Why Don't England Join the EURO

i

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International Symposium on Sustainable Development, May 31 - June 01 2012, Sarajevo

ii

Third International Symposium on

Sustainable Development

(ISSD’12)

May 31 - June 1, 2012

Sarajevo

Bosnia and Herzegovina

Proceedings

Volume 5

ECONOMICS OF SUSTAINABLE DEVELOPMENT

Sarajevo - 2012

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ECONOMICS OF SUSTAINABLE DEVELOPMENT

3rd

International Symposium on Sustainable Development (ISSD2012)

May 31 – June 01 Sarajevo, Bosnia & Herzegovina

Publisher:

International Burch University

Editors;

Prof.Dr. Meliha HANDZIC

Assoc.Prof.Dr. Abdulhamit SUBAŞI

Assoc.Prof.Dr. Ali GÖKSU

Conference Partners:

International Burch University, Sarajevo, Bosnia and Herzegovina

Texas A&M University-Commerce, USA

Bulent Ecevit University, Zonguldak, Turkey

Suleyman Demirel University, Isparta, Turkey

Akdeniz University, Antalya, Turkey

DTP & Design:

Erna Ahmetspahić

DTP and Prepress:

International Burch University

Printed by: International Burch University

Circulation: 500 copies

Place of Publication: Sarajevo

Copyright: International Burch University, 2012

International Burch University Publication No: 17

ISBN 978-9958-834-19-6

Reproduction of this Publication for educational or other non-commercial purposes is authorized without prior permission from the copyright holder. Reproduction for

resale or other commercial purposes prohibited without prior written permission of the copyright holder.

Disclaimer: While every effort has been made to ensure the accuracy of the information, contained in this publication, International Burch University will not assume

liability for writing and any use made of the proceedings, and the presentation of the participating organizations concerning the legal status of any country, territory, or

area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.

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ORGANIZERS OF ISSD'12

Conference Partners:

International Burch University, Sarajevo, Bosnia and Herzegovina

Texas A&M University-Commerce, USA

Bulent Ecevit University, Zonguldak, Turkey

Suleyman Demirel University, Isparta, Turkey

Akdeniz University, Antalya, Turkey

Local Organising Committee:

Meliha Handzic, Chair

Teoman Duman, International Liaison

Abdulhamit Subasi, Program Sessions Coordinator

Ali Göksu, Program Sessions Coordinator

Emina Alickovic, Review Coordinator

Natasa Tandir, Review Coordinator

Zeynep Kara, Secretary

Nadira Sarajlic, Public Relations Officer

Kasim Erturk, Treasurer

Ibrahim Kinal, Webmaster

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Akyildiz Huseyin Suleyman Demirel University Turkey

Altin Ahmet Bulent Ecevit University Turkey

Ay Gurkan George Washington University USA

Aydemir Muzaffer Bilecik University Turkey

Bagdigen Muhlis Bulent Ecevit University Turkey

Bayraktaroglu Serkan Sakarya University Turkey

Cinar Ozer Kahramanmaras Sutcu Imam University Turkey

Coskun Ali Fatih University Turkey

Develioglu Kazim Akdeniz University Turkey

Digrak Metin Kahramanmaras Sutcu Imam University Turkey

Dogan Hulusi Akdeniz University Turkey

Donko Dzenana Sarajevo University Bosnia and Herzegovina

Duman Mehmet Artvin Coruh University Turkey

Duman Teoman International Burch University Bosnia and Herzegovina

Duran Burhanettin Istanbul Sehir University Turkey

Durna Ufuk Akdeniz University Turkey

Ekiz Huseyin Sakarya University Turkey

Emektar Riza Robert Morris University USA

Ercisli Sezai Atatürk University Turkey

Eroglu Abdullah Suleyman Demirel University Turkey

Eruslu Niyazi M. Yalova University Turkey

Esiyok Dursun Ege University Turkey

Goksu Ali International Burch University Bosnia and Herzegovina

Gungor Ibrahim Akdeniz University Turkey

Handzic Meliha International Burch University Bosnia and Herzegovina

Inal Emin Akdeniz University Turkey

Ibicioglu Hasan Suleyman Demirel University Turkey

Kalabusic Senada University of Sarajevo Bosnia and Herzegovina

Kalayci Seref Suleyman Demirel University Turkey

Kantarci Kemali Akdeniz University Turkey

Karcioglu Resat Ataturk University Turkey

Karlik Bekir Konya-Mevlana University Turkey

Kosecik Muhammet Turgut Ozal University Turkey

Kudabaev Zarylbek I. American University of Central Asia Kirgiz Republic

Musemic Rajfa University of Sarajevo Bosnia and Herzegovina

Oguz Cennet Selcuk University Turkey

Ozsoy Ismail Fatih University Turkey

Padem Huseyin International Burch University Bosnia and Herzegovina

Pinnington Ashley H. The British University in Dubai UAE

Rose Andrew K. University of California USA

Sari Ramazan Middle East Technical University Turkey

Schwartz Harvey York University Canada

Sitembolukbasi Saban Suleyman Demirel University Turkey

Slotsve George Northern Illinois University USA

Subasi Abdulhamit International Burch University Bosnia and Herzegovina

Toksen Erol Ege University Turkey

Tourk Khairy A. Illinois Institute of Technology USA

Uyar Suleyman Akdeniz University Turkey

Vergil Hasan Bulent Ecevit University Turkey

Witkowski Jaroslaw University of Economics Poland

International Scientific Committee

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Preface

These proceedings contain the papers presented at the Third International Symposium on Sustainable

Development (ISSD 2012). The conference was organised by the International Burch University-Sarajevo

in partnership with Texas A&M University-Commerce, Suleyman Demirel University-Isparta, Akdeniz

University-Anatalya and Bulent Ecevit-Zondulak. It was held in Sarajevo, Bosnia and Herzegovina, from

May 30 to June 01, 2012.

The aim of the symposium was to bring together a diverse community of researchers and practitioners

interested in exploring a wide spectrum of questions that relate to sustainability. It served as a forum for

regional and international community to meet, generate and share ideas in the field of theoretical,

experimental and applied research.

The focus of ISSD 2012 was on “management and technology: issues and challenges”.

The conference solicited papers addressing economic, social and environmental aspects of sustainable

development. The original research papers submitted to the conference covered a wide variety of topics

from six tracks. These tracks included: management and organisations for sustainable development,

information systems and sustainability, green technologies and strategies, sustainability finance and

accounting, economics of sustainable development and marketing perspective on sustainability.

These proceedings contain only research papers that were selected as a result of a review process

involving at least two reviewers appointed by the organising committee. In addition to contributed papers,

the conference program also included poster sessions and two keynote presentations from the international

distinguished researchers:

”Green IS: An Opportunity and Responsibility for Information Systems to Make a Difference”, presented

by Associate Professor Helen Hasan, University of Wollongong, Australia

“Management and Sustainability”, presented by Professor Hal Langford, Texas A&M University-

Commerce, USA

As editors, we would like to thank everyone who contributed to the content and production of these

proceedings, namely, the authors, members of the scientific committee, reviewers and the organisers of

the conference who made this conference possible.

Meliha Handzic, Abdulhamit Subasi and Ali Goksu

Editors

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Table of Contents

Preface ............................................................................................................................................................................v

Table of Contents ............................................................................................................................... ..........................vii

Full Papers

TRACK 5

RELATIONSHIP BETWEEN HUMAN CAPITAL AND ECONOMIC GROWTH: PANEL

CAUSALITY ANALYSIS FOR SELECTED OECD COUNTRIES

Ferdi Kesikoğlu, Zafer Öztürk ..................................................................................................................... 1

A REEXAMINATION OF CAUSAL NEXUS BETWEEN ECONOMIC GROWTH AND

RENEWABLE ENEGY CONSUMPTION FOR US: FURTHER EVIDENCE FROM BOOTSTRAP-

CORRECTED CAUSALITY TEST

Şenay Saraç, Ertugrul Yıldırım .................................................................................................................... 9

AN ANALYSIS OF THEORIES ON STOCK RETURNS

Ahmet Sekreter ........................................................................................................................................... 15

THE CAUSAL RELATIONSHIP BETWEEN ENERGY CONSUMPTION AND GDP IN TURKEY

Huseyin Kalyoncu1 , Ilhan Ozturk2 , Muhittin Kaplan1 ............................................................................ 20

''SUSTAINABLE DEVELOPMENT PROJECTS AS OPPORTUNITY FOR ECONOMIC

DEVELOPMENT OF BOSNIA AND HERZEGOVINA''

Ajdin Perčo, Erkan Ilguen .......................................................................................................................... 27

THE RELATIONSHIP BETWEEN TAX REVENUE AND ECONOMIC GROWTH IN TURKEY: THE

PERIOD OF 1975-2011

Yeşim Helhel , Yakup Demir ..................................................................................................................... 32

THE EFFECT OF EXCHANGE RATE VOLATILITY ON IMPORT DEMAND: EVIDENCE FROM

TURKEY Hakan Demirgil 1, Hidayet Keskin1,Canan Şentürk1,Murat Karaöz 2 ..................................... 40

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COX REGRESSION MODELS WITH TIME-VARYING COVARIATES APPLIED TO SURVIVAL

SUCCESS OF YOUNG FIRMS

Aygül Anavatan, Murat Karaöz ................................................................................................................. 49

SEEKING DEBT CRISIS AND SOLUTION IN EUROPE

Ali Yavuz, Ceyda Şataf, Dilek Göze Kaya, Serap Gül .............................................................................. 59

ECONOMIC STRUCTURE IN A RURAL AREA IN THE 19TH CENTURY: A COMPARISON OF

ELEVEN VILLAGES OF BARTIN DISTRICT OF VIRANŞEHIR SANJAK

Ramazan Arslan ......................................................................................................................................... 67

EFFECT OF FOREIGN DIRECT INVESTMENTS ON DOMESTIC INVESTMENTS OF

DEVELOPING COUNTRIES: A DYNAMIC PANEL DATA ANALYSIS

İsmet Göçer1, M. Metin Dam1, Mehmet Mercan2 .................................................................................... 94

WOMEN’S ROLE IN ECONOMIC DEVELOPMENT: FROM CLASSICAL APPROACH TO THE

PRESENT

Ruhan İşler, Canan Şentürk ...................................................................................................................... 104

DETERMINANTS OF TURKEY CURRENT ACCOUNT DEFICIT: AN ECONOMETRIC ANALYSIS

M. Metin Dam, İsmet Göçer, Şahin Bulut, Mehmet Mercan .................................................................... 111

EARNING ISPARTA CARPET BUSINESS TO THE LOCAL ECONOMY AGAIN AND ENSURING

ITS SUSTAINIBILITY BY REVISING IT

Nesrin Şalvarci Türeli, Erhan Türeli ..................................................................................................... ..122

MEASUREMENT OF THE COMPETITIVENESS OF TURKEY: EU COUNTRIES, 1980-2010

PERIOD COMPARISON

Sevgi Sezer1 , Mehmet Mercan2............................................................................................................ ..129

THE EFFECT OF FINANCIAL DEVELOPMENT ON ECONOMIC GROWTH: PANEL DATA

ANALYSIS

Mehmet Mercan1 , Osman Peker2, Şahin Bulut2, Ismet Göçer2 .............................................................. 137

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THE EFFECT OF OPENNESS ON ECONOMIC GROWTH: PANEL DATA ANALYSIS

Mehmet Mercan1 ,Ismet Göçer2 , Şahin Bulut2 , Metin Dam2 ................................................................ 159

FOREIGN CAPITAL INFLOW AND SUSTAINABLE ECONOMIC DEVELOPMENT: A CASE

STUDY OF TURKEY

Ahmet Cetin1, Murat Mustafa Kutluturk1, Birol Cetin2 .......................................................................... 173

KNOWLEDGE ECONOMY AND EFFECT ON WOMEN’ S EMPLOYMENT IN TURKEY

İbrahim Arslan 1, Eda Dineri 1, İsmail Taş 2 ............................................................................................ 180

ECONOMIC COSTS AND BENEFITS OF THE EU ENLARGEMENT: THE IMPACT ON THE EU

AND SEEC’S

Haris Kurtagić, Elif Nuroglu ................................................................................................................... 186

EFFICIENCY AND IMPACT OF ECONOMIC SANCTIONS

Ilham Redzic ............................................................................................................................................. 205

RISK TOLERANCE AND INVESTMENT PREFERENCES IN BOSNIA AND HERZEGOVINA

Mela Hadrovic, Ugur Ergun ..................................................................................................................... 222

THE AFFECTING CHANNELS OF THE GLOBAL CRISIS ON THE SOUTH-EASTERN EUROPE

(SEE-7) COUNTRIES’ GROWTH PERFORMANCE

Ali Sen1 , Huseyin Altay2 ........................................................................................................................ 229

THE IMPORTANCE OF APHRODISIAS ANCIENT CITY IN SUSTAINABLE ECONOMICAL

DEVELOPMENT

Zekeriya Matcicek 1, Aykut Pajo 2 .......................................................................................................... 236

ECONOMIC DIMENSION OF THE ENVIRONMENTAL POLICIES APPLIED IN TURKEY AND ITS

POTENTIAL EFFECTS ON SUSTAINABLE DEVELOPMENT

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Mevlüt Karabiçak, Serpil Ağcakaya ......................................................................................................... 243

EUROPEAN UNION MEMBERSHIP PROCESS OF TURKEY; ITS PROS AND CONS FOR TURKEY

Turhan Durmus Gokhan ........................................................................................................................... 253

THE ROLE OF TWIN DEFICIT PROBLEM IN SUSTAINABLE GROWTH: AN ECONOMETRIC

ANALYSIS FOR TURKEY

Halil Uçal, Mehmet Bölükbaş .................................................................................................................. 258

THE EU INTEGRATION AND THE MONETARY UNION: WHY ENGLAND DON’T JOIN THE

EURO

Ekrem Yasar Akcay 1, Elvettin Akman 2, Cigdem Akman 2 ................................................................... 268

EU ECONOMIC INTEGRATION PROCESS OF MACEDONIA

Agim Mamuti ........................................................................................................................................... 272

CORPORATE GOVERNANCE PRACTICES IN BOSNIA AND HERZEGOVINA

Aida Nušinović, Erkan İlgun .................................................................................................................... 278

ECONOMIC DIPLOMACY AND BUSINESS NEGOTIATION- MANAGERIAL APPROACH

Amra Nušinović, Erkan İlgun .................................................................................................................. 284

AN ANALYSIS OF RELATIONSHIP BETWEEN ECONOMIC GROWTH AND SELECTED

ECONOMIC INDICATORS WITH REGRESSION TREES AND OLS: 1990-2009 PERIOD IN

TURKEY

M. Ali Avci1, Harun Sulak2 .................................................................................................................... 290

REPORT ON: STUDENTS EXPENDITURE AND THE ECONOMIC RECESSION

Kerim Hadziabdic, Erkan İlgun ................................................................................................................ 299

GREEN ECONOMY-GREEN SUSTAINABILITY-GREEN ETHICS

Nilgün Dolmaci , Nurdan Kuşat ............................................................................................................... 313

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THE EFFECT OF RELIGION ON THE PROCESS OF SUSTAINABLE DEVELOPMENT ECONOMY

(IN TERMS OF THRIFT)

Mehmet Masum Ocak, Mehmet Günay, Selçuk Gülenaz ........................................................................ 318

MACROECONOMIC DETERMINANTS OF SUSTAINABLE DEVELOPMENT IN BOSNIA AND

HERZEGOVINA

Emil Knezović, Uğur Ergun ..................................................................................................................... 324

THE APPLICABILITY OF GREEN ECONOMY POLICIES: GOVERNANCE APPROACH AND

SUSTAINABLE DEVELOPMENT

Fatma Neval Genç, Gülizar Seda Çorak, Murat Yılmaz………………………………………………..330

IDENTIFYING THE DIMENSIONS OF ATTITUDES TOWARD VOCATIONAL ECONOMY AND

COMMERCE EDUCATION: A RESEARCH IN SARAJEVO, BOSNIA AND HERZEGOVINA

A.Tuba Duman, Uğur Ergün .................................................................................................................... 354

KNOWLEDGE MAPS & KNOWLEDGE MAPPING: LITERATURE REVIEW

Admir Čavalić, Erkan Ilgun ..................................................................................................................... 373

THE EFFECTS OF BASIC MACROECONOMIC PRICES ON MANUFACTURING INDUSTRY

PRODUCTION IN TURKEY

İlknur Pulak Taras, Gülçin Manzak Aydin, Demet Barlin Harmankaya .................................................. 381

“CONSEQUENCES OF FINANCIAL CRISIS IN BOSNIA AND HERZEGOVINA”

FISCAL AND MONETARY POLICY

Nađa Dreca ............................................................................................................................................... 391

2008 GLOBAL CRISIS, THE CASE STRUGGLE TURKEY

Şahin Bulut , İsmet Göçer , Metin Dam M , Mehmet Mercan ................................................................. 397

NATURAL RESOURCES AND ECONOMICAL GROWTH IN CENTRAL ASIA AND CAUCASUS

Filiz Kadi .................................................................................................................................................. 408

ECONOMIC GROWTH AND FINANCIAL INDICATORS CONNECTION

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Mustafa Öztürk, Osman Kadi, Filiz Kadi………………………………………………………………...422

ANALYSIS OF TURKEY’S SUSTAINABLE DEVELOPMENT PERFORMANCE AT LAST DECADE

BY APPLYING GREEN ECONOMY INDICATORS

Yusuf Akan, Ilyas Okumuş .................................................................................................................... 434

EFFECTS OF GENDER DIVERSITY ON THE GROWTH OF THE FIRMS IN THE INCUBATORS

Mürsel Akyüz , Mesut Albeni , Hakan Bozdağ , Murat Karaöz .............................................................. 452

THE ROLE OF INNOVATION IN THE DEVELOPMENT OF SOUTH KOREA

Sibel Yegül, Ayse Durgun, Dilek Memisoglu .......................................................................................... 460

GLOBALIZATION AND YOUTH UNEMPLOYMENT PARADOX: TURKEY SAMPLE

Boran Toker, Çiğdem Demir …………………………………………………………………………….455

FACTORS AFFECTING THE NEW VEHICLE REGISTRATION IN THE EU COUNTRIES

Cumhur Erdem, Şaban Nazlioğlu ............................................................................................................. 468

THE ANALYSIS OF SUSTAINABILITY DEVELOPMENT OF EASTERN AND SOUTH EASTERN

EUROPE IN THE POST SOCIALIST PERIOD

Fatih Çelebioğlu ....................................................................................................................................... 477

THE FACTORS DETERMINED TO THE IMPROVEMENT IN THE LEAST DEVELOPED AND

DEVELOPING COUNTRIES: TESTING A MODEL

Adil Oğuzhan, Gözde Ergin ..................................................................................................................... 486

A REEXAMINATION OF CAUSAL NEXUS BETWEEN ECONOMIC GROWTH AND

RENEWABLE ENEGY CONSUMPTION FOR US: FURTHER EVIDENCE FROM BOOTSTRAP-

CORRECTED CAUSALITY TEST

Şenay Saraç, Ertugrul Yildirim ................................................................................................................ 500

A TOWARDS SUSTAINABLE TRANSPORT POLICY AND HARMONIZING EXTERNAL TRADE

BY MODE OF TRANSPORT: MACEDONIAN CASE

Riste Temjanovski .................................................................................................................................... 508

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Relationship Between Human Capital And Economic Growth: Panel Causality Analysis

For Selected Oecd Countries

Ferdi Kesikoğlu, Zafer Öztürk

Bülent Ecevit University, Zonguldak, Turkey

E-mails: [email protected], [email protected]

Abstract

In this study, the relation between education and health expenditures that are accepted as an

indicator of human capital and economic growth is tested empirically. According to the

findings of the study, based on 1999 – 2008 period for 20 OECD countries that are selected

by the panel casuality test, a bidirectional casuality relation is observed between the education

and health expenditures and economic growth in the period and country group under

discussion. The obtained findings both support the intrinsic growth theories and tally with the

empirical studies on the subject.

Keywords: Education expenditures, health care expenditure, human capital, economic growth,

panel causality.

1. INTRODUCTION

Studies on growth in the economics literature are usually divided into two groups. The first

one is the Neo-classical growth theory that was dominant until 1980s and it identifies the

source of economic growth with technology and increase in population which is considered as

external in the model. The Neo-classical growth theories, which take shape depending upon

savings, capital-labour and income variables, propound that there will be no long-term

discrepancy between countries in terms of level of development. The theories that emerged as

alternatives to the Neo-classical theory are called as endogeneous growth theories. Emerging

endogeneous growth theories bring forward the idea that endogenous conditions like human

capital, foreign trade policies, financial development and public expenditures of a country can

affect economic growth.

Considering the subject within the frame of endogenous growth theories, it is ascertained that

the human capital resources of a country have a great impact on growth. In recent years, the

empirical studies on economic growth also increasingly emphasize the role of human capital

in economic growth process. As often expressed in the empirical studies, the most important

indicators of the human capital are health care and education. For education and health, the

number of people graduated from collages and life expectancy at birth or total public

expenditure intended on education and health care are used as variables in empirical models.

Education and health care expenditures increase the quality of labour force and positively

contribute to the production capacity and thus to the economic growth. It is also emphasized

by the endogenous growth theories that in the development process, health care and education

expenditures play an important role in the formation of human capital and have a significant

contribution to the sustainable economic growth in long-term.

mailto:[email protected]


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In this study, within the frame of theoretical and empirical arguments presented above in

summary, the relationship between education, health care expenditures and economic growth

is tested by the panel causality test for 20 OECD member countries that are selected

considering data sufficiency for 1999 – 2008 period. In the first part of the study that

composed of three parts, the theoretical frame is presented. After the second part that

summarizes the findings of relevant empirical studies, the empirical model and the findings of

the model are evaluated. The study reveals the importance of human capital for economic

development.

2. EMPIRICAL LITERATURE

Empirical literature about the relationship between human capital and economic growth is

summarized in Table 1.

Table 1: The Empirical Literature

Author Method Period Country Result

Romer (1989) Endegenous

Growth Model 1960-1985 Transnational Positive effect of education on growth

Mulligan and

Sala-i Martin

(1992)

Endegenous

Growth Model

Economic growth increases the rate of

return on human capital

Barro and Lee

(1993) Panel Method 1960-1985 189 Country Positive effect of education on growth

Kelly (1997) Ordinary Least

Squares 1970-1989 73 Country

Do not have any effect on economic

growth of health spending

Rivera and

Currais (1998)

Ordinary Least

Squares 1960-1990 OECD Countries

Positive effect of health spending on

economic growth

Freire-Serén

(2001) Two-Step OLS 1960-1990 Transnational

There are two-way causal relationship

between human capital and economic

growth

Kar and Ağır

(2003)

Granger Causality,

VECM 1926-1994 Turkey

-causality of education spending to

economic growth

-causality of economic growth to health

spending

Serel and

Masatçı (2005)

Johansen

cointegration 1950-2000 Turkey

-Human capital has a positive effect on

growth in the long term

-Causality of economic growth to human

capital

Taban (2006)

Johansen

cointegration,

Granger Causality

1968-2003 Turkey Two-way causal relationship between

health indicators and economic growth

Taban and Kar

(2006) Granger Causality 1969-2001 Turkey

Two-way causal relationship between

educaiton and economic growth

Haldar and

Mallik (2010)

Johansen

cointegration,

ARDL

1960-2006 India investment in education and health are

very important and has a significant

positive long run effect on per capita

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GNP growth

Şimşek and

Kadılar (2010)

Cointegraiton,

granger causality,

ARDL

1960-2004 Turkey

-Causality of human capital to GDP in

the short and long term

- Causality of GDP to human capital in

the short term

Keskin (2011) Multiple Linear

Regression

Cross-Sectional

Data

177 BM

Countries

Has important effects on economic

development, educatiton and health

spending

Yaylalı and Lebe

(2011)

Cointegraiton and

VAR 1938-2007 Turkey

Two-way causal relationship between

educaiton and economic growth

3. MODEL, DATA AND METHODS

In this study, the estimated models are shown in the following equations.

m n

k

tktktt uEGTMGDPGDP1 1

0

l

ll (1)

m n

k

tktktt uGDPEGTMEGTM1 1

0

l

ll (2)

m n

k

tktktt uSAGLKGDPGDP1 1

0

l

ll (3)

m n

k

tktktt uGDPSAGLKSAGLK1 1

0

l

ll (4)

In the model, GDP symbolizes the rate of growth, EGTM symbolizes the GDP ratio of total

education expenditures, SAGLK symbolizes the GDP ratio of total health expenditures, and

s symbolize the parameters and m and n symbolize the lag length. According to Schwarz

information criterion 3 is determined as the length of delay. Besides, employment (IST) is

added as a control variable to the model as it can be in relation to growth, education and

health. The data used in the analysis is obtained from World Bank WDI, OECD-STAN data

bases. The data set used icludes 1999 – 2008 period and 20 OECD member countries: Austria,

Czech Republic, France, Hungary, Ireland, Israel, Italy, Japan, Holland, Spain, UK, Denmark,

Germany, Poland, Portugal, Slovakia, Finland, Iceland and USA.

According to Holtz-Eakin, Newey and Rosen (1988), the hypothesis test can be made in

equation 5 in order to examine whether model in equation 1 cause GDP to EGTM and model

in equation 2 EGTM to GDP. This hypothesis test can also be made for equations 3 and 4 that

present the relation between GDP and SAGLK.

0321 (5)

The economics literature suggests three approaches to test casuality in panel data set. The first

approach is based on the generalized method of moments (GMM) and the Wald test in

equation 3. The GMM method requires the panel data set to be N>T. The second one is

suggested by Hurlin (2008) and fixed effects are based on panel data approach. The fixed

effect panel data approach can be applied only for static series. The third one is proposed by

Kónya (2006) and it is based on the estimates of seemingly unrelated regression (SUR). The

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last approach requires the panel data set to be T>N. In this study, the GMM - system approach

is preferred since the data set used is N>T and some variables in the model are I(1).

Holtz-Eakin, Newey and Rosen (1988), Arellano and Bond (1991), Arellano and Bover

(1995) and Blundell and Bond (1998) developed the GMM – system approach which can

solve the endogeneity and it can be and applied to T<N feature samples. This method is

basically an instrumental variable method. It is based on producing instrumental variables

which have the similar characteristics of moment instead of variables that are considered to

have the problem of endogeneity and using instrumental variables in regression model. It is

possible to express GMM β estimator as in equation 6 for a model in the form of

iii uxy (Cameron and Triverdi, 2009, p. 175):

yZZWXXZZWXGMM

1

(6)

In equation 6, X represents the matrix of independent variable, Z represents the matrix

instrumental variable, Y represents the matrix of dependent variable and W represents the

matrix of symmetric weight. The GMM β estimator minimizes the objective function. The

objective function is indicated in equation 7.

XyZN

WZXyN

Q11

)(

(7)

When the matrix of weight is taken in the quadratic form, it is equal to XyZ . However,

when the matrix of weight is selected as in two-staged EKK the optimal GMM estimator is

reached. The optimal GMM is indicated in equation 8.

yZSZXXZSZXOGMM

1

11 ˆˆ

(8)

In the equation 8 S is the estimation of uZNVar 2/1

. The efficiency of the GMM estimator

depends on selecting the right matrix of instrumental variable. There are three tests used for

this purpose. The first one is the AR(1) and AR(2) tests developed by Arellano and Bond

(1991). The AR(1) test examines the null hypothesis in the form of “no first-order

autocorrelation.” Because of the method of obtaining instrumental variable, first-order

autocorrelation should be observed automatically in the error term of the model and the null

hypothesis should be rejected at a %5 statistical significance level. Otherwise, it is understood

that the instrumental variables cannot be determined correctly. On the other hand, AR(2) test

examines the null hypothesis in the form of “no second-order autocorrelation.” The no

second-order autocorrelation should not be rejected at a %5 statistical significance level in the

model. Otherwise, it is again understood that the instrumental variables cannot be determined

correctly. The second test is known as the Sargan test. It examines the null hypothesis in the

form of “instrumental variable is valid.” Therefore, the null hypothesis should not be rejected

at a %5 statistical significance level. The last test is known as Hansen’s J test. The J test also

examines the null hypothesis in the form of “instrumental variable is valid” and the null

hypothesis should not be rejected at a %5 statistical significance level. Furthermore, if the

tests are ranked according to the degree of reliability, AR(1) and AR(2) tests are in the first

place, the Sargan test is in the second and the J test take the last place. Particularly, as the

number of instrumental variables increase the success of the J test decreases (Roodman, 2006,

p. 14).

Finally, Windmeijer (2005) proved that the GMM estimate is exposed to small sample

deviation in a finite number of observations and proposed a method to correct this small

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sample deviation that emerge in standart errors. Moreover, the author proves that when this

deviation arising from the small sample is corrected, the deviations observed in standard

errors and coefficients decrease as well. In order to correct the results of the GMM method

used in this study, the correction proposed by Windmeijer (2005) is followed. The only code

that can implement this correction is written by Roodman (2006). For this reason, the code

written by Roodman (2006) is used for GMM estimation.

4. FINDINGS

In table 2, the results of the model estimation that examines whether there is a casual

relationship from education to growth is shown.

Table 2: Estimation Results of Model 1

Independent

Variables

Coefficient Corrected

Standard Error

T Statistics Probability

GDPt-1 0.67* 0.111 6.05 0.000

EGTM -6.19* 0.980 -6.32 0.000

EGTMt-1 7.72* 1.502 5.14 0.000

EGTMt-2 -0.75 1.471 -0.52 0.607

EGTMt-3 -0.84 0.964 -0.88 0.382

Arellano-Bond AR(1) Statistics -4.21 (0.000) F Statistics 18.56 (0.000)*

Arellano-Bond AR(2) Statistics -0.79 (0.429) No. Of

Observations 120

Cross-Section 20

Wald Statistics (EGTMt-1 = EGTMt-2 = EGTMt-3 = 0)

10.94 (0.0071)

Time Dimension 10 years

Method Two Staged Panel

GMM-system

Note: * symbol shows the %1 statistically significant coefficients. In the statistics related to

the model, the values before the parentheses show the related statistic values and the values in

parentheses indicate the possibilities.

According to the findings, the F statistics show that the model, as a whole, is statistically

significant at a %5 significance level. The AR(1) statistics show first-order autocorrelation is

observed in the error terms of the model and AR(2) statistics show no second-order

autocorrelation. The Wald statistics that examine EGTMt-1 = EGTMt-2 = EGTMt-3 = 0

hyphothesis is rejected at a significance level of %1. This finding means that the education

expenditures are the reasons of growth.

In table 3, the results of the model estimation that examines whether there is a casual

relationship from growth to education expenditures is shown.


Independent

Variables


Standard Error


EGTMt-1 0.954* 0.038 25.03 0.000

GDP -0.041* 0.009 -4.28 0.000

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6

GDPt-1 0.010 0.015 0.65 0.515

GDPt-2 0.034** 0.015 2.20 0.030

GDPt-3 0.006 0.012 0.56 0.577


Arellano-Bond AR(2) Statistics 0.56 (0.577) No. Of

Observations 120

Cross-Section 20

Wald Statistics (GDPt-1 = GDPt-2 = GDPt-3 = 0)

10.49 (0.0071)


Method Two-Staged Panel

GMM-system

Note: * symbol shows %1 ** shows %5 statistically significant coefficients. In the statistics

related to the model, the values before the parentheses show the related statistic values and

the values in parentheses indicate the possibilities.

According to the no. 2 model estimation results, the model is significant at a %1 significance

level and the instrumental variables are valid. Besides, the Wald statistics cannot reject the H0

hypothesis at %1, %5 and %10 significance levels in the form of growth is not the reason of

education expenditures.

In table 4, there are the results of a casual relationship research from health expenditures to

growth that is stated above in no. 3 model.


Independent

Variables


Standard Error


GDPt-1 0.462* 0.131 3.52 0.001

SAGLK -5.529* 0.732 -7.55 0.000

SAGLKt-1 6.072* 1.260 4.82 0.000

SAGLKt-2 -0.674 1.292 -0.52 0.603

SAGLKt-3 -0.467 0.824 -0.57 0.572



Observations 120

Cross-Section 20

Wald Statistics (SAGLKt-1 = SAGLKt-2 = SAGLKt-3 = 0)

17.05 (0.0000)



GMM-system




According to the no. 3 model estimation results, the model is significant at a %1 significance

level and the instrumental variables are valid. Besides, the Wald statistics cannot reject the H0

hypothesis at %1, %5 and %10 significance levels in the form of growth is not the reason of

health expenditures.

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7

In table 5, there are the results of a casual relationship research from growth to health

expenditures that is stated above in equation 4.


Independent

Variables


Standard Error


SAGLKt-1 0.928 0.257 36.06 0.000

GDP -0.769 0.013 -5.84 0.000

GDPt-1 -0.005 0.020 -0.25 0.805

GDPt-2 0.009 0.021 0.46 0.645

GDPt-3 0.040 0.015 2.56 0.012

Arellano-Bond AR(1) Statistics -3.57 (0.000) F Statistics 527.27(0.000)*


Observations 120

Cross-Section 20

Wald Statistics (GDPt-1 = GDPt-2 = GDPt-3 = 0)

18.06 (0.0000)



GMM-system




According to results of no.4 model estimation results that is summarized in table 5, the model

is significant at a %1 significance level and the instrumental variables are valid. Besides, the

Wald statistics accept the that there is a casual relationship from growth to health

expenditures at %1significance level .

5. CONCLUSION

In this study the nexus between human capital and economic growth was tested empirically

using panel causality test for 20 OECD countries. Achieved evidence indicates that there are

bi-directional causal relationship between education expenses and economic growth.

Furthermore two-sided causal relationship between health expenses and economic growth was

found. These findings support the suggestion of endogenous growth theory which is a

competitor of Neo classical growth theory.

REFERENCES

Arellano, M. and Bond, S. (1991) Some Tests of Specification for Panel Data: Monte Carlo

Evidence and an Application to Employment, The Review of Economic Studies, 58(2), 277-

297.

Arellano, M. and Bover, O.(1995) Another Look at the Instrumental Variable Estimation of

Error-components Models, Journal of Econometrics, 68, 29-51.

Barro, R. J. and Lee J. W. (1993) International Comparisons of Educational Attainment,

NBER Working Paper Series, WP No: 4349.

Blundell, R. W. and Bond, S. (1998) Initial Conditions and Moment Restrictions in Dynamic

Panel Data Models, Journal of Econometrics, 87, 115-143.

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8

Cameron, A. C. and Trivedi, P. K. (2009) Microeconometrics Using Stata, Stata Pres, Texas.

Freire-Seren, M. J. (2001) Human Capital Accumulation and Economic Growth,

Investigaciones Economicas, Vol. XXV (3), 585-602.

Haldar, S. K. and Mallik, G. (2010), Does Human Capital Cause Economic Growth? A Case

Study of India, International Journal of Economic Sciences and Applied Research, 3 (1): 7-25.

Holtz-Eakin, D., Newey, W. and H. Rosen (1988) Estimating Vector Autoregressions with

Panel Data, Econometrica, Vol 56, 1371-1395.

Hurlin, C. (2008) Testing for Granger Non-causality in Heterogeneous Panels, Hyper Articles

en Ligne Sciences de I'Homme et Société, http://halshs.archives-

ouvertes.fr/docs/00/22/44/34/PDF/Causality_WP.pdf.

Kar, M. and Ağır, H. (2003) Türkiye’de Beseri Sermaye ve Ekonomik Büyüme: Nedensellik

Testi, II. Ulusal Bilgi, Ekonomi ve Yönetim Kongresi Bildiriler Kitabı, (Derbent- Izmir), 181-

190.

Kelly, Trish (1997) Public expenditures and growth, Journal of Development Studies, 34:1,

60-84.

Keskin, Abdullah (2011) Ekonomik Kalkınmada Beşeri Sermayenin Rolü ve Türkiye, Atatürk

Üniversitesi İktisadi ve İdari Bilimler Dergisi, Cilt: 25, Sayı: 3-4, 125-153.

Konya, L. (2006) Exports and Growth: Granger Causality Analysis on OECD Countries with

a Panel Data Approach, Economic Modelling, Vol. 23, No. 6, 978–992.

Mulligan C. B. and Sala-i-Martin, X. (1992) Transitional Dynamics in Two-Sector Models of

Endogenous Growth, NBER Working Paper Series, WP No:3986.

Rivera, B. and Currais, L. (1999) Economic growth and health: direct impact or reverse

causation?, Applied Economics Letters, 6:11, 761-764.

Romer, P.M. (1989) Human Capital and Growth: Theory and Evidence, NBER Working

Paper Series, WP No:3173.

Roodman, D. (2006) How to Do xtabond2: An Introduction to “Difference” and “System”

GMM in Stata, The Center for Global Development Working Paper Series, No. 103.

Serel, H. and Masatçı K. (2005) Türkiye’de Beşeri Sermaye ve İktisadi Büyüme İlişkisi: Ko-

Entegrasyon Analizi, Atatürk Üniversitesi İktisadi ve İdari Bilimler Dergisi, Cilt: 19, Sayı: 2,

49-58.

Şimşek M. and Kadılar, C. (2010) Türkiye’de Beşeri Sermaye, İhracat ve Ekonomik Büyüme

Arasındaki İlişkinin Nedensellik Analizi, C.Ü. İktisadi ve İdari Bilimler Dergisi, Cilt 11, Sayı

1,115-140.

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1969-2001, Anadolu Üniversitesi Soyal Bilimler Dergisi, Cilt:6 Sayı:1, 159-181.

Taban, S. (2006) Türkiye’de Sağlık ve Ekonomik Büyüme Arasındaki Nedensellik İlişkisi,

Sosyoekonomi, Temmuz-Aralık 2006-2, 31-46.

Windmeijer, F. (2005) A Finite Sample Correction for the Variance of Linear Efficient Two-

step GMM Estimators, Journal of Econometrics, Vol 126, 25-51.

Yaylalı, M. and Lebe, F. (2011) Beşeri sermaye İle İktisadi Büyüme Arasındaki İlişkinin

Ampirik Analizi, Marmara Üniversitesi İİBF Dergisi, Cilt XXX, Sayı I, 23-51.

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A Reexamination Of Causal Nexus Between Economic Growth And Renewable Enegy

Consumption For Us: Further Evidence From Bootstrap-Corrected Causality Test

Şenay Saraç, Ertugrul Yıldırım

Bulent Ecevit University, Department of Economics, Zonguldak, Turkey.


Abstract

Recent debates about renewable energy consumption manifest two main expectations. Firstly,

renewable energy consumption should contribute to economic growth and secondly, it should

not cause a damage on environment. This study focuses on the first issue by applying

bootstrap-corrected causality test for the US since empirical literature criticizes the Toda-

Yamamoto test which bases on asymptotic distribution. The models consist of real GDP,

employment, investment and kinds of renewable energy consumption. Only one causal

relationship was found from biomass-waste-drived energy consumption to real GDP. No

causal relationship was found between real GDP and all of the other renewable energy kinds –

total renewable energy consumption, geothermal energy consumption, hydro-electric energy

consumption, biomass energy consumption and biomass-wood-drived energy consumption.

That is using of energy from waste cause not only solving the dumping problems but also it

contributes to real GDP. For policy purpose, the results of this study suggest that countries

should concentrate on energy producing from waste as an alternative energy resource.

Keywords: Sustainable development, Economic growth, Renewable energy consumption, US.

JEL: O13, Q42, O51

1. INTRODUCTION

Sustainable development can be defined as: “development that meets the needs of the present

without compromising the ability of future generations to meet their own needs”. Many

factors can contribute to achieving sustainable development goal. One of the most important

factors is the sustainable supply of energy resources (Rosen, 1996; Dincer and Rosen, 1998;

Dincer, 1999). A secure supply of energy resources is a necessary condition but not sufficient

requirement for sustainable development within an economic society. Furthermore,

sustainable development needs a sustainable supply of energy resources and an effective and

efficient utilization of energy resources. In this context, renewable energy is one of the crucial

elements for sustainable development. A number of factors lead to increase attention on

renewable energy sources such as the volatility of oil prices, the dependency on foreign

energy sources, and the environmental consequences of carbon emissions and government

policies that promote renewable energy production (Bowden and Payne, 2010; Apergis and

Payne, 2010a).


renewable energy consumption should contribute to economic growth and the secondly, it

should not cause a damage on environment. This study focuses on first issue. There are four

hypotheses about causal nexus between economic growth and energy consumption.

According to the growth hypothesis energy consumption contributes to economic growth both



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directly and/or indirectly by complementing to labor and capital in the production process.

Validity of the growth hypothesis implies that energy conservation policies could reduce real

GDP. The conservation hypothesis implies that energy conservation policies would not reduce

real GDP. Achieving unidirectional Granger-causality from real GDP to energy consumption

supports the conservation hypothesis. Interdependent causal nexus between energy

consumption and real GDP is suggested by the feedback hypothesis. It is supported by the

validity of bidirectional Granger-causality between energy consumption and real GDP.

Finally, the neutrality hypothesis proposes that energy consumption serves a relatively minor

role in the determination of real GDP while energy conservation policies would not reduce

real GDP. The absence of Granger-causality between energy consumption and real GDP

supports the neutrality hypothesis.

Ozturk (2010) reviews the literature about energy consumption-economic growth nexus.

Empirical evidence about causal nexus between energy consumption and real GDP are mixed.

Furthermore very few studies investigate the relationship between renewable energy

consumption and real GDP. Table 1 summarizes empirical literature about renewable energy

consumption-economic growth nexus.

Table 1: Literature review: Renewable energy consumption and Economic Growth

Study Methodology Period Subject Relationship

Sari and Soytas

(2004)

Variance

decomposition

1969-1999 Turkey REC increases GDP

Ewing et al. (2007) Variance

decomposition

2000:1-

2005:6

US REC increases IP

Sari et al. (2008) ARDL 2000:1-

2005:6

US IP→REC

Sadorsky (2009) Panel Cointegration 1994-2003 18 emerging countries GDP→REC

Apergis and Payne

(2010a)

Panel Cointegration 1985-2005 20 OECD countries GDP↔REC

Apergis and Payne

(2010b)

Panel Cointegration 1992–2007 13 countries within

Eurasia

GDP↔REC

Payne (2009) Toda-Yamamoto 1949-2006 US GDP≠REC

Bowden and Payne

(2010)

Toda-Yamamoto 1949-2006 US (sectoral level) GDP↔REC

Note: Abbreviations are defined as follows: REC= renewable energy consumption, GDP=real gross domestic

product, IP=industrial production. EC→GDP means that the causality runs from energy consumption to growth.

GDP→EC means that the causality runs from growth to energy consumption. EC↔GDP means that bi-

directional causality exists between energy consumption and growth. EC≠GDP means that no causality exists

between energy consumption and growth.

Only Payne (2009) and Bowden and Payne (2010) use Toda-Yamamoto causality test. But

Toda-Yamamoto test which bases upon lag-augmented VAR model has assumption of the

normality of the error term. Hacker and Hatemi (2006) indicate that if the error term of the

model is characterized by non-normality, asymptotic distribution can be poor approximation.

In this case findings of Toda-Yamamoto test are invalid.

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The contribution of our empirical study is threefold. First this study uses a multivariate

causality test by including employment and investment variables into the model between

renewable energy consumption and real GDP since the omission of relevant variables leads to

econometric problems. Second, this study employs bootstrap-corrected causality technique

suggested by Hacker and Hatemi (2006) to avoid unclear results due to the assumption of

normality and the third one is to pick the true lag order by combining Schwarz (1978)

Bayesian information criterion and the Hannan and Quinn (1979) information criterion as

suggested by Hatemi (2003).

The rest of the paper is organized as follows: The next section describes the data,

methodology and the results from empirical analysis are presented in third section. Section

four presents conclusion and policy implications of the paper.

2. Data

Employment, real gross fixed capital formation and real GDP variables are taken from OECD

National Accounts data that is attained from source OECD data base and time series of

renewable energy consumption variables are obtained from the US Energy Information

Administration as billion Btu. Tim span of the renewable energy consumption variables are as

follows: 1949-2010 for total renewable energy consumption, biomass energy consumption,

hydropower energy consumption and biomass-wood-drived energy consumption, 1960-2010

for geothermal energy consumption and 1970-2010 for biomass-waste-drived energy

consumption.

3. Methodology and Results

Toda-Yamamoto augmented VAR(p+d) model can be described in the following a compact

way (Hacker and Hatemi-J, 2006):

(1)

Where:

1( , , , , , )( (1 ( ))) matrix,p p dF v A A A n n p d

1

1

1

((1 ( )) 1) matrix, for t=1,...,T,...

t

t

t

t p d

x

x

Z n p d

x

matrix,

0 1( , , )((1 ( )) ) matrix,TZ Z Z n p d T

1( , , )( ) matrix,T n T

Toda and Yamamoto (1995) introduce the following modified Wald (MWALD) test statistic

for testing the null hypothesis of non-Granger causality:

.K FZ

1( , , )( ) matrix,TK x x n T

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(2)

Where:

The MWALD test statistic is asymptotically χ2 distributed, conditional on the assumption that

the error terms are normally distributed, with the number of degrees of freedom equal to the

number of restrictions to be tested. According to Toda and Yamamoto (1995), their function

(Eq.2) guarantees the use of asymptotical distribution theory. However, using Monte Carlo

simulations Hacker and Hatemi-J (2006) showed that the MWALD test statistic over rejects

the null hypothesis, especially if the error term is characterized by autoregressive conditional

heteroscedasticity (ARCH) and non-normality. Furthermore, Hacker and Hatemi-J urged that

the asymptotic distribution can be a poor approximation, especially for the small samples that

are common in empirical studies.

Hacker and Hatemi-J (2006) found that the bootstrapped empirical size for the modified Wald

test is close to the correct size in the different cases when the extra lags are greater than or

equal to the integration order of both variables, and it is generally closer to the correct size

than the asymptotic distribution empirical size.

To perform the bootstrap simulations, firstly regression (Eq. 1) is estimated with the null

hypothesis of no Granger causality. For each bootstrap simulation it is generated the

simulated data, K*.

** ˆ ZFK (3)

where F is the estimated value of the parameters in Eq. (1). That is. The

bootstrap residuals (Ψ*) are based on T random draws with

replacement from the regression’s modified residuals, each with equal probability of 1/T. The

mean of the resulting set of drawn modified residuals is subtracted from each of the modified

residuals in that set. The modified residuals are the regression’s raw residuals modified to

have constant variance, through the use of leverages. Eq.(4) defines the modified residual

through leverage adjustment for xit.

(4)

In order to calculate the bootstrap critical values, the bootstrap simulation is run 100,000

times and calculated the MWALD test statistic each time. In this way, it is able to produce the

empirical distribution for the MWALD test statistic.

The analyses consist of three stage, In the first stage, to ensure robustness for the common

components of the variables, we use several unit root tests, including the augmented Dickey

and Fuller (1979) (ADF) test, the Phillips and Perron (1988) (PP) test, as well as the

1

1 2( ) ( ) ( ) ~ .U PMWALD Y Y Z Z V Y Y

1ˆ ( )F KZ ZZ

1

m itit

ith

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Kwiatkowski et al. (1992) (KPPS) test. According to our results, not represented here, the

common components of the all variables turn out to be integrated of order one, I(1).

The next step is to pick optimal lag order. Two of the most successful criteria according to the

simulation results presented in the literature are Schwarz (1978) Bayesian information

criterion (SBC) and the Hannan and Quinn (1979) information criterion (HQC). However, the

earlier studies illustrate that each of these two different criteria can perform better than the

other depending on the properties of the true VAR model. Hatemi-J Criteria (HJC), displayed

in Table 2, is employed to pick true lag order which is suggested by Hatemi-J (2003).

Table 3: Selection of Lag Length

Models AIC SBC HQC HJC

Model 1:Real GDP=Employment+Investment+Total REC 2

-25.2568

1

-17.6647

2

-18.3052

2

-17.9066 Model 2:Real GDP=Employment+Investment+Biomass Total EC 2

-25.7735

2

-18.0247

2

-18.8220

2

-18.4233 Model 3:Real GDP=Employment+Investment+ Hydropower EC 2

-24.2653

1

-16.6757

2

-17.3138

2

-16.9152 Model 4:Real GDP=Employment+Investment+Biomass Wood-

drived EC

2

-26.1630

2

-18.4142

2

-19.2114

2

-18.8128 Model 5:Real GDP=Employment+Investment+Biomass Waste-

drived EC

2

-21.4469

2

-14.8194

6

-16.5588

2

-15.3432 Model 6:Real GDP=Employment+Investment+Geothermal EC 2

-23.0602

2

-15.6311

2

-16.5377

2

-16.0844 Note: Abbreviations are defined as follows: AIC=Akaike information criteria, SBC= Schwarz Bayesian

information criteria, HQC=Hannan-Quinn information criteria, HJC=Hatemi-J information criteria,

REC=Renewable energy consumption and EC= Energy consumption. First number is selected lag length and

second one is min test stats of relevant criteria.

Note: Abbreviations are defined as follows: AIC=Akaike information criteria, SBC= Schwarz

Bayesian information criteria, HQC=Hannan-Quinn information criteria, HJC=Hatemi-J

information criteria, REC=Renewable energy consumption and EC= Energy consumption.

First number is selected lag length and second one is min test stats of relevant criteria.

In the last step bootstrap-corrected causality test was applied. Table 4 illustrates the MWALD

stats and critical values.

Table 4: Causality Test Results

H0: REC does not Granger cause GDP H0: GDP does not Granger cause REC

MWALD %1 CV %5 CV %10 CV MWALD %1 CV %5 CV %10 CV

Model 1 0.069 10.505 6.590 4.974 2.288 10.727 6.764 5.087

Model 2 2.226 11.078 6.833 5.162 1.602 10.847 6.764 5.108

Model 3 0.966 10.272 6.447 4.915 1.261 10.754 6.758 5.090

Model 4 1.637 10.610 6.623 4.996 1.684 10.965 6.839 5.181

Model 5 12.422* 11.681 6.969 5.160 4.482 11.872 7.003 5.186

Model 6 1.228 11.064 6.871 5.148 0.332 11.603 6.994 5.255

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Note: * represents rejection of null hypothesis at 1% significance level. REC=Renewable energy consumption.

For definitions of the models see Table 3.

According to Table 4 only one causal relationship was found from biomass-waste-drived

energy consumption to real GDP. This finding supports the growth hypothesis. No causal

relationship was found between all of the other renewable energy kinds and real GDP. All of

the findings, except for biomass-waste-drived energy consumption, support the neutrality

hypothesis.

4.CONCLUSION

Recent debates about relationship between renewable energy consumption and economic

growth manifest two main expectations. Firstly, renewable energy consumption should

contribute to economic growth and secondly, it should not cause a damage on environment.

This study focuses on the first issue by applying bootstrap-corrected causality test for the US

since empirical literature criticizes the Toda-Yamamoto test which bases on asymptotic

distribution.

According to bootstrap-corrected causality test results only one causal relationship was found

from biomass-waste-drived energy consumption to real GDP. No causal relationship was

found between all of the other renewable energy kinds and real GDP. These findings are

interesting since biomass-waste-drived energy consumption has a low percentage (6%) of

total renewable energy consumption.

Many developed countries are trying to dump their garbage on the lands of lesser developed

countries. However dumping garbage on other places spreads pollutions and diseases instead

of solving the problem. In fact it is more dangerous to dump garbage in the less developed

countries since there are neither technologies available to process it nor enough awareness.

Even creating landfills wastes precious resources. Lastly our findings indicate that there is a

causality from waste-drived energy to real GDP. Using of energy from waste cause not only

to resolve the dumping problems but also it contributes to real GDP. The countries that are

using other energy resources do not take advantage from using waste-drived energy. For

policy purpose, the results of this study suggest that countries should concentrate on energy

producing from waste as an alternative energy resource.

REFERENCES

Akaike, H. (1974) A new look at the statistical model identification, IEEE Transactions on

Automatic Control, 19 (6), 716-723.

Apergis, N. and Payne J.E. (2010a) Renewable energy consumption and economic growth:

Evidence from a panel of OECD countries, Energy Policy, 38, 656-660.

Apergis, N. and Payne J.E. (2010b) Renewable enrgy consumption and growth in Eurosia,

Energy Economics, 32, 1392-1397.

Bowden, N. and Payne, J.E. (2010) Sectoral Analysis of the Causal Relationship Between

Renewable and Non-Renewable Energy Consumption and Real Output in the US, Energy

Sources, Part B: Economics, Planning, and Policy, 5:4, 400-408.

Dickey, D.A. and Fuller W.A. (1979) Distribution of the estimators for autoregressive time

series with a unit root, Journal of the American Statistical Association, 74, 427-431.

Dincer, I. (1999) Environmental impacts of energy, Energy Policy, 27, 845-854.

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Dincer, I. and Rosen M.A. (1998) A worldwide perspective on energy, environment and

sustainable development, International Journal of Energy Research, 15, 1305-1321.

Ewing, B.T., Sari, R. and Soytas U. (2007) Disaggregate energy consumption and industrial

output in the United States, Energy Policy, 35, 1274–1281.

Hacker, R.S. and Hatemi-J A. (2006) Tests for causality between integrated variables using

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500.

Hannan, E. J. and Quinn B.G. (1979) The determination of the order of an autoregressive,

Journal of the Royal Statistical Society, 41, 190-195.

Hatemi-J, A. (2003) A new method to choose optimal lag order in stable and unstable VAR

models, Applied Economics Letters, 10, 135-137.

Kwiatkowski D., Phillips P.C.B., Schmidt P. and Shin. Y. (1992) Testing for the null of

stationarity against the alternative of a unit root, Journal of Econometrics, 54, 159-178.

Ozturk, I. (2010) A literatüre survey on energy-growth nexus, Energy Policy, 38, 340-349.

Payne, J.E. (2009) On the dynamics of energy consumption and output in the US, Applied

Energy, 86, 575–577.

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Biometrika, 75, 335-346.

Rosen, M.A. (1996) The role of energy efficiency in sustainable development, Technology

and Society, 15(4), 21-26.

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Energy Policy, 37, 4021-4028.

Sarı, R. and Soytas U. (2004) Disaggregate energy consumption, employment, and income in

Turkey, Energy Economics, 26, 335–344.

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Economics, 30, 2302–2313.

Schwarz, G. (1978), Estimating the dimension of a model, Annals of Statistics, 6, 461-464.

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possibly integrated processes, Journal of Econometrics, 66, 225-250.

An Analysis of Theories on Stock Returns

Ahmet Sekreter

Abstract

Objective in writing this article is to provide an overview of the theories that has been

developed for stock returns which is an important area of financial markets’ researches. Since

the researches in this field are very active for the past quarter, it is not possible to describe all

works that has been done in this area. Most important researches will be discussed without

going deeper in mathematical tools and theories.

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Empirical works have been showing that stock returns are predictable cross-sectional and by

time. The discussions about prediction of stock price behavior started with Markowitz with

his article –Portfolio Selection-. Markowitz won Nobel Prize in 1990 for his research about

portfolio theory. However he criticized by many economists since implementation of the

theory requires lots of effort to evaluate data and since it uses historical data the prediction

will not be accurate. In addition the assumption that stock returns are normally distributed is

not true in reality. Sharpe, Lintner, and Mossin independently developed a model which has

come to be known CAPM (capital asset pricing model) in 1964, 1965, and 1966 respectively.

Beta coefficient is a key parameter in CAPM world. Beta measures risk of an asset in relation

to the market such as S&P500 or an alternative factor. Actually the CAPM is a simple model

which is based on sound reasoning and some of the assumptions -all investors have the same

information, information is costless, and there are no taxes transactions costs- are unrealistic

in market. APT (arbitrage pricing theory) presented for a better estimation for stock returns

than CAPM. CAPM is a modified theory while APT is a completely different model. APT’s

multiple factors provide a better indication of asset risk and a better estimate of expected

return. There are n-factors effecting stock returns in APT but the number of factors are

unknown. Furthermore CAPM and APT are single-period models. To get multi-period aspects

of market ICAPM was developed. After that CCAPM (consumption-oriented capital asset

pricing model) was introduced. It tried to explain behavior of stock returns by a logical

extension of APT. A long literature exist on prediction of stock market returns but especially

after the latest financial crisis these theories must be analyzed and suggested new ideas for

forecasting behavior of stock returns.

Keywords: Stock Returns, Markowitz, CAPM, APT, ICAPM, CCAPM, Fama-French 3-factor

model.

1.Theories

1.1.Markowitz Portfolio Selection

Empirical studies in finance show that forecasting stock returns is possible by developing

some models. Markowitz – as some people call Einstein of finance- developed an idea on

stock returns under some assumptions. Although some assumptions like ‘no taxes’,

‘information is available for everybody and it is costless’, ‘no transaction cost’ do not exist in

real world, the tools developed by him allow to measure the risk and return. An investor

wants to maximize returns for a given level of risk or wants to minimize risk for a given level

of return.

According to Markowitz Portfolio theory investors choose the optimum portfolios which lie

on this curve. An investor who can bear more risk choose portfolios that are on upper part of

the curve and investor who is a risk-averse choose portfolios that are lower part of the curve.

It was shown in Markowitz Portfolio selection that the variance of rate of returns is measure

of risk of return under some assumptions. The formula developed by Markowitz proved that

diversifying portfolio reduces the total risk.

Capital Asset Pricing Model

Capital Asset Pricing Model (CAPM) is based on Markowitz Portfolio Theory and it

describes the relationship between the risk and return of a portfolio. The formula in CAPM is

the equation of SML (Security Market Line).

Ri: rate of a stock return

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Rm: rate of market return

β: cov(Ri,Rm)/ var(Rm)

Rf: risk-free rate

When beta is equal to zero expected return is equal to risk-free rate (Rf) and when beta is

equal to 1 it means that the expected return is equal to market return (Rm). By using simple

math the equation of the line above is found as follow:

Ri=Rf + β(Rm-Rf)

So in CAPM the rate of a stock return is defined as risk-free rate plus product of beta and

market risk premium (Rm-Rf). CAPM can be used for all stock after estimating beta.

Estimation of beta and market risk premium is the critical point in CAPM. Beta can be

calculated as daily, monthly or yearly and all give different betas. Calculation of different

time intervals gives also different betas and market risk premium also changes over time. The

required estimations can be found after collecting lots of historical data. Predicting future by

calculating some past data is sometime not reliable.

2.Arbitrage Pricing Theory

"The APT is derived from the premises that asset returns follow a linear return generating

process, and that in well-functioning financial markets, there will be no arbitrage

opportunities. On the basis of these assumptions, one can show that there is an equilibrium

linear relationship between the returns on risky assets and a small set of economy-wide

common factors. While several macroeconomic variables do have some relationship with

different risky assets, the APT postulates that the pricing of risky assets depends only on the

set of variables whose influence is felt significantly by all risky assets together. This set of

variables is known as the common factors of the APT."( Otuteye, Eben)

The basic assumption of APT is based on the absence of arbitrage in the market. The returns

can be calculated if there is no arbitrage opportunity. Capital markets are perfectly

competitive and trend of investors always prefers more wealth to less wealth. APT is less

restrictive than CAPM in its assumptions. There is only factor in CAPM but in APT there are

n factors which affect the expected rate of return. Expected rate of return is formulated as

follow

E[R]=Rf + b1f1+b2f2+…+bnfn

bk: the sensitivity of the stock to the factor bk

fk: the risk premium for factor k

It is stated in APT that there are n factors however these factors are not defined and even the

number of factors are unknown. However it is reasonable because every stock can have

specific effects that affect the return rate. APT does not rely on stock market and it does not

deal with measure of the performance of market, instead of market it focuses on factors that

affecting price of stock. The factors in APT can be adapted to changes that influence stock

price and from this aspect it brings advantages to the user but determining these factors is not

easy since it requires great research.

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3.Intertemporal CAPM

CAPM was one of the most important developments in finance when it was introduced. It

became basis of many research papers. However it was started to criticize that it is a single-

period model. The Intertemporal CAPM was an alternative for CAPM introduced by Robert

Merton which is a multi-period model. Merton claimed that since real interest rate, stock

market returns, inflation and therefore investment opportunity set can be changed after that

investors may want to hedge risks which they exposure. The demand on hedging causes a

change in the asset pricing equation. Merton stated in his model that since the model is based

on consumer-investor behavior it must be intertemporal, ICAPM is a linear model to state the

shifts of investments over time and predict investment opportunity set.

3.1.Consumption-Oriented the Capital Asset Pricing Model

Consumption-Oriented Capital Asset Pricing Model (CCAPM) is an extension of traditional

CAPM. CAPM is based on market portfolio’s return and it used it to understand behavior of

the return rate. In CAPM the prediction of future relies on market portfolio’s return. Beta in

CAPM measures sensitivity of stock return to the expected market return. CCAPM has the

same formula with CAPM only it differs from CAPM by explanation of beta. Beta in

CCAPM is defined as follow:

Consumption beta (βc)=

And formula for CCAPM is restated as follow:

Ri=Rf + βc(Rm-Rf)

Ri= expected return on risky asset i

Rf= implied risk-free rate

Rm= implied expected market return

βc= consumption beta of the risky asset i

The investors’ consumption growth and risk aversion determines the expected return of risky

asset and the risk premium. The consumption beta defined above provides the systematic risk

in CCAPM world. In CCAPM, an asset is more risky if consumption is low or savings are

high.

The consumption beta can be found by empirical works and statistical methods like finding

beta in CAPM.

The CCAPM, like CAPM, is based on only one parameter and it has been criticized because

of this issue. However the empirical works have shown that there are more than one affect

that influence the stock prices and return rates. The empirical works also have shown that the

CCAPM’s predictions are not supported by those results.

3.2.Fama and French Three Factor Model

The CAPM and CCAPM are trying to explain stock returns based on only one factor. The

APT and ICAPM are adding many factors that affecting stock returns but these factors are not

stated. Empirical works have shown that after testing CAPM, beta in CAPM can explain 70%

of the return in the market. Eugene Fama and Kenneth French tried to explain the rest of 30%

unexplained stock return by expanding capital asset pricing model. Fama and French expand

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CAPM by adding two more factors in the formula of traditional CAPM. In the empirical

works Fama and French found that the two classes of stocks are better than the others. The

value stocks have provided much better return than growth stocks that is stocks which have

high book to market ratio and the small stocks have provided much better than large stocks in

the market as a whole. After adding these two factors in capital asset pricing model the new

formula is as follow:

Ri=Rf+ β(Rm-Rf)+bs*SMB+bv*HML

Ri= expected return rate on risky asset i

β: the beta measure the sensitivity of stock return to the expected market return but this beta is

not same as beta in capital asset pricing model since in Fama-French 3 factor model there are

two more factors added into the formula.

Rf=risk-free interest rate

Rm= expected market return rate

SMB= small market capitalization minus big market capitalization

HML= high book to market ratio minus low

bs and bv= the coefficients of SMB and HML respectively. These coefficients are determined

by linear regression after defining SMB and HML.

4.Conclusion: Estimation of the Parameter Beta in Models

Beta is the only explanatory power in the CAPM and CCAPM. Beta is the only factor that

affecting the stock prices and return rates in these models. There are many factors in the

models the APT and ICAMP. Fama and French 3-factor model contains three factors which

influence the behavior of the return rates however beta is the factor that has the most

explanatory power in this model. Estimation of the parameter beta in models is very important

to get accuracy in predicting the stock prices and return rates. The chosen time interval causes

getting a different beta, and since stock returns can be evaluated daily, weekly, monthly, or

annually the chosen frequency also affects the accuracy of beta. Some empirical tests have

shown that 3 years time interval and annually evaluated stock returns give better results. Most

CAPM tests and et all have focused on cross sectional aspects of data. However the recent

researches have shown that investigating the conditional relationship between beta and return

gives better estimations under the assumption of time series analysis since beta is not stable

over time.

BIBLIOGRAPHY

Anthony Kyereboah-Coleman, (2009), Portfolio Theory.

Douglas T. Breeden, (1979), An Intertemporal Asset Pricing Model with Stochastic

Consumption and Investment Opportunities.

Eugene Fama, Kenneth French, (1995), Size and Book-to-Market Factors in Earnings and

Returns.

Graeme West, (2006), An Introduction to Modern Portfolio Theory: Markowitz, CAP-M,

APT, and Black-Litterman.

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Gregory Cannor, Robert A. Korajczyk, (1992), The Arbitrage Pricing Theory and

Multifactors Models of Asset Returns.

Gur Huberman, Zhenyu Wang, (2005), Arbitrage Pricing Theory.

Harry Markowitz, (1952), Portfolio Selection.

James L. Davis, (2001), Explaining Stock Returns: A Literature Survey.

John Y. Campbell, Motohiro Yogo, (2006), Efficient Tests of Stock Return Predictability.

Jonathan W. Lewellen, (2000), On the Predictability of Stock Returns: Theory and Evidence.

Robert C. Merton, (1973), An Intemporal Capital Asset Pricing Model.

Internet Sources

www.wkipedia.org

www.portfoliosolutions.com/f-11.html

http://www.investopedia.com

http://www.bionicturtle.com/forum/threads/p1-t1-64-arbitrage-pricing-model-apt-versus-

capm.5328/

The causal relationship between energy consumption and GDP in Turkey

Huseyin Kalyoncu1, Ilhan Ozturk2, Muhittin Kaplan1

1Meliksah University, Faculty of Economics and Administrative Sciences, 38010, Kayseri,

Turkey.

2Cag University, Faculty of Economics and Business,33800, Mersin, Turkey.

Email: [email protected], [email protected], [email protected]

Abstract

This paper attempts to investigate the short-run and long-run relationship and causality

between energy consumption and economic growth during 1960-2006 period for Turkey.

Johansen and Juselius cointegration method and vector error correction model (VECM) have

been employed to examine this issue. After finding cointegration among variables, a VECM is

estimated and the Granger causality tests were carried out based on a VECM. The results have

shown that there is no short-run causality in both energy consumption and GDP models. The

results also confirmed that there is unidirectional long-run causality among variables of

interest and the direction of long-run causality is running from per capita GDP to per capita

energy consumption. As a result, conservation hypothesis which postulates unidirectional

causality from economic growth to energy consumption is confirmed for Turkey. Taken

together, these empirical findings involve valuable information for policy makers.

Keywords: Energy consumption, Economic growth, Causality, Turkey

http://www.wkipedia.org/

http://www.portfoliosolutions.com/f-11.html

http://www.investopedia.com/

http://www.bionicturtle.com/forum/threads/p1-t1-64-arbitrage-pricing-model-apt-versus-capm.5328/

http://www.bionicturtle.com/forum/threads/p1-t1-64-arbitrage-pricing-model-apt-versus-capm.5328/




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JEL classification: C3, O4, Q43

1. INTRODUCTION

The topic of causal relationship between energy consumption and economic growth has been

well-studied in the energy economics literature for both developing and developed countries.

The causality relationship between energy consumption and economic growth has important

policy implications. Hence, several studies have attempted to establish the relationship

between energy consumption and economic growth1. A general observation from these

studies is that the results have been mixed and it can be concluded that, almost all types of

causality results have been reported in the literature. The directions that the causal

relationship between energy consumption and economic growth has could be categorized into

four testable hypothesizes within the literature. First, the “neutrality hypothesis” suggests the

absence of a causal relationship between energy consumption and economic growth. Second,

the “conservation hypothesis” postulates unidirectional causality from economic growth to

energy consumption. Third, the “growth hypothesis” asserts unidirectional causality from

energy consumption to economic growth. Fourth, the “feedback hypothesis” emphasizes the

bidirectional relationship between energy consumption and economic growth in which

causation runs in both directions (Squalli, 2007).

There are few studies in which the energy consumption-growth nexus have been examined for

Turkey. Soytas et al. (2001) found that causality is running from energy consumption to

growth. However, the causality is running from economic growth to energy consumption

according to the study of Lise and Van Montfort (2007). On the other hand, while

bidirectional causality is confirmed in the study of Erdal et al. (2008), no causality is

investigated in the studies of Altinay and Karagol (2004), and Soytas and Sari (2009). Thus,

there is no consensus on the causality between energy consumption and growth for Turkey.

It is not possible to conclude definitely the direction of causality between energy consumption

and economic growth. However, it is known that this causality is of major importance for

effective energy policy design and implementation. A country that is energy dependent will

have a cautious energy policy because any negative shock on energy supply will have

negative effects on economic growth. On the other hand, in an economy where energy

consumption is determined by economic growth an energy conservation policy will have very

little affect on economic growth (Ouedraogo and Diarra, 2010).

The objective of this paper is to investigate the relationship and causality between energy

consumption and economic growth in Turkey for the 1960-2006 period by using Johansen and

Juselius cointegration method and vector error correction model. The results obtained in this

study are dependent on the sample period, the variables used and the methodology employed.

The rest of the paper is organized as follows: The next section describes the data and

methodology. Section 3 presents the results from empirical analysis. Section 4 concludes the

paper.

2. Methodology

The relationship between energy consumption and GDP has been discussed in detail in the

empirical literature. However, the results of the empirical studies provide mixed results on the

existence of causality and the direction of causality. The existence of cointegration 1 See Ozturk (2010) for detailed literature survey on energy-growth nexus.

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relationship between energy consumption and GDP is taken as evidence that there is close

relationship between these variables. Then, the direction of causality has been investigated. In

this study, we will examine the relationship between energy consumption and GDP estimating

vector error correction model (VECM). The VECM representations of energy model can be

written as:

(1)

(2)

where, represent the natural logarithm of energy consumption per capita

and reel GDP per capita respectively. ECT represents error-correction term and is the usual

error term.

The advantage of this formulation and estimation procedure is that it allows a straightforward

test of the direction and the source of causality. Using the VECM, we can test the long-run

and short-run causality between per capita energy consumption and GDP per capita. The

existence of short-run causality meaning that the dependent variable responds only to short-

term socks can be determined by testing the null hypothesis of in equation (1) and

in equation (2). To determine whether energy consumption cause economic growth

/or visa vice in the long-run, we look at the coefficients on the ECT’s in equations (1) and (2).

While the size of the coefficients on ECT indicates how fast deviations from long-run

equilibrium are eliminated, the significance of these coefficients implies the presence of long-

run causality among energy consumption and economic growth. We can also determine

whether these two sources of causality are jointly significant by testing the joint hypothesis of

in equation (1) and in equation (2). The

rejections of the joint hypothesis imply that following a shock to the system, both these

sources of causation are responsible for the re-establishment of long-run equilibrium.

3. Data and Empirical Results

All data are annually and gathered from the World Development Indicators (2008), Central

Bank of the Republic of Turkey (CBRT) electronic data delivery system, IMF’s International

Financial Statistics (IFS) website. The series employed in this study are per capita energy

consumption (lepc) and per capita real GDP (lpcgdp) and sample period is from 1960-2006

for Turkey. Table 1 provides descriptive statistics of the data used in the study. Per capita

energy consumption is expressed in terms of kg of oil equivalent and obtained from the World

Development Indicators (2008). The real GDP series is expressed in 1987 constant billion TL

(local currency) and obtained from the Central Bank of the Republic of Turkey (CBRT)

electronic data delivery system (www.tcmb.gov.tr). Per capita GDP series are obtained from

dividing real GDP series by population which is taken from IMF’s International Financial

Statistics website. All series are expressed in logarithms.

Table 1. Descriptive Statistics of Data

Variables Mean Standard deviation Median Maximum Minimum

PCEC 777.2 267.6 739.0 1304.0 274.0

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PCGDP 1288.9 388.8 1183.4 2160.3 702.1

Observations 47 47 47 47 47

Note: PCEC stands for the per capita energy consumption (in kg oil equivalent); PCGDP is per

capita GDP at 1987 constant Turkish Liras (TL).

The results obtained from preliminary analysis of data and estimation of the VECM equation

(1) and (2) on the causal relationship between per capita energy consumption and per capita

GDP are presented in this section. It become customary to check unit root of time series

before carrying out econometric analysis of the data since non-stationary regressors invalidate

most of the standard empirical results. For this reason, we first establish the level of

integration of the series using both the Augmented Dickey-Fuller (ADF) and the Phillips and

Perron (1988) (PP) unit root test tests. After establishing that series are I(1), we can proceed

to test for a long-run relationship between the series. The existence of the long-run

cointegration relationship among per capita energy consumption and per capita GDP will be

tested using the maximum likelihood estimation (MLE) method of Johansen and Juselius

(1990). If the cointegration relationship is found, then a VECM given above will be estimated

and related test of causality will be carried out.

We first perform unit root tests in levels and first differences in order to determine univariate

properties of the series used in this study. We, therefore, use the classical unit root tests,

namely, Augmented Dickey-Fuller (ADF) (see Dickey and Fuller, 1981; Said and Dickey,

1984) and PP unit root tests (see Phillips and Perron, 1988). The number of lags in the ADF

regressions is determined by using the Schwarz Information Criteria (SIC). Table 2 provides

the results obtained from the ADF and the PP tests over the sample period for the levels and

first differences of variables. The test results shows that while the hypothesis of a unit root in

levels cannot be rejected, it was rejected in first differences at the 1% level suggesting that the

variables are difference stationary, I(1) variable. This is true for both the ADF and PP test

statistics.

Table 2: Unit Root Test Results

Variables ADF Statistics PP test Statistics

Level First difference Level First difference

Lepc -0.9724 -13.7671*

-0.8301 -12.1625*

Lpcgdp -0.3770 -7.5360*

-0.3409 -7.5327*

1% Critical Value -3.5811 -3.5811 -3.5811 -3.5847

5% Critical Value -2.9266 -2.9266 -2.9266 -2.9281

10% Critical Value -2.6014 -2.6014 -2.6014 -2.6022

Note: (*) indicate 1% level of significance

Having established that all variables are integrated of the same order , we proceed with the

Johansen multivariate cointegration tests, which allow us to test for long run relationship

among the per capita energy consumption and per capita GDP. Before undertaking

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cointegration tests, let us first specify the relevant order of lags of the vector autoregression

(VAR) model. In determination of the relevant order of lags used in the VAR model, we used

the Hannan-Quinn (HQI) information criterion, the Schwarz Bayesian Criterion (SBC) and

Akaike’s Information Criterion (AIC). Table 3 presents the results on lag specification.

According to all of the lag selection criteria, the number of lags was determined as one.

Table 3. Selection of Lags

Number of Lags HQI criterion AIC criterion SIC criterion

1 -7.825731* -7.9163* -7.6706*

2 -7.621177 -7.7722 -7.3626

3 -7.389001 -7.6004 -7.0270

4 -7.159026 -7.4308 -6.6936

Note: * indicates lag order selected by the criterion. HQI, AIC and SIC stands for:

Hannan-Quinn information criterion, Akaike information criterion and

Schwarz information criterion respectively.

Table 4 provides the cointegration test results obtained from the Johansen and Juselius (1990)

method for the energy model. In the JJ method, two tests are used to determine the number of

cointegrating vectors (r): the trace test and the maximum eigenvalue test. In the trace test, the

null hypothesis is that the number of cointegrating vectors is less than or equal to r, where r is

0, 1, or 2. In each case, the null hypothesis is tested against a general alternative. In the

maximum eigenvalue test, the null hypothesis r = 0 is tested against the alternative that r = 1, r

= 1 against the alternative r = 2, etc.

The results show that the null hypothesis of no cointegration, i.e., r=0 is rejected by both the

maximum eigenvalue and the trace statistics since both of these statistics are greater than

corresponding critical values. Also, the null of r=1 cannot be rejected in favor of r=2. These

results confirm the conclusion that there is only one cointegrating relationship amongst the

two variables. Cointegration vector normalized with per capita energy consumption is found

to be 1, -0.506, and 1.099.

Table 4: Johansen-Juselius Maximum Likelihood Cointegration Tests results Trace Test Maximum Eigenvalue Test

Null

r = 0

r ≤ 1

Alternative

r ≥ 1

r ≥ 2

Statistic

31.1547*

0.0122

Critical

Values

15.4947

3.8414

Null

r = 0

r ≤ 1

Alternative

r = 1

r = 2

Statistic

31.1426*

0.0121

Critical

Values

14.2646

3.8414

Notes: Asterisks (*) denotes statistical significance at 5%. r stands for the number of cointegrating vectors.

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After we determined that per capita energy consumption and per capita GDP series are

cointegrated, we can proceed to test causality among these variables estimating a VECM.

Different from the VAR model, VECM allows us to investigate both the short-run and long-

run causality as well as joint causality of both long-run and short-run causality. The results of

the causality tests based on the VECM are presented in Table 5. The examination of the table

shows a number of important results on the causal relationship between per capita energy

consumption and per capita reel GDP.

Table 5. Granger causality test

Dependent Variable Sources of Causation (Independent Variable)

Short-run Long-run

ECT Joint Joint

lpcgdp lepc ( lpcgdp and ECT) ( lepc and ECT)

lepc 0.905

24.923*

12.784*

lpcgdp 1.250

0.497

0.634

Note: Asterisk (*) denotes statistical significance at 1% level of significance

The coefficient on lagged GDP term in the per capita energy equation and lagged per capita

energy term in GDP equation are statistically not significant event at 10% level. These imply

that there is no short-run causal relationship between per capita consumption and per capita

GDP.

In addition, the coefficient on the error-correction term (ECT) for the per capita energy

consumption is statistically significant at 1% level in which its t-value equals to -4.99 and its

size is equal to -0.5633 implying that adjustment coefficients are fairly high and deviations

from the long-run equilibrium are eliminated rapidly. The coefficient on the error-correction

term (ECT) in the per capita GDP equation (which is equal to -0.071 with t-value of -0.71) is

however statistically significant at 10% level of significance. Taken these two findings

together, the results imply that per capita real GDP variable is weakly exogenous and there is

unidirectional long-run causality between lepc and lpcgdp running from lpcgdp to lepc.

Furthermore, while the joint hypothesis that the coefficients on the ECT and the interaction

terms are jointly zero is rejected at 1% level in the per capita energy equation, the

corresponding hypothesis in the per capita real GDP equation could not be rejected at 10%

level. These findings provide further support for the results that there is unidirectional long-

run causality between lepc and lpcgdp and the causality is running from real GDP per capita

to per capita energy consumption. As a result, conservation hypothesis which postulates

unidirectional causality from economic growth to energy consumption is confirmed for

Turkey. Thus, energy consumption is determined by economic growth and energy

conservation policy will have very little affect on economic growth in Turkey.

Finally, considering the evidences provided in Table 5 together, it can be argued that there is

only a long-run causality between per capita energy consumption and per capita real GDP but

there is no short-run causality.

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4. CONCLUSION

This paper attempted to investigate the causal relationship between per capita energy

consumption and per capita GDP employing vector error correction model (VECM) for

Turkey. After finding cointegration among variables, a VECM is estimated and the Granger

causality tests were carried out based on a VECM. The results have shown that there is no

short-run causality in both per capita energy and GDP models. However, the coefficient on

the ECT term for per capita energy equation is negative and statistically significant implying

the presence of long-run causality among variables of interest. The results also confirmed that

there is unidirectional long-run causality among variables of interest and the direction of long-

run causality is running from per capita GDP to per capita energy consumption since the

ECT’s coefficient in the GDP equation is insignificant. This result was also confirmed by the

findings obtained from the joint hypothesis that the coefficients on the ECT and the

interaction terms are jointly zero. As a result, conservation hypothesis which postulates

unidirectional causality from economic growth to energy consumption is confirmed for

Turkey. Thus, energy conservation policy will have very little affect on economic growth.

Taken together, these empirical findings involve valuable information for policy makers.

It is well known that causality issue between energy consumption and GDP is of major

importance for effective energy policy design and implementation. For policy purposes, the

presence of long-run unidirectional causal relationship between per capita energy and per

capita GDP imply that energy consumption per head will increase in parallel with the level of

economic activity and hence it is very important to secure energy resources to achieve

sustainable economic growth.

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Erdal, G., Erdal, H., Esengun, K., 2008. The causality between energy consumption and

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Johensen, S., Juselius, K. 1990. Maximum likelihood estimation and inference on

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Lise, W., Van Montfort, K. 2007. Energy consumption and GDP in Turkey: is there a co-

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Ouedraogo, I.M., Diarra, M., 2010. Electricity consumption and economic growth in Burkina

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Ozturk, I., 2010. A literature survey on energy–growth nexus. Energy Policy 34(1), 340-349.

Phillips, P.C.B., Perron, P. 1988. Testing for a unit root in time series regression. Biometrika

75, 335-346.

Said, E.S., Dickey, D.A. 1984. Testing for unit roots in autoregressive moving average

models of unknown order. Biometrika 71, 599-607.

Soytas¸, U., Sari, R., Ozdemir, O., 2001. Energy consumption and GDP relation in Turkey: a

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Facilitating Competitiveness and Change in the Global Environment Proceedings. Global

Business and Technology Association, pp. 838–844. Available at:

http://sari_r2.web.ibu.edu.tr/yayinlarim/Energy%20Soytas_Sari_Ozdemir.pdf.

Soytas, U., Sari, R., 2009. Energy consumption, economic growth, and carbon emissions:

challenges faced by an EU candidate member. Ecological Economics 68(6), 1667-1675.

''Sustainable Development Projects as Opportunity for Economic Development of

Bosnia and Herzegovina''

Ajdin Perčo, Erkan Ilgun

International Burch University, Faculty of Economics

71000, Sarajevo, Bosnia and Herzegovina.

E-mails: [email protected]

Abstract

The global climate changes as a worldwide phenomena are on the top of the agenda of most

states and international organizations. The adverse effects we currently feel and even worst

things to come are stressing the need for action and firm resolution of this problem. In this

sense, the need for ‘’environment friendly’’ energy is becoming top priority and renewable

energy sources are in high demand. Furthermore, many countries are noticing this as a

development potential and are investing in this sector. One of these countries is Bosnia and

Herzegovina with its unlimited natural resources including wind, water etc. This paper will

analyze ongoing and planed projects in the area of renewable energy and economic benefits

Bosnia and Herzegovina will experience from it. Furthermore, after the adoption of Kyoto

Protocol and creation of state agency Bosnia and Herzegovina is now eligible to apply for

CDM (Clean Development Projects). These projects are financed by developed countries and

are to be implemented in developing countries. It goes without saying that this is enormous

opportunity for Bosnian companies and agencies to apply for these projects and bring foreign

investments that will boost domestic economy. Besides this, the journey of Bosnia and

Herzegovina towards European Union is requiring various laws to be adopted and

implemented. One of these laws are rules and regulations related to the various aspects of

climate changes and ways on how to combat climate changes. Financial incentives that

European Union is providing to ‘’green energy’’ companies and renewable energy sources are

additional motivation for Bosnia and Herzegovina to develop this are furthermore. Thereby in

this paper I will address the current issue of climate changes and the need for renewable

energy sources. Special focus will be on Bosnia and Herzegovina and the opportunities for

economic development available through investing and working on ‘’green energy’’ and

renewable energy projects. I will analyze current projects and future planned projects and

their impact on economic development of Bosnia and Herzegovina. The focus of the research

will be on various documents, projects and analysis currently available for this purpose. The

main finding is that Bosnia and Herzegovina is truly a country with great potential for

investments in renewable energy projects and the research paper will provide abundance of

arguments for this statement.


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Keywords: sustainable development, developing countries, Bosnia and Herzegovina,

renewable energy, ‘’green energy’’ projects, economic development, CDM (Clean

Development Mechanisms)

1. INTRODUCTION

Global climate changes are a long term changes in weather conditions including temperature,

rain, wind, level of water etc. According to many scientists and organizations including

United Nations Intergovernmental Panel on Climate Change (IPCC) these changes are mainly

caused by human actions that include increased level of greenhouse gas emissions.

Furthermore, scientists are predicting temperature increase in the range of 1.1 to 6.4 ºC

depending on the extent of the current greenhouse gas emission (The Carbon Neutral

Company, 2012).

Main sources of greenhouse gas emission are fossil fuel burn, industrial processes, waste

disposal, and traffic. The emitted gas is contained within Earth’s atmosphere and that way the

temperature is increasing and producing adverse effects. At the next stage, these adverse

effects will result in the extreme weather conditions, destruction of biodiversity, expansion of

desert area, rising sea level, spread of diseases, and possible disappearance of Gulf Stream. It

is obvious that the dramatic events will occur unless humanity find new ways to combat

climate change problems. One of the solutions offered is the concept of ‘’environment

friendly’’ energy that will provide new sources of energy. In the following part, we will

briefly examine the various sources of this type of energy.

2. Concept of ‘’Environment Friendly’’ Energy

‘’Environment friendly’’ energy or ‘’green energy’’ is usually considered to be made of the

following technologies and processes: biomass, solar energy, hydropower etc. Biomass as a

renewable energy source is biological material from living, or recently living organisms

(Biomass Energy Centre, 2011). Biomass energy derived from organic substances has been

used for thousands of years as from the moment when people started to use wood for cooking

and heating. Even today the wood is most important source of biomass energy. However,

many other materials including plants, wood industry waste and organic component of

industrial scrap are usable for production of biomass energy. Next technology is solar energy

has been used since the ancient times through the application of evolving technologies. Solar

energy technologies include solar heating, solar photovoltaic, solar thermal electricity and

solar architecture, which can make considerable contributions to solving some of the most

urgent problems the world now faces (Solar Energy Perspectives: Executive Summary, 2011).

Hydropower is mostly associated with the production of electricity through use of energy of

falling water. Energy produced this way is called hydroelectricity and it is being produced

with the use of dams. Bosnia and Herzegovina did not use its entire hydropower potential

since it is using only 40% of available capacity which is low level compare to some other

countries. In year 1991 there was 11 small dams which represented only 4,4% of available

capacities. However in the last few years there is rapid expansion in building of small dams

with hundreds of projects being constructed or waiting for approval. In year 2008, Bosnia and

Herzegovina operated with 14 big dams and with several of small dams that generate total

28,3 MW of electricity (Energis, 2010). Finally, wind power is the process of conversion of

wind energy into a practical form of energy. This can be done in several ways but mostly used

are wind turbines for production of electricity, windmills for mechanical power, and wind

pumps for drainage.

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3. Global Trends in Sustainable Development Projects Investments

Sustainable development projects are attracting interests of investors and there has been a

steady rise in the funding of these types of projects. The projects being financed include

biomass, geothermal and wind generation projects, hydro projects, solar projects, marine

energy projects, and biofuel projects. According to analysis conducted by Bloomberg, year

2010 was record setting in the amount of money of $211 billion being invested into

sustainable development (Bloomberg New Energy Finance, 2011). These funding were used

into various areas including: technology research and development, manufacturing scale up,

production etc. Furthermore, striking feature occurring in the couple of last years is the fact

that developing countries overtook developed countries in terms of investments. This has been

mostly due to China heavily investing into various projects amounting up to $48.9 billion

(Bloomberg New Energy Finance, 2011). As time goes on, the interest for sustainable

development projects can only increase and attract more investors from both governmental

and private sector.

4. THE OVERVIEW OF RENEWABLE ENERGY AND SUSTAINABLE

DEVELOPMENT PROJECTS IN BIH

4.1. Hydropower Potential

Small dams, along with biomass energy, are currently the most significant source of

renewable energy in BiH, and their development should be a priority when defining strategy

and policy for the sector of renewable energy. There are various evaluations about the

potential of small dams but there are no major differences between them. In the past studies of

JP EPBIH (conducted prior to year 1992) the hydro potential of BiH is evaluated around

99.256 HWh/year, technical potential of 23.395 GWh/year, and of which 2.599 GWh/year is

related to small dams with installed power of 700 MW that could be achieved by building

around 800 small dams with average capacity of 700 MW (Aleksandar Knezevic and Martin

Tais ,2007). According to study of EPBiH, technical potential of rivers eligible for small dams

construction is around 100 MW or 12.64% of total hydro potential of BiH. According to

ADEG, the potential for small dams construction is estimated on 1,004.63 MW or 3.519,74

GWh. Out of this, Federacija of BiH posses 2.090 GWh, and Republika Srpska 1.430 GWh.

Also, according to ADEG, a study has been conducted for around 160 locations for small

dams, and estimated capacities of those facilities were around 122 MW, which is 552 GWh of

electric power (Aleksandar Knezevic and Martin Tais ,2007).

4.2. Biomass energy potential

The most significant source of biomass for the purpose of energy production is a wood and

related waste produced in lumber industry. However, remaining of biomass from agriculture

also represent a substantial energy potential especially in the regions of northern, central, and

southern Bosnia and Herzegovina. Prior to year 1991, big companies from lumber industry

used wooden waste to produce steam within their own facilities and using available

technology. However, these facilities are now outdated and they run business creating huge

losses, or are completely shut down. The most detailed analysis has been done through

EU/FP6/INCO/ADEG project, and in the table below we can see the results (57% of the

potential is related to Federacija BiH, while 43% to Republika Srpska). Besides this

evaluation, it is worth of noting that assessment for the waste solely from lumber industry are

around 4,45 mil.m3 (Aleksandar Knezevic and Martin Tais ,2007). However it must be noted

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that none of the evaluations clearly defined what kind of potential is being described, whether

it is theoretical, technical, economic, or ecological potential.

4.3. Solar energy potential

Bosnia and Herzegovina on average has around 1840.9 solar hours, while on the south that

value is even higher and is around 2352.5 h/y. Theoretical potential for solar energy in BiH is

around 74.65 PWh which is 1.25 greater than the total of primary energy necessary for

Federacija BiH. Bosnia and Herzegovina is country with favorable conditions when it comes

to radiation of sun heating. According to available data, the sun is annually transmitting 1,250

kWh of energy in northern Bosnia, and 1,600 kWh energy in southern Bosnia. It is reasonable

to claim, considering the declining costs, that number of installed solar panels in BiH by ear

2015 could reach the area of 50 000 m2. This capacity could annually produce around 33

GWh of solar energy.

5. CDM Projects in Bosnia and Herzegovina

The view that human activities have resulted in global climate changes is supported by current

scientific thinking (NRC, 2011). From the onset of industrial revolution till the present days

of mass production, the damage to environment that industry caused has been immense. Since

the level of climate change has reached dangerous level, it was of utmost importance to

address issue on a global scale. At this point, The United Nations Framework Convention on

Climate Change has been produced in 1992, and Kyoto Protocol subsequently adopted in

1997.

Beside national laws, Kyoto Protocol established market based mechanisms to combat the

climate changes. Those measures include the following:

Emission trading

Clean Development Mechanism (CDM)

Joint Implementation (JI)

We will focus on Clean Development Mechanism which is allowing Annex I countries to

meet their target by investing globally into emission reduction projects. Through this

mechanism the Kyoto Protocol is offering industrialized countries cost-effective way of

reducing their emission and it benefits developing countries with new investments, and

thereby CDM is ‘’important instrument in fight against climate change’’(Schneider, 2007)

CDM projects can earn credits, so called CER (Certified Emission Reduction), where each

credit is equivalent to one tone of CO2. Credits can then be sold to contracted parties within

Annex B of Kyoto Protocol. In order for project to earn CER, it must present verified analysis

that will prove that the carbon emission reduction occurred, its proven and that the project is

solely responsible for that reduction.

Bosnia and Herzegovina ratified UNFCCC on May 17, 2000. The Kyoto Protocol was ratified

on April 22, 2007, after lengthy procedure that included ratification of agreement by various

state levels. But due to complicated procedures, BiH constituted Designated National

Authority only in September, 2011. Because of this delay the country missed investments

worth in millions of Euros that were part of Clean Development Mechanism (CDM). Head of

UNDP Regional Office in Banja Luka stated that ‘’the establishment of the DNA enabled

Bosnia and Herzegovina to start implementing the CDM projects of about EUR 400 million

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worth investments’’ (UNDP, 2011). Since Bosnia is non-Annex I country it is thereby eligible

to receive investments that are to reduce carbon emission, but has no any obligations to

reduce level of emission. The economic benefits would be worthy as it would boost economy

and create additional jobs. Furthermore, Bosnia has a great potential in renewable energy

sources including wing and solar energy. The region of Hercegovina is especially favorable to

renewable energy projects and by developing high quality CDM projects, Bosnian companies

have chance of attracting foreign investments.

6. Activities of EU and other international organizations

The biggest challenge of the modern era both globally and more profoundly in EU is the issue

of climate change, growing dependence on energy import, and restriction on free access to

energy resources. European Union prepared and is currently implementing ambitions energy

policy – the one that includes full spectrum of energy sources ranging from fossil fuel, nuclear

energy, and renewable energy (solar, wind power, biomass, geothermal energy, hydro power)-

aimed at starting new industrial revolution that will create economy with lower energy needs.

Bosnia and Herzegovina is clearly oriented toward EU integration. Led mostly by its

participation in The Energy Community Treaty for South Eastern Europe, BiH made some

important steps in adjusting its energy system and market mechanisms to the international

standards listed in international treaties, policies and best practices. Beside ECT SEE which

also includes signing certain EU rules for energy sector, BiH signed Stabilization and

Association Agreement (SAA) with EU, Energy Charter Treaty (ECT) and Protocol on

Energy Efficiency and Related Environmental Aspects (PEEREA), ratified Kyoto Protocol, as

well as many other international treaties. Those other treaties and projects include cooperation

with Instrument for Pre-Accession Assistance (IPA) funds, UNDP, World Bank, EBRD,

KfW, bilateral projects of technical assistance etc.

Another influential international organization that is playing its part in BiH when it comes to

sustainable development and renewable energy projects is GEF (Global Environmental

Facility). GEF has been founded in 1991 as a international financial mechanism for financial

and technical help to the developing countries with the aim of helping them achieve

international treaties they signed. Bosnia and Herzegovina is also participating in GEF, and

the following projects are currently being implemented: ''National Capacity Self Assessment

for Global Environmental Management’’, ‘’Promoting Energy Efficiency in Buildings’’,

‘’BiH Biomass Energy for Employment and Energy Security Project’’, and ‘’Preparation of

the Initial National Communication the United Nations Framework Convention on Climate

Change – UNFCCC’’.

7. CONCLUSION

As presented through this paper, the renewable energy projects and sustainable developments

have truly a great potential for economic development of Bosnia and Herzegovina. Through

the development of different kind of green energy, participation in CDM Projects, and

partnership with EU, Bosnia and Herzegovina can truly develop its economy and create new

jobs. Nevertheless, it is important to note that the country still did not use even the smallest

available potential in this area and there is still a long way ahead. But the prospects for the

future are good and look promising. In the coming period there will be a need for greater

involvement of state in this sector. The modern laws harmonized with EU regulations will be

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key in enabling Bosnia to attract foreign investments in this sector. Furthermore, NGOs and

governmental agencies will need to educate themselves in order to be able to apply for various

funds available in EU. Hundreds of millions of euros are available, but the projects proposal

must be of high quality and skillful people are key in bidding for these funds. Overall, Bosnia

and Herzegovina must continue the same way but should accelerate reforms and adjust its

market to more easily accommodate foreign investments in green energy and sustainable

development sector.

REFERENCES

1. NRC (2001). Climate Change Science: An Analysis of Some Key Questions, National

Academy Press, Washington, D.C., U.S.A.

2. Aleksandar Knezevic and Martin Tais (2007) Energetska efikasnost i obnovljivi izvori

energije, Prioriteti energetske strategije u BiH, Fondacija Heinrich Boll, p 91,92,93. URL

http://www.boell.ba/downloads/energetska_efikasnost_i_obnovljivi_izvori_energije_final.pdf

, retrieved on April 23, 2012

3. Schneider, L. (2007), An evaluation of the CDM and options for improvement, URL

http://wwf.panda.org/what_we_do/footprint/climate_carbon_energy/energy_solutions/resourc

es/?118000/An-evaluation-of-the-CDM-and-options-for-improvement , retrieved on February

12, 2012

4. Energis (2010) Hydropower, URL http://energis.ba/?lang=bh&n1=3&n2=17&n3=0&c=16

, retrieved on February 2, 2012

5. Biomass Energy Centre (2011) What is biomass?, URL

http://www.biomassenergycentre.org.uk/portal/page?_pageid=76,15049&_dad=portal&_sche

ma=PORTAL retrieved on March 10, 2012

6. International Energy Agency (2011) Solar Energy Perspectives: Executive Summary, URL

http://www.webcitation.org/63fIHKr1S , retrieved on January 15, 2012

7. Bloomberg New Energy Finance (2011) Global Trends in Renewable Energy Investment,

5, ISBN: 978-92-807-3183-5

8. UNDP (2011), Clean Development Mechanism Projects – Pathway to New Investments in

BiH, URL http://www.undp.ba/index.aspx?PID=7&RID=723 , retrieved on January 18, 2012

9. The Carbon Neutral Company (2012) Climate change summary, URL

http://www.carbonneutral.com/knowledge-centre/climate-change-summary/ , retrieved on

February 25, 2012

The Relationship Between Tax Revenue And Economic Growth In Turkey: The Period

Of 1975-2011

Yeşim Helhel,Yakup Demir

Akdeniz University, Tourism Faculty, Antalya, TR

Abstract

In the study, the relationship between tax revenues and economic growth for the Turkish

economy has been examined in the period of 1975-2011. Johansen Juselious cointegration test

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and Granger causality test have been used in order to find long term and short term

relationship, respectively. Impulse-response function and variance decomposition analysis

have been applied via VAR model. The findings have shown that there is interaction between

tax revenue types and the economic growth in the long term and is not such an interaction in

the short term. The effect of the shock given to indirect tax revenue to economic growth rate

has decline; the response of growth rate to shock given to direct tax revenue has been

tendency to rise up towards the end of the period. In the variance decomposition method;

direct tax revenue is more effective than indirect one. But, the growth rate that is expressed by

GDP (gross domestic product) or other factors affecting growth rather than tax revenue has

been appeared affected itself.

Keywords: Direct tax, indirect tax, economic growth, granger causality test, co-integration

test, VAR

1.INTRODUCTION

Turkey has adopted foreign trade policy and strengthening of free market economy as an

economic growth model with the beginning of 1980’s, and applied them so far as basic

principles. In this model, increase of demand, encouragement of private sector and making the

price policy more functional are acceptable principles of the free market. The government that

has fiscal and monetary policy instruments is assumed as a catalyst instead of interference to

economy. The major fiscal policy tools to have sustainable growth process by government are

(Paksoy, S. and S. Bakan, 2010, p.154) ;

Expenditure

Income

Debt policies.

Aside from expenditure and debt policies, tax revenue is the most important tool within the

income policy. Tax is an economic value to finance public services taken by individual &

corporation compulsorily according to their ability to pay ( Pehlivan, O., 2009: p.19). It is

important that while government actualizes fiscal and non-fiscal services, tax burden should

be delivered equitable, and the distribution of tax should balance the condition of stability.

Moreover, tax should be taken in accordance with legal principles, and should increase the

level of welfare. But these considerations are not enough alone. It’s also important that tax

revenue must be used for society services and contribute the country’s economic growth and

development, otherwise, the citizens of the country damage from that wrong policy.

Economic growth is one of the macro variables related to tax revenues. Neo-classic growth

models claimed that economic policies don’t have any impact for long term growth

percentage and they also adverted that government’s interference by means of fiscal policy is

unnecessary, moreover, damages optimal distribution of resources. In spite of these theories,

endogenous growth models revealed that fiscal policy tools, such as public expenditures,

taxation and subsidies etc. have strong impact on long term growth percentage. Many models

have been constituted to prove this case (Yanpar, A., 2007, p.1).

When the impact of taxes on economic growth has been analyzed, the distinction of direct and

indirect taxes has been made in recent years. Due to the importance of that discrimination to

shape tax system vigorously, the relationships between aforementioned tax types and

economic growth have been evaluated by means of Vector Autoregressive Model (VAR) in

our study. Although our study is similar to the other studies related to Turkish economy in

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terms of analysis technique, it is different in terms of the analysis period. The focus of this

study is that the effect of tax revenues to economic growth will be positive in developing

countries in the case of legal regulations are made about tax policy.

2.DIRECT AND INDIRECT TAXES

Direct taxes are taken from individuals and institutions according to their levels of revenue

whose tax payer is also the same with payer on this subject, tax payer cannot transfer own tax

burden to others. Income and corporation tax are both example of direct taxes. Indirect taxes

arise from the use of services and goods. Everyone derived benefit from services or goods

liable to tax has to pay it at the same rate regardless of income level. Tax payer and payer are

different on this subject. Value added tax (VAT) and excise tax are both example of indirect

taxes (Temiz, D. , 2008, p.3).

Direct taxes which consist of income tax, property tax and corporation tax, indirect taxes

which consist of taxes taken from both domestic and foreign trade have different function and

impact on the economies. Direct taxes have the results for high income groups which have

inclination to high savings and investment and also low marginal propensity to consume. On

the other hand, indirect taxes have results for low income groups. The basic aim of the

taxation is to create resources to cover expenses of public for both developed and developing

countries. So, both tax types can also be used as a policy tool. However, the characteristics of

the distribution of tax revenues are expected to impact upon economic growth and

development line in the developing countries where indirect tax revenue is an important part

of total tax revenues (Açıkgöz, Ş., 2008, p.93).

Chart 1. The Percentage of Direct and Indirect Taxes (www.tcmb.gov.tr)

The high ratio of indirect taxes is closely associated with economic growth & development.

Since tax systems & policies are not fully settled in the developing countries, they focus on

indirect taxes (Göçer, İ., M., Mercan et all, 2010, p.99). While the ratio of direct tax to the

total tax revenue in the developed countries is high, it reverses for the developing countries.

This reversal is a result of easier collection of indirect taxes, and that easiness comes from the

unawareness of tax payers about statutory obligation. So, they do not respond to tax

executives. When the progress of direct and indirect taxes have been examined, the

composition of total tax revenue reversed from direct tax to indirect tax revenue after 1990s.

The indirect tax percentage rose up to 67% from 48% between 1990 and 2011. Turkey

distinguishes from developed countries with this tax structure. This deterioration is a result of

increased value added tax rate like excise tax rate. Table 1 shows the distribution of indirect

and direct tax revenue percentages between 1990-2011 years.

http://www.tcmb.gov.tr/

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3.LITERATURE REVIEW

Engen and Skinner (1996) shown that tax affects economic growth in moderate levels in the

long-term. But this moderate effect may have large cumulative effect on living standards. Lee

and Gordon (2005) shown that corporation tax rate has negative relationship with economic

growth, and there is no relationship between tax rate associated with manpower income and

economic growth by analyzing 27 years long data set of 70 countries between 1970- 1997.

The relationship between economic growth and tax revenue in the period of 1965-2002 was

tested in the study of Anastassiou and Dritsaki (2005) for Greek economy. According to their

findings; there are relationships between total tax revenues, marginal direct tax rates, savings-

income rate and economic growth in the long term. They have reported that there is one-way

causal relationship from total tax revenue and marginal direct tax rate to the economic growth

in the short term.

The relationship between tax revenue and economic growth was investigated for Turkey by

Durkaya and Ceylan (2006), and they used Engle-Granger co-integration test in order to

search long term relations between direct and indirect tax revenues and economic growth.

Vector error correction model (VECM) and Granger causality test were used to investigate

short-term relations between direct and indirect tax revenues and growth for the years of

1980-2004. The findings show that there is causal relationship between direct tax and growth.

Temiz (2008) analyzed to find relationship between public tax revenues and economic growth

for 1960-2006 years. Temiz used Johansen co-integration test to search long term relations

and VECM to search short term relations. The findings show that there are two way causal

relationships between total tax revenue and economic growth. Açıkgöz (2008) used causality

analysis and impulse-response functions to determine causal relationships between tax types

and economic growth.

The findings are that the direction of casual relations is from economic growth rate towards

the proportion of direct tax revenue in total tax revenue and the proportion of indirect tax

revenue in total tax revenue. Additionally, one-way causal relationship from direct tax burden

(proportion of direct tax revenues to GDP) toward growth rate has also been reported.

Mucuk & Alptekin (2008) applied VAR analysis in order to investigate the casual relationship

between tax types and economic growth for the period of 1975-2006 for Turkey. They

determined the relationships among them by means of co-integration test for the long term

duration, and the granger causality test shows that there is one way relation from direct tax

revenue toward economic growth in the short term

4. DATA SET, METHOD AND FINDINGS

In this study, the proportion of direct taxes to GDP (direct tax burden), proportion of indirect

taxes to GDP and annual GDP have been used for the period of 1975-2011 by using annual

data for Turkey. Annual data have been provided from Central Bank of Turkey and Revenue

Administration of Turkey. “L” and “D” used in front of variables refer to the logarithm of that

variable and first difference of that variable, respectively. ADF test has been applied to series

for stationary of them in order to investigate the relationships between the variables, and

Table1 indicates the ADF test results. Critical values have been evaluated by Eview-5

econometrical program and based on MacKinnon values.

ADF test results have indicated that the levels of variables are not stationary, but first levels of

variables are stationary. Johansen-Juselius test has been used in order to examine long-term

relationships between variables, by then. In Johansen-Juselius test, two different tests called

Trace and Max Eigen value statistics have been applied to determine the number of co-

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integration vector and whether they are statistically significant or not. Before these tests have

been applied, the length of optimal lag should have been determined under different criteria.

Taking into account annual data usage and shortness of period, the maximum lag length has

been determined as 3. As can be seen in Table 2, the lag length has been found as “0”

according to the all criteria (Mucuk, M. V., Alptekin, 2008, p.165).

Table 1: The Results of ADF Test of Values

Unit Root Test Results Belong to Level of Variables

Constant Constant –Trend

Variables m ADF –t M ADF-t

Ldtax 0 -2.028 (-2.611) 0 -2.051(-3.202)

Lgdp 1 -1.623 (-2.622) 4 -2.822(-3.243)

Lindtax 0 -0.128 (-2.611) 0 -2.951(-3.202)

Unit Root Test Results Belong to First Level of

Variables

Constant Constant-Trend

Variables m ADF –t M ADF-t

DLdtax 0 -9.312 (-2.614) -9.228 (-3.207)

DLgdp 0 -4.131 (-2.627) -4.327 (-3.229)

DLindtax 1 -6.850 (-2.615) -6.731 (-3.209)

Note: “m” given in the table shows dependent variable lag determined by Akaike

Information Criteria the values within parenthesis show critical values of MacKinnon

Table at the level of %10 statistical significance

Table 2: The Criteria of Lag Length Determination (* shows lag length by ciriteria)

Lag

Length

LogL LR FPE AIC SC HQ

0

-21.36558

NA*

0.001529* 2.030465* 2.177722*

2.06953*

1 -14.42982 11.55959 0.001833 2.202486 2.791513 2.35875

2 -12.45725 2.794483 0.003437 2.788104 3.818901 3.06157

3 -4.74705 8.995233 0.004270 2.895588 4.368155 3.28626

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Johansen-Juselius co-integration test findings have been in Table 3 & Table 4 according to

Trace & Max-Eigen statistics in the framework of determined optimal lag length. Trace

statistics indicates “1” co-integration equation(s) at the (0.05) level. Max-Eigen statistics also

indicates “1” co-integration equation(s) at the (0.05) level. This results show that the variables

of both tax types and economic growth have been acted together in the long term.

Table 3. Cointegration Test According to

Trace Statistics

Table 4. Cointegration Test According to

Max Eigen Statistics

Hypothesi

s

Eigenvalu

e

Trace

Statistic

%5

Critical

Value

Hypothesi

s

Eigenvalu

e

Trace

Statistic

%5

Critical

Value

None 0.642802 3.804.75

8

2.979.70

7

None 0.642802 2.470.71

6

2.113.16

2

At most 1 0.326940 1.334.04

1

1.549.47

1

At most 1 0.326940 950.209 1.426.46

0

At most 2 0.147796 383.831 384.146

At most 2 0.147796 383.831 384.146

Short term relations of variables have been evaluated with Granger causality test as shown in

Table 5. There is no any relationship between economic growth and indirect or direct tax

revenues in the short term. It should be pointed out that there should be other factors which

may affect to the economic growth

Table 5: Granger Causality Test Results

Null Hypothesis Chi-sq Prob.

Growth is not the granger cause of indirect tax

Growth is not the granger cause of direct tax

Indirect tax is not granger cause of growth

Direct tax is not granger cause of growth

0.674505

0.273824

2.740258

2.503435

0.7137

0.8720

0.2541

0.2860

5. VAR ANALYSIS TEST RESULTS

Size of the effects of direct and indirect tax revenues to economic growth with the help of

VECM has been presented in this part. Evaluation has been completed through impulse-

response functions and variance decomposition analysis. VECM model has been used instead

of VAR models because of long term and consistent relationships among variables. Impulse-

response function (IRF) reflects the effects of one standard deviation shock in one of the

random error terms to the present and future values of internal variables. Chart 2 shows the

impact of the shocks that occur in the variables of direct and indirect tax revenues on variable

of GDP for VECM. While the impacts of one standard error shock occurred in indirect tax

revenue on the economic growth has increased till second term, it has decreased till fourth

term and decreasingly lost its significance. While the impacts of one standard error shock

occurred in direct tax revenue on GDP has decreased till third month and gradually increased.

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-.08

-.04

.00

.04

.08

.12

1 2 3 4 5 6 7 8 9 10

Response of GDP to INDTAX

-.08

-.04

.00

.04

.08

.12

1 2 3 4 5 6 7 8 9 10

Response of GDP to DIRTAX

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Inverse Roots of AR Characteristic Polynomial

Chart 2 : Impulse-response Functions Chart 3 : IR of AR Characteristic

Poly.

It’s necessary to evaluate the variance decomposition results to determine the importance of

potential random shock in any variable. Variance decomposition distinguishes one of the

internal variable deviations affecting all internal variables as separate shocks so that it gives

information about the dynamic situation of the system. Variance decomposition presents

alternative approach to reveal dynamics of VAR system. The source of variance deviation of

variables in the model can be decomposed, thus the percentage of changes resulted from itself

and other variables can be understood easily (Özsoy, C., 2007, S.11).

A change in GDP occurs in the 1st period is resulted from only itself (excluding tax revenues,

other factors affecting growth). In this sense, tax revenues don’t affect GDP in the first period.

The effect of it appears after 2nd period and shows an increase during periods. Direct tax has

the most impact on GDP. Approximately 26% of the variance for GDP is explained by direct

tax in 10th period and approximately 71% of it is affected by itself (or other factors affected).

The effect of indirect tax to change is remained at 3%.

It is necessary to test the model whether it has stationary or not. The stationary of model

depends on eigenvalue of coefficient matrix. If eigenvalues of coefficient matrix are within

the unit circle, the system is stationary or stable. If at least one eigenvalue is out of the unit

circle or on the unit circle, the system is not stationary and it indicates expanding

characteristics (Mucuk and Alptekin, 2008, p.168). The position of inverse roots of AR

characteristics polynomial shown below proves that presented model is stationary as shown in

Chart 3.

Table 6 : Variance Decomposition

PERIOD SE GDP INDTAX DIRTAX

1 0.110236 100.0000 0.000000 0.000000

2 0.115645 96.31835 3.667978 0.013668

3 0.125720 81.65548 3.526506 14.81801

4 0.129691 76.96164 3.674209 19.36416

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5 0.132262 75.07070 3.797569 21.13173

6 0.138779 76.11258 3.588492 20.29893

7 0.142982 76.10009 3.608613 20.29130

8 0.146186 73.90997 3.494080 22.59595

9 0.149230 71.74413 3.359454 24.89641

10 0.151868 70.68551 3.244468 26.07003

6. CONCLUSION

In this study, an interaction between tax revenue types and the economic growth in the long

term has been proved by co-integration test, and Granger causality test does not indicate any

interaction in the short term. In other words, the effects of tax policies applied do not appear

in the short term, but can appear in the long term. In according to IRF; the effect of the shock

given to indirect tax revenue to economic growth rate has declined; the response of growth

rate to shock given to direct tax revenue has been tendency to rise up towards the end of the

period. In the variance decomposition method; direct tax revenue is more effective than

indirect one. But, the growth rate, which is expressed by GDP (gross domestic product) or

other factors affecting growth rather than tax revenue, has been appeared affected itself.

If tax revenue has been channeled to incentives for investment, it can lead to the economic

growth. Since Turkey experienced the national and global crises in between 1975-2011,

governments in preparing their budgets were not investment-oriented, but they were oriented

to overcome the crises. The budget was performed to meet the deficit and scale up tax ratio.

Moreover, a stable tax policy was not applied in Turkey, the policy prevailed by a government

was removed or lessened effectiveness of it by subsequent governments. Although the ratio of

indirect tax has been increased over the years, its impact on economic growth remains weak.

Despite being a relationship between direct tax and economic growth in the long period, this

relationship is weak. The other factors affecting GDP growth rather than tax revenue have

gained weight.

Acknowledgement: This paper has been supported by Akdeniz University, Scientific

Research and Projects Supporting Unit (BAPB).

REFERENCES

Açıkgöz, Ş.(2008), “Tax Revenue, Taxation Mix and Economic Growth Relationship in

Turkey: 1968-2006”, Ekonomik Yaklaşım,V:19, N.68, p.91-113.

Anastassiou, T. and C., Dritsaki (2005), “Tax Revenues and Economic Growth: An Empirical

Investigation for Greece Using Causality Analysis”, Journal of Social Sciences, 1(2), 99-104.

Demircan, Siverekli, E.(2004), “Vergilendirmenin Ekonomik Büyüme ve Kalkınmaya Etkisi”,

Erciyes Üniversitesi, İİBF Dergisi, N.21.

Engen, E.M and J., Skinner (1996), “Taxation and Economic Growth”, National Tax Journal,

49 (4), 617-642

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Durkaya, M., S., Ceylan, “Tax Revenues and Economic Growth”, Maliye Dergisi, N.150,

p.79-89.

Ekici, M.Sena (2009), “The Determinants of Tax Revenue & Its Economical-Social Side”,

Electronic Journal of Social Sciences, V.8, ISSN : 1304-0278, p.200-223

Göçer, İ., M., Mercan, et all (2010), “Ekonomik Büyüme İle Vergi Gelirleri Arasındaki İlişki:

Sınır Testi Yaklaşımı”, Dumlupınar Üniversitesi Sosyal Bilimler Dergisi.

Güriş, S, E.Çağlayan and B.Güriş (2011), Eviews İle Temel Ekonometri, Der Yayınları,

İstanbul, ISBN: 9789753533706

Lee, Y., R.Gordon (2005), “Tax Structure and Economic Growth”, Journal of Public

Economics, 89, p.1027-1043.

Mucuk, M. and V., Alptekin (2008), “The Relationship Tax and Economic Growth in Turkey:

VAR Analysis (1975-2006)”, Maliye Dergisi, N.155, p.159-174

Paksoy, S. and S, Bakan (2010), “Tax Policies Which are Applied in Turkey & Effects of

Them on Economic Growth: (After 1980)”, Journal of Social Sciences, V.9, ISSN : 1304-

0278, p.150-170

Pehlivan, O.(2012), Vergi Hukuku, Genel İlkeler ve Türk Vergi Sistemi, Murathan Yayınevi,

Trabzon, ISBN: 9786055451219

Temiz, D.(2008), “The Relationship Between Tax Revenues and Economic Growth in Turkey

: The Period of 1960-2006”, 2.National Economy Congress, İzmir,

Özsoy C.(2009), "Türkiye'de Eğitim ve İktisadi Büyüme Arasındaki İlişkinin VAR Modeli İle

Analizi", The Journal of Knowledge Economy & Knowledge Management, Vol:IV, , 71-83.

Turan, T.(2008), “Maliye Politikası Araçlarının Ekonomik Büyüme Üzerindeki Etkileri: Bir

Literatür İncelemesi”, Sayıştay Dergisi, S.69, p. 17-36

Yanpar, Atila (2007), Gelişmekte Olan Ülkelerde Büyüme Yönelimli Vergi Politikası,

Master Degree Thesis,

Yılmaz, Ö., V.Kaya(2007), “İhracat, İthalat ve Reel Döviz Kuru İlişkisi: Türkiye İçin Bir

VAR Modeli”, İktisat İşletme ve Finans Dergisi, p.250, 69-84.

The Effect of Exchange Rate Volatility on Import Demand: Evidence from Turkey

Demirgil Hakan1, Keskin Hidayet1, Karaöz Murat2,Şentürk, Canan1

1Süleyman Demirel University, Isparta, Turkey

2Akdeniz University, Antalya, Turkey,

Abstract

Since 2001 financial crisis, Turkey has adopted fluctuating exchange rate regime in order to

make the economy stronger against external shocks. This has lead to a high volatility of

Turkish lira against to foreign currencies. Therefore, it became essential for policy makers to

evaluate the potential effects of exchange rate volatility on international trade. The purpose of

this study is to provide new evidence on the effects of exchange rate volatility on the import

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demand of Turkey along with income and price elasticities. Our data cover the period 2010:01

to 2010:05. We, initially, employed a GARCH model to evaluate exchange rate volatility one

of the independent variables that estimate real import. The study also includes conventional

determinants such as relative price level of imports and real GDP. Afterwards, our paper

investigates long-run and short-run relationship between real imports and its determinants by

using ARDL error correction model. The empirical results indicate that real exchange rate

volatility of local currency has significant and reverse effect on import demand.

Keywords: Exchange rate volatility, Import demand, GARCH model, ARDL error correction

model, Turkey.

1. INTRODUCTION

The high degree of volatility and uncertainty of exchange rate movements since the beginning

of the generalized floating in 1973 have led policy makers and researchers to investigate the

nature and extent of the impact of such movements on the volume of trade. Most studies

investigate empirically the effects of exchange rate volatility on the export flow. However,

there are only a few studies which investigate the impact of exchange rate volatility on import

demand.

Gotur (1985) found mixed evidence regarding the effect of exchange rate volatility on import

demand using aggregate data for the US, Germany, France, Japan and UK. The main

conclusion of this analyze is that the Akhtar-Hilton methodology fails "to establish a

systematically significant link between measured exchange rate variability and the volume of

international trade". Anderton and Skudelny (2001) estimated euro area import demand

function for the period 1989:01 to 1999:02. They found a significant negative effect of extra-

euro area bilateral exchange rate volatility on euro area imports. Aydın et al. (2004) examines

the export supply and import demand for the Turkish economy using both single equation and

vector auto regression frameworks. The analysis shows the real exchange rate as a significant

determinant of imports and the trade deficit, but not of exports. Baum et al. (2004) estimates

the impact of exchange rate volatility on real international trade flows utilizing a 13 country

dataset of monthly bilateral real exports for 1980-1998. They find that the effect of exchange

rate volatility on trade flows is nonlinear, depending on its interaction with the importing

country’s volatility of economic activity, and that it varies considerably over the set of

country pairs considered.

Arize (1998) tried to apply the co-integration technique to the import demand model using

quarterly data over 1973:02 through 1993:04 and estimated the short- and long-run influence

of exchange-rate volatility on the import flows of the United States. The major finding is that

there is a significant long- as well as short-run negative effect of exchange-rate volatility on

the volume of imports. Arize and Shwiff (1998) provided new evidence on the long-run

relationship between import flows and exchange-rate volatility in G-7 countries, during the

quarterly period 1973:02 to 1995:01. They found that exchange rate volatility has a significant

negative effect on the volume of imports of G-7, countries whereas for Canada, it is positive

and significant.

Hwang and Lee (2005) examine the impact of exchange rate volatility on trade flows in the

UK, over the period 1990-2000. Volatility is modelled by GARCH-M method. This study

identifies the existence of a positive relationship between exchange rate volatility and imports

in the U.K. in the 1998. Gül and Ekinci (2006) investigate the interactions between the real

exchange rates and export and import applying bivariate Granger causality test in Turkey. The

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results indicate that there is a cointegrating relationship between the real exchange rates and

export and import. Erden and Sağlam (2009) investigate the impact of exchange rate volatility

on import demand in Turkey. The results indicate that while volatility and import demand on

investment goods are co-integrated and are negatively related, there is no co-integrating

relationship between exchange rate volatility and import demand on consumptions goods. Sarı

(2010) provides the exchange rate volatility by using MSARCH which is a new econometric

method; the results indicate that the import and exchange rate volatility are inversely related.

Alam and Ahmed (2010) estimated the import demand function for Pakistan covering

quarterly period 1982:01 to 2008:02 by employing ARDL approach. The result from ARDL

analysis, support the hypothesis that in Pakistan there exist a long run relationship among,

import demand, real economic growth, relative price of imports, real effective exchange rate

and volatility of real effective exchange rate.

2. Data and Methodology

For the following analysis, we gathered data on real import demand (RIMP) which is

constructed as nominal import level deflated by the unit value index of import level, relative

price (RELPR) which is the ratio of import price index of Turkey to consumer price index for

Turkey (CPI), real GDP (GDP) seasonally adjusted using by CENSUS X12 method and

exchange rate volatility (VOL). A continuous monthly sample from 2000:01 to 2010:05 is

used in this study. RIMP, RELPR, GDP and CPI variables collect from Turkish Statistical

Institute. Exchange rate volatility means that risk level faced by importers due to

unpredictable fluctuations and thus it is an unobservable variable. We, therefore, used the

conditional variance measure derived from GARCH model by Bollerslev (1986):

where c is constant term, are the coefficients and is the error term normally distributed

with mean zero and variance . ARCH model developed by Engle (1982) presume that the

variance can be obtained from the following AR process:

where is the conditional variance of exchange rate, are the coefficients and

indicates the squared residuals from the mean equation. However, the GARCH (p,q) process

is a widening version of ARCH in which is a function of the lagged values of itself as well

as of . The conditional variance of exchange rate is estimated by:

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The most familiar drawback of testing for nonstationary in the process of time series is the

very low power of unit root tests. Thus, a method which has received considerable attention

over the past years is the autoregressive distributed lag (ARDL) bounds testing approach to

cointegration developed by Pesaran and Shin (1999) and Pesaran et al. (2001) is usually used.

The advantages of this method are to compare with other cointegration procedure. Firstly, a

major advantage of this approach is that order of integration for each variable is not required

for testing on the existence of a long-run relationship between them. More precisely, it is not

relevant whether the variables are I(0) or I(1). Moreover, the long and short run coefficients

can be estimated simultaneously and a dynamic error correction model (ECM) can be derived

from ARDL through simple linear transformation.

Applying the method, the error correction version of the ARDL model is given by:

where the c is the constant tem, are the long run multipliers, are the short run coefficients

and is the white noise error term. To test the long run relationship, an F-test on the null

hypothesis of no cointegration in the long run relationship is defined by

, against the alternative hypothesis of

is conducted. The calculated F statistic is compared with the

critical values provided by Pesaran et.al (1999). If the calculated F statistic lies above the

upper bound, the null hypothesis of no cointegration is rejected. In other case, the null

hypothesis can be accepted if F statistic below the lower bound. If the existence of a

cointegration relationship is identified, then following cointegration model is projected:

The selection of the orders of lags in ARDL model is very important which is guided by

Akaike Information Criterion (AIC). Furthermore, the properties of the residuals are checked

to ensure the absence of serial correlation. Finally, the dynamic short-run coefficients for the

error correction representation are estimated according to;

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where ECMt-1 is the error correction term resulting from estimated long run equilibrium

relationship;

and is the coefficient represent the speed of adjustment to long run equilibrium i.e. the

percental monthly correction of a deviation from the long run equilibrium the month before.

3. Empirical Results

The Augmented Dickey Fuller (ADF) and Philips-Perron (PP) tests results are shown in Table

1. This tests shows that RIMP, RELPR, GDP are to be integrated of order one, I(1), except for

measures exchange rate volatility (VOL). VOL is to be integrated of order zero, I(0).

Evidently, composition of I(0) and I(1) variables provides a good reason for using the bounds

test approach (ARDL model).

Table 1. ADF and PP tests of the series

Variable ADF test with intercept Philips-Perron test with intercept

Level First Difference Level First Difference

RIMP -0.861 -2.906** -1.912 -18.695*

RELPR -1.665 -5.889* -1.383 -9.185*

GDP -1.366 -8.245* -1.462 -7.136*

VOL -7.441* -15.659* -7.484* -67.973*

Critical values are: -3.483 (for 1% level), -2.887 (for 5% level), -2.581 (for 10% level). *,**

and *** indicates significant at 1%, 5% and %10 level respectively.

In the first stage of the ARDL procedure, the order of lags on the first differenced variables

for eq. (4) is usually obtained by means of Akaike Information Criterion (AIC). Given that we

are using monthly observations, we experimented up to 8 lags on the first-difference of each

variable and decided to choose 2 lags length.

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Table 2. Lag Lengths for Bounds Test

Lag Length AIC Breusch-Godfrey LM Test

(Prob.)

8 6,9658 0.142

7 6,9673 0.571

6 6,9036 0.734

5 6,9024 0.108

4 6.8588 0.104

3 6.7958 0.413

2 6.7951 0.507

1 6.7976 0.401

In Table 3, the results of the bounds co-integration test demonstrate that the null hypothesis of

against its alternative is easily rejected at the 5% significance level. The computed F-statistic

of 4.738 is greater than the lower critical bound value of 3.49; thus indicating the existence of

a steady-state long-run relationship among RIMP, RELPR, GDP and VOL.

Table 3. Bounds Test for Cointegration Analysis

K Bounds F test Critical Values

3 4.738

Lower Bound Upper Bound

%90 level 2.97 4.00

%95 level 3.49 4.58

%99 level 4.56 5.83

Diagnostics

R2=0.440 F-Statistics=5.398 (0.000) D-W Stat=1.938

Breush-Godfrey LM=1.59

(0.451)

Jarque-Bera=10.307 (0.005) White Test= 7.872

(0.928)

Ramsey RESET=0.312

(0.577)

Given the existence of a long-run relationship, in the next step we used the ARDL

cointegration method to estimate the parameters of ARDL (1,0,1,1) model. GDP and VOL

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variables display the expected signs for the regressors and they are highly statistically

significant. The results of long run test suggest that the demand for imports in Turkey has not

been affected by an increase in the relative price level of import. Because, Turkey mostly

imports goods that are essential for continuing economic activity like petroleum products and

raw materials.

Table 4. ARDL (1,0,1,1) Model and Long Run Coefficients

Variable Coefficient t-stat

Constant -33.426 -3.758*

RIMPt-1 0.331 3.763*

RELPR 0.139 0.825

GDP 2.48E-06 0.507

GDPt-1 8.73E-06 1.843*

VOL -0.069 -1.996**

VOLt-1 0.034 1.002

Coefficients for Long Run

Constant -50.002 -3.815*

RELPR 0.208 -0.989

GDP 1.676E-05 3.763*

VOL -0.051 -3.994*

Diagnostics



(0.636)

Jarque-Bera=13.375 (0.001) White Test=3.279 (0.785)

Ramsey RESET=1.184

(0.278)

*, **and *** denote significance at the1%, 5% and 10% level, respectively.

Error Correction Model (ECM) is employed to check the short run relationship among RIMP,

RELPR, GDP and VOL. The t-statistics of ECM is statistically significant which shows that

there is short run relationship among variables and results are incorporated in Table 5. The

coefficients of error correction term represent the speed of adjustment of this variable back to

its long- run value following a shock. 81% of any deviation from the long-run equilibrium is

corrected every month.

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Table 5. Error Correction Representation of ARDL Model

Variable Coefficient t-stat

Constant -0.171 -0.254

ECMt-1 -0.816 -5.039*

RIMPt-1 0.119 0.913

RELPR 0.321 0.688

RELPRt-1 0.376 0.806

GDP 3.73E-06 0.775

GDPt-1 3.61E-06 0.769

GDPt-2 8.93E-06 1.918***

VOL -0.077 -2.687*

Diagnostics



(0.182)

Jarque-Bera=7.388 (0.024) White Test=1.182 (0.316)

Ramsey RESET=1.168

(0.190)

*, **and *** denote significance at the1%, 5% and 10% level, respectively.

In order to check for parameter constancy, we employ the CUSUM stability test to the

estimated ARDL model.

Graph 1. Stability tests for Short Run ARDL (ECM) Model

-40

-30

-20

-10

0

10

20

30

40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CUSUM 5% Significance

(a) CUSUM Plot for the estimated ARDL

Model

-10

0

10

20

30

01 02 03 04 05 06 07 08 09 10

Recursive C(1) Estimates

± 2 S.E.

-4

-3

-2

-1

0

1

2

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-3

-2

-1

0

1

2

3

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-250

-200

-150

-100

-50

0

50

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-300

-200

-100

0

100

200

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-.00004

-.00002

.00000

.00002

.00004

.00006

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-.00006

-.00004

-.00002

.00000

.00002

.00004

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-.00004

-.00002

.00000

.00002

.00004

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

-.2

.0

.2

.4

.6

01 02 03 04 05 06 07 08 09 10


± 2 S.E.

(b) Recursive Coefficient Test for stability of ECM

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The CUSUM plot for the model is shown in Graph 1 (a). As can be seen, the plot is within the

5% critical bounds. Furthermore, we conduct the Recursive Coefficient Test to confirm the

stability of parameters see Graph 1 (b). As the coefficients do not display significant

variation as more data is added to the estimating equation, it is a strong indication of stability.

For the model, the stability tests show an overall constancy of the cointegration space.

4. CONCLUSION

In this paper, we have analyzed real import demand for Turkey using available monthly time

series data from 2000:01 to 2010:05. It could be concluded from this study that there is a long

run relation among import demand, relative prices, real GDP and real exchange rate volatility.

CUSUM and Recursive Coefficient Tests also indicate that there exists a stable import

demand function. By employing an error correction framework, we also obtain estimates for

the speeds of adjustment to long run equilibrium and short run elasticities for the import

demand of Turkey. Therefore, it found that import demand of Turkey is positively affected by

real GDP indicating that it is growth driven. Further, the results show that relative price level

has no significant effect on import demand, which is quite obvious for growth driven

economy.

Results of the study also disclose that real exchange rate volatility of local currency has

significant and reverse effect on import demand. The import demand of Turkey is sensitive

and elastic (long run elasticity is -0.051 meanwhile short run elasticity is -0.077) to real

depreciation and its volatility. The short-run dynamics assessed by estimation of the error

correction models indicate an average adjustment coefficient of -0.82. For sustainable foreign

trade policy (mediately sustainable economic growth), Central Bank of the Republic of

Turkey should conduct more stable exchange rate policy.

REFERENCES

Alam, S. and Ahmed, Q.M. (2010) Exchange Rate Volatility and Pakistan’s Import Demand:

An Application of Autoregressive Distributed Lag Model International Research, Journal of

Finance and Economics, 48, 7-22.

Anderton, R. and Skudelny, F. (2001) Exchange Rate Volatility And Euro Area Imports,

European Central Bank Working Paper, 64.

Arize, A. C. (1998) The effects of Exchange Rate Volatility on U. S. Imports: An Empirical

Investigation, International Economic Journal, 12(3), 31-40.

Arize, A.C. and Shwiff, S.S. (1998) Does Exchange-Rate Volatility Affect Import Flows In

G-7 Countries? Evidence From Cointegration Models, Applied Economics, 30, 1269-76.

Aydın, M.F., Çıplak, U. and Yücel, E.M. (2004) Export Supply and Import Demand Models

for the Turkish Economy, Research Development Working Paper No: 04/09, The Central

Bank of the Republic of Turkey.

Baum C.F., Caglayan M. and Ozkan N. (2004), Nonlinear Effects of Exchange Rate Volatility

on the Volume of Bilateral Exports, Journal of Applied Econometrics, 19, 1-23.

Bollerslev, T. (1986), Generalized Autoregressive Conditional Heteroskedasticity, Journal of

Econometrics, 31, 307-27.

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Engle, R.F. (1982) Autoregressive Conditional Heteroscedasticity with Estimates of the

Cariance of UK Inflation, Econometrica, 50, 987-1008.

Erden, L. and Sağlam, G. (2009) Türkiye’de Döviz Kuru Oynakliğinin Sektörel Ithalata

Etkileri: Bir Ardl Ithalat Modeli Analizi, H.Ü. İktisadi ve İdari Bilimler Fakültesi Dergisi,

27(2), 19-44.

Gül E. and Ekinci A. (2006) Türkiye’de Reel Döviz Kuru İle İhracat ve İthalat Arasındaki

Nedensellik İlişkisi: 1990 – 2006, Dumlupınar Üniversitesi Sosyal Bilimler Dergisi, 16, 165-

190.

Hwang H. and Lee, J. (2005) Exchange Rate Volatility and Trade Flows of the U.K. in 1990s,

International Area Review, 8(1), 173-182.

Pesaran, M.H. and Shin Y. (1999) An Autoregressive Distributed-Lag Modelling Approach to

Cointegration Analysis, in: Strom, S.(Ed.), Econometrics and Economic Theory in the 20th

Century, Camridge University Press, Cambridge.

Pesaran, M.H., Shin, Y. and Smith, R.J. (2001) Bounds Testing Approaches to the Analysis of

Level Relationships, Journal of Applied Econometrics, 16(3), 289-326.

Sarı A. (2010) Döviz Kuru Oynakliğinin Ithalata Etkileri: Türkiye Örneği, İstanbul

Üniversitesi Iktisat Fakültesi Ekonometri ve İstatistik Dergisi, 11, 31–44.

Cox Regression Models with Time-Varying Covariates Applied to Survival Success of

Young Firms (*)

Aygül Anavatan, Murat Karaöz

Akdeniz University, İİBF, Department of Econometrics

07058, Kampus, Antalya, Turkey


Abstract

Cox proportional hazards model assumes that independent variables remain constant

throughout the observation period. Model can give biased results in cases which this

assumption is violated. One of the methods used modelling the hazard ratio in the cases that

the proportional hazard assumption is not met is to add a time-dependent variable showing the

interaction between the predictor variable as parametric function of time. In this study, we

investigate the factors that affect the survival time of the firms and the time dependence of

these factors using Cox regression considering time depedent independent variables.

(*) This paper is an extension to the findings of the scientific research project “The Factors Affecting

Survival and Growth Performance of Newly Established Enterprises in Business Incubators: A Survey

on the KOSGEB Business Development Centers (İŞGEM)”, 109K139, which has been funded with

grant from TÜBİTAK. We also acknowledge the administrative support to the project from KOSGEB.


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Keywords: Survival analysis; Cox Regression Model; Proportional Hazard Assumption; New

Firms

1.INTRODUCTION

Survival analysis deals with the probability of occurrence of a given event at a set of

particular points in a time interval (Cox and Oakes, 1984). The typical survival anaylsis may

include the reports of hazard rates, ratios and survival curves while relating a likely set of

independent variables to a specific event. In the small business and entrepreneurship

literature, survival analysis has been used to track the start-ups over the years. A survival

curve of a cohort of newly established firms reports what percentage of the cohort continue to

survive since its inception over time, indicating whether some of the firms are failed over the

years (Karaöz and Albeni, 2011). Cox proportional hazards (PH) model is the most preferred

model in order to investigate the effect of variables on survival time. The key assumption of

Cox model is that hazard rate related to different levels of the factors is constant throughout

the follow-up period (Başar, 2006). Violation of the PH assumption requires additional

measures for unbiased results of Cox Survival regression. In this paper, Cox regression has

been applied to investigate the survival of newly established firms under incubation. Violation

of PH assumption has been tested and further Cox regressions are performed considering

time-varying effects of independent variables to survival.

2.SURVIVAL ANALYSIS

In a survival analysis, it is usually referred to the time variable as survival time,

because it gives the time that an individual has “survived” over some followup period (Geiss

et al., 2009). It is also typically referred to the event as a failure, because the event of interest

usually is death, disease incidence, or some other negative individual experience (Kleinbaum

and Klein, 2005).

When survival time ( ) is defined as a random variable with cumulative distribution

function and probability density function , survival

function is explained by Equation (2.1) (Yay, Çoker and Uysal, 2007);

(2.1)

Survival function gives the probability that the random variable exceeds the

specified time (Kleinbaum and Klein, 2005). All survival functions have the characteristics

that i) they are nonincreasing; that is, they head downward as increases, ii) at time ,

; that is, at the start of the study, since no one has gotten the event yet, the

probability of surviving past time 0 is one, iii) at time , ; that is,

theoretically, if the study period increased without limit, eventually nobody would survive, so

the survival curve must eventually fall to zero (Kleinbaum and Klein, 2005).

The hazard function , with its complement of survival function , is given by Equation

(2.2), where denotes a small interval of time (Kleinbaum and Klein, 2005);

(2.2)

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The hazard function gives the instantaneous potential per unit time for the event

to occur, given that the individual has survived up to time (Tabatabai et al., 2007). In

contrast to the survival function, which focuses on not failing, the hazard function focuses on

failing, that is, on the event occurring (Kleinbaum and Klein, 2005).

2.1.The Cox Proportional Hazards (PH) Model

The Cox PH model is usually written in terms of the hazard model formula shown at

equation (2.3). This model gives an expression for the hazard at time for an individual with a

given specification of a set of explanatory variables denoted by . That is, represents a

collection of predictor variables that is being modeled to predict an individual’s hazard

(Kleinbaum and Klein, 2005).

(2.3)

The Cox model formula says that the hazard at time is the product of two quantities.

The first of these, , is called the baseline hazard function. The second quantity is the

exponential expression to the linear sum of , where the sum is over the explanatory

variables (Kleinbaum and Klein, 2005). A hazard ratio is defined as the hazard for one

individual divided by the hazard for a different individual. The two individuals being

compared can be distinguished by their values for the set of predictors, that is, the X’s. HR is

shown by the following formula, where denotes the set of predictors for one individual,

and denotes the set of predictors for the other individual (Kleinbaum and Klein, 2005);

(2.4)

Once the model is fitted and the values for and are specified, the value of the

exponential expression for the estimated HR is a constant, , which does not depend on time

(Kleinbaum and Klein, 2005);

(2.5)

Running the Cox regression, observations should be independent of each other and HR

should remains constant with time. This assumption related to hazard ratio is known as PH

assumption. If the HR is increasing over time, the estimated coefficients assuming PH is

overestimating at first and underestimating later on (Bellera et al., 2010).

2.2.Extension of the Cox Proportional Hazards Model

An important feature of this formula, which concerns the PH assumption, is that the

baseline hazard is a function of , but does not involve the ’s. The ’s in the formula are

called time-independent ’s (Kleinbaum and Klein, 2005). It is possible, nevertheless, to

consider ’s which do involve . Such ’s are called time-dependent variables. If time-

dependent variables are considered, the Cox model form may still be used yet in an extended

form, as the orginal model do not satify the PH assumption (Kleinbaum and Klein, 2005).

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In the case of being time-dependent explanatory variables, Cox regression model expands to a

model which contains time-independent variables and some functions of the time the product

with these variables. Independent variables are, , where time-independent

variables and time-dependent variables (Sertkaya et al., 2005). Then,

Cox regression model is, and which denote vector of coefficients of explanatory variables

(Sertkaya et al., 2005);

(2.6)

Where is defined as a function of time. usually is defined in the form of , ,

or as step function (Sertkaya et al., 2005).

3.AN APPLICATION INTO NEW FIRM SURVIVAL UNDER INCUBATION

Although the Survival analysis extensively been used in medical research on

individuals, recently it becomes widely popular in Business Success and survival research.

Thus, rather than on individuals, in this paper, we apply Cox regression to investigate the

survival of newly established firms under incubation. There are studies applying survival

Violation of PH assumption has been tested and further Cox regressions are performed

considering time-varying effects of independent variables to survival. Our 414 observations

on firm characteristics acquired from 12 different incubators, İŞGEMs, located across Turkey.

The data includes almost all firms that currently exist İŞGEMs or the firms that resided in the

past yet left İŞGEMs by graduation or failure. The survey data consists the total of.

A business incubator can be identified as an organization which mentors the

development of newly founded firms by specialized services such as providing office space,

specialized staff, machinery, equipment, facilities and business assistance (Aernoudt, 2004).

3.1.Variables Used in the Analysis

For our analysis, factors affecting the initial success of young enterprises can be

summarized as i) Human capital characteristics of new enterprise's owner such as education

level and sector experience, ii) Firm characteristics such as scale, age and human capital, iii)

Industry characteristics such as market growth rate and entry barriers, vi) Incubation features,

v) Other external factors such as macroeconomic fluctuations, regional factors and public

policies (Hackett and Dilts, 2004). All of the data and variables used in our analysis are taken

from Karaöz and Albeni (2011) and descriptive statistics and definitions are presented at

Table 3.1.

Table 3.1: The variables used in analysis and descriptive statistics

VARIABLE DEFINITION Observation

s Mean Minimum Maximum

EVENT OF INTEREST

exit

If the firm is closed (failed)

during or after the incubation

1, otherwise 0

414 - 0 1

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DEPENDENT VARIABLE

incubage

The elapsed time from the

firm's entry into incubation

until it's closed (month)

404 41,52 2 158

INDEPENDENT

VARIABLES

CH

AR

AC

TE

RIS

TIC

S O

F T

HE

EN

TR

EP

RE

NE

UR

income

If entrepreneur's income only

comes from the incubated

firm 1, otherwise 0

414 - 0 1

gender

If entrepreneur is female 1,

male 0 (If there are both male

and female partner 0)

414 - 0 1

lnentage

Entrepreneur’s age (If there

is a partnership, it is taken as

the oldest entrepreneur’s age-

logarithmic scale)

367 3,64 3 4,25

enteduuni

If entrepreneur is a college

graduate 1, otherwise 0 (if

there is a partnership and one

of the partners is college

graduate 1)

414 - 0 1

entexp

Entrepreneur's prior

experience before arriving

İŞGEM (year)

414 5,83 0 40

family

If there is a role model for

entrepreneurship in

entrepreneur's family or

surrounding 1, otherwise 0

414 - 0 1

FE

AT

UR

ES

OF

TH

E F

IRM

partner The number of partners witin

the established firm 414 1,24 1 4

export If the firm export 1,

otherwise 0 414 - 0 1

lnempini initial firm size (logarithmic

scale) 392 1,31 0 5,70

onlyloan If firm's founding capital is

completely loan 1, otherwise 414 - 0 1

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0

networking

If entrepreneur is in

cooperation with

stakeholders within and

outside the incubator 1,

otherwise 0

414 - 0 1

innova If entrepreneur has made

innovation 1, otherwise 0 414 - 0 1

advert If the firm has had an

advertising 1, otherwise 0 414 - 0 1

brand If the firm is a brand owner

1, otherwise 0 414 - 0 1

INC

UB

AT

ION

SE

RV

ICE

S A

ND

PR

OP

ER

TIE

S

comserv

If entrepreneur has used at

least one of the common

services offered by

incubation 1, otherwise 0

414 - 0 1

whenest

If the incubated firm entered

the incubation center within

first 3 years (36 months) of

incubation center 1,

otherwise 0

414 - 0 1

incubsize The number of incubation's

workshop 414 43,14 14 84

IND

US

TR

IAL

PR

OP

ER

TIE

S

sector

If the firm is in the

manufacturing industry 1, in

the service sector 0

411 - 0 1

compete Intensity of competition in

the sector (1-5 Likert scale) 410 - 1 5

EX

TE

RN

AL

FE

AT

UR

ES

prorank

(%) Share of the GDP per

capita of the province in the

Country GDP where the

incubation center is located

414 1,51 0,59 2,07

cycle

If the firm has experienced

an economic crisis 1,

otherwise 0

414 - 0 1

Source: Karaöz and Albeni (2011).

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According to our data, Firm Survival Curve has been presented at Figure 3; Surivors

diminish to about 20% with 158 months.

0.00

0.25

0.50

0.75

1.00

0 50 100 150analysis time

Kaplan-Meier survival estimate

Figure 3.1: Survival curve of firms with failures during or after incubation

3.2. Results

All Cox Regression results with and without considering time effects are presented in Table

3.2. Our PH tests indicate that further estimations are necessary using time-dependent

variables. Model 2 estimates include the variables which in Model 1 and all of the interaction

terms created by each of these variables multiplying , which is a function of time, in

order to handle variable-time interaction. The Model 3 are obtained by using only the relevant

variables of (incubsize) and (prorank), which are found to be the time-dependent variables.

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Table 3.2: Estimates of the basic and with time-dependent Cox model variables

Coefficients

Variable income gender lnentage enteduuni entexp family partner export lnempini onlyloan networking innova advert brand comserv whenest incubsize sector compete prorank cycle

Model 1

1.18 -0.056 0.265 0.659 -0.084 -0.307 -1.71 0.827 0.214 -1.03 -1.47 -1.67 0.636 0.865 0.264 -1.18 -0.02 -0.156 -0.157 -1.16 0.46

0.010**

* 0.892 0.732 0.044** 0.042** 0.402 0.015** 0.308 0.278 0.063* 0.004***

0.006**

* 0.17 0.275 0.592 0.013** 0.002*** 0.738 0.416 0.013** 0.21

Model 2

5.16 1.14 6.45 0.289 -0.307 -4.63 1.07 6.47 0.274 -6.97 4.45 -2.24 -2.74 -4.22 -6.63 -0.985 -0.261 -4.39 2.92 19.4 10.5

0.253 0.745 0.422 0.924 0.342 0.205 0.844 0.576 0.847 0.215 0.333 0.74 0.522 0.685 0.217 0.813 0.015** 0.291 0.23 0.003*** 0.085*

Model 3

1.75 -0.093 0.721 0.762 -0.101 -0.249 -2.39 0.951 0.196 -1.88 -1.54 -2.46 0.615 1.61 0.638 -2.25 -0.253 -0.425 -0.341 16.9 0.791

0.000**

* 0.826 0.364 0.024** 0.013** 0.518

0.001**

* 0.303 0.298 0.002*** 0.004***

0.001**

* 0.198 0.074* 0.234 0.000*** 0.009*** 0.362 0.099* 0.002***

0.040*

*

income

gender

lnentage

enteduuni

entexp

family

partner

export

lnempini

onlyloan

networking

innova

advert

brand

comserv

whenest

incubsize

sector

compete

prorank

cycle

Model 2

(cont.) -0.959 -0.352 -1.48 0.139 0.055 1.23 -1.08 -1.25 -0.023 1.3 -1.7 -0.147 0.924 1.48 1.99 -0.415 0.059 1.03 -0.903 -5.74 -2.5

0.427 0.699 0.474 0.861 0.505 0.212 0.457 0.678 0.954 0.378 0.177 0.937 0.418 0.582 0.161 0.718 0.030** 0.344 0.17 0.001*** 0.108

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Model 3

(cont.) 0.058 -5

0.017** 0.001***

*, **, and *** indicate significance at the 1, 5 and 10% levels, respectively.

Log-likelihood and prob values of Model 1, 2 and 3, respectively, are -190.632 [0.000***], -165.552 [0.000***] and -173.255 [0.000***].

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Considering all the model estimates, we obtain various results regarding the variables.

The possibility of failure of the firms, whose owners only dependent on earnings coming from

its new-born firm higher than other firms. In this case it has been seen that the entrepreneurs

having income from other sources are more likely to be successful in start-up business. It is

interesting to see the result that the firms whose owners are university graduates have about

two times higher risk of failure than other firms. An increase in the number of partners in the

firm decreases the possibility of failure of firms. It is interesting to see that failure risk of

firms, whose founding capital is formed entirely by loans, are lower than whose initial capital

is partially or fully self-financed. If an entrepreneur is in collaboration with stakeholders

within and outside the incubation, survival probability of the firm becomes higher. Moreover,

it has been seen from the estimates that innovation activity of new firms increases chance of

survival. Brand ownership also increases the chance of the firm's survival. Establishing a firm

within an incubation center that is within its first 3-years increases survival probability.

Finally, firms those experience a macroeconomic crisis have nearly two times more

likelyhood of failure than others.

4.CONCLUSIONS

Cox proportional hazard model, besides others, rest on proportional hazards

assumption that independent variables do not vary with time. When PH assumption is violated

and Cox regression estimates become biased. Then, Cox survival estimates can be corrected

by including the time-varying effects to the analysis. Identification and calculation of time-

dependent effects give the oppotunity to obtain some otherwise unseen valuable special time

pattern information. In our analysis, initially, the Cox regression was performed by

considering that all explanatory variables are constant over time. Then, extended Cox

regression models were estimated by including the time-dependent explanatory variables in

the model. Our extended model results have shown that it become usefull to estimate the Cox

Proportional Hazards regression by also including the time-varying explanatory variables to

the analysis. Both the time-independent and time-dependent variables create significant

effects on the probability of survival of the İŞGEM firms.

REFERENCES

Aernoudt, R. (2004). Incubators: Tool for Entrepreneurship?. Small Business Economics, 23,

127-35.

Başar, E. (2006). Orantılı Olmayan Hazard Üzerine Bir Çalışma. Paper presented at 5.

İstatistik Günleri Sempozyumu, Antalya,111-16.

Bellera, C.A., MacGrogan, G., Debled, M., De Lara, C.T., Brouste, V., & Mathoulin-

Pélissier, S. (2010). Variables with time-varying effects and the Cox model: Some statistical

concepts illustrated with a prognostic factor study in breast cancer. BMC Medical Research

Methodology, 10-20.

Cox, D.R., & Oakes, D. (1984). Anaylsis of Survival Data. London: Chapman and Hall.

Geiss, K., Meyer, M., Radespiel-Tröger, M., & Gefeller, O. (2009). SURVSOFT—Software

for nonparametric survival analysis. Computer Methods and Programs in Biomedicine,

Elsevier Ireland LTD., 96, 63–71.

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Hackett, M., & Dilts, D.M. (2004). A Systematic Review of Business Incubation Research.

Journal of Technology Transfer, 29, 55-82.

Kleinbaum, D.G., & Klein, M. (2005). Survival Analysis: A Self-Learning Text (2nd Ed.).

New York: Springer.

Sertkaya, D., Ata, N., & Sözer, M. T. (2005). Yaşam çözümlemesinde zamana bağlı açıklayıcı

değişkenli Cox regresyon modeli. Ankara Üniversitesi Tıp Fakültesi Mecmuası, 58, 153-58.

Tabatabai, M. A., Bursac, Z., Williams, D. K., & Singh, K. P. (2007). Hypertabastic survival

model. Theoretical Biology and Medical Modelling, 4-40.

Karaöz, M., & Albeni, M., (2011), İş Kuluçkalarında Yeni Kurulan Girişimlerin Hayatta

Kalma ve Büyüme Performansını Etkileyen Faktörler: KOSGEB İş Geliştirme Merkezleri

(İŞGEM) Üzerine Bir Araştırma. The Scientific and Technological Research Council of

Turkey (TÜBİTAK). (Issue Brief No. 109K139).

Yay, M., Çoker, E., & Uysal, Ö. (2007). Yaşam Analizinde Cox Regresyon Modeli and

Artıkların İncelenmesi, Cerrahpaşa Tıp Dergisi, 38, 139-45.

Seeking Debt Crisis And Solution In Europe

Ali Yavuz,Ceyda Şataf,Dilek Göze Kaya, Serap Gül

S.D.Ü. İ.İ.B.F. Maliye Bölümü,

E-mails: [email protected], [email protected], [email protected]

[email protected]

Abstract

In this study, the European Union (EU) countries, the countiries of their lives go down to the

root causes of the debt crisis by making suggestions in search of solutions to the debt crisis

will be examined. Emerging in the U.S.A. mortgage market crisis in 2007, quickly spread to

the real sector from the financial sector in the years 2007-2009. And so the U.S.A. economy,

increased unemployment and stagnation in 2008 and 2009 a major problem encountered. The

economic crisis in the U.S. especially in EU countries, especially spread through strong

financial relationships. Cause of the crisi spreading, the U.S.A., its foreign trade with third

countries EU’s countries and possble recession and real income loses, narrowed. Foreign

demand for exports of goods and services of third countries. Another reason for the crisi, said

that the U.S.A. debt-based consumer spending growth can’t be prevented. E.U.’s main causes

of debt crisi, the misappropriation of resources, competition loss, and therefore can’t be seen

in this negative economic revival began participation in the Euro. Falling ineterest rates in

euro countries participating in the pre-crisis period, the total demand by facilitating increased

borrowing opportunities. GIIPS( Greece, Ireland, Italy, Portugal, Spain) countries in paralel

with an increase in demand has increased in both public and private debts. Increased demand

led to an increase in the prices of goods and services increase in investment. In the last part of

study, the debt crisis of the EU countries should take measures to release the elimanation of



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debt problems, increase the competiveness of member states and the EU, strengthning

economic governance issues within the EU will be examined.

Keywords: Global Crisis, Debt Crisis , European Union

1.INTRODUCTION

U.S.A. real estate crisis emerged in late 2008, then the real economies of Britain and the

ongoing volatility in financial markets have a devastating effect on the financial markets have

faced a crisis. Decline in total demand and the slump in financial markets has resulted in the

decline in trade volume. However, severe damage to many of this crisi has a strong economy.

The latest example of this situation in the EU, but many measures taken against some of the

effcets of the crisis be established.In this sudy, the first global crisis that emerged in the USA

and Europe that followed the debt crisis in Europe by examining the emergence debt crisis

fort he country based evaluations are performed to look for solutions.

2. Global Crisis and Its Reasons

Global crisis, emerging in U.S.A., has begun in finance, firstly in the real sector and then

spreaded to the entire economy. The reason why this crisis began is that mortgages, given in

low interest rates, was not paid back to banks in due dates. Loans not paid back both caused

finance institutions to go bankrupt and financial crisis reflected to the real sector as a result of

declining demands with shaken consumer confidince in the market ( Önder,2009:17) Because

global crisis led to the liquid and confidince problem, direct foreign investments and the

short-term money movements as portfolio investments decreased (Engin ve Yeşiltepe, 2009:

17). After the attact in U.S.A. , in 11 September of 2001, followed by a recession in economy,

the Federal Reserve System (FED) brought interest ratios down from %6,5 being in 2001 to

%3 in 2003 in order to arouse economics. This fall in interest rates reflected to the interest

rates applied to the mortgage. Since low inflation and low interest rates decreased the costs of

mortgage, the demand for this sector increased. Increasing demand brought together the

increase in the costs of home. Even tough families could not afford these costs, financial

markets gave bonded home loan to people (Kutlu ve Demirci, 2011: 122). From the 2000 till

the end of 2006, there was liquid abundance in the financial markets. The abundance of

liquide caused to given loan those people who has no income or work. After banks had

introduced the seized homes to market, the costs of homes fell down. However, the users of

credit discontinued to pay credits because of such reasons that bank loans were too higher

than home charges (Alantar, 2008: 2). The banks giving mortgage evaluated the property

before the repaying of credits and sold it to an investment bank or a mortgage institution. Not

paying back the credits, here, not only the bank that giving credit but also the institution that

buying the security suffered by. Hence, the crisis made an chain like effect. Due to the fact

that the crisis reflected to the real economy, in U.S. and Europe came about a decrease in the

rates of growth. As in the figure, since 2007, the decline of the growth rates is seen in the

developed and the developing countries (Alantar, 2008: 3-6).Trade balance deficit increasing

with the global crisis revealed the current account deficit problem. And the current account

deficit brought out the need to find out external source. It was not easy to fulfill the need of

source. Things that were done to avoid the negative effects of global crisis has caused budget

deficits and increase of loans in EU countries (Oskay, 2010: 72-73).

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2.1. Europe Debt Crisis

Europe is the main reason in the decline of the credit scores of debt crisis countaries,

pressures in the stock market, dominant countries’ bonds and in the spread of credit debt swap

agreement. The financial staples, which are under pressure in Europe, are countries such as

Greece, Icelandic, Ireland and Portugal (Arezki vd, 2011: 3). In the Eurozone to solve the debt

crisis emerging in the spring of 2010, the money and finance policies of Economic and

Monetary Union (EMU) was not been affected (Gianviti vd., 2010: 1). Debt crisis of

Eurozone , 2010, caused big movements in yields to call while causing great changes in the

rates of Euro and other currency unit (Gianviti vd., 2010: 5). The government is generally

held responsible for crisises on account of the exceeded budget deficits to practice definite

goals in the pact of stability and growth as a part of Maastricht Treaty. The reformation

proposals of EU include the controlled financial policies and rising bank arrangements of

national governments. While the Stability and Growth Pact, Maastricht Treaty and European

Union was focusing on debt and budget deficit rates of government, they neglected the

“excessive” debt rates of private sector. This excessive debt caused crisis in the financial

markets (Stein, 2011, 199). When banking crisis came out in private sector, governments -

especially of countries like Ireland and Spain – undertook the dept of the private sector and

saved these banks from that debt. Taxpayers has become indebted to the foreign financiers

(Stein, 2011, 200-201). The rates of debt after crisis /GSMH has increased. Constitutional

budget deficit is more lower in Ireland and Spain than the Euro zone. The private sector has

become the main reason of debt crisis in these countaries (Stein, 2011, 202).

2.1.1. Euro Zone

EU member states, a common currency (EURo) through use of established monetary union.

However, the “ Euro ZOne” called the monetary union, because of the up heaval in recent

years has undergone some of the economic crisis. First, some countries in the euro area credit

ratings agencies has been reduced significantly. After thr Irish government bonds in Greece

and Portugal, then the degree is worthless, and this case has been brought up to the crisis

escalated. With 17 member countries, including the so-called Euro common currency, the

euro area and countries use the euro by the European Central Bank monetary policy to be

applied to a single source, including Euro 17 depending on the countries’s economies together

tightly as they could. This is the negativity coming from the other Euro countries in the

territory of one euro in facilitating the spread within a short time.However, the financial and

real sectors of the EU member states at a high level of integration between these countries and

the speed increased the levels of exposure. (Odabaş, Bahtiyar, 2011, 104). Looking at the

table in 2010 while public deficits to be reduced compared to the Euro in 2010 which took

place in 2009 while public debt has increased over the previous year. Euro area government

debt to GDP ratio was 79.3% in 2009 to 85.1 % in 2010, this rate increased to. Public deficits

in the euro area GDp ratio which is the figure of the previous year, 6.3% from 6.0% a year.

Public expenditure in 2010 compared to 2009 in the Euro 17 countries, showed a slight

decline in governemnt revenues over the same period almost unchanged. However, this table

Euro Area 17 key figures related to the general governemnt budget deficit anf debt included

ratio of debt stocks by country looking very serious budget deficits or differences emerge.(

(Odabaş, Bahtiyar, 2011, 104-105).

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Table 1: Euro Zone (17) Countries’s Public Debt Stock

Euro Zone (17) 2007 2008 2009 2010

GDP Current Prices (milyon

€) 9 035 939 9 264 270 8 970 953 9 204 316

Budget balance (milyon €) -60 082 -188 988 -566 680 -550 481

Budget balance (% GSYİH) -0.7 -2.0 -6.3 -6.0

Public Expenditures (%

GSYİH) 45.9 46.9 50.8 50.4

Public revenues (% GSYİH) 45.2 44.8 44.5 44.4

Public debt (milyon €) 5 984 848 6 472 881 7 116 276 7 837 207

Public debt (% GSYİH) 66.2 69.9 79.3 85.1

Kaynak: Eurostat, Provision Of Deficit And Debt Data For 2010 - First Notification,

<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF>,

(26.04.2011)’den uyarlanmıştır. (aktaran Odabaş, Bahtiyar, 2011, 105)

2.1.2. European Union Member Countries Debt Crises

Euro-Zone is described as surrounding countries Greece, Portugal and Ireland, the debt crisis

occurring in the second quarter of 2010 and later expanded by including Italy and Spain,

followed by a road. This situation, particularly in terms of golbal growth and financial

stability is a major risk to the Euro Area countries. (Değerli, Keleş, 2011, 2).

2.1.2.1. Crisis in Greece

Informal econmy in Greece is veryimportant in the beginning of the euro. In excess of

informality reduces tax revenues. Also in Greece in the Euro zone, while the poor

performance fort he rise in nnational income, inflation rates, the region has achieved the

highest level. For these reasons, the cost of borrowing has also risen in Greece. Euros between

2000-2008 to just over 3% inflation rate in the process of adaption illusion. Improved

macroeconomic conditions and increased foreign capital inflow in this period. Greater than

5% GDP in 1995 to 2008, net capital inflow was 100%. Paralel to the increase in domestic

demand, increasing imports increased current acoount deficit. The current account deficit was

3.7% in 1997 to 14.4% has risen up. Increased demand has increased prices and employment

costs, and this has reduced the competitiveness of Greece. Since 1997, the Euro, with 47 %

average increase in consumer prices was well above the 27% economy. Increase expected in

the IMF’s real effective Exchange rate in Greece is around % 20-30’s. In these circumstances

the loss of competititon is obvious. Along with increasing the budget deficit crisis, wit

hgrowth reversed and increased debt. National income in 2008 showed an increase of %2, 2%

by 2009 has become smaller and correspondingly reduced government revenues and the

budget deficit in 2008 was % 7.7 in 2009 to 13.6% increased. Borrowing in 2007, while % 96

of GDP in 2009 rose to %116. (Öztürk,Aras, 2011, 147.) Ireland and Spain in the government

are seen as different because of the debt crisis in Greece. The stability and Growth Pact,

Greece, Ireland and Spain the debt crisis proportions when a value is cleraly relevant. Greece,

a large fiscal deficit and the cumulative result of a large public debt and the debt crisis of

chronic macroeconomic balances is seen as the origin. The global crisis worsenend the

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financial situation began to deterşorate şn the second half of 2007 in Greece. Greece’s credit

rating to fall in the budget predicament causes the public debt/GDP raito of 115.1% in the

euro area has been the most indebted country, Italy, and also during 2014, this ratio was

expected to continue to rise. (Stein, t.y., 210-211).

2.1.2.2. Crisis in Ireland

Ireland based on the continuous development of the construction sector growth has

accelerated since the 1990’s. Prosperity has increased the demand for the construciton sector

due to the increase in housing prices and this situation greatly enhanced. Along with

increasing global crisis of 2008, however, housing prices have fallen by 50-60% and caused

to be dragged into the crisis in Ireland. Housing loans as a result of thisi crisis, banksa re

forced to configure a distorted financial structures. 45 billion dolars in government in order to

improve the financial condition of banks has transferred a resource. This situaition has

increased government budget deficits, the impact of the crisis and economic recession, tax

revenues began to decline.

Uncertainty of the budget reduction in tax revenues in Ireland has increased even more by

compressing.(http://www.sobiad.org/eJOURNALS/dergi_EBD/arsiv/2011_2/mustafa_ozturk.

pdf, 2011, 148). Looking at the table of public deficits in the year 2010 in Ireland increased

by about twicw compared to 2009. Took place in 2010, the public debt has increased over the

previous year. While the public debt to GDP ratio in Ireland in 2009 65.6% 96.2% in 2010,

this rate rose to. If the public deficit to GDP ratio which is the figure of the previous year -

14.3% from -32.4%2s was. Watching a growing trend in public expenditures, public revenues

almost unchanged over the same period. (Eurostat, 2011,5.)

Table 2 : Ireland’s Public debt stock

İrlanda 2007 2008 2009 2010

GDP Current Prices (milyon €) 189 374 179 989 159 645 153 939

Budget balance (milyon €) 128 -13 196 -22 795 -49 903

Budget balance (% GSYİH) 0.1 -7.3 -14.3 -32.4

Public expenditures (% GSYİH) 36.7 42.8 48.2 67.0

Public revenues (% GSYİH) 36.8 35.5 33.9 34.6

Public debt (milyon €) 47 361 79 837 104 782 148 074

Public debt (% GSYİH) 25.0 44.4 65.6 96.2

Source: Eurostat, Provision Of Deficit And Debt Data For 2010 - First Notification,

<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF>,

(26.04.2011)’den uyarlanmıştır.

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2.1.2.3. Crisis in Portugal

% 4 growth in the transition to the Euro and EU in Portugal was one of the fastest-growing

countries. Process of harmonization with euro ineterest rates fell to % 6 in Portugal. Loose

fiscal policy and low interest rates, increased consumer spending. Fixes capital investment

increased. The construction sector grew. The current account deficit zero in 1995 to 2000 was

an increase of % 9. But at the same rate did’nt increase production. Portugal’s economy did’nt

reach serious problems as Greece and Ireland’s economy until the problem reached serious

proportions. Portugal in 2001, the rules of the Stability and Growth Pact countries

unimplementing is the only country in the euro area is the prof that the recession taking place

for a long time. Portugal is a very high current account deficit and the deepening crisi in the

banking sector has led to improper practices. According to 2009 data of the country’s public

debt/ GDP or 83 and the ratio of budget deficit/ GDp ratio -10.1 or be too far from these

nembers are an indication of the Maastricht Criteria.

Stabilization program in the country is prepared to reduce budget deficits and subsequent

rejection of parliament, the Prime Minister’s resignation has led to deterioration of political

stability and credit rating agencies lowered the credit rating of Portugal. The scope of the

packet is reduced to %2 of GDP budget deficit until 2013, freezing of pensions, salaries in the

public sector with more than 1500 Euros to cut between% 5-10, health, education and local

government expenditures, such as applications for cut down on the agenda has.( Pioneer

Perspectives, 2011, s.3-7) .

3. Solutions developed as a Crisis

Payment diffciculties of the EU member states outside the euro-zone opportunities against the

financing has been established fort he creation of Fund Balance of payments. Mode of

operation of this fund will use the funds to issue bonds is colleterally member states of the

country. (Council of the European Union, 2002.1-2)

Credit Pool mechanism established. This system was created fort he use of a debt once a pool

of Greece. Euros 80 billion and 30 billion Euros of EU-funded by the IMF in a repository 110

billion euros. ( European Comission, 2011:1)

Established the European Financial Stability Mechanism. This mechanism of natural disasters

and a member of the EU member states of the country to live in their own finacial difficulties

as a result of external factors outside the control of the event was created to be used.

However, to some extent affected by external factors such as Greece and Ireland, but also

being heavily influenced by internal factors of the crisis, this mechanism is used. In this

system, credit markets on behalf of the EU member countries and made available are

provided. With this mechanism, the bodies of the EU adopted the use of resources in a tight

macro-economic stablization program brought the applicatioan requirement. This mechanisim

is temporarily formed. Instead, in 2013, will be the European Stability Mechanism. (Europe

Press Releases, 2010:1)

The European Fianancial Stability Fund was established in 2010. The purpose of the Fund’s

debt problems so that the eurozone countries and monetary union to provide temporary

financial support to maintain financial stability. Euro zone countries’ common mode of

operation of the fund launched under the guarantee is provide credit to member countried

through bonds. Mechanism of the European Financial Stability Fund, the European Financial

Stability Fund is a temporary place in 2013 will leave the European Stability Mechanism.

(Council of The European Union, 2010:1-5)

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In 2010 decided to establish the European Stability Mechanism. This mechanism will be

operational in 2013, is an institutional structure will have a permanent nature. The debt

problems of the former is like living in Greece and Ireland was set up temporarily in order to

provide financial support to member countries of the Union. As a condition of the mechanism

of utlilizng the principle of economic adjustment programs introduced strict application. The

used slices of credit in support of the European Stability Mechanism in a difficult situaition if

necessary, may purchase bonds of the Member countries. ( Council of The european Union,

2011:1-6)

4.CONCLUSION

Since 2008, when the global economic crisis in the U.S.A. the recession that occurred, both

these adversely affected the economies of the country and the world. In the Euro ares, to

experience what the point of all the scenarios in case of Greece is focused failure to pay debts.

Uncertain consequences as a result of the union was to be exported to Greece, a crisis likely to

affcet other countries will point to an entangled state. In case of inability to pay and a possible

bankruptcy of Greece and the other euro zone countries, Greece will lead to decrease in value

of bonds. Such a possibility or even france, Italy and Spain in the troubled days spent in a

negative way. Severe effects of the crisi is happening to other Euro zone countries in order to

prevent the spread of October 27th 2011 in Brussels, EU leaders come together and have

taken concrete steps to save the euro. Greece’s debt to the leaders agreed on the reduction of

debts the banks have made their under taking losses up to %50 of the banks. Thus, banks in

Greece’s 250 billion euros in debt, is expected to be reduced to euro 102 billion. In addition,

the European Financial stability Fund resources was decided to remove 440 Billion Euros 1

trillion euros, the new fund will enter the application in November 2011 regarding the

framework agreement has been reached. Another important decision taken at the summit of

any country in the future to provide protection against losses arising from the entry of default

was recapitalizing the bank. At this point, emergency banking reforms and succesful

implementation of public finance reforma s are inevitable. Public finaces, especially the

successful implementation of the rules should be binding and obligatory for all countries.

Result in decesions taken at the summit to show the long term, so tihs context, fiscal rules

seem to be necessary tı put and to establish new institutions willbe watched on.

REFERENCES

ALANTAR, Doğan,(2008), Küresel Finansal Kriz: Nedenleri Ve Sonuçları Üzerine

BirDeğerlendirme,

http://www.finanskulup.org.tr/assets/maliyefinans/81/Dogan_Alantar_Kuresel_Finansal_Kriz

_Nedenleri_Sonuclari_MFY81.pdf, 28.02.2012)

AREZKI, Rabah, B. Candelon and A. N. R. Sy, (2011), Sovereign Rating News and

Financial Markets Spillovers: Evidence from the European Debt Crisis, IMF Working Paper

Council Of The European Union (2002). Facility providing financial assistance for balances

of payments, (EC) No 332/2002,

http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_ec

onomic_framework/l25005_en.html (23.07.2011)

Council Of The European Union (2010). Extraordinary Council Meeting Economic And

Financial Affairs, 9596/10 (Presse 108), Council Of The European Union,

http://www.finanskulup.org.tr/assets/maliyefinans/81/Dogan_Alantar_Kuresel_Finansal_Kriz_Nedenleri_Sonuclari_MFY81.pdf

http://www.finanskulup.org.tr/assets/maliyefinans/81/Dogan_Alantar_Kuresel_Finansal_Kriz_Nedenleri_Sonuclari_MFY81.pdf

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Brussels,http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.p

df, (13.07.2011)

Council Of The European Union (2011). EUCO 10/1/11 REV 1 CO EUR 6 CONCL 3,

24/25,http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf

(28.06.2011)

ENGİN, Ediz ve Ebru Yeşiltepe, Global Ekonomik Krizin Gölgesinde Türkiye’nin Maastricht

Kriterlerine Uyumu, Ekonomi Bilimleri Dergisi, Cilt 1, Sayı 2, ISSN: 1309-8020, 2009

European Comission (2011). Economic and Financial Affairs, The Greek Loan

Facility,http://ec.europa.eu/economy_finance/eu_borrower/greek_loan_facility/index_en.htm

(01.08.2011)

Europe Press Releases (2010). The European Stabilization Mechanism, MEMO/10/173,

Brussels,10 May 2010,

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/173, 13.07.2011

Eurostat, Provision Of Deficit And Debt Data For 2010 - First Notification,

<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-

EN.PDF, 28.02.2012

Eurostat, Provision Of Deficit And Debt Data For 2010 - First Notification,

<http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-

EN.PDF>, (26.04.2011)’den uyarlanmıştır. (aktaran Odabaş, Bahtiyar, 2011, 105)

GIANVITI, François, A. O. Kruege, J. Pisani-Ferry, A.Sapir ve J.von Hagen,( 2010), A

European Mechanism for Sovereign Debt Crisis Resolution: A Proposal

KUTLU, Hüseyin Ali ve N. Savaş Demirci, Küresel Finansal Krizi (2007) Ortaya Çıkaran

Nedenler, Krizin Etkileri, Krizden Kısmi Çıkış Ve Mevcut Durum, Muhasebe ve Finansman

Dergisi, Ekim/2011

OSKAY, Cansel, (2010), Türkiye’de Dış Borçlar ve Avrupa Borç Krizinin Olası Yansıması

Üzerine Bir Değerlendirme, Bütçe Dünyası Dergisi, Sayı: 34

ÖNDER, İzzettin, (2009), Küresel Kriz ve Türkiye Ekonomisi, Muhasebe ve Finansman

Dergisi (http://journal.mufad.org.tr/attachments/article/238/2.pdf , 28.02.2012)

Pioneer Perspectives (2011). The Euro Sovereign Debt Crisis,

http://us.pioneerinvestments.com/misc/pdfs/economy/perspectives_portugal_debt_downgrade

.pdf?adtrack=institutional (22.07.2011)

STEIN, Jerome L., (2011), The Diversity of Debt Crises in Europe, Cato Journal, Vol. 31,

No. 2 (http://www.cato.org/pubs/journal/cj31n2/cj31n2-2.pdf, 28.02.2012)

http://www.sobiad.org/eJOURNALS/dergi_EBD/arsiv/2011_2/mustafa_ozturk.pdf,

(22.03.2012)

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.pdf,%20(13.07.2011

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.pdf,%20(13.07.2011

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/173

http://journal.mufad.org.tr/attachments/article/238/2.pdf

http://www.cato.org/pubs/journal/cj31n2/cj31n2-2.pdf

http://www.sobiad.org/eJOURNALS/dergi_EBD/arsiv/2011_2/mustafa_ozturk.pdf

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Economic Structure in a Rural Area in the 19th Century:

A Comparison of Eleven Villages of Bartın District of Viranşehir Sanjak

Ramazan Arslan

Department of Economics, Bartın University, Bartın, Turkey

E-mail: [email protected]

Abstract

This study aims to examine the existing economic structure of a rural area of

Ottoman Empire in 19th century. The sample field of the study is eleven villages of

Bartın district, a significant coastal town of Ottoman Empire. Voluntary sampling was

used in choosing the villages and attention was paid on choosing villages which could

reflect the overall situation of the region in terms of economic structure. By looking

into the Temettüat registers of the examined district for the year 1844, these results

were tried to be identified.

Keywords: Bartin district, Temettüat Registers, 19th Century, Ottoman Empire,

Viranşehir Sanjak, Economic Structure,.

In the periods before the reign of Ottoman Empire, states took in a set of inventories

in order to produce social, economic, financial and military policies. It is known that

one of these inventories was made in Old Egypt between 2500 – 3000 B.C. (Barkan,

2000, p. 181). In order to keep the Empire under control, Ottoman Empire developed

a set of specific inventory systems (İnalcık, 1996, p.IX). Rapid increase in the number

of soldiers with constant salaries in Ottoman army was placing a serious burden on

the budget and forcing the central government to find more money income (Pamuk,

2007a, pp. 119-121). In order to resolve these problems in the financial structure,

various measures such as creating lease holding system and transferring resources from

the treasure were taken (Genç, 2000, p.101) and as it is known, finally, foreign

borrowing was tried (Tabakoğlu, 1985, pp. 296-297). Although Ottoman bureaucracy was

hesitant about foreign borrowing for a long period, in a short time foreign borrowing

turned out to be the most frequently used method for budget deficits (Pamuk, 2007b,

pp.144-145). Besides, solution seeking in financial field continued through reforms in

budget and tax issues (Güran, 1989, pp 7-17), and instead of civil tax a new single tax

called “Proportionate Tax” was brought in.

In the 19th century, there had been significant differences in the economic structure

of the government and significant changes occurred in traditional Ottoman regime

(Pamuk, 2002, p.241). Beginning with Tanzimat possession inventories were made in

Hüdâvendigar (Bursa), Ankara, Aydın, Izmir, Konya and Sivas cities (Çadırcı, 1987,

p.190). Again in the same period tax resources were determined again by new tax

regulations (Tabakoğlu, 2003, p.169), and thus, as a result of property, land, cattle and


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Temettüat inventories, Temettüat registers were formed. Temettüat inventories were

made in order to determine the financial situation of the public, to establish a fair tax

system and to increase public revenues; and the disrupted financial system was tried

to be tinkered (Öztürk, 2000, p.550). After the inventory in 1840, all personal assets,

real estate, land, cattle, product etc. information were recorded for each house in 1844

in each residential area like districts and villages. Classification of Temettüat registers

were grounded on administrative partition and these registers were alphabetically

prepared for each province. Total number of Temettüat Registers between 1844- 1845

is 17.747 (Başbakanlık Osmanlı Arşivi Rehberi, 2000, p.254).

The main source of this research which aims to look into the properties of the

existing economic structure of a rural area in the Ottoman Empire in the nineteenth

century is the Temettüat Register no 02824 recorded at the ML.VRD.TMT. fund of

Prime Ministry Ottoman Archive.

Bartın, which was a significant coastal city of Ottoman Empire during the period

(especially in lumbering) is chosen as the sample field for this study. Bartın, today, is

one of Turkey’s cities in the West Black Sea Region. Rumor has it that the name

Bartın comes from the mythological Greek word “Parthenios”, which means “river”.

Bartın, which had fell under the domination of various states at different times in

history, was annexed to the Ottoman Empire with the conquest of Amasra by Mehmet

the Conqueror ( II. Mehmed) in 1461 (Bartın Rehberi, 1927, p.8).

After annexed to the Ottoman Empire, Bartın was taken into the Bolu district of

Anatolian Governorship; it became a town in 1867 and its municipal organization was

founded in 1876. In 1920 it was joined to Zonguldak lieutenant governor, then after

Zonguldak became a city in 1924, Bartın turned to be a district of the city and in

1991, Bartın itself became a city.

Today Bartın has 4 districts which are: Center, Amasra, Ulus and Kurucaşile; 9

municipalities including Arıt, Kozcağız, Kumluca and Abdipaşa towns; and 262

villages (Bartın Valiliği, 2011).

1.INCOME SOURCES

Income sources in an economy differ according to sectors and locations. Villages or if

we are to say it with a more general expression, rural areas are small residential

areas where there is no specialization in economic life and indeed, it is not

necessarily needed, where production is at the level of earning one’s keep, and where

agriculture and husbandry are important income sources (Öztürk, 1996, p.109). These

residential areas also inform us about the agriculture in the Ottoman Empire. The

economic structure of Ottoman Empire which was based on agriculture in general also

draws attention in the 11 residential area we work on. Besides, it is also seen that

lumbering is placed on the top as a source of income.

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1.1.Number of Residential Areas

In this study, the records of 11 villages annexed to Bartın township, chosen as the

sample field of the study, and registered to Temettüat Register no 02824 recorded at

the ML.VRD.TMT. were examined and the features of the economic structure in a

rural area of the Ottoman Empire in the midst of the nineteenth century were tried to

be put forward. The villages used in this study are: “Mekeçler” (BOA, ML.VRD.TMT

No:02824, pp.4-10), “Kurtköy” (BOA, ML.VRD.TMT No:02824, p.11-16), “Receb

Beşeoğlu” (BOA, ML.VRD.TMT No:02824, pp. 17-21), “Gedikler” (BOA, ML.VRD.TMT

No:02824, pp.22-24), “Çayır” (BOA, ML.VRD.TMT No:02824, pp.25-32), “Bonlar” (BOA,

ML.VRD.TMT No:02824, pp.32-34), “Kıran” (BOA, ML.VRD.TMT No:02824, pp.35-39),

“Hoşafçılar” (BOA, ML.VRD.TMT No:02824, pp.40-41), “Emiroğlu” (BOA, ML.VRD.TMT

No:02824, pp.42-43), “Pınarlı” (BOA, ML.VRD.TMT No:02824, pp.44-49) and

“Akmescid’’ (BOA, ML.VRD.TMT No:02824, pp.49-50). Aforementioned rural area has

154 tax-paying houses and all of people living in these houses are Muslim.

1.2.Resource Balance

Income from lumbering has an important share in the distribution of income sources

in the rural area and it takes the first place. We collected all relevant

We put all lumbering-relevant incomes in Temettiat register under the same topic.

Revenue from lumbering within the total product was 59,69% in 1260/1844 in Bartın

rural area. (graphic 1) And this shows that lumbering is an important income source

in our study field. Forestland in Bartin is one of the most interesting and among the

richest forestlands in Turkey in terms of plant and tree species diversity (Bartın

Valiliği, 2011). Agricultural income is the second income source for rural areas. The

rate is 33.51%. In this context, income from fields, vegetable gardens and grape vines

are included in agricultural income sources. The reason for agricultural income to take

the second place as an income source can be explained with the economic properties

of the region.

Income rate from being a laborer is 4,66%. Laborer which means worker (Devellioğlu,

2005, p.31) has been a considerable income source in villages. Income from

husbandry, on the other hand, is the last item in income resources in the region with

a rate of 2.14%. Due to rich pastures and humid climate, bovine breeding is

widespread in the region.

In the graphic below, the distribution of income sources of the rural area is given.

Graphic 1: Breakdown of Income Resources (%)

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In the distribution of incomes, large amount of income is obtained from lumbering in

villages. Lumbering transportation has an important share in all villages. It is 38,89%.

Income obtained from lumber milling has the second place with a ratio of 36,65%.

Income from both lumbering and its transportation takes the third place as an income

source. Lumber trading is only done in Akmescid village.

1.3.Distribution of Income Sources by villages

In all village settlements income from lumbering has an important share as a source

of income. Mekeçler Village had the highest agricultural income among total product

across the villages. Income from lumbering amounted 58,04% in this village. The

lowest agricultural income was in Kıran Village with a rate of 30,04%. Income from

husbandry among total product was the highest in Akmescid Village with the rate of

Graphic 2: Breakdown of Lumbering Income Resource (%)

2,14% and lowest in Mekeçler village with 0,21%. There was no income obtained

from husbandry in Hoşaflar Village.

There was no laborer income in three villages in all sources. Laborer income was the

highest in Recep Beşoğlu Village.

When income from lumbering is looked into in total product in all villages, it has a

big share of 59,69%. Among villages, Kıran village had the highest income from

lumbering with a rate of 66,52%.

Table 1: Distribution of Income Sources by villages

Villages

Agricultural

Income

(Kurus)

%

Husbandry

Income

(Kurus)

%

Labor

Income

(Kurus)

%

Lumbering

Income

(Kurus)

% Unexpected

(Kurus) %

Total

(Kurus)

Mekeçler 5.914 37.56 50 0.32 450 2.86 9.330 59.26 0 0.00 15.744

Kurtköy 4.512 37.78 125 1.05 500 4.19 6.807 56.99 0 0.00 11.944

Receb

Beşeoğlu 4.392 34.62 144 1.14 1.600 12.61 6.551 51.64 0 0.00 12.687

Karagedikler 2.649 36.08 44 0.60 700 9.53 3.950 53.79 0 0.00 7.343

Karaçayır 4.166 34.64 59 0.49 1.250 10.40 6.550 54.47 0 0.00 12.025

Bonlar 2.467 39.77 36 0.58 0 0.00 3.700 59.65 0 0.00 6.203

Kıran 4.019 30.04 111 0.83 150 1.12 8.901 66.52 200 1.49 13.381

Hoşafçılar 761 37.84 0 0.00 0 0.00 1.250 62.16 0 0.00 2.011

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Emiroğlu 2.269 35.72 154 2.42 0 0.00 3.930 61.86 0 0.00 6.353

Pınarlı 4.646 33.60 132 0.95 150 1.08 8.900 64.36 0 0.00 13.828

Akmescid 11.153 33.51 713 2.14 1.550 4.66 19.870 59.69 0 0.00 33.286

TOTAL 46.948 34.83 1.568 1.16 6.350 4.71 79.739 59.15 200 0.15 134.805

Source: BOA, ML. VRD. TMT, 1844, 02824, pp. 4-50.

1.4.Income Distribution by Houses

Income per capita is an important indicator of the level of the welfare of the people

of a country. The amount of income per capita is directly related to the economic

structure of a country and rises in income shows the progress of the financial

development move of a country (Öztürk, 1996, p.115).

Since the sources we use include the incomes of the tax payers, the people the

people we include here will be tax-paying houses.

Table 2: Total Income of the Villages and Income per House

Village Number

of Houses

Total

Income

Income

per House In Village Average

Mekeçler 20 23.426 1.171 +

Kurtköy 18 11.944 664 -

Receb Beşeoğlu 12 12.687 1.057 +

Karagedikler 8 7.343 918 -

Çayır 22 12.025 547 -

Bonlar 6 6.203 1.034 +

Kıran 13 13.381 1.029 +

Hoşafçılar 5 2.011 402 -

Emiroğlu 6 6.353 1.059 +

Pınarlı 17 13.828 813 -

Akmescid 26 33.286 1.280 +

TOTAL 153 142.487 931

Source: BOA, ML. VRD. TMT, 1844, 02824, pp. 4-50

Income per house in the rural area was found as 931 kurus. Among the total 11

villages 6 of the villages were recorded to have an income above the average and 5

of them were recorded to have an income below the average.

Income per house was the highest in Akmescid Village with an average income of

1,280 kurus per house. And, the lowest average income, on the other hand, was in

Hoşaflar Village with 402 kurus per house. The reason behind the high rate of

average income in Akmescid village is that lumbering trade is only made in this

village. In general, there are no significant differences between the averages of plus

and minus income groups. It is possible to say that the income levels of the houses

in the same group are close to each other.

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2.LAND DISTRIBUTION

Total land recorded for agricultural purposes ( as fields and vegetable gardens) in

village settlements was 2033 decare. These lands are 100% planted areas.2

All the lands in the villages were used for planting cereals, vineyards, vegetable

gardens. 93,21% (1895 decare) of the agricultural lands were fields and 6,79% (138

decare) of the lands were vegetable gardens. This shows that agricultural production is

the second source of income in the region after lumbering.

2.1.Distribution of land by villages and the amount of land per house

In this part, land shares, amount of planted areas and their shares among the total

2033 decare agricultural area will be emphasized. 100% of the 2033 decare land that

villages have are planted areas. There are no lands allowed to lie for fallow. Total

land amount per taxpaying houses is 13,29 decares (Özlü, 2008, p.118).3

Graphic 3: Agricultural Distribution of Lands (%)

Akmescid Village has the highest share in land distribution. Total land amount of this

village is 422 decares. The village with the lowest amount of land is Hoşafçılar

village with 21 decares. When we look into the amount of land per house, Bonlar

Village has the highest rate with 20.33 decares per house. Again Hoşafçılar Village

has the lowest amount of land with 4.20 decares per house.

In terms of planted area, again Akmescid has the highest amount while Hoşafçılar has

the lowest amount of planted area. The amount of planted area in Akmescid Village

is 422 decares and the same amount is 21 decares in Hoşafçılar Village. The amount

of planted area per house is the highest in Bonlar Village with 20.33 decares per

house. The lowest amount is in Hoşafçılar Village with 4.20 decares per house.

2 In the analysis in 37 villages of Bilecik 36.55% of the land was lied to fallow and 63% of the land was planted.

See Öztürk, 1996, p.121; it was 71.7% on the same dates in Akçakoca rural area. See Zeynel Özlü, “XVIII. ve

XIX. Yüzyıllarda Karadeniz’de Bir Kıyı Kenti Akçakoca”, Yeditepe Yayınevi, İstanbul 2008, p.185. 3 Number of houses in Akçakoca on the same period: 294, total planted area: 857,25 decares, planted areas per

house 2,7 decare. See. Özlü, p.188.

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The total land amount of all villages, the amount of planted and fallow land, amount

of land per house is given in detail in Table 3.

2.2.Distribution of Planted Area by Villages

In their distribution by the type of agricultural production and villages, it is seen that

the total land reserved for branches of production is used to full capacity. The usage

rate of fields reserved for such products as wheat, barley, oat and flax are close to

one another. The largest land use in grains production is in Akmescid Village with

380 decares while the least land amount is in Hoşafçılar Village with 17 decares. The

land distributed for vegetable gardens is the highest again in Akmescid Village with

42 decares and lowest in Bonlar Village with 5 decares.

2.3.Comparison of planted areas with the villages of Banaz district

When the planted areas of the rural area is compared to the villages of Banaz district

in terms of product diversity4 it is seen that the land reserved for grains and broad

bean has a larger share in the villages of Banaz district (94.3%). The share of land

reserved for vineyards, orchard and vegetable production is higher in the villages of

Bartın district (6,79%). This validates that agriculture is an important income source in

the villages of Banaz while in Bartın villages lumbering stands out as the main

source of income.

Table 3: Land Distribution

Villages Nr. of

Houses

Total

Planted

Area

(Decare)

Planted

Area per

House

(Decare)

Total

Unplan

ted

land (Decare)

Unplant

ed land

per

house (Decare)

Total

Land

(Decare)

Land

per

House

(Decare)

Planted

Area

%

Unpl

anted

land

%

Mekeçler 20 280 14,00 - - 280 14,00 100 -

Kurtköy 18 206 11,44 - - 206 11,44 100 -

Receb Beşeoğlu 12 189 15,75 - - 189 15,75 100 -

Karagedikler 8 117 14,63 - - 117 14,63 100 -

Çayır 22 195 8,86 - - 195 8,86 100 -

Bonlar 6 122 20,33 - - 122 20,33 100 -

Kıran 13 186 14,31 - - 186 14,31 100 -

Hoşafçılar Village 5 21 4,20 - - 21 4,20 100 -

Emiroğlu 6 94 15,67 - - 94 15,67 100 -

Pınarlı 17 201 11,82 - - 201 11,82 100 -

Akmescid 26 422 16,23 - - 422 16,23 100 -

TOTAL 153 2033 13,29 - - 2033 13,29 100 -


Table 4: Distribution of Agricultural Production Land

Village Nr. Of

Houses

Fields where

grains are

planted

(Decare)

%

Vineyard,

orchard

and

vegetable

production

(Decare)

%

Total

Production

(Decare)

%

4 Among 37, only the first 11 villages of Banaz district were chosen to make comparison. See: Güler Erdem Bay,

“19. Yüzyılda Banaz Kazası’nın Sosyo-Ekonomik Yapısı”, İstanbul Üniversitesi Sosyal Bilimler Enstitüsü

Yayınlanmamış Yüksek Lisans Tezi, İstanbul 2010, p.15.; Planted area grain land in Akçakoca rural area in 1844

was 412 decare. See (Özlü, p.185).

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74

Mekeçler 20 273 97,50 7 2,50 280 100

Kurtköy 18 198 96,12 8 3,88 206 100

Receb

Beşeoğlu 12 178 94,18 11 5,82 189 100

Karagedikler 8 110 94,02 7 5,98 117 100

Çayır 22 184 94,36 11 5,64 195 100

Bonlar

Village 6 117 95,90 5 4,10 122 100

Kıran Village 13 177 95,16 9 4,84 186 100

Hoşafçılar

Village 5 17 80,95 4 19,05 21 100

Emiroğlu 6 83 88,30 11 11,70 94 100

Pınarlı 17 178 88,56 23 11,44 201 100

Akmescid

Village 26 380 90,05 42 9,95 422 100

TOTAL 153 1895 93,21 138 6,79 2033 100


2.3.Distribution of Land by Usage Area

In all villages a large amount of the land is reserved for grain production. The

income from a 1895-decare-field reserved for field crops was 38.352 kurus. The

highest revenue was obtained in Akmescid village as 9.155 kurus. The lowest income

level belongs to Hoşafçılar village with 545 kurus. Graphic 4: Agricultural Distribution of Lands (%)

An area of 138 decare was left for vineyards, gardens and vegetable gardens. The

revenue from this area is 1998 kurus. The highest revenue is obtained from Kurt Köy

with 1.245 kurus. Again, the lowest revenue was obtained from Hoşafçılar Village

with 216 kurus.

The total area reserved for wheat, barley, oat, flax, vineyard and fruits& vegetable is

2033 decares. 46.948 kurus revenue was made from an area of 2033 decares in all

villages (Özlü, 2008, p.118).5 The highest income was obtained in Akmescid Village in

5 When we compare this income with Akçakoca on the same period, we find a significant difference between the

two. It was figured that 46757 kurus revenue would be earned from 746,5 decare area in Akçakoca rural area

( See Özlü, p.188). This means 62,63 kurus per decare. On the other hand, 46948 kurus revenue was generated

from 2033 decare in Bartın rural area, and such a low number as 23,09 was found per decare.

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75

all villages with 11.153 kurus. The lowest income was obtained in Emiroğlu Village

with 2.269 kurus.

Table 5: Distribution of Land by Villages in terms of their usage area and value, 1844


2.4.Comparison of grain areas with surrounding districts in terms of productivity

When we compare Bartın rural area with Bilecik, Bursa and Akçakoca rural areas in

the same period, we find totally different ratios. Among the three districts Bilecik has

the highest rate. Bartın rural area has the lowest level of productivity among the four

districts.

Table 6: Comparison of Bartın rural area with surrounding

districts’ rural areas in terms of productivity ( Kurus)

City Grain Productivity Level

Bilecik 68,95

Bursa (Öztürk, 1996, p.134) 44,22

Akçakoca (Özlü, 2008, p.207) 38,50

Bartın 20,24

2.5.Productivity of Agricultural Production by villages

The productivity of crops in agricultural land varies according to the type of product

and geographical properties, on the other hand, effect productivity. Differences in

practice in the production phase and use of fertilizers also effect productivity.

When we leave all other factors aside except the geographical factors and make an

evaluation; it is possible to set forth in which productive product a residential area

should specialize in by determining in which product a village gets the highest

revenue per decare (Öztürk, 1996, p.132).

Village

Fields where grain

production is made

Vineyard, orchard and

vegetable garden Total

Decare Income

(Kurus) Decare

Income

(Kurus) Decare

Income

(Kurus)

Mekeçler 273 4.802 7 1.112 280 5.914

Kurtköy 198 3.267 8 1.245 206 4.512

Receb

Beşeoğlu 178 3.681 11 711 189 4.392

Karagedikler 110 2.118 7 531 117 2.649

Çayır 184 3.446 11 720 195 4.166

Bonlar 117 2.125 5 342 122 2.467

Kıran 177 3.407 9 612 186 4.019

Hoşafçılar

Village 17 545 4 216 21 761

Emiroğlu 83 2.017 11 252 94 2.269

Pınarlı 178 3.789 23 857 201 4.646

Akmescid 380 9.155 42 1.998 422 11.153

TOTAL 1895 38.352 138 8.596 2033 46.948

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76

Table 6: Productivity of Agricultural Products by Villages (Kurus)

Village Grains

Vegetable

s

Grape

vine

Vineyard

Income

Fruit

Tree

Cloth

Trading

Income

Miscellan

eous

Fruits Total

Mekeçler 4.802 347 765 -- - - - 5.914

Kurtköy 3.267 253 792 100 - 100 - 4.512

Receb Beşeoğlu 3.681 324 351 - - - 36 4.392

Karagedikler 2.118 189 306 - - - 36 2.649

Karaçayır 3.446 234 360 - 126 - - 4.166

Bonlar Village 2.125 117 225 - - - - 2.467

Kıran Village 3.407 162 387 - 63 - - 4.019

Hoşafçılar Village 545 72 81 - 63 - - 761

Emiroğlu 2.017 162 - - 63 - 27 2.269

Pınarlı 3.789 324 243 - 290 - - 4.646

Akmescid Village 9.155 713 533 - 702 50 - 11.153

TOTAL 38.352 2.897 4.043 100 1.307 150 99 46.948


The village with the highest productivity in grain production in rural area is Akmescid

Village. With a 9.155 kurus revenue Akmescid is the village with the highest revenue

among all villages and it is also the village with the highest revenue in vegetable and

fruit growing. Hoşafçılar Village has the lowest revenue in grain production with 545

kurus revenue.

Highest revenue in vegetables belongs to Akmescid Village with 713 kurus revenue.

Hoşafçılar village where the lowest revenue is obtained is also the village with the

lowest grain and grape revenue.

Kurtköy has the highest grape income with 792 kurus and Hoşafçılar has the lowest

grape income with 81 kurus. Grapevine and cloth trading income is only obtained in

Kurtköy with 100 kurus each. In miscellaneous fruits part 99 kurus revenue was

obtained in three villages in total.

2.5.Size of Agricultural Enterprises

In Ottoman agricultural statistics enterprises were divided into three groups according

to their size. Companies with an area below 10 decares were grouped as “imalât-ı

sağire”(small scale enterprise), those with an area between 10-5- decares were grouped

as “ imalât-ı mutavassıta”( medium-sized enterprise), and those with an area more than

50 decares are grouped as “imalât-ı cesime (large-scale enterprise)’’ (Güran, 1998b, p.

242). According to this division the rate of small businesses in Bartın rural area is

18.15% while the rate of medium-sized businesses counts for 81.85%. There are no

big-sized enterprises ( with an area over 50 decare) among agricultural businesses.

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77

And this shows that there are mostly medium-sized enterprises in the villages (Sarı,

2007, p.45).6

Table 7: Size of Agricultural Enterprises

1-10

Decare %

10-50

Decare %

Over

50

decare

%

Planted field 231 12.19 1664 87.81 - 0

Vegetable garden 138 100 - 0 - 0

TOTAL/AVERAGE 369 18.15 1664 81.85 - 0

2.6.Grain Production

We see that grain production, which was the most important source of income for

Ottoman Empire (Keyder and Tabak, 1998, p.182), had been an important source of

income in Ottoman rural areas, a small reflection of the empire, as well. Moving

from the data regarding the grain production of eleven villages chosen, numbers about

the type of grain and their amounts (table 8) will be presented.

2.7.Distribution of Grain Production by Villages in terms of Amount

All the fields in the Temettüat register, the main source of our study, are planted

areas. There are no fields allowed to lie for fallow. Wheat, barley and oat are grown

in all villages. Besides, reed plant and flax oil grows in Akmescid too. The highest

wheat production is made in Akmescid village with 880 bushels while the lowest

production is made in Hoşafçılar village with 50 bushels.

As is seen, wheat production takes the first place in grain production. In the villages

we realized our study, a total amount of 3840 bushels wheat production was made.

After wheat, the second most produced grain is barley. Barley is most produced in

Kıran Village and least produced in Hoşafçılar Village. The total production of field

products was 8315 bushels. The highest share belongs to Akmescid Village with 1900

bushels and the lowest share belongs to Hoşafçılar Village with 85 bushels.

Table 8: Distribution of Grain Production according to their

amounts (Bushel)

Village Wheat Barley Oat Reed Plant Total

Mekeçler 370 390 190 - 950

Kurtköy 310 220 120 - 650

Receb Beşeoğlu 340 270 200 - 810

Karagedikler 230 160 50 - 440

Çayır 480 290 190 - 960

Bonlar Village 240 120 110 - 470

Kıran Village 390 220 80 - 690

Hoşafçılar Village 50 30 5 - 85

6 According to a study in 2007, when the ratio of the sizes of the agricultural businesses and the area they cover

is looked into the total rate of three group business with 50-100 and 100-200 and 200-499 decare (da) size make

60,75%. In Bartın, on the other hand, the number of businesses with 0-20 da make up 29,2%.And the companies

with 20-100 da make up the 68,7%. Besides, there are no companies larger than 500 da in Bartın (Salih Sarı.

Bartın City Agrarian Geography, Unpublished Post Graduate Thesis, Sakarya University Institute of Social

Sciences, 2007, p.45).

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78

Emiroğlu 180 140 30 120 470

Pınarlı 370 190 130 200 890

Akmescid Village 880 390 350 280 1900

TOTAL 3840 2420 1455 600 8315


2.8.Annual amount of grains produced by their type

When we calculate annual grain amount produced annually based on the product type,

following results are obtained:

Graphic 5: Grain Product Amounts (Bushel)

2.9.Grain Amount per House (Kg)

We can find if there is a surplus product in the total agricultural production amount

of the villages. When doing this, we can use the tithe paid for one year in the

villages. Total tithe from wheat in the villages is 384 bushels. Since this tax in-kind

corresponds to 10% of the total product, moving from this information we can find

the total wheat production as 3840 bushels. When 384 bushels, the tithe, is deducted

from the total production, the amount of wheat the villagers will consume in a year

is found; and this amount corresponds to 3456 bushels (88.354 kg). Does this amount

supply the villagers with the necessary amount they need?

When we consider that a person can consume almost 8 bushels (205 kg) of wheat in

a year (Güran, 1998 a, p.16), wheat consumption of the villages in the same year is

calculated as 6120 bushels (156.978 kg) (Özlü, 2008, pp. 195-196).7 According to this

calculation, it is revealed that villagers cannot even supply their own wheat amount

7 153 houses, the population of the village is found as 765 by calculating 5 people living in each house. As it is

known that each person consumes 8 bushels of wheat every year, total consumption is found as 765x 8= 6.120

bushels. Please see Ömer Lütfi Barkan, “Tarihi Demografi Araştırmaları ve Osmanlı Tarihi”, Türkiye Mec.,

C:X, İstanbul 1953, p.1-26 for Ömer Lütfi Barkan’s thesis stating that each Ottoman house’s population is five

people. The same calculation can be made for Akçakoca rural area. There were 294 houses in Akçakoca. And

accordingluy, the total population is 1470. Total annual wheat consumption is 1470x8= 11.760. However, the

total wheat production in Akçakoca was 1790 bushels. Thus, all dwellings of Akçakoca produce less wheat than

they need. And this brings in mind that the people in the villages provide their wheat need from the districts in

the neighbourhood partially. See Özlü, pp. 195-196.

3rd


79

for themselves and their families let alone merchandise it. 8

The required amount of

wheat-deficit for aforementioned villages to nourish themselves is 2.280 bushels or in

other words 58.482 kg. However, this deficit should be approached with precaution

because in those aforementioned villages such supporting products as barley, oat, reed

plant, flax and flax oil are also grown.

3.HUSBANDRY

3.1.General Structure

Husbandry is at the bottom of the list as an income source in the region. Its share in

the total revenue is 2.14% (Özlü, 2008, p.82) .9 Existing husbandry, as far as it seems,

is for meeting needs. It is not possible to say that production for the market is made

and that husbandry is done as an occupation. It appears that only ox among cattle is

used in ploughing. Such pack animals as bear, horse, donkey and hinny are not found

in the villages.

Table 9: Ovine and Cattle Distribution

Village Ovine

(Number)

Income-

generating

ovine

(Number)

Total

Revenue

Cattle

(Number)

Income-

generating

cattle

(Number)

Total

Revenue

(Kurus)

Mekeçler 9 3 6 56 2 20

Kurtköy - - - 35 6 75

Receb Beşeoğlu 15 14 14 43 4 40

Karagedikler - - - 26 2 20

Çayır 10 6 12 23 2 50

Bonlar Village 0 - - 25 3 30

Kıran Village - - - 63 8 80

Hoşafçılar Village - - - 5 - -

Emiroğlu 3 3 4 32 8 150

Pınarlı - - - 32 5 105

Akmescid Village 24 14 29 110 28 598

TOTAL 61 40 65 450 68 1168

The number of bovine in rural area is 61. Among these 61 animals, 40 of them

brought in money; the income generated from these 40 animals was 65 kurus.

Akmescid Village ranks in the first place in raising ovine with 24 ovine. Again the

highest income from ovine was generated in Akmescid Village with 29 kurus.

The total number of cattle is 450. There are cattle in all rural areas. The highest

number of cattle is in Akmescid Village. The number of cattle in this village is 110.

The income generated from these 110 cattle is recorded as 1168 kurus. An important

part of this revenue is generated from milk cows and milk buffalos.

The rate of ovine among all animals is 11.94% while the rate of cattle is 88.06%.

When we group the animals raised in rural areas according to their species (Table 10)

we see that cattle species has the highest share. It is seen that ovine breeding did not

develop in the villages in rural areas while bovine breeding significantly improved.

8 For similar and comperative calculations see Öztürk, 1996, p. 146; A. Mesud Küçükkalay-Ayla Efe, Osmanlı

Ziraî Sektörünün Ticarileşebilme İmkânı Üzerine Bir Deneme:1844-45 Alpu Köyü Örneği, p.252. 9 In Özlü’s study on Akçakoca, the share of husbandry in Akçakoca rural area was found to have 3% share in

total revenue. Between 1811-1864 Akçakoca was a town attached to Bolu-Safranbolu (Viranşehir)- Has

Voyvodalığı (Özlü, p.32).

3rd


80

Table 10: Total Animal Distribution in Villages by their species

Animal species Number %

Goat 15 3,09

Sheep 46 9,48

Cattle 424 87,42

3.2.Ovine breeding

It is seen in the records that goat and sheep were the animal species in which ovine

breeding developed. There was no information on poultry so we cannot comment on

poultry. The total number of goats and sheep that we assessed in total ovine is 61

(Table 11). Among these 61 ovine, 15 of them are goats and 46 of them are sheep.

Among both species sheep has a predominant place.

Table 11: Distribution of Ovine by Villages

Village

Milk

sheep

(number)

Milk

sheep

Revenue

Infertile

sheep

(number)

Infertile

sheep

revenue

Milk goat

(number)

Milk

goat

revenue

Infertile

goat

(number)

Infertile

goat

revenue

Goat

kid Lamb

Mekeçler 3 6 0 0 0 0 0 0 0 6

Kurtköy 0 0 0 0 0 0 0 0 0 0

Receb

Beşeoğlu 7 14 0 0 0 0 0 0 0 8

Karagedikler 0 0 0 0 0 0 0 0 0 0

Çayır 6 12 0 0 0 0 0 0 0 4

Bonlar Village 0 0 0 0 0 0 0 0 0 0

Kıran Village 0 0 0 0 0 0 0 0 0 0

Hoşafçılar

Village 0 0 0 0 0 0 0 0 0 0

Emiroğlu 0 0 0 0 0 0 3 4 0 0

Pınarlı 0 0 0 0 0 0 0 0 0 0

Akmescid

Village 3 6 4 9 7 14 0 0 5 5

TOTAL 19 38 4 9 7 14 3 4 5 23


Annual revenue from 61 ovine is 65 kurus. And 18 kurus of this amount is earned

from goats and 47 of it is earned from sheep. It seems that when annual revenue

from each animal is considered, sheep is a more productive animal. As goat species

mostly milk goats are raised. Goat is only raised in Emiroğlu (3 ) and Akmescid (12)

villages. And in sheep species again mostly milk sheep are raised. It is seen that

these animals are mostly raised in Recep Beşeoğlu village.

3.3.Bovine Breeding

The distribution of bovine breeding in the rural area is as follows (Table 13); Number

of cattle is higher than the number of pack animals. Except from milk cow and milk

buffalo, no income is generated from the other animals among cattle. The number of

draught animals among cattle is high. And among pack animals there are no donkeys

in all rural areas except 1 in Emiroğlu village.

3rd


81

Table 12: Distribution of Bovine Animals by Villages

Village

Mil

k

Co

w

(nu

mb

er)

Mil

k

Co

w

Rev

enu

e

Mil

k

Bu

ffa

lo

(nu

mb

er)

Mil

k

Bu

ffa

lo

Rev

enu

e

Bla

ck

Ca

ttle

Ca

ttle

Bu

ffa

lo

Infe

rtil

e B

uff

alo

Ma

le

Bu

ffa

lo

Ca

lf

Ma

re

Ma

le

Bu

ffa

lo C

alf

Fem

ale

B

uff

alo

Ca

lf

Infe

rtil

e c

ow

Fem

ale

C

alf

Yo

un

g

catt

le

Fem

ale

B

uff

alo

Ma

le

Ca

lf

Yo

un

g

ho

rse

Do

nk

ey

Mekeçler 2 20 0 0 28 1 4 3 1 0 0 2 0 4 2 6 2 1 0 0

Kurtköy 5 50 1 25 19 0 0 0 0 0 0 1 4 0 1 0 5 0 0

Receb Beşeoğlu 4 40 0 0 15 0 4 7 0 0 0 1 0 2 0 2 3 5 0 0

Karagedikler 2 20 0 0 12 0 0 0 2 0 0 0 0 7 2 0 1 0 0 0

Çayır 0 0 2 50 10 0 6 0 0 0 1 1 1 0 0 1 1 0 0

Bonlar Village 3 30 0 0 6 0 4 0 0 1 2 0 0 0 2 2 2 1 2 0

Kıran Village 8 80 1 25 16 0 0 2 0 0 0 1 0 2 5 0 0 3 0 0

Hoşafçılar Village 0 0 0 0 4 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Emiroğlu 6 90 2 60 9 0 0 2 0 0 0 0 2 0 5 1 0 4 0 1

Pınarlı 3 45 2 60 17 0 0 1 0 0 0 2 0 1 2 1 1 2 0 0

Akmescid Village 17 268 11 330 30 3 4 2 2 2 7 3 9 10 2 0 8 0 0

TOTAL 50 643 19 550 166 5 22 17 3 3 4 10 5 12 24 6 3 18 2 1


When we look into the animal species used for ploughing and packing and those

which should be regarded as capital, we see ox and water buffalo on the top of the

list. Only donkey is recorded carrying and apart from donkey, there is not any other

animal like horse and hinny.

The total number of bovine animals in the rural area raised for various purposes and

used in various areas is 370. Among these animals 369 of them are cattle and 1 on

them is pack animal.

Annual revenue from 50 milk cows in cattle group is 643 kurus. Average annual

revenue per animal is found as 12.86 kurus. In terms of annual revenue, income from

milk buffalo takes the second place. While income is 10 kurus per milk cow, the

same income from each milk buffalo is two and a half times higher than it. The

annual revenue from each milk buffalo is 25 kurus (Özlü, 2008, p.165). 10 The total

revenue from cattle is 1193 kurus.

The highest number of milk cows is in Akmescid Village. There are 17 milk cows in

the village. There are two milk buffalos in each Çayır, Emiroğlu and Ponar villages,

and one in both Kurtköy and Kıran Villages. There are no milk buffalos apart from

the mentioned ones. The highest number of cattle used for ploughing is in Akmescid

village. The total number of cattle used for ploughing in this village is 30. When the

number of houses in this village is considered ( a total of 24 houses) it is obvious

that there are more than one cattle for each house.

10

In a research on Plovdiv city, it was found that 60 kurus income is generated from a buffalo and 5-6 kurus

income is generated from a milk cow annually. (Özlü, p.165).

3rd


82

3.4.Draught and Pack Animals in house scale

During the times before mechanization and in fields where mechanization did not

apply, cattle is the main agricultural tool and there is almost one cattle for each

house in the rural area. According to our calculations, there is 1.02 cattle per house.

When we accept that each house has one cattle, it means that all household heads in

all villages have a cattle. The rate of cattle, used as draught animal, per house in the

rural area is shown in Table 12. In the table, we see that the number of draught

animal per house is 1.02. The highest number of cattle per house is in Bonlar Village

and the number is 1.67 per house, which means there is more than one cattle for

each house in this village. The highest number of cattle is in Mekeçler Village and

the total number of cattle is 33. However, since the population of the village is high,

the number of cattle per house is 1.65. The lowest number of cattle is in Emiroğlu

Village and there are 5 draught animals in the village. In Hoşafçılar Village, where

there are only 5 houses, there are no draught animals.

Table 13: Draught Animal per House

Village Number of

Houses

Total cattle

number

Cattle per

House

Mekeçler 20 33 1.65

Kurtköy 18 19 1.06

Receb Beşeoğlu 12 19 1.58

Karagedikler 8 12 1.50

Çayır 22 16 0.73

Bonlar Village 6 10 1.67

Kıran Village 13 16 1.23

Hoşafçılar Village 5 0.00

Emiroğlu 6 5 0.83

Pınarlı 17 9 0.53

Akmescid Village 26 17 0.65

TOTAL/AVERAGE 153 156 1.02


3.5.Amount of land per cattle

When we look into the amount of agricultural land per cattle in our sample study

field, we see quite different numbers. As seen in Table 14, village averages differs. On

all planted areas scale, the average land per cattle is 13.03. The highest amount of

land per cattle is in Akmescid Village. Pınarlı Village follows Akmescid Village with

an average land per cattle among all planted area is 22.33 decare. The village where a

cattle has the lowest land is Mekeçler Village. The average land for a cattle among all

planted area in this village is 8.48 decare.

According to the calculations made, a couple of horses plough 6-7 decare area while a

couple of cattle plough 2-3 decare area (Güran, 1998 a, p.86). Accordingly, it is found

that a cattle in Bartın rural area is only used for two work days for ploughing.

Table 14: Land per cattle

Village Number of Total

cattle

Planted area

(Decare)

Planted Land per

Cattle

(Decare)

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83

Mekeçler 33 280 8,48

Kurtköy 19 206 10,84

Receb Beşeoğlu 19 189 9,95

Karagedikler 12 117 9,75

Çayır 16 195 12,19

Bonlar Village 10 122 12,20

Kıran Village 16 186 11,63

Hoşafçılar Village 0 21 0

Emiroğlu 5 94 18,80

Pınarlı 9 201 22,33

Akmescid Village 17 422 24,82

TOTAL/AVERAGE 156 2033 13,03


3.6.Beekeeping

Although beekeeping is not accounted as a source of living, stil some villages are

engaged in beekeeping. As it can be seen in Table 15, all villages are engaged in

beekeeping except from Hoşafçılar and Emiroğlu villages. The total number of bee

hives in all villages is 43 and the total annual revenue from beekeeping is 299 kurus.

The annual revenue from each bee hive is 6 kurus in all villages except Pınarlı and

Akmescid villages.

Table 15: Villages where people are engaged in Beekeeping, number of beehives and

annual revenue

Village Number of Beehives Annual Revenue

(Kurus)

Mekeçler 4 24

Kurtköy 5 30

Receb Beşeoğlu 14 84

Karagedikler 4 24

Çayır 2 12

Bonlar Village 1 6

Kıran Village 1 6

Hoşafçılar Village 0 0

Emiroğlu 0 0

Pınarlı 3 27

Akmescid Village 9 86

TOTAL 43 299


4.DISTRIBUTION OF LABOR FORCE

In village settlements, there are not many occupational diversity as in urban areas. In

villages, where main source of income is based on agriculture and husbandry, there is

no need for occupational differentiation (Güran, 1985, p.318). However, in rural areas

there are reasons to do agricultural and non-agricultural activities together. Because of

the density of population in the rural area, not everyone could engage in agriculture

(Güran, 1998 b, p.271).

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4.1.Occupational Breakdown of Household Heads

The rate of agricultural revenue in total revenue in the rural area used as the study

field is 35.51%, while the same rate for lumbering is 59.69%. In other words, we see

that the income rate earned from an occupation other than agriculture and husbandry

and which can be regarded as occupational income has a quite high level in total

revenue. This shows that Bartın, located in the West Black Sea Region, is rich in

terms of forests. According to Forest Management Map Database of General

Directorate of Forestry, Bartın city has 98.578 ha forest area and 13.229..029 cubic

meter planted forest. Most of the existing forest areas are high forests (Sarı, 2007,

p.23). It can be said that the large amount of forest areas in the region developed

lumbering activities.

When the occupations of the household heads were specified in the registers their

being “erbâb-ı ziraat”( farmer) is indicated clearly. Since almost all of the people

engaged in a business other than agriculture have agricultural lands, it is understood

that these people are engaged in farming. Recent studies show that almost all of the

people living in the villages of Bartın are somehow engaged in agricultural activities

(Sarı, 2007, p.44).

Table 16: Occupational Breakdown of Household Heads

Village Number

of

Houses

Erbab-ı

Ziraat

(farmer)

Laborer unempl

oyed

Forlo

rn Servant Beggar Orphan

“Asâkir-i

Nizâmiye-i

Şâhâne”

( a military

position)

Luna

tic

Mekeçler 20 19 1 0 0 0 0 0 0 0

Kurtköy 18 11 3 1 1 1 1 0 0 0

Receb

Beşeoğlu 12 12 0 0 0 0 0 0 0 0

Karagedikler 8 6 2 0 0 0 0 0 0 0

Çayır 22 16 3 0 0 0 0 2 0 1

Bonlar 6 5 0 0 0 1 0 0 0 0

Kıran 13 11 1 0 1 0 0 0 0 0

Hoşafçılar 5 3 0 0 0 1 1 0 0 0

Emiroğlu 6 5 0 0 0 0 0 1 0 0

Pınarlı 17 14 1 0 0 1 0 0 1 0

Akmescid 26 24 0 0 0 1 0 1 0 0

TOTAL/

AVERAGE 153 126 11 1 2 5 2 4 1 1


It is indicated that 10 household heads among 153 in all villages do not have any

income. These people without any income are recorded as “Sa'ile”, “unemployed”,

“orphan”, “Lunatic”, “Diseased and Alone” and “Asâkir-i Nizâmiye-i Şâhâne”. Only in

Çayır Village there is a record of one people as “Asâkir-i Nizâmiye-i Şâhâne”. This

person had no property, land or animals and was engaged in merchandising in

Adapazarı and later came to Bartın to attend Asâkir-i Nizâmiye-i Şâhâne”. There are

other 9 people without any income and without any kind of property. It is stated that

those people live off with the support of other people. Apart from these 10 people, all other

household heads have some piece of agricultural lands that they work. Most of these

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household heads are earning their income from lumbering apart from agricultural activities.

The share of income obtained from lumbering among total revenue is 59.15%.11

As is seen in Table 15, 126 houses (82.35%) among a total of 153 in all villages are

engaged in agriculture. It is also recorded that there are 11 laborers, 1 unemployed, 2 forlorn,

5 servants, 2 beggars, 4 orphan and 1“Asâkir-i Nizâmiye-i Şâhâne”.

4.2.Distribution of Active Labor Force Income

In this section, the breakdown of revenue from occupation by villages will be

examined and moving from that overall breakdown results will be found. The number

of people with an income from an occupation, total and average occupation income

breakdown and the share of this income in total revenue will be assessed.

Table 17: Breakdown of Labor Force Income by Villages

Village

Number

of

Houses

Number

of Houses

with

Occupatio

n Income

Total

Occupa

tion

Income

(Kurus)

Average

Occupa

tion

Income

(Kurus)

Number

of

Houses

with

Occupat

ion

Income

+ other

Income

source

Total of

Other

Income

(Kurus)

Total

Revenue

(Kuruş)

Share of

occupatio

nal

income in

revenue

(%)

Mekeçler 20 20 6,414 320.70 20 9,330 15,744 40.74

Kurtköy 18 15 5,137 342.47 18 6,807 11,944 43.01

Receb

Beşeoğlu 12 12 6,136 511.33 12 6,551 12,687 48.36

Karagedikler 8 8 3,393 424.13 8 3,950 7,343 46.21

Çayır 22 19 5,475 288.16 22 6,550 12,025 45.53

Bonlar

Village 6 6 2,503 417.17 6 3,700 6,203 40.35

Kıran Village 13 12 4,280 356.67 13 9,101 13,381 31.99

Hoşafçılar

Village 5 4 761 190.25 5 1,250 2,011 37.84

Emiroğlu 6 5 2,423 484.60 6 3,930 6,353 38.14

Pınarlı 17 16 4,928 308.00 17 8,900 13,828 35.64

Akmescid

Village 26 25 13,416 536.64 26 19,870 33,286 40.31

TOTAL/

AVERAGE 153 142 54,866 386.38 153 79,739 134,805 40.70

Source: BOA, ML. VRD. TMT, 1844, 02824, pp. 4-50 In all the villages examined, all household heads earn income from lumbering apart

from agricultural activities. The village with the highest occupation income is

Akmescid Village. Their occupation revenue has 40.70% share in total revenue (Özlü, 2008, p.180).

12 Rural area has a total 54.866 kurus occupation income. The village with the highest

occupation income is Akmescid Village, which also has the highest number of

household heads having an occupation income. The average revenue in all villages is

11

See Breakdown of income resources by villages, table.1. 12

The rate of occupational income in total revenue in Akçakoca in the same period was quite higher than Bartın

and it was 87%. (Özlü, p.180).

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386.38 kurus. The highest average is again in Akmescid Village with 536.64 kurus.

25 houses out of a total of 26 have an occupation revenue in this village.

The share of occupation revenue in total revenue in terms of their village breakdown

is as follows: As it is stated before, the share of occupation revenue in total revenue

in all rural area is 40.70% and the highest rate is in Recep Beşeoğlu village with

48.36%. All the total 12 houses in Recep Beşeoğlu village have occupation revenue.

The lowest occupation revenue, according to its share in total revenue, is in Kıran

Village with 31.99%.

5.DISTRIBUTION OF TAXES IN VILLAGES

5.1.General Information

Tax is transfer of fund to the government from economic resources with a political

decision in order to carry on public works (Milliyet Genel Ekonomi Ansiklopedisi I-II,

1988, p.920). And it was the basis of income distribution in pre-industrial economies.

This financial system, which was one of the basic dynamics of the empire took its

unique place in world finance history with the collapse of the empire (Genç, 1975,

p.231).

There had been various implementations of tax in Ottoman Empire in terms of how it

is imposed, how it is collected and its diversity. In the period before Tanzimat, there

were taxes with different rates and collection methods under the main headings of

“Tekâlif-i Şer’iye” and “Tekâlif-i Örfiye”.

19th

century had been a totally different period for Ottoman society and economy

compared to the previous periods. One of the most significant improvements during

the century is the reform movements that the Ottoman executives initiated (Pamuk,

2007a, p.238). With Tanzimat, as in other institutions, many reforms were made in

financial structure too. Financial institutions and tax system had been the main focus

of Tanzimat reforms (Ortaylı, 1974, p.2).

In tax practice religious taxes were remitted and substituted by tithe at a rate of one

of a tenth in agricultural products and “adet-i ağnam” (literally meaning “sheep tax”)

in ovine, jizya taken from non-Muslim citizens. And civil tax was also substituted

with “vergü-yi mahsusa” ( a private tax) (Güran, 1989, p.13). Jizya was a per capita

tax levied on non-Muslim citizens in Ottoman Empire (Karaman and Pamuk, 2010,

p.599).

5.2.Vergü-yi Mahsusa ( Private tax)

This tax which was allocated somehow considering the income of the people and

which was substituted for civil tax during Tanzimat period began to be applied as of

1840. The amount of this tax was determined in sanjak scale and the total amount

was divided between the districts. Later the members of the town council used to

determine the amount that each town or village had to pay in a meeting where,

according to the ethnicity of the population, imam and priest were participating;

finally the tax was allocated according to the abilities of the people to pay.

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In determining the amount of the tax, the total amount of removed civil tax was

based on and the ability of the taxpayers to pay which was used when allocating the

tax among taxpayers was determined by a census. In this new practice, real estate,

land, animal and if the person is engaged, their trade income was grounded on. In

order to determine this financial strength fairly and to allocate the tax in a just

manner according to people’s ability to pay, inventories were taken in 1844 in a large

part of the country. And as a result of these inventories “Property, Land, Animal and

Temettüat Registers” were prepared.

During the inventories taxman began tax registering from the villages and registered

every single person’s name and reputation, their property, land and animals, average

amount of revenue of the merchants and tradesmen. And a notable person would be

appointed by the city council to each town to help the taxman for registry and a

secretary would be appointed to them. Registries were to be made on a properly and

fairly, and those who make wrong or incomplete register would be punished.

During the collection, the mukhtar of the village or neighborhood, imam or clerk

registered the collection they made to the register book with a name of the household

head and would bring the book and money to the district. The taxes that people paid

were registered to the book at the district and the amount money and date of the

payment were written and sealed by the principal and presiding officer. During the

collection and the delivery of the tax to the taxman, zaptiah soldiers were also

appointed for security reasons.

The collection of this tax was made in two installations as “ruz-ı Hızır” and “ruz-ı

kasım” until 1261/1845. And each installation was collected in three other installations.

However, since these collection periods were not appropriate for collection, from this

date on the tax was to be collected step by step from the farmers from harvest

period till the end of the year, and from merchants and tradesmen it was to be

collected in a year in installations. With this regulation in 1864, paying the tax in 10

installations was introduced. This tax which was based on identifying property, land

and other income resources of the public and taxation according to their ability to pay

was abolished in 1860 and instead, land and income taxes were brought (Öztürk, 1996,

p.176).

After all these general information about taxes, we will now put an emphasis on the

shape of Vergü-yi Mahsusa in Ottoman rural area. From the Temettüat register

sequence no: 02824, we know the amount of tax allocated to villages in the rural

area. Here we will look into the allocation of taxes in the villages from the registers

belonging to the villages.

There are differences in tax allocation between villages in the rural area examined.

Table 18 shows total vergü-yi mahsusa realized in all villages as well as amount of

vergü-yi mahsusa per house.

When we look into the average amount of tax levied per house, it is seen that the

amount is 187,10 kurus in total rural scale. And when we look at village averages we

see that 6 villages are above this average and 5 villages are below the averages.

Highest average tax was seen in Akmescid Village as 241,73 kurus. The lowest

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average tax was seen in Hoşafçılar Village as 98 kurus. Total vergü-yi mahsusa in all

villages is 28.627.

Table 18: Distribution of Vergü-yi Mahsusa

Village Number of

Houses

Vergü-yi Mahsusa

(Kuruş)

Tax per

house

(Kuruş)

In village average

Mekeçler 20 4,128 206.40 +

Kurtköy 18 2,660 147.78 -

Receb Beşeoğlu 12 2,558 213.17 +

Karagedikler 8 1,296 162.00 -

Çayır 22 3,156 143.45 -

Bonlar Village 6 1,252 208.67 +

Kıran Village 13 2,546 195.85 +

Hoşafçılar Village 5 490 98.00 -

Emiroğlu 6 1,332 222.00 +

Pınarlı 17 2,924 172.00 -

Akmescid Village 26 6,285 241.73 + TOTAL/ AVERAGE 153 28,627 187.10


5.3.Tithe

The word tithe means a one tenth part of something (Akdağ, 1999, p.408); and in

Islam land law it means a land tax at a rate of 1/10 and 1/20 taken from the

products raised in lands whose owners converted to Islam with their own will and

from the lands which were won after a war and divided among the war veterans

(Öztürk, 1996, pp. 184-185).

Tithe taken directly from the producers (Keyder and Tabak, 1998, p.146) is like a

religious service and regarded as the zakat of the land and was only taken from

Muslims and the owned land. Tithe in the Ottoman Empire was the name of the

money taken from demesne. Since the word exaction would not be approved among

the public, it was called as tithe and thus, had been used for centuries.

Tithe was taken from all products in agriculture. It was taken from all grains and

grain types, products raised in vegetable gardens, fruits, vineyards and grape products,

pastures and other agricultural products; and the collection of this tax was made in

three ways: in kind, in cash and fixed.

This tax was not previously transferred to the national treasury but paid to the land

owner by rayah working on the land. After the corruption of manorial system the

authority of demesne was given to tacksman, taxman and civil servants.

During Tanzimat tithe was collected at a rate of one tenth. Tithe, the most efficient

source for the finance of socio-economic development, was remitted in 17 February

1341 (1925) and was replaced by “mahsulat-ı araziye (land income)” (Öztürk, 1996,

184-185).

Following these historical improvement phases of tithe, the tithe per house, its share

in total tithe and the rates of tithe in Bartın rural area will be highlighted.

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Burden of tithe tax varies in each house according to the capacity of agricultural

lands in rural area and according to the products.

In all rural areas, the total tithe occurred as 5.366 kurus. The average tithe burden

per house is 35.07 kurus.

The highest tithe average per house was seen in Akmescid Village. Here the average

tithe per house was 47.04 kurus.

The highest tithe tax burden in rural area was also seen in Akmescid Village which

had the highest average tax burden per house. The lowest average was found in

Hoşafçılar Village as 84 kurus. Since the total number of tax payers in Hoşafçılar

Village was only 5, the total tax amount was low.

Table 19: Total Tithe and its Break Down per house

Village Number of

Houses

Total Tithe

(Kurus)

Tithe per

house

(Kurus)

Mekeçler 20 665 33.25

Kurtköy 18 485 26.94

Receb Beşeoğlu 12 525 43.75

Karagedikler 8 302 37.75

Çayır 22 594 27.00

Bonlar Village 6 277 46.17

Kıran Village 13 434 33.38

Hoşafçılar Village 5 84 16.80

Emiroğlu 6 254 42.33

Pınarlı 17 523 30.76

Akmescid Village 26 1,223 47.04 TOTAL/AVERAGE 153 5,366 35.07


5.4.The Share of Taxes in Total Revenue

The share of Vergü-yi Mahsusa in total revenue in rural area was 20.09, and the

share of tithe was 3.77.

Among villages, the village with the highest Vergü-yi Mahsusa was Çayır Village.

The share of Vergü-yi Mahsusa in total revenue in Çayır Village was found as

26.25%. And the lowest rate was found in Mekeçler Village.

The highest rate of tithe among the total revenue was again found in Çayır Village

with 4.94% and the lowest rate was found in Mekeçler Village with 2.84%.

When we look into rural areas in terms of net revenue, it is found that Mekeçler

village has the highest net revenue with 79.54% excluding tithe and tax and

Hoşafçılar Village has the lowest revenue with 71.46%. The average of all rural area

is 76.14%.

The share of Vergü-yi Mahsusa and tithe in total revenue and the rate of net revenue

is given in Table 20 below on village scale.

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Table 20: Vergü-yi Mahsusa, Tithe and Net Revenue Rates


5.5.Vergü-yi Mahsusa and Tithe in Tax Burden

Vergü-yi Mahsusa and tithe burden in total revenue developed at different levels in

different villages. The rate of Vergü-yi Mahsusa and tithe in all tax expenditures in

all rural area was 84.21% and 15.79%, respectively.

The highest Vergü-yi Mahsusa occurred in Mekeçler Village with 86.13% and the

lowest occurred in Karagedikler Village with 81.10%. The situation with tithe

regarding the highest and lowest levels is vice versa. It was the lowest in Mekeçler

Village and highest in Karagedikler Village.

The rates of Vergü-yi Mahsusa and tithe in total tax burden realized in the villages

are given in Table 21 below.

Table 21: The rate of Vergü-yi Mahsusa and Tithe in Total Tax

Village

Vergiyi

mahsusa

(Kuruş)

Tithe

(Kuruş)

Total

(Kuruş)

Vergü-yi

Mahsusa

%

Product

Tithe

%

Total

Tax

%

Mekeçler 4,128 665 4,793 86.13 13.87 100

Kurtköy 2,660 485 3,145 84.58 15.42 100

Receb Beşeoğlu 2,558 525 3,083 82.97 17.03 100

Karagedikler 1,296 302 1,598 81.10 18.90 100

Çayır 3,156 594 3,750 84.16 15.84 100

Bonlar Village 1,252 277 1,529 81.88 18.12 100

Kıran Village 2,546 434 2,980 85.44 14.56 100

Hoşafçılar Village 490 84 574 85.37 14.63 100

Emiroğlu 1,332 254 1,586 83.98 16.02 100

Pınarlı 2,924 523 3,447 84.83 15.17 100

Akmescid Village 6,285 1,223 7,508 83.71 16.29 100 TOTAL/

AVERAGE 28,627 5,366 33,993 84.21 15.79 100


Village

Total

Revenue

(Kuruş)

Vergiyi

Mahsusa

(Kuruş)

Tithe

(Kuruş)

Net

Revenue

(Kuruş)

Vergü-yi

Mahsusa

%

Product

Tithe

%

Total

Revenue

%

Net

Revenue

%

Mekeçler 23,426 4,128 665 18,633 17.62 2.84 100 79.54

Kurtköy 11,944 2,660 485 8,799 22.27 4.06 100 73.67

Receb Beşeoğlu 12,687 2,558 525 9,604 20.16 4.14 100 75.70

Karagedikler 7,343 1,296 302 5,745 17.65 4.11 100 78.24

Çayır 12,025 3,156 594 8,275 26.25 4.94 100 68.81

Bonlar Village 6,203 1,252 277 4,674 20.18 4.47 100 75.35

Kıran Village 13,381 2,546 434 10,401 19.03 3.24 100 77.73

Hoşafçılar Village 2,011 490 84 1,437 24.37 4.18 100 71.46

Emiroğlu 6,353 1,332 254 4,767 20.97 4.00 100 75.04

Pınarlı 13,828 2,924 523 10,381 21.15 3.78 100 75.07

Akmescid Village 33,286 6,285 1,223 25,778 18.88 3.67 100 77.44

TOTAL/AVERAGE 142,487 28,627 5,366 108,494 20.09 3.77 100 76.14

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6.RESULT

In this study, which aims to examine the existing economic structure of a rural area

of the Ottoman Empire in the midst of nineteenth century, significant findings are

obtained regarding the income resources, land distribution, husbandry, labor force

distribution and taxes in the chosen eleven villages.

First of all, income resources of these chosen villages was found to be including 5

items which are agricultural, husbandry, being a laborer, lumbering and unexpected. It

was observed that in a rural area chosen as the study field in Ottoman Empire, which

was an agrarian state, lumbering was at the top of the list with 59.69% and on the

contrary, agricultural income was in the second line of the list with 33.51% and

husbandry was at the bottom of the list with 2.14%.

It was found that there were differences in the distribution of income sources in

different villages and that average revenue per house was 931 kurus. It was also

found that 6 of those 11 villages were above the average and 5 of them were below

the average and that there were no big differences in the averages of income groups.

When the agricultural production is looked into, it was found that such grains as

wheat, barley, oat and flax were raised as well as vineyards, fruits and vegetables;

and the total land amount in village scale was 2033 decare. All those land were

planted; 93.21% of the land was used as fields (1895 decare), 6.79% (138 decare)

was used as vegetable gardens. The land for each tax-paying house was 13.29 decare,

and the land used for grain production was 8315 bushel. Wheat is raised in large part

of this grain production area.

In terms of the size of agricultural enterprises, the share of small businesses was

18.15% and share of medium-sized businesses was 81.85%. In those sample eleven

villages, it was found that there were mostly medium-sized businesses and that there

were no large-scale businesses.

It was seen that husbandry was not practiced as an occupation but as a means to

meet the needs. In all villages, bovine breeding was in the forefront (88.06%). The

share of ovine breeding was 11.94%. Annual income was obtained from milk cows

and milk buffalos. Buffalo oxen were used as draught animals. In 153 houses in the

rural area there were 156 oxen; which means there were 1.02 draught animal per

house. This rate shows that each household heads had one draught animal. The

average amount of land for one ox in planted areas was 13.03 and the days that each

ox was used for ploughing was two working days on average.

With regards to occupational income, there are 10 household heads among 153 who

did not have any income source. And these people were recorded under “beggar”,

“unemployed”, “orphan”, “lunatic”, “diseased and lonely” names. The total

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occupational income in the rural area was 54.866 kurus and the income average was

386.38 kurus. The share of occupational income in total revenue was found as

40.70%.

The total revenue of the rural area was calculated as 142.487 kurus and the Vergü-yi

Mahsusa was calculated as 28.627 kurus. As a result of the calculations, tax burden

imposed per house was found as 187.10 kurus. It was stated that six villages were

taxed above this village average and five villages were taxed below the average. On

the other hand, tithe burden in the rural area was 5.366 kurus and tithe per house

was calculated as 35.07 kurus.

Finally, when the total amount of wheat and the tithe paid in the villages is taken

into account, it is determined that there are no surplus product in agricultural

production amount. This finding showed that in the sample rural area of Ottoman

Empire in this study, the villagers could not even provide themselves with the amount

of wheat they need for a year let alone they merchandise it.

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Özlü, Zeynel, XVIII. Ve XIX. Yüzyıllarda Karadeniz’de Bir Kıyı Kenti Akçakoca,

Yeditepe Yayınevi, İstanbul 2008

Öztürk, Said, Tanzimat Döneminde Bir Anadolu Şehri: Bilecik, Kitabevi Yayınları,

İstanbul 1996.

Öztürk, Said, “Temettüat Tahrirleri”, Akademik Araştırmalar Dergisi, Yıl:2, Sayı:4-5

(Osmanlı özel Sayısı), İstanbul 2000.

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Effect Of Foreign Direct Investments On Domestic Investments Of Developing

Countries: A Dynamic Panel Data Analysis

İsmet Göçer1, Osman Peker1, Mehmet Mercan2

1Adnan Menderes University Faculty of Economics and Administrative Sciences, Department

of Economics, Aydin/Turkey,

2 Research Assistant, Hakkari University Faculty of Economics and Administrative Sciences,

Department of Economics, Hakkari/Turkey,

E-mails: [email protected], [email protected],[email protected]

Abstract

Foreign direct investments are regarded as a significant source of investment in developing

countries. However, foreign direct investments may affect domestic investments in different

aspects. They can enforce the domestic firms to crowd out of the sector, or crowd in them.

In this study; the effects of foreign direct investments for developing countries was examined

by means of panel unit root tests and dynamic panel data analysis, within using belonging 35

countries 1992-2010 period data. As an empirical results obtained from the analysis; foreign

direct investments increases domestic investments and has got crowding in effects in

developing countries. In these countries, $1 of foreign direct investment (FDI) causes $2.64

increasing in total investment.

Keywords: Foreign Direct Investment, Crowding in-Crowding out Effects, Developing

Countries.

Jel Codes: E22, F21, G11, P33.

1. INTRODUCTION

FDI is an investment involving a long-term relationship that control of a resident entity in one

economy is reflecting a lasting interest and in that enterprise resident in an economy other

than that of the foreign direct investor (OECD, 1992). FDI refers to the net inflows of

investment to acquire a lasting management interest, 10 percent or more of voting stock, in an

enterprise operating in an economy other than the investor (World Bank, 1999). These kind

investments involve setting up the factory; purchase domestic firm (including privatization),

joint venture with a local firm, licensing agreements and purchases of real estate.

FDI have significant effects for economies. It can provide a country access to new markets,

cheap production, new technology, alternative products, labor and management skills and

financing (Sun, 1996; Barelli and Pain, 1997; Sun, 1998; Jayaraman, 1998; Borensztein,

Gregoria and Lee, 1998 and Javorcik, 2004).

FDI has come to play a major role in the internationalization of business lately. FDI reached

this volume owing to liberalization policies, new economic integrations, trade acts, tariff

liberalization, thanks to new information technology decline the communication and remote

management costs. FDI flows have increased from $54 billion in the 1980’s to $1244 billion

in 2010. FDI firms exported $6 trillion, which about thirty percent of global exports, created


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added value $7 trillion and supply $33 trillion income to employee in 2010 (UNCTAD-WIR,

2011).

FDI may have some different effects on host country economies. It may cause crowding out

or crowding in of domestic firms from sector. Purpose of this study is to analysis this effect

on developing countries economy. These effects will be analyzed via panel unit root tests and

dynamic panel data analysis method using 35 developing country’s 1992-2010 period data.

2. THEORETICAL FRAMEWORK

FDI can affect investments of domestic firms via its own investment activities in various

ways. Some of the positive and negative effects of FDI on domestic investment are regarded.

Impact of FDI on domestic investments may determine according to its complementarity and

substitution features. While FDI producing substitute goods, it may crowding out especially

inefficient domestic firms; on the other hand FDI will crowding in domestic investment that

producing complementary goods or it will uses row material from domestic market (Buffie,

1993).

If there are FDIs’ crowds out effects on the domestic investments; one unit FDI increases will

lead to increase of total investment in the host country smaller than one unit. On the other

hand, if FDI has got crowds in effects on the domestic investment, one unit FDI increases will

lead to more than one unit increase of total investment in the host country. If the effect is

neutral, a unit FDI increases causes a unit increases on total investment (Misun and Tomsik,

2002).

Crowding out effects of FDI may takes place when foreign and domestic firms are in the same

industry. When FDI has come to a sector which included intensive domestic activities, the

firms that will compete and domestic firms cannot stand this competition, and will be

crowded out of sector. If the FDI goes towards the indigenous sectors, which there is less

investment in this sector, through increase the volume of trading and market in this sector, it

will be crowding in the domestic firms in this sector (De Mello, 1999).

2.1. Mathematical Framework of Crowding In and Crowding Out Effects

For analysis this effects of FDI may beginning with a simple equation where investment in a

country is the sum of domestic investment (Id) and FDI: 13

From the point of view of the recipient country, FDI can be considered to be an exogenous

variable (because it depends on conditions in the world economy, Transnational Corporations

(TNCs) strategies, etc.).

Domestic investment is depending on the domestic revenue (GDP). The model simply maybe

arranged as follows:

By replacing (2) in (1), a model for total investment was obtained:

13 UNCTAD-WIR, (1999) has been followed here and the model has been extended by the authors.

(1)dI I FDI

1 (2)dI GDP

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1 (3)I GDP FDI

The model of equation (3) assumes that FDI has no macroeconomic externalities on domestic

investment and that, therefore, one dollar of FDI becomes one dollar of investment. Since the

purpose of the exercise is to verify whether these externalities exist and, if they do, whether

they are positive of negative, a more general formulation is used:

1 2 (4)I GDP FDI

An empirical finding that β2> 1 is evidence for crowding in while β2< 1 is evidence for

crowding out. While investors are investing not only current year, but also look at the past

years’ economic growth rate. So investments dynamic process can expand as follows:

, , , , ,

0 1 0

(5)p p p

i t i j i t j j i t j j i t j i t

j j j

I F I G

Where I = investment; F = FDI; G = growth of GDP; is the fixed country effects and is a

serially uncorrelated random error.

That long-term crowding in and crowding out will be tested with this the relevant coefficient

is:

The criterion used to determine crowding in or crowding out is the value and significance of ˆ

LT. Wald test constraints: If

ˆLT

=1, means that foreign direct investment caused neither

crowding in effect nor crowding out effect on domestic investment, that is neutral (N) effect.

An increase of one unit FDI will make a total investment also increased one unit; Ifˆ

LT＞1,

means that FDI caused crowding-in effect on domestic investment, that a unit of FDI can

bring more than one unit of total investment; Ifˆ

LT＜1, means that foreign direct investment

caused crowding-out effect on domestic investment, that a unit of increase in FDI to the total

increase in investment is less than one unit of.

3. SITUATIONIN DEVELOPING COUNTRIES

Global foreign direct investment (FDI) flows realized to $1.24 trillion in 2010. UNCTAD

estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.4–1.6

trillion. Some of the poorest regions continued to see declines in FDI flows. Flows to Africa,

least developed countries, landlocked developing countries and small island developing states

all declined, as flows to South Asia. At the same time, major emerging regions, such as East

and South-East Asia and Latin America experienced strong growth in FDI inflows

(UNCTAD-WIR, 2011).

International production is expanding, with foreign sales, employment and assets of TNCs all

increasing. TNCs’ production worldwide generated value-added of approximately $16 trillion

in 2010, about a quarter of global GDP. Foreign affiliates of TNCs accounted for more than

0

1

ˆ (6)

1

p

j

j

LT p

j

j

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10 per cent of global GDP and one-third of world exports. Table 1 shows the distribution of

FDI in the economies.

Table 1: Distribution of the FDI in Economies (Billion $)

Source: UNCTAD-STAD.

According to Table 1, while FDI in developing countries increasing, decreasing in

developed countries. For the first time, developing and transition economies together attracted

more than half of global FDI flows. Outward FDI from those economies also reached record

highs, with most of their investment directed towards other countries in the South. In contrast,

FDI inflows to developed countries continued to decline. The distribution of FDI among for

2010 year top 20 developing countries is shown in Table 2.

Table 2: Distribution of the FDI in Top Eleven Developing Countries (Million $)

YEAR 1980 1990 2000 2006 2007 2008 2009 2010

1 China 57 3.487 40.175 72.715 83.521 108.312 95.000 105.735

2 Brazil 1.910 989 32.779 18.822 34.585 45.058 25.949 48.438

3 Singapore 1.236 5.575 16.484 29.348 37.033 8.588 15.279 38.638

4 Saudi Arabia -3.192 312 183 17.140 22.821 38.151 32.100 28.105

5 India 79 237 3.588 20.328 25.350 42.546 35.649 24.640

6 Mexico 2.099 2.633 18.110 20.052 29.734 26.295 15.334 18.679

7 Chile 213 661 4.860 7.298 12.534 15.150 12.874 15.095

8 Indonesia 180 1.092 -4.495 4.914 6.928 9.318 4.877 13.304

9 Angola 37 -335 2.174 9.064 9.796 16.581 11.672 9.942

10 Malaysia 934 2.611 3.788 6.060 8.595 7.172 1.430 9.103

11 Turkey 18 684 982 20.185 22.047 19.504 8.411 9.071

Source: UNCTAD-STAD.

4. LITERATURE

There have been many studies for of FDI effects on domestic investment in the economics

literature. In these studies reached different conclusions. Summary of these studies are given

in order of date of construction.

Lubitz (1966), studied relating to Canada and found a big effect FDI to domestic investment

that: $1 of FDI led to $3 of capital formation in host country. Similarly Van Loo, (1977),

studied again on Canada with 1948-1966 periods data and found that: $1 of FDI led to $1.4

of capital formation in host.

Borensztein, et al, (1998), studied of the impact of FDI on domestic investment, utilizing data

on FDI flows from developed countries to 69 developing countries on a yearly basis from

1970 to 1989, has found, that FDI has stimulated domestic investments; one dollar net inflow

of FDI increases total investment in the host economy between 1.5 and 2.3 times the increase

in the flow of FDI.

World

Developing

Economies

Share of

Developing

Economies

Transition

Economies

Share of

Transition

Economies

Developed

Economies

Share of

Developed

Economies

1980 54 7 14 0 0 47 86

1990 207 35 17 0 0 173 83

2000 1.403 258 18 7 1 1.138 81

2005 983 332 34 31 3 619 63

2006 1.462 429 29 55 4 978 67

2007 1.971 573 29 91 5 1.307 66

2008 1.744 658 38 121 7 965 55

2009 1.185 511 43 72 6 603 51

2010 1.244 574 46 68 5 602 48

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Chudnovsky, Lopez and Porta (1996), found crowding out effect in the case of Latin America,

where the development of domestic subcontractors was part and parcel of the privatization

agreement with foreign investors. Intel built a large microprocessor plant in Costa Rica and

contributed to domestic capital formation. This investment as such didn’t displace local

entrepreneurs, because they hadn’t got exist, even potentially. Intel affiliate gave rise to

investments by about 40 local suppliers. But there were some complaints by local business

people that Intel's investment crowds them out of the labor market by absorbing skilled

programmers.

Jomo (1997), studied for Indonesia, Malaysia, and Thailand, which relied heavily on FDI and

TNCs have invested in new industries of the economies of those countries mainly

microelectronics-related toys and other consumer goods for export markets, initially many of

the FDIs where with few linkages to the rest of the economy, domestic suppliers of services

and inputs have emerged in time, and FDI crowding in a lot of firms in this industries.

UNCTAD-WIR (1999), including an econometric study for FDIs’ effects on domestic

investments. This study covers 39 developing countries’ 1970-1996 period data by means of

panel data analysis. The results with respect to the effects of FDI on investment by individual

countries show that neutral effects dominate while the number of crowding in and crowding

out cases were equal: the former were found in 19 countries and the latter in 10 countries

each. As regards regional patterns, out of the 12 Latin American countries included in the test,

none was in the group with crowding-in effects and none of the 12 Asian countries was in the

crowding-out group: while neutral and crowding in effects prevailed in Asia, neutral and

crowding out effects prevailed in Latin America.

Agosin and Mayer (2000), studied for Asia, Africa and Latin America country via panel data

analysis and found that: while there were complementary relationship between investments in

Asia and Africa countries, there were substitution relationship in Latin American countries.

Driffield and Hughes (2003), found of FDIs complementarity and creation on the heap

economy features’. According to Backer and Sleuwaegen (2003), in the context of

occupational choice models, FDI declining the power of local entrepreneurs. But, FDI

increases the domestic investments through networking, chain and learning effects.

Agosin and Machado (2005), studied of the impact of FDI on domestic investment via

econometric methods and found FDI hadn’t got a positive effect on domestic investment.

Apergis, Katrakilidis and Tabakis (2006), with panel study involving 30 countries found that:

FDI had got complementary relationship between domestic investment in the single-variable

model, whereas, in the context ofa multivariate model was obtained from the substitutional

relationship. Lin and Chuang (2007), tested this effects for Taiwan economy, found that FDI

have got important effects on domestic investments. According to them, FDI crowding out to

little domestic firms and crowding in the big domestic firms.

Ang (2009), studied of the impact of FDI on domestic investment for Malaysia through VAR

analysis using 1960-2003 periods data and found that: $1 FDI increase the domestic

investments $1.25. Therefore, FDI involves crowding in effects in Malaysian economy.

Gan and Gao (2010), studied of the impact of FDI on domestic investment for China via panel

data analysis methods using 1992-2007 periods data and found that: $1 FDI increase the

domestic investment in central region $4.08 and $5.88 in Shanxi region. So, FDI have got

crowding in effects in China economy.

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5. EMPIRICAL ANALYSIS

5.1. Data Set

A balanced panel of 665 annual observations from 35 developing countries over the period

1992-2010 was used in this study. The sample of countries represents all major regions in the

world as FDI attracting in 2010. It includes 11 countries from Latin America and Caribbean,

11 from Asia and the Pacific, 10 from Africa and 3 from economies in transition. Investment,

Gross Domestic Product (GDP) and Foreign Direct Investment (FDI) are these studies’

variables. Data set was obtained from World Bank, UNCTAD and IMF. All data currency is

US dollar. I = investment to GDP ratio; F = FDI to GDP ratio; G = growth of Real GDP.

5.2. Method

For this study data set included in the dynamic processes, dynamic panel data analysis method

was used. Dynamic panel data analysis method is taken into consideration dynamic structure

between the dependent and independent variables (Baltagi, 1995). In addition to use of panel

data in estimating ensures control for missing or unobserved variables and relationships allow

identification of country-specific effects (Arellano-Bond, 1991; Matyas and Sevestre, 1996).

The dynamic panel allows dynamic effects to be introduced into the model and allows

feedback from current or past shocks (Hsiao, 1986). This approach requires that N>T (Hahn,

1997) and N and T must be very big (Hsiao, 2003: 75).Simple equation of dynamic panel data

is:

, 1 (7)it i t it i ity y x u

for i=1,2,...,N; and t=1,2,...,T. is a scalar, itxis kx1, it

denotes the i-th individuals effect

and ituis the remainder disturbance.

In this study, along dynamic panel data estimation methods the technique Generalized Method

of Moments (GMM) was used.GMM procedures are more efficient than other estimators

Arellano and Bond (1991). The resulting GMM estimator is asymptotically efficient (Baltagi,

1995). GMM estimators use all possible lagged values of dependent and independent

variables as instrumental variable (Arellano and Bond 1991). Sargan test is used to determine

if instrumental variables of the GMM are suitable (Greene, 2003).

The Sargan test is a test of the validity of instrumental variables. The Sargan test based on the

Arellano and Bond (1991) instrument set for the first differenced equations exhibits a zero

rejection frequency under both the null hypothesis and alternative hypothesis (Bowsher,

2002). The Sargan test is based on the observation that the residuals should be uncorrelated

with the set of exogenous variables if the instruments are truly exogenous. It is a test of the

over identifying restrictions. Hypotheses are:

H0: Instrumental variables are exogenous (Moment conditions are valid).

H1: Instrumental variables aren’t exogenous (Moment conditions are invalid).

The hypothesis tested with the Sargan-J statistic. This statistic will be asymptotically chi-

squared (2 ) with m-k degrees of freedom. m is instrumental variables number and k is

number of the parameter. If the obtained test statistic probability value greater than 0.05, null

hypotheses will accepted. Therefore, instrumental variables are uncorrelated to residuals, and

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therefore they are acceptable, instruments are healthy. If the obtained test statistic probability

value smaller than 0.05, H0 will be rejected and instrumental variables are unacceptable.

5.3. Panel Unit Root Test

Panel unit root testing is accepted more strong for only the time dimension of time series unit

root tests. Since it covers the data of both time and cross-sectional size (Im, Pesaran and Shin,

1997; Maddala and Wu, 1999; Taylor and Sarno, 1998; Levin and Lin, 1992; Hadri, 2000;

Choi, 2001; Levin, Lin and Chu, 2002; Breuer and Wallace, 2002; Carrion-i-Silvestre, 2005;

Pesaran, 2006; Beyaert and Camacho, 2008). At the same time, the addition of cross-sectional

size of the analysis, increased variability in the data.

The first problem encountered in the panel unit root tests are whether or not independent of

each cross-section. Panel unit root tests are divided into first generation and second generation

tests. While Breitung (2000), Hadri (2000) and Levin, Lin and Chu (2002) based on the

assumption of a homogeneous model; Im, Pesaran and Shin (2003), Maddala and Wu (1999),

Choi (2001) based on the assumption of a heterogeneous model.

In this study; Im, Pesaran and Shin (2003) (IPS) test will be used since the countries aren’t

homogeneous. IPS test is based on this model:

for i=1,2,...,N; and t=1,2,...,T. i is a error correction model. If 1i

(or unit root test

probability value<0.05) serial is trend stationary, or else it has got unit root and not stationary.

Table3: IPS Unit Root Test

Variable Level Value Prob Value

I -6.011 0.0000

F -3.511 0.0002

G -11.396 0.0000

Note: In panel unit root tests Schwarz criterion is used and length

was1 taken.

According to the Table 3, all series are stationary in level values. So this means analyzes to be

performed in this series is reliable.

5.4. Dynamic Panel Data Analysis

Dynamic data analysis made with using model (5) via GMM and the results of obtained are

presented in Table 4.

Table 4: Results of Dynamic Data Analysis

Variables Coefficients t-Statistics I(-1) 0.97 414.05

I(-2) -0.06 -28.68

I(-3) 0.26 86.35

F 0.44 57.62

F(-1) 0.51 34.14

F(-2) -1.07 -294.95

F(-3) 0.57 65.55

G 0.36 619.67

G(-1) -0.31 -234.85

, 1 ,

1

(8)jp

it i i t ij i t j it it

j

Y Y Y X

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G(-2) -0.03 -38.16

G(-3) -0.001 -1.21

R2=0.87 J-Statistic=26.91 Instrument Rank=35

White Period method was used to correct the standard errors. Sargan test was used to

determine whether the instruments are suitable or not by using J-statistic and instrument rank.

In this way found the p-value=0.208. This result is bigger than 0.05. Thus decided to

instruments are suitable and analysis results are reliable.

Long-term investment coefficient calculated using equation (6) and found it 2.64. This result

shows; in developing country, $1of FDI creates $2.64 in total investments. As result of FDI

increases domestic investment and it has got crowding in effect in the developing country.

This is a very high degree. Countries, which wishing to increase their domestic investments,

should utilize from this source.

6. CONCLUSIONS

There are different opinions about the effects of FDI on domestic investment in economics

literature. Some economics believe that, FDI reduces domestic investment and it has got

crowding out effects. Other claim FDI increases domestic investment and it has got crowding

in effects. The main purpose of this study is to analyze these effects in developing countries.

For this purpose, using data from 1992-2010 for 35 developing countries a dynamic panel

data analysis was performed. As an empirical results obtained from the analysis; FDI

increases domestic investment and has got crowding in effects in developing countries. $1of

dollar FDI leads to an increase $2.64 total investment in these countries. This value is very

high; FDI for the emerging countries shows how important it is. Therefore, countries, which

wishing to increase their domestic investments, absolutely should utilize from this source.

As a result, if a country wants to accelerate its developing pace; it tries to attract more FDI its

country. The same time governments should take necessary measures for foreign investments

attributes and qualities.

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OECD, (1992) Detailed Benchmark Definition of Foreign Direct Investment, Second Edition,

Paris.

Pesaran, H. (2006) A Simple Panel Unit Root Test in the Presence of Cross Section

http://ideas.repec.org/s/taf/regstd.html

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Dependence, Cambridge University Working Paper, 0346.

Sun, H. (1996) Direct Foreign Investment and Linkage Effects: the Experience of China,

Asian Economies, 25(1): 5-28.

Sun, H. (1998) Macroeconomic Impact of Direct Foreign Investment in China: 1979-1996,

The World Economy, 21(5): 675-694.

Taylor, M. & Sarno L. (1998) The Behaviour of Real Exchange Rates During the Post-

Bretton Woods Period, Journal of International Economics, 46: 281-312.

UNCTAD-WIR (1999) Indirect Impact: Does FDI “Crowd out” or “Crowd in” Domestic

Investment? New York and Geneva.

UNCTAD-WIR (2011) Non-Equity Modes of International Production and Development,

Switzerland.

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Review of Economics and Statistics, 59: 474 481.

World Bank, (1999) World Development Report, Oxford: Oxford University Press.

Women’s Role In Economic Development: From Classical Approach To The Present

İşler Ruhan Şentürk Canan

Süleyman Demirel University, Isparta, Turkey

E-mails: [email protected],[email protected]

Abstract

The aim of this study is to examine women’s role in economic development from a historical

perspective. Many classical economists considered women to be irrational as economic

agents. They took it for granted that women were paid less than men. Feminist economists

criticise traditional-neoclassical economics claiming that conceptual basis for the mainstream

economic knowledge is gender discrimination and women’s experiences are not reflected in

economics. For this reason, they suggest that economic horizon be broadened by reviewing

and questioning economics, including women’s perspective.

Towards the end of the 1980s, the concept of human development was improved and United

Nations Development Programme (UNDP) started working under the name of Human

Development Index (HDI) in order to measure the development levels of countries. In the

same way, studies on the elimination of gender-related inequality that is one of the new

dimensions of development concept were started by UNDP. In this context, Gender-Related

Development Index (GDI) was developed. Furthermore, Gender Empowerment Measure

(GEM) has been emerged to measure the distribution and participation of women in the

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economic and political life. In recent years, The World Bank has shifted its focus from

structural adjustment to poverty reduction. The growing interest to the problems of gender

and women has been an important part of this process. When gender inequality is not taken

into consideration, economic growth and development cannot be handled effectively, because

poverty leads to gender inequality and gender inequality negatively affects economic

development.

Considered as a human capital, human factor is a fundamental determinant of economic

development. In this context, the major target of economic development is to improve life

standards and to provide equal opportunities in health, education, employment for everybody

without gender discrimination. Women should be involved in the current economic

development plans, programs and projects with the help of the government policy.

Keywords: Gender, Feminist Economics, Economic Development, Gender İnequality,

Women’s Studies.

1.INTRODUCTION

The period, when the term "development" began to be widely used, is known as the period

after the World War II. However, it was possible to come across some points related to the

issue in the science of economics before this period. The process, which Adam Smith, with

the term "natural progress of opulance" (Smith, 1776:459) and John Stuart Mill, with the term

"economical progress" (Mill, 1902) have tried to define, may be basically identified with the

development. The process, introduced by the concept of development, has a history spanning

centuries. The Industrial Revolution and the great change brought by this revolution has the

highest priority and the most important role in this historical process that may be basically

identified with the capitalist development. For those nations outside the Industrial Revolution,

"Westernization", "industrilization" and "modernization" have turned out to be the main

objective for attaining the tangible process, gained by the Western civilization, under various

names and these names have been used synonymously with the terms progress/development

(Yumuş, 2011:9,10).

Up until the 1970s, an increase in Real Gross National Product (GNP) and the national

income per capita were the main indicators used to measure the economic development.

However, with the the definition of the economic development after the economic crisis in

1970s, the criteria used in the measurement of the economic development started to be

questioned. With these improvements, the development has been mostly perceived from a

human perspective and the improvement of man's life standard has come into prominence

(Memmedova, 2000).

Although the development discipline produced its unique literature after the World War II, the

role and place of the women have been neglected for a long time and they have not been

given due importance in mentioned development processes. Considering that women make up

the half of world's population in all periods of the history, the role of women in economic and

social life should not be neglected. The fact that gender equality is both a fundamental

principle of democracy and one of the requirements for sustainable development is well

known. From this point of view, the role and significance of women both in social welfare

policies and in development plans and policies should be questioned.

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In this context, firstly, the theoretical approaches on the "development and women" will be

evaluated from a historical perspective, then some assesments will be made related to "the

development and women in international institutions and processes".

2.Theoretical Approaches to Development and Women

The role and place of women have been neglected for a long time and women have not been

given due importance. The place of women in the development process was first introduced

by Ester Boserup in 1970 (Palaz, 2005:316,317). This section of the study, in a historical line,

analyzes" the role of women in economy" before the creation of development literature and

"the role of women in development" after the creation of this literature. In this context, the

Classics' view of women, Neo-classical view, Boserup's view of women in development and

feminist economists' views are reviewed respectively.

Most of the classical economists are skeptical about women's rational decision-making

capacities. Pujol (1992) states that it could be inferred from Adam's Smith's work The Wealth

of Nations (1776) that "women are relatively invisible in the The Wealth of Nations, aside

from their obvious role in contributing to population growth". To Bodkin (1999:46,47), it can

be understood from the same work that women have limited roles in market economy,

moreover, it is their parents and relatives who decide on their education because “Smith does

not trust the young women to choose their subjects of study wisely” For this reason, they are

deprived of the opportunity to learn the intellectual issues as their career choices are limited.

Jean Baptise Say argues that women are irrational consumers. He exemplifies this issue with

women's being extravagant towards expensive jewelry (Bodkin, 1999:55). Say, in his work

Olbie, states that women's natural wage is lower than that of men, because it is men who must

support a family while women support only themselves (Forget, 1997:109).

Pujol (1995) argues that the classical school, as well as some neo-classical successors- Jevons,

Edgeworth, Marshall and Pigou- accept women as "irrational" and "unfit as economic agents".

Considered to be among the neo-classical economists and the father of the welfare economy,

Pigou, has argued that women are weaker and more imperfect than men and thus welfare may

be maximized by keeping women's salaries lower than that of men's (Pujol,1992:151). The

Neo-classical point of view suggests that the elimination of the inequality between men and

women and women's full participation in the economy may only be realized with

development and industrialization. It states that the main reason why women cannot equally

benefit from the development and why their participation in economic and social life is not

realized is the differences men and women have in human capital equipments, such as

education and work experience (Palaz, 2005:317).

Ester Boserup, in Woman’s Role in Economic Development (1970), emphasizes that women

do not benefit from development opportunities as much as men and new technologies

provided by development programs deteriorate women's status (Palaz, 2005:318). The main

issue of women in development is their incorporation into the existing economic development

plans, programs and projects. If women are fully integrated into development plans and

projects and take active roles, they will benefit more from the opportunities of the

development. In this context, as suggested by Neo-classical view, it is considered that women

may equally benefit from the economic development with certain state interventions and

policy practices rather than assuming that the case of women could be improved with

economic development (Lansky, 2000).

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The feminist economics does not review and question the "woman in economy", but rather it

reviews and questions the economy including women's point of view. This questioning leads

to the development of new economic methods, theories and policies and thus to the expansion

of the horizons of economics. This questioning is realized with the principle "different but

equal" (Eroğlu and İşler, 2006:69,70). At the same time, this review will also contribute to the

development of women's economic conditions. Feminist economists criticise the view based

on the Cartesian philosophy according to which women perceive the model person in theories

of traditional economists as man, because women occupy the subordinate position and in this

context they cannot reflect their women experiences on the science of economics. Therefore,

they suggest that conceptual foundations of economic knowledge are produced and

reproduced on gender bias (Eroğlu and İşler, 2006:108). In this context, the feminist

economists suggest that the reason behind women's subordination to men in a society and

their not being fully integrated into the social and economic life is the "patriarchal-man"

system. Thus, they assert that all the instutional barriers against women should be eliminated

and women should be empowered and actively participate in development plans and projects.

Although they accept that general economic developments and improvements have positive

effects on women, they point out that these effects may be very complex and may not always

improve the case of women (Forsythe et al., 2000). The goal here is to provide women with

the access to necessary knowledge, skills and resources, giving them the opportunity to

develop themselves and play an active role in development plans (Palaz, 2005:318,319).

3.Development and Women in International Institutions and Processes

Previously, the development programs saw women as objects rather than economic actors, for

this reason, they were only interested in producer roles. However, it was only when the

economic value of the child was understood that the necessity for reducing the expenditures

on preventive measures against pregnancy in population programs and increasing their

revenues was supported (Tinker, 1997:38; Ertürk, 1996:349). In this context, The United

Nations sought ways to improve women's education, feeding and status. The fact that women

could not fully participate in the development was called as "waste of human resources".

Women were characterized as resources and the belief that their contributions would

accelerate the development process and make it more effective became dominant. Indeed, in "

Strategy for The Second Development Decade", the importance of promoting women's the

International Development organization in the "total development" was emphasized ( Yavuz

and Serdaroğlu, 2010:54).

The group of Society for International Development (SID) - Women in Development (WID)

created a five-page bibliography on the subject and it was at this stage that Boserup's book

was discovered (Tinker, 1997:33). The book of E. Boserup, a liberal feminist, is the first study

to analyze the differing effect of sex/gender division of labor and development and

modernization on "gender" on the basis of data and evidence. Boserup’s study examines the

effect of the development projects on the Third World Countries' women. The writer states

that most of these projects neglected women and many of these technologically sophisticated

projects impeded women's economic interests and independence (Yavuz and Serdaroğlu,

2010:54-57).

The First World Conference on Women was held by The UN Commission on the Status of

Women in Mexico City in1975 and the decade between the years of 1975 and 1985 was

declared as the "United Nations Decade for Women" by the General Assembly of the United

Nations. The main theme of the "United Nations Decade for Women" was identified in the

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framework of determining and reaching the goals of "Equality, Development and Peace”;

improving women's status on national; regional and international levels; preventing

gender/sex discrimination against women; providing the equal opportunities for women to

participate in the production and benefit equally from the development opportunities. The

“Action Plan", determining the measures for the improvement of women's status, was

accepted in the Second World Conference on Women, held in Copenhagen, in 1980. Short

after the Second World Conference on Women, Committee on the Elimination of

Discrimination against Women (CEDAW) was accepted and opened for signature by parties

to CEDAW. The Third World Conference on Women was held in Nairobi in 1985 and far-

reaching strategies were determined for the improvement of women's status after a general

evaluation of the "United Nations Decade for Women" (Palaz, 2005:319,320). The Fourth

World Conference on Women held in Beijing, in 1995, demanded the recognition of women's

rights as human rights.

After the First World Conference on Women, many governments set up offices to deal with

women's problems. International aid agencies began to employ a large number of WID

specialists in order to prove their commitment to the improvement of women's status. "WID"

conceptualization was first used by Boserup, to draw the attention of American policy makers

and by SID Committee of Women as part of the strategy to bring the evidence produced by

others. A set of common concerns branded as "Women in Development" in a flexible way or

as "WID" began to be explicitly stated by the American liberal feminists advocating the

administrative and legal changes that would lead the women in development agencies to have

more chances to get professional employement and provide them with the chance to be

integrated into economic systems in a better way. Criticisms on the Western capitalism,

modernization and based on them WID shaped the ‘Women and Development’ (WAD)

apporach, whose intellectual foundations lie in Marxist Feminism and the Dependency

Theory. (Yavuz and Serdaroğlu, 2010:56-65). In addition to WID and WAD, many different

approaches appeared on the agenda with regard to development-women

relationship:‘Development Alternatives with Women for a New Era’ (DAWN); ‘Gender and

Development’ (GAD); ‘Women, Culture and Development (WCD). İn the frame of

development-women relationship in 1990s, the theme of "empowerment" as well as the theme

of "environment" gained popularity. In the United Nations Conference on Environment and

Development (UNCED) meetings in 1992, DAWN, on the development and environment,

pointed out its view on " taking into consideration the local experiences related to ecological

problems for the sustainability of life at the level of basic needs" of poor women in the South.

The local inspection of the "sustainable development" was one of its demands. DAWN

suggested that they had the best information on the local environment problems, faced by the

poor and women in the South, and their solutions. This was the basis for women's demands to

participate in environmental decision-making and management process (Yavuz and

Serdaroğlu, 2010:83,84).

In 1990s, organized women groups kept the governments and other agencies under constant

pressure for them to take women's concerns into consideration. Activists, feminist thinkers

and academicians were warned to enforce the link between theory and practice and to revise

their theories. Although some shifts were observed in rhetoric and practice, WID remained to

be the dominant approach for the governments, aid and development agencies-UN agencies

and NGOs- (Connelly et al., 2000:63,64).

As Erturk (1996:348) has stated, the reasons underlying these developments can be expressed

in three ways:the first one is the far-reaching effect of women's movements in Western

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countries, the second one is the East-West polarization and the third one is the Third World

radicalism and the paradigmatic change that leads to the search for egalitarian policies by

questioning the current economic development models (Palaz, 2005:322).

Kuiper and Barker (2006) emphasize that “the past decade has witnessed a paradigm shift at

the World Bank from a focus on structural adjustment to a focus on poverty reduction. As

evidenced by the Bank’s 2001 report, Engendering Development: Through Gender Equality

in Rights, Resources, and Voice, an increased attention to gender issues has been an important

part of this process. The premise of the report is that economic growth and development

cannot be effectively addressed when gender inequality is not taken into account, because

poverty increases gender inequalities and gender inequalities hinder economic development.”

The writers (Barker and Kuiper, 2006:1) also point out the positive changes in its theory,

policy and approaches related to the conditions of WB’s programmes and loans which are

now determined in cooperation with local groups and non-governmental organizations.

Previously, it was economists in Washington who were decision-makers only. After the

1990’s gender and women’ issues became one of the focuses of the Bank.

4.CONCLUSION

Since the publication of Ester Boserup's 1970 book, Woman’s Role in Economic

Development, this field has moved from corrective focus to a broader framework of gender

differences. Development is likely to improve social indicators and minimizes the gender gap

through education. In addtition to significant correlations between national income growths

and reduction in child mortality, reduction in male-female education gap, increase in all

education levels and in women education level, there is a close correlation between women

education and political and civil liberties index as well. However, besides these positive

effects, it is worth noting findings about the economic development that affects the share of

both the power and income sources between sex and systematically develops men's life more

than women's, leading to the enforcement of men's control over the means of production. For

instance, even though the living standard of women increases, their decision-making power

and status may decrease when structural, technical and institutional changes in rural

economies are taken into consideration (Jacobsen, 2007:386-388).

Women still suffer from inequalities. Their access to such resources as land, credit, training is

limited. Despite their great contribution to different spheres of life-care-givers in the

household and community sectors and workers, knowledge-providers, and entrepreneurs-,

they are unable to get what they deserve (Williams, 2006:227).

The human factor is the main determinant of economic development. Human capital theory

emphasizes the importance of investments made in human. Therefore, providing equal

opportunities in health, education and income to everyone, without discrimination between

men and women, and increasing their living standards should be the main objective of

development.

REFERENCES

Barker, D.K. and Kuiper, E. (2006) “Feminist Economics and the World Bank” in E. Kuiper

and D. K. Barker (eds.) Feminist Economics And The World Bank -History, Theory and

Policy, Routledge, New York.

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Bodkin, R.G. (1999) Women’s Agency in Classıcal Economıc Thought: Adam Smith, Harriet

Taylor Mill, and J. S. Mıll, Feminist Economics, 5(1), s.45-60.

Boserup, E.(1970) Woman’s Role in Economic Development, London:George Allen

&Unwin.

Connelly, M.P., LI, T.M., Mac Donald, M., Parpart, J. L. (2000) “Feminism and

Development:Theoretical Perspectives” in J. L. Parpart, M.P. Connelly, V.E. Barriteau (eds.)

Theoretical Perspectives on Gender and Development, IDRC Books, Ottawa.

Eroğlu Ö.and İşler R. (2006) İktisat Düşüncesinde Farklı Bir Bakış:Feminist İktisat, Asil

Yayın Dağıtım Ltd.Şti., Ankara.

Ertürk, Y. (1996) Alternatif kalkınma stratejileri: Toplumsal cinsiyet, kadın ve eşitlik, ODTÜ

Gelişme Dergisi, 23 (3), 341-356.

Forget, E.L. (1997) The Market For Virtue: Jean- Baptiste Say On Women in The Economy

and Society, Feminist Economics, 3(1), 95-111.

Forsythe N., Patricio R., and Durrant V. (2000) Gender Inequalities and Economic Growth:A

Longitudinal Evaluation, Economic Development and Cultural Change,48(3),573-618.

Jacobsen, J.P. (2007) The Economics of Gender, Third Edition, Blackwell Publishing, USA.

Kuiper, E. and Barker, D.K. (2006) Feminist Economics And The World Bank -History,

Theory and Policy, Routledge, New York.

Lansky, K. (2000) Gender, Women and All the Rest, International Labour Review, 139 (4),

481-505.

Memmedova, M. (2000) İktisadi Kalkınmada Kadının Rolü ve Türkiye ve Azerbaycan

Karşılaştırması, Yayınlanmamış Yüksek Lisans Tezi, Anadolu Üniversitesi Sosyal Bilimler

Enstitüsü, Eskişehir.

Mill, J.S. (1902) Principles of Political Economy: With Some of Their Applications to Social

Philosophy, (Vol. II.), Second Edition, London: J.Parker, W Strand.

Palaz, S. (2005) “Toplumsal Cinsiyet ve Kalkınma: Kalkınmada Kadının Yeri” in M. Kar and

S. Taban (eds.) İktisadi Kalkınmada Sosyal, Kültürel ve Siyasal Faktörlerin Rolü, Ekin

Kitabevi, Bursa.

Pujol, M.A. (1992) Feminism and Anti-feminism in Early Economic Thought, Aldershot,

U.K. Elgar.

Pujol, M.A. (1995) “İnto the Margin” in E. Kuiper ve J. Sap (eds.), Out of the Margin:

Feminist Perspectives on Economic Theory, Routledge, New york.

Smith, A. (1776) An Inquiry Into The Nature And Causes Of The Wealth Of Nations, (Vol. I.)

London: W.Strahan; T. Cadell.

Tinker, I. (1997) “The Making of a Field: Advocates, Practitioners and Scholars” in N.

Visvanathan, L. Duggan, L. Nison’off, N. Wiegersma (eds.) The Women, Gender and

Development Reader, Zed Books Ltd., London.

UNDP, (1995) Human Development Report, Oxford University Press, New York.

Williams, M. (2006) “Why Feminist economists should pay more attention to the coherence

between the World Bank and the WTO” in E. Kuiper and D. K. Barker(eds.) Feminist

Economics And The World Bank -History, Theory and Policy, Routledge, New York.

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Yavuz, G. and Serdaroğlu U. ( 2010) “Kalkınma ve Kadın (veya toplumsal cinsiyet)

İlişkilendirilişinin Değişimindeki Kavşaklar” in U. Serdaroğlu (ed.) İktisat ve Toplumsal

Cinsiyet, Efil Yayınevi, Ankara.

Yumuş, A. (2011) Kalkınma Planları Çerçevesinde Toplumsal Cinsiyet Eşitliği Anlayışının

Ekonomik, Toplumsal ve Siyasal Boyutları, T.C. Başbakanlık Kadının Statüsü Genel

Müdürlüğü Yayınları, Ankara.

Determinants Of Turkey Current Account Deficit: An Econometric Analysis

M. Metin Dam, İsmet Göçer,Şahin Bulut,Mehmet Mercan

Adnan Menderes University, Faculty of Economic and Administrative Sciences Department of

Economy

Abstract

The main causes of the current account deficit in Turkey; the foreign trade deficit, the high

ratio of intermediate goods imports, high oil prices and Turkey's energy import dependence,

lack of domestic savings, foreign direct investment and low tourism revenues.

In this study, the causes of the current account deficit and current account deficit financing

structure were examined. In addition, the determinanats of Turkey current account deficit

wereanalyzed via VAR methods using the data of 2002-2011 monthly current account deficit,

net export, interest on external debt, transfer payments and costs of tourism.

As a result of the study, According to variance discrimination results obtained from VAR

model composed under this roof, current account deficit is determined by its own shocks in

the short term. In addition, current account deficit prediction error variance is determined by

tourism expenditures and foreign debt interest rate as well as its own variables. Current

account deficit is affected by export, foreign debt interest rate, transfer payments and shock

given to tourism expenditures.

Keywords: Current Account Deficit, Determinants, VAR, Turkey

1.INTRODUCTION

1.1.What is current account deficit?

Current account deficit is the difference between the amount of foreign currency getting in

and out a country. Export and tourism make up foreign currency income and import and

foreign expenditure make up foreign currency expenditure. Current account deficit is reached:

the foreign currency obtained from goods export, service export like tourism(e.g the wage

income of those working abroad) and manufacture factors are added and the expenditures

made in the same category (import, tourism expenditures, the transfer of the profit gained by

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foreigners) are subtracted from total. İf the figures obtained show a value then it means that

you have a current account deficit.

The economic relations of a country with outsideworld is monitored in a balance-sheet called

payment balance. This balance-sheet shows us how much foreign currency surplus or deficit

occurred within the term mentioned demonstrating the foreign currency incomes and

expenditures in a balanced approach.

Payment balance is made up of two sections. Current deficit balance and capital account.

Only current deficit balance will be clarified here. Current account balance consists of 4 sub-

balances.

1. Goods balance

2. Services balance

3. Investment revenues balance

4. Current account transfers

Goods Balance: The difference between foreign currency incomes obtained from the sales

abroad and foreign currency costs for goods purchased from abroad by a country.

Services Balance: The difference between foreign currency incomes obtained from services

such as transport, insurance, tourism and foreign currency costs paid for similar services.

Investment Revenues Balance: The difference between the profits gained from the FDI,

interest revenues from portfolio investments by a particular country etc. and foreigners’

profits from similar investments in that country and foreign currency revenues in foreign

currencies.

Currentc Account Transfers: The foreign currency input from workers abroad. Therefore, we

can formulate current account balance as;

Current Account Balance = Goods Balance + Services Balance + Investment Revenue

Balance + Current Account Transfers. If the result of this total is minus(-), current account

deficit exists.

1.2. What Are The Effect of Current Account on Economy?

An economy whose current account is on the rise needs to grow its capital accounts as well.

The foreign dependence of an economy whose capital accounts grow increases. One of the

most debated issues in Turkish economy is current account deficit. Given that the final goal of

macroeconomic policies is to provide an interior and exterior balance in the economy of a

particular economy, an un acceptible and unsustainable current deficit will mean gradual

deviation from exterior balance, therefore, in this case, the problem needs solving through

economic policies.

While the provision and maintenance of interior balance means, in general, price stability and

exact employment, exterior balance means the payment balance between the total expenditure

and revenues of a particular country. Current account deficit can be explained as a deviation

related to exterior imbalances in this regard(Telatar, 2011).

1.3.What are the Objectives of this Study?

The aim of this study is to analyse the determinants of current account deficit through

2002:M1-2011:M12 data. This issue needs to be discussed and suggestions for solution need

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to be developed because of the fact that current account deficit reached its peak 2011. The

study is important in this respect. The rest of the study consists of 6 main sections. In the

primary sections are completed that it is introduction, second section determinants of current

account deficit in Turkey, the third section up-to-date data regarding current account deficit

in Turkey, the fourth section literature, the fifth section analysis and final section.

2.Determinants of Current Account Deficit in Turkey

The determinants of current account deficits (CAD) are now at the centre of international

macroeconomics with the recent experience of large imbalances of a number of countries

including the USA. The empirical literature appears to focus on the determinants and

sustainability of CAD in individual countries or the consequences in a cross-section of

countries (Özmen, 2005).

The determinants of current account balances are of considerable interest in open economy

macroeconomics. Alternative theoretical models have different predictions about the factors

underlying current account dynamics and about the sign and magnitude of the relationships

between current account fluctuations and these determinants(Chinn and Prasad, 2000). Hence,

empirical analysis of the sort undertaken in this paper could help discriminate among

competing theories.

The current account deficit (CA), we define as follows14:

CAt = NXt + rtBt + TRt (1)

In the equation (1) current account deficit; explained through trade in goods, interest

payments on foreign debt and transfer payments.

tNX; net exports of goods and services, tB

; bills, bonds, equities, loans and physical capital

that exceed the net foreign assets (foreign debt of countries, external debt stock), tr ;

international interest rate, t tr B; net return on net foreign assets (foreign debt of the countries,

the interest on foreign debt) and tTR; represents transfer payments net of public and private

sector.

NXt = Xt – Mt, part of CAt has the biggest share is the last period in Turkey. When the

country is indebted to t tr Band tCA

is negative value adversely affected.Transfer payments are

usually made out of small countries, since there is little outsiders, TRt positive affected CAt.

According to this definition, the causes of the current account deficit, external debt and

interest payments on trade in goods.

3.Up-to-date data regarding current account deficit in Turkey

The republic of Turkey produced 57 billion dolar current account deficit from 1923 to 2002.

The current account deficit, which was 48,5 billion dolars in 2010, rose to 77,1 billion dollars

in late 2011.

Figure 1. Current Account Balance (January 2000 - August 2010. GDP ratio,%)

14In this section, Uygur(2004)were the work of the reference analysis.

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Source: Central Bank President D. Yilmaz Submission of Plan and Budget Commission of the

Parliament (October 2010).

Mehmet Simsek, Turkish Finance Minister, points out that current account deficit is an issue

that has both structural and cyclical aspects. He also added that domestic demand in Turkey

has grown 8-10 times as fast as that of Europe, and surging oil prices and Arab spring in the

region caused the current account deficit to rise to an unpredictably high levels.

4.Literature

The studies in which current account deficit is analyzed through exterior balance approach

was launched by Husted (1992), and he was followed by Milesi-Ferretti and Razin (1996),

Fountas and Wu (1999) and Edwards (2001).

Khan and Knight (1983), using pooled cross-section time-series analysis for a sample of 32

non-oil developing countries during the period 1973-80. The empirical results suggest the

importance of exercising circumspection in attributing to any single cause the current account

imbalances experienced by non-oil developing countries during the 1970s.

When foreign Exchange rate falls down, export goods’ prices rise and export is badly

influenced. And imported goods’ prices relatively fall down and import increases. (Peker

Hotunluoğlu, 2009)

Edwards (2005) examined the relation between US dolar and US current account deficit. It

was pointed out in the analysis that foreign demand for dollars will lower current accoun

deficit and in the near future US foreign deficit will decrease the rate of growth at a

remarkable scale.

Aristovnik (2006) reached the conclusion in his research on transition economies that, in case

current account transactions deficit surpasses 5% of GDP, eonomies generally have trouble

with foreign sustainability.

Yamak and Korkmaz (2007), in his study in which he used a data set of 2001:04-2005:09

period and modern times series techniques, reached the conclusion that Turkish current

account deficit is sustainable in weak form and there is a co-integration relation between

export-import series.

Peker (2009) analyzed the sustainability of current account transaction deficit in Turkey

through co-integration method using 1992:01-2007:12 period monthly data. As a result of the

survey, he found out that current account deficit can be sustained at alow level, though a long-

term relation between export and import series exists, co-integration co-efficient is 0,8926

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consequently, he concluded that foreign currency revenues are lower than foreign currency

expenditures.

Oktar and Dalyancı (2011) found out that the sustainability of Turkish economical growth

depends on maintenance of current account deficit. He also examined the relation between

monetary policies and current account transactions for Turkish economy through time series,

and found out that there is no Granger causality between Central Bank of Turkish Republic

policy interest rate and current account transactions balance in the short term and an adverse

co-integration relation in the long-run.

Erdil Sahin (2011) emphasized that current account deficit because of high rate growth

depending on domestic demand and execessively valuable Turkish Lira should be recovered

through new structural reform policies based on firm growth Fundamentals. He concluded

that current account deficit financed by short-term capital entrances like in Turkey, however,

is unsustainable due to capital exit risk, whatever size it is.

Chen (2011) examined the sustainability of current account deficit on economy policy in G-7

countries through econometric methods and found out that while current account deficit is

sustainable for Germany and Japan in the long run, he couldn’t reach positive results for

Canada, France, Italy, UK and USA.

Kim, Min, Hwang and Mcdonald (2009) concluded in the studies they conducted on the 1981-

2003 period quarter data of far-east countries such as Indonesia, Korea, Malasia, the

Phillippines and Thailand that those developing countries had a high growth rate and their

current account deficit was sustainable.

5.ANALYSIS

5.1.Data Set

2002:M1-2011:M12 covering the period of this study, five variables were used. What

variables stand for; (CAD), the level of current account deficit, (NX), net exports (FID),

interest on external debt, (TP) transfer payments and (TE) represents the costs of tourism.

Variables were obtained from Central Bank of Turkey Electronic Data Delivery System,

balance of payments detailed presentation part. As a result of the analysis, which variable or

variables were effective on the variables that detrmine the current account deficit was

analyzed. Estimates for all the test and computer package Eviews 5.1 program was used.

5.2.Method

Without any restrictions on the VAR models, structural models can be delivered between the

dynamic relationships and for this reason, often used in time series (Keating, 1990:453 - 454).

Since the VAR model which is most frequently used in Time series of economic studies does

not require inernal-external distinction, in any way out of economic theory, it differs from

simultaneous equation systems in this respect. Moreover, that lagged values of dependent

variables are also included in VAR models makes strong predictions for the future possible.

(Kumar, Leona, Gasking, 1995: 365).

As a result of estimating VAR model, instead of interpreting the parameters obtained,

comments can be made for the future by passing the analysis of residues obtained from the

estimated result of the system. The effects of shocks that these are likely to ocur in error terms

of the variables in the models are measured with Impulse-Response functionsas shown in

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116

Enders(1995: 305-311), the Variance Decomposition which is determined with the model

prediction and measures the prediction error variance another technique is used in the

analysis of residuals. It is mention that with technical assistance mentioned, the effects of

statistical shocks on the variables will be observed.

5.3.Unit Root Test

Static variables are checked in the methods used in time series analysis. A time series is

stationary if its average and variance does not change over time and the covariance in a period

is dependent on only the distance between two periods not the period the covariance is

calculated (Gujarati, 1999: 713). Dickey and the problem of the estimated regression models

are faced with a fake because of the (Granger and Newbold, 1974), the obtained results do not

reflect the true relationship. In such a case, T and F statistics are lost. Therefore, meaningful

and non-stationary time series regression analysis reflect real relationships, but this is a co-

integration relationship between the time series is made possible by the presence of (Gujarati,

1999: 725-726).

This level of stability study, the variables before Augmented Dickey-Fuller (1979) test was

analyzed to compare the results of this test is then Phillips-Perron (1988) test was used.

Table 1. ADF Unit Root Test

Variable ADF Test

Critical Value (%1) Level Value 1.Difference 2.Differece

CAD -2.758[0] -2.022[12]* -9.457[11]** -3.493

NX -1.695[1] -14.142[0]* --- -3.489

FID -1.414 [6] -5.436 [5]* --- -3.489

TE -0.003[12] -4.90711]* --- -3.492

TP -7.736[0] --- --- -3.486

Note: ADF with Schwarz criterion were tested. Level for all variables in the test format and the intercept was

used as the level value. The first difference variables (*) and the second difference (**) and the level values were

used. The values in square brackets, variables, states that the length of SIC determined by the appropriate delay.

NX CAD and the second by taking the difference of the variables, and TE FID has become

stationary by taking first difference. TP was the model-level value. The level of each variable

included in the model are stationary.

VAR will be estimated prior to model, appropriate for the model determined the length of the

delay. To do this, the following tests were used:

Table 2. Corelation LM Test

Lags LM-Stat Prob

1 35.40355 0.0812

2 33.27135 0.1244

3 30.48034 0.2068

4 47.77828 0.0640

5 31.62167 0.1693

6 23.02558 0.5761

7 30.94912 0.1907

8 17.11513 0.8776

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117

-40

-30

-20

-10

0

10

20

30

40

03 04 05 06 07 08 09 10 11


9 22.40669 0.6122

10 16.95346 0.8835

11 27.58093 0.3275

12 20.79169 0.7042

Table 3. VAR Lag Selection Criteria Endogenous Variables

Lag LogL LR FPE AIC SC HQ

0 -8784.908 NA 7.62e+63 161.2827 161.4062 161.3328

1 -8676.626 204.6417 1.65e+63 159.7546 160.4954 160.0550

2 -8604.155 130.3155 6.94e+62 158.8836 160.2416* 159.4343

3 -8563.791 68.87893 5.27e+62 158.6017 160.5770 159.4027

4 -8542.246 34.78816 5.70e+62 158.6651 161.2576 159.7164

5 -8483.881 88.88556 3.16e+62 158.0529 161.2627 159.3546

6 -8418.272 93.89887 1.55e+62 157.3077 161.1349 158.8598*

7 -8390.276 37.49885 1.54e+62 157.2528 161.6972 159.0552

8 -8348.860 51.67573 1.22e+62 156.9516 162.0133 159.0043

9 -8315.491 38.57332* 1.14e+62* 156.7980* 162.4770 159.1010

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)

FPE: Final prediction error

AIC: Akaike information criterion

SC: Schwarz information criterion

HQ: Hannan-Quinn information criterion

Table 3 is examined, LR, FPE and AIC values are in the same direction, and 9 is the

minimum value for the delay. Both aim to determine the level of consistent delay, and, due to

lack of a very long time period covered nine-term delay, the delay level is determined as

appropriate for the model.

5.4.Variances Decomposition

To investigate the presence of structural breaks related to the variables, using the squares of

residuals, and thus return the system investigating the CUSUM structural break related to the

variables (Brown, Durbin and Evans, 1975:149-155) chart was used.

Figure 2. CUSUM of variables

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118

Equalities, we can say that the structural break related to other variables. Due to a fracture

model variables were observed in the break out will be estimated using an artificial variable to

express any.

Table 4. Variance Decomposition Results

Variance Decomposition of DDCAD:

Period S.E. DDCAD DNX DFID DTE TP

1 84300967 100.0000 0.000000 0.000000 0.000000 0.000000

2 1.49E+08 95.09178 2.023950 1.984184 0.591259 0.308826

3 1.61E+08 90.33680 2.747490 4.052956 2.412449 0.450309

4 1.63E+08 87.25829 5.747876 4.171563 2.333944 0.488322

5 1.71E+08 81.11985 7.289460 3.938387 7.201878 0.450421

6 1.71E+08 80.28052 7.239189 3.901067 8.099975 0.479254

7 1.78E+08 77.81817 6.709760 5.361156 7.610183 2.500734

8 1.94E+08 72.94288 6.458122 6.146644 10.21749 4.234860

9 2.02E+08 69.33291 6.572370 7.840872 12.30576 3.948098

10 2.04E+08 68.12074 6.577430 8.276226 12.54971 4.475894

Variance Decomposition of DNX:


1 726.8696 62.11543 37.88457 0.000000 0.000000 0.000000

2 822.0173 60.45094 31.35544 0.956160 7.233698 0.003761

3 835.0815 59.89074 31.07529 0.938940 7.125766 0.969261

4 875.3560 61.66188 28.68063 1.468556 7.026169 1.162764

5 889.0531 59.94052 28.02536 1.528729 9.333278 1.172110

6 904.9741 58.08003 28.67585 3.093604 9.012475 1.138039

7 971.0690 53.04461 33.22206 2.904349 8.086086 2.742890

8 1001.682 52.55017 31.41238 3.676091 9.583833 2.777520

9 1016.415 51.33369 30.52297 4.409506 9.308097 4.425732

10 1029.796 50.83004 29.86570 4.308151 9.425688 5.570417

Variance Decomposition of DFID:


1 6409819. 0.960621 3.561922 95.47746 0.000000 0.000000

2 8578346. 1.703198 7.614193 87.11718 0.278227 3.287206

3 8867969. 1.816690 9.815775 82.08521 2.768816 3.513511

4 8929659. 1.843917 10.02791 80.96368 2.734430 4.430063

5 9101219. 1.913250 10.74781 78.29582 4.769543 4.273574

6 9537165. 5.070666 10.02298 72.88628 7.228628 4.791440

7 10506134 4.620808 8.634321 76.81778 5.978435 3.948656

8 11332499 4.982647 7.593771 76.05110 7.402783 3.969697

9 11463066 5.196262 9.053756 74.52841 7.297956 3.923618

10 11850968 5.048882 11.80834 71.04702 7.549994 4.545765

Variance Decomposition of DTE:


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119

1 3664782. 4.144082 0.903425 0.009031 94.94346 0.000000

2 4203964. 9.252956 0.705626 3.328949 86.21273 0.499736

3 4559527. 8.289357 6.540827 3.097522 78.29637 3.775922

4 4967974. 7.025928 9.021794 5.351039 69.75619 8.845054

5 5040278. 7.202990 9.302489 5.226973 68.86394 9.403608

6 5131554. 8.425076 9.819431 6.159875 66.43832 9.157296

7 5398903. 11.91116 12.21158 6.516126 60.95210 8.409036

8 5870845. 11.86556 17.82288 10.86181 52.02978 7.419963

9 6065571. 12.60093 21.15931 10.38818 48.82419 7.027386

10 6194207. 14.69380 20.81232 10.05785 47.10559 7.330433

Variance Decomposition of TP:


1 5585095. 10.32720 0.065194 1.202163 0.198028 88.20741

2 5933919. 10.60821 0.778084 1.230677 1.858145 85.52488

3 6556542. 9.127853 1.108046 6.006631 8.924092 74.83338

4 6756191. 10.77251 1.114342 5.727087 11.34185 71.04422

5 7099558. 13.86680 1.179061 7.423425 10.38171 67.14900

6 7377532. 13.17017 2.558330 6.979129 13.20643 64.08594

7 7431274. 14.08089 2.533998 6.881688 13.29330 63.21013

8 7561157. 14.27852 3.692998 6.671441 13.02000 62.33704

9 7734123. 13.79738 3.539359 10.22790 12.45194 59.98342

10 8063976. 20.45568 3.295772 9.469962 11.50355 55.27503

Cholesky Ordering: DDCAD DNX DFID DTE TP

Accordingly, the current account deficit is largely determined by its own shocks. Net exports

are determined by its own shocks in the short term, and by tourism expenditure and external

debt with interest in the long term. It looks that net exports are determined by current account

deficit and tourism expenditures as well as its own shocks in the long run. Foreign debt

interest rate results from supply shocks and net exports in the long term. Tourism

expenditures are affected by net exports and current account deficit in the long term. Supply

shocks of transfer payments result from itself in the short term and from tourism expenditures

and foreign debt interest rate in the long term.

That is, a negative increase in exports affects macroeconomic variables by triggering current

account deficit. It is a challenge to take current account deficit that follows an unstable trend

to a stable line. In other words, unless a regulation is made in order to break the trend of

unrest result in the coninuation of current account deficit. This situation is among basic

findings of the survey. One of the most significant consequences of variance decomposition is

that current account deficit is determined again by itself. The results obtained are supported

by the outcomes of impulse-response analysis.

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120

-1.20E+08

-8.00E+07

-4.00E+07

0.00E+00

4.00E+07

8.00E+07

1.20E+08

1 2 3 4 5 6 7 8 9 10

Response of DDCAD to DDCAD

-1.20E+08

-8.00E+07

-4.00E+07

0.00E+00

4.00E+07

8.00E+07

1.20E+08

1 2 3 4 5 6 7 8 9 10

Response of DDCAD to DNX

-1.20E+08

-8.00E+07

-4.00E+07

0.00E+00

4.00E+07

8.00E+07

1.20E+08

1 2 3 4 5 6 7 8 9 10

Response of DDCAD to DFID

-1.20E+08

-8.00E+07

-4.00E+07

0.00E+00

4.00E+07

8.00E+07

1.20E+08

1 2 3 4 5 6 7 8 9 10

Response of DDCAD to DTE

-1.20E+08

-8.00E+07

-4.00E+07

0.00E+00

4.00E+07

8.00E+07

1.20E+08

1 2 3 4 5 6 7 8 9 10

Response of DDCAD to TP

-300

-200

-100

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10

Response of DNX to DDCAD

-300

-200

-100

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10

Response of DNX to DNX

-300

-200

-100

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10

Response of DNX to DFID

-300

-200

-100

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10

Response of DNX to DTE

-300

-200

-100

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10

Response of DNX to TP

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

1 2 3 4 5 6 7 8 9 10

Response of DFID to DDCAD

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

1 2 3 4 5 6 7 8 9 10

Response of DFID to DNX

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

1 2 3 4 5 6 7 8 9 10

Response of DFID to DFID

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

1 2 3 4 5 6 7 8 9 10

Response of DFID to DTE

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

8000000

1 2 3 4 5 6 7 8 9 10

Response of DFID to TP

-2000000

-1000000

0

1000000

2000000

3000000

4000000

1 2 3 4 5 6 7 8 9 10

Response of DTE to DDCAD

-2000000

-1000000

0

1000000

2000000

3000000

4000000

1 2 3 4 5 6 7 8 9 10

Response of DTE to DNX

-2000000

-1000000

0

1000000

2000000

3000000

4000000

1 2 3 4 5 6 7 8 9 10

Response of DTE to DFID

-2000000

-1000000

0

1000000

2000000

3000000

4000000

1 2 3 4 5 6 7 8 9 10

Response of DTE to DTE

-2000000

-1000000

0

1000000

2000000

3000000

4000000

1 2 3 4 5 6 7 8 9 10

Response of DTE to TP

-3000000

-2000000

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8 9 10

Response of TP to DDCAD

-3000000

-2000000

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8 9 10

Response of TP to DNX

-3000000

-2000000

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8 9 10

Response of TP to DFID

-3000000

-2000000

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8 9 10

Response of TP to DTE

-3000000

-2000000

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8 9 10

Response of TP to TP

Response to Cholesky One S.D. Innovations

5.5.Impulse Response Function

Analysis of basic situation arising as a result, net exports as the determinants of current

account deficit, external debt interest, transfer payments and indirect effects of tourism

expenditures affect the current account deficit.

Figure 3. Impuse-Response

6.Conclusion

In this survey, which was conducted on the determinants of current account deficit, current

account deficit, export, foreign debt interest rate, transfer payments and tourism expenditure

were studied. The variables mentioned were subjected to VAR analysis for 2002:M1-

2011:M12 period as a result of stationarity research as long as they are stationary.

First, of the variables CAD and NX, the second difference taken, FID and TE the first

difference taken, were made stationary. TP was involved in the model with its surface value.

Each variable was involved in the model so long as they are stationary. The model’s time-lag

length was determined as 9.

According to variance discrimination results obtained from VAR model composed under this

roof, current account deficit is determined by its own shocks in the short term. In addition,

current account deficit prediction error variance is determined by tourism expenditures and

foreign debt interest rate as well as its own variables. Current account deficit is affected by

export, foreign debt interest rate, transfer payments and shock given to tourism expenditures.

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It was observed that current account deficit is a potential problem in Turkey. It is thought that

it can stimulate crisis unless kept under control. However, the precautions taken by the

Central Bank of Turkish Republic recently are of great importance in terms of hindering

current account deficit. Therefore, not only total demand will be intimidated but also national

amount of savings will be raised. In this respect, increasing tourism revenues, keeping short

term capital movements under control measures to decrease imports and increase exports

could be taken into account.

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Constancy of Regression Relationhips Over Time”, Journal of the Royal Statistical Society,

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CHEN, S.W. (2011), “Are Current Account Deficits Really Sustainable in the G-7

Countries?” Japan and the World Economy 23, 190-201.

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Industrial and Developing Countries: An Emrical Exploration”, NBER Working Paper, 7581.

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Costly is Adjustment Likely to be?” Naber Working Paper Series 11541

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KHAN, M.S. and KNIGHT, M.D. (1983), “Determinants of Current Account Balances of

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Account Deficits”, NBER, WP, 5467.

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Earning Isparta Carpet Business To The Local Economy Again And Ensuring Its

Sustainibility By Revising It

Nesrin Şalvarci Türeli, Erhan Türeli

Süleyman Demirel University, Isparta, Turkey


Abstract

Hand-woven carpet, one of the symbols of Isparta has lost its popularity in the sense of

business, employment, socio-cultural and economic aspects. In 1960s the carpet industry

which provided a great amount of income especially in local areas, and then in the overall city



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was pushed out of the market by failing to compete due to prevailing of machine-woven

carpets and their being much more cheaper.

Isparta hand-woven carpet is known as winter-time carpets in respect of its technical

properties. Among the patterns of the Isparta hand-woven carpet whose weaving woof and

warp thread are made of cotton and loops are made of wool, plant motifs stand out. Moreover,

weaving thickness (weaving quality) is low because wool knits are thick; that is, the number

of loops in each decimeter is limited. Motifs include rougher details, so figures cannot be

understood. It is necessary to renew the Isparta hand-made carpets that are needed to be

revised in the sense of materials (using tinsel strings made of wool, golden and silver) and

figures in order to have the business regained the Isparta hand-woven carpet industry.

In this study, the revitalization of Isparta hand-woven carpet industry and its sustainability

have been handled. SWOT analysis was done regarding this purpose. As a result of SWOT

analysis, the strong and poor sides, and the opportunities and threatening factors of Isparta

hand-woven carpet industry have been found out.

Keywords: Hand-woven carpets, Sustainable development, SWOT analysis.

1.INTRODUCTION

Isparta has been an important carpet production centre from the past till present. In Isparta,

usually family facilities or people that weave carpets as a source of income usually conduct

hand-woven carpet manufacture. Today, it is rather hard to gain healthy data about the

employment rate and production amount of hand-woven carpet sector in Isparta. To what

extent the current data reflects the truth is also unknown.

Isparta hand-woven carpet business is facing serious problems and a risk of disappearing in

recent years. Production has decreased and nearly come to a halt. The fact that the enterprises

have maintained a production concept, which is closed to the demand in the world, has been

influential in coming to this point. Especially not keeping pace with the fashion trends

concerning carpet designs and quality, not indulging in innovation or advertisement activities

or not sparing enough afford for them, lack of coordination and cooperation among the

business enterprises that make up the sector have lead the sector to its current troublesome

situation.

In our point of view, Isparta hand-woven carpet sector, which has a deeply rooted

infrastructure, can be handled and organized again in the frame of sustainable development

plans. As a result, several carpet looms, which are not in use currently, can start operating

again for production, knowledge accumulation on carpet art which is about to be forgotten

would be brought into use and transformed to future generations (Barışta,1994: 53).

The purpose of this study is determining the recent problems of the sector, providing

recommendations about the work that should be done in order to increase the competitive

capacity in the national and international levels and revisions.

While conducting the study, secondary sources relating to Isparta hand-woven carpet tradition

were examined, face-to-face interviews with the representatives of the sector were organized

and the problems were detected. As an outcome of the interviews, there was a consensus on

the fact that the sector is declining and production is about to stop. Solutions were

recommended together.

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2.HISTORICAL DEVELOPEMENT OF ISPARTA HAND-WOVEN CARPETS

“Carpet and rug are handicrafts that are integrated with Turkish history and culture and they

enable people to reflect their emotions, souls, thoughts and inner worlds to the designs and

colors (Bilgin, Demir, 2008:63). Carpet and rug have an important place in the lives on

Turkish communities since the nomadic period. Hand-woven carpet sector has flourished

during the Seljuk era, the period of principalities and Ottoman Empire and reached the top

point in 16th, 17th, and 18th centuries. (Türeli et al., 2006).

Turkmen clans residing in and around Isparta are known for their delicate carpet weaving.

The carpets weaved during the period of Yamut (Hamitoğulları) principality belonging to

Oghuz Tribes which migrated to Anatolia from the Seljuk Oghuz territories and settled to

Isparta and around are named Yamut carpets. Thus, we may say that Yamutoğulları

principality is the first group to have a broad knowledge of carpet weaving and develop this

sector in and around Isparta with the name of Yamut carpets (Sakarya, 1992:540).

Between the years 1872–1875, during the period in which Eyüplü Ali Rıza Efendi was the

governor of Isparta, first Girls High School (Isaprta Kız Rüştiyesi) was established in 1872,

and weaving trainings started in the additional building in front of the Girls High School after

bringing master trainers from Manisa (Küçükerman, 1990:133). Those years were definitely

important years for the emergence of Isparta carpets. We see that the British monopolized the

carpet sector in 1880s on every level from the manufacture of the carpet yarn to the

exportation of the carpets. Those incidents have prepared the base for the East Carpets

Campaign on the following years (Türeli, et al., 2006). Thanks to the company which was

founded between the years 1890-1891, during the period of Governor Zihni Pasha, carpet

weaving expanded to villages (Böcüzade, 1983:252). During this period carpet weaving was

thought to women in Isparta Girls High School and the number of women willing to learn this

art increased (Küçükerman, 1990: 135). Dr. Badosaki and Etreli Zade Mehmet Efendi

founded special looms, design and dye houses and carried this art forward (Böcüzade,1983:

252). During 1908, Isparta hand-woven carpets were considered among the most quality

carpets. Isparta carpet was weaved by tying 22x28 knots per dm2 and 24x32 knots per dm2

and was in demand of European Market (Temurçin, 2004:82). The years 1912–1918 are quite

important for Isparta carpet sector. Previously the carpet was weaved by Turkish women but

traded by Greeks and during those years attempts to help Turkish people to make them trade

their carpets started. “The fact that there were more than 10.000 carpet looms in Isparta city

center shows that in nearly every household there was at least one carpet loom.” (Kayıpmaz,

2002). In 1926 first worst factory was established is Isparta to meet the carpet yarn demand of

the district. In 1943 the factory joined the Sümerbank Foundation under the name of ‘Isparta

Worst and Carpet Weaving Facility. In 1989 it was renamed as Sümerbank Holding A.Ş.

Sümerhalı, Halıcılık El Sanatları ve Ticaret A.Ş. (Sümerbank Holding Inc. Sumercarpet,

Carpet weaving Handicrafts and Trade Inc.) (Sakarya, 1992: 544). Sümerhalı has been the

leader of hand-woven carpet production in the region for long years and determined the carpet

production and trade.

Until 1980s, the most important activity in the workshops or households was carpet weaving.

In the following years, in spite of the establishment of the biggest and only carpet market

(bazaar), the economical value and thereby the market value of the hand-weaved carpets

Melli, Sarıkeçili, Saçıkaralı, Karahacılı, Horzumlu, Tüngüşlü, Eskiyörük, Honamlı, Karakoyunlu,

Fettahlı

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decreased and machine-woven carpets slowly started taking their place. As a consequence of

this, there was a substantial decrease both in hand-weaved carpet sector and in the number of

people performing this art.

3.CHARACTERISTICS OF ISPARTA HAND-WOVEN CARPETS

Isparta hand-woven carpet is a kind of carpet, which has a low weaving density, and wool

weft, warp, cotton and knots. Its designs are in herbal forms. As the weaving density quality is

low, they have indelicate details. Their colors are in pastel shades. Concerning the designs of

Isparta hand-woven carpets, usually herbal motives such as rose, bouquet, sprig, flower and

leaf are placed in corner-centre and scatter styles. These designs are named according to their

composition styles such as Çelenkli (Chaplet), Saksılı (Vase), Kandahar, Balçiçek (Honey

flower), Beşir, Şamdanlı (Candelabra), Kıvrımlı (Wiggly), Goncalı (Rosebud), Goblen, Elvan

(Coloured), Davraz, Köşegöbek (centre-cornered), Üzümlü (Grape), Köşegöbek Zemin

(Centre-cornered ground), Serpmeli (Scattered), Köşegöbek Serpmeli (Centre-corner

scattered), Süpürgeli (Whisk), Saat Kapağı (Clock Lid), Karpuzlu (Water Melon), Kuşlu

(Bird) Gülistan (Rose Garden), Güllü (Roze). Apart from these some special designs for the

wall rugs are also available. Those design compositions include the scenes (Istanbul

Bosporus, city walls, Venice etc), mosques (with five minarets, four minarets), writings (Hat

examples), animal figures (partridge, peacock, lion) and coins. Those designs are colored in

navy blue, copper, pink, yellow, green, beige, white, brown, musk, glass-green blue, black

and their shades.

Isparta carpets have been certified by TSE as 26x33 Isparta Super, 25x31 Isparta I, 24x30

Isparta II, 24x28 Isparta III, and 38x38 Isparta thin. For those carpets, Iranian knotting is used

which is locally known as single knot or open knot. Carpets have been named differently

according to their sizes: paspas (door mat) (40x40) (50x50), seccade (prayer rug) (80x120),

divan (sofa cloth) (50x150), karyola (bed cloth) (120x220), yolluk (hall rug) (85x235), kelle

(head) (200x300), taban (floor).

4.SWOT ANALYSIS OF ISPARTA HAND-WOVEN CARPETS

“SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis is a procedure which

includes analyzing the facilities in terms of the external factors (opportunities, threats: OT)

and internal factors (strengths, weaknesses: SW) of their current conditions.”(Yumuk, İnan,

2005:181).

In this section of the study a SWOT analysis of Isparta hand-woven carpet sector was

conducted. By SWOT analysis we tried to manifest the strong sides (external opportunities

and advantages); weak sides (technology, finance and market based elements that prevent

reaching the targets); opportunities (advantageous terms offered to the sector by external

environment, environmental developments) and threats (environmental problems that emerge

in reaching the targets) of Isparta hand-woven carpet sector.

Strong Sides of Isparta Hand-woven Carpet Sector:

Knowledge accumulation in hand-woven carpet production (the number of manufacturing

companies is 31.) (Ölmez, 2006:22).

Easy raw material supply.

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Existence of factories which can start production (there are 4 worst factories) (Ölmez,

2006:23).

Existence of qualified work force and its eligibility. (According to 1996 Chamber of

Commerce data, the number of weavers is 35.000) (Ölmez,2006)

High number of looms (According to 1996 Chamber of Commerce data, the number

of looms is 20.000) (Ölmez, 2006:12).

Existence of a carpet bazaar.

Isparta hand-woven carpet has no hazardous effects on the human health as it is

produced using natural material.

Hand-woven carpet production causes no pollution.

Incombustibility feature as wool does not catch fire easily.

It absorbs the electricity on the human body due to the fact that wool prevents static

electricity.

Weak Sides of Isparta Hand-woven Carpet Sector:

Carpet weaving is not seen as a profession (it is considered by many as an activity of

women which provides additional income)

Lack of adequate information about the External Market.

Exportation is rather limited.

Facilities do not possess ISO 9000 quality certificate.

The carpets produced are not fashionable.

There is no effort for manufacturing quality products.

Facilities do not constantly indulge in quality improvement activities.

The desired quality cannot be managed with the production in households,

standardization cannot be maintained and the quality cannot be controlled

Small-scaled facilities form the majority and their costs are quite high.

Absence of workshop-type manufacture.

Facilities operate with minimum labor force and employees complain about this issue.

Lack of mass production

Lack of team work and cooperation

Lack of a sectoral unity.

Lack of an authorized body to coordinate the corporations in carpet sector

‘Isparta Rose Carpet Culture and Tourism Festival’ organized in the Isparta city centre

every year is rather in a street fair mood which is quite far from the expectations.

Threats of Isparta Hand-woven carpet sector:

A strong competition.

High prices of hand-woven carpets compared to machine-made ones.

Machine-made carpets are cheap and there are various design alternatives.

Decrease in the sales both to local and foreign tourists.

No brandization.

Manufacturers usually have to supply the raw-materials and semi-finished products

from uncertified (not possessing ISO 9000 certificate) facilities.

Change in the consumer preferences.

Internal market narrows continuously, and machine-made carpets are in demand.

The negative public opinion about Isparta hand-woven carpets in terms of their high

fluff length and indelicate appearance.

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They do not fit the modern furniture designs.

House workshops are forced to close down as apartment buildings increase.

Opportunities of Isparta Hand-woven Carpet Sector:

There is expertise customs in Isparta.

There are villages manufacturing carpets in the region.

There is an airport.

There is railway.

There are Carpet, Rug and Old Fabrics Designs- Handicraft Programs in Süleyman

Demirel University

It is close to touristic regions.

Products manufactured using natural materials are in higher demand nowadays.

5.CONCLUSION

Isparta is an important centre of Turkish hand-woven carpet art. However, in recent years,

Isparta hand-woven carpet sector has declined considerably. The pace of this decline could

not be decreased although there is adequate substructure and knowledge accumulation in

Isparta about hand-woven carpets.

Isparta hand-woven carpet business has to increase the quality of the manufactured carpets

and decrease the cost in order to be able to operate and compete in the local and international

sectors. People who are in the hand-woven carpet sector in Isparta should see the cost factors

they need to deal with in order to reach high quality. This assessment would show them their

opportunities and make them more powerful in the sector they are operating.

There is a need for revision in carpet designs and quality as well as determination of the

substructure policies. In this regard, carpet manufacturers in the region should be brought

together with an aggregation project and KOSGEB’s support should be taken at this point.

The units15, which form this aggregation, should complement each other and operate in a

harmony. What’s more, the units of the aggregation can be brought together under one single

facility and this can be helpful in sharing the facility costs and controlling the production

costs. A selected leader corporation should intervene in the problems that may occur or have

already occurred on time. Consultancy services should be provided to the units, which form

the aggregation, consciousness concerning designs, patenting and brandization should be

developed, innovative designs should be adopted and applied. A supply chain and cooperative

structure should be formed (Craftsman’s Association Report, 2008:166).

It must be ensured that consumers purchase carpets consciously and gain high benefit from

the carpets they have purchased. Touristic identities (carpet, rose) of Isparta and the

surrounding region should be demonstrated and a local and provincial advertising and

15 Aggregation, is an organization model in which enterprises that operate in the same region,

business line and value chain, having a cooperation with each other but also a competition among

each other, and having a commercial relation and the Corporations that support them (universities,

public institutions, research institutions, Professional unions, technology and innovation centers,

banks, insurance companies, logistics firms etc) league together.

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marketing understanding should be adopted. Carpet workshops and villages should be opened

for tourism; this way, tourists can participate in the designing and weaving processes and this

may encourage them to purchase the carpets as well as forming an emotional connection and

ensuring remembrance.

Isparta should be brought forward by its hand-woven carpets, tourism and advertisement, and

the city should become a brand with its carpets. Just as the consolidation of Paris with love,

Rio with entertainment, and New York with energy (Atesoglu et al. 2009:731), Isparta can

consolidate with carpet. In order to manage this, Isparta hand-woven carpet should be

advertised and accepted to the world. The carpets should also be enriched in inimitable

characteristics. Isparta Museum should be brought to the agenda for re-organizing it as Isparta

Carpet Museum. Carpet enterprises should possess ISO 9000 certificate. “As ISO 9000

certified enterprises, they should follow-up with the developments on quality and apply

quality cost reportage and quality cost system, which is the figural reflected dimensions of the

quality activities, in order to survive in the dense competition (Yumuk, İnan, 2005:184).”

An ecological carpet bazaar can be established. An international carpet fair can be organized.

Isparta can be made an attraction centre by advertising its cultural characteristics and the

natural products manufactured in the city. A business centre in which old carpets are repaired

can be established. This way, hand-woven carpet manufacturers may have a chance to

increase their market shares over time upon managing an increase in the quality and

modernizing.

In order to ensure sustainable development on the local level, human health friendly

production should be maintained and continued and knowledge about healthy natural products

should be transmitted to future generations. Society should be made more aware concerning

the production and consumption of natural products.

REFERENCES

Ateşoğlu, İ., Adıgüzel, O., Çetintürk, İ., Selman, A.(2009) “Uluslar Arası Destinasyon

Markası Oluşturma Stratejileri Isparta Örneği”, Uluslararası Davraz Kongresi,24-27 eylül,

729-738.

BARIŞTA, H. Örcün., (1994) “Isparta Halıcılığı Üzerine”, Kamu ve Özel Kuruluşlarla, Orta

Öğretim ve Üniversitelerde El Sanatlarına Yaklaşım ve Sorunları Sempozyumu Bildirileri,

Kültür Bakanlığı Halk Kültürlerini Araştırma ve Geliştirme Genel Müdürlüğü, Dokuz Eylül

Üniversitesi Rektörlüğü, Ankara,53-66.

Bilgin, M.H., Demir, E.(2008) Türkiye El Halıcılığı Sektör Araştırması, İstanbul Ticaret

Odası Yayınları, Sektörel Yayınları,Yayın No:2008-82.

Böcüzade, S. S.(1983) Dünden Bugüne kadar Isparta Tarihi, Serenler Yayını, İstanbul.

Esnaf ve Sanatkar Raporu (2008) Mevcut Durum Sorunlar Öneriler, Türkiye Esnaf Ve

Sanatkarları Konfederasyonu, Ankara. http://www.tesk.org.tr/tr/yayin/esnafraporu.pdf

(03.03.2012).

Kayıpmaz, N.(2002) “Yeniden Tanzim ve Teşhiri yapılan Isparta Müzesi Halı-Kilim

Seksiyonundaki Isparta Çevresi Geleneksel Düz ve Düğümlü Dokuma Yaygıları ile Şark Halı

Dönemi Isparta Halıları Analizi”, 8. El sanatları Sempozyumu 13-15 Kasım, Bildiriler Kitabı,

Dokuz Eylül Üniversitesi, İzmir, 258-262.

Küçükerman, Ö.( 1990) İzmir Limanı ve Isparta Halı Fabrikası, Sümer Halı, Ankara.

http://www.tesk.org.tr/tr/yayin/esnafraporu.pdf

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Ölmez, F.N. (2006) Isparta İlinde El Dokuması Halı Üretiminin Sektörel Analizi ve

Geleneksel Isparta Halısında Bazı Modifikasyonların Uygulanması, (SDÜ BAP) Projesi,

Isparta.

Sakarya, O.(1992) “Isparta Halıcılığının Dünü, Bugünü ve Geleceği”, Isparta’nın Dünü

Bugünü ve Yarını Sempozyumu, Isparta İli Kalkındırma Derneği, Ankara.539-551.

Ulusal Kümelenme Politikasının Geliştirilmesi Projesi Basın Bilgi Notu,

http://www.bodto.org.tr/images/other/kumelenme_kapanis_etkinligi_basin_%20bilgi_%20not

u.pdf.(21.04.2012)

Temurçin, K., (2004) “Isparta İlinde Sanayinin Gelişimi Ve Yapısı”, Cilt: 2 Sayı: 2 DOI:

10.1501/Cogbil_0000000044 ,s.79-95. http://dergiler.ankara.edu.tr/dergiler/33/825/10468.pdf

(12.04.2012)

Türeli, E., Özaltın, N.F., Yurteri, F.Y., Işık K., (2006), “Desenlerle Isparta Halıları”, 2. Türk

Bilim ve Teknoloji Tarihi Kongresi, Isparta.

Yumuk, G., İnan, H.İ. (2005) “Trakya Bölgesindeki İmalat Sanayi İşletmelerinin Kalite

Maliyetlerinin SWOT Analizi İle Değerlendirilmesi”, Tekirdağ Ziraat Fakültesi Dergisi,

2(2),177-188.

Measurement Of The Competitiveness Of Turkey : Eu Countries, 1980-2010 Period

Comparison

Sevgi Sezer1, Mehmet Mercan2

1Uludağ University, Faculty of Economic and Administrative Science

2Hakkari University, Faculty of Economic and Administrative Science

E –mails: [email protected],[email protected]; [email protected]

Abstract

Today, in the new world order caused by economic glabalization, technologic and political

changes in world economy result in changes in the competitiveness of the countries.

Everyday, countries intensify their effort to gain, develop and protect their power to compete

with other countries. Today, even the most developed countries are trying to strengthen their

competitiveness in order to enlarge their share in the world economy. Turkey desires to

increase its competitiveness in all sectors in order to rise the welfare level of its people and to

speed up its economic growth. Turkey endeavors to increase its competitiveness against EU,

who is one of the most important economic partners of Turkey, in all sectors. In this study, the

period of 1970-2011 to measure the competitiveness of Turkey towards the EU countries and

aims to achieve predictions for the future, and the watermark.

Keywords : Competitiveness, Turkey, EU, International Trade,

JEL Classification: F12, F14, F15

http://www.bodto.org.tr/images/other/kumelenme_kapanis_etkinligi_basin_%20bilgi_%20notu.pdf

http://www.bodto.org.tr/images/other/kumelenme_kapanis_etkinligi_basin_%20bilgi_%20notu.pdf

http://dergiler.ankara.edu.tr/dergiler/33/825/10468.pdf

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1.INTRODUCTION

The common objective for all the countries in the changing world order is to provide

competition conditions and increase the prosperity.However,competition is a

multidimensional fact. Competitiveness of the countries and companies is depended on

various factors. The importance of competitiveness has increased after the rapid change and

development with the globalization in every sense. Studies about competition and

competitiveness in countries also have increased.

Since competition and competitiveness are handled by various discipline in various

aspects, there is no a common definition or measurement technique. However, if we want to

classify in general,there are two points of view in the measurement of compititiveness. The

first one is the studies carried out in micro (business and industry) level.The second one is the

macro (country) point of view. While the competition among businesses inside the country

and the effects of this competition on national and international market is emphasized in

micro level approach, the status of the country in international competition is emphasized in

macro approach. Competitiveness means that while countries try to increase the incomes of

their citizens under the conditions of free and established market, at the same time they can

present their products and services to the international markets and become successful. The

definition mostly attributed in macro approach is this one.

We can put in order the three basic characteristics of competitiveness according to the

study results like this:The first one is that the main objective of having competitiveness is to

provide an increase the living standards in the country and the prosperity of the citizens.This

prosperity increases can be provided by paying attention to the activities like investment and

production,increasing the cooperation between all institutions and paving the way for

specialization.The second one is that the country should focus on its specific features,abilities

and potentials in order to catch the opponent countries in producing the products and services

and distributing them.The third one is that numerous indicators are used to analyze the

competitiveness of the country. For instance, international market share,trade balance of the

country,production,employment,openness.i.e.

The competitiveness of Turkey with 15 basic countries of EU between 1980 and 2010

periods was tried to be measured by the globalization index measuring the competitiveness. It

was aimed to make predictions for the future according to the upcoming results.

This study consists of four sections. In the first section literature scaning was carried

out.In the second section data set and method was presented and explained. In the third

section there are analysis results.In the fourth section a general evaluation will be carried out

and recommendations will be made.

1.1.LITERATURE REVIEW

Theoretical foundations of international competitiveness date back to classical economics.

There are several numbers of approaches such as the Theory of Competitive Advantage

Approach,Double Diamond Approach, Nine Factors Model Approach for international

competitiveness.The issues such as the definition of international competitiveness concept,

assessment, explaining the determiners for this concept and stating the economic relations of

it ranges according to the chosen approach.So there is no generally accepted approach for

international competitiveness.(Kibritçioğlu, 1996:112). In theoritical context, there is no

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certain consensus about international competitiveness and the factors affecting it and also it is

not possible to say that the explanations are complementory each other.

The concept of international competitiveness is one of the significant facts of the globalization

process. The concept of international competitiveness in literature is handled and tried to be

defined in three different ways as in firm,sector and international level. (Kesbiç ve Ürüt,

2004: 56-59).

Neither there is a generally accepted approach for the definition of the concept of

international competitiveness,nor there is an approach for assessment and determining the

factors affecting it. In international economy literature, macroeconomical,microeconomical

and commercial approaches are generally used in order to assess the competitiveness in

internatinal trade. Among these approaches, the commercial approach is based on the theory

of international foreign trade and it searches the foreign trade performance of

sector/country.As a part of commercial approach, international competitiveness can be

calculated via the Revealed Comparative Advantage Index which was built up by Balassa in

1965. (Wziatek-Kubiak, 2003: 2-4). In order to assess international competitiveness many

indices are also used in literature such as The Relative Export Advantage Index, The Relative

Import Influence Index, The Relative Trade Advantage Index, Intra-industry Trade

Index,Specialization in Export Index,Similarity in Export Index,Relative Competition

Advantage Index,i.e. (Altay ve Gürpınar, 2008: 262-267).

When we deal with the factors affecting the international competitiveness, many factors are

used such as micro and macro economical, price and out of price, within firm and non-

firm,structural,qualitative,social and political,i.e.In economy literature, many qualitative and

quantitative factor affecting the competitiveness are handled,but price- oriented factors are

usually emphasized for the ease of finding data and assessment. In other words, in the factors

affecting the international competitiveness and its assessment issues there are versatile studies

in economy literature.However, depending on the time, as a result that developing countries

began to compete more than with developed countries, studies on the efficiency of the factors

affecting the international competitiveness began to increase.In this sense, many economic

variables were handled and labor cost, foreign exchange rate, market volume(GDP) and

openness were mostly used variables.

So we can collect the studies in four main titles (Yapraklı, 2011: 377-379) : First group

studies searched the relationship between the labor costs and competitiveness. As a

determiner for competitiveness labor cost is the contraversial field.Studies about the effect of

the cost of labour on the international competitiveness was performed by Fagerberg (1988),

Jorgenson and Kuroda (1991), Guerrieri and Mecliciani (2005). As a result of these studies, it

was found out that the high price level in the labor costs meant high productivity and qualified

labour employment.This result is the indicator of the efficient source usage and productivity-

cost advantage and it affects the international competitiveness positively. On the other hand,

Agrawal (1995), Wang (2002), Omel and Varnik (2009) and Du Toit (2010) found out in their

studies that high labor costs had a negative effect on the competitiveness.As a conclusion, we

can not say that there is a certain consensus about the effect of labor cost on the international

competitiveness.

Another variable used to measure the factors affecting the international competitiveness was

intended for assessing the relationship between market volume and international

competitiveness. The common view about this issue is that: Expansion of market volume

increases the competitiveness. Studies about this issue was carried out by Fagerber (1988),

Kim and Mirion (1997), Esterhuizen (2006), Mu and Zhang (2010) and Feinberg and

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Weymouth (2011). As a conclusion of these studies it was identified that Gross Domestic

Products of the countries was a significant factor for international competitiveness. Also the

expansion of market volume increases the international competitiveness by benefiting from

scale economies and providing efficient source usage. However, it was found out that GDP

was not enough to explain the international competitiveness in the studies on developed and

developing countries by Cho, Moon and Kim (2008).

An another variable used to measure international competitiveness was foreign exchange rate.

In the studies measuring the effect of foreign exchange rate on international competitiveness

by Yoshitomi (1996), Zawalinska (2005) it was identified that the increase in the exchange

rate affected the international competitiveness positively. However, in the studies by Safin

and Rajtar (1997), Du Toit (2010) it was identified that the increase in the exchange rate

affected the international competitiveness negatively. As a result, it is necessary to present the

certain effect of the foreign exchange rates about increasing or decreasing the

competitiveness.If the positive effect is bigger than the negative effect,the increase in foreign

exchange rates affects the competitiveness positively; if the nagative effect is bigger than the

positive effect,it affects the international competitiveness negatively.

Also in some studies measuring the international competitiveness openness was used.

Openness degreee of a country is usually measured by the proportion of its GDP to its foreign

trade volume(export+import) (Kazgan, 1988: 116). In the studies by Fagerberg (1988),

Feinberg and Weymouth (2011) and Egbetokun (2011), it was found out that there was a

positive effect between openness and international competitiveness. This result was obtained

by the country’s becoming more competitive due to the reasons such as efficient resource

distribution,production increase and technology transfer while the openness degree increased.

Globalization Index in our study is based on the method used in the build of Human

Development Index of United Nations Development Plan (UNDP). (Çoban ve Çoban, 2004:

167). In the study by Çoban and Çoban (2004), competitiveness of Turkey and European

Countries between 1970 and 2010 periods was analyzed by GI(Globalization Index)

developed by A.T.Kearney Consulting Company. Even when country experiences took into

consideration, it was found in

the study that competitiveness of Turkey increased remarkably and accession to the EU would

affect this process positively.

2. DATA SET AND METHOD

In this study a comperative competitiveness of Turkey with EU countries between 1980 and

2010 periods was to be expressed with the help of GI(export + import / GDP) , globalization

index in goods and services. The data set in the analyses which was consisted of total

export,total import, foreign direct investments,population, the number of incoming and

outgoing tourists to the country, domestic loan volume, the number of internet users and GDP

series in terms of countries was collected from the World Bank database.

(www.worldbank.org).

The issues such as economic integration, political links,technology and personal

communication which are considered to be an a factor for the globalization can be expressed

parametrically with the help of globalization index called shortly as KFP and used to measure

the international competitiveness of the countries. With the use of globalization index the

issues such as international affairs and policies, commercial and financial movements, human

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mobility, thougts and international data flow can also be embodied.So competitiveness can be

explained more significantly.(A.T. Kearney, 2001).

Globalization Index is originally based on the method used in the build of UNDP (United

Nations Development Programme) Human Development Index. At first step the variables to

be used in the index are identified and then quantitative measurements of the variables

involved are carried out. The obtained quantitative values after these two steps are normalized

to clear the problems which can be seen in various variables identifeid with different

modules.16. For example, before normalizing the two variables such as avarage life

span(year) and GDP in human development index, the second one approaches nearly one

hundred times of the first one.At last,the aggravated sum of normalized variables which gives

a numerical result for each country is checked out.

In the globalization index consisting of 11 variables17 the weights of variables used in index

calculations are drown up in Table-1 (Lockwood, 2001: 5).

Tablo-1: The Variables in Globalization Index

Category Variable Name Variable Definition Weights

Globalization in

goods and

services

Commerce (Export +Import) / GDP 1

Convergence GDP according to Nominal

GDP/PPP*

1

Financial

Globalization

Income (Loans + Depths) / GDP 1

Foreign Direct Investments

(FDI)

(Incoming FDI + Outgoing FDI)/

GDP

2

Portfolio Invetments (PI) (Incoming PI + Outgoing PI) / GDP 2

Globalization in

Personal

Communication

s

Tourism (Incoming Tourists Number +

Outgoing Tourist Number) / Total

Population

1

Telephone International phone call to and for

per individuals(Minute)

2

Transfer payments (Loans + Depths) / GDP 1

Internet

Connections

(Personal

connections)

İnternet Users Internet Users/ Total Population 2/3

İnternet Sites Number of servers for each one

million people

2/3

16 Normalization (standardization) is the operation of changing the scale of any varibales,in other

words,transforming the measurement units of the involved variable to standartd Z (Z variable with

zero avarage , one variant and normal range) units .(Koutsoyiannis, 1989: 548-549).

17 Vide infra for the involved variables: http://www.atkearney.com (03.09.2003).

http://www.atkearney.com/

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Security Servers Number of security servers for each

one million people

2/3

*PPP: Perchasing Power Parity

When Table-1 is observed, we can see that globalization index was calculated by considering

four categories as globalization in goods and services,financial globalization, globalization in

personal communication and internet connection.The degree of economic integration is

calculated by combining the data about international trade, foreign direct investments and

capital flows, wages for foreign workers and workers exchange rates in globalization

index.Also the index embodies the international technological communication by regarding

the number of internet users,internet sites and security servers.

3. ANALYSIS RESULTS

Competativeness of Turkey with EU countries was comperatively analyzed via globalization

index developed by A.T.Kearney Consulting Company in this study.

Index values calculated by us and given in Appendix-1 were also displayed in Figure-1 and

Figure-2 with a summary like approach reflecting the globalization trend in terms of

competitiveness.

There are periodical avarages of globalization values of the countries between 1980-2000 and

2001-2010 periods in Figure-1 indicating the development of globalization index in terms of

periods.

When Figure-1 is observed, we can see that Denmark is in the first in both periods in EU

countries.Sweden is the second in both periods,too. Considering the periods of 1980 and 2000

Luxemburg,Holland and Belgium follow Denmark ve Sweden in turn.In the studies by Çoban

ve Çoban’ın (2004); Austria holds its fourth place in both of the periods between 1970-1985

and 1986-2001. According to the periods of 1970 and 1985

Denmark,Sweden,Finland,Germany,England,Greece and Italy receded for a row in the period

of 1986 and 2001. The ninth country of the period between 1970 and 1986 and the full

member of EU in 1986 Portugal showed a significant development and it climbed up to the

fifth place. The twelfth country of the period of 1970 and 1985 France climbed up to tenth

place in the periods of 1986 and 2001.

Figure- 1: Development of Globalization Index in Terms of Periods

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In the studies by Çoban and Çoban (2004) again, we can see that Denmark is again the first in

the periods of 1970 and 2001. Ireland,Holland,Austria and Denmark followed this country in

turn.In the periods involved the countries having important roles in EU such as

Germany,England,France and Italy were quitely in back rows. Also when the avarages are

taken into consideration, EU countries avarages are 3.55 in the periods of 1970 and 1985,4,23

in the periods of 1986 and 2001 and 3.89 in the periods of 1970 and 2001. Turkey,which is in

the developing countries category and the arguments about EU membership has increased

recently, was in the last place in all three periods.However,when the figure in Appendix-2 is

observed,we can an increase trend in globalization index of Turkey since 1996 when Customs

Union happened. This means that accession of Customs Union affected the competitiveness of

Turkey positively.

The changing of index values indicated on Figure-1 in terms of periods are as in Figure 2.

Figure 2: Change of Index Values In Terms of Periods (%)

According to Figure-2 the changing rate avarages of the periods of 1980 - 2000 and 2001 -

2010 is 0.99 in EU countries and this means that globalization index of EU countries

increased in the rate of %99 in the periods involved.

When the change in terms of periods in globalization index for Turkey is observed, it was

found remarkable increases.The involved change rate was 1.72 between 1980-2000 and

2001-2010 periods.This means that globalization index of Turkey has increased in the rate of

%172 form 1980 to 2010.These increase rates are above the avarages of both EU and EU

countries and they indicate that competitiveness of Turkey has remarkable increased in time.

4. GENERAL EVALUATION AND RECOMMENDATIONS

Competativeness of Turkey with EU countries was comperatively analyzed via globalization

index developed by A.T.Kearney Consulting Company in this study as the periods of 1980

and 2010 are considered.

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Periodical avarages of index values in the period of 1980-2000 and 2001-2010 are

taken by the globalization index. As a result, it is observed that Denmark is the first country in

both periods. Sweden is the second in both periods,too. Considering the periods of 1980 and

2000 Luxemburg,Holland and Belgium follow Denmark ve Sweden in turn.

Turkey,which is in the developing countries category and the arguments about EU

membership has increased recently, was in the last place in all three periods. However,when

the figure in Appendix-2 is observed,we can an increase trend in globalization index of

Turkey since 1996 when Customs Union happened. This means that accession of Customs

Union affected the competitiveness of Turkey positively.

When we observe the changing rate avarages of the periods of 1980 - 2000 and 2001 - 2010 is

0.99 in EU countries and this means that globalization index of EU countries increased in the

rate of %99 in the periods involved.

When the change in terms of periods in globalization index for Turkey is observed, it was

found remarkable increases.The involved change rate was 1.72 between 1980-2000 and

2001-2010 periods.This means that globalization index of Turkey has increased in the rate of

%172 form 1980 to 2010.These increase rates are above the avarages of both EU and EU

countries and they indicate that competitiveness of Turkey has remarkable increased in time.

Çoban and Çoban (2004)’s studies contains the periods of 1970 and 2000 and our study

contains the periods of 1980 and 2010.When Çoban and Çoban (2004)’s study and ours are

evaluated together, it can be said that competitiveness of Turkey has remarkably increased in

the periods used in the analysis and the accession in EU would affect this process positively

as the experiences of the countries considered.

Accoriding to the results of both studies, we can say that Turkey which has a young and

active population is in a good position in terms of international competitiveness and follow

right policies in its foreign trade and it increases its competitiveness every year The only

recommendation can be focusing on the production and export of the capital-intensive

products and products with high foreign trade incomes in the increasing competitiveness.

REFERENCES

Altay, B. and Gürpınar, K. (2008) “Revealed Comperative Advantages and Some

Competitiveness Indices: A Practice on Turkish Furniture Industry”, Afyon

Kocatepe University, İ.İ.B.F. Magazine, X(5), ss. 257-274.

Kesbiç, C.Y., Baldemir, E. and Doğan, S. (2005) “Measurement of Competitiveness and its

Importance: An Analysis for Turkish Agricultural Sector”, 1-20,

http://www.ekonometridernegi.org/bildiriler/o10s3.pdf, (09.04.2012).

Kibritçioğlu A. (1996) “A Conceptual Approach to International Competitiveness”, MPM,

Productivity Magazine , 96(3), ss. 109-122.

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Wziatek-Kubiak, A. (2003) “Critical Synthesis, Review of the Main Findings, Methodologies

and Current Thought on Competitiveness of Accession Countries.Mapping of Competence”,

Center for Socail and Economic Research, http://www.case.com.pl, (30.03.2012).

Yapraklı, S. (2011) “Makroeconomic Factors Affecting International Competitiveness : A

Practice on Turkish Production Industry”, Selçuk University İİBF. Social ve Economic

Researces Magazine, Vol.16, Num..22., pages.-373-403.

Kazgan, G (1988), Openness Growth in Economy, 2. Press, Altın Kitaplar, İstanbul.

Çoban, O. and Çoban, S. (2004) “The Measurement of Competitiveness of Turkey by

Globalization İndex: A Comparison with EU Countries, 1970-2001”, Kırgızistan-Türkiye

Manas University Social Sciences Magazine, 10,163-174.

The Effect Of Financial Development On Economic Growth: Panel Data Analysis

Mehmet Mercan1, İsmet Göçer2, Osman Peker2, Şahin Bulut2

1Hakkari University, FEAS, Department of Economy,

2 Adnan Menderes University, FEAS, Department of Economy

E –mials: [email protected],[email protected], [email protected],

[email protected]

Abstract

In this study, the effect of financial development on economic growth was searched for the

most rapidly developing countries(emerging markets)(Brazil,Russia,India,China and

Turkey,BRIC-T) via panel data analysis by using the annual data of the period from 1989 to

2010. Foreign direct investments and trade openness which were thought to have effects on

the growth were included in the analysis.According to empirical evidence derived from the

study made with panel data analysis it was found that the effect of financial development on

economic growth was positive and statistically significant in line with theoretical

expectations.The evidence thateven foreign direct investments and openness contributed to

the growth positively was also found.

Keywords:Financial Development, Economic Growth, BRIC-T, Foreign Direct Investment,

Trade Openness.

Jel Codes: E49, F19, G29

1.INTRODUCTION

An increase in financial instruments and becoming of these instruments more commonly

available in a country is defined as a financial development.In other words, financial growth

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means the development of financial markets (Erim,2005). Financial growth is the change of

financial system in terms of size and structure. However, financial deepening expresses the

share of money supply in national income and it becomes a measure for financial growth and

financial instrument variety(Saltoğlu,1998). Financial growth can be expressed as a channel

that transforms the savings to the investment in financial changing process.

In its literature, great contributions of the financial markets and instituations to the economic

growth process of the countries in many ways are emphasized and this constitutes the subjects

of many ampirical studies.In the studies it is generally stated that a financial system which

performs its financial functions would contribute to the economic growth in long

term.18Smoothly running financial markets in economy supports the capital accumulation,

helps the small funds to direct to the big investments, encourages the disseminations of new

technologies and thus by providing the effective usage of the sources , it supports the

economic productivity and growth(Aslan and Küçükaksoy,2006)

Economic growth of that country will be high, if financial instituations provide the credit

demands of the reel sector.In the early studies about financial and economic growth (Gurley

and Shaw,1955,1967; Gerschenkron, 1962; Goldsmith, 1969), we observe that the effect of

financial intermediation function on economic growth process is uttered although the theoric

thoughts can not be expressed as a whole.

Though Gurley and Shaw make a great contribution to the literature by expressing the

relationship between financial sector and economic growth for the first time, they do not make

any comment about whether there is a causality relationship between financial development

and economic growth or not or if there is , what the direction of this relationship is.Patrick

(1966) for the first time dealed the relationship between financial sector and economic growth

by conceptualizing.He expressed that the causality between financial sector and economic

growth could be in two different forms. The writer explained this relationship by using the

demand-following and supply-leading concepts. In demand-following case he expresses the

financial sector growth to supply the demand occuring as a result of the developments in reel

sector and in supply-leading he explains that the growth of financial sector institutionally

would stimulate the economic growth.

It is very difficult to say that there is an agreement in many studies performed in order to

determine the direction of the causality between financial sector and economic growth. In the

ampirical analysis between financial development and economic growth we can see that there

are studies expressing the causality relationship is both one-sided and two-sided.19Also in

some studies it is stated that the relationship between financial development and economic

growth variables is weak,even financial growth may have a decreasing role in economic

growth process(Singh, 1997; Deidda, 2006).

Shortly called as BRIC firstly in the early 2000s Brazil,Russia,India and China that have

common characters like wide area, big population and rapid economic growth are accepted as

the fastest growing “emerging market” in world economy(O’Neill, 2001:1-16). Total area of

these countries contains more than %25 of the world area and total population of them

18 Vide infra; King and Levine, 1993a, 1993b;Arestis and Demetriades, 1997; La Porta vd., 1997;

Thiel, 2001; Levine, 2004; Eschenbach, 2004; Lawrence, 2006; Shan and Jianhong, 2006; Ang, 2007.

19 Vide infra; Hermes, 1994; Arestis and Demetriades, 1997; Thiel, 2001; Eschenbach, 2004;

Lawrence, 2006; Shan and Jianhong, 2006; Ang, 2007

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contains more than %40 of the world population. It is argued that BRIC group would take G7

group’s place and get the leadership of the world economy when the economic indicators are

considered(Frank and Frank, 2010:46-54).Goldman Sachs who has studies about BRIC

countries estimates that in 2050 China will be the greatest economy in the world,India will be

the third,Brazil will be the fourth and Russia will be the sixth biggest economy.

Based on these indicators, with the help of panel data analysis by using the annual data of

1989 and 2010 in our study the effect of financial development on economic growth is

searched for BRIC countries and Türkiye that is the most devoloping country than after China

and has a developing economy.In second section of the study, the literature ranking about

empirical studies is presented as a table.In the following sectionsthe data set and method used

in the analysis are introduced and evidences are given. In final section a general evaluation is

conducted.

2. Literature Review

The first studies searching the relationship between financial development and economic

growth were conducted by Bagehot (1873) and Schumpeter (1912). In his study Schumpeter

(1912) indicated that a smoothly running economy would support the investors economically

by providing the finance of technological innovations that was necessary for producing the

new products the most effectively and productively. Meanwhile,he expressed that the growth

of financial sector especially the growth of banking sector was necassary for economic

growth.In literature followingSchumpeter (1912) many theorical and empirical studies were

performed.The studies searching the relationship between the financial development and

economic growth, country group, the used methods and results were indicated in Table .As we

can observe from the Table 1 the view that financial development effects the economic

growth positively was supported although there was no agreement between financial

development and economic growth in terms of causality in the studies generally.

Table 1: The Abstract of Some Theoric and Empirical Studies Searching the Relationship betweenfinancial development

and economic growth

Writers Sampling and Econometric

Method

Basic Evidences

Gurley and

Shaw (1955-

1967)

Theoricstudy They indicated the necessity of the

realtionship between financial

development and economic growth.They

suggest that the services provided by the

developed financial structure facilitate the

relationship between saving owners and

investors.

Goldsmith (1969) An International study-35

countries between the periods

1860-1963

He found a positive relationship between financial system size and economic growth.

Benecivenga

and Smith

(1991)

Theoric study He estimated that the development of

financial mediation in certain conditions

would effect the growth rate.

Atje and

Jovanovic

An International study-94

countries betweenthe periods

They concluded that stock markets and

bank credits effect the growth positively.

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(1993) 1960-1985

King ve Levine

(1993)

An International study– 80

countries between the periods

1960-1980

They said that all indicators of financial

development were highly related with

economic growth rates, physical capital

accumulation and economic productivity

increase.

Obstfeld (1994) Theoric study Liquid stock markets were positively

related with economic growth,yet the

integration with international capiatl

markets was not related with the saving

rates of theprivate lenders.

Benecivenga vd.

(1995)

Teorik çalışma Hisse senedi piyasası likiditesi, büyüme

oranları, verimlilik artışları ve sermaye

birikimi arasında güçlü pozitif bağlantı

bulunmaktadır.

Levine and

Zervos

(1996)

A horizontal section analysis

using 3 growth rates as

dependent variant containing

77 countries

There is a statistically positive meaningful

relationship between financial deepening

indicators and growth as the increase of the

output, the investment andthe productivity

in three directions.

Jayaratne and

Strahan (1996)

Panel data analysis including

50 USA states (1972-92)

They found that the quality increase in

banking debths was related with a more

rapid growth.

Levine (1997) A horizontal section analysis They indicated that financial development effected the economic growth via capital accumulation and technological innovation.

Rousseau and

Wachtel (1998)

Time series analysis for 5

industrialized countries

(USA, Canada, England,

Sweden, Norway)

They estimated the financial growth by a

very tiny feedback from the production to

the mediation.

Rajan and

Zingales

(1998)

Time series analysis on the

base of firm and industry for

a wide country group. (1980-

1990)

Financial development has a great effect

on economic growth.A developed financial

structure provides a competetive advantage

against the industries depended on external

financing.

Neusser and

Kugler (1998)

Production industries of

OECD countries –time series

analysis.

Financial development gives priority to the

growth and it is co-integrated with the total

factor productivity of production industry

and gross rate national product of

pruduction sector.

Levine and

Zervos

(1998)

An international analysis

(1976-93)

Both liquid stock markets and developed

banking sector effect the growth, the

capital accumulation and the increase in

productivity positively.

Demirgüç-Kunt

and

Maksimoviç(19

98)

An international analysis for

30 developed and developing

countries.

Active stock market and a well-developed

legal system facilitate the growth of the

firms.

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Levine and

Zervos (1998)

Developed Economies

Horizontal section regression

They got the results supporting the

hypothesis that suggests financial

development leads the economic growth.

Levine, Loayza

and Beck (2000)

Horizontal section study and

dinamic panel techniques

Between financial development and long

term growth there is a strong positive

relationship which is not derived from

synchronicity.

Beck, Levine

and Loayza

(2000)

Horizontal section study,

instrumantal variable

procedure, dinamic panel

techniques

Financial intermadiators have a positive

and great effect on the growth of total

factor productivity supporting the gross

rate national product growth.

Kang and

Sawada (2000)

Time series data for 20

countries

Inner Growth Model

Financial development and trade

liberalizition accelerate the economic

growth by increasing the marginal benefits

of human capital investments.

Henry (2000) 11 developing countries

Panel Data Analysis

It was found that the liberalization in stock markets

increased the investments in many countries.

Shan vd. (2001) 9 OECD Countries and China

Causality Test and VAR

Analysis

He found two sided causality in 5 countries and

supply leading causality in 3 countries,but in 2

countries he found no relationship.

Arestis,

Demetriades and

Luinted (2001)

5 Developed Countries

Cointegration and Correction

Model Analysis

The development of the banks and capital

markets accelarates the economic

growth,but in this process banks have a

more effective role.

Shan and Morris

(2002)

19 OECD Countries ve China

Causality Test

They reached the results that financial development

causes economic growth directly or indriectly.

Arestis vd.

(2002)

6 Developing Countries

Standard Econometric

Techniques

The effect of financial liberalization on

financial development is ambigious.

Al-Yousif

(2002)

30 Developing Countries-

Ganger Causality and Panel

Data Analysis

It was found that there was a two sided

causality relationship between financial

development and economic growth.

Müslümov and

Aras (2002)

OECD Sample (22 countries)

Granger Causality and Panel

Data

It was obtained a one sided relationship

from the development of capital market to

economic growth.

Bhattacharya

and

Sivasubramania

n (2003)

India Sample

Causality Analysis

They reached the result that financial development

causes economic growth.

Calderon ve Liu

(2003)

109 Developed and

Developing Countries

They reached the result that financial development

effects the economic growth via capital

accumulation and productivity.

Fink vd. (2003) 13 Developed Countries

Cointegration and Correction

Model Analysis

They reached the evidences supporting the

“demand-following”and “supply-leading”

approaches in Italy, Japan and Finland; “supply-

leading”in USA, Germany, Austria, England,

Switzerlandand weakly “supply-demanding” in

Holland and Spain.

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Ghirmay (2004) 13 Africancountries He expressed that financial system had a signifiacnt

role in the growth of African countries.

Beck and

Levine (2004)

40 countries

Panel Data Analysis

They emphasized the importance of financial

development in the economic growth process.

Dritsakis and

Adamopoulos

(2004)

Greece Sample

Causality Based on Error

Correction Model

They reached the result that there was a


development and economic growth.They

could not find any relationship between the

growth and the openness of the economy.

Thangavelu vd.

(2004)

Australia Sample

VAR Methodology

They found a causality from economic

growth to the development of financial

intermediaries,but they could not reach an

evidence that the development of financial

markets would cause economic growth.

Rioja and Valev

(2004)

10 Countries

Panel Data Analysis

They got the evidence that economic growth

increased by increasing the productivity in the

countries that the financial development was high

and by accelerating the capital accumulation in the

countries that financial development was low.

Christopoulos

and Tsionas

(2004)


Panel Cointegraiton Analysis

They found the evidence that economic growth was

the cause of financial development.

Chang and

Caudill

(2005)

Taiwan Sample

VAR Methodology

They found a causality from financial

development to the economic growth,thus

the “supply-leading” hypothesis was

confirmed.

Caporale vd.

(2005)

5 Southeastern Asian

Countries

Cointegration Granger

Causality

It was found that capital market increased the

economic growth by increasing the investment

activity.

Ndikumana

(2005)

99 Countries

Panel Data Analysis

He presented the results that the development of

financial intermediation increased the investments.

McCaig and

Stengos (2005)

71 Countries

They identified that the development of financial

intermediation affected the growth strongly and

positively.

Rousseau ve

Vuthipadadorn

(2005)

10 Asian Countries


Causality

They reached the results that financial development

stimulated the investments and there was a one-

sided realationship (supply-leading) from

financial development to the investments in many

countries.

Shan and

Jianhong

(2006)

Chine Sample

VAR Methodology

They found that there was a two sided


development and economic growth.

Ang and

McKibbin

(2007)

Malaysia Sample


Causality

They identified that growth increased the

financial deepening.Meanwhile the

relationship was supply-leading.

Artan (2007) 79 Countries Sample

Panel Data Analysis

In underdeveloped countries financial

development affects the growth negatively.

Shahbaz vd.

(2008)

Pakistan Sample


Causality

He showed that there was a stronge and a

two sided causality relationship between

the development in stock markets and

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economic growth.

Abu-Bader and

Abu-Qarn

(2008)

Middle East and North

African Countries

VAR Methodology-Causality

In analysis results it was identified a demand-

following causality suggesting the financial

development increased the economic

growth.However, for Israel it was identified a

supply-leading causality from economic growth to

financial development.

Enisan and

Olufisayo

(2009)

7African Countries

ARDL Method

They concluded that the development in stock

market in Egypt and South Africa increased the

economic growth and the direction for the causality

was from the development in stock market to the

economic growth.

Kar vd. (2011) MENA Countries(1980-

2007)

Panel Granger Causality Test

They infered that it was impossible to

make a certain comment about the

causality between financial development

and economic growth.

Hassan, Sanchez

Yu (2011)

168 Countries Classified

According to Income Level

Panel Data Analysis

It was discovered that there was a positive

relationship between financial

development and economic growth in

developing countries.For many country

samples a two sided causality was obtained

for short term period.

Source: Study of the writers and Kularatne, 2001: 10-11.

There are also studies searching the relationship between financial development and economic growth in Turkey

sample. In ampirical studies on Turkey it can be said that there is no consensus about the causality relationship

between financial development and economic growth. Table 2: The Abstract of Some Theoric and Ampirical Studies Searching the Financial Development and Economic Growth

Relationship on the Scale of Turkey

Kar and

Pentecost (2000)

Turkey Sample

Cointegration Analysis

Error Correction Model

In the study they found that the direction of the

financial development and economic growth

relationship could change depending on the

selected financial development indicator.

Gökdeniz vd.

(2003)

Turkey Sample1989-2002)

Regression Analysis

The evidence that financial markets

affected the economic growth could not be

found.

Atamtürk (2004) Turkey Sample(1975-2003)

Granger Causality

He found the evidence of a one-sided

causality from financial development to

economic growth.(Supply-leading

hypothesis was confirmed.)

Onur (2005) Turkey Sample

Granger Causality

(Autoregressive Model)

After financial liberalization in Turkish

economy it was found out that financial

liberalization, financial development and

openness was not the cause of Gross

Domestic Product,but Gross Domestic

Pruduct was the cause of financial

liberalization, financial development and

openness.

Aslan and

Küçükaksoy

(2006)

Turkey Sample

(1970-2004)

Granger Causality

They found out that economic growth was due to

financial development.In other words it supported

the economic growth.

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Test

Aslan and

Korap (2006)

Turkey Sample

(1986-2004)

Cointegration

AnalysisGranger Causality

Test

They expressed that the direction of the causality

between financial development and economic

growth changedaccording to the financial

development indicator.

Acaravcı vd.

(2007)

Turkey Sample

(1986-2006)


They found out that in Turkey there was a one-

sided causality from financial development to

economic growth.

Kandır vd.

(2007)

Turkey Sample

(1988-2004)



He found out that there was a demand-following

relationship between financial development and

economic growth.In other words it was observed

that economic growth increased the financial

development in Turkey.

Afşar (2007) Theoric Study-Literature

Scan

He found out the evidence that there was a strong


economic growth in Turkey but the direction of the

causality was ambiguous.

Altunç (2008) Turkey Sample

(1970-2006)



He expressed that the direction of the causality

between financial development and economic

growth changed according to the financial

development indicator.

Ağır vd. (2009) Turkey Sample

Literature Scan

He expressed that the relationship between

financial development and economic

growth could be simultaneous.

Altıntaş and

Ayrıçay (2010)

Turkey Sample

(1987-2007)

ARDL(Autoregressive

Distributed Lag Mode)Bound

TestApproach

They found out that financial development

was the most effective factor on the growth

and also the effect of the rate was

relatively less.They infered that the

avaibility of the funds rather than their

costs could contribute to increase the reel

incomein developing countries like

Turkey.

Keskin and

Karşıyakalı

(2010)

Turkey Sample

(1987-2007)

Engle-Granger Method and

Causality Analysis

They observed that there was a demand-following


economic growth,thus financial development was

due to economic growth in Turkey.

Öztürk vd.

(2011)


andTurkey Sample (1992-

2009)

Panel Causality Test

They found out that there was a one-sided

causality from financial development to

economic growth.(Demand-following

hypothesis was confirmed.)

Özcan and Arı

(2011)

Turkey Sample

(1998-2009)

VAR Analysis

Ekonomik büyümeden finansal gelişmeye doğru tek

yönlü bir nedenselliğin varlığı bulgusunu elde

etmişlerdir. (Talep izleyici hipotez doğrulanmıştır)

İnce (2011) Turkey Sample

(1980-2010)


Granger Causality Analysis

They found out that although there was a strong

relationship between economic growth and

financial development in a long term period, there

was a relationship in a short term period.

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145

3. Financial Development Indicators

In financial development literature, the proportion of financial sector to Gross Domestic

Product is defined as financial depth (Feldman and Gang, 1990; Outreville, 1999). The

indicators predicating the size of loan and currency are the variables that are used as a

measure of financial development.In literature in limited and unlimited sense, the proportion

of curruncy supply to GDP (M1/GDP, M2/GDP, M2Y/GDP), private sector loans/GDP,

private sector credits of the banks/GDP, market value of the firms in Stock Exchange

Market/GDP,effective money/GDP are usedas the indicator of financial development and

financial depth.20“ Loans for the private sector” variable that has been used recently as an

alternative indicator for financial intermediation is not preferred because the indicators based

on the size of currency (MI, M2,M2Y) in some studies do not represent the financial

development. (Khan and Senhadji, 2000).

The most fundamental of these indicators is the indicators giving the proportion of limited

and unlimited defined currency supply/GDP.It is indicated that M1/GDP proportion is not in

strong relation with the growth,but M2/GDP proportion indicates the measure of the size of

the whole sector in financial intermediation and it is in strong relation with the change in per

cepita real GDP (King and Levine, 1993).

4. AMPIRICAL ANALYSIS

4.1. Data Set and Model

In this study the effect of financial development on eceonomic growth was searched by using

the data between 1989-2010 period in the sample of 5 developing countries which have an

important place in world economy (Brazil, Russia, India, China ve Turkey-BRIC-T).In the

analysis, besides the financial development, foreign direct investments and trade openness

which were thought to affect the growth was included to the model.From the variables used in

the analysisy;represents the growth rate (GDP), fd;represents Financial Development

(M2/GDP), fdi;represents Foreign Direct Investments (FDI/GDP) ve open;represents trade

openness (X+M/GDP).The data was obtained from the web pages of IMF and the World

Bank(www.imf.org, www.worldbank.org).

For analysis Stata 11 and Eviews 5.1. econometric analysis programmes were used and for

model choise and correction tests codes21 were used.

4.2. Method

Panal data analysis was used to search the data from different countries together. Panel data

analysis (Baltagi, 2001; Gujarati, 1999 and Tarı, 2010):

20 Vide infra; Khan and Qayyum, 2007; s. 4; Outreville, 1999, Darrat, 1999, Gupta, 1984; King and

Levine, 1993; Demetriades and Hussein, 1996, Halıcıoğlu, 2007

21 For codes Thanks to Prof. Dr. Haluk Erlat, Asst.Prof. Bülent Güloğlu and Asst.Prof. Şaban Nazlıoğlu

.

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146

This model was based on decomposing the error term ( ) to its components in terms of its

individual and time effects. In the modeliindicates the countries, tindicates the time. When the

error term was decomposed:

was obtained. This final equation is called error component model. Here indicates the

individual effects, indicates the time effects.It is

supposed (Independent Identically Distributed), in other words the

avarage of error terms is zero, its variant is stable and it is distributed normally(having white

noise process).

In the Panel data analysis the stability of the series are searched through panel unit root tests

firtsly.Then the type of individual and time effects should be identified. An indogeneity test

should be conducted among the variables when there is a variable which is considered to have

a close relation with the given variable,therefore it is suspected for its indogeneity. After that

a model should be estimated and the problems of changing variant and autocorrelation in the

model should be tested.

4.3.Panel Unit Root Analysis

It is accepted that the panel unit root tests which regard the information about both time and

horizontal section dimension of the dataare statistically stronger than the time series unit root

tests which regard the information only about the time dimension (Im, Pesaran ve Shin,1997;

Maddala ve Wu, 1999; Taylor ve Sarno, 1998; Levin, Lin ve Chu, 2002; Hadri, 2000;

Pesaran, 2006; Beyaert and Camacho, 2008).Because the variability in the data increases

when the horizontal section dimension is included to the analysis.

The first problem in panel unit root test is whether the horizontal sections building the panel

are independent or not.At that point panel unit root tests are classified as the first generation

and the second generation.The first generation tests are also classified as homogeneous and

heterogeneous.While Levin, Lin and Chu (2002), Breitung (2000) and Hadri (2000) are based

on homogeneous model hypothesis, Im, Pesaran and Shin (2003), Maddala and Wu (1999),

Choi (2001) are based on heterogeneous model hypothesis. On the other hand, the main

second generation unit root tests are MADF (Taylor and Sarno, 1998), SURADF (Breuer,

Mcknown and Wallace, 2002), Bai and Ng (2004) and CADF (Pesaran, 2006).

Since the countries included in the analysis are not homogeneous, Im, Pesaran and Shin

(2003)will use (IPS) testin this study. This test:

is based on the model above. Here ; is error correction term and when <1 happens, we

understand that the serie is trend stable ,on the other hand when 1 happens, it has unit

root,thus it is not stable. IPS test enables the sto differentiate for the horizontal section

units,in other words heterogeneous panel structure.Test hypotheses:

H0: for all the horizontal section units,so the serie is not stable.

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147

H1: for at least one horizontal section unit,so the serie is stable.

When the possibility value obtained from the test results is smaller than 0.05, H0is rejected

and it is decided that the serie is stable. IPS panel unit root test results are on Table 4.

Table4:IPS Panel Unit Root Test Results

Variant Level

Value

Possibility

Value

First

Difference

Possibility

Value

y -0,74 0,77 -2,64 0,00

m2 -0,21 0,41 -4,60 0,00

fdi -1,04 0,14 -3,29 0,00

open 3,66 0,99 -3,79 0.00

Note:In Panel unit root test Schwarz criterionis used and delay length is regarded as 1.

When we study on the results on Table4, it is observed that all series are not stable in level

value,but the series become stable when first differences of the series are taken.In other

words,in the studied period it is found out that macroeconomic variables are not stable and the

shock effects on these variables do not disappear after a while.

4.4. Breush- Pagan Lagrange Multiplier (LM) Test

In this stage of the analysis, F test was performed in order to determine the type of time effect

and individual effects( random or stable). Because the selected countries are in a certain

economic group, it was anticipated that individual effects would be stable and also the time

effects of financial development on the growth would be stable for the countries in the studied

period. Whether the effects are really random or not can be determined by F test (Baltagi.

2001:15).

F test is classified as F1 andF2 . F=F1+F2. F1;tests the individual effects are stable

andF2tests the time effects are stable.

In F1 test; H0: (No individual effects ) hypothesis is tested throughF1 statistics. F1

statistics is calculated by the formula below.

(4)

Here ; indicates the individual effects in the equation (4), N;indicates the horizontal section

(country) number, T; indicates the time dimension, ; indicates the prediction for the error

terms in the equation (3). When the possibility value obtained from the test results is smaller

than 0.05 , H0is rejected and it is decided that individual effects are stable.

In F2 test; H0: (No time effect) hypothesis is tested by F2 statistics. F2 statistics is

calculated by the formula below.

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148

(5)

Here ; indicates the individula effects in the equation(4), N; indicates the horizontal section

(country) number, T; indicates the time dimension, ; indicates the predictions for the error


than 0.05 , H0is rejected and it is decided that time effects are stable.

In F=F1+F2 test;

H0: (No individual and time effects)

H1: or both of them (At least one or two of the effects are random).

When the possibility value obtained from the test results is smaller than 0.05 , H0is rejected

and it is decided that both of the effects are stable.In this case a prediction is made through the

two-sided stable effect model.In Table5 there are F tests results.

Table5: LM Tests

Test Possibility

Value

Decision

F1 0,004 Individual Effects are not Stable.

F2 0,001 Time Effects are not Stable.

F 0.001 Individual Effects and Time Effects are not Stable..

When we look the results in Table5, we can see thatindividual effects and time effects are

stable.According to this result the prediction was made by the two-sided stable effect model.

4.5. Hausman Endogeneity Test

In this stage of the study,whether there was a relationship between the individual effects and

the explanatory variables or not was tested by Hausman method. Test hypotheses:

H0: Cov( No endogeneity problem.

H1: Cov( An endogeneity problem.

Here ; indicates the individual effets in the equation (4),but indicates the exlanatory

variables in the equation(3).When the possibility value of (Chi2=Kikare) obtained from

the analysis is smaller than 0.05 , H0is rejected and it is decided that there is an endogeneity

problem in the model.In this case random effects model is used.(Greene, 2003).However,

when H0 is accepted,stable effects model is used.This prediction is effective , non- deviated

and coherent.Hausman test is not an alternative forF test. But it works as function to check the

decision by F test.Hausman test was conducted and χ2=14.62 veχ2 possibility value =0.404

was obtained and since this value was bigger than 0.05 , H0 hypothesis was accepted and it

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149

was decided that there was no endogeneity problem in the model.In this case, it is necessary

to do the analysis with the random effects model and this result supports the F test results.

4.6. Two-Sided Random Effects Model Predictions

Panel data analysis is predicted by the two-sided random effect model and the result are on

theTable6.

Table6: Prediction Results

Variable Coefficient Standard

Error t-Statistics*

m2 1,332 0,949 1,403

fdi 0,792 0,439 1,802

open 4,315 2,596 1,662

Stable Term 2,310 1,101 2,097

Weighted R2=0,46Fist= 4,28

*: %10 level of significance was used.

In stable effect models weighted statistics values are used. (Baltagi 2001: 21). When we look

to the weighted test statistics in Table6,we can see that model is reliable as statistically.Also

whether there are flexible variants and autocorrelation problems in the model are tested

below.

4.7. Lagrange Multiplier (LM) Flexible Variant Test

The most common test in order to test whether the error terms variant of the model changes

from horizontal section to horizontal section is LM test. (Greene, 2003). Test hypotheses:

H0: Variant is stable. So there is no flexible

variant problem.

H1: At least one Variant is not stable. So there is a flexible variant

problem.

The required test statistics to test these hypotheses are calculated through the following

formula:

(6)

When the possibility value obtained from the test results is smaller than 0.05 , H0is rejected.In

other words it is decided that there is a flexible variant problem in the model. (Greene,

2003).Lm test was conducted and the possibility value was found 0.05.In this case H0 was

rejected and it was decided that there was no flexible variant problem in the model.

4.8. Autocorrelation Test

It is a test to study the relationship of the error terms of the model with its delayed values.The

equation to measure this relationship is AR(1) process (Wooldridge, 2002):

(7)

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Test hypotheses:

H0: No autocorrelationproblem.

H1: Am autocorrelationproblem.

The required test statistics to test these hypotheses is calculated by the following formula:

(8)

HereSSRR; indicates the sum of the squares of the error terms of the limited model in the

equation (3) SSRUR; indicates the sum of the squares of error terms of the unlimited model,

g; indicatesthe limit number and df; indicates the independence grade. When the possibility

value obtained from the test results is smaller than 0.05 , H0is rejected.It is decided that there

is an autocorrelation problem in the model. (Drukker, 2003).

F test was conducted and the possibility value was found0,052.In this case H0is accepted

and it was decided that there was no autocorrelation problem in the model.

Since there is no flexible variant and autocorrelation problems in the model, the prediciton

results are reliable and interpretable. As can be seen from the Table 6, financial development

level affects the economic growth positively in line with the theoretical expectations.A % 1

increase in financial development level will increase the growth with the rate of % 1.33. The

importance of the foreign direct investments especially in developing countries is often

emphasized. As a result of the analysis the effect of a % 1 increase in the foreign direct

investments on the growth will be % 0,79. Also trade openness variant used in the model was

observed as the most effective variant in growth and it was found out that a %1 increase in

openness level increased the growth with the rate of % 4,31.So this affected Turkey mostly in

terms of the decrease in export depending on the decrease in external demand as a result of

2008 global economic crisis. (Somel, 2009).

5.CONCLUSION

In this study the effect of financial development level on economic growth was searched via

panel data analysis method in the sample of 5 developing countries which have an important

place in the world economy(emerging markets, Brazil,Russia,India,China and Turkey-BRIC-

T). the foreign direct investments and trade openness which were considered to affect the

growth as well as financial development were included in the study where the annual data of

1989-2010 periods were used. At the panel unit root analysis result it was found out that series

were not stable and the effects of shocks on the series did not disappear after a while and

therefore it was determined that macroeconomic shocks affected the economy of the countries

significantly.

At the F tests result conducted to define the applicable panel data analysis method it was

found out that individual and time effects were stable,for that reason an analysis with the two-

sided stable effect model was carried out.At the endogeneity test result it was found out that

there was no endogeneity problem in the model. At the model conformation tests result it was

foud out that there was no flexible variant and autocorrelation problems in the model. In this

regard, the predicted model is reliable econometrically.

According to the analysis results, it was determined that a % 1 increase in financial

development level increased the growth at the rate of % 1,33 , a % 1 increase in foreign direct

investments increased the growth at the rate of % 0,79.Also it was found out that trade

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openness in the model was the most effective variant of the growth and the evidence that a %

1 increase in openness level increased the the growth at the rate of % 4,31.The expression that

the global economic crisis in 2008 affected Turkey mostly in export dimension supports the

analysis result.

To sum up, in the study the effect of financial development, foreign direct investments and

openness were searched and it was found that openness, financial development and foreign

investments in turn affected the growth mostly. If the sustainable growth is considered as one

of the most significant variables of the growth for the countries, the increase in foreign trade

especially in export,the stimulations for the foreign direct investments and the increase in

financial development level are very important.

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The Effect Of Openness On Economic Growth: Panel Data Analysis

Mehmet Mercan1,İsmet Göçer2, Şahin Bulut2, Metin Dam2

1Hakkari University, FEAS, Department of Economy,

2Adnan Menderes University, FEAS, Department of Economy,

E-mails:[email protected],[email protected],[email protected],[email protected]

Abstract

In this study, the effect of openness on economic growth was searched for the most rapidly

developing countries(emerging markets)(Brazil,Russia,India,China and Turkey,BRIC-T) via

panel data analysis by using the annual data of the period from 1989 to 2010. As openness

variable, the proportion of external trade scale to GDP was used. According to empirical

evidence derived from the study made with panel data analysis it was found that the effect of

openness on economic growth was positive and statistically significant in line with theoretical

expectations.

Keywords:Trade Openness, Economic Growth, BRIC Countries, Turkey.

Jel Codes: E41, F43, G53

1.INTRODUCTION

In our globalized world whether there is a relationship between trade openness and economic

growth and openness is useful for the economy of the countries or not is still a matter in

arguement. On one hand by trying to decrease the quotas and tariffs through GATT (General

Agreement on Tariffs and Trade ),UNCTAD (United Nations Conference on Trade and

Development) which was established to liberalize the trade between countries and WTO

(World Trade Organization) which was established instead of GATT in 1995 , increasing the

openness of the countries to the world trade is aimed,on the other hand countries impose

restrictions in the world trade by increasing the invisible barrier both to protect the domestic

industries and to get income.

With non-functioning of the national development thesis through the late and the collapse of

the Eastern Block at the end of 1980’s it was again started to argue that openness was

necessary for the national economies. In this context some economists expressed that having a

certain development level was a precondition for openness policies to support the growth

while operating the growth models based on openness and export. (Han and Kaya, 2006: 245;

Sun and Parikh, 2001: 187-188).There are classical economists on the basis of the view that

capital movement liberalization and trade openness will increase the economic growth and

welfare after 1980’s.According to Classical and Neoclassical economists foreign trade makes

important contributions to the development and the foreign trade is not only an effective

productivity instrument but also it is the engine of the growth.Since the sources are limited in

developing countries, the production on the scale of a high and sustainable growth can not be

performed and new sources can be needed for production.With the openness, domestic

markets will encounter with the competition, the domestic industries which can not compete

with international prices will transfer their production factor to the other productive factors

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and the welfare increase will happen as a result of more effective allocation of the sources.So

for this type of economies it will be useful to make production under free trade.The

precondition of providing growth under free trade is to apply a foreign trade policy which the

national economies may combine with the international structure and to direct the allocation

of the sources for pruduction to the sectors determined by the international demand.The

natural aim of this type of economy is the industrilization and the availibility of the growth

and it is suggested that the required dynamism for this will be realized by a structuring

coming from external demand rather than domestic demand (Çelebi, 1991: 33).

Against the liberal understanding of some classical economists , some economists defended

the import substitution and drew attention to the importance of protectionism for

industrialization. (Bahmani, Oskooee, Niromand, 1999, s.1).He suggested that free trade

would not contribute to the growth among the countries that their development levels were

different, but it would be useful among the countries that their development levels are the

same.For instance,in England where the Industrial Revolution began first and in many of the

other countries that were trying to reach England’s development level he expressed that free

trade is on behalf of England and less developed countries were negatively affected for

foreign trade relatively. (Chang, 2004: 20).

Openness was modelled with the New Growth Theories suggested in 1980’s and it was started

to be tested ampirically.Internal growth theoriessuppose (varsayar) that trade openness will

stimulate the new technologies input. (Harrison, 1996).No matter how the economy is open,

technology input increases,technology usage becomes wide and a more rapid growth realizes

as compared to a less open economy. (Wu, 2004, s. 1).Internal growth models mentioning the

importance of technological diffusion as the source of growth in long period generally

suggest the thesis that the countries that are open to the foreign trade will reach higher stiff

growth rates(Grossman ve Helpman, 1990: 796).So Romer(1986) and Lucas (1998) expressed

that the size of the openness in a country was proportional with the ability of adaptation to the

new and imported technologies and the ability of the arrangement in production.

In the studies so far about the effect of the trade openness on economic growth it is difficult to

say that there is a consensus.Besides Romer (1986) and Lucas (1988) in the context of

internal growth theories, while Dollar (1992), Barro and Sala-i Martin (1995), Sachs

andWarner (1995), Sinha and Sinha (1996), Edwards (1992, 1998) asserted that the effect of

the trade openness on economic growth was positive,Levine and Renelt (1992), Harrison

(1996), Rodrigez and Rodrik (1999) claimed the opposite of this idea.

Shortly called as BRIC firstly in the early 2000s Brazil,Russia,India and China that have

common characters like wide area, big population and rapid economic growth are accepted as

the fastest growing “emerging market” in world economy (O’Neill, 2001:1-16). Total area of

these countries contains more than %25 of the world area and total population of them

contains more than %40 of the world population. It is argued that BRIC group would take G7

group’s place and get the leadership of the world economy when the economic indicators are

considered(Frank and Frank, 2010:46-54).Goldman Sachs who has studies about BRIC

countries estimates that in 2050 China will be the greatest economy in the world,India will be

the third,Brazil will be the fourth and Russia will be the sixth biggest economy.Based on these

indicators, in our study the effect of openness on economic growth will be searched for BRIC

countries and Türkiye that is the most devoloping country than after China and has a

developing economy.

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2.Openness

The openness rate of a country is generally calculated as the proportion of foreign trade

volume to GDP besides the usage of the proportion of import to GDP (Romer (1993)) and the

rate of export increase (Chow (1987), Kwan and Cotsomitis (1991))(Bahmani-Oskooee and

Niroomand (1999), Ahmad and Anoruo (2000), Dar and Amirkhalkhali (2003)).Openness

also indicates the dependence of the country on the foreign trade.The size of openness rates

indicates the importance level of the foreign trade for economy of the country.With the trade

openness of the country , an increase can be seen in foreign Exchange incomes and expenses

at the export and import volume increase results. The share of foreign trade in GDP will

increase with the foreign trade volume increase. In Figure 1 trade openness rates of BRIC-T

countries are presented.

Figure 1. BRIC-T Countries Trade Openness Rates

Source:It was formed by the writers using the World Bank data

As can be followed from Figure 1, in all BRIC-T countries called as emerging markets since

1990’s we see a stiff openness rates and the share of foreign trade increases. It has been

observed that openness rate is about 0,5 in recent years,so foreign trade volumes of the

countries have reached to nearly half of their GDP.Also in Figure 2the growth rate ofBRIC-T


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Figure2. BRIC-T Countries Growth Rates

Source:It was formed by the writers using the World Bank data

As can be followed from Figure 2, we see that the growth rates of the related countries are

closs to each other and the countries were nagatively affected from the global economic crisis

in 2008 and the Asia crisis in 1997.The striking point in Figure 2 is China and India’s positive

growth throughout the whole periods.Also we see that Russia and Turkey are the most

affected countries from the global crisis in 2008.In Table 1 economic size of BRIC-T


Table 1.Economic Sizes of the Selected Countries(Billion $)

BRA CHN IND RUS TUR BRIC-T WORLD OECD AB

2000 645 1.198 460 260 267 2.830 32.240 26.162 8.477

2001 554 1.325 478 307 196 2.859 32.046 25.917 8.579

2002 504 1.454 507 345 233 3.043 33.305 27.085 9.362

2003 552 1.641 599 430 303 3.526 37.466 30.422 11.409

2004 664 1.932 722 591 392 4.300 42.229 33.873 13.172

2005 882 2.257 834 764 483 5.220 45.658 35.749 13.749

2006 1.089 2.713 951 990 531 6.274 49.506 37.744 14.665

2007 1.366 3.494 1.242 1.300 647 8.049 55.849 41.346 16.957

2008 1.653 4.522 1.216 1.661 730 9.782 61.305 43.816 18.252

2009 1.594 4.991 1.377 1.222 615 9.800 58.088 41.036 16.310

2010 2.088 5.927 1.727 1.480 734 11.956 63.124 42.809 16.223 Source:It was formed by the writers using the World Bank data As can be followed from Table 1, the GDP of the studied 5 countries in 2010 is totally 11,956 Billion$. This value

corresponds to the % 71 of European Unity GDP, % 28 of OECD countries GDP and % 19 of world countries total GDP. In 2000 while BRIC-T countriestotal GDP corresponds to % 8 of world countries total GDP, the increase of this rate to % 19 in 2010 is a significant evidence to be noticed.

As can be followed from Table 1, the GDP of the studied 5 countries in 2010 is totally 11,956

Billion$. This value corresponds to the % 71 of European Unity GDP, % 28 of OECD

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countries GDP and % 19 of world countries total GDP. In 2000 while BRIC-T countriestotal

GDP corresponds to % 8 of world countries total GDP, the increase of this rate to % 19 in

2010 is a significant evidence to be noticed.

3. Openness and Growth : Literature Scan

The studies searching the relationship between trade openness and economic growth, country

groups, the used methods and results are presented in Table 2. As can be followed from Table

2 the view that openness affects the economic growth positively is generally supported in the

studies and the importance of growth based on export is emphasized. Table 2: Abstract of Some Theoric and Ampirical Studies Searching the Openness and Economic Growth Relationship

Writers Sampling and Used

Econometric Method

Basic Findings

Edwards (1998) 93 countries study

Method of Least Squares

He found that total factor productivity increased more

rapidly in the country that are more open.

Bahmani-Oskooee

and Niroomand

(1999)

For 59 countries 1960-92 Period

Johansen cointegrationmethod They found that there was a positive relationship between

openness and growth in 19 countries that has

cointegration relations. Ahmad and Anoruo

(2000) For 5 countries1960-97 period

Johansen cointegrationmethod They indicated that openness and growth variables were

cointegrated,and also they expressed that there was a

two-sided causality relationship between openness and

growth in error correction model. Ahmad (2001) Developed and developing countries,

Engle-Granger and VAR model

Study results supports the export-oriented growth

hypothesis.

Sun and Parikh

(2001)

29 region of China(1985-1995)

Panel Data Analysis

They expressed that export and foreign capital inputs

have significant and positive effects on economic growth.

Vamvakidis (2002) Regression predicted for various

periods

He identified that free trade has had no positive effect on

the growth since 1870,even this effect was positive in

1930’sand he expressed that this could be explained by

the changing world trade regime.

Jin (2003) North Koreathe period of 1953 and

1999 Granger causality test

He supports the hypothesis that free trade arouses the economic growth.

Wu (2004) APEC (Asian-Pacific Economic

Cooperation) countries.

He identified that openness not only provided an effective change in country’s economy,but also it changed the structure of production technology.

Kaplan (2004) General Equilibrium Model He identified that the changes of economic policy effected the sectors in economy and production factors in different ways.

Utkulu and

Kahyaoğlu (2005)

Türkey (1990-2004)

Non-linear Time Series and Markow

Modelling

They found that trade openness in Turkey affected the growth positively.

Yapraklı (2007) Türkey (1990-2006)

Johansen Cointegraiton Method

He identified that economic growth was affected positively from trade openness and there was a mutual causality between trade openness and economic growth in short term.

Kurt and Berber

(2008)

Türkey (1989-2003)

VAR analysis

They expressed that the hypothesis that trade openness claimed by endogeneous growth theories would increase the growth was applicable for Turkish economy.

Yang (2008) 30 countries (OECD and Asya)

between 1958 and 2004

Panel Data Analysis

In the economies where the export growth is more rapid than the economic growth it was identifeid that froeign exchang policy helped in this situation.

Omisakin vd. (2009) Nigeria (1970-2006)

Toda-Yamamoto causality and ARDL

Method

There is a positive relationship betweeen trade openness and growth and a % 10 increase in trade openness rate increases the growth nearly with the rate of % 7.

Source: Writers’ studies

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4. AMPIRICAL ANALYSIS

4.1. Data set and Model

In this study, the effect of openness on economic growth was searched for the most rapidly

developing countries(emerging markets)(Brazil,Russia,India,China and Turkey,BRIC-T) via

panel data analysis by using the annual data of the period from 1989 to 2010. From the

variables used in the analysisy;represents the growth rate (GDP) andopen;represents trade

openness (X+M/GSYİH). The data was obtained from the web pages of IMF and the World

Bank (www.imf.org, www.worldbank.org).

For analysis Stata 11 and Eviews 5.1. econometric analysis programmes were used and for

model choise and correction tests codes22 were used.

4.2. Method

Panal data analysis was used to search the data from different countries together. Panel data

analysis (Baltagi, 2001; Gujarati, 1999 and Tarı, 2010):

This model was based on decomposing the error term ( ) to its components in terms of its

individual and time effects. In the modeliindicates the countries, tindicates the time. When the

error term was decomposed:

was obtained. This final equation is called error component model. Here indicates the

individual effects, indicates the time effects.It is supposed

(Independent Identically Distributed), in other words the avarage of error terms is zero, its

variant is stable and it is distributed normally(having white noise process).In the Panel data

analysis the stability of the series are searched through panel unit root tests firstly.Then the

type of individual and time effects should be identified. An indogeneity test should be

conducted among the variables when there is a variable which is considered to have a close

relation with the given variable,therefore it is suspected for its indogeneity. After that a model

should be estimated and the problems of changing variant and autocorrelation in the model

should be tested.

4.3.Panel Unit Root Analysis

It is accepted that the panel unit root tests which regard the information about both time and

horizontal section dimension of the data are statistically stronger than the time series unit root

tests which regard the information only about the time dimension (Im, Pesaran ve Shin,1997;

Maddala ve Wu, 1999; Taylor ve Sarno, 1998; Levin, Lin ve Chu, 2002; Hadri, 2000;

Pesaran, 2006; Beyaert and Camacho, 2008).Because the variability in the data increases

when the horizontal section dimension is included to the analysis.

The first problem in panel unit root test is whether the horizontal sections building the panel

are independent or not. At that point panel unit root tests are classified as the first generation

22 For codes Thanks to Prof. Haluk Erlat, Asst.Prof. Bülent Güloğlu and Asst. Prof. Şaban Nazlıoğlu .

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and the second generation. The first generation tests are also classified as homogeneous and

heterogeneous.While Levin, Lin and Chu (2002), Breitung (2000) and Hadri (2000) are based

on homogeneous model hypothesis; Im, Pesaran and Shin (2003), Maddala and Wu (1999),

Choi (2001) are based on heterogeneous model hypothesis. On the other hand, the main

second generation unit root tests are MADF (Taylor and Sarno, 1998), SURADF (Breuer,

Mcknown and Wallace, 2002), Bai and Ng (2004) and CADF (Pesaran, 2006).

Since the countries included in the analysis are not homogeneous, Im, Pesaran and Shin

(2003) will use (IPS) testin this study. This test:

is based on the model above. Here ; is error correction term and when <1 happens, we

understand that the serie is trend stable ,on the other hand when 1 happens, it has unit

root, thus it is not stable.IPS test enables the sto differentiate for the horizontal section

units, in other words heterogeneous panel structure.Test hypotheses:

H0: for all the horizontal section units,so the serie is not stable.

H1: for at least one horizontal section unit,so the serie is stable.


and it is decided that the serie is stable. IPS panel unit root test results are on Table 4.

Table4:IPS Panel Unit Root Test Results

Variant Level

Value

Possibility

Value

First

Difference

Possibility

Value

Y -0,74 0,77 -2,64 0,00

OPEN 3,66 0,99 -3,79 0.00

Note:In Panel unit root test Schwarz criterionis used and delay length is regarded as 1..

When we study on the results on Table 4, it is observed that only Y and OPENseries are not

stable in level value and series became stable in the first difference. In other words,in the

studied period it is found out that macroeconomic variables are not stable and the shock

effects on these variables do not disappear after a while.So we can say that the last economic

crisis was destabilized the countries’ economies considerably.

4.4. Breush- Pagan Lagrange Multiplier (LM) Test

In this stage of the analysis, LM test was performed in order to determine the type of time

effect and individual effects( random or stable). Because the selected countries are not in a

certain economic group, it was anticipated that individual effects would be random and also

the time effects would be random for the countries because there is an economic crisis

affecting most of the countries in the studied period. Whether the effects are really random or

not can be determined by LM test (Baltagi. 2001:15).

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LM test is classified as LM1 and LM2 . LM=LM1+LM2. LM1; tests the randomness of

individual effects and F2 tests the randomness of time effects.

In LM1 test; H0: (No individual effects ) hypothesis is tested throughLM1 statistics.

LM1 statistics is calculated by the formula below.

(4)

Here ; indicates the individual effects in the equation (4), N;indicates the horizontal section

(country) number, T; indicates the time dimension, ; indicates the prediction for the error


than 0.05 , H0is rejected and it is decided that individual effects are random.

In F2 test; H0: (No time effect) hypothesis is tested by LM2 statistics. LM2 statistics

is calculated by the formula below.

(5)

Here ; indicates the individual effects in the equation (4), N; indicates the horizontal section

(country) number , T; indicates the time dimension, ; indicates the predictions for the error


than 0.05 , H0is rejected and it is decided that time effects are random.

In LM=LM1+LM2 test;

H0: (No individual and time effects)

H1: or both of them (At least one or two of the effects are random).


and it is decided that both of the effects are random.In this case the prediction is made through

the two-sided random effect model.In Table 5 there are LM tests results.

Table5: LM Tests

Test Possibility

Value

Decision

LM1 0,243 Individual Effects are not Random.

LM2 0,052 Time Effects are not Random.

LM 0.032 Individual Effects and Time Effects are not Random.

When we look the results in Table 5, we can see thatindividual effects and time effects are

stable.According to this result the prediction was made by the two-sided stable effect model.

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4.5. Hausman Endogeneity Test

In this stage of the study,whether there was a relationship between the individual effects and

the explanatory variables or not was tested by Hausman method. Test hypotheses:

H0: Cov( No endogeneity problem.

H1: Cov( An endogeneity problem.

Here ; indicates the individual effets in the equation (4),but indicates the exlanatory

variables in the equation (3). When the possibility value of (Chi2=Kikare) obtained from

the analysis is smaller than 0.05 , H0is rejected and it is decided that there is an endogeneity

problem in the model.In this case stable effects model is used.(Greene, 2003).However, when

H0 is accepted,random effects model is used.This prediction is effective , non-deviated and

coherent. Hausman test is not an alternative forLM test.But it works as function to check the

decision by LM test. Hausman test was conducted and χ2=14.62 ve χ2 possibility value

=0.406 was obtained and since this value was bigger than 0.05, H0 hypothesis was accepted

and it was decided that there was no endogeneity problem in the model.In this case, it is

necessary to do the analysis with the random effects model and this result supports the LM

test results.

4.6. Two-Sided Random Effects Model Predictions

Panel data analysis is predicted by the two-sided random effect model and the result are on

theTable6.

Table6: Predicition Results

Variant Coefficient Standard

Error t-Statistics

Possibility

Value

Trade Openness 0,271 0,078 3,442 0,000

Crisis Dummy Variable 0,030 0,047 0,648 0,518

Stable Term 0,056 0,014 3,791 0.000

Weighted R2=0,39 DW=1,89 Fist= 3,66 Root MSE=0.035

In random effect models weighted statistics values are used. (Baltagi 2001: 21). When we

look to the weighted test statistics in Table 6,we can see that model is reliable as

statistically.Also whether there are flexible variants and autocorrelation problems in the

model are tested below.

4.7. Lagrange Multiplier (LM) Flexible Variant Test

The most common test in order to test whether the error terms variant of the model changes

from horizontal section to horizontal section is LM test. (Greene, 2003). Test hypotheses:

H0: Variant is stable. So there is no flexible

variant problem.

H1: At least one Variant is not stable. So there is a flexible variant

problem.

The required test statistics to test these hypotheses are calculated through the following

formula:

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(6)

When the possibility value obtained from the test results is smaller than 0.05 , H0is rejected.In

other words it is decided that there is a flexible variant problem in the model. (Greene, 2003).

Lm test was conducted and the possibility value was found 0.23..In this case H0 was rejected

and it was decided that there was no flexible variant problem in the model.

4.8. Autocorrelation Test

It is a test to study the relationship of the error terms of the model with its delayed values.The

equation to measure this relationship is AR(1) process (Wooldridge, 2002):

(7)

Test hypotheses:

H0: No autocorrelationproblem.

H1: Am autocorrelationproblem.

The required test statistics to test these hypotheses is calculated by the following formula:

(8)

HereSSRR; indicates the sum of the squares of the error terms of the limited model in the

equation (3) SSRUR; indicates the sum of the squares of error terms of the unlimited model,

g; indicatesthe limit number anddf; indicates the independence grade. When the possibility

value obtained from the test results is smaller than 0.05,H0is rejected.It is decided that there is

an autocorrelation problem in the model. (Drukker, 2003).

F test was conducted and the possibility value was found0,622. In this case H0is accepted

and it was decided that there was no autocorrelation problem in the model.

Since there is no flexible variant and autocorrelation problems in the model, the prediction

results are reliable and interpretable. As can be seen from the Table 6, financial development

level affects the economic growth positively in line with the theoretical expectations.A % 1

increase in financial development level will increase the growth with the rate of % 1.33. The

importance of the foreign direct investments especially in developing countries is often

emphasized. As a result of the analysis the effect of a % 1 increase in the foreign direct

investments on the growth will be % 0,79. Also trade openness variant used in the model was

observed as the most effective variant in growth and it was found out that a %1 increase in

openness level increased the growth with the rate of % 4,31. So this affected Turkey mostly in

terms of the decrease in export depending on the decrease in external demand as a result of

2008 global economic crisis. (Somel, 2009).

5.CONCLUSION

In this study the effect of financial development level on economic growth was searched via

panel data analysis method in the sample of 5 developing countries which have an important

place in the world economy(emerging markets, Brazil, Russia, India, China and Turkey-

BRIC-T). The foreign direct investments and trade openness which were considered to affect

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the growth as well as financial development were included in the study where the annual data

between 1989 and 2010 periods were used. At the panel unit root analysis result it was found

out that series were not stable and the effects of shocks on the series did not disappear after a

while and therefore it was determined that macroeconomic shocks affected the economy of

the countries significantly.

At the F tests result conducted to define the applicable panel data analysis method it was

found out that individual and time effects were stable, for that reason an analysis with the

two-sided stable effect model was carried out.At the endogeneity test result it was found out

that there was no endogeneity problem in the model. At the model conformation tests result it

was foud out that there was no flexible variant and autocorrelation problems in the model. In

this regard, the predicted model is reliable econometrically.

According to the analysis results, it was determined that a % 1 increase in financial

development level increased the growth at the rate of % 1,33 , a % 1 increase in foreign direct

investments increased the growth at the rate of % 0,79.Also it was found out that trade

openness in the model was the most effective variant of the growth and the evidence that a %

1 increase in openness level increased the the growth at the rate of % 4,31.The expression that

the global economic crisis in 2008 affected Turkey mostly in export dimension supports the

analysis result.

As a conclusion, in the study the effect of financial development, foreign direct investments

and openness were searched and it was found that openness, financial development and

foreign investments in turn affected the growth mostly. If the sustainable growth is considered

as one of the most significant variables of the growth for the countries, the increase in foreign

trade especially in export,the stimulations for the foreign direct investments and the increase

in financial development level are very important.

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Foreign Capital Inflow and Sustainable Economic Development:

A Case Study of Turkey

Ahmet Cetin1, Murat Mustafa Kutluturk1, Birol Cetin2

1CankiriKaratekin University, Faculty of Economic and Administrative Sciences,

18100 Cankiri, Turkey.

2Turkish International Cooperation and Development Agency,

VlahaBukovca, Podgoritsa.

E-mails: [email protected], [email protected],[email protected]

Abstract

This study analyses the effect of foreign capital inflow (especially foreign direct investment)

on the sustainable economic development of Turkey. The main objectives of the study are to

analyses the long run relationship between foreign direct investment and sustainable

economic development. Quarterly data were used from the period of 1992:Q1 to 2011:Q3.

The Engle-Granger Methodology for cointegration was applied to estimate the long run

relationship. The Augmented Dickey Fuller (ADF) unit root tests were used to check the

stationarity of each variable in the model. The ADF tests of the differences of each variable

indicate that all of the variables are integrated of the first order. Cointegration was applied to

estimate the long run relationship. A stable long run relationship was found between foreign

direct investment and the sustainable economic development. Even if error correction

http://www.dtm.gov.tr/Ekonomi/Trkekon.htm

mailto:[email protected],[email protected]

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coefficient was statistically significant, the short run regression model was statistically

insignificant. It was conducted that foreign direct investment had positive impact on the

sustainable economic development in the long run but not in the short run.

Keywords: Capital Inflow, Foreign Direct Investment, Economic Development, Engle-

Granger, Cointegration

1. INTRODUCTION

It has been considered capital as the central element of the process of economic development.

Based on this view, the capital-deficient countries heavily resorted to foreign capital as the

primary means to achieve rapid economic growth. In economic literature, it has been widely

accepted that Foreign Capital Inflow (FCI) stimulates sustainable economic development via

adoption of new (foreign) technology, which can happen via licensing agreements, beginning

competition for resources, employee training and knowledge, and export spillovers. Because

of these benefitsof foreign capital inflow, many developing and emerging countries have

attracted and experienced large capital inflows during the past decades. However, foreign

capital inflow can even adversely affect the development process. It exposes the recipient

country to external shocks. That short-term capital flows can increase the fragility of the

financial system and destabilize the economy. They not only pose a threat to the financial

system but also undermine the economic progress of the developing nations. Additionally, it

is more volatile than other categories of capital flows and its sudden reversal tends to have

destabilizing effects on the host country. The growth experience of many of these countries

has not been very satisfactory and, as a result, they accumulated a large external debt and are

now facing serious debt servicing problems.

Peterson Institute for International Economics reports that FDI possibly increase the level of

productivity so that initiate a circle that in turn increase wage level, saving, so investment, and

again productivity. According to report, FDI with higher technology transferred, new

management skill implemented, and increasing skill of local workers may bring new

dynamics to the economy beside spillover these new implementations into the local firms. In

addition competition in the local market will rise efficiency, increase output, and also

stimulate economic growth. Such developments may lead economies to increase not in the

way of quantity but also quality of products. Growing economy demands new skilled labor

should increase wages and so standards of livings like education and health23.

Similar concerns were also reported by OECD. Countries on the track of the development

consider FDI as a medium of economic development. To attract the FDI, countries liberalize

their FDI regimes, hoping macroeconomic growth and enhance welfare. If countries hope to

attract foreign investments some basic foreign investment friendly policies and some basic

features like scale economies, labor supply, infrastructures, natural resources etc. and some

level of economic development need to be available so that FDI may have effect on spillover

of technology, human capital formation, integration with world through trade, competitive

environment and so on. Such policies and its effects will help economic development like

23http://www.iie.com/publications/chapters_preview/53/1iie258x.pdf

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reduction of poverty, environment friendly technologies and socially sensitive corporate

policies24.

According to Papanek (1973) FCI consist of three parts. Fist part is foreign aid that includes

official borrowings and transfers that has no direct effect on the economy. Second part is

foreign private investment that has two components: net foreign private direct investment and

long term borrowing. Net Foreign Direct Investment (FDI) is physical capital that has effects

on economy’s reel sectors by increasing physical capacity of product or services and prepares

an environment for new economic opportunities and employment. Lastly all other inflows

refer to net short term borrowings, net private transfers etc. that has little but unsustainable

impacts on the economy. As in this paper development was being concerned, FDI as a most

effective part of FCI on development was chosen as the main indicator.

For these reasons, in case of such a scenario FDI may cause economic development which is

our concern in this study. As proxy variable of sustainable development, the ratio of external

depth to export was used. If this ratio gets higher, amount of GDP allocated for current and

future payments increases that social spending such as poverty,, health and education could

negatively be affected in the long run (Anwar, 2011).

2. LITERATURE REVIEW

Even though there is a debate over FDI and its effects on economies at different stages for

years, it is undeniable that countries suffer with shortage of saving require other nations

savings to break the chain of being the member of so called less developed nations. FDI is one

of the most important pillars of the economic growth and development for especially

developing, transition and emerging economies.

Lucas (1988) and Barro (1990)using endogenous growth model tried to investigate if any

effect of FDI on economic growth through diffusion of technology and they show importance

of technology on the economic development. The importance of liberalization at the financial

sector and stable economy for FDI was emphasized by De Gregrioand Guidotti (1995).

Similar points made by the World Bank (2002) that FDI improve productivity, growth and

trade even though effects diversifies among countries and sectors according to host countries

policies and characteristics.

Qi (2007) discuses in the paper, that FDI may have direct and indirect effect on the economy.

It may directlypromote economic growth but also it may help human capital development,

strengthening completion related sectors and technology transfer indirectly. Aitken and

Harrison (1997) reached a conclusion supports previous one that FDI increase the

productivity not only for foreign firm but also domestic firms in the same sector.

On the other hand De Backer and Sleuwagen (2003) and Carcovic and Levine

(2005)discussed the subject that after FDI it may change the structure of the economy and

may affect the trade, price, finance etc. so that it will affect resources allocation and slow the

economy.

FDI may improve economic conditions by increasing employment, productivity, export

transferring technology and skills (UNCTAD 2008). According to Borensztein (1998) FDI

through training and labor management are beneficiary not only for the economic growth but

24http://www.oecd.org/dataoecd/47/51/1959815.pdf

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also oversee firms’ interaction with other local firms that may lead to increase production

standards higher for production and improve management skills more.

In the sectorial level Sekmen (2007) investigated Turkey’s tourism sector for 1980-2005 and

didn’t find cointegration among variables but found unidirectional relationship between FDI

and GDP and bidirectional relation between exchange rate and GDP and FDI. Ilhan and

Huseyin (2007) searched for the impact of FDI on Turkey’s and Pakistan’s economic growth

for the periods of 1975 and 2004. They concluded that there is bidirectional causality exists

for the case of Turkey and unidirectional causality exist for the case of Pakistan from FDI to

GDP.

3. DATA AND METHODOLOGY

For this study quarterly data has been collected from Electronic Data Delivery System

ofCentral Bank of the Republic of Turkeyfor the periods between 1992:Q1 and 2011:Q3. All

variables namely external debt, export, and foreign direct investment (FDI) were measured in

million US dollars. As a measurement of sustainable development the ratio of external debt to

export (EDX) is used. Variables are used in the form of natural logarithm. In addition to

taking logarithm form of variables,X11 seasonal adjustment methodology has implementedto

variables.

Griffith (2001) indicates that if time series are concern in a regression, two non-stationary

variables may produce incorrect results. Time series are generally tends to show increasing or

decreasing tendency.

In order to catch the long and short run relationship between FDI and development

cointegration technique is used. This technique, that was introduced by Granger in 1981 and

developed by Engle and Granger 1987, gives us advantages to analyze the both short and long

run relation together. Basically this approach indicates that even if economic time series

exhibits non-stationary behaviors, a suitable linear combination between these variables may

remove trend component so that time series variables become stationary. In such a case these

time series variables are called as cointegrated which economically may be a good indicator

of long run or steady state equilibrium if exist. Cointegration test can be conducted via Engle

and Granger (1987) or Johansen (1988, 1991) and Johansen and Juselius (1990).

Residual based Engle Granger (EG) test is implemented in two steps. OLS is being used on

level variables for cointegration regression than residuals are acquired to test stationarity

using Augmented Dickey-Fuller (ADF) unit root tests. But before implement the test statistics

variables integrated order are needed to be identified. If both variables are integrated at the

same level, say I(d) than linear combination of these variables will also be integrated at the

same level, I(d). If not say I(d-r) where r<d than one may conclude that there is long run

relationship between these variables or there is some cointegration.To implement EG test

following regression is estimated and residuals are acquired: ttt xy 10 . Obtained

residuals are used for following models estimates: ttt xy 10 . EG test is used to test

on error term and if it is, say, I(0) than residuals series are said stationary. In such a case

Engel introduces Error Correction Mechanism (ECM). Unit root tests can be implemented on

the level and first difference variables:

ip

j

titjitijit xyyy1

.

11

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ADF, that test the unit root of concerned time series variables, consist of first difference of the

series as dependent variable and lagged and lagged difference terms, constant and a time trend

as independent variables. The test of unit root is to test coefficient of ( 1ty).

As discussed by Loayaza (2002) the cointegration relationship between foreign direct

investment and sustainable development following log-log form is used for estimation:

ttt LnFDILnEDX 10

4. EMPIRICAL RESULT AND DISCUSSION

4.1. Unit Root Test

Prior to conducting the cointegration analysis, it is essential to check the Stationarity for each

variable in the model.Unit root tests for stationarity are performed on both levels and first

differences for both variables in the model. Three different modelswith varying deterministic

components have been consideredwhile performing the tests. These are: (1) model with the

intercept; (2) the model with a constant and atrend; and (3) a model that neither includes a

constant,nor a trend in the long-run cointegration space. The results of the tests are reported in

Table 1.The results of the unit root tests shows that all the variables are non-stationary at

level. First differencing ofall variables yields acceptance of the null hypothesis ofstationarity.

Based on these test results, it is, therefore,conclude that both variables are I(1) variables.

Table 1: ADF Unit Root Test for Stationarity

Test with intercept and trend at level

None Intercept Trend&Intercept

LnEDX -0.86 -1.04 -2.51

LnFDI 1.04 -0.47 -2.38

Test with intercept and trend at first difference level

None Intercept Trend&Intercept

D(LnEDX) -10.22* -10.28* -10.21*

D(LnFDI) -10.32* -10.41* -10.39*

Note: * indicated the stationary of the variables at 1% level of significance

4.2. Cointegration and Error Correction Model

To implement Engel Granger procedure following model has been estimated and result

summarized below:

LnEDX = 3.155758 - 3.155758 Trend - 0.074408 LnFDI

(t-stat) (34.26) (-4.17) (-3.76)

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R2 = 0.735 Adj. R2 = 0.728 DW = 0,486 F-Stat = 105,469 (Prob. 0.000)

The above results indicate that in the long run equation the variables are cointegrated since the

residuals of the regression are stationary with one lag length based on SIC at the 5 percent

level of significance.

Error Correction model has been formed as follows and test statistics given below.

D(LnEDX) = -0.005804 + -0.007396 D(LnFDI) + -0.154757 ECM-1

(t-stat) (-0.757) (-0.647) (-2.405)

R2 = 0.071 Adj. R2 = 0.046 DW = 2.09 F-Stat = 2.896 (Prob. 0.0614)

FDI was found statistically insignificant in the short run. We may conclude that FDI has no

impact over economic development in the short run. On the other hand ECM is negative and

statistically significant as required. This means that there is a relationship between FDI and

economic development in the long run. 15% of deviation from the long run relation is being

correctedevery period.

5. CONCLUSION

The aim of this study is toanalyses the long run relationship between foreign direct investment

and sustainable economic development in Turkey with the application of an Engle-Granger

approach using quarterly data from the period of 1992:Q1 to 2011:Q3.The date indicated that

a stable long run relationship was found between foreign direct investment and the sustainable

development. FDI would impact positively. Even if error correction coefficient was

statistically significant, the short run regression model was statistically insignificant. It was

conducted that foreign direct investment had positive impact on the sustainable economic

development in the long run but not in the short run.

In the long run, the model indicates that a 1 percent increase in FDI would support sustainable

development by 0.074 percent. According to study, FDI has no effect in the short run and

limited effect in the long run.

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Knowledge Economy And Effect On Women’ S Employment In Turkey

Arslan İbrahim1, Dineri Eda1, Taş İsmail2

1Gaziantep University, Gaziantep, Turkey,

2Tunceli University, Tunceli, Turkey

E-mails:[email protected], [email protected],[email protected]

Abstract

In recent years, information and communication technology has changed remarkable by effect

of globalization movement that occurring in the world. This changing also affected world

economy significantly at the same time. Nowadays the new economic relations based on

information technologies, such as labor and capital have reduced the importance of production

factors and information has been the most important elements in the production factors.

Continuously variation in technology with the creative power of information causes a change

in the employment parallel. The main purpose of the study is to examine how information

and communication technologies have changed the direction of the woman’s employment.

Along with the development of information and communication technologies, computer and

communication tools take place of the labor force could be decreased the number of

employment, may also increase with the emergence of new business opportunities. Like many

other developing countries, Turkey is implementing various projects and taking some steps to

adapt and take advantages of benefits of the knowledge economy. With all other economic

variables women’s employment is also affected by the steps thrown and this response has

socially importance. This paper aims to investigate Turkey's harmonization process in the

knowledge economy and how knowledge economy impacted on female employment in

Turkey and make some assumptions for future.

Keywords: Knowledge economy, Woman’s Employment, Unemployment, Turkey’s

Economy

1.INTRODUCTION

From primitive society to present, highlighted changes in the all life was formed by the

accumulation of knowledge. The center of civilization moved from primitive society to

agriculture sector by years. Over time, the importance of the agricultural sector has decreased

and industrialization replaced of agricultural sector by the improving of technology. After the

process of industrialization in the knowledge economy has been the only representative of

civilization. According of Toffler, agricultural sector is the first stage of economic

development, after that industrialization period took place, in the last stage service economy

has emerged (Toffler, 1970).

Knowledge economy is production and services based on knowledge-intensive activities that

contribute to an accelerated pace of technical and scientific advance, as well as rapid

obsolescence. The key component of a knowledge economy is a greater reliance on

intellectual capabilities than on physical inputs or natural resources (Powell and Snellman,



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2004). Many sectors have key input for itself. In an agricultural economy land is the key

resource. In an industrial economy natural resources, such as coal and iron ore, and labor are

the main resources. A knowledge economy is one in which knowledge is the key resource. it

is not new how knowledge important for economy (Houghton and Sheehan, 2000).

Knowledge economy is revolution for the world’s gaining a new dimension to itself. In the

whole world all limits are eliminated and economic, cultural and social life became accessible

anytime, anywhere by the effect of knowledge economy with information and communication

technologies. When developed countries are using possibilities of information and

communication technologies in the most effective way, developing countries staying behind

the time for catching new technologies. Turkey begins to take a part in the global economy

re-integrated micro-and macro-economic changes in this process by the advantages of

information and communication technologies. This paper aims to investigate how women

employment affected by the knowledge economy and information and communication

technologies taking place in Turkish economy. This paper also examines if women

employment went up or went down as result of using knowledge economy in economic

activity intensively.

2.Structure of Employment in Knowledge Economy and Literature Review

The new economic relations which based on the knowledge economy is reduced the

importance of factors of production such as labor and capital, notwithstanding information has

been the most important element for production factors. People needed financial capital in

past but today they needed knowledge, patents, copyrights, information assets, brain power

and experience except financial capital (Akolaş, 2000). Technology is changing by the

creative power of information this also causes a parallel change in employment. Depending

on technological developments, new industries have emerged and nature of the personnel

employed has also changed. Information technology and communications sector has

controlled market conditions in present and as a result of this change certified importance of

information (Yeloğlu, 2004). This situation leads to change in the qualities of those who were

employed. The development information and communication technologies help to people

show their expertise and skills. If a country does not make investment to improve human

capital that country will have inequality for using information and communication

technologies in global world.

Developments in computer and communication technologies are forcing businesses to follow

the development in perspective of cost, time, quality and service issues (Şahin, 2010). When

they are following this development they are also changing qualify of their employment. The

increasing prevalence of information and communication technologies are increasing demand

for qualified people and also decreasing demand for unqualified people.

Toffler stressed "the technology is feeding itself in three stages, the first one is creativity and

the second one is practical applicability, last one is diffusion of technology to society.

(Toffler: 1970). It may take certain time for work force to conform to changes in the

employed labor force. Developments of internet and information technologies are named as

the new economy in the 1990s in America. Then labor productivity has increased in EU and

unemployment rates remained low compared previous years (Freeman, 2002).

Women workforce in the service sector was 92% and male workforce was 74% in 2008 in the

world. In addition to woman workforce more than male workforce in service sector, male

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workforce more than female workforce in science, engineering and technology sectors

(www.wrc.org.uk. Accessed 04/26/2012). Employment rate of female labor in the agricultural

sector went down to 42.2% from 50% in Turkey between the years 2004 and 2011. At the

same period employment rate of male labor in the agricultural sector moved to 18% from

21%. Employment rates of male in the industry sector raised up to 31% from 28% despite of

fact that female employment rate went down from 16% to 15%. When the service sector is

examined we show that female employment increased from 33% to 42%. Male employment

in service sector remained around 50% at the same period (http://www.tuik.gov.tr. accessed:

26.04.2012). Atik and Tombak (2012) examined women employment in knowledge economy

and employment structure in turkey compared to US, Japan, EU, BRIC countries. They figure

out that women employment could not take enough place in knowledge economy, women

mostly work in agriculture sector in Turkey. Atik and Altınparmak (2010) tested contribution

of knowledge economy to employment in Turkey compared with 27 EU countries. As a result

of analysis, female labor force more employed then male labor force. According to the paper

contribution of knowledge economy to employment is about 28,7 in 2008. Freeman (2002)

tested relationship between earnings per hour and computer usage in the early 2000’s. he

found positive relationship between variables. Yeloğlu (2004) compared Turkey with EU

countries about variables of knowledge economy and changing in years between 1995 and

1999. He figured out Turkey similar to North European counties about knowledge economy.

Arslan (2010) investigated the relationship between woman employment and knowledge

economy. They used panel data analyses to test relationship between the years 2000 and 2009.

According to results, significant relationship has been identified between the variables. In

addition it has been found long term causality from knowledge economy to woman

employment.

3.Employment Structure of Women Labor Force

In the late of 1970’s economy began to liberalization by the effect of development in the

computer and liberal views. at the beginning of the 1990s new media, digital networks and

information and communication technologies replaced of electronic age. This innovation

brought by the knowledge economy leads people to do all transactions through a virtual

environment. The internet users and ratio between total population and internet users in

Turkey are given in following table comparison with other countries.

Table 2. 1. Internet Users and Population Statistics for 2011

Countries Estimated Population

in 2011

Internet Users Ratio of Total

Population

USA 313,232,044 245,203,319 78.20%

Japan 126,475,664 99,182,00 78.40%

Germany 81,474,834 65,125,000 79.90%

France 65,102,709 45,262,000 69,50%

Italy 61,016,814 30,026,824 49.20%

http://www.tuik.gov.tr./

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Spain 46,754,824 29,093,984 62.20%

Turkey 78,785,548 35,000,000 44.00%

Source: http://www.internetworldstats.com/top20.htm

Some countries where highest numbers of internet users are given in the table above. Turkey

ranked 10 from 20 countries in 2011 also Turkey ranked 11 from 20 in 2010. The woman

internet users in Turkey are shown in the table following over years.

Table 2. 2. Internet and Computer Using Rates for women in Turkey between 2004 and 2011

Years 2004 2005 2007 2008 2009 2010 2011

Numbers of Internet Users 6,1 5,6 20,7 26,6 28.0 31,7 35,3

Numbers of Computer Users 8,2 8,0 23,7 28,5 30,0 33,2 36,9

Source: http://www.tuik.gov.tr

After 2005 woman internet users are increased rapidly. It is reached 35,3% in 2011. In the

same way numbers of woman computer users are increased rapidly. It is reached 36,9% when

it was jus 8,2% in 2004.

Table 2. 3. The Relationship between Education Level and Computer Usage For Woman in Turkey

Years Not

Graduated

Elementary Secondary

School

High

School

Faculty

2004 0,3 0,4 6,0 26,2

2005 0,4 1,2 16,9 64,9

2007 0,3 5,3 30,1 82,4

2008 1,2 7,1 38,3 85,5

2009 1,3 9,3 47,1 86,7

2010 1,6 10,6 48,5 68,2 89,9

Table 2.3. showed that women who do not graduated from any school used computer almost

zero percent but this rank reached just 1.6 percent in 2010. Women who graduated elementary

school use computer more then not graduated ones but increased from 0.4% to 10.6% in six

years. For the secondary school level almost half of women used computer in 2010. For high

school level we could not find more data but table showed that 68,2% of women used internet

graduated from high school. This rank is reached high level for the woman who graduated

faculty. It was almost 90 % in 2010. That is quite sure number of woman who use computer

increased after 2004 rapidly.

Table 2. 4. The Relationship between Education Level and Internet Usage For Woman in Turkey

Years Not

Graduated

Elementary Secondary

School

High

School

Faculty

2004 0,2 0,2 3,6 8,3 22,6

2005 0,2 0,3 9,8 27,1 57,9

http://www.internetworldstats.com/top20.htm

http://www.tuik.gov.tr/

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2007 0,2 3,9 23,3 49,1 80,7

2008 0,8 5,9 35,6 57,0 85,1

2009 1,1 7,7 43,5 62,4 85,8

2010 1,1 9,6 46,2 66,4 88,8

Table 2.4. showed that Turkey has same characteristic for Computer and internet usage for

woman. Both of table almost have same ranks. Woman who graduated from faculty using

internet more than 80% after 2005.

The use and access of women to information and communication technologies is lower than

in men. Reasons for this problem;

Low level of literacy rate and educational level

Women have less time because of her role in society

Woman have less financial resources in society

Geographical location: women are living in rural areas more than men in developing

countries.

Traditionally, the sectors separated such as agriculture, industry and services.

Table 2. 5. Female Employment Rates in Agriculture-Industry-Service Sector

Years Agriculture Industry

Service

2004 50.8 16,1 33.1

2005 46.3 16,6 37.0

2006 43.6 16,4 40.0

2007 42.7 16,1 41.2

2008 42.1 15,7 42.2

2009 41.6 15,3 43.1

2010 42.4 15,9 41.7

2011 42.2 15,2 42.6

Woman labor force in agriculture was 50.8% in 2004. Then woman labor force decreased by

8 percent over years and it was 42,2% in 2011. Woman labor force in industry did not change

much. It was on the line between 15-16%. Woman who worked in service sector increased by

9 percent at the same period and reached to 42,6 in 2011. This table also showed 8 percent

loss in agriculture moved to service sector for women employment.

3.1.Result

In recent years, the technological developments have led to a new social and political

dynamics. Activities of the economic units are faster and cost effectively with effect of

information and communication technologies. Information is a today's most important

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production factor. Source of value creation in the knowledge economy are education,

information technology and science.

Knowledge economy moved location of business areas to virtual environment based on

technology. As a result of this, the way of employment has also changed using. Using

information became more important than using physical strength to employee. In this case

government must generate some policies for individuals to adjust them to conditions that

knowledge economy brought. Women's employment is an issue that needs to be emphasized

even more important. Women, non-governmental organizations to adapt to these

improvements in technology, the state has to undertake the activities. It is important problem

for developing and underdeveloped countries that women were left out of the labor force.

Woman in society mostly has not and has no money for developing her personal skill. this

issue important especially for their competitive strength against male workforce in knowledge

economy. Woman work force mostly employee in agriculture sector and woman work force

increased in the last decade in turkey but still so far from developed countries. Government

should make policies to increase using of information technologies. Otherwise it could be so

hard for the woman change their work sector and employee in knowledge sector. Government

also leaves some budget for developing personnel skills. At the same time woman adopt

herself to technology age to employee in knowledge sector. Developing countries should

follow new technology age’s requirement and adopt it to economy for catching developed

countries.

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Akolaş, A.(2000).Bilişim Sistemleri ve Bilişim Teknolojisinin Küreselleşme Olgusu ve

Girişimcilik Üzerine Yansımaları.

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26.04.2012.

Arslan, İ., Özkan, G. S., Bayraktutan, Y.(2011). Woman Employment İn Information

Economics (An Analysis For OECD Members). International Journal of Business and Social

Sciences. Vol.2, No:11.

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Yapısı. Bilgi Ekonomisi Ve Yönetim Dergisi. Cilt VII. Sayı. I.

Atik H., Altınparmak, A.(2010). Avrupa Birliği ve Türkiye’de Bilgi Sektörünün İstihdama

Katkısı. 8. Uluslar arası Bilgi, Ekonomi ve Yönetim Kongresi Bildiriler Kitapçığı, 28-31

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Freeman, B. R.(2002), The Labour Market in The İnformation Economy, Working paper ,

Cambridge.

Huyer,S., Sikoska,T.(2003). Overcoming The Gender Digital Divide: Understanding ICT’s

and Their Potential For The Empowerment Of The Women” INSTRAW Research Papers.

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İşletmelerin Strateji ve Maliyetleri Üzerine Etkileri.

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Economic Costs And Benefits Of The Eu Enlargement: The Impact On The Eu And

Seec’s

Kurtagić Haris, Nuroglu Elif

International University of Sarajevo, Sarajevo, B&H


Abstract

The South-eastern enlargement of the European Union will be the sixth enlargement since

establishing the European Community in 1957. The research uses the Gravity model, and

measures the factors that have an influence on trade. The Gravity model involves coefficients

http://iibf.ogu.edu.tr/kongre/bildiriler/04-02.pdf

http://www.iudergi.com/tr/index.php/sosyalsiyaset/article/view/98

http://www.tuik.gov.tr/VeriBilgi.do?tb_id=25&ust_id=8

http://www.wrc.org.uk/includes/documents/cm_docs/2011/s/1_statistics_about_women_in_the_uk_2009_25_5_10_latest_nn_sr1.doc

http://www.wrc.org.uk/includes/documents/cm_docs/2011/s/1_statistics_about_women_in_the_uk_2009_25_5_10_latest_nn_sr1.doc

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that explain the pattern of trade with GDP, geographical distance, population, and several

dummy variables. Trade that is explained by Gravity model includes two regions, EU-15

(inclusive Bulgaria and Romania) and SEEC’s. The reason why Bulgaria and Romania are

included, even if they are part of the SEEC’s, is to acquire as accurate pattern of trade as

possible. Comparing the data from 2010, the gravity model describes trade flows between 23

countries. Thus, the purpose of this study is to analyze trade flows between two regions.

Taking into consideration the costs of enlargement, this research examines the effects of the

trade, its significance on the development of SEEC’s after enlargement, well-being of

countries that are not part of the EU, as well as it offers a solution for the South-east European

countries. Therefore, the solution that this research proposes is a model based on creation of

the Balkan Union.

Keywords: EU-Enlargement, Gravity model, South-eastern Europe, European union, Trade

flows.

1.INTRODUCTION

The South-eastern enlargement of the European Union (EU) – the sixth since 1973 – is a huge

test for the EU, as well as for the applicant countries. The European Union consists of 27

members. Besides incumbent members, there are candidates, as well as potential candidates.

Inclusive candidates: Croatia, Macedonia (FYR), Montenegro, Iceland, Serbia and Turkey,

the potential candidates will comprise the next enlargement of 9 countries. The potential

candidates are Albania, Bosnia and Herzegovina, and Kosovo. This enlargement will increase

the EU area by 25%, the number of population by 19%, and absolute GDP by 5%. Although,

the exact time pattern of accession is not clear yet, the European Commission plans to start

with a group of 3 states that consist of Croatia, Montenegro and Iceland. Turkey is not sure

yet, whether to access the Union or not, because the country has strong economy, and many

analytics think that joining the Union would hurt Turkish economy.

On the other hand, the applicant countries of South-eastern Europe are relatively poor

countries with a GDP per capita below the EU average. Hence, the average GDP per capita of

nine countries is $10,490 that would be 3 times lower compared to EU-27 or 4 times lower

compared to EU-15.

Similar to the third EU enlargement, the next enlargement would be a new challenge for the

EU countries, as the integration of poor with rich countries increases heterogeneity. The

South-east European countries will enter the EU on the basis of the Treaty of Accession. Once

they access the EU, the members are part of a union and a single market. One union of 27

countries with over 501 million consumers, which have access to a single market, is of huge

importance for customers. Construction of a single market of the European Union has brought

the new impact, and improved the emergence of a common EU policy such as competition

policy. The EU constantly works on improvement of common policies, especially, on a

common market. Those policies have gained great importance that increases over time. The

policies are important, since they strengthen mutual trade, improve the quality of products and

services, then they expand a single market, and the most important thing is that they reduce

trade barriers and increase positive effects of the common market. As a result, the EU policies

preserve the good functioning of market, and the European Commission prevents or corrects

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the non-competitive behaviour of companies. When it comes to South-east European

countries (SEEC’s), the fact is that its consumers enjoy a freedom of choice that is diversified

by almost the same prices, lower quality and a fewer innovations comparing to the EU

standards. The competition is present between SEEC’s, but they are not competitive to the EU

single market. Those companies cannot achieve scale of economies or competitive advantages

as the EU countries do. Thus, this research shows economic costs and benefits that the EU

enlargement brings to SEEC’s. It presents gains from trade for both, the European Union and

South-east European Countries. This paper looks at the economic costs and benefits of the

enlargement of the EU, as well as the impact that the enlargement would bring to the South-

east European countries.

2.MAASTRICHT TREATY, EUROPEAN UNION, SINGLE MARKET, AND SINGLE

CURRENCY – EURO

In order to improve trade, six countries (Belgium, France, Germany, Italy, Luxembourg and

the Netherlands) have adopted first four regulations for a common market in agriculture,

finance and regulation of governing competition. On 1 January 1973, Denmark, Ireland and

the United Kingdom joined the EU. Greece became the 10th member of the EU in 1981 and

Spain and Portugal join Union five years later. The situation was stable until the Berlin Wall

fell in 1989, so the European Economic Community (EEC) member states were negotiating

over a new treaty at Maastricht in December 1991. However, it included intergovernmental

cooperation in foreign policy and internal security that resulted in the Maastricht Treaty,

which created European Union on 1 November 1993. The collapse of communism throughout

Central and Eastern Europe has connected Europeans. As a result of that, in 1993 the Single

Market was completed with freedom of movement of goods, services, people and money.

Three new members came in 1995, Austria, Finland and Sweden.

The euro, Europe’s single currency replaced the old currencies on 1 January 2002, when 12

EU Member States adopted it as their official currency, creating the euro zone. The euro zone

makes life easier for business, consumers and travellers. On 1 May 2004, 10 countries got

memberships in the EU: the Czech Republic, Cyprus, Hungary, Malta, Poland, Slovakia,

Estonia, Latvia, Lithuania and Slovenia, while Bulgaria and Romania on 1 January 2007.

Today, the EU has 27 member states. Enlargement to 27 was one of the most important steps

in the history of European integration. 12 new countries in the EU, not only have expanded

geographical size and population, but they have created an end for splitting the continent into

two since 1945. As the idea of the EU says, democratic freedom was settled in 12 new

member states. The creation of the single market gave European Union countries a strong

incentive to liberalize previously protected monopolistic markets. Within the Union, Member

States have removed all tariffs on trade, while having unified tariffs on imports from outside

the EU. It means that no matter which country is the importer, the tariff paid on products is

the same, and once customs procedures are completed, goods can be shipped throughout the

EU without additional duties. In accordance to rules and regulations of the European Union,

member of the Union should be guaranteed:

- Price stability,

- Stability of currency,

- Limitations of public debt, 60% of GDP,

- Economic balance with limited deficit of national budget,

- Investment stability, in sense of level of long-run interest rates, and

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- 3% of GDP.

The European Union is formed on the principles of liberty, democracy, respect for human

rights and fundamental freedoms, and the rule of law, principles that are common to the

Member States. The EU has a motto, ‘United in diversity’, and May 9 is commemorated each

year as Europe Day. By singing the Treaty of Rome in 1957, the EU members promised to

abolish barriers to trade freely across the European continent. In Tupy (2003), the benefits of

free movement of goods are seen as major benefits of consumers. Generally, the European

Union has integrated the market, and established common rules. Those rules are implemented

through technical standards of consumer protection, environmental standards, competition

policy, and fairness in the workplace (Tupy, 2003, p. 6). Thus, for the SEEC’s the common

market could be a place for integration of every aspect of the state. Once the boarders are

opened to flow of goods and capital, people would look at historic events less, and they will

go for personal interest.

3.EUROPEAN UNION TODAY

Today, European Union exists as a union that aims to increase economic and political

circumstances. The logic behind that is to deliver a peace, stability, and prosperity, to help

improve living standards, promote a single currency that will build a single market, where

people, goods, services and capital could move within the European Union. It is not a

government or state or international organization, but a novel entity which respects human

rights. Many countries, a huge single market, and single currency provide many benefits, but

for whom? As a single market, the EU is a major world trading power. The single market

aims at putting down barriers and simplifying rules to enable everyone in the EU to take

advantage of the opportunities given to them by having access to 27 countries and 501 million

people. Looking from economics perspective, small countries from Europe cannot achieve

growth and prosperity without the EU. Therefore, in order to compete on the world stage and

achieve economies of scale, the European countries need a broader base, and the European

single market provides it. The single market is one of the European Union’s greatest

achievements. Restrictions on trade and free competition between member countries have

gradually been eliminated; therefore, the whole system helps standards of living to rise.

Within the EU, all border controls on goods have been eliminated, together with customs

controls on people, but the police still conduct random checks as part of the fight against

crime and drugs. When it comes to tax barriers, then tax barriers have been reduced by

partially aligning national Value Added Tax rates, which must be agreed by the EU member

states.

There is also the EU’s competition policy that tries to ensure that within the European single

market competition is not only free but also fair. Therefore, in the EU single market there is

no cartel, or unfair monopoly.

The European Union was created to succeed in political objectives, through achieving

economic cooperation. In modern terms, people call it as an “area of freedom, security and

justice”, where every citizen has an equal justice and protection by the law.

The European Commission represents the EU in international negotiations at the World Trade

Organizations (WTO). Right now, the EU would like to put more emphasis on quality of

food, precautionary principle (“better safe than sorry”) and animal welfare.

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The EU has regional policy stating that European Funds should be used to improve

development in regions that are lagging behind, to increase standard of living in areas that are

in decline, to help young people and the long-term unemployed find work. One important and

interesting thing is that European Funds are also allocating funds to farming and to less-

favoured rural areas.

In order to fund its policies, the European Union has an annual budget that in 2010 amounted

to more than € 140 billion. The budget is financed from the EU’s own resources that cannot

exceed 1.23 % of the total gross national income of all the member states (Fontaine, 2010, p.

35). The resources are mainly collected from:

- Customs duties on products imported into the EU,

- A percentage of the value added tax (VAT) levied on goods and services throughout

the EU, and

- Contributions from the member states, reflecting the wealth of each country.

The European Union has more influence on the world stage when it speaks with a single voice

in international affairs such as trade negotiations.

4.European Enlargement

On January 1, 2007, the EU recorded the fifth enlargement. Bulgaria and Romania became

new members of the EU. Before that, on May 1, 2004 the EU enlarged from 15 to 25 member

countries. In the period from 1990 to 1999, the EU invested more than $85 billion to support

the new Member States during the accession process (Delegation of the European Union to

the United States of America, 2011, p. 21). Every new enlargement of the European Union is

seen as a historic step toward long-term objectives of the union. Thus, any country that

respects liberty, democracy, human rights and fundamental freedoms, and the rule of law is

qualified to apply for EU membership. Applying for the EU membership is the start of a long

and rigorous process. Once a country submits an application to the Council of the EU, it

activates a sequence of EU procedures that may, or may not, result in the country being

invited to become a member. After applying for membership, the process starts with

accomplishing the Copenhagen Criteria. There are not many criteria, but, in essence, every

country has to work on it, since the criteria are detailed. Fontaine (2010) mentions these

criteria as follows:

- Institutions that provides high democracy, the rule of law, human rights and respect

for and protection of minorities.

- Strong market economy and the ability to cope with threats and pressure within the

Union.

- Ability to take on the obligations of membership, accomplishing the aims of the Union

(Fontaine, 2010, p. 16).

Once the Council unanimously agrees to begin accession negotiations, discussions may be

formally opened. The negotiation has got 35 separate policy areas that are called “chapters”,

and each candidate country proceeds separately from one stage of the process to next. Each

stage must satisfy all conditions, and then the candidate country could move on. Thank to this

process, the prospect of accession acts as a powerful incentive for reform, providing

simultaneously benefits to the EU and to its acceding members.

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A candidate country is one whose EU membership application has been accepted by all

relevant EU institutions, allowing it to begin accession negotiations. Once negotiations are

concluded to the desired level for both sides, a comprehensive Draft Accession Treaty is

submitted for approval by the Council of the EU, the European Commission, and the

European Parliament. After the treaty is approved, it is signed by the candidate country and

the representatives of all EU Member States. Afterward, all Member States and the candidate

get the treaty for ratification. Once the ratification process is done, the treaty enters into force

on its scheduled date, and the candidate country becomes an EU Member State.

5.Enlargement of the South-eastern Europe

The next enlargement in the EU is related to Western Balkan region. The structure and

procedures to be applied on the Western Balkan region are the same as it was for the former

candidates. A first significant step in this process is the establishment of European partnership

with Albania, Bosnia and Herzegovina, Kosovo, Montenegro, and Serbia. It would be a very

important factor that assists the Western Balkan states in preparing for membership within

rational framework and in developing action plans with timetables of reforms.

“The main instrument that created by the European Union for Balkan integration is the

Stabilization and Association Process (SAP), launched in 2000, that was established as a long

process in order to establish development of the Western Balkans both in terms of political

effort and financial and human resources” (Montanari, 2005, p. 59). The aim of the SAP is to

create conditions that alike to the EU. Thus, the candidates work on preparation for future EU

standards.

When it comes to SEEC’s enlargement, conflicts can arise between European Union

members as a result from its redistribution effects. EU members observe SEEC’s as a

geographical area for expanding single market that can import more goods and services from

the current EU members. Once the union is enlarged, there is a new distribution of income

that can create lower income for some of the EU 27. That is not the only threat for EU 27,

high unemployment is another one. Taking this fact into consideration, when more

immigration happens, the neighbouring countries of the SEEC’s might be affected more. First

targets are Slovenia and Hungary as very close countries to candidate of the EU. Previous five

enlargements are observed if they were Pareto efficient for all member states and the

candidate states, and evidence suggests that enlargements were not Pareto efficient in every

enlargement round (Schneider T. P., 2007, p. 570). Thus, as Schneider (2007) states, the next

enlargement is going to be very complicated from aspects of EU redistribution and from the

free movement of labour. Thus, “the EU Eastern enlargement will adversely affect labour-

intensive and low-tech sectors in the EU member countries but will stimulate growth of skill-

intensive service industries and some capital-intensive and high-tech industries in Western

Europe” (Schneider T. P., 2007, p. 572).

Table 1

Basic Socioeconomic Indicators for South-eastern Europe (2010)

Population Per capita GDP Unemployment 2009

(millions) (current US$) (percent of labour force)

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Albania

Bosnia and Herzegovina

Bulgaria

Croatia

Kosovo

Macedonia

Montenegro

Romania

Serbia

3.20

3.76

7.54

4.42

1.82

2.06

0.63

21.44

7.29

3,678

4,409

6,325

13,754

3,059

4,460

6,510

7,538

5,269

-

-

6.8

9.1

45.4

32.2

19.1

6.9

16.6

Sources: World Bank, World Development Indicator.

Monstat, Department of statistics of labour market, life conditions, social services

and household consumption.

As a result, the candidate countries would have an incentive to export workers, rather than to

attract them. Table 1 shows the unemployment rate, population and GDP per capita for

SEEC’s from 2010. From the table it is obvious that for relatively slow countries the

unemployment rate is high. Kosovo has unemployment of 45.4%, but the real unemployment

rate is around 25%, since the country has a problem with a gray economics. The other

countries have acceptable rates, but still high that is a threat for labour migration and labour

inflows in the EU. Two biggest countries of the SEEC’s became the EU members, and

remaining 7 will bring 23 million new customers to the single market. If we take into account

GDP’s of SEEC’s than it is obvious that states have relatively low ones, comparing to the EU-

15 (4 time lower), and EU-27 (3 time lower). Some of the candidate countries are

economically weak, with high unemployment rate and low wages, and they will be ready to

adapt to the system of free movement of labour. However, the Union could apply the potential

limitations on the free movement of workers of new member. There was a case when the

United Kingdom joined the Union in 1973. The state had to accept the limitations on the free

movement of its workers within Belgium, France, Germany, and Luxembourg (Schneider T.

P., 2007, p. 574). This clause could be used when accepting SEEC’s to the Union, where

Austria, Slovenia, and Hungary might ask for limitations of free movements of these three

countries’ workers in order to sign accession treaty.

Within the EU, the gains from the enlargement could be redistributed from the either

relative winners of enlargement (members of the Union or the candidates) to the relative

losers of enlargement that can also be state from these two groups.

When it comes to trade flows in 2010, than from Table 2 we see that Croatia is a main

exporter to the EU-15 (BG+RO). The total import for the EU-15 (BG+RO) is 32.42% of total

of the SEEC’s. On the other hand, Croatia is the leader in imports, as well. The total export

from the EU (BG+RO) to Croatia is 39.32 of total of the SEEC’s exports. From that fact, it is

not surprising that the country is the first to access the union. After enlargement the imports

will be higher for each country, the members of the EU will export to SEEC’s and try to

import less. Croatia and Serbia to some extent manage their resources properly, but the rest

have to increase an export that is almost 40% of overall exports to SEEC’s.

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Table 2

EU-15 + BG and RO trade with South-eastern Europe by Country (2010)

EU-15+BG and RO Imports EU-15+BG and RO Exports

Million US$

Percentage of

Imports from

SEEC’s

Million US$

Percentage of

Exports to

SEEC’s

Croatia

Serbia

Macedonia

Bosnia and

Herzegovina

Albania

Montenegro

4,149

3,867

1,738

1,732

1,157

152

32.42

30.22

13.59

13.53

9.04

1.19

9,069

6,414

2,081

2,557

2,442

500

39.32

27.81

9.03

11.09

10.59

2.17

6.Strategy

The strategy of the EU for creating sustainable growth and jobs encourages innovation within

businesses and investment in people that can design a knowledge-based society. Not only that,

but the idea is to attract more people into employment, and keep them in work longer as life

expectancy rises. Besides, the adaptability of workers and enterprises, provide better

education and skills, globalization and mobility would increase the well-being of the society.

By 2020, the EU aims to have accomplished the following targets:

- 75 % of the population aged 20-64 should be employed,

- 3 % of the EU’s GDP should be invested in R&D,

- The “20/20/20” targets in terms of reduction of greenhouse gas emissions, renewable

energy production, and energy efficiency should be met.

- The share of school dropouts should be under 10 % and at least 40 % of the population

between the ages of 30 and 34 should have a degree of diploma.

- 20 million fewer people should be living below the poverty line (Delegation of the

European Union to the United States of America, 2011, p. 38).

In order to accomplish the objectives, the EU adopted a proposal to re-focus R&D and

innovation policy on major challenges; enhance the quality and attractiveness of Europe’s

higher education system; deliver sustainable economic and social benefits from a Digital

Single Market; enable the EU’s industrial base to become more competitive, promote

entrepreneurship, and develop new skills for workers; and ensure economic, social and

territorial cohesion by helping the poor and socially excluded.

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7.COSTS AND BENEFITS OF THE SOUTH-EASTERN ENLARGEMENT

7.1.The Overall Economic Impact of the Enlargement

Taking into account the economic costs of enlargement, as well as the distribution of gain

among incumbent Member States, we should consider the broader benefits and costs for the

Union’s economy that would take place after the enlargement.

The countries of the last EU enlargement were highly welcomed in the EU alliance because

they belong to those of the developed countries in the EU, and, hence, did not only cost

nothing, but contributed to the EU budget with significant amount. In a case of the South-

eastern enlargement, the EU incumbents are firstly concerned about the costs, rather than the

possible benefits.

Typically, this enlargement would enable consumers and companies to arrange their

businesses more efficiently, so that there would be higher output and income. Taking into

consideration the costs of enlargement the question is how the distribution of gains is shared

among the EU members. Those countries that have strong trade relations with the SEEC’s

will benefit.

The European enlargement process is by no means a win-win project, but relatively

unpredictable condition that creates both winners and losers. Due to the huge wage-gap

between East and West sides of Europe, there might be a migration wave from East to the

West, as a result of full involvement of East side of Europe in the single market.

On the other side, there are almost certain gains for some new members. Thus, the

incumbent members prolong the acceptance of those candidates. One obvious case is Turkey.

The country has applied for the European Union, and almost 17 years later in 2004, the EU

finally decided to open accession negotiations. This news was a real shock for almost each

member of the Union. That was in the period when Turkey was becoming stronger in its

economy. The country was showing signals of real and healthy economy. Thus, many EU

states appeared unwilling to accept Turkey to the European club. Immediately, some of them

emphasized that the applicant would have to accept few exceptions from the common

policies. Germany asked for permanent restrictions on the free movement of labour while

France and other members of the EU called for refusing an allocation of agriculture subsidies

to Turkish farmers (Schneider C. J., 2007, p. 85). Thus, from the case of Turkey, it is obvious

that EU members are only looking for distribution of gains. Current members will question

enlargement if a new state is to decrease the gains.

In this context, economic integration with the European Union is a challenging issue.

Official unemployment rates are very high, while “unofficial” estimates of unemployment

that include the large gray economy could be lower for 20%. Thus, it is obvious that SEEC’s

will benefit from the enlargement. They can export workers to neighbouring countries, even

they can increase net trade, but the costs will be imposed on the current members of the EU.

Table 3

EU-15 Countries’ Imports + BG and RO from South-eastern Europe (2010)

Percentage of the EU total

Country Million US$ imports from the SEEC’s

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Italy

Germany

Austria

Greece

Romania

Spain

France

Netherlands

United Kingdom

Bulgaria

Belgium

Sweden

Denmark

Portugal

Finland

Ireland

Luxembourg

Total

4,426

3,047

1,680

744

488

411

396

378

344

338

267

106

60

41

27

23

11

12,787

34.61

23.83

13.14

5.82

3.82

3.21

3.10

2.96

2.69

2.64

2.09

0.83

0.47

0.32

0.21

0.18

0.09

Source: IMF, Direction of Trade Statistics.

When it comes to patterns of trade in the past few years, the EU trade with the South-eastern

Europe has been in surplus; expressed in U.S. dollars. The largest trading partner of the

SEEC’s is Italy, which absorbs 43 percent of EU imports from the region and accounts for 33

percent of the exports (Montanari, 2005, p. 7). This suggests that geographical distance plays

a considerable role in determining trade patterns. Table 3 shows that in 2010 Italy accounts

for 34.61% of total imports from SEEC’s to EU-15 (BG+RO). That is the main reason why

SEEC’s trade mostly with their neighbouring partners. Behind Italy are Germany, Austria,

Greece and Romania. It shows that distance between capitals plays considerable role in

international trade. Countries that are away from the SEEC’s take account of around 10% of

total imports.

7.2.The Costs of Enlargement

When it comes to costs of the enlargement, then the most significant ones are: the costs for

public finances, the costs of labour market disruption, and the costs of wage competition

(Grabbe, 2001, p. 33). On the other hand, we have to take into account costs of the expansion

of membership as well. It means that the EU bureaucratic machinery is likely to grow to be

unmanageable. There is the added cost of preparing translations of all EU documents in

language of member state. However, the cost of preparing is in second place, behind the

reaching decisions.

Reaching decisions on a unanimous or qualified-majority basis is likely to become more

difficult (Richard E. Baldwin, 1997, p. 172). South-eastern countries have problems in

reaching decisions in their parliaments, and accession to the EU would make things worse,

since the new members would, very often, go for personal feelings, rather than for well-being

of the society. Voting prolong, and not reaching decision on time, would increase the costs of

bringing people to the parliament, and most important is the time spent while new regulations

could have already taken place.

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Nowadays, the situation of Croatia and its accession to the European Union is related

to neighbouring countries. Many analysts of macroeconomic issues warn saying that if

Croatia enters the EU; many mechanisms will change, especially for Bosnia and Herzegovina

and its exports and imports, because the EU asks for high criteria of product quality. As a

country with cheaper labour, Bosnia is going to be a place where Croatia produces licensed

products that are expensive to be produced in the EU. There are Croatian media, who speak

about negative consequences of accession to the EU. If Croatia joins the Union, it would

become small, political and economical unessential province inside the European giant

countries (R.I., 2012). The European Union is not a single country, but Union of different

people and countries (big and small), where member states represent their own interests on

European level better and more efficiently, then in a case they would, in today’s globalized

world, without the Union.

Table 4

EU-15 Countries’ Exports + BG and RO to South-eastern Europe (2010)

Percentage of EU total

Country Million US$ exports from the SEEC’s

Italy

Germany

Austria

Bulgaria

Greece

Netherlands

Romania

France

United Kingdom

Belgium

Spain

Denmark

Sweden

Ireland

Finland

Portugal

Luxembourg

Total

6,116

5,428

2,775

1389

1,344

1,332

1,120

904

785

568

548

254

191

149

109

32

15

23,059

26.52

23.54

12.03

6.02

5.83

5.78

4.86

3.92

3.40

2.46

2.38

1.10

0.83

0.65

0.47

0.14

0.07

Source: IMF, Direction of Trade Statistics.

Table 4 shows almost the same results as Table 3. Italy, with 26% is a leader in

exports from SEEC’s, where Germany, Austria, Bulgaria and Greece come after. One half of

the countries from the table have a total of 15% of overall exports that explains again

importance of distance between capitals.

7.3. The Economic Benefits of Enlargement

After enlargement, benefits will accumulate, not only to the member states of the Union, but

also to us, individual citizens. One of the principles on which the EU is based is that it will

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improve the welfare of its member states and their citizens. This process does not have appeal

to the government of the member state which have initiated the accession process; it is also

expected to have an influence on the citizens and their readiness to assist integration process.

The main economic benefits after enlargement are the classical ones generated by integration

processes. Thus, those benefits can be generated from expansion of the Single Market,

strengthening of the Union’s position in global markets and catching up with EU living

standards. When SEEC’s join the Union they will be passing from a free trade area for

manufactured products to a single market. The major benefit is free movement of workers,

which is a highly sensitive issue.

Enlargement will be good for the European economy. Enlargement will add over million

consumers to the single market that will create many new jobs in both the applicant countries

and the incumbent member states. Looking from perspective of European companies, they are

looking forward to seeing more states on the EU single market that would possibly reduce the

risk of doing business in the other half of the continent.

In the long-run, the applicant countries will need help from the EU in order to increase private

investment that will meet the EU environment and transport standards. The main economic

benefit of EU membership is a potential improvement in the investment climate of the South-

east European countries.

When the SEEC’s join the EU, participation in the single market should involve the end of

contingent protection (anti-dumping and safeguards). In1999, the total number of anti-

dumping investigations opened was 86 (Nello, 2002, p. 296). It is obvious that some countries

will be better-off and some worse-off. Bosnia can increase the sale of its domestic tobacco

company`s products if it proves that the Croatian tobacco company is dumping in Bosnia (this

case was speculated in media in 2010).

The EU imposes environmental regulations that take into account environmental quality

protection, production processes, and products (Tupy, 2003, p. 9). One of the significant

benefits will be quality in the countries of South-eastern Europe. It will affect local producers,

and decrease their profits, but more importantly, the customers will be better-off. Besides,

citizens will enjoy higher air quality, water protection, pollution controls, and all other things

that create negative externality. For instance, people from Zenica (Bosnia and Herzegovina)

could have higher air quality, when Environmental Regulation Agency introduces pollution

control to Metal company.

8.GRAVITY MODEL

8.1. Gravity Model of EU-15 (including Bulgaria and Romania) and SEEC’s

The aim of this research is to analyze trade patterns between the EU and SEEC’s. Thus, the

research devotes much time analyzing trade between the European Union and South-eastern

Europe, and it uses one of the most popular models in International Economics – Gravity

model. Therefore, it is attractive to evaluate whether there could be a potential for trade

growth between the two groups. The answer to this question can be obtained by estimating a

gravity model of trade. Such model as gravity is very often applied to research trade patterns

between countries. The model that is used in this research is very similar to one that

Montanari (2005) uses while explanating trade patterns. Gravity model describes bilateral

trade patterns in accordance with socioeconomic and geographical characteristics of the

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countries measured (Montanari, 2005, p. 60). The gravity model is used to measure bilateral

trade flows between EU-15 and SEEC’s.

The countries included in the analysis are divided into two groups. First group consists of the

EU-15, while the other includes countries from the South-eastern Europe. Even if, Bulgaria

and Romania are the members of the SEEC’s, the research uses them as the EU members, to

get more precise results. EU-15 does not include Bulgaria and Romania, but EU-27 does, so

we obtain a real potential of the SEEC’s only if we include two countries into the first group.

Greece was a part of the EU-15, and, therefore, it counts in the first group of the model.

This research uses the data as from 2010. Thus, there are separate indicators for Montenegro

and Serbia. Due to lack of data, the analysis excludes Kosovo.

The equation of the Gravity model is as follows:

(1)

: is the export flows from EU-15 countries (including Bulgaria and Romania) to SEEC’s.

We take data for exports (2010) that are measured in current US Dollars, Millions.

: represents the GDP of the exporting country expressed in current US Dollars,

Millions.

: is the GDP of the importer country expressed in current US Dollars, Millions.

: is the distance between capitals of exporter and importer in kilometres.

: is the dummy which has 1 if exporter and importer share a common border and 0

otherwise.

: is the dummy variable which is 1 if exporter and importer countries use a common

currency and 0 otherwise.

: is a dummy variable which takes 1 for a specific importer and exporter country and

is used to capture the effects of any political, historical or cultural event between two

countries.

: describes error term.

Appendix A mentions data sources used in the model and explain the functions of the gravity

model. The model says that trade increases if countries have the same border, or they use the

same currency. In a case of signing a bilateral agreement, like CEFTA, the trade barriers

decrease and countries trade more.

8.2.The Basic Gravity Model

Table 5, which consists of 4 models, explains patterns of trade between the EU countries and

SEEC’s. In the first model, GDP of exporter country seems to have a positive effect on trade

flows and its coefficient of 1.06 shows that when GDP of exporter increases by 1%, its

exports increases by 1.06%. Similar result is given for the importer, where the coefficient of

0.78 shows the increase in trade flows when GDP of importer increases by 1%. There is

negative coefficient for the distance saying that when countries are further they trade less. In

order to decrease the cost of transportation, those countries trade mostly with neighbouring

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countries, and the model says that 1% increase in distance will decrease trade by 2.39%.

Besides that, the model uses dummies such as common borders and currency. While common

borders have a positive impact on trade with coefficient of 0.53, the common currency has a

negative effect with -0.62. This negative dummy might be a result of not using Euro.

Montenegro is the only one, who is a member of the Euro zone. The value of R2, 86%, shows

that this model explains 86% of the variation in trade flows between the EU and SEEC’s.

Table 5

Gravity Model: Regression Results

Variable Model 1 Model 2 Model 3 Model 4

lngdpexp

lngdpimp

lndist

BOR

CUR

bilateral

expfix

impfix

cons

R2

RMSE

AIC

BIC

N

1.06

(0.07)

0.78

(0.11)

-2.39

(0.18)

0.53

(0.35)

-0.62

(0.30)

-11.30

(3.28)

0.86

0.81

249.31

265.00

101

1.06

(0.07)

0.78

(0.11)

-2.34

(0.20)

0.58

(0.36)

-0.64

(0.30)

0.00

(0.00)

-11.72

(3.35)

0.86

0.81

250.81

269.11

101

1.06

(0.07)

0.89

(0.09)

-2.52

(0.17)

0.00

(0.02)

-0.01

(0.05)

-13.08

(3.07)

0.85

0.84

255.99

271.68

101

1.06

(0.07)

0.76

(0.11)

-2.33

(0.20)

0.58

(0.36)

-0.74

(0.33)

-0.01

(0.02)

0.04

(0.05)

-11.54

3.36

0.86

0.81

252.13

273.05

101

8.3.Bilateral Effects Model

The equation used to estimate column 2 is:

(2)

where is a dummy variable which takes 1 for a specific importer and exporter

country and is used to capture the effects of any political, historical or cultural event between

two countries on their trade flows, and all other variables are the same as Equation 1.

Second model has the same coefficient of GDP as the first one. Thus, if there is any increase

in GDP of exporter and importer countries, the trade would also boost. In the second model,

there is a slightly lower coefficient of distance, because the bilateral variable is included. The

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coefficient of common borders says that trade increases if two countries share the same

border.

8.4.Main Effects Model (Exporter and Importer Fixed Effects)

The equation used to estimate Model 3 is:

(3)

where equals 1 whenever a country is exporting and 0 otherwise and equals 1

whenever a country is importing and 0 otherwise. These dummies might differ depending on

the countries’ tendency to export and import.

This model does not include dummies and bilateral effects variables, but it has exporter and

importer fixed effects. In general, the model does not give a better picture; R2 is lower than

the first and second models, and even, Akaike`s information criteria (AIC) are worse.

8.5.Main Effects Model with Dummies

When we enlarge Model 3 with common border and common currency variables, the model

becomes the following:

(4)

The model has a higher R2 with 86%. The distance has a negative coefficient as usual. The

model says that neighbouring countries trade more with each other than other countries.

The results show that trade increases with economic size, measured by GDP in our model

while it decreases with distance between them. This kind of model could be very useful for

analyzing international trade; it is seen in the straightforwardness of explanation of trade

patterns that can be used to test the impact of new policy measures.

8.6.Results

Measuring overall economic impact of EU-enlargement is almost impossible task given that

there are problems of global economy, uncertainties, which could change the whole process.

The main benefits of enlargement for incumbent countries are not economic, but rather they

are related to stability and security. The economic benefits to the EU-27 will not be

significant in the short-run, neither the costs. However, in the long-run the whole European

economy will gain significantly from enlargement.

Table 5 presents four different models, where each of them consists of various variables. Each

model uses GDP of exporting and importing countries. By becoming a part of the single

market, there would be increase in the outputs and the growth of imports and exports that lead

to an increase in GDP. As a result, according to the results of our models, if SEEC’s access

the union, GDP’s will become higher, trade will increase, and at the end export flows become

larger. Therefore, households would benefit from the European enlargement and from the

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removal of tariffs. Removal of tariffs would lead to reduction in import prices, and will affect

the allocation of household income.

The removal of trade barriers would have a clear impact on price setting. As a result, the

scenario would be a reduction in prices. Conversely, the increased demand should be taken

into account, together with the removal of trade tariffs, which at the end will provide a

positive output.

The European Union has to manage enlargement appropriately if it wants to gather all the

potential benefits. Flourishing management depends on developing political strategy that is

behaving in interest of enlargement as a way of gains for the public and for interest groups.

Comparing previous enlargements and next ones, there are significant differences. For

instance, Greece, Portugal and Spain became members of the EU before the single market and

monetary union programs were implemented. Thus, they became members when the EU was

a much less integrated and smaller market. Today, the EU economy is experienced and it has

a faster growth trade than it was in time of accession period of Portugal and Spain.

The main benefits of enlargement for the SEEC’s are not only economic, but they are more

oriented to provide stability and security. The major risks are concerns of large migration

flows, wage competition, and the costs to the EU’s budget.

Results show that there is a room for trade to increase, especially, in neighbouring countries.

SEEC’s would have to invest in new technology in order to be competitive for the EU single

market.

9.POLICY SUGGESTIONS

Yugoslavia was located in the South-eastern Europe, in the heart of the Balkan Peninsula. The

heart connected two continents, Europe with Asia, and was the gate to the Black Sea. The

country had resources and good geographical position to grow and become super power of

Europe. Unfortunately, the country had not been unable to run resources properly.

The economy of Yugoslavia was oriented toward agriculture, so the whole national prosperity

depended on the development of agriculture. The character of Yugoslavia is seen in the fact

that out of 24,849,425 hectares of the whole territory, 11,500,000 hectares, or 46 per cent,

account for agriculture (Roucek, 1933, p. 414). The country produced hemp, cotton, hops,

opium, tobacco, etc. All these, and many other products, were high quality. The important

thing is that no single part of Yugoslavia produced all these products. The country consisted

of 7 parts that are today independent countries (Bosnia and Herzegovina, Croatia, Kosovo,

Macedonia, Montenegro, Slovenia, and Serbia). Hence, each part of Yugoslavia was famous

for the production of a particular good. Exports went mainly to France, Germany, and

Switzerland. The interesting thing is that each province of Yugoslavia has its own special

kinds of fruits. Different fruits and variety of foods and beverages are produced in a way that

is traditional for every region of the country. Besides that, there were plenty of mineral

resources such as coal, iron, copper, etc. Yugoslavia could, by its richness of iron, take a place

as one of the leading countries in Europe. The main importers of Yugoslavian products were

Italy (28.31%), Austria (17.68%), Germany (11.66%), Hungary (7.18 per cent), Greece

(6.05%), etc. (Roucek, 1933, p. 420). The main products of exports were wood, cement,

cereals, and ores.

The economic situation of Yugoslavia gave a real situation of the country, the country`s

potential, and prosperity. Today, the former parts of Yugoslavia need a stabilization process

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that would bring them to previous conditions. It is obvious that countries need capital and

investment in infrastructure.

Taking all of these facts into consideration, a solution for the SEEC’s, among the one of the

European Union, might be the creation of the Balkan Union. The union would consist of 7

countries (Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, and

Serbia). In that case, the members of the Union would be oriented towards a kind of closed

economy. They would trade more between each other, and try to decrease imports from

countries out of the Balkan Union.

The construction of the Balkan Union would look like the European Union. There would be

institutions to regulate the union, but mainly, ones for culture, education, and trade. If each

member specializes in production of particular goods and services, and achieves comparative

advantage with economies of scale, then that product would be easy to sell, or to exchange for

something else, of course from one of the Union members.

The Union would need to have a supervisor. Currently, the only state that has incentives and

interest to regulate these countries is Turkey. If all countries agreed, Turkey would be the

supervisor and manager of the Union. Even more, as a state with high FDI in South-eastern

Europe, Turkey will be responsible for infrastructure, growth and development of the Union.

Developing countries, as “members” of the Balkan Union, must diversify their productive

structure and strengthen domestic demand. People should buy more domestic products, and

stop buying the similar foreign products, thinking foreign is better. Still, there are many

foreign products that are better, but at least beverages and foods have to be bought from

domestic producers.

Today, the countries not only depend on agriculture and manufacturing, but on tourism. Thus,

economic policy for each country should be taking advantages of potential, which they have.

There are countries such as Bosnia and Herzegovina, and Montenegro that should be oriented

towards tourism, specifically winter and summer tourism.

Recently, Minister of Turkey, Rifat Sait has called for establishing of Balkan Parliament,

where, besides Turkey, there would be Albania, Bosnia and Herzegovina, Bulgaria, Greece,

Kosovo, Macedonia, Montenegro, Romania, and Serbia (Bojadžić, 2011). With headquarters

in Izmir, the initiative of Turkey and its leading party, AK party, would welcome academics,

NGO, politicians, journalists, writers, representatives of private sector, etc. who could invest

money in development of Balkans. The idea might seem unachievable, where some countries

could reject supervision of Turkey, but it is the only country that does not look at historical

problems that occurred on the Balkans, and it wants to establish regular connections with each

state from the Balkans.

10.CONCLUSION

This study discusses economic costs and benefits of South-eastern enlargement of the

European Union. The idea of the united Europe is not a recent idea. Thus, the research starts

with brief overview of the idea of the European Union and its objectives. The purpose was to

maintain a peaceful and prosperous life throughout Europe. At the beginning of the fifties in

the last century, the EU has signed many treaties and brought new policies that would ensure

a zone for free capital movement. Besides that, the Union had five enlargements and

introduced a common currency. Creation of a single market, which today consists of 501

million of consumers, is to provide a better life for every citizen.

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Next enlargement is of the South-east European countries. After accession of the SEEC’s, the

European Union will have more than 30 members, with diverse cultures, histories and

languages. Can such a diverse union of nations create a common political “union”? The EU

was a trial to unify Europe, but it is obvious that it is difficult, since it is impossible to connect

Germany or Sweden with, let say, Mediterranean, and there is no surprise for the failure of

Greece and Italy. Can citizens of the EU establish a sense of being European while deeply

belonging to their country? In essence, they can, if incumbent members follow the example of

the first European Community. The moral legitimacy of the European Community is based on

compromise, while consolidating the peace between former enemies. It stayed within the

principle that all members, large and small, had equivalent rights and respected minorities.

Therefore, the next enlargement should bring equivalence to small countries, and more

important, stable market. EU member states account for almost 1/3 of the entire global

economy, so in that sense the common market is the preferable mean to the global market.

The research uses the Gravity model to test the trade relations between EU-15 (inclusive

Bulgaria and Romania) and SEEC’s. After adding dummy variables such as common borders

and currency to the model, the results show that there is a space for growth of trade between

them. Trade is positively affected by GDP of exporters and importers. Larger GDP means

higher production and increased ability for trade. However, distance has negative effect, and

in this model it decreases trade if country is far away from partner. On the other hand,

common borders positively affect trade, so by diminishing trade barriers, quotas, and taxes

countries could stimulate trade to grow. Since Montenegro is the only one who uses Euro, the

currency seems to affect trade negatively, and this shows that if any of SEEC’s adopts Euro it

would stimulate trade.

Current situation of the EU shows that high unemployment is present in many EU countries,

so the EU has to be focused on achieving growth and creating jobs. In order to make its

economies more dynamic and increase social cohesion, Europe must invest more in research

and innovation, education and training. Thus, President of the European Commission

presented a strategy for next 10 years, which is called the Europe 2020 strategy.

REFERENCES

Bojadžić, J. (2011, November 29). Dnevni avaz. Retrieved November 30, 2011, from

http://www.dnevniavaz.ba/vijesti/teme/67662-sta-se-krije-iza-inicijative-poslanika-rifata-

saita-iz-izmira-erdoganova-partija-predlaze-osnivanje-parlamenta-balkana.html

Borchardt, K.-D. (2010). The ABC of the European Union law. Luxembourg: Publications

Office of the European Union.

Delegation of the European Union to the United States of America. (2011). The European

Union: A Guide for Americans. . Washington: Delegation of the European Union to the

United States of America.

Fontaine, P. (2010). Europe in 12 lessons. Luxembourg: Publications Office of the European

Union.

Grabbe, H. (2001). Profiting from EU Enlargement. Centar for European Reform, 1-65.

Montanari, M. (2005). EU Trade with the Balkans: Large Room for Growth? Eastern

European Economics, 59-81.

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Nello, S. S. (2002). Preparing for Enlargement in the European Union: The Tensions between

Economic and. International Political Science Review, 291-317.

R.I. (2012, January 4). Index. Retrieved January 9, 2012, from

http://www.index.hr/vijesti/clanak/vesna-pusic-bez-cega-sve-ostajemo-kazemo-li-ne-

eu/592030.aspx

Richard E. Baldwin, J. F. (1997). The Costs and Benefits of Eastern Enlargement: The Impact

on the EU and Central Europe. Centre for Economic Policy Research, Center for Economic

Studies, 125-176.

Roucek, J. S. (1933). Resources of Yugoslavia. Economic Geography, 413-425.

Schneider, C. J. (2007). Enlargement Processes and Distributional Conflicts: The Politics of

Discriminatory. Public Choice, 85-102.

Schneider, T. P. (2007). Discriminatory European Union Membership and the Redistribution

of Enlargement Gains. The Journal of Conflict Resolution, 568-587.

Tupy, M. L. (2003). EU Enlargement: Costs, Benefits, and Strategies for Central and Eastern

European Countries. Policy Analysis, 1-20.

APPENDIX

DATA AND VARIABLES USED FOR THE ESTIMATION OF THE GRAVITY MODEL

The reporting countries that are used for the analysis are the members of the EU-15 (Austria,

Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,

Netherlands, Portugal, Spain, Sweden, and United Kingdom). Since the Belgium and

Romania are not parts of the EU-15, they are not included in the South-east European

countries, but they are attached to the first group, the EU-15. There are six partner countries:

Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, and Serbia.

The data GDP and population were taken from the World Bank’s World Development

Indicators. First two figures are measured in current US Dollars, Millions. Bilateral trade

flows, imports and exports, were taken from the IMF’s Direction of Trade Statistics, year

2010. Thus, the reference year for estimating potential trade between the EU-15 + (BG and

RO) and the South-east Europe is 2010.

Distances between capital cities of the countries were taken from

www.viamichelin.co.uk. The most used routes for transportation of goods by trucks and by

ship (in case of Italy and its partner countries) are taken for analysis.

Dummy variable BOR takes a value of 1 if country of EU-15 and its partner share a

common border, 0 otherwise.

Dummy variable CURR takes a value of 1 if country of EU-15 and its partner uses a

common currency, 0 otherwise.

http://www.viamichelin.co.uk/

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Efficiency and Impact of Economic Sanctions

Ilham Redzic

International University of Sarajevo

Faculty of Business and Administration, Bosnia and Herzegovina

E- mail: [email protected]

Abstract

The purpose of this paper is to examine economic sanctions as a foreign policy instrument and

to give judgment to their efficiency and impact. Since WWI economic sanctions have been

used as a tool for preventing conflicts and signaling instrument of foreign policy. Their

efficiency and impact have been the main topics for many discussions. Since the War in

Yugoslavia in 1991, economic sanctions gained on their importance and usage. Two classical

examples of economic sanctions will be discussed in this paper: War in Yugoslavia and

sanctions against Iran. Economic sanctions appear to be unsuccessful in most cases and their

usual victims are innocent inhabitants.

Keywords: Economic sanctions, efficiency of economic sanctions, Yugoslavia, Iran.

1.INTRODUCTION

Since the beginning of human kind, people and nations have been fighting among themselves.

Wars have become part of daily life because of reasons such as pretensions of some countries

for territory of other countries, their economic and cultural wealth etc; or even to impose their

own beliefs on others. One of the means used in achieving those goals are economic

sanctions. Although, Economic Sanctions are ideated to be means for preventing conflicts,

they often do not serve the purpose.

This paper will provide basic information about economic sanctions as well as their analysis

and effectiveness, their importance in the foreign policy of countries, and also their role in

war and pre-war preparations. The main idea of this paper is that economic sanctions are

usually not effective and they almost always harm civilians.

The structure of the paper is as follows: Section 2 is the literature review. In Section 3,

economic sanctions will be discussed as a phenomenon. Answers for many questions

regarding economic sanctions and their role as foreign policy tool can be found in this part.

Section 4 provides information about economic sanctions imposed on Serbia during 1990s

and current sanctions against Iran. Finally, Section 5 concludes.

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2.Literature review

Radcliffe (2010) states that economic sanctions are penalties imposed against another country

in order to force that country to change its policies, by inflicting economic losses. Debating on

efficiency of economic sanctions, Radcliffe (2010) says that success of sanctions depends on

how many parties are involved in imposing sanctions. He states that bilateral sanctions are

more effective than those imposed unilaterally (the USA sanctions are often unilateral), but

overall success of economic sanctions is very low. As he says, sanctions usually affect

ordinary people without achieving targeted goal.

Lektzian and Souva (2007) claim that effects of economic sanctions are “conditional”

meaning that economic sanctions imposed on non-democratic society are less effective than

those imposed on democratic society. They also argue that economic sanctions that are

imposed on poor countries by powerful states are often effective, due to the fact that poor

countries are highly dependent on economic aid from strong economies.

Economic sanctions are not efficient and they are often imposed to show that sender country

(country which sends sanctions) does not agree with political situation in receiving country

(country that receives sanctions). Sometimes, country imposes unilateral sanctions when they

are helpless in exercising their influence upon others, says Wallensteen (1968). Andreas

(2005) states that economic sanctions should be used, but only those which will not have

criminalizing effects, such as smuggling of banned goods and other illegal acts. For him,

targeted sanctions such as freezing foreign assets of leaders, and diplomatic embargo are

likely to have very few criminalizing consequences, and are therefore better for achieving the

goal.

Davis and Engerman (2003) argue that increased usage of economic sanctions is good

because it is always better to make changes in the world through peaceful acts than through

military acts. This reason is very strong, but Davis and Engerman (2003) also conclude that

states with higher economic power and better political situation are able to impose more

effective sanctions than poor countries. This implies that economic sanctions always serve

only the rich countries and they are anti-poor oriented.

On the other hand, some authors argue that economic sanctions are successful. In their

research, these authors ignore sanctions whose goal is only to send signals. According to

Hufbauer, Jeffrey and Elliot (2008) those sanctions should not be evaluated because they do

not have clear definition and clear target. They are imposed only as opinion of one country

towards policy of others. Roger (1996) advocates economic sanctions more than others. She

argues that if the sanctions are to be successful, it is important that imposer is very familiar

with the roots of wars, be better predictor of those conflicts, and at the end, is able to impose

proper sanctions.

Henderson (1998) agrees with authors who think that economic sanctions harm only innocent

and ordinary inhabitants of countries. It is natural that heads of the states affected by sanctions

do not share pain with their vassals. Knowing this, we can say that economic sanctions are

really inefficient. They affect those people that are not real target of economic sanctions. But

imposer countries do not care about innocent people. They are only concerned with achieving

their goals, even though their experience tells them differently – the sanctions will not be

efficient.

Rarick (2007) agrees with most authors when it comes to ineffectiveness, and even concludes

that economic sanctions are wrong tools of foreign affairs. He states that even though many

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powerful countries know sanctions odds for achieving goals are small, they still use them

whenever they can.

One of the most cited authors regarding this topic is Robert Pape. Robe (1997) indicates that

only in 5% of all cases economic sanctions could be recognized as the reasons for political

changes. Blanchard and Ripsman (2000) claim that economic sanctions’ effects are

“unquestionably negative” compared to expectations of those who impose them. They also

say that neither economic sanctions nor the threat of imposing economic sanctions can bring

true changes in political sense of one country.

3.Economic Sanctions

3.1.What are the Economic Sanctions?

Economic sanctions are tools for international policy, tools for showing countries’ opinions

regarding some situations and instruments for international political changes. They also serve

as a tool for punishing countries that are violating human rights of their inhabitants, or they

represent some source of threat to the rest of the world. Their most important function is

probably to work on preventing all of the sources of human conflicts. Elliot, Hufbauer and

Oegg (2008) note that economic sanctions have three main functions: to punish, to prevent,

and to make changes in political sense. Economic sanctions as punishments are used very

often; sometimes as a punishment for disordering international law and order; sometimes as

punishment for country’s oppression and disrespecting of human rights. Second function, as

crucial function, is to deter conflicts between countries (ex countries of ex Yugoslavia) and

civil wars. In order to prevent high costs of war and to avoid all other costs that are sometimes

more important than human lives, economic sanctions are used as very powerful tools for

resolving disputes.

By forbidding international aid or putting embargo on imports of weapon, imposers could

affect (slow down) further progress of the conflicts. Third function is used frequently

nowadays. This function of economic sanctions is used in order to influence political changes

in some countries (Libya, Syria, etc), or to decrease security threat from other countries (Iran,

North Korea). By imposing sanctions, powerful countries (imposer) can manifest their

disagreement regarding political situation in the country that receives sanction. Usage of

economic sanctions is in constant trend of enlargement. It is obvious that economic sanctions

are becoming one of the main international policy tools. The United States of America is the

leading country in imposing economic sanctions and its portion of all sanctions imposed in

the world since WWII is very large.

Table 1: Trends in Use of Economic sanctions

Number of new cases of economic sanctions imposed until 1999.

Period

1914-1949 1950-1959 1960-1969 1970-1979 1980-1989 1990-

1999

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Type

Non-U.S. 11 6 7 9 7 18

Other &

U.S.

4 4 4 3 8 30

Unilateral

U.S.

4 3 10 26 13 14

Total 19 13 21 38 28 62

Source: Institute for International economics and center for global development, Washington,

2006

Table 1 shows the increase in usage of economic sanctions since WWI until the last year of

the 20th century. It also shows portions of Non-USA sanctions, bilateral sanctions of the USA

and other countries, and unilateral sanctions imposed by the USA. During the 1970s,

unilateral sanctions imposed by the USA increased a lot due to Cold War era. It can be

concluded that usage of all types of Economic sanctions boosted during the 1990s.

Figure 1 shows the ongoing economic sanction trends and comparison of the USA sanctions

and all other sanctions in the world. It can be concluded that increase in usage of economic

sanctions as foreign policy tool, by the USA, is much higher than usage of all other countries

in the world.

Figure 1. Trends in ongoing Economic sanctions

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Source: Institute for International economics and center for global development, Washington,

2006

3.2.Efficiency of economic sanctions

Since the emergence of economic sanctions there is a debate about their efficiency. Although

there are some people who argue that economic sanctions are efficient in reaching their goals

as foreign policy tool, majority concludes that economic sanctions are mostly inefficient. If

that is so, why are they still in use and why they stayed first option in resolving the

international disputes? All sanctions that are imposed have some goals (to send signal; to

punish, etc.) and if those goals are reached, we can say that economic sanctions are

successful. Based on empirical evidence, it can be concluded that economic sanctions are

generally inefficient.

To determine the real success of sanctions it is important to look at their real objective and

purposes. It is natural to expect inefficient sanctions, if objectives are mixed or too complex.

Sometimes, sanctions are meant to be inefficient and their only goal is to declare opinion or to

send a signal. Although some scholars see much more success in imposition of sanctions than

others, economic sanctions often end with military operation within target country. For

example, Hufbauer et al. (1985) argue that economic sanctions show success in 34% of all

examined cases, from 1914 until 1990.

Table 2: HSE Research on Economic sanctions cases

Source: Pape (1998)

According to Table 2, 41 case of all considered in HSE research was successful, while 79

were failures. Highest success was recorded when goal was to destabilize country, which is

natural because it is easy to destabilize one country using Economic sanctions as weapon.

In his response to this result, Robert Pape (1998) concludes that much of these “successful”

cases ended in war. In his examination of these cases he came to result in which only 5% of

all cases could be called successful. Pape (1998) considered 8 cases in which economic

sanctions influenced loss in the GNP of one country more than 4.6%, and he called them

“High Punishment and Sanction Outcomes”.

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Table 3: Sanctions Outcomes in HSE cases

Source: Pape (1998)

Of all these cases, only one was complete success (India’s imposition of sanctions against

Nepal) according to Pape (1998). It is really ironic that some economic sanctions hit one

country’s economy, almost destroy it, and at the end they show failure.

Even with all of these conditions fulfilled, Pape (1997) thinks that economic sanctions will

not be completely efficient, and that military action is always better solution in terms of

reaching the goals of foreign policy. Rudy and Ventheicer (2006) argue that efficiency of

economic sanctions depends on characteristics of sanction itself. If sanctions are imposed

bilaterally, they have better odds to be partially successful. Another characteristic that

influence success of economic sanctions is duration of imposed sanctions. If sanctions are

meant to last over long period of time, it is more likely that they are going to be less

successful or completely unsuccessful. Also, there is the question of cost of the imposed

sanctions. If sanctions impose high costs to target country, and if they do not impose high

costs to country sender of sanction, they will be more successful (Rudy and Ventheicer,

2006). Those authors that argue conditional effect of economic sanctions (Lektzian and

Souva, 2007) base their conditionality on the fact that democratic societies will be affected by

economic sanctions more than non-democratic societies.

Lektzian and Souva (2007) identify three categories that influence success of economic

sanctions: sanctions that express interest, punishment and institutions. Sanctions for

expressing interest are not concentrated on making changes in policy of other countries, but

rather to make inhabitants and voters pleased with the actions of their government.

Second category is sanctions that are used as tool for punishment. Those sanctions follow

simple policy of imposition of economic sanctions against countries whose policy is about to

be changed. Third category are institutional sanctions that are combination of those two

mentioned above. Elliot et al. (2008) also argue some sort of conditionality. When deciding

whether sanctions are effective, they sort them by their goals, their political and economic

impact on country affected by sanction, their characteristics in given occasion. When

governments impose sanctions that have conflicted goals, sanctions will most probably be

ineffective and unsuccessful. When it comes to sanctions whose goal is to change government

of other country, they must be all-inclusive and quickly imposed.

“A strategy of “turning the screws” (increase pressure and extend the duration) gives the

target leaders time to adjust by finding alternative suppliers or markets, by building new

alliances, and by mobilizing domestic opinion in support of its policies.” (Elliot et al. 2008)

Those three authors recommend 4 assumptions according to which economic sanctions will

be the most successful: Sender of sanctions should avoid high costs, both political and

economic (when sanctions with higher cost of imposition fail, country sender can have severe

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problems); multilateral sanctions together with modest goal (not too big bite) are more

efficient than others (when sanctions have small goal to achieve and when they are imposed

multilaterally, they have better odds for success ); imposed sanctions should be quick and

comprehensive (successful sanctions lasted about three years, while unsuccessful sanctions

lasted about eight years); target country should be weaker in political and economic sense,

than country imposer (it is natural that stronger countries are able to impose stronger

sanctions and that sanctions imposed against poor countries are more successful).

Economic sanctions were very effective during the 1940s and 1950s. But after developments

in world economy and increase in usage of unilateral sanction (especially the USA),

efficiency of those sanctions is enormously decreased. Today’s economies are very connected

and they heavily depend on international trade. Although this dependence means various

sources of supply, it also means that imposition of economic sanctions is easier than ever.

In his speech, Patterson (1994) derived few important conclusions regarding economic

sanction imposition: It is important to know the right time and place for imposition of

sanctions; harshness of sanctions should be proportionally divided and those who are not

guilty for bad policy should not be harmed by sanctions; countries that impose sanctions

should monitor their effects very closely; only legitimate authority should impose sanctions

(e.g. the UN); sanctions should be imposed according to their popularity amongst people of

targeted country (if there is a strong opposition, there is higher chance that people will follow

that opposition against leading party or leader); it is very important to protect basic human

rights guaranteed by international authorities and conventions while imposing sanctions;

sanctions need some time in order to start working. This last conclusion is in conflict with

opinions of majority authors who concluded that sanctions are more efficient if they last

shorter.

3.3 Impact of economic sanctions on innocent people

Harming innocent people is probably the most adverse impact of economic sanctions. Primary

goal of economic sanctions is to harm leaders of target country in order to change their views

and policy. Although harming is unintentional in most cases, it is also possible that countries

senders impose sanctions intentionally. Economic sanctions mostly affect ordinary people of

target countries, because imposer countries know that the easiest way to make changes is to

turn people against their leaders. Iraq in 1990s is a clear proof that sanctions can kill more

people than true military sanctions and irony lies in the fact that almost all dead people were

civilians.

According to Gordon (1999), imposition of economic sanctions can be compared to siege in

old history wars. In those wars, civil casualties are mass and same like those in countries that

receive economic sanctions. Prohibition of imports of goods was done in those wars in same

way as it is done in today’s imposition of economic sanctions, which creates the biggest

problem to those not included in political incidents. When attacking a country with economic

sanctions, imposers should avoid innocent casualties in order to make economic sanctions

successful and clean. It is very interesting how leaders of powerful countries do not

characterize economic sanctions as war crime, even though they have the same impact on

innocent people like wars and other types of crimes. Other types of problems that civilians

faced with under economic sanctions are increased cost of goods, criminalization (smuggling

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inelastic goods, etc.) and one very dangerous psychical problem which is the increase in

radicalism and extremism.

Although target sanctions (also called “smart sanctions”) have only certain group that

surrounds political head of receiver country for target, they did not show success in avoiding

undesirable casualties, such as harming innocent people. Countries that impose sanctions

often have hidden intentions and under the policy of removing the dictators they also hurt

people they do not like or people considered to be dangerous (murders of Iran’s nuclear

scientists). Gavin (1989) argues that discriminating consequences of economic sanctions have

key influence on success of those sanctions. Those sanctions could also cause lack of

medicines, even though those medicines are rarely under the sanctions.

The case of Iraqi sanctions from 1990s proves that economic sanctions exhausted people so

much that their incomes decreased to that level, where they were unable to buy medicines.

This shows how sanctions harm people, even when medicines and other essential things are

out of sanctions. There is an interesting question after all these facts: Do imposer countries

think that dictators like Saddam Hussein, Kim Jong Il, and others suffer when sanctions on

food and other goods are imposed? Of course not. This situation is even good for dictators,

because it can consolidate their position. They control those goods that exist beside sanctions

and with them they can control people. As it is mentioned, one of the serious impacts of

economic sanctions is emergence of criminalization connected to economic sanction, such as

smuggling and other types of crime acts. “The imposition of comprehensive sanctions by the

international community unintentionally encouraged much closer state-criminal ties and large-

scale smuggling” (Andreas, 2005).

4.Classical Cases of Economic Sanctions

4.1.Serbia in 1990s

Some of the most comprehensive sanctions were imposed against Yugoslavia (today Serbia)

in 1990s. Their politics caused the breakdown of Socialistic Republic of Yugoslavia. The

politics of Serbs was different than opinion of other nations within Yugoslavia, and because

of that, they wanted to separate from the country. Serbia, as “protector of Yugoslavia”, did not

allow other republics to separate, and then the first war since WWII in Europe started. When

Europe and the UN saw how severe those conflicts are, they tried to stop them, or at least to

decrease their quantity. First action was the imposition of sanctions.

Since 1990s and emergence of war conflicts in many parts of world, especially on Balkans,

world’s most powerful countries began with massive usage of economic sanctions as tool of

foreign policy. In May 1992 Serbia faced with sanctions. Although Serbian authors argue that

Milosevic, the president of Yugoslavia, accepted sanctions and they declare sanctions as

successful, sanctions did not have so strong impact on suspension of war conflicts. However,

sanctions had impact on creation of peace treaty. Sanctions, such as embargo on weapons,

directly influenced war in Bosnia, because it was directed only against Bosnian Muslims. First

round of economic sanctions was imposed after disobedience to resolution for cease of all

conflicts on May 30.

Security Council of the United Nations requested embargo on imports of all products

produced in Yugoslavia, ban on supply of all goods and commodities to Yugoslavia, except

medical supplies and food for hungry people and social cases. All technical and scientific

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exchange as well as visits and cultural exchange, was suspended. Diplomatic visits were

reduced to the lowest level.

“It also decided that all states should not make available to the authorities in FRY, or to any

commercial, industrial or publicly utility undertaking in FRY, any funds or any other financial

or economic resources. Air-traffic was also prohibited, as well as participation of persons and

groups representing FRY in sporting events” (Delevic, 1998). Original idea for imposition of

economic sanctions was to stop conflict and to save people from violation of their basic

human rights, but like in almost all of the cases of economic sanctions, the biggest burden of

those sanctions was on ordinary people of all republics in Yugoslavia. The impact of

sanctions on Serbia’s economy was strong. Data says that income per capita decreased by

50%, from $3240 to $1390. Yugoslavia’s old suppliers suspended all activities in that country

and it was hard to find new ones. It was hard and expensive to find other materials that will

replace missing one, and furthermore it led to decrease in living standards.

Three months after the imposition of economic sanctions, Yugoslavian industrial production

fell down by 40%.

Figure 2: Index of Industrial production in Yugoslavia

Source: Federal Bureau for Statistics, Yugoslavia, 1998

Figure 2 shows the decrease in Yugoslavia’s Industrial Production from 1989 until 1994. First

signs of fall were in 1989 with rocky confidence between republics in Yugoslavia and

continued with the start of war conflicts in 1991. The sharpest fall started with the imposition

of economic sanctions that stroke all aspects of Yugoslavia’s economy. Impact of sanctions

on GDP and public spending was enormous.

Table 4: Changes in Public spending and revenues

% of GDP 1990 1991 1992 1993

Public spending 49 63 65 70

Revenues 46 46 24 11

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Source: Author`s own calculations, data from “Economic sanctions as a foreign policy tool”,

2002, pp. 30

According to Table 4, public spending as a percentage of GDP increased during the period of

economic sanctions in Yugoslavia, while revenues decreased significantly. Monthly rate of

inflation in Yugoslavia in 1993 was 4667%.When it comes to unemployment in Yugoslavia

during the imposition of economic sanctions, it is important to mention that unemployment

increased enormously in the period of three years (1991-1993), from 14% to 39%. In year

1992, 1.3 million of workers in Yugoslavia were out of work, so called paid leave, and around

750 000 people were unemployed. In terms of employment, sanctions stroke women the most.

In 1998, there were 56% of unemployed women. One major fact shaped so high volume of

budget deficit in Yugoslavia during the sanction period.

Serbs that lived in Croatia and Bosnia, asked for humanitarian help from their mother land

Serbia, and every year big amount of government spending went to those people in other

countries. According to Jovanovic and Sukovic (2002) percentage of Serbian citizens that

lived with less than 2$ per day increased to 39% in 1992, comparing to 14% in 1990. “The

percent of income used to purchase food varied between 30 and 40% during 1980-91. In

1993, it rose to a 50%, signaling nutrition emergency. For low income people the rate was

even higher - around 60%. In 1991, the average salary bought one food basket for a family of

four. In 1993, it bought only 1/5 of the food basket” (Jovanovic, Sukovic, 2002).

When it comes to criminalizing consequence of economic sanctions, the best example is

Yugoslavia in 1990s. Like in every nondemocratic society, imposition of economic sanctions

and other types of sanctions is good opportunity for emergence of criminal actions or even

development of existing criminal groups and their actions. Smuggling was the most used

criminalizing action during the period of economic sanctions, and while smuggling is illegal

act, it was considered as patriotic act during the period of economic sanctions in Yugoslavia

(Andreas, 2005). Economic sanctions had positive effects on only one kind of people in

Yugoslavia, criminals. Although one goal of economic sanctions was to eliminate Milosevic,

the president of Yugoslavia, they did opposite.

As it is argued before, economic sanctions are extremely favorable for nondemocratic leaders.

The same situation was with Milosevic. He controlled the most important goods (oil, flour,

sugar etc.) and all humanitarian help, and he blamed foreign forces for bad economic situation

in country. He persuaded his inhabitants that he is able to pull out his country from economic

and political darkness and he also supplied groups that supported him with goods that were in

shortage. The best example of legal smuggling in Yugoslavia was oil smuggling. Milosevic

smuggled oil from Russia through port in Montenegro (another republic of Yugoslavia that

was not independent at that time). The distribution of oil was in hands of Milosevic and to

him loyal people also.

Many authors say that economic sanctions imposed against Yugoslavia were effective

because they stop the war. This statement is worthy to discuss. War in Bosnia stopped after

the progress that Muslim army made in 1995. Richard Holbrook, American diplomat that

created Dayton agreement, admitted that he made mistake when he stop progression of

Muslim army in Bosnia, because today’s Bosnia is “Barrel of gunpowder”. Another reason for

ending the war in Bosnia was severity of the conflict. Europe and the USA could not allow

further extensions of this war that took more than 200 000 human casualties by 1995. This is

why, the opinion that economic sanctions ended war in Yugoslavia is funny. Only impacts

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that economic sanctions had are partial obedience of Serbia to the UN, and humanitarian crisis

they have created.

4.2.Iran in 2000s

Although Iran faced the International rage and economic sanctions after Islamic revolution in

1979, today’s situation is even worse for Iran’s reputation on international scene and

especially its economy. During 1990s international community was informed that Iran tries to

develop nuclear program for civilian usage. However, in years 2002 and 2003 information

about Iran’s hidden enrichment of fuel, leaked. Iran claimed that they do not have hidden

intentions and their only purpose of fuel enrichment is to obtain high power from nuclear

resources. The USA and Israel have major concerns because of Iran’s “nuclear program” and

they threatened Iran with war. According to the USA and Israel, Iran has plans to produce an

atomic bomb.

Iran declared its full support to Palestinians in their fight for liberty. This is why Israel is

afraid of Iran and their nuclear program. Nuclear problem forced the UN to impose many

rounds of economic sanctions against Iran. Four rounds of economic and other sanctions are

imposed against Iran by the UN since 2006. Also there is huge number of national sanctions

imposed by the USA, Japan, Canada, Israel, Australia, South Korea, Switzerland, India, EU,

etc. The UN imposed sanctions because of Iran’s refusal to cooperate with International

Atomic Energy Agency (IAEA) as well as to suspend all uranium-enrichment activities. The

UN sanctions were imposed as follows: first round in 2006, second in 2007, third in 2008 and

fourth in 2010. Those sanctions were massive and they hit all parts of Iran’s economy and its

population. The UN sanctions included: a ban on exports to Iran of all materials, goods and

technology that could be of help for further enrichment of uranium and further development

of Iran’s Nuclear Program (INP); a prohibition of any assistance to any person that could

manage or help in exports of prohibited goods (mentioned above) to Iran; a ban on exports of

all arms and war technology as well as a ban on all financial assistance that could be helpful

for Iran’s Nuclear program; asset freeze to all persons that could be involved into

development of INP; a travel ban to all persons involved into development of INP and others.

Non-UN sanctions also included prohibition of investing into Iran’s gas or oil sector,

prohibition of providing Iran’s shipping industry with materials for making ships and their

maintenance, etc. EU and the USA, and many other countries focused their sanctions on travel

bans for persons that are involved in INP as well as sanctions against major banks in Iran. The

latest sanctions imposed against Iran are EU sanctions (23 January, 2012) that targeted Iran’s

main industry oil. EU prohibited imports of crude oil from Iran and other petroleum products;

all assets of Iran’s Central bank within EU are frozen; trade in precious materials, gold and

diamonds is banned. Imposition of those sanctions could cost EU very much. According to

World Bank almost 40% of Iran’s oil is bought by EU countries, and even though Europe

thinks these sanctions will hit Iran the most, it does not have to be the case.

Three biggest buyers of Iran’s oil in EU are Italy, Spain and Greece. Those three countries are

endangered by a huge deficit and they are the weakest parts of EU. If they face oil shortage,

they could fall into even worse situation than they are in today, and that could be disastrous

for Euro zone and common currency.

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Figure 3: Europe-Iran crude oil Trade

Source: U.S.Energy information administration, 2011, www.eia.gov

Figure 3 shows how huge the dependence of some European countries on Iran is, when it

comes to the imports of crude oil. Greece, the EU country with the strongest economic

problems within the Europe at the moment is the biggest importer of crude oil from Iran.

Economic sanctions imposed by many countries of the world, made Iran’s payments harder

for execute, and therefore Iran’s imports from many countries is endangered, even imports

from those that did not impose sanctions. Lack of hard currency is also a problem for Iran.

This is why Iranians have troubles while traveling abroad. Although, International Monetary

Fund (IMF) estimated in July last year that percentage of oil in total Iran’s exports will be

around 78 %, oil and other energy exports for 2011/2012 is much smaller and its portion

within GDP is only 21 %.Hufbauer estimates that latest economic sanctions imposed against

Iran could decrease its GDP by 10% (Torchia, 2012).

Table 5: Iran’s Average Annual Real GDP Growth

Source: Economic Intelligence Unit (World Bank)

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According to Table 5, Iran’s real GDP growth had difficulties during the period of sanctions.

Before sanctions, growth was 7.1 in year 2003 and even 7.5 in 2002. But in 2005 it was 4.7. It

was estimated that growth in 2010 was 2.9, which is huge difference compared to 2002. Iran

had problems with inflation even before economic sanctions, and when they were imposed

situation became worse. According to Torchia (2012) inflation rate went to 20% in the last 18

months and analysts assume that the real rate of inflation is even higher. One of the reasons is

because sanctions made imports more expensive. As it always happens in economy, higher

inflation makes national currency less valuable.

One of the areas that were stricken very much is Foreign Direct Investment. Many foreign

investors gave up on investing in Iran because of bad political situation. Others gave up

because of the USA and the UN pressure. All these things forced foreign investors as well as

foreign suppliers out of Iran. Without FDI, Iran’s economy must go down.

Figure 4: Foreign Direct Investment in Iran during the sanctions period

Source: Iran Ministry of Economy and Finance

Figure 4 shows that since imposition of economic sanctions in 2006, Foreign Direct

Investment decreased a lot. Although before 2010 there is a small increase, after latest EU

sanctions in 2012, FDI will probably decrease a lot. When it comes to efficiency of those

economic sanctions imposed against Iran, officials disagree. John Bolton, a senior fellow at

the American Enterprise Institute, doubts their efficiency, but admits that sanctions are brutal.

Shamuel Bar, Director of Studies at the Institute of Policy and Strategy in Herzliya, says that

new stricter economic sanctions will be counterproductive and that they will even improve

Iran’s nuclear program (Press TV).

Opposite to these opinions, most of European and American politicians and scientists consider

economic sanctions efficient and until now successful. Hillary Clinton, Secretary of State,

says that sanctions “had slowed Iran’s nuclear program” and that sanctions disturbed Iran’s

economy, especially in the two sectors: Exports and banking (NY Times). The USA Congress

is preparing new set of sanctions against Iran and they targeted all companies and persons

linked to Iranian Revolutionary Guards. Barak Obama imposed sanctions against Iran’s

Central bank in order to block financing Iran’s nuclear program (Fox news).

http://en.wikipedia.org/wiki/American_Enterprise_Institute

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This announcement came few weeks after Iran threatened to close the Strait of Hormuz

through which around 20% of world’s oil passes and that Iran will suspend all oil shipment to

Europe (Financial Times). Economic sanctions against Iran had some success indeed, but it is

questionable will they reach their final goal. After all these sanctions, Iran must work harder

than ever in order to find suitable technologies (and even scientists because many of them are

murdered by Mossad and CIA) that will be helpful for development of nuclear program.

Figure 5: Iran’s crude oil exports, millions of barrels per day

China; 0,54

Turkey; 0,18

South Korea; 0,24

Japan; 0,34

Other; 0,18

Italy; 0,18

Spain; 0,14

other EU; 0,13 India; 0,33

Source: U.S. Energy Information Administration, 2011

Figure 5 shows Iran’s crude oil exports in first six months of 2011. Total exports were 2.26

millions of barrels per one day. As we can see, countries that already declared opposition to

oil embargo (India, China, South Korea, Turkey) are importing 1.29 millions of barrels per

day from Iran, which is 57% of all Iran’s exports per day. Japan only imposed sanctions on

goods that could help Iran’s nuclear program and also hesitate to impose sanctions on oil. EU

imposed oil embargo against Iran in January 2012, but its true implementation will start in

July. This gives plenty of time to Iran to find other buyers to fulfill the gap that will appear

after the EU countries stop importing the oil.

China and India (huge markets) already rejected sanctions against Iran and they have

announced that they will even increase their imports of oil from Iran. Iran will probably offer

their oil at discount prices in order to attract countries to buy excess of oil that will appear

after Europe stops buying it (Wall Street Journal). In that situation nothing new will happen.

Iran will sell all of its oil and only problem will be the loss of 20-30 billion dollars because of

discount. Almost same situation is with other goods that Iran exports.

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Figure 6: Iran’s Exports to Selected countries

Source: International Monetary Fund

According to Figure 6, Iran’s exports with selected countries increased even in the period of

sanctions imposed by UN (2006, 2007, and 2008). China, India and Turkey will continue and

even increase the import of Iran’s oil (Japan imposed sanctions only against persons involved

in nuclear program). All economic sanctions imposed against Iran could be a part of pre-war

preparations, as history already showed many times. The idea is to make Iran retarded by

imposing arm embargo and to create many collaborators that will cooperate with the USA and

Israel in the case of military action, as well as to turn people against their government. When

it comes to sanctions itself, Iran’s economy could survive despite them as long as they can

find buyers for their oil, which is the major source of Iran’s exports and significant portion of

Iran’s GDP.

5.Conclusions

Economic sanctions gained on importance nowadays. By using economic tools for achieving

political and diplomatic goals, countries around the world try to keep peace or to fulfill their

interests. Economic sanctions have been used since WWII as tools for preventing conflicts

and for changing political systems of other countries. Since 1990, countries increased usage of

these types of sanctions. The most famous sanctions were against Iraq, Yugoslavia, Iran, and

Zimbabwe. According to many relevant sources, economic sanctions are generally inefficient.

In many studies that examined more than 150 economic sanctions throughout the history,

some signs of success are noticeable in small number of cases. Complete success was found

in less than 5% of all cases studied. So, it can be concluded that economic sanctions are

unsuccessful in achieving their goals. In order to impose successful economic sanctions,

countries need sanctions that will have following characteristics: it is better when sanctions

are multilateral (countries that receive sanctions are unable to find substitution for missing

goods and commodities); sanctions must be imposed by powerful economy and they are more

efficient if imposed against poorer economy; sanctions imposed against democratic country

have higher chances to be efficient than those imposed against nondemocratic society (if

imposed against nondemocratic, they can even be counterproductive, meaning they can

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strengthen the position of the dictator); quick and comprehensive (hit all aspects of economy)

sanctions are better than slow (long lasting) and those that are not comprehensive.

In addition to this, it is important to say that sanctions are almost always successful when one

country that imposes sanctions, controls all trade of country that receives sanctions. Targeted

or smart sanctions are those which are planned carefully and which have very narrow part of

economy to attack. In order to influence political situation in one country, imposers attack

assets (freezing them) of certain persons, companies and groups that are closest and mostly

involved in that political situation (for example, to freeze abroad assets of persons involved in

political situation of one country). By doing so, imposer countries of sanctions avoid negative

side effects and unintentional harming of innocent people. When it comes to the impact of

economic sanctions, harming innocent people is negative side effect that everyone

emphasizes.

It is expected that imposition of sanctions on oil and commodities will harm innocents the

most. Real economic consequence of oil embargo is the rise of prices of all goods and

services. This increase in prices will affect living expenses of ordinary citizens of a country.

All sanctions should be planned in order to avoid harming civilians. This study reveals that

almost all sanctions harmed innocent people in every country where they were imposed. Two

examples of economic sanctions are taken to be analyzed in this study: economic sanctions

imposed against Yugoslavia during the war in 1990s, and economic sanctions imposed against

Iran. Many authors emphasize the case of Yugoslavia when they speak about successful

sanctions, but severity and number of casualties accelerated the end of the war in that country.

These sanctions had many good aspects (imposed multilaterally, against nondemocratic

country, very comprehensive) and because of that they were partially efficient in case of

forcing Yugoslavia’s president to obedience. To conclude, economic sanctions imposed

against Yugoslavia were one of the most comprehensive in human history and partially

successful.

Iran’s current nuclear sanctions are the most comprehensive ongoing sanctions. The UN

imposed four rounds of sanctions against Iran with many unilateral sanctions imposed by

other countries, led by the USA sanctions. After examination of Iran’s sanctions in this study

it can be concluded that sanctions imposed against Iran are partially efficient because they

slowed down Iran’s nuclear program, but inefficient in a way that they could not stop it

totally. It might be argued that the real purpose of sanctions against Iran is to exhaust that

country in order to attack it and to finish its nuclear program with military action. That would

not be first time in history that sanctions ended with military action. To summarize, although

sanctions proved to be unsuccessful in most cases they are still in use because every peaceful

action is better than military conflict and unnecessary casualties.

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2012)

Risk Tolerance and Investment Preferences in Bosnia and Herzegovina

Mela Hadrovic, Ugur Ergun

International Burch University, Faculty of Economics,



Abstract

Risk tolerance is considered as an important factor in making financial decisions, saving and

investment choices. This paper has examined level of investment risk tolerance and

investment preferences of B&H’s population and it had explored whether demographic and

socioeconomic factors to risk tolerance and investment preferences. Using a randomly chosen

sample of 200 individuals above the age of 20, empirical analysis has shown that above

independent variables that are significantly affecting individual’s risk tolerance are income

level, education level and gender. Regression analysis has proven that above average risk

tolerance is associated with higher income level and higher education level. Moreover,

analysis has supported the assumption that males are more risk tolerant then females.

Regarding the investment preferences, obtained results show that the out of eight independent

variables, only variable measuring whether an individual has a financial commitment is

significantly negatively related to the investment.

http://onlinelibrary.wiley.com/doi/10.1111/twec.2005.28.issue-3/issuetoc

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Keywords: Risk tolerance, Risk aversion, Investment preferences, demographic and

socioeconomic factors, regression model, level of significance.

1. INTRODUCTION

Risk tolerance is being defined as degree to which an investor is willing and able to accept the

possibility of an uncertain outcome to an economic decision. This means that risk tolerance is

maximum amount of uncertainty one is willing to accept when making a decision, in this case

financial decision (Holton, 2004).Due to the fact that risk tolerance is major factor affecting

financial decisions, numerous researches have been done to explore and define what are the

factors affecting risk tolerance. These researches have been considering demographic,

socioeconomic and attitudal factors as factors affecting risk tolerance and have examined

factors such as gender, age, marital status, income level, education, occupation and others as

determinants of individuals risk tolerance. (MacCrimmon&Wehrung, 1986; Grable & Lytton,

1998; Hallahana et al., 2004).

The primary goal of the research is to analyze how risk tolerant or risk adverse are people in

Bosnia and Herzegovina, to examine their investment preferences and to test what

demographic and socioeconomic factors are significantly affecting level of risk tolerance and

investment preferences.

The paper is organized as follows. In the next section, sample of date is being introduced and

described and independent and dependent variables are being shortly described and analyzed.

The same section also explains the methodology of the research. Section 3 presents and

discusses results of the empirical analysis. Finally, Section 4 summarizes the research and

presents key conclusions of the research.

2. DATA, VARIABLES AND STATISTICAL ANALYSIS

2.1. Data

The research is based on the data gathered from the survey. 200 individual have been asked to

complete 10 question survey and survey instrument contained information about respondents’

demographic and socioeconomic characteristics. Two hundred respondents were randomly

chosen and survey was performed by phone and this is why there are no missing values for

any question.

2.2. Variables

In the first analysis risk tolerance variable is taken as dependent variable. It represents the

self-assessed level of risk tolerance each respondent has determined for himself. In the second

analysis investment type is defined as dependent variable and it is taking following values for

different types of investment: 1=deposit, 2=lend to someone, 3=stocks, 4=real estate,

5=mutual funds, 6=gold and silver and 7=collectibles.

When considering independent variables, based on the previous research performed by

Demirel and Gunay (2011) and Al-Ajmi (2008), age, marital status, education level, number

of dependents, stability of income source, and whether individual has financial commitments

are chosen as variables that are expected to be significantly affecting risk tolerance and

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investment preferences. Independent variables and their values are being summarized in the

table below.

Table 1. Independent variable definitions

2.3. Statistical Analysis

Variable Measurement Variable Measurement

Gender 1= male

2= female

Number of dependents Respondents’

number of

dependents

Age Respondents’ age (20

– 60)

Stability of income

source

1 = unpredictable

2= somewhat

predictable

3= reasonably

predictable

4= predictable

5= very predictable

Marital Status 1= married

2= not married

Income 1= <300 KM

2= 300 – 700

3= 700 – 1000

4= 1000 – 1500

5= 1500 – 2000

6= 2000 – 2500

7= >2500

Education 1= secondary

2= postsecondary

3= Bachelor

4= Master

5= PhD

Financial

commitments

0= no loan

1= having loan

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The model used for the empirical analysis is multiple regression model that permits estimating

effect on Yi of changing one variable X1i while holding the other regressors constant (Stock

& Watson, 2006). Multiple regression models that are going to be estimated is as following:

Yi = β0 + β1Age + β2Gender+ β3Status + β4Educ + β5Dep + β6FreqY + β7IncLev + β8Loan (1)

Model developed is used for both analyses, for testing significance of independent variables

in relation to either risk tolerance in first case and investment preferences in the second

analysis.

3. RESULTS AND DISCUSSION

3.1. Sample characteristics

Regarding the sample characteristics, out of 200 respondents 58.5% were male and 41.5%

were female. Respondents have ranged from 22 to 59 years old and approximately 70% of all

respondent are in the age range from 25 to 46. Furthermore, 60.5% of respondents are married

and 39.5% are not married. For the simplification of the analysis “not married” are considered

all who are either single, divorced, separated, widowed, etc. (Grable & Lytton, 1999). Most of

the respondents are having either secondary or bachelor degree, 45% and 39% respectively,

while all other education level account only for 16%. When it comes to the number of

dependent, response have ranged from 1 to 5 members and most of the respondents, about

37% of them have 4 family members. Considering income aspect, most of the respondents

have either predictable or at least reasonably predictable (stable) income source, accounting

for approximately 65% of all response. Data on the income level match the data provided by

Federal Office of Statistics that the average salary is approximately 800 KM and survey has

shown that most of the people are in the income group from 700 – 1000 KM (Federal Office

of statistics)

When considering dependent variables, it is evident that people in Bosnia and Herzegovina

are below average risk tolerant given the fact that approximately 70% of respondent have

rated their risk tolerance 5 or less then 5, on the scale from 0 to 10.

The unwritten rule states that people in B&H only believe in investment in real estate and this

research has proven so, 57% of all respondents have stated that they would invest in real

estate, while all other six types of investment account for the 43% (deposits 20%, lending to

someone 0.5%, stocks 9%, mutual fund 4.5%, gold and silver 8% and collectibles 1%).

3.1. Risk tolerance estimated model

Coefficientsa

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

95,0% Confidence

Interval for B

B Std. Error Beta

Lower

Bound

Upper

Bound

1 (Constant) 2.274 .354 6.425 .000 1.576 2.972

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IncLev .669 .096 .443 6.949 .000 .479 .859

2 (Constant) 1.733 .385 4.499 .000 .973 2.492

IncLev .540 .102 .357 5.265 .000 .338 .742

Education .476 .149 .217 3.203 .002 .183 .770

3 (Constant) 1.389 .399 3.481 .001 .602 2.176

IncLev .478 .103 .316 4.627 .000 .274 .682

Education .519 .147 .236 3.525 .001 .228 .809

Gender .793 .289 .172 2.746 .007 .223 1.363

a. Dependent Variable: RiskTol

Table 2.I Multiple regression; coefficients

Based on the stepwise multiple regression, the final estimated model for the risk tolerance is

as follows:

Y = + 1.389 + 0.478IncLev + 0.519Educ + 0.793Gender (2)

β0 represents the intercept and the its value in the final model is 1.389 meaning that if all

independent variables are zero value of an individual’s risk tolerance will be 1.389. This can

further be explained as human nature of being resistant to risk. Furthermore, although gender

variable is statistically insignificant (0.07>0.05) model includes it because of significant

bivariate correlation with risk tolerance. In such a situation, researcher can decide whether to

include given variable in the model or not.

R2 and adjusted R2 are measures that quantify the extent to which the regressors account for

the variation in the dependent variable. Since R square is increasing when every next variable

is added to the model, adjusted R2is better measurement of the mode fit (Stock & Watson,

2006). The estimated model has adjusted R2value of 0.253 meaning that 25.3% of the

variations in the dependent variable are explained by income level, education level and gender

variables. This indicates that research should be revised and improved by adding new

independent variables that are potentially affecting risk tolerance and better predicting

variations. Variables that could be considered for the future research could be: current

economic situation in the county, economic expectations, interest rates and financial

knowledge (Ribeiro, 2001; Grable & Lytton, 1999).

3.2. Investment preferences estimated model

All the independent variables have been introduced in the model and by performing stepwise

multiple regression the following coefficient were estimated:

Coefficientsa

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Table 3. II Multiple regression; coefficients

As shown in the table above out of eight independent variables, only variable measuring

whether an individual has a financial commitment proved to be significantly affecting

investment type.

Y= 3.833 – 0.514Loan (3)

Equation (3) shows that if all independent variables are exactly zero, value of dependent

variable (investment type) will be approximately 3.833, approaching value of investment in

real estate. Moreover, adjusted R2 has a value of 0.025 meaning that produced equation

provides explanation for only 2.5% of variations in investment type preferred by respondents.

The graph shows that most of the respondents (57%) have answered that they would invest in

the real estate. 20% would

make deposit in the bank,

while other four investment

types all together account for

30%. As in the case of risk

tolerance, insignificance of

independent variables suggests

that further research should be

performed by introducing new

variables mentioned in the

previous section. Conventional

wisdom claims that people in

B&H only believe in

investment in real estate and

consider it the least risky. This

explains the outcome of the

survey.

Figure 1 Graphical representation of investment types

4. CONCLUSION

In this study, model for testing significance of demographic and socioeconomic factors in

determining risk tolerance and investment preferences was developed. Firstly, income level,

education level and gender were proven to be significant and positively related to risk

tolerance. As each of these variables increase, risk tolerance is increasing. Secondly, multiple

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

95,0% Confidence Interval

for B

B Std. Error Beta Lower Bound Upper Bound

1 (Constant

)

3.833 .158

24.213 .000 3.521 4.146

Loan -.514 .208 -.173 -2.474 .014 -.924 -.104

a. Dependent Variable: Investment

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regression models has identified that only financial commitments are significant for

determination of investment and this relation is negative, showing that if an individual has a

financial commitment it investment will decrease or it will choose less risky investment. Due

to the fact that both estimated models are having low adjusted R2, they are not a very good

explanation of variations in dependent variables; in the future of the research new variables

should be included. Until now research was mostly focused on demographic characteristics of

each survey respondent, but in the future more of the socioeconomic factors characteristic for

Bosnia and Herzegovina are going to be considered. In this way, current economic situation,

macroeconomic data, interest rates, economic expectations and individual’s financial

knowledge are going to be used as predictors of risk tolerance and investment preferences.

This will improve the model, it will provide more complex and accurate explanation of what

are the possible reasons why risk tolerance and investment preferences vary. However

research needs improvements in the future, the overall conclusion of the is that demographic

and socioeconomic factors are affecting risk tolerance and investment preference.

REFERENCES

Al-Ajmi, Y. J. (2008). Risk Tolerance of Individual Investors in an Emerging Market.

International Research Journal of Finance and Economics.Vol. 17, pp. 15-26.

Demirel, E. and Gunay, S. G. (2011).Financial Risk Taking Behavior Comparisons between

Two Different Countries Based on Demographic Factors: Turkey and Macedonia Case.

Middle Eastern Finance and Economics.Vol. 10, pp. 111-120.

Federal Office of Statistics. Last Accessed on 4 27, 2012, from http://www.fzs.ba/

Grable, J. E.and Lytton, R. H. (1998). Investor risk tolerance: Testing the efficacy of

demographics as differentiating and classifying factors. Financial Counseling and Planning, 9

(1), pp. 61-74.

Grable, J. E. and Lytton, R.H. (1999).Assessing Financial Risk Tolerance: Do Demographic,

Socioeconomic,And Attitudinal Factors Work?. Journal of the FRHD/FERM.

Hallahana, T. A., R. W. Faffb and M. D. McKenziea, 2004. “An Empirical Investigation of

Personal Financial Risk Tolerance”, Financial Services Review 13, pp. 57–78.

Holton, G. A. (2004). Defining risk.Financial Analyst Journal.60 (6),pp. 19-25.

MacCrimmon, K. R. and Wehrung, D. A. (1986).Taking risks.New York: The Free Press.

Ribeiro, B. M. and Teixeira, J. R. (2001).An econometric analysis of private-sector

investment in Brazil.Cepal.Review 74, pp. 153-166.

Stock, J. H. and Watson, M. W. (2006).Introduction to Econometrics.2nd edition, Pearson

Education International

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The Affecting Channels Of The Global Crisis On The South-Eastern Europe (See-7)

Countries’ Growth Performance

Ali Sen1, Huseyin Altay2

1Dumlupinar University; Kutahya; TURKEY;

2Bilecik University; Bilecik


SEE-7 includes Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia

and Slovenia.

Abstract

This paper analyzes the impact of the global crisis on the growth performance of SEE-7

countries. From the beginning of 2000’s to the eve of the global crisis, these economies had a

strong growth performance. Especially, increasing export, inflows of foreign direct

investments and private capital significantly contributed to their economic growth. However,

the global economic crisis adversely affected all the SEE-7. According to empirical findings

obtaining from the panel regression results, until the global crisis, the external variables

significantly contributed to growth performances of these economies. However, the impacts

of external variables on GDP growth rate reduced sharply during the crisis.

Keywords: The SEE-7 countries, growth performance, the global crisis, external variables,

panel data.

1.INTRODUCTION

While the global crisis erupted in advanced countries, it started to affect other countries after

last quarter of 2008. In the beginning of 2009, many developing countries were heavily

exposed by the global crisis. The impact of the global crisis on economic activity varied

widely across countries that have different real, external and financial vulnerability (Berkmen,

et al. 2009). At first, the most adverse affecting countries became more openness ones.

Seven of South-Eastern Countries (the SEE-7)25 also suffered from the global crisis despite

of their different monetary, exchange rate regimes, and fiscal stances (Cocozza et al., 2011).

However, these countries had some common characteristics as economically and politically.

Firstly, they were new independent countries. Most of them gained their independence in the

mid-1990s after a violent war, including destructive effects on their economies. Secondly,

their transitions from central planned to market economies occurred at the same period. In

1990s because of conditions of war and transition, these economies had to deal with both

economic and politic distresses. Finally, they had a high level of economic and financial

openness and thus exposed to the risk that came with the global crisis.

25 SEE-7 includes Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia and

Slovenia.



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Most of current economic literature, not depending on empirical evidences, claimed that the

main cause of their economic contractions in the global crisis was sharp reduction of their

export capacities and foreign capital inflows. The aim of the paper is to analyze the effect of

external variables, which many of them are components of the balances of payments, on GDP

growth rate of SEE-7 countries in 2000-2010. The paper examines the effects of external

variables in two different periods. It describes 2000-2007 as the period of pre-crisis and 2007-

2010 as pre-crisis plus post-crisis. Thus, it is possible to compare with two different periods

with respect to impacts of external indicators. There are not enough empirical papers about

this topic in literature. The purpose of the paper is to fill this gap and provide empirical

evidence to support the claims of current literature.

At first, the impacts of the global economic turbulence were spread across SEE-7 countries by

two different channels (Cocozza et al., 2011):

First channel is deficiency of import demand of the developed countries shortening the export

capabilities of other countries. Especially, small open economies like SEE-7 the export-

oriented began to slump. In addition, because the largest partner of SEE-7 countries is EU,

they incurred aftermaths of the global crisis.

Second is disappearance of their financial facilities because of turmoil in the global finance

and capital markets. Diminishing in inflows of foreign direct investments, portfolio equity and

contradiction in total reserves in SEE-7 countries reduced their growth rates. As long as

capital inflows reduced, SEE-7 countries’ growth rate having been fuelled by credit boom

decreased. In addition, as their exchange rates depreciated, their real burden of foreign

currency loans increased. Both their external debt stocks and interest payments on external

debts rapidly rose. The extent of openness to flows of foreign direct investment has been a

major cause of the transmission of the effects of the crisis to the region (Bartlett and Prica,

2011).

The paper is structured as follows: Section 2 introduces an overview of current literature

about transmission channels of the global crisis in SEE-7 countries. In Sections, an

econometric analysis identifies the effects of external variables on GDP growth rates in SEE-7

economies. Section 4 includes conclusions.

2. AN OVERVIEW OF CURRENT LITERATURE

From the beginning of 2000s to 2008, the SEE-7 had a strong growth performance. All the

SEE-7 countries experienced rapid increase of economic output pre-crisis. The measures of

economic stability and restructuring seriously contributed to this achievement (Nero, 2010).

In addition, increasing their facilities of exports and financial sources integrated them into the

global economic system and provided a significant contribution of their growth performances.

As a result, in the period of 2000-2007, they had an average growth rate about 4.9 % (Table

1). In 2008-2010, the same rate reduced 0.9 %. Investments, remittances, industrial

production, foreign exchange reserves and employment rates have fallen sharply. As a result,

growth has slowed down (Ismail and Sahin, 2009). Especially, Slovenia, Croatia and

Montenegro further suffered from the crisis.

Table 1. Growth Rates, (%)

Bosnia and

Herzegovina Croatia Macedonia Montenegro Serbia Kosovo Slovenia

2000 5.5 3.8 4.5 3.1 5.3

4.3

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2001 4.4 3.7 -4.5 1.1 5.3 27.0 2.9

2002 5.3 4.9 0.9 1.9 4.1 -0.7 3.8

2003 4.0 5.4 2.8 2.5 2.7 5.4 2.9

2004 6.1 4.1 4.6 4.4 9.3 2.6 4.4

2005 5.0 4.3 4.4 4.2 5.4 3.8 4.0

2006 6.2 4.9 5.0 8.6 3.6 6.0 5.8

2007 6.8 5.1 6.1 10.7 5.4 6.3 6.9

2000-07 5.4 4.5 3.0 4.6 5.1 7.2 4.4

2008 5.4 2.2 5.0 6.9 3.8 6.9 3.6

2009 -2.9 -6.0 -0.9 -5.7 -3.5 2.9 -8.0

2010 0.8 -1.2 1.8 2.5 1.0 4.0 1.4

2008-10 1.1 -1.7 1.9 1.2 0.4 4.6 -1.0

According to Stiblar (2009), they were small and weak local capital markets, overdependence

on capital inflows from Western Europe. They were highly dependent on external inflows of

money, either capital investments or loans, and foreign financial aid. Sanfey (2010) argued

that during the past decade, SEE-7 has experienced a serious transformation such as the

progress in economic development, democratic reforms, and integration into global economic

and financial markets. On the other hand, SEE-7 countries had huge current account deficits

and thus needed foreign credit or investments. The former have high current account deficits

driven by even higher trade deficits (Gligorov and Landesmann, 2009).

Beltramello et al. (2009) described the global crisis as an “imported” crisis, because its origins

stem from countries in Western Europe and North America. Due to falling demand from key

EU trade partners, the region’s exports declined substantially. According to Risteski and

Trpkova (2009), the main channels of the crisis were trade shocks, lower remittances and

lower foreign direct investments. As a result, credit growth decelerated and domestic demand

shrunk.

According to Jerger and Knogler, (2009), there were some significant channels to spread to

SEE-7. First of them was decline of export demand as the most obvious channel through

which an economy may be affected. Decline of the demand for exports obviously became

more painful for countries with high export dependence. Export of goods and services as a

percentage of GDP in Slovenia, Macedonia and Croatia is respectively 67%, 50% and 42% in

2008. Second leading channel was a considerable amount of debt denominated in foreign

currencies. The burden of this debt increased with devaluation of the domestic currency.

Bartlett and Monastiriotis (2010) claimed that as the SEE banking systems were not directly

exposed to ‘toxic assets’, the crisis was transmitted to the region through a number of indirect

channels. These included a contraction of international trade, a sudden stop to credit growth, a

rapid fall in inflows of foreign direct investment. Over the last decade, foreign investors found

extensive opportunities, besides the banking sector, in telecommunications, energy and other

sectors opened up by privatization.

According to IMF (2009), the SEE–7 were exposed to the global crisis more than in previous

ones, because they were more integrated with the world economy through trade, FDI, and

remittances. The crisis significantly influenced these countries through reduced demand for

their exports. Rising interest rates increased debt service costs. Increased trade and financial

links with the outside world also imply greater dependence on external conditions. Because

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the slowdown in global growth reduced trade, remittances, foreign direct investment, these

factors had a major impact on the SEE–7. Tightened global liquidity conditions adversely

affected financing facilities.

SEE-7 countries had developed based upon an economic model dependent on capital inflows

from abroad; with the global credit crunch adversely affected their ability to maintain this

growth strategy (UN, 2009). The rapidly expanding credit growth financed with short-term

external bank borrowing came to a sudden stop in 2008 (IMF, 2011).

Sewel (2011) argued that the crisis transmission mechanism was not the banking and financial

system. Rather the serious decline in export markets and the collapse of foreign direct

investment that had the origin of recent growth and development in the region adversely

affected their performance. Virtually all of the countries had balance of payments deficits

prior to the crisis. Generally, current account deficits are quite normal for such developing

countries in the beginning of growth. The first growth spurt is frequently financed by inflows

of investment, capital goods and equipment. Moreover, their physical capital legacy had

already become old largely. Thus, they needed new enormous investment facilities as both

physical and financial capital stock (Gallego, 2010). Until the global crisis, the availability of

export facilities and significant capital inflows for SEE-7 have helped finance their growth

spurt (Sewel, 2011).

Jovicic (2009) studied the relationship between the degree of trade integration to the EU

market and the timing and intensity of the onset of the crisis effects among the Western

Balkan countries. She found that while those with a high degree of trade integration

experienced the crisis sooner, those with a lower degree of integration experienced a larger

decrease in production.

3. ECONOMETRIC MODEL AND RESULTS

The dataset is composed of annual data for SEE-7 countries, which are Croatia, Serbia,

Montenegro, Macedonia, Kosovo, Bosnia and Herzegovina and Slovenia from 2000 to 2010.

Data was collected from the World Bank’s World Development Indicators (WDI). The

objective of our empirical model is to investigate the impacts of external variables on GDP

during the global crisis and pre-crisis. To compare crisis period with pre-crisis period it is

analyzed 2000-2007 and 2000-2010 separately. The aim is to examine in both period data set.

Data set consists of 10 variables. The dependent variable is Gross Domestic Product (GDP) as

change of percentage. As share of percent of GDP the independent variables are Foreign

Direct Investment (FDI), Private Capital Flows (PCF), Portfolio Equity (POE), Total

Reserves (TOR), Export of Goods and Service (EXP), Import of Goods and Service (IMP),

Official Exchange Rate (OER), External Debt Stocks (EDS), and Interest Payments on

External Debt (IPE).

The paper has four different models analyzing the impacts of external variables on GDP

growth rate.

(2)

(3)

(4)

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(5)

To estimate models, it is used OLS method. Firstly, to eliminate the problem of poisson

regression, unit roots is tested for each variable. Levin, Lin, Chu (LLC) and Im, Pesaran, Shin

(IPS) unit root results are in Table 2. According to Table 2, all variables are stationary in first

level I(1).

Table 2. The Results of Panel Unit Root Test

Variables Levin, Lin, Chu Im, Peseran, Shin

t statistic Results W statistic Results

GDP -1,734**

I(1) -1,435*

I(1)

FDI -4,056***

I(1) -1,953**

I(1)

PCF -3,065***

I(1) -1,386*

I(1)

POE -1,879**

I(1) -2,372***

I(1)

TOR -5,083***

I(1) -2,471***

I(1)

EXP -4,199***

I(1) -1,825**

I(1)

IMP -1,665**

I(1) -1,206*

I(1)

OER -5,298***

I(1) -4,949***

I(1)

EDS -3,044***

I(1) -1,777**

I(1)

IPE -5,331***

I(1) -3,104***

I(1)

Secondly, it is investigated whether the problems of autocorrelation and heteroskedasticity.

The availability of autocorrelation problem is tested by Wooldridge test; the availability of

heteroskedasticity problem is analyzed by Wald test. In models it is implemented Estimated

Generalized Least Squares (EGLS) to eliminate autocorrelation problem. White’s cross

section coefficient covariance method is applied to eliminate heteroskedasticity problem.

Thirdly, it is determined the method (fixed effects or random effects) to estimate the models

using Hausman test. Finally, in estimating the models, it is analyzed two different periods

(2000-2007 and 2000-2010) separately (Table 3 and Table 4).

Table 3. The Results

Variables

2000-2007 2000-2010

Model

1

Model

2

Model

3

Model

4

Model

1

Model

2

Model

3

Model

4

FDI -0.016

(-0.002)

3.864

(1.257)

21.648*

(1.897)

5.240

(1.355)

PCF 4.933

(0.536)

-2.580

(-0.362)

-18.975

(-0.807)

1.366

(0.138)

POE -8.658

**

(2.167)

-5.199***

(-2.860)

-29.576***

(-2.888)

-16.367**

(-1.097)

TOR -8.248

(-1.565)

0.767

(0.133)

-21.425

(-1.255)

-8.099

(0.133)

EXP -1.626

(-1.579)

-2.507**

(-2.677)

19.800

(0.874)

11.939

(1.216)

IMP -0.630

(-0.998)

-0.299

(-0.614)

-3.283**

(-2.290)

4.124

(0.758)

OER -10.962

(-1.095)

-15.80*

(-1.725)

-22.307

(-1.463)

-9.734

(-1.288)

EDS 3.515 6.400**

-7.444 -5.511**

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(1.228) (2.187) (-0.960) (-2.063)

IPE -1.493

(-0.202)

4.389

(0.985)

-32.843

(-1.173)

-8.676

(-1.042)

R2 0.813 0.809 0.803 0.873 0.177 0.187 0.145 0.452

Adj R2 0.787 0.788 0.788 0.832 0.105 0.131 0.102 0.347

F statistic 0.000 0.000 0.000 0.000 0.043 0.015 0.024 0.000

N 42 42 42 42 63 63 63 63

D-W 2,079 2.108 2.217 2.225 2.194 2.147 2.029 2.021

Woolridge

test 0,003 0,007 0,001 0,005 0,001 0,005 0,001 0,004

Wald test 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000

Hausman

test RE RE RE RE RE RE RE RE

* Significant at 10%; ** significant at 5%; *** significant at 1%; t values in brackets.

Table 3 shows results from panel OLS regressions for SEE-7 countries in two different

periods that are 2000-2007 and 2000-2010. It is estimated four models for each period. Model

1 includes four variables that foreign direct investment, private capital flows, portfolio equity

and total reserves. Model 2 consists of three variables that are export, import and official

exchange rate. Model 3 comprises only two variables that are external debt stock and interest

payments on external debt. Model 4 have all variables in other models.

Although, for each variable, it is not obtained enough significant results from the panel

regressions, these models reveal a striking empirical evident coinciding with main hypothesis

of this paper. Adjusted R2 has higher values in 2000-2007 than 2000-2010 does. In other

words, the models for 2000-2007 have more explanatory power than 2000-2010 do. The

effects of external variables on GDP growth rate in the SEE-7 countries are further in pre-

crisis period. From 2000 to 2007, in other words until the global crisis, the external variables

contributed to growth performances of these economies. However, the impacts of external

variables on GDP growth rate naturally reduced sharply during the crisis. For example, in

model 4 including all variables, while adjusted R2 is 0.832 for 2000-2007, the same value is

only 0.347 for 2000-2010.

4. CONCLUSIONS

The impacts of the global crisis were spread across SEE-7 countries by two different

channels. First of contagion channels of the global crisis is deficiency of import demand of

the developed countries shortening the export capabilities of other countries. Second of them

is disappearance of their financial facilities because of turmoil in the global finance and

capital markets.

The paper examines the effects of external variables on GDP growth rate in the SEE-7 in two

different periods. The first is 2000-2007 as the period of pre-crisis. The second period is

2007-2010 as pre-crisis plus post-crisis. Thus, it is possible to compare with two different

periods with respect to impacts of external indicators.

According to empirical findings obtaining from the panel regression results, until the global

crisis, the external variables significantly contributed to growth performances of these

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economies. However, the impacts of external variables on GDP growth rate naturally reduced

sharply during the crisis.

REFERENCES

Bartlett, W. and Monastiriotis V. (2010) South East Europe after the Economic Crisis: A New

Dawn or back to Business as Usual?, London School of Economics and Political Science:

LSE European Institute, London (November).

Bartlett, W. and Prica, I. (2011). The Variable Impact of the Global Economic Crisis In South

East Europe, Economic Annals, Volume LVI, No. 191 / October – December.

Beltramello, A., Cruickshank-Valencia E., and Hengel E. (2009) The Global Financial Crisis:

Preliminary Evidence in South East Europe and Responses from Governments, SEE

Investment Committee, Tuesday, 7 April Brussels.

Berkmen, P., Gelos G., Rennhack R., and Walsh J.P. (2009) the Global Financial Crisis:

Explaining Cross-Country Differences in the Output Impact, IMF Working Paper,

WP/09/280), December.

Cocozza, E., Colabella, A. and Spadafora, F. (2011). The Impact of the Global Crisis on

South-Eastern Europe, IMF Working Paper WP/11/300, December.

Ergin, I. Sahin S. (2009) Global Financial Crisis and its Impact on Balkans, 1. International

Symposium on Sustainable Development, June 9-10, Sarajevo.

Gallego, S., Gardo, S., Martin, R. Molina L., and Serena, J.M. (2010) The Impact of the

Global Economic and Financial Crisis on Central Eastern and Southeastern Europe (CESEE)

and Latin America, Bancodespano.

Gligorov, G. and Landesmann M. (2009) What is to be done? A policy note, The Vienna

Institute for International Economic Studies.

IMF. (2009). The Implications of the Global Financial Crisis for Low-Income Countries, IMF

Multimedia Services Division, March.

IMF. (2011) Republic of Slovenia: 2011 Article IV Consultation—Staff Report; Public

Information Notice on the Executive Board Discussion; Staff Statement; and Statement by the

Executive Director for Slovenia, May, IMF Country Report No. 11/121.

Jerger, J. and Knogler M. (2009) The Economic and Financial Crisis in South-Eastern Europe,

International Scientific Conference: Challenges of the World Economic Crisis, Nis, October

15-16th.

Jovicic, M. (2009). The Onset of the Economic Crisis in the West Balkans. The conference on

Economic Policy and Global Recession. Belgrade, 25-27 September.

Nero, V.W. (2010) Economic and Labour Market Impacts of the Global Economic and

Financial Crisis on the Countries of the Western Balkans and Moldova, March.

http://www.ilo.org/public/english/region/eurpro/geneva/download/ecosoc_crisisimpact_westb

alkan.pdf

Risteski, S. and Trpkova M.Sc. M. (2010) Global Economic Crisis and its Impact on the

Western Balkan Countries Labor Markets, The Young Economists Journal, Vol. 1, issue 15.

Pp. 96-107.

http://www.ilo.org/public/english/region/eurpro/geneva/download/ecosoc_crisisimpact_westbalkan.pdf

http://www.ilo.org/public/english/region/eurpro/geneva/download/ecosoc_crisisimpact_westbalkan.pdf

http://econpapers.repec.org/article/aiorteyej/

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Sanfey, P. (2010) South-Eastern Europe: Lessons from the Global Economic Crisis, European

Bank for Reconstruction and Development, Working Paper No. 113.

Sewel, J. (2011) The Balkan Economies: Regional Roadblocks, European Distractions and

Global Crisis, NATO Parliamentary Assembly.

Stiblar, F. (2009) The Impact of the Global Crisis on Montenegro and the Western Balkans,

published by Central Bank of Montenegro.

UN. (2009) The Global Financial Crisis: Impact and Response of the Regional Commissions

The Importance Of Aphrodisias Ancient City In Sustainable Economical Development

Matcicek Zekeriya1, Pajo Aykut2

1Adnan Menderes University,Aydın,

2Kırklareli University,Kırklareli

E –mails: [email protected],[email protected]

Abstract

Aphrodisias is an ancient city nearby Karacasu, Aydın. It was established by the name of

Goddess Aphrodit. It is a big settlement from the Bronz Age to Bizans time. It has been found

baths, agora, stadium, odeon, Aphrodit temple in arceologic excavations. Aphrodisias is

known as an important sculpturing centre in first- era, was given sculpturing education in that

term.Of all the ancient cities in Anatolia, The Stadium of Aphrodisias is one of the best

preserved.

Aphrodisias is an ancient city which is famous for its Aphrodit temple especially in Roman

age. It is one of the most important archeological places of Turkey with its well-protected

movement – buildings now. The excavations started by New York University in 1961 are

being continued today, too. The new historical sites have been found in excavations that still

last now. These historical sites have been presented in the museum of Aphrodisias.

About 125.000 tourists visit Aphrodisias ancient city each year. The visitors come from

America and European Countries mostly in spring and autumn. In other hot months, French,

Italian and Spanish people visit and Brazilian tourists have visited ancienty city lately.

Tourists who come in winter visit mostly for shopping and Aphrodisias ancient city is visited.

The avarage age of visitors is quite high. It is preferred by only the participants of cultural

tours because Aphrodisias Ancient city is visited according to cultural tourism. These tours

reachmostly beginning from İstanbul to Bursa – Çanakkale – İzmir Efes – Kuşadası – Didim

Milet and then Aphrodisias – Pamukkale Hierapolis and Antalya. In this research the variation

of tourist which visit Aphrodisias ancient city have been determined and it has also been

determined how tourists in this community spend their money. The effect of these spendings

on economical sustainable development of Turkey and the region where ancient city is has

beendetermined.

http://www.google.com.tr/search?hl=tr&tbo=p&tbm=bks&q=inauthor:%22Franjo+%C5%A0tiblar%22

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Keywords : Aphrodisias, Sculpturing education, Aphrodit temple, Karacasu, Ancient city

1.INTRODUCTION

Today, negative factors such as excessive urbanization, difficulty in living conditions put big

pressures on people who especially live in urban areas. Escape from these pressures reflect on

tourism movements and tourism searches based mostly on natural environment replace with

the usual concept of tourism which consist of the triangle of sea, sand and sun(Oral et al.1996;

Gulez, 1998).

Increase of interest to the natural and cultural places necessitates the protection and renewal

of natural and cultural areas and the provision of ecological balance. Tourist prefer to goto

regions whose original, natural and historical riches are protected, not modern structures,

concrete pile soar a nature which has been destroyed.

Sustainable tourism is a form of development that cultural integrity, ecological processes,

biodiversity and systems which continue life have been sustained by being protected the

environment where people are in interaction with without any damage or being chanced and

that all resources have been managed to satisfy the economic, social and an esthetic needs of

tourists and people who are in the region which has been visited and to provide the needs of

future generations. The sustainable development of natural and cultural environment is

possible with protection and development. A tourism development based on environmental

protection will bring an environment which has developed in economical, social and physical

way(Akten et al. 2011)

The continuity of natural and cultural valves is of great importance for continuity of

Karacasu’s economy in the future. In this study, the importance of Aphrodisias ancient city in

sustainable economy and the reasons of continuity of country’s economy have been

examined.

1.1.SUSTAINABILITY

“Sustainability”, as meaning of word, expresses the situation of being continuity and

seamlessness. The concept of livability has to be evaluated wits sustainability in ecosystem,

management, services energy or area-transitivity, feelings and economy income

(Buyukyegen, 2008).

The concept of sustainability has firstly emerged at the Conference on human environment of

United Nations in Stockholm in 1972(Newman et al. 1999). At this conference 113 countries

have given an undertaking that they start to environmental cleaning and have decided that

environmental problems won’t be able to be categorized not only as air pollution, water

pollution and chemical contamination and it has also been revealed that the necessity of

radioactive substances that affect everyone are not released everywhere(Aktas, 2007).

Sustainability is to ensure to continue its existence non-stop without consuming by overuse or

overload to main resources of the vital link, without deterioration or decay of function of a

society, ecosystem or a system which has continuity. Sustainability is an essential

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precondition for sustainable development in the use of potentials such as sail, water, surface

and underground riches, flora as natural resource (Tozar, 2006).

The sustainable development of natural and cultural environment is possible with protection

and development. In general meaning, the protection of natural and cultural environment is

the transfer of these values for future generations. The success of renewal integrated

protection depends on the realization without causing social fragmentation and disrupts the

health of social structure which contains.

A health protection policy has to take historical, natural and cultural heritage into social life

and integrate with it (Buyukyegen, 2008).

The main purpose of development of sustainable tourism is the economic development and

protection of environmental valves as a result of tourism activities. At this point(Gezici,

2008);

To develop environment, economy and tourism with an increasing importance as a

part of each other.

To increase the quality of the environment.

To improve the life quality of local people.

To ensure high quality - standards for tourists.

To integrate tourism with other economic sectors.

To ensure equality in development.

A concept of sustainable tourism which includes very comprehensive targets such as

to guarantee the protection of the environment for future generations.

2. SUSTAINABLE ECONOMY AND KARACASU

2.1. The Geographical Structure of Karacasu

The County of Karacasu which is between Karıncalı Mountain in the west of it and Baba

Mountain in the east of it located on approximately 40 km - long valley which has a

mountains and hilly land.

There are cities and countries such as Denizli – Babadağ in the east, Aydın – Bozdoğan in the

west, Aydın – Kuyucak in the north, and Denizli – Tavas and Kale in the south of Karacasu

located on 90 kilometers distance from the city center.

The most important stream of county is Dandalaz which starts from Dedeler Village and

pours into Big Menderes River.

The altitude of country is 600 meters and the highest point is Karıncalı Mountain. The area of

country is 782 km2. The central population of Karacasu is 6200 and it has a total population

21980 together with villages. The climate of country has the characteristics of Mediterian

climate. But because the altitude is partially high, winter is colder; summer is cooler and more

rainless than the other regions of Aydın.

2.2. Karacasu County’s Economy

The country of Karacasu has a big tourism potential. Aphrodisias Museum and historical sites

which located in Geyre, a 13 km distance to country is one of the most important museums

and historical sites in the world and in Turkey. And it is visited by approximately 200.000

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domestic and foreign tourists per year 159. 367 domestic and foreign tourists visited the

museums and historical sites in 2008 and had an income of 187.546 TL.

İt has been planned to make repair renovation in all exhibition areas except for Sevgi Gönül

Sebsateion Hall for the purpose of performing exhibition layout which has been presented in.

Aphrodisias Museum Sevgi Gönül Sebsateion which has entered service since May 2008 and

having entirely a contemporary look of museum exhibition.

There have already been 12 leather, 25 Ceramic and 7 Olive management in small or

medium-sized. At the same time, the management of the olive has been made in the houses.

Weaving is a field of endeavor which has been managed as traditionally. There are a great

number of fully automatic weaving looms especially in villages of Ataköy, Işıklar, Yeniköy,

Palamutçuk and Dikmen.

In addition there are restaurant which has been operated by entrepreneurs in the country on

the way to Karacasu - Aphrodisias. These restaurants take materials that they use in their

foods or meals directly from the farmers can find opportunity of bazaar that they will be able

to present their products.

They have people of Karacasu work as worker in the excavations and studies made in

Aphrodisias. Also they can find the restoration opportunity to employ in restaurants and sale

points which have been established in the region.

2.3. The Aphrodisias Tourism

The Aphrodisias antique city, which is located in the city of Geyre within Aydın’s Karacasu

borough, was one of the most important architecture, arts, sculpture and worship centers of

the antique age. The magnificent antique city which is 3 kilometers from Geyre, 13 kilometers

from Karacasu and 98 kilometers Aydın city center of different values for ages.

Aphrodisias was a rich and cultivated antique city which was famous for worshipping

Aphrodite during the Roman era and today, it’s one of the most important archeological sites

in Turkey with its well preserved monumental structures. In 1st century B.C. Roman Emperor

Augustus put Aphrodisias under his personal protection. Today, the monuments that still

stand were built 250 years after his reign. Two forums encircled with columns were planned

around the theater and the temple. The most secure stadium in the antique era was located on

the northern tip of the city. At the end of the 3rd century A.D. the city became the capitol of

Caria, a state of the Roman Empire. The city was encircled by walls in the middle of the 4th

century A.D. It started losing its importance at the beginning of the 6th century. The Temple

of Aphrodite was turned into a church and the city was completely abandoned in the 12th

century. During the digs at the Acropolis Hill Tumulus within the Aphrodisias historical sites,

chalcolithic ceramics and obsidian tools that were dated back to 4600 B.C. were uncovered.

A cult centered city

During the Aphrodisias digs, Lydian style ceramic plates, archaic and classic era settlements

were uncovered around the Acropolis Hill Tumulus and the Temple of Aphrodite. During 1st

century B.C. in Aphrodisias, the most important antique city of the region, the nature and

abundance themed Aphrodisias Aphrodite cult, which was an amalgamation of the Asian

Minor goddes Ishtar, Anatolian based goddes Cybele and Greek based Goddes Aphrodite,

started to grow and the city was tuned into a cult center after the establishment of the Temple

of Aphrodite. During to Byzantium era the city was turned into the primacy of the Caria area.

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According to Byzantium sources the area was conquered 4 times by the Seljuk Dynasty

between 11-13th centuries. The lands of Karacasu were inhabited by Turcoman tribes. So the

Menteşe Seigniory and later on Aydınoğulları ruled the area. In 1413 Murad II added the

lands of Karacasu to the Ottoman Empire. In 1867, Karacasu became a borough of Aydın.

The first researches at the antique city were undertaken by Laborde and Texier in 1835 on

behalf of the “Society of Dilettanti”. The first digs were made by a French engineer and

amateur archeologist by the name of Paul Gaudin between the years 1904-1905. In 1937 an

Italian named Giulio Jacopi found the agora of Aphrodisias. During the digs established by

Prof.Dr. Kenan Erim on behalf of NYU between the years 1961-1990, many of the artworks

we see today have been unearthed and restored. Today, the excavation team headed by

Prof.Dr. R.R. Roland Smith on behalf of NYU has been resuming research 1991.

The city that was established with the Money of Zoilos

In 1st or 2nd century B.C., streets with grilled plans were built in Aphrodisias. The building

of the monumental statues that are located in the middle of the city began at the end of 1st

century B.C. First expenses were paid by the city’s famous citizen Zoilos.

In the first stage, the Temple of Aphrodite, North Agora and the Theater was built. In the

beginning of 1st century A.D. the center of the city was expanded with a second forum that

was built between old agora and the theatre. Also at the same time, a huge temple complex

called Sebasteion that was dedicated to the Julia Claudius family was built to the north of the

agora. At the end of the 1st and during the 2nd century many new buildings were established

for public use. The most important of these are the Turkish baths that have been built on the

west corner of the South agora and dedicated to Emperor Hadrian. We also have to mention

the Bouleuterion (a building which housed the council of citizens) which was built on the

northern corner of the North agora and the monumental door that leads to the holy space of

Aphrodite. We see very few new structures in Aphrodisias between the 3rd and 5th centuries

but we know that many of the buildings in the center of city were regularly used and repaired

when necessary. The most important architectural Project of the late Roman era is the

transformation of the Temple of Aphrodite into a Christian church in 500 A.D.

Here are some of the monumental structures that have been unearthed after the digs in

Aphrodisias: Temple of Aphrodite, Tetrapylon, Stadium, Odeon, The School of Philosophy,

The Pontif Palace, Hadrian baths, The Tiberius Portico, Agora, Basilica, Theatre, Theatre

baths, Peristyle and Emperor’s chambers, Sebasteion, Martyrion. The Aphrodisias Museum is

the ultimate point of the excavations that have been going on since 1961. The construction of

the museum which started in 1971-1972 and finished in 1977 was opened to public on July

21, 1979 with an official reception.

The virtuosos of art

The real purpose of the Aphrodisias Museum is not only to present its visitors with examples

of rich archeological finds but at the same time to accentuate the excellence and variety of the

statues that were made in the workshops during Roman and early Byzantium eras. From the

quality and abundance of the artwork on display, we can easily conclude that Aphrodisias was

once one of the major centers of sculpturing in Asia Minor and Roman Mediterranean. Surely,

the existence of with and blue-gray colored marbles that are found on the skirts of Mount

Baba on the northeastern part of the region played an important role in this. Between 1st

century B.C. and 5th century B.C. the sculptors in Aphrodisias created masterpieces using

techniques far more advanced than their time and shown that they were the virtuosos of this

art.

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They have produced great statues using Classic Greek and Hellenistics styles and also made

extremely unique engravings and decorative reliefs on houses and formal buildings. The

artworks of these masters not only reflect Greek or Hellenistic prototypes uniquely (unlike

portraits of holy bodies), but they also display a complex approach by emphasizing the

inclination of idealizing through realistic decorations. This inclination has become integrated

with a unique style and even Baroque style that is clearly visible in the shininess of the body

and also the way that the eyes, hands and clothes are sculptured. The master sculptors of

Aphrodisias were also experts in architectural decoration, columns that included human and

animal figures and acanthus reliefs, wallboard crests, panel busts, reliefs about mythological

subjects and many elements that were used for thedecorations of buildings.

The galleries of the museum are located around a central courtyard. Starting from the right of

the entrance, the museum is toured counter clockwise. The artworks are displayed according

to theme rather than chronologically. Each gallery is dedicated to one aspect of Aphrodisias

sculpturing. In order, the glass case that displays prehistoric findings and the Tondo Gallery,

The Empire Gallery, The Zoilos Wings, The Melpomene Gallery, Odeon Gallery, Unfinished

Artworks Gallery, glass cased display gallery, Love Gallery (the additional building that was

opened in 2008 which displays the bas reliefs of Sebasteion), the Penthesileia Gallery, the

Aphrodite gallery, Rank Titles Wing and the inner courtyard are the parts of the

museum(ACTM 2011).

3.THE RESEARCHES ON THE EFFECTS OF TOURISM TO THE ECONOMY IN

KARACASU

The number of visitors which come per year to Aphrodisias ancient city and historical

sites and the amount of total income has been established in Table 1.

YEAR FOREIGN

VISITOR

DOMESTIC

VISITOR

GENERAL

TOTAL TOTAL INCOME

1997 192,789 21,457 214,246 71.717.00 TL

1998 180,585 25,945 206,530 128.970.00 TL

1999 64,991 18,609 83,600 93.510.00 TL

2000 111,729 20,195 131,924 306.710.00 TL

2001 143,196 27,168 170,364 665.825.00 TL

2002 120,500 10,360 130,860 968.150.00 TL

2003 80,500 10,495 90,995 622.022.00 TL

2004 92,934 19,918 112,856 448.830.00 TL

2005 118,035 10,508 128,541 337.137.00 TL

2006 69,827 11,432 81,495 202.564.00 TL

2007 97,809 16,255 114,084 141.546.00 TL

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2008 130,781 28,586 159,367 187.546.00 TL

2009 116,650 21,020 137,670 223.472.00 TL

2010 127,669 15,776 143,445 242.720.00 TL

Table 1: The number of visitors which come per year to Aphrodisias ancient city and

historical sites and the amount of total income

While the museums and historical site were changing separately until the term of 2004, it was

given up from this application as from 2004 and it has been ensured museums and historical

site visit by one price. İt has been ensured museum and historical site visit by one price. It is

the reason why income numbers were high before 2004.

Since 2010 the entry visit of historical site has been customized and awarded to a firm. This

firm has made the input control of historical site, security of it and the cleaning jobs. The

people from Karacasu have been employed for these jobs. The people who work in store and

cafeteria in Aphrodisias museum are also from Karacasu. Approximately %10 of tourists

visiting prefer this store and cafeteria. %45 of tourists which do shopping from the store and

cafeteria consist of Americans. Also %15 of tourist consist of Spanish, %15 Italian, %5

French, %5 German and the other %15 them consist of other European Countries. While

tourists who are 50 years and over prefer Aphrodisias in winter, younger tourist prefer in

summer.

Tourists that come to Aphrodisias eat their lunch in the restaurants which have been

managed on the way Aphrodisias – Karacasu. The tourists which eat in these restaurants

consist %35 of Italian, %15 of Spanish, %5 of French, %5 of English, %5 of German, %5 of

American and the rest %30 of other nations. Approximately 50 staffs have been employed in

these restaurants. Also, ceramic products, textile products with hand weaving, souvenirs have

been sold in these restaurants and in sale parts establish close to historical site.

4.RESULT

It is clear that how much the economy of Karacasu depends on Aphrodisias historical

site and museum. It has been understood that these economic facts which identify with

Aphrodisias historical site will be exist in no way if Aphrodisias ancient city doesn’t exist. So

it has been provided that Aphrodisias ancient city are widened and transferred for future

generations by protecting its today’s state to be sustainable of these economic facts. As the

Aphrodisias ancient city exist and its adverts reach to a lot of people, tourist potential will

increase. Thus, the county economy will develop and will transfer for future generations as

sustainable.

REFERENCES

Aktaş, E. D. (2007). The quality of life in sustainable development of cities, in the scope of

current approaches, Example of Kocaeli. Gebze High-Tech-Institute, Institute of engineering

and science, Master’s thesis, Gebze.

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Akten, M. & Akten, S. (2011). The sustainable concept of Tourism; Example of Sarıgöl 1.

Symposium of National Sarıgöl country and values, Sarıgöl.

Büyükyeğen, G. (2008). Edirne city center and it’s close environment. The evaluation of

recreational resource values in the context of sustainability, Zonguldak Karaelmas University

Institute of scierse, Department of land scape architecture, Master’s Thesis, Bartın.

Gezici, F. (1998). The Impact of tourism actions fort he purpose of sustainable regional

development. A comparative research on Turkey. ITU the Institute of Science, Departmentof

urban and regional planning, Istanbul.

Newman, P. & Kenworhy, J. (1999). Sustainability and cities; overcoming, automobile,

Dependence.

Oral, S. & Şenbük, U. (1996). Structural evaluation of tourist regions in terms of sustainable

tourism. 19. World Town Planning Day, Colloqium proceedings, MSU Broadcast part of the

city and regional planning, Istanbul.

Tozar, T. (2006). Ecological Planning methods developed for sustinability of natural

Resources, Master’s Thesis, Yildiz Technical University, Institute of science, Department of

Urban and regional planning, Istanbul.

ACTM- Aydın Culture & Tourism Magazine, 2011, 2, 40-48

Economic Dimension Of The Environmental Policies Applied In Turkey And Its

Potential Effects On Sustainable Development

Mevlüt Karabiçak, Serpil Ağcakaya

Abstract

The purpose of the paper is to analyse the economic dimension of environmental policies still

being applied in Turkey and to research the potential effects of sustainable development. In

1987 Bruntland Report was published by UN World Commission on Environment and

Development and attention on sustainable development was attracted. In the aforementioned

report, against the ever deteriorating environmental problems, the necessities of establishing

the vital bridge between environmental development and economic development and the

sustainability of development are accepted.

The first precaution coming to mind for preventing environmental destructions that causes

crucial costs for national economies is the efficient and productive use of current resources

and the establishment of an optimal equilibrium between current and future generations in

terms of the use of resources. Being sensitive in terms of the principle of sustainable

development in the formation of environmental policies is accepted to be an important

approach for the prevention of environment. Although the sustainable development

endeavours cause significant costs, it is observed that new policies are constantly formed in

terms of environment. In the scope of the paper, the potential effects of environmental

policies that aim to decrease the negative effects created by the destruction of environment

and to turn the world into a more habitable area on sustainable development are analysed

through national and international data.

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1.INTRODUCTION

The subject of environment is the most essential and common problem of the whole world.

This matter to great extend originates to excessive usage of factors. Environmental destruction

particularly, during th recent years has shown the gradual increase, so that the whole living

beings or lifeless creatures have been negatively effected. In one hand the necessary

expenditures to be mad efor protecting the living standarts and hence, stil to raise it more and

on the other hand aiming that each of these expenditures not to cause the mentioned

environmental destruction. The necessity of establishing a multi directioned balances in

between the production and consumption stands as a reality. This phenomenon brings forth

the mutual influence of the lifeless and living beings to the present agenda and so has

continiously been increasing the economical costs of the environmental protections. This

point meanwhile, determines the borderlines of the environmental sciences as well.

The wide pronounciation of the term environment was first met in daily languages of the

communities at early 1970’s. At first glance the term environment may be considered to ben

an easily understandable concept but it’s very complicated structure shows itself when

carefully examined.

Environmental pollution has both productional and consumptional dimensions. During the

formation of these two phases, many harmful effluents gets produced and do spread around.

Unacceptably high levels of such effluents and their contaminating effects getting into the air,

soil and water and polluting the underground. So, all these do cause the increased

environmental destruction. This destruction shows itself sometimes as like desert, drought,

erosions, poverty, impropriety, negligence and irresponsibility. Environmental problems,

nowadays have essentially changed its nature and have rather gained a global dimensions by

passing over the national borders.

Reducing the costs and relieving the negative pressures upon the sustainable developments

needs a new approach towards the matter. This new approach can only be provided by

international, national and regional collaborations. This study will cover how and what kind

of method should be applied for avoidance of negative environmental effects but not reducing

the social welfare and sustainable development what probable costs will be faced to and how

these can be possibly met.

2.CONCEPTIONAL FRAME

Environmental science can be accepted as a branch investigating and studying the mutual

effects amoung the living beings and their surroundings and so putting up the obtained results

to discussions. Ecology and the economy by some means are the concepts with in eachother.

Ecology aims to utilize less of factors for protection of environment. The economy, however,

is aiming for a higher level developments for higher prosperities. Henceforth, such sustainable

development forms thee common denominator of the coincidence between these two

concepts. The Brutland report about “our common future” defines the sustainable

development as, to meet todays, requirements with out benefitting from the possibilities being

planned to meet requirements of the future generations. (Gönel 2010, p.275)Another view for

sustainable development is that it need to benefit from protecting the ecological processes and

life supporting systems by means of obtaining a continious use of ecosystems and the genuses

(Ertürk Hasan 2009, p.397) By this definition the economical development target was focused

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to the point succeding on the potential economical growth whilist protecting the benefitted

natural capital stock. (Dağdeviren 2003, p.143.)

Sustainable development doesn’t only aims to form an environment that would be clean, safer

and livable but also deals with the view that it should be more stable, healthful, prosperous

and with higher living standarts, which suits well to human being. (Gönel 2010, p.285)

Therefore, the borderlines of sustainable development is overapping or completing with the

environmental protection standarts it is therefore possible to qualify the sustainable

development as an environmental confidant. This environmental confidant development has

the potential capability of going over the environmental problems and solve. This potential,

along with bringing up the new growth sources as productivity can a pronovelty (newness),

new markets, security and stability, effective use and optimal distrubution of these sources.

(http://www.oecd.org/dataoecd/36/10/48060835.pdf).

3.ENVIRONMENTAL PROBLEMS AND THE PROCESS OF ENVIRONMENTAL

SCIENCE

Environmental problems are as old as the history of human being. As the use of sources

started to increase along with the industrial revolution, which has caused the increased

environmental destruction since then. The first signs of pollution was noticed in England. One

of the pollution are as in England were rivers. England, therefore has taken actions against all

kinds of river pollution forms by the law passed in 1876 (Burows 1980, p.158) The first

warning about the possible global heat rise due to CO2 gas was made by Swedish scientist

Svante Ahrrenius in 1898 but wasn’t recognised as a serious one. (Karbuz, 2002, p.9) The

first human death disastors took place in the town of Donora (Penn) in 1948 and the other one

in London in 1952 had shown the necessity to take precautions against the pollutions.

(Turkman 2000, p.36)

Some scientists and thinkers have expressed their views about the possible great catastrophies

along with the continued environmental destructions, which all were initiated by spoiling the

natural structure by human race since 1960’s. Paul Erlich’s publication in 1968 named

“population bomb” and Rachel Garson’s book of “silint spring” 1962 are example of the

releavant problems. In 1968 Unesco called upon a conference “UN Biosphere Conference” by

which, the first steps fort he ecologically sustainable development were taken. 1972 is another

turning over point on this particular activities. A meeting was held in Stockholm with 114

participant countries. (Karbuz, 2002, p.9) The most important result obtained from this

conference was the common approach shown by the participating countries of different

regimes and development levels fort he point of environmental responsibilities. The markedly

expressed principal idea at this conference was, tol ive in an environment that would most suit

too human honour and good health (Ertürk, 2009, p.234) Another important result was

“Mediterrenean action plan”, along with the warnings of environmental consciousness at

Stockholm conference, 16 participiant mediterrenean countries have approved the action plan

to save mediterrenean sea from the pollution (Görmez 2003, p.86-87)

The worlds environment and the development comission was formed in 1983 under the

chairmanship of GRO Harlem, the prime minister of Norway and had published a report with

the topic of “Our common future” which had created a great interest. (Uslu, 1990, p.53)

((http://en.wikipedia.org/wiki/Brundtland_Commission) Fallowingly, a top meeting took

place in Rio de Jenerio in 11.02.1992 where, the agende 21 of this meeting had consisted of

800 pages in 40 chapters. After this conference total of 165 countries signed in 1993 the

“Biological Assortment or variety” agreement. In 1994, 150 countries signed “The climatic

http://www.oecd.org/dataoecd/36/10/48060835.pdf

http://en.wikipedia.org/wiki/Brundtland_Commission

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changes environmental agreement” which led to the formation of United nations sustainable

development commission. (Gönel, 2010, p.290)

In 1997, Rio +5 conference was held with rather lesser attendance and not much of sufficient

progress could be achieved on the above mentioned development. Again in 1997, the Kyoto

protocol was found acceptable in Kyoto and was offered to the signitures in 1998 in New

York, but somehow by the delays of USA, Russia and China could become effective on Feb

15,2005. The second top meeting for sustainable development was held in Johannesburg from

Aug 26 to Sept. 4, 2005. More than 100 participations from the presidential or ministerial

levels along with many civil public organizations and employer representatives was achieved.

(Gönel, 2010, p.291)After this meeting two basic documents came out. One was the political

proclomation and the other was the implementation plan. In this meeting 5 very important

decisions were taken in the fields of water projects, energy, health, agriculture, biological

variations and the protection of ecosystem administrations. (Karabıçak Armağan 2004, p.212)

In 2007, Lula Silva, the president of Brazil, in his speech to UN General Assembly made an

offer to hold a global top meeting Rio+20 to discuss the subjects about the sustainable

developments in the world. His offer was approved on Dec. 24.2009 by the UN general

assembly and the date was set for June 20-22.2012. The four points to be focused in this

meeting are ; (http://www.mfa.gov.tr/uluslararasi-cevre-konulari.tr.mfa

-To review promises(engagements)

-The new problems arouse

-Struggles against poverty and the gren economy by means of sustainable development

-Associational frames for sustainable development

The Rio +20 UN sustainable development conference scheduled to be held in June 20-22.

2012 is actually an indication of the sensibility and the will to promote the mentioned matters.

(http://www.uncsd2012.org/rio20/index.html).

In Turkey too, under the responsibility and coordination of the ministry of development those

Project activities within the framework of Turkey’s supportive projects to the preparations for

Rio+20 conference and on the subjects of fortifying the systems of protected areas of Turkey,

sea and the protected seaside areas to be made easier fort he continuation.

(http://www.undp.org.tr/Gozlem3.aspx?WebSayfaNo=3510). In this context a meeting was

held in Ankara on Feb. 22.2012 on the sustainable development prosessing the future

(http://www.csb.gov.tr/gm/tau/index.php?Sayfa=haberlerdetayHYPERLINK

"http://www.csb.gov.tr/gm/tau/index.php?Sayfa=haberlerdetay&Id=520"&HYPERLINK

"http://www.csb.gov.tr/gm/tau/index.php?Sayfa=haberlerdetay&Id=520"Id=520).

4.ECONOMICAL DIMENSIONS OF ENVİRONMENTAL PROTECTION POLICIES

TO BE IMPLEMENTED AND IT’S RELATION TO DEVELOPMENT

In the literature of economy it was admitted that human needs are ever lasting but are limited

for the sources to meet these requirements. So it seems possible to meet these requirements

with such sources. Therefore, the necessity for all sorts of technological and technical

effectiveness taken under considerations fort he usage of natural resource. Again the

mentioned effectiveness here must coincide with the effectiveness in the consumption and in

the distribution of the sources. The effective and reasonable utilisation of sources carries up

the prosperity to the agenda. The development of a community can olnly be by maximizing

the social relief and prosperity. Promoting this social prosperity with out any reduction leads

http://www.mfa.gov.tr/uluslararasi-cevre-konulari.tr.mfa

http://www.uncsd2012.org/rio20/index.html

http://www.undp.org.tr/Gozlem3.aspx?WebSayfaNo=3510

http://www.csb.gov.tr/gm/tau/index.php?Sayfa=haberlerdetay&Id=520



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the fact that a balance must be built between the existing and future generations. In our times

it is believed that this balance can only be provided with the principles of sustainable

development.

Basic problem of the underdeveloped countries is too crowded population and the poverty.

Communities through out the history and before the industrial terms and those of

industrialized communities the fact of population had the recycling effects qualitatively and

quantitatively over the economy. Of course these recyclines and transformations in economy

is affecting the structure of population. The volume of population is an indicator affecting

upon the production, division, consumption and also gets affected itself from these facts.

(Küçükkalay, Türkcan, 2008, p.89) Over population adversly affects the distribution ofi

income and promoting the excessive use of sources. This situation causes the in effectiveness

among the production consumption and sharing and eventually negatively effects upon the

living quality. Therefore the importance of development by means of economy which basicly

measures the growing problems of the countries has been dominant factor in our days. To

protect the level of prosperity of developed countries and overcoming the prolonged revolving

poverty of the poor countries can only be realized by sustainable developments. According to

the thesis of povertytrap the reason why some countries are poor is just because they’re poor.

In this povertytrap there is a steady state where per capita and per outputs are low. Therefore,

whenever such a poor country intends to break this chain falls back into the same circle.

(Ünsal 2007, p.179) United Nations development program is taking two indexes under

consideration one is human poverty index and the other one is human development index.

Human development index is the one that UNDP has produced aiming to show the

development differences of the nations in international level. Such dimensions like health,

education, living standarts had all been added to this index. For obtaining an index, the life

expectancy at birth representing the health, the mean years of schooling represents expected

years of schooling and per GNDP used for representing the living standarts.

(http://hdr.undp.org/en/statistiks/hdi/ Studying datum given in Table 1 here below, the

living standart gross national income per capita is 13559 USD, which is 62% high than

Bosnia Herzegovina while the life expectancy at birth is 4% and expected years of schooling

is 10% lower. Mean years of schooling in Bosnia is 2,2 years more than Turkey with the

average of 8,7 years. Additionally human development index in Bosnia Herzegovina is 0,710

higher than Turkey. World Bank uses 1 USD/day measures to determine the level of

poorness. Nowadays 1,2 billion people are living below this amount. Another measure is food

energy method. By this internationally accepted method, the minimum level of calories

determined but the consumption of other than foods were omitted. (Cepni 2010, p.201)

Table 1. Fixed Values Used in Human Development Index

Turkey

(2010)

Bosnia Herzegovina

(2010)

Health Life Expectancy At Birth 72,7 75,5

Edication

Mean Years Of Schoolling 6,5 8,7

Espected Years Of

Schoolling

11,8 13,0

Living

Standards

Gross National İncome Per

Capita

13.359 $ 8.222 $

Human Development Index 0,679 0,710

http://hdr.undp.org/en/statistiks/hdi/

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Source:http://hdr.undp.org/en/statistiks/hdi;http://hdr.undp.org/en/statistics/hdi/. / ;

(http://hdr.undp.org/en/media/HDR_2010_EN_Table1_reprint.pdf .

Economical growth has a numerical properties expressing income per capita and physical

increases in production where as the economical development includes not only numerical

factors but also qualitative elements. In order to mention about the development there must be

an improvment in processing rules and in quality levels of foundation and establishments.

(Çepni, 2010 ; p.199) Nowadays the occurances of some negative progress about the

environmental protection are directing the countries and communities to behave more

sensitively. Instead of the developments with in definite borders and careless use of sources

such a sustainable development that would cover the coming generations was found to bee

more acceptable view all over the world. Sustainable development therefore is the kind that

covers the economy, environment and the communities together. Here the fundamentual

problem is the excess financial burdens that sustainable development policies may cause.

There are various opinions about the mentioned financial costs. Whilst the traditional

approaches are rather distant on sustainability, the environmentalists are rather quite insistant.

There are some views stating the possibilities of setting a harmonious acceptence between

these two views. The aims of sustainable development aren’t too far from the economical

development targets. Actually, the object of sustainable development is simply to look after

an adjustment or harmony between the economical requests and conveying capacity of

ecosystems. (Gönel, 200, p.276) If such an adjustment could be realized in all countries, then,

both the global rivalry will not be adversly affected by these policies and non of the

economical stability will be spoiled or destroyed. Therefore, no social prosperity decrease. To

set up such a harmony definitely is diffucult but is never impossible.

Minimising the environmental costs and converting the negativities to adventages forms

firstly will depend upon the conversion of negative extroverts into introvert which may form

during the production. Improving the sustainable living qualities, determining and

implementing the methods would eradicate the negativies caused by the production and

consumptional activities however what may be nede to provide this is the conformity between

the targets desired to reach and the chosen instruments. (Toprak:2006, p.151);

(Dağdemir:2003, p.141-155); (Çokgezen, 2007:102). Have been able to maintion about some

principles for the solution of existing environmental problems within the sustainablity. These

principles are; “sustainable developments”, “the polluatant pays”, “precaution”, collabration

complementary high level protections, avoidance and avoidance at source.

4.1.The Principle of Sustainable Development

The essential projection point of this principle is the relation of environmental problems with

the economical development. Environmental effluent Have a certain recyling (revaluation)

capacity, which peovides appriciable savings in the utilization of natural sources. The

ecological and natural living transformation gets negatively affected when the environment

receives rapid pollution over the recyling capacity. (Başol and others.2007, p.163) The

additional factors like over population migration problems, unorganized urbanization,

increased traffic jams, earthquakes, wars, social disorders and complications have all great

additional negativity to the ones mentioned above. Nowadays civil urbanization ratio is

increasing rapidly in great number of countries and the population density gets higher in

bigger towns. This unbalanced distribution of population leads to infrastructural insufficiency

and so to over usage of sources will end up with increased pollution.

http://hdr.undp.org/en/media/HDR_2010_EN_Table1_reprint.pdf

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First of all the new technologies are needed for setting a suitable environmental protection

policy that would match to sustainable development principles. This can only be realized by

some attentive plans or precautions. For example, millious of wehicles nowadays are moving

around all round the world. Additional milllions are joining them everyday. By charging

higher taxes for those vehicles harmful to the environment and lesser taxes for unharmful to

the environment and lesser taxes for unharmful ones might be the collobarative support of

research and development centers the minimisation of these negative effects upon the

environment can reasonably be reduced. We can classify the renovations as renevals of

products, processes and organisations. The first two are expressed as technological renevals.

The organisational one can be taken as example to “just in time” renewal principles. Through

the aid of technological renevations improved production schemes and new methods can be

developed. Technological renovations, whilist making thee new products more populer, it

may also become a reason fort he birth of a sector. It’s very important to select the most

suitable one among the alternative technologies. Developing countries can not explore new

Technologies but can obtain them through the transferances. (Kaya, 2008. p.281) but these

developed countries don’t give chance to them for such transferance of new Technologies.

Insufficient Technologies may have negative effects upon the environmental protection, that

is why many of those underdeveloped countries become rather a field or source of poluution.

The foremost duties about the sustainable developments are up to the central and local

authorities. Uncontrolled, unhealthful and rapid civil urbanisation results in increased

squatters shacks round the suburban areas. A great deal of sharing the benefits due to rapid

urbanisation causes the destruction of historical background and sites of the town.This excess

and denser growth of inhabitant areas loose their gren nature and turno ut to be a mass of

concrete structures. Insufficiency of present technical and social infrastructure creates very

unhealty appearence (Türkmen 2000, p.140). Local authorities should take necessary

precaution mutually with central authorities, civillion social and Professional organisations to

make their towns a beter place to live in. Some randomly made construction plan check ups

and modifications have been creating very unlucky effects upon historical and cultural

structure of the towns. Environmental and touristic sites get badly and irrevocably harmed by

such wrong administrations.

Traffic jam is another negative factor in sustainable developments. Thousands of people are

loosing their lives and wasted in Turkey and all around the world. Better results can be

obtained if the suitable correction can be made infrastructures of transportational fascilities be

improved and when the proper transference of existing usable sources be realized.

Earthquakes cause tremendous collapses and lose of lives all over the world. Those can save

themselves may have psychological disorders. So, careful studies and calculations of the

constructions and beter selection and use of good quality materials will provide strong

fascilities. This will avoid the lose of many lives and sarrowness.

Health is one of the indicator to emphesise the importance of sustainable development. For a

helaty community a clean enviroment is firstly needed. Living in a clean, neat media does

increase the quality of life. Lesser expenditures for health increases communal savings, such

savings will help the development of the countries progresses and to have a prosperous life.

World peace is the subject that can be benefited from to obtain best results in sustainable

developments.No natural destruction can compete with the pollution may be caused by the

wars. The matter of armaments and wars were always neglected to mention in the

environmental literatures by which they do put forward their views by all chance about the

environmental protection. Neverthless should those invested billions of dollars for armaments

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be allocated to help settling peace, protecting cultural values and for an honourable human

living, there would remain no poverty, hungerness and pollution all over the world. Those

realistic countries, being aware of loses due to wars always stay away from supporting, feding

or provking the terrorism. This takes the human being to peace and confidence.

4.2.Who Polluts Will Pay Principle

Environmental cost inclusively to turn the responsibility and duty of preventing the pollution

over to the pollutant by charcing the total cost of the use of natural sources. However, its not

always possible to identify the pollutant. That’s why a great potion of the pollution cost are

rather made paid by the public through the taxes. For instance, Turkey being an OECD

member has been having maximum revenue through the taxes relevant to environment, that

4,8% GNDP of Turkey and 25% of the total income taxes weren’t set up for environmental

purposes. Neverthless the ratio of expenditures fort he prevention of pollutions to GNDP,

1,1%could hardly be increased to 1,2%. (http://www.oecd.org/dataoecd/54/17/42198785.pdf,

p.21) It’s rather diffucult to detect or identify the individuals causing the pollutions. There is a

need for very precise good detection network. To realize such an attempt, public should be

with reasonable education conscious, capable of preserving his civil rights an be dynamic

ones. There should be no pressure on dense population and poverty, as otherwise the problem

of hunger will exist in such a community. If the individuals are having some fear and

anxiousness for their survivals, environmental problems are then nothing more than a fantastic

matter for them. Therefore the subject sustainable development is definitely an ethical

concept. Communities or individuals must have ethical responsibilities that not look after only

fort he prosperities of their own groups but must for those who have no support and uncapable

of expressing themselves.

4.3.Precaution and Prevention Principle

Necessary precaoutions must be taken before making any decisions and testing for probable

reactions may arise from such decisions. All precautions no matter how effective they may be

won’t be sufficient once the environmental destruction occurs.

4.4.Completing and Collaboration Principles

Environmental protection must be in harmony with other policies and must go for

collaboration in all fields when necessary. But, reducing the globally occured pollutions it is a

must to have an international colaboration. The dimensions of such international

collaborations and sharing the attendances rather depends on the countries capacity in creating

Technologies and their usage.

4.5.High Level Protection Principles

When taking any kind of decision the authorised unit or societies must take the environmental

policies under considerations. Law makers should also obey these rules as well.

4.6.Prevention at Source Principle


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Environmental harms must be readily prevented at source, otherwise there will be not much

meaning once the damage occurs. For example, one of the most important subject of Turkey

is forest fires. The main point about such fires is not to have the start of such fires because the

useful flora and wildlife can nnot be reobtainable. Such fire does not only destroy the nature,

but burns those inhabitants site sor villages. Billions of tl.s worthed goods get simply lost.

Turkish development policies from the planning period to present times has shown a progress

towards the sustainable development with in the dimensions of economy environment and

community activities. In spite of the marked progresses achieved in this field, the observation

and evaluations of sustainable developments have remained limited. Some small scale local

studies were realized on this subject neverthless the need preparing Turkey’s national

sustainable development indication set and index is stil valid.

5.SUMMARY

The most essential principle in environmental protection is to provide proper utilisation of

natural sources in right balance and to look after and pressure rightfull share among the

generation. Therefore, it is a must to seriously accept research and developments for

introducing new Technologies into the circulation. Must be precise to benefit from the

recycling possibilities for effluents coming from the productions and to aim to edible sources

and use the sources but not finish. Environmental and economical policies those will provide

the sustainability must take over a dominant role. Excessive productions and selfishness in

consumptions will never be ethical and will also maket he most reasonably applicable policies

invalid about the environmental protection. The complementary policies which the

international collaborations and harmony and will fallowing the effectiveness of the

appropriate distrubution of the sources, productions and consumptions seems to give very

meaningful results and high level protective precautions are thought to be a fruitful and will

be preventive against the probable environmental problems right at the source before coming

into being fort he global effectiveness of the sustainable development policies and to transfer

a livable environment to the generations. An intelligance having the power and desire to live

in a clean and neat surroundings snd also fighting against all sorts of pollutions in the world

must build its soverignty all over the world.

BIBLIOGRAPHY

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Çevrenin Ekonomik Analizi, Alfa Aktüel, Bursa.

BURROWS, Paul (1980), The Economic Theory of Pollution Control, First MIT Press

Edition Cambridge, Massachusetts.

ÇEPNİ, Elif (2010), Ekonomik Göstergeler ve İstatistikler Rehberi, Seçkin Yayınevi, Ankara.

ÇOKGEZEN, Jale (2007), “Avrupa Birliği Çevre Politikası ve Türkiye”, Marmara

Üniversitesi İİBF Dergisi, Cilt XXIII, Sayı 2.

DAĞDEMİR, Özcan (2003), Çevre Sorunlarına Ekonomik Yaklaşımlar ve Optimal Politika

Arayışları, Gazi Kitabevi, Ankara, Kasım.

DOĞANER GÖNEL, Feride (2010), Kalkınma Ekonomisi, Efil Yayınevi, Ankara.

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GÖRMEZ, Kemal (2003), Çevre Sorunları ve Türkiye, Gazi Kitabevi, Ankara.

KARABIÇAK, Mevlüt, ARMAĞAN, Ramazan (2004), “Çevre Sorunlarının Ortaya Çıkış

Süreci, Çevre Yönetiminin Temelleri ve Ekonomik Etkileri”, SDÜ İİBF Dergisi, C.9, S.2.

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Kalkınma Johannesburg Zirvesi)”, İktisat İşletme ve Finans Dergisi, Sayı 198, Eylül.

KAYA, A.Ayşen (2008), “Uygun Teknoloji Seçimi ve Kalkınma”, Kalkınma Ekonomisi

Seçme Konular, Editörler: Sami Taban ve Muhsin Kar, Ekin Basım Yayın Dağıtım, Ankara..

KÜÇÜKKALAY, A.Mesud, TÜRKCAN, Kemal (2008), “Nüfus ve Kalkınma”, Kalkınma

Ekonomisi Seçme Konular, Editörler: Sami Taban ve Muhsin Kar, Ekin Basım Yayın

Dağıtım, Ankara.

TOPRAK, Düriye (2006), “Sürdürülebilir Kalkınma Çerçevesinde Çevre Politikaları ve Mali

Araçlar”, SDÜ Sosyal Bilimler Enstitüsü Dergisi, Yıl:2, Sayı:4.

TÜRKMAN, Ayşen (2000), Yaşanabilir Bir Çevre İçin, Dokuz Eylül Yayınları, İzmir.

USLU, Orhan (1990), Sanayileşme ve Kentleşmenin Getirdiği Çevre Sorunları, Sürekli ve

Dengeli Kalkınma Açısından Bir Tartışma”, Sürdürülebilir Kalkınma Konferansı, Türkiye

Çevre Sorunları Vakfı, Önder Matbaa, Ankara.

ÜNSAL, Erdal M. (2007), İktisadi Büyüme, İmaj Yayınları, Ankara.

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European Union Membership Process Of Turkey; Its Pros And Cons For Turkey

Turhan Durmus Gokhan

Suleyman Demirel University

Isparta/TURKEY


Abstract

The membership process of Turkey has been carried out since 1959 when Turkey first applied

to join what was then called the European Economic Community. This process had profound

influence on Turkey in many fields such as economy, social life, international policy,

education etc.

The first agreement signed between Turkey and European Union was “Ankara Agreement”

which took place in 12 September 1963. This agreement envisaged establishment of customs

union, which is aimed at integration of Turkey and European Economic Community in three

main phases. Following this agreement additional protocols were signed. The year 1987 was

another turning point for the process that Turkey applied for full membership on this date.

Besides the developments in 1987, in 2004 Turkey realized an important step on the way to

becoming a full member. In 2004 European Union Member States decided that negotiations

with Turkey could be initiated. The negotiations are still carried out. All of the agreements

and protocols in the process required Turkey perform new policies which affect the society in

many fields.

The question of how this process has affected Turkey, which is asked by many, is still one of

the most questioned issues of Turkey. It is obvious that 53 years-old process has had a lot of

advantages and disadvantages for Turkey. To see the main pros and cons clearly, the issue

must be analyzed under three main subtitles; economy, social life and policy.

Keywords: EU, Turkey, Membership Process, Customs Union, Ankara Agreement.

1. INTRODUCTION

The relations between Turkish people and the European civilization have a deep and long

history. Remarkable relations date back till the Seljuk Empire times then it continues with the

Ottomans. The Otoman Empire was recognized as a European state with the Declaration of

Paris in 1856 (Eldem, 2005). After Ottoman Empire’s collapse, Turkish Republic was

founded and its fundamental aim was to reach modern civilizations level.


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The way of reaching modern civilizations level was to internalize developments experienced

in the west without destroying our own values. Till the end of 1950s, the relations ran at an

idle, however 1959 was a landmark in view of Turkey’s relationships with Europe. In this

year the Turkish government applied to European Community to be an associate member.

The second important date is 1963. The Turkish government signed the Ankara Agreement

with the EEC. It was the first financial protocol between the community and Turkey

(Euractive 2004) and constituted legal foundations of the membership process. After Ankara

Agreement, another important component in the relations was The Additional Protocol of 13

November 1970 which meant Turkey would be a part of customs union step by step. After the

long period of negotiations, protocols and different obstacles which took nearly thirty years,

in 1995 Customs Union Agreement was signed. With this agreement, Turkey became a full

member of the Customs Union in 1 January 1996 and almost 60 per cent of Turkey’s trade is

now with European states.

1999 Helsinki Summit followed Customs Union Agreement and Turkey became a candidate

country. After Helsinki Summit, another important date was October 2004 when the

Commission presented the 2004 regular report on Turkey’s progress towards accession and

recommended the opening of accession negotiations with Turkey in this report (Pime Ministry

Undersecretariat of Customs 2007). In October 2005 negotiations started and membership

process took a new route.

As seen above, Turkey has a very long membership process. The main aim of this long and

grueling period was to reach modern civilizations, therefore what must be asked at this point

is what are the pros and cons of this membership process for Turkey. In this study this

question will be examined.

2. Advantages of the Membership Process

The long membership process has had profound affects on Turkey in many areas. Main

advantages of the process can be classified under these subtitles;

2.1. Political Framework

In political area, the membership process has gained Turkey many important aspects. Turkey

is a geographically strategic country which has strong bounds with Asian Turkish Countries,

Muslim World and Balkan Countries. If Turkey can carry out effective policies toward these

areas, it can be one of the key states in the union and increase its effectiveness. Using her

cultural, historical and religious ties, Turkey can be an important bridge between the east and

west, that is because Turkey is one of the unique countries that have such strong ties with both

the east and the west, which makes Turkey an important player.

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2.2. Democracy, Social Standards and Human Rights Framework

The process has contributed enormously to the development of democracy understanding in

Turkey. Turkey has been exposed to many military coups and as a result there existed a

morbid understanding that army have right to interfere with the government. This means army

is the power above all foundations, which conflicts with the democracy notion. During the

process positive steps have been taken to eliminate this misunderstanding and democracy has

been strengthened through the laws and regulations passed during the process. Actually the

membership process has been used as an instrument to convince the obsolete pro-militarists

and achieve the real democracy.

During the membership process, human rights and judicial reforms have been one of the most

important issues that should be dealt with neatly. The civil, political, social and economic

rights of humans are likely the main concerns of the union. Some reforms aiming at enriching

human rights, judicial organization and eliminating strict restrictions have been dictated by

European Union as a part of membership conditions and these reforms have had positive

effects in terms of human rights and social standards. Many practices such as capital

punishments, torture, child labor, restrictions on freedoms, poor working conditions, poor

social security etc., which are not suitable for a modern country, have been amended or

entirely abolished in accordance with European Union standards.

2.3. Economic Framework

When examined the economic benefits of the membership process, it is clearly seen that

Customs Union is the key term in this field. With Customs Union Agreement Turkey has

taken an important step in view of her technical regulations in economic fields. To be able to

exist in European markets and compete with other states, Turkey needed production

standards. These high standards and regulations were provided with Turkey by European

Union as parts of the membership process. Customer satisfaction, food security and product

quality are main targets of the regulations and undoubtedly these regulations increased quality

and standards in Turkey.

European Union means a new market for Turkey. European Union lacks of many products

which are abundant in Turkey. If Turkey can achieve quality and high technical standards, she

can make huge profits from the new market. With the process many regulations about export

and import were made flexible and trade among Europe countries became much easier. This

increased Turkey’s economic importance in the region as well.

Turkey’s location resembling a bridge between Asia and Europe became much more

important with the membership process. With Turkey which is dependable partner state,

European Union has broaden its economic affairs to Middle East and Asian states. As a result,

Turkey’s importance and effectiveness got bigger.

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2.4. Cultural Framework

Cultural framework is one of the most controversial issues in the membership process. Some

spheres argue that cultural alienation occurs as a result of the reforms, developments and

alterations experienced during the process, while others argue the society has interaction with

other cultures which results in positive feedbacks.

Being aware of different cultures and taking good samples from these cultures may be one of

the most significant outcomes of the process. During the process, many reforms have been

realized in all spheres, a lot of Turkish citizens had chance to visit different countries of the

union, many university students have benefited from different exchange programs and

undoubtedly all of these have contributed to cultural structure of Turkey. For example, many

university students had a chance to travel different countries of the union and these

experiences opened up new vistas for them.

Apart from social interaction, there are cultural outcomes stemming from economical, social

and political developments. Especially social reforms affected Turkey’s cultural structure

more than the others. Many social reforms bettering life conditions have been passed and

cultural aspects started to alter as a result. For example, many restrictions on freedoms have

been abolished and the citizens added freedom understanding to their cultural heritage.

Another good example is that effect of military foundations on fields of politics has been

eliminated and democracy understanding has been internalized as a part of culture.

3. Disadvantages of the Membership Process

In spite of the advantages mentioned above, there are many disadvantages experienced and

foreseen. The main issues centre on fear of cultural assimilation, interference to domestic

policy and possible compatibility problems.

3.1. Possible Compatibility Issues

There are two main roots of a culture; the first one is religion and the other one is national

history. Nearly all of the European Union countries come from the same religious roots and

they have a common historical background. On the other hand, the Christian Europeans put a

distance on every different social, religious and ethnic structures and cultures for ages. They

excluded and tried to destroy the different cultures and these thoughts remained not only in

politician’s minds but also remained in regular European citizen’s mind (Hatipoğlu 2004). At

this point there is a strong controversy that Turkey has a different religious and historical

background. If the union is a Christian Union as implied above, does Turkey have a place in

the union? Even if she finds a place, can she have adaptation? These are the questions which

are asked and examined by both sides.

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3.2. Fear of Cultural Assimilation

Each culture has its own unique values and aspects. In the process many values and aspects of

Turkish Culture has degenerated as a result of dominant culture of the union which stems

from economic, social, political and cultural strength of European Union. Many citizens of

Turkey are afraid of cultural assimilations and the signs of cultural assimilations observed till

now have supported their concerns.

3.3. Interference with Domestic Policies

Each state has unique laws, foundations, regimes, state structures... As a result, some laws

necessary for a country can be found exaggerated or insufficient by another country. Similar

conditions can be seen in the membership process. Many regulations and laws had to be

abolished, changed or passed in accordance with European Union’s requirements. This case

raised the questions in minds whether European Union interferes with Turkey’s domestic

policies. Does European Union have right to force Turkey to change any law about her own

domestic policy? This is one of the biggest question marks in minds.

Another worry is that the future of the EU is not certain. It is a big question whether EU is

going to be a union of states or a federal state or something else. But it is certain that the EU

is moving towards to a federation. Modern state has the right to control its domestic affairs

and can decide for its actions.(Tulgar 2009) If European Unions is moving towards federation,

in the future will Turkey be able to decide for her own actions or will Turkey control her own

domestic affairs herself? Is Turkey’s sovereignty restricted?

4. Conclusion

The membership process of Turkey has been carried out since 1959 when Turkey first applied

to join what was then called the European Economic Community. This process had profound

influence on Turkey in many fields such as economy, social life, international policy,

education etc. The question of how this process has affected Turkey, which is asked by many,

is still one of the most questioned issues of Turkey. It is obvious that 53 years-old process has

had a lot of advantages and disadvantages for Turkey. In this paper, main advantages and

disadvantages of the process are mentioned and examined under various subtitles.

REFERENCES

Ulgar F. G., Advantages and Disadvantages of EU Membership for Turkey, M.A. Thesis,

2009, Bahcesehir University, İstanbul.

Eldem E., Ottoman Financial Integration with Europe: Foreign Loans, the Ottoman Bank and

the Ottoman Public Debt, Boğaziçi University, Department of History

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Hatipoğlu M. M., Avrupa Birliği: Çağdaş Uygarlığın Yolu mu, Ulusal Egemenliğin Sonu mu?

( Is the EU way to modern civilizations or the end of national sovereignty?) Symposium, 08-

09.11.2004, Istanbul Hacettepe University Publication

Hakim A., Middle East Needs Turkey’s EU Membership, The Journal of Turkish Weekly

Opinion, 02 October 2005

Euractiv

http://www.euractiv.com, the independent media portal fully dedicated to EU affairs, 2007

Ministry of Foreign Affairs

http://www.mfa.gov.tr/agreement-establishing-an-association-between-the-european

economic-community-and-turkey-signed-at-ankara_-september-1_-1963_.en.mfa, 2008

The Role Of Twin Deficit Problem In Sustainable Growth: An Econometric Analysis

For Turkey

Halil Uçal, Mehmet Bölükbaş

Adnan Menderes University, Faculty of Economic and Administritive Sciences,

09900, Nazilli, Aydın, Turkey.

E-mails:[email protected], [email protected]

Abstract

In economics literature the relationship between budget deficit and current account deficit is

known as twin deficit hypothesis. The Keynesian Approach accepts a relationship between

two deficits. In contrast to this, Ricardian Equivalence Hypothesis defends there is no

relationship between these two deficits. Twin deficit has become the subject of several studies

to test which of these hypotheses are reliable but no consensus has achieved. Some studies

found a relationship from budget deficit to current account deficit but some of them had the

opposite result. Especially after 1980 it is known that many developed and developing

countries encountered with this twin deficit problem. Also Turkey has the problem of twin

deficit. Therefore, it is important to find whether there is a causality between them and the

direction of this causality.

In this study the relationship between budget deficit and current account deficit is examined

by using Johansen Cointegration Analysis. This study is based on period 1996:Q1-2011:Q4.

According to results of co-integration; variable coefficients are statistically significant and

consistent with what we expected in hypotheses. CAD has a significant negative effect on

BD. When there is a 1% increase in CAD, BD decreases 0,12%. This finding is consistent

with economic theory because according to Keynesian Approach two deficits have

http://www.mfa.gov.tr/agreement-establishing-an-association-between-the-european

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relationship with each other. However, in contrast to this approach, the direction is from CAD

to BD and also coefficient is negative.

Keywords:Budget Deficit, Current Account Deficit, Sustainable Growth, Econometric

Modeling, Turkey

1. INTRODUCTION

The Twin Deficit is referred to a situation where an economy is running both Current Account

Deficit (CAD) and Budget Deficit (BD). According to Ricardian Equivalence CAD and BD

are not correlated. Budget deficit is a result of tax cut which reduces public revenues and

public saving (Alkswani, 2000: 4). Decrease in public savings will be compensated by an

increase in private saving. Therefore national saving will not be affected and the budget

deficit will have no effect on the current trade deficit (Alkswani, 2000: 4). On the other hand,

according to Keynesian proposition the two deficits are linked and the direction is from BD to

CAD. Because if there is a budget deficit, government has to borrow more and as a result the

interest rates rise. The rise of interest rates leads inflow of money from abroad and then the

local currency appreciates. The appreciation of currency results with increase in import and

decrease in export. As a result, trade deficit increase and current account balance distorted.

The twin deficit has started to become a problem with the beginning of the 1980’s in USA.

Increase in military expenditures and decrease in income tax raised budget deficit. The

increase in budget deficit caused increase in debt of US to the rest of the world and therefore

caused distortion in balance of payments. After the global crisis in 2008, it is seen that not

only in USA also in other developed and developing countries have the same macroeconomic

problems. Especially in developed countries such as European countries faced with serious

problems in their economies. Growth in developing economies such as China and India has

become a danger for developed countries. Foreign trade worsened and caused decrease in

balance of payments in western countries. Also high borrowing of governments deepened

crisis in European countries.

In recent years, CAD has become the most discussed issue for Turkey’s economy. According

to Peker (2009) macroeconomic policies such as inflation targeting generally cause

appreciation of local currency and thus stimulate import. Turkey has lack of savings like other

developing countries. Because of this, growth in economy depends on import oriented

production and consumption. Although Turkish economy performs high level of growth, the

trade balance is worsening. In the last decade Turkish foreign trade has showed a large

increase. However, increase in trade volume has become more than increase in export. Also

increase of gas and oil prices in the world has increased Turkey’s energy expenditure.

Therefore trade balance and also current account balance worsened.

After the 1999 earthquake and 2001 crisis, fiscal policies tightened and to increase the

revenues new tax policies implied. Especially new taxes such as Private Consumption Tax

(ÖTV) on import oriented goods implied to help improving budget balance. Especially ÖTV

revenues on petroleum products, almost totally import oriented, helped to finance the budget

deficit. Tax burden is 20% in 2011 which was 13% in 1998. Also share of value-added taxes

(VAT) from import in total value-added tax revenues raised to 17% which was 11% in 1999.

The gap between domestic VAT and VAT from import is closed as of 2011.

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The growth in economy and tightened fiscal policies reduced the vulnerability to crisis of

Turkish economy. However, good performance of budget balance had no positive effect on

balance of payments. Export-import ratio was under 70% except 2001 and 2009. After 2001

Trade deficit increased continuously and in period 1997-2004 CAD/GDP ratio was 1,1% but

in period 2005-2010 the ratio raised to 5,1%.

Graph 1 shows the relation of BD and CAD in the last 15 years.

Figure 1. Budget Deficit and Current Account Deficit in Turkey, 1996-2011

(millions of $)

Source: Electronic Data Delivery System (EDDS), CBRT, 2012.

As seen in the figure, especially after the 2001, Current Account Balance continuously

worsens. However, in this period Turkish economy experienced high growth rates. With the

global financial crises in 2009 CAD decreases sharply. After that it increases sharply too. In

this period BD moves in the opposite direction. According to graph, BD did not rise over 30

billion dollars except 2009. Shrink in economy and decrease in foreign trade decreased budget

revenues in 2009. However in the last decade BD/GDP ratio decreased continuously and

become -1.4% as of 2011. This ratio is less than 3% which is the reference value in Maastricht

Criteria. As of 2011 most of the EU member countries do not meet this criterion.

In this paper it is discussed whether CAD and BD has a correlation with each other and if

there is, in which direction is this relationship. According to hypothesis of this paper there is a

correlation between these two deficits and it is negatively correlated. Because the increase in

trade deficit increases the budget tax revenues and this help to decrease budget deficit.

2. LITERATURE

In economic literature, there are many empirical researches that focused on twin deficit

problem. In 1980’s United States faced with increase in federal trade deficit (TD) and federal

budget deficit together. After that the relationship between trade deficit and budget deficit has

become an important subject for researchers.

Darrat (1988) tried to find the linkage between TD and BD by using data period 1960:I to

1984:IV for United States. He found the evidence of causality from budget deficit to trade

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deficit and stronger causality from trade to budget deficit by using multivariate Granger

Causality Test.

In the other study for the U.S., Enders and Lee (1990) searched the relationship between BD

and CAD in period 1947 to 1987 by using VAR analysis. They found that government

spending innovation generates a persistent current account deficit.

Also, Abelln (1990) examined the relationship between federal budget deficits and

merchandise trade deficit for U.S. He used multivariate time series within autoregressive

model for period 1979:02 through 1985:02. He found that indirectly budget deficits affect

trade deficits.

Another work on US budget deficit and current account deficit linkage is study of Bahmani-

Oskooee (1989). He examined the linkage in period 1973-1985 and concluded that the budget

deficit contribute to current account deficit.

Not only U.S. but also other countries are faced with this twin deficit issue. Therefore, there

are studies about other countries too. Islam (1998) examined the casual relationship between

budget deficits and trade deficits of Brazil from 1973:1Q through 1991:Q4. The results

suggested that there is a bilateral causality between them.

Vamvoukas (1999) used annual data in period between 1948 and 1994 for Greece. He used

error correction model for the analysis and found that budget deficit has short and long run

positive and significant causal effects on trade deficit.

Alkswani (2000) studied on twin deficit problem in petroleum economy by using Saudi

Arabia annual data from 1970 to 1999. In his empirical analysis he used ECM, Johansen

cointegration and Granger bivariate causality tests and as a result found that trade deficit

causes budget deficit.

Also in Turkey, there are many studies focusing on Turkey’s twin deficit problem. Some of

these studies are Ay, et al.(2004), Uğur and Karatay (2009), Aksu and Başar (2005), Utkulu

(2003), Yücel and Ata (2003), Kutlar and Şimşek (2001), Zegin(2000), Sever and Demir

(2007), Akbostancı and Tunç (2002). Some of them used current account deficit variable and

some used trade deficit variable in their empirical studies. Most of them used quarterly data

for Turkey.

Akbostancı and Tunç (2002) used quarterly variables between 1987:Q1 and 2001:Q3. They

used Budget balance and trade balance as a percentage of GDP. By using ECM and

Cointegration analysis the empirical results show that there is a long run relationship between

two and in the short run worsening of budget balance worsens trade balance.

Sever and Demir (2007) used quarterly data between the years 1987 and 2006 to examine the

relationship of budget deficit with current account deficit. By using stationarity test, granger

causality test and VAR analysis they found that budget deficit influence current account

deficit indirectly.

Şimşek and Kutlar (2001) used budget deficit and trade balance seasonally adjusted data in

log form in period 1984(4) through 2000(2). In the analysis stationarity test, granger causality

test, misspecification test, cointegration test and ECM used and found that there is a positive

relationship between two variables and trade deficit increase budget deficit.

Zengin (2000) used seasonally adjusted quarterly data for period 1987:I through 1998:I. The

main variables are trade deficit and consolidated budget deficit as ratios to GNP. In the

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analysis VAR, Variance decompositions and impulse response function used. The result of

the empirical analysis is that budget deficit influence trade balance.

Yücel and Ata (2003) used yearly data from 1975 to 2002. The variables are current account

deficit an budget deficit both in log form. The result of the empirical analysis is that there is a

cointegration between CA and BD and there is a long run positive relationship. Granger

causality test results say that causality is from BD to CA in lag(1) and causality is from CA to

BD in lag (3,4 and 7).

Utkulu (2003) used budget deficit and trade deficit variables as yearly data in period between

1950 and 2000. By using cointegration analysis and ECM, he found that there is a two sided

long run causality between budget and trade deficits.

Ay et al.(2004) used monthly data between 1992 and 2003 for the empirical analysis to find

the linkage between BD and CAD. The variables used in the empirical analysis were in

percentage of GDP. They used Granger Causality test and regression analysis. According to

the empirical analysis there is reciprocal relationship between two variables. According to two

regression analysis the coefficients are positive.

3. MODEL, METHOD AND DATA SET

In this section, a multivariate model has established to investigate twin deficit problem in

Turkey.

BD = β0 + β1 CAD + Ut (1)

Where BD, CAD, are budget deficit and current account deficit respectively. Budget deficit

(BD) is generally defined as an amount by which some measure of government expenditure

and some measure of government revenue. BD is dependent variable, whereas, current

account is independent variable in this model. And current account deficit (CAD) Current

account deficit includes foreign trade in goods, services and transfers. Current account occurs

when a country’s total import of goods, services and transfers is greater than total export of

goods services and transfers. Many studies in the literature use BD as an independent

variable. But in this study BD is used as dependent variable unlike other studies.

This paper adopted the method of co-integration first found by Engle-Granger (1987),

developed by Johansen (1988) and applied by Johansen and Juselius (1990). This method

depends on direct investigation of co-integration in the vector autoregressive (VAR)

representation and produces maximum likelihood estimators of the unconstrained co-

integration vector, but it allows one to explicitly test for number of co-integration vectors.

Johansen’s methodology takes its starting points in the vector auto regression (VAR) of order

p given by;

yt= A1 yt-1 + ……. Apyt-p + Bxt + Ɛt, (2)

Where yt is a k vector of non-stationary variables I(1), xt is a d vector of deterministic

variable; and Ɛt indicates an innovation vector. This VAR can be written as;

p-1

Δyt= π yt-1 + Σ τiΔyt-I + Bxt + Ɛt, (3)

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i-1

where

p

π = Σ Ai– I, τi= - Σ Aj. (4)

I=1

Where cointegration hypothesis defined as a reduced rank of the matrix π is stated in the form

of π = αβ. α and β represent the two matrix which have (kxr)-dimensional and r rank. r is the

number of co-integration (rank), β is a co-integration vector showing long-term effects of

variables in the equilibrium relations and α indicates speed of adjustment in error correction

model. Accordingly an matrix π is estimated from an unrestricted VAR in Johansen method

and tested that specified conditions with reduced rank of π rejected or not. And determined by

the help of Johansen method’s test statistics (λtrace and λmak) how many rank of the matrix π

has.In this context, the data set of the variables used to determine the twin deficit problem in

Turkey belong to1996:Q1-2011:Q4 period. All data were taken from Electronic Data Delivery

System (EDDS) published by the Central Bank of the Republic of Turkey (CBRT). And

Econometric Views (Eviews 5.1) software program was used for all tests and estimates.

4. EMPIRICAL RESULTS AND DISCUSSION

4.1. Pre Tests

Before constructing the Johansen method, it is important to make some process and pre-tests.

Firstly the independent variables were transformed into logarithmic form and variables are

understood to have seasonal effect deseasonalized by using moving average method. Then

checked the univariate time series of variables by using a unit roots test. Here checked unit

roots of variables by adopting the Augmented Dickey Fuller (ADF) (1979) test. ADF unit root

test results can be seen in Table 1.

Variables were initially tested with first-level values and then tested with the levels of receipt

of the first differences. Accordingly determined that all variables are integrated in the same

order I(1). Therefore the necessary pre-condition for co-integration is provided.

Table 1. ADF Unit Root Test

Variables

ADF Test

Critical Values

1 %

BD

CAD

-2.318258 [3]

-3.353061 [1]

-4.1118

-4.1104

ΔBD

ΔCAD

-9.694507 [2]

-4.617754 [6]

-3.5440

-3.5526

Note: Trend and intercept term is used as test type for BD and CAD variables,

but only intercept term is used for the first differences of variables (Δ). The

values in square brackets indicates appropriate length of delay according to

AIC.

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It is necessary to determine an appropriate number of delay to apply Johansen

method. There are many measurements in the literature to determine the length of delay;

Akaike Info Criterion, Schwarz Info Criterion, Hannan-Quin Criterion and Recent Forecast

Error Criterion are the most commonly used (Johansen, 1995; Enders, 1995). But these

criterions are not enough on their own. Also there should not be econometric problems in the

length of delay selected with info criterions. According to this, in this model the length of

delay is determined as two. In this context the model presented in Table 2 shows forecasting

of diagnostic test is successfully;

Table 2: Diagnostic Test Results

White

Heteroskedasticity

Chi-sq Df Prop

14.897 18 0.669

Normality Test

Jarque-Bera Df Prop

0.203535 2 0.9032

0.633672 2 0.7285

4.2. Cointegration Analysis

After checking univariate of all time series variables, now can be tested co-integration among

these two variables (BD and CAD). The purpose of the co-integration test is to determine

whether a group of non-stationary series are co-integrated or not.

According to Table 1, all variables are I(1), that means co-integration relation between

unemployment and independent variables can be investigated by helping of Johansen Co-

integration Method. The results of λtrace and λmak statistics are presented in Table 3. λtrace

and λmak statistics helps to find existence of co-integration and number of vectors. According

to the statistics; the null hypothesis (there is no co-integration relation between variables), is

rejected against to alternative hypothesis (there is at least one co-integration relationship

between the variables). In this case, should be concluded the existence of at least one co-

integration relationship at 5 % critical value.

Table 3: Co-integration Test

Null

Hypothesi

s (H0)

Alternative

Hypothesisi

s (H1)

Eigenvalu

e

Trace and

Mak

Statistics

5%

Critical

Value

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λTrace λTrace

statistic

r = 0 r > 0

0.309956 23.57399

15.4947

1

r ≤ 1 r > 1

0.009183 0.571998

3.84146

6

λMak

λMak

statistic

r = 0 r = 1 0.309956 23.00199 14.26460

r = 1 r = 2 0.009183 0.571998 3.841466

The co-integration equation is presented in Table 4. According to results of co-integration;

variable coefficients are statistically significant and consistent with what we expected in

hypotheses. CAD has a significant negative effect on BD. When there is a 1% increase in

CAD, BD decreases 0,12%. This finding is consistent with economic theory because

according to Keynesian Approach two deficits have relationship with each other. However,

in contrast to this approach, the direction is from CAD to BD and also coefficient is

negative.

Table 4: Co-integration Equation

BD CAD

Normalized

Co-integration

coefficient (β′)

1.000 0.122535

(0.08580)

Adaptation rates

coefficient (α)

-0.000427

(7.68E-05)

-5.23E-05

(0.00019)

Co-integration

Equation BD= 5001.857 - 0.122535CAD

4.3. Error Correction Model

If there is a co-integration relationship among non-stationary variables, there has to be an

error correction representation (Engle & Granger, 1987) which illustrates the dynamic

convergence of the system to the long-run equilibrium. A precondition for the existence of

co-integration is that all the variables are integrated of the same order. If this is fulfilled,

then the residuals from the long-run estimates can be used as the error correction term

(ECT) to explain the short run dynamic. The error correction variable in a short run

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dynamic relationship indicates the proportion of the disequilibrium from one period that is

adjusted in the next period (Cholifihani, 2008; 74).

Error correction model (vector error correction: VEC) was established in order to

investigate the short-run dynamics of variables acting together in the long-run and the

results are presented in Table 5. As seen in Table 5; coefficient of error correction term

(ECt-1) is statistically significant and negative. If the error correction term is negative, that

means deviations in the short-run will be eliminated and series converges to the long-run

equilibrium value again among the series moving together in the long-run. Namely error

correction term is good working. According to the result approximately 87 % of deviations

from the long-run equilibrium value eliminate in each period.

Table 5: Error Correction Model Estimation Results

BAt= β0 + β1CAt-1 + αECt-1+ ut

Variables Coefficient t-statistic

BAt-1 -0.049275 -0.33937

CAt-1 -0.247044 -1.45152

ECt-1 -0.874470 -4.69637

Invariable

term

-138.1142 -0.31490

R2 = 0.46

2R = 0.44 F = 17.12

5.CONCLUSION

In this paper we tested whether there is a relationship between BD and CAD in Turkey with

the framework of growth. In the last decade, Turkey’s economy performed well. After the

2001 crisis new economic policies strengthened the economy against crises. With the help of

tight fiscal policies, government did not compromise on the budget. However increase in

consumption, appreciated currency, lack of savings and rise in price of energy products

caused increase in trade deficit. As a result current account deficit rose. According to

empirical results there is a significant negative correlation between BD - CAD and the

direction is from CAD to BD. When there is a 1% increase in CAD, BD decreases 0,12%.

Many studies on Turkey do not cover last decade’s data. However this study reflects the

effects of structural changes in Turkish Economy after the period 2001 in terms of BD and

CAD. In this regard empirical results of this study differ than other papers. That is to say, an

increase in CAD helps to fix the budget balance. 2/3 of tax revenues come from indirect taxes

which means most of tax revenues in Turkey come from consumption tax.

It seems that economic growth in Turkey based on consumption which results with CAD.

This is not a sustainable situation. Because, in period of slowdown in the economy cause not

only decrease in CAD but also deterioration of budget balance. This situation reduces the

credibility of the government and the economy. Therefore Turkish economy has to cope with

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CAD not with tax policies but with increasing production facilities. If not, the economy may

face with both deficits at the same time.

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Hipotezi: Türkiye Uygulaması, Çukurova Üniversitesi Sosyal Bilimler Enstitüsü Dergisi,

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Arasındaki İlişki: Türkiye Örneği (1992-2003), Selçuk Üniversitesi, Sosyal Bilimler Enstitüsü

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Cholifihani, M. (2008) A Cointegration Analysis of PublicDebt Service and GDP in

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Dickey, D. and Fuller, W. A. (1979) Distribution of the Estimates for Autoregressive Time

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Engle, R. F. and Granger, C. W. (1987) Co-integration and Error Correction Representation,

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Enders, W. (1995) Applied Econometric Time Series First Edition, Wiley New York.

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Johansen, S. (1988) Statistical Analysis of Cointegration Vectors, Journal of Economic

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Ekonometrik Bir Yaklaşım: 1984–2000, Dokuz Eylül Üniversitesi, İİBF Dergisi, 16 (1), 1–13.

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TCMB (2012) Elektronik Veri Dağıtım Sistemi (EVDS), www.tcmb.gov.tr

Utkulu U. (2003) Türkiye’de Bütçe Açıkları ve Dış Ticaret Açıkları Gerçekten İkiz mi?

Koentegrasyon ve Nedensellik Bulguları”, D.E.Ü. İİBF Dergisi, 1(18), 45–61.

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Yaklaşım Dergisi,11(39), 37–67.

The Eu Integration And The Monetary Union: Why England Don’t Join The Euro

Akcay Ekrem Yasar1,Akman Elvettin2,Akman Cigdem2

1Ankara Unıversity,Ankara/Turkey

2Suleyman Demirel University,Isparta/Turkey

E-mails: [email protected],[email protected], [email protected]

Abstract

EU which was established in 1957 with Rome Treaties and in 1992 with Maastricht

Treaty made process from economic union towards political union, also has tried considering

the harmony many issues such as agriculture, commerce. One of these issues is monetary

union.

Within the Monetary Union that came into make its plans in 1969 and it was thought

that could prevent the cycle and consider the common monetary policy. In this framework, in

1979, The European Monetary System was established and then in 1986 within the Single

European Act, this process continued and in 1992 with Maastricht Treaty it became clearer.

Then in 1997, The European Monetary Institute was established and finally in 1999,

EURO was accepted as monetary unit for EU members. Now, 17 members put the EURO

account but England hasn’t yet. There are many causes about this issues such as political,

economics, social, national interests. for England. In addition, this issue or policy effected the

other relationships of England.

Keywords: EU, England, The Monetary Union, EURO, National Interests.

1. INTRODUCTION

The idea of integration in Europe begins with Dante in the 13. Century, embodied by the

Organization for European Coal and Steel established by the Treaty of Paris (ECSC) after

World War II in 1951 and the European Economic Community (EEC) established by Treaties

of Rome in 1957, the Union lived an important process of deepening and enlargement over

time (Akçay, Akman and Argun, 2011).


mailto:[email protected],

mailto:[email protected],

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The Union that also goes the political integration with the Maastricht Treaty signed in 1992

and took the name of European Union (EU), started common policy in many areas such as

Common Foreign and Security Policy, Common Commercial Policy, Common Monetary

Policy for providing integration by all means. The foundation of the Common Monetary

Policy which appears as one of these policies was implemented in the 1960s; concrete steps

have been taken in 1999 by the acceptance and implementation of the euro as the currency

(Karluk and Tonus, 1998).

Economic crisis that has started in 2008 and influenced and many Community member

countries such as Greece, Italy, influenced the world in general and the European Union in

particular. Although many countries use the euro especially in a period when the future of the

euro and the European Union is discussed, Britain's not use despite being a member of the

Unity, is seen in the current situation provides an advantage to England.

Our study focuses on why Britain doesn’t use the euro. In this sense, in our study, initially the

Community's Common Monetary Policy’s historical process will be addressed, then British

perception of the Community and the Common Monetary Policy will be mentioned and

finally the question of why Britain did not want to use the euro will try to be answered.

2. Common Monetary Policy’s Historical Development Process

The basis of the Common Monetary Policy are taken to the period starts with La Haye

Summit in December 1969 and report that was prepared under the chairmanship of post-

period Luxembourg Prime Minister Pierre Werner and was named as "Werner Report". By

the report that was completed in October 1970, Common Monetary Policy which is planned

up to 10 years in three-stage is intended. The main objective of the Common Monetary Policy

has been the liberalization of capital movements, fixing exchange rates and the creation of the

single currency (Karluk and Tonus 1998).

While the Common Monetary Policy is being designed in this way, the collapse of the Bretton

Woods system in August 1971 and U.S.A.’s let to dollar fluctuate have created instability and

made it difficult to make planned things. In this sense, monetary integration had been arrested.

Thereupon, in March 1972, member states proposed the concept monetary snake "(Snake in

the tunnel) (Gavin, 2002; Möckli, 2009). Accordingly, this system is the fluctuation of

national coins against U.S. dollars, in a narrow margin (the tunnel). (snake) However, the oil

crisis was lived during this period and the weaknesses of the dollar have completed this

process, and a Mark region consists Germany, Benelux countries, Denmark was created

(Karluk and Tone, 1998).

Then, monetary integration was replicated with the support of France and Germany in 1979

and as a concrete step European Monetary System was established (Tunçsiper and Ruby,

1998). This system is based on fixed but adjustable exchange rates. All member states except

Britain, has been included in this system. However, this system that is applied about 10 years

did not create much change.

A committee chaired by J. Delors who is the president of the European Commission was

established at the European Summit in 1988 in Hanover, for economic and monetary

integration and a report was presented in April 1989. According to this report, establishing an

institution that is responsible for economics, political coordination, national budget deficits

and monetary policy was suggested.

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In the light of this report and proposal, starting the first phase of the Economic and Monetary

Union was decided at the Madrid Summit in June 1989 and even the United Kingdom is

against, fully liberalization of capital movement in eight member states until 1 July 1990 was

intended (Karluk and Tonus, 1998).

However, with the Maastricht or European Union Treaty that was signed after the Maastricht

Summit in 1992 Community came into a political integration process and completion of

Common Monetary Policy process within a calendar was decided.

In addition, in 10 January 1994, member states have agreed to the concrete but non-binding

rules about the approximation of the economic policies. In parallel with these steps, European

Monetary Institute was established for the coordination of monetary policy. After that, related

to the single monetary policy, the national central banks have been left to the European

System of Central Banks created by the European Central Bank and this structure has taken

the place of the European Monetary Institute.

Volatility in the U.S. dollar in 1995 has show that a single monetary policy is needed in the

European Union and required, the decision of pass of the member states before 1 January

1999 to a single monetary policy that has been called "Euro”, is held at the Madrid Summit

carried out at 15-16 December 1995 and the Amsterdam Summit in 1997. The design of euro

banknotes that was accepted in 1999 passed in 2002 and while initially 12 member countries

were participated in Euro, this number today has became 17. (Erçel,

http://www.tcmb.gov.tr/yeni/banka/emu/SORULAR5.html, 2012).

3. View of England to the EU and the Common Monetary Policy

England, throughout history, didn’t look at to an integration that will be lived in Europe too

hot. Because both it doesn’t consider such an integration could be achieved and doesn’t want

the presence of another power in continental Europe except it.

Historically, Commonwealth countries are important for both commercial and foreign policy

in England. Commonwealth countries, has a share of 43% in British trade (Gavin, 2002). But

the main point in here is that England makes cheap agricultural policy with the

Commonwealth countries. In this sense, when look at to Europe, the Common Agricultural

Policy, is a policy that is under the influence of France, and more expensive than Britain's

Commonwealth policy. Because of expensiveness of Europe Common Agricultural Policy

and scarcity of agricultural land in England, and therefore the fact that England will receive

less money from Europe, than it pays, Britain was not hot to the issue, it has created

hesitation. Because this policy will create a deficit on the balance of payments in England

(Young, 2000).

However, deteriorating relations with Commonwealth countries of England in time led it to

the EEC. In fact, although United Kingdom wasn’t hot for EEC membership, it wanted to

make a Free Trade Agreement with the EEC and thus close the trade deficit by continuing

relations with the countries of the Commonwealth. However, the integration of Britain with

EEC delayed due to political events such as both the common agricultural policy, both the

pound and the Fouchet Plan area, Nassau Agreement with the EEC (Young, 2000).

While England was trying to establish a relationship with the EEC, on the other hand, it tried

to continue its relationship with countries of the Commonwealth. One of the important

reasons of this is for this is Sterling Area. England uses Sterling in trade with Commonwealth

countries and also uses excess of the sterling appears in the Commonwealth countries as a

http://www.tcmb.gov.tr/yeni/banka/emu/SORULAR5.html

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result of being deposited to London banks, in the banking system and tries to eliminate trade

deficit (Young, 2000).

As addition to this, when it is looked to international conjuncture at the inter-war period,

economic disturbances, and crises carried the world to the World War II, and the world is

connected to dollars by Bretton Woods system that was made after war. With this system,

members of the IMF were attached to a certain extent to the dollar and it was called the fixed

exchange rate. With this system, states were connected their money to dollar, their dollars to

the gold. Now, countries have excess of dollar at the end of trade started to take back this

excess (Gavin, 2002).

In this environment, even though Great Britain caught up advantage with the Pound Sterling

Area, this situation began to deteriorate in 1949. Commonwealth countries wanted to convert

their money in dollars but because of the absence of enough dollars in the hands of England, it

was forced to devalue. In fact, Britain didn’t want to devalue, and resisted until the last point.

In this sense, it banned the exits to abroad for tourism, made restriction of the sterling,

restricted military expenditures, even began to withdraw from east of Suez. Because

devaluation will be a significant loss of prestige for a strong state such as Britain. However,

when the situation deteriorated, it had to go to the devaluation. By the devaluation, moneys

value was devalued against other currencies, the price of manufactured goods was reduced

over other currencies and exports have been encouraged (Parr, 2006). In this case although

trade deficit is reduced and it also increases the value of reserves, Commonwealth countries

that have more Sterling in their hands suffered a loss and England that is a major financial and

banking center has experienced the loss of prestige. In addition, although it tries to reduce its

burden of military spending by making offset agreements with Germany, it couldn’t be

successful, and in 1967 it was forced to make one more devaluation (Zimmermenn, 2000).

Britain's EEC approach was been as result of this situation but was rejected by De Gaulle

because of the political and economic reasons

At the same time, the dollar was connected to gold by the Bretton Woods system and gold

wase demanded with the dollar surplus but because of the absence of gold reserves in the U.S.

that will do so, United States began to fall into difficulty. When U.S.A. considered that it

couldn’t protect the gold, it also directed to Germany like Britain and has worked to alleviate

its burden by Offset Agreements. However, the devaluation in England in 1967 put also the

United States into trouble. Because sterling is now transformed into dollar. Thereupon, when

De Gaulle wanted to exchange gold in its hand to gold for political reasons, the United States

lived a little more trouble and provided not to be gold demanded by applying pressure (Gavin,

2002; Hoffmann, 1964). In the meantime, Britain turned its famous banking infrastructure

into a structure that based on dollars and has become the world's second largest market in

dollar reserves. In other words, Britain now tied up its everything in dollars and became

dependent on dollars by transforming into a structure that is finance dominated than industry

4. Instead of conclusion: Britain and the Euro

Britain, whose EU membership was rejected by the French leader De Gaulle because of

political and economic reasons between 1963 and 1967, became a member of the community

after the death of De Gaulle in 1973. Since this date, although it is a member of the

Community, it approached cautiously because of particularly the Community's Common

Agricultural Policy (even it participates) and Common Monetary Policy.Because, also called

two policies may cause ill effects at England's trade policy and the banking system such as

trade deficit, deterioration in the balance of payments

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Although, England who connected itself to the U.S. dollar in terms of financial and banking

system and convert its system from Sterling into dollars as the world's second largest dollar

reserves, being a member of the community, it didn’t obey the Community's common

monetary policy especially, refused to use the euro came into force in 1999.

Britain's entry into the agricultural policy would harm Commonwealth countries, which have

an important place with Britain, both politically and commercially. Britain that has already

been damaged by the Community's agricultural policy, is working to resolve this situation by

regional development policies (Eraktan, 2006).

If we look at in terms of the Common Monetary Policy, Britain’s which is so dependent to

U.S. Dollar; inclusion to Euro will cause its damage in terms of economic, political and

prestige. In the environment that the EUROZONE whose basis was constructed by The Hague

Summit in 1969 and Werner Report, became a threat to the EU’s future by recently living a

difficult test because of the crisis, it is a fact that it provided a significant advantage to

England.

Eu Economic Integration Process Of Macedonia

Agim Mamuti

International Balkan University (IBU),Skopje, Macedonia

[email protected]

Abstract

The purpose of this research is to provide a general overview of the accession process with a

special reference to the economic integration and the challenges of the Republic of Macedonia

in the road of joining the European Union.

The European Council of December 2005 granted the status of candidate country to the

Republic of Macedonia. The Stabilization and Association Agreement (SAA) between the

Republic of Macedonia and the EU was signed in April 2001 and entered into force in April

2004. The Council adopted the Accession Partnership for the country, including key priorities

for reform, in February 2008. In October 2009, the Commission recommended to the Council

to open negotiations with the country, as well as to move to the second phase of SAA

Implementation. These recommendations were reiterated in 2010. The Council has not yet

concluded its deliberations on the Commission's proposals. Visa liberalization for citizens

travelling to the Schengen area has been in force since 19 December 2009.

The country has a small, open economy, with total trade in goods and services recovering to a

level of 114% of GDP in 2010, following the 2009 recession. Trade integration with the EU is

advanced, with about 63% of all exports currently going to and about 53% of imports

originating from the EU. The CEFTA region is the country's second most important trading

region, accounting for around 24% of exports and around 10% of imports. The export

structure continues to be highly concentrated on a limited range of products, with textiles and

clothing accounting for about 17% of total exports and manufactured iron products for 26% in


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2010. The stock of FDI increased to about 51% of GDP, with the Netherlands, Slovenia and

Austria being the biggest investors. In total, EU countries accounted for about 60% of total

FDI inflows. Switzerland, Turkey and Serbia are the most important non-EU investors. The

exchange rate against the euro has remained stable in nominal terms. Price competitiveness

has remained largely unchanged. Overall, in the last years trade integration with the EU is

well advanced, but exports remain concentrated on a few price-sensitive products.

International price competitiveness remained largely unchanged.26

Keywords: EU, economic integration, Macedonia, Stabilization and Association Agreement

(SAA), candidate-country, membership

1.EU ECONOMIC INTEGRATION PROCESS OF MACEDONIA

Macedonia’s process to become a member of the European Union (EU) is an objective that

enjoys broad national consensus. This process for EU membership thus must shape national

policy, both foreign and domestic, the reform initiatives, and the economic agenda and

business strategies.

Macedonia’s EU aspiration provided the compass for the reforms that were implemented in

the transition process, and it still anchors the social agreement among virtually all

Macedonian citizens. It is important for this reason to review here what has been achieved and

what is to come; bearing in mind that EU integration reaches into every aspect of the life.

Economic growth is increasingly important for Macedonia for its own sake as well as for the

country’s path toward the EU; equally important is the growth of its institutional and

administrative capacity at all levels of government, from the local to the international. The

main objectives and stepping stones in the next stages of Macedonia’s EU integration will be

economic growth, economic and social opening to the EU and institutional preparedness.

An important milestone in Macedonia’s path toward EU membership was the signing of the

Stabilization and Association Agreement (SAA) in 2001. This agreement provided a strong

motivation for the intensification of the adjustments necessary for the fulfillment of EU

membership criteria. One positive outcome of the SAA was the establishment of an

appropriate administrative structure and of an institutional framework for implementation of

the Agreement as well as for monitoring of its implementation.27

The next important step occurred in December 2005, when Macedonia achieved the status of

a candidate country. This was an important political recognition of the progress and reforms

achieved; however, an important reservation to this positive assessment of Macedonia’s

progress is the fact that a date for negotiations has not been set because the country is not yet

ready. The acquisition of candidate status does not mean fulfillment of the strict EU criteria

for membership. In fact, Macedonia has only reached the point at which the complex process

26 Official documents from the web-page of Ministry of Foreign Affairs of RM,

http://www.mfa.gov.mk

27 Commission of the European Communities, The Republic of Macedonia 2011 Progress Report,

Brussels, October 2011, p.25

http://www.mfa.gov.mk/

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of negotiation about the individual chapters of the Acquis Communautaire and of fulfillment

of the membership criteria, especially the economic ones, begins.

Fulfillment of the economic criteria for membership must be a top priority for Macedonia, not

only in order to meet the standards of the EU, but also because they are crucial for

Macedonia’s economic and social progress. Macedonia needs to fully develop a functioning

market economy that will allow an even ground for competition and weed out all the

oligarchic elements in the economy that stifle its overall growth. The Macedonian economy

needs to be able to cope with the intense competitive pressures and market forces within the

EU. Consequently, Macedonia needs to be aiming for where the EU economy will be at the

end of the reporting period not where the EU economy is today.28

The capacity of Macedonian institutions to effectively manage the requirements implied by

EU membership and, before membership, the administration of processes such as the

implementation of laws and the management of funds, needs to be strengthened. Answering

the European Commission Questionnaire revealed that Macedonia has the potential to meet

the administrative requirements of EU membership, but this potential cannot remain latent

and needs to become the norm. Firm political commitment and leadership, not only

management, is needed to prepare these institutions and the Macedonian economy for

European integration. Municipalities need to be able to administer funds effectively and

transparently. They need to be able to effectively interact with EU organs and to formulate

sound and comprehensive policies Public and civil servants from all levels of government

need to be trained to work within European standards and processes, to effectively plan,

budget and administer funds, to create projects and manage them ably and to be capable of

being a positive and proactive member of the EU that can fully participate in European

governance and in the formulation of EU policies. 29

The next step ahead is the negotiation process, which are both a great opportunity and a great

threat. If Macedonia proceeds efficiently in this process, it will demonstrate to itself and to the

world its institutional readiness for membership; if it fails to do so, its image as a modern state

will suffer correspondingly. A successful negotiation will have important positive economic

benefits and solidify a fragile national consensus; a negative outcome to the negotiation may

nurture Euro skepticism and a general resistance to any further reform processes since these

will be seen as having high costs and few benefits.

Macedonia will not be in a position to negotiate parallel chapters at the same time, as other

countries have done; it will need to do so sequentially. This may slow the overall process.

Macedonia need not rush this process, but, rather, it should strategically adopt segments of the

Acquis if it is to its benefit to do so and leave those segments that may be hardest for its

economy and society to internalize for last. Furthermore, it is very important that there should

be some continuity among Macedonia’s negotiators. They will also need to communicate

intensively with the general public and explain the process so as to maintain the national

consensus for EU membership. Consequently, the process of negotiating Macedonia’s entry

into the EU must be as transparent as possible.

28 Official documents from the web-page of the Secretariat for European Affairs of RM,

www.sep.gov.mk

29 Национална програма за усвојување на правото на ЕУ – ревизија 2011, Секретаријат за

европски праша (Влада на Република Македонија), Скопје

../../../../../Erna%20Ahmedspahic/Desktop/subasi%20issd.erna/www.sep.gov.mk

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The time between achieving candidate status and the negotiations leading to future

membership will be challenging, both politically and economically. While issues of political

stability and interethnic dialogue have dominated the discussions between European and

Macedonian politicians thus far, economics will dominate the next stage leading toward EU

membership.

Macedonia needs to undertake a major overhaul of its laws and institutions to prepare for EU

membership. Such a large revision of laws, regulations and institutions should, in the long

term, be beneficial. However, there will be transition costs, and considerable thought must be

given to the phasing in of various EU-related laws and regulations. Consequently, Macedonia

must create the capacity to weigh the costs and benefits of adopting specific EU laws and

regulations at any given time and to develop a comprehensive plan for doing so.

Preparing for EU membership will be a major task for the Macedonian government and

society, as well as for the business sector. While the experience of other countries suggests

that the pace with which changes are implemented may accelerate over time, it is critical that

Macedonia have a clear roadmap of the process, one that identifies costs and benefits of

adopting specific measures and weighs them against Macedonia’s ability to absorb such

changes as well as their congruence with Macedonia’s economic strategy at any period of

time.30

Macedonia has an enormous potential market open to it because of the free trade agreements

(FTAs) it has signed, including the one with the European Union. Overall, the FTA’s did not

initially stimulate Macedonian exports very much, suggesting a weak supply response on the

part of Macedonian exporters or ineffective implementation of the FTAs.31

Macedonian producers must pay greater attention to such factors as environmental standards,

packaging, quality, marketing, management techniques and market study to prepare for the

EU market.

It is hence worthy of mention that one of the elements of the pre-accession process is access

to EU funds which will be channeled through the new Instrument for Pre-Accession

Assistance (IPA). The main goal of the pre-accession funds is to prepare the institutions of

future member countries for the management and administration of the much larger Structural

Funds that the country will have access to once it becomes a member of the EU.

Indeed, in order to obtain the pre-accession funds, the country needs to define its development

and investment priorities for the medium-term, as well as clearly define and organize the

institutional mechanisms for using the funds. The IPA funds will have a positive effect on

economic growth through creation of a more attractive business climate by contributing to

investments in infrastructure, institution-building, human resources, agriculture,

competitiveness of firms, all with a consideration for balanced internal regional development.

Within the region, Macedonia has an advantage in bordering the EU, in the form of Greece, to

the south. Indeed, the bulk of foreign investments that have come in the past years have been

from Greece. However, the possibility of exporting to the rest of the EU is significantly

hampered by the numerous borders that need to be crossed to reach the biggest part of the EU

30 Official documents from the web-page of the Ministry of Economy of RM, www.economy.gov.mk

31 EUROSTAT

../../../../../Erna%20Ahmedspahic/Desktop/subasi%20issd.erna/www.economy.gov.mk

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market. For this reason, it is in Macedonia’s interest that the rest of the Western Balkan

countries also enter the EU as soon as possible.

The EU has a market of over 500 million people32, but there is a market of sixty million

customers within this region that also can be tapped if unification of sorts occurs regardless

of, or as a prelude to, Macedonia’s entry into the EU; indeed, regional cooperation of

increasing intensity is an important aspect of the Stabilization and Association Agreement. An

encouraging move in this direction is the recent political commitment to, and the start of in

2007, a single free trade agreement (FTA) for the countries of SEE.

Improvement of land and air communication must be Macedonia’s top priority. The airport is

Macedonia’s gateway to the world and is in dire need of investments, which will come most

easily if it is fully privatized. Except for Greece, all EU countries are a considerable distance

from Macedonia, and air connections are critical for trade and business. Nevertheless, this

does not undermine the importance of Corridors 8 and 10, for both Macedonia’s regional and

European perspectives. Corridor 10 has a greater perspective of realization and natural

evolution, being also important to Greece. However, Corridor 8 will require more of a push

by Albania, Macedonia and Bulgaria. Although corridors 8 and 10 were effectively taken off

the European transport map, their importance is increasing as EU foreign policy progressively

turns toward Asia.

2.CONCLUSION

In the past ten years the Republic of Macedonia is legitimized as a reliable partner and true

ally of the EU. Macedonia has not ignored any institutional stage in the development of

relations with the EU - starting with the Cooperation Agreement, the Agreement on

Stabilization and Association, applying for membership in the European Union, up to

receiving a status as a candidate-country for membership.

The decision of the European Council of December 17, 2005 granting the candidate status for

EU membership is an event of historical importance for the Republic of Macedonia as

deserved recognition for the efforts and results achieved in the way of achieving the strategic

goal - EU membership.

The economic results achieved by the Republic of Macedonia during the transition are far

lower than the achievements in the South-eastern European countries. The numerous non-

economic events in the country and the region in the 1990’s and the beginning of the century

also contributes to this. With a low inflation rate of 2.5% in last years and a stable exchange

rate (with one devaluation of 16% in 1997), Macedonia was a leader among the transition

countries in terms of the macroeconomic stability, but numerous non-economic events in the

country and the region led to a low average growth in the entire transition period.

In the recent years, the Republic of Macedonia generally meets most of the Maastricht

criteria. The single bigger problem that our country is facing is the non-existence of a long

term 10-year bond used as a reference instrument when defining the interest rate. In this

period, the Maastricht criteria are not obligatory for the Republic of Macedonia but they still

have great significance for approximation of our economy to the European Union.

32 McKinsey, Global investor Opinion survey on corporate Governance ( 2002 )

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Having in mind the present situation within the EU, regarding the negative atmosphere for

enlargement, the implementation of Copenhagen and Maastricht criteria will simply not be

good enough for candidate countries such as Macedonia. Knowing that in the past a decision

for accession was often made for geo-strategic reasons, obtaining political support is even

more important factor for the Macedonian accession to the EU. Taking into consideration this

fact, it is a need Macedonia to solve the name issue with Greece.

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Corporate Governance Practices in Bosnia and Herzegovina

Aida Nušinović

International Burch University, Faculty of Economics,



Abstract

The purpose of this paper is to present the state of corporate governance in Bosnia and

Herzegovina, to determine the degree of its principle applications, and to emphasize the

importance of good corporate governance practices for transition economies, such as Bosnia

and Herzegovina. Corporate governance, by its simplest definition, presents a system of

management and control over the company. Good corporate governance practice is important

for the investment climate, because it provides greater security for investors and shareholders

and leads to sustainable long-term economic development. Because of the reorganization of

the still present economic system, developing countries are faced with many problems related

to the implementation of corporate governance, such as insufficient use of existing legislation,

underdeveloped capital markets and insufficient bussiness transparency of the company.

Foreign investors do not wish to invest in companies that do not apply the principles of

corporate governance and studies have shown that for making investment decisions, the

application of good corporate governance practices plays an important role. The problems

Bosnia and Herzegovina is facing are still a lack of business transparency of company

operations, as well as the insufficient protection of minor shareholders. At the end of this

paper certain guidelines are given in order to improve practices of corporate governance in

Bosnia and Herzegovina, and also the importance of their application to the company and the

country itself is highlighted.

Keywords: corporate governance, transition economies, economic development, principles,

business transparency

1. Definition of Corporate Governance

The term of corporate governance is far more complex than thought of at first, and implies not

only the way in which a company is governed, but a full range of internal and external

relations, as well as legal regulations. According to the definition of the OECD (Organization

for Economic Cooperation and Development), corporate governance involves a set of

relationships between a company’s management, its board, its shareholders and other

stakeholders. Good corporate governance should provide proper incentives for the board and

management to pursue objectives that are in the interests of the company and its shareholders

http://eur-lex.europa.eu/en/index.htm

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and should facilitate effective monitoring. The presence of an effective corporate governance

system, within an individual company and across an economy as a whole, helps to provide a

degree of confidence that is necessary for the proper functioning of a market economy. With

good corporate governance practice, values as justice, responsibility and transparency of

business are promoted. In economic societies in which a clear separation exists between

ownership and governance, conflicts of interest appear amongst interested participants in the

process of corporate governance, the influence of institutional investors, stockholders,

creditors, the administration, and employees. It is necessary that all of these relationships be

regulated in the aim of the successful running of the company.

According to who has the crucial position and role as concerns the relationships in a

company, that is, which interest groups affect decision-making, and in which way do these

interest groups participate in corporate governance, we differentiate between two types of

corporate governance:

- The open corporate governance system

- The closed corporate governance system

The open system of corporate governance is called also the market, outsider, and Anglo

American system of corporate governance, and is characteristic for corporations in the

countries of the USA, Great Britain, Australia, and New Zealand. In the open system of

corporate governance the supervision of management and the company is not in the hands of

any influential interest group, while the main role falls to the capital market and the actions of

the investors who invest in it. Managers have a key role in governing the company.

The closed system of corporate governance is also called the internal (insider) and the

European system of corporate governance, and is characteristic for the countries of Europe as

well as for countries which have harmonized their corporate governance principles with

OECD recommendations which refer to corporate governance. A closed system of corporate

governance is often used in countries with a poorly developed capital market and a

concentrated ownership structure. It is characteristic of this system for a group of stockholders

to hold a large percentage of the total number of stocks, that is, they are the owners of a

significant package of stocks, and in this way actively govern the company. In this system, the

capital market has a secondary meaning as opposed to the open system of corporate

governance.

Bosnia and Herzegovina is closer to a closed system of corporate governance, considering its

poorly developed capital market, but also due to the other characteristics of the closed system

of corporate governance.

2. Corporate governance in developing and transition economies

Developing countries are still reorganizing their economic systems, so that they face

numerous problems tied to the application of corporate governance, such as the insufficient

application of existing legal regulations, lack of personnel for corporate governance, an

undeveloped capital market, the still great presence of the state in company ownership, as

well as other problems which impede upon the application of corporate governance principles.

Good corporate governance practice is extremely important for countries in transition, and has

influence on the optimization and growth of the country's economy. A lack of corporate

governance practice leads to a negative investment climate, negatively influences the capital

market, and impedes upon the further economic growth of the country. Good corporate

governance leads towards long-term, sustainable survival of an economy. Developing

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countries need new, fresh capital and due to higher risk, foreign investors do not wish to

invest in companies who do not apply the principles of corporate governance, which reduces

the chances of the flow of direct foreign investments.

33McKinsey's study has shown that foreign investors are ready to invest 30% more of their

resources into shares of companies from Eastern Europe with good corporate governance

practice, while 40% of investors stated that corporate governance is a more important factor in

deciding whether they will invest in a company in Eastern Europe than growth potential or

profit. It is important that a company itself realize that corporate governance improves its

economy's competitiveness on the international market. A company with a good corporate

governance practice is a transparent and responsible company and as such has greater chances

for access to international sources of financing.

3. OECD principles of Corporate Governance

OECD principles (Organization for Economic Cooperation and Development) were adopted

in the year 1999 and revised in 2004, and they represent elements of good corporate

governance and contain recommendations for policy makers, law regulation makers,

investors, and companies for OECD countries, as well as in countries outside of the OECD.

The principles represent non-binding standards, good customs and instructions for use, and

may be adjusted to specific conditions in certain countries. The principles help companies in

defining their own corporate governance practices. OECD principles cover six key areas of

action: 1) construction of the frame of corporate governance, 2) rights of shareholders and

key ownership functions, 3) equal treatment of shareholders, 4) the role of interest groups in

corporate governance, 5) publishing of data and transparency, and 6) the board's

responsibility.

In the aim of promoting the application of OECD principles of corporate governance in

countries which are not OECD members, such as Bosnia and Herzegovina, regional round

tables were held, in collaboration with the World Bank, in which the policies of corporate

governance were discussed. In the year 2002, the Regional Round Table result was the White

Paper document - a recommendation on corporate governance in southeastern Europe, which

was officially adopted in Sarajevo in the year 2003. White Paper provides a list of practical

recommendations, guidelines, and suggestions to policy creators, stock markets, companies,

and others who have interest in the application of good corporate governance practices, and

helps SEE countries in the promotion of corporate governance practices. This document is

primarily focused on companies whose stocks are publically traded, but can also be applied to

companies whose stocks are not listed on the stock market. OECD principles as well as

recommendations within White Paper help in the development of national codex of corporate

governance. One such codex is the corporate governance Codex for companies listed on the

Sarajevo Stock Exchange (SASE) which represents a group of the best company leadership

practices in the world, adapted to a transitional market such as Bosnia and Herzegovina. The

codex includes the following areas: transparency in business, relationships with investors and

interest carriers, assemblies, the supervisory board, the administration, auditing and

mechanisms of internal control, as well as social responsibility. Accepting the corporate

governance codex is a requirement for companies in quotation (A list companies), while the

application of the codex is not required of the companies listed and included on the free

33 Christ College Institute of Management, Hosur Road, Bangalore 560 029

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market. A company which has accepted the corporate governance codex is obliged to abide

by the provisions of the codex, and if it is unable to implement certain provisions, it is obliged

to, within the questionnaire, which is a constituent part of the codex, state why it is not

implementing the enclosed recommendations. In this way, investors can decide whether they

wish to invest in a certain company on the Sarajevo Stock Exchange. In 2011 also Banja Luka

Stock Exchange has adopted the Standards of Corporate Governance with the aim to improve

corporate governance practices in companies which are listed on this stock exchange.

4. Corporate governance practices in Bosnia and Herzegovina

In order to analyze the application of corporate governance principles in Bosnia and

Herzegovina, the World Bank, for the first time in the year 2006, made a Report on the

Observance of Standards and the Codes ( ROSC ). An analysis of the following adherence to

OECD principles was conducted:

Table 1. OECD Principles

Section I: Ensuring the basis for an effective corporate governance framework

Principles: Overall corporate governance framework; Legal framework enforceable/ transparent;

Clear division of regulatory responsibilities; and Regulatory authority, integrity, resources

Section II: The right of shareholders and key ownership functions

Principles: Basic shareholder rights; Rights to part. in fundamental decisions, Shareholders GMS

(general meeting shareholders) rights; Disproportionate control disclosure; Control arrangements

allowed to function; Exercise of ownership rights facilitated; and Shareholders allowed to consult each

other

Section III: Equitable treatment of shareholders

Principles: All shareholders should be treated equally; Prohibit insider trading; and Board/Managers

disclose interests

Section IV: Role of stakeholders in corporate governance

Principles: Legal rights of stakeholders respected; Stakeholder redress; Performance-enhancing

mechanisms, Stakeholder disclosure; Whistleblower protection; and Creditor rights law and

enforcement

Section V: Disclosure and transparency

Principles: Disclosure standards; Standards of accounting & audit; Independent audit annually;

External auditors should be accountable; Fair & timely dissemination; and Research conflicts of

interests

Section VI: Responsibilities of the board

Principles: Acts with due diligence, care; Treat all shareholders fairly; Apply high ethical standards;

The board should fulfill certain key functions, Exercise objective judgment, and Access to information

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To adhere to certain principles, the assigned grades were “observed”, “largely observed”,

“partially observed”, “materially not observed” and “not observed”. The results of the study

are represented in the following table:

Table 2. Frequency of Each Category – Compliance with Corporate Governance Principles

Principles %

Observed 0 0

Largely observed 4 12,5

Partially observed 22 68,8

Materially not observed 6 18,7

Not observed 0 0

Total 32 100 %

For adhering to the majority of principles, Bosnia and Herzegovina received the grade

“partially observed”. For adhering to the principles of the basic stockholders right, the

shareholders GMS rights, the principle stakeholder redress, and the creditor rights law and

enforcement, B&H received a poorer grade, namely “largely observed”. The grade

“materially not observed”, B&H received for not adhering to the following principles: the

rights of shareholders to participate in fundamental decisions, Board/Managers disclosure of

interests, stakeholder disclosure, whistleblower protection, disclosure standards and acting

with due diligence, care. In no case did Bosnia and Herzegovina receive the grades

“observed” or “not observed”.

4.1. Application of Corporate Governance Principles by companies in Federation of BiH

In 2011 the independent consulting firm SEE Business Solutions d.o.o. Sarajevo has

conducted an analysis of the application of corporate governance principles by companies in

Federation of Bosnia and Herzegovina. The study processed 55 joint stock companies. The

results according to the analyzed areas were the following:

The Management and Supervisory board: in more than 50 % of the analyzed companies

the supervisory board consists of only 3 members and only 11% of companies board members

are independent, while 38 % members are either stockholders or employees in the company.

In 38 companies the compensations for supervisory board members are fixed, and 12

companies don’t pay compensation to the board members. Only 8 companies have formed

Commissions of the Supervisory/Management board.

Control environment: of the 55 analyzed companies, 43 have established a system of

internal control, while the position of internal auditor exists in 28 companies. 31 companies

have established a risk management system.

Publications: in 23 companies financial reports are available on the web site, which is less

then 50% of analyzed companies. Independent auditor’s reports can be found at only 21 web

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sites. Regarding the publishing of transaction with concerned parties and information on

materially significant events, 28 companies publish these information.

Stockholders' rights and protection: payment of dividends in the past 3 years did only 10

companies, while 45 companies did not pay their dividends. On 38 % companies web sites the

information about the general assemblies can not be found. Of the 55 of analyzed companies,

41 companies stated that they formally incorporate social responsibility through internal

documents.

Based on recommendations given in the OECD report from year 2006 and accordance to the

newest researches, we can single out some key courses for corporate governance development

in Bosnia and Herzegovina:

The companies should strengthen the supervisory board, increase the number of members,

insist upon the independence of members, form commissions for the naming of supervisory

board members, as well as define compensation policy for the members of the supervisory

board

It is necessary for more companies to organize their own control environment in accordance

with their own level of risk exposure and to manage risk more intensively

According to OECD principles, companies should publish all significant information such as

financial and business company results, the goals of the company, the ownership structure,

data on board members and their compensations, as well as their corporate governance

policies

Greater the protection of interests of minor shareholders. Shareholders very often do not have

at their disposal important information on the business of the company and this impedes upon

their security

The access to relevant information has to be simple and timely, and the publishing of data on

transactions of connected parties should be strengthened.

This research has shown that joint stockholder companies in the Federation of Bosnia and

Herzegovina, and the situation being similar in companies in the smaller Bosnian and

Herzegovina entity, the Republika Srpska, have not attained significant improvement in the

past few years. The reason for the stated problem can be in the misunderstanding of corporate

governance principles and the importance of incorporating good corporate governance

practices.

5. Conclusion

Good corporate governance practice decreases the risk for investors, increases the

performance of the company, improves access to capital markets, increases transparency and

social responsibility in business. Since the goal of Bosnia and Herzegovina is to get closer to

the European Union, companies will have to incorporate corporate governance principles in

their business transactions if they wish to be competitive on the international market.

Spreading good corporate governance practice implies recognizing the significance and the

usefulness of corporate governance for the company as well as for the country itself.

Corporate governance is important, for the country, the companies, as well as for society as a

whole. Corporate governance leads to the achievement of social wealth, increases

competitiveness on the international capital market, leads towards a positive investment

climate, and to the long-term development of the economy. Good corporate governance

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practice contributes to the greater transparency of business, better supervision of the

company, and therefore its better reputation. For the aim of further promotion of corporate

governance, special care should be taken of the greater promotion of good corporate

governance practice, greater protection of the interests of minor shareholders, strengthening

the role of the supervisory board, greater compliance of entity laws, as well as greater

transparency in company's business transactions.

In the past years, corporate governance gained more importance, and many studies have

shown that the application of good corporate governance practices leads to the greater value

of the company and a smaller risk of financing.

REFERENCES

Ana Bobirca, and Paul-Gabriel Miclaus (2007), Extensiveness and Effectiveness of

Corporate, Governance Regulations in South-Eastern Europe.

Corporate Governance Country Assessment, Bosnia and Herzegovina, June 2006 ,

http://www.worldbank.org/ifa/rosc_cg_bih_eng.pdf.

Corporate Governance in FBiH – the results of research in 2011., SEE Business Solution

d.o.o. Sarajevo , http://conference.capitalmarket.ba/6/prezentacije/Sanja%20Jokic.pdf

Corporate Governance Codex SASE ( 2009. ), http:/www.sase.ba and Standards of Corporate

Governance BLSE ( 2011 ) http://www.blberza.com

Corporate Governance, News in international standards, legislation and practice in Bosnia and

Herzegovina (2008 ), Revicon.

Dr. Hubertus G. Tschopp ( 2002 ), Corporate governance, The Key to Success of Failure,

Boardroom, Magazine of Corporate Governance, Leadership and Quality of Life.

Mc Kinsey ( 2000 ), Global investor Opinion Survey on corporate Governance.

OECD Principles of corporate governance ( 2001 Edition ).

Robert W. McGee ( 2008 ), Corporate Governance in Transition Economies, Springer.

White paper on Corporate Governance in South East Europe (2003.), OECD 2003

www.stabilitypackt.org

Economic Diplomacy and Business Negotiation- managerial approach

Amra Nušinović, Erkan İlgun

International Burch University, Faculty of Management,



Abstract

Economic Diplomacy explains how states conduct their external economic relations in the

21st century: how they make decisions domestically; how they negotiate internationally; and

http://www.worldbank.org/ifa/rosc_cg_bih_eng.pdf

http://conference.capitalmarket.ba/6/prezentacije/Sanja%20Jokic.pdf

http://www.blberza.com/

http://www.stabilitypackt.org/

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how these processes interact. Economic diplomacy in the global environment has become

essential for all countries. The contemporary world is painted with constant changes, where

the key of economic success lies in their ability to understand and a good adjustment to the

new business environment. This newly created environment is nothing more than

globalization. If we bear in mind that the global economy is characterized by high levels of

competitiveness, the question is how the economic operators of small countries, such as

Bosnia and Herzegovina, can gain market share and how they can achieve competitive

advantage. Research shows that a very important role may be played by effectiveness and

efficiency of diplomacy, or more precisely its economic component, relatively economic

diplomacy. It is a fact that highly-educated and motivated diplomacy is indispensable to every

nation which ties its economic prosperity to constant and fruitful exchange on the world

market, to the free circulation of people, goods, and capital, and to its successful economic

performance in the world. In today's world of global world economy, it is especially

necessary. Negotiation is constantly present in our lives, and according to some, it represents

one of the skills necessary for survival. Regardless if the aim of the negotiation is victory over

an opponent, compromise, or the development of good mutual international relations, a

manager must know competitive tactics to be able to achieve the best negotiation results.

Possession of negotiation skills is crucial in the interaction of the manager with the

employees, the head manager, or with stockholders outside of the company. Business

negotiation is the very essence of diplomacy, that is its basic activity. Diplomacy and

negotiation are terms which always appear together.

Keywords: Economic diplomacy, global economy, business negotiation, global environment,

international relations, Economic diplomacy in Bosnia and Herzegovina.

1. The Term and Significance of Economic Diplomacy

Economic diplomacy is a specific combination of classic diplomacy, economic sciences, and

managerial sciences, methods and techniques for negotiation with foreign partners, public

relations, and collecting economic information of interest for the economy of one's country or

company, in the aim of penetration onto the world market. Economic-diplomatic and

diplomatic action do not have magical powers, nor can they resolve inner structural problems

of the economy and the country. They must be in service of economic and political

recuperation and the country's stabilization, as well as its successful representation and

penetration in the world. Therefore, they do not only follow but they assist the economic

development of the country, its performance in foreign policy and foreign economy in the

world. From the Renaissance up to today, economic issues has been one of the narrowest

tasks of diplomacy, parallel to politics. The term Economic Diplomacy is of a relatively new

date and is rooted in the French language- la diplomatie economique.

Economic Diplomacy can be looked at from two perspectives. One is Economic Diplomacy in

the larger sense, and it is more comprehensive and relevant to all the subjects of a society who

participate in strengthening the economic competitiveness of a nation with diplomatic

methods; the second definition of Economic Diplomacy in the narrow sense concerns the

exclusive activities of the Ministry of Foreign Affairs in the defense of the economic interests

of its country. Economic diplomacy promotes national economic interest and business in other

countries. It is associated with trade, business, market, and investment promoted through

political diplomacy. Economic diplomacy depicts how states conduct their economic relations

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with other countries by using political influence and promoting trade and investment to find a

market for its products and services.

We will state some of the interesting and up-to-date definitions of Economic Diplomacy:

„Economic Diplomacy represents a type of government service to the economy or the

business sector of a country, whose main goal is the achievement and development of socio-

economic benefits out of international business activity.“

„Economic Diplomacy incorporates within itself negotiation skills, followed by the process of

collecting information of interest for the economy of the country it is representing.

Subsequently, economic diplomacy lobbies with the goal of positioning economy in the

foreign market on the one hand, as well as with the goal of protection of the economy of its

own country on the other.“

„Economic diplomacy represents a specific combination of diplomacy in the classical sense of

the word, as well as economic sciences and management, whose main goal is to create,

sustain, and develop a positive environment for multilateral and bilateral economic

cooperation.“34

Economic diplomacy is functional at three levels: bilateral, regional, and multilateral.

Bilateral economic diplomacy plays a major role in economic relations. It includes bilateral

trade and treaty; agreements on investment; employment or avoidance of double taxation; and

range of formal and informal economic issues between two countries. Bilateral Free Trade

Agreements have been the order of the day, and are being implemented by many countries

around the world. Regional cooperation is of growing importance in economic diplomacy.

National interest and economic liberalization is easily accepted when it is confined to a

particular region. The opening of borders and markets becomes easier within a regional

framework. Multilateral economic diplomacy takes place within the framework of the World

Trade Organization (WTO), the World Bank, the International Monetary Fund (IMF), and UN

agencies. When speaking of human potential in economic diplomacy, a representation is not

possible without the help of managerial concepts. The term that is increasingly being used in

management is the so-called „human ware“, that is, the element in an organization which is

becoming more and more appreciated on the market (intangible assets).

It is worth nothing that economic diplomacy represents a type of multicultural management,

that is, it is made up of people from various cultural value systems, which have to form a

complete team, which also represents one of the most frequent problems for all those who

work in international business. The differences in size and economic strength of a country, the

differences of the political and economic systems, the various characteristics and systems of

market regulation influence the fact that countries also develop differing concepts of

economic diplomacy. Economic diplomacy is faced with very complex standards which

regulate the organizations responsible for economic policies such as for example, the World

Trade Organization (WTO), the International Monetary Fund (IMF), or the Organization for

Economic Collaboration and Development (OECD).

2. The role of diplomacy in a country's economic development

34 Mile Sadžak, (2008).Synopsis, Sarajevo. Economic Diplomacy- managerial approach

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The role of economic diplomacy is becoming more significant, in international business, as

well as in the process of economic universilization and the need for export-oriented

companies. Economic diplomacy has great influence on the economic development of a

country. Researching economic diplomacy imposes the need to consider its role in the

development and promotion of a country's economy. It is necessary to establish the

relationship of: national business- state administration – economic diplomacy. The basic task

of the state administration is to establish relations between the business subjects of its country

with economic diplomacy and its representatives, which represent their country abroad.

Economic diplomacy is dealing with a new concept of international economic collaboration,

but also with the connection between economic diplomacy and business. Therefore, it has

common ground in the fields of foreign trade, finances, industrial relations, negotiations and

contracts in politics, as well as in business. Economic and diplomatic actions must be in the

service of the state, as well as its successful representation and penetration into the world

markets. With the globalization of world economy and international politics, the interest of

certain economies in being promoted abroad and earning greater participation in the world

market and a share in the realized profits, becomes the state interest of their countries.

Today, an economic representative is an economic observer of economic developments on the

world market in the country he/she is sent to. In daily communication with skilled economic

diplomats of interested countries, they expect information and guarantees that all conditions

and full security for their investment are provided. In economic life, aside from all other

factors, economic diplomacy helps with quality information and advice on current trends,

scope, types, and quality of similar or sought-for products of competitor-companies and

countries, analyses of the needs and saturation of foreign markets, acceptable prices and

deadlines, all the way to the designs or product samples of competitor companies. It is a fact

that a rational and thought-out concept of the economic representation of Bosnia and

Herzegovina in the world still does not exist, one that complies with the needs and abilities of

our economy.

3. Economic diplomacy and business negotiation

Business negotiation is the very essence of diplomacy. It is a skill which a diplomat must

possess if he/she wishes to successfully fulfill his/her mission. Diplomacy and negotiation are

two terms which always go together. This is also pointed out by Berridge: „diplomacy is the

leading of international relations more by negotiation than by force, propaganda or the

application of rights“or Kovačević who states that negotiation is the way in which diplomatic

activities are achieved and represents the core of diplomacy.35

The interesting aspect is how a diplomat enters into the challenges of modern times.

Domestic companies can lose a great part of their money if an investment is brought into

question because a manager does not understand or has missed the chance to acquaint

him/herself with the latent political opposition which is key to the realization of the

investment or the export of products, while the country can lose great amounts of money on

the international market because its trade negotiators do not understand the need for a political

conflict to be resolved in mutual negotiations. An economic diplomatist is responsible for

representing the interests of his/her country in his/her work; so consequently, the result of the

Assistant Prof.; Dumlupınar University, Faculty of Economics and Administrative Sciences (İİBF),

Department of Public Administration.

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negotiation has great influence on the entire economic development. Due to this, the skill of

negotiation is one of the most important priorities, and with the strengthening of the

negotiating power itself, it becomes of particular importance. Cultural differences play a

significant role in international business negotiations. Ignorance of the behavior, needs, and

customs of a different environment can represent problems in negotiations, as well as be

negatively reflected on the relationships between the negotiators, as well as the countries.

Taking into account cultural differences means a certain level of tolerance and understanding.

For most negotiations, the rule that „nothing is agreed upon until everything is agreed upon“

applies, which means that any provision of the agreement is subject to change until the parties

approbate it completely. However, international agreements and contracts enter into force by

way of ratification by a state organ, which is usually parliament. Fulfilling the contract and

agreement affects the credibility and mutual trust between negotiators. A once violated or

canceled agreement can permanently hinder relations between the countries. Failure to fulfill

the agreement negatively affects the country's image itself, and this can also negatively reflect

on its economy. Of course, it is in every country's interest to have the contract and agreement

fulfilled by the other party. Economic diplomacy should play a major role in this business.

Therefore, an economic diplomat must be aware of all the contractual relationships between

his/her country and the host country, as well as their essence in order to be able to react on

time, but also to mediate in contentious situations in order to prevent eventual unwanted

consequences. International business negotiations are extremely complex activities. For their

successful execution, it is necessary that every country in the best and most efficient way

changes and prepares its resources. Naturally, developed countries have great advantage here.

The question arises of how small countries and developing countries can be equal partners in

negotiations with developed countries. Experience indicates more and more that even

developing countries can have a large and important influence in international negotiations,

insofar as they have the correct procedure. In order for developing countries to strengthen

their negotiation positions in international frameworks, it is necessary for them to provide

maximum attention to the elimination of causes for their deficiencies.

4. Economic diplomacy in Bosnia and Herzegovina

Economic diplomacy is a very powerful term in the world, while it is still an unknown one in

Bosnia and Herzegovina. Developing economic diplomacy for the government in B&H is still

not on the list of priorities. Our country does not have a developed web of representatives in

potential markets, which would additionally encourage the broadening of economic

cooperation of B&H firms in these areas. The extremely unfavorable economic situation in

which our country finds itself in forces upon it the need to speed up integrative processes, in

order to, in conditions of heightened interdependence with highly-developed countries,

achieve a more powerful speeding-up of development, and above all in the economic sphere.

Bosnia and Herzegovina is a country in transition with a difficult heritage of war which

burdens both the transition process as well as the process of economic development, and it has

an almost non-existent economic diplomacy. The diplomacy of Bosnia and Herzegovina is

very weak, bureaucratic, and insufficiently equipped to support our economy. The export our

country achieves, and which is not on a satisfactory level, best tells us how much the

economy is suffering due to not establishing economic diplomacy. According to the opinion

of Mr. Sven Alkalay, the minister of foreign affairs in B&H, the markets of Libya, Turkey,

the countries of the Middle East, but also Germany, Italy, and Austria, should be better treated

and we should significantly activate ourselves towards them. These are the countries in which

pre-war B&H was extremely esteemed for its quality. There are many chances for export in

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these countries, receiving significant jobs, but also potential investors who would invest in

B&H, its economy and development. Economic diplomacy is the best way to give information

about our potential, our possibilities, products, and services. There are countless possibilities

opening up for B&H companies, those which would with the adequate diplomatic

engagement, lead to business success, and one of them is the placement of certified „halal“

products, which are increasingly sought in EU countries, as well as better promotion of the

natural and touristic beauties of B&H in the world. The export achieved by B&H, which is

not at a satisfactory level, best tells of the way the economy is suffering due to not

establishing economic diplomacy, and it is problematic also that 95% of export is achieved on

the markets of ten to twelve countries, ignoring the enormous markets such as Russia or the

Arab countries. Our products have little or no participation in these markets, while it is

exactly these countries that are the area we need to look for our chance in. Faced with a new

market environment and new market rules, the economy of Bosnia and Herzegovina finds

itself in a very difficult and unenviable position. Technological obsolescence, non-existence

of political consensus, non-existence of clear economic and political goals result in the

difficult and unfavorable economic position of Bosnia and Herzegovina on the international

economic scene. The wish of Bosnia and Herzegovina for the development of international

economic collaboration enforces the need for intensifying economic and diplomatic activities,

whose goal is the protection of national economic interests. Bosnia and Herzegovina does not

have its own economic representatives in the world.

5. Conclusion- Economic diplomacy as the future of diplomacy

It can be said that economic diplomacy is the future of diplomacy because in the

circumstances of the globalization of the world economy, it has become the basic source for

penetration onto world markets. It is a fact that highly-educated and motivated diplomacy is

necessary for every nation which connects its economic growth to the constant exchange on

the world market, the free movement of people, goods, and capital, its successful economic

performance in the world. None of us can live and produce on our own all that is necessary

for the normal functioning of the economy and satisfying the needs of the citizens. The main

function of economic diplomacy is the protection of national interests in international

economic relations. On the other hand, we are facing a world economic crisis which, aside

from everything, is heavily burdening international relations and having an important effect

on the profiling of current economic diplomacy. Considering that the basic goal of economic

diplomacy is to stimulate economic exchange between countries, it is clear that it is an

important factor in its development. The opinion prevalent in the West is that the opening of

markets, free movement of goods, services, and capital are necessary elements for the

successful economic growth of a country. Economic diplomacy promotes such an idea, and in

this way contributes to the openness and greater exchange and collaboration of the developed

world with developing countries. The global goal of world development is that those parts of

the world where poverty rules, destitution, starvation, and the like, that these states are

brought to a minimum and in the end, completely eliminated. It is for this reason that it is

necessary to fight with all resources and with human solidarity, and in this, a great role is

played by economic diplomacy.

REFERENCES

Economic diplomacy powerful lobby in the world, in Bosnia is still a mystery,

http://www.ekapija.ba/website/bih/page/399438

http://www.ekapija.ba/website/bih/page/399438

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Economic Diplomacy: Positioning in the era of globalization,

http://www.gmbusiness.biz/index.php/arhiva/21-30/gm_24/3321.html

Economic Diplomacy, http://economicsanddiplomacy.blogspot.com

Ilija J. Džombić, (2008). Economic Diplomacy in Bosnia and Herzegovina.

Mile Sadžak, (2008).Synopsis, Sarajevo, Economic Diplomacy- managerial approach.

Mirza Pašić, (2008). TKD Šahinpašić , Diplomacy.

Nicholas Bayne, Stephen Woolcock, (2007). Ashgate, The New Economic Diplomacy:

Decision-Making and Negotiation in International Economic Relations.

Vladimir Prvulović, (2006). Megatrend, Beograd. Economic Diplomacy.

An Analysis Of Relationship Between Economic Growth And Selected Economic

Indicators With Regression Trees And Ols: 1990-2009 Period In Turkey

Ali Avci1, Harun Sulak2

1.Pamukkale University, Department of Economics

2.Süleyman Demirel University, Department of Econometrics

E-mail: [email protected],[email protected]

Abstract

The purpose of this study is to examine the relationship between economic growth and

selected economic indicators during the economic crisis in Turkey between 1990-2009 with

regression trees and OLS method. Important crises in Turkey were April 1994, February

2001 and August 2008 crises. For economic growth, industrial production is used as the

dependent variable and eight variables were used as independent variables which are

commonly mentioned in the literature. In both method, there is a negative relationship

between industrial production and trade balance and domestic loans, on the other hand a

positive relation to other variables. For international reserves, a positive relationship is found

with industrial production in regression trees method, however there is a negative correlation

in the method of least squares.

Keywords: Economic growth, financial crisis, regression trees

1.INTRODUCTION

Since 1980s both domestic and external financial liberalization policies that put into practice

without adequate infrastructure in developing countries led to economic crisis and markets

become more vulnerable to shocks. These crises are; 1992-1993 European Monetary System

(ERM), 1994 Latin America, 1997 South-East Asia, 1998 Russia, 1999 Brazil, 1994 and 2001

Turkey, 2002 Argentina and 2008 Global financial crises. Applications of financial

liberalization in Turkey, has been implemented in an environment of macroeconomic stability

http://www.gmbusiness.biz/index.php/arhiva/21-30/gm_24/3321.html

http://economicsanddiplomacy.blogspot.com/

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is not provided. While, partial monetization and fiscal deficits caused by increased public

spending disrupting macroeconomic environment, on the other hand financial liberalization

efforts led to macroeconomic stability and economic management practices even more

complex.

When we look at Turkey's economy historically, unstable macroeconomic environment, the

unstable growth, high inflation, the fragility of the banking system and weak banking

supervision is seen as common factors in the emerging economic crises. (Kasman, 2003: 84)

Selected economic indicators of Turkey after 1990 are seen in Table 1 and Table 2.

Table 1: Selected Economic Indicators of Turkey:1990-1999

1990 1993 1994 1995 1996 1997 1998 1999

Current account balance 1

-1.74 -3.57 2.01 -1.38 -1.34 -1.39 0.74 -0.37

GDP Growth 9.27 7.65 -4.67 7.88 7.38 7.58 2.31 -3.37

Inflation 58.24 68.38 104.75 86.01 77.22 81.45 137.96 54.18

Short term debt/Foreign Debt 19.22 27.01 17.07 21.28 21.73 21.24 21.88 23.10

Foreign Debt Stock2 33.36 38.61 51.99 44.37 44.71 45.35 36.41 41.28

R.E.D.K. 9.86 9.40 -23.87 7.73 -1.36 13.96 4.31 5.29

Unemployment rate 7.50 8.00 7.60 6.60 5.80 6.90 6.20 7.30

Trade balance3

-9427 -14044 -4134 -13114 -10264 -15048 -14038 -9771

Overnight interest rate 51.91 62.83 136.47 72.30 76.24 70.32 74.60 73.53

Exchange rate 0.00 0.01 0.04 0.06 0.11 0.21 0.31 0.54

Total reserves3

6049 6271 7169 12441 16435 18658 19488 23345

Portfolio Investments3

597 3589 458 626 1577 1975 -200 3497

Table 2: Selected Economic Indicators of Turkey: 2000-2010

2000 2001 2002 2003 2007 2008 2009 2010

Current account

balance 1 -3.72 1.92 -0.27 -2.48 -5.94 -5.75 -2.28 -6.49

GDP Growth 6.77 -5.70 6.16 5.27 4.67 0.66 -4.83 9.01

Inflation 49.23 52.85 37.42 23.27 6.22 11.99 5.29 6.30

Short term

debt/Foreign Debt 24.79 14.49 12.69 15.99 17.05 18.69 18.33 26.58

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Foreign Debt Stock2 44.43 59.05 56.75 48.39 39.52 39.35 44.73 40.40

R.E.D.K. 15.95 -21.21 7.82 12.12 18.86 -11.30 0.83 11.22

Unemployment rate 6.60 8.35 10.30 10.50 10.23 10.97 14.01 11.92

Trade balance3

-22057 -3363 -6390 -13489 -46852 -53021 -24850 -56354

Overnight interest rate 56.72 91.95 49.51 36.16 17.24 16.00 9.24 5.81

Exchange rate 0.67 1.45 1.64 1.40 1.17 1.53 1.49 1.54

Total reserves3

22488 18879 27068 33991 73383 70428 70873 80713

Portfolio Investments3

5702 -493 798 2646 5415 248.25 1152 5960

Source: (TCMB database; WDI Database; IFS Database).

1: to GDP 2: to GNP, 3: Million Dollars.

2.LITERATURE REVIEW

Classification and regression trees (classification and regression tree - CART) model which

was developed by Breiman (1984) is a nonparametric method frequently used in recent times

to reveal the relationships between continuous and categorical variables. The purpose of the

analysis is to create sub-groups with similar or the same output values. In the case categorical

dependent variable classification trees are used, however in the case of continuous variable

regression trees are used. (Breiman, 1984: 223).

Since CART model is recently used in economic researches, literature about this model is

very limited. Here are some studies in the literature.

Gosh and Gosh (2003), investigated the effects of structural factors such as supervision and

regulation of financial sector in the economic crises as macroeconomic variables. 42

developed and developing countries in the period 1987-1999 were investigated by analyzing

the balance of payments crises that occurred in these countries.

Chamon et al. (2007), analyzed the 1994-2005 period of the 49 countries by using the

classification and regression trees model and tried to determine the capital account crises.

Capital account crises are defined as money and other types of economic crisis that are likely

to occur and crises in which sudden stops in capital flows entering the country.

Davis and Karim (2008), in their study have tried to anticipate global financial crisis that

occurred at the end of 2007. 105 countries in the period 1979-2003 were analyzed using logit

models and classification and regression trees. CART model was more successful in general

to predict the economic crises of the study compared to logit model

3.DATA SET AND VARIABLES USED IN ANALYSIS

In the literature, as indicators of the economic crisis, current account, capital account,

financial sector, corporate sector and public sector variables are used. In this study, in order to

create models to explain the economic crisis, nine variables which have significantly higher

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explanatory power are used. Analysis period covers the period 1990:1-2009:5 in which

economic crises were widely seen. All data in the analysis are monthly and annual percentage

changes are used in the purpose of purification of seasonality. For dependent variable

industrial production is used as an indicator of economic growth because industrial production

is used instead of economic growth in the literature. As independent variables, inflation, the

stock price, oil price, real exchange rate deviation from trend, the real interest rate, real stock

of deposits, the balance of trade deficits and domestic credit is used.

Classification and regression trees (classification and regression tree - CART) model which

was developed by Breiman (1984) is a nonparametric method frequently used in recent times

to reveal the relationships between continuous and categorical variables. The purpose of the

analysis is to create sub-groups with similar or the same output values. In the case categorical

dependent variable classification trees are used, however in the case of continuous variable

regression trees are used. (Breiman, 1984: 223).

4.RESULTS

4.1.Regression Trees Model

In this study, since industrial production is continues variable, regression trees is used in

analysis by using Statistica ® 8.0 software package. As a separation criterion LSD impurity

index and as a test of accuracy, the N-fold cross-validation test is performed with a value of

10. In this test, data set is randomly divided into n equal groups and one of this group is taken

for test, others are for learning data.

The analysis results will be explained with the aid of a table and figure. The figure shows

obtained optimized tree and the table is display importance order of variables. Nodes in the ID

is node number, N is the number of observations, Mu is average and Var is variance. The

mean values of the cells indicate the likelihood of crisis. Where a node is divided into two

sub-node, under the node it is explained which explanatory variables is used for separation.

CART model were used to determine the crisis periods. Created tree to identify periods of

crisis is shown in Figure 1. As seen from Figure 1, in Turkey the three-term important break

are in the growth figures in the range of 1990:1-2009:5. These are April 1994, February 2001

and August 2008. After January 1994, January 2001 and August 2008 general average rate of

industrial production decreased.

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ID=1 N=235

Mu=3,917767Var=80,457792

ID=2 N=225

Mu=4,800101Var=64,381533

ID=4 N=146

Mu=3,264099Var=73,871026

ID=6 N=133

Mu=4,459450Var=63,946593

ID=8 N=99

Mu=5,658817Var=64,590915

ID=10 N=63

Mu=3,400783Var=63,819611

ID=12 N=49

Mu=6,274025Var=36,493718

ID=13 N=14

Mu=-6,655566Var=29,435773

ID=11 N=36

Mu=9,610377Var=41,403107

ID=9 N=34

Mu=0,967177Var=45,685988

ID=7 N=13

Mu=-8,965264Var=11,229895

ID=5 N=79

Mu=7,638788Var=34,425620

ID=3 N=10

Mu=-15,934748Var=30,534725

Periyod

<= 2008,09 > 2008,09

Periyod

<= 2002,02 > 2002,02

Periyod

<= 2001,01 > 2001,01

Periyod

<= 1998,03 > 1998,03

Periyod

<= 1995,03 > 1995,03

Periyod

<= 1994,01 > 1994,01

Figure 1: Periods of crisis identified by CART Model

Results of the regression tree method are shown in Figure 2 and Table 4. Importance of the

variables in maximal tree are depicted in Table 4. According to the table, the most important

variables that affecting the industrial production (economic growth) are trade balance,

domestic credit, oil price, international reserves while least affecting variables are inflation,

the stock of real deposits and real interest rate.

Table 4: Indicators Severity Rating: Turkey

Variable Importance

order

Trade balance 1.00*(-)

Domestic loans 0.67*(-)

Oil price 0.57*(+)

International reserves 0.57*(+)

Stock price 0.46*(+)

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R.D.K.T.S. 0.44(+)

Inflation 0.30*(+)

Real deposit Stock 0.28(+)

Real Interest rate 0.21(+)

* Variables used in the optimal tree (Signs in the parentheses gives the direction of the

relationship with industrial production.)

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ID=1 N=235

Mu=3,917767Var=80,457792

ID=2 N=191

Mu=6,921826Var=41,028106

ID=4 N=81

Mu=9,964534Var=30,054830

ID=5 N=110

Mu=4,681287Var=37,271103

ID=19 N=83

Mu=3,372912Var=37,329390

ID=24 N=40

Mu=0,800905Var=27,036801

ID=25 N=43

Mu=5,765478Var=35,025825

ID=35 N=40

Mu=4,844550Var=24,944834

ID=3 N=44

Mu=-9,122582Var=42,393781

ID=43 N=38

Mu=-7,397255Var=26,482974

ID=6 N=63

Mu=11,502550Var=22,476540

ID=7 N=18

Mu=4,581480Var=19,322350

ID=18 N=27

Mu=8,703327Var=15,652783

ID=26 N=31

Mu=-0,671195Var=21,621680

ID=27 N=9

Mu=5,871470Var=12,513872

ID=34 N=3

Mu=18,044520Var=7,356049

ID=36 N=33

Mu=3,759588Var=20,251964

ID=37 N=7

Mu=9,959368Var=15,357617

ID=42 N=6

Mu=-20,049655Var=4,908533

ID=44 N=16

Mu=-3,828618Var=25,587251

ID=45 N=22

Mu=-9,992628Var=11,136510

Trade Balance

<= 32,314043 > 32,314043

Trade Balance

<= -44,807985 > -44,807985

Domestic Credit

<= 77,397957 > 77,397957

Domestic Credit

<= 17,982080 > 17,982080

Enflation

<= 65,647253 > 65,647253

International Reserves

<= 32,600393 > 32,600393

Domestic Credit

<= 68,371696 > 68,371696

Stock Price

<= 184,484631 > 184,484631

Oil Price

<= -52,377707 > -52,377707

Domestic Credit

<= 105,860023 > 105,860023

Figure 2: Regression tree for FBE (Optimal tree 15)

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4.2. Least Square Method

Variables and periods used in the CART model are also used in the analysis of OLS method.

The analysis results are given in Table 5.

Table 5: Results of OLS Method

Dependent Variable: ENDUR

Method: Least Squares

Included observations: 235

Variable Coefficient Std. Error t-Statistic Prob.

C 1.076257 1.164645 0.924107 0.3564

ENF 0.307930 0.030484 10.10126 0.0000

PETFIY 0.030598 0.013338 2.294084 0.0227

RDTS 0.109186 0.045379 2.406105 0.0169

RFO 0.137476 0.052097 2.638839 0.0089

RMS 0.306508 0.048950 6.261686 0.0000

TD -0.028531 0.005032 -5.670327 0.0000

TH 0.444913 0.075231 5.913949 0.0000

ULSREZ -0.032784 0.010625 -3.085582 0.0023

YKRD -0.266508 0.020930 -12.73328 0.0000

R-squared 0.641473 Mean dependent var 4.033283

Adjusted R-squared 0.627004 S.D. dependent var 8.939843

S.E. of regression 5.459869 Akaike info criterion 6.274697

Sum squared resid 6647.667 Schwarz criterion 6.422810

Log likelihood -721.0022 Hannan-Quinn criter. 6.334423

F-statistic 44.33222 Durbin-Watson stat 0.950161

Prob(F-statistic) 0.000000

As shown in Table 5, the trade balance, international reserves and domestic credit variables

are inversely proportional with industrial production. Industrial production increased by

decreasing the value of these variables. All other variables are proportional to industrial

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production. All variables except intercept are accepted at 5% significance level. In general

OLS results are consistent with the results compared with the results of CART model.

5.CONCLUSION

Economic crises in Turkey in the 1980s, extent has become a frequent phenomenon since the

1990s as a result of the excessive liberalization of capital movements and financial markets.

the most important economic crises in the 1990s are April 1994, February 2001 and the 2008

Global Financial Crisis. In addition to being significant reductions in the growth figures

during the economic crisis, many significant deviations occur in the economic indicators. The

most important damage created by the economic crisis is reduced economic growth and rising

unemployment as a result of disruption of social welfare. As a result of causal relationships

existing between Economic growth and other economic variables, these variables affect each

other Observation of existing relations are crucial for preventing crises and to ensure

sustainable growth. In this context, in the paper the relationship between economic growth

and selected economic indicators in times of crisis were analyzed using both regression trees

and least square methods

According to the findings in the study with each method of analysis during the economic

crisis a significant proportion of is seen falling in economic growths as expected. In times of

crisis with economic downsizing it is concluded that oil price, stock price, the real exchange

rate deviation from trend, inflation, the stock of real deposits and real interest rate decreases,

whereas the balance of trade deficits and domestic loans is increased. As a result, to obtain

the necessary precautions against crises timely by central banks the variables that are

significantly affecting economic growth should continuously monitored.

REFERENCES

Breiman, L., Friedman, J.H., Olshen, R.A. and Stone, J.C. (1984),Classification and

regression trees, Wadsworth Inc, Monterey, California.

Chamon, M., Manasse, P. ve Prati, A. (2007), “Can We Predict the Next Capital Account

Crisis?”, IMF Staff Papers, Vol. 54/2.

Davis, E. P. ve Karim, D. (2008), “Could Early Warnin Systems Have Helped to Sub-Prime

Crisis?”, National Institute Economic Review, No. 206.

Gosh, S. and Gosh, A. R. (2003), “Structural Vulnerabilities and Currency Crises”, IMF Staff

Papers, Vol. 50/3.

IMF, (2010), International Financial Statistics Database IFS, (Çevrimiçi),

http://www.imf.org/external/data.htm

Kasman, A. (2003), “Banking Efficiency During the Financial Crisis Period”, ISE Review,

Vol. 7/25-26.

Manasse, P., Roubini, N. ve Schimmelpfennig, A.

(2003), “Predicting Sovereign Debt Crises”, IMF Working Paper, No. 221.

TCMB, (2011), Elektronik Veri Dağıtım Sistemi, http://evds.tcmb.gov.tr/cbt.html

World Bank, (2011), World Development Indicators, (Çevrimiçi),

http://data.worldbank.org/data-catalog/world-development-indicators

http://www.imf.org/external/data.htm

http://evds.tcmb.gov.tr/cbt.html

http://data.worldbank.org/data-catalog/world-development-indicators

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Report on : Students expenditure and the economic recession

Kerim Hadziabdic

Inetnatinal Burch University Sarajevo, Bosnia and Herzegovina

Abstract

All subjects were selected from International Islamic University Malaysia (IIUM),

data was collected using questionnaire which is attached to the research paper. There are two

types of data which is local student’s data and foreign student’s data. The findings from

research are representing that foreign students as well as local students are affected by current

economic recession.

1.INTRODUCTION

THE ECONOMIC recession which had taken place on 2008-2009 had a global implication

all around the world. Like any other economic recessions before, it had been triggered by a

widespread contraction succeeding an economic bubble. As for the case of 2008-2009, the

bubble that blew before the event was the increasing number of subprime mortgages and

lending of individuals due to low interests. It had mainly originated from the United States,

and when it had a dire critical economic meltdown, no other country in the world could

escape the repercussions. Contingency ripple took place and country as far as Malaysia too

were well effected by the economic recession.

An economic recession is a phenomena of which it effects almost any if not every aspect of

individuals who rely on money and the common market. Thus students, like any other

individuals are part of this economic equation and are subject to impact to any economic

circumstances. Malaysia has over 900,000 students currently enrolled in public and private

higher education institutions (Ministry of Higher Education, 2009). This number includes

foreign students who had become part and element of the Malaysian financial market. Both

students wether local or foreign are well included in economic activities, either by saving

money in banks, selling or buying things, or spending on services provided by the higher

institutions. The great number of university students thus cannot be easily overlooked in the

implications of the economic recession. The economic crisis has had an impact on their

family’s finances and many have felt an effect on their own financial lives. The crisis also

ultimately affected students’ confidence, behavior, trust in financial institutions and overall

well-being.

2.SELECTION OF PROBLEM

The economic recession may had happened almost two years ago, but no one could

deny the economic repercussions still lingers today. Students engaged in many economic

activities on a daily basis. Many like foreign students that recite at IIUM deal with money

transactions that involve external as well local curacies. The global economic crisis 2008-

2010 influences these transactions in many ways. Whilst Malaysians claim they were not

badly affected by global economic crisis which originates mainly in US and Europe none the

less on a longer time scale it would have altered the economic behavior of locals. The issue

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here is how economic recession indirectly have an impact on the students pockets beat it the

local students or foreign students of IIUM. Both types of students leave in a quiet similar and

controlled environment and even consume common life style. What should differ on these

students is their source of savings or money gotten of their parents whom would be more

directly affected by the economic recession. Thus, the study aims to look into aspects of

expenditure on a much localised scenario. It would be interesting to note how this particular

phenomenon would have direct or indirect implication on student’s expenditure of various

backgrounds.

2.1.Objective of study

This paper tries to examine the two main components which are the type of student of IIUM

and the level of changes on their expenditure habits after the global economic recession.

These students which are between ages 18 to 30 are at their beginning of financial maturity

and independence. Many of which decide their own economic decisions. However they still

rely on a given source of income weather it is from their parents, scholarships or any other

forms of financial assistance. By identifying the students of these various backgrounds it is

possible for us to analyse the indirect impact of current economic recession on the students,

furthermore they are also the factor of foreign and local students of IIUM who may act

differently on the level of economic implications they meet with. This study also hopes to

identify whether the economic behavior of students on the account of their expenditure are

influenced by where they are from (foreign or local) in the event of an economic recession.

The findings of this research would help in many ways of decision making of related

authorities such as the university, or even at a personal financial management on a similar

economic circumstances.

2.2.Research Questions

Are student’s spending habits effected by an economic recession?

Which type of student is more responsive towards the change in an economic recession, the

locals or foreign?

3.Literature Review

Malaysia had its bumpy road in facing the uncertainties of modern global economy.

Global economic crisis of recession, inflation, bubble burst, and oil crisis are the examples of

problem faced by Malaysia and without exception, most countries in the world. The global

economic recession of 2008-2009 like any others before had effected considerably on all

aspects of life of the public. What had actually caught my attention is that how many had

undermined the role of young adults , typically students had anything at all to do with such

global economic crisis. Many argue that students; whom may still heavily rely on parents or

government in funding them, are best unaffected by the greater economic phenomenon.

Students simply don't care, since they do not work or earn for money and oblivious to the

hardship of their parents. Of course, these are generalization and a well attained myth of

ungrateful sons and daughters who would plunder the money of their parents if not the tax

payers money. The truth is that students are at a great stage of transitional period to financial

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and psychological maturity. They’ve begin to deal problems and issues identical to those

faced by working adults and had become a more responsible individual part of a greater

society. Issues of monetary crisis that may had happened on a greater international and state

level definitely trickles down to the general public and to students with no exception.

Malaysia has over 900,000 students currently enrolled to both private and public

universities (a good 3% of the population of Malaysia as of 2010) and a number that much

could not escape any of the country’s economic equation. The well known by-product of any

economic recession is the increasing number of unemployment as well as prices of goods,

followed by the mass withdrawal from ordinary expenditure. Replicating this at the very

micro level, a student has as much to worry about it than any other regular working adult.

The scarcity of jobs offered by the market and the constant struggle of fresh graduates with

existing unemployed workforce had become a nightmare of students who yearns for a sense

of approval from the society and parents. While enrollment was related directly to salaries

and employment opportunities for college graduates, it was related inversely to wage and

employment opportunities for non college graduates (Freeman 1975; Handa and Skolnik

1975; and Mattila 1982).

Whilst many studies focuses on the financial troubles faced by students who intends

to pursue their studies ( i.e unaffordable tuition fees ) and prospect of working after

graduating, little attention had been laid on financial difficulties faced when they are still

enroled to a particular university. A review of university choice studies examined the

differences changes in student responses to five key components of university cost: tuition,

room and board(hostels), travel, cost of foregone earnings, and financial aid ( Leslie and

Brinkman 1987, pp 195-197 ). These variables are the focus of a students financial planning,

and come what may an economic recession or financial abysmal that may had befallen them,

this issues still holds a primary importance.

However, on an account of an economic recession may well effect how students

handle their money, on a fixed cost ( i.e. books, transport, food ) or for leisures. An

assessment done by National Institute of Endowment for Financial education on how a

recession impact cripples student’s finances, they've concluded that 93% of students have felt

and effect on their own financial lives. The crisis also ultimately affected student’s

confidence, behaviour, trust in financial institutions and overall well being. This data stems

from the landmark study Arizona Pathways to Life Success in University Students (APLUS),

funded by the National Endowment for Financial Education. At the height of the economic

crisis (February 2009 to April 2009), researchers at the University of Arizona completed

Wave 1.5 of a longitudinal study of how young adults develop financial attitudes and

behaviors.*

In addition to that, this study stresses on how the economic recession of 2008-2009

would have direct or indirect implication on student’s expenditure and it would have to be

addressing to students enrolled to local Malaysian university. IIUM fits in this category and

boasts to have almost 13,000 students studying there. By implicating the idea of students

difficulties in their finances (which is more or less covered under their expenditure

behaviour) I hope to define not just how a student’s pocket can relate to an economic

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recession but also on what are the common patterns that drive a typical students expenditure

on day to day basis. By principle, a student will face either shortage of financial funds from

their parents (as parents too had to reshuffle their expenditure planning due to an economic

recession ) or the scarcity of financial aids from the government ( loans, endowments

PTPTNs). This will deliberately alter their lifestyle and expenditure (ie, going less outings,

and reside on cheap hostel food). I have also noticed that under the administration of Prime

Minister Najib Tun Razak, much emphasis had been focused on students financial aids and

welfare. According to his speech in introducing the supplementary supply (2009) bill, he

mentions that the Government is willing to provide various subsidies, incentives and

assistance for fuel consumption, food security, scholarships and educational assistance as

well as social welfare programs. The allocation for subsidies and other assistance in 2008

totaled RM 34.1 billion or 22% of total operating expenditure and RM6 billion is accounted

for helping students (Najib, 2009; Supplementary Supply (2009) Bill ).

Finally, the study sets to look at the differences of expenditure behaviour that exists

between local and foreign students on similar economic condition. IIUM is well known to

have a great number of foreign students which stays for the average period of 3 - 5 years to

complete a course. Given the long tenure of these students in Malaysia, foreign students may

endure similar economic activities just as the locals do. However, there are many more

variables that may influence their behaviour of spending, for which this study is trying to

analyse. In comparison to the local students, a foreign student is expected to be more

responsive to an economic recession. Thus , I am determined to have a full study of

behaviour of the students expenditure on a given economic climate, namely due to the

economic recession of 2008-2009 and discuss how local and foreign students cope up with it.

THEORETICAL FRAMEWORK

This study’s theoretical framework is inspired in replicating the research done by

University of Arizona completing a longitudinal study of how young adults develop financial

-

Economic

Crisis

Decrease of

expenditure

Foreign

students

Local

students

Decrease in

students

income

Spending less

time on outings

Reluctance of

using credit

services

Increase in

savings

Increase

price of

goods

Change in

currency

rates

200

2

50,0

0

40,00

20,

00

10

,0

0

0,

00

-

10,0

0

-

20,

00

Parents

decrease

expenditure

on

DI

TXV

DI

TİV

Area of interest

(EXPENDITUR

E)

Fig. 1.1 - A model of Students expenditure and the economic

recession

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attitudes and behaviors. However, due to limited sources and time frame given this study

seeks to carry a vertical cross-section of a given number of students of IIUM in a single

survey.

It is, perhaps, easier to understand the nature and function of a theoretical framework if it

is viewed as the answer to two basic questions:

1. What is the problem?

Why is this study’s approach a feasible solution?

Starting with the sample, it should be noted that this study is conducted on a short

semester period, and that the number of students enrolled for the semester is considerably

much lower than of a normal long semester. Nonetheless, this study aims to produce a set of

sample of students replicable to the population of students in IIUM.

This study assumes that there shall be no expenditure differences between male and

female students on a given economic circumstances, although these numbers should be well

noted. In addition to that, variables such as student’s ethnicity, home of residence, and their

GPAs are well accounted for analyzation. The data collection method preferred in the study is

survey questionnaire, which respondents can complete in less then 10 minutes about their

family financial environment, attitudes and behaviour on the recent economic crisis and etc.

Figure 1.1 demonstrates how variables should relate to one another, forming the proposed

research question;

Would students spend less following an economic crisis, if so are foreign students more

responsive in such circumstances?

Taking the economic crisis of 2008-2009 as a starting point, it led to several foreseeable

effect, namely decrease of expenditure in the public and the increase price of goods. As stated

earlier, the sample is taken from within the student population of IIUM; the university is thus

a controlled environment for which all students reside. All students are assumed to be

financially dependent on their parents, at least on the term of student’s monthly additional

income.

Decrease in students income should indicate the following effect of parents decreasing the

amount spent on their university enrolled child. I am therefore to generalize the spending

habits of students narrowing them down to increase of savings, spending less time on outings,

and or reluctance of using credit services all of which signifies student’s expenditure. Note

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also there is an added variable to foreign students, for which involves in transnational

financial transaction and should be responsive to the change of currency rates of their country

to Malaysia.

Data collection

A questionnaire survey of 30 respondents had been carried out through a non

probability sampling method. They had been approached at random, however, the research is

conducted under quota sampling method. In order to match the real representation of the

student population of IIUM, the study restricts the number of foreign students respondents to

7 out of 30 bringing the percentage to 23,3 % of the whole sample. This number reflect

closely to the ratio of foreign student to local students in IIUM. Sample questionnaire is

attached to Appendix.

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Data analysis

Data analysis of respondents identity

Figure 1.7 Campus status

Figure 1.6 Occupation of Guardian

Figure 1.5 Student’s monthly

income We can see that in figure 1.5, most students

receive in an average monthly income of Rm300

to Rm600. However, for the top range of students

monthly income of Rm700 and above is received

by all foreign students. This importantly signifies

that foreign students needs more money than local

students.

It is important to also note the minimal

background of students by knowing how their

guardian is employed and financing them. 12

students out of 30 answered that their guardians

are in private sector followed by 11 whom are self

employed. This data signifies that average of

students comes from a middle income families.

As shown on figure 1.7, we can see that it

correlates with figure 1.5, of students monthly

income. The major 83% of students whom stays

in-campus has the average income of 300-600rm.

Many can rely on this minimal income because

lifestyle is considerably cheaper by living in

campus. Accommodation

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Gathering the data, we could see on figure 1.2, that the respondents consists of more female

than male. As stated earlier, there shall be no distinctions between the expenditure habit of

male or female.

In figure 1.3, the ratio is maintained to reflect the original student population of IIUM.

The significance of year of intake tell us that there are more senior students compared to

juniors. The fact is senior students would have much more financial awareness and

experiences in managing their monthly income.

Figure 1.2 Gender Figure 1.3 Nationality Figure 1.4 Year of intake

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Figure 1.8 Social outings

Figure 1.9 Use of credit/debit card

Figure 2.0 Savings

However, it is interesting to note that despite most

having only up to 600rm to spend on monthly basis,

still there are many students (11 of them ) who

enjoys a good social outings for 2 to 4 times a

week. It just shows that , come what may,

economic recession or not, socializing is still the

main primary importance in a student’s life.

Most of the students does not use or own a credit or

debit card. This number represents the number of

local students whom rely mostly on cash based

transactions whilst the rest (mostly foreign

students) are dealing with credit/debit cards.

A lot of students find it unimportant to save if they

have just enough cash for the monthly expenditure.

However, there are students who would reserve not

more than 25% of their monthly income for

savings. If you could relate to figure 2.3 of students

interest in part time employment, it goes to say that

many are interested to have a minimal saving whilst

increasing their monthly income.

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Figure 2.1 Students perception towards price of goods

Figure 2.2 Financial Assistance

Figure 2.3 Part time employment

Figure 2.1 explains that the economic recession has

a greater and prolonged effect. Up to 93% of

students believe that prices of goods are getting

much expensive than before.

According to the result of the survey, up to 60% of

the sample still greatly rely on their parents for

financial assistance and difficulties. They feel more

comfortable by gaining monetary help from their

parents because it has been their primary source of

income anyway. This data is followed by an equal

distribution of respondents who would rely on

friends or simply wait till difficulties is overcome.

As said earlier, figure 2.3 in students perception of

having a part time job whilst studying shows the

correlation of student’s need for extra money to

cope up with the rise of price of goods. More over,

many students also believe that they are mature

enough to offer services to the job market, a

determination to be part of the bigger society. 80 %

of the students also consider that part time job

would not effect their studies immensely.

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The questionnaire also provides an open ended question, enquiring on how students feel the

economic recession of 2008-2009 had effect on them. This question tries to sum up the

overall feeling and perception towards such economic scenario where prices goes up and how

it influences their monthly expenditure. Up to 70% of respondents have the impression that

the economic recession has little or no impact on their lifestyle or expenditure. This leaves us

the rest 30 % (which represents 9 respondents ) all of whom said that they are uneasy with the

increase price of goods and thought that they ought to get more money to handle difficult

situations up. 6 out of this 9 respondents are foreign students and 3 are locals. This shows that

foreign students are more conscious to the changes brought by an economic recession and is

determine to deal with it.

The survey continues by providing questions specifically asked on foreign students. These

questions are designed to ask about activities done by foreign students in handling their

finances.

Foreign students response

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Figure 2.4 Frequency in dealing with international banking transaction

Almost all of foreign students deal with

international banking transaction. 43% of who

deals on a monthly basis. International students

whom still rely on their parents who are back

home get their money through international

banking. International banking is one of the

sector most vunerable to economic crisis.

Following this question, many students said that

at the recent currency exchange, they had less to

spend.

Effected by

economic recession

Students’s response :

“ Prices are much expensive and more

pocket money is needed to maintain such

current lifestyle.”

“ Things are getting pricier than

usual, there is less to spend. “

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Discussion

Consistent with the research question proposed, the questionnaire conducted had

intended to get as much data to prove of disapprove the argument. Reviewing back to the

question, are students spending habits effected by an economic recession, it is undeniable that

students do admit changes. Although, infinite factors does influence in giving such result, I

am certain that economic crisis plays a big and important role in effecting the financial lives

of not just working adults but students as well. There is indeed a link between students

financial management and the bigger economic picture, and we can well discard the myth

that students are unaware of economic crises.

From that the study gathered how students generally feel about the economic recession.

Most of the local students receive in average of Rm300-Rm600 monthly and comes from a

middle income family status. I believe them having to live on around Rm 400 a month would

be modest at best. Yet, with prices of good increasing either through gradual inflation or

economic crisis, they managed to maintain with that amount and many feel that they are least

effected by the economic crisis, though they acknowledge their ability to spend less.

On the other hand, the foreign students has been projected to have more for their monthly

income, some up to more than Rm 1500. Comparing this to the local, it shows that the locals

have greater confidence in their financial securities than that of the foreign students. Local

students are surrounded by elements familiar to them, whilst foreign student having to adapt

to a foreign culture, may think they need more to spend.

Take for example, Ali ; a Palestinian student may not be easily accustomed to normal

day to day food like rice and sambal belacan, a cheap source of food for local student. He

may have to reside if not occasionally to an Arab food restaurant which is considerably more

expensive. This is a classic example involving just food, though many other factors may lead

as to why foreign students need more monthly income. ( communication, room, etc.)

Ironically, where both foreign and local students differ in their monthly income, they still

think social outing should not be missed. Most of the respondents continues to go for social

outings despite the increase prices of goods. This agrees with such longitudinal study carried

out by a research that confirms how university students spend time, 16 hours for which is

dedicated to socializing (National Survey of Student Engagement, 2006; Nonis, Philhours &

Hudson, 2006).

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Coming to the second proposed research question, the result shows that there are no clear

sign that economic recession is a direct factor to their expenditure behaviour. The study can

only conclude that due to foreign students avid involvement in international banking

transaction compared to local student, they are more responsive and vulnerable to global

economic consequences. Foreign students also replied that due to the recent currency

exchange rate, many felt that they have less to spend. This somewhat is aligned to the

hypotheses proposed by this study that ultimately, foreign students are relatively more

responsive to global economic conditions than local students.

Conclusion

In conclusion we can say that student’s expenditure is affected by current economic

recession. Foreign students are affected more because of currency rates, increase of prices of

basic needs, and it always more expensive to study abroad than to study at home.

There are several limitations in this study. The findings, among other things may not

represent wider population of both types of students due to limited number of respondents.

However, the number of respondents in this study still provides the insight indeed. As

findings presented, foreign students have more expenditures compare to local student and

their pockets are affected by economic recession.

Bibliography

Freeman, Richard B. 1971. The Market for College. Trained Manpower. Cambridge, Mass.:

Harvard University Press.

Handa, M.L , and Skolnik, M.L 1975 “Unemployment, Expected Returns, and the Demand

for University Education in Ontario: Some Empirical Results.” Higher Education 4: 27,

43.

Hilgert, M. A., Hogarth, J. M., & Beverly, S. G. (2003). Household Financial Management:

The Connection Between Knowledge and Behavior. Federal Reserve Bulletin July: 309-

322.

Leslie, Larry I., and Brinkman, Paul T. 1987. “Student Price Response in Higher Education:

The Student Demand Studies.” Journal of Higher Education 58(2): 181, 204.

Najib Tun Abdul Razak, 2009. “In Introducing the Supplementary Supply (2009) Bill 2009.”

Ministry of Finance. 12.

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Nonis, S. A., Philhours, M. J. & Hudson, G. I. (2006). Where Does the Time Go? A Diary

Approach to Business and Marketing Students’ Time Use. Journal of Marketing Education,

28, 121-134.

Mattila, J. Peter, 1982 “Determinants of Male School Enrollments: A time Series Analysis.”

Review of Economics and Statistics. 64, 242, 51.

Ministry of Higher Education, 2009.( http://www.mohe.gov.my/educationmsia/index.php?

article=mohe )

Green Economy-Green Sustainability-Green Ethics

Nilgün Dolmaci, Nurdan Kuşat

Süleyman Demirel Üniversity, Isparta, Turkey


Abstract

Although the concept ‘environment’ is perceived as a space where people live, it narrates an

ecosystem in the broad sense. Ecosystem is described as a raw material store which fulfills

the physical and biological needs. However, considering that the resources are scarce and the

needs of people are limitless, it is clearly seen that the environmental resources are scarce as

well. Within this content, efficient use of environmental resources has a great importance for

sustainable development.

Green economy approach brings a new perspective for the sustainable development. Since

the degeneration in economic, cultural and historical environment led to development

problems, green economy is an important instrument achieving sustainability in

environmental values.

In this study, green economy and green sustainability is handled from the point of decreasing

the damage that environment and ecosystem are exposed. When it comes to solve the paradox

between economic development and environment, the study touches on the green ethics

perception which can be defined as getting and adopting the information, attitude and

behavior that will preserve the living space and living quality of human beings both

individually and globally.

Keywords: Green Economy, Sustainable Development, Green Sustainability, Green Ethics

1. INTRODUCTION

The words ‘green’ and ‘sustainability’ are usually used together. While the word ‘green’

represents the environment, ‘sustainability’ refers to convection of current resources to the

next generation without any loss. Sustainable development, which is one of the most popular

http://www.mohe.gov.my/educationmsia/index.php?article=mohe

http://www.mohe.gov.my/educationmsia/index.php?article=mohe


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development models in the last years, comes to the forefront as an environmental

development model. In this regard, sustainable development can be defined as green

sustainability.

The aim of sustainability is to improve our living standards without harming the resources

that we need to survive. By this way, the green economy will enable to develop environment

friendly products and processes and environmental problems will be kept in sight to a large

extent.

Besides the fast growing world population, the increasing level of welfare in the countries

and increasing world commerce due to the globalization and many other formations have

increased the production and correspondingly the resource consumption. This situation has

created great problems about resources which are hard to remediate. According to Otegbulu

(2011:240), unless we preserve the natural, physical and chemical system of the world, it will

be impossible to meet the needs of human beings.

At this point, it is claimed that mankind has less time than hundreds of years to bring the

environmental problems under control and abstain from social and ecologic retrogressive

situation (Foster, 2008: 12-13). On the other hand, Des Jardin (2006:581) admits that

environmental issues must be dealt besides ethic and economic problems while planning and

effective social and political future and offers an initiation regarding the issue. After all this

initiation will be an important step to determine the direction of future.

This study aims to develop a perspective in green economy, green sustainability and green

ethics. Most of all this study searches solutions for the paradox between economic

development and environment.

2. GREEN SUSTAINABILITY AND GREEN ECONOMY

This concept, which has taken its place in economy literature as economic sustainability, has

reached to its current value as a significant element of competitive power. WTO (1998:20)

defines the sustainable development as a development model which enables to fulfill the

needs of current generation without jeopardizing the needs of next generations in the

Brundtland report. This report mentions about not only the maximum economic growth

through the sustainable development but also activating a fair and equitable economic

development (Garrod and Fyall, 1998:200)

Starting with the first and second industrial revolution and gained a pace with globalization,

the transition period from an agricultural society to an industrial society led to more

consumption to be more industrialized. However, the greediness of countries to produce and

have a great competitive power triggered environmental crisis. In our day, while the

industrialized countries take some precautions to lessen environmental disasters and not to

experience environmental problems thanks to their technologic superiority, developing

countries are lack of these regulations. The reason of this is generally economic or politic.

The low education level of these countries triggers these problems as well.

In Brundlant report, where it is emphasized that sustainable development inheres a period of

change, one of the aims of sustainable development is stated as integrating environment and

economy during the decision-making (TÇSV, 1991:78). In fact, other aims also have some

features serving to this aim.

The over-capitalist policy implementations leading a mass exploitation of environment have

confronted great reaction and criticism. The Deep Ecology approach is acquired currency

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owing to these reactions. According to this approach likewise the sustainable development

approach, not only the mankind must be preserved but also the whole ecosystem. According

to Meltzner (1994:28), the main idea of deep ecology is to meet the needs of living creatures

other than mankind and develop their life quality. As to Luke (2002:180) the equality on the

ecosystem is extremely important and all living creature have to have fair and equal

opportunities. Therefore, in order to reach the sustainable development to green

sustainability, we should pay attention to the main philosophy of deep ecologic approach.

Ecosystem represents the whole with living and non-living things. Instead of particularizing

the whole and attribute different values to every part, talking about green sustainability and

green economy would be more rational.

Though the environment is described as the space where we live, it refers to a great

ecosystem. This ecosystem offers us many opportunities to meet our physical and biological

needs. Economic environment is the main structure providing every kind of resource which is

necessary for the production process. It is a raw material store in short. It is the main source

of production. Considering that resources are scarce, we can easily say that environmental

resources are scarce as well and must be used efficiently. We can say that this is a must for


The new economic order displayed that classic economy theories are not enough for the

sustainable development. Within this point, ecologic economy approach came into agenda

and tried to fill the gap. As to Daly (2007:86), who is acknowledged as one of the trailblazers

of ecologic economy, it is not always possible that the production processes are environment

friendly and create positive exteriorities. More importantly, the cost of negative exteriorities

due to the production process must not be more than the renovation capacity for the

consumed ecosystem resources.

Cultural and historical environment also play an important role on the sustainable

development besides the economic environment. Unfortunately, the degeneration in cultural

and historical values of the countries leads to irretrievable development problems. Because

reparation of loss of the values conveyed from past to present is impossible. And this will

lead that the next generations will not know their past and deal with some problems in future.

As to Uslu (1997:43), to provide sustainable development is a must for all economies.

However, putting economy into ecologic frames would be more logical rather than assessing

the ecologic structure as a component in the economic frame (Uslu, 1997:43).

According to Kumar and Kumar (2011:961) ‘Green Economy’ is an instrument to achieve a

sustainable environmental development. It defines a structure where a sustainable economic

development is achieved without giving any harm to the ecosystem. Kumar and Kumar

(2011:961) also states that the success of green economy idea depends on the politic reforms.

The politic reforms must provide a sustainable economic richness, must ease the issues and

enable optimum usage of natural resources. In short, state policy primarily has to aim

developing improved technologies to provide clean and recyclable energy.

Barbier (2011:234-236), on the other hand, has a different point of view about green

economy. Barbier emphasize that there are two difficulties in front of the green economy.

One of them is sustainability and the other is financing. The need for a constant production

by consuming resources, which are the components of environment, to provide a sustainable

development is a great problem. High costs of precautions that will be taken to preserve the

environment are the second dimension of the issue.

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In order to remove the deadlock between economic growth and environmental sustainability,

the character of the growth must be changed. Therefore, some restrictions must be put into

use in order not to use nonrenewable resources and to terminate the use of resource and

technologies that lead to environmental pollution (Ertürk, 2011: 161)

3. GREEN ETHICS FOR GREEN SUSTAINABILITY

History shows that the societies are in war with environment for long years and treat nature as

if it is a waste grave. It is known that the exploitation of nature sometimes led to the collapse

of civilizations. Considering these historical facts, it is claimed that mankind has less time

than hundreds of years to bring the environmental problems under control and abstain from

social and ecologic retrogressive situation (Foster, 2008: 12-13)

In order not to run short of environmental resources and not to give harm to the environment

during production and consumption process, both the companies and individuals must have a

green consciousness. Green consciousness refers to environment ethics and consciousness.

Green consciousness means that every individual must feel responsible to create a livable

environment and to sustain it (Çepel, 2006: 25). The reasons of environmental problems and

environmental pollution are the ignorant ideas and attitudes of societies rose from their social

and economic activities to achieve an utmost welfare level (Ertürk, 2011: 244).

Though sustainable development idea is put forward due to the future concerns, it has

gradually turned into a comprehensive and complete ethical approach (Kılıç, 2008:

217).Ethical principles are really important in terms of identification of environmental issues

and the remedy of polluted and damaged environment.

(http://www.etik.gov.tr/makaleler/abdulkadir_mahmutoglu.pdf). Green ethics displays the

individuals how to relate with nature or in a more comprehensive approach with the outer

world. And it emphasizes the moral aspect of human-nature relations. It indicates that

mankind must improve responsibility for the natural environment and other living things

(http://www.guncelonkal.com/PDF/cevre_etigi_maddesi.pdf).

With another expression, green ethics can be defined as the systemic examination of moral

relation between mankind and nature (Des Jardins, 2006: 46) and the responsibilities of

individuals (Kılıç, 2008: 32). Green ethics and ecological responsibility target is directly

related with each other. The main idea is that natural resources must be used without being

consumed completely and destructively and the sustainability of these resources for the next

generations must be enabled (Mutlu, 2008: 97). In this regard, green ethics is an approach

aiming to preserve all the values and aspects of nature.

In order to realize the improvement and admission of environment oriented green ethics

approach and adopt the organic world understanding, which is based on the idea that the

nature is a living organism, the education for environment must be widespread (Ertürk, 2011:

144).

Green ethics and sustainability intersects in many points. Environmental dimension of

sustainability states that the societies must preserve the natural resources and ecosystems.

The self-renewing capacity of ecosystems is limited; therefore, everybody must be conscious

about the usage of natural resources such as earth, air and water (Nemli, 2004: 26). In line

with this responsibility, the green ethics aims to have mankind adopt the information, attitude

and behavior that will preserve the living space and living quality of mankind at individual,

social and global level.

http://www.etik.gov.tr/makaleler/abdulkadir_mahmutoglu.pdf

http://www.guncelonkal.com/PDF/cevre_etigi_maddesi.pdf

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4. CONCLUSION

Sustainable growth has a great significance for all economies. However, what is more

important for the developing countries is sustainable development. Considering that the

concept of development has many more aspects than the concept of growth, it can be said that

developing countries are in a much more difficult situation. Moreover it can be said that

sustainable development is related with environment and green economy and it depends on

the implementation of green ethics.

Green economy and green sustainability is only possible when the green ethics is properly

implemented and adopted by all parts of the society. We can outline what can be done within

this concept:

Expectations from the State: Green consciousness can be achieved with a comprehensive

education system in all parts of the society. Changes in education system must be seen as a

direct state policy and never be belonged to a mere government. Otherwise it would not be

possible to provide a green sustainability.

Expectations from the Companies: It is really important for companies to reach the green

ethics consciousness. Especially, environmental friendly resources that are used in the

production will decrease negative exteriority after production. In this regard, corporate

companies must set a model and support the idea with social responsibility projects to gain

positive results. Moreover, these companies must support the innovative operations with

R&D projects about green ethics and green sustainability.

Expectations from the International Institutions: Implementation of green ethics values at a

national level will provide a regional effect. For this reason, green ethics implementations

must be spread to the whole world. In this regard, environmentalist institutions and

companies shaping the economy and commerce must be in solidarity and international

institutions that will work for the green sustainability are needed. However, in order to be

more successful, power of sanction of these institutions must also be at the highest level.

Last but not least, world trade and world economy under an intense globalization are in need

of green production and nature conservation.

REFERENCES

Barbier, E. (2011) The Policy Challenges for Green Economy and Sustainable Economic

Development, Natural Resources Forum 35, pp. 233–245

Çepel, N. (2006), Ekoloji, Doğal Yaşam Dünyaları ve İnsan, Palme Yayıncılık, Ankara.

Daly,H.E. (2007) Ecological Economics and Sustainable Development: Selected Essaysof

Herman Daly. Massachusetts: Edward Elgar Publishing

Des Jardins, J.R., (2006). Çevre Etiği- Çevre Felsefesine Giriş, İmge Kitabevi, Ankara.

Ertürk, Hasan, (2011). Çevre Politikası, Ekin Kitabevi, Bursa.

Foster, J.B., (2008). Savunmasız Gezegen: Çevrenin Kısa Ekonomik Tarihi, Epos Yayınları,

Ankara.

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Garrod,B. Ve Fyall,A. (1998) “Beyond the Rhetoric of Sustainable Tourism?”, Tourism

Management, Vol:19, No:3, pp.213-224

Kılıç, S., (2008). Çevre Etiği: Ortaya Çıkışı, Gelişimi ve Sonuçları, Orion Kitabevi, Ankara.

Kumar,B. Ve Kumar,P. (2011), Green Economy: Policy Framework for Sustainable

Development, Current Science, Vol. 100, No. 7, 10 April 2011, pp.960-962

Luke, T.W. (2002) Deep Ecology: Living As If Nature Mattered, Organization &

Environmet, Volume 15, Issue 2, pp. 178-186

Metzner;R. (1994) Ekoloji Çağı, Derleyen Günseli Tamkoç, Derin Ekoloji, Ege Yayıncılık,

İzmir

Mutlu, A., (2008). Ekoloji ve Yönetim: Toplumsal Ekoloji ve Sürdürülebilir Gelişmenin

Karşılaştırılması, Turhan Kitabevi, Ankara.

Nemli, E., (2004). Sürdürülebilir Kalkınma: Şirketlerin Çevresel ve Sosyal Yaklaşımları,

Filiz Kitabevi, İstanbul.

Otegbulu, A.C. (2011) Economics of Green Design and Environmental Sustainability,

Journal of Sustainable Development Vol. 4, No. 2; April 2011, pp.240-248

Türkiye Çevre Sorunları Vakfı (1991) Ortak Geleceğimiz, TÇSV Yayınları, Ankara

Uslu, O. (1997) Ekonomik ve Ekolojik Uygulamalarda Sürüdürülebilir Kalkınmanın Yeri,

Sürdürülebilir Kalkınmanın Uygulaması, TÇV, Aralık

WTO (1998) Guide for Local Authorities on Developing Sustainable Tourism, World

Tourism Organization, Madrid



The Effect Of Religion On The Process Of Sustainable Development Economy (In

Terms Of Thrift)

Mehmet Masum Ocak1, Mehmet Günay2, Gülenaz Selçuk1

1Celal Bayar University, Faculty of Education Lecturer, Manisa. Turkey,

2Celal Bayar University, Faculty of Science-Literature, Asst. Prof. Dr , Manisa, Turkey,

Emails: [email protected], [email protected], [email protected]

“We do not inherit the earth from our ancestors; we borrow it from our children.”

An Indian proverb.

Abstract

In this study, we have tried to emphasize that from the perspective of sustainable

development economy, the factor of religion affects communal incidents in our social life.





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Since religion, a need for a person, who is a member of a community, presents itself as a

reality of a society as well. Sustainable development aims at protecting and exploiting natural

resources in the most effective way. The concept of sustainable development put forward

with no hesitation entails its implementation in all societies throughout the world and requires

governments to take responsibilities for this matter. Sustainable development gives priority to

a person’s health, happiness and adaptation to his environment. It is out of question to

separate or isolate religion, one of the most prominent features of life forms, from the social,

cultural or economic dynamics of a community.

Our religion, Islam, which regards happiness of individuals and societies as essential in the

world and hereafter, sets rules to live our lives in harmony and in a well-balanced way. It also

orders us to sensibly spend what we have earned according to the limits of thrift. Everyone is

going to be asked to answer the questions of how he made a living, where and how he spent

it. While spending his money, he is required to take his needs, instead of his wills, into

consideration and not to spend too much or waste it by staying away from any extreme

expenditure. Apart from the warning against spending on the areas forbidden by the religion,

there is insistence on being thrifty and frugal.

Extravagance/waste is one of the most serious dangers that a sustainable development

economy can ever confront. Since as an outcome of waste, individuals and naturally

communities will start to lose all the facilities and things they have already possessed, and

face the challenges and deprivations ensued from their absence. They will turn out to be a

dependent population. Today, while people are starving in many parts of the world, it is hard

even to state the limits of the waste that some of us have caused.

We should not neglect that we can make use of our religion’s, Islam’s, orders and

prohibitions in order to stop waste and encourage to be frugal in the work process of

sustainable development economy. We have tried to explain in detail the hadiths, our

Prophet’s statements, and verses which are the essential references of our religion.

Keywords: Thrift, Religion, Verse, Hadith, Sustainable Development, Waste

1.INTRODUCTION

Sustainable development has the meaning of programming today’s and tomorrow’s

life and development in such a way that it maintains the balance between humans and nature,

responds to the needs of next generations and facilitates their development without depleting

natural resources. Sustainable development is a concept with social, ecological, economic,

spatial and cultural dimensions. This is a process of progress that increases life standards by

focusing on such subjects which aim to diminish the disaster risks as economical

development and preserving ecological system along with socio-cultural progress, political

stability and determination.

While defining sustainable development, the most significant factor may be the

balance between ‘today’ and ‘tomorrow’. For the generations of both today and the future, it

is of importance to reach economical, social and ecological aims, that is, developmental aims

in awell-balanced way. Long-term planning and thinking.

Each person has the duties and responsibilities to his Creator, prophet, the religion he

serves, himself, spouse, children, parents, siblings, natural environment and society. A person

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is going to be questioned for what he has done with his eye, ear, hand, foot and heart along

with all the knowledge, actions, spiritual and physical blessings given to him.

“Our religion taking individual and social peace and happiness as a basis sets rules to

live life in a balanced way and orders to properly use what we have earned with respect to the

criteria of thrift. Each person is going to be asked how he has earned his life and what he has

spent his savings on. He has to consider his needs rather than desires while sending his

savings. Expenditure is banned in the areas prohibited by Allah; and the principle of not

wasting is set for the situations permitted by the religion”. (Ergenekon, 1996)

Our religion is such a religion that never permits abuse or colonialism as extreme

wealth and luxurious expenditure are banned by Islam. Prevention of expenditure on luxury

could not encourage capital accumulation as much as it was in the west since such transfers

of financial assets as offerings and alms forestalled getting extremely rich and maintained a

well-balanced fiscal distribution in society.

Allah states in one verse “ Your riches and your children may be but a trial: whereas

Allah, with Him is the highest, Reward.”.(at-Teğabun, 64/15)

This verse demonstrates that property is sedition. Here, sedition means a matter of

testing. Otherwise, if its literal meaning was taken into consideration, it would be necessary

to get rid of world’s assets. However, our Almighty Lord orders Muslims to work for the

world as much as they should do for hereafter. Displaying property as sedition, He implies

the anarchy and depression caused by not being able to use it to good advantage. In one

account, while walking, our Prophet and his friends came across with a young man working

very ambitiously. When some said “I wish this young man was working for something

related to hereafter instead of worldly”, our Prophet said: “Don’t say so; if he is working in

order not to go around begging or need someone’s help, he is on Allah’s track. If he is

making a living for his old parents or children, he is still on Allah’s track. However, if he is

working to show off or swing the lead, he is on devil’s track.”

Spending the physical and spiritual belongings in vain is called extravagance.

Therefore, if a person unduly spends his money, property, time or natural resources, what he

does is extravagance. In other words, it is also called waste.

Millions or billions of dollars goes for nothing owing to extravagance, the varieties

and damages of which are too many to count. Therefore, a man who witnesses people and

children starving does not choose food, throw bread into the bin, waste food. Besides,

considering the cities and countries in shortage of water does not waste energy. As being

aware of the people who cannot make ends meet, he does not care luxurious goods and does

not waste his money.

Varieties of waste: waste in food and drink, clothes, time, information, health, energy

resources, etc.

Thrift is necessary not only for particular social strata but all individuals of a society

as well. For this reason, thrift spreading in all social strata allows the middle class to get

stronger.

“Three significant tenets of Islam played an important role in the course of economic

development.

The first of these tenets is the basis that all the things on the Earth are created for all

humans. The second important principle is the one that prevents luxury and grandeur (the

principle that bans the building to show off). Finally the third principle is the one that

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ascertains the necessity of learning and teaching all kinds of science and knowledge. It also

underscores that keeping such knowledge hidden is forbidden by the religion”. (Bilgiseven,

1987)

The Almighty Allah has created all the beauties and blessings for us. We have been

trusted with all these beauties and blessings given by Allah. All the blessings Allah has

granted on us such as life, health, children, property, title, etc. could be test items. We are

going to be questioned if we wasted them and how we used those blessings. Regarding to our

topic, Allah says “Then on that day you shall most certainly be questioned about the boons.”

(Tekasür, 102/8)

On this topic, our prophet also said that: On Judgement Day, no one can move away

from his tracks unless he is questioned about where he spent his life, his actions, how he

made a living, what he spent his money on, how he used his body and health (Tirmizi,

Kıyame, 1)

One of the tenets our glorious religion, Islam, adopts is being economical and

moderate. Being economical and moderate amounts to one being prudent about everything

including spending, talking, drinking and eating.

“The opposite is waste. Waste means going to the extremes in any subject, deviating

from the right and true, transgressing the limits, spending the chances and assets on

unnecessary things or abundantly.” (Yazır, 1992)

In short, waste means spending the blessings a person possesses unduly and

extremely ( Şamil, İslam Ans. “İsraf” ) In Islam, waste is banned by verses and hadiths. “O

Children of Adam! wear your beautiful apparel at every time and place of prayer: eat and

drink: But waste not by excess, for Allah loveth not the wasters”. (Araf, 7/31 )

“And give to the near of kin his due and (to) the needy and the wayfarer, and do not

squander wastefully. Surely the squanderers are the fellows of the Shaitans and the Shaitan is

ever ungrateful to his Lord. ”( İsra, 17/27 ) Verses clearly display this ban.

The verse describes waste as ingratitude to Allah and the ones doing so as Satan’s

sibling, which proves how horrible ‘extravagance’ or ‘being lavish’ is.

Our prophet says “Eat, drink, wear and give alms without being arrogant or without

wasting” (Buhari, Libas, 1)

This hadith attracting our attention gives an opinion about how meticuluous Islam is

on the subject of ‘waste’. Our prophet once visited Sa’d, one of his friends. Meanwhile, Sa’d

was performing his ablution. When Resulüllah noticed that he was using water more than

necessary, he asked what the waste was that. When Sa’d asked whether there was waste in

performin ablution, our prophet responded “Yes, even if you perform your ablution in

flowing river” (İbn Mace, Taharet, 48). Our religion asked us not to overuse water even from

a flowing river even for religious services.

The Almighty Allah created everything in balance. Humans must be moderate in all

areas of life including expenditure.

Islam takes the necessity as a basis in spending money, goods and property; and bans

spending in vain. Expenditure must be correlated with the necessity, not income. Even if our

income incresases, our expenditure should not go beyond the limits of our necessity. Just like

in all areas, Islam orders to be moderate by staying away from the extremes of being lavish or

stingy. In our religion, this criteria is regarded one of the features of a perfect Muslim.

http://www.facebook.com/KURANgentr



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As regards to the topic, Allah says: “Make not thy hand tied (like a niggard's) to thy

neck, nor stretch it forth to its utmost reach, so that thou become blameworthy and destitute.”

( İsra, 17/29 ) In another verse:

” Those who, when they spend, are not extravagant and not niggardly, but hold a just

(balance) between those (extremes).” (Furkan, 25/67 ). In the verse, while being mean and

lavish is criticised, being moderate is praised; and this attitude is mentioned is one of the

features of Allah’s slaves.

When we look at the verses and hadiths, it is clear that we are asked not to waste our assets,

goods, properties while buying what we need. And this way of acting is emphasized as one of

the features of a perfect Muslim.

“O Children of Adam! wear your beautiful apparel at every time and place of prayer:

eat and drink: But waste not by excess, for Allah loveth not the wasters.” stated in Araf 7/31.

In the verse, on the one hand a person is ordered to eat and drink and on the other

hand not go to extremes in those actions. In other words, just like in everything, there must be

a moderate way even for eating and drinking.

“He may say (boastfully): "Wealth have I squandered in abundance !. " Thinketh he that none

beholdeth him?" (Beled, 6-7)

As stated in the verse below, negligent people ignore a simple fact: Our Holy Lord

has granted countless blessings to humans including flesh, air, food, the devices they use.

Whatever is on the earth and heaven along with all visible and invisible grants and

livelihoods is at his disposal. A man’s duty is to use what has been given to him in a

moderate way and not to waste In the Koran, Allah warns that humans are going to be

questioned about the blessings given to them in hereafter with the question “Then on that day

you shall most certainly be questioned about the boons.” (Tekasür, 102/8)

In the Koran, Allah says, “O Children of Adam! wear your beautiful apparel at

every time and place of prayer: eat and drink: But waste not by excess, for Allah loveth not

the wasters.” (Araf, 7/31) He also states the believers should benefit the blessings and forbids

their waste. However, it should be underscored that not wasting does not amount to rejecting

the wealth, limiting the expenditure on the areas that Allah gives permission or being unfair

to ourselves. The single criteria here should be whether the expenditure has been for Allah’s

will or not.

Muslims both thank for the blessings and be very careful about not wasting.

Considering the verse, “Those who, when they spend, are not extravagant and not niggardly,

but hold a just (balance) between those (extremes).” (Furkan, 25/67), they use food, water,

clothes, things provided by technology as much as they need.

2.CONCLUSION

Extravagance harms both an individual and the whole society. This leads our family

and nation to be poor. A lavish person always tries to spend money recklessly. As he is used

to spending money a lot, when he is short of money, he tries illegal ways to make money.

Sometimes, he becomes a burden on the shoulders of his family, society and country since he

is in despair help of the others. It is quite often to see such occasions in society. Wasteful

people and nations get disappointed sooner or later. They find themselves in the abyss of

despair and hopelessness.



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Not only individuals, countries and nations could be prodigal as well. Prodigality

even depletes seemingly countless troves. I could deplete forests, ores, water and sources of

petrol and electricity. The exhaustion of such reserves causes those nations to be in need of

the others.

The negative effects of waste become more influential in today’s financial life. In

the old days when economies depend on agriculture, the discrepancy between welfare and

poverty was not as visible as it is a present. In today’s industrialised communities which are

transforming into communities of information, there are people who live far beyond the level

welfare along with the ones trying to survive in abject poverty. Over industrialism, arms race

and insatiable greed of the colonialists to find more raw materials damaged the agricultural

areas which have a vital importance on the Earth. Therefore, the West’s finances which

currently depend on over consumption and waste confront dire straits. Such troubles affect all

the economies in the globalized world. Although the west have managed to maintain

financial welfare so far, they admit that at present resources are limited; water and food with

a crucial role in conserving prosperity have always been wasted recklessly and from now on

humans do not have the luxury of squandering.

For a society to survive, individuals have duties to the community they live in.

Besides it is essential to keep social balance and peace and to ward off any factor that may

cause tension among people.

Sustainable development aims to the protection and effectively use of natural resources. The

concept of sustainable development put forward with no hesitation entails its implementation

in all societies throughout the world and requires governments to take responsibilities for this

matter. . It is out of question to separate or isolate religion, one of the most prominent

features of life forms, from the social, cultural or economic dynamics of a community. It is

out of question to separate or isolate religion, one of the most prominent features of life

forms, from the social, cultural or economic dynamics of a community.

Our religion Islam, focusing on the peace of individuals and society both in the

world and hereafter, sets rules to live life in a well-balanced way, and orders us to duly spend

what we earn by paying attention to the criteria of thrift. A person is going to be asked how

he made a living, how and on what he spent his money. Our religion asks us to take our needs

into consideration rather than our desires when it comes to spending, and also we are

encouraged not to waste or go to the extremes. There should be no expenditures on the areas

forbidden by the religion and there is strong insistence on being thrifty and moderate.

We have tried to explain in detail the hadiths, our Prophet’s statements, and

verses which are the essential references of our religion. In this study, we have tried to

emphasize that from the perspective of sustainable development economy, the factor of

religion affects communal incidents in our social life. Since religion, a need for a person, who

is a member of a community, presents itself as a reality of a society as well.

We should not ignore that we can make the most of our religion’ s orders and prohibitions as

regards thrift and preventing waste in the process of sustainable development economy.

BIBLIOGRAPHY

BİLGİSEVEN, A. (1987) Eğitim Sosyolojisi, Publication of the Turkish World Research

Foundation , (4. Edition), Flaş Matbaası, İstanbul

BUHARİ, (1986), Libas, Kütübü Sitte, Akçağ Yayınları, İstanbul

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ERGENEKON, S. (1996), Tasarruf Eğilimini Etkileyen Sosyolojik Faktörler, PhD Thesis,

Istanbul University Institute of Social Sciences , İstanbul

İBNİ MACE, (1986), Taharet, Kütübü Sitte, Akçağ Yayınları, İstanbul

ŞAMİL İSLAM ANSİKLOPEDİSİ, (1998), “İsraf”, Şamil Yayınları, İstanbul

Meaning of The QURAN, http://www.kuranikerim.com/english/m_indexe.htm

YAZIR, E.H.( 1992), Hak Dini Kur’an Dini, Zehraveyn Yayınları, İstanbul

TİRMİZİ, (1986), Kıyame, Kütübü Sitte, Akçağ Yayınları, İstanbul

Macroeconomic determinants of Sustainable Development

in Bosnia and Herzegovina

Emil Knezović, Uğur Ergun

International Burch University, Faculty of Management,

71000, Sarajevo, Bosnia and Herzegovina


Abstract

The origin of term sustainable development comes from forestry and it means the extent of

cutting and putting the new trees on the planet. Synonymous for it is sustainability and it

refers to ability to endure as much longer as it is possible. This paper shows the degree of

correlation between sustainable development in Bosnia and Herzegovina and five

macroeconomic determinants: unemployment, export, import, average salaries and CPI as a

measure for inflation. The paper provides information about importance of economy in this

process and it explains all variables that are used. It is based on the period of five consecutive

years (2007-2011). Research for all of five variables was conducted on monthly basis for this

period, so in total it provides 58 data (January and February of 2007 are excluded) for each

variable. Next thing that this paper shows is the current position of the country in terms of its

development. The paper represents a combination of basic research (provides a lot of useful

information about the topic) and quantitative research (shows numerical results that are

gotten by the analysis of the problem). Unemployment, as one of the biggest and growing

problems in the country, is dependent variable and paper tries to prove relationships among

this variable and the others. Results in the paper are obtained through descriptive analysis.

The paper provides data about causes for high unemployment in our country and it shows

how much impact each variables mentioned above have or does it have at all. Finally, paper

shows on what country should put more emphasize in order to improve its current position

and to be able to compete with more developed countries.

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Keywords: sustainable development, unemployment, export, import, salary, inflation, CPI,

economy, GDP

1. INTRODUCTION

Actions done should not affect people that are inhabited there. Sustainable development

represents holding the balance among consumption, savings and regeneration of all our

resources. Sustainable development is a process of change and it has to start from each

individual and it continues by transmitting it to each area of our lives. One quotation

describes, in the best way, change that sustainable development influences. It says: “Insanity

is doing the same thing over and over and expecting different result”.36 As starting point of

process, known as sustainable development, it refers to year 1970, when World leading

countries made an agreement to allocate 0.7% of their total gross national income in order to

help those countries which are struggling. In 1992 at conference in Rio de Janeiro sustainable

development became a leading term in field of politics about environment. Sustainable

development implies four ways of consolidation (use of resources, investments, technical

development and institutional changes). During the process the understanding of sustainable

development has been spread to two fields more: economic and social. All three are making

so called “magic triangle” of sustainable development. Today, UN represents the leading

international organization that deals with it. It was founded in 1945, right after the Second

World War in order to harmonize the situation and to make “relationships” among countries.

It represents an international organization whose stated aims are facilitating cooperation

in international law, international security, economic development, social progress, human

rights, and achievement of world peace.37 Today, this organization is consisted of 193

countries members.

This paper defines basic terms related with sustainable development, explains data used in the

research and provides the results on five consecutive years. The aim of the paper is to

examine and analyze macroeconomic determinants of sustainable development in Bosnia and

Herzegovina.

2. BOSNIA AND HERZEGOVINA

Bosnia and Herzegovina is positioned on the Balkan Peninsula with total area of 51 172

square kilometers and estimated population of 4.5 million people. Country is bordered with

Croatia, Serbia and Montenegro. Capital city is Sarajevo.

2.1 History

First recorded appearance of name Bosnia has happened in 10th century in a geo-political

handbook of Byzantine emperor Constantine VII. Since ninth century Bosnia was an

independent country and it was governed by Bans. Independency was kept on until 1463,

when last Bosnian Ban was removed and Ottoman Empire conquered this region. In 1878

36 Albert Einstein, (attributed) US (German-born) physicist (1879 - 1955),

http://www.quotationspage.com/quote/26032.html

37 http://en.wikipedia.org/wiki/United_Nations

http://en.wikipedia.org/wiki/International_organization

http://en.wikipedia.org/wiki/International_law

http://en.wikipedia.org/wiki/International_security

http://en.wikipedia.org/wiki/Economic_development

http://en.wikipedia.org/wiki/Social_change

http://en.wikipedia.org/wiki/World_peace

http://www.quotationspage.com/quotes/Albert_Einstein/

http://www.quotationspage.com/quote/26032.html

http://en.wikipedia.org/wiki/United_Nations

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Bosnia became a part of Austro-Hungarian Empire. In 1914 Gavrilo Princip, a member of

youth movement called “Young Bosnia”, assassinated Austro-Hungarian heir Franz

Ferdinand in Sarajevo. This event was, as most of historians say, an event that started the

First World War. After the end of the War, in 1918 Bosnia becomes a part of country called

country of Slovenians, Croats and Serbs, which was renamed in 1929 in Kingdom of

Yugoslavia. After Second World War Kingdom Yugoslavia became Socialist Federal

Republic of Yugoslavia and was operating under that name until October 1991. In that year

Bosnian people vote for sovereignty and in February of 1992 for independency. In May 22 of

1992 Bosnia and Herzegovina became a member of UN. Dayton agreement in November of

1995 marked the end of four years war in the country. Bosnia and Herzegovina is consisted

out of two administrative units: Federation of Bosnia and Herzegovina and Republika Srpska.

The special status in the country has region of Brcko-District and it is not part of neither of

those two units.

2.2 Politics and Political structure

Based on its state organization, Bosnia and Herzegovina represents unique state structure in

the world. Legislative power is given to bicameral Parliament consisted of House of

Representatives and House of People. At the top we have presidency that is made out of three

members. Each of them elected based on his ethnic characteristics. So, one is representative

of Bosniaks, one is representative of Serbs and one is representative of Croats. Council of

ministers represents central government and is consisted out of six ministers with positions in

fields of external affairs, international trade and economy, civil affairs and communication,

human rights and refugees, European integration, and finally treasury. On the state level we

have established several agencies whose primary occupation is to create reports about


2.3 Sustainable Development

As a part of Yugoslavia, Bosnia and Herzegovina was specialized in raw and energy

production. Additionally, most of military production was done in the country. It was hugely

due to huge amount of resources that were available especially for hydro and energy

production. Among that, Bosnia and Herzegovina was and still is rich by coal and metal.

Highly intensive production and exploitation of these resources were not what Sustainable

development policies imply. It was totally opposite since there was imbalanced relationship

between economy and ecology. In time when idea of Sustainable Development was formed

and developed in Rio de Janeiro, Bosnia and Herzegovina was going through war. When in

1997 Rio 5 conference was done, this country was occupied by its own reconstruction and

could not participate in developing the process of sustainable development. However, later on

through several international programs, Bosnia and Herzegovina succeed to join the process

of sustainable development and participated in forming MAP – Mediterranean Action Plan.

2.4 Economy

Since the end of the war, Bosnia and Herzegovina had two main issues. One was to rebuild

its infrastructure that was totally destroyed during the four years of war. The second one was

to change the “style” of economy. Before, in this country is so called central economy, where

most of institutions were government owned and now they had to privatize them. The main

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help for rebuilding were FDI. Total FDI in period from 1994 to 2011 is around 8 billion of

BAM, where the “best” year of FDI in Bosnia and Herzegovina was 2007 where this country

total around 2.4 billion of dollars. This year represent 30% of all FDI since 1994.

Among the main investors (2010 estimated) we have Austria (1.88 billion of BAM), Serbia

(1.72 billion of BAM), Croatia (1.35 billion of BAM) and Slovenia (1.07 billion of BAM).

When it comes to sector investments were mainly done in manufacturing where main

companies of steel production faced joint venture. In the second place of FDI we have

banking services which results in many foreign banks in our countries. In this sector we have

highest investments from Dubai, Croatia and Austria. Economy in Bosnia and Herzegovina

has faced the wall in last few years after continues growth in period before it. As whole world

faces today, this country also feels the consequences of global crisis. The 2009 was the worst

year where it GDP felt for 3%. However, this country started to recovering and in the last two

years has increasing GDP.

3. DATA USED

3.1 Unemployment

Based on International Labor Organization we define the unemployment as situation in which

people without job could not find one in past four weeks. Another definition adds that

unemployment represents a situation in which qualified worker, who are willing to work in

current conditions can not find the job. This problem is presented in each country in the

world and all governments are dealing with it. Among the reasons we can find: labor costs,

low investments from companies, political reasons, low qualifications, personal behavior, job

dissatisfaction, national policies, new technologies, economic crisis and discrimination.

Having in mind the current structure of labor market economists differentiate three main

types of unemployment; structural (the gap between availability of jobs and demand for the

workers), frictional unemployment (when people change their jobs or they move on to the

other regions or countries) and cyclical unemployment (there is generally low number of

available jobs in the market). In order to measure unemployment economists use

unemployment rate. Several international organizations are dealing by comparisons of

unemployment among the countries. Among them we have Eurostat, OECD and ILCP. Based

on the latest information Bosnia and Herzegovina takes 188th place among 200 ranked

countries. This data shows that Bosnia is dealing with big issues regarding unemployment

and that big part of its labor force is unemployed.

3.2 Trade

Trade is term that we use every day. It represents a situation in which good or service change

its owner. In order to earn money trade must happen and place where it happens is called

market. We can identify two types of trade in economy: domestic trade and international

trade. Domestic trade represents the situation where all transactions are done within a

country. On the other hand, international trade represents situation in which two or more

countries made transactions among themselves. Import happens in situation when a domestic

country buys goods and services from foreign one. In most cases two main reasons stand for

doing import. One is that domestic company can import products that have higher quality

and/or lower price than the ones that are produced within the country. On the other hand

some services such as computer equipment, for example Apple is not produced in Bosnia and

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Herzegovina, and so the only way to have it on the market is to import it. Export refers to

opposite situation. It happens when goods and services are produced at home and sold in

other country. As for import several reasons stand for export too. Among them there are

possibilities to earn higher profit, because export gives ability to company to produce and sell

more.

3.3 Inflation

Inflation represents the degree by which price level of goods and services has raised in

certain period. At the same time value of money has decreased, since for the same money

buyer can buy less now. Inflation can result in real decrease of money value, which results in

uncertainties in future. This is seen as negative effect of inflation. On the other hand inflation

can give authorities and government possibility to adjust nominal rates and to call promotes

investments in nonmonetary areas. However inflation is normal from time to time and in

some cases shows how economy is doing. Inflation may be divided into cost push inflation

(companies decide to increase their prices because their costs have increased) or demand pull

inflation (demand for certain product increases so much that it is far more above the supply of

that product). Formula for CPI is new price / old price x 100.

3.4 Salary

Salary represents a payment from company, organization or other legal entity to an employee

on a periodical basis. Salary is important to economy since it provides finance to population

so they can spend and move money around. Based on the contract terms between employer

and employee we may distinguish salary by time (workers are paid for the time they work in

their companies), salary by work (company pays its worker regarding the work done such as

time spent on work and quality of finished work) or salary by results (workers are paid based

on quantity they have produced). Economy ranges workforce based on its income. The main

part of household income is its salaries and that why today there are several categories or

salary grades. Those often called “levels of salaries” distinguish employees and importance

of position they occupy. Same as in other areas of economy there has to be levels of income

so economy could produce different products that have different prices and etc. Beside

national or in modern time, global economic reasons, salary provides information to

individuals so they can be able to see their current position.

4. ANALYSIS AND RESULTS

Unemployment has

varied in the period of

five years. As

already mentioned

unemployment may be

the reason of several

factors. As we can see

from the chart one the

left, unemployment was

decreasing until 2009. It

is assumed that world

crisis from 2008 stroke.

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Bosnia and Herzegovina in 2009, and it results in increase of 5.98% of unemployment rate in

3 years. Analysis of 58 data for each variable on 5 year basis shows the following:

Descriptive Statistics

N Range Minimum Maximum Mean Std. Deviation

Unemployment 58 66761.00 469967.00 536728.00 511660.1552 17367.22390

Import 58 824155.00 719309.00 1543464.00 1205184.3793 171683.70156

Export 58 346719.00 385687.00 732406.00 562313.4310 90477.96194

Inflation 58 3.30 -1.20 2.10 .2931 .60491

Salaries 58 203.00 625.00 828.00 764.9483 59.53693

Valid N (listwise) 58

Standard deviation for unemployment shows that most of the data is somewhere around the

mean. When it comes to trade, import counts for 69,900,694.00 of BAM (68.19%), while

export counts for only 32,614,179.00 of BAM (31.81%). This shows that in almost five year

(January and February of 2007 excluded) Bosnia and Herzegovina made trade deficit of

37,286,515.00 of BAM. Inflation in 58 months totaled to 17% which means that if people

could buy certain things for 100 BAM in February of 2007 in December of 2011 they had to

paid 117 BAM. Average salaries increased from 625 BAM to 828 BAM or for 32.48%. It

increased until 2009 and from that point it has almost a flat curve. In December of 2011

Bosnia and Herzegovina counted 536,728.00 of unemployed people or 43.83% of its total

workforce. Even if this number of unemployed people is the record for five years the

percentage of unemployed people is not the biggest one (44.74% in March 2007). Beside

unemployment standard deviation is low only in salary while higher standard deviation we

have in import and export and extremely high in inflation which means that results varying

hugely from the mean.

5. CONCLUSION

The aim of this paper was to examine five determinants of economic sustainable development

of Bosnia and Herzegovina and to see how they impact situation. From the results we could

see that the main reason for unemployment, among the variables mentioned, is trade. Huge

trade deficit is among the leading reason why this country stagnates in sustainable

development. In order to operate with profit, company s revenue has to exceed the expenses.

Same goes for economy; if there is no positive outcomes out of trade, in that case country

cannot operate positive. However, it is important to increase export, because based on several

economic theories it increases employment. On the other hand, economic researches show

that relationship among unemployment and import is strongly negative, which means that

increase in import also increases employment. Reason for that is that there is more

consumption, which represents that economy is growing and that more money is available.

The upcoming years will be crucial for the country since data shows slight stabilization in the

last year. It shows that country started to recover a little bit from the crisis that hit it in the

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2009. In 2010 government made a strategic plan with several strategic goals in order to move

forward. Among the goals they put macroeconomic stabilization, competiveness,

employment, sustainable development and EU integration. In order to succeed government

has to implement policies developed in this strategic plan efficiently and has to coordinate

among these five goals, because the only way to have results is to implement them in the

same time.

REFERENCES

Agency of statistics of Bosnia and Herzegovina, Last Accessed April 29, 2012,

http://bhas.ba/?option=com_saopstenje&cbgodina_saopstenja=2012&pregled=1&lang=ba

A. Hodžić (2008). Geo-economic and geopolitical importance of the Balkan region in the

expansion of European Union. Center for Security studies.

Bosnia and Herzegovina, The Council of Ministers, Directorate for Economic Planning

(2010). Development strategy of Bosnia and Herzegovina.

CIA - Central Intelligence Agency, Last accessed on April 28, 2012,

https://www.cia.gov/library/publications/the-world-factbook/geos/bk.html

N.L. Dobretsov, A.V. Kanygin, and A.E. Kontorovich, Paper on Economics and Environment

as Factors of Sustainable Development of Siberian Mineral Resources

Quotations Page, Last Accessed on April 22, 2012, http://www.quotationspage.com/quote/

26032.html

Tutor2u, Last Accessed on April 10, 2012, http://tutor2u.net/economics/revision-notes/a2-

macro-causes-of-inflation.html

Wikipedia, Last Accessed April 29, 2012, http://en.wikipedia.org/wiki/United_Nations

The Applicability of Green Economy Policies: Governance Approach and Sustainable

Development

Fatma Neval Genç, Gülizar Seda Çorak, Murat Yılmaz

Adnan Menderes University, Faculty of Economic and Administrative Sciences,

09900, Nazilli, Aydın, Turkey.

E-mails: [email protected], [email protected], [email protected]

Phone: +90 256 347 70 11

Abstract

This report tries to focus on how the “governance” approach can enable “green economy”

that develops along with change in the field of energy. As is known, governance approach

emerged as a product of public administration paradigm starting to change at 1970s, and is

http://bhas.ba/?option=com_saopstenje&cbgodina_saopstenja=2012&pregled=1&lang=ba

https://www.cia.gov/library/publications/the-world-factbook/geos/bk.html

http://www.quotationspage.com/quote/%2026032.html

http://www.quotationspage.com/quote/%2026032.html

http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html

http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html

http://en.wikipedia.org/wiki/United_Nations




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specially emphasized by supranational organizations like The United Nations, The European

Commission and The World Bank. This is because; the increasing energy demand leads the

world to a new energy economy and the search for renewable energy sources. While financial

policies are crucial for sustainable development, applicability and consistency of these

policies can be succeeded by networks and tight relationships between the actors that

governance has developed.

Keywords:Green Economy, Governance, Sustainable Development, Global Warming and

Climate Change, Carbon Tax.

1.INTRODUCTION

Our world experiencing Global Crisis in 2008 continues to discuss effects of this crisis on

one hand while it goes through global climate change on the other hand. We encounter with

new serious signs indicating that nature becomes more and more unbalanced every passing

day. In addition, it becomes difficult to meet unlimited needs of the world population, which

increases day by day, through limited resources. Accordingly, search for new resources is

launched. Principally aiming at growing after crisis, the world targets sustainable

development by giving weight to renewable ones among existing resources in addition to

search for new resources.

Today, global climate change is not an agenda topic for only scientists, heads of state and

summits but also civil society and economists. This is because; it is possible to recover this

problem by adopting “green economy” policies that bring about energy transformation and

focus on efficiency, growth and employment in investments. In brief, four main conditions of

sustainable development are human, environment, energy and economy. Aiming at creating

an active and conscious civil society as a sector, governance approach can introduce a model

that is capable of meeting this deficit. This model can be developed through relationships of

sectoral and social networks. This is because; global climate change is not a problem that can

be overcome by states alone. It is not low-cost, and it does not have boundaries. This study

will focus on global climate change, renewable energy resources, energy-economy

relationship and “green economy”-related alternative policies developed/expected to be

developed by supranational organizations and governments (states) generally and by Turkey

specially within the framework of “sustainable development” concept emphasized by

governance approach. The present study will also deal with approaches and activities of “civil

society”, which is expected to take an active role in formation of these policies and is one of

main components of governance.

The first chapter focuses on global climate change and the process concerning recognition of

the problem. The second chapter deals with birth of the concept of governance and its

importance in sustainable development. The third chapter chronologically examines global

and local steps taken in the matter of climate change (Rio UN Conference on Environment,

IPCC, KYOTO, HABITAT etc.) and touches upon paradigm changes experienced in the

administrative mentality and appearance of governance in these steps. The fourth and last

chapter focuses on policies and financial instruments developed by developed and developing

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countries in the field of green economy, theoretically examines carbon Tax in particular, and

discusses possible effects of Turkey’s accession to Kyoto Protocol.

1.1. GLOBAL CLIMATE CHANGE: RECOGNITION OF THE PROBLEM

The change our world has gone through since its existence has determined living

space, class and cycle of living beings at the present time. The “moment” we are in also bears

witness to this change and affects natural change of the world. Considering that earth

assumedly started to be formed approximately 5.5 billion years ago and the first living being

assumedly appeared 3.5 million years ago, and the first human being started to live on the

earth just nearly 100 thousand years ago, it is possible to say that there is a difference of 5.4

billion years between formation of earth and start date of human being to live on the earth.

Apart from problematique of evolution and physical development of human beings, which is

included in the field of study of anthropologists, looking at universal content historical data

we have, we can say that human being got acquainted and started to interact with earth not a

very long time ago from the point of earth. This interaction, which covers the entire history

of human being, is a process still continuing. It is accepted that human beings have deformed

earth and atmosphere within this process as a result of invention of machinery,

industrialization and rapidly increasing growth of technology.

The surmise that natural cycle of the world was deformed due to human factor was reached

upon examination of external effects (seasons, weather events etc.) and movements (rotation

of the world, crustal movements etc.) experienced by human beings that come from “nature”.

It was stated for the first time in declaration of 1972 UN Stockholm Conference that

everyone had a right to have good living conditions in a quality environment. This right was

included in “third-generation rights”. The 56th article of the Constitution of the Republic of

Turkey says, “Everyone has the right to live in a healthy, balanced environment.” and

emphasizes that it is the duty of the state and citizens to improve the natural environment, to

protect environment health and to prevent environmental pollution. Limitedness of bearing

capacity of the environment was also suggested for the first time at Stockholm Conference. In

this context, a basis of the sense of sustainable development was formed.

Environmental problems had been categorized as air pollution, water pollution and soil

pollution until the last twenty years. However, the earth started to get heated as a result of

increase in technology use, non-controllable growth in industrialization, and emission of

greenhouse gases (carbon dioxide, methane and ozone gases having heat retention features),

therefore global warming and climate change problem came to be more important than all

other environmental problems. This is because; no other problem than global climate change

and global warming has directly threatened humanity to this degree. Global warming is a

deepened problem, which is also associated with other environmental pollutions. Global

warming was a topic discussed only in a couple of academia of developed countries in the

1980s. The importance of the problem was recognized at a lated speed. Upon recognition of

the problem, The World Climate Conference was held in 1979, and a scientific infrastructure

was prepared through establishment of Intergovernmental Panel on Climate Change (IPCC)

in 1988 (Karakaya, 2008:11).

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Global warming and environmental problems have no boundaries. It is not possible to expect

that a pollution experienced in Asia will not affect other lands and oceans of the world. From

this point of view, global climate change is a common problem of all individuals, all states

and all organizations, and can be overcome only through cooperation and common will. One

should not regard policies developed in regard to global climate change as of special power

groups. Global order is not static, but dynamic. In fact, governance approach is an important

paradigm to avoid this idea. Decisions should be made through participation of different

actors from each level. They should be implemented through efforts, interaction and

supervision of these actors.

A large number of international studies, meetings and agreements have been carried out up

until today regarding environmental problems and global climate change, which are

considered common problem of the entire humanity. However, active “stakeholder”

participation, openness, transparency, accountability, measurability, effective communication

channels and a fair environment are needed in decision making, implementation and

evaluation processes for adoption, applicability and consistency of generated ideas, prepared

plans or alternative policies. Considering that environmental problems are regarded as a

common problem of the entire humanity, governance approach is closely related to ensuring

green economy and sustainable development with participation paradigm and principles it has

developed. It would be appropriate to touch upon dynamics and history of governance

approach prior to proceeding to relationship of governance with sustainable development and

green economy and mentioning financial policies implemented for green economy.

2. PARADIGM CHANGE EXPERIENCED IN ADMINISTRATIVE MENTALITY:

GOVERNANCE

General propositions made concerning classical administrative mentality and traditional

public administration organization (Weber Bureaucracy) started to remain incapable as

expectations and demands from states increased because different administrative mentalities

were adopted by different countries as a result of new world order after the World War II and

need-based consumption approach of citizens changed. Firstly, in the 1960s, different

bureaucratic models were compared through Comparative Public Administration. At the end

of this comparison, non-functionality of principles of classical public administration approach

(rules set in detail, strict hierarchy, specialization, unity of command, over-monitoring) was

revealed. New Public Administration and New Public Management approaches, which

shifted public administration to business administration axis and aimed at eliminating

democracy and representation crisis having gone on in public administration in a certain way,

survived until the 1990s. It can be thought that these approaches emerged as alternative

models to criticisms addressing to interventionist structure of state. However, both

mechanisms of state and citizens should internalize behavioral changes required by

democratization within the process where democratic systems and constitutionalism are

questioned, and they should go through different experiences in order to advance their

political cultures and levels of consciousness in this direction. Efforts that were launched by

democratic systems on the way to achieving best as of the 1980s in particular focused on new

models and concepts allowing for direct participation of people in government and aiming at

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removing jacobinism and fanaticalness. Public administration order experiencing a crisis of

concept and identity (Kalfa, 2011:404) adopted an utterly different identification with the

concept of “governance”. Although the concept of governance had appeared in some

academic studies in the USA beforehand, it took the first serious stage in the Report named,

“Sub Saharan Africa: From Crisis to Sustainable Growth; A Long Term Perspective Study”

published by The World Bank in 1989 as “good governance”. Then, it was generalized by

United Nations, OECG and IMF in the following years (Uysal et al., 2011: 15). The concept

of “governance” taking shape with the slogan, “State that does not row, but steers” (Koçak,

2010:470) enabled necessary meanings to be attributed to it in a field having certain meaning

deficits. Governance approach, which includes active and effective urban administrations

within the framework of the participation-localization-demilitarization triangle instead of

clumsiness of traditional public administration mentality in provisions of services and

fulfillment of demands, covers more flexible and horizontal organization instead of

complicated traditional public organization allowing participating at minimum level and

includes active civil society as a sector, has adopted the following principles as general

administration principles: transparency, openness, participation, accountability, flexibility,

effectiveness and efficiency in use of public resources. Governance approach develops

partnership and cooperation model in administration. According to Public Administration

dictionary of TODAIE, governance is a structure or order formed by results obtained through

joint efforts of all relevant actors in a social political system (Bozkurt and Ergun, 2008:274).

Versatility and participation of governance as a model refers to participation and coming

together of all actors/parties in a public administration system in terms of order (Gündoğan,

2010:16-17). Development of methods aimed at solution of problems by the society itself is

of great importance for legitimacy of decisions and achievement in solution of problems. In

governance, society consists of relationships between networks of public, private and

voluntary organizations. Thanks to relationships and partnerships between networks, active

participation of different segments of the society is ensured. These partnerships bring about a

special link. Networks with different characteristics (civil–military bureaucracy, private

sector, non-governmental organizations) play an active role in the process of constituting

public policies within interaction and communication with one another (Üstüner, 2003:49-

50). What is important is to enable for networks with different structures and different

characteristics to meet on a common ground in policies to be constituted and decisions to be

implemented. Civil society, which is now regarded as a sector, has started to lead the state. In

this sense, governance puts an emphasis on active citizen and civil society participation at

each level (local-national-international), but on a local scale in particular. Governance should

be adopted as a model and system in order for green economy policies, which are developed

to ensure sustainable development, to be set and implemented. It is an inevitable requirement

to determine financial-economic solution models developed or to be developed concerning

global warming and climate change, which are common problem of today and future, through

participation and support of multi-stakeholder partnerships and active civil society.

3. SUSTANABLE DEVELOPMENT-GOVERNANCE RELATIONSHIP

Having summarized multi-level and participatory structure of governance, it is necessary to

emphasize the meaning carried by governance in terms of sustainable development.

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Sustainable development is a concept representing the relationship, more precisely the

compromise between economic development and environment (Sönmezoğlu, 1989:547). In

this context, we think that it would be more useful to touch upon history of sustainable

development and its link with governance without proceeding to economic dimension of the

issue.

3.1. Governance, Rio UN Conference on Environment and Agenda 21

Recognition of problems related to environment and natural cycle of the world took place in

the 1960s when the Cold War made its presence felt. The fact that habitat, living space of

human beings, and future of humanity were in danger was understood during discussion of

dimensions of nuclear armament and disaster scenarios likely to emerge during nuclear war.

Following these discussions, a rapid increase occurred in studies on environmental problems

and future of humanity. Club of Rome, which regarded itself as “world citizen” and

expressed its anxieties about future of humanity, published the report named “The Limits to

Growth” in 1972, which made its mark on the last forty years (Bardi, 2011: ix). This report

emphasized that facilities of environment for human beings to live in the next generations

were decreasing more and more. The fact that this report was followed by UN Conference on

the Human Environment, foundation of the UN Environment Programme, acceptance of

Declaration of the Human Environment and establishment of World Commission on

Environment and Development in 1983 revealed that environmental problems could not be

ignored by governments or supranational organizations, and that sustainable development

approach should absolutely be adopted when constituting both economic and political

policies.

A frightening picture was drawn in Bruntland Report (Our Common Future) run by UN in

1987 concerning future habitable spaces and resources in the world, and a basic definition

was made for sustainable development in parallel with that. The report defines sustainable

development as, “sustainable development is development that meets the needs of the present

without compromising the ability of future generations to meet their own needs” (Çetin,

2006:2). According to this report, the only way out of humanity against environmental

problems, which got harder and harder every passing day, was to establish a bridge between

environmental development and economic growth and to make development sustainable

(Yıkmaz, 2011:17). Certain recommendations and warnings were given to governments

concerning revision of growth, risks associated with technology use, controlling population

increase, adoption of economic policies in accordance with environmental problems and


Evaluations made in the period until 1992 demonstrated that consciousness about the matter

and precautions taken for preventing environmental problems fell short of the expectations.

Decisions having the characteristics of a recommendation and investigations performed in the

form of an assessment did not have any deterrent force. 1992 Rio UN Conference on

Environment (Rio Summit/1992 Earth Summit) became an important step for adoption of

sustainable development with action strategies and outputs it developed. Sustainable

development constituted main agenda of 1992 Rio UN meeting. At the end of Rio Summit,

Rio Declaration was published to indicate rights and obligations of countries in the matter of

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global climate change and development and to determine principles of sustainable

development. Agenda 21 action plan, which is referred to as an expression of a global

consensus and political commitment at the highest level aiming at actualizing “sustainable

development” which targets establishment of a balance between development and

environment (Aydın Kent Konseyi [Aydın City Council], 2011), was drawn up as an annex to

the declaration.Prepared with the aim of reducing destruction on nature and abandoning all

kinds of technologies harming the environment, Agenda 21 set the agenda of the 21st century

as “sustainability of humanity”. Agenda 21 highlighted inevitability of global partnership for

achieving the said sustainability. In addition, Agenda 21 is different from other studies in that

it argues that non-state actors should also share the responsibility for preventing

environmental problems and ensuring sustainable development (Göktürk, 2008:3).

Agenda 21 emphasized the importance of participation and cooperation of local governments

in process for planned activities to be carried out and goals to be achieved. In parallel with

that, it was decided to set Local Agendas 21 to determine problems on site, to monitor

activities, to ensure local participation and to do principal local plans (The Rio Declaration on

Environment and Development, 1992: the article 28). In this scope, establishment of Local

Agenda 21 mechanisms became another output of the conference whose main theme was

sustainable development. Within the framework of this idea, local Agenda 21 aims at

preparation and implementation of a long-term strategic plan concerning achieving goals of

Agenda 21 and bringing solutions to local sustainable development problems, and requires

actualization of governance based on participatory and multi-actor local partnerships within

the scope of this target (Göktürk, 2008: 2).

It would not be wrong to say that Local Agenda 21 mediates localization and legitimation of

global decisions. Local Agenda 21 introduced governance model, which was based on

partnership and participation, instead of urban administration based on centralization and

hierarchy. The first organization in which the concept of governance became a subject to

international strategies is meaningful in terms of our topic. As mentioned above, it was

planned in the third chapter of 1992 Rio UN Conference on Environment to constitute units

close to people in order to ensure participation and cooperation via governance approach

through becoming a field and instrument of collective administration with common

participation of all actors in the system by setting aside a one-way administrative mentality.

In this context, it was aimed at establishing a governance network based on participation by

means of Local Agenda 21 mechanisms.

From 1992 UN Rio Summit to the present, many studies and meetings have been conducted

on sustainable development at both national and international scales. Among these efforts,

UN Framework Convention on Climate Change (1994), Istanbul HABITAT II Summit

(1996), KYOTO protocol (1997), UN Millennium Summit (2000) Johannesburg Summit

(2002) and projects and compressive studies carried out for Rio+20 Summit (2012) can be

regarded as held within the body of United Nations. As a founding member of the United

Nations, Turkey did not remain indifferent to efforts performed. Turkey developed policies

on the basis of sustainable development and governance, and consistently emphasized

sustainability and a participatory administration model in its development plans. As a matter

of fact, the seventh chapter of the 9th Development Plan includes the article, “Fulfillment of

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international obligations will be realized in the framework of the principle of sustainable

development and the principle of common but differentiated responsibility” (SPO, 2006). In

2010, SPO prepared the comprehensive Turkey 2010 Millennium Development Goals

Report, and set the target of integrating sustainable development principles with country

policies and programmes and reversing annihilation of environmental resources (SPO, 2010).

In the 2012 programme of the 9th Development Plan, policy priorities and measurements are

mentioned following the article, “Main goal is to reach adequate environmental protection

level and to make cities clean and safe places with high life quality through protection of

human health, natural resources and aesthetic values in accordance with sustainable

development principles” (SPO, 2011). Specialized Commission Report on Good Public

Governance discussed the actions to be taken in order to ensure participation at each level

and to activate civil society. National Biodiversity Strategy Action Plan (2007) and finally

National Experience on Carbon Markets and Future Outlook (2011) reports indicate that

Turkey is included in, willing for and interested in environmental sustainability process.

Since main purpose of our study is to establish the link between governance, sustainable

development and green economy within a theoretical framework and under particular

limitations, it is not possible for us to present information pertaining to all studies and

activities conducted from Rio up to the present.

3.2. Governance in Constitution of Sustainable Development Policies

Measurable targets can be set and these targets can be accomplished if policies and practices

concerning environmental problems are developed based on cooperation of various

stakeholders/partners (central government, local governments, civil society and private

sector), that is, governance.

It is important to focus on governance approach concerning how to ensure sustainable

development. In this scope, reports such as “governance for sustainable development”

(UNED, 2001) and “global environmental governance” (Halle and Najam, 2011) were

prepared, and policies suggested in these reports were implemented. It was emphasized in the

Governance for Sustainable Development report that governments, supra-national

organizations and civil society had a general deficiency in implementation of sustainable

development following the 1992 Rio Summit, that the deficiency stemmed from non-

existence of sufficiently harmonious actions of the said networks, and that common policies

for future should be generated and implemented within the framework of governance.

International Institute for Sustainable Development (IISD) holds the idea that administration

of networks and partnerships is not same as that of classical organizational management.

While classical administrative mentality makes mention of use of personnel and financial

resources, business plans and work evaluation, governance approach focuses on shaping

relationships between actors and stakeholders and accountability of structures acting in

cooperation and actions of these structures. This is because; it is difficult to ensure

transparency and accountability of multi-stakeholder partnerships within classical

organizational management approach. Accountability is a concept answering the question,

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“Why is a work performed; who is responsible for this work; in which aspect is this person

responsible for work?” Accountability becomes bidirectional when processes and plans are

distributed to exercise one’s authority and obligations are expressly indicated and

responsibility is shared. While a vertical accountability-based partnership is formed in the top

management mechanism, there is a horizontal accountability between stakeholders/partners.

A fair process which includes transparency of information and decision making processes as

well as negotiation and participation methods is required for policies constituted and

decisions made by administration mechanisms, courts and all kinds of decision making

bodies to acquire public confidence and support.

According to International Institute for Sustainable Development (IISD), key aspects of

governance that should be discussed in terms of sustainability include (IISD,2011);

Vision, mission, goals and objectives – what is the network or partnership all about?

“Network principles" or "partnership principles" – operating values that guide collaboration.

Decision-making process - what types of decisions does the membership have the authority to

make, or to delegate their representatives to make?

Accounting / reporting – how will the network or partnership report to its stakeholders and

broader communities/audiences on its work and its financing?

Other issues that may be of concern - e.g., project proposals and results of projects; role of

the secretariat; roles of special committees; procedures for withdrawing from the

collaboration; dispute-resolution mechanisms; and limitations on advocacy.

Upon looking at the above-mentioned key aspects, it is observed that governance steers

sustainable development discussions in the matter of determination of international strategies

at a local and global scale.

Governance approach also focuses on civil society-government partnership, a public

organization mechanism’s hosting a partnership for sustainable development, and

possibility/impossibility of ensuring a cooperation between organizations completely

independent from governments (IISD, 2008: 10-21). International organizations established

for sustainable development have generally focused on the concept of multi-stakeholder

governance. In a public system, authority and power generally come from state. However,

this power is legitimized only when it is shared. During environmental governance

discussions, legitimacy basis of green economy policies is sought in common decision-

making processes. Relevant international organizations and supra-national organizations, the

United Nations in particular, accept that consistency can be achieved in implementation of

these decisions only through a multi-actor participation which is parallel with governance

approach. It is possible to see this situation in reports, studies and plans published. Green

economy policies, which are expected to make sustainable development possible,

undoubtedly include technical issues and require establishment of initiatives/networks with

high technical capacity. At this point, recommendations and opinions related to targets are

expected from groups of specialists in order to set measurable targets and develop technical

strategies. 1992 Rio Declaration (UNCED 1992) demonstrated that consciousness of and

responsibility for environmental and social issues were inevitable, and emphasized that this

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responsibility had to be distributed among all stakeholders. Participation of people and all

actors in the system (a whole of pieces interrelated with one another) is of great importance

for regulations made for solution of the problems to bring about public benefits. It is

undoubtedly a basic truth that each one of stakeholders has different characteristics, and they

are not actors with the same importance level. Pre-determination of goals and expectations

helps us concerning which organizations should make what kinds of attempts, and what kind

of roles the stakeholders will take within initiative. Pre-determination of goals and

expectations is a necessary stage in terms of attribution of different characteristics to each

stakeholder and differentiation of roles of stakeholders. Multi-stakeholder process is an

effective model for development and implementation of environmental and social

responsibilities, and leads actions in accordance with sustainable development approach. In

conclusion, governance of stakeholders is an approach that should be primarily adopted for

ensuring conformity between new institutional structures formed to overcome environmental

problems, which is a public issue.

IISD developed various strategies to ensure sustainable development in particular.

Sustainable development strategies are not a simple documentation. These plans are an

adaptable and consistent process of strategic and coordinated activities (Figure 1). The model

can be expressed as follows (IISD, 2011b);

It is necessary to develop a vision for an effective and progressive process based on

mutual consensus, to continue to set new goals and to determine returns of achieving

these goals, and to use this achievement as a guide for the next step of learning

process.

A particular importance should be attached to establishment of coordinated

mechanisms and continuous monitoring of operation of such mechanisms.

Model of the governance, which creates a difference, has a special place in the sense

that it adopts harmonious strategic processes rather than big planning schemes,

competition rather than authoritativeness, a strong relationship between networks and

hierarchical structure rather than strict hierarchy, monitoring, learning, progressing

and feed backing rather than controlling, and learning more rather than being content

with what is known.

Figure 1:Components of Strategic and Coordinated Activities Aimed at Sustainable

Development: National Sustainable Development Strategy and Process

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Reference: (International Institute for Sustainable Development, 2011)

According to this model, leadership, planning, implementation and monitoring processes are

followed on the basis of participation and coordination. Leader should determine strategic

approach, show his/her commitment to and concentration in the issue, internalize sustainable

development principles aimed at intergenerational and mutual solidarity, and have other

stakeholders adopt the same. Plans should build on a legal and organizational basis and be

subjected to a political evaluation. In the implementation process, a particular attention

should be paid to accountability, financing and intervention of policy initiatives in the

process. In the monitoring process which is the last component; evaluations should be made

in regard to strategies, sustainable development approach should have been understood, and

learning and adaptation process should have been gone through.

Other examples of efforts of UN and its affiliated organizations on governance-

sustainable development relationship are “National Strategies for Sustainable Development”

(NSSD) research project and “Governance Structures for National Sustainable Development

Strategies” (GSNSDS) studies. NSSD is an international common research project

concerning strategies undertaken and stakeholders efforts conducted for sustainable

development on a national scale in various countries. GSNSDS is an effort in which a study

group constituted by OECD within the body of International Institute for Sustainable

Development examines good governance examples and their effectiveness regarding

sustainable development strategies in approximately 20 countries.

4. ECONOMIC and FINANCIAL POLICIES DEVELOPED IN THE WORLD AND

IN TURKEY WITHIN THE FRAMEWORK OF GREEN ECONOMY

Although recognition of Global Warming and Climate Change problem, attraction of

attentions to this issue, and rise of level of consciousness have made up the first step, it is a

fact that deterrence can be achieved only through economy. Therefore, the most effective

way of protecting the environment is adopting methods such as making polluters to

compensate for harms of their activities harmful to environment, introducing tax incentives

for activities not damaging the environment, legally prohibiting practices harming the

environment or imposing additional tax burden on these kinds of practices (Bilgin and

Orkunoğlu, 2010: 80).

In this way, production and consumption channels will turn to encouraged eco-friendly mode

of production or consumption of substitute goods instead of carrying out an activity within

the scope of environment tax in order to avoid additional tax burden. Considering from the

point of public revenues, the fact that administrative costs of environment tax practices are

lower than other practices38 and they have an impact reducing tax burden on other sources of

taxation thanks to income-generating feature will create a positive impact (Bilgin and

Orkunoğlu, 2010: 80).

38 Financial instruments reduce administrative expenses as the cost for decreasing sourcing through

command-control mechanism is several fold more than the cost for decreasing it by implementing

environment tax (FULLERTON et al., 2008:3).

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4.1. Financial Instruments Used in Environmental Policies

Environmental policies phase of sustainable development includes guiding decisions and acts

of economic actors in favor of environment by increasing costs of choices bringing a high

level of damage to environment and encouraging the choice with a high social benefit.

Among many components of environmental policies, the most effective ones are policies

built on the market basis in that they are cost-effective and enable new production techniques

to be created and expanded through supporting eco-friendly technologies.

Financial instruments related to environment can be examined under two groups. However,

scope of the present study only theoretically deals with purpose and effects of environment

taxes and, focuses on Carbon Tax collected over carbon-content fuels, which are the most

important cause of global warming and climate change.

4.1.1. Environment Taxes: The fact that right of possession and disposition of global

collective goods (free goods) belongs to entire world and environmental resources do not

have any price set under market conditions causes these resources to be used abusively. In

addition, environmental effects lead to externalities that mean social benefit or cost. While

beneficial externalities increase social welfare, the cost aspect of it lays a burden on the

society. Accordingly, the most important instrument in environmental policies is to enable

environmental externalities spreading as social cost to be compensated by those causing this

externality by imposing an additional tax burden, that is, to “internalize externalities” as

stated in the literature.

In the European Union and OECD countries, taxes are implemented within the framework of

environmental policy through adapting existing taxes to environment39 and loading an

additional tax burden on polluters for their activities causing negative externalities in the

environment. Accordingly, the expression of environment tax includes both taxes and duties

and charges (Çelikkaya, 2011:99).

Environment taxes have double dividends in the sense that they internalize negative

externalities, and reduce tax burden on labor and capital thanks to revenue earned from this

tax (Fullerton et al., 2008: 3; Monrgenstern, 1995: 6).

4.1.1.1. Purposes of Environment Taxes

39 That tax collected over lead gasoline, which is more harmful to environment due to lead content,

is higher than the tax collected over unleaded gasoline, which is less harmful to environment, can

be given as an example for this practice which is called tax discrimination.

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4.1.1.1.1. To Internalize Negative Externalities:Economic units that carry out activities

harmful to environment create a cost that does not reflect on market price of these harmful

goods, which is social cost. This is a market failure (Çelikkaya, 2011: 99). An additional tax

should be imposed on those causing social cost as a price to eliminate this failure. This is

because, environmental resources are public goods, and if an additional tax is collected over

use of these resources, market price of the resource subject to tax will increase, and therefore

a decrease will be achieved in consumption, which is the goal desired to be accomplished. In

addition to fall in environmentally hazardous consumption, new, cleaner and eco-friendly

production technologies will be adopted from the side of production.

4.1.1.1.2. To Reduce Tax Burden on Labor: It is aimed for special tax on environmentally

hazardous activities to reduce burden of taxes such as income tax, special security premiums

and corporate tax by increasing tax burden on these activities, that is, to enable for tax burden

to be distributed more fairly (Çelikkaya, 2011:99).

Chart 1: Reducing Effect of Environment Tax Revenue on Tax Burden on Labor

Price

SMC

P’ --------------------------------------------------------- PMC+Environment Tax

P PMC

Demand

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Q QAmount of Consumption of Goods Polluting the Environment

Reference : (Fullerton et al., 2008:11)

“Let’s assume that we will examine the market of an environmentally hazardous goods under

a circumstance where there is no state control concerning environmental pollution. Demand

curve indicates marginal utility provided by this goods for consumer at the end of

consumption. In this market, marginal utility (demand curve) and private marginal cost

(PMC) intersect at P price and Q amount levels. However, negative externality caused by

consumption of environmentally hazardous goods creates a cost on the rest of the society.

Accordingly, Social Marginal Cost (SMC) is higher than Private Marginal Cost (PMC). In

this market, ratio of tax to be applied according to who pollutes pays for it approach

(Piqovian approach) will reduce the difference between social marginal cost and private

marginal cost (by increasing PMC), accordingly price of this goods will rise from P level to

P’ level. Rise in price will lead consumers to consume less by guiding them to substitutes of

the said goods” (Fullerton et al., 2008: 11).

Increased revenue obtained by state through environment tax will reduce the tax collected

over incomes. In this way, the difference between gross revenue and net revenue of

employees will decrease, accordingly labor supply will increase. As a result, tax burden on

labor will be decreased (Fullerton et al., 2008: 11).

4.1.1.1.3. To Generate Revenue:Sustainable development and green economy mean

protecting the nature for today's generation as well as next generations (Regional

Environmental Center REC Turkey, 2006: 9). Many financial policies adopted for this

purpose fulfill their financial functions as other taxes do in the sense that they generate

revenue for state.

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Chart 2: Environment Taxes in EU (Billion Euro, GDP %)

Energy Transportation Pollution and Natural Resources Total

Environmental Percentage of Taxes in GDP

Reference: (Stamatova and Steurer, 2011: 1)

4.1.1.2. Economic Effects of Environment Taxes

4.1.1.2.1. Effect of Environment Taxes on Distribution of Income: Taxes levied on

investments are already addressing to rich people who have a chance to replace their

investments with eco-friendly investments supported by state. Since low-income families

allocate higher amount of money to fuel in comparison to high-income families (Akkaya,

2000:3) and use fossil fuels like coal, they may be negatively affected by carbon tax.

However, this situation is prevented through exceptions granted up to certain energy

consumption levels40(Akkaya, 2000: 3).

On the other hand, carbon tax is seen to have neutral effect on distribution of income

(Akkaya, 2000: 3) considering other indirect effects such as restriction of environmentally

40 In The Netherlands, no tax is collected for consumption of 800 cubic meters natural gas and

consumption of 800 kwh electricity. It is seen that tax imposed for decreasing energy consumption

keeps its effectiveness as this exception amount is not set as very high (Akkaya, 2004:4).

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hazardous consumption, use of revenues for encouraging investments, fall of tax burden on

labor and provision of compensatory payments (Özdemir, 2009: 22–23).

4.1.1.2.2. Effect of Environment Taxes on Competition: In countries implementing

green tax reform, some sectors recommend ways such as voluntary participation instead of

environment taxes because of possibility of these taxes to affect international competition

negatively.

There will as many winners as losers in sectoral or international competition at the end of

environment tax practices. In fact, an effective taxation in fight with pollution will also

decrease costs in the long term. In addition, the more countries adopt implementation of

environment taxes, the less international competition is affected. After all, it is tried to

prevent loss of competitiveness through implementing exemption, exception and tax return

mechanisms in many sectors, and revenue of environments taxes collected is returned to these

sectors as incentives.

4.2. Carbon Tax

Among environmental problems, the most hazardous one is global warming and climate

change. The basic reason for that is greenhouse gases emitted during burning of fossil fuels

whose usage has gradually increased since the Industrial Revolution (Koç and Garip,

2008:151). Carbon dioxide gas has the greatest share in greenhouse gases concerning which

policies are directed by the Kyoto Protocol. Karbon Tax, which is a specific tax collected

over carbon emission amount, is the most important phase of fight with climate change in

terms of financial instruments.

When there is an activity of an economic actor causing a negative externality in the

environment, this externality turns into social cost if it is not included in the market price.

Accordingly, policy instruments may be deterrent only if they directly increase costs of

relevant activities through affecting prices. Therefore, Carbon Tax collected over carbon-

content fossil fuels based on the principle, ‘who pollutes pays for it’ seems to be the most

effective instrument.

Although environment is a global property and the problem should be solved by

taking global-scale measurements, it is not possible to implement a global taxation. However,

Carbon Tax is undoubtedly the most important tax as it appears in many international

agreements and introduces inter-country partnerships in terms of implementations.

Even though cost of environmental problems and fights with these problems is high, it

is seen that marginal cost of protection by carbon tax is less than marginal benefit to be

obtained through protection of the environment (Hotunluoğlu and Tekeli, 2007: 112).

Carbon taxation is a practice aimed at reducing the difference between private costs occurring

in the situation where no tax is imposed and social cost imposed by negative externalities,

which occur at the end of activities causing carbon emission, on society by adding carbon tax

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burden to cost functions of those performing such activities (Hotunluoğlu and Tekeli,

2007:111). Reduction of carbon emission was suggested in 1988 Toronto Conference, and a

reduction target of 20% was set for the first ten years (Repetto, 1992: 54). It was decided to

determine emission strategies for a common purpose in UN Convention on Climate Change,

which was signed in 1992 with participation of more than 150 counties (Repetto, 1992: 54).

In the first ring of production chain; taxation is implemented starting from fossil fuel

sources such as mines and wells, which affects all stages of fossil fuel use as it reflects on

producers and companies processing these sources or using them as inputs and consumers

such as households purchasing carbon-content goods and services. Consumers will respond to

rise of energy prices by carbon tax by using less fossil fuel, and producers will react to it by

turning to less carbon-content inputs (Repetto, 1992:54). However, effectiveness of carbon

tax depends on price flexibility of fuel41 and return of carbon tax revenues to clean

investment and production techniques (Çelikkaya, 2011:104–105).

In regard to development process of carbon tax in practice, we can say that it started to be

discussed for the first time in England in the 1970s. However, carbon taxation was firstly

implemented by Finland in 1990, and Norway and Sweden in 1991. Then, the Netherlands

and Denmark put it into effect. These countries were the first EU member countries adopting

carbon tax (Hotunluoğlu and Tekeli, 2007:115; Çelikkaya, 2011:104–105)).

4.2.1. Effectiveness of Carbon Taxation in Practice

Carbon tax transfers right of possession from those polluting the environment to state.

Therefore, individuals have to pay tax to state in order to get back their right to pollution. In

this context, carbon tax, which is effective as an economic instrument, intervenes in the

market, and accomplishes environmental purpose through equalization of marginal social

benefit and marginal social cost. In addition, financial purpose is accomplished by generating

public revenue (Hotunluoğlu and Tekeli, 2007).

While some people argue that since tax increases costs, it will create a disadvantage for

domestic producers especially in energy-intensive sectors, opponents state that carbon tax

will encourage new technological developments and bring about positive results in terms of

competition in the long term (WRI, 2008: 1–2)

Some econometric analyses demonstrated that environment taxes collected in countries

implementing carbon taxation did not have any significant effect on carbon dioxide emission.

This situation can be attributed to three reasons (Hotunluoğlu and Tekeli, 2007:121-122):

41 Environment-related taxes are mostly implemented in the sectors of energy and transportation.

According to estimations, flexibility is high in the energy sector in the long term. Therefore,

environment taxes have a very important effect on reduction of energy demand in the long term.

Studies on gasoline demonstrate that price elasticity is quite high (Kulu, 2001:3).

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Environment taxes do not cover the entire carbon dioxide emission, and requirement for tax

to cover the entire emission mentioned in the carbon theory tax cannot be achieved.

Energy-intense sectors using significant amount of fossil fuels have an influence on

government for giving exceptions and exemptions as they become disadvantageous as a

result of rise in costs by tax (WRI, 2008:1–2), they fail to proceed to clean production

techniques in the short term, and accordingly they face the danger of falling behind in

international competition. This tax cannot completely accomplish its environmental and

financial purpose due to exemptions granted in this manner.

Although the primary purpose of this tax is to restrict environmentally hazardous activities

and carbon emission in theory, financial resource-related purpose is attached more

importance because of large amount of tax revenues (Yıldız, 2006: 104).

In addition, it is seen that environment taxes, which must directly regard the environmental

goal and are “primarily” categorized as environmental taxes, are shaped as taxes collected

over goods due to ease of implementation instead of adoption as a pollution tax (Akkaya,

2000:3).

How these tax revenues are used is of great importance for effectiveness of implementation

of carbon tax. Obtained tax revenues can be used for meeting budget deficits in order to

ensure macro-economic stabilization independently from the purpose of taxes. This, however,

requires tax ratio to be at a level to keep tax revenues at maximum42. Accordingly, if Carbon

Tax is not raised to a level sufficient to be deterrent for obtaining large amounts of tax

revenues, it will not be possible to reduce harmful gas emission to the level targeted within

the framework of sustainable development (Tekin and Vural, 2004:325).

Ratios in goods and services on which all types of environment taxes will be implemented

must be correctly set in order to accomplish the purpose effectively. Considering Carbon Tax,

which is collected in direct proportion to carbon content, tax to be imposed on coal must be

higher in comparison to natural gas as it is a more polluting fossil fuel due to carbon content

it contains (Akkaya, 2000:3)

4.3. Kyoto Protocol and Turkey

The most important legal document concerning reduction of carbon emission is Kyoto

Protocol. According to this Protocol, countries appearing on the Annex-1 list of the Protocol

(EU member countries being in the first place) have to reduce their emission levels by %5

from levels observed in 1990 during the 2008-2012 period. Turkey became a party to Kyoto

Protocol with a Law accepted on 05/02/2009, and made a commitment to reduce carbon

emission until 2013. In this way, parties to the Protocol entered into an important obligation

regarding prevention of environmental pollution (Regional Environmental Center REC

Turkey, 2006: 31).

42 Laffer Curve.

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Unlike other agreements, Kyoto introduces three flexibility mechanisms in order to

decrease costs in reduction of greenhouse gas emissions (Republic of Turkey Ministry of

Environment and Forestry, 2009:24-25):

Joint Implementation: This is a project-based mechanism to be implemented by countries

appearing in Annex-1. If necessary conditions are fulfilled with this implementation, Annex-

1 countries can conduct emission reduction project among themselves. That is to say, when

an Annex-1 country achieves emission reduction, it wins an “Emission Reduction Unit”, and

can sell this amount to another Annex-1 country.

The Clean Development Mechanism: This mechanism is implemented between Annex-1

countries and non Annex-1 countries. Annex-1 countries are regarded to realize an actual

reduction in emission ratios through technology transfer within the scope of projects they

carry out in non Annex-1 countries. Annex-1 countries use Certified Emission Reduction

Credits they have won at the end of the project within the scope of their own reduction

obligations, and gain right to generate more emissions in the country up to this amount.

Emissions Trading: In this market-based implementation, if any country included in Annex-1

list achieves more emission reduction than it commits, it can sell this additional reduction

defined in Annex-B to parties included in Annex-1.

Table 2: Turkey’s Current Participation in Flexibility Mechanisms

Kyoto Instruments Host Country Guest Country

Reference:(Republic of Turkey Ministry of Environment and Forestry, 2011:80)

4.4.1. Turkey as a Party in Fight with Global Warming and Climate Change

Since Turkey was an OECD member, it was included in both Annex-1 and Annex-2

lists in 1992 when UN Framework Convention on Climate Change was opened for signature.

Although Turkey supported purposes and general principles of the convention, it did not

become a party to convention until 2004. In the 7th Parties Conference held in Marrakech in

2001, it was decided to “delist Turkey from Annex-2 and to give it a place in Annex-1 in

another position different from the Annex-1 countries by recognizing its ‘special

circumstances’”. Upon this decision, Turkey became a party to UNFCCC on the 24th of May

2004 and to Kyoto Protocol on the 26th of August 2009 (Possible Effects of Kyoto Protocol

on Turkish Energy Sector, 5).

The Clean Development Mechanism NO . YES .

Joint Implementation NO NO

Emissions Trading NO NO

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4.5. A Critical Perspective on Environment Taxes and Carbon Markets

It is possible to criticize effectiveness of environment taxes from many aspects.

Possibility of polluting environment as much as affording taxation does not generate a

healthy result. In addition, it does not seem to be a fair solution for those who are already

low-income and have to use fossil fuels like coals which are supplied much and relatively

cheaper.

Considering carbon markets, although emissions trading seems to encourage countries

for emission reduction by allowing them for generating revenue through selling emission

reduction they achieve more than the set amount, it does not seem that it will eliminate fossil

energy dependency because it gives other counties to generate emission more than the

limitation.

“Turkey is also in voluntary carbon market with some clean energy production

projects, and aims at increasing its share in this market. This is because a company

developing clean production techniques will sell its own emission credit to a company

polluting environment and avoiding facing heavy costs of it within the scope of Kyoto

Protocol Clean Development Mechanism. This will cause purchasing company to continue

hazardous production by paying the price for it” (Konak, 2011:154). The fact that developing

countries have a chance to purchase pollution they generate instead of adopting industrial

production techniques that bring less damage to environment will delay new structural

changes in industrialization. Although renewable energy type projects like energy efficiency,

solar energy, biogas, geothermal, wind, hydroelectricity, which can make the greatest

contribution to sustainable development, are large in number among The Clean Development

Mechanism projects, these projects bring about low amount of emission reduction and

introduce few credits (Konak, 2011:164).

On the other hand, the fact that carbon markets have turned even environmental issues

into an instrument of speculation tarnishes plausibility of solution seeking. That The Czech

Republic, The Netherlands, Estonia, Sweden and France declared their national emission data

in April 2006 early and it was realized that they generously distributed carbon credits led to

speculations in the carbon market (Konak, 2011:163 ) and carbon prices fell instantly.

Therefore, fall in cost of purchasing carbon credits and decrease in profit of selling emission

reduction surplus caused companies not to prefer emission reduction.

In short, Kyoto flexibility mechanisms mediate not reduction, but transfer of emission

from one place to another.

Another problem the world faces within global climate change is food problem.

Turkey has productive soils and a high bio-diversity. Complementary component of making a

direct investment in protection of nature is making an investment in biological capacity.

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Among ways of increasing productiveness of land are returning distorted lands to their

previous conditions, improving land tenures, improving land management, product

management and crop productivity. To achieve this, factors such as land tenures of

landowners, land ownership problems and lack of infrastructures should be solved (WWF,

2010:94).

Considering the problem and developed solutions together, it is seen that more

concrete and realistic solutions are needed in terms of justice of income and environment.

Approaches such as making existing fuel sources less hazardous through techniques like

filtering and making investment in heat insulated and energy-efficient buildings and transport

systems that consume less energy, that is, making production energy-efficient seem to be

beneficial solutions at this stage.

Since increase in GDP is not enough alone today, changing consumption habits and

raising awareness concerning the fact that resources of our world are limited and gradually

decreasing are the primary solutions to be adopted.

5.CONCLUSION AND RECOMMENDATIONS

It is environment which has suffered most in the process of fulfilling unlimited needs

through limited resources. The fact that this damage which is “human” related returns again

to human to damage him caused seriousness of this problem to be recognized and become a

topic focused on by not only marginal groups and scientists but also national and

international organizations, heads of states, media and economists. Although nature has self-

perpetuation feature, technology and industrialization, which advance at a speed impossible

to keep pace with, destroy this ability of nature in the ratio of their own speeds.

Continuing its rapid economic growth, the world has encountered a big problem

which is impossible to be compensated and threatens “today” and “future”: Global warming

and climate change. A new concept appeared in the 1970s in which not only physical capital

but also human capital and environment increased their importance: Sustainable

development. To develop by meeting the needs of the present without limiting the future

generations. Economy, public administration, social policies, civil society, media, national

and international organizations should progress shoulder to shoulder in order for sustainable

development to be really ”sustainable”.

Especially multi-national companies shifted their production to developing countries

as a result of removal of limitation on international trade. Capital mobility and search for

cheap labor also had an impact on this tendency of the companies. These companies

concentrating in petrochemical, automotive, electronics, rubber and pharmaceutical sectors

that bring the greatest damage to environment started to rapidly pollute these regions which

had remained naturally intact until their intervention. Green economy (environmental

economics) developed within the framework of sustainable development aims at minimizing

the damage to environment at the stages of production, consumption and leaving waste on

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nature, and requires use of efficient and more renewable energy resources. While national

and international steps taken for environment increase every passing day, they bring along

certain responsibilities. Since implementation of these policies arouses fear of missing

foreign capital among developing countries that desire to achieve a rapid growth even though

they are subjected to industrial waste, these countries cannot properly implement green

economy policies. In this case, it is thought that a choice has to be made between

environment and economy. However, environmental policies will already show their benefits

in the long term. In this context, the most effective solution is adoption of green economy

policies aimed at achieving production, growth and economic development without polluting

environment or by bringing minimum damage to environment instead of falling into a

dilemma and making a choice between giving up production for environment or growing

even if it results in damaging the environment.

Environment is a global common property. Sustainability of environment can be

achieved only through an international cooperation. Within this framework, the most

important international step is Kyoto Protocol, to which Turkey became a party in 2009, and

the most prominent financial instrument is carbon tax. Taking into consideration

environmental negative externalities, which occur in production and consumption stages, in

production and pricing besides this tax and other environmental taxes will be deterrent due to

obligation of bearing cost of destroying environment. These taxes should be homogenously

imposed on a global scale as much as possible, and rise in prices and costs in the entire world

should not negatively affect sectoral and international competition in order for these taxes to

fulfill their environmental and financial purposes duly. Governments should regulate

exemptions and exceptions without tarnishing the purpose of taxation. Revenues obtained

from additional environment taxes should be used for encouraging eco-friendly activities and

developing new production techniques. In this sense, progress should be achieved through

technology transfers. At this point, social policies including training should be developed,

and specialists should be trained and employed in these fields.

In Turkey, environment taxes do not absolutely serve their purposes. There are many

answers to the question, “Is it possible to implement Carbon Tax in Turkey?” On the other

hand, effect of this taxation on citizens should be taken into consideration besides

introduction of an emission reduction. The fact that our economy, in which foreign

investments have a big share, does not have the luxury to lag behind international

competition in this period makes it probable for industrial segment, which comes first to be

affected by carbon tax, to put leverage on government for receiving exemptions and

exceptions. In addition, it is possible for carbon tax to negatively affect low-income families

considering that they allocate greater part of their incomes to fuel consumption in comparison

to high-income families and most of these low-income families use fossil fuels like coals that

contain high level of CO2. Natural gas, which emits less carbon than coal, appears to be first

alternative for households. In this context, local governments have a great responsibility for

carrying out necessary infrastructure works.

Since enterprises in Turkey cannot take part in emission trading as a purchaser until

2012 within the scope of Kyoto Protocol, they can perform sales only in foreign voluntary

carbon markets. Important changes will occur in their tax burdens as they will become both

purchaser and seller as of 2012

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Actors of sustainable development are environment, society and economy.

Accordingly, environmental policies to be implemented in accordance with this purpose

should be given credit and adopted by society. Therefore, people should be expressly

informed especially about financial policies to be implemented, principle of transparency

should never be violated, and effectiveness should be achieved between institutions of the

sate within an absolute information sharing and cooperation. Public sector, civil society and

private sector, that is all segments of the society, should fulfill their part for sustainable

development, and they should act in tandem.

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Identifying The Dimensions Of Attitudes Toward Vocational Economy And Commerce

Education: A Research In Sarajevo, Bosnia And Herzegovina

A.Tuba Duman, Uğur Ergün

Internatıonal Burch Unıversıty, Faculty of Economıcs,

Sarajevo, Bosnia and Herzegovına


Abstract

The purpose of this research is to identify the dimensions of attitudes toward vocational

economy and commerce education in high schools in Sarajevo, Bosnia and Herzegovina.


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Secondary school students’ attitudes toward professional economy and commerce education

are analyzed through a self administered questionnaire. The surveys were collected from four

high schools giving economy and commerce education in Sarajevo Canton. Out of the total

number of 820 students in the second, third and fourth grades, 373 students were surveyed as

part of the study. The results show that the students’ attitudes toward vocational economy and

commerce education in Sarajevo Canton can be explained by six dimensions. These

dimensions are “laboratory and physical resources”, “education”, “books”, “courses”,

“overall attitude”, and “career intentions”.

Keywords: Vocational education, economy and commerce education, high schools, Sarajevo

1. INTRODUCTION

Bosnia and Herzegovina is a new republic established after a devastated war between

regional forces On December 14, 1995. The country is divided into two entities (Bosnia-

Herzegovina Federation and Serbian Republic) and an autonomous district (Brcko). The area

of Bosnia-Herzegovina Federation covers %51 of the area of the country and the area of

Serbian Republic covers %49. The approximate population of Bosnia Herzegovina is 3.4

million and 51.1% of the population is female and 48.9% is male (in 2007 estimates).

Bosnian (43.5%), Serbian (31.2%) and Croation (17.4%) ethnic groups constitute the

majority of the Bosnia Herzegovina’s population (Küçükkiremitçi, Genç, Şimşek, Ekinci,

Ersoy ve Sekmen, 2010).

Present education system in Bosnia Herzegovina is planned and carried out separately by two

entities and autonomous Brcko district. Although Federation Ministry of Education and

Science forms the national education planning and coordination of the 10 cantons that

constitute Bosnia Federation, Canton Ministries of Education carry out education applications

in a non-central way. Cantons are authorized to legislate and use their own laws on the

condition that they adhere to the federation laws. In Serbian Republic (Republika Srpska)

there is a central education system. Central administration plans and carries out the issues

such as determining school subjects, preparing curriculum, control and number of teachers. In

the country totally 12 ministries of national education (10 cantons, Serbian Republic and

Brcko District) conduct education applications (Jabuča, Gaković, Hadrović, Prohaska, Đokić,

Vlasić, Markotić, Mandić, Merlo, Praso, Jović, Leto, Sarajčić, Mulać, Vlasić, Numic,

Ličina and Gaković, 2001).

In Bosnia Herzegovina 9-year compulsory education is implemented and it is free of charge

(Foundation for Development of Relations with Bosnia (BIGMEV), 2012). Education and

training start at the age of 6. Education life in Bosnia Herzegovina is divided into three parts:

primary, secondary and higher education. Schools offering primary education are named as

“osnovna škola” and they implement a 9-year education program that trains students between

the ages of 6-15. After primary education, students start secondary education which lasts 3 or

4 years. Seven school types are found in the country (Jabučar et al., 2001). These are general

education, languages and mathematics (Gimnazija), teaching schools (These schools are only

in the Federation regions where mainly Bosnians live.), art schools, technical and related

schools (These schools are only in the Federation region and they are named as 4-year

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vocational schools.), vocational schools (These schools are named as 3-year vocational

schools.), religious schools, special schools.

Schools that are dealt within the scope of this study are technical and related schools and

vocational schools and they offer economy and commerce education. Technical schools give

4-year vocational education, vocational schools give 3-year vocational education. Schools

that give 4-year vocational education accept students with exams; entrance to 3-year schools

is with ability tests. In order for graduates of 3-year vocational schools to continue higher

education, they have to switch to 4-year education and complete it. The ones who have

completed their 4-year education can continue higher education (Institutional and Capacity

Building of Bosnia and Herzegovina Education System, 2008).

This research examines the attitudes of high school students receiving economy and

commerce education towards vocational education and the relationship between these

attitudes and career expectations for the future.

The research questions are determined as follows:

What are the factors forming the attitudes of students, who are receiving economy and

commerce training in Sarajevo Canton, towards vocational education?

What are the basic dimensions determining the attitudes of students towards vocational

education?


2.1. Vocational Education

The technological improvements in our rapidly improving and changing world increase the

use of information and cause this information to spread quickly. This situation reveals labor

market’s need for intermediate staff that is equipped, open to innovation and is able to adapt

themselves to new improvements. Therewithal, the need and expectations of business world

lead people to specialize in certain fields. This increases the importance of the vocational

schools training qualified staff. In this sense, “vocational education can be named as activities

that bring ability and behavior with individual development in a profession with the aim of

meeting the needs of individuals that make up society and individuals’ activities to improve

their capabilities with various aspects in order to be useful for the society” (Yıldırım, 2003:

2).

Vocational and technical education is one of the prior issues in education in European Union

countries. In the year 2002 in the notice published as part of “Copenhagen Process” it was

emphasized to increase the quality of VET and the decision to study on the issue was taken

(Copenhagen Process, 2002).

Bosnia-Herzegovina, taking steps to integrate itself into European criteria, initiated the

integration projects also in VET field and reform movements between the years of 1998-2000

with “EU Phare” program. Within the scope of this project “Green Paper” including strategy

and plans related to VET that is compatible to EU trends was prepared. “The White Paper”

was published in December 2001 by being accepted by all institution and canton level

ministries.

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2.2. Economy and Commerce Education in Sarajevo Canton

In Bosnia in general and in Sarajevo Canton economy and commerce high schools offer their

graduates diploma and certificate as a result of the education they give. In Sarajevo Canton

there are a total of 35 state and private high schools and the total number of the students in

these schools are 162,434. Among these high schools there are 5 schools, which are related to

the topic of the thesis carried out, including commercial high school, high school of

economics and multi-programmed high schools offering commerce education and the total

number of students of these schools are 820.

Unemployment is a serious problem of Bosnia Herzegovina. When the causes of this problem

are taken into consideration it seen that the educational level of the unemployed is low and

they do not have the enough qualification to find a job. This must show us that vocational

education is a quite important education to train qualified staff for the labor market. The

unemployment rate’s being high in Bosnia Herzegovina effects the female population at the

most.

2.3. Factors Influencing the Quality of Economy and Commerce Education

One of the main factors of economic and social development is vocational education.

Vocational education is seen as a crucial tool to obtain efficiency in the operation of economy

and to achieve social welfare (Mouzakitis, 2010). Because of the reasons mentioned

vocational education is one of the issues that managers and educators always overemphasize

(Qiang and Shiyan, 2012). When the research and applications carried out are examined, it

can be suggested that main factors determining the quality of vocational education fall under

six headings (Pehlivan, 2008; İmamoğlu, 2010; Ozturk, 2001). These main factors are; course

structure, textbooks, educators, technological resources, practical education and internship

and physical environment.

2.3.1. Course Structure

According to Child (2004), education curricula can be grouped under four headings. These

are content, learning experiences, objectives and assessment. Child at the same time defines

the effective curricula as the ones that encourage teachers and students to talk on the

important issues and bring practical experience with academic knowledge. As in all areas,

curricula in vocational education should be designed in a way that teaches students the

requirements of the profession and presents them an opportunity to show their capabilities

(Bowers, 2006; Kang and Bishop, 1986). The course curricula in vocational education should

be prepared by taking teacher and student’s opinions (Bowers, 2006). It can be expected the

curricula reflecting teacher and student’s opinions to be more encouraging and successful.

2.3.2. Textbooks

Nowadays, even though the use of technology increases, the importance of the course books

for the education does not change (Prucha, Walterova and Mares, 2003). In this sense, also in

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vocational education, course books are an important factor for student’s attitude towards the

course and learning. In vocational fields the course books have the characteristics of a tool

that visually presents art, science and technology in accordance with the student’s level

(Novota, Ridzonova, Kadnar and Stefkova, 2012). Novota et al. (2012) found in their study

that even if vocational education students do not use the course books constantly, they use

them as a part of education. In this study teacher state that they find the course books

insufficient and they refer to the Internet to complete the lacking parts. Writers state that

course books are one of the most important elements in terms of the quality of education.

2.3.3. Educators

The most successful teachers are the ones who give their students pedagogically the most

qualified education in the field offered (Darling-Hammond, 1997). According to the

observational theory put forward by Bandura (1971), most of the time the reason for the

changes in human behavior is by observing the behavior of the people nearby like teacher,

parents and friends. Among these people around student teacher factor confronts us as the

person from whom the student is influenced and whose behavior the student models at most.

Additionally, Lleras (2008) puts forward that there is a positive relationship between

students’ learning and teachers’ positive motivation. In terms of the communication between

teacher and student, the efficiency of education depends on the highness of motivation of

both sides (Igwe, 2002).

2.3.4. Technological Resources

In economy and commerce education the use of technology is by using packaged software,

simulations, case studies, public access databases via the Internet, networking and interactive

programs. In this respect, in the schools giving vocational education on economy and

commerce, by teaching students packaged software widely used in the markets students can

be made to get ready for the profession in this way. For instance in accounting education it

has become compulsory for the course schedule and curricula to be improved in every respect

and evaluated continuously (Yıldırım and Dalgeç, 1993). However, what is more important

for the success of education is teachers’ providing education by using different education

methods while using computer (Dwyer, Ringstaff, and Sandholtz, 1991).

2.3.5. Practical Education and Internship

At the present time, the internship training which is usually given in vocational education

appears to be a complementary element for vocational education syllabuses (Knouse, and

Fontenot, 2008). The internship training is important because it is the environment for the

students to reinforce the things they have learnt during the lessons and to practice. Since

students are personally in daily life with the internship programs, these programs make them

gain a good training experience and provide them with a chance to improve themselves

(Hendrie, 2004; Hirsch, 1974; Littky and Grabelle, 2004).

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2.3.6. Physical Resources

One of the factors that contribute to the academic success at school is school equipment

(Hallack, 1990). The adequacy of physical facilities is one of important signs for student

achievement (Shami and Hussain, 2005). School buildings, classrooms, accommodation

units, libraries, laboratories, furniture, recreation equipment and other education materials

constitute the physical environment and equipment in school. In addition to these, other

factors such as books, audio-visual software and hardware and the size of classrooms can be

regarded as the factors that forms student’s learning environment (Farrant, 1991 and Farombi,

1998). In a research by Shami and Hussain (2005) it is found out that the adequacy of

physical facilities is directly related to student’s success. In a research carried out in the

District of Columbia in the United States of America, it is seen that the grades of students

who have education in neglected and old buildings are lower than the grades of students who

have education in modern and well-maintained buildings (Edwards, 1991).

2.3.7. Student Participation

In vocational education student participation starts with student’s choosing his/her school.

Research shows that the participation of students who choose their school willingly and their

chance to choose the right career is increasing (Bishop and Mane, 2004).

Students’ learning by taking responsibility in their education environment is important for

their learning motivation to increase and for students to exhibit positive behavior (Le Brun

and Johnstone, 1994). Students’ active participation in class is closely related with their

achievements in learning and forming positive attitudes towards education (Howard, Short,

and Clark, 1996). In previous research on the subject, it is suggested that the elements

determining student’s active participation in class are student’s taking notes, getting in touch

with teacher or classmate and sharing ideas (Howard, Short, and Clark, 1996; Howard and

Henney, 1998). The student who participates in class performs a more effective learning by

exhibiting an active behavior. Since vocational education is an education method which is

largely based on application and is actualized with student participation, student’s success

and career choice is directly related with active participation in class (Carbonaro, 2005;

Farkas et al., 1990; Johnson et al., 2001; Kelly, 2008).

2.3.8. Career Intentions

Vocational education as by its structure is directly related with career planning. Students

thinking of getting vocational education, also make their career plans with their education

plans. In a sense vocational education is a career oriented education. Thus, it is recommended

that education on career facilities, occupations related to the education received and industry

qualifications is given to students during training (Kelly and Price, 2009).

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Vocational education’s career development dimension is important to form positive attitudes

in students towards school, to decrease prudential concerns and to increase students’

motivation to improve themselves (Arum and Shivat, 1995). Kuijpers , Meijers and Gundy

(2011), it can also be expected that student makes career plans in vocational education in

which real life problems are discussed and student directly participates in discussion.

While making career plans in the correct way might have important positive impacts on

students’ life after training, making them in the wrong way might also have many negative

impacts (Carbonaro, 2005; Gamoran, 1987; Lee and Bryk, 1988). Research shows that

placing especially students from low-income groups in vocational education fields without a

plan causes a decrease in student’s motivation and failure in profession (Vanfossen, Jones,

Spade, 1987; Gamoran and Mare, 1989). This case emerges more clearly in the event of

placing students especially from minority ethnic groups in vocational education in an

unplanned way (Brekke, 2007; Oakes, Ormseth, Bell and Camp, 1990).

2.3.9. Other Factors

It should be indicated here that there might also be a good many different reasons

determining students’ attitudes towards vocational education and their intentions of making a

career. For example, various reasons such as students’ family and social environments, the

place and geography where the education is received and personal facilities presented to the

student can also effect attitude and career plans (Schoon, Martin and Ross 2007; Guo and

Harris, 2000). Furthermore, students’ personal qualifications and differences can also play an

important role on their career plans (Bowles and Ginties, 2002). Topics other than determined

elements are excluded from the scope of this research and left to be examined in the next

studies. This research’s findings are limited to tested topics and its sample.

3.METHODOLOGY

3.1. Data Collection Instrument and Pilot Study

The questionnaire used in this research consists of three parts. General questions are asked in

the 1st part. Students are asked in which department they study, their reasons for choosing

vocational education and who has got impacts on their choosing vocational education.

In the 2nd part demographic qualifications of participants are tried to be identified. In this

part, demographic questions related to students themselves and their families are asked. In the

3rd part, questions to assess vocational education are posed. In this part participations are

requested to consider 9 different dimensions as they evaluate vocational education. These

dimensions are composed of questions about ideas on instructors and attitudes towards

commerce education, course, the contents of course books, the use of technology in

education, doing internship, physical facilities of educational institutions, student’s

participation in class and professional career expectations. While these questions are

answered, it is expected to respond within the options of 1 “strongly disagree” and 5

“strongly agree”. 3 is “I am not sure” option. For the students who do not have any opinions,

“I have no idea” option was also given.

Before this questionnaire was implemented, a preliminary study was done in order for the

questionnaire to be understood easily and not to overlook any problems related to the

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research. A high school teacher and a university instructor who are engaged in related

education were requested to examine the questionnaire and their opinions were taken. During

these interviews parts which are not understood were revised and one of the questionnaire

questions was removed. After that a pilot study was carried out by applying the questionnaire

with a group of 45 3rd grade students from Economy high school in Zenica city. The

application was done face to face in classroom environment. At the end of the preliminary

study, the questionnaire was given its final shape.

3.2. Population Sampling and Data Collection

2, 3 and 4th grade students receiving education in economy and commerce high schools in

Sarajevo Canton form the universe of this research. According to the information from

Canton Ministry of Education, 820 2, 3 and 4th grade students receive education in economy

and commerce high schools. High schools offering economy and commerce education, the

types of these high schools, their education years, number of students and number of

questionnaires collected in the scope of this research are given in Table 1. As it might be

observed in the table, 45 % of the targeted number of students is reached and questionnaire

response rate is 45 %.

Table 1. Number of high school and students surveyed

School School Types Education Year Number of

Current Students

Number of

Collected

Questionnaires

A (Ekon Saraj) Economy 4 300 85

B (Trgov Sarj) Commerce 4 200 78

C(Vogoşca) Economy 4 265 157

D (Hadzici) Commerce 3 55 53

TOTAL 820 373

In the process of collecting questionnaire data, firstly the permission was asked by writing a

petition to Sarajevo Canton Ministry of Education. In this petition, the objective of this

research was explained and the questionnaire form to be used in the research was presented.

The data collection was performed with the permission of the Ministry of Education by

making appointments with schools in different times. The data collection was performed in

four different economy and commerce high schools in Sarajevo Canton. One of these schools

is economy high school, another is commerce high school and the other two are Economy

departments of Srednjoskolski Centar schools. Srednjoskolski Centar Schools are multi-

programmed high schools embodying different departments. All of school directors were

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interviewed beforehand and informed about how the questionnaire was going to be

performed. All directors and pedagogues were closely interested in the application.

In general the students’ interests and participation were high but in one school, instructor had

to read and explain questionnaire questions one by one. The instructor put forward students’

lack of interest towards education as a reason for his/her using this method and stated that the

questionnaire would be more productive in this way. Questionnaires were implemented

throughout December 2011 and a total of 373 questionnaires were collected.

4.RESEARCH RESULTS

4.1. Socio-demographic Analysis

The socio-demographic characteristics of the participants are given in Table 2. When the

socio-demographic characteristics are examined, it is seen that 71.0% of the participants are

female and 29.9% are male students. 67.5% of students’ families are composed of 4-5 people.

It can be observed that 54.5% of the monthly income of the participants’ family is between

500 KM and 1.100 KM. The total is 71.5% and this shows that participants are satisfied with

the quality of vocational education in general.

Table 2. Socio-demographic profile of the respondents

Socio-demographic Variables n %

Gender Male 107 29.0

Female 265 71.0

Total 372 100

Family size 2-3 80 21.5

4-5 251 67.5

6 or more 33 8.9

Missing 8 2.2

Total 372 100

Monthly family income

(Convertible Bosnian Mark (KM))

500 or less 50 13.4

501-800 92 24.7

801-1100 111 29.8

1101 or more 102 27.4

Missing 17 4.6

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Total 372 100.0

Father’s occupation Worker 146 39,2

Public employee 41 11,0

Business owner 42 11,3

Unemployed 80 21,5

Missing 63 16,9

Total 372 100,0

Father’s education Primary school 25 6,7

High school 242 65,1

University 57 15,3

Missing 48 12,9

Total 372 100,0

Mother’s occupation Worker 105 28,2

Public employee 39 10,5

Business owner 20 5,4

Unemployed 201 54,0

Missing 7 1,9

Total 372 100,0

Mother’s education Primary school 98 26,3

High school 223 59,9

University 43 11,6

Missing 8 2,2

Total 372 100,0

School type 3 53 14,2

4 319 85,8

Total 372 100,0

how the student selected this school family 74 19,9

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friends 14 3,8

Own decision 250 67,2

teachers 9 2,4

others 22 5,9

Missing 3 ,8

Total 372 100,0

Why the student selected this

school

Others motivated me 4 1,1

To find jobs easier 177 47,6

To continue university

education

160 43,0

Other reasons 27 7,3

Missing 4 1,1

Total 372 100,0

Overall quality of vocational

education

Low quality 10 2,7

unsatisfactory 23 6,2

undecided 33 8,9

Overall quality 187 50,3

High quality 79 21,2

Missing 11 3,0

Don’t know 29 7,8

Total 372 100,0

4.2. Descriptive Evaluation of Measurement Scales

The items of the scale used in the research are measured with 5-point Likert scales which

denoted 1 absolutely negative and 5 absolutely positive categories at both ends of each scale

items. While 1 and 2 alternatives marked for scale items express negative attitude, 4 and 5

alternatives express positive attitude. Grading done with 3 on the scale shows that no

attitudes are developed related to mentioned item. Table 3 shows the descriptive analysis of

students’ answers to 29 scale items related to attitudes of participant students towards

vocational education.

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Table 3. Descriptive Analysis of Attitudes toward Vocational Education in Sarajevo Canton

Descriptive Statistics

N Minimum Maximum Mean Std.

Deviation

1. I think I advance myself with the vocational education. 360 1.00 5.00

3.90 0.87

2. Our classroom size is adequate for the number of

occupying students. 356 1.00 5.00

3.90 1.00

3. I plan to continue university education in this area. 341 1.00 5.00

3.89 1.20

4. I plan to pursue my career after my graduation. 336 1.00 5.00

3.88 1.17

5. Internship supports my vocational education. 298 1.00 5.00

3.87 1.06

6. The number of vocational courses at our school are

adequate. 357 1.00 5.00

3.82 1.10

7. People who get education in this vocational area will have a

successful career in this area. 326 1.00 5.00

3.78 1.01

8. If I had to choose again, I would choose to take vocational

education. 330 1.00 5.00

3.73 1.19

9. Our teachers' subject knowledge is satisfactory. 360 1.00 5.00

3.70 1.09

10. I like vocational education. 349 1.00 5.00

3.66 1.02

11. I can get help in solving vocational education problems. 347 1.00 5.00

3.63 1.05

12. Homework improves us professionally. 351 1.00 5.00

3.63 1.07

13. I like vocational courses. 350 1.00 5.00

3.61 1.05

14. Our school building is well-kept. 341 1.00 5.00

3.57 1.10

15. My internship company is closely related to my vocational

education. 247 1.00 5.00

3.56 1.08

16. I like to deal with vocational problems. 339 1.00 5.00

3.56 1.05

17. I can participate in the sample problem solving in the

classroom. 324 1.00 5.00

3.52 0.98

18. I don't think that vocational courses are boring. 350 1.00 5.00

3.46 1.13

19. Our teachers' methods for teaching vocational subjects are

very good. 361 1.00 5.00

3.46 1.12

20. Social spaces in our schools are adequate. 334 1.00 5.00

3.34 1.12

21. Vocational books make my learning the subjects easier. 351 1.00 5.00

3.23 1.24

22. Equipment at our school is adequate for contemporary

needs. 315 1.00 5.00

3.20 1.11

23. Computer labs at our school are adequate. 360 1.00 5.00

3.16 1.36

24. Number of days allocated for internship is adequate. 310 1.00 5.00

3.14 1.34

25. The way our teachers' approach towards students is very

good. 363 1.00 5.00

3.12 1.22

26. The theoretical information in vocational education books

supports practical life. 344 1.00 5.00

2.99 1.15

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27. Vocational books cover contemporary subjects. 345 1.00 5.00

2.92 1.22

28. We use computer software related to our profession

adequately. 363 1.00 5.00

2.90 1.37

29. I can use school laboratories for my vocational education

adequately. 353 1.00 5.00

2.84 1.28

4.3. Exploratory Factor Analysis

In order to determine the number of dimensions of the 29 attitude items presented in Table 3,

an exploratory factor analysis was implemented. The factor analysis was performed in five

stages and the results obtained at the end of these stages are presented in Table 4. In the first

stage of the analysis 7 dimensions whose Eigen values are over 1 were revealed by using

basic components method and varimax transformation. However, among the scale items

respectively three items related to internship were excluded from the analysis because of their

factor loads’ being low. As a result of the examinations, it was revealed that an important

number of the students had not answered these questions. One reason for this is that the

internship activities were not performed as required and students could not develop attitudes

towards this topic. Two more items among scale items were respectively excluded from the

analysis. It was observed that one of these two items was loaded on more than one item and

the other one appeared as a separate factor. It was observed that among these items, the item

related to teacher attitude was not completely understood by the students. The item related to

the size of the classrooms was interpreted not to be associated with any dimensions by the

students because of the fact that the classrooms were already big enough.

As a result of the analyses 6 factors presented in Table 4 were obtained. These factor

dimensions are named as “Laboratory and physical resources, education, career, books,

courses and overall attitude”. As it can be seen in Table 4 the data support the factor analysis

(Kaiser-Meyer-Olkin Measure of Sampling Adequacy: ,84) (Hair, Anderson, Tatham and

Black, 1998) and 6 factors explain 67,62% of the total variance. The factor structure obtained

as a result of the analyses was compatible with the theory and literature so the following

analyses of the research were started.

Tablo 4. Exploratory Factor Analysis of Attitude Items

Components and loadings Components

1 2 3 4 5 6

1. Computer labs at our school are adequate.

Laboratory

and

physical

resources

,838

2. I can use school laboratories for my vocational

education adequately.

,812

3. We use computer software related to our profession

adequately.

,789

4. Equipment at our school is adequate for contemporary

needs.

,735

5. Our school building is well-kept. ,647 ,419

6. Social spaces in our schools are adequate. ,641

7. I like to deal with vocational problems.

Education

,785

8. I don't think that vocational courses are boring. ,715

9. I can get help in solving vocational education

problems.

,595

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10. Our teachers' methods for teaching vocational

subjects are very good.

,591

11. Homework improves us professionally. ,589

12. Our teachers' subject knowledge is satisfactory. ,546 ,403

13. I can participate in the sample problem solving in

the classroom.

,432 ,479

14. I plan to continue university education in this area.

Career

,862

15. I plan to pursue my career after my graduation. ,836

16. If I had to choose again I would choose to take

vocational education.

,705

17. People who get education in this vocational area a

will have a successful career in this area.

,635

18. Theoretical information in vocational education

books supports practical life.

Books

,824

19. Vocational books make my learning the subjects

easier.

,784

20. Vocational books cover contemporary subjects. ,764 ,429

21. The number of vocational courses at our school is

adequate. Courses

,779

22. I like vocational courses. ,679

23. I like vocational education. Overall

attitude

,743

24. I think I advance myself with the vocational

education.

,646

Factor Eigen Values 7,762 2,563 1,756 1,605 1,402 1,139

The Variance Values for the Factors 32,343 10,681 7,317 6,689 5,842 4,747

Total Variance Explained 67,618

Kaiser-Meyer-Olkin Measure of Sampling Adequacy ,840

Bartlett Test of Superficiality Chi-square: 1972,103 (276), significance=,000

4.4. Reliability and correlation analysis

Reliability analyses were implemented in order to determine to what extent the substances

that constitute the factors are related with the factors they belong to. Reliability analysis

results of factors are given in Table 5. Due to the fact that factor reliability coefficient in

reliability analyses was high and there were no items that would significantly reduce the

reliability coefficients, any items were not removed from the scale.

As it can be seen in Table 5, reliability coefficients of the tested dimensions except for

“courses” dimension are over 70. These values prove that this scale can be evaluated as

reliable (Nunnaly, 1978). Since the courses dimension is theoretically an important

dimension of education evaluation and reliability value ,614 is acceptable in general, this

dimension was included in the analysis (Hair et. al., 1998). In order to examine the

relationships between the factors in the research model, scale indexes were composed based

on the general arithmetic means of scale items which constitute the factors obtained from the

factor analysis. The arithmetic means, standard deviation and correlation values of the factors

are presented in Table 6. As it can be observed from the correlation table, the highest

correlation value among independent variables in the research model is ,56. As the

correlation values among factors are not so high, it can be interpreted that they can be

accepted as different factors.

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Table 5. Reliability Analysis Factors Number of Items Cronbach Alpha

Laboratory and physical

resources

6 ,873

Education 7 ,825

Career 4 ,798

Books 3 ,802

Courses 2 ,614

Overall Attitude 2 ,700

Table 6. Correlation Analysis Factors AA SS 1 2 3 4 5 6

Laboratory 3,13 0,99 1 ,508 ,436 ,234 ,365 ,223

Education 3,56 0,76 1 ,480 ,430 ,560 ,489

Career 3,79 0,95 1 ,280 ,380 ,278

Books 3,03 1,02 1 ,443 ,200

Courses 3,71 0,94 1 ,350

Attitude 3,77 0,84 1

5. DISCUSSION

The purpose of this study was to identify the underlying dimensions of vocational economy

and commerce education in Sarajevo, Bosnia and Herzegovina.

The research was carried out in 4 vocational schools in Sarajevo Canton. The majority of

students who participated in the research were composed of female students. Students

commonly stated that they had taken their vocational education decision themselves and their

main purpose was to find a job easily and to continue their university education. Half of the

students indicated that the quality of education they received was in “general level”. When

the socio-demographic qualifications of students are examined, it can be observed that the

income of their families is low, most of the parents are high school graduates and in

connection with this fact their unemployment rates are high are the reasons leading them to

have vocational education.

In order to determine students’ attitudes towards vocational education, a 29-item economy

and commerce scale was prepared. When students’ answers for the items in this scale are

viewed, it can be said that students improve themselves by receiving vocational education

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and they regard vocational education as a tool to make career and continue their university

education. The arithmetic means’ related to these items being high is an expected situation.

The literature research also shows that vocational education is an education received for

career. On the other hand, students exhibit negative attitudes in three topics. These facts are;

books do not include recent topics, packaged programs related to vocational topics are not

adequately used and students do not sufficiently use the school laboratories. According to

these results, in order to improve students’ attitudes towards vocational education, the

necessity to perform the required studies on these three topics comes out.

To identify the basic dimensions determining students’ attitudes towards vocational

education, seven dimensions were specified and items related to these dimensions were

presented to students’ evaluations. As it was indicated in the research model, these seven

dimensions were courses, textbooks, lecturers, technology use, internship, physical

environment and student participation. As a result of the factor analyses performed with the

obtained data, it was concluded that these seven dimensions might be examined in a more

reliable way under four basic dimensions. The new obtained dimensions were education,

books, courses and laboratories and physical facilities. Because of this fact it can be stated

that for the Sarajevo Canton where the datum was collected, the four basic elements forming

the attitudes towards vocational education in economy and commerce education are

education, books, courses and laboratories and physical facilities.

As a conclusion, it can be stated that policy makers and school administrators should focus on

these four dimensions to improve students’ perceptions of the vocational education in

economy and commerce areas. Administrators should also investigate the ways to improve

practical internship opportunities for students which will prepare them for future careers.

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Knowledge Maps & Knowledge Mapping: Literature Review

Admir Čavalić, Erkan Ilguen

International Burch University,Sarajevo, Bosnia and Herzegovina

Abstract

This study provides information about Knowledge Mapping as a tool of Knowledge

Management, how it is used and how do we “occasionally” use it daily. Main part of this

paper focuses on the relation among an organisation and knowledge mapping, and how k-

maps are important and what’s their purpose. After a broad analysis of articles from

nowadays significant researchers about knowledge mapping I was able to extract the main

issues, statements and definitions on knowledge mapping and what would help an

organisation in its strategic positioning and development in the manner of k-maps. Moreover,

where to focus on, in the need of preparing a knowledge map. Also, which k-maps developed

throughout the time and their difference among each other?

Keywords: Knowledge Mapping, Knowledge Management, Organisation, Strategic

Positioning

1. INTRODUCTION

Knowledge is an accepted and significant base for competitive advantages and companies

started to establish new smart information system. One of the key processes in Knowledge

Management is Knowledge Mapping. The main use of knowledge maps is to get an outline

about the available sources of information and to help in finding appropriate sources quickly.

So therefore a source can be expertise, knowledge, a person, etc. In order to apply any

knowledge mapping technique, an organization must be sure of its success and efficiency. A

basis to identify the level of knowledge of an organisation could be the knowledge map

which also can support the strategic positioning in terms of knowledge management. In an

organisation one of the most important goals is the expertise location. In this expertise

mapping the organisation’s knowledge needs to be inventoried as well as to map the

organisation’s information flow. The common approached to achieve this are assessment of

interviews, abilities records and extensive surveys and analysis.

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"Knowledge mapping is a process by which organisations can identify and categorise

knowledge assets within their organisation - people, processes, content, and technology. It

allows an organisation to fully leverage the existing expertise resident in the organisation, as

well as identify barriers and constraints to fulfilling strategic goals and objectives. It is

constructing a roadmap to locate the information needed to make the best use of resources,

independent of source or form".43

Knowledge Mapping in not a term that is new, in fact we all are practising knowledge

mapping throughout our whole and everyday life. The only difference is that we are not

writing/drawing it down and we are not doing it systematic. So basically knowledge mapping

is having a record of information and knowledge we need like where we can get it from, who

holds it, whose expertise is it, and so on. A good example would be our home. When we need

to find something that we need and which is in our home it would be easy and fast to find it

because we have almost all information and knowledge about “where is what” and “who

knows what” at our home. This map which is about our home and which in our mind it is

always updated, therefore we are able to act quickly and precised. But of course to have such

a “mind” map about our organisation and organisational knowledge would be impossible.

Since there is too much information and many individuals included. This is where knowledge

mapping comes to action and shows us details of every knowledge that exist in the

organization containing information about location, quality, and accessibility; and all the

knowledge which is required to run the company smooth, means it enables us to find the

knowledge we need easy and efficiently.

It is important to note that the main aim of knowledge maps is not to create new knowledge

but to structure and provide an easy access to knowledge which already available within the

organisation. To find out and assess the knowledge assets of an organisation and make the

organisation have maximum benefits from these assets.

2. Additional Definitions of Knowledge Mapping

“Knowledge mapping is a process of surveying, assessing and linking the information,

knowledge, competencies and proficiencies held by individuals and groups within an

organization.”44

- Dr Ann Hylton, KeKma-Training 2002

“It's an ongoing quest within an organization (including its supply and customer chain) to

help discover the location, ownership, value and use of knowledge artifacts, to learn the roles

and expertise of people, to identify constraints to the flow of knowledge, and to highlight

opportunities to leverage existing knowledge. Knowledge mapping is a important practice

consisting of survey, audit, and synthesis. It aims to track the acquisition and loss of

information and knowledge. It explores personal and group competencies and proficiencies.

It illustrates or "maps" how knowledge flows throughout an organization. Knowledge

mapping helps an organization to appreciate how the loss of staff influences intellectual

43 Vestal, Wesley. "Knowledge Mapping 101". Presentation at USAID Knowledge for Development

Seminar September 22, 2003. http://pdf.usaid.gov/pdf_docs/PNADK308.pdf

44 "U.S. Agency for International Development." U.S. Agency for International Development. Web.

15 May 2012. <http://www.usaid.gov/>.

http://www.smithweaversmith.com/km-im.htm#knowledge%20artifact

http://pdf.usaid.gov/pdf_docs/PNADK308.pdf

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capital, to assist with the selection of teams, and to match technology to knowledge needs and

processes.”45

- Knowledge Mapping: A Practical Overview by Denham Grey March, 1999

“Knowledge mapping is related to making knowledge that is available within an organisation

translucent, and is about giving you the insights into it's quality.”46

- Willem-Olaf Huijsen, Samuel J. Driessen, Jan W. M. Jacobs

“Knowledge mapping externalizes networks of cognitive relationships and renders them in

graphic form. This pictorial approach to individual or group knowledge assists in the

formation and maintenance of shared mental models and streamlines collaboration.

Knowledge maps are commonly referred to as mind maps, semantic networks, and concept

maps.”47

- Jonassen, D. H., & Carr, C. S. (2000) & Novak, J. D. (1998)

“A knowledge map is a presentation of one or more aspects of the knowledge available

within an organization that aims to fulfill a specific information need for one or more

employee roles within the organization.“48

- Driessen, Huijsen and Grootveld

To sum up all the definitions, knowledge mapping is a process and an approach to

information that can be applied to any area that requires knowledge; it can also be used in

specific circumstances such as implementing technological modification, preparation for an

acquisition, introducing a new policy, or mapping intellectual capital.

3. Knowledge Mapping: Where to Focus?

3.1 Strategic

3.1.1 Enterprise-level

Strategic business, technical, market knowledge

Determine the organization’s “bench strength”

Identify areas to focus KM efforts

45 "Knowledge Mapping: A Practical Overview." : Impact Alliance. Web. 15 May 2012.

<http://www.impactalliance.org/ev_en.php?ID=2011_201>.

46 "Thoughts.com." Where Is the Map? 3 Easy Steps to Construct a Speech. Web. 15 May 2012.

<http://www.thoughts.com/colbygross511/where-is-the-map-3-easy-steps-to-construct-a-speech>.

47 "Definition: Knowledge Mapping." Definition: Knowledge Mapping. Web. 15 May 2012.

<http://technologysource.org/extra/83/definition/2/>.

48 "Mapping the People in Your Organisation." Mapping the People in Your Organisation. Web. 15

May 2012. <http://www.moxy.com.au/index.php/moxy-knowledge/18-articles/60-mapping-the-

people-in-your-organisation>.

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3.1.2 Cross-functional between divisions/business groups

Operational assessment of working knowledge

3.2 Tactical

Working group/process

Tactical and operational knowledge applied to process excellence, innovation, customer

relationship

- USAID, 2003

4. Classification of Knowledge Maps

4.1 Through classification of knowledge maps many advantages can be achieved:

A descriptive overview (which can function as an inventory or repository)

A problem solving heuristic (that relates possible mapping solutions)

Reduces the complexity characteristic (in choosing a knowledge map format)

Recognition of similarities and differences (among different types of knowledge maps)

To compare (different knowledge maps)

May reveal new forms of knowledge maps (which are not applied yet)

4.2 Through classification of knowledge maps many disadvantages may appear:

- Focus on description, instead of explanation

- Reification (pretending that an ideal archetype does exist)

- Static (difficult to adjust as a domain changes and evolves)

Due to these disadvantages it is recommended that the classification system should rely on

more than just one classification principle and should suggest various, alternative

classification criteria. A classification should minimize the differences within a group and

maximize the differences between groups.

Knowledge maps are classified by:

- Purpose

- Graphic Form

- Content

- Application Level

- Creation Mode

Furthermore, according to this it can be classified in questions forms:

1. Which knowledge management purpose do I want to achieve with the map? (The

“why?” of the map.)

2. Which kind of content about knowledge do I want to represent in the map? (The

“what?” of the map.)

3. Who should use the map in which context or situation and at what level? (The “for

whom?” and “when?” of the map)

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4. Which graphic form should be used and who can create the map in what way? (The

“how?” and “who?” of the map)

So basically knowledge maps differ themselves in the usage of why, what, for whom, how

and who wants information and to whom we want to transfer it. Therefore, their limitation

lies in that that we can’t mix them, even there are some possibilities. But they are limited by

the purpose and how we want to transfer our information and knowledge throughout an

organisation. In the next two pages you will be able to see 2 tables.

Table 1 shows sample knowledge maps types based on these primary classifications. Table 2

deliberates on which kind of knowledge map may be useful for a given knowledge

management process or challenge. Those two tables were taken from the research article from

Martin J. Eppler, A process-Based Classification of Knowledge Maps and Application

Examples.

5. Conclusion

Since a knowledge map gives you information of knowledge and information within your

organisation, IBU would benefit from a knowledge map. It would have fast access to many

information about the students, professor, grades, etc and IBU in total.

It would be an easy effort to see which students are visiting/joining IBU. Which nationality,

age, previous education, gpa, etc they have; also the progress of the students throughout their

education. As well as the satisfaction of students about the professors, grade overview of all

of them, etc.

We would be able to see which quality IBU is offering, what kind of professor they have.

Who has a phd or master title, where they taught before, etc.

All this would be beneficial to IBU but I think that every university should and must have a

regularly updated knowledge map. But I think that IBU already have some kind of

knowledge map due to its regularly surveys which are offered to students.

Knowledge Map Classification

A. Classifying knowledge maps by intended purpose or KM process (‘‘why?’’)

1. Knowledge creation maps: illustrate the planned steps to develop a certain (organizational)

competence or create new knowledge (i.e., a technology road map)

2. Knowledge assessment or audit maps: illustrate the evaluation of certain knowledge assets

graphically, for example, by a 2 x 2 matrix (axes: current ability and future importance)

3. Knowledge identification maps: provide a graphic overview on knowledge assets (experts,

patents, practices) and points to their locations/coordinates

4. Knowledge development or acquisition maps/learning maps

(a) Learning overview and learning path maps

(b) Learning content structure maps

(c) Learning reviewing/repetition maps

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5. Knowledge transfer, sharing, or communication maps: show who transfers knowledge to

whom

6. Knowledge application maps: show which knowledge is necessary for carrying out certain

processes or steps in a single process

7. Knowledge marketing maps: can be used to signal competence to the public in a certain

domain

B. Classifying maps by their content (‘‘what?’’)

I. By (digital and analog) content formats: 1. websites (incl. blogs, portals, homepages), 2.

documents

(incl. books), 3. databases or repositories, 4. learning objects or online courses (or

modules),

5. other file formats (e.g., sketches, drawings)

II. By content types: 1. methods, 2. processes, 3. experts (incl. groups), 4.

organizations/departments/ institutions, 5. lessons learned/experiences, 6. skills and

competencies, 7. concepts, 8. events, 9. patents, 10. knowledge or communication flows or

relationships, 11. interests or knowledge needs

C. Classifying maps by the application level (‘‘who?’’)

1. Personal knowledge maps (visualizing one’s own skills or expert contacts, see Eppler

and Sukowksi, 2000 or Burnett et al., 2004)

2. Dyadic knowledge map (to support knowledge creation, transfer, or assessment between

two people)

3. Team knowledge maps (visualize the skills present or needed in a project team, like the

T-matrix, see Eppler and Sukowksi, 2000)

4. Departmental knowledge maps

5. Community knowledge maps

6. Organizational knowledge maps

7. Inter-organizational/network knowledge maps

D. Classifying knowledge maps by graphic form (‘‘how?’’)

I Table-based format (for an example see Heng, 2001)

1. Person by skills table

2. Skill area by people table

3. People by documents

4. Team by project experience table

II. Diagrammatic format

1. Structure diagrams

(a) Venn diagram, (b) concentric circles (with or without segments), (c) matrix (i.e., 2 x 2),

(d) network diagram, (e) mind map, (f) concept map (Tergan and Keller, 2005),

(g) cognitive map (Huff and Jenkins, 2002), (h) strategy map, (i) fishbone

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2. Process diagrams (Galloway, 1994)

(a) Timeline, (b) swim lane chart, (c) flow chart, (d) event chain, (e) critical path

method,

(f) Gantt chart, (g) cycle chart, (h) decision tree, (i) value chain, (j) flight plan (Eppler

and Sukowksi, 2000) III. Cartographic format

1. Geographic map: globe/continent/land/island/region, 2. informational map: park, 3.

tube/metro

(Burkhard and Meier, 2005) map, 4. galaxy/stars, 5. sea/ocean, 6. building/ architectural

map

IV. Metaphoric format

(a) From the natural realm: 1. tree, 2. iceberg, 3. canyon, 4. mountain, 5. river, 6...

(b) Man made artifacts: 1. house, 2. temple structure, 3. radar screen, 4. bridge, 5. race track,

6...

E. Classifying maps by their creation method (‘‘how?’’ and ‘‘who?’’)

1. Maps that are automatically and dynamically generated by the computer (such as self-

organizing maps, see Kohonen, 2001)

2. Maps that are semi-automatically generated (automatically assembled and then

optimized by analysts)

3. Maps that are designed once by domain and mapping experts and then used in the same

way by all users

4. Maps that are iteratively created, modified, or extended by the map user(s) themselves

(community generated maps)

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REFERENCES

1. Vestal, Wesley. "Knowledge Mapping 101". Presentation at USAID Knowledge for

Development Seminar September 22, 2003. http://pdf.usaid.gov/pdf_docs/PNADK308.pdf

2. "U.S. Agency for International Development." U.S. Agency for International

Development. Web. 15 May 2012. <http://www.usaid.gov/>.

3. "Knowledge Mapping: A Practical Overview." : Impact Alliance. Web. 15 May 2012.

<http://www.impactalliance.org/ev_en.php?ID=2011_201>.

4. "Thoughts.com." Where Is the Map? 3 Easy Steps to Construct a Speech. Web. 15 May

2012. <http://www.thoughts.com/colbygross511/where-is-the-map-3-easy-steps-to-construct-

a-speech>.

5. "Definition: Knowledge Mapping." Definition: Knowledge Mapping. Web. 15 May 2012.

<http://technologysource.org/extra/83/definition/2/>.

6. "Mapping the People in Your Organisation." Mapping the People in Your Organisation.

Web. 15 May 2012. <http://www.moxy.com.au/index.php/moxy-knowledge/18-articles/60-

mapping-the-people-in-your-organisation>.

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1. http://lpis.csd.auth.gr/mtpx/km/material/knowledge%20maps.pdf

2. http://www.slideshare.net/dtandukar/KMap

3. http://it.toolbox.com/wiki/index.php/Knowledge_Map

4. http://pdf.usaid.gov/pdf_docs/PNADK308.pdf

5. http://www.moxy.com.au/index.php/moxy-knowledge/18-articles/46-knowledge-mapping

6. http://kmwiki.wikispaces.com/Knowledge+mapping

7. http://knowledge-mapping.blogspot.de/2006/11/concept-mapping-today.html

8. http://www.tlainc.com/articl180.htm

9. http://www.trainmor-knowmore.eu/AC44FB2A.en.aspx

10. http://ezinearticles.com/?Knowledge-Mapping&id=9077

11.http://www.moxy.com.au/index.php/moxy-knowledge/18-articles/60-mapping-the-people-

in-your-organisation


http://lpis.csd.auth.gr/mtpx/km/material/knowledge%20maps.pdf

http://it.toolbox.com/wiki/index.php/Knowledge_Map


http://www.moxy.com.au/index.php/moxy-knowledge/18-articles/46-knowledge-mapping

http://kmwiki.wikispaces.com/Knowledge+mapping

http://knowledge-mapping.blogspot.de/2006/11/concept-mapping-today.html

http://www.tlainc.com/articl180.htm

http://www.trainmor-knowmore.eu/AC44FB2A.en.aspx

http://ezinearticles.com/?Knowledge-Mapping&id=9077

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The Effects of Basic Macroeconomic Prices on Manufacturing Industry Production in

Turkey

İlknur Pulak Taras, Gülçin Manzak Aydin, Demet Barlin Harmankaya


[email protected]

Abstract

In this research; the effects of macroeconomic prices, such as interest rate, exchange rate,

energy prices and wages, on Turkish manufacture industry production in the period 1992-

2008 are investigated. The aim of the research is to bring current macroeconomic policies in

Turkey up for discussion once more. In this framework, the economic policies implemented

in Turkey since 1980 are elaborated in the first place in order to interpret the economic trends

between the years 1992 and 2008 ideally. Then for the purpose of analyzing the mentioned

relations, various econometric methods are used. First of all, ARDL Bound Test is applied to

series in order to investigate the long run relationship among them. Secondly, causality

relationships are questioned by using Granger Causality Test based on Hsiao Approach; and

impulse-response functions and variance decomposition tables obtained from Vector

Autoregressive Model (VAR) are elaborated. At last, findings are evaluated within the

economic framework drawn beforehand and the research is concluded by policy proposals.

Accordingly, long run relationship among variables cannot be found, however at the end of

causality tests all the variables except real wages are found to be “Granger cause of

production”. Moreover, the impulse-response functions put forward that the production

reacted negatively to real interest rate, positively to real effective exchange rate and

negatively to real energy prices. The coefficient derived for real wages, on the other hand, is

discovered to be insignificant. This can be explained by the export orientation policy that has

targeted foreign demand instead of domestic. Above all, it should not be neglected that real

wage level deserves considerable interest since it determines wealth of the majority of

society. As a result of the analyses and assessments in the research, it can be concluded that

these variables can and should be utilized as efficient and essential policy tools.

Keywords: interest rate, exchange rate, energy prices, real wage, Turkish manufacture

industry, ARDL Bound Test, Vector Autoregressive (VAR) Model

1.INTRODUCTION

The question of whether development is succeeded by the hands of state or market

mechanism (state vs. market) takes a central place in development economics literature.

Although the answers include theoretical and ideological aspects, historical experiences

enlighten these questions. Besides the West European countries, the experiences of South

Eastern countries are elaborated again and again in this context. Although both sides

underlined the elements that support their arguments, there is little evidence pointing out that

only the market mechanism provides sufficient instruments for development. Rather, it seems

that industrialization could not be achieved without control and supervision of the state at

specific time and situations.




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As for the dominant paradigm, Neoclassical Economics claims that free market economy

creates the best conditions for all countries and prices are directive in case of deviances from

equilibrium. The equilibrium price of a commodity/factor is said to illustrate the point where

the supply and demand become equal and thus demanded production also equals demanded

consumption. In summary, according to the Neoclassical model, prices should be determined

under free market conditions and the actors would behave rationally with respect to these

prices which could not be affected by individual actors under “perfect competition”. At this

point, the general price level is determined in national market, energy prices in its own

market, exchange rate and interest rate in the money market and lastly wages in the labor

market in real world.

Beyond these assumptions of Neoclassical Economics, price is not only an endogenous value

determined by the associated demand and supply but also effective on them. As Keynes

pointed out after 1929 Great Depression, interest rate is, ceteris paribus, effective on

investment and exchange rate, ceteris paribus, on balance of payments. As for other prices

from a supply side viewpoint, energy prices contribute directly to production cost and wage

level is distinctive for production level by its functions both as a cost item and as a main

component of demand. In fact, this study is based on the view arguing that utilizing those

prices as policy tools in controlling the related variables (investment, import, export,

production) are another choice among different economic policies.

Multidimensional policy choices are significant since real economic relations are much more

complicated than those in free markets idealized by Neoclassical Economics. In fact in real

world, all prices are intervened to be held within boundaries determined by certain

macroeconomic policies. For instance the main policy in Turkey since 2001 has been to

control inflation by intervening interest rate while leaving the exchange rate to fluctuation.

This is a policy choice among many others. This choice depends on policy makers’ priorities

determined in the framework of current targets and economic relations.

In this framework, this article aims to reevaluate the macroeconomic policies implemented in

Turkey. For this reason, the effects of variables like interest rate, exchange rate, energy prices

and wages on manufacture production are investigated by using various econometric

methods. First of all, the series are put to cointegration test in order to investigate long term

relation between them. Then causal relations are analyzed by using Granger Causality Test

with Hsiao Approach. At last, Vector Autoregressive Model (VAR) is applied to see the

effects of variables on production and impulse-response functions and variance

decomposition tables are examined. Meanwhile the study is limited by the years between

1992 and 2008 for which continuous time series data for all of these variables are available.

Since the policies after 1980 constitute a persistent framework, the second section of this

study is devoted to an overview of Turkey’s late economic history for the sake of better

evaluation of economic developments in the period 1992-2008. In the third section, data set

and method are explained and in the forth, findings are presented. In the fifth section, the

results of the application are presented with their economic implications and the study is

concluded by a general assessment.

2.Main Milestones of Turkish Economy after 1980

The similarities of macroeconomic policies implemented in developing/peripheral economies

are said to be surprising. This can be explained by the close relation of these countries with

developed ones, or the centre. Öniş and Şenses (2007) defined this situation with “reactive

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state” concept and exemplified it for Turkey. Accordingly, even if the policy shifts are

supported by domestic coalitions, the main factor behind this policy shifts has been external

dynamics. In fact, like many other developing countries, policy-makers in Turkey have

followed the major centers of international decision making like the World Bank (WB),

International Monetary Fund (IMF), World Trade Organization (WTO) etc. In this direction,

the post 1980 era can be summarized by Neoclassical dominance that promoted liberalization

in all fields of the economy.

More clearly, by 24th January 1980 Decisions an inward looking industrial model, import

substitution was replaced by an outward looking model, export orientation. This

transformation created an environment where free market strengthened its dominance and the

state interventions were restricted within the economic area. This atmosphere was spreading

all around the world by the decline of the Cold War conditions. Korkut Boratav (2004: 149)

defined the post 1980 policies in these words:

A foreign exchange policy worked in line with real devaluations; a more liberal import

regime; export as a national priority supported by promotions and subsidies like expensive

foreign currency49, cheap credit and tax return; abolition of price controls and subsidies on

main commodities and macro policies towards the suppression of domestic demand are the

key elements of 24th January Decisions.

The policies implemented after 1980 including liberalization of trade and capital movements,

privatization of state enterprises and pointing private sector as the locomotive of growth have

been the most long-termed ones among similar policies. Meanwhile, the dependence of

exports to imports influenced the external deficit in a negative way (Boratav, 2004: 161).

This structural defect was tried to be fixed by continuous and high capital flows from abroad.

For this aim, foreign exchange regime is liberalized in 1984 and capital movements in 1989.

İnsel et al. (2004) evaluated this situation as the effort to fill the gap created by infrastructural

deficiencies with liberal financial system. In a parallel way, financial liberalization had

become a determinant element for the whole economy especially after 1990. For this reason,

studies analyzing the mentioned period could not ignore the impact of financial sector.

According to the study done by İnsel et al. (2004) the very first effects of financial

liberalization in 1989 had been the increase in current account deficit and appreciation of TL.

Therefore, external borrowing had increased by 223 % in the period 1989-1993. Likewise,

the fact that the majority of capital flows were short termed and their outflows were not

restricted or regulated paved the way for a series of financial crisis and resource transfer. As

can be seen in Table 1 and 2, financial crises in 1994, 1999 and 2001 led reel growth decrease

by values between 3 and 6 % according to the previous years.

Table 1: Real Growth, Net Capital Flows and Unemployment Rate (1992-1998)

Years Real Growth (%) Net Capital Flows

(million $)

Unemployment Rate

(%)

1992 6.0 3,648 8.5

1993 8.0 8,903 8.9

49 This situation is changed in an opposite way by the effect of capital movement liberalization in

1989.

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1994 -5.5 -4,257 8.5

1995 7.2 4,565 7.6

1996 7.0 5,483 6.6

1997 7.5 6,969 6.8

1998 3.1 -840 6.9

Source: Turkish Statistical Institute (www.tuik.gov.tr) and Central Bank of the Republic of Turkey

(http://evds.tcmb.gov.tr/) Date Accessed: 02.11.2009.

Actually, the years after 1990 were differentiated in terms of commodity and capital flows

from 1980s when some regulations somehow had been persisted (Kazgan, 1999: 175). In

detail, the liberalization process controlled by the IMF and the WB at the beginning of 1980s

was reinforced by new agreements signed in 1990s like General Agreement on Trade and

Tariffs (GATT) and Customs Union. Both agreements aimed to decrease national protection

in trade and increase the capacity of world trade. However, the abolishment of protection in

industrializing countries like Turkey promoted the importation50 of industrial goods instead

of producing them in the country. This was supported by concessions offered by Customs

Union Agreement. Accordingly, while Turkey decreased its tariffs almost to zero for the third

parties, the developed countries decreased tariffs in textile, leather goods and rubber shoes,

which are exported by the developing world, in small amounts such as from 15.5% to 12.1%

(Kazgan, 1999: 177-178). As a result, exports as percentage of imports in Turkey

decreased51 day by day besides the capital flows appreciating the domestic currency and thus

imports are promoted instead of exports.

Pamukçu and Yeldan (2005) emphasized two significant characteristics of the post-1990 era.

Firstly, the growth after 1990 had been speculative-led, dependent on capital inflows and

secondly, the growth could not create new employment, which is called jobless-growth. The

reflections of the arguments can be observed in Table 1 where negative values in net capital

flows represented capital outflows. It is acknowledged that in 1994 when capital outflows

exceeded inflows, the growth rate had been – 5.5%. Similarly, in Table 2 it can be deducted

that 2001 crisis was significant because of the big amount of net capital outflow compared to

the net capital inflows or outflows in other years. Looking at these developments, it is not an

exaggeration to claim that the high growth rates between 2002 and 2007 are compatible with

continuous and big amounts of capital inflows. This can be deducted also from the fact that

the slowdown of world capital in 2008 directly influenced the growth rate in Turkey. In other

words, the contraction in 2008 created a decrease in net capital inflows which would continue

in 2009 when the growth rates are negative.

Table 2: Real Growth, Net Capital Flows and Unemployment Rate (1999-2008)

Years Real Growth (%) (%)

Net Capital Flows

(million $)

Unemployment Rate

(%)

1999 -3.4 4,829 7.7

2000 6.8 9,584 6.5

50 As a result, nominal rate of protection decreased from 65 % in 1983 to 28.3 % in 1990 (Kazgan,

1999: 176).

51 While the value of exports as percentage of imports was 72.4 % between 1984 and 1989, this rate

decreased to 55.8 % between 1993 and 1997 (Kazgan, 1999: 180).


http://evds.tcmb.gov.tr/

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2001 -5.7 -14,557 8.4

2002 6.2 1,172 10.3

2003 5.3 7,192 10.5

2004 9.4 17,702 10.3

2005 8.4 42,660 10.3

2006 6.9 42,689 9.9

2007 4.7 48,637 10.3

2008 0.9 33,636 11

Source: Turkish Statistical Institute (www.tuik.gov.tr) and Central Bank of the Republic of Turkey

(http://evds.tcmb.gov.tr/) Date Accessed: 02.11.2009.

Another characteristic of the capital movements in this period has been that their inflows or

outflows are random and volatile, which made the Turkish economy so fragile. Legislations

aiming to promote long-term capital inflows instead of short-term or to set certain rules for

capital outflows are some suggestions that could decrease the fragility and increase the

stability. As mentioned before, the growth in this period was unable to create employment as

much as the expected. The values in the 2nd and the 4th columns of the tables put forward the

relationship between growth and unemployment. In detail, even in the years 2004 and 2005

when the Turkish economy grew by 9.4% and 8.4% respectively, the unemployment rates

were above the 10% level. This situation set forth that the link between growth and physical

investment which constitute the base for production has been weak. On the contrary, during

the crisis years when the growth rates were below zero, the expected relation worked and the

unemployment rates increased. For instance, the rate of unemployment increased from 6.5%

in 2000 to 8.4% in 2001 and to 10.3% in 2002. Lastly, the increase in the rate to the level of

11% in 2008 due to global recession supported the expectation that this increase would

continue in 2009.

As a subset of the period of focus, years between 1998 and 2008 was also special since the

IMF was effective on macroeconomic policies through uninterrupted stand-by agreements

during the period. In the 2006 Report prepared by Independent Social Scientists, the year of

1998 was evaluated as a cornerstone in the Turkish Economic History as well as 24th January

1980 or the year 1989 when the capital movements were liberalized. In fact, it was the first

time that macro policies were tied to the persistent relation between Turkey and the IMF

within this period. According to the items in the programs following each other, free

movements of international and national financial capital would be allowed, no intervention

would be needed in terms of over appreciated value of TL, labor markets would be more

flexible, state enterprises would be privatized and the state would be restructured depending

on neoliberal understanding (Independent Social Scientists, 2006).

3.Data Set and the Method

The data for wage “quarterly reel wage per hour worked in manufacture industry production”

and for production “quarterly industrial production” were taken from Turkish Statistical

Institute. For interest rate, “ex-post real interest rate” and for exchange rate “monthly real

effective exchange rate” and for energy prices “electricity, gas and water” were used from the

data set of the Central Bank of the Republic of Turkey. All the data were transformed to

quarter data on the same base year 1997 and the price effect was cleared.


http://evds.tcmb.gov.tr/

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In the first place, the graphics of the variables were analyzed and production series were

adjusted seasonally. Then the situations of whether they were stationary or not were tested

with ADF Test (Unit Root Test). The series including unit root were also applied structural

breaks test in order to analyze their being stationary. ARDL Bound Test was used to analyze

the long-term relationship. Since cointegration was not valid, the analyses were continued

with lagged variables. Granger Causality Test with Hsiao Approach (1982) was used in

investigating the one way causal relation of other variables toward production and the results

of impulse-response functions and variance decomposition by using VAR Analysis were

discussed.

4.Findings

After required adjustments done mentioned above and Granger Causality Test is applied to

variables, it is found that exchange rate, interest rate and energy prices Granger-cause

manufacturing industry production in Turkey within the related period. As for wages, such a

relation could not be identified for this term. Then application of VAR Analysis put forward

the findings shown in Table 3 where “F” symbolized interest rate, “E” energy prices, “UC”

wage level, “DK” exchange rate and “UR” production.

Table 3: Variance Decomposition Table for D(UR)

Period S.E. F D(E) D(UC) D(DK) D(UR)

1 0.041386 26.12569 10.43293 0.303792 1.880974 61.25661

2 0.045642 21.80958 17.90020 1.188303 8.713255 50.38867

3 0.049081 24.66460 17.76381 1.039880 9.024850 47.50686

4 0.050463 27.99220 17.17754 1.085908 8.758086 44.98626

5 0.050863 28.85729 16.90906 1.069230 8.706563 44.45786

6 0.051005 29.16273 16.85717 1.079802 8.685333 44.21496

7 0.051039 29.22121 16.85599 1.079802 8.684548 44.15845

8 0.051049 29.22451 16.87086 1.080577 8.682052 44.14200

9 0.051051 29.22371 16.87515 1.080618 8.681462 44.13907

10 0.051051 29.22310 16.87678 1.080656 8.681294 44.13817

As seen from Table 3, the change in production is mostly explained by itself, which was

followed by interest rate (with 26.13%), energy prices (with 10.43%), exchange rate (with

1.88%) and wages (with 0.3%). It is obvious that the explanation level of wage level has been

pretty low. These findings have been parallel to those of the Granger Causality. After using

variance decomposition, impulse-response functions seen below have been analyzed.

Accordingly, the response of production to interest rate was negative in the first period with

significant coefficients. The coefficients have been insignificant in the following periods. In a

similar way, production reacted negatively to energy prices in the first two periods and then

the coefficients became insignificant. As for the response of production to exchange rate it

seemed to be positive for the first two periods and the coefficients became again insignificant

in the others. Again in line with the previous findings, the coefficients in terms of wage level

have been insignificant for all periods.

The Response of D(UR) to F

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The Response of D(UR) to D(E)

The Response of D(UR) to D(UC)

The Response of D(UR) to D(DK)

5. Conclusion and Remarks

In this study, the relationship between the movements of macroeconomic prices, which

appeared to be effective on production between 1992 and 2008, and the progress of

production has been researched. The macroeconomic prices undertaken at this point have

been restricted with interest rate, exchange rate, energy prices and wages. The findings of the

econometric analysis have been evaluated with dominant economic policies of the period,

which means that the movements of the variables have been discussed in the light of enforced

programs. As it has been stated in the study of İnsel and Sungur (2003) covering the years of

1989-1999, free capital movements increased volatility in real and financial indicators and

brought short-term perspective on economic programs. As a result of the liberalization of

capital movements, the pressures on exchange rate, interest rate and other prices have risen.

Nonetheless, this tendency of short-term perspective handicapped both the formation of long-

term perspective required for a stable economy and the rise of investments towards

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production. The paragraph below (Doğruel and Doğruel, 2008) has been instructive in terms

of stating the main features of the period.

In this long period exceeding 30 years since the second half of the 1970’s, the governments

have approached the real economy through the framework of export increase and financial

capital inflow; the focus of the policies has been on the inflation control and resource creation

for economic sustainability, in other words, on the achievement of macro stability. Turkey’s

long-term growth aim has lagged behind in this environment and a long-term action plan or

approach for manufacturing industry could not have been formulated although considered

from time to time.

In the same direction, the simultaneous planning custom of policies for industry and

international trade, which characterizes the industrialization strategy of 1960s and 1970s, has

been given up after 1980. Due to commitments made to European Union and World Trade

Organization, Turkey’s priorities have not been attached sufficient importance in

international trade policies that could be used for supporting industrial development (Türel,

2007). Likewise, according to Şenses and Taymaz (2003), in the post 1980 era, external

dynamics have been very effective on the formation of basic approaches and policies

regarding industry. As a matter of fact, Turkey had been missed out the potential positive

effects of national and international prices on production. This negative picture of Turkish

economy has revealed the importance of this study, namely, the effect of changes in

macroeconomic prices on manufacturing industry production. The general situation

underlined as such has shown parallelism with objective findings of the study and has

required an overview of enforced macroeconomic policies.

It has been seen that the empirical findings of the study have supported the opinions and

observations discussed through the study. To remember, real effective exchange rate does

Granger-cause manufacturing industry production. Thus, any change in this variable had been

effective on the future values of manufacturing industry. In fact, this result has provided the

satisfactory evidence for the suggestion of using exchange rate as an effective policy

instrument. Furthermore, impulse-response functions have shown that production has given

positive reaction to exchange rate in the first two periods. As a reminder, increase in the

exchange rate serial used in this study has indicated the appreciation of TL. At first sight,

there has been an expectation that appreciation of TL would show a negative impact on

production by promoting imports rather than exports in international trade. However

apparently, the structure of national production dependent on imported inputs has caused the

realization of a reverse relationship between exchange rate and production different from the

expected one in the economic theory.

That is to say, inputs and intermediate goods imported cheaply due to appreciated domestic

currency have increased production between 1992 and 2008. Although this result could seem

to be favorable at first, it should not be forgotten that the crucial point has been the increase

in current account deficit. To put it another way, because of the production structure that is

dependent on imports, Turkey’s high growth rates have caused a widening current account

deficit. This situation, which gives way to savings balance deterioration, has increased the

need for capital inflow and therefore has played a role in supporting free capital movements.

It is clear that this cycle has created pressure on interest and therefore it became difficult

leave high interest rate policy that has secured the continuity of capital inflow.

If the findings in terms of interest rate have been analyzed, it is revealed that real interest rate

does Granger-cause manufacturing industry production. This result, on its own, has shown

that interest rate could and should be utilized positively for promoting production increases

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besides inflation targeting. In addition, variance decomposition results have shown that the

most effective variable on production has been interest rate and impulse-response functions

showed that the reaction of interest rate to production was in negative direction in the first

period.

A relationship in this direction has been in line with the expectations of economic theory. As

known, an increase in interest rate would have a negative impact on production because of its

deterrent effect on investments. Besides, this situation has influenced the level of

employment indirectly. Indeed, employment problem has been one of the most urgent

problems to be handled since the official unemployment rates have been in double digits in

Turkey. Even so, interest rate has been kept high due to the current restrictions. As stated,

high interest rates have caused to reach high growth rates in Turkish economy by warranting

hot money flow between 2002 and 2007. Nonetheless, these high rates have both put Turkish

economy on the spot in refunding internal and external liabilities and have influenced income

distribution negatively because of the economic growth without creating employment. These

outcomes have pointed out that the particular variable that policy makers, who wanted to be

effective on production, had to take into account had been interest rate.

According to another result, energy prices which are taken into notice in terms of electricity,

gas and water Granger-cause manufacturing industry production. Furthermore, variance

decomposition results achieved by VAR Analysis have stressed that the second most

distinctive variable on production has been energy prices after interest rate. In addition, when

impulse-response functions were analyzed, it has been seen that production had given a

negative reaction to increases in energy prices in the first two periods as expected.

At this point, it is noteworthy to assert that the price of electricity in Turkey, which is used

intensively in industry, has been higher than almost all OECD countries. The price of natural

gas, which is reasonable with respect to that of electricity, has been important both as a

primary resource used in industry and as a resource used in electricity production. On the

other hand, since the natural gas is dependent on foreign resources, it has been hard to control

its supply and price. All these motives have illustrated the significance of following and

controlling energy prices for policy makers willing to increase production and income. In

other words, regulation of the energy prices to foster production has been crucial for Turkish

industry. In this direction, it has been found worthwhile to revise the decision about

privatization of energy sector as has been offered as a solution since 2001.

Last result of the study is that any change in real wages does not Granger-cause

manufacturing industry production. Also, when impulse-response functions and variance

decomposition results were analyzed, it was seen that coefficients determining the

relationship between production and wages have been insignificant and the explanation level

of wages in terms of understanding production has been significantly low. On the basis of this

analysis, it could be concluded that the relationship between manufacturing industry sector

and domestic demand has been weak. This finding seems to be neither surprising nor

unreasonable for an economy that is based on export-led growth, dependent on foreign

demand rather than the domestic. Above all, the social dimension of wages has to be taken

into account rather than interpreting it solely as a macroeconomic price. This has been a

considerable matter due to the fact that the number of people living in poverty in Turkey is

increasing day by day. As a result of this situation that has taken its root from 1980

transformation, on the one hand the participation of economy to world trade has increased

significantly, the structure of exports has shown an important change towards industrial

products and on the other hand, the expected increases in production, employment, private

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domestic and foreign investments have not been provided and real wage developments have

shown an unstable outlook.

To sum up, as indicated clearly in report of TÜSİAD, the deepening tendency of integration

in the world economy after 1990s has been forcing all countries to review their industrial

policies. This process has carried the potential of creating a deindustrialization process for

developed and developing countries (Doğruel and Doğruel, 2008). The policy making that

has to be implemented against this dangerous situation is the use of national resources in a

productive way and to allocate them for pre-determined targets. Acknowledging the

significance of fiscal policy52, the economy should be managed by a state, responsible not

only for regulation but also for direction. Such an increase in production would provide a

general improvement in welfare by both preventing unproductive use of resources and by

increasing employment through new investments.

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52 For policies discussed after 2008, see A. Spilimbergo, S. Symansky, O. Blanchard, C. Cottarelli

(2008) “Fiscal Policy for the Crisis” IMF Research Department Position Note,

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Pamukçu, T. and Yeldan, E. (2005) “Country Profile: Turkey, Macroeconomic Policy and

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Crisis” IMF Research Department Position Note,

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Consequences of financial crisis in Bosnia and Herzegovina

Fiscal and Monetary Policy

Nađa Dreca

International University of Sarajevo,Faculty of Business and Administration

71000, Sarajevo, Bosnia and Herzegovina


Abstract

Aim of this paper is to analyze effects did global financial crisis have on BiH’s economy and

society in general. After examination of effects, it will be researched what are the policies

that government has implemented in order to decrease negative effects. Both, fiscal and

monetary policies will be examined, with special emphasize will on the stand by arrangement

with IMF because it was often debated whether this arrangement was good or wrong

movement of the government. Moreover, this paper will provide information about have did

these measures affect society and especially certain interest groups, such as demobilized

military. Finally when all of these above mentioned are analyzed and discussed, conclusions

about efficiency of implemented policies will be made and proposals of what could be done

will be developed.

Keywords: global crisis, Monetary policy, Fiscal Policy, Central Bank

1. INTRODUCTION

Government of Bosnia and Herzegovina introduced some measures aimed in cutting public

administration costs and urge state-owned enterprise to devise saving plans. Bosnian

government encourages public spending, new capital investments, building roads, open new

projects. To conclude, BiH was doing pretty well until 2008, registering decent levels of

http://www.bilkent.edu.tr/~yeldane/FEMISE_Macro2005.pdf

http://www.imf.org/external/pubs/ft/spn/2008/spn0801.pdf

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economic growth. As the crisis hit Europe, economic growth substantially slowed down,

huge public deficit took place and the only solution to prevent absolute collapse was to get

the loan from the International Monetary Fund. All of the fiscal policies had some effect, but

they created social problems. On the other side, since Central Bank has only limited tools and

thus, monetary policy could not do much.

2. EFFECTS OF FINANCIAL CRISIS ON BIH ECONOMY

Previous to the 2008 and global financial crisis, BiH was considered as the most stable

economy in the Western Balkans. Of the great importance for macroeconomic stability at that

time was that the currency has been pegged to the euro, which ultimately protected it form

the fluctuations and created stability. Furthermore, economy was performing better and

country was experiencing slow but continuous growth in GDP. Since BiH is approaching EU

integration, much faster economic growth with higher GDP increase is required in order to

catch up with EU member countries. However, when crisis hit BiH this ambition for caching

up complicated further because GDP growth has immediately slowed down, due to the

reduced exports, remittances and credit. Finally, in 2010 some signals of slow recovery have

shown.

When talking about this crisis, inflation is usually perceived as one of the greatest problems.

Year 2007 2008 2009 2010

% change in CPI 1.5 7.4 -0.4 2.1

Table 1. Inflation

From the table above it can be concluded that crisis created high inflation, especially in the

2008 when retail prices increased by 7.4%. This big increase of price level was caused by

extraordinary rise in energy and food prices on world markets in the first months of 2008.

Regarding financial inflows before the crisis, the highest percentage of these inflows were in

the form of foreign direct investment (FDI). In 2007 FDI grow but in the following years it

started decreasing and currently FDI represents approximately around 1% of GDP. It is

important to emphasize that beside the financial crisis, the second highest problem why FDI

has drastically decreased is complex political situation and insecurity.

Since the war ended unemployment is constantly high. Business cycle is very slow, not many

jobs are being created, so the unemployment persists to be one of the leading problems.

Existing economic crisis, as previously mentioned, had slowed business cycle further,

production decreased and consequently unemployment rose. Regarding sectors that were first

to feel the effects of global financial crisis, these are the strongest export sectors, metal

industry and also building and industry of construction. Some of the most successful

companies in the metal industry, such as Arcelor Mittal Zenica and ASA Prevent have

already in 2008 decreased their production by 20-50%. In some Cantors there is need for

approximately million KM per month to cover only the basic contribution for the new

unemployed persons. So, number of unemployed is continuously increasing, while

government is trying to implement austerity measures of cutting social expenditures.

Increasing demand for social benefits and reduction in government spending created

atmosphere of general dissatisfaction, strikes and social unrest.

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The movements of public revenues and expenditures indicates that significant further

worsening of the country’s fiscal position occurred and that fisical deficite increased further.

It is evident that revenues were gradually decreasing and this was mainly due to the decrease

in colection from taxes and lower collection came as a result of decreased consumption. On

the other side austerity measueres that were enforced as an effect had decrease in government

expenditures

Further more, economic shocks have also caused an increase in the grey economy which

represented significant problem even before the economic crisis. In the research about crisis

and grey economy in the BiH, PhD Rajko Tomas showed that actual portion of grey economy

in 2008 was approximately 60%. It can be argued that this percentage has increased even

more in past two years because of the crisis and because of introduction of fiscal cash

machine . Introduction of fiscal cash machine hurt small business the most and caused high

percentage of these to exit from the market.

3. MONETARY AND FISCAL POLICY

As the negative impacts of the global crisis make their way across Bosnia and Herzegovina,

governments are employing different mechanism to improve their competitiveness and

encourage economic activities. As a first step, improving competitiveness can come through

currency depreciation, but in the case of Bosnia and Herzegovina it cannot be adopted

because Bosnian currency is pegged to the euro through a Currency Board. Beyond currency

depreciation, the Bosnia could employ other monetary and fiscal policy instruments to ease

adjustment and encourage economic activity, including financial spending programs o

encourage aggregate demand or loosening of lending controls to increase liquidity in the

banking system. Central Banks in the region of Bosnia cut their policy rates, but for Bosnia

and Herzegovina the only available macroeconomic policy was reduction of minimum

reserve requirements and requirements for funds borrowed from abroad. Also Central Bank

of Bosnia and Herzegovina exempted funds in foreign currency from reserve requirements. In

2008, it cut reserve ratio for all deposits from 18% to 14% by increasing the liquidity and free

credit potential, is aimed at stimulating banks to keep the growth rate of the lending activity

which was considerably slowed down. The tendency of slow-down of growth of bank lending

to private sector started.

As the tendency of decrease of activities in the local credit market continued, the Governing

Board of the Central Bank of Bosnia and Herzegovina in November 2008, passed a decision

according to which all the new credit lines withdrawn by commercial banks from foreign

countries should be excluded from the base for required reserve calculation. This measure

was aimed at stimulating the inflow of capital from foreign countries in the local banking

sector and providing additional incentives to the credit activity of commercial banks. In

December 2008, the Governing Board also passed a decision on introducing a differentiated

rate of required reserve on commercial bank deposits. The purpose of this decision is to

release additional liquid funds from the required reserve for commercial banks, in order to

stimulate larger credit activity in attempts to make a positive influence on the level of

economic activity in the country.

Also new decision about deposit insurance limit is brought, new amount increased from

7.500 to 20.000 KM, and Deposit Insurance Agency provides insurance of deposits in

commercial banks in the amount of 35.000KM per person.

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The influence of the financial crisis in 2008 was indirectly felt in BH economy as well,

particularly in its financial sector. Slowing of capital inflows from abroad and withdrawal of

deposits from domestic commercial banks, which partly contributed to the negative balance

of sales and purchases of KM, as well as a reduced pace of growth of credit activities of

banks resulted in a considerably slower growth of money supply relative to previous years.

In 2009, the banking sector in BH, despite strong effects of the world economic crisis,

managed to maintain stability and responds successfully to clients’ demands, which served to

safeguard the confidence in the banking system. In order to mitigate negative effects of the

global financial crisis, around the middle of the year the banking agencies adopted the

Decision on Temporary Measures for Reprogramming of Credit Liabilities of Physical

Persons in Banks, which allowed banks to reprogram all obligations of a debtor’s at his

request.

The slow-down of capital inflows from foreign countries and the withdrawal of deposits from

the local commercial banks, which partly contributed to the negative balance of KM sale and

purchase, and also the decline of the growth rate of bank lending activities resulted in a

significantly slower growth of money supply.

3.1 Fiscal Policy

Government of Bosnia and Herzegovina introduced some measures aimed in cutting public

administration costs and urge state-owned enterprise to devise saving plans. Bosnian

government encourages public spending, new capital investments, building roads, open new

projects.

Letter of Intent

In early May 2009, members of the Fiscal Council of BH and delegation of the International

Monetary Fund (IMF) harmonized a Letter of Intent that was forwarded to the Governing and

Executive Board of IMF, in which a three-year Stand by arrangement was agreed for Bosnia

and Herzegovina in the amount of EUR 1.2 billion with annual installments of EUR 400

million each

In the Letter of Intent they proposed many policies in order to decrease budget deficit. One of

them was end 2009, we intend to: (i) eliminate special unemployment benefits granted to

demobilized soldiers by allowing the sunset clause to expire; (ii) introduce a maximum

income threshold for eligibility for civilian and veterans benefits; (iii) reduce all civilian and

veterans’ benefits by 10 percent and eliminate indexation; and (iv) reform war veterans’

pensions. These reforms will entail the revision of existing legislation, including: (i) Decree

on eligibility for pension under more favorable conditions of the military insurees of the

Army of FBiH; (ii) Decree on eligibility for age pension under more favorable conditions of

the military insurees of the Army of FBiH; and (iii) Decree on eligibility for age pension

under more favorable conditions of the members of the former Army of FBiH and civil

servants and employees of the former Ministry of Defense of FBiH.

IMF Stand-By Arrangement

Faced with increasing financing pressures in early 2009, the authorities put together a

comprehensive program supported by an IMF Stand-By Arrangement. The program was

designed to safeguard the currency board and cushion the effects of the deteriorating external

environment, while adopting policies to correct fiscal imbalances and strengthen the financial

sector. The authorities’ approach included: (i) gradual fiscal consolidation accompanied by

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structural fiscal reforms to bring public finances on a sustainable path; (ii) steps to strengthen

the resilience of the financial sector alongside commitments by foreign parent banks to

maintain their external exposures to BiH and keep their subsidiaries capitalized; and (iii)

substantial financing from the Fund along with funds from the World Bank and the EU.

The program helped mitigate the impact of the crisis on the economy. Private investment and

spending on consumer durables collapsed, while private current consumption softened to a

lesser extent, on the back of moderate growth of wages and social benefits. The drop in

domestic demand appears to be leveling off, aided by stabilizing credit conditions. Private

investment, however, continues to lose ground as a result of weak FDI inflows.

Results of Stand – By Arrangement

The program helped mitigate the impact of the crisis on the economy. Inflation has

decelerated.

The Federation government approved with a delay the pension reform strategy in June 2010,

and parliament adopted the public wage legislation in July 2010 (both end-March structural

benchmarks). Eligibility audits of war benefit recipients started only in July and are yet to

produce any tangible results (continuous benchmark from start of year). The end-March

structural benchmark on the reform of privileged pensions, which was missed by the

Federation, was also redesigned .In Republika of Srpska, all end-March 2010 benchmarks

related to eligibility audits, the reform of privileged pensions, and the pension reform have

been met.

By the end of the Stand by Arrangements, the level of Fund credit outstanding is projected to

reach 8.5 percent of GDP, and Fund repurchases and charges would peak at 63 percent of

total debt service in 2014. The country’s excellent record of meeting Fund financial

obligations, the expectation that the program would lay the foundations for the return to a

sustainable medium-term growth path, and a strong political commitment to the program

provide assurances that B&H should be able to meet its financial obligations at defined time.

Fiscal coordination was improved. Since its establishment in 2008, the role of the Fiscal

Council in coordinating fiscal policy across the country has been limited. It is important that

the authorities take steps to improve the Council’s operational framework and involve it in

the design of medium-term fiscal policy and fiscal targets.

The establishment of the Fiscal Council in 2008 represents an important step in advancing

national fiscal policy coordination. Recently, there have been increases of excises to align tax

rates with EU levels, but discretionary revenue gains were partly offset by declining customs

collections owing to EU accession. Direct taxes were lowered and exemptions re-defined.

Tax administration has also improved and, contrary to the experience in many countries,

collection does not seem to have suffered during the recent crisis. On the expenditure side,

progressive increases in wages and social benefits have occurred since 2006 in a pro-cyclical

fashion, dampening the effect of the automatic stabilizers. Unemployment benefits, which

generally act as a counter-cyclical force on the expenditure side, have increased during good

times with the rights awarded to demobilized soldiers in the Federation.

During the period of crisis Bosnian government propose some discretionary revenue

measures. In 2008 Association Agreement with EU (lowered import tariffs on EU goods) was

made. In 2009 Increase in the road fee (+0.10 KM/l), excises on coffee and progressive

increase in excises on tobacco.

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With monetary policy assigned to maintain the currency board arrangement, fiscal policy was

the only available instrument to soften the economic downturn. However, given the starting

unsustainable fiscal position, a discretionary fiscal stimulus was not a policy option.

During these period in Bosnia and Herzegovina some reforms were adopted, such as Rights-

based benefits reform. Much of the spending pressure affecting the fiscal accounts over the

past few years stems from poorly targeted and inefficient rights-based benefits. There was

agreement on the need to press ahead with the implementation of the reform of the system of

rights-based benefits according to the action plan prepared in consultation with the World

Bank. Faced with increasing demographic pressures, the authorities have initiated reforms of

the pension systems. The Federation approved a pension reform strategy, which still needs to

be fleshed out in greater detail and to incorporate an overhaul of privileged pensions. In the

RS, with the pension reform strategy already approved by parliament, the authorities need to

follow through with the preparation and adoption of pertinent legislation.

Reforms to rein in the wage bill was also implemented. BiH’s government payroll has grown

substantially in recent years and is very high compared with other countries. There is still a

need for deeper reform of public administration.

4. CONCLUSION AND PROPOSALS OF MEASURES

To conclude, BiH was doing pretty well until 2008, registering decent levels of economic

growth. As the crisis hit Europe, economic growth substantially slowed down, huge public

deficit took place and the only solution to prevent absolute collapse was to get the loan from

the International Monetary Fund. All of the fiscal policies had some effect, but they created

social problems. On the other side, since Central Bank has only limited tools and thus,

monetary policy could not do much.

In the case of Bosnia and Herzegovina the best way to correct consequences of crisis is to

change policy of public finance, to decrease the budget deficit and decrease of public deficit.

Main problem and weakness for Bosnian financial system is so high level of the benefits

provided to special groups of citizens and thus it is absolutely necessary to make reforms

regarding spending on these benefits.

Further more, it would be good if more flexible mechanism of the use of required reserves of

the Central Bank through use of the securities would be introduced and if Central Banks

would get the right to set the interest rate of the commercial banks. Of especially help would

be establishment of domestic bank which would than help development and support new

investments and development of the Bosnian financial sector.

Government should provide help to the domestic companies in order to keep their status on

the market, to keep stable unemployment rate and increase their competitiveness. One of the

measures that could be is the increase in the level of the public sector works that will create

jobs.

Sector of economy that should be supported the most heavily is agricultural sector, to

encourage the production of the agricultural goods that are currently being imported and

increase consumption of domestically produced goods. These will lead also to the increase in

GDP of the country and help export expansion.

Finally, introduction of progressive taxation could create some positive results, but detailed

cost-benefit analysis should be done in order to evaluate whether this type of taxation would

increase government revenues.

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REFERENCES

Agency of Statistics of Bosnia and Herzegovina www.bhas.ba

“Bosnia and Herzegovina: Letter of Intent and Technical Memorandum of Understanding“,

Published:June 16, 2009, Available at IMF officaila page www.imf.org,

“Bosnia and Herzegovina: Letter of Intent and Technical Memorandum of Understanding“,

Published:June 16, 2009, Available at IMF offical page www.imf.org

Central Bank of Bosnia and Herzegovina, Various Issues, www.cbbh.ba

Consequences of the global financial crisis on BiH economy“, Source: FENA, Published:

December 30, 2008., http://www.emportal.rs/en/news/region/74519.html

International Monetary Fund. http://www.imf.org/external/np/sec/pr/2010/pr10111.htm , .

http://www.imf.org/external/pubs/ft/scr/2010/cr10348.pdf

“The Western Balkans: Between the Economic Crisis and the European Perspective”,

Institute for Regional and International Studies, Sofia, September 2010, page.52

http://www.iris-bg.org/files/The%20Western%20Balkans.pdf,

2008 Global Crisis, The Case Struggle Turkey

“You are the Privileged, give us lessons”*

Bulut Şahin1, Göçer İsmet1, Dam M. Metin1, Mercan Mehmet2

Martin Wolf, Financal Times' chief economic commentator.

1Adnan Menderes University, Faculty of Economics and Administrative Sciences,

Department of Economics, Aydin, Turkey

2Lec. Hakkari University, Faculty of Economics and Administrative Sciences, Department of

Economics, Aydin, Turkey

E-mails: [email protected], [email protected], [email protected], [email protected]

Abstract

In this survey, how Turkey overcame the 2008 crisis was studied using 2002:1-2011:12

period data through co-integration test. Within the scope of Empiric analysis, the influence of

http://www.bhas.ba/

http://www.imf.org/

http://www.imf.org/

http://www.cbbh.ba/

http://www.emportal.rs/en/news/region/74519.html

http://www.imf.org/external/np/sec/pr/2010/pr10111.htm

http://www.imf.org/external/pubs/ft/scr/2010/cr10348.pdf

http://www.iris-bg.org/files/The%20Western%20Balkans.pdf

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selected macroeconomic variables such as Economical growth, ISE, unemployment, export,

agriculture, foreign currency rate-USD and supply of Money were studied through two-stage

Engle-Granger co-integration method.

As a result of co-integration test, in the long run, export policies, IMKB, agriculture and

foreign currency policies practiced have positive contribution to economic growth; therefore,

Turkey has been successful in the struggle against economic crisis. Money supply policies

had negative effect on economic growth and the recent economic crisis affected the growth of

Turkish economy in a negative way. In the short term, export and agriculture had a positive

effect on the growth of Turkish economy but global economic crisis had a negative effect.

Keywords: 2008 Global economic crisis, struggle, Turkey, co-integration.

1.INTRODUCTION

In a globalizing world, all countries monitor and study what happens in a particular country.

As a result of globalization, all countries are interrelated directly or indirectly. Economic and

political relations have become more and more important along as a result of globalization.

Developed countries not only manipulate globalization for their own sake, but also they use it

as a weapon against developing countries (John Perkins, 2006) the rapid change in the

accelerated with immense developments in hi-tech, communication and transport, and there

remains no limitation in front of capital and information. The spread of c rises to a different

country is regarded as the result of a globalization (Öztürk and Gövdere, 2010) the recent

crisis which broke out with the bubbles in the mortgage markets in USA and continued with

the publication of the two giants of the market, Fannie May and Freddie May and deepened

with bankruptcy of Lehman Brothers in USA in September, 2008 and detriments from private

sectors (General motors etc.) first influenced finance markets (American stock markets in the

first place and then the whole world economies fell sharply) and then real economies

(economic growth, unemployment etc.). (Turkish ministry of Finance). The influences of the

crisis are still on the go in especially EU countries (Greece, Portugal, Spain, Italy, Hungary

etc.)

The globalizing world had its first devastating economic recession 1929 and it was followed

by oil crises in 1970 and 1980. however new crises were on the way: European monetary

crisis(1992-1993), Mexico Tequila Crisis (1994-1995), south-east Asia crisis (1997-1998),

Indonesia Crisis (1997), Russia Crisis (1998), Brazil Crisis (1999), and Argentina Crisis

(2002). Recent crises in Turkey are; 4th April, 1994, November 2000, and February 2001

(Koyuncu and Şenses, 2003)

The concept of crisis which badly affects living standards of people and financial crises

definitions and their types were handled. Next, the world financial crisis process which

emerged in mid-2007 but whose effect was felt in 2008 in Turkey, and also known as

mortgage crisis was explained and finally the effects of crisis on Turkish economy and its

reflections were mentioned and the effects mentioned were analyzed econometrically and its

results were assessed.

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2.ECONOMIC CRISIS, DEFINITIONS AND TYPES

2.1.Definition of the Economic Crisis

A great many definitions have been made for economic crisis. Only a few of those will be

given here. “Economic crises can be defined as violent surges which happens beyond an

acceptable change limit in any kind of goods, service, production factor or foreign Exchange

market.” (Kibritçioğlu, 2003) it means “incidents which happen all of a sudden and

unexpectedly in the economy result in quakes in a country’s economy (macro) and firms

(micro)” (Aktan and Şen, 2002) In other words, economic crisis can be stated as an

unexpected and unpredictable state of nervousness which requires quick action, which needs

to be managed well and which threatens the company’s current values, goals and assumptions

by making its prevention and adaptation mechanisms inadequate. (kobifinans, 2010)

“Financial crisis is a nonlinear corruption in which adverse selection and moral risks are at an

advanced level, consequently, financial markets cannot convert funds actively into economic

institutions which have the most productive investment opportunities. (Mishkin, 1996)

2.2. 2008 Process of Global Economic Crisis

Most of the countries were effected by the crisis. In this period there were also less effected

countries(China, Rusia, Brazil etc.). the negative effects of crisis were felt in turkey in the last

quarter of 2008. In this crisis real sector was effected in Turkish economy unlike fiscal sector

crisis in 2001-2002(Global crisis and Turkey, 2009).

The recession in developed countries and sharp falls in the growth rate of developed countries

diminished foreign demand, world export rate has declined since the last quarter of 2008. The

most effected economies were those which based their growth on exports. As a result of the

decline in foreign demand as well as obscurity consumer and real sector reliability declined to

the lowest and resulted in a sharp decrease in domestic demand primarily

investment(Yörükoğlu, 2009).

Figure 1: Selected Macroeconomics Overall Views Of Selected Groups 2002-2011

Sources: The data was created by me taking IMF(World Economic Outlook Database, April 2012).

-15,00

-10,00

-5,00

0,00

5,00

10,00

15,00

20,00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Figure 1.7 Campus status

Figure 1.7 Campus status DI CAD/GDP

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Table 1: Descriptions of variables used in Figure 1

WORLD EG World Real Economic Growth

WORLD TV World Trade Volume

D UN Development Countries Unemployment Rate

D CAD/GDP Development Countries Currnet Account deficit/GDP

DI TV Developing Countries Trade Volume

DI TIV Developing Countries Total Import Volume

DI TXV Developing Countries Total Export Volume

DI CAD/GDP Developing Countries Currnet Account Deficit/GDP

According to the chart above, 12% by volume of global trade in 2009, recorded a 23%

reduction In terms of value.

Apparently the U.S. economy which started the crisis transferred it to EU. US appear to have

got over the crisis. In the EU zone crisis tends to spread. Even though Greece was healed

temporarily countries such as Spain and Portugal are also susceptible.

International credit rating institute(S&P) warned that it would lower 15 EU countries’ ratings

in December 2011, and decreased 9 EU countries’ ratings including France, Austria, Italy on

13 January 2012(Haberturk, 14 Jan. 2012).

So what happened in Turkish economy while all these were taking place in the world?

2.3. Process of 2008 Global Economic Crisis Turkey

Reconstruction, strengthening and durability of Turkish banking sector following 2001 crisis

enabled it to be more resistant to global crisis. Therefore real sector, not the banking sector,

was effected by the recent global crisis. Thus Turkey was less effected by the crisis and got

rid of its negative effects easily. In order to perceive the effects of crisis on Turkish economy,

developments of basic macroeconomic parameters are written below.

Figure 2: General Wiev of Selected Turkey macroeconomics Variables 2002-2011 (% annually)

-20,00

-10,00

0,00

10,00

20,00

30,00

40,00

50,00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EG TI/GDP TS/GDP CPI

TX UNM GGE/GDP CAD/GDP

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Sources: The data was created by me taking IMF(World Economic Outlook Database, April 2012).

Table 2: Descriptions of variables used in Figure 2

Variables Descriptions

EG Economic Growth

TX Total Export

TI/GDP Total Investment /Gross Domestic Product

UNM Unemployment Rate

TS/GDP Total Saving/ Gross Domestic Product

GGE/GDP General Government Expenditures / Gross Domestic Product

CPI Consumer Price Index

CAD/GDP Current Account Deficit / Gross Domestic Product

In figure 2 some annual economic data are provided for 2002-2011 period. According to the

chart, of the economic indicators growth rate, export volume, total savings, total investments

and inflation fell while current account deficit, government expenditures and unemployment

rate increased.

Turkey is the fastest growing economy of Europe in 2010 and in the first quarter of 2011. In

the second quarter of 2011 Turkey reached 8.8% growth rate being the second after China

9.5% in the world. OECD foresees that Turkey will be fastest growing OECD country for

2011-2017 period. What helped Turkey overcome the crisis most is trade Turkey follows

aggressive export policies(cooperating with African and Asia countries) and is shifting its

trade to other places at a time when Europe is in crisis(Çağlayan, 2011).

Turkey’s export reached 114 billion dollars in 2010 rising four times and imports reached

185,5 billion dollars rising 3,5 times in the last decade. In 2011the country’s export was 134

billion 969 million dollars. According to the first 79 months data of 2011 exports were made

to 79 countries/regions (Çağlayan, 2011).

Let’s look into the effects of crisis by checking Turkish economy’s recent data: according to

the chart below Turkey started to feel the recent global crisis in the last quarter of 2008 and

found itself in the middle of the crisis Feb. 2009. Macroeconomic indicators, especially

unemployment rates in 2009, growth rate, ISE as a finance indicator and consumption figures

demonstrate this clearly. Then Turkey continued its economical activities, shifted its export

from Europe to other countries and started to get over effects of the crisis in a very short time

by applying strict fiscal policies. This situation is clear in the next figures.

Table 3: Selected Macroeconomic Indicators of the Global Economy in Crisis and Post-2008

Turkey 2008-2012

Selected

Macroeconomic

Indicators

2008 2009 2010 2011 2012Q1*

Economic Growth % 0,7 -4,8 9,2 8,5

Total Consumption % -0.4 -2.0 5.9 7.2

Unemployment Rate % 10,9 14,0 11,9 9,7 9,1

Istanbul Stock Market

Endex 37587,1871 37489,9219 59440,0334 60724,6953

58226,7269

Credit Volume (Million 114.657.587,4 124.082.398,6 166.330.794,2 231.587.129,9 634.752.560,9

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TL)

Total Export (Million

USD) 132.027.190 102.142.606 113.883.213 134.969.268 34.744.000**

Sources: The data was created by me taking TUIK.

*: Quarter of 2012, while expressing 2008, 2009, 2010 and 2011 year period represents.

**: http://www.tim.org.tr/tr/tim-gundem-8.html (DA:20.04.2012)

3.LITERATURE

Short quotations were made from the crisis studies and given in this section.

Obstfeld and Rogoff (2009), used oil prices, economic growth, international reserves, long

term interest rates, policy interest rate, estate prices(case-shiller index), exchange rate, net

trade figures, current account deficit, the portion of settled investments in GDP, international

investments and foreign deficit while clarifying global imbalances and financial crisis

Gourinchas and Rey (2007), showed econometrically that price arrangements of dollar which

has been held as reserve currency in the last 10 years determined US net export.

Zandi, expressed that low energy costs would greatly contribute to the US economy and

would help development in technology.

Verick and Islam (2010), suggested that the recent global crisis significantly effected

economic growth first, then mixed and the related factors emerged in the markets, freedom of

monetary policies has occurred, global imbalances emerged and financial risks have

increased. In the most recent of them, beyond all these, economic collapse and

unemployment increased and focused on this issue.

Taylor (2009), clarified reactions of inflation and macroeconomic activities that was used by

CMB’s which use interest rate instrument. Especially short-long term interest rate being used:

1. Current interest rate to target interest rate, 2. How far Current economic activities are

from full employment, 3. At what level short long term interest rate should be in full

employment.

Krugman (1999), expressed that at the time of crisis firms and entrepreneurs could provide

growth using foreign capital.

Hayaloğlu and Artan (2011), examined IMF well and tried to make out its role.

Şimşek and Altay (2009), studied fiscal policies applied during global crisis in their survey

and emphasized that. Economy would not recover by only increasing public spending without

foreign sources. And they stated that crisis could only be prevented by studying the effects of

crisis well, recovering the global liquidity congestion, decreasing domestic obscurities,

applying monetary and fiscal policies that are freed from diminishing effects of real sector.

4.DATA SET, METHODOLOGY AND EMPIRICAL RESULTS

4.1.Data Set

Data used for analysis between 2002:01 – 2011:12 monthly closed values for 120

observations from Central Bank of the Republic of Turkey-CBRT-(Electonic Data Delivery

System). Analysis was conducted using E-wievs 5.1 packet program.

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Table 4: Variables Used in Analysis And Descriptions

IPI Industrial Production Index

X Export

ISE Istanbul Stock Exchange Market

M2 Monetary Supply

AGR Agriculture

USD ABD ($)

DUM Dummy variable for month of February 2009

For analysis first of all logarithmic series were obtained by taking logarithm of the indexes

monthly average values and the integration level of logarithmic series were examined.

Whether logarithmic series are stationary or not was studied Augmented Dickey Fuller

(ADF)(Dickey and Fuller, 1981) and Phillips-Perron (PP)( Phillips-Perron, 1988, 1990) tests.

4.2.Methodology

Some pretests need to be carried out so that EKKY-two stage Engle-Granger co-integration

analysis could be made to the least squares method. First selected variables were analyzed for

stationary.

In this survey series stationary was tested with ADF and PP methods. Short and long term

relations between the series were conducted Engle-Granger two stage co-integrations

analysis.

Moreover short term models are obtained when long term equation residuals are added to

series whose differences are taken.

5.EMPIRICAL RESULTS

5.1.Unit-Root Test Results and Evaluations

The stationary of the variables are calculated for the ADF in Table 5.

Table 5: ADF Unit Root Test Results

Variables t-Statistic Critical Values

%1 %5 %10

lnIPI -1.54 [12] -3.49 -2.88 -2.58

lnX -1.94 [2] -3.48 -2.88 -2.58

lnISE -1.45 [1] -3.48 -2.88 -2.57

lnM2 -2.75 [1] -3.48 -2.88 -2.57

lnUSD -1.64 [2] -3.48 -2.88 -2.58

lnAGR -0.07 [12] -3.49 -2.88 -2.58

DUM -10.98 [0] -3.48 -2.88 -2.57

∆IPI -9.44 [11] -3.49 -2.88 -2.58

∆X -13.02 [1] -3.48 -2.88 -2.58

∆ISE -8.95 [0] -3.48 -2.88 -2.57

∆M2 -7.85 [0] -3.48 -2.88 -2.57

∆USD -8.06 [1] -3.48 -2.88 -2.58

∆AGR -4.02 [12] -3.49 -2.88 -2.58


%1 %5 %10

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404

lnIPI -1.66 [12] -4.04 -3.45 -3.15

lnX -2.07 [2] -4.03 -3.44 -3.14

lnISE -1.68 [1] -4.03 -3.44 -3.14

lnM2 -0.62 [1] -4.03 -3.44 -3.14

lnUSD -1.78 [2] -4.03 -3.44 -3.14

lnAGR -2.21 [12] -4.04 -3.45 -3.15

DUM -10.91 [0] -4.03 -3.44 -3.14

∆IPI -9.35 [11] -4.04 -3.45 -3.15

∆X -13.10 [1] -4.03 -3.44 -3.14

∆ISE -8.98 [0] -4.03 -3.44 -3.14

∆M2 -8.49 [0] -4.03 -3.44 -3.14

∆USD -8.08 [1] -4.03 -3.44 -3.14

∆AGR -4.14 [12] -4.04 -3.45 -3.15

Note: MacKinnon (1996), Δ symbol indicates that the variables taken the first

difference. In values [ ]; The optimum length of lag is determined (Schwarz

Information Criterion: SC).

As shown in Table 5, the series has a unit root at level of first-degree differences, but

that is not a unit root at a significance level of 5%. It appeares to be stationary. In other

words, the level of alignment of the series I (1) is.

PP test results are given in Table 6.

Table 6: PP Unit-Root Test Results


%1 %5 %10

lnIPI -2.68 [7] -3.48

-2.88 -2.57

lnX -1.84 [21] -3.48

-2.88 -2.58

lnISE -1.20 [6] -3.48

-2.88 -2.57

lnM2 -3.22 [2] -3.48 -2.88 -2.57

lnUSD -1.78 [1] -3.48

-2.88 -2.57

lnAGR -3.07 [2] -3.48 -2.88 -2.57

DUM -10.98 [0] -3.48

-2.88 -2.57

∆IPI -23.06 [26] -3.48 -2.88 -2.57

∆X -93.94 [24] -3.48 -2.88 -2.58

∆ISE -30.15 [14] -3.48 -2.88 -2.58

∆M2 -39.86 [33] -3.48 -2.88 -2.58

∆USD -50.43 [96] -3.48 -2.88 -2.58

∆AGR -30.03 [7] -3.48 -2.88 -2.58


%1 %5 %10

lnIPI -4.01 [4] -4.03 -3.44 -3.11

lnX -3.83 [4] -4.03 -3.44 -3.14

lnISE -1.83 [6] -4.03 -3.44 -3.14

lnM2 -0.68 [2] -4.03 -3.44 -3.14

lnUSD -1.95 [1] -4.03 -3.44 -3.14

lnAGR -3.97 [2] -4.03 -3.44 -3.14

DUM -10.91 [0] -4.03 -3.44 -3.14

∆IPI -25.22 [28] -4.03 -3.44 -3.14

∆X -94.64 [24] -4.03 -3.44 -3.14

∆ISE -30.52 [14] -4.03 -3.44 -3.14

∆M2 -40.31 [34] -4.03 -3.44 -3.14

∆USD -56.72 [102] -4.03 -3.44 -3.14

∆AGR -29.87 [7] -4.03 -3.44 -3.14

Note: MacKinnon (1996), Δ symbol indicates that the variables taken the first

difference. In values [ ]; Barlett-Kernel used as a prediction method is the optimum

length of lag.

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As shown in Table 6 that the series has a unit root, but the first degree level at 5%

significance level differences appear to be stationary, ie there is a unit root. In other words,

the level of alignment of the series I (1) is.

After levels of integration of series is determined I (1) the error terms of the series

obtained by regression of the series I (0) is expected to be (Brooks, 2008).

When ADF test is applied for a series of error terms, the ADF test statistic is -

7.288124, given a series at a critical value of 1% does not have 5% significance level a unit

root is seen in Table 7.

Table 7: The Regression error terms Unit Root Test

The length of lag: 0 Critical

Values t- St. Prob.

ADF Test Statistical -7.288124 0.0000

Test Critical Values 1% level -3.48

5.2. Long-Term Analysis

Long-term model for the series included in analysis was estimated and the results are

given Table 8.

Table 8: Long-Term Analysis

Variables C AGR USD ISE X M2 DUM

Statistical Values -3.45

[-8.71]

0.04

[4.92]

0.277

[4.22]

0.164

[6.83]

0.428

[12.12]

-0.166

[-5.20]

-0.148

[-2.95]

Table 9: Long-Term Analysis Statistic

R2 CRDWAC CRDWTAB Fist

0.93 1.25 0.511 287.78

In Table 9 the descriptive statistics for the analysis of long-term value of CRDWAC

CRDWTAB, in Table 10, the ADFAC value of long-term residuals are significant because of

the 5% level of co-integration analysis of long-term relationship between the series.

In table 8, long term analysis crisis effected Turkish economy in a negative manner and its

statistically significant. Export is the most remarkable variable which contribute to the

country’ economy. This rate is statistically significant coefficient and 0,428. The other

variables that contributed to the growth of Turkish economy are ISE, USD and AGR and they

are statistically significant. Supply of money effects economic growth negatively.

5.3 Testing for Co-Integration

Residuals series were composed from long term analysis of countries and ADF and CRDW

tests were applied to the series.

Table 10: The Relationship Co-Integration

ADFAC ADFTA CRDWAC DWTA Conclusion

VARIABLES -7.28 -3.77 1.25 0.511 Yes

Note: Critical values, Engle-Granger, 1987, taking in Table II. The calculated test

statistics, in absolute value, the table is larger than the critical values, the existence of

co-integration relationship between the series makes decisions.

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In table 10, its clear that there is a co-integration relation between Turkey

macroeconomic series. Since a co-integration relation is found its decided that short term

analysis could be made.

5.4. The Short Term Analysis

Short-term error correction model and the results are given in Table 11.

Table 11: The Short Term Analysis

Variables ECt-1 C ∆AGR ∆USD ∆ISE ∆X ∆M2

Statistical

Values

-0.531

[-5.49]

-0.002

[-0.38]

0.032

[3.23]

0.175

[1.24]

-0.020

[-0.31]

0.495

[12.12]

-0.110

[0.40]

Table 12: The Short Term Analysis

R2 DW Fst LMols WHols Constant

Variables 0.75 1.84 48.48 0.75 0.06 -0.002

Note: LMols: Breusch-Godfrey Serial Correlation LM test probability values, WHols: White

Heteroskedasticity test probability refers to the value. These values are less than 0.05 is large, the

model is considered Note a problem.

When the results in table 12 are examined, its observed that error corrections term

coefficients in the short term are negative and statistically significant. Therefore, deviations

occurring in the short term between series which move together in the long run are removed

and series approach their long term balance value again. The variable which effects economic

growth n the short term is export series with 0,49 coefficient and in a positive way.

Agriculture an exports effect economic growth in a positive way and its significant. Effect of

global economic crisis is negative and statistically significant.

6.CONCLUSION

In this survey, the effects of 2008 global economic crisis on the selected

macroeconomic variables in Turkey was studied using 2002-2011 period monthly data. Crisis

was represented in analysis with a dummy variable. In the long term analysis it was proved

empirically that in Turkish economy agriculture, exchange rates, exports effected economy in

a positive way while money supply and 2008 global crisis effected negatively. All of the

variables in the analysis are significant. While exports effected economic growth in a positive

way as expected the effect of crisis on Turkish economy is negative.

In the short term analysis; error correction terms coefficients is negative and statistically

significant. Therefore, deviations occurring in the short term between series which move

together in the long run are removed and series approach their long term balance value again.

In other words the effect of a shock on one of the variables disappear in the long run.

According to empirical results obtained; the biggest contribution to Turkish economy was

made by export and agriculture and recent economic crisis had a negative effect on its

growth. Because, crisis in Turkey lasted relatively short and precautions were effective.

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Natural Resources and Economical Growth in Central Asia and Caucasus

Filiz Kadi

Fatih University Economics Department

Abstract

As it is known, all former Soviet states faced serious economical and social problems after

they gained independency. At this stage of history, these countries took into their hands

responsibilities for self-development. To overcome their problems, they tried to find and

imply suitable policy in all spheres of social life. In order to strengthen their economy, they

had to look their capability and capacity, and use them in the right direction. However, many

factors such as cut off the link between the main provider of the Soviet Union, Russia and

other republics, problems in management, the lack of experience in market economy brought

to serious problems in these countries. As a result, production process was seriously damaged

in all sectors of their economy. Consequently, without being able to manufacture products,

these countries began to focus on the raw materials, not considering effects of economic

dependency on natural recourses.

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In the proposed paper, the authors will make an attempt to explore natural resources and

economical growth in Central Asia and Caucasus and analyze positive and negative effects of

natural resources in these countries.

Keyterms: Natural recourses, Economical growth, Central Asia, Caucasus, etc.

1.Natural Resource and Economic Growth

There is a curious phenomenon that economists call the resource curse - so named

because, on average, countries with large endowments of natural resources perform worse

than countries that are less well endowed. Yet some countries with abundant natural

resources do perform better than others, and some have done well.53

The idea that natural resources might be more an economic curse than a blessing began to

emerge in the 1980s. In this light, the term resource curse thesis was first used by Richard

Auty in 1993 to describe how countries rich in natural resources were unable to use that

wealth to boost their economies and how, counter-intuitively, these countries had lower

economic growth than countries without an abundance of natural resources.54 Numerous

studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between

natural resource abundance and poor economic growth.55 These disconnect between natural

resource wealth and economic growth can be seen by looking at an example from the oil-

producing countries. From 1965-1998, in the OPEC countries, gross national product per

capita growth decreased on average by 1.3%, while in the rest of the developing world, per

capita growth was on average 2.2%.56 Some argue that financial flows from Foreign Aid can

provoke effects that are similar to the Resource Curse.57

Economists put forward three reasons for the dismal performance of some richly endowed

countries:

• First, the prospect of riches orients official efforts to seizing a larger share of the pie, rather

than creating a larger pie. The result of this wealth grab is often war. At other times simple

rent-seeking behavior by officials, aided and abetted by outsiders, is the outcome. It is

53 Joseph E. StiglitzThe Resource Curse Revisite, http://www.project-

syndicate.org/commentary/stiglitz48

54 Auty, Richard M. (1993). Sustaining Development in Mineral Economies: The Resource Curse

Thesis. London: Routledge.

55 Sachs, Jeffrey D., Warner, Andrew M. (1995). Natural resource abundance and economic growth.

NBER Working Paper 5398

56 Gylfason, Thorvaldur (2000). Natural resources, education and economic development. CEPR

Discussion Paper 2594.

57 Djankov, Montalvo, Reynal-Querol (2005). The curse of aid.

http://en.wikipedia.org/wiki/Jeffrey_Sachs

http://en.wikipedia.org/wiki/OPEC

http://en.wikipedia.org/wiki/Gross_national_product#Gross_National_Product

http://en.wikipedia.org/wiki/Per_capita

http://en.wikipedia.org/wiki/Per_capita

http://en.wikipedia.org/wiki/Foreign_Aid

http://www.project-syndicate.org/contributor/184

http://ideas.repec.org/p/nbr/nberwo/5398.html

http://www.econ.upf.edu/docs/papers/downloads/870.pdf

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cheaper to bribe a government to provide resources at below-market prices than to invest and

develop an industry, so it is no surprise that some firms succumb to this temptation.

• Second, natural resource prices are volatile, and managing this volatility is hard. Lenders

provide money when times are good, but want their money back when, say, energy prices

plummet. (As the old adage has it, banks only like to lend to those who do not need money.)

Economic activity is thus even more volatile than commodity prices, and much of the gains

made in a boom unravel in the bust that follows.

• Third, oil and other natural resources, while perhaps a source of wealth, do not create jobs

by themselves, and unfortunately, they often crowd out other economic sectors. For example,

an inflow of oil money often leads to currency appreciation - a phenomenon called the Dutch

Disease. 58

The former body of literature is primarily concerned with the negative effects of oil resource

wealth on a developing country’s domestic economic policies and socio-political cleavages

once the inflow of rents has already begun.59 The latter body of literature focuses on political

determinants of economic growth in developing countries within the constraints of the

international system (Bates, 1981; Haggard, 1990). Natural resource production typically

generates high economic rents. Gelb [1988], in particular, stresses that governments typically

earned most of the rents from natural resource exploitation. Others argue that natural

resource abundance inevitably leads to greater corruption and inefficient bureaucracies; or

that high rents distract governments from investing in the ability to produce growth

supporting public goods, such as infrastructure or legal codes.60

More recently, Collier and Hoffler (2002) have shown that natural resources considerably

increase the chances of civil conflict in a country. According to their estimates, the effect of

natural resources on conflict is strong and non-linear. A country that has no natural resources

faces a probability of civil conflict of 0.5 percent, whereas a country with natural resources-

to-GDP share of 26 percent faces a probability of 23 percent. Civil conflict, of course, is an

extreme manifestation of institutional collapse and the work of Collier and Hoffler (2002) is

therefore suggestive of a role for natural resources in affecting institutional quality more

generally.61

2. Economic Structure of Central Asia Countries and Azerbaijan

58 Joseph E. Stiglitz The Resource Curse Revisite, http://www.project-


59 Belawi and Luciani, 1987; Chaudhry, 1997; Gelb, 1988; and Karl, 1997

60 Jeffrey D. Sachs and Andrew M. Warner, NATURAL RESOURCE ABUNDANCE AND ECONOMIC

GROWTH, NBER working paper

61 Xavier Sala-i-Martin Arvind Subramania, Addressing the Natural Resource Curse: An Illustration

from Nigeria, Discussion Paper #:0203-15 May 2003, Newyork


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After the independency of central Asian countries, there appeared many serious problems in

social as well as in economical spheres. As it is known, it takes too much time and afford to

rebuild all relations and to start social changes after the old system existing for a long time

during the period of entering to market economy62; thus in transition economies especially

transformation of the government system becomes one of the most difficult problems.

Moreover, if one considers the fact, that policy makers realizing this transition came from the

old socialist government traditions 63, the burdens of transition period can be better

understood.

Administration of these transition economies expected to face negative conditions of this

process in the early years of their independency only for short period of time. However,

negative sides of economy show that their optimistic expectations were not realized in

practice. Firstly, difficulties occurred in the production process brought many other problems.

The main of the problems was production shrinks and reduction in GDP depending on it.

Many of these countries could not reach GDP level they had before the independency.

Table 1. GDP Growth Rate (%)

1992 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Azebaijan -22,6 -11,8 11,1 9,9 10,5 11,2 10,1 26,4 34,5 25 10,8 9,3 5

Kazakhstan -5.3 -8,2 9.8 13.5 9.8 9.3 9.6 9.7 10.7 8.9 3.3 1.2 7.3

Uzbekistan -11,2 -0,9 3.8 4.2 4 4.2 7.7 7 7.3 9.5 9 8.1 8.5

Turkmenistan -5,3 -7,2 18.5 20.4 15.8 17.1 17.2 13 11.4 11.8 14.7 6.1 9.2

Source: World Bank Development Indicators CD-2012,

Due to the economical dependency of these countries, during the transition period they

experienced big depression between 1989 and 1996 like the capitalism lived in 1929-1933. If

we consider the first decade of the transition period, in general losses appeared in production

for 40-60% on average. In the transition economy, the production showed U-shape because

of the reduction in the production process and results of the stabilization policy effects. 64

62 TİKA, Kırgızistan Ülke Raporu, Türk İşbirliği ve Kalkınma Ajansı Yayınları, Ankara, 1996, N0:31, p.

19.

63 Michael BRUNO: Kriz, İstikrar Programları ve Ekonomik Reform. Çev. Zülfü Dicleli, İstanbul, 1994,

p. 202.

64 Emsen, Ömer Selçuk ve Değer, Kemal. Geçiş Ekonomileri ve Türkiye’de Doğrudan Yabancı

Sermayenin Dinamikleri, Atatürk Üniversitesi Yayınları, Erzurum, 2005. p. 87.

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3. Natural Resources Of Central Asian Countries and Azerbaijan

Azerbaijan, Turkmenistan, Uzbekistan and Kazakhstan have big reserve in term of petroleum

and natural gas. 28 giant petroleum and gas sources are in these countries among the world

there are 509. These four countries have 189 trillion fitkup (5 billion meter kup which equals

31 billion barrels petroleum) total natural gas reserve and 13 billion barrel total petroleum

reserve. In term of oil, Azerbaijan takes the first place with 8 billion barrels reserve,

Kazakhstan takes the second place with 2.9 billion barrels reserve, Turkmenistan takes third

place with 2 billion barrels reserve and Uzbekistan takes the last place with 69 million barrels

reserve. In term of natural gas, Turkmenistan has first place with 129 trillion fitkup reserve

(equals 21 billion barrels petroleum), Uzbekistan has second place with 54 trillion fitkup

reserve(equals 9 billion barrels petroleum) , Azerbaijan 4 trillion ftkup reserve (equals 697

million barrels petroleum) and Kazakhstan has the last place with 1 trillion fitkup

reserve(equals 181 million barrels petroleum).65 The last research showed Kazakhstan

reserves are higher than others both petroleum and natural gas. Tables below show new

report.

Table 2. Countries Petroleum Reserves

Country Total Approved

Reserve (Billion

tons)

Share in The

World Reserve

%

Total

production

(million tons)

Share in World

production

Azerbaijan 1.0 0.6 15.7 % 0.4

Kazakhstan 5.4 3.3 60.5 % 1.6

Uzbekistan 0.1 0.05 6.6 % 0.2

Turkmenistan 0.1 0.05 10.1 %0.3

Source: Yeni Bir Ekonomik Güç Olarak Avrasya, DEİK, Ekim 2005

Table 3. Countries Natural Gas Reserves

65 Sadettin Korkmaz, DOĞAL KAYNAKLAR AÇISINDAN YENİ TÜRK DEVLETLERİ Jeoloji Muhendisliği s,

40, 20-24, 1992. p. 20

http://www.jmo.org.tr/resimler/ekler/3aeec875c479e55_ek.pdf?dergi=JEOLOJ%C4%B0%20M%C3%

9CHEND%C4%B0SL%C4%B0%C4%9E%C4%B0%20DERG%C4%B0S%C4%B0

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Country Total Approved

Reserve (trillion

m3)

Share in The

World Reserve

%

Total

production

(billion tons)

Share in World

production

Azerbaijan 48.4 % 0.8 4.6 %0.2

Kazakhstan 105.9 %1.7 18.5 % 0.7

Uzbekistan 65.7 % 1.0 55.8 % 2.1

Turkmenistan 102.4 % 1.6 54.6 % 2.0

Source: Yeni Bir Ekonomik Güç Olarak Avrasya, DEİK, Ekim 2005

Table 4. Exports of goods and services (% of GDP)

Source: World Bank Database 2012

Table 5- Fuel exports (% of merchandise exports)

Source: World Bank Database 2012

Natural resources take significant share in these countries export. In table 4 shows the natural

resources share as a percentage in their export. All countries export mostly depends on

natural resources.

1991 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Azerbaijan 45.6 27.9 39 40.9 42.7 42 48.7 62.9 66.5 68.1 65.7 51.5 55.1

Kazakhstan

38.9 56.6 45.8 46.9 48.4 52.5 53.5 51.1 49.4 57.2 42. 43.9

Turkmenistan 38.7 83.9 95.5 81.3 69.04 62.3 61.6 65.02 73.09 36.7 71.1 51.03 51.7

Uzbekistan 35.2 27.9 24.5 28.07 30.8 37.2 40.2 37.8 37.1 39.6 43.5 36.3 31.4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Azerbaijan 85.08 91.3 88.9 86.01 82.2 76.7 84.5 81.3 97.08 92.8 94.5

Kazakhstan 53.8 56.7 59.05 61.8 64.8 70.6 69.4 66.5 53.8 56.7 59.05

Turkmenistan 81.0 na na na na na na na na na na

Uzbekistan na na na na na na na na na na na

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Due to the recent oil price gains, the two countries’ exports have increased sharply.

Azerbaijan’s exports increased to more than 60% of GDP in 2006, up from 36% in 2003,

with oil exports ($12 billion in 2006) making up more than 90% of total exports. While

Kazakhstan’s oil dependency is less pronounced, oil exports ($24.6 billion in 2006) still

accounted for about 60% of total exports. Additional oil export receipts (measured as an

increase in oil exports between 2003 and 2006) reached 49% (Azerbaijan) and 24%

(Kazakhstan) of their respective GDP in 2006. Kazakhstan saved more than 60% of the

increased oil export receipts in its oil fund, while Azerbaijan saved only 12%66

Graph 1- World Nominal Oil Price Chronology: 1970-2011

Source: Federal Reserve Bank of St. Louis.

http://research.stlouisfed.org/fred2/series/OILPRICE/downloaddata?cid=98

Graph 1 shows oil price changing since 1970 to 2006. In this period petroleum price

shows fluctuation. Except at the beginning of 1980’s, the oil price fluctuated between 10$

and 30$ in 1985 – 2000 years. After 2000, oil price increased sharply from 23$ to 73$ in

2006. This increase still continues, oil price was 92.93$ on January of 2008, it exceeded even

130$, today67

oil price is 92,30 $.

66 Norio Usui, How Effective are Oil Funds? Managing Resource Windfalls in Azerbaijan and Kazakhstan, ERD

Policy Brief Series No. 50, December 2007. p. 3

67 16.05.2012


http://www.eia.doe.gov/cabs/AOMC/images/chron_apr2007.xls

http://www.eia.doe.gov/cabs/AOMC/images/chron_apr2007.xls

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Table 6 -Oil Price in the Last decade

Years Price

2000 30.298

2001 25.924

2002 26.098

2003 31.140

200 41.438

2005 56.466

2006 66.103

2007 72.363

2008 99.568

2009 61.693

2010 79.428

2011 95.077

http://research.stlouisfed.org/fred2/series/OILPRICE/downloaddata

Central Asian countries have large reserves of oil. The world wide very high prices of

oil generates huge amount of profit for these countries.

For example Kazakhstan's growing petroleum industry account for roughly 30

percent of the country’s GDP and over half of its export revenues. In an effort to reduce

Kazakhstan's exposure to price fluctuations for energy and commodities exports, the

government created the National Oil Fund of Kazakhstan.68

In order to manage their oil income effectively these countries established stability

funds. They invest some oil revenue to these funds. For example, in Azerbaijan, cumulative

budget surpluses between 2003 and 2006 reached 2.1% of 2006 GDP. During the same

period, assets in SOFAR increased by 5.7% of 2006 GDP, but, at the same time, the

government borrowed money worth 4% of 2006 GDP from external sources (Figure 6). It is

clearly inconsistent to build up funds in SOFAR and, on the other hand, borrow abroad.

Given the relatively low return to investments from SOFAR (at around 3–4% in nominal

dollar terms during the past few years), the government bore financial costs to fill the gap

68

Kazakhstan Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal


http://www.nationalbank.kz/?uid=C2E445B2-802C-E8FB-321519953624836A&docid=180

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between the interest rate for external borrowing and investment returns to SOFAR. In

contrast, Kazakhstan saved most of the cumulative budget surpluses in NFRK (15% of 2006

GDP), and paid back external debts not only to smooth out public expenditures but also to

reduce future debt obligations (1.6% of 2006 GDP).69

However, the growth of profit should be effectively managed so that the economy

doesn’t suffer. On the other hand, in case of price falls it is important to be prepared to

prevent or diminish the negative impact on the economy. Because very high dependency of

economy on this resource means high risks. The economy of Azerbaijan for instance, within

34.5% growth rate of economy in 2006 the growth of agriculture was only 0.9 %. And the

other important point is that agricultural production growth has slowed in last years and it

become negative in 2010. The growth rate of agriculture in 2000 which was 19.5%, in 2001

decreased to 11.1%, in 2002 to 6.4% and in 2010 it was -2.2 %. The development of sectors

other than oil sector has slowed in other countries too. For Kazakhstan the same process

migth said too. For example the growth rate of agriculture in 2001 was 17.1 while it grew -

11.6 in 2010.

As known, this high income if can not be managed effectively might affect to the economy

negatively.

Table 7- Growth of Output annual change, %

Azerbaijan 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture -7 19.5 11.1 6.4 5.6 5 7.5 0.9 4 6.1 3.5 -2.2

Industry -13.3 -13.2 8.2 14.7 12.5 11.6 43.4 49. 32.8 9.9 10.5 4.4

Manufacturing -14.3 -42.1 4.1 8.2 14 10.5 16.3 9 10.2 7.1 -12.6

Kazakhstan

Agriculture -24.3 -3.2 17.1 3.2 2.2 -0.1 7.1 6 8.9 -6.2 13.2 -11.6

Industry -14.2 15.2 15.4 12 9.2 11.2 10.6 13.4 8.4 1.9 0.4 8.3

Manufacturing … …. 13.7 7.6 7.9 10.1 7.1 7.9 7.6 -3 -2.8

Turkmenistan

Agriculture -7 17 23 0.095 0.099 19.3 20.3 24 … … … …

Industry -6 24.4 17.3 13.2 16.2 25.8 21.8 29.7 … 24.4 17.3 …


Policy Brief Series No. 50, December 2007. p. 5

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Manufacturing na na na na na na na na na na na na

Uzbekistan

Agriculture 2.0 3.2 4.1 6 6.8 10.1 6.2 6.2 6.1 4.5 5.7 6.1

Industry -5.1 1.8 2.9 3.4 3.1 5.0 4.9 4.5 6.6 6.8 4.1 8.3

Manufacturing -1.3 4.9 0.5 1.0 2 2 2 3.02 3.9 4 6

Sources: Worldbank database 2012

The table below shows the GDP indicators for various sectors of the economy.

According to the table the share of agriculture in GDP is small in all countries. Especially in

Kazakhstan economy the share of agriculture in 1999 was 12.8 while in 2005 it decreased to

6.7. The share of industry grew from 31.3 to 42.4. In Kazakhstan’s sectoral base the largest

speed realized in service sector. It increased form 33.4 to 55.970

.

The table below shows the GDP indicators for various sectors of the economy.

According to the table the growth rate of agriculture in GDP is small in all countries.

Especially in Kazakhstan economy the growth rate of agriculture in 2001 was 17.1 while it

grew -11.6 in 2010. The share of manufacturing grew from 32.6 to 37.6. In Kazakhstan’s

sectoral base the largest speed realized in service sector. It increased form 33.4 to 55.9.

70

www.adb.org

Azerbaijan 1991 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Agriculture 32.3 27.2 17.1 16.1 15.1 13.4 11.8 9.8 7.5 7.0 5.9 6.6 5.7

Industry 31.3 33.5 45.3 47.1 50.1 52.5 54.7 63.5 68.7 68.4 70.2 61.08 64.7

Manufacturing 17.6 12.5 5.6 6.7 8.07 9.3 8.9 7.01 6.1 4.08 5.04 5.9 5.8

Kazakhstan

Agriculture na 12.8 8.6 9.3 8.6 8.4 7.5 6.7 5.8 6.09 5.7 6.4 4.8

Industry na 31.3 40.4 38.8 38.5 37.6 37.6 40.09 42.1 40.6 43.2 40.2 42.4

Manufacturing na 15.2 17.6 17.6 15.5 15.2 14.1 12.8 12.4 12.3 12.6 11.3 13.1

Uzbekistan

Agriculture 32.9 32.2 34.3 34 34.2 33.09 30.7 27.9 26.1 23.9 21.3 19.5 19.5

Industry 33.2 27.7 23.1 22.6 22.0 23.4 25.9 23.1 27.4 32.0 30.7 33.1 35.4

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Table 8- Structure of Output % of GDP

Sources: worldbank database 2012

Likewise in Azerbaijan’s economy the share of agriculture decreased from 32.3 to 5.7;

the manufacturing has also slowed down, while the share of industry increased from 31.3to

64.7. In Uzbekistan the share of industry sector increased, but the share of agriculture

decreased. This little decrease becomes vital when in the economy of Uzbekistan the

production of cotton and its export is taken into consideration.

In Turkmenistan the share of industry sector increased, but the share of manufacturing

decreased. Due to the problem of acquiring data for the last years makes it difficult to

compare the recent changes.

Table 9 – Unemployment rate in 2008

Country Rate

Azerbaijan 6,1

Kazakhstan 6,6 (2009 year)

Uzbekistan 3

Turkmenistan 10

Source: http://www.cenimar.com/factbook/trend.jsp?tickerBase=W_LABU_&countryCode=AJ

World development 2012

The direct employment impact of the oil boom is limited. However in Kazakhstan,

Azerbaijan and Turkmenistan unemployment rate is relatively higher.

Table 10– Poverty rate ( % population )

Country Rate

Azerbaijan 49

Manufacturing … 11.8 9.4 9.4 9.1 9.2 10.1 9.09 10.7 12.5 12 13.2 8.9

Turkmenistan

Agriculture 32.3 17.1 24.3 24.3 22.01 20.2 19.4 18.8 17.4 12.3 12 12 12

Industry 30.9 62.6 44.3 44.2 42.3 41.2 40.1 37.6 36.2 53.7 54 54 54

Manufacturing n.a 40.4 10.6 14.6 15.2 18.5 21.6 na na na na na na

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Kazakhstan 35

Uzbekistan 28

Turkmenistan n.a.

Source: The little Data Book 2006 The World Bank.

In countries with increasing income the level of poverty is rather high. This level in

provincial areas in comparison to urban areas is higher. For example, in all of Kazakhstan’s

oblasts the poverty headcount is higher in urban areas than in rural areas, but the rural-urban

difference is especially pronounced in the oil-producing oblasts, where the poverty headcount

is two to three times higher in urban compared to rural areas. In the oil-producing regions,

cities may benefit from oil rents, e.g. in Mangistau oblast the town of Aktau has a poverty

headcount of 18% which is well below the regional average of 40%. At the narrower

geographical level, producing oil in a rayon is not a guarantee of lower poverty. In the three

oblasts mixing oil-producing and non-oil-producing rayons (Aktöbe, Kyzylorda and West

Kazakhstan), only four out of ten rural oil-producing rayons experience less poverty than the

regional average poverty headcount (Ivashenko, 2004).71

The high rate of poverty suggests that the income from oil is not distributed fairly and

equally. When we look at the Gini coefficient it can seen unfair income distribution.

Table 11. Gini coefficient in countries, 1988-2001

Country 1988 2001

Azerbaijan 34.7 36.5

Kazakhstan 25.7 31.3

Uzbekistan 25.0 27.0 (2000)

Turkmenistan 26.4 40.8 (1998)

Source: World Bank, Global Poverty Monitoring web site, < http://www.worldbank.org/research/povmonitor/

4.CONCLUSION

The governments of resource-rich Asian countries need to find a right balance

between fulfilling social and infrastructure development needs (by spending oil revenues),

maintaining macroeconomic stability (by sterilizing oil revenues), and saving part of oil

wealth for future generations (by saving oil revenues). Policymakers need to pay close

71

Richard PomfretWILL OIL BE A BLESSING OR A CURSE FOR KAZAKHSTAN?

http://www.economics.adelaide.edu.au/research/wpapers/

http://www.worldbank.org/research/povmonitor/

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attention to the effects of higher public spending on the real exchange rate and

macroeconomic stability, and should

make the best strategic use of windfall gains for achieving long term development goals.

Transparent management of oil revenues is an indispensable requirement to make sure the

money is well spent.72

The development of economy in sectors other than oil and gas requires an increase of

investment in the sectors which can increase the rate of employment. The growth of

investment in other sectors will prevent and diminish the possible crisis’ negative effects and

its depth in case of price falls.

Undoubtedly, the money gained form rich natural resources should be used by the

countries to extend the contribution of processing of natural resources, thus facilitate the

growth of capital investment. As a result, a country instead of selling natural resources will

improve in processing of such resources and with the employment opportunities in the first

place the contribution level of the country will impressively develop.

On the other hand, the recent increase in the food prices on the international arena

forces these countries to reconsider their agricultural policies. Except for Turkmenistan,

potential of other countries should be utilized to increase the contribution of agriculture to the

economy by those facilities that will solve urbanization problems and stimulate the use of

labor force. This will positively impact the employment rate and contribute to the social-

economic development. Therefore, a fair distribution of income and decrease of poverty rate

will be achieved.

REFERENCES

Auty, Richard M. (1993). Sustaining Development in Mineral Economies: The Resource

Curse Thesis. London: Routledge.

Belawi and Luciani, 1987; Chaudhry, 1997; Gelb, 1988; and Karl, 1997

Deik.org.

Djankov, Montalvo, Reynal-Querol (2005). The curse of aid.

Emsen, Ömer Selçuk ve Değer, Kemal. Geçiş Ekonomileri ve Türkiye’de Doğrudan Yabancı

Sermayenin Dinamikleri, Atatürk Üniversitesi Yayınları, Erzurum, 2005.


Policy Brief Series No. 50, December 2007. p. 11.

http://www.econ.upf.edu/docs/papers/downloads/870.pdf

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Gylfason, Thorvaldur (2000). Natural resources, education and economic development.

CEPR Discussion Paper 2594.

Jeffrey D. Sachs and Andrew M. Warner, NATURAL RESOURCE ABUNDANCE AND

ECONOMIC GROWTH, NBER working paper

Joseph E. Stiglitz The Resource Curse Revisite, http://www.project-


Kazakhstan Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal

Michael BRUNO: Kriz, İstikrar Programları ve Ekonomik Reform. Çev. Zülfü Dicleli,

İstanbul, 1994, s. 202.

Norio Usui, How Effective are Oil Funds? Managing Resource Windfalls in Azerbaijan and

Kazakhstan, ERD Policy Brief Series No. 50, December 2007. p. 3

Richard PomfretWILL OIL BE A BLESSING OR A CURSE FOR KAZAKHSTAN?

http://www.economics.adelaide.edu.au/research/wpapers/

Sachs, Jeffrey D., Warner, Andrew M. (1995). Natural resource abundance and economic

growth. NBER Working Paper 5398

Sadettin Korkmaz, DOĞAL KAYNAKLAR AcISINDAN YENİ TЬRK DEVLETLERİ Jeoloji

Muhendisliği s, 40, 20-24, 1992. p. 20

http://www.jmo.org.tr/resimler/ekler/3aeec875c479e55_ek.pdf?dergi=JEOLOJ%C4%B0%20M%C3

%9CHEND%C4%B0SL%C4%B0%C4%9E%C4%B0%20DERG%C4%B0S%C4%B0

TİKA, Kırgızistan Ülke Raporu, Türk İşbirliği ve Kalkınma Ajansı Yayınları, Ankara, 1996,

N0:31, s. 19.

Xavier Sala-i-Martin Arvind Subramania, Addressing the Natural Resource Curse: An

Illustration from Nigeria, Discussion Paper #:0203-15 May 2003, Newyork


Source: Federal Reserve Bank of St. Louis.



http://www.project-syndicate.org/commentary/stiglitz48

http://www.project-syndicate.org/commentary/stiglitz48

http://ideas.repec.org/p/nbr/nberwo/5398.html



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World bank database 2012

Economic Growth And Financial Indicators Connection

Mustafa Öztürk, Osman Kadi, Filiz Kadi

Fatih Üniversitesi, Fatih Üniversitesi 34500 Büyükçekmece/İstanbul

E-mails: [email protected],[email protected],[email protected]

Abstract

Real macro economic factors have always been accepted as main determinants of

nations’ economies’. However, the development of financial markets and the rise of financial

activities in globalizing world economies have led financial actors to affect nations’

economies’ more and more everyday.

With the rise of liberalization process after 1980, the influences of financial

developments rised in Turkey, too. In today’s world, the effects of financial factors on

Turkish economy is more evident than any time.

In this study, with the aim of detecting the effects of financial factors on Turkish

economy, the relations between financial data as Exchange rates, interest rates and IMKB

100 index and economic growth has been analysed.

Keywords: financial data, exchange rates, interest rates, economic growth, Vector Auto

Regression Model (V.A.R).

1.INTRODUCTION

The relation between financial developments and economic growth has been frequently

debated subject lately. These debates mostly focus on the case that financial developments

affect economic growth or economic growth affects financial developments.

In today’s economies in which financial markets gradually enlarge and financial instruments

gradually increase, it is observed that financial improvements influence economic growth.

Assets’ prices are formed and change under the influence of financial developments; financial

developments determine consumption and investment expenses in a significant amount.

In this study, financial macroeconomic data and economic growth relation has been

analysed by dividing the onservations between 1998-2010 into quarters. After a literature

review of the subject, causality relation between financial data and economic growth has been

analysed by granger causality test. After that, vector auto regression (VAR) model has been

applied. Lastly, effect-reaction functions have been deducted by the help of correctness tests.




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2. Empirical Studies

Harvey (1998) studied the relation between interest rates and maturity form and consumption

expense. Estrella ve Hardouvelis (1991) analysed the one between bond yields and growth.

Cozier ve Tkacz studied the amount of impact that interest rates in Canada have on GSYİH.

Mishkin (1995) and Bernanke and Gertler (1995) asserted that the causality from interest

rates to real production is dubious. Kamin and Rogers (2000) studied the relation between

national income and exchange rate. Çetintaş and Barışık (2003) analysed the relation between

banks, capital market and economic growth.

3. Data Set and Method

In today’s Turkey which has adopted liberal politics, it has occurred as a subject of debate

that the nation has left open to foreign shocks after the elimination of restraints beyond

foreign capital. Besides, it is asserted that a nation having savings gap needs foreign capital

for financing its expenses, mainly investment expenses and otherwise a crisis may occur.

With this aim, the years between 1998 and 2009 have been analysed in three-month segments

and macro economic data has been analysed with capital movements towards Turkey. After

detecting the crisis level that is caused by corruption of macro data, whether capital

movements are influential on these corruptions or not and which macro economic data at

which amount is influenced by capital movements have been searched for. Analyses eviews

5.0 packet programmes and VAR model were used for that.

Table. 3. 1 Macro Economic Variables Used in the Model

Variables Code of Variable Type Definition

Growth Rate (GSYİH) GROWTH1 Endogenous Seasonal Adjusted Stagnant

Real Foreign Exchange Rate EXCHANGELOG1 Endogenous Seasonal Adjusted Stagnant

Foreign Exchange Interest INTEREST1 Endogenous No seasonal impact observed

Deposit Banks Loans LOANSA1 Endogenous Seasonal Adjusted Stagnant

IMKB 100 Index IMKBLOG1SA Endogenous Seasonal Adjusted Stagnant

The series in the model have been selected as quarter periods from TCMB electronic data

distribution (EVDS) and they include the periods between the first quarter of 1998(1998Q11)

and the fourth quarter of 2009(2009Q4). All series that are subject to analyse have been

composed of precise periodic values. Numerical values that the the series are composed of

have been added to calculation as TL.

In the first step, it was analysed if the series contains unit root or not by the help of

Augmented Dickey Fuller and Dickey Puntola tests. The unit roots ones are bowdlerized of

root. After that, by rate to moving average method it was deseasonelized. In the third phase,

optimal delay values for the model have been determined with information criteria. In the

fourth step, relations between series and their directions were detected by Granger causality

test. In the fifth phase, VAR (Vector Auto Regressive) model was formed for the forecast of

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relations of foreign capital flow and reel macro economic data. In the sixth phase, relations

between variables were analysed by establishing cause and effect functions.

4. Model Determination and Analyses

4.1. VAR (Vector Auto Regressive) Model

Description and analyses of engagements between macro economical variables, forecasting

the future is significant. However, engagements are mostly mixed and multi dimensional. The

direction of the relation between variables, detection of dependent and independent variables

may be difficult. For this reason, simultaneous equation systems are required.

VAR Model (Vector Auto Regressive) is a model in which many variables are included in the

analyses with their past values and each equation is settled out by the method of least-square

method (Gujarati 2009:747). They have been developed for analyses of simultaneous

equation system. In this type of models, there are no boundries of in-out division. This model

puts all variables under operation at the same time and analyses in integrity. Variables can be

used even if they are not stabile at the same level. It is a cause of choice in time series

analyses for the reason that there are no restraints and it allows analyses of dynamic relations.

The fact that delayed values of dependant variables are included in the model paves the way

to strong anticipations of the future. With two variables, VAR Model can be formulated as

this:

tt

p

i

it

p

i

it xbybay 11

1

21

1

11

tt

p

i

it

p

i

it xdydcx 11

1

21

1

11

In the model, a1 is constant term, p is delay length, v is error term. In VAR model the

average of error terms is zero. Kovarians with delayed values is zero. Variances are constant.

They are in normal distribution and rassal quality. It is assumed that there is no relation

between errors and their delayed values but this doesn’t mean a restraint to the model.

Otocorelation problem may be eliminated by increasing delay length of variables. However,

in the condition of errors’ being in relation to each other (the correlation between them is

different from zero), change in one of the errors affects the other in a certain amount of time.

There is no relation between error terms and variables on the right of the model. On the right

handside of the model, there are delayed values of inner varibles and there isn’t the problem

of simultaneouty. This allows the equations in the model to be settled out with least squares

method.

4.2. Stagnancy

Stagnancy is a variable’s avarage, variance and otocovariance’s being stable in time.

)()( tt YEYE Average

22)()( tt yEyVar Variance

)]))([ kttk yyE Covariance

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Serie’s stagnancy is important in time series which follows a stocastic period. In stagnant

series, possible shocks will be temporary. The impact of shock will decrease gradually and

serie will be back to long term avarage level. In instagnant series, there will be no long term

avarage that the serie can go back after the shock. Series’ stagnancy is determined by unit

root test. Expanded Dickey Fuller (ADF) tests are used for this.

t

m

i ittt eXXaX 11 (1)

t

m

i ittt eXXbtaX 11 (2)

Equations numbered (1) and (2) are the regression equations which are used for Dickey Fuller

test. Number (1) is an equation with a steadiness but without a trend, and number (2) is an

equation with both a steadiness and a trend. In number (1) equation H0: α =0 hypothesis and

in number (2) equation H0: b =0 hypothesis is tested for unit root test. If H0 is rejected, Xt

serie is stagnant, if not rejected it is not stagnant. Acoording to the results of ADF unit root

test, series are analysed to see if they have unit root on peg and this is done looking at %1,

%5 and %10 significance levels. Once the unit root is found, difference is taken and

evaluated out of the unit root (Bozkurt 2007:27–45).

Dickey Fuller Test was tested on %5 significance level with variables subjected to

analysis. While the test was being carried out, it was tested automatically using Schwarz Info

Criterion option since it was unknown if the error term was with autocorrelation. First

differences of not-stationary ones were differed from the unit root by taking I(1).

Table. 5.2. Steady State of Variables

Code of variable Without trend With trend

τ %1 %5 %10 τ %1 %5 %10

Growth rate (GSYİH) -5,78 -3,59 -2,93 -2,60 -5,48 -4,2 -3,53 -3,20

Real Foreign Exchange

Rate -7,85 -3,58 -2,93 -2,60 -7,77 -4,17 -3,51 -3,19

Foreign Exchange

Interest -4,59 -3,58 -2,93 -2,60 -4,54 -4,18 -3,52 -3,19

Deposit Banks Loans -1,49 -3,61 -2,49 -2,60

-6,63 4,17 -3,51 -3,19

IMKB 100 Index -5,07 -3,58 -2,93 -2,60 -5,03 -4,17 -3,51 -3,19

Number 1 in codes of variable shows that the first level difference of that serie is taken. * symbolizes level of

the serie as %1 and ** as %5

4.3. Delay Level for VAR Analysis

Delay lengths for VAR analysis were specified being dependent on LR, FPE, AIC, HQ, SC

criteria in table 6.31 and via autocorrelation LM, heteroscedasticity White and normal

distribution Jargue-Bera tests. The smallest delay level, where there is no autocorrelation (as

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LM probability values more than 0,05), no heteroscedasticity (as White test Joint probability

value more than 0,05) and there is normal distribution (as normality probability values more

than 0,05), is 2 according to LR critical value.

Table. 5.3. Capital Movements and Delay Length for Real Data

VAR Lag Order Selection Criteria

Endogenous variables: GROWTH1 EXCHANGELOG1 INTEREST1 LOANSA1

IMKBLOG1SA

Exogenous variables: C

Date: 05/23/12 Time: 22:58

Sample: 1998Q1 2009Q4


Lag LogL LR FPE AIC SC HQ

0 320.4919 NA 9.70e-14 -15.77460 -15.56349* -15.69827

1 363.3976 72.93965* 4.01e-14* -16.66988* -15.40322 -16.21190*

2 383.6763 29.40417 5.40e-14 -16.43382 -14.11161 -15.59418

3 411.3330 33.18796 5.57e-14 -16.56665 -13.18889 -15.34536

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)

FPE: Final prediction error

AIC: Akaike information criterion

SC: Schwarz information criterion

HQ: Hannan-Quinn information criterion

4.4. Causation Analysis

While the relations between variables are studied, two things are aimed at: one is whether

there is a connection between variables and if yes, in which direction; two is on which length

of delay the connection might be taking place. Granger (1969) causation test is a test done for

this purpose.

iit

n

i

iit

n

i

it uyaxay

11

0 (3)

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iit

n

i

iit

n

i

it uxyax

11

0 (4)

Through the causation test symbolised with the equations numbered (3) and (4), how the

variables x and y affect each other is found. With the components of x added to the model, it

gets clearer if x causes changes on the future values of variabley. The same is applied for y

with a parallel reason.

It is necessary that the variables x and y are stagnant or to be made stagnant to conduct the

Granger causation test. If the variables are not stagnant, a false causation will be observed.

The causation which appears as a result of fake regression is a sign of simultaneous

correlation.

Granger Causation Test was conducted for the reasons such as testing the correlation between

capital movements and real data, and identifying which variables affected each other in what

direction.

Table. 4.2. Economic Growth and Causation Test for Financial Indicators

Pairwise Granger Causality Tests

Date: 05/23/12 Time: 23:00

Sample: 1998Q1 2009Q4

Lags: 1

Null Hypothesis: Obs F-Statistic Probability

EXCHANGELOG1 does not Granger Cause

GROWTH1 42 7.90027 0.00769

GROWTH1 does not Granger Cause EXCHANGELOG1 0.17014 0.68225

INTEREST1 does not Granger Cause GROWTH1 42 4.54812 0.03931

GROWTH1 does not Granger Cause INTEREST1 4.85088 0.03361

LOANSA1 does not Granger Cause GROWTH1 42 5.06493 0.03013

GROWTH1 does not Granger Cause LOANSA1 1.65679 0.20562

IMKBLOG1SA does not Granger Cause

GROWTH1 42 12.5469 0.00105

GROWTH1 does not Granger Cause IMKBLOG1SA 0.49030 0.48795

INTEREST1 does not Granger Cause

EXCHANGELOG1 46 8.32617 0.00609

EXCHANGELOG1 does not Granger Cause INTEREST1 6.53786 0.01417

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LOANSA1 does not Granger Cause

EXCHANGELOG1 46 0.25459 0.61644

EXCHANGELOG1 does not Granger Cause LOANSA1 5.22721 0.02722


EXCHANGELOG1 46 0.27700 0.60138

EXCHANGELOG1 does not Granger Cause

IMKBLOG1SA 1.60341 0.21224

LOANSA1 does not Granger Cause INTEREST1 46 1.15539 0.28842

INTEREST1 does not Granger Cause LOANSA1 7.51754 0.00887


INTEREST1 46 0.43663 0.51228

INTEREST1 does not Granger Cause IMKBLOG1SA 0.09848 0.75518


LOANSA1 46 0.79231 0.37835

LOANSA1 does not Granger Cause IMKBLOG1SA 1.39905 0.24338

Portfolio investments, which constitute one part of capital movements, have a one-way

influnce on the followings; other investments, export/import ratio and capacity utilization

rate.

Other investments also have a one-way influence on economic growth. Furthermore,

export/import ratio, capacity utilization rate, industrial production index and unemployment

rate unilaterally affect other investments.

Foreign investments unilaterally affect industrial production index.

4.5. Rating of Variables

Rating the variables used in VAR method is applied for impulse-response functions which

are used to specify the reactions of the variables to shocks. Rating should be from exogenous

to endogenous. Assigning the correlation between exogenous and endogenous is done in

connection with the reactions that variables give to temporary shocks. Whereas the most

exogenous doesn’t react against the shocks stemmimg from other variables, the most

endogenous reacts against shocks both from others and the ones coming from itself. Rating

the variables is mostly decided through Granger Causation Analysis (Çiçek 2005:82–105). In

Cholesky decomposition, impulse-response functions may change when the variables are

rated differently (Güloğlu 2010:3). A correct rating must take place if the aim is a successful

analysis of the reactions of variables to shocks. In this study, variables are rated from

exogenous to endogenous using Granger Causation Test.

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Rating of real variables is as follows; direct investments, industrial production index, rate of

capacity utilisation, growth, export/import ratio, unemployment rate ve other investments.

Rating of variables is as follows; real exchange rate, foreign currency interest rate, 100 IMKB

indexes.

4.6. Impulse-Response Functions

Impulse-Response functions show how effective a standard deviation shock seen in one of

the random error terms of VAR model findings might be both in the present and future values

of endogenous variables. This decides whether the most effective variable could be used as a

political tool or not. Cholesky decomposition is one of the common methods used in defining

impulse-response coefficients, verticalising errors and diagonalising the acquired variance-

covariance matrix.

Moving average method is one of the useful ways to analyse the mutual interactions between

xt and yt series. i coefficients are used to generalize the impacts of shocks in xt and yt on

the series of xt and yt. Four elements of jk (0) matris are influence values.

iyt

ixt

i

t

t

t

ii

ii

y

x

y

x

02221

1211

)()(

)()(

For instance, 12 (0) shows the impact of a unit shock in yt on xt serie. Again, it shows,

respectively of 11 (1) ve 12 (1), the impact of a unit shock in xt-1 ve yt-1 on xt serie

(Bozkurt 2007:94-98).

Cumulative actions of xt and/or yt term are acquired through impulse-response functions’

sum of coefficients that their indexes match. For instance, it should be known that the item

12 (n) is the result of the impact of yt variation on xt+n after an n term. Therefore, the total

of cumulative actions of the term yt on xt serie after an n term is

)(0

12 in

i

. Long term

influence value is acquired when n stretches into infinity. Since the series xt and yt are

accepted static, the sum of

)(0

2 in

i

jk

for all j ank k conditions is finite. Impulse-response

function is the name given to 11 (i), 12 (i), 21 (i) and 22 (i) coefficients. (Bilgili vd.

2007:142-143).

Whether capital movements have an impact on financial data was analysed through causation

test in previous part. In this section, on the other hand, disposability of capital movements as

a political tool was tried to test using the impulse-response analysis.

Vector Moving Average (VMA) display format was used in order to show the possible

reactions of real data to a standard deviation shock which may take place in capital

movements through impulse-response analysis. Results were shown in figures 6.23, 6.24 and

6.25. In the graphics of impulse-response analysis, centerline shows point estimates and

bottom and over lines show confidence interval of a standard error.

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Figure 4.1. Impulse-Response Function

-.03

-.02

-.01

.00

.01

.02

.03

1 2 3 4 5 6 7 8 9 10

Response of GROWTH1 to EXCHANGELOG1

-.03

-.02

-.01

.00

.01

.02

.03

1 2 3 4 5 6 7 8 9 10

Response of GROWTH1 to INTEREST1

-.03

-.02

-.01

.00

.01

.02

.03

1 2 3 4 5 6 7 8 9 10

Response of GROWTH1 to LOANSA1

-.03

-.02

-.01

.00

.01

.02

.03

1 2 3 4 5 6 7 8 9 10

Response of GROWTH1 to IMKBLOG1SA

Response to Cholesky One S.D. Innovations ± 2 S.E.

In figure 4.1, reaction shown by economic growth to a shock of standard deviation in real

dutch disease, foreign currency interest and IMKB 100 indexes is shown. Reactions given

could be outlined as follows;

Real dutch diseases positively affected the economic growth until the end of the second term.

However, after the second term it couldn’t put a recognizable impact.

Foreign currency interest rate negatively affected the economic growth until the third term.

No significant connection between deposit bank loan and growth rate could be identified.

The impact of IMKB 100 index on economic growth was positive until the end of the second

term. However, after the third term this influnce disappeared.

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4.7. Stagnancy Test of VAR Model

Stagnancy should be tested after the model is set up. Stagnancy of the model depends on

eigenvalues of coefficient matrix. System gets stagnant once all eigenvalues of coefficient

matrix exist within unit circle. When the eigenvalues of coefficient matrix exist outside the

unit circle, then the system is not stagnant. This means that it is because of the facts that since

all the eigenvalues of coefficient matrix are in the circle unit that the model is stagnant.

Figure 4.2 Stagnancy Test for VAR Model

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Inverse Roots of AR Characteristic Polynomial

4.8. Autocorrelation Test of VAR Model

In order to testify whether VAR model involved a problem in structural meaning,

Autocorrelation Test – LM was conducted. The test, which was applied to specify whether

the error terms found in VAR model were connected, reveals that there is no autocorrelation

for 12 lags.

Table. 4.3. Capital Movements and Autocorrelation-Lm Test for Real Data

VAR Residual Serial Correlation LM Tests

H0: no serial correlation at lag order h

Date: 05/23/12 Time: 23:03

Sample: 1998Q1 2009Q4


Lags LM-Stat Prob

1 33.16078 0.1271

2 17.08283 0.8788

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4.9. Heteroscedasticity Test

Chi-Square value shows there is no heteroscedasticity problem in the model predicted.

In other words, it reveals the fact that error term variance is the same for all observations. It

can be seen that there is no heteroscedasticity according to the results of white

heteroscedasticity test.

Table. 4.4. Capital Movements and White Test for Real Data

Joint test:

Chi-sq df Prob.

160.3245 150 0.2672

4.10. Stability Tests

Conducting CUSUM and CUSUM squere tests, it was attempted to study whether there was a

structural break in the model and no break was identified.

3 18.71859 0.8104

4 31.84992 0.1624

5 23.28707 0.5608

6 25.88333 0.4138

7 25.45298 0.4372

8 15.74284 0.9223

9 30.50397 0.2060

10 23.30021 0.5600

11 31.83537 0.1628

12 25.43800 0.4381

Probs from chi-square with 25 df.

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Figure 4.2 Stability Tests

-0.4

0.0

0.4

0.8

1.2

1.6

00 01 02 03 04 05 06 07 08

CUSUM of Squares 5% Significance

-20

-15

-10

-5

0

5

10

15

20

00 01 02 03 04 05 06 07 08


5.CONCLUSION

Economical activities in modern-day economies are under the influence of both real

and financial data. In this analysis, it is observed that interest rates, exchange rates and stock

market data influence economic growth.

In a condition where bank loans are quite efficent in economical activities, changes in

interest rates will influnce those activities. Real economical activities are really rapid in

economies which are integrated into international system. Exchange rates, on the oher hand,

have a decisive impact in this situation. Just as securities exchanges are affected by economic

developments, economic life is also affected by the developments taking place in stock

market.

Economies which plan to achieve a steady and constant growth should also realize

healthy and sustainable finacial data besides their real macro economic data.

BIBLIOGRAPHY

Bernanke, Ben S., ve Mark Gertler. (1995). “Inside the Black Box: The Credit Channel of

Monetary Policy Transmission”, Journal of Economic Perspectives, Cilt.9, No.4. s. 27-48

Bozkurt, H. (2007). Zaman Serileri Analizi, İstanbul: Ekin Kitabevi

Cozier, B. ve Tkacz, G., (1994), “The Term Structure and Real Activity”. Working Paper 94-

103, Bank of Canada.

Çetintaş, H. Barışık, S. Türkiye’de Bankalar, Sermaye Piyasası ve Ekonomik Büyüme:

Koentegrasyon ve Nedensellik Analizi (1989-2000), İMKB Dergisi Cilt 7 Sayı 25-26

http://www.imkb.gov.tr/Libraries/imkbdergi/IMKB_Dergisi_Turkce25_26.sflb.ashx

Çiçek, M. (2005). “Türkiye’de Parasal Aktarım Mekanizması: VAR (Vektör Otoregresyon)

Yaklaşımıyla Bir Analiz”. İktisat İşletme ve Finans, Sayı. 233.

http://www.imkb.gov.tr/Libraries/imkbdergi/IMKB_Dergisi_Turkce25_26.sflb.ashx

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Gujarati D. N. (2009). Temel Ekonometri, İstanbul: Literatür Yayıncılık.

David K. Backus. Kehoe, Patrick J. Kydland, Finn E (1992). International Real Business

Cycles, The Journal of Political Economy, Vol. 100, No. 4. s. 745-775,

http://www.fperri.net/TEACHING/macrotheory08/bkk.pdf (16.05.2010)

Estrella, A., ve Hardouvelis, G. A., (1991), “The Term Structure as a Predictor of Real

Economic Activity”, Journal of Finance, 46, 555–576.

Güloğlu, B. Vektör Otoregresif Modellerin Etki Tepki Fonksiyonlarının Güven Aralıklarının

Güvenirliliği, http://www.ekonometridernegi.org/bildiriler/o15s1.pdf s.3 (18.08.2010)

Harvey, C. R., (1988), “The Real Term Structure and Consumption Growth”, Journal of

Financial Economics, 22, 305–333.

Kamin S., Rogers J., 2000, The Asymmetric Effexts of Exchange Rate Fluctutations: Theory

and Evidence From Developing Countries, IMF Working Paper, WP/00/184

Mishkin, Frederic S. (1995). “Symposium on the Monetary Transmission Mechanism”,

Journal of Economic Perspectives, Cilt. 9, No. 4, s. 3-10.

Yentürk, N. (1997). “Finansal Serbestlik ve Makroekonomik Dengeler Üzerindeki Etkileri”,

Ekonomik Yaklaşım, Cilt 8, Sayı 27, , s.139–141

http://yaklasim.iibf.gazi.edu.tr/ciltler/8/27/8.pdf

Analysis of Turkey’s Sustainable Development Performance at Last Decade by

Applying Green Economy Indicators

Yusuf Akan, İlyas Okumuş

University of Gaziantep, Gaziantep, Turkey

E-mails:[email protected], [email protected]

Abstract

In recent years, sustainable development has become a worldwide discourse, driven by

international treaties global environmental organizations and bodies such as European Union,

OECD. Sustainable development is a concept to be analyzed aspects of economic, social,

environmental and institutional. With the advents of sustainable development, green

economic development has become one of the most important economic issues. Countries

which target economic, social and institutional development should not neglect

environmental development. Development of green economy is the best way of slowing the

negative ecological and environmental impact. Developing countries neglect the protection of

the natural environment in the process of rapid industrialization. As a result of this situation,

natural resources rapidly run out and environmental quality begins to deteriorate. These

negative results return a significant cost to society. In this study, Turkey economy which has

averagely 5.5% economic growth in the last 10 years will be analyzed in terms of green

economy indicators. Turkey is a highly suitable ecological condition for crop production,

animal husbandry, fisheries and forestry activities because of its geographical position. The

basic components of ecological conditions are climate, highly variable the shape of the earth,

http://www.fperri.net/TEACHING/macrotheory08/bkk.pdf

http://www.ekonometridernegi.org/bildiriler/o15s1.pdf%20s.3

http://yaklasim.iibf.gazi.edu.tr/ciltler/8/27/8.pdf



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water, can be made large agricultural land, forest and meadow and pasture, as well as Turkey

has also other natural resources. It is known as source of metals and solar and winds are ones

of the most energy resources for Turkey. Turkey which one of the fastest growing economies

in recent years can be analyzed in terms of some data how efficient uses natural resources. In

this study, Turkey economy will be analyzed in terms of ecological footprint index and which

sources energy produced. In 2007, ecological footprint index is 2.7 global hectares and in

2002 it was 2.0. Turkey has increasing ecological deficit day by day. Ecological deficit is 1.4

global hectares in 2007. In 2000-2010, energy use per capita has increased parallel to

economic growth. According to energy data, Turkey foreign energy dependency has

increased in last decade. In addition, share of renewable sources in total electricity production

hasn’t changed significantly. The foregoing findings indicate that Turkey currently belongs to

an economic development pattern based on high resource consumption. The economic

development is mainly established on the exploitation and utilization of nonrenewable

resources. Therefore, Turkey should change the development pattern, regulate the industrial

structure, promote the utilization rate of resources, develop green pollution-free products, and

enhance the sustainable development of ecological economic system.

1.INTRODUCTION

Last decade performance of Turkish economy attracts everyone`s attention. If we told more

tangible words, both economic growth figures and the duration of the overcoming crisis are

remarkable progress. In the last decade, Turkey`s economy has grown averagely 5.5%. While

it was achieving this economic growth, environmental issue which is one of the concepts of

sustainable development has been neglected. Sustainable development constitutes a very

important place in Turkey's National Environmental Action Plan and Eighth Five-Year

Development Plan. Despite this situation, it is discussed that the shortcomings of these two

documents and not yet fully tangible success achieved. Turkey has discussed “development

or environment?” vicious cycle issue for many years.

In recent years, Turkey has been living the process of rapid industrialization and

urbanization. However, pressures on the environment of these situations are increasing day

by day. For example; a fast rate of urbanization in Turkey and spreading out of the city`s

natural boundaries, like demographic trends in the world, bring a heavy burden on

ecosystems across the country. This situation raises two important problems. Firstly, because

of increasing demands such as food, energy and water, resources of the city are not sufficient.

In addition, due to growing consumption, waste collection and pollution abatement systems

of the city are also forced. This is a major burden to the natural environment. Secondly, a

structure of the city which lives a lot of people under human conditions emerges.

Moreover, unplanned urbanization is not limited only to these areas of the city, but also

creates regions, not far from the center, have not been supported by adequate infrastructure.

This situation creates disasters causing the loss of life and property in less developed and

unsuitable regions of Istanbul and other large cities for settlement because of natural events

such as a sudden and heavy rainfall. This has led to major burden on country`s economy. A

wide variety of effects such as climate change and environmental changes that may be severe,

given the current economic and social structure to force in terms of both environmental and

development goals is possible to produce an even darker scenarios. Due to these and other

problems, such as threatened urbanized areas, rural areas, especially some of the damage

caused by agricultural practices on biological diversity and ecosystem and the country's

energy policy dilemmas, economic, social and ecological sustainability is threatened.

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With the global flow of sustainable development becoming a major trend, green business, and

economic issues related to green practices has since gained attention. World Bank (1998)

pointed out that the green economy is the best way of slowing the negative ecological and

environmental impact. In sustainable development, international community’s develop Green

Economy assessment models or indicators successively in order to obtain an authentic and

effective analysis of eco-environment and natural resource depreciation conditions, as well as

to modify human economic activities to achieve management objectives though indicator

assessment. As a whole, Green Economy assessment indices or measurement types that have

been developed all have their individual features. Most strive for sustainable development in

factors including society, economics, ecology, and the environment (Chen et al. 2009).

In recent years, Turkey is actively promoting green economic-related computing work in

order to advance the sustainable development as a nearly national warning and guide for

decision making. However, due to scope of survey and completeness of data collection

constraints, objective and comprehensive testing is still difficult in reflecting the status of

development of the domestic green economy. This study attempted to apply the model of

ecological economics and ecological footprint analysis to assess the value of environmentally

sustainable development in Turkey. The method of the core concepts of ecological footprint

is the land area as productivity and carrying capacity of the conversion of waste based on

assessment of local residents to support a particular land area required (amount of resources);

in the energy analysis, how much of the energy produced from renewable sources, how much

of it produced from non-renewable sources and how much of the renewable sources produced

from hydroelectric sources or the other renewable sources will be analyzed. Also, it will be

analyzed to changes of energy use per capita and energy dependency.

2.Literature review

2.1.Ecological Footprint

While human handle and use earth, produce and apply technology and information, consume

natural resources and meet the requirements of living; they followed by aggressive behavior

towards nature without taking living space (ecosphere) into account Ecological destruction

occurs as a result of the balance of ecosystem degradation. All living area of the planet is

threatened.An ecological problem which is a quite complex structure and is realized in a long

time has grown exponentially and has spread the whole planet with no end feature. Factors

such as Industrialization, urbanization, political, economic and technological development

increase ecological destruction and ecological problems are placed head of the agenda of

modern societies. Ecological footprint is a product of ecological awareness-raising efforts to

become aware of the destruction. This concept is firstly used by Dr. Mathis Wackernagel,

Prof. William Rees et al. The scientists developed for the new calculation method and

technique to measure the amount and productivity of pristine natural resources, to product

solutions preventing the constantly destruction and consumption of nature. Ecological

footprint uses corresponding biological productive land to estimate the resource consumption

and waste absorption area of a specific population or economy.

Ecological footprint is a quantitative technique that shows the amount of biologically

productive area is consumed all planet, the size of land and water areas is needed for waste

disposal, how much biologically productive area is used by families or people and the

number of planets is needed for future needs (Rapport, 2000).

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While ecological footprint is calculated, two basic foundations are followed. Firstly, it is

viewed in resources consumption and waste produced. Secondly, it is measured to the

biologically productive areas required to product needs and disposal the waste.

Researches on ecological footprint provide awareness of the destructive and impoverishing

effects of liberal economic policies rapidly depleting the planet`s resources and forcing

carrying capacity of the planet. In this respect, measurement of the ecological footprint is a

new contribution to drawing attention efforts of the world`s carrying capacity. The pressure

of consumer society on the planet caused by global capitalism is a growing ecological

footprint (ÖztunalıKayır, 2003).Population is the other factor which contributes to the

ecological destruction like consumption. Since the ideas put forward by Thomas Malthus in

1798, it is drawn attention that the human population has increased far above the planet`s

carrying capacity (Rapport, 2000).

Calculation of ecological footprint itself is not a prediction model but what is used to assess

the current status. Its designed function lies in providing ecological camera to photograph the

utilization of nature by human beings (Rees, 2000). In terms of the world or a country,

ecological footprint studies focus on comparing every country’s consumption of ecological

carrying capacity or analyzing the appropriation of ecological carrying capacity by trade; in

terms of cities, ecological footprint is used to check the contrast to average national value or

to assess sustainable strategies; in terms of household unit, calculation or simple

questionnaire is used to investigate individual consumption, compare the impact of selection

process and gradually increasing consumption items. Therefore, this study aims to find out

the impact factors of Turkey’s sustainable development through empirical analysis of

ecological footprint in Turkey and based on this, to further provide a reference for working

out the policies of Turkey’s sustainable development.

3.Energy

Energy has a crucial role in achieving sustainable development objectives. Especially, the use

of fossil-based fuels to meet energy needs of the communities leads to the important

economic, environmental and social problems.

Energy creates a fundamental dilemma in terms of sustainable development. Despite the

necessity of achieving socio-economic objectives of energy, particularly fossil-based energy

systems is closely linked with environmental issues such as atmospheric pollution and

climate change (Gururaja, 2003). There are many environmental problems arising from the

use of energy, energy production and transformation. For example; 11 environmental

concerns that energy plays an important role can be defined. These are major environmental

accidents, water pollution, land use and spatial effects, marine pollution, radiation and

radioactivity, solid waste disposal, hazardous air pollutants, air quality reduction, acid

residues, the ozone layer and global climate change. While energy policy has largely taken

into account economic factors in the 1970s and 1980s, clean fuels and energy technologies as

well as to control the environmental impact through energy efficiency has increasingly

attracted the interest during the last ten years(Rosen andDinçer, 2001). The above-mentioned

climate change is a global problem requiring global solutions. To address this problem,

discussed issues differ from the developed and developing countries. Emphases on the

fundamental issues in industrialized countries are energy efficiency and the transition to less

polluting energy sources feature. In developing countries, energy is needed to increase

economic growth for poverty reduction (Stigson, 1999). Energy is one of the most important

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elements of a country to survive. Operation of factories, burning stoves in homes, the

achievement of transport communications, in short, everything depends on energy to sustain

life. An Energy problem adversely affects the functions of a country. A country`s national

security and welfare can be measured with the energy power. A country is not possible to

defend itself without energy (Alnıak, 2006).

Supply of secure energy sources is necessary for the development of a society but it is not a

sufficient factor. Moreover, sustainable development requires the supply of sustainable

energy sources. Access to sustainable energy services is one of the necessary elements of

sustainable development (Volpi, 2005). Fossil fuels (coal, oil and natural gas) are recognized

as limited supply of energy resources. The sunlight, wind and water (hydro) powers are

generally renewable and have been underlined that these powers are used for a long time. In

addition, wastes converting to useful forms of energy and biomass fuel are seen as

sustainable energy sources. Sustainable development also requires the efficient use of energy

resources as possible (Dinçer and Rosen, 1999).

To achieve sustainable development, green energy play an important role in meeting energy

needs in both industrial and domestic applications. Therefore, the purpose of sustainable

development in a country, the development and use of green energy strategies and

technologies should be given priority. Widespread use of green energy sources and

technologies in both developing and developed countries are vital importance for the

sustainability of energy sector and are among the key issues which should receive priority

(Midilli et al., 2006). Therefore, in this study, we analyzed the energy data of the last ten

years. As a result, how much of the energy generated from renewable sources will be

examined. In addition, How much of the electricity generated from renewable hydroelectric

sources is obtained and how much is from other renewable sources will be examined and

their change over the years. Energy import rates will be analyzed to provide a significant

contribution to sustainable development of Turkey will participate to develop green energy

policies and strategies.

4.Analysis

4.1.Ecological Footprint Indicators Analysis

Wackernagel and Rees have seen mandatory calculation of ecological footprint to achieve

sustainability; they published footprints of different countries in a report in 1997. In this

report, 52 countries make up 80% of the world`s total population were analyzed and some

countries consumed higher amount of biological productive area than theirs. After this initial

report, calculations of ecological footprints of countries are often renewed. Ecological

footprint indicators of 152 countries have been measured so far by Global Footprint Network

who pioneered ecological footprint studies. National and global calculations based on

international scientific accepted organizations data such as United Nations (UN), Food and

Agriculture Organization (FAO), United Nations Conference on Trade and Development

(UNCTAD), World Resources Institute (WRI).

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Source:www.footprintnetwork.org

Figure 1 tracks the per-person resource demand (Ecological Footprint) and resource supply

(Biocapacity) in Turkey since 1961. Biocapacity varies each year with ecosystem

management, agricultural practices (such as fertilizer use and irrigation), ecosystem

degradation, and weather.

According to average footprint per capita and biocapasity graph of Turkey in 1961-2007 is

published by Global Footprint Network Organization, it is seen that ecological footprint

index has increased parallel to rapid economic growth. According to this graph, it is seen that

the size of biocapacity of Turkey has decreased continuously since 1961. This decline seems

to have accelerated in recent years with high economic growth. Looking at the figure, the

years exceeded biocapacity coincide with the period of the neo-liberal policies gained

momentum and started to change consumption habits (Akıllı et al., 2008).

Calculation of ecological footprint index provides the chance to compare the many data of

countries, individuals, cities, villages, businesses, institutions. For example; if the footprint

size of the individual is below the national average, the individual does not constitute a

pressure on natural resources; on the contrary, the individual is thought to consume natural

values. In addition, comparing the footprint of each country to its own biological capacity is

useful for back to see what remains. In the case of using much more natural resources as they

have, the ecological deficit consists in terms of natural resources of countries. Conversely, if

biological capacity of a country is more than the ecological footprint, it means that this

country has ecological reserve. Looking at Graph 1, Turkey gives a continuous ecological

deficit after 1980s. This deficit is increasing along with rapid industrialization in recent years.

Ecological footprint index, biological capacity, ecological deficit or reserves of countries

were published by Global Footprint Network Organization in 2002, 2005 and 2007 in terms

of income levels and regions. According to these publications, the ecological footprint index

of Turkey has increased to 2.7 from 2.0 between 2002 and 2007. In contrast, the amount of

biocapacity has decreased from 1.4 to 1.3 global hectares. Ecological deficit being 0.6 in

2002 has increased to 1.4 global hectares. According to 2002 data, it required 2.2 global

hectares productive land per person to survive. However, in the planet, it is predicted 1.8

global hectares productive land as the ecological footprint per capita. That is, 0.4 global

hectares ecological deficit occurs in the entire world. According to calculations made in

2007, this deficit increased from 0.9 global hectares per person.

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Table 1 Ecological Footprint, 2007 (Global Hectares)

Population Ecological

footprint of

consumption

Cropland

footprint

Grazing

footprint

Forest

footprint

Fishing

ground

footprint

Carbon

footprint

Built-

up

land

World 6671.6 2.7 0.59 0.21 0.29 0.11 1.44 0.06

High income countries 1031.4 6.1 1.02 0.23 0.70 0.26 3.78 0.11

Middle income countries 4323.3 2.0 0.54 0.15 0.20 0.11 0.88 0.07

Low income countries 1303.3 1.2 0.46 0.11 0.24 0.06 0.25 0.07

Turkey 73.0 2.7 0.96 0.08 0.29 0.06 1.24 0.07


According to the data in Table 1, the size of ecological footprint per capita is proportional to

levels of income of countries. Ecological footprint index is high in the countries with high

income levels; it is low in the low income countries. Looking at the data of 2007 in table 1

and table 2, Turkey`s ecological footprint index is the same the world average ecological

footprint but Turkey`s biocapacity size is lower than the world`s. According to table 2, all

country groups classified income levels gives ecological deficit.

Table 2 Bio-capacity, 2007 (Global Hectares)

Population Cropland Grazing

Land

Forest Fishing

Ground

Built

Land

Total

Biocapacity

Ecological

Deficit or

Reserve

World 6671.6 0.59 0.23 0.74 0.16 0.06 1.8 0.9

High income countries 1031.4 0.99 0.29 1.19 0.49 0.11 3.1 3.0

Middle income countries 4323.3 0.53 0.22 0.76 0.13 0.07 1.7 0.2

Low income countries 1303.3 0.44 0.21 0.29 0.07 0.07 1.1 0.1

Turkey 73.0 0.77 0.12 0.32 0.05 0.05 1.3 1.4


According to these data, the pressures of people on environment seem to be very

clear.Abnormal nature events are the results of these pressures in recent years. We must give

up some habits damaging nature for a livable world. It is necessary that policy makers make

arrangements and decisions in this direction. For example; renewable energy resources

should use for production energy to reduce carbon footprint index that has important share in

ecological footprint index.

4.2.Energy analysis

To achieve environmentally sustainable development,instead of traditional fossil-based fuels,

the use of alternative or renewable energy sources has brought. These green energy sources

which consists of Water (hydro), solar, geothermal and solar energy don’t damage

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environment, so the required sub-structures are formed by many countries to use these

sources. According to the last 10 years energy data of Turkey, there has been no change in

the shares of renewable energy resources in total energy production. The share of

hydroelectric sources in total electricity production was 24.7% in 2000; this figure was %

24.5 in 2010. Share of hydropower resources has increased 30.6% in 2004, then it entered

downward trend and it realized 16.8% in 2008. And then it was starting to rise again and it

was 24.5% in 2010.

When we looked at the energy data of the last 10 years, renewable energy sources excluding

hydroelectric sources has very small share of total electricity production. While share of these

sources in total electricity production was 0.2% in 2000, this rate rose to 1.9% in 2010. This

rate didn’t change much until 2006. This rate increased regularly to 1.9% level in 2006-2010.

This rate is far behind comparing the EU and OECD countries` averages. Looking at the data

of energy use per capita in recent years, we see an increase in parallel with economic growth.

In 2001, energy use per person was 1091 kg oil. This figure increased 1441 kg oil in 2010.

Table 3 Energy Ratios of Turkey in 2000-2010

Year Energy use

per capita

(kg oil)

Energy imports,

net

(% of energy use)

Electricity production

of hydroelectric sources

(% of total)

Electricity production

From renewable

sources, excluding

hydroelectric

sources(%of total)

2000 1200 66.1 24.7 0.2

2001 1091 65.3 19.6 0.3

2002 1134 67.5 26.0 0.2 2003 1173 69.7 25.1 0.2

2004 1203 70.2 30.6 0.2

2005 1238 71.6 24.4 0.1 2006 1347 71.7 25.1 0.2

2007 1429 72.7 18.7 0.3

2008 1389 70.6 16.8 0.6 2009 1359 69.0 18.5 1.1

2010 1441 71.1 24.5 1.9

Source:Worldbank database

Energy imports rates of Turkey showing energy dependency are increasing even more the last

10 years. While the ratio of energy imports was 66.1% in 2000, it increased by 71.1% in

2010. This rate was averagely 61% in EU and it was 30% in OECD countries in 2010. From

these data, Turkey is a country of growing foreign-based. Turkey is a developing country

based on non-renewable energy sources. In addition, rapid growth in recent years has grown

energy needs; energy use per person has increased much more too. When it is considered this

rapid increase and foreign energy dependency, Turkey has to invest in renewable energy

sources. Turkey should change the development patterns.

5.Summary

According to ecological footprint data that explained in 2002 by global footprint network

organization, Turkey’s per capita footprint amount is calculated 2.0 global hectares, and bio-

capacity amount 1.4. In 2002 Turkey's per capita ecological deficit was 0.6 global hectares.

According to 2007 data, this deficit is explained as 1.4. With the rapid industrialization and

urbanization in recent years, the damage to the environment has increased. The per capita

energy used increased from 1200 kg oil to 1441 kg oil between 2000-2010. As an indicator of

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dependence on foreign energy, imports rates increased from %66.1to %71.1. The energy

from hydroelectric sources which have the largest share of renewable sources declined to

%24.5, but this decline is not significant. Although the energy produced from other

renewable sources is not change significantly, there has been a steady increase since 2006.

The foregoing findings indicate that Turkey currently belongs to an economic development

pattern of high resource consumption. The economic development is mainly established on

the exploitation and utilization of nonrenewable resources. Therefore, Turkey should change

the development pattern, regulate the industrial structure, promote the utilization rate of

resources, reinforce the introduction of feedback energy, develop green pollution-free

products, increase the added value of products, and enhance the sustainable development of

ecological–economic system. The above analyses display that the fast development of Turkey

economy is based on the over-exploitation of environmental resources.

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Effects Of Gender Diversity On The Growth Of The Firms In The Incubators73

Akyüz Mürsel1, Albeni Mesut1, Bozdağ Hakan1, Karaöz Murat2

1Süleyman Demirel University, Isparta, Turkey

2Akdeniz University, Antalya, Turkey, [email protected]

E-mails: [email protected],[email protected], [email protected]

Abstract

Factors affecting the growth of the firms are usually divided into three groups. These are

factors related firms, factors related entrepreneurial, and industry – related factors. Gender

diversity is a entrepreneurial – based factor. In this study we investigated the effect of gender

diversity on the growth of the firms. So far, in empirical studies being male or female

entrepreneurs are found to be an impact on firm performance. It appears from studies that

survival probabilities of firms founded by women are lower than those firms founded by male

entrepreneurs and firms which established by women entrepreneurs grow more slowly than

firms established by male entrepreneurs was concluded.

To measure the impact of gender diversity on growth performance of firms we used data of

business incubation firms in Turkey. Face to face interviews were conducted with companies

operating in the 12 Business Incubators around the Turkey. The sample of this study is firms

still active in business incubators, firms are closing left and was graduated from Business

Incubators.

In the application part of the study we investigated Tobit Regression Model to measure the

effect of the gender diversity on the growth of the firms. Based on findings, gender diversity

was concluded to be effective on the growth of the firms in a meaningful way.

Keywords: Firm Growth, gender diversity, entrepreneurs, firm survival, incubators.

1.INTRODUCTION

Discussions of firm growth based on very old. Gibrat launched the debate on the growth of

the firm with his work in 1931. According to Gibrat firm growth rates is independent of firms

initial scale. Today the growth of the firms is an increasingly important area of debate. To

much work has been done so far on this subject in different countries but have little or no

literature on firm growth in Turkey.

73 This study includes some results of a project supported by TÜBİTAK. We thanks to TÜBİTAK for

their supports. (The project was; “İş Kuluçkalarında Yeni Kurulan Girişimlerin Hayatta Kalma Ve

Büyüme Performansını Etkileyen Faktörler: Kosgeb İş Geliştirme Merkezleri (İŞGEM) Üzerine Bir

Araştırma, 2010”, Project Director: Professor Dr. Murat KARAÖZ)



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Mentioned several factors that affect firm growth. They are devoted to three main

categories. These;

Entepreneur related factors

Firm related factors

Industry related factors

Which characteristics of entrepreneur, entrepreneur’s age, educational level, past work

experience and gender as factors affecting the growth of the firm discussed in the literature of

the growth of the firm.

In this study, we will investigate the affects of the gender diversity on the growth of the

firms. Until now, most of the studies concluded that gender differences affect firm

performance. Companies founded by women entrepreneurs, they grow more slowly than

male competitors and more likely to failure is expressed. To reveal the relationship between

gender and the firm performance we carried out analyses with the firms in the business

incubators aroun the Turkey.

In the second section of the study there is summary of the literature about the relationship

between gender and firm performance. After this in the third section we estimated the Tobit

Regression analysis to measure the relationship between gender and firm growth.

2. THE RELATIONSHIP BETWEEN GENDER AND FIRM PERFORMANCE

Gender of the entepreneur founded the firm are often associated with the firm

performance. The findings shows that, firms founded by women enprepreneurs demonstrates

lower growth rates than male competitors. (Coad, 2009; 89).The works which observed the

relationship between gender and firm growth generally concludes that founder of the firm

being male or female makes performance differences..

Empirical studies shows that firms founded by women grow more slowly than firms

founded by male entrepreneurs. The small firms founded by women have an important role

especially in developing countries. In developing countries firms established by women are

less ambitious about growth and financial performance than firms founded by men (Singh,

2001).

According to a compherensive study made by Mead and Liedholm (1998) in the African

countries; firms established by male entrepreneurs grew by 11% per annum, on the other

hand firms founded by women entrepreneurs grew by 7% per annum. Study suggests that;

entrepreneur’s gender has a signifciant effect on the firms growth or survival. Chance of

survival and growth of the firms established by women, other factors fixed, is lower than

firms founded by male entrepreneurs. However, reasons of the higher proportion of closures

for the firms founded by women entrepreneurs may be personal or other non-business.

Considering only work-related reasons, does not occur any difference in closing rates.

In a study in the Dominican Republic; Firms established by men have high labor

productivity, on the other hand firms founded by women have low productivity and growth

rates. (Downing and Daniels, 1992; Edit, Nichter and Goldmark, 2009). Coad and Tamvada

(2008) similarly have done a study for Indian firms. According to the results; firms managed

by women are more likely to decline than firms managed by male entrepreneurs. Also firms

founded by the women are less likely to growth. They also have concluded that the firms

established by women grow more slowly among the growing firms.

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Other studies examining the relationship between gender and firm performance;

Catley and Hamilton (1998), McPherson (1996).

3. IMPACT OF THE GENDER DIVERSITY ON THE FIRMS PERFORMANCE

3.1. Sample of the Survey

Sample of our study are the firms in the business incubators around the Turkey. There are 12

business incubators around the Turkey. We investigated the firms which currently operat in

incubators, graduated from incubators and closed. There are 466 firms in the incubators in

Adana, Diyarbakır, Elazığ, Ereğli, Zonguldak, Mersin, Tarsus, Samsun, Van, Yozgat,

Eskişehir and Nevşehir. We have used the 414 questionned firms as a sample in our

investigation.

3.2. The Variables Used In

Totally 23 variables there were used in our analysis. 22 of this are independent variables. In

accordance with literature there are entrepreneur related variables, firm related variables,

industry related variables and hatchery related variables. We have made the variables

categorical. For example, if a firm have grown the value is “1”, in contrary if a firm have not

grown the value is “0”.

The “gender” variable created to measure the impact of the gender diversity on the firm

performance is concerns us even more. “gender” variable were included in the analysis with

the other variables whether there is any meaningful effect on the growth of the firm.

Table 1: Variables Used In Analysis VARIABLE DESCRIPTION Number of

observation

Average Min. Max.

Dependent Variable

firmgrowth Firm Growth (%) 351 0.12 0 1

ENTREPRENEUR FEATURES

gender İf entrepreneur is female; 1, if male; 0 (if there are both male and

female partner; 0)

414 0.14 0 1

lnentage Age of the entrepreneur(if there is a partnership the odest partner

age, logarithmic scale)

367 3.64 3 4.25

enteduuni Education level of the entrepreneur , If a university degree; 1, if not;

0 (if there is a partnership and if one of the partner has university graduates; 1)

414 0.31 0 1

workexp Previous working experience of the entrepreneur as a worker (year) 414 8.21 0 1

entexp Previous experience of entrepreneurship (year) 414 5.83 0 40

manexp Previous management experience of the entrepreneur (year) 414 6.98 0 40

FIRM FEATURES

ortaksay The number of the partner in the venture 414 1.24 1 4

export The company has had an export; 1, if not; 0 414 0.10 0 1

lnempini İnitial size of the firm (logarithmic scale) 392 1.31 0 5.70

onlyloan if the initial capital is fully loan; 1, if not; 0 414 0.26 0 1

onlyselffin İf the initial capital is fully own allowance; 1, if not; 0 414 0.26 0 1

networking İf entrepreneur has made network with the firms in the incubator or firms outside the incubator; 1, if not; 0

414 0.62 0 1

yen İf entrepreneur has made innovation; 1, if not; 0 414 0.41 0 1

marka İf firm has a trademark; 1, if not; 0 414 0.19 0 1

INCUBATION SERVICES

buro İf entrepreneur has received one office services at least in the incubator;1, if not; 0

414 0.61 0 1

ortakhiz İf entrepreneur has received one of common services offered at

least in the incubation;1, if onot; 0

414 0.64 0 1

danisman İf entrepreneur has received one of advisory services at least in the incubation 1, if not; 0

414 0.58 0 1

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whenest İf fhe firm has been established within the first 36 months of

incubation was established; 1, if not; 0

414 0.55 0 1

incubsize The number of rash in the incubation 414 43.14 14 84

INDUSTRY FEATURES

compete Intensity of competition in the sector (Likert scale of 1-5) 410 3.53 1 5

sektor İf the company in the manufacturing industry; 1, if firm in the

service sector; 0

411 0.81 0 1

EXTERNAL FEATURES

ilrank The share of the city’s GNP per capita İn the Turkey’s GNP per

capita (%)

414 1.51 0.59 2.07

cycle İf firm has experienced already a crisis 1, if not; 0 414 0.76 0 1

3.3. The Model

3.3.1. Tobit Model

Using Tobit model the growth equation will be estimated. (Tobin, 1958). In this model the

continuous observation of the values and discrete changes in the values of zero is governed

by the same stochastic process. So decisions of both growth and to continue the activities

affected by the same set of exogenous variables. Tobit Model assumes that businesses closing

as a corner solution. All these assumptions makes Tobit model such a statistically restrictive

method. (Karaöz ve Albeni, 2010).

3.4. Empirical Findings

To bring out how gender diversity affects the growth of firms firmgrowth variable was taken

as the dependent variable and gender variable was included in the analysis together with all

other independent variables. Tobit regression was estimated for this purpose. There is a high

correlation between incubation services, buro, danisman and ortakhiz variables. So they were

made separately for the regression analysis. The entrepreneur features workexp, entexp and

mangexp variables in the same way were taken separately in the analysis to put forward the

individual contributions of each variables.

gender variable was included in the analysis as independent variable to measure the affect of

the gender differencies on the growth of the firms. İf the entrepreneur is women “1” was

given as a value. On the other hand if the entrepreneur is male “0” was given as a value. (if

there is both women and male partner “0” was given as a value)

We have 351 data belonging to firms for growth datas.74 144 of these firms has grown but

207 of them has not grown.

Table 2: Grown Firms (Categorical)

fg01 (grown, not grown,

categorical)

Number %

0 (not grown) 207 58.97

1 (grown) 144 41.03

Total 351 100.00

74 NOTE: We have not reached historical information of some companies. So there is no evidence

about growing of this firms. For that reason This is why the 351 firms were used.

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Firms grow and not grow were put forward categorical with the fg01 variable. İf firm has

grown “1” was given, if firm has not grown “0” was given. According to the results 144

firms in the incubators has grown. The rate of the grown firms is %41.03.

132 firms of them 144 growing firms founded by male entrepreneurs. So %91 of growing

firms was founded by men. Only 12 0f 144 growing firms founded by women entrepreneur.

This corresponds to %9 of growing firms.

Table 3: Gender and Grown Firms (Categorical)

fg01 (grown, not grown

categorical)

gender (male, female, categorical)

Total 0 (male) 1 (female)

0 (not grown) 182 25 207

1 (grown) 132 12 144

Total 314 37 351

Tobit regression analysis results are given in the table below. According to the result of Tobit

regression anlysis gender differences has a significant affect on the growth of the firm

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Table 4:

Tobit

Regression

Analysis

Results

MODEL 1 MODEL 2 MODEL 3 MODEL 4 MODEL 5

Coefficients P Values Coefficients P Values Coefficients P Values Coefficients P Values Coefficients P Values

gender -50.52 0.192 -59.55 0.123 -64.64 0.095* -37.94 0.332 -40.99 0.294

Lnentage -24.53 0.668 -29.27 0.608 -22.32 0.695 -81.14 0.163 -63.50 0.254

Enteduuni -13.47 0.610 -13.78 0.600 -16.59 0.527 -11.73 0.657 -8.45 0.751

Workexp -0.52 0.686 -0.77 0.546 -0.82 0.521

Entexp 2.31 0.169

Mangexp 2.63 0.087*

Ortaksay 64.25 0.002*** 52.83 0.013** 57.48 0.007*** 63.80 0.003*** 63.84 0.003***

Export -13.65 0.714 -14.35 0.698 -7.98 0.830 -9.18 0.805 -8.38 0.823

Lnempini -66.24 0.000 -64.82 0.000 -67.66 0.000 -68.24 0.000 -67.66 0.000

Onlyselffin -39.57 0.137 -45.75 0.083* -35.84 0.177 -39.91 0.128 -37.41 0.156

Onlyloan

Network 114.27 0.001*** 107.53 0.001*** 113.17 0.001*** 110.37 0.001*** 108.77 0.001***

Yen 83.33 0.001*** 83.12 0.001*** 83.37 0.001*** 81.88 0.002*** 80.27 0.002***

Buro 87.25 0.008*** 82.35 0.013** 85.11 0.010**

ortakhiz 123.60 0.001***

Danisman 91.92 0.002***

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Sektor -54.75 0.085* -51.50 0.105 -60.39 0.055** -52.18 0.101 -52.30 0.101

Compete 5.67 0.579 1.27 0.902 3.32 0.745 4.08 0.689 4.47 0.662

Marka 89.84 0.004*** 88.50 0.004*** 96.83 0.002*** 85.04 0.006*** 85.89 0.005***

Whenest 12.16 0.642 24.37 0.353 11.77 0.651 11.79 0.651 8.89 0.735

İncubsize 0.22 0.652 0.23 0.629 0.10 0.836 0.20 0.673 0.21 0.666

Cycle1 28.42 0.317 35.70 0.204 34.41 0.221 27.31 0.335 32.46 0.256

ilrank -38.49 0.203 -47.95 0.116 -33.06 0.270 -37.36 0.216 -42.06 0.167

Log likehood -1740.36 -1738.47 -1739.18 -1738.96 -1739.49

LR chi2(18) 126.25 130.01 128.60 129.04 127.99

Prob>chi2 0.00 0.00 0.00 0.00 0.00

Pseudo R2 0.035 0.036 0.036 0.036 0.035

*; %10 Significance of importance level , **; %5 Significance of importance level , ***; %1 Significance of importance level

451

4. CONCLUSION

Influence of gender differences in the performance of the company has become a much discussed

topic in the literature. So far, most of the studies has concluded that gender difference affects firm

performance. Companies founded or managed by women entrepreneurs are growing more slowly

than firms founded by male entrepreneurs was concluded in the studies. Some studies suggest the

possibility of the sinking of the companies founded by women entrepreneurs is high.

According to the results of the analysis in this study (10% significance level Tobit regression

analysis model, 3) the gender gap has a significant effect on firm performance.

There are 144 growing company according to our analysis. 132 of these companies was founded

by male entrepreneurs. Whereas, there are only 12 growing firms founded by women among the

144 growing firms. So companies founded by men entrepreneurs are more likely to growth than

firms founded by women entrepreneurs.

As a result, survival and growth of women entrepreneurs are less likely than male entrepreneurs

can be said. Main reasons for this, women entrepreneurs encounter financial difficulties, women's

business experience is less than and male-dominated an economy that the structure of such

reasons.

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YILMAZ, F. , “Güç İlişkileri ve Firma Teorisi”, Ankara Üniversitesi SBF Dergisi, Cilt 57, Sayı

1, 2002, ss.157-76.

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The Role Of Innovation In The Development Of South Korea

Sibel Yegül, Ayse Durgun, Dilek Memisoglu

Abstract

In recent years, innovation and innovative science have completely become a manufacturing

factor. Countries which comprehended the importance of innovation activities earlier than others

and which developed their policies accordingly are now among developed countries. And, South

Korea has become one of the most important ones of these countries.

The subject of this study covers the South Korean economy, the role of innovation in the

development of South Korea and development processes of innovation in South Korea.

Keywords: Innovation, South Korea, Development, Development Processes

1.INTRODUCTION

Economic growth can be achieved in long term mainly through information and innovation of

new technologies. Today, countries with high technology levels are on their way to gain total

control of all economic areas, starting with the industry. In brief, technology has become the

single and the most important determinant of competitive advantage among countries. Therefore,

countries with a technological superiority play a determining role on an international level not

only in the increase of social welfare and life standards but also in the distribution of World's

limited resources.

Innovation has a huge place in the economy and development of South Korea which took its

place among G20 countries. South Korea has understood the importance of innovation at a very

early stage and built its development exclusively on innovation and change processes.

1.1. SOUTH KOREA ECONOMY

After World War II, Paris Peace Treaties were signed as a result of Paris Peace Conference in

1945. Upon the recommendation of Truman, powerless countries were given the chance to

determine their own future. With this decision, South Korea gained its independence like tens of

others. Between the years 1945 and 1953, Korea had a very weak economy and an unsatisfactory

industrial structure. In the course of these years, the most apparent feature of the Korean

economy is the exportation of primary products and importation of manufacturing products. In

this period, almost the whole exportation activity of Korea consisted of agricultural products and

raw materials. (Sung, 1992:77).

Between 1953 and 1962, various economic policies were implemented in order to restructure the

Korean economy, initiate rapid development and eliminate economic stagnation. Despite political

instability and increasing inflation which appeared at that time, targeted economic policies were

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applied. Syngman Rhee left his mark on the period between 1945 and 1961 by carrying out ultra-

nationalist policies throughout his mandate. (Koo and Kim, 1992:123)

South Korea led its economic development in accordance with five year-development plans. The

first of such plans came into effect in 1962. Initially, the State made common cause with private

sector and gave particular importance to big private sector companies. In the beginning,

development of big companies was facilitated in order to improve foreign trade and then, the

attention was redirected to the development of small and medium enterprises within the

framework of implemented policies. (Karabiber, 1997:2)

When Korea decided to prioritize exportation-oriented industrialization in 1960, companies

which were supposed to do it adapted their organization to these new strategies under the

conditions of that period. In addition to this, adequately trained, highly motivated and well-

prepared workforce took its place in this rapid development, too. In 1960, the State tried to build

its economic policies and choices on five principals. These principals included development of

highly qualified workforce, stable and regular marcoeconomic policies, creation of efficient and

secure financial markets, minimization of price fluctuations, development of agricultural sector

and importation of foreign technologies. Intervening measures determined by the State for the

success of economic policies include export promotion, control of financial markets, cause-

related direct credits, discriminative and different supporting stimulus measures. Furthermore, the

success of basic economic policies had depended on such different factors as protection of

technicians and bureaucrats from political abuse by selection and employment of well-trained

professionals, restructuring of the State organization, continuous follow-up of objectives

predefined within the State's basic economic policies and industrialization strategy as well as

timely and appropriate realization of corrections (TÜSİAD (Turkish Industrialists' and

Businessmen's Association), Görüş Dergisi (Görüş Magazine), 1996: 32-36).

Years Billion Korean Wons Billion $ Per Capita

Income in $

Growth Rate

1993 265,517 330 7,484 5.8

1994 303,772 378 8,467 8.6

1995 348,979 452 10,037 9.0

1996 386,640 480 10,548 6.9

1997 450,853 437 9,511 4.9

1998 443,127 316 6,823 -5.8

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1999 483,800 406 8,581 10.7

Table 1: General Economic Conditions (1993-1999)

Source: Turkish Embassy of Seoul, Trade Consultancy Office,http://www.musavirlikler.gov.tr Access Date, January

25, 2012)

Table 1 displays general economic conditions of South Korea between the years 1993-1999.

While the growth rate in 1993 is 5.8%, it progressively increased and reached 9.0% in 1995.

Even though a certain decrease can be observed in 1995, this rate climbed to 10.7% in 1999.

2. THE ROLE OF INNOVATION IN THE DEVELOPMENT OF SOUTH KOREA

South Korea can be seen as the most striking example in the subject of "keeping up with the

state-of-the-art technology". Korea is one of the eight Asian countries which were indicated by

the World Bank (1993) to experience a "miraculous" growth between 1965 and 1990 and

particularly, the electronics industry had seen a major advancement within these 25 years.

R&D activities have been highly privileged in South Korea. 'They have built research centres,

technology parks and zones where industry and technology come together since 1960' (Kozlu,

1995:29)

2.1. DEVELOPMENT PROCESS OF INNOVATION IN SOUTH KOREA

Innovation activities which have played an important role in the development of South Korea are

analysed under 2 main categories as follows;

R&D Activities

Miraculous economic growth of South Korea and its superior ability in scientific and

technological fields require even more developed and dynamic research and development

activities because the rate of development and growth is very high since 1980. In 1980s, the

government shifted its focus from industrial policies to technological policies. This shift resulted

in a significant increase of R&D expenditure, particularly in the private sector. The share of

private sector in total R&D expenditure increased from 32% in 1971 to 80% in 1987 (Hassink,

2001:8).

South Korea's investments in the field of technology increased twenty times from $480 Million in

1980 to $10 Billion in 2000 while at the same time, the rate of technological investment per

domestic product increased from 0.84% to 2.68%. Even in the middle of foreign currency crises

occurred in 1997-98 and successive economic crises, South Korea had achieved to increase its

R&D investments to USD3.85 billion in 2002, in other words, from 3.6% to 4.7% of total

government budget. The number of scientific and technological experts increased from 18,500 in

1980 to 160,000 in 2000 (South Korea Guide: 16)

http://www.musavirlikler.gov.tr/

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Years

Research and

development Expenditure

(% of GDP)

High-technology

exports (current billion

US$)

Researchers in

R&D (per million

people)

Technicians in

R&D (per

million people)

1996 2.42 27,416.00 2,209.32 635.47

1997 2.48 31,182.00 2,262.26 581.43

1998 2.34 30,645.00 2,022.51 534.23

1999 2.25 41,080.00 2,173.24 567.33

2000 2.30 53,950.00 2,334.09 456.65

2001 2.47 40,042.00 2,919.01 456.34

2002 2.40 46,600.00 3,022.83 499.02

2003 2.49 57,160.00 3,206.99 570.90

2004 2.68 75,742.00 3,298.11 585.35

2005 2.79 83,526.00 3,780.23 552.31

2006 3.01 92,944.00 4,186.86 586.94

2007 3.21 110,633.00 4,627.16 719.93

Table 2: R&D Indicators between 1996-2007

Source: The World Bank, http://www.worldbank.org/ , Access Date: January 25, 2012)

As can be seen from Table 2, R&D expenditure/GDP rate of South Korea in 1996 was 2.42%

while this rate reaches 3.21% in 2007. High technology exportation amounts to 27 billion Dollars

in 1996 while this amount is 110 billion Dollars in 2007.

Private companies called "Chaebol" contributed to the South Korean economy at a large scale

since they dominate the economy. Especially, 5 big Chaebols possessed the majority of Korean

patents in 1990. Along with the positive influence of R&D on yield, big enterprises planned out a

special management and tended to make expansions in this matter. In 2000, 4 big Chaebols,

Samsung, LG, Hyundai and SK, spent 4,731 billion Korean Wons for R&D activities and this

trend continued in 2001, as well. While private companies made a R&D expansion of 20% in

2000, this rate is only 9% in laboratories, institutes and universities controlled by the government

(Luthria and Maskus: 144)

In 1997, South Korean private sector made the 77% of R&D expenditure of the country and this

trend has persisted afterwards. High-end technology was the main subject of increasingly popular

http://www.worldbank.org/

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R&D investments and a great deal of effort was put into attracting South Korean engineers

working in American companies. Engineers who agreed to return have played a key role in the

learning process and have had positive influences on the yield of research activities of Korean

companies. On the other hand, Korean government contributed to these activities, too, by

following an adequate policy (Luthria and Maskus: 145-146).

2.2.Scientific and Technological Activities:

South Korea is one of the OECD countries which allocate the largest share to R&D from GNP.

But the role of government in the resources allocated to R&D is rather low. Accordingly, finance

and performance are mostly under the control of private sector. It has been observed that

universities put a lot of effort into R&D activities. The number of R&D employees within

universities is at the same level as the European average. Korea takes the fifth position regarding

total patent numbers with a global percentage of 5%. This great number of patents is mostly the

contribution of Chaebols, notably Samsung. Patent percentages;

Samsung Electronics Co. Ltd. (40%)

Daewoo Electronics (9.7%)

LG Semiconductor Co. Ltd (7.2%)

LG Electronics Inc. (6.6%)

Hyundai Electronics Ind. Co. Ltd. (6.5%)

Patent numbers have the foregoing distribution within the country. (U.S. Patent and Trademark

Office Report, 1998: 75).

The government founded in April 1999 the National Science and Technology Council (NSTC) in

order to reinforce the coordination of national scientific and technological policies. The reasons

of foundation of the NSTC include the recent decrease in the number of young people who

choose to build a career on a science or technology-related subject in comparison with previous

years as well as the increase of concern for yield due to high amount of investments in science

and technology. Having the main objective to coordinate essential policies targeting scientific and

technological advancement, to broaden investments in science and technology and to define the

priorities of national R&D programmes, the NSTC targets at the same time to increase the yield

of expansion-oriented R&D activities related to information technology, bioengineering,

nanotechnology, environmental technology, cultural technology and space science. The NSTC is

composed of 19 cabinet members working in the field of science and technology. The president

chairs the council.

The government planned to establish a National Research Scholarship System in order to increase

the motivation of scientists and engineers. Thus, researchers who dedicate themselves to their

work will be rewarded with prizes of the president and will have access to the benefits of a

pension fund thanks to research funds. In addition, the government actively tries to

internationalize the R&D activities of South Korea in terms of the competition among global

R&D networks and currents. As a result of this, Korea incrementally opened its R&D projects to

foreign institutes in order to form a quality research environment for leading foreign investors

and local scientists.

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The government increased basic research investments budget from 19% in 2002 to 25% in 2006

and encouraged 400,000 experts in six nationally strategic fields in 2005 in order to support basic

research activities and highly capable, creative researchers and scientists. These nationally

strategic fields are information technology, bioengineering, nanotechnology and space science as

well as environmental and cultural technologies. This has also permitted to take numerous steps

towards the augmentation of women talents in technological development. Some measures taken

with regard to this subject include women employment, a quota system and positive

discrimination towards women concerning employment in scientific and technological fields.

(Foreign Information Service of Korea, South Korea Guide: 16).

3.CONCLUSION

Innovation stands for the implementation of new methods and practices within cultural, social

and administrative environments. Innovation can be achieved in all fields.

South Korea succeeded in accomplishing a striking development of innovation and attracting

high levels of attention thanks to its economic development.

In 1980s, South Korea saw a rapid technological development in addition to a significant growth

and advancement. Growth and advancement were attained as a result of innovative undertakings

as well as the importance given to education, skills development, human resources and

workforce. The secret to this success consists mostly of their R&D activities, the importance

given to the technology, prioritization of innovation and acceleration of education and

advancement. They have taken important steps in the path of competing with developed countries

and experienced various change processes. The prominent factor of these change processes is the

development of innovation and making a government policy out of it.

South Korea's investments in the field of technology and innovation increased twenty times from

$480 Million in 1980 to $10 Billion in 2000 while at the same time, the rate of technological

investment per domestic product increased from 0.84% to 2.68%.

In 1997, private sector raised its R&D expenditure and initiated investments in high-end

technology. When engineers working in American companies agreed to return, they played a key

role and contributed to the yield of Korean companies. Korean government contributed to this

development by implementing adequate policies, too.

In conclusion, South Korea has built its development strategy upon innovation. And to that end, it

followed other countries like the United States who achieved their development in a similar way.

They have accomplished the learning and development processes thanks to innovation. Big

private business enterprises called Chaebols have gained more and more importance in the

economy, and the State and the private sector have acted in concert with regard to the

development strategy. South Korea is now among those countries which have developed though

innovation.

REFERENCES

Amabile T.; Conti R., Coon H. (1996), et al, "Assessing the Workplace for Creativity", Academy

of Management.

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Cabral R., (1998)"Refining the Cabral-Dahab Science Park Management Paradigm", Int. J.

Technology Management, Vol.16.

Donald W. M. & Bruckner C. (2003), The Ultimate Competitive Advantage: Secrets of

Continually Developing a More Profitable Business Model, Berrett-Koehler Publishers.

Foreign Information Service of Korea, "South Korea Guide".

Görüş Dergisi (Görüş Magazine), (September-October 1996)TÜSİAD (Turkish Industrialists' and

Businessmen's Association).

Hassink R., “Towards Regionally embedded Innovation Support Systems in South Korea?”,

Urban Studies, 00420980, Vol.38, Issue.8, Jul.2001.

Karabiber M. (1997), “Kore Kalkınmasının Temelleri ve Türk-Kore İlişkileri” (Foundations of

the Korean Development and Turkish-Korean Relations), Undersecretariat of Treasury of the

Turkish Prime Ministry, Directorate General of Economic Researches,

Koo H. and Kim E. M. (1992), “The Developmental State and Capital accumulation in South

Korea”, States and Development in the Asian Pacific Rim, London: Sage Publications.

Kozlu, C. (1995), Türkiye Mucizesi İçin Vizyon Arayışları ve Asya Modelleri (Seeking Vision

for Turkish Miracle and Asian Models), İş Bankası Yayınları (Eds.)

Luthria M., Maskus K., “Protecting Industrial Inventions, Authors’ Rights, and Traditional

Knowledge: Relevance, Lessons, and Unresolved Issues”, the World Bank and University of

Colorado at Bouldert.

Osterwalder A.( 2012), http://www.businessmodelalchemist.com/,

Sung M. P., “Korea Leading Developing Nations: Economy, Democracy, and Welfare",

University Press of America, 1992.

The World Bank, http://www.worldbank.org/ , (Access Date: January 25, 2012)

Turkish Embassy of Seoul, Trade Consultancy Office, "General Economic Conditions of the

Republic of Korea and its Economic and Commercial Relations with Turkey", June 2010, Seoul.

Turkish Undersecretariat of Foreign Trade, http://www.musavirlikler.gov.tr, (Access Date:

January 25, 2012).

U.S. Patent and Trademark Office Report, 1998.

http://www.businessmodelalchemist.com/

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Globalization and Youth Unemployment Paradox: Turkey Sample

Boran Toker1, Çiğdem Demir2

1Akdeniz University, Ayşe Sak School of Applied Sciences, Antalya, 07197, Turkey

2Akdeniz University, Faculty of Economics and Administrative Sciences, Antalya, 07058, Turkey


Abstract

Globalization process, which has developed with the application of neo-liberal policies in the

world, is the primary and most discussed concept in terms of its positive and negative effects on

developing and developed countries. Aforesaid process has caused power imbalance between the

developed countries that have completed their industrializations and developing countries that

have not completed their industrializations; and with the liberalization of capital and commerce,

it has made the capital sovereign on labor. In this context, the most important disadvantage of

globalization, which is a knife-edge situation for developing countries, is unemployment.

Unemployment for a developing country like Turkey, which has large young population, is a

serious problem that globalization causes in economic and social field. The reason that underlies

this problem is that globalization causes unemployed growth in Turkey that has a young and

dynamic population. The relative height of young unemployed in the rates of unemployment

affects the Turkish nationality growing unemployed with its economic, social and psychological

dimensions deeply.

In this study, it is aimed to determine the dynamic economic effects of globalization process

exercising power over Turkey with 1980s onwards on youth unemployment. In this context, the

relationship between youth unemployment and globalization was econometrically analyzed with

VECM approach by using the annual data of 1980-2011 periods. With Johansen Co-integration

Test, long term relationship between youth unemployment and globalization variables was

researched and with error correction variable the time to adjust the deviation that may occur in

long term balance was determined. Moreover, with the results of Impulse-Response Function and

Variance Decomposition, solutions are offered for sustainable economic development and

effective employment policy by revealing how youth unemployment reacts to globalization and

how it has been affected from globalization.

Keywords: Globalization, Youth Unemployment, Sustainable Economic Development,

Employment Policy, VECM.

1. INTRODUCTION

Globalization is a new world economic system, which prescribes and describes ways in which

businesses, concepts and events are organized around the world. It is a phenomenon that has

affected people differently in every sphere of life (Ukpere and Slabbert, 2009). Globalization is

defined as the free movements of goods, services and capital across borders. It is a contentious

process by which the western market economies have effectively spread across the globe

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(Heshmati, 2003). Globalization also has been viewed as; it is a process of interaction and

integration among the people, companies, and governments of different nations, a process driven

by international trade and investment and aided by information technology. This process has

effects on the environment, on culture, on political systems, on economic development and

prosperity, and on human physical well-being in societies around the world

(Globalisation101.org, 2012). Although it does not constitute a new phenomenon, it is viewed as

an inexorable integration of markets, nations and technologies to a degree never witnessed before

in a way that is enabling individuals, and corporations to reach around the world further, faster,

deeper and more economically than ever before (Heshmati, 2003).

Globalization and technological advances have been changing labor markets around the world.

Young workers are facing new challenges in making the transition from school to work. While

for some the opening of national economies to international competition through trade and

investment as well as information and communications has generated income and improved

welfare, for others the process of globalization has been a source of persistent inequality and

social exclusion (Morris, 2006).

Youth employment creation is a critical component of a country’s long-term economic stability

and growth. There are difficulties in Turkey in employment generation in general, in youth

employment generation in particular (Ercan, 2007). The 15-24 years75 old composed 16% of the

Turkish labor force in 2011. The unemployment rate for youth aged 15-24 is 18.4% in 2011

(832.000 unemployed). The unemployment rate among university educated youth is 30%

(TURKSTAT Household Labour Force Survey, 2012). Employment remains a problem for this

group and oddly enough more so for the educated youth group. Paradoxically, with such low

average education levels and the demand by employers for better-qualified workers, educated

young people (high school and above) have higher relative unemployment rates in urban Turkey.

Turkey has a serious bottleneck in job creation for its young cohorts, especially for the educated

portion (Ercan, 2007).


Meidani and Zabihi (2012) investigate the dynamic effect of globalization on unemployment rate

in Iran during the period 1971 to 2006 using Johansen-Juselius co-integration test. In the study,

the trade intensity index (ratio of total exports and imports to GDP) as a measure of globalization

have used. Also in this model, gross domestic product, the consumer price index as well as other

variables affecting the unemployment rate have considered. They show that the globalization has

a significant and negative effect on unemployment rate. The value of error correction coefficient

is equal to -0.46 implying that around 95% of the unemployment rate adjustment occurs after two

years.

75 The United Nations defines youth as young women and young men aged 15–24 years. This group

includes teenagers aged 15–19 and young adults aged 20–24. National definitions for youth do not

necessarily correspond to this age group. These often depend on such factors as voting rights, land

rights, the end of compulsory education and eligibility for military service, liability for criminal offences

(Morris, 2006).

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Ukpere (2011) posits that there is a strong linkage between globalization, unemployment, income

inequality and poverty in Africa. He reveals that the current globalization seems to have

aggravated the problem of unemployment, the corollary of which is endemic income inequality

and mass poverty in Africa. He also maintains that capitalist globalization undeniably, created

wealth but also intensified inequality and poverty, particularly in Africa. African countries need

to develop comprehensive strategies to create jobs locally.

Aremo, et al. (2010) investigated the impact of globalization on labor force utilization in Nigeria

was addressed with a view to assessing the extent to which globalization has influenced the

structure of development in Nigeria. They showed that globalization practice could generate

negative impact on employment in both short and long run periods suggesting that if

globalization continues as being practiced, globalization could further worsen the extant decrepit

state of unemployment in Nigeria other things being equal.

Yusof (2010) investigates the link between globalization and the Malaysian labor market by

applying the autoregressive distributed lag approach, a relatively new-time series technique to the

analysis. The findings of this study indicate that globalization does not significantly affect the

labor variables in the long-run.

Dutt, et al. (2009) presents a model of trade and search-induced unemployment, where trade

results from Heckscher-Ohlin (H-O) and/or Ricardian comparative advantage. Using cross-

country data on trade policy, unemployment, and various controls, and controlling for

endogeneity and measurement-error problems, they find fairly strong and robust evidence for the

Ricardian prediction that unemployment and trade openness are negatively related. This effect

dominates the positive H-O effect of trade openness on unemployment for capital-abundant

countries, which turns negative for labor-abundant countries. Using panel data, they find an

unemployment-increasing short-run impact of trade liberalization, followed by an

unemployment-reducing effect leading to the new steady state.

Lee and Vivarelli (2009) use an ex-post measurable definition of globalization, namely increasing

trade openness and Foreign Direct Investments (FDI). A general result is that the optimistic

Heckscher-Ohlin/Stolper-Samuelson predictions do not apply, that is neither employment

creation nor the decrease in within-country inequality are automatically assured by increasing

trade and FDI.

Jenkins (2006) considers the impact of foreign direct investment on employment in Vietnam, a

country that received considerable inflows of foreign capital in the 1990s as part of its increased

integration with the global economy. Despite the significant share of foreign firms in industrial

output and exports, the direct employment generated has been very limited because of the high

labour productivity and low ratio of value added to output of much of this investment. In this

study also shows that the indirect employment effects have been minimal and possibly even

negative because of the limited linkages which foreign investors create and the possibility of

“crowding out” of domestic investment.

Harms and Hefeker (2003) demonstrate that international portfolio diversification can help to

reduce unemployment. If workers earn a capital income that is negatively correlated with

domestic labor demand shocks, the wage set by a monopoly union may be lower and thus

expected employment higher than in the case of a positive correlation.

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Ghose (2000) reveals that in the case of industrialized economies, growth of manufactured

imports from developing countries has had a small adverse effect on manufacturing employment

but virtually no effect on wages. Thus unemployment and growing wage inequalities cannot

really be attributed to trade. He maintains that in those developing economies which emerged as

important exporters of manufactures to industrialized countries, growth of trade had a large

positive effect on manufacturing employment and wages. In some of these economies, moreover,

growth of trade was also associated with declining wage inequality. Thus, on balance, the global

effects of trade liberalization on manufacturing employment and wages appear to have been

significantly positive even though there have been job-losers in both industrialized and

developing economies.

2. MATERIALS AND METHODS

In this section, the VECM approach which has been used to analyze the relationship between

globalization in Turkey and young unemployment with 1988-2010 annual data has been

introduced and the results have been presented.

2.1. DATA

In the model the young unemployment rates in Turkey (YI) are dependent variable and

economical globalization (EG), sociological globalization (SG) and political globalization (PG)

are explanatory variables. Furthermore, in order to find out the effects of economic instability

together with globalization on young unemployment, the inflation rates have also been included.

For the data of these variables, World Development Indicators (WDI) of The World Bank and the

KOF Index of Globalization tables have been used.

2.2. VECM APPROACH

Starting point of this approach is an adequate statistical description of the linear relation between

the k nonstationary variables. The usual way is the modelling as a vector autoregressive process

of finite order p.

where U denotes a normally distributed k-dimensional white noise process, D represents the

deterministic terms, and Aj, j = 1, 2, …, p, are kxk dimensional parameter matrices. The

reparametrisation as a vector error correction model leads to

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The matrix represents the long-run relations between the variables. Since all components of Yt

are I(1) variables, each component of Yt,…, Yt-p+1 is stationary and each component of Yt-

1 is also integrated of order one. This makes relation (2) unbalanced as long as has a full rank

of k. In this case the inverse matrix exists and we could solve equation (2) for Yt-1 as a

linear combination of stationary variables. However, this would be a contradiction. Therefore,

must have a reduced rank of r < k. Then, the following decomposition exists:

where all matrices have rank r. B'Yt-1 are r stationary linear combinations which guarantee that

the equations of system (2) are balanced. The columns of B contain the r linearly independent

cointegration vectors and the matrix Γ contains the so-called loading coefficients which measure

the contributions of the r long-run relations in the different equations of the system. The

adjustment processes to the equilibria can be derived from these coefficients. (Kirchgässner &

Wolters, 2007:219)

It can be shown that for a given r, the maximum likelihood estimator of defines the

combination of that yields the r largest canonical correlations of with after

correcting for lagged differences and deterministic variables when present. Johansen proposes

two different likelihood ratio tests of the significance of these canonical correlations and thereby

the reduced rank of the matrix: the trace test and maximum

eigenvalue test, shown in equations (4) and (5) respectively.

(4)

(5)

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Here T is the sample size and is the i:th largest canonical correlation. The trace test tests the

null hypothesis of r cointegrating vectors against the alternative hypothesis of n cointegrating

vectors. The maximum eigenvalue test, on the other hand, tests the null hypothesis of r

cointegrating vectors against the alternative hypothesis of r +1 cointegrating vectors. Neither of

these test statistics follows a chi square distribution in general; asymptotic critical values can be

found in Johansen and Juselius (1990) and are also given by most econometric software

packages. (Hjalmarsson & Österholm, 2007:4

In the study, in order to analyze the stationary of the variables used, “Augmented Dickey-Fuller”

(ADF) developed by Dickey and Fuller (1979) and Phillips-Perron (PP) unit root tests have been

used and the obtained results have been presented in Table 1.

Table 1. Unit Root Test Results

VARIABLES

ADF

(constant)

ADF

(constant

trend)

PP

(constant)

PP

(constant

trend)

YI

(Lag Lenght)

-1.0134

(0)

-2.2697

(0)

-1.0760

(1)

-2.2697

(0)

SG

( Lag Lenght)

-2.2656

(5)

-5.0074

(4)

-1.5182

(0)

-2.5918

(0)

PG

( Lag Lenght)

-2.9232

(5)

-2.2288***

(1)

-1.3754

(3)

-1.8523

(1)

EG

( Lag Lenght)

-2.0258

(0)

-1.3735

(0)

-2.0195

(4)

-1.0593

(3)

YI

( Lag Lenght)

-4.2456***

(0)

-4.2343***

(0)

-4.2380***

(1)

-4.1946***

(2)

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Johansen Cointegration Test results which reveal the long term relationships between the I(1)

variables have been shown in Table 2.

Table 2. Cointegration Tests based on the Johansen Approach

Eigenvalue value % 5 critic

value value

% 5 critic

value

0.874759 99.9679*** 69.8188 43.6277*** 33.8768

0.740981 56.3402*** 47.8561 28.3679** 27.5843

0.576180 27.9723* 29.7970 18.0273 21.1316

Note: ***, ** and* indicate statistical significance at 1% ,5% and 10% levels, respectively.

In both trace and the max test results, three cointegration relationships among young

unemployment, economical-social-political globalization and the inflation rates have been

determined. It has been found that there is a power balance which these variables will move

together.

(0.099) (0.370) (0.311) (0.022)

3. CONCLUSION

In the study, the effects of globalization on young unemployment in Turkey have been modelled

with 1988-2012 annual data by using VECM method. Although several studies assessing the

relationship between unemployment and globalization in Turkey theoretically are available in the

SG

( Lag Lenght)

-2.9120*

(5)

-2.9179

(5)

-5.5809***

(0)

-5.4989***

(0)

PG

( Lag Lenght)

-5.1870***

(0)

-5.4243***

(0)

-5.2272***

(1)

-5.5823***

(1)

EG

( Lag Lenght)

-4.4412***

(0)

-4.8041***

(0)

-4.4412***

(0)

-4.9752***

(5)

Note: ***, ** and* indicate statistical significance at 1% ,5% and 10% levels, respectively.

Lag lengths, determined by AIC, are in parenthesis. Critical values are from MacKinnon

(1996).

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literature, an empirical study has not been found. Another difference of this study comes at this

point.

The paradox between young unemployment and globalization has been presented by using

econometric analysis which has been conducted to find out how globalization with its

economical, social and political dimensions together with the instability in the country affect

young unemployment. It has been found that social globalization and the inflation rate increases

young unemployment significantly in the long term, and this result shows consistency with

economical expectations.

REFERENCES

Aremo, A.G., & Adele, A.M. 2010. Empirical analysis of the impact of globalization on labour

force utilization: Evidence from Nigeria. African Economic and Business Review, 8 (1), 1-18.

Dutt, P., Mitra, D., & Ranjan, P. (2009). International trade and unemployment: Theory and

cross-national evidence. Journal of International Economics, 78 (1), 32-44.

Ercan, H. (2007). Youth Employment in Turkey. Ankara: International Labour Office.

Ghose, A.K. (2000). Trade Liberalization and Manufacturing Employment, ILO Employment

Paper, No.3. Geneva: International Labour Office.

Harmsa, P., & Hefeker, C. (2003). Globalization and unemployment: the role of international

diversification. Economics Letters, 78, 281–286.

Heshmati, A. (2003). The relationship between ıncome inequality and globalization. Last

Accessed on 4.20.2012, from http://www.soc.iastate.edu/sapp/globalizationoutcomes4.pdf

Hjalmarsson, E. and Österholm, P. (2007) Testing for Cointegration Using the Johansen

Methodology whenVariables are Near-Integrated, International Finance Discussion Papers,

No.915

Jenkins, R. (2006). Globalization, FDI and employment in Viet Nam. Transnational

Corporations, 15 (1), 115-142.

Kirchgässner, G & Wolters, J. (2007). Introduction to Modern Time Series Analysis. Springer.

Lee, E., & Vivarelli, M. (2006). The Social Impact of Globalization in the Developing Countries.

Discussion Paper No.1925.

Meidani, A.A.N., & Zabihi, M. (2012). The dynamic effect of globalization on unemployment

rate in Iran: a co-integration analysis. International Business Research, 5 (1), 120-126.

Morris, E. (2006). Globalization and its effects on youth employment trends in Asia. Regional

Expert Group Meeting on Development Challenges for Young People. Bangkok.

Ukpere, W.I. (2011). Globalisation and the challenges of unemployment, income inequality and

poverty in Africa. African Journal of Business Management, 5 (15), 6072-6084.

Ukpere, W.I., & Slabbert, A.D. (2009). A Relationship between current globalisation,

unemployment, inequality and poverty. International Journal of Social Economics, 36 (1/2), 37-

46.

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Yusof, S.A. (2010). Globalization and the Malaysian labor market: an empirical investigation.

Journal of Economic Cooperation and Development, 31 (1), 17-40.

Factors Affecting The New Vehicle Registration In The Eu Countries

Cumhur Erdem1, Şaban Nazlioğlu2

1Department of Economics ,Gaziosmanpaşa University, Tokat-Turkey

2Department of Econometrics, PamukkaleUniversity, Denizli-Turkey


Abstract

Theobjective of this study is to determine whether economic factors (namelyprice, consumer

preferences, consumer income, interest rate, fuel prices, industrial production, and trade)have any

explanatory power on new vehicle registry in the EU member countries. To meet this objective, a

panel cointegration analysis was applied to the panel of thirteen EU countries for the time period

spanning from January 1999 to August 2010. This study concludes that while the vehicle sales in

the EU are determined by the macroeconomic factors instead of the factors in the demand theory,

the consumer preferences are impetuses for passenger car sales in the EU countries.

Keywords: newvehicle sales, demand theory, macro economic variables, EU countries, panel

cointegration,

1. INTRODUCTION

Automotiveindustry has become very dynamic and competitive sectors on a global scale in recent

years. Since the industry is considered as a crucial contributor to economic growth, it has been

observed that most of the developed countries (such as. the USA, Germany, France, UK, Italy,

Spain and South Korea) and many of the less developed ones (such as China, India, Malaysia,

Thailand) have policies for becoming major players on world market by improving their own

industry. Therefore, prediction of new vehicle registry is of great interest for policy makers,

legislators, transport and urban planners, and traffic engineers in nations whose economies highly

depend on the vehicle industry because the prediction of future vehicle registry has a vital

importance in terms of forecasting national accounts as well as future energy and infrastructure

requirements (Abu-Eisheh and Mannering, 2002). Predicting the new vehicle registration and

having information about the determinants of the vehicle demand has also crucial importance for

the strategic planning of vehicle manufacturers.

The industryplays a vital role in the economies of European Union (EU) member countries, the

world’s largest vehicle producer and playground for a highly competitive and innovative



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industry, in terms of manufacturing, employment, exports, Rersearch&Develpment and

government revenue (European Automobile Manufacturers’ Association (hereafter ACEA),

2011). As of 2009,Germany is the largest vehicle producer (5.2 million units) in the EU followed

by Spain, France, United Kingdom (UK), Italy, Czech Republic, and Poland (ACEA, 2011).

Vehicle production and demand in most of the countries (including the EU) show upward and

downward trends from time to time depending on the changes in economic conditions. Wad

(2009) stated that “the effect of the global crisis came immediately with the stop for consumer

credit and rapidly declining consumer confidence hitting in particular durable and expensive

purchases like automobiles”. Even though 14.1 million new cars were registered in the EUby

2009, the automotive industry experienced the biggest decline in EU car sales since 1993. New

passenger car registrations decreased by 9.5% compared to the pre-crisis levels of 2007 (1.6%

compared to 2008) and commercial vehicle registrations declined by 32.4% compared to

2008(ACEA, 2011).

Due to the significance of the vehicle industry on the economies of EU member countries, from

both policy makers and manufacturers’ perspectives, there is a need to establish a policy

framework that grows the automotive industry. In this context, it is important to determine the

factors affecting the new vehicle registry in EU member countries. However, the empirical

attempts on the determinants of the vehicle sales in the EU countries are very scarce and this gap

in the literature provides room for examining the factors affecting the new vehicle sales in the EU

countries. This paper thereby aims at addressing to which extent the economic factors have

impact on the number of new vehicle registry in EU countries. To meet this objective, a panel

data analysis was applied to the panel consisting of thirteen EU countries for the period January

1999-August 2010.

2. Literature review

There are a limited number of studies in the literature related to the determinants of vehicle

demand. In an early study, Abu-Eisheh and Mannering (2002) analyzed the determinants of

automobile import in West Bank and their estimation and simulation results showed that

population/employment, economic growth, oil prices, exchange rates, and governmental policies

have relative importance on the importation of automobiles. They concluded that much of the

growth in automobile ownership is determined by economic growth.

Lord and Sahito (2010) analyzed whether yen-for-dollar exchange rate and gasoline prices have

impact on the demand for Japanese cars in the US and found that demand for Japanese imports is

positively correlated with the gasoline prices. They also found a positive relationship between the

yen-for-dollar exchange rate and imports after 1988.

Alper and Mumcu (2007) estimated the demand for new automobiles in Turkey and found that

the origin of automobile’s country and quality have impacts on the demand for automobile in

Turkey and found that the demand for new automobiles is price inelastic in the short run.

Mannering (1988) conducted a study to determine how consumers in the USA value interest rates

in their new car choice decisions. His findings shows that consumers tend to overvalue interest

rates relative to their true worth, proving the success of interest rate incentive programs.

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McManus (2007) hypothesized that there is a link between gasoline price and selling price of

automobiles in the USA and to reveal the existence of this link, he regressed the aggregate

automobile prices on the number of independent variables including the interest rates. He found

that interest rates has negative impact on the price of automobiles and concluded that since

interest rate has negative impact on the automobile sales, automobile manufacturers overcomes

this effect by reducing the selling price of automobiles.

Dotseyand Reid (1992)tested the effectiveness of interest rates, proxied for the monetary policy,,

and oil prices in economic activity for the USA and concluded that both tight monetary policy

and oil price increases are statistically related to the declines in economic activity. Beck (2003)

investigated the difference in consumers' responses to changes in the price of automobiles and

changes in the level of the interest rate for automobile loans in USA and found that consumers

respond to price changes rather than interest rate changes when purchasing a new automobile. His

estimation results showed that there is a statistically significant and negative relationship between

auto-demand and both interest rate and price variables. As expected, they found a positive and

statistically significant positive relationship between auto-demand and disposable income.

3. Empirical Model and Data

To examine the determinant of new vehicle registrations in the EU, the demand model which is

augmented with the macro-economic aggregates is described as follows:

)1(lnlnlnlnlnln 76543210 ititititititititit XMIPIFPiyCCIPNV

where i stands for the EU country, t refers to time period, NV is new vehicle sales, P is price of

vehicles, CCI is consumer confidence indicator (consumer preferences), y is consumer’s

disposable income,i is interest rate,FP is fuel prices (diesel prices for the commercial vehicles,

gasoline prices for the passenger cars), IPI is industrial production, and XM is total trade.

For new vehicles, four particular segments are considered in the estimations. The number of new

registry for passenger cars (PC), light commercial vehicles (LCV) up to 3.5t - (excluding mini-

buses up to 3.5t), commercial vehicles (CV) over 3.5t - (excluding buses&coaches over 3.5t),

heavy commercial vehicles (HCV) over 16t - (excluding buses&coaches over 16t) were used for

the dependent variables.

The independent variable price is one of the variables that represents the price of vehicles. In

equation (1), the sign of the coefficient on the price is expected to be negative due to the demand

theory which postulates that the quantity demanded is a negative function of the price.

One of the important contributions of this study to the empirical literature is to determine the

sensitivity of the new vehicles sales to the consumer confidence indicator. Consumer confidence

indicators were formulated in the late 1940's by George Katona at the University of Michigan as

a way to include empirical measures of consumer expectations into the models of spending and

saving behavior. The demand model described above includes a measure of the consumer

confidence indicator to accounts for changes in consumers’ preferences due to the current

economic condition, recessions or expansions, which effect consumers' decision to buy a car.

Concerning the theory of demand, this variable can be used as proxy to measure the consumers’

preferences (Beck, 2003). With regard to the expected sign of the consumer confidence indicator,

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the views are not unambiguous about to what extent the consumer confidence affects the demand

of a good. On the one hand, a positive relationship is expected between new vehicle registration

and consumer confidence indicators due to fact that optimistic consumer confidence may

encourage consumers to make large expenses and to increase the tendency for borrowing. On the

other hand, pessimism may cause consumers to decrease their expenditures and to make more

strategic financial decisions.

The consumer income is one of the traditional determinant of a good consumed. The demand

theory assumes that an increase in demand for a good is positively associated with an increase in

consumer income. In this study, the growth rate of per capita income is used as a proxy for the

consumer income.

Another independent variable representing the price of automobiles is interest rate that is

included into the model to determine whether macroeconomic instability has any explanatory

power on the new vehicle registry in the EU member countries. As a durable good, it is expected

that the demand for vehicles is affected by the real interest rates. Accordingly, a negative

relationship between interest rate and vehicle sales is expected due to fact that higher interest

rates mean higher costs of borrowing for loans.

The fuel prices may be one of the important factors in explaining the fluctuations in new vehicle

sales. High oil prices are expected to be negative effect on the consumer demand for the vehicles.

According to Lee and Ni (2002), both the demand and supply of oil-sensitive industries are

affected after an oil price shock. They also emphasized that the vehicle industry is negatively

affected by oil price shocks and that the long run effects of oil price shocks will results in a

weakening demand for full-size cars or opting for alternative means of transportation.

It was hypothesized that worldwide economic conditions are expected to have impact on demand

for commercial vehicles. For the commercial vehicles, industrial production index and trade

volume were added to the models as independent variables to determine the effectiveness of

economic activities on vehicle demand. It is expected that there is a positive relationship between

demand for commercial vehicles and both industrial production and trade volume. It is expected

that the demand for the vehicles is expected to rise as the cargo transportation increases with the

growing economic activity in the sectors such as the construction, agriculture, chemical, mining

and service.

This study covers the monthly data spanning from January 1999 to August 2010 for 13 EU

countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands,

Portugal, Spain, Sweden, and United Kingdom). The starting date of time period and the cross-

sectional dimension of the panel are restricted to availability of the variables in concern for the

EU countries. The monthly data for the new registration of vehicles, short-term interest rates,

harmonized index of consumer prices were obtained from EUROSTAT databank. To reflect

relative movements in the average aggregate price level for new vehicles, motorcars inflation is

measured by harmonized index of consumer prices (2005=100). We observe seasonal cycles in

the passenger cars and therefore the seasonally adjusted observations for this variable were used

in the analysis. The monthly observations for the consumer confidence indicators, industrial

production index, trade volume in goods were obtained from OECD databank. Trade volume

(export+import) was indexed by taking January 2005=100 as the base time. Since monthly data

for the growth rate of per capita income is not available for the countries in hand, the quarterly

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data for the growth rate of per capita income retrieved from OECD database and was transformed

to monthly observations by means of cubic spline interpolation method (PROC EXPAND

procedure in SAS). The fuel prices are measured as including taxes and duties and were obtained

from European Commission Oil Bulletin.

4. Methods and Findings

In order to search for the long-run relations among the new vehicle sales and their determinants

in equation (1), this study utilizes panel cointegration methods. The justification behind the use of

panel cointegration analysis is due to the fact that panel data methods are more powerful than

times series analysis since the panel data gets additional information from the cross-sectional

dimension in addition to the time series dimension.

In the first step of our empirical analysis, unit root properties of the series are investigated via

four panel unit root tests developed by Breitung (2000), Levin et al. (2000), Im et al. (2003), and

Hadri (2000). The panel unit root analysis indicates that while the variables of interest have unit

root in their level forms, they are stationary in the fist-difference form76. The unit root analysis

therefore implies that the variables may be cointegrated in the long-run, which provide a room to

continue the empirical analysis with the examination of the cointegration properties of the

variables.

To analyze the existence of the long-run equilibrium relationship among the variables in

question, several panel cointegration tests are developed in McKoskey and Kao (1998), Kao

(1999), Pedroni (1999). The test of McKoskey and Kao (1998) and of Kao (1999) strictly

assumes a homogenous panel cointegration vector for the panel. Pedroni (1999) relaxes this

assumption by allowing heterogeneous cointegration vectors among cross-sectional units of the

panel.

To test for the null of no-cointegration in the panel, Pedroni (1999) developed the seven

cointegration statistics which are asymptotically distributed as standard normal77. First, four

statistics are based on the within-dimension approach which pools the autoregressive coefficient

across different members for the unit root tests on the estimated residuals. The next three

statistics are based on the between-dimension approach which averages the individually

estimated coefficients for each member in the panel.

The results from the panel cointegration tests are reported in Table 1. The findings strongly

support that the new sales of commercial vehicles, light commercial vehicles, and heavy

commercial vehicles in the EU are cointegrated with the prices, the consumer confidence index,

the interest rate, the real income growth, the diesel prices, the industrial production, and the trade

76See Pedroni (1999) for further details and mathematical representation of the statistics.

77Single-family homes are unattached houses and townhouses, including individually owned and

operated housing units as well as single-family townhouse condominiums. Currently, some 66 percent of

all U.S. housing consists of single or one-family homes (Listokin, D. and Burchell, R.W., Housing (shelter),

Microsoft® Student 2009 [DVD], Redmond, WA: Microsoft Corporation, 2008).

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volume. Similarly, the passenger car sales tend to be move together in line with the changes in

the prices, the consumer confidence index, interest rate, the consumer income, and the gasoline

prices. The existence of the cointegration relations is also implies that the short-run deviations

from the steady-state equilibrium in the estimated demand models for the vehicles are corrected

over time. Accordingly, the policy makers in the EU countries may not quickly react to the short-

term shocks to the new vehicle sales.

Table 1: Results for panel cointegration tests

Statistic Commercial

vehicles (CV)

Light commercial

vehicles (LCV)

Heavy commercial

vehicles (HCV)

Passenger

Cars (PC)

Within-dimension

Panel v-stat 6.02 6.42 5.92 12.92

Panel rho-stat -29.37 -21.94 -28.30 -27.37

Panel pp-stat -30.71 -24.80 -29.52 -29.19

Panel adf-stat -28.24 -22.14 -27.69 -22.99

Between-dimension

Group rho-stat -30.48 -23.79 -29.28 -28.63

Group pp-stat -35.20 -29.68 -33.64 -31.81

Group adf-stat -32.05 -26.88 -31.29 -27.01

The critical value at 1 percent level of significance is 1.96 for panel v-stat and -1.96 for other statistics. All

the statistics are statistically significant at 1 percent level of significance.

The existence of the cointegration among the variables arises the question of to what extent the

explanatory variables influence the new vehicle sales in the long-run. To estimate the long-run

cointegration parameters, panel ordinary least squares (OLS), panel dynamic OLS (DOLS) and

panel fully modified OLS (FMOLS) have been extensively utilized. Since these estimators are

asymptotically equivalent, the choice among the methods depends upon their performance in

finite samples (Banerjee, 1999). Monte Carlo experiments carried out by Kao and Chiang (2000)

show that panel DOLS outperforms both panel OLS and FMOLS estimators. The recent Monte

Carlo study of Wagner and Hluoskova (2009) indicate that the panel DOLS estimator

outperforms both single- and system-equation panel cointegration methods. We therefore

estimate the panel cointegration parameters by the group-mean panel DOLS estimator developed

by Pedroni (2001). The panel DOLS estimator of Pedroni (2001) is flexible in examining cross-

country heterogeneity in the panel as well as in providing the mean value of the panel

cointegrationcoefficient.

Estimation of the cointegration parameters from the group-mean panel DOLS approach is

computationally simple that the following regression model is estimated with the OLS for each

member of the panel.

it

K

Kk

kitikitiiit

ii

ii

xxy

(2)

wherey denotes the dependent variable, x is the matrix of the explanatory variables (lnP, lnCCI, i,

y, lnFP, lnIPI, lnXM), ∆ is the first–difference operator, -K and K are leads and lags to be

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determined. The panel cointegration parameter is constructed as

N

i

iN1

1*ˆ where i is the

cointegration parameter obtained from the individual OLS estimation of equation (2). Finally, the

associated t-ratio for the panel cointegration parameter is derived as

N

i

tNt1

ˆ

2/1

ˆ*

.

The results for the panel cointegration estimations are reported in Table 2. Findings indicate that

although some of the cointegration parameters appear to be insignificant, they have the expected

signs. More specifically, while the commercial and heavy vehicles are negatively affected from

interest rates, they are positively associated with a rise in the industrial production and in the total

trade. For the light commercial vehicles, consumer confidence, income, and trade are found to be

significantly positive. When we turn the passenger cars, it is found that while the passenger car

sales are positively determined by the consumer confidence and the income,it is negatively

determined by the interest rates.

Table 2: Results for panel cointegration estimation

Commercial

vehicles

Light

commercial

vehicles

Heavy

commercial

Vehicles

Passenger

Cars

lnP -1.74 (1.47) -0.26 (1.49) -1.23 (0.41) -0.06 (1.28)

lnCCI 0.44 (0.73) 1.16 (2.15) ** 0.10 (0.46) 0.75 (1.66) *

I -0.04 (3.04) *** -0.01 (0.98) -0.05 (3.36) *** -0.01 (2.18) **

Y 0.06 (0.95) 0.05 (2.31) ** 0.03 (0.11) 0.02 (1.97) **

lnFP -0.06 (0.74) -0.43 (3.35) -0.19 (1.24) 0.05 (0.08)

lnIPI 0.34 (2.38) *** 0.90 (1.36) 0.46 (3.40) ***

lnXM 0.83 (3.40) *** 0.30 (2.80) *** 1.20 (4.28) ***

Figures in parentheses are the absolute t-statistics. ***, **, * indicates the significance at 1, 5, and 10

percent level of statistical significance.

5. Conclusions and Policy Implications

In this study, we determine to what extent the economic variables affect the new vehicle sales in

the selected EU countries over the period January 1999-August 2010 by means of panel

cointegration analysis. The empirical results for the vehicles show that the vehicle sales are

strongly associated with higher industrial production and trade. For the passenger cars, we find

out that the passenger car sales are basically determined by the consumer preferences.

The panel cointegration analysis provides important implications about the vehicle sales in the

EU. First of all, the macro economic variables such as interest rate, industrial production, and

trade appear to be more pronounced factors in the fluctuations of the vehicle sales.

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REFERENCES

Abu-Eisheh, S.A. and Mannering,F.L. (2002) Forecasting automobile demand for economies in

transition: a dynamic simultaneous-equation system approach.Transportation Planning and

Technology, 25(4), 311-331.

ACEA (European Automobile Manufacturers’ Association)(2011)The automobile industry in

Europe - an industry with strength and

breadth.http://www.acea.be/index.php/collection/industry_and_economy_industry_report,

(Accessed:02/01/2011)

Alper, C.E. and Mumcu,A. (2007) Interaction between price, quality and country of origin when

estimating automobile demand: the case of Turkey.Applied Economics, 39, 1789–1796.

Banerjee, A. (1999) Panel data unit roots and cointegration: an overview. Oxford Bulletin of

Economics and Statistics, 61, 607-629.

Beck,E.C. (2003)Are consumers more interested in financing incentives or price

reductions?Issues in Political Economy, 12,1-9.

Breitung, J. (2000)The local power of some unit root tests for panel data. in B. H. Baltagi, ed.,

Nonstationary Panels, Panel Cointegration and Dynamic Panels, Advances in Econometrics, 15,

161-177.

Dotsey, M. andReid,M.(1992) Oil shocks, monetary policy, and economic activity. Economic

Review, 78, 14–27.

Hadri, K. (2000)Testing for stationarity in heterogeneous panel data. Econometrics Journal, 3,

148–161.

Im, K. S., Pesaran, M. H.and Shin, Y. (2003)Testing for unit roots in heterogeneous panels.

Journal of Econometrics, 115, 53–74.

Kao, C. (1999)Spurious regression and residual-based tests for cointegration in panel data.

Journal of Econometrics, 90, 1-44.

http://www.acea.be/index.php/collection/industry_and_economy_industry_report

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Kao, C. and Chiang, M.H. (2000)On the estimation and inference of a cointegrated regression in

panel data. In B.H. Baltagi, ed., Advances in Econometrics.Nonstationary Panels, Panel

Cointegration and Dynamic Panels, 15, 179–222.

Lee, K. andShawn,N.(2002)On the dynamic effects of oil price shocks: a study using

industry level data. Journal of Monetary Economics, 49, 823-852.

Levin, A., Lin, C., and Chu, C.J. (2002)Unit root tests in panel data: asymptotic and finite-sample

properties. Journal of Econometrics, 108, 1-24.

Lord, R.A. and Saito,Y. (2010) Effect of exchange rates and gasoline prices on us imports of

japanese automobiles, The International Trade Journal, 24(2), 182-208.

Mannering, F. (1988) Analysis of the impact of interest rates on automobile demand.

Transportation Research Record, 1116, 10-14.

McCoskey, S., and Kao, C. (1998)A residual-based test of the null of cointegration in panel

data.Econometric Reviews, 17, 57-84.

McManus, W. (2007) The link between gasoline prices and vehicle sales.Business Economics,

42, 53-60.

Pedroni, P. (1999)Critical values for cointegration tests in heterogeneous panels with multiple

regressors. Oxford Bulletin of Economics and Statistics, 61(Special Issue), 653–670.

Pedroni, P. (2001) Purchasing power parity tests in cointegrated panels.Review of Economics and

Statistics, 83, 727-931.

Wad, P. (2009) Impact of the global economic and financial crisis over the automotive industry in

developing countries, United Nations Industrial Development Organization, Research and

Statistics Branch, Working Paper, No:16/2009.

Wagner, M., Hlouskova, J. (2009) The performance of panel cointegration methods: results from

a large scale simulation study, Econometric Reviews, 29(2), 182-223.

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The Analysis of Sustainability Development of Eastern and South Eastern Europe in the

Post Socialist Period

Fatih Çelebioğlu

Dumlupınar University, Faculty of Economics and Administrative Sciences,

Department of Economics, Kütahya, TURKEY,

[email protected]

Phone: +90 274 265 20 31 (ext.2114-2200) Fax: +90 274 265 21 97

Abstract

Since the collapse of socialism, Eastern Europe and South Eastern (Balkans) Europe countries

have been expeditiously changing as social, economic and politic structure. Some former socialist

countries (as Bulgaria, Slovenia, Slovakia, Latvia, Lithuania, Poland and Romania) and Greece

became full member of European Union. Some Balkan countries (Serbia, Montenegro, Croatia,

Bosnia-Herzegovina, and Macedonia) lived difficult war years. After the wars, they have started

to struggle for economic, social and political reconstruction process. Some CIS (Commonwealth

of Independent States) countries (as Moldova, Ukraine and Belarus) tried to adapt market

economics. Each country in this region wants bigger real per capita income, better welfare level,

and generally become a developed country. But these countries have some political, economic

and social problems in development and sustainability process. The aim of this paper is to

analysis the countries in terms of development indicators such as per capita GDP growth rates,

Human Development Index values and Sustainable Human Development Index values in the

period of 2000-2010. It will be used the tools of spatial statistics (ESDA -Exploratory Spatial

Data Analysis).

Keywords: Sustainable Development, per capita GDP growth, Human Development Index,

Sustainable Human Development Index, ESDA (Exploratory Spatial Data Analysis)

1. INTRODUCTION

Eastern and South Eastern Europe are an important area because of witness historic and politic

experiences and incidents for ages. But it has been also living historical alteration in recent

decades. Although some Balkan countries were relatively stable in 1990s, there was war in

Balkan Peninsula. Some former socialist countries (as Bulgaria, Slovenia, Slovakia, Latvia,

Lithuania, Poland and Romania) and Greece became full member of European Union. The others

have been struggling for this aim. In spite of Kosovo declared of independence in 2008, many

countries haven’t been accepting this situation. Besides, CIS (Commonwealth of Independent

States) countries (as Moldova, Ukraine and Belarus) tried to adapt market economics.

Nevertheless these regions of Europe are living relatively stable condition nowadays, compare


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with last ten years. Whole countries in these regions, especially gain independence in recent

decades, wants to become rapidly developed country.

After a long war and unstable political period, the countries have taken an opportunity about their

development process nowadays. These regions have been gaining stable structure overtime and

this stable period has been supporting development indicators. In this paper, Balkan countries are

being analyzed in terms of development indicators such as average rates of per capita GDP

growth in the period of 2000-2010, Human Development Index in 2010, and Sustainable Human

Development Index in 2010.

2. HUMAN DEVELOPMENT INDEX (HDI) AND SUSTAINABLE HUMAN

DEVELOPMENT INDEX (SHDI)

UNDP calculates The Human Development Index (HDI). HDI includes some special data such as

life expectancy at birth, adult literacy rates, gross primary-secondary and tertiary enrolment, GDP

(gross domestic product) per capita (PPP - purchasing power parity- US$). HDI separates three

subgroup as developed (high development), developing (middle development), and

underdeveloped (low development) countries.

Africa, Middle East, South Asia and some South American countries have big problems in terms

of level of human development. Especially in Africa, the level of human development is lower

than other regions of the world.

Besides, The Sustainable Human Development Index (SHDI) was calculated by the Ministry of

Environment and Natural Resources of Sri Lanka in 2008. The new version of the index has been

revised in 2010. This index calculated with the contributions of United Nations University in

Tokyo, Japan. The index calculated by incorporating environmental aspects and quality of the life

such as carbon emission, bio capacity, ecological footprint and poverty to Human Development

Index (HDI) developed by UNDP to consider the sustainable human development aspects which

ignore in HDI. (environmentmin.gov.lk, April 12, 2012).

Acoording to Togtokh and Gaffney (April 15, 2012); by including carbon emissions in

recalculation of the HDI, it has gotten an indication of the cost of one country’s quality of life to

another’s. If a country has a very high HDI but also high carbon emissions, it can be said that the

high quality of life enjoyed by this nation comes at a price to the quality of life in other countries,

particularly developing nations, and to future generations. The index shows that, while the US is

vilified for its poor record on tackling emissions, Canada is a long way from being a role model.

Yet, with the traditional HDI, the UN is using such countries with very high human development

as examples to the rest of the world. Other nations attempting to emulate the success of these

particular countries in terms of human development look at the economic model and policies

adopted to bring about that success.

Sustainable Human Development Index (SHDI) has been calculating by using HDI and different

indexes as the following:

SHDI = ¼(HDI +Ecological Index-Climate Change Index +Poverty Index)

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3. DATA, METHODOLOGY AND FINDINGS

3.1. Data

GDP (Gross Domestic Product) per capita growth (annual %) data set comes from World

Development Online Database (WDI online) for 21 countries in the period of 2000-2010. Human

Development Index data (2010) has been prepared by UNDP (United Nations Development

Programme). Sustainable Human Development Index was calculated by Ministry of Environment

and Natural Resources of Sri Lanka in 2008. The last version of the index was published in

2010.

To analyze spatial relations between Eastern and South Eastern Europe countries, we use GeoDa

(Geographic Data Analysis) software package which conducts Spatial Data Analysis, geo-

visualization, spatial autocorrelation and spatial modeling78.

3.2. Methodology

3.2.1. Quartile Maps

Our analysis start with the quartile maps of the distribution of our variables for each country.

Darker colors explain higher values and lighter colors show lower values in quartile map in for

all variables.

78 Here are some of the studies in this regard: Rey and Montouri (1999), Ying (2000), Manfred et al.

(2001), Le Gallo and Ertur (2003), Van Oort and Artezema (2004), Dall’erba (2005), Voss et al. (2006),

Ezcurra et al. (2007), Ezcurra et al. (2008), Battisti and Di Vaio (2008), Celebioglu and Dall’erba (2010).

Figure 1: Per capita GDP annual growth

rates in the period of 2000-2010

Figure 2: Human Development Index

Values (2010)

Figure 3: Sustainable Human

Development Index (SHDI) values in

2010

bword://!!ARV6FUJ2JP,spatial%20analysis/

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Figure 1 shows that per capita GDP growth rate is

especially high values in Albania, Bulgaria, Belarus,

Lithuania, Moldova, and Ukraine. On the contrary,

Macedonia, Greece, Turkey, Hungary, and Slovenia

have the lowest values in this analysis. Figure 2

displays distribution of each country. According to

figure 2, especially Greece, Czech Republic, Hungary,

Slovenia, Slovakia, and Estonia have the highest

Human Development Index values. Bosnia

Herzegovina, Macedonia, Turkey, Moldova, and

Ukraine have the lowest HDI figures. Figure 3 presents

Sustainable Human Development Index (SHDI)

values. In this figure, we can see only one difference

compare with Figure 2 in terms of highest values. While Estonia is one of the highest value

countries in HDI, there is Lithuania in SHDI in place of Estonia. We understand from quartile

maps that disparity is clear in this region. For this reason we start ESDA analysis with spatial

weight matrix.

3.2.2. Spatial Weight Matrix

A spatial weight matrix is the necessary tool to impose a neighborhood structure on a spatial

dataset. As usual in the spatial statistics literature, neighbors are defined by a binary relationship

(0 for non-neighbors, 1 for neighbors). Weight matrix calculation is performed under GeoDa. It

can be used two basic approaches for defining neighborhood: contiguity (shared borders) and

distance. Contiguity-based weights matrices include rook and queen. Areas are neighbors under

the rook criterion if they share a common border, not vertices. Distance-based weights matrices

include distance bands and k nearest neighbors. Based on these two concepts, we decided to

create weight matrices to investigate the distribution of our variables of interest: k_3 nearest

neighbor matrix. Due to space constraints, we present the k_3 nearest neighbor matrix only

below:

*

( ) 0

( ) 1 ( ) ( ) ( ) / ( ) 3

( ) 0 ( )

ij

ijij ij i ij ij

j

ij ij i

w k if i j

w k if d D k and w k w k w k for k

w k if d kD

where di,j is great circle distance between centroids of country i and j and Di(k) is the 3th order

smallest distance between regions i and j such that each region i has exactly 3 neighbors. Now

that the weight matrix has been defined, we estimate a couple of spatial statistics that will shed

some light on the spatial distribution of our variables. The most common of them is Moran’s I

which is a measure of global spatial autocorrelation (Anselin, 1988).

3.2.3. Calculation of Moran’s I for Global Spatial Autocorrelation

Spatial autocorrelation refers to the correlation of a variable with itself in space. It can be positive

(when high values correlate with high neighboring values or when low values correlate with low

neighboring values) or negative (spatial outliers for high-low or low-high values). Note that

(1)

https://www.geoda.uiuc.edu/support/help/glossary.html#rook

https://www.geoda.uiuc.edu/support/help/glossary.html#queen

https://www.geoda.uiuc.edu/support/help/glossary.html#vertex

https://www.geoda.uiuc.edu/support/help/glossary.html#distwgts

https://www.geoda.uiuc.edu/support/help/glossary.html#knn

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positive spatial autocorrelation can be associated with a small negative value (e.g., -0.01) since

the mean in finite samples is not centered on 1. Spatial autocorrelation analysis includes tests and

visualization of both global (test for clustering) and local (test for clusters) Moran’s I statistic

(Anselin et al. 2006).

Global spatial autocorrelation is a measure of overall clustering and it is measured here by

Moran's I. It captures the extent of overall clustering that exists in a dataset. It is assessed by

means of a test of a null hypothesis of random location. Rejection of this null hypothesis suggests

a spatial pattern or spatial structure, which provides more insights about a data distribution that

what a quartile map. For each variable, it measures the degree of linear association between its

value at one location and the spatially weighted average of neighboring values (Anselin et al.

2007; Anselin 1995) and is formulized as follows:

*

1 1

1 1

( )n n

ij it jti j

t n n

it jti j

w k x x

I

x x

Where ijw& is the (row-standardized) degree of connection between the spatial units i and j and

Xi,j is the variable of interest in country i at year t (measured as a deviation from the mean value

for that year). Values of I larger (smaller) than the expected value E(I) = -1/(n-1) indicate positive

(negative) spatial autocorrelation. In our study, this value is (-0.050). There are different ways to

draw inference here. The approach we use is a permutation approach with 999 permutations. It

means that 999 re-sampled datasets were automatically created for which the I statistics are

computed. The value obtained for the actual dataset has then been compared to the empirical

distribution obtained from these re-sampled datasets.

The results of Moran’s I are presented in table 1 below. All the results indicate a positive spatial

autocorrelation, i.e. the value of a variable in one location depends positively on the value of the

same variable in neighboring locations. For instance, when the per capita income in one country

increases by 1%, the one of its neighbors increases by slightly more than 33%. All of our three

variables of interest are significant (at 1%) with the k_3 nearest neighbor matrix. For this reason,

this is the weight matrix we will use in the rest of our study.

Table: The results of Moran’s I for the nearest four neighbors

Variables K_3

Per capita GDP (average values of 2000-2010) 0.3310

(0.010)

Human Development Index Values (2010) 0.2421

(0.029)

Sustainable Human Development Index Values

(2010)

0.2672

(0.027)

Note: p-values are into brackets

(2)

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3.2.4. Moran’s Scatterplots of Variables

The Moran scatter plot complements Moran’s I because it provides to categorize the nature of

spatial autocorrelation into four types: low-low (LL), low-high (LH), high-low (HL) and high-

high (HH). The x-axis captures the value of a variable compared to the average value of the

sample. For example, all the points on the right hand side of the figure mean (the vertical axis in

the middle) that in the corresponding provinces, the value of the variable under study was above

the sample’s average. On the other hand, the y-axis captures the average value of the same

variable in the neighboring locations (with the neighbors being defined by the weight matrix). For

instance, all the points below the mean (the horizontal axis in the middle of the figure) represent

provinces of which neighbors display, on average, a lower value than the sample’s mean.

The result of this approach is a figure with four windows which reflect the correlation between

the relative (to the mean) value of a variable in one location and the relative value of the same

variable in neighboring locations. For instance, the quadrant HH means a high value in the

studied area and a high value in the neighboring areas. Countries located in quadrants I and III

refer to positive spatial autocorrelation, i.e. the spatial clustering of similar values, whereas

quadrants II and IV represent negative spatial autocorrelation, i.e. the spatial clustering of

dissimilar values. Note also that the link between a scatter plot and Moran’s I is reflected by a

line of which slope is the value of Moran’s I statistic.

Figures 4 to 6 above show the Moran scatter plots of our variables of interest. All of the per

capita GDP, Human Development Index and Sustainable Human Development Index have

positive spatial autocorrelation that is reflected by the value of Moran’s I and the fact that most of

the countries are located in quadrants HH and LL.

When we look at the HH quadrant in scotterplot of per capita GDP growth, we see mostly

Eastern Europe such as Belarus, Estonia, Latvia, Lithuania, Moldova, Romania, and Ukraine. In

Figure. 6: Moran’s

Scatterplot for Sustainable

Human Development

Index in 2010

Figure 4: Moran’s Scatterplot for

average of per capita GDP growth in

the period of 2000-2010

Figure 5: Moran’s

Scatterplot for Human

Development Index in 2010

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the contrary, the HH quadrant in scotterplot of HDI has been composed by Croatia, Czech Rep.,

Poland, Slovakia, Slovenia, Estonia, Latvia, and Lithuania.

Besides, Czech Rep., Poland, Slovakia, Slovenia, Estonia, Latvia, and Lithuania take part in HH

quadrant of SHDI.

3.2.5. LISA Statistics for Local Spatial Autocorrelation

LISA statistics (Local Indicators of Spatial Association) measure, by definition, the presence of

spatial autocorrelation for each of the location of our sample. It captures the presence or absence

of significant spatial clusters or outliers for each location. Combined with the classification into

four types defined in the Moran scatter plot above, LISA statistics indicates significant local

clusters (high–high or low–low) or local spatial outliers (high–low or low–high). The average of

the Local Moran statistics is proportional to the Global Moran's I value (Anselin 1995; Anselin et

al. 2007).

Anselin (1995) formulated the local Moran’s statistics for each country (I) and year (t) as follows:

2

0

0

/ii ij j i

j i

xI w x with m x n

m

where wij is the elements of the row-standardized weights matrix W and xi(xj) is the observation

in country i(j). Their significance level is based on a randomization approach with 999

permutations of the neighboring provinces for each observation.

The randomization approach is used in the context of a numeric permutation approach to describe

the computation of pseudo significance levels for global and local spatial autocorrelation

(3)

Figure 7: LISA Cluster Map of per

capita GDP growth (average of

2000-2010)

Figure 8: LISA Cluster Map of HDI

(2010)

https://www.geoda.uiuc.edu/support/help/glossary.html#perm

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statistics. In order to determine how likely it would be to observe the actual spatial distribution at

hand, the actual values are randomly reshuffled over space 999 times.

Countries that are in HH area (red color) in Figure

7 are Belarus, Estonia, Latvia, Lithuania, and

Ukraine. HH type autocorrelation is very strong in

Eastern Europe. In Figure 8 is LISA cluster map of

HDI. This figure point out that Czech Republic,

Poland and Slovakia are in HH quadrant (red

color), Romania is in HL area (pink color) and

Ukraine is in LL area (blue). It is interesting that

although Ukraine is in HH quadrant of per capita

GDP growth, there is a different situation in the

figure. Though Figure 9 is similar to Figure 8,

Albania is in LL area of SHDI. But in LISA map

of SHDI, Ukraine was in HH type autocorrelation.

4. CONCLUSIONS

The aim of this paper is to analysis spatial distribution of development indicators such as per

capita GDP growth rates, Human Development Index values and Sustainable Human

Development Index values in the period of 2000-2010. For this purpose we use quartile maps,

Moran’s Scotterplots and LISA (Local Indicators of Spatial Association) statistics.

We investigate spatial distribution of per capita GDP growth in the period of 2000-2010, Human

Development Index (2010) and Sustainable Human Development Index (2010). First of all, our

quartile maps show that there is an important development level gap between countries of

Europe. Secondly, when we estimate spatial autocorrelation by means of Moran’s I, our results

indicate positive (and significant) global autocorrelation for all of our variables and thus

indicating the geographical location of a country influences its level of per capita GDP growth

rate, Human Development Index and Sustainable Human Development Index.

Secondly, these results are corroborated by the corresponding Moran’s Scatterplots that display

the HH quadrant in scotterplot of per capita GDP growth includes mostly Eastern Europe such as

Belarus, Estonia, Latvia, Lithuania, Moldova, Romania, and Ukraine. In the contrary, the HH

quadrant in scotterplot of HDI has been composed by Croatia, Czech Rep., Poland, Slovakia,

Slovenia, Estonia, Latvia, and Lithuania. Besides, Czech Rep., Poland, Slovakia, Slovenia,

Estonia, Latvia, and Lithuania take part in HH quadrant of SHDI.

Thirdly, LISA statistics confirm the significant presence of local spatial autocorrelation and

highlight spatial heterogeneity in the form of two distinct spatial clusters of high and low values

Figure 9: LISA Cluster Map of

SHDI (2010)

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of per capita GDP growth rate, Human Development Index and Sustainable Human Development

Index.

And finally, we can say that there is an important spatial heterogeneity and spatial disparity in

terms of our all variables. But the countries in the east part of Europe are divided two groups in

the region. Firstly, swiftly growing countries in terms of per capita GDP growth rate and

secondly, countries that has high level of SHDI –HDI. For this reason, we can say that swiftly

growing countries in terms of per capita GDP growth rate should be developed also in terms of

human development.

REFERENCES

ANSELIN, L. (1988), Spatial Econometrics: Methods and Models, Kluwer Academic Publishers,

Dordrecht.

ANSELIN, L. (1995) Local Indicator of Spatial Association – LISA. Geographical Analysis 27,

pp.93–115

ANSELIN, L., Sridharan S and Gholston S (2007) “Using Exploratory Spatial Data Analysis to

Leverage Social Indicator Databases: The Discovery of Interesting Patterns”, Social Indicators

Research, 82, pp.287–309.

ANSELIN, L., Syabri I. and Kho Y. (2006) GeoDa: An Introduction to Spatial Data Analysis.

Geographical Analysis 38, pp.5–22.

Battisti M. and Di Vaio G. (2008) A Spatially Filtered Mixture of β-Convergence Regressions for

EU Regions, 1980–2002, Empirical Economics. 34, 105–121.

Celebioglu F. and Dall’erba S. (2010) Spatial Disparities across the Regions of Turkey: An

Exploratory Spatial Data Analysis, The Annals of Regional Science, 45, 2, 379-400.

Dall’erba S. (2005) Distribution of Regional Income and Regional Funds in Europe 1989–1999:

An Exploratory Spatial Data Analysis, The Annals of Regional Science, 39, 121-148

Ezcuerra R., Iraizoz B., Pascual P. and Rapún M (2008) Spatial Disparities in the European

Agriculture: A Regional Analysis, Applied Economics, Volume 40, Number 13, July 2008 , pp.

1669-1684(16)

Ezcuerra R., Pascual P. and Rapún M. (2007) Spatial Disparities in the European Union: An

Analysis of Regional Polarization, The Annals of Regional Science, 41, 401–429.

http://www.environmentmin.gov.lk/web/index.php?option=com_content&view=article&id=104

&Itemid=275&lang=en, April 12, 2012.

Le Gallo J. and Ertur C. (2003) Exploratory spatial data analysis of the distribution of regional

per capita GDP in Europe, 1980–1995, Papers in Regional Science, 82, 2, 175-201.

Manfred F.M., Fröhlich J., Gassler H. and Varga A. (2001) The Role Of Space in The Creation of

New Technological Knowledge in Austria: An Exploratory Spatial Data Analysis, In: Manfred

F.M. and Fröhlich J. (Eds.), Knowledge, Complexity and Innovation Systems, Springer, Berlin,

124-145.

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Rey S.J., Montouri B.D. (1999) US Regional Income Convergence: A Spatial Econometric

Perspective, Regional Studies, 33, 143–156.

Togtokh C. and Gaffney O., http://ourworld.unu.edu/en/the-2010-human-sustainable-

development-index/, April 15, 2012.

Van Oort F.G. and Atzema O.A.L.C. (2004) On The Conceptualization of Agglomeration

Economies: The Case of New Firm Formation in the Dutch ICT Sector, The Annals of Regional

Science, 38, 263–290.

Voss P.R., Long D.D., Hammer R.B. and Friedman S. (2006) County Child Poverty Rates in the

US: A Spatial Regression Approach, Population Research and Policy Review, 25, 369–391.

WDI Online Database, http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2

www.undp.org

Ying L.G. (2000) Measuring the Spillover Effects: Some Chinese Evidence, Papers in Regional

Science, 79, 75–89.

The Factors Determined To The Improvement In The Least Developed And Developing

Countries: Testing A Model

Gözde Ergin, Adil Oğuzhan

Trakya University, Department of Econometrics.

Abstract

Finding the different ways of the improvement as a multidimensional process causes

different improvement ways in all countries in the world. The economic improvement that cause

a structural changing is very important in all economies all over the world and it is necessary for

the least developed countries at the same time. These countries have solved the phenomena of

poverty, unemployment, low life standards and unimproved. The differentiation in the socio-

cultural structures of the least developed and developing countries effect the improvement in a

positive way.

In the study, the socio-economic factors of improvement and a classification according to

the gross national product levels per person in the least developed and developing countries have

been done by taking the definition accepted by World Bank into consideration. There are fifteen

countries in the classification of the least developed and developing countries. The data of thirty-

three factors in the comparison of these countries have been obtained from the data source of

World Bank, OECD, EUROSTAT and UN (2000 – 2009).

http://www.springerlink.com/content/102983/?p=0cb19402bb11451591d8e42bbee53a5d&pi=0

http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2

http://www.undp.org/

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The Statistical and Casual Models in the kinds of econometric models have been

estimated with ‘’Panel Model Method’’. For choosing the suitable model, the test for choosing

model ‘’Hausman’’ has been used. As a result, the factors determined to the improvement of the

countries in a different improvement levels have been discussed and the comments related to

them have been made.

1. INTRODUCTION

The concept of economic development could be defined as the process of increasing of

material wellbeing, abolishing the poverty, the input in production and the usage of these outputs

as a result and besides, as an activity of the protections of the level of the socio-economical

standards of the society in order to use them more actively and with different methods for the

production process.

The problems of individuals and the world increase gradually because of the increase of

the world population and the globalization. In todays world, where the incomes of the individuals

raise, the distribution of income gets worse and the poverty increases, the importance of the

development problematic dramatically increased. In a world which gets smaller with the

expansion of communication tools due to globalization, the level of information acquisition of

both countries and individuals has risen. Therefore, solutions are sought through development

policies for the alternating lifestyles, economies and the differentiation in countries’ and

individuals’ socio-cultural structures.

Development, having multiple aspects, has various angles and these bring about different

development periods in each country. For that reason, development is defined in different ways

by various people and thinkers.

Economic Development is very important in every economies and it nearly becomes

compulsory for the low-level of development countries. Because, these countries can only find a

solution for poverty, low-living standarts and backwardness entity with economic development.

But on the other hand when examining for advanced tecnology, development shows necessity for

maintaining current growth rate in advanced tecnologies (Jain & Ohri, 2007:2)

Development carries meaning of recovering economy and in any case of negativities for

underdeveloped countries. As known,it should be tried to be developed and handled with all

defects in this issue and origins of these defects for achive successing in a weak issue. The

biggest step of developing should be provided the process of developing with handle by looking

cause and effects of deficincies in economy. Development not only developt in terms of

economy, but also known as social and politically changes and positive contributions of these

changes.

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2. Development Theories

After from 1950s, a lot of development theories suggested to the world.(boyacıoğlu,

200:27-28). The major ones of these theories are known as The Development Theory of Rostow,

The Balanced Development Theory and Unbalanced Development Theories. According to

Rostow’s development theory in 1960, the development countries are the countries surpassed the

stage of traditional society,transition,rising,maturity, and the mass consumption.

In the countries which is in the stage of traditional society occur an intense agricultural

sector and the functions of the limited production and modern scientific-technical practices.

Education and infrastructure investment in the transition stage society have a dramatically

increasing and bring about new initiatives. .In rising stage the composed profit returns to

investment and technology is started to use successfully at all sectors. Anymore, the societies in

the maturity stage use their sources in the areas having modern technology. While their

production and exportation are increasing, parallelly the requiremenst for new import goods are

increasing, as well. As for in the stage of mass consumption, the per capita income arise and the

society starts concentrating on consumption rather than production.Impetus between these stages

is the expediting economic growth as returning internal and external austerity to enough amount

investment. (Dolun ve Atik, 2006: 8).

Balanced development aims a condition of equilibrium in the economy.The economic

events occured in the underdeveloped society rely on the complementarity link.In terms of

thought, complementarity is the important factor of the balanced development and it is not an

instrument to realize the balance situation but it is an directive item.The balanced development

model rests on the mutual dependence.As a first, it is the mutual dependence in production.On

one hand, every economic group have to find income and look for the market for its outcome

.As a second, it is that every income growth create an enhancement in demand.

The balanced development with balance, food products with clothing, agricultural

feedstock with industrial products, public enterprises with other investments and such as

production for the export and domestic demand are asked to arised for many other ecomomic

situations .

According to Rosentein-Roden respected the pioneer of balanced development in order to

increase income and demand are needed benefical and healthy investments.Concerted

investments are going to increase income and demand.Thus, investment in parts is not enough

both increasing demand and income.Overall, coordinated investments in Rosentein-Roden model

supplies with the external savings.

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With the aim of comparing economic development and economic growth, an organized schedule

is given below.

3. Panel Data Analysis

When T numbered observations of N numbered econometric units are dealed together

establish panel data model. Assets belonging to any year establish the cross section of the panel;

the assets the economic units take by years establish the time sector. In other words, across every

econometric unit there is a time series. Panel data analysis model is the model where economic

relations are presumed using time sector cross. (Powel, 2010: 1).

4. A Model Test Regarding Development Factors Affecting Development at

Underdeveloped and Developing Countries

Taking into consideration the development factors affecting the development of

developing and underdeveloped countries with the condition of benefiting from panel data, the

Socio-Economic variables of countries taking place at the panel model are defined as below.

Economic Development Economic Growth

Content

Economic Development refers to either mutations

savings and national (mutations betwen institutional

and tecnologic) frame or progressive mutations of

economic structure.

Economic Growth is an increase in capacity of an

ecenomy to produce goods and services like

investment, savings and revenues.

Use

Economic Development refers to benefit from unused

resources in underdevelop countries.

Economic Growth is related with development

of low-used sources from developed contries to

use in optimum way.

Boost

(büyüme)

Development, equilibrium rate is connected with the

raising of high steady state.

.Growth is connected with general steady and

graduaded raise at the rate of investment and

outcome.

Definition Economic Development implies the problems of

underdevelopment countries.

Economic Growth implies the problem of

developed countries.

Action

Creates both qualitative and quantitative mutations in

economy.

Creates only quantitative mutations economy.

Scope Connected with all mutations in economy. Connected with small motations in economy.

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1X : Research- Development Cost GDP % 2X : GDP Per Capita(Year )

3X : Rural Population’s % Among Total

Population

4X : The Rate of Urban Poplation in the Overall

Population

5X : Death Rate ( 1000 Person)

7X : İnfant Death Rate (1000 İnfant)

6X : Tax Revenue GDP %

8X : Agricultural Rate % in GDP

9X : Service Sector % in GDP 10X : Industrial Sector % in GDP

11X : Import of Good and Service % in GDP % 27X :FDI %in Net Capital Inflow

12X : Export of Good and Service % in GDP % 13X : GDP Rate

14X : Real Inflation Rate 15X : Unemployment Rate

17X : The Number of Scientfic Article 19X : Expectancy of Life (Year)

18X : Electrical Consumption Per Capita 20X : Inflation Rate

22X : Cultiroted Land (Hek.) 23X : The Rate of Employed In Industrial Sector

24X : The Rate of Employed In Service Sector 25X : Dependency Rate

28X : Comminication Revenue 29X : Energy Import % in GDP

30X : The Rate of Big Urban in Over Population 31X : Women at the Parliament

32X : The Rate of Population ( Year) 33X : GDP per Capita($)

4.1. Approximation Results According to Panel Model of Underdeveloped Countries

Under this chapter underdeveloped countries are Uzbekistan; Kyrgyzstan; Ethiopia;

Kenya, Nepal, Bangladesh and Afghanistan. These countries are considered as underdeveloped

ones according World Bank’s definitions. For these countries different approximation models of

social and economic sector will be tested.

Table 1: Approximation Results of Underdeveloped Countries Social Sector According to

Panel Model

Model I Model II Model III Model IV Model V

Constant Effective Model

Random

Effective

Model

Pooled Least

(LSDV)Model

Fit Panel Data Model

using GLS, removing

Autocorrelation and

homoscedasticity

Robust

Score

Variables Coefficients

Coefficients Coefficients Coefficients Coefficients

C

-6.672591

(0.2953)

-1.786856

(0.7641) -

8.353807

(0.000)

-1.516349

(0.897)

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X19?

3.505694

(0.0047)

2.428435

(0.0139)

3.505694

(0.0047)

.5925234

(0.000)

2.367225

(0.166)

X25?

-1.995913

(0.0007)

-1.605449

(0.0037)

-1.995913

(0.0007)

-1.352025

(0.000)

-1.583195

(0.014)

X30?

1.940735

(0.0044)

1.279782

(0.0045)

1.940735

(0.0044)

.1943402

(0.000)

1.244267

(0.195)

X31?

0.103846

(0.0518)

0.132759

(0.0077)

0.103846

(0.0518)

.05734

(0.000)

.1343365

(0.015)

Fixed Effects (Cross)

Random

Effects

(Cross

_UZB--C 0.099859 0.136976 -6.572731 - -

_KIR--C -1.402104 -0.869378 -8.074695 - -

_ETOP--C 0.571702 0.178319 -6.100889 - -

_KEN--C 0.641290 0.633556 -6.031301 - -

_NEPAL--C 0.470263 0.270047 -6.202328 - -

_BANG--C -0.696803 -0.483477 -7.369394 - -

_AFG--C 0.315794 0.133956 -6.356797 - -

R2

0.847275 0.506778 0.847275 - -

R2

0.821389 0.476426 0.821389 - -

Se 0.215075 0.220746 0.215075 - -

∑ ei2

2.729168 3.167381 2.729168 - -

Log

likelihood 14.23175 - 14.23175 62.08698 -

F-statistic 32.73143 16.69666 32.731 - -

Prob(F-

statistic) 0.000000 0.000000 0.000000 - -

Akaike info

criterion -0.092336 - -0.092336 - -

Schwarz

criterion 0.260999 - 0.260999 - -

Hannan-

Quinn criter. 0.048013 - 0.048013 - -

Durbin-

Watson stat 1.167119 1.009085 1.167119 - -

Wald-ist.

- 66.79 - 399.78 -

LM - 108.83 - - -

corr(u_i,Xb) -0.8864 0 (assumed) - - -

F u_i=0 25.72 - - - -

sigma_u .76597963 .48702719 - - -

sigma_e .21507476 .21507476 - - -

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Rho .92692184 .83680818 - - -

Table2: Panel Model of Approximation Results Economic Development Sector of Underdeveloped

Countries’



Random

Effective

Model

Pooled Least

(LSDV)Model


using GLS,removing

Autocorrelation and

homoscedasticity

Robust

Score



C -21.94974

(0.0544)

8.061894

(0.0137) -

10.48043

(0.000)

8.83934

(0.000)

X22? 1.808341

(0.0157)

-0.144044

(0.4889) 1.808341

-.3189611

(0.000)

-.1946205

(0.025)


Random

Effects

(Cross

_UZB--C 0.570444 0.416194 -21.37930 - -

_KIR—C 2.574761 0.075481 -19.37498 - -

_ETOP—C -2.399361 -0.598519 -24.34911 - -

_KEN--C 0.266447 0.407666 -21.68330 - -

_NEPAL—

C 1.172460 -0.181637 -20.77728 - -

_BANG--C -0.874519 0.137800 -22.82426 - -

_AFG--C -1.310231 -0.256984 -23.25998 - -

R2

0.684503 0.006429 0.684503 - -

R2

0.648883 -0.008183 0.648883 - -

Se 0.301551 0.316311 0.301551 - -

∑ ei2

5.637852 6.803588 5.637852 - -

Log

likelihood -11.16097 - -11.16097 50.3867 -

F-statistic 19.21651 0.439978 19.21651 - -

Prob(F-

statistic) 0.000000 0.509375 0.00000 - -

Akaike info

criterion 0.547456 - 0.547456 - -

Schwarz

criterion 0.804427 - 0.804427 - -

Hannan-

Quinn criter. 0.649528 - 0.649528 - -

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Durbin-

Watson stat 0.663113 0.459701 0.663113 - -

Wald-ist. - 0.44 - 256.57 5.04

LM - 82.60 - -

corr(u_i,

Xb) -0.9727 0 (assumed) - - -

F u_i=0 16.40 - - - -

sigma_u 1.6653277 .39296918 - - -

sigma_e .30155042 .30155042 - - -

Rho .96825253 .62938698 - - -

4.2. A Model Test According to the Economic Development of Underdeveloped Countries

When the economic factors dimension of improvement models of underdeveloped

countries is seen as a panel model, Constant Effective Model has been estimated as a first model.

In the estimation of this model all economic variables has been added to the model as explanatory

variables.

The Hausman Test was applied to understand which model is more coherent at the above

approximated Fixed Effect Cross Model and Random Effects. The results are below.

Table 3: Hausman Determination Model Test Results

Correlated Random Effects - Hausman Test

Pool: Untitled

Test cross-section random effects

Test Summary

Chi-Sq.

Statistic Chi-Sq. d.f. Prob.

Cross-section random 7.819711 1 0.0052

Because the test result is p<0.05 the hypothesis is denied and FEM is preferred. In

addition the i of the countries statistic meaning test is approximated at LSDV model III.

4.3. Panel Model Approximation Results of Developing Countries

Under this chapter as developing countries; Azerbaijan, Argentina, Brazil, Bulgaria,

China, Mexico, Turkey and Kazakhstan are taken. These countries are considered as developing

ones according World Bank’s definitions. For these countries different approximation models of

social and economic sector will be tested.

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Table 4: Panel Model of Approximation Results Economic Development Sector of Developing

Countries



Random

Effective

Model

Pooled Least

(LSDV)Model


using GLS, removing

Autocorrelation and

homoscedasticity

Robust

Score



C

1.205352

(0.5830)

3.536970

(0.0721) -

8.461126

(0.000)

2.974038

(0.332)

X8?

-1.417998

(0.0000)

-1.449383

(0.0000)

-1.417998

(0.0000)

-1.315091

(0.000)

-1.443142

(0.000)

X18?

1.281596

(0.0000)

0.988897

(0.0001)

1.281596

(0.0000)

.3027834

(0.010)

1.059926

(0.004)


Random

Effects

(Cross

_AZER—

C -0.481379 -0.460849 0.723973 - -

_ARJ--C 0.479222 0.464491 1.684574 - -

_BRE--C 0.072678 0.013988 1.278031 - -

_BULG—

C -0.609218 -0.427305 0.596134 - -

_CHN--C 0.386770 0.265768 1.592122 - -

_MEK--C 0.019974 -0.059541 1.225326 - -

_TC--C 1.092678 0.996506 2.298030 - -

_KAZ--C -0.960724 -0.793057 0.244628 - -

R2

0.868931 0.679488 0.883863 - -

R2

0.260507 0.671163 0.868931 - -

Se 4.750457 0.268295 0.260507 - -

∑ ei2

-0.563648 5.542612 4.750457 - -

Log

likelihood 59.19276 - -0.563648 9.971518

F-statistic 0.000000 81.62015 59.19276 - -

Prob(F-

statistic) - 0.000000 0.000000 - -

Akaike

info

criterion

0.264091 - 0.264091 - -

Schwarz

criterion 0.561845 - 0.561845 - -

Hannan-

Quinn 0.383469 - 0.383469 - -

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495

criter.

Durbin-

Watson

stat

1.472890 1.202092 1.472890 - -

Wald-ist. - 163.24 - 174.48 76.11

LM - 129.86 - - -

corr(u_i,

Xb) -0.5420 0 (assumed) - - -

F u_i=0 29.98 - - - -

sigma_u .66598321 .4772026 - - -

sigma_e .26050657 .26050657 - - -

Rho .86729755 .77040971 - - -

Table 5. Hausman Determination Model Test Results

Correlated Random Effects - Hausman Test

Pool: Untitled

Test cross-section random effects

Test Summary

Chi-Sq.

Statistic Chi-Sq. d.f. Prob.

Cross-section random 6.672753 2 0.0356

Because the test result is p<0.05 the hypothesis is denied and FEM is preferred. In addition the i of the

countries statistic meaning test is approximated at LSDV model III.

Table 6: Panel Model of Approximation Results Social Sector of Developing Countries


Sabit Etkili Model Tesadüfi Etkili

Model

Pooled Least

(LSDV)Model


using GLS, removing

Autocorrelation and

homoscedasticity

Robust

Score

Değişkenler Katsayılar Katsayılar Katsayılar

Katsayılar

Katsayılar

C 11.25996 30.32038 - 7.424574 31.62741

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496

(0.0407) (0.0000) (0.000) (0.000)

X25?

-7.450049

(0.0000)

-6.270002

(0.0000)

-7.450049

(0.0000)

.0323962

(0.868)

-6.833261

(0.000)

X30?

9.174063

(0.0000)

0.856127

(0.0001)

9.174063

(0.0000)

.2843438

(0.000)

1.173124

(0.009)


Random Effects

(Cross

_AZER--C -9.249312 -1.556559 2.010649 - -

_ARJ--C -5.165218 0.628508 6.094744 - -

_BRE--C 3.671319 0.593179 14.93128 - -

_BULG--C -2.847708 -0.949942 8.412254 - -

_CHN--C 14.45671 -0.236747 25.71667 - -

_MEK--C -1.194810 1.310704 10.06515 - -

_TC--C -0.779853 0.497350 10.48011 - -

_KAZ--C 1.108873 -0.286492 12.36884 - -

2R 0.886835 0.527576 0.886835 - -

2R 0.872286 0.515305 0.872286 - -

eS 0.257151 0.326793 0.257151 - -

2

ie 4.628865 8.223100 4.628865 - -

Log-Lik. 0.473513 - 0.473513 -100.2685

F -Statistic 42.994 60.95 - -

Prob(F-statistic) 0.000000 0.000000 0.000000 - -

Akaike info

criterion 0.238162 - 0.238162 - -

Schwarz criterion 0.535916 - 0.535916 - -

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5.CONCLUSION

The development of economies is possible trough achieving a better position of the

accepted criteria and indicators of development. Societies and countries can be categorized

among developed countries when they manage to realize the necessary conditions of

development. The variation among development factors and socio-economic levels of countries

has led to the establishment of categories of developed, under developed and developing

countries.

Development is a well-rounded process, thus because of its well rounded face the

difference of development processes in each country is dissimilar. Economic development brings

also structural change which is very important for every economy but in countries where the

development level is rather low, is almost compulsory. Because these countries can bring solution

to their poverty, unemployment, low level of living standard and underdevelopment trough

economic development. The diversification of socio-cultural structure of underdeveloped

countries affects positively the development. In these countries culture has limited effect upon

economic actions and brings a slow development process.

In developed countries development is a necessity to prolong existent growth rate. In

these countries it is aimed to upgrade the living standards of people trough economic

development. In developing countries the first target of development which is the skewness of the

economy and inequality brings also poor level of living. In these countries the socio-cultural

Hannan-Quinn

criter. 0.357540 - 0.357540 - -

Durbin-Watson

stat 1.493082 0.852996 1.493082 - -

Wald-ist. - 85.99 - 311.09 72.20

LM - 58.48 - - -

corr(u_i, Xb) -0.9951 0 (assumed) - - -

F u_i=0 71.25 - - - -

sigma_u 7.0313029 .43614757 - - -

sigma_e .25715142 .25715142 - - -

rho .99866425 .74204622 - - -

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development criteria are in low levels and the existence of a traditional cultural approach hinders

development.

According to the evaluations of social criteria of underdeveloped countries in this essay,

life expectations, the rise number of women at the parliament and the increase of life percentages

in metropole together with the decrease of dependence rate, affects positively the development.

These factors have shown that they are an important step towards development level of the

underdeveloped countries. It is arrived to conclusion that in undeveloped countries the decrease

of rural population and exports has positive effects upon development.

When we look to the suggestive variations of the social criteria model of developing

countries, we see that while the increase of life percentages in metropole increases development,

the increase of dependence rate has negative effects upon development. According to economic

criteria, the increase of the agricultural sector at GDP affects negatively the development. The

increase of per capita electric consumption is an important indicator of development for the

developing countries.

Therefore the increases in prosperity and positive economic activities are only possible

trough economic development. In conclusion via development policies is possible to create more

modern societies.

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2008, s.155-156

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Balgati, H. Badi; Bresson, Georges; Pirotte Alain, ‘’Joint LM Test for Homoskedasticity in a One-Way

Error Component Model’’, Syracuse University, Department of Economics and Center for Policy Rearch,

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Boyacıoğlu, Ebru, ‘’Gelişmiş ve Gelişmekte Olan Ülkelerin Kalkınma Kriterleri Açısından

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Oxon, 2009, s.147-148

Dinler, Zeynel, İktisada Giriş, Ekin Dağıtım, Bursa, 2009, s. 587

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Ekonomik ve Sosyal Araştırmalar Müdürlüğü, Ekim, 2006, Ankara, s.6-8

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Dülgeroğlu Ercan, Kalkınma Ekonomisi, Uludağ Üniversitesi Basımevi, Bursa, 2000, s.42

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Veri Yaklaşımı’’, Finans Politik & Ekonomik Yorumlar, Cilt:44, Sayı: 508, 2007, s.39

Powel, James L., Panel Data Models, Departmant of Econometrics University of California workingnotes,

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A Reexamination Of Causal Nexus Between Economic Growth And Renewable Enegy

Consumption For Us: Further Evidence From Bootstrap-Corrected Causality Test

Şenay Saraç1, Ertugrul Yıldırım2

1Bulent Ecevit University, Department of Economics, Zonguldak, Turkey.

2Bulent Ecevit University, Department of Economics, Zonguldak, Turkey.


Abstract


renewable energy consumption should contribute to economic growth and secondly, it should not

cause a damage on environment. This study focuses on the first issue by applying bootstrap-

corrected causality test for the US since empirical literature criticizes the Toda-Yamamoto test

which bases on asymptotic distribution. The models consist of real GDP, employment,

investment and kinds of renewable energy consumption. Only one causal relationship was found

from biomass-waste-drived energy consumption to real GDP. No causal relationship was found

between real GDP and all of the other renewable energy kinds – total renewable energy

consumption, geothermal energy consumption, hydro-electric energy consumption, biomass

energy consumption and biomass-wood-drived energy consumption. That is using of energy from

waste cause not only solving the dumping problems but also it contributes to real GDP. For

policy purpose, the results of this study suggest that countries should concentrate on energy

producing from waste as an alternative energy resource.

Keywords: Sustainable development, Economic growth, Renewable energy consumption, US.

JEL: O13, Q42, O51

1. INTRODUCTION

Sustainable development can be defined as: “development that meets the needs of the present

without compromising the ability of future generations to meet their own needs”. Many factors

can contribute to achieving sustainable development goal. One of the most important factors is

the sustainable supply of energy resources (Rosen, 1996; Dincer and Rosen, 1998; Dincer, 1999).

A secure supply of energy resources is a necessary condition but not sufficient requirement for

sustainable development within an economic society. Furthermore, sustainable development

needs a sustainable supply of energy resources and an effective and efficient utilization of energy

resources. In this context, renewable energy is one of the crucial elements for sustainable

development. A number of factors lead to increase attention on renewable energy sources such as

the volatility of oil prices, the dependency on foreign energy sources, and the environmental



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501

consequences of carbon emissions and government policies that promote renewable energy

production (Bowden and Payne, 2010; Apergis and Payne, 2010a).


renewable energy consumption should contribute to economic growth and the secondly, it should

not cause a damage on environment. This study focuses on first issue. There are four hypotheses

about causal nexus between economic growth and energy consumption. According to the growth

hypothesis energy consumption contributes to economic growth both directly and/or indirectly by

complementing to labor and capital in the production process. Validity of the growth hypothesis

implies that energy conservation policies could reduce real GDP. The conservation hypothesis

implies that energy conservation policies would not reduce real GDP. Achieving unidirectional

Granger-causality from real GDP to energy consumption supports the conservation hypothesis.

Interdependent causal nexus between energy consumption and real GDP is suggested by the

feedback hypothesis. It is supported by the validity of bidirectional Granger-causality between

energy consumption and real GDP. Finally, the neutrality hypothesis proposes that energy

consumption serves a relatively minor role in the determination of real GDP while energy

conservation policies would not reduce real GDP. The absence of Granger-causality between

energy consumption and real GDP supports the neutrality hypothesis.

Ozturk (2010) reviews the literature about energy consumption-economic growth nexus.

Empirical evidence about causal nexus between energy consumption and real GDP are mixed.

Furthermore very few studies investigate the relationship between renewable energy consumption

and real GDP. Table 1 summarizes empirical literature about renewable energy consumption-

economic growth nexus.

Table 1: Literature review: Renewable energy consumption and Economic Growth

Study Methodology Period Subject Relationship

Sari and Soytas

(2004)

Variance

decomposition

1969-

1999

Turkey REC increases

GDP

Ewing et al.

(2007)

Variance

decomposition

2000:1-

2005:6

US REC increases IP

Sari et al. (2008) ARDL 2000:1-

2005:6

US IP→REC

Sadorsky (2009) Panel

Cointegration

1994-

2003

18 emerging

countries

GDP→REC

Apergis and

Payne (2010a)

Panel

Cointegration

1985-

2005

20 OECD

countries

GDP↔REC

Apergis and

Payne (2010b)

Panel

Cointegration

1992–

2007

13 countries within

Eurasia

GDP↔REC

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502

Payne (2009) Toda-Yamamoto 1949-

2006

US GDP≠REC

Bowden and

Payne (2010)

Toda-Yamamoto 1949-

2006

US (sectoral level) GDP↔REC

Note: Abbreviations are defined as follows: REC= renewable energy consumption, GDP=real

gross domestic product, IP=industrial production. EC→GDP means that the causality runs from

energy consumption to growth. GDP→EC means that the causality runs from growth to energy

consumption. EC↔GDP means that bi-directional causality exists between energy consumption

and growth. EC≠GDP means that no causality exists between energy consumption and growth.

Only Payne (2009) and Bowden and Payne (2010) use Toda-Yamamoto causality test. But Toda-

Yamamoto test which bases upon lag-augmented VAR model has assumption of the normality of

the error term. Hacker and Hatemi (2006) indicate that if the error term of the model is

characterized by non-normality, asymptotic distribution can be poor approximation. In this case

findings of Toda-Yamamoto test are invalid.

The contribution of our empirical study is threefold. First this study uses a multivariate causality

test by including employment and investment variables into the model between renewable energy

consumption and real GDP since the omission of relevant variables leads to econometric

problems. Second, this study employs bootstrap-corrected causality technique suggested by

Hacker and Hatemi (2006) to avoid unclear results due to the assumption of normality and the

third one is to pick the true lag order by combining Schwarz (1978) Bayesian information

criterion and the Hannan and Quinn (1979) information criterion as suggested by Hatemi (2003).

The rest of the paper is organized as follows: The next section describes the data, methodology

and the results from empirical analysis are presented in third section. Section four presents

conclusion and policy implications of the paper.

2. Data

Employment, real gross fixed capital formation and real GDP variables are taken from OECD

National Accounts data that is attained from source OECD data base and time series of renewable

energy consumption variables are obtained from the US Energy Information Administration as

billion Btu. Tim span of the renewable energy consumption variables are as follows: 1949-2010

for total renewable energy consumption, biomass energy consumption, hydropower energy

consumption and biomass-wood-drived energy consumption, 1960-2010 for geothermal energy

consumption and 1970-2010 for biomass-waste-drived energy consumption.

3. Methodology and Results

Toda-Yamamoto augmented VAR(p+d) model can be described in the following a compact way

(Hacker and Hatemi-J, 2006):

(1) .K FZ

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503

Where:

1( , , , , , )( (1 ( ))) matrix,p p dF v A A A n n p d

1

1

1

((1 ( )) 1) matrix, for t=1,...,T,...

t

t

t

t p d

x

x

Z n p d

x

matrix,

0 1( , , )((1 ( )) ) matrix,TZ Z Z n p d T

1( , , )( ) matrix,T n T

Toda and Yamamoto (1995) introduce the following modified Wald (MWALD) test statistic for

testing the null hypothesis of non-Granger causality:

(2)

Where:

The MWALD test statistic is asymptotically χ2 distributed, conditional on the assumption that the

error terms are normally distributed, with the number of degrees of freedom equal to the number

of restrictions to be tested. According to Toda and Yamamoto (1995), their function (Eq.2)

guarantees the use of asymptotical distribution theory. However, using Monte Carlo simulations

Hacker and Hatemi-J (2006) showed that the MWALD test statistic over rejects the null

hypothesis, especially if the error term is characterized by autoregressive conditional

heteroscedasticity (ARCH) and non-normality. Furthermore, Hacker and Hatemi-J urged that the

asymptotic distribution can be a poor approximation, especially for the small samples that are

common in empirical studies.

Hacker and Hatemi-J (2006) found that the bootstrapped empirical size for the modified Wald

test is close to the correct size in the different cases when the extra lags are greater than or equal

to the integration order of both variables, and it is generally closer to the correct size than the

asymptotic distribution empirical size.

1( , , )( ) matrix,TK x x n T

1

1 2( ) ( ) ( ) ~ .U PMWALD Y Y Z Z V Y Y

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504

To perform the bootstrap simulations, firstly regression (Eq. 1) is estimated with the null

hypothesis of no Granger causality. For each bootstrap simulation it is generated the simulated

data, K*.

** ˆ ZFK (3)

where F is the estimated value of the parameters in Eq. (1). That is. The

bootstrap residuals (Ψ*) are based on T random draws with

replacement from the regression’s modified residuals, each with equal probability of 1/T. The

mean of the resulting set of drawn modified residuals is subtracted from each of the modified

residuals in that set. The modified residuals are the regression’s raw residuals modified to have

constant variance, through the use of leverages. Eq.(4) defines the modified residual through

leverage adjustment for xit.

(4)

In order to calculate the bootstrap critical values, the bootstrap simulation is run 100,000 times

and calculated the MWALD test statistic each time. In this way, it is able to produce the

empirical distribution for the MWALD test statistic.

The analyses consist of three stage, In the first stage, to ensure robustness for the common

components of the variables, we use several unit root tests, including the augmented Dickey and

Fuller (1979) (ADF) test, the Phillips and Perron (1988) (PP) test, as well as the Kwiatkowski et

al. (1992) (KPPS) test. According to our results, not represented here, the common components

of the all variables turn out to be integrated of order one, I(1).

The next step is to pick optimal lag order. Two of the most successful criteria according to the

simulation results presented in the literature are Schwarz (1978) Bayesian information criterion

(SBC) and the Hannan and Quinn (1979) information criterion (HQC). However, the earlier

studies illustrate that each of these two different criteria can perform better than the other

depending on the properties of the true VAR model. Hatemi-J Criteria (HJC), displayed in Table

2, is employed to pick true lag order which is suggested by Hatemi-J (2003).

Table 3: Selection of Lag Length

Models AIC SBC HQC HJC

Model 1:Real GDP=Employment+Investment+Total

REC

2

-25.2568

1

-17.6647

2

-18.3052

2

-17.9066

Model 2:Real GDP=Employment+Investment+Biomass

Total EC

2

-25.7735

2

-18.0247

2

-18.8220

2

-18.4233

1ˆ ( )F KZ ZZ

1

m itit

ith

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Model 3:Real GDP=Employment+Investment+

Hydropower EC

2

-24.2653

1

-16.6757

2

-17.3138

2

-16.9152


Wood-drived EC

2

-26.1630

2

-18.4142

2

-19.2114

2

-18.8128


Waste-drived EC

2

-21.4469

2

-14.8194

6

-16.5588

2

-15.3432

Model 6:Real

GDP=Employment+Investment+Geothermal EC

2

-23.0602

2

-15.6311

2

-16.5377

2

-16.0844

Note: Abbreviations are defined as follows: AIC=Akaike information criteria, SBC= Schwarz

Bayesian information criteria, HQC=Hannan-Quinn information criteria, HJC=Hatemi-J

information criteria, REC=Renewable energy consumption and EC= Energy consumption. First

number is selected lag length and second one is min test stats of relevant criteria.

In the last step bootstrap-corrected causality test was applied. Table 4 illustrates the MWALD

stats and critical values.

Table 4: Causality Test Results

H0: REC does not Granger cause

GDP

H0: GDP does not Granger cause

REC

MWALD %1

CV

%5

CV

%10

CV MWALD

%1

CV

%5

CV

%10

CV

Model

1 0.069 10.505 6.590 4.974 2.288 10.727 6.764 5.087

Model

2 2.226 11.078 6.833 5.162 1.602 10.847 6.764 5.108

Model

3 0.966 10.272 6.447 4.915 1.261 10.754 6.758 5.090

Model

4 1.637 10.610 6.623 4.996 1.684 10.965 6.839 5.181

Model

5 12.422* 11.681 6.969 5.160 4.482 11.872 7.003 5.186

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Model

6 1.228 11.064 6.871 5.148 0.332 11.603 6.994 5.255

Note: * represents rejection of null hypothesis at 1% significance level. REC=Renewable energy

consumption. For definitions of the models see Table 3.

According to Table 4 only one causal relationship was found from biomass-waste-drived energy

consumption to real GDP. This finding supports the growth hypothesis. No causal relationship

was found between all of the other renewable energy kinds and real GDP. All of the findings,

except for biomass-waste-drived energy consumption, support the neutrality hypothesis.

4.CONCLUSION

Recent debates about relationship between renewable energy consumption and economic growth

manifest two main expectations. Firstly, renewable energy consumption should contribute to

economic growth and secondly, it should not cause a damage on environment. This study focuses

on the first issue by applying bootstrap-corrected causality test for the US since empirical

literature criticizes the Toda-Yamamoto test which bases on asymptotic distribution.

According to bootstrap-corrected causality test results only one causal relationship was found

from biomass-waste-drived energy consumption to real GDP. No causal relationship was found

between all of the other renewable energy kinds and real GDP. These findings are interesting

since biomass-waste-drived energy consumption has a low percentage (6%) of total renewable

energy consumption.

Many developed countries are trying to dump their garbage on the lands of lesser developed

countries. However dumping garbage on other places spreads pollutions and diseases instead of

solving the problem. In fact it is more dangerous to dump garbage in the less developed countries

since there are neither technologies available to process it nor enough awareness. Even creating

landfills wastes precious resources. Lastly our findings indicate that there is a causality from

waste-drived energy to real GDP. Using of energy from waste cause not only to resolve the

dumping problems but also it contributes to real GDP. The countries that are using other energy

resources do not take advantage from using waste-drived energy. For policy purpose, the results

of this study suggest that countries should concentrate on energy producing from waste as an

alternative energy resource.

REFERENCES

Akaike, H. (1974) A new look at the statistical model identification, IEEE Transactions on

Automatic Control, 19 (6), 716-723.

Apergis, N. and Payne J.E. (2010a) Renewable energy consumption and economic growth:

Evidence from a panel of OECD countries, Energy Policy, 38, 656-660.

Apergis, N. and Payne J.E. (2010b) Renewable enrgy consumption and growth in Eurosia,

Energy Economics, 32, 1392-1397.

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Bowden, N. and Payne, J.E. (2010) Sectoral Analysis of the Causal Relationship Between

Renewable and Non-Renewable Energy Consumption and Real Output in the US, Energy

Sources, Part B: Economics, Planning, and Policy, 5:4, 400-408.

Dickey, D.A. and Fuller W.A. (1979) Distribution of the estimators for autoregressive time series

with a unit root, Journal of the American Statistical Association, 74, 427-431.

Dincer, I. (1999) Environmental impacts of energy, Energy Policy, 27, 845-854.

Dincer, I. and Rosen M.A. (1998) A worldwide perspective on energy, environment and

sustainable development, International Journal of Energy Research, 15, 1305-1321.

Ewing, B.T., Sari, R. and Soytas U. (2007) Disaggregate energy consumption and industrial

output in the United States, Energy Policy, 35, 1274–1281.

Hacker, R.S. and Hatemi-J A. (2006) Tests for causality between integrated variables using

asymptotic and bootstrap distributions: theory and application, Applied Economics, 38, 1489-

500.

Hannan, E. J. and Quinn B.G. (1979) The determination of the order of an autoregressive, Journal

of the Royal Statistical Society, 41, 190-195.

Hatemi-J, A. (2003) A new method to choose optimal lag order in stable and unstable VAR

models, Applied Economics Letters, 10, 135-137.

Kwiatkowski D., Phillips P.C.B., Schmidt P. and Shin. Y. (1992) Testing for the null of

stationarity against the alternative of a unit root, Journal of Econometrics, 54, 159-178.

Ozturk, I. (2010) A literatüre survey on energy-growth nexus, Energy Policy, 38, 340-349.

Payne, J.E. (2009) On the dynamics of energy consumption and output in the US, Applied

Energy, 86, 575–577.

Phillips, P.C. and Perron P. (1988) Testing for a unit root in time series regression, Biometrika,

75, 335-346.

Rosen, M.A. (1996) The role of energy efficiency in sustainable development, Technology and

Society, 15(4), 21-26.

Sadorsky, P. (2009) Renewable energy consumption and income in emerging economies, Energy

Policy, 37, 4021-4028.

Sarı, R. and Soytas U. (2004) Disaggregate energy consumption, employment, and income in

Turkey, Energy Economics, 26, 335–344.

Sarı, R., Ewing, B.T. and Soytas, U. (2008) The relationship between disaggregate energy

consumption and industrial production in the United States: an ARDL approach, Energy

Economics, 30, 2302–2313.

Schwarz, G. (1978), Estimating the dimension of a model, Annals of Statistics, 6, 461-464.

Toda, H.Y. and Yamamoto T. (1995), Statistical inference in vector autoregressions with possibly

integrated processes, Journal of Econometrics, 66, 225-250.

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TOWARDS SUSTAINABLE TRANSPORT POLICY AND HARMONIZING EXTERNAL TRADE BY MODE OF

TRANSPORT: MACEDONIAN CASE

Ph.D Riste Temjanovski, Associate Prof.79

Abstract

There is a growing imbalance between modes of transport in all over the world. The increasing success of

road and air transport is resulting in ever worsening congestion, while, paradoxically, failure to exploit

the full potential of rail. But saturation in certain parts of the European Union must not blind us to the

fact that outlying areas have inadequate access to central markets. In this context the main engagement

in the trans-European policy is to pursue the optimization of the interregional transport services at the

European level through a multimodal approach and interoperability for each transport mode. Coherent

transport policy can contribute to reduction of the budget expenses for the transport sector by providing

the conditions for efficient management of infrastructure or the instruments for internalization and

reduction of transport external costs.

For Macedonia case, transport plays essential role for economic development. Regional co-operation in

Western Balkans is of even greater importance today. From a commercial point of view, the Union is the

main trading partner for Western Balkans, and its business cooperation with these countries has

increased in importance.

But, one mode of transport is consistently predominant. Road transport was the main mode of transport

used for trade with European countries. The analysis of external trade shows that road transport was by

far the most used mode of transport for trade with 92% by value. But in terms of volume, this accounted

for 89% over the five years. Also showing a higher percentage in terms of volume than value, rail

transport accounted only between 12-20% by volume and between 5-10% by value.

In addition, the Republic of Macedonia should take advantage of its position, harmonize all transport

modes, because such as South-East European country, it is at intersection of routes to Balkans,

Mediterranean and Caspian Region and Asia. Corridors VIII and X are expected to be ones of the impulses

to generate economic development among countries of Western Balkans.

Sustainable transport is an enormously complex and dynamic subject, and it can be concluded that the

transport system in this region can be improved by favoring those transport modes which are more

effective and environmentally friendly.

79

d-r Riste Temjanovski, vonredni profesor - Associate Prof. Riste Temjanovski, PhD, Goce Delcev" University – Faculty

of Economics – Stip, R.of Macedonia e-mail: [email protected]

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Key words: sustainable transport, sustainable development, transport modes, road transport, external

trade, Western Balkans

Introduction

Transport is a key element in the development of any society. Advances in transport technology

have extended the range of markets, enabled new methods of production, fostered specialization and

strengthened social, political and economic ties between countries and major geographic areas.

Transport creates valuable links between regions and economic activities, between people and the rest

of the world.

The demand for transport of people and goods is rising from day to day, and the consequences are

reflected in an overburdening of parts of the transport network and an imbalance in the overall

transport infrastructure. In the last few years private passenger road traffic in particular has been

growing at the expense of other modes of transport, which shows up in the unfavorable ratio in the

choice of transport mode.

Transport represents one of the most important human activities worldwide. It is an indispensable

component of the economy and plays a major role in spatial relations between locations. The trade of

goods, finance, information and people among the world’s economies is not new. But in recent decades

the international flow of trade and finance has grown to unprecedented levels and become essential to

the world economy.

Transport is one of Europe’s strengths. European transport systems compare well in terms of efficiency

with other developed regions of the World and they are an essential component of the European

economy. The European countries differ both regarding the level of transport development as well as in

the priorities of development plans. On the one hand are the countries of the European Union with

developed transport systems, and on the other the countries in transition, that have poorer transport

infrastructure and fleet as well as inefficiently organised transport. In transition countries the efforts of

institutional restructuring of government management of transport infrastructure are particularly

noticeable. However, the developed countries as well deal seriously with issues of privatising the

transport sector and the transport infrastructure.

The development and progressive completion of a Trans-European network, as the infrastructure basis

for the flows of goods and the free movement of people in the Internal market, remains a vital policy

objective for the EU that will bring the Western and Eastern part of the Union together and so creating

the future Single European Transport Area.

Trans-European transport policy is key factor to stimulate economic development in Europe. For the

countries from Western Balkans integration in the world economy has three aspects:

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a regional one, that involves the economic relations between each other and other countries in Western Balkans and Central and Eastern Europe, (many of which are members of the Central European Free Trade Area - CEFTA);

a European one that involves primarily their relations with the European Union (EU), by far their most important trading partner and source of direct investment; and

a global one, that involves their trade relations with the rest of the world. While in many respects they are giving the European dimension the highest attention because of the

importance of their economic links with the EU, they cannot afford to ignore the other two dimensions:

their relations with the EU will yield greater benefits, if they are pursued within a liberal trade

environment towards the rest of the world; and the same is true for their relations with their neighbors

which are also on a path to integrate in the European structures.

Transport systems in the countries in transition differ significantly in both structure and scale. For

instance, some carry exceptionally high volumes, if only because of the surface area they cover and the

size of the population they serve. In addition, progress with the economic reform process varies widely

from one country to another and not all countries are introducing market mechanisms at the same pace,

this being the case in the transport sector.

For Macedonia case, transport plays essential role for economic development. Regional co-operation in

south Eastern Europe is of even greater importance today, in the aftermath of conflict in former SFRJ,

than a two decade ago. Political and commercial ties amongst EU member states and countries from

Western Balkans are strengthening rapidly. Political ties are tighter due to the fact that the Western

Balkans countries aim to become full members of the Union, and their relations with the Union are

based on different agreements bringing them closer to full integration. From a commercial point of view,

the Union is the main trading partner for Macedonia, and its business cooperation with these countries

has increased in importance.

Macedonia and Core Regional Transportation Network

Republic of Macedonia is a landlocked country located in the south-central part of the

Balkan Peninsula. Country area is 25.713 sq km bordering with two EU member states: in the

south - Greece and in the east - Bulgaria. The neighbor in the north is Serbia and Kosovo, and

Albania in the west.

The economy in Republic of Macedonia is ranging on the list of non-so-successful economies in

transition. As a new independent state, it has strived very hard to survive and to maintain

macroeconomic stability, while at the same time implementing all the necessary reforms that were

requested by international organizations. During the last two decades, Macedonia has been

progressively opening its market and has made progress in liberalizing its economy.

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The transport sector has an important role in the national economy. In addition, the

Republic of Macedonia should take advantage of its position, because such as South-East

European country, it is at intersection of routes to Balkans, Mediterranean and Caspian Region

and Asia. Republic of Macedonia is promoting the concept of EU Neighborhood Policy into the

transport field for better connection the EU with the neighboring countries and regions. External

links include all direct links of the Country with neighbouring countries, as they manifest the

most direct relations as parts of the obligations to develop good neighbourly relations and

intensive exchange and cooperation with the surrounding.The major transnational axes are those

which contribute most to promote the international exchanges and traffic as well as to enable

regional cooperation and integration. The High Level Group document has determined the EU

member states Major Trans - National axes, where the South Eastern axis links the EU through

the Balkans and Turkey to the Caucasus and the Caspian Sea as well as to Egypt and the Red Sea.

Access links to the Balkan countries as well connections towards Russia, Iran and Iraq and the

Persian Gulf are also foreseen as well as a connection from Egypt to the South towards other

African countries. SEE axis which are passing through Republic of Macedonia, fully are covering

the existing defined Corridor X and VIII. On the existing Corridor X, with a total length of 172

km, passing the country in North - South direction; at about 71% has been already finalized to

modern highway standards and the remaining sections accounting 29% of the total being ready

for tender procedures.

On the existing Corridor VIII, with a total length of 304 km, crossing the country from

East to West, is less advanced in comparison to Corridor X. Only 36.3 % of the total length is

already built to modern highway standards. Corridors VIII and X are expected to be ones of the

impulses to generate economic development among countries of Western Balkans. In other hand

they also play a main role in domain the Economic and Environmental Programs in this regional

policy. These corridors would be assisted by the establishment of set of multilateral principles

and encourage the transfer of passenger and goods.

Distances from major destinations

Country Distance in

km

Zagreb ( Croatia) 815 km

Sarajevo (Bosnia and 450 km

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Herzegovina)

Belgrade (Serbia) 420 km

Sofia (Bulgaria) 250 km

Tirana (Albania) 230 km

Prishtina (Kosovo) 90 km

Thessalonica (Greece) 230 km

Athens (Greece) 700 km

The European Community is supporting the implementation of these projects to attain

greater, efficient transport system whish reduce regional disparities and effective better balance

between European countries.

There is strong political commitment to the development of the regional transport

networks is confirmed with the signing of the Memorandum for understanding of the

development of the South East Europe Core Regional Transport Network in June 2004.

More recent efforts for defining the Core Regional Transport Network are made with in the future

Treaty for Establishing a Transport Community between the EU and South East Europe Partners

which should be in force by 2011.

Border crossings

The border cross issue is depending mainly on the successful implementation of the

modernization of customs regulations, improvement and operability of the cross border buildings,

enhancement of the battle against smuggling, corruption and illegal human trade. The other issues

are mostly related with the interaction between the public and private sector and strengthening of

the regional cooperation.

The number of official border crossings in the Republic of Macedonia towards the

neighboring countries is:

a) 15 road border crossings:

3 with Bulgaria (Deve Bair near Kriva Palanka, Novo Selo near Strumica, and

Delcevo);

3 with Serbia (Tabanovce, Sopot and Pelince near Kumanovo);

2 with Kossovo (Jazince near Tetovo; and Blace near Skopje);

3 with Greece (Bogorodica near Gevgelija, Medzitlija near Bitola, and Star Dojran

near Dojran); and

4 with Albania (Stenje near Resen, Sveti Naum near Ohrid, Kafasan near Struga, and

Blato near Debar).

b) 3 railway border crossings:

2 with Serbia (Tabanovce near Kumanovo, and Volkovo near Skopje);

1 with Greece (Bogorodica near Gevgelija).

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c) 2 airport border crossings in Skopje (Alexander the Great Airport) and Ohrid (St. Paul

the Apostle Airport).

According to the National Strategy for Integrated Border Management, categorization is

carried out at border crossings in regards to their operational capacity (current and prospective).

Improving the throughput of the crossings, with full respect to the previously mentioned concept

of " accessible but secure borders and “Schengen best practice" in this country are implementing

the concept of "Single Window" and "One-Stop-Shop". By applying these concepts, will greatly

reduce the waiting time at the crossings as well as their transfer, which will produce major

positive economic effects. Some of the issues in the near future will be placed among others: The harmonization of customs procedures with neighboring countries The harmonization of categorization of the borders with neighbors.

The development of border crossings depends largely on successful implementation and

modernization of customs legislation, improving the operation of border crossings and

intensifying the fight against smuggling, corruption and trafficking of human beings, respecting

the basic principles of "accessible but secure borders”. Other issues in greater extent are related to

the interaction between public and private sector and strengthening of regional cooperation.

National Transportation Network

Transport network of the Republic of Macedonia, structured of several communication sub-systems, has

been established through the system of transport and communications, upon which national space is

organized. Transportation system of the Republic of Macedonia is composed of road, railway, air, lake

transport and post traffic and system of communications consists of telecommunications and radio-

diffusion system.

- Road transport. Republic of Macedonia has a total of 13.940 km categorized road network, out of which

911 km are national roads, 3771 km ragional and remaining 9258 km local roads. Major part of national

roads or 553 km are included in the European roads "E" system, while only 251 km of motorways may be

included in the TEM TEM (Trans– Europe Motorway) system of roads, these being: Border R.Serbia -

Kumanovo - Petrovec - Veles - Gradsko -Negotino - (to Demir Kapija); Skopje - Petrovec; Hipodrom-

Miladinovci; Skopje (Saraj) - Tetovo; Tetovo - Gostivar. Out of the total length of categorized national and

regional road network, 251 km (4.7%) are at motorway level, 341 km (7.9%) are with tracks width of 7

meters or more, 297 km (6.9%) are of tracks width of 7 meters and less, 1523 km (35.3%) have width

bigger than 5.5 meters, 306 km (7.0%) are of width ranging from 4.5 and 5.5 meters, 872 km (20.2%)

with width less than 4.5 meters and 774 km (17.9%) are with earth tracks.

The national road network is of a high density with the exception of the highways. Today,

the overall road network of the country has a total length of 13898 km. The network itself is a

good starting basis for further development.

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Table 1: Type of roads and total length in Republic of Macedonia

Type of roads Total length (km)

Highways 251

Magistral roads 911

Regional roads 3771

Local roads 9258

TOTAL 13940

Source: State statistical Office: Statistical Review: Transport, tourism and other services. 8.4.10.04.669. Skopje:

Statistical Office 2010.

Table 2: The assessment of the general conditions of the road infrastructure

Good Medium Poor

Highways (Magistral 2x2) 60% 30% 10%

Magistral (M 1x2) 60% 30% 10%

Regional 1 (R1) 45% 27% 28%

Regional 2 (R2) 20% 30% 50%

Gravel (R2) 50% 50%

The overall condition of the road structure (main and important regional roads) is lower in comparison to European and some Neighboring Countries Standards. The existing constructions are in fact generally strong and of a good quality. The magistral roads, and in particular the highways, which have to carry the higher portion of traffic are in a better condition than those of second importance. The worst conditions can be assessed on low-traffic regional roads; most of them with dead ends. Many of them don't present neither geometric, structural, nor traffic characteristics and not justifying their classification into the regional road network.

- Rail transport. The Railway Infrastructure in the Republic of Macedonia was

constructed in 1873 with the first Railway Track from Skopje to Thessaloniki in Greece. Today

the railways network is about 696 km in single track lines and normal gauge of 1435mm. There are 53 locomotives, 110 passenger cars, and 1323 freight wagons. In 2009 the railway

carried 1.523.000 passengers, equating to 154 million passengers/kms. As for cargo, the railway has carried 2.929.000 tons, equating to 497 million ton-kms of cargo. The railway carries selected bulk commodities including fuels, coals, cokes, steel products and clinker/cement. The main line on Corridor X from Tabanovci to Gevgelija – via Skopje and Veles is a single-track line,

electrified (25Kv, 50Hz) and relay signal system which allows a good exchange of communication by

fiber-optic cable. The last renovation on most sections has taken place 30 years ago. The total length of

the railway infrastructure in Corridor VIII is about 307 km on the territory of R. of Macedonia and 152 km

(or 49%) are constructed and operational. Аbout 89 km or 25% of the total length are remaining to be

constructed on the link with Bulgaria and 66 km or 20% of the total length on the link with Albania

subject to construction.

The railway system suffers from a chronic lack of maintenance that has been evidenced for many years and the rehabilitation that will be required to recover the position to achieve acceptable levels of safety at speed are difficult to quantify with any accuracy at this time.

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Besides incomplete basic infrastructure network: the missing part of Corridor VIII and

still no electricity on part of Corridor VIII, which is in function, and branch Xd of Corridor X,

there are several factors that explain the relatively small role of railways in the transport system

of the country. All major issues related to geographical features of the state, i.e. the short distance

among urban centers in the country especially between Skopje - Veles, Skopje - Kumanovo and

Skopje-Tetovo are currently limiting factor for the low level of technical and technological

development. This lack of adequate investment in infrastructure especially in transport can

become a great asset to the extremely large benefit for the country (in all European countries

there is well-organized suburban rail passenger traffic). In 2007 Macedonian Railways (Makedonski Železnici; MŢ) was reorganized into two separate joint stock

companies—a public enterprise in charge of infrastructure management, Macedonian Railways

Infrastructure (MŢ-I) and a transport company in charge of passenger and freight operations,

Macedonian Railways Transport (MŢ-T). R.of Macedonia adopted a new railway law and rail safety law in

2010, both of which entered into force on April 17, 2010. Since 2007, there are two independent rail

companies as successors to Macedonian Railways—Public Enterprise Macedonian Railways

Infrastructure (MZ Infrastructure) and the joint-stock company Macedonian Railways Transport (MZ

Transport). This change was part of a broader railway reform program aimed at making the Macedonian

rail sector comply with EU directives and the EU rail acquis, and by doing so, increase the commercial

orientation of activities in order to allow the rail system to operate successfully and in competition with

other operators.

Trade and role the transport mode

The adaptation of the national economy to the European market is necessary, considering the fact that the

European Community is important external trade partner, and integration processes in Europe will result

in long-range economic and other implications on future cooperation. The involvement of the economy of

the Republic of Macedonia into integrated developments in Europe has been conditioned by the

commencement of the process of economic restructuring, introduction of modern technical and

technological solutions and international standards. The national economy, due to limited accumulation

and need for intensified economic development and changing of unfavorable economic structure will

remain liable to utilization of additional accumulation from abroad.

One mode of transport is consistently predominant in transport and trade of passengers and goods.

Road transport was the main mode of transport used for trade with European countries other than EU.

The analysis of external trade shows that road transport was by far the most used mode of transport for

trade. Road transport was the main mode for 92% of exports and 79% of imports by value (the same

transport mode participate with 89% over the five past years of export by volume and 72% of import by

volume) with 92% by value. Also showing a higher percentage in terms of volume than value, rail

transport accounted only between 12-20% by volume and between 5-10% by value.

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The volume of goods exported from the R. Macedonia by rail between 2005 and 2010

decreased by 10.48% (2005) to 5.77 % (2010). The volume of export by air is 0.10%, mainly on account of the volume of goods traveling by air with EU-

27, but because of the small volume of this trade, the participations is not as significant as it appears. By

contrast, imports by air scope by 2.63% (by value) over the five years period, with EU-27 as the main

trading partners.

Table 3: Modal split in Macedonian trade in terms of value-volume; export-import.

Modal split in Macedonian trade in terms of value-volume; export-import.

Transport mode

value export value import volume export volume import

USA $ % USA $ % kg % kg %

Rail 190.378.973 5.77 726.374.069 5.82 329.528.188 10.03 726.374.069 12.66

Road 3.058.399.535 92.33 4.152.519.023 79.77 2.953.033.151 89.87 4.152.519.023 72.36

Pipeline 3392586 1.03 591558654 10.85 0 0 780694204 13.6

Air 18689889 0.57 146128022 2.68 3169343 0.1 957543 0.2

Mail 401283 0.01 2719638 0.05 3028 0 90947 0

Others 33575 0 45038630 0.83 641 0 77912712

1.36

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Graph 1: Modal split in Macedonian trade in terms of value (USA $) and volume (tonnes) export

Graph 2: Modal split in extra EU-27 trade in terms of value (USA $) and volume (tonnes) imports

Promote the Sustainable transport policy

The twentieth century, more than any other, has seen a considerable growth of the transport demand

related to individual (passengers) as well as freight mobility. This growth is jointly the result of larger

quantities of passengers and freight being moved, but also the longer distances over which they are

carried. Recent trends underline an ongoing process of mobility growth, which has led to the

multiplication of the number of journeys involving a wide variety of modes that service transport

demands.

But how to attain harmonizing transport modes?

The basic strategic determination of transport policy of the Republic of Macedonia is the

achievement of higher level of the overall functional integrity of the space in the Country, as well as

facilitation of conditions for significantly greater infrastructure and economic integration with

neighboring and other European countries. Macedonian transport policy should place rail and road

transportation on an equal footing: the legal provisions and the level of financial contribution of

the state for railway and road infrastructure should be equivalent. This will allow users to make

the socially optimal choice between the two modes for each trip. The achievement of higher level of integrity of the space in the country assumes reduction of regional

disparities, i.e. quality changes in spatial, economic and social structure, especially in areas with

emphasized malfunctions of social and economic development. An Integrated transportation system

has a key role to play in facilitating economic growth in remaining competitive by having access to fast,

efficient and reliable transport services, as well as ensuring individual mobility through offered transport

services.

Operating, managing, maintaining and executing new constructions of the transportation

network directly contributes to the economy, linking people to their works and other daily

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activities, promotes employment as a key element of social inclusion which enables

economic growth. Transport can also contribute on releasing the economic and

regeneration potentials of particular areas in the country.

With developing the transport network, we promote the social inclusion by connecting

remote and disadvantaged communities and increasing the accessibility of the transport

network;

The immediate expected impact of a transport investment is to reduce general transport

costs, lead times for transportation in general and having a positive impact on the short

term GDP development. Strategy for sustainable development of the Republic of Macedonia for the next period must

take into account into:

Improvement of the urban flow and traffic, securing the urban transport infrastructure’s role in reducing the green house gas emissions;

Implementation of environmental noise protection, and support for a transport system that efficiently plans land use while preserving vital habitat and biodiversity;

Undertaking measures that improve the economic and ecological sustainability of transport; Strengthen the broad horizon of policy setting for sustainable development, i.e. without losing

sight of environmental sustainability, look beyond it and treat economic and social sustainability as equally important aspects in transport policies;

The new railway line will lead to a reduction of negative externalities in result of the modal shift of passenger and freight traffic from road to rail. These externalities are mainly the reduction of road accidents, air pollution, CO2 emissions and noise.

Space protection and reservation for future strategic transport corridors, for which there are no

transportation and economic arguments at present;

Interconnection of the Republic of Macedonia and neighbouring countries, for the purpose of

establishing links between Macedonian rail transport and other points.

Delivering an optimal solution can only be achieved if the issue is addressed in a cross–

sectoral models. Planning and policy development outside the transport sector must take transport

generation into account and provide the information necessary to find an optimal solution.

Planners and policymakers must essentially decide how they want cities to look and how they

want people and goods to be transported in the future. Transport policy is not some miraculous

tool with which to solve a society's development problems. It must work in unison with national

development programmes, physical planning, investment, economic and monetary policy, legal

regulations and other areas. It must move in step with the implementation of these programmes

and respond with vitality and responsibility to the changes taking place in society. We must all

acknowledge that, in many respects, our quality of life depends on the success of our transport

policy.

Conclusion

The undoubted favorable geographical position of the Republic of Macedonia and its complexity

may lead to greater spatial and functional integration with its neighborhood and wider, through well

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designed and systematic transport infrastructure. The greater integration of the Republic of Macedonia

into European and global transportation developments requires maximum utilization of its geographical

position towards direct surrounding. The fact that one of the most important transportation corridors,

connecting Scandinavian and Baltic regions, through the countries of Central Europe with the countries

of the Near East i.e. South Africa, passes through the Country deserves particular respect.

In the future the especially point will be taken to:

Development of transportation system that will minimize harmful impacts of the traffic

on environment and contribute to an improved quality of living in urban and rural areas

of the country;

Establishment of transport intermodal centres, as main contact points among different

transport types, as a precondition costeffective transportation system (Goods

transportation via air, railway and combined goods transportation);

Dynamic implementation of infrastructure, through application of priorities based on

transport and economic criteria, in line with strategic determinants of the country when

transportation acts as initial factor of the overall development;

Specific development of tracks passing through or by major urban agglomerations;

Increase of pass through capacity of the Macedonian transportation system, its

connection with neighbouring countries and joint connection to European systems and

trends;

Maximum utilization of traditional roads when locating the main transportation corridors;

Adjustment of general tracks positioning to natural relief characteristics;

Adaptation of transportation network to the main generators of future movements of

passengers and goods transport; Minimization of transportation time and costs;

It should be noted that external connection of the country will be based on defined communication

corridors in line with international conventions and agreements, reflecting our orientation towards

European and Balkan commitments towards economic and technological communications. The level of

transport system development and its integration into corresponding European systems and trends will

determine the directions and communications of people and products, as well as capital and information

flows within the country and beyond. Development is expected to include expansion, improvement and

modernization of communication subsystems in the Republic of Macedonia. Integrated combined

transport for fast transfer of goods by modern methods and technologies is expected to develop in relation

to the development of supportive goods transportation centres. To this end, synchronization among

terminal blocks for land and air traffic should be established and demands for transit, import-export and

internal goods transportation harmonized.

References:

1. Borruso G.: The Adriatic Corridor. International Adriatic Conference "Vision Planet project INTERREG

II". Trieste, Italy - 1,2 1999. pp 1. http://www.univ.trieste.it/vplanet.index.htm

2. EUROSTAT (2009): Transport infrastructure in the European Union and Central European Countries 1990-

2009. Statistics in focus: Transport, Theme 7 - 4(2009). 2.0.1105.

3. EC. 2007. Trans-European networks: Towards an integrated approach. Brussels:

Commission of the European Communities, Directorate General for Regional Policy.

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4. EC. 2009. Green Paper TEN-T: A Policy Review: Towards a Better Integrated

Transeuropean Transport Network at the Service of the Common Transport Policy.

Brussels: Commission of the European Communities, Directorate General for Regional

Policy. 5. European Comission: Thematic Evaluation of the Impact of Structural Funds on Transport Infrastructures.

(Final Report). Oscar Faber, United Kingdom..et al., 2000, pp.1-3.

6. EC: White paper: European transport policy for 2010: time to decide. Luxembourg: Office for Official

Publications of the European Communities, 2001. pp. 10-15.

7. Kinnock Neil,. http://europa.eu.int/en/comm/dg07/speech/sp9861.htm (31. 03. 1998)

8. Memorandum of understanding on development of the Pan-European Transport Corridor X.

9. Report of the preliminary atudies of the creation of a new transport corridor "west-east": across Albania,

Macedonia and Bulgaria. Sofia: Transproekt, 1993. p. 28.

10. Transproekt (1993): Report of the preliminary studies of the creation of a new transport corridor "West-

East": across Albania, Macedonia and Bulgaria. Sofia: Transproekt, 1993. str. 4.

http://europa.eu.int/en/comm/dg07/speech/sp9861.htm

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Figure 1.2

Gender

We can see

that in

figure 1.5,

most

students

receive in an

average

monthly

income of

Rm300 to

Rm600.

However,

for the top

range of

students

monthly

income of

Rm700 and

above is

received by

all foreign

students.

This

importantly

signifies

that foreign

students

needs more

money than

local

students.

It is

important

to also note

the minimal

background

of students

by knowing

how their

guardian is

employed

and

financing

them. 12

students out

of 30

answered

that their

guardians

are in

private

sector

followed by

11 whom

are self

employed.

This data

signifies

that average

of students

comes from

a middle

income

families.

Change in

currency

rates

It is

important

to also note

the minimal

background

of students

by knowing

how their

guardian is

employed

and

financing

them. 12

students out

of 30

answered

that their

guardians

are in

private

sector

followed by

11 whom

are self

employed.

This data

signifies

that average

of students

comes from

a middle

income

families.

Reluctance of

using credit

services

Decrease in

students

income

Parents

decrease

expenditure

on

Spending less

time on

outings

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