trade
balance in such cases is mostly affected by various factors: (i) The cost of production of exporting/importing goods and
services of the economy; (ii) the cost of raw inputs and intermediate goods; (iii) real exchange rate movements; (iv)
multilateral policies of tax restrictions on trade; (v) non-tariff barrier etc.
3. 1 Composition of Kosovo’s Export and Import

Nowadays in the fast paced economic environment, trade balance (net exports “NX”) of a country is considered as key
aggregate indicator of the analysis of a country’s economic condition. Consequently, Kosovo is suffering with excessive
volume of imported goods and services in comparison with exported ones.
Figure 2 Proportion view of Exports and Imports of goods and services 2005-2011
3.000.000,00
2.500.000,00
2.000.000,00
1.500.000,00 Import
1.000.000,00 Export
500.000,00
-
2005 2006 2007 2008 2009 2010 2011
Source: KAS, Author’s plot.
Kosovo’s main exports and imports are based on EU and countries under CEFTA agreement (including neighbor countries),
resulting with growing trend on both exports and imports sectors as shown in Figure 2. Kosovo’s goods and services that
are produced for export have had an average annual growth rate of 36% over the period of 2005 – 2011. On the other
hand, the goods and services that country’s economy could not fulfill for domestic demand over the same period, have had
the average annual growth rate of 13% on imports. This situation results as the economic development is extremely slow,
and resources on producing goods and services to fulfill the actual domestic demand for imported goods and services are
not used effectively and efficiently.
Government implemented various mechanisms to expand the efficiency of the country’s productivity of export sector (MTI
- Trade Policy Framework, 2009). A change that needs to be made into the trade policy framework consists of the
harmonization and review of various policies, including macroeconomic policy, tax policy and fiscal policy. However, trade
policy is supposed to have a positive effect on fiscal policy, which serves as a channel to conduct successful social and
industrial policy. Kosovo’s trade policy framework has an impact on the country’s budget. The impact of such policy covers
expenditure and revenues side of the budget and it has a positive relationship between trade revenues and tariff revenues.
The volume of the trade and its impact on country’s revenues are also affected by their cost of implementation of World
Trade Organization agreement (WTO). Table 2 shows the exported goods based on sectors and their percentage coverage
of total exports in the period of 2005 to 2011.
62
Table 2 Percentage coverage of Exported Goods
% Coverage of Exports 2005 2006 2007 2008 2009 2010 2011

Food and live animals 9. 0% 7. 7% 8. 6% 7. 4% 8. 8% 6. 3% 5. 5%
Beverages and tobacco 4. 9% 2. 5% 2. 4% 2. 9% 3. 1% 1. 8% 2. 5%
Crude materials, inedible, except fuels 47. 7% 38. 7% 32. 4% 23. 0% 23. 2% 25. 0% 25. 4%
Mineral fuels, lubricants and related materials 3. 1% 7. 7% 7. 6% 4. 2% 4. 4% 3. 7% 5. 1%
Animal and vegetable oils, fats and waxes 0. 3% 0. 2% : 0. 0% 0. 0% 0. 0% 0. 0%

Chemicals and related products, n. e. s. 2. 4% 1. 3% 0. 8% 1. 2% 1. 5% 0. 8% 1. 3%
Manufactured goods classified chiefly by material 11. 9% 28. 8% 30. 7% 52. 9% 50. 9% 56. 1% 52. 9%
Machinery and transport equipment 15. 7% 8. 1% 13. 7% 5. 4% 4. 7% 3. 3% 5. 1%
Miscellaneous manufactured articles 5. 1% 5. 0% 3. 7% 3. 0% 3. 4% 3. 0% 2. 2%
Commodities and transactions not classified else.
in the SITC 0. 0% : : : : 0. 0% 0. 0%
Source: KAS, Authors’ computation. *data that were not available for particular goods classification are stated with “:”
Kosovo’s trade structure apparently has experienced a growth trend of international trade volume (Figure 2). Analysis of
Table 2 shows primary goods and manufactured goods exported in 2005, where primary goods covered of 64. 93% of total
exports, while manufactured goods covered of 35. 07%. The analysis indicates different development trend on exports
structure in 2011 (upside down trend), as primary goods covered of 38. 55% of total exports, while manufactured goods
covered of 61. 45%. This development suggests that Kosovo’s trade performance has been shifted over years in structure
of export resources. Primary goods exported over the period of 2005-2011 accounted of annual average of 46. 45%, while
manufactured goods over the same period accounted of annual average of 53. 55% of manufactured goods exported. The
classification of the primary goods and manufactured goods has been done accordingly to Standard International Trade
Classification1 (SITC).
Table 3 Percentage coverage of Imported Goods

% Coverage of Imports 2005 2006 2007 2008 2009 2010 2011
Food and live animals 17. 8% 17. 5% 17. 3% 16. 8% 16. 7% 16. 4% 16. 6%
Beverages and tobacco 5. 7% 5. 6% 5. 8% 4. 5% 4. 5% 4. 7% 4. 6%
Crude materials, inedible, except fuels 2. 0% 1. 9% 2. 3% 2. 3% 2. 3% 3. 1% 3. 5%
Mineral fuels, lubricants and related materials 15. 8% 16. 6% 16. 4% 14. 7% 14. 6% 15. 7% 18. 2%
Animal and vegetable oils, fats and waxes 0. 9% 1. 1% 1. 0% 0. 8% 0. 8% 0. 8% 0. 8%
Chemicals and related products, n. e. s. 10. 0% 10. 6% 9. 9% 10. 0% 10. 0% 9. 5% 10. 3%
Manufactured goods classified chiefly by material 19. 0% 20. 3% 19. 5% 19. 3% 19. 3% 19. 6% 19. 6%
Machinery and transport equipment 20. 2% 17. 8% 18. 7% 22. 6% 22. 5% 20. 4% 16. 9%
Miscellaneous manufactured articles 8. 6% 8. 6% 9. 1% 9. 3% 9. 2% 9. 4% 9. 1%
Commodities and transactions not classified else. in the
SITC : : 0. 0% 0. 0% 0. 0% 0. 4% 0. 5%
1The Standard International Trade Classification (SITC) distinguishes five main categories (sections) of primary goods: Sections 0 and 1
are often grouped together as 'food and drink', 2 and 4 as 'raw materials'. Food and live animals (SITC 0); beverages and tobacco (SITC
1); crude materials, excluding fuels (SITC 2); mineral fuels (SITC 3); animal and vegetable oils, fats and waxes (SITC 4).
63
Source: KAS, Author’s computation. *data that where not available for particular goods classification are stated with “:”
The negative trade balance is addressed mostly from rapid growth of imported goods over the years. Growth in imported
goods resulted from increase in prices of products into international market of a category of Kosovo’s imports (e. g. Kosovo
main import category is Oil Derivate). Prices increased as an impact of global financial crises of 2008 and Eurozone crises
of 2010 addressing the public debt difficulties. Hence, analysis from Table 3 above show that, as primary goods and
manufactured goods, in 2005 primary goods covered of 42. 13% of total imports, while manufactured goods covered of 57.
87%. The analysis of imports structure over the years indicates a constant continuity, accordingly in 2011 primary goods
covered of 43. 56% of total imports, while manufactured goods covered of 58. 63%. Overall performance of imports structure
over the period of 2005-2011 for primary goods imported accounted for annual average of 41. 42%, while manufactured
goods imported over the same period accounted for annual average of 58. 63%.
Besides looking at exports and imports goods based on sectors, it is important to recognize the destinations of exported
and imported of goods to analyze the trade balance of the country. Trade is difficult to sustain only by domestic resources;
thus, countries are interested to cooperate together for their mutual benefits.
Trading among countries also increase and reinforce the competitiveness among them. Therefore, relevance of countries
destinations is in helping the country’s trade environment to identify the trade opportunities, trade barriers and trade tariffs
in respect to trade bilateral agreements with each respective country. Table 4 shows the exports of Kosovo’s international
trade with EU, CEFTA and Other countries.
Table 4 Exports EU, CEFTA and Others in ('000 Euro)

Period 2005 2006 2007 2008 2009 2010 2011
Austria 1, 017 1, 211 2, 005 2, 072 1, 978 5, 670 5, 711
Belgium 19 17 5, 587 28, 113 5, 176 11, 455 5, 085
Great Britain 72 62 154 173 249 681 1, 343
Denmark 142 44 94 53 75 44 52
France 515 232 145 247 639 1, 084 1, 305
Germany 5, 965 3, 952 16, 190 7, 205 7, 563 15, 587 24, 144
Greece 5, 522 3, 914 8, 400 10, 851 240 222 194
Italy 5, 668 12, 654 9, 672 25, 485 46, 218 80, 193 83, 924
Slovenia 1, 231 4, 515 4, 290 6, 304 2, 882 6, 203 6, 001
Bulgaria 970 13, 506 10, 005 2, 632 2, 709 6, 765 936
Other of EU 500 2, 001 12, 828 10, 839 3, 546 3, 907 7, 953
Total of EU 21, 621 42, 108 69, 370 93, 974 71, 275 131, 811 136, 648
Albania 5, 784 12, 645 20, 799 21, 113 26, 182 30, 841 34, 566
Macedonia 10, 828 9, 734 17, 384 20, 046 17, 355 26, 308 30, 949
Montenegro 743 2, 207 2, 913 3, 770 3, 084 3, 920 6, 988
Serbia 8, 158 20, 910 19, 280 9, 893 3, 504 3, 941 7, 198
Turkey 1, 041 1, 668 2, 660 3, 044 6, 512 9, 357 7, 831
Switzerland 681 7, 047 12, 937 7, 380 10, 510 17, 786 17, 611
Bosnia and Herzegovina 3, 411 5, 126 5, 287 5, 919 1, 206 1, 847 612
Croatia 928 1, 123 1, 837 793 2, 151 2, 744 2, 794
USA 182 3 17 286 290 116 182
China 10 5 18 31 1, 596 14, 779 28, 268
Other of non EU 2, 896 8, 198 12, 610 32, 214 21, 663 52, 507 45, 518
Total non EU 34, 662 68, 666 95, 742 104, 489 94, 053 164, 146 182, 517
Total Export 56, 283 110, 774 165, 112 198, 463 165, 328 295, 957 319, 165
Data Source: KAS.
64
An exports analysis made from Table 4 of international trade data, shows that Kosovo’s exports in 2005 within EU countries
were based mainly to Germany accounting for 5, 965 million Euros and Italy accounting for 5, 668 million Euros of total
exports. While for the same year, exports in countries under CEFTA were mainly to Macedonia accounting for 10, 828
million Euros. Thus, Germany, Italy and Macedonia in 2005, have been main destination of Kosovo’s exports, which covered
the international trade volume with 11%, 10% and 19% respectively. However, for the international market excluding EU
and CEFTA countries, Kosovo’s exports have been relatively low. While, in 2011, regarding the EU countries main exports
covered similar destinations, Germany accounting for 24, 144 million Euros and Italy accounting for 83, 924 million Euros
of total exports with EU countries. While, the case of exports in 2011 under CEFTA agreement were mainly based to Albania
accounting for 34, 566 million Euros of total exports. Whereas, the development of exports structure in international market
is evident. Exports to China accounted for 28, 268 million Euros in 2011 in comparison to 2005 where total exports to China
accounted for 10, 000 Euros. Thus, Germany, Italy, Albania and China in 2011, have been the main destination of Kosovo’s
exports, which covered the global trade volume with 8%, 26%, 11% and 9%, respectively. Analysis suggests that Kosovo
exports structure has been sustained efficiently, and recorded annual average growth rate of 36% of total exports during
2005-2011.
German China; German

y; 11% 9% y; 8%
Macedo
nia;
19%
Albania
Italy; ; 11%
10% Italy;
26%
Figure 3 Exports 2005 Exports 2011

Data Source: KAS, author’s plot.
Nevertheless, the growth rate in total exports is not a sufficient indicator to imply drastic improvements on country’s negative
trade balance (MTI, Trade Policy of Kosovo 2009). Trade balance or net exports of a country are defined by the ratio of
imports over exports (monetary value or physical value of NX). Therefore, below on Table 5, are shown the imports with
EU, CEFTA and Other countries. The comparison analysis of imports and exports in international market is one of key
indicators that reveal country’s economic condition and its development toward economic growth. Similarly, analysis of
imports has been made to see if there exist improvements of trade balance during 2005-2011. 1
Table 5 Imports EU, CEFTA and Others in ('000 Euro)

Period 2005 2006 2007 2008 2009 2010 2011
Austria 20, 719 23, 539 26, 842 30, 953 38, 886 33, 126 38, 669
Belgium 4, 646 4, 734 6, 012 7, 223 6, 105 6, 394 8, 656
Great Britain 7, 478 6, 378 9, 502 12, 580 14, 133 13, 457 17, 084
Denmark 1, 730 1, 806 3, 751 6, 194 3, 413 2, 624 3, 545
France 19, 468 15, 834 25, 007 37, 505 27, 166 33, 635 34, 755
Germany 123, 763 122, 652 155, 031 196, 627 246, 120 280, 617 293, 441
Greece 44, 027 37, 614 63, 737 81, 403 79, 107 96, 267 103, 179
1 Economy theory suggests that Country’s trade balance improves gradually over time.
65
Italy 49, 555 52, 461 57, 678 74, 385 87, 646 100, 603 159, 444
Slovenia 54, 998 56, 001 62, 420 66, 762 66, 249 65, 738 71, 614
Bulgaria 37, 791 58, 498 42, 008 53, 824 44, 493 35, 211 50, 541
Other of EU 67, 802 70, 316 120, 916 134, 526 141, 686 158, 073 165, 629
Total of 27 EU 431, 977 449, 833 572, 904 701, 982 755, 004 825, 745 946, 557
Albania 18, 093 23, 108 35, 262 59, 632 58, 385 69, 714 96, 400
Macedonia 220, 148 257, 754 237, 895 346, 536 291, 837 319, 313 365, 961
Montenegro 6, 411 17, 800 15, 063 13, 789 13, 059 11, 454 12, 232
Serbia 152, 257 191, 053 222, 534 208, 951 210, 901 260, 471 254, 917
Turkey 85, 375 97, 075 101, 827 128, 249 141, 545 150, 360 184, 452
Switzerland 18, 415 22, 800 28, 222 32, 441 21, 949 20, 981 22, 194
Bosnia and
18, 450 18, 465 29, 838 38, 747 59, 739 82, 986 79, 835
Herzegovina
Croatia 24, 975 28, 074 38, 982 49, 985 58, 544 58, 542 64, 063
USA 17, 693 11, 555 14, 698 23, 610 26, 703 35, 311 42, 847
China 54, 864 74, 655 104, 951 121, 059 128, 318 135, 406 170, 285
Other 108, 834 113, 707 174, 010 203, 255 169, 557 187, 442 252, 605
1, 003, 1, 226, 1, 180, 1, 331, 1, 545,
Total non EU 725, 515 856, 046 282 254 537 980 791
1, 157, 1, 305, 1, 576, 1, 928, 1, 935, 2, 157, 2, 492,
Total Export 492 879 186 236 541 725 348
Data Source: KAS.

Table 5 shows the imports of Kosovo international trade environment. Kosovo’s main reasons for importing are essentials;
it needs to fulfill the demand for the goods and services that are not available in country’s production resources, it does not
have sufficient quantity of the imported goods within its borders, and sometimes is cheaper to import relevant goods and
services from abroad due to innovations and technology advancement in developed countries. However, increased imports
of primary and manufactured goods that do not exist in domestic market leads in overall growth of productive manufacturing
(Lee, 1995). Thus, Kosovo’s main imports in 2005 form EU countries were from Germany, which accounted for 123, 763
million Euros and Slovenia, which accounted for 54, 998 million Euros of total imports. While, in 2005 the imports within
CEFTA are mainly carried from Macedonia, which accounted for 220, 148 million Euros, followed by Serbia that accounted
152, 257 million Euros of total imports. Since international trade volume of imports were mainly carried out by Germany,
Slovenia, Macedonia and Serbia, the percentage coverage of total imports of 2005 were 11%, 5%, 19% and 13%
respectively. The flow of imports in 2011, have almost similar structure as of 2005, where within EU countries, Germany
accounted for 293, 441 million Euros, and Italy accounted for 159, 444 million Euros of total imports. Accordingly to CEFTA
and other countries imports were carried out from Macedonia, which accounted for 365, 961 million Euros, and Serbia,
which accounted for 254, 917 million Euros of total imports. While, imports from other countries were from Turkey, that
accounted for 184, 452 million Euros then China accounted for 170, 285 million Euros of total imports. In 2011 the coverage
of total imports by EU countries was covered by Germany with 12% and by Italy with 6%. Furthermore, total exports from
CEFTA and other countries were covered from Macedonia with 15%, from Serbia with 10%, from Turkey with 7%, and from
China with 7%. Analysis made from table 5 show that Kosovo’s imports structure has been marked with annual average
growth rate of 13% during 2005 - 2011.
66
China;
7% German
Serbia; Germany
13% ; 11% y; 12%
Turkey;
7%
Slovenia Italy;
; 5% 6%
Serbia ;
Macedon 10%
ia; 19% Macedo
nia; 15%
Figure 4 Imports 2005 Imports 2011

Data Source: KAS, author’s plot.
Since, the study’s purpose is to investigate the country’s trade balance from 2005-2011, from analysis of Table 4 and Table
5 (flow of exports and imports structure of the country), it can be concluded that Kosovo’s trade balance during the
investigation period was improving slightly its negative trade balance. Where annual average growth rate of exports was
36% of total exports, while in the other hand annual average growth rate of imports was 13% of total imports. According to
David Hume (1752), increased to exports leads to inflation and higher in prices, while increased in imports leads to lower
prices. Therefore, it is very difficult to sustain trade balance of the country.
120,0%
100,0%
80,0%
60,0% Accumulative % increase
YoY on export
40,0%
Accumulative % increase
20,0% YoY on Import
0,0%
2005 2006 2007 2008 2009 2010 2011
-20,0%
-40,0%
Figure 5 Accumulative % increase Year over Year (2005-2011) of exports and imports
Source: KAS, Author’s plot.
In Figure 5, it can be seen that Kosovo’s exports participation in the international market is increasing, thus, improvements
of productivity and promotion of exports structure leads to export competitiveness (Wagner, 2007). On the other hand,
increased imports lead to improvements of country’s productivity, while trade growth would contribute to country’s economic
growth.
Conclusion
Kosovo’s economic activities, considering international trade linkage were destroyed during the conflict with Serbia in 1999.
Despite circumstances, Kosovo’s economy has been gradually recovered into a modern open economy. The main
67
economic issues that Kosovo is facing remain its negative trade balance. International trade environment is dictated by
imports; where shares of net exports in proportion to GDP were relatively to 60% in 2011. The reason of poor export
performance are mainly based on social, political, and economical issues that Kosovo is confronting. Nevertheless,
government took important macroeconomic steps, as well as developed comprehensive process to review, shift the political
and economic policies, to sustain the countries trade balance in long term.
The main suggestion that Kosovo’s trade balance could improve in long-term leads to depreciation of the value of the real
exchange rate that can help to reduce the trade deficit. Thus, when the real exchange rate is depreciated, it makes export
sector more competitive, rising the quantity demanded. Whereas, a depreciation of the value of the real exchange rate
would make import sector more high-priced, thus reducing the demand for importing international goods. Sustaining
efficiency and productivity in export sectors would require a period of low interest rate and low inflation rate.
The ability of the Kosovo economy to achieve constant continuity growth of exports and to resists the challenges of imported
goods to sustain the negative trade balance will depend on economic performance. Improvements on negative trade
balance would help the country to reduce the poverty and boost economic development, enhance competitiveness by
helping the country to cut the cost of inputs, and recovers the value added of produced output. Foreign direct investments
are also encouraged by country’s trade performance that facilitates innovations and technology. As a result, trade has an
impact into job invention by increasing the employment rate with higher income; also, it helps in boosting the supply of
goods and services by implying wider consumers’ choice with lower prices (European Commission, Benefits of Trade).
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69
Record-Keeping as a Factor Related to Meeting the Personal Financial Ratios Guideline
Dr. Belinda Xarba

“Eqrem Cabej” University, Gjirokaster, Albania
bmeshini@yahoo. com
Dr. Alketa Bejko

alketabejko@yahoo. com
Dr. Etleva Peta

evapeta@yahoo. com
Abstract
An effective way through which the families can measure the progress of their financial situation is using personal financial
analysis. The aim of this study is to determine that household record-keeping of the personal expenditures and incomes is
positively significant in achieving the recommended level of liquidity ratio, saving ratio and capital accumulation ratio. This
study was conducted in the region of Gjirokastra, South Albania and this paper presents the partial results of this study. The
analysis of personal financial ratios applied for Albania is still a “fragile seedling”. As a result, researchers, policy-makers and
groups of interest should pay more attention to it. Up to the present day, there is no recommended level for financial ratios of
personal financial reviews discussed in any academic projects especially for Albania. In order to perform the analysis of the
ratios we have been referring to the foreign researches and their guide levels, from which were selected the guide levels that
we shall refer to during the study. Based on the analysis of data related to this study, as well as on the results of Chi-Square
Test, it resulted that the managers of household who keep notes on the personal expenditures and incomes are more probable
to become closer to the recommended levels of financial ratios. The lack of alternative data led us to questionnaires in order
to collect information. After the data was collected and refined, the programs Microsoft Office Excel and Spss Ibm Statistics
were used for their elaboration. Chi – square test was used for testing.
Keywords: Record - Keeping, Personal Financial Ratios, Guideline
Introduction
The financial progress of a family is related to personal financial ratios and the achievement of their recommended level.
Researchers as: Griffith, 1985; Prather, 1990; Lytton, Garman, & Porter, 1991; DeVaney, 1993 & 1994; Grenninger,
Hampton, Kitt, & Achacoso, 1996; Moon, Yuh, & Hanna, 2002; Baek & DeVaney, 2004; Park & DeVaney, 2007; Yao 2009;
Bieker 2011; Garrett et al, 2013; etc. have suggested or used analysis of financial ratios and their guideline levels.
“Just as stock ratios are primarily based on a company's earnings, the personal financial ratios are based on an individual's
income. The objective of the ratios is to help individuals move from a situation of having high debt and low savings at the
beginning of their working careers, to one where they have high savings and no debt at the end of their working careers”
(Charles & Farrell, 2006, p. 1).
Indeed, the application of financial ratios supports several basic skills such as keeping records, thinking analytically, and
setting goals. As families begin to understand that meeting one or more of the ratio guidelines could help in avoiding
insolvency or the propensity for insolvency, the use of financial ratios and guidelines should be reinforced (DeVaney, 1994,
p. 21).
70
This paper presents the partial results of a wider study related with personal financial ratios, meeting recommended levels
of these ratios from households and factors that affect the achievement of the recommended levels. This study was
conducted in the region of Gjirokastra, South Albania.
The main objective of this study is to evidence that managers of households which practice record keeping on personal
spending and personal incomes are more likely to achieve the recommended level of: liquidity ratio, savings ratio and
capital accumulation ratio.
The research tests are as it follows:
Test 1: Managers of households which practice record keeping on personal spending and personal incomes are more likely
to achieve the recommended level of liquidity ratio.
to achieve the recommended level of capital accumulation ratio.
to achieve the recommended level of savings ratio.
Literature review
Liquidity ratio
The basic liquidity ratio further clarifies personal financial status by revealing the number of months the household could
continue to meet its expenses after a total loss of income resulting from illness, disability, or unemployment. It is calculated
by dividing total liquid assets by the household's net monthly living expenses, (Lytton et al. 1991, p. 11). Though some
financial assets are not in liquid form, they could be converted to spendable form with little or no loss in value, provided
enough time is allowed for the conversion (Prather 1990, p. 55).
Liquidity ratio = liquid assets /net consumption expenditures (monthly), (Lytton et al. 1991, p. 12).
Families who are contemplating the purchase of a home, vehicle or major furnishings may want to evaluate the level of
debt which they are able to manage relative to income. Other families may be concerned with having a reserve of cash or
cash equivalents for emergencies and want to know what amount is recommended; understanding the liquidity ratio and
guideline may help them make decisions about the allocation of assets (De Vaney 1994, p. 24).
Griffith (1985), has recommended a minimum value of this report at least 2-3. Greninger et al, 1996, p. 67 have suggested
that the liquidity ratio to be at least 2. 5.
Savings ratio
Savings ratio = annual total savings / annual disposable income
“The savings ratio provides an indicator of progress in achieving financial goals by measuring the percentage of disposable
income that is being saved annually. The savings ratio compares all cash inflows over a specific time period, generally one
year, to disposable income. If the individual or family does not save any money during the year, the savings ratio will be
zero. Moreover, the savings ratio is a measure of the percentage of disposable income allocated for future, not present,
goal attainment” according to Lytton, Garman, Porter (1991, p. 18-19). Greninger et al, 1996 has recommended that the
ratio should be at least equal to or greater than 10%.
Capital accumulation ratio
Capital accumulation ratio = investment assets / net worth. The capital accumulation ratio reveals how well an individual or
family is advancing toward financial goals for capital accumulation. It compares the value of investment assets with net
worth (Moon, et al. 2002, p. 501).
In fact, “In the formation stage of the financial life cycle, people often have very little money left over after living expenses
to use for investment purposes. If money is available, most young people soon use it as a down payment for a home. The
71
investment assets-to-net worth ratio should increase as the family advances through the life cycle” (Lytton et al. 1991, p.
21).
Some experts recommend that at least 25 % of a household's assets should be monetary, with that percentage expected
to increase as the individual and/or family nears retirement (Carman and Forgue, 1991 cited at Lytton et al. 1991, p. 21)
Under spending has a positive effect on meeting the guideline, which is expected, as saving can contribute to accumulation
of investment assets (Yao, Hanna, Montalto, 2002, p. 168).
The fact that net worth increased with decreases in household income is an important consideration in working with
beginning and expanding families. This indicates that net worth can increase even though income does not increase as
well. Young families, faced with increasing expenses of a growing family, need this type of information (Fitzsimmons &
Leach, 1994, p. 15).
Vaughn, 1976 has concluded that increasing income is not the only way to increase net worth. The most likely possibility is
reduction of expenses via change in quantity, quality, and variety of goods and services purchased (cited at Fitzsimmons
& Leach, 1994, p. 15).
In 2015 Xarba, Peta, Bejko recommended technical assistance for the citizens to use not only the earnings with high
efficiency but also to manage better their personal expenses.
Husniyah & Fazilah (2011) have noted that “financially stable urban families were those doing budgeting whereas financially
stable rural families were those who frequently involved in cash-flow activities specifically doing record-keeping. Record-
keeping practice predicted the families to be more financially stable as compared to budgeting” (p. 10).
In an economy such as one started in 2007, homeowners that do not meet the solvency ratio would be more likely to be
exposed to the serious financial problem of being unable to keep up with their mortgage payments if they experience an
income loss (Yao, R. 2009. p. 141).
According to Yao, Hanna and Montalto (2002) “Having a capital accumulation ratio guideline is helpful because it helps
households to be more aware of their financial healthiness and encourages households to invest for their goals. However,
the capital accumulation ratio should be used together with other ratios in terms of assessing households' financial health”
(p. 169).
Methodology of the study

Questionnaires
As it is mentioned previously in our country (Xarba et al. 2015) it is the first time that it is performed an analysis of the
financial ratios of households. This lack of official data on households in Albania, from which we could take data to calculate
the personal financial ratios, directed us towards questionnaires that were given to complement to the managers of the
households. The distribution of questionnaires was conducted into households of Gjirokastra District in its rural and urban
areas, households selection was casual. Data was collected specifically for the purpose of calculating and analyzing
financial ratios. While much of the response effect cannot be corrected at the data processing stage of a study, to minimize
that portion of response error due to lack of information, the analysis in this study was limited (Prather 1990 p. 59) to a
subset of the original sample where the informant was either the head of the household or the spouse of the head of
household. This eliminated cases where the informant was the child, parent, grandparent, sibling, or roommate of the head
of the family. Thus the original sample of 523 was restricted to 302 cases. Questionnaires were distributed and completed
during 2013. Households that had no employees or self-employed persons to provide safe monthly income were excluded
from this study. Gjirokastra district consists of the three towns: Gjirokastra, Permet, Tepelenë (Office of Tourism,
Gjirokastra) with an area of 2883. 98 km2 and lies in the south of Albania, bordering with Korca, Berat, Fier and Vlora.
According to the Population and Housing Census 2011 in the district of Gjirokastra are 20, 991 residences inhabited by
persons with ordinary residence (Census of Population and Housing Census 2011, INSTAT). This sample represents a
95% confidence level with an error ± 5%. A copy of the questionnaire by which are generated data for tabulation of results
is attached in appendixes.
72
Creating and computing new variables

In order to calculate the capital accumulation ratio was necessary to create and compute variables: investments assets and
net worth.
Net worth is the amount remaining after subtracting total liabilities from total assets. It is what a household would
be worth on paper if all assets (monetary, tangible, and investment) were sold at the current market value to repay
all debts (Lytton et al. 1991, p. 20)
Creating variable "Net worth":
A significant indicator necessary for the calculation of financial ratios is net worth. Based on existing theory and using the
data collected from the questionnaire was calculated:
Net worth = Total assets - Total liabilities
Creating variable "Investment assets":
For purposes of this study in this group were included all assets that can generate income, the calculation of "investment
assets" was performed as follows: “Investment assets” = “The amount in checking account” + “The amount invested in
different types of savings accounts” + “The amount invested in stocks” + “The amount invested in Treasury Bonds” + “The
amount invested in other financial investments” + “The value of rented land” + “The value of rented warehouses” +
“The value of rented stores” + “The value of other properties leased” + “Other investment assets”
Creating variable “Total of other personal assets”
For purposes of this study in this group were included: Residence, Vehicle, Furniture, Appliances, Assets for personal use.
The calculation of this variable was performed as follows:
Total of other personal assets are: Residence + Vehicle + Furniture + Appliances + Assets for personal use.
To calculate the variable "total assets" was gathered all the amount of personal assets that owns households at the moment
of completing the questionnaire.
Total assets = Investment assets + Total of other personal assets + Cash
Creating the variable "Total liabilities":
For purposes of this study in this group were included all loans and unpaid liabilities which are shown in the questionnaire
(for further more information see the appendix). These are measured by the creation of new variable "total liabilities" which
is calculated as follows:
Total liabilities = "The amount of mortgage" + "The amount of the car loan" + "The amount of student loan" + "The amount
of other loans and liabilities" + "Credit card debts. "
According to methodology used at (using data from questionnaire) Xarba, Peta & Ruspi 2015 were calculated the liquidity
ratio and were created the necessary variables for the calculation of this ratio.
To calculate the savings ratio and create the necessary variables for the calculation of this ratio we were referred to the
methodology used at (using data from questionnaire) Xarba, Peta, Bejko 2015.
Results of the research

The managers of the household in the sample were divided into 63. 2% males, 24. 2% females and 12. 6% were
both males and females.
Table 1 indicates the distributions of the main financial variables which are components of personal financial
ratios.
73
The mean value of total assets were 7175552. 58 and the median 5890000. 00. In the table you can find all respective
values of the mean and median for the main components of personal financial ratios and their distributions.
Regarding to the distribution of investment assets, annual savings, total liabilities and annual debt payment we can conclude
that they were more deviated. Deviation was more evident to total liabilities and annual debt payments presented with a
median value of 0.
Table 2 shows the distribution of three household financial ratios are discussed and used in this study. The mean of liquidity
ratio was 10. 8, however median was 2. 52. It indicates that many households have unnecessary high value of liquidity
ratio, while more than half fail to reach even the minimum of recommended level.
It is worth emphasizing that the mean value of savings ratio is 0. 09. It indicates that the level of savings is nearly in the
recommended levels. On the other hand, the 5th percentile value was –0. 35 and 25th percentile value was –0. 03, and
nearly a third of households have had negative savings ratios. Negative savings are the result of higher expenditure than
income.
Savings ratio must have a level greater or equal to 0. 1 (Greninger et. al. 1996), according to Xarba, Peta & Bejko (2015)
for this sample only 43% of the households included in the study, meet the guideline.
According to Xarba, Peta & Ruspi (2015) for this sample only 47. 4% of the households included in the study, meet the
guideline for the liquidity ratio (liquidity ratio greater than 3).
Part of the problem with the Capital Accumulation Ratio guideline is that net worth is in the denominator, because some
households have zero or negative values of net worth. However, when the analyses are performed excluding households
with zero or negative net worth, there are few changes in the patterns reported. (Yao et al. 2002, p. 170).
In our study only 1 of champions who had investment assets with a value greater than 0 had a negative net worth.
Researchers have given their recommendations about the guide level of capital accumulation ratio:
Yao 2009, Moon et al. (2002), De Vaney, Greninger et al. (1996), Lytton et al. 1991.
Considering the literature studied (calculations for this ratio were performed in Excel) the capital accumulation ratio was
calculated for the sample studies where the households were classified into household that reached level guide and ones
that did not reach. This classification was performed starting from the guide of this ratio suggested by researches greater
or equal to 0. 5. Only 20. 5% of the households including in the study, meet guide level of savings ratio. For detailed
information see Table 3.
In the specific section of the questionnaire was measured with Likert scale of 1 to 5 the variable "How often do you record
the notes of your household incomes and expenses?” where the respective ratings were: 1 = Never, 2 = Any time, 3 =
Sometimes, 4 = Often, 5 = Always.
In order to measure the impact of record keeping on spending and personal income in achieving the recommended level
of personal financial ratios was used Chi square test. The research tests are as it follow:
To perform the above tests was used this variable "How often do you record the notes of your household incomes and
expenses?” which is measured with 5- point version: never, any time, sometimes, often, always, compared with the
variables “Households classified by meeting the recommended level of liquidity ratio”, “Households classified by meeting
the recommended level of savings ratio”, “Households classified by meeting the recommended level of capital accumulation
ratio”, variables that were classified into 2 categories: "Households that do not meet the recommended level" and
74
“Households that meet the recommended level”.

From the results of Chi-Square Tests for "How often do you record the notes of your household incomes and expenses?”
and “Households classified by meeting the recommended level of liquidity ratio”, was concluded that there is significant
association between record-keeping on personal spending and personal incomes and meeting the recommended level of
liquidity ratio (χ2 = 126. 395, df=4, p <0. 05, when Sig < alpha, there is a relationship between variables, Table 4).
For concrete research (V= 0. 647, df = 4) it was concluded that effect size is very high. According to the result that expresses
the relationship between two variables (V= 0. 647, Table 5) was concluded that: regularly record-keeping on personal
spending and personal incomes has a significant impact in meeting the recommended level of liquidity ratio.
Based on these results it was concluded that managers of households which practice record keeping on personal spending
and personal incomes are more likely to achieve the recommended level of liquidity ratio.
and “Households classified by meeting the recommended level of capital accumulation ratio”, was concluded that there is
a significant association between record-keeping on personal spending and personal incomes and meeting the
recommended level of capital accumulation ratio (χ2 = 24. 322, df=4, p <0. 05), (when Sig < alpha, there is a relationship
between variables, Table 6).
For concrete research (V= 0. 284, df = 4) was concluded that effect size is very high. According to the result that expresses
the relationship between two variables (V= 0. 284), Table 7, it was concluded that regularly record-keeping on personal
spending and personal incomes have a significant impact in meeting the recommended level of capital accumulation ratio.
and personal incomes are more likely to achieve the recommended level of capital accumulation ratio.
and “Households classified by meeting the recommended level of savings ratio”, was concluded that there is significant
association between record-keeping on personal spending and personal incomes and meeting the recommended level of
savings ratio (χ2 = 96. 053, df=4, p <0. 05, when Sig < alpha, there is a relationship between variables, Table 8).
For concrete research (V= 0. 564, df = 4) it was concluded that effect size is very high. According to the result that expresses
the relationship between two variables (V= 0. 564), Table 9, it was concluded that regularly record-keeping on personal
spending and personal incomes has a significant impact in meeting the recommended level of savings ratio.
and personal incomes are more likely to achieve the recommended level of savings ratio.
Conclusions
From the 302 households involved in the calculation of the capital accumulation ratio only 20. 5% meet the guideline. This
indicates that a very small amount of net worth was held in liquid and investment assets. In a considerable percentage of
the households in this study, the largest weight of assets is occupied by other personal assets (as we know net worth is
calculated as the difference: what I own (asset) - what I owe (liabilities) = what belongs to me (net assets), while for the
effect of this study (Total assets = investment assets + other personal assets + cash). A statement that indicates indirectly
that income from interests and rents will be very low for a considerable percentage of the studied households.
75
Xarba, Peta & Ruspi (2015) results indicate that 47. 4% of households that were surveyed have met the recommended
level for liquidity ratio (p. 55).
According to Xarba, Bejko, Peta (2015) the analysis of the savings ratio results that 57% of households that were surveyed
did not meet the recommended level for this ratio. They recommended that government, through its policies, should
stimulate savings in our country”.
The findings indicate that there is a statistically significant association between record-keeping on personal spending and
personal incomes and meeting the recommended level of liquidity ratio, capital accumulation ratio and savings ratio, thus
managers of households which practice record keeping on personal spending and personal incomes are more likely to
achieve the recommended level of these ratios.
Only 24. 5% (Table 10) households managers have always keep notes. This shows that one of the main factors that has
affected in the low numbers of households that have met the recommended level of liquidity ratio, capital accumulation ratio
and savings ratio has been because of the negligence of households in record keeping.
An investment assets-to-net worth ratio reveals how well an individual or family is advancing toward financial goals other
than home ownership as it compares the value of actual investment assets accumulated to net worth (Lytton et al. 1991, p.
20).
No financial ratio created in the United States has been tested empirically of its efficiency of financial status for Albanian
households. Thus according to Xarba et. al 2015 it was recommended considering the fact that for our country there is no
recommended levels for savings ratio, it is of interest to be studied and determined the optimal level of this ratio for our
country.
As families gain understanding of the use of financial ratios, they will want to make comparisons of ratio values using
information from past records and to set goals for the future (DeVaney, 1994, p. 21).
According to Xarba, Peta, Ruspi, (2015) researches into households budgets in the Albanian economy in the view of using
financial ratios during the transition period has been minimal. Empirical researches in this area have been quite rare in our
country. Lack of knowledge on household finances and their management make quite important to attract the attention
towards personal finance and personal finance ratios. This emergency is indicated even by world experience of recent
years which connects the start of the global financial crisis with household finances and their mismanagement.
References
[1] Baek, E. , & DeVaney, S. A. (2004). Assessing the baby boomers’ financial Wellness using financial ratios and a
subjective measure. Family & Consumer Sciences Research Journal, 32, 321–348.
[2] Bieker, R. (2011). Differences between Black and White household financial Well-being:What do household financial
ratios indicate? National Social Science Journal, 37, 8-16.
[3] Charles J. Farrell, J. D. (2006), “Personal Financial Ratios: An Elegant Road Map to Financial Health, ” Journal of
Financial Planning, Volume 19.
[4] DeVaney, S. A. (1993). Change in household financial ratios between 1983 and 1986, Were American households
improving their financial status? Financial Counseling and Planning, 4, 31-46.
[5] DeVaney, S. A. (1994). The usefulness of financial ratios as predictors of household
[6] insolvency: Two perspectives. Financial Counseling and Planning, 5, 5-24.
[7] Fitzsimmons, V. S. & Leach, L. J. (1994). Net worth change:Beginning and expanding life cycle stages. Financial
Counseling and Planning, 5, 65-82.
[8] Grenninger, S. A. , V. L. Hampton, K. A. Kitt, and J. A. Achacoso. 1996. “Ratios and benchmarks formeasuring the
financial Well-being of families and individuals. ” Financial Services Revieë
[9] Griffith, W. 1985. “Personal financial statement analysis: A modest beginning. ” Proceedings, Third Annual
Conference of the Association of Financial Counseling and Planning Educator, edited by G. Langrehr, 123-131
Columbus Ohio: Ohio State University, Department of Consumer Sciences.
76
[10] Husniyah, A. R M. Fazilah, A. S (2011) “Factors contributing to financial stability of urban and rural families”,
Pertanika Journal of Social Sciences & Humanities, Volume 19, No. 1, 2011 Pages 99 to 112.
[11] INSTAT: Censusi i popullsisë dhe banesave 2011, INSTAT 2012 Fq. 161
[12] Lytton, R. H. , Garman, E. T. , & Porter, N. M. (1991). How to use financial ratios when advising clients. Financial
Counseling and Planning, 2, 3-23.
[13] Moon, S. J. , Yuh, Y. , & Hanna, S. D. (2002). Financial ratio analysis of Korean households. Family and Consumer
Sciences Research Journal, 30 (4), 496-525.
[14] Park. M. , DeVaney. Sh. 2007, “Examining a Model of Economic Well-being, based on Financial Ratios” Consumer
Interests Annual, volume 53, 131-145.
[15] Prather, C. G. (1990). The ratio analysis technique applied to personal financial statements: Development of
household norms, Financial Counseling and Planning, 1, 53-69.
[16] Yao, R. , Hanna, S. D. , & Montalto, C. P. (2002). Factors related to meeting the capital accumulation ratio guideline.
Financial Services Review, 11 (2), 153-171.
[17] Yao, R. (2009). Financial Wellbeing of Chinese American households. Asian Consumer and Family Economics
Association, Yamaguchi, Japan, June.
[18] Xarba, B. Peta, E. Ruspi, E. (2015), “The impact of the reading information in meeting the recommended level of
liquidity ratio””, Book Proceedings of ICBLAS II 2015 Tirana, Albania, April 4 2015
[19] Xarba, B. , Peta, E. , Bejko, A. (2015), “Raportet financiare personale, rëndësia e tyre”, Balkan Journal of
Interdisciplinary Research (BJIR), Special issue I, Proceedings of First International Conference on
Interdisciplinary Studies, Tirana, Albania, June 2015.
[20] Xarba, B. , Peta, E. , Bejko, A (2015) (In press, July edition), "Savings ratio, the impact of reading information",
European Scientific Journal.
Tables
Table 1: Distribution of variables, components of personal financial ratios
Mean Median Percentile 05 Percentile 25
Disposable annual income 1130706. 54 959500. 00 335200. 00 614000. 00

Monthly disposable income 94225. 57 79958. 50 27933. 00 51167. 00
Monthly Household Consumption Expenditure 76740. 41 68950. 00 24200. 00 50833. 00
annual savings 209821. 95 54750. 00 -222000. 00 -32000. 00
Annualy debt payments 50976. 16 . 00 . 00 . 00
Liquid assets 823382. 05 180000. 00 5000. 00 15000. 00

Investment assets 2372491. 32 700000. 00 . 00 . 00
Total assets 7175552. 58 5890000. 00 565000. 00 3625000. 00
Total liabilities 295895. 70 . 00 . 00 . 00
Net worth 6879656. 89 5695000. 00 335000. 00 3260000. 00
Percentile 25 Percentile 75 Percentile 95 Percentile 99
Disposable annual income 614000. 00 1380000. 00 2390000. 00 3900000. 00
Monthly disposable income 51167. 00 115000. 00 199167. 00 325000. 00
Monthly Household Consumption Expenditure 50833. 00 97292. 00 152083. 00 215334. 00
annual savings -32000. 00 279750. 00 1080400. 00 1900000. 00

Annual debt payments . 00 . 00 276000. 00 619200. 00
Liquid assets 15000. 00 900000. 00 4100000. 00 8005000. 00
Investment assets . 00 3500000. 00 10100000. 00 16500000. 00
Total assets 3625000. 00 9605000. 00 18550000. 00 23450000. 00
77
Total liabilities . 00 . 00 2000000. 00 4000000. 00

Net worth 3260000. 00 9360000. 00 18050000. 00 23450000. 00
Table 21: Distribution of Financial Ratios

Mean Median Percentile 05 Percentile 25
Liquidity ratio 10. 80 2. 52 . 07 . 29
Capital Accumulation Ratio . 21 . 13 . 00 . 00
Savings ratio . 09 . 07 -. 35 -. 03
Percentile 75 Percentile 95 Percentile 99 Standard Deviation
Liquidity ratio 11. 92 43. 28 90. 24 20. 74
Capital Accumulation Ratio . 44 . 84 . 92 . 68
Savings ratio . 23 . 55 . 66 . 30
Table 3: Households classified by meeting the recommended level of savings ratio *The gender of household manager Crosstabulation*
The gender of household manager
Male Female Both Total
Households classified by Households that do not meet Number 146 65 29 240
meeting the recommended the recommended level % within total 48. 3% 21. 5% 9. 6% 79. 5%
level of capital accumulation Households that meet the Number 45 8 9 62
ratio recommended level % within total 14. 9% 2. 6% 3. 0% 20. 5%
Number Number 73 38 302
Total
% within total % within total 24. 2% 12. 6% 100. 0%
Tabela 4: Chi-Square Tests (Impact of record-keeping & liquidity ratio)

Value df Asymp. Sig. (2-sided)
Pearson Chi-Square 126. 395a 4 . 000
Likelihood Ratio 140. 950 4 . 000
Linear-by-Linear Association 115. 461 1 . 000
N of Valid Cases 302
a. 0 cells (0. 0%) have expected count less than 5. The minimum expected count is 22. 25.
Table 5: Symmetric Measures (Impact of record-keeping & liquidity ratio)

Value Approx. Sig.
Phi . 647 . 000
Nominal by Nominal Cramer's V . 647 . 000
a. Not assuming the null hypothesis.
b. Using the asymptotic standard error assuming the null hypothesis.
Table 6: Chi-Square Tests ( (Impact of record-keeping & capital accumulation ratio)

Value Df Asymp. Sig. (2-sided)
78

Table 7 : Symmetric Measures (Impact of record-keeping & capital accumulation ratio)

Value Approx. Sig.
Phi . 284 . 000

Table 8: Chi-Square Tests (Impact of record-keeping & savings ratio)

Value Df Asymp. Sig. (2-sided)
Table 9: Symmetric Measures (Impact of record-keeping & savings ratio)

Value Approx. Sig.
Phi . 564 . 000
Table 10: Record keeping on personal spending and personal incomes
Frequency Percent Valid Percent Cumulative Percent

Never 65 21. 5 21. 5 21. 5
Any time 62 20. 5 20. 5 42. 1
Sometimes 54 17. 9 17. 9 59. 9
Valid
Often 47 15. 6 15. 6 75. 5
Always 74 24. 5 24. 5 100. 0
Total 302 100. 0 100. 0
Appendixes
Questionnaire
Please circle the alternative approximates more you and your household. Complete the required information.
1. The gender of the person who actually manages the money in the family is:
79
1. Male
2. Female
3. Both
2. Personal expenditures:
2.1 Please enter your household average monthly expenditure that your family has had to last month:
Attention! Do not report expenditures more than once.
DESCRIPTION Sum/ALL
2. 1. 1 Personal expenditures (food, clothing, shoes, detergent, hairdressing, make- up, gifts, fitness,
jewelry, etc. )
2. 1. 2 Health care expenditures (medicines, doctor visits, etc. )
2. 1. 3 Transportation expenditures (fuel, maintenance, license / taxes, tickets, public transport, etc. )
2. 1. 4 Debt expenditures (credit cards, car installment loan, personal installment loan, line of credit, etc.
excluding home loan)
2. 1. 5 Housing expenditures (phone, water, electricity, cables, furniture, appliances, etc. )
2. 1. 6 Expenditures for children (day care, babysitters, toys, clothing, etc. )
2. 1. 7 Tax expenditures / taxes (taxation and various taxes)
2. 1. 8 Monthly expenditures of mortgage
2. 1. 9 Expenditures: Monthly rent house
2. 1. 10. Entertainment expenditures (movies, concerts, theater, vacations, hobbies, pets, bars,
restaurants, art magazines and books, CDs, videos, cassettes, etc. )
2. 1. 11. Other expenditures
2. 2 Please enter your household average yearly expenditure that your family has had to last year.
DESCRIPTION Sum/ALL
2. 2. 1 Insurance Expenditures: car, life, etc. (not included insurance of the home)
2. 2. 2 Education Expenditures (school fees payment, textbooks, courses, etc. )
2. 2. 3 Maintenance of the apartment, utilities, repairs, etc.
2. 2. 4 Tax expenses for housing, apartment insurance
2. 2. 5 Expenditures for charity (donations, other)
2. 2. 6 Other expenditures
3. Personal Income:
Please enter your household average monthly/yearly incomes that your family has had to last month/year. (Attention! Do
not report expenditures more than once. )
DESCRIPTION Sum/ALL Monthly Yearly

3. 1. 1 Incomes from private business
3. 1. 2 Incomes from agriculture
3. 1. 3 Incomes from livestock
3. 1. 4 Incomes from remittances
80
3. 1. 5 Incomes in the form of gifts

3. 1. 6 Incomes from workhand
Salaries of family members are as follows::
3. 1. 7 Salary 1
3. 1. 8 Salary 2
3. 1. 9 Salary 3
3. 1. 10 Salary 4
Pensions for members of the family are as follows:
3. 1. 11 Pension 1
3. 1. 12 Pension 2
3. 1. 13 Pension 3
Other incomes
3. 1. 14 Other incomes
1. Set below the amount of cash that your family owns at the moment:
2. Cash ___________ ALL
3. Set below the amount of money that your family owns in checking account:
4. Amount of _________________ALL
5. Does your family has saved or invested financial instruments?

6. Yes No
7. Circle the appropriate alternative in which your family has saved or invested money:
8. Accounts, savings deposits
9. Stocks
10. Bonds / Treasury Bonds
11. Other investment
12. Set below the amount on money you have invested or saved:
13. Amount of _________________ALL
14. Set below the income derived from the amount of the money you have invested or saved.
15. Amount of _________________ ALL earned during one year
16. Does your family has invested in real estate?

Yes No
17. Circle the appropriate alternative in which your family has invested money:
18. Rented land.
19. Home rented.
20. Warehouses rented.
21. Stores rented.
22. Other assets rented.
23. Set below the amount on money you have invested in real estate
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24. Amount of _________________ALL
25. Write down the income earned from the amount of the money you have invested in real estate:
26. Amount of _________________ ALL earned during one year
27. Houshold liabilities:

28. 14. 1 Does your family has taken loans (money owed)?
Yes No
a. Circle the appropriate alternative that shows the kind of loan that your family has taken:
1. mortgage
2. car loan
3. student loan
4. other loans and liabilities
b. How much unpaid loan does your family owe?

29. Amount of _________________ALL
a. Credit card debts.

30. Amount of _________________ALL
31. Household assets:

Please enter the market value of the following items:
DESCRIPTION Sum/ALL
15. 1 Residence
15. 2 Vehicle
15. 3 Furniture
15. 4 Appliances
15. 5 Assets for personal use
15. 6 Other investment assets
14 On a scale of 1 to 5, where 1 is “Never” and 5 is “Always” determine how often do you record the notes of your
household incomes and expenses?
82
The Impact of Family Income on Students Financial Attitude
Doc. Ph. D. Dorjana NANO

Lecturer University “Eqrem Cabej”
Email: nano. dori@yahoo. com
Ph. D. Teuta LLUKANI

Email: t. llukani@gmail. com
Ph. D. Antoneta Polo

Email: neta_polo@gmail. com
Abstract
This research explores the differences on Financial Attitudes among Albanian university students based on their family
income. The main objectives of this study are: i) firstly, to assess students attitude towards money management practices; ii)
to examine whether their financial attitude differs based on the level of family income; and iii) finally, to present some
conclusions and recommendations for parents, practitioners and students in way that they can shape healthy financial habits.
An instrument comprised of specific and personal questions is administered to 637 students from five public and two private
universities in Albania. The consistency and reliability of the survey is tested by the dimension reduction technique and
Cronbach Alpha test. Data analysis is conducted based on analyse of variance. The results exhibits that Albanian university
students do not have good financial attitude. Parental income is found to influence their children attitude towards money
issues. Students with low parental income are discovered to show better financial attitude in comparison with other categories.
This research recommends parents and other practitioners to teach proactively students about money smart.
Keywords: financial attitude, family income, Albanian university students.
1. Introduction
In recent years there has been a growing concern about student’s attitude toward money management. University students
make up one segment of the population that especially need to be aware of the impact of their financial decisions.
Inadequate attitude toward the importance of budgeting or tracking expenses can lead in misusing money and building bad
financial behavior (i . e. plentiful spending on goods and services for the purpose of impressing others) among young adults.
The financial decisions made early in life create habits difficult to break which affect students’ ability to become financially
secure adults (Martin & Oliva, 2001). A large body of literature researches student’s attitude toward personal finances and
continually reports that students are risked of unreasonable financial attitude and behavior. Dilworth, Chenoweth and
Engelbrecht (2000), conducted a research to explore students and their parents’ attitude toward everyday finances. They
identified seven major themes: necessities, security, luxuries, savings, debts, charity, and money philosophy. Students’
participants were found to anticipate major purchases as homes, cars, and new furnishings. Authors suggested that
financial education should play a more role to help students nearing graduation to temper their aspiration for luxurious and
to learn patience in accomplishing financial goals. In another study conducted to 401 undergraduate students from a mid-
sized northwestern university, Coleman explicated that almost half of the participants felt that they knew “more than most”.
As expected, non-business majors, were unlikely to admit that they knew “more than most” in comparison with business
ones. Other studies conducted in the early 2000s (Leila and Laily, 2011; Richter and Prawitz), continued to find that students
are not much confident about money matters. Danes (1994) suggested the need for parents to realize when children are
83
ready to be involved in various financial decisions so they can take advantages of these windows of opportunity by creating
adequate financial attitude and learning experience. Hayhoe et al. discovered that if parents used money as a reward,
students are more likely to borrow money. According to Jewkes (2009, the majority of children create money habits – good
or bad – at home. Furthermore, studies have discovered that students who report high parental income are more prone to
spending money, less interested in financial matters and see less need for precautionary saving. Parental income can be
used as an indicator of a student’s lifestyle, social class, and the resources and opportunities that are available to them
(Robb and Pinto, 2010). These results lead to the following questions: Does students’ parental income have an influence
on their financial attitude? Does higher family income result in not appropriate financial attitude? The main aim of this paper
is to explore whether there is any discrepancy in students’ financial attitude based on their family income. The main
objectives of this study are:
• Firstly, to estimate the level of students’ financial attitude based on different classes of family income;
• Secondly, to investigate whether students’ financial attitude is influenced by their family income;
• Finally, to draw some conclusions and recommendations in order to help students establish reasonable financial
attitude.
This research raises the following hypothesis:
Students’ family income influences their financial attitude.
2. Methodology
This study utilizes a questionnaire designed in two parts covering personal and financial attitude questions. The personal
section requires information about: gender, age, parental income, work experience, money management source of learning,
etc. The financial attitude includes one question on how safe does the student feel about money management and eleven
attitude statements to capture their attitudes toward money practices. A five point Likert scale is utilized in order to measure
on how the participants agree or disagree with the particular financial attitude statements. Participants are asked to select
from 1, if they completely disagree with statement given to 5 whether they completely agree. The average response for the
twelve statements provides an overall score for the students’ financial attitude. 637 participants from five public and two
private universities across Albania participated in the study. Public universities involved in this research are: University of
Tirana; Agriculture University of Tirana; University “Aleksandër Moisiu”, Durrës; University “Aleksandër Xhuvani”, Elbasan
and University “Eqrem Çabej”, Gjirokastër. Private universities considered are: University “Marlin Barleti”, Tiranë and
“Kristal” University, branch Përmet. The response rate counts for 95% (607 of 637). Questionnaires completed less than
95% of the questions involved are considered unavailable. Data are processed in the Statistical Package for the Social
Sciences (SPSS 20). The consistency and validity of the survey are tested based on the factor analyses and the reliability
analysis. In addition, the one way Welch ANOVA technique is utilized for investigating the differences in financial attitude
based on students’ family income. Furthermore, multiple comparisons between different groups, classified according family
income classes, are examined by considering Tukey post-hoc test.
3. Data Analyzing and Findings

• The Reliability of the questionnaire
The internal consistency of the questionnaire is tested based on the value of factor loading provided by the factor analyses
of each component included in the financial attitude section. The reliability of the survey is measured based on the
Cronbach’s Alpha index yielded by the reliability analysis. The high proportion of variance in our variables tested by Kaiser-
Meyer – Olkin's test (KMO = 0. 792) indicates a valuable factor analysis. The usefulness of factor analysis is also
confirmed by the zero value (less than 0. 05) of the significance level of Bartlett's Test of Sphericity. Three out of thirteen
components included in the factor analyses are extracted based on the Principal Component Analysis, since they loaded
less than 0. 4 (Table 1). The other factors loaded resulted greater then 0. 4, showing a good internal consistency of the
survey. Meanwhile, the Cronbach’s Alpha index stands at 0. 704 considering all the items that are resulted successfully
84
from the factor analyses. A reliability coefficient of 0. 70 or higher is considered “acceptable” as recommended by Cavana
et al. , (2001).
Table 1: Factor & Reliability Analysis

Factor Loading
Maintaining financial records . 467
Spending less than your income is very important . 579 KMO = 0. 792
I believe I have in control my financial situation . 614
I feel capable to manage optimally my future income. . 619
I am certain about my money spending. . 507
I feel credit cards are safe and risk free . 296
I believe is very important to save money each month. . 492
I feel life insurance is an important way to protect loved ones. . 585 Bartlett's Test of Sphericity
Sig. 000
I feel is very important to read and understand the contract of an . 612
apartment lease or a loan before I sign.
I like talking with my friends/colleges about money management issue. . 491
Cronbach’s Alpha index: 0.

704
Sample Characteristics
Table below illustrates information about the participants’ characteristics. Based on the statistics provided in table 2, it can
be seen that the majority of the respondents were males (71%), aged 18 – 22 years old. Almost half of the respondents
(48. 1%) have reported middle or lower middle family income (greater than 20, 000 Lekë – 60, 000 Lekë). 36. 6% reported
upper middle or high family income (greater than 60, 000 – 80, 000 Lekë, or greater than 80, 000 Lekë), and only 10. 6%
displayed low parental income (0 – 20, 000Lekë). Most of the respondents considered school as their primary source of
money management learning, and only a third reported their family. The majority (61. 6%) reported their university studies
to be fully paid by their parents.
Table 2: Sample Characteristics
Gender Frequency Percentage
Female 176 29%
Male 431 71%
Total 607 100%
Years of Age
18 -22 439 72. 3%
23 – 29 126 20. 8%
30 – 39 37 6. 1%
39 and over 4 0. 7%
Missing system 1 0. 1%
Total 606 99. 9%
Family Income
0 – 20, 000 Lekë 64 10. 6%
Greater than 20, 000 – 40, 000 Lekë 152 25. 0%
Greater than 80, 000 Lekë 106 16. 8%
Missing system 24 4. 6%
Total 607 100%
Primary Source of Money management learning
85
My family 176 29. 0 %

School 239 39. 4 %
Discussion with friends 21 3. 5 %
Media 33 5. 4 %
Experience 135 22. 2 %
Total 604 99. 5%
University education paid by:
Self 120 19. 8 %
Parents 374 61. 6 %
Mostly self 31 5. 1 %
Mostly parents 44 7. 2 %
50% self, 50% parents 29 4. 8 %
Others 5 0. 8 %
Total 603 99. 3%
• Students Financial Attitude
In order to capture the level of financial attitude and its differences among students with different family income, an analysis
of variance (ANOVA) and descriptive statistics are conducted. Table 3 below provides detailed information about the mean
and standard deviation according to different groups’ income. Statistics demonstrates that students scores around four at
the financial attitude showing not a satisfactory performance, since the upper limit is 10. The overall score of financial
attitude is illustrated to be statistically significant among different groups (F = 3. 069, sig. = 0. 016).
Table 3: ANOVA
Mean Standard Deviation
0 – 20, 000 Lekë 4. 07 . 582
Greater than 20, 000 – 40, 000 Lekë 3. 95 . 596
Greater than 40, 000 – 60, 000 Lekë 4. 01 . 575 F = 3. 069
Greater than 60, 000 – 80, 000 Lekë 4. 03 . 415
Greater than 80, 000 Lekë 3. 95 . 663 Sig. 0. 016
In closer inspection of the data, it can be observed that students who have reported the lowest family income (0 – 20, 000
Lekë) have yielded the highest score of financial attitude (M = 4. 07), followed by students with middle or upper middle
family income (M = 4. 01, M = 4. 03). Students, who declared lower middle parental income and those with the highest
ones, are shown to perform worse in financial attitude. This statistics support the hypothesis that students’ parental income
influences their financial attitude.
The Tukey Post Hoc test (table 4) provides evidence about the multiple comparisons of the financial attitude scores based
on the variable family income. Results reveal a statistically significant discrepancy in financial attitude scores among
students with lowest family income and those of lower middle family income. The mean difference between the lowest
income students and the highest one is shown to be significant at 90% level of significant. This outcome approves the
hypothesis that students’ family income affects their financial attitude level.
86
Table 4: Tukey Post Hoc Test

(I) Family Income (J) Family Income Mean Std. Error Sig. 95% Confidence Interval
Difference (I-
J) Lower Upper
Bound Bound
0-20, 000 Leke Greater than 20, 000 – 40, 000 Lekë . 122* . 044 . 042 . 00 . 24
Greater than 40, 000 – 60, 000 Lekë . 068 . 044 . 533 -. 05 . 19
Greater than 80, 000 Lekë . 124 . 047 . 064 . 00 . 25
Greater than 20, 000 – 0-20, 000 leke -. 122* . 044 . 042 -. 24 . 00
40, 000 Lekë Greater than 40, 000 – 60, 000 Lekë -. 054 . 034 . 523 -. 15 . 04
Greater than 60, 000 – 80, 000 Lekë -. 079 . 036 . 175 -. 18 . 02
Greater than 80, 000 Lekë . 001 . 038 1. 000 -. 10 . 10
Greater than 40, 000 – 0-20, 000 leke -. 068 . 044 . 533 -. 19 . 05
60, 000 Lekë Greater than 20, 000 – 40, 000 Lekë . 054 . 034 . 523 -. 04 . 15
Greater than 80, 000 Lekë . 055 . 038 . 601 -. 05 . 16
Greater than 60, 000 – 0-20, 000 leke -. 043 . 045 . 880 -. 17 . 08
80, 000 Lekë Greater than 20, 000 – 40, 000 Lekë . 079 . 036 . 175 -. 02 . 18
Greater than 80, 000 Lekë . 081 . 040 . 245 -. 03 . 19
Greater than 80, 000 0-20, 000 leke -. 124 . 047 . 064 -. 25 . 00
Lekë Greater than 20, 000 – 40, 000 Lekë -. 001 . 038 1. 000 -. 10 . 10
*. The mean difference is significant at the 0. 05 level.
4. Conclusions, Discussions and Recommendations

This study exhibits the financial attitude of 607 students from multiple universities across the country. It reveals the level of
financial attitude and its discrepancy among Albanian university students based on their family income. The study provides
evidence that Albanian university students do not have a good attitude towards personal finance. One of the factors found
to affect their attitude on personal finances is their parental income. Evidences suggest that students with low level of family
income are more likely to have a better financial attitude in comparison with students with other parental income.
The outcomes of this research can be mainly explained by the inappropriate parental guidance about money management
practices. Parents mostly neglect teaching children money matters everywhere. Students with higher parental income may
have the attitude that money comes easily and they can buy whatever they want. The statistics of this study demonstrated
that most of the students declared their university studies to be fully paid by their family. By not knowing the value of working
for money and having almost financed their living and education spending, students are not fostered to prioritize, tracking
expenses and following a monthly budget. On the other hand, students with low parental income may have being faced
with difficulties early in life and have learn that money matters.
87
Training parents on how to teach children healthy financial habits will make them capable to teach and model positive
financial habits in the home. It is essential to parents to educate children to set priorities and give them a personal allowance
in order to value money and their education. They can instruct their children for good or bad. Parents can teach their children
that “money values”, or “money is there to be spent”. Finally, Proverbs 22:6 says: “Train up a child in the way he should go,
and when he is old he will not depart from it. ” Except the role of parents, institutions of higher education, banks and
professionals could offer seminars to students on the importance and ways to establish a proactively financial lifestyle.
It is recommended that further quantitative research can be conducted in order to verify the other factors affecting students’
financial attitude. In addition, future qualitative studies would be useful to gain insight in depth of students’ financial attitude.
Furthermore, other studies could be undertaken to understand the correlation between students’ financial attitude and
behavior. Finally, future researches can utilize the logistic regression method of study, in order to explicate students’
financial attitude by considering other variables simultaneously.
References
[1] Atkinson, A. , F. Messy (2012): Measuring Financial Literacy: Results of the OECD / International Network on
Financial Education (INFE) Pilot Study. OECD Working Papers on Finance, Insurance and Private Pensions, No. 15,
OECD Publishing. http://dx. doi. org/10. 1787/5k9csfs90fr4-en.
[2] Cavana, R. Y. , Delahaye, B. L. & Sekaran, U. , (2001): Applied Business Research: Qualitative and Quantitative
Methods. Queensland: John Wiley & Sons Australia, Ltd.
[3] Coleman, S. , Financial Literacy and Attitudes Toward Personal Finance of College Undergraduates. http://rwahlers.
iweb. bsu. edu/abd2008/papers/p08_coleman.
[4] Danes, S. M. (1994). Parental perceptions of children’s financial socialization. Financial Counseling and Planning 5,
127 - 146.
[5] Dilworth, J. L. , Chenoweth C, l. , Engelbrecht, J. , (2000). A Qualitative Study of the Money Goals of College
Students and Their Parents. Journal of Association for Financial Counseling and Planning, 11 (2), 33-42.
[6] Hayhoe, C. R. , Leach, L. J. , Turner, P. R. , Bruin, M. J. , Lawrence, F. C. , (2000). Differences in Spending Habits
and Credit Use of College Students. Journal of Consumer Affairs, 34 (1), 113-133.
[7] Jewkes D. Melanie, (2009): “Teaching Children Money Management”. Finance & Economics. University Cooperative
Extension.
[8] Leila Falahati and Laily Hj. Paim, (2001). A comparative study in Money Attitude among University Students: A
Gendered View. Journal of American Science, 7 (6).
[9] Martin, A. , & Oliva, J. C. (2001). Teaching children about money: Applications of social learning and cognitive
learning developmental theories. Journal of Family and Consumer Sciences, 93 (2), 26-29.
[10] Melanie D. Jewkes, (2009). Teaching Children Money Management. Finances and Economics.
[11] Richter, J. , Prawitz, D. A. , (2010): Attitudes of College Students Toward Credit Cards: A Comparison Of Credit Card
User Types. Accessed online on June 2013 from http://www. mrupured. myweb. uga. edu/. . .
/credit_card_study_poster_abstract_EFERMA_2010_F1. pdf.
[12] Robb, C. A. & Pinto, M. B. (2010): College Students and Credit Card Use: An Analyses of Financially at-risk
students. College Students Journal, 44 (4), 823.
88
The Analyses of Albanian Budget Expenditure
Doc. Ph. D. Dorjana Nano

Email: nano. dori@yahoo. com
Ph. D Cand. Eduina GUGA

Manager at “Guga Electronics”
Email: eduina. guga@hotmail. com
Abstract
Public expenditure efficiency has been an issue of concern for many researchers. Studies have shown that public budget of
the developed and developing economies is not optimally allocated and managed. Anyway, discrepancies are found between
both economies. This paper aims to investigate and critical analyze the allocation of public expenditure in the Republic of
Albania. In addition, it provides some relevant comparison of the performance indicators among Albania, regional countries
and OECD states. Data provided by the Ministry of Finance and Open Access Data are evaluated by considering the functional
classification of the budget expenditure. Results of this study suggest that Albania spends more on social protection and social
security, and less on education and health compared with the average of the EU countries and OECD countries. In addition,
inefficiency of the public sector is discovered. This research recommends the necessity in the improvement of input allocation
by using 70 percent less resources to achieve the same amount of public output and consequently contributing positively on
fiscal consolidation.
Keywords: analyses, albanian, budget, expenditure
1. Introduction
Albania is experiencing the transformation phase for more than 23 years. The importance of the public and private sectors
on the economic development has being augmented significantly. Although the increasing role of the private sector on
allocation of resources and GDP contribution, it is found evidence that public sector plays a major part on money distribution.
According to Curristine (2009) a significant portion of monetary values is distributed and redistributed through the public
sector, which in different countries, ranges from 25-60 % of the GDP.
Government plays a major role on the development and progress of the country since it by has the legal right and financial
tools for attracting a substantial portion of the income from the private sector through the taxation system. It is also its
responsibility for the public expenditure efficiency, which consists on the use of resources so as to maximize the production
of public goods and services. According to Verhoeven et al. , (2007) , an economic system is said to be more efficient than
another (in relative terms), if it can provide more public goods and services for society without using more resources.
There are a lot of reasons that emerge the importance of analyzing the public expenditures conducted by the government.
Firstly, the public sector economic activities, carried out by the government, have a specific character and do not submit to
the same rules compared to those of the private sector function. The main principle governing private sector economic
activities is “voluntary exchange", which according to Adam Smith (1776) makes it possible for all to win. Since the activity
of government is not based on voluntary exchange of services provided, then the analysis and transparency of costs
conducted by the government is not only a necessity, but also the only way for the public to understand what the activities
and services offered and provided by the government are. Secondly, the analysis of government expenditure is important
to be conducted in order to give a clear view on how these expenses are financed. Public expenditures could theoretically
be financed through taxes, loan and by printing of new money. All three of these ways have different impacts on the
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economy of a country, and that is the reason why this analysis is necessary. Thirdly, analysis of public expenditure is a
necessity to identify the cost of the services provided by the government. Cost analysis, i. e. of government efficiency is
particularly necessary during the process of decentralization, where, given the principle of subsidiary, the efficiency of the
governing levels is a basic criterion to decide on the distribution of functions between local and central government. Finally,
expenditure control is an important process for controlling bureaucracy. Analysis of the public sector in different countries
has proved that in a situation where public control lacks, over public finances, then the growth of the budget expenditure is
encouraged, in order to keep the administration, reducing at the same time the quantity and quality of public services
derived directly from the public (Dhori Kule, Olta Milov, 2008).
This research aims to analyze Albania’s Republic Budget for the period of 2006-2013 in order to highlight and evident its
main focus among different functions. The main objectives of the study are:
• to identify the importance of the public expenditure analyses on economic development of a country;
• to review and analyze the existing literature on the efficiency of public expenditures;
• to conduct a detailed analyses of the Albanian public expenditures based on the period 2006 – 2013 and to
make relevant comparison among Albania, countries in the region and OECD states.
• to draw some conclusions and policy implications with regard to improve public expenditure effectiveness.
Efficiency of public spending has been studied extensively in recent years, particularly in relation to general expenditure,
education and health. Efficiency is the relationship between resources used and the maximum possible goods and services
produced by this amount of resources. Clements (2002) noted that about 25 percent of expenditures for education are
abused in EU countries, while best practices are observed in OECD countries. Alfonso et al. , (2005) conducted a research
on public expenditure efficiency of the 23 member countries of the OECD (Organization for Economic Co-operation and
Development). They constructed seven semi- public performance indicators. Authors discovered inefficiency of the public
expenditure and argued that these countries could have increased the results by 11. 6 percent using the same resources.
However, it is pointed out that inefficiency is closely as well related with other factors beyond government control, such as
the average economic level of the families and level of parental education. In 2010, this study is enriched by extending the
analysis considering the new member states of the European Union (EU). Alfonso et al. , found that countries with small
public sector (public expenses less than 40 percent of GDP) tend to be more efficient. Results demonstrated that efficiency
varies substantially among EU member states, which in turn means that there is a great potential for savings. The results
of these studies are limited regarding the tools used to measure the performance and the influence of exogenous factors
beyond the control of public authorities.
Verhoeven et al. , (2007) evaluated the efficiency of expenditure on health and education in the G7 countries, and
suggested measures to be undertaken in order to increase the efficiency, including careful planning and personnel
management, reallocation of costs to outputs cost-effective, and implementation and enforcement of the regulatory
framework.
Spinks and Hollingsworth (2009) utilized the evaluation techniques without parameters to determine the relative technical
efficiency of health expenditure among the OECD member countries. They used an output-oriented Data Envelopment
Analysis (DEA) to measure the technical efficiency of the health systems using the latest data available on infant death and
life expectancy as health outcomes. Their results showed that technical efficiency varies across these health systems and
this translates into potential savings of resources. The average efficiency scores for all heath systems were 0. 98 for life
expectancy at birth and only 0. 821 for infant mortality. More than half of the health systems in the sample were technically
inefficient in 2009 for both outputs. They found that 30% of national health systems were technically efficient for both
outputs.
90
Taking advantage of the availability of new indicators, Sopek (2011) has undertaken a research on analyzing the efficiency
of public spending on education in Croatia using the PISA scores1. Author suggests that Croatia has still room for improving
the efficiency of its system.
Despite the large body of foreign literature studied the efficiency of public expenditure, there is still a lack analyzing this
topic recently in Albania. Centre for Research and Development (CRD) conducted a research in Albania aimed to analyze
the performance of Albanian public expenditure for the years 1993-2003, according to the economic and functional
classification2. Results of this study demonstrated a discrepancy between economic development priorities and planned
expenditures for priority areas such as education and health. Health was found to be the sector with the largest difference
for available funds, compared to other developed countries. In addition, some deficiencies in the costs for central
administration budget line were noticed in the budgetary planning in 2005. The planned expenditures for central
administration were resulted to be about 30 percent less than the costs actually incurred during 2003, which could create
anomalies in the functioning of central institutions activities during the budget implementation. Furthermore, some
deviations were discovered among facts and plans, especially in the economic costs and unemployment assistance for the
years 1999-2002 (up to 101 %), housing for 2000 (642 %), order and security for the years 1999 and 2000 (up 113 percent)
etc. These deviations are explained by a periodic lack Parliament supervision of the expenditures and as well as the low
capacity for managing the state budget by the respective ministries. Finally, compared to the years 1999-2001, it was
observed an improvement of the planning and monitoring of implementation of the state’s budget for 2002 and 2003.
3. Methodology
This research assesses the efficiency of the budget expenditures in Albania for the period 2006 - 2013. Efficiency is
measured by making use of indexes and performance indicators provided by the Ministry of Finance and Open Data
Access. The analysis is based on the functional classification of public expenditure which intends to show the direction
where public funds are spent. This classification includes “code” and “function”, as follows:
01. General Public Services
02. Protection
03. Order and Public Safety
04. Education
05. Health
06. Insurance and Social Assistance
07. Recreation, Culture & Religious Affairs
08. Energy
09. Agriculture, Forestry, Fishing & Hunting
10. Mineral Resources
11. Transport and Communications
2 Economic classification of budget expenditures serves to indicate the purpose of Use of revenues, as such, they do not show where
they are spent, but the economic direction of the expenditure budget, is on seven classes: Current Expenditures, Staff, Interests,
Operating Expenses & Maintenance, Subsidies, Social Insurance Costs, Local Government Expenditures, Other expenses, Capital
Expenditures (Law no. 9936, dated 26.06.2008 "On budget system managemen")
91
12. Other Commercial Services

13. Other expenses
Comparative technique and ground theory are utilized. The comparative study is useful in order to compare the indexes
and the priorities sectors among Albania, countries in the region and OECD states. In addition, this comparison will be
valuable to examine any lack or deficiency in the Albanian budget allocation and management.
4. Data Analyses of the State Budget

The analysis of expenses by function is very important because in this way can be explained which were the sectors where
that the budget funds are directed. This is ultimately because the public is primarily interested to know where and in what
sectors budgetary funds are spent. Likewise, the expenditure analysis shows where and how the funds are spent and how
the political priorities are established to support specific sectors and with the achievement of these priorities. The
expenditure analysis by function, through indicators expressed as a ratio to GDP, also serves to determine fairly and
precisely the objectives for the coming years. This is because accurate prognosis cannot be conducted if the history of
budget expenditures in prior periods is not available. Finally, the analysis of expenses by function is important to compare
the level of expenses incurred in Albania with that of the developing countries or with equal or higher development.
Budgetary expenditures of Albania compared with regional countries

The line chart below provides information about the budget expenditure in percentage of GDP for Albania and region
countries. As it can be seen from the Figure 1, Albania has the lowest expenditures to GDP in the region. Meanwhile,
ranked in first place is Greece (50. 4 %), followed by Bosnia and Herzegovina (50 %), Montenegro (47 %), Serbia (44 %),
Croatia (42 %), Turkey (37 %), Macedonia (33 %) and Kosovo (31 %).
Figure 1: Budget Expenditure of the Region in % of GDP, Source: ODA, 2014
The country with the greatest budget expenditure reduction of over the last decade is Bosnia and Herzegovina, while the
country with the largest increase is Kosovo.
92
Public Expenditure by Functional Classification

In order to analyze the expenditures by function we are using indicators that reflect the expenses in relation to GDP and in
absolute form. As it can be seen from the "Map", in 2012, the function of "Social security and Social Insurance" continues
to absorb most of the Albanians money. The amount allocated was 105. 7 billion, in other words, 26. 01 % of the entire
budget. Compared to 2010, this feature has been increased by 7 %. In the second place, but with a significant difference
is the use of "Transport” with 48. 8 billion or 11. 16 % of the budget. Compared with a year ago this feature has been
increased very slightly, with about 500 million.
Figure 26: State Budget 2013 according to the Functions Source: Ministry of Finance, 2014
The third function funded by the states budget, is “Debt“. The amounts paid for the interest of the domestic and external
debt for 2011 is 47. 8 billion. It means that Albanians are paying more interest than investment in roads, or the education
system, health and so on. This item absorbs 11. 7 % of total expenditures and has been steadily increasing since 2007,
with five milliards each year. "Education" and "Health" remain constant by about 10 % and 8-9 % of the budget, while the
“Defense” level is 5. 2 %, deepening further the gap with "Order and Security”. That means more money for the national
security than for the internal order and the police. Despite the advertisement of Agriculture as a high priority to the
development of the country, its budget does not exceed 2 % of the State’s Budget. “Culture” is positioned worse, and it also
includes Tourism within. Only 3. 4 billion or 0. 83 % of the budget is allocated to Cultural Heritage, Museums, Forts that are
demolished or archaeological parks of Albania. This amount is included within the budget for tourism development, which
is at 0. 06 % of the total budget.
Comparison with OECD countries

All OECD member countries consume most of the budget for social security, with the exception of South Korea and the
United States. South Korea spends most of its budget on economic issues and U. S. on healthcare. Both countries spend
less on social security compared to other OECD 1 countries. Health expenses are the second priority leading after social
security among member countries of the OECD. A well-organized health system helps increase the efficiency and
productivity. This is an area where inefficiencies cause significant cost for economy. Expenditure on health, in percentage
of the total budget is among the three main priorities for all countries, with the exception of Hungary in which it is ranked
the fifth. In Korea, Netherlands, Poland and Sweden these expenditures are ranked the fourth. Ireland and U. S. pay 21
percent of their budget on health, while Japan and Iceland 19 %.
93
Poland lies at the other extreme, spending only 10 % of the budget on health. Hungary, Greece and the Netherlands spend
11 percent. Education is the third and among the foremost priorities of the OECD countries. Long-term investments in
education and human capital play an important role in maximizing productivity.
Healthy economies tend to invest a large share of GDP in building human capital. Investment in education and training
contribute to further growth and innovation. Education is one of the five priorities for every country, but in Denmark, Iceland
, South Korea and New Zealand it is ranked in second place and it is ranked in the third for Ireland, Luxembourg,
Netherlands, Norway, Portugal, Sweden, UK and USA, and in the fourth and fifth place for other countries. Iceland and
New Zealand allocate 19 percent of the budget on education, more than any other country, Canada 18 percent, South
Korea and the U. S. 17 percent of the budget. Greece stands at the lowest level with only 7 percent of the budget allocated
to education, Germany 9 percent, Italy 10 percent, and eight other countries about 11 percent.
Expenditure on the functioning of Social Security and Social Defense/Protection

Expenditures on social protection for families with low income and unemployment payments are funds which express the
re-allocation of the state budget. Transfers to the Special Fund of Social Insurance of the State Budget are calculated as
the difference between income from social security and social insurance expenditures. A large part of this amount is used
to cover the deficit in the social insurance scheme, which itself suffers from insufficiency of contributions collected to cover
pensions distribution. For this reason, social insurance subsidy is becoming a constant problem. Also, through transfers
from the budget to the SHI (Social and Health Insurance), the state realizes a part of its policy for additional payments to
certain individuals, which are outside the insurance scheme.
Figure 3: State Budget Transfers for SHI, Source: Ministry of Finance, 2014
State Budget Transfers for SHI (milion Lek)

45000
40000
35000
30000
25000
20000
15000
10000
5000
0
2000
2012
1993
1994
1995
1996
1997
1998
1999
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
Expenses for Transport and Public Affairs

Transport and communication are key factors to the economic development of a country. In the market economy conditions,
transportation and communication are essential elements that have an impact on reducing the costs of the economic
transactions and in the sustainable development of the country, especially in the development of rural suburban areas of a
country. In Albania, the need to support this sector during the transition period has been a necessity because of the fairly
low level and backwardness Albania inherited in the field of transport and communications in general. The distribution of
the budget in percentage for the function of "Transport and Public Affairs” for 2013 is as follows
Figure 4: Distribution of the budget in Percentage for the "Transport and Public Affairs" Function 2013, Source: Ministry of
Finance, 2014
94
As it can be seen from the table, most of the budget for “Transport and Public Affairs” is allocated to the national road
network (65. 68 % of the 2013 Budget). Among the major investments that have been made in this direction in the recent
years are the following:
• Construction of Rreshen-Kalimash road 60 km, with four lanes and a tunnel about 6 km, which cost around 520
million Euros, or 50 % of the Albanian Government funding. The rest was funded by commercial loans. (finished
in 2009)
• Construction of Milot-Rreshen road, 26 km, (part of the corridor Durresi - Kukesi- Morina), funded from the
World Bank & F. OPEC (USD 35 million) and the Government of Albania (finished in 2009)
• The construction of the Fier- Levan - Vlore road, 43 km, about 101 million euros (finished in 2010).
• The construction of Fier- Levan -Tepelena road, 71 km, (about 70 million), (finished in 2010).
• Build parallel secondary roads in Rrogozhina-Lushnja- Fieri interval, 2. 8 billion (year . 2009 – 2012)
The second priority of this function is the construction and maintenance of Water Supply and Sewerage. This has absorbed
about 23. 8 percent of the 2013 budget. The water supply and sanitation sector is characterized by a poor management
and its decentralization has not given the expected improvements. Incomes have been rising from year to year, but the
subsidy continues to be necessary to keep it functioning, at a time when the sector could have been profitable.
Income of Water Supply and Sewerage Sector (WSSS) in 2010, has experienced a high increase, with about 50 % more
than in 2009. The amount of subsidy in 2010 was 1. 8 times higher than the previous year. If we examine the subsidy /
income ratio a decrease would be noticed, by 40 % in 2008 to 22 % in 2009, but again 2010 is accompanied by a further
increase, taking the ratio to 42 %.
5. Conclusions and Recommendations

Albania has the lowest expenditures to GDP in the region. Meanwhile ranked in first place is: Greece (50. 4 %) followed by
Bosnia and Herzegovina (50 %), Montenegro (47 %), Serbia (44 %), Croatia (42 %), Turkey (37 %), Macedonia (33 %) and
Kosovo (31 %). The analysis of public expenses for public functions showed that the priorities of our country have been
different compared to OECD countries. All OECD member countries spent most of the budget for social security, except of
South Korea and the United States. Health expenses are the second priority leading after social security among the member
countries of the OECD. Expenditures on health, as a percentage of the total budget are the third main priority for all
countries, except for Hungary (fifth place), and Korea, Netherlands, Poland and Sweden (fourth). Ireland and U. S. devote
21 percent of total expenditures in health while Japan and Iceland 19 %. Poland lies at the other extreme, spending only
10 % on health expenditure, while Hungary, Greece and the Netherlands spend 11 percent. "Transport and Public Affairs"
95
are ranked the second, with about 10. 64 % of budget funds in 2013. Compared to 2012, this function has decreased by 7.
8 %. Meanwhile, "Education" and “Health " remain respectively at the levels of 8. 96 % and 9. 8 %, approximately the same
as in the previous years. Education is the third among the foremost priority for OECD countries. Countries with healthy
economies tend to invest a huge weight of GDP in building human capital. Education is one of the five priorities for every
country. Denmark, Iceland, South Korea and New Zealand ranked education in second place, and Ireland, Luxembourg,
Netherlands, Norway, Portugal, Swede, UK and USA inthe third place . Greece stands at a low level in this direction with
only 7 percent of the allocated budget, Germany 9 percent, Italy 10 percent, and eight other countries about 11 percent.
One of the most emergent needs that are recommended in this paper is to improve the quality of education in order for the
system to be similar and approximate to the EU standards. Albania is more in need for a skilled workforce, equipped with
the competencies, knowledge and skills to hand the work, which cannot be won only with the primary education system.
Persistent gaps in the educational outcomes of secondary and higher education would constitute a limiting factor for the
future economic prospects of the country. Organic Budget Law was a necessity to reflect changes made to the operation
and the separation of powers, as well as the design and implementation of the budget. Public Investment Management is
an important element of expenditure reform. The planning funds for investments suffers from two problems : the
fragmentation of funds in many objects, as well as the investment for many years in the same object without a clear idea
of the cost of this investment. Often these funds are used for purposes other than those for which the funds were created,
or are created to hide the transactions from submission to parliament or the public becoming a source of corruption.
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96
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[17] Report of the High Level Expert Committee (July 2011): Efficient Management of Public Expenditure
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[18] Shengeen Neetha Fan and Rao (2008) Public Spending In Developing Countries: Trends, Determination, and Impact
EPTD DISCUSSION PAPER NO. 99
http://siteresources. worldbank. org/EXTRESPUBEXPANAAGR/Resources/ifpri2. pdf
[19] Sopek Petar (2011): Testing the Sustainability of the Croatian public debt dynamic models
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hr%2Ffile%2F116484&ei=P2tXU6OdJ8m5yAPHxoFo&usg=AFQjCNFrNPGIuS6R2-
5J4Tx8sIBOHNFuPQ&sig2=ZPZXXzkQEnF4ad4zVZkQrA
[20] Verhoeven, Marijn ; Gunnarsson, Victoria ; Carcillo, Stéphane, (November 2007), Education and Health in G7
Countries: Achieving Better Outcomes with Less Spending
[21] World Bank (2008): Albania - Public Expenditure and Financial Accountability (PEFA) Public Financial Management
Assessment
http://ec. europa. eu/enlargement/pdf/financial_assistance/ipa/2010/pf_2_public_financial_management_en. pdf
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Income Inequality Tolerance and Preferences for Redistribution in Turkey
Ayfer Karayel
Department of Economics, Galatasaray University, Turkey
ayferkarayel@yahoo. com
Abstract
In this paper, the extent to which redistribution is desired by the Turkish and its determinants are estimated. For this purpose,
the 2009 Social Inequality Module of the International Social Survey Programme is used. Finding the attitudinal differences
between urban and rural region residents, and understanding whether these can be attributed to educational differences is
additionally aimed. The estimations indicate that pro-redistribution preferences are shaped by distributive justice
considerations captured by the question on just payment at work. Having no or low educational qualification, living in urban
regions and small cities also play an important role. Being in the lowest income categories is also associated with higher
demand for redistribution. The attitudinal difference between rural and urban residents cannot be attributed to differences in
the educational levels, differences in cultural values and/or income levels seem to play an important role. This study’s finding
that women are more tolerant of income inequality than men is the opposite of the previous finding based on the 2011 WVS
data, and of the more usual finding in other studies. Hard work has a non- significant effect in the present study although it
was one of the determinants of pro-redistribution preferences previously. The impact of income is similar to previous analysis’
finding. However, mixed results were found in the previous analysis relative to the effect of living in a specific region. The
effects are more homogeneous with ISSPA data, as all of the regions with significant coefficients have relatively reduced
support for redistribution than Istanbul.
Keywords Preferences for Redistribution, Turkey, International Social Survey Programme
1. INTRODUCTION
Cross-country analyses of the determinants of people’s preferences for redistribution highlight primarily the importance of
socio-economic factors comprising current income, occupational status, prospect for upward mobility, along with personal
history and endowments such as education, social status, risk aversion, subjective social class, race and marriage status.
Beliefs in the fairness of the allocation mechanism, perceived moral worth of the poor, individual autonomy, left-right political
orientation, active union membership, cultural factors and place of residence are other mostly accepted determining factors
in empirical research.
The highly cited Meltzer and Richard model (1981) implies that the median voter will vote for redistributive politics in
countries where income inequality is high, that is where median income is lower than mean income and there are net gains
from redistribution. Along with the analyses confirming this hypothesis and supremacy of economic factors (Corneo and
Grüner, 2002; Alesina, Di Tella and MacCulloch, 2004; Alesina and Giuliano, 2009; Guillaud, 2011; Neher, 2012),
controversial evidence is also found by certain studies. When a great number of welfare recipents are a racial minority
(Luttmer, 2001; Alesina and La Ferrara, 2001, 2005), when the poor expect an upward social mobility which may in turn
depend on education and institutional context (Piketty, 1995; Bénabou and Ok, 2001; Alesina, Di Tella and MacCulloch,
2004; Alesina and La Ferrara, 2005; Corneo and Grüner, 2002; Alesina and Giuliano, 2009; Guillaud, 2013). The limitations
of the Meltzer and Richard hypothesis and derived homo oeconomicus effect (Corneo and Grüner 2002), are also pointed
to in some analyses that focused on developing countries (Haggard, Kaufman and Long, 2013; Im, 2014). The study by
Haggard et al. draws attention to the heterogeneity among the poor and to the limited or dampening effects of inequality
on demands for redistribution. The study by Im reveals that limited educational opportunities in rural areas of China lead to
increased authoritarianism and social dominance orientation among the poor which in turn lead to higher tolerance of
inequality by people of lower socioeconomic status. This finding shows the complexity of the mechanisms of attitude
formation as less educated individuals are found pro-redistribution in most cross-country or single-country studies (Verme,
2007; Neher, 2012; Gaeta, 2012; Haggard et al. , 2013).
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The model based on income and the distribution of income is extended by the introduction and significant results of other
variables. Risk aversion is found to have a positive impact on preferences for redistribution, as more risk averse individuals
are also more inequality averse and pro-redistribution (Ferrer-i-Carbonell and Ramos, 2010; Gaeta, 2012; Guillaud, 2013).
Belonging to a lower social class than the middle also makes individuals inequality averse and pro-redistribution
(Macunovich, 2011 ; Neher 2012 Guillaud 2013). Perception of unfairness of the allocation mechanism in society drive to
favor more redistribution, other things equal (Fong, 2001 ; Piketty, 1999 ; Alesina and Angeletos, 2005 ; Corneo and Grüner,
2002 ; Cojocaru, 2011). Perceived moral worth of the poor and individual autonomy are two other variables (Neher, 2012)
that may also be related to the belief in hard work for success and to the beliefs about mobility. Left-right political orientation
affects also redistribution preferences although the reverse causality problem may occur (Kaltenthaler et al. 2008 ; Verme,
2007). Cultural factors, and welfare regime habits are shown to affect redistribution preferences as evidenced respectively
in the specific contexts of the immigrants in the USA and in reunified Germany (Alesina and Giuliano, 2009 ; Luttmer and
Singhal, 2011). With mixed evidence, demographic variables such as gender, age, marital and employment status, active
union membership, religious orientation, and size of the city of residence are also found to shape preferences for
redistribution.
Previous research for Turkey based on World Values Survey data supports the assumption that economic self-interest
shapes individual preferences for redistribution (Karayel, 2015). The present study is based on data from International
Social Survey Programme (ISSP) and aims to find the attitudinal differences between urban and rural region residents, and
to understand whether these can be attributed to educational differences. The paper is organized as follows. Section 2
presents the methodology, data and variables. Section 3 presents the results of the empirical analysis, and the last section
concludes.
2. METHODOLOGY, DATA AND VARIABLES

The econometric analysis draws on the fourth Social Inequality module of ISSP (2009) and uses a standard logit model.
Turkish people’s income inequality tolerance and preferences for redistribution are measured through the answer given to
a five-steps scale question that asks repondents whether it is the responsibility of the government to reduce the differences
in income between people with high incomes and those with low incomes. Answers are scaled as: 1 = Strongly agree; 2 =
Agree; 3 = Neither agree nor disagree; 4 = Disagree; 5 = Strongly disagree. This five-steps scale variable has been
transformed to a binary response variable in which individuals holding strong redistributionist views are distinguished from
all other responses (neutral and opposition views) by equalizing values of 1 and 2 to 1, and values from 3 to 5 to 0. This
variable is labeled REDISTRIBUTION and used as the dependent variable capturing both inequality tolerance (or aversion)
and preferences for redistribution. This question refers explicitly to government action for reducing income inequality, but it
can be argued that inequality cannot be reduced by charitable action alone if people are averse to inequality.
Turkish respondents are between 18-87 years of age. Explanatory variables are selected among the available data with no
or limited number of missing observations. Although some relevant variables that were not available in WVS data are
available in the ISSP data, some of them could not be used, given the number of missing values and problem with data.
One of them is the variable measuring subjective social mobility. Subjective social status variable indicating top bottom self
placement on a scale is the other. Left-right political orientation variable is available in both WVS and ISSP data, but could
not be used in the present estimations due to the high number of unrevealed preferences. Employment status and
subjective social status variables also posed problems.
However, variables relative to size of the city of residence and to the type of the community (urban/rural) available for
Turkey only in the ISSP data could be used, and most of the relevant variables are included. Explanatory variables used in
the estimation are presented below with variable labels. Coefficients are interpreted relative to the reference category.
Descriptive statistics of the variables are displayed in Table 1.
The variable measuring opinions about the importance of hard work for success (HWORK) has originally five categories.
Answers ranging from the first to the third category, respectively “essential”, “very important” and “fairly important” are
assigned the value 1 and labeled “important”. Answers in the fourth and fifth categories, respectively “not very important”
and “not important at all” are assigned the value 0 and labeled “not important”, this category being the reference.
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Another variable of interest is just pay (JUSTPAY) that asks respondents whether they would say they earn much less or
much more than deserved. The original six categories of answers are recoded in four dummies where the first two
categories are assigned the value 2 and labeled “less than deserved”, the third category is assigned the value 1 and labeled
“what is deserved”, the fourth and fifth categories are assigned the value 0 and labeled “more than deserved”, and finally,
the sixth category composed of respondents who never worked is assigned the value 3. The category with the lowest value,
that is “more than deserved” is the reference.
Demographic variables are sex, age and marital status. Sex variable takes the values :“1 = Male ; 2 = Female”. “Male” is
the reference category. The age variable is grouped in six categories as follows (AGE6CATEGORIES): 1 = 18-30; 2 = 31-
40; 3 = 41-50; 4= 51-60; 5 = 61-70; 6= 71-87. The first category is the reference. Marital status is indicated by two dummies:
1. Married; 0. Not married (reference category). Widowed, divorced, separated and single individuals are all included in the
“not married” category. This variable is labeled MARRIED.
The variable DEGREE shows highest educational level attained. The original six categories are recoded in four as follows:
1 = No formal qualification (reference category); 2 = Lower qualification that comprises lowest and above lowest formal
qualifications; 3 = Higher qualification that comprises higher and above higher secondary levels; 4 = University degree.
The variable UNION recoded in two dummies, takes the value 1 for trade union members and the value 0 for individuals
who were once member or never member (reference category).
Declared family income in Turkish Liras (TRY) of respondents are categorized in six groups: 1 = 0-999; 2 = 1000-1999; 3
= 2000-3999; 4 = 4000-5999; 5 = 6000-8999; 6 = 9000-15600. This variable is labeled as INCOMEF and the first category
is the reference.
Attendance of religious services is indicated by the variable ATTEND which is recoded in five categories. The first category
includes those who attend from five times a day up to five times a week. The second category ranges from once a week to
three or two times a month (reference category). The third category ranges from once a month to several times a year. The
fourth category ranges from once a year to less frequently than once a year, and finally, the fifth category includes those
who never attend.
REGION is indicated by one of the following regions : 1. Istanbul; 2. Aegean; 3. Mediterranean; 4. Southeast Anatolia; 5.
Western Anatolia; 6. Eastern Anatolia; 7. Western Black Sea; 8. Central Anatolia; 9. Central East Anatolia; 10. Eastern
Black Sea; 11. Western Marmara; 12. North Eastern Anatolia. Istanbul is the reference.
Type of community variable, RURALURB, originally grouped in five categories is recoded in two dummies where residents
in big cities, suburbs, town or small cities are assigned the value 0 and residents living in country villlages and rural areas
are assigned the value 1. Finally, size of community variable, SIZE, indicates the population of the province where the
interview took place. Turkey’s provinces are grouped in five categories according to their population : 1. More than 2 million
habitants; 2. Between 1 and 2 million habitants; 3. Between 500000 and 1 million; 4. Between 250000 and 500000
habitants; 5. Less than 250000 habitants. The reference category is the first one.
3. RESULTS
Results are displayed in two models and as odds ratios in Table 2. Odds ratios are exponentiated coefficients; they
correspond to negative coefficients when they are less than 1 and to positive coefficients when they are greater than 1. For
each categorical variable, they are interpreted relative to the reference category.
The first model (M1) excludes the educational level of respondents indicated by DEGREE. Educational level is introduced
in the second model (M2 or complete model). Both models show that the feeling of being paid unjustly at work is associated
positively and strongly with pro-redistribution attitudes compared to people who feel to be paid more than what is deserved.
People who never worked support similarly more redistribution relative to the reference category. In the second model,
those who think to be paid what is deserved show also more support for redistribution.
In both models, women are more tolerant of income inequality than men, considering that the less-than-1 odds ratio for
female in the second model is significant and that in the first model is close to 10 percent significance level. This result is
the opposite of the previous study’s finding based on the 2011 WVS data, and of the more usual finding in other studies.
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When education is included, the decreased odds ratio suggests that the attitudinal difference between female and male is
not attributable to educational level differences. A positive association is found only for the 41-50 years age category and
pro-redistribution preferences relative to the youngest age category. Being married has no significant effect on attitudes.
The complete model (M2) indicates that the support for redistiribution is reduced with increasing educational levels, a result
similar to that of most empirical findings. The complete model also indicates that the second lowest income category is
more likely to support redistribution compared with the lowest. Coefficients are non-significant for higher income categories.
The odds ratio for people who never attend religious services is significant in the first model and close to 10 percent
significance level in the complete model. This suggests that people who never attend religious services are highly tolerant
of inequality and oppose to redistribution relative to the reference category.
All of the regions with significant coefficients have relatively more tolerance for inequality and reduced support for
redistribution than Istanbul. When education is included, the coefficient of North Eastern Anatolia increases, the difference
between North Eastern Anatolia and Istanbul is attenuated even if North Eastern Anatolia residents oppose more to
redistribution than Istanbul residents. This suggests that the difference is partly attributable to educational level.
It is also interesting to note that rural residents do not support redistribution compared with urban residents. In the second
model where education is included, rural residents oppose to redistribution by the government even more, similar to the
case of female respondents : the attitudinal difference between rural and urban residents cannot be attributed to differences
in the educational levels, differences in cultural values and/or income levels are likely to play an important role.
Finally, for all region sizes indicated by the number of inhabitants, the association is positive. As the size gets smaller, pro-
redistribution preferences increase, excluding the non-significant coefficient for the size between 500000 and 1 million
habitants.
4. CONCLUSION
The present analysis aims to find the determining factors of individual support for redistribution in Turkey based on the data
from the 2009 ISSP Social inequality Module.
The estimations indicate that pro-redistribution preferences are shaped by distributive justice considerations captured by
the question on just payment at work. Having no or low educational qualification, and living in urban regions and small cities
also play an important role. Being in the lowest income categories is also associated with higher demand for redistribution.
The attitudinal difference between rural and urban residents cannot be attributed to differences in the educational levels,
differences in cultural values and/or income levels seem to play an important role.
Variables included in the present estimations that are comparable to those of the analysis based on WVS data are gender,
hard work, being dissatisfied with the financial situation of the household (used as a proxy for income), being a union
member, and region.
This study’s finding that women are more tolerant of income inequality than men is the opposite of the previous finding
based on the 2011 WVS data, and of the more usual finding in other studies. Hard work has a non- significant effect in the
present study although it was one of the determinants of pro-redistribution preferences previously. The impact of income is
similar to the previous finding. Being a union member’s effect is non-significant in both studies. However, mixed results
were found in the previous analysis relative to the effect of living in a specific region. The effects are more homogeneous
with ISSPA data, as all of the regions with significant coefficients have relatively reduced support for redistribution than
Istanbul. The difference between North Eastern Anatolia and Istanbul residents seems to be partly attributable to
educational level.
REFERENCES
[1] Alesina, A. & Angeletos, G. M. (2005). Fairness and redistribution. The American Economic Review, 95 (4), pp. 960-
980.
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[2] Alesina, A. , Di Tella, R. & MacCulloch, R. (2004). Inequality and happiness : are Europeans and Americans different
? Journal of Public Economics, 88, pp. 2009-2042.
[3] Alesina, A. & Giuliano, P. (2009). Preferences for Redistribution. NBER Working Paper 14825. Retrieved from:
<http://www. nber. org/papers/w14825>
[4] Alesina, A. & E. La Ferrara. (2001) Preferences for redistribution in the land of opportunities. NBER Working Paper
No. 8267.
[5] Alesina, A. & La Ferrara, E. (2005). Preferences for redistribution in the land of opportunities. Journal of Public
Economics, 89, pp. 897-931.
[6] Bénabou, R. & Ok, E. (2001). Social mobility and the demand for redistribution : the POUM hypothesis. Quarterly
Journal of Economics, 116, pp. 447-487.
[7] Cojocaru, A. (2011). Inequality and well being in transition economies : A non-experimental test of inequality
aversion. Working Papers 238, ECINEQ, Society for the Study of Economic Inequality.
[8] Corneo, G. & Grüner H. P. (2002). Individual Preferences for Political Redistribution. Journal of Public Economics, 83
(1), pp. 83-107.
[9] Ferrer-i-Carbonell, A. & Ramos, X. (2010). Inequality Aversion and Risk Attitudes. IZA Discussion Paper no. 4703.
[10] Fong, C. (2001). Social preferences, self-interest and the demand for redistribution. Journal of Public Economics 82,
pp. 225-246.
[11] Gaeta, G. L. (2012). In the mood for redistribution. An empirical analysis of individual preferences for redistribution in
Italy. Economics Bulletin, 32 (3), pp. 2383-2398.
[12] Guillaud, E. (2013). Preferences for redistribution : an empirical analysis over 33 countries. Journal of Economic
Inequality, 11 (1), pp. 57-78.
[13] Haggard, S. , Kaufman R. R. , Long, J. D. (2013). Income, Occupation, and Preferences for Redistribution in the
Developing World. Studies in Comparative International Development, 48 (2), pp. 113-140.
[14] Kaltenthaler, K. , Ceccoli, S. , Gelleny, R. (2008). Attitudes toward Eliminating Income Inequality in Europe.
European Union Politics, 9 (2), pp. 217-241.
[15] Karayel, A. (2015). Attitudes to Income Inequality and Preferences for Redistribution in Turkey. Forthcoming in the
Proceedings of the 14th Eurasia Business and Economics Society Conference.
[16] Luttmer, E. F. P. & Singhal, M. (2011). Culture, Context, and the Taste for Redistribution. American Economic
Journal : Economic Policy, 3 (1), pp. 157-79.
[17] Meltzer, A. H. & Richard, S. F. (1981). A Rational Theory of the Size of Government. Journal of Political Economy,
89 (5), pp. 914-27.
[18] Neher, F. (2012). Preferences for Redistribution around the World. Freie Universitat Berlin School of Business and
Economics Discussion Paper, Economics 2012/2.
[19] Piketty, T. (1995). Social mobility and redistributive politics, Quarterly Journal of Economics, 110 (3), pp. 551–84.
[20] Piketty, T. (1999). Attitudes Toward Income Inequality in France : Do People Really Disagree ? Seminar notes no.
9918, C. E. P. R. E. M. A. P.
[21] Verme, P. , 2007. Happiness and Inequality Aversion Worldwide. Conference Paper. Retrieved from: <http://www.
isid. ac. in/~planning/ConferenceDec07/Papers/PaoloVerme. pdf >
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Table 1: Descriptive statistics of variables
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Source : ISSP - Social inequality (2009)
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Table 2 : Logit estimation results reporting odds ratios
Note: *, **, *** mean significantly different from zero at the 0. 10, 0. 05, 0. 01 significance level.
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Competitive Analysis of the Hotel Industry in Konya by Using Porter’s Five Forces Model
Asst. Prof. Dr. Ramazan GÖRAL

Selcuk Üniversity/Konya,
trgoral@selcuk. edu. tr
Abstract
One of the areas of industry in Konya which needs to be analyzed regarding effective factors on competition is hotel industry.
Accordingly, the current research tries to analyze factors impacting on the industry using Porter's five forces model. According
to this model, an industry is affected by five competitive forces and these forces determine the state of competitiveness and
profitability of an industry. Porter’s model is based on the insight that a corporate strategy should meet the opportunities and
threats in the organizations external environment. Especially, competitive strategy should base on and understanding of
industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every
market: entry of new investors, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and rivalry
among existing competitors. Porter’s model supports analysis of the driving forces in an industry. Based on the information
derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their
industry. This study aims to analyze the competitiveness at Konya Hotel Industry by using Porter’s Five Forces Model. In this
study, questionnaires have been used for data collection. The statistical population of the research consists of managers of
hotel business (Senior, middle, executives).
Keywords: Porter’s Five Forces, Threat of Entry, Power of Suppliers, Power of Buyers, Threat of Substitutes, Rivalry Among Existing
Competitors.
1. Introduction
It is claimed in the Industrial Organization Theory that businesses can gain competitive advantage when they apply the
strategies required by the external factors. In other words, the competitive forces in a particular industry determine the
strategies that provide competitive advantage for the businesses in that particular industry (Porter, 1980; Porter, 1985).
Therefore it is really important to analyze the competition conditions of the industries that businesses are and/or planning
to be engaging in activities in, pick strategies accordingly to the results of the analysis, maintain the existing market share
of the business and increase it further. Five Forces Model by Michael Porter is deemed as one of the important models that
explain competitive forces in an industry. Porter (1979) asserts that the competition environment and the forces that affect
businesses in an industry determine the profitability of businesses in that industry, and that all industries have an unique
underlying structure that generates competitive forces (pp. 137-145). Hence it is necessary that the environment and five
forces that affect competition are analyzed for a business to situate itself in the best position available in its current industry.
Porter has brought an important initiative to the field of competition analysis with the ‘five forces model’ he has developed
on industrial construction that he claims has influence on the selection of location and the specifying of strategies to be
followed. Industrial analysis is seen as a precondition for a business to situate itself safely and for it to set the course of its
strategies by Porter (Karacaoğlu, 2006, pp. 29-30). In other words, by mentioning the collective power of the five forces,
Porter indicates that businesses could thrive with correct positioning in the environment structured by these forces. The
foreseen purpose in the model is the ability to subsist despite competitive forces and to use these forces in their favorwith
correct positioning.
This paper intends to analyze the competitive level of hotel industry in Konya within the scope of ‘Five Forces Model’ and
explain the forces that determine the competitive level in the hotel industry. The level, structure, causes and consequences
of competition that hotel businesses are/may be facing will be presented more clearly with the conduction of this analysis.
Moreover, the empirical data generated by the end of the research can be used as guidance for business strategies to be
developed and picked.
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2. Porter’s Five Forces Model and Hotel Industry

According to Porter (2008), mindfulness of the five competitive forces could assist a business to understand the industry
and position itself in a much more profitable place that is safer from attacks (p. 2). In this regard, Porter’s five forces
approach aims to reveal the bargaining powers of the suppliers and customers, competition between current businesses,
threats of replacement products and possible new entries into the industry. When all the opportunities and threats created
by each industrial force becomes clear, it will be possible for hotel managers to generate and conduct offensive and
defensive strategies to position their businesses appropriately (Tavitiyaman, Qu& Zhang, 2011, p. 648).
The first of the factors that are important for gaining competitive advantage is the entry of new businesses to the industry
and the threats posed by them;
New market entries signal the possible entry of new competitors in the industry. As these threaten the market share of the
present businesses in the industry and increase the main generating capacity, creating excess supply, they might lead to
remarkable reductions of the prices and consequently a decrease in the incomes of competitive businesses. The threat
generated by new entries into the industry depends on the reaction the new business may face from its present competitors
and present entry obstacles. Porter has listed these obstacles as (1) scale economies, (2) product differentiation, (3) capital
needs, (4) access to chains of distribution, (5) cost disadvantages independent of scale, (6) present brand loyalty and (7)
government policies (Porter, 2008, pp. 3-5).
Since the buildings and joining the supply chain requires vast amounts of investment and these investments can’t be
returned in short times, it can be said that the hotel industry features high levels of entry obstacles. Along with this, chain
hotel managements act aggressively in order to increase brand recognition. This might result in creating effects of brand
recognition and addiction and become an obstacle for entry. On the other hand, from economical to luxurious, attempts at
differentiating the factors such as service pricing, decoration, architecture, site, management and employees in hotel
industry can be observed. The increasing numbers of hotels limit the available sites appropriate for the target market.
Government policies might be facilitative in sites considered for hotel construction, or they might make it more difficult
(Cheng, 2013, pp. 52-57; Rutila and Tuominen, 2014, p. 19).
Consequently, the hotel industry features high levels of entry obstacles for newcomers due to a combination of different
factors such as scale economies, vast requirements of capital for investment, supply and appropriate sites, experience.
Another threat in Porter’s five forces model is threat of substitutes.
Substitute products are products and services produced in other industries that can substitute for businesses’ products,
even though they may not be identical or similar (Ülgen, Mirze, 2004, p. 97). Substitute products and services fulfill similar
customer needs in different ways. These products are especially threatening in cases of (1) price dominance of replacement
products, (2) conversion cost and customers’ tendencies towards replacement products (Porter, 2008, p. 8).
There are no specific substitute product threats towards business’ product and services in hotel industry. However,
switching domestic travels to international ones or changing some destinations forones with more relevant costs or such
might be problems businesses face. Among the same group of tourists, tendencies towards choosing cheaper
accommodation like motels, hostels, guesthouses; preferring alternative options for food and beverages might emerge
(Cheng, 2013, pp. 52-53).
Another threat generated by the industry is the bargaining power of suppliers
Suppliers with high bargaining powers can mostly put their wishes across in their relations with businesses, therefore
businesses may not have the flexibility to pick and conduct strategic decisions and actions. Powerful suppliers might
threaten the productivity of businesses in an industry by either raising the prices or lowering the quality of the products. The
profit made in an industry is transferred to the suppliers by either of these means. (1) Input diversification, (2) Cost of
switching suppliers, (3) supplier sales volume, (4) innovative integration are fundamental determining elements to suppliers’
powers (Porter, 2008, pp. 6-7).
When the bargaining power is seen from the perspective of the hotel industry, the hotels need the furthered global
information and reservation services. Moreover, hotels engage in business with various suppliers from the execution of the
project to the service provided for the guests, like furniture, construction, textile, food and beverages, entertainment.
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However, unlike other industries, hotels are not confronted with the bargaining power of suppliers intensely. Having said
this, as hotel managements need to gain cost advantage against their competitors at all times, they should cooperate with
suppliers that contribute to gaining cost advantage, along with the creation of products and services that diversify in their
own strategic groups (Cheng, 2013, p. 54).
Another one of the important factors that shape the competitive structure of the industry is the bargaining power of buyers.
Buyers that demand the goods and services produced in the industry are what is meant by customers here. Their bargaining
power is that of lowering the prices, or of demanding higher quality or more service. (1) The customers’ knowledge, (2) the
customers’ ability to perform backward integration, (3) the cost of switching suppliers to the customer and (4) the
concentration of the customer in the total endorsement are the fundamental determining factors to customers’ bargaining
power. Customers are the foremost force that directs change in accommodation industry (Tavitiyaman, et al, 2011, p. 648;
Porter, 2008, p. 7; Ulgen et al, 2004, pp. 99-100). Studies conducted in the field show that customers will increasingly
purchase more, demand lower prices and acquire larger bargaining power (Taylor, Finley, 2009, pp. 82-95).
When the element of customers’ bargaining power is looked at through the lens of hotel businesses, it is not likely for most
customers to buy a hotel or construct a new one, as the required investment is high. Even many international hotel chain
companies are the operators or managers of many hotels in their chains instead of owning them. Therefore backward
integration as customers’ bargaining power is not likely to happen. The limited nature of hotel customers globally (one
customer not purchasing many rooms) gives advantage to hotels in regards to customers’ bargaining power. Nonetheless,
corporate guests demanding special prices for large-scale bookings is inevitable. For example, like tour operators providing
service with low profit margins because of the competition, corporate guests would have a higher price sensitivity which
means they hold a bargaining power risk (Cheng, 2013, p. 54)
Another element of Porter’s five forces model that affect the competition and managerial performance is rivalry among
existing competitors.
Rivalry between the existing competitors is the result of various structural elements. Many or equally strong competitors,
slow expansion of the industry, high fixed costs, insufficient differentiation, surplus capacity, obstacles for exiting, etc.
elements increase the volume of the competition between businesses (Porter, 2008, p. 9).
In the hotel industry, the entry of alternative services such as the construction of new hotels in increasing numbers, time
sharing system, renting housing, increases the competition. Competition in the hotel industry is determined mostly by price,
similarity of segments and location (Tavitiyaman et al, 2011, p. 649). When considered all together, competition tends to
be intense in the hotel industry. Besides, there are barriers to exit from the hotel sector originating from various strategic
and economic factors in big cities. As there are not sufficient locations for hotels or the markets are shared, hotel businesses
in the industry tend to be located closely to each other. Moreover, even though it can be claimed that goods and services
differ from economical hotels to the luxurious ones, it can be hard convincing people that they really do (Rutila, 2014, p.
19).
3. Research
3. 1. Research Purpose
The purpose of this research is to examine the factors which affect the competition level of Hotel Industryin Konya (with
regards to the factors partaking in Porter’s five competitive forces model), to determine their levels and to analyze whether
they vary in terms of certain demographic and operating characteristics.
3. 2. Parameters and Hypothesis of the Research

According to Porter, five forces which determine the competition level are Entry of New Investors, Threat of Substitutes,
Bargaining Power of Buyers, Bargaining Power of Suppliers and Rivalry Among Existing Competitors. Therefore, the
competition level in this study was evaluated with regards to these five parameters.
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The basic hypothesis to be tested for this study is as follows;

H. 1: Competition level perception of Participants differs significantly in accordance with hotel classification.
H. 2: Competition level perception of Participants differs significantly in accordance with hotel size.
H. 3: Competition level perception of Participants differs significantly in accordance with their experience in the sector.
3. 3. Method of the Research

A questionnaire had been made with senior managers and department managers of 24 hotels in Konya, which held Tourism
Licenses. There are 3 five-star hotels, 7 four-star hotels and 14 three-star hotels in Konya. Minimum two managers from
each hotel were interviewed and the questionnaire forms were handed.
The questionnaire consists of two main parts as questions with regards to Porter’s Five Competitive Forces and
demographic questions. The scales, which have been developed and used earlier for studies aim to determine the
competition level of a sector by using Porter’s Five Competitive Forces model, were prepared for hotel management in 5-
Likert typein accordance with this study (1= Strongly Disagree, 5= Strongly Agree). The questions of the questionnaire
were drafted in a way that choosing number “1” means that the person who chose this answer is considered “very low level
of competition” and choosing number “2” means that the person who chose this answer is considered “very high level of
competition”. 40 of the questionnaire forms which were answered by hotel or department managers were received.
Partial Least Squares (PLS) method, which has a statistical power in complex models and small sample occasions, was
used for this study due to limited number of samples. PLS introduces minimum limitation for sample size. According to
some researchers, sample size does not cause any problems in PLS method. Moreover, the practical rule suggested for
sample size in PLS method is; it is suitable to find samples 10 times more than the scale number of parameter that has
maximum scale number in PLS model (Hair, Hult, Ringle&Sarstedt, 2014, pp. 19-20).
PLS method works with metrical, half metrical and categorical data and can process nonparametric data. Therefore, while
determining the statistical levels of estimations, nonparametric methods are being used (Hair et al, 2014, pp. 22-23).
The use of PLS method in marketing, strategic management, management information systems and many other fields has
been increasing in recent years (figure 1).
Figure 1: Number of PLS-SEM Studies by Years

Source: (Hair, et al, 2014; xv)
Systematic approach to evaluation of study results is as follows;
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• Confirmatory Factor Analysis,

• Determining Composite Reliability,
• Calculating AVE-Average Variance Extracted,
• Testing the hypothesis.
SmartPLS and SPSS software were used in order to evaluate the study results.
3. 4. Data Analysis
Firstly, bootstrapping analysis has been made by SmartPLS program in order to develop parameters for determining the
competition level and to determine the variable value. In bootstrapping analysis, many preload subsamples are being
created by way of changing from the current sample and “t” value is being determined (Hair et al, 2014, pp. 135-138). In
this study, significance level of each variable were tested by taking “t” value as 1. 96 (∝= 0. 05) and the scales which do
not meet the condition were eliminated from the analysis. Afterwards, indicator outer loading was made. In accordance with
a generally accepted rule, in order to determine convergence validity, each question should be loaded as bigger than 0, 7.
In this regard, there were no questions in the survey that does not meet this condition.
The average, standard deviation and factor loading of each scale created by PLS method were analyzed and as a result of
the analysis, the factor uploadswere proper (minimum 10 points more than the other and the maximum of the line) for PLS
conditions (Table 1).
Table 1. Average, Standard Deviation and Factor Loadings of Scales Analyzed in the Research
Factor Scales AV SD BPOB REAC TOE BPOS TOS

Our customers have enough information to compare the
products and services provided in our hotel to the products 3, 40 1, 39 0, 83 0, 56 0, 42 0, 45 -0, 01
and services provided in other hotels.
Customers drive a hard bargain about the money for room
3, 15 1, 09 0, 66 0, 47 0, 22 0, 44 0, 16
reservations.
In case the customers prefer other hotels, they do not face
2, 90 1, 39 0, 58 0, 41 0, 34 0, 22 -0, 19
any extra costs.
In case the customers prefer other hotels, it is not easy to
3, 54 1, 36 0, 81 0, 68 0, 50 0, 38 -0, 02
replace them with new customers.
The hotels in Konya are in balance with regards to their
3, 02 0, 97 0, 51 0, 70 0, 30 0, 56 0, 12
sources and capacities.
Products and services of the hotels in Konya are standard
3, 34 1, 25 0, 60 0, 77 0, 30 0, 36 0, 01
and differentials are low.
The market of the hotels of Konya is the same. 3, 34 1, 44 0, 58 0, 81 0, 29 0, 51 0, 03
It is easy to enter into the market as a new Hotel in Konya. 3, 62 1, 29 0, 58 0, 47 0, 96 0, 62 0, 06
Our customers do not have brand loyalty regarding the hotels
3, 37 1, 10 0, 25 0, 13 0, 81 0, 37 0, 16
and can easily prefer new hotels which are no name.
The number of the suppliers who supplies main products and
services (food provider, tour operator, travel agency, bus 3, 40 1, 30 0, 43 0, 47 0, 38 0, 78 0, 27
firms, etc. ) is low.
The products and services provided by the suppliers are
important for the quality of the services provided to the 3, 08 1, 24 0, 36 0, 47 0, 39 0, 65 0, 24
customers.
Replacing the current suppliers costs high. 2, 76 0, 97 0, 28 0, 31 0, 45 0, 63 0, 18
The terms of our cooperation with the suppliers (food
provider, tour operator, travel agency, bus firms, etc. ) who 3, 35 1, 29 0, 44 0, 57 0, 53 0, 84 0, 44
we are working with are long.
There are plenty of options for accommodation and food &
3, 83 0, 97 0, 00 0, 17 0, 18 0, 39 0, 88
beverage for our customers outside the hotel.
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Choosing other accommodation or food & beverage option

3, 31 1, 13 -0, 04 -0, 08 -0, 03 0, 26 0, 64
does not burden extra cost on the customers.
Alternative accommodation units (guesthouse, rent house,
timeshare etc. ) has benefit-cost advantage comparing to 3, 62 1, 24 -0, 01 -0, 08 -0, 04 0, 17 0, 71
hotels.
AV: Average; SD: Standard Deviation; BPOB: Bargaining Power of Buyers; REAC:Rivalry Among Existing Competitors;
TOE: Threat of Entries; BPOS: Bargaining Power of Suppliers; TOS:Threat of Substitutes
Next, the results of Composite Reliability were calculated. The traditional criteria for consistency is Cronbach Alpa and this
criteria assumes that all indicators have equal reliability. However, PLS scales each indicator with regards to their
reliabilities. Moreover, Cronbach Alfa is sensitive to number of questions of the scale and generally does not consider
consistency reliability. In this regard, although Cronbach Alfa can be used as a traditional scale of consistency reliability; it
is more appropriate to use another scale for measurement of PLS. The most appropriate scale here is Composite Reliability
scale, which takes into consideration the different loadings of indicator parameters. Values between 60-70 points are
sufficient for composite reliability and for oncoming processes of multidimensional researches, values between 70-90 points
can be acceptable (Hair et al, 2014, pp. 101-102).
In this context, composite reliability values are calculated as reliability scale in this study. The reliability results are shown
in Table 2. The values of factors are acceptable between 70-90 points.
The commonly used scale for Convergent validity is Average Variance Extracted (AVE). The generally accepted value for
each factor is 50 and more points (Hair er al, 2014, p. 103). AVE values are shown in Table 2 and the values are acceptable
as they are all more than 50 points. Thus, convergent validity is confirmed.
Table 2. Reliability Values of Research Factors

AVE Composite Reliability
BPOS 0, 5274 0, 8140
REAC 0, 5756 0, 8022
TOE 0, 7848 0, 8786
BPOS 0, 5337 0, 8186
TOS 0, 5677 0, 7946
Finally, arithmetic average and standard deviation of parameter scores are calculated after setting parameter scores with
SmartPLS (Table 3). These arithmetic averages are used for evaluating the Competition Level of Hotel Industry in Konya.
Moreover, the scores are analyzed by use of ANOVA method and the hypothesis are tested.
Table 3. Arithmetic Averages of Factors

Average Standard
Deviation
BPOB 3, 25 0, 94
REAC 3, 23 0, 90
TOE 3, 50 1, 06
BPOS 3, 15 0, 87
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TOS 3, 59 0, 83
4. Findings
4. 1. Demographic Findings
Demographic information regarding study subjects are shown in Table 4. Accordingly, 82, 5% of the survey attendees are
male whereas 17, 5% of them are female with 62, 5% of them are university graduates, 35% of them are high school
graduates and 2, 5% of them are primary school graduates.
Table 4. Demographic Findings

Frequency Percent
Gender
Male 33 82, 5
Female 7 17, 5
Education
Primary
1 2, 5
Education
High School 14 35
Pre License 9 22, 5
License 16 40
4. 2. Professional Findings
Professional titles and experiences of attendees are shown in Table 5. Accordingly, 17, 7% of attendees are General
Managers, 7, 5% of them are Deputy General Managers and 75% of them are hotel department managers. A great majority
of attendees are experienced managers in the sector (90%) and in the field (52, 5%).
Table 5. Professional Title and Experience Findings

Frequency Percent
Title
General Manager 7 17, 5
Deputy General Manager 3 7, 5
Department Manager 30 75
Experience in the Sector
Less than 1 year 2 5
1-5 years 2 5
More than 5 years 36 90
Experience in the Field
Less than 1 year 3 7, 5
1-5 years 16 40
More than 5 years 21 52, 5
4. 3. Competition Level of Hotel Sector of Konya

“The most efficient force”, “The least efficient force” and “Competition Level in General” in the sector are evaluated by
calculating arithmetic average of the scores regarding each competition force (Table 3) for determining the Competition
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Level of Hotel Industryin Konya in accordance with Porter’s Five Competitive Forces, which constitutes the basis of this
research. As shown in Table 3, the Most Efficient Force in determining the competition level is Threat of Substitutes (TOS=3,
59) where the Least Efficient Force is Bargaining Power of Suppliers (BPOS=3, 15). Each factor determining the competition
level of hotel industry in Konya are as 3=Medium Competition Level and 4=High Competition Level, as shown in Figure 2.
Therefore, the competition level of hotel industry in Konya is not very high but medium level.
Series1;
TOS; 3,59
Series1;
BPOS; 3,15
Series1;
TOE; 3,5
Series1;
REAC; 3,23
Series1;
BPOB; 3,25
Figure 2. Competition Level of Hotel Industryin Konya
4. 4. Findings Regarding Hypothesis

ANNOVA test results which are tested by SPSS software are given below with regards to hypothesis of this study. In Table
6, the results of “H1: Competition level perception of Participants differs significantly in accordance with hotel classification”
is given. Taking into consideration p<0, 05 in each analyze of competition forces and the differences in hotel classification
averages, H1 hypothesis is accepted.
Table 6. Competition Level Perception With Regards to Hotel Classification

H1: Competition level perception of participants differs significantly in accordance with hotel Average Standard Sig
classification Deviation
3 star 2, 60 0, 57
4 star ,
REAC 3, 00 0, 62 000*
5 star 4, 33 0, 59
3 star 2, 76 0, 75
4 star ,
BPOB 2, 94 0, 74 000*
5 star 4, 29 0, 63
3 star 2, 89 0, 70
4 star ,
BPOS 2, 61 0, 62 001*
5 star 4, 23 0, 24
3 star 2, 96 0, 89
4 star ,
TOE 3, 33 1, 21 000*
5 star 4, 41 0, 30
3 star 4, 03 0, 94 ,
TOS
4 star 3, 01 0, 53 015*
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5 star 3, 85 0, 58
*p<0, 05
In Table 7, the results of “H2: Competition level perception of Participants differs significantly in accordance with hotel size”
is given. Taking into consideration p<0, 05 in each analyze of competition forces and the differences in hotel sizes, H2
hypothesis is accepted.
Table 7. Competition Level Perception Regarding Hotel Size

Competition level perception of participants differs significantly in accordance with hotel size Average Standard Deviation Sig
1-49 2, 58 0, 59
50-99 2, 85 0, 66
REAC 100-149 2, 73 0, 40 , 000*
150-199 3, 98 0, 08
200-249 4, 16 0, 77
1-49 2, 90 0, 89
50-99 2, 53 0, 41
BPOB 100-149 3, 16 0, 97 , 000*
150-199 3, 62 0, 66
200-249 4, 18 0, 67
1-49 2, 96 0, 79
50-99 2, 64 0, 57
BPOS 100-149 2, 70 0, 82 , 001*
150-199 3, 52 1, 04
200-249 3, 97 0, 68
1-49 2, 81 0, 84
50-99 2, 75 1, 01
TOE 100-149 4, 17 0, 82 , 000*
150-199 4, 25 0, 35
200-249 4, 25 0, 62
1-49 4, 37 0, 41
50-99 3, 36 0, 98
TOS 100-149 2, 97 0, 26 , 015*
150-199 3, 87 1, 61
200-249 3, 59 0, 65
*p<0, 05
In Table 8, the results of “H3: Competition level perception of Participants differs significantly in accordance with their
experience in the sector” is given. Taking into consideration p>0, 05 in each analyze of competition forces, H3 hypothesis
is declined. Therefore, the competition level perception of attendees does not differ regarding term of services.
Table 8. Competition Level Perception Regarding Service Terms

Competition level perception of Participants differs significantly in accordance with their experience Average Standard Sig
in the sector Deviation
Less than 1 year 3, 31 0, 29

REAC 1-5 years 3, 02 0, 84 , 33
More than 6 years 3, 31 1, 00
BPOB , 15
1-5 years 2, 94 0, 83
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BPOS 1-5 years 2, 91 0, 72 , 28
TOE 1-5 years 3, 19 0, 98 , 29
TOS 1-5 years 3, 66 0, 68 , 42
*p<0, 05
5. Conclusion
In this study, Competition Level of Hotel Industry in Konya is evaluated with regards to the parameters of Porter’s Five
Competition Force. Moreover, it is also evaluated whether perception regarding competition forces differs in terms of
demographic and operating characteristics.
According to research results, competition level of Hotel Industry in Konya is “middle-high” levels. The Most Efficient Force
in determining the competition level is Threat of Substituteswhere the Least Efficient Force is Bargaining Power of
Suppliers. Taking into consideration all results;availability of guesthouses of institutions, cheaper hostel or relatives’ houses
preferences of tourists can be considered as a threat for hotels. Besides, the customers can change their accommodation
very fast due to their precision to price and also because their brand royalty is low. Therefore, it is possible to state that
negotiation power of customers is high. There are not many obstacles in town to prevent new hotel investments other than
fixed investment costs. Because of the fact that the products are standard, the competition level is high in this scope.
Furthermore, although competition level perception differs with regards to hotel classifications and sizes, it does not change
the service terms of managers.
References
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Management, Volume 9, 52-57.
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PartialLeastSquaresStructuralEquationModeling (PLS-SEM), London, SAGE Publications .
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Faaliyet Gösteren İmalat Sanayi İşletmeleri İçin Bir Model Önerisi, A. Ü. SBE. Yayınlanmamış Doktora Tezi, Ankara.
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York.
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Sciences Hachelor’s Thesis.
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CompetitiveStrategiesand Hotel Performanca, İnternationalJournal of Pospitalitiy Management 30, 648-657.
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Indonesian Online Tourism Promotion: a Rhetorical and Discoursal Look
Diah Kristina, Ph. D.

Prof. Tulus Haryono
M. Ek. , Rara Sugiarti, M. Tourism. Sebofelas Maret University
Solo, Indonesia.
Abstract
The new media offer a much wider opportunity for international recognition including the promotion of tourism destination in
Indonesia. This study aims at exploring the ways tourist destinations in Central Java, Indonesia are promoted on the website
done by five different online promotion developers. There were 20 online promotional texts scrutinized to see their typical
characteristics using theories of Critical Discourse Analysis proposed by Dijk (1998) and Kress (2010). The research findings
reveal that generally the online promotional texts were constructed as descriptive genres most of which were composed in
simple and compound sentences. There were relatively limited numbers of complex sentences employed. The mental model
of the texts typically shows a great concern to the history, philosophy, cultural myth and geographical location of the tourist
destinations under discussion. Typical use of imperatives commonly found in advertisements seems to be hardly available.
Likewise, rhetorical questions that function to engage readers are unlikely existing in the online promotion of tourist destination
of Central Java developed by the Indonesian government and other private agents. In contrast, the online promotion of tourist
destination of more developed institutions like the Singaporean and Malaysian government makes use of recount genre that
functions as a testimony. For a thicker description of findings, in-depth interviews with English speaking tourists were also
conducted.
Keywords: tourist destination, rhetorical question, testimony.
I. Introduction
With the coming of the new media, business florishes dramatically including the hospitality industry in Indonesia. The www.
emarketer. com reported in 2014 that internet users all over the globe will hit the peak of 3 billion in 2015 and nearly half of
the world’s population will have regular access to the web by 2018. Additionally, the Indonesian internet users will reach
the top five overtaking Japan by 2017 showing how significant this new media for business, official and private
communication purposes. Hasbrouck (2001) argues that the development of information is parallel with the development
of people’s movement, power and money. Historically, the global electronic web was believed to be initially drawn from the
rapid expansion of the travel industry.
With respect to tourism industry, the Indonesian government set up a target of 7 millions tourists visiting this country in
2014. For that reason, promotion of tourist destination to foreigners using the language that attracts and motivates them is
considered crucial. The language that persuades, reaches out and engages the prospective visitors is assumed to have an
important role, not only to attract but also to motivate, to convince and to booze the tourists’curiousity.
This article aims at exploring the Indonesian online tourism promotion made by 5 online promotion developers namely,
Ministry of Tourism of the Republic of Indonesia, Tripadvisor, www. eastjava. com, Budha Dharma Education Association
1996-2012, and Lonely Planet. 8 validated online texts among 20 available online texts were selected for the primary data
and tentatively 4 English speaking informants were requested to look at and read the online tourism promotion texts. Since
the study is still in progress, other four informants of much younger age group will be interviewed and an additional focus
group discussion with the stakeholders will be also conducted. Theoritical insights were drawn form theories proposed by
Dijk (1998) and Kress (2010) and used as analytical lenses.
II. Related works and their relevance to the current work

Some works are considered relevant to this work among others are Novalina (2008) who studied the role of tourist promotion
in the Ministry of Tourism and Culture Bandung District to motivate tourists to visit Bandung and the sorroundings. However,
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this study did not address the significant role of language in promoting the destination. Another closely related study may
be the work of Muhammad Arifin Bin Salim, et. al (2012). This study was done as a review of literature using online database
by employing 3 keywords namely, tourism, tourism discourse and language of tourism. The previous work certainly differs
from the current work in terms of nature of the research and data collecting techniques inwhich the present study is
etnographical. In terms of effectiveness of the online promotion, the work of Kim and Fesenmaier ( (2008) might be relevant
to this work in the aspect of persuasiveness of the destination websites but not the language to express the message
inwhich the researchers investigated users first impression and quick judgment on the online texts.
Seaton & Bennet (1996:179) state that promotion and tourism has particular objectives. They argue that ‘Effective
promotion starts, like any other marketing activity, from an analysis and clear formulation of strategic objectives. These
involve: (1) identification of the target audiences to be reached; (2) identification of the communication goals to be achieved
with each; (3) formulation of messages designed to achieve the goals; (4) choice of media for delivering the messages
effectively to the designated audiences; (5) allocation of a budget to achieve the production and delivery of the messages;
and (6) evaluation mechanism in terms of sales, direct action or communication measurers’.
Considering the objectives of tourism promotion proposed by Seaton & Bennet (1996), the current work especially focuses
on the third objective namely, formulation of messages designed to achieve the goals. In this respect the study is done by
looking at the way the language of online tourist promotion is formulated in order to persuade, motivate and change behavior
of the prospective tourists.
III. Research Method

Under the research method, some sub-topics are set namely, research design, data and data resources, data collecting
technique, data analysis, validity and reliability of data.
III. 1. Research design

The present study belongs to descriptive – qualitative and etnographical type of research. Descriptive refers to an objective
representation of phenomena investigated by the researcher. The phenomena being investigated are the English
expressions and their persuasive elements used in the online tourism promotion in Central Java, Indonesia, the verbal
convention and effectiveness of language use in the online texts. The etnographical qualities of the study were drawn from
the observation and in depth interviews with the informants as users of the online tourist promotion.
III. 2. Texts used

The texts used were online tourist promotion texts on the websites made by 5 tourism promotion web-developers namely
Ministry of Tourism of the Republic of Indonesia, Tripadvisor, www. eastjava. com, Budha Dharma Education Association
1996-2012, and Lonely Planet. Actually, there are 22 Indonesian online promotion texts on the web that promote Central
Java. However, after validated, 12 texts from the Indonesian web developers were selected and other 4 online texts
developed by the Malaysian and Singaporean web developers were used as cross-checkers.
III. 3. Data and data resources

The primary data were words, phrases, clauses and sentences drawn from the online tourist promotion of Central Java
destination. Besides, the secondary data were information taken from observation and indepth interviews with 4 foreign
visitors from USA, Australia and Chille. The informants were professionals and selected based on their age group as
different age-group is assumed to have different expectations on how the online tourist promotion should sound and look
in order to persuade them to visit the destination.
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III. 4. Techniques of collecting data

Taking into account the nature of the study as a descriptive- qualitative and ethnographical study, the technique of collecting
data is presented as follows:
a. Data were collected from online tourist promotion texts developed by 5 Indonesian website developers.
b. In depth interviews in a semi-structured way were carried out to get reliable and comprehensive information
from the informants.
c. Informal observation and talks were done with members of the freelance tourism community who upload new
destinations on the Instagram.
III. 5. Data and data analysis

The source data of this study were Indonesian online tourist promotional texts focusing on Central Java destinations.
Additionally, the primary data of the study were words, phrases, clauses and sentences in the online texts while the
secondary data were information collected during the in depth interviews witth the informants. The data analysis was done
using the macro, micro and super structure analysis proposed by van Dijk (1998) and multimodal perspectives advocated
by Kress (2010).
III. 6. Validity and realibility

Validity of the source of data for the study is obtained based on the face validity in which the online texts were taken from
the Google search engine with the keyword of ‘online tourism destination in Central Java’. To add, the reliability is achieved
by making sure that ‘the findings obtained are consistant with the data collected’ (Merriam, 1998:206).
IV. Results of the study

The general assumption drawn by viewers from the online tourist promotion developed by the Indonesian Ministry of
Tourism (http://www. indonesiatravel/en/discover-indonesia/region-detail/32/cen) is the opinion that central Java is rich in
culture (Sentence 1 &3), has an extensive network of good roads and railways that link major cities and villages (S 9, 10,
11), uses culinary specific to every city as one of the main attractions (S 16, 17, 18, 19). In terms of rhetorical structure, the
producer of the online text employs a strategy of describing the historical background of Central Java since the Hindhu,
Buddhist and Islamic reigns (S 1-5), the Dutch occupation (S 6, 7) and the Indonesian independence (S 8-27). Textually,
the online promotion is constructed from 20 simple sentences, 8 compound sentences and 1 complex sentence.
Syntactically, those sentences are developed using pre and post modifiers in the form of noun and adjunct phrases. At first
impression, the online promotion text looks short and simple but lacking of substantial information seeked by the foreign
tourist like suggested by informant 2 below.
‘I didn’t find this is very useful as a matter of fact I try to do a lot of online research before I am coming here. . . there is a
small number of information and the information is very basic and the photos. . . it’s hard to get the sense of how beautiful
it is. ’ (interview conducted on Sunday, June 21, 2015).
Contrary to the 2 nd informant, the 1 st and the 3 rd informants found the information in the online promotion help them to
have an initial knowledge of the destination and the photo of Borobudur temple creates a ‘mystical feel because it helps
viewers to enjoy the atmosphere of some sanitized place that facilitates an escape from routine’ (interview conducted on
Friday, June 19, 2015). The 4 th informant even highlights how inportant pictures or photographs have been for prospective
tourists to come and visit the destination: ‘of course photos are the first thing I am looking for before coming here’ (interview
conducted on Sunday, June 21, 2015).
The imperative construction typical to advertisements and modalities showing obligation are used in a very limited way for
example ‘be sure to visit. . . ’ (7); ‘try the lumpia. . . ’ (8); ‘ if you like religious objects, you should visit. . . ’ (10); ‘you could
trace. . . ’ (10). Likewise, the discoursal strategy employed has been creating a mental model of mixing history, culture,
tradition and panoramic views as the main point of tourism attractions and that the text is presented descriptively and
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informatively with minimal engagement between the text producer and the online promotion viewers shown by the absence
of rhetorical questions and limited gimmick expressions to reach out the audience.
The second online text developed by the Budha Dharma (http://www. buddhanet. net/borobudur) uses the historical
perspective to pass on information about Borobudur temple (S1-3 and S10-13) embedded by physical structure of the
temple in between. Since the online promotion text offers a particular object to visit, therefore a descrption of its historical
background and phyisical appearance is presumably considered significant by the text producer. Likewise, the online text
is constructed descriptively with relatively equal use of simple and compound sentences. The engangement between the
text producer and the text consumer seems distant as the former provides information and the latter consume the
information. It therefore lacks of persuasive values.
The third online text was developed by lonely planet. com and is available at www. lonelyplanet. com/indonesia/central-
java. The mental model induced by the text producer makes use of factual appearance of Jakarta city as a modern place
with traces of Javanese historical tradition. The ideology behind the text construction is presenting Jakarta as a mix between
Java’s past and future. In its linguistic realization, the text producer employs bombastic words to attract readers/viewers
like ‘fair share of charm’, ‘bombastic tourist centres’, ‘intriguing fusion of Java’s past and future’, ‘the stupendous Borobudur
and Prambanan temples’, ‘this stunning island’. Syntactically, the text is composed of 3 simple sentences and 2 compound
sentences and 1 complex sentence. Eventhough the online text is descriptive but the way the text producer constructs the
sentences is made more variative.
The following online tourist promotion text to be scrutinized is the one developed by www. eastjava. com that describes
about Dieng plateau. Similar to that of the second text, this online text is dominated by nominal sentences in which it has
22 simple sentences, 2 compound sentences and 3 complex sentences. In terms of discoursal strategy, the text describes
the geographical location of the tourist site in terms of latitude and panoramic views.
With regard to the physical appearance, the online tourist promotion text developed by tripadvisor. com which is available
at the http://www. tripadvisor. com seems to be completely different from the rest of the online promotion text explored in
the study. There are two significant things that the developer inovates namely the use of reviews from visitors which are
rated based on the categories of excellent, very poor, average, poor and terrible. Additionally, the reviews are functioned
to provide testimonies to the prospective tourists. Even, they provide question and answer corners to address queries from
visitors to the web master. Though some descriptions of the destination are almost always existing in the testimony
however, the employment of modalities showing obligation is dominant. Some others use if clauses to create a more
persuasive impression and direct invitation.
V. Discussion
The study has shown that the Indonesian online tourist promotion texts though provide important historical information of
the tourism destination which are seeked for by potential tourists, they ought to have more comprehensive and up-dated
information. In order to maximize their persuasive values they need rhetorical strategies which not only inform and describe
but also invite, motivate and persuade these prospective tourists to make decissions for a visit. Beeton et. al (2005) argue
that verbal messages needs to be deliberatedly manipulated to affect the hearts and minds of the audience. This argument
therefore lies a strong ground for more energized verbal messages which can affect the hearts and minds of the potential
tourists to make a favorable decission to visit the destination. In that case, a more substantial modification is needed to
create a more persuasive online tourist promotion to the Indonesian tourist destination especially the Central Java online
tourist promotion.
Furthermore, sophistication on the construction of the verbal messages needs to be improved in order to have a more
natural and persuasive messages by reducing the dominant use of simple sentences. In terms of content however, the
informants suggest to update the information on the online tourist promotion and provide list of events. Besides, an addition
of testimony and review of the toursist destination might help potential tourists to make up their mind.
Likewise, the Indonesian online tourist promotion developers might be able to learn from Singapore and Malaysia in making
their descriptive texts of online promotion sound more motivating using more variative construction of English sentences.
The employment of gimmick language and rhetorical questions to attract and persuade audience needs to be considered.
119
In the visual presentation of the online tourist promotion, what the Indonesian developers can adopt is the use of three
colummns picture and rubric which are more practical and efficient to get the information with.
VI. Conclusion and implications

After looking very closely at the Indonesian online tourist promotion produced by 5 websites developers, a conclusion can
be drawn as follows:
1. The Indonesian online tourist promotion texts generally are drawn from a mix of history, culture, tradition and
panoramic views as their point of attractions.
2. The texts were typically descriptive and informative in nature. Consequently, they were less persuasive.
3. Syntactically, most of the Indonesian online tourist promotion texts were constructed in simple sentences and
compound sentences. Only a small number of complex sentences are used.
4. A substantial modification needs to be made in terms of comprehensiveness, up-dated information, writing style,
discoursal strategies, visual presentation.
5. The employment of rhetorical questions for persuasive purposes, reviews of destination, testimonial discourses and
questions & answers forum needs to be seriously considered.
The above conslusions bear some implications on the modelling of persuasive online tourist promotion texts acceptable to
users. Additionally, the websites developers need to equip themselves with the knowledge of persuasive language to
improve the quality of their jobs. Finally, various studies related to online tourist promotion should be encouraged.
References
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managing visitor behavior: A scoping study at port campbel national park. Victoria: Crc for sustainable tourism Pty.
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Candlin and K. Hayland (eds), Writing: Texts, Processes and Practices. London: Longman, 21-39.
[3] Bhatia, V. , K. (2004). World of written discourse: a genre based view: Advances in applied linguistics. London: Sage
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[4] Dann, Graham. (1996). The language of tourism: A Sosiolinguistic perspective. Wallingford: CAB International.
[5] Dijk, Teun, A. van. (1997). Discourse as social interaction. Discourse studies: A multidisciplinary introduction Volume
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Pelangi Aksara.
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Publishing.
[7] Kathpalia, Sudjata, S. (1992). A genre analysis of promotional texts. PhD thesis submitted to the National University
of Singapore.
[8] Kristina, Diah, dkk. (2005). Efektifitas bahasa Inggris dalam brosur pariwisata di Solo Raya. Laporan Penelitian
Dosen Muda. Puspari UNS.
[9] Kristina, Diah. (2011). A genre analysis of sales promotion letters and company profiles in an Indonesian batik
industry. Unpublished Dissertation. Universiti Utara Malaysia.
[10] Kristina, Diah. (2011). Image building in English. Buku teks mengajar. Surakarta: Diploma 3 Bahasa Inggris. Fakultas
Sastra dan Seni Rupa. Universitas Sebelas Maret.
[11] Kristina, Diah. (2014). Building trust and credibility: The rhetoric of positive self image in the advertorials of Garuda
Indonesia. Proceeding dalam Kongres Internasional Masyarakat Linguistik Indonesia. Bandar Lampung, 19-22
Pebruari 2014.
[12] Limaye, M. R. (1984). The syntax of persuasion: Two business letters of request. Journal of Business
Communication, 20/2, 17-30.
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[13] Swales, J. M. (2000). ‘Language for specific purposes’. Annual Review of Applied Linguistics, 20, 59-76.
[14] Swales, J. M. (1990). Genre analysis: English in academic and research settings. Cambridge: Cambridge University
Press.
[15] Kress, G. and Leeuwen, T. v. (2001). Multimodal discourse: The modes and media of contemporary communication.
New York: Oxford University Press Inc.
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[17] Lathifah, N. D. (2007). Analisis faktor-faktor yang mempengaruhi strategi adaptasi promosi ekspor bagi pengingkatan
kinerja pemasaran ekspor: Studi kasus industri ekspor furniture di Jawa Tengah. Semarang: Universitas Diponegoro
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Journal articles
Heejun, K. And Fesenmaier, D. R. , (2008). Persuasive design of destination websites: An analysis of first impression. Journal of
Travel Research, Vol. 47. August 2008: 3-13. DOI: 10. 117/0047287507312405: Sage Publication.
Muhammad Arifin Bin Salim, Noor Aireen Binti Ibrahim, Hanita Hassim. (2012). Language for tourism: A review of literature.
Elsevier Ltd.
Appendixes
121
Lack of Credit in Albania; Who is to “Blame” Analyzing the Demand
PhD. Cand. Eugen MUSTA

European University of Tirana,
Faculty of Economy and Information Technologies, Department of Finance
Assoc. Prof. Dr. Elvin Meka
European University of Tirana,
Faculty of Economy and Information Technologies, Department of Finance
Abstract:
The last global crisis had it influence on Albanian economy as well. As the economy is still struggling to recover from the
slowdown, a special attention is dedicated to lending which will in turn help investments pick up. Banks in Albania are currently
flooding in excess deposits, but meanwhile the lending has hit its lowest score. What is refraining banks from lending? Is it
really them to blame or maybe the demand is also part of the problem? Are businesses suffering from lack of funds to finance
their activity or are they hesitating to invest and are waiting for better times to come along? The purpose of this study is to
look into these questions and find the reasons behind them. This paper is focused on the demand side, analyzing some of the
most important indicators influencing the demand for credit like enterprises growth, profits, planned investments, working
capital needs, liquidity, etc. In order to get better understanding on the behavior of these variables the enterprises are divided
in four groups by size criteria. The analysis is covering data for five-year timeframe, which is corresponding with the start of
the economic slowdown. To help getting a prospect of the present and the future perceptions of the economic situation, a
survey was conducted on a small sample of enterprises. This study comes to the conclusion that the demand for credit is
growing, but what’s keeping businesses from applying for it, is mainly because of high interest rates and cost of credit, the
study ends with some recommendations toward the solution.
Key Words : Albania, demand for credit, credit gap, banking system, economic slowdown
1. Introduction
Albania is part of the global economy and it can’t be immune from what is happening around the world. Even though in the
country there is the presence of some international banks, during the first wave of the subprime crisis it didn’t look like any
of them were affected and the economic and financial situation in the country looked pretty solid. During the first couple of
years after the crisis, Albania was still enjoying a good economic growth and everybody was thinking that after all the
country is not that much integrated into the global market and at least for this kind of scenario was a good thing. But it
wasn’t so. Right after the start of the Greek debt crises and Italy’s recession, the effects didn’t take long to reflect on
Albanian economy. There is no surprise in this, considering that Italy and Greece are Albania’s main trade partners and
also host almost 1 million Albanians who live and work in these two countries.
An economic slowdown followed. Diminished remittances coming from abroad, the fall in consumption, because of the
“upcoming crisis” perception, all this and else, contributed in a rise of the number of bad and non-performing loans up to
24% of the credit outstanding1, which put banks in a not very comfortable position. So, logically the bank lending got more
rigid and the economy started to reflect loss of liquidity, lower consumption rates and economic slowdown.
Even though the Bank of Albania took some actions trying to stimulate the lending by lowering the base interest rate from
5. 25% at the end of 2009 to 2. 00% on July 1, 20152 and also by making commercial banks to write off some of the bad
loans etc. , all this had no success in reviving the lending.
1 Bank of Albania
2 Bank of Albania
122
At this point in time this study is looking into the main indicators influencing financing to find the answer to where the
problem may lay. Specifically in this paper we are focusing our attention on the demand side. We analyzed the behavior of
indicators like investments, growth, and profit of the enterprises to determine what is influencing the demand also we
conducted a survey to catch the perception of the business in their need for credit and the access they have to finance.
2. Research questions, hypothesis and objectives

As stated before with this study we want to find out why there is a lack of credit in the economy and who is to “blame”. In
this paper we are particularly focusing on the demand side of the problem and our research question to be answered is: Is
it the demand for bank credit from businesses low because of the unsecure economic situation or is their access to financing
limited?
To answer to these questions we are hypothesizing that:
H1. The businesses are not asking for credit because they feel is not the appropriate time to invest
H2. The businesses are not asking for credit because the cost of financing at the moment is high and/or there is no access
to financing
The main objectives we will aim to achieve in the quest of proving our hypothesis will be finding out if businesses are
suffering from lack of credit. Is there a good business climate to stimulate their growth? Do they have enough information
about different financing options and which are the most used/preferred financing methods?
3. Methodology
The approach of this study will be the descriptive analysis of the behavior of different economic and structural indicators
and the interaction between them. We will make use several data sets from secondary sources like The Albanian Institute
of Statistics (further on we will recall it only as INSTAT), Doing Business Albania, World Bank, Bank of Albania, etc. and
will compare them against our primary source data gathered through a survey1 in the form of a structured questionnaire
which we did among a random sample of the local businesses. Objective indicators of access used include whether the
firm has any credit products (e. g. overdrafts, loans or line of credit), loan applications and rejections, percent of finance for
working capital and investment, and interest rate. Subjective indicators of access include whether the firm claims access is
one of the top three obstacles and whether the firm states “no need for a loan” as a reason for not applying for a loan.
In this study we are looking at a possible financing gap to be the reason explaining why there is a lack of credit in the
economy. Even though there is no agreed definition of the term "financial gap", according to OECD, it is "used to mean that
a sizeable share of economically significant SMEs cannot obtain financing from the banks, capital markets or other suppliers
of finance" (2006: 16). The literature suggests that the extent of financing gap can only be determined by comparing the
supply of financing to what is demanded (National Credit Regulator, 2011). Focusing on the demand side for instance, we
find different authors to argue that the availability to finance can be influenced by both internal and external factors Beck
(2006). When looking at the demand side of credit we will notice that SME are more vulnerable to accessing credit during
or after crisis because as Falkena et al. are pointing out in their study "SMEs tend to seek finance for relatively small
amounts. The cost involved in the credit assessment and monitoring of a loan or investment make it disproportionately
more expensive to provide funds to an SME" (2004). Common knowledge is that know during economic crisis the agency
problems, adverse selection and asymmetric information grow to be more significant which makes the suppliers of finance
to choose to offer credit at higher interest rates and that can leave many potential borrowers without access to credit. Even
though this problems are not specifically connected to SMEs a study of OECD, concludes that "their impact is bigger for
1The survey was prepared based on the model of the Survey on the Access to Finance of Small and Medium-sized Enterprises (SAFE)
established in 2008 from the European Commission and the European Central Bank
123
SMEs than for larger companies " (2006). Other studies suggest that credit sources tend to dry up more rapidly for small
firms than for large companies during economic downturns (ECB, 2013a).
The literature suggests that the nature of funding required by an SME depends on its development phase. Businesses in
the start-up phase generally rely on personal savings, friends and families, while those businesses which are stable rely
on bank loans for financing (Felkana et. Al, 2001). The most influencing factors on a company financial behavior are firm
size and age, ownership type and legal form, geographical location, industry sector and asset structure or the ability to
provide collateral (Abdulsaleh, 2013). Ou & Haynes, argue that equity financing is preferred mode over debt for financing
new SMEs (2006), but according to Berger and Udell (1998) “issuing additional equity to satisfy the firm’s financial needs
would lead to a dilution in ownership and control” so they suggest that the owner-managers may prefer debt rather than
equity financing. Further on we find that one of the most popular sources of external financing for SMEs is trade credit.
According to Berger & Udell trade credit was estimated for almost one-third of the total debt of SMEs in US in 1998 (2006).
Garcia-Teruel & Martinez-Solano (2010) define trade credit as “a delay in the payment for goods or services after they have
been delivered or provided as a result of an agreement between the supplier and the firm”. Emphasizing the role of trade
credit in developing countries, Abdulsaleh (2013) states that “the role of trade credit as a source of raising financing for
SMEs is even more important in countries with less developed banking and financial systems where asymmetric information
problems are more pronounced”. Still to many empirical and theoretical studies are pointing that usually in developing
economies bank credit is the most important source of external financing. Just to mention a few studies that comes to this
conclusion for example: according to OECD “the commercial banking sector is the main source of external finance for
SMEs" (2006), also to the conclusion that banks are the main external capital provider for SMEs sector in both developed
and developing countries, come Ono & Uesugi, (2009) etc. A very interesting conclusion we find from Keasey and
McGuinness (1990) who argued that in spite of the fact that bank financing is more expensive in comparison to other
sources of finance, it generates a higher rate of return for SMEs. They further conclude that bank finance can help SMEs
accomplish better performance levels than other financing sources can do, because SMEs employ the funds more efficiently
when they are monitored by, and answerable to banks.
5. Analysis
We begin by looking at the structure of the market and identify the main groups of actors in the economy to determine their
importance and influence. As the literature suggested we find that in practice it is true that there is no unified unit for
classifying enterprises. Chart 1, shows them grouped by employee number which is a pretty common division only that
there is no universal standard for what the intervals should be, so the interval number is not always the same. Using the
classification used by INSTAT, we are getting 4 groups defined by the intervals: 1-4 employed, 5-9 employed, 10-49
employed, 50+ employed, but on other statistical data we used from the same source, intervals were slightly different. We
are further on calling these groups respectively Micro, Small, Medium and Big and we will sometimes summarize the first
3 groups like SMEs.
By this classification we can notice that the number of micro enterprises in Albania is the dominant one with a 90% share.
If we want to add up the small and medium-enterprises categories we will end up with almost 99% of the market been made
up from SME. This results suggest that Albanian enterprises structure is no different than the EU structure pattern where
Small and Medium-sized Enterprises (SMEs) accounting for more than 99% of all business and two-third of employment
(EC - 2013 SMEs Access to Finance Survey).
124
Active enterprises grouped by number of employees
90% 1 - 4 emp
5 - 9 emp
10 - 49 emp
50 + emp
5%
1% 4%
Chart 1. Source: INSTAT - Business Register 2014, chart build by authors

But as the literature suggests, groups divided only by the number of employed people by itself doesn't tell much, so for
getting a better understanding of the weight which each category has on the economy, we looked for more indicators
associating this groups. Table 21 shows us that micro-enterprises and the big-enterprises employ almost the same number
of workers respectively 35% and 31 %. But again if we have to account for SMEs total weight, they employ almost 70% of
the working force. If we take a look at the turnover by groups we will see that bigger here is better. And is getting more
obvious when it comes to investments where the group of the big-enterprises (accounting for just about 1 % of the total
number of enterprises), is doing 54% of the total investments for 2013 and the rest of it is almost equally distributed to the
rest of the groups.
Another indicator at which we looked at was the trend of growth of active enterprises during the last five-years.
Active, new and gone enterprises

120000
100000
80000
60000
40000
20000
0
-20000
-40000
2010 2011 2012 2013 2014
all active 103038 109039 106837 111083 112537
new created 16469 12905 12828 12131 17377
dead -6904 -15030 -7885 -15923

As we can see from the Chart 2, the overall number of active enterprises during the last years is having some fluctuations
but still holding a growth trend. The number of the new enterprises apparently is showing a crisis perception behavior with
a fall of the number of new enterprises during 2011, 2012, 2013 to start rising on 2014. On the other hand the number of
enterprises going out of business was high during this period, making the real growth very small and even negative in
20122.
1Table 2, in the appendix

2 Chart 4, in the appendix
125
Even though the growth in the number of enterprises during these years is slow, the investments didn’t look to surfer too
much and are not reflecting the overall economic slowdown. As we can see on the chart below the growth after 2011 is
looking stable.
Total investments made from all active enterprises in

mil. Lek
200000
150000
100000
50000
0
2006 2007 2008 2009 2010 2011 2012 2013
Investments Total

Considering the fact that the bank lending has shrunk, we have to look at other indicators to find out what are the sources
used for financing these investments. To do so we analyzed the net profit/loss indicator trend for all enterprises during the
same period. Chart 5 shows that the profits got smaller after 2010. This trend complies with the economic slowdown pattern.
What is noticed next in Chart 61 where we compare side by side the two indicators, is that after 2011 the investments got
bigger than the net profit, by it we can conclude that the growth in the investments cannot be explained by internal financing.
Active enterprises net profit for the period in Mil. Lek

200.000
150.000
100.000
50.000
-
2006 2007 2008 2009 2010 2011 2012 2013
Net Profit
Chart 5. Source: INSTAT – Statistical databases, chart build by authors

If we focus our analysis on every group separately the patterns we find are telling different stories for each group 2. Starting
with the first group of the micro-enterprises we notice that the investments with this group are generally low and they are
always lower than the generated net profit, suggesting that on this category investments are financed internally by retained
profits. Moving to the next group, the small-enterprises mostly tend to invest all generated profits and after 2012 they are
investing more than they are earning suggesting that they are using external financing. Further on the medium-sized
1 See Chart 6 in the appendix

2 See Chart 9 in the appendix
126
enterprises investments pattern is more like the micro-sized on, it looks like they invest more moderately relaying on internal
financing. One exception is noticed during 2012 where the investments are more than double the net profits of that same
year, but by this we cannot conclude with certainty that their financing behavior changed because most of the investments
are planed ahead and the ratio of profit vs investments of the previous couple of years gives them enough funds from
retained profits to finance their investments internally. The last group, the big-enterprises after 2011 shows a changing
pattern where investments are growing significantly, but profits are the lowest of the analyzed period. This may suggest
that they are investing in long term projects on which the return on investment is delayed, but for sure we can say that they
are using external financing.
Survey results analysis1

In explain the sources of external financing used for supporting investments, working capital and liquidity we went looking
into the data’s gathered from our survey. The results will be interpreted for every group as follows:
The first group, micro-enterprises, when asked about the importance of financing for their businesses in a scale 1 to 10
where 1 is low importance and 10 is high importance, they responded to an average of 5. 8. 69% responded that profit is
lower and 29 % said that it hasn't change, meanwhile 31% stated that their investments had grown, 30% had fallen, 39%
answered that investments hasn't change. When asked about what kind of financing is used, some 50 % of them responded
internal financing mainly from retained profits. None of them has been using bank overdraft or line of credit during the last
year. Some 12 % are using bank credit, 19% has used bank credit before but not during the last year and 69% of them
have never used a bank loan as a form of credit for their business needs. More than 50% are using trade credit and more
than 10% have used it before. Also popular with this category is crediting though loans from family and friends with about
40%, leasing accounts for 20% for this year and around 20 % used in the past. There is also a growth by almost 31% for
external crediting for supporting planned investments and 38% for working capital needs. Bank credit is the most preferred
form of credit among this group with 80 %, but only 12% applied for a loan this year, 50% didn't apply because they didn't
need one and 38% didn't apply because of other reasons, where the most important one for 75% of the cases is high
interest rates and cost of the loan and only 12 % think they don't meet the collateral or other forms of guaranties.
The second group, small-enterprises are valuing the importance of financing for their business with only a score of 3 out of
10. While 80% of them is getting lower profits, 20% are claiming higher profits, this may be due to many factors (the most
probable one may be the industry related) but considering our low population sample we are not going to dive into this as
it is out of the focus of this paper. 60% of this group is using internal financing to support their activity and also bank
overdraft or line of credit is used by 40% of them. Bank credit even though has been used in the past, currently is not used.
Even though this group prefers bank credit 40% better than other means of financing, the main reason for not applying for
60% of them is high interest rates and cost of the loan. Future needs for crediting for this group are growing as data shows
that 40% of them will need credit to finance their investments projects, 20% for financing working capital and 40% for cash
flows availability.
The third group, medium-sized enterprises is giving an average score of 5 out of 10 to the importance of financing their
activity. Approximately 90% of them are having a drop on profits and 100% of them have drop on investments. They
financed their businesses primary through bank overdrafts or line of credit as well by bank loans, trade credit and 40% of
them also by leasing. All this gives imprison that they are going through hard times. This is more obvious when we look
into their future growing needs for working capital financing for 50% of them and for cash flow financing for also 50% of
them. It results that they applied for bank overdraft or line of credit, bank credit, trade credit but at some cases they got
rejected or got amounts lower than 75% of what they asked. For almost all of them bank credit is the most preferred
financing mean, but 50% of them think that interest rates and costs of loan are too high.
The last group, Big-enterprises gives an importance of 4. 5 out of 10 to financing. They are claiming that their profits didn't
change. Investments didn't change for 50 % of them and went down for the other 50%. In this group, 50% are using internal
financing, currently are not using bank overdraft, line of credit or bank loans, but they have in the past. 50% of them predict
1Considering the small sample used on this survey, the results we are presenting are being considered more like a perception of the
overall behavior of the enterprises rather than statistically significant argument
127
growth on their need for external financing for investments projects and also for cash flow needs. They didn't apply for a
loan during the last year because they consider that interest rates and costs of loan are high.
6. Conclusions and recommendations

At the end of our analysis of some of the most important indicators influencing the demand for credit in Albania, it results
that beside a drop in profits lately there is a growing trend for investments especially for the group of small and Big-
enterprises. This was consistent within the data provided though secondary and primary sources, leading us to reject our
Hypothesis 1 which stated that there is no demand for credit because of low investments rate. Additionally, we noticed also
a growing demand for credit for financing working capitals and liquidity needs. Even though between groups of enterprises
the purposes, amounts and type of crediting was different, they all had the same most common reasons for not applying
for a bank loan and that was high interest rates and costs of loan. This is proving that our Hypothesis 2 is true, that the
demand for credit is low because of high cost of credit and high interest rates.
Also, our study found out that there is not enough information, especially for the micro-enterprises about different kind of
crediting available, more specifically about the bank overdraft, line of credit, factoring etc. Bank credit is by far the most
preferred way of external financing among all groups, but especially for SMEs. The one group who suffered the most the
lack of credit is the small-enterprises. This group is showing struggle to grow and in this they have bigger needs for
financing, which as it shows are not served and by these they are the most endangered category risking failure the most.
Looking at the absence of equity financing option we conclude that even the big enterprise in Albania are left with only one
option to finance their needs and that’s through bank credit.
The government has to recognize that the SMEs sector faces constrained access to external financing which may
negatively affect its crucial role in achieving national development goals. So we suggest that governmental programs and
initiatives like credit guarantee loans, subsidized fees will be typical examples to ensure that SMEs have easier access to
financing. Also the perception of the banks toward SMEs have to change and they have to start looking at these enterprises
like attractive line of business and have to develop effective monitoring systems like credit score models etc. for overcoming
the information asymmetry problem. This recommendation goes especially to most of the smaller banks in the country
which as argued on a previous study by Musta & Shehu (2015), considering their small marked share, in order to survive,
have to look more into specializing on servicing this business categories. Also as literature suggests it’s a common sense
for banks to realize that many future holders of conventional accounts start as micro-enterprises, greater attention to this
market segment will pay off in the longer run.
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And Support In South Africa.
[12] OECD (2006). Financing SMEs and Entrepreneurs. OECD Policy Brief
[13] Ono, A. , & Uesugi, I. (2009). Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from
Japan's SME Loan Market.
[14] Ou, C. , & Haynes, G. W. (2006). Acquisition of Additional Equity Capital by Small Firms – Findings from the National
Survey of Small Business Finances. Small Business Economics
[15] World Bank Group, (2015). Doing Business 2015, Economy Profile 2015, Albania
Internet databases and publications

INSTAT, (2015). Business Register 2014. Report downloaded on June, 20 2015 from:
http://www. INSTAT. gov. al/en/themes/statistical-business-register/publications/books/2015/business-register-2014. aspx
INSTAT, (2014). Results Of Structural Survey Of Economic Enterprises, 2013. Report downloaded on June, 20 2015 from:
http://www. INSTAT. gov. al/en/themes/enterprises-economic-indicators/publication/books/2015/results-of-structural-
survey-of-economic-enterprises, -2013. aspx
INSTAT. Enterprises Economic Indicators, last seen on July, 3 2015 at:
http://www. INSTAT. gov. al/en/figures/statistical-databases. aspx
7. Appendix
Source: INSTAT, (2014). Results Of Structural Survey Of Economic Enterprises
129
Enterprises Real Growth Rate (birth- death rate)
20,0%
15,0%
10,0%
5,0%
0,0%
2010
-5,0% 2011
2012
2013
2014
birth rate death rate
Chart 4 . Source: INSTAT - Business Register 2014, calculations and chart build by authors
Active Enterprises - investmensts vs net profit in Mil. ALL

180000
160000
140000
120000
100000
80000
60000
40000
20000
0
2006 2007 2008 2009 2010 2011 2012 2013
Total Investments Net Profit
130
Active enterprises - Investments as done by groups

100000
80000
60000
40000
20000
0
2006 2007 2008 2009 2010 2011 2012 2013
1-4 5 - 19 20 - 79 80 +
Active Enterprises - Net Profit by groups

70.000
60.000
50.000
40.000
30.000
20.000
10.000
-
2006 2007 2008 2009 2010 2011 2012 2013
1-4 5 - 19 20 - 79 80 +
Micro - Enterprises investmenst vs net Small - Enterprises investmenst vs net

profit profit
40000 45000
35000 40000
30000 35000
25000 30000
25000
20000
20000
15000
15000
10000 10000
5000 5000
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013
Total Investments Net Profit Total Investments Net Profit
131
Medium - Enterprises investmenst vs net

Big - Enterprises investmenst vs net
profit
profit
40000
100000
35000
30000 80000
25000
60000
20000
15000 40000
10000
20000
5000
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013
Total Investments Net Profit Total Investments Net Profit
132
Economic Development
Tal Shahor
The Academic College of Emek Yezreel,
Emek Yezreel 19300, Israel, tals@yvc. ac. il
Abstract
Economic development is a process aimed at improving the quality of life of the citizens which can be achieved by increasing
the national income. This increase includes: increased household income (employee salaries and self-employed profits), and
no less important, increased taxes which would facilitate an improvement in the services that citizens receive from government
system. To achieve improved quality of life, it is important that the additional income does not simultaneously increase the
disparity between rich and poor (which is liable to occur if the main beneficiaries of the increase in income are the financiers
and the managerial level). It should also not lead to an increase in unemployment (as sometimes occurs when companies go
through a streamlining process), or cause environmental pollution. Additionally, to improve the quality of life, attention must
be given to other areas such as education, culture, health, etc. which all require extensive resources, and their development
is therefore also a matter of economic interest. The goal of this article is to present the principles and processes required to
facilitate economic development without harming other components that comprise the quality of life.
Keywords: Economic development, improving the quality of life, national income, citizen, resources
Introduction
According to the World Bank, local economic development is a process in which the public, the business owners, and third
sector organizations join forces to create conditions that are more conducive to promoting economic growth and boosting
employment (The World Bank, 2015). All economic development is aimed at improving the citizens' quality of life. Quality
of life includes not only classic economic components such as income or rate of unemployment, but also societal
components such as education, personal security and poverty, and environmental components (air and water pollution,
open spaces, etc. ). Local economic development focuses on defined and relatively small, areas. One of the problems that
arises from the above-mentioned list is the fact that in many cases, an increase in a specific component is likely to have a
detrimental effect on another component. Thus, for example, an increase in the average income will often cause increased
environmental pollution, and in many cases may also cause an increase in the rate of poverty1. This situation illustrates
one of the basic rules in economics (and of course also in economic development), that is "There is no such thing as a free
lunch" or in other words everything comes at a cost. This cost is not necessarily manifested in monetary terms and may in
fact have a social, cultural or environmental component. It is therefore important that economic development is an integrated
process that addresses a very wide range of factors that influence quality of life, with the goal of bringing about maximum
possible improvement in the citizens' quality of life. According to the United Nations Human Settlements Programme (2005),
many factors can affect the quality of life, and it is not always possible to address all factors concurrently. Consequently,
one of the very first stages of economic development must be prioritizing the areas that are the most important. This is then
followed by an assessment of the best way to improve these areas while causing minimum damage in other areas. The
underdeveloped roads system in northern Italy provides a good example of prioritizing and subsequent costs. The state of
this roads system does not stem from a lack of financial means (northern Italy is one of the wealthiest regions in the world)
but rather from a conscious decision by the Italians to lay relatively narrow roads (with no margins) to avoid damaging open
spaces (forests and agricultural land). China provides us with an example of the opposite approach. In order to accelerate
growth of production, the Chinese were willing to pay a higher cost in terms of the environment and personal freedom.
While we can of course argue about whether or not the Chinese decision is correct, it is clear that had the Chinese wanted
to protect the environment more, the national income would have been lower.
1 The extent of poverty is determined by the gap between the rich and the poor. Consequently, if economic development increases the
wealth only of the rich, the poverty rate will increase even if the income of all other sectors does not change.
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Various ways to increase

Increased Household Income
In many areas, particularly those that are weak economically, one of the most important changes required in order to
improve the quality of life is increased household income. However, the maximum wage that a private sector employer can
pay is the "output value of the labor", that is the amount by which the employee increases the income of the enterprise,
otherwise it will not be viable for the employer to retain the employee and he will be forced to dismiss the worker1. A crucial
prerequisite for increasing wage-earner income is therefore an increase in employee output value (another term customarily
used to describe this process is increased labor productivity), and the real question is how can this be achieved?
Theoretically, the answer would be to build more sophisticated, know-how intensive, high-tech production plants which
would usually have a higher employee output value. However, such enterprises do not usually survive for any length of
time if the work force in the relevant area is unsuitable. Attempts to encourage the establishment and operation of such
enterprises by offering grants and tax benefits were usually doomed to failure. These factories would often shut down after
a short period of time, and, if they did manage to survive, the profits were low leaving no room to pay higher wages2.
Therefore, in many cases, setting up enterprises of this type is not a viable solution. Action needs to be taken in two different
directions to achieve a real increase in household income over an extended period of time (primarily for wage-earners, but
also for the self-employed) – one direction is to improve technology, and the other is to maximize comparative advantages.
Increasing Income by Improving Technology

Definition: Improving technology is any change that will generate improved operation of the production components. Many
people associate improved technology with the introduction of the new technologies (computers, robots, or more
sophisticated machinery). However, based on the definition above, it is clear that this is only one of the options for improving
technology (and not necessarily the most efficient one). There are other and no less effective, ways to make this
improvement, such as scaling down the bureaucracy, preventing corruption, a stable governmental system, development
of physical infrastructure (sewerage, roads, communications), professional training, etc. With regard to increasing income,
improving technology will enable employees to operate more efficiently, which will increase their production output, thereby
enabling payment of higher wages3. Sometimes setting up new enterprises can also serve the function of improving
technology if the new enterprise is suited to the population's skill set, and enables them to better utilize their professional
trade skills. This would of course increase the employee production output and in turn the wage that the employees would
receive.
There is another advantage to improvements in technology – usually technological improvements do not negatively impact
the environment (as opposed to setting up new enterprises). In fact, in many cases they even have a side effect of improving
the quality of life (for example, sewage purification facilitates an increase in agricultural production and also prevents
pollution of water sources). Therefore in economic development processes it is important to focus on technological
improvements, which will create a better business atmosphere and will also contribute to an improvement in the quality of
life.
1 This analysis is also correct (with slight changes) for business owners. However, because the general population consists mainly of
wage-earners (approximately 90%), and also because the wage earners are usually the lowest paid sector, this paper will focus on the
income of wage-earners.
2 There is of course a possibility that the employees will come from different areas. However, in this case, the enterprise's contribution to
increasing the salaries of local residents will be limited.
3 It is likely, of course, that part of the increased income will be transferred to the financiers, although usually, a significant portion of the
increased income is also passed on to the employees. If the employers do not share part of this increased income with the employees,
it can be said that the technological improvement did not achieve its objective and that employee moves to organize trade unions in the
enterprise is justified. Herein lies the claim that the existence of trade unions can have a positive effect on the economic development
process (on the condition, of course, that they do not demand wages and conditions that exceed the employee production output.)
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Increase in Income by Utilizing Comparative Advantages

One of the most important points that need to be taken into account throughout the entire economic development process
is the comparative advantage. According to a simple definition of this concept, a comparative advantage is the ability to
produce better quality products and/or at a lower cost than those of other manufacturers. Examples of factors that can
contribute to the comparative advantage include location (proximity to markets and/or to raw products), availability of natural
resources (proximity to the sea in the case of tourism), and of course the human capital, which in recent decades has
contributed enormously to generating a comparative advantage. The value of the human capital is found in both the level
of education (particularly in the field of technology) and in other areas that we will address later in this article.
The economists' basic assumption is that economic activity cannot succeed over time if it is not based on a comparative
advantage. On the other hand, the correct utilization of this comparative advantage can increase the number of employees
and businesses, and also the wages, two actions which generate an increase in the household income. One of the
questions that arises at this stage of the discussion is: What should be done when there is no comparative advantage? The
answer is that in every country, there is always a region or settlement that has a comparative advantage. We will present
several examples to explain this subject (which when first raised frequently generates many questions and counter
arguments).
Example A – Land Costs: In places with a comparative advantage in fields such as tourism or technology a large number
of economic functions will be established (such as hotels, high-tech companies, research institutes, etc. ), which will
increase the demand for land and therefore drive the price of land upwards. On the other hand, in places that do not have
a comparative advantage of this type, there is not much demand for land and consequently, land costs will be low. Under
these conditions, the land in this place will be readily available and inexpensive, and therefore suitable for businesses
requiring large expanses of land such as shopping malls which also require large parking areas, and production plants
which require large production halls and warehouses for storage. It is easy to see that the disadvantage of these areas in
fields such as tourism and technology actually becomes a comparative advantage in terms of land prices and availability
which can then be utilized for economic development. While it is indeed reasonable to assume that resident incomes will
be higher in areas with a comparative advantage in the fields of tourism and technology, those people who live in areas
without such a comparative advantage have no alternative other than to utilize to the maximum what they do have.
Example B – Wages: Places with a high level of technological education usually have a comparative advantage in the
technological field which attracts sophisticated high tech companies (that are know-how and technology intensive) which
pay high salaries. Places with a low level of technological education are unsuitable locations for companies that pay high
salaries. However, such places do also offer a certain comparative advantage because the low wages paid are an
advantage in high-tech industries and they can therefore specialize in producing simple products. China, which provides a
good example to illustrate this situation, utilizes its cheap workforce to produce a major part of the textile products used
throughout the world. Although specialist labor-intensive industries do not enable payment of higher wages (the increase
being the main objective of economic development) the question to be asked is what alternative do these countries have?
Although the wages paid today to a Chinese laborer are significantly lower than the acceptable rate in developed countries,
the question is what would happen in China in fields such as life expectancy, infant mortality or hunger, if all these labor-
intensive factories did not exist.
Another question that needs to be asked is what will happen in places such as China in the long term? Some of us are old
enough to remember that until 40 years ago the Japanese specialized primarily in the manufacture of cheap products (in
some ways reminiscent of the Chinese today). In those days, if you wanted a good quality car, you would buy a European
or American vehicle. The Japanese cars (along with their watches and televisions, etc. ) were bought because the price
was low due to the relatively low wages paid to the Japanese laborer. In other words, the Japanese advantage could be
seen because, relative to ability, the wage paid to the Japanese laborer was quite low thereby enabling the Japanese
market to produce cheap, good quality products. This situation led to the rapid development of the Japanese economy and
enabled the standard of living to improve within a relatively short period. However, the Japanese success story did not end
here. Economic development is frequently accompanied by a very important side-product. In the case of Japan, it was the
improved level of education and technological capability within the workforce. Thus, within several decades, Japan's
comparative advantage shifted from low-cost labor to employees with a high level of technological skills. This enabled the
Japanese to move on to the production of more sophisticated and better quality products, thereby increasing the employee
production output value and the salaries. Production of more simple products was transferred to other countries such as
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Korea or Malaysia, which were also undergoing a similar developmental process, and today low-cost production is centered
in China. However, if the process described above continues, within a relatively short time Chinese wages will also be
increased.
The conclusion that can be reached from both these examples is that in order to raise the household income to its maximum
level, economic development must be based on the existing comparative advantages. This has always been true, but never
more so than today with the globalization process, which has shown that those who do not have a comparative advantage
will disappear from the marketplace. In some cases, steps aimed at creating a comparative advantage can be taken. For
example laying railroad tracks for production plants requiring transportation for heavy goods, increasing the technological
education, etc. But usually actions intended to generate a comparative advantage take a great deal of time to implement,
are very costly, and there is no guarantee that they will actually generate the comparative advantage as planned.
Consequently, at least in the initial stages, it is important to identify the comparative advantages of the place that is intended
for development and to base the development on these advantages. The role of government assistance in this process is
to enable the stakeholders to utilize the comparative advantages and to help them start up the development process. Past
experience around the world and also in Israel shows that in most cases attempts to implement projects that do not have
a comparative advantage and which are based on government support (for example from incentives and tax benefits) do
not achieve their objective.
Effect of Increased Means of Production on Income

One of the first steps considered in the context of economic development is investment in new enterprises or expanding
existing production plants. But investments of this type are not always effective and in many cases it is likely to become
clear that it is actually a waste of resources. To explain this subject, we will divide the means of production into two main
components: one component is Labor, and the term Capital is used for the other component which includes machinery,
buildings and equipment. Setting up new businesses or expanding existing businesses is equivalent to an increase in
capital. And frequently economic development programs do indeed focus primarily on searching for ways to increase the
amount of capital. However, there are a number of problems with this approach. The first problem refers to the concept of
diminishing returns on capital. This concept can be explained with the example of a manufacturing plant that is based on
employees and machinery. If we increase the number of machines, and leave the number of employees at the same level,
then when there are few additional machines, each one will generate a significant increase in production output. However,
if there is a large number of additional machines, at a certain point the employees will no longer be able to handle all the
machines and the additional output generated by each additional machine will gradually decrease until at some point
additional machines will not increase production at all because there are not enough employees to operate them. In this
case, the addition of more machines without making additional changes in the system will not increase production1. In many
cases, economic development is stopped because of the fact that there are too many machines and marginal productivity
is calibrated2. Under such circumstances, there is of course no point in making additional investments in machinery and
equipment or in setting up new factories of the same type. The route to economic development lies in achieving
technological improvements or better utilization of the comparative advantages.
Economic Equilibrium
Another problem which should be taken into account when assessing the viability of encouraging additional investments
relates to the concept equilibrium. The basic assumption in economics is that usually the economy is in a state of
equilibrium, in other words supply equals demand for each product. This is important because in normal circumstances,
everything that the consumer wants and can afford to buy has already been produced and it is therefore not feasible to set
1 Note: the increase in the number of machines must be stopped before the output of each machine is calibrated because the growth
must be halted at the stage where the increased output is less than the cost (economic, social, and environmental) of the additional
investment.
2 Note: it is not always easy to identify that the problem is the excess machines and equipment, because this situation may also include
(even fairly extensive) unemployment. This unusual situation is likely to stem from the fact that, for various reasons, the unemployed
are not suited to work in the existing types of businesses.
136
up additional businesses. (Although this sounds a little strange, this is indeed the situation, and if you check the restaurants
and shops that spring up every other day in our area, you will find that a large number of them close within a short period
of time). According to this approach, there will be additional economic activity only if a change in this market has occurred.
Such changes may be increased consumer income (leading to increased purchasing and therefore also increased
production), change in behavior (for example, parents investing more money in supplementary education which would lead
to operating additional after-school activity groups), or price increase of other products (increased vacation costs in Turkey,
will lead to growth in the domestic tourism industry in Israel). Equilibrium as described above is significant because, before
initiating the establishment of new businesses or the expansion of existing enterprises, it is important to verify that there is
actually a demand for the proposed products.
The removal of bureaucratic obstacles is another very important factor that can facilitate increased production when the
economy is in a state of equilibrium and the marginal productivity of capital is low. For example, delays in receiving building
permits are likely to cause delays in setting up new businesses for which there is a demand (for example, hotels in popular
tourist areas). In this case, the removal of such obstacles will facilitate production growth and will generate additional jobs.
Foot-dragging in the legal system or poor personal security also constitute obstacles which, if removed, would encourage
commercial enterprise.
Local Economic Development using Strategic Planning

Strategic planning is a dynamic process aimed at helping organizations to define their goals, to set priorities, and to develop
courses of action that will enable them to achieve these goals, based on cooperation between all the stakeholders both in
the organization or those associated with it. Local Economic Development using Strategic Planning is a process that utilizes
strategic planning to improve the economic situation of the local authority or of a group of neighboring local authorities. It
is important to note that when dealing with economic development, it is not enough to only address the classic economic
areas such as increased income and employment opportunities. Other areas that must also be addressed include health,
environment, level of education, personal security, poverty, etc. because these areas are important not only due to their
effect on the quality of life of the residents, but also because they are crucial to success in the economic fields.
The strategic planning process includes the following key characteristics:
1. Detailed definition of the program goals and determining the course of action are part of the process. In other words,
the goals are not defined and dictated in advance. Instead the planning body must define the goals as part of the
planning process.
2. The planning process is dynamic. In other words, the process does not end with implementation of the program but
continues simultaneously alongside the stages of implementation; the outcome is constantly assessed, and planning
is reviewed and changed as required.
3. All parties and stakeholders that are expected to be involved in the implementation and/or who might be affected by
the plan participate in the planning process and implementation, for the following reasons:
a. The basic assumption is that the local residents are the people who are most familiar with the conditions and
needs of the local authority or of the region1;
b. The success of the program requires the cooperation of all parties and stakeholders. Cooperation can only be
achieved if the stakeholders feel that they can influence the planning and that they are partners in developing
the plan;
1 Israel has a long history of highly detailed and "professional" economic and geographic planning which ultimately failed because the
local population was not partners in the planning. The development towns provide us with a good example. Contrary to general
opinion, the development towns were established as the result of a highly detailed and organized planning process. For many years,
the government invested numerous resources in these towns (more than in any other population sector in Israeli society). The failure
of these development towns can be attributed to, among other causes, the fact that these towns were always designed and supervised
by professionals living outside of the town itself, and who it seems were unable to adapt the planning and development to local
conditions.
137
c. The program should be run by the residents both during the planning stage and during the implementation. This
would save on expenses and would also focus the local authority's resources on the development itself rather
than wasting valuable resources by outsourcing to other parties.
4. The planning must also address long-term objectives. In fact, one of the functions of strategic planning is to provide
the local government with a break from dealing with day-to-day operations, and to enable those involved to take a
broader look at matters.
5. Strategic planning aimed at economic development must also deal with improving the quality of life because frequently
decisions in the private sector about where to invest depend on the quality of life. Potential entrepreneurs will not want
to establish new businesses in run-down and neglected locations because the various professionals who are critical to
running the enterprise will not want to live in such areas. Therefore local authorities that are going through a process
of strategic planning must consider the advantages their region has to offer in terms of quality of life and do their best
to promote these advantages. For example, in smaller areas they can foster community activities, and in larger towns
and cities, they can develop cultural centers for entertainment and commercial centers. One such example is the
emphasis placed on community life in Misgav; and another good example is the development of unique areas in
Jerusalem such Nachla'ot, Nachalat Shiv'ah, etc.
Strategic Planning Stages

According to a document issued by the United Nations (2005), the local development process based on strategic planning
consists of 10 stages as follows:
1. Initial stage: the first step assesses the ability and resources of the local authority and whether it is ready to go through
the strategic planning process. Following this assessment, the geographical area (which may be a number of
neighborhoods, the entire local authority, or several neighboring local authorities) to be included in this planning
process must be determined. Additionally, it is important to check whether it is preferable to work with an external party
or whether the strategic plan should be implemented independently.
2. Enlisting the cooperation of various stakeholders: As mentioned above, enlisting the cooperation of the other
stakeholders is crucial to the success of strategic planning. Consequently, before beginning the planning itself, a
consensus must be achieved in both the political system and among those stakeholders who may be affected by the
planning (business owners, administrators, and various public figures) regarding the need to implement the program.
3. Situation analysis: involves gathering data on the existing situation in the relevant fields (economy, demography,
environment, etc. ), and building an economic profile for the local authority or the group of local authorities participating
in the program. Additionally, at this stage the strengths and weaknesses of the system are identified. It is important to
remember that detailed data gathering can be a very costly process. It is therefore usually necessary to compromise
on the accuracy and detail of the data in order to save money for the next stages.
4. Defining the vision for the system: the vision should answer the question: Where do we want to go? This provides a
brief description of the future that the program is striving to achieve.
5. Defining objectives and priorities (that is prioritizing the objectives): usually it is not possible to achieve all the objectives
that comprise the vision defined in the previous stage. We must therefore break the vision down into a number of
defined objectives which are then prioritized according to importance (knowing that some of them will not be achieved).
It is important to define the objectives in such a manner so that their success can be evaluated; in other words, so that
it will be possible to determine with a high level of objectivity if the objectives were achieved.
6. Selecting possible strategies for achieving the objectives: at this stage, it is necessary to determine in detail what
actions will be taken in order to achieve the objectives. This is the beginning of the practical stage of the program where
we define what must actually be done.
7. Selecting the course of action: for every action or group of actions that was selected in the previous stage, it is
necessary to define exactly what must be done, when it must be done, and who is responsible for each stage. The
138
course of action must be attainable within the timeframe, the budget, and the political conditions under which the
program is operating.
8. Implementing the program: to implement the program, we must make the tools required official either by establishing
special departments that will deal with this matter, or by creating positions and areas of responsibility for existing
bodies. It is important to take into account the possibility that clashes will occur between the various parties involved
in the program, and to try to plan in advance the required response to such problems.
9. Monitoring and evaluation: one of the key characteristics of strategic planning is that the program is dynamic. In other
words, performance must be monitored in order to evaluate if it is necessary to make changes in to the program.
10. Adjustment and modification of the program based on findings from the previous stage.
The Importance of Local Economic Development

According to Andrew and Goldsmith (1998) during recent decades a process has occurred in which functions and economic
and other activities have been transferred from central government to the local authorities. This change stems mainly from
the fact that according to mainstream economic thought in the western world, the government system is a large and
cumbersome body that operates in a wasteful and inefficient manner. Consequently, many areas that were previously
controlled by the government are now transferred to other bodies. Some of these activities have been transferred to the
private sector in a process known as privatization. However, some activities cannot come under the auspices of the private
sector (public goods, and activities that will have an external effect). The solution is therefore to transfer those same
activities to bodies that are smaller than the government, in other words, to the local authorities. According to this approach,
the local authorities have a better understanding of matters in the field and also a greater commitment to the residents, and
can therefore perform these tasks in the best possible manner. In the strong, well-established, and most importantly, highly
organized local authorities, this shift of responsibility has proved to be the correct move. The objective of economic
development through strategic planning is to improve the situation in those local authorities that struggle to fulfill the
abovementioned tasks.
Another reason for the high importance of the strategic process is the fact that local economic development is likely to be
a Zero-sum Game; in other words, an improvement in one local authority is likely to occur at the expense of another local
authority. An example of this is the case in which a specific local authority establishes a new industrial zone, and competes
for funding and new projects against the industrial zones in the neighboring local authorities. In such a case, not only is the
success of the new industrial zone likely to come at the expense of the older industrial zones, but also the competition for
resources and unnecessary investments in infrastructure are likely to cause the new industrial zone to fail while
simultaneously destroying the established industrial zones. In a case such as this, the strategic process could lead to the
correct division of resources whether through the joint operation of one industrial zone or through a logical division of
projects between the local authorities (for example, one local authority could establish an industrial center while the other
local authority could establish a commercial center). Conflicts of interest such as these could occur between both the local
authorities and between stakeholders within the local authorities. In this situation, a strategic process involving all the
relevant parties could help to resolve the problem.
According to Leigh and Blakely (2013), a number of changes have occurred in the world economy during the last 30 years,
which have transformed local economic development using strategic planning into a very important factor. These changes
are:
1. Globalization: the ability of production units and factories to transfer from one location to another means that production
and manufacturing capabilities that are not competitive will not survive. On the other hand, globalization enables those
who are successfully competitive to develop further.
2. Increased rate of change: Both technologies and types of product change rapidly. Manufacturers and employees need
to adapt to these changes. Employee skills will not give them an advantage for a whole lifetime. They must acquire
additional new skills or at least frequently update their current skills.
139
3. Effect of technological development on demand for employees: technological development has led to an increased
demand for employees with technological or administrative capabilities, and to a decrease in demand for all other types
of skills. Consequently, there has been a dramatic increase in salaries for the first group, and a decrease in employment
opportunities and salary for all the others. Those with technological skills find it easier to move from one location to
another (and sometimes from one country to another). This increased mobility is likely to generate a situation where
local or regional authorities find that their areas are populated by low-income residents. The local or regional authority
then finds that its income from local taxes has decreased considerably which in turn leads to a cycle of economic and
social decline.
These three changes have caused the economic system to change more rapidly than it did in the past. Consequently, the
economic planning of the local authorities must also be in a constantly dynamic state all the time, and must also take into
account all the social, demographic, and economic components that may affect its state. In other words, the economic
planning and development must be based on strategic planning processes.
Another change that has occurred during the last three decades is that while in the past the local government (and
sometimes even central government) was actively involved in setting up and running economic projects, today the local
government has taken on more of a role as an enabler. This means that the local government is no longer directly involved
in setting up factories and running economic projects, and is instead responsible for creating the right conditions and
atmosphere that will attract investors and entrepreneurs to be active in the area. This change also stems from the concept
that in general, government activities are ineffective and therefore the role of the government is to generate conditions that
will enable the free market to operate successfully. Previous attempts throughout the world and in Israel have shown that
when the government selects the projects to be established and also their exact locations, and encourages entrepreneurs
to set up the projects by offering grants and other financial benefits, a considerable number of the new projects were found
to be unsuitable. These projects prove to be unsuitable because they are not long-lasting and also because they are unable
to advance the local authority where they are located. In many cases, it also became apparent that the main beneficiaries
of the financial benefits given by the government in development areas were not the development town residents, but rather
the entrepreneurs who on the whole were wealthy in their own right and who lived outside of the area that is intended for
development1. Other studies, for example by Lester (2003) found that in the opinion of the entrepreneurs, incentives in the
form of reduced taxes were actually effective in terms of economic development. While in the short term the amount of
taxes declined, over time the ongoing economic development would eventually increase the taxes to their former level.
Although it seems that there is room to encourage economic development through tax benefits, such a move must be made
very carefully and accurately, so that it will only encourage suitable projects (in other words those that offer a comparative
advantage).
Additional Notes
Another characteristic of economic development today that is worthy of note is the importance afforded to local
entrepreneurs, who can with a relatively low investment set up small businesses that will provide them and perhaps a small
number of local residents with employment. Although the contribution of each such business on its own is small, if favorable
conditions are created to accommodate a large number of these small businesses, then the economic situation could be
greatly improved. A good example of such a case is the development of authentic tourism in distant and undeveloped
locations which, at this stage, would not be a suitable location for any significant industrial development. The development
of tourism in such areas is based on local cuisine, traditional handcrafts, or guest accommodation of a simple standard.
This type of development does not require huge resources or complicated planning, and does not take up a lot of time. It
is therefore suitable for the first stage of economic development. While the number of people that might be employed in
such activities is limited, and the income is not particularly high, it can serve as a basis for future development of a higher
level of tourism or as a springboard for transitioning to a different type of industry.
One important aspect of economic development is the increase in total income for all residents in the local authority. Such
an increase not only improves the standard of living of the residents, it also increases the amount of money they will spend
1 The carpet manufacturing facility in Or Akiva owned by Avraham Shapira is a good example of this. For many years the government
invested more and more resources in this factory. In addition to these investments, they also set very high customs duty on imported
carpets in order to protect the factory and its products and to provide work of a low technological standard for low wages. This
situation simply reinforced the difficult conditions of the work force in the area instead of advancing them.
140
within the local authority. This in turn leads to increased economic activity for local businesses, which increases employment
opportunities. Increasing the total income of all residents in the local authority requires businesses to sell their output to
people living outside the local authority region. It is therefore important to encourage businesses that are oriented to the
population outside of their own towns.
Another area that could contribute greatly to the local economy, although it's development involves a long and difficult
process, is resident participation in operating the civil system. This participation could include involvement in cultural
activities which are administered on a voluntary basis by committees, non-profit organizations that are involved in helping
residents who are experiencing difficulties, volunteers in the civil guard, or even residents planting public lawns in central
areas. These activities not only foster a sense of belonging and wellbeing among the residents. They also provide an added
benefit of cost savings, and free up local authority resources that can be invested in providing additional services. In small
settlements with a homogeneous population, such activities come naturally and can be organized with relative ease (in
some cases, the population already operates in this way, and the role of the local government is to provide assistance).
However, in large settlements or in settlements that do not have a homogeneous population, this option is somewhat more
complicated and it is at this point that the main advantages of the strategic planning process come to the forefront. As
mentioned above, by the very nature of this process numerous and large groups of local population are meant to be involved
in this process. This involvement is intended to foster a sense of belonging and responsibility among the residents as they
are taking the first step on the path to involving the local population in operating the civil system.
As demonstrated by the abovementioned pointers, economic development using a strategic planning process is a long and
complex process that requires the cooperation of numerous parties in the local authority (and sometimes also from outside
the authority). Consequently, according to Aizencang-Kane (2010), in order for the process to succeed, the heads of the
local authorities must be involved in the process. They must lead the process and demonstrate leadership and
determination to overcome the problems which will, without doubt, pop up over time. On the other hand however, they must
also be flexible enough to accept the conclusions that will arise from the process even if these conclusions do not exactly
jell with the policy planned in advance. It can therefore be said that the strategic thinking and planning process is linked to
the subject of municipal democracy. Municipal democracy which considers not only the matter of elections every five years,
but also the concept of participatory democracy, in other words the involvement of residents in the decision-making process.
This involvement causes the establishment to relinquish some of its power in the decision-making process for the benefit
of the residents. Local authorities that embark on the process of strategic planning must be aware of this need to relinquish
some of their power.
Conclusion
Economic development is a process aimed at improving the quality of life of the citizens. In this process, one must take into
account that an increase in a specific component of quality of life is likely to harm other components. This situation illustrates
the basic rule in economics that everything has its price. It is important to remember that in our case, the cost is not only
monetary expenditure, but may also be in social, cultural or environmental costs. (For example, establishing an industrial
zone may damage the open spaces, which are very important in terms of quality of life. ) In this paper we have presented
the fundamental principles and the main processes required to facilitate an improvement in the economic status without
harming the other components that make up quality of life.
References
[1] Aizencang-Kane P. (2010) Urban Creativity: Effective Management and Democratic Openness", Floersheimer
Studies, The Institute of Urban and Regional Studies, The Hebrew University of Jerusalem. http://www. fips. org.
il/Site/System/UpLoadFiles/DGallery/%F4%F8%EC%E4%20%E9%F6%E9%F8%FA%E9%E5%FA%20%F2%
E9%F8%E5%F0%E9%FA. pdf
[2] United Nations Human Settlements Programme, (2005), Promoting Local Economic Development Strategic Planning
— Volume 1: Quick Guide, Ecoplan International, Inc.
141
[3] http://www. chs. ubc.

ca/archives/files/Promoting%20Local%20Economic%20Development%20through%20Strategic%20Planning.
pdf
[4] Local Economic Development. (2015). The World Bank. http://go. worldbank. org/V68WA64TF0.
[5] Andrew C. and Goldsmith M. , "From local government to local governance- and beyond?", International Political
Science Review, 1998, Vol. 19, 2 (101-117).
[6] Leigh N. G. & E. J. Blakely (2013). Planning local economic development - Theory and Practice Fifth Edition SAGE
Publications, Inc, The University of Sydney, Australia.
[7] Lester Nina (2005), "Assessing Economic Development
[8] Incentives: Central Texas City: Managers Perspectives", Texas State University-San Marcos, Political Science
Department, Public Administration.
142
Career Options and Entrepreneurial Potential among Female Graduates: Motivations,

Obstacles and Realities
Ana Paula Marques

, Associate Professor, PhD of Sociology (University of Minho/Portugal),
Senior Researcher in the Interdisciplinary Centre of Social Sciences (CICS. NOVA. UMinho),
amarques@ics. uminho. pt
Abstract
The objective of this paper is to contribute for a better understanding of the perceived motivations, obstacles and self-
employment realities in the advanced technology sectors and knowledge intensive-business. In terms of public policies in
economic and business, promoting female entrepreneurship emerges as a factor of mobilization of women for active economic
life, as well as a strategy to support business initiatives, particularly as factor conducive to the promotion of equality between
men and women. However, according to a recent study on the promotion of innovative women and entrepreneurship, one of
the main obstacles that explains the lower participation of women in entrepreneurial activities of an innovative nature are
related to educational choices pursued in formal education systems and the persistence of traditional stereotypes about
women, science and innovation. Also, in comparison to men, women not only possess a lack positive attitudes about their
own personal capacities or inclinations for starting businesses, but also have less personal contact with entrepreneurs.
Empirical results are based on a case study project centred on a Portuguese University and the potential of entrepreneurship
among graduates who have completed their course between 2002 and 2008. Drawing upon information-rich evidence from
in-depth interviews, insights are presented in order to highlight an important relationship between the entrepreneurial intention
and the social origin, field of education and gender of the graduates.
Keywords: Higher Education; science and innovation, entrepreneurial potential, gender, motivations; obstacles
Introduction
Difficulty entering the labour market reflects the phenomenon of unemployment, which has gradually gained visibility, both
in the international and the Portuguese contexts (authors). What distinguishes the current situation from that of past
decades is the high level of unemployment among graduates, a state which is aggravated, on one hand, by the inability of
the labour market to provide employment for all young graduates, and, on the other, by the decrease in the correlation
between qualifications and the skills with potential for transferability to the workplace, (i. e. , an inadequate relationship
between graduate skills and employer requirements).
In order to tackle this worrying unemployment situation, it has become necessary to turn to alternative strategies for entering
the world of work, and entrepreneurship may be one such means. This strategy has been the subject of great interest for
the heads of several institutions, particularly those working in the fields of education and employment, and research and
knowledge transfer. Essentially, taking a wider view of "entrepreneurship" at the societal level (COM, 2006, 2012a), there
is a tendency to stress the importance of developing an "entrepreneurial culture". At the same time, entrepreneurship has
also been viewed as a "solution", mainly in economic terms, within the narrower context of increasing competitiveness and
job creation.
Despite the fact that such views and perspectives have generated controversy and criticism from various disciplinary fields,
particularly the social sciences, many countries have, in practice, attempted to promote entrepreneurial activity through
various programs and incentive mechanisms, as they recognize the significance of its contribution, particularly in terms of
higher education (COM, 2012b). In this context, both the government and HEIs play an important role in creating
environments which motivate a generation of young entrepreneurs, and provide them with conditions which enable them
to succeed in their efforts to create a new business or enter self-employment (Kautonen, et al. (2009).
143
However, when entrepreneurship, and particularly the creation of businesses/self-employment opportunities within
advanced, knowledge-intensive technology sectors, is analysed from the point of view of gender, inequality is found to
persist in terms of the number of women working in the field. This is especially significant when we consider the level of
feminization of higher education in recent decades, both in terms of access and completion.
According to recent European Commission data (Eurostat, 2013), of the 27 EU countries, Portugal has the highest
percentage of doctoral degrees held by women in these fields (women represent 50% of PhDs in engineering). However,
despite the high rate of females graduating and completing doctoral degrees, there is still a tendency for women to be
underrepresented in scientific fields such as engineering, sciences and information technology.
The findings of the few investigations into gender equality in Portuguese academia therefore appear, as in other cases, to
invalidate the assumption that there is a pipeline effect, i. e. that inequality will simply disappear as a result of greater
feminization. Furthermore, the difficulties in reconciling work and family life (associated with the persisting representation
of women as primarily responsible for housework and the care of others), the prevalence of a meritocratic culture, the
"masculinized" career, and the low level of insight into the mechanisms and forms of gendered discrimination, framed by
the absence of clear equality policies, appear to underlie these processes.
With this in mind, the present article focuses on female entrepreneurship, exploring and analysing the main motivations,
obstacles and realities experienced by women, especially those who decide to forge an independent career by creating a
business, or entering self-employment.
1. Female entrepreneurship potential: Case study design and objectives

Our aim with the first half of this paper is to describe, by means of brief presentation of a case study, the methodological
strategy which underpinned the project "Entrepreneurship potential at UM" (2010-2012). The objectives of this study were
to: i) propose a new theoretical and methodological framework for the concept of entrepreneurship, privileging a
multidisciplinary approach, particularly encouraging participation from the field of social sciences; ii) describe strategies
and learning methodologies within the academic context which can encourage entrepreneurship and the career
development of highly qualified graduates; iii) analyse perceptions and representations of the principal obstacles/success
factors when implementing a business idea/entering self-employment; and iv) evaluate the integration of key elements of
entrepreneurial education into the curriculum and extracurricular activities1.
The choice to use a case study is justified by the need to explore this subject, which remains little systematized and
underdeveloped within the context of social sciences, particularly sociology, as well as the fact that the University of Minho
(UM) has put in place relevant entrepreneurship promotion initiatives. Furthermore, this active encouragement of
entrepreneurship on the part of UM has been accompanied by the creation of new structures and an academic interface,
in particular LIFTOFF, an entrepreneurship office (www. liftoff. aaum. pt) and TecMinho (www. tecminho. uminho. pt).
The methodological design is comprised of both quantitative and qualitative approaches. In the first methodological stage,
an online survey was sent to 1, 419 graduates from the University of Minho (North of Portugal), who completed their degrees
between 2002 and 2008. These graduates are from 43 courses which were grouped into the following six fields of study,
in accordance with the Portuguese National Classification of Education and Training Areas (2008): Education, Humanities,
Social Sciences and Law, Science and Computing, Engineering, and Health and social care. The results obtained were
from a 20% quota sample, a total of 283 valid surveys. In the second methodological stage, in-depth interviews were
conducted with graduates (eight in total), who had participated in the first stage of this research, focusing on those with
“high entrepreneurial potential”.
On the basis of responses to an online survey completed by two hundred and eighty-three (283) graduates who completed
their studies between 2002 and 2008, from different fields of study and of both genders, we will create a social profile of
respondents. This will include a presentation of sociographic data regarding these graduates and an analysis of their
1 For the purposes of this article, only some of these goals in the project were analyzed from a gender studies point-of-view, in particular,
the perception of motivations and obstacles encountered when implementing a business idea/entering self-employment.
144
entrepreneurial intent, taking into account social inequalities, particularly those concerning gender and field of study, as
well as other attributes related to social capital.
2. Respondents’ profiles
In our sample1 we noted a high rate of female participation (60%) in UM courses, with an unequal distribution according to
field of study. On some of the engineering courses, there is a more even gender balance (e. g. biological engineering). This
is one of the trends already mentioned in other nationwide investigations (see Gonçalves, 2009; Alves, 2008; Marques,
2007, Martins, Mauritti and Costa, 2005). The mean age is around 29, and the majority of respondents are single (66%),
with 32% being married or in a civil partnership. To a certain extent, the results support the thesis that it is common for
young people beginning their working lives to put off starting their own family.
In terms of access to higher education in the respondents’ families, we found that over 40% of the respondents' parents
had less than 4 years of formal education, and only 17% of parents and 19% of mothers were educated to degree level.
Most parents worked in low-skilled, low-qualified jobs2, and they were mainly employees. The trend for there to be a certain
degree of social selectivity, as confirmed by other studies, appears have to been mitigated by the widening of students’
social backgrounds, with young people from households with a relatively low educational and professional status accessing
higher education.
Analysis of the survey results reveals that the majority of respondents (67%) state that they are in full time employment.
The remainder inhabit a range of employment statuses, including independent worker and entrepreneur (12. 4%),
internship/research grants or student (11%), and part time (1%). 9% of respondents are unemployed. Such figures suggest
that the combined factors of vulnerability and instability of contractual relationships have become one of the main
explanatory factors for the emergence of professional and social risks (Marques, 2010; Sennett, 2001; Beck, 1992;
Felstead, Jewson, 1999). However, it is important to stress the uneven incidence of these vulnerabilities according to field
of study; the most precarious working relations are encountered by young graduates from arts and humanities subjects, a
higher proportion of whom declare themselves to be self-employed or unemployed. On the contrary, the status of young
people from areas such as health and social workers (100%), education (72. 9%) and engineering tends (71. 7%) to be
one of dependent employment, while those who graduated in the field of social sciences, business and law are more diverse
as far as professional status is concerned (see Table 1).
On the basis of the information gathered, it is also noted that this vulnerability in terms of employment has a greater impact
of women. The proportion of male respondents in full time employment, particularly among those who studied courses such
as engineering, education, biology/geology teaching, mathematics teaching, public administration and economics is higher
than that of females. Female respondents who graduated in fields such as archeology, foreign languages, geography,
foreign affairs and journalism are at a particular disadvantage.
Table 1: Distribution of respondents by area of training and relationship with employment
Study Field (%)

Relationship with employment
Education Arts & Social Sciences, Engineerin Health and Total
Employee a full time 72, 9 Humanitie
30, 8 Sciences,
63, 9 Math
67, 2 and g71, 7 Social
100, 0 66, 8
Independent Worker 10, 2 s
23, 1 Trade
9, 3 and Computer
3, 4 7, 5 Workers
,0 8, 5
Law Sciences
Entrepreneur ,0 7, 7 6, 2 5, 2 1, 9 ,0 3, 9
Part-time worker 1, 7 ,0 1, 0 1, 7 ,0 ,0 1, 1
Internship 1, 7 ,0 7, 2 ,0 5, 7 ,0 4, 4
Research Grant 3, 4 ,0 2, 1 12, 1 ,0 ,0 4, 4
Unemployed 5, 1 23, 1 10, 3 3, 4 13, 2 ,0 8, 8
Student 5, 1 15, 4 ,0 6, 9 ,0 ,0 2
Total 100 100 100 100 100% 100 100
1For a deeper understanding of the information, see. Marques e Moreira (2011a, 2011b).
2 They correspond, in general, to training levels I to III within the European Union framework.
145
Source: Survey on entrepreneurial potential at UM (2010)
3. Motivational structures of potential entrepreneurs

In this section we will analyse only results regarding the respondents who stated themselves to be "potential entrepreneurs",
namely those who, at some point in their career, have had the intention/desire to create their own job or business, even if
they have not done so. In our analysis, we will consider the motivations or expectations indicated by respondents who have
taken the opportunity to follow a professional path which is independent and autonomous in terms of contractual and/or
hierarchical relationships, that is to say, one in which the defining feature of the job/work type is the fact that it is based on
a relationship of contractual "independence" and freedom from organizational constraints or hierarchical subordination,
being subject only to market constraints (Supiot, 2001; Burchel et al. , 1999)1.
In general terms, the main motivations underlying this entrepreneurial potential consist, on the one hand, of the desire for
new challenges (57. 4%), the prospect of earning more money (34%), the desire to be your own boss (23. 9%), and the
opportunity to launch new products/services (21. 3%), and, on the other hand, of difficulty finding work in your field of study
(22. 3%), avoidance of unemployment or an unsatisfying job (20. 3%), and better reconciliation of professional and personal
life (14, 2%).
Other reasons, such as it being the only way to get a job, or family tradition received very low percentages as a proportion
of the overall result. In turn, when this information is considered according to gender, we find that difficulty finding a job
after finishing a degree (30. 7%), avoidance of unemployment, or leaving an unsatisfying job (21. 1%), and better
reconciliation of family and working life (18. 4%), are more prevalent responses among women than men. In contrast, it
becomes clear that motivating factors representing instrumental orientation to work were more prevalent among men
surveyed than women, in particular the prospect of earning more money (48. 2%).
Finally, the main employment sectors within which self-employment opportunities/business tend to be created are,
"education, health and social work" (29. 4%); "culture, tourism, communication, marketing, ICT and biotechnology" (27.
4%), "trade, hotels and restaurants" (17. 3%) and "financial activities, real estate, lettings and business services" (14. 2 %).
4. Projects for entrepreneurship: discourses and meanings

In this section, our analysis focuses on the attempt to demonstrate the rich variety of ways in which people describe their
plans for, and perceptions of, entrepreneurship, according to gender and educational field. These discourses and meanings
seemingly capture both the many diverse ways of being entrepreneurial, and the underlying meaning of these (McElwee,
2008), providing very rich descriptive data with regards what people mean when they talk about entrepreneurship.
By analysing discourses concerning plans and motivations for self-employment, it becomes possible to identify important
divisions with regards entrepreneurial potential, when considered as the intention to start a venture or enter self-
employment. Indeed, field of study and gender emerge as key variables in explaining differences in entrepreneurship
behaviour (Marques & Moreira, 2011a). As such, we have observed how becoming self-employed is understood by some
of our male interviewees as an opportunity for personal and professional growth. Expressions such as "achievement",
"taking risks" or "improving life" appear in their discourses about the plans and motivations that lead them to consider
putting their business projects into action. In contrast, the women use arguments such as "difficulty finding a job", "the only
option for work" or "fear to take a project forward", phrases which suggest that, in a way, entrepreneurship is seen as a
strategy for avoiding unemployment. We will now examine some narratives in which we discovered differentiated meanings
and representations of entrepreneurship according to gender and field of study, “I can give several reasons to go ahead,
but none are a matter of employability. It is really for enjoyment (…) I’m just not able to teach, I can do other things, I have
a talent for them (…)” (John, 28, Education); “ (. . . ) Look . . . I’d like, for example, to start-up a FTA Leisure Centre (Free
Time Activities), or a kindergarten. At the moment, because I really love children. . . and I think it is increasingly difficult to
1Although relevant, we are not going to tackle the question of whether self-employment or creation of a business is a choice or the result
of constraints, due to the structure and objectives of this article.
146
find employment (. . . ) and I am going to have a son and I know it is increasingly difficult to find a kindergarten, for example”
(Mary, 29, Social Sciences).
John clearly views entrepreneurship as a pathway to personal achievement. The interviewee, who has a degree in the field
of Education, intends to carry out a role which presents him with new challenges. In the second case, Mary, who holds a
degree in the field of social sciences, shows some uncertainty towards her professional future. The decision of the
interviewee- to create a kindergarten- is explained not only by her difficulty finding a job in the field she studied, but also by
the possibility of taking care of the son she is expecting. It is interesting to note here that we are looking at a choice in
which, from a sociological point of view, the variable of gender takes on particular importance. In the distribution of family
responsibilities, taking care of the children is regarded by the women as their "natural", accepted obligation. Within the
domestic sphere, for example, we often see the continuation, and even reinforcement, of a symbolic order characterized
by male domination, which is perpetuated by means of the internalization, by both genders, of values, attitudes and
representations transmitted to them throughout the socialization process (Perista, 2010). The blurring of the boundaries
between the domestic/family space and the productive/professional space contributes to gender inequalities, and presents
itself to women in particular as a constraining factor with regards their social and professional options and projects.
The creation of a self-employment opportunity/company is recognized by interviewees as a winding path, which is not free
from risks and uncertainty, although different perceptions of obstacles/constraints appear throughout the process. It is thus
plausible to conceptualize risk not only as a socially constructed phenomenon (Beck, 1992), but also as a logic of thinking,
in which conditions the existence of individuals as unpredictable, since individuals cannot always be sufficiently certain
whether their own choices and decisions have the potential to bring them failure or undesired effects. The choice to enter
self-employment or create a business is a good example of this, as demonstrated by the two following testimonials, “There
are issues of funding, attracting new customers, validating our products and differentiating them from the competition, and
questions of price, because there is some unfair competition for these technical services. . . essentially. . . ” (Peter, 27,
Engineering); "I think that when a woman presents herself (in the business world) and, in quotation marks, wants to assume
leadership like a man . . . people are more receptive to a man than a woman. I think this stereotype is still accepted broadly
in society. However, there have been changes, and mentalities will change” (Helen, 25, Education).
The first quote concerns the situation of a young engineer who is considering the initial phase of business start-up, and
considers market competition to be one of the main factors which may condition the success of his business project. The
obstacles highlighted relate to the objective conditions within which he is developing and implementing his planned business
idea. As the last quote demonstrates, there is inevitable crossover between gender stereotypes and obstacles to
entrepreneurship. By pointing out the barriers which woman face in entrepreneurial activity in her testimonial, young
education graduate Helen recognizes, from the outset, the prevalence of male, patriarchal domination in the corporate field.
Both discourses present empirical evidence suggesting that social representations of the entrepreneurial career path and
its obstacles are still based on stereotypical models of the roles played by men and women in the business world. Here
too, the variable of gender appears to have an important bearing.
Conclusions
With this paper, we aimed to contribute towards a better understanding of perceived motivations, obstacles and realities.
This study is exploratory in nature, and as such, the limitations of our findings must be borne in mind. Nevertheless, our
research highlighted two areas for analysis: i) entrepreneurial potential according to field of study/course, gender and social
origin; ii) the meanings and discourses of graduates regarding entrepreneurial motivation and plans. The data suggest that
males with a greater social capital, having graduated from engineering courses have a greater tendency to choose careers
in self-employment and entrepreneurship. On the other hand, it can be noted that within the traditionally feminine fields of
social sciences and education, the traditional model of gendered division of labour (Bourdieu, 1999), persists among
graduates, with less young women choosing to follow a career in self-employment, as demonstrated. Thus, women remain
underrepresented in the technology sector and knowledge-intensive services, despite their high levels of academic
qualification.
Likewise, the significance of stereotypes and prejudices associated with social gender roles and the gendered division of
domestic work go some way towards explaining the persisting horizontal and vertical gender segregation which
147
characterizes the labour market. In any case, there is a need for ongoing, forward-looking research, in order to further
expand upon this exploratory evidence, including a reflection upon the impact of science and innovation policies in place
within HEIs and research centres, as well as government policies which aim to foster entrepreneurship among female
graduates.
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caso da faculdade de Ciências e Tecnologia. Lisboa: Fundação Calouste Gulbenkian/ Fundação para a Ciência e
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da Região Norte. Relatório final. Universidade do Minho, URL: http://hdl. handle. net/1822/8633.
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[18] McElwee, G. (2008). In Search of Montsalvatch: Making sense of interviewing farmers. Tamara Journal of Critical
Organization Inquiry. 7 (2). pp 134-148.
[19] Perista, H. (2010). “Mulheres, homens e usos do tempo: quinze anos após a Plataforma de Acção de Pequim, onde
estamos, em Portugal?. Revista de Estudos Demográficos. 47. pp. 47-63
[20] Sennett, R. (2001). A Corrosão do Carácter. As Consequências Pessoais do Trabalho no Novo Capitalismo. Lisboa:
Terramar.
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University Press.
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148
Understanding the Neuromechanisms of Consumer Behavior in Advertising Industry1
Norsiah Fauzan
Department of Cognitive Science, Faculty of cognitive Science and Human Development,

Universiti Malaysia Sarawak, 94300 Malalysia.
nursiahfauzan@gmail. com
Tel: +60 82 581515, Fax: +60 82 581567,
Abstract
The objective is to acknowledge the relevance of the unconsciousness in the consumers’ behavior by providing a new point
of view based on the innovative findings of cognitive neuroscience. This paper highlights recent studies on emotion, and
memory, focusing on their implication in the advertising process. The intention of this paper is to open our eyes to new scientific
findings that may well mean a new way of understanding how advertising works, giving a new value to the role of emotion and
consciousness. The 21st century gives us the opportunity to look once more at the perspective of incorporating validated
scientific contributions based on the new discoveries about brain functioning. This article will build bridges between these
scientific results and current advertising practice in a way that allows us to introduce a new point of view which redefines the
influence of emotions and its role in the processes of memory, attention, reasoning and decision-making.
Keywords: Consumer neuroscience, emotions, advertising
1. INTRODUCTION
This article proposes the methods of neuroscience to understand the consumers’ choice and decision making in response
to advertisement which further allow the appropriate design of graphics or strategy for neuro marketing. The primary
objective is to highlight to a broad audience the prospect of turning to neuroscience biological variables to inform models
of marketing and consumer decision making. The research in consumers’ decision making has benefitted from the revealed
preferences perspective that follows the tradition of focusing on observation on what people actually choose or using
questionnaire and interview to get their reasoning for their choice. However, it actually ignores the mechanisms inside “the
black box” in which the decisions are made in relation to other additional variables such as stress, intentions, attitudes and
memory which facilitates insights in providing context and testable constraints. These biological variables in neuroscience
and its interactions with sociological variables adds value to decision making and consumer choice research.
Understanding of underlying mechanism that led to the observed choice is crucial so that one is in a better position to
understand the consumer loyalty to a brand, understanding of contextual influences which interact with the different neural
circuitry that leads to a different choice, and most importantly the influences on choice made by consumer. Such knowledge
can be important in many domains such as marketing and advertising industry, legal decisions and medical. Neuroimaging
tools in neuroscience yield valuable information for the interpretation
of choice data. Neuroscience helps us to explore the hidden elements of the decision process. The decision neuroscientist
might draws on the concept and techniques from neuroscience to inform research in advertisement and marketing.
2. Objectives
1This paper has been published at: Journal of Applied Sciences Research, Received: 27 March, 2015; Revised: May 13, 2013; Accepted:
May 22, 2013, , JOURNAL home page: http://www.aensiweb.com/jasr.html
149
The objective of this research is to propose the methods of neuroscience to understand the consumers’ choice and decision
making in response to advertisement which further allow the appropriate design of graphics or strategy for neuro marketing.
Understanding the relevance of the unconsciousness in consumers’ behavior by providing a new point of view from the
innovative findings of cognitive neuroscience will open our eyes to new scientific findings that may well mean a new way
of understanding how advertising works, giving a new value to the role of emotion and consciousness.
3. Methods
To understand the mental process involved in consumer behavior and advertising, the researcher will first explain
associated areas of the brain such as the limbic system where the Amygdala, hypothalamus and hippocampus are located
and implicated in the study of consumer behavior in advertisement. This will be followed by the role of emotions and memory
in advertisement to provide a more understanding on the consumer behavior and their responses to the advertisement with
reference to the synthesis on related research. Finally, suggestions are given on how and appropriate devices to be used for
the research.
4. NeuroMechanism in Advertisement
Figure 1 : Limbic System
Human behavior is a manifestation of both cognitive and affective processing. Figure. 1 above demonstrated the limbic
system, Thalamus in the limbic system converts the desire and needs as an urge or motivation to an urge within the
cortex. The cortex translates the urge into a desire for something specific. It is from the limbic system that explains the
motivational aspect of desire that provides the urges. Very often, the urges have priority and forces other matters aside.
The underlying urge becomes the desire or needs from a person’s mental state which later translated into actions and
steps to satisfy the internal nagging or desire and needs for something specific. The study of emotions has been crucial in
advertisement research due to significant role of memory in advertisement. Amygdala within the limbic system motivates
the consumer behavior to purchase, hippocampus keeps the memory and experiences of the consumer regarding the
products or brand and hypothalamus, a center for the limbic system which is highly connected with the frontal parts of the
brain which is responsible for judgement and decisions.
5. 0 Role of Emotion in Advertisement

Emotion is a process that varies in intensity and exhibits variety of concomitant indices such as physiological changes in
heart rate, blood pressure and adrenalin levels. It resides in individuals and is intense enough to elicit “feelings
experiences”. It produce arousal and attention to the “emotional message” or stimulus as pictured in the advertisement.
The commercial message is a vehicle that arouse flow of feelings that most people report as emotional experiences. The
advertisers can go beyond the traditional focus groups to tap into consumers’ subconscious minds by relying on biometric
150
indicators by using EEG for brainwave activity, heart rate and respiratory to effectively target consumers. This methodology
and reliance on scientific evidence goes against the creative ‘gut’ instinct which led advertising decisions for decades. The
advertiser can make a claim about being ‘delicious’ to convince the consumers on the chocolate brand advertised but is
there any scientific evidence that can make people believe the advertisement. The neuroscience approach would help the
advertising industry to persuade with scientifically verified results by measuring the actual pleasure of eating the chocolates.
The fastest way is to actually bring a portable EEG device to measure the brainwave activity while eating the chocolate
brand they advertised. The pleasure experience can be measured using an EEG and analyzing alpha waves (8–13 Hz),
beta waves (13–30 Hz) and theta waves (4–7 Hz). The expected brainwave activity will be alpha waves (8-13 HZ) and the
specific brain regions activated will be the nucleus accumbens, part of the limbic system responsible for emotions, pleasure
and reinforcement. Take for example an emerging chocolate brand “BeyondDark” in UK that substantiates their claim of
“ultimate chocolate feel good treat” marketing campaign using scientific evidence from EEG brainwaves to measure
pleasurable feeling, just one chocolate drop elicited a pleasurablel feeling of 65. The company collaborates with Birkbeck
University and MyndPlay company to provide the EEG headsets and analysed the brainwave data for the study on Measure
of Pleasure to create a pleasurable scale to compare how eating chocolate ranked against other common ‘pleasurable’
activities like finding money, blowing bubbles, and stroking a puppy. The results showed that finding money elicited
strongest reaction followed by eating a piece of BeyondDark chocolates and playing with kittens.
6. 0 Consumer memory
Advertisers might want to implicate on the consumer memory by using comedy, drama and suspense. Happiness, anger
and sadness while watching the ads must have left stronger emotional trace on the episodic memory of specific events
experienced by an individual. When people watch commercial ads, people tends to process the audio and video events in
the ads in addition to their internal physiological states such as thought and feelings. The episodic traces vary in strength
depending on the intensity of the person’s experience, and the meaningfulness of the information and their understanding.
When people are emotionally aroused when watching commercials, it will leave stronger episodic memory than those
experience without arousal [5].
Having that feeling embedded in memory, and creating the emotional connection that makes the customer want to return
and in fact creating sense of loyalty. The economics behind experience are all around loyalty, recommendation, customer
lifetime value. Over time, emotions and their corresponding bodily change (s) become associated with particular situations
and their past outcomes. In decision making, most people consciously or subconsciously associate these physiological
signals, and their evoked emotions with their past outcomes, and they bias decision-making toward certain behaviors.
Evidence from brain scans shows that emotions impinge directly on consumer decision making. That fits with what the
psychology of customer experience is about: finding that emotional connection. Other evidence from neuroscience
highlights the importance of subconscious and memorable moments. The subconscious processes 200, 000 times more
information than the conscious mind and processes emotions about 10 times faster than the conscious mind. This indicates
the degree of correlations between ad memorization and the degree of affective content within the advertisement. These
affective advertising activates the amygdala, and orbitofrontal cortices.
7. 0 Brief Branding moments

In terms of establishing advertising effects, research has shown that there are certain periods of commercials that are far
more significant for the consumer. These are referred to as “branding moments” and are thought to be the most engaging
parts of the commercial. It was suggested that the strength of a commercial with regard to its effect on the consumer can
be evaluated by the strength of its unique branding moments. Usually, the branding moment are short segments with
scene duration lasting longer than 1. 5 seconds which have been shown to be more memorable. In 2004, McClure et al
conducted a study to investigate the difference in branding between Coca cola and Pepsi. Participants had to indicate
which cola they prefer while their brain was scanned. Results showed that when subjects tasted samples of Pepsi and
Coke with and without the brand’s label, they reported different preferences [4]. Without labels, subjects evaluate both
drinks similarly. When drinks were labeled, subjects report a stronger preference for Coke. Coke managed to trigger certain
associations in our brain, and simply seeing their logo is enough to make a drink taste better.
151
Both drinks produced equal activation in the ventromedial prefrontal cortex (VMPC), which is thought to be activated
because the taste is rewarding. When the subjects were informed of the brand names the consumers preferred Coke, and
only Coke activated the ventromedial prefrontal cortex, suggesting that drinking the Coke brand is rewarding beyond simply
the taste itself. There was also significant activation in the hippocampus and dorsolateral prefrontal cortex when subjects
knew they were drinking Coke. These brain structures are known to play a role in memory and recall which indicates the
subjects to associate their present drinking experience to previous brand associations. The results of this study suggested
that the Coke brand has much more firmly established itself as a rewarding experience. However, in another study by
Koenigs & Tranel [3], there are people who are less sensitive to this branding effect: subjects with ventromedial prefrontal
cortex damage (an area involved in emotional processing. Unlike their normal counterpart, these patients maintained their
preference for Pepsi. The authors conclude that lacking the normal affective processing, VMPC patients may base their
brand preference primarily on their taste preference. ” The VMPC thus act as a gate that let emotional memories affect
present evaluations.
Neuroscience adds value to consumer studies and on the other hand consumer research provides real world applications
for neuroscience study. When tracking brain functions, neuroscientists generally use either electroencephalography (EEG)
or functional magnetic resonance imaging (fMRI
technology. EEG measures fluctuations in the electrical activity directly below the scalp, which occurs as a result of neural
activity. By attaching electrodes to subjects' heads and evaluating the electrical patterns of their brain waves, researchers
can track the physiological changes and or intensity of responses such as anger, lust, disgust, and excitement. In 2008,
junk food giant Frito lay hired a neuromarketing to look into consumers respond to Cheetos, the top-selling brand of cheese
puffs in USA. The consumer researchers used EEG technology on a group of participants, the participants respond strongly
to the fact that eating Cheetos turns their fingers orange with residual chees dust. Karmarker cited an articles in August
2011 [2] that the EEG patterns indicated a sense of giddy subversion that consumers enjoy over the messiness of the
product. With the data in hand, the company moved ahead with an ad campaign featuring a series of 30 second TV
commercial in which the Cheetos mascot, Chester Cheetah, encourages consumers to commit subversive acts with
Cheetos. (In one commercial, an airline passenger quietly sticks Cheetos up the nostrils of a snoring seatmate. Problem
solved. ) The campaign garnered Frito-Lay a 2009 Grand Ogilvy Award from the Advertising Research Foundation.
Research using neuroscience has given two added advantage. Firstly, the ability to show what’s going on inside the brain
and secondly, the transparency, because showing the results of scientific paper is more believable than giving what
perceived to be the correct answers from a survey. The advances in sciences will make baseless advertising claims lose
its value and brilliant products and truthful claims increasingly triumph. The two commonly used devices are EEG and
fMRI. EEG is portable and can easily record the brain activity with the cap of electrodes sitting on the surface of your
head, however the recording did not get to the deep areas of the brain. On the other hand, the fMRI uses a giant magnet,
often 3 Teslas strong, to track the blood flow throughout the brain as test subjects respond to visual, audio, or even taste
cues. fMRI gives researchers a view into the aforementioned pleasure center. "The more desirable something is, the more
significant the changes in blood flow in that part of the brain, " But this sophisticated piece of equipment are costly and has
few technological limitations. , fMRI requires them to lie very still inside a machine that can be intimidating. EEG allows
subjects to move around during testing.
8. Conclusion
Most of the neuroscience studies involved brain scanning conducted in medical or technological environment. More
research need to be done in supermarkets or shopping mall for consumer decision making. Testing underlying
neurophysiological states is difficult because it is unclear exactly how various factors are perceived in the human mind.
Consumers reaction and decision making process is not simply a biological variables but interaction between biological
and sociological variables and culture. It was proposed that neuroscience adds value to consumer neuroscience research
by enhancing ability to make iinference beyond the usual variables and paradigms. There are concerns over the value
and the potential usage of consumer neuroscience data. The potential for enhanced consumer welfare is certainly present
but equally present is the potential for the information to be used inappropriately for individual gain. Currently, Consumer
neuroscience research is a compilation of only loosely related subjects that at this point, is unable to produce any collective
conclusions.
152
References
[1] Ambler T, Burne T. The impact of affect on the memory of advertising. Journal of Advertising Research. 1999;39
(2):25–34
[2] Carmen Nobel (2012), What Neuroscience tell us about Consumer desire. WORKING KNOWLEDGE, the thinking
that leads. Harvard Business school. Retrieved fromhttp://hbswk. hbs. edu/item/6950. html
[3] Koenigs, M. , Tranel, D. (2007). Prefrontal cortex damage abolishes brand-cued changes in cola preference. Social
Cognitive and Affective Neuroscience, 3 (1), 1-6. DOI: 10. 1093/scan/nsm032
[4] McClure, S. M. , Li, J. , Tomlin, D. , Cypert, K. S. , Montague, L. M. , & Montague, P. R. (2004). Neural Correlates of
Behavioral Preference for Culturally Familiar Drinks. Neuron, 44 (2), 379-387.
[5] Pillemer, Davit B. (1984), “Flashbulb Memories of the Assassination Attempt on President Reagan’” Cognition 16,
63-80.
[6] Plassmann, H. , O'Doherty, J. , Shiv, B. , Rangel, A. (2008). Marketing actions can modulate neural representations
of experienced pleasantness. Proceedings of the National Academy of Sciences, 105 (3), 1050-1054. DOI: 10.
1073/pnas. 0706929105
153
The Implications of the Recent Economic Crisis on Fertility in Greece
Byron Kotzamanis
Laboratory of Demographic and Social Analyses, University of Thessaly, Greece.
bkotz@prd. uth. gr
Anastasia Kostaki
Department of Statistics, Athens University of Economics and Business, Greece.
kostaki@aueb. gr
Abstract
A systematic review of past economic recessions occurred in developed countries confirms that social and economic crises
often have serious effects on fertility while, beyond national differentiations, these effects have certain characteristics, e. g. a
weak effect on generational fertility;an postponement on the timing of first birth, closely related to a late marriage or union;a
close relationship between unemployment and age-specific fertility. The sensitivity of fertility behavior to economic crises is
less marked in countries with longstanding family policies and strong social security systems. The recent social and economic
recession in Greece took place under different social conditions than many recessions in the past. More women than ever are
participating in the labor market, most couples use reliable contraception that enables them to postpone childbearing, while
social security and health costs are burdened from the rapidly expanding numbers of elderly. All these factors can affect
reproductive decisions and potentially aggravate the negative effects of the recession on fertility. This work, using the latest
available official data of Greece, provides an investigation of the impact of the current economic crisis on fertility levels, as
well as the evolution of these levels through time.
Keywords: Social and economic recession, fertility.
1. Introduction
The relationship between economic conditions and fertility is a classic research question in demography. The literature
often mentions that fertility follows the cycles of the economy, while in times of economic downturn and uncertainty in the
labor market, people are led to postpone childbearing, to adjust their family planning. (Goldstein, et al. , 2013; Adserà,
2004; Sobotka, Skirbekk &Philipov, 2011; Hofmann & Hohmeyer, 2012; Schmitt 2008 and 2012).
From a theoretical point of view, the issue that fertility 'react' positively in times of economic growth and “negative” in
economic recessions has been discussed for over two centuries. Originally, Adam Smith in his work the "Wealth of Nations"
in 1776, links the economic growth with the population growth. Becker (1960), studies the relation between fertility and
income level. Easterlin (1973, 1976) considers fertility as a function of the economic environment of the younger
generations, based on the experience they had during childhood years, living in the parental household.
In contrast of the above theories Butz and Ward (1979a, 1979b) analyzing data for the US fertility of the first half of the
decade of 70s, introduces the theory that fertility follows the opposite trend compared to the cycles of the economy.
Considering the increasing participation of women in the labor market, he claims that the acquisition of a child in economic
good times increases the "opportunity cost" for a woman. However, Macunovich (1996) argues that fertility remains linked
to the cycles of the economy, while the negative effects of high unemployment during economic downturns are greater than
any benefits of the reduction of '' value '' of women's work.
Nowadays, with the onset of the economic crisis in 2007-2008 in the US and the subsequent dissemination of European
countries, the interest for exploring the relationship between economic crises and fertility is revived.
154
2. Τhe current economic crisis and its background

The literature suggests that economic downturns have an effect in changing fertility calendar, i. e. postponement of births,
which results in reducing the total fertility rate and the number of children (Rindfuss, et al. , 1988; Andorka, 1978; Sobotka,
2008; Cutright & Shorter, 1979; Morgan, 1991 and 1996).
However the current economic crisis is characterized by significant differences compared with the previous ones. First of
all, it is the most intense and longest crisis than all the previous ones, while the current conditions are significantly different
in comparison to crises of previous decades (in 20s or even in 70s). Particularly in the late 2000s, the welfare state is much
more developed than it was for 50 or 100 years ago, the percentage of women in the labor market and their educational
level are significantly higher than in the past decades, contraception tends to be generalized, and the mean age of the first
childbearing is much higher than before. In most European countries is as high as 28 to 29 years, that is four to fivetimes,
higher than in the 70s, allowing limited further postponing of childbearing for a woman. In a variety of countries, the
economic crises are accompanied with simultaneous significant changes of the pension systems, e. g. reduction in the
purchasing power of pensioners and increase of the upper age limits, that leads to a reduction of job opportunities for
younger people and clearly lower salaries.
At the same time, the current crisis occurred at a time at which many countries have extremely low fertility levels, while in
a part of them a small rise of these levels have been observedin recent pre crisis years (as for example Greece). The
increase in fertility in Greece had started since the early 2000s, stabilized in 2009, decreasing thereafter from 1. 55 children
/ woman in 2009, to 1. 3 in 2014, while a same reversal is recorded in other countries (Bulgaria, Croatia, Czech Republic,
Estonia, Latvia, Hungary, Romania, Spain, Italy, Portugal).
The differential intensity of the possible effects of the crisis in fertility levels can be attributed to the fact that before the crisis
some countries had highly developed social safety nets and very strong family support policies resulting to minimize the
effects of economic recessions (Thévenon, 2011; Fagnani, 2012).
The economic recession obviously affects first of all the younger part of the population that of reproductive ages. The
unemployment rates at these ages reach extremely high levels, as a consequence of the crisis, and therefore this is highly
likely to affect the reproductive behavior of young population. Usually, in this case a postponement of births is observed.
The connection between economic recession and fertility seems to be strong in the southern countries, as well as in Eastern
and Central Europe, whereas in the countries of Western and Northern Europe, where the impact of recession on the
unemployment rates is limited, the current crisis and the slight rise of unemployment do not appear to have significant
impact on fertility (Goldstein, et al. 2013).
Numerous studies referring to countries of central-eastern Europe confirm the above (UNECE, 2000; Philipov & Dorbritz,
2003; Sobotka 2004 & 2008a, b; Frejka, 2008), emphasizing the relationship between the effects of the economic recession
and public policies of family support. These studies emphasize that the relationship between work (career) and fertility are
less confrontational in social democratic and former socialist countries due probably to the strong institutional support to
working mothers. In the "classic" social democratic welfare state of Nordic countries the combination of employment and
motherhood does not pose particular problems not only due to high benefits and long parental leave but also because of
the wider positive attitude / behavior towards working mothers (Matysiak & Vignoli's, 2008). Finland had an exemplary
policy that led to an increase in cross-sectional fertility in deep economic crisis (early 1990s). The introduction of a subsidy
in the mid 1980s for parents who stay at home (child home-care allowance) for the care of their child (until the age of four)
has considered as an attractive alternative to unemployment and limited job prospects for many women in the years of
crises (Vikat, 2004).
Government policies can be effective in order to minimize or even to reverse the negative effects of the financial crisis in
fertility according to Hoem (2000).
3. The implications of the current economic crisis on fertility in Greece.

3. 1. Data and methods
155
The investigation of the potential impacts of the current economic crisis on the fertility levels of the population in Greece is
based on analysis of the empirical data, provided by the Hellenic Statistical Authority (ELSTAT). These are,
• Number of births by five-year age group of mother,
• Number of births by five-year age group of mother and order of birth,
• Mean population sizes of women in reproductive ages by five-year age groups.
Although we have long time series for our analysis, we should note that the period from the onset of the crisis and beyond
is relatively short (five years only, 2010-2014), while not yet available by ELSTAT data on births of 2014. This does not
facilitate the investigation of potential impacts of the crisis on fertility.
Using the empirical data as described above, simple and complex classical demographic indicators are calculated, those
are,
1. Fertility rates by age of mother,
2. Fertility rates by age of mother and order of birth,
3. Total annual fertility rate (synchronic analysis),
4. Mean age of mothers of childbearing (for first births and for all births).
3. 2. Results
3. 2. 1 The evolution of fertility in post war Greece (1956-2013)
From the end of the civil war (1949) until 1967, the number of births (Chart 1, Table 1 in Appendix) fluctuates at high levels.
Specifically in 1949 births was 139. 108, while the very next year (the first after almost a decade of war status) will amount
to 151 134 and the next 17 years will stay around 150000-155000 to record in 1967 its highest value (162. 839). The next
seven years its trend is downward (at 1973 equals 137 526), while during the first postwar period this number will increase
from 144 069 at 1974, to 148 134 at 1980. But the following years it will significantly decline to 101 167 in 1989 (32%
reduction since 1980), followed by a decade of relative stabilization at very low levels (around 100, 000 per year), despite
the strong migratory flow from the former Eastern European countries. Finally, the first decade of 21st century births will
have an increasing trend (118 302 in 2008, that is 17. 5% higher compared with 1999). However this trend that will halt
thereafter. While in 2009 births exceeded 110, 000 from 2010 onwards will be progressively reduced, falling by 20% over
the four last years.
156
Figure 1: Greece, 1951-2013, Births (absolute numbers) και Crude Fertlity Rate (0/00)
170000 24,0
165000 23,0
160000 22,0
155000 21,0
150000 BIRTHS 20,0
145000 19,0
140000 18,0
135000 17,0
CFR (00/0)
BIIRTHS
130000 16,0
CFR
125000 15,0
120000 14,0
115000 13,0
110000 12,0
105000 11,0
100000 10,0
95000 9,0
90000 8,0
1959
1991
1951
1953
1955
1957
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
YEAR
3.2.2 Total Fertility Rate

The Total Fertility Rate (TFR) indicating the average number of children per woman, (Figure 2, and Table 2, in Appendix),
the first 30 years, until the early 1980s, recorded relatively high values (among the highest in European countries, namely
2. 2-2. 4 children per woman). In particular, at the beginning of the examined period TFR equals 2. 31 children / woman
and remains stable for a decade at levels higher the reproduction limit although with slight fluctuations since in 1967, when
it reaches its highest value (2. 45). Then, after 1980, in a first period, TFR will record a rapid decline (at 1989 equals 1. 40
children / woman), resulting in the inclusion of Greece in the group of low fertility countries. The downward trend will continue
clearly and slowly during the following decade, so in 1999 TFR takes its lowest value (1. 24 children / woman), leading to
the accession of Greece, in accordance with the international bibliography, in countries with very low fertility (Lowest-Low
Fertility). From the early years of 21th century TFR begins to recover (in 2005 will exceed 1. 3 children / woman and 2008-
2010 will roughly exceed 1. 5 children/woman). However the increase of TFR will not further continue, while in 2013 its
value will be significantly lower (1. 3 children / woman).
3.2.3 Mean age of childbearing

The mean age of childbearing in both all births as well as for first births, is characterized by considerable fluctuations (Table
2 in Appendix). The mean age for all births is high and relatively stable during the first postwar years while it declines from
the early 1960s (decrease by 2. 6 years between 1960 and 1981). This drop is obviously a result of continuous increasing
157
of the age-specific fertility rates for younger reproductive ages (<25 years) and the simultaneous decline of the
corresponding rates in mature reproductive ages. But after a short time (until 1985) of relative stability the mean age will
start to slowly increase at the beginning, but faster in following years, resulting togrow by about 5 years between 1985 and
2013 (26in 1985 to 30. 9 in 2013). This increase is mainly due (up to the mid-1990s) to reduce of the age-specific fertility
rates at younger ages, and from the late 1990s onwards, the increase of mean age at childbearing can be contributed to
the increase of the age-specific fertility rates in mature reproductive ages.
Figure 2 (Mean age and TFR) capture the above described situation as it combines the intensity of the cross-sectional
fertility with its calendar. The vertical drop of the curve from 1956 to 1981 and marks a period where the average age is
constantly decreasing and the intensity of the cross-sectional fertility remains stable with slight fluctuations over the
reproduction level (2. 1 children per woman). Then for the four-year period 1981 – 1985 there isa heavy fall of TFR and a
stability of the mean age of birth and then for a longer period (1985 - 2001) the mean age of birth constantly increases
while TFR constantly declines. From 2001-2010 there is an increase both in the mean age of birth and of TFR, while from
2010 the average age of birth increases and TFR falls.
Figure 2: Greece, Total Fertility rate versus mean age of childbearing (all births) 1960-2013
32
age
31 2013
30 2009
29 2001 1956
28
27
1987
26
1981
25
24
1 1,1 1,2 1,3 1,4 1,5 1,6 1,7 1,8 1,9 2 2,1 2,2 2,3 2,4 2,5 2,6 2,7 2,8 2,9 3
children/woman
3.2.4 Age Specific Fertility Rates
158
Figure 3 illustrates the progress of the age-specific fertility rates. A first view of the figure shows that the rates in the
younger reproductive ages (years 15-24) exhibit an upward trend until the beginning of the 1980s, a trend that will be
reversed in the next twenty years, leading them to collapse. The decline will halt temporarily for a short period (the 2000s)
and will start again after 2010. Unlike the development of the age-specific rates of younger reproductive ages, the
corresponding one for the later reproductive ages (> 30 years) will move initially downward, at the beginning of first decade
of 21th century and then upward. In recent years, however, coinciding with the onset of the economic crisis in Greece, it is
becoming a common trend: the rates in almost all ages significantly decline. A special behavior and diversified development
follow the rates at ages 26-29. These rates follow an upward trend (as those of ages below 25 years) but they strongly fail
during the decade of 80s, while they exhibit some temporary signs of recovery in later years.
Figure 4, which illustrate the completed fertility in successive ages, show that the completed fertility in the age 25 until the
late 70s is increasing. Thereafter it is decreasing in all age groups. Figure 5 also confirms our previous conclusions, namely
that the rise of TFR since 2000 - and in particular the differentiation in 2009 compared with 1999 is solely due to the increase
of fertility levels of ages greater than 30. The figure also clearly reflects all changes of fertility levels throughout the period
considered, especially those of the last fifteen years, and also confirm that the increase of TFR since 2000 is solely due to
declining fertility of younger ages and thatthe fall of TFRthereafteris due to declining fertility of all ages. Moreover it becomes
obvious that though the high values of TFR until 1980 is due to young ages, their subsequent reduction is almost entirely
due to the same ages, while this reduction does not offset until the late ‘90s by increasing fertility of ages greater than 30.
Figure 3: Greece. Age-Specific Fertility Rates (1960-2013)
220
15
210
16
200 17
190 18
19
180 20
170 21
22
160 23
150
140
130
(.000)
120
110
100
90
80
70
60
50
40
30
20
10
0
1960 1964 1968 1972 1976 1980 1984
year1988 1992 1996 2000 2004 2008 2012
159
28
220
29
210 30
31
200 32
33
190 34
35
180 36
37
170 38
39
160 40
41
150 42
43
140 44
(.000)
45
130 46
47
120 48
49
110
100
90
80
70
60
50
40
30
20
10
0
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
year
160
Figure4: Greece, completed fertility in successive ages for chosen years.
3,0
1960 2,9
1970 2,8
1980
1999 2,7
2009 2,6
2012 2,5
2013 2,4
2,3
2,2
2,1
2,0
1,9
CHILDREN/WOMAN
1,8
1,7
1,6
1,5
1,4
1,3
1,2
1,1
1,0
0,9
0,8
0,7
0,6
0,5
0,4
0,3
0,2
0,1
0,0
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
AGE
3. 2. 5. Fertility by birth order

Analysis of fertility by birth order allows to consider a) whether -and to what extent, the reduction in cross-sectional fertility
after 1980 resulted from the reduce of total births and whetherthere are signs of changing family patterns , particularly
regarding childlessness and b) to formulate some hypotheses for the most recent periodafter 2009 (years of crisis).
Examining the evolution of births in the postwar period (Figure 5 and Table 3 in Appendix) we first find that the first order
births steadily increase. In particular, the first births being 40% of total births in the 50s, now (in 2013) represent 51% of the
total, while the latter have risen slightly by the end of the 70s (from 32-33% to 38%) to then they stabilize. The steadily
increasing participation of births of 1st and 2nd order clearly reflected in the figure, while in 1960 they are 73% of the total,
from the mid-1970s they are 80% of total births, while inthe late 90s they exceed 85% (89% in 2013) of total births.
Births of 3rd, 4th or higher orders exhibit a relatively smooth progression and fewer fluctuations in relation to the first two
classes by following, though with differentiated rates, a rough downtrend (faster decline of births of 4thor higherorders in
relation to those of 3rd order). Specifically, unlike the first two births orders, 3rd order births reduce slowly (from 15% in the
50 to 9% recently), and those of 4th or higher orders are collapsing (from 13% to 3%). It is worth noticed that in the 50s
births or 4th or higher orders was around 20, 000, whereas those of 2013 just exceeded 3, 000. These trends are consistent
with the apparently shrinking and gradual disappearance of large families.
161
Figure 5 : Greece. Distribution of births by order (1960-2013)
100%
95% 4th order or higher
90%
3rd order
85%
80%
75%
70%
65%
60% 2nd order
55%
50%
%
45%
40%
35%
30%
25%
20% 1st order
15%
10%
5%
0%
1970
2002
1960
1962
1964
1966
1968
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2004
2006
2008
2010
2012
YEAR
3.3.6 Total Fertility Rates and Mean Age at Childbearing by order of birth
First order TFR will experience a rapid growth in the beginning of the period (between 1960 and 1964) from 0. 89 to 1. 00.
In the next period (1964 -1980) it will stabilize more or less around the unit, while during ‘80s it will significantly diminished
by 40%, (0, 98 in1980 and 0, 62 at 1989). During the 90s it will stabilize around 0. 6 children/woman, followed by the mid-
2000s rise (2010 = 0. 75 children/woman) while it will exhibit a small decline in the first years of the crisis (2011-2013).
Close if not identical progression- will follow TFR of 2nd order. This indicator after a rising period (0. 69 children / woman in
1960, 0. 92 in 1970), it will stabilize in 1970 to collapse then during the 1980s (0. 55 children/woman in 1989). The fall will
continue at a milder pace than during the 90s (0. 47 children / woman in 1999) will be stopped thereafter while it will begin
an upward trend after 2010.
162
Figure 6: Greece, Total fertility rates differentiated by birth order (1960-2013)
1,10
1,00
0,90
1st order
0,80
0,70
children / woman
0,60
2nd
0,50
0,40
0,30
3rd order
0,20
0,10
4th + order
0,00
1960 1965 1970 1975 1980 1985
Year 1990 1995 2000 2005 2010
UnlikeTFR of 1st and 2nd order of births, that of 3rd order will remain constant for about twenty years (around 0. 3 children),
thereafter it will be 50% lower between 1980 and 1989 (0. 16 children), while it will stabilize thereafter around the value of
0. 14 and it will slightly raise after 2005 (0. 17 in 2010). Finally as regards TFR of 4th class and above these will follow an
uninterrupted downward trend throughout the period considered (0. 32 in 1960 and 0. 04 in 2013).
Our analysis shows that while the collapse of the total TFR during the 1980s is due to all orders of birth, the most significant
"responsibility" have the indicators of 1st and 2ndorders. In particular, the reduction of TFR between 1980 and 1989 is due
almost half (45%) to the collapse of 1st order TFR and secondarily the diminishing of 2nd order TFR (participation 35%). By
extension, the declining values of indicators of 1st and 2nd order can be attributed almost by 80% to the reduction of the
total cross-sectional fertility during the first period of its rapid collapse. Similarly, the increase in total TFR between 1999
and 2009 is by 52% due to the increase in 1st order TFR, 34% to the increase 2nd order TFR and only 14% to the increase
of the 3rd order TFR. Finally, the reduction of the total TFR between the years of crisis (from 2010 and 2013) is solely due
to the reduction of the corresponding TFRs of the first two orders.
Changes to mean age at birth by birth order are depicted in Figure 7 and Table 4 in Appendix. The average age drops to
all orders of birth until the early-mid 1980s to reverse then for the births of 1st , 2ndand 3rdorder. Thus, the average age at
1st order birth increases by 5. 7 years between 1983 and 2013, while the average age of 2nd birth increases by 5. 3 years
163
during the same period. These rises suggest an important change in the calendar of fertility of generations, i. e. a
postponement of childbearing which is strongly associated with less total births.
Figure 7: Greece, Age of Mother by birth order (1960-2013)
35,0
34,0
33,0
4th order
32,0
31,0
30,0
29,0 3rd order
Age of Mother
28,0
27,0
2nd order
26,0
25,0
all orders
24,0 1st order
23,0
22,0
21,0
20,0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
4. The impact of economic crisis to fertility, first conclusions

Our analysis shows that the collapse of the Total Fertility Rate (TFR) in Greece during the 80s was mainly due to the
change of the women's fertility calendar as all generation until 1975 will record a TFR > 1. 7 children / woman (at least 4
decimal points higher than the lowest value of TFR noted in 1999). The growth of this indicator in the 2000s is solely due
to a compensation of the postponement of births in the previous two decades and absolutely not to an increase of the
average number of children in the younger generations. The recent reversal of the upward trend of TFR coincides indeed
with the emergence of the financial crisis, however it cannot be attributed solely to it.
At the same time, in Greece, the available data indicate that the recent economic crisis is affecting in priority women under
30 years old (extreme high unemployment). However, this crisis coincided with a previous trend of increasing the mean
age at the childbearing, started in the mid ‘80s). This trend has resulted at 2013 to an extremely high average age at
childbearing (30 years for the first child). Therefore, any continued postponement of childbearing to higher ages during the
years of crisis (probable on the basis of international experience) will possibly lead to unavoidable fall of fertility of younger
generations (i. e. those who were born after 1985) as, even if women of those generations aim to acquire one, two, three
or more children, a part of them will not succeed it (any replacement is problematic as child conception is a function of age
and decrease rapidly after 30 years old).
It should also be pointed out that childbearing occurs in Greece within marriage (the percentage of non-marital births is the
lowest in Europe). Simultaneously, the mean age at first marriage follows the last thirty years an ascending course (from
23. 2 years in the mid-1980s to 29. 2 years in 2013). Based on the above, the mean age at first marriage and the mean
age at first child birth are, directly correlated. Therefore, in a country like Greece, where childbearing occurs almost entirely
within marriage with both partners employed, it was important for most women of these generations to have a relatively
stable work before their first marriage and their first child acquisition. Given the extreme high unemployment rate in the age
164
groups 20-35, this fact is not valid for a part of this population group, resulting to the collapse of the first marriage rates in
recent years. As a direct result, we observe a further increase both of the percentage of unmarried women in younger
generations and also of the average age at the first marriage. Both of them (the second in combination with the
postponement of marital births) will inevitably lead to a further decline of the total fertility rate of younger generations of
women (those born after 1985).
In conclusion, according to the international bibliography, in countries with strong social policies and especially policies
supporting family and childbearing the negative effects of the crisis are diminished. In Greece, at the beginning of the crisis,
the welfare state was not particularly developed and, at the same time, it was extremely inefficient. In this context, family
and childbearing aid measures were very limited, focused almost exclusively on the large families (>3 children) and in some
cases these measures were inefficient (see for example retirement criteria for mothers with a minor child). The recent
measures (those adapted in the first half of the current decade) were usually horizontal, while available policies resources
shrank significantly while their rehabilitation is not expected in the near future. All these facts does not allow some optimism
concerning the reversal of fertility decline of younger generations which, as expected, that they are going to spend a
significant part of their reproductive life in crisis conditions.
APPENDIX
Table 1: Greece, 1951-2010, Number of births and Crude Birth Rate (CBR)
Year Births CBR (00/0) Year Births CBR (00/0)

1951 155422 20, 32 1983 132608 13, 47
1952 149637 19, 35 1984 125724 12, 70
1953 143765 18, 39 1985 116481 11, 73
1954 151892 19, 23 1986 112810 11, 32
1955 154263 19, 35 1987 106392 10, 64
1956 158203 19, 70 1988 107505 10, 71
1957 155940 19, 26 1989 101657 10, 08
1958 155359 19, 01 1990 102229 10, 07
1959 160199 19, 40 1991 102620 10, 01
1960 157239 18, 88 1992 104081 10, 04
1961 150716 17, 95 1993 101799 9, 73
1962 152158 18, 01 1994 103763 9, 83
1963 148249 17, 48 1995 101495 9, 54
1964 153109 17, 99 1996 100718 9, 40
1965 151448 17, 71 1997 102038 9, 47
1966 154613 17, 95 1998 100894 9, 31
1967 162839 18, 75 1999 100643 9, 25
1968 160338 18, 34 2000 103267 9, 46
1969 154077 17, 56 2001 102282 9, 34
1970 144928 16, 48 2002 103569 9, 43
1971 141126 15, 98 2003 104420 9, 47
1972 140891 15, 85 2004 105655 9, 55
1973 137526 15, 40 2005 107545 9, 69
1974 144069 16, 08 2006 112042 10, 05
165
1975 142273 15, 73 2007 111926 10, 00

1976 146566 15, 95 2008 118302 10, 53
1977 143739 15, 44 2009 117933 10, 45
1978 146588 15, 54 2010 114766 10, 15
1979 147965 15, 50 2011 106428 9, 42
1980 148134 15, 36 2012 100371 9, 05
1981 140953 14, 49 2013 94134 8, 56
Table 2: Greece, Total Fertility Rate (TFR) and mean age at childbearing (i) all births (ii) 1st order births (1960-2013)
Mean age of
mother of 1st order Mean age of mother of
Year TFR Mean Age births Year TFR Mean Age 1st order birth
1956 2, 31 29, 2 1985 1, 67 26, 3 24, 5
1957 2, 25 29, 2 1986 1, 60 26, 4 24, 7
1958 2, 22 29, 0 1987 1, 50 26, 5 24, 9
1959 2, 26 28, 7 1988 1, 50 26, 8 25, 1
1960 2, 21 28, 7 25, 9 1989 1, 40 27, 0 25, 3
1961 2, 12 28, 7 25, 9 1990 1, 40 27, 2 25, 5
1962 2, 16 28, 6 25, 8 1991 1, 38 27, 4 25, 7
1963 2, 13 28, 4 25, 7 1992 1, 39 27, 5 26, 0
1964 2, 24 28, 2 25, 7 1993 1, 34 27, 8 26, 2
1965 2, 24 28, 1 25, 4 1994 1, 35 28, 0 26, 4
1966 2, 32 27, 9 25, 4 1995 1, 31 28, 2 26, 6
1967 2, 45 27, 8 25, 3 1996 1, 28 28, 4 26, 8
1968 2, 42 27, 7 25, 1 1997 1, 29 28, 6 27, 0
1969 2, 35 27, 7 25, 1 1998 1, 26 28, 8 27, 2
1970 2, 40 27, 4 25, 0 1999 1, 24 28, 9 27, 3
1971 2, 32 27, 4 25, 0 2000 1, 27 29, 1 27, 5
1972 2, 32 27, 3 24, 8 2001 1, 25 29, 2 27, 7
1973 2, 27 27, 2 24, 7 2002 1, 27 29, 4 27, 9
1974 2, 38 26, 9 24, 5 2003 1, 28 29, 5 28, 0
1975 2, 33 26, 8 24, 5 2004 1, 30 29, 7 28, 3
1976 2, 35 26, 6 24, 4 2005 1, 33 29, 8 28, 5
1977 2, 27 26, 5 24, 4 2006 1, 40 29, 9 28, 4
1978 2, 27 26, 3 24, 2 2007 1, 41 30, 0 28, 6
1979 2, 26 26, 2 24, 2 2008 1, 51 30, 1 28, 7
1980 2, 23 26, 1 24, 1 2009 1, 52 30, 2 28, 8
1981 2, 09 26, 1 24, 2 2010 1, 51 30, 3 28, 9
1982 2, 03 26, 1 24, 2 2011 1, 41 30, 4 29, 3
166
1983 1, 94 26, 1 24, 2 2012 1, 34 30, 7 29, 7

1984 1, 83 26, 2 24, 3 2013 1, 30 30, 9 29, 9
Table 3: Greece, Births by order.

%
1st 4nd +
Year 1st order order 2nd order % 2nd order 3nd order % 3nd order order % 4nd + order
1960 64553 41% 49577 32% 22104 14% 21005 13%
1961 60805 40% 49888 33% 21157 14% 18866 13%
1962 61958 41% 51518 34% 20776 14% 17906 12%
1963 62357 42% 50284 34% 19527 13% 16081 11%
1964 66952 44% 51706 34% 19686 13% 14765 10%
1965 64594 43% 53671 35% 19430 13% 13753 9%
1966 67520 44% 55232 36% 19146 12% 12715 8%
1967 69496 43% 60218 37% 20543 13% 12582 8%
1968 66284 41% 60893 38% 20779 13% 12382 8%
1969 61955 40% 59424 39% 20930 14% 11768 8%
1970 60141 41% 55155 38% 19240 13% 10392 7%
1971 58744 42% 53832 38% 18727 13% 9823 7%
1972 59336 42% 52571 37% 19087 14% 9897 7%
1973 56646 41% 51753 38% 19256 14% 9871 7%
1974 61633 43% 53393 37% 19547 14% 9496 7%
1975 61681 43% 52428 37% 18539 13% 9625 7%
1976 64798 44% 54756 37% 18534 13% 8478 6%
1977 63577 44% 54087 38% 18182 13% 7893 5%
1978 65541 45% 55015 38% 18530 13% 7502 5%
1979 66056 45% 55330 37% 19067 13% 7512 5%
1980 66169 45% 55396 37% 18934 13% 7635 5%
1981 61360 44% 53879 38% 18258 13% 7456 5%
1982 59192 43% 52884 39% 17967 13% 7232 5%
1983 58686 44% 50302 38% 16827 13% 6793 5%
1984 56312 45% 47832 38% 15314 12% 6266 5%
1985 51436 44% 45566 39% 13926 12% 5553 5%
1986 50233 45% 44236 39% 13017 12% 5324 5%
1987 48344 45% 40724 38% 12139 11% 5185 5%
1988 48770 45% 41372 38% 12237 11% 5126 5%
1989 45102 44% 39826 39% 11748 12% 4981 5%
1990 45588 45% 39833 39% 11914 12% 4894 5%
1991 46583 45% 38558 38% 12262 12% 5217 5%
1992 48450 47% 37947 36% 12166 12% 5518 5%
1993 46276 45% 37771 37% 12094 12% 5658 6%
1994 46978 45% 38478 37% 12429 12% 5878 6%
1995 47056 46% 37828 37% 11564 11% 5047 5%
1996 47067 47% 37068 37% 11396 11% 5187 5%
1997 47176 46% 38228 37% 11562 11% 5072 5%
1998 47450 47% 38048 38% 10910 11% 4486 4%
1999 47525 47% 37915 38% 10901 11% 4302 4%
2000 49229 48% 38536 37% 11131 11% 4371 4%
2001 48268 47% 39078 38% 10566 10% 4370 4%
167
2002 48900 47% 39543 38% 10841 10% 4285 4%

2003 49729 48% 39696 38% 10709 10% 4286 4%
2004 50389 48% 39884 38% 11036 10% 4346 4%
2005 50528 47% 41434 39% 11682 11% 3901 4%
2006 53323 48% 42350 38% 12128 11% 4241 4%
2007 52981 47% 42712 38% 12171 11% 4062 4%
2008 55995 47% 44484 38% 13536 11% 4287 4%
2009 55328 47% 44322 38% 14042 12% 4241 4%
2010 55296 48% 42002 37% 13235 12% 4233 4%
2011 53632 50% 38117 36% 10997 10% 3682 3%
2012 51317 51% 36085 36% 9639 10% 3330 3%
2013 47675 51% 34614 37% 8715 9% 3130 3%
Table 4: Greece, 1960-2013, TFR and mean age at childbearing by birth order
TFR Mean age at childbearing

2ng 1storde 2ng 3rd
Year 1storder order 3rd order 4th or higher order r order order 4th or higher order
1960 0, 89 0, 69 0, 31 0, 32 25, 9 28, 6 30, 7 34, 4
1961 0, 85 0, 69 0, 30 0, 29 25, 9 28, 6 30, 8 34, 4
1962 0, 88 0, 72 0, 29 0, 27 25, 8 28, 6 30, 8 34, 4
1963 0, 91 0, 71 0, 28 0, 24 25, 7 28, 6 30, 8 34, 4
1964 1, 00 0, 75 0, 28 0, 22 25, 7 28, 6 30, 9 34, 3
1965 0, 98 0, 79 0, 28 0, 20 25, 4 28, 5 30, 8 34, 2
1966 1, 02 0, 82 0, 28 0, 19 25, 4 28, 4 30, 8 34, 0
1967 1, 05 0, 91 0, 30 0, 19 25, 3 28, 2 30, 8 33, 9
1968 1, 00 0, 93 0, 31 0, 18 25, 1 28, 0 30, 6 33, 7
1969 0, 95 0, 92 0, 32 0, 18 25, 1 28, 0 30, 5 33, 7
1970 1, 00 0, 92 0, 32 0, 16 25, 0 27, 7 30, 4 33, 5
1971 0, 96 0, 90 0, 31 0, 16 25, 0 27, 9 30, 4 33, 6
1972 0, 97 0, 88 0, 32 0, 16 24, 8 27, 7 30, 4 33, 4
1973 0, 92 0, 86 0, 32 0, 16 24, 7 27, 4 30, 2 33, 3
1974 1, 01 0, 89 0, 33 0, 16 24, 5 27, 3 30, 1 33, 2
1975 1, 00 0, 86 0, 31 0, 16 24, 5 27, 2 30, 0 32, 9
1976 1, 02 0, 88 0, 30 0, 14 24, 4 27, 1 29, 8 32, 9
1977 0, 99 0, 86 0, 29 0, 13 24, 4 27, 0 29, 8 32, 7
1978 1, 00 0, 86 0, 29 0, 12 24, 2 26, 8 29, 5 32, 5
1979 0, 99 0, 85 0, 30 0, 12 24, 2 26, 7 29, 3 32, 1
168
1980 0, 98 0, 84 0, 29 0, 12 24, 1 26, 6 29, 2 32, 0

1981 0, 90 0, 80 0, 28 0, 11 24, 2 26, 5 29, 1 31, 8
1982 0, 86 0, 78 0, 27 0, 11 24, 2 26, 5 29, 1 31, 7
1983 0, 85 0, 74 0, 25 0, 10 24, 2 26, 6 29, 0 31, 7
1984 0, 81 0, 70 0, 23 0, 09 24, 3 26, 7 28, 9 31, 5
1985 0, 73 0, 66 0, 20 0, 08 24, 5 26, 7 28, 9 31, 4
1986 0, 70 0, 63 0, 19 0, 08 24, 7 26, 9 29, 1 31, 5
1987 0, 67 0, 58 0, 17 0, 08 24, 9 27, 0 29, 1 31, 4
1988 0, 67 0, 58 0, 17 0, 07 25, 1 27, 3 29, 2 31, 6
1989 0, 62 0, 55 0, 16 0, 07 25, 3 27, 5 29, 5 31, 5
1990 0, 62 0, 54 0, 17 0, 07 25, 5 27, 7 29, 6 31, 7
1991 0, 62 0, 52 0, 17 0, 07 25, 7 28, 0 29, 8 31, 6
1992 0, 64 0, 51 0, 16 0, 08 26, 0 28, 1 30, 1 31, 9
1993 0, 61 0, 50 0, 16 0, 08 26, 2 28, 4 30, 2 31, 9
1994 0, 61 0, 50 0, 16 0, 08 26, 4 28, 6 30, 4 32, 1
1995 0, 60 0, 49 0, 15 0, 07 26, 6 28, 8 30, 6 32, 1
1996 0, 60 0, 47 0, 15 0, 07 26, 8 29, 1 30, 8 32, 1
1997 0, 59 0, 48 0, 15 0, 06 27, 0 29, 3 31, 1 32, 2
1998 0, 59 0, 47 0, 14 0, 06 27, 2 29, 5 31, 2 32, 5
1999 0, 59 0, 47 0, 13 0, 05 27, 3 29, 8 31, 4 32, 3
2000 0, 61 0, 47 0, 14 0, 05 27, 5 30, 0 31, 4 32, 4
2001 0, 60 0, 47 0, 13 0, 05 27, 7 30, 2 31, 6 32, 6
2002 0, 61 0, 48 0, 13 0, 05 27, 9 30, 3 31, 6 32, 6
2003 0, 62 0, 48 0, 13 0, 05 28, 0 30, 4 31, 8 32, 7
2004 0, 63 0, 49 0, 13 0, 05 28, 3 30, 5 32, 0 32, 8
2005 0, 64 0, 51 0, 14 0, 05 28, 5 30, 7 32, 2 32, 9
2006 0, 68 0, 52 0, 15 0, 05 28, 4 30, 7 32, 2 32, 9
2007 0, 69 0, 53 0, 15 0, 05 28, 6 30, 8 32, 3 32, 6
2008 0, 73 0, 56 0, 17 0, 05 28, 7 31, 0 32, 3 33, 0
2009 0, 74 0, 56 0, 17 0, 05 28, 8 31, 1 32, 4 32, 9
2010 0, 75 0, 54 0, 17 0, 05 28, 9 31, 2 32, 3 32, 7
2011 0, 73 0, 49 0, 14 0, 05 29, 3 31, 5 32, 3 32, 5
169
2012 0, 70 0, 47 0, 13 0, 04 29, 7 31, 7 32, 5 32, 5

2013 0, 67 0, 47 0, 12 0, 04 29, 9 31, 9 32, 5 32, 3
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Research, Special Collection 7, Vol. 19 (8): 171-224.
[27] Sobotka, T. , V. Skirbekk, and D. Philipov. 2011. “Economic recession and fertility in the developed world. A
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Collection 3 (Article 8): 177-212.
171
The Concentration-Profitability Relationship in Turkish Industry
Meral Ozhan
Hacettepe University
Ankara, Türkiye
Abstract
The concept of industrial concentration refers to the control of a given industry by a small number of leading firms which are
exclusively engaged in that industry. In economic theory concentration is an important concept to understand a departure
away from competitive market structure which is accepted as a reference point for efficiency. Using the traditional structure-
conduct-performance (SCP) paradigm many researchers found that the higher the level of concentration is the higher the level
of profitability. In an earlier study I attempted to determine the level of concentration in the Turkish manufacturing industry for
84 sectors. In addition, I conducted a multiple regression analysis in various forms to identify the determinants of
concentration and its effects on profitability. In most regression results, the relation between concentration and profitability
was found positive and statistically significant. The present paper takes one step further and summarizes two new dimensions
of industrial concentration. The first is to understand the current level of concentration for the Turkish manufacturing industry
using a larger set of data. The new data set obtained from the TurkStat provides some basic statistics over the period 2009-
2012 for 224 four-digit manufacturing industries. A brief analysis of the current data shows a slightly declining trend in the
overall concentration ratio. CR4 (four-firm concentration ratio) fell from 51 to 49, CR8 (8-frim concentration ratio) fell from 61
to 60, and HHI (or H for short, Herfindahl-Hirschman index) dropped from 0. 173 (or from 1730) to 0. 153 (or to 1530). However
a much bigger drop is observed for a longer period in the data coming from the top 500 industrial firms of ICC (Istanbul
Chamber of Commerce). The latter data show a sharp fall in CR8 from 32 percent to 24 percent. These results together reflect
a falling tendency in the dominant role of large firms in the Turkish economy which is a sign of increased level of competitive
environment.
Keywords: concentration, profitability, relationship, Turkish, industry
1. Introduction
The concept of industrial concentration refers to the control of a given industry (or market) by a small number of leading
producers who are exclusively, or at least very largely, engaged in that industry. Why is concentration so important?
Economic theory suggests that, with very few exceptions, any departure away from the competitive structure would lead to
loss of efficiency. This conclusion is stated in the excess capacity theorem or under capacity utilization which is the main
characteristic of imperfect market structure. Therefore it would not be misleading to argue that the higher the concentration
is the greater the loss in general efficiency. Excluding two theoretically ideal market structure, namely perfect competition
and monopoly, economists are left with oligopoly and monopolistic competition, as the actual market structure.
In 2014 the manufacturing industry in Turkey contributes about 18 percent to GDP at market prices among 20 broad
categories of industries. Second and third highest shares accrue to trade and transport sectors each contributing about 13
percent respectively. Therefore a closer look at the structure and behavior of the firms in this branch of economic activities
should challenge researchers.
The subject matter of this paper is to elaborate the possible causes and likely consequences of industrial concentration.
The more emphasis is placed on the effects of industrial concentration on profit in the Turkish manufacturing industry.
Accordingly, some hypothesis are tested using the data collected for the Turkish manufacturing industry. Within this
framework three questions will be answered: 1. What is the level of industrial concentration in the Turkish manufacturing
industry? 2. What are the main determinants of the level of concentration? 3. What is the possible effects of industrial
concentration on profit?
Knowledge of the structure of industry and its impact on the performance of the economy would be helpful not only from
the theoretical standpoint but also for the purpose of policy formulation. In the event of possible integration with the
European Union external considerations together with internal distributional issues require adequate knowledge relating to
172
the functioning of economic forces and the performance of the producing units. These should be the main concern of the
present and the future policy makers as Turkey has yet to develop anti-trust regulations to control monopolistic behavior
and promote competition. However, the number of empirical investigations undertaken for the Turkish manufacturing
industry within the structure-behavior-performance (SCP) framework are few. As such, the findings of the present study are
likely to prove considerably helpful in many respects. Thereby special attention would be drawn for promoting further
empirical investigations within the SCP framework not only in industry, but also in other main branches of the economy like
trade, transport, and finance.
The remainder of this paper is organized as follows. In the next section I investigate the current level of concentration in
the Turkish manufacturing industry. Following this, the main determinants of concentration is explained referring to an
earlier research results. In the succeeding section the relationship between concentration and profitability is analyzed with
the help of a simple set of regression models using the cross-section data for the year 2012. The final section concludes
the paper.
2. Level of concentration in the Turkish manufacturing industry

In the literature various measures/indices of economic concentration are defined. Two most commonly used measures are
concentration ratios, CRi, (where i is an integer, like 4, 8, 20, and so on) and Hirchman- Herfindahl index, H.
Concentration ratios are generally calculated for i = 4 and i = 8 as CR4 and CR8. CR4 is the cumulative shares of the first
four firms in the total output or the sales of firms operating in a specific industry. In statistical terms it is defined in the
following formula
S i
CR 4 = i =1
N
S
i =1
i
(1)
where,
Si = the value of sales (or output) of an individual firm.
N = the total number of firms.
Similarly, CR 8 is defined as follows:
S i
CR8 = i =1
N
(2)
S
i =1
i
173
In analyzing the structure of an industry the accepted critical levels of concentration for CR4 is 50 percent and for CR8 is
70 percent are accepted. That is if CR4 is above 50 percent and CR8 is above 70 percent the industry in question is
considered as concentrated.
Herfindahl-Hirchman (H for short) index is defined as the sum of the squared shares of all individual firms in an industry. It
is calculated as follows
N
H =  si2 (3)
i =1
Where
si is the market share of firm i,
N is the number of firms.
The Herfindahl Index (H) ranges from 1/N to one. If percents are used as whole numbers, as in 25 instead of 0. 25, the
index can range up to 1002, or 10, 000.
Three critical levels are defined using the H index as follows:
An H below 0. 1 (or 1, 000) indicates an unconcentrated index.
An H between 0. 1 to 0. 18 (or 1, 000 to 1, 800) indicates moderate concentration.
An H above 0. 18 (or above 1, 800) indicates high concentration.
A relatively small index either of the above indices (i. e. CRi or H) indicates a competitive industry with no dominant players.
In one of the case studies carried out earlier by the author (Ozhan, 2000) it is found that in the Turkish manufacturing
industry the average concentration is above the critical level. In particular CR4 with 1983 data was 58 percent and CR8
was 71 percent. After 14 years, in 2012 the same ratios fell to 49 percent and 60 percent respectively. Apparently, there is
about 10 percentage points decrease in concentration ratios. Figure 1 shows these changes.
174
Figure 1. Varying structure of industry, CR4 from 1998 to 2012
100
90 16
30
80
70
Percentage
60 48
50 42
40
30
20 35
27
10
0
1998 2012
CR4<30 30<CR4<70 CR4>70
Source: Own calculations based on the data from TurkStat.
In figure 1, CR4 ratios are classified into three categories:

If CR4 is less than 30 the industry is unconcentrated.
If CR4 is less than 70 and greater than 30 the industry is moderately concentrated.
If CR4 is greater than 70 the industry is concentrated.
In order to understand the current structure of industry further H indices are calculated for 2012. The results are presented
in Table 1 below.
Table 1. Herfindahl-Hirshman index (H), 2012

Number of industries %
Unconcentrated (relatively competitive) industries (H <1000) 125 61
Moderatelly concentrated industries (1000<H <1800) 42 21
Highly concentrated industries (1800<H) 57 18
Total 224 100
Source: Own calculations based on the data from TurkStat.
Using the data from the TurkStat between 2009 and 2012 the it is seen that the H index has dropped from 0. 173 (or from
1730) to 0. 153 (or to 1530). Referring to this Table the H index for the Turkish manufacturing industries presents an
unconcentrated structure.
Finally, using the ICI (Istanbul Chamber of Commerce) data covering the Turkey`s top 500 industrial enterprises a sharp
drop is observed in the CR8. In 20 years from 1993 to 2012 the ratios fell from 32 percent to 24 percent. This historical
record is given in Figure 2.
175
Figure 2. Historical time trend of CR8, out of the largest 500 industrial firms
34,0
32,0
8-Firm concentration ratio
30,0
28,0
26,0
24,0
22,0
20,0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Own calculations using the data from ICC (Istanbul Chamber of Commerce).
The ICC data shows a sharp fall in the CR8 from 1993 up to 1999 and it pikes up slightly from that point on in the following
years.
These results together reflect a falling tendency in the dominant role of large firms in the Turkish economy which is a sign
of increased level of competition.
3. The determinants of industrial concentration

Economists have identified six main factors that determine the level or the degree of concentration. These are scale
economies, mergers and acquisitions, entry barriers, advertising, public policy, and stochastic variables. In the 1986 study
of the author the main determinants of industrial concentration in the Turkish manufacturing industry the following
explanatory variables are included in a set of multiple regression models|: economies of scale, absolute capital requirement,
advertising intensity, growth rate of market demand, government credit availability, export and import. The model is tested
employing the 1983 industrial survey data obtained from the TurkStat sources. Although the data made available by the
TurkStat for all four digit industries (84 in number) some nonrandom samples of smaller sizes are also used. In the estimated
equations all of the parameters appeared almost invariably with their expected signs – though with a low level of significance
for some variables. These findings are presented in Table 2 for a double logarithmic model.
Table 2. Determinants of Concentration ratio

Dependent variable: lnCR8
Coefficient Std. Error t Statistic Prob.
Constant -1. 3685 0. 3273 -4. 1808 0. 0000
176
lnSC 0. 1756 0. 0300 5. 8549 0. 0000

lnCLR 0. 0948 0. 0247 3. 8311 0. 0000
lnCR 0. 1120 0. 0474 2. 3652 0. 0030
lnAD 0. 0985 0. 0237 4. 1615 0. 0000
lnIM -0. 0477 0. 0218 -2. 1834 0. 0030
lnDE -0. 0210 0. 0124 -1. 6949 0. 0520
PPD 0. 1112 0. 0941 1. 1814 0. 0630
R-squared 0. 7494
Adj. R-squared 0. 7076
F= 17. 9400
Obser: 50
Where
lnSC: Measure of scale, average output of big firms in an industry
lnCLR: Capital-labor ratio
lnCR: Credit ratio
lnAD: Advertising intensity
lnIM: Import
lnDE: Demand elasticity
PPD: Public or private dummy variable
ln in this list expresses logarithm of variables.
In the model presented in the Table 1 all of the explanatory variables have their expected signs. The estimated coefficients
have satisfactory statistical results reflected in relatively high t values, as well as high R-squared and F value. The use of
the double logarithmic model is that the estimated regression coefficient for each explanatory variable measures the
elasticity of the dependent variable with respect that variable (Gujaraty, Porter, 2010).
To conclude this section I can state that until a newer research result comes out the variables presented in the Table 2
should be relied on as the main determinant of industrial concentration. In addition to the SCP approach there are two more
approaches trying to explain the degree of correlation between concentration and market power
4. Effects of Concentration on Profitability

Given the level and the determinants of economic concentration, a second important economic concern is how to predict
the possible outcome of concentration. The traditional structure-conduct-performance (SCP) paradigm predicts that
effective collusion between firms increases with industry concentration because concentration lowers the cost of collusion.
In addition to the SPC approach there are two more approaches trying to explain the degree of correlation between
concentration and the market power. These are known as the relative market power (RMP) hypothesis and the efficiency-
structure (ES) hypothesis.
177
The relative market power (RMP) hypothesis predicts a positive relationship between a firm’s market share and its
performance. That is, if consumers can rely on a firm’s position in the market as an indicator of quality, this allows larger
firms to earn supernormal profit. Therefore, the traditional SCP and RMP hypotheses provide an argument for antitrust
regulation prohibiting actions that reduce the number of viable and potential competitors. However, an alternative view
proposes the efficient-structure (ES) paradigm. According to this approach both the SCP and the RMP hypotheses ignore
the possibility of market entry by new firms. From the standpoint of the ES paradigm, more efficient firms can charge lower
prices than their competitors and still earn economic profits. Their comparative advantage allows more efficient firms to
capture a larger market share in a specific industry, which will lead to an increase in market concentration. Thus, higher
market concentration may benefit both firms and consumers; so that firms can earn higher profits while consumers can
benefit from lower prices (Berry-S. -Weissb, S. , Wendee, S. , 2011).
Specifically, the SCP paradigm suggests some important relations. The most important of all is that the higher the level of
concentration is the higher the level of profitability. Although there are no unanimous opinion on the direction of this relation
most studies suggest a positive correlation between the level of concentration and profitability. In an earlier study (Ozhan,
1986) in order to investigate the relationship between concentration and profitability three different multiple regression
models are tested. In these models a positive but statistically insignificant relationship is noticed between profitability
(explained variable) and concentration (one of the explanatory variables). The profit variable in the TurkStat sources is not
readily available. Therefore in my related studies I define profit by subtracting wages from the value added in each sector.
So profit is defined indirectly in the form of nonwage income. The results of one these prior study is given in Table 3 below.
Table 3. Concentration ratio and profit relationship, 1983

Dependent variable: PRO
Coefficient Std. Error t- Statistic Prob.
Constant 0. 1630 0. 0274 5. 9483 0. 0000
lnCR4 0. 0997 0. 0313 3. 1844 0. 0020
lnCLR -0. 0422 0. 0122 -3. 4550 0. 0000
PPD 0. 1690 0. 0471 3. 5917 0. 0000
R-squared 0. 2560
Adj. R-squared 0. 2281
F= 9. 1800
Obser = 84
In this table:
PRO: The ratio of profit (measured as nonwage income) to total sales.
lnCR4: logarithm of 4-firm concentration ratio.
lnCLR: logarithm of capital- output ratio.
PPD: Private/public dummy variable
Although the results of this semi-logarithmic model presented in Table 3 are statistically significant (due to high t-values)
the model explains only about 23 percent of variation in profit ratio. The model captures the positive relationship between
the level of concentration and profitability.
178
In the same model the negative sign of capital-labor ratio implies that as capital intensity increases, the share of profit in
value added falls. This negative relationship can be attributed to the diminishing marginal productivity as capital per labor
increases.
To test the relationship between profit and concentration with the new set of data I tried three linear regression models. In
the first model I selected a set of industries (n = 99 out of 224 four-digit industries) for 2009 with a profit rate of less than
10 percent. The scatter chart
of the data in this sample is given in Figure 3.
Figure 3. 4-Firm Concentration Ration (CR4) and Profit Rate, 2009
10,0
9,0
8,0
7,0
Profit rate, %
6,0
5,0
4,0
3,0
2,0
1,0
0,0
0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0
4-Firm concentration ratio, 2009
The chart reveals that a slight positive relation does exist between profit ratio and four firm concentration ratio (CR4). This
is show in a dark line with a positive slope in the same figure.
For the same set of data the results of a simple two-variable linear regression model are given in Table 4.
Table 4. CR4 and Profit rate for industries with profit rate less than 10 percent
SUMMARY OUTPUT (Model 1)

Regression Statistics
Multiple R 0. 274382
R Square 0. 075285
Observations 99 51. 5 7. 6 0. 150712
179
ANOVA
df SS MS F Significance F
Regression 1 46. 2851 46. 2851 7. 897229 0. 00599
Residual 97 568. 5102 5. 860929
Total 98 614. 7953
Coefficients Std Error t Stat P-value

Intercept 6. 429023 0. 473305 13. 58327 3. 59E-24
CR4 0. 022152 0. 007883 2. 810201 0. 00599
The regression results support hypothesis stating the positive correlation between concentration and profitability. However
the model explains only a small portion (about 7 percent) of the variation in profitability is explained by CR4. From the
same regression results it is also possible to calculate that the elasticity coefficient of midpoint is 0. 1507. That is to say
that a one percent increase in CR4 leads to 0. 1507 percent increase in the profit rate.
The second regression model is also estimated with a larger set of data covering 193 sectors for 2012. The scatter chart
of the second model is depicted in Figure 4.
Figure 4. Profit rate and CR4 for 193 industries in year 2012
The regression results are given in Table 5.
180
Table 5. Regression results for profit rate for 193 industries in year 2012

Multiple R 0. 315954
R Square 0. 099827
Observations 193
ANOVA
df SS MS F Significance F
Regression 1 223. 3998 223. 3998 21. 18141 7. 6E-06
Residual 191 2014. 472 10. 54697
Total 192 2237. 872

Intercept 9. 41701 0. 476021 19. 78277 4. 07E-48
CR4 0. 037551 0. 008159 4. 602327 7. 6E-06
In the second model with increase number of observations the adjusted R2 is slightly increased to about 10 percent and the
t value for CR4 is also increased from 2. 8 to 4. 6. The mean of CR8 is 49. 5 percent and the mean of profitability is 11. 3
percent. Accordingly, the elasticity of profitability at the midpoint is 0. 1645. It means that as the 8- firm concentration ratio
increases by one percent around its mean profitability ratio increases by 0. 165 percent.
Finally, a third model is constructed for the relationship between CR8 and profitability with 195 data points (sectors). The
scatter chart of the model is given in Figure 5.
181
Figure 5. Scatter chart for CR8 and profit rate 2012 for 194 industries
25,0
P 20,0
r
o
f 15,0
o
t
10,0
r
a
t
e 5,0
0,0
0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0
8-Firm concentration ratio, 2012
The results of the third regression model are given in Table 6.
Table 6. Regression results for CR8 and profit rate 2012 for 194 industries
Multiple R 0. 32496
R Square 0. 105599
Adjusted R square 0. 100941
Observations 194
182
ANOVA
df SS MS F Signif F
Regression 1 239. 4106 239. 4106 22. 66884 3. 78E-06
Residual 192 2027. 755 10. 56122
Total 193 2267. 165

Intercept 8. 884798 0. 557874 15. 92618 5. 95E-37
CR8 0. 039149 0. 008222 4. 76118 3. 78E-06
Although the R2 is still relatively (about . 10) it is the highest among the last three models. Briefly, the model shows that
about 10 percent of the variations in the mean value of profitability is expressed by the variations in CR8. The remaining
90 percent variations are attributed to other variable which are not included in the model. Finally, the mean of CR8 is 61. 6
percent and the mean of profit rate is 11. 3 percent. So the elasticity for the 8-firm concentration ratio at the average of
both variables is 0. 214. This figure shows that as CR8 increases by one percent the profit rate in that industry increases
by 0. 214 percent.
5. Conclusion
Using the TurkStat data for the 224 four-digit manufacturing industries it has been observed that that there is a slightly
decreasing trend in the overall level of concentration. This result is also supported by looking at the data collected from the
Turkey`s top 500 industrial enterprises by the Istanbul Chamber of Commerce. Both of these statistics indicate a falling
tendency in the dominant role of large firms in the Turkish economy which is a sign of increased level of competition.
Economists accept that concentration disturbs social welfare, because in concentrated industries the profit margin of firms
is relatively higher than unconcentrated industries. In the related literature many researchers adhering to the SCP approach
found a positive relationship between concentration and profitability. In the Turkish manufacturing industries there is a
falling tendency of overall concentration from 2009 to 2012. However about 100 industries (40 percent) out of 224 industries
CR4 is above the critical level of 50 percent. This study also shows that there is a positive and statistically significant
relationship between concentration and profitability.
The reasons for this high level of concentration is common to most developing countries. At the beginning of industrialization
process governments encourage big size firms and do not regulate markets by anti-trust policies. In Turkey antitrust law is
put into force in 1994. On the other hand because of indivisibility and the small size of the domestic market, the firms are
born in an uncompetitive environment. For most of the industries the minimum efficient scale (MES), is the natural
explanation of this structure. But, the concentration above this technically required level is not acceptable for economic and
social reasons. Still there is a need for further study to provide more comprehensive results in the field. In the light of new
research the government can apply antitrust policy vigilantly.
References
[1] Blair, J. M. (1972) Economic Concentration: Structure, Behavior and Public Policy. Harcourt Brace Jovanovich
Inc.
[2] Gujaraty, D. N. , Porter, D. C. (2009) Basic Econometrics, 5/E.
[3] ICC (Istanbul Chamber of Commerce) (2015), The 500 Largest Industrial Firms.
183
[4] Martin, S. (2010) Industrial Concentration in Context, OUP.

[5] Ozhan, M. (2001) Concentration in the Turkish manufacturing Industry (Istanbul, conference presentation?).
[6] ----------, (1986) "Türk İmalat Sanayinde Yoğunlaşma" Asomedya, Ankara.
[7] ----------, 1989, "Karlılık, Verimlilik ve Yoğunlaşma İlişkisi" Verimlilik Dergisi, MPM, Ankara.
[8] ----------, 1990, "Avrupa Sanayi Yapısı ve Türk İmalat Sanayi" Kalkınma Bankası Dergisi, Ankara.
[9] Thomas R. Berry-Stölzlea, Mary A. Weissb, Sabine Wendec, (2011) Market Structure, Efficiency, and
Performance in the European Property-Liability Insurance Industry.
[10] TurkStat: www. tuik. gov. tr
[11] Waldman, D. E. and Jensen, E. J. 2014, Industrial Organization, Addison Wesley.
184
Cash Benefits for Sickness and Maternity in Selected States of the European Union and
Austerity Measures
PaedDr. Zuzana Horváthová, Ph. D.

Department of Law and Public Administration, Metropolitan University Prague
Email: zuzana. horvathova@mup. cz
Assoc. Prof. Ing. Josef Abrhám, Ph. D.

Email: josef. abrham@mup. cz
Assoc. Prof. JUDr. Iva Chvátalová, CSc.

Email: iva. chvatalova@mup. cz
Abstract
The paper introduces the results of the research focused on cash benefits for sickness and maternity in selected Member
States of the European Union during the financial crisis and concerns the economic and demographic data. The aim was to
determine whether and to what extent the expected austerity measures touched the monitored social area. For the paper we
studied the situation from 2009 to 2014, especially in relation to employees and employers. Regarding the methods of the
research, the authors gathered the data obtained from the relevant legal, statistical and other printed documents as well as
the documents from the website of the European Union, relevant national ministries, social insurance companies, sickness
funds and similar institutions. They undertook a legal, economic and demographic data analysis and consequently its
comparisons as well as the final evaluation.
Keywords: social security, health insurance, maternity cash benefit, macroeconomic factors
1. Introduction
Owing to not only the financial crisis, the economic situation in the last few years made the Czech Republic adopt austerity
social measures and the process continues even now. One of the sources of inspiration for their further formulation
represents an analysis of legal regulations in some European Union countries. When making a choice, the authors took
into account a standard breakdown of social policies, including social security proposed by G. Esping-Andersen (Esping-
Anderson, 1990), and chose prototypes of liberal, conservative, social democratic and South-European and Central and
East-European models. They decided to include both the EU 15 countries as well as the states, which joined later,
preferably the historically close Slovak Republic, and also those where the changes in the social area can be expected.
They also took into account the financial situation of the countries which are receiving or eventually will receive financial
assistance from the EU. Based on the above mentioned the authors examined the regulatory developments and economic
and demographic indicators in the Czech Republic, Estonia, Finland, Ireland, Latvia, Germany, Austria, Greece, Slovak
Republic, Spain and in Sweden.
The research focused in a greater detail on the legislation and other relevant documents that guided and guide the
processes in the selected EU Member States concerning three major cash benefits for sickness insurance - sickness,
185
maternity and nursing pays. In terms of time the research focused on the legal situation from 2009 up to 2014. In the Czech
Republic, the duties of employers to the employees that are unable to work have been discussed many times and we can
expect further changes. Therefore, this aspect was put in the centre of the attention in the given countries, namely the
obligation of employers to participate financially in the period of incapacity of employees, or during a maternity leave,
respectively.
Decision making on austerity measures should be based on the assessment of many factors, not only purely the economic
ones, but also of the evolution of demographic indicators, the development of incapacity for work, of the priorities of the
state population policy, etc. On the basis of the economic and demographic data that illustrate the social security system,
including changes in cash benefits sickness insurance, the authors focused on economic growth, convergence as well as
on public finance and population development.
The aim of the study was both to assess the development of the legislation for sickness, maternity and nursing benefits in selected
Member States of the European Union in the context of economic developments during the financial crisis as well as to verify
whether and to what extent the expected austerity measures touched the monitored areas. The authors first formulated and
subsequently verified the input hypotheses. In the case of sickness substantial interventions were expected in several
parameters, in particular the benefit cuts, prolongation of the benefit or the introduction of the waiting period and strengthening
the role of employers in addressing the situation of employees disable to work, respectively. For maternity benefit one expected
keeping its status quo with regard to demographic developments in Europe, particularly related to population aging associated,
besides others, with the decreasing birth rate. Changes in nursing pays were not expected, given the fact that this is usually paid
for a limited period of time that is significantly shorter than the period of support for sickness and maternity pays. The impact of
austerity measures would be marginal, then.
Regarding the methods of the research, the authors gathered the data obtained from the relevant legal, statistical and other
printed documents as well as the documents from the website of the European Union, relevant national ministries, social
insurance companies, sickness funds and similar institutions. They undertook a legal, economic and demographic data
analysis and consequently its comparison and the final evaluation.
2. Economic and demographic factors in the selected Member States of the European Union
The financial, economic and subsequently the debt crisis caused significant changes in the development of key
macroeconomic indicators. The traditionally estimated effects of the integration process have not shown in the recent years.
Faster growth in less developed countries and their convergence to the EU average as a result of the trade and movement
of capital between Member States has stopped. In recent the years, on the contrary, we have been witnessing a favourable
growth in the core countries of the North West Europe compared to the countries of the called South Wing. The common
currency is currently contributing to the divergence in the euro area membership, which is contrary to the original intentions
of the project of the common currency. Out of the countries analysed in the given period the above-average growth rate in
EU showed Germany, Sweden and partly also Austria. A group of trouble countries represented, out of the examined
countries, namely Greece, Spain, but also Ireland. The gross domestic product of Greece declined even in all of the
monitored years (2009-2014) and the economic level of the country fell from 92% in 2008 to 72% of the average EU_27 in
2014 (EUROSTAT Database). In the case of Ireland and Spain, the decline in gross domestic product was slower, which
can be derived from the divergent course of the debt crisis. The main cause of the crisis in Greece was a long undisciplined
fiscal policy (a bloated public sector), combined with the loss of external competitiveness of the economy. The share of
public debt to gross domestic product in the period of entry into the Eurozone was already higher than 100% limit of and
continued to increase to 150% (EUROSTAT Database). Before the start of the mortgage crisis Ireland belonged among
the economies with relatively low public debt. The main reason for the sharp deterioration in public finances and debt was
the rehabilitation of the affected banking sector by the state. In the case of Spain, the reason was a combination of the
mortgage crisis and problems with external competitiveness. The economic growth combined with low interest rates led to
a rapid credit growth in the Spanish real estate market. The rapid growth in property prices stimulated the domestic
consumption, wages grew faster than labour productivity and a relative competitiveness deteriorated (Bures, 2012). Unlike
Greece, Spain showed balanced public finances before the onset of the debt crisis.
186
It can be concluded that the main factor of the success during a recession became the stability of the economies. A common
feature of the Eurozone economies in trouble is so called double deficit, which includes both public finance deficit and the
deficit of the current account of the balance of payments. The double deficits are evident in Greece, Spain and Ireland.
Conversely, developed countries of the North West Europe achieve a surplus in foreign trade. In the case of Germany, the
share of the balance of the current account relative to GDP makes more than 5% in the long term, while in Sweden and
the Netherlands the share is even higher. Developed economies of the Eurozone reached, in EU comparison, above the
average growth rate of their gross domestic product. Mostly it was also confirmed that the impact of the economic recession
in the short term was not so pronounced in countries with well-developed social model.
Shall we examine the causes of the loss of competitiveness of the south-Europe economies and vice versa the increase in
export performance of Germany, we find that the cause was a different development of the price levels. The price level in
Germany and other developed countries grew slower after the adoption of the common currency than in less developed
countries, causing a gradual loss of the competitiveness. Nowadays it is already indisputable that the mere correction of
public finances is not a sufficient solution to the countries affected by the crisis. The problem of external competitiveness
can be assessed as even a more serious one. The affected states should seek mechanisms to correct the state of the
current account deficit, but that is difficult when it is impossible to weaken the exchange rates of these countries. Within the
euro area there may be used only structural measures to improve the competitiveness of exports, and also measures to
restrict the domestic consumption. Strictly speaking, these are reductions of wages and prices in the domestic economy.
In case of remaining with the Eurozone, the peripheral economies will be therefore forced to continue to operate in an
environment of declining consumption, economic levels and growing unemployment. Simply we can say that the current
exchange rate of the Euro is too strong for the South-European economies and relatively favourable for the stable countries
of the North West Europe.
In analysing the new Member States of Central and Eastern Europe (we examine the Czech Republic, Slovakia, Estonia
and Latvia) one may, according to the impacts of the economic crisis, identify two distinct groups of countries. First, there
is Central Europe, which passed the recession, but the impact on the economic dynamics was average in the comparison
to the European Union. By contrast, the Baltic States are examples of the economies that were affected very significantly.
However, the imbalances were reduced relatively quickly due to appropriately applied economic policies. A typical example
of such a development in the framework of the Baltic countries is Latvia, where due to the enormously strong GDP growth
in the second half of the past decade the economy got overheated and there was a build-up of macroeconomic imbalances
that were manifested in the excess of the domestic demand, double-digit inflation rate, the faster growth in labour costs
than in productivity as well as in the deficit of the current account. Subsequently, there was a contribution of the overheated
real estate market and the banking sector crisis. The government and the central bank responded to the emergency
situation with a set of fairly strong measures, which aimed to restore the balance by restoring the competitiveness. The
devaluation of the exchange rate was rejected because of the negative impacts on the economy. The central bank primarily
pointed at the risk of the price increase of the imports, at weakening of the banking sector and a reduced motivation of the
businesses to solve the problem of declining productivity (Rimševičs, 2012:7). Thus other measures in the areas of fiscal
and structural policies were implemented. Namely, there was a significant reduction of budgetary spending. The number of
employees of public sector and their wages were cut down. There was also a decrease in investments in health and social
policy and the pension system was revised (Rimševičs, 2012:7). The reforms resulted in strong negative impacts on the
economic and social levels of the population (a decline in average incomes and high growth of unemployment), but also in
a relatively rapid restoration of the equilibrium and accelerating the economic growth. After a period of a sharp decline
between 2009 and 2010 the Baltic States have recorded the fastest growth within the European Union since 2011.
Additionally in 2013 Latvia managed to fulfil the convergence criteria and even joined the Eurozone. Estonia has not
undergone such a significant crisis as Latvia, but also experienced a decline in economic growth and a significant increase
in the unemployment. Estonia's economic imbalance and the subsequent recession, however, allowed for an accession to
single currency, which had been impossible during the economic boom of the past decade because of the inability to meet
the convergence criterion set for the inflation (European Central Bank, 2010).
Despite the fact that public finances are not the only problem of the current debt crisis, they represent, for most European
countries, a key challenge for keeping a balanced economic development in the next decade. The biggest public budget
deficits in recent years showed South-Europen states, Ireland and Latvia. Enormous deficits in Ireland in 2009 and 2010
but were caused, as mentioned above, by the crisis in the banking sector and hence cannot be combined with a lack of the
fiscal discipline. The time-limited episode in Latvia was caused by the economic downturn rather than by the
187
mismanagement. In Germany, Austria, the Czech and Slovak Republics there may be seen a substantial deterioration, but
with the exception of Slovakia it does not go above average in the comparative profile of the European Union (compare
with the average of the EU_27). In contrast, almost a smooth evolution can be observed in the case of Sweden and Estonia,
which have also a low public debt. When comparing the success of individual typologies of social models, we can derive a
definite relationship between fiscal discipline and the South-European social model. Other associations are not seen as
among the countries with low public debt within the monitored group there were included both liberal (Estonia) and pretty
much socially conceived states such as Sweden (European Commission, 2013: 5).
Perhaps no EU Member State could avoid taking austerity measures of varying intensity during the economic recession.
The significance of fiscal interventions differed according to the economic and political environments in the countries
concerned. One cannot find a direct correlation between the amount of public budget deficits and the depth of the austerity
measures. The explanation can be found in a number of interconnections. Reducing public spending could exert pressures
on the part of residents and voters, so politicians are trying to avoid that. It can also happen that the austerity measures
impede the economic growth. Another question is what parts of the budget the imposed austerity measures affect. Having
a specific look at the development of social protection expenditures, we believe that in the period 2009-2013 the expenses
of Germany, Greece, Estonia and Latvia fell significantly. Other states preferred savings in other expenditure items.
The following text will focus on the development of the demographic indicators as other possible factors in spending on
social protection. Even in this respect the group of the countries surveyed does not constitute a homogenous unit. Ireland
and Sweden are among the countries with the highest total fertility rate in the European Union. In both countries, the fertility
rate is of around 2 points. Other states are among the countries with a population below the average total fertility rate set
between 1. 3 and 1. 5 points. The total fertility rate reflects very well on long-term population development, however, short-
term trends can be accurately assessed on the number of births each year. When looking at the period 2009-2013 in the
context of the last ten years, it can be stated that the Scandinavian countries culminated in the current baby boom in 2010
(the largest number of live births since 2000), the Slovak Republic and Ireland in 2009, the Czech Republic, the Baltic
States and South-European countries in 2008. Only Germany and Austria showed the largest increases significantly earlier
(around the year 2004). We can then tend to the conclusion that holding the current level of maternity pay or even prolonging
their receipt in the period in most countries surveyed has real demographic causes (EUROSTAT Database).
3. Changes in sickness, maternity and nursing in the examined countries of the European Union
The research showed that the substantial austerity measures were adopted in the Czech Republic, Estonia, Ireland and
Latvia. Certain changes occurred in Greece and Slovakia. Changes leading to the austerity measures were not recorded
in Finland, Germany, Austria, Sweden and Spain.
Based on the analysis, comparison and the subsequent assessment of all the data collected, it was possible to verify the input
hypothesis, according to which, and given the financial crisis, the austerity measures in the social sphere will also affect the
monitored sickness cash benefits.
The first hypothesis is related to sickness. The assumption was that substantial interventions will affect multiple parameters,
especially the extension of the reduction of the benefit or the introduction of the waiting period and strengthening the role of
employers in addressing the situation of employees disable to work, respectively.
This hypothesis was confirmed mainly in the countries that joined the EU in 2004 and in Ireland and Greece.
In Greece, there was a partial amendment concerning the tightening of conditions for the waiting period, i. e. the required
length of insurance, which is one of the conditions for the disability pay. Of the original 110 days (for construction workers
it was 90 days) the spell was extended to 120 days (for construction workers it makes 100 days).
The change in the amount of sickness pays occurred in several states. In Estonia, the standard rate of sickness benefit
was reduced as part of the austerity measures in the economy, from the original 80% to 70% of the set income. In Ireland,
where the benefit is paid at a flat rate, the amount gradually decreased taking into account the income level. For sake of
completeness, it should be noted that sickness benefit in Ireland further increases a lump sum taking into account the
number of dependent adults and children. For example, the maximum amount of sickness pay accounted for 204. 30 Euro
per week in 2009 (European Commission, 2009), but only 188 Euro per week in 2011; between 2012 and 2014 the benefit
188
remained the same. In Latvia, for a transitional period of 2010 to 2014, it was determined that half of the amount above 16
Euro per day belongs to the state budget. Originally, the reduction was established only for the year 2012, but it was
extended as an anti-crisis measure. In the Czech Republic the sick pay was reduced down to 60% (European Commission,
2013). As a rule, until the 30th calendar day of illness 60% of the daily assessment base belonged to the hospital; from the
31st to the 60th calendar day of a temporary incapacity the daily assessment base made 66% and from the 61st calendar
day the daily assessment base made 72%. The adopted measure was initially deemed applicable for 2010 and its aim was
to reduce the budget deficit (European Commission, 2014).
The prolongation of the waiting period occurred in Estonia and from one day to three days, and in Ireland where it changed from
three days to six ones. In the Czech Republic and the Slovak Republic the withdrawal period was significantly reduced. In both
countries the period was adjusted identically from 42 calendar days to 7 calendar days (European Commission, 2010).
Shortening the period of support for sickness benefit was not expected and occurred only in Latvia (European Commission,
2009). The period of support was during 2009 reduced from 52 weeks to 26 weeks in case of the incapacity for work (except for
special exceptions), and from 78 weeks to 52 weeks in case of repeated sick leaves falling within the period of three years.
Regarding the status of the employer, this changed in the reporting period in the Czech Republic and Estonia. In the Czech
Republic, the Labour Code, as amended 1. 1. 2009 to 31. 12. 2010 anchored the obligation of employers to pay, during the
period from the 4th day to the 14th day of sick leave, a wage compensation. Only in the year 2011 the payment of the
compensation should have been granted within 21 days. Based on the amendment, however, there was the extension of
the above mentioned obligation until 31. 12. 2013. Until 2009 in Estonia, the law of 1992 on employment contracts did not
establish an obligation to contribute to the compensation during the sick leave. Then, there was a substantial change, and
nowadays employers must pay 70% of the previous income from the 4th to the 8th day of the incapacity for work (European
Commission, 2010).
Moreover, Ireland has decided since 2012 on the taxation of sickness insurance from the first week of receiving the
compensation. Till then, the compensation was subject to tax only after six weeks.
The second hypothesis related to the maternity benefit and no changes were expected in the light of the demographic
trend. Thus the hypothesis was confirmed just partially. The cut in the benefit took place in Latvia, from 100% to 80%.
Moreover in the years 2010 to 2014, it pays that a part of the maternity benefit exceeding the limit is cut to half the amount.
In Ireland, in 2010 and 2011, the maternity benefits were decreased by a minimum and maximum limit (for example the
maximum was reduced from Euro 280 per week in 2009 to Euro 270 in 2010 and down to 262 Euro in 2011). However, the
principle that the benefit is calculated as 80% fixed income (while maintaining limits) was maintained, but should it happen
that there was an increase in the sickness benefit due to the dependents in the family, this more favourable amount is
admissible. Additionally, it was decided, from July 2013, to tax the maternity benefit.
In 2010 the Czech Republic introduced a temporary reduction in maternity benefit from 70% of the daily assessment base to
60%. Moreover, a more stringent calculation of the assessment base was adopted. Due to a considerable disagreement of both
the professionals and the public the amendment of the law brought back the initial method of calculation applied before 2010 and
there was introduced a recovery of the supplement of the maternity benefit for the period from 1. 1. 2010 until the effective date
of the relevant amendment, i. e. 31st May, 2010. The Slovak Republic adopted a gradual increase of the benefit from 55% to 60%
in 2011 and 65% in 2012.
In the case of the support period for maternity benefit some changes were adopted, however of contradictory nature. Slovakia
prolonged, among other things, a base length of the eligibility for support from 28 weeks up to 34 and in the case of multiple births
from 37 to 43 weeks. Estonia conversely cancelled a prolonged payment due to multiple births or a complicated childbirth from
154 days to down to 140 days, in general.
Regarding the position of employers, the obligation to continue payment of wages / salary during the maternity leave is anchored
in the law of several states. Newly such an obligation has been introduced in Greece, where the employer continues paying the
salary for 15 days in the first year of the employment contract, if the woman worked at least 10 days. If the employment contract
lasted more than one year, the employer can pay a wage for one additional month. Wages can be reduced by an amount
corresponding the benefit that the woman receives from social institutions (European Commission, 2010).
189
The third hypothesis, according to which no changes were expected in nursing benefit regarding the fact that the support period
for this benefit is typically much shorter and the impact of austerity measures would be marginal, was confirmed. The amount of
the nursing or sickness benefit provided remained the same in all examined countries. In 2010 in the Czech Republic there was,
in case of the nursing, temporarily introduced a waiting period of 3 days. But that measure was met with great disapproval of the
public and the amendment to the adjustment was withdrawn the same year. In Estonia, there was a reduction of the sickness
benefit, but nursing remained unchanged. In the same period, a nursing benefit was introduced in Spain (European Commission,
2011).
4. Conclusions
It can be concluded that the austerity measures adopted in the studied countries primarily as a response to the financial
crisis, touched both the field of social security as well as cash benefits for sickness and maternity. At the same time, major
changes have taken place or are underway in Ireland and in the countries of Central and Eastern Europe. They focus
mainly on a sick leave. In contrast, Germany, Austria, Finland and Sweden did not adopt fundamental changes in terms of
benefits. And surprisingly neither Greece nor Spain materialised any significant savings (actually non in case of Greece).
In the year 2011 came in Sweden into effect new Social Insurance Code, which brought along a partial change compared
to the previously existing legislation, but not in the direction of austerity measures in the monitored area.
Ireland decided to reduce sickness benefit and to tax it already from the first week of receiving. As for maternity benefit
minimum and maximum levels of the benefit were reduced and newly it is also a subject to taxation. The development in
the Slovak Republic has brought savings in the form of a substantial shortening of the withdrawal period, but in terms of
the maternity benefit there was an extension of the payment of the benefit as well as to its gradual increase. Recently, a
nursing benefit was introduced in Spain.
For sake of completeness we shall note that namely those states which remained untouched by austerity measures and
which set for maternity, sickness or nursing benefits minimum or maximum assessment bases for their calculation or other
similar limitations maintained their standard rate or conducted a regular valorisation (for example Finland).
The above-mentioned findings correspond with the fact that majority of the surveyed countries has undergone in recent
years through stagnation or even an economic decline. But it cannot be proved that there is a direct link between the
dynamics of the economic growth (decline) and a change in social security spending, including cash benefits for sickness
and maternity. Rather, different patterns of economic and social policies were reflected themselves, and of course the
political preferences of individual countries. In countries with more liberal social models one can record more aggressive
interventions. In the states of South Europe, on the contrary, a fiscal multiplier is pretty much employed, thus reducing
expenditures is linked not only with social but also with negative economic effects (measures mitigate the economic growth).
That is also why any interventions in public finances are more considered. In terms of demographic factors studied they
proved no correlation with the examined types of illness expenditures. On the contrary, the vast maintaining of the current
level of maternity pays or even prolonging their receipt in the examined period in most countries has its real demographic
causes.
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191
Characteristics of the labor market in Kosovo and Europe
Artan Haziri, Ph. D Cand.

Professor at AFAS (Association for Finance and Accounting Services)
Professor at College Victory
artanhaziri@live. com
Abstract
The level of economic development of Kosovo is reflected in a delay of many economic parameters in place which results even in the
strangulation of the labor market as the biggest challenge in Kosovo. Would not mind that the most worrying aspect of the labor market in
Kosovo is the high unemployment rate which reflects with the numerous problems in Kosovo society. The labor market in Kosovo was
consistently followed by a different set of anomalies which have led to the raising concerns of the Kosovo population which are reflected
not only by the unemployed, but also the active part of the population which in the absence of functioning of the collective contract, failure
of unions, low average wage and a series of violations of workers' rights more and more is undergoing development gap in the labor
market. Kosovo is the highest rate of unemployment in the region which is around 50%. And when we consider the composition of
contingent labor, such as very young population which annually makes contingent labor increases in parallel with this also increases the
rate of demand for labor and immigration as the feature itself, then the approach should become much more serious. From the statistical
data shows that unemployment is the highest in young persons (16-24 years), this age includes about 40% of the total number of
unemployed. Also, the unemployment rate appears too high even to women though are not very active. Viewing these data mean that
unemployment in Kosovo is mostly long term and it is estimated that about 80% of the unemployed are long-term unemployed for more
than 12 months. This condition appears as unemployment will remain for a long time the main challenges of the economy and society in
general.
Keywords: Unemployment, employment policies, work force, labour market, SOK
1. Employment policies and macroeconomic framework needed

The results of this study and other analyzes indicate that a high rate of unemployment and its structure reflect important
social problem, which should be addressed by policy makers and the Ministry of Labour and Social Welfare. After that
unemployment in Kosovo is mainly a consequence of the level of economic development heritage. The main problem is
the creation of a sound macroeconomic policies that could provide the conditions for the functioning of the labor market in
the country which is able to maintain the existing work places and especially for the creation of new jobs. Labor market
policies can not be developed successfully if not taken into account the situation of employment / unemployment. Policies
for job creation - which means increased opportunities for productive work Kosovars should be the target of economic and
social development strategy. This strategy has not been developed and this is a serious obstacle for building more logical
correlation between economic policy, employment policy and social policy. This could lead to an employment-friendly
environment and trends in employment growth. Labour Market Policy aims to enhance individual employment opportunities
and expand labor demand. Integration and coordination of activities of different actors and political dimensions are the main
issues to be discussed and to be built specially by the Ministry of Labour and Social Welfare as well as various government
agencies. The Republic of Kosovo is in the middle of Southeast Europe (SEE), which has a land area of 10, 908 km2 and
approximately 1, 739, 825 inhabitants (Census, 2011) resident excluding the three municipalities in the north. The capital
of Kosovo is Pristina with a population of about 200 thousand inhabitants. According to macroeconomic data Kosovo in
comparison with many European countries Kosovo has suffered less from the economic crisis. Kosovo and Albania are the
only countries in SEE, which have increased the GDP per capita in 2009. Kosovo remains the poorest economy in the
region and face high levels of poverty, massive unemployment (which on average is estimated to be 45%, compared with
37% from Macedonia and Albania with 14%), heavy dependence on imports and the very small sector of export, and lack
of energy. Gross national income (GDP) per capita are estimated to be $ 3. 520, and thus Kosovo is ranked 93 in the world,
behind Macedonia, Albania, Serbia and Bosnia and Herzegovina. The overall number of unemployed at the end of 2013 is
268, 104 Due to the large size of the informal economy, registered unemployment figures may not fully reflect the situation
192
of employment in the private sector. Kosovo financial sector remains in good shape, despite the global financial crisis.
In Kosovo currently operate seven commercial banks, nine insurance companies and two pension funds.
The use of the euro as the official currency contributes to the stability of Kosovo's economy and keeps inflation in acceptable
rate, thus providing a sound basis for monetary policy. Kosovo has weak employment results, where unemployment has
reached 45 percent and the employment rate is extremely low, 26 percent. Poverty remains widespread in Kosovo where
around 29 percent of the population lives in total poverty and 8 percent of the population lives in extreme poverty. Creating
jobs is even more important for the fact that the population of Kosovo is young compared to other countries in the region.
Nearly half the population is under 24 years old and only 6 percent of the population is over the age of 65 1. Unemployment
is the percentage of unemployed from the entire capacity of the workforce in a certain area within a country or across the
country. So, this economic indicator shows the level of unused labor force in the economic processes in a geographic area.
According to the classification of the European Union unemployed are those members of the workforce who have not had
a job during the week when the study was done, have actively sought for work during the week and are ready to start a job
during the next two weeks. The unemployment rate is an indicator of overall economic welfare. A low level is indicative of
a strong economy where job seekers can find it quickly, while a high level could indicate a weaker economy. On the other
hand, employers can more easily find employees when unemployment is high. So one of the issues of concern in society
today is unemployment. Determination of unemployment notion is based on the definition given by the International Labour
Organization (ILO ). The unemployed are considered all persons of working age based on the measurement of the
economically active population who during the reference period meet the requirements: - are without work, available for
work and seeking work. 1
2. What is unemployment?
The answer to this question seems obvious: an unemployed person is someone who does not have a job. But as economists
we need to be precise and careful in our definitions of economic categories.
If you are in full time education, for example, you do not have a full time job in the ordinary sense of the word, that is to
say you are not a paid employment for full-time. And there is a good reason: you are studying. Hence it appears that you
are not available for work. What if you were not a student, but you could suffer from any long-term illness, which means
that you are unfit for work. Again, though you do not have a job, we would not say that you were unemployed because you
were not ready (available) to work. From these two examples, it seems clear that we need to qualify our initial definition of
an unemployed person "someone who does not have a job" to "someone who does not have a job and is ready to work".
But we still need to be clear what we mean by "ready to work". Assume that you were not employed full-time and you are
looking for a job as an assistant study for 50 euros a day. Would you choose it? If you do not ignore for a moment the
complexity that economic studies are so interesting, that this is the reward of those, you probably would not accept the job
because the salary level offered is too low. At the other extreme, suppose that you have earned so much money in the
National Lottery that you decided to leave the university and to live with the money earned for the rest of your life. Would
you be still unemployed? No, because you were not ready for the job yet, regardless of what level of salary was offered.
So being unemployed depends if you are willing to work (if you're "available for work" to existing wage levels. 2
Now we are able to give a precise definition of what it means to be unemployed, the number of unemployed in an economy
is the number of people of working age who are able and willing to work with existing levels of wages and who do not have
a job.
3. Unemployment in Kosovo over the years

Kosovo after the war in 1999, has faced many life problems of all natures and such a problem is with employment as the
majority of enterprises have been damaged by the war in different ways (burned, looted, damaged by bombing, etc. . ), and
a large part of them that have survived these problems have lost their market and manufacturing technology which had in
1 Institute for Development Research "Riinvest" 2010, Prishtina

2 Economics, South-Western, Centage Learning, Autor: N. Gregory Mankiw dhe Mark P. Taylor, UET Press, 2012
193
their possession and were not competitive in the regional market and could not afford a new system of market economy.
As a result of all these problems that were noted above, employment has begun to appear as a problem and is creating a
huge army of unemployed and the unemployment figures go higher. When to this is added the process of privatization
which rather than generate new working places, this process was accompanied by many problems and do not affect the
growth of jobs but, the same helped increase unemployment by closing many of working places as privatized enterprises
changed business activity and the majority of them passed from production to trade or most of purchased lands were used
as construction land.
Fig.1 Registrations growth rate
8,20% 9,70% 6,70% 5,70%

3,40%
2,40% 2,60% 0,40% 0,90%
-1,10% -3%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-20%
Source: Report of performance / Labour and Employment in 2013, (Ministry of Labour and Social Welfare)
4. Unemployment by age
Regarding the registered unemployment rate by age group, most of the unemployed (126, 836) in accumulated figures still
refer to the age of 25-39 years or 47%. However, a direct comparison of total figures by age suffer from different number
of years in terms of coverage in any age group.
Fig. The rising unemployment rate by age
4,00% 3,60% 3,20% 3,70%
1,90%
2,00%
Series1
0,00%
15-24 25-39 40-54 55-64
Source: Report of performance / Labour and Employment in 2013, (Ministry of Labour and Social Welfare)
The highest pressure regarding to the unemployment rate is still the youngest group by age, particularly in terms of growth
in enrollment by 3. 6%, (see fig. )
In general, according to the results of 2013, the unemployed aged 25-39 then 40-54 and 55-64 years show an increase in
enrollment, which is (3. 2%, 3. 7% and 1. 9%) in 2013.
194
5. Unemployment by gender
The total number of people registered as unemployed in the public employment services in Kosovo by the end of 2013,
consisted of 124, 369 women and 143, 735 men. The number of female registrations increased by 4. 2% during 2013, as
well as the number of men registered as unemployed has increased by about 2. 7%.
64,60%
70,00% 59,80% 62,10% 61,80%
56,30% 56,70% 54,00%
60,00%
50,00% 40,20% 43,70% 43,30% 46,00%
37,90% 35,40% 38,20%
40,00%
30,00%
20,00%
10,00%
0,00%
2007 2008 2009 2010 2011 2012 2013
Source: Report of performance / Labour and Employment in 2013, MLSW
However, the overall gender gap is significant value by 1. 5 percentage to the growth rate. For more, regarding to
unemployed women we can realize an increase in terms of exit from unemployment. Consequently, some of the women in
the general output in 2013 increased to a level of more than 38. 2% (see Fig. 5). Taking into account the relation of gender
differences with "risk" youth groups (15-24) and unskilled unemployed, there is a negative development. Regarding the
numbers of unemployed men of the same age group (15-24), seems an increase of 14. 4% in last year to 3. 1%. While
unemployed women (15-24) in the new age, in 2013 show a growth rate of -12. 7% to 4. 1% (see table. )
Table: Unemployment by gender

2011 2012 2013
Description Female Male Female Male Female Male

Monthly rate of incomes 0. 52% 0. 48% 0. 70% 0. 83% 0. 58% 0. 55%
Monthly rate of outflow 0. 67% 0. 82% 329% 2. 40% 0. 24% 0. 33%
12 monthly increase -2934 -7065 -38548 -27372 4995 3768
12 monthly increase -1. 80% -4. 10% -24. 40% -16. 40% 4. 20% 2. 70%
Unemployment 157922 167339 119374 139967 124369 143735
Proportion 48. 60% 51. 40% 46. 00% 54. 00% 46. 40% 53. 60%
195
12 monthly increase of unqualified -1. 60% -4. 10% -27. 70% -18. 60% -17. 10% 28. 70%
Registration of unqualified 113722 81672 82260 66489 68164 85557
Proportion of unqualified 58. 20% 41. 80% 55. 30% 44. 70% 44. 30% 55. 70%
12 monthly growth of 15-24 2. 10% 0. 60% -12. 70% -14. 40% 4. 10% 3. 10%
Registered 15-24 53172 53950 46423 46192 48338 47607
Proportion 15-24 49. 60% 50. 40% 50. 10% 49. 90% 50. 40% 49. 60%
Looking at levels of qualification by gender appears a gender gap reduction, which is based on a decreasing scale for
women (see table. ) where women have reduced the percentage of negative points -27. 7% in the previous year to - 17.
1% in 2013, while uskilled men tend growing where in 2012 was -18. 6%, and now for 2013 is 28. 7%.
Regarding the unskilled unemployed women is worth mentioning again the procedures to apply for social assistance in
Kosovo which was granted to more than 40, 000 families. A basic requirement for this is to demonstrate that they do not
receive other income. To do so it worth to register all family members of an adult family as unemployed! Although a detailed
analysis of this data has shortcomings and little gaps, is quite convincing because is refered to numerous recordings of
women out of work, which are administratively "pushed" from the definition of personal status as "inactive economically "in
status of "registered unemployed".
6. Employment by sector
During 2013, according to classification of economic sectors, as it was in previous years, most of offered vacancies refer
to the tertiary sector (services, 70%), followed by the secondary sector (manufacturing, 21%) and the primary sector
(agriculture, 9%).
Tertiary sector shows a modest increase in the number of job vacancies reported during the reporting period from 56% in
2012 to 70% in 2013. While domestic sources in the secondary sector shows declining value of 32% in 2012 21% during
the year. Same primary sector shows a decrease of 12% in last year to 9% in 2013.
Table: Vacancies by sector in 12 months
70%
2013 21% Tertiary
9%
56% Secondary
2012 32%
12%
Primary
67%
2011 28%
5%
0 0,2 0,4 0,6 0,8
196
7. Unemployment rate in Kosovo in 2014

The unemployment rate in Kosovo is 35. 3 percent. Statistical Agency of Kosovo (SAK) has published "The results of the
Labour Force Survey 2014" in Kosovo. 1
This publication contains detailed data on employment and unemployment by age, gender, employment status, economic
activities, occupations and other similar issues, dealing with the labor market. According to results stemming from the
publication, the participation rate in the labor force is 41. 6%. About one in five women of working age (21. 4%) are active
in the labor market, compared with three-fifths (61. 8%) of men. The employment rate, according to results of the Labour
Force Survey in 2014 is 26. 9%. The employment rate among women of working age is only 12. 5%, while the employment
rate for men is 41. 3%. Very low rate of unemployment among women stems from the combination of very low participation
of their labor force and high unemployment. Women were employed mainly in the sectors of education, health and trade,
with more than 55%. Men were mainly employed in the manufacturing, trade and construction, with about 44%. The
unemployment rate in 2014 is 35. 3%. The unemployment rate is much higher for women about 42%. Unemployment
among young people is very high in Kosovo. Among persons aged 15-24 in the workforce, the unemployed rate is 61. 0%.
Unemployment is higher among young women with 71. 7%, than in young men with 56. 2%.
8. Un/employment rate in Europe (Germany and Italy)

8. 1 Germany
Germany’s economy and labour market have shaped up well in recent years. However, further improvements for groups
like youth, long-term unemployed and women still need to be undertaken. The current labour market outlook opens many
opportunities for people who had difficulties to find a jobbefore. In Germany, employment continues to grow and the
employment rate is now among the highest in the OECD (73. 4% inthe first quarter of2014). Consequently, unemployment
has fallen to51% (ILO definition)in the second quarter of 2014-well below the OECD average of7. 4% and less than half of
the Euro area’s average at11. 6%. According to the 2014 OECD Employment Outlook, the unemployment rate will decline
further in 2015 and Germany looks set to join the small group of OECD countries with unemployment rates below 5%. 2
8. 1. 1 Reduction of long-term unemployment

There are still about 1 million people who have been unemployed for one year or longer.
Although the number has declined over the last years, long-term unemployed are still disadvantaged in the labourmarket.
In many cases, integration in the labour market has not been successful due to a range of multipleplacement obstacles.
Additionally to existing methods and strategies the Federal Labour Ministry ispreparing a programme to address this issue.
3
8. 2 Un/employment in Italy
Italy’s anaemic growth implies that unemployment is expected to remain high until end of 2015. According to the OECD’s
May 2014 projections, Italy’s growth rate will remain sluggish in2014to pick up only a little in 2015. As a result, the
unemployment rate has increased further to reach 12. 6% in July 2014–2. 4 percentage points above the EU average –and
only 55. 5% of the working-age population was in employment. Given the short-term growth projections, the unemployment
rate is not expected to decrease significantly until the end of 2015. 4
1 The results of the Labour Force Survey 2014" in Kosovo, visit: http://ask.rks-gov.net
2 http://www.oecd.org/germany/EMO-DEU-EN.pdf
3 http://www.bmas.de/SharedDocs/Downloads/DE/Thema-Internationales/g20-employmentplan-germany.pdf?__blob=publicationFile
4 http://www.oecd.org/italy/EMO-ITA-EN.p
197
9. Conclusions
By analyzing all that was mentioned above about the labor market in Kosovo conclude that the high rate of unemployment
is as a result of non-developed economy where remains largely non-utilization of available manpower. Kosovo should
create favorable policies to attract foreign capital in order to use the advantages that are offered especially in the aspect of
the young people. Strategic orientation of the Kosovar economy should be state policy of favoring the development of small
and medium enterprises as generator of economic development on occasion will allow creation of new jobs, especially for
young Kosovar. Also the budget management and its control is one of the sustantiall elements regarding for creation of
new jobs, especially in lowering the costs in the social safety net focusing only on those who really need. Use of natural
resources as significant potential in economic development, especially th fund of agricultural land is an important factor
towards alleviating the level of unemployment as an acute illness in Kosovo that already absorbs the largest number of
employees or better to say self-employed during these years. Having regard, the unemployment rate, which is correlates
negatively with the level of education should take measure to an increased level of qualification for relevant professions
that a dominant role will play professional schools in preparing young people for certain areas. This, in order to increase
productivity as well as the self-initiative to open businesses and self individual selfemploment. So, the whole process
requires a commitment of all fundamental actors operating in Kosovo starting from government, business representatives,
groups of interest, in order to draft appropriate strategies to ensure healthy economic growth.
Bibliography
[1] Artan Haziri – Comparative analysis of labor market policies and characteristics of unemployment in Kosovo
and Macedonia in 2009. Pristina
[2] Labour market and unemployment-Riinvest institute 2003 Pristina
[3] MLSW - DLE of Kosovo 06/2009. Pristina
[4] Petrit Pollozhani - Economic Structure and Employment as a representative of economic development (2006)
Struga
[5] Report of performance, labor and employment 2010-2013. Pristina
[6] Report of performance / Labour and Employment in 2013, MLSW (Ministry of Labour and Social Welfare)
[7] Stanley Fischer – Macroeconomy - the World Bank and Department of the Economy - Massachusetts Institute
of Technology
[8] Statistical Agency of Kosovo (SAK) "The results of the Labour Force Survey 2014.
[9] Statistical Office of Kosovo, labor market statistics, 2005-2014, Pristina
198
Environment and Women Entrepreneurs in Albania
Azra Zmijanej
University of Shkodra “Luigj Gurakuqi”, Albania
zmijaniazra@yahoo.com
Abstract
Albania has become a much attractive environment for the development of women's entrepreneurship. If women are provided
with the necessary resources, skills and opportunities to create strong businesses, and if they are willing to pursue the growth
potential of these companies due to a more favorable environment, will benefit from economic growth. Promoting women
entrepreneurs will create employment, empowerment and gender equality. But in fact the woman in the enterprise faces many
challenges caused by various factors. In this study sought to analyze women entrepreneurs and their work environment in
Albania and the challenges they face. It will identify policies for the development of enterprises managed by women in Albania.
The data for this study were provided by various sources of literature. Secondary data are the result of the review of a wide
and contemporary literature about women entrepreneurs, the environment and challenges. Primary data collection were
carried out a series of in-depth personal interviews with some powerful women entrepreneurs in Albania. The results of this
study show that woman has won respect in society and plays an important role in governance, political and private sector. It
is clearly evidenced that women are becoming increasingly involved in social and economic life of the country and that an
enabling environment for women's entrepreneurship, consolidates and supports their role.
Keywords: enterprising woman, empowering, environment, economic growth.
Introduction
When it comes to gender equality in Albania, mainly it is meant to advance the position of women in society. Looking at the
situation of women’s performance in the labor market, indicators are quite worrisome. Women are subject to a higher rate
and longer term unemployment and reduced participation in the labor market (60% of women) (LFS, 2011), whilst their
involvement in private self-employment activities is lower (Miluka, 2011) as compared to men in Albania. Another feature
is women concentration in sectors with low productivity and a high rate of informality, such as agriculture and manufacturing.
Seemingly, they are less involved in industry and service sectors as compared to men (ISB, 2013). Such concentration is
partly a result of the educational system and of women’s overwhelming responsibility to tend to domestic chores. As a result
of occupational segregation and higher discontinuity of experience in the labor market (due to weak child care provisions)
there are evident wage differentials for women as compared to men (MSWY, 2014). Women’s time allocation to unpaid
work and domestic care services and duties is much higher than men. Thus, according to Albania Time Use Survey 2010-
2011, women carry out 86% of unpaid work and 96% of domestic chores, which is found to be an opportunity cost for paid
work. This allocation is more time consuming for rural women and women with small children (INSTAT, 2012). LSMS (2008)
indicates that a lower percentage of women are involved in full-time work and entitled to social security, whilst a larger
number of women are situated at the bottom part of the wage pyramid in Albania. Same data indicate that access to
education, work experience, availability of social support, and male labor complementarities in various activities where
women are involved do positively influence labor force participation (ISB, 2013).
On the Education and Training front major concerns remain with respect to young girls and women education, especially
in rural areas. The transfer rate from compulsory education to secondary education is lower for females compared to males
(MES, 2013). High school girls from remote areas of Albania experience higher drop-out rates compared to the boys of the
same age (ISB, 2013). There exists an under-presence of women in professional education (approximately 1/3 of the total
enrolments) mainly due to schools distance and locations (MES, 2012). Moreover the VET system is claimed to be prone
to gender segregation where girls are mainly enrolled in agro-business, tourism, administration, hair-dressing and tailoring
courses. Participation to Training Center is much better (more than half of the participants were females in 2012) however
the offered courses are poor in diversity and target low wage categories.
199
Action Plan Rationale

Entrepreneurial women give a contribution substantially to the economy, especially in times of limited growth, where job
creation and private sector survival is challenging. By such contribution they offer significant opportunities to generate
income, increase employment and reduce gender inequalities. Gender is a powerful role, which not only is important in our
daily lives, but also in the organization were people work. Women constitute a large underrepresented group in Albania in
terms of business start-up and ownership. Encouraging more women to become involved in enterprise and grow existing
businesses will have a potentially positive impact on Albania’s economic performance.
The National Strategy for Gender Equality, Gender-based Violence and Domestic Violence 2010-2015 was a serious step
of the GA involvement gender equality and women’s empowerment matters. The strategy laid the grounds for further actions
to roll out government support for women’s economic empowerment particularly in the areas of women’s employment,
skills, and female entrepreneurship. By the end of 2013, the Ministry of Social Welfare and Youth endorsed the Employment
and Skills Strategy 2014-2020 (ESS), which aims to enable access to decent job opportunities, access to vocational
education and training for youth and adults, promote social inclusion and territorial cohesion and achieve effective
governance of the labor market and qualification systems in Albania (MSWY, 2014). During the same period, the
Government of Albania drafted the new Business and Investment Development Strategy 2013-2020, as the main document
for the identification and implementation of the national policies for the promotion of business investments for the period
2013-2020.
Although both strategies delve into women access to vocational education and labor market, creative economy and women
entrepreneurship they lack a strong focus and clear agenda in support of woman entrepreneurship. To fill in this gap the
Ministry of Economic Development, Trade and Entrepreneurship has approached UNWOMEN Albania with a request for
technical support in developing an Action Plan on Women Entrepreneurship in Albania.
This Action Plan has been developed in response to a pressing need to encourage more Albanian women to start and grow
their own businesses and to address positively the need for coordinated support for women’s enterprise. The Plan aims to
provide a collaborative long-term approach on the development of women entrepreneurship in Albania.
The Action Plan aims to:
• Promote an effective multi-governance approach to female entrepreneurship in the Albanian context
• Encourage development of government policies in support of the needs of women entrepreneurs
• Identify the key issues to be addressed through the development of strategic partnerships between the state
and non-state actors at the local, national and regional levels
• Provide practical guidelines and examples of good practice from other countries in the region and around the
world
• Highlight the change in culture and attitude needed to ensure that future SME development encourages women
participation in business in both urban and rural areas.
For purposes of practical implementation of its goal and outcome, the plan is primarily aimed at GA, Local Government
Units, Women NGOs, Banks, Donor Agencies and their specific programs, VET Institutions, Institutions of Higher
Education, etc.
Action Plan Development Methodology

For purposes of this action plan the following definition of “female entrepreneur” shall be used:
“Female entrepreneurs are those who use their knowledge and resources to create new business opportunities either
formally or informally who are actively involved in managing their businesses, are responsible in some way for the day-to-
day running of the business, and have been in operation for longer than a year. ”
The team in charge of the development of the Action Plan selected e methodology that was participatory in nature and
flexible enough to allow for necessary adjustments as more information and data became available. It followed a 4-step
process as described below:
200
Assessment of the situation: The assessment of the women entrepreneurship situation in Albania was mainly based on
the use of secondary data. A thorough review of the relevant literature was carried out in order to create a complete picture
of the current state of play of women entrepreneurship in Albania covering a number of available policy documents, reports
and project publications. Further, a comprehensive analysis of the legal and policy framework with focus on EU legislation
requirements was conducted by the consultants. An extensive consultation of documented best practices on women
entrepreneurship was carried out and selected examples from other countries in the region and beyond were identified and
incorporated in the Action Plan.
Stakeholder engagement process: The engagement process was based on interviewing an initial set of participants
representing different stakeholder groups, such as Ministry of Economic Development, Trade and Entrepreneurship,
Ministry of Social Welfare and Youth, Ministry of Agriculture, Rural Development and Water Administration, representatives
from the NGOs and business community, donors and academia. Consultants followed a “snowball sampling” approach,
whereby a small pool of initial subjects nominate other participants who meet the eligibility criteria for a study. The initial
set of stakeholders suggested a list of other key stakeholders that were contacted during the process. During this step in
the process consultants collected information about the interests of the various stakeholders in the action plan, the
resources they could provide and the role they could play in the implementation of the plan.
Step 3. Selection of action categories: Selection of the action categories was based on the literature review and the
information collected during the stakeholder engagement process. The initial set of action categories which was developed
based on the literature review was revised after the consultation with relevant stakeholders. The action categories are
described under the Framework for the Action Plan.
Step 4. Peer review process and validation: The peer reviewing process and validation was based on the utilization of
a forum of stakeholders which were continuously informed during the action plan drafting. The forum meeting took place
during January 2014 and served to fine-tune the action plan draft based on the reflection of the participants’ comments.
Finalization of the document took place during the end of January 2014 and the final draft was sent to MEDTE for approval.
Conclusions and Recommendations
The development of this Action Plan is an important step ahead to boost the entrepreneurship spirit among Albanian
women. The document, a strategic tool, provides a synthesis of the contributions, analysis and vision of the key
stakeholders and a follow-up of the overall attempts made in Albania in the last decade, with focus on women
entrepreneurship. As such, it is in line with the GoA strategic plan on entrepreneurship and the UN vision on Women
Economic Empowerment. Built on solid grounds, the plan is robust and includes ambitious goals and outcomes that will be
impossible to attain, unless strong commitment by multiple stakeholders representing the government, NGOs, business
sector, academia and the donor community is ensured.
The successful implementation of this plan calls for:
• Establishment of a multi-stakeholder policy advisory group, with METDE as the hosting institution, to
provide a focal point for women entrepreneurship-related issues and to support the successful
implementation of the action plan.
• Designation of a coordination unit within METDE to oversee the implementation of the action plan.
• Setting up of Women’s Business Center to assist female entrepreneurs with education, training, coaching,
and mentoring services and access to finance.
• Development of a detailed Monitoring and Evaluation Plan and Baseline Data, and Indicators Report.
• A fund-raising strategy that outlines current funding available and strategies for securing additional funds
from different sources.
• An increasingly adjusting process with the changes occurring in the enabling environment, so that the plan
stays relevant and responsive
• Increased attention on the cultural and attitudinal changes related to female entrepreneurship in Albania,
especially in rural areas.
References
201
[1] Agolli, M. , 2013, Assessment on the need to strengthen entrepreneurial training programs and partnership
with businesses in VET and life-long learning programs. GIZ, Tirana, Albania.
[2] Bezhani, M. , 2008, InFocus Program on Boosting Employment through Small Enterprise Development Job
Creation and Enterprise Department Series on Women’s Entrepreneurship Development and Gender in
Enterprises. WEDGE Women Entrepreneurs in Albania.
[3] European Commission, 2008, Small Business Act for Europe. Brussels, Belgium.
[4] European Commission, 2013. Entrepreneurship 2020 Action Plan. Brussels, Belgium.
[5] Government of Albania, 2011, National Strategy on Gender Equality and reduction of Gender-based and
Domestic Violence, 2011-2015. Tirana, Albania
[6] INSTAT, 2012, Albania Time Use Survey 2010-201. Tirana, Albania
[7] ISB, 2013, Study on Women Entrepreneurship in Albania. Tirana, Albania
[8] Mandro-Balili, A. , 2013, Women Property Rights: Analysis of the Legal Standards and their De-facto
Implementation - The Case of Albania. UNWOMEN, Tirana, Albania.
[9] MEDTE, 2013, Business and Investment Development Strategy. Tirana, Albania.
[10] Miluka, J. , 2011, Gender Wage Gap in Albania. Tirana: MLSAEO& UN Women. National Report on the Status
of Women and Gender Equality in Albania 2011. Tirana: MLSAEO& UN Women.
[11] MARDWM, 2012, Agriculture Statistical Yearbook. Tirana, Albania.
[12] MES, 2013, Education figures. Tirana, Albania.
[13] MES, 2012, Vocational Education in Albania. Tirana, Albania
[14] MSWY, 2014, Employment and Skills Strategy 2014-2020: “Higher skills and better jobs for all women and
men, ” Tirana, Albania. OECD, et al. , 2012, SME Policy Index: Western Balkans and Turkey 2012: Progress
in the Implementation of the Small Business Act for Europe, OECD Publishing.
[15] http://dx. doi. org/10. 1787/9789264178861-en
[16] PBWHA. , 2013, Assessment of the Environment for Women Entrepreneurship in Albania. ILO, Tirana,
Albania
[17] UN Women, 2011, National Report on the Status of Women and Gender Equality in Albania UN Women.
Tirana, Albania
[18] Voell, S. , 2004, “North Albanian Customary Law Kanunas a Habits, ” paper presented at 8th EASA
Conference “Face to face: Connecting distance and proximity, ” Department of Social and Cultural
Anthropology, University of Vienna.
[19] Wheeler, R. , 1998, “Past and Present Land Tenure in Albania- Patrilineal, Patriarchal, Family- center, ” Land
Tenure Centre, Albanian series, Working Paper No. 13, University of Wisconsin.
[20] Wheeler, R. , Waite M. , 2003, “Albania Country Brief- Property Rights and Land Market, ” Land Tenure
Centre, University of Wisconsin, USA.
[21] World Bank, 2006, “Status of Land Reform and Real Property Markets in Albania, ” Tirana.
[22] Zhllima, E. , Viaggi, D. , and Muller, D. , 2010, “Property Rights of Land and its Perception in Rural Part of
Central Albania, ” paper prepared for NEW MEDIT Journal No 3.
[23] Zhllima, E. , 2012, Analysis of Development Project Models Implemented for the Economic Empowerment of
Women in Albania. Tirana: UNDP.
[24] Zhllima, E. , 2013, Gender Analyses of Extension Services for the Ministry of Agriculture, Food and Consumer
Protection in Albania. Draft consultancy report. Tirana: UN Women.
202
Analysis of Interest Rate Impact on the Profitability Level of the Banking System in Albania
during the Period 2005 -2014.
Sokol NDOKA, PhD Candidate
Prof. As. Dr. Anilda BOZDO
Abstract
This study is an analysis of the movement and impact of interest rates on the profitability level of the banking system in Albania.
This analysis covers a 10-year timeframe (is organized in three time segments - before, during and after the financial crisis),
taking into consideration the critical point of the years 2008-2009 considered as the “peak” of the global financial crisis. Such
separation is made in order to see the possible changes of each period of time and to identify the impact differences of this
factor in each period of study. This study is based on the hypothesis that the decrease of the interest rate has positively
affected the income increase from interest as a result of the impact of two factors, negative levels of Gaps and an increased
level of spread toward the average assets. As a matter of fact, it has neutralized on a certain level the other risks such as that
of the loan which has dominated over the other risks. This paper is based on an empirical study with secondary quantitative
and qualitative data. This study provides a considerable contribution in the framework of identification of factors affecting the
profitability of the banking system in Albania, namely in the context of interest rate; In addition, this study aims at highlighting
the importance of open Gaps minimization for the efficient profitability increase of the financial system.
Key words: Albanian banking system, profitability, interest rate risk, Gaps, spreads, movement, global financial crisis.
1-Introduction
In nowadays business impact plays a critical role. Almost in every business decision it is required to the managers and
executives to balance impact with return. The effective management of business impact is essential to the success of the
company. In the banking system the impact management takes a special importance. Some of the main impacts that
directly affect the profitability of commercial banks are:
Interest rate impact,
Credit impact,
Operational impact,
Exchange rate impact.
The aims and objectives of the study:

1- The analysis of interest rate impact in relation to the profitability of commercial banks in Albania during the period
2005-2014.
2- The compilation of a report that shows the current situation of the profitability of commercial banks in Albania in
connection with interest rate impact.
Hypotheses of the work:

The interest rate impact is one of the main factors affecting the profitability of commercial banks in Albania during the period
2005-2014.
203
Research question:
1. How has the interest rate impact affected on the financial result of the commercial banks in the period 2005-
2014?
2. Did the commercial banks Albanian keep the reprising gaps at critical levels?
Working methodology:
Qualitative approach (qualitative data), quantitative approaches (quantitative data).
2-The interest rates and their impact

The interest rates are among the most monitored indicators in an economy because of the self importance that they have.
Basically, the interest rates represent the cost of borrowing, so the price of credit and as such they affect both the personal,
family and business everyday decision making as well as the economic development of the country. When the real interest
rates are low in an economy are encouraged the investments and borrowings while when the real interest rates are high
we have a contraction of the credit’s delivery as funds become more costly. The impact arising from changing interest rates
called differently interest rate impact represents the impact that the interest rate changes cause additional costs for the
banking sector and affect negatively the net incomes from interest and the net value of bank capital. In the balance of
commercial banks more than 50% of the total income derived from interest income and this makes banks more exposed to
the interest rate impact and therefore the ALM managers pay particular attention that in order this impact does not affect
the performance of banking activity. The interest rate impact is increased in recent years as a consequence of the
international financial crisis and with the aim of identifying and reducing this impact in a timely manner by banks and
branches of foreign banks that operate in Albania, the Bank of Albania in April 2013 has issued an instruction "On the
administration of the interest rate impact in the bank’s book" in which are determined the basic requirements and regulations
for the management of interest rate impact in the bank’s book, the method of calculation of the exposure towards the
interest rate impact as well as reporting to the Bank of Albania.
2. 1- Sources and effects of interest rate impact.

The interest rate impact may derive from various factors and among the most important are: reprising impact, yield curve
impact, basic impact and options’ impact. Reprising impact is one of the impacts that commercial banks face more often.
This impact arises from the difference in maturity between assets and liabilities with fixed interest rates and from the
reprising of bank assets and liabilities with changeable interest rates and makes that an interest rate change brings unequal
changes between the assets and liabilities and net income from interest by exposing the bank to interest rate impact. The
discrepancy between the maturities of the portfolio of a bank may refer it to the yield curve impact. This impact arises when
unexpected changes to the shape and inclination of the yield curve affect negatively the bank incomes or the market value
of banking capital. The basic impact arises when the interest rates imposed on loans and the interest rates placed on
deposits for the same maturities are not assigned to such levels that the bank can realize profits and a change of interest
rate can bring it a significant spread between incomes and expenses for interest resulting in financial losses. The options’
impact arises when the bank owns sensitive options toward the interest rate, these options may be related to securities or
not. The change of the interest rates of these options exposes the net income toward the interest rate impact bringing
losses to the bank. As also mentioned above, the interest rate fluctuation affects the net income from interest and the
economic value of the bank. These two indicators serve to the bank for the assessment of exposure to interest rate impact.
The income analysis considers the impact of interest rates change on the realized incomes. This analysis is used by almost
all banks because incomes of the bank have a great importance for the bank, the reduction of incomes or the bank losses
could threaten the financial stability of the bank and the capital value. The income analysis is divided into two parts, the
first part analyzes the relationship of net income from interest to total income and directly sees the connection between the
interest rate changes and the income from them and the second part analyzes the relationship between the incomes
204
generated by other activities to the total income as the interest rates change also affects to the latter, although not directly.
The analysis of the economic value of the bank serves mostly to the shareholders and managers of the bank to assess the
net capital value since the economic value takes into account the potential impact of interest rates change on the present
value of cash flow that in future shows a clearer picture of the impact of the interest rate change on a long-term period.
2. 2- The management models of interest rate impact.

The rapid development of financial institutions has meant that banks are more exposed to interest rate impact and to protect
against its they use various techniques and statistical models. Below will be treated the reprising model, which is based on
the gap between sensitive assets and liabilities, maturity model which is based on the maturity gap and the duration model
which is based on the duration gap. These models show the effect of interest rate change to the market value of the bank's
assets and liabilities and to net income from interest.
3- Econometric model on net margin of the interest rates

3. 1- Net interest margin
Net interest margin is the most appropriate indicator of efficiency and suitability assessment of the activity of a bank or a
banking system in general. This indicator measures the efficiency of the management of bank assets that generate income
for the bank and serves as the main criterion in the optimization of banking assets’ structure. The net interest margin (NIM)
is calculated as the ratio between net income from interest and average total assets or between net income from interest
and income generating assets.
This indicator in the banking system has had oscillations, in 2005 was its lower level, up to its maximal increase its 2007,
a year when had not yet begun to feel the effects of the economic crisis. 2007 was the boom of the loan portfolio increase
by about 78%, which influenced the increase in net interest margin. In 2008 it began the contraction of new credit/loan
issues, which led to the reduction of the margin until 2013. Maintaining high levels of spread by the side of the Albanian
commercial banks neutralized somewhat the losses from problematic loans.
Chart No. 1 Net interest margin
Net interest margin 2005-2014

4,4
4,2
Value in %
4
3,8 Incomes from
3,6 interests/average assets
3,4 that bring incomes
2014
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
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Source: Bank of Albania

Meantime, keeping the negative gaps by the side of banks as all loans were given with variable interest rate annually,
helped to reduce the margin decline, in terms of interest rates declining in unison with the policy followed by the Central
Bank European. In 2014 began the expansion of the loan portfolio with new loans, the decline of problematic loans’ indicator
toward / total loans, which led to increase of net interest margin.
Chart No. 2 The level of gaps according to the intervals of time
Gap, Assets Liabailities according to the remained maturity

50000
0
Value in millions in ALL
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Up to 7 days
-50000
7 days - 1 month
-100000 1-3 months
6-12 months
-150000
-200000
Year
Source: Bank of Albania

MNI fluctuation can come from the change of net income from interest as well as from the level of assets that generate
incomes. High levels of net margins may not always show high levels of efficiency but also the opposite, instead that the
bank manages the bank impacts it is "protected" by maintaining high interest rates on loans and low interest rates on
deposits thus increasing the net incomes from interest. On the other hand, even its reduction doesn’t shows efficiency, if
we take into account the accounting analysis of net interest margin the reduction of net interest margin may arise from the
tax rate reduction or by the increase of credit/loan default. MNI reduction in the first case can bring increased efficiency of
the bank or banking system while in the second case, the increase of problematic loans’ number can lead to the reduction
of the bank's profits. Identification, monitoring and evaluation of the factors that affect the level of net interest margin is very
important for policy makers in order to orient their policies for individual banks or the banking system toward its good-
functioning and stability.
3. 2- The determinants of net interest margin

There are two methods to measure the net interest margin, the method ex-ante and the ex-post one. Ex-ante method
measures the net interest margin before the realization of interest income while ex-post methods are realized as interest
income. According to ex-ante method the net interest margin is calculated as the difference between interest rates on loans
and deposits specified in the initial contract signed by the bank and customers. These rates can be viewed by the public
and are easily comparable between banks. Ex-post method calculates the net interest margin as the difference of incomes
and expenses interest that the bank has realized during the study therefore after their realization. The difference between
these two methods of measuring the MNI is related to the level of problematic loans. Ex-ante method often produces
incorrect results when the source of the applied data can be different, while the ex-post method has several disadvantages
because according to Demirguc-Kunt and Huizinga (1998) the incomes from interests and from the reserves created for
problematic loans materialize in different time periods.
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From the several empirical studies on net interest margin, the most used methods is the second one, ex-post, since its
results are more accurate. According to Demirguc-Kunt (1999), the ex-post method is more inclusive and useful because
it takes into account that the banks with higher interest rates and with a high level of loans are potentially more at risk
toward the banking impacts. In the study we have reviewed the ex-post method for the measurement of net interest margin,
based on data from the financial statements of commercial banks in Albania for the period 2005-2014.
The analysis of factors affecting the level of net interest margin at a commercial bank or banking system is treated according
to two methods. The first method is a method of accounting analysis of the net interest margin, while the second method is
based on the theoretical treatment of factors affecting MNI which are then applied in practice through econometric analysis.
Both of these methods will be treated below.
3. 2. 1- Theoretical analysis of factors affecting the net interest margin

The pioneer of theoretical analysis of factors affecting the net interest margin is the study of Ho and Saunders (1981) and
it was named model of mediation. According to this model, banks are considered as impact-averse agents that collect
deposits and give loans, the latter arrive in the bank randomly and where the probability of their arrival depends on the
margins that the banks charge and from the elasticity of the demand for loans and of the offer for deposits. The fact that
the arrival of deposits and loans is completely random and not in synchrony, exposes the banks toward the interest rate
impact. For example, in the case when the bank accepts a deposit but on the other hand there is no demand for a loan,
then these funds will be invested in the money market. This case exposes the bank toward the reinvestment impact, the
impact that the income from the funds to be reinvested will reduce more than the cost of funds. In case the bank accepts a
request for a loan but this loan is financed from the money market and not from the deposits, the bank will be exposed
toward refinancing rate impact and credit default impact. The refinancing impact brings that the cost of re-borrowed funds
will be higher than the income generated from the investments in assets. To reduce these impacts, in exchange, the banks
seek higher margin. Ho and Saunders (1981) in their work argue that banks, in order to increase the shareholder returns
impose additional margin (mark-up) for loans and reduced margins (markdown) for deposits in order to minimize the impact
of excess (balance) in the demand for deposits or in the offer for credit/loan. According to Ho and Saunders (1981) these
established margins, theoretically will depend on four factors: the attitude of the banks towards impact, the market structure
where banking institutions are operating, the average size of transactions that the banks realize and the interest rate
fluctuation. According to them, even if the banks operate in a market with high competition market, the interest margin will
be positive again because it cannot disappear because the bank transactions are always accompanied by insecurity and
this margin that emerged from insecurity of the performed transactions is called "pure margin interest" and is supposed to
be universal for all banks. The model of Ho and Saunders (1981) uses a two-stage procedure for econometric evaluation
of the relative impact of specific micro and macro factors to the interest rate margin. The first stage coincides with the
determination of the size of "clean margins" by presenting the effect of explanatory variables that are not explicitly stated
in the theoretical model and the second phase coincides with the analysis of the relationship between "pure margins" and
the variables presented in theoretical model. According to Ho and Saunders, banks are seen as mediators that accept
deposits and give loans passively, so the prices of loans and deposits (PL dhe PD) are placed by banks while their quantity
is placed exogenously. So
PL = p – b and PD = p + a
Where p – indicates the “real" price of the loan or deposit according to the bank, or indicates a margin for the provision of
liquidity service speed while b indicates the impact premium for the compensation of the impact arising from the
incompatibility of deposits and loans. Prices and interest rates of loans and deposits are inversely related between them,
so we can say that: : r D = r – a and r L = r + b where, r D and r L are the interest rates of loans and deposits set by the bank
while r is the interest rate in the money market. Thus, the interest margin is calculated as follows:
s=rL–rD=a+b
According to the authors, after a series of transformations, the basic equation is expressed as follows:
s = r L - r D = α/β + ½ x R σI2 Q
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Where, α / β indicates the neutral spread of impact, in the conditions of a competitive market α and β express respectively
the intersection with the vertical axis and the inclination of the symmetric function of the arrival of deposits and loans. R
indicates the coefficient behavior toward impact, σI2 indicates the variance of fluctuations in interest rates for deposits and
loans and Q indicates the size of the performed banking transactions.
During subsequent years, several authors used the model of Ho and Saunders (1981), taking as the explanatory variables
of net interest margin, besides the theoretical model variables, other variables too. Allen (1988) took into account the
provision (offering) of various types of deposits and loans from banks and showed in his study that "pure interest margin"
can be reduced as a result of the diversification of products and services offered by banks. McShane and Sharpe (1985)
replaced the fluctuation of interest rates on deposits and loans, as in Ho and Saunders, with the fluctuation of market
interest rates. Carbo and Rodriguez (2007) developed the model of Ho and Saunders including both traditional and non-
traditional activities of the banks aiming the study of the effect of specialization in the banking spread by using the model
of the European banking system. Maudos and Fernandez de Guevara (2004) extended the model of Ho and Saunders
studying explicitly the bank's operating expenses.
The empirical studies performed on the net interest margin are numerous, such as those on certain countries or groups of
countries as well as for individual banks or for the banking system as a whole. The two-stage mediation model that was
used by Ho and Saunders (1981) and later by Saunders and Schumacher (2000), requires long time series of explanatory
variables of "pure interest margin", but many authors (Demirguc-Kunt and Huizing 1998; Moore and Craugwell 2000; Brock
and Rojas-Suarez 2000; Gelos 2006) have also studied the one-stage model which can be realized even with shorter time
series and by placing additional variables such as macroeconomic conditions, taxation, regulations on insurance deposits
and the structure of financial system to see their impact on the interest margin. The results obtained from numerous studies
of MNI factors are different and in some cases contradictory. Some of the determining factors of net interest margin
according to econometric analysis are: the operating costs, the quality management, the credit impact, the liquidity impact,
the interest rate impact, the size of banks, the level of capitalization, the non-interest incomes.
4- Specification of econometric model

The mediation model of Ho and Saunders (1981), later used by Saunders and Schumacher (2000), Estrada et al (2006)
and some other authors, assesses the factors which affect the interest margin by following two stages and also It requires
long time series. While other authors as Angbazo (1997) and Maudos of Fernandez de Guevara (2004) have applied the
one-stage model for determining the factors that affect the net interest margin. Irini Kalluci model (2010) on which my study
is based, assesses the determinants of net interest margin by one-stage model applied by Maudos of Fernandez de
Guevara (2004) and unlike the latter, the one which identifies the determinants of net interest margin for the 5 countries of
the European Union, the model in which my study is based, assesses the factors affecting the net interest margin only for
the Albanian banking system for the period 2002-2007 through the method of Panel Data for individual banks as well as
model of Fernandez Maudos de Guevara. The model that we’ll examine, analyzes the factors affecting only the net interest
margin for the Albanian banking system for the period January 2005 - December 2014 for the Albanian banking system.
Regarding the dependent variable in our work, unlike Maudos and Fernandez de Guevara (2004) study, in our study as
well as in the study of Irini Kalluci (2010), the net interest margin is calculated as the ratio between the net incomes from
interests with the assets that generate incomes. The model used in the case of the Albanian banking system differs from
the model used by Maudos of Fernandez de Guevara (2004) as the small number of observations does not allow the use
of a large number of variables. Differently from the study of Maudos and Fernandez de Guevara (2004), the study of Irini
Kalluci (2010) does not include the variable equation that expresses the degree of interaction between credit impact and
market impact since they are specifically included in the model and variable that expresses the average size of transactions
measured by the volume of loans granted. To measure the market power of banks in the study of Maudos of Fernandez
de Guevara (2004) is used the Lerner index and that of Herfindahl-Hirschman while in the case of Albania is used only the
latter for reasons of lack of data in the calculation of Lerner index. The market impact is measured by the authors Maudos
of Fernandez de Guevara (2004) with the fluctuation of interest rates of the interbank market or of the public debt, while in
the case of Albania the market impact is measured as the standard deviation of interest rates on treasury bills, euribor and
libor. According to the model in which I am based, for the assessment of the factors that affect the net interest margin will
be used eight variables, based on a theoretical model as well as numerous empirical studies. These variables are the
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operating costs, the attitude towards impact, credit impact, which management, opportunity costs of obligatory reserves,
non-interest incomes, index of concentration and market impact.
Operating Expenses - This variable is calculated as the ratio between the bank operating expenses and total assets and
it’s expected that the relationship between the net interest margin and operating expenses be positive. The reason why this
indicator is included in the equation is to see if the banks, for high operational cost, transferring the latter to customers by
placing higher interest margins or not.
Attitude towards impact - This variable is measured by the ratio between the share capital and total assets and it’s
expected that its impact on net interest margin be positive as the well-capitalized banks are inclined to establish high
margins to protect their capital but is the important to identify the sources of well-capitalized banks. A high level of
capitalization of banks not always comes as a result of increasing the share capital of the bank to be more protected from
the impacts but it can also come as a result of the regulatory and supervisory requirements by the central bank.
Credit Impact - This variable is measured by the ratio between the problematic loans and the total loans granted and it is
expect that this indicator will have a positive impact on net interest margin, the greater this impact will be the greater will
be the margin placed on interest rates of loans and new deposits. So in a certain way, the pledge of problematic loans will
affect new borrowers.
Quality of management - This variable is measured by the ratio between the operating expenses and its gross income.
With quality management we’ll mean the identification of low impact assets and high return and of low cost liabilities. The
relationship between net interest margin and the quality of management is expected to be negative, the higher will be the
ratio of the activity expenses with the gross income, so the management quality will be lower, consequently the lower will
be the net interest margin.
Opportunity cost of obligatory reserves - This variable in the case of Albania is calculated as the ratio of obligatory
reserves in the central bank toward the total assets unlike the model of Maudos and Fernandez de Guevara (2004) which
is calculated as the ratio of liquid reserves with the total of assets. It is expected that the relationship between this indicator
and the net interest margin be positive as a high level of reserves would make banks set high interest rates on loans and
lower one for deposit aiming the compensation of the loss of profits from the investment of funds in the form of obligatory
reserve.
Non-interest income - This variable is calculated as the ratio between the net commission income and the amount of net
income from interest and other activities. This variable is expected to have a negative association with the net interest
margin as those banks that provide higher income from commissions tend to lower the interest rates on loans and deposits
resulting in the reduction of the net interest margin.
Concentration Index - This variable serves as a measure of the degree of concentration in the market in terms of loans.
In the case of Albania, this variable is measured by the Herfindahl-Hirschman Index (HHI) and is calculated as the sum of
the squares of the market share of credit to any bank in the market. It is expected that a high level of concentration index
can lead to higher margins in interest because banks have more power in setting interest rates. But it can also happen that
a high level of concentration lead to increased efficiency (cost reduction) and consequently to lower interest margins.
Interest rate impact - This variable is measured by interest rate fluctuation. In the case of Albania, this variable is calculated
as the standard deviation of monthly treasury bills rates when during a month has been realized more than one auction, in
the contrary has been taken the interest rate of the treasury bills of Bank of Albania’s auctions. While for the interest rates
of Euribor and Libor were taken into study the monthly interest rates. These two variables have been taken in the study
since the loans granted in foreign currencies occupy a significant portion of loans in the entire system. In the model will be
treated the three upper variables, taken separately, to identify those interest rates which affect more the net interest margin.
4. 1- The data and assessment methods

The data used in this study have been obtained from the Bank of Albania and other international institutions. The data used
in the model are the monthly data for the entire Albanian banking system for the period January 2005 - December 2014.
The dependent variable, the net interest margin, shall be calculated as the ratio between the net income from interest and
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the total assets that generate income. The total number of explanatory variables of the net interest margin (dependent
variable) will be 8 and the assessment of the regression equation will be done using the method of least squares (LS). The
total number of observations used in the model is 48 and the data are structured.
4. 2- Results of econometric model

The overall regression equation would appear as follows:
𝑀𝑁𝐼𝑛 = 𝛽0 + 𝛽1 × 𝑋1 + 𝛽2 × 𝑋2 + 𝛽3 × 𝑋3 + 𝛽4 × 𝑋4 + 𝛽5 × 𝑋5 + 𝛽6 × 𝑋6 + 𝛽7 × 𝑋7 + 𝛽8 × 𝑋8
Where, n - indicates the number of the equation in the table below, respectively: 1 for the dependent variable "market
impact" measured by the standard deviation of the interest rates of treasury bills when during a month has been realized
more than an auction, in the contrary has been taken the interest rate of treasury bills of the Bank of Albania auctions, 2
when this variable is measured by Euribor interest rates and 3 when this variable is measured by Libor interest rate. β0 -
indicates the constant, the average value of the dependent variable if all the independent variables are 0. β1, β2, β3, β4,
β5, β6, β7, β8 - indicate the angular coefficient, the estimated differences in the dependent variable with βx unit for every
one unit of change in the independent variable. X1 - indicates the independent variable – the operating costs, X2 – indicates
the independent variable - the attitude towards impact, X3 – indicates the independent variable - the credit impact, X4 -
indicates the independent variable - the quality of management, X5 - indicates the independent variable - the opportunity
cost of reserves, X6 – indicates the independent variable – the income from other activities, X7 - indicates the independent
variable – the index concentration and X8 - indicates the independent variable - the interest rate impact.
Table No. 1: The econometric results for the dependent variable MNI
The three equations above represent a coefficient of determination (adjusted R-square) very good level, ie 99. 79% to
equation 1, 99. 8% for equation 2 and 99. 81% for equation 3, which clarifies that the majority of fluctuation in the net
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interest margin is explained by the independent variables in this study. Regarding the test of significance, we see that prob.
F-statistic is 0, so, in general exists a connection between the dependent variable and independent variables. While
regarding to the importance of each dependent variable individually assessed, we note that not all considered variables
have statistic importance, so not all of them have strong ties with the net interest margin. From the general equation shown
above we can reduce the constant parameter as it is not transmitted in the population (-0. 00447) if all the independent
variables are 0, the net interest margin cannot be negative.
The independent variable "operating expenses" in the regression equation represents a positive coefficient and it is
statistically important as expected to be. An increase of this variable will lead to the increase of the net interest margin; this
relationship complies also with the results obtained in the analysis of accounting analysis of net interest margin. For the
three upper equations the ratio of the operating expenses with the total assets represents an estimated coefficient of 1. 95,
which is an indication that the increase of the bank's operating expenses with a unit will cause the latter to be transferred
to bank customers, respectively with 1. 95 times in the form of higher rates of interest for loans or lower for deposits.
Regarding the independent variable "attitude towards impact", it represents a positive coefficient. The relationship between
the attitude toward impact and the net interest margin means that the banks anticipate that in the future they may experience
losses from the granted loans and to be protected against this they increase their share capital but the capital financing is
more expensive than the debt financing, so the banks, in order to compensate the cost of financing impose high interest
margins. This coefficient for the above equations varies from 0109 for the first equation to 0118 for the second equation
and 0128 for the third equation. An increase with one unit of the share capital will lead to increase of 12% of the net interest
margin (equation 3).
The relationship between the net interest margin and credit impact in the regression equation is negative and the
relationship between them is important for the equation 3 while some empirical studies have confirmed a positive
relationship between variables. In the case of Albania, the coefficient -0016 (equation 3) shows that the increase with a unit
of the problematic loans leads to a reduction of the net interest margin to 0. 016 times. This result is explained by the fact
that the increase in problematic loans in the banking system has made banks reduce the interest margins in order to reduce
the potential problematic loans and to protect their incomes.
The quality management is the variable that affects minimally the fluctuation of the net interest margin in the case of the
Albanian banking system, the coefficient - 0. 00045 (equation 2) shows that the increase with a unit of the quality
management will lower the net interest margin to 0. 00045 units, so the relationship is negative as well as other empirical
studies.
The explanatory variable opportunity cost of reserves is negatively correlated with the net interest margin, in the case of
Albania the coefficient of this variable is -0083 (equation 1), which shows that its increase with one unit affects the net
interest margin to 0. 083 units. This result shows that the increase of the obligatory reserve at the central bank and the loss
of profit from its keeping in the central bank are not transferred to bank customers through higher interest margins.
Income from other activities is a statistically important variable and its relationship with the net interest margin is positive,
which means that the banks that have higher incomes from fees/commissions and not from their core activity tend to
maintain higher interest margins to compensate their income. The increase of this variable with one unit affects the increase
with 0033 (equation 3) units in the net interest margin.
The Independent variable – the concentration index in terms of loans, adversely affects the net interest margin in the first
two equations and positively in the third equation. These results indicate that the increase the concentration of loans in the
first two equations would reduce the net interest margin as the banks use higher concentrations to get specialized in the
offered services and to reduce the net interest margin. While regarding the concentration of loans in the third equation, it is
noted that the increase of the concentration of loans influences in the increase of the net interest margin with a coefficient
of 0. 009 times, so as many power the bank will have in lacing the interest rates so more will increase net interest margin.
Finally, the explanatory variable market impact, we see its impact to the dependent variable net interest margin, unlike the
expectations, has a negative impact. An increase of the interest rates of treasury bills (equation 1), Euribor interest rates
(equation 2) and libor interest rates (ekuacioni3) will lead to the reduction of the net interest margin. This conclusion comes
as a result of the negative gaps of assets and liabilities according to the remained maturity in monthly periods from January
2005 to December 2014.
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5- Conclusions
1- The three studied equations represent a coefficient of determination (adjusted R-square) in very good levels,
which clarifies that the majority of fluctuation of the net interest margin is explained by the independent variables taken into
study.
2- The independent variable "operating expenses" in the regression equation represents a positive coefficient and
it is statistically important. An increase of this variable will lead to the increase of the net interest margin.
3- Regarding the independent variable "attitude towards impact", it represents a positive coefficient. The
relationship between the attitude towards impact and the net interest margin means that the banks anticipate that in the
future they may experience losses from the granted loans and to be protected against this they increase their share capital
but the capital financing is more expensive than the debt financing, so the banks, in order to compensate the cost of
financing impose high interest margins.
4- The relationship between the net interest margin and credit impact in the regression equation is negative and
the relationship between them is important for the equation 3 while some empirical studies have confirmed a positive
relationship between variables.
5- The quality management is the variable that affects minimally the fluctuation of the net interest margin in the
case of the Albanian banking system.
6- The explanatory variable opportunity cost of reserves is negatively correlated with the net interest margin in the
case of Albania.
7- Income from other activities is a statistically important variable and its relationship with the net interest margin
is positive.
8- The Independent variable – the concentration index in terms of loans, adversely affects the net interest margin
in the first two equations and positively in the third equation.
9- The explanatory variable market impact, we see its impact to the dependent variable net interest margin,
different from the expectations.
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2008.
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E-Banking as a Tool for Competition Advantage in Albania
Prof. Assoc. Evelina Bazini

Faculty of Economy, University of Vlora “Ismail Qemali”, Albania
evelina. bazini@univlora. edu. al
Abstract
The adoption of e-banking is occurring quite extensively as a channel of distribution for financial services due to rapid advances
in ICT and intensive competitive banking markets. E-banking offers o lot of benefits which add value to customers’ satisfaction
in terms of better quality of service offerings and at the same time enable the banks gain more competitive advantage over
other competitors. Internet banking is either offered as a value added service of physical bank branches or a virtual bank
where customers can only perform banking transactions through the Internet and it is important to mention that operating
costs of a virtual bank are much lower compared to traditional banks. This study is designed to evaluate e-banking as a
strategy and related methods adopted in banking sector in Albania to improve the customer satisfaction. The aim was to
analyze customers’ perception towards e-banking services, the quality of e-banking services provided by the banks and the
constraints in achieving customer satisfaction. The study also recommends the possible and practical additional measures
the banks should take in order to achieve maximum customer satisfaction. Data were collected from the bank customers
through self designed structured questionnaires. Out of 100 questionnaires distributed, only 62% were returned/ responded
back. Non-probability sampling was used due to the limitation of resources and time. Data management and analyses were
done using SPSS program and Microsoft excel.
Keywords: e-banking, competitive advantage, customers satisfaction, e-distribution channels.
1. Introduction
E-banking allows customers of a financial institution to conduct financial transactions on a secure website operated by the
institution, which can be a retail or virtual bank, credit union or building society. Electronic or online banking is the latest
delivery channel to be presented by the retail banks and there is large customer acceptance rate which means delivery of
banking services to customers using electronic technology either at their office or home.
The E-Banking offers enormous opportunities in every sphere of business as the competitive advantage, member/ client
retention increased revenues and reduced costs.
2. Literature review
2. 1. Definition of e-banking
Daniel (1999) described electronic banking as the provision of banking services to customers through Internet technology.
Other authors (Daniel, 1999; Karjaluoto et al. , 2002) indicated that banks have the choice to offer their banking services
through various electronic distribution channels technologies such as Internet technology, video banking technology,
telephone banking technology, and WAP technology. Karjaluoto et al. (2002) also indicated that Internet technology is the
main electronic distribution channel in the banking industry. In more detail the author described e- banking as an online
banking that involves the provision of banking services such as accessing accounts, transferring funds between accounts,
and offering an online financial service.
E-banking is also called as "Virtual Banking" or "Online Banking". E-banking is a result of the growing expectations of bank's
customers. E-banking involves information technology based banking. Under this I. T system, the banking services are
delivered by way of a Computer-Controlled System. This system does involve direct interface with the customers. The
214
customers do not have to visit the bank's premises. Popular services covered under E-Banking. The popular services
covered under E-banking include:
• Automated Teller Machines
• Credit Cards
• Debit Cards
• Smart Cards
• Electronic Funds Transfer (EFT) System,
• Cheques Truncation Payment System
• Mobile Banking, Internet Banking
• Telephone Banking, etc.
2.2. Competitive Advantage – a conceptual framework

The concept of competitive advantage used by Porter (Porter’s work - 1979, 1980, 1985, and 1990), is still the starting
point for any discussion of competitive advantages even thought there are many economists who used the concept of
competitive advantage before him (Jones 2003). Straub and Klein (2001) and Barney (2002) argue that the term of
competitive advantage did not appear in Porter’s work until the year 1985, whereas Caves (1984), Day (1984), Spence
(1984) and Barney (1986) used the term around the same times as Porter while Penrose (1959) and Ansoff (1965) used
the concept of competitive advantage before that time.
Competitive advantage is recognized as a continuous concern for all companies. According to Dussauge et al (1992)
technology could be considered as the core element that enables the company to identify the two major generic strategies:
cost leadership and differentiation. Porter defined competitive advantage as the heart of a company’s performance and it’s
reflects companies’ ability to offer consumers greater value, either by means of lower prices or by providing greater benefits
and services that justifies higher prices (Porter, 2000). Order-winning criteria include rate of innovation, fitness for purpose,
volume flexibility, variety, extreme customization and, above all, rapid responsiveness (Berawi, 2004; Porter, 2000). In
addition, companies can create competitive advantage by achieving or discovering new and better ways to compete in an
industry and taking them to the market, which is ultimately an act of innovation (Abdul-Rahman & Berawi, 2002; Porter
2000). Moreover, Porter (2000) stated that, recently, companies try to build up distinctive strategies that result in realistic
profitability. Thus, he recommended a continuous development in products and in approaches to competing by the
innovative use of technology. Strategic innovation is considered as the basis for competitive advantage (Grant, 2005); it is
recognized as a source of competitive advantage (Porter, 1980).
When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when
it earns or has the potential to earn a persistently higher rate of profit (Porter, 1980; Grant, 1997; Hill et. al, 2001).
Competitive advantage then is the ability of the firm to occupy a superior position in an industry and outperform its rivals
on the primary performance goal- profitability. A company’s superior competitive position allows it to achieve higher
profitability than the industry’s average (Porter, 1985). Competitive advantage can arise from various sources. According
to Porter (1985), a firm can achieve a higher rate of profit (or potential profit) over a rival in one of two ways: either it supplies
an identical product or service at a lower cost, in which case the firm possesses a cost advantage; or it can supply a product
or service that is differentiated in such a way that the customer is being able to pay a price premium that exceeds the
additional cost of the differentiation advantage.
2.3. The advantages of e-banking8

E-banking has recently come to be considered as one of the most effective banking transaction methods because it
possesses many advantages which offline banking channels cannot offer. E-banking managers aim to utilize these
advantages to increase the online banking adoption rate.
Based to a certain extent on reasons offered by Lee, there are two main types of perceived benefits, which can be
categorized as direct and indirect advantages. Direct advantages refer to immediate and tangible benefits that customers
215
would enjoy by using online banking. For example, customers can benefit from series of services, as a wider range of
financial benefits, faster transaction speed, and increased information transparency.
First, this wider range of financial benefits includes the lower transaction handling fees, higher deposit rates, opportunities
to win prizes and extra credit card bonus points.
Second, the faster transaction speed obviously means that time can be saved since online banking does not need paper
documents, the processing of which can give rise to errors and delays, and which also requires more personnel. Online
banking automates this process by mediating transactions through websites and electronic data interchange, and can also
reduce the need for customers to communicate with bank staff regarding transaction details because these can be obtained
from a website.
Third, during the transaction, online banking allows customers to monitor contractual performance at any time, or to confirm
delivery automatically. In other words, more relevant information is immediately available and transparent to customers.
Indirect advantages are those benefits that are more intangible and difficult to measure. For example, online banking allows
customer to perform banking transactions anywhere in the world and enjoy 24‐hour service, as well as offering customers
more investment opportunities and services, such as stock quotations and news updates.
Another classification for the benefits of e-banking is that based on from the viewpoint of customers, banking organizations
and economy in general. IT as an enabler has broken all bounds of cost, distance and time.
3. Current situation of using e-banking in Albanian banking sector

In the Albanian banking sector today operate 16 banks, with fully private capital and foreign capital dominates. The number
of banks began to increase after the ‘90, when in 1992, 4 new banks were licensed. And over the years, banking sector in
Albania, began to improve, thus increasing the number of banks that compete in this market, which definitely brought the
increase of influence of this sector in economic development, through increased funding to individuals and firms in the
economy.
This can be considered as a relatively large number of banks compare with the number of population in Albania, which
increases the competition and makes it difficult the cooperation between banks to increase the interest rate. However if we
compare our banking system with other relional countries, in Albanian banking system operates the smaller number of
banks11.
In Albania, electronic services became part of the banking system much later compared to developed countries. Security
of transactions has been one of the main problem that has accompanied the performance of electronic services in
developed countries. Over time banks gained experience while minimizing some of the problems previously encountered.
In Albania, the range of products that commercial banks have added as electronic products and services has increased
over the years. As in the world, even in Albania they were initially foreign banks who first introduced electronic services.
Later, even local banks agreed to offer their products electronically. The facts show that electronic services are in their
infancy. The main reason lies in the cost-benefit ratio. If there is a significant number of clients that will use e-banking as a
service then the high costs associated with providing this service would cause losses for banks. Electronic banking is
actually associated with both the traditional channels (like counters and affiliates) and also automatic channels (ATM and
POS). Multi-channel tracking strategy is aimed to strengthen client-bank relationship day after day. Supervision Report of
2006 showed that electronic products and services used by commercial banks in customer service were adopted as the
provision of ATM services, electronic cards of almost all banks by increasing the speed and quality of service (Surveillanc
Report , 2006)11.
The first bank that has provided e-banking is the American Bank of Albania in 2002, with the introduction of ABAflex. It
remains the only bank that offers a package of services inherent in the Internet. Efforts by other banks to offer e-banking
service were made by other banks such as for example the Raiffeisen Bank, National Bank, Credins etc. (BoA, 2007: 28).
Today, among 16 banks that contain banking system in our country, only nine of them offer electronic services11.
216
Research methodology
This study is designed to evaluate e-banking as a strategy and related methods adopted in banking sector in Albania to
improve the customer satisfaction. The aim was to analyze customers’ perception towards e-banking services, the quality
of e-banking services provided by the banks and the constraints in achieving customer satisfaction. The study also
recommends the possible and practical additional measures the banks should take in order to achieve maximum customer
satisfaction.
Data were collected from the bank customers through self designed structured questionnaires. Out of 100 questionnaires
distributed, only 62% were returned/ responded back. Non-probability sampling was used due to the limitation of resources
and time. Data management and analyses were done using SPSS program and Microsoft excel.
Research results
Out of 100 questionnaires distributed, only 62% were returned/ responded back. Out of 62 questionnaires collected, about
71% were female and 29% were male. Besides, 92% of samples hold bachelors or higher university degree. In terms of
occupation about 87% of them were found engaged in the private sector 13% of the respondents were engaged in the
public sector. Around 93% of the respondents in our sample have heard about the e-banking, out of which around 87%
were the female respondents. Among those who have not heard about the e-banking most of them were the housewives
(62. 3%). About the source of respondents' knowledge about e-banking, 93% who have heard about the e-banking, 32%
have heard from the media (television, radio, or newspaper), and 41% have got the information from the bank itself.
Similarly, 27% of the respondents have got the information from other users of e-banking.
Out of 62 respondents under surveyed, 82% indicated they do e–banking service with their banks compare to 25% that do
not. Only 17% of them preferred the face to face or conventional banking. This means that 83% prefer e–banking to the
traditional banking system. The major types of e–banking services enjoyed by the customers in the following order are ATM
banking (76%); Money Transfer (83%); and all Internet banking facilities (12%). The reasons given by the respondents for
preferring e–banking to traditional banking practice include: availability of banking facility anytime and anywhere; it is easy
to use; time saving; it offers a convenient way of operating banking transactions; there is no need for queuing. A greater
proportion (87%) of the respondents is very comfortable with the e banking choice while only very few of them are not
comfortable (13%). The reasons given by the respondents that are not comfortable are: security concern, lack of knowledge,
unreliability and preference for face to face contact. The most part of the them who use e-banking hold bachelors, higher
university degrees or were representatives of private businesses that operate in the area or employ of public agencies. For
the two last categories this was not a new practice since they use internet services for other reasons at their businesses or
agencies. This helps to understand the fact that greater proportion (82%) of the respondents do e-banking themselves
while 18% sort help when doing e-banking. There are 78% respondents that indicated they were satisfied with the e–
banking services provided by their banks while 22% are not satisfied. The reasons given by those respondents who are
satisfied include: easy access, customer friendly environment, faster than conventional banking that mean no long lines for
making money transfers, using your account anytime and anywhere, even when they are abroad, and assistant from bank
employs any time. Those respondents not satisfied with the e–banking services gave the following reasons: slow response
of Internet connection and inaccessibility.
When asked for the benefits of using e-banking, the respondents gave the following list: speedy transfer; efficient
transactions; regular check of transaction and statement details, easy access; saves transaction costs; lower transaction
fees. The expected associated risks of e–banking identified by the respondents from the study are: cyber fraud; cyber theft;
security concerns; risk of hackers; leaked customer information; making closed system open up; third party intervention ;
transaction process and wrong information/code from sender and others such as card retrieval problem, delay due to wrong
codes, unreliable power supply, slow Internet connectivity, system failure/error and lack of knowledge. When asked whether
or not customers’ bank choice is influenced by the quality of e–banking services and/or products provided, the majority of
the respondent in all the five banks included in the research were answered that they are satisfied with the e–banking
services. Only in two of the banks, customers were very satisfied with the facilities and assistants provided by the banks
employers in using e-banking. This trend if sustained, may give to these two banks a competitive advantage over others in
the nearest future.
217
Concluding remarks
A competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower
prices or by providing additional benefits and service that justify similar, or possibly higher, prices.
This study attempts to examine whether customers’ choice of banks is influenced by the quality of e-banking services and
products provided. In Albania, electronic services became part of the banking system much later compared to developed
countries. Security of transactions has been one of the main problem that has accompanied the performance of electronic
services in developed countries. Over time banks gained experience while minimizing some of the problems previously
encountered. Banks should drown themselves in all the intricacies regarding e-banking to determine ways that will affect
the customers satisfaction and use it to their maximum benefit. The salient dimensions of marketing orientation which are
customer and competitor orientation, are considered important strategic orientations to achieve a competitive advantage
(Sørensen, 2009; Zhou et al. , 2005; Slater and Narver, 1994; Day and Wensley, 1988; Day and Wensley, 1983).
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The Link Between Innovation Behaviors and Productivity Strategies of Enterprises in

Albanian Economic Growth
Güngör Turan
PhD in Economics, Epoka University, Albania, gturan@epoka. edu. al
Irma Gjana
(corresponding author) PhD Cand. in Business Administration,
Epoka University, Albania, irmagjana@gmail. com
Abstract
The paper primarily aims to provide a link between the innovation behaviors and productivity levels of enterprises in Albania,
which are the main source of job creation and employment in economic growth, as well as underscore the importance that the
innovation behaviors and productivity strategies of enterprises play in Albanian growth in the long-run. The regression model
developed and Johansen co-integration test applied on the data of GDP per worker and the number of created jobs or
employed in 1991-2013, are investigated with the scanted literature throughout the study.
Keywords: innovation, productivity, Albania.
JEL: Classification L26 · L60 · O31 ·O33
1. Introduction
Today, worldwide, innovation and productivity play a crucial role in economic development. European Union has shown a
good performance in developing strategies and programs for each of its countries in research and innovation. The increase
of funds in the innovation and R&D, are resulting in an increase in productivity and in job creation and leads the Union
countries in long term economic growth rates. Despite the strategies and many other initiatives taken, Albania has made
very little progress in the field, and/so research and innovation still remains one of the priority tasks of Albanian government.
In a challenging global world, Albania has now the opportunity to access innovative technologies. It has the possibility to
use the financial and non financial help of international funds, as well as the possibility of a bigger market that channels to
the increase of the quality of services and economic development.
According to the World Bank (2013), Albania has a lot to do in order to efficiently benefit from the time and place given its
strategic circumstances. The reinforcement of R&D infrastructure and public research institutions, the increase on the R&D
and innovation spending, and the investment on the human resources and education are some of the main fields where
Albania needs to improve. Albania underwent a transition period to market economy, and today it faces different challenges
in economic development. Small and medium-sized enterprises (SMEs) dominate the sector, and are the main contributors
in the country’s economic growth. According to INSTAT (2013), SMEs occupy 99. 8% of the total numbers of firms in
Albania, and they generate 81% of employment and 70% of added value. (European Commission; Enterprise and
Industry/SBA Fact Sheet 2013/ Albania)
Despite adopting international strategies and, changing much legislation and other initiatives, Albania has made very little
progress in the field of innovation. In the 2014 Global Innovation Index, Albania stands last, in the 94th place, in relation to
the position of other European and regional countries. (The Global Innovation Index 2014, the Human Factor in Innovation)
According to different studies, small firms are said to be the engines of technological and innovative change. As most major
firms in Albania are of that kind, a lot of effort must be spent to increase the research and innovation in SMEs, and to derive
from them the best and the highest productivity results.
220
The remainder of the paper is organized as follows: literature review of linking between innovation, productivity of
enterprises and economic growth; regression model and data specification for implementing of Johansen co-integration
and Granger causality method to test long-run relationship on the topic; and conclusion.
The relationship between innovation, productivity, and growth, and especially, the measurement of effects that innovative
activities have on firms’ productivity and economic growth, has been an area of great interest for researchers. Different
empirical studies, including Hall et al. (2009) on Italy, Mairesse and Mohnen (2005) on France, Janz et al. (2004) on
Germany, and Loof and Heshmati (2002) on Sweden, have shown that the effect of innovation on productivity is positive.
Hall et al. (2009), developed a structural model of innovation, where information on innovation and productivity measures
gave light to some peculiar features that innovation shows in SMEs, particularly in Italian SMEs. According to this study,
process and product innovation have a positive impact on a firm’s productivity.
In firm level studies such as Mairesse and Mohnen’s (2005) on France, Janz et al. ’s (2004) on Germany, Loof and
Heshmati’s (2002) on Sweden, the R&D effect on productivity is found to be positive. The majority of these studies depends
on the production – function approach, and includes R&D as an input to production.
The importance of SMEs in the economic development of the country as a main source of national income and as an
important area for employment and entrepreneurship is undeniable. SME’s importance in Albania is also field in some
scientific research such as, Mucollari et al. (2012) and Keskin & Senturk (2010).
According to Mucollari et al. (2012), the SMEs are the backbone of the Albania economy and have an important role in
bringing on innovative products and techniques. In the other hand Keskin & Senturk (2010), have shown the importance of
SMEs by means of SWOT analysis of SMEs sector in Albania, and by comparison of this sector with the one in Turkey.
The SMEs are very important as implementers of innovation and therefore as a catalyst for important steps toward national
development. In Albania, more needs to be met in the context of improving the national strategy, infrastructure, and
technology policies of innovation to benefit from the important source of its SMEs, which are considered the backbone of
economy. At this point, researchers and international organizations operating in Albania have focused on the importance
of concrete regulations needed to be implemented in order to reach targeted developments. Shkurti (2013), Scalera & Uruci
(2011), IDRA (2011), Bahiti & Shahini (2010), Xhepa (2006), yield gaps at various points, such as; lack of well established
national strategy and technology policies on innovation, limited resources, poor infrastructure, competing against
experienced giants, hard crisis time, etc. All researches underscore the idea that special importance should be given to
R&D strategy for innovation, as to use the financial and non financial help of international funds to increase the quality of
services and economic development of Albania.
3. Research Model and Methodology

This part is organized as follows: the regression model and data specification performed in the study; descriptive statistics
of the variables; Johansen co-integration tests; the co-integration of GDP per worker and the number of employed (the
number of created jobs) by carrying out a univariate analysis, and, lastly, the Granger causality test.
3. 1 Model and data specification

This is the regression equation model performed in this paper:
GDP per worker = α + β1EMP + ε
Where α represents the intercept, β1represents the estimated regression coefficient, and ε is the error term.
221
The dependent variable in the equation is GDP per worker , and it represents labor productivity and growth, which are measured
by a firm’s contribution to a country’s GDP growth (Praag & Versloot, 2007). Therefore, in this paper it is used as a measure
of a firm’s labor productivity in the form of a firm’s contribution to the GDP per worker.
The independent variable EMP represents the total number of employed, which is the measure of the number of created
jobs in the economy. Employment indicates that firms may contribute to the number of employment. Firm growth, is
measured by the number of jobs created (Praag & Versloot, 2007). Therefore, it is used as an indicator of the quantity of
employment created by enterprises in the economy.
The data consist of yearly data obtained from the Worldbank database (http://dataworldbank, accessed: 20 March 2015)
for Albania in 1991-2013. All tests are performed by using E Views7 statistical program.
3. 2 Descriptive statistics
The following graphs diagrammatically represent the data. Tables and figure show descriptive statistics of the data and
regression output. According to the regression output, GDP = 19326614. 5934 - 13364. 5941937*EMP is the estimated
regression model.
Graph 1. GDP per worker

GDP
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
92 94 96 98 00 02 04 06 08 10 12
Graph 2. The number of employed

EMP
1,500
1,400
1,300
1,200
1,100
1,000
900
92 94 96 98 00 02 04 06 08 10 12
222
Table 1. Descriptive statistics of variables
GDP EMP
Mean 5660672. 1022. 548

Median 5321147. 956. 3580
Maximum 8954597. 1403. 496
Minimum 2612719. 904. 4240
Std. Dev. 2219423. 127. 6608
Skewness 0. 190828 1. 302560
Kurtosis 1. 625085 4. 387640
Jarque-Bera 1. 951218 8. 349188
Probability 0. 376963 0. 015381
Sum 1. 30E+08 23518. 61
Sum Sq. Dev. 1. 08E+14 358539. 9
Observations 23 23
Table 2. Regression output

Dependent Variable: GDP
Variable Coefficient Std. Error t-Statistic Prob.
C 19326615 2499550. 7. 732038 0. 0000

EMP -13364. 59 2426. 412 -5. 507966 0. 0000
R-squared 0. 590944 Mean dependent var 5660672.

Adjusted R-squared 0. 571465 S. D. dependent var 2219423.
S. E. of regression 1452892. Akaike info criterion 31. 29895
Sum squared resid 4. 43E+13 Schwarz criterion 31. 39769
Log likelihood -357. 9379 Hannan-Quinn criter. 31. 32378
F-statistic 30. 33769 Durbin-Watson stat 0. 466510
Prob (F-statistic) 0. 000018
223
Figure 1. Histogram and statistics of variables

6
Series: Residuals
Sample 1991 2013
5 Observations 23
4 Mean -2.59e-09
Median -427736.0
Maximum 2394645.
3 Minimum -2408048.
Std. Dev. 1419488.
Skewness 0.343054
2
Kurtosis 2.028528
1 Jarque-Bera 1.355564
Probability 0.507742
0
-1999995 -999995 5 1000005 2000005
3. 3 Johansen co-integration test

The time series data display a variety of behavior. The main reason why it is important to know whether a time series is
stationary or non-stationary before one embarks on a regression analysis is that there is a danger of obtaining apparently
significant regression results from unrelated data when non-stationary series are used in regression analysis. Such
regressions are said to be spurious (Hill et al. , 2008). Before analyzing the co-integrating relationship between GDP per
worker and employment, it is important to carry out a univariate analysis. The economic series like those of GDP and
employment tend to possess unit roots. The presence of unit roots in the underlying series points towards the non-stationary
of the underlying series. If both the independent and the dependent variables show the presence of unit roots, the
regression results do not hold much meaning. This is referred to as spurious regression, whereby the results obtained
suggest that there are statistically significant relationships between the variables in the regression model. However, in fact,
all that is obtained is the evidence of contemporaneous correlation, rather than a meaningful causal relation. The problem
of spurious regression is compounded by the fact that the conventional t- and F-statistics do not have standard distributions
generated by stationary series; with non-stationary, there is a tendency to reject the null in both cases and this tendency
increases with sample size (Gül & Acıkalın, 2008). The stationary of each series was investigated by employing the unit
root tests developed by Dickey and Fuller. The test consists of regressing each series on its lagged value and lagged
difference terms. The number of lag length is based on the SIC information criterion.
Table 1. ADF unit root (level) and first differences test results of GDP variable
Null Hypothesis: GDP has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=4)
t-Statistic Prob. *
Augmented Dickey-Fuller test statistic 0. 173514 0. 9642

Test critical values: 1% level -3. 769597
224
5% level -3. 004861

10% level -2. 642242
Exogenous: Constant, Linear Trend

Augmented Dickey-Fuller test statistic -2. 910469 0. 1782
5% level -3. 632896
10% level -3. 254671
Null Hypothesis: D (GDP) has a unit root

Exogenous: Constant

5% level -3. 012363
10% level -2. 646119
Null Hypothesis: D (GDP) has a unit root

t-Statistic Prob. *

5% level -3. 644963
10% level -3. 261452
*MacKinnon (1996) one-sided p-values.
Tables 1 and 2 reports the Augmented Dickey–Fuller (ADF) test statistics under the null hypothesis of a unit root (level)
and first differences of variables of GDP and EMP. This table also presents the number of lag lenghth included in the
regression. The hypothesis of unit root against the stationary alternative is not rejected at all levels for GDP per worker
variable with constant and linear trend. The ADF test of GDP per worker variable gives the unit root at all levels. Therefore,
first differences of that variable are taken and it is shown that GDP per worker data are stationary now. Hence, it has been
concluded that these variables are integrated of order 1. Also, the ADF test results of the
EMP variable gives unit root at 1% level with constant and linear trend, and taking first differences that variable is stationary
and integreted of order 1.
225
Table 2. ADF unit root (level) and first differences test results of EMP variable
Null Hypothesis: EMP has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=4)
t-Statistic Prob. *

5% level -3. 004861
10% level -2. 642242
Null Hypothesis: EMP has a unit root

t-Statistic Prob. *

5% level -3. 632896
10% level -3. 254671
Null Hypothesis: D (EMP) has a unit root

Exogenous: Constant
t-Statistic Prob. *

5% level -3. 012363
10% level -2. 646119
Null Hypothesis: D (EMP) has a unit root

t-Statistic Prob. *
226

5% level -3. 644963
10% level -3. 261452
*MacKinnon (1996) one-sided p-values.
On the basis of the above-mentioned unit root tests, the Johansen’s co-integration test was performed to see whether any
combinations of the variables are co-integrated. Johansen (1988), and Johansen and Juselius (1990) have identified co-
integration analysis. This approach uses a maximum likelihood procedure that tests for the number of co-integration
relationships and estimates the parameters of those co-integrating relationship.
LR test statistics and critical values are shown in Table 3. The results of both trace and max-eigen value tests suggest that
there is no long-run co-integrating relationship between variables at the 5% significance level. In other words, a long-run
stable relationship between variables does not exist.
Table 3. Johansen co-integration test results
Unrestricted Cointegration Rank Test (Trace)
Hypothesi
zed Trace 0. 05
No. of CE
(s) Eigenvalue Statistic Critical Value Prob. *
None 0. 350326 9. 892522 15. 49471 0. 2891

At most 1 0. 039007 0. 835551 3. 841466 0. 3607
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesi
zed Max-Eigen 0. 05
No. of CE
(s) Eigenvalue Statistic Critical Value Prob. *
None 0. 350326 9. 056971 14. 26460 0. 2814

At most 1 0. 039007 0. 835551 3. 841466 0. 3607
*MacKinnon-Haug-Michelis (1999) p-values
227
3. 4 Granger causality test

Table 4 presents the results of Granger causality test. The results of the co-integration test have been confirmed by the
Granger causality test results. Because the P values are greater than 0. 05, both “EMP does not Granger Cause GDP” and
“GDP does not Granger Cause EMP ” are accepted. Therefore, the pair wise Granger causality test confirms the result of
the Johansen co-integration test results of no co-integration between variables in Albania in the long run.
Table 4. Pairwise Granger Causality Tests Results
Null Hypothesis: Obs F-Statistic Prob.
EMP does not Granger Cause GDP 21 1. 09638 0. 3579

GDP does not Granger Cause EMP 0. 83397 0. 4523
4. Conclusion and recommendations

This paper empirically analyzes the co-integration of the long-run relationship between GDP per worker as measure of
labor productivity levels of enterprises and the number of employed as a measure of jobs created by enterprises in Albanian
growth. Since one of the variables is non-stationary and presents unit root, Johansen’s co-integration method has been
applied. This methodology has allowed for obtaining of a long-run co-integrating relationship among these variables. The
co-integration results provide evidence of a no co-integrated vector. This indicates that the GDP per worker and the number
of employed does not move together in the long run. Labor productivity is the main source of increases in GDP per worker
in Albanian growth. But labor productivity levels of enterprises are not enough for sustainable long-term economic growth
in Albania. Therefore, enterprises must exhibit more innovative behaviors and productivity strategies by using efficient
production technology-physical capital and human capital-skilled labor force to create enough number of jobs for higher
and rapid growth. In the long-term it can be seen that sustainable economic growth generates higher GDP per worker and
the number of created jobs at the same time.
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229
Progressive Income Taxation and Economic Growth with Endogenous Labor Supply and
Public Good
Wei-Bin Zhang
Ritsumeikan Asia Pacific University, Japan
Jumonjibaru, Beppu-Shi, Oita-ken、874-8577 Japan
(Home Tel: 0977-73-9787; Office Tel: 0977-78-1020; Fax: 0977-78-1123;
wbz1@apu.ac.jp
Abstract
This study builds an economic growth model of gender division labor, endogenous labor supply with nonlinear progressive income taxation.
The tax income is spent on supplying public goods. The economic system consists of one production sector and one public sector. The public
sector is financially supported by tax incomes. The model describes dynamic interactions of growth and gender division of labor with
progressive income taxation. We simulate the model to demonstrate existence of equilibrium and motion of the dynamic system. We also
examine effects of changes in different parameters on the motion of the economic system.
Keywords: progressive income taxation; economic growth; endogenous labor supply; public good
1. Introduction
To understand modern economies it is important to study dynamic interdependence between economic growth and public
investment (Barro, 1990; and Turnovsky, 2000, 2004). Public policies have important implications for private consumption,
saving, capital formation and production. The purpose of this study is to study the dynamic relationship between government’s
spending and private consumption within a dynamic general equilibrium framework. We study a neoclassical growth model “with
two prevalent features observed in developed economies: progressive income taxation together with utility-generating public
spending”, Chen and Guo (2014: 174). Nevertheless, different from the traditional models with the Ramsey utility (e.g., Barro
and Sala-i-Martin, 1992; Futagami et al., 1993; Glomm and Ravikumar, 1994, 1997; Agénor, 2011; Baier and Glomm, 2001;
Palivos et al., 2003; Greiner, 2007; Hu et al., 2008; Kamiguchi and Tamai, 2011; and Chen and Guo, 2013, 2014), this
study applies Zhang’s utility function (Zhang, 1993). We show that the dynamic model with Zhang’s approach has a stable
equilibrium point, implying that one can effectively conduct comparative dynamic analysis.
We examine a dynamic interdependence between labor supply and economic growth with nonlinear progressive income taxation.
The tax income is spent on supplying public goods. We introduce gender and public goods into the neoclassical growth theory.
Although gender differences have long been taken into account in economic analysis at the microeconomic level, it is only recently
that gender issues have been examined in macroeconomic analytical frameworks. Stotsky (2006) identifies a number of
phenomena related to gender differences and economic behavior: (1) gender-based differences can influence macroeconomic
variables, such as aggregate consumption, savings; (2) these differences may also affect the behavior of governments; (3)
women tend to devote a larger share of household resources to the households’ basic needs and the children’s fostering; (4)
women tend to have a higher propensity to save and to invest in productive activities and show greater caution in saving and
investing; (5) women’s lack of education and other economic and social opportunities, both absolutely and relative to men, inhibits
economic growth. Although there have been a number of attempts to modify neoclassical consumer theory to deal with economic
issues about endogenous labor supply, family structure, working hours and the valuation of traveling time with endogenous
sexual division of labor and consumption (Becker, 1976; Gomme et al., 2001; Campbell and Ludvigson, 2001; Gutierrez, 2003;
Tassel, 2004; Stotsky, 2006), economics still needs proper analytical frameworks to deal with gender division of labor and
economic growth theory with capital accumulation, public goods and different fiscal policies. As gender differences are interactive
with economic growth and government fiscal policies affect economic growth and households’ behavior, it is reasonable to
230
assume that gender differences in behavior that result from the private decision or are affected by public policies should lead to
different outcomes in economic growth. But Stotsky (2006) observes that there are few formal models which take account of
impact of fiscal policies on gender differences. This study attempts to make a contribution by proposing a formal growth model
of describing dynamic effects of progressive income taxation on economic growth and gender division of labor. In examining
behavior of the model, our attention is focused on the numerical simulations of a calibrated economy. Simulation enables us to
see movements of different variables during lengthy transition periods. We highlight the dynamic effects of fiscal policy and the
tradeoffs these involve for economic performance.
This study is conducted in an analytical framework for small open economies. There is a large number of the literature on
economics of open economies (e.g., Obstfeld and Rogoff, 1996; Lane, 2001; Kollmann, 2001, 2002; Benigno and Benigno,
2003; Galí and Monacelli, 2005; Uya, et al. 2013; and Ilzetzki, et al. 2013). We follow this tradition in dealing with dynamic
interdependence between economic growth, public goods, and progressive income taxation. Rather than following the main
frameworks in modeling household behavior in economic growth theory with wealth accumulation, we use Zhang’s utility function
to deal with behavior of the households. It is well known that the Solow model is the starting point for almost all analyses of
economic growth (Solow, 1956). The Solow model does not provide a mechanism of endogenous savings. Another important
approach to the household behavior is the representative agent growth model with Ramsey’s utility function (Ramsey, 1928;
Cass, 1965; Koopmans, 1965). One of the problems of this approach is that it makes the analysis intractable even for a simple
economic growth problem. Another approach in economic modeling is the so-called OLG approach (Diamond, 1965, Samuelson,
1959). The approach is a discrete version of the continuous Ramsey approach (Azaridias, 1993). This study will model behavior
of households with an alternative approach proposed by Zhang in the early 1990s (Zhang, 1993). This study is an extension of
the growth models with public goods proposed by Zhang (2010, 2014). In Zhang’s models, all the tax rates are fixed. This study
makes taxation on the household’s income an endogenous variable. This paper is organized as follows. Section 2 introduces the
basic model with wealth accumulation, gender division of labor, externalities, public goods, and congestion. Section 3 examines
dynamic properties of the model. Section 4 simulates the motion of the economic system and demonstrates effects of changes
in some parameters on the economic system. Section 5 concludes the study.
2. The basic model

This section develops a small-open three-sector growth model with endogenous wealth and public goods. We consider that the
open economy can import goods and borrow resources from the rest of the world or exports goods and lend resources abroad.
There is a single good, called industrial good, in the world economy and the price of the industrial good is unity. The rate of
interest, r* , is fixed in international market. Capital depreciates at a constant exponential rate,  k . The economy has one
production sector and one public goods sector (Zhang, 2010). Most aspects of the production sector are similar to the standard
one-sector growth model (Burmeister and Dobell, 1970; Barro and Sala-i-Martin, 1995). The population is constant and
homogenous; each worker is employed in either of the two sectors. Households own assets of the economy and distribute
their incomes to consume and save. Production sectors or firms use labor and capital inputs to produce goods. Exchanges take
place in perfectly competitive markets. Factor markets work well and factors are fully utilized at every moment. Saving is
undertaken only by households. Labor force and capital stock are distributed between the two sectors. Household activities are
conducted within houses as well as outside doors. For simplicity, we assume that the country has N 0 identical families. Each
family consists of four members - father, mother, son and daughter. The total population of the country is equal to 4 N 0 . It
can be seen that on the basis of the literature of growth models with endogenous fertility (for instance, Barro and Becker,
1989; Raut, 1992; Conde-Ruiz et al., 2010; Zhang, 2015), it is possible to generalize our model to take account of
endogenous fertility. It is assumed that only the adults work. The children get educated before they get married and join the
labor market. We assume that the husband and wife pass away at the same time. When the parents pass away, the son and the
daughter respectively find their marriage partner and get married. The properties left by the parents are shared equally among
the male and female children. The children are educated so that they have the same human capital as their parents. When a
new family is formed, the young couple joins the labor market and has two children. As all the families are identical, the family
structure is invariant over time under these assumptions. Let subscripts j = 1 and j = 2 stand for man and woman
231
respectively. Let T j (t ) stand for the work time of a representative household of gender j and N (t ) for the flow of labor
services used at time t for production. We have N (t ) as follows
2
N (t ) =  h j N 0T j (t ),
j =1
N (t ) = N 0 T (t ),
~
where hj is the level of human capital of gender j . We assume hj to be fixed. We also have
T (t )  h j T j (t ).
~

2
where
j =1
The production sector

We specify the production function of the production sector as follows
F (t ) = A Kii (t ) Nii (t ),  i + i = 1,  i , i  0 ,
where  i and  i are parameters. Like Chen and Guo (2014), we omit possible effects of public goods on productivity. The
marginal conditions
 i F (t )  F (t )
r* = -  k , w(t ) = i , w j (t ) = h j w(t ), (1)
K i (t ) N i (t )
where r * is the rate of interest fixed in the international market, w j (t ) is the wage rate per unit of time for gender j.
From (1), we have w1 (t ) / w2 (t ) = h1 / h2 . This relation is a consequence of assumption that there is no gender
discrimination in the sense that any one is paid per unit of time according to one’s work efficiency. In reality, this is a strict
requirement as there is gender discrimination in labor markets (Beneria, 1995, 1999; Banerjee, 2008; Booth, 2009; Dong and
Zhang, 2009).
The disposable income and budget constraint
Let k (t ) stand for the capital stock owned by a household. To explain our approach to consumer behaviour, we notice that
when there is no taxation on the household’s current income the household income from the interest payment and the wage
payments is
y0 (t ) = r * k (t ) + w1 (t )T1 (t ) + w2 (t )T2 (t ). (2)
In the studies by Guo and Lansing (1998) and Chen and Guo (2014), the income tax rate  (t ) is taken on the following form
a
 y* 
 (t ) = 1 -  0   ,
 y0 (t ) 
232
where y* is the steady-state level of per capita income, which is taken as given by each household. In our study we don’t require
a given y . We introduce the progressive tax rate  h (t ) as a function of y0 (t ) as follows
*
 h (t ) =  0 +  1 y0a (t ), 1   0 , a  0 ,  1  0 . (3)
In the case of a  0 the tax rate is increased as the per capita income is increased. The tax schedule is said to be progressive.
In the case of a = 0 the tax schedule is called flat. Many studies assume a constant tax rate of income or a flat consumption
tax (e.g., Cazzavillan, 1996; Zhang, 2000; Raurich, 2003; Fernández et al. 2004; Chen, 2006; Guo and Harrison, 2008). We also
mention that Lloyd-Braga et al. (2008) introduce progressive consumption taxation. A more general approach should take
account all possible types of taxation. For simplicity of analysis, this study is focused on progressive income taxation. The
representative household’s current income y (t ) with the given tax rate is
y (t ) =  h (t ) y0 (t ) , (4)
where  h (t ) = 1 -  h (t ). We neglect the possibility that man and woman may be subject to different tax policies. The total
value of wealth that a representative household can sell to purchase goods and to save is k (t ).
We assume that selling and
buying wealth can be conducted instantaneously without any transaction cost. The per household disposable income of the
household is defined as the sum of the current income and the wealth available for purchasing consumption goods and saving
yˆ (t ) = y(t ) + k (t ).
The disposable income is used for saving and consumption. At each point in time, the household would distribute the total
available budget between savings s(t ) and consumption of goods c(t ). The budget constraint is given by
c(t ) + s(t ) = y
ˆ (t ).
This equation means that consumption and savings exhaust the consumers’ disposable income. Denote T j (t ) the leisure time
at time t and the (fixed) available time for work and leisure by T0 . The time constraint is expressed by
T j (t ) + T j (t ) = T0 , j = 1, 2 .
Substituting this time constraint into the disposable income yields
yˆ (t ) = y (t ) -  h (t ) w1 (t )T1(t ) -  h (t ) w2 (t )T2 (t ), (5)
where
y (t ) = k (t ) +  h (t ) r * k (t ) +  h (t ) w1 (t )T0 +  h (t ) w2 (t )T0 .
Substituting (5) into the budget constraint yields
 h (t ) w1 (t )T1 (t ) +  h (t ) w2 (t )T2 (t ) + c(t ) + s(t ) = y (t ). (6)
233
The utility function

At each point in time, the representative household decides the three variables subject to the budget constraint. We assume that
utility level U (t ) is dependent on the leisure times, the consumption level of commodity, and savings as follows
U (t ) = u (G(t ), t )T1 01 (t ) T2 02 (t )c  0 (t ) s 0 (t ),  01 ,  02 ,  0 , 0  0 ,

where u is a time-dependent variable,  01 ,  02 ,  0 and 0 are called respectively the husband’s and wife’s propensities
to stay at home, the family’s propensities to consume good and to hold wealth. For simplicity, we specify the utility function with
the Cobb-Douglas form. A detailed explanation of the approach and its applications to different dynamic problems are provided
in Zhang (2009).
The household’s optimal behaviour
Maximizing U j subject to budget constraint (5) yields
 h (t ) w1 (t )T1 (t ) =  1 y (t ),  h (t ) w2 (t )T2 (t ) =  2 y (t ), c(t ) =  y (t ),

(7)
s(t ) =  y (t ),
where
1
 ,  1    01 ,  2    02 ,     0 ,    0 .
 01 +  02 +  0 + 0
From (4), we have
T1 (t )  1 w2 (t )
= .
T2 (t )  2 w1 (t )
We see that the ratio of time at home between man and woman is positively related to the ratio of man’s and woman’s propensity
to stay at home and negatively related to the ratio of man’s and woman’s wage rates. Some studies examine interdependence
between growth and time allocation in the literature of economic development, predicting reallocation of labor from households
to the market in association of economic growth (for instance, Becker, 1965; Goodfriend and McDermott, 1995; Kelly, 1997;
Edmonds and Pavcnik, 2006; and Ferber and Green, 2007). There is an immense body of empirical and theoretical literature on
economic growth with time distribution between home and non-home economic and leisure activities (e.g., Greenwood and
Hercowitz, 1991; Benhabib and Perli, 1994; Ladrón-de-Guevara et al. 1997; Rupert et al. 2001; Cambell and Ludvigson,
2001; Vendrik, 2003; and Chesters et al. 2009). This study shows how the progressive taxation policy affects the gender
division of labor and leisure.
The wealth accumulation
According to the definitions of s (t ) and k (t ), the change in the household’s wealth is given by
k (t ) = s(t ) - k (t ). (8)
This equation simply means that change in the wealth is equal to saving minus dissaving.
The public sector
234
We now describe the public sector. In this model, we assume that the public sector is financially supported by the
government’s tax income. The capital stocks and workers employed by the public sector are paid at the same rates that
the private sector pays the services of these factors. The public sector has income as follows
 
I p (t ) = r * k (t ) + w1 (t )T1 (t ) + w2 (t )T2 (t )  h (t ) N 0 . (9)
We assume that the public sector supplies public goods by utilizing capital, K p (t ), and labor force, N p (t ), as
follows
G(t ) = Ap K p p (t )N p p (t ), Ap ,  p ,  p  0 ,  p +  p = 1.
 
For the given tax rates, the public sector is faced with the budget constraint
( )
w(t ) N p (t ) + r * +  k K p (t ) = I p (t ). (10)
The government may have various objectives in providing public services. In this study it is assumed that public sector
behaves effectively in the sense that it will use the available resource to maximize public services. Maximizing public
services under the budget constraint yields
 p N p (t ) r * +  k
= . (11)
 p K p (t ) w
The factors are fully employed
Ki (t ) + K p (t ) = K (t ), Ni (t ) + N p (t ) = N (t ). (12)
We thus built the model with progressive income taxation. In the rest of the paper, we will examine properties of the model
and see how changes in different parameters will affect the economic system.
3. The behavior of the model

This section studies dynamics of the model. First, we show that the motion of the entire economic system can be described
by a differential equation with the tax rate as the variable. The following lemma is checked in the Appendix.
Lemma
The dynamics of the economic system is governed by the following one differential equation with the tax rate as the variable
h (t ) = ( h (t )), (13)
where  (t ) is a function of  h (t ) defined in the appendix. The values of all the other variables are uniquely determined as
functions of  h (t ) at any point in time by the following procedure: N p (t ) by (A5) → K p (t ) by (A1) →
I p (t ) = w N p (t ) /  p → w by (A8) → k (t ) by (A8) → K (t ) = k (t ) N 0 → N (t ) by (A6) → K i (t )
235
by (A9) → N i (t ) by (A9) → y 0 (t ) by (A7) → T j (t ) by (A5) → T j (t ) by (A5) → y (t ) by (A4) → F (t ) by (A2)
→ K (t ) by (A4) → G (t ) by the definition → c(t ) and s (t ) by (A7) → w j by (1).

As the expressions are tedious, it is difficult to interpret the analytical results. For illustration, we simulate the model to demonstrate
dynamic properties of the model. We specify the parameter values as follows
r * = 0.05 ,  i = 0.32 ,  p = 0.4 , A = 1.5 , Ap = 0.9 , N 0 = 100 ,

h1 = 3 , h2 = 2.6 , T0 = 12 ,  0 = 0.15 , 0 = 0.8 ,  01 = 0.1, (14)
 02 = 0.15 ,  0 = 0.03 ,  1 = 0.2, a = 0.2 ,  k = 0.08 .
The rate of interest is 0.05 . Man’s propensity to stay at home is lower than woman’s propensity to stay at home. Man’s human
capital is higher than woman. The total productivities of the two sectors are specified at 1.5 and 0.9 , respectively. Although
the specified values are not based on empirical observations, the choice does not seem to be unrealistic. For instance, some
empirical studies on the US economy demonstrate that the value of the parameter,  , in the Cobb-Douglas production is
approximately equal to 0.3 (for instance, Miles and Scott, 2005, Abel et al, 2007). With regard to the technological parameters,
what are important in our study are their relative values. This is similarly true for the specified preference parameters. With the
initial conditions, h  (0) = 0.24 ,

the changes of the variables over time are plotted in Figure 1. As shown in the appendix,
the wage rates of the man and woman are determined as functions of the rate of interest. The tax rate rises over time, which
implies that the current income before tax is rising. Both man and woman reduce their working hours. The consumption level and
wealth rise. The production levels of the two sectors are reduced over time. The trade balance is improved. The nation uses less
capital and holds more wealth,
18 000 450 0.256 650
E0 h Ip
17 000 540 0.249 530
16 000 K 0.242 Np
t 630 410
t t t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
6700 16 100 710

2320
K
695
6100 2170 14 950
Fi Ni Ki Fp
680
5500 2020 t
13 800 t t
t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
2030 66 6.8 12.5

k T1 c
1980 61 4.4 11.6
Kp
56 T2
1930
t 2 t 10.7 t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
t
Figure 1. The Motion of the Dynamic System

The equilibrium values of the variables are given as follows
236
w1 = 5.66 , w2 = 4.9 , N = 2409.3 , K = 15649.7 , K = 6679.3 ,

E0 = - 448.5 ,  h = 0.257 , I p = 624 , Fi = 5577.7 , Fp = 672.6 ,
N i = 2010.9 , N p = 398.4 , K i = 13729.6 , K p = 1920.1, k = 66.8 ,
T1 = 6.25 , T2 = 2.05 , c = 12.5 .
The eigenvalue is - 0.224 . The equilibrium point is stable. This result is important as it allows us to effectively conduct
comparative dynamic analysis.
4. Comparative dynamic analysis

We now examine impact of changes in some parameters on the national economy. As we explicitly provided the procedure to
simulate the motion, it is straightforward to make comparative dynamic analysis.
A fall in the rate of interest in the global market
First, we examine the case that the rate of interest is reduced as follows: r * : 0.05  0.04 . The simulation results are
plotted in Figure 2. In the plots, a symbol  stands for the change rate of the variable in percentage due to changes in the
parameter value. As the capital cost falls in the global market, the wage rates are increased as follows
 w1 =  w2 = 3.84 .
Both the husband and wife work less hours initially and work more hours in the long term. The tax rate and tax income fall. The
household accumulates more wealth and consume more initially, but accumulates less wealth and consume less in the long
term. The national economy employs less foreign capital initially but more in the long term.
30 280 0 6  Fi
10 20 30
 h t
140 Ip 10 20 30
10
K  E0 9 7
t t
10 20 30 0 t
10 10 20 30 18 20
K
9 13
3 15  Fp  Np
t  Ki
10 20 30
13 17
9  Ni 2
t
10 20 30
17 21
11 t
21 t
0 10 20 30 0 10 20 30
2 30 20
0  T1 t
 Kp 10 20 30
6.5 c
10 k 25 5
 T2
t t
11 10 20 30
t 10 20 30 50
0 10 20 30 10 10
Figure 2. A Fall in the Rate of Interest

A rise in woman’s human capital
We now increase woman’s human capital as follows: h2 : 2.6  2.8 . The simulation results are plotted in Figure 3.
Man’s wage rate is not affected and the woman’s wage rate is increased as follows
 w1 = 0 ,  w2 = 7.69 .
237
The wife works more hours and the husband works less. The tax rate is increased and the government gets more income. The
two sectors’ output levels and input factors are increased. The nation employs more capital and the nation has more wealth. The
trade balance is improved.
5 11 5 5.5
K
Ip
3.5 28  E0 2.5 4.5
K  h  Fi
2 3.5
t
45 t 0 t
t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
5.5 5.5 5.3 5.3
4.5 4.5 5  Fp 5
 Ni  Np
 Ki
3.5 3.5 4.7 4.7
t t t
0 10 20 30 t 0 10 20 30 0 10 20 30 0 10 20 30
5.3 4.5 17 4.5
k  T2
c
5 3.5
 Kp 8
2.2
1.9 2.5
4.7 1  T1 t t
t t
0 10 20 30 0 10 20 30 10 20 30 0 10 20 30
Figure 3. A Rise in Woman’s Human Capital
The man’s propensity to say at home being enhanced
We now increase woman’s human capital as follows:  01 : 0.1  0.12 . The simulation results are plotted in Figure
4. The wage rates are not affected. As the man tends to have stronger preference for staying at home, the man’s working hours
is reduced and the woman’s working hours is augmented. The tax rate and tax income fall. The two sectors’ output levels and
input factors are lowered. The nation employs less capital and the nation has less wealth. The trade balance is improved. The
household consumes less and has less wealth. Accordingly, the tendency for the man to stay longer hours without change in
other variables such as human capital will worsen living conditions and lower national economic performance. It should be noted
that many gender studies on development and gender division of labor tend to be focused on the strong increase in married
women’s labour force participation. Except well-noted reasons such as financial factors as well as demographic and socio-
economic variables, another important factor is due to the change in household norm (which traditionally means that for a
married couple living together according to the traditional life style, the husband earns the family income in the formal
market, whereas the wife take care of household and the children, and hence is not involved in paid work). Vendrik (2003)
shows that the traditional household norm seems to have dominated in many OECD countries up to the 1960s, but have
been changed rapidly since then.
238
0 80 0
t 5
10 20 30 10 20 30
t
 Fi
50  h
4 K  E0 4 7
20 Ip 9
8 t t
K 0 10 20 30
8
0 10 20 30
5 5 7.4  F 7.4
 Np
p
 Ni  Ki
7 7 8 8
9 9 8.6 8.6
t t t t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
7.4 0 22 2
t
 T2
 Kp 10 20 30
8 4.5
3.5 5 c
t
8.6 k 10 20 30
t 7 12
 T1 7
t
0 10 20 30 0 10 20 30
Figure 4. The Man’s Propensity to Say at Home Being Enhanced
The income taxation being more progressive

We now consider the case that the taxation is more progressive as follows: a : 0.2  0.25 . The simulation results
are plotted in Figure 5. The wage rates are not affected. The tax rate and tax income are increased. The public sector’s output
level and two inputs are augmented. Both the consumption level and wealth are lowered initially and enhanced in the long term.
The man works longer hours initially and works almost the same hours in the long term. The woman works longer hours initially
and works less hours in the long term. The trade balance is initially deteriorated and improved in the long term. The public sector’s
output level and two inputs are augmented initially and are reduced in the long term. The nation employs more capital initially
and less in the long term.
5 20 5 I
p 2
K  E0  h  Fi
0 2.5
1.5 t 0.5
K 10 20 30
t
t
10 20 30 0 10 20 30
20 t
2 1
0 10 20 30
5 5
2 2  Np
 Fp
 Ni
 Ki 3.5 3.5
0.5 0.5
t t
10 20 30 10 20 30 2 2
1 1 t t
0 10 20 30 0 10 20 30
5 5 5 5
 Kp
 T2
c
3.5 k 2.5
1.5 2
 T1
t
2 t 10 20 30 0 t t
0 10 20 30 2 10 20 30 1 10 20 30
Figure 5. The Income Taxation Being More Progressive
239
The tax rate function’s constant part being increased
We now increase the tax rate function’s constant part as follows: 0  : 0.03  0.04 .
The simulation results are plotted
in Figure 6. Comparing Figures 5 and 6, we see that the effects of making the taxation more progressive are qualitatively similar
to the effects in this case.
10 8 10
20
 h
t
K K
10 20 30
5
0 t 50  E0 4 Ip  Fi
10 20 30
0 t 0 t
10 120
0 10 20 30 10 20 30
10 10 9 9
5 5 7.5  Fp 7.5
 Np
 Ni  Ki
0 0 6 6
t t t
10 20 30 10 20 30 0 10 20 30t 0 10 20 30
9 20 6
5 c
7.5 k  T2
 Kp t 10 0
2.5 10 20 30 t
10 20 30
6 0  T1 t
t 10 6
0 10 20 30 10 20 30
Figure 6. The Tax Rate Function’s Constant Part Being Increased
A rise in the propensity to save
We now consider the case that the household increases the propensity to save as follows: 0 : 0.8  0.81. The
simulation results are plotted in Figure 7. The wage rates are not affected. The tax rate and tax income are increased. The public
sector’s output level and two inputs are augmented. The wealth is increased. The consumption level is lowered initially and
enhanced in the long term. The man works longer hours initially and works almost the same hours in the long term. The woman
works longer hours initially and works less hours in the long term. The trade balance is initially deteriorated and improved in the
long term. The industrial sector’s output level and two inputs are augmented initially and are reduced in the long term. The nation
employs more capital initially and less in the long term.
240
1.8 1. 1.2
6
Ip
K
0.9 t 0.5
2 0.5
 E0 10 20 30
 h  Fi
K
0 0 t
t 10 t 0.2 10 20 30
10 20 30 0 10 20 30
1.2 1.2 1.1 1.1
0.9  Fp 0.9
0.5 0.5  Np
 Ni  Ki 0.7 0.7
t t
0.2 10 20 30 0.2 10 20 30 t t
0 10 20 30 0 10 20 30
1.1 1.7 2.5

0.6
k c
0.9 0.9 1.4  T2
 Kp t
10 20 30
0.7 0.3
0.1  T1
t t t 0.8
0 10 20 30 10 20 30 10 20 30
Figure 7. A Rise in the Propensity to Save
The total factor productivity being enhanced

We now consider the case that the total factor productivity is enhanced as follows: A : 1.5  1.6 . The simulation
results are plotted in Figure 8. The wage rates are increased. The tax rate and tax income are increased. The public sector’s
output level and two inputs are augmented. Both the consumption level and wealth are enhanced. Both man and woman work
longer hours initially and work almost the same hours in the long term. The trade balance is deteriorated. The industrial sector’s
output level and capital input are augmented. The nation employs more capital.
14 40 14 14
Ip
10 K  E0 12
80 7
K  Fi
 h 10
6
t 120 t 0 t t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
4 14 7.8 3.8
12 7.3 3.25
2  Fp
 Ni  Np
 Ki 6.8
10 2.7
0 t t t t
10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
14 12 8 12
k c
13.5 9  T2
4 9.5
 Kp  T1
13 6
0 7
t t t t
0 10 20 30 0 10 20 30 10 20 30 0 10 20 30
Figure 8. The Total Factor Productivity Being Enhanced
241
The total population being increased

The standard one-sector neoclassical growth model predicts that change in the population has no impact on per capita
consumption and wealth. As the taxation is progressive in our model, our model predicts different reaction to change in the
population. We now allow the population to be increased as follows: N : 100  105 . The simulation results are
plotted in Figure 9. The wage rates are not affected. The work hours are increased initially and are affected slightly in the long
term. The tax rate and tax income are increased. The public sector’s output level and two inputs are augmented. Both the
consumption level and wealth are enhanced. The trade balance is improved. The industrial sector’s output level and capital input
are augmented. The nation employs more capital.
7 20 7 7.6
K
 E0 Ip
5 40 4 6.3
K
3 1  h  Fi
60 5
t t t
t
0 10 20 30 10 20 30 0 10 20 30 0 10 20 30
7.6 7.6 7.2 7.2
6.3 6.3 6.7 6.7

 Ki  Np
 Fp
 Ni 6.2 6.2
5 5
t t t t
0 10 20 30 0 10 20 30 0 10 20 30 0 10 20 30
7.2 1 5 1
6.7 k t c
10 20 30 2.5  T2 t
 Kp 0.8 0.3 10 20 30
6.2  T1
t 0 t
0 10 20 30 2.6 10 20 30 1.6
Figure 9. A Rice in the Population
5. Concluding remarks
This study developed a dynamic economic growth model of public goods and gender division of labor with progressive income
taxation. The tax income is spent on supplying public goods. The economic system consists of one production sector and one
public sector. The public sector is financially supported by tax incomes. The model describes dynamic interactions of growth and
gender with progressive income taxation. We simulated the model to demonstrate existence of equilibrium and motion of the
dynamic system. We also examined the effects of changes in different parameters on the motion of the economic system. The
model can be extended in multiple directions. For instance, it is straightforward to extend the model to multiple countries or/and
multiple types of households. To focus on the role of progressive income taxation, this study only analyzes a homogeneous
progressive taxation policy without taking account of possible taxation differences between gender and taxation on consumption
and production. Our model is still limited to the neoclassical view of gender performance without taking account of
institutional changes. Another important direction for future research is to explain the so-called glass ceilling effect. The
term, introduced by Albrecht et al. (2003), refers to the phenomenon that the gender pay gap is increasing across the wage
distribution and accelerating in the upper tail.
242
Appendix: Proving Lemma

From (1) and (11) we have
r* +  k Ni Np
z = = , (A1)
w i Ki  p K p
where  j   j /  j , j = i , p . From (A1) and the specified form of the production function
F = A  i i K i z i . (A2)
From (1) and (A2), we have

1/  i
 r* + k  1 A
z =   , w = wi , (A3)
 A i  i z
where Aw  A i / ii . Insert (A3) in the definition of y
( )
y = 1 + r *  h k + ~  h , (A4)
where ~  (h1 + h2 ) w T0 . Insert (7) in T j + T j = T0

~
Tj =  j -
(
1 + r *  h ~ j k
,
) (A5)
h
where we use (A4) and
~ j
~ j  T0 - , ~ j  .
hj w hj w
From (A5) we have the labor force as
N =h-
(1 + r  )~ k ,
*
h
(A6)
h
where
h  h1 
~ + h 
1 2
~ , 
2
~ 
~ +
1
~ .
2
From (2) and (A5)
y0 = r * k +
wN  *
= r -
(
1 + r *  h w~  wh )
k + . (A7)
N0   h N0  N0
243
From (A7) and (3) we have
  -  1/ a
k =  h 0
 -
wh  *
 r -
1 + r *  h w ~ 
-1
( ) (A8)
 .
  1  N0  

 h N0 
Insert (A1) in (12)
N
i Ki +  p K p = . (A9)
z
Insert w N p =  p I p in (9)
(
N p = r* k N0 + w N )  wp h
. (A10)
We can see that the variables can be expressed as functions of h . as follows: N p by (A5) → K p by (A1) →
I p = w N p /  p → z by (A8) → w by (A8) → k by (A8) → K = k N0 → N by (A6) → K i by (A9) → N i
by (A9) → y0 by (A7) → T j by (A5) → T j by (A5) → y by (A4) → F by (A2) → K by (A4) → G by the definition
→ c and s by (A7) → w j by (1). We express
k = ( h ). (A11)
Taking derivatives of (A11) with respect to t yields

k = h . (A12)
 h
From (8) we have
k =  0 ( h )  s -  . (A13)
From (A12) and (A13), we solve

-1
  
h =  ( h )   0   . (A14)
  h 
We thus proved the lemma.
244
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247
Comparison of Economic Performance of Three Trade Free Zones in Iran (Kish, Gheshm,
Chabahar)
Ezzatollah Asgharizadeh
Associated Professor of Dept. of Industrial Management, University of Tehran, Tehran,
Iran, asghari@ut.ac.ir
Mehdi Ajalli
Corresponding Author: Ph.D Candidate of Industrial Management, University of Tehran, Tehran,
Iran, mehdiajalli2010@gmail.com
Mansoor Momeni
Professor of Dept. of Industrial Management, University of Tehran, Tehran, Iran, mmomeni@ut.ac.ir
Abstract
Free zones (Export Processing Regions) with their special Functions including assisting export development and making new
job opportunities can be of major help to economy of countries. Present paper aims at comparing economic performance of
three free trade zones of Iran, Kish, Gheshm and Chabahar during first ten years of their activities (1973 to 2004) using four
techniques of operational research, SAW (Simple Additive Weighting), TOPSIS (Technique for Order-Preference by Similarity
to Ideal Solution), ELECTEER (Elimination et Choice Translating Reading) and Taxonomy and taking economic goals of these
zones as indices. To this end, economic goals of these zones, that is attracting foreign and internal investment, making new
job opportunities, enhancing value of export from these zones and their ability to attract internal and foreign tourists were
considered as research indices. Results obtained showed that free zone of Gheshm had a better performance compared to
two other zones and this is due to significant difference of its export value compared to other zones, with regard to the available
statistics and the said indices. Kish and Chabahar respectively followed it.
Keywords: Performance assessment, free trade zone, Kish, Gheshm, Chabahar, SAW, ELECTRE، TOPSIS, TAXONOMY
1. Problem statement
In today’s world and considering rapidly increasing trend of globalization and elimination of economic borders between
countries and intense competition among multinational companies and governments supporting them, it can be inferred
that power of communities is in fact dependent to their economic power and political efforts are in fact headed towards
economic goals, enhancement of well-being and wealth of their people. After Iran joined World trade organization and
opened its borders to imported goods, not attending international trade arena in full power through making correct economic
decisions and reliance on internal resources and production power and using privileges paves the way for final self-
destruction. To this end and to facilitate export of different kinds of products produced inside the country and importing
capital goods required for internal production, government of Islamic republic of Iran started establishing the three said free
trade zones in early 90s to take necessary steps as to achieving the set goals. After ten years and after efficiency and
effectiveness of the established zones became clear and after feeling need to have new zones, plans for establishing three
new free trade zones (Arvand, Aras, Anzali) were approved by Islamic Parliament and thereby, covered free trade zones
of North and South parts of Iran. If these zones have successful performance Iran can enjoy the following privileges:
- Facilitation and enhancement of non-oil export (considering decrease in oil reserves and necessity of reliance of economy
on renewable resources and using local human resources) [1].
- Raising foreign currency revenues of Iran and diversification of its resources
- Raising foreign investments
248
- Making new job opportunities and helping development of these zones. On the contrary, if performance of these zones is
diverted, excessive raise in imports from these zones puts their performance on the trail against national interests and this
disadvantage is added to destruction of current opportunities.
Considering opportunities facing Iran including its strategic geographical location and possibility of taking advantage of
conditions and regional political-economic competition, accessing high seas and main regional consumer markets in north
and south of Iran and relative advantage in production and transit of special goods, it is not far reaching to expect that the
said zones will have successful performance. But the important point to be clear is that with regard to huge investments
made in these zones, can they enjoy expected and predicted performance or not. If the answer to this question is positive,
what is suggested to continue the path and to enhance them? But if the answer is negative, what are the reasons behind
lack of success and what solutions are suggested to improve the situation.
2. Introduction
Free trade zone and its new definition “export processing zone” is a small geographical location inside a country and its
goal is to attract export-oriented industries though offering desired conditions for trade and investment. Free zones in
developing countries are distinguished from other parts of economy of the related country in such areas as conditions, rules
and regulations regarding export and import, infrastructures, etc. and generally, are established near international airports
and ports [2]. But sometimes a difference is put between free trade zone and export processing zone. Free zones are
considered as traditional zones having long history but export processing zones are considered as new phenomena with
goal of increasing export. Present paper puts no difference between these zones. Record of establishing free zones in Iran
goes back to the year 1991. During this year, Islamic Parliament approved plan for establishing Kish, Gheshmand Chabahar
free trade zones and ten years after that in 2003, decided to establish three other zones (Arvand, Anzali and Aras). With
regard to privileges these zones potentially bring to Iran, this measure was worth a while. But unfortunately, it seems that
no sufficient attention has been paid to them on the part of governments regarding investment, managerial support and
creating infrastructures and on the part of researchers regarding identifying problems and challenges facing them and
offering suggestions as to make an improvement [3].
Governments generally have the following goals when establishing such zones:
• Creating foreign currency revenue through improving export of non-traditional goods and diversifying foreign
currency revenue sources of the country
• Attracting foreign investments
• Making new job opportunities and reducing problems resulting from unemployment
• Importing new technologies adapted to internal circumstances
• Disseminating knowledge, demonstration effects and enhancing competiveness of local agencies [4].
Other objectives may be considered when regarding for conditions inside each country. Among these objectives are
eliminating deprivation and enhancing wellbeing of local people. To achieve these goals, some strategies have been
codified for managing free zones:
• Issuing certificate of importing raw materials, intermediate data and capital goods exempted from customs
• Less unnecessary formalities and flexibility of labor laws to encourage investments
• Tax exemption
• Offering communication services and equipment above average limit of host economy
• Possibility of joint investment of local and international agencies
With regard to technology transfer, the point to be mentioned is that transferring technical knowledge and technology
transfer to the country is conducted in three ways:
249
1. By cooperation among companies having new technologies and local companies (or natural persons) regarding
knowledge transfer and main sections of production process to Iran.
2. Training local human resources and assigning managerial positions to them in host country
3. Establishing technical relation and resources transfer among transferor country and host country
Through studying common structure of activity in the free zones of Iran and free zone of Gheshm, it becomes clear that
majority of activities suggest localization of capital in labor intensive, small (mainly) and low technology industries and
establishment of assembly section (or packaging section) in these zones and even relatively heavy industries have had no
significant dependence to foreign technologies. Therefore, attracting new technology, even in presence of a structure such
as the one existing in free zones right now, is inconsistent with what is expected [5].
Free zones approved to be established in 1993 were Kish, Gheshm and Chabahar. At first, these zones were deprived of
basic facilities and necessary infrastructures for implementing these huge plans and developments conducted in them,
although not significant compared to what has been expected, their progress is a huge step since their first days.
Investments made in these zones up to 2003 have amounted to IRR. 7586 Billion. This amount of investment includes civil
and current expenses and expenses covered by free zone agencies in affiliated companies and institutes. Having such
capabilities as very desirable geographical position, vast territory, oil and gas reserves, plenty of local capable human
resources, diverse resources and raw materials on national level and acceptance on the part of local people in all zones,
closeness to foreign consumer markets in Persian Gulf region and accessing high seas which facilitates transit of goods to
different regions, have paved the way to their ever more development and progress [6].
As previously mentioned, free zones call for special attention due to the fact that they provide for national interest on
national level. But unfortunately, researches published till now are so thin. It may be said that the most important reason of
this issue is lack of information sources published by official authorities in this regard. Firstly, it is notable to consider a
study conducted in 1995 as a thesis. This study assesses accuracy of positioning of commercial-industrial free zones in
Iran and using such operational research techniques as minimizing expenses of transportation, human resources and
general regional factors, maximizing profit, factor analysis, positioning studies and pattern of studying location of market
and after scoring all cities of Iran, considers four zones of Anzali, Sari, Bandarabbas and Boushehr for commercial purposes
and assigns commercial function to Bandarabbas. Other researches have been conducted on “factors affecting attraction
and expansion of investment in Gheshm free zone’ and “studying status of relative advantage of labor intensive industries
in Gheshm free zone”. But considering initial objectives, have finally resulted in no tangible conclusion with regard to
performance improvement [7].
3. Research Methodology
Present paper is in fact a survey study and attempts to compare economic performance of Kish, Gheshm and Chabahar
free zones using four techniques naming taxonomy, Topsis, Saw and Electree. The reason for choosing these three zones
is that they have been established at the same time and have the same record and this provides for possibility of ranking
them. Due to special conditions and more tourist attractions compared to two other zones, Kish has attracted more attention
and more investments made in that have resulted in its better performance in some areas. Indices considered in this regard
are generally the same goals expected from free zones. Although in their choosing, accessing the required data has been
considered, comparing a ten year period (from 1994 to a decade after that in 2004) is included as well. After the first decade
of establishment of these zones, a turning point in their history was observed, as at the end of this ten year period,
government started establishing new zones through considering weak points and strengths of their performance. Indices
chosen in this regard are as follows: internal investment attracted by each zone in IRR. Billion, foreign investment attracted
in Dollar Million, value of export in a thousand dollars, making job opportunities in thousand people which due to having no
access to information of the years 1991 to 2004, only covers statistics of the years 1993 to 2001 (this is due to the fact that
comparing three zones based on one index and the same information, is of no harm to the desired goal). Number of internal
and foreign travelers attracted to free zones (in thousand people) is due to effect of such factors in helping development of
the zones. Technology could be considered as an important factor which due to not having any index for measuring that in
three said zones is omitted from this set of indices. This way, decision making matrix is prepared as follows:
250
Table 1: Figures of Free Zones’ Economic Performance from 1993-2004

Number of Number of Making job Foreign internal value of Zone
Foreign Internal Opportunities Investment investment export
Travelers Travelers
Kish 19466 23886 1647 10.5 10684 529.49
Gheshm 115312 4725 1095 26.5 8907 447.86
Chabahar 2326 1382 59 8.5 8571 2.88
Four following techniques are among operational research techniques and provide for comparing various options according
to a number of indices and are considered as a part of multivariate decision making (MADM) models. MADM techniques
are divided into compensatory and non-compensatory up ones. Compensatory models include methods which allow for
transfer between indices. For example, weaknesses of an index can be compensated by strength of another index. Non-
compensatory models include such methods that do not allow for transfer between indices. Therefore, each index is
considered alone and comparison is conducted index by index. Non-compensatory models are divided into three groups:
Concordance sub group; scoring sub group and scoring sub group. From the first class, Electree technique, from the second
one, Topsis and from the third class, Saw techniques are used.
SAW Technique: According to this technique, normalizing figures was conducted using scaling up method and weight of
each index was obtained using Shannon’s Entropy Technique. For final ranking of normalized figures, each index was
multiplied by the obtained weight. Table of normalized figures and weight of indices and ranking of figures is as follows:
(Table 2):
Table 2: Normalized Figures and Weight of Indices Matrix

X1 X2 X3 X4 X5 X6
Kish 0.168 1 1 0.396 1 0.845
Gheshm 1 0.197 0.664 1 0.833 1
Chabahar 0.02 0.057 0.035 0.32 0.802 0.005
w 0.175 0.149 0.172 0.089 0.187 0.226
Normalized figures according to linear scaling up method: ij P

aij
Aij =
Maxaij
 (Pij ln Pij )
1
E=
ln m
251
dj
w= d j = 1- E j
d j
S1=0.613 S2=0.789 S3=0.198
As can be seen, according to SAW technique and according to the weights obtained for options, performance of Gheshm
is better than Kish and performance of Gheshm is more desirable than Chabahar.
Topsis technique: Many papers have proposed analytical models as aids in conflict management situations. Among the
numerous approaches available for conflict management, one of the most prevalent is multi-criteria decision making.
Decision-making problem is the process of finding the best option from all of the feasible alternatives. In almost all such
problems the multiplicity of criteria for judging the alternatives is pervasive. That is, for many such problems, the decision
maker wants to solve a multiple criteria decision making (MCDM) problem. In classical MCDM methods, the ratings and
the weights of the criteria are known precisely [8, 9, 10] MCDM may be considered as a complex and dynamic process
including one managerial level and one engineering level [11].The managerial level defines the goals, and chooses the
final ‘‘optimal’’ alternative. The multi-criteria nature of decisions is emphasized at this managerial level, at which public
officials called ‘‘decision makers’’ have the power to accept or reject the solution proposed by the engineering level. These
decision makers, who provide the preference structure, are ‘‘off line’’ from the optimization procedure done at the
engineering level [12]. The engineering level of the MCDM process defines alternatives and points out the consequences
of choosing any one of them from the standpoint of various criteria. This level also performs the multi-criteria ranking of
alternatives [13].
Technique for order performance by similarity to ideal solution (TOPSIS), one of the known classical MCDM methods, was
first developed by Hwang and Yoon [14] for solving a MCDM problem. It bases upon the concept that the chosen alternative
should have the shortest distance from the positive ideal solution and the farthest from the negative ideal solution. In the
process of TOPSIS, the performance ratings and the weights of the criteria are given as crisp values.
Under many conditions, crisp data are inadequate to model real-life situations. Since human judgments including
preferences are often vague and cannot estimate his preference with an exact numerical value.
Normalized figures of indices were obtained according to Euclidian descaling method. Data were weighted according to
Shannon’s Entropy technique, dividing measurements of each option was calculated and relative closeness of each option
to the ideal answer was obtained (Relation 1). Finally, the matrix shows that what normalized figures of each data and
finally, weight of indices are and what are ranking of figures (Relation 2).
Table 3: Normalized figures and weight if indices matrix
X1 X2 X3 X4 X5 X6
Kish 0.166 0.974 0.832 0.353 0.654 0.806
Gheshm 0.985 0.193 0.55 0.89 0.545 0.682
Chabahar 0.019 0.05 0.029 0.285 0.524 0.004
w 0.241 0.205 0.195 0.092 0.051 0.216
252
(1)
di+ =  ( Vij - Vi* )
2
-
di = (V ij - Vi - )
2
di -
Ci= (2)
di - + di +
C1=0.607 C2=0.625 C3=0
Therefore, according to Topsis techniques, Gheshm has a better performance than Kish and performance of Kish is better
than Chabahar, though Kish and gheshm, have close performances.
Electree based Scoring: According to this technique, normalized matrix is calculated in the same way as TOPSIS. Then,
concordant and not concordant sets are obtained for each index and the following matrices. Concordant set of Ak ,l
includes indices in which, option k is superior to option l and not concordant set includes options in which, option k is not
preferred to option l.
-
Max Vkj - V lj
NI k ,l = I k ,l =  w j
Max Vkj - Vlj
-
Max Vkj - V lj
-
NI k ,l =
-
I=
I k ,l
Max Vkj - Vlj m(m - 1)
Number of options: m
Two 3*3 matrixes are formed according to the following instruction:
253
-
I k ,l  I → f kml = 1
-
I k ,l  I → f k ,l = 0
-
NI k ,l  NI → g k ,l = 1
-
NI k ,l  NI → g k ,l = 0
Final comparison is achieved based on matrix obtained from multiplication of two matrices (matrix 1) resulting from the
following matrices. Results of brief operation are as follows:
Coordinate S1 S2 S3
Set
S1 - 0.667 1
S2 0.337 - 1
S3 0 0 -
Non-Coordinate S1 S2 S3
Set
S1 - 1 0
S2 0.817 - 0
S3 0 0 -
S1 S2 S3
S1 - 0 1
S2 0 - 1 (Matrix 1)
S3 0
Therefore, considering the fact that final preferences matrix of performance for Kish and Gheshm was obtained equally, in
final scoring, each one can be considered as 1st rank and Chabahar follows them.
S1=S2>>S3
Scoring performance of free zones according to Taxonomy technique
Table 4
254
X1 X2 X3 X4 X5 X6
S1 19466 23886 1647 10.5 10684 529.49
S2 115312 4726 1095 26.5 8907 447.86
S3 2326 1382 59 8.5 8571 2.88
- 45701 9997.6 933.6 18.6 9387.3 326.74

x
σ 60890.71 12143.2 806.2 10.7 1135.5 283.4
Normalized figures table according to the formula for calculating normal standard figure (Z) is as follows:
Table 5
X1 X2 X3 X4 X5 X6 gi
S1 .75 1.14 .88 -.75 1.14 .71 10.67
S2 11.43 -.43 .15 .73 -.42 .42 2.54
S3 -.71 -.7 -1.08 -.94 -.71 -1.14 12.68
g =8.63
-
xi - x
Z=

At this level, in order to omit inconsistent options, through calculating Euclidean distance of each two couples, upper bound
and lower band were determined with 95% confidence and the result shows that none of the options can be omitted
(homogenization operation has shown). Numbers inside matrix are Euclidean distance of each two couples.
Table 6
S1 S2 S3 Ri
S1 - 10.93 4.02 4.02
S2 10.93 - 12.45 10.93
S3 4.02 12.45 - 4.02
-
R =6.32
S2R=15.915 S=3.98
L= 6.32 - 2 (3.98) =-1.65
U=6.32 + 2(3.98) = 14.29
255
Now after referring to normalized figures, standard deviation gi can be calculated and through that and by considering
formula of ranking options, they are ranked. Thereby, if variable y i is considered for ranking options, the following results
will be obtained. The option having less yi is better and this shows that performance of Gheshm free zone is better than
Kish and Kish is better than Chabahar.
gi
Yi = -
g + 2s g
Y1=0 .55 y2=0.131 y3=0.65
In conclusion, comparing performance results among different techniques is as shown in the following tables. According to
Kaplan method, results of performances are compared. In this method, table for win and lose of each option compared to
other options is prepared and final score is obtained from difference of wins and loses. Considering higher different of wins
and losses for Gheshm free zone compared to other zones, this zone has been collectively of the best performance and
Kish and chabahar respectively follow that.
Table 7: Comparison of zones’ ranks in different techniques
SAW TOPSIS TAXONOMY ELECTRE
Kish 2 2 2 1.5
Gheshm 1 1 1 1.5
Chabahar 3 3 3 3
Table 8: General ranking according to Kaplan method.

Kish Gheshm Chabahar different of wins and
losses
Kish - D W 2-1=1
Gheshm W - W 2-0=2
Chabahar D D - 0-2=-2
4. Conclusion
In one technique, Kish and in in three techniques, Gheshm gained 1st place and Chabahara was recognized as a zone with
the weakest performance as it gained third rank in all indices. Through careful investigation of results obtained it can be
seen that better performance of Gheshm is its higher rate of export value compared to other zones. This difference is so
significant that has made this zone relatively successful and has affected capabilities of Kish in some indices such as
attracting internal and foreign investment. In 2004, free zone development plan was codified based on strategy of codifying
division plans of 4th development plan of Iran towards “national interests” of this country. This plan is to visualize movement
path of six free zones including Kish, Gheshm, Chabahar, Aras, Arvand, Anzali and to detail goals of progress in these
zones. In free zone development plan, challenges of development have been detailed along with solutions as to developing
each zone. But, up to 2007, this plan wan not discussed in cabinet and it seems that no success is going o come out of
continuing this process for free zones. Specifically, in Iran, competition of these zones with zones located in Persian Gulf
area such as Hamriye and Fajriye which are trying to gain international-level performance is an issue and weaknesses and
strengths of each zone must be considered when determining special missions for each zone. This study is a starting point
256
for publishing other studies regarding free commercial and industrial zones as well as special economic regions of Iran and
through investigating different aspects of these zones, their performance is enhanced. It is recommended that similar
studies are conducted through considering investments and expenses consumed relative to performance in order that
efficiency and effectiveness of managerial decisions and policies applied to each zone become clear. Moreover, researches
on percentage of achieving predicted goals of each zone and identifying achieving or not achieving them must be
conducted. Lack of statistics offered up to 2006 has limited studies to investigating performance of these zones up to the
year 2004 and no more. Also, lack of statistics regarding investments made in each zone has resulted in not taking these
figures into account when calculating and if these indices were measured based on expenses and investments, a good
index for comparing managerial performance and efficiency of each zone would be formed. Statistics regarding making job
opportunities of zones for the period of 1993-2001 were available and used. Another limitation, as previously mentioned,
was lack of a generally accepted index for measuring “technology transfer” which if available, could make a full comparison
possible.
References
[1] http://www.qeshm.ir/?Lang=fa&Page=40-22
[2] http://www.irtp.com/farsi/data.asp?address=references/statistics
[3] http://www.itsr.ir
[4] http://www.unctad.org/Templates/Search.asp?intItemID=2068&lang=1&frmSearchStr EPZ &
frmCategory=all&section=whole
[5] UNCTAD. (1993). export processing foreign zones for sub-Saharan Africa.UNCTAD,EDCD,255
[6] http://www.tarkhis.net/modules.php?name=News&file=article&sid=348.-
[7] Yoon, K Paul. Hwang, Ching Lai. (1995). Multiple Attribute Decision Making an Introduction (Quantitative
Applications in the Social Sciences .California. Sage Publication.
[8] Chen, C. T., 2000. A fuzzy approach to select the location of the distribution center, Fuzzy Sets and Systems,
118, (1), 65-73.
[9] Zimmermann H.-J., 1987. Fuzzy Sets, Decision-making and Expert Systems, Kluwer, Boston.
[10] Hsu H.M., Chen C.T., 1997. Fuzzy credibility relation method for multiple criteria decision-making problems,
Information Sciences 96, 79-91.
[11] Teghem J., C. Delhaye Jr., Kunsch P.L., 1989. An interactive decision support system (IDSS) for multicriteria
decision aid, Mathematics Computer Modeling 12:10/11, 1311-1320.
[12] Mahmoud A., Sinna Abo., Azza H. A., 2005. Extensions of TOPSIS for multi-objective large-scale nonlinear
programming problems, Applied Mathematics and Computation, Volume 162, Issue 1, 4, Pages 243-256
[13] Lee E.S. LiR.L., 1988. Comparison of fuzzy numbers based on the probability measure of fuzzy events,
Computer Mathematics Application 15, 887-896.
[14] Hwang C.L., Yoon K., 1981. Multiple Attributes Decision Making Methods and Applications, Springer, Berlin
Heidelberg.
257

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EUROPEAN CENTER FOR SCIENCE

EDUCATION AND RESEARCH

EUROPEAN JOURNAL OF ECONOMICS

ISSN 2411-9571 (Print)

EUROPEAN JOURNAL OF ECONOMICS AND BUSINESS STUDIES

September - December 2015

Copyright © 2015 EUSER

Key title: European journal of economics and business studies

Prof. Dr. Catalin Zamfir, Director, ICCV, Academia Romana

Copyright© 2014 EUSER-European Center for Science Education and Research

PROSPECTS OF USING EARLY NEUTRAL EVALUATION IN CASE MANAGEMENT OF COMPLEX

NORMAN ZAKIYY ............................................................................................................................... 9

DOC. DR. ANTONETA POLO .............................................................................................................. 20

CORRELATION OF ETHICAL CONDUCT WITHIN AN ORGANISATION WITH THE ABSENCE OF

JERNEJ BUZETI ................................................................................................................................. 27

CRUCIAL IMPORTANCE OF WORK PRODUCTIVITY IN THE CONDITIONS OF A-TYPICAL

MAŁGORZATA DOBROWOLSKA ........................................................................................................... 36

FINANCIAL ANALYSIS AND BANKRUPTCY RISK IDENTIFICATION MODEL USED BY COMPANIES

PIOTR PREWYSZ-KWINTO, ................................................................................................................. 40

NPLS — THE SOLUTION RECIPE FOR ALBANIA ........................................................................... 48

ELONA SHEHU, PHD CANDIDATE ...................................................................................................... 48

KOSOVO’S INTERNATIONAL TRADE: BALANCE OF TRADE ......................................................... 58

GENT JUSUFI ................................................................................................................................... 58

RECORD-KEEPING AS A FACTOR RELATED TO MEETING THE PERSONAL FINANCIAL RATIOS

DR. BELINDA XARBA ......................................................................................................................... 70

THE IMPACT OF FAMILY INCOME ON STUDENTS FINANCIAL ATTITUDE .................................... 83

DOC. PH. D. DORJANA NANO........................................................................................................... 83

THE ANALYSES OF ALBANIAN BUDGET EXPENDITURE ............................................................... 89

DOC. PH. D. DORJANA NANO ............................................................................................................ 89

INCOME INEQUALITY TOLERANCE AND PREFERENCES FOR REDISTRIBUTION IN TURKEY.......... 98

AYFER KARAYEL ............................................................................................................................... 98

ASST. PROF. DR. RAMAZAN GÖRAL ................................................................................................. 106

DIAH KRISTINA, PH. D. ................................................................................................................... 116

PHD. CAND. EUGEN MUSTA .......................................................................................................... 122

ECONOMIC DEVELOPMENT ..................................................................................................... 133

TAL SHAHOR ................................................................................................................................. 133

CAREER OPTIONS AND ENTREPRENEURIAL POTENTIAL AMONG FEMALE GRADUATES:

ANA PAULA MARQUES ................................................................................................................... 143

UNDERSTANDING THE NEUROMECHANISMS OF CONSUMER BEHAVIOR IN ADVERTISING

NORSIAH FAUZAN .......................................................................................................................... 149

BYRON KOTZAMANIS ...................................................................................................................... 154

THE CONCENTRATION-PROFITABILITY RELATIONSHIP IN TURKISH INDUSTRY ......................... 172

MERAL OZHAN .............................................................................................................................. 172

PAEDDR. ZUZANA HORVÁTHOVÁ, PH. D. ........................................................................................... 185

CHARACTERISTICS OF THE LABOR MARKET IN KOSOVO AND EUROPE .................................... 192

ARTAN HAZIRI, PH. D CAND. ........................................................................................................... 192

ENVIRONMENT AND WOMEN ENTREPRENEURS IN ALBANIA ................................................. 199

AZRA ZMIJANEJ ............................................................................................................................. 199

SOKOL NDOKA, PHD CANDIDATE .................................................................................................... 203

E-BANKING AS A TOOL FOR COMPETITION ADVANTAGE IN ALBANIA ..................................... 214

PROF. ASSOC. EVELINA BAZINI ......................................................................................................... 214

THE LINK BETWEEN INNOVATION BEHAVIORS AND PRODUCTIVITY STRATEGIES OF

GÜNGÖR TURAN............................................................................................................................ 220

PROGRESSIVE INCOME TAXATION AND ECONOMIC GROWTH WITH ENDOGENOUS LABOR

WEI-BIN ZHANG ............................................................................................................................ 230

EZZATOLLAH ASGHARIZADEH ................................................................................................... 248

Kamal Halili Hassan

4. Findings and Discussion

i) Guiding parties to communicate with each other;

(c) ENE ascertains complex issues at the early phase of a case

5. Potential of Introducing ENE Programme in Malaysia

6. Implications of the Study

8. Limitations of the Study