Masaryk University
Faculty of Economics and Administration
Department of Public Economics
Brno 2013
Proceedings of the
17th International Conference
Current Trends
in Public Sector
Research
Proceedingsofthe17thInternationalConference
CurrentTrendsinPublicSectorResearch
Proceedings of the 17th International Conference
Current Trends in Public Sector Research
The conference is held under the auspices of
The Mayor of the City of Brno Roman Onderka
The Governor of the South Moravian Region Michal Hašek
Š l a p a n i c e , 1 7 – 1 8 J a n u a r y 2 0 1 3
Proceedings of the
17th International Conference
Current Trends
in Public Sector
Research
Masaryk University
Faculty of Economics and Administration
Department of Public Economics
Brno 2013
Programme Committee
Jiří Špalek (head), Masaryk University, Brno (Czech Republic)
Ivan Malý, Masaryk University, Brno (Czech Republic)
Juraj Nemec, Masaryk University, Brno (Czech Republic)
Robert Jahoda, Masaryk University, Brno (Czech Republic)
Vladimír Hyánek, Masaryk University, Brno (Czech Republic)
David Špaček, Masaryk University, Brno (Czech Republic)
Ján Šebo, Matej Bel University Banská Bystrica (Slovakia)
Romana Provazníková, University of Pardubice (Czech Republic)
Petr Tománek,VŠB-Technical University of Ostrava (Czech Republic)
Petr Sunega, Institute of Sociology,Academy of Sciences, Prague (Czech Republic)
Michiel de Vries, Radboud University Nijmegen,Amsterdam (Netherlands)
Organizing Committee
Dagmar Špalková (head)
Lenka Furová
Kateřina Kociánová
Reviewer
Ludmila Malíková
Editors
Lenka Furová, Dagmar Špalková
Technical editor
Lenka Furová
Supported by Association of Public Economics
The publisher assumes no responsibility for proofreading and editing of
the contributions.
All papers were reviewed by external reviewers and Programme Committee.
Copyright ©2013 Masarykova univerzita
ISBN 978-80-210-6159-0
CONTENTS
PROLOGUE (Helmut K. Anheier) ........................................................................... 7
SESSION I: NON-PROFIT AND PUBLIC SERVICES
BEBLAVÝ MIROSLAV: Case Study of Impact of Innovations in the Financing
of Higher Education in Slovakia ............................................................................ 12
DEDOVA MARIYA: Development of Public Cultural Services Management:
Study of the Night of Museums ............................................................................ 21
DOSTÁL JAKUB, HRŮZA FILIP: Identifying the Importance of Measuring
Monetary Value of Volunteering in the Czech Republic ..................................... 29
JURČÍK RADEK: Green Procurement of Public Contracts – Introduction and
Present Situation .................................................................................................... 38
KREBS VOJTĚCH, PRŮŠA LADISLAV: Solidarity and Equivalence in Social
Systems – Current Problems................................................................................... 49
MERTL JAN: The Sense and Rationality of Non-profit Sector in Social and
Health Services ...................................................................................................... 58
MUŽIK ROMAN, SZALAYOVÁ ANGELIKA: Measuring Waiting Times in
Slovakia .................................................................................................................. 66
NAVRÁTIL JIŘÍ: Dancing to the Same Tunes? Comparison of Czech and Slovak
Citizens’ Engagement in Civil Advocacy Twenty Years after the Divorce .......... 75
PAVLÍK MAREK: Sport Clubs and Economic Aspects of their Relations
with Municipalities and Sport Federations .......................................................... 83
POSPÍŠIL MIROSLAV, PROUZOVÁ ZUZANA, ŠKARABELOVÁ SIMONA,
TŮMOVÁ ALMANI KATEŘINA: Economic Crisis: A Hard Blow or a Challenge
for Non-profits?...................................................................................................... 92
RICHEA MARIA-MAGDALENA: The Nonmonetary Compensation Structure
for Volunteer Work in the Non-profit Sector....................................................... 99
STAŇOVÁ ĽUDMILA: Power and Politics in the Innovation Process
of the Integrated Rescue System in Slovakia........................................................ 109
STRUK MICHAL: Environmental Protection Expenditure of the Czech
Municipalities ......................................................................................................... 116
SVIDROŇOVÁ MÁRIA, VACEKOVÁ GABRIELA: Self-financing of Nongovernment
Organizations versus General Benefit of their Goals...................... 125
ŠPALKOVÁ DAGMAR, ŠPALEK JIŘÍ: Housing Tenure Choice and Housing
Expenditures in the Czech Republic ...................................................................... 137
WILDMANNOVÁ MIRKA: What is True for the European Social Model – Rigor
or Generosity? ........................................................................................................ 146
SESSION II: PUBLIC ADMINISTRATION AND PUBLIC SECTOR
BERNÁ ZUZANA: Decentralized Punishment under Different Matching Types.. 154
FIŠAR MILOŠ: Corruption among Russian Students: Experimental Evidence
from the Pilot Sessions at Lobachevsky State University of Nizhni Novgorod.... 163
NEMEC JURAJ, ŠPAČEK DAVID: Public Administration Accreditation in the
Czech Republic and in Slovakia ............................................................................. 170
PLAČEK MICHAL: The Utilization of Benchmarking in the Production
and Analysis of Municipal Budgets ....................................................................... 179
PŮČEK MILAN, KOPPITZ DAVID, SOBOTKA MARTIN: Practical Use of the
Dynamic Balanced Scorecard Method in a City .................................................... 190
STAROŇOVÁ KATARÍNA: Innovative Elements in Civil Service Reform in
Slovakia: A Way to Attract and Retain Young Professionals? ............................. 200
WAWROSZ PETR, OTÁHAL TOMÁŠ: Corruption and Competition: Toward
Economic Theory of Corruption ............................................................................ 213
SESSION III: PUBLIC FINANCE
HODŽIĆ SABINA: Comparison of Tax Control in Slovenia and Croatia................ 226
HORŇÁKOVÁ MICHAELA, ŠPAČEK DAVID: Financial Management in Practice
of Czech Regions – Background Points, Experiences and Issues.......................... 237
JAHODA ROBERT, GODAROVÁ JANA: Microsimulation of the Mortgage
Interest Deduction. The Czech Case ...................................................................... 246
MELECKÝ ALEŠ: Government Debt Management in the Czech Republic:
Sensitivity Analysis of the Optimal Allocation...................................................... 255
PAVLÍČEK TOMÁŠ: The Problem of Measuring the Income Situation of the
Self-employed in the Czech Republic.................................................................... 264
PEVCIN PRIMOŽ: Local Government Finance and the Case of the Anti-flypaper
Effect....................................................................................................................... 274
ROSENBERG ZDENĚK: The Double Taxation of Savings and Economic Growth
in Czech Republic .................................................................................................. 281
SEDMIHRADSKÁ LUCIE: Accuracy of Tax Revenue Forecasts in Czech
Municipalities ......................................................................................................... 287
SOKOLOVSKYI DMYTRO, SOKOLOVSKA OLENA: Modeling of Tax Policy
Influence on Taxpayers’ Behavior ......................................................................... 295
VOSTATEK JAROSLAV: Economic (dis)Advantage of Entering the So-called
Second Pension Pillar under the Present Czech Conditions................................. 304
LIST OF PARTICIPANTS ........................................................................................... 314
9
Prologue
It was my great pleasure to have been invited as a keynote speaker to the Conference on
“Current Trends in Public Sector Research”, which was organised by the Department of
Public Economics at Masaryk University, Czech Republic. I am equally delighted to have
been asked to provide a prologue to the proceedings of the Conference – a publication
welcomed by many but especially by those unable to attend the meeting itself.
It is indeed great news that Masaryk University has deepened its activities and academic
research in the field of non-profit or third sector research by establishing a Centre for
Nonprofit Sector Research (CVNS), and by making research in this growing field one of
the themes of the conference. I’d like to congratulate Masaryk University most warmly
on the opening of CVNS. I regard the Centre’s inter-disciplinary and comparative
approach to be very fruitful in shedding light on the challenges the Czech non-profit
sector is facing. I am sure that the Centre’s research and policy advice will make
important contributions to the Czech non-profit sector as well as civil society at large,
and I look forward to learning about its findings.
In my keynote address to the Conference, I discussed various key issues of non-profit
research and provided an overview of the evolution of the field. Non-profit research is a
comparatively young discipline. In its early years (-1990s), scholars focused on the
functions and behaviour of nonprofits, and introduced major theories in terms of
institutional choice, public goods provision, information asymmetries, and state as well
as market failures. The key insights of the early years are that there are good reasons
why nonmarket firms exist in market economies, and that non-profit organisations
require an adequate legal and policy framework to bring their advantages to the
forefront and to avoid shortcomings and failures.
Between 1995 and 2005, responding to new socio-political developments, non-profit
sector research examined privatization and public-private-partnerships (PPP), the
watchdog role of civil society, and the social capital generated by civic engagement. Key
insights of that period are that nonprofits are useful tools of government reform
(privatization) and that they can be used for market reform as well (quasi-markets).
Furthermore, they are good partners for PPPs. At the moment, and probably in the years
to come, the main question in the field of non-profit sector research is: How do societies
invest in their own future when governments are no longer able or willing to take both
leading or primary roles? The inability or unwillingness of governments to take primary
roles calls all sectors into focus and makes it likely that new forms of inter-sectoral
partnership and of hybrid organisations will emerge.
Therefore, not only dialogue between the public and non-profit sector, but also dialogue
between public sector research and non-profit sector research will become more and
more important. For one, research has introduced several useful typologies on how
10
public and non-profit sectors relate, and identified a number of patterns:
complementarity, substitution, conflict, co-optation among them. What is more,
countries like the United States or Germany have developed distinct policy patterns:
third party government, whereby government contracts private non-profits to deliver
services, or subsidiarity, which established a hierarchy between the public and the
private in terms of responsibilities.
Undoubtedly, these models will develop in years to come, especially as PPP and complex
contracting regimes invite hybridity and form differentiations. The newly founded
Centre for Nonprofit Sector Research at Masaryk University is well positioned to
contribute to a better understanding of what these changes are, and what their
implications are for research and policy.
Helmut K. Anheier
SESSION I:
NON-PROFIT AND PUBLIC SERVICES
12
Case Study of Impact of Innovations in the Financing
of Higher Education in Slovakia
Beblavý Miroslav
Abstract
In 2002, Slovakia adopted a new strategic reform that fundamentally altered the financing
of institutions of higher education. The new, quasi-market financing of public institutions
of higher education made the institutions more dependent on inputs and desirable outputs.
Institutions of higher education now receive subsidies based on a combined mix
of normative financing which stems from the financial requirements of the field of study
and a performance component, which is based primarily on a scientific performance
of the respective institution. This mixed financing formula creates noteworthy differences
among the HEIs. On the micro level, the financial earnings of a selected university
workplace for the university’s budget are analyzed. Significant differences in the scientific
performance of the teachers and a lacking wage differentiation are shown and discussed.
Keywords
higher education financing, quasi market, normative financing, performance financing
Introduction
Higher education in developed countries has been for decades a subject of constant
change. The pace of change has in recent years even accelerated. Increase in the number
of students seen in many developed countries in the past twenty years has created
not only unprecedented demand for higher education, but it has also created pressure
on the institutions and public finances, which has traditionally funded most
of the education-related spending in almost all OECD countries.
The increases in demand and rising expenses in the higher education have raised
the attention given to outputs and cost-effectiveness of higher education. The general
tendency in post-industrial societies to emphasize individual needs and client
orientation in public services also contributed to the changing environment of higher
education financing and organization.
Governments all over the world responded to these developments through a number
of policies, which usually included the introduction or strengthening of the use of private
funding, including tuition. In 2002, the Slovak government introduced a major reform
of higher education, but for political reasons the student fees and tuition were
not significantly included. The government decided to impose changes on the use
of public subsidies by creating a series of powerful motivators and ensuring
13
that the objectives of the individual institutions of higher education (HEI) are being met,
and also by changing the rules allowing the HEIs to flexibly utilize the new conditions
for use of their tangible and intangible assets. A case study of the nature of the reform
and its impact are discussed in this paper.
Material and Methods
The chapter stems from theoretical research previously presented in Beblavý, Mederly,
Beblavá (2010). Material assessing the current performance of the funding formula
and financial consequences of the reform is based on the publicly available data
of the Ministry of Education, Science, Research and Sport of the Slovak Republic covering
the years 2009 - 2012. The ministerial data are presented in two web-based documents:
Description of State Subsidy to Public Higher Education Institutions for 2012
and in Annual Report on State of Higher Education for 2011. Data on individual research
production for the case study were taken from the Comenius University web-based
database of all its employees’ research production. Own calculations based on available
data are presented.
Innovations in financing public services, including higher education
In this paper, we look at impact of innovations in how public funding is distributed
to higher education. A good example are vouchers and voucher-like mechanisms
through which a grant follows the student (Barr, 1993, p. 722). The government can
create quasi-markets with students and governments as consumers. Such mechanisms
can also be integrated into traditional funding formulae for universities.
Genua (2001, p. 610) describes three channels for direct financing of higher education
by the state:
• incremental funding – “funds are allocated on the basis of past expenditure levels
with incremental resources made available for the development of new
activities”.
• formula funding – “the budget of the institution is determined by some form
of assessment of the actual institutional expenditure per student enrolled
or expected to be enrolled.… Research funds can also be determined by a formula
system that allows the distribution of the funds in a selective way on the basis
of research record.”
• contractual funding – “is applied via tender schemes. Public funding agencies
issue targets in terms of student numbers or research and the various
institutions apply for the funds to carry out specified tasks.”
Jongbloed (2008, p. 13) suggests that funding on the base of outputs has
better economic results than on the base on input. Output funding “is believed to contain
more incentives for efficient behaviour than input funding. If budgets depend
14
on performance measures, there is reason to believe that those who receive the budgets
will pay increased attention to their performance.”
Current performance funding of universities in Slovakia
Innovations in funding of Slovak higher education analyzed in this chapter span
a decade and three governments. They started in 2000 by the Government’s White
Paper called “Concept of Further Development of Slovak Higher Education
in the 21st Century”. The paper called for a radical change in legal framework
of the higher education and accompanying changes in governance and financing.
While some of these changes were then piloted during the 2000-2001 period, it was
the new Act on Higher Education approved in 2002 that set the stage for the new
system.
Subsidies to public HEIs in Slovakia are distributed according to the methodology
for allocating subsidies from the state budget, which is based on the Higher Education
Act. Teaching, research and development and social support for students is being
financed through this subsidy. In 2012 441 424 063 euro has been allocated
for institutions of higher education. The subsidies allocated for the HEI enjoy, except
for ring-fencing and mandatory maximum total wage bill, substantial discretion
in their use.
The vast majority of money is divided according to two sets of criteria. The first is based
primarily on the number of students and a student „normative“ differentiated according
the expected costs of the respective field of study. Also, the number of graduates
and the employability of graduates are taken into account in the design of this formula,
but only marginally. Table no. 1 shows the normative per student for each of the fields
of study for the year 2012, both for bachelor's and master's degree. We can observe
that there is a significant variance from - 557 EUR per undergraduate law student
to 3528 EUR per one master student of veterinary science (omitting doctoral students
at the end of the table).
The ratio between the highest and lowest normative is thus more than 1:6.
Table 1: Normative financing per student by level and field of study (EUR)
Fields of study undergraduate graduate
1. medical fields, pharmacy, midwifery 1744 2616
2. artistic disciplines including design 1790 2685
3. veterinary science 2352 3528
4. scientific disciplines, engineering, information technology 957 1436
5. agriculture 1012 1518
6. architecture, translation, interpreting 969 1454
7. education, pedagogy I. grade, special pedagogy, psychology.
physical education and other education, journalism
820 1230
8. mathematics 882 1324
15
Fields of study undergraduate graduate
9. economic fields, management, business studies public
administration, tourism, geography, languages
750 1125
10. social sciences, humanities 732 1098
11. law 557 835
12. pedagogy – science, technical and vocational subjects 938 1407
13. pedagogy – modern languages 775 1162
14. pedagogy – mathematics, informatics 820 1230
15. pedagogy – humanities, social sciences, economics 775 1162
16. chemistry, technology, selected metallurgical fields of study 1401 2101
17. nursing, physiotherapy, public health. pedagogy - art and art
education
1279 1918
18. PhD – medicine 5623 5623
19. PhD – science, engineering, information technology,
pharmaceutical science, agriculture, forestry
3804 3804
20. PhD – other 2337 2337
Source: Ministry of Education, Science, Research and Sport of the Slovak Republic
The second main set of criteria is based on research performance, which is determined
by the research work hitherto, ability to obtain domestic and foreign research grants,
the share of PhD students and university’s share in publishing and the arts. Publication
in a scientific journal registered in the ISI Current Content (CC) is in financial terms
thirtyfive times more valuable than a paper published in a non-registered publication
at home. The variance is thus even greater than by the normatives per student.
Table 2: Financing per unit of performance (EUR)
Source: Ministry of Education, Science, Research and Sport of the Slovak Republic
In addition to these two sets of criteria, there are also grants aimed at development
to be allocated through tendering procedure by the Ministry of Education and social
support subsidies for students, which are legally granted. For the purpose of this chapter
Unit of performance Financing
Domestic research grant (for each 1000 €) 182
Foreign research grant (for each 1000 €) 860
Internal PhD student after the first oral exam 3 545
Scientific monograph (group A1) 6 270
Textbook and other printed publications (group A2) 1 243
Publication in a CC journal (Group B) 4 121
Peer-reviewed scientific publication published abroad, but not in a CC journal
(Group C category AEC. AFA. AFC)
291
Peer-reviewed scientific publication published abroad, but not in a CC journal
(Group C category AED AFB. AFD)
116
Peer-reviewed publication published abroad (Group C, Category ACC, BEC) 151
Peer-reviewed publication published in Slovakia (Group C, category ACD, BED) 60
Other scientific publications (Group C) 58
Other publications (Group C) 30
Unit of artistic performace 128
Highest artistic performace (Category ZZZ, ZYZ - waging 12) 1 536
16
we will not take into account these two sources of financing because of their relatively
small share when compared to normative and performance financing. All subsidies
merge together into a single annual budget for the HEIs. The budget thus consists of
both, the performance and the normative element. In table no. 3 we can observe:
• total performance power of HEI
• number of students of each institution
• conversion of the subsidy to a single student
• the average monthly salary of teaching staff
The table is sorted by the performance power converted to a subsidy for a single
student. Leading of the art colleges - despite negligible scientific activities – could be
explained with their extremely high normative per student. Nevertheless, we can
observe that the subsidy per student is varying in hundreds of euro, even for similar
fields of study. We have schools with a low normative, but still able to compensate for it
with their scientific performance. Therefore, it is not possible to argue
that performance-based financing evens out the subsidies for schools.
Table 3: Funding per student by performance component
Institution of higher
education
Performance
component
(euro)
Number
of students
Performance
funding
per student
(euro)
Average teachers
monthly salary
in 2011 (euro)
VŠVU Bratislava 3 692 731 826 4469 1031.90
VŠMU Bratislava 4 922 607 1 127 4369 1006.60
AU B.Bystrica 2 663 992 672 3964.3 1020.60
UVL Košice 6 715 515 1 860 3610.4 1148.30
UK Bratislava 59 596 766 23 816 2502.4 1211.90
STU Bratislava 46 202 540 18 802 2457.3 1335.20
UPJŠ Košice 18 046 181 7 902 2283.7 1167.00
KU Ružomberok 9 145 252 4 501 2031.8 1058.80
TU Košice 29 350 910 14 812 1981.5 1299.60
TU Zvolen 8 525 810 4 323 1972.0 1095.90
ŽU Žilina 20 430 837 10 551 1936.4 1091.50
SPU Nitra 15 435 365 8 381 1841.6 1010.40
UMB B. Bystrica 15 692 816 8 982 1747.2 1074.60
PU Prešov 13 062 238 7 655 1706.3 1069.90
UKF Nitra 15 671 333 9 198 1703.7 1154.10
TUAD Trenčín 5 997 982 3 812 1573.4 1169.40
TvU Trnava 8 195 021 5 375 1524.8 1113.80
UCM Trnava 6 701 348 4 800 1396.2 1057.10
EU Bratislava 16 989 556 12 364 1374.1 1039.00
UJS Komárno 2 086 538 1 619 1288.7 1066.80
Source: Ministry of Education, Science, Research and Sport of the Slovak Republic; own calculation
17
On the other hand, the most important budget components which should be significantly
linked to the quality and competitiveness of the respective institution of higher
education are the wages of the teaching staff. The question is, what is the relationship
between the funding and wage of the employees. The "optimal" situation is a strong
relationship. In practice, however, is the correlation mildly negative: -0.17,
which de facto means there is no correlation (in the range of correlations from -0.2
to 0.2, these are considered to be very weak). In other words, there is no connection
between wages and public subsidies, so that schools that have a higher subsidy
per student - for reasons both pedagogical and scientific - are using the subsidies
for purposes other than salaries, rewarding better teachers or increasing the numbers
of teaching staff.
Case study – impact of the performance funding at the micro level
In the previous section, we have shown the impacts of funding of public HEIs
at the macro level. Performance of schools, however, is being created at lower levels,
e.g. at the level of individual departments, institutes, and so on. Available “normative”
and public data on individual publishing outputs allow us to calculate the specific
financial contribution of an individual teacher to the income of the whole institution
of the HEI. We tested this calculation for the selected department of the Comenius
University in Bratislava.
Table 4 depicts the contribution of university teachers’ research outputs
to the allocation of subsidies from the state budget. Individual contribution is calculated
from an employee’s scientific performance.
Example of the methodology: a work published in CC journal is awarded with 4 121 euro
per unit. According to the employee's workload share for the publication, the funding
allocated to the school is counted. If the author's share is 33%, the author has earned
1360 euro for the next annual budget of the institution. Amounts per unit performance
are based on the table no. 2. We have counted contribution of employees to the budget
based on their individual performance in the years 2009, 2010 and 2011. The budget
for 2012 is calculated as the performance for the years 2009 and 2010. 2013 will be
calculated from the performance for 2010 and 2011.
18
Table 4: Revenue generated individually by university teachers for the university budget
by research (EUR)
Academic rank Name Performance per year
Earnings as reflected
in the annual budget
of the institution
2009 2010 2011 2012 2013
Professor A 139.2 1355.85 436.5 1495.05 1792.35
Associate professor B 11521.44 6051.36 5116.5 17572.8 11167.86
Associate professor C 6344.62 4511.17 6765.9 10855.79 11277.07
Associate professor D 11677.05 3426 2161 15103.05 5587
Associate professor E 291 291 6270 582 6561
Associate professor F 0 621.5 4121 621.5 4742.5
Assistant professor G 969.5 3236.85 0 4206.35 3236.85
Assistant professor H 4237 1931 0 6168 1931
Correlation with the
previous year
0.80 0.18
TOP3 performers B, C, D B, C, D B, C, F
Share of the TOP3
performers
84 65.3 73
Source: Ministry of Education, Science, Research and Sport of the Slovak Republic, Academic Library of
Comenius University in Bratislava; own calculation
What can be drawn from the data on HEI financing at the micro level:
• Performance of individuals is volatile on the individual level. In consecutive
years, individuals can "earn" as much as tenfold compared to the previous year.
• However, it is possible to identify consistent top performers, who occur in TOP3
in all three consecutive years or in two of three years.
• TOP3 performers substantially affect the scientific and financial performance
of the department, since they account for 65-84% of the research output.
• The differences between the top and the bottom performers are abysmal.
Results and Discussion
At the macro level we have shown that the performance part of the funding formula
significantly contributes to the differentiation among the universities. This might serve
as a contribution to the qualitative evaluation between the same types of HEIs
(e.g. comparison in performance-based earnings of various technical universities).
It helps to refute the myth about the rigid normative-based HEI financing in Slovakia,
which supposedly impedes the pressure on quality. Our findings may also shift
the accountability for quality of the HEIs more to the local authorities and self-governing
HEI bodies.
19
At the micro level we have proved that the teacher’s research outputs do not translate
into wage differentiation, which indicates a lack of just performance appreciation.
Conclusions
The reform of higher education financing in Slovakia in 2002 strategically transformed
the flow of financial support so that public institutions of higher education were
incentivicized to increase their quality and flexibility. Even before the reform, Slovak
HEIs included important elements of trust (let the professionals do their job)
and a strong autonomy. Students indirectly participated in the management
of universities. The reform of 2002 allowed for a freer allocation of funding for school‘s
own activities, but also left the institutions with higher autonomy with stronger
emphasis on choice and competitiveness among schools that have begun to actively fight
for more students.
This reform, through which the state assigned prices for the products considered
important (number of students, graduates, research outputs, staff qualifications),
significantly influenced the behaviour of the institutions. During the six years following
the reform, the number of full-time students increased by 40% and the number
of PhD students has doubled. This can be explained by the low absolute number
of doctoral students, low costs of admission of these students and disproportionately
high subsidy for doctoral students compared with students in the lower levels of study.
The reform of higher education in Slovakia is an example of a quasi-market approach,
which mimics the market with public sector subsidization. Quasi-markets, as opposed
to real markets, are often vulnerable to undesirable behaviour of its participants
and the undervaluation of hard-to-reach quality outputs. Private HEIs in Slovakia are not
subjected to state funding, thus the competition between public and private schools is
weakened.
Our findings demonstrate that different funding of individual HEIs is primarily reflected
in the number of teachers / other costs, but it is not reflected in the average salary
of teachers, the predisposition of a true differentiation. We have also a case study
of an academic department showing substantial and consistent differences in scientific
performance of the teaching staff - reflected through the „earnings“ of the individuals
for the institutional budget. For the future, it is advisable to link the individual’s outputs
more strongly to their respective pay.
References
Academic Library of Comenius University in Bratislava. (2012) [online] Available at:
http://alis.uniba.sk:8000/cgi-bin/gw_49_3_8/chameleon?skin=epc [Accessed October
2011].
20
BARR N. (1993) Alternative Funding Resources for Higher Education. The Economic
Journal. Vol. 103. No. 418. Blackwell Publishing. pp. 718-728.
BEBLAVÝ M., MEDERLY P. and BEBLAVÁ E. (2010) Innovations in Financing Higher
Education in Slovakia. Innovations in Financing Public Services: Country Case Studies.
Stephen. J. Bailey. Pekka Valkama and Ari-Veikko Anttiroiko. eds.. Palgrave Macmillan.
GENUA A. (2001) The changing rationale for European University research funding: Are
there negative unintended consequences? Journal of Economic Issues. Vol. 35. Iss. 3.
JONGBLOED B. (2008) Funding higher education: a view from Europe. Center for Higher
Education Policy Studies.
Ministry of Education, Science, Research and Sport of the Slovak Republic. (2012) HEI
Financing - Annual Report on State of Higher Education for 2011. (2011) [online]
Available at: <http://www.minedu.sk/rozpis-dotacii-zo-statneho-rozpoctu-verejnymvysokym-skolam-na-rok-2011/>
[Accessed October 2012].
Ministry of Education, Science, Research and Sport of the Slovak Republic. (2012) HEI
Financing - Description of State Subsidy to Public Higher Education Institutions for
2012. [online] Available at: http://www.minedu.sk/data/att/1824.zip [Accessed
October 2012].
21
Development of Public Cultural Services Management:
Study of the Night of Museums
Dedova Mariya
Abstract
This paper addresses the issue of public cultural services management by the example
of event organization in cultural institutions. The Night of Museums event has been held
annually in St. Petersburg and attracted more than 100 000 visitors for its fifth edition
in 2012. A multistage study on this event has been organized aiming at exploring
the potential of the large-scale event in development of public cultural services
management both from the side of audience and cultural entities. The findings of the study
indicate audience development within the event, implementation of innovative solutions
through application of creative methods by cultural institutions and develop
recommendations for effective provision of public cultural services.
Keywords
public services, culture, museums, events
Introduction
This paper studies management of public services in cultural sphere by the example
of the Night of Museums. This event is annually arranged in St. Petersburg (Russia).
The starting point is the following: services produced within this particular event are
both typical for museums and of cross-sectoral nature. Within this event various types
of cultural institutions such as museums, libraries and galleries, and lofts offer
innovative solutions for audience development. Through organizing special events
devoted to one theme they develop public cultural services. Within the Night
of Museums libraries and other non-museum institutions present themselves
with different types of exhibiting activities. For this reason these are studies
on museum’s activities that are considered within the research.
Much of academic literature highlighted the changing role of museums in post-modern
society and discussed main challenges for their further development (See: Kotler, 2001;
Van Aalst, Boogaarts, 2002; Burton, Scott, 2003; Anderson, 2004). Increasing museum
audience is a key issue in this respect. One of a specific approach used by practitioners
for this purpose is organization of events. Events can contribute to audience
development in different manner. They strengthen community ties, enhance a sense
of belonging and raise interest among public (Kotler, Kotler, 2000, p.283). More informal
atmosphere created by the events (Tobelem, 1998, p. 339) encourages newcomers
for visiting museums (Barbosa, Brito, 2012, p.10) and in general attract wider audiences
22
(Kolb, 2005, p.39; Gyimothy, 2009, p.201). Most commonly museum audience is
characterized as well educated and wealthier than average citizens (Kawashima, 1999,
p.23). However, some
specifications in characteristics of visitors occur when it concerns events.
Frequent event visitors, who are interested in culture, also set a value upon leisure
and socialization (Prentice and Andersen, 2003, p.27). Furthermore, those event
visitors, who come to museums for entertainment or social activity can’t be
automatically considered as museum visitors (Barbosa, Brito, 2012, p.15).
The impact of Night of Museums event on a city has been studied by a few international
scholars. Jiwa et al. (2009) explore economic, cultural and social benefits of Light Night
and Nuit Blanche, as it is called in the UK and France, on community cohesion, tourism
and regeneration. The authors use a case study approach to demonstrate an effect
of such an event for revitalization of town centers. Krause (2007) studied this event
as a tool for city marketing in Germany. This paper explores the approaches used
for management of public services in cultural sphere by the example of the Night
of Museums event.
In May 2012 an annual event Night of Museums was held in St. Petersburg for the fifth
time. The idea of the event organized annually throughout 157 countries originated
from Germany, where the Long Night of Museums (Lange Nacht der Museen) was
arranged in Berlin for the first time in 1997. This distributed event (Schaller et al. 2012)
is characterized by a number of single events arranged in the same time and devoted
to the same theme during late hours (some part of institutions stay open till 6 a.m.).
For the last five years the number of cultural institutions (i.e. museums, libraries, lofts
etc.) taking part in the event in St. Petersburg has increased from 33 to 77 entities
and the number of visitors has increased from 24 000 in 2008 to 100 000 visitors
in 2012.
Despite of the high popularity of the event among visitors and cultural institutions
and the fact that the event is held in more than twenty Russian cities, to author’s
knowledge, none of studies has been done on this particular event in Russia. However,
innovative solutions offered by different kinds of events have been addressed
by scholars taking the example of St. Petersburg (Gordin and Matetskaya, 2010).
The purpose of this research is to contribute to an understanding of management
of public cultural services. The objectives of the study can be described as follows:
to explore the effect of the Night of Museums on audience development; examine
approaches of St. Petersburg cultural institutions in raising their attractiveness; provide
recommendations for effective provision of public cultural services.
Getz (1997) points out two main traits of special events organized in museums: they are
occasional and usually differ from typical organization’s activities. This is partially
relevant for the Night of Museums as once a year cultural institutions arrange different
kinds of activities connected to their main theme using more creative approach.
23
For instance, it can be expressed through organization of interactive sessions in those
institutions that primarily serve for conserving and exhibiting. In other cases
some changes in target audience can be observed (for more information see Results and
Discussion section).
Events attract wider audience to museums (Kolb, 2005, p.39; Gyimothy, 2009, p.201)
and diversify patterns of museum attendance (Barbosa, Brito, 2012, p.15). In this regard
our first research hypothesis (H1) is formulated as follows: events organized
in museums attract non-frequent visitors.
Out third research hypothesis deals with management of public services in big cities
during organization of distributive events. St. Petersburg lacks synergetic approach
in management of culture that in some particular cases is very relevant for organization
of urban celebrations, festivals and etc. (Gordin, Khoreva, 2012, p. 163). Organization
of an event not only contributes to development of public cultural services,
but also to development of a cultural institution itself (H2).
Material and Methods
For the purposes of the research a multistage study devoted to the Night of Museums
was organized. The authors would like to emphasize that the study is still being
processed.
In the first stage of the study a survey of visitors, who attended the event in May 2012,
was organized in pre-selected 11 museum clusters of the city. Museums
and other cultural institutions were assigned to a set of clusters based on primarily
geographical factor guided by previously made research on cultural clusters in the city
(Gordin and Matetskaya, 2010). Within these clusters institutions distinguish
by the organizational (museums, libraries, lofts) and legal (state and private-owned)
forms. In total 383 visitors (resulted in 370 valuable questionnaires) of 39 cultural
institutions were interviewed. Every tenth visitor in each institution was interviewed.
Due to high popularity of the event, almost at every institution there was a line
of visitors waiting for entering a building. Interviewers approached visitors, when they
were queuing. The survey consisted of 13 open-ended and closed-ended questions
covering visitors’ behavior (number of annual visits and to hosting institution),
satisfaction (event satisfaction, public services satisfaction, expectation fulfillment)
and demographic questions (age, gender). For the analysis of the survey results
a correlation analysis was conducted. In case of open-ended questions the answers were
first categorized and then recoded.
In the second stage an expert survey of cultural institutions managers’ engaged
in preparation and organization activities of the event was conducted. An expert survey
consisted of 12 open-ended question covering motivation, expectations and impact
of the event for the particular institution. At the present time 16 surveys have been
24
completed. A survey has two versions: for those institutions that take part in the event
for the first time and those, which had participated before. The reason for this division
is the assumption that motivation for participation in the event for institutions,
which already participated in the event and which did not can be different in terms
of their expectations and commitment.
Here we need to explain briefly what types of museums and other cultural institutions
tend to take part in the Night of museums in St. Petersburg. According to Committee
of Culture of the City of St. Petersburg there are more than eight thousand objects
of cultural heritage preserved by the state, 182 of which are museums. The most popular
museums among tourists are a few well-known across the world museums such
as Hermitage, the Russian Museum etc. The significant part of museums is hardly ever
visited by tourists, who usually come just for a couple of days and aspire to visit
those sites that have become the brands of the city. Hence, the target audience for less
popular museums is residents. Nevertheless, due to specificity of some museums (e.g.
Museum of Pedology, Museum of Urban Electric Transport, and Military Medical
Museum) local residents don’t even know about their existence. Thus, for some
of museums the Night of Museums is a unique opportunity to attract attention
of potential visitors by means of advertising within the event.
As it was mentioned above the research is being continued and will be further
developed by the study of the Internet discussions devoted to the event. The semantic
analysis of visitors’ posts on the event will contribute to achievement of the research
objectives. Moreover, it is planned to organize a longitude research on the topic
and to continue the research next year during the Night of Museums 2013.
Results and Discussion
In this section we present findings relevant for an each of hypothesises stated above.
(H1): Events organized in museums attract non-frequent visitors
Results of analysis for visitors’ survey don’t strongly support the hypothesis about the
attractiveness of the event for non-frequent museum-goers: the most part
of respondents – 35% visit museums “once-twice a month”. However, the second most
large group – 26% visit museums “once-twice a year”. Almost a half of respondents
(49,5%) for the question “Why do you come to the Night of Museums?” ticked
the answer “For interesting activities in museums”.
There are also some important findings on audience development based on the results
of expert surveys of those managers, who were directly engaged in preparation
and organization of the event in cultural intuitions. A number of managers emphasized
changes in demographic characteristics of visitors during the event and, consequently,
shifts in target audience occur at particular institutions:
“…Youngsters in contrast to our generation are not used to visit museums, but this form
25
of the event encourage them to discover this wonderful world” (Head of the Local Studies
Department, Library “Old Kolomna”);
“…We try to organize everything in such a manner that everyone would find something
interesting and enjoyable. Moreover, we are interested in attraction of visitors in the age
from 20 till 40 years old” (Head of Cultural Programs Department, Central Municipal
Public Library named after V. Mayakovskiy);
“…It is obvious that children are our main target group in day-time, especially during
working days. During the Night of Museums there are much fewer children. Therefore,
the main target group within this event is elder people” (Deputy Head of the Museum
of Arctic and Antarctic);
“…In the first turn we wanted to see people, who rarely visit us. Our audience
is the intellectuals of St. Petersburg, those who are pensioners or near this age, obviously
creative intellectuals and students, especially of creative specializations. We wanted to see
during the Night middle aged people, 25-35 years old, working in absolutely different
spheres, not related to the art. And those people indeed came and there were many”
(Art Director of the Fund of M. Shemyakin).
Thus, we observe audience development within the event caused by increased interest
among non-visitors and shifts in target audience for some of institutions.
(H2) Organization of an event not only contributes to development of public cultural
services, but also to development of a cultural institution itself
Based on the results of the managers’ expert survey three main effects of the event
organization for institution development were identified:
• Positive development of internal communication network:
“…For personnel this is a creative and organizational cohesion, when everybody knows
what happens and contributes to the common goal” (Director of the Literature Museum
“XX century”);
“…For the positive effect I can name the experience of joint work of all the departments”
(Head of Cultural Programs Department, Central Municipal Public Library named
after V. Mayakovskiy);
“…Night of Museum is an excellent way to exercise team activity – almost everyone works
for this event, all personnel, regardless the department” (Project Coordinator in Museum
of Anna Akhmatova).
• Extension of museum space:
“…The fact that we by reclaiming the space around the yard and building, develop
our communicate with neighbors, residents of the building and housing cooperative, gives
26
as the opportunity to reclaim more and more of non-museum space – this is our direction
for further development” (Director of the Literature Museum “XX century”).
“…We’d like to utilize the space in front of the museum, but this bears against
accommodation, because this territory doesn’t belong to us. We wished to put there
some installations. We would be happy to have some simplified order of accommodation
for these purposes and support of other institutions” (PR-manager of the Erarta Museum).
The potential for museums to reclaim the non-museum space is very high in the city
(Gordin, Matetskaya, 2011), but in the same time, as we can observe, it can be
challenging. Nevertheless, such events contribute to tackling this issue.
• Development of cooperation with other cultural institutions
Within a large-scale event organization institutions also develop cooperation
with other entities that positively affects internal development:
“…I agree that every possible cooperation with other cultural institutions of other
organizational forms is always useful, it is not harmful to learn how other entities work,
which methods they use, which innovative solutions they can share” (Head
of Organizational and Methodic Department of Central Library named after
M. Lermontov).
“…Night of Museums is the event, when we can learn and share experiences” (Exhibition
Project Manager in the State Centre of Photography RosPhoto)
Conclusion
The purpose of this research was to contribute to an understanding of management
of public cultural services. Taking the example of the Night of Museums in St. Petersburg
we explored the potential of the large-scale event in development of public cultural
services management both from the side of audience and cultural institutions.
We have explored the effect of the event on audience development and found additional
support for the results of previous studies. Events attract wider audience to museums
(Kolb, 2005, p.39; Gyimothy, 2009, p.201) and lead to shifts in structure of target
audiences for particular cultural institutions.
Further, we have determined three main effects that occur within preparation
and conduction of the event: positive development of internal communication network;
extension of museum space and development of cooperation with other cultural
institutions. Intensification of activities in cultural institutions and between them
on a routine basis will significantly contribute to development of public cultural service
management.
27
At the end, we would like to highlight that the research is still in the process
and we collect other qualitative and quantitative data to discuss further different
approaches for management of public cultural services.
Acknowledgements
This work is an output of a research project “Innovative forms of interaction
between cultural heritage and creative industries” implemented as part of the Basic
Research Program at the National Research University Higher School of Economics
(HSE).
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29
Identifying the Importance of Measuring Monetary Value
of Volunteering in the Czech Republic
Dostál Jakub, Hrůza Filip
Abstract
Identifying and measuring of the nonmarket activities not captured by standard economic
indicators while still being part of the economy still remains among the actual questions
to be solved. The aim of this paper is to identify the importance of researching
the economic value of volunteering in the Czech Republic through the identification
of main reasons, suitable ways and approaches and relevant areas. The findings
of the research were used for formulation of practical recommendations.
Presented outcomes are based on foreign and domestic sources.
Keywords
volunteering, Czech Republic, monetary value, approaches, nonmarket
Introduction
Volunteering activities in terms of theory and practice is an up to date topic. A number
of specific issues in this area were addressed recently. They are subject to a number
of both theoretical and practical research and studies. This paper deals
with the quantification of volunteering through monetary value in case of Czech
environment and conditions.
Sozanská and Tošner (2005) define volunteering as a conscious, freely chosen activity
for the benefit of others, provided by citizens free of charge. According to them,
volunteering can be professionally organized, without losing its spontaneity.
Unpaid non-compulsory work, meaning the time individuals give without pay
to activities performed either through an organization or directly for others outside
their own household (ILO, 2011). There exist many different definitions of this specific
activity and area. Volunteering produces many different impacts affecting volunteers
themselves, the beneficiaries of their activities, the organizations organizing volunteer
activities and generally the societies in which the volunteers operate (Salamon,
Sokolowski and Haddock, 2011). We see specific problem related to this area in the fact
that only few of these impacts are captured in a systematic form with the exception
of a few industrialized countries (Australia, Canada, the UK, Switzerland, Norway, and
the United States).
Stiglitz, Sen and Fitoussi (2009) recently dealt with the importance of precise
measurement and valuation of goods and services produced within society regard
to GDP. They argue that GDP is the most widely used measure of economic activity
30
and express the measurement of economic well-being through international standards
for its calculation. On the other hand they criticized that GDP mainly measures
only market production. According to their further argumentation this interpretation
can lead to misleading indications about how well-off people are, which may
consequently lead to making the wrong policy decisions. Monetary valuation
and measurement provide useful information about production and consumption
through a single figure. Stiglitz, Sen and Fitoussi (2009) say that valuing products
and services with their prices would thus seem to be a good way of capturing, in a single
number, how well-off society is at a particular moment.
Nevertheless, there are several other arguments that speak for measuring the volunteer
work. For example ILO (2011) provides following arguments:
• volunteer work is sizable and creates significant economic value
• a growing number of international organizations has come to recognize
the contribution and importance of volunteer work
• volunteer work is of special importance to the labour force statistical community
• despite the contributions that volunteer work makes both to the volunteers
themselves and to the beneficiaries of their generosity, little sustained effort has
gone into the measurement of the scope, scale, or distribution of such work,
and this impedes policy-making and our general understanding of labour
dynamics
• what is not counted cannot be effectively managed
• out of sight/ out of mind
• establishing a system for improving the data available on volunteer work will
thus serve a variety of useful purposes
Ironmonger (2008) expands these general arguments and places them on practice
in case of Australian state Queensland. According to him, calculation of the economic
value of volunteering in Queensland is important because it can:
• emphasize to government and policy makers that voluntary work makes
a significant contribution to the Queensland community
• encourage Queensland people to become volunteers by demonstrating
the economic benefits of volunteering
• inform the media and the community about the value of volunteer time
to the Queensland economy
Approach to this issue has gradually evolved from recognition of the non-zero value
of volunteering. Some approaches highlighted the explicit costs associated directly
with volunteering, such as Sues and Wilson (1987), who argued that volunteers
31
are not totally free and related costs are represented by recruitment, administration,
liability, supervision and recognition. This general opinion was confirmed
from a microeconomic perspective by Emanuele (1996), who estimated a downward
sloping curve for volunteer labor and therefore confirming that volunteers are not free.
Other approaches were not limited to explicit simply measurable costs, but focused
also on capturing the implicit part of the value of volunteer work (not directly by market
valuated). For example Steinberg (1990) dealt with the costs of volunteers.
Much of the research on solving this issue is applied in healthcare, for example hospitals
and their staff. Femida and Narasimhan (2004) determined that the benefits and costs
incurred by volunteers (out-of pocket expenses and opportunity cost). Brown (1999)
and Ross (1994) agreed with non-zero opportunity costs. Montmarquette and Monty
(1987) confirmed the importance of opportunity costs of time in connection
with the levels of volunteers’ education. Hodgkinson and Weitzman (1996) and U.S.
Bureau of the Census (1995) went further and argued that volunteer workforce
is on average more educated than employed workforce and thus average hourly wages
may tend to understate the value of volunteer time.
The aim of this paper is the identification of the importance of researching the economic
value of volunteering in the Czech Republic through the identification of main reasons,
suitable ways and approaches and relevant areas.
Material and Methods
From methodological view this paper uses positive and qualitative approaches
and also some normative recommendations as research outcomes. The core
of the research is based on literature review of foreign and domestic sources with recent
and historical knowledge from theory and practice. Positive approach was used
and based on literature review.
Data was gathered from domestic sources like Czech volunteer web, Czech statistical
office and other local sources. We focused on these three elements: area of volunteering,
numbers of volunteers, and estimated monetary value. We found out that data
about numbers of volunteers and estimated monetary values are available almost
only at the national level. We faced the problem of data inconsistency and discuss
it further in the paper. Data is from period 2009 to 2012.
Further used were the methods of deduction and synthesis of acquired knowledge
for the identification of research outcomes. The last part of this paper has normative
character and contains recommendations for further research in this area.
Subsequently the appropriate adaptation of research findings to the specific conditions
of the Czech Republic was done.
32
Results and Discussion
Considering why police makers should know the monetary value of voluntary work,
Colman (1998) presents interesting argument. He claims that what is not counted
and measured is often insufficiently valued and thus given secondary priority in policy
planning. He adds that this can be dangerous because important unpaid work may not
receive the necessary support, and because individuals under financial or time stress
may first cut back on voluntary commitments as “luxuries” they can no longer afford.
There are two main issues in this research area: what to measure and how it should be
measured. An important prerequisite for solving this issue is the identification
of potential areas of use in theoretical perspective. It is necessary to answer the question
of why these specific areas were chosen. Based on the current knowledge of theory,
research and practice, it is possible to examine the possibilities of applying
this approach to the environment in the Czech Republic with its specific conditions
of public policies, services, volunteer or nonprofit sector. Just the difference
in conditions and functioning of the systems within a particular environment requires
certain adjustments for the correct application of approach.
For further procedure it is necessary to identify the areas of volunteering in the Czech
Republic which may be the relevant subject for this issue:
• Healthcare: In the end of 2009, there were more than 40 health and social-health
facilities. Only in program called Volunteers in hospitals serve more than
1000 registered volunteers per year (Dobrovolnická centra a programy,
Czech volunteer web). Many others volunteers served also in other type
of these facilities as well as in health-social terrain (Šimková, 2011).
• Social services: According the research from 2012, half of the social institutions
have long term experience with volunteers and another one fifth would like
to (Janíková 2012). Overall in social services, there were 9278 volunteers (2009)
in various types of facilities, e. g. retirement houses and facilities for disabled
people, facilities for children and youth and many others (Návarová, 2011).
• Culture: Ministry of Culture in Czech Republic presents two main areas
of application of volunteering in culture – Care of tangible and intangible cultural
heritage and Public cultural services.
• Sport: The Czech Sports Association involves about 200 000 volunteers
who participate both on an ongoing (competitions) or one-time activities (events,
tournaments). Ministry of Education, Youth and Sports (2009) states
that volunteering is the basis of activity in sport environment and demonstrably
brings economic profit of several hundreds mil. USD per year to the State.
According to CSTV, the estimated value of volunteers achieved through various
33
methods of valuation is 60-200 mil. USD, while the annual support
from the budget of the Czech Republic is around 110 mil. USD.
• Work with children and youth: About 30 000 long-term volunteers participate
in this area while in the long run is the number of volunteer almost double.
These volunteers are also very important, because they provide the care
of about 400 000 children and youth (Sedláček, 2010)
• Ecology and environmental protection: Tenth of thousands of volunteer take care
about the environment and their volunteering produces long-term benefits
in many areas. Volunteers take care of many protected areas and help to preserve
them. They also contribute to the protection or rescuing of many animals
(Toman)
• Emergencies: Volunteering in emergency management has various forms
and became really popular. Only in associations of volunteer firefighters there are
about 400 000 member, and according to the estimations about 75 000 are ready
to serve as firefighters. Moreover, there are many other volunteer rescuers of all
kinds, plus many people serve as volunteers when floods occur.
• Church and religious societies: Accurate data about volunteers in Church
and Religious Societies are missing, but we can say that it is very widespread.
We can find volunteers participating in activities of churches and religious
societies every week in almost every church in the country. They serve
as volunteer singers, preachers, economists or altar servers and also all over
the country during the Night of Churches, which is based on volunteer work
(Volunteering in Church and Religious Societies).
• Protection of human rights: There are no official data about volunteering
in human rights, but it is becoming quite common. For example, UNICEF has
about 700 volunteers in the Czech Republic. Many other organizations like
League of Human Rights are working with volunteers regularly too.
• Research activities (usually volunteers as a sample): These activities require
spent time of people and the cost of this spent time should be part of the total
costs of the research. There exist various specific researches requiring different
inputs (time, samples, tools)
• Army and civil safety: Here, for example, the militia, which are created
either preventive or ex-post as a tool for reducing crime in a certain area. It is
composed of volunteers from the community residents serving in their spare
time. However, they have neither official competence nor relationship
with the local government. Randomly they arise based on immediate needs
and, in some aspects, partly replace the police.
• Other: Volunteering randomly appears in other areas such as public
34
administration and replace production of public goods in case of financial
distress or other problems of administrative units (for example municipalities).
If we look at the official data, we see interesting contradiction. According to the Czech
statistical office, in 2009 (last available data) were in the Czech Republic
27 155 volunteers, who worked 47 194 363 hours and value of their volunteer work was
335 mil. USD. Looking at the data from particular areas, we can say that the overall data
is roughly underestimated. Another important aspect of the research is to answer the
question in what forms volunteering takes place, if it is only manual work for average
related wage, or it is more sophisticated work, where it would be more appropriate to
consider the relevant payroll costs (e. g. what volunteer earns at work equals to the
price of his voluntary work).
Then we precisely value his work and minimize a paradox, or phenomenon,
of volunteering where the exact same work performed by two persons with highly
different market wage. For example same work done by nuclear engineer and bus driver
would be valued according to their market wage in their regular job and not based
on the actual work value. It would be rational to pursue more efficient solution
where the nuclear engineer prefers to work for the market wage in his job and earns
money instead of volunteering and donated some of his wage to pay for other less
"expensive" volunteers. In certain areas, this may have relevance to the issue of costeffectiveness,
particularly in those where there is some uncertainty (e. g. firefighters).
In the operative part of the research it is necessary to choose appropriate methods
of measuring the economic value of volunteering. Based on the analysis of relevant
resources, following research methods can be used (ILO, 2011; Salamon, Sokolowski
and Haddock, 2011):
• opportunity costs – assigns to hours of volunteer work the average wage
that the volunteer would earn if he had worked at his regular job the same hours.
• replacement costs – assigns to hours of volunteer work what it would cost to hire
someone to do the work of the volunteer.
• willingness-to-pay – measured at a particular augmented level of income.
(connected with virtual currency approach and non-profit market valuation
of volunteering through which we can value the volunteer wage)
• societal benefits – assumes that the extra amount of output resulting
from the volunteer activity can be determined, this can be considered
as a reasonable estimate of the economic value of volunteer work.
Conclusion
Volunteering in the Czech Republic is the area in which large numbers of people take
part. However, these working activities are not included in standard economic
indicators such as GDP. Although the Czech Statistical Office provides data
35
on volunteering, in our opinion they grossly underestimate the current situation.
There are notably more volunteers in some of the areas than the official data say.
Knowing the value of volunteer work is particularly important for policy makers,
because what is not counted and measured is often insufficiently valued and given
secondary priority in policy planning. Moreover, unpaid work may not receive
the necessary support because individuals under financial stress may first cut back
on voluntary commitments.
If we look at the available estimates of volunteer work in the Czech Republic,
according to the Czech Statistical Office, despite the probable underestimation,
the overall value is around 350 mil. USD annually. This situation calls for a more
accurate measurement of volunteering, both in general and individual areas. This is
an opportunity for further research, both for scientists, who could perform it,
as well as for voluntary organizations, which would acquire currently unavailable data
to the more accurate data aggregation. Due to the non-homogeneity of volunteering,
it seems appropriate to have data in different areas, as the individual benefits can vary
considerably – not only because of the different activities of volunteers.
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http://www.dobrovolnik.cz/oblasti-dobrovolnictvi/
BROWN, E. (1999) Assessing the value of volunteer activity. Nonprofit and Voluntary
Sector Quarterly, 28(1), 3-17. ISSN: 0899-7640.
COLMAN, R. (1998) The Economic Value of Civic and Voluntary Work in Nova Scotia, GPI
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ue%20of%20Civic%20and%20Voluntary%20Work%20in%20Nova%20Scotia.pdf?1
Dobrovolníci mění svět: sborník příkladů dobré praxe. (2011) Editor Svatava Šimková.
Praha: Národní institut dětí a mládeže MŠMT, 119 s. ISBN 978-808-7449-158.
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2004, vol. 33 no. 1 28-54. ISSN: 0899-7640.
HODGKINSON, V. WEITZMAN, M. (1996) Giving and volunteering in the United States.
Washington, DC: Independent Sector.
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Work. International labour office Geneva. March 2011. [cit. 28.8.2012] Available from
WWW: www.ccss.jhu.edu
IRONMONGER, D. (2008) The economic value of volunteering in Queensland, Updated
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JANÍKOVÁ, E. (2012) Dobrovolnictví v sociálních službách. Výsledky průzkumného
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data/018/002154.ppt
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pro dobrovolnictví v kultuře a umění [cit. 15.9.2012] Available from WWW:
http://www.dobrovolnik.cz/res/data/023/002794.pdf
Ministry of Education, Youth and Sports (2009) [online]. Koncepce státní podpory
sportu v České republice [cit. 8.9.2012] Available from WWW: http://www.msmt.cz/
sport/koncepce-statni-podpory-sportu-v-ceske-republice
MONTMARQUETTE, C., MONTY, L. (1987) An empirical model of a household’s choice of
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37
U.S. Bureau of the Census, 1995. Statistical abstract of the United States. Washington, DC:
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dobrovolnicka-centra-a-programy/s
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/dobrovolnictvi-v-ekologii/
38
Green Procurement of Public Contracts
– Introduction and Present Situation
Jurčík Radek
Abstract
Green economy is a new trend in all fields of products. Also in public economy, there are
political discussions about passing rules concerning ecological standards.
On the other hand, respecting these rules costs money. The main aim of this article is giving
recommendation of how to improve green procurement based on analyses of the present
situation of green rules and green contracts in the Czech Republic. We want to show
the ways if and how it is possible to get preference for green procurement. There are
many ways to do it in practice. Firstly it is necessary to define what the green procurement
is and make public choice about supporting it. It is possible to think about three ways to do
it: through tender conditions, evaluations (ecological choice of criteria and their weight
which should be at 30 % in the framework of the most advantageous offers), and “green”
variants. Public choice for green procurement should have economic reasons.
Keywords
green economy, Sustainable development, tender documentation, award of contract,
ecological criteria, “green” variants
Green procurement rules and situation in the Czech Republic
The connection between public purchasing and the environment is following.
According to European statistics, public procurement authorities are major consumers
in Europe, spending some 16 % of the EU’s gross domestic product which is
a sum equivalent to hundreds billions EUR (Ostřížek, 2007). The purchasing power can
be used to opt for goods and services that also respect the environment. They can make
an important contribution towards sustainable development (Jurčík, 2007a).
Green public procurement covers areas such as purchase of energy-efficient computers
and buildings, office equipment made of environmentally sustainable timber, recyclable
paper, electric cars, environment-friendly public transport, organic food in canteens,
electricity from renewable energy sources, and air conditioning systems complying
with state of the art environmental solutions. Green purchasing is also about setting
an example and influencing the market. By promoting green procurement, public
authorities can provide industry with real incentives for developing green technologies.
In some product, work and service sectors, the impact can be particularly significant,
as public purchasers command a large share of the market (in computers, energy-
39
efficient buildings, public transport, and so on). Green procurement covers a large area
of public economy. The examples are from the area of agricultural products.
Contracting authorities consider life-cycle costs of a contract. Green public procurement
allows you to save money and protect the environment at the same time. This is
the main economic aspect: sustainable development. By purchasing wisely, contracting
authorities can save materials and energy, reduce waste and pollution, and encourage
sustainable patterns of behaviour.
According to the European Commission, if all public authorities across the EU demanded
green electricity, it would save the equivalent of 60 million tonnes of CO2, which is
equivalent to 18 % of the EU’s greenhouse gas reduction commitment under the Kyoto
Protocol. Nearly the same saving could be achieved if public authorities opted
for buildings of high environmental quality. If all public authorities across the EU were
to require more energy-efficient computers, and this led the whole market to move
in that direction, this would result in a saving of 830,000 tonnes of CO2 (European
Commission, 2004). If all European public authorities opted for efficient toilets and taps
in their buildings, this would reduce water consumption by 200 million tonnes
(equivalent to 0.6 % of total household consumption in the EU).
One of the aims of this article is to express an opinion on the correctness
of this statement of the European Commission. Further, it is necessary to discuss ways
to implement rules for green procurement effectively. Consider which products, services
or works are the most suitable on the basis both of their environmental impact
and of other factors, such as the information you have, what is on the market,
the technologies available, costs and visibility (European Commission, 2001).
Analyses how to implement green procurement rules into public economy in practice
(public procurement) are the main aim of this article.
Realisation of green procurement policy
Contracting authorities have the responsibility to get the best value for taxpayers’
money for everything they procure. Best value for money does not necessarily mean
going only for the cheapest offer. It means you have to get the best deal
within the parameters you have set. The protection of the environment can be one
of these parameters and can, therefore, act as an equal factor among others for awarding
of the contract (Jurčík, 2007b). Therefore, value for money does not exclude
environmental considerations.
There are several ways to take environmental considerations into account (see table 1).
40
Table 1: Methods of green procurement
Method
Czech law (law no 137/2006 Coll.,
on Public Contracts)
European procurement
directives for public
authorities (2004/18/EC)
Technical specification
in tender documentation
§ 44 - § 49 Art. 23 - 27
Qualification § 50 - § 66 Art. 45 - 52
Evaluation § 78 - § 81 Art. 53 – 55
“Green” variants § 70 Art. 24
Source: Author
Tender documentation shall be the totality of documents, data, requirements,
and technical specifications of the contracting entity delimiting the subject-matter
of a public contract in detail necessary for drawing up a tender. The contracting entity
shall be responsible for correctness and completeness of the tender documentation
(Hacket, 2003). What a product is made of, and how it is made, can form a significant
part of its environmental impact.
Qualifications of economic operators shall be understood as suitability of economic
operators to perform public contracts (it consists of four types: basic qualifications
prerequisites, professional qualifications prerequisites pursuant, economic and financial
qualifications prerequisites pursuant and technical qualifications prerequisites
pursuant, e.g. requirements for ecological procedures into fulfilment of public contracts.
In the framework of business (tender) conditions, it is not excluded or prohibited to ask
ISO 9001 or ISO14001 certificates.
Variants of a tender shall be authorised if a public contract is awarded on the basis
of the basic evaluation criterion of the most economically advantageous tender,
and where the contracting entity has authorised variants in advance in tender
conditions. If the variants of a tender are admissible, the contracting entity shall indicate
the requirements to be met by such variants in tender documentation or,
where applicable, together with any special requirements regarding drawing
up the tenders. One of allowed variants should be “green” variants, e.g. food for school
canteens without using chemical fertilizers.
The evaluation committee shall assess the tenders submitted by tenderers
from the point of view of the fulfilment of statutory requirements, and requirements
of the contracting entity indicated in tender conditions. The tenders that fail to meet
such requirements shall be rejected.
The basic evaluation criteria for the award of a public contract shall be
• economic advantageousness of the tender, or
• the lowest tender price.
The basic evaluation criterion in competitive dialogue shall be the economic
41
advantageousness of the tender only. The contracting entity shall select the basic
evaluation criterion according to the type and complexity of the public contract
and indicate it in the contract notice, or in the call for competition. If the contracting
entity decides to award a public contract according to the basic evaluation criterion
of the most economically advantageous tender, it shall always establish partial
evaluation criteria. Such partial evaluation criteria shall be linked to the performance
of the public contract offered and, in addition to the tender price, they may, in particular,
be quality, technical merit of the performance offered, aesthetical and functional
characteristics, environmental characteristics, operational costs, cost-effectiveness,
sales and after-sales service, technical assistance, delivery period or period
of completion. If the basic evaluation criterion of the most economically advantageous
tender is applied, the contracting entity shall accord relative weightings expressed
in percentages to the individual partial evaluation criteria. The established relative
weighting accorded to individual partial evaluation criteria may be identical.
The contracting entity shall indicate the partial evaluation criteria and the weightings
thereof in the contract notice, in call for competition, the tender documentation or,
where appropriate, in the invitation to submit tenders in a restricted procedure,
in a negotiated procedure with publication, in the invitation for negotiations
in negotiated procedure without publication or, if appropriate, in the invitation
to confirm an interest to participate, or in the competitive dialogue documentation.
One of the evaluation criteria should be ecological requirements. This is not possible
when the basic evaluation criterion is the lowest tender price. This is possible just
in such cases when the basic evaluation criterion is economic advantageousness
of the tender.
Under Directives 2004/17/EC and 2004/ 18/EC, production methods can explicitly be
taken into account when defining the technical specifications, but this is also possible
under the previous directives. Contracting authorities have the right to insist
that the product you are purchasing has to be made from a specified material, provided
the Treaty principles of non-discrimination, and the free movement of goods
and services are respected. Statement that is possible to set conditions concerning
environmental considerations is contained in decision making practice of the European
Court of Justice. The Court of Justice further clarified those possibilities in, for example,
judgments of the Court of Justice of 17 September 2002 in case C-513/99
and of 4 December 2003 in case C-448/01. In case from September 2002 (C-513/99)
Concordia Bus Finland Oy Ab, formerly Stagecoach Finland Oy Ab, and Helsingin
kaupunki, HKL-Bussiliikenne, the court takes into account criteria relating
to the protection of the environment to determine the most economically advantageous
tender. Helsinki city council decided on 27 August 1997 to introduce tendering
progressively for the entire bus transport network of the city of Helsinki, in such a way
that the first route to be awarded would start operating from the autumn 1998
timetable. Under the rules governing public transport in the city of Helsinki,
42
the planning, development, implementation and other organisation and supervision
of public transport, unless provided otherwise, are the responsibility
of the Joukkoliikennelautakunta (public transport committee) and the Helsingin
kaupungin liikennelaitos (transport department of the city of Helsinki, ‘the transport
department’) which is subordinated to it. The commercial service committee decided
on 12 February 1998 to choose HKL as the operator for the route in lot 6, as its tender
was regarded as the most economically advantageous overall. According to the order
for reference, Concordia (then Swebus) had submitted the lowest-priced tender,
obtaining 81.44 points for its A offer and 86 points for its B offer. HKL obtained
85.75 points. As regards the bus fleet, HKL obtained the most points, 2.94 points,
Concordia (then Swebus) obtaining 0.77 points for its A tender and -1.44 points
for its B tender. The 2.94 points obtained for vehicle fleet by HKL included the maximum
points for nitrogen oxide emissions below 2 g/kWh and a noise level below 77 dB.
Concordia (then Swebus) did not receive any extra points for the criteria relating
to the buses' nitrogen oxide emissions and noise level. HKL and Concordia obtained
maximum points for their quality and environment certification. In those circumstances,
HKL received the greatest number of points overall, 92.69. Concordia (then Swebus)
took second place with 86.21 points for its A offer and 88.56 points for its B offer.
Table 2: Steps concerning preparation of tender documentation
Definition of public need (it is also necessary
to think about social and ecological policy which
have indirect economical benefit for the state)
Define of subject of the tender in tender
documentation (legal Framework of EC
directives)
Draw up clear and precise technical specifications
Establish selection criteria
Establish award criteria
Define weights
Source: Author
43
Green procurement and food from organic agriculture
The production of organic food is a specialised process. For a food product
to be marketed as organic in the EU, it must fulfil certain requirements and be certified
by an approved inspection body. In the EC, these requirements are laid down
by the Council Regulation (EEC) No 2092/91 on organic production of agricultural
products. Contracting authorities can make the requirements of your technical
specifications even stricter than those in the Council Regulation (EEC) No 2092/91. It is
possible to require that a service contract for a canteen provides a certain percentage
of organic food or that certain foodstuffs are organically produced. Finally, it is obviously
possible for public authorities to reduce environmental impact through seasonal
purchasing, i.e. by providing in their canteens only those varieties of fruit and vegetables
that are available in the area at the time.
These include cereals, dairy products, fruit and vegetables (according to season)
and meat. Organic food is offered in hospitals, old peoples’ homes, schools
and kindergartens. The defined share of organic food can differ depending on the kind
of institution: e.g. 30 % in kindergartens with the plan to increase this percentage
to 50 % within the next two years (3).
Some EC countries had passed methodologies (how to procure some agriculture
products), such as dressings and enteral nutrition, such as tube feeding sets, Nasogastric
tube, gastrostomy, port (Knapp), extension tube – Knapp, gastrostomy catheter,
peg, jejunostomy (SEMC, 2007).
Articles for enteral nutrition affect the environment and health primarily in three ways,
according to present knowledge:
• chemical additives hazardous to health and the environment
• use of finite resources
• generation of waste
Examples of tender conditions
• The products shall be free from phthalates (<=1000 ppm)
• Packaging material shall be free from PVC.
• Paper/cardboard in transport and internal packaging shall be unbleached
or bleached without chlorine
• extension tubes for gastrostomy ports (Knapp) free from phthalates
(<=1000 ppm)
In the agriculture products (such as milk, fruit and vegetables, milk and meet
preparations, drinks, aquaculture products) it is possible to establish these criteria:
44
• using fertilizers incorrectly,
• causing erosion and destroying of woods
• water pollution
• torture of domestic animals
• high consumption of energy and water e.g. in the process of food production
• requirements for packaging
• high level of pollution at the transport of food
• level of energy consumption at contracts on kitchen equipment.
Next criteria concerning food
• requirements or evaluation on some % of food from ecological sources.
There exists the regulation EC No 834/2007 on ecological production
• on case of sea food some % or all contracts: all fish was hunted by allowed
methods and does not contain chemical products (or it should be holding up
some limit for chemical substances)
• packing should be full or part of recycle materials
• kitchen equipment fulfil requirement for the ENERGY Star level (classification A)
• existence of good life conditions for animals.
These “agriculture” conditions should be established by contracting authorities
as tender conditions or in the framework of evaluation or as conditions concerning
“green” variants. It is also possible to use some ecological qualification or conditions,
such as ISO 9001 or ISO 14001 which are allowed by law. Further certificate such as ISO
14021, ISS 14024 or ISO 14025 are not allowed by public procurement law and de lege
ferenda it is possible to recommend discussion about changes of law.
Statistics
There are buying individual offices and ministries. In the following figures, there is
a total of buying (purchase) of products and buying of products marked with one
of followed eco symbol, or rather percentage, the total share of products marked
of followed eco symbol to the total purchase.
45
Table 3: Purchases made byindividual offices (in EURO)
Office
Purchase in 2010
Share
With eco marks Total
Ministry of the Environment
(www.mzp.cz)
4842271.00 5102138.00 95%
Ministry of Transport
(www.mdcr.cz)
8951575.00 20785363.00 43%
Ministry of Industry and Trade
(www.mpo)
3567204.00 4420384.00 81%
Ministry of Education, Youth and
Sports (www.msmt.cz)
3146174.00 3351621.00 94%
Ministry of Defence (www.army.cz) 16795619.00 42747216.00 39%
Ministry of Culture (www.mkcr.cz) 10037862.00 30705786.00 33%
Ministry of Regional Development
(www.mmr.cz)
X X X
Ministry of the Interior
(www.mvcr.cz)
101085789.00 172997787.00 58%
Ministry of Justice (www.justice.cz) 165314040.00 342808223.00 48%
Ministry of Foreign Affairs
(www.mzv.cz)
42029350.00 44459050.00 95%
Ministry of Agriculture
(www.eagri.cz)
3853238.00 3842238.00 100%
Ministry of Health (www.mzcr.cz) X X X
Ministry of Finance (www.mfcr.cz) 66789373.00 84094744.00 79%
Ministry of Labour and Social Affairs
(www.mpsv.cz)
166709571.00 190191769.00 88%
Czech National Bank (www.cnb.cz) 677994.00 1764942.00 38%
Government Office 2762488.00 3499080.00 79%
Public Defender of Rights
(Ombudsman)
836817.00 1746811.00 48%
Total 597399365.00 952517152.00 63%
Note: Ministry of Health and Ministry of Regional Development these ministries were not sent correct data.
Source: Ministry for of Environment and own calculation
Table 4: Purchase of some products in 2010 (in EURO)
Product
Purchase
Share
With Eco Mark Total
Boilers and other sources of heat 1 559 496,00 4 231 693,00 37%
Paper and writing materials 43 048 777,00 102 378 528,00 42%
Furniture 100 815 344,00 189 126 585,00 53%
Office electronics 435 031 190,00 560 661 554,00 78%
White electronics 1 821 068,00 7 495 973,00 24%
Washing and clean means 4 199 033,00 20 302 343,00 21%
Grease 642 290,00 1 985 886,00 32%
Workroom and garden 2 339 390,00 6 828 499,00 34%
46
Product
Purchase
Share
With Eco Mark Total
Textile 5 039 403,00 54 999 378,00 9%
Fuel 15 456,00 145 212,00 11%
Others 2 887 918,00 4 361 501,00 66%
Total 597 399 365,00 952 517 152,00 63%
Source: Ministry of Environment and own calculation
Table 5: Purchase of Computer Technology
Year
Purchase
with Eco Mark
Total Purchase Share
2009 345 595 951,00 462 524 526,00 74%
2010 358 646 128,00 470 021 738,00 76%
Source: Ministry of Environment and own calculation
Table 6: Purchase of Furniture
Year
Purchase
with Eco Mark
Total Purchase Share
2009 70 214 164,00 182 548 633,00 35%
2010 66 035 057,00 114 454 441,00 53%
Source: Ministry of Environment and own calculation
Table 7: Purchase contained in Information system of Public Contracts
Computer
technology
31October -
31December
2010
Furniture
31 October –
31December
2010
Computer
technology
1 January 2011 –
31 October 2011
Furniture
1 January 2011 –
31 October 2011
Total number
of purchase
20 13 36 14
Number of Green
Purchase
1 0 1 0
Source: ISVZ (www.vestnikverejnychzakazek.cz)
From these figures, it follows that the significant parts of ministries consider green
procurement as a suitable tool. Some of these offices implement purchases
of the ecological saving products into their internal methodological regulations.
The regulation of the Czech government no 465/2010, on green procurement, is not
respected in general.
Conslusion
There are new trends in the field of public economy in the European Union.
One of the trends is a procedure supporting environmental requirements. Public choice
47
for green procurement cost on one hand, rather expensive, on the other hand it enables
sustainable development. There are problems with proving ecological conditions
and lack of ecological standards in the field of agriculture products. There is
the standard ENERGY Star in the field of electrical products (e.g. computer).
Because of it, it will be necessary to statement ecological requirements by statement.
Respecting green procurement rules would have an influence on behaviour
of agriculture firms (Tomšík, 2008) and market positions of these firms (Kučerová,
Žufan, 2008). Green procurement is not a modern trend just in the European Union
and has a big influence on consumer behaviour (Stávková, 2008). Also e.g. China’s state
council is to force local governments in the country to take a greener approach
to procurement. According to Chinese authorities new rules concerning green
procurement will give eco-friendly and energy saving products priority in future public
purchases. The country introduced a compulsory procurement list aimed at encouraging
the purchase of greener products in 2007, and the latest move is seen as a key piece
of state strategy in cleaning up the country's act. "The country's requirement for strict
implementation of the compulsory green procurement list will encourage
more suppliers to go green and have their names on the green procurement list"
(Conghu, 2009). This procurement policy is a good example for both EC and Czech
Republic’s procurement policies. The Czech Ministry of Environment was preparing
rules for green procurement. The author was a part of the team preparing these rules.
This is one way to support green standard in the public administration and to realize
one of the EC and government policy in the public economy.
There are some barriers for significant use of ecological saving products. We can
mention these:
• higher price of ecological products,
• lower quality of products with eco label and unsuitability for some offices,
• outsourcing of the services (e.g. facility, cleaning) – it is not possible
to purchase from external suppliers.
The recommendation how to increase green procurement purchase:
• simplification of green procurement evidence system,
• decrease of administration in the field of green procurement,
• better methodological support – more methodological materials (e.g. examples
of tender documentation on green contracts).
Acknowledgements
This article was written in the framework of MSM 6215648904 TS 04.
48
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C.H.Beck. ISBN 978-80-7179-575-9
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Economics, 7: 293-300.
49
Solidarity and Equivalence in Social System
– Current Problems
Krebs Vojtěch, Průša Ladislav
Abstract
Solidarity and equivalence are long-term issues in all social systems in advanced countries.
At first glance it may appear that the two principles act against one another,
though in reality there are lots of very close ties between them – to the extent that social
systems are constructed as universal the principle of solidarity asserts itself,
while to the extent that social systems are constructed according to levels of income
from economic activities the principle of equivalence asserts itself. It is just the extent
to which those individual principles should be enforced that makes it such a fundamental
question when deciding on modifications to individual social systems. The paper is thinking
of theoretical solutions of the principle of equivalence and solidarity and their use
in individual social systems in the future. It brings arguments the extent of solidarity is
too large and that is why the principle of equivalence needs to be strengthened.
Keywords
solidarity, equivalence, social systems
Introduction
Social system (here means a social sphere - the part of the system of society which forms
a reference frame for social policy with its internal relations and connected with social
background as well) not only in our society but also nearly in all European advanced
countries faces a necessity of a crucial change (reform). It is expected to contribute
to a recovery of public finance and will support sources and incentives of the efficient
economic development in postmodernist society without the heart of its social cohesion
being disturbed. Even though it is impossible to state if there are any effects, the changes
are inevitable. Continuing development of the current social system is not sustainable
even in a mid-term horizon. There are lots of causes. In summary, we can classify them
as a risk of blocking following social development which is related to a threatening
of the effective economic development and possible negative impacts on creating
sources of its growth and also with negative impacts on living conditions
and improvement in their quality.
Radical changes must be based on what is crucial for their structure - which are
undoubtedly two basic (absolutely different) principles: of equivalence and solidarity.
It will be not only the problem of viewing them, but also a change in their position
(importance) in the social system.
50
The aim of the paper is to point out the necessity to strengthen the principle
of equivalence in individual social systems.
Most importantly, as it has been said, let´s suppose two important principles in social
systems play an important role, although both are supported by different ideologies
and different economic and social impacts are expected from them. On the other hand,
all other trajectories, including our social system, must be focused on optimum
combination and cooperation and contribute to harmonious development of the whole
society.
Material and Methods
The main strategic approach for the preparation of this paper was a secondary analysis
of the literature focused on the characteristic trends of social systems in European
countries. We used a kontent analysis of the literature, laws and program documents
of selected Member States of the European Union.
Results and Discussion
Principle of equivalence
1 Common solution
The concept of equivalence means an equal value, something having the same effect
and value. In social policy, the principle of equivalence is often applied mainly in systems
of insurance and is defined as a principle according to merits or efficiency. It supposes
distribution of pensions, possessions, conditions etc to individuals will be equal,
consistent with their performance, according to their merits (Krebs, 2010).
We can state, the principle of equivalence is currently in a process of a revival.
Definitely, it is connected with the fact the present modern society is strongly influenced
by the idea of individualism. More and more abilities of individuals, their performance,
competitiveness, intellect and social qualities (communicative abilities, cooperation,
personal responsibility, ethical behaviour...) are relied on. Economic theory promotes
the individualistic concept as well. Ideology of neoliberalism puts the emphasis
on individuals, their freedom, rights for property and responsibility is viewed
individualistically. It supposes that the principle of equivalence meets requirements
for economic growth and its stimulation better. That is why it is openly against publicly
organised solidarity and social redistribution, respectively against its “excessive”
dimension (despite the fact it cannot define that quantitatively). (Keller, 2005)
2 Equivalence in social insurance
Although the principle of equivalence may seems to be in opposition to set social
systems whose the most characteristic feature is, on the other hand, redistribution
and the principle of solidarity. But the principle of equivalence is relatively widely used
51
and above all in insurance area. Equivalence is, for example, a condition of an overall
balance in all insurance systems and its macroeconomic equivalence guarantees
its functioning, continuity and even whether the clients succeeded in revaluation of their
deposited means. It applies both to private and public insurance (it is not influenced
by the fact that possible deficits of a public insurance will be compensated from state
revenues). The requirement for equivalence is very categorical and it is necessary
to be met. The principle of equivalence in insurance is used as a tool which helps
to achieve a balance between a height of insurance and expected risk (loss) which can be
compensated by it either the equivalence between individual risks and a height
of adequate insurance (the principle of individual equivalence) or equivalence
between homogenous group of risks and insurance of adequate group of the insured
(the principle of collective equivalence). In the case, we must take into account problems
of solidarity because the basis of every insurance consists in a willingness to join
together to solve common problems. Insurance systems are examples how both
principles are closely interconnected.
At first, the development was focused on the private insurance. Increases in risks,
responses to originated demands of industrial development for insurance sector
and the fact that that the analysis of individual risks was becoming very difficult they
resulted in gradual application of collective equivalence, applied to a big group
of heterogeneous risks (similar risks were linked together). Bismarck acted
with his concept of social insurance in the same way. Social and private insurance
were similar to one another and based on - to a certain extent - solidarity (probability
model). During the time both insurances and their development started to differentiate.
Reforms by W. Beveridge became a turning point in the development. By means of these,
the principle of solidarity was strengthened and social insurance was formed
in practically the same shape which is known nowadays. Strengthening of solidarity was
closely connected with the adoption of insurance derived from incomes. New fixed
minimal benefits and a fixed contribution for all insurance holders were set. Dependence
of insurance on incomes, especially if no limits the insurance is paid from are set, puts
pressure on solidarity and its acceptance not only by the high income insured
but also the society as a whole.
Private and social insurance have started to go on their own ways. Private insurance is
aimed at strengthening of the principle of individual equivalence. By means of improved
methods and computers, it is possible to carry out highly differentiated analyses of risks
which enable insurance differentiation and it is possible to adapt it to clients´
requirements. Better living standard and income level of some groups encourage
its development as well. It must cope with some obstacles, income differentiation
in society, it means social and economic conditions of the lowest income groups
for which the private insurance might not be available. On the other hand, goals of social
insurance and the insurance dependent on incomes and due to a solidarity is available
52
even to groups which are excluded from the private insurance. But its price
for the society is very high. The system prompts undesirable development: solidarity is
too high, relation between insurance and contribution is vague, motivation is low,
incomes are lower than costs, the system is permanently unbalanced, deficits grow
and macroeconomic equivalence is damaged.
Currently, the difference between the private and social insurance is becoming topical.
The principle of equivalence should be involved even in the social insurance.
3 Preferences and risks of equivalence
What are the preferences and risks in social systems? Most importantly, let´s say
a current glorification of social self-sufficiency which is supported by the ideology
of individualism and its principle – the principle of equivalence can be, in our opinion,
beneficial for some its parts. It concerns mainly our current system of pension insurance
which shows excessive solidarity and besides supplementary systems it offers
only limited possibility of the equivalence of deposited insurance. High income people
have relatively low pensions because pension ratio to their wages decreases with higher
wages. In newly set pensions, the ratio, after 40 year insurance and with the wage equal
to 0.5 multiple of average wage in the national economy, is 84%. With the wage equal
to four-multiple of average wage is only 17%. It is caused by a significant reduction
in individual basis of assessment. The system is too generous, in favour of low incomes
and provides insufficient compensation for pensions constructed from high incomes.
The situation was a subject of the complaint sent to the Constitutional Court
which decided that it is necessary to change the method of calculation of pensions
(its findings resulted in so called “small pension reform” which came into force
on the 1st October 2011).
Due to the growing labour costs the current basic system of pension insurance increases
growing production costs and make the competitiveness of Czech producers worse. It is
caused by insufficiently applied principle of equivalence (benefits respond to paid
insurance insufficiently especially as regards mid and high income groups). It does not
motivate even economically active citizens. Forthcoming reform should strengthen
the requirement for the equivalence in the pension system.
Anyway, these positive aspects connected with the strengthening of equivalence have
its obstacles and risks. Above all, the principle of equivalence is hard for so called
“non self-sufficient”. In all societies there are and will be such people who will not be
able to secure their existence in the system based on the principle of equivalence
whose application represents high financial barriers for someone. The private insurance
is sometimes unaffordable for those who are most dependent and need it most. A part
of people is often dependent on other people´s help, their tolerance, sympathy, solidarity
and it is impossible to refer them simply to charity how the neoliberal doctrine thinks.
53
Charity activities are not able to meet people´s requirements, we have to respect
multinational commitments, legislation, possible growth in social tension in society.
Principle of solidarity
1 Background
Solidarity (cohesion, mutual support) is an essential element in structures of all social
systems and how it is nowadays understood, it is not only mutual understanding
and help, but also mutual responsibility. It is considered as a significant momentum not
only of material but also moral and spiritual development and a condition
of the progress (Krebs, 2010). “It is a reflection of the fact the person is dependent
on the coexistence in the society he/she helps to create and which provides him/her
with some benefits. It expresses human sympathy and responsibility for themselves
and the others as well. In democratic countries is based on a free will and willingness
to respect interests of a wider community. This is expressed in representative
democracy in democratic countries.” (Krebs, 2009)
This mostly accepted definition characterises its heart of the matter. It might not be
changed even in the future: it means it should stay in our country (in the EU as well)
as a value which can help to guarantee worthy living conditions to all citizens, it should
contribute to a prevention of social tensions and conflicts and to support social cohesion
in the society. But we must say it cannot be on the same scale so as not to damage
the idea of self-sufficiency and economic effectiveness and prosperity.
Solidarity, as we know, is not a definite term. It can have many forms, ways
of implementation, different size, impacts etc. We can see solidarity has
a lot of meanings and therefore it demands a deep analysis and research of different
motives, relations and consequences which are, of course, different. Only if we proceed
this way we can reach the functionality and sustainability of the whole social system
in the long-term horizon. Without such analysis, there is the risk that the thoughts
of solidarity will lead to non effective generalization aimed at e.g. a tendency
to understand the solidarity as an entirely positive intellectual concept having
only positive features or on the other hand, it will be rejected as a concept encouraging
dependence, non-self-sufficiency, demotivation and low effectiveness of the economic
system. But of course, the solidarity can be both desirable, positive, encouraging
and supporting prosperity even in a social harmony and undesirable, demotivating
and supporting parasitism and social erosion and resulting in delayed impacts
on economic growth. It is important to recognise these effects in concrete social
and political measures and make a deliberate choice.
As long as we speak about specificity of the phenomenon of solidarity, we cannot ignore
the differences between the spontaneous, voluntary solidarity (some authors view
that as the real one) and the forced, involuntary, real. The topic must be paid more
attention to since it seems there are some ways out how to solve social problems.
54
2 Voluntary solidarity
Voluntary solidarity is appreciated by everyone because it is natural to give up
some profits in favour of someone else either the motive is consanguinity, affection,
sympathy or only the fact he is expected to do that. Someone regards it
as the only acceptable one. There is a quotation: “There is either spontaneous solidarity
or none. To dictate it means to damage it. A law can make people avoid immoral
behaviour but the effort to force them to show their solidarity is useless.” (Baldwin,
1990). Of course, the voluntary solidarity (supported by liberal thinking) plays
an important role in social systems apart from other things, it does not create so big
pressure on redistribution. It has probably higher ethical value than the forced one. It is
also a base of all charity activities. But the problem is, it is impossible to guarantee
the functioning neither of the social security system nor the social system as a whole.
3 Forced solidarity
The non voluntary, forced solidarity means the solidarity forced by the state in the form
of taxes and obligatory public insurance and the state obligation to guarantee even
solvency of relevant funds. After the second world war- and so far - the solidarity
of the society organised by the state has significantly participated in the development
in social systems in our country (and in some other European countries) either
in the form of taxes or insurance. Large social security of citizens needs a high rate
of redistribution. When setting it, the state must be aware of the antimony
between performance and equality and must take into account that the high rate
of redistribution could have a negative impact on the economy and will lead
to a demotivation of individuals and lower responsibility for their own living conditions.
It is a notorious fact that the forced redistributions are not desirable or acceptable.
The real development in the last years shows that the risk of “the incautious rate
of redistribution” has become very topical in the CR (Krebs, 2009).
Currently, we can see they were not sufficient (Aspalter, 2003). We cannot accept them
and we must insist on a state shift towards some restrictions in the forced solidarity
in some elements of the social system. We must consider that the viewing solidarity is
not restricted only to it.
Mainly, as far as the extent of solidarity of society the size of the forced solidarity is too
wide (Decision, 2010). Such solidarity is desirable where a person in need
and without means is provided a help. It is desirable and ethical so that such burden will
be shared by the state (by fellow citizens). On the other hand, there is question
whether the same solidarity should increase many citizens´ incomes (e.g. of mid
and high income groups) by means of miscellaneous benefits.
It is obvious that the ideas on long-term stability of the system coming from different
ideological solutions, attitudes to health care cannot succeed. The solution may insist
in an acceptance of a certain complex of objectively respected requirements for health
55
care (This one was developed in compliance together with new advantages
and disadvantages of models of health care, based on ideological solutions above all
in the European region and they consider even the situation in our medical care
after the year 1989.).
Finally, a very important fact of excessive solidarity in the system of basic pension
insurance is necessary to be mentioned. Here we must only emphasize that the system
of pension insurance is an area which definitely meets requirements for strengthening
the principle of equivalence best: paid insurance give the right to an adequate benefit,
but at the same time it is an area which is in the social security system most closely
connected with a participation (and reintegration) of people in the area of work
and which provides wide space for partial compensation of the principle of solidarity
by the principle of equivalence (expenditures on pension insurance accounted
for about 359bn crowns in the year 2011 and represented about 75% of all expenditures
on social security, 9.4% GDP). It could relieve a resource of society e.g. to finance
development in education which is most suited to balance limited life chances.
Therefore, it is not possible to make only “cosmetic changes” in the current basic system
but restructure it and strengthen the weight of equivalence.
One thing is certain, the present methods in the social system have not been sufficiently
significant so that they could set a trend heading towards an acceptable solidarity
of society. So that is why such objective is hard and redistributions are always a political
decision of the government where not only ideas but also interests of various groups
and lobbies are met. In addition to that, we are still influenced by our socialistic past
and the idea of equality is deeply rooted in our society. That is why not only the social
development brings crucial changes in new technologies and their application
in production but also changes in social relations, life style, labour market, education ...
whose consequences cannot be fully predicted or we do not want to imagine them
because they do not concern us directly. These changes as the whole expect a revision
of the current social state and its functioning and necessarily change opinions
on redistribution of the society.
Conclusion
Most importantly, we should say the development of a society (not only ours) currently
faces a certain friction between economic and social area. The turning point
between them is far from a balance between an economic effectiveness and social
thoughtfulness, (which were more common in the beginning of a development
of the welfare state and social market economy in west European countries
after the 2nd world war). Each of these areas - despite obstacles and their approaches works
according to its own logic: effectiveness and performance is a domain
of the economy, a passive social state mainly based on the forced solidarity is a domain
of the social sphere. To a large extent, both areas are functioning so that they destroy
56
each other. What is the way out of the vicious circle? Either higher and higher economic
performance, supporting growing and never ending demands for a solidarity how they
were accepted by the industrial society in the last century or an effort to optimize
the rate of the solidarity connected with a revaluation of its extent, purpose, effects etc,
connected with a strengthening of the principle of equivalence and preferring other life
values which will meet requirements of modern post-industrial society better.
We cannot ignore the fact that opinions on the development in the world
which advances and is in the permanent process of reassessment. Dominant values
in a specific society are always connected with the history, reached degree of social
development, with commitments and mission of a given stage, with other perspectives
of development etc. They are not definite for ever which applies to the Czech social
system as well. In our opinion, changes in hierarchy of values, other conditions of social
development, its mission and goals must be reflected in attitudes to the solidarity
and equivalence in social systems. But so far it has not happened (as long as we do not
specify solidarity, we have the solidarity forced by the state – in the form of taxes
and obligatory insurance in mind).
We can summarize: current social system and especially changes in the social security
system reflect conditions in which relatively generous social system was developed
and has been working till now. The etatist concept of solidarity, we are still based on, is
sharply inconsistent with requirements of the future post-industrial society.
Not only the state of public finance, but also the increasing impact of individualism
which relies on individuals more and more, his/her abilities, performance, intellect
and social qualities confirm that. The change in perception of the sense and the role
of solidarity and equivalence in social system and necessity to change proportions
to strengthen the principle of equivalence are connected with it (Krebs, 2009).
Summarize your paper and stress the most important points of it. Think about topics
for the future work.
Acknowledgements
This article has been elaborated as one of the outcomes of research project "Fiscal
measures in the EU countries in relation to the crisis” supported by Grant Agency
of the University of Finance and Administration.
References
ASPALTER, CH. (2003) The Welfare State in Emerging Market Economies: Case Verde
Publishing. ISBN 978- 1-933-284-73-6
KELLER, J. (2005) Soumrak sociálního státu. Praha: SLON, 2005. ISBN 80-86429-41-5
KREBS, V. a kol. (2010) Sociální politika, Praha: Wolters Kluwer Česká republika, ISBN
978-80-7357-585-4
57
KREBS, V. a kol. (2009) Solidarita a ekvivalence v sociálních systémech. Praha: VÚPSV,
ISBN 978-807416-044-8
Decision of the Constitutional Court No. 135/2010 Coll.
58
The Sense and Rationality of Non-profit Sector
in Social and Health Services
Mertl Jan
Abstract
This paper is focused on the sense of non-profit sector in social and health services.
After transition to market economy, the problem of financing and provision
of those services, in the past done under the direct control of the government, clearly arose.
However, the market solutions proposed were not bringing satisfactory results.
In this regard, the concept of non-profit organizations emerged in both theory and practice
of developed countries. This paper will focus on the main concepts and reasons
behind those organizations, which give economic and social rationality for their existence.
Special attention will be paid to the situation in social and health services sector and some
specific problem of the situation in the Czech Republic.
Keywords
social services, health services, non-profit sector
Introduction
Between years 1960-1970 in European countries began the process of objectification
of the legislative status (activities and content) of various institutions and organizations
controlled by government. These entities have been authorized either by legal entities
or individuals engaged in a particular activity. The acquisition of legal personality tried
to extend the possibilities of these entities and increase their autonomy. Activities
for which they were registered were often of public or generally availability nature,
which were previously in the direct jurisdiction of the government or municipality
(e.g. education, health care, social services).
Budgetary and contributory (in Czech language “rozpočtová a příspěvková”)
organizations are one of the forms of not-market-based organization,
which were established under the centrally-planned economy. In most other European
countries those organizations do not exist in this form. They were conceived as largely
dependent on state funding and could perform under the budget rules own economic
activity. They could not manipulate with their assets because it was not their property,
but the property of their founders. These basic characteristics persisted up to now.
During the economic transformation, and in particular in the context of the reform
of local governments is to change the perception of these organizations active in the field
of social and health care. Although still being largely financed from public funds
(including public health insurance) are recorded in the national accounts according
59
to ESA 95 in non-financial institutions, such as public enterprises.
From this understanding is not impossible for them to have been converted
into commercial companies.
The theoretical background behind this concept include the approaches of public
and social policy and the civil society (Potůček, 1997) and the economic analysis
of the non-profit principle and things behind it (Arrow, 1963). The position of the nonprofit
sector in society was clearly recognized by Pestoff (Pestoff, 1995).
At the same time, this concept falls into the branch of social economy (Dohnalová
& Průša, 2011). Significant international research has been conducted in this area
and the definitions of non-profit sector emerged from the cross-national comparison
(Salamon & Anheier, 1997). These results are maintained and expanded up to now
(Center for civil society, 2012).
Institutionally, the concepts of government and non-government owned, for-profit
and non-profit based, publicly and privately financed organizations (Goulli, 2001) are
useful for the topic. It is worth recognizing, that the classic economic classification
approach of public and private goods is not enough for this approach, because it says
nothing about how they are provided and financed in social reality. In this sense
also the approach of institutional goods classification is highly relevant (Bénard, 1985).
The aim of this paper is to analyze the sense and rationality of non-profit organizations
in social and health services. In the Czech Republic, we still have not generally
understood and productively utilized the benefits and positive aspects of non-profit
organizations in various institutional forms. It is therefore useful to analyze
and emphasize their significance, economic and social logic behind them.
Material and Methods
This paper is based on theoretical analysis of the attributes of non-profit sector
and selective comparative analysis of different mechanisms for social and health care
provision and financing, including careful view of the subjects that are financing
and providing those services. Theoretical literature used is summarized in the included
reference list. Empirical data used include the OECD health database about the number
of hospitals, as they are documenting the share of non-profit organizations
in this industry in selected OECD countries. Also indirectly, the results of international
cross-country analysis done by Salamon are used (Salamon & Anheier, 1997),
because they resulted in more exact definitions of the non-profit organizations.
The paper is however focused primarily on theoretical arguments and this way
also the conclusions are made.
60
Results and Discussion
The basic economic principle behind the non-profit organizations can be explained
in a relatively simple way. At the same time, it is strange, that this principle is
often misunderstood by general public, but also by some researchers. Thus it is worth
to emphasize, that the non-profit principle does not exclude the possibilities of actually
gaining a profit: the important rule is, that if this profit is created, it has to be returned
into the organization, either in the form of re-investment resulting in the expansion
of the services, or by lowering the price of existing services.
Non-profit organizations thus strive for rational economic allocation the same way
as other economic subjects do; however, they are not pushed by their owners
to maximize profits and allocate them to shareholders or trade their stocks
on the exchange. Also the non-profit principle guarantees that the money is kept
in the enterprise of its origin; this is especially important for the social and health
services, as empirically here a pressure for allocating money elsewhere is seen.
Also, it brings an important element of autonomous budgeting, which is a large
difference to the contrary of subjects directly financed from the government budgets
and even returning the possibly created surpluses back to their founders, as it has been
observed in the Czech republic.
As for the financing sources of non-profit organizations, it highly depends on the branch
they operate in and the degree of public service they fulfill. The most general statistics
(average from 7 OECD countries) shows that Public sector payment is 41%, Private fees
49% and Private giving (fundraised) is 10% (Salamon & Anheier, 1996),
however he situation varies and for example in health care, the share received
from health insurance funds will be always the dominant share of the income.
From the rich overall typology of nonprofit organizations (Salamon & Anheier, 1997),
the three main types are the most important in the social and health services: nonprofit
organizations organizing and providing social and health care and services, the charities
and foundations doing primarily fundraising and social work and health insurance
companies that will deal with social health insurance contributions. The latest example
is highly controversial in the Czech public debate: after 2006, the suggestions
of privatization of health insurance companies was discussed heavily, even in the form
of regulated profit amount in exchange for gaining the right to collect and allocate social
health insurance contributions. Currently, the public health insurance companies behave
like non-profit, however their status does not explicitly state it and the government
influence together with the situation on the market (one big General Health Insurance
company and 7 smaller others) decreases the level of their autonomy very much.
This does not imply that the theoretical transformation to the “ideal nonprofit”
in the case of health insurance companies is at all cost desirable; the models
of those institutions in the health care system vary and it is out of the scope of this paper
to analyze it.
61
There are several reasons why particularly in social and health services, similarly
to some other branches of economy like education etc., the non-profit principle is
suitable for general use. These include
• the problem of trust and confidence,
• low demand elasticity and problem of time-based decisions,
• market failure,
• information asymmetry,
• public interest on provision and availability of those services.
Many of these aspects were already analyzed in literature, we can quote Arrow,
that "The very word, 'profit,' is a signal that denies the trust relationship." and also
“as a signal to the buyer of his intention to act as thoroughly in the buyer’s behalf
as possible, the physician avoids the obvious stigmata of profit maximizing” (Arrow,
1963). This means, that those services require for their successful application a high
level of relationships, which could be possibly harmed by the pressure for making
profits.
Since Arrow has formulated those issues for the economic theory they have been subject
to hot debates. It was argued, that the social and health care itself is not as special goods,
that there is also other goods inevitable for human life, such as food, that are produced
using for-profit principle and their production and allocation works adequately.
Also, the institutional framework of health and social services provision has advanced,
being able to separate the management and financing of organizations from the actual
provision of these services and direct patient-doctor relationships. This may seem –
together with the empirical existence of some for-profit subjects in this area – to weaken
the Arrow’s arguments.
A simplified economic approach could also suggest that when having adequate
competition on the market, we do not need the concept of non-profit organizations at all.
The suggested mechanism is relying on the competitive market as the factor
of decreasing the market prices theoretically up to the point where the profit will be
zero, thus realizing a “true non-profit” environment. However, in reality,
this rarely happens, as the degree of competition is almost never like that. Also if it
eventually happens, it would prevent the mechanisms of reinvesting the gained profits
into the enterprise, because the industry would not be able to generate them at all.
The last argument in this area is that the nature of competition on the market could be,
especially without adequate regulation, very rough and ethically unsuitable for areas
like social and health services (see also previous arguments of Arrow that also can be
transposed to the nature of competition on those markets). Thus, even if the questions
of effectiveness of the nonprofit organizations in terms of wages, transparency etc. could
62
be raised, we cannot simply abandon this concept saying that the for-profit principle
with adequate market competition will replace the non-profit one.
Moreover, we can see that in the times of globalization and pressure of the financial
markets on the economy, as well as with increased demand on health and social care
services general availability, on the other hand, some of those arguments were even
strengthened. The result is, that we currently can say, that the non-profit principle is
very important for the effectiveness and availability in this sector and has to be
considered as a crucial component of the institutional structure here. And this has
its own empirical evidence: social and health services sector was in the 1990s dominant
source of growth of the non-profit institutions in the economy (Salamon & Anheier,
1997).
Institutionally, the concept of non-profit social and health services is rooted
in many documents at the European level, such as the Amsterodam Treaty and the Green
(EU, 2003) and White Book on the services of general interest (EU, 2004). In the Czech
Republic, there is general legislation in this area, which can be utilized e.g. for social
services, however in health care, the situation is different and not using
these possibilities. The ambulatory care is nearly 100 percent private and the legal form
is for-profit independent businesses (economically operating on the principle of high
degree of competition and strong regulation by health insurance companies].
The hospital sector remained primarily government-owned, even the corporatization
was taking place and in 2006 the big discussion of the non-profit hospital laws
happened. The new Act No. 245/2006 Coll., on Non-Profit Hospitals was enacted
in April, and it brought some steps in modernization in terms of applying corporate
governance and management to hospitals, which absence was the main shortcoming
of the previous, contribution from the government health budget based mode
of operation. However, the political changes and inadequate institutional environment
stopped the successful implementation of this law, which resulted in the fact
that no hospitals really were transformed by the rules that this law predicted.
This situation – as an empirical example – has clear consequences when doing statistical
comparison, as shown on the next figure.
63
Figure 1: Share of hospital types by type of organization, OECD
Source: OECD, 2012
From the figure above we can see the situation in hospitals typology, being one
of the largest institutions in health care industry. Comparison between USA and Czech
Republic shows, that American structure of hospitals is heavily based on non-profit
ones; the Czech structure nearly has not utilized them at all. Other countries come
between those extremes. As an interesting example, Mayo clinic, one of the largest
hospitals in the United States, is a non-profit one.
We can conclude that although there are a number of economic and institutional reasons
and rational approaches that support the usage of the non-profit organizations in social
and health services, especially in the health ones they have not been utilized in the Czech
Republic much. This does not mean that they are a “one size fits all solution”,
just suggests that they should have stronger position in the mix. Their effectiveness
and/or efficiency are debatable similarly to the for-profit institutions and depend on the
market structure, regulation and institutional framework; the absence of the for-profit
motive does not mean that they do not provide rational economic allocation of resources
just like any other economic subject.
Conclusion
Non-profit organizations are generally perceived especially in Czech public discourse
as belonging to charity and non-market allocation of resources. This surely is one
of the branches they can work at, but there are further possibilities of the usage
of this concept on standard market relationships and transaction together with high
corporate culture and governance level.
This is closely connected with the principle of concentration on actual services provision
and trustful operation on the market. An imperative to allocate the profits
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
USA Czech
republic
Germany France Austria Spain
For-profit privately owned
Non-profit privately owned
Publicly owned
64
for the development and availability of the services provided together with the longterm
stability and economic rationality is something that is highly needed and can be
also said missing in economy today, where the conflict between inflexible government
and global markets exist.
The nature of social and health services is heavily suited for the non-profit principle
application. High level of trust required the inadequacy of profit motives
in the relationships between the actors of transaction, importance of actual quality
and concentration on the real operation of an enterprise all contribute to this. This does
not mean that another ways are not possible theoretically; it just justifies that the nonprofit
principle should have strong role in the mix, giving those organizations autonomy
from the direct auspices of the government and freedom from the market pressure
for profits maximization at all costs. Empirically this results in non-profit organizations
having strong position in social and health care sector worldwide.
In the Czech republic after the year 2000, strong demand for the transformation
of the organizations financing and providing social and health services arose,
as the original forms of budgetary and contributory organizations has not been suitable
in many cases for the new environment. Especially in health services, however,
this process was not successful and the conflict described above resulted
in either keeping things under the direct control of the government, or the attempts
of “full” privatization. As seen from the international comparison, this radical approach
is not usually employed in health care systems of the world and a mixture
of institutional forms in providing health care exists, where the non-profit organization
usually take significant portion of the “market”.
Acknowledgements
Article was written with support of IGA of the University of Finance
and Administration 7744.
References
ARROW, K. (1963) Uncertainty and the Welfare Economics of Medical Care. American
Economic Review, 53(5), pp. 941-973.
BÉNÁRD, J. (1985) Economie Publique. Paris: Economica.
Center for civil society, (2012) Comparative nonprofit sector. [Online]
Available at: http://ccss.jhu.edu/research-projects/comparative-nonprofit-sector
[Accessed 11 10 2012].
DOHNALOVÁ, M. and PRŮŠA, L., (2011) Sociální ekonomika. Praha: VÚPSV.
EU, (2003) Green Paper on services of general interest. [Online]
Available at: http://eur-lex.europa.eu/LexUriServ/site/en/com/2003/com2003_027
65
0en01.pdf [Accessed 11 10 2012].
EU, (2004) White Paper on services of general interest. [Online]
Available at: http://eur-lex.europa.eu/LexUriServ/site/en/com/2004/com2004_0374
en01.pdf [Accessed 11 10 2012].
GOULLI, R. and FRIČ, P., (2001) Neziskový sektor v České republice. Praha: Eurolex
Bohemia.
OECD, (2012) OECD Health Data Statistics. OECD ILibrary: OECD.
PESTOFF, V. (1995) Citizens as co-producers of social services in Europe - from the welfare
state to welfare mix. Krakow, Krakow Academy of Economics.
POTŮČEK, M. (1997) Nejen trh. Praha: Slon.
SALAMON, L. and ANHEIER, H. (1997) Defining the Nonprofit Sector: A Cross-national
Analysis. Manchester: Manchester University Press.
SALAMON, L. and ANHEIER, K., (1996) The Nonprofit Sector: A New Global Force.
Baltimore: John Hopkins Institute for Policy Studies.
66
Measuring Waiting Times in Slovakia
Mužik Roman, Szalayová Angelika
Abstract
On the waiting list are queuing patients with indicated health care, which is impossible
to provide because of financial reasons, capacity value or other reasons. As a rule, there are
patients who do not require acute care and which deferral do not deteriorate their health.
The aim of our research was to find out how long patients have to wait depending
on their diagnosis, health insurance company and the type of provider and also how has
changed the length of waiting times in comparison with 2008. We found out
that in Slovakia most patients on waiting lists wait with gonarthrosis, coxarthrosis
and cataract. For the total hip or knee replacement patients in Slovakia wait on average
about 15 months and for cataract surgery about 3 months. Since 2008, waiting time
for total hip replacement had increased by about 6 weeks and for cataract surgery was
extended by more than 40%.
Keywords
health care, waiting times, waiting lists, total knee replacement, total hip replacement,
cataract surgery, health insurance companies
Introduction
According to Act no. 581/2004 on health insurance, health care supervision
and on amendments to certain laws, health insurance companies queue policy holders
on the waiting list based on proposals from health care providers, who maintain a list
of such insured. Waiting lists are defined in this Act, however, the specifications
and details are provided by Decree of Ministry of Health no. 412/2009, which provides
details on the list of insured persons waiting to receive planned care,
and by its amendment, the Decree of Ministry of Health no. 151/2011.
In accordance to this Decree, provider adds to waiting list policyholder for planned
health care if he would have to wait longer than three months for the intervention.
On the waiting list are queuing patients only with indicated planned health care,
which deferment will directly not threat the patient's life or complicate patient’s
condition. Health Insurance Company can offer to its policyholder health care by other
provider in the interest of reducing the waiting time. Acute patients should not wait
for intervention. If the patient's condition requires urgent surgery is it possible
to manage it in a very short time. In terms of this Decree on waiting lists, it is
compulsory provide waiting lists for patients with eye diseases and its adnexa requiring
implantation of medical device, diseases of the circulatory system, diseases of the
67
musculoskeletal system and connective tissue requiring implantation of medical device,
congenital malformations, deformations and chromosomal abnormalities and patients
who are waiting on radiological examination - mammogram and radioiodine treatment
for thyrotoxicosis. For providing some other intervention patients also have to wait.
However, they are not included in the official waiting lists and their monitoring is
therefore impossible. Surveys by OECD (Siciliani, Hurst 2003), Health Consumer
Powerhouse (Eisen, Björnberg, 2009) and other organizations prove that the waiting
lists are serious issue in many countries. In Slovakia, there are currently no accessible
exact data on waiting times for the individual treatments. Therefore we have decided to
do field research for three interventions with most patients on waiting lists.
Material and Methods
View of the fact that there is not available accurate information on waiting times
with a certain diagnosis of individual providers; we have decided to find out the length
of waiting in selected health care providers with the help of research methods "mystery
shopping". According to the data from Health Care Surveillance Authority, most patients
on a waiting list are patients with gonarthrosis, coxarthrosis and cataract. Therefore,
our goal was to find out the length of the waiting period for treatments related
to these diseases. By acquired data we could compare single providers and insurance
companies, what can result in reducing information asymmetry and strengthening
competition. In the research we have randomly chosen representatives from different
providers: University Hospitals, Faculty Hospitals, hospitals administrated by Higher
Territorial Unit or Ministry of Health or private company and private clinic. Number of
surveyed providers was 17 for total knee replacement (2 were excluded on the basis
that this surgery is no longer performed in hospital), 17 for total hip replacement (1 was
excluded for the same reason as in previous intervention) and 23 for cataract surgery
(1 was excluded for the same reason as in previous interventions).
As a research method we chose Mystery shopping (fictitious purchase). Aim of this
marketing research technique is to evaluate the level of services and subsequently
initiate the improvement of these services. In accordance to this method, we contacted
individual providers and pretended interest in the surgery. Mystery shopper followed
the specified scenario. Immediately after the interview, researcher prepared objective
evaluation of examined factors. Interviewed subject at the time of completion of mystery
shopping does not know that he or she is studied. Our case scenarios were worded
as follows: "My mom/dad needs surgery (total joint replacement surgery or cataracts).
Where she/he was at hospital they offered her/him the term not until XY months.
When she/he could get the term for surgery in your hospital?"
Research was realized from May 9, 2012 to May 16, 2012. We tried to compare the data
with data from health insurance companies, but we have no response to our request.
This type of research was chosen because the official data request could cause a garbling
68
of data, whereas providers want to be placed into a better position in any comparisons.
In the research on waiting times for total hip replacement in 2008, no private clinic was
included. In 2012, there was included a private clinic "Clinica Orthopedica", which has
the shortest overall waiting times. For eye care providers performing cataract surgery,
the ratio of private to government facilities was 6:9 in 2008 and 8:14 in 2012.
During interview over the phone, we could not verify whether the interviewed doctor
was sufficiently knowledgeable, do not mislead or deliberately lied.
Results and Discussion
Total knee replacement
Figure 1 shows the waiting times for total knee replacement. The longest waiting period
from selected sample of hospitals, approximately 3 years, is in teaching hospitals
in Trenčín and Prešov. The shortest period is at a private clinic; however, there are high
patient fees in place. Length of the waiting period varies considerably depending
on provider. It does not matter whether it is a teaching or University hospital likewise
in which is part of Slovakia is hospital settled. This means that the type of facility
and the place of residence are not the key parameters for the length of waiting period.
Overall, regardless of the type of provider and health insurance company, the average
waiting time for total knee replacement is about 15 months.
Figure 1: Waiting times for total knee replacement (days)
Type of facility Name or city VšZP Dôvera Union average average
(monhts)
Teaching hospital Trenčín 1 095 1 095 1 095 1 095 35,9
Teaching hospital Prešov 1 095 1 095 1 095 1 095 35,9
University hospital Ružinov - Bratislava 1 642 548 548 913 29,9
General hospital Topoľčany 1 278 ??? 365 822 27,0
Teaching hospital Nové Zámky 730 730 730 730 23,9
Teaching hospital Žilina 730 730 730 730 23,9
University hospital Martin 396 365 128 296 9,7
Private hospital Košice - Šaca 275 275 275 275 9,0
General hospital Piešťany 244 244 244 244 8,0
General hospital Bojnice 192 177 177 182 6,0
Teaching hospital Nitra 174 128 128 143 4,7
University hospital Košice 113 168 113 131 4,3
General hospital Poprad 183 54 122 120 3,9
General hospital Michalovce 50 114 114 93 3,0
Private clinic Clinica Orthopedica 21 21 21 21 0,7
Average 547,9 410,3 392,3 459,3 15,1
Source: Authors
Note: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company)
69
Total hip replacement
Waiting times for total hip replacement are not significantly different from waiting times
for knee replacement. Figure 2 shows that short waiting period may be at major state
owned hospitals and also at smaller hospitals administrated by Higher Territorial Unit
or a private company. The longest average time for hip or knee replacement is
at Teaching hospitals. Overall, regardless of the type of provider and health insurance
company, the average waiting time for total hip replacement is about 14 and a half
months.
Figure 2: Waiting times for total hip replacement (days)
Type of facility Name or city VšZP Dôvera Union average average
(monhts)
Teaching hospital Trenčín 1095 1 095 1 095 1 095 35,9
Teaching hospital Prešov 913 913 913 913 29,9
Teaching hospital Nové Zámky 730 730 730 730 23,9
Teaching hospital Žilina 730 730 730 730 23,9
General hospital Topoľčany 1278 365 365 669 21,9
University hospital Ružinov - Bratislava 1460 153 153 589 19,3
General hospital Bojnice 584 584 584 584 19,1
General hospital Piešťany 244 x x 244 8,0
University hospital Martin 397 244 76 239 7,8
General hospital Poprad 244 212 A 228 7,5
Private hospital Košice - Šaca 183 183 49 138 4,5
Teaching hospital Nitra 168 92 92 117 3,8
General hospital Michalovce 92 x x 92 3,0
University hospital Košice 76 NA NA 76 2,5
General hospital Považská Bystrica 61 61 61 61 2,0
Private clinic Clinica Orthopedica 30 30 30 30 1,0
Average 517,8 414,8 406,5 446,4 14,6
Source: Authors
Notes: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company), NA – Not found, A –
After completing the application the term is assigned by Health Insurance Company, x – The term to be
determined after a personal consultation
Cataract surgery
Waiting times for cataract surgery as compared to waiting times for total
endoprosthesis are several folds shorter. The average waiting time for cataract surgery
is 3 months. Its length depends on the Health Insurance Company and type of medical
facility (Figure 3). The length of waiting is also affected by fees (€ 70 - 200) that could
significantly reduce the waiting period at private clinics and some non-state hospitals.
70
Figure 3: Waiting time for cataract surgery (days)
Type of facility Name or city VšZP Dôvera Union average average
(monhts)
General hospital Topoľčany 229 229 229 229 7,5
University hospital Martin 198 243 198 213 7,0
Teaching hospital Prešov 210 210 210 210 6,9
Teaching hospital Trenčín 275 214 82 190 6,2
Private clinic Oftal s.r.o. 183 183 183 183 6,0
Teaching hospital Banská Bystrica 143 205 143 164 5,4
Teaching hospital Nitra 129 129 129 129 4,2
General hospital Poprad 1 158 158 106 3,5
Private hospital Malacky a.s. 82 82 82 82 2,7
Private clinic Neovízia 153 45 45 81 2,7
Private clinic 3F s.r.o. 90 60 60 70 2,3
General hospital Bojnice 30 92 30 51 1,7
University hospital Košice 35 35 35 35 1,1
Private clinic Oftum Košice 30 30 n 30 1,0
Private clinic Centrum mikrochirurgie oka 21 30 30 27 0,9
General hospital Rimavská Sobota 21 28 21 23 0,8
General hospital Trebišov 21 21 21 21 0,7
Private hospital Košice - Šaca 14 18 18 17 0,5
Private clinic Dom Oka s.r.o. 15 15 15 15 0,5
University hospital Bratislava - Petržalka 14 14 14 14 0,5
Private clinic VIKOM, 1. Žilinské očné
centrum
10 10 10 10 0,3
Private clinic Mediklinik s.r.o. 1 1 1 1 0,0
Average 86,6 86,6 93,3 81,6 87,2 2,9
Source: Authors
Note: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company), n – No contract with
Union health insurance company
Comparison of insurance companies
Waiting time for the planned health care depends on Health Insurance Company,
where the policyholder is insured. Figure 4 shows the difference between the lengths
of waiting time for the three above mentioned interventions.
71
Figure 4: Comparison of waiting times for each disease by insurance companies (days)
Source: Authors
Note: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company)
For total knee replacement policyholders of General Health Insurance Company
(Všeobecná zdravotná poisťovňa) have to wait the longest, approximately 18 months.
Compared to Dôvera and Union health insurance companies, whose policyholders wait
approximately 13 months, is it by 5 months longer. Also for total hip replacement
policyholders of General Health Insurance Company have to wait the longest,
almost 17 months. Compared to Dôvera and Union, whose policyholders wait
approximately 13 and half months, it is almost 4 months longer. Waiting period
on cataract surgery is almost equal without significant variations between insurance
companies; about 3 months. For all three diseases, private health insurance company
Union has the shortest waiting times. This only convinces us that the effectiveness
of policies of individual insurance companies can be various.
Comparison over time
Data on waiting times for hip and cataract surgery from 2012 were compared with data
from 2008. In 2008, was used the same survey methodology and studied sample was
very similar (see Material and Methods). Comparison is shown in figures 5 and 6.
Figure 5: Comparison of waiting times for total hip replacement (days)
Source: Authors by Szalayová A et al. (2008). Same same. But different. 2008.
Note: Data are weighted by the number of policyholders in insurance company
Note 2: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company), HIC = Health Insurance
Company
548 518
87
410 415
93
392 407
82
0
100
200
300
400
500
600
Total knee replacement Total hip replacement Cataract surgery
VšZP
Dôvera
Union
539
307 322
441
518
415 407
481
0
100
200
300
400
500
600
VšZP Dôvera Union Average of all HIC
2008
2012
72
General Health Insurance Company as the only one insurer was able to keep the length
of waiting time unchanged or even slight decreased (about 3 weeks) for hip replacement
in the last four years. The average waiting time for private insurers prolonged
about 3.5 months for Dôvera and less than 3 months in the Union. Although, the General
Health Insurance Company policyholders on average still have to wait the longest
for intervention; about 17 months. The average waiting period for hip replacement had
increased since 2008 by about 6 weeks. In 2008, policyholders had to wait for hip
replacement surgery on average of 441 days; in 2012 is it 481 days. Over the past four
years the huge differences between health insurance companies have reduced.
Figure 6: Comparison of waiting times for cataract surgery by insurance companies (days)
Source: Authors by Szalayová A et al. (2008). Same same. But different. 2008.
Note: Data are weighted by the number of policyholders in insurance company
Note 2: VšZP = Všeobecná zdravotná poisťovňa (General Health Insurance Company), HIC = Health Insurance
Company
Since 2008, waiting times for cataract surgery were extended by more than 40%;
what means less than 4 weeks. The most extended waiting period is in Dôvera;
by almost 80%. In 2008, Dôvera’s policyholders had to wait for the shortest (52 days)
and in 2012, the longest (93 days). General Health Insurance Company shows
the smallest increase, by 25%. In 2008, it had the longest waiting times, but in 2012,
the waiting period is equal to the average of all insurers. In Union, the waiting period
was extended by about 40%. Despite this fact, their policyholders wait for cataract
surgery the shortest. The differences between health insurance companies after four
years have slightly reduced. The difference between the longest and the shortest waiting
period among insurance companies was 17 days in 2008 and 11 days in 2012.
Recommendations
Analysis of waiting lists has convinced us that it is necessary as soon as possible
to establish a legal right for patients to know what services they are entitled to,
in what timeframe and with what degree of financial participation. This right must
be defined at three levels: (1) Factual; which defines health services, which are entitled
by the public health insurance. Each policyholder must know even before entering
69
52
59 62
87
93
82
88
0
20
40
60
80
100
VšZP Dôvera Union Average of all HIC
2008
2012
73
the doctor’s office what is his or her indisputable legal right, and vice versa, what he
or she may or may not get. (2) Timeframe; which defines in what timeframe health
services should be provided to each policyholder. It is unfair to patients that in one city
man wait for surgery for four years, while in the neighboring town wait only 2 months.
It is necessary to set a maximum waiting time for each service, during which the service
will have to be done. The time limit will guarantee access to health care in real time
for all policyholders. (3) Financial; which defines patient participation for various health
services. One of the common problems in health care is that patients do not know how
much, to whom and for what for they have to pay, what can be easily misappropriated.
Each levels of legal right are defined in many countries in various ways, such as Sweden,
Netherlands or USA. It is important for us to create the best one for our health care
system.
The management of waiting lists in its current form creates an ideal environment
for corrupt behaviour. Uniquely determined transparency rules and publicising
of waiting lists will reduce the incidence of opportunities for "failure of individuals."
This space for corruption is there because of two reasons. Firstly; it is not published how
many patients and for how long are waiting. Therefore, nobody can monitor if there are
no transfers on the waiting list by unofficial payments. Secondly; there is big power
of individuals; in this case it is the head of department who "decides on everything."
Conclusion
For total hip or knee replacement in Slovakia patients have to wait an average
about 15 months and for cataract surgery about 3 months. For the knee replacement,
the policyholders of General Health Insurance Company have to wait the longest
(548 days) and the policyholders of Union Health Insurance Company the shortest
(392 days). For total hip replacement, the policyholders of General Health Insurance
Company also have to wait the longest (518 days) and the policyholders of Union
the shortest (407 days). For cataract surgery, waiting times for all policyholders
are within a small difference (11 days); the longest have to wait the policyholders
of Dôvera (93 days) and the shortest the policyholders of Union (82 days). Overall,
the shortest waiting times for the most common intervention on waiting lists have
Union. Since 2008, waiting time for hip replacement had increased by about 6 weeks,
from 441 to 481 days. Waiting time for cataract surgery since 2008 had increased
by more than 40%, from 62 to 88 days.
The analysis pointed out that it is necessary to establish a legal right for patients
to know what services they are entitled to, in what timeframe and the extent
of their participation. It is necessary to set clear rules for the formation of waiting lists
and make them available to the public. Such increase of transparency can reduce
the incidence of corruption.
74
Acknowledgements
This research has been elaborated as one of the outcomes of non-profit organization
Health Policy Institute, Bratislava, Slovakia. Both authors are analyst in this Institute.
References
Act No. 581/2004 Coll. on Health Care Insurance Companies and Surveillance
over Health Care and on Amendment and Supplementation of Certain Acts
Decree of Ministry of Health no. 151/2011 Coll., which amends and supplements Decree
of Ministry of Health no. 412/2009 Coll., which establishes details on the waiting list
for policyholders who are waiting for provision of planned healthcare.
EISEN, B., BJÖRNBERG, A., (2009) Canada Health Consumer Index 2009, Frontier Centre
for Public Policy, ISSN 1491-78
SICILIANI, L., HURST, J., (2003) Explaining Waiting Times Variations for Elective Surgery
across OECD countries, OECD, DELSA/ELSA/WD/HEA(2003)7
SZALAYOVÁ, A et al. (2008) Same same. But different. Health insurance companies rating.
Bratislava, Health Policy Institute.
75
Dancing to the Same Tunes?
Comparison of Czech and Slovak Citizens´ Engagement
in Civil Advocacy Twenty Years
after the Divorce
Navrátil Jiří
Abstract
This paper aims at exploration of individual participation in civil advocacy activities
in the Czech Republic and Slovakia. It differentiates between two main competing
explanations of civic participation - the institutional, and the cultural one. Building
upon two surveys, paper shows that despite the different trajectories of institutional
politics in both countries, the extent, forms and issues of civil advocacy participation
on the individual level are strikingly similar. Consequently the cultural factors –
as more enduring and resistant to changes in the short term - are identified as the key
to understanding the shape and character of civil societies in two countries.
Keywords
civil society, civil advocacy, individual participation, Czech Republic, Slovakia
Introduction
This paper aims at exploration of the problem of individual participation in civil
advocacy activities in the Czech Republic and Slovakia. It differentiates between two
main competing explanation of civic participation - the political-institutional one,
and the cultural one, and builds upon the assumption that while institutional factors
may change (and indeed changed in both countries) quite quickly and significantly,
the cultural factors are much more enduring and resistant to changes in the short term.
The paper asks whether we may find significant differences between the levels,
forms and issues of civil advocacy in two countries and consequently ascribe these
changes to different institutional development or whether the two nations still share key
features of political culture and patterns of civic participation continue to resemble each
other.
The Czech and Slovak Republic represent a felicitous laboratory for such an exploration.
On the one hand, they shared historical, cultural and political traditions almost
for 74 years when they were part of a single state and formed a single society.
On the other hand, it has been 20 years after these two nations divorced and separated
their political institutions. Since 1992, institutional and political development
76
of both countries started to diverge and indeed started to provide different incentives
and opportunities for individual civic participation.
The structure of the paper is following: first, the theoretical framework of the paper is
introduced and concepts of political (opportunity) structure and political culture are
described. Next, the differences in the evolution of political structures of both states
after 1992 are depicted. Furthermore, data and empirical results are introduced
and compared. The paper concludes with brief discussion of results.
Theoretical framework
This paper aims at de-composing the problem of “weakness of post-communist civil
societies” (Rose, 1999; Rose, Mishler, Haerpfer, 1996; McMahon, 2001; Howard, 2002)
into the problem “citizens’ organizational passivity” and their relation to “transactional”
CSOs without members (Petrova, Tarrow, 2007; Císař, 2008). It focuses solely
on the advocacy oriented civil activities - aiming at changing policies, linking individual
and broader political process or securing collective goods (Jenkins, 1987;
Salamon et al., 2000).
Two broad competing perspectives of individual participation both in institutional
politics and in civic sphere emerged in social sciences - institutional or cultural one.
The importance of institutional environment for political behaviour have been theorized
and confirmed by many studies (Tilly, 1978; Kriesi, et al. 1995; Tarrow, 1998;
Meyer, 2004; Snow, Soule, 2010). Political opportunity structure is analysed
in order to explain how the institutional setting of a given polity motivates
or discourages the challenging groups that pursue some political or social change.
This paper claims that both the attitudes of government towards civil society,
and the strategies of CSOs towards elites represent key political opportunities
for individual engagement in civil advocacy.
Apart from institutional explanation of individual action, there are alternative
approaches that point to the importance of “soft” factors in shaping the extent
and character of civil participation (cf. Almond, 1983). Political culture may be depicted
e.g. as collective identity of citizens, of large cultural frames, ideologies, discourses,
or as inherited set of beliefs, norms, values, opinions or attitudes that citizens have
or hold about the political issues in the society (cf. Almond, Verba, 1989).
According to this perspective, it is primarily the cultural configuration of a given polity
that determines its political features (Almond, 1983; Almond, Verba, 1989; Inglehart,
1988). Most importantly, this perspective claims that “prior set of attitudinal patterns
will tend to persist in some form and degree and for a significant period of time,
despite efforts to transform it (Almond, 1983, p. 127) and thus impose “significant
constraints” on citizens´ behaviour despite the substantial changes that may take place
77
on the level of political system, political institutions or political process (cf. Almond
1983, p. 128).
To conclude, this paper builds upon the assumption, that political culture is much more
long-term and enduring factor influencing the citizens´ participation in civil advocacy
than relevant political opportunities, and it is the factor that may explain their common
features in the case of Czech and Slovak Republic. In other words, it expects
that the while the similarities in the patterns of civic advocacy engagement shall be
attributed to shared historical, cultural and political past of the two societies,
the differences are the outcomes of institutional reforms, twists in political process
and transformations of CSO sector after the divorce of the two countries in 1992.
Evolution of the political opportunities (1992 - 2010)
Evolution of institutional context for individual participation may be analysed
within two main layers: government and CSOs.
Attitudes of Czech governments and advocacy CSOs have changed a lot,
but never become openly and politically hostile – we may speak of continual
improvement of mutual relations. Initial enthusiastic attitude changed
after the 1992 with Klaus´s government´s closing the political opportunities
for advocacy CSOs (Frič, 2005, p. 35). This slowly changed after 1996 when some
important institutional settings for communication and resource distribution were
established and the process of preparation for EU membership started. After the first
left-wing government since 1989 took office in 1998 both the political discourse
and the practical measures started to change. The introduction of regional
self government in 2000 multiplied the access points for CSOs for entering
the policy making processes and funding. The government also established permanent
Government Council for Non-State Non-profit Organizations (see below) (cf. Frič, 2005,
p. 35). After elections in 2006, the central-right-wing parties for the first time invited
the Green Party into the Cabinet. As the party continuously participated within
the personal and inter-organizational networks of non-profit sector, the major part
of advocacy CSO – the environmental CSOs – tamed its critique of the activities
of government and replaced it with systematic cooperation with political institutions.
Consequently, the process of establishment of the third sector as a source of alternative
expertise for the state executive was accomplished.
The strategies of Czech CSOs may be described as largely non-confrontational and nonpolitical:
CSOs were seldom forced to develop public position towards the government
and its policies and expressed continuous efforts to keep their distance both
from institutional and “street” politics. Continuous and successful incorporation Czech
CSOs into the political process enabled them to use more covert and unimpressive
tactics and tendencies to see citizens as the target audience of their highly
78
professionalized activities, and to be very sceptical about their motives, willingness
and capacities to take part (Navrátil, Pospíšil 2010).
Evolution of government attitudes toward civil sector in Slovakia differed significantly.
After Vladimír Mečiar´s second government took over office, it quickly became accused
of dictatorial practice, non-transparent treatment of public resources and effort to gain
control over civic sector (Strečanský, 2004; Szeghy, 2010). After the end of Mečiar´s
period in 1998, the situation largely calmed down and the opportunity structure quickly
opened up. Part of the sector gained the close access to the political process; advisory
bodies were established to enable CSOs to express their concerns and opinions
on various issues within political institutions. The final period of political opportunity
structure started in 2006 and lasting to 2010 Fico’s government was accused of „etatism,
centralization of the state power, insufficient respect arrogance towards third sector,
which provoked reaction of CSOs” (Szeghy, 2010).
The advocacy strategies of Slovak CSOs were completely different than in the Czech
Republic: the threat of undemocratic measures of Mečiar´s government provoked
unexpectedly strong resistance and mobilization of non-governmental sector.
With some help from foreign authorities and non-states actors Slovak CSOs succeeded
in unifying CSOs from different sectors in explicitly political struggle for the character
of the state, and probably succeeded in causing the fall of Mečiar´s government
(Strečanský, 2004). After the calm period of 1998-2006, advocacy CSOs again showed
their preparedness to engage in political issues and succeeded in large mobilizations
of citizens against the new non-profit legislation.
Vis-à-vis these two different paths of development, one would expect also different
extent of citizens´ participation in both countries, different forms of this participation
and probably also the different issues of civil advocacy activities (e.g. non-political
vs. political issues etc.).
Material and Methods
Paper draws on survey data that were collected in Czech and Slovak Republic in April
2010 that was funded by the CEE Trust within the project “Has our dream come true?
Comparative research of Central and Eastern European Civil Societies". 800 respondents
participated in survey in CR and 796 in SR. The survey was conducted via CATI.
The quota sampling was used to cover nationally representative population aged
18 and more. The survey consisted of 19 standardized questions focusing on the extent
and character of participation in civil advocacy activities. Data were processed in IBM
SPSS Statistics software.
Results and Discussion
To assess the extent and character of Czech and Slovak citizens´ individual engagement
79
in civil advocacy, we compare following aspects: first, the very (reported) activity
of citizens, form of their activity, and issue area, where they are active in.
Data show that the level of citizens´ involvement in civil advocacy in both countries is
very similar (see Table 1): around one third of respondents declare that they are active,
and two thirds report that they are not involved. Indeed the significance test for two
population proportions show that there are not differences among the Czech and Slovak
population regarding the share of active citizens.
Table 1: Personal engagement in civil advocacy in the Czech and Slovak Republic (%)
Engagement Czech Republic Slovakia
yes 32,9 36,4
no 66,9 63,5
refuse 0,2 0,1
total 100 100
N 800 796
(Q: Are you personally active in one or more of the above activity areas or organizations?)
Source: Author
Next we look at forms of activities in civil advocacy of those who are active (see Table 2).
Again, the data show very similar patterns: donation is by far the most favourite form
of personal involvement in both countries. Overall ranking of popularity of various
forms of protest is identical in both countries. However, some categories differ more
in both countries: these are the proportions of citizens that are participating
in the campaigns and/or that were engaged in voluntary work. Both these proportions
are significantly higher in the case of Slovak citizens.
Table 2: Forms of personal engagement in civil advocacy in the Czech and Slovak
Republic (%)
Form of activity Czech Republic Slovakia
donation 89,8 87,2
supporter (signing petitions, participating
in campaign) *
52,4 70,3
voluntary work * 37 51,9
chatting, blogging etc. 26,5 27,5
member of an NGO 20,3 20,5
other (promoting ideas and attitudes) 5,3 1,6
don´t know 0,2 0
N 263 290
(Q: In what way did you get involved in a civil activity?)
Source: Author
Note: Asterisk denotes statistically significant differences in proportions between two countries
The next step is to look at the personal engagement according to different issue areas
(see Table 3). The level of match between two countries is even more impressive
80
than in the case of forms of their engagement. Only 1 out of 15 issue areas seems to have
significantly different attractiveness for citizens in both countries, and even in this case
(women rights), the difference is not extreme but only limited. In other words, it seems
that there are some differences between two countries regarding the issues
of engagement but these are rather small, insignificant and not substantial.
Table 3: Personal engagement in civil advocacy areas in the Czech and Slovak
Republic (%)
Advocacy area Czech Republic Slovakia
rights of children 55,6 51,9
disabled people’s rights 55 49,9
animal rights 48,6 40,9
environment 43,4 50,1
human and citizens’ rights and
freedoms
32,8 39,7
education, health, social policy 32,5 38,8
citizens’ security 23,3 27
international and global issues 22,2 23
consumer protection 18,8 26
anti-corruption 18,4 21,8
women rights * 17,7 30,3
work of democratic institutions 16,7 13,4
national minority rights 16,6 15,8
economic policy 12,6 14,2
LGBT rights 5,9 7,9
N 263 290
(Q: In which advocacy area are you active in?)
Source: Author
Note: Asterisk denotes statistically significant differences in proportions between two countries.
Conclusion
Presentation of the data revealed surprisingly deep similarities in the level, forms
and areas of civil advocacy engagement in both countries. Despite the fact,
that the development of political opportunities for individual engagement in civil
advocacy in both countries significantly differed after 1992, the similarities of individual
citizens´ involvement are dominant. Drawing back to the theoretical framework
of the paper, we may conclude, that it is the cultural argument that could provide us with
deeper understanding of patterns of civil engagement in different countries.
Nonetheless, it seems that at least some of the differences that were explored
as significant may be attributed to the political-institutional developments in both
countries: higher importance of voluntary work and support of advocacy campaigns are
quite clearly result of unusually large-scale political mobilizations against Mečiar´s
governments. On the other hand, relatively lower preference of advocacy of women
rights in Czech society may be connected with the overall perception of over-
81
representation of this issue within society, or by much better organizational
infrastructure of feminist CSO in Slovakia. However, this is the problem for future
research.
Acknowledgements
This article has been elaborated as one of the outcomes of project “Employment
of Newly Graduated Doctors of Science for Scientific Excellence”
(CZ.1.07/2.3.00/30.0009).
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společnost v období transformace a evropeizace (Political Activism in the Czech Republic:
Social Movements and Civil Society in the Periods of Transformation and Europeanization).
Brno: CDK.
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Sector European Policy Working Paper 6.
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Cambridge: Cambridge University Press.
INGLEHART, R. (1988) „The Renaissance of Political Culture.“ The American Political
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JENKINS, J. C. (1987) Nonprofit Organizations and Policy Advocacy. The Nonprofit
Sector: A Research Handbook. New Haven: Yale University Press.
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American Non-governmental Organizations on Women’s Groups.” Democratization vol.
8, no. 2, pp. 45-68.
MEYER, D. S. MINKOFF, D. C. (2004) “Conceptualizing Political Opportunity.” Social
Forces vol. 82, no. 4, pp. 1457–1492.
NAVRÁTIL, J. POSPÍŠIL, M. (2010) “COUNTRY REPORT - CZECH REPUBLIC.“ Final report
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and Eastern European Civil Societies". Unpublished manuscript.
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Emerging European Polity: The Puzzle of East Central Europe.” Comparative Political
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83
Sport Clubs and Economic Aspects of their Relations
with Municipalities and Sport Federations
Pavlík Marek
Abstract
There is a running discussion about the system of financing sport from public budgets
and there are opinions that sport is not sufficiently supported. We know surprisingly little
about the situation of sport clubs and to find a better support system we have to gather
information about the environment of sport clubs. What do we know about relations
of sport clubs with public authorities and their own sport union/federation and why do we
need to know? The aim of this paper is to analyze relationships between sport clubs
and municipalities/sport federations and discuss economic consequences of these relations
for the efficiency of public resources allocation.
These relationships are important for the evaluation of the system of sport support.
Both public authorities and sport unions are partners for sport clubs in the area
of financial and non-financial support. We gathered data from sport clubs and performed
an analysis especially for three selected sport branches (athletics, basketball, karate).
We discovered a significant “failure” in the relationship between sport clubs and their own
sport federations. We conclude that before increasing or changing public grants system
the “self-organization” of sport clubs in sport unions/federations should be improved,
especially in some sport branches.
Keywords
sport, sport federation, municipality, public budgets, relationship
Introduction
Sport is a phenomenon which affects the majority of every society; even the EU
recognized sport as an important part of its objectives of solidarity and prosperity
(Commission of the European Union; 2007a). Sport clubs are basic units where both
professional and amateur sportsmen are organized. Most sport clubs operate as nonprofit
organizations (NPOs), which is a result of tradition, tax incentives and public
grants conditions (see e.g. Novotný 2011, Hodaň, Hobza 2010). NPOs as providers
of most of these activities are accepted as important actors of economic
as well as political development (Brown, D.,L., Kalegaonkar, A. 2002).
The EU also believes that “grassroots sport, equal opportunities and open access
to sporting activities can only be guaranteed through strong public involvement”
(Commission of the European Union; p. 13, 2007a). On the other hand, research gives us
84
also arguments against the support of sport activities/organizations from public budgets
(e.g. Martin 2001, Jones 2002) and we can also accept the claim that the process of grant
allocation is more a political than a rational economic process (Kantor 1995).
The issue of relations between sport clubs and public authorities and their own sport
unions/federations has been selected for analysis to explore the situation in the Czech
Republic. There is a running discussion about the system of financing sport from public
budgets and there are opinions that sport is not sufficiently supported. We know
surprisingly little about the situation of sport clubs and to find a better support system
we have to gather information about the environment of sport clubs.
The aim of this paper is to analyze relationships between sport clubs
and municipalities/sport federations and discuss economic consequences
of these relations for the efficiency of public resources allocation. We set the following
research questions:
• How often do sport clubs receive support (financial grants or non-financial support)
from the municipality and from their own sport union/federation?
• What are the differences between total results and selected sport branches?
Are there any anomalies based on a given sport branch?
• What are potential economic consequences of revealed quality of relations for sport
clubs and public budgets?
We assumed that relations with sport federation/union could be better than relations
with public municipalities; however, our results proved this assumption wrong.
Methodology
The author performed the questionnaire research among sport clubs in the Czech
Republic in spring 2011. The list of 19 questions was sent to 1,567 sport clubs
and 430 completed forms were returned. Non-profit legal form was listed
by 406 respondents. It is difficult to estimate the total number of sport organizations
in the Czech Republic, hence we cannot evaluate if the answers are sufficient
for a representative sample. A questionnaire was sent to approximately 60% of sport
organizations enrolled in the Czech Union of Sport (ČSTV). ČSTV associates 72 sport
federations and it is estimated that 70% of athletes are members of the ČSTV.
We estimated that respondents’ answers (430) represent approximately
58,000 registered members of sport clubs. However, there is an estimate
of 2.5 mil. members of sport organizations. The percentage of respondents according
to size category and the number of inhabitants in the municipality where the club is
situated can be seen in Table 1.
85
Table 1: Characteristic of the respondents
Number
of members
% of respondents
Inhabitants in the municipality
(in thousands)
% of respondents
1-30 18,4 less than 5 11,6
31-70 27,9 5-10 10,7
71-150 23,5 10-50 32,3
151-300 19,5 50-150 19,3
301-500 5,1 150-400 7,2
501 and more 5,6 over 400 18,8
Source: Author
In this paper we analyze responses to four questions: (1)“Did you receive support (it
means financial grants or/as well as non-financial support) from your municipality?”;
(2) “Did you receive support from your sport union/federation/association?”; (3) “Was
your last grant request successful?”; (4) “What was your last economic profit/loss?”. All
results (430 respondents) were filtered for three selected sport branches: (1) athletics –
74 respondents; (2) basketball – 29 respondents; and (3) karate – 26 respondents. All
answers were anonymous.
Results and discussion
Public financing of sport organizations in the Czech Republic
There are many possibilities for Czech sport organizations to receive some kind of grant
(see Table 2). Usually there is a condition of non-profit legal form to enable
the organization to receive public grants. However, at the level of professional sport
clubs, for profit legal form is also accepted. Allocation rules inside sport federations
are not usually connected with the legal form of a potential grant recipient.
The legal form of a strong majority of sport organizations is non-profit and also 94,7%
of our respondents have a non-profit legal form.
Table 2: Review of sport clubs and their public sector partners
Type of sport
NPO
Description Subsidizer Decision maker
General Sport
Associations
(GSA)
There are nine GSAs which encompass all
sport branches unions/federations in the
Czech Republic. These “Nine” were
stakeholders of the biggest lottery
company in the Czech Republic. Their
role consists in provision of financial and
non-financial support for sport
unions/federations. It seems that their
role has been decreasing since 2011.
Ministry of
Education, Youth and
Sport
Ministry of Defense
Ministry of Interior
EU funds/projects
Ministry
committee
86
Type of sport
NPO
Description Subsidizer Decision maker
Sport branch
federations /
unions /
associations
Members of one of the GSAs. Each sport
union/federation incorporates sport
clubs in the given sport branch. These
unions/federations can be divided also
into regional sub-unions/federations.
Regional
municipalities
Ministry of
Education, Youth and
Sport
EU funds/projects
Representative
body
Sport clubs
Basic unit. Most sport clubs are NPOs;
however, some of them operate as Ltds,
joint stock companies or sole
proprietors.
Regional and local
municipalities
EU funds/projects
Sport branch
federation/ unions /
associations
Representative
body
National
authority
Executive board
of sport union
/federation
Source: Author
The role of municipalities in the process of subsidizing sport NPOs is all the more
important because we found out that sport NPOs receive grants and non-financial
support from municipalities more frequently than they receive support from their own
sport federation/association – see results in Fig. 1. The results also show important
information about a failing system of “internal” support inside the sport federations.
It could be expected that sport federation and association “internal” support system
is more supportive and generous than municipality support. However, sport federations
can also be recipients of public grants; the only difference is the system of redistribution.
Nemec (2009) showed that there is a risk of high dependence on public budgets
for sport clubs, using the case of the Slovak Republic.
Figure 1: Comparison of received support from local municipalities and sport unions/
federations in %
Source: Author
0,00
10,00
20,00
30,00
40,00
50,00
60,00
both grants and
non-financial
support
yes, only financial
grants
yes, only nonfinancial
support
no no and municipality
/ sport federation
makes up obstacles
Local municipality Sport federation/ associaton
87
Seeing that only 23% of respondents did not receive any support from municipality
and respecting that 18% of respondents did not ask for grants in the last two years
(2009, 2010); we can conclude that relations between sport clubs and municipalities
are surprisingly very good. The real problem is that almost 50% of respondents did not
receive any support from their own sport unions/federations. This result raises two
important questions:
• Why is non-financial support from sport unions/federations so low? We can accept
that the lack of financial resources is an obstacle to increasing financial support;
we can, though, hardly accept that an organization created by (and for) sport clubs
does not provide support or even occasionally creates obstacles for its own
members (6% of respondents).
• Is this situation the same for all sport branches (system failure) or can we identify
specific sport federations which are failing? To answer this question, we selected
three sport branches with a higher number of respondents. Considering
the findings, we can ask if the public grants allocated to these “wrong” sport
federations are meaningful!
Partial results for selected sport branches
We selected three sport branches to be analyzed in detail. Sport clubs in these three
branches are different in average number of members as well as in the price
of membership dues. These differences are caused by the character of the sport
branches (see Tables 3 and 4).
Table 3: Number of members
in % athletics (74) basketball (29) karate (26)
1-30 17,57 6,90 38,46
31-70 28,38 10,34 38,46
71-150 20,27 41,38 7,69
151-300 25,68 34,48 15,38
301-500 4,05 3,45 0,00
501 and more 4,05 3,45 0,00
Source: Author
Table 4: Membership dues
in % athletics (74) basketball (29) karate (26)
No membership dues 6,76 0,00 7,69
till 200 CZK/year 8,11 0,00 0,00
201-500 CZK/year 22,97 6,90 11,54
501-1.500 CZK/year 41,89 17,24 19,23
1.501-4.000 CZK/year 18,92 55,17 57,69
4.001-10.000 CZK/year 0,00 20,69 3,85
More than 10.000 CZK/year 1,35 0,00 0,00
Source: Author
88
Differences can be found also in the clubs’ approach to public grants. Significantly fewer
of karate clubs ask for grants and a higher portion of karate clubs did not succeed
with their grant request. It seems that there can be a connection between the number
of members and success of the grant request, as it is information that the municipalities
always want to know when deciding about grants (Pavlik 2012).
Table 5: Were you successful with the last municipality grant request?
in % Athletics (74) Basketball (29) Karate (26)
Yes, we get what we asked for 28,38 31,03 7,69
Yes, but we get less than we asked 60,81 65,52 50,00
No 5,41 0,00 11,54
We didn’t ask for the grant 5,41 3,45 30,77
Source: Author
Relations with sport federation and municipality are shown in Figure 2. It provides
a few interesting findings in comparison with the results in Figure 1. The basketball
sport federation provides significantly less support than the average
and also than unions or federations in the other two sport branches. Karate did not
receive non-financial support from its sport federation; however, karate is in a different
position to others – there is more than one karate union/federation in the Czech
Republic.
Figure 2: Comparison of support received from local municipalities and sport unions/
federations in % for three selected sport branches
Source: Author
What are the economic consequences of a “failing” system of support from the sport’s
own organization? We accept that both municipalities and sport federations have
a financial limit for the grants. We assume that the role of municipalities is wider
than just provision of non-financial support for NPOs. Why do sport federations provide
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
both grants
and non-
financial
support
yes, only
financial grants
yes, only non-
financial
support
no no and
municipality /
sport
federation
makes up
obstacles
Athletics (M)
Athletics (SU)
Basketball (M)
Basketball (SU)
Karate (M)
Karate (SU)
Note:
(M) municipality;
89
such a low level of non-financial support? We can identify and discuss three answers:
1. They do not want to do it – in this case, we would see the system failure. Why do
those who are elected by sport clubs not want to be helpful to sport clubs?
2. They cannot do it – in this case, we have to seek reasons for such obstacles –
although we cannot ask (or expect) anyone else to do it than sports clubs.
3. They are not asked for such support by sport clubs – in this case, the lack
of support cannot be perceived as a problem.
The first obvious effect of this situation is that the sport clubs consider themselves not
sufficiently supported and assume that it is because of a lack of resources. They may
believe that limited financial resources lie at the root of the lack of support
from their own sport federation.
Additional information about the situation of sport clubs is shown in Table 6,
which illustrates the profit the sport clubs made in relation to the grants. The results
(see Tab. 6) can be interpreted in three ways: (1) They serve as evidence of high
dependence on public grants; (2) They show poor economic skills of sport clubs;
(3) They can be affected by the effort of sport clubs to be seen as “poor” and “non-profit”,
even if being non-profit does not mean that the club cannot have higher revenues
than expenditures, as that is a necessary condition for long-term operation.
Table 6: Economic profit
in %
athletics
(74)
basketball
(29)
karate
(26)
Total
results
(430)
Expenditures exceeded revenues (grants received) 14,86 27,59 11,54 20,93
Expenditures exceeded revenues (no grants) 8,11 6,90 38,46 17,67
Revenues equal to expenses (grants received) 68,92 48,28 34,62 50,23
Revenues equal to expenses (no grants) 1,35 0,00 0,00 1,16
Revenues exceeded expenditures (grants received but
without effect on profit)
0,00 0,00 7,69 3,26
Revenues exceeded expenditures (grants received and
having a positive effect on profit)
6,76 17,24 7,69 5,12
Revenues exceeded expenditures (no grants) 0,00 0,00 0,00 1,63
Source: Author
Conclusion
We found that there is a significant problem with the system of financial and nonfinancial
support hidden inside the sport federations. Although it is generally accepted
that self-organization could be more effective in the non-profit sector, our findings
showed a failure.
The results also showed that the strategy of most municipalities is to accept more grant
90
requests but allocate smaller sums of money than requested. In the short term, such
behavior can be seen as a good solution, because more clubs receive support.
However, in the long-term view, there is a risk of “inflation,” because clubs adapt
to the usual municipality strategy “to cut” and they will be asking for more money.
The pressure on public resources as well as the illusion of a lack of resources will
probably arise in the long term.
A discussion of economic consequences for sport clubs is connected with the question
“what happens if sport clubs do not receive the grant?” In other words, does it mean
that absence of the grant can cause a deficit situation or do clubs simply decrease
their expenditures? Grants usage is dependent on rules given by the municipality;
but receiving a grant enables reallocation of newly free resources to other expenditure
opportunities. Without detailed accounting data, we cannot give a strong answer.
It is usually argued that without grants most clubs cannot survive. The results
of this research are partly supportive of that assumption. But there is a probability
that clubs have insufficient financial skills or it could be a result of strategic behavior.
Before implementing any changes in the system of sport support we should seek
the root of the failures revealed in this paper. Why is support from sport federations
so small? Why are economic results of sport clubs so poor? Without answers to these
questions, we probably cannot suggest any rational changes in the system of sport
support.
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organizations. In Proceedings of the 16th international conference - Modern and current
trends in the public sector research. Brno: Masarykova univerzita, Ekonomicko-správní
fakulta, 2012. od s. 252-260, 8 s. ISBN 978-80-210-5822-4.
92
Economic Crisis: A Hard Blow or a Challenge
for Non-profits?
Pospíšil Miroslav, Prouzová Zuzana, Škarabelová Simona,
Tůmová Almani Kateřina
Abstract
To analyse the impact of the economic crisis on the Czech nonprofit sector is a complex
task, for which there are not sufficient data available to date. In this paper we limit
ourselves to a probe into the level of giving as an important indicator of the support
for Czech NPOs. We use several indicators to estimate the impact of the current economic
crisis on the funding for NPOs from individuals, businesses and the state. While the support
from individuals and from businesses has been largely unaffected by the crisis, or has
only been affected very briefly, the funding from the state has decreased, even though
not very dramatically. By way of conclusion, we suggest that the crisis can not
only be a threat but also an opportunity for NPOs if they want to emancipate themselves
from too much dependence on the state.
Keywords
economic crisis, impact, nonprofit sector, Czech Republic
Introduction
It can be reasonably expected that the 2008–2012 global recession will have affected all
society and all walks of life, including the private nonprofit sector. The worsening
economic and social situation and the austerity measures introduced by the government
will increase the demand for the services provided by nonprofit organisations (NPOs)
on the one hand but reduce the amount of finances available to NPOs from public
budgets on the other. There will be more people in social need and there will be
less public funding for the social safety net, which will increase the demands on NPOs.
In this situation, will they be able to sustain the extent and the level of their services,
to say nothing of extending and expanding them to meet the increased demand?
Will the government, business and the public be willing, and be in a position, to continue
to support NPOs or will their support inevitably decline?
To analyse the impact of the economic crisis on Czech nonprofit organisations will
require future work, when reliable data become available and when more indicators can
thus be included in the analysis. For the first tentative assessment of the situation,
we limited ourselves to a probe into the level of giving as an important indicator
of the financial situation in Czech NPOs, leaving aside other measures such as assets
and income from assets, earned income, volunteering etc.
93
Material and Methods
In our previous paper (Pospisil et al, 2012) we used data for the main sources
of revenue for NPOs (individuals, businesses and the state) drawn from the Czech
Satellite Account on Nonprofit Institutions (CZSO, 2009). As these revenue data
(Transfers received - D.75) are consolidated (EUROSTAT, 1995, p. 106), in this paper we
examine not only these three sources of funding but also grants made to nonprofit
organisations by philanthropic foundations.
For assessing the impact of the economic crisis on the Czech nonprofit sector we focus
on the developments in the giving environment for NPOs. Our basic method of collecting
existing materials, research findings and their metadata was desktop research.
The sources of data for individual giving used in this article were the Czech Donors
Forum, which administers SMS Giving in the Czech Republic, and financial information
about well-known public charitable appeals. Data on individual and corporate donors
come from information from their income tax returns. These data were collected
by Nadace Via. The source of data on public funding was the “Analysis of Funding
for Non-State Nonprofit Organisations from Public Budgets”, which is prepared annually
by the authors and published by the Czech Government. Finally, data on foundations
were taken from “Information about the activities of foundations that were recipients
of funding from the Foundation Investment Fund”, which is prepared annually
by the Czech Donors Forum and published by the Czech Government.
Analysis of Developments in Funding for NPOs
Individual donors
There are no statistical data on individual giving available in this country. We have
therefore looked at three separate indicators, which will not give us the full picture
of individual philanthropy, but can at least indicate its trends in the past several years.
First, Table 1 shows the income of selected well-known public charitable appeals
and collections that collect money from individual citizens (and businesses too)
and which are repeated annually and give thus a time series indicating the willingness
and ability of the public to give for public beneficial causes over time. The figures do not
seem to indicate any clear pattern of change in giving in the past seven years.
Table 1: Income of selected public charitable appeals (CZK million)
Appeal 2005 2006 2007 2008 2009 2010 2011
Caritas: Twelfth Night Appeal (general
humanitarian)
62,3 54,7 58,1 60,2 65,0 68,7 72,7
Children in Need (general children) 11,9 15,1 16,2 15,2 15,0 19,0 15,7
League against Cancer 12,6 11,6 13,6 14,6 14,6 14,8 14,2
Barriers Account (general health) 18,2 19,0 26,6 28,0 19,2 23,3 18,2
Paraple (paraplegia patients) 7,8 10,9 9,6 10,7 12,3 11,1 15,1
Světluška (the blind) 7,0 10,9 10,2 8,8 8,4 9,4 9,0
Source: Annual reports of the NPOs, table created by authors
94
Table 2 offers a look at individual people’s giving via SMS, which is at the moment
probably the most popular way of making a donation. If we exclude the exceptionally
“generous” years of 2005 (Indonesian tsunami), 2009 (floods) and 2010
(Haiti earthquake and floods in Central Europe), when people spontaneously reacted
to big natural disasters, both the number of donors and the sum total of donations have
remained fairly stable over the past several years.
Table 2: Individual donations to NPOs through SMS Giving (CZK million)
Year Number of SMS messages Total amount raised
2004*) 936 522 25,3
2005 3 270 413 88,3
2006 1 392 112 37,6
2007 1 336 806 36,1
2008 1 323 402 35,7
2009 1 796 096 48,5
2010 2 256 690 60,9
2011 1 429 025 38,6
*) Inaugural year of SMS donations in the Czech Republic
Source: Czech Donors Forum
Finally, we can find some indication about individual giving in the statistics
of the Ministry of Finance about applications by natural persons for tax deductions
on charitable donations made to NPOs. Most individual donations in the Czech Republic
are made to collection boxes in the street and through the SMS, i.e. without a consequent
request for a tax deduction, but the time series could indicate a trend if there was one.
The number of individual donors dropped slightly in 2009, but has been rising again
since. A similar drop in 2009 appears in the total sum donated, which has since returned
to almost pre-2009 levels. All these changes are relatively small, however,
so that the level of individual giving seems to have remained stable.
Table 3: Individual donations to NPOs by persons applying for tax deduction
Year Number of donors Total amount donated
(CZK million)
Average amount donated
(CZK)
2007*) 141 093 1 469 10 412
2008 110 614 1 425 12 884
2009 107 898 1 198 11 103
2010 112 272 1 387 12 35
2011 116 993 1 342 11 466
*) The last year of joint tax declaration of married couples
Source: VIA Foundation
95
The data for 2007 should be excluded because they are influenced by the fact
that married couples were able to submit joint tax declarations, which made tax
deductions on charitable donations more advantageous and may thus have influenced
the total number of donations made. Without the year 2007, there is a drop in both
the number of donors and the total sum donated in 2009 but both measures have
since recovered.
Public funding
Since funding from public budgets is the most important source of finances for Czech
NPOs, together with funding from households, the development of funding by the state is
the other most important indicator of whether or not NPOs have been impacted
by the austerity measures introduced by the government as a response to the economic
crisis.
Table 4: Public funding for NPOs (CZK million)
2005 2006 2007 2008 2009 2010 2011
State budget 3 509 5 569 6 600 6 311 5 701 5 767 5 741
Regional
budgets
1 413 1 931 1 094 1 483 1 578 1 419 1 612
Municipal
budgets
N/A N/A 3 165 3 731 2 672 2 579 2 727
State funds N/A N/A 300 179 225 574 782
TOTAL 11 159 11 704 10 176 10 339 10 862
Source: Czech Government, Analysis of Funding for Non-State Nonprofit Organisations from Selected Public
Budgets in 2005-2010, plus preliminary data for the year 2011
Table 4 shows that there is indeed an approximately 9 % decline in government support
between the years 2007-2008 and 2009-2011. This does not appear very dramatic,
but if we also consider the inflation rate, which was 2.8 %, 6.3 %, 1,0 %, 1.5 % and 1.9%
respectively for those five years, the decline represents a considerable drop in NPOs’
income.
Corporate donors
Several newspaper articles published towards the end of 2010 suggested that the level
of corporate giving had been going down, by around 10 % between 2009 and 2010
(e.g. Czech TV 2010). This is very difficult to verify, but we can get some indication
of the truth from the data provided by the Ministry of Finance, which records
applications for tax deductions by companies that have given finances for public
beneficial purposes. Not all donors ask for the deductions, not all the donations
are for NPOs, and direct donations are only one way that companies use to support
NPOs, besides corporate sponsorship, corporate volunteering, purchase of services,
96
and others. But it is a good indicator of the overall tendency, and as is apparent
from Table 5, the total sum donated did go down between 2008 and 2010, by 12 %,
but, to everybody’s surprise, rose again in 2011, and to un unprecedented level at that.
What remained lower than the figures for 2007-2008, however, was the number
of companies that had made donations to NPOs.
Table 5: Corporate donations to NPOs by companies applying for tax deduction
2007 2008 2009 2010 2011
Number of companies applying for tax
deduction
18 845 19 251 16 732 15 634 16 296
Total amount donated (CZK million) 2 509 2 415 2 334 2 225 2 465
Average amount donated (CZK thousand) 133 125 139 142 151
Source: VIA Foundation
Philanthropic foundations
Income from foundations only makes up a small fraction of Czech NPOs’ total income,
but it is an important source in some activity areas and for some types of NPO.
Foundations have been affected by the crisis quite badly, above all because due
to the fall of the financial markets the revenue from foundation assets is
so low that foundations have very little pay-out money to make grants to NPO applicants
(see Figure 1).
Figure 1: Annual Payout of 65 Largest foundations
Source: Czech Government, Information about the activities of foundations that were recipients of funding
from the Foundation Investment Fund 2010, plus preliminary data for the year 2011
Results and Discussion
We have only looked at giving as one indicator of the impact of the economic crisis
on NPOs, but giving is an important one, which very likely reflects the overall trend
97
in the availability of funding for NPOs. From the data introduced above, however sparse
they are, we can make some tentative conclusions:
(i) The impact of the crisis in the Czech Republic has so far not been as hard
as in some other countries. The Czech economy has slowed down,
but not slumped into recession. That is why the (mediated) impact
on the nonprofit sector has not been very serious, NPO leaders report that they
have not felt serious financial shortfall in their organisations.
(ii) Funding from the state for NPOs has decreased, but only slightly.
(iii) Due to the crisis, the revenue of foundations from endowments
and other financial assets has decreased quite dramatically between 2007
and 2011 so that the total amount of grants made by Czech foundations in 2011
was only 66,04 % of that in 2007.
(iv) There seems to be no significant downturn in private giving however:
after as light “hesitation” in/around 2009, both individual citizens and businesses
remain as willing and able to make charitable donations as before.
Conclusions
This last finding is an important one and offers a good argument to those who believe
that the crisis is an opportunity, not a disaster, for the nonprofit sector. There is a large
group of nonprofit leaders that see the crisis and the resulting decreased support
from the state as a chance to deal with two related phenomena that they perceive as ills
and weaknesses of the Czech nonprofit sector. The continued support for NPOs
from private individuals is a chance to improve the relations with the public, to attract
more people to nonprofit activities, to win more participation and support from them
and to increase the level of civic engagement. And if the nonprofit sector can no longer
rely on state support to the same degree as before (and if it gets more support
from individuals at the same time), it is a chance for Czech NPOs to build a strong,
autonomous civil society and nonprofit sector, which is a real partner to the state
and to business, overcoming thus the legacy of the paternalistic state, in which NPOs
only play a subservient role and are far too much dependent on the state. Finally,
a time of crisis is also a unique chance for NPOs to demonstrate their worth; they can
show how much they can do for society in hard times, boosting thus their selfconfidence
as well as their image in the eyes of the public. It will be very interesting
to see in the next few years if these arguments of the nonprofit leaders have fallen
on fertile ground and if the chance that the crisis offers will have been taken up by Czech
NPOs.
References
Czech Donors Forum (2012) Dárcovské SMS za osm let přinesly téměř čtyři sta milionů
98
[online]. [SMS giving has brought almost four hundred million in eight years]. Prague:
Fórum dárců [Czech Donors Forum]. [cit. 2012-10-15] Available from WWW:
http://www.donorsforum.cz/aktuality/139/darcovske-sms-za-osm-let-prinesly-temer-
ctyri-sta-milionu.html.
Czech Government (2010a) Rozbor financování NNO z veřejných rozpočtů v letech
2005-2010 [online]. [Analysis of Funding for Non-State Nonprofit Organisations from
Public Budgets in 2005-2010]. Prague: Úřad vlády ČR [Office of the Czech Government].
[cit. 2012-10-15] Available from WWW: http://www.vlada.cz/scripts/detail.php
?pgid=332.
Czech Government (2010b) Hodnotící informace o činnosti nadací – příjemců příspěvku
z nadačního investičního fondu v roce2010 [online]. [Information about the activities of
foundations that were recipients of funding from the Foundation Investment Fund in
2010]. Prague: Úřad vlády ČR [Office of the Czech Government]. [cit. 2012-10-15]
Available from WWW: http://www.vlada.cz/assets/ppov/rnno/dokumenty/HI_
2010.pdf.
Czech TV (2010) Na mecenáše dolehla krize, darovali méně [online]. [Donors hit by the
crisis: they donate less]. Prague: Czech Television. [cit. 2012-10-15] Available from
WWW: http://www.ceskatelevize.cz/ct24/ekonomika/102335-na-mecenase-dolehla-
krize-darovali-mene/.
Czech TV (2012) Po letech útlumu se dárcovství v ČR vrátilo na předkrizovou úroveň
[online]. [After a few years of downturn, giving in the Czech Republic is back to the precrisis
level]. Prague: Czech Television. [cit. 2012-10-15] Available from WWW:
http://www.ceskatelevize.cz/ct24/ekonomika/195876-po-letech-utlumu-se-
darcovstvi-v-cr-vratilo-na-predkrizovou-uroven/.
CZSO (2009) Satelitní účet neziskových institucí 2005-2009 [online]. [Satellite Account
on Non-Profit Institutions 2005-2009]. Prague: Czech Statistical Office. [cit. 2012-10-15]
Available from WWW: http://apl.czso.cz/pll/rocenka/rocenka.indexnu_sat?mylang
=EN.
Eurostat (1995) Evropský systém účtů ESA 1995. [on-line].[European system of
accounts]. Eurostat, překl. ČSÚ, [cit.:2012-10-15] Available from WWW: http://apl
.czso.cz/nufile/ESA95_cz.pdf
Nadace VIA (2012) Vývoj soukromého dárcovství v České republice v letech 2007 až
2011. [The development of private giving in the Czech Republic 2007-2011]. Prague:
Nadace VIA.
POSPÍŠIL, M., PROUZOVÁ, Z., ŠKARABELOVÁ, S., ALMANI TŮMOVÁ, K. (2012) Czech nonprofit
sector twenty years after: current developments and challenges. CIVIL SZEMLE,
Budapest, Hungary. ISSN 1786-3341, 2012, vol. 2012, no. 3, pp. 5-22.
99
The Nonmonetary Compensation Structure for Volunteer
Work in the Non-profit Sector
Richea Maria-Magdalena
Abstract
Nowadays, the hallmark of the international working environment is defined
by continually changing of economic and social processes. The dynamic of change
generates new requirements in terms of human resources management strategies
for public, nonprofit and for profit organizations, in order to meet high performance
standards set by the new rules of economic game. Thus, considering the fact that payment
system in the nonprofit sector is limited by nondistribution constraint, this study aims
to identify the nonmonetary compensation structure for volunteer work.
In this respect, the main research objectives of this study are: (1) to highlight
the perception of managers from nonprofit field regarding extrinsic rewards for volunteer
work and (2) to identify non-wage motivational strategies adopted within nonprofit
organizations.
Keywords
Volunteer work, compensation structure, nonmonetary benefits, motivational strategies,
human resources management practices in the nonprofit sector
Introduction
Currently, the hallmark of the international working environment is defined
by constantly changing of economic and social processes. Thus, the dynamic of change
generates new requirements in terms of human resources management strategies
for public, nonprofit and for profit organizations. In this respect, “human resources
management practices must create value by increasing the intellectual capital
within the agencies” Pynes (2004, p. 43) and also must be focused on improving
the resources of knowledge owned by the employees, in order to meet the high
standards of performance imposed by the labour market. Therefore, a significant effect
of the contemporary economic and social rules of the game are that “the policy relevance
of questions relating to the nonprofit labour force is growing” Powell and Steinberg
(2006, p. 159).
Given the new requirements imposed by the dynamic of change over the human
resources management practices on a highly competitive labour market, in this paper
I will present the research findings resulted from the pre-test stage of a qualitative
research that I have conducted, in order to identify the nonprofit manager’s perception
100
regarding the nonmonetary compensation structure for volunteer work in the Romanian
nonprofit sector.
Literature Review
The main specificity of nonprofit sector is that it deals both with nonprofit workers
or personal staff and for profit workers or paid staff, and in this regard, this study aims
to identify the compensation structure of nonmonetary benefits for volunteer work.
Considering the fact that, management perspective regarding the compensation
structure for volunteer work it is strongly connected with the idea that “people
volunteer instrumentally in order to receive a byproduct of volunteer work; it is not
that they enjoy volunteering per se, but their utility increases because they receive
an extrinsic reward from volunteering” Meier and Stutzer (2008, p. 41), in the next
section, I want to emphasize the nonmonetary benefits perceived in past researches
as extrinsic motivational factors for volunteering.
First Theoretical Perspective of Nonmonetary Benefits for Volunteer Work
Taking into consideration that fact that nonprofit management models “represents one
possible analytical framework that can be used to understand the various dimensions,
dilemmas, and structures involved in nonprofit management” Anheier (2005, p. 247),
in the following, I will present the first theoretical perspective related to nonmonetary
characteristics of volunteering.
A very important theoretical statement of this perspective is that “if pay in nonprofits
is limited by the nondistribution constraint, nonprofit workers may be compensated
by better working conditions or nonmonetary benefits” Powell and Steinberg (2006,
p. 165). Therefore, the human resource management policy for the nonprofit workers
must be designed on a motivational structure, based on nonmonetary extrinsic
motivational factors.
According to Powell and Steinberg, the nonmonetary compensation structure can be
designed taking into consideration the following extrinsic motivational factors:
(1) a non-wage compensation or non-wage benefits, defined by “an employer
contribution to an employee’s health plan or retirement fund, as well as paid leave
and other possible benefits such as parking, transportation, or health club subsidies”
(2006, p. 165) and (2) the ethos of a workplace, defined by “the degree of flexibility
in scheduling work, the implementation of family friendly policies, the stability
of employment, and the degree to which a workplace affords upward career mobility”
(2006, p. 165).
Further on, in their description process of nonmonetary compensation for volunteer
work, Powell and Steinberg, present the results of several studies in this research topic,
revealing the following features: (a) nonprofit workers have a “higher flexibility in work
arrangements than the government workers and receive significantly higher levels
101
of training” (2006, p. 166); (b) in the nonprofit sector, women have “more schedule
flexibility (paid sick leave and the ability to take time off for personal matters)
and more likely to report that their work promoted skill development, was less
repetitive and offered more chances for promotion” (2006, p. 166); (c) nonprofit sector
provides “flexible work arrangements, such as: flex-time, part-time work,
or telecommuting meant to provide more flexibility for the employee” (2006, p. 166);
(d) work in nonprofit sector gives “opportunities to work independently and to develop
one own’s skills, the quality of colleagues, the opportunities for social action…and allows
for work-family balance” (2006, p. 166).
As we observed above in the Powell and Steinberg line of thought, their theoretical
perspective of nonmonetary conditions of work can lead to a model of human resources
management practice for the compensation structure of nonmonetary benefits
for volunteering. Thus, considering the theoretical perspective of Powell and Steinberg,
the first model of human resources management practice on nonmonetary compensation
structure for volunteer work can be shaped as follows:
P1. Basic principles:
• (C1) Nonmonetary benefits – employer’s contribution to a health plan
or a retirement fund, paid leave, health club subsidies, transportation.
• (C2) Working conditions – the degree of flexibility in scheduling work, stability
of employment, family friendly policies, upward career mobility.
P2. Conceptual structure of extrinsic motivational factors for volunteer work:
• (Ef1) flexibility in work arrangements => schedule flexibility => flex-time,
part-time work, or telecommuting;
• (Ef2) higher levels of training => work promoted skill development => less
repetitive => more chances for promotion;
• (Ef3) opportunities to work independently => develop one own’s skills =>
opportunities for social action => work-family balance.
Second Theoretical Perspective of Nonmonetary Benefits for Volunteer Work
Nowadays, the new trends in the international labour market are part of a process
of transition from a society characterized by standardization of work (Fordism),
to a society characterized by individualization of work (PostFordism). This transition
process involves certain changes in structuring the work activity, as follows: “the more
work relations are ‘deregulated’ and ‘flexibilized’, the faster work society changes
into a risk society incalculable both in term of individual lives and at the level
of the state and politics” Beck (2000, p. 3). Under these conditions, could the political
economy of insecurity generate alternative solutions, in order to inhibit the incalculable
risks and their impact over the global work society?
102
A possible response it is given by Beck, according to which “the counter-model of work
society is based not upon leisure but upon political freedom; it is a multi-activity society
in which housework, family work, club work and voluntary work are prized alongside
paidwork” (2000, p. 125). Therefore, the idea of civic labour is based upon the fact
that “those who wish to escape the spell of the work society, must enter the political
society…that gives material form to the idea of civil rights and transnational civic
society” Beck (2000, p. 125). How can we define the concept of civic labour? Can we
identify a model of structuring this work activity in the frame of the second modernity?
According to Beck, the theoretical statement proposed for the model of civic work
activity is that “civic labour presupposes civil rights and…must be done for others, civil
rights pass beyond the paper and become a palpable social reality in people’s lives” Beck
(2000, p. 126). In this respect, the author emphasize the the role of civic labour, which is
“to place at the center of things the art of activity and becoming active-including the
resource of time, space, money and cooperation necessary for that purpose” Beck (2000,
p. 126).
Therefore, considering the nature and the features of civic work, this theorethical
perspective leads to the fact that “civic labour is not paid work but is rewarded
with civic money and thereby socially recognized and valued” Beck (2000, p. 126).
Reaching to this point of this theoretical statements, we can advance the following
legitimate question…but where is the nondistribution constraint that sets defined
and strict boundaries regarding to the matter of nonmonetary compensation
for volunteer work?
The answer is that the elementary condition of nondistribution constraint it is not
altered by rewarding civic labour with civic money, because “civic money means
a quantity for getting by with that at least matches the level for income support” Beck
(2000, p. 126) and civic work “is voluntary self-organized labour” as Beck pointed out
(2000, p. 127).
In this regard, extrinsic motivational factors for the volunteer work are civic money,
but defined as a monetary resource which generates nonmonetary compensation
for volunteering, through the fact that this source of revenue maintains continuous
sustainability for civil society’s existence. Therefore, the model of civic work:
(a) constitutes an alternative source of activity and identity “which not only gives people
satisfaction, but also creates cohesion in individualized society by breathing life
into everyday democracy” Beck (2000, p. 127); (b) represents a non-paid activity “but it
is rewarded both materially and non-materially through civic money, qualifications,
pensions, entitlement and ‘favour credits’” Beck (2000, p. 130); (c) civic money “ensures
the autonomy of civil labour…its minimum level is derived from the standards
of unemployment benefit and income support…and it is added to out of community
funds and resources generated through the civic labour itself” Beck (2000, p. 130).
As we observed in the theoretical perspective proposed by Beck for the nonmonetary
103
benefits of volunteer work, this model emphasizes motivational factors resulted
from the service provision and the results of the work itself, by obtaining civic money
as a resource for maintaining the social community’s funds. Thus, considering
the theoretical perspective of Beck, the second model human resources management
practice on nonmonetary compensation structure for volunteer work can be shaped
as follows:
P1. Basic principles:
• (C1) Counter-model of work society - it is a multi-activity society, in which the civic
labour and civil rights are practical realities.
• (C2) The model of civic labour - is based on the fact that this type of activity is not
paid work, but is rewarded with civic money.
P2. Conceptual structure of extrinsic motivational factors for volunteer work:
• (Ef1) civil work constitutes an alternative source of activity and identity => gives
people satisfaction => creates cohesion in individualized society;
• (Ef2) civil work is rewarded with civic money => a form of social recognition
and social value;
• (Ef3) civil work represents a non-paid activity => rewarded both materially
and non-materially => civic money => qualifications => pensions => entitlement
and ‘favour credits’;
• (Ef4) civic money ensures the autonomy of civic labour => standards
of unemployment benefit => income support => civic labour itself.
Theoretical Approach of the Study
The research strategy that I have used to conduct the study on nonmonetary
compensation structure for volunteer work, was grounded theory and therefore,
the theoretical model of extrinsic motivational factors for volunteer work will be
described after presenting the data analysis resulted from the pre-test stage
of this study.
Methodological Design
The Research Theme
Considering the fact that the Romanian legal framework for volunteering doesn’t
stipulate clearly the nonmonetary compensation for volunteers, excepting some legal
rights (such as: legal norms of labour protection, health and risk inssurances
when the nature of volunteer activity imposes this, a volunteering contract,
the reimbursement of expenses necessary to carry out the volunteer activity),
104
the research problem of this study is to identify the nonmonetary compensation
structure for volunteer work in the Romanian nonprofit sector.
Pre-test stage of the study
In the investigation process of the nonmonetary compensation structure for volunteer
work in the Romanian nonprofit sector, I have conducted a qualitative research.
Data collection process consisted in conducting in-depth interviews with nonprofit
managers within a nationwide network of volunteer centers. In the pre-test stage
of this study, I have conducted two in-depth interviews with human resources managers
of two of the volunteer centers, members of the national network of volunteer centers.
Therefore, in this paper I will present the research results that I have discovered
after conducting the pre-test stage of the study, in two empirical observed cases.
Material and Methods
The empirical research strategy it is based upon conducting a qualitative research
in order to identify the nonprofit manager’s perception regarding the nonmonetary
compensations for volunteer work. The research strategy it is based upon the method
of semi-structured in-depth interviews, and proposed the existence of one dependent
variable, with the following level of measure – the extrinsic motivational rewards
for volunteering.
Raised Research Questions
1. What are the components of the nonmonetary compensation structure for volunteer
work?
2. The nonmonetary compensation structure for volunteer work includes other further
motivational rewards than those that are stipulated in the legal framework?
Research Objectives of this study are:
• to highlight the nonprofit manager’s perception regarding the extrinsic
motivational reward for volunteering;
• to identify non-wage strategies adopted in nonprofit organizations.
105
Data Analysis
Figure 1: The first empirically observed case – manager’s perception in the nonprofit
field, regarding extrinsic motivational rewards for volunteer work
Source: Author (qualitative research data collected in the pre-test stage of the study)
The research data in the first empirical case, present the nonprofit manager’s strategy
for rewarding volunteering, and points the fact that extrinsic motivation it is used
as a strategic tool for determine intrinsic motivation. In this respect, the nonmonetary
compensations for volunteer work, reveals extrinsic motivational factors, such as:
a volunteering gala, a volunteering certificate, camps, the title called the volunteer
of the month, social gatherings, help in the situations of risk.
Figure 2: The second empirically observed case – manager’s perception in the nonprofit
field, regarding extrinsic motivational rewards for volunteer work
Source: Author (qualitative research data collected in the pre-test stage of the study)
The research data in the second empirical case, present the nonprofit manager’s strategy
regarding nonmonetary rewards for volunteering and it points the fact that extrinsic
Extrinsic Motivation…we have it in mind, but in general, we have many sessions to help them find
intrinsic motivation again and again because this type of motivation it is less expensive. But, to reach
extrinsic motivation, we use many methods, such as: we organize a volunteering gala - called
graduation day, where only volunteers who performed a predetermined number of volunteer
activities receive certificates, in order to certify and recognize their volunteer work. We organize
camps, mountain camps or sea camps, where volunteers receive a discount fairly consistent, and all
volunteers that have won a prize within the volunteer gala, benefit from 100% discount for these
camps. We have social gatherings on weekends, where they come to spent their free time, we organize
debates, discussions, in order to help them to know each other better and to form a group. Also, we
celebrate the birthdays of volunteers…We award the title called ‘the volunteer of the month’…This is all
about our extrinsic motivational methods, rarely, (unless circumstances require this) in situations of
high risk, when volunteers don’t have enough financial possibilities to finish their studies, we help
them with study scholarships.
We got a lot of strategies that are related with the idea of merit recognition. Our volunteer staff it is
valued for absolut any result they get, and every time they have a failure the, the work strategy it’s
rethought. We try somehow to motivate them, in order to outline personal development opportunities,
such as recommendations for scholarships and things like that, things that mean a lot to them. The
whole idea of motivation, in our opinion, is to match volunteers needs with the organizational needs and
then it occurs a self-motivation process. This strategy leads to a self-motivation process, because the
volunteers shape their own personal development goals and they are trying to achieve them. Whether
we are talking about volunteer staff or about paid staff, we always begin with a motivational policy
based upon principles of management by objectives, and then their motivation comes from getting the
results that they have already designed. They are always recognized, always appreciated, they always
receive different degrees of personal recognition, such as the volunteer of the month, the volunteer of the
year, simple things like this, which apparently aren’s such a big thing, but for them are important
motivators and therefore, it is very important to act in this way. We don’t do anything special, we just
try to listen them when they encounter difficult situations, to understand their problems…if they need
some time off, then to offer them that time. We always design any strategy from them to the
organization, not from the organization toward them, we always conceive things in this manner.
106
motivation it is used as a strategic tool for the idea of merit recognition, emphasizing
the following extrinsic motivational factors: volunteer staff it is recognized
and appreciated, the title called the volunteer of the month or the volunteer of the year,
volunteers have the freedom to shape their own personal development goals and try
to achieve them, organizational strategies designed from volunteer (and personal) staff
to organizational needs.
Results and Discussion
After carrying out the pre-test stage of the study, we can develop a theoretical
perspective of nonmonetary benefits for volunteering, on the basis on the research
findings, revealed in the two empirical cases presented in the previous stage. Thus,
the human resources management practice on nonmonetary compensation structure
for volunteer work can be shaped as follows:
The Theoretical Perspective of Nonmonetary Benefits for Volunteer Work
Resulted from the Pre-Test Stage of the Study
P1. Basic principles:
• (C1) Extrinsic motivation it is operationalized as follows: (A) it is used
as a strategic tool for determine intrinsic motivation =>“less expensive” and (B) it
is used as a strategic tool of the idea of =>“merit recognition”.
P2. Conceptual structure of extrinsic motivational factors for volunteer work:
• (Ef1) different degrees of personal and social recognition (Type A)=> the volunteer
staff it is valued for work results =>“they are always recognized, appreciated”
=>“the volunteer of the month, the volunteer of the year” and (Type B)
=>a volunteering gala =>“a predermined number of volunteer activities”
=>“a volunteering certificate” =>“to certify and recognize their volunteer work”
=> a further reward =>“100% discount for the camps” organized within the
nonprofit organization;
• (Ef2) to match volunteers needs with the organizational needs =>“it occurs a selfmotivation
process” =>“the volunteers shape their own personal development
goals” =>“they are trying to achieve them”;
• (Ef3) a motivation policy =>“principles of management by objectives”
=>the motivational incentive = “getting the designed results”;
• (Ef4) organizational strategies designed from volunteer (and personal) staff
to organizational needs (Type A) =>“every time they have a failure” =>“the work
strategy it’s rethought” and (Type B) =>“we listen them when they encounter
difficult situations” =>“understand their problems” =>“offer some time off”.
• (Ef5) social gatherings (Type A)=>“on weekends they come to spent their free
107
time” =>organized “debates, discussions” =>“to know each other better”
=>“to form a group”; and (Type B)=>“we celebrate the birthdays of volunteers”;
• (Ef6) help in the situations of risk =>“study scholarships”.
After we developed a theoretical perspective resulted from the pre-test stage
of the research, we may compare this theoretical model with the two theoretical models
presented in the literature review stage of the study. Therefore, we conclude the fact
that from the empirical research data, resulted a theoretical model that comprises
elements from the both theoretical models presented in the early stage of this study.
Therefore, the common points of the three theoretical perspectives on nonmonetary
benefits for volunteering are the following: the extrinsic motivational strategy it is
designed as groundwork for determining a process of intrinsic motivation; the common
extrinsic motivational themes are: working conditions, opportunities to work
independently, forms of social recognition and social value, non-materially rewards;
the new extrinsic motivational concepts are: organizational strategies designed
from volunteer staff to organizational needs, social gatherings, help in the situations
of risk.
Conclusion
C1. The nonmonetary compensation structure for volunteer work includes other further
motivational rewards than those that are stipulated in the Romanian legal framework.
C2. After carrying-out the pre-test stage of research, we can develop a theoretical
perspective of nonmonetary benefits for volunteering, on the basis on the research
findings, which means the nonprofit managers are aware of the importance of having
motivated volunteer staff within their organizations.
C3. Within nonprofit human resources management policies we identified a common
vocabulary of motivational rewards for volunteering.
Implications for Future Research
• to expand the study, in order to introduce in the research inventory further
dependent variables.
Acknowledgements
The author of the paper is a beneficiary of the ”Doctoral Scholarships for a Sustainable
Society”, project co-financed by the European Union through the European Social Fund,
Sectorial Operational Programme Human Resources and Development 2007-2013.
108
References
ANHEIER, K. H. (2005) Nonprofit Organizations. Theory, management, policy, USA &
Canada, Routledge, ISBN: 203-50092
BECK, U. (2000) The Brave New World of Work, Cambridge UK and USA, Blackwell, ISBN:
7456-2397-2
CRESWELL, J. W. (2009) Research Design. Qualitative, Quantitative and Mixed Methods
Approaches, Los Angeles & London & New Delhi & Singapore, SAGE Publications, ISBN:
978-1-4129-6556-9
MEYER, S., STUTZER, A. (2008) ‘Is Volunteering Rewarding in Itself?’, Economica, vol. 75,
Issue 297, pp. 39-59. ISSN: 1468-0335
PERRY, L. J. (2004) Human Resources Management for Public and Nonprofit
Organizations, San Francisco, Jossey-Bass A Wiley Imprint, ISBN: 7879-7078-6
POWELL, W. R., STEINBERG, R. (2006) The Nonprofit Sector. A research handbook, New
Heaven & London, Yale University Press, ISBN-13: 978-0-300-10903
THE ROMANIAN LAW ON VOLUNTEERING – LAW 195/2001. (2012) [online]. The
Romanian National Network on Volunteer Centers [cit. 16.11. 2012] Available from
www.voluntariat.ro/legislatie_voluntariat.htm#1
109
Power and Politics in the Innovation Process
of the Integrated Rescue System in Slovakia
Staňová Ľudmila
Abstract
This paper deals with the implementation process of an innovative project aimed
at modernization of the Integrated Rescue System (IRS) in Slovakia. The project was
initiated in 2009 by the ministry of interior. The innovative side to it was not just
in the content of the project, which was at that time not yet complete, but especially
in the way it was supposed to be carried out – by a new administrative structure, a project
team headed by a plenipotentiary for IRS. The project team consisted of various different
actors with different interests with one actor eventually revolting against the project.
Our goal was to find possible explanations for his uncooperative behavior in context
of the power and politics theory by analyzing actor interests and looking at what deep
structure games were employed by the agent of innovation in order to prevent potential
opposition.
Keywords
Integrated Rescue System, innovation, power and politics, deep structure games
Introduction
The IRS is a “system of cooperation of the rescue services with the goal to save a human
life, health, property or the environment.” (§2, section 1 of the Act on IRS, 2002)
In other words, it is a system, in which all rescue services, ranging from the police
through to mountain rescuers, should cooperate by means of integrated practices
and work methods in order to secure a faster and more effective help in emergency
situations. The IRS is a system with many actors. Strategically, the IRS is managed
by the ministry of interior (MoI), more specifically, by one of its departments –
Department of crisis management and civil protection (DCMCP), which prepares
the conceptions for organization and development of the IRS, in close cooperation
with the ministry of health (MoH), which also holds some competences in the field.
The operational and tactical level are managed by the individual rescue services,
which may be divided into primary and secondary. Primary rescue services are the fire
brigade supervised by the Fire and Rescue Corps Presidium (MoI), ambulance service,
supervised on the operational level by the National Emergency Centre (NEC, comes
under MoH), on tactical level by healthcare providers (public and private providers,
supervised by MoH institutions), chemical laboratories for civil protection supervised
by the DCMCP (MoI), Mine rescue service, which is legally an NGO and Mountain rescue
service, which comes under the ministry of interior on the level of a department.
110
The Police Force of SR (MoI) is a “cooperating service of the IRS” (§9a of the Act on IRS,
2002), which suggests they are not, at least not formally, equal to the primary actors
in the IRS. Last but not least, the eight district offices, in charge of the Coordination
centers or, in other words, 112 call centers, are also an important actor in the IRS.
(§5 of the Act on IRS, 2002) Legally, they are the devolved central government.
Since its establishment in 2002, the functioning of the IRS on operational level has
proved several problems, underpinned by the European Commission, which took legal
action against Slovakia in this matter (Hmírová, 2010). The fragmentation of the actors
in IRS popped up not just as the obstacle in solving problems in IRS, but also
as the potential cause of those problems. The need to integrate the IRS actors became
the justification of the creation of a new plenipotentiary and his project team consisting
of the IRS actors, proposed to the government by the ministry of interior (Explanatory
report, 2010). The innovative element hence lies in the new approach to solving
problems in the IRS, which would otherwise have been solved by all actors individually
or in inter-organizational cooperation. The actors all came under a new single
organization – a project team, making them work together in designing the goals
and means to fulfill the vision of a more integrated IRS (Explanatory report, 2010).
One of the most dominant ideas how to achieve that was to establish a Central
management and monitoring centre (CMMC) as an independent organization
or under the MoI. The centre was meant to integrate the national operation centers
of the most frequently used rescue services – fire brigade, ambulance and police –
and representatives of other departments performing tasks in the field of crisis
management (Conception of the IRS for 2011-2015: 15). The centre was meant to gather
and evaluate data required for the operational management, which is important
for making strategic decisions based on comprehensive information about the activities
of all the services in the IRS. The CMMC was, in other words, a new structure that would
integrate the functions previously performed individually by the supervising national
operation centers of different rescue services (Hmírová, 2010). This, although being still
in the stage of ideas, could be considered as the actual innovation of the IRS as a product
and service.
Throughout the duration of the project, most team members were cooperative except
one – the NEC representatives. When it was clear that the future of the project depends
on who wins the government elections, the NEC refused to cooperate at all.
(Minutes of PT Negotiation No. 3, 25.2.2010). The successfulness of the project became
uncertain after more than a year of regular project team meetings, where the NEC was
present. This situation raised questions on what went wrong in the innovation process,
which should have resulted in a common acceptance of the product and service
innovation by the project team. The non-conformity of one of the NEC pointed
our attention to the importance of the role actors play in successful adoption
of the innovation and what may be the reasons behind refusal of innovation. We decided
111
to look to the organizational power and politics theory for more answers, as it deals
with organizational behavior of actors.
Frost and Egri (1991) use the organizational power and politics perspective to explain
the successfulness of the innovation process (p.229). They point to the importance
of recognizing interests and power distribution among actors in an organization,
because it is on their support that the successfulness of the innovation process depends
on. If the innovation interferes with their powers, the power struggle, or political
“games”, as they call them begin (Ibid: 235). When talking about power, we can refer
to one of the five sources of power proposed by French and Raven (2001): 1.Power
to reward, 2.Coercive power, 3.Legitimate power, 4.Referential power, 5.Expert power.
The distortion of existing power distribution poses a challenge for the agent
of innovation. He becomes an actor in these games as well, having to win conformity
of problematic actors to his innovation (Frost, Egri, 1991: 262). The agent of innovation
was, in our case, the General Director of the Legislative Department of the Ministry
of Interior, who is also the author of the Statute of Plenipotentiary for IRS
and the project team idea. When the team was established, she became the team leader
and the “right” hand of the plenipotentiary. (Hmirova, 2010)
The project team may be perceived as a political arena, where all actors defend
their interests and political games take place, either on the surface or undercover.
Surface politics (Frost, Egri, 1991: 237) are everyday power games in organizations
within known rules of the game. Deep structure politics, on the other hand, are less
visible because they create the rules of the game, which involves change of power (Ibid).
This means that the attitudes of the actors in this conflict are often radical
and very critical. The gist of the conflict is more complex than in surface politics,
which are usually about power struggles – the deep structure conflict is ideological,
rational-critical, often suppressed and it usually lasts for a longer period of time.
These games are more difficult to see and may be understood only by those who are
familiar with the historical, political or social context of the actor. Deep structure games
include: 1. Naturalization, 2. Neutralization, 3. Legitimization and 4. Socialization.
(Ibid: 241)
We presume that the NEC for its long tradition and specialized environment is a deeply
embedded structure, which means that deep structure political games would be
required in order to make this actor comply with the innovation if his interests were not
automatically in compliance with the idea of the project.
Material and Methods
Our research questions are the following: 1. Were the interests of the NEC in compliance
with the project’s vision? 2. If not, which deep structure games were employed
112
by the agent of innovation to secure NEC compliance with the project? 3. What are
the possible explanations of non-compliance, despite the employment of these games?
Our first step was to define interests of the NEC. Inspired by French and Raven (2001),
we listed four major competences of actors in IRS: 1.organizational, 2.HR, 3.methodic,
4.economical. Our assumption was that if the project interferes with all four, it threatens
all powers of the actor, who will therefore not comply with the project under
any circumstances. In this phase we used analysis of legislative documents as the main
method of our research.
The next step was to look at different activities of the project team, as well
as of its leader, the agent of innovation. We tried to identify different types of deep
structure games in these activities and look at how the NEC reacted. The source of data
for this phase was particularly the personal experience of the author of this research,
as she was one of the project team members, though for a party, that had
no competences in the IRS (the author was from the department of communication
of the ministry and her duty was to communicate the goals and activities of the team
to the media and public). Other sources of data include the interview with the team
leader and official minutes of negotiations.
The major limit of this research is that the author works with data gained in majority
from her own experience, although this data is supported by internal documents.
On the other hand, as was mentioned above, studying deep structures requires insider
knowledge of the historical, social and political context and familiarity
with the interpersonal relationships in the organization. This is hardly imaginable
without being “one of the group” for a longer period of time and that way gaining trust
of the other team members to behave in their natural way.
Results and Discussion
Our research has shown that the CMMC, if set up as planned, would take
on organizational, economical, HR and partially methodical competences in the area
of operational management in case of three actors – the Police Force, Fire and Rescue
Corps and the NEC. The difference between these three is that the main scope of activity
of the NEC is in the area of operational management. If the project was successful,
operational management would go in the hands of the CMMC, and that would question
the justification and existence of NEC. In other words, why have the NEC if the CMMC
can perform its functions? This gave the NEC a major incentive to boycott the project.
Because the project was supported by the government personified in a plenipotentiary,
the NEC could not openly refuse to cooperate, but could latently obstruct decision-
making.
That would explain why the NEC refused all partial innovations, which were meant
to gradually lead to once CMMC, such as the common compatible information-
113
communication infrastructure that the NEC rejected for “not suiting its specialist needs”
(Minutes of PT Negotiation No. 3, 25.2.2010). The NEC procured its own infrastructure
and adjusting to an infrastructure chosen by someone else would take away
its economic competences in the area. Another example are PR activities aimed
at promoting the single emergency number 112, although here the NEC used
a legitimate argument of “why promote a number that does not work reliably”
and therefore preferred to promote the national number for ambulance service 155.
The agent of the innovation was, in her own words, aware of this situation and therefore
employed different ways of incorporating the NEC into the project. In her activities we
can see several signs of deep structure games. (Hmirova, 2010)
The agent of innovation started off her games with the so called “Samizdat meetings”
which began before the formal decision of the government was made about the project.
These meetings were used to discuss current problems of IRS and brainstorm ideas
on possible solutions. They were attended only by selected employees of the ministry,
whom the agent could trust. The agent applied the game of legitimization by leading
participants to realizing that the situation in the IRS is serious and needs solution.
In legitimization, “higher utility values such as dedication, loyalty, country, religion, etc.
for authorization or nourishment elite interests in the system.” (Frost and Egri, 2001:
242) That “higher value” was in this case the human life, which could be saved more
effectively if the IRS was modernized. This idea was used throughout the project
to mobilize its members and make them more dedicated to serve project goals.
This “tool” had greater effect on those that did not experience life and death situations
in practice – bureaucrats, who perhaps for the first time had the opportunity
to influence something as important as saving the human life. Practitioners, such
as the NEC members, many of whom were former doctors or nurses that had personal
experience with emergency situations were more immune to the life and death rhetoric.
Unlike the bureaucrats, they could analyze the practical impacts of concrete solutions
for themselves and had their own opinions on how the IRS could work better.
Legitimization as a deep structure game had, therefore, no significant impact on the NEC.
Gaining the government approval for the project carries the signs of naturalization,
where “existing forms and interest group privileges are considered inviolable
and thus are not subject to discussion, debate and change” (Frost and Egri, 2001: 242).
This helped the project to be perceived as a “natural order”, i.e. something that cannot
be questioned, at least not openly, because the government ordered it. The legitimacy
of the project was proved indisputable by the full attendance at the first negotiation
of the larger project team, where the highest officials turned up taking it as a duty
to do so.
Naturalization had impact on the NEC in the sense that it did not reject cooperation,
but it did refuse to take part in some activities such as were the above mentioned PR
activities. Throughout the operation of the project we can notice a decline
114
in cooperation, which escalated by a meeting with the NEC director, who openly
“expressed the determination of some NEC representatives to return the decrees
appointing them project team members back to the Ministry of Interior.” (Minutes of PT
Negotiation No. 3, 25.2.2010: 2). This signaled a rebellion against the "natural order."
Because this happened close to the end of term of the government in office, the conflict
was not really resolved, but rather settled down.
Neutralization as another type of deep structure game assumes neutral agents
innovation. Already “during the handing out of decrees designating the IRS
representatives as members of the project team, the NEC director openly doubted
the intentions to complete the tasks with the current IRS officials in office, as they are
very much responsible for the negative state of the IRS, but were appointed regardless –
this way the director expressed distrust towards them.” (Minutes of PT Negotiation
No. 3, 25.2.2010: 2). Neutralization could not have been successful with such a personal
bias among team members, which included the former NEC director who as an employee
of the ministry of interior closely cooperated with the agent of innovation
on the strategic vision of the project.
In the advanced phase of the project trainings became more important –
in the professional as well as social term. As it usually is with trainings, group lunches
and dinners, as well as the informal evening program are all a very strong tool
for building a sense of “one team”. Informal discussions on IRS often lead to new
realizations which were utilized the next day in negotiations. This is what Frost and Egri
(1991) call socialization. It serves the agents of innovation to bring their followers
to the correct understanding of their product (p.242). Socialization was applied
by the agent of innovation on all actors, though the NEC was left out of a couple
of activities – mainly for the ministry of interior not being able or competent to finance
their participation.
Conclusion
In our research we have found that the project of modernization of the IRS largely
interfered with the competences of the NEC – so much that if successfully completed,
the NEC’s existence would be threatened as its functions would be taken up
by a different organization. It had therefore all the incentives to reject an innovation.
The NEC is a deep structure, whose opposition could have been handled by deep
structure games – at least according to the theory. The agent of innovation applied
all of them to NEC, although socialization a little less, in comparison with other actors.
Neither of the games, however, had the effect that it should. Legitimacy did not work
because it operated with a “life and death” message which was very familiar to the NEC.
From their point of view of a legitimate and irreplaceable organization, saving a human
life can be performed more effectively if the NEC remained as it were – a sole
organization – and it was not willing to go further in this discussion. Neutralization did
115
not work because the project involved actors who were for not neutral for the NEC –
such as the former NEC director. Naturalization also proved inefficient in the final stages
of the project, as the NEC questioned the government project and wanted to return
their project team decrees.
Our findings point to the fact that if the fate of an organization is involved, an innovation
is likely not to be accepted, even if deep structure games are involved. The actor at stake
will revolt – if not openly, then in hidden ways and that way reject any smaller parts
of innovation having in mind that they could, in future, threaten its position.
Coerciveness is the only solution in cases like these. Any attempts stimulating the actors
own realization of the necessity to innovate are bound not to work.
References
DOSI, G. (1988) Nature of the Innovative Process. In Technical Change and Economic
Theory. DOSI, G. (ed.), New York: Pinter Publishers, kap. 10, s. 221 – 238
FRENCH, J. R. P, RAVEN, B. (2001) “The Bases of Social Power”, In The Negotiation
Sourcebook. ASHERMAN, I. G. a S. V. (ed.) USA: HRD Press, pp. 61 – 74.
FROST, P. J. EGRI, C. P. (1991) “The political process of innovation.” In Organizational
Behavior, Vol. 13, pp. 229 – 295.
GALBRAITH, J. R. (1982) Designing the Innovating Organization. In Organizational
Dynamics. Vol. 11 (Winter), s. 5 – 25.
MINTROM, M. (1997) Policy Entrepreneurs & the Diffusion of Innovation. In American
Journal of Political Science, Vol. 41, No. 3, s. 738 – 770.
Act No. 129/2002 on Integrated Rescue System.
Minutes of Project Team Negotiation No. 3. 25.2.2010. Č.p. KM-251-3/2010. Bratislava,
5.3.2010.
Explanatory report on the Statute of the Plenipotentiary of the Slovak Government for IRS.
[online]. 26. 11. 2012 http://www.rokovania.sk/File.aspx/ViewDocumentHtml/Mater-
Dokum-40845?prefixFile=m
Conception of the IRS for 2011-2015. [online]. 26. 11. 2012. http://www.emergency-
slovakia.sk/buxus/docs/Navrh_koncepcie_IZS_2011-2015_uznes_a_priloh.pdf
HMÍROVÁ, L. (2010) Ministry of Interior of the Slovak Republic, Pribinova 2, 812 72
Bratislava. Interview in Bratislava 25.3.2010 (on project of modernization of the IRS).
116
Environmental Protection Expenditure
of the Czech Municipalities
Struk Michal
Abstract
This paper presents the development of the environmental protection expenditure (EPE)
of 205 Czech municipalities with extended powers plus the capital city Prague during
the period of 2001-2011. Municipal EPE is divided to the categories based on the CEPA
classification. Municipal EPE is analyzed as an aggregated sum of current and capital
expenditure. Outcomes are compared with the development of the total municipal
expenditure. Through this the paper verifies whether the municipal EPE acts as a luxury
good, which is suggested by the environmental Kuznets curve concept. Results prove
this only partially. EPE acts as a luxury good in most cases when the total municipal
expenditure grows too. But in the cases when the total municipal expenditure decreases,
the EPE still grows, which violates the luxury good concept. Nevertheless, this behavior
of EPE shows that it has a high priority among the municipal expenditure.
Keywords
EPE, environmental protection, municipal expenditure, CEPA, Czech Republic
Introduction
The environmental protection expenditure (EPE) represents all kinds of expenditure
spend with the primary aim to increase the quality of the environment, restore
the previous state, reduce the negative effects of the production processes on the nature,
or in general “protect the nature from the human action”. As the society becomes richer,
it naturally tends to consume (and subsequently require) more of what it considers
a luxury good. The quality of the environment is one of such luxury goods,
which was suggested by Ruttan (1971) and empirically verified by, for example,
Antle and Heidebrink (1995). The relation between the changes in the income
and the quality of the environment was analyzed by Grossman and Krueger (1991).
They extended the original idea of Simon Kuznets (1955) about the inverted U-shaped
curve describing the relation between the income inequality and the growth
of population income. Grossman and Krueger discovered same pattern
with the environmental quality. According to them, until a certain level of economic
development the increasing income per capita results in the deterioration
of the environment, however, after reaching that certain level, the further economic
development is accompanied by a subsequent phase of environment improvement.
The threshold point in their study was identified as the income per capita level of $8.000
(year 1985 dollars). This observation was interpreted as an increased demand (followed
117
by the supply) for the environmental protection at the higher levels of income.
The relation between the increasing income and the deterioration of the environment is,
based on the similarities with the original curve suggested by Kuznets, known
as an environmental Kuznets curve (EKC). The empirical verifications of this concept
have undergone a boom in 1990s, and some papers on this topic occasionally arise
up to today. A good overview of the important studies about EKC offers for example
Yandle et al. (2004). On the other hand, the EKC concept has also been strongly
criticized, for example by Stern (2004) or Galeotti and Lanza (2005), who claim that,
instead of inverted U-shape, the curve has often a problematic N-shape
and that the evidence supporting EKC is at best mixed.
In this paper I do not analyze the changes in the environmental quality. Instead
of that I focus on the development of municipal environmental protection expenditure.
In my opinion, the municipal expenditure represents the needs of the population.
These needs are expressed in the election process as the people’s choice
of those politicians, who claim to fulfill their desired specific needs. Although there
are certainly many objections whether the politicians follow their election programs
once they have been elected, one thing they have in common is that they usually want
to be reelected again. And in order to do that, they need to persuade the electorate
that they are fulfilling electorate’s needs. If the environmental quality becomes such
need (which as the luxury good with the increasing income should), the municipal
spending focuses more on EPE. Unlike in many other areas of municipal spending, EPE
represents rather small share of the total municipal expenditure, and therefore even
a notable rise in the EPE does not necessarily result in a significant pressure
on the municipal budget, while the effects of such spending (when compared
to the situation before the spending) would be most likely easily noticeable
by the public. In this logic, if the population considers the environmental quality
as one of their important needs, the municipality responses with the faster growth
of EPE compared to the other areas of municipal expenditure.
There are two aims of this paper. First one is to answer the question
about the development of EPE within the selected representative group of Czech
municipalities during the period of 2001-11 with presenting the differences between
various environmental protection categories as specified by the CEPA classification.
The second one is to answer the question whether do municipal EPE of the analyzed
municipalities act as a luxury good? As the Czech Republic is generally considered
to a developed economy, this should hold. The first aim is achieved by collecting the data
from relevant sources and their interpretation, while the second is achieved
by the application of the appropriate mathematical-statistical tools to these collected
data. The benefits of this paper are two-fold: the clear presentation of the information
about municipal EPE development in the Czech Republic together with the additional
empirical evidence of EKC concept.
118
Material and Methods
The analyzed sample consists of 205 Czech municipalities with extended powers (ORPs)
plus the capital city of Prague. Although Prague is not ORP itself, as it constitutes
a whole region, I have decided to include it in the analysis, as it (as by far the largest
municipality in the Czech Republic) represents a significant portion of both Czech
population and Czech EPE. Analyzed municipalities cover all Czech regions, although
the frequency of municipalities from particular region span from 7 (Karlovy Vary
Region) to 26 (Central Bohemian Region). This difference generally corresponds
to the different population size among the regions. Analyzed sample of municipalities
currently represents almost 57% of total population of the Czech Republic (calculated
from the data of the Czech Statistical Office – Population, 2012). Therefore,
the conclusions claimed in the further analysis are relevant for at least one half
of the Czech Republic.
The analyzed data come from two public databases, ARIS (2012) and ÚFIS (2012).
Both of them provide the information about expenditures of the Czech municipalities.
ARIS provides information from the period 2001-2009, while ÚFIS provides
the information from the latter years of 2010 and 2011. The two databases are
almost identical from user’s perspective. In fact ÚFIS is officially the successor of ARIS.
The data on the EPE are collected according to the international CEPA classification
(CEPA, 2012). It consists of 9 areas of environmental protection. Expenditures
from these categories are of two types: the current and the capital. Current expenditure
can be simply defined as the expenditure used for provision of regularly, relatively
often repeating tasks (for example regular solid waste collection). Capital expenditure
represents rather irregular expenditure with usually long-lasting effect (for example
building an incinerator). In the following analysis due to the lack of space I present
only the aggregated sum of current and capital expenditures.
Table 1: CEPA classification of EPE categories and related identification in the Czech
municipal budget structure presented in ARIS/ÚFIS
CEPA classification category Relevant ARIS/ÚFIS paragraphs
Protection of ambient air and climate §2115, §371*
Waste water management §2321, §2322, §2329, §2333
Waste management §2122, §372*
Protection of soil and ground water §2342, §372*
Noise and vibration abatement §375*
Protection of biodiversity and landscape §1037, §374*
Protection against radiation §377*
Research and development §378*
Other environmental protection activities §376*, §379*
Source: CEPA (2012), Soukopová et al. (2011, p. 41)
119
In the financial terms, CEPA classification categories do not create a homogenous set.
There can be identified 3 most important categories, which in the period of 2001-2011
accounted on average for 98.1% of the total municipal EPE within the sample.
These 3 financially most important categories are Waste water management (28.4%),
Waste management (34.3%), and Protection of biodiversity and landscape (35.4%).
Figure 1 shows in this case 3 most important categories of EPE. Although it presents
the shares of aggregated sums of CEPA categories from the period of 2001-2011 instead
of the average shares, the figures are almost exactly the same. The distribution
of EPE between CEPA categories was thus stable throughout the examined period.
Figure 1: Aggregated sums and relative shares of the CEPA classification EPE on the total
EPE of 205 Czech ORPs plus Prague, 2001-2011
Source: Author based on the data from ARIS and ÚFIS
Table 2 presents the data about municipal EPE of the Czech ORPs plus Prague
during the period of 2001-2011 divided to the main CEPA categories.
Table 2: Development of the aggregated nominal current and capital municipal EPE
according to the CEPA classification, 205 Czech ORPs plus Prague, 2001-2011, mil. CZK
Waste water
management
Waste
management
Protection of
biodiversity
and landscape
Remaining
CEPA
categories
Total EPE
Total
municipal
expenditure
2001 2 624.58 2 799.51 3 025.02 334.91 8 784.02 457 973.35
2002 2 209.08 3 527.74 3 398.83 215.35 9 350.99 479 259.94
2003 3 771.87 3 688.34 3 797.52 156.59 11 414.32 397 068.56
2004 3 807.19 4 049.95 4 424.44 261.14 12 542.73 380 758.24
2005 3 773.42 4 458.76 4 780.14 230.54 13 242.86 349 363.39
2006 3 138.02 4 626.34 5 109.12 231.13 13 104.61 380 049.75
2007 4 158.93 4 766.93 4 788.90 174.36 13 889.13 395 438.77
2008 4 356.02 5 114.58 4 704.87 293.25 14 468.72 421 367.19
Waste water
management
40 778 mil. CZK
29%
Waste
management
49 176 mil. CZK
34%
Protection of
biodiversity and
landscape
50 786 mil. CZK
35%
Remaining CEPA
categories
2 431 mil. CZK
2%
120
Waste water
management
Waste
management
Protection of
biodiversity
and landscape
Remaining
CEPA
categories
Total EPE
Total
municipal
expenditure
2009 4 402.83 5 300.90 6 571.35 277.50 16 552.59 453 339.59
2010 4 124.74 5 429.02 4 836.45 208.18 14 598.39 407 734.61
2011 4 411.11 5 414.12 5 349.28 227.62 15 402.13 377 181.55
Source: Author based on the data from ARIS and ÚFIS
Expenditure amount from each year (beginning with 2002) was divided
by the expenditure level of the previous and the first year in order to calculate
the annual changes of the EPE. This step creates a clear measure of comparison
between the developments of various time series. Figures in all tables have been
inflation-adjusted according to the annual rates of the Czech Statistical Office (Inflation
rate, 2012).
Results and Discussion
Table 3 presents the annual changes of municipal EPE in 2001-2011.
Table 3: Relative annual changes of the aggregated municipal EPE according to the CEPA
classification, 205 Czech ORPs plus Prague, 2001-2011
Waste water
management
Waste
management
Protection of
biodiversity
and landscape
Remaining
CEPA
categories
Total EPE
Total
municipal
expenditure
2001 100% 100% 100% 100% 100% 100%
2002 83% 124% 110% 63% 105% 103%
2003 171% 104% 112% 73% 122% 83%
2004 98% 107% 113% 162% 107% 93%
2005 97% 108% 106% 87% 104% 90%
2006 81% 101% 104% 98% 97% 106%
2007 129% 100% 91% 73% 103% 101%
2008 99% 101% 92% 158% 98% 100%
2009 100% 103% 138% 94% 113% 107%
2010 92% 101% 73% 74% 87% 89%
2011 105% 98% 109% 107% 104% 91%
Source: Author based on the data from ARIS and ÚFIS
Figures show that in the majority of cases EPEs grew at faster pace than the total
municipal expenditure, and in several cases, when the municipal expenditure decreased,
EPE decreased even faster. Such results support the idea of EPE acting as a luxury good.
However, Table 3 contains also several results where the total municipal expenditure
decreased while EPE continued to grow. This observation can be interpreted in a sense
that the EPE is perceived by local authorities as one of the higher priorities
of the municipal budget, and even when the total municipal expenditure decreases,
the sum of money heading to the environmental protection area increases.
121
Table 4 presents the sum of the annual changes of the municipal EPE in 2001-2011.
Table 4: Relative annual changes of the aggregated municipal EPE according to the CEPA
classification from the base at 2001, 205 Czech ORPs plus Prague, 2001-2011
Waste water
management
Waste
management
Protection of
biodiversity
and landscape
Remaining
CEPA
categories
Total EPE
Total
municipal
expenditure
2001 100% 100% 100% 100% 100% 100%
2002 83% 124% 110% 63% 105% 103%
2003 141% 129% 123% 46% 128% 85%
2004 138% 138% 140% 74% 136% 79%
2005 135% 149% 148% 64% 141% 71%
2006 109% 151% 154% 63% 136% 76%
2007 141% 151% 141% 46% 141% 77%
2008 139% 153% 130% 73% 138% 77%
2009 139% 157% 180% 69% 156% 82%
2010 128% 158% 130% 51% 136% 73%
2011 135% 155% 142% 54% 140% 66%
Source: Author based on the data from ARIS and ÚFIS
Figures from Table 4 show, that during the period of 2001-2011 the sum of municipal
finances spent in the environmental protection area increased notably,
except for the Remaining CEPA categories of EPE. Nevertheless, these categories account
for a very small (<2%) fraction of total municipal EPE and therefore are not
that important. On the other hand, total municipal expenditure decreased by one third.
This again proves the important role of EPE among municipal expenditure, as the EPE
increased even though the sum of the available municipal finances decreased.
Another way of presenting absolute figures is to calculate slope lines. This provides
the information about the growth pace. I have calculated the slopes of the annual
changes of EPE using standard OLS method for a simple linear regression line.
Table 5: Slopes of the development of aggregated EPE according to the CEPA classification,
205 Czech ORPs plus Prague, 2001-2011
Waste water
management
Waste
management
Protection of
biodiversity
and landscape
Remaining
CEPA
categories
Total EPE
Total
municipal
expenditure
Slope 0.032 0.048 0.039 -0.021 0.038 -0.027
r2 0.29 0.77 0.36 0.20 0.58 0.63
Source: Author based on the data from ARIS and ÚFIS
Table 5 shows the calculated slopes of the development of selected CEPA expenditure,
their sum and the development of total municipal expenditure. High values of r2 for both
aggregated values mean that the calculated slopes describe the development
of expenditure relatively well (this holds even more for the Waste
management expenditure category). To better illustrate the difference
122
between the developments of both aggregated expenditure, I include a graph
of the figures.
Figure 2: The development of the total municipal EPE and the total municipal
expenditure, year 2001 = 100%, 205 Czech ORPs plus Prague, 2001-2011
Source: Author based on the data from ARIS and ÚFIS
Figure 2 provides clear evidence of the increasing gap. This finding that the municipal
EPE keeps growing even though the sum of municipal expenditure decrease is
an interesting one, and further research could provide sufficient explanation
why is this so.
By presenting all these figures I have provided sufficient evidence for illustrating
the development trends of EPE in the Czech Republic. Besides that, a potential
for investigating the reasons behind the EPE growth while the aggregated municipal
expenditure decrease has risen.
When considering the limitations of this paper, first of all there exists a problem
with the data validity. Some municipalities in ARIS and ÚFIS report very questionable
data, which might be due to the lack of skilled personnel. But within this sample,
there are generally only larger municipalities that usually do not have such problems
and report correct data. The other limitation is the fact that I have aggregated current
and capital expenditure. However, this was due to the lack of space and will be dealt
with in the next more extensive research. This further research would also contain
comparison of the EPE and expenditure development between the regions.
Conclusions
In this paper I have presented and examined the development of municipal EPE
of the sample of 205 Czech municipalities with extended powers (ORPs) plus Prague
during the period of 2001-2011. I have found out that the EPE of analyzed municipalities
Municipal EPE - relative changes Municipal expenditure - relative changes
Municipal EPE - slope Municipal expenditure - slope
123
grew almost in all cases notably faster than the total municipal expenditure,
which supports the EKC concept for the developed countries like the Czech Republic.
However, on the other hand this EPE grew even when the total municipal expenditure
decreased, what contradicts the assumption of EPE as a luxury good and requires
further research for a sufficient explanation. Presented data needs to be further
analyzed on the less aggregated level in order to provide a more precise explanation
of their development.
Acknowledgements
This article has been elaborated as one of the outcomes of a specific research project
MUNI/A/0786/2012 “Quality evaluation of public policies in the context of restrictive
constraints of public finances”.
References
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125
Self-financing of Non-government Organizations
versus General Benefit of Their Goals
Svidroňová Mária, Vaceková Gabriela
Abstract
The presented paper deals with the self-financing of non-government organizations
and compares the current state and potential of self-financing in Slovakia and Austria.
We focus on exploring the self-financing activities of NGOs in the context of maintaining
a generally beneficial purpose for which they were based. We draw on the comparable
findings of primary research conducted in Slovakia and Austria, showing that selffinancing
must be understood in a broader context than the "business" of non-government
organizations and that it can be in compliance with the general benefit as the primary
purpose of organizations founded on a non-profit basis.
Keywords
non-government organizations, non-profit organizations, self-financing, general benefit
Introduction
The scope of non-government organizations (NGOs) is so diverse that it is impossible
to find a single term to define these organizations. Therefore many authors
(Salamon and Anheier, 1999; Hyánek, 2011; Marček, 2004; Toepler, 2003, etc.1)
in a number of publications prefer a broader description of the characteristics of nonprofit
organizations. The structural-operational definition by Anheier and Salamon
(1999) can be used. According to this definition an NGO should meet five characteristics:
institutionalization, independence, non-distribution constraint, self-government,
voluntary participation.
The concepts of non-profit and non-government organizations have many names
and likewise there are also a number of names for self-financing (Etchart, Davis,
2001, etc.2): gainful occupation, economic activity, enterprise of NGOs, non-profit
business, income from NGO´s own activities, community business.
NGOs have not yet reached such a level of economic and managerial professionalism
to be able to exist solely on sources from self-financing activities. It is not their goal –
it would be in contradiction to several principles of their financing (multi-sourcing, non-
1 There are other authors which works and publications we studied, for further references see also:
Bútora, 2011, Frič, Goulli, 2001, Haken, 2005, Hansmann, 1996; Kuvíková, 2004; Ondrušek, 1998; Pestoff,
2006; Petijová, Woleková, 2006; Rektořík, 2001, Rose-Ackerman, 1996; Weisbrod, 1988
2 Atkinson, 2003; Etchart, Davis, Messing, 2001; Fukas, Guštafík, 2005; Ondrušek et al., 1999
126
distribution constraint). As used by several foreign and domestic authors (Etchart,
Davis, 2011; Glaeser, Shleifer, 2001, Hansmann, 1996; Kuvíková, 2004; Majduchová,
2004; Murgaš, 2001, Ondrušek, 1999; Šebo, 2002) the income cannot be used to enrich
the owners, managers or members. According to the above named authors the selffinancing
activities include: membership fees, sale of services and products, the use
of intangible and tangible assets, and the use of investment appreciation.
The traditional main financial goal of a company is to maximize its profit. As NGOs
are not founded primarily for the purpose of making a profit they pursue
as their primary goal the achievement of general benefit. This fundamentally changes
their financial policy which usually gives priority to the pursuit of liquidity
(Littich 2007).
It is necessary for the basic task of the financing of NGOs in order to fulfill their mission
to continuously provide liquidity. What financial sources and in what amounts should
be used to meet this task vary and it is upon NGOs’ strategic management decisions.
One of the curiosities of NGOs is that they usually have a wider range of financing
options compared to profit-oriented companies. Appendix 1 provides a structured
overview of the most important sources of funding (Schober et al., 2010).
In the paper we want to prove that self-financing is a suitable method of fundraising
for NGOs with respect to the benefits and risks that self-financing entails. We explore
whether, and to what extent, self-financing has an effect on the general benefit
of the goals of NGOs.
According to available data such a paper that deals with the possibilities of achieving
generally beneficial goals of NGOs through the use of self-financing activities has not yet
been published. This presented paper provides new insight into the studied problem
while generating sufficient theoretical and methodological basis for further scientific
study and research work in this field.
Material and Methods
The goal of the paper, on the basis of comparable findings of primary research of NGOs
conducted in Slovakia and Austria, as well as the best practices of selected NGOs
in Slovakia, is to prove that self-financing may be in compliance with the general benefit
and purpose of NGOs.
Primary data was obtained by the sociological method of a structured questionnaire.
Source data for Austria are the findings of the project "Different sources of funding
of non-profit organizations" (Schober et al., 2010) conducted by the Research Centre
NPO-Kompetenzzentrum WU Wien. For Slovakia the data are the findings of primary
research conducted in the dissertation "Self-financing strategy and sustainability of nonprofit
organization" that was part of the project “VEGA 1/1001/09 2009-2010:
The status of the non-profit, non-governmental sector in building a framework
127
for the provision of public services (European Perspectives)” solved by a team
of authors from the Faculty of Economics, Matej Bel University in Banska Bystrica.
This presented paper will be part of the findings of the Masaryk University project
„CZ.1.07/2.3.00/30.0009 Employment of Newly Graduated Doctors of Science
for Scientific Excellence“.
In order to achieve comparable findings the same methodology in both countries was
chosen (Benčo-Vaceková, 2012):
• Selection of relevant NGOs in the database or on the Internet.
• Establishing personal contact with selected NGOs at management level.
• Sending an e-mail with a link to an online-questionnaire to contacts that have
been identified in the previous step.
• Sending a reminder after two weeks from the start of questioning.
Based on the representative sample of NGOs in Slovakia (SVK) and Austria (AT)
and the best practices of 13 Slovak NGOs we can focus on the self-financing of NGOs
in the context of sustaining the general benefit of their goals.
Results and Discussion
The output of the paper is a clear definition of the funding sources of NGOs with focus
on the self-financing. We mainly focus on the so-called “quasi-equity” which is
subdivided into non-profit and commercial incomes. We point out the difference
between self-financing and commercial/business activity of NGOs, and on the basis
of relevant and comparable outcome of primary research in SVK and AT we prove
that self-financing is not only a business activity in the common market conception.
We also want to point out that self-financing may not be inconsistent with the general
benefit and purpose of NGOs which leads to fulfilling the goal of this paper.
Sources of funding NGOs
The main division of sources follows the microeconomic division on equity
and borrowed capital. The concept of equity is problematic in many NGOs as they do not
have any equity in the business or economic meaning. Generally, there is a lack
of investors who would provide capital in anticipation of earnings. Classic features
of equity are often undertaken by donors, providers of subsidies or members
of the organization. To take into account this aspect we use the term "quasi-equity"
(Schober et al., 2010).
The "quasi-equity" can be divided into typical non-profit incomes and standard
commercial incomes. Under typical non-profit incomes (to the left of the image
in Appendix 1) we understand incomes primarily related to the main core work
and mission of an NGO; these incomes may come from a variety of funders.
128
Commercial incomes are, on the contrary, incomes from activities non-related
to the mission of an NGO. In particular it is income from investment activity or yield
of capital (e.g. income from renting its assets). Commercial income also applies
to restructuring of assets and include sale of assets and the associated effects
of financing, such as the sale of buildings and real estate. Other commercial income is
a residual category that includes all the commercial activities carried out by NGOs
that are not related to their mission and at the same time cannot be assigned
to any of the other commercial income categories.
The borrowed capital can be divided into common bank loans and other subsidized
borrowed capital, i.e. loans that are provided by government authorities and designed
specifically for NGOs. Government supports NGOs and thus provides this capital
also by assumption of guarantees or remission of debts and taxes.
The following charts represent the main sources used in of NGO funding, the outcome is
from comparable researches in Austria (266 respondents) and in the Slovak Republic
(136 respondents).
Figure 1: Sources of funding of Slovak NGOs
Source: Authors, 2011.
Other sources of funding were not further specified, therefore we cannot assign
this point to non-profit or commercial income. The structure of funding is dominated
by private and individual sources, also of significance is self-financing and public
funding. Foreign sources are represented by foreign foundations that support Slovak
0%
20%
40%
60%
80%
100%
State,statesubsidies,
municipalbudgets
State/publiccontracts
Individualdonors/companies
Grants(privatefoundations)
Assignationsof2%oftax
income
Membershipsfees
Saleofownproducts
Saleofownservices
Foreignsources
Tangibleassetsrental
Intangibleassetsrental
Investmentappreciation
Othersources
42%
4%
60%
45%
92%
62%
17%
41%
13% 11%
4% 8% 8%
Quasi-equity: non-profit income
Quasi-equity:
commercial income
129
NGOs and as such they can be assigned to non-profit income. None of the respondents
stated bank loans or foreign capital which supports the fact that in Slovakia loans
for NGOs have yet not been established as a common source.
The funding sources in the Austrian NGOs correspond to the presumed model, i.e. public
finance is clearly the most used source. Other frequently used sources are fees
for services and products, donations from individuals, sponsorship and membership
fees (Figure 2):
Figure 2: Sources of funding of Austrian NGOs
Source: Schoeber et al, 2010.
In both countries non-profit income as a part of quasi equity prevails. For the purpose
of achieving the goal of the paper the quasi-equity is essential for us. As the charts show,
the non-profit income can be generated from self-financing activities that are not
necessarily of a commercial character. We will try to point out the differences resulting
from the breakdown of incomes for non-profit and commercial, especially in the context
of maintaining a generally beneficial purpose of NGOs in the implementation of selffinancing
activities.
Self-financing of NGOs
As already mentioned, self-financing of NGOs is not a clearly defined term. In a broader
meaning it is defined as any diversification of the funding sources of NGOs.
From the narrower point of view self-financing can be understood as a business
0%
20%
40%
60%
80%
100%
Stategrantandsubsidies
EUgrantandsubsidies
Individualdonors
Companies
Grants(privatefoundations)
Grants(companies)
Sponsorship
Membershipsfees
Saleofownproductsandservices
Assetsrental
Investmentappreciation
Clearingofreserves
Bankloans
Pre-financingagreements
91%
41%
56%
36%
11%
23%
53% 51%
63%
19% 21% 22% 22%
6%
Quasi-equity; non-profit income
Quasi-equity;
commercial
income
Borrowed capital
130
or any other economic activities of the NGOs that generate their own income, i.e. selffinancing
as a method of obtaining internal sources (Kuvíková-Svidroňová, 2010).
Self-financing activities bring financial income and potential profit but the principle
of non-distribution constraint still applies and compared to any commercial company
it is given in advance how NGOs use this profit. Profitable activities of NGOs (e.g. revenue
from sale or rent of assets, revenue from advertising) are subject to income tax.
When taxing this type of income it is necessary to take into consideration:
1. Whether the activity is conducted within the mission of the organization, such activity
is in accordance to the statutes or the activity fills the purpose for which an NGO was
established. This is called core work and it cannot be considered as a business activity.
It is not important whether incomes are higher than expenses while conducting core
work activities. The goal of NGOs is not gaining a profit but to promote and support
the mission and purpose to which they were founded. Even if NGOs gain some profit
by performing core work activities in the terms of fulfilling the general benefit, it cannot
be called a profit as defined by the law on income tax and is not subject to taxation.
2. Whether the activity is really a “business” - we draw on the definition of business
which primary European Union law indirectly describes as every sort of economic
activity regardless of its legal form and method of financing. In defining business
and functional definition of "economic activity" in the particular case, three components
are taken into the consideration: the provision of goods and/or services;
taking economic and financial risk of carrying out the economic activities;
economic activity must have the potential to generate income from economic activity.
NGOs provide services of special character (public services and/or general benefit
services). The main feature of these services is they do not bring profit
(therefore companies are not interested in providing them and they are provided
by the state or NGOs).
If the activity is not a core work activity or it complies with the above-stated definition
of business, then we are talking about another form of self-financing which Majduchová
(2004) refers to as a commercial activity. To distinct: the term self-financing activities is
considered to be those that are associated with the entry of NGOs on the market
and that require thinking of the business sector, but these are not business/economic
activities in the true sense of the word (they do not meet the above two conditions).
It follows that in order to maintain and fulfill the generally beneficial purpose it is
strategically advantageous for NGOs to focus on self-financing activities in accordance
with the core work of NGOs and their missions. Therefore, we can say
that from the narrower point of view, self-financing is raising funds from sources which
we defined in the "quasi-equity" as non-profit income. We explored the range of use
of self-financing by NGOs in two research projects conducted in SVK and AT. Concerning
the Slovak part the findings are extended by the best practices of selected Slovak NGOs.
131
Recommendations based on the results of primary research in SVK and AT
The most used source of funding in Austrian NGOs is public sources, used by 91%
of respondents participating in the research (Schober et al., 2010). This involves longterm
contractual relationships which greatly influence the acquisition of new sources
of funding. The question how much effort NGOs have to put in to keep these sources
whilst obtaining new financial sources and fulfilling their missions comes to the fore.
The need to fulfill the mission and achieve the generally beneficial goals of NGOs must
be a priority when doing any activity bringing money in for running NGOs.
A partial aspect of this issue also includes a fixed purpose of sources
and the accountability of the source provider. Compared with other sources of funding it
can be stated that the highest effort must be made by NGOs when applying for EU funds,
state funds and contributions and donations from companies and individuals.
This explains the research results which showed a clear desire of NGOs to gain a larger
part of the funds through their own activities (Schober et al., 2010). It also confirms
the importance of self-financing as it can offer the highest level of independence
and freedom in the decision-making process.
We can support the importance and benefits of self-financing with the findings
of the part of the Austrian research on funding of NGOs that focused on the freedom
of use of financial sources. This shows that the highest purpose-fixed sources provide
the lowest freedom to decide about the use of these sources in fulfilling the mission
(Schober et al., 2010). The highest influence of source provider was observed
in contractual support from the state and the EU (the source provider strictly controls
the use of provided money). The lowest influence and control was in the event of income
from financial investments and renting assets which are self-financing activities. We can
conclude that self-financing has a positive effect on achieving generally beneficial
purposes for which NGOs were founded.
Similar results were obtained in research about the funding of NGOs in SVK (Svidroňová,
2O12). However, there is an important difference - unlike Austria, the least used sources
by NGOs in SVK are state/public contracts (only 2.20%). This suggests that in SVK
suitable conditions to provide public services by NGOs are still missing. On the other
hand, self-financing in SVK is represented by 25.4% (Svidroňová, 2012) which is higher
than the estimation reported in "ideal" diversification of funding sources (Vaceková,
2009). Although the level of this type of financing is a quarter of the total sources
of an NGO, the value of 25.4% is still lower than the European average of 36.9%
(OECD, 2001).
Due to the evaluation of the impact of self-financing on the generally beneficial goals
of NGOs we explored whether respondents considered self-financing activities
for commercial deflect attention from the mission and core work of the organization.
68% of NGOs reported no, self-financing is not such an activity. More than 21% of them
said no, but had some objections to self-financing (e.g. NGOs should not develop
132
business activities) or the respondents were not able to decide because they said it
depends on other factors e.g. the legal form of an NGO. Less than 11% of organizations
believe that self-financing is a commercial activity that distracts from the mission
and core work of NGOs. We conclude that NGOs must be able to distinguish
between what is a commercial activity and what is an activity that requires a business
way of thinking and focus on self-financing in compliance with the mission and core
work.
In Appendix 2 we summarize NGOs considered as "best practices". These are the NGOs
that have a high self-financing ratio (in some cases almost 100%) in the funding sources.
To increase this ratio and to strengthen their sustainability the NGOs used the factors
described in Appendix 2. The most common factor for the use of self-financing
in the higher range was the expansion of core work and the extension of the portfolio
of provided services or by narrowing and specialization in some services
so that projects/programs providing specialised services is able to self-finance
its operation and that they also contribute to the organization's budget. This factor was
followed by staff training and the use of volunteer labour and in some cases
also the establishment of cooperation with companies (Svidroňová, 2012).
All these factors resulted in the strengthening of the financial stability of the NGOs.
Thus we were able to demonstrate that self-financing may not be contrary to the general
benefit of NGOs and thus we fulfilled the goal of the presented paper.
Conclusion
The goal of the paper was on the basis of comparable findings of primary research
projects of NGOs conducted in Slovakia and Austria, as well as best practices
of selected NGOs in Slovakia and to prove that self-financing may be in compliance
to the general benefit and purpose of NGOs.
We fulfilled this goal: we confirmed that self-financing is a method used for raising funds
and one of the possible ways to gain financial stability, independence and in the end
to the long-term sustainability of NGOs.
We have shown that self-financing can be connected to the core work and does not have
to be in conflict with the general benefit and purpose of NGOs. The fulfillment of mission
of NGOs supported by self-financing activities in accordance with established core work
is considered to be an appropriate way which should be undertaken by NGOs in order
to achieve financial independence and stability.
The proposals are based on the partial results of primary research
and on the experience of Slovak NGOs we drew on 13 best practices. Most of the best
practices NGOs have succeeded in increasing the ratio of self-financing by adjusting
the portfolio of provided services. Thus they gained sources that can be used
by an organization´s needs according to its development strategy and not according
133
to the donor´s demands. This increases the degree of independence and allows NGOs
to use the sources to create a sustainability strategy.
An outline of the problems and their solutions which we introduced in the presented
paper is considered as a suitable basis and starting point for further research in the field
of self-financing of NGOs. Since our existing research is from both theoretical
and methodological perspectives it is unique in this field in Slovakia and we will try
to use it as a competitive advantage and continue to further explore this issue.
Acknowledgements
This article has been elaborated as one of the findngs of research project
CZ.1.07/2.3.00/30.0009 Employment of Newly Graduated Doctors of Science
for Scientific Excellence.
References
BENČO, J., VACEKOVÁ, G. (2012) Theoretical-methodological problems of the scientific
research. In Acta Moravia. Scientific journal for economics, management and
informatics. Kunovice : European politechnic institute, Ltd. Vol. 3, No. 5, 2011, p. 31-40.
ISSN 1803-7607.
ETCHART, N., DAVIS L,. MESSING, J. (2001) Príručka podnikania neziskových organizácií.
Centrum prevencie a riešenia konfliktov, 2001. ISBN 80-968095-8-X
HYÁNEK, V. (2011) Neziskové organizace: teorie a mýty. Vyd. 1. Brno : Masarykova
univerzita, 2011. 132 s. ISBN 978-80-210-5651-0.
KUVÍKOVÁ, H., SVIDROŇOVÁ, M. (2010) Kvantitatívny rast a akceptácia súkromných
neziskových organizácií v Slovenskej republike. In Bílá místa teorie a černé díry reforem
ve veřejném sektoru II, Sborník příspěvků z mezinárodního vědeckého semináře 2010.
Šlapanice : Ekonomicko-SVK pávní fakulta MU, 2010, p. 34. ISBN 978-80-7399-907-0.
LITTICH, E. (2007) Finanzierung in NPOs. In Handbuch der Nonprofit Organisationen.
Stuttgart : Schäffer Poeschel Verlag, 2002. ISBN 978-37-910-1941-3.
MARČEK, E. (2004) Financovanie neziskového sektora na Slovensku po roku 1989.
PANET. [online] 2004. [cit. 2010-02-05]. Dostupné na WWW: http://www.
partnerstva.sk/buxus/generate_page.php? page_id=558.
SALAMON, L. M., ANHEIER, H. K. (1999) Nástup neziskového sektoru. Mezinárodní
srovnání. Praha : AGNES, 1999. ISBN 80-8044-015-8.
SCHOBER et al. (2010) Die unterschiedlichen Finanzierungsquellen von NPOs.
Ausgewählte deskriptive Ergebnisse zur NPO-Finanzierungsbefragung 2010. [online]
2010. [cit. 2012-08-30]. Dostupné na WWW: http://www.wu.ac.at/npo/competence
/research/abgeschlforsch
134
SVIDROŇOVÁ, M., VACEKOVÁ, G. (2012) Current state of self-financing of private nonprofit
organizations in the conditions of the Slovak Republic. In TEDE - Technological
and Economic Development of Economy. Taylor & Francis. Vol. 18, No. 3, 2012. ISSN
2029-4913.
TOEPLER, S., SALAMON L.M. (2003) NGO Development in Central and Eastern Europe:
An Empirical Overview. East European Quarterly, Vol. 37, 2003.
Quasi equity Borrowed capital
Non-profit incomes Commercial incomes
From individuals
Private contributions
From companies
Private foundations
Membership fees
Remuneration for services
performed or work
Corporate contributions
Corporate foundations
Sponsorship
From public and government
bodies
Subsidies
Contracs
Transfers from other NPOs
Commercial Partnerships
Rental
Interest / dividend
Restructuring of capital
Other Commercial Income
From investing activities
Bank loans
Overdrafts
Credit
Subsidized foreign capital
Public loans
Other loans
No real economic exchange relationship
Real economic exchange relationship
Appendix 1: Sources of funding NGOs
136
Appendix 2: “Best practices”
Organisation Factor Activities
Orbis institute
Slovakia, o.z
Field of activity - extension of
services, creation of a program /
project.
Incomes from promotion events are used to fund
education, leadership programs and workshops.
Outdoor institute
Field of activity - extension of
services, creation of a program /
project.
Renting and providing attractions such as wall
climbing. Organizing wall climbing technique
courses.
OZ Jablonka
Field of activity - extension of
services, creation of a program /
project.
Sale of old varieties of fruit trees and shrubs,
organizing seminars and workshops – ecoeducation,
traditional crafts.
Galenospharm
Field of activity - extension of
services, creation of a program /
project.
Organizing courses.
Business (commercial) activity. Business with parking. Incomes from parking fees.
Networking, cooperation with
companies.
Cooperation with several important companies,
e.g. Zentiva.
Sieť LetNet
Field of activity – extension of
services. Organizing meetings, selling products.
Membership fees. Registration charges, membership fees.
Aliancia Fair-
Play
Field of activity - extension of
services, creation of a program /
project.
Selling products (gifts) and services (organizing
trainings for other NGOs).
Involvement of volunteers.
Involvement of volunteers into self-financing
activities.
Kaspian
Field of activity - extension of
services, creation of a program /
project.
Sale of products (T-shirts with the logo of the
organization), ceramic workshop, publishing and
sale of publications. Providing advertising space in
the skate park.
Involvement of volunteers.
Volunteer to map the possibilities of self-financing
(how much investment is required, what are
revenues), in collaboration with the staff will seek
other sources of funding.
EFFETA
Field of activity - extension of
services, creation of a program /
project.
Organizing courses of sign language, providing
interpreters services, organizing workshops.
Lepší svet n. o. Field of activity - extension of
services, creation of a program /
project.
Organizing workshops (ceramics, painting,
arranging), cafes and galleries. Sale of paintings
and other products of the workshops. Providing
advertising agency services, rental of premises,
publishing a magazine.
O. z. Pomoc
ohrozeným
deťom Cooperation with companies,
networking.
Cooperation with Nadácia pre deti Slovenska (coorganization
of projects). Cooperation with Philip
Morris International (“social marketing/cause
related marketing” - Education of police officers to
evaluate the risk in domestic violence cases).
Nadácia Pontis
(foundation)
Field of activity - extension of
services, creation of a program /
project.
Organizing conferences, forums and seminars
(mainly focused on philanthropy, donations,
responsible entrepreneurship).
O. z. Archimera
Field of activity - extension of
services, creation of a program /
project. Organizing exhibitions and competitions.
Source: Authors
137
Housing Tenure Choice and Housing Expenditures
In the Czech Republic
Špalková Dagmar, Špalek Jiří
Abstract
The paper examines the potential factors affecting housing tenure choice decision (rent
or own) using an econometric model drawing on sample data. Results of the analysis,
making use of the investigation of EU-SILC in the CR, testify to the fact that tenure choice is
influenced by the factors similar to those in other countries – household income, marital
status of the household head and household size (persons/household). On the other hand,
the influence of other demographic characteristics of the household head (gender or age)
has not been confirmed. The econometric model also made it possible to evaluate potential
influence of these factors on housing expenditures of households. The tenure choice
decision is significantly influenced not only by the logical influence of household income
but also by household size and residence in Prague, particularly in the rented housing
sector.
Keywords
housing, tenure, choice, expenditures, determinants
Introduction
One of the key decisions to be made by any household is the choice between owning
or renting their home, which is known in specialized literature as tenure choice.
As for the methods of public sector investigation, it is a very interesting case, since
various attitudes and research methods have been applied to this issue. Engaged
in tenure choice research are not only sociologists or geographers but also economists.
They mostly focus on studying the determinants which are relevant for the decision
of households to own or rent their housing and on establishing the degree
of their influence. A number of authors view tenure choice as an independent decision.
Nevertheless, a more common opinion has it that the choice of home type is only a part
of other decisions households have to make in relation to consumption and investment
(Turner, O’Neal, 1986). Thus tenure choice is typically analyzed in connection
with household mobility, housing attributes (dwelling characteristics), household
attributes or as an element of consumption and investment decisions.
The first researcher to deal with tenure choice in the context of household decisions
on mobility was Boehm (1981). He applied a working assumption that households
decide about their housing and expected mobility simultaneously. In his work he
demonstrated a strong interdependence of the two decisions and at the same time he
138
proved that the decisions are affected by identical factors. Boehm’s research (1982) was
also focused on housing attributes that explored mutual relations between tenure choice
and household preferences for housing quality and dwelling size, surroundings, type
of location, etc. An alternative approach was adopted by Andersen (2009) for assessing
household preferences for housing quality: questionnaire survey. He divided
the housing characteristics into four groups: the dwelling itself, its surroundings, social
infrastructure and location character. He concluded that tenure choice is greatly affected
by such factors as environment without crime and good access to public transport
suitable for bringing up children. However, the survey results have to be interpreted
with great caution, because some of the household preferences may not be realistic
and they can be rather biased by each household’s current housing situation.
Tenure choice is probably most frequently examined in connection with household
attributes. A wide range of these characteristics can be classified into two basic groups,
namely socioeconomic and demographic characteristics. The household characteristics
can be analysed as a whole (e.g. Skaburskis, 1999, Bazyl, 2009). A number of authors,
however, are engaged in studying only one a several selected factors. There is
a consensus among researches that the strongest influence on household decisions is
exercised by income of its members. The fourth approach emphasizes two important
aspects of ownership – consumption and investment - that must be taken
into consideration in connection with decisions about tenure choice. Home acquisition
is the largest investment for most families and as a rule the only financial resources are
available from household income. While making their decision whether to own or rent,
households virtually decide about their portfolio composition and their present
and future consumption at the same time (e.g. in Artle, Varaiya (1978) or Henderson,
Ioannides (1983)).
The issues of tenure choice have been touched on by Czech authors as well. Lux
and Sunega (2012) considered the influence of the form of ownership (i.e. only tenure)
on mobility. Using family accounts statistics, Tsharakyan and Zemčík (2011) studied
whether the rent deregulation had an impact on households renting behaviour
or their ownership status (renters vs. owners). None of the above papers is devoted
to the analysis itself of tenure choice.
Our paper combines the last two approaches to exploration of tenure choice. Based
on the results of the econometric model we define the factors that affect tenure choice
of Czech households over the period of 2005-2010. Using the acquired factors we
further quantify their impact on the share of housing-related expenditures. Our aim is
to assess suitability of the given method for investigating tenure choice and establish
which socioeconomic and demographic factors determine housing expenditures
or the weight of their impact.
139
Material and Methods
As shown above, our approach relies on the quantitative analysis of sampled data.
In order to analyze tenure choice we applied an econometric model in accordance
with the most frequent approaches. The model relies on some form of regression logit
model (e.g. Bazyl (2009), Ulker (2008)). This approach allows (using the so-called odds
ratios) to capture the individual influences of each of the set of potential factors
that may affect tenure choice. The model enables to calculate the conditional probability
of the choice of a particular type of housing depending on a given factor provided
that the values of other factors are constant. In this paper a probit model is used,
which has the following formula (Wooldridge, 2006):
log
1 −
=	 + + ⋯ + (1)
where π = Probability of homeownership for a given value of x and takes
form of normal cumulative distribution function:
= Φ =
1
√2
xk = Explanatory variables (see below)
βk Coefficients estimated by the probit model.
The values of the coefficients βk express the effect of each of the factors on the tenure
choice and at the same time show its direction. We refer to home ownership
as the default choice, because the values of the coefficients βk are related to this option.
Positive values of the coefficient βk therefore indicate that higher values of factor xk
increase the likelihood of rental. On the other hand, negative values indicate that
a greater likelihood of choosing home ownership for high values of the factor xk.
Then for those factors that have a dichotomous nature (most often Yes/No) lower values
of the factor mean ‘No’ and its higher values ‘Yes’.
In the second part of our analysis the regression model was applied as well. The model
serves to quantify the relationship between household composition and share
of housing expenditure of the total household income. The model considers this relation
separately for owners (o) and renters (r). Therefore the econometric model has a form
of two regression equations (Ulker, 2008):
For owners:
!,# = $! + ! ln&!,# + ! 'ln&!,#( + )!ln*!,# + ∑ ,!,#,
-.,/,0
-.,/
1
2 + 3!4!,# + !,#							 2
For renters:
5,# = $5 + 5 ln&5,# + 5 'ln&5,#( + )5ln*5,# + ∑ ,5,#,
-6,/,0
-6,/
1
2 + 3545,# + 5,#						 3
In the model wo,i (wr,i) denote shares of housing expenditures of owners (renters)
140
in the total net household income Mo,i (Mr,i). Shares nk/nk,i refer to the share of individual
age groups of men and women in a given household. While parameter γ captures
the influence of household size on the housing expenditure share, parameter ηk
indicates the influence of gender and age composition of the household. Coefficient ζ
captures the relationship between the share spent on housing and the vector
of demographic and socioeconomic variables (detailed composition of the vector is
shown in Table 2).
The analyses included in this paper are based on the data pertaining to Czech
households collected by the CSO (The Czech Statistical Office). The data were collected
under sample surveys of income and living conditions of households between 2005
and 2010, under the Living Conditions programme (hereinafter the "EU-SILC").
This data set contains information on the social structure of households, their incomes
and expenditures. The dates relate to the date of the investigation, i.e. the defined date
in the spring of that year, only the incomes are listed for the previous year.
In order to convert the sample of households to the entire Czech Republic the coefficient
of the "PKOEF" is used, which expresses the weighting of each surveyed household.
In the data sets, households are divided into five groups according to the form
of ownership. For our analysis, however, the relevant definitions are only home
ownership and rented housing. Into the definition of ownership three different factors
were combined - living in an owned home, in a flat in personal ownership, and a flat
with cooperative ownership. Into the category of rented housing falls the lease
and rental of whole flats.
After calculations for the entire population of the CR it was ascertained
that the percentage of homeownership significantly exceeds the percentage of rented
housing and keeps increasing over time. The ownership percentage grew from 73,6 %
in 2005 to 79,1 % in 2010. In the past this development was the logical result
of the gradual privatisation of the housing stock. Privatisation, however, is slowly
becoming a thing of the past, and we therefore ask the question: What factors have
caused this development in recent years? To what extent do demographic
and socioeconomic characteristics affect the household's choice of the type of housing?
Which of these characteristics is statistically the most significant?
Our examination relies on the following assumptions or hypotheses: "Home ownership
is preferred in households where the head of the household (HOH) has a tertiary
education and is married. Rented housing is preferred by households with lower income
and who are "incomplete", specifically, divorced with children." The second part
of the analysis is based on the assumption that the same factors, which have an impact
on tenure choice, also affect the expenditure share, which a household spends
on housing. Therefore we study the same groups of factors as in the case of the probit
model. This time we would like to establish whether the influence of the factor is
significant (the appropriate coefficient is statistically markedly different from zero)
141
and whether this influence is the same in the rent and ownership sectors.
Then the differing values of the coefficient can point to the regions where the behaviour
of renters and owners differs and where may be some space left for some interference
from outside.
Results and Discussion
In line with the above hypotheses, we focused on the examination of the impact
of the demographic and socioeconomic characteristics of the households on tenure
choice. Specifically we have paid close attention to the head of the household – his/her
age, sex and marital status and furthermore we focused on the household
from the viewpoint of its economic status, its disposable income or number and age
of the children. Results of the regression analysis examining the determinants of tenure
choice are summarized in Table 1. Marginal effects βk are computed not only for 2010
but cover also five-year time span (2005-2009). This enables to assess development
trends of these effects as well.
Table 1: Probit Estimation Results for Housing Tenure Choice (1=owner)
Factor (xk)
Marginal effect (ββββk)**
2005 2006 2007 2008 2009 2010
Constant -5,348 -4,825 -4,353 -4,512 -5,819 -5,501
Household size (number of persons) -0,131 -0,178 -0,182 -0,228 -0,183 -0,170
Number of economically active persons -0,197 -0,066 -0,023 -0,020 -0,029 -0,005 n
Number of self-employed persons -0,091 -0,169 -0,177 -0,138 -0,097 -0,068
Age of the head of household -0,019 -0,017 -0,014 -0,013 -0,018 -0,014
Gender of the head of household (1=male, 2=female) -0,023 0,029 0,057 0,003n -0,030 0,011
Education in the household (1=both primary, 2-higher) 0,242 0,280 0,221 0,273 0,329 0,246
Head of the household is married -0,331 -0,166 -0,085 -0,187 -0,193 -0,067
Head of the household is single -0,507 -0,464 -0,438 -0,458 -0,460 -0,351
Head of the household is divorced -0,146 -0,031 0,058 0,034 -0,039 0,017
Household with children* -0,164 0,012 0,041 0,041 0,046 -0,055
Children up to 2 years of age* -0,083 -0,119 -0,145 -0,053 -0,205 -0,027
Fully unemployed household -0,107 0,083 0,337 0,332 0,199 0,124
At least one retired person -0,117 0,091 0,087 -0,023 0,058 -0,005 n
Head of the household works in public sector* -0,190 -0,225 -0,172 -0,143 -0,086 -0,051
Household located in Prague* 0,676 0,687 0,614 0,537 0,516 0,555
Total area per person -0,024 -0,026 -0,026 -0,025 -0,025 -0,023
Income of the household (disposable) -0,267 -0,253 -0,234 -0,237 -0,327 -0,337
**dichotomous variables take values 1 (Yes) / 0 (No)
**All values are statistical significant at 99% level (t-statistics upon request) excluded the coef market n
Source: Authors
142
As expected one of the most significant factors affecting the choice of tenure in 2010
(as in previous years), is the disposable income of the household (β2010=-0,337).
Households with higher incomes tend to prefer living in their own property rather
than renting. The importance of this factor grew in the course of the reference period.
The second strongest factor turned out to be residence in the capital city of Prague,
which increased the likelihood of living in rented housing (β2010=-0,555).
Among other strong (and statistically significant) factors affecting tenure choice in 2010
was the marital status of the head of the household, the education level of the household,
the number and the economic status of the household members. There was an increased
likelihood of ownership if the head of the household was a married man (β2010=-0,351).
Similarly, the assumption that there is a high likelihood of single or divorced people
preferring rented housing was not proved. Rented housing is chosen with greater
probability by households with a smaller number of people (β2010=-0,170), with a lower
level of education of the head of the household (β2010=-0,246) or by the fully
unemployed (β2010=-0,124). The results also confirmed the assumption
that the financially demanding step of purchasing their own home can only be afforded
by households with higher incomes, which usually corresponds to higher education.
This type of tenure choice is preferred by families (not individuals), which is related
to the larger number of persons in the household; and regarding the regular loan
repayments also by household’s members working (not unemployed). The influence
of other factors, such as: number of economically active persons; number of selfemployed
persons; age of the head of the household and his/her gender;
whether there are children in the household; and the total area per person, was not
demonstrated.
Table 1 also indicates the development trends of the individual factors in tenure choice
of households over the period 2005-2010. Throughout the observed period
the following factors had a decisive effect on tenure choice: income of the household;
education of its members; whether the head of the household is married or not.
If the head of the household is married, the members of the household have a higher
than primary education and a higher income, this implies the choice of home ownership.
Our results in this respect correspond to the results of similar foreign studies.
Ulker (2008) in his article showed that there was a highly significant influence
of socioeconomic characteristics, such as income and education on the tenure choice
of households in the USA.
143
Table 2: Influence of factors on the share of housing expenditures
Model 4 Owned housing Rented housing
2005 2007 2010 2005 2007 2010
Constant 14,861 15,891 23,475 19,033 25,740 44,076
Log net household income (lnM) -2,209 -2,327 -3,474 -2,864 -3,906 -6,728
Second power log income (lnM)2 0,081 0,085 0,128 0,107 0,147 0,255
Number of persons in household (ln n) 0,051 0,064 0,068 0,131 0,151 0,234
Number of men age 0-10 0,038 -0,001 0,004 0,003 -0,014 -0,056
Proportion of males aged 11-17 0,073 0,025 -0,009 0,005 -0,056 -0,058
Proportion of males aged 18-29 0,066 0,007 0,008 0,118 0,004 -0,011
Proportion of males aged 30-59 0,065 0,002 -0,004 0,116 0,045 -0,031
Proportion of males aged 60+ 0,074 0,003 -0,002 0,111 0,005 -0,072
Proportion of females aged 0-10 0,056 0,000 -0,013 0,140 -0,062 -0,103
Proportion of females aged 11-17 0,084 0,013 -0,029 0,017 0,049 -0,026
Proportion of females aged 18-29 0,072 0,024 0,011 0,088 0,011 -0,033
Proportion of females aged 30-59 0,094 0,006 0,006 0,078 -0,021 -0,083
Proportion of females aged 60+ 0,075 0,008 0,013 0,089 -0,007 -0,060
Head of household is married 0,037 0,018 0,035 0,044 0,041 0,046
Head of household is single 0,020 -0,014 0,017 0,052 0,039 0,039
Head of household is divorced 0,014 0,016 0,012 0,005 0,015 0,037
Fully unemployed household 0,032 -0,002 -0,011 -0,032 -0,025 0,000
Education in the household -0,051 -0,037 -0,032 -0,034 -0,052 -0,057
At least 1 pensioner -0,030 -0,026 -0,041 -0,011 -0,044 -0,032
Head of household works in public sector 0,001 0,014 0,010 -0,007 -0,010 0,057
Household residence in Prague 0,043 0,049 0,034 0,059 0,052 0,142
Total floor area per person 0,000 0,000 0,000 0,002 0,003 0,005
Age of head of household 0,000 0,000 0,000 -0,001 -0,001 0,000
Gender of Head of household 0,010 0,002 0,003 0,036 0,032 0,005
Source: Authors
Judging from the results of the second regression model it can be stated that our
hypothesis has only partly been confirmed. Tenure choice itself is as much influenced
by disposable household income as it is by the share of housing expenditures.
This influence grows more significant in renters (βr2010=-6,728 versus βo2010=-3,474).
The same applies to the number of persons living in the household – while the influence
is relatively small for owners (γo2010=0,068), in the rent sector the share of housing
expenditures rises significantly with a growing number of persons (γo2010=0,234).
The differences are found also in Prague households. Generally, the housing costs
in Prague are higher but this influence is shown to be more pronounced in renters
(over the whole surveyed period). However, this difference is on the increase since 2005
(ζr2010=0,142 versus ζo2010=0,034). On the contrary, the age and gender of the head
of household are completely irrelevant in determining the share of housing
144
expenditures. It can also be observed that Czech households in both sectors adapt
their floor area to the number of persons living there. This corroborates
the interrelation of tenure choice and determination of share of housing expenditures.
According to our findings, households really take into account future payments
when choosing a type of housing, at least to a certain degree.
Conclusion
As in other countries, tenure choice in Czech households is affected by three crucial
factors: income of the household, level of education of its members and marital status
of the head of the household. On the other hand, gender and age of the head
of the household, and whether there are children or pensioners within the household
turned out to be completely insignificant. These results are largely in line with our
hypotheses, set out at the beginning of our research. We were able to confirm
the hypothesis that a higher level of education of the household members
(including the head of the household) and the fact that they are married increases
the likelihood that they will choose home ownership. The second hypothesis, however,
was confirmed only in part. It was proved that lower income households are more
likely to live in rented housing. However, we failed to confirm that incomplete
households, e.g. divorced parents with children, would prefer rented housing.
A number of the above factors also affect the level of housing expenditures
within households. Income appears to be decisive in this respect but this influence is
much more important in rented homes than in owned homes. It was also proved
that Prague residents spend more on housing per se, which may be relevant
for the public policy. This influence is again more significant in the renting sector.
On the other hand the influence of gender, age or marital status of the head
of the household was not shown. Of course, it is necessary to treat the interpretation
of the submitted results with care. The EU-SILC is a sample survey in which (in 2010)
11 249 households were examined out of a total number of 4 018 288. The source data
are only statistical estimates, which were burdened with an unspecific error.
However, we believe that despite these limitations the results presented are relevant
and conclusions can be drawn from them.
Acknowledgements
The preparation of this paper was supported by the GA CR project P403/12/0366:
Identification and evaluation of region specific factors determining outcomes of reforms
based on NPM- the case of CEE.
145
References
ANDERSEN, H. S. (2009) Explanation for preferences in Denmark for surroundings and
location of the home. Paper for ENHR conference, Prague.
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Economic Theory, Vol. 18, Issue 1, pp. 38-58. ISSN: 022-0531.
BAZYL, M. (2009) Factors influencing tenure choice in European countries. Warsaw
School of Economics, Working paper No. 1-09.
BOEHM, T. P. (1981) Tenure Choice and Expected Mobility: A Synthesis. Journal of Urban
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BOEHM, T. P. (1982) A Hierarchical Model of Housing Choice. Urban Studies, Vol. 19, No.
1, pp. 17-31. ISSN 0042-0980.
HENDERSON, J. V., IOANNIDES, Y. M. (1983) A Model of Housing Tenure Choice. The
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Studies, Vol. 36, No. 13, pp. 2199-2215. ISSN: 0042-0980.
LUX, M., SUNEGA, P. (2012) Labour Mobility and Housing: The Impact of Housing Tenure
and Housing Affordability on Labour Migration in the Czech Republic. Urban Studies. 49
(3): pp. 599-614. ISSN: 0042-0980.
TSHARAKYAN, A., ZEMČÍK, P. (2011) Rent Deregulation, Tenure Choice, and Real Estate
Price Expectations, CERGE-EI Working Papers wp430, The Center for Economic
Research and Graduate Education - Economic Institute, Prague.
TURNER, M. A., O’NEAL, K., (1986) Household Tenure Choice: Review of the Empirical
Literature, The Urban Institute, Washington.
ULKER, A. (2008) Household Composition and Housing Expenditures in Rental-Occupied
and Owner-Occupied Markets, Family and Consumer Sciences Research Journal, Vol. 36,
No. 3, 189-207
WOOLDRIDGE, J. M. (2006) Introductory econometrics: a modern approach. 3rd ed.
Mason: Thomson/South-Western. p. 890 ISBN 0324289782
146
What is True for the European Social Model
- Rigor or Generosity?
Wildmannová Mirka
Abstract
The European social model currently represents an issue for many scholarly topics.
Most authors (Krebs, Mitchell, Godet, etc.) agree on fact that due to demographic factors
and fiscal crisis of economy, the view on a welfare state of Europe has to be changed.
Discussion about the phenomenon of welfare state (Krebs, 2011) does not concern only
its very existence, but rather how it should be working: what should be its extent, how it
should be organised, how it should be effective in a long run. Changes in a concept
of perceiving a welfare state are reflected in concepts of particular welfare states
of developed European countries. It is apparent that the national economies’ capacity
to fund extensive social programs is limited, and that it is necessary to shift the boundary
between the state’s and individuals’ (clients) responsibilities. This article seeks to answer
the question, where the Czech Republic stands in terms of drawing the social benefits
compared to Great Britain and France, representatives of the advanced economies.
The paper aims to answer the question whether the Czech Republic is really a generous
welfare state, or whether this is only a myth being used as an argument.
Keywords
social policy, social benefits, research, public spending, European welfare state
Introduction
In times of the current "economic crisis" social security systems finds itself in a centre
of experts‘discussions. In a framework of public spending restrictions some countries
reduce also the social security benefits while others, on a contrary, do not apply
any reductions and prefer to keep the latter either at their current rate or to increase
them in a long term in order to maintain or improve the standard of living
of their inhabitants, increase their purchasing power and maintain a long-term
sustainable growth. In the Czech Republic there is an effort to reduce the resources
flowing into the social security benefits. An example might be a decrease in expenditure
on the social security benefits between the years 2010 and 2011 from 40,8 to 36 million
Czech crowns (MPSV, 2011). Along with the trend of reducing social security
expenditure, expenditure on family policy included, a low birth rate trend exists
in the Czech Republic too. Fertility in the Czech Republic is currently under the level
of simple reproduction, i.e. less than 2.1 live birth per woman. According to Eurostat,
fertility in the Czech Republic in 2009 was 1.49 (according to the Czech Statistical Office,
147
1.49 in 2010), whilst compared to France there had been two children
(according to the French statistical office 2.01 in 2010) per woman. Low birth rate has
resulted in aging of the population. According to Krebs (2010, p. 180), the ratio of oldage
pensioners to employed population is around 30%. It has begun to grow rapidly in
2010 and will reach 50% by 2020. Population aging affects virtually all the spheres of
national economies and has a huge impact on government’s spending, on ensuring
health care costs and payments of pensions in particular. Fiscal challenges stemming
from the population aging thus appear as highly significant. It is in connection
with the low birth rates and an increase in the proportion of seniors in the society
that nowadays the importance of social and family policy is being evaluated
and considered (Mitchell, 2009). According to Mitchell (2010, p. 5) opinions regarding
the question of whether the use of policy instruments to motivate young people
to established a family or have more children vary across the scientific community.
Some scientists argue that birth rate is affected by the knowledge that the arrival
and upbringing of a child means the loss of life security together with lack of economic
resources, because the family’s living standard decreases with child’s arrival.
According to Krebs (2010) it is in the state’s own interest to ensure the full functioning
of families and to make the efforts in the area of economic, social and legal support
for them.
The purpose of financial support is to supplement or partially replace families’ income
(Krebs, 2010) and it gets executed primarily by means of various benefits. Financial
support may have different forms. It may be a case of a direct support in a form of family
benefits (Kolibová, 2008), or social and other scholarships (Höhne, 2008a; Kolibová,
2008). The aim of the state is to ensure such opportunities, economic and social
environment that will render families less dependent on social benefits, so to say direct
financial support. That is the reason fuelling the state’s initiative in the area of indirect
financial support. Indirect financial support represents the state’s assistance, usually
in form of various types of tax reliefs, among which tax deduction for a dependent child
in particular (Höhne, 2008a; Kolibová, 2008).
It is not only the Czech Republic that is facing aging of the population and a low birth
rate. These phenomena bring with them lot of economic issues. Low birth rate could
potentially lead the society to a difficult situation when the small percentage
of economically active citizens will provide for the growing number of elderly people
in the society.
According to Godet, (2007, p. 7) family, being not only a matter of private
but also of public affairs, is associated with many externalities that are positive for the
society and determines social cohesion and sustainable development. According to
Godet (2005, p. 273), the positive externalities are children's health, education, social
148
inclusion, and the cases where a family fulfills its function. These positive externalities
support the growth and well-being of not only a family but the entire society.
Investments into the family are thus not only quantitative investments in human capital,
but also qualitative investments that produce positive externalities resulting
in sustainable economic and social growth and prosperity of the state. Being the smallest
investments possible at the same time, they are therefore more effective than would be
investments in family child care compensations.
The paper aims to answer the question whether the European social model is directed
to rigor in fiscal policy or whether it is about to take the directions towards keeping
the generosity of public social spendings. The comparison between the social models can
encounter the difficulty that due to the uniqueness of these national models it is very
difficult to compare the fiscal expenditure. The structure of social security across the EU
is left to the discretion of national policies. Although the relevant parameters
of these systems can be compared, it is necessary to draw attention to the methodology
of the national statistics in social field.
Materials and Methods
As mentioned above, the basic issue for international comparisons of social models is
their uniqueness at the national level. Firstly, we encounter other’s language
terminology (which, given the defined benefit is not a problem),
furthermore there exists a different form of benefits financing out of the system
(from the system of social security or a national budget) or else these benefits are not
the same (it can be a case of unifying the two different benefits into one). Criteria
for granting certain benefits may vary in different countries too
(e.g. length of the provision of the allowance). In our research it was decided to establish
a provision of selected benefits in the Czech Republic and two chosen EU countries
(United Kingdom and France), where it can be assumed that these are states
with a traditional welfare policy towards the families with children. At the same, time
we start from the premise that these are the countries of responsible and strict fiscal
conditions.
Four model households with children were being compared in all the states. Creating
of the family models was a chosen method in order to imitate the real demands
of families in terms of social assistance from the state. Thanks to these models
and formation of relatively equal scenarios for all the compared states it will be easier
to understand and compare the diversity of their systems. There was a size set
within the various types of families, so to say the number of adults and children
in the household and net family income, and according to them, the family’s entitlement
to various forms of tax relief, right to child benefit, maternity grant and housing
allowance. Since both systems are set up differently and it is difficult to create a family
149
model and a number of benefits for them, in the British system particularly
(due to the set of a system of individual benefits and determination of tax bonuses
for children), we used the data that are available from the official sources
and quotationd as a guide for setting the benefits. Therefore, in reality, the amount
of benefits available to the families who meet the specified models may differ slightly
from those with whom we work. This certainly does not undermine the importance
of the final findings of our research. The research has worked with the valid legislation
from the year 2011 (France, Czech Republic) and April 2011 - March 2012 (United
Kingdom).
Results and Discussion
Due to the different historical development of family policy, and different systems
consequently, only the benefits that can be mutually compared have been selected.
The evaluation model was simplified in some respects. It has been set according
to the level of availability of information on the provision of benefits and some benefits
have been adjusted slightly in order to facilitate comparison, naturally, without changing
their character.
Models of families of different sizes and incomes, from the lowest to the average,
were created in order to detect a real generosity of the system. Subsequently,
the researched benefits were applied and then compared within these models.
Increase in the net family income when granted the benefits for specific models was
assessed, as well as the final income after taking into account benefits in their totality.
The research is mainly focused on social benefits (in compliance with Czech model),
namely: child allowance, housing allowance, tax bonuses, materninty grant, maternity
allowance (terminology varies by individual state). Partial analysis of the steps
of the research is elaborated in detail in the paper ‘Czech Republic – a generous welfare
state?‘, which was presented at the international scientific conference ‘Social
development and quality of life in the contex of macroeconomic imbalances‘
in May 2012 (2012, pp. 703-704).
Partial and final modeling analysis confirmed the opinion that in terms of granting
of the benefits under the family policy, the United Kingdom is more generous
than the Czech Republic. A comparison of the final families’ income showed
that in majority of the model example families, the percentage increase in net household
income after having been granted the benefits is higher in the British model.
This finding refutes the general view that the Czech Republic, being a country
of the former Eastern bloc is a welfare state with significantly higher generosity of social
benefits, particularly when compared to Western countries.
In a further research more knowledge regarding the diversity of social systems of family
policies in the Czech Republic and Great Britain was achieved. In the United Kingdom,
150
granting of benefits, of tax bonuses on children and living allowance especially is
administratively much more demanding than in the Czech Republic, which inevitably
puts a higher burden on a budget. Administrative complexity is mainly caused
by the amount of benefits being set as guidance only, and each family is assessed
as an individual case, and by a large number of factors being taken into account.
Complexity of the system and a lack of access to the accurate information on benefits
setting presented one of the problems when creating the models. That is
why when determining the amount of claimed benefits we primarily held indicative
of the available tables. On the other hand, basic information about all the benefits is
easily accessible and written in a language comprehensible even to an ordinary citizen.
Generally, the distribution of benefits in the Great Britain is set differently than it is
in the Czech Republic. The analysis showed that the level of financial assistance
to the single parent families and families of social disadvantage is significantly greater
in the United Kingdom than in the Czech Republic. Benefit rate for these social groups
in the United Kingdom is extremely set up; nevertheless with a rising income
the amount decreases significantly. Conversely, in the Czech Republic, primarily benefits
as housing allowance and bonus tax are balanced evenly and spread across from lowincome
families to families with average incomes.
A comparison of model families with France showed that France provides families
with children with more diverse amount of benefits that are supplied depending
either on the number and age of children in the family regardless of income
or depending on income. French family policy financially supports the families better
based on its two components: the family and the social one. Czech Republic provides
fewer types of benefits supporting families with children, always depending
on its income. Czech family policy is purely social. In the Czech Republic there are no
benefits that would be intended exclusively for families with two or more children,
depending on the number of children. Czech system of family benefits, compared
to the French one, does not financially support families with more children. The tax
credits benefits in the Czech Republic are equal to all children, since every child is
provided with a lump sum, as opposed to the case in France where it is mainly richer
families, and average income families that benefit from the tax relieves, but only if they
have 3 or more children.
Overall, families with children are more financially supported in France. Comparison
of the economic impact of family benefits and tax credits on families showed
that in three cases out of five a family is supported by the benefits a lot more in France,
on a scale of thousands per month. The French system proves to be more efficient
in terms of the impact of benefits on the economic situation of the observed families’
models. Based on the positive experience from France it is therefore possible
to formulate the recommendations on how the Czech Republic could increase
the financial support for families.
151
Table 1: Total expenditure on family benefits in the Czech Republic and France (2010)
Czech Republic in
million CZK
Czech Republic
% GDP
France in million
EUR
France % GDP
Total
expenditure on
family benefits
40,791 million
CZK
1,08 %
44 124,1 million
EUR
(=1 103,1 million
CZK)
2,28 %
Source: MLSA, CAF.% of gross domestic product (GDP): own calculation
There were 40, 791 million CZK paid to the family benefits (e.g. welfare benefits)
in the Czech Republic in 2012. It is 1, 08% when expressed as a percentage of GDP
of the Czech Republic. In the same year there were 44 124, 1 million EUR
(1 103, 1 million CZK) paid on family benefits in France, which is 2.28% GDP of France
in 2012. When divided by the number of inhabitants and converted to CZK (in the case
of France) it can be concluded that overall an accounted expense cost on each resident is
3872, 8 CZK in the Czech Republic and 17 371, 7 CZK a year in France. The expenditure
per inhabitant is thus almost 4, 5 times higher in France.
Conclusion
Based on the comparison of the model groups of households in selected types of benefits
for families with children in two selected countries of Europe, Great Britain and France,
it can be concluded that in the compared benefits high generosity had been shown
in both states. The United Kingdom is more generous in granting the benefits. French
family policy supports families financially more, families with more children especially,
which also burdens the state budget a lot. Both comparisons indicate that the Czech
Republic is not such a generous welfare state, as is often argued.
However, the Czech Republic with its low spending on family policy is not a winner,
because the social costs have not been compared to the economic performance
of the country, which cannot be ignored in a given context. In our research, the emphasis
was put on the comparability (in terms of the content of the selected benefits – content
of securing the risk) of benefits of the social model, rather than on other economic
indicators (GDP performance, employability, etc.). Based on the obtained data it can be
stated that perceiving the Czech Republic as synonym of a generous welfare state is
based on the previous system of social security, but regardless all the possible social
reforms it remained such to the present time.
Despite the problems that arose while comparing the benefits, we come to the debate
whether welfare Europe selects the option of rigor or generosity of its social systems.
The very issue of setting the methods of comparison among models of national systems
would contribute to the clarification of some comparative analyses, which may have
slight imperfections. Even national analyses are often faced with the methodological
152
inadequacies (MLSA, CSO, partial analysis of institutions). These questions could present
an inspiration for further research on the welfare state in Europe.
References
GODET, M., SULLEROT, E. (2007) La famille: Affaire privée et publique. Paris: Jouve, 278p.
GODET, M., SULLEROT, E. (2007) La famille une affaire publique. Paris: Jouve, 294p.
Office for National Statistics. (2012). Annual Survey of Hours and Earnings, 2011
Provisional Results (SOC 2000). Office for National Statistics. [Online] 2012. Available
from WWW: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition
= tcm%3A77-235202.
NHS (2012) NHS Maternity grants. Carers direct - NHS Choices. [Online] 2012.
[Quotation, February 14, 2012.] Available from: http://www.nhs.uk/CarersDirect/
moneyandlegal/socialfund/Pages/Maternitygrants.aspx.
HÖHNE, S. (2008). Podpora rodin s dětmi a vliv peněžních transferů na formu rodinného
soužití. Praha : VÚPSV. 63 p.
MITCHELL, E.(2010). Finanční podpora rodin v České republice v evropském kontextu.
Praha: Ethnographic Institute of Josef Hlávka, 2010. 107p.
KREBS, V. et all. (2010) Sociální politika. Praha: Wolters Kluwer, 2010, 5th release 542 p.
Wildmannova, M. (2012) Czech Republic – generous welfare state?, Bratislava:
Národohospodářská fakulta EU Bratislava,pp. 703-714
Press release MPSV. (2012) Materiál MPSV předkládaný na jednání Vlády ČR 8. února
2012 [online]. [quotation, 2012-03-10]. Available from WWW:http://www.mpsv.cz/
files/clanky/12104/mv_080212_v2.pdf
MPSV. Vývoj sociálních výdajů MPSV v roce 2011. (2012) [www document]. 20.2.2012.
Available from WWW: http://www.mpsv.cz/files/clanky/12657/tz_200312a.pdf
Czech Statistical Office [online]. (2012) Available from WWW:http://www.czso.cz
CZSO. Příjmy a životní podmínky domácností 2010: Domácnosti podle počtu
nezaopatřených dětí a počtu pracujících členů. složení domácností a roční příjmy na osobu.
(2011) [www document]. 15.7.2011. Available from WWW: http://www.czso.cz
/csu/2011edicniplan. nsf/t/CB0030D286/$File/3012116b.pdf
MPSV. Vývoj sociálních výdajů v roce 2011. (2011) [www document]. 20.3.2012.
Available from WWW: http://www.mpsv.cz/files/clanky/12657/tz_200312a.pdf
Ministry of Finance of the Czech Republic. Makroekonomická predikce [online].
[quotation, 2012-03-24]. Available from WWW: http://www.mfcr.cz/cps/rde/xbcr/
mfcr/Makroekonomicka-predikce_2011-Q4_A.pdf
SESSION II:
PUBLIC ADMINISTRATION
AND PUBLIC SECTOR
154
Decentralized Punishment
under Different Matching Types
Berná Zuzana
Abstract
This paper presents selected results of experiment with Czech University students
replicating study of Denant-Boèmont et al. (2007, pp. 145–167). The original experiment
studied impacts of opportunity of counter-punishment and sanction enforcement
in repeated voluntary contribution to public goods. As this experiment was executed
in so called partner matching (where subjects interacted with the same co-players
during whole session), the aim of author’s replication was to enrich and complete the data
by results obtained in stranger matching (where composition of groups changed randomly
before each round of a session). The results showed, in accordance with author’s
expectations, that strangers contributed considerably less and punished less heavily than
partners. This finding is in line with so called strategies hypothesis.
Keywords
cooperation, voluntary contribution mechanism, decentralized punishment, partner
matching, stranger matching
Introduction
One of main tasks of experimental research in economics has been attempt to explain
the emergence of cooperation in situations of social dilemma (term first employed
by Dawes, 1975, 1980). Identification of individual incentives to cooperate in situations
where economic rationality should lead agents not to, as well as factors having capacity
to influence the level of cooperation has been subject of laboratory testing in last
three decades.
A typical example of a social dilemma situation is voluntary contribution to public goods.
In order to identify factors influencing level of contributions, experimenters have
employed different schemes and modifications of classical Voluntary Contribution
Mechanism (hereafter “VCM”). One of such modifications is VCM with opportunity
to punish free riders. The mechanism is as follows: After all individual decisions
are made, information about individual levels of contribution to a public good is
published and individuals get opportunity to sanction their co-players. As this means
sanctioning without intervention of external authority, we speak about so-called
decentralized punishment (Nikiforakis, 2007, p. 92). Received sanction reduces current
income of punished subject and, at the same time, the act of punishment brings cost
also to the sanctioning subject. As it doesn’t ensure any future financial benefit
155
to the latter, we can speak also about so-called altruistic punishment (Fehr and Gächter,
2002, p. 137). Other appellations such as costly or peer punishment (see e.g. Guala, 2012,
pp. 1-15, Casari, 2012, pp. 21-22) are used to represent the same mechanism
of decentralized punishment.
The very first experiments (Ostrom et al., 1992, pp. 404-417, Fehr and Gächter, 2000,
pp. 980–994) demonstrated considerable positive effect of opportunity of decentralized
punishment on cooperation. Following studies (e.g. Nikiforakis, 2007, pp. 91–112,
Denant-Boèmont et al., 2007, pp. 145–167, Nikiforakis and Engelmann, 2011,
pp. 319 332) have shown, however, that efficacy of this mechanism has several
limitations. For instance, positive effect of punishment is maximized when players get
unique opportunity to impose sanctions on free-riders while the latter don’t know
who sanctioned them. Yet, such (artificial) limitation doesn’t enable subjects to engage
in various punishment strategies like retaliation, sanction enforcement etc.
Experiments enabling multiple punishment opportunities, counter-punishment or feuds
show that former positive effect of punishments is often outweighed by these strategic
considerations. Furthermore, decentralized punishment is effective only under a specific
cost-impact ratio (see Nikiforakis and Normann, 2008, pp. 358–369, or Egas and Riedl,
2004, pp. 871–78). Experimental results have shown that subjects in deciding
whether engage in altruistic punishment or not take into account costs and effects
of their actions. And finally, decentralized punishment is more effective if combined
with other cooperation-enhancing mechanisms. It has been shown, for instance
(see Ostrom et al. 1992, pp. 404-417, or Bochet et al., 2006, pp. 11-26),
that decentralized punishment is more effective if combined with possibility of (verbal)
communication.
This paper presents selected results of experiment replicating study of Denant-Boèmont
et al. (2007, pp. 145-167). In this experiment, players had opportunity to 1) retaliate
received sanctions (so called “counter punishment”, Nikiforakis, 2007, pp. 91–112)
and 2) engage in repeated sanctioning of low contributors in order to enhance
cooperation. The latter act is called by authors sanction enforcement and it may take two
forms: sanctioning of those who fail to punish low contributors and those who punish
high contributors. The results showed that significant negative effect of counterpunishment
prevailed over the positive one of sanction enforcement (which was not
statistically significant) and the overall effect was negative.
Denant-Boèmont et al. (2007, pp. 145-167) experiment was executed in so called
partner matching which means that subjects interacted with the same co-players
in every round of an experimental session. Alternative setting, so called stranger
matching, implies that group composition changes randomly before each round,
and such setting represents a good approximation to single-shot experiments
since reputation effects are eliminated (a “perfect approximation” would be
under perfect stranger matching ensuring that two subjects don’t meet
156
more than once during a session). If reputation matters one would expect partners
to cooperate significantly more than strangers (Andreoni and Croson, 2008, p. 776).
However, the first study dealing with this question (Andreoni, 1988, pp. 291-304)
showed just the opposite. Starting with former paper, there has been an intensive
discussion whether cooperation is higher under partner setting or not.
Andreoni and Croson (2008, pp. 776-783) bring a synthesis of replications and studies
on this topic. According to it the picture reminds quite unclear, as “four studies find
more cooperation among strangers, five find more by partners and four fail to find
any difference at all”.
The aim of experiment presented in this paper was to enrich and complete the data
acquired by Denant-Boèmont et al. (2007, pp. 145-167) by results obtained
under stranger matching. The motivation was the question whether a different matching
type would influence individual contributions and willingness to engage in costly
punishment or not. The author hypothesized that contribution levels would
be considerably lower and subjects would assign less punishment points under stranger
matching than in original experiment executed in partner matching. The results showed,
in accordance with author’s hypothesis, that subjects actually contributed and punished
less than in original experiment.
Material and Methods
Experiment: Overview
The author’s experiment replicated four treatments of Denant-Boèmont et al.
(2007, pp. 145-167) experiment studying effects of counter-punishment and sanction
enforcement. Each treatment constituted a single session in which 24 subjects took part.
The participants played in groups of four. The modification vis-à-vis original experiment
was that composition of these groups changed within every round (so-called stranger
matching).
Set of experiments took place at Masaryk University in Brno during academic year 2009-
2010. The participants were recruited among undergraduate students of different
faculties of Masaryk University by means of an advertisement published in university’s
information system. In total, 96 subjects participated in the experiment.
Average individual earning was 230.5 CZK. All experimental sessions were executed
on computer terminals using z-Tree program (Fishbacher, 1999, pp. 171–178).
Each of four treatments consisted of 20 identical rounds (repetitions). In the beginning
of each treatment participants played one trial round so that they make sure
to understand correctly the instructions.
The basic treatment called Baseline consisted only of two stages in each round.
The first stage which we may call investment stage was classical VCM. Within this stage
participants were given certain disposable income and they were asked to decide
157
which part of it they would keep on their personal account and which part they would
invest to a group account. Then a punishment stage followed in the beginning
of which players learnt about individual investments to the group account and they got
a subsequent opportunity to assign points to their co-players reducing their current
income. At the end of punishment stage players got informed about their original income
(after first stage), number of points received and total payoff from a round.
The generators of received sanctions stood hidden to players.
The three other treatments contained one more punishment stage
and the only difference among them was character of published information
about punishments assigned. In this second punishment stage players had opportunity
to punish again all of their co-players in a group. In Revenge Only treatment all players
learnt after first punishment stage who and by which amount sanctioned only them
personally. In No Revenge treatment, on the other hand, they were informed about all
punishments excepting those assigned to them while in Full Information treatment they
learnt about all assigned punishments and their generators.
Different treatments allowed use of various punishment strategies. In Baseline, subjects
used punishments only in response to contribution decisions made in first stage.
Revenge Only treatment allowed, in addition to above mentioned, use of counterpunishment.
In No Revenge the possibility of counter-punishment was eliminated
while subjects were allowed to engage in sanction enforcement, as well as punish
their co-players in response to first-stage contributions. Full Information treatment
allowed all sanction strategies above mentioned. Therefore, the difference
in contribution levels between Baseline and Revenge Only treatments,
as well as difference between No Revenge and Full Information measures the marginal
effect of counter-punishment on cooperation. On the other hand, the difference
in contributions between Baseline and No Revenge, as well as between Revenge Only
and Full Information represents marginal effect of sanction enforcement (DenantBoèmont
et al., 2007, pp. 145–167).
Calculation of payoffs
During the experiment, payoffs were calculated in experimental monetary unit - token.
At the end of sessions total sum acquired was converted into CZK, using exchange rate
1 token = 0.50 CZK, and subsequently paid to participants. The calculation of profits is
based on Fehr and Gächter’s (2000, pp. 982-983) design.
In the beginning of each investment stage subjects were given 20 tokens and were asked
to decide how many of them they would keep (on their personal account) or invest
to a group account common to all players in a given group. Each token kept on private
account maintained its value (ratio 1:1), while each token invested to a group account
yielded 0.4 tokens to every player of a group. Calculation of payoffs at the end
of investment stage is given by equation 1.
158
# = 20 − 9# + 0.4 ∑ 9<
<2
(1)
At the end of this investment stage subjects learnt about their current profits
and individual contributions (of their co-players) to group account. Then a punishment
stage followed within which each player had opportunity to reduce payoffs of her coplayers
by assigning them points (0-10 points to each co-player). Each point received
reduced its owner’s profit by 10 % while 10 and more points received meant reduction
by 100 % (not more). Assignment of points caused costs also to the punishing subject;
she born cost from punishing each of co-players and these costs (for each co-player)
added up. The costs born by punishing subjects were a convex function punishment
points and their amount is given by Table 1. (Subjects disposed of identical table
and were thus able to calculate financial consequences of their actions.)
Table 1: Cost function of points assigned
Points assigned 0 1 2 3 4 5 6 7 8 9 10
Costs of points assigned by player 0 1 2 4 6 9 12 16 20 25 30
Source: Fehr and Gächter, 2000
The calculation of individual payoffs at the end of first punishment stage was given
by equation 2.
# = # =>?@A0,1 − 1/10 ∑ C<#<D# EF − ∑ G'C#< (<D# (2)
where G'C#< ( is convex cost function defined in Table 1, assigning cost to player i
for punishing player j.
This payoff represented total payoff in the Baseline treatment. In three other treatments
one more punishment stage followed. Each point received reduced again current profit
of its receiver by 10 %. The costs of punishments assigned were (again) calculated
on the basis of Table 1. Total profit at the end of second punishment stage (i.e. total
profit by round for the four treatments) was given by equation 3.
#
H
= # I>?@ J0,1 − =∑ C<# + ∑ C<#
H
<D#<D# FKL −	∑ G'C#<( − ∑ G'C#<
H
(<D#<D# (3)
where C<# is punishment of player i assigned by player j in the second stage and C<#
H
is
punishment of player i assigned by player j in the third stage.
Hypothesis
Based on previous findings (e.g. Fehr and Gächter, 2000, pp. 980–994) the author
hypothesizes that (1) contribution levels will be considerably lower and (2) subjects will
assign less punishment points under stranger matching than under partner matching
(employed in Denant-Boèmont et al., 2007, 145–167).
This assumption is based on so called strategies hypothesis introduced by Andreoni
159
(1988, pp. 293-294). According to this hypothesis, subjects – if they are rational - play
in order to influence their partners’ actions. As strangers play actually a repeated single
shot game, there is no reason for them to play strategically and we can thus expect
that they would contribute less than partners. The same reasoning may be used
in relation to punishments: the single shot equilibrium presumes zero punishment
(see e.g. Fehr and Gächter, 2000, p. 983) and there is no reason to expect another result
in repeated one-shot interactions where in addition subjects’ experience plays a role.
Results and Discussion
Average contributions
Average individual contributions in four experimental treatments are captured
by Figure 1. The highest average contributions were attained in No Revenge treatment
(13.05 tokens), followed by Baseline (10.46) and Full Information (8.15), and the lowest
average contributions were reached in Revenge Only treatment (5.52). This order copies
the results of Denant-Boèmont et al. (2007, pp. 152-155). However, contribution levels
in our experiment were actually considerably lower than in original experiment
(where average contributions were 16.17 under No Revenge treatment,
15.49 under Baseline, 10.59 under Full Information and 7.21 under Revenge
Only treatment). The difference in contribution levels between the two experiments
(or the two matching types) varied from 1.69 to 5.03 tokens which supports the first
part of author’s hypothesis saying that subjects contribute considerably less under
stranger matching.
Another significant difference in relation to the original experiment was that
in our experiment, average contributions had decreasing trend in all four treatments.
(In Denant-Boèmont et al. (2007, pp. 145–167) experiment, the average contribution
level didn’t change appreciably during the game in any treatment. Exception was decline
over time in Revenge Only and an initial increase in the first periods of Baseline
and No Revenge.) This finding demonstrated that under stranger matching cooperation
was not sustainable solution. Despite high initial contribution levels (mainly
in No Revenge treatment) average contributions in all treatments tended over time
to zero, which is in line with game theoretic predictions.
160
Figure 1: Average individual contributions
Source: Author
Quantity of sanctions
The second part of the hypothesis was related to intensity of sanctions. Average quantity
of sanctions assigned under the two matching types may be observed in Table 2.
Table 2: Average quantity of sanctions
Treatment
Baseline Full
Information
No
Revenge
Revenge
Only
Average points assigned
in Denant-Boèmont et al.
(2007)
Stage 2 1.512 0.46 0.65 0.73
Stage 3 - 0.57 0.37 0.38
Both
stages
1.512 1.03 1.02 1.11
Average points assigned
in author’s experiment
Stage 2 0.68 0.15 0.52 0.30
Stage 3 - 0.24 0.18 0.31
Both
stages
0.68 0.39 0.70 0.61
Source: Author
As it is clearly visible from Table 2, subjects sanctioned considerably more heavily
in original experiment, i.e. under fixed matching. In the Baseline and Full Information
treatments average punishment points over the stages were even more than double
compared to author’s results. This supports again author’s hypothesis saying
that subjects punish less under stranger matching (i.e. when composition of groups
changes in each round).
161
Other results
The results concerning impacts of counter-punishment and sanction enforcement
on contribution behavior and individual welfare were presented in author’s previous
paper (Berná, 2010, pp. 36-43). In accordance with original experiment,
they demonstrated a (strong) negative effect of counter-punishment and (weaker)
positive effect of sanction enforcement on contributions and individual earnings.
An analysis of sanction behavior of subjects engaging in punishment will be subject
of a separate paper.
Conclusion
The aim of author’s experiment was to enrich and complete the data acquired
by Denant-Boèmont et al. (2007, pp. 145–167) by results obtained under stranger
matching. The results showed that concerning individual contribution, Czech subjects
reacted similarly on different punishment conditions as participants of original
experiment. Yet, strangers contributed and punished considerably less than partners
which was in line with author’s expectations based on strategies hypothesis.
This paper contributes to existing literature dealing with cooperation in VCM
experiments under partner and stranger matching. As results up to now have shown,
there is no clear pattern between matching types and level of cooperation. Some studies
have concluded that partners cooperate more than strangers, while other demonstrated
the opposite and some found no differences at all. This question thus remains an open
topic to further research.
As original experiment involved French University students while author’s replication
the Czech ones, before drawing any conclusions relative to different matching types,
it seems to be important to eliminate so called country effects causing possible
disparities in results obtained in different cultures. This will be author’s next step.
Another challenge is to enrich existing data with results obtained in an experiment using
outside-University subjects. This could help reduce concerns related to so called external
validity of experimental evidence (i.e. the extent to which experimental data may be
extrapolated in order to explain economic reality).
References
ANDREONI, J. (1988) ‘Why Free Ride? – Strategies and Learning in Public Goods
Experiments’, Journal of Public Economics, vol. 37, No. 3, pp. 291-304.
ANDREONI, J., CROSON, R. (2008) ‘Partners versus strangers: random rematching in
public goods experiments’. In Handbook of Experimental Economics Results 1, pp. 776–
783. ISBN 9780444826428.
BERNÁ, Z., (2010) ‘Dopady umožnění opakovaného trestání v experimentech s veřejnými
statky’. In Zborník príspevkov z XII. ročníka medzinárodnej vedeckej konferencie pod
162
názvom Financie a riziko - Prístupy mladých ekonómov, Bratislava: Vydavateľstvo
EKONÓM, pp. 36-43. ISBN 978-80-225-3090-3.
BOCHET, O., PAGE, T., PUTTERMAN, L., (2006) ‘Communication and punishment in
voluntary contribution experiments’, Journal of Economic Behavior and Organization, vol.
60, No. 1, pp. 11–26.
CASARI, M., (2012) ‘Weak reciprocity alone cannot explain peer punishment‘. In Guala,
F., 2012. Reciprocity: Weak or Strong? What Punishment Experiments Do (and Do Not)
Demonstrate, Behavioral and Brain Science, vol. 35, pp. 21–22.
DAWES, R. M. (1975) Formal Models of Dilemmas in Social Decision Making. In Human
Jugement and Decision Processes, ed. Martin F. Kaplan and Steven Schwartz. New York:
Academic.
DAWES, R. M. (1980) ‘Social Dilemmas’, Annual Review of Psychology, vol. 31, pp. 169-93.
DENANT-BOEMONT, L., MASCLET, D., NOUSSAIR, C., (2007) ‘Punishment,
counterpunishment and sanction enforcement in a social dilemma experiment’,
Economic Theory, vol. 33, No. 1, pp. 145–167.
EGAS, M., RIEDL, A. (2008) ‘The economics of altruistic punishment and the maintenance
of cooperation’, Proceedings of the Royal Society B: Biological Sciences, vol. 275,
pp. 871–78.
FEHR, E., GACHTER, S. (2000) ‘Cooperation and punishment in public goods
experiments’, American Economic Review, vol. 90, No. 4, pp. 980–994.
FEHR, E., GÄCHTER, S. (2002) ‘Altruistic punishment in humans’, Nature, vol. 415, pp.
137–140.
FISCHBACHER, U. (2007) ‘Z-Tree: zurich toolbox for readymade economic experiments’,
Experimental Economics, vol. 10, pp. 171–178.
GUALA, F. (2012) ‘Reciprocity: Weak or Strong? What Punishment Experiments Do
(and Do Not) Demonstrate’, Behavioral and Brain Sciences, vol. 35, pp. 1–59.
NIKIFORAKIS, N. (2008) ‘Punishment and counter-punishment in public good games:
can we really govern ourselves?’, Journal of Public Economics, vol. 92, pp. 91–112.
NIKIFORAKIS, N., ENGELMANN, D. (2011) ‘Altruistic Punishment and the Threat of
Feuds’, Journal of Economic Behavior and Organization, vol. 78, No. 3, pp. 319-332.
NIKIFORAKIS, N., NORMANN, H.T. (2008) ‘A Comparative statics analysis of punishment
in public-good experiments’, Experimental Economics, vol. 11, pp. 358–369.
OSTROM, E., WALKER, J., GARDNER, R. (1992) ‘Covenants with and without a sword:
self-governance is possible’, American Political Science Review, vol. 86, pp. 404–417.
163
Corruption among Russian Students:
Experimental Evidence from the Pilot Sessions
at Lobachevsky State University of Nizhni Novgorod
Fišar Miloš
Abstract
Economical experiment has been becoming a tool to measure human behaviour in real
time under controlled condition in order to explain economical problems form different
perspective then does the traditional theory. One of the problems which are hard to explain
by the traditional attitude is corrupt behaviour. Corruption is on one hand a phenomenon
which can harm the economical growth on the other hand it can be esteemed
as an outcome of natural human behaviour when men is under any circumstances utilitymaximising,
self-interested individual. In the article we discus some economical experiment
concerning corrupt behaviour and give the overview of pilot research done by author
in Russia in 2012.
Keywords
bribe, corruption, economical experiment, Russia
Introduction
In a point of view of modern society corrupt behaviour represents a serious problem
which can limit the economic competition and therefore diminish the economic growth
of the country. There has been existed for a long time a monitoring of level of corruption
among countries by Transparency International, but is this the only way how to measure
corrupt behaviour? The author of this article presumes that research focused on human
behaviour can contribute to the understanding of corrupt behaviour
more than monitoring its conspicuous consequences. One of the possible ways how
to glean the human behaviour is using methods of experimental economics.
Short overview of the experiments concerning corrupt behaviour
As experimental economics is quite young method in economics theory, experiments
focusing on corrupt behaviour are very young. We talk about the first laboratory
experiment concerning corrupt behaviour in the work of Abbink et al (2002) when they
created a reciprocation trust game in which two person play against each other as briber
and official. The output of their research is that the potential punishment lowers
the level of corruption in experiment. This experiment was extended
by Jacquement (2005) and a role of principal was added into the game. The results show
that if the official is granted larger income by a principal than the corruption is less likely
among them. Some of the corruption experiments have focused on examining anti-
164
corruption measures. Apesteguia et al (2007) compared three potential anti-trust
policies using market games and focused on a situation where one firm of the cartel
decides to be a whistleblower. Rivas (2008) investigated gender effect on corrupt
behaviour in two player game with a result, that there is no significant influence
of gender on the behaviour.
Cameron et al (2009) focused their research into explaining cultural or country effect
on the corrupt behaviour. They run series of experiments in Australia, India, Indonesia
and Singapore with more than 1700 subjects. It showed that corruption is tolerated
more in India then Australia, which was also expected.
Other possible way how experimentally measure corrupt behaviour is to run a field
experiment. Armantier and Boly (2008) did test the external validity from laboratory
in Canada by moving the experiment to the field – in Burkina Faso. They applied
the experimental process on situation where candidate offers a bribe to a grader
in order to be better graded. There were not found any difference in the probability
of accepting the bribe, but there was a difference in situation when the bribe was
doubled. In laboratory the acceptance did not change, but in field the grader become
more corrupt.
Experimental evidence form Russian experiment
As mention above there is a possible way how to examine the corrupt behaviour using
experimental methods. There has been series of corruption experiment done at Faculty
of Economics and Administration, Masaryk University (see Špalek, 2011
or Chasikidisova, 2012). We have used the same experimental settings for a pilot
experiment during our stay at N.I. Lobachevsky State University of Nizhni Novgorod,
Russia in May 2012.
Experimental design
The design of our experiment is inspired by Cameron et al (2009). The basis
of the experiment is one shot three person game focusing on a bribery problem. Subjects
are randomly divided into three groups – firm, official and citizen. The firm starts
the game by making a decision to offer a bribe or not. If the firm does not offer a bribe,
then the rest of the players is not allowed to make any decision. If it bribes then official
has an opportunity to accept or reject the bribe. If the bribe is accepted the citizen has
to choose between punishing the firm and official or not. If the bribe was rejected
then there is again no possibility for citizen to play the game.
All subjects are from the beginning of the experiment aware about their potential payoff
– Figure 1. In comparison with the original setting by Cameron et al (2009) it was
adjusted for average Russian income level. We used the same numbers as in Czech
experiments but changed the exchange rate between experimental currency and Russian
rubbles. After the end of the experiment the payoff was divided by 60 for firms,
165
by 40 for officials and by 30 for citizens and paid in Russian rubbles to the subjects.
Funding for the experiment was provided by Faculty of Economics and Administration,
Masaryk University.
Figure 1: The structure of the treatment
Source: Author according to Chasikidisova (2012)
The payoff of each subject depends on his own decision and also on the decision made
by other player in subset. As mention, the experiment is kind of three person game.
It means that for example decision of firm no. 1 affects the payoff of official no.1
and citizen no.1 and vice versa. As can be seen from the figure 1 in the situation
when the firm does not bribe the payoff for it is 6000, for official 3000 and citizen 8000.
Accordingly the payoff of the firm vary between 3400 (offered bribe (B) = 400,
punishment (P) = 1200) and 9400 (bribe 1200). For officials between 600 (B = 400,
P = 1200) and 6600 (B = 800) and citizens could earn between 1200 (B = 800, P = 1200)
and 8000 (B = 0).
It is obvious that for the citizen to punish the corrupt behaviour means lower income.
Even though, as CAMERON et al (2009) show, some of the citizens do punish firms
and officials.
Procedure in Russia
As the experiment in Nizhni Novgorod was conducted as a pilot experiment its main goal
was to introduce the experimental economics and experimental investigation
to students and academic staff at Faculty of Economics at Lobachevsky State University.
Offer bribe (B)
B = {400,500,600,700,800}
Do not offer bribe
Reject bribe
Do not punish
Accept bribe
Punish (P)
P = {200,300,…,1200}
FIRM (F)
OFFICIAL (O)
CITIZEN (C)
F: 6000
O: 3000
C: 8000
F: 6000-200
O: 3000
C: 8000
F: 6000-200+3B
O: 3000+3B
C: 8000-7B
F: 6000-200+3B-3P
O: 3000+3B-3P
C: 8000-7B-P
166
We have run two sessions with 33 subjects in total. All subjects were students
of the 4th year of studying program International economics.
At the beginning of each session the subjects were handed a copy of instruction.
After reading the instructions there was explained the game procedure and shown
an example. The subjects were also asked to raise questions which were answered.
In order to diminish the language effect of not understanding English instruction,
all necessary materials was translated before into Russian language. Also all oral
communication was done in Russian with the assistance of the native speaker
as a translator.
Comparison of the pilot experiment in Russia with research in Czech
Republic
As mention before we have used the same setting for the experimental sessions
in Russian as it has been used at Faculty of Economics and Administration, Masaryk.
Therefore we do compare in this paper the pilot results with findings of the research
done in Czech Republic with students (Chasikidisova, 2012).
Structure of the subjects
At the end of the experiment the subjects were asked to fill in a questionnaire in order
to gain their gender, age, religious belief, work experience, income, experience
with corruption and motivation of their behaviour in the experiment.
Male and female were deputized almost equally in the subject simple (51.52% female).
Subjects of Russian experiment indicated in 75.76% religious beliefs. This is in contrast
with subjects in Czech Republic where there were only 26.7% believers among subjects.
As the experiment was performed only with students only we asked them
also about their work experience. In Russia 42.42% subjects had been working
for in average 1.8 years. The work experience of subjects in Czech experiments was
quite similar. 43.3% subjects had work experience, however mostly short-time jobs
without significant duration.
We did also focus on the income of the subjects. In general there was larger income
by the subjects who had been working than unemployed subjects. When we compare
the findings with the average income in Russia (18 553 RUB in 2010 according to main
Socio-economic indicators of living standards of population) we find that 68.97%
subjects have lower monthly income, 17.24% around the country average (category
15 000-19 999 RUB in questionnaire) and 13.79% above average. In the finding
by Chasikidisova none of the student in Czech experiment has income larger
than average income in Czech Republic. The reason for these results can be
that in Russia the students have to pay tuitions and therefore many of them have
to work in order to obtain the education.
167
The most interesting part of the questionnaire is without doubts the part focusing
on contact with corruption. The subjects were asked “How many times have you had
contact with corruption in the last year?” Most of the subjects indicated 10 and more
times in Russian and also in Czech experiments. There was indicated contact
with corruption 10 and more times in Russian experiment by 67% subjects, in Czech
Republic 52%. As we are familiar with the Corruption Perception Index by Transparency
International, the results are not surprising.
Even second question in questionnaire about personal experience has indicated larger
corruption level in Russia, then in Czech Republic. What can be considered as sad fact is
that about one third of Russian subjects have met corruption in person, as shows Table 1.
Table 1: Contact with corruption
in Russia in Czech Republic
in person at work 9.1% 6.5%
in person outside work 21.2% 3.9%
through friends, family 39.4% 19.5%
mass media 69.7% 79.2%
Source: Author and Chasikidisova, 2012
Results of the experiment sessions in Russia
In Nizhny Novgorod we were not able to gain more subjects for our experiment;
therefore pilot session had no statistical significance and we do not test the data.
However as the characteristics of the subjects in Russian and Czech experiments are
more or less similar (shown in previous part) we can provide an overview of the results
and compare them. From Czech experiments we do take only part of the data concerning
experiments with students. We exclude the data for general public.
As mention in the part Experimental design, the subjects were divided into three groups
– firm, official and citizen – each with 11 subjects. Chasikidisova (2012) used
92 students as experimental subjects. The behaviour of the subjects is summarized
in Table 2.
Table 2: Behaviour of the subjects
in Russia in Czech Republic
The firm bribes 45.5% 77.1%
avg. bribe 580 692.59
The officials accept the bribe 60.0% 60.9%
The citizen punishes 33.3% 62.5%
avg. punishment 200 700
Source: Author and Chasikidisova, 2012
As you can see in the table there is a difference in behaviour of the initial subjects – firm.
168
In Czech experiment more than three quarters of subjects offered a bribe, in Russian
pilot the bribe was offered only by less than half of the subjects. As the characteristics
of the subjects are practically similar we could observe country effect which is
in contrast with expectation that there will be larger ratio of bribing firms in Russia
than in Czech Republic. However as stated before the size of subject pool in Russia was
so small, that we cannot make any conclusions. Nevertheless this is a good clue
for further research in Russia.
As we observed difference in the firm behaviour, the behaviour of the officials was
almost the same in Czech and Russian experiment. But we cannot make any conclusion if
it is significant while there were only 5 subjects as official in Russian experiment
when 64,5% firms did not offer the bribe.
We cannot also make any conclusion about the behaviour of the citizen
when only 3 subjects were in the game after the decision of firms and officials.
Out of them only 1 person punished.
Conclusion
In sum, we informed in this article about the pilot experimental sessions at Lobachevsky
State University of Nizhny Novgorod, Russia and gave rough overview about the results.
To gain more valuable results there is a need to repeat the experiment in Nizhny
Novgorod with more subjects, which we hope can be done since we have established
good connection to researchers at Faculty of Economics there.
Acknowledgements
This article has been elaborated as one of the outcomes of research project
MUNI/A/0778/2012 Selected models of the public economics in experimental
environment.
References
ABBINK, K., IRLENBUSCH, B., RENNER, E., (2002) An experimental bribery game. Journal
of Law, Economics and Organization 18 (2), p. 428-454.
Apesteguia, J., Dufwenberg, M., Selten, R., (2007) Blowing the Whistle. Economic Theory.
Vol. 31, Issue 1, p. 143-166.
ARMANTIER, O., BOLY, A., (2008) Can Corruption Be Studied in the Lab? Comparing a
Field and a Lab Experiment. CIRANO - Scientific Publications No. 2008s-26.
CAMERON, L., CHAUDHURI, A., ERKAL, N., GANGADHARAN, L., (2009) Propensities to
engage in and punish corrupt behavior: Experimental evidence from Australia, India,
Indonesia and Singapore. Journal Of Public Economics Vol. 93, Issue 7-8, p. 843-851.
169
CHASIKIDISOVÁ, H. (2012) Corruption in the Public Administration: Theory and
Experiment. Masaryk University, Faculty of Economics and Administration.
JACQUEMENT, N., (2005) Corruption as Betrayal: Experimental Evidence on Corruption
Under Delegation. Documents de Travail Working Paper No. 05-06.
RIVAS, M. F., (2008) An Experiment on Corruption and Gender. The Papers from
Department of Economic Theory and Economic History of the University of Granada
Working Paper No 08/10.
MAIN SOCIO-ECONOMIC INDICATORS OF LIVING STANDARDS OF POPULATION. (2011)
[online]. Russian Federation Federal State Statistic Service [25.10.2012] Available from
WWW: http://www.gks.ru/bgd/regl/b11_12/IssWWW.exe/stg/d01/07-01.htm.
170
Public Administration Accreditation in the Czech Republic
and in Slovakia
Nemec Juraj, Špaček David
Abstract
Results of accreditation processes realized by the European Association for Public
Administration Accreditation (EAPAA) indicate that only very few schools in Central
and Eastern Europe (CEE) comply with international standards. More factors may be
responsible for such situation – resources, historical paths, etc. The goal of this paper is
evaluating the functionality of the system of national accreditation in higher education
on the example of two country studies – Czech Republic and Slovakia. Research results
discover too many problems connected with probity character of accreditation processes
in both countries. It also states that immediate reactions cannot be expected –
governments and main actors do not see purposes for change.
Key words
accreditation, public administration, EAPAA, probity accreditation, peer accreditation
Introduction
Not much has been written about the accreditation of academic programmes (with focus
on public administration) in CEE. Few existing books (Verheien and Nemec, 2000,
Loffler and Vintar, 2004, Jenei and Karoly, 2008) indicate some malfunctions.
Forthcoming paper in the Public Management Review by Nemec et all (2013) provides
more info about the topic and represents impetus for further research. Ciaian et all
(2005) highlight important problems on the example of economic sciences in Slovakia
(public administration is part of economic sciences in this country).
The issue of the quality assurance in higher education is more commonly researched
and there are plenty of articles and books on the topic – there is no need to list most
important for the purposes of this paper.
The goal of this paper is evaluating the functionality of the system of national
accreditation in higher education on the example of two country studies – Czech
Republic and Slovakia. Qualitative analysis is the core method of our paper – on the base
of the review of existing processes (data collected from web pages of accreditation
committees and enriched by own experience) we try to synthesise core problems
and possible reactions.
171
Accreditation on the Higher Education Level
There are many approaches to the accreditation of academic institutions
in the developed world (see for example Jenei and Karoly, 2008). Some of them have
more regulative functions: others serve predominantly as quality management tools.
In most countries accreditation of a higher education program is normally understood
as a process which ends in “yes” or “no”. The accreditation body recommends or does
not recommend to include the school (program) in a nationally recognized network.
Yes in this case means a grant of the right to deliver the respective program.
Concerning structures, approaches, tools and methods used, we could distinguish
between many forms of accreditation, distinguished by different characteristics, such as:
A: Domain: National accreditation: valid for a single country (in the EU normally for all
member countries) or International accreditation.
B: Accreditation body: Accreditation completely delivered by respective state body
(mainly Ministries of Education and their branches); Accreditation awarded
by the Ministry, but carried out by a semi-independent public body (some kind
of Accreditations committee, nominated by the state); Accreditation awarded
by the Ministry, but created by a fully independent, normally private body - outsourcing
to private accreditation bodies; Non-state accreditation systems, where the processes
and outcomes are fully independent from the state and carried out by a professional
organization.
C: Methods of evaluation: Accreditation on the basis of fixed quantitative criteria
(probity); Accreditation on a more flexible basis – for example on the basis of a set
of broader standards and/or a mission and its fulfilment.
D: Evaluation staff: Accreditation process carried out by “bosses/controllers” - one level
higher than evaluated staff; Accreditation process carried out by “peers” (colleagues
who assess the situation in order to help to improve it; Accreditation process carried out
by professional persons independent of the institution.
E: Main goals: To award the right to deliver a degree – predominantly a regulative
function; To help to improve the quality of the school/programme – predominantly
a quality management function.
F: Scope: Accreditation of the whole body (university or faculty); Accreditation
of a program.
G: Site visit: A site visit compulsory for the accreditation process; A site visit is not
included: all evaluation is only “paper based”.
Do we need accreditation?
Many countries use accreditation as the tool to select universities eligible for public
monies. The general rule is that only nationally accredited programs can be supported
172
by public funds: in most countries non-accredited programmes are not delivered. Let us
think about this. We can still ask the question “Do we really need accreditation?”
Why should anybody have the right or privilege to say “yes” or “no” to some school
or its programme?
Some experts (like J. Kinkor in the Czech Republic) might argue that students (supported
by parents) are the best judges of the quality of a school where they want to study.
So there is no need for the government to establish the national accreditation system,
to check if a school/program has the right to deliver a university degree. Students`
choices might be also preferred because of the high risk of “government failure”
(Stiglitz, 1997). The “government failure” problem in connection with accreditation
means that no accreditation system is perfect, as it is very difficult to get a precise
independent measure of quality.
On the other hand – can we fully accept the assumption that students really are the “best
judges”? It is relatively simple to show that the majority of students follow certain
strategies that prevent “socially optimal choice”. With imperfect labour markets
the typical student’s strategy might be short-term: choosing the easiest way to finish
their studies. Another problem, very significant in Central and Eastern Europe, occurs
when students, perhaps because of, for example a lack of resources or their family
situations, prefer to enrol at the nearest available university programme
in an acceptable field of study.
There is another unavoidable motive for European accreditation. Globalization
and the Bologna agreements, which focus on bridging national university education
systems and institutions, and helping students to migrate during their studies, show that
the international acceptance of the program or institution is now increasingly important.
It is natural that the tutors will want to know if credits obtained in another school
are equivalent.
Based on all above we may argue that accreditation process may but must not be one
of tools supporting increasing quality of higher education. It might deliver positive
impact, but only if it is effective and efficient process – in the following text we
investigate, it this is true in selected countries.
Czech Republic
In the Czech Republic, the accreditation of academic programs is delivered
by the Accreditation Committee (AC) of the Ministry of Education, Youth and Sports
(www.akreditacnikomise.cz). This Committee has currently 20 members - professors
from Czech universities appointed by the Minister. Within the organization
of the Accreditation Committee 21 permanent subcommittees exist (again selected
mainly from Czech university professors and associate professors), none of which refer
to public administration as a field itself (although separate subcommittees exist
for Economics, Social sciences, or Law for example). The AC does not publish any set
173
of minimum standards that define the minimum general content requirements of public
administration study programs. It also does not set the list of areas where public
administration programs can be provided.
The AC attends to quality of university education and broadly evaluates the educational,
scientific, research, development and innovative, artistic and other creative activities
of universities. The AC has twenty-one members. A chairman, vice-chairman
and members of AC are appointed by the government based on minister’s nomination.
The minister prior to the nomination requests a recommendation by representatives
of universities, the Research and Development Council and the Academy of Sciences
of the Czech Republic and discusses the nomination with them. Only a broadly
respected professional may become a member of the AC. The members of AC shall be
independent when discharging their office.
In the Czech system of higher education the basic unit to be accredited is a study
programme. Any study programme can include several study branches
and specializations. Main criteria for accreditation are as follows:
• The contents of studies (if existing, shall respect the national curricula –
as indicated above, PA national curricula do not exist in the country).
• Technical and IT equipment (internet access, internal information system,
library).
• Quality of science and research (no clear set of indicators for minim quality).
• Responsible person (docent for Ba, professor for Ma, full time, maximum
employment in other institution 50%, can be responsible only for one
programme, graduated in publishing in the discipline).
• Teaching staff (main courses shall be delivered by internal staff, sufficient
number of staff of adequate quality (??), on Ba level 40% of courses shall be
delivered by docents and professors, on Ma 60%, teachers with more than 1,75
full employments are not accepted for evaluation).
The accreditation of a study programme shall be granted for a maximum of ten years,
counted as of the day of legal force of the decision. The validity of the accreditation may
be repeatedly prolonged. During implementation of the accredited study programme
a university may apply for accreditation for extension thereof. The Act provides
that an accreditation of a study programme shall be terminated by announcement
of termination of study programme by the university, or by lapse of time therefore
the accreditation was granted. A university shall arrange for an option for the students
to continue with studies of the same of similar study programme at the same of different
university. The ministry shall not grant the accreditation if:
a) the study programme does not fulfil requirements set in part four of the Act,
174
b) the study programme is not sufficiently supported as regards personnel, gadgetry
and information,
c) realization of the study programme is not sufficiently financially, materially
or technically established ,
d) the university does not provide guarantee of due tuition,
e) wrong data decisive for granting of accreditation were presented in the application,
e) the Accreditation Board hasn‘t issued an approving statement.
Slovakia
The accreditation process in Slovakia (we do not evaluate “complex evaluation”
processes introduced from 2009 in this paper) involves two levels of decision making.
The main part of the process is carried out by the Accreditation Committee (AC) –
a semi-independent advisory body of the Government of Slovakia. The Accreditation
Committee (www.akredkom.sk) has a main decision-making body and several
subcommittees to evaluate study programmes. The members of the AC
and its subcommittees are university professors and expert practitioners, working
on a voluntary basis, supported by a small group of professional administrative staff.
The system is relative simple – the University submits an application to accredit
a selected study program. The assessment is allocated to one of subcommittees.
The committee checks the application, drafts a proposal and the main body reaches
a final decision. There is no site visit. After AC decides it submits its proposals
to the Minister of Education, who has the final right to decide the award of accreditation.
The Slovak accreditation process is mainly based on a set of publicly known criteria.
It confirms the capacity of the school to deliver the programme, and it says yes or no
to the program. Non-accredited programs cannot be delivered.
The set of decision criteria is as follows:
1. The level of scientific activities of the school and its bodies participating
in the program (minimum level is set out in a descriptive way, not by indicators).
2. Sufficient material and technical equipment (the minimum concrete criterion is
a library; other aspects are set out in a descriptive way, not by indicators).
3. Structure of academic staff (the requirements are set out in only a descriptive
way, not by indicators).
4. Quantity of academic staff (defined so that the maximum number of MA and BA
theses per staff member is 10. MA theses can be supervised by PhD or higher
qualification holders).
5. The structure of committees for the final state examination (the minimum
175
requirements for the approval committee, two members of which must be
internal docents or professors).
6. Person responsible for the programme (there must be a full time internal person
responsible for the programme, with proven experience in the field, sufficient
publications and teaching experience, below 70 years of age, minimum docent
for BA and professor for MA programmes).
7. The contents of the programme (as a minimum 3/5 of the curricula must be
based on national “Masters Curricula” and the program shall provide necessary
skills).
8. Length of studies (BA: 3-4 years, MA: 1-3 years)
9. Final theses (MA and BA levels shall include final theses of prescribed structure
and length).
10. Selection of students (the proper approach is set out in a very descriptive way,
not by indicators).
11. The requirements to pass examinations and to obtain degree (the proper
approach is set in a very descriptive way, not by indicators).
12. The quality of graduates (expectations of graduates are set out in a very
descriptive way, not by indicators).
Results and Discussion
Based on the above mentioned characteristics and our personal experience we may
conclude that the Czech and Slovak accreditation systems have following common main
features:
• dominantly national accreditation;
• state accreditation system undertaken by a semi-independent state body;
• probity accreditation system;
• experts who undertake the accreditation are peers, but in reality they become
more like controllers than peers;
• regulative accreditation;
• accreditation of a programme;
• “paper” based accreditation.
Such accreditation process has it strengths and weaknesses. Potentially positive aspects
are some level of peer involvement, the relative independence of the AC and especially
the existence of published criteria. On the other hand, systems include many critical
176
points, limiting their effectiveness as a regulative and quality control tool. The following
text highlights the most important problems.
The list of above indicators clearly shows one of the problematic aspects of this kind
of accreditation – most of the criteria are insufficiently transparent and can be
interpreted very differently, to help or to hinder a school.
It is also doubtful whether all these criteria are genuine. For example, in many cases
a 63 year old professor would be able to deliver much less than a 35 year old PhD.
Some of the criteria even have perverse effects – for example one of a few specific
accreditation indicators is the need to employ an in-house docent or professor
to represent a program. Therefore universities need professors and docents to serve
as guarantors of programs. One option is to artificially speed up the process
of promotion, and there are too many indications for comfort that this is actually
happening. Suffice it to mention one – the promotion criteria in majority of schools,
especially in Slovakia. As Ciaian et al. (2005) show for Slovakia, most economics faculties
use rather soft criteria for the promotion of professors – in some cases a person is
promoted without being the author of any article in an Web of Science international
journal, while the required number of quoted articles in international journals
for promotion to professor is 0–3.
As accreditation is the necessary precondition to get the right to deliver a university
programme, such a system of criteria, in combination with the method of selection of AC
and its subcommittee members, and with the method of setting national standard
curricula (Slovakia), creates a lot of risks some of which have been realized. The Slovak
AC and its subcommittee members are professors, predominantly recruited
from existing established universities. Professors from these schools were
also responsible for setting the national curricula. As the voice of experts from practice
is very marginal, such arrangements give established universities too much influence
over the process. This level of influence is normally misused to grant accreditation
to their programmes without real evaluation, and to block any new entrants
into the “market”.
Another problem in Slovakia is that in many cases the national curricula were not
created on the basis of modern international practice but they just mirrored the current
structures of established programs (supply driven curricula). Nor do the approved list
of study programs that can be delivered in the national higher education system, reflect
modern international practice – for example, many standard programs (such as public
finance) are not included, and several “system specific” programs are codified
(e.g. public economics and services). The national curricula are also far too fragmented.
That is there are too many “small” courses, and they still focus on direct education
inputs, that is lectures and seminars. Most programs derived from such curricula include
177
over 20 teaching contact hours per week, much more than current international
practice, which is moving from direct lecturing towards problem solving and homework.
Conclusions
The accreditation process in the Czech Republic and in Slovakia is expected to serve
mainly as a regulatory tool, to prevent low quality programs either entering the market,
or surviving in it. However, because of the aforementioned features it does not serve
to these goals very effectively. In addition it limits the chances for many positive
progressive developments. It allows for too much subjectivity and includes too few
international comparisons.
Because of this accreditation is frequently more of a fighting tool between new
and established schools in their search for public funding, and not positive public policy
instrument.
On the international level, probity based accreditation is frequently combined
or replaced with peer review standard based accreditation. In Europe such accreditation
in public administration field is delivered by EAPAA. The differences between
international practice and national practices are visible, if we look on results of EAPAA
accreditation in our two countries.
In Slovakia the Faculty of Economics UMB Banska Bystrica received accreditation
in 2005, but did not ask for re-accreditation. In the Czech Republic Faculty of Economics
and Administration MU Brno received three year accreditation in 2012. No other school
is willing to apply – very much also because it would not fulfill standards.
The difference between national probity based system, discouraging quality
and international standards is large. National governments are partly aware about this,
but their corrective actions are minimalistic – we may argue that the main purposes
for limited will to be closer to international standards is the satisfaction of main actors
with the current situation. In such conditions, proposing changes – we would argue
for “combined” (national and EAPAA) system – is ineffective.
Acknowledgements
Our research was supported by the GACR project P403/12/0366: Identification
and evaluation of the region specific factors determining success of NPM reforms - CEE
region.
References
CIAIAN, P., POKRIVCAK, J., RAJCANIOVA, M. (2005) ‘Stav ekonomickej vedy na
Slovensku‘ Finance a úvěr, vol. 11–12, pp. 546-565. ISSN: 0015-1920
178
JENEI G., KAROLY, M. (2008) Public Administration and public policy degree programmes
in Europe: The road from Bologna. Bratislava: NISPAcee. ISBN 978-80-89013-37-1
LOFFLER E., VINTAR M. (2004) Improving the quality of East and West European Public
Services. ASHGATE and NISPAcee, Bratislava, ISBN: 0 7546 3972X
NEMEC, J., SPACEK, D., SUWAJ, P., MODRZEJEWSKI, A. (2013) Public Management as a
University Discipline in New European Union Member States. Public Management
Review, forthcoming
STIGLITZ, J. E. (1997) Ekonomie verejneho sektoru. Praha: Grada. ISBN 80-7169-454-1
VERHEIJEN, T., NEMEC, J. (2000) Building higher education programmes in Public
Administration in CEE countries. Bratislava: NISPAcee. ISBN B005SECGPU
179
The Utilization of Benchmarking in the Production
and Analysis of Municipal Budgets
Plaček Michal
Abstract
In this article, the author would like to discuss the possibilities of using benchmarking in
the production and analysis of the budgets of municipalities. The aim is to assess the use of
benchmarking in practical applications. The author tries to prove his claim with an
analysis of Czech and foreign publications which deal with benchmarking, and by empirical
surveys, which were carried out in municipalities of the South Moravia and Vysočina
regions. The research showed that the officials, who are formally responsible, recognize the
importance of benchmarking, but they do not use benchmarking in practical applications
for producing and analyzing budgets. According to research, the data about using results
oriented benchmarking are not fully credible.
Keywords
benchmarking, budget, performance oriented, process oriented, municipalities
Introduction
The aim of this paper is to assess the level of benchmarking utilization in the budgeting
and financial analysis in municipalities. The author analyses Czech and foreign
literature, describes the experience with benchmarking in the Czech Republic
and presents the results of his own research. Benchmarking is one of the most important
and most widespread tools for measuring performance and improving processes
in Czech local governments and the public sector in general. According to previous
research, it is deemed acceptable for utilization in practice by responsible officials.
Benchmarking was acquired in the reform of public administration in Central
and Eastern Europe (Bouckaert, 2008). Valuable experience from Central and Eastern
Europe countries are represented by the article Best Value in Transitional Countries
from Christiina Tonnisson, mainly because of the methodology of research, which was
carried out by many municipality managers.
In the Czech Republic there was a special project to support local government
organizations in the Visegrad countries supported by a Canadian government agency
CIDA (Široký, 2004). Benchmarking has therefore become an established tool for quality
improvement, which was showed in the dissertation by Jarmila Neshybová.
If we focus on the sources describing the practical applications of benchmarking
in the Czech Republic, there are quite a large number of sources freely provided by
the Ministry of Interior. One of the first publications which can be recognized is
180
the publication by J. Široký: the Benchmarking in Public Administration from 2004.
Another publication by the Ministry of Interior was the publication by M. Půček´s
Benchmarking in Public Administration from 2006. Other resources are the publication
of MEPCO (International Advisory Centre of Municipalities) Good Practice
of Benchmarking. Contributions to the National Conference of Quality, dissertation´s,
diploma´s and bachelor thesis are regularly focused on benchmarking. It has created
a large number or internet projects such as http://www.benchmarking.vcvscr.cz/ etc.
The author found through analyzing sources that paradoxically, in the Czech Republic
the number of publications dealing with benchmarking in the public sector has
increased more than the experience of private sector. In this context, we can mention
two publications: monograph Benchmarking, How to Imitate Successful Ones,
and Benchmarking, Myth and Reality.
Benchmarking
Benchmarking can be understood as a systematic, continuous, planned process
performed to measure, compare and evaluate the processes, products, services,
or performance parameters with selected organizations, partners or competitors
that in selected parameters can be considered better performed than one´s own
organization in order to define the opportunities for self - improvement.
(Nenadál, 2011 p. 15) Nenadál in his book Benchmarking, Myths and Reality presents
the definition of the American Center for Productivity and Quality and the American
Society for Quality, the same author cites the research of M. Kozak, that the majority
of definitions emphasizes the connection with improving performance processes. Camp
defines benchmarking as following: „a proactive process to change operations
in a structured fashion to achieve superior performance. The benefits of using
benchmarking are that functions are forced to investigate external industry best practices
and incorporate those practices into their operations. This leads to profitable, high asset
utilisation businesses that meet customer needs and have a competitive advantage.“
(Magd, Curry, 2003, p.168)
The methods of benchmarking were for the first time in managerial practise, used
by Xerox (Nenadál, 2011, p. 11.), (Neshybová, 2011, p. 64). The first application
in the public sector was the initiative of city managers of the Ontario Initiative OMBI
(Široký, 2004, p. 7). Benchmarking of municipalities developed separately
from the private sector (Boveman et al, 2002). Benchmarking in the private sector is
strictly focused on acquiring the best practises, in the public sector it is known
as „the good enough“. Private sector implemented benchmarking voluntarily
as a function of internal management, the public sector usually mandatorily (Boveman
et al, 2002). If the public sector implements this activity voluntarily, this process is often
associated with “a defensive benchmarking”, where the main goal is not to show the best
performance, but only moderately good performance possibly not the worst (Boveman
181
et al, 2002). The obtained data from the benchmarking of private sector are confidential,
the public sector data are expected to be published (Bjørn, Bjørnar, 2008).
If we look at benchmarking in a broader context, we can classify it as one of the tools
for improving the quality of the New Public Management reforms (Pollit,
Bouckert, 2004). In Western countries it is associated with Best Value Concept (Magd,
Curry, 2003). The use of benchmarking is often demonstrated by the example
of England, USA, New Zealand, which can be pointed to as pure NPM countries.
Many projects regarding benchmarking were implemented by local self- governments.
(Boveman et al, 2002), Next Steps agencies, health care providers, functions of central
government (Cowper, Samuels, 1999) in England. In the USA and New Zealand
the application of benchmarking health care providers is very closely described
(Wynn, Willams, 2005).
The source of this information in particular is the following articles: The Evolution
of Benchmarking in UK Local Authorities author´s Boveman et al. which excerpts
analyses of already published research, adds a literature search and the OECD report
Performance Benchmarking in the Public Sector: The United Kingdom Experience.
This article focuses purely on research and the future development: A framework
for Benchmarking in the Public Sector, Literature Review and Direction for Future
Research from Authors Dorsch and Yasin.
The using of benchmarking in the compilation and analysis of municipality
budgets
When we analyze the possibilities of using benchmarking, we should distinguish
between “process oriented” and “results oriented” (Klages, 1999). As the process
oriented benchmarking, we can consider:
a. Benchmarking of methods and budgeting process
b. Benchmarking of budget expenditures from the perspective of 3E
As the results oriented benchmarking can be considered:
a. Benchmarking of ratings and others evaluations of financial health
In comparison with process orientated benchmarking, the result orientated
benchmarking is focused on identifying gaps in performance and has a lower effect
of learning.
Secondary analysis for Czech Republic shows:
• In the analysis of relevant sources, which should cover the comparison
of the budgeting process itself, for example methods used (closely Wright,
Němec, 2002), time spent and cost of process, the author did not register
any relevant initiatives, whether it was an item listed for comparison posted
182
on websites of Benchmarking Initiatives (BI), MEPCO organizations,
and Networks of Healthy Cities
• Much greater emphasis is placed on the analysis of budget´s expenditures.
When comparing themselves among municipalities, use of the database
Benchmarking Initiative is the most common (Neshybová, 2011, p. 68).
This database contains the absolute amounts spent on certain items that can be
evaluated in terms of 3E:
• “ The spending on state administration and self government
• Total revenue and expenditures
• Expenditure on subsidies
• Expenditure on cultural facilities and services
• Expenditure on social facilities and services and others” (Neshybová,
2011, p. 68)
• In the area of financial health it is the most common comparison carried out
by third parties. When evaluating the financial health of municipalities, we can
identify two fundamental problems; it is the inclusion of socioeconomic variables
and the quality of public services provided by municipalities to the evaluation
model (Zafra-Goméz, López-Hernandés, 2009). This category represents
the Ministry of Finance and its system of monitoring and reporting indicators,
in the context of the transition state on the accrual basis of accounting,
this system draws data primarily from the balance sheet, such as liquidity,
and the share of liabilities on total assets. The data regarding incomes
and expenditures for the calculation of debt service are taken from budgets.
Private entities are represented by activities ČEKIA and Moody´s. ČEKIA
publishes a comprehensive report on the server www.ipoint.cz. Generally,
the indicators of budget performance, liquidity and debt ratio therefore are used.
ČEKIA methodology is on the same base as the SIM of Finance Ministries
(i.e. the Government Resolution No. 695). For the most important, consider
these factors:
• The ratio of liabilities to total assets (the risk is considered to be
the indicator with value greater than 25%)
• The ratio of current assets to short term liabilities (current liquidity,
the risk is called a value less than 1)
Moody´s awarded the rating, it is necessary to distinguish the national rating that most
Czech cities ranges from grade Aa1.cz and Aa2.cz (Moody´s, 2012, p.1), but the basic
credit BCA rating has greater explanatory power, that evaluates municipalities in a more
detailed way. Part of the evaluation report is a series of five basic indicators,
183
which according to the author describe very well the level of finance management.
The indicators are the following:
• “ Net and indirect debt / operating income
• Debt service / total revenue
• Gross operating balance / operating income
• Balance of total budget / total revenue
• Current transfers / operating income
• The capacity of self – financing
• Capital expenditure / total expenditure” (Moody´s, 2012, p. 1)
These indicators can be calculated from budgets, which cities are obliged to post.
In addition, Moody´s is the only one institution which evaluates the level of financial
management and administration. Its own methodology is presented as a combination
of budget performance, liquidity and debt ratio, which is brought up
in the dissertation of Irena Opluštilová.
Methodology and results of our own research using benchmarking
in municipal budgeting
The aim of this research was to evaluate the level of using benchmarking in municipal
budgeting, especially in the South Moravian region and the region of Vysočina. The base
of the research was the previous findings of Dr. Neshybová, which were published
in her dissertation; she claims that benchmarking is most used in municipalities
with extended power in these regions. That is the main reason why these two regions
were selected as a sample. The author contacted via mail, heads of financial departments
of all municipalities with extended powers in the region of Vysočina (15 municipalities)
and in the South Moravia region (21 municipalities). The structure of respondents was
as following: 72% women, 28% men, 81% with university education, and 19%
with secondary education. The questionnaire included 7 questions, 4 possible answers
choices from multiple questions. The questionnaire was opened for 21 days. The return
ratio of total number of respondents of questionnaires was 61, 90% in South Moravian
region (13 from 21 cities surveyed) and the region of Vysočina (11 of 15 surveyed
cities).
The questions were designed for the purpose of preliminary research and the aim was
to verify the claims of Dr. Neshybová. The secondary goal was to extend the existing
knowledge by focusing on the practical issues of using benchmarking the production
of municipal budgets.
In determining the reliability of the research, the author did not use any statistical
methods, the chosen sample is based on the premise that the results obtained
184
in these regions will have a general validity for other municipalities of the Czech
Republic, according to the literature review, in other regions which have not taken place
in programs on the implementation of benchmarking in a much greater extent than
in the above mentioned. The selected sample is not statistically significant, even though
I believe that it provides a fairly good picture of the situation in the Czech Republic.
The concept of benchmarking is generally known among the heads of financial
departments, 100 % of the officials from Vysočina region who took part in the survey
encountered this concept and 91,67% in the South Moravia region. The next question
regarded the added value which should be given to benchmarking in the process
of compiling and analyzing budget. 87% of respondents in South Moravia region
and 90,91% respondents from region Vysočina consider benchmarking useful.
During his research the author put forth a question which concerned the type of data
that would be in the preparation and analysis of individual budgets chosen by the heads
of financial departments. The possible answers and results for the South Moravian
region and Vysočina region are posted in the following table.
Table 1: Results (in %) of responses to the question: "What figures would you choose
for the budgets benchmarking?"
Answer
Result –
South Moravian region
Result –
Vysočina region
Absolute values of current and capital
revenue and expenditure, current
balance, total balance, etc.
15,38 18,18
Ratios, such as debt service, capital
expenditure / total expenditure
15,38 36,36
Data per citizen, such as capital
expenditure per citizen, operating
expenses per citizen
15,38 18,18
Other 53,85 27,27
Source: Author
The results showed a large share of the answer "other" respondents were also asked
to specify their answer. Most specifications were a combination of the previous options.
The author is aware of certain issues of subjectivity of possible answers, as options
of possible answers which were presented only as indicators related to budget
performance, it is connected with the continuous reform of state accounting, as it is still
in progress and the author's subjective opinion is that the heads of departments
who have been around for years and who used to work primarily with budgets,
as the main base, don´t have experience with using balance sheet for calculating debt
ratios and liquidity, because the balance sheet did not provide a true and fair view
of reality.
One of the other important issues is undoubtedly the key under which the municipalities
185
should be compared. "Benchmarking Initiative divides the city into groups according
to population, so as to maintain the condition compared with the comparable."
(Neshybová, 2011, p 68) The same approach is used by ČEKIA. This thesis was proved
by the results of the survey, the respondents responded to the question, which cities
they would like to benchmark their financial performance against. Responses are
summarized in the following table.
Table 2: Results (in%) of responses to the question: "Which cities would you like
to benchmark your financial performance against?"
Answer
Results – South Moravian
region
Results – Vysočina region
Cities with the same population 84,62 54,55
Cities solving the same problems,
e.g. debt ratio
7,69 0
Others 7,69 18,18
Neighbourhood cities 0,00 0
Cities of Southern Moravia region 0,00
Cities of the Vysočina region 27,27
Source: Author
In both regions anticipated answer:”Cities with the same population „was selected,
by far, over the other options. An interesting situation occurred in Vysočina,
the respondents expressed interest in benchmarking with towns in the same county.
According to the author, this is more about psychology and usage of defensive
benchmarking in order to show that the municipality does not perform worse
than other cities in the region.
One of the most frequently mentioned disadvantages of benchmarking is high timeconsumption.
Generally, we can use the following data sources: "public accessible
sources, direct comparison, a special database, external reports, self-assessment against
the models of excellence." (Nenadál, 2011, p.20) author asked heads of financial
departments question which related to how much time they would be willing to spent
with benchmarking. The results are summarized in the following table.
Table 3: Results (in %) of responses to the question: "How much time would you be
willing to spend on benchmarking?"
Answer
Results – South Moravian
region
Results – region Vysočina
Less than 8 hours 38,46 63,64
Less than one week 53,85 36,36
More than one week 7,69 0,00
Source: Author
The results suggest that officials do not want to spend too much time with the process
of benchmarking, which corresponds mainly to the possibility of using databases.
186
This would correspond with an orientation on performance-oriented benchmarking,
which serves as the primary tool for identifying gaps in performance, which would
comply to a relatively low willingness to spend time with process benchmarking.
As mentioned in the previous text, all municipalities with extended powers of the region
of Vysočina were involved in this initiative, as there was a special question focused
on the region of Vysočina, this question was regarding the question about the methods
of data collection for benchmarking. The result was that the Benchmarking Initiative
database is used by only 36.36% of respondents.
Conclusion
The research results showed that the formally responsible officials recognize
the importance of benchmarking, but realistically do not use this method
in the budgeting process. According to research, the data about the intensity of using
result oriented benchmarking are not fully credible. This differentiation from the results
of research of Dr. Neshybová and the published foreign research could be caused
by the very specific focus of this research. Previous research deals with the issue
of utilizing benchmarking in municipalities as a whole, whereas the author's research is
focused on the specific field of utilizing benchmarking in the production of municipal
budgets, as it was specially focused on financial management.
The author on the basis of analysis of the literature concluded, that there is some gap
in benchmarking initiatives, which concern themselves mainly with budget process.
This was not mentioned either in the publication of Good Practice Benchmarking,
or the issued MEPCO. It would certainly be worth trying to do research, which would be
focused on methods used in the preparation of budgets and what the time-consuming
process in individual cities are.
Individual cities, which are involved in the Benchmarking Initiative, are likely to have
enough information to be able to focus on examining budgetary expenditures in terms
of 3 E. While in the Vysočina region a benchmarking project was implemented,
according to survey, a relatively small proportion of heads of financial departments use
the Benchmarking Initiative database.
In evaluating the financial health of the municipalities, according to the author, there is
no relevant initiative to evaluate this issue in its complexity. The SIM of Ministry
of Finance and comparison of municipalities ČEKIA focuses more on liquidity ratios
and debt ratios. A more comprehensive evaluation is provided by Moody's, who took
over the methodology of evaluating the financial health of U.S. cities
(more in The Application of Joint Default Analysis to Regional and Local Governments).
This assessment, however, is only offered to towns as a commercial service.
The initiative could take the non-profit sector, such as the organization Rozpočet obce,
ops, which publishes the budgets of municipalities and is planning the project
187
of benchmarking in terms of financial health; this project is designed more for public
society than for the bureaucrats.
According to the author's opinion it would be the best solution to the problem in terms
of performance-oriented benchmarking indicators to complement SIMU Ministry
of Finance by other indicators, especially budget management and to create a database
for the municipalities, which would allow a quick comparison of the financial health
of individual municipalities. If we focus on the process of budgeting, the simplest
solution would undoubtedly be to add the database Benchmarking Initiative
to budgeting methods item and complete the case studies of good practise
with the experience of the municipalities, which use a different method than incremental
budgeting, which, according to the author, prevails.
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Public Sector Principal-Agent Relationships. Benchmarking, vol. 15, no. 6, pp. 723-741
ProQuest Central. ISSN 14635771. DOI 10.1108/14635770810915913.
BOUCKAERT, G., NEMEC, J., NAKROŠIS, V., HAJNAL, G. and TONNISSON, K. (2008) Public
Management Reforms in Central and Eastern Europe. NISPAcee. 2008. Bratislava. ISBN
978-80-89013-41-8
BOWERMAN, M., GRAHAM, F., BALL, A. and FRY, J., (2002) The Evolution of
Benchmarking in UK Local Authorities. Benchmarking, vol. 9, no. 5, pp. 429-449 ProQuest
Central. ISSN 14635771.
COWPER, J., SAMUELS, M. (1999) Performance benchmarking in the public sector: The
United Kindom experience., [online]. Available from WWW:
http://www.oecd.org/dataoecd /12 /8/1902895.pdf
ČEKIA. (2008) Hospodaření obcí se v posledních čtyřech letech zhoršuje. [online].
Available from WWW: http://www.ipoint.cz/zpravy/105267311-cekia-hospodareni-
obci-se-v-poslednich-ctyrech-letech-zhorsuje/
DAHLBERG, L., and ISAKSSON, CH. (1999) The implementation of benchmarking from a
Swedish perspective., [online]. Available from WWW: http://www.oecd.org
/dataoecd/12/ 8/1902895.pdf
DORSCH, J.J., and YASIN, M. M. (1998) A Framework for Benchmarking in the Public
Sector Literature Review and Directions for Future Research. The International Journal
of Public Sector Management, vol. 11, no. 2, pp. 91-115 ProQuest Central. ISSN 09513558.
Kolektiv Autorů (2007) Dobré praxe z benchmarkingu. 1. vyd. Praha: MEPCO s.r.o., 101 s.
ISBN 978-80-903960-3-6
188
Kolektiv Autorů (2004) Sborník příspěvků 1. české národní konference kvality ve veřejné
správě s mezinárodní účastí. 1. vyd. Praha: Ministerstvo vnitra ČR, , 160 s. ISBN80-239-
4099-6.
MAGD, H. and CURRY, A. (2003) Benchmarking: Achieving Best Value in Public-Sector
Organisations. Benchmarking, vol. 10, no. 3, pp. 261-261 ProQuest Central. ISSN
14635771.
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ng&submit.x=0&submit.y=0
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from WWW: http://www.moodys.com/researchdocumentcontentpage.aspx?docid
=PBC_107844
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190
Practical Use of the Dynamic Balanced Scorecard Method
in a City
Půček Milan, Koppitz David, Sobotka Martin
Abstract
Municipalities in the Czech Republic are required by law to ensure development
of their territories. Development as such is not dependent solely on available funds,
neither on the ability to obtain these resources, but rather on the activity of the responsible
actors active on the territory. This activity must be specifically targeted. The article deals
with the use of the dynamic Balanced Scorecard method in the field of urban development
management, which is illustrated on the example of city of Vsetín. Vsetín’s BSC model is
visualized in the causal loop diagram. The article presents one of the ten already processed
models (Vsetín’s population model), and is simulated with the available data.
Keywords
system dynamics, Balanced Scorecard method, municipal development
Introduction
Modeling, simulation and practical application of system dynamics
belong to the procedures that are commonly used as a framework for the New Public
Management concept (hereinafter, NPM). The NPM is understood in the scope
of this article as a theoretical and practical framework for addressing the research
objectives. The NPM designation is used by theorists and practitioners for naming
different styles and characters in specific management of public services that build
on the experience of the management of the private sector (Barzelay, 2001; Hughes,
2003; Czech authors from dry and Spacek, 2009).
Modeling and simulation represent important processes in the context of strategy
verification. One of the methods that enables us to incorporate the strategic
management into the organization life is the Balanced Scorecard method (hereinafter,
BSC). The method was developed by Kaplan and Norton. Schoeneborn (2003, p. 2),
as an example, presents BSC as a new concept that converts the strategy into everyday
practice. Nielsen and Nielsen (2006, p. 2) describe the BSC as a method that applies
the "cause - effect" logics, which is then incorporated into the strategic map. Capelo
and Dias (2009, p. 3) mention that the strategic map combines indicators into the chain
of causal effects. The BSC method is in the Czech public administration reality perceived
as a method improving quality and performance of the organization (e.g. Lukášová et al.,
2009; Špaček, 2010; Ochrana and Půček 2012). This article does not address
the description of the BSC method. Description of the method, its purpose and strengths
191
are further addressed for example by Horváth & Partners (2002), Hušek and Šusta
(2006), Lukášová et al. (2009), or Provazníková (2009). The basic assumption
for the successful application of the BSC method is strong management support and link
to remuneration system (e.g. Kaplan and Norton 1996; Hušek and Šusta 2006).
The main advantages of the BSC method in public administration include (see Vacek
et al. 2006; Široký et al. 2006; Půček and Ochrana 2009): (a) clarity: strategic map shows
the city strategy on one paper page, (b) balance: we do not say just what we want to do
for people, but also under what financial conditions, through which processes
and which necessary knowledge do we use to achieve it , (c) measurability: it is possible
to determine a relatively small number of criteria, (d) the method establishes a basis
for remuneration.
BSC method has also a number of limitations, they include (for example, Akkermans,
van Oorschot, 2002, p 4): (a) inability to simplify causality, (b) inability to separate
causes and the resulting effects from each other, (c) absence of evaluation mechanism usually
there is no mechanism that takes into account the relevance of the defined
criteria; (d) lack of connection between strategy and everyday activities, (e) excessive
focus on internal processes - BSC is not able to answer the fundamental question
of managers: what are the other actors doing.
Bianchi and Montemaggiore (2008, p. 179-180) point out that despite the generally
accepted benefits of the BSC, this method has conceptual and structural limitations.
BSC method is criticized for its static approach (see e.g. Bianchi and Montemaggiore,
2008, p. 180, and Sloper et al. 1999, p. 1). In this context, it is valuable to mention Sveiby
et al. (2002, p. 2) who draws attention to the absence of system dynamics approach
in the BSC method. The emphasis here in particular is put on the linear approach
of the BSC method in relation to the evaluation of the resulting chain of causes
and effects, although the authors Kaplan and Norton (1996, p. 67) recommend BSC
to capture a system dynamics model that provides a comprehensive and quantifiable
model.
Limitations mentioned above can be removed by incorporation of the system dynamics
method into the BSC. The concept of system dynamics assumes that individual elements
are interconnected with one another in a form of complex models (e.g. Lane, Oliva 1998,
p. 219), which can be e.g. graphically represented in form of casual loop diagrams.
BSC system approach can provide essentially two basic effects. First, utilization of loop
diagrams to capture the strategy allows us to examine the mutual influences
of individual elements. It will then be easier to understand the displayed links and reveal
the forces that negatively impact the development of the organization.
Practical use of dynamic BSC method that is applicable at the municipal level will be
presented in this article on the example of Vsetín municipality. Vsetín is the county seat
with around 28,000 inhabitants, which simultaneously performs delegated state
administration role for 32 surrounding villages (about 68,000 inhabitants). The city
192
began to develop a strategy and methodology to apply the BSC in 2004, as one
of the first municipalities in the country. The strategic map of Vsetín and a set of scales
were published by Půček and Ochrana (2009, p. 95-97).
Goals of the article: The analysis provided in this paper is focused on examining
the potential of system dynamics in the form of the dynamic BSC method, related
to the municipal development. In this context, authors aimed to (1) create space
for discussion on the system dynamics in municipal management and its utilization,
based on the description of the dynamic model of Vsetín, (2) present one of the ten
models, including the simulation related to the municipal development.
Material and Methods
Methods
Modeling is based on a combination of positive and normative methodologies.
When creating a dynamic model, it is next to impossible to disregard one aspect
or the other. Positive methodology has been used particularly in the problem analysis
and description. It was also used for the study of theoretical sources and the analysis
of the BSC method application experience at the municipal level. The result of a positive
methodology is represented by the recognition of the actual state and situation.
Normative approach is related mainly to the basic revision of assembled models
which were compared to the newly created municipal strategy and utilized scales.
The result is a certain degree of optimization of the model as a whole.
The mix of positive and normative methodology has been used in many scientific
research methods. The analysis method related to the study of literature
and other information sources was used in the first row. The analysis method was used
particularly for the creation of partial models (subsystems) where it was necessary
to decompose the problem into individual elements. Besides that, the synthesis method
was used as well, which is typical for dynamics models. Linking sub-models into a single
unit enables us to examine mutual causalities and the behavior of the model as a whole.
This paper also follows two monographs dealing with management of organizations
in the Czech public administration- Půček, Ochrana (2009), Půček, Koppitz (2012).
Data and access to models
While drafting case studies, authors had access to all the necessary information related
to the management and strategic documents, as well as to data from different databases
available on the internet. Data and information were obtained from data storages
of the Czech Statistical Office, ARIS system including information on municipal economy
in the Czech Republic, TIMUR system, or the DataPlan database of the National Network
of Healthy Cities. The simulation was performed in the application VENSIM 5 PLE Plus.
The basic framework for the whole BSC model of Vsetín can be represented
193
by the following causal loop diagram shown in Figure 1. The diagram visualizes the basic
influential elements of the organization system of public administration. To complement
this model with the quantitative relationships between individual elements
of the system it is possible to simulate the evolution of the system and portray possible
scenarios. The following models are valuable because they were prepared
by the employees of the municipality under the expert guidance of Šusta – Půček.
Afterwards, the authors generalized and refined models for the simulation purposes.
Figure 1: Casual loop diagram of dynamic BSC of Vsetín
Source: Půček, Ochrana (2009, p. 76)
The municipal development model of Vsetín shown above consists of several basic
building blocks- first of all the inhabitants of the city who represent the primary focus
of the city’s vision itself. All efforts of the city are interlinked with the Czech legislation
requirements on local governance and competencies. Czech legislation contains
obligation of the municipality to look after the overall socio-economic development
of the area and the social needs of local citizens. Development concept is also in line
with the theory of local economic development. Its definition is related to the rights
of local citizens and the involvement of private business, public government and NGO
sector. The aim of local economic development is to improve the quality of life
of all stakeholders and to ensure the sustainability of this development (cf. the definition
of local economic development such as the World Bank (2003), Blakely and Leigh
(2010)).
In accordance with the approach of local economic development discussed above,
the emphasis is laid on citizen satisfaction index which is positively influenced by:
(a) the quality of life, (b) availability of job opportunities, and (c) availability of housing.
194
The fundamental position of these three factors that affect the population’s satisfaction
is reflected in the partial dynamic models. In order to simulate the BSC model
as a whole, partial models were complemented by quantitative relationships and real
data, obtained from the databases mentioned above, and were used as an input
for variables. Individual databases are always mentioned besides the characteristics
of partial models. The model allows us to simulate the presumed development
over a span of ten years. Due to limited availability of data - particularly related
to the municipal budget, which is available up to 2009 at the time of this article - 2009
was chosen as the default.
Results and Discussion
Presentation of the selected model and its simulation – Population model
of Vsetín
Dynamic model of Vsetín, completed by the authors of the article and based on available
documents from the city and other obtained data, includes the following models
and simulations: (1) Population model, (2) Quality of life model (the attractiveness),
(3) Sport opportunities model, (4) Cultural model, (5) Transportation models:
(5.1) Public transportation model, (5.2) Parking spaces model, (6) Environmental
model: (6.1) Air quality model, (6.2) Availability of parks and green spaces model,
(7) Education sector model, (8) Labor market model, (9) Housing sector model,
and (10) City budget model.
Considering the requested length of this article, only the Population model is elaborated.
More detailed description of the model (including explanation of its individual aspects,
their utilization and connection) and other models and simulations can be obtained
directly from authors of this article. The authors assume their future publishing as well.
The Population model (see Figure 2) is based on a standard string of action which shows
the aging of the population (see e.g. Sterman (2000, p. 470)). Natural population
increase and decrease is accompanied by migration effects. The migration itself is in this
case affected by more attractive environment as well, which is expressed
by the coefficients of quality of life and availability of housing. Additive correlation
between the two factors was applied due to the model separation of the two effects
(cf. Sterman (2000, p. 528)).
Because of other related sub-models, individual population groups are divided
into categories of children (pre-school age, primary school), high school students
(includes all secondary education), people of working age (entering the labor market)
and the citizens of post-productive age.
Input variables in this sub-model were derived from the databases of the Czech
Statistical Office and the annual reports of the city that are available on the website.
195
Figure 2: Population model of Vsetín
Source: Authors, based on internal documentation of Vsetín
The following scenarios of projected development are based on simulation of the city’s
BSC model. Figure 3 shows the projected development of the population. Two effects
have come to the surface in this model. The presence of aging population is obvious.
Substantially to this effect, attractiveness of the city is oscillating, which has a direct
impact on population migration flows. The city's population was influenced mainly
by increasing quality of life in the first half of the observed period. However, the second
part of the period showed more negative effects that reversed the development
of the city. It contributed significantly to the depopulation, especially in the group
of productive age, which is also reflected by the children population values.
196
Figure3 : Population simulation model
Source: Authors
Application of the model
Authors of this article have modified dynamic models that were created
during the implementation process of the BSC in Vsetín so that they can be applicable
also for other cities. In general, the BSC method is not used for municipal development
in the Czech Republic quite yet. Nevertheless we can find examples of the cities that try
to use the BSC method to support and accelerate development at the local level.
Another example of a city using the BSC method is Uherské Hradiště (strategic map,
see Půček and Koppitz, 2012). Authors assume future verification of the model
in the other cities as well.
Limitations of the dynamic model
Application of any method and its effects should be assessed. Success of such application
can be measured through assessment of advantages (or shortcomings) that the method
can provide to the subject. If we talk about limitations of the BSC dynamic model,
then we have to start with limitations that are associated with the system dynamics
theory and subsequent models based on this theory. Modeling is always based
on the creation of a simplified picture of the world. Akkermans and van Oorschot
(2005, p. 939) highlight the fact that dynamic modeling is carried out on the mental
model. This fact points out to the difference between the simplistic mental map
and the "real world." Sterman (1991, p.11) acknowledges that each model is as good
197
as its underlying assumptions. Successful implementation of the model is associated
mainly to a good observation of the surrounding world.
Another critical point can be seen in the creation of the model and its applicability
in practical decision-making. E.g. Stave (2002, p. 161) describes the difference
between the model makers and those who make appropriate strategic decisions
in the public sector in practice. Therefore, it is very valuable that the models were
created by employees of the municipality under supervision of Šusta and Půček.
Benefits and limitations of Vsetín’s example
General benefits mentioned at the beginning of the article were confirmed in the Vsetín’s
reality - especially those related to the setting of measurable objectives and links
to remuneration. There has been an increase in performance and quality of work
(fulfilling the investment plan, success in obtaining grants, regular measurement
of customer satisfaction had an improving trend, performance of processes proven
by benchmarking between comparable cities, etc.). Two other benefits - balance
and clarity – are not that obvious. The problems can be assigned to: (a) the balance was
challenged by some of the city partners and their lobbying interests, the connections
and links were not clear as well. (b) strategy map was not clear and understandable
enough for a number of partners and employees. These were also the reasons
why the city has decided to use the dynamic BSC. The main benefit of the dynamic BSC
was that all of the participants were able to better understand the individual links.
This enabled better functioning. However, problems occurred in this case as well:
(a) models were not filled with data - this was completed during the preparation
of this article. (b) the change in the municipal government in 2007 gradually weakened
ties between the objectives and remuneration. (c) city leaders are more oriented
towards daily routine operative tasks (management support was weak).
Despite these limitations, the utilization of BSC in Vsetín is of positive nature.
Conclusion
The article addressed two goals. The first was to create space for discussion
on the system dynamics in municipal management and its practical application.
This goal was addressed by demonstrating the dynamic Balanced Scorecard concept
on example of the municipality of Vsetín. Vsetín’s BSC model is represented
by the causal loop diagram (see Figure 1). The article described benefits and limitations
of the BSC method as well, especially in theoretical way and in relation
with its utilization in Vsetín. The second goal was to present one of the ten already
processed city models. The Population model (see Figure 2) was obtained
by simulations based on available data (see Figure 3).
Sterman (2000, p 899) notes that the researcher must constantly strive to understand
the analyzed problem. The dynamic model should be capable of recording the most
198
important links and relationships. In this sense, the advantage of the described model
was that its original version was created by the employees of the city under the expert
guidance (i.e. it was created by those who fulfill the city strategy). Authors have
modified the models for the simulation purposes.
In the next phase, authors assume to publish all ten models. It is also desirable to verify
the applicability of processed models in other comparable cities in the Czech Republic
and to compare the data resulting from the simulation.
Acknowledgements
This article was elaborated as one of the outcomes of PRVOUK P17 - the scientific
development program of the Charles University - political, social and media science
in light of current challenges.
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200
Innovative Elements in Civil Service Reform in Slovakia:
A Way to Attract and Retain Young Professionals?
Staroňová Katarína
Abstract
Civil service reforms in Central and Eastern European countries (CEEC) in the last decade
have focused on various tools that would increase professionalization and attract
professionals into civil service to design and implement other needy sectoral reforms.
Different countries have undertaken different trajectories of reforms. To some extent,
Slovakia responded to these challenges and introduced „innovative elements“ (World Bank,
2007) in order to streamline the recruitment and motivate young qualified candidates,
reduce high turnover and create senior civil service, such as the ‘fast stream system’
and ‘nominated civil service’. However, these had only limited success. The creation
of functioning human resource management system and approaches is undoubtedly
the main area of failure in civil service reform, not only in Slovakia. This paper maps
various innovative elements introduced into the civil service system in Slovakia and tries
to explain why they did not sustain and eventually were abolished.
Keywords
civil service, innovation, professionalization, fast stream, Slovakia
Introduction
A professional civil service is the cornerstone of an effectively performing public sector.
Before accession, the EU had made administrative capacity development a condition
for EU membership. The development of administrative capacity
included the requirement to establish professional and de-politicised civil service
systems in the then applicant states. The transition of CEEC into modern democracies
in the past two decades brought a lot of questions and problems connected
with institutional redesign, including questions regarding how to make the civil service
attractive to young qualified candidates as well as professionals who would be willing
to undergo reforms in all other fields of public administration, such as judiciary,
pensions, tax reform, etc.
There is a lot of literature discusing the patterns of central administration that has
emerged in the CEEC since the fall of communism (Dimitrov et al, 2006, Verheijen,
1999). It was expected that emerging administrations would naturally converge
with Western models and traditions of public administration (Hesse, 1998).
This expectation was turned into a program ‘principles for a European Administrative
Space’ (Sigma, 1998, Meyer-Sahling, 2009a) which became the cornerstone for civil
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service reform policy. In the last years prior to EU accession reforms were conducted in
candidate states to bring about the formalization of HR relations and compliance with
these principles of the European Administrative Space. More recent research became
sceptical on the prospects of the gradual Westernisation of CEEC administrations (World
Bank, 2007, Meyer-Sahling, 2009b, Staroňová-Gajduschek, 2013), particularly because
the ideal of European Administrative Space did not fit the realities of political, economic
and labour conditions in the countries concerned. Thus, differences between Western
and CEEC administrations could persist in the long term (Goetz, 2001, Meyer-Sahling,
2009a).
In CEE countries there is concern about high turnover rates (World Bank, 2007)
with particularly serious losses of qualified staff in a changing labour market
which offers more opportunities in the private sector and abroad (World Bank, 2007).
There are several issues here: a) need to attract young and qualified staff
in an increasingly sophisticated labour market, b) need to attract professionals
from practice to conduct reforms for a limited period of time, c) fiscal constraints.
Thus, the development of incentive systems that would make the public administration
a sufficiently attractive employer for talented staff remains a key issue, even after EU
accession and was a focus of reform efforts and innovative experiments in several CEE
countries.
In the context of CEE civil service reforms, Slovakia lacked any comprehensive reform
program and all the efforts were of ad hoc nature. For example, the innovative reform
package of 2003 was initiated by Ministry of Labour, whereas the 2006 reform measures
were initiated by Ministry of Finance right before the elections. Hungary and Lithuania,
on the other hand, developed a comprehensive program in which all reforms were
anchored. According to Meyer Sahling (2009b) Slovenia and to a lesser extent the Czech
Republic have been active administrative reformers, but the civil service has played
a subordinate role in these activities. Poland has concentrated on the fight
against corruption but it has lacked both a civil service reform plan and a wider
administrative reform strategy for most of the postaccession period.
Slovakia initiated civil service reform as late as 2001, mainly under pressure
from the EU (Staroňová and Láštic, 2012). Meyer-Sahling (2004, p. 94) suggests
as an explanation of this delay in reforming civil service the lack of competent
candidates capable of and willing to replace communist administrative elites.
The reform aimed at professionalizing the public sector by introducing two separate
provisions in 2001: the Law on the public service (Act No. 313/2001), which defines
the public service and covers service such as health and education; and the Law on civil
service (Act No. 312/2001), which regulates the civil service in state administration
bodies. In 2003, the former law was substituted by the Law on Employees working
in Services of Public Interest. The attempt to establish a professional and neutral civil
service was not without difficulties. The main problems were diverging views on key
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issues such as conditions for tenure or pension and health insurance rights of civil
servants. In order to obtain EU membership, reform initiatives have been formulated
rapidly with little political consensus (see Staroňová and Malíková, 2005).
The most fundamental amendment was a package adopted in 2003 (coming into effect
on 1 January 2004) regulating the status, recruitment and remuneration of civil
servants, that brought innovative elements into the civil service system, such as fast
stream recruitment, performance appraisal and nominated civil service. These innovative
elements were to strengthen the capacity to attract and retain good calibre staff at all
levels, since the previous delays in the adoption of the Civil Service Law led to a situation
where ministries were over-staffed, as those that remained in the administration were
generally not interested in changing jobs, while new posts were unable to attract staff
(Staroňová and Láštic, 2012). This created problems in particular for new functions,
such as policy analysis posts, project management, reform implementation and civil
servants dealing with EU matters.
The main objective of this paper is to analyse major reforms in Civil service
from the perspective of innovative elements that would attract young professionals
and reformers into the ranks of Civil Service in Slovakia. The research is based
on mapping changes key innovative elements in design and practice. Although research
focusing on Civil Service in the CEE has mainly concentrated on its politicization,
in Slovakia, there is a clear need for discussing the sustainability of “new thinking”
in creating viable approaches in HRM policy in this region.
Material and Methods
As stated above, the methodology is based on mapping key innovative elements
(see Table 1) in Slovak Civil Service. Data are gained from analyses of the relevent
legislation and documents as well as interviews with key stakeholders
for its implementation in practice (see list at the end of the article).
Table 1: Innovative Elements under Investigation Introduced into Civil Service
HR aspect Measure Goal
Professionalization
Temporary civil
service
to tackle political nominees (advisors) in civil service
(rights and duties as civil service)
Nominated civil
service
to introduce senior civil service with tenure
(professionalization of civil service)
Recruitment Fast stream system to attract young qualified candidates for the civil service
Incentive system
Personal bonus to increase flexibility in the pay system in order to
motivate high calibre staff (decrease gap between public
and private sectors)
Performance bonus to start merit based remuneration linked to
performance
Special bonus to attract and remunerate civil service in posts that are
difficult to fill or where good salaries should serve as a
prime anti-corruption measure
Source: Author
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In this research, only three main ammendments will be discussed, namely 2003 (Act
No. 551/2003) when innovative elements were introduced, 2006 (Act No. 231/2006)
when Civil Service Office was abolished and 2009 (Act No. 400/2009) when the main
innovative elements from 2003 reform (performance appraisal, fast stream recruitment
and nominated civil service) were abolished.
Results and Discussion
Recruitment
Social scientists since Weber as well as international organizations such as World Bank
agree that the method by which civil servants are recruited has important implications
for governance outcomes. Rauch and Evans (2000) have linked meritocratic recruitment
to higher bureaucratic performance and lower corruption, World bank to economic
development.
Originally, recruitment was planned to be centralized and based on objective criteria
and examination with all posts to be advertised openly. A system was introduced
that allowed a relatively automatic career path based on seniority and at some steps
passing certain exams, as well as an appropriate “grade” on the annual appraisal.
The Civil Service Law gave responsibility to the Civil Service Office to forecast
and analyse the necessary number of civil service posts and operational expenditure
by means of systematisation with subsequent open recruitment and selection
procedure. Dismissal of civil servants was largely limited by the law.
The systematisation had to include the number of permanent, temporary, nominated
and preparatory civil service posts (see Table 2), ranked by position resulting
from the organisational structure of the ministry (or other state administrative body).
In addition, the systematisation had to state the volume of financial resources allocated
for remuneration of civil servants. The systematisation had to be approved
by the government when discussing the draft budget, and then voted on by parliament
as part of the state budget. The process of systematisation created tension
between the Civil Service Office and Ministry of Finance as both considered themselves
to have the authority for final decisions on number of posts and related expenditure.
In practice, it was the Ministry of Finance having the final word on expenditures
for the civil servants providing arguments that they are the members
of the Government, not the Civil Service Office. As a result, ministries complained
about the structure of systematisation and the inflexibility in making changes
and the fact that they were not clear whether to contact Ministry of Finance or Civil
Service Office. Systematisation was abolished in 2006 reform package, including the civil
service registry.
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Table 2: Types of Civil Service
Preparatory civil service
(1. 4. 2002 – 31. 3. 2004,
merged with 3 month
probation)
Permanent civil
service
(1. 4. 2002 – until
now)
Temporary civil
service
(1. 1. 2004 – until
now)
Nominated civil
service
(1. 1. 2004 – 1. 11.
2009)
Qualification exam
(1. 4. 2002 – 1. 6. 2006)
√
(transfer to permanent civil
service)
Exam for nominated CS
(1. 1. 2004 – 1. 11. 2009)
√
Job selection procedure
(1. 4. 2002 – until now)
√ √
√ + without
selection
procedure
Pooled (mass)
recruitment
(1. 1. 2004 – 1. 11. 2009)
√
(7-11 grade)
Selection
(1. 11. 2009 – until now)
√
Source: Author
In reality, the Civil Service Office never had a crucial word in the recruitment of civil
service since already a year after its creation (2003) this task was delegated to line
ministries and only some types of recruitment (nominated and fast track recruitment)
was left to central coordination (see Table 3). 2003 changes also introduced compressed
preparatory service and merged it with the probation period which shortened
the preparatory service period from original 6-24 months to 3 months and abolished
the system of qualification exams from preparatory into permanent civil service.
Table 3: Civil Service Office Recruitment: centralized vs. delegated selection procedure
Since 2002
(CSO
creation)
2003 2004 2005
Until 2006
(CSO
termination)
Total
Number of open positions
publicized
2000 4639 11682 4283 1291 23895
Delegated selection
procedure on admin. bodies
0
2067
(45%)
9349
(80%)
4184
(97%)
1171
(90%)
16717
(70%)
Centralized Selection
procedures by CSO
256 351
(8%)
142 (1,2%) 202 79 1030
Source: Author, based on reports of the Civil Service Office for years 2002, 2003, 2004, 2005 and 2006.
Fundamental changes introduced in 2006 abolished most elements of the merit system
just few weeks before elections in 2006. The Civil Service Office was terminated
(on the grounds of its ineffectiveness), and its functions were largely decentralized
to the ministries or simply ceased to exist (e.g. the entry examinations became simple
job interviews). Moreover, the 2006 changes provided the head of office at a ministry
(a political post from 2003) a new autonomy to dismiss a superior officer within their
205
direct management without stating reasons. Thus, top managerial positions such
as directors’ generals became de facto political positions. This, naturally, raises
questions about the quality, transparency and impartiality of the dismissal
and recruitment process. At that point, however, it was clear that there will be
government change and this provision opened the space for better coalition formation.
Introduction of the fast stream system
The package of 2003 amendments introduced an internal and an external fast stream
system in order to attract qualified candidates for the civil service. The fast stream
system took the form of:
a) a pooled recruitment system for applicants from outside the civil service;
b) nominated civil service for applicants from inside the civil service.
Pooled recruitment system was inspired by EU countries and their fast-stream system
which enables rapid career growth and is the key to attracting very capable people
to positions in the civil service. Thus, the purpose of this procedure was to select
persons with an innovative and creative approach to problem-solving.
Since the introduction of the pooled recruitment system, there were 3 rounds
altogether with the following results:
Table 4: Number of applicants and successful candidates 2003-2005
Number of Applicants Successful Candidates
2003 629 17
2004 265 11
2005 313 14
Source: Author
Nominated civil service was brought in by the 2003 reform which was to reward top
officials with specific salaries (a 50% pay increase) and job protection in the form
of security of tenure together with pension and health benefits. Civil servants applying
for nominated civil service needed to pass a nomination exam. It was expected that
approximately 1000 civil servants would be part of the ‘nominated service’ with tenure.
According to the former head of the civil service office, however, only 5 candidates
passed the exams (out of 367 applicants) in the first round in 2004 and in 2005 none
of the 177 applicants passed. Following the abolition of the CSO in 2006 the organization
of exams for the nominated civil service was handed over to the Head of the Government
Office (a political nominee) who did not organize any exams until 2009 when nominated
civil service was abolished.
Both methods of fast streaming into the civil service were not very successful in terms
of the number of successful candidates and their placement. The biggest problem lies
in the hybrid position-based and career-based system which has developed in Slovakia.
206
Although candidates had the opportunity to be ‘parachuted’ into higher positions (salary
grades 7-11 in the pooled recruitment system and top civil service with tenure
for nominated civil service), the whole system is not suited for this as there is no formal
career planning system in place, but rather a position based approach. Thus, the rigour
of the examination process in the fast stream system does not correspond to the real
career opportunities of the successful candidate. The exams were more difficult
than regular entry exams for a vacancy consisting of 5 rounds within 1 month (general
knowledge test, foreign language test, psychological test, evaluation centre
for "potential" carried out by an external body, interview with a committee) as opposed
to 2-3 rounds in 1 day in the regular job vacancy interview. Despite this more rigorous
testing the ministries did not offer a better job (or payment) and the successful
candidates did not have a faster career opportunity as the CS Law does not incorporate
a career system. Thus, when a successful candidate wanted to get a higher position
he/she had to undergo new testing (this time job or post testing) which was easier
than the first tests. Moreover, the ministries were reluctant to employ the successful
applicants (particularly the Ministry of Finance) because they had their own criteria.
Half of the successful candidates did not start their positions and career in the civil
service (they were disappointed by the negative attitude of individual ministries,
by the fact that despite passing more rigorous tests they ended up with the same salaries
and treatment as regular civil servants, etc.).
Nevertheless, the system had the undoubted advantages of bringing qualified candidates
into the top positions of the system and could be utilized further if some finetuning was
conducted in cooperation with individual ministries.
Incentive System
Several features of a classical career system – seniority and job security – do not seem
to be feasible in the context of a country conducting reforms. Under these principles,
salaries would remain low but compensation comes in the form of gradually increasing
wages and tenure. The tenure principle has been eroded owing to increasing levels
of politicization, while seniority holds little attraction for the young workforce in these
countries. Fiscal constraints make an overall increase in wage levels virtually
impossible. If wages are so low in the public compared to private sector, as it is/was
everywhere in the Central Eastern European region (Verheijen, 1999; Láštic, 2010), it is
impossible to find enough, if any, qualified candidates for certain civil service positions.
A study of the World Bank (2007) on the administrative capacity of the new member
states pointed to the same problems.
Loosening the rigidity
Reform of the pay system in civil service in 2003 has abolished some rigid elements
such as seniority, increased employees’ responsibility and obligations with emphasis
on performance; payment classes have been enlarged from 9 to 11 with the highest
classes reserved for senior civil servants and has introduced innovative elements
207
for attracting and motivating staff. Even with the reforms in pay-tables, the desired
compression ratios did not materialize (remaining approximately 1:3, well below
the 1:6 benchmark of the World Bank. Thus, exceptions from the general pay rules had
to be made in order to fill important positions. This was exactly the main argument
for “loosening” the rigidity of the merit system in Slovakia. The aim was to build a clear
distinction between top level civil service posts and lower level posts, including a decompression
of the salary system and the creation of much improved employment
conditions for top level officials via payment of bonuses (see Table 5).
As a first step, Slovakia has made a first step towards replacing systems based mainly
on seniority with performance based systems by removing seniority elements
and introducing a ‘performance based points system’, although this has not become
properly embedded in the system. Moreover, Slovakia has attempted to institutionalize
flexibility in pay systems, particularly in the payment of bonuses. The personal bonus
may be as high as 100 % of the basic salary. Each ministry decides internally
on the amount and mechanism of the payment of bonuses for its civil servants
and this information is not publicly available on the grounds of data protection.
In reality, however, it is typically negotiated between the civil servant
and his/her employer (director general and then approved by the head of service office),
and the negotiations take place before the actual assessment period. This kind of bonus
effectively becomes a part of the fixed salary. As a result, a hybrid system exists:
the basic classification system is for the general civil service, while position-based
for top officials with negotiated salaries for that position.
During the functioning of Civil Service Office and systematization, the Ministry
of Finance and line ministries have institutionalized an informal arrangement
through which funds saved on vacant positions when conducting restructuralization can
be used to increase wage levels through personal bonuses that can range up to 100%
of pay. Reorganization to gain additional funds for bonuses, however, has not proved
to be possible in all ministries as they differed in the number of staff and stage
of reorganization. Relatively small ministries simply did not have the opportunity to slim
the offices to keep finances for bonuses. Moreover, this informal system was not
sustainable in the long term as the ministries deliberately overestimate the number
of posts needed in annual budget discussions with the Ministry of Finance in order
to keep the unspent finances for remuneration.
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Table 5: Components of Sallary of a Civil Servant
Functional Sallary
BenefitsTariff Sallary (Base Sallary)
Personal
Bonus
Special
Bonus
Salary Grade
Performan
ce Bonuses
Service in
Office
Civil Service
Law 2001
(1. 4. 2001 –
1. 1. 2004)
Sallary Grades
(1 – 9)
calculated on
years in service
+ education
No No No No
Individually
determined based on
recommendation of
the superior
(no cap)
Ammendmet
2003
(1. 4. 2001 –
1. 11. 2009) Sallary Grades
(1 – 11)
regardless of
service years
0 – 3 %
cumulative
annually
(point
system)
No
Up to 100
% of
Tariff
Sallary
50 – 100 %
for „Special
Posts“
50 % for
„Nominated
Civil Service“
Amendment
2009
(1. 11. 2009 –
till now)
No
1 %
cumulative
for each
year of
service
No
Based on
recommendation of
the superios up to 20
% of annual
functional sallary
Source: Author
Some Ministries have made good use of the new human resource flexibility brought
by the 2003 amendment to the Civil Service Law to attract young and high quality
candidates. Particularly, the Ministry of Finance became an outstanding example
in 2003-6 era (and with the change of Government in 2006 the only one where staff
remained the same even in high positions), which became generally recognised as a very
highly performing organisation with good leadership, high quality staff and a strong
esprit de corps. This was also recognized internationally when in June 2006 the Ministry
was the first central European central government institution to obtain the ‘Recognized
for Excellence’ award within the European EFQM quality model.
Although differences exist across the Ministries in the average personal bonuses paid,
Staroňová and Láštic (2012) calculated the trends in the remuneration in the civil
service and clearly showed that liberalization of the Civil Service Law in 2003 brought
the possibility for the ministries to provide higher bonuses for top civil servants
and this possibility actually increases the compression ratio and brings it to the level
of private sector managers. The calculation of the annual take-home salaries of Directors
General showed that in some ministries they would earn up to three times their basic
salary, i.e. the basic salary is equivalent to 35 per cent of the final salary (Staroňová
and Láštic 2012).
Whereas flexible payment of bonuses helps to overcome the problems of the highly
formalized and grade based base pay system, the lack of clearly defined criteria
for the allocation of bonuses as well as the ad hoc nature of the system, based as it is
on artificially construed wage budgets, make it vulnerable to politicization and risks
209
creating wage budget levels that have little to do with the real needs
of the administration.
Performance Bonuses
Pay for Performance (PFP) tools are thought to encourage high quality performance
of civil servants and to reward the best based on their merits. However, Ingraham
(1993) warns that the common practice of adopting PMT without broader reforms
to support them results in viewing these tools as mere adjustments of the base,
rather than fundamental revisions of existing systems.
The 2003 package of changes introduced a first step towards a new system of job
evaluation and appraisal –the so called ‘performance based points system’. On an annual
basis each civil servant was evaluated by his or her superior using a points system (1-4)
which could bring him or her additional payments (up to 3% annually that are
cumulative in nature) or lead to the termination of employment. Some ministries have
experimented with performance management systems internally, particularly
the Ministry of Finance, with a big success. The lack of a strong central driver
for institutional reform overall has led to a decentralized approach to PFP that has
created strong disparities in overall government capacity and has reduced the overall
effectiveness of. Data from the period 2004-5 show that 45% of the civil servants
received the highest points and 42% the second highest points (Information on service
assessment 2004, 2005 Civil Service Office). Thus, due to the lack of coordinated effort
and capacity for application, the system was used for annual increase of salary
rather than true performance evaluation and was abolished in 2009.
Special Bonuses
The 2003 reform introduced two distinctive posts with permanent special bonuses:
the nominated civil service and posts of ‘superior significance’. The nominated civil service
is to reward top officials with automatic 50% pay increase to monetary salary base.
Posts of superior significance have a permanent special bonus to monetary salary base
of 50-100% of their tariff salary, however, with an obligation to disclose
their and their family’s assets. These posts are designated by the Minister and head
of office for tasks and priorities stemming from the Cabinet Memorandum (including EU
tasks) and used to be approved by the Civil Service Office and government
through systemization if additional finances were required. If the ministry was able to
provide the permanent special bonus from its own budget without asking additional
resources from the state budget, the posts do not need to be approved
by the government. There used to be approximately 300 posts of superior significance
with permanent special bonuses according to systemization data
which after its abolishment are non existent (see table 3). In addition, there are posts
of superior significance with permanent special salary. These posts are designated
by ministers and heads of office in appropriate Ministry and approved together
with the proposed salary by the government in order to oversee the process. The salary
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is calculated on the basis of comparison with private sector. Under Dzurinda’s
government in 2002-2006 this was used for the following five posts quite successfully:
Head of the State Treasury, Head of the Debt Management Agency, Chief Economist
at the Ministry of Finance, Head of the Anti-corruption Unit at the Government Office,
and Head of Programming of Structural Funds at the Ministry of Labor, Social Affairs
and Family (see Table 6). Posts of superior significance had the aim of attracting
and remunerating civil servants in posts that were difficult to fill or posts where good
salaries should serve as a prime anti-corruption measure. These measures have been
evaluated very positively because highly qualified staff was attracted
and also the obligations under this regime are a counterbalance for higher base salary.
Table 6: Posts of superior significance
2004 2005 2006
Posts of superior
significance with
special bonus
planned 268 401 428
Real 230 342 353
Posts of superior
significance with
special salary
planned 2 5 3
Real 2 5 2
Source: Author, on the basis of systemization documents of the Civil Service office.
Note: Systemization was abolished as of 1 June, 2006 and no data are available further on.
Conclusion
In this paper, our aim was to map what the World Bank in its 2007 report named
as „innovative elements“ that the central government developed and introduced in 2003
reform package as well as show to what extent did they work in practice. The findings
of the paper do not support many of the assumptions that surrounded the initial
adoption of these elements. Consequently, there was a big gap between goals and reality.
Big difficulty lies in the hybrid position-and career-based system which exists in Slovakia
and which does not allow for proper career planning and promotion.
Another major weakness of the reform package was the low capacity in the coordinating
body – Civil Service Office – which did not succeed to overcome the highly fragmented
administrative system and complex coalition politics. When the base of the organization
is weak, other management techniques have a poor and unreliable foundation to build
on. As a result, many innovative elements were utilized only in some ministries to a big
benefit but did not suceed to roll out to the administration as a whole (e.g. performance
management). The lack of horizontal coordination systems has led to a general erosion
of merit principles. However, any managerial efforts need to be conducted
in an integrated manner due to their complex and inter-related nature which means that
isolated solutions are insufficient. Following the termination of the Civil Service Office,
211
very little was done to develop new mechanisms for integration, co-ordination
and oversight.
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Interviews
Beblavý, Miroslav - state secretary (deputy minister) at Ministry of Labour Social Affairs
and Family (2002-2006), head of the team conducting Audit (Functional review) in
2000, prepared amendments to Civil Service Law in 2003
Červenáková, Jana - head of the office at the Ministry of Finance (2002-2006) that has
won EFQM award in 2006
Federič, Igor - head of Government Office (2006-2010, 2012 – now)
Kajánek, František – former director at CSO responsible for HR, later at Ministry of
Labor, Social Affairs and Family – CAF, quality management and strategy for HR
development
Kozáková, Anastáza - consultant for PHARE Modernization of Civil Service and Public
Service
Mikloš, Ivan - minister of Finance (2002-2006) and former vice prime minister for
Economy (1998-2002), amendment to Civil Service Law in 2006
Nižňanský, Viktor and Jaroslav Pilát, plenipotentiary at Government Office for
decentralization and public administration reform (2002-2006), head of Government
Office (2010-2012)
Plai, Ľubomír - head of the Civil Service Office until its termination (2002-2006)
213
Corruption and Competition:
Toward Economic Theory of Corruption
Wawrosz Petr, Otáhal Tomáš
Abstract
Why corruption persists in governmental organization? While corruption is a problem
of private sector as well as governmental sector, economic experts rather attempt to solve
corruption in governmental organization. Moreover, economic literature sometimes
defines corruption as a problem of the state. In this paper, we argue that the reason
for persistence of corruption in governmental organization is the lack of monetary
calculation within bureaucratic management and lower intensity of political competition
in comparison with entrepreneurial market process. Market process serves as a means
of feedback for efficient organizational arrangement.
Key words
corruption, bureaucratic management, market process, monetary calculation, political
corruption
Introduction
Jacob Svensson argues that: “A common definition of public corruption is the misuse
of public office for private gain.” Svensson (2005, p. 20). But he also argues that:
“No definition of corruption is completely clear-cut.” Svensson (2005, p. 21) Gordon
Tullock (1996) defines corruption as rent-seeking. Robert Klitgaard defines corruption
as illicit behavior, which: “…flourishes when agents have monopoly power over clients,
when agents have great discretion, and when accountability of agents to the principal is
weak.” (Klitgaard 1988, p. 75) And Shleifer and Vishny defines corruption: “…as the sale
by government officials of government property for personal gain.“ (Shleifer and Vishny
1993, p. 599) From this perspective, the term corruption or corrupt behavior may be
perceived quite superficially by the general public and by professional communities.
However, certain generally accepted intuitive characteristics of the problem can be
traced from statements released both, to the general public and to experts in the field.
Such characteristic can be that corruption is perceived rather as a problem
of governmental organization than the market. So why according to these perceptions
corruption persists in governmental organization?
The phenomenon of corruption enjoying attention of the media, international
institutions, and professional communities is usually viewed from different theoretical
perspectives. It is therefore difficult to choose a single point of view
for the phenomenon. Historically the phenomenon of corruption was mostly analyzed
214
by political scientists (i.e. Aristotelés 2004). For excellent literature overview, see
Heidenheimer and Johnston and LeVine (1999). Even sociologists are concerned
with corruption (i.e. You and Khagram 2005). For representative examples of empirical
analyses in the Czech literature, see Frič (1999), Kabele (1999), and Frič (2001).
In this paper, however, we would like to provide strictly economic analysis based
on methodological individualism. More precisely, in this paper we would like to provide
economic analysis of phenomenon that some call corruption, some bribery, some rentseeking,
and some consider it to be a natural human behavior. Our aim is to provide
general theoretical definition of corruption, which can be applied on the market
organizations as well as on governmental organizations and theoretically explain why is
corruption rather problem of the governmental organization than the market as it is
usually presented by the general public and by experts in the field of political science,
sociology and economics.
Of course, as well as there is no clear cut definition of corruption there is also no clear
cut distinction between public sector (governmental organization) and the market.
Warren (2004) argues that corruption is a symptom of the lack of democracy.
While there are various theoretical approaches to this phenomenon, its fair appearance
has different forms. For instance, corruption of executive functions undermines trust
in democracy. Corruption of judicial functions on the other hand undermines rule of law,
which is complementary to democratic institutions. Corruption of legislative functions
undermines outcomes of complex democratic processes based on mixtures of voting
procedures, pressure groups influences and legal organizations. And corruption
of public sphere is not only corruption of government (i.e. politicians and bureaucrats)
but corruption of democratic deliberation process at all. Corruption of civil society
undermines its integrity, and corruption in the market undermines rules of its function.
We do not, however, attempt to point out particular corrupt behaviors dependent
on defined institutional settings. Our purpose here is to provide general theoretical
framework to explain phenomenon of corruption that can take various forms so that our
general theoretical framework is explanatory for every institutional setting.
In the economic literature corruption is represented for instance by buy offs in public
tenders, embezzlement of government funds, patronage, electoral fraud, nepotism,
clientelism, or tax evasion. In our model we will use the example of bribery that is
the most frequent. It is useful to define corruption as bribery, which is a voluntary
exchange between economic agents, where a bribe is the price paid by an agent buying
a particular service provided by another particular agent because this wider definition
of corrupt behavior allows us to synthesize several theoretical approaches.
In the economic literature corruption is also understand differently in respect
of its political consequences. For instance Susan Rose Ackerman (1999) distinguishes
between high-level corruption involving elected and senior public officials and low-level
corruption involving mid- and low-level bureaucrats. While the first category covers,
in particular, financing of political parties and their election campaigns, parliamentary
215
lobbying, and public tenders at any level of state administration, the second category
refers to municipalities and all forms of public service provided by the state through
regional and local agencies, as well as state-guaranteed health care service. Such level
also entails informal links among private companies and low-level state bureaucracy.
However, both literature dealing with high-level or political corruption and literature
dealing with low-level or petty corruption use the example of bribery in its modeling.
For this reason we do not see contradiction in explanation of both political corruption
and petty corruption with using the example of bribery in our model.
The article is organized as follows. The first section brings general definition
of corruption, which is explanatory for every institutional setting. Our definition
is the most general definition of corruption as we know. Similar definition presented
Colombatto (2003) but he did not develop theoretical model that would explain
persistence of corruption in governmental organization. For previous arguments,
see Banfield (1975), and Otáhal (2007). To explain why corruption persists
in governmental organization, in the second section we develop evolutionary argument
based on Banfield (1975), Kirzner (1973), and Pelikán (2003). We argue that corruption,
in essence, is the calculation problem. Since governmental organization is
the only owner of the means of production, it cannot calculate profit and losses,
thus efficient production of goods and services cannot be established. We extend
this argument with Schumpeter (1942), and argue that if governmental organization is
the only owner of the means of production, it cannot calculate profit and losses,
thus efficient organization without corruption cannot be established. Our argument is
also theoretically supported by Becker and Stigler (1974), but in different context
of efficiency wages solution (Otáhal 2011). As a contrafactual argument against Becker
and Stigler (1974) solution literature points out that corruption increases transaction
costs so that it is recommended to restrict it with strict rules provided by government.
These rules set and enforced by governmental organizations thus represent second best
solution for widespread corruption. Literature also presents other contrafactual
arguments. For instance Becker (1983) argues that free competition of pressure groups
results in efficient regulations. For criticism of this arguments, see Grochová and Otáhal
(2012). Wittman (1989) argues that democratic competition can be as efficient
as competitive entrepreneurial process. In the third section, we argue against Wittman
in accordance with Tullock (1959) with extension to corruption. In conclusion we
summarize our argumentation and suggest further research.
Definition of corruption
Corruption is a term which denotes a specific contract between at least two people –
a bribe-giver and a bribe-taker. Through such a contract a bribe-giver makes
a commitment to give to bribe-taker some reward and bribe-takers makes
a commitment to give to bribe-givers particular advantage (such an advantage can be
216
of a tangible or non-tangible nature). Within such a context corruption is a result
of human action (Rose-Ackerman 1999, Otáhal 2006, Lambsdorff 2007).
The parties of corruption make a corrupt deal because corruption brings them some
benefits. From the point of human action, the aim of which is to increase some benefits,
corruption explained on example of bribery does not constitute a problem - it is
a mutually advantageous exchange (Kohn 2004). People condemn corruption out of
a different reason: there is a third party (neither a bribe-taker, nor a bribe-giver),
to whom corruption gives some harm, the corruption is not in the interest of this third
party (Colombatto 2003, Otáhal 2007).
For example, company A did not obtain some order from company C because it was
given to company B (bribe-giver). If there was no corruption, the order from company C
would be given to company A. In this case, due to the corruption, the income
and benefits of company A were reduced. Let us assume that the offer of company A is
more socially advantageous than the offer of company B. Thus there are more people
affected by corruption (the third party). In the case of a public tender (governmental
organization), where a public official was bribed, almost all citizens are harmed because
if there was no corruption, the difference in the price (or quality) which is offered
by company B (a bribe-giver) and that offered by company A could be used
for the benefit of citizens who are not a part of corrupt exchange (the third party).
If a manager of a private company is bribed (so the tender is not of a public nature),
then at least all owners of the company are in harm - corruption reduces their income.
Our understanding of corruption as voluntary exchange is consistent with the frequently
mentioned definition of corruption (Nye 1967, p. 416): „behaviour that deviates
from the formal duties of a public role (elective or appointive) because of privateregarding
(personal, close family, private clique) wealth or status gains“. An updated
version with the same elements is the definition by M. Khan (Khan 1996, p. 12),
who says corruption is “behaviour that deviates from the formal rules of conduct
governing the actions of someone in a position of public authority because of privateregarding
motives such as wealth, power, or status”. However, in contrast to both
definitions, we argue that corruption does not occur only in the public sector
(governmental organization). We think that corruption may occur anywhere,
where a bribe-giver and a bribe-taker breach duties set by some norms (from
the economic point of view - by institutions), regardless of whether it is a legal norm
(an formal institution) or a non-legal norm (informal institution). After all, practical
examples confirm our approach – for instance football players, referees and officials
were in the Czech Republic and other countries condemned for corruption.
These persons had not in any way the status of public officials even though they are
publically subsidized. For example, Czech football premier league was hit by bribery
scandal in 2003 and 2004. As a result of the scandal several referees and football official
were condemned. For details see Feik (2007) and Janeček (2009).
217
In accordance with the most papers we reduced corruption on bribery (i.e. Shleifer
and Vishney 1993, 1994). However, it is necessary emphasize that bribery is not only
one of form corruption (i.e. Warren 2004). For instance international organization
dealing with this issue Transparency International defines corruption as abuse of power
in order to receive undeserved personal gain. From that point of view the main
characteristic of corruption is that somebody acts dishonestly in the performance
of his/her duties arising from his/her position. The essence of this dishonesty is usually
that a person misuses his/her status (delegation) and does not act impartially.
Corruption behavior can thus be defined as a deviation from the compliance of the legal
standards or of the standard behavior of the majority. In other words, corruption is
a betrayal of commitment to the community and its moral principles. If somebody acts
impartially, the beneficiary has a position of the member of corruption contract even if
he/she does not know to be supported. The support damages other persons (the third
party).
Competition as monitoring system
Misses (1949) shows, in a system of public ownership do not exist incentives to optimize
the expenditures spent on production of public services as well as incentives motivating
public officials to optimize the costs spent on the monitoring of the agents.
Since the state is the only owner of the means of production, it cannot calculate profit
and losses. Because of the absence of private ownership, there is no exchange
and consequently no monetary price. That is why the state cannot assess the monetary
value of its production and agent’s decisions. Mises (1949) further compares different
economic organizations framed by different underlying property-rights systems.
While the enterprise where monetary calculation creates monetary incentives is called
market organization, the public enterprise where is monetary calculation impossible
because of the lack of exchange based on the private property is called bureaucratic
organization. Public choice literature further stresses problems connected
with incentives in governmental organizations (Buchanan and Tullock 1965), which lead
to problems with political and bureaucratic rent-seeking (Tullock 1967, Krueger 1974,
Niskanen 1971). It is emphasized that rent-seeking within governmental organization
significantly reduces economic growth, (Murphy, Shleifer and Vishny 1993).
Banfield (1975) compares business and governmental organizations and stresses
that without the profit-and-loss mechanism the public officials cannot easily sanction
and reward agent’s decisions and consequently create the system of incentives,
which would motivate agents to pursue value-maximizing allocation of resources
without corruption. Kirzner (1973) argues that the absence of monetary calculation
in bureaucratic organization restrains competitive entrepreneurial activities because it
lacks the essential incentive in the form of the pure entrepreneurial profit,
which motivates the entrepreneurs to discover the value maximizing opportunities
nearing the market to equilibrium. Therefore, even if the state tries to eliminate
218
corruption by means of raising the monitoring costs it cannot guarantee the value
maximizing allocation of resources because it lacks monetary calculation based
on market prices, which hold, as Hayek (1945) argues, irreplaceable informational
function. Schumpeter (1942) argues that entrepreneurial innovation can be targeted
to establishing new production technologies as well as to improving organizations.
In compliance with previous argumentation it means that if organizations do not face
to competitive entrepreneurial process (Kirzner 1973) they can be inefficient
and corrupt. Pelikán (2003, p. 34-37) follows and argues that the lack of feedback
to governmental organizations in comparison with market organizations operating
within competitive entrepreneurial process lead to lower ability of governments
to discover technological innovations as well as lower ability of governments to organize
themselves efficiently in comparison with large private firms sometimes larger
than national economies. This lack of feedback provided by entrepreneurial competitive
process lead to persistent of inefficiency of governmental organizations
and to corruption.
Following the above logic, Becker and Stigler suggest a solution, which would establish
efficient monitoring systems within organizations: “A highly promising method
of compensating enforcers (agents) is suggested by the market in private transaction….”
(Becker and Stigler 1974, p. 13). In other words, the recommendation means if the bribe
is just a market price for the demanded profitable service, it is reasonable to think
about letting agents sell these demanded services and compensate them by “bribes”
(market prices) instead of salaries. More precisely, in the case of the state being
the principal (superior organization), Becker and Stigler ask if we are aware
of the difficulties of the state’s monitoring system why we do not think about loosing
the contract with the state and as the result, we allow the agents to take “bribes”
(market prices) for their demanded services? This proposal, however, does not mean
selling monopoly privileges as Tullock (1996) explains. The proposal is based
on entrepreneurial competitive process where private agents (entrepreneurs) provide
creation and enforcement of law (maintain legal system). So the state does not form
the conditions of the contract with the agents – there is no third party in sense
of the principal but only in sense of society. The evidence is the Becker’s and Stigler’s
assertion: “Free competition among enforcement firms may seem strange… But society
does not pretend to be able to designate who the bakers should be – this is left to personal
attitudes and taste. Why should enforcers of law be chosen differently? Let anyone
who wishes to enter the trade, innovate and prosper or fail.” (Becker and Stigler 1974,
p. 12).
Nevertheless, a question may be raised whether there is no third party, no principal
in form of the state, who monitors or creates incentives forcing the enforcers
(entrepreneurs who maintain legal system) to do their job as their clients, alternatively
society, expect. The answer is again entrepreneurial competitive process, which means,
as Kirzner (1998) explains, free entry to the market in order to seek entrepreneurial
219
profit. This, however, does not necessarily mean that simple deregulation and world
without rules is efficient monitoring system. Simple deregulation does not solve
the corruption problem because no regulation could also encourage entrepreneurs
to rent‐seek (Djankov et al, 2002). The argument thus suggests that the enforcement
of property rights done through an entrepreneurial competitive process is more efficient
and more restricts corruption than enforcement of property rights through state
monopoly.
Political competition and corruption
It is necessary emphasizes that bridging social capital (it means weak ties among people
with different social, racial or other environment) can also have a dark side. It can
connect people who would not meet within their bonding ties but if they meet they
make a corrupt deal. However, from our point of view corrupt contract
due to its characteristic can be seen as a form of close ties. Warren (2001) or Benson
and Baden (1985) show examples of the dark side of bridging social capital situation
that brings together government functionaries and business people and systems
of bribes develop between both parts. Our analysis implies that in the case of state
and politicians and bureaucrats corruption is inevitable consequence. Politicians
and bureaucrats are better informed party then voters (their principal – see the first
section) and the information asymmetry creates opportunities for misuse their position.
There is literature stressing that political competition can lead to efficient outcomes so
that in compliance with our analysis it means that there is no reason to believe
that politicians and bureaucrats are more corrupt than firms (i.e. Wittman 1989).
This argumentation, however, is probabilistic and does not emphasis the intensity
of competition in the case of voting procedures. Other literature argues that voting
procedures are of minor importance (Olson 1971, Stigler 1971), therefore only interest
groups are able to compete for political power. In compliance with this argumentation
for instance Becker (1983) argues that political competition of pressure groups can
establish efficient and uncorrupt governmental organization.
Taking aside this arguments, voters, of course, could punish politics and not to vote
them again. But democratic voting system has specific quality. It virtually provides
to every citizen a very specific privilege to choose his favorite politician in elections.
The rule “one vote for one citizen” gives to every citizen a very specific property right
(Coase 1960, Alchian 1965, Demsetz 1967) to exercise political power. This kind
of artificial property is not convertible; it could be used just in time of elections. It is
practically worthless in “day-to-day” economic activities, because it cannot be consumed
or exchanged for higher values. These circumstances give to politicians a relatively
certain position about the future of their industry. The very specific character of votes,
which are useful only in time of elections, guaranties politicians that there has to be
always demand for their services established by elections. Moreover, in the case,
220
that the great part of citizens will decide not to use their rights to vote, the politicians
of the particular country are in a better position, because they have to go along with
interest of the smaller group of citizens in order to be elected. Within the competitive
entrepreneurial process, the politician would be in an opposite situation.
If the customers do not wish to buy the politician’s services, he would fail to gain
the profit and he would be forced to leave the market. In the extreme, if there were no
demand for political services in the market at all, the whole industry would disappear.
According to the logic of a democratic voting system, even though ninety nine per cent
of voters will not vote, one per sent will still give to the wining politician the same power
to sell monopoly positions to his voters or interest groups for reelection. To sum up:
the democratic voting system cannot sufficiently compensate a competitive voting
system of monetary prices. Politician’s ability to act against citizen’s interest results
from the relatively certain position they possess in comparison with the uncertainty
of the competitive entrepreneurial process. In this way, a democratic state will always
provide less strong incentives that would pursue their agents to avoid corruption.
That is why the problem of corruption will prevail in governmental organization.
Conclusion
The article questions persistence of corruption in governmental organization. It explains
that enforcement of property rights through entrepreneurial competitive process rather
improves efficiency of organization and restricts corruption than political competition.
It is shown that in a system of sole public ownership some incentives supporting
corruption behavior do not exist. Especially there are incentives to optimize
the expenditures spent on production of public services as well as incentives motivating
public officials to optimize the costs spent on the monitoring of the agents due
to the lack of feedback provided by political competition in comparison
with entrepreneurial competitive process.
The other reason supporting enforcement of private property rights through
competitive process is that corrupt contract differs from legal contracts that it is sealed
in secrecy. That means higher transaction costs and higher risk. Both can be reduced
if corruption contract is made among people who already have legal contact who know
each other. Previous legal contract makes corruption also more predictable. If person
thinking about a corrupt contract faces more intensive competition they have more
opportunity to make legal deals and not rely on corruption. More intensive competition
also means greater threats and losses if corrupt contract is revealed.
At its last section article shows that political competition has limited possibilities to fight
with corruption. The voter’s right is not convertible and could be used just in time
of elections. It is practically worthless in “day-to-day” economic activities, because it
cannot be consumed or exchanged for higher values. These circumstances give
to politicians a relatively certain position about the future of their industry. Voters
221
also faces high costs as deciding who they elect they must take in consideration not only
the issue of corruption but other themes that are important for them. With fact that one
vote cannot affect the result of most election it is clear why the problem of corruption
will prevail in governmental organization.
Further research should be targeted to technical improvement of our theoretical
framework, to explanation of our logic on more rigorous models and to further
corroboration, which does not exclude empirical testing of our implications.
Acknowledgements
This article is the result of a research project supported by the Ministry of Education,
Youth and Sports of the Czech Republic, no. VZ 6214648904 “The Czech Economy
in the Process of Integration and Globalization, and the Development of Agricultural
Sector and the Sector of Services under the New Conditions of the Integrated European
Market”, thematic area 01 “Macroeconomic and microeconomic performance
of the Czech economy, and the Czech government’s econo-political measures
in the context of the integrated European market”.
For inspiration and encouragement to this project, which started in 2006, we thank
Professor Mark Thomas from Harvard University. For discussion we also thank
Professor Pavel Pelikán from University of Economics, Prague. Earlier results explained
in this paper were presented at Prague Conference on Political Economy held in Prague
in 2007 and Summer School on Analytical Politics and Public Choice held in Turku,
Finland, in 2007. For comments and suggestions we thank all participants
and two anonymous referees.
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SESSION III:
PUBLIC FINANCE
226
Comparison of Tax Control in Slovenia and Croatia
Hodžić Sabina
Abstract
Taxpayers pay taxes in line with tax rate determined by the law and within legally
designated deadline. Tax control in Slovenia and Croatia ensures proper settlement
of legally prescribed obligatory tax burden. The purpose of tax control is to detect tax
irregularities punishable by the laws of both Slovenia and Croatia. Each country (Slovenia
and Croatia) determines its own acts and legal acts on tax control. This paper's main
objective is to present tax control in Slovenia and Croatia, as well as their features
and characteristics of conducting tax control. A number of mistakes are found
during annual tax control of tax base accounts. The mistakes are the results of tax
legislation dynamics, unclear regulation and provisions, as well as short period
for the adjustment to the new legal provisions.
Keywords
tax control, fiscal policy, methods of tax control, taxpayer, Slovenia, Croatia
Introduction
The Republic of Slovenia's tax control includes control, inspection reviews and tax
investigations. Tasks of the tax control in the Republic of Slovenia are entrusted
to the Tax Administration of the Republic of Slovenia. Tax control asks for special
attention since it includes complete control upon the implementation of tax legislation
in the Republic of Slovenia. Irregularities regarding tax settlement and payment,
as well as other compulsory payments, were identified in the process of tax control.
Tax control controls legality, regularity and timeliness of fulfilment of tax obligations
determined by legislation and taxation. Hence, it is necessary to determine efficiency
and equality of taxpayers, and to respect fundamental principles of tax procedure
and principles of tax control. It has to be based upon objective criteria; otherwise,
it raises the question of ethics and morality of a tax inspector. Tax authority issues
annual control plan and attempts to fulfil it. Objective criteria are based upon statistical
methods, random sampling method, and previous measures. Persons keeping business
records and records in line with law are obliged to provide tax authority with all
the documentation necessary for tax inspection control. The main purpose of tax control
is not prosecution of taxpayers, nor the sole increase of the received taxes,
but independent and impartial judgement of the regularity of tax burden
and its definition. It can be in favour of the taxpayer as well. Governments and local
227
authorities have to deal with increased pressures on their budgets to ensure the fiscal
discipline (Barone and Mocetti, 2011, p. 748).
The Croatian tax system underwent a major transformation in the process of transition
and harmonization of tax legislation with the European Union. Reformed tax system has
been implemented since 1 January 2005. Tax control is conducted according to the laws
that define respective tax type, while tax control process is conducted in line
with the provisions of the General Tax Act. In Croatia tax control is conducted
in 20 branch offices and in the Central office of the Tax Administration in Zagreb.
Controls of one or more types of taxes are subject to tax control. For example,
the subject of tax control can be revenue tax and control of income tax in 2012
as a taxation period. It can be executed for any legal and physical person that has facts
relevant to taxation. For example, if the entrepreneur is a physical person, control can
also include facts not related to its economic activity, while in case of for-profit company
it includes control of relations relevant to taxation between the company members
and the company itself. Before tax control begins, a tax control note must be sent
to taxpayer 8 days before tax control taxes place at the latest. Tax control might last
from few days to several months, depending on the taxpayer size, type and number
of taxes to be controlled, taxation period that is subject to tax control and taxpayer's
cooperation etc.
This paper's main objective is to present tax control in Slovenia and Croatia,
as well as their features, and to determine differences in the execution of tax control.
Furthermore, this paper presents the current state of tax control in countries
and their recommendations for further improvements.
Material and Methods
Comparation method and analysis and synthesis method were used in this paper
in order to compare tax control in the countries. Besides those methods, tax officials
in Tax Administration were interviewed in order to obtain data. Data was collected
in the Statistics Department of the Tax Administration.
Tax inspection control, as well as tax audit, in other European countries
includes organized, approved and pre-planned procedures. Within that frame systematic
review of material evidences and business events determines regularity of fulfilment
of tax obligation. The fairness of the legal system is more strongly related to tax
compliance than is simple confidence in the legal system. People′s tax compliance seems
to depend on how well the entire government works, not just the judiciary (Hug
and Spörri, 2011, p. 121).
Tax control in the Republic of Slovenia
In the Republic of Slovenia the Tax Administration Act (ZDS-1, 2004 and 2005) has
directed the tasks of tax control to the Slovenian Tax Administration. Tax Administration
228
is organized, directed and managed by the tax register. Slovenian legislation recognizes
tax control, tax search and tax inspection as forms of tax control.
Tax control is conducted by the tax controllers that verify formal regularity
and timeliness of submission of tax notifications and tax obligations, settlement
and payment of tax based upon forms and other compulsory data (Koletnik, 2009, p. 14).
Tax inspection control is conducted by the authorized representative of the tax authority
appointed by the tax inspector. Tax control is conducted by the tax authority in case
of suspicion that tax legislation has been violated (Koletnik, 2009, p. 15).
The aim of tax inspection is to entice loyalty of a taxpayer. When conducting tax
inspection control, the tax inspector has an obligation to focus solely on the tasks listed
in the work order. In case wider scope of control is needed, the tax inspector has to
obtain the corresponding work order from the tax office.
Tax control is state's way to diminish the difference between voluntary tax acceptance
and legal voluntary tax inflow. In the Republic of Slovenia and the Republic of Croatia tax
control is intended for economic entities (legal persons) and natural persons.
Pursuant to Article 127 of the Tax Procedure Act (2006) tax control in the Republic
of Slovenia includes:
1. Tax control of tax settlement at the tax authority
2. Control and audit according to the Act which regulates customs service
3. Tax search
4. Tax inspection control
Tax inspection serves to detect tax irregularities. Consequences include incorrectly filled
tax return form, inadequate choice of tax rates, and untimely fulfilment of tax
obligations. In the Republic of Slovenia tax inspection control is conducted by the tax
inspectors. Pursuant to the Act on Inspection Control, inspectors perform tasks
of inspection control with the aim to protect public interest, and interest of a company
and an individual.
Tax inspection is expected to be beneficial in (Koletnik, 2006, p. 72):
1. Protecting loyal and detecting unloyal taxpayers
2. Raising arrangement of taxpayer's business to a higher level, indirectly offering him
new knowledge, especially to those entrepreneurs obliged to economically audit annual
reports
3. Offering new knowledge for improvement of tax legislation and higher efficiency
of tax system to the authors of tax legislation, and strengthening loyalty of taxpayers
The main purpose of tax inspection is to control fulfilment of the taxpayer's obligations,
i.e. tax bases, tax rates, quotes and terms of tax payment, in order to ensure public
229
financing to the state and/or state financial resources for the authorized recipients
(Koletnik, 2006, p. 72). Inspection control includes control of regularity and timeliness
of tax settlement from the taxpayer's business, inspection of accounting and other
records, and identifying unreported revenue, as well as establishing measures envisaged
by the law.
The Tax Authority Act considers control and inspection as forms of tax control.
Controlling means previous, opposite or subsequent audit of business processes
and states, and identification of allowed and forbidden deviation from vocational,
and professional and ethical rules. Inspection refers to revision and assessment
of compliance with the tax regulations in company's business (Koletnik, 2007, p. 26).
According to the Work Report of the Tax Administration of the Republic of Slovenia,
tasks of the tax control are conducted by the Control Department, Inspection Control,
Search and Analytic Department, and Department for the International Exchange
of Information.
Table 1 presents the results of the Tax Administration in the Republic of Slovenia
in 2010 and 2011.
Table 1: The results of the Tax Administration in the Republic of Slovenia in 2010
and 2011
2010 2011 %
The results of the
control (control and
inspection) in EUR
274.817.653 295.851.427 7,7
Control of tax
settlement
(number of
applications with
established
irregularities
92.630 95.336 2,9
Inspection controls
(number of conducted
tax inspection
controls)
7.760 7.828 0,9
Source: Poročilo o delu Davčne Uprave Republike Slovenije v letu 2011.
Taking a look at the table, it can be easily concluded that the results of the control have
risen in 2011 for 7.7 % in relation to 2010. Thus, the Republic of Slovenia has achieved
a rise of 7.7 % in the financial inflow in Euros in relation to 2010. Furthermore,
the control of tax settlements also notes a rise, i.e. a rise in the number of reports
with determined irregularities for 2.9 %, resulting in very high quality of the Tax
Authority. The number of the conducted inspection controls has risen for 0.9 %
in relation to 2010 due to the increased control of the tax settlement.
230
Table 2: Types of tax inspections in the Republic of Slovenia
TYPES OF TAX INSPECTIONS
GENERAL TAX INSPECTION SPECIAL TAX INSPECTION
Regular tax inspection Additional tax inspection Regular tax inspection Additional tax inspection
Complete
regular
tax
inspection
Short
regular
tax
inspection
Complete
additional
tax
inspection
Short
additional
tax
inspection
Complete
regular
special tax
inspection
Short
regular
special tax
inspection
Complete
additional
special tax
inspection
Short
additional
special tax
inspection
Source: Koletnik, 2006, p. 72
Case when taxpayer performs tax control according to the planned schedule
and/or due to specific reasons is known as regular, i.e. additional tax inspection.
The group of specific tax inspections includes inspection of payroll tax, value added tax,
gambling and betting tax, sales tax etc.
Tax control in the Republic of Croatia
According to the General Tax Act, tax control is a part of relation between tax and law
in which tax authority conducts a procedure in order to check and establish facts
relevant for the taxation of taxpayers and other persons. Tax authorities conduct control
in accordance with the legislation that determines specific tax types. Taxpayer must
present true and correct information that are also submitted in tax return form.
Persons authorized to conduct tax control include tax auditors, tax inspectors and other
government officials authorized to conduct tax control. Authorization to conduct tasks
of tax control is given in the form of an identification that has to be presented
to taxpayer. Taxpayers are required to make estimated tax payments at specified dates
during the year in respect of their current year′s tax liability (Feltham and Paquette,
2002, p.29).
Participants in the tax control in the Republic of Croatia are Tax Administration
and taxpayers. Tax control is generally conducted at the taxpayer's headquarters;
if a taxpayer does not own business premises suitable for conducting tax control, it is
conducted in the official premises of the Tax Administration. Tax control is conducted
(Galušić et.al, 2009, p. 137):
1. During regular working hours
2. Before or after regular working hours, with the taxpayer's consent
3. Before or after regular working hours if it is unconditionally required by the purpose
of tax control.
Tax control is characterized by two elements: it is conducted exclusively
by the authorized officials of the Tax Administration and the procedure of tax control is
determined by specific regulations. Inspector has a right to inspect taxpayer's business
231
premises in his presence or his representative's presence. Persons qualified to conduct
tax control must abide by the certain principles during tax control. Those principles
include: principle of objectivity, principle of proportionality, principle of the party's
declaration, principle of legality, principle of establishing the material truth, principle
of independence and free evaluation of proof, principle of efficiency and economical
quality etc.
The future aim of the Tax Administration is higher quality of monitoring of the tax
control results in the applications of the Information system of the Tax Administration
and introduction and implementation of cat tools for electronic control.
Results and Discussion
Review of the tax control methodology in these two countries significantly varies.
In the Republic of Slovenia there is thoroughly developed system of tax control;
on the other hand, such system in Croatia is significantly less reviewed and developed.
Several control techniques are being used for the tax inspection control in the Republic
of Slovenia. They differ with regard to (Čokelc, 1997, p. 273):
1. Control direction – the following can be differentiated:
1. Retrograde direction from tax evidence or tax settlements to general ledger
2. Progressive direction controls from business events and accounting records
through logs and general ledger to tax evidence, i.e. other tax settlements
2. Originality of comprehensive basis – the following can be differentiated:
1. Direct control – determines regularity of fulfilment of tax obligations on the basis
of the control of accounting records and other proofs on business events and conditions
2. Indirect control – assessment of the facts relevant to taxes with the help of indirect
information collected together with the assessments of pure assets and money flows
3. Form and contents – the following can be differentiated:
1. Formal control – determines propensity to differentiate business events
and conditions, and tax settlements by tax and accounting regulations
2. Contents control – determines contents regularity of declared data in tax settlements,
and compliance to tax regulations and code of practice
4. Manner of search – the following can be differentiated:
1. Control of business events and conditions based on accounting control of all selected
business events and conditions on which depend type, size and dynamics of tax
liabilities
232
2. Control of the accounting department is justifiable in larger companies that process
data electronically.
Depending on the subject of control, legal form of a company, taxpayer's size and general
arrangement of the accounting department, tax inspector chooses one of the offered
techniques during tax control.
Some of the most commonly used reviewed methods of assessing during tax control
include:
1. Method of internal temporal comparison
It is conducted as an internal comparison of income, business results and other settings
of different time zones. The implementation of this method in the phase of preparation
for the tax inspection control is very helpful for initial perception of taxpayers (Čokelc,
1997, p. 278).
2. Method of comparison between entrepreneurs
It is implemented in the phase of preparation for the tax inspection control.
In this method tax inspector compares and assesses data from accounting declaration
of the examined company with the data of the same profile companies. For example,
if declaration of business result states taxpayer's income is below the average
of the comparative company, it can be a sign that not all assessable income has been
recorded or that the expenditures have been declared in the excess amounts.
Such notions direct tax inspector towards control performed in the execution phase.
(Čokelc, 1997, p. 278).
3. Sampling method
It is implemented in the execution phase of the control. The review of the entire
business events is rarely executed during tax control due to a large volume of data.
In that case, scanning through data and control of the selected parts can be rather
helpful to the inspector. This control focuses on the selection of documentation,
and accounting and other records that are being use as a sample. If the criteria
for determining the sample are not specifically defined, the tax inspection has a right
to set their own criteria. Implementation of some other mathematical and statistical
methods is rare due to their complexity. (Čokelc, 1997, p. 280).
4. Assessment method
In tax practise it is used as a mean to achieve regularity of items declared in a tax
evidence of a taxpayer.
Pursuant to the Tax Procedure Act (2006), principles of the tax inspection control
in the Republic of Slovenia include: principle of legality, principle of material truth,
principle of ratio, principle of safety and aid, principle of confidentiality, principle
233
of legal and timely settlement and payment of tax obligation, and principle of duty
to provide information. Business phases of the tax audit in the Republic of Slovenia
include planning tax audit, realization of tax audit and final implementation of tax audit.
During the phase of planning the auditor collects, examines and evaluates the existing
basics, and designs operation plan for the audit. During this phase it is necessary to read
and revise substantial material in order to obtain general information.
Besides these tasks, both the tasks of internal and external comparison,
and the assessment of the revised company should be taken into account. To obtain all
the necessary data, the tax inspector must cooperate with the tax department,
i.e. administration. The phase of the tax audit realization includes the following business
steps (Koletnik, 2009, p. 76):
1. Introduction to and assessment of the wider environment of the audited area;
2. Introduction to and assessment of the relation between the owner and the managers
to the company's organization, especially of the one taking care of the permanent
company's sustainability;
3. Introduction to and assessment of the accounting system;
4. Introduction to and assessment of the system of internal control in a company
and accounting controls;
5. Introduction to accounting data necessary for the calculation of tax obligations.
External tax audit results in final discussion with the taxpayer and in written report
on the audit results.
Methodology of tax control in the Republic of Croatia is not as thoroughly developed
as in the Republic of Slovenia. Hence, a taxpayer is chosen on the basis of risk
assessment, which is a base for annual planning, and in line with requirements
by which the Tax Administration shall proceed.
All the relevant facts that can ultimately increase or decrease tax obligation are
determined during the tax control. Taxpayer proves facts in the following manner:
by providing information, presenting records, business books, business documentation
and other documents. Assessment of the tax base is conducted if taxpayer is unable
to present books or records that must be kept under the tax legislation, if he is not
issuing bills, if he is unable to prove taxation information with plausible documentation,
and if he refuses to participate in the tax control. When it comes to natural persons,
assessment can be defined as the difference between taxpayer's expenses for private use
and/or acquired private assets and reported income. The effect of the tax control
in the Republic of Croatia greatly depends on the methods applied during the control.
Inspector must check every corresponding book entry in order to determine correctness
of a business event and book entering. Economic theory differentiates several methods
for quality performed examination. They can be divided into general and specific.
234
General methods include inductive, deductive, and empirical method. Special methods
include method of direction and scope method. Methods of direction include progressive
and retrograde, and scope methods include full method and interruption method
(pattern).
Progressive method is used in revision, starting point being the control of the course
of execution. The objective of this method is to determine correctness or incorrectness
of a final action or effect, and action during which the mistakes occur. The first step
of retrograde method is to examine finalised jobs, i.e. their results. Both methods are
usually used during the tax control or they are used alternatively.
The Tax Administration performs tax control in the Republic of Slovenia. The efficiency
of the Tax Administration in tax control depends on the number of successfully resolved
controls and reports. It is important for the efficient functioning of the tax system. Tax
control is efficient when it reaches a high level of independend fulfilment of tax
obligations. Tax administration prepares annual tax control plan. The principle to follow
when performing tax control is to perform continuous tax control of large taxpayers.
In 2011 tax control in Slovenia yielded very good results. That year 7,828 tax controls
were carried out and EUR 162,488.475 of the additional tax liabilities found.
In 2011 528 filed independent taxpayer returns were registered in tax control, which is
33.7 % more than 395 registered in 2010. The value of the filed independent taxpayer
returns in 2011 arose to EUR 6,020.605, which is 89.9 % more than in the same period
of the previous year.
Much like the situation in the Republic of Slovenia, the Tax Administration performs tax
control in the Republic of Croatia. Depending on the size of a taxpayer, it can last
from few days to few months. Scheduled time that is too short may compromise
the quality of control, while scheduled time that is too long increases the costs of control.
The results of the tax control over the past ten years show decrease of 364 % in filed
reports, the number of tax inspectors has increased by 8.26 %, and duties per tax
inspector have risen by 396 %. Furthermore, the average number of spent days per
inspector has risen by 342 %, and the number of irregular reports has risen by 53 %.
During that period an increase of controls performed over legal persons with respect
to natural persons has been noted. Keeping in mind that the control of legal persons is
more complex than that of natural persons, the number of days spent per tax control has
increased. That lead to better efficiency of tax liabilities per tax inspector or in total.
Conclusion
To each taxpayer it is greatly important to recognize and understand the facts
influencing tax culture, tax moral and tax ethics. Those represent a guarantee
that the taxpayer will pay his tax within legally set period.
Tax control in the Republic of Slovenia and Croatia is conducted by the Tax
235
Administration. Tax control in the Republic of Croatia is conducted according
to the provisions of the General Tax Act. The same term in the Republic of Slovenia
refers to the notion of tax inspection regulated by the Act on Inspection Control.
Tax inspection control in the Republic of Slovenia includes all types of taxes
and other prescribed expenditures, except customs and excise duties. In the Republic
of Slovenia and the Republic of Croatia both legal and natural persons are subjects
to the tax control. The subject of the tax control in both countries can be audited for one
or more taxes during one or more taxation periods. The great difference
between the two countries lies in the fact that the Republic of Slovenia has thoroughly
developed the methodology of tax control, while the same cannot be said
for the Republic of Croatia. To that part, Croatia should work on organization
and method of the tax control conduction. Tasks of the Tax Administration in both
the Republic of Slovenia and the Republic of Croatia include collection of taxes and other
compulsory expenditures, control of the legality, regularity and timeliness of settlement
of the tax obligation determined by the taxation legislation, as well as prevention
and detection of tax offenses and other criminal offenses. It can be concluded that the tax
control in the Republic of Slovenia refers to the notion of tax inspection, while
in the Republic of Croatia refers to the notion of tax control. In both countries, it is
conducted by tax inspectors that must have the tax inspector exam, as well as diploma
certificate. Furthermore, both countries have in common the fact that the subject
of the tax control can be the control of one or more taxes in one or more taxation
periods, as well as the fact control of both natural and legal persons. Compared
to the Slovenian tax system and legislation, the Republic of Croatia still doesn't have
thoroughly developed tax control. The reason lies in the fact that the Republic
of Slovenia has clearly defined types of tax inspection to be conducted,
while the Republic of Croatia still needs to do the same.
The Republic of Slovenia has thoroughly developed and improved its tax control, in line
with other member states of the European Union. On the other hand, the Republic
of Croatia still needs to invest a lot of hard work and effort in order to develop its tax
control and to implement it in line with the other member states. In order to improve
the efficiency of tax control in Croatia, it is recommended to intensify tax controls
in Croatian state companies. Such tax control should give way to more detailed analysis
of regularities and timeliness of calculation of tax from business activity, more detailed
analysis of book-keeping and other records, and it should determine the percentage
of unreported income that have inflicted damage on state budget. The Tax
Administration of the Republic of Croatia should keep unique and detailed tax control
scheme for each company.
Both countries should simplify tax acts and their practical implementation. Currently,
taxpayers must fill a number of tax records and provide different evidence in short
period before tax calculation. That adds to the possibility of making errors when filing
the tax form in. Such errors are then found during the tax control. In order to perform
236
efficient tax control both countries should ensure larger number of tax inspectors
specialized in tax control. The increased volume of tax control calls for an appropriate
manner to raise the awareness of the downsides for company and public sector among
the persons in charge.
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237
Financial Management in Practice of Czech Regions Background
Points, Experiences and Issues
Horňáková Michaela, Špaček David
Abstract
In this paper the authors discuss to what extent improvements of financial management
can be found in Czech regional self-government. Before any findings are presented,
the paper briefly introduces main aspects of Czech reform of regional self-government
and outlines the requirements on changes in financial management practices
as anticipated by current reform policy.
Keywords
New Public Management, financial management, reforms in CEE region, Czech public
administration reform
Introduction
Requirements on more systematic public management (including financial
management) emerge in public administration reform mainly as a consequence of ideas
of New Public Management (NPM). The label NPM is referring to approaches which,
on theoretical as well as practical level, have been emphasizing business-line tools
and techniques in public management and its reforms (Pollitt and Bouckaert, 2011).
In general, NPM is usually discussed as a (theoretical as well as practical) result
of perceived inefficiency of “traditional” public administration and bureaucracy. Studies
about the NPM diversity and impacts are persistently scarce and often favour an AngloAmerican
perspective on NPM (Barzelay, 2001, in Homburg, Pollitt and van Thiel, 2007).
In the region of Central and Eastern European (CEE) countries’ attention given to this
topic has been rising particularly since the end of the last decade. Still, the literature
on NPM impacts on reforms in the CEE region is rather fragmented and it is still not
clear how it deals with NPM impacts on reforms outcomes in the CEE region and why.
Public financial management systems represent series of institutional routines that offer
a powerful means to direct bureaucratic behaviour (Campos and Pradhan, 1996).
They require to go beyond dominant incremental and short-term budgeting, certain
income „freedom“, transparent and formula-based allocation of resources, outcome
based control mechanism and also pluralistic public-private-civic delivery of public
services (Nemec, 2003).
In the case of financial management experiences in public administration, in 2003
Nemec criticizes the lack of progress of replacement of the old „budgeting systems“,
238
the predominance of the old style incremental and „brutto“ budgeting, compliance
methods of control, subjective allocations, centralized management of finances.
Nemec (2008) concluded that all new EU member countries significantly improved their
financial discipline, also thanks to the implementation of modern budgeting methods.
He admits that a switch to programme performance budgeting is an ongoing process
in the region which requires linking inputs to outputs, outcomes and results in order
to delivery value for money from public expenditures.
Material and Methods
In this paper we discuss to what extent the improvements of financial management can
be found in Czech regional self-government. Before we present our findings we briefly
introduce the main aspects of Czech reform of regional self-government and outline
the requirements on changes in financial management practices as anticipated
by current reform policy. The paper was elaborated within the project of the Czech
Science Foundation no. 403/12/0366 “Identification and evaluation of region specific
factors determining outcomes of reforms based on NPM – the case of CEE“.
The paper follows the methodology used in the project of Czech Science Foundation
no. 402/08/1158 “Implementation of new instruments for public expenditure
at regional level in the Czech Republic.”. Within this project questionnaire surveys and
following interviews were carried out in order to ask representatives of all Czech
14 regions about several aspects of budgetary mechanisms and financial management
they use. The project was completed in 2010. One part of the project focused on the area
of financial management of the Czech regions. In this paper, which follows
the framework of the project 403/12/0366 we tried to revise findings of the previous
research, building on secondary information from websites of Czech regions on regional
budgets, budgetary outlook and strategic aims. We synthesized the information gathered
by questionnaire surveys realised by the project no. 402/08/1158 and new findings
and information available from regional closing accounts, the State Budgets and selected
theoretical sources.
Role of Regions and Financial Management in Czech Reform Policy
and Legislation
Together with municipalities regions represent self-governmental units in the Czech
administrative system. According to the Article 99 of the Czech constitution
(Constitutional Act 1/1993), regions are higher self-governmental units. According
to the Act No.129 on regions of 2000, a region is a legal corporation under public law,
it owns assets and has an income laid down in the law and it manages resources
on terms laid down in the law and according to its own budget. Similarly
to municipalities, regions shall exercise not only self-governmental responsibilities,
but also state administration functions if entrusted to them by acts on the basis
239
of deconcentration (the called “mixed”, or “joined” model of territorial public
administration system). A region is then obliged to ensure performance of delegated
power in its administrative district. Still in 2003, the report of the Ministry of Interior
on the reform progress criticized that the funding of the created regions had not been
sufficiently solved, because their incomes were dependent on the state subsidies not
on the system of tax shares as it was the case of municipalities. Also at the present time,
the regions are funded predominantly by subsidies from the state (through mandatory
expenses of the government). Although this mechanism has been criticized,
such solution of funding may currently – in the situation of “blackouts” in tax revenues –
appear beneficial.
Basic principles of regional economy are described in the Act on regions
(Act No.129/2000). This act also requires a regional assembly to establish a financial
as well as controlling committee. Another act (Act No. 248/2000 on support of regional
development) anticipates that regions shall elaborate strategies of their development
and regulates financial support of regional development. Requirements on financial
management are also specified in Act No.250/2000 on budgetary rules for budgets
of territorial self-government and in Act 320/2001 on financial control. Budgetary rules
specify mechanisms of elaboration of budgets, preparation of closing account
which shall include report on review as well as budgetary outlook.
Except for legislation almost all Czech reform policies and strategies have touched
requirements on public management improvement (starting with Conception of public
administration reform from 1999 which is often branded as the first post-communist
reform conception in the Czech literature). Much of the previous rhetoric about reform’s
starting points and objectives can be explicitly or implicitly found in current reform
initiatives. The reasons may be various – from not meeting the goals,
over the incremental character of the reform, to the (sometimes headless) spread
of the good governance ideas which has become very “sexy” in programmes
of administrative reforms and modernizations in the world. We may observe that many
aims overlap from the previous period and only the weights which are assigned
to them in reform policies has changed.
In July 2007, the government approved the document Efficient Public Administration
and Friendly Public Services – Strategy on Realization of Smart Administration
in the Period 2007 – 2015 (“Smart Administration Strategy”) which was submitted
with regard to the preparation of the Czech Republic on drawing resources
from European structural funds in the programming period 2007 – 2013. Because last
governments have not approved other PA reform policy, we can consider the Smart
Administration Strategy as the last Czech reform strategy. The strategy works
with a hexagon of public administration, among its pillars financing can be found
together with legislation, organization of its execution, citizen, bureaucrat and ICTs and
also with the emphasize on good governance principles. According to the “situation
240
analysis”, which forms a very brief part of the strategy, main issues of self-governments
relate to deficiencies in managerial capacities of small municipalities, heterogeneous
quality of services and low pace of innovations. In case of financial management,
the strategy criticizes that strategical management is usually not linked to financial
management in self-governments. Therefore the strategy (also) anticipates, describing
the visionary state of public administration by 2015, improvement of policy-making
and policy implementation through higher rationalization and transparency
and implementation of strategic planning on the corporate level and in functional areas
and their integration with budgets. It also expects revision of budgetary mechanisms
and ways of allocation of public resources. According to its aims improved financial
management is perceived as instrument producing savings and results-centricity
of public administration. The strategy explicitly anticipates implementation
of programme budgeting which would be focused on performance monitoring and bring
following audits of results and performance. This shall address the situation
when efficiency of public spending is not monitored and evaluated.
Economy of Regions - Overall Characteristics
As a result of the impact of the recession, Czech regions had to face a decline
in resources in the years 2009, 2011 and 2012 which in practice reflected mainly
in a lower tax revenue since 2009. However it is a restrictive policy of the central
government lowering the grant revenue from the State Budget since 2011 that manifests
more significantly than a failure of regions’ so called own resources.
Despite the continuing economic recession regions’ economies had ended in a surplus
in 2010 the reason being the national tax increases, along with the regions’
preparedness for the formerly announced cut of financing of European projects
from the State Budget in the field of regional operational programs (Closing accounts
of all regions from 2008 - 2011, Budgets of all regions from 2012). This enabled them
to prepare and create a kind of financial "base" for the co-financing of European projects
for the forthcoming years. Such practice is not uncommon at the regional level and can be
also traced in the balance of the regions’ economies in the previous periods. Image
below illustrates the management of regional budgets.
In terms of the regions’ indebtedness a continuous increase is apparent. The debt
situation of the regions is significantly impacted by options of drawing of EU funds
and the necessity of their pre-financing and co-financing. The regions make investments
throughout the European subsidies, especially in the field of infrastructure and they are
thus approaching the projects of a significant investment range. The scope of investment
in this case involves not only the extent of a funding, but also the time scale
of investments. Liabilities that the regions are currently accepting have an impact
on their long-term fiscal sustainability. In this context, it is necessary to address
the question of whether regional teams consider realistically all the possibilities
and risks of specific investments for the future when deciding on the implementation
241
of specific investment activities. Nevertheless, it is necessary to mention that the case
where the returnable funds resources are being used for the purpose of long-term
projects and investment and regional development, is a more appropriate form
of financing than using the same funds o cover current expenditures and short term
consumption. There are two main sources of repayable funds that county can use
for the purpose of co-financing:
• loans from the European Investment Bank (EIB),
• loans from commercial banks operating on the Czech financial market.
By using the above methods of financing the projects, regions have access to very
favourable credit conditions. The use of commercial credit products is a subject
to the act on public contracts and therefore, a region must issue a tender for a given
product prior to the contractual loan obligations. The question is whether, in this area,
there is no moral hazard in the form of easy access of subjects of public administration
to the loan. A prerequisite for such conduct of private subjects is an assurance
of a continual regions’ income, conferred on them by the law on a budgetary tax.
Table 1: Development of balance regional budgets
Billion CZK
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
I. Tax revenue 0,0 10,2 11,4 12,6 39,6 42,3 46,1 49,8 43,8 45,1 45,3 45,4
II. Non-tax
revenue 0,1 0,7 1,4 3,2 2,8 2,9 3,5 3,9 4,0 4,9 4,8 4,9
III. Capital revenue 0,0 0,0 0,2 0,3 0,4 0,4 0,8 0,6 0,4 1,1 0,5 0,4
Own incomes 0,1 10,9 13,1 16,1 42,8 45,6 50,4 54,3 48,1 51,1 50,6 50,7
IV. Subsidies 14,4 26,7 82,8 84,6 70,7 76,6 75,0 77,4 88,7 89,5 85,8 86,4
Revenue 14,5 37,6 95,8 100,7 113,5 122,1 125,4 131,7 136,9 140,6 136,4 137,1
V.Ordinary
expenditures 13,2 32,1 85,0 88,4 100,6 108,5 107,7 112,5 120,9 118,7 119,6 119,5
VI.Capital
expenditures 1,2 3,7 9,4 11,5 12,0 15,9 16,6 20,5 23,7 20,0 18,3 18,8
Expenditures 14,4 35,8 94,3 99,9 112,6 124,4 124,3 133,0 144,6 138,7 137,9 138,3
Saldo 0,1 1,8 1,5 0,8 0,9 -2,3 1,1 -1,3 -1,2 1,9 -1,5 -1,2
* Anticipaded situation
Note: Prague is not included in the analysis. This is so because the City Prague, the capital, is also a
municipality and the fourteenth region of the Czech Republic and its data are included in the municipal
statistics.
Source: The Closing Accounts 2001-2011, The Proposal of the State Budget 2012.
In the years 2011 and 2012 the co-financing of European projects in the field of the ROP
(Regional Operational Programmes) witnessed a restricted participation of the State
242
Budget. Applicants for these resources are especially towns, municipalities, contributory
organizations of the regions or the regions themselves.
Instruments of Financial Management in Regional Practices - Results
and Discussion
Currently, regions have processed all the documents that the above legislation requires.
They are especially dealing with: budgets, regions’ closing accounts, regional
development strategies and regions’ budget projections.
All the above-mentioned legal norms are formulated with a high degree of liberty
and enable a heterogeneous practice in the regions’ financial management. On one hand
this can bring more flexibility when creating regions’ own standards and regulations,
on the other hand, it leads to certain disadvantages, especially when an unpredictable
situation arises for which the regions are not properly prepared in advance and it has
to be dealt with promptly. Regions’ own rules governing their provisional budget
and the actual budget process can be mentioned as an example. The approach
to the provisional budget issue is ad hoc in some regions. They have no internal
regulations that would govern the process. However, there are also regions
with approved principles of the provisional budget, which in the case of non-approval
of the budget specify a formal aspect of securing the financing of the regions’ activities
until a regular budget is approved.
Regions apply their own approach in terms of the budgetary rules too. Some regions
have created their own budget rules, based on the law, but which they further specify
and elaborate. Furthermore, documents that determine the principles of region’s
budgetary process or a detailed schedule of the budget process are being prepared
in the regions. The regions also differ in their approach to these internal standards.
In some regions the rules are binding for the perennial horizon while in the case
of other groups of regions the rules are modified annually. Most regions possess
a combination of documents dedicated to the procedural aspect of the budget process,
which they often combine.
Data gathered throughout structured interviews suggest that, as a part of its twelve-year
history, each region have created his own approach to many issues as well
as to the solutions to problems that are similar in many ways, but may differ too. This is
not different in case of use of different tools for financial management either. In the case
of financial management the surveyed interview focused on tools that are being used
within the county budgeting and on the management of fiscal imbalances. Structured
interviews revealed the following:
• In most cases, regions budget their available resources based on historical
approach 12 out of 14 regions. South Bohemian Region proved to be the only region
where the budgetary practice differs from establishing the situation of the previous
243
years. The statement of the Council of the South Bohemian Region is the basic starting
base policy in the region. A respondent in a controlled interview, said: "The regional
development program is all encompassing, it is very difficult to present a full view it
in when creating the budget. Rather than strategic and conceptual documents there are
the municipal policy statements reflected in the budgets. Various programs and strategies
are important for sorting out the priorities, objectives and directions of development
of individual areas." The Policy Statement of the Regional Council presents the priorities
and objectives of the regional government and is therefore also seen as a guidance
in the preparation of the budget forecasts and in the particular budgets consequently.
Approach to budgeting practices applied in the South Bohemian Region should be
deeper investigated. However, based on the answers of the respondents in this region it
appears that there already exist quite crucial elements pointing out to a totally different
logic approach to the decision making about allocation of the resources, the foundation
of which is the emphasis on a demand-oriented approach (Closing Account of South
Bohemian Region 2011)
• In terms of the fiscal imbalances in 2010 the survey showed that 4 regions use
credit facilities of the European Investment Bank, other regions draw returnable funds
from commercial banks. The main instrument for managing fiscal imbalances
in 6 regions is payment schedule (Dvořakova in Šelešovský, 2010). It was already clear
from the previous survey that the regions do not see the active management issue
of fiscal imbalance as a tool which could be beneficial to them in the event of financial
management. The answers of the respondents point out to the fact that the legal
condition of loans conditional acceptance of an invitation to tender is a sufficient tool
to ensure a low cost loan, which is the only condition that the regions considered
important.
• Of all fourteen regions in the Czech Republic only Plzensky Region did not receive
any credit or loan throughout its existence. Conversely, in 2009, Central Bohemian
Region was the most indebted region (excepting the City Prague Region). This situation
remains the same even in the year 2011, when the Central Bohemian Region is,
with its debt 3.72 billion CZK, the most indebted region. The only tool of the fiscal
imbalance in Central Bohemian Region is repayment schedule (Closing Account
of Plzensky Region 2011).
• A special example of active management was recorded in the fiscal imbalances
management of the City Prague Region. Position of the City Prague as a capital
of the Czech Republic, region and municipality, is regulated by a special Act
No. 131/2000 Coll. the capital city of Prague. Capital City Prague Region has committed
liabilities in foreign currency and therefore it is necessary to monitor exchange rate
risks, using swaps and derivatives in this case. The Capital City of Prague has established
a special department whose responsibility is management of debt service and investing
funds.
244
• In addition to the City Prague Region South Bohemian Region has an active effort
to control the fiscal imbalances. The incomes from short-term and long-term loans
or balances in term deposits are evident from the text of the closing account
of the region. Respondents addressed in South Bohemian Region in 2010 stated that,
when convenient, the Region tries to optimize the structure of debt instruments
and their early repayments or of interest of available balances by means of term
deposits (Dvořáková in Šelešovský, 2010). There are therefore actively used tools
of fiscal imbalances management, such as portfolio optimization of debt management
tools and available financial resources management in the South Bohemian Region.
Conclusion
The paper summarized selected aspects of financial management that are apparent
in practices of Czech regions. Our findings show that the practice is fragmented
and heterogeneous and although some pioneers with real financial management
practices can be found, most of the regions have not got beyond classical budgetary
process (“historical approach to budgets”). Supplementary interviews indicate
that representatives of regions do not perceive active management of fiscal imbalance
as an instrument that can be beneficial for their financial management. They rather rely
on the procedures specified in the public procurement legislation. Except for Prague,
an active approach to management of fiscal imbalance can be found in South Bohemian
Region.
References
CAMPOS, E., PRADHAN, S. (1996) Budgetrary institutions and expenditures outcomes:
binding governments to fiscal performance. World Bank Policy Research Working Paper
No. 1646 [online]. [cit. 2012-10-15]. ISSN: 1813-9450. Available from WWW:
http://elibrary.worldbank.org/docserver/download/1646.pdf?expires=1350505359&i
d=id&accname=guest&checksum=4EFDC3BE8D8CAA7A5B48373207394D4F
Closing accounts of all regions from (2011) Budgets of all regions from 2012 available
from website of Association of regions, [cit. 15.10.2012] Available from WWW: <
http://www.asociacekraju.cz/>.
HOMBURG, V., POLLITT, CH., VAN THIEL, S. (2007) Introduction. In New Public
Management in Europe - Adaptation and Alternatives. London: Palgrave Macmillan, pp.
1 - 9, ISBN 978-0-230-00693-5.
Ministry of Finance Czech Republic: State Budget (2012) [cit. 15.10.2012] Available from
WWW: http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/zakon_o_sr_66838.html
Ministry of Finance Czech Republic: State closing accounts 2001-2011 [cit. 15.10.2012]
Available from WWW: http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/plneni_stat_rozp.h
tml
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NEMEC, J. (2002) Budgeting and financial management: methods and techniques in CEE
countries. Bratislava: NISPA. pp. 283-340, ISBN 80-89013-08-2.
NEMEC, J. (2008) Public management reforms in CEE: lessons learned. In Public
management reforms in Central and Eastern Europe. Bratislava: NISPA, pp. 343-
371ISBN 978-80-89013-41-8.
POLLITT, CH., BOUCKAERT, G. (2011) Public management reform - a comparative
analysis: new public management, governance, and the neo-weberian state. Oxford:
Oxford University Press, ISBN 978-0-19-959509-9.
ŠELEŠOVSKÝ, J. et al. (2010) Hodpodaření krajské samosprávy, Masarykova univerzita:
Olprint, ISBN: 978-80-210-5423-3.
The project of Czech Science Foundation no. 402/08/1158 and its findings and
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WALKER, R. M., BOYNE, G. A., BREWER, G. A. (2010) Cambridge Univesity Press: New
York, ISBN: 978-0-521-11663-3.
246
Microsimulation of the Mortgage Interest Deduction.
The Czech Case
Jahoda Robert, Godarová Jana
Abstract
This paper focuses on the mortgage interest deduction for owner occupied housing
in the Czech Republic. The main research goal concerns the method how to model
the impact of personal income tax liability as a result of legislative changes in 2014.
Personal income tax reform is slated to begin in 2014, one part of which will be a cap
on loan interest deductibility. It is suggested, that the reform should lead to a decrease
in the yearly value of the tax expenditure.
In our analysis data for the Czech Republic from the EU-SILC surveys are used.
We estimated the value of this tax expenditure at approximately CZK 5 billion in 2010,
with almost half the amount spent by the highest two deciles in income distribution.
However, EU-SILC doesn’t include all needed variables, so the paper shows and discuses
microsimulation method used, its conclusion and limitations.
Keywords
Microsimulation, personal income tax, revenue forgone method, SILC, tax expenditure,
mortgage interest deduction
Introduction
Tax support for owner-occupied housing is a common public policy objective. It may
take markedly different forms in different countries, but a common approach is to take
into account interest on housing loans in calculating personal income taxes. In analysing
the impact of tax exemptions for housing loans, researchers normally speak
of "mortgage interest deductions" (referred to hereinafter as MID). Households
permitted to take interest paid on housing loans into account in calculating their tax
obligation pay lower personal income tax (hereinafter PIT). This tax revenue reduction
is generally called “tax expenditure” and the aim of a MID policy is to ease property
acquisition for home-owners. Such policy is rather expensive and we can see raising
discussion on reduction of the maximum amount of support given to the individual
households. This debate gains on significance in the times of problems with public
finance sustainability and when it seems there exists causal relationship to public
support of homeownership, “mortgage bubble” and following economic slump.
Distributional aspect might be seen as consequent question to budgetary cost of MID.
When the costs of this policy are borne by the whole society, beneficiaries seem to be
concentrated among the richest members of the society. One may ask
247
than what the results of such a policy are. Why should public support benefit individuals
who could take care of their living anyway?
Knowing the answer to the extent of support of MID policy, its distribution
among different income groups in the society and knowing what might be the impacts
of MID policy change is important for many governments in developed countries.
Austerity measures in public finance induce changes in the tax policy and restriction
in MID is one of the possible way of the reform. Experience from countries
which already changed their MID policy show that there are various options for MID
reform and therefore diverse outcomes might be expected. Our paper will argue
what outcomes could be expected in the Czech Republic when sharp reduction in MID is
being decided upon.
The goal of this paper is to model current budget costs of mortgage interest deduction,
and to discuss conclusion and limitations of this microsimulation model. In order
to achieve the goal we precede with following sub-questions: What is known from
previous research about the effect of MID and its reforms on tax revenue? Do we have
the data and is possible to analyse them in the research objective?
In the first section we discuss different models of MID, which are dealt in present
literature. At the same time we discuss different calculation methods of MID
and their impact on budgetary costs and distributional aspects. In the second section we
present data and methodology of calculation which we employ for finding the value
of MID and for its distribution in the Czech society. In the third section of this paper we
present the main results of our calculations. We deal mainly with budgetary costs of MID
policy in the Czech society. In the last section we sum up main findings of our paper
and discuss research question which emerge after having the answer to the main
question of our paper.
Material and Methods
Mortgage interest deduction in current literature
The issue of public support and its distribution is one often addressed by researchers,
particularly in a situation in which countries are undergoing MID reform. For example,
Italy adopted changes to MID after 1992 ending ties between tax exemptions
and the marginal tax rate. Jappelli and Pistaferri (2006) evaluate the impact
of this change on Italian households. Another example is given by Bourassa and Grisby
(2000), who discuss the impact of modifications to MID in the US.
Pelegrino, Piacenza, Turati (2012) study the present and distributive impact of housing
taxation and alternative approach on Italian households. The used microsimulation
model considers as input data those provided by the Bank of Italy from 2008
in its Survey on Households Income and Wealth (hereafter SHIW). A contrary to SILC
this survey includes: the interests paid on mortgage, and the initial mortgage debt.
248
In the alternative approach they take into account the imputed rent from owner –
occupied dwelling as a component of gross income for the purpose of personal income
tax calculation. Authors mention that, the share of Italian households with a mortgage is
only 8.1 per cent, whereas in Germany it is 25 per cent, in Great Britain
and US 50 percent.
Jappelli and Pistaferri (2006) use the SHIW data from 1989 to 2002 to evaluate
the impact of tax system changes on the propensity to borrow in Italy. In their paper
changes of tax system consist in reducing deductible mortgage interests.
Authors assume that the reform should have an impact on high – income taxpayers
and multiple income households.
We can find many diverse models of mortgage interest deduction among different
countries. The simplest version is that taxpayer deducts all mortgage interest
from his income. If progressive personal income tax applies subsidy from mortgage
interest deduction depends only on marginal income tax rate. In this easy-form system
high income home owners usually gain higher benefit than middle income.
Mortgage interest deduction has been part of the law in the Czech Republic since 1998,
when taxpayers were first allowed to reduce their tax base by the amount of interest
on housing loans paid up to CZK 300,000. The answer to the question “who is
the recipient of such a policy and what are the budgetary costs” is rarely found
for the Czech Republic. The first comprehensive evaluation of tax expenditures in the CR
was in Kubatová and Jareš (2011), where authors discuss various viewpoints on tax
expenditures and methods for measuring them. Their approach to quantification tax
expenditure is generally known as "foregone revenue method". Yet the results
of their study of 210 tax exemptions in the CR have primarily illustrative character,
since they don’t discuss distributional effects. Moreover their methodology and
assumptions of calculations are simplistic, since their main goal is to study all
tax exemption which can be found in the Czech tax system. Distributional effects
of different residential tools and their effectiveness in the CR was analysed by Lux,
Sunega and Boelhouwer (2009). Even their methodological approach, which led them
to the claim of highly unequal distribution, might be questioned. According to them,
taxpayers from the 10th income decile benefited most from the tax relief; their share is
equal to 84 per cent of total tax relief. They state, that data from tax declaration in 2002
were used for calculation, but they don’t discuss nature of these data and where do they
get it from.
Data and microsimulation model used
A primary reference used by the authors is data from the EU-SILC survey European
Union Statistics on Income and Living Conditions for the CR from 2005-2010. The EUSILC
database provides comparable, cross-sectional data on income, poverty, social
exclusion and living conditions in the European Union. The Czech sample contains
249
approximately 10,000 Czech households (for more on EU-SILC survey methodology,
see CZSO 2011).
The model used is based upon a simplified version of the Czech tax system. A study
carried out by the Ministry of Finance of the CR (Jareš, pp. 77-103, 2010) showed
that the value of some deductible items and tax credits is negligible compared to total
tax revenues. The model therefore employs only deductible items for interest
on housing loans, along with the following tax credits: the basic credit (for individuals),
the tax credit for low-income spouses and the child tax credit starting in year 2006.
Before the year 2006 a mix of tax credits and tax allowances was applied.
The dependence of tax expenditures on housing loans may be expressed using
the following equation:
T = f I, TA , TS (1)
T∗
= f(I, TA∗
, TS) (2)
TEU
= T∗
− T (3)
where T In Equation (1) represents the household tax obligation. The household tax
obligation is influenced by the amount of its taxable income I. Another factor influencing
the household tax obligation is the way the tax system is set up. For purposes
of the equations, the focus is on the means by which tax is calculated from the tax base
VW taking into account tax exemptions VX. The means for calculating tax from the tax
base VW ordinarily presumes that the appropriate taxation rates will be applied
to the tax base. Tax exemptions VX, then take the form of items reducing the tax base
(deductible items) or items which reduce the tax obligation calculated (tax credits).
The calculations must then take into account the method by which taxable income is
transformed to the tax base. The above indicated procedure for calculating the tax
obligation presumes that the unit of taxation is the household, which was indeed
the case in the CR in 2005-2007. If the unit of taxation is the individual, calculations
proceed analogously but the tax obligation of households then consists of the sum of tax
obligations of their individual members. The above indicated schematic procedure
for calculating income tax is given in detail for the CR in OECD (2010). A survey finds
the same calculation approach for other OECD countries, as well as a description
of any deviations from the above indicated general procedure.
In Equation (2), the hypothetical household tax obligation is given for situation
in which the taxpayer cannot reduce the tax base by the amount of interest paid
on the housing loan. In such a situation, there is a higher tax obligation and lower net
household income. Equation (3), then, expresses the value of the tax expenditure made
by the household taking into account the potential reduction in tax due to housing loan
interest. The following table summarizes the basic characteristics of the taxation system
influencing the amount of household tax expenditure.
250
Table 1: Recap of chief tax system parameters for calculating employee income tax
Period 2005-2007 Period 2008-2012
Tax Base Gross Wage Supergross Wage
Tax exemption employed Mix of deductible items and exemptions Tax credits
MI figured into tax base max. CZK 300 000/yr max. CZK 300 000/yr
Tax rate from tax base Progressive scale 15 %
Source: Authors according to Czech legislation
In the succeeding step, we apply the above calculation procedure for tax exemptions
to the SILC survey data to calculate the overall tax exemption for the CR
and its distribution among individual groups of households.
The SILC 2010 household survey data codes for whether households employ a mortgage
or other form of loan for housing purposes, but the data matrix does not indicate what
the effective exemption amount is. Also missing is data on total loan payments for 2009,
as well as interest payments for the same period. The Czech Statistical Office determines
the answers to these questions but does not provide them to analysts (allegedly
because of the low data validity). Because of this, data concerning yearly housing loan
interest had to be imputed into the matrix by the model. It is described in the following
equations:
MIV[
= ∅MV[
∗ IR[
(4)
∅MV[
= V[
∗
^_∗
`
_`
∗
∅^_`
^_∗
` (5)
in which Equation (4) shows that interest payments on mortgages (housing loans) &bc#
for each household are equal to the average amount of the mortgage for the year
in question ∅&c#
and the interest rate for that year IR[
. Equation (5) then specifies
the average amount of the mortgage in greater detail, as given by the market value
of the residence V[
, the share of the market price of the residence covered by the original
mortgage
de∗
/
e/
, And the share indicating what portion of the mortgage remains unpaid
for the year in question
∅de/
de∗
/ .
The SILC 2010 data contains only information on the estimated market value
of household residences. We have used it to determine the amount of interest payments.
We start from the fact that households making payments on housing loans have the best
information on the market value of their residence and have no reason not to divulge
this information to a survey. Further, the housing loan depends upon the residence
in which the household currently lives (a necessary condition for taking into account
loan interest on housing loans in determining income taxes). Information on interest
rate paid by each household is not contained in the SILC survey, we have to replace it
with a uniform rate of 5 % p.a. The average rate is given as the weighted average
of the Hypoindex for new loans made between 2006-2009 (the average rate of interest
ranges between 4.7 % and 5.2 %, depending upon the weighting method used).
251
With the SILC 2010 data, we have therefore modelled the average amount of unpaid
loans so that their sum for all households is set equal to CZK 687 billion.
Under the formula, we have anticipated that the unpaid loan amount for each household
would consist of a fixed percentage of the market value. Because the unpaid loan
amount for each household is different, two distinct modelling approaches were used.
These approaches differ on the way, how we work with the age of mortgage.
For differences see bellow section.
Results and Discussion
Tax expenditure connected with MID and its distribution within Czech society
As shown in Table 2, however, the results of these two variant calculation methods are
close to each other. Though the simple variant leads to a lower value for the tax
exemption, the difference is minor. Figure 1 shows that the reason for this is the fact
that the more complex variant shows more households with an annual amount
of interest spent on housing of greater than CZK 300,000 and may therefore not deduct
the entire amount from the tax base. The figure also confirms that the results will not be
fundamentally influenced by the calculation variant chosen. To make calculation easier,
therefore, the analysis which follows will make use of the simpler calculation variant
for tax exemptions on housing loans.
Table 2: Estimated yearly tax exemptions for housing loans – simple and complex
calculation variants [estimates in mil. CZK]
SILC 2010
Percentile Group according net money household income per equivalency (EU)
1 2 3 4 5 6 7 8 9 10 Total
Count (mortgage=1) 27 746 31 295 31 775 45 471 50 923 63 246 74 658 72 964 89 112 106 612 593 803
simple variant 132 187 193 297 300 477 543 643 774 1 413 4 959
complex variant 120 184 178 302 309 450 554 683 793 1 515 5 089
difference 12 3 15 -5 -9 27 -11 -40 -19 -102 -130
Source: Author’s calculations based upon SILC 2010 data
Figure 1: Distribution of Households with Housing Loans by amount of exemption
and calculation variant selected in 2010
Simple variant Complex variant
Source: Author’s calculations based upon SILC 2010 data
252
Number of Households with Housing Loans and Effective Tax Exemption 2004-2010
One may note in the following table a growth trend in the number of households using
mortgages to finance their housing. In 2005, the proportion of households
with a mortgage was not quite 10 % of all households in the CR. By 2010, this share had
already exceeded 14 %. As has already been noted above, the SILC data does not contain
information on the amount of loans or interest paid, making it impossible to state
with certainty whether the loan amount is also growing. However, using the model
as described, we have estimated the annual amount of tax expenditure during individual
years.
Table 3: Development of nos. of households with mortgages, potentially incl. tax
exemptions 2004 - 2010
year
SILC
Data
No. of households share tax expenditure
total
with
housing
loan
Nominal
[mil. CZK]
year-on-
year
change
per
household
with loan
2004 2005 4 012 695 378 573 9,43 % n.a.
2005 2006 4 027 670 422 622 10,49 % n.a.
2006 2007 4 043 341 405 293 10,02 % n.a.
2007 2008 4 081 852 445 704 10,92 % 3 082 - 6 915
2008 2009 4 116 364 521 212 12,66 % 4 639 1 577 8 900
2009 2010 4 149 665 593 803 14,31 % 4 959 320 8 351
2010 2011 4 180 620 611 902 14,64 % 5 263 305 8 602
Source: Author’s calculations based upon SILC 2005-2011 data
The table thus indicates that between 2004 and 2006, there are no data on value
of the residence in SILC surveys. After 2006 the total number of loans provided grew,
to greater expansion in the number of housing loans. The amount of effective exemption
per household also grew, influenced on the one hand by growing real estate prices
and thus housing loans, and on the other by the enrichment of Czech society,
with taxpayers moving into higher brackets within a progressive tax system.
What seems interesting, the trend was not dampened by the replacing the progressive
tax scale by a proportional 15 % tax.
Conclusion
Tax support for owner-occupied housing is one of the most common focuses of research.
In times when austerity measures in public finance are posed one may suggest MID
reform which would cut back budgetary cost of this policy. During the previous 20 years
we can see various attempts of such reforms with different outcomes. Some countries
limited maximum amount of MID when defining tax base, not only maximum amount
of MID might be limited but also maximum value of the support might be set,
other countries separated the value of the support from the influence of the actual rate
of tax.
253
When we take into account present problems with public finance sustainability,
which could be seen in most developed countries, question on budgetary costs of MID
policy arises. What are the present costs of MID policy? What do we design the model
MID? Who are the present beneficiaries and what would be the change of their position
after using different approach to model? These are the questions which are the concern
of present governments and which we solved in our article.
In comparison with previous Jares’s study (2010), we believe our method of calculation
provides a more precise estimate of the tax exemption, even though our calculation
method is not based upon interest payment records. This paper is based upon SILC
survey data which monitors whether households are making use of housing loans.
The amount of interest is then modelled using the value of the residence occupied
by the household. There are two methodological points in our research which might be
discussed in future research. The first one is the question of the lack of transparency –
the amount of support and its distribution are not recorded in data, but have to be
modelled. The second one is the budget impact on tax inflows, which is connected
with the foregone revenue method of calculations. According to our method the value
of this tax expenditure at approximately CZK 5 billion in 2010.
Tax exemptions for housing loans among households influence tenure choice, which is
not neutral. The amount of exemption is dependent in particular upon the marginal tax
rate on incomes. Changes thus influence household demand for loans
and thereby including behaviour changes of households into calculations could slightly
change the outcomes of the analysis. Yet according to our belief, we present most
accurate budgetary estimate of MID policy in the CR and provide its distribution aspects
in the Czech society.
Acknowledgements
This article has been elaborated as one of the outcomes of research project supported
by the Czech Science Foundation, project GA403/12/0366.
References
BOURASSA, S.C. and GRIGSBY, W.G. (2000) Income tax concessions for owner-occupied
housing. Housing Policy Debate 11, 521–546.
CZSO., (2011) [online]. Household Income and Living Conditions 2010. Methodological
notes. Czech Statistical Office, Code: e-3012-11 [cit. 20. 3 .2012] Available from WWW:
http://www.czso.cz/csu/2011edicniplan.nsf/engt/CD0026ED71/$File/301211ma.pdf
JAPPELLI, T. and PISTAFERRI, L. (2006) Do People Respond to Tax Incentives? An
Analysis of the Italian Reform of the Deductibility of Home Mortgage Interests. European
Economic Review, 51(2), 247-271.
254
JAREŠ, M. (2010) [online]. Výzkumná studie č. 2/2010: Daňové úlevy v České republice,
Ministry of Finance of the Czech Republic. [cit. 15. 2 .2012] Available from WWW:
http://www.mfcr.cz/cps/rde/xbcr/mfcr/VS_Danove_ulevy_v_CR.pdf
KUBÁTOVÁ, K. and JAREŠ, M. (2011) Identifikace a kvantifikace daňových úlev v ČR v
roce 2008. (Identification and Quantification of Tax Reliefs in the Czech Republic in the
Year 2008. With English summary.). Politická Ekonomie, 59(4), 475-489.
LUX, M., P. SUNEGA, and P. BOELHOUWER (2009) The effectiveness of selected housing
subsidies in the Czech Republic. Journal of Housing and the Built Environment 24 (3):
249-269.
OECD., (2010) Taxing Wages 2008-2009: Special Feature: Non-Tax Compulsory
Payments As An Additional Burden On Labour Income, Paris and Washington, D.C. ISBN
978-92-64-08299-1
PELEGRINO, S., PIACENZA, M. and TURATI, G. (2012) [online]. Assessing the
Distributional Effects of Housing Taxation in Italy: From the Actual Tax Code to Imputed
Rent. CESifo Working Paper Series No. 3368. [cit. 15. 2 .2012] Available from WWW:
http://ssrn.com/abstract=1775799
255
Government Debt Management in the Czech Republic:
Sensitivity Analysis of the Optimal Allocation
Melecký Aleš
Abstract
Sound debt management practices help prevent occurrence of debt crisis, reduce
vulnerability to macroeconomic and financial shocks, and support economic growth.
Unexpected increases in debt-service charges can substantially change the dynamics
and accumulation of government debt. The unexpected increases can occur due
to significant risk exposures to exchange rate, interest rate and refinancing risks that
the government has assumed when allocating its debt. Vulnerability of public debt
to macroeconomic shocks can be reduced by responsible allocation of debt. This article
emphasizes some of the best practices of the public debt management and empirically finds
the optimal debt allocation for the Czech Republic using Giavazzi and Missale (2004, p. 7)
approach. To calibrate the latter, conditional expectations, based on a vector
autoregression (VAR) model for the Czech macroeconomy, are used. Using sensitivity
analysis, the paper then studies robustness of the empirically determined, optimal
government debt allocation for the Czech Republic.
Keywords
public debt management, optimal debt allocation, VAR model, sensitivity analysis, Czech
Republic
Introduction
A government’s debt portfolio contains complex financial structures and can create
substantial balance sheet risk for the government. Sound debt management practices
can help to prevent occurrence of debt crisis, reduce vulnerability to macroeconomic
and financial shocks, and support economic growth. The IMF and the World Bank
therefore published, in cooperation with national debt management experts, a set
of guidelines on public debt management for policy makers (IMF and WB, 2001, pp. 10-
32). This work includes formulation and properties of public debt management
objectives, the underlying institutional framework and possible coordination issues,
ensuing formulation of the debt management strategy, attributes of a sound risk
management framework, and other important areas of public debt management. The ongoing
financial and debt crisis demonstrates the important role of public debt
management. Melecky (2012a, pp. 226-231) presents an empirical analysis of possible
drives behind different formulations of public debt management strategies across
a sample of countries. From a practical risk management perspective, Buera and Nicolini
(2002, p. 24) find that the size of financial transactions that the government must
256
undertake each period to replicate state contingent bonds is very large and increases
dramatically with the number of states. Melecky (2012b, pp. 136-148) provides a review
of policy approaches to choosing the currency structure of foreign-currency debt in view
of the fact that historically the exchange rate risk is the most important risk for the debt
managers in emerging market economies. A detail description of sound risk
management frameworks and debt portfolio risks, including market risk, refinancing
(rollover) risk, liquidity risk, credit risk, settlement risk, operational risk, could be found
in Wheeler (2004, pp. 91-100). Hawkesby and Wright (1997, pp. 4-12) adapt a taxsmoothing
methodology used in Bohn (1990, pp. 1217-1230) and impose realistic
constrains to public debt management to conduct debt allocation analysis for nine OECD
countries. Hawkesby and Wright (1997, p. 24) conclude that issuing short term domestic
currency debt provides the best hedge against further income and purchasing long-term
foreign currency debt can provide tax smoothing leverage. Gerard and Gilson (2001,
pp. 5-15) show, in a simple two country model, how an exchange rate regime can
influence the public debt structure. Melecky (2010, pp. 107-117) then develops
empirical framework that debt managers could use when deciding on the currency
allocation of public external debt using a set of synchronization indicators of exchange
rate volatility. Concerning public debt management in the Czech Republic, Matalík
and Slavík (2005, pp. 39-43) state that it went through dynamic development during
the transition period of 1990s and early 2000s. A very low initial level of state debt,
missing fundamental segments of the financial market, and the absence of basic debt
instruments, combined with no or low fiscal deficits, impeded development
of the domestic debt market. The requirement to establish functioning government bond
market to spur domestic capital market development thus arose. Matalík and Slavík
(2005, p. 50) conclude that public debt management should be included as part
of the state treasury management, which in contrast with the recommendations
of Wheeler (2004).
This article focuses on public debt management in the Czech Republic because this area
is relatively under-researched, especially in terms of empirical studies. It uses
the theoretical approach of Giavazzi and Missale (2004, p. 7) to empirically analyze
the optimal debt allocation for the Czech Republic. It then extends the findings
presented in Melecky and Melecky (2012, pp. 573-574) using alternative data
transformation and calibration of the Giavazzi and Missale framework. The novelty
of the calibration is in its use of conditional expectations based on an estimated VAR
for the Czech Republic. Moreover, it extends the previous research by studying
the robustness of the determined optimal debt allocation using a sensitivity analysis.
This is to focus on the effect of initial indebtedness and assertiveness of debt
consolidation, as measured by the level and overall adjustment in the debt-to-GDP ratio,
respectively.
257
The modeling approach and calibration
For the estimation of optimal debt allocation, this article follows the modeling approach
of Giavazzi and Missale (2004, p. 7). The model consists of three equations that describe
optimal shares of short-term floating-rate debt (s*), foreign-currency denominated debt
(q*), inflation-indexed debt (h*), and long-term fixed-rate debt (1-s*-q*-h*).
For the detailed derivation of these equations see Giavazzi and Missale (2004, pp. 3-8).
( ) ( )
( )
( ) ( )
y t 1 1* 1 1
1 1
1 11 1* * 1 1
1 1 1
( B ) ( )
( )
( ) 2Pr
( ) ( ) ( )1 2Pr
t t tt t
t t t t
T
t t tt t t t
t
t t t t
B Cov iCov y i
s
B Var i B Var i
E A BCov e i Cov i
q h TP
Var i Var i BVar i
πη η π
π
+ ++ +
+ +
+ ++ + + +
+ + +
+ +
= +
− ∆
− − +
−
(1)
( ) ( )
( )
( ) ( )
y t 1 1* 1 1
1 1
1 11 1* * 1 1
1 1 1
( B ) ( )
( )
( ) 2Pr
( ) ( ) ( )1 2Pr
t t tt t
t t t t
T
t t tt t t t
t
t t t t
B Cov eCov y e
q
B Var e B Var e
E A BCov e i Cov e
s h FP
Var e Var e BVar e
πη η π
π
+ ++ +
+ +
+ ++ + + +
+ + +
+ +
= +
− ∆
− − +
−
(2)
( )
( ) ( )
y t* 1 1
1
1 11 1* * 1 1
1 1 1
( B ) ( )
( )
( ) 2Pr
( ) ( ) ( )1 2Pr
tt t
t t t
T
t t tt t t t
t
t t t t
BCov y
h
B Var B
E A BCov e Cov i
q s IP
Var Var BVar
πη ηπ
π
π π
π π π
+ +
+
+ ++ + + +
+ + +
+ +
= +
−∆
− − +
−
(3)
where yη and πη are elasticity of government budget to GDP with respect to output
and inflation respectively. Bt denotes percentage value of government debt-to-GDP ratio.
Cov(.) stands for covariance and Var(.) for variance of corresponding variables.
Pr denotes probability that the adopted stabilization plan fails, and Et (At-ΔBtT) is
the planned reduction in debt-to-GDP ratio over period T. TPt, FPt, IPt represents
the term premium, the foreign exchange premium on Czech koruna vis-à-vis the euro,
and the inflation premium respectively.
The process of estimation consists of the following steps. First, I estimate unrestricted
VAR model with one lag (VAR(1)), as suggested by the Schwartz information criterion.
The VAR contains, as endogenous variables, domestic output, inflation, the interest rate,
exchange rate growth and, as exogenous variables, the constant, time trend, and foreign
(Eurozone) output, inflation and the interest rate. The variables yt, it, πt and et are
then calculated as forecast errors of the VAR model’s static (one period ahead)
prediction of output, inflation, interest rate and exchange rate difference. The next step
is calibration of the remaining parameters of equations (1)-(3). The subject parameters,
their description and numerical values are presented in Table 1:
258
Table 1: Calibration of input parameters
Parameter Description
Initial
Value
ηy Elasticity of government budget to GDP with respect to output 0.05
ηπ Elasticity of government budget to GDP with respect to inflation -0.21
Bt Government debt to GDP (1st quarter 2012), (in %) 40
TPt Term premium (2011 average), (in %) 1.87
FPt Foreign Exchange Premium on CZK (2011 average), (in %) 3.90
IPt Inflation premium (2011 average), (in %) -0.38
Pr Probability that stabilization plan fails, (in %) 2.00
Et(At-delthaBt
T) Planned reduction in debt-to-GDP ratio over T, (in %) 2.00
Source: Authors’ calculations
The semi-elasticities of government budget over GDP with respect to output
and inflation were estimated as the respective correlations over 1999Q1-2012Q1.
Note that the elasticity to inflation is negative which is somewhat puzzling but this result
is robust to using annualized q-to-q inflation, y-to-y inflation or detrended inflation.
The negative correlation of budget balance to GDP with inflation prevails. This finding
deserves further investigation which I leave for further research. The government debt
to GDP ratio, Bt, was set to 40 percent in line with the Czech government indebtedness.
The term premium was calculated as the 2011 average of the difference between
the yield of 10-year government bond and the yield of 6-month money market rate
(assumed to be equivalent to the 6-month Treasury bill rate). The foreign exchange
premium on the Czech koruna vis-à-vis the euro is computed as the 2011 average
of the difference between the percentage change in the CZK/EUR nominal exchange rate
and the interest rate differential, between the 3-month PRIBOR rate and 3-month
EURIBOR rate. The PRIBOR rate was obtained from the CNB database and the EURIBOR
from Eurostat. The inflation premium is calculated as the 2011 average of the difference
between actual CPI inflation at time t and the expected CPI inflation conditional
on information set dated t-1. The AR(1) process was used to generate expected inflation
for simplicity. This is because data on inflation expectations are not readily available
or inflation linked bonds traded. I leave more sophisticated treatment of expected
inflation for further research. Note that another simple approximation of inflation
expectations could be achieved by using the CNB inflation target at a given time,
assuming perfect credibility of CNB’s monetary policy and its inflation target.
Alternatively, fast learning of the economic agents would need to be in place to ensure
this approximation holds during a monetary policy-driven disinflationary period,
as experienced by the Czech Republic. The probability that a given stabilization (fiscal
consolidation) plan may fail was initially set at 2 percent following Giavazzi and Missale
(2004, p. 9). In further research, I will consider more thoroughly the track record of the
259
Czech government in adhering to its announced stabilization plans, most notably those
involving significant fiscal consolidation. The consolidation plan, the planned reduction
in debt-to-GDP ratio, ( )1 1t t t
T
E A B
+ +
− ∆ , was initially set to 2 percent. Note that the Czech
Republic is currently envisaging continuing, though declining, fiscal deficits and debt
accumulation with the balance budget planned to be reached in 2015. After having
calibrated the model, I use the Matlab function fsolve to solve for the optimal values of
the three unknowns in the equations (1)-(3).
Discussion of Results
Employing the initial calibration of the parameters in the equations (1)-(3) and data
described above, the fsolve function solution results in optimal values of debt allocation
that are presented in Table 1.
Table 2: Optimal debt allocation with initial values setting
Considered Allocation s* q* h* fix
Estimated Optimal 4% 4% 1% 91%
Actual (December 2011) 10% 18% 0% 72%
Source: Authors’ calculations; MoF Development of the Government debt.
Note: s* -short-term floating-rate debt, q* - foreign-currency denominated debt, h* - inflation-indexed debt,
and fix - long-term fixed-rate debt, which is computed as 1-s*-q*-h*
These results suggest even higher share of long-term fixed-rate debt than applied
in December 2011 (91% vs. 72%) and lower shares of short-term floating-rate debt
and foreign-currency denominated debt. Allocation of a small part of the government
debt to inflation-indexed bonds should be part of the optimal debt structure
for the Czech Republic, such local currency instruments should be available.
Figure 1: Sensitivity of the optimal debt allocation to changes in the consolidation plan
Et(At-delthaBt
T)
Source: Authors’ calculations
Note: s* -short-term floating-rate debt, q* - foreign-currency denominated debt, h* - inflation-indexed debt,
and fix - long-term fixed-rate debt, which is computed as 1-s*-q*-h*
-20
0
20
40
60
80
100
120
0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 5,5 6 6,5 7 7,5 8 8,5 9 9,5 10
Optimalallocationin%
Consolidation plan in %
s*
q*
h*
fix
260
Next, I discuss the results of the applied sensitivity analysis concerning the parameters
Et(At-delthaBtT), Pr, and Bt respectively. Consider the sensitivity of the optimal debt
allocation to the Et(At-delthaBtT) parameter first. As can be seen from Figure 1, optimal
debt allocation is very sensitive to how ambitious the fiscal consolidation plan will be.
A more ambitious plan (increase in parameter Et(At-delthaBtT)) significantly reduces
the share of long-term-fixed debt in comparison with the other possible allocations.
This reduced share of long-term debt is then mostly in favor of the share of short-term
floating rate debt. The inflation-indexed debt increases the least if the fiscal
consolidation plan changes from 0.5 to 10 percent debt to GDP reduction a year.
Figure 2: Sensitivity of the optimal debt allocation to plan failure (Pr)
Source: Authors’ calculations
Note: s* -short-term floating-rate debt, q* - foreign-currency denominated debt, h* - inflation-indexed debt,
and fix - long-term fixed-rate debt, which is computed as 1-s*-q*-h*
Consider now the sensitivity of the optimal debt allocation to the Pr parameter
(the probability that the fiscal consolidation plan would fail). Results
of the corresponding sensitivity analysis are plotted in Figure 2. An increase
in the probability of failure (gradually from 0.5 to 10%) implies a more conservative
allocation with a rising share of long-term fixed-rate debt and falling shares
of other debt types i.e. short-term floating rate debt, foreign-currency denominated debt
and inflation-indexed debt. This sensitivity is particularly strong within the interval
in which the probability of failure ranges from 0.5 to 3%. After that, in the interval
from 3 to 10%, the sensitivity of the optimal debt allocation to the consolidation plan
failure falls.
Consider now the sensitivity of the optimal debt allocation to the initial level
of indebtedness Bt. Figure 3 shows how increases in debt to GDP influence the optimal
0
10
20
30
40
50
60
70
80
90
100
0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 5,5 6 6,5 7 7,5 8 8,5 9 9,5 10
Optimalallocationin%
Probability that plan fails in %
s*
q*
h*
fix
261
debt allocation into different types of debt instruments if Bt (debt to GDP) ranges
from 40 to 60%. It mainly increases the share of long-term fixed-rate debt (and reduce
shares of short-term floating rate debt, foreign-currency denominated debt
and inflation-indexed debt) with higher initial level of indebtedness, in the direction
of more conservative allocation that leave less margin for error. However, the effect
of the initial debt to GDP seems to be only marginal.
Figure 3: Sensitivity of the optimal debt allocation to Debt-to-GDP (Bt )
Source: Authors’ calculations
Note: s* -short-term floating-rate debt, q* - foreign-currency denominated debt, h* - inflation-indexed debt,
and fix - long-term fixed-rate debt, which is computed as 1-s*-q*-h*
Conclusion
Sound debt management practices could help avoid unexpected increases in debt
services charges, prevent occurrence of debt crisis and reduce vulnerability
to macroeconomic and financial shocks. This paper carried out empirical analysis
of the optimal debt allocation for the Czech Republic using Giavazzi and Missale (2004,
p. 7) approach and conditional expectation of variables generated from a VAR model
for the Czech Republic. Based on the adopted calibration, the estimation results suggest
that the Czech government should allocate most of its debt (about 91%) to long-term
fixed-rate bonds. This is a higher share than the Czech Ministry of Finance (CMoF)
allocated to this instrument by end-2011. Further, the CMoF should allocate
about 4 percent of its debt to short-term floating-rate bonds, 4 percent to foreigncurrency
denominated bonds, and 1 percent to inflation-indexed bonds. However,
these optimal shares are particularly sensitive to the strength of the fiscal consolidation
plan, and the probability of the plan’s failure, mostly within the 0.5-3.0 percent range.
On the other hand, the optimal debt allocation is much less sensitive to the initial level
of indebtedness (debt to GDP). The Czech Ministry of Finance should be mindful
0
10
20
30
40
50
60
70
80
90
100
40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Optimalallocationin%
Debt/GDP in %
s*
q*
h*
fix
262
of the possibility that the optimal debt allocation over the studied instruments may need
to be significantly changed should a new consolidation plan be adopted,
or the probability of failure of the existing one altered significantly.
Acknowledgements
Financial support from the Czech Science Foundation GA402/10/1046 is gratefully
acknowledged.
This article has been elaborated in the framework of the project Opportunity for young
researchers, reg. no. CZ.1.07/2.3.00/30.0016, supported by Operational Programme
Education for Competitiveness and co-financed by the European Social Fund
and the state budget of the Czech Republic.
I would like to thank Martin Melecky for useful comments.
References
BOHN, H. (1990) ‘Tax Smoothing with Financial Instruments’, American Economic
Review, vol. 80 No. 5, pp. 1217-1230. ISSN: 0002-8282.
BUERA, F., NICOLINI, J. P., (2002) ‘Optimal Maturity of Government Debt without State
Contingent Bonds’, Universidad Torcuato Di Tella, DoE Working Papers 016.
GERARD, M., GILSON, N., (2001) ‘Public debt structure and exchange rate regime’,
Dipartimento di Economia Politica dell'Università di Milano Bicocc Working Paper.
GIAVAZZI, F., MISSALE, A., (2004) ‘Public Debt Management in Brazil’, National Bureau
of Economic Research, Inc., Cambridge, NBER Working Paper No.10394.
HAWKESBY, C., WRIGHT, J. (1997) ‘The Optimal Public Debt Portfolios for Nine OECD
Countries: A Tax-Smoothing Approach’, University of Auckland Working Paper.
IMF AND THE WORLD BANK, (2001) ‘Guidelines for Public Debt Management‘,
Washington D.C., Available from WWW:
<http://www.imf.org/external/np/mae/pdebt/2000/eng/guide.pdf>.
MATALIK, I., SLAVIK, M. (2005) ‘Debt Management in the Czech Republic (formation in
the 1990s and the current state) ‘. Prague Economic Papers vol. 1, pp. 33-50. ISSN 1210-
0455.
MELECKY, A., MELECKY, M., (2012) ‘Optimal Allocation of Government Debt for the
Czech Republic: Managing Vulnerability of Debt Service Charges to Macroeconomic
Shocks‘, Proceedings of the 30th International Conference Mathematical Methods in
Economics 2012, Karviná, pp. 569-574.
MELECKY, M., (2012a) ‘Formulation of Public Debt Management Strategies: An
Empirical Study of Possible Drivers‘, Economic Systems, Vol. 36, pp. 218-234. ISSN: 0939-
3625.
263
MELECKY, M., (2012b) ‘Choosing The Currency Structure Of Foreign-Currency Debt: A
Review Of Policy Approaches‘, Journal of International Development, Vol.24, pp. 133-151.
ISSN: 1099-1328.
MELECKY, M., (2010) ‘Currency Allocation of Public External Debt and Synchronization
Indicators of Exchange Rate Volatility‘, Comparative Economic Studies 52 (2010), pp.
104-129. ISSN: 0888-7233.
WHEELER, G., (2004) Sound Practice in Government Debt Management, International
Bank for Reconstruction and Development: World Bank USA, ISBN: 0-8213-5073-0.
264
The Problem of Measuring the Income Situation
of the Self-employed in the Czech Republic
Pavlíček Tomáš
Abstract
The article discusses the different ways of determining the financial situation of the selfemployed
in the Czech Republic. The available data and surveys related
to the administrative, direct and indirect methods, specifically the data from tax reports,
income surveys and expenditure surveys are described. In this context the data coming out
of the tax reports for years 2006-2010 are presented in more detail and their development
is discussed. The situation in 2008 and 2009 is explained in context of the macroeconomic
development and major tax law changes.
Keywords
self-employment, self-employed, profit, income, tax base, tax report
Introduction
The problem of the determination of the financial well being of the self-employed(SE) is
a complex one because it combines the analysis of business results and personal income.
The SE business profit creates a so-called mixed income part of which is an equivalent
of profit and part of which is the equivalent of salary. The clear distinction between
these categories, between the private and company is not possible. For specific tax
and social policies the measurement of the state of the smallest businesses
and the income situation of the SE is essential which is why there is a broad literature
on this topic, very often primarily concerned with the problem of tax evasion. There are
three types of information sources in the Czech Republic which I discuss in the paper:
the tax report(TR) aggregate data, the surveys independent of the tax system
and indirect methods based on comparison of expenditure. These are compared
to the national accounts value of net mixed income.
In the Czech Republic the most significant work on socioeconomic status of the SE has
been conducted in 2006 by the Research Institute for Labor and Social Affairs (Průša
et al., 2006; Průša et al., 2008). Novák published a series of articles dealing
with the problem (Novák, 2006; Novák, 2007; Novák, 2008; Novák, 2009) providing
important statistical insight. There is a chapter on the topic in (Večerník, 2010)
and in (Kotýnková, 2006) which discuss the situation of the SE from 1989. The Czech
studies never used the indirect comparative expenditure based method as introduced
in (Pissarides and Weber, 1989) and the publishing of more detailed data
from administrative sources is also rare.
265
The objective of this short paper is thus to discuss the current options of measuring
the financial well being of the SE in the Czech Republic, which is to be found in the first
part, and in the set context present one of the basic ones – the results obtained
from the TRs – specifically for years 2006-2010.
Material and Methods
Determining the actual success of businesses in a given year is a problematic issue
in general but grows even more difficult for the group of SE. In this section the different
options available in the Czech Republic are discussed.
The reported tax base
The reporting available is distorted by many factors from which the tax optimization is
the most important one. SE may lower their revenue by not reporting it and they may
enhance costs. The enhancement of costs is done either through the legal percentage
declared costs (PDC, “paušál”) or illegally by reporting fictional costs. They also may
directly be influenced by changes in tax law, which are not rare in Czech context.
The direct deductibles have the biggest direct administrative influence.
Even with the obvious limit to interpretation the TR has some significant advantages.
Firstly it is an administrative source where all subjects with some income from §7
(i.e. from direct entrepreneurship) must report their result and they do so together
with their taxable income from other sources. This combination allows us to filter all
the records for the ones where the profit or tax base from §7 is existing, where it is
dominant and where there is no combination with employment. These data are
theoretically comparable with the many criteria provided in the TR which includes
the geographical area, gender, age and the field of business. The data are a useful source
of information about the numbers of the active SE enhancing the standard methods
described in (Novák 2006). Secondly the data have direct connection to the tax revenue.
Because the changes in the tax system are well known it is possible to roughly estimate
their influence on the data. The comparison of data from this source with information
from other sources listed bellow allows the estimations of shadow economy.
Some very aggregate results based on tax base which were provided by the General tax
directorate are presented at the end of the paper. The availability of more detailed data
for research is limited.
The income surveys
There are various income surveys going on, out of which the yearly SILC (survey
of income and living conditions) is the most comprehensive. The sample of SILC is very
strong providing information about more than 1000 people with SE income.
In the questionnaire the question on income is somehow connected with the profit
reported in the TR. Specifically the respondent can express either the profit from the TR
or his best estimate. Also the selection weights are not applied specifically to the SE
266
group which may slightly distort the sample and for comparison with the TR data it will
need to be reweighed. The source of the weights for NACE, KZAM and possibly AGE may
be either the Labor force survey or data directly observed from the TR. For year 2011
the data from complete population census will be available. Some authors use
the observed difference from TR as a way of estimating the amount of income
underreporting in the TRs. E.g. (Matsaganis and Flevotomou, 2010) use this method
using a sample of blind data from the Greek TR database – their result was the
underreporting level of 10%.
The indirect expenditure based method
There are many studies abroad which try to measure the underreported income and use
expenditure based evaluation of the income of the SE.
The basic method was first described and used by (Pissarides and Weber, 1989) in a
study trying to estimate the amount of British black economy. By black economy they
mean very narrowly the amount of income underreported by the SE whom they
compare to the people employed in normal employment. They assume that the
consumption of goods generally depends on income and thus it is possible to infer the
income by information about spending. The method assumes that the reporting on some
goods specifically food is reported accurately and that there is one reference group
where both income and expenditure is reported accurately. The implicit and most
important assumption is that of the stability of the relation between income and
consumption among the measured and reference groups. The food consumption is
chosen for its reported accuracy and organizational independence.
This general approach was replicated number of times in different countries.
Very interestingly the results don’t vary too much and all move around 30% or the need
to multiply the the reported income by 1.55 to get a ‚real‘ number. The results of some
of the studies (Pissarides and Weber, 1989; Johansson, 2005; Hurst et al., 2010;
Engström and Holmlund, 2009) are summarized in Table . These studies differ in a
specific definition of the SE household depending on local conditions and also on the
data available.
Table 1 : Selected expenditure based underreporting studies
Source: Author
The similarity of the results across nations with different tax system actually is very
interesting. There actually may be a different tax independent explanation for such
difference like a real difference in the food consumption habits between the two groups.
Country % cca Authors Year of publication
Finland 16-40 Johannson 2006
USA 30 Hurst, Li, Pagsley 2010
Sweden 30 Engstrom, 2009
Britain 35 Pissarides, Weber 1989
267
One of the things that was not controlled for is an increased consumption of food from
restaurants and smaller opportunity to use employer subsidised lunches in case of SE
people which might be important in Czech context.
The big problem of this method is the necessity of analysis of spending for the whole
households where we are interested only in the SE income. The more the income is
mixed from different other sources like social benefits, employment or even capital
gains the less relevant will be the results. The original study of (Pissarides and Weber,
1989) solves this problem by limiting the analysis to households where both money
earners are SE. I suggest determining the relative proportion of SE income
for each family and including it as one of the factors.
For an analysis of the consumption patterns in the Czech Republic the usage
of the only expenditure survey available – the family accounts statistics (FAS) - is
possible but it has certain limits. The sample does not contain the high income units,
which means that any result can be applied only to the lower parts of the distribution.
The advantage of the survey is the regularity and long term consistence, potentially
allowing the comparison of the tendency to underreport over different time periods.
Most importantly the use of Czech FAS for evaluating the underreporting due to tax
reasons as performed in the aforementioned forein studies is limited because
the connection between the income reported in a TR and the income reported in FAS is
rather vague. In FAS the income represents the net amount of money
that the entrepreneur gives to the family budget each month and theoretically shouldn’t
be influenced by tax related underreporting but is rather unpredictably influenced
by the proportions of money assigned to family consumption each month. We can still
calculate the theoretical net income of the families in the surveys based on food
expenditure but it will be very hard to choose the right group to compare it
with either from SILC or TR as it is assumed that the higher income families are not part
of FAS.
Indirect mixed income estimation in National accounts
Czech statistical office uses different indirect methods to estimate the mixed income
based on TRs and other sources. The production obtained from the TR is adjusted
by combination of data including a comparison to the results of small businesses
from the same field for the purpose of the production accounts. The Published net mixed
income figures as a balance item in the „household income creation account“ in national
accounts under a code B.3n. However the resulting and published aggregate data
and the comparative character by which they are estimated don’t allow a more detailed
look on the distribution. More on the topic e.g. in (Fořtová, 2009). Some authors use this
measure as a measure of average income of the SE (Fassmann, 2007, pg. 269) simply
dividing it by the estimated number of SE. The actual counting of people contributing
to this aggregate number, which is necessary to calculate an average, is however
rather problematic because of different numbers from different sources – see
268
(Novák, 2006) and the necessity to estimate the number of people in the particular segment
of shadow economy.
Results and Discussion
The comparison of average non-weighted data from SILC, FAS and the TRs relevant
to 2009 is presented in Table . The differences are significant. The average reported
§ 7 tax base from TR is by far the smallest and the difference between the SILC hints
a possible very high level of underreporting just under 50%. If we take the whole
households it is visible that the number from FAS is lower than the one from SILC
because it is a net value and the sample is less representative excluding the highest
earners. By dividing the Czech statistical office calculation by the number of SE from LFS
we get the by far highest number.
Table 2: The Czech Republic SE yearly income measures from different sources
(year 2009)
Fiscal
year
2009
TR Average §7 tax base of people with SE income and 0 employment income
from TR(includes students and pensioners)
166,805 CZK
SILC Average entrepreneurship income from SILC (people with
entrepreneurship income and 0 employment income)(not weighed)
273,011 CZK
SILC Average entrepreneurship income from SILC – households headed by SE 398,770 CZK
FAS Average entrepreneurship income in households headed by SE person (this is
net income, the sample does not include the high earning families)
216,800 CZK
National Accounts mixed income per SE person 577,630 CZK
Source: Czech statistical office, Author computation based on SILC, FAS, LFS and data from general tax
directorate
Bellow I present the data gathered from the selection of administrative TR data for tax
periods 2006 – 2010 and I discuss their relevance under the different tax influences.
In the context of what was explained above, they provide one dimension
of the development of the SE financial situation. The analysis shown cannot be based
on microdata, which are not available, but I believe that the comparison of these rough
data still provides an interesting insight even if we stay at the general level.
A more detailed analysis of such data was shown in (Průša et al., 2008) by Vančurová
but this unique analysis is limited to the district of Southern Bohemia and was
performed only in 2006.
Figure 1 shows the comparison between a total mixed income reported in the TRs
and the Czech statistical office estimate of net mixed income in the economy (white bar).
While the NA figure grows steadily the TR value peaks in 2008 with significant fall
in 2009 and then remains stable. Their highest ratio in the described period
269
thus appears in 2006 - 1:3.11 with a low in 2008 – 1:2.13 and returning to 1:3.02in
2010.
Figure 1: the total mixed income from national accounts and from TRs
Source: Czech statistical office National Accounts, Own computation based on general tax directorate
information
Table shows the average §7 tax base of the people who reported a non-zero tax base
from §7 while not having any income from employment. This filtering is chosen
as the statistics would be distorted downwards by people who have their business
license only as a side business to employment.
Table 3: Average tax base from entrepreneurship, Number of subjects reporting a loss, SE
registered as unemployed, GDP at current prices
2006 2007 2008 2009 2010
Total cumulative number of SE registered
as unemployed(CZK) 28,398 22,270 22,276 41,487 53,662
y/y % -21.58% 0.03% 86.24% 29.35%
Average §7 tax base for subjects with +SE
income and 0 income from employment 147,368 157,981 218,744 166,805 160,437
y/y % 7.20% 38.46% -23.74% -3.82%
Number of subjects reporting a loss 117,660 111,402 89,843 95,453 96,111
y/y % -5.32% -19.35% 6.24% 0.69%
GDP at purchaser prices(mil. CZK) 3,352,599 3,662,573 3,848,411 3,739,225 3,775,237
y/y % 7.59% 9.25% 5.07% -2.84% 0.96%
Source: Author, based on general tax directorate data and, data from ministry of labor and social affairs, GDP
from Czech statistical office
To analyse the causes for such a development of reported tax base(Pr) it is useful
270
to differentiate between the part influenced by economical development(E) and the part
influenced by tax optimization(T).
f5 = g(h, V)
Abstracting from structural changes I try to explain the development of the tax base
depending on the changes in tax legislation and on macroeconomic development.
In the selected period these were represented by two main events:
• The tax system changes introduced in financial years 2008 and 2009
• The Macroeconomic development with the economy going through a slump
in 2009 while peaking in 2007.
The major tax changes included a change to flat tax rate, different way of deducing
the compulsory insurance payments and a significant rise in the minimum untaxable
amount (defined by the so called tax discount) for fiscal year 2008 and the changes
in PDC effective in the years 2009 and 2010. From the tax optimization point of view,
the actual lessening of the tax in 2008 should lessen the incentive for tax optimization
resulting in a rise of declared profits. The major shift upwards is however influenced
heavily by an administrative move – the compulsory payments for social and health
insurance were no longer subtracted from the reported tax base. The payments
for social security were 21084 mil. CZK in that year with the exact data on health
payments not available but we can estimate a similar number meaning the total would
be enough to shift the 50 bl. back closer to the trend.. The change in PDC in 2009 was
significant, resulting in much more costs declared by these percentage declarations.
It lowered the profits reported (the total amount of costs declared by fiction is
represented by the last column in Figure 1). The total amount of costs declared
by this fiction grew from 57,891mil. in 2008 to 94,674 in 2009 which could explain some
part of the fall between 2008 and 2009 seen in Figure 1 and Table . In 2010 there was
a relatively minor reduction of the PDC.
To confirm a non tax system induced component in the development i.e. the actual result
of the real economic situation we will look at other related indicators.
The first one is the number of subjects declaring a loss which developed inversely
to the tax base - Table . It was influenced by the change in insurance payments in 2008
but this statistics unlike the tax base is independent from the effect of changes in PDC,
thus confirming a non tax influenced component of the development in 2009.
For further confirmation of the effects other than the tax optimization I use a statistics
which is not directly affected by tax optimization but also indicates the financial well
being of the sector – the number of SE closing their business and registering
as unemployed. The statistics of businesses which were actually closed and their owners
signed as unemployed in the labour office is in the first two rows of Table . The available
statistics of the Ministry of labour and social affairs can tell us how many people actually
271
signed but it unfortunately does not cover people who left the unemployment status
for self-employment. This means that the numbers shown in the table can be positively
distorted by increased seasonality or by increased number of people who tried
the business and failed immediately – registering people who moved back
and forth between statuses throughout the year. There was an important increase
of this statistics from 2009 with the lowest numbers in 2008 and 2007
which again suggests a real basis of the effect of the 2009 drop.
To make the image more precise, we may look at the distribution of the tax base
over the whole group which can be seen in Figure 2.
Figure 2: the change in distribution of §7 tax base for SE without additional employment,
y - axis: number of people, x- axis: the tax base ranges in thousands of CZK
Source: Author, own computation based on general tax directorate data
Only the curves for years 2006, 2008 and 2010 are shown which represent the major
changes. There was a gradual move from 2006 to the shape seen in 2008 with less
subjects with under 200.000 Kč §7 tax base and growing numbers over this mark,
while from 2008 the shift reversed with the peak shifting into the range 100-200.
This corresponds with the average shift that we described in Table and Figure 1.
This shift might have been caused by the PDC change but also by bigger numbers of high
earners closing businesses and low income people from labor market opting for self
employment as a refuge from unemployment. More detailed analysis of the cause
of this move is beyond the scope of this paper.
Conclusion
The complex problem of the financial well being of the SE does not have a single correct
answer with the results varying from administrative sources, independent surveys
and indirect methods.. Although the real financial inflow is only one, the estimates
that we get vary significantly depending on the perspective that we use.
The presented data from the tax reports would suggest the SE had exceptional years
272
in 2008 and 2009,. Their average reported §7 tax base moved out of the general trend
with both tax and non-tax factors playing a role, but the biggest moves in those two
years were caused by change in the tax system. Some non-tax influence is supported
by supplemental data on the amount of people registered in unemployment and number
of subjects reporting a loss especially for the drop between 2008 and 2009. However,
from the national accounts point of view, 2008 and 2009 were both “business as usual“
on aggregate. The ratio between the tax base reported in tax report and the national
accounts mixed income grows since 2008.
Acronyms
FAS – Family Accounts Survey(sometimes referred to as „household budget survey“),
LFS – Labor force survey, NA – National accounts, PDC – percentage declared cost, SE –
Self Employed, SILC – Survey of Income and Living Conditions, TR – Tax Report
Acknowledgements
The aggregate data – averages and distribution - from tax report database were kindly
provided by the General financial directorate.
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274
Local Government Finance and the Case
of the Anti-flypaper Effect
Pevcin Primož
Abstract
The empirical findings presented in the majority of literature have shown that lump-sum
transfers tend to have greater stimulatory effect on local government spending
than the equivalent increase in the income of the median voter. This notion has been
labeled as the fly-paper theory of incidence. Nonetheless, the empirical evidence presented
in this study suggests that the fly-paper effect could not be validated for the unconditional
lump-sum transfer revenues (i.e. financial equalization) of Slovenian municipalities.
Potential theoretical explanation for this phenomenon could be derived from adjusted
premises of the agenda control model of the fly-paper theory, although it may also be
considered that money might be fungible in the specific case of substantial “external
predetermination” of local public spending.
Keywords
local public finance, lump-sum grants, financial equalization, flypaper effect, Slovenia
Introduction
The empirical findings have shown that lump-sum transfers of central government tend
to have greater stimulatory effect on local government spending than the equivalent
increase in the income of the median voter (Brennan, Pincus, 1996; Strumpf, 1998).
This phenomenon has been labeled as the »fly-paper theory of incidence«, since »money
sticks where it hits« (Gramlich, Galper, 1973). Theoretical and empirical literature
provides several possible general explanations for this phenomenon. For instance,
Wyckoff (1985) has produced several potential data explanations of the effect, such as
misinformation, improper classification of governmental aid programs, endogeneity
of both grants and local expenditures variables in the empirical models, lower implicit
expenditure effects of income, persistence of agenda control where local spending is
determined with exogenous reversion levels etc. Similarly, Bailey and Connolly (1998)
have provided an overview of several theoretical explanations of the effect.
Those explanations include deadweight loss argument (as local governments use
distortionary taxes to finance some of their expenditures), transaction cost argument
(as high transaction costs induce local governments to prefer grant spending instead
of tax cuts), fiscal illusion hypothesis (as grants received do not affect perceived local
budget constraints) etc.
275
Although the fly-paper effect has been extensively addressed in the literature, several
points should be added regarding the research. First, the research seems to be somehow
biased as the majority of studies tend to focus on industrialized countries (see Acosta,
2010). Second, although the majority of studies were able to confirm the validity
of the effect, the real issue remains about the explanation of the effect. In this context,
Wyckoff (1985) has already pointed in the mid 1980-s that the majority of explanations
tend to be rather limited, so the fly-paper existence should exist due to the combination
of theories discusses earlier. Third, it needs to be acknowledged that some studies were
not able to confirm the validity of effect (Worthington, Dollery, 1999).
The investigation into the reasons why the fly-paper effect could not be observed seems
to be rather limited. For instance, Inman (2008) has regarded the effect as potential
puzzle since money is fungible and the source of financing should therefore not affect
the optimal allocation of resources. Moreover, Becker (1996) has even argued that flypaper
effect is actually a statistical artifact, since inappropriate functional form
of estimation may generate the illusion of fly-paper effect presence. However, the label
anti-flypaper effect, describing the situation where private income has greater
stimulatory effect on local government spending than the equivalent increase lump-sum
transfers, has been rarely addressed in the literature. Only several authors (e.g., Filimon
et.al., 1982; Wyckoff, 1985; Vegh, Vuletin, 2011) present that label and possible reasons,
why the anti-flypaper effect should and could occur. Filimon et.al. (1982) have portrayed
the local government expenditure formation in the context of the agenda control model.
This model predicts that local spending is determined with exogenous reversion level –
local spending is approved or disapproved through referendum. Yet, if additional
spending is not approved, the expenditures are set to a reversion level of spending,
which is usually mandated by the government. Actually, if reversion is less than or near
the median voter’s preferred level, even anti-flypaper effect can occur, which means
that income generates larger expenditure effect than equivalent increase in grants.
In contrast, Vegh and Vuletin (2011) have recently developed the so-called portfolio
theory of the fly-paper effect, which actually involves insurance arguments helping
explain the size of the effect. They have argued that the size of the fly-paper effect is
a decreasing function of the correlation between fiscal transfers and private income
at local level, where such relationship should be stronger the higher is the volatility
of fiscal transfers and/or private income. Yet, if two sources of revenues (private income
and transfers) are positively correlated, than those two sources become more similar
in terms of risks, which ultimately causes that the magnitude of the fly-paper effect is
smaller, potentially becoming even negative (the anti-flypaper effect).
Consequently, this paper would predominantly like to empirically validate the existence
of the fly-paper effect in specific context of post-socialist country (Slovenia),
since this theory has been predominantly empirically validated for the old industrialized
countries. Since municipalities represent the only existing tier of local government
276
in Slovenia, the empirical modeling is based on the regression analysis that estimates
the “standard” expenditure function of Slovenian municipalities for the period 2006-
2009, where specific intergovernmental transfer, called financial equalization, will be
analyzed, serving as a typical example of the unconditional lump-sum grant.
Material and Methods
The purpose of this study is to empirically examine the evidence on the “stickiness”
of intergovernmental transfers and to test possible existence of fly-paper effect
in the population of Slovenian municipalities for the period 2006-2009.
Intergovernmental transfer considered in the analysis is the specific type of financial
equalization. Namely, the Act on Local Finances (1998) introduced a system
of appropriate expenditure in order to allow municipalities to carry out
their constitutional and legal responsibilities. According to this system appropriate
expenditure is calculated on the basis of a special equation, which included correctional
factors for diversity in municipalities for the purpose of achieving the equalizations
(in comparison to national average), such as the spatial size of municipality, number
of residents, number of residents aged below 15 and above 65 and the length of local
roads.
Moreover, Local Self-Government Act (2007) stipulates that municipalities must raise
their own revenue. Specifically, Act on Local Finances ZFO-1A (2008) envisages
that municipalities finance their activities from four major groups of resources, that is
own tax revenues (revenues from inheritance and gift taxes, property taxes, taxes
on real estate business transactions, shared 54% of personal income tax paid
by municipal residents, etc.); other own revenues (administrative fees and duties,
concession duties and municipal communal rates, environmental duties, revenues
derived from the municipal property management, donations, transfers from central
government budget, etc.); municipal duties (i.e., compensation fees for use of municipal
land, etc.); and borrowing (the amount is limited by the law).
Financially disadvantaged municipalities, unable to fully perform their duties,
are eligible to receive additional financial assistance from the central government
in accordance with the principles and criteria prescribed by the law. This actually means
that municipalities, where own resources may not be sufficient to finance provision
of the services that certain municipality is obliged to deliver, are eligible to receive
special financial equalization from central government budget. Put differently,
municipalities with insufficient own revenues to finance municipal appropriate
expenditures, receive additional revenues in order to be able to perform their duties
(see Act on Local Finances ZFO-1A, 2008). This means that this type of
intergovernmental transfer would fall into the group of the so-called unconditional
lump-sum grants, where the main purpose of the instrument is to equalize horizontal
fiscal imbalance (Bird, Smart, 2002; Slack, 2007). Given the fact that fly-paper effect
277
testing is related to lump-sum grants only, it seems suitable to use this instrument to
investigate the “stickiness” of intergovernmental transfers in Slovenia. Moreover,
financial equalization amounted to approximately 54 million EUR in 2009, which is not
substantial when compared to total revenues of municipalities, although 191 (out of
210) municipalities received that kind of central government support (Ministry of
Finance, 2010).
Based on the conventional empirical literature concerned with the estimation
of expenditure effects of intergovernmental transfers (e.g., Worthington, Dollery, 1999;
Acosta, 2010), the estimated reduced-form regression model for local government
expenditure is described as:
EXPit = βXit + uit, (1)
where EXPit is total expenditure per capita for municipality i in year t, Xit represents
explanatory variables that affect municipal expenditure level in particular year, and uit
describes unobservable shocks to municipal spending. Specifically, regression analysis
uses per capita municipal total expenditures as dependent variable (LEXP). Explanatory
variables used in the analysis are per capita financial equalization received from central
government budget (LFINEQUAL), per capita income (LINCOME) , which relates to idea
that available income should be the other important prerequisite for municipal
spending, consequently making the possibility to test the magnitude of the fly-paper
effect. All those variables are expressed in log terms in order to reveal magnitudes
of income and grant elasticity, i.e. relative effects of income and transfers on municipal
spending.
Besides, some other additional control variables are used in the analysis such
as expenditures needs (LNEEDS), total municipal population (POP), changes
in municipal population per 1,000 inhabitants on yearly basis (POPGROWTH), municipal
population per squared kilometer of territory (DENS), proportion of population
unemployed (UNEMP), proportion of population older than 65 years (65+)
and proportion of population younger than 15 years (-15). These control variables are
integrated into the model, since the majority of them tend to be rather standard
in the empirical literature on fly-paper effects. The source of data for the variable
FINEQUAL is Ministry of Finance (2010), for variables EXP and NEEDS Ministry
of Finance (2011), and for the other variables SORS (2011).
It is worth noting that the paper utilizes only log-linear regression analysis
for the possible explanation of the magnitude of the fly-paper effect in the specific case
of Slovenian municipalities. Two main reasons for using only this methodology exist:
(1) the utilization of this method is the most common in the empirical literature
on the fly-paper effect, since it enables the estimation of the income and grant elasticity,
which is the dependency of municipal expenditures on local income and transfer
revenues received by municipalities; (2) the use of other possible parametric or non-
278
parametric approaches (e.g., correlation analysis, data envelopment analysis etc.) would
not yield the particular intentions of the research, since there is no purpose to estimate
the associations between expenditures, income and transfer revenues, neither
the production function of municipalities wants to be portrayed, but the main purpose
of the empirical part of the paper is to simply estimate income and grant elasticity
to enable the discussion on the possible existence and magnitude of the fly-paper effect.
Results and Discussion
The results of the regression analysis are presented in table below. It should be noted
that two distinct regression functions are estimated; for the 2006-2008 period
and for the 2009 period, the elimination of explanatory variables being based on the
χ2 test. The main reasons for the estimation of two functions are: (1) the number
of municipalities has increased in 2009 (from 193 to 210), so the population
of municipalities under consideration is not identical; (2) the economic
environment changed dramatically in 2009, causing that there was large increase
in the number of municipalities that needed financial equalization to finance their legally
mandated responsibilities.
Table 1: Stickiness of financial equalization, Slovenian municipalities, 2006-2009
Explanatory
Dependent: LEXP
Period 2006-2008
Pooled LS
Period 2009
Ordinary LS
LINCOME 1,675773*** 0,138710
LFINEQUAL 0,250578*** 0,125676***
65+ / 0,016965
15- / -0,031856*
UNEMP / -0,012532**
LNEEDS 0,878473*** /
POP 1,46E-05 /
POPGROWTH 0.005913 /
Intercept -16,11107*** 5,485903***
N 421 191
R2
adj. 0,104688 0,207728
d-stat. 1,898021 2,183723
F-stat. 10,82208*** 10,9633***
Statistically significant: *** - 99% level; ** - 95% level; * - 90% level.
Source: Author’s calculations based on the above stated data.
Evidently, the obtained results suggest that the income elasticity is larger compared
to grant elasticity in both periods, which means that the fly-paper effect could not be
279
revealed for the instrument of financial equalization. Although the explanatory power
of both models is rather weak and also their structure differs substantially, this is not
unexpected as financial equalization is only one instrument of intergovernmental
transfer revenues and the economic conditions in both periods are substantially
different. Moreover, the elasticity of financial equalization compared to elasticity
of income is substantially lower in the 2006-2008 periods, which suggests the existence
of the anti-flypaper effect. However, income elasticity almost equals equalization
elasticity in 2009, which would suggest that money is fungible, although regression
coefficient for income is not statistically significant. This suggests rather limited
dependence of municipal expenditures on private income, although the results might be
biased due to the economic downturn experienced in that year.
Conclusion
It could be claimed that the anti-flypaper effect could be observed in local government
finances in Slovenia, as the grant elasticity is statistically significantly lower compared
to income elasticity when the fiscal impacts of financial equalization are investigated.
Although theoretical explanations for the anti-flypaper effect are rather limited,
potential explanation for this phenomenon, maybe relevant in the context of local
government expenditure formation and determination, could be delivered
from (modified) agenda control model, initially developed by Filimon et.al. (1982).
Namely, this model predicts that local spending is determined with exogenous reversion
level. This reversion seems plausible since municipalities in Slovenia are actually
financed within the system of the so-called appropriate expenditure determination.
Technically, this means that the municipal spending is mandated by the government,
and voters are reluctant to (explicitly or implicitly) support any additional spending,
since it would require additional sources of financing, which are not assured
by government. This perhaps indicates that the rough foundations for the potential
validity of modified agenda control model could be experienced, reinforced even
with the presumption that reversion level is rather low since only constitutionally
and legally determined tasks are financed. Still, additional empirical research
in this topic for Slovenia should be encouraged, aimed also at other kinds of lump-sum
transfers.
References
ACOSTA, P. (2010) ‘The “fly-paper effect” in presence of spatial interdependence:
evidence from Argentinean municipalities’, Annals of Regional Science, vol. 44, No. 3, pp.
453-466. ISSN: 0570-1864.
ACT ON LOCAL FINANCES (1998) Official Gazette of RS, No. 56/98.
ACT ON LOCAL FINANCES ZFO-1A (2008) Official Gazette of RS, No. 57/2008.
BAILEY, S., CONNOLLY, S. (1998) ‘The Flypaper Effect: Indentifying Areas for Further
280
Research’, Public Choice, vol. 95, No. 3-4, pp. 335-361. ISSN: 0048-5829.
BECKER, E. (1996) ‘The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect’, Public
Choice, vol. 86, No. 1-2, pp. 85-102. ISSN: 0048-5829.
BIRD, R.M. , SMART, M. (2002) ‘International Fiscal Transfers: International Lessons for
Developing Countries’, World Development, vol. 30, No. 6, pp. 899-912. ISSN 0305-750X.
BRENNAN, G., PINCUS, J. J. (1996) ‘A minimalist model of federal grants and flypaper
effects’, Journal of Public Economics, vol. 61, No. 2, pp. 229-246. ISSN: 0047-2727.
FILIMON, R. et. al. (1982) ‘Asymmetric Information and Agenda Control: The Bases of
Monopoly Power in Public Spending’, Journal of Public Economics, vol. 17, No. 1, pp. 51-
70. ISSN: 0047-2727.
GRAMLICH, E., GALPER, H. (1973) ‘State and Local Fiscal Behavior and Federal Grant
Policy’, Brookings Papers on Economic Activity, vol. 1973, No. 1, pp. 15-65. ISSN: 1057-
8641.
INMAN, R. (2008) The Flypaper Effect, Working Paper No. 14579. Cambridge: NBER.
Available from WWW:<http://www.nber.org/papers/w14579>.
LOCAL SELF-GOVERNMENT ACT (2007) Official Gazette of RS, No. 94/2007.
MINISTRY OF FINANCE (2010) Calculations of the appropriate expenditures of local
authorities and needed financial equalizations, 2003-2009. Ljubljana: RS, Ministry of
Finance. Available from WWW:<http://www.mf.gov.si>.
MINISTRY OF FINANCE (2011) Financial Statements of Municipalities. Available from
WWW:<http://www.mf.gov.si>.
SLACK, E. (2007) Grants to Large Cities and Metropolitan Areas, in: Boadway, R., Shah, A.
(Ed.). Intergovernmental Fiscal Transfers: Principles and Practice, Washington: The
World Bank. ISBN: 08-21-36-49-28.
SORS (2011) SI-Stat Data Portal. Ljubljana: Statistical Office of the Republic of Slovenia.
Available from WWW:<http://www.stat.si>.
STRUMPF, K. (1998) ‘A predictive index for the flypaper effect’, Journal of Public
Economics, vol. 69, No. 3, pp. 389-412. ISSN: 0047-2727.
VEGH, C., VULETIN, G. (2011) ‘Unsticking the flypaper effect in an uncertain world’, 2012
AEA Meeting Papers. Available from WWW:<http://www.aeaweb.org>.
WORTHINGTON, A.C., DOLLERY, B.E. (1999) ‘Fiscal Illusion and the Australian Local
Government Grant Process: How Sticky is the Flypaper Effect?’, Public Choice, vol. 99, No.
1-2, pp. 1-13. ISSN: 0048-5829.
WYCKOFF, P. (1985) ‘Revenue Sharing and Local Public Expenditure: Old Questions,
New Answers’, Economic Review, vol. 1985, No. IIQ, pp. 13-26. ISSN 0732-1813.
281
The Double Taxation of Savings and Economic Growth
in Czech Republic
Rosenberg Zdeněk
Abstract
This paper presents the results of the simple agent-based model. The model simulates
the abolishing of the double taxation of savings in the Czech economy and its impact
on economic growth using three levels of growth sensitivity to total amount of savings
in the economy. The model concludes that double taxation of savings has very little
if any effect on GDP growth rates. This is true for all three settings of growth sensitivity
to savings. Double taxation has basically no negative impact on economic growth
in the short run and slightly bigger but still questionable impact in the long run. The final
years of simulation also show that rather than small changes in tax system settings it is
the future demographic change that deserves attention.
Keywords
tax, savings, economic growth, multi-agent based simulation
Introduction
In most countries the interest paid on already taxed savings is also taxed and this fact is
part of the problem known as double taxation of savings. Additional taxation may cause
lower levels of savings on the behalf of consumption and so it may harm future
economic growth through diminished accumulation of capital. This finding is attributed
to J.S. Mill and gained a lot of attention in 1930s. Back then, some saw interest as new
income and had little understanding of any exemption from taxation whatsoever
(Weaver, 1932). Others like A. Marshall and C.A. Pigou endorsed the argument
and demanded no taxation of savings. Irving Fisher clearly explained
that those who save the most and for the longest period of time will suffer the most
from the duplication of taxation. He also pointed out that no silent business partner
takes his part and later comes for the fruits from the other part which is exactly
what government does (Fisher, 1939). Arguments supporting both sides from many
economists are mentioned in a recent article (Fossati, 2010) which summarizes
the whole debate that spans over a century and is still fairly open.
In this article no theoretical claim is made about whether double taxation of savings is
just. It shows that the negative impact of double taxation of savings on economic growth
is measurable but basically insignificant. This result was simulated using an agent-based
282
model resembling the Czech economy and stays true even with a strongly enhanced role
of savings in the economy.
Model and Data
The presented model consists of 10,000 agents which represent the economically active
Czech population. Increasing the number of agents does not affect the results. The prices
are constant and the only taxes are income tax on personal income and 15% tax
on interest of the agent’s savings. The model works under many assumptions which
were set to represent current trends in the Czech economy. Generally, the model is very
simple but is aimed to simulate the Czech population’s dynamics of aging. The fiscal year
is used as a time unit and simulation covers the years 2011 to 2050.
The differences in wages of individual agents are predetermined at birth
and represented with a coefficient for every individual agent. Wages increase with age
till 50 and then keep constant until retirement. Individual saving rates also increase
with age until 50 and stay constant from then till retirement. Agents decide if they will
have a job which depends on their age and randomly assigned willingness to work,
which forms the start of a model which copies actual employment from the Czech
Republic (Ministry of Labour and Social Affairs of Czech Republic, 2011). Willingness
to work and to save is affected by taxation. Agents save at real the interest rate of 1-
2 % p.a. and their savings are affected by their salary and age following the data
from Ministry of Finance of the Czech Republic (2010).
Agents also lose work and die, and the probability of the death of the agent is tested
every year with respect to data from the Czech Statistical Office (2010). A new agent is
born aged 15-25 years when another agent dies or reaches age of 65, which represents
the age of retirement, and so keeps their number constant. The original age structure
of agents copies the one of the Czech Republic.
As the model is very simple, many important features of tax collection are completely
omitted which is not unusual even for more complicated models. Tax evasion
for example is often the goal of specific agent-based models, but for models similar
to this one it is usually reduced only to use of lower tax rate (Bloomquist, 2006).
The economic growth in the model is determined as the multiple of two elements.
The first is net national savings, which is the sum of savings of all agents
after depreciation. This basically represents the growth of capital stock in the model.
The second element is the coefficient c representing the three possible levels of impact
savings can have on economic growth. The model is run once with taxation of savings
and once without it. Three levels of c are used in the model for both of these settings.
The general income level is identical to GDP in the model and is affected by the amount
of previous savings. This is because higher savings lead to higher stock of physical
capital and that increases the productivity of labor.
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The model operates under fixed government’s budget constraint. The income tax rate is
used to compensate for loss of government income after abolishing taxation of interest
and also for increase in revenue due to higher economic growth caused by the same
reason. The income tax rate does not change immediately and so the simulation may end
with higher government’s revenues for settings without the double taxation of savings.
The income tax was set according to the actual Czech tax rate. This rate was slightly
increased for the settings without double taxation of savings at the beginning
of the simulation to compensate for revenue loses.
The model is programmed in JAVA. Many thanks go to Stanislav Heller for the technical
realization of the model.
Results
The model showed that for conservative values of c (the impact the savings have
on economic growth) there is very little difference between systems with
and without double taxation of savings. Even for c = 0.5 which represents a growth
in national savings by 1%, resulting in 0.5% growth of GDP and which is more than is
realistic for small open economy, the results are much smaller than was expected.
All the presented figures show results for c = 0,5 because for a lower c, the differences
are negligible.
Figure 1: Income tax revenues with and without double taxation of savings (mld. CZK)
Source: Author
Figure 1 shows that within 10 years the revenues from personal income tax of 10,000
agents in settings without double taxation surpasses that of model with this taxation.
Later, a slight drop is caused by lowering the rate of tax, which is made possible
by the slightly faster GDP growth without double taxation.
284
Figure 2: Average income (CZK)
Source: Author
The average income has very similar outcomes to income tax revenues due
to its specification in the model. The growth of pretax income is strongly affected
by the changes in age structure of the population, as is visible most explicitly around
2043. This is mainly caused by higher unemployment which the model predicts
at that time. This behavior of the model may not be necessarily realistic but does not
affect the final outcome in any significant way.
Figure 3: Unemployment rate (%)
Source: Author
Table 1, which follows, presents the final results of the simulation. It is clear that for low
values of c (strength of saving’s income on economic growth) there is no significant
difference between different approaches to the taxation of savings. The difference
of 0.03% and 0.08% in average annual growth rates is much too low to deserve
any interpretation. This is most obvious from 1.84% (= 41.91 – 40.07) of current GDP
difference after 40 years of simulation.
Table 1: Growth rates
With double taxation Without double taxation
c 0.1 0.25 0.5 0.1 0.25 0.5
Total growth (%) 40.07 142.61 555.34 41.91 151.03 589.29
Average growth rate (%) 0.83 2.19 4.69 0.86 2.27 4.82
Source: Author
285
The results for c = 0.5 suggest that something positive has been achieved by abolishing
the double taxation of savings, however the difference 0.13% in the annual growth rate
is still rather small. The cumulative effect seems somewhat significant but it is necessary
to keep in mind that an obtained gain of 33.95% GDP is the product of 2011,
which would be equal to only 5% gain in GDP if products of 2050 were compared.
Another interesting finding of the model was observed for the low impact of savings
on economic growth. For this setting, the pretax income of agents grows quite well
in the early years, reaching 37000 in 2035, but then the growth basically disappears
because of the aging of the Czech population. This is true for an economy both
with and without the double taxing of savings.
Discussion
Rather than studying the effect that savings had on the growth in the past, which would
hardly be very significant in the long run given the youth of the private banking system
in the Czech Republic, the presented model used three different levels of this.
Confirming these results using a developed model with a valid labor market is one
of the next logical steps in the analysis.
The whole role of the interest rate and its taxation calls for further research. Even if
the Czech population was fully aware that, for example, 3% pretax interest rate is 2.55%
after 15% tax on interest, it is still unclear how much effect this would have. Especially
in recent years, it is obvious that current GDP growth as well as expectations of future
development have much larger impact on total amount of savings than changes
in interest rate.
Conclusion
The results provided here show that under reasonable assumptions the double taxation
of savings in the form of taxing the interest has very little impact on economic growth
even in long run. This holds true through any tested level of the impact that savings have
on growth. On the other hand, it is worth noting that even for the small role of savings,
economic growth was slightly bigger without double taxation of savings, whilst keeping
government revenues unchanged. The model also shows the surprisingly high impact
of the Czech population’s aging on economic growth, especially when large previous
savings cannot compensate for this gap.
Acknowledgements
This article was supported by Research Centre for Competitiveness of Czech Economy.
286
References
BLOOMQUIST, K.M., (2006) A comparison of agent-based models of income tax
evasion. Soc. Sci. Comput. Rev. 24, 4 (December 2006), pp. 411-425. Available from
WWW: http://ssc.sagepub.com/content/24/4/411.full.pdf+html
CAROLL, C.D., WEIL, D.N., (1994) Saving and Growth: A Reinterpretation, CarnegieRochester
Conference Series on Public Policy, 40:133-92.
EDWARDS, S., (1995) Why are Saving Rates so Different Across Countries?: An
International Comparative Analysis, NBER Working Papers No.5097.
FISHER, I., (1939) The Double Taxation of Savings, The American Economic Review
Vol. 29, No. 1, pp. 16-33. Article stable URL: www.jstor.org/stable/10.2307/1806984
FOSSATI, A., (2010) The double taxation of savings: the Italian debate revisited, No
3/2010, DISEFIN - series of economic working papers, University of Genoa, Research
Doctorate in Economics and Finance of European Union. Available from WWW:
<http://EconPapers.repec.org/RePEc:gea:wpaper:3/2010>
KALDOR, N., (1956) Alternative Theories of Distribution, Review of Economic Studies,
23(2): 83-100.
LEWIS, W.A., (1955) The Theory of Economic Growth. Homewood, III: Irwin.
Ministry of Finance of Czech republic, (2010) [online]. Závěrečná zpráva PES: Úspory
domácností a hrubý pracovní příjem [cit. 17-5-2012]. Available from WWW:
http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/vf_duchod_ref_pes_55891.html
Ministry of Labour and Social Affairs of Czech Republic, (2011) [online]. Analýza vývoje
zaměstnanosti a nezaměstnanosti v 1. pololetí [cit. 2012-04-15]. Available from WWW:
http://portal.mpsv.cz/sz/politikazamest/trh prace/rok2011p1/analyza1p2011.pdf
MOHAN, R., (2006) "CAUSAL RELATIONSHIP BETWEEN SAVINGS AND ECONOMIC
GROWTH IN COUNTRIES WITH DIFFERENT INCOME LEVELS.." Economics Bulletin, Vol.
5, No. 3 pp. 1−12 Available from WWW: http://www.economicsbulletin.com/
2006/volume5/EB−05E20002A.pdf
SOLOW, R. M., (1956) A Contribution to the Theory of Economic Growth. Quarterly
Journal of Economics (The MIT Press) 70 (1): 65–94.
THORNTON, D. L., (2009) Personal saving and economic growth, Economic Synopses,
issue , number 46. Available from WWW: http://EconPapers.repec.org/RePEc:fip:
fedles:y:2009:n:46
WEAVER, D., (1932) An Economic Fallacy: The Double Taxation of Savings. The Economic
Journal Vol. 42, No. 167, pp. 495-498. Article stable URL: www.jstor.org/stable
/10.2307/2224053
287
Accuracy of Tax Revenue Forecasts in Czech Municipalities
Sedmihradská Lucie
Abstract
The paper explores factors influencing accuracy of tax revenue forecast in 198
municipalities of extended scope between 2003 and 2011 using the fixed-effects model
analysis. The accuracy of municipal tax revenue forecasts is influenced not only
by the national economic situation (especially GDP growth rate) but local economic
and fiscal conditions have their importance as well. Tax revenue forecasts tend to be more
optimistic in smaller municipalities and in municipalities with less favorable economic
and fiscal conditions. Our results also suggest that municipal tax revenue forecasts are
subject to political business cycle.
Keywords
budget accuracy, tax revenue forecasting, political business cycle
Introduction
Some inaccuracy of revenue forecasts is inevitable; however our previous research
(Sedmihradská and Kramoliš, 2012) shows that majority of municipalities
underestimate their revenue forecasts and approve budgets with much more
conservative estimates than the revenue forecast of the Ministry of Finance. Municipal
tax revenues were on average underestimated by more than 4% in the last decade
with significant differences among individual municipalities. The aim of the paper is
to identify factors which cause these differences.
First, based on the literature review, there are recognized major factors which influence
accuracy of revenue forecasts. Then we test if these factors can explain the differences
in tax revenue forecast accuracy in 198 municipalities of extended scope between 2003
and 2011 using the fixed-effects model analysis.
Revenue forecast accuracy and its determinants
Revenue forecasting is one of the first steps while preparing the draft budget. Its results
influence the decision-making of resource allocation, so that inaccuracy of the forecasts
may have tangible impacts. Budget inaccuracy is the difference between the approved
(budgeted, estimated) and actual (real) revenues. In this paper the following budget
inaccuracy indicator is used:
100.
x
xx
x
A
AB
BI
−
= , where (1)
288
x = analyzed budget segment (revenues or a line of them), BI = budget inaccuracy,
B = approved amount and A = actual amount.
The inaccuracy can be either in the form of overestimation, i.e., the approved revenues
exceed the actual revenues and BIx> 0 or underestimation, i.e., the estimated revenues
are lower that he actual ones and BIx<0. Thus in case BIx grows the forecasts are less
conservative, i.e., the underestimation is smaller or it turns into overestimation
or the overestimation grows. Growth of BIx thus does not generally mean improvement
of budget accuracy.
In case of revenue overestimation not all approved expenditures can take place and cuts
are needed. Revenue overestimation softens the hard budget constrain and shifts
the decision-making about the needed cuts from the preparation and approval phase
of the budgetary process to the execution phase. Rubin (1987, p. 83) stresses
the associated shift in power in favor of the budget officer. As in the Czech Republic
municipalities do not operate under strict balanced budget requirement, revenue
overestimation may result in budget deficit.
Underestimation means that during the budget year there appear some additional
revenues which can be either added to the year-end balance or spent on newly approved
expenditures. The process of the decision making during the year, however, may be less
transparent than the standard budgetary process, as less publicity for budget
amendments than the draft budget is required and because of common praxis
of delegation of decision-making power from the municipal council to municipal
commission or the mayor (see Češková and Kinšt, 2011, p. 209). As underestimation
of budget revenues is considered to be fiscally responsible – thus positive – some
authors, e.g. Rodgers and Joyce (1996, p. 49), argue that a part of the revenue forecast
error “can only be explained by the very rational choice to underestimate revenues
in order to provide cushion against a recession that is unanticipated”.
Figure 1 shows the development of budget inaccuracy of municipal tax revenues (BITAX)
and total municipal revenues (BI-REV) in the analyzed 198 municipalities
of extended scope together with the tax revenue forecasts provided by the Ministry
of Finance. It shows the average inaccuracy and the 95% confidence interval
of the indicator. The difference between the drawn line and zero line shows
the percentage of additional revenues received during the budget year
with only exception of tax revenue in 2009 when the tax revenues were missing.
The total revenues show relatively stable development, the correlation analysis
confirmed our expectation that the revenue inaccuracy is negatively influenced
by the share of grants and capital revenues in total revenues, the correlation coefficients
being -0.2531 and -0.1754, respectively. The inaccuracy of tax revenues shows,
with exception of 2009, improvement. We suppose that one of the reasons could be
continuous decline of the importance of the revenues from the individual income tax
paid by entrepreneurs. 30 % of proceeds from this tax remain in the municipality
289
of the permanent residence of the particular entrepreneur. Therefore this tax is much
more volatile as well as hard to forecast than the taxes shared based on the revenue
sharing formula. The average share of this tax in total tax revenues in the analyzed
municipalities fell from 9.8% in 2001 to 2.1% 2011.
Figure 1: Revenue inaccuracy (2001-2011)
Source: ARIS, ÚFIS, documentation to the state budget proposals (2003-2011), own calculations and
presentation
The accuracy of revenue forecasts is influenced by numerous factors which Chatagny
and Soguel (2012, p. 6-9) divide into four main groups: economic environment, fiscal
situation, technical and organizational aspects and political factors. Some of the factors
are the same for all municipalities such as the national GDP growth rate, inflation rate
or date of municipal council elections, but many factors are specific for each
municipality. For example economic situation in a particular municipality may influence
some tax revenues. Similarly each municipality is in a different fiscal situation. Fiscal
situation influences the revenue forecasting bias toward underestimation. Rubin (1987,
p. 92) found that “the greater the cities´ overall fiscal stress, the greater the likelihood
of overestimating revenue.” Thus fiscal hardship leads to acceptance of thinner “forecast
cushion” than generally wanted. This finding is consistent with Rose and Smith (2012)
who found that U.S. states which adopted budget stabilization funds, i.e., have reserve
funds at their disposal in case of an unexpected event, are less conservative in their
revenue estimates. Thus again, thinner “forecast cushion” is accepted because real
reserves exist.
While revenue forecasting is most of all a technical process regardless how sophisticated
290
methods are used, the approved budget, or exactly the expected revenues approved
in the annual budget, is a result of political decision-making and thus can be
manipulated. As mentioned above, less conservative revenue estimates may allow
approval of higher or additional expenditures. This can be especially tempting before
elections when the incumbent tries to show voters their competence and get reelected.
Empirical evidence of the existence of political business cycle in revenue forecast shows,
however, only weak support such as Bischoff and Gohout (2010) in case of German lands
or Chatagny and Soguel (2012) in case of Swiss cantons.
Material and methods
Forecasting of budget revenues is influenced by the revenue structure. The ability
to exactly estimate individual revenue types differs significantly and therefore our
analysis focuses only on tax revenue inaccuracy (BI-TAX) and we deal with variables
representing the economic environment, fiscal situation and political factors.
The key factor influencing the forecast inaccuracy is the economic situation, which can
be characterized by three major indicators: GDP growth rate, inflation rate
and unemployment rate. While data on the former two are available only nationally,
the unemployment rate is available for individual municipalities of extended scope.
Higher economic growth (GDP) results in higher actual revenues (BI decreases), higher
inflation (INFL) means higher actual nominal revenues (BI decreases) and higher
unemployment (UNEMPL) results in lower tax collections due to both lower incomes
and lower consumption. Due to the revenue sharing mechanism, the differences
in the unemployment rate among municipalities have only a limited impact. We can,
however, consider it as a proxy for characteristic of economic situation in the particular
municipality. So it can indirectly impact the activity and so the taxes paid
by entrepreneurs, i.e., higher unemployment means lower actual revenues (BI grows).
The impact of the size of the municipality (POP) can be twofold: bigger municipalities
employ more specialized staff and revenue forecasting can be based on more
sophisticated methods. On the other hand, bigger municipalities start budget
preparations earlier (see Sedmihradská, 2006), so the uncertainty about further
development is bigger. Neither Rubin (1987) nor Goeminne, Geys and Smolders (2008)
found effect of population size on forecast accuracy.
Fiscal situation of a municipality is described through two indicators: total revenues per
capita (REV) and budget balance as a share on total revenues (BAL). These indicators do
not indicate if a municipality observes fiscal stress, however they indicate if the fiscal
situation is more or less favorable. We expect that municipalities with lower revenues
per capita and budget deficit will be more optimistic. Thus BI grows if per capita
revenues and budget balance falls.
291
The theory of political business cycle assumes that revenue forecasts are more
optimistic before elections (ELECT); therefore BI should be higher in the election years.
To empirically assess the relation between budget inaccuracy and economic, fiscal
and political factors we use a panel dataset from 2003 to 2011 for 198 municipalities
of extended scope. Out of the total 206 municipalities of extended scope we have
excluded 8 cities (Brno, Liberec, Opava, Ostrava, Pardubice, Plzeň, Praha and Ústí nad
Labem) which are divided into districts with own budgets. We do not have data
on individual districts budgets and the evaluation of accuracy of the aggregated
(consolidated) budgets seems inappropriate.
Financial data were acquired from the information systems Automated Budget
Information System (ARIS) and Accounting and Financial Information System (ÚFIS)
administered by the Ministry of Finance. The data are based on the Czech budget
classification, i.e., all the data are recorded on the cash principle. The data for GDP
growth rate and inflation rate are from the Czech Statistical Office and
for unemployment rate from the Ministry of Labor and Social Affairs.
We estimate the following multivariate model to test our predictions (subscripts i and t
referring to municipalities and time respectively):
BI-TAXi,t = a +b1GDPt +b2UNEMPLt−1 +b3INFLi,t +b4POPi,t +b5REVi,t +b6BALi,t +b7ELECTt +ei,t (2)
where
BI-TAXi,t is the budget inaccuracy of the tax revenues calculated based on formula (1),
GDPt is the annual change in the gross domestic product expressed in the real terms,
in percent,
UNEMPLt is the unemployment rate, i.e., number of registered unemployed divided
by number of economically active inhabitants, in December, in percent,
INFLi,t is the yearly average inflation rate, in percent,
POPi,t is the number of inhabitants, in thousands,
BALi,t is the budget balance as a share of total revenues, i.e., difference between total
revenues and total expenditures divided by total revenues, in percent,
REVi,t are total municipal revenues per capita, in thousands CZK,
ELECTt is a dummy variable that takes the value 1 in election years (i.e., 2006 and 2010)
and 0 in other years.
For estimation of the model we have used fixed-effects models analysis in the software
Gretl 1.9.2. This approach is similar to Rose and Smith (2012). Results
Results
The obtained results are presented in Table 1 and confirm some of our expectations:
292
higher GDP growth and lower unemployment leads to higher actual revenues
and consequently higher tax revenue underestimation, i.e., lower BI-TAX. The impact
of GDP growth is much stronger, increase by 1 percentage point leads to increase of tax
underestimation by 2 percentage points in case of GDP growth and decrease by only
0.2 percentage points in case of unemployment rate. At the same time there is no
impact of inflation. Despite our expectation the impact of the population size is
significant: smaller municipalities are more optimistic than bigger ones.
Table 1: Estimates of the tax revenue inaccuracy models (198 cross-sectional units, timeseries
length 9; 1,782 observations)
CONST 17.3043***
(5.1261)
GDP(t) -2.0582***
(0.0555)
UNEMPL(t-1) 0.2179***
(0.0828)
INFL(t) 0.0211
(0.1024)
POP(t) -0.5538**
(0.2664)
REV(t)
-0.3119***
(0.0394)
BAL(t) -0.033**
(0.016)
ELECT(t) 3.8666***
(0.3569)
Mean value of the dependent variable -4.8505
Standard error of dependent variable 9.7392
Adjusted R-squared 0.6364
Durbin-Watson statistic 1.7206
Source: Author
Note: std. error reported in parenthesis, *** significant at 0.01 %, ** significant at 0.05 %
Fiscal situation influences BI-TAX as expected, municipalities in less favorable situation,
i.e., with lower revenues per capita and budget deficit, tend to underestimate tax
revenues less. This finding is consistent with Rubin (1987). The influence of these
factors is, however, not very strong: decrease of per capita revenues by one thousand
CZK leads to increase of BI-TAX by 0.3 percentage points and increase of budget deficit
share in total revenues by 1 percentage point leads to increase of BI-TAX only
by 0.03 percentage points.
The most surprising result is the strong and highly significant positive impact of election
which suggests the existence of political business cycle in municipal revenue forecasts,
i.e., the BI-TAX is in the election years higher by 3.9 percentage points than in the other
years. Interpretation of this finding is quite difficult, when we consider the following:
First, both the municipal council elections and the elections to the Chamber of Deputies
take place in the same year. Second, there is some interdependence between municipal
293
tax revenue forecasts and the forecasts of the Ministry of Finance. Municipalities are
independent in their revenue forecasts, however, they know the tax revenue forecasts
provided by the Ministry of Finance and they consider them to some extent
during their own forecasting process. Existing case studies (Talíř, 2012 and Radilová,
2012) show examples, when the budget officers take the ministerial forecasts
as the most optimistic scenario. So, without further research, it is unclear, whether
this forecast optimism rises at the municipal side or if is caused by optimism
in the forecasts of the Ministry of Finance.
Conclusions
Czech municipalities systematically underestimate their revenues and there are
significant differences among municipalities. Our results confirmed that the accuracy
of municipal tax revenue forecasts is influenced not only by the national economic
situation (especially GDP growth rate) but that local economic and fiscal conditions have
their importance too. Underestimation of tax revenues tends to be higher in bigger
municipalities with more favorable economic and fiscal conditions. This finding is
consistent with Rubin (1987) and suggests that in worse times municipalities use all
available resources including “hidden” reserves in the form of revenue underestimation.
Obtained results suggest, that municipal tax revenue forecasts are subject to political
business cycle. This finding is interesting, especially, because there is only very limited
empirical support of this common assumption. Due to the interdependence of municipal
forecasts and forecasts of the Ministry of Finance and concourse of municipal council
elections and the elections to the Chamber of Deputies in the same year, further research
is needed to find out if the forecast optimism rises at the municipal or ministerial side.
Revenue forecasts may be subject to manipulation and the determination of the factors,
which influence them, allows assessing if this is happening in case of Czech
municipalities. While the rational behavior in case of worse economic and fiscal
situation of a municipality does not confirm this suspicion, the confirmation
of the political business cycle does. Therefore we intend to continue this research
by exploring additional factors and possibly prolonging the time series so that
also the election year 2002 is included.
Acknowledgements
The study was supported by the Internal Grant Agency of the University of Economics,
Prague, project F1/1/2012 „Fiscal federalism in the Czech Republic“.
294
References
BISCHOFF, I., & GOHOUT, W. (2010). The Political Economy of Tax Projections.
International Tax And Public Finance, 17(2), 133-150. Available from WWW:
http://dx.doi.org.ezproxy.vse.cz/10.1007/s10797-008-9103-y
ČEŠKOVÁ, M. and KINŠT, J. (2011) Rozpočtová skladba v roce 2011.Olomouc : ANAG.
ISBN 978-80-7263-638-9
GOEMINNE, S., GEYS, B., & SMOLDERS, C. (2008). Political Fragmentation and Projected
Tax Revenues: Evidence from Flemish Municipalities. International Tax And Public
Finance, 15(3), 297-315. Available from WWW:
http://dx.doi.org.ezproxy.vse.cz/10.1007/s10797-007-9021-4
CHATAGNY, F. and SOGUEL, N.C. (2012) Determinants of Tax Revenue Forecasting
Errors : Evidence from Swiss cantons. Available from WWW:
http://www.pubchoicesoc.org/papers_2012/Chatagny_Soguel.pdf
RADILOVÁ, M. (2012) Predikce příjmů obecních rozpočtů. Master thesis, University of
Economics, Prague.
RODGERS, R., and JOYCE, P. (1996). The effect of underforecasting on the accuracy of
revenue forecasts by state governments. Public Administration Review, 56(1), 48.
ROSE, S., & SMITH, D. L. (2012). Budget Slack, Institutions, and Transparency. Public
Administration Review, 72(2), 187-195.
RUBIN, I. S. (1987). Estimated and Actual Urban Revenues: Exploring the Gap. Public
Budgeting & Finance, 7(4), 83-94. doi:10.1111/1540-5850.00766
SEDMIHRADSKÁ, L. (2006) Možnosti využití nových rozpočtových metod a nástrojů v
rozpočtovém procesu obcí ČR. In: Theoretical and Practical Aspects of Public Finance [CDROM].
Praha: Nakladatelství Oeconomica. ISBN 80-245-1032-4.
SEDMIHRADSKÁ, L. and KRAMOLIŠ, J. (2012) How accurate are revenue forecasts in
Czech municipalities? An initial analysis. In: Teoretické a praktické aspekty veřejných
financí [CD-ROM]. Praha: Nakladatelství Oeconomica. ISBN 978-80-245-1764-3.
TALÍŘ, J. (2012) Predikce příjmů obecních rozpočtů. Master thesis, University of
Economics, Prague.
295
Modeling of Tax Policy Influence on Taxpayers' Behavior
Sokolovskyi Dmytro, Sokolovska Olena
Abstract
This paper aims to propose the approach to classify the industries in terms of easiness
of tax evasion. Based on assumptions of taxpayer’s behavior, our results allow defining
the type of dependence of real tax rates on their nominal ones. We find that the graph,
describing the taxpayer’s behavior, has two key points: maximum – the optimal tax rate
(if this rate increase, the real tax revenues fall), and also the point of simple reproduction
(after achieving this level, firms stop to pay taxes at all with appropriate shifting
into informal sector or closing down). I.e. two key levels of tax burden: «optimal»
and «zero» can be defined. The values of those parameters for taxpayers operating in
different groups of industries were calculated.
Keywords
tax burden, economic behavior, tax evasion, game theory
Introduction
In the current context the developing and transition countries, including Ukraine,
face the problems of insufficient revenues, collected in different level budgets.
The economic reforms need rather more costs (i.e. revenues), than stable situation.
For this reason, any arrears in developing and transition countries create more
problems than in developed ones. The budget arrears due to direct nonpayment,
concealment of income, transferring the economic activity into illegal sector leads
to budget shortfall. In this situation the threats come from insufficiently clear planning
of tax base (number of taxpayers, their revenue), from insufficiently clear behavior
rating of taxpayers in case of changes in state tax policy and also from insufficiently
organized inspection of tax collection. All foresaid and-or can lead to default
by taxpayers from their obligations.
Our research provides the development of a game-theoretical model of interaction
between taxpayers and tax authorities.
In theory, one of the main aspects of budget nonfulfillment problem is the issue of tax
evasion, which is well known in world literature as «tax evasion problem». For purpose
of our research the studies of tax evasion by means of game-theoretic modeling are
of interest. The application of game-theoretic tools to solve the problem of tax evasion
first was made by Alligham and Sandmo (1972, pp. 323-338), Srinivasan (1973, pp. 339-
346), McCaleb (1973, pp. 287-294), Christiansen (1980, pp. 389-393) analyzed
problems of optimization of correlation between identifying tax violation and amounts
296
of penalties, and also application of those penalties to struggle with tax evasion.
Andreoni et al., (1998, pp. 818-860) using game theory and principal agent theory
suggest that penalties and audit probability are difficult to describe in compliance
models. The main aspects of tax avoidance, evasion and administration were overviewed
by Slemrod and Yitzhaki (2000). Vasin (2002), starting out from classical model
of Alligham-Sandmo-Srinivasan, handles a problem of tax revenue maximization, taking
in consideration the different variants of penalty function. The Lipatov’s model (2005)
assumes the minimal information about auditing probability and the possibility
of payoffs for tax inspectors from taxpayers. As against Vasin, who optimizes the actions
of tax authority, Lipatov, deciding the main problem of his research, resolves itself
into adopting of agents’ decisions, which are satisfactory but not optimal. Alm
and McKee (2004, pp. 297–312) using game-theoretic tools investigated compliance
behavior when returns are selected for audit based upon the deviation of each
individual’s tax report from the average report of all other taxpayers. Bilotkach (2006,
pp. 31-49) examined the tax evasion by Ukrainian enterprises through underreporting
activity. But proposed game-theoretic model will be feasible only after introducing
into the model the third person – a customer (a principal), because if the principal
and the tax inspector are all in one, than taking bribes on his part will be absolutely
irrational behavior. Congdon and Kling (2010, pp. 375-386) consider the theoretical
implications of behavioral economics for tax policy and the welfare consequences
of taxation.
Among studies in applied economics, concerned with evaluation of specific figures of tax
evasion for certain countries, for purposes of our research we examined the following
ones. Engel and Hines Jr. (1999), Gemmel and Ratto (2012, pp. 33-58) proposed
the model of behavior of rational taxpayer. Despite the feasibility of proposed
approaches, they can’t be used for our study because they characterize the individuals’
behavior, but not the enterprises’ one. De Melo et al. (1992) in their study compared
the tax systems of low-income countries (which is more close to Ukrainian realias);
however they analyzed Madagascar’s tax system as a comparative base,
which characterizes by various distortionary taxes. The application of given model
to Ukraine is complicated by reason of presence of less distorting tax system
and by reason of model’s incompleteness, which examines only the indirect taxes..
Based on analysis of research in the area of tax evasion it can be concluded that one
of the currently important problems, which now is not solved, is the problem
of optimization of tax burden, which is grounded on analysis of dependence
between taxpayers’ behavior and changes of tax pressure. Indispensably it should be
taken into account the possibility of opportunistic behavior of taxpayers. In this context
our model differs from existing ones properly by the fact that, besides of traditional
unsecured detection of taxpayers’ tax evasion by tax inspector, we also introduce
the possibility of recognition the “fair” taxpayer as a tax evading person. Consequently,
the scope of research is the influence of changes of tax burden on taxpayers’ behavior.
297
The goal of research is to define the real tax burden which depends on the nominal tax
burden falling on enterprises of different industries; also the response of enterprises
to possible tax rates changes will be analyzed.
Material and Methods
The assumptions are the following. 1) The perfect demand elasticity for firms’
production (i.e. the prices are set endogenously). 2) The taxpayers practice bounded
rationality in their actions, i.e. they try to maximize their revenues, irrespective
to means of objective achievement, taking the decisions according to their awareness.
3) The motives of behavior and principles of environment valuation are invariable for all
taxpayers in all industries.
Classification of taxes and industries. Based on economic and statistical analysis
for further research it was decided to limit the number of taxes to six: profit tax, payroll
tax (as burden on production cost, which the economic agent can manipulate), land tax,
excise tax, customs duty. One of the main taxes – the VAT, did not consider in the model,
because it has a specific procedure of assessment and refund. Further it is reasonable
to specify some taxes, notably: customs duties – on export and import duty,
since the export duty is levied only for some raw materials, while import tariff is levied
on most of products, imported in Ukraine by taxpayers; excise tax – on excise tax
on import and domestic excise tax.
So, the chosen taxes are the following: profit tax, payroll taxes, land tax, domestic excise
tax, excise tax on import, export duty, import tariff.
Principles of identification of some taxes in terms of possibility and methods of tax
evasion.
Taxes related to external trade differ by procedure of taxpaying, notably, they are paid
by event (i.e. the basis for taxpaying is only the fact of product’s border crossing)
in contrast to taxes non related to external trade (in this case the basis for taxpaying is
the coming of determined period of time). The same is for procedure of control
over taxpayers: for taxes related to external trade the control exercises directly
at the moment of product’s border crossing; for taxes non-related to external trade
the control exercises at specified time. The evasion from different taxes involves
different cost. The main rule is the following: it is easier to evade taxes, which need
technically complicated calculation of financial results, and it is more complicate
to evade taxes, which are based on simple physical or cost indicators.
The ranking of taxes by easiness of tax evasion was made as follows. The easiest is
the evasion from paying profit tax and payroll taxes. The easiness of evasion from paying
profit tax is caused by possibility of ambiguous profit calculation in accounting
documents. Moreover, large enterprises, notably in metallurgical industry
and machinery, often shift the significant part of their profit into offshore zones.
298
Based on analysis of statistical data the taxes were ranked by easiness of tax evasion,
namely: profit tax, payroll taxes, domestic excise tax, excise tax on import; export duty;
import tariff, land tax. Such ranking by easiness of tax evasion is confirmed by tax debt
profile. Particularly, one of the higher debts is the debt related to non-payment of profit
tax, and one of the smaller debts is the debt related to land tax.
Industries are grouped according to: share of different taxes, procedure of paying
of each tax in given industry, general characteristics of firms operating in given industry,
which influence on behavior of separate firm. Based on analysis of Ukrainian legislation
for each industry we established a list of taxes, paying by firms operating in this
industry.
Results and Discussion
Model of taxpayer’s behavior. In the case when the nominal tax rate increases
(and this tax affects on economics of enterprise), this leads to increase of cost and
decrease of profit – regardless the type of tax. This means, that all taxes irrespective
of their name and procedure of assessment can be regarded as profit taxes. It is
important because in practice some taxes can increase, while other ones can decrease.
In this situation only the final impact matters – did the total tax burden increase
or decrease, i.e. did the share of profit, withdrawing for social needs will be increased
or decreased.
If this share increases, the firms will tend to decrease the increment of tax burden due
to additional tax evasion, associated with additional cost. And if this cost is not
extremely high, this will result to the certain increase of scope of tax evasion and further
enlargement of gap between nominal and real tax coefficient. This can be explained
by following way: every tax rate (for example, land tax) can be increased, but tax evasion
will not take place to tax with increased rate; it will take place to those taxes,
for which the agent has a best practice to evade (for example, the profit tax and VAT).
The decrease of share of profit leads to decrease of gain, proceeded from tax evasion.
Thus let us assume that the firm will decrease a little the scope of tax evasion,
and the gap between nominal and real tax coefficient will be also decreased.
To define how exactly the relation between nominal and real tax coefficient will be
changed for each industry, it is important to take in account the value of additional cost,
related to increase of scope of tax evasion (or cost-cutting in case where the scope of tax
evasion decrease), and also the value of cost, needed to detect the evidence of tax
evasion. Because of the fact that the procedure of taxpaying provides the interaction
between agents –taxpayers and principals – the state authorities, which control the tax
collection, is expedient to model such process based on game-theoretic model
of interaction between mentioned agents.
To define the value of certain strategies of interaction, we envisage the following
299
parameters: tax base (income, profit, volumes of external trade etc, further – “income”)
(R), tax rate (τ), value (function, coefficient) of penalties for tax evasion (γ), cost
of concealment procedure, related to tax evasion (depends, particularly, on complication
of tax evasion in certain industries) (ν), cost needed to agent to maintain
the transparence of his activity (depends on industry) (μ), cost of procedure of control
for tax treatment (depends, particularly, on complexity of inspections in different
industries) (π), value of detecting by principal the real tax evasion of agents (depends
on costs of concealment of tax evasion bearing by agents, and inspection costs bearing
by principal) (p), value of detecting by principal the fictitious tax evasion of agents
(depends on costs of maintaining the transparence bearing by agents, and inspection
costs bearing by principal) (q), cost (complication) of estimation (maid by principal)
of predicted value of collected tax, frequency of tax inspections. The game, modeling
the interaction between agents in the process of taxpaying, is presented in Table 1.
Table 1: The cost matrix of «principal – agent» interaction
Agent (taxpayer)
does not pay pays
Principal
does not inspect {0; R ν− } { Rτ ; ( )1 Rτ µ− −
inspects
( ) ( ){ , 1 ;p Rν π τ γ π+ −
( ) ( )( ) }1 , 1p Rν π τ γ ν− + −
( )( ){ ( ) ( )1 , , 1 ;q R q Rµ π τ µ π τ γ π− + + −
( )( )( ) ( ) ( )( ) }1 , 1 1 , 1q R q Rµ π τ µ π τ γ µ− − + − + −
Source: Authors
The following additional assumptions of the model are:
1. The taxpayer’s incentive to evade taxes grows up with the increase of aggregate tax.
As a consequence, when the aggregate tax increases, the expectable share of taxpayers,
who come to a decision about tax concealment, also increases.
2. For each taxpayer there is a threshold; before achieving the threshold, he fairly pays
taxes, after exceeding this threshold, the taxpayer decides to evade taxes.
3. For each taxpayer there is a «threshold of reproduction on a simple scale» (τˆ).
This means that if the profit after aggregate tax is equal to zero, the taxpayer withdraws
from market (or he passes completely into shadow sector), and aggregate tax he paid is
identical to zero.
According to 1) the certain agent to determined level fairly pays the aggregate tax
(bringing an income Rτ for principal); after that he changes his strategy for tax evasion
strategy with principal income ( )1p Rτ γ+ . According to 2) the certain agent pays
the aggregate tax (fairly or with partial evasion) until the amount of his aggregate tax is
ˆτ τ< , after that the taxpayers abandons the market, zeroing the amount of paid tax.
To extend this principle for all taxpayers, it should be taken into account that
the number of opportunists increases monotonously with the increasing of tax rate.
300
Subsequently, the general income equation can be written as follows:
( ) ( ) ( )1 1 1
1 1 1 ;n n n n
realR R p R R R p Rτ τ τ γ τ τ τ γ+ + +
= − + + = − + +
( )( )1 1 n
realR p p Rγ τ τ= − − − .
Reducing this equation by R and taking into account the dependences from industry
and time, we obtain dependence of real tax rate on its nominal rate:
( ) ( ) ( )( ) ( )1 1 ,
n
t j p p b t j t jε ε ε ε ε ε ε
γ
 
= − − − 
 
% (1)
where ( )t jε
is the nominal tax coefficient for ε-th industry at moment j; pε
is
the coefficient of complication of tax evasion for ε-th industry; ε
γ is the generalized
coefficient of penalties for ε-th industry; bε
is the scale coefficient related to level
of replacement for ε-th industry; n is the coefficient of curvature of graph function.
Figure 1a. represents the type of dependence (1)
For each industry the tax structure differs. So it makes sense to assume that the degree
of easiness/complication of tax evasion for each industry is predicated upon the tax
structure, paid by firms of given industry, and does not depend directly on other aspects
of functioning of those firms.
( ) ( )( ) ( )1 1 1 1 ,
n
t j a t j t j
ε
ε ε ε ε 
+ = − + + 
 
% (2)
where ( )1a p p bε ε ε ε ε
γ= − − .
Since the coefficient of equation (2) base on statistical estimation, the possible statistical
error and the divergence of obtained numerical values, should be taken into account;
therefore it is expedient to unite the similar (by value) functions of tax burden using
the averaging of aε
values. With consideration of values of parameters, obtained after
analysis of statistical data for Donetsk region for period 2006-2010 (Sokolovska
(2011)), it appeared rational to divide all industries of region into four groups
(representing the main budget revenue generating industries in Donetsk region):
group 1: mining of fuel and energy raw materials;
group 2: production of vehicles and transport equipment; commerce; auto service;
reparation of household goods and items of personal-use; transport
and communications;
group 3: production of food, beverages and tobacco; machinery and equipment;
group 4: mining of raw materials (except fuel and energy raw materials); production
of metal and metal products; electrical, electronic and optical machinery and apparatus.
As input data for empirical estimation of our model, we used the main economic
indications characterizing: actual rates of main taxes; economic performance data across
301
main industries: sales revenues and added value; characteristics, defining the value of
various strategies of interaction between enterprises (taxpayers) and tax inspectors
(authorities). For each of those groups we obtained a value of function of real tax burden
with respect to tax base – the added value; Figure 1b represents the graphs of those
functions and also the optimal and threshold values of tax burden.
a) Analytic dependence of real tax
burden on nominal one
b) Dependence of real tax burden on nominal
one for groups of industries
Source: Authors’ investigation
The interpretation of obtained results is presented on Figure 2.
Figure 2: Correspondence between nominal and real tax burden for industries
The optimal tax
burden for taxpayers
of industries of group
1
will be
2,5% of total revenue,
while the expected tax
revenues (real tax
burden) is
1,34%
2 13,0% 7,19%
3 21,5% 11,80%
4 30,0% 16,40%
Source: Authors
It should be noted, that the some model parameters are not the statistical data and they
should be modeled in addition. The type of dependence of p and q values on ν, μ and π
variables is to be defined. To strengthen the model adequacy, the possibility of side
payment (briberies, criminal protection racket etc.) is to be considered. It is important
to include the history of interaction, the additional information about tax inspections,
0
0,02
0,04
0,06
0,08
0,1
0,12
0,14
0,16
0,18
0,2
-0,1 0,1 0,3 0,5
realtaxburden
nominal tax burden
Group 1 Group 2
Figure 1: Dependence of real tax burden on nominal one
302
the different variants of penalties etc. Also further specification and extension
for classification of taxes and industries in terms of easiness of tax evasion are required.
Conclusion
This study proposed the approach to classify the industries in terms of easiness of tax
evasion of taxpayers operating in certain industry. Based on assumptions
of their behavior we define the type of dependence of real tax rates on their nominal
ones. It is confirmed that the graph, describing the taxpayers’ behavior (depending
on change of tax pressure), has two key points: maximum – the optimal tax rate (if this
rate increase, the real tax revenues fall), and also the point of simple reproduction
(at this point, firms stop to pay taxes at all, i.e. they either shift into informal sector
or close down).We calculated the values of those parameters for taxpayers operating
in different industries.
References
ALM, J., McKEE, M., (2004) Tax Compliance as a Coordination Game, Journal of Economic
Behavior & Organisation, vol. 54, pp. 297–312. ISSN: 0167-2681.
ALLINGHAM, М. G., SANDMO, A., (1972) Income Tax Evasion: a Theoretical Analysis,
Journal of Public Economics, vol 1, No3/4, pp. 323-338. ISSN: 0047-2727.
ANDREONI, J, ERARD, B., and FEINSTEIN, J., (1998) Tax compliance. Journal of Economic
Literature, No36, pp. 818-860. ISSN: 0022-0515.
BILOTKACH, V., (2006) A Tax Evasion - Bribery Game: Experimental Evidence from
Ukraine, European Journal of Comparative Economics, No 3:1, pp. 31-49. ISSN: 1824-
2979.
CHRISTIANSEN, V., (1980) Two Comments on Tax Evasion, Journal of Public Economics,
vol. 13, No3, pp. 389-393. ISSN: 0047-2727.
CONGDON, W., KLING, J. and MULLAINATHAN, S., (2010) Behavioral Economics and Tax
Policy, National Tax Journal, vol. 62 (3), pp. 375-386. ISSN: 0028-0283.
DE MELO, J., ROLAND-HOIST, D., HADDAD M., (1992) Tax Evasion and Tax Reform in a
Low-Income Economy General Equilibrium Estimates for Madagascar, The World Bank,
WPS No 918.
ENGEL, E., HINES, J. R. Jr., (1999) Understanding Tax Evasion Dynamics, NBER Working
Paper No. 6903. ISSN 0898-2937.
GEMMELl, N., RATTO, M., (2012) Behavioral responses to taxpayer audits: evidence from
random taxpayer inquiries, National Tax Journal, vol. 65 (1), pp.33-58. ISSN: 0028-0283.
LIPATOV, V., (2005) Evolution of Tax Evasion, Munich Personal RePEc Archive, MPRA
Paper No. 966.
303
McCALEB, T. S., (1976) Tax Evasion and the Differential Taxation of Labor and Capital
Income, Public Finance, vol. XXXI, No 2, pp. 287-294. ISSN: 0033-3476.
SOKOLOVSKA O., (2011) Modeli agentov i rinkov. In: Kak obosnovat’ budgetnonalogovuiy
politiku gosudarstva? Opit nauchnogo proektirovaniya i realizacii
avtomatizirovannoy systemi soprovojdeniya budgetnogo processa na regionalnom
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SANDMO, A., (2005) The theory of tax evasion: A retrospective view, National Tax
Journal, No 58, pp. 643-63. ISSN: 0028-0283.
SLEMROD, J., YITZHAKI, S., (2000) Tax Avoidance, Evasion and Administration, NBER,
Working Paper No 7473. ISSN 0898-2937.
SRINIVASAN, Т.N., (1973) Tax Evasion: a Model, Journal of Public Economics, vol. 2, No
4, pp. 339-346. ISSN: 0047-2727.
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nalogov. Rol ogranitcheniy na chtraf, Economic Educational and Research Consortium.
304
Economic (dis)Advantage of Entering the So-called Second
Pension Pillar under the Present Czech Conditions
Vostatek Jaroslav
Abstract
From 2013, the Czech Republic allows a partial opt-out to pension savings in private
pension companies (funds). Two major studies were prepared in 2012; these studies came
to a conclusion that at most 50% of the insured will benefit from entering the so-called
second pension pillar. Both studies disregard the costs of the pension system
transformation, in contrast to the world literature and previous Czech studies. In addition,
sensitivity analysis is not included, and some of the input parameters used are optimistic.
A number of other input parameters remain unknown. Even without further analyses, it is
so obvious that entering the second pillar is quite disadvantageous for the economy
and the state. The opt-out is only effective for a small group of the wealthiest employees,
which is also caused by the current construction of the public pensions. An optimal pension
policy would comprise a division of today’s public pillar into a solidarity pillar (financed
from the state budget) and a public insurance pillar, in which old-age pensions would fully
depend on contributions made to the pillar.
Keywords
old-age pensions, pension products, FDC, NDC, pension pillars, World Bank, privatization of
pensions, Pan-European pension system
Introduction
Ideological advocates of the social security privatization rely on the unquestionable
advantages of private security compared to any security provided by the state.
The economic basis of such advantages is the market mechanism, which leads (should
lead) to lower costs of providing the relevant products. In case the given market does
not exist or function properly, it is up to the Government to establish conditions
required for the functioning thereof. However, the public sector is still dominant
in the area of old-age pensions as well as some other social security branches in most
developed countries. In practice, several social models and systems coexist, which,
in principle, compete for their dominance in individual countries. Some international
institutions – historically mainly the World Bank – play an important role in this regard.
(World Bank 1994).
In the first half of the 1990s, the World Bank generalized the Chilean pension reform
of 1981; the World Bank study tried to document the need for the public pension
privatization – whether rapid or gradual – in excess of a purely redistribution pillar.
305
This resulted in the “second” pension pillar concept, which was meant as a mandatory
private pillar, preferably in the form of personal pensions, in line with the Chilean
model. In principle, a number of pension reforms had taken place pursuant to this World
Bank “formula”, namely in the countries of Latin America and post-communist countries,
whereas the implementation of such reform usually represented a precondition
for the provision of loans by the World Bank. It is thus even more remarkable that there
were signs of great self-criticism within the World Bank during the same decade, after it
was revealed that many facts and premises included in the given publication do not
correspond to reality. In this respect, the contribution at the World Bank conference
in 1999 is well-known in the world (Orszag and Stiglitz 1999). The proceedings
of the conference (Holzmann et al. 2001) and subsequent major scientific materials
include a clause, by which the World Bank disclaims all responsibility for the content
of the publication (the publication of 1994 does not include such disclaimer).
The views of the World Bank teams, led by R. Holzmann, underwent further significant
transformations during the first decade of this century. Starting
with the 2003 conference, the World Bank has been promoting the Pan-European
pension system concept, which absolutely disregards the mandatory private pension
pillar, dominant within the 1994 concept. It has been replaced with universal social oldage
pension insurance in the form of NDC – this is (newly) an abbreviation of a nonfinancial
defined contribution scheme (Holzmann and Palmer 2006). Further scientific
activities of the World Bank in this respect concentrated on NDC schemes. In 2012,
two volumes of a new publication were published, which assess existing (clearly
positive) experience with this product /scheme/ (Holzmann, Palmer, Robalino 2012).
The Pan-European pension system comprises three different pillars: NDC scheme
at the core and two “wings” in the form of a social pillar and an voluntary private pillar.
In 2005, the World Bank “reclassified” the pension pillars: the “second” pillar
(mandatory private savings/insurance) stayed; (old)new first pillar “came
into existence”, conceived as a public insurance pillar, while the existing first pillar
from the 1994 classification was renumbered to a “zero” pillar. All this characterizes
the development trends of the pension theory and policy. We mainly mention this so
that the supporters of the public pension privatization in the Czech Republic finally start
taking interest in the principal development trends in the world. Even though it still
applies (should apply) that namely the paradigmatic pension reform should be subject
to a decision within the qualified public choice process, specific product parameters,
comparison and assessment of various pension reform options should play significant
role as well. Not ideological arguments and commercial interests.
The economic (dis)advantage of implementing the second pension pillar for its potential
participants at the expense of the public pension pillar is always a question of comparing
two different products/pillars, as they exist or should exist in a specific country.
Moreover, it is also important to consider other major reformatory measures that come
306
into question. This issue is particularly urgent in the Czech Republic, as the existing
Czech public pillar is a mixture of the first and the zero pillars pursuant to the new
classification of the World Bank. Furthermore, there is an issue concerning
the transition from the existing to the new system, which is always associated with costs
and benefits of such transition. In case the second pillar implementation is associated
with additional government budget expenditure, it is crucial to know how such costs
would be financed and what would the resulting economic and social impact be.
The objective of this paper is to compare the various methods aimed at comparing
the advantages of entering the second pension pillars under Czech and similar
conditions, within international and Czech literature. We have not attempted to create
our own model – this is not even necessary, considering the outputs of the below
mentioned studies and under the given construction of the second pillar. Therefore,
it will be a brief comparison analysis of input parameters of individual studies
and calculations as well as elements missing from such calculations.
Material and methods
The key question in comparing a funded pillar and a pay-as-you-go public pillar relates
to the investment returns that are crucial for the economics of the second pillar. Besides,
all laic and expert deliberations regarding the benefits of the pillar rely from this
parameter. Laics argue that it is more beneficial for clients to invest their contributions
on the financial market than to pay them to a public budget; even though there is some
exposure to investment risk, it is safe to assume the risk will be appropriately rewarded
in the long run. M. Feldstein (1997, p. 4) uses an example to demonstrate that with real
returns of 9% per annum, it would be possible to provide the given level of old-age
insurance with a contribution rate of 2.7%, while a pay-as-you-go scheme would require
a contribution of 19% of income – both under otherwise constant (future anticipated)
conditions of the United States. The calculation also comprises implicit returns (internal
rate of return) of a pay-as-you-go scheme. In addition to this, it is also necessary to take
into account the costs of transition to the funded scheme that would be borne
by taxpayers during the transition period and that would approximately amount to 3%
of revenue (wage). The later published simulated development of the contribution rate
foresees an increase in the current payroll tax rate in the U S by 2% of income,
which would go down to 13.8% in the tenth year of the transition, falling
below the current rate (12.4%) in the 19th year of the reform, and amounting to only
6.9% of wage in the 35th year. It would subsequently decline quickly to the target of 2%
of wage (Feldstein and Samwick 1998).
Many authors have addressed the comparison of pension products and pillars
since the publication of the study by Feldstein and Samwick. Furthermore, the situation
has significantly changed as well. OECD studies on investment returns in the most
developed countries of the world are important. The differentiation between investment
307
returns for pension funds and for clients is essential for the purpose of comparing
different products and pillars. While the average investment returns for pension funds
in G7 countries and Sweden amounted to 7.3% of assets for the period of 25 years
ending with 2007, the same returns for clients amounted to approximately 5% of assets.
The difference comprises the total overhead of the private financial sector, including
the costs of providing pensions and other transaction costs (Whitehouse et al. 2009).
No estimates are available so far of the costs of a state pension company under identical
conditions – and of the increase in returns within a nationwide public funded pension
pillar. L. Kotlikoff gives a symbolic example in this regard – at his lectures, he shows his
ultrabook, claiming that the investment overhead of a public, fully funded scheme
conceived by him would virtually equal to zero: “All investing is done by a single
government computer at zero cost.” In line with his proposal, employees
of up to 60 years of age would pay contributions of 8% of wage. Poor, unemployed,
and disabled people would also receive additional state support. Furthermore, the state
should also guarantee a nonnegative return for the entire period contributions are made
(Kotlikoff 2012). In this respect, many theoreticians and governments accentuate
the existence of a low-cost state pension company that would also service occupational
schemes; the British NEST Corporation is a current example (Barr 2012, p. 186).
Several authors have addressed the above mentioned issues in the Czech Republic.
In the 1990s, a trio of young national economists recommended a rapid transition
to mandatory private savings/insurance; the applied model relied on the effect of high
investment returns under the condition of relatively low wage increases
and also assumed a positive impact of the pension reform on economic growth (Kreidl
1998). The model was based on the aforementioned World Bank concept of 1994.
The study of M. Ježek, published in 2003, relies on the same principles; however, it more
accentuates approaches, under which public pensions represent clients’ investments
(portfolio theory) – it foresees portfolio diversification. In this approach, the public
pension pillar “comes back into play”, working with a scheme where clients may opt out
from the public pillar and enter the second pillar, depending on the benefits of such
transfer; however, they may never return back (opt-out). At the same time, M. Ježek
(2003) relies on the continuation of the existing pay-as-you-go public pension pillar,
essentially a redistributional one, which allows studying intensity of the advantages
relating to the opt-out for individual income groups. (On the other hand, V. Kreidl
assumed radical reduction of the public pension for the solidary pillar.) However,
the results are essentially identical, because most employees will switch
over to the second pillar voluntarily, due to the clear benefits of the opt-out.
The issue was later further elaborated by R. Jahoda and J. Špalek (2009), who – in their
micro-simulation model – disregard the precondition of rational behavior of employees
making decision on whether or not they should take advantage of the opt-out. The model
becomes more realistic by reducing the expected investment returns for clients
308
(to the level of 3% per annum; alternatively to 4% and 2% per annum) and – in my view
– mainly by considering the so-called noncontributory periods within the existing public
pension scheme. The importance of these noncontributory periods is significant
in the Czech Republic – they amounted to more than 20% of the total insurance periods
several years ago. Even though their importance has decreased to some extent, there are
still other elements of the existing public system construction that have redistribution
effects. The most significant fact is that a private FDC scheme, in its basic construction,
disregards these noncontributory and other similar periods, since the only revenue
of the scheme is the contribution made (paid). The same approach has now been
implemented in introducing the second pillar in the Czech Republic. This considerably
discriminates the pillar, with significant effects on its attractiveness. At the same time,
the consideration of such noncontributory periods is possible under any DC scheme – it
just needs to be known and desired. The basic conclusion of the model by R. Jahoda
and J. Špalek is the disadvantage of the opt-out for the majority of the insured, provided
they behave rationally. Moreover, they emphatically point out that other factors will also
play an important role in practice, i.e. the actual outcome may be opposite – the majority
of prospective clients may enter the second pillar in the Czech Republic as well,
with any and all consequences arising from such step, particularly for the government
budget from the perspective of time.
Following the adoption of the pension savings acts, several analytical studies have
emerged – with different focus and content – that strive to characterize the advantage
or disadvantage of the opt-out for individual income groups and for men and women.
At the beginning of November 2012, the Ministry of Labor and Social Affairs (MoLSA)
published its Actuary Report on Pension Insurance, which also comprised the analysis
of entering the second pillar. The analysis tries to cover rational decision-making
of individuals, concluding that the opt-out is beneficial for approximately 50%
of potential participants, irrespectively of their age at the beginning of the opt-out.
In this regard, the crucial criterion is the “implicit debt, which expresses the difference
between the sum of discounted insurance premium payments and the sum of discounted
benefits drawn by an individual within the pension insurance scheme. An individual
would enter the second pillar, in case the implicit debt is higher if he/she participates
than if he/she does not.” (MoLSA 2012, p. 107). The definition of implicit debt obviously
switches the order of both sums, because it should be the scheme debt. The calculation
foresees a nominal discount rate of 4% per annum, which may be seen as rather
adequate. The rational behavior of individuals will thus result in an increase of the total
implicit debt of around 7.5% of GDP or almost CZK 300 billion. The report does not
address the financing of the scheme deficit as a result of the (potential) rational
decision-making of the insured. The impact on the public finance must be even greater
in case of an extensive opt-out in excess of the rational decision-making –
i.e. a customary practice in the post-communist countries. The budget deficits will
necessary affect the economy as a whole, as well as individual citizens – whether directly
309
or indirectly: via negative impact on economic growth. Summing up these impacts, it is
clear that the pension reform cannot be considered to be beneficial for the population
and the economy as a whole, and rather considerably at that. The causes of such results
cannot be derived from the report – a large number of inputs are not available.
The MoLSA website has featured a pension reform calculator since 2011. Users will
select the nominal return of their pension fund ranging from 1.5 to 8.5% per annum,
with an expected inflation rate of 2% per annum. The precondition is that an insured
person participates in the pension scheme since the age of 20, with full contribution
(insurance) period. It is not clear whether the calculator considers noncontributory
and other similar periods, which may misrepresent the results, favoring the second
pillar. Even without this, the calculator basically cannot be used to make a decision
on entering the pillar. This may be viewed positively, because the actual investment
returns of individual clients within the second pillar will mainly depend on luck.
In the second half of November 2012, the Government of the Czech Republic published
model calculations of entering the second pillar, which apparently rely on the innovated
(albeit unpublished) version of the given calculator (Government 2012). Unlike
the calculator that is still available on the MoLSA website, this new version does not
include the differentiation of women based on the number of children; however,
there are slight differences for young men and women; based on this fact, we can
assume certain handicap is foreseen for women by reason of raising children. The most
significant difference of this government material is the fact that nominal investment
returns have been allocated to individual pension funds implemented (2.5%; 3.5%;
4.5%; and 5.5%) and that, following the calculation results, it recommends to enter
the second pillar. The overall conclusion is that approximately 50% of the insured will
benefit from entering the second pension pillar. The key problem associated with these
government calculations is the fact they ignore the transformation costs as well
as incomplete information on input parameters. Even though the explanatory text to the
calculator states that, for example, the fee for the transformation of savings to annuity
had been taken into account within the calculation, we do not know the specific amount
and whether or not it respects the well-known issue of adverse selection, etc.
In 2012, the advantages of entering the second pillar were also addressed by O.
Schneider and J. Šatava. They came to a conclusion that the opt-out may be beneficial
for up to 50% of men and 30% of women. The basic method for the assessment
in question is the calculation of the net present value (NPV) of the pension insurance
premiums and the pensions for the expected investment returns. Similarly as the MoLSA
in its materials, the IDEA study (Schneider and Šatava 2012) only reveals some
parameters of its model. It foresees zero inflation – similarly as in case of the MoLSA,
and it is also practical; contrary to this approach, the MoLSA calculator requires inputs
in the form of a nominal investment return, whereas the expected inflation rate amounts
to 2% per annum; however, the resulting pension amounts are quoted at the level
of existing wages. Furthermore, the IDEA study assumes wage increases of 3%
310
per annum – it could even be more (4%). Investment returns within the second pillar
are assumed at 3% per annum (in real terms) – this is an optimistic value. The NPV
calculations take into account a 3% discount rate, which is not significant for relative
advantage calculations. The key problem, which is not discussed, is the expected amount
of an annuity in the amount of one twentieth of the savings – the relation namely
to the calculated costs of providing the annuity, which are reflected in the net
investment returns for the above mentioned OECD studies, is not clear.
Results and discussion
The previous chapter shows that the current Czech studies have several significant
flaws. Firstly, preconditions for model calculations – model parameters used – are
insufficiently specified. For example, data concerning the annuity calculation are
missing, with the exception of the mortality tables used. However, it is generally known
that the annuities within the private insurance sector are considerably more expensive
than within the public sector – just considering the adverse selection in case of possible
selection of another product (other than an annuity). I have not found a specific estimate
of such parameters, which very significantly affects the entire outcome of assessing
the benefits of entering the second pillar, in any background materials to the Czech
pension reform. The annuity price also reflects the mechanism of the private annuity
indexation.
The current Czech studies also tend to use optimistic assumptions regarding investment
returns; in any case, this type of parameters should be discussed, with the use
of international literature. Sensitiveness analysis is rarely performed. In case we
also assume today’s wage level in the future, it is necessary to clearly specify, whether
this means an assumption of zero-growth of real wages or whether it is only
a retroactive recalculation of real wages to ensure better comprehensibility by readers,
because the assumption of zero-growth of real wages renders the calculations more
beneficial in favor of the second pillar.
An absolutely crucial problem is the ignoring or underestimating of the transaction costs
of transition to the funded pillar. This does not only concern the specification
of the government budget deficit for individual years, but also the need to estimate
the impact of increasing taxes necessary to cover such deficits on the development of
the economy – GDP, unemployment, collection of pension insurance premiums,
and public pensions as such. A downright cynical approach to resolving this problem is
the assumption of financing such government budget deficits (as a result of partial
privatization of public pensions) by an immediate reduction of public pensions, which is
subsequently also reflected in the “benefits” of the opt-out (Hovorka 2012).
If we take into account the conclusions of all the aforementioned analyses, it is clear that
– considering all the missing elements of such analyses – almost all potential
311
participants will be disadvantaged by entering the second pillar: whether directly
or indirectly – considering the fiscal and national economic implications.
When assessing the economic advantages of entering the second pension pillar, it would
be much easier to divide the existing Czech public pension pillar into a zero pillar
and a first pillar, in line with the above mentioned classification of the World Bank.
The zero pillar would automatically drop out of the analysis. The easiest approach would
be to compare the first pillar of a NDC type with a combination of an NDC scheme
and a second pillar of an FDC type. In line with the recommendations given
by international experts, the public pension reform would also comprise the reduction
of the wage ceiling from today’s 400% of average nationwide wage to 125-200%.
The comparison would then be considerably easier.
Conclusion
Comparisons of potential advantages of two alternative products – i.e. assessment
of benefits associated with the opt-out to the second pension pillar – should relay
on the comparison of two comparable products, if possible. An optimal competitor
of the Czech second pillar is the universal social old-age pension insurance in the form
of an FDC scheme, whereas international experiences explicitly suggest that – with other
conditions remaining constant – the given public insurance pillar is undoubtedly more
beneficial, both for clients and for the state. In this regard, it makes sense to further
analyze solely the specific potential form of such public pillar.
In case both the government and the pro-government studies have concluded that
at most 50% of the insured will benefit from entering the second pillar, while ignoring
the implications of the reform for the government budget and the economy as a whole,
it is apparent that the opt-out is only beneficial for a very small group of the wealthiest
insureds. Disregarding the tendency to use optimistic parameters in such studies, it is
clear that the Czech pension reform is economically pointless – from the perspective
of the majority of the insured as well as the state. This actually renders any further
studies of economic benefits associated with the reform unnecessary.
References
BARR, N., (2012) Economics of the Welfare State. 5th Edition. Oxford: Oxford University
Press. ISBN 978-0-19-929781-8
FELDSTEIN, M., (1997) Transition to a Fully Funded Pension System: Five Economic
Issues. NBER Working Paper 6149. Cambridge, Mass.: National Bureau of Economic
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w6149. pdf?new_window=1
FELDSTEIN, M., SAMWICK, A. (1998) The Transition Path in Privatizing Social Security.
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nber.org/chapters/c6251.pdf
GOVERNMENT, (2012) Modelové propočty výhodnosti vstupu do II. pilíře penzijního
systému (Model Calculations concerning the Benefits of Entering the Second Pension
Pillar). [cit. 2012-11-20] Available from WWW: http://www.mpsv.cz/files/clanky
/13920/Varianty_reforma_penzi.pdf
HOLZMANN, R. et al. (eds.), (2001) New Ideas About Old Age Security Toward Sustainable
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HOVORKA, J., (2012) Důchod od státu klesne na 6500 Kč. Komu pomůže reforma? (The
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penize/clanek.phtml?id=749945
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List of Participants
SURNAME FIRSTNAME ORGANIZATION COUNTRY E-MAIL
BEBLAVÝ Miroslav
Comenius University in Bratislava, Faculty of Social and Economic
Sciences
SVK beblavy@governance.sk
BERNÁ Zuzana Masaryk University, Faculty of Economics and Administration CZE zuzana.berna@econ.muni.cz
DEDOVA Mariya National Research University Higher School of Economics RUS mdedova@hse.spb.ru
DOSTÁL Jakub Masaryk University, Faculty of Economics and Administration CZE jakdostal@volny.cz
FIŠAR Miloš Masaryk University, Faculty of Economics and Administration CZE milos.fisar@mail.muni.cz
GODAROVÁ Jana Masaryk University, Faculty of Economics and Administration CZE hamsova@mail.muni.cz
HODŽIĆ Sabina Faculty of Tourism and Hospitality Management in Opatija HRV sabinah@fthm.hr
HORŇÁKOVÁ Michaela Masaryk University, Faculty of Economics and Administration CZE 76105@mail.muni.cz
HRŮZA Filip Masaryk University, Faculty of Economics and Administration CZE phillipus@mail.muni.cz
JAHODA Robert Masaryk University, Faculty of Economics and Administration CZE jahoda@econ.muni.cz
JURČÍK Radek Mendel University in Brno, Faculty of Business and Economics CZE radek.jurcik@email.cz
KOPPITZ David MEPCO CZE david.koppitz@mepco.cz
KOPRENCKA Luciana University of Vlora ALB lucianakoprencka@yahoo.it
KREBS Vojtěch University of Economics in Prague, Faculty of Economics CZE krebs@vse.cz
MELECKÝ Aleš VŠB-Technical University of Ostrava, Faculty of Economics CZE ales.melecky@vsb.cz
MERTL Jan The University of Finance and Administration CZE honza.mertl@gmail.com
MUŽIK Roman
Comenius University in Bratislava, Faculty of Social and Economic
Sciences
SVK muzik.roman@gmail.com
NAVRÁTIL Jiří Masaryk University, Faculty of Economics and Administration CZE Jiri.Navratil@econ.muni.cz
NEMEC Juraj Masaryk University, Faculty of Economics and Administration CZE juraj.nemec@umb.sk
SURNAME FIRSTNAME ORGANIZATION COUNTRY E-MAIL
OTÁHAL Tomáš Mendel University in Brno, Faculty of Business and Economics CZE Tomas.otahal@mendelu.cz
PAVLÍČEK Tomáš University of Economic in Prague CZE tpavlicek@centrum.cz
PAVLÍK Marek Masaryk University, Faculty of Economics and Administration CZE pavlik@econ.muni.cz
PETANAJ Migena University of Vlora ALB migenapetanaj@hotmail.com
PEVCIN Primož University of Ljubljana, Faculty of Administration SVN primoz.pevcin@fu.uni-lj.si
PLAČEK Michal Masaryk University, Faculty of Economics and Administration CZE Michal.Placek@econ.muni.cz
POSPÍŠIL Miroslav Masaryk University, Faculty of Economics and Administration CZE Miroslav.Pospisil@econ.muni.cz
PROUZOVÁ Zuzana Masaryk University, Faculty of Economics and Administration CZE prouzova.z@centrum.cz
PRŮŠA Ladislav The University of Finance and Administration CZE Ladislav.prusa@vupsv.cz
PŮČEK Milan MEPCO CZE milan.pucek@seznam.cz
RICHEA
Maria-
Magdalena
National School of Political Science and Public Administration ROU richeamaria@yahoo.com
ROSENBERG Zdeněk Masaryk University, Faculty of Economics and Administration CZE Zdenek.Rosenberg@gmail.com
SEDMIHRADSKÁ Lucie University of Economics in Prague, Faculty of Economics CZE sedmih@vse.cz
SOBOTKA Martin University of Pardubice, Faculty of Economics and Administration CZE martin.sobotka@upce.cz
SOKOLOVSKYI Dmytro
Institute of Industrial Economics of National Academy of Sciences
of Ukraine
UKR dmy.falko@gmail.com
SOKOLOVSKA Olena
Institute of Industrial Economics of National Academy of Sciences
of Ukraine
UKR elena.lukyanenko@gmail.com
STAŇOVÁ Ľudmila
Comenius University in Bratislava, Faculty of Social and Economic
Sciences
SVK ludmila.stanova@gmail.com
STAROŇOVÁ Katarína
Comenius University in Bratislava, Faculty of Social and Economic
Sciences
SVK staronova@governance.sk
STRUK Michal Masaryk University, Faculty of Economics and Administration CZE struk@mail.muni.cz
SURNAME FIRSTNAME ORGANIZATION COUNTRY E-MAIL
SVIDROŇOVÁ Mária Matej Bel University, Faculty of Economics SVK maria.svidronova@umb.sk
SZALAYOVÁ Angelika Comenius University in Bratislava, Faculty of Natural Sciences SVK szalayova@hpi.sk
ŠKARABELOVÁ Simona Masaryk University, Faculty of Economics and Administration CZE simona@econ.muni.cz
ŠPAČEK David Masaryk University, Faculty of Economics and Administration CZE david.spacek@econ.muni.cz
ŠPALEK Jiří Masaryk University, Faculty of Economics and Administration CZE spalek@econ.muni.cz
ŠPALKOVÁ Dagmar Masaryk University, Faculty of Economics and Administration CZE dasa@econ.muni.cz
TŮMOVÁ
ALMANI
Kateřina Masaryk University, Faculty of Economics and Administration CZE 118709@mail.muni.cz
VACEKOVÁ Gabriela Matej Bel University, Faculty of Economics SVK gabriela.vacekova@umb.sk
VOSTATEK Jaroslav The University of Finance and Administration CZE jaroslav.vostatek@vsfs.cz
WAWROSZ Petr Mendel University in Brno, Faculty of Business and Economics CZE Petr.wawrosz@centrum.cz
WILDMANNOVÁ Mirka Masaryk University, Faculty of Economics and Administration CZE mirkaw@econ.muni.cz
Comments
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CURRENT TRENDS IN PUBLIC SECTOR RESEARCH
Proceedings of the 17th
International Conference
organised by the Department of Public Economics,
Faculty of Economics and Administration, Masaryk University
Editors: Lenka Furová, Dagmar Špalková
Technical editor: Lenka Furová
Editorial Board: P. Pirožek, L. Blažek, E. Hýblová,V. Hyánek, M. Kvizda, J. Maryáš,
J. Nekuda, D. Němec
Published by Masaryk University, 2013
1st edition, 2013 – number of copies 120
Printed by:Tiskárna KNOPP, Černčice 24, 549 01 Nové Město nad Metují
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