Journal of US-China Public Administration · Journal of US-China Public Administration Volume 10, Number 10, October 2013 (Serial Number 96) Contents Social Governance The Pragmatic

Volume 10, Number 10, October 2013 (Serial Number 96)

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Public Administration

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Journal of US-China Public Administration

Volume 10, Number 10, October 2013 (Serial Number 96)

Contents

Social Governance

The Pragmatic Research Approach: A Framework for Sustainable Management of Public Housing Estates in Nigeria 933

Paulinus W. Ihuah, David Eaton

The Reform of the Local Administration in Spain in Terms of Population 945

Manuel Octavio Del Campo Villares, Francisco Jesús Ferreiro Seoane

Flexible Industrial Land Policies on Exit Strategies in the Rapid Transition Period: A Case Study of Hongkou District, Shanghai 958

Jun Wang, Hao Chen

Ecological Management of Beijing-Tianjin-Hebei Urban Agglomeration: The Tragedy of Commons and System Solution 970

Wang Bo, Liyun Xi

Solitary Sunnah and Its Legislative Value Among the Muslim Jurists: Readings of Selected Examples 982

Abdurezak A. Hashi

Management Issues and Practice

Correlation Between Employee Bonus and Company Performances: FTSE TWSE Taiwan 50 Index Companies 993

Tzu-Lan Kuo, Pei-Ju Lucy Ting, Kuang-Hui Chiu

Effects of Strategic Management Accounting Techniques on Perceived Performance of Businesses 1004

Semra Aksoylu, Ebru Aykan

System Analysis of the Banking Systems of the USA and the EU 1018

Nikolaj Moldenhauer

Vocational Guidance Need 1028

Ingrida Veipa, Solvita Kozlovska

Journal of US-China Public Administration, ISSN 1548-6591 October 2013, Vol. 10, No. 10, 933-944

The Pragmatic Research Approach: A Framework for

Sustainable Management of Public Housing Estates in Nigeria

Paulinus W. Ihuah, David Eaton University of Salford, Greater Manchester, United Kingdom

The paper is based on a research which tries to explore, explain and develop a framework that would be used in the

sustainable post-construction management of public housing estates. Literature review provides evidence of the

extent of unoccupied, unfinished, vandalized, and abandoned social housing estates in the Niger Delta region of

Nigeria, signifying that the availability and management of decent public housing estates in the Niger Delta of

Nigeria are lacking because the post-construction management practice is not as good as it should be. The aim of

this paper is to assess and set out the methodology and rationale for adopting a strategy to the research. It further,

thus, examines case study design strategy that follows exploratory and explanatory methods and other research

worldviews as alternatives in philosophy, approach and in research methodology. In addition, the paper draws out

the significance of pragmatism as current practical world thinking that is a better answer to a research study aim,

objectives and questions which focus on real-life situations. It argues that the development of a framework for use

in the post-construction management of social (public) housing estates in a sustainable manner is needed; and that,

using a pragmatic philosophical perspective and approach of worldview through a mixed method (qualitative and

quantitative) in a case study design line of inquiry in the research methodology would be a better proposition to

adopt in the study. The paper recommends that the issues of sampling, validity, reliability, the relationship between

the researcher and the subject and other research quandaries are vital when deciding on an appropriate method.

Keywords: housing maintenance, pragmatic approach, research methodology, stakeholders involvement,

sustainability

The rationale behind this paper is to explore and examine an appropriate research approach to adopt as to successfully develop a framework for public housing estates sustainability. The research study upon which the paper is based focuses on sustainable management of social (public) housing estates in Niger Delta, Nigeria. Sustainability provides that a sustainable development must be one that “meets the needs of the present without compromising the ability of the future generations to meet their own needs” (Bruntland, 1987; as cited in Cooper & Jones, 2008; Brandon & Lombardi, 2011, p. 21). In this sense, sustainability provides for a framework to help ensure long-term ecological, social, and economic growth in society (Ding, 2008) and to ensure a better quality of life for everyone now and for generations to come. In that case, social (public) housing estates need to have a strategy for their sustainable management after commissioning. In a similar

Corresponding author: Paulinus W. Ihuah, M.Sc., The School of the Built Environment, University of Salford; research fields:

real estate development and management. E-mail: [email protected]. David Eaton, Ph.D., professor, The School of the Built Environment, University of Salford; research fields: construction

economic and finance.

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A FRAMEWORK FOR SUSTAINABLE MANAGEMENT OF PUBLIC HOUSING ESTATES

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context, sustainable post-construction housing management will provide the management of the operation and the control of social housing estates facilities, stakeholders and the surroundings, on behalf of the client or property owner, as well as, providing for the monitoring, assessing, maintaining, evaluating and accounting of a social housing estate’s usable life and condition (Frej & Pesier, 2003). But, in the developing countries, the expanding urban areas and population face lack of adequate social housing provision and management, and this situation is getting worse yearly (Ha, 2008). Also, 60%-80% of the estimated population of developing countries live in shanty towns, slums and uncontrolled environments (Wapwera, Parsa, & Egbu, 2011; UN-HABITAT, 2006). Jiboye (2004) and UN-HABITAT (2006) indicated that there was no evidence of improvement in low-income groups’ social housing estates conditions in terms of affordability, tenure, standard and access to services. The 2004 Nigerian housing statistics indicated that about 70% of Nigerians are homeless (FGN, 2004) and this situation has not changed till today (Wapwera et al., 2011). Above all, there is evidence that the social housing estates provided are now unoccupied, vandalized, uncompleted, and abandoned (Fatoye & Odusami, 2009). This situation can be found particularly in the Niger Delta where all the features and benefits of housing highlighted above are suspected as being lacking (Ebie, 2012). As a result, some of the social (public) housing estates have become white elephants within the very poor or low-income people that desperately need it and no consideration of a strategic process for the sustainable management of the social (public) housing estates has yet been developed. Further, it is predicated that wider institutional issues, stakeholder’s involvement and good housing maintenance practices are lacking, and as yet, no framework or model to achieve this situation has been developed. As a result, this research seeks to explore how these concepts could be merged and operate in a framework which could provide the social (public) housing estates to be managed in a sustainable manner in their post-construction era. This is also supported with the argument that the mere construction of social housing estates is not sufficient on its own, but, what matters much more is sustaining the assets (social housing units) created by the improvements (Ihuah & Fortune, 2013; Franks, 2006). This provides the opportunity to see beyond the project construction phases, and to appreciate the benefits of operating such housing estates as more than just as investment (Franks, 2006). Housing on its own and in the built environment amongst others is very important as it provides: accommodation; jobs; education; and health services; which in the research context must be: accessible; safe; hygienic; aesthetically pleasing; and also sustainable (Jiboye, 2011). But to address the issues, which ensures the purported benefits, as mentioned before, a methodological determination of choice of research strategy for the research is necessary. Methodological conceptualisations for a research topic is vital as it informs the researcher of the different philosophical worldviews, approaches, designs, methods and analytical techniques that are available for use in a research work (Saunders, Lewis, & Thornhill, 2009); as well as provides a researcher an opportunity to make decisions on how to address a research problem.

Rational for the Study Housing which is one of the basic needs of the human remains imperative as it ensures a well, satisfied

and pleasurable living to people in the world (Oyebanji, Akintoye, & Liyanage, 2011). Accessing this housing is continuously a major challenge facing some of the countries in the continent. Many stakeholders in the housing sector are putting various measures to alleviate this deploring situation, but so many are still struggling in the issue and the citizens cannot appropriate to be homeless always. Several researches in the housing sector have focused mainly on the provision (housing delivery), but the question that needs to be asked is: “what are


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we delivering, if we cannot maintain or put a plan to sustain what have been delivered”. However, researching in this context must follow the ethical research processes and issues such as protecting and promoting confidentiality of tenant participation in the research (Batchelor, Owens, Read, & Bloor, 1994) and ensuring the prudence of the information collected, in accordance with the area of the research. Post-construction management of social housing can be aligned to an aspect of facility management (property management), and Amaratunga, Haigh, Sarshar, and Baldry (2002) censured that research in facility management had been based on undependable approach when interpreting real world problem. Therefore, research in social housing estates deficits and problem should hence come up with a research strategy that will actually validate the fault principles when contextualised in a different real world problem using the underlying assumptions in the methodology of research, such as in the case of this study. In this sense, adopting a research method requires the understanding of the various interfaces in public housing management and links it to the appropriate research design for a better solution. Adopting a particular method, as earlier mentioned, is to give considerations to two major factors including the topic to be research and the specific research question(s) (Saunders et al., 2009; Yin, 2009). Also, it is very necessary to consider other research world views that are within the research methodology before choosing a particular approach for a study. Some researchers in the housing research study have adopted quantitative or qualitative method, such as Aluko’s (2012) study in the effect of Land Use Act on sustainable housing provision in Nigeria, and Jiboye’s (2011) study on sustainable housing development in Nigeria respectively. However, whatever single or mixed method adopted for a study is not much more important, rather the method should be good enough to actually fulfil the aim and objectives of the research at hand.

Methodology The paper adopts a qualitative approach with justifications presented from relevant peer reviewed papers,

referred journals and textbooks on the different elements of research methodology. A content analysis tool was used to compare and contrast various dimensions from the selected secondary materials. Participant observation and document scrutiny also played a key role. Another contributing method of data collections to this paper is through face to face workshop attendance, e-lectures and class room lectures participation in research methodology. The discussions and conclusion are based on the various research philosophies and the assumptions underlying each of the research approaches, designs, and methods, as well as contextualised in procession to this present research study purpose.

The Research Philosophical Paradigms Research methodology is a philosophical stance of worldview that underlies and informs the style of

research (Sapsford & Jupp, 2006). In another view, Collis and Hussey (2003) and Creswell (2009) considered research methodology as the overall approach to the design process of conducting research including all phases from the theoretical underpinning to the collection and analysis of data. Therefore, it could be deduced from the above that the philosophical worldview of things is vital to the meaning of research methodology. Hence, research philosophy is concerned with the way in which things are viewed in the world (Saunders et al., 2009; Yin, 2009). It addresses the assumptions that support the research strategy and the methods chosen as part of a research paradigm. In addition, our practical experiences, relationship to knowledge and the process by which they are known and developed in real-life situations (Saunders et al., 2009) also matter. Therefore, it helps to


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clarify research design, to know which research design will work and which will not, and to identify and even create a design that may be outside the researcher’s knowledge supported by past experience (Easterby-Smith, Thorpe, & Lowe, 2003). But understanding research philosophy and agreeing to adapt to a particular perspective for a proper research paradigm are probably contested as the first step in setting other research parameters and choices to a study (Kagioglou et al., 1998). As a result, in discussing the different research philosophies, it is important to have the knowledge that they are lead by a set of assumptions which could be ontological, axiological or epistemological. They have different assumptions which will influence the way in which the research process is diagnosed and will provide a route to understanding the way to approach research in a field of endeavour (Saunders et al., 2009). However, many researchers have a preference to understand these complex philosophical perspectives within the context of the two main traditions of research inquiry, generally acknowledged as quantitative and qualitative lines of inquiries (Bryman, 1992; Creswell, 2009; Saunders et al., 2009). From the above, it is clear that these research methods cannot be understood in isolation from the research philosophies (ontology, epistemology, axiology and pragmatic) stance of the researcher. Therefore, the four major aspects (though summarised in Tables 1 and 2) of thinking about research philosophy and the postulations as suggested by Creswell (2009), Yin (2009), and Saunders et al. (2009) needed to be considered.

Ontology This questions the assumptions that need to be made about the way in which the world works and

concerns itself with the nature of reality (Saunders et al., 2009). The ontological assumption in qualitative research views the problem of reality as that constructed by the researcher involved in the research circumstances, i.e., “constructivism” (Creswell, 2009). This implies that the researcher, those individuals being researched and the reader interpret information, i.e., “interpretative” (Creswell, 2009) differently. However, in quantitative research, it views realities as “objective” (i.e., “objectivism”) and it is a study independent of the researcher (Saunders et al., 2009). This can be measured by using questionnaires or another instrument and indicates “positivism” (Saunders et al., 2009; Creswell, 2009).

Epistemology This questions the assumptions of what is acceptable as knowledge and that which constitutes an

acceptable knowledge in a field of study (Saunders et al., 2009). It argues that in a qualitative approach, the researcher networks with those they learn from, interviewing or observing participants over a long period of time for a genuine partnership for the study, i.e., “interpretive” (Creswell, 2009; Saunders et al., 2009). However, in a quantitative approach, it questions the relationship of the researcher to that being researched (Creswell, 2003). It makes it clear that the researcher should remain distant and independent from that which has been researched, therefore, attempting to control for bias, selecting a systemic sample, and hence, being objective in assessing a situation, i.e., “positivism” (Creswell, 2009).

However, in debates about the research process, Saunders et al. (2009) argued that it may be appropriate to start by asking the question “do you need to adopt one philosophical position” in a study even though ontology and epistemology have a ready for action loop in research. Also, that if it is important to consider the roles values play in research generally, and within a chosen research paradigm (Saunders et al., 2009). The rationale behind this as suggested by Saunders et al. (2009), Tashakkori and Teddlie (2003), and Creswell and Plano Clark (2011) is that sitting comfortably in one position or the other is not idealistic as some research questions would require the combination of methods in answering them. Also, epistemology provides the understanding


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whether the work is influenced by the researcher or not. Therefore, it is in this circumstance that the following section of the study considers axiology, pragmatism, and realism as necessary for this research.

Axiology This philosophical issue questions on what roles values play in research choices, as well as emphasis more

on value judgements capability of a researcher (Saunders et al., 2009). It provides that in a qualitative research, the researcher accepts as valid the value-laden nature of the study and enthusiastically reports his/her values and prejudice for, as well as the value of knowledge provided from the field by the informants (Creswell, 2003; Saunders et al., 2009). Hence, the choice of what to do, and how to do it, are determined by human beliefs and experiences (Easterby-Smith et al., 2003). Conversely, in a quantitative paradigm it provides that the researcher’s values should be kept out of the study. This implies that the researcher’s choice of what to do, and how to do it, is determined by objective criteria (Easterby-Smith et al., 2003). Finally, it is the philosophical perspective, approach, method and data collection techniques choice that is determined by one’s values (Saunders et al., 2009).

Pragmatism This philosophy concerns thinking that choosing between one position (epistemology, ontology, or

axiology) and the other is somewhat unrealistic in practice; and it is argued that the most important determinant of which position to adopt is the research questions (Creswell & Plano Clark, 2011; Saunders et al., 2009). This is particularly relevant where the research question does not suggest clearly that either a positivist or interpretive philosophy should be adopted in an inquiry, for example, within an epistemological perspective. Therefore, in this philosophical quarrel the uses of both qualitative and quantitative methods to resolve a real-life world challenge are commended.

Table 1 Summary of the Various Research Methodological Perspectives Research philosophy Perspectives

Ontology Objectivism (external relationships) Constructivism (internal relationships)

Epistemology Positivism-observer is independent of that being researched Interpretative (observer is dependent of that being researched, which implies a social phenomenon)

Axiology Value neutral (value free) Value biased (value laden)

Pragmatism Neither positivism or interpretative; and or, value free or value laden, but combination of all to address a social real-life issues

Design Archival research, grounded theory, experiment, survey, ethnography, case study, action research Strategy Opinion, empirical, archival, analytic Method Multi-method, mono-method, mixed method

Data collection Literature review, structured interview, semi-structured interview, questionnaire, qualitative, quantitative

In research methodology and philosophy, quantitative and qualitative approaches are the two main traditional methods, but, today the mixed method approach exists, which is also known as deductive/inductive (Creswell, 2009). But, a choice of a particular method is influenced by certain factors such as: the topic to be researched; the objectives; and the specific proposed research questions. Creswell (2009) added that other factors such as sustaining personal interest was publishable in scholarly journal, and developing new ideas in the scholar literature was equally important.


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Table 2 Summarised Comparison of Research Viewpoints in Social Sciences Research Interpretative Positivism Pragmatism Realism

Ontology

Things are socially constructed leading to subjective reasoning which may change with multiple realities

Emphasises that researcher is external, objective and independent of that study

Researcher is external, multiple, and the view is that chosen to best answer the research questions

Researcher is objective and exists independently of human mind but interpreted out of social situation

Epistemology

Toward subjective meanings of social phenomena, looking at details and realities behind it with motivating actions

Things are observed to prove credibility to facts, focusing on causality and law generalisations thereby reducing phenomena to simplest elements

Either subjective or objective meanings can provide facts to a research question; focus on practical application to issues by merging views to help interpret data

Belief that observing an event proves credibility of facts; scarce data, facts creates imprecision and misinterpretations; focus only within context or contexts for explanations

Axiology

The research is value bound; such that the researcher is part of what is being studied, not isolated from the studied and will be subjective

The research is value free, hence independent of the data and objective in the analysis of the data

Values play a vital role to interpret results using subjective and objective reasoning

The research is value laden; hence, the researcher is biased by world views, culture, values, experiences and will affect the results/research

Approach Qualitative Quantitative but can still use qualitative

Uses both qualitative and quantitative

Approach adopted depends on the research matter

Method Mixed or multiple methods Mono-method but can use mixed in certain cases Mixed or multiple methods

Method to use is based on the research problem or situation

Qualitative, Quantitative, and Mixed Methods Approaches A qualitative research approach is an investigation process of a sympathetic study into a social or a human

problem, focused on edifying a diverse, holistic depiction, fashioned with words, reporting comprehensive views of informants, and conducted in a normal setting (Creswell, 2009). Therefore, it is described as constructivist or naturalistic or interpretative and inductive techniques of research study which try to explore a subject when the variables and the theory base are not known (Creswell, 2009). However, a quantitative research approach is an investigation into a social or human problem, based on testing a theory composed of variables, measured with numbers, and analysed with numerical procedures, in order to determine whether the prognostic generalizations of the hypothesis hold true (Creswell, 2009). As a result, it is objective leading to positivist and deductive reasoning in a research study (Saunders et al., 2009; Yin, 2009). For the mixed method approach several definitions exist: it is a research inquiry that employs both qualitative and quantitative approaches in a research work for the purposes of breadth and depth of understanding and partnership (Johnson, Onwuegbuezie, & Turner, 2007). Creswell and Plano Clark (2011) added that the indispensable premise of mixed method design was that the use of qualitative and quantitative, in rapport, would provide a better understanding of the research problem than the use of either one method alone in a study. This is argued to be one, if not, the most of the central premise of the pragmatic philosophical reasoning in research today (Tashakkori & Teddlie, 2003).

Case Study Strategy and Other Design Alternatives According to Yin (2009, p. 18), a case study was “an empirical inquiry that investigates a contemporary

phenomenon within its real-life context especially when the boundaries between the phenomenon and context


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are not clearly evident”. In addition, Oates (2006) presented four elements characterized by the case study research:

(1) Focus on in-depth rather than breadth; (2) Natural setting: the instance is studied in its natural setting, not in a laboratory; (3) Holistic study: the researcher recognizes the complexity of social truths; (4) Multiple sources and methods: the researcher employs a number of data sources. Furthermore, Yin (1994) classified case studies into three main categories: (1) A descriptive study: which aims to describe and analyse a particular phenomenon. Hence, Pare (2001)

indicated that social scientific studies prefer to use the descriptive case study more than others; (2) An exploratory study: this is used to define the questions as well as to assist a researcher to understand

a research problem. Yin (1994) clarified that this method occurred when the research topic was relatively new, or when the topic suffered from a shortage of information and literature;

(3) An explanatory study: this provides further explanation than a descriptive study. It is “trying to explain why events happened as they did or particular outcomes occurred” (Oates, 2006, p. 143).

There are for example many different research design alternatives which can be applied in a research study such as: experiment, survey, case study, action research, grounded theory, ethnography, and archival research (Yin, 2009; Saunders et al., 2009; Creswell, 2009). As such, a critical distinction of these research design alternatives is vital before choosing a particular design strategy and it will help to elicit the various potentials of each alternative.

In the case of experiment and survey, they are governed by positivist and objectivism philosophy but case studies, action research, ethnographic research, grounded theory, and archival research are governed by interpretive and constructivism thinking. The experiment and survey take the positivism and objectivism propositions in term of epistemological and ontological undertakings. The experiment and survey are undertaken under a controlled environment (Baker, 2001). In experiment and survey, investigating and observing fact and the context are difficult because of the constraint of the number of variables (Yin, 2009). Therefore, these alternatives are not justifiable for use in this study as it will undermine the aim and objectives of this study.

In ethnographic research design, it provides an insight into the norms and values of human, social and organisational aspects of social-cultural phenomenon (Saunders et al., 2009). In addition, it takes a prolonged time though this may be flexible, particularly when involved in a real-life setting (Burns, 2000; Creswell, 2009). Hence, it will not be appropriate for this research based on its criteria and characteristics which are inconsistent with the nature of this work. The action research design alternative would not be a better strategy as the researcher is expected to influence and change the attitudes and behaviours of the informants in a phenomenon. This will again detract from the purpose of this research. Furthermore, grounded theory research design will not be appropriate to use as its approach allows data to be collected without an initial theoretical framework and tested before a conclusion is drawn (Creswell, 2009). In archival research design, it only allows research questions which focus on the past and changes over time to be addressed and it is purely limited by the nature and condition of the information held in the archive relevant to the work. For example, some of the data could be held for confidential reasons or the researcher may be refused access to it. Therefore, in line with this research study, using archival strategy will necessitate the research analysis to only be on the accessible or available data, which again will detract from the rationale and goal of the research work; hence it is not a


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suitable design for the study. Although some of these methods, such as action research, could potentially be used in this study, the aim,

objectives and questions, as well as the philosophical perspective opted for the study would warrant the use of case study approach in the research. For instance, case studies answer better the “how”, “why” and “what” questions of this study which helps to achieve the aim and objectives of the research (Yin, 2009). In addition, the case study method requires multiple sources of evidence including documentation, archival records, interviews, direct observations, participant observation and physical artefacts. The case study strategy provides the opportunity that the study is undertaken in a manner that incorporates the views of the people (participants) in the field of study (Yin, 2009). A case study method helps to deal fully with all varieties of evidence, for example, interviews, documents and questionnaire (Yin, 2009). Further, case study design does not provide opportunity for the researcher to influence or change the attitudes or procedures of the participants or the environment and yet it permits the researcher to explore into the behavioural patterns of the participants (Yin, 2009). A case study method through the exploratory and explanatory strategy offers in-depth details and potential understanding of the various impacts of independent variables to dependent variables. As a result, the case study design will offer a better opportunity to develop a framework for sustainable management of the social housing estates in the Niger Delta. Therefore, since the case study criteria and characteristics provide consistency and would not undermine the nature of this research, it is a preferred design option compared to the other design alternatives earlier stated for the study. In addition, taking an interpretive stance in the pragmatic philosophical perspective, it would claim that the most suitable method for conducting empirical research in an interpretive tradition is the exploratory and explanatory case study (Yin, 2009). Furthermore, as an interpretive, inductive and deductive form of research in an epistemological preposition, case studies explore the details and meanings of experience and do not usually attempt to test a priori hypotheses (Yin, 2009). Therefore, the study is based on an exploratory and explanatory case study approach, using a number of qualitative and quantitative data assembling instruments, including a questionnaire, interviews, and documentation. The qualitative research model has been chosen because of the basic philosophical assumption that people, their behaviour, and their experience play a significant factor in this research, whereas the quantitative research model has been chosen because of the significant amount of data and feedback it provides, the greater access it allows to participants, and the low cost involved.

Discussion on Why and How Pragmatism—Mixed Method—Paradigm Fits the Study As earlier discussed, the purpose of providing such fundamental underpinnings on the various research

philosophies and approaches is to elicit the potential assumptions of each, which guides the choice of a particular paradigm for this research. As a result, the philosophical perspective adopted by this research as in Figure 1 is that of a pragmatic approach which draws heavily on the inductive and deductive reasoning. This is because that in order to fully analyse a phenomenon, it is vital and necessary to support the inductive approach with deductive thinking to enable it to tackle a real-world problem such as in the case of this research. But, in research philosophy there are other alternatives such as interpretative, realism and positivism (Saunders et al., 2009). However, from the view of the epistemological perspectives particularly the interpretative approach, associated with inductive reasoning of which this research is influenced, the choice of leaning more on inductive reasoning than objective reasoning in a pragmatic approach becomes obvious.


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Figure 1. This research “onion” process. Source: Inspired by Saunders et al. (2009).

The rationale behind the choice of approach is the research questions, where the use of either quantitative or qualitative approaches does not completely address the research problem, whilst a combination of approaches does (Creswell & Plano Clark, 2011). The pragmatic approach emphasises that multiple realities exist in any given proviso, and that, the researcher’s choice of paradigm is dependent on the research question the study is trying to solve (Saunders et al., 2009). The pragmatic approach provides for the use of both qualitative and quantitative research methodologies to collect information and make inquiry into complex phenomenon of social and natural contexts (Creswell, 2009; Morgan, 2007). Therefore, the pragmatic research philosophy provides for the adoption of mixed methods as the data collection method which opens the opportunity to be objective and subjective in analysing the points of view of the participants (Saunders et al., 2009).

The pragmatic approach helps to provide a grounding where the research avoids engaging in issues of insignificance rather than issues of truth and reality and as such is intuitively appealing (Creswell, 2009; Tashakkori & Teddlie, 2003). A pragmatic approach allows areas to be studied that are of interest, embracing methods that are appropriate and using findings in a positive manner in harmony with a recognised value system (Creswell, 2009). In addition, the pragmatic research approach is multi-purpose in nature; and therefore, a good tactic that will allow questions to be addressed that do not sit comfortably within a wholly quantitative or qualitative approach to research design and methodology. Pragmatic research approaches also perceive issues differently in different scenarios and permit different views and interpretation of the world.

In the epistemological paradigm, the pragmatic research approach provides the justification and rationale for combining methods and the knowledge of providing tentative answers to research questions for mixing approaches and method in a study (Johnson et al., 2007). The pragmatic research approach, though recent in research philosophies debates, focuses on the problem and tries to find practical solutions with the use of mixed methods. As a result, Saunders et al. (2009) contended that pragmatism provided a basis for practical research by integrating different perspectives which help to elucidate the data interpretation process in research.


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Therefore, a pragmatic approach helps to understand the assumptions that underpin the knowledge and inquiry. In addition, it does not classify the research as purely quantitative or qualitative in nature with either a positivist or interpretive philosophy. Hence, a pragmatic approach provides a balanced point between the deductive and inductive perspectives of thinking which offers practical answers for merging different paradigms. As a result, Creswell (2009) suggested that a pragmatic research approach seemed to be the most prominent paradigm with a strong philosophical relationship for a mixed method approach. Furthermore, a pragmatic approach provides a better grounding to fully explore the complex phenomenon instead of using a single method approach in the research. The pragmatic approach is a better process to answering “what”, “why”, and “how” research questions (Saunders et al., 2009). Therefore, considering the unique features of this pragmatic perspective and critically deducing from the above, this research would adopt a pragmatic stance in research inquiries. The purpose of the alternative philosophical stances does not comfortably sit within the confines of this research aim and objectives, and the adoption of an alternative will undermine the goal of the work. The pragmatic approach allows case study design strategy which requires several sources of evidence in a cross-sectional research study; and because of this, different analytical instruments are permitted such as the NVivo and SPSS computer packages for qualitative and quantitative information analyses.

This study is trying to develop a framework to sustainably manage social (public) housing estates through an in-depth exploration and explanation of those issues that had previously left the housing estates not managed properly. This again is predicated on the reason that the other philosophical prepositions will not properly address the problem. The framework development will involve the understanding and revealing of the exact numbers of the social housing estates that have been provided by the state and federal government to the people of the Niger Delta. Further, it will authenticate the number of social (public) housing estates which are completed or in-complete, occupied or un-occupied, and completely abandoned in the area.

Conclusions From the discussion above, with reference to the aim of the main research study and the type of research

questions, the lack of evidence and very few studies on this particular area (sustainable social housing estate management in Niger Delta, Nigeria) have justified the use of an exploratory and explanatory case study research within the pragmatism philosophy of world reasoning. These approaches will enable the research to explore and gain an understanding of the areas that might need an explanatory intervention study. Also, from the philosophical worldview on how research should be done, it is patent to deduce that focusing only in a particular view, approach and method will definitely detract the purpose of the project and therefore, the combination of methods, views and approaches would better address the aims and objectives of the research. Although, quantitative and qualitative methods are different, and no one approach is superior to the other; but qualitative method appears to be invaluable for in-depth exploration of a subject area, while quantitative method is recognised to facilitate the discovery of quantifiable information about the area. They all have their weakness and strengths, but it is much more ideally to combine both in a research of real-life situation. As such, this paper argues that developing a framework for use in the management of social (public) housing estates in a sustainable manner which is needed, should be done with pragmatic thinking, approaches and techniques in the research methodological field. This is also in line with the understanding that housing and its associated issues are social problems requiring a social way of reasoning so as to curb the post-construction management difficulties. The paper therefore recommends that more work is undertaken to ensure the development and


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refinement of the framework, to enhance its use in practice in other emerging developing countries. Furthermore, the issues of sampling, validity, reliability, the relationship between the researcher and the subject and other research quandaries are vital when deciding on an appropriate method.

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The Reform of the Local Administration in Spain

in Terms of Population

Manuel Octavio Del Campo Villares University of the Coruna, Coruna, Spain

Francisco Jesús Ferreiro Seoane University of Santiago of Compostela, Santiago of Compostela, Spain

Spanish Local Corporations are playing an increasingly important role in the provision of public services without

reducing their function of consolidation and structuring of the current sociopolitical system. This reality implies an

increase in their need of financial funds without new compensation resources. Also, there is a certain tendency to

loose population in many counties along with a greater organic and territorial dispersion that accelerates their

financial weakening. This makes necessary to find management alternatives ensuring the appropriate provision of

local public services and thus the Local Corporation reform becomes an alternative. In this context, the present

paper approaches the analysis and the results based upon a territorial balance criterion on the population and its

distribution, aiming ultimately to design an indicator able to measure the need of the Spanish local government

structure according to its population and the size of its municipalities. This indicator might measure the regional

impact to any variation both in the distribution of its population and in the number of municipalities.

Keywords: public administration, citizen, public finances, public service and administrative reform

In a socio-economic situation as complex as today’s, marked by a deep economic crisis, budgetary containment and a review of many of the principles that govern the society in Spain, the financial adjustment of the agents that integrate the Spanish Public Sector becomes both a necessity and a priority. This context of seeking alternatives to achieve the necessary balance of public accounts that has pressured Local Government to obtain new forms of management capable of addressing the challenges of such a scenario is the framework in which the work stands.

Without this balance it is impossible to guarantee the delivery in time of the common public services to the citizens’ daily lives: water supply, street lighting, refuse collection, public safety and town planning, etc., all of which are municipal responsibilities. However, the current crisis has shown that in many cases it is not enough to act just on the items that integrate the revenue and expenditure, included in the public budget but must go beyond and analyze the efficiency and viability of the local administrative structure.

Therefore, to ensure fiscal stability of local finances, it is necessary to refine the model of public service

Corresponding author: Manuel Octavio Del Campo Villares, Ph.D., professor, Department of Applied Economics, Faculty of

Economics, University of the Coruna; research fields: public administration and education policies. E-mail: [email protected]. Francisco Jesús Ferreiro Seoane, Ph.D., professor, Department of Applied Economics, University of Santiago of Compostela;

research fields: entrepreneurship and education policies.

D DAVID PUBLISHING

THE REFORM OF THE LOCAL ADMINISTRATION IN SPAIN

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provision, under the objective to find a flexible and sustainable public system. To do this, it has been introduced the study of the local government reform as an alternative to public spending cuts and with the advantage of not acting directly on the welfare state.

Paying attention to the purpose of this work, the local administrative reform as an alternative for obtaining a balance in local government finance and efficiency in the provision of local public services, this paper has been structured following three points: the first point presents the structure of the Spanish public sector in order to identify where and what to restructure and the evolution of the pursued activity and procedural forms followed by Local Government in Spain, providing the foundation for the administration’s reform. The second point shows the financial situation of the Spanish Local Treasury contextualized within the current socio-economic scenario of crisis and severe deficits. After that, in a third entry, two of the usual administrative areas are addressed and quantified when treating any territorial administration reform: its dependent administration and the micro size of many of the municipalities, both of them put in relation to the population of each Autonomous Community (AC, CCAA in Spanish). Finally, it is a conclusion with the general assessment on the possibility that the local government reform might be a valid alternative to restructure its finances and enable it to maintain its level of public provision.

Bases, Structure and Policy Framework of the Local Public Sector in Spain The economic activity in Spain is exercised under the framework of a social market economy established

in the Spanish Constitution (Article 3), which also recognizes the entrepreneurial freedom besides the involvement of public authorities in ensuring the exercise and defense of productivity. Thus, public initiative is explicitly recognized (Article 128 of the Spanish Constitution) in the economic activity as a whole, even reserving the right to control, intervene resources, production levels and essential attributed services if the public interest advises it.

Table 1 Structure of the Public Sector in Spain Classification Function

Public administrative sector or public administrations

1. Central administration: estate 2. Regional Government: Autonomous Community (AC, or CCAA in Spanish) 3. Administration or Local Corporation: provinces and municipalities (LC, or CL in Spanish)

To produce difficult merchandizing services oriented to the community and to redistribute income and national wealth operations

Public business sector or public business

1. Autonomous commercial, industrial and financial state-dependent bodies, CCAA or CL 2. Public entities dependent on the state, CCAA or CL 3. Public companies dependent on the state, CCAA or CL

To produce goods and services not intended for commercial sale, to collect, process and distribute financial deposits, and to transform individual risk into collective risks

Note. Source: Ministry of Public Administration, European System of Accounts (ESA) and own elaboration.

Table 1 shows all the agents that belong to the Spanish Public Sector; each one is classified according to two criteria: first, the territorial scope: central, regional and local level; and second its functionality, administrative or business. Therefore based on the functions set by the constitutional precept, the areas of public intervention are many. It’s easy to fall into the temptation to equate public administration and public sector, however, the public sector also carries out productive, commercial, industrial and financial activities. Thus, the provision of public goods and services extends beyond the administrative or management action,


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which by extension raises the need for public funding to unsustainable levels, especially for those levels of government with limited sources of income such as the Local Authorities.

After identifying the structure of the Spanish Public Sector, both the municipalities and basic local administration have experienced many changes in two senses:

(1) As to the range of services provided; (2) The volume of financial, physical and human managed resources. The common issue in both cases is their constant and progressive expansion facing a situation where the

State is the director of the public activity and appears sometimes as an organization much too big and heavy when addressing daily public services such as street lighting, street cleaning or civil protection, but at the same time is too small to address the major problems that the globalized modern society is facing (De la Merced Monge, 1997). This reality is manifested by both its distance from the public demand and its loss of power in supranational spaces.

In this context, the local governments of Spanish democracy have been forced to deal with a myriad of citizen coexistence deficits that must be addressed in order to structure and facilitate social cohesion (Ramió Matas, 2009; Rodríguez González, 2011). It is in this role as structuring instrument (Article 137 of the Constitution) where the Local Corporations assumed an increasingly important role, highlighted by the need of new costly facilities, infrastructures and services, which implies increasing their financial need. Moreover, the growth of municipal activity was reinforced by other factors (De la Mora, 1997; Garces, Marín, García, Navarrete, & Bote, 2008; Del Campo Villares & Ferreiro Seone, 2012):

(1) The growth and modernization of the country made municipal governments to want to equate their competences to the ones of the most advanced surrounding countries;

(2) The democratic system demands more closeness between administrations and citizens, and in this sense the municipal authority acts not only as an ultimate administration but assuming improper powers given its closeness;

(3) The initial “interest” of municipal governments to meet public demand caused a chain reaction at the level of demand of the citizen, creating a circular process of growth for the demand for new municipal utilities.

As a consequence of this all, due to the administrative level of the municipalities, closest to the citizenship, these end up intervening in all walks of life, from being a civic regulator agent to a service provider. However, despite all the process of change and growth of local activity in Spain, its impact on methods, management and organizational forms used by the closest administration to the citizen has been little (De la Mora, 1997; Ramió Matas, 2009; Rodríguez González, 2011). Thus local government in Spain has a pending modernization process at the organizational, technical and cultural levels, which will have to provide the way out of that situation defined as “perpetual financial failure against an overwhelming attention of functions and services”. Modernization can be undertaken following two channels:

(1) The introduction of habitual technologies of management of the private sector in the area of the administration, moving from the administrative norm to the facility management and public services;

(2) The provision by the private sector of certain public services: The indirect management of public services is to privatize its management, transfer to the private sector the provision of the public service but not their responsibility.

Regarding the first point, the introduction of management techniques from the private sector rightly adapted could be applied to (Ramió Matas, 2009; Bel, 2011):


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(1) An advanced service offer preceded by a broad and deep knowledge of the use, needs and expectations of citizens on local services;

(2) Marketing and promotion of the local services offered; (3) Internal management, with short integration of the information systems, work systems or implanted

procedures. In relation to the introduction of the private sector in providing public services, even though local

administration has begun to use indirect management formulas, such procedures must be refined and rigorously selected in order to avoid dissatisfaction, which is quite frequent. It is a preliminary step to distinguish between what the Public Finance Institute names provision of public goods and services and the servicing of the same ones. The debate regarding management modernization of the essential common services falls mainly behind this distinction (Bel, 2011; Del Campo Villares & Ferreiro Seone, 2012). Thus, whereas provision refers to ownership, i.e., public guarantee as to partial or universal coverage of the service, servicing refers to the ways and procedures by which the provision is carried out.

However, although the outsourcing is an option to improve the quality and efficiency of some public services sometimes, it has been used to overlook another solution, “to improve the functioning of the public organizations themselves” (Ramió Matas, 2009), i.e., the introduction of private management techniques in the administration without affecting the provision or use of public services. Nevertheless the common line widely followed by most municipalities has been to shift the responsibility for the service from the public to the private sector without meaning that the local government would stop reserving the right to control and regulate the activity/service.

The Finances of Local Treasuries: The Local Public Deficit in a Crisis Environment Due to the current socio-economic situation as well as the context of international reference (Europe), the

need to modernize, adjust and apply new management methods by the territorial administration faces an added problem, the situation of economic and social extreme urgency as well as the sharply criticized capacity and performance of certain public institutions which basic aim becomes to balance Public Treasuries’ finances necessary to ensure their payment commitments.

For this reason, there is a need as well as an obligation to rethink the budgetary policy from CL without undermining fundamental pillars like the efficiency in municipal management or the financial responsibility share as well as local jurisdiction, ensuring both the provision of municipal services and the social cohesion. To do this, following the orthodoxy of financial activity, there are three options to achieve the budgetary equilibrium (Cabannes, 1999):

(1) To redefine municipal competences; (2) An austerity and efficiency management policy; (3) To reform the financing system. With regard to the first option, there are issues to be addressed (De la Merced Monge, 1997): inventory of

skills, to redefine the role of the parallel administration, to foster inter-municipal cooperation and revalue based on its evolution on the provision of local services. In short, it is to allocate responsibilities by issues and size taking into consideration these key variables: population, their geographical contiguity or dispersion in urban areas to facilitate their connection in a network (Bel, 2011).

It is important at this point to mention two features that define the distribution of local competencies: its


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scope and lack of accuracy, which carry strong dispersions in quantity, quality, costs and services rendered (Álvarez Corbacho, Monasterio Escudero, & Suárez Pandiello, 1998). The Article 25.1 of the Basic Law of the Local Government reinforces this lack of definition pointing out that in the management of their interests the municipalities can promote all activity and provide public services helping to meet citizens’ needs and aspirations.

And it is precisely this lack of definition of the competences managed by municipalities which cause a growth in the local public expenditure and also its debt to an irresponsible maximum level. There are too many examples throughout the Spanish territory: airports, stations, conference and exhibitions centers abound without enough population to use them.

With regard to the second option of austerity and budgetary rigor, it implies the need to establish a set of goals by the administration: to promote public procurement through competitive public auctions, apply cost-benefit criteria, seek alternative financing programs in collaboration with the private sector, increase the level of fiscal co-responsibility, reduce tax fraud and fulfill payment obligations (Álvarez Corbacho et al., 1998).

With regard to the scheme to finance, the third option, tax measures have to be taken as part of a structural approach and a comprehensive fiscal and budgetary policy (Bosch & Solé-Ollé, 2012). This tributary model will have to be oriented at the same time subject to the characteristics of simplicity, fairness, and neutrality in line with the tax systems of the international setting of reference.

However, since the temporal context of the crisis and the revision of certain principles define our society needs to go beyond financial orthodoxy studied in the preceding paragraphs, it is necessary to change the current political-administrative structure of Spain (Bosch & Solé-Ollé, 2011; Rodriguez, 2011). To this we must add the multiplier effect of the Greek case with the radical restructuring of the local administration, eliminating two-thirds of the municipalities1 and the urgent quest for EU new forms of governance suitable to the territory and its financial capacity (Moisio, 2011; Rodríguez González, 2011).

It is very common in periods of crisis or financial insufficiency that the political class opts for easily applicable and quick impact measures such as reducing public investment, reducing public employee’s salaries or linear cuts in current spending. All these measures with rapid effect lower public spending but at the same time keep countless organisms that could dispense (Bosch & Solé-Ollé, 2011).

However, these periods of crisis and social change, when the urgency to find solutions to these situations prevail, are perfect to address solutions otherwise unthinkable in quieter scenarios, like the introduction of new management techniques, outsourcing or privatization of services. Also, the new scenario puts on the table a new alternative unaddressed until now: to analyze the viability of the territorial structure of Spanish administration2. It is in this line where the reform of the local administration of maximum proximity to the citizen appears as a relevant alternative in reducing the cost of the public provision.

It must be said as well that the design of the current Spanish local administration dates back to the 19th

1 The rule reduces from 1,034 to 355 municipalities, which will suppose a saving on the indebted public accounts of 1,185 million Euros per year. The objective of administrative reform is to create more capable municipalities on the basis of a larger population, at least 10,000 people and can provide better services to citizens. Along the same lines but on a smaller scale there are cases located in Italy and Portugal. 2 To restructure local governments encompassed merger of municipalities, the strengthening cooperation between local authorities, the re-foundation of supra-municipal governments, metropolitan cooperation and the role of the regions and municipal consortiums.


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century, a fact that increases the difficulty to adjust the local administrative structure to the new environmental demands: new urban, demographic and labor designs, which also face an increasingly complex institutional architecture, where the gap between the municipal structure and the local geography evolution is increasing (Sanchis Palacio, 1999; Rodríguez González, 2011), being greater the distance observed at the territorial level between:

(1) The rural municipalities, where the micro-municipal structure dominates, installed in a state of unprecedented demographic crisis which is intertwined with a host of deficiencies;

(2) In contrast, the expansion of urban areas beyond its territorial limits, its influence and scope of activity extends through a growing geographical area, while the local financial management and control mechanisms are just designed to act on their municipal political-administrative ambit.

Consequently, a fourth option joins these three traditional areas in the study of the financial activity equilibrium to ensure the provision of public services and citizen’s attention, while funder-plaintiff-user of public activities streamlining and downsizing the structure of administration, with a strong emphasis on the case of the Local Corporations.

Many reasons can be argued tackling the restructure of the Local Corporations, their financial and budgetary insufficiency, the need to introduce and rationalize management procedures, lack of important services to ensure a minimum quality of life or the worsening of budget deficits due to the downturn of their revenue collection capability dependent of the construction industry. Therefore, next it is shown a study which main focus is to carry out an analysis on the suitability of the current peripheral structure of the Spanish Local Administration, considering the population as the reference variable (Sanchéz, Ordóñéz, & Molina, 2006; Gilbert, 2011) on each of its AC. For that purpose and following the literature about the reorganization of the Local Administrative structures, this study follows two broad approaches (Bel, 2011; Moisio, 2011; Rodríguez González, 2011):

(1) The first one is based on an organic representation, where Public Institutions are considered to have failed to adapt to the needs of the society in which they are located; henceforth they should carry out a deep transformation, seeking wider forms of competence through fusion, aggregation or removal of administrations. Studies on the optimal municipal size have shown those issues such as population’s size or its dispersion, offer significant economies of scale and density, thus fostering the fusion of municipal jurisdictions;

(2) The second one is based on the respect for the prevailing administrative structure as the legitimate source of the democratic system, therefore advocates the structure of the existing public service, proposing as a solution supra-municipal cooperation formulas. Taking this approach, the most common experiences are: privatization of public services to achieve economies of scale in the production which is specified in a service provision contract between the government and the company supplying the service, and faced with the privatization that acts on the production of the service, inter-municipal cooperation acts over the jurisdiction of the service provider, assigning to a public authority a greater volume of output or a concentration higher than what might be expected to attribute to the different municipalities separately.

Complexity of Territorial Administration in Spain

Organic Autonomy: The Parallel Administration Analyzing the administrative level, the focus begins analyzing those administrative units with less power

and independence both in function and budget. Thus the Spanish public structure is set under the shade of a


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wide range of heterogeneous bodies and institutions with very different sizes, where their distribution and number are shown in Table 2, to find these entities and autonomous commercial, industrialists and financiers organisms sorted by region and are related to the population on January 1, 2012 (Sanchéz et al., 2006; Del Campo Villares & Ferreiro Seone, 2012).

At this point we need to emphasize the limitations of this research, which are analyzed only from the population variable. While it is true that the population is the key variable, all local development process involves three dimensions3 (Sanchis Palacio, 1999), being one of them the social one, defined by the number of people satisfied by the public provision. However, many other variables are involved when adapting and improving the local administrative structure (Garcés et al., 2008; Rodríguez González, 2011): the population pyramid, aging, population density, scattered settlement or local sectorial structure.

The focal interest, therefore, is to highlight the interest and convenience on the study of the complexity and heterogeneity of peripheral Spanish Public Sector in per-capita terms. To do this, the regional administrative complexity index is used, ICAca

4 or “département d'agglomeration” in the French case, (Sanchéz et al., 2006; Gilbert, 2011; Del Campo Villares & Ferreiro Seone, 2012), which is included in the equation (1), which also can be applied to any scale of territorial public administration5, where a higher value represents more administrative complexity.

ICAca = ((Nº OAEPca/Popca) × 10,000) / ((Nº OAEPE /PopE) × 10,000) 6 (1) Retrieved in the previous index, this is corrected through the percent difference between the number of

Autonomous Organisms and Public Entities (OAEP in Spanish) available to each autonomous community compared to the total in Spain in per-capita terms (10,000 inhab.), which is shown in Table 2 in the column DIF%ca-e. The difference will be added to ICAca if the percentage exceeds the national average or subtracted if below average, obtaining this way an aggregate measure of the total administrative complexity each CCAA → ICATca

7, total administrative complexity index by autonomous community, and included in the equation (2), where a higher value is a synonym of a greater administrative structure.

ICATca = ICAca + ((%(Nº OEpca / Popca) – (%(Nº OEpE / PopE)) (2) It can observed from the results obtained how several autonomous communities show an unsustainable

degree of bureaucratization in terms of the number of dependent Autonomous Organisms in terms of per-capita basis, to take action in this matter would give them a considerable administrative savings margin, as in the case of Navarra, Catalonia, Basque Country, Aragon, and Asturias. On the opposite side are Rioja, Cantabria, Madrid, and Castile and Leon, each of them revealing a reduced administrative complexity in terms of population. 3 Dimensions are contained in a local development process: (1) economic, based on criteria of profitability and efficiency; (2) political-administrative referring to control, design and public management; and (3) social group of people subject of public service care. 4 It measures the degree of subdivision of each region parallel administration based on their population. 5 The territorial administration’s internal complexity of any CCAA may be due to its own administrative structure as well as a local administrative level, lower than regional. Therefore it is possible to identify with the administrative complexity index applied to each administrative level which has a greater bureaucratization at source. These indexes also are shown in Table 2:

Regional administrative complexity index (ICAAca) or “communautés d'agglomeration”: [1.a] ICAAca = ((Nº OAEPAca / Popca) × 10,000) / ((Nº OAEPLE / POPE) × 10,000) Local administrative complexity index (ICALca) or “municipalité d'agglomeration”: [1.b] ICALca = ((Nº OAEPLca / Popca) × 10,000) / ((Nº OAEPLE / POPE) × 10,000)

6 Nº OAEPca = Number of Autonomous Organisms and Public Entities; ca = CCAA = Autonomous Communities; Pop. = Population; E = Spain. 7 The total administrative complexity index (ICATca) measures the complexity of each AC’s parallel administration, corrected by the size of its population compared to the total population of Spain.


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Table 2 Organic Complexity ICA, ICAL and ICATs / Population (10,000)

CCAA Pop. 1/1/2012

OAEP CCAA

OAEP CL

Total OAEP ICAAca ICALca ICAca DIF%ca-e ICATca

Andalusía 8,424,102 15 261 276 0.457 0.861 0.821 -0.071 0.750 Aragon 1,346,293 5 78 83 0.953 1.809 1.545 0.217 1.763**

Asturias 1,081,487 14 39 53 3.320 1.002 1.228 0.091 1.319*

Balearic Islands 1,113,114 9 35 44 2.074 0.873 0.991 -0.004 0.987 Canary Islands 2,126,769 10 63 73 1.208 0.823 0.860 -0.056 0.804 Cantabria 593,121 6 3 9 2.594 0.140 0.380 -0.247 0.133 Castilla La Mancha 2,558,463 3 65 68 0.301 0.706 0.666 -0.133 0.533 Castilla and León 2,115,334 3 44 47 0.364 0.578 0.557 -0.177 0.380 Catalonia 7,539,618 48 563 611 1.833 2.074 2.031 0.411 2.442***

Com. Valen. 5,117,190 15 134 149 0.752 0.727 0.730 -0.108 0.622 Extremadura 1,109,367 4 33 37 0.925 0.826 0.836 -0.065 0.770 Galicia 2,795,422 12 67 79 1.101 0.666 0.708 -0.116 0.592 Madrid 6,489,680 15 67 82 0.593 0.287 0.317 -0.273 0.044 Murcia 1,470,069 8 45 53 1.396 0.850 0.904 -0.038 0.865 Navarre 642,051 6 52 58 2.397 2.250 2.264 0.504 2.768***

Basque Country 2,184,606 10 143 153 1.174 1.818 1.755 0.301 2.057***

Rioja 322,955 1 1 0.794 0.000 0.078 -0.368 -0.290 Total 47,190,493 184 1,699 1,883 1.000 1.000 1.000 0.000 1.000 Notes. *** maximum organic complexity value; ** high organic complexity value; * significant organic complexity value. Source: National Statistics Institute (INE), statistics series of the Ministry for Public Administration, and own elaboration.

Thus, on the basis of the data obtained and even before addressing the restructuring of the Local Administration (municipalities diminution), many Spanish autonomous communities reveal the not insignificant margin of potential Organisms and Autonomous Entities to eliminate, and, on the other hand, a good number of them have a laxative or at least doubtful functionality and significance. It is not just their number (1,883) already high, but also the appreciable turndown margin given their activity, pointing out the case of organisms aimed at attending the needs of organizations such as culture, leisure and sports, less prioritized (non-basic and easy to delegate services) compared with other Spanish constitutionally essential ones: health, education, housing and social care and therefore easier reduction in a state of financial urgently.

Complexity and Municipal Dispersion Spain: A Measure for Reform The same way the local structure is analyzed in terms of Organisms and Autonomous Entities, following

the same methodology used in the previous section, a closer look will be taken into the structure of Local Government, i.e., the number and size of the Spanish municipalities as well as its geo-population dispersion.

Firstly, in order to measure this dispersion, the dispersion index (IDMca) is defined, included in the equation (3), it will measure the level of dispersion of the population of each autonomous community according to its municipal size. As its value increases, the dispersion of its population distributed by municipalities will also be greater, so a considerable number of micro-local terms are still predominant.

IDMca = ((Nº Munca / Popca) × 10,000) / ((Nº MunE / PopE) × 10,000) (3) Again, The IDMca will be subject to correction by the percentage difference between the proportion of

municipalities per capita (10,000 inhab.) by CCAA and this percentage at a national level compared to the same


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proportion nationally (% DifMunca-e). And that, it will be added when it exceeds the national average and should be subtracted if it is below the average, obtaining a new measure of total municipal dispersion by region → IDMTca

8, total municipal dispersion index by region, and shown in equation (4). IDMTca = IDMca + ((%(Nº Munca / Popca) – (%(Nº MunE / PopE)) (4)

Considering together9 the total administrative complexity index (ICATca) in Table 2, and the total municipal dispersion (IDMTca) in Table 3, the maximum administrative complexity index (IMAXCATca) is obtained, which is presented in equation (5), and whose values for each region are listed in the last column of Table 3, which will serve as a reference when having to identify and quantify the opportunity of restructuring in key population. This global index measures the level of bureaucratization’s rotation (parallel administration size) of each region in relation to its local dispersion (number of municipalities).

IMAXCATca = ICATca × IDMTca (5)

Table 3 Municipal Distribution and Municipal Complexity Index by Region (s/10,000 Pop.)

CCAA Pop. 1/1/2012

Mun. ≤ 1,000 Pop.

Mun. ≤ 5,000 Pop.

Mun. ≤ 20,000 Pop.

Mun. > 20.000 Pop.

Total Mun. IDMca DIFMun

%ca-e IDMTca IMAXCATca

Andalusía 8,424,102 195 314 181 81 771 0.532 -0.805 -0.272 -0.204 Aragon 1,346,293 620 86 21 4 731 3.157 3.710 6.867*** 12.103*** Asturias 1,081,487 17 30 24 7 78 0.419 -0.999 -0.579 -0.764 Balearics 1,113,114 6 21 28 12 67 0.350 -1.118 -0.768 -0.758 Canary Islands 2,126,769 1 25 37 25 88 0.241 -1.306 -1.065 -0.857 Cantabria 593,121 31 51 15 5 102 1.000 0.000 1.000 0.133 Castilla La Mancha 2,558,463 1,985 205 61 15 2,248 5.109 7.067 12.178*** 6.486***

Castilla and León 2,115,334 624 219 43 15 919 2.528 2.625 5.151*** 1.957* Catalonia 7,539,618 482 255 147 63 947 0.730 -0.464 0.267 0.651 Com. Valen. 5,117,190 218 168 93 63 542 0.616 -0.661 -0.045 -0.028 Extremadura 1,109,367 204 143 31 7 385 2.018 1.751 3.769** 2.903* Galicia 2,795,422 23 179 91 22 315 0.655 -0.593 0.062 0.037 Madrid 6,489,680 47 53 46 33 179 0.160 -1.444 -1.284 -0.056 Murcia 1,470,069 2 7 19 17 45 0.178 -1.414 -1.236 -1.069 Navarre 642,051 186 64 19 3 272 2.463 2.517 4.980** 13.786*** Basque Country 2,184,606 101 81 51 18 251 0.668 -0.571 0.097 0.200 Rioja 322,955 144 21 7 2 174 3.133 3.668 6.801*** -1.97 Total 47,190,493 4,886 1,922 914 394 8,116 1.000 0.000 1.000 % s.Total 60.20 23.68 11.26 4.86 Notes. *** maximum dispersion value; ** high dispersion value; * significant dispersion value. Source: INE and own calculations.

In the case of the complexity derived from the dependent administration (see Table 2), the most developed 8 The total municipal dispersion index (IDMTca) measures the dispersion of the population of each CCAA by municipalities corrected by the number of municipalities in each CCAA to the total of municipalities of Spain, and where: ICMca = Municipal Dispersion Index by CCAA, Nº Mun = Number of Municipalities, Pop. = Population, E = Spain, CCAA = Autonomous Community (AC). 9 Merging in this way the complexity of the parallel administration of the Territorial Treasuries with the diversity of Spanish municipalities in terms of population.


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CCAA showed a greater weight in terms of per-capita with regard to the number of Organizations and Dependent Entities: Catalonia, Navarra, and the Basque Country. The center of Spain with less developed regions, highly aged and with high migration levels, shows a greater municipal density, proliferating the number of municipalities with a small settlement, as in the case of Castilla La Mancha, 12.18; Aragon, 6.87; Rioja, 6.80; Castilla and León, 5.15, followed by Navarra at a considerable distance.

On analyzing the global data (IMAXCAT), taking into account the complexity of dependent Administration (ICAT) and the local dispersion (IDMT), it can be observed that communities such as Navarre, Aragon and Castilla La Mancha with 13.79, 12.10, and 6.49 respectively have the highest global administrative bureaucracy, thus the urgency shown to reform the Local Government, followed by Extremadura and Castilla and León at a considerable distance. It is interesting to see using the IMAXCAT Castilla La Mancha, region with a higher local dispersion (IDMT greater) falls into third place. This is due to the fact that its parallel administration (reduced ICAT) is not particularly large. Catalonia is on the opposite situation with a highly complex parallel administration, its minor local dispersion assigns a value of 0.65 IMAXCAT terms when his ICAT was the second highest 2.44.

Taking as the reference the population’s variable, the room for maneuver when it comes to local administrative simplification is not only substantial in terms of reducing the number of Autonomous Organisms but also in the number of municipalities. Communities such as Castilla La Mancha, Aragon, Rioja, Castilla and León, and Navarra, more than double the state average’s number of municipalities.

What’s more, Table 3 also shows the percentage distribution of municipalities, based on its population size where the main characteristic of the Spanish municipal treasuries is its micro size, with 83.9% of municipalities with less than 5,000 inhabitants and 60.2% with less than 1,000 inhabitants. This makes both the economic base and financial capacity of most municipalities inexistent, failing to undertake the provision of new services or improve on the already provided (Álvarez Corbacho et al., 1998; Rodríguez, Núñez, Seijas, & Iglesias, 2004), which means that their only way-out are the debt and the transfer of funds from higher levels of the public administration.

Continuing with the issue of the local smallholding, along the same lines both the International Monetary Fund and the European Union have forced Greece and Portugal to simplify their local map, considering it an essential and non-negotiable measure. More important still, Spanish municipalities have as average just over half the population of Greece.

For all these reasons, based on three hypotheses, Table 4 shows a simulation of the number of municipalities that would disappear by merging with other boundaries. Of course, the elimination of the municipalities that are under the considered minimum level of population may lead to a newer municipality and may not necessarily be absorbed by a greater one, same way eliminating municipalities lead to a reduction of the Dependent Organisms. Therefore, even when the figures should be seen just as an interesting approach, the results still show an undeniable interest, being established the following hypotheses10:

(1) Minimum hypothesis: elimination of municipalities with fewer than 1,000 inhabitants; (2) Media hypothesis: elimination of municipalities with less than 5,000 inhabitants; (3) Maximum hypothesis: elimination of municipalities with fewer than 10,000 inhabitants.

10 The maximum hypothesis coincides with the set for Greece, while the average hypothesis is the most appealed when tackling of local government’s restructuring in Spain, being the minimum hypothesis the essential one that cuts out those clearly unfeasible municipalities.


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Table 4 Hypothesis of Municipal Distribution per CCAA Under Various Criteria of Simplification

CCAA Total Mun. (31/12/12)

Disappear as a maximum Maintain a minimum IMAXCAT

H.Min H.Med H.Max H.Min H.Med H.Max H.Min H.Med H.Max Andalusía 771 194 510 619 577 261 152 0.746 0.858 0.854 Aragón 731 620 706 717 111 25 14 2.357 1.012 1.037 Asturias 78 16 47 57 62 31 21 0.950 1.369 1.634 Balearics 67 6 27 44 61 40 23 0.650 1.345 1.311 Canary Islands 88 1 24 46 87 64 42 0.255 0.887 1.016 Cantabria 102 31 82 91 71 20 11 0.299 0.169 0.156 Castilla La Mancha 2,248 1,981 2,190 2,224 267 58 24 0.999 0.406 0.275 Castilla and León 919 623 842 880 296 77 39 1.044 0.529 0.444 Catalonia 947 481 737 826 466 210 121 2.028 2.443 2.432 Com. Valen. 542 215 383 441 327 159 101 0.548 0.714 0.785 Extremadura 385 204 347 371 181 38 14 2.556 0.997 0.577 Galicia 315 22 202 256 293 113 59 1.116 0.934 0.805 Madrid 179 47 99 130 132 80 49 -0.008 0.013 0.017 Murcia 45 2 9 14 43 36 31 0.027 0.732 1.176 Navarre 272 186 250 262 86 22 10 7.201 3.584 2.663 Basque Country 251 101 182 208 150 69 43 2.054 2.410 2.587 Rioja 174 143 165 170 31 9 4 -0.485 -0.291 -0.213 Total 8,116 4,873 6,802 7,356 3,243 1,314 760

Note. Source: INE and own calculations.

The results allow seeing where to act to reform Local Administration: upon the number of municipalities or upon the number of Dependent Organisms. So, if restricted to the low hypothesis there still are several regions with a high overall administrative complexity: Navarra, Extremadura, Aragon, Basque Country, and Catalonia, while is also seen how the complexity of Castilla La Mancha, Extremadura, and Castilla and León is eliminated by simply removing those municipalities with fewer than 1,000 inhabitants. If increasing the level of restriction of set hypothesis (average and maximum), the number of communities with maximum administrative complexity is reduced and, above all, that concentrates in the same regions: Navarra, Basque Country, and Catalonia.

Moreover, in order to determine the inter-territorial balance achieved under each of the hypothesis made a number of indicators have been collected, presented in Table 5. The gains in terms of reducing the overall administrative complexity are higher just by the minimum hypothesis; the Pearson coefficient (CP) drops by 78% while the coefficient of Aperture (CA) increases more than 100%. The gain is highest with the middle hypothesis, where the CP drops more than 90% while the CA increases by 136%. The step between the average and maximum hypothesis barely accounts for an improvement; this makes us conclude that the elimination of municipalities with fewer than 1,000 inhabitants is essential and non-negotiable and that the base size of the resulting municipalities should be around 5,000 inhabitants.

The opportunity to undertake major adjustments on the structure and composition of Local Administration is more than considerable, especially due to its further depopulation and extreme delegation of powers to agencies under non-basic character.


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Table 5 Spatial Dispersion Indicators CCAA Current distribution Minimum hypothesis Media hypothesis Maximum hypothesisAbsolute path 16.428 7.874 3.875 2.876 Relative path 8.583 5.992 3.635 2.784 Pearson coefficient (PC or CP) 10.325 2.186 0.830 0.690 Opening coefficient (OC or CA) 5.218 10.700 12.316 12.502

Conclusions Local Corporations have experienced an extraordinary growth in both its core activity and the allocation of

new competences whether its own or delegated, a situation that contrasts with its organizational structure and management, almost unchanged. This has led to both an adequacy and financial mismatch in the relation to the environment in which this level administrative acts.

It is therefore necessary to rationalize and restructure the operational framework for Spanish Local Administration to adapt to a new economic, political and social reality in which need and reinforcement must be used in combination to provide the basic services together with the socio-economic globalization. This is compounded by the fact that the new economic reality that Local Corporations must get is adapted to stand on a profound crisis and recession context that translates into these local government institution increasing failure of resources and a highest expenditure.

This situation results in the need and requirement by the public sector to reduce its overall current, investor and structural spending. Along with it, the search for new sources of funding is endowed with the adequate revenue collection that does not condition the necessary efficiency and equity in the most needed public services provision. However, the performance of the classic mechanisms of financial activity, public income and expenditure are not the only alternative to balance the accounts of the Public Administrations. One of them is restructuring the Local Administration given its characteristics of heterogeneity, dispersion and size.

To this end, the Local Administration can act at two functional levels: its Organisms and dependent Autonomous Entities and in the own composition of the Local Administration, reducing the number of municipalities, being these a special frame at the time of restructuring the Administration by number and size through partnerships, municipal mergers or institutional arrangements.

Analyzing the composition and distribution by autonomous communities on their local area, the possibilities of reducing local government are many:

(1) In the case of the 1,883 Entities and Autonomous Organisms, with an average of nearly 100 per region. The regions with a greater margin of reduction are Catalonia, Navarra, and Basque Country;

(2) Meanwhile the number of municipalities is 8,116 and there is an average of over 400 per community. There are several communities where more than three quarters of its municipalities do not reach the 1,000 inhabitants so this should lead to their reduction as in the case of Aragon, Castilla La Mancha, and Rioja.

Consequently, just taking as a reference the population variable, there are several regions where the possibilities of local restructuring are maximum as in the case of Aragon, Catalonia, two Castillas, Extremadura, Navarra, and Basque Country. The depopulation of large number of municipalities in Spain eliminates the proper financial capacity of more than 60% of municipalities that do not reach the 1,000 inhabitants, while only 5% of the municipalities in Spain reached city status.


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Finally, a reflection is needed beyond the observed quantitative factor to add a qualitative factor and how gradually exerts a substantial influence in defense of a Local Administration’s efficient restructuring, until recently, hardly noticeable such as the newly conception of public action, where the efficacy and efficiency about their daily business go beyond a rhetorical theory to a practical reality. In this regard, there are two factors contributing to fostering the restructuring of Local Administration: (1) the growing public’s perception of the cost of public activity; and (2) the awareness of the public accountability. Those who govern do so with the money of others, and this requires justifying public spending and making efficient management.

References Álvarez Corbacho, X., Monasterio Escudero, C., & Suárez Pandiello, J. (1998). Deficit and debt level of the Spanish Territorial

Finances. The Caixa Galicia Foundation. Bel, G. (2011). Local services: Size, scale and governance. IEB’s report of fiscal federalism. Institute for Economy of Barcelona. Bosch, N., & Solé-Ollé, A. (2011). Fiscal crisis and local government’s reform. IEB’s report of fiscal federalism. Institute for

Economy of Barcelona. Bosch, N., & Solé-Ollé, A. (2012). A preliminary assessment on the local administrations’ reform in Spain. IEB’s report of fiscal

federalism. Institute for Economy of Barcelona. Cabannes, M. (1999). Financial constraints of the government local scope. Reflections on the funding of decentralized

governments (pp. 115-138). Castilla La Mancha University. De la Merced Monge, M. (1997). Local corporation financing. The current situation and future alternatives. The public sector’s

new challenges facing the European Monetary Union (Vol. 13). Special Cinco Días and Foundation ICO. De la Mora, L. (1997). The new challenges for the cities on the threshold of the twenty-first century. The public sector’s new

challenges facing the European Monetary Union (Vol. 12). Special Cinco Días and Foundation ICO. Del Campo Villares, M. O., & Ferreiro Seone, F. J. (2012). From the administration to the management of public services.

Galician School of Public Administration (EGAP), Regional Ministry of Presidency, Public Administration and Justice, Regional Government of Galicia.

Dussauge Laguna, M. I. (2009). Compared literature on administrative reforms: Developments, limitations and possibilities. Management and Public Politics, XVIII(2), 439-474.

Garcés, M., Marín, M., García, A., Navarrete, F., & Bote, V. (2008). From public audit to public politics evaluation. Association of Institute of Public Auditors of Spain, and Institute Foundation of Official Credit.

Gilbert, G. (2011). Beyond the inter-municipal association towards the municipalities in two tiers of government: The French case. IEB’s report of fiscal federalism. Institute for Economy of Barcelona.

Moisio, A. (2011). Municipal associations: The experience of the Nordic countries. IEB’s report of fiscal federalism. Institute for Economy of Barcelona.

Ramió Matas, C. (2009). Evaluation of the Institutional innovation and local administration management. Euro Region Galicia—Northern Portugal Magazine, Atlantic Axis Innovation in the Public Organizations, No. 15, 21-52.

Rodríguez, R. (Director), Núñez, A., Seijas, M., & Iglesias, M. (2004). Galician municipalities for the XXI century, analysis of a territorial restructuration and local government (Vol. I). Santiago de Compostela University.

Rodríguez González, R. (2011). Crisis opportunities. A debate on the territorial administration’s restructures. Administration & Citizenship, Magazine of the Galician School of Public Administration, 6(2), 21-34.

Sanchéz, J., Ordóñéz, C., & Molina, C. (2006). The needs related to the autonomous communities’ spending. The development of an indicator based on the population. Administration & Citizenship, Magazine of the Galician School of Public Administration, 1, 121-172.

Sanchis Palacio, J. R. (1999). Local development strategies: Methodological approach from a socio-economic and comprehensive point of view. Management and Organization: Business Management, Organization and Administration Magazine, No. 21, 147-160.


Flexible Industrial Land Policies on Exit Strategies in the Rapid

Transition Period: A Case Study of Hongkou District, Shanghai∗

Jun Wang, Hao Chen Tongji University, Shanghai, China

Currently, the maximum tenure of industrial land use in China is 50 years, which far exceeds the manufacturing life

cycle. In the absence of an effective exit mechanism, a large number of manufactories are waiting for land

value-added income or illegal sublease for commercial use rather than returning the land-use rights for urban

redevelopment. As one of the urban central areas in Shanghai, Hongkou District is facing a serious challenge on

land scarcity and impending speculative inflows during the critical period of rapid transition. The objective of this

research is to explore flexible industrial land policies on exit strategies in Hongkou District, where local

government plays a major role in the urban land transfer, eventually to strengthen the initiative of land-use cycling

of the governments for a better adaption to the changing demand in the future. So the research mainly consists of

two parts: (1) finding bottlenecks: after deep investigation and analysis on the causes which restrict land users’

access to land transfer, the findings reveal that profit mechanism, no alternative policy for land-use change, low

compensation, low costs of illegal behavior and high rate of planned non-profitable land on these industrial land

blocks are the main bottlenecks; and (2) breaking bottlenecks: regarding the importance of comprehensive

arrangement and government intervention, this research is about to discuss flexible industrial land policies on exit

strategies in Hongkou District during the transition period, such as profit distribution mechanism, flexible exit

mode, priority compensation, trans-regional land supply and combination of regular review and public supervision,

as well as their application value and feasibilities.

Keywords: flexible policy, exit mechanism, industrial land, Hongkou District

With the rapid economic development in China, the gap that system reform lags behind economic development has seriously hampered China’s sustainable development. Taking land system for example, the maximum tenure of industrial land use in China is 50 years now, much longer than the life cycle of most manufactories. As a result, a large number of manufactories are waiting for land value-added income or illegal sublease for commercial use rather than returning the land-use rights for urban redevelopment. This phenomenon forms obstacles to the government for the regulation of industry and space planning, which leads to low efficiency of land use. This is also against government’s original intention of providing land as one of enterprise’s essential productive factors. ∗ This research was supported by Prof. Nankai Xia of Tongji University and originally presented at AESOP/ACSP 5th Joint Congress 2013: Planning for Resilient Cities and Regions, July 15-19, 2013, University College Dublin, Dublin, Ireland.

Jun Wang, Ph.D., professor, College of Architecture and Urban Planning, Tongji University; research fields: new town/new development area planning, city renewal and land use, heritage conservation. E-mail: [email protected].

Corresponding author: Hao Chen, M.Sc., College of Architecture and Urban Planning, Tongji University; research fields: urban renewal, land policy. E-mail: [email protected].

D DAVID PUBLISHING

FLEXIBLE INDUSTRIAL LAND POLICIES ON EXIT STRATEGIES

959

Since the development stage of every city varies a lot, Shanghai as one of the representative of the Chinese first-tier cities is the first to face the issues that are specific to the transition period. One of them is how to make full use of limited land resources, look for further space stock possibilities and provide necessary space for development. But the situation that industrial land-use rights cannot be returned easily aggravates the shortage of land resource objectively and restricts the space supply for building industrial system of the service economy in Shanghai. As one of the central districts with good economic foundation and historical cultural resources, Hongkou District is facing high land prices, which increases land value-added income and illegal sublease for commercial use. This situation also leads to an even more serious challenge on exit strategy of industrial land.

Development Overview of Industrial Land in Hongkou District Based on industrial land and factory survey table of Hongkou District (2006) and author’s added research

in 2013, the status of industrial land development in Hongkou District is as follows (statistical units in accordance with the streets administrative divisions of Hongkou District in 2009).

Spatial Distribution There are 170 blocks of industrial land with 111 hectares in Hongkou District. Its main distribution trends

are: in the southern area, smaller block of industrial land scatters layout. While in the northern area, industrial land appears relative agglomeration. In addition, around the boundary of Hongkou and Zhabei Districts, it has linear distribution trends (see Figure 1).

Figure 1. Spatial distribution of industrial land in Hongkou District. Source: Shanghai Tongji Urban Planning & Design Institute.


960

Functional Analysis From functional perspective, only 25.8% of industrial land blocks in Hongkou District are still used for

production activities and 5.3% of them are idle, while up to 68.8% are used for other purposes, such as commercial uses and business, which contains a high rate of illegal sublease (see Figure 2).

Figure 2. Functional analysis of industrial land in Hongkou District. Source: Hongkou District Government.

FAR (Floor Area Ratio) To most of the industrial land in Hongkou District, economic feasibility of redevelopment is quite positive

(FAR < 2.0). Effective use of these redevelopment resources may relieve the critical situation of lack of commercial land and create good conditions for the restructuring and redevelopment (see Figure 3).

Figure 3. FAR of industrial land in Hongkou District. Source: Hongkou District Government.

Possibility of Land Transfer According to official statistics and forecasts, only 31% of the industrial land in Hongkou District may exit

in the next five years. While this critical situation does not match the planning intention: master plan of downtown Shanghai (2010 combing Edition) mentioned about the replacement of industrial land in Hongkou District for other kind of land uses (see Figure 4).

44

9

117

42.7

4.4

89.5

0

20

40

60

80

100

120

140

Production Idle Other uses

Number of blocks Floor area

8

04 6

26

2 0 2 2 3

10

1

16

4

23

2 4 6

035 7

4

11

1 03

95 3

05

1015202530

0~1 1~2 Above 2

(104 m2)


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Figure 4. Possible land transfer of industrial land in Hongkou District. Source: Hongkou District Government.

Bottleneck and Constraints of Industrial Land Exit in Hongkou District Huge Speculative Arbitrage

In Hongkou District, 68.8% of the industrial land is used for commerce rather than industrial production. The most important reason is that with land price continuously rising in Hongkou District and differential land benefits increasing, it makes bigger profits from value-added income or illegal sublease for commerce.

Low Compensation of Land Requisition The current land requisition compensation standard is primarily based on the provisions of Article 47,

Land Administration Law of the People’s Republic of China (2004 revised version): land requisition and compensation refers to the original land use. Because industrial land price is usually not high enough, this means that the land-use right owner may not be satisfied with the price government departments could offer, which also cannot help break the existing solid interest group.

Low Illegal Cost As to such private rental behavior, the relevant regulatory authorities have difficulties in ascertaining

rights and executing the law. In addition, policy easing during the rapid transition period indirectly contributes to such speculation.

Rigid Procedure of Land-Use Change Without Alternatives Normal procedure of changing land use of the existing industrial land needs public bidding, auction or

listing. As a result, the land-use right owner who has demand to upgrade their industries will face three “uncertainty”: uncertain about the future land cost, uncertain about the possibility of getting the land, and uncertain about the time the project could get started. So, it will take high risks to change industrial land to commercial land through official procedure at the practical level.

High Ratio of Planned Non-Profitable Land Around 40% of the industrial land in the regulatory detailed plan is all or part of non-commercial land

(including park, public service facilities, etc.). Therefore, the economic motivation of the government and developers is limited. So is the land requisition compensation.

23

8

24 21

50

4 717

7 920

2 6 92 4 0

6 4 10

102030405060

Total amount of industrial land blocksPossible amount of industrial land blocks which could exit in next 5 years


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Flexible Industrial Land Policies on Exit Strategies in Hougkou District Government-Dominated Profit Distribution Mechanism

The distribution of benefits and gap between huge speculative arbitrage and low compensation of land requisition are the critical problems to be solved when talking about exit strategy of industrial land. As to the belonging of the value-added part of land, there are usually three arguments: private benefits, government’s benefits or sharing benefits.

On the one hand, unauthorized renting by the enterprise itself can be recognized as private benefits, but this does not match the land property and business scope. In addition to the existing low FAR, outmoded buildings and unfit space for commercial needs, the land value has not been fully realized. On the other hand, if industrial land is expropriated and redeveloped with the low price in terms of the Land Management Law, which can be recognized as public benefits, it seems unfair and the land-use right owner will not endorse at all. Therefore, the simple distribution of land value to the private or the public is unfair, inefficient and hard to operate. As a result, only through reasonable benefits balance and promoting efficiency of land use, could our land-use right owners have the initiative and intrinsic motivation to return the land-use right.

Considering the benefit-sharing thoughts (benefits conclude economic, social and cultural value increment), it is advised to take the following two flexible compensation models in order to embody the original owner’s right of sharing the fruits of redevelopment.

After-compensation mechanism (for planned land property of the profitable uses). In addition to the land compensation in accordance with the standard, the District Government could withdraw an appropriate proportion from land-transferring fees and return it to the original land-use right owner or establish a special fund to encourage reinvestment in Hongkou District.

Transfer payments (for planned land property of the non-profitable uses). In the regulatory detailed plan, a lot of land for public service facilities, green spaces and municipal facilities is planned on these industrial land blocks, resulting in great economic pressure on the implementation level. Hence, it is encouraged to have transfer payments or package sell with planned land of the profitable uses at the district level.

Flexible Exit Modes Traditional mode (current mode). Take changing land-use property from industrial land to commercial

land for example (Yu, 2008). First, changing land property for commercial use must comply with the master plan, and have the approval of the planning authority. Second, if the changing for commercial use complies with the urban planning, according to the provisions of the current approach to land transfer, the transfer should be open to the public by bid, auction or listing. And the original owner and the buyer will not be allowed to conduct this trade by their own. Third, usual practice is that industrial land user contacts with the local land authority and land-reserving institution makes the reserve, according to the annual purchase and reserve plan.

Flexible modes. For the various needs of industrial land exit, especially for the enterprises which have a strong willing of self-update, industrial transformation or temporary land-use change, the existing changing process is too rigid without alternatives, which restricts the initiatives of industrial land exit through a legal channel. Thus it is advised to have multiple flexible exit modes for enterprises to choose under flexible policy framework, eventually achieving a win-win situation of the government and enterprises (see Table 1).


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Table 1 Comparison of Exit Modes of Industrial Land

Traditional mode (Bid, auction or listing)

Flexible mode 1 (Enterprise self-update agreements)

Flexible mode 2 (Temporary change of land-use property)

Applicable target —Strong willing to transfer the land

—Self-update demand —No willing to transfer the land by bid, auction or listing

—High historical and cultural value —Strong temporality of land use —No willing to transfer the land

Common character Functional exit of industrial land

Difference —Have initiative to transfer land by bid, auction or listing

—Self-update demand —Conditional agreements

—Functional update by utilizing original plant

Land property Change Change No change Building property Change Change Change Structure Change Change No change Property relations Change No change No change Rights of spiting, transferring and conducting warrants Yes No No

Benefits distribution

Government (Land owner)

—Land transfer fees under new land use by bid, auction or listing — Subsequent land tax

—One-time land transfer fees for price difference in according with remaining years —Subsequent land tax

—An annual portion of the land fees for temporary change of land-use property in according with land price difference —Subsequent land tax

Enterprise (Land-use right owner)

Compensation of land, buildings and other fixtures

Income after renovation or reconstruction Income after renovation

Typical case China Publishing Blue Bridge Creative Industry Park 1933 Shanghai

Two cases are presented: (1) Case 1: China Publishing Blue Bridge Creative Industry Park (enterprise self-update agreements) The owner of the park is China Book Import and Export Company, one branch of the China Publishing

Group in Shanghai. It used its own land and planned a Creative Industry Park oriented by content industry and new media, featured by digital publishing. Formerly known as Shanghai Jing Cheng printing factory, it was primarily used for rental before the transformation. The total area of the park is 31,000 square meters. The occupancy rate of the park was 100% with over 70% industry concentration. Its 2011 annual park operating income was CNY37.85 million, while cultural enterprises’ total income was CNY22.19 million (see Figure 5);

(2) Case 2: 1933 Shanghai (temporary change of land-use property) Built in 1933, the main building was originally used for slaughter for the Municipal Council with land area

of about 15,000 square meters and construction area of 26,300 square meters. It was known as the most modern Far East slaughter field at that time, which was selected as one of the outstanding historical buildings in Shanghai.

The property of the building belongs to the Shanghai Great Wall Biochemical Pharmaceutical Factory. However, the building could only be on lease as a general warehouse before renovation. The total rental income was only about CNY2 million per year. Shanghai Creative Industry Investment Company rented the building with overall CNY10 million a year for 15 years and invested more than CNY70 million for renovation, which finally made this unique historic site reborn as a landmark of creative and fashion industry in Shanghai.


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Economic benefits of the project are quite significant—rental in 2007 reached CNY5 per day per square meter, higher than the overall rental level of the North Sichuan Road office area. In the recent years, only the round show site on the third floor of the main building charges more than CNY20 million (see Figure 6).

Figure 5. Design sketch of China Publishing Blue Bridge Creative Industry Park.1

Figure 6. 1933 Shanghai and its round show site.

Regardless of the transaction costs and property rights system, the comprehensive benefits of traditional bid, auction and listing is the highest under market mechanism. But in such case, enterprise self-update agreement and temporary change of land-use property are more feasible options than maintaining the current situation. Therefore for Hongkou District, the long-term goal is to abolish the industrial land and accomplish industrial land exit completely. In addition, the short-term goal is to encourage traditional bid, auction or listing by preferential policies or subsidy. In case any difficulties exist, it should be considered to conduct guide according to applicable condition of enterprise self-update agreement and temporary change of land-use property (see Figure 7).

1 Retrieved from http://finance.eastday.com/hdqxb/lq/index.html.


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Figure 7. Comprehensive benefits comparison of exit modes.

Six Priorities Due to limited local funds and realistic conditions, Hongkou District is suggested to take exit

strategy in turn. Based on industrial land and factory survey table of Hongkou District (2006) and the Twelfth Five-year Plan, the following six types of industrial land should be encouraged to exit by priority compensation.

Exit priority of industrial land near key development areas. Main content about spatial planning of the Twelfth Five-year Plan of the Hongkou District is “one region, one street, one circle” development model: North Bund Shipping Service area achieves major breakthroughs; Sichuan Road business, travel, culture and leisure street makes new achievements; and Dabaishu knowledge innovation and service trade circles develops rapidly. Therefore the industrial land relevant to these three areas should be encouraged to exit first. From the research investigation, the removal process of industrial land in Dabaishu area is at a fast pace and those in radiation circle can be removed step by step; industrial land around North Sichuan Road is relatively less and small but hard to be removed due to high FAR. Considering surrounding traditional urban context and texture, it is suggested to conduct flexible mode 2 (temporary change of land-use property); industrial land in North Bund is extensive with high FAR. But considering the long-term income of the North Bund development and high cost of land acquisition compensation in the future, the recent land acquisition seems to be a sensible choice in the medium or long term (see Figure 8).

Exit priority of larger industrial land. Due to historical reasons, industrial land property rights in Hongkou District are dispersed and the size of industrial land varies significantly. In addition, from previous experience, small acquired industrial land cannot form industrial agglomeration. Thus, from the view of redevelopment, regardless of the demolition or the update of the original plant, a certain land area is the threshold of highly efficient re-use. Priority should be given to large block or a certain land scale after joint land transfer with adjacent block, which may eventually form a tiered compensation system and encourage exit strategy of industrial land along with old residential district renovation (see Figure 9 Left) and the municipal facilities relocation (see Figure 9 Right) simultaneously.


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Figure 8. Key development areas and relevant industrial land in Hongkou District. Source: Shanghai Tongji Urban Planning & Design Institute.

Figure 9. Joint land transfer.

Exit priority of industrial land with poor building quality. The building ages, initial investments and maintenance managements all make the differences of building quality. Taking economic costs into account, owners of dilapidated flats are generally more willing to transfer the industrial land. In addition, the early-built flats are always with dirty and messy characteristics, which have a big impact on the living environment of residents nearby. Taking Shanghai Huaguang Instrument Factory (see Figure 10) for example, after the production ceased, it was used for accommodation and bathing, which had a negative impact on the lives of residents. Later on, it was planned to conduct removal after negotiation by Hongkou District Government.

Exit priority of industrial land with low FAR. Considering economic feasibility for redevelopment,


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those industrial land blocks of which original FAR is more than 2 are of low redevelopment economy, so priority should be given to those with lower FAR. The amount of industrial land in Hongkou District with FAR from 0 to 1 and 1 to 2 is 53 (31%) and 69 (41%) respectively. Among them, FAR in Jiangwan, Xingang, and Guangzhong is generally less than 2, so it should be prioritized to exit in these areas.

Exit priority of industrial land controlled by the easy-negotiators. During the process of the game and negotiation between government and enterprises, the existing relationship of government level structure makes it difficult or even impossible for the government to negotiate with enterprises with higher or lateral background level. The transaction cost is relatively high in this situation. On the contrary, when government negotiates with enterprises at lower background level, the transaction cost is lower and acquisition is normally easy to conduct (see Figure 11).

Figure 10. Shanghai Huaguang Instrument Factory.

Figure 11. Government-enterprise relations game from the perspective of administration level.

Exit priority of industrial land with planned commercial projects. Based on the planned land property from industrial land and factory survey table of Hongkou District (2006) and relevant supporting list, related


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industrial land is suggested to be transferred first under the principle of “industry development priority and social driving effect priority”. In addition, compared with planned non-profitable land, land acquisition compensation of industrial land with planned commercial intention or profitable project is considerable and exit strategy is easy to implement.

Regional Coordination and Cross-District Transfers of Land For enterprise’s owners who are willing to reproduce and conduct gradient transfer of industrial land, it

has not been relevant preferential policies in Hongkou District to encourage industrial enterprises to be removed from the central area to industrial park. By comparison, some of the suburbs of Shanghai have more abundant land stock and more willingness to import “high, new, top” industrial projects into the industrial park. So, if region coordination and cross-district transfers of land are implemented, huge difference of land stock, land composition and facing problem in every district will be planned as a whole. Meanwhile, for Hongkou District Government, this behaviour also benefits the negotiation between government and enterprise’s owner. Besides, the specific transfer destination should include 104 industrial blocks mentioned in 2009 Shanghai “two planning in one” (see Figure 12).

Figure 12. Gradient transfer of industrial land in Hongkou District.


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Regular Inspection and Public Supervision Regular land inspection. For unauthorized plant rental and lack of supervision, the relevant department

of the District Government should strengthen the regular land inspection. One is to check whether the enterprise has privately changed land-use property and do business out of the authorized business range. The second is to check whether the enterprise breaks the rules of environmental, safety, health or fire-fighting requirements.

Public supervision. The introduction of public report and media exposure should be encouraged to enlarge the channels of supervision in order to reduce the cost of government enforcement and increase the enterprise illegal cost. Since industrial land rental is normally accompanied by a large number of floating population and instability, residents will have enthusiasm and initiative to report illegal rental, which may force residents to be active stakeholders on exit issue of industrial land.

Conclusions During the critical period of innovation drive and transition development, whether the limited land

resources can be made full use of and efficient flexible policies can be explored, concerning exit strategy of 111 hectares industrial land, is a prerequisite for the future space development in Hongkou District. Only by innovative system and policies, could the passive situation of the government nowadays be broken, turning from the passive to the initiative.

Firstly, it is proposed that under the government-dominated profit distribution mechanism, after-compensation and transfer payments should be implemented to promote benefits balance of industrial land exit among the various stakeholders and to ensure initiative of returning the land-use right and intrinsic motivation of cooperation. Secondly, instead of rigid exit mode without alternatives (only by bid, auction and listing), it is suggested to encourage flexible policies such as enterprise self-update agreement and temporary change of land-use property for various demands of different enterprises. Thirdly, “six priority” strategy should be implemented to ensure Hongkou District to make full use of limited resources and give priority to the development of the most potential industrial land. Fourthly, regional coordination and cross-district transfers of land should be implemented to guarantee the productive land demand of enterprises for further production. Last but not least, it is proposed to combine with regular land inspection and public supervision, in order to restrict enterprise’s illegal arbitrage and add government’s chips for negotiation.

References Zhu, J. (2000). The impact of industrial land use policy on industrial change. Land Use Policy, 17(1), 21-28. Raggi, M., Sardonini, L., & Viaggi, D. (2013). The effects of the common agricultural policy on exit strategies and land

re-allocation. Land Use Policy, 31, 114-125. Yu, W. W. (2008). System design of industrial land in land-use change process. Co-operative Economy & Science, No. 17, 75-76.


Ecological Management of Beijing-Tianjin-Hebei Urban

Agglomeration: The Tragedy of Commons and System Solution∗

Wang Bo Beijing Normal University, Beijing, China

Liyun Xi

Peking University, Beijing, China

The continuous integration development trend of China urban agglomerations will not only further promote

economic development but also cause the loss of the natural buffer zone which could protect the regional

environment, leading to the combined effects of environmental pollution. Hardin’s “Tragedy of the Commons”,

“Prisoner’s Dilemma”, Olson’s “Logic of Collective Action”, and other theoretical models demonstrated the

tragedy result of ineffective governance of regional ecology. Clear property rights, centralized governance, social

autonomy, and competitive-collaborative model based on comparative advantage of the organization are four kinds

of “system solution” for regional ecological management, providing scientific management tool for urban

agglomeration management in different regional contexts.

Keywords: Beijing-Tianjin-Hebei, urban agglomeration, regional ecological management, tragedy of the commons,

system solutions

Background: Urban Agglomeration and Regional Environment In the context of globalization and urbanization, the close interaction among cities, the diversification of

urban regional, and the complexity of urban regional spatial system, carried out new regional spatial organization form, leading to urban agglomeration. The urban agglomeration region becomes the center of global politics, economy, culture and information. Regional management of urban agglomeration has also become a hot issue of theory and practice. In 1961, Geographer Jean Gottmann, the director of the Institute of Geography, University of Oxford, proposed the concept of Megalopolis in Megalopolis: The Urbanized Northeastern Seaboard of the United States. Yuemin Ning translated Megalopolis as “huge megalopolis” in 1983 (Ding & Ning, 1983, p. 324). Yixing Zhou presented the concept of Metropolitan Interlocking Region as a more advanced spatial form of urban agglomeration (Zhou, 1988). Xueqiang Xu used “metropolitan area” to unify the concept of Megalopolis and Metropolitan Interlocking Region (Xu, 1994). Some scholars have put forward concepts such as “dense urban areas” (Xu, 1995), “Metropolitan Regions” (Xue, 2005), and ∗ This study is supported by National Social Science Fund Project (10CZZ028), “Central Universities Fundamental Research Funds”.

Corresponding author: Wang Bo, Ph.D., professor, School of Government Management, Beijing Normal University; visiting scholar at Harvard University (2011-2012); research field: regional public governance. E-mail: [email protected].

Liyun Xi, Ph.D., full-time researcher, Institute of Political Development and Government Administration, Peking University; research field: public governance.

D DAVID PUBLISHING

ECOLOGICAL MANAGEMENT OF BEIJING-TIANJIN-HEBEI URBAN AGGLOMERATION

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“quasi-Metropolitan Interlocking Region” (Chen, 1997). Shimou Yao defined urban agglomeration as a relatively complete urban complex, constituted by a

considerable number of cities with different natures, types and grades of the scale in a particular geographical area, relying on certain natural environmental conditions, with one or two large mega-cities as a regional core of the economy, developing the intrinsic link between cities with modern transport and information network (Yao, 1992, p. 87). Guoping Li said:

The urban agglomeration, urban population, Metropolitan Interlocking Region, or mega-cities area, all mean net type regional aggregation of the basic factors of production (such as population, land, resources, capital, etc.) and higher production elements (such as knowledge, high-tech and personnel, research institutions, leading discipline, transnational corporations and other modern communication networks) in the process of marketization, industrialization and informatization, embodying the formation of some city network aggregation or regional urban communities with one or more mega-cities as the core. (Li, 2012, p. 87)

Chinese Academy of Social Sciences has proposed that China had formed 15 urban agglomerations in 2006 Blue Book of City Competitiveness. Institute of Geographic Sciences and Natural Resources Research pointed out that China is creating 23 urban agglomerations in 2010 China Urban Agglomeration Development Report. Department of Housing proposed 13 urban agglomerations in the National Urban System Plan (2005-2020). Some scholars have pointed out that China’s national spatial structure gradually formed the “Ten Metropolitans” (Xiao, 2009, p. 55): Beijing-Tianjin-Hebei urban agglomeration, Yangtze River Delta city group, the Pearl River Delta city group, Shandong Peninsula, South Liaoning urban agglomeration, Central plains city, Yangtze River city group, West Coast Cities, Chongqing urban agglomerations, and Guanzhong urban agglomeration. Table 1 shows five urban agglomerations in coastal regions of China.

Since the 1980s, the Pearl River Delta region has become China’s Pearl River Delta city group with Shenzhen as a leader. Since the 1990s, along with the displacement of regional economic development axis from south to north, Yangtze River Delta city group has rapidly developed into the second pole of China’s economy with Shanghai Pudong New Area as a hub. On entering the 21st century, the economic development axis of coastal regional continues to move northward. Beijing-Tianjin-Hebei city group became the third pole of economic development in China. Tianjin, with its advantages in Bohai-Rim Economic Circle, began to play the role of explorer in China’s economic and social comprehensive supporting reform.

From the national macro-level, the development trend of coastal economy has changed from three-pole isolated development to three-pole continuous integration. “Pearl River Delta city group” has formed the first development pole after three decades of development. “Yangtze River Delta city group” constituted the second development pole with coordinated, complementary and beneficial interaction of Shanghai, Zhejiang, and Jiangsu. Beijing-Tianjin-Hebei area is building the “third development pole” in China. Currently, Beijing-Tianjin-Hebei urban agglomeration has been formed the “Nuclear-Point-Axis-Zone” spatial pattern with Beijing, Tianjin as dual core, Shijiazhuang, Tangshan as the regional center, including many small regional cities. Regional economy interacts more closely day by day, the “regional flow” in urban agglomerations convects continuously, and the regional flow, constituted by factors of production, such as personnel flow, logistics, technology flow, information flow, capital flow and other flow of production factors, interacts more and more closely, like an “invisible hand” winding each city as a whole. With the processes of urbanization and regional integration, the construction of regional cooperation of Beijing-Tianjin-Hebei city group increases continuously, and the degree of regional public governance unification is raised increasingly.


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With the spread of China’s urban agglomerations, the three core urban agglomerations have shown the continuous integration developmental trend. This will further promote the development of China’s coastal economic belt, also cause the loss of natural environmental buffer zone, leading to the combined effects of environmental pollution. Beijing-Tianjin-Hebei urban agglomeration, the Yangtze River Delta agglomeration, and Pearl River Delta agglomeration account for about 8% of national territory, but consume 42% of the coal, 52% of the gasoline and diesel, and emit 30% of total sulfur dioxide, nitrogen oxides and soot. There are more than 100 hazy days annually in these areas, in some cities, even more than 200 days. The system of regional environmental governance needs to be reconstructed.

Table 1 Five Urban Agglomerations in Coastal Regions of China Name Range Geographic position Basic characteristics

Urban agglomeration in Mid-south Liaoning

With Shenyang, Dalian as center, 8 cities are included, such as Anshan, Fushun, Benxi, Yingkou, Liaoyang, etc.

Located in Liaodong Peninsula and north rim of Bohai Sea Economic Zone

The population is 27.6 million, and GDP is RMB 1,374.9 billion, accounting for 65% and 81% of the Liaoning Province, respectively.

Urban agglomeration in Beijing-Tianjin-Hebei

With Beijing, Tianjin as center, 10 cities are included, such as Tangshan, Qinhuangdao, Baoding, Zhangjiakou, etc.

Lying in north of North China Plain

The population is 1,307.21 million, and GDP is RMB 3,353.26 billion, accounting for 5.5% and 8.4% of China, respectively.

Urban agglomeration in Shandong Peninsular

8 cities are included, such as Jinan, Qingdao, Yantai, Zibo, Weihai, Rizhao, etc.

Lying in juncture area of Yellow River Economic Belt and Bohai Economic Zone

The population is 40.3 million, accounting for 42.66% of the Shandong Province, and GDP is RMB 2,176.35 billion, 5.4% of China.

Urban agglomeration in Yangtze River Delta

With Shanghai as center, 20 cities are included, such as Nanjing, Suzhou, Wuxi, Zhenjiang, Nantong, Hangzhou, Ningbo, Jiaxing, etc.

Lying in junction area of Yangtze River development axis and coastal development axis, crossing Jiangsu Province, Zhejiang Province and Shanghai Municipality

The population is 116.7 million, and GDP is RMB 6,829.73 billion, accounting for 8.7% and 17.02% of China, respectively.

Urban agglomeration in Pearl River Delta

With Guangzhou, Shenzhen as center, 9 cities are included, such as Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, etc.

Lying in marine estuary of the Pearl River in central south area of Guangdong Province

The population is 29.67 million, accounting for 35.5% of the Guangdong Province, and GDP is RMB 3,214.7 billion, 8.01% of China.

Note. Source: China’s statistics yearbook (2011).

“Tragedy of the Commons” of the Regional Ecology In 1833, William Forster Lloyd proposed the academic concept of “Tragedy of the Commons” (p. 98) in

the book which discussed about population. In 1968, British scientist Garrett Hardin published “Tragedy of the Commons” on Science; an article described how the individual’s rational pursuit of maximum benefits causes the damage of public interest. In accordance with Hardin’s conceived Shepherds Game model, there is a public pasture and a group of insatiable sheep grazing in the wild, although each sheep knows this may lead to pasture degradation. However, if the sheep chooses not to eat, not only would it lose the current benefits but also it has to share the consequence of pasture degradation. The Tragedy of the Commons phenomenon shows that, for individuals who pursue the maximum interests, it is hard to achieve public interest through collective action


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and cooperation.

In a society where public goods are shared, everyone, that is, all the people are pursuing their own best interests… This is a tragedy; every person is pursuing his own best interests. The freedom to use public goods will perish all people. (Hardin, 1968)

Public goods have the property of indivisible and non-exclusive consumption and income and have different needs and supply curves from those of personal items. Social individuals may have the “free riding” motive to consume public goods when they are enjoying the public service (urban parks, green spaces, public gardens, and environmental sanitation). The non-exclusive property of public goods leads the society members to believe that one can still use public goods even though he does not undertake costs of the production and provision of public goods. The public good, which belongs to greatest number often, becomes the one to be the least taken care of. People care for their own well-being yet ignore public goods; as for all the public goods, he only pays attention to those related to him personally at most (Aristotle, 1983, p. 30). Therefore, public goods are often in a state of lacking effective supply. In addition, people differ on preferences for public goods in terms of quantity and quality, “The government’s provision of public goods tends to reflect median voters” preferences. Some people’s excessive demand for public goods cannot be satisfied, the other part of people’s differentiated tastes are not met” (Wang, 2003, p. 32). This would further exacerbate the scarcity of public services, pushing it into a “tragedy of the commons”.

The ecological pattern of Beijing-Tianjin-Hebei region is presented as follows: mountain ecological reserve, piedmont region of protection and utilization, plains exploitation zones, coastal development and protection zones (see Figure 1).

Figure 1. The ecological pattern of Beijing-Tianjin-Hebei region.

Since reform and opening, Beijing-Tianjin-Hebei area formed the economic zone based on administrative zone, called the “Administrative Economic Zone” (Liu, 1996, p. 3), a self-contained, relatively independent


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economic zone in which the economic activities are organized according to administrative region. Currently, Beijing-Tianjin-Hebei region has a distinct “administrative zone economy” property, the isolation of administrative zone resulted in significant negative externalities of pollution, hindering the integrated governance of regional environment. Beijing-Tianjin-Hebei urban agglomeration showed deterioration of natural ecology: vegetation degradation, soil erosion, siltation of rivers, sandstorms, etc. (see Figure 2). Environmental degradation has become a bottleneck that constrains sustainable development of regional economic and social development.

Figure 2. Vegetation distribution of Beijing-Tianjin-Hebei area (2010).1

The water quality of Beijing-Tianjin-Hebei area is relatively poorer (see Figure 3).

Currently, the metropolitan average water volume of Beijing-Tianjin-Hebei area accounted for only 3.6% in the country, the per-capita water resources in Beijing-Tianjin-Hebei area is 1/2 of the Yangtze River Delta, less than 1/5 of the Pearl River Delta and the national average, far below the internationally recognized 1,000 cubic meters cordon. (Tianjin Economy Research Group, 2010, p. 8)

Since 2013, China’s central and eastern regions recurred haze, air pollution is serious. In the process of rapid industrialization and urbanization in this country, the high energy consumption, high emission, heavy pollution, and the rapid growth in the amount of city vehicle resulted that the total emission of air pollutants far exceeded the capacity of environment, forming the “common tragedy” of large and medium-sized city’s haze. Ministry of Environmental Protection released the air quality reports of 114 cities in September 2013. The top 13 seriously polluted cities are Xingtai, Shijiazhuang, Handan, Hengshui, Tangshan, Baoding, Jinan, Langfang, Zhengzhou, Xi’an, Tianjin, Cangzhou, and Beijing, most of which are located in Beijing-Tianjin-Hebei Urban Agglomeration. Tianjin ranked 11th, while Beijing ranked 13th (see Table 2).

1 See CGA Central Database of Harvard University.


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Figure 3. Regional water quality in China (2008).2

Table 2 The Heaviest Polluted Cities in China, September 2013 City AQI (Air Quality Index) PM2.5 1. Xingtai 191.05 140.47 2. Shijiazhuang 172.06 127.57 3. Handan 147.69 107 4. Hengshui 139.09 101.67 5. Tangshan 137.67 99.3 6. Baoding 130.26 89.17 7. Jinan 122.34 86.93 8. Langfang 121.07 86.13 9. Zhengzhou 119.24 87.77 10. Xi’an 109.46 77.33 11. Tianjin 109.33 77.3 12. Cangzhou 103.93 76.07 13. Beijing 103.34 75.67

Note. Source: Ministry of Environmental Protection of China (http://www.zhb.gov.cn/).

The air quality of Beijing-Tianjin-Hebei region is close to public tolerance limits. “If the problem of resource and environmental constraints is not solved, the development will be ‘starved’,

people’s livelihood will be ‘compromised’ … let breathing clean air, drinking clean water and eating safe food be an important content of development” (Li, 2013, p. 1). The strong haze and pollution resulted that the traditional path of economic development cannot continue; it also forced the innovation of regional management. Beijing-Tianjin-Hebei urban agglomeration needs to improve the new mechanisms of joint prevention and control of air pollution, including the system of joint law enforcement and supervision of regional atmospheric environment, the emergency response mechanism for pollution event, environmental

2 See CGA Central Database of Harvard University.


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information sharing mechanism, inter-regional pollution prevention treatment and consultation mechanism for coordination, the early warning and emergency response mechanism for regional air pollution. Simultaneously, the industrial structure in the region should be upgraded. How can we get out of the common’s tragedy of environmental governance? As far as theory and institution practice are concerned, there are four main system solutions.

Solutions to the Governance: Four Kinds of “System Solution” The First Solution: Clearing Property Rights, Internalizing Negative Externalities

Coase (1991) said:

In the case of clear property rights, if transaction costs are zero or small enough to be negligible, the market mechanism can internalize the externalities, allocate resources optimally, this is the first Coase Theorem, if transaction costs are not zero or not small enough to be negligible, then the rational choice of system can reduce costs, internalize externalities and allocate resources optimally. (p. 57)

Coase Theorem states that as long as the property rights are defined, many economic activities that have external effects can achieve optimal welfare effects through appropriate contractual arrangements.

The so-called Coase Theorem proved that as long as cleared the private property, no matter this private property belongs to whom and how to assign it, the optimal resource allocation and institutional arrangements for the whole society can be found through free selling and buying of property and free choice of private contractual relationships. (Yang, 1997, pp. 16-17)

The reason for “Tragedy of the Commons” is that the private cost is less than the social cost, the property rights are unclear, therefore it is necessary to clear the property rights and internalize negative externalities.

Yanshan area north of Beijing-Tianjin-Hebei and western Taihang Mountain area are the key components of “capital city and its environs”. “Beijing-Zhangjiakou-Chengde ecological zone” constituted ecological barrier for Beijing and Beijing-Tianjin-Hebei metropolitan. To ensure water security in Beijing, there is no long-term industrial development in Hualia west of Beijing, Chengde, Fengning, Luanping and other places north of Beijing, which are in upstream of Guanting and Miyun Reservoir.

There is a huge economical gap between these areas and Beijing-Tianjin area, especially Zhangjiakou, Chengde, Baoding mountainous area, which have many state-level poverty-stricken counties, the eminent development gap affected the function of these areas as “ecological barrier”. Fully explore ecological, cultural and tourism resources of Beijing-Tianjin-Hebei ecological and cultural zone, reducing regional disparities and achieve balanced regional development. (Wu, 2006, p. 132)

There is an urgent need to establish and improve the ecological and economic compensation mechanism within the region, plan and lay out the regional economic development, environmental protection, and maintain balance between economic development and environmental protection through benefit compensation. By remodeling costs-benefit mechanisms, regional benefits could be shared by all cites in the urban agglomeration. Kaldor-Hicks proposed the principle “Those who benefits compensates”, in order to achieve optimal allocation of ecological resources through giving compensation to the losers.

In Figure 4, AC line represents the marginal ecological injured party’s original personal income; OF line represents marginal external costs. According to Kaldor-Hicks improvement principles, ecological compensation reduces the marginal external cost. With the increase of marginal income, MNPB’ line and


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MEC’ line are formed, and tend to reach MNPB’ = MEC’, promoting regional general welfare. Regional ecological beneficiaries (Beijing and Tianjin) can promote regional environmental protection from ecological compensation, counterpart support and economic cooperation. In order to achieve balanced regional industrial development and the environment, ecological compensation should adhere to three principles: the polluter pays principle (PPP), the user pays principle (UPP), and the beneficiary pays principle (BPP).

Figure 4. An economic analysis of regional ecological compensation. Source: Wang (2010).

In addition, the public governance process of Beijing-Tianjin-Hebei urban agglomeration is not a game, but infinitely repeated games among Beijing, Tianjin, Hebei and other cities. In the process of infinitely repeated games, taking into account the:

Long-term evenly matched battle, could only result in depletion of their financial intelligence, it is difficult to meet the next round of competition and innovation, they will tend to forsake short-term opportunity action, and more often adopt a cooperative game strategy in order to obtain long-term returns. (Bleeke & Ernst, 1998, p. 1)

Although the “Prisoner’s Dilemma” leads to the city intergovernmental uncooperative balanced position, the repeated game among the city governments could improve the probability of regional ecological cooperation.

The Second Solution: Government Intervention, Regional Governance Institutions to Solve the “Commons’ Dilemma”

Unlike Coase, Stiglitz proposed “non-decentralization laws”: the market will not be able to achieve efficient allocation without government intervention, the market should rely on government regulation, and regulation according to the law is better than fine. He opposed the idea of Coase, believed that externality problems such as regional air pollution are hard to clear property rights problems. What’s more, “private solution” cannot overcome the “free-riding” issue, high transaction costs will result in inefficiency. It is better to simply consider the “ready” government as a collective organization responsible for this “market issues” than to establish a “new” organization voluntarily and unitedly, it can also save transaction costs (Stiglitz, 1998, p. 8). But he also pointed out that the government should pay attention to two points of market

Ecological quality

Cost and

benefit

Interiorization of external cost


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regulation, neither overestimate the effect of direct government control, nor underestimate the ability of indirect regulation.

The eco-building of Beijing-Tianjin-Hebei urban agglomeration needs cooperation among city governments, beginning with the upstream region as a whole. This requires integrating Beijing, Tianjin and Hebei into a system, protecting water resources from upstream to downstream areas in the aggregation, improving environment systematically. It has launched a series of ecological cooperation between Beijing and Zhangjiakou-Chengde region, and it did have some actions. How can we better build sustainable regional ecological governance mechanisms? Domestic scholars have proposed many solutions: “administrative division adjustment programs”, “Zhangjiakou-Chengde ecological and economic comprehensive experimental zone”, “Beijing and Tianjin sandstorm source control program”, and so on. Some scholars believe that in the context of regional integration, as Zhangjiakou-Chengdu region has become Beijing’s ecological barrier and has a direct impact on Beijing’s ecological and water quality, the government can set up Zhangjiakou-Chengdu region as “Zhangjiakou-Chengdu ecological economic comprehensive experimental zone” which Beijing also takes part in, establish Beijing-North Hebei Basin Management Committee, integrate Zhangjiakou-Chengde area into Beijing, strengthen regional ecological security, and promote regional sustainable development through raising the solution to Beijing’s ecological environment and water issues up to national level policy issues.

Regional integration needs executive body of regional contracts. Under the impetus of the Central Government, Beijing, Tianjin and Hebei can set up “Beijing, Tianjin and Hebei Governance Committee” cooperatively, which should surpass existing regional cooperation mechanisms, and is a more consistent, higher level regional authority controlling more real power. Regional incremental benefits should be distributed equally through just rules of regional contracts, leading the regions to cooperate with the drive of benefit guide.

The Prisoner’s Dilemma model leads to pessimistic conclusion for regional cooperation, because “non-cooperative” is a strictly dominant strategy for both parties in a game. However, the rule can be changed. The rule system of urban agglomeration governance is unlike that of Prisoner’s Dilemma. Different rules lead to different return series systems and trigger strategic change. Based on regional resources, regional governance institution plans and lays out the economic development, environmental protection, remodeling costs—benefit mechanism to guide ecological cooperation of cities in the aggregations. The city in breach must be punished. Penalties include: stopping cooperation income distribution, deducting net margin, cancelling its reciprocal rights, and that the defaulting party will be isolated by other regional municipal governments. Clear expected penalties will increase city government’s cost of uncooperative strategy, which is conducive to the realization of regional ecological cooperation.

The Third Solution: A Range of Social Autonomy Elinor Ostrom said: Leviathan or privatization is not the only effective solution, which she analyzed from

an empirical point of view, and the public water governance of human society is not, in fact, dependent on the state nor the market.

Most of the modern economic theory believed the world was under the charge of a government (rather than many governments), and looked at the world from the government perspective… whenever the market failures, it rushed to rescue, it is economists’ task to suggest when and how to save. On the contrary, private individuals have little or no ability to solve the collective problems they face. This theory resulted in some misinterpretations of important economic and


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political issues. (Sugden, 1986, p. 54)

Ostrom pointed out the third viewpoint beyond the government and the market: governing the commons through social collective action. She first summarized the theoretical models people used to analyze public affairs solution, including Harding’s “Tragedy of the Commons”, “Prisoner’s Dilemma”, and Olson’s “Logic of Collective Action”; these theoretical models all illustrated tragic results of lack of effective governance in public affairs. She believed that the toolbox of policy analysts has a variety of tools, but still lacks “a concrete definite theory of collective action, by virtue of this theory, a group of the parties are able to organize themselves voluntarily, in order to maintain remaining formed by their own efforts” (Ostrom, 1999, p. 4).

The Fourth Solution: Competition-Collaboration Based on the Organization’s Comparative Advantages The governance of public affairs still needs theoretical thinking and practical exploration. We can still get

a valuable revelation through management practices in eastern and western urban agglomeration. That is to establish supportive cooperation-competition mechanism among civil society, government and market, based on comparative advantages of public sector, private sector and the third sector, to help achieve marketization and socialization of public services through competition, optimize allocation of social resources, and satisfy the demand for regional public goods.

Since the 1990s, the new regionalism perspective has gradually formed. New regionalism, based on the experiences of urban agglomerations governance in North America and Western Europe, believed that the realization of regional governance can be achieved through cooperative system arrangement among city governments. New regionalism stressed both the collaboration between governments, and the public-private sector collaboration. New regionalism advocates establishing cooperative, collaborative network relationship between governmental and non-governmental organizations, and also among private sectors, in order to effectively manage regional issues. Regional governance is a partnership collaboration process between the public and private sector.

The nature of public sector, private sector and the third sector determines that each of them has their own advantages. David Osborne said: the main advantages of the public sector are stability and freedom from the impact of preference; the main advantages of private sector are innovation ability, the ability to produce capital, the ability to obtain economies of scale; the third sector’s main advantages are compassion, responsibility, and the ability to generate trust. Therefore, the public sector is best for policy management, management implementation, implementation of fairness, prevention of discrimination, and enhancement of social cohesion. Private sector is best suited for economic tasks, investment, tasks generating profits. The third sector is best for social services, volunteer labor tasks. As the public sector, the private sector and the third sector have their own advantages and disadvantages, which requires the helmsman to combine scarce public and private resources through competitive mechanism, break the government monopoly of public goods supply, introduce social resource, deliver part of public service functions to enterprises, intermediary organizations and community groups, achieve “the official and civilians cooperation” in local public services, and improve public service performance.

In the governance model, the government function has changed, the steering function has gradually separated from the rowing function. “The public institution functions more like facilitator, broker, seed capitalists in today’s and early market rather than the bulk supplier for specific goods or services” (Osborne & Plastrik, 1996, p. 30). The main duty of the government lies at steering; the steersman should get a full picture


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of all the problems and possibilities, and balance the competing demands for resources, then combine all resources, so that other people can solve these problems, that is, the government should combine the scarce public and private resources to achieve the management target as a go-between. Governments need, in the first place, to reform public sector, on this basis, further introduce private capital, achieve the diversification of public services and the marketization and socialization of public service provision. The government is no longer the only public service provider, changed from public service monopoly to the public service supervisor, facilitator, and manager, in order to promote the multi-agent collaborative governance for regional ecological environment.

Conclusions and Reflection The rapid development of China’s urban agglomeration is both an opportunity and a crisis. With the

expansion of China’s urban agglomerations, the three core urban agglomerations have shown continuous integration development trend. This will not only further promote the development of China’s coastal economic belt, but also cause loss of natural buffers and digestive zone for protecting environment, leading to the combined effects of environmental pollution.

How can we solve the urban agglomeration regional ecological management dilemma? Chinese and foreign scholars did not give a single answer. Clear property rights, centralized governance, social autonomy, and competitive-collaboration based on the organization’s comparative advantage, are four options for regional ecological management. These four kinds of “system solution” are not always conflicting. At times they can be used independently, but they can also be used comprehensively, providing scientific management tool for urban agglomerations governance providing in different regional contexts.

References Aristotle. (1983). Political science. Beijing: Commercial Press. Bleeke, J., & Ernst, D. (1998). Collaborating to compete. Beijing: Encyclopedia of China Press. Chen, L. R. (1997). Comments on the Yangtze River Delta region quasi Megalopolis. Urban Planning Forum, 9(3), 28-31. Coase. (1991). Social cost problem. Property right and institution changes-collected translated works of property right school and

new institution school. Shanghai: Joint Publishing. Ding, H. J., & Ning, Y. M. (1983). Introduction of city geography. Hefei: Anhui Science Press. Hardin, G. (1968). The tragedy of the commons. Science, 168, 1234-1248. Li, G. P. (2012). Research on Beijing-Tianjin-Hebei urban agglomeration development and management. Beijing: Peking

University Press. Li, K. Q. (2013). Abolish unreasonable policy in China. Retrieved from http://news.sohu.com/20130330 Liu, J. (1996). The theory and practice of China’s administrative subdivision. Shanghai: East China Normal University Press. Lloyd, W. F. (1833). Two lectures on the checks to population. Oxford, England: Oxford University Press. Osborne, D., & Plastrik, P. (1996). Banishing bureaucracy: The five strategies for reinventing government. Shanghai: Shanghai

Translation Press. Ostrom, E. (1999). Governing the commons. Shanghai: Joint Publishing Press. Stiglitz. (1998). Why does the government interfere the economy? Beijing: China Logistics Supply Press. Sugden, R. (1986). The economics of rights, cooperation and welfare. Oxford: Blackwell. Tianjin Economy Research Group. (2010). Binghai new district plays important part in Beijing-Tianjin-Hebei urban circle’s raise. Wang, J. (2010). The Beijing-Tianjin-Hebei agricultural cooperation model based on ecological compensation mechanism.

Journal of Hebei University of Economics and Trade, 24(5), 67-69. Wang, S. G. (2003). Diversity and unity. Zhejiang: Zhejiang People’s Press. Wu, L. Y. (2006). The second period report of development planning of urban and rural space in Beijing-Tianjin-Hebei region.

Beijing: Tsing Hua University Press.


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Xiao, J. C. (2009). Ten urban agglomerations in China. Beijing: Economic Science Press. Xu, X. Q. (1994). The formation of Pearl River Delta Metropolis. Urban Problems, 23(3), 45-48. Xu, Y. F. (1995). The definition of urban intensive area-taking Jiangsu province as an example. Economic Geography, 12(3),

67-69. Xue, F. X. (2005). China’s extended metropolitan regions: Formation and delimitation. Economic Geography, 36(6), 34-37. Yang, X. K. (1997). Modern economy and China’s economy. Beijing: Chinese Social Science Press. Yao, S. M. (1992). Urban agglomerations in China. Beijing: University of Science and Technology of China Press. Zhou, Y. X. (1988). Definition of urban place and statistical standards of urban population in China: Problem and solution. Asian

Geography, 7(1), 12-18.


Solitary Sunnah and Its Legislative Value Among the Muslim

Jurists: Readings of Selected Examples

Abdurezak A. Hashi International Islamic University Malaysia (IIUM), Pahang, Malaysia

The science of hadith authentication and classification (ulum al-hadith) has been developed by Muslim scholars

mostly based on critical analysis of the texts and chains of the reports (ahadith) that are attributed to Prophet

Muhammad (s.a.w.). Though this science is basically designed to identify the authentic reports which are truly the

words, actions or tacit approvals of the Prophet (s.a.w.), however, it has left its implications on fiqh (legal) opinions

among the Muslim jurists (fuqaha), who left contrasting legal opinions on certain issues of fiqh, some of which are

as a result of their differences on hadith classification, particularly classifications of hadith into solitary and

recurrent reports. This paper uses analytical method, and intends to address the implications of hadith

authentication and classification methods on the legislative power of the sunnah, with particular emphasis on the

solitary sunnah and its legislative value among the Muslim jurists.

Keywords: solitary hadith, implications, legislative value, fiqh, analysis

Introduction: Functions and the Position of the Sunnah in Relation to the Qur’an

The Arabic term sunnah means clear path, established course of conduct or way of life. When sunnah is associated to the Prophet (s.a.w.), by saying sunnatu-rasulilah, it means the way of life of Prophet Muhammad (s.a.w.), including his deeds, sayings, tacit approvals, and to some extent, descriptions of his physical features and moral behavior. Closely related to sunnah is the word hadith which literally means report or narration; conceptually, hadith signifies the reports that are narrated on the authority of the Prophet (s.a.w.), thus hadith has the same denotations of the word sunnah, whereby sunnah and hadith interchangeably denote the way of life of Prophet Muhammad (s.a.w.). In this paper, these two terms are used as synonymous terms. With regards to the position of the sunnah in relation to the Qur’an, besides practicing the teachings of the Qur’an, which is the founding scripture of Islam, Muslims are also told to follow the way of life of Prophet Muhammad (s.a.w.). In chapter 33, verse 21, the Qur’an characterizes the Prophet (s.a.w.) as a model or good example of life for every Muslim, while in chapter 3, verse 32, the Qur’an makes it clear that those who wish to be obedient to Allah (s.w.t.), should also be obedient to the Prophet (s.a.w.). In chapter 16, verse 44, the Qur’an also mentions that the duty of the Prophet (s.a.w.) is to explain the Qur’an (litubayyina li al-nas), through words, actions or tacit approvals, in such a way that the sunnah basically forms the practical account of the Qur’anic ideals and values. These and many other verses of the Qur’an prescribe Muslims to follow and practice the way of life of

Corresponding author: Abdurezak A. Hashi, Ph.D., assistant professor, Department of Biotechnology, Kulliyyah of Science,

International Islamic University Malaysia (IIUM); research fields: comparative religion, theology, philosophy, worldviews, modality, religious pluralism, Islamic thought and studies of the Qur’an. E-mail: [email protected].

D DAVID PUBLISHING

SOLITARY SUNNAH AND ITS LEGISLATIVE VALUE

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the Prophet (s.a.w.). These verses also closely associated the sunnah to the Qur’an, in such a way that the sunnah becomes the second source of the Islamic teachings, based on which beliefs, values, laws and conducts are understand and evaluated. It interprets the Qur’an through different levels1: (1) the sunnah confirms and supports (sunnah mu’akkidah) the teachings of the Qur’an, in such a way that the Qur’an and sunnah become complementary to each other2; (2) the sunnah interprets (sunnah mubayyinah) the Qur’anic concise terms; either by providing detailed accounts (tafsil) of the concise words (mujmal) of the Qur’an, or by limiting (takhsis) the generic terms (al-‘am) of the Qur’an, however, in both cases the sunnah plays a role of interpreter of the Qur’an; and (3) the sunnah might provide an independent teachings, which should be in line with the teachings and the message of the Qur’an, such as those narrations in which the Prophet (s.a.w.) prohibited wearing silk or golden cloths to Muslim man. For it interprets the ideals of the Qur’an and thus forms its practical account, Muslim scholars of different schools have unanimously agreed on the principle that the sunnah of the Prophet (s.a.w.) falls in the second position of the list of the shari’ah sources (masadir al-shari’ah)3; it comes after the Qur’an. Furthermore, for it constitutes the second source of the Islamic teachings, the sunnah became the subject of academic studies since the early age of the Islamic history4. These studies addressed different dimensions of the sunnah, including authentication and classifications, as well as the studies that highlighted the position of the sunnah in relation to the Qur’an5. This paper intends to highlight the legislative power of the sunnah, particularly the solitary sunnah. It begins with a concise exposition of hadith authentication method as well as its classifications, followed by an in-depth analysis of the solitary sunnah and its legislative value among the Muslim jurists.

Principles of Authentication and Classification of the Sunnah

Given the fact that by the end of the first century of the Muslim calendar and onwards, there were, already, thousands of reports which are attributed to the Prophet (s.a.w.), some of which are forged or fabricated (‘Azami, 1977; Abdullah & Abdul Manas, 2006), Muslim jurists and scholars of hadith (report), who lived in the second and third centuries of the Muslim calendar and onwards, have endeavored to establish common

1 Despite the fact that the jurists unanimously consented on the principle that the Qur’an and sunnah are the supreme sources of Islam, method and style of interpretation remain a matter of disagreement. In the course of interpretation of the text (nass) of the Qur’an and sunnah, some jurists desired the style of syllogism (ahl al-ra’yi), others prefer traditionalism (ahl al-hadith) over syllogism, while others adopted literalism (al-zahiriyyah). This variety of styles of interpretation led to appearance of various schools of thought, including among others, Hanafi School, Maliki School, Shafi’i School and Hambali School. The four mainstream schools of Islamic jurisprudence are al-Hanafiyyah founded by Abu Hanifah (d.148 A.H.), Al-Malikiyyah founded by Imam Malik (d.179 A.H.), Al-Shafi’iyyah founded by Imam al-Shafi’i (d.204 A.H.), and Al-Hambaliyyah founded by Ahmad b. Hanbal (d.241 A.H.). Despite the fact that convergences and divergences appear here and there in their views, nevertheless, there has been harmony for the most part among their various scholars throughout Islamic history. 2 Good example of this type of sunnah is the narrations of the Prophet (s.a.w.) in which he addresses pillars of faith and Islam, which the Qur’an has already explained. 3 Indeed, the Qur’an and sunnah form the divine guidance (al-wahy al-rabaniyi), which cannot be separated from each other; whereby the Qur’an constitutes the recited revelation of God (al-wahy al-maqru’), while the sunnah forms the practical revelation (al-wahy al-amali). 4 Notwithstanding with the fact that Muslims practiced the sunnah in daily life activities, the official documentation of compilation of the sunnah started formally around the end of the first century of the Muslim colander. Generally speaking, the studies of the sunnah (the way of life of Prophet Muhammad s.a.w.), include three components, namely the position of the sunnah in relation to the Qur’an, principles of validation, and classification of the sunnah. 5 With regards to the position of the sunnah in relation to the Qur’an, Muslim scholars of different schools unanimously agreed that the sunnah is the second source of Islamic teachings. For further details see: Al-Zuhaili (1989), Badran Abu al-Ainain Badran (1965), and Kamali (1998).


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principles through which the authenticity of given reports (ahadith) are established and understood6. After sometime of scholastic debates and dialogues on the principles of hadith authentication, Muslim jurists and scholars of hadith have categorically agreed on common principles of hadith validation, with some differences on the details. Generally agreed authentication system of any given report consists of, among others, the following principles (Al-Khatib, 1981). First, the teaching (matn) of the report (hadith) which is attributed to the Prophet (s.a.w.) should not contradict with the Qur’anic text7. Second, it should not be against the dictates of reason or the laws of nature and common human sense (experience) (‘Azami, 1977; Al-Khatib, 1981). Third, it should not be contradictory to generally agreed principles of Islam (qawa’id al-shar’iyyah al-amah)8. Fourth, the chain of the narrator (sanad) who reported the narration should not be disconnected (maqdhu’). Fifth, narrators (ruwat) of the hadith should be morally upright (‘adl) and with retentive memory (hifz)9. These principles, some of which are derived from religious teachings, while others appeal to the common sense, are known to have been employed by Muslim jurists (fuqaha) and scholars of hadith, to authenticate, classify and interpret those reports (ahadith) which are attributed to the Prophet (s.a.w.). Both the jurists (fuqaha) and scholars of hadith (muhadithun) had consented on the principle that, in order for a hadith, any given hadith, to be valid with legal authority, both the narrator (mukhbir) and the content (mukhbir bihi) have to fulfill the abovementioned common conditions of hadith authentication10. In addition, based on these principles, reports which are attributed to the authority of the Prophet (s.a.w.) are divided into classes on different grounds, such as the degree of authenticity, the condition of the chain (sanad) or number of narrator. For instance, there are cases in which based on the degree of authenticity, reports are classified into valid report (hadith sahih) and invalid report (hadith dha’if)11; while based on the condition of the chain, given reports are classified into

6 For further reading on the history of hadith documentation and preservation see the followings: Abu Shahbah (1982), and Abu Layth (2003). 7 This is because, if the narrated report contradicts with the Qur’an, it implies unimaginable scenario; narrating a report that is contradictory to the Qur’an implies that the Prophet is teaching something that is not in line with teachings of the Qur’an, which is never being the case. Thus if there are discrepancies between the zahir al-nass of the Qur’an and any given report then such report should be rejected or interpreted in a way that harmonizes it with the Qur’an. This principle is founded on the understanding that, since the Qur’an is transmitted through continuous mass testimony (mutawatir) which stands beyond doubts, its text and message constitute the foundation of Islamic teachings. Similarly, it is hard to imagine that the Prophet (s.a.w.) would invite the entire mankind to believe in the Qur’an and at the same time will teach something contradictory to it. Hence, since the role of the Prophet (s.a.w.) is to convey (balagh) and interpret (bayan) the message of the Qur’an, any given report attributed to the Prophet (s.a.w.) must be in harmony with the teachings of the Qur’an. Second, the Qur’an was documented during the time of the Prophet (s.a.w.) and transmitted trough mutawatir, thus narrated reports (ahadith) have to be in line with teachings of the Qur’an. This principle allows evaluating given narrations through the teachings of the Qur’an; if there is a contradiction between the Qur’an and the reports attributed to the Prophet (s.a.w.), then that would automatically indicate the invalidity of such report. 8 Muslim jurists agreed to reject narrations that go against generally agreed principles of the shari’ah. For instant ‘Aishah (r.a.) questioned the authenticity of the narration in which Abu Hurairah said: “whoever washes dead person or caries has to renew his or her ablution…”, then when ‘Aishah (r.a.) received such narration she replied: “does that mean Muslim dead bodies are impure (najis)?”. 9 These principles are collectively known, as the sciences of hadith (ulum al-hadith), a discipline in which narrations and reports attributed to Prophet Muhammed (s.a.w.) are studied and evaluated. 10 With regards to the narrator (mukhbir) of the hadith, both agreed that hadith narrator has to fulfill the following conditions: (1) mentally sound (‘aqil); (2) Muslim; (3) just; and (4) with retentive memory. In his monumental book, al-Risalah, Imam Shaf’i, argued that narrators of hadith were those who believe in Allah (s.w.t.), with the character of being truthful (sidq). Similarly, according to Imam Shaf’i every narration must be connected to the Prophet (s.a.w.). Imam Shafi’i stated: “whenever we find two conflicting narrations dealing with a single event, the savant must investigate ‘the heart of the matter’ thoroughly and only accept as valid that which is more likely to be in harmony with spirit of the Book, the Sunnah and the general principles of the Muslims”. See Imam al-Shafi’i (2005, pp. 38-39), and Mohd Nabi Aziz Abd Aziz (2007, p. 109). 11 Authentic hadith is the report that is reported with continues chain, by upright person with retentive memory, and without any outlandish defects. However, weak or dha’if report is the narration that does not fulfill the criterion of authentic reports.


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hadith maqtu‘ (disconnected report), hadith mutasil (connected report), hadith marfu‘ (elevated report), etc.; whilst based on the number of narrators in the chain, given reports are categorized into recurrent report (hadith mutawatir), solitary report (hadith ahad), etc. Generally speaking, to establish the authenticity as well as the authority of given reports (ahadith), these aspects are all important.

Despite the fact that Muslim jurists (fuqaha) agreed on the position of the sunnah and its relation to the Qur’an, however, styles of hadith validation and modes of classification are matters of disagreement among the Muslim jurists. This is because, though in principles, jurists (fuqaha) and scholars of hadith agreed on the position of the sunnah in relation to the Qur’an12, however, classifications of reported narrations (ahadith) into classes, for instance, solitary and recurrent, as well as the legislative authority of each class, are also matters of disagreement among them. For instance, Muslim jurists hold different opinions about the legislative value of the solitary hadith, particularly when it comes to specification (takhsis) and limitation (taqyid) of the generic terms (‘am and mutlaq) of the Qur’an13; some of them are on the view that solitary hadith has the power to specify the generic terms of the Qur’an, while others categorically opposed to such view, as analyzed in the following paragraphs.

Solitary Sunnah and Its Implication on Fiqh

The Arabic word ahad literally means solitary or singular. Conceptually, hadith ahad or solitary report is the narration that is reported by single narrator or odd individuals, regardless of whether this singularity occurs throughout the chain or at some levels of the chain. In the general sense, hadith ahad refers to the Prophetic narration “that is narrated by one transmitter” (Kamali, 2005, p. 173), in certain stages or throughout the chain of the narration; however “this understanding is not always accurate. Ahad is actually defined as a hadith that does not fulfil the requirements of mutawatir”14. The term mutawatir is rooted in the Arabic word of tawatara, i.e., recurrent or continues succession. In the science of hadith, mutawatir is the report “that has been transmitted by an indefinite number of people in such a way that precludes the possibility of their agreement to perpetuate a lie upon the Prophet (s.a.w.)” (Abdullah & Abdul Manas, 2006, p. 77). Reported by an indefinite number of narrators, hadith mutawatir signifies a practice that is repeatedly done or said by the Prophet (s.a.w.), in a way that such saying or practice is known to a large number of Companions of the Prophet (s.a.w.), some of whom reported it with its identical form or meaning. The distinction between recurrent hadith and solitary hadith is: “based on the manner in which the tradition (hadith) has been communicated from the Messenger of Allah (s.w.t.), to us”15; whereby unlike the recurrent report which reflects widespread incident or saying that has been narrated by a larger number of people, solitary hadith is

12 Scholars all agreed that the position of the sunnah in relation to the Qur’an is to interpret and expose the Qur’anic teachings. 13 For instance, Hanafi School disagreed with the mainstream of Muslim jurists (jumhur) on the solitary hadith and its relation to the Qur’an; this is because, in principle, Hanafi School agreed on the authority of the sunnah in general, however, they questioned the legislative value of the solitary hadith, particularly when it comes to specification (takhsis) and limitation (taqyid) of the generic terms (‘am and mutlaq) of the Qur’an. They argue that, the Qur’an is transmitted through continuous mass testimony which is beyond possible doubt, while solitary hadith is transmitted through solitary chain of narration, in which the possibility of error in it cannot be ruled-out. Thus, Hanafi School imposed a number of additional conditions for the acceptance of solitary hadith in legislations. Hanafi School of jurisprudence is marked by less reliance on mass oral solitary traditions as an authoritative source of legislative teachings, and with greater emphasis on the role of qiyas (analogical reasoning). 14 It may have been narrated by one, two or three persons at every level or the number may vary, but their number does not reach that of the mustawatir. See Kamali (2005, p. 173). 15 Retrieved from http://islamicsystem.blogspot.com/2011/11/definition-of-iman.html.


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marked by singularity of transmission16. Reported by a large number of people throughout the chain, who is not likely to agree upon a lie, and

supported with sensible evidence, the legal value of recurrent hadith roses high on given issues; it:

Curries definite knowledge and prescribe certainty, and thus its legal authority is the same like that of the Qur’an. The large number of people involved in reporting the mutawatir hadith produces certainty in such a way that the report is without doubt the hadith of the Messenger of Allah (s.w.t.).17

Unlike the recurrent hadith, which carries decisive authority on given issues, for it is reported by a lesser number of transmitters compared to mutawatir, the decisive certainty of solitary hadith is disputed among the jurists18. Some of the jurists, like those of Hanafi School adopted strict measures on accepting the legal authority of solitary hadith in general, while some of the jurists, like those of Hanbali, Zahiris and to some extent Shafi‘i Schools, adopted accommodative attitude toward accepting its legal authority19. The jurists’ dispute about the legal authority of the solitary hadith is not about whether given solitary narrations are weak or not, this dispute is about its reliability and strength to legislate. In fact for authentication wise, the requirements that the transmitter of recurrent and solitary narrations has to fulfil are the same, whereby narrators of ahad and mutawatir reports must be competent, just and with retentive memory.

In the instances when given ahad narration fulfils these requirements and it:

Is free from obvious and hidden defects, it is a decisive evidence according to the Zahiris (literalists school of fiqh) and Hambalis (hamabli school of law), but it is less decisive (i.e., zanni) according to the majority of the madhahib. (Kamali, 2005, p. 173)

Zahiris and Hambalis are on the view that if the solitary hadith fulfils the conditions of authenticity, the solitary hadith functions as decisive evidence with binding legislative authority. However, same like the jurists of Zahiris and Hamabalis, the jurists of Hanafi and Maliki Schools agreed on the principle that ahad narration has to fulfil generally agreed method of hadith validation, yet to further “verify reliability and strength of the ahad hadith” (Kamali, 2005, p. 173), jurists of Hanafi and Malaiki Schools tend to impose some additional requirements. For instance, narrated by competent, just transmitter with retentive memory, and free from obvious and hidden defects, ahad narrations, according to the jurists of Maliki school, should also be in line with the practices of Madinah people (amal ahl al-madinah). This is because, according to Maliki school, Madinah “practice is the true reflection of the teachings and sunnah of the Prophet (s.a.w.), and as such it is more reliable than the reports of odd individuals” (Kamali, 2005, p. 173). Thus, if the solitary narration contradicts the practice of Madinah people, then jurists of Maliki School prefer the practice of Madinah over the solitary hadith.

16 Imam al-Nawawi, in Sharh Sahih Muslim, stated that the solitary report was a “report that does not fulfil the conditions of the mutawatir report, regardless of whether the narrator was a single person or more. It is the kind of report that generates dispute over its ruling. The overwhelming majority of Muslims, ranging from the Companions, Successors of the Companions, and the following generation of narrators of tradition (muhaditheen), jurists (fuqaha), scholars of usul (foundations of jurisprudence) agree to take the individual report as evidence in the sacred law relating to actions, but they do in fact entail speculation and not certainty”. Retrieved from http://islamicsystem.blogspot.com/2011/11/definition-of-iman.html. 17 Retrieved from http://islamicsystem.blogspot.com/2011/11/definition-of-iman.html. 18 This dispute is not because hadith ahad is weak or forgery, neither about the requirements that the transmitter of the solitary narrations has to fulfil is different from that of the recurrent hadith. 19 Leading jurists, like Imam al-Shatibi, stated that “the Lawgiver allowed singularly narrated traditions which engender speculation only in matters concerning actions which are in the branches (furu’) but not the foundation (usul) of the din (religion)”. Retrieved from http://islamicsystem.blogspot.com/2011/11/definition-of-iman.html.


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Similarly, jurists of Hanafi School have also laid down a number of additional requirements to verify the reliability of solitary hadith20. First, according to jurists of Hanafi School, solitary narration should not contradict the known actions and practices of its narrator; “should it be known that the narrator (of ahad) had actually acted contrary to his own report, this would mean the report is unreliable” (Kamali, 1998, pp. 74-76). This is because, says Hanafi School, Companions of the Prophet (s.a.w.) are known to have firmly applied and followed the teachings of the Prophet (s.a.w.) and it is never been the practice of the companions to narrate a report on the authority of the Prophet (s.a.w.) and ignore it in practice. Thus, if there is a solitary narration which goes against the known practices and decisions of its reporter, then the legislative value of such report demises. It is on this ground, for example, that the Hanafi School does not rely on the following solitary hadith, narrated by Abu Hurayrah: “If a dog licks a dish, wash it seven times, one of which must be with clean sand” (Al-Albaniyi, 1988, p. 72). According to the view held by jurists of Hanafi School, this solitary narration is unreliable, and the reason is because Abu Hurayrah, the transmitter of this solitary report, “did not act upon it” (Kamali, 1998, p. 75). According to the jurists of Hanafi School, this particular solitary hadith also goes against the normal practice of washing impure substances which is one or three times. Therefore, since the requirement of washing is normally one, two or three times, and the narrator of this report (Abu Hurairah) does not act upon it, this solitary report is considered weak, and thus jurists of Hanafi School does not rely upon it.

Furthermore, this is also one of the reasons of why Hanafi School questioned the reliability of the solitary report in which male guardian (wali) is required for female marriage contract, and took the position that male wali is not a requirement for the validity of female marriage contract. Aishah (r.a.) reported the Prophet (s.a.w.) saying that: “No marriage except with a guardian and the ruler is the guardian of she who has no guardian” (Abu Da’ud, 2004). On another occasion, Aishah (r.a.) reported similar narration but with different tone and words, as follows: “if any woman marries without the permission of her guardian, then her marriage is void, then her marriage is void, then her marriage is void” (Al-Termidhiyi, 2006). For Hanafi School, this solitary hadith is unreliable for a number of reasons, including that the reporter of this narration, which is Aishah (r.a.), does not act upon it. This report made male guardian a must for the validity of female marriage contract, however, the narrator of the hadith, Aisha (r.a.), arranged the marriage of her nice, the daughter of her brother namely Hafsa b. Abdul Rahman, while her brother was absent during the marriage contract initiation (Ibn al-Hamam, Muhammad Ibn Abd al-Wahid, 1900, p. 159). Aisha’s action in this case seems to be contradictory to the report that is attributed to her on the need for male guardian to initiate female marriage contract. As such, for Hanafi School, if indeed Aisha (r.a.) narrated this report, why did not she act upon it? The fact that the narrator did not act upon his or her own solitary narration, says the Hanafi School, weakens the reliability and legislative power of such a solitary narration. For that reason, the Hanafi School of law does not rely upon this narration, and thus prefers not to include male guardian in the essential requirements of the validity of female

20 Jurists of Hanafi School of law agreed on the authority of the sunnah in principles, however, they have imposed somewhat stricter conditions to accept the legislative value of the solitary hadith, particularly when it comes to specification (takhsis) and limitation (taqyid) of the generic terms (‘am and mutlaq) of the Qur’an. They argue that, the Qur’an is transmitted through continuous mass testimony which is beyond possible doubt, while the solitary hadith is transmitted through solitary chain of narration, in which the possibility of error in it cannot be ruled-out. Thus, Hanafi School of jurisprudence is marked by less reliance on mass oral solitary traditions as an authoritative source of legislative teachings, and with greater emphasis on the role of qiyas (analogical reasoning), this does not however mean that Hanafi School of jurisprudence is completely denying the legal authority of solitary reports, rather it acknowledges the legislative power of solitary hadith, but imposes a number of additional conditions for the acceptance of solitary hadith in legislations. See Abu Halibah (2001, pp. 154-155), and Kamali (1998, pp. 74-76).


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marriage contract. However, “the majority of jurists including those of Shafi’i School, on the other hand, take the view that

discrepancies between the report and the action of the narrator may be due to forgetfulness or some other unknown factor” (Kamali, 1998, p. 75). They argue that, in the case where there is a contradiction between the actions of the narrator and his or her solitary reports, priority would be given to the reports over the actions of the narrator. The reason is because reports (ahadith) are authority (hujjah) while human actions and opinions are not; thus what is important is the narration not the narrator’s action. Thus, “discrepancies of this kind do not, by themselves, provide conclusive evidence to render the report unreliable” (Kamali, 1998, p. 75); hence, the sunnah would be evaluated in itself regardless of narrator’s behavior. Responding to the Hanafi School’s opinion on this hadith, al-Shirazi (d.476 A.H.), who is a prominent Shafi’i jurist, argues that if a narrator (rawi) does not act upon his or her narration, that does not necessarily make his or her narration void. The reason is because, the words of the Prophet (s.a.w.) are authority (hujjah), while the actions of the narrator are not authority, thus the later cannot nullify the former; provided the report fulfils other requirements of hadith validation (Al-Shirazi, 1983, p. 343). Thus, according to the jurists of Shafi’i School of law, the presence of male guardian (wali) to initiate female marriage contract is required21; indeed in the views of Shafi’i School of law, male guardian is a must prerequisite (shart) for the validity of marriage contract; and any marriage contract that is done without male guardian (wali) is null and void. This is due to the fact that, jurists of Shafi’i School of law and others accepted the legislative authority of this solitary report, and thus concluded to the opinion that a female needs a relative male guardian to represent her in the marriage contract, otherwise her marriage will not be valid.

Second, according to Hanafi School of law, solitary hadith should not contradict with apparent (literal) meaning of the Qur’anic text (zahir al-nass). This condition (shart) is a general requirement upon which every narration, both recurrent and solitary reports, are validated, however, Hanafi School of law gives greater emphasizes to this condition (shart) on the validation of solitary narrations. The reason is because, the text of the Qur’an forms decisive certainty, while solitary narrations, says Hanafi School of law, do not constitute firm certainty, thus the latter should not, in any form, explicitly or implicitly, run-counter to the former (Al-Samarqandi, 1987, pp. 433-434). This is the reason why Hanafi School of fiqh, for instant, questions the reliability of the solitary hadith that states: “no marriage may be made without the presence of a guardian”22. Besides the fact that this hadith contract with the known practices of its reporter, as mentioned earlier, according to Hanafi School of law, the teachings of this hadith seems to be different from the apparent meaning (zahir al-nnas) of the Qur’anic texts such as verses in chapter 2, verses 230-231, and chapter 2, verse 240, which, according to the jurists of Hanafi School of fiqh, explicitly permit woman to initiate her marriage contract without male guardian. Thus the legal authority of the abovementioned narration in which the male guardian is required for the female marriage contract is questioned. The Hanafi School of law is on the view that since woman is permitted to initiate other contracts, such as selling and buying, without referring to a male guardian (i.e., brother or any other male relative), she can also initiate a marriage contract as well, without male guardian.

Third, among the additional conditions laid down by Hanafi School of law to accept the reliability and the 21 He could be her father, paternal grandfather, son, grandson, full brother, paternal half-brother, paternal uncle, etc., with the condition that he should be a Muslim. 22 For further discussion on this and other narrations related to this subject see: Ibn Rushd (1999).


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legal authority of the solitary hadith is that the subject matter of the solitary narrations should not be a matter “that would necessitate the knowledge of a vast number of people” (Kamali, 1998, p. 75). For instance, if we receive an information attributed to the Prophet (s.a.w.), by means of solitary chain, of an action of the Prophet (s.a.w.) which is supposed to be known by a vast number of people (ma ta‘umu bihi al-balwa), probably hundreds or thousands, yet one or two have narrated it, the legislative value of such report is challengeable (Al-Jasas, 2000, p. 6). For this reason the Hanafi School of law questioned the legislative authority of the solitary narration which states that: “anyone who touches his sexual organ must take a fresh ablution”. The Hanafi School argues that, had this hadith been authentic, it would have become an established practice among all Companions of the Prophet (s.a.w.), which is not the case; hence the Hanafi School does not rely upon this narration. Nevertheless, the Shafi‘i School of law does accept the legislative authority of this narration, and holds that the people who witness or observe an incident do not necessarily report it; they argue that there are incidents in which countless people witnessed, like pilgrimages (hajj), but only few of them reported their observations. As such, for Shaf’i School of law, to insist of this kind of requirement for the reliability of the solitary hadith makes no sense, thus they tend to accept the legislative authority of this solitary narration.

Fourth, the solitary hadith should be in harmony with the renowned narrations (al-sunnah al-mashhurah) (Mohd Nabi Aziz Abd Aziz, 2007, p. 70). Discrepancies between famous reports (al-sunnah al-mashhurah) and solitary hadith, says the Hanafi School of law, make the legal authority of solitary hadith unreliable. It is on this ground that the Hanafi School of law does not rely on a number of reports including the report on witness (shahid) and swearing (yamin) on the part of the accuser (Al-Hindiyi, 1998, p. 76), which according to Hanafi School of law contradicts the famous report that requires witness from the accuser and swearing from the accused.

Fifth, another additional requirement imposed by the Hanafi School of law on the acceptance of solitary hadith is that solitary hadith should not contradict with analogical reasoning (qiyas); however, in the cases whereby the solitary report contradicts analogical reasoning, if the narrator of a given solitary haidth is not a faqih (jurist) (Al-Badkhashiyi, 1984, p. 354), then Hanafi School of law prefers qiyas over solitary narration. The Hanafi School of law holds that when a narrator of solitary hadith is not a faqih (jurist), his report is accepted only if it agrees with qiyas, otherwise qiyas would be given priority over ahad.23 However, if the narrator is known to be faqih, such as the four rightly guided caliphs (khulafa’ al-rashidin), then his solitary report would be preferred over qiyas (Al-Sarakhsi, 1996, p. 276). It is on this ground that the Hanafi School of law has questioned the legislative value of the hadith reported by Abu Hurayrah (r.a.) on selling the animal whose milk is retained in its udders (musarrat) so as to impress the buyer. Abu Hurayrah reported that the Prophet (s.a.w.) said:

Do not retain milk in the udders of a she-camel or goat so as to exaggerate its yield. Anyone who buys a musarrat has the choice, for three days after having milked it, either to keep it, or to return it with a quantity (sa‘) of dates. (Al-Termidhiyi, 2006)

This hadith according to Hanafi School of law is contrary to qiyas, that is, to make analogy with the rule of equality between indemnity and loss (Al-Tamartashi, 2000, pp. 266-267). Hanafi School of law holds the

23 The Hanafis maintain that when the narrator of ahad is not a faqih, his report is accepted only if it agrees with qiyas, otherwise qiyas would be given priority over ahad. However, if the narrator is known to be a faqih, then his report would be preferred over qiyas. See Kamali (1998, p. 76).


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view that the quantity (sa‘) of dates may not be equal in value to the amount of milk the buyer has consumed. Hence if the buyer wishes to return the beast, he must return it with the cost of milk which was in its udders at the time of purchase, not with a fixed quantity of dates. However, jurists from other schools of fiqh have, on the other hand, accepted this legislative value of this hadith and have given it priority over qiyas. These jurists are on the view that, for it was used to be the staple food in those days, dates are particularly specified in this report, thus the compensation may include of a sa‘ of dates or of its monetary value.

Sixth, according to Hanafi School of law, the subject matter of the solitary hadith should not be on the issues and practices upon which the companions disagreed (mima ikhtalafa al-sahabah fi al-amali bihi) (Mohd Nabi Aziz Abd Aziz, 2007, p. 74). If, for instant, it is reported to us a solitary narration which reflects on one side of the companions’ views of any given issues, then the legislative authority of such narration would not be binding (Al-Sarakhsi, 1393 A.H., p. 369). This is because, in this case the narration consists of one opinion, and opinions have no binding authority.

Concluding Remarks In the legal profession, judgments of right or wrong are issued on given matters, however, judgments are

valid only if the sources or evidences of given judgments are firmly established with decisive sentence (nass qat‘i). With this in mind, Muslim jurists have in principles agreed that the sources of fiqh judgments (al-ahkam al-fiqhiyyah) are, among others, the Qur’an, the sunnah, Ijma‘ (consensus), qiyas (analogy), etc., whereby legal judgments of business transactions, family disputes, as well as criminal cases, are all derived from these evidences (adilah). However, based on moods of transmission as well as the level of clarity of the sentences, the jurists classified these sources (adilah) mainly into two types: dalil qat‘i, i.e., clear or decisive source, and dalil zani, i.e., speculative source. The former could be further divided into two: qat‘i al-thubut or reported by means of certainty, and qat‘i al-dalalah or to signify certainty. In this case, given sources of judgement (adilah al-ahkam) might be reported by means of certainty, like the verses of the Qur’an, but with speculative sentence (zaniyu al-dalalah), such as those verses of the Qur’an, which indicate many meanings to many people (al-mutashbihat). In addition, it is also true that a given source or evidence might be presented with decisive sentence (qati’ al-dalalah) but reported through probable chain (zaniyu al-thubut), as in the case of some narrations that are attributed to the Prophet (s.a.w.), which are basically stated with decisive sentence (qati’ al-dalalah), but through speculative transmission (zaniyu al-thubut) as in the case of many solitary narrations (ahadith). It is also possible that given evidences might be both qat‘i al-thubt and qa‘i al-dalah (reported by means of certainty with decisive sentence) while some evidences might be both zaniyu al-thubut and zaniyu al-dalah (reported by means of uncertainty and with speculative sentence). The mainstream of the Muslim jurists (fuqha) is on the view that the fiqh judgments which are based on the evidences that are qat‘i al-thubt and qa‘i al-dalah (reported by means of certainty and with decisive sentence) are binding, such as the Qur’anic verses and the authentic recurrent hadith which are stated with decisive sentence. However, the jurists also noted the principle that the validity of fiqh opinions and judgments which are based on evidence that is zaniyu al-thubut (reported by means of uncertainty) can be challenged, even though such evidence is presented with clear sentence, such as the solitary narrations (ahadith), the authenticity of which is disputed. However, in the cases whereby the evidence is reported by means of certainty or recurrent such as the Qur’an, but with probable or speculative sentence (zaniyu al-dalalah), differences of opinions on given issues are then allowed.


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Based on this categorization, the fuqaha agreed that the evidences (al-adilah) of jurisprudence which are reported by means of certainty or recurrent (mutawatir) such as the Qur’an and hadith mutawatir have binding legal authority as long as the sentences of such verses and recurrent hadith are decisive (qa‘i al-dalah); a denial of which is tantamount to infidelity (kufr). However, the fuqaha disagreed on the legal authority of narrations which are reported by means of ahad; some of them like Hanbalis and Zahiris, have adopted accommodative behaviour toward solitary hadith, while others like Hanafi School of fiqh adopted somewhat strict measures toward accepting the reliability of solitary hadith and thus minimized the legal authority of solitary hadith on given matters.

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al-Dawliyyah. Abu Halibah, Ahmad Yusuf. (2001). Usul al-Hadith ‘Inda al-Imam Abu Hanifah (Foundations of narrations of the Prophet

[s.a.w.] according to Abu Hanifah). Gaza: Majalah al-Jami’ah al-Islamiyyah. Abu Layth, Muhamad al-Khayr Abadi. (2003). Ulum al-Hadith: Asiluha wa Mu’asiruha (The science of hadith: Its classical and

contemporary prospects) (2nd ed.). Selangor: Dar al-Shakir. Abu Shahbah, Muhammad b. Muhammad. (1982). al-Wasit fi Ulum wa Mustalah al-Hadith (The medium of science and concept

of hadith). Cairo: Dar al-Fikr al-Arabi. Al-Albaniyi, Muhammad Nasir al-Din. (1988). Sahih Sunan al-Nisa’i (Authentic collections of al-Nasa’i). Beirut: Al-Maktab

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intllects). Beirut: Dar al-Kutub al-Ilmiyyah. Al-Hindiyi, ‘Ala al-Din ‘Ali al-Mutaqi, b. Hussam al-Din. (1998). Kanzul al-‘Umal fi Sunan al-Aqwal (The reserve of laborers in

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Al-Sarakhsi, Abu Bakar b. Muhammad b. Ahmad. (1393 A.H.). Usul al-Sarakhsi (Al-Sarakhsi’s principles of fiqh). Beirut: Dar al-Ma‘rifah.

Al-Sarakhsi, Abu Bakar Mohammad b. Ahmad b. Abu Sahal. (1996). al-Muharir fi Usul al-Fiqh (The edited in fiqh principles). Beirut: Dar al-Kutub al-Ilmiyyah.

Al-Shirazi, Abu Ishaq Ibrahim b. Ali. (1983). al-Tabsirah fi Usul al-Fiqh (The insights on fiqh principles). Damascus: Dar al-Fikr. Al-Tamartashi, Mohammad b. Abdillah b. Ahmad b. Mohamad. (2000). al-Wusul Ila Qawa ‘id al-Usul (The approach to

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al-Fikr. Badran Abu al-Ainain Badran. (1965). Usul al-fiqh (Islamic jurisprudence). Dar al-Ma’rif. Ibn al-Hamam, Muhammad Ibn Abd al-Wahid. (1900). Sharh Fath al-Qadir (Commentary of almighty’s victory). Beirut: Dar

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according to the opinion of the Hanafi School of fiqh). W.P.


Correlation Between Employee Bonus and Company

Performances: FTSE TWSE Taiwan 50 Index Companies

Tzu-Lan Kuo Nan Shan Life Insurance Co.,

Ltd., Taiwan

Pei-Ju Lucy Ting National Taipei University,

Taiwan

Kuang-Hui Chiu National Taipei University,

Taiwan

In addition to examining the effect of employee compensation tools on its financial report, a public company should

evaluate whether such tools could also retain or attract talent that can strengthen its competitiveness. This research

aims to study how an employee reward system could impact on a company’s performance, and develop a theory on

how enterprises choose their employee reward plan. Taking into consideration that there is a lack of agreed

objective of an employee reward plan, this paper attempts to evaluate the need for an employee reward system and

its effectiveness from the perspective of how a system is implemented. In order to explore the relationship between

an employee reward system and company performance, this research will compare in total the performance of 80

companies between 2002 and 2012: 50 of them are from the FTSE TWSE Taiwan 50 index that have a reward

system and the other 30 are also listed companies but without a structured reward plan in place. The findings

include that companies with an employee reward system generally perform better than those without one, and this

is especially the case for those implementing a single employee bonus system than those with multiple systems. It

is found that the employee reward tools can have a positive impact on a company’s performance, particularly

employee cash dividends and employee shares and bonuses.

Keywords: employee stock option, bonuses, incentive compensation scheme, firm performance

Employee stock option is a common tool used to incentivize employee performance in particular in the electronics and high-tech industry. Nevertheless the tool itself is considered to reward employees’ past performances rather than motivate their future performances. A considerable length of time and continuing growth of share price are required in order for the tool to take effect and to conjoin the interests between shareholders and employees. Human resource is an important asset that an organization can have and the main objective of an employee reward system is to guide and strengthen the expectations, in terms of output and behaviors, an organization has on its employees. Therefore, the reward system must be related to the employees’ performance and the company’s strategy. This paper intends to establish the importance of employee stock option as a reward tool and identify economic conditions facilitating the adoption of such tool. The amount of the annual surplus is the basis for deciding whether or not to give employees bonuses, and the frequency of

Tzu-Lan Kuo, MBA, Nan Shan Life Insurance Co., Ltd.; research field: compensation plan. Corresponding author: Pei-Ju Lucy Ting, Ph.D., assistant professor, Department of Business Administration, National Taipei

University; research fields: communication and behavior change. E-mail: [email protected]. Kuang-Hui Chiu, Ph.D., professor, Department of Business Administration, National Taipei University; research field:

information system.

D DAVID PUBLISHING

CORRELATION BETWEEN EMPLOYEE BONUS AND COMPANY PERFORMANCES

994

research and development activities, the scale of business operations, and the level of business performance are the economic conditions for the adoption of employee stock options. When designing a reward system that can motivate employees and positively enhance corporate values, enterprises usually take into consideration the nature and growth of the organization. Such rationale is different from the traditional decision-making process based on deferring payments and combining employees and shareholders’ interest.

Literature Review

Early literature considers disclosing any corporate information to have a risk of data leakage and have a negative impact on company performance. Another school of thought argues that corporate information transparency would facilitate corporate governance, reduce manager-shareholder information asymmetry, and minimize the chances for managers to engage in improper earnings. Clinch (1991) noted that businesses can design systems based on motivation to avoid managers’ engagement in earnings management, in addition to applying information-based concerns to prevent employees from hiding crucial information. In practice, such design of rewards is found to positively correlate with employees’ performance in research and development. A reward system is designed to bridge shareholders’ and managers’ interests especially when there is an agency problem between the managers and shareholders. J. J. Gaver and K. M. Gaver (1995) found in their empirical study that growth firms preferred to use long-term incentive compensation to solve the agency problem, whereas non-growth companies preferred a fixed salary for their executive managers. Subsequent studies further explore the relationship between investment and award systems. For example, Abbott (2001) followed Smith and Watts (1992) and J. J. Gaver and K. M. Gaver (1995) from the perspective of the agency problems and found that companies high in the investment opportunity set were more inclined to apply market-based incentives to motivate their executives. Many of the previous empirical studies focus on how executive compensation programs would contribute to the agency problem and on how the compensation design is related to corporate strategies and/or organizational structures. It can be concluded that the top executives are crucial in terms of creating and influencing corporate value; and that for knowledge-oriented corporations, apart from the top executives, employees also play a critical role. Therefore, rather than from the perspective of the agency problem, this study defines a company compensation system as an important corporate strategy and explores how it is structured in accordance with a company’s competitiveness in the market, industry characteristics, resources as well as other external and internal conditions.

Companies began to issue employee stock options since August 2000 when the legislations were passed by the Securities and Futures Institute, Taiwan. Prior to that, there was no literature evaluating the adoption and the effectiveness of such a tool on company performance in Taiwan, and whether it is a corporate governance tool or a motivational tool on human capital. The study conducted by Hanlon, Rajgopal, and Shevlin (2003) concluded that a company’s future earnings was positively related with the employee stock options granted to the top five executives. Some other research emphasizes the relationship between employee rewards and market performances. For example, Perry and Zenner (2001) retrieved compensation data from Standard and Poor’s ExecuComp database and found that returns on the company shares would have a positive effect on the executives’ compensation. Boschen, Duru, Gordon, and Smith (2003) in their study also confirmed that company’s stock price had a positive impact on the executive compensation. Cheng (2004) concluded that in situations when a company CEO approached retirement, and/or when a firm faced a small loss in earnings, the association between changes in R&D (research and development) spending and changes in the value of CEO


995

annual option grants was significantly positive. Therefore, the compensation committee in a company may seek to prevent opportunistic reductions in R&D expenditures by rewarding the executives with the employee share options.

Shleifer and Vishny (1997) claimed that corporate governance systems could assist investors to oversee and control the management of the firm, and thus received better rewards. Past discussions concerning governance systems involve firm value (Anderson & Reeb, 2003; Villalonga & Amit, 2006), financial performance (Coles, Daniel, & Naveen, 2008), firm performance (Bhagat & Black, 2002; Fich & Shivdasani, 2006), capital cost (Anderson, Mansi, & Reeb, 2003), firm’s credit rating (Ashbaugh-Skaife, Collins, & Lafond, 2006), informativeness of earnings and dividends (Fan & Wong, 2002; Francis, Schipper, & Vincent, 2005), earning quality (Wang, 2006), and corporate failure (Parker, Peters, & Turetsky, 2002). Most of them place more emphasis on the compensation systems for chief executive officers, and rarely on employees as well as the employee bonus and rewards (Core, Holthausen, & Larcker, 1999).

Employees usually are concerned about fairness of the compensation system: whether one is over- or underpaid. Werner and Mero (1999) found that overpayment was a significant predictor of positive performance changes, whereas underpayment was a significant predictor of negative performance changes. The study of Basu, Hwang, Mitsudome, and Weintrop (2007) found that excess pay related to ownership and monitoring for top executives was negatively correlated with subsequent accounting performance, and no association was found between excess pay and subsequent stock returns. It can be concluded that excessive bonuses for top executives may not contribute significantly to corporate future performance. When the executives are overpaid and the lower-level managers are underpaid, turnover of general managers would be higher than usual. On the other hand, some research indicates that when the level of uncertainty a company faces is high, increasing the compensation gap between the top executives and the management would motivate managers to put more effort to improve the firm’s performance. Other research indicates that a generous bonus scheme may not be the best approach to motivate employees, rather managers would be more inclined to manipulate company earnings and/or sign high compensation contract (Shin, In Press).

Since 2008 employee compensations and rewards are considered expenses in corporate accounting. Many of the foreign-invested enterprises in Taiwan began to question the employee bonus scheme and its accounting treatment in 2002, after a series of corporate accounting scandals in the U.S. in 2001. At the time, the employee bonus was not acknowledged as an expense item; instead it was treated as earning distribution in the retained earnings statement. Besides, the number of bonus stock shares was decided based on the face value, rather than the market value. Consequently the allocated shares for employees became more and the value for each share was diluted. Some corporations also issue depositary receipts in the U.S., such as Taiwan Semiconductor Manufacturing Company Limited, and are required to prepare their financial statements following the U.S. generally accepted accounting principles. Since the employee bonus was not treated as an expense, their income statements between Taiwan and the U.S. showed different results over the same period of time.

Nevertheless, the action that the employee bonus is treated as an expense means that corporate profits are eroded. Prior to expensing the employee bonus, the number of bonus shares is determined based on the employee rewards ratio listed in the corporate policy. Specifically, the ratio determines the allocation, before calculating the number of bonus shares based on the share face value. When expensing the employee bonuses, the number of bonus shares is determined by dividing the allocated amount by the closing price on the day prior to the shareholder board meeting. This means, the amount of bonus shares would be significantly reduced. As a


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result, business management becomes less capable to attract or retain talent through offers of employee shares. Therefore apart from evaluating the impact of reward tools on financial statements, the most imperative issue for business managers would be evaluating the purposes and effectiveness of the tools under the circumstances of limited resources.

Operational performances for an enterprise usually refer to the company’s financial status and the level of values it creates for its shareholders. Specifically the former refers to accounting-based performance indicators, whereas the latter to market-based performance indicators. Two approaches are usually adopted to empirically evaluate financial performance: accounting-based and market-based measures. Accounting-based measures refer to the quantitative indices which use the results from the financial statements to reflect a company’s operational performance (Spicer, 1978; Cochran & Wood, 1984); for instance, return on assets (ROA) and return on equity (ROE). On the other hand, market-based measures refer to the use of corporate share returns as an indicator of corporate performance. The study conducted by McGuire, Sundgren, and Schneeweis (1988) identifies that when a company’s performance is evaluated based only on accounting-based measures, the scope for measurement is limited to only the historic aspect of corporate performances. Besides, biases are prone to occur while dealing with different accounting procedures. Nevertheless when using only market-based measures to evaluate operational performances, there is an underlying assumption that the market measures are appropriate, sufficient and robust in reflecting the true value of the firms. Previous literature shows that a single company performance indicator is adopted and the result is relatively weak. This research therefore evaluates corporate operation performance from three aspects, so as to avoid bias results. They are earnings per share (EPS), ROA, and ROE.

Methodological Design

This study aims to explore the impact of adopting an employee reward system on corporate operational performance. Specifically the authors wish to investigate the assessments a company could apply to evaluate whether or not the employee award system has successfully motivated and attracted talent in human resources. This study intends to apply quantitative methods to analyze and examine the correlations and differences among the adoption of an employee award system and company’s performance. Corporate operational performance data from December 1, 2002 to June 30, 2012 of Taiwanese corporations that have adopted cash bonuses, stock dividends and/or stock options are collected. It is hoped that the findings of this research would provide company managers and decision-makers’ critical insights into designing a more suitable and motivational employee reward system.

Research hypotheses are established based on study objectives. They are summarized in Table 1 and their relationships are illustrated in Figure 1. Three types of reward systems are treated as independent variables in this study: cash bonuses, stock dividends, and stock options. Employees could acquire shares and dividends when company earnings are turned into capital gain. Companies do so to share their profits and motivate their employees. According to Taiwanese Company Law, companies could, when more than two thirds of shareholders attend the shareholders’ meeting and receive consent from more than half of them, document in their articles of association the percentage of earnings turning into capital. Employees can acquire earnings through two forms: cash bonus or stock dividends.

Another approach that corporations can adopt to motivate their employees is to issue stock options so that the employees can have the right to subscribe company shares in the future. According to Article 167-2 of


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Taiwanese Company Law, when more than two thirds of the board members attend the board meeting and more than half of them agree with the resolutions, companies can sign a contract of stock options with the employees so that the employees can purchase an agreed amount of company shares with an agreed price in a pre-defined period of time. Companies are allowed to restrict any transfers of those shares within no more than two years.

Figure 1. Research structure and hypotheses.

Table 1 Summary of Hypotheses

Hypotheses

H1 There is significant difference in corporate performance between companies that have employee reward systems in place and those that do not.

H1-1: There is significant difference in corporate EPS between companies that have employee reward systems in place and those that do not.

H1-2: There is significant difference in corporate ROA between companies that have employee reward systems in place and those that do not.

H1-3: There is significant difference in corporate ROE between companies that have employee reward systems in place and those that do not.

H2

H2-1: The number of reward tools applied in a company would have significant impact on corporate EPS. H2-2: The number of reward tools applied in a company would have significant impact on corporate ROA. H2-3: The number of reward tools applied in a company would have significant impact on corporate ROE.

H3

H3-1: Cash bonuses would have significant impact on corporate EPS. H3-2: Cash bonuses would have significant impact on corporate ROA. H3-3: Cash bonuses would have significant impact on corporate ROE. H3-4: Stock dividends would have significant impact on corporate EPS. H3-5: Stock dividends would have significant impact on corporate ROA. H3-6: Stock dividends would have significant impact on corporate ROE. H3-7: Stock options would have significant impact on corporate EPS. H3-8: Stock options would have significant impact on corporate ROA. H3-9: Stock options would have significant impact on corporate ROE.

This study aims to investigate the relationship between employee reward systems and company operational performance. Taken from the Taiwanese Market Observation Post System and the Taiwan Economic Journal Database, data between December 1, 2002 and June 30, 2012 of 50 companies that have

Independent variable

No employee reward system

Employee reward system‐ Cash bonus

‐ Stock dividends

‐ Stock option

Dependent variable

Earnings per share

H1‐1 / H3‐1

Return on assets

H1‐2 / H3‐2

Return on equityH1‐3 / H3‐3

H2 / H3

H1


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implemented employee reward systems and 30 companies without the systems are retrieved. The former ones are index companies in Taiwan and all of them are listed in the market. After screening out incomplete data, five companies with employee reward systems implemented are excluded which leaves 45 samples and in total 75 companies listed in the Taiwanese stock market are selected for this research. The definitions for the dependent variables are summarized in Table 2.

Table 2 Definitions for Dependent Variables

Dependent variable Formula EPS (Net Income Dividends on Preferred Shares) / Average Outstanding Shares ROA (Net Income + Interest Expense (1 Tax Rate)) / Weighted Average Total Assets ROE Net Income / Net Weighted Average Shareholders’ Equity

The statistical software SPSS 17, along with Excel 2013, is used to analyze the collected data. Descriptive statistics is applied to explain the structure and characteristics of the sample data. These include, for instance, the implementation of employee reward systems (independent variable) and the ratios of corporate operational performance (dependent variable). Independent t-test and ANOVA are used to test the hypotheses; for example, it is used to explore whether the operational performances between companies that have employee reward systems implemented and those without would be significantly different. Lastly multivariate regression analysis is used to predict the causal relationship between variables.

Data Analysis and Results

Out of the 45 companies that have implemented employee reward systems, 43 of them use the system of cash bonuses, 24 use stock dividends, while the remaining 18 companies use stock options. Due to the small sample size, independent t-tests are used to examine H1; that is, whether the implementation of the employee reward systems would result in differences in three indices reflecting corporate operational performances (EPS, EOA, and ROE). The test results are summarized in Table 3.

Table 3 Independent T-Test Results

Without reward system With reward system 95% confidence interval Mean SD Mean SD t df Sig. Mean difference Lower Higher EPS -0.01 1.63 3.68 4.83 -4.71 57.69** 0.00* -3.69 -5.25 -2.12 ROA -1.26 7.04 6.90 5.18 -5.78 73 0.00* -8.16 -10.97 -5.35 ROE -6.37 17.17 11.38 7.07 -5.37 35.62** 0.00* -17.75 -24.45 -11.03 Notes. * Sig. = 0.05. ** Levene’s test indicated unequal variances (EPS: F = 4.10, Sig. = 0.05 / ROE: F = 25.16, Sig. = 0.00), so degrees of freedom were adjusted.

The independent t-test results show that, in terms of the performance indices of EPS, ROA, and ROE, there are statistically significant differences between companies with employee reward system and those without. Specifically, companies that have employee reward systems implemented perform better in EPS, ROA and ROE.

One-way ANOVA test is used to examine whether the types of reward system matters in terms of creating impact on corporate operational performances. Three types of reward systems are treated as independent


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variables: cash bonuses, stock dividends, and stock options. Forty-three companies have practiced cash bonuses; 24 stock dividends and 18 stock options. The companies are grouped based on the number of reward system tools they have implemented: only one tool, two out of the three tools and all tools. Similarly three performance indices (EPS, ROA, and ROE) are considered as dependent variables. The one-way ANOVA results are summarized in Table 4.

Table 4 One-Way ANOVA Results

Sum of squares df Mean square F-value Sig.

EPS Between group 52.46 2 26.23 1.12 0.37 Within group 984.00 42 23.43 Total 1,036.47 44

ROA Between group 22.65 2 11.32 0.41 0.67 Within group 1,157.13 42 27.55 Total 1,179.78 44

ROE Between group 82.83 2 41.41 0.82 0.45 Within group 2,115.32 42 50.37 Total 2,198.15 44

The ANOVA results consistently indicate that the number of tools a company applies in their employee reward system does not have an effect on corporate performance. That is, no matter how many types of reward systems from one to three they have implemented in their organizations, no differences can be observed in the values of their EPS, ROA, and ROE.

In this research, it is in the interests of the researchers to also investigate the impact of each reward system tool on the performance indices. Multivariate regression is used to fulfill this purpose. Results from the multivariate regression analysis are summarized in Table 5.

Table 5 Multivariate Regression Results EPS as dependent variable 95% confidence interval for β Model Standardized coefficient β t Sig. Lower Higher R2 Constant 0.15 0.88

0.24 Cash bonuses 0.22 1.84 0.07 0.74 1.35 Stock dividends 0.37 2.56 0.01* 0.50 1.98 Stock options -0.05 0.35 0.73 0.55 1.82 ROA as dependent variable Constant -0.68 0.50

0.31 Cash bonuses 0.38 3.30 0.00* 0.74 1.35 Stock dividends 0.32 2.26 0.03* 0.50 1.98 Stock options -0.09 -0.66 0.51 0.55 1.82 ROE as dependent variable Constant -2.43 0.02*

0.32 Cash bonuses 0.45 3.94 0.00* 0.74 1.35 Stock dividends 0.20 1.46 0.15 0.50 1.98 Stock options -0.01 -0.09 0.93 0.55 1.82

Note. * Sig. = 0.05.


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The results of multivariate regression show that different reward system tools may have different levels of impact on the performance indices of EPS, ROA and ROE. Specifically, out of the reward tools of cash bonuses, stock dividends and stock options, the tool of stock dividends has a significant positive impact on EPS; cash bonuses and stock dividends have a significant positive impact on ROA; and cash bonuses have a significant positive influence on ROE. Overall, the tools of cash bonuses and cash dividends would have significant influence, whereas the tool of stock options on the other hand is found to create no significant impact on all performance indices.

In summary, results from descriptive statistical analysis and the independent t-test show that the implementation of reward systems would create positive impact on corporate performance; and this is especially the case on the index of ROE. Nevertheless ANOVA tests show that there is no difference in indices between corporations that apply only one tool, two tools and all tools. In other words, the amount of tools would not necessary create significant impact on corporate performances. Lastly, results of the multivariate regression analysis indicate that the reward tool of cash bonuses would impact on ROA and ROE; stock dividends on EPS and ROE; whereas stock options have no significant impact. All of the results testing the hypotheses are summarized in Table 6.

Table 6 Summary of Hypotheses Results Hypotheses Support

H1: There is significant difference in corporate performance between companies that have employee reward systems in place and those that do not. �

H1-1: There is significant difference in corporate EPS between companies that have employee reward systems in place and those that do not. �

H1-2: There is significant difference in corporate ROA between companies that have employee reward systems in place and those that do not. �

H1-3: There is significant difference in corporate ROE between companies that have employee reward systems in place and those that do not. �

H2:

H2-1: The number of reward tools applied in a company would have significant impact on corporate EPS.

H2-2: The number of reward tools applied in a company would have significant impact on corporate ROA.

H2-3: The number of reward tools applied in a company would have significant impact on corporate ROE.

H3:

H3-1: Cash bonuses would have significant impact on corporate EPS. H3-2: Cash bonuses would have significant impact on corporate ROA. � H3-3: Cash bonuses would have significant impact on corporate ROE. � H3-4: Stock dividends would have significant impact on corporate EPS. � H3-5: Stock dividends would have significant impact on corporate ROA. � H3-6: Stock dividends would have significant impact on corporate ROE. H3-7: Stock options would have significant impact on corporate EPS. H3-8: Stock options would have significant impact on corporate ROA. H3-9: Stock options would have significant impact on corporate ROE.

Note. �: Hypothesis supported.

Discussions and Research Limitations

This research shows that the implementation of an employee reward system would substantially help in


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improving corporate performance. However, more reward tools do not necessarily lead to even better performances. Amongst the three tools investigated in this research (cash bonuses, stock dividends, and stock options), it is found that cash bonuses and stock dividends would create most impact on performance. Overall, the findings indicate that corporations should not underestimate the influence of employee reward systems on corporate performance indices including EPS, ROA and ROE. Nevertheless in the context of limited resources, managers should be careful when deciding how many and how to implement the reward tools.

A number of limitations are applied to this research. First of all, company data for this research were obtained from corporations in the Taiwan 50 Index. Not only are these companies are well-established, but the majority of them have employee reward systems implemented. Nevertheless, the performances of these companies tend to be above average in the Taiwanese market and thus analysis of the results from these companies may be limited in its application to all sizes and natures of companies. In this research, dependent variables evaluating corporate performance include EPS, ROA and ROE. They are selected because corporate performances tend to be vulnerable to external economic impact. Company data between 2002 and 2012 are acquired for the purpose of this research; yet within this period of time, there is an economic downturn between 2008 and 2009. The impact of such downturn is not taken into consideration for this research which therefore limits the applicability of the research findings. Lastly better understanding is required of the impact of expensing employee stock options in Taiwan. Compared to the other two reward tools, cash bonuses and stock dividends, stock options are relatively new in Taiwan and less utilized in Taiwanese companies. Limited application of such tools may restrict the capacity for its impact on corporate performance to be statistically supported.

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Effects of Strategic Management Accounting Techniques on

Perceived Performance of Businesses

Semra Aksoylu, Ebru Aykan Erciyes University, Kayseri, Turkey

The present study was carried out to examine the compliance of medium and large-size enterprises in Kayseri,

Turkey with strategic management accounting techniques (SMAT) and to determine the effects of SMAT on the

perceived performance of businesses. The sub-dimensions of SMAT were specified as cost-oriented,

customer-oriented, and competitor-oriented techniques. The effects of SMAT and sub-dimension usages on the

perceived performance of businesses were investigated by hypotheses. The data gathered from 202 accounting

managers in Kayseri were used to test the hypotheses. Results revealed that the participating businesses had a usage

intensity of above average for 16 out of 17 SMAT and they had over 50% compliance with 12 of these techniques.

Although SMAT and cost, customer and competitor-oriented sub-dimensions had significantly weak impacts on

perceived performance, the positive relationships and effects were found to be sufficient to accept the hypotheses.

Keywords: strategic management, management accounting, perceived performance, strategic management

accounting techniques (SMAT), business performance

Together with the rapid developments and changes taking place and consequent globalization processes, the terms strategy, mission, vision, competitive advantage, efficiency, productivity and sustainability have gained popularity in the business and management literature. Business development and persistence are vital for sustainable competitive advantage. Businesses employ different managerial tools and techniques to sustain such an advantage. They usually look for low-cost but high-quality manufacturing techniques through the use of management approaches such as total quality management, process management, information management, strategic management and target long-term positive outcomes (business satisfaction, performance increase, creativity, etc.). Within the strategic management perspective, with such developments, strategic management accounting techniques (SMAT) was evolved as a result of the pursuit for efficiency and productivity of businesses. Therefore, the initial objective of the present study was to assess the SMAT usage intensity of medium and large-size businesses in Kayseri (Turkey) and to determine their compliance with these techniques. The second and eponymous objective was to determine the effects of SMAT usage on the perceived performance of participating businesses. Initially, the terms strategic management accounting, techniques and perceived performance are defined and the relationships among them are explained; then, the analysis results for the hypotheses are presented and discussed.

Corresponding author: Semra Aksoylu, Ph.D., assistant professor, Social Sciences Vocational School, Erciyes University;

research fields: accounting, management accounting, financial accounting. E-mail: [email protected]. Ebru Aykan, Ph.D., assistant professor, Social Sciences Vocational School, Erciyes University; research fields: strategic

management, organizational behavior, human resource management, entrepreneurship. E-mail: [email protected].

D DAVID PUBLISHING

EFFECTS OF STRATEGIC MANAGEMENT ACCOUNTING TECHNIQUES

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Strategic Management Accounting Before defining strategic management accounting, it is necessary to define traditional management

accounting. Management accounting is a type of accounting which arranges the information and reports needed by business managers in taking managerial decisions and interpreting such reports and allowing managers to compare them with annual budget and standard practices. Traditional management accounting generally deals with the internal operations of a business (Yükçü, 1998). On the other hand, strategic management accounting covers entire operations allowing accountants and other business managers to tend toward an outward-oriented perspective as opposed to an inward-oriented perspective (Kırlı & Gümüş, 2011). A consensus has not yet been reached on the definition of strategic management accounting in the accounting literature. The term “Strategic Management Accounting” was first proposed by Simmonds in 1981. Simmonds pointed out the need for developing business strategies by not only considering internal management accounting data but also by providing and analyzing the management accounting data of competitors through strategic management accounting (Cadez & Guilding, 2008). Therefore, strategic management accounting expresses the use of management accounting systems to provide information support to business managers in strategic decisions and control activities (Cinquini & Tenucci, 2010).

In general, there are two different points of view on strategic management accounting: (1) strategic management accounting is composed of a group of strategic accounting techniques; and (2) strategic management accounting expresses the participation of accountants in the strategic decision-making and control mechanisms of a business (Cadez & Guilding, 2008). Considering the latter view, strategic work units are formed and such units are presumed as the heart of business and business reports are presented to these units for the proper operation of strategic decision-making tools and control mechanisms (Otley, 2001). Strategic management accounting has various functions like gathering competitor information, gathering information from the accounting service in strategic decisions and reducing costs based on strategic decisions (Shah, A. Malik, & M. S. Malik, 2011). While performing such functions, the strategic management accounting process is implemented in four phases (Langfield-Smith, 2008):

(1) Definition of strategic operational units; (2) Strategic cost analysis; (3) Strategic market analysis; (4) Strategic assessment. Long-term outward-looking techniques have to be used while performing the above-mentioned phases of

strategic management accounting. Such techniques are presented below.

SMAT SMAT is evaluated in the literature in five categories (Cadez & Guilding, 2008): strategic costing;

strategic planning, control and performance management; strategic decision-making; competitor accounting; and customer accounting. SMAT is presented in Table 1 in accordance with these categories.

The techniques presented in Table 1 are briefly defined below: (1) Attribute costing. This technique covers the costing of benefits provided by products served to

customers. These costs are composed of grantee agreements, reinforcement, ornamentation, supply guarantee and after-sale service costs. In brief, this technique is focused on product qualities like product characteristics,


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certain sale agreements and after-sale services (Şener & Dirlik, 2012);

Table 1 SMAT SMAT Categories SMAT

Strategic costing

1. Attribute costing 2. Life-cycle costing 3. Quality costing 4. Target costing 5. Value chain costing

Strategic planning, control and performance management 1. Benchmarking 2. Integrated performance measurement

Strategic decision-making 1. Strategic cost management 2. Strategic pricing 3. Brand valuation

Competitor accounting

1. Competitor cost assessment 2. Competitor position monitoring 3. Competitor performance appraisal 4. Balanced scorecard

Customer accounting 1. Customer profitability analysis 2. Lifetime customer profitability analysis 3. Valuation of customers as assets

(2) Life-cycle costing. This technique is defined as calculation of the total costs of a product throughout the life-cycle of the product. Such a life-cycle may cover the design, advertisement, marketing, growth, maturation, decrease, and extinction processes of a product (Cinquini & Tenucci, 2006);

(3) Quality costing. The quality of a product is a significant indicator of market competition with regard to that product. Therefore, increasing and sustaining quality always provide a competitive advantage to the producer. There is a cost to both reaching and failing to reach the desired quality (Karcıoğlu, 2000). Quality costs are composed of the costs to provide the desired quality and the costs to be borne by inferiority;

(4) Target costing. This technique supports cost planning in the design process of products and is put forward as a strategic profit and cost management process. It employs various ideas to reduce the costs during design, research and development phases and meets consumer demands like speed, quality and reliability. It also tries to reduce the life-cycle cost of a product. Target cost, constituting the base of the target costing technique, is calculated based on the sale price to reach a target market share and expresses market-based cost. Unlike traditional “cost plus”, the target cost is a function of sale price and profit instead of being a function of costs (Aksoylu & Dursun, 2001);

(5) Value chain costing. The value herein corresponds to the monetary equivalent of the technical, economical and social benefits and services provided to a customer in exchange for the price paid by the customer. Therefore, value has a monetary expression and implies the net benefit of a customer corresponding to price paid. The value chain is composed of entire activities creating a value in all phases from the basic raw material sources to the final goods supplied to consumers. Beside internal activities, businesses also need to develop external activities while creating a value (Türk, 2004). They will thus be able to develop ties with other enterprises through external activities and consequently be able to reduce costs and increase profitability. Such


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a case yields a significant competitive advantage for a business using value chain costing; (6) Benchmarking. Adaptation of the good or perfect practices of other businesses either in the same sector

or in different sectors and efforts to improve activities by comparative assessments are defined as benchmarking. Benchmarking enterprises have the opportunity to benefit from the knowledge and experiences of others gained through trials, errors and various costs (Civelek, 2000). Strategic plan covers long-term targets and strategy leads the way to reach such targets. Understanding the strategies of other successful businesses or investigating the reasons for selecting a certain strategy are critical issues for a successful business;

(7) Integrated performance measurement. This technique covers integrated performance measurement systems pointing out the consideration of both financial and non-financial measurements. Valid measurement units are used in performance measurements (Cinquini & Tenucci, 2010);

(8) Strategic cost management. This is defined as the use of strategy and marketing-oriented cost data to put forward and develop strategies which are able to provide a constant competitive advantage (Cadez & Guilding, 2008);

(9) Strategic pricing. Various types of information such as the reactions of competitors to price fluctuations, price flexibility, economical indicators and experiences are needed during the pricing process (Cinquini & Tenucci, 2006). Such information is used to assess competitors and their market trends together;

(10) Brand valuation. This technique includes a combination of multiple factors gained over the brand through strategic factors like planned brand gains, brand position in the market and level of marketing support of the brand. It expresses the financial valuation of factors like leadership, permanence, internationalization, support and protection through a brand (Şener & Dirlik, 2012);

(11) Competitor cost assessment. Unlike the other techniques, competitor cost assessment focuses on the cost structures of competitors. Various information sources such as physical observations, common suppliers or customers and former employees of competitors are used to gather information on this issue (Cinquini & Tenucci, 2006);

(12) Competitor position monitoring. This technique includes the assessment and monitoring of competitor sales, market shares, trading volumes, unit costs and trends in sales revenues in order to analyze the position of competitors. Within the scope of information about competitors, a business assesses its own position, checks its own strategy, and performs changes or revisions if needed (Şener & Dirlik, 2012);

(13) Competitor performance appraisal. This technique is composed of financial analyses performed by taking the information gathered from the financial statements of competitors into consideration. Such analysis reveals significant information about the performance of competitors;

(14) Balanced scorecard. The balanced scorecard was first proposed by Kaplan and Norton in 1992 and integrates financial and non-financial dimensions into financial management. The objective of this technique is to create a balance through establishing correlations among various multi-dimensional business strategies such as customer perspectives, internal operational processes, information, growth and financial position (Shah et al., 2011);

(15) Customer profitability analysis. This technique includes the calculation of profit gained from a certain customer. Profit calculation is carried out based on monitorable sale revenues and costs for a certain customer. It is sometimes also called “customer account profitability” (Cadez & Guilding, 2008);

(16) Lifetime customer profitability analysis. This technique expresses future projections of customer profitability to analyze customer profitability in upcoming years. The focus herein is estimation of future


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revenue streams and costs for certain customer or customer groups (Şener & Dirlik, 2012). It explains the sustainability of future projections of customer-related accountings;

(17) Valuation of customers as assets. This technique focuses on calculation of the value added by customers. For instance, the present value of future revenue streams to be provided by a certain customer can be calculated with this technique (Cadez & Guilding, 2008).

Perceived Performance Businesses employ various performance measurement methods. Although separate objective-subjective

and quantitative-qualitative methods are commonly used, some studies also use both of them together (Singh, 1986; Dess & Robinson, 1984; Alpkan, Ergün, Bulut, & Yılmaz, 2005). The performance measured by a questionnaire survey applied to enterprise managers to measure qualitative and quantitative performance and to inquire how they perceive the success of an enterprise compared to other enterprises in the sector with regard to various performance indicators is known as “perceived performance” (Alpkan et al., 2005). Despite some validity and reliability problems (Çelik & Karadal, 2007), the difficulties in reaching objective data to assess the performance of businesses require the use of perceived data from the participators of such surveys.

The performance of businesses, when able to reach and evaluate information, is assessed not only with financial indicators but also with various other factors. Such factors may include the image and reputation of a business, recognition of the brand, reliability, efficiency in competition, creativity, innovativeness, and social responsibility. Business performance on these factors is also considered by shareholders, customers, employees and the public. Therefore, it is recommended that business performance can be assessed not only with financial criteria but also with intangible criteria. If the intangible assets of a business affect its performance, it is possible to assess its performance with intangible criteria (Yıldız, 2010). Performance outcomes obtained by managers or employees by comparing the financial and intangible assets of a business with others may provide explanatory information about performance.

Performance is the most commonly considered issue among organizational outcomes. There are limited studies investigating the relationships between SMAT usage and performance. Chenhall and Langfield-Smith (1998) carried out a study with the largest businesses in Australia and observed significant relationships between strategic management accounting tools and business performances. Cadez and Guilding (2008) indicated a weak relationship between the usage of strategic management accounting tools and 7-dimensional performance including the perceived performance of the top 500 Slovenian businesses. Şener and Dirlik (2012) investigated the relationships between SMAT usage and the perceived performance of the top 1,000 businesses in Turkey and observed a medium level relationship between them. Since the researchers performed the study in over 37 of these 1,000 businesses, the sample size was not able to represent the entire population. The present study was therefore planned to eliminate such deficiencies in perceived performance assessment.

Research Methodology Research Objectives, Model and Hypotheses

The present study was shaped around two basic objectives. The initial objective was to assess the SMAT usage intensity of medium and large-size business in Kayseri (Turkey) and to determine their compliance with these techniques. The second objective was to determine the effects of SMAT usage on the perceived performance of participating businesses. The theoretical model formed to investigate such effects is presented


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in Figure1.

Figure 1. Research model.

SMAT usage and sub-dimensions were considered as independent variables and perceived performance was taken as a dependent variable. There are one main (H1) and three sub-hypotheses (H2, H3, H4) in the current study: H1 represents the effects of SMAT usage on perceived performance; H2, H3 and H4 represent the effects of the sub-dimensions of these techniques on perceived performance. The hypotheses were formed as follows:

H1: SMAT usage has a positive effect on perceived performance and there is a positive meaningful relationship between them.

H2: Usage of strategic costing-oriented techniques has positive effects on perceived performance and there is a positive meaningful relationship between them.

H3: Usage of customer-oriented techniques has positive effects on perceived performance and there is a positive meaningful relationship between them.

H4: Usage of competitor-oriented techniques has positive effects on perceived performance and there is a positive meaningful relationship between them.

Universe and Sample The research was carried out in the province of Kayseri in Turkey. The city has a population of about 1

million, is a cradle of industry and manufacture, and is famous for its large number of entrepreneurs. The manufacturing businesses of the Kayseri Organized Industrial Region constitute the universe of the study. The universe was composed of 486 medium and large-size businesses (employing more than 50 personnel) out of the 822 businesses listed in the records of the Directorate of Kayseri Organized Industrial Regions. The data were gathered through a questionnaire survey applied to the accounting managers of businesses. A total of 210 responses were received from the participators, 8 of them were excluded for various reasons. Therefore, 202 surveys were assessed. Respond rate for surveys was realized as 41.5%.

Usage of strategic costing-oriented

techniques

Usage of customer-oriented

techniques

Usage of competitor-oriented

techniques

Perceived performance

SMAT usage

(+)

(+)

(+)

(+)


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Data Gathering and Analysis Methods The questionnaire forms were composed of three sections. There were 7 questions in the first section about

the manager and the business; 11 questions in the second section to determine the perceived performance level of the business; 17 questions in last section to determine the usage rates of SMAT. Two scales were used in the present study and these scales are explained below:

SMAT. The independent variable SMAT was formed by using the scales developed by Shah et al. (2011), Cadez and Guilding (2008), and Cinguini and Tennucci (2006). The scale, composed of 17 terms, was used to investigate SMAT usage intensity. The Quintette Likert scale, representing (1) never, (2) rarely, (3) sometimes, (4) most of the time, and (5) always, was used in SMAT usage terms. The Cronbach Alfa value indicating scale reliability was determined as 0.92.

Perceived performance. A subjective scale developed by Alpkan et al. (2005) and able to measure qualitative and quantitative performance together was used to measure perceived performance. The scale is composed of 11 terms. The terms for perceived performance are expressed as (1) significantly lower than competitor, (2) slightly lower than competitor, (3) same as competitors, (4) slightly higher than competitors, and (5) significantly higher than competitors. The Cronbach Alfa value of the scale was determined as 0.91.

Results Demographic Characteristics

Among the participants (see Table 2), 33.7% were under the age of 30, 40.6% were between 31-40 years old, 18.3% were between 41-50 years old, and 7.4% were over the age of 51 years old. The rate of male participants was 85.6%. And 97% of the 202 participants had university and higher educational level. With regard to enterprise size, 22.3% of the enterprises had 50-100 employees, 63.4% had 101-150 and only 4% had more than 201 employees.

Table 2 Demographic Characteristics of Participants Characteristics Frequency Percentage

Gender Male 173 85.6 Female 29 14.4 Total 202 100

Age

20-30 68 33.7 31-40 82 40.6 41-50 37 18.3 51 + 15 7.4 Total 202 100

Education

Primary 20 9.9 High School 64 31.7 Vocational College 21 10.4 University 92 45.5 Graduate 4 2 Ph.D. 1 0.5 Total 202 100

Enterprise size 50-100 employees 45 22.3

(to be continued)


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101-150 employees 128 63.4 151-200 employees 21 10.4 201 + employees 8 4.0 Total 202 100

The demographic characteristics were used neither as independent nor as dependent variables and were not used in hypotheses, relationship or difference analysis. The only aim was to provide information about the sample and to provide support in hypotheses interpretations.

Mean Research Variables The mean and standard deviations for dependent and independent variables of the study are presented in

Table 3.

Table 3 Averages and Standard Deviations of Variables Variables Mean Standard deviation Strategic costing-oriented techniques 3.54 0.68 Customer-oriented techniques 3.29 0.92 Competitor-oriented techniques 3.45 0.86 SMAT 3.46 0.67 Perceived performance 3.70 0.68

Perceived performance and SMAT usage had scores above the mean (3.70 and 3.46, respectively). Among the SMAT sub-dimensions with similar means, usage of strategic costing-oriented techniques had a higher mean of 3.54 and customer and competitor-oriented techniques had a relatively low mean of 3.45 and 3.29, respectively.

Compliance Level of Enterprises With SMAT and Usage Intensities The compliance levels of enterprises with SMAT, usage intensities and frequencies are given in Table 4.

With regard to a 5-point scale, usage intensities varied between 3.68 (quality and target costing) and 2.69 (balanced scorecard). Sixteen out of 17 techniques had usage intensity over average.

Primarily, SMAT usage rates were taken into consideration to determine the compliance levels of participating businesses with SMAT. A 5-point scale: (1) (never) indicating non-compliance; (2) (rarely) and (3) (sometimes) indicating low level of compliance; (4) (most of the time) and (5) (always) indicating high level of compliance, was used to determine the compliance levels of businesses with SMAT.

Results revealed that participating businesses had over 50% compliance with 12 of 17 techniques. Only the balanced scorecard had a non-compliance level of over 10% (36.1%).

Table 4 indicates that businesses mostly complied at a high-level with strategic costing-oriented techniques: quality costing (61.4%), target costing (61.9%), strategic pricing (61.4%), and brand valuation (60.9%). The businesses not able to comply with these techniques were mostly composed of competitor/competition-oriented techniques: competitor position monitoring (5.9%), competitor cost assessment (8.4%), and competitor performance appraisal (9.4%). The highest non-compliance ratio was observed in the balanced scorecard (36.1%) technique. Since the balanced scorecard is mostly used in performance assessment applications in the business world, accountants are weak in this technique. The current findings are different from those of the study carried out by Cinquini and Tenucci (2006) on international businesses in Italy. Italian businesses have a low level of compliance with these techniques. Such differences


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were mainly due to differences in selected sample and cultural differences.

Table 4 SMAT Compliance Levels and Usage Intensities of Businesses

Technique Frequency

Mean Standard deviation Non-complying

businesses Businesses with low level compliance

Businesses with high level compliance

1. Quality costing 6 (3%) 72 (35.7%) 124 (61.4%) 3.68 0.91 2. Target costing 7 (3.5%) 70 (34.7%) 125 (61.9%) 3.68 0.93 3. Strategic pricing 8 (4%) 70 (34.6%) 124 (61.4%) 3.66 0.93 4. Brand valuation 11 (5.4%) 68 (33.7%) 124 (60.9%) 3.64 0.98 5. Benchmarking 9 (4.5%) 83 (41%) 110 (54.5%) 3.57 0.98 6. Int. performance measurement 17 (8.4%) 83 (41%) 102 (50.6%) 3.37 1.01 7. Customer profitability analysis 9 (4.5%) 86 (42.5%) 107 (53%) 3.56 1.01 8. Value chain costing 10 (5%) 77 (38.1%) 115 (57%) 3.54 0.98 9. Strategic costing 11 (5.4%) 77 (38.2%) 114 (56.4%) 3.52 0.94 10. Lifetime customer profitability analysis 13 (6.4%) 82 (40.6%) 107 (53%) 3.49 1.03

11. Attribute costing 10 (5%) 90 (44.6%) 102 (50.5%) 3.48 0.90 12. Competitor position monitoring 12 (5.9%) 85 (42.1%) 105 (52%) 3.48 1.07 13. Valuation of customers as assets 19 (9.4%) 83 (41%) 100 (49.6%) 3.41 1.09 14. Competitor cost assessment 17 (8.4%) 90 (44.5%) 95 (47.1%) 3.39 1.07 15. Competitor performance appraisal 19 (9.4%) 77 (38.1%) 106 (52.5%) 3.37 1.11 16. Life-cycle costing 17 (8.4%) 100 (49.5%) 85 (42%) 3.27 0.96 17. Balanced scorecard 73 (36.1%) 55 (27.2%) 74 (36.6%) 2.69 1.46

The Factors Specifying SMAT Usage A factor analysis was performed to determine the sub-dimensions of the strategic management accounting

techniques. Varimax rotation was employed to determine basic factors, and three factors with an attribute value of over 1 were able to explain 61.08% of total variance. The results of factor analysis are presented in Table 5.

Three factors were determined in factor analysis. Factor 1 was determined as “strategic costing-oriented techniques”, factor 2 as “customer-oriented techniques”, and factor 3 as “competitor/competition-oriented techniques”. With regard to factor loadings, the first factor group “strategic costing-oriented techniques”, occupied first place with a variance explanation ratio of 43.95% and Eigen value of 7.472. The reason for this factor group having higher values may be explained by acceptance of future-oriented techniques aimed at providing businesses with a competitive advantage. The variance explanation ratio of the second factor group including customer-oriented techniques was realized as 9.93% and this group was mostly composed of the sustainability of customer-oriented accountings and the valuation of customers as assets. The total variance explanation ratio of the third factor group “competitor/competition-oriented techniques” was calculated as 7.20%. This factor is largely dependent on a competition information base. Competitor position monitoring, competitor cost assessment, competitor performance appraisal, and benchmarking techniques were entitled in this way since they were employed within the frame of competitor/competition information use.

Correlation Table The relationship between SMAT usage and sub-dimensions and perceived performance are presented in

Table 6.


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Table 5 Results of Factor Analysis

SMAT Factor loading

Eigen value

Explained variance

Cronbach Alfa

Factor 1: Strategic costing-oriented 7.472 43.95 0.88 Quality costing Target costing Life cycle costing Attribute costing Value chain costing Strategic pricing Strategic costing Brand valuation Integrated performance measurement

0.814 0.767 0.729 0.700 0.647 0.555 0.552 0.510 0.502

Factor 2: Customer-oriented 1.688 9.93 0.79 Lifetime customer profitability analysis Valuation of customers as assets Customer profitability analysis Balanced scorecard

0.869 0.847 0.696 0.512

Factor 3: Competitor/competition-oriented 1.22 7.20 0.82 Competitor position monitoring Competitor cost assessment Competitor performance appraisal Benchmarking

0.816 0.769 0.746 0.550

Total explained variance 61.08

Table 6 Correlation Matrix

1 2 3 4 5 1. Strategic costing-oriented techniques usage 1 2. Customer-oriented techniques usage 0.580* 1 3. Competitor-oriented techniques usage 0.682* 0.581* 1 4. SMAT usage 0.914* 0.808* 0.827* 1 5. Perceived performance 0.139* 0.195* 0.147* 0.182* 1

Note. * p < 0.01.

A positive but weak relationship was observed between SMAT usage and sub-dimensions and perceived performance. Despite the weak relationship, increasing SMAT and sub-dimensions yielded increasing perceived support. Şener and Dirlik (2012) carried out a study on the top 500 and the second largest 500 industrial businesses in Turkey and observed a medium level relationship between SMAT usage and perceived performance. Similarly, Cadez and Guilding (2008) indicated a weak relationship between the usage of strategic management accounting tools and 7-dimensional performance including the perceived performance of the top 500 Slovenian businesses. Chenhall and Langfield-Smith (1998) carried out a study on 140 manufacturing businesses selected from the largest businesses in Australia and observed significant relationships between strategic management accounting tools and business performances. In another study, Said, Hui, Othman, and Taylor (2010) examined 109 Malaysian businesses and determined a medium level relationship between the usage of strategic management accounting tools and financial performance and service quality performance.


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Hypotheses Testing There are four hypotheses created within the scope of the present study. The first hypothesis is: H1: SMAT usage has a positive effect on perceived performance and there is a positive meaningful

relationship between them. A regression analysis was performed to test this hypothesis. The results of regression analysis performed

to test H1 are presented in Tables 7 and 8. Results revealed that SMAT usage was able to explain 2.8% of perceived performance. The Beta factor was positive and supported the positive meaningful relationship between variables. Therefore, H1 hypothesis was accepted.

Table 7 Results of Regression Analysis Performed to Determine the Effect of SMAT Usage on Perceived Performance

R R² Corrected R² Standard error of estimation F

Perceived performance 0.182 0.030 0.028 0.64 6.835

Notes. p < 0.01. Dependent variable: perceived performance; Independent variable: SMAT usage.

Table 8 Coefficients of Regression Analysis Performed to Determine the Effect of SMAT Usage on Perceived

Performance

Non-standardized coefficients Standardized

t Sig. Beta Standard error Beta

Constant 3.091 0.238 0.182

13.013 0.00 SMAT usage 0.176 0.067 2.614 0.01

The second hypothesis of the current study examines the effect of cost-oriented techniques on perceived performance and the relationship between usage of strategic costing-oriented techniques and perceived performance. The second hypothesis is:

H2: Usage of strategic costing-oriented techniques has positive effects on perceived performance and there is a positive meaningful relationship between them.

Table 9 Results of Regression Analysis Performed to Determine the Effect of Strategic Costing-Oriented Techniques Usage on Perceived Performance



Notes. p < 0.05. Dependent variable: perceived performance; Independent variable: strategic costing-oriented techniques usage.

Table 10 Coefficients of Regression Analysis Performed to Determine the Effect of Strategic Costing-Oriented Techniques Usage on Perceived Performance



Constant 3.231 0.241 0.139

13.432 0.00 Strategic costing-oriented techniques usage 0.133 0.067 1.991 0.02

Tables 9 and 10 present the regression analysis and Beta factor to test the hypothesis. The effect of


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strategic costing-oriented techniques on perceived performance was determined as 1.5%. The positive Beta value indicates linearity of the relationship. Hypothesis H2 was accepted.

The third hypothesis of the current research is: H3: Usage of customer-oriented techniques has positive effects on perceived performance and there is a

positive meaningful relationship between them. With regard to the effect of customer-oriented techniques, usage on perceived performance, the correlation

coefficient was found as 0.195, determination coefficient as 0.038 and corrected determination coefficient as 0.033 (see Table 11). A significantly weak but positive relationship between customer-oriented techniques usage and perceived performance supports hypothesis H3 (see Table 12).

Table 11 Results of Regression Analysis Performed to Determine the Effect of Customer-Oriented Techniques Usage on Perceived Performance



Notes. p < 0.00. Dependent variable: perceived performance; Independent variable: customer-oriented techniques usage.

Table 12 Coefficients of Regression Analysis Performed to Determine the Effect of Customer-Oriented Techniques Usage on Perceived Performance



Constant 3.243 0.169 0.195

19.238 0.00 Customer-oriented techniques usage 0.139 0.049 2.817 0.00

The last hypothesis of the present study was focused on the effect of competitor-oriented techniques usage on perceived performance. The hypothesis is:

H 4: Usage of competitor-oriented techniques has positive effects on perceived performance and there is a positive meaningful relationship between them.

Table 13 Results of Regression Analysis Performed to Determine the Effect of Competitor-Oriented Techniques Usage on Perceived Performance



Notes. p < 0.05. Dependent variable: perceived performance; Independent variable: competitor-oriented techniques usage.

Table 14 Coefficients of Regression Analysis Performed to Determine the Effect of Competitor-Oriented Techniques Usage on Perceived Performance



Constant 3.317 0.189 0.147

17.581 0.00 Competitor-oriented techniques usage 0.111 .053 2.098 0.03

Tables 13 and 14 indicate that competitor-oriented techniques usage was able to explain 1.7% of perceived


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performance. Despite a meaningful but significantly weak relationship, the positive effect requires acceptance of the hypothesis.

Conclusions and Discussion Compliance of businesses with SMAT and the effects of SMAT usage on perceived performance were

investigated in the present study. With regard to a 5-point scale, SMAT usage intensities varied between 3.68 (quality and target costing)

and 2.69 (balanced scorecard). Sixteen out of 17 techniques had usage intensity over average. Similarly, businesses had over 50% compliance with 12 of these techniques. Only the balanced scorecard had a non-compliance level of over 10% (36.1%).

A model was developed to investigate the effect of SMAT on perceived performance. The model was tested with a main hypothesis (H1) and three sub-hypotheses (H2, H3, and H4).

The first and main hypothesis was expressed as “SMAT usage has a positive effect on perceived performance and there is a positive meaningful relationship between them”. Results revealed that SMAT usage affected the perceived performance. The hypothesis was accepted.

Although the SMAT sub-dimensions of strategic costing, customer and competitor-oriented techniques had a significantly weak effect on perceived performance, positive meaningful relations were found to be sufficient to accept the hypotheses.

It was concluded that participating businesses use SMAT and have a high level of compliance with these techniques. Also, a relationship was observed between SMAT usage and perceived performance and such relationships had very low explanatory power for the perceived performance. While a medium level relationship was observed between SMAT usage and performance in the literature, such relations were very low in some cultures. Literature support is evident for the present study when compared with similar businesses in different cultures.

The reasons for weak relationships (correlations) or effect levels should be pointed out herein. The selection of mostly medium-size businesses, the non-objective responses of accounting managers due to organizational image concerns, and the existence of several factors able to affect perceived performance may have caused such a weak relationship in the present study. Therefore, differently sized enterprises and different provinces should be included simultaneously in future studies for better representation and generalization of such relationships and effects.

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Chenhall, R. H., & Langfield-Smith, K. (1998). The relationship between strategic priorities, management techniques and


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System Analysis of the Banking Systems of the USA and the EU

Nikolaj Moldenhauer Baltic International Academy, Riga, Latvia

The article compares the banking systems of the USA and the EU employing the system analysis. The functions of

the Executive Board and the Board of Directors are considered, there is also a comparison of the bank authorities,

responsible for the decision-making: the features and interrelation of the parts of the system and their alternative

within another bank system. The special attention is paid to the efficiency of the system construction on the basis of

bank authorities and the degree of the power decentralisation. The article considers in details the efficiency of bank

systems exposure to the countries’ monetary policy. In particular, the tools of the monetary policy implementation

are considered. The article also presents comparison of the methods of influencing the monetary policy, the

frequency of their employment, the degree of their impact, and the way of implementation. In the process of

analysing the banking systems of the USA and the EU, there is the conclusion on the high efficiency of the system

with higher level of decentralisation since this system is accomplished formation.

Keywords: the European Central Bank, the Euro-system, the Federal Reserve System, the Governing Council, the

Board of Directors

General Structure (Introduction) The principal difference of the banking system structures in the USA and the EU lies in the fact that the

banking system of the EU comprises several currencies: to begin with, the national banks of the countries—the members of the Euro Zone (17 countries), then the National Central Banks of the states—the EU members, which have not transited to Euro, either due to the special status (the UK and Denmark) or due to having delayed the procedure of Euro introducing. The second reason is actual for Sweden and the states joined to the EU in May 2004 (7 countries of 12). This constitutes that these countries have their national currencies, allowing provision of their own monetary policy and provision of money sovereignty for their central banks. It also implies that they do not take part in implementing the principal activities of the Monetary Union, such as monetary policy in the Euro Zone.

As a result of the currencies’ variety, the structure of the EU banking system is titled as the European National Banks System and comprises:

(1) The European Central Bank; (2) The National Central Banks of 27 countries—members of the EU. The legal documentation establishing the European Central Bank System—the Maastricht Treaty and the

European Central Bank System Charter of 1993—assumed that all the states—the EU members would switch

Corresponding author: Nikolaj Moldenhauer, Master of Social Sciences in Management, doctoral student of Regional

Economics and Economic Policy, Baltic International Academy; research fields: capital markets, government-business relations, monetary policy, econometric modelling, business law. E-mail: [email protected].

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to Euro and the European Central Bank System was planned as an organisation which would deal with all the tasks, connected with the unified currency. Nevertheless, before introducing Euro into all countries, the Euro-system is a key authority. The Euro-system comprises the European Central Bank and the National Central Banks of the states—the EU members, introduced Euro.

The Euro-system as a central banking system of the Euro Zone includes: (1) The European Central Bank; (2) The National Central Banks of 17 states—the Euro Zone members; (3) Accordingly, the Euro-system is the structure of the European Central Bank System. Since the political

decisions of the European Central Bank, having impact on, for instance, monetary policy, are naturally disseminated among the countries of the Euro Zone, in reality the functions of the Central Bank of the Euro Zone implement the Euro-system as a team. At the same time, the European Central Bank and the National Central Banks facilitate the achievement of the common goals of the Euro-system (The European Central Bank, 2011a).

The Euro-system takes responsibility for determination and implementation of monetary policy in the Euro Zone. This function is mainly employed via the financial operations on the market. The most important part of this issue solution is the total Euro-system control of the money supply. In these frameworks, the European Central Bank and the National Central Banks become the only organisations having the right of emitting the banknotes as a legal tender in the Euro Zone. Consequently, taking into consideration the dependence of the banking system on the money supply, the Euro-system is capable of placing the dominating impact on the money market conditions and the market interest rates.

The currency rates and domestic liquidity, being the important variables of the monetary policy, are in the area of impact of the currency operations. It is natural to impose the monetary policy implementation to the Euro-system, since the Central Banks’ function as the necessary operational objects. Second, in case the Central Bank implements this task, it guarantees that the operations with foreign currency correspond to the objectives of the Central Bank’s monetary policy (The European Central Bank, 2011b).

As it has been mentioned above, the principal distinguishing peculiarity of the European system is different currencies’ existence, while the Federal Reserve System (FRS) operates one currency only. Therefore, the FRS as a bank structure is a totally formed organisation not intended for following the pluralism of different monetary interests and connect them in the unified system. As a result, the FRS is a significantly simple system compared to the European Central Bank System. The FRS consists of 12 commercial regional banks; each of them has their own subsidiaries and the Board of Directors. The Law on the FRS was adopted on December 23, 1913. This Law is the Congress Act on the FRS organisation as a central banking system of the USA, signed by Woodrow Wilson.

The Reserve Banks operate as the banks for the USA Treasury, and indirectly for the USA population. They are often called as the “Banks of Banks” due to reserving the banknotes and coins, and processing the cheques and e-bills. The Reserve Banks also control the commercial banks in their districts. Being the bank of Government, the Reserve Banks process the payments of the Ministry of Finance and acts of selling the state securities, and then assist in managing the money funds of the Treasury and investment activities. The Reserve Banks provide the research on regional, national and international economic issues (The Federal Reserve, 2011).

Table 1 presents the comparison of functions between the European Central Bank and the FRS.


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Table 1 Functions The European Central Bank The FRS

1. Determination of the Euro-system policy; 2. Decision-making, coordination and monitoring the monetary

policy operations: the European Central Bank instructs the National Central Banks on details of necessary operations (value, time, date, etc., and controls their successful execution;

3. The legal regulations adoption; 4. Authority on banknotes emission; 5. The currency markets intervention; 6. International and European cooperation; 7. Financial risks monitoring.

1. Solution of the panic problems in banking sector; 2. Executing the functions of the Central Bank in the USA; 3. Keeping the balance of interests between the commercial

banks and the government; 4. Controlling and regulating the banking organisations; 5. Protection of the credit rights of the consumer; 6. Managing the country money supply via the monetary

policy: a. Maximum level of employment; b. Stable price level, including the prevention of inflation

and deflation; c. Management of the long-term interest rates;

7. Supporting the financial sphere stability and management of the system risks at the financial markets;

8. Accomplishment of financial services to the depositary organisations, the USA government, and to the official foreign organisations: a. Facilitating the transactions between the regions; b. Providing the needs in liquidity (banknotes emission);

9. Consolidation of the USA positions in the global economy.

Despite the differences in statements, it is possible to mention that the tasks are common, and the principal of them are as follows:

(1) Money emission, or liquidity provision; (2) Monetary policy and simultaneous stabilisation of the employment level, GDP and inflation rate.

Comparison of Bank Authorities Responsible for Decision-Making There are three authorities in the EU responsible for decision-making in the frameworks of the European

Central Bank policy (The European Central Bank, 2011a): (1) The Governing Council; (2) The Executive Board; (3) The General Council. There are also three authorities responsible for decision-making at the FRS (The Federal Reserve System,

2011a): (1) The Board of Governors (see Table 2); (2) FOMC—Federal Open Market Committee; (3) The Board of Directors. The principal difference lies in the fact that the Governing Council in the EU has the authority for

changing the interest rates since, in accordance with the Treaty on the European Union functioning and the Statute of the European System of Central Banks, the Governing Council has the authority for acceptance of strategically significant for Euro-system decisions.

The FOMC is to deal with this task in the USA. FOMC is the FRS department responsible for monetary policy. It deals with developing the policy oriented on stimulating the stable prices and economic growth. In other words, FOMC regulates the money supply within the country.

The Board of Governors, President of the Federal Reserve Bank of New York, and the Presidents of other


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four Reserve Banks, participating on the rotation basis, are voting members of FOMC. The Chairman of the Board of Governors is the head of FOMC.

Table 2 Board of Governors EU USA

The Governing Council of European Central Bank is the principal authority making decisions in the Euro-system and it consists of: 1. All members of the Executive Board of European Central Bank; 2. Managers/presidents of all National Central Banks in the Euro Zone.

The responsibilities of the Governing Council are as follows:1. Working out the monetary policy in the Euro Zone; 2. Functions as the second and final authority for the third parties appeal to the European Central Bank decisions made by the Governing Council; 3. Permission for issuing Euro banknotes and minting the Euro coins in Euro Zone; 4. Establishing the necessary rules on standardisation of accountancy and operation statements carried out by the National Central Banks; 5. Taking the rules, regulating the distribution of income in money term within the Euro-system and the National Central Banks; 6. Acceptance of the annual statement of the European Central Bank.

The members of the Governing Council address to the Euro Zone and participate in various interviews for explaining the European Central Bank policy.

According to part 284 of the Treaty, the European Central Bank reports to the European Parliament about the decisions, made on monetary policy and other tasks on the regular basis. The quarterly report of the President of the European Central Bank to the parliament committee on monetary and economic affair is the most important forum for the regular exchange with opinion. The President also presents the annual report of the European Central Bank at plenary meeting of the European Parliament.

The system is headed by the Board of Governors, consisting of seven members taking the official positions in the government and appointed by the President and approved by the Senate. The responsibilities of the Board of Governors are as follows: 1. Guidance of the monetary policy; 2. Analysis of domestic and international economic and financial terms: a. Guidance of the committees involved in the solution of the current problems such as banking laws for consumers; b. E-commerce laws.

The Board has power for 14 years, but every two years one of the Board members is exchanged. The USA President appoints Chairman and Chairman Deputy for four years. The prolonged time frame of power permits the Board members to function in consecutive order, on a competent basis and maintain independence under the condition of political pressure capable of provoking inflation in case the pressure implementation. The Board members are to report to the Congress and support the relationships with other government organisations on the regular basis. The Chairman reports to the Congress on the FRS monetary policy twice a year, he also addresses on other issues and regularly meets the Secretary of the Treasury.

FOMC is the case of the integrated inter-depending structure of the FRS. It has the experts from the Board of Governors and 12 Reserve Banks. The regional contribution of the Reserve Banks Directors and consulting groups introduces the opinion of the private sector to FOMC and provides the nation-wide approach toward the monetary policy. Consequently, FOMC functions as a uniting department, while the Governing Council of the EU being the principal authority, makes decisions on the monetary policy.

Time of Meetings FOMC usually meets eight times a year in Washington D.C. The prospects of American economy and

monetary policy are discussed at every meeting of the committee. The Governing Council of the European Central Bank meets two times a month, as a rule, the first and the

third Thursday. The issue of interest rates is usually discussed at the first meeting every month. Consequently, the Governing Council, having the presidents of the National Central Banks and the


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members of the Executive Board as its representatives, makes the decisions connected with the monetary policy in the EU. The decisions on the monetary policy in the USA are taken by FOMC, represented by the Board of Governors, the President of New York Federal Reserve Bank, and the Presidents of four Reserve Banks.

Board of Directors and Executive Board The Board of Directors and the Executive Board function as operative authorities of monetary policy

implementation. The main difference lies in the fact that the Board of Directors in the USA does not have so much power as the Executive Board in the EU does, since there is a maxim of decentralisation within the frameworks of the monetary policy implementation in the FRS.

As a result, every Board of Directors supervises and controls the activities of district bank. Representing the interests of every district, these directors contribute to the local business. Every Board appoints the president and the first vice-president of the Reserve Bank under the condition of the Board of Governors approval.

As distinguished from the USA, the Executive Board in the EU is responsible for: (1) Arranging the Governing Council sitting; (2) Implementation of the monetary policy in the Euro Zone in accordance with the guidelines and

decisions of the Governing Council, providing the necessary instructions to the National Central Banks; (3) Managing the European Central Bank on a daily basis; (4) Implementation of the certain authorities, including the regulating ones, delegated to it by the

Governing Council.

General Council The structure of General Council includes: (1) The president and vice-president of European Central Bank; (2) The presidents of the National Central Banks of all 27 countries—the EU members. The General Council can be supposed as a “transitive authority” since it executes the tasks of the

European Monetary Institute, which is necessary for the European Central Bank for accomplishing the Third Stage of Economic and Monetary Council, because several countries—the EU members have not introduced Euro.

It is responsible for: (1) The statements on the progress in convergence of the countries—the EU members who have not

introduced Euro yet; (2) Providing the consultations on preparing the necessary activities for permanently fixing the exchange

rates of the corresponding countries—the EU members; (3) Monitoring the process of functioning the European Exchange Rate Mechanism II (ERM II) and

stability of mutual exchange rates for every currency pair in the EU.

Structure of the Capital All the banks-members in the USA have the stocks of the Reserve Banks and receive the dividends.

Distinguishing from the private corporation stockholders, the banks have no right to sell or exchange their stocks of the FRS. About 38% of 8,039 commercial banks in the USA are the members of the FRS. The national banks are to be the members, while the State local bank can join the system if it satisfies certain


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requirement. The banks-members are the stockholders of the Reserve Bank of their Districts and are to have 3% of their capital in the form of stocks in their Reserve Banks (The Federal Reserve, 2011).

The share of the National Central Banks of the EU in the structure of the European Central Bank capital correlates to the share of the total population and the GDP of the countries—the EU members as a ration to the EU population and GDP. The Euro-system National Central Banks are to make their contributions to the capital structure in full volume. The National Central Banks of the countries—not Euro Zone members are to pay minimum percentage of their authorized capital as a contribution to the operative expenditures of European Central Bank.

Monetary Policy Tools Table 3 presents the comparison of monetary policy tools between the European Central Bank and the

FRS.

Table 3 Monetary Policy Tools FRS European Central Bank Reserve requirements Minimum reserves Open market operations Open market operations Discount window Main refinancing operations Discount rate Long-term refinancing operations Auctions on credits of deposit organisations with reserved interest rate Fixed rate tenders

Reserve Requirements One of the monetary policy tools employed by the FRS is fractional reserve, known also as a necessary

coefficient of reserve, or reserve requirements. The necessary ratio of reserve states the amount of money required by the FRS as a reserve from the banks. It is stated by the Board of Governors of the FRS. Consequently, change of the reserve requirements has impact on the banks capability of creating money in two ways:

(1) Influencing the excess reserves

(1)

(2) According to McConnell, Brue, and Flinn (2011), “Change the value of money multiplier. Money multiplier shows how much the bank credit portfolio can be increased” (p. 820).

(2)

(3)

(4)

Minimum Reserves The Euro-system binds the credit organisations to keep the minimum reserves at the accounts at the

National Central Banks. The objective of this minimum reserve system is stabilisation of the interest rates on the market and creation (or increase) of the structural liquidity surplus.


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FRS Open Market Operations Operation on the market means money injection or withdrawal to/out of the banking system and/or

population in general. It is accomplished via buying and selling bonds of the USA government. The FRS aiming at selling the securities is imposing impact on the federal funds rate, according to which the banks give the overnight money from the federal fund to each other; this money is the bank reserve in the FRS. This indicator is actually determined by the market, without direct control from the FRS part. Accordingly, the FRS tries establishing the efficient rate for the federal funds via increasing or diminishing the money supply at market operations.

There is a certain procedure of buying the Treasury bonds by Federal Reserve Banks from the commercial banks:

(1) Commercial banks sell part of their Treasury bonds to the FRS; (2) Federal Reserve Banks pay for these bonds by increasing the commercial banks reserves in the FRS by

the value of purchase. Therefore, the commercial banks reserves grow by the value of sold bonds. The transaction of buying the bond from population or legal entity consists of the following stages,

exemplified by “Greedy” Company and “Capital” Bank: (1) Company “Greedy” sells the bond to the Federal Reserve Banks and receives the cheque as a payment;

the cheque is given by the FRS to this company; (2) Company “Greedy” deposits this cheque to its account at “Capital” bank; (3) Bank “Capital” presents this cheque to the Federal Reserve Banks for payment, sending it there for

registration. As a result, bank “Capital” reserves increase. The principal difference between buying bonds from population and transactions between the commercial

banks and the FRS lies in the required reserves received by the commercial banks. In procedure of transaction with population according to the law the commercial bank is to transfer the part of money received from natural person or legal entity to the reserve fund of the FRS corresponding to the required reserve. Since money received from population for bonds is not included in the system “commercial bank—the FRS”, it is impossible to foresee the reserves.

Reasoning from this paragraph the FRS mostly implements the monetary policy by orienting on the federal funds rate.

European Central Bank’s Open Market Operations The most significant tool of the European Central Bank is the open market operations. They serve for: (1) Interest rates controlling; (2) Monetary market liquidity controlling; (3) Presenting information on monetary policy situation. Open market operations can be subdivided as follows: (1) Operations on fine adjustment: they are done for certain moment and oriented on the monetary market

liquidity controlling and interest rates controlling, particularly for smoothing the impact on the interest rate induced by unpredicted market fluctuations;

(2) Structural operations are employed when the European Central Bank determines the situation with the Euro-system structural liquidity concerning the financial sector (on regular or random basis). For example, the alterations of the market liquidity volumes are used for long-term prospects. These operations


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can be carried out with employing the reverse transaction, the outright operations or the ECB bonds emission.

Despite the absence of the exact equivalent on the Federal funds in the Euro-system, the marginal object of crediting can be referred to the similar monetary policy tool. The Euro-system, as well as the FRS, regularly controls the liquidity of its economic agents providing the permanently active procedures securing and covering the daily liquidity. Its interest rates usually provide the band for the overnight rate on the monetary market. One of these mechanisms of regulation of liquidity is the marginal object of crediting allowing that the counteragents (such financial institutes as banks) increase the daily liquidity from the National Central Banks according to the accessible assets. In other words, the banks, as well as Federal funds, borrow the overnight credits on the basis of their assets. Another distinguishing component of the Euro-system mechanism of liquidity provision is the fact that the deposited money can be used by counteragents for depositing the overnight in the National Central Banks. Accordingly, the National Central Bank provides its services to the commercial banks as a depository organisation and simultaneously covers the commercial banks liquidity (The European Central Bank, 2011b).

Discount Window The FRS directly sets the interest rate on the overnight credits, borrowed from the FRS by the banks, for

the discount window. This indicator, as a rule, is set at the value of about 100 basic points higher than the rate indicator of the Federal funds. The goal is to stimulate the banks for searching for the alternative facilities.

Main Refinancing Operations The main refinancing operations can be distinguished as a discount window in the Euro-system, although

this monetary policy tool refers to the open market operations according to the European Central Bank classification. It is not possible to determine these tools as entirely similar, but at the same time they have certain connatural features. The main refinancing operations are the transactions aimed on providing the regular liquidity on the weekly basis and the repayment date of one week.

That the discount window is used as a last resort seems to be the only left credit institution, which is regularly employed by the main refinancing operations. The unifying component here is the source of credit. The source of credit is the central bank (the FRS or the European Central Bank), providing its own money.

Discount Rate (Refinancing Rate) According to McConnell et al. (2011):

When the commercial bank borrows the loan, it issues the bill of credit to the Federal Reserve Bank; the bill of credit is backed by valuable deposit, usually the Treasury bonds. As it happens in ordinary transaction, the creditor determines his risks by imposing the interest rate. (p. 821)

According to the Federal Reserve System (2011b):

Consequently, receiving the loans from the FRS increases the commercial banks reserves and facilitates their ability of crediting.

The discount window rates and the Federal funds rates influence the refinancing rate or discount rate, which is usually about 3% higher than the Federal funds rate.

Long-Term Refinancing Operations The long-term refinancing operations are transactions of providing the regular liquidity on the monthly


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basis and the term of repayment of three months (as a rule). They refer to the open market operations, as well as the main refinancing operations.

As a matter of fact, this mechanism can work as an equivalent of the discount rate. The principal condition on crediting the counteragents of the Central Bank is exactly supported. It is possible to mention the similarity of the European Central Bank and the FRS rates under transiting from short-term to medium-term condition.

Auctions on Deposit Organisations Credits With Reserved Interest Rate According to McConnell et al. (2011):

The FRS holds two auctions monthly, and banks compete for the right to borrow the reserves for the 28 days period. The auction total sum is lent to the banks offering the highest interest rates. Nevertheless, the credits are given by the lowest interest rate among the offered ones by the banks-winners. (p. 821)

Tenders With Fixed Rate for Liquidity Provision Under the ordinary circumstances the Euro-system in the process of open market operations estimates the

total demand for the banking sector liquidity and allocates this sum on the basis of tender. These tenders are usually tenders with swimming interest rates, and this means that the banks pay the interest rates, offered at the moment of staking on. The Euro-system can also offer its tenders with fixed rate; the rate is agreed beforehand and the banks offer the sum they are ready to deal with fixed interest rate.

Comparing these tools, it is possible to notice their similarity. The principal difference lies in denomination, since the American variant uses the word “tender”, while the European one—“tender”.

Conclusions The principal distinguishing peculiarity of the European banking system compared to the American one is

existence of several currencies in the European Central Banks System. This fact is the reason of divergence in both general banking structure and bank authorities of these systems.

The FRS structure is a logical accomplished structure with the permanent components. Vice versa, the European Central Banks has the General Council as a transit authority. Another significant difference between these systems is the fact that the Euro-system exists due to the currencies pluralism, like the General Council does.

As a result, the FRS demonstrates the higher degree of decentralisation; this has become possible due to the accomplished system and unified currency. Vice versa, the European Central Bank within the frameworks of the Euro-system seeks for higher centralisation of monetary power. It is worth mentioning that the European Central Banks uses the National Central Banks as its counteragents, as the FRS does with its branches. However, the efficiency of this policy depends on the economic agents’ monetary interests, while existence of several currencies manifests the difference in the interests. As a result, the European Central Bank activities are mostly planned and controlled, and the European Central Bank has fewer possibilities for flexibility under the condition of constant volatility of the market.

In other words, the degree of decentralisation in this case demonstrates the degree of the banking system accomplishment as an efficient participant of free laissez-faire market.

References McConnell, C. R., Brue, S. L., & Flinn, S. M. (2011). Economics (in Russian) (18th ed.). Moscow: INFRA-M.


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The European Central Bank. (2011a, October). Organisation of the European Central Bank. Retrieved October 26, 2011, from http://www.ecb.int/ecb/educational/facts/orga/html/or_002.en.html

The European Central Bank. (2011b, October). Price stability—Objective of the Eurosystem. Retrieved October 26, 2011, from http://www.ecb.int/ecb/educational/facts/monpol/html/mp_001.en.html

The Federal Reserve System. (2011a, August). A publication of the Board of Governors of the Federal Reserve System. Retrieved October 26, 2011, from http://www.federalreserve.gov/pf/pf.htm

The Federal Reserve System. (2011b, August). A publication of the Board of Governors of the Federal Reserve System. Monetary policy and the economy. Retrieved October 26, 2011, from http://www.federalreserve.gov/pf/pdf/pf_2.pdf

The Federal Reserve. (2011, October). The structure of the Federal Reserve System. Retrieved October 27, 2011, from http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/


Vocational Guidance Need

Ingrida Veipa, Solvita Kozlovska Jekabpils Agrobusiness College, Jekabpils, Latvia

Vocational guidance is the public and state targeted action in youth preparation for choice of profession,

considering subject’s personality characteristics, as well as the labor market situation; and assistance for youth and

adults in career choices and job placement. Career guidance should be viewed as a single set of services, which

includes: professional information, vocational counseling, vocational choice and the activities in youth adaption

work. According to data of the European Training Foundation, Latvia is in the third place from the end in the

involvement of young people in vocational education. This confirms that vocational education has not big

popularity in Latvian. The aim of the article is to compare national career guidance systems in several countries to

establish the conditions of developing an effective system. The methods used in the research include: analytical

descriptive method, and qualitative research method—interview.

Keywords: career, profession, vocational guidance system

Latvian Vocational Guidance System Characteristics Vocational education content in accord with the labor market demands ensures the existence of

professional standards and actuality. Employers’ organizations are not able to take full responsibility for the development of professional standards and competence description. Therefore, this work is currently being carried out by the Ministry of Education. However, employers’ activity, initiative and the ability of this process are insufficient. All professions which are in demand in the labor market occupational standards have not been developed yet because of the forming new professions in labor market. Market economy, forwarding new demands for professional qualification, is growing faster than the supply of adequate professional education programs. An important problem that hinders targeted investments into vocational education is the fact that there is no clearly defined demand of economic sectors for the medium term available. The effect of various factors draws attention to the fact that man’s personal growth, development, professional activity and expression are influenced by conditions that are not always associated with personal motivation.

After analyzing a variety of knowledge and skills’ classification, it appears that they improve each other and should be viewed as interrelated and focused on personal growth and development of life (see Table 1).

These are skills that must be developed at primary, secondary and higher education, through new ways of

Corresponding author: Ingrida Veipa, Master’s Degree in Biology and Master’s Degree in Pedagogy, head of Economics

Department, Jekabpils Agrobusiness College; Ph.D. studies of Economics at Daugavpils University; researcher, Daugavpils University Latvia-Lithuania Cross-Border Cooperation Programme 2007-2013, Project “Enhancing Entrepreneurship Development Capacity in Latgale—Utenas Cross-Border Region”; expert, European Social Fund Project “Building Capacity and Improving Theoretical Klowledge of Leading Executives of Vocational Subjects and Internships”; research fields: marketing of vocational education, career education, promoting factors of entrepreneurial ability. E-mail: [email protected].

Solvita Kozlovska, Master’s Degree in Economics, Economics Department, Jekabpils Agrobusiness College; research fields: company development, human resource management, long-life learning, career education. E-mail: [email protected].

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teaching, problem-solving-based learning, which focuses on learning outcomes (knowledge and skills acquired throughout the learning process), rather than a specific stage of the discharge or the time spent in school.

Table 1 Comparison of Integrated Skills General skills Business skills Career management skills

Communication skills, time management, teamwork, presentation skills, learning to learn, problem-solving, critical thinking, foreign languages, information and communication technologies.

Management skills, communication skills, ability to influence and “sell” their ideas, effective co-ordination and planning skills, ability to make contacts, appetite for risk, innovative thinking and creativity, ability to work under dynamic conditions.

Confidence, study and creation of possibilities, action planning, compliance and decision-making, ability to cope with uncertainty (lifelong learning).

Note. Source: Jaunzeme (2013).

Career guidance system is one of the tools which can facilitate a better matching of skills to support the transition from one educational level to the next, taking up professional activities for adult to make decision about their employment as well as to address social inclusion issues. According to the EU policy formulation, as well as taking into account the high unemployment level of young people between 15 and 24 years old, that remains stable within 30%-33% among the graduates of general secondary education, 21%-23% among the graduates of vocational education, and 8%-9% among the graduates of higher education in the period of time between 2009 and 2012; the career counseling should be strengthened in all stages of education. According to the Statistics Department data, the number of unemployed youth (aged 15-24 years) had not essentially decreased from 2008 to 2012. Ensuring systematic implementation of support and availability, it is also possible to affect the motivation of young people to continue education and not to leave ongoing training programs. Drop-out rates among young people in vocational education institutions in the first study year amounts to 20%, in higher education since 2006, the number of drop-outs in Latvian universities throughout the study period is in the range of 15%-17%, but the average rates have been exceed by industries such as engineering, manufacturing, and construction (23.8%), natural sciences, mathematics and information technology (19.1%), and agriculture (35.7%) (Jaunzeme, 2013).

In order to find a common understanding of the complex nature of the career guidance, the main elements are:

(1) Career-information is required to plan, to start the profession activities and to stay in the labor market. It includes information about occupations, skills, career paths, educational opportunities, labor market trends and conditions, educational institutions, non-governmental organizations services. This is the basis of support system;

(2) Career education in the educational establishments involves activities which are integrated in the process of learning and are provided by the teachers, career guidance counselors, and other specialists. It provides an opportunity for pupils and students to understand their abilities and interests, their motivation, values, and choose their further education and career direction. Implemented activities provide young people with the knowledge about the labor market;

(3) Career counseling helps people (youth and adults) to clarify their goals and expectations, understand their identity, make decisions and manage career, which may be planned or unplanned, realize the nearest employment targets, understand and find employment and skills development opportunities and acquire the


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skills which are necessary to maintain employment (CV preparation, job interview skills) (Jaunzeme, 2013). In Latvia the first thoughts about children career appear when they are in 7th grade but mostly the career

choices are done in the 9th or 12th grades. Whereas in Scandinavia, the child’s career path is being built at an early age, but during school children can express themselves not only in lessons but also in the various educational interest activities. It is the teacher’s opportunity to see the children’s abilities and interests. Career development support measure preventively should be started at childhood from kindergarten to senior citizens in lifelong learning centres.

“We live at the period when the previous concept ‘I want to get a profession, so I study and work’ in my opinion doesn’t exist anymore”, said Sintija Lase, a market manager of organization Junior Achievement—Young Enterprise Latvija at the beginning of 2013, “it simply cannot exist because every year there are new jobs created. Those professions we will see in five years we can’t see nowadays. So firstly we have to give opportunities to learn and develop all time. Secondly it is very important to understand the direction in which to develop and acquire strong foundation on which to build their future profession”. (Aleksejeva, 2013)

Due to the change of economic situation, the number of inhabitants has decreased so people need to have ability to be flexible to change jobs because the changes in the structure do not longer provide jobs for life, so lifelong learning is very important. University researcher Inta Jaunzeme in her study “Latvian Situation Compared to EMKAPT Draft Recommendations to Policy-Makers” indicated that not only education but other factors were also very important: for example, external factors: professional skills, health, experience, mobility, job search skills, and adaptability; personal factors: child care, labor market suitability, training and the availability of transport; and personal circumstances: work culture, family support, informal social contacts, resources and financing the availability.

Career competence consists of: (1) Self-knowledge (physical and character traits, emotional traits, interests, values, and skills); (2) Information and knowledge about learning opportunities and the world of work (about professions,

educational institutions where to acquire chosen profession, requires of the work market, etc.). The body of different abilities, skills and attitudes is needed to personality for successful inclusion in

education and labor market, as well, for successful realization in life (career management skills that include the ability to learn, decision-making skills; abilities to correlate interests, skills and possibilities; noticing profitableness and the ability to use it; social skills, civic skills, intercultural skills). The aim of career education is to provide student opportunities and support in career competency acquisition (Pudule, 2013).

In Latvia, there have been prepared several hundreds of professional career consultants—masters who are willing to work in schools, districts in full load, but local governments do not have enough money to pay for their work or they use the excuses that it is the task of the class teachers and the State Employment Agency.

However, the class teacher … “He or she must be both a psychologist and a social worker. Often the class teacher has to replace the family to children whose parents are abroad, working for a long time or have family problems. Class teacher is almost everybody—an educator, a parent, a career counselor. But everything has its limits. We need professional career consultants. Latvian educational institutions need career counselors”, states I. Lemesonoka, manager of Youth and Parent Career Information and Consulting centre. (Aleksejeva, 2013)

About 50 career counselors work in Latvia in 2013 but it is not enough. Due to the load, career counselor is unable to provide individual attention to each student. Instead of it

there are organized career hobby groups which organize excursions to companies. Students are involved in the


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“shadow days” or other career education activities, but it is a fragmentary approach. There are countries with four to five professionals in each school, and each of them is responsible for its own area.

According to the Cabinet of Ministers Order, March 29, 2006, No. 214 about the concept “the improvement of the career development support system” in the State Education Development Agency has made a career development support system: Co-operation Council. It acts as an inter-branch information sharing and consultative institution in order to develop and promote career development and support services to promote their quality and contribute to the choice of further education or professional career development that corresponds to each person’s abilities, interest and age. The exchange of information and discussion on current issues about the guidance in education and employment sectors are regularly provided as well as the project of the description of the career counselor job made by the Ministry of Science and Education is being discussed. The information and methodological materials made by the information and guidance department of the State Employment Agency are regularly presented and discussed as well as the European Union adopted career support policy guidance documents, recommendations and their links to national policy1.

State Education Development Agency survey shows that half (49%) of young Latvian adopt their own careers decision, they do not discuss it with family or career counselor. In addition, only one-third (28%) of young people assess their “strengths” and the economic sector or occupation where they can use them best. While the late and chaotic career choice consequences are reflected not only in the individual’s dissatisfaction with life, but also in a country’s economic development.

Often young people begin to think about their career only after school-leaving exams. Then they make their decision in a hurry which is mostly based on the choice of an easier way or going to study with others or looking for a prestigious study place. Such kind of approach later disappoints not only the young people, but its effects are visible in the economy—both as the overproduction of certain professions, and as a lack of specialists in the labor market in different sectors and unemployment among young people, said Alexandra Joma, the Head of the Department of the Information and Guidance of the State Education Development Agency.

Although a fifth (20%) of respondents indicate that in their lifetime they see themselves as businessmen, creating and managing their own businesses, however, the same part (20%) of respondents indicate that they see their career development in the future outside Latvia, but only 5% see it in the biggest regional city of their native place.

More than a third (39%) of Latvian youth found that the most effective way to find out whether they are suitable for a profession, is a summer job or practice opportunity. The survey indicates that 14% of young people in order to effectively explore their suitability for a profession say that it would be a necessary career advice, but only 2% use it.

Nora Kaleja, a career consultant of the State Education Development Agency, said:

If the young person succeeds in working in the profession or industry that interests him, he may better to explore and test his suitability for it. Wherewith, the employers, professional training institutions and the country as a whole should create more opportunities for young people at an early stage to gain work experience, engage in experimental work, short working practices and get career advice.

At the beginning of October 2013, State Education Development Agency organizes “Career Week” in 11

1 Retrieved from http://viaa.gov.lv/lat/karjeras_atbalsts/kaas_sadarb_pad_apraksts/par_kaas_sadarb_pad/.


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Latvian cities. To encourage young people to think over their career choices, the opportunity to speak to young people

through social networks is also used. For example, social networking Draugiem.lv has set up an interactive game “Try on the Profession”. The

game offers young people the opportunity to explore different fields of professions which will be required in the future and where young people can get work with both the professional and higher education. Game “Try on the Profession” provides for young people an interactive way to slip into the role of one of the top 10 professions: information technology project manager, pharmacist, carpenter, chemical specialist, pastry-cook, electronics design engineer, occupational health and safety specialist, forester, tourism information and telecommunications consultant design engineer. Playing the game is possible to know the facts about definite industry and the professions and skills necessary for successful professional career development, as well as useful information on where the profession can be learned. This is an example of how companies can get involved, and at least partly make the functions of career consultants. Interactive game “Try on a Profession” is available at www.draugiem.lv/SEDA.2

The site www.profesijupasaule.lv is made in Latvia. This interactive site could be like a walk through the virtual world of the professions, meeting companies and the job descriptions of people who work there, reading interviews with professionals, and finding out where to learn these professions. This is another tool that can help young people to choose.

The ways should be found how to support young people’s transition from school to the working world much better. Imants Lipskis, the director of the department of LM Labour Market Policy, said: “Latvian aims in the field of employment are to raise the employment rate of people aged 20 to 64 years from 68.9% in 2013 to 73% in 2020. In EU in 2012 on average it was 68.5%. One of the initiatives is to promote the individuals’ own responsibility and adaptation to labor market conditions”. As I. Lipskis pointed out in the opening of the conference “Support Guidance System of Lifelong Learning Career Development, Problems and Solutions in Latvia” on June 28, 2013, the obstructive factors of rational use of human resources are the following: a lack of education and skills; mobility (professional, regional); subjective factors—fear, unwillingness to take responsibility and risks; lack of experience; national characteristics (lack of confidence, poor community identity, independence and self-sufficiency as a life motto); and workers flow from industry to industry (Brinkmane, 2013).

Examples of Vocational Guidance Systems in Other Countries Table 2 presented the examples of vocational guidance systems in other countries.

Table 2 The Examples of Vocational Guidance Systems in Other Countries Country Features of professional guidance

Austria

Career guidance in school education: Career guidance in Austrian schools is organized according to the three-tier model: career teachers provide individual counseling; students receive advice from consultants; and both of them are supported by school psychology services that can offer special assistance. They are supplemented by teachers and other special agencies outside the school. Career Center University network has been established and providing guidance on career choices.

(to be continued) 2 Retrieved from http://viaa.gov.lv/lat/karjeras_atbalsts/euroguidance_sadala/jaunumi/?text_id=20824.


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In addition, these centers are the contact points for different jobs and internships, and a living link with the business. The Ministry of Education has set up six psychological student counseling service centers to help students and prospective students at universities and colleges. The main providers of information about careers atschool level are pedagogical advisors.

Germany

Basically career education can be divided into two sectors: vocational guidance and professional orientation. Career guidance is aimed to young people. On average, schools and local employment agencies are responsible for this sector. Their collaboration is based on a basic agreement between the Federal Employment Agency and the Standing Conference on Education and Cultural Affairs in the Federal Republic of Germany. The private sector in the economy (firms, associations, chamber) is the general partner. They offer a variety of activities such as open days or practice for students. Trade unions support the dialogue between schools and enterprises. They provide information about the vocational guidance through the work of the “school and the work environment” (in the regions)/and offers training courses.3

Denmark

There are two types of professional orientation centers: (1) Youth Guidance Center, which is responsible for the guidelines as regards to the transition from compulsory education to young people’s education and outsourcing services to young people outside education and employment; (2) Regional Guidance Centers, responsible for the guidelines as regards to the transition from youth education to higher education. In order to ensure that all citizens have access to quality information about education and occupation, the Ministry of Education provides a web-based national guidance portal.4

Estonia

Career services contain career education, career information and career counseling—its development and provision. This may include services in schools, universities, colleges, educational institutions, public employment services, in companies both in community and private sectors. Security and development of career services are financed from the state and local budgets, noticeable support comes from the European Lifelong Learning Programs and the Structural Funds.

Netherlands

8th grade student receives the assessment written by elementary school. With the help of it a pupil can start to look for a school that would be suitable for him/her. “Primary Advice” is a professional evaluation. This assessment is based on: marks obtained by a student; the results obtained in other tests; what the student is like in the class; tendency to specific subjects; this would be officially released on paper.

Finland

Two systems for management and consulting have been set up, which improve each other: the schools primary responsibility is to advise pupils and students, and career employment services are for outside education and training system. Students are assured that they will receive guidance counseling during the study period and the final stage of the cycle of learning. Students and their parents have to receive all the information about the school and the students acquired knowledge, what options it has and its impact for the future.

Australia

The vocational educational system in Australia is called VET—Vocational education and training. VET provides the skills and qualifications of all types of employment, except those which is a need for higher education. Flexibility of the system allows students to study one or two professions at the same time to gain specialized skills and knowledge. There are private training organizations, which include private training organizations, business colleges, companies, experts from different fields, offering training and adult education organizations.The aim of these organizations is to make a profit. From 2008 to 2017 in Australia, a program is implemented, which was initiated by the Australian Government. Due to this program, Australian secondary schools get support to set up modern workshops with modern technology. In order to promote better results and encourage young people to get involved and to study in VET system, a “Professional Student Award” and the Prime Minister’s Award for outstanding knowledge and skills have been set up in Australia.

Summary Some conclusions are presented as follows: (1) The similarities of the above mentioned countries, creating professional orientation system are: (a) Vocational guidance services play an important role in every developed society, particularly in those

that are experiencing rapid economic and social change; (b) Vocational guidance system has an important role in each country to provide the qualitative workers; (c) Vocational guidance is linked to schools with different levels (elementary, high school, college, etc.);

3 Guidance systems. Retrieved from http://www.euroguidance.net/?page_id=576. 4 Guidance systems. Retrieved from http://www.euroguidance.net/?page_id=576.


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(d) Basically, all countries have both the school psychologists and psychologists who help young people to choose a career direction;

(e) There are a lot of main objectives and components of national career guidance reforms according to the EU’s resolution on lifelong learning management and the EU recommendation on guidance policy and practice;

(2) Basically career guidance services are free and are funded from the state, local governments as well as from EU raised funds;

(3) Educational institutions should work with employers to find out exactly what skills are needed in the labor market;

(4) It is necessary to popularize career education among young people, so that they could gain more information about its opportunities, about what it is and what can be learned from it;

(5) A Stage in the guidance system should be created, which would be compulsory for every child and teenager to constitute it as a norm (e.g., every pupil of form 9 visits a career counselor individually).

References Aleksejeva, N. (2013). Career education—Individual way. Retrieved from http://www.e-klase.lv/lv/raksts/zinas/latvija/karjeras

-izglitiba-individuals-cels/ Brinkmane, I. (2013). From guidance on career education. Retrieved from http://www.izglitiba-kultura.lv/zinas/no-profesionalas

-orientacijas-uz-karjeras-izglitibu Cvetkova, I., Hodireva, V., Martuzāns, B., Ramiņa, B., & Rauhvargers, A. (1999). Human resource development. Retrieved from

http://www.aic.lv/ENIC/lat/lno/prof_1999/3.htm Guidance Systems in Europe. (2012). Retrieved from http://euroguidance.eu/guidance-systems/ Jaunzeme, I. (2013). The evaluation of the career development support system. Retrieved from http://www.viaa.gov.lv/files/

news/19710/petijums_emkapt_kaas_1_.pdf Pudule, G. (2013). Career opportunities partnership building general education schools. Retrieved from

http://www.dukonference.lv/files/proceedings_of_conf/53konf/pedagogija/Pudule.pdf The Australian Government Department of Education. (2013). Australian vocational student prize. Retrieved from

http://deewr.gov.au/Schooling/AustralianVocationalStudentsPrize/Pages/Home.aspx The Conception of Professional Orientation in the Republic of Latvia. (1994). Retrieved from

http://www.lm.gov.lv/upload/normativie_akti/prof_orient_konc_1994.pdf Vocational Guidance Education in Full-Time Compulsory Education in Europe. (2009). Retrieved from

http://www.iolavoroliguria.it/IoLavoro/Docs/focus/_allegati/europa/temi/orientamento/documenti/documenti/096_FI_EN.pdf

Documents

Journal of US-China Public Administration · Journal of US-China Public Administration Volume 10, Number 10, October 2013 (Serial Number 96) Contents Social Governance The Pragmatic