ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.7, No ...€¦ · PLN (Ltd.) has monopoly right...

Journal of Economics and Sustainable Development www.iiste.org

ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)

Vol.7, No.22, 2016

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Public Service Quality

Adelvia Nabunome

Post Gradued Program, Unviversity Tribhuwana Tunggadewi, Malang 65144 Eats Java Indonesia

Budi Prihatminingtyas

Universitas Tribhuwana Tunggadewi, Malang 65144 Eats Java Indonesia

Abstract

The limited quality of public service given by PT. PLN District Soe as electricity supplier for people who live in

Regency of Southern Timor Tengah arouses customer’s dissatisfaction. The electricity’s power outage or blackout

will disturb and annoys costumer’s activities, because electric power is one of many basic necessities in our daily

lives for cooking, lighting, as energy source for some electronic equipments, supporter for health services and lots

more. The purposes of this research are: (1) How does the quality image of National Electricity Company services

in Regency of Southern Timor Tengah. (2) What factors that constraint and support service quality of National

Electricity Company in the Province of Southern Timor Tengah. This research is held at working area location of

PT. PLN District Soe for three months started from January to March 2016. The method of this research is

Descriptive Qualitative, with purposive sampling as its sample collection’s technique. Data source was taken from

primary and secondary data by using research instruments of questionnaire, interview, observation, and

documentations. The result of analysis shown that the quality of its public service is less than satisfactory because

of too many blackouts for compensating insufficient electric power. Slow responses in service occur because of

insufficient manpower, many stealing of the electrical cable and electricity selling prize. As for supporting factor

is physical facility. However, electricity is needed by our society, if there exists limited or poor quality in electricity

services, the impact will make customer trust reduce to minimum level.

Keywords: Service Quality, Electricity

Introduction

Electricity is one of many basic necessities in our daily lives for cooking, lighting, energy source for some

electronic equipment, supporter for health services and lots more. This is the reason of our dependency in

electricity existence. It is absolute that electricity becomes energy source needed by human in every situation for

supporting human activities. The human dependency to electricity happens because its flexibility, easy to transform

into other shapes of energy for running many industrial equipments, households, and other appliances. As

electricity supplier for Indonesia’s society, our government then assigning PT. National Electricity Company or

PT. PLN (Ltd) as electricity supplier for our society, this decision is made with purpose to be arranged in a fair

condition for mutual benefits to avoid monopoly action about this interest and hopefully makes the service deliver

in maximum efforts.

As mention inside the Regulation of Indonesia’s Republic No. 30 Year 2009 about Arrangement of

Electricity Power stated that electric power has a very important and strategic roles for achieving national

development goals, hence efforts in electrical power provider is in the hand of Indonesia’s government. Its supply

must be increase to align with development progress for assuring enough electrical power that will be equally

spreading throughout Indonesia’s territory with excellent quality. Any electrical development must have benefits

and assuring those results (from its development) should be utilize as maximum as it can be for the prosperity and

the welfare of Indonesia’s society.

The position of PLN from marketing perspective is still considered to be seller’s market, in which there

is a monopoly aspect in market domination. Although their marketing activities may not be too rapid like other

companies’ marketing strategy, but PLN must also consider larger marketing expansion by giving excellent service

such as being responsive to customer’s complaints. PT. PLN as one of provider in public service should giving a

maximum service to society because every PLN electricity user is expected to receive better service and have a

guarantee about its continuity and its quality. However, at the service operation, it is unavoidable to have some

administration mistakes or technical disturbances that occur many times.

The essence of service is a series of activities made for service processes that ongoing by simultaneously

and regularly for every society’s element. Whereas every human needs service in daily basis, or to be extreme, it

can be said that service can not be separated from human life (Sinambela, 2014). One of the factors that determine

customer satisfaction is customer’s perception to service quality which focused on five dimensional service quality

namely as physical evidence, reliability, responsiveness, assurance, and empathy. Due to electricity blackout

without notice or any warning makes bigger costs for buying other alternatives lights such as candles. Besides,

many electronic types of equipment are damage because of this blackout. Many people also complain about some

delayed jobs and loss because of electricity went out, one reason that makes business run in staggering walk



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because electricity is their prominent assets.

To find out the quality of services that delivered by PLN District Soe, the researcher construct the problem

of study as follows: 1. How is the image of service quality of National Electricity Company in the Regency of

Southern Timor Tengah, 2. What factors that obstructs and supports the quality of service given by National

Electricity Company in the Regency Southern Timor Tengah.

Review of Related Theories

National Electricity Company or abbreviated as PLN is one of State Owned Corporation that runs in electrical

business field in Indonesia. This company is the only electricity company belongs to government which made PT.

PLN (Ltd.) has monopoly right of any electricity selling throughout Indonesia’s territory. It has duties as

transmission manager, system operation and electrical power transactions with world class quality which able to

convey expectations from stakeholder, and give great contribution in the improvement of society’s welfare.

Therefore PLN must able to give the best service to society from rural areas to megapolitan cities in Indonesia

(PLN, 2014).

Quality is the adjustment movement to requirements or demands, or suitability for applications, ongoing

improvement or perfectness, free from damage/flaws, fulfillment of customer’s need from very beginning, and

every time the customers ask, do every activity correctly from the start, and something that can satisfy the customer

(Tjiptono, 2012). Quality is to keep the promise of giving a good service to make customers feel satisfied and

beneficial. To increase quality is every employee’s responsibilities within an organization. While (Tjiptono, et all,

2012) define quality with statement : “A suitable or appropriate quality that fitness for use under a definition that

a product or services must be able to fulfill the expectation of users” .

A service in fundamental definition is a series of activities filled with service processes which do

simultaneously at routine basis that covers entire human living in their social lives. Basically, every human needs

service, where to the extreme point, can be said that services are inseparable to human lives (Sinambela, et al,

2014). While Moenir, 2010 gave a statement that service is an activity that done by individual or group of people

with certain fundamental theories applied through system, procedures and special methods in order to make efforts

in fulfilling other interests that align with their right. According to (Sinambela, et al 2014) a public service is

defined as service giving (to serve) to other people need or interest or for society that have certain interests to the

related organization, where service will be given according to the principal rules with method or established

procedures that agreed by these parties. (Harbani, 2014) also giving the definition of public service as: every

activity that conduct or do by government to certain people in which for every activity will brings benefit in

collections of it or in a whole, and offers satisfactory result even the result physically will not be attach to certain

product. While Harbani et al, 2014 said that a public service is “a service deliverance (to serve) for certain people

or society who have interest in that particular organization according to the principal rules and established

methods”. From Government Regulation No.25 Year 2009 about Public Service, it said that the meaning of public

service is: activity or series of activities held in order to fulfill or complete any services need according to the

regulations, for every citizen and people, for belongings, services, and or, administrative services performed or

provided by public service implementer.

According to Zeithaml, Berry and Pasuraman in (Kridawati, 2012) which have conducted some

researches about several areas of services and manage to identify 5 characteristics of service dimensions which

used by customers for evaluating the quality of services that they have accepted. These are: (1) Reliability as the

ability in giving service at prompt, satisfy, and suitable as has been promised, (2) Responsiveness as the ability to

help customer and willingness to serve customer in good manners, (3) Assurance as act that covers knowledge,

decency and good manners that must be owned by personnel, free of any danger, risks, or hesitations about their

jobs.(4) Empathy as their care to give attentions as individual for their customers, understanding the customer’s

need also easy to call or contact (5) Tangibles (direct evidence) as physical facilities, employee’s equipment and

communication media.

Dimensions of service quality as stated by Zeithaml, Berry and Parasuraman are having big influence to

customer’s expectation and the service that they accept in reality. When in reality customers accept services beyond

their expectation then they will say that the services have a good quality, but if the customers accept services below

their expectation then they will say that the services have poor quality or unsatisfactory. Customer expectations

are similar with customers desire that will be determine by information that they accepted from words of mouth,

personal needs, pastime experiences and external communication by looking at advertisement and promotion.

Research Methods

The location of this research is in the Regency of Southern Timor Tengah at Brach Office of PT. National

Electricity Company of that region. The regency of Southern Timor Tengah is one of many types of regency in

the province of Nusa Tenggara Timur, Indonesia. The deliverance of services are giving by using Procedural

Operation Standard or SOP (Standat Operational Prosedur). For research method is using a descriptive qualitative



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method because it fits with the research that has explanatory characteristic. The population of this research is

customers or electricity users of PLN in Southern Timor Tengah Regency who use prepaid kwh metre and postpaid

kwh metre. Then, sample is taken from this population by purposive sampling or maybe known as judgmental

sampling, which is sampling collection based on judgment to respondents that fulfill many criteria’s to be use as

sample of this research.

Result of The Research This is a research with descriptive characteristic about the quality of public service implementation in PLN District

Soe. The researcher wants to observe, reveal then describe about its quality. Based on the result of this research

that was taken from interview and observations, the explanation is as follow:

The Quality of Public Service of PLN District Soe

The administrative regional of Southern Timor Tengah Regency composed by 32 (Subdistrict) divided in 12

Division of Subdistrict and 266 villages. The population of their people in 2015 is 459315 local people. Majority

of them are having professions as farmers and employees. It covers area approximately 3947, 1 km, with many

interesting and fabulous tourism resorts which have not been explored in optimum. The electricity power for

Southern Timor Tengah Regency is supplied from single source of power plant in PLTD Soe which use isolated

system. As in effect, when there was disturbances occurred in an area then automatically one action of electricity

blackout will be accepted for some areas of this regency. On May 2016, PT. PLN is operating electricity lines from

Gardu Induk / GI (Main Power House) Nonohanis with the amount of 1 x 20 Mega Volt Ampere (MVA) and High

Voltage Air Channel with the expectation of be able to reduce blackout occurrences.

Public service in this present day becomes basic part of every society’s element necessity. Each public

bureoucracy must put huge effort to give their best service quality to society as their public service’s users. The

public service of PLN District Soe these days must be repaired and improved. By efforts to improve the quality of

its public service to be better is a way that must be due to create more effective and efficiently services according

to the needs and people’s aspiration. Taking from interview result with informant of this research, customers were

not pleased by services given by PLN District Soe. Part of their reason is about the electricity blackout that

happened many times. The blackouts are continue to happen 4 up to 7 times in a month whether on schedule or

outside the schedule. In fact, these activities can happen anytime. It is the cause of many disturbances in society’s

daily activities. One effect of this blackout is bigger expenses for people in this region. They must buy other

alternatives of power source such as candles. Next, this blackout is disturbing children’s study activities at night

time. Another impact of this sudden blackout is damaging many hardware parts of personal computers, due to

scratch on hard disc plates that suddenly stop when it is still moving. Other equipment that broke is power supply.

It is the main part for PC computer that responsible to directly accept electric current that can be unstable when

electricity is going off and on. With unstable power after the blackout it will make the part of power supply

becomes vulnerable. Other equipments such as household appliances are also easy to have broken components

such as: television, washing machine, refrigerator, et cetera.

Slow response (Long Time) of Services in Sub District

The slow response when there are complaints from customers is caused by too limited employees in their Sub

District. Total amount of employees in this office is 6 people who have responsibility to cover entire district.

Services provided from this office are: 1) new installment of electric power that usually takes time less than 10

days turns to be 2 weeks long for finishing this new installment, 2) trouble service. However, where trouble occurs

in one of customer’s house where suppose to be fixing within a day, PLN employees need longer time for about 2

days for fixing the trouble. This slow response also affected the working performance of employee which impacted

on the service given for its customers. 3) Credit token calculation that is not according to the real value without

any explanation. There is no explanation from PLN District Soe about the calculation of token credit that they buy,

make customer confused and feel dissatisfied about the product. Although the users of this prepaid credit token

are increasing today and make society able to apply energy sufficiency living methods for themselves as well as

actively participate in monitoring electricity usage in their own homes, at the same time, this smart electricity

development creates a problem. Majority of prepaid credit token users have been complaint about lessen content

of kwh (electric power). For those who are familiar with prepaid electricity power must be heard about the term

of token. When user buy this electric token (voucher) for refilling the electricity power in their homes they will get

one payment receipt where inside of it written certain code numbers to verify the amount of electric power that

will be added to electricity power (kwh) at their homes. These numbers must be inserted in the number column at

their electricity box. Then, electric power is added and it ready to be use according to the amount of money that

you spend to buy it. When the electric power almost runs out, a red lamp as the sign will on and produce beeping

sound as warning.

In brief, there are some factors that obstruct and support the quality service perform by PT.PLN District

Soe. Some constraint factors are: 1) the limited energy source due to downtime of power plant generator. This

downtime occurred because insufficient facilities provided for the people’s needs. At peak time where the highest



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workload achieve, the energy needed by PLN in Kupang’s area (central area that monitoring PLN District Soe and

7 other districts around that regency) is only 57,90 MW whereas the electric power owned by PLN is only 52 MW

and resulting power shortage in this area. Then, as a compensation of this shortage there will be blackout for some

times in certain parts of the regency. 2) Nature factor such as bad weather that can not be predicted before like

strong wind that tear down tree braches or landslide or ground avalanche, where all of those can cause electricity

blackout. 3) People awareness in relation to public service. There are some stealing activities happening today.

Some electrical cables and other electric facilities are stolen and causing electric current or flows working unstable

or not normal. Finally, 4) the limited apparatus or employees, limited electrical facilities, and delayed new

electricity installment because of its difficult terrain and manpower limitation.

The supporting factors of public services in PLN District Soe are as follow: 1) Physical facilities owned

by PLN District Soe such as comfortable service room. By this adequate facility, it will accelerate services and

give comfortable feeling to their customers and increasing customer’s satisfaction. 2) Human resources, where in

this discussion is their employees, as one factor that gives good services to their customers. They are reliable to

strong responsiveness and able to give service assurance to their customers, able to express empathy and

immediately giving direct services when needed.

Conclution and Suggestions

Conclusions

1. The quality of public service at PLN District Soe is less satisfactory due to electricity blackout that happen in

many times.

2. There are supporting and obstructing factors of public service at PLN District Soe.

The supporting factors are physical facilities which consider being adequate for their customers and employees

that ready to serve their customers. Whereas the obstructing factors are the lacking of energy source which

force series electricity blackout happen by schedule, natural cause such as cable cuts by tree branches and

landslide, stolen cables and other facilities, also limited manpower or employee that force them to do double

work shift and in the long run will slow down their working performance.

Suggestions

According to the summary that stated above, suggestions that able to give by researcher for improving the public

service quality of PLN District Soe are:

1. In practical, government must involve with serious actions by making some developments of new power plant

generator or doing reparation of those damage power plant generators immediately to assure the fulfillment of

electricity demand that increase these days in the Regency of Southern Timor Tengah. The local government

can make business negotiation with PLN to seek alternative power sources to convey electricity demand such

as the usage of windmill.

2. For PLN District Soe. Their public service quality must be increase more by reducing electricity blackout or

making this blackout according to the schedules that has been setting up before. Also, to minimize factors that

obstruct services and adding facilities that will support the service given.

3. From academic perspectives, a further research from other aspects that influences public service of PLN will

be useful by focusing on the government’s role and strength-weakness-opportunity-and treat of PLN which

will influence their public services.

References

Fandy, Tjiptono. (2012). Service, Quality & Satisfaction. Bayumedia.

Moenir, A.S. (2010). Manajemen Pelayanan Umum Di Indonesia.Jakarta: Bumi Aksara.

Pasalong, Harbani. (2014). Teori Administrasi Publik, cetakan VI. Bandung. Alfabeta

PLN. (2014). Saatnya Hati Bicara 2. Sekretariat Perusahaan PT PLN (Persero). Jakarta

Republik Indonesia. Undang-Undang No. 25 Tahun (2009) Tentang Pelayanan Publik Sekertariat Negara. Jakarta.

Sadhana, Kridawati. (2012). Etika Birokrasi Dalam Pelayanan Publik.CV. Citra. Malang. Diakses 21 September

2016

Sinambela, L.P. (2014). Reformasi Pelayanan Publik; Teori, Kebijakan dan Implementasi, cetakan VII. Jakarta:

PT. Bumi Aksara.

Undang -Undang Republik Indonesia No 30 Tahun (2009) Tentang Ketenagalistrikan. Sekertariat Negara. Jakarta.

Diakses pada 1 Oktober 2016

Author Profile

Adelvia Nabunome Post Gradued Program, Unviversity Tribhuwana Tunggadewi.

Budi Prihatminingtyas she is researcher, lecturer post gradued program in university of Tribhuwana Tunggadewi

Malang Indonesia.



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Portrait of Batik Tulis Industry at Pakandangan Barat Village Sumenep Regency in Regional Autonomy Era

Alwiyah1 Djoko Mursinto2

1.A student of Postgraduate Program (S3) of the Faculty of Economics and Business of Airlangga University,

Surabaya, Indonesia)

2.A Professor for Postgraduate Program (S3) of the Faculty of Economics and Business of Airlangga University,

Surabaya, Indonesia)

Abstract

This research have an objective to describe the history of batik tulis, ilustrating the production process, analyzing

backward and forward linkage of batik tulis industry, and analyzing resistance and stimulant factor of batik tulis

development at Pakandangan Barat Village, Sumenep Regency in regional autonomy era. This research is a

qualitative research using primary and secondary data obtained from interview and Focus Group Discussion

(FGD) and also from theoritical and empirical study related to batik. Informants consisted of artisans,

entrepreneurs, consumers, cultural analyst and policy makers related to batik industry in Sumenep with a number

of 23 informants. The process of production and distribution in the batik industry in Pakandangan Barat Village,

Sumenep Regency consists of three main elements, namely input, process, output, and is supported by three

other elements, namely suppliers, consumers and government. All the batik process is still done in the traditional

way. All the raw materials is obtained from Surabaya except for natural coloring material that obtained from

around Pakandangan Barat Village. Making batik is a side job that done by people from generation to generation.

Every step of production process worked by different artisan (specialization). The marketing strategy still

traditional, not using marketing mix and utilize technology for promotional yet. Analysis of backward linkage

show there is corelationj between entrepreneurs with supplier and artisan. Analysis of Forward Linkage show

there is corelation between entrepeneurs with consumers and competitor. SWOT analysis produce Agressive

Business Strategy that is maintain characteristic, uniqueness, batik tulis motive that contain historical value and

wisdom and also give education to consumers.Batik tulis industry management is still managed conventionally,

not optimum yet on utilizing technology. Regional government only doing advocacy effort and provide

assistance to batik artisan on partial and sectoral form, not comprehensive and holistic. Regional autonomy

should opening opportunity for regional government in developing local and regional policy to optimizing

utilization of economic potential at Kabupaten Sumenep.

Keywords: batik tulis, sumenep, backward and forward linkage, SWOT, regional autonomy

Introduction

Batik is a wealth of Indonesian culture that is recognized by the world. As a support of history that factually

belong to Indonesia, the United Nations Educational, Scientific, and Cultural Organization (UNESCO) has

provided confirmation. On October 2, 2009, Indonesian batik has been designated by UNESCO as Masterpieces

of the Oral and Intangible Heritage of Humanity (Surya, 2009).

Earlier research about batik propose that a good batik development strategy are with maintaining

natural coloring, design that contain philosophical, historical, and local wisdom, and also utilize networking and



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online marketing (Anwar et al, 2013; Borshalina, 2015; Cahyaningrum dan Mayangsari, 2014; Haryanto dan

priyanto (2013). Nurhayati (2015) dan Rahab et al (2015) stated batik as a tourist attraction.

Batik is a product of nusantara, but within time, there is an impression that batik is a cultural product of

Java Island only, whereas Madura Island is also have batik tulis craft that passed from generation to generation.

The history of batik in Madura even developed along with dynamics condition that happen in every region.

Based on history, the Sumenep Palace is the oldest palace in Madura Island that established at 1269. While batik

craft exist within the palace environtment, then it can be explained that Sumenep Regency is origin of batik that

knowm in Madura. However, if compared with the development of batik on other region of Madura, like

Tanjung Bumi Batik, Sumenep Batik still can’t compete with Tanjung Bumi Batik that already known on

national scale even on international scale. Refers to a story at Jokotole government era 1415-1460, the history of

batik related to Potre Koneng, a daughter of Prince Secadiningrat II. The beautiful princess once exiled and

commend his son at Pakandangan Barat Village, Bluto District to a man called Empu Kelleng. Potre Koneng is

the first to teach batik crafting to people at Pakandangan Barat Village that until now become the center of batik

tulis industry in Sumenep Regency. Batik at Pakandangan Barat Village reach their glorious era when the batik

entrepreneur join with Gabungan Koperasi Batik Indonesia (GKBI) that centered in Yogyakarta. But

Pakandangan Barat batik decreased at 1965, along with economic and political problems at that time.

Pakandangan Barat batik started to developing again around the year 2000 (Zulkarnain, 2012).

The data of batik industry in Sumenep Regency based on stakeholder in Sumenep Regency is varied.

Based on Department of Industry, there are 42 batik industry. Based on department of Cooperatives, there are 12

batik industry and 50% of them located at Pakandangan Barat Village. But based on observation in 2015 there

are only 6 batik industry in Sumenep Regency that centered in Pakandangan Barat Village and only 3 that still

producing.

Law number 22 year 1999 and law number 25 year 1999 give a new authority to government, especially

regional government. After the application of both laws, regional government with the people manage and

responsible for their own region. There is no central government domination for that region. Central government

only monitor and evaluate on the application of regional autonomy.

With regional autonomy, government and people demanded and stimulated to be more creative on

developing their own resources, both human and natural resources. If government and people in a region are

smart and creative on managing the resources that owned by their region, then that region will be more

prosperous. The world is prosperous not because of natural resources, but because of human creativity. With the

regional autonomy, regional government expected to increase services that will affect on people prosperity.

Moreover, with the regional autonomy, government and people expected to optimizing their local economic

resources (Rasyid, 2002). The presence of regional autonomy law should also presence Sumenep Regency

regional rule that support the development of batik industry. As the cultural wealth that have a high art value,

sumenep batik will increase another regional potency such as tourism.

The background description underlie this research. This research have a purpose to describe the history

of batik tulis industry, ilustrating the production process, analyze backward and forward linkage of batik tulis

industry, and analyzing resistance and stimulant factor of batik tulis development at Pakandangan Barat Village,

Sumenep Regency in regional autonomy era.



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A lot of earlier research using the same analytical tool that is backward and forward linkage analysis.

Bechet (2010) analyze the production structure on industrial group to become stable. Clauss (2002) analyze

direct and indirect transaction that applied on an industry. Kula (2008) dan Drejer (2002) analyze key sector and

important role on county development strategy. Guo dan Planting (2000) analyze the decrease of world

economics as the impact of import decrease. Mittal (2007) analyze the loss of horticulture sector after a big

number of harvest. Raihan dan khondker (2010) analyze the production activities connection. Teka (2011) stated

that factor that related to fabrication process such as labour proffesinalism, limited load, and local policy. Tohmo

et al (2006) found that there is home market effect on industrial sector.

This research is a qualitative research using primary data obtained from interview and Focus Group

Discussion (FGD) with Informants consisted of artisans, entrepreneurs, consumers, cultural analyst and policy

makers related to batik industry in Sumenep with a number of 23 informants. Secondary data obtained from

theoritical and empirical study related to batik.

History and Condition of Batik Tulis Industry at Pakandangan Barat Village

Batik tulis at Pakandangan Barat Village Sumenep Regency existed since the time of the first king of Sumenep

Kingdom, Aria Wiraraja, at 1269. Batik first come from the royal family of Sumenep Palace. Batik develop at

Pakandangan Barat Village because this region is the location where Potre Koneng exiled. While her pregnancy,

Potre Koneng teach batik crafting process to women on Pakandangan Barat Village. Batik tulis industry on

Pakandangan Barat Village emerge since 1960. Initially there are 6 batik industry in the village. But now only 3

of them that still operating.

Production Concept on Batik Tulis Industry at Pakandangan Barat Village

Production concept of Sumenep batik industry consist of three main elements, that is input, process, output, and

supported by other elements, that is supplier and government as policy maker.

Input. Input consists of material (fabric), supporting material (malam, natural coloring, and artificial

coloring, batik crafting equipment, canting, stove, dandang, pan, dyeing place, drying place, packaging,

showcase, etc), artisan (people who craft batik), place to crofting batik (fixed asset, entrepreneurs house),

personal money, and businessman managerial skill. Only small part of batik crafting material can be found on

the region. That material is natural coloring that obtained from around Pakandangan Barat Village area. Most of

the material and supporting material obtained from Surabaya. The distance between Sumenep-Surabaya is 182

km that can be travelled in 4 hours. Lots of the materials that obtained from Surabaya makes the cost of the

material become high that makes production cost inefficient. This is not match to Alfred Weber’s industrial

theory that states if the location of the industry should placed in the area that have minimum cost (Weber, 1929).

Batik tulis industry in Pakandangan Barat Village located around 182 km from Surabaya, it makes the

transportation cost become high. The right industry location is close to the material obtaining area to decrease

prodcution cost and increase profit.

Process. Process or Batik Crafting started with choosing dan cutting of the fabric, adjusting, drawing,

reng-rengan, filling, colet, nembok, dyeing, pelorotan, and packaging.Batik crafting process done manually by

different skilled labour (specialization). According to Adam Smith on his book The Wealth og Nation (1776),



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states that specialization of work will increase the production (Smith, 1937). This is not match to the

phenomenom happen on batik tulis industry at Pakandangan Barat Village. Specialization on production process

does not increase the production. This is happen because batik crafting is not the main job for the artisan at

Pakandangan Barat Village.

J.H. Boeke on Dual Society theory states that the tendency of people in developing region are more

willing to work if they are not having money (Boeke, 1953). This theory is match with the condition of artisan at

Pakandangan Barat Village. On harvest or after harvest season they will rest, including from crafting batik. The

artisan make crafting batik as a side job not as a main job. This is highly influencing to the production level on

batik industry at Pakandangan Barat Village.

Picture 1. Production Concept and Batik Tulis Sumenep Industry Dsitribution

Source: Primary data (2016) Output. Output as a batik fabric produced by the artisan at Pakandangan Barat Village, some on the form of batik sheets and other on the form of shirt, dress, etc. The result of batik production then displayed at the entrepreneurs showroom to be sold to the customer. There are also some that sent to agents, store, or people that interesting to sell the batik. The istribution strategy applied is direct distribution is distribution from entrepreneur to the end customers and indirect through agents. The marketing strategy that applied by batik entrepreneur at Pakandangan

Input Process Output

Marketing and Distribution

- Batik artisan - Fabric (material) - Natural coloring - Artificial coloring - Malam - Batik crafting

equipment - Artisan

managerial skill - Fixed asset

(House and batik crafting place)

- Money (personal) - Supplier

Fabric cutting

Adjusting

Drawing

Kelowong

Filling

Colet

Nembok

Dying

Pelorotan

Packaging

Ready to sell batik fabric

Batik clothing

Price strategy and promotion, competitor and competition

Government: Training support to increase the human resources and marketing.

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Barat Village is varied. Including word of mouth, participating on exhibition, and through social media (BBM), and others such as giving business card to people. But the marketing strategy that has been done is not optimal yet. Batik madura is already have a brand image in society. Through the brand image of batik madura, batik from Pakandangan Barat Village can be promoted until international market through online media. Good marketing have to planned with marketing program that is developing a marketing program or plan to achieve the goal of the company (Kotler, 2003).The marketing program have to pay attention on product, price, distribution, and promotion. Picture 2 Batik Tulis Sumenep Industry Concept

Source: Primary data (2016)

Eksternal Party Roles in Batik Tulis Industry at Pakandangan Barat Village Batik tulis industry at Pakandangan Barat Village, Sumenep Regency cover industry elements consist of internal and external. Ecternal element consist of supplier, artisan, government, consumer, and competitor. While the internal elements is the entrepreneur or the managerial abillity of the entrepreneur. Both party, internal and external, have an important role for the development of batik tulis industry at Pakandangan Barat Village, Sumenep Regency. Picture 3 Backward-Forward Linkage of Batik Tulis Sumenep Industry

supplier Artisan

Consumer Government Competitor

Technical abillity

Managerial Abillity

Financial abillity

Businessman



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Backward-Forward Linkage analysis of Batik Tulis Sumenep Industry

Research result shown that there is a linkage between supplier and artisan with the entrepreneur, and also

between entrepreneur with consumer and competitot. On that linkage there is government roles through training

and marketing program.

Picture 3 shown that in batik tulis business, Batik Tulis Sumenep businessman correlated with external

parties both before production process (backward linkage) and after production process (forward linkage).

Government, as facilitator and accomodator influencing the backward-forward linkage.

Dual Society Concept on Batik Tulis Sumenep Industry

Farmer who also work as batik craftsman portray traditional lives of society. While batik tulis entrepreneur

portray modern lives through his vision and courage to open new opportunity. This relation can be illustrated on

Table 1 as dual society concept between farmer who also work as batik craftsman with batik tulis entrepreneur in

Sumenep Regency.

Table 1. Economic Dualism Concept Between Farmen-Craftsman with Batik Tulis Sumenep Entrepreneur

Farmer-Craftsman Entrepreneur Impact

Agricultural: Nonagricultural: Economic:

a. Farmer get an extra income

b. Better financial condition on

entrepreneur family

Culture:

a. Preserved batik tulis culture

b. Preserved local widom through the

story written on batik tulis theme

Social:

Established mutualism relationship

between farmer-craftsmam with

entrepreneur

Traditional people with farming as their

main job

People with non-farmer as their main

job

Hereditary traditon: New opportunity:

Have a skill to make batik tulis that

passed from generation to generation

Utilize opportunity from batik crafting

skill that owned by people to produce a

batik tulis product

Partial-conventional characteristic Developing skill:

Do batik crafting activities when in

need of money or when not farming

Attend training that organized by

government, in the ragion or outside the

region


SWOT Analysis

SWOT analysis done with analyzing internal and external factors of batik tulis sumenep industry, to discover the

strenght, weakness, opportunity, and threat that faced by the entrepreneur. Through table 6.5 the critical success

factor and grand strategy of batik tulis sumenep industry can be determined. From the analysis above the

strenght of batik tulis sumenep located on the skill of the entrepreneur in mastering batik crafting activities and

good financial power. Moreover, batik tulis sumenep uniqueness that still preserved through its motives is the

core competitive for batik tulis sumenep industry. With the presence of the core competitive then the

development of batik tulis sumenep already have a foundation. While the identified weakness show that batik

tulis sumenep lack on some skill or competence that owned by competitors.



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Table 2. SWOT Matrix

Opportunity (O):

1. Tourism potential in Sumenep Regency

2. Government policy to make student and

civil servant use batik

3. Government support on creative industry

development

Threat (T):

1. Competitor outside Madura Island,

especially Solo and Jogja that more

innovative

2. Batik printing that cheaper and more

variative

3. Craftsman think that batik crafting is a

side job

4. Young generation are not interesting to

work as batik craftsman

Strenght (S):

1. Financial abillity

2. Entrepreneur have a good skill about

batik

3. Have an unique pattern

4. Preserving motives that contain local

heroes and legends

5. Bring local wisdom on its motives

S-O Combination:

1. Uniqueness of batik tulis motives that

contain hirtorical and local wisdom value

that can be the strenght feature offered to

Sumenep Regency tourists

S-T Combination:

1. Entrepreneur skills can be spread to young

craftsman to always working

2. Giving motivation to young craftsman to

love and proud of batik tulis sumenep

3. Preserving motives with batik tulis

sumenep characteristic.

4. Improving promotion quality with

utilizing information technology (website,

social media, etc).

5. Improving innovative design quality

Weakness (W):

1. Limited availabillity of professional

craftsman

2. Craftsman regeneration is difficult

because batik crafting is a difficult skill

3. Inadequate accounting system

4. Pricing decision is not based on data

5. Rely on WOM marketing

communication

6. Limited marketing communication

7. Formed as family business, so the

management is a single management

8. The price is more expensive than batik

printing

W-O Combination:

1. Government support should be given to

craftsman, especially youyng craftsman, so

craftsman regeneration could be better

2. Government giving managerial training to

entrepreneur, so entreprener can optimally

run the family business

3. Government giving education to the

consumer about batik crafting process

though batik tour, to make the consumer

understand about value and process

contained on a batik

4. Government helping batik sumenep

marketing communication from the Madura

Island entry gate

W-T Combination:

1. Those threat are inspiration

source for entrepreneur to overcome the

weakness of batik tulis industry

2. Entrepreneur can use it to be

more innovative and crative on developing

the business



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Table 3. SWOT Analysis

INTERNAL

STRENGTHS

Weight Rating Weighted Value

S1 No problem on financing 0.025 2 0.05

1.825

S2 Entrepreneur have skills on batik sector 0.2 4 0.8

S3 Unique characteristic of the motives 0.15 4 0.6

S4 Preserving motives that contain local history and legends 0.05 3 0.15

S5 Bring local wisdom value on its motives 0.075 3 0.225

WEAKNESSES

W1 Limited availabillity of professional craftsman 0.075 3 0.225

1.225

W2 Craftsman regeneration is difficult because batik crafting is a difficult skill 0.05 1 0.05

W3 Inadequate accounting system 0.025 2 0.05

W4 Pricing decision not yet based on data 0.05 2 0.1

W5 Rely on WOM marketing communication 0.075 3 0.225

W6 Limited marketing communication 0.1 2 0.2

W7 Formed as family business, so the management is a single management 0.025 3 0.075

W8 The price is more expensive than batik printing 0.1 3 0.3

1 3.05 3.05

EKSTERNAL

OPPORTUNITIES

O1 Tourism potential in Sumenep Regency 0.3 4 1.2

1.4 O2 Government policy to make student and civil servant use batik 0.15 1 0.15

O3 Government support on creative industry development 0.05 1 0.05

THREATS

T1 Competitor outside Madura Island, especially Solo and Jogja that more

innovative 0.2 4 0.8

1.8 T2 Batik printing that cheaper and more variative 0.05 2 0.1

T4 Craftsman think that batik crafting is a side job 0.1 3 0.3

T5 Young generation are not interesting to work as batik craftsman 0.15 4 0.6

1 3.2 3.2

Picture 3 above showed that the condition of batik development at Sumenep Regency located at

Quadran II which mean even facing some threat, batik tulis sumenep still have internal strenght. Strategy that

have to implented is utilizing the strenght to take advantage of long term opportunity.

Entrepreneur skills can be spread to young craftsman to always create

1. Giving motivation to young craftsman to love and proud of batik tulis sumenep

2. Preserving motives with batik tulis sumenep characteristic.

3. Improving promotion quality with utilizing information technology (website, social media, etc).

4. Improving innovative design quality



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Picture 3. Grand Stategy Matrix

RESULT

The result based on discussion above is an empirical result and also theoritical result. Those results as explained

below.

Empirical Result

Batik crafting process at Pakandangan Barat Village Sumenep Regency needs raw material that obtained from

Surabaya that caused production cost become expensive. This result makes researcher hope that the government

form an association or cooperative at Pakandangan Barat Village to facilitating the availability of the raw

materials to decrease the production cost and increase entrepreneur profit and also increase bati craftsman

prosperity..

Batik craftsman at Pakandangan Barat Village think that crafting batik is their side job rather than their

main job. The majority of them work as a farmer or fisherman. They only crafting batik when they in need of

money. It makes the amount of batik produced in Pakandangan Barat Village become hard to predict.

Generally, batik crafting processes from the beginning until end done by the the same craftsman as

happen in Jogja, Solo, and Pekalongan. This is not found at Pakandangan Barat Village. Every stage at batik

crafting process done by different craftsman (specialization).

Entrpreneur and craftsman have an emotional relation that make the craftsman have loyalty to the

entrepreneur. This is shown with the loyalty of craftsman from generation to generation work for the same

entrepreneur.

Batik tulis industry at Pakandangan Barat Village shown there is linkage between supplier, craftsman,

and entrpreneur, also between entrepreneur with consumer and competitor. On that linkage there are government

role through training program, forming an association or cooperative and also dacilitating batik tulis gallery as

marketing medium.

Batik tulis entrepreneur at Pakandangan Barat Village is not yet optimal on information technology

utilization for their product promotion. The promotion that alredy done is still simple, word of mouth and

TURN AROUND AGRESSIVE

4

3

2

1

0

DEFENSIVE DIVERSIVICATION

O

W

T

S



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14

Blackberry Messenger.

Regional government role just limited to training for batik craftsman that organized annually by

Department of Industry and exhibition by Departmen of Cooperative and Small Medium Entreprise. The

regional government roles in developing batik tulis industry that have art and culture value as Sumenep Regency

identity is not yet optimal, as statet on law number 22 year 1999 about regional government that government and

people demanded to be more creative on developing regional resources.

Theoritical Result

Empirical result about he availabillity above is not match with Weber (1929) who stated that industrial area

located in place that have the minimum cost. With the distance between Sumenep and Surabaya causing raw

material price become high.

Dual society concept that stated by J.H. Boeke (1953) explain the economic characteristic of Indonesian

people that low production mobility factor is much influenced by tradition. Traditional people characteristic have

a certain pattern. This theory is match with the phenomenon that happen on batik craftsman at Pakandangan

Barat Village.

Adam Smith (1937) on his book The Wealth of Nation stated that division of labor (specialization) can

increase production. This is not match with the condition that happen at Pakandangan Barat Village. The

phenomenon that happen at Pakandangan Barat Village is specialization not increase the production.

Batik tulis entrepreneur management at Pakandangan Barat Village is still traditional. They are not yet

use Kotler (2003) marketing management theory on marketing their product.

Professor Ryaas Rasyid on his book Penjaga Hati Nurani Pemerintahan stated that regional autonomy

opening opportunity for regional government to develop regional and local policies to optimizing economic

potential in the region. This is not match with regional government policy in Sumenep Regency that is not fully

supporting the development of art and culture, especially batik tulis industry.

Batik Tulis Sumenep Development Strategy

Based on analysis discussion above the development strategy of batik tulis industry in Sumenep Regency can be

obtained. Those strategies illustrated on picture 4. Picture 4 show that batik sumenep industry is an

implementation from dual society theory in Sumenep Regency, especially at Pakandangan Barat Village. Dual

society concept can be illustrated in rural society. People that initially pure agrarian society change to be batik

craftsman.

Batik entrepreneur, which is the third generation have the power to survive in financing sector, have a

good skill on batik sector, and motivated to preserving the uniqueness of batik sumenep that affect the quality of

batik tulis sumenep with that have Sumenep character.

Even the craftsman have a good abillity on crafting batik, but they still think their main job are farmer

or fisherman, and think that batik crafting as a side job. It become an obstacle for entrepreneur to reach optimal

production volume. So when there is an order in big number, they can not accept it immidiately, because they

have to wait for the craftsman to finish the batik.

Furthermore, if reviewed from linkage concept, both backward and forward, basically linkage can



Vol.7, No.22, 2016

15

formed a relation between internal and external parties. Linkage affecting the cost and benefit generated by batik

tulis business at Pakandangan Barat Village, Sumenep Regency and could be a consideration for government to

do further development.

Barriers

The barrier of this study is the fact that only three batik industries at Pakandangan Barat Village that ready to be

interviewed, namely Batik Tulis Melati, Batik Tulis Albarokah, and Batik Tulis Kharisma. Even though the

Departments of Industry ecplain that there are 6 batik tulis industries at Pakandangan Barat Village. Only three

of them that still operating. The other three batik industries are refused to be interviewed because they already

stop the production.

Conclusion

Analysis on this discussion is the result of research that already proven with linking economic theories to answer

the problems.

From these discussions can be concluded as follows:

1. Batik madura initially emerge among Sumenep royal family at the time of Sumenep first king, Arya

Wiraraja, on 1269. Because lack of interest from the royal family causing Pakandangan Barat Village as the

only batik tulis industry developed in Sumenep Regency. Pakandangan Barat Village is Pottre Koneng

exiled location.

2. Batik tulis production process at Pakandangan Barat Village different from other batik tulis industries.

Every batik crafting processes still done traditionally. Every production process worked by different

craftsman (specialization). Batik crafting is a side job that done by people from generation to generation

that caused lack of innovation and creativity among batik craftsman. Lack of interest from young

generation causing limited number of batik craftsman. Most raw materials obtained from Surabaya except

for natural coloring that can be found around Pakandangan Barat Village, it makes raw materials price

become expensive.

3. Backward Linkage analysis shown there is correlation between entrepreneur with supplier and craftsman

that become input in batik tulis production process. Forward Linkage analysis shown there is correlation

between entrepreneur with consumer and competitor on distribution and promotion activities.

4. SWOT Analysis generate diversivication strategy that entrepreneur skills can be spread to young craftsman

to always working. Giving motivation to young craftsman to love and proud of batik tulis sumenep.

Preserving motives with batik tulis sumenep characteristic. Improving promotion quality with utilizing

information technology (website, social media, etc). Improving innovative design quality.

5. Batik tulis industry management is still managed conventionally, not optimum yet on utilizing technology.

Batik craftsman learn to crafting batik hereditary that causing lack of innovation and creativity on producing

design that wanted by the consumer. Regional government only doing advocacy effort and provide

assistance to batik artisan on partial and sectoral form, not comprehensive and holistic.



Vol.7, No.22, 2016

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Picture 4: Batik Tulis Sumenep Development Strategy


Batik Tulis Sumenep Entrepremeur

Third generation: Family Business

Maintainaing uniqueness of batik

Managerial skill

Financial power

Batik tulis product with sumenep characteristic

Cor

e C

ompe

titi

ve

Batik Tulis Sumenep Industry

Production Concept

External Environtment

Internal Environtment

INPUT OUTPUT

Consumer

Competitor

Craftsman: Mostly farmer

Supplier Partner

Government

Du

al S

oci

ety

PROCESS

Marketing Strategy: Marketing communication Distribution channel Pricing decision

Forward Linkage

Backward Linka

ge

Networking

Cost Benefits

Next development Cultural

Economic

Social



Vol.7, No.22, 2016

17

6. Weber Theory (1929) stated that industry location locating at place that have minimum cost. J.H. Boeke

theory of dual society concept(1953) explain the economic characteristic of Indonesian people that low

production mobility factor is much influenced by tradition. Adam Smith (1937) on his book The Wealth

of Nation stated that division of labor (specialization) can increase production. Marketing Management

theory according to Kotler (2003) utilizing marketing mix strategy. According to Professor Ryaas

Rasyid with the regional autonomy, regional government expected to increase services that will affect

on people prosperity. Moreover, with the regional autonomy, government and people expected to

optimizing their local economic resources

7. Raw Material obtained from Surabaya makes raw materials price become expensive. Work

specialization does not increase production because batik crafting is a side job. Marketing just done

traditionally without marketing strategy and utilization of technology.

Suggestion

Based on result and discussion of the research, suggestions can be concluded as follow:

1. For batik tulis entrepreneur at Sumenep Regency

Batik tulis entrepreneur expected to increase managerial skill, preserving unique characteristic of batik

tulis sumenep, and utilizing marketing strategy and technology.

2. For Sumenep Regency Government

a. Government role is important to increase production with increasing the frequency of batik

crafting training for young generation.

b. Government expected to stimulate the interest of young generation to becaome batik craftsman

with organizing related events, such as batik design competition.

c. Government form cooperative or association that can facilitating all baik materials to make

material price more efficient. It can increase the profit for entrepreneur and craftsman.

d. Government providing gallery as batik product promotion medium

e. On regional autonomy era, the regional government expected to developing regional policies

to support batik tulis industry that have art and culture value as Sumenep Regency identity.

3. For future research

a. Future researcher expected to do research that can provide the design of batik tulis industry

developpment to increase batik tulis entrepreneur in Sumenep.

b. Future researcher expected to do research that can connecting batik tulis to tourism sector that

can increase tourist interest to come to Sumenep.

c. Future researcher suggested to expanding research object to batik tulis industries at entire

Madura Island.

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Marketing Model in Developing the Potential SMEs Based on SWOT Analysis

Dewi Andriany Lailan S. Hasibuan Sri E. Rahayu Lecture of Economic Faculty, Muhammadiyah University of North Sumatra

Abstract This study aims to explore the strengths, weaknesses, opportunities and threats for Small and Medium Enterprises (SMEs) actors in conducting their business, in addition to the efforts that have been made parties in developing SMEs. Using a focus group discussion with SMEs actors, relevant agencies and banks does the data collection. The marketing model that can be developed are: developing Internet-based marketing to expand market share, develop production technology to produce a greater quantity, provide easier access to the things that support the wider marketplace, accompanied by mentoring, training so that products can be accepted on a broader marketing, set up a platform for SMEs so that the perpetrators have the same standard to compete at a broader level. Implementation of this model requires support from various parties, such as governments, universities, banking, telecommunications services and other stakeholders. Keywords: Marketing Model, SMEs, SWOT Analysis. 1. Introduction Small and medium business group is a business group of economic importance in the economy of the city of Medan. This is due, small and medium enterprises and cooperatives is a business sector that has the greatest number with the absorption of a significant labor force. The income gap is quite big still occur among large employers in small and medium enterprises and cooperatives (SMEs), so the development of the competitiveness of Small Businesses, directly an effort to improve the welfare of the masses, as well as narrowing the economic gaps.

Based on data from the Central Statistics Agency (BPS), the number of large employers only 0.2% while the Small Entrepreneur, medium and cooperative reached 99.8%. This means that the number of small and medium enterprises and cooperatives to nearly 500 times the number of large businesses. The issue of Small Business contribution to the GDP, only 39.8%, while large businesses reached 60.2%.

To economic growth, small and medium enterprises and cooperatives contributed only 16.4% and 83.6% large enterprises. Based on market share, small and medium enterprises and cooperatives are only a market share of 20% (80% by large businesses). This shows two things at once, which is super strong big business sector and very weak Small Business sector. The hope is that with the increased production of small businesses, as well as medium and cooperative with a growth rate higher than the rate of productivity growth in the region, or by 6-8% per year, then there will be the absorption of labor and equipment for the small and medium enterprises and cooperatives, along with the growing labor force, by 5-10% per year.

Andriany, et al (2014) have designed a model approach to participatory in empowering poor Medan to improve the living standards, a model that will be applied by small businesses in which the empowerment of the poor is done through empowerment strategy in total which include their social protection program, environmental improvements, human resource empowerment and economic empowerment productive. The expansion of the business base and Small Businesses the opportunity to encourage the growth of new entrepreneurs, through increased knowledge and entrepreneurial spirit. Institutional Strengthening Small Business mainly to expand access to sources of capital, especially bangking and non-banking, use of technology and marketing as well as promotional products. Another simultaneous thing to do is improve the business environment through the simplification of licensing procedures.

The General Guidelines PNPM (2007) mentioned component of community development includes a series of activities to build critical awareness and independence of the community that consists of mapping the potential, problems and needs of the community, participatory planning, organizing, resource utilization, monitoring, and maintenance of the results that have been achieved. To support a series of activities, provided



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funding support community learning activities, volunteer development and community assistance operations; and facilitator for facilitation, capacity building, mediation and advocacy. The role of the facilitator, especially at the beginning of empowerment, while community volunteers are the main driving force in society in the region.

It is essential to conduct a study on the efforts that have been made by the perpetrators of SMEs it self and the efforts made by relevant agencies in the development of SMEs, particularly in the field of marketing. Marketing is an important aspect for the development of SMEs, as long as it SMEs only do a limited marketing namely in the areas of production alone. 2. Literature Review The study of the performance of the marketing done by Andrews and Smith (1996) and Menon et. al (1999) suggest that the test results were less clear because it was lacking in creative marketing programs emphasize on performance marketing. But others argue that creativity has the most influence on the performance marketing because it is very profitable to develop products (Knight, 2000 and Menon et. Al, 1999).

Performance marketing is an important element of the company's performance in general due to the performance of a company can be seen from the performance marketing over the years. Performance marketing is a concept for measuring a company's marketing achievement. Any company interested to know his achievements as a reflection of the success of the business in a competitive market. Slater and Narver (1995) describe the results of the implementation of corporate strategies including in the form of customer satisfaction, the success of new products, increased sales and profitability.

Performance marketing is a common construct used to measure the impact of the company's strategy. However, the issue of performance measurement is an issue and the classic debate because as a construct, multidimensional marketing performance which in it contained a variety of objectives and types of organizations. Therefore, the performance should be measured using a variety of measurement criteria at once (multiple measurement). If using single measurement criteria it will not be able to provide a comprehensive understanding of how the performance of a company's real (Calantone, 1994).

Performance marketing is also said to be the organization's ability to transform itself to meet the challenges of the environment with long-term perspective (Keats et.al, 1998). The performance assessment becomes part of the company's efforts in view of the suitability of the strategy implementation in the face of environmental changes. The environment has become an important part of the company and it is difficult to be changed by the company. Companies can only recognize it and then manage properly so that it can benefit the company. The introduction of a good environment will have an impact on the quality of the resulting strategy, which will further impact on the performance marketing.

Performance marketing is a construct that is often used to measure the impact and orientation strategies applied by the company. The marketing strategy has always aimed to produce marketing performance (such as sales volume and sales growth rate) was good and good financial performance. In general, the size of the company's performance is measured by the value of currency sales, Return on Investment (ROI), Return on Assets (ROA). But the size of the measure was seen as a measure of aggregate produced through the process of accounting and finance, but not directly describe management activities, especially marketing management (Ferdinand, 2002). Therefore, the size of which should be used is a measure that is activity-based measure that can explain the marketing activities that produce performance-marketing performance eg better to use the size of the number of units sold or produced from the only use of the rupiah value of sales.

Marketing strategy development process (Marketing Strategy Making, MSM Process) is one of the important areas of study in marketing management studies. This is important because the system paradigm states that the performance of a strategy is not solely determined by how the strategy implementation and evaluation of strategies carried out continuously, but is also determined by how well the process that accompanies the development of that strategy. In accordance with the paradigm of the system, the performance of a strategy will be determined by how well the preparation and provision of inputs and resources to shape the content of a strategy, as well as input and resources to implement the strategy. The performance of a strategy also depends on the process that is passed in presenting a strategy, as well as intangible as the output of a strategy that has been formulated through the process and feedback was good, and therefore can produce a quality strategy (Ferdinand, 2002).



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Preparation of marketing strategy involves determining the strength, direction and interaction of the strategic strength. The aim of developing a marketing strategy is to build, maintain, and sustain competitive advantage. Researchers are many who understand the preparation of the strategy is a structured analytical process. In general, the development of marketing strategy has the following characteristics (Lumpkin, 1997): 1) In particular with regard to the determination of how the company was able to excel in competition, to harness its power to give more value to its customers from time to time, 2) It is a complex process which usually involves a complex decision-making also by managers and require a comprehensive analysis of the environmental changes as well as a blend of useful information, 3) It requires a lot of strategic information that is relevant and extensive knowledge, 4) Involve high uncertainty and confusion and 5) Involve experience, intuition and conjecture from the managers.

Various characteristics of the proven marketing program making require creativity in view of the existing environment. The company can not only rely on the company's internal data, but also need to look for other market data and the ability of the manager to see the opportunities and threats that arise there. With the alignment between marketing programs with the environmental conditions, the company will be able to compete with other companies and they are also able to improve marketing performance.

Luo (1999) explains that creativity is defined as the development of marketing programs to the implementation or application of the strategy undertaken in the market (shape change), which indicates a significant difference from the practice of marketing. Creativity marketing program is a novelty that has been widely used to describe the creativity in the field of advertising. Creativity is an attempt solving business problems faced every day. The process ends when creativity produced a new product, new ideas, new strategies to deal with the changes there. Through creative marketing programs, the company will obtain a new angle with which to face the opportunities and threats ahead. Creativity requires the development of newer and more aggressive alternatives that can make it like a motor that offers a new learning process and the potential to change behaviors within the organization.

Along with the increased competition, the role of marketing as an important part of the company cannot be ignored. Companies need to constantly adjust their marketing programs with various changes that occur in the environment. In this case, the creativity of the marketing program is the key to the competition. According to Andrew and Smith (1996) creativity is an attempt solving business problems faced every day. Creativity arises because of the changes that occur. That is, changing conditions in the business environment makes the company had to think of new ways to adapt it self and to then prepare to compete with other companies. Creativity emerged as an alternative form of development of newer and perhaps more radical than the previous strategy.

The results of the study Menon et al (1999) found that creative marketing strategies positively related to market performance. Average market performance itself is an element of performance marketing in general. Morris (1995) explained that there are three indicators that can be used to measure creativity that is search information, discussion programs, and compliance programs. A search for information related to the company's efforts to identify the environmental conditions. Program discussions related to the company's efforts to exchange views on existing programs. Conformity of the program related to the conformity of the program with the environmental conditions. Creativity in making marketing program will provide a mechanism for companies to differentiate so it can be used as a weapon in improving marketing performance. As long as companies are still using old marketing program and make adjustments to changing conditions occur then the company will be difficult to compete for 'taste' of the consumer has changed. This became the basis for the need for a company to seek marketing programs that can be used as a creative and interesting media to acquire customers. 3. Research Methodology This study used a qualitative descriptive approach; with the involvement of SMEs and related institutions conduct focus group discussions to identify the strengths, weaknesses, opportunities and threats faced by SMEs. Data collected through the FGD associated with the appropriate marketing system is expected to be applied by the perpetrators of SMEs. The research object is the SMEs, which are in the district of Medan Deli. The research data will be analyzed by means of qualitative analysis SWOT, to uncover strengths, weaknesses, opportunities and threats faced by SMEs.



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4. Finding and Discussion This research was conducted in Medan Deli because the District is a district with the largest population in the city of Medan (173.951 inhabitants, BPS 2015) and when the number of actors Small Business proportionally to follow a population then estimated the number of perpetrators of Small Businesses majority will be obtained in the district of Medan Deli, It is estimated that today in the city of Medan there are about 200 thousand perpetrators of Small Business. Therefore, this study was conducted in the district of Medan Deli to then be used as a model to be developed in the city of Medan.

One of the strong reasons other is no initial information that PNPM Mandiri / PPMBK (Program for Enhancing Livelihoods-based Community) in the case of retrofitting to the perpetrators of Small Business is not running in the district of Medan Deli, so the identification of problems in this district will be portrait as a whole for districts another in the city of Medan.

SMEs age is between 30 s / d 55 years, with an average gender is female with an average education level of high school graduates. This type of business is conducted Batik craft, the craft of the shell (accessories), industrial tofu, shoes, meals, with total workforce of 1-10 people.

As for strengths, weaknesses, opportunities and threats faced by SMEs perpetrators of marketing aspect can be seen in the following matrix:

Based on feedback from the SMEs, they expect some action that is predicted to contribute to the progress of the business, namely: 1) was formed cooperatives, 2) presence of additional working capital, 3) Keep the training for the workers, 4) the government should help in terms of marketing and 5) government aid in the capital. The things above are expected to help the development of SMEs is more significant, such as the cooperatives which would provide a standard for products to be marketed, so that the guaranteed quality. Assistance in marketing has been done as holding fairs or bazaars, be it regional, national or international. The lack of continuity of the event is the cause of underdevelopment marketing SMEs products.

Based on the information that has been extracted from the perpetrators of SMEs, sub-district government officials, agencies, and banking, it can be concluded that the perpetrators of SMEs has gained a wide range of conveniences, such as in terms of marketing. By organizing an exhibition at the local, regional, national and international, of course, is an activity that supports the familiar product to a wider area. But in reality, the development of SMEs is not evenly show signs satisfactory. Only SMEs are able to be more proactive which shows a significant development. It would be a task to formulate how the continued activity of the relevant agencies, assisted by universities, to ensure continued progress for SMEs.

Furthermore, it can be described some of the strengths, weaknesses, opportunities and threats owned SMEs offender. It is described as follows:

The strength of the SMEs: 1. Operational Flexibility, SMEs are usually managed by a small team, each member has the authority to

determine the decision. This makes SMEs more flexible in their daily operations. This business reaction speed to any changes (for example: a shift in consumer tastes, product trends, etc.) Is quite high, so that a small business is more competitive.

2. Speed Innovation, the absence of hierarchical organization and control in SMEs, products and new ideas can be designed, tilled, and launched immediately. Although the brilliant idea came from thinking employees - not the owner - the closeness between them make this idea tend to be more easily heard, accepted and executed.

3. Low Cost Structure, Most small and medium businesses do not have a dedicated workspace in office complexes. Most run at home with their own family members as employees. This reduces the extra costs (overhead) in their operations. Furthermore, small medium businesses also receive support from the government, non-governmental organizations, and the bank in the form of tax relief, donations, and grants. This factor major influence in the formation and financing their operations.

4. Ability to Focus on Specific Sectors, SMEs are not obliged to obtain the quantity sold in large quantities to reach a turning point (break even point - BEP) of their capital. This factor enables small and medium businesses to focus on sector specific products or markets. Examples: home-based craft business can focus on working on the type and model of craft.



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Table 1. SWOT Matrix INTERNAL EXTERNAL

Strength - The price of competing

products - Product quality is below

standard - Production capacity is still low - Promotion is still used Word of

mouth - Some SMEs have their own

capital - Marketing is limited (still

around the business location, by order, sold to schools and cafes, some SMEs are already marketed outside the region)

Weakness - Low labor Skill - Some SMEs obtain loans from

others - Still using simple technology - Some SMEs have never

received any assistance

Opprtunity - The number of consumers who

are more and more (market opportunity is still wide open)

- Following the bazaar or exhibition

- Some SMEs obtain loans from banks

- Attended training skills - Some SMEs get funding from the

government - Some SMEs received assistance

from the government apparatus

Strategy SO Develop Internet-based marketing to expand market share.

Strategy W-O Develop production technology to produce a larger quantity

Thread - Prices of raw materials are

relatively expensive - Lack of venture capital - SMEs are required to conduct the

production process with a productive and efficient, and can produce the products according to the frequency of the global market with quality standards such as the issue of quality (ISO 9000), environmental issues (ISO 14000) for follow MEA

- - Limited Market access will cause the resulting product can not be marketed competitive in both national and international markets.

Strategy S-T Provide easier access for those that support broader marketing, along with mentoring

Strategy W-T Provide training so that products can be accepted on a broader marketing and Establish a forum for perpetrators of SMEs that have a common standard to be able to compete on a wider level

The weakness of the SMEs: 1. Lack of Funding Capital and Limited Access. Lack of capital SMEs, because in general, small and medium

enterprises are individual enterprises or companies that are covered, which rely on capital from the owner of the number is very limited, while the loan capital from banks or other financial institutions are difficult to obtain because of the requirements of administrative and technical requested by the bank can not be met. The requirements that the greatest obstacle to SMEs is the provision of the collateral because not all SMEs have adequate and sufficient assets to serve as collateral

2. Quality of Human Resources (HR). Most small businesses are traditionally grown and are a family business



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that is hereditary. HR quality limitations of small businesses both in terms of formal education as well as knowledge and skills greatly affect the management of the business, so that the business is difficult to develop optimally. Besides, with the limitations of the quality of its human resources, the business unit is relatively difficult to adopt new technological developments to enhance the competitiveness of the products it produces.

3. Weak Business Network and Capabilities Market Penetration. Small businesses are generally a business unit of the family, have very limited business networks and low market penetration capabilities, plus the resulting product is very limited and has qualities that are less competitive.

4. Mentality SME Entrepreneurs. The important thing is often also forgotten in any discussion of SMEs, namely the spirit of entrepreneurship, SMEs themselves. The spirit is here, among others, the willingness continues to innovate, tenacious without surrender, be willing to sacrifice and the spirit to take risks.

5. Lack of Transparency. Lack of transparency among the early generations of builders of SMEs to the next generation. Lots of information and network that is hidden and not notified to the parties subsequently running the business so that it creates difficulties for the future generations in developing its business.

6. The problem of raw materials, this is because the number of the limited availability of raw materials as well as high raw material prices. SMEs do not have the ability to look for alternative / raw material substitution, because the cost to conduct experiments replacement of raw materials must be quite high.

7. Limitations of technology, the limitations of technology, especially the efforts of the household (micro), is caused by many factors, among others, lack of capital investment to purchase new machines or to enhance the production process, the lack of information regarding developments in technology or machinery and tools the new production-tool, and limited human resources to operate new machines or make innovations in products and production processes.

8. The difficulty of marketing, promotion strategy less convincing consumers. 9. The choice of location that does not represent the perception of consumers. 10. Insufficiency product quality to compete. The absence of standardization of the quality caused SMEs only

produce according to their ability and not adapted to the competitive quality standards. Opportunities of the SMEs:

1. Making products or services that consumers demand. 2. Making a product or service that can win the competition. 3. Preparation and utilize sources of production. 4. The design products that fit the needs of the buyer or customer. 5. Help from the government and outside parties either in the form of working capital loans, equipment,

training etc. 6. Sufficient resources. 7. Skills / skills good 8. The presence of CSR funds from the private sector to used by SMEs

The thread of the SME: 1. Fully Conducive Business Climate yet. Government policies to cultivate SMEs, although from year to

year continue to be refined, but it felt not to be conducive. This can be seen, among others, still the unhealthy competition between entrepreneurs of small and medium entrepreneurs with great.

2. The difficulty of getting permission to run their businesses. Complaints are often heard about the number of procedures to be followed at a cost that is not cheap, coupled with long periods of time. This is somewhat related to the economic policy of the Government is assessed impartially small parties such as SMEs but rather to accommodate the interests of the big employers.

3. Lack of Facilities and Infrastructure Business. The lack of information relating to the progress of science and technology, leading facilities and infrastructure that they have also not fast developing and less support their growth as expected. In addition, SMEs often difficulties in obtaining a place to do business due to the high price of the lease or where there is less strategic.

4. Illegal Payments, Practice of unofficial levies or better known as the extortion become one of the obstacles for SMEs as well as increase spending not less. This not only happens once but also can be repeated periodically, such as every week or every month.



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5. Implications of Autonomous Region, with the enactment of Law No. 22 Year 1999 on Regional Government as amended by Law No. 32 of 2004, the regional authority has the autonomy to organize and manage the local community. This system changes will have implications for small and medium businesses in the form of new levies imposed on SMEs. If the condition is not done it will reduce the competitiveness of SMEs.

6. Implications of Free Trade, as it is known that the AFTA which came into force in 2003 and APEC 2020 has important implications to the small and medium enterprises to compete in the free trade. In this case, inevitably SMEs are required to conduct the production process with a productive and efficient, and can produce the products according to the frequency of the global market with quality standards such as the issue of quality (ISO 9000), environmental issues (ISO 14000).

7. Nature of Security Products with short, majority of the products of small industries have traits or characteristics as products and craft with a short resistance. In other words, the products produced by SMEs Indonesia perishable and durable.

8. Limited Market Access will cause the resulting product cannot be marketed competitive in both national and international markets.

9. Lack of Access to Information, In addition to access to finance, SMEs also encounter difficulties in terms of access to information. The lack of information known by SMEs, a little more to give effect to the competition of the products or services of the SME business unit with other products in terms of quality

5. Conclusion and Recommendation Develop an Internet-based marketing to expand market share. This will require support from various parties, such as providers (to provide cheap internet service along with management training marketing site), department of trade and industry to ensure that the marketed product has a high level of security for public consumption, government officials districts to ensure business continuity where monitoring is done every day so as to identify any small problems faced by SMEs with the perpetrators of the marketing system. Develop production technology effectively and efficiently to produce a larger quantity. This would require the support of institutions such as industry, universities and the machine manufacturers. The production technology developed well adapted to the ability of SMEs in investment, and in terms of location. Providing easier access for those that support broader marketing, along with mentoring. Provide training so that products can be accepted on a broader marketing. Establish a forum for perpetrators of SMEs that have a common standard to be able to compete on a wider level. References Andrews, Jonlee and Daniel C. Smith, 1996, “In Search of the Marketing Imagination: Factors Affecting the Creativity of Marketing Programs for Mature Products”, Journal of Marketing Research, Vol. 33, p. 87-174. The Central Bureau of Statistics Medan (BPS), 2015. Calantone, Roger J et. al, 1994, “Examining the Relationship between Degree of Innovation and New Product Success”, Journal of Business Research, Vol. 30, p. 143-148. Andriany, Dewi et. al, 2015, Pengembangan Model Pendekatan Partisipatif Dalam Memberdayakan Masyarakat Miskin Kota Medan Untuk Memperbaiki Taraf Hidup, Laporan Penelitian Hibah Bersaing, DP2M DIKTI, Tidak Dipublikasi. Ferdinand, Augusty, 2002, “Marketing Strategy Making: Proses dan Agenda Penelitian”, Jurnal Sains Pemasaran Indonesia, Vol.1 No, 1, p. 1-22. Keats BW dan Hitt MA, 1998, “A Causal Model of Linkages Among Environmental Dimentions, Macro Organizational Characteristic and Performance” Academy of Management Journal, Vol. 31, p.570-598. Knight, Gary, 2000, “Entrepreneurship and Marketing Strategy: the SME Under Globalization”, Journal of International Marketing, Vol.8, No.2, p.12-32. Lumpkin, G. T., dan Dess, G. G., 1996, “Clarifying the Entrepreneurial Orientation Construct and Linking it to Performance”, Academy of Management Review, Vol. 21 (1), p. 135-172. Luo, Yadong, 1999, “Environment-Strategy-Performance Relation in Small Business in China: A Case of



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Township and Village Enterprises in Southern China”, Journal of Small Business Management, January, p. 37-52. Morris, Michael H. dan Pamela S. Lewis, 1995, “Determinants of Entrepreneurial Activity Implications for Marketing”, European Journal of Marketing, Vol. 29 No. 7, 1995, p. 31-48. Menon, Anil, Sundar G. Bharadwaj, Phani Tej Adidam dan Steven W. Edison, 1999, “Antecedents and Concequences of Marketing Strategy Making : A Model and A Test”, Journal of Marketing, Vol. 63, p.18-40. (PNPM) MANDIRI, 2007, Pedoman Umum Program Nasional Pemberdayaan Masyarakat. Slater, F. Stanley dan John C. Narver, 1995, “Market Orientation and the Learning Organization”, Journal of Marketing, Vol.59.



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Social Security and Taxation

Aurela BRAHOLLI, Ph.D Candidate

Professional Business Academy, Faculty of Economy, Tirana, Albania

Galantina CANCO, Prof.Dr. Agricultural University of Tirana, Faculty of Economy and Agribusiness, Tirana, Albania

Abstract Some people who get Social Security must pay federal income taxes on their benefits. But, no one pays taxes on more than 85 percent of their Social Security benefits. Nearly 90% of individuals over age 65 rely on Social Security income to pay for a large portion of living expenses throughout their retirement years. The federal government makes this benefit available to those who have worked and contributed to the system for a certain number of years, but the total monthly benefit varies from person to person. In Europe, the competence for social security and the right to levy income tax lie with the country of employment in cross-border matters. This has two disadvantages. First, the Employment Principle distorts active persons' choice of place of work. Second, the employment-based regulation of state competencies cannot be applied to non-active persons. The Treaty of Maastricht, however, confers the right of free movement to all citizens of the Union. Against this background, this paper pleads for a reform in European policy coordination. The Employment Principle should be replaced with the Principle of Delayed Integration where cross-border matters are concerned. Keywords: Social security and taxation , Employment Principle, Delayed Integration, Origin Principle, free movement etc.

1. Introduction

The European Union stands for the will to overcome the political and economical separation of its Member States. Europe should be a place where its citizens enjoy the freedom to move and to pursue their business wherever they wish. This goal was confirmed in the Treaty of Maastricht by the introduction of Union Citizenship. According to Article 18 every citizen of the Union shall have the right to move and reside freely. This was a confirmation of the policy of integration in as much as the right to free movement was and still is a privilege of active persons. Non-active persons such as the recipients of social assistance are effectively constrained in their choice of residence till this very day. Not least of all political integration and free movement are expected to enhance economic development. However, it is precisely this expectation that is being questioned in connection with Eastern Enlargement. Whether or not, and to what extent, there will be undesirable migration in addition to desirable migration is something that is stirring emotions. Even economists appear to be split as to how to judge Eastern Enlargement and what political measures to recommend. Some see the accession of new Member States as a welcome opportunity to break down rigid labor market structures with increased external competition (Burda, 2000). In their view, there is no such thing as undesirable migration. Others, on the other hand, are concerned about immigration that is driven simply by the desire to reap social benefits. They see testing times ahead for the welfare state (Sinn, 1994). Although European wide harmonization could certainly remove the basis for social tourism, such policy harmonization is in conflict with the principle of subsidiary, and due to the economic heterogeneity of the Member States it is not worth striving for, at least for the foreseeable future. Thus there seems to be a fundamental trade-off between the objective of free movement, on the one hand, and the objective of subsidiary, on the other hand. The object of this paper is to analyze this trade-off and to discuss possible solutions.What is being sought is a regulatory framework for European policy co-ordination that can do several things. First, it must put the Member States in a position in which they are able to pursue their own redistribution objectives in accordance with the subsidiary principle. Second, it must treat all citizens of the Union equally with respect to their right to free movement. In particular, this means that active and non-active persons must no longer be treated differently. Third, this regulatory framework must be designed in such a way that it impedes undesirable migration without impeding desirable migration. It is argued in this paper that the present EU framework fulfils such co-ordination requirements inadequately. It is employment-based, which means that the citizens of the Union are effectively subject to income taxation and social security in that Member State where they are employed ("lex loci laboris"). Such assignment of migrants is problematic for two major reasons. For one, an employment-based assignment cannot by nature be applied to non-active individuals and this makes a liberal application of the right to free movement difficult. For another, such a rule of assignment tends to distort decisions on migration due to the fact that the choice of place of work has an immediate effect on taxes and social benefits. From an empirical point of view it is not fully clear how important such distortions are. Still economic theory suggests not to play them down and rather to eliminate them if possible. That however requires to replace the Principle of (the Country of) Employment by something different. The alternative on which this paper focuses is the so-called Principle of



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Delayed Integration. Delayed Integration means that migrants - active persons and non-active ones alike- remain assigned to their country of origin for tax and social security purposes for an agreed period of time after emigrating. Only after this period has elapsed does the country of immigration take over the fiscal competence for these particular persons. This concept of Delayed Integration is not completely novel. It is already put into practice here and there in international tax and social security law. Its systematic application in international policy co-ordination however, has only recently attracted particular attention (Sakslin, 1997; Richter, 2001b; Weichenrieder, 2000). The Council of Economic Advisors to the German Ministry of Finance (Wissenschaftlicher Beirat, 2001) has looked into Delayed Integration in detail in its report on "Free Movement and Social Security in Europe". After weighing up the advantages and the disadvantages, the Council found a changeover from the Employment Principle to the Principle of Delayed Integration worthy of consideration. This paper is structured as follows. Section 2 presents some numbers on cross-border migration in Europe. Not only is the current situation of interest, but also the extent of migration that is expected to result from Eastern Enlargement of the EU. Section 3 outlines the present regulations concerning free movement in the EU. Section 4 explains how migrants are taxed and covered by social security.

2. Migration in Europe and Eastern Enlargement

In Germany and Austria there is much concern about excessive immigration as a result of Eastern Enlargement. For similar reasons, non-active citizens of the Union are denied an unrestricted right to free movement. There is a fear of social tourism. Such concerns about excessive migration could be allayed with the argument that they have no basis in reality: There is relatively little migration within Europe. This applies to both migration within

countries1 and cross-border migration. In 1993, there were approximately 17 million foreigners in the EU, corresponding to 4.6% of the total population. 12 million people (3.3%) were nationals of third countries and only 4.9 million (1.3%) were European citizens (Bauer and Zimmermann, 1999, p 3). There is considerable variation hidden behind such averages, however. The share of foreign nationals varies considerably across countries (OECD, 1999). It is below 2% in Finland and Spain, whereas it reaches 19% in Switzerland and 35% in Luxembourg. With values in the order of 9% it is moderately high in Austria, Belgium and Germany. Sweden has roughly 6% foreign nationals which is the highest share among Scandinavian countries .Now it would be wrong to infer a low propensity to migrate from low shares of foreigners. A low level of migration could be a sign of a migration equilibrium. Still, the need for political intervention cannot be ruled out. A migration equilibrium need not be allocationally efficient. Rather, residence choices could be fiscally distorted, which would raise the question of appropriate political measures to be taken. Low shares of foreigners in the EU could alternatively result from obvious or hidden barriers to free movement. It is the non-active citizens of the Union and the nationals of third countries, in particular, who are mobility constrained by present law.

3. Free Movement in the EU

As mentioned before the right of free movement is not enjoyed by all citizens of the Union to the same extent. Only active persons, more precisely persons who are put on an equal footing with active persons such as family members and surviving dependants, are completely free to move and to reside within the territory of the Member States. Non-active persons, more precisely persons who are not put on an equal footing with active persons, are restricted in their freedom to move. Member States may well take a more liberal stance towards migration and the Nordic countries do in fact whenever own citizens are affected. However the rule for the Union is that Member States limit the right of residence and they are even authorised to do so. Thus immigrants must have sickness insurance and sufficient resources at their disposal in order to ensure that they avoid becoming burdens on the social assistance system of the country of immigration during their stay.6 For recipients of social assistance, this provision means that they have de facto no freedom to move. It is precisely because they do not dispose of sufficient resources that they have to rely on social assistance. By moving abroad they, however, lose their claim to welfare support. Social assistance is not portable. According to German law, social assistance can be but need not be granted to German nationals residing abroad.7 If neither the home country nor the country of immigration grants social assistance, the freedom to move does not really exist for the needy. It is certainly not in conformity with the spirit of Maastricht if the freedom to move takes on a different shape for different groups of people (Sasklin, 1997, p.205; Wissenschaftlicher Beirat, 2001). The Treaty of Maastricht introduced the status of Union Citizenship and conferred on beneficiaries not only the right to vote and to stand as a candidate at municipal and European elections. As mentioned before, citizens of the Union were also granted the right to move and reside freely within the territory of the Member States. Although this right is subject to contracted limitations and conditions in accordance with Community law, the contracting parties must, however, have had in mind that such limitations will and should not last for ever. The explicit reference to the freedom to move in Article 18 of the EEC Treaty only makes sense if one assumes that the right to free movement should also be granted to those persons who do not already enjoy this right by virtue of other provisions. Since the right to free movement is already guaranteed to active persons or persons on an equal footing by Articles 39 and 43 of the EEC Treaty, one



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has to infer that the contracting parties in Maastricht were decided to regard employment no longer as an absolute requirement for free movement.

4. Avoiding International Collision in Taxation and Social Security

Whenever citizens exercise their right to free movement, it becomes necessary to fix jurisdictional memberships and competencies. Citizens and jurisdictions need to be assigned to each other, and there are collision norms in international tax and social security law to regulate this. The various provisions are, however, anything but uniform both technically and in terms of content. As far as direct taxation is concerned, collision is avoided by the application of bilateral tax conventions. One has to rely on such conventions as the EEC Treaty provides no legal basis for co-ordinating national policies in the field of direct taxation. The bilateral tax conventions closely follow the OECD Model Tax Convention on Income and on Capital. Article 4 of this Model Convention rules that whenever the residence of a person is in need of clarification, in the first instance, he shall be deemed to be a resident of the State in which he has his permanent home available to him. Special provisions, however, apply when dealing with cross-border matters. For example, Article 15 of the OECD Model allocates the right to levy taxes on earned income to the country of employment if that employment exceeds an agreed period of time. It is then the responsibility of the residence country to avoid double taxation. This general provision does not rule out special ones in specific bilateral tax conventions. Several countries have agreements with their neighbours according to which so-called frontier workers, regular commuters across the border, are subject to taxation in the country ofresidence.Aside from such atypical special provisions, it is the country of employment which has the right to levy taxes on earned income in the EU. Employment-based taxation goes so far that workers in Germany who are resident abroad can apply to be taxed as if they were resident in Germany. In this way , they enjoy all the personal and family tax concessions that a resident can claim. It was only in 1996 that Germany enacted this provision thus reacting to the Schumacker ruling by the European Court of Justice in 1995.9 This development can be interpreted as a confirmation and a strengthening of the Employment Principle (Wissenschaftlicher Beirat, 2001. p. 52). The Employment Principle also dominates social security law, at least as far as the scope of Regulation (EEC) No. 1408/71 on social security for migrant workers is concerned.

4.1 Taxable Social Security Income

For Social Security benefits to be taxable, individuals must have income above the threshold. This is based on total combined income, calculated as an individual's adjusted gross income plus nontaxable interest earnings and half of his or her Social Security benefit. If combined income for a single individual is above $25,000 but below $34,000, or above $32,000 but below $44,000 for married couples, 50% of Social Security benefits are taxed. Combined income above these maximum amounts results in benefits taxed up to 85%. At this time, there is no income level that creates a situation where Social Security benefits are 100% taxable for retirees.

5. Critical Assessment of the Employment Principle

The employment-based regulation of jurisdictional memberships and competencies has advantages and disadvantages. It is chiefly the disadvantages which will be examined here. The most obvious drawback is a result of the fact that the Employment Principle is not applicable to non-active persons. Either special provisions become necessary if non-active persons may wish to migrate or some discrimination of such persons must be accepted. It has already been pointed out that an unequal treatment of Union Citizens hardly conforms to the spirit of the Treaty of Maastricht. Special provisions are just as problematic, however, because the separation of employment and non-employment is difficult to enforce in practice. According to a ruling of the European Court of Justice, as few as 10 to 12 hours of work per week may suffice for a person to qualify as working from a legal point of view.Once being qualified as working, such a person is eligible to all the social benefits granted in the country of employment, supplementary social assistance, housing and child benefit, in particular. Economic reasoning suggests that the claim to such benefits impacts residential and occupational decisions even if it is only a conditional one. In any case, special provisions for non-active persons are difficult to enforce if the only objective is to deny these persons workrelated social benefits. Even if one could ignore migration of non-active persons, the Employment Principle would still give reason for criticism on allocational grounds. In order to understand this kind of criticism one has to consider the joint interest of the countries of emigration and immigration. Labour is a factor of production which, in the case of perfect mobility, is only then globally efficiently allocated if its marginal product is equated across countries. The marginal product is reflected by the firms' cost of labour. When making locational decisions, workers do not compare costs of labour however. Instead, they compare wages net of taxes and subsidies. A migration equilibrium is, therefore, characterised by equalised net wages. Such a behaviour is only able to sustain production efficiency if equated net wages translate into equated costs of labour. Obviously a precondition for this to result is that the tax-subsidy wedge is of the same magnitude in the different jurisdictions. Only policy harmonisation can ensure this. Policy harmonisation, as has been explained, is no viable option for the EU, however. Hence the Employment Principle induces an internationally inefficient allocation of labour. The



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Employment Principle is also criticised for impeding non-paretian distributive policy pursued at the national level . In order to provide a better explanation of this objection, it is advisable to make some simplifying assumptions. Suppose that the labour force divides into perfectly mobile and perfectly immobile workers. Both groups are complementary in production, so that the productivity of one factor increases with the availability of the other. This division into mobile and immobile is exogenous and not, for instance, the result of human capital investment. In such circumstances immobile labour cannot wish mobile labour to be taxed in the country of employment. Perfectly mobile workers must earn an internationally competitive wage. Hence their net remuneration cannot fall short of what is paid elsewhere in the world. By emigrating, they are able to avoid any wage tax levied at source. Any tax on mobile labour which is not internationally harmonised is, therefore, shifted backward. This is harmful for the immobile factor. Not only is it left with the full tax burden, but as a result of factor complementarity, its productivity is less than it would be without taxation. A positive correlation between mobility and earned income not only seems highly plausible.

A willingness to move is surely encouraged by cosmopolitanism, a knowledge of foreign languages, etc and thus by innate and acquired intellectual abilities which tend to have a positive effect on labour productivity. A positive correlation is also supported by empirical evidence. The empirical studies tend to focus on the connection between mobility and education.

6. Qualifying the Criticism of the Employment Principle

The negative allocation effects of the Employment Principle asserted above should also be put into perspective. It is frequently doubted that the propensity to move is sufficiently pronounced to have the distortive effects indicated. Such objections need to be tackled empirically and theoretically. Feld (2000a, Section 2.2.2)16 has recently provided a comprehensive survey of the empirical literature on fiscal competition in Tiebout's tradition. According to Feld, a distinction between the different causes of fiscally induced mobility must be made when evaluating this literature. The recipients of social assistance obviously strongly respond to the transfer level. At leastthis has been shown for the USA for the period since 1969. In that year, the Supreme Court ruled that the Residence Requirements for the recipients of welfare payments were in breach of the American Constitution. According to these requirements, transfer benefits were conditioned on years of residence and on the labour market status of the potential claimants. Since 1969, all US citizens or lawfully resident aliens may claim welfare payments in the State where they reside.It is non-paretian redistribution that, above all, suffers from competitive pressure. Taxes that merely cover the cost of rivalry in consumption must be levied according to the Benefit Principle if allocational efficiency is to be achieved. This means that such taxes should be levied employment-based if the cost of providing such goods is employment related. The taxes are set first-best efficient if, just as the marginal-cost pricing rule would suggest, they cover the cost which the jurisdiction incurs by the marginal job. This means that the taxes would in principle have to be imposed as a poll tax if the cost incurred by the jurisdiction is related to the creation of the job and not to earned income. When taxes are based on income or expenditure, as is commonly the case, allocational efficiency is at risk. In particular, labour supply decisions will be distorted if taxes are wage related although costs incurred by the jurisdiction are not. Migration decisions still remain undistorted if only the location-specific tax equals the cost that is caused by the free provision of local public goods and services to the marginal individual. A detailed analysis of the various distortions of possible forms of taxation goes beyond the scope of this paper. It should be noted, however, that employment based taxes are efficiency enhancing to the extent that they can be rationalized by the Benefit Principle. Now one may rightly doubt that the high level of employment-based taxes and social security contributions in Europe can be justified by the Benefit Principle. A recent attempt to support such scepticism empirically is made by Sinn et al. (2001).20 In their study, the direct fiscal effects of immigration per immigrant and year are calculated for West Germany for 1997. More precisely, the present values of tax revenues and the various social insurance

7. Alternatives to the Employment Principle

Theoretically, there are several possibilities to eliminate the distorting effect of employment based taxation on migration while sticking to the freedom of movement. Certain fairly obvious possibilities do not constitute viable political options, however. One of these is the adoption of the Nationality Principle as a substitute for the Employment Principle. Despite certain economic advantages, which will be described in connection with the Origin Principle, the Nationality Principle cannot be the basis for co-ordinating national policies in the EU. Treating Union Citizens differently according to their nationality would be interpreted as a form of discrimination which is expressly forbidden in Article 12 of the EU Treaty. Regulating migration by means of taxation is not a viable solution for the EU either. Taxing emigration and/or immigration would be interpreted as a violation of the right to free movement and would therefore have little chance of realisation. Another proposal with doubtful prospects of political success provides for a transition from the Employment Principle to the Origin Principle. This option was brought up by Sinn (1994) who chose to speak of the Home Country Principle and who pleaded for its adoption with a These numbers are taken from the German translation of Sinn and Werding (2001). One need not



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stress that they are to some extent debatable. In a different study Bonin (2001) finds that the fiscal balance of immigrants to Germany is positive on average. Any such result is heavily dependent on the kind of social and economic characteristics assumed to hold for immigrants. The Origin Principle shows certain similarities to the Nationality Principle without being equivalent. On the one hand, it is more liberal than the latter as it allows a free first choice among redistributive systems. On the other hand, it is more restrictive as it rules out any later switch in life. "Origin" may have fewer negative political connotations than "nationality" and, in this respect, a change in Europe from the Employment Principle to the Origin Principle may have somewhat better chances than a change to the Nationality Principle. With regard to economic incentives, by contrast, the difference between the two principles is not that large. Therefore, it should suffice if the discussion of specific features is restricted to the Origin Principle. On the positive side, migration decisions are not distorted by taxes and transfer payments. Individuals cannot escape their origin, once fixed, by migrating. Production efficiency is maintained internationally since net wage arbitrage implies equalisation of gross wages and marginal products of labour. Distributive policies by individual countries are not thwarted by mobile taxpayers' threat to emigrate. The country of origin also shares the gain in income that the emigrants make. Hence, there is income redistributed from countries of immigration to countries of emigration, which helps to mitigate regional shocks. Finally, and positively, it should be noted that the Origin Principle, unlike the Employment Principle, is applicable to non-active persons. These individuals can be granted the right to free movementwithout the threat of social tourism arising.

Note that the Origin Principle requires the latter to remain assigned to their country of origin even if they decide to leave it for ever. For this reason, the country of origin is able to pursue a policy of non-paretian redistribution, but any policy of paretian redistribution will not be sufficiently internalised.

Such considerations concerning the effectiveness of distributive policy are based on a benevolent planner approach. The argument against the Origin Principle is strengthened if one adopts a Leviathan-state perspective. For it is clear that the Origin Principle provides governments with the leeway to abuse their fiscal power. Taxpayers cannot threaten to emigrate. As a result, the incentive for governments to pursue a policy in the interest of their citizens is weak. The Origin Principle is not favourable to competition among jurisdictions. The Employment Principle has more of a disciplinary effect on Leviathan governments. The same applies to the Residence Principle. This principle is probably the most liberal rule of assigning individuals to jurisdictions. It respects private decisions to migrate without imposing activity requirements. It is, however, rarely adopted when international migration is concerned. A prominent exception is given by the Nordic countries. In all these countries the right to social security is based on residence and all lawful residents, including recipients of social assistance and third-country citizens, enjoy free movement. Sufficient resources are not a condition for the entry. Expulsion is not possible for reason of insufficient resources after three years of residence (Sakslin, 1997).

8. The Principle of Delayed Integration

In a certain sense the Origin Principle, on the one hand, and the principles of employment or residence, on the other hand, represent extreme solutions to the problem of assigning migrants to jurisdictions. The Origin Principle does not permit any switching of jurisdictional membership while the principles of employment and residence leave the decision to switch completely to the discretion of the migrant. Since these solutions are extreme, it comes as no surprise that they are open to criticism. Besides certain merits, they also have serious shortcomings. Even more: what appears to be an advantage of one solution can be regarded a disadvantage of the other, and vice versa. For example, there are no distortions to migration with the Origin Principle if local redistribution is non-paretian, whereas the principles of employment and residence induce such distortions. The reverse also holds: The latter principles favour an internalisation of the cost of providing local public goods at the place of work and residence, respectively, while the Origin Principle does not permit such an internalisation. Whenever extreme solutions are not completely convincing, it seems reasonable to seek for compromises. The Principle of Delayed Integration represents one such compromise. It means that moving from one country to another will result in a delay in reassignment for fiscal purposes . The longer the chosen duration of the delay, the closer this principle comes to the Origin Principle. The shorter the duration is, the more similar to the Residence Principle it becomes. This duration, or period of transition, is a parameter which can be used as a policy instrument.

9. Conclusions

Europe has made great progress in its efforts to overcome the political and economic separation of its Member States. The level of integration achieved cannot be estimated highly enough. The willingness to deepen integration finds particular expression in the introduction of Union citizenship and the prohibition of discrimination on the basis of nationality in the European Treaty. There is, however, a certain degree of strain between integration and subsidiarity. Integration is enhanced by the harmonisation of national policies whereas subsidiarity requires political autonomy of the Member States and/or regions. It is necessary to establish some sort of balance in this strained relationship. In order to do so, there is a need for a regulatory framework which allows for free movement



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at the individual level and which, at the same time, allows the pursuit of independent political objectives at an jurisdictional level. Rules of assigning individuals to jurisdictions are of fundamental importance in this regulatory framework. The necessity to differentiate between persons who belong to a jurisdiction and persons who do not also arises in an integrated Europe. Otherwise the claims to regional autonomy cannot be settled. Abandoning the notion of nationality as a rule of jurisdictional assignment without some form of replacement will not do. An important function of the notion of nationality has always been the regulation of the membership of individuals to home communities. Union Citizenship just does not do this. What is needed is a rule according to which Union Citizens are assigned to Member States for the purpose of taxation and social security. This rule must be integration-friendly and anchored in Community law. The Principle of (the Country of) Employment only partially serves this purpose because it does not cover all Union Citizens. Furthermore, it tends to distort migration decisions. After weighing up the various advantages and disadvantages, the Principle of Delayed Integration seems to be an alternative rule worth considering. It shares two attractive features. First it is a rule which would allow one to extend the policy of free movement to all citizens without discriminating between active and non-active ones. Second by fixing the period of delay it would allow policy makers to trade off competing objectives. The longer the delay is chosen the less will locational choices be fiscally distorted. The shorter it is the fiercer will fiscal competition be among Member States. Europe would have to strike a balance between such objectives.

References

1.Bauer, T.K. and K.F. Zimmermann (1999), Assessment of Possible Migration Pressure and its Labour Market Impact Following EU Enlargement to Central and Eastern Europe, IZA Research Report No. 3, Bonn. 2.Bean, C., S. Bentolila, G. Bertola and J. Dolado (1998), Social Europe: One For All? (CEPR, London). 3.Becker, U. (1999), Freizügigkeit in der EU – auf dem Weg vom Begleitrecht zur Bürgerfreiheit, Europa-Recht, 522-533. 4.Bertola, G. et al. (2001), EU Welfare Systems and Labor Markets: Diverse in the Past, Integrated in the Future?, in: G. Bertola, T. Boeri and G. Nicoletti (eds.), Welfare and Employment in a United Europe (MIT Press, Cambridge), 23-122. 5.Boeri, T. and H. Brücker (2000), The Impact of Eastern Enlargement on Employment and Labour Markets in the EU Member States, (European Integration Consortium: DIW, CEPR, FIEF, IAS, IGIER, Berlin and Milano). 6.Bonin, H. (2001), Fiskalische Effekte der Zuwanderung nach Deutschland: Eine Generationenbilanz, IZA Discussion Paper No. 305, Bonn. 7.Borjas, G.J. (1999), Immigration and Welfare Magnets, Journal of Labor Economics 17, 607- 637. 8.Burda, M.C. (2000), Mehr Arbeitslose – Der Preis der Osterweiterung? Zur Auswirkung der EU-Erweiterung auf die europäischen Arbeitsmärkte im Osten und Westen, in: L. Hoffmann (ed.), Erweiterung der EU (Duncker & Humblott, Berlin), 79-102. 9.Card, D. (2001), Immigrant Inflows, Native Outflows, and the Local Labor Market Impacts of Higher Immigration, Journal of Labor Economics, 22-64. 10.Disney, R. and P. Johnson (2001), Pension Systems and Retirement Incomes across OECD Countries (Edward Elgar, Cheltenham).



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Factors Influencing Population of Beef Cattle in Ciamis Regency,

West Java Province, Indonesia

Agus Yuniawan Isyanto1* Iwan Sugianto2

1.Department of Socio Economic, Faculty of Agriculture, University of Galuh, Indonesia

2.Latifah Mubarokiyah Institute of Economic Science, Indonesia

Abstract

The research was conducted in Ciamis as one of the centers of beef cattle in West Java Province. This study was

conducted to identify factors influencing beef cattle population in Ciamis Regency. Farm level survey data from

100 beef cattle farmers were obtained using well structured questionnaire. The parameters were estimated by using

multiple linear regression. Result reveal that beef cattle population in Ciamis more determined by the number of

beef cattle inflow compared with outflow and beef cattle slaughtered. Variables beef cattle inflow, beef cattle

outflow, pasturage, grass land, forest, the number of beef cattle ownership, human population and beef price

significant influence on beef cattle population. While number of farmers no significant effect on beef cattle

population.

Keywords: factors, population, beef cattle

1. Introduction

Consumption of beef in Indonesia tends to increase over time in line with population growth, increasing income,

changes in public taste (Kusriatmi, et al., 2014), better development of education, and the growing awareness of

the importance of nutrients from livestock (Ariningsih, 2014). Increased of beef demand not be offset by the

availability of local beef production (Marhendra, et al., 2014), thus partially met through import (Winarso and

Basuno, 2013; Elly, et al., 2013; Ashari, et al, 2012).

The imbalance between the supply and demand of animal protein consumption in Indonesia has always

been a classic problem that is never resolved even today. Livestock population is unable to meet the needs of the

population, not only due to the high rate of population growth, but also because of the low growth in livestock

populations (Syafrizal, 2011).

Beef cattle production is an important branch of livestock production sector as it occupies a special place

in countries economy with its employment rate and values of products produced (Elfadl, et al, 2015). Beef cattle

have a strategic role in strengthening food security efforts. The most fundamental issue is how do we ensure that

the food animal production is comparable to current needs (Paly, 2013).

National meat production is affected by population and the quality of the beef cattle. Quality of beef cattle

depending on body weight and carcass percentage. Increased the quality of beef cattle do with increased

productivity. The greater the population and the higher productivity will increase the national beef supply capacity

(Atmakusuma, et al, 2014). This study estimates the factors influencing population of beef cattle.

2. Theoretical Framework The potential of beef cattle in a certain area is the number of beef cattle that can be exported or cut from a certain

area without disrupting the continuity of the beef cattle population (Hardjosubroto, 1987 in Samberi, et al., 2010).

There are three main things that need to be considered in the development of animal husbandry in the region,

namely livestock, human and land resources (Gunardi, 1992 in Fariani, et al., 2014).

Some factors that could potentially reduce the beef cattle population is declining competitiveness, high

price disparities and the quota system (Saptana and Ilham, 2015). Beef production growth rate faster than the rate

of population growth. If this goes on or no significant effort to increase beef cattle population, then the beef cattle

population will continue to decline (Nuhung, 2015).

Improvement cattle population to do with the revitalization of artificial insemination through improved

management and skills inseminator, provision of cheap cement packages, and improved maintenance management.

Integrated policy of gradual removal of quotas that complemented with seed policy, technology, investment, and

prices have positive influence on the beef cattle population. Beef cattle investment policy through lower interest

rates, increased realization of farming credit, physical infrastructure revitalizing and marketing institution can

influence the development of beef cattle population (Rusastra, 2014). Development of an integrated system of

crop-livestock farming can increase the carrying capacity of feed, so as to increase the population (Saptana and

Ilham, 2015)

Gross population is the sum of the existing livestock population with the birth and livestock inflow in the

same period. It said gross population because it has not reduced by the number of livestock sold, cut, and dead.

Net population is the result of a reduction in gross population by the number of livestock sold, cut, and dead. In

other words, the net population is the sum of the actual livestock population plus the number of births and inflow,



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35

and reduced by the number of livestock sold, cut, and dead (Dirjennak, 2013 in Paly, 2013). Social and economic

factors can affecting the livestock number and composition (Sherpa and Kayastha, 2009).

3. Research Methodology

The study was carried out in Ciamis Regency by using mainly primary data and were obtain from 100 beef cattle

farmers were randomly selected.

The study utilizing multiple linear regression, and the following multipe linear regression model was

employed to estimate factors influencing population of beef cattle. The model is defined by:

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 β6X6 + β7X7 + β8X8 + β9X9 + ui

where: Y = beef cattle population (head), X1 = number of beef cattle inflow (head), X2 = number of beef

cattle outflow (head), X3 = pasturage (hectare), X4 = grass land (hectare) (kg), X5 = forest (hectare), X6 = Number

of farmer (people), X7 = number of beef cattle ownership (head), X8 = population (people), X9 = beef price (Rupiah),

β = coefficient of regression.

4. Results and Discussion

4.1. Growth of Population of Beef Cattle in Ciamis Regency

Beef cattle population in Ciamis influenced by the amount of beef cattle inflow, outflow and slaughtering. During

the period 2002-2012, the average increase in beef cattle population amounted to 5.77% per year, the average

increase in beef cattle inflow per year 31.80%, the average increase in beef cattle outflow per year 0,52 %, and the

average increase in beef cattle slaughtered per year 1,47%. This indicates that the increase in beef cattle population

in Ciamis more determined by beef cattle inflow. While beef cattle out flow and beef cattle slaughtering have a

little effect on beef cattle population. Growth of beef cattle population, inflow, outflow and slaughtered can be

visually seen in Figure 1.

Figure 1 shows that the beef cattle population in Ciamis increased in 2012 compared with 2002. The

increase of the population is determined more by beef cattle inflow compared to outflow and slaughtering. This

condition shows the dependence of Ciamis Regency on cattle supply from other regions.

Figure 1. Growth of Population, Inflow, Outflow and Slaughtered

4.2. Factors Influencing Population of Beef Cattle in Ciamis Regency

The results of the analysis of the factors influencing the beef cattle population in Ciamis Regency is presented in

Table 1.

0

20000

40000

60000

80000

100000

120000

Population

Inflow

Outflow

Slaughtered



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36

Table 1. Multiple linear regression estimate of factors influencing population of beef cattle

Variable Coefficient Standard Error t-ratio Sig.

Constant

Beef cattle inflow

Beef cattle outflow

Pasturage

Grass land

Forest

Number of farmers

Number of livestock ownership

Population

Beef prices

-3.084

0.654

-1.581

-0.188

0.909

-0.343

0.580

5.734

1.336

-0.351

3.443

0.214

0.487

0.083

0.108

0.188

0.440

2.143

0.483

0.174

-0.896

3.061

-3.249

-2.273

8.385

-1.826

1.317

2.675

2.767

-2.019

0.387

0.009**

0.006**

0.041**

0.000***

0.091*

0.211

0.019**

0.016**

0.065*

R2 value

Adjusted R2 value

F-ratio

= 0.956

= 0.926

= 32.605***

(***) significant at 1%, (**) significant at 5%, (*) significant at 10%

Table 1 shows that simultaneously, the variables included in the model significantly influence the beef

cattle population in the district of Ciamis. R2 value of 0.956 indicates that the variation of the change of the

independent variables included in the model can explain the variation in the dependent variable changes amounted

to 95.60%; while the remaining 4.40% is influenced by other variables not included in the model. Simultaneous

analysis shows that all variables have significant influence on beef cattle population.

Partial analysis shows that the variable beef cattle inflow, beef cattle outflow, pasturage, grass land, forest,

the number of livestock ownership, population and beef price had significant effect on the beef cattle population.

Variable number of farmers no significant effect on beef cattle population.

Beef cattle inflow variable has significant and positive influence on the beef cattle population. Increase

of beef cattle inflow would increase beef cattle population. These conditions indicate the existence of Ciamis

District dependence on the supply of beef cattle from other areas that may threaten self-sufficiency of beef cattle

in Ciamis Regency. Need to be efforts to increase the population of beef cattle originating from the Ciamis Regency

itself through an increasing number of farmers, the number of livestock ownership, the number of beef cattle births

and a decrease of beef cattle outflow and death of beef cattle.

Beef cattle outflow has significant and negative effect on beef cattle population. Increase of beef cattle

outflow will reduce the population of beef cattle. Attempts to increase beef cattle population is the increase in beef

cattle population in the Ciamis Regency itself through an increasing number of farmers, number of livestock

ownership, birth of beef cattle; as well as the decline in beef cattle deaths. According to Elly (2007), beef cattle

outflow reduce the population of beef cattle. According to Priyanti, et al (2012), beef cattle outflow from West

Java had significant effect on beef cattle population.

Pasturage has significant and negative effect on the beef cattle population. Increase of pasturage will

declining beef cattle population. Pasturage is not owned by farmers, so it can not be used by farmers as feed for

beef cattle. This pasturage expansion will reduce the land for other farming resulting in decreased agricultural

waste which has been used by farmers as beef cattle feed. According Adinata, et al (2014), the ability of the

environment to provide livestock feed includes the production of forage and agricultural wastes.

Grass land has significant and positive influence on the beef cattle population. Increasing the grass land

will increasing population of beef cattle. Grass land is a common land so that farmers can take advantage of the

grass as a source of beef cattle feed. Increased grass land will increase the production of grass so as to increase the

population of beef cattle. According Matondang and Rusdiana (2013), the death of the calves reaches 20-40%

caused by lack of feed and water during the dry season. According to Elly, et al (2013), an increase in the cattle

population must be supported by the availability of forage throughout the year, both quantity and quality. The

ability of farmers in the supply of feed will determine the number of livestock that can handled by farmers.

Forest has significant and negative effect on beef cattle population. Increase of forest will declining beef

cattle population. Forest land has not been used for the cultivation of grass as feed for beef cattle. Increase of forest

will reduce the area for cultivation of grass resulting in production decreasing of grasses that can reduce the

population of beef cattle. According Delima, et al (2015), the availability of land suitable for growing forage is

something that is important to increase livestock numbers.

Number of farmers no significant effect on beef cattle population. Positive sign of regression coefficient

shows that increase of number of farmers will increasing beef cattle population. The increase in the number of

farmers is one of the efforts to improve the beef cattle population. however, an increasing number of farmers must

be accompanied by increased technical and management skills in order to achieve high productivity of beef cattle.

According to Tatipikalawan (2012), labor productivity is affected by the number of livestock ownership.

The number of beef cattle ownership has significant and positive influence on the beef cattle population.



Vol.7, No.22, 2016

37

The more the number of beef cattle ownership will increase the population of beef cattle. Farmers have an average

of two cows, so they potentially can be increased the number of beef cattle ownership. Success of Beef cattle

business can be seen among others from the growing number of beef cattle ownership (Hoddi, et al., 2011).

According Suwito (2000) in Trigestianto, et al. (2013), ideally farmers had at least 4 cows to maintain profit from

livestock business.

Population has significant and positive influence on the beef cattle population. Increase of the number of

population will increasing population of beef cattle. Increase of population will increase the demand for beef which

influence on the increasing the beef cattle population to meet the needs of beef. According to the Son and

Rustariyuni (2015) and Harmini, et al. (2011), increase in the population will increase the demand for beef.

Beef prices has significant and negative influence on beef cattle population. Increase of beef prices will

declining beef cattle population. Increase of beef price will increase the supply of beef. Increase of the supply of

beef was done through increased of beef cattle slaughtering so that will reduce the population of beef cattle.

According Rusastra (2014), high disparity of beef prices will lead to smuggling that could potentially reduce the

population of beef cattle

5. Conclusion

Beef cattle population in Ciamis more determined by the number of beef cattle inflow compared with outflow and

beef cattle slaughtered. Variables beef cattle inflow, beef cattle outflow, pasturage, grass land, forest, the number

of beef cattle ownership, human population and beef price have significant influence on beef cattle population.

While number of farmers no significant effect on beef cattle population.

6. Recommendation

Efforts to increase the beef cattle population in Ciamis could be achieved through outflow reduction of beef cattle

to other regions, increased the number of beef cattle ownership, and increased grass land area. Increased the

number of livestock ownership is done in order to increase beef cattle population without depending on the inflow

of beef cattle from other region.

7. Acknowledgement

Writers say thank you to Directorate of Research and Community Service, Directorate General of Strengthening

Research and Development, Ministry of Research Technology and Higher Education, Republic of Indonesia, for

funding this research through a scheme of research grant competition of the fiscal year 2016.

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Pemasaran Domestik. Forum Penelitian Agro Ekonomi, 32(1), 59-71.

Samberi, K.Y. Ngadiyono, N., and Sumadi. (2010). Estimasi Dinamika Populasi dan Produktivitas Sapi Bali Di

Kabupaten Kepulauan Yapen, Propinsi Papua. Buletin Peternakan, 34(3), 169-177.

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Park, Khumbu Region: Trends as Affected by Socio-Economic Factors and Climate Change. Kathmandu

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Money Supply, Financing and Economics Growth: Evidence from

the NBC Central Bank Functions

Seum Chhay* Wang Lei School of Business Administration, Liaoning Technical University, 188, Hulaudao 125051, China

The research is financed by the Liaoning Technical University, Liaoning Province, China

Abstract

Importantly, Central bank is a critical functional to play in supporting economic growth like as economic agent of development delivers on its commitment to necessary fiscal consolidation of the national economy. This paper only examines money supply and financing of the National Bank of Cambodia, its results stimulate growth of the productive sectors. I used the time series, regression method, ratio method to find the significant relationship money supply, financing, and economic growth, how the central bank functions effect on the economic growth, as well as, its impetus was found that a strong positive linear relationship of money supply, financing on the economic growth that reliance on outputs of the times series, ratios, and regression model that is confirmed by coefficients valued at 0.829578, 0.727115 and adjusted R-squared valued at 0.995515, 0.991338, it means equal a unitary. It is a significance of the level at P < 0.05; the results reveal the positive relationship money supply, financing which shows a significant influence or impact on economic growth. The paper goal gives the central bank policy makers to map out the standards of monetary policy functions to make better the extent of money supply, financing in order of accountability, transparency, and in addition the efficiency, to avail the potential communications for the economic growth. Keywords: Money Supply, Financing, Economic Growth, National Bank of Cambodia (NBC)

1. Introduction

Shelagh (2005)’s modern banking textbook, pointed out the two debates dominate the central banking literature, the first relates to the functions of the central bank, the second to the degree of autonomy enjoyed it. Modern central banks are normally responsible for monetary control and, in addition, may be involved in prudential regulation and placing government debts on the most favorable terms possible. In effective, Central banks functions play the important role in the stability in economic growth and financial institutions. Nier (2009) expressed that expanded role of the central banks that goes beyond the tools already typically at the disposal-monetary policy could enhance the overall effectiveness of financial regulation, allowing synergies to be exploited with new regulatory tools. As we have known and empirical studies from the existing of the economic performance data have been showing that central banks in the world, its functions to pay attention in accountability, efficiency and defense for economic growth. For examples, advanced, emerging and developing countries the central banks have putted important efforts on the monetary policy to build economic structures for growth, full employment and prosperity. But some central banks play monetary policy variables (interest rate, foreign exchange and cash reserve) was applied to deliver the financing supports to both public-private sectors aimed to ensure the economic growth and full employment. In addition to the central bank’s functions can become a great important responsible to mitigate the economic problems. For examples, Slowdown growth in the United States, Fed have been cut interest rate at the lower level mainly objectives to recover economic growth. Deflationary economy happened in Japan in a several years, the Bank of Japan (BOJ) ordered monetary policy to provide lower interest rate for recovery economic growth from the deflationary positions. During the declining domestic demand, slowdown industrial production so Chinese central bank have been using monetary policy variables to stimulate financial packages to keep the Chinese economic growth at the level of target growth by 7% per annual, this is have been confirmed by the Chinese government strongly. For examples, 1960s in Japan, central bank implemented the fixed exchange rate policy for the selected export firms those who exported the industrial products or commodities to foreign markets included United States, France, Italy, and Germany. In addition, 1970s, 1980s, 1990s, China, central bank adopted the fixed exchange rate policy for the selected firms those who exported industrial products or commodities to oversea markets, and in addition government special economic zones. In this method aims to make a strong economic growth in the national economy and sharing the World, such as in the several years Japanese economy was ranked 2 of the largest economy in the world, but now the rank 2 moved to China. Further, Chinese central bank needs to stabilize the sustainable economic growth rate about 6.7%, and particularly as to defense the Chinese yuan depreciations against US dollars thereby Xinhua (2016) released the Chinese central bank injects 437 billion yuan (about 64.7 billion US dollars) into the financial system in market operations via the medium-term lending facility (MLF) with interest rate charge 2.85% for the six-month loans 230 billion yuan, 3% for the one year loan 207 billion yuan further the Chinese central bank has provided the fund for 21 financial institutions already, aims to help commercial banks and China’s three policy banks maintain liquidity by allowing the banks to borrow from the central bank by using security as collateral, and in addition Chinese central bank



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needs to maintain a prudent monetary policy with timely fine-tuning to create a favorable environment for both growth and debt reduction. The economic point of view, the key monetary policy variables is delivering financial resources on the both conventional and unconventional frameworks with lower interest rate, foreign exchange, and other determinants on economic growth. For examples, the Fed has determined the reserve requirements 0 to 10% this reserve requirements or liquidity ratio is a minimum value set by the Board of Governors of Fed system. NBC (2016) has been expressing as for 37 years ago, that NBC central bank plays the important role in the contribution to the development of banking and finance sector in Cambodia; its results remarkably have a progress and integrated to the regions. Particularly in the implementations of the prudential of monetary policy in aims to maintain the price stability forwards to meet the government policy. However, monetary policy instruments has placed in the market platforms including exchange rate between Riel & US dollar currency stabilized under management of NBC, foreign reserves increases, change in inflation rate at low level has well controlled. For example, since the declining the price of agricultural products, Cambodia’s central bank have pointed out their promise to play the important functions to support the government economic policy to keep the stability in economic growth, particularly in the constant macroeconomic growth. Chea Srey (2016) emphasized on the liquidity-providing collateralized operation (LPCO) is to (i) establish benchmark rate for the market so as to serve the conduct of the monetary policy based on the market mechanism, (ii) to promote the negotiable certificate of deposits (NCDs), which then be used as collateral in interbank market transactions, (iii) to promote the use of Riel, (iv) to support agriculture sector development and (v) to contribute to lower the current high interest rate in local currency (Riel).

The research paper emphasize the sections (1) introduction on our objectives, scale of study and research (2) literature review and hypothesis development this section to explore the implications of ideas, theory and interest on the relationship money supply, financing and economic growth and then create the hypothesis for the appropriate the outputs growth. (3) research method this section to build research model for analyzing. (4) results this section is the translation the outcome of analysis based on the statistical data in findings and (5) conclusion. In effective, the research question is formulated in this research study: what extend the money supply and financing has influenced on economic growth in the NBC central bank functions? This study goal is to confirm that the relationship of money supply (MS), financing (FINAN) and economic growth, the trend in MS & FINAN and economic growth to provide the NBC central bank policy makers, economic planners, decision powers to create their policy variables and business models in aims to support constant economic growth as well as to stabilizing macroeconomic growth in terms of under maintenance of GDP growth, full employments, low inflation and unemployment at the level of expected target was forecasted.

2. Literature Review and Hypothesis Development

2.1. On View of Literature

Epstein (2005) shows in the role of central banks in development, as to based on the most historians identify the central bank following functions as being historically essential to the operations of central banks: (1) unifying and issuing the country’s banks notes; (2) acting as the government’s bank; (3) acting as the commercial banks’ bank; (4) serving as a lender of last resort to banking and even the financial system as a whole; (5) conducting monetary policy to manage the foreign exchange and the price level. Other activities have been added to this list: (6) conducting monetary policy to manage the overall level of economic activity and (7) allocating credit to promote national goals. Sinha (2010) points out that central bank as banker, agent and adviser to the government by mainly functions: (1) the central bank performs the same functions for the government as commercial bank performs for its customers. It maintains the account of control as well as state governments, it receives deposits from government; it makes short-tem advances to the government, it collects cheques and drafts deposited in the government for repaying external debt or purchasing foreign goods or making other payment as a banker; (2) as an gent to the government, the central bank collects taxes and other payments on behalf of the government. It raises loans from the public and thus manages public debt. It also represents the government in the international financial institutions and conferences; (3) as a financial adviser to the lent, the central bank gives advise to the government on economic, monetary, financial and fiscal matter such deficit financing, devaluation, trade policy, foreign exchange policy, etc. Athanasios (2007) shows the Taylor rules are simple monetary policy rules that prescribe how a central bank should adjust it interest rate policy instrument in a systematic manner in response to developments in inflation and macroeconomic activity. Alex Nikolsko, David H. (2012) emphasized that the Taylor rule (1993), monetary policy postulated to be followed by central banks will beneficial to the economy can be specified. John Taylor (1993) on discretion versus policy rule in practice to emphasize this rule closely approximates Federal Reserves policy during the past several years. In addition to the policy reported in Taylor (1993) is generally consistent with these results as using his multi country rational expectations model, he stimulated economic performance of the G-7 countries under several different monetary policy rules. Economic performance was examined under different policy rules. The policy rules were ranked according to how successful they were in achieving price stability and output stability. Although there is not consensus about the size of the



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coefficients of policy rules, it is useful to consider what a representative policy rule might look like. One policy rule that captures the spirit of the recent research and which is quite straightforward is:

Where, r is the federal funds rate, p is the rate of inflation over the previous four quarters, y is the percent deviation of real GDP from a target. That is, y = 100(Y-Y*)/Y* where Y is real GDP, and Y* is trend real GDP (equals 2.2 percent per year from 1984.1 through 1992.3).

He points out that a flexible exchange-rate system will work better if country-specific shocks to the consumption or investment equations have relatively large variance. For the flexible exchange- rate regime, he assumed that each central bank adjusts its short-term interest-rate target in response to changes in the price level and real output from a target. However, for the fixed exchange-rate system, the interest rates in the individual countries cannot be set independently of one other. He raised up the example, if the Fed raised the Federal funds rate above the Japanese call money rate, funds would flow quickly into the United States putting upward pressure on the dollar and threatening the fixed rate unless the Bank of Japan likewise raised the call money rate. In order to keep exchange rates from fluctuating, therefore, a common target for the world short –term interest rate must be chosen. Analogously, with the flexible exchange-rate case, it was assumed that the world short-term interest rate rises if the world price level rises above the target. He compares the flexible exchange-rate system with the fixed exchange-rate system shows that the fluctuations in real output are much larger in the United States, France, Germany, Italy, Japan, and the United Kingdom when exchange rates are fixed, compared with when they are flexible. The standard deviation of output nearly doubles in Germany and Japan under fixed exchange rates in comparison with flexible exchange rates. The fluctuations in real output in Canada are slightly less under fixed rates than under flexible rates, but there is deterioration of price stability in Canada under fixed exchange rates. A change in the Canadian domestic policy rule under flexible exchange rates could easily match the output stability of the fixed exchange rate case with more price stability. In this sense, John Taylor considered the flexible exchange rate system dominates for all the countries.

Monetary policy decisions of European Central Bank or ECB (2016) points out that interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25% and -0.40% respectively. The governing council continues to expect the key ECB interest rate to remain at present or lower level for an extended period of time, at well past the horizon of the net asset purchases. Regarding non-standard monetary policy measure, the Governing Council confirms that the monthly asset purchases of 80 billion euro are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.

2.2. Hypothetical Related Evidence

NBC (2002) uses monetary policy and monitor monetary development to ensure that the monetary trend is in line with demand of the real economy. The growth of money supply will be maintained at the appropriate pace taking into account the declining money velocity that reflects the increasing confidence of the general public in the banking sector. The restricted monetary policy with respect to credit the government will be continued to ensure price stability. Evidently, the NBC (2003) projection for main monetary aggregates is described in the note 1. Most of the central bank in the world wants their monetary policy plays the important function in money supply and financing for the economic growth sectors and welfare of the country. Serey Chea (2016) expresses that the National Bank of Cambodia (NBC) has committed to action plan to promote gender and women financial inclusion. For example, Cambodia, women access to financial services is inclusive at Microfinance level where 78% of borrowers are women.

Majone (1997; Bernanke (2004b) pointed out that independent central banks would be able to secure low inflation and increasing the reliance on industry self-regulation would allow financial innovation contributing to economic prosperity. Levine (2005) expressed that more credit means increased access to finance and greater support for investment and economic growth. Bernanke (2004a) pointed out that the bank of Japan’s recent policies illustrates the certainty of communication policies. In April 1999, the bank of Japan not only reduced its call rate to within a few points of zero, it also announced its attention to keep the call rate at zero until deflationary concerns are dispelled. This policy, known as the zero-interest rate policy (ZIRP), was interruptedly a 25-basis point rise in the call rate in August 2000 but then effectively reintroduced in March 2001 in conjunction with the bank of Japan’s new policy of quantitative easing. Williams (2015) said that a typical estimate is that a 1% loss in GDP is associated with 4% reduction in house prices. This implies affect costly trade off of using monetary policy to affect house prices when macroeconomics and financial stability goals in conflict. Reuven (2016) viewed that on these differences in economic performance have resulted in diverging monetary policy stances. The United States has begun to normalize its monetary policy and its expectations to tighten it more in the future-through more negative rates on reserve deposits and greater quantitative easing. The change in GDP growth of Cambodian economic performance by developing the productive growth sectors including agriculture, manufacturing and service

.5 .5( 2) 2r p y p= + + − +



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supported by the central bank’s functions. NBC (2016) pointed out that to support government economic policy to ensure the standards of

macroeconomic stability. The evidence in the central bank’ role in during the declining of agricultural products, particularly items in paddy and rice as the central bank have requested the association of bank in Cambodia (ABC) and the Cambodia microfinance association (CMA) in order to response the tasks including (1) continuing and expanding loans with affordable interest rate to agricultural sector, especially paddy and rice sector, (2) providing more flexible repayments methods to vulnerable customers, (3) continue monitoring and communicating with vulnerable customers to find appropriate solutions, (4) continue implementing consumer protection mechanism based on international best practices. This experimental monetary policy in the ECB have applied for the their economic growth and stability in full employment as Mario (2016) points out that to protect price stability, the ECB used its instruments in a manner it had not done before and developed new tools-all within our mandate. ECB reduces interest rates to very low levels, provided targeted financing to support bank’s lending to firms and households, and started a large-scale asset purchased programme. Shelagh (2005) she also emphasized the simple equation on the money supply and inflation is

Where, is the rate of inflation, i.e., the rate of change in the price level over a given period of time (month, year), is the rate of growth in the money supply, where the money supply can be defined as “narrow” money (e.g. cash + sight deposits at the banks) or “broad” money (narrow money + times deposits, CDs, etc.), and is the rate of growth of real output (e.g. real GNP). This equation is a good idea for the central banks monetary

policy makers need to target the growth rate of money supply to fit the economic output growth rate. As we have known that the NBC central bank functions including regulations, supervisions and monetary policy are so important to contribute to the economic growth in the Cambodia’s context. The results of the literature views and hypothetical related evidences mentioned above is relative to our hypotheses formation, definitely we can emphasize hypotheses: (H1) there is a significant relationship between money supply and economic growth, (H2) there is a significant relationship between financing and economic growth, (H3) there is relationship between money supply, financing have been associated with the economic growth.

3. Research Method

Cambodia’s economic growth is so important role in the maintaining stability in the society’s progress. For 1.5 decades, Cambodia’s economic growth strongly stood in the annual average at 7.6%, as began from year 2001-2015, its ranking was number 6 in the World, and in addition, the World Bank recently reported that Cambodian economic growth can bring the GDP per capita into the middle income trap from the lower income trap. These results have been contributed from the several driving forces, which include agriculture; garment exports, tourisms, and real estate investment increase those to stimulate Cambodia’s economic growth. In effective, to investigate the important influence on the driving forces to generate the economic growth by focusing the banking investment area, evidently the NBC central bank has been contributing to stabilize the macroeconomics, interest rate, especially on maintaining foreign exchange between local currency Riel and US dollar, in addition the contributions of central bank to reduce 1% of poverty eradication per year with the government policy. Accordingly Esptein (2005) currently pointed out best practice approach to central banking consists of the following (1) central bank independence, (2) a focus on inflation fighting (including adopting formal inflation targeting and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings.) Esptein also observed that the early and recent history of central banking in the United States, United Kingdom, Europe and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using direct methods of intervention have among the most important tasks of central banking.

As we have known that the NBC central bank has played their functions and responsibilities through price stability, stabilized foreign exchange rate between local currency and foreign currency, particularly in between Riel and US dollars, maintaining increases in foreign reserves, its policies to keep low inflation within inflation target but the Ministry of Economy and Finance of Cambodia has targeted inflation rate around 5% and low unemployment rate by 4% as possible. However, the NBC central bank has mainly objective to support the government economic policy in aims to boosting economic growth. By year 2016, the growth of banking structures has been calculated that 35 commercial banks, 9 specialized banks, and 38 microfinance institutions as shows in the note 2, are running the operation of financing in the productive economic sectors such as agriculture, manufacturing, and services, and in addition, the NBC central bank makes the stability in price of Riel with US dollars and more use of Riel currency in economic activities by cooperation with the government policies including Rectangular Strategy Phase II, 2008-2013, Phase III, 2013-2018, National Strategic Development Plan, 2014-2018, and the Financial Sector Development Strategy (2001-2010, 2006-2015, 2011-2020). Vouthy (2016) points out

P MS y

MS P y

= −

= +

)) )

) ) )

P)

MS)

y)



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the policies to promote Riel use, that government and the National Bank of Cambodia central bank have implemented policies are (1) enhance public confidence in Riel through stabilization of the exchange rate against US dollar, (2) differentiated between the reserve requirement rate in Riel and US$ deposits to promote financial intermediation in the Riel, (3) provided liquidity instruments in Riel to financial institutions by issuing Negotiable Certificate of Deposits in Riel, (4) introduced liquidity-providing collateralized operation to provide Riel liquidity with lower interest rate to banks and financial institutions, and the government has functions are that required all taxes and utility costs to be paid only in Riel, salary of public sector officials are paid in Riel, opened Riel-based payroll bank accounts for public sector employees, improved the awareness on the importance of the Riel through various campaigns, films, and documents, required price tag to be set in Riel (Regulation by the Ministry of Commerce), launched campaign on exchanging of old Riel banknotes to new notes, introduced fast system as a Riel-based retail electronic payment which allow customers to receive the transferred funds immediately.

NBC central bank has made the survey the sample 856 enterprises, 2,273 households, 10 selected commercial banks, 5 selected microfinance institutions in the 25 provinces of Cambodia, the results show that all transactions was utilized the 65% US dollars currency for their business operations. Economic point of view, the central bank should make effort on the keeping of stable price of Riel and implementations of monetary policy role in foreign exchange, finance providers, increase instruments of the based money and broad money, in order to more attractive economic growth because of the economic system has dominated exchange of US dollars currency, probably 80% of use United States currency in the economic activities. The money supply and financing have moved around the economic activities in Cambodia for the 5 years (2011-2015), as totally structural bank’s money supply only included monetary based (M1) and broad money (M2) about 48,754 million US dollars and financing sources about 38,959 million US dollars the gross domestic products (GDP) growth for 5 years about 75, 903 million US dollars in terms of the constant price. However, it has a non- performing loan about 19.8 million US dollars in 2013. Bernanke (2010) explained that broad financial condition, including monetary policy, are supportive of growth, and banks appear to have become somewhat more willing to lend.

3.1 Data collection

We have decided to collect the statistics data based on the secondary source from the National Bank of Cambodia central bank’s report. In addition to the complement of the statistics data, we need to take it from the useful sources including Ministry of Economy and Finance (MEF), WB, ADB, and IMF and also from the newspapers and working papers or research papers that are related to our research’s objectives.

3.2 Sample

We have decided Five years of observations of data on money supply, financing and economic growth, as the data was started from year 2011 to 2015. And for our analysis also based the sample statistics data of the variables on money supply which combines M1 (currency outside banks and demand deposits) and M2 (M1 + Quasy money (time and saving deposits and foreign currency deposits), financing variables data combines 1+ 2 + 3 + 4 according to data selected from the National Bank of Cambodia’s Annual Report 2015 was published by NBC (2016), to emphasize the credit granted classified by ownership in the economic sector on 1 financial institutions, 2 non-financial institutions, 3 personal essentials, and 4 other lending.

3.3 Research model

We have decided to identify the variables that be selected to construct the research model in this study.

Table 1: Design of Variables

Concept Variable Indicator Measure Symbol

Money supply

monetary base, broad money.

quantities of money were used.

currency outside bank, demand deposits, quasy money, in million US dollars.

M1, M2

Financing 1financing institutions, 2 non-financial institutions, 3 personal essentials, 4 other lending.

financing source for the economics productive sector.

credit granted classified by ownership in the economics sector, in million US dollars.

FINAN (it combines 1 + 2 + 3 + 4)

Economic Growth

Gross Domestic Products Economic growth with the constant price

Gross domestic products growth per year, in mil..US dollars

EG

So we create the formulation of research model based on the economic growth function Y = F (MS,

FINAN), instead of the simple regression method is Yt = β0 +β1MSt + β2FINANt + εt, However, we can assume that Yt is output of growth, year time is t, β0 is intercept, β1, β2 is estimated parameter and β1, β2 is a positive slope (β1,

β2 > 0), εt is a random error, and in addition, Y is considered dependent variable is EG, MS and FINAN is considered



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independent variables. In effective, we can use the sample regression method to construct our research model is EGt = β0 +β1MSt + εt and EGt = β0 +β1FINANt + εt that aims to apply in our study.

3.4 Data analysis method

We use times series, simple regression, ratios based on the statistics data in million US dollars in terms of conversation of local currency Riel within the official exchange rate from the central bank, was collected. In effect, the aims to find the trends of the money supply, financing and economic growth, the coefficients, adjusted R-squared values of the money supply, financing and economic growth in the Cambodian economic performance perspectives. We use the software Eviews 8 to evaluate the all inputs selected.

Time series analysis

Figure 1. The trends of MS, FINAN and EG in 2011-2015, as US$ million



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Figure 2. HP Filter of EG, MS, and FINAN



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Regression analysis

Table 2. Covariance analysis: Ordinary. Sample: 2011 2015. Included observation: 5

Covariance Correlation Probability EG MS FINAN

EG 4274142. 1.000000 -----

MS 5134859. 6189724. 0.998317 1.000000 0.0001 -----

FINAN 5840028. 7009691. 8031776. 0.996746 0.994163 1.000000 0.0002 0.0005 -----

Table 3. Factor method: Maximum Likelihood

Covariance analysis: Ordinary correlation Sample: 2011 2015 Included observations: 5 Number of factors: Minimum average partial Prior communalities: squared multiple correlation Convergence achieved after 6 iterations Loadings

F1 Communality Uniqueness

EG 1.000000 1.000000 0.000000 FINAN 0.996746 0.993503 0.006497

MS 0.994981 0.989987 0.010013

Factor Variance Cumulative Difference Proportion Cumulative

F1 2.983490 2.983490 --- 1.000000 1.000000 Total 2.983490 2.983490 1.000000

Model Independence Saturated

Discrepancy 0.035963 9.676259 0.000000 Chi-square statistic 0.143851 38.70504 --- Chi-square prob. NA 0.0000 ---

Bartlett chi-square 0.053944 20.96523 --- Bartlett probability NA 0.0001 ---

Parameters 6 3 6 Degrees-of-freedom 0 3 ---



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Table 4. Principal components analysis

Sample: 2011 2015 Included observations: 5 Computed using: Ordinary correlations Extracting 3 of 3 possible components

Eigenvalues: (Sum = 3, Average = 1) Cumulative Cumulative

Number Value Difference Proportion Value Proportion 1 2.992818 2.986805 0.9976 2.992818 0.9976

2 0.006013 0.004845 0.0020 2.998831 0.9996 3 0.001169 --- 0.0004 3.000000 1.0000 Eigenvectors (loadings):

Variable PC 1 PC 2 PC 3 EG 0.577784 -0.155441 -0.801252

MS 0.577285 -0.616154 0.535814 FINAN 0.576982 0.772135 0.266270

Ordinary correlations: EG MS FINAN

EG 1.000000 MS 0.998317 1.000000

FINAN 0.996746 0.994163 1.000000

Table 5. Dependent variable: EG

Method: Least Squared Sample: 2011 2015 Included observations: 5

Variable Coefficient Std. Error t-Statistic Prob. MS 0.829578 0.027824 29.81510 0.0001

C 7091.716 279.9938 25.32812 0.0001 R-squared 0.996637 Mean dependent var 15180.60

Adjusted R-squared 0.995515 S.D. dependent var 2311.423 S.E. of regression 154.7896 Akaike info criterion 13.21118 Sum squared resid 71879.42 Schwarz criterion 13.05496 Log likelihood -31.02796 Hannan-Quinn criter. 12.79189 F-statistic 888.9400 Durbin-Watson stat 2.653040 Prob(F-statistic) 0.000083

Variable Coefficient Std. Error t-Statistic Prob. FINAN 0.727115 0.033948 21.41874 0.0002

C 9515.063 281.4664 33.80532 0.0001 R-squared 0.993503 Mean dependent var 15180.60




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Table 6. Dependent variable: EG

Method: Least squares Sample: 2011 2015 Included observations: 5

Variable Coefficient Std. Error t-Statistic Prob. MS 0.527466 0.231488 2.278584 0.1503

FINAN 0.266772 0.203216 1.312750 0.3197 C 7958.856 706.7502 11.26120 0.0078 R-squared 0.998193 Mean dependent var 15180.60


Table 7. Engle-Granger Co integration Test

Null Hypothesis: series are not co integrated Automatic lags specification based on Schwarz criterion (maxlag=0)

Dependent tau-statistic Prob.* z-statistic Prob.*

EG -1.791286 0.8011 -3.924703 0.9548 MS -2.514164 0.5487 -5.094148 0.6520

FINAN -1.923156 0.7573 -5.202022 0.5952 *MacKinnon (1996) p-values.

Warning: p-values may not be accurate for fewer than 20 observations. Intermediate Results:

EG MS FINAN

Rho - 1 -0.981176 -1.273537 -1.300506 Rho S.E. 0.547749 0.506545 0.676235 Residual variance 10134.13 25540.23 73397.20 Long-run residual variance 10134.13 25540.23 73397.20 Number of lags 0 0 0 Number of observations 4 4 4 Number of stochastic trends** 3 3 3

**Number of stochastic trends in asymptotic distribution

Table 8. Pairwise Granger Causality Tests

Lags: 1

Null Hypothesis: Obs F-Statistic Prob. MS does not Granger Cause EG 4 8.81241 0.2069

EG does not Granger Cause MS 5.72533 0.2520 FINAN does not Granger Cause EG 4 0.30047 0.6808

EG does not Granger Cause FINAN 0.25336 0.7031 FINAN does not Granger Cause MS 4 2.63093 0.3517

MS does not Granger Cause FINAN 0.01508 0.9222



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Ratio analysis

Table 9. Relationship of MS, FINAN to EG

MS FINAN Date

EG 0.53 0.34 2011

EG 0.58 0.42 2012

EG 0.61 0.49 2013

EG 0.71 0.57 2014

EG 0.73 0.67 2015

Figure 3. Relationship of MS, FINAN to EG

4. Results

According to the time series analysis, we used the data of variables as money supply (MS), financing (FINAN). In the figure 1, we found that increase in the positive growth of the variables, we observed that money supply has been increased more than financing variable but both variables have associated with economic growth significantly. In the figure 2, we found that the trends of the variables such as MS, FINAN, and EG was a positive linear but the cycle of MS, FINAN, and EG variable is dropped down in 2013 but positive numbers bigger than the numbers in 2011, 2012 but less than numbers in 2014, 2015 based on HP-filer (Lambda=100) analysis’s outputs. The overall results positively showed the steady growth of the variables MS, FINAN, and EG from 2011 to 2015. So Cambodia’s economic performance as well as economic growth has been enjoyed in the 5 years. According to the regression analysis, we used the data of variables was collected from 2011-2015 to analyze the variables relations, in the table 2, 3, 4 we have found that higher correlation in each variables based on the covariance analysis, and in this variables model showed the discrepancy valued at 0.035963, and chi-square statistics valued at 0.143851 based on factor method, and in addition we have used the principal components analysis in the variables, showed that the ordinary correlations of variables is nearly equal unitary and the eigenvalues and eigenvectors is a positive more than zero, the directions of the variables which it is stretched, as a result there is a significant relationship between money supply and economic growth, there is a significant relationship between financing and economic growth, which is a significant at 0.05 levels (P<0.05). Further, the relationship between money supply, financing is in a positive linear therefore we decided to accept the hypothesis 3 (H3): there is relationship between money supply, financing have been associated with the economic growth. In the table 5, the results of regression analysis we found that MS variable has the coefficient valued at 0.829578, R-squared valued at 0.99637 and it has p-valued at 0.0001 as a result the strong relationship MS and economic growth therefore we accepted the hypothesis 1 (H1): there is a significant relationship between MS and economic growth (EG). And we also found that independent FINAN variable has the coefficient valued at 0.727115, R-squared valued at 0.993503 and it has p-valued at 0.0002 as a result the positive relationship FINAN and economic growth (EG) therefore we accepted the hypothesis 2 (H2): there is significant relationship between FINAN and economic growth (EG). Further, the two independent variables MS and FINAN have the important influence on the economic growth in which is a significant at 0.05 levels (P<0.05). In the table 7 and 8, we have found that Engle-Granger Co integration Test on the variables, null



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50

hypothesis, and the dependent of variables EG, MS, and FINAN mostly in significant relationship at the p-values 0.9548, 0.6520, and 0.5952. Pairwise Granger Causality Tests showed that about 89% of MS and EG has influenced relationship, 75% of FINAN and EG has influenced relationship, and about 65% of FINAN and MS have influenced relationship. Based on the two tests we decided to accept the hypotheses: H1, H2, and H3. In the table 9, figure 3 regarding the ratio analysis we can identify the variables relations, the relationship of MS about 63% of the economic growth in the average per year, the relationship of FINAN about 50% of the economic growth in the average per year. Therefore outputs of ratio analysis, it was confirmed that MS and FINAN have impacted on the economic growth significantly.

5. Conclusion

Such as commercial banks, MFIs and other agents include government want to borrow money from the central bank for growth of their communications, business models and economic activities based on the principles of central bank functions in money supply and financing with the comfortable conditions, and in terms of conventional mechanism. According to our observation and studies, their capital sources (as showed in note 3) are mostly come from the foreign countries or international institutions included ADB, WB, IMF, or strategic economic cooperation partners those who can supply finance at low interest rate and with good coordination for Cambodia’s financial sectors such as banks, MFIs, other credit agents as a result its budgets has been contributed to the strong Cambodia’s economic growth and demand increase. For the 37 years ago of the NBC central bank performance, the money supply and financing was a good position because of under the NBC central bank functions however the NBC central bank management and leaderships, responsibilities as functions have limited, particularly in the monetary policy have been played the important role in the money supply, financing associated with the economic growth in the stability it was confirmed by outputs of regression, times series, ratio analysis. We saw that money supply and financing have been increased in year to year, and in addition its relations to the economic growth significantly based on results of selected data have calculated. The NBC central bank should increase the growth rate of money supply equals the rate of economic growth concentrated on the Cambodia’s economic performance so its growth can assist the central bank functions wok well in forwarding to stabilize the national economy, and additionally in its capacity able to manage inflation rate, price stability, foreign exchange, as particularly to classify the contributions of the central bank into the government economic policy. NBC central performance of year 2011-2015, our analysis of the regression model, time series and ratio was found that a strong positive linear relations of MS, FINAN to the economic growth, and in addition the NBC central bank has good right functional positions in monetary policy frameworks to challenge the strong dollarized- economy and price falls in the agricultural products particularly rice products, even though the NBC central bank contributions is evidently able to stabilize the annual average economic growth at 7.6% for the Five years ago. Further, the NBC central bank should formulate the monetary policy standards as finance provider and potential model means that central bank should play roles in the selection of the strategic economic cooperation partners or pick up winner policy in order to build the growth of the economic productive sectors like agriculture, manufacturing, and services, and as well as to intervene the structures of economic development aims to boost growth in the Cambodia’s context and to share benefits to the global. The regression analysis outputs show that the money supply, financing have the significant positive relationship and also the money supply and financing have the important influence on the economic growth in the Cambodia’s context confirmed by the adjusted R-squared valued at 0.99 however the money supply and financing have been associated by 99 percent has been impacted on the economic growth. NBC central bank should increase more money supply and financing through measurements of monetary policy standards meaning that central bank is the finance provider objectively to guarantee stability in the potential productivity growth in Cambodia inclusive. In 1960s, Cambodia had the prosperous economy because of the central bank and government established the special interventions based on the monetary and fiscal policy tools direction for the state-owned enterprises included state commercial banks, state trade agents as a result the GDP growth average per year about 5%.

References

Athanasios Orphanides (2007). Taylor Rule, Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington D.C., P. 1-15.

Alex Nikolsko-Rzhevskyy*, David H. Papell** (2012). Taylor’s Rule versus Taylor Rules, *Department of Economics, Lehigh University, Bethlehem, PA 18015, Department of Economics, **University of Houston, Houston, TX 77204-5882, P. 1-22.

Aparijita Sinha (2010). What are the Functions of Central Bank? [Online] Available: www.preservearticles.com (December, 28, 2010).

Ben S. Bernanke (2004a). Central Bank Talk and Monetary Policy. Remarks by Governor Ben S. Bernanke at the Japan Society Corporate Luncheon, New York.

Ben S. Bernanke (2004b). The Great Moderation. Remarks at the Meetings of Eastern Economic Association,



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51

Washington DC. Ben S. Bernanke (2010). The Economic Outlook and Monetary Policy. Remarks by Ben S. Bernanke, Chairman

Board of Governor of the Federal Reserve System at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming (August 27, 2010).

Chea Serey (2016). National Bank of Cambodia arranges a discussion forum on Liquidity-providing collateralized operation (LPCO), [Online] Available: www.nbc.org.kh (October, 13, 2016).

Chea Serey (2016). The Alliance for Financial Inclusion (AFI) Annual General Meeting and Global Policy Forum on Building Pillars of Sustainable Inclusion.

ECB (2016). Monetary policy decisions. President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today. [Online] Available:

www.ecb.europa.au/press/pr/date/2016/htm/pr160908.en.html Erlend W. Nier (2009). Financial Stability Framework and the Role of Central Banks: Lesson from the Crisis.

International Monetary Fund, WP/09/70, P. 1-66. Geral Epstein (2005). Central Banks as Agents of Economic Development. Political Economy Research Institute,

Working Paper Series November 104 (September, 2005). John C. Williams (2015). Measuring Monetary Policy’s Effect on House Prices. FRBSF Economic Letter, P. 1-6. John B. Taylor* (1993). Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on

Public Policy 39, 195-214 North-Holland. * Stanford University, Stanford, CA 94305. Khou Vouthy (2016). Policy Implications. Economic Research and International Cooperation Department,

National Bank of Cambodia (October 20, 2016). Levine, R. (2005). Law, Endowments and Property Right. Journal of Economic Perspectives, 19(3), P. 61-88. Mario Draghi (2016). Working Together for Growth in Europe. Introductory remarks by Mario Draghi, President

of the ECB, at Deutscher Bundestag, Berlin (September 28, 2016). Majone, G. 1997. Independent Agencies and the Delegation Problem: Theoretical and Normative Dimensions in

Steunenburg, B. and Van Vught, F (eds), Political Institutions and Public Policy, Dordrecht, Kluwer, P. 139-56.

NBC (2016). Outcome of meeting between the National Bank of Cambodia (NBC) and the Association of Banks in Cambodia (ABC), the Cambodia Microfinance Association (CMA).

NBC (2016). The 37 years, NBC played the important role in the Cambodian Economic Development. Press Release of NBC at the Kohsenteaphea Newspaper, 10 October, 2016.

NBC (2016): National Bank of Cambodia Annual Report 2015, P. 1-73 (September 10, 2016). NBC (2002). Annual Report, P. 1- 40. National Bank of Cambodia, [Online] Available: www.nbc.org.kh Reuven Glick (2016). Views on the Current Economy and the Outlook. Economic Research Department, Federal

Reserve Bank of SanFrancisco, P.1-4. Shelagh Heffernan (2005). Modern Banking. John Wiley& Sons Ltd., the Atrium, Southern Gate, Chi Chester,

West Sussex P0198SQ, England, Tel (+44) 1243779777 (Chapter 1). Xinhua (2016). China central bank injects 437 billion yuan via medium-term policy tool (November. 03, 2016).

Notes Note 1, this is the table A1 for note 1. Note 2, this is the table A2 for note 2. Note 3, this is the table A3 for note 3.

Table A1. The Rate of Monetary Aggregate Projection, 2003

Descriptions Projection Rate

Money Supply ( only M2) 20.5%

Currency in currency deposit 22.0%

Foreign currency deposit 20.0%

Net foreign assets 11.5%

Net domestic assets 14.5%

Source: NBC, 2003.



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52

Table A2. The lists of Financial Institutions Operations in Cambodia

Date No. Banks No. MFIs Banks Credit Bank Deposit MFIs Credit MFIs Depo.

2011 35 25 4,337 5,880 636 114

2012 35 30 5,890 7,651 877 275

2013 39 35 7,414 8,918 1,307 442

2014 44 39 9,615 11,857 2,035 912

2015 46 53 12,032 13,783 3,015 1,305

Source: NBC (2016). Banks credit, Bank deposit, MFIs credit, and MFIs deposit in Million US dollars. No.: number.

Table A3. Financial sources (share of paid up capital) of banks in Cambodia, as 2014

Banks Foreign share Banks Foreign share Banks Foreign share

ACLEDA 49% MB 100% PPCB 100%

ABA 100% CUBC 100% RHB 100%

AGRI 100% CIMB 100% Sacomb 100%

ANZR 55% Mega 100% SHB 100%

BOC 100% PLB 100% SKB 100%

BIPP 100% HLB 100% TCB 100%

BKB 100% ICBC 100% UCB 100%

CAB 100% KBC 100% ASB 100%

POST 100% KTB 100% ACB 100%

CCB 45% MJB 100% CAM 100%

CPB 100% MYB 100% CKSB 100%

Source: NBC (2014). Minimum paid up capital of banks and specialized banks is 150, 000 million riel and 30,000 million riel.



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53

The Effect of Fiscal and Monetary Policy on Private Investment in

Jordan by Using Time Series Analyses

Mohnad Ahmed Eyal-Slman

Halah Hussain AL-shabatat

Master students from the University of Mutah, Jordan,2016

Abstract:

the aim of this research to a statement of the impact of each financial and monetary policy on private investment

in Jordan during the period (1980 - 2014), aims to assess the relationship between private investment and a group

of influential factors such as (gross domestic product (GDP), money supply , direct taxation, government spending,

and the interest rate) .To achieve this objective was the use of model VAR (Vector Auto Regression ) on variables

study, has also been applied Unit Root Test to see whether the study variables stable, with the passage of time,

showing that the gross domestic product (GDP), and government spending and money supply is stable at the

second difference I(2), either private investment and the interest rate and direct taxation is stable at the difference

I(1).And the application of the test of the choice of the number of periods of Lags during the testing of less than

the value of the viable (Akaike and Schwartz) where he found that the best number of years the slowdown is three

years.The Granger test of causality with that there is a bidirectional relationship between private investment and

government spending as well as between private investment and direct taxation any that each causing the other.

And that there is a single trend between private investment and gross domestic product (GDP) and any that the

gross domestic product (GDP) cause private investment. And that there is a single trend between private investment

and any criticism that the presentation of the money supply cause private investment. There is a causal relationship

in any direction between the interest rate and private investment.It was also the use of the two main instruments

for analysis: analysis of the components of the variance a respond to the backlash of the Act. It was found that all

of the gross domestic product (GDP) and IMF and government spending and direct taxation positively affects

primarily. Either the interest rate affect negatively on private investment in Jordan, this is consistent with the

Economic Theories previous studies and discussed in the relevant subject. The study recommends that the need

for the use of monetary policies and finance including offers an investment climate to encourage investment.

Introduction:

investment enjoys a privileged place it topics popular clear before the government economists in the light of world

economic trends and has an influential role and positive role in the process of economic growth and development,

and counts by many States in solving its economic problems of poverty, unemployment and low levels of

production, and the low level of per capita income, high rates of inflation. As a result, signs of competition between

the various States to attract international investments, thereby harmonizing these States to improve their

investment environments through incentives encouraging laws and attracting investment.

The impact of economic policies in the economic activity of the important topics in macroeconomic

analysis, controversy continues around them; the actions taken by the state to influence the gross domestic product

(GDP) and a number of economic objectives, the most important of which is raising the rates of growth and full

employment and price stability, known as the economic policies which is divided into two parts are important:

fiscal policy, monetary policy; financial policy meant the use of taxes and government spending any set of actions

taken by the State including related income and expenditures, while using the monetary policy of the legal reserve

discount price open-market operations as tools to achieve the economic goals and commensurate with the

investment environment.

Jordan, like other countries of the world and heading for economic and social growth an integrated, and

through seeking to raise the standard of living of its members focused on the investment process as one of the most

important components of the gross domestic product (GDP), through the adoption of a series of corrective actions

fiscal and monetary policies aimed at restoring confidence in the investment environment in Jordan through action

to achieve monetary stability, in addition to the modernization and development of the laws and legislation in

support of investment and the establishment of the institution of encouraging investment.

The volume of total investment in 1980 toward (463.9 million dinars, rising in 1990 to about 694.1 million

dinars and about (1266.7 million dinars in 2000 finally rose to (23,063.9 million dinars in 2014.(the Jordanian

Central Bank, Annual reports).

With regard to private investment, the volume of private investment in 1980 (294.15 million dinars, it

rose in 2009 to about (1945.1 million dinars, the rate (12%) of GDP and (74%) of total investment. Demonstrating

the importance of private investment in Jordan for the total investment amounted to GDP.(the Jordanian Central

Bank, Annual reports).

The objective of the study is to a statement of the impact of each financial and monetary policy on private



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54

investment in Jordan during the period (1980_2014) with a focus on private investment in terms of its forms,

sectoral nationwide, the problems faced by the. It also aims to search for the determinants of investment, etc.

The importance of the study:

comes the importance of the study of the few studies of its kind in Jordan and the study on the impact of the

financial and monetary policy on private investment in Jordan using the time series. This covers the longer period

of time than most other, it is also consistent with the economic reality in Jordan, and in line with the government

interest in the individual and the subject where private investment is considered one of the economic solutions

effective in achieving economic growth and economic and social development.

The study methodology:

Use the two researchers in this search descriptive approach analytical work, which is based on an estimate of the

relationship between the private investment in Jordan and fiscal and monetary policies during the period

(1980_2014) using the regression model of autonomy (VAR).

They will also benefit from the following tests:

1. The root test unity to know whether the economic variables used in the study stable, with the passage of time.

2. A test to determine the ( Lags ) number of periods of idling timetable during the testing of less value to the

criterion of (Akaike and Schwartz) .

3. Granger Causality Test with to determine the direction of a causal link between the variables.

Use will be key instruments for analysis:

1. Variance Decompostion .

2. Impulse Response Function to the backlash of the act to trace the route timetable to sudden changes which could

be exposed to different variables model.

Previous studies:

Was the subject of investment, the focus of attention of a large number of economists to the topic of great

importance in the economies of the countries, however, the studies on the subject of the study are rare because

most of the studies focused on direct foreign investment, the most important of those studies:

Study (government spending and its impact on private investment in Jordan) (Zyadat, 2000) analysis

of the structure of government spending on both sides of the capitalist in Jordan during the period (1996-1970) as

well as the analysis of the structure and development of private investment in Jordan, and analysis of the relative

importance to the total investment, in addition to distributed to various economic sectors. Also aimed at identifying

the most important factors affecting in government expenditure in Jordan, and analyze the impact on private

investment.

The study standard model, making government spending a function in each of: (gross domestic product

(GDP), public revenues, private investment, government expenditure in the previous year and the number of the

population), the results of the study showed a positive relationship between the government spending on the one

hand and economic variables: GDP public revenues and the number of the population. On the relationship between

government spending and private investment, the study showed that there is a positive impact for capital

expenditure on private investment, and the impact of the negative impact the current expenditure on private

investment.

The study (the role of macroeconomic policies in the private sector investments in Sudan, 1990_2007)

(Sudan University, Ahmad Badawi, 2008) aimed at verifying the impact of macroeconomic policies on the private

sector investments by focusing on some of the settings: (public investment, banking credit to the private sector,

the rate of exchange, national income), using the model of the gradient self-common integration model and error

correction.

This study to the gross domestic product (GDP) was a positive impact directly on private investment in

the long term during the study period this is confirmed in a study (government spending and its impact on private

investment in Jordan) (Zyadat, 2000) which was mentioned earlier, and that the expansion of government

investment had a negative impact on the private sector investments while the curtailment in later periods has had

a positive impact in spite of the fluctuation of the author in the long term, credit and real banking system has had

a positive impact in the short term while negative impact on long-term.

The aim of the study Haiyan County Song and Zinan Liu ( Haiyan Song and Liu Zinan,2001) entitled "

investment decisions in China during the period of reform) to analyze investment decisions in the long term

the influential factors during the period of economic reform in China (1983_1953). The study standard model,

making investment a function in each of: (gross domestic product, government expenditures, wages, taxes and

interest rates).

Results of appreciation to the existence of a negative relationship between wages and the interest rate and

taxes on the one hand and investment on the other hand, in the long term, as well as a positive relationship and



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55

strong between expenditures and ongoing governmental and gross national product on the one hand and investment

on the other hand.

It adopted a study (private investment policies and financial sector in Malaysia and India) (James

2009(method of time-series analysis (VAR) made special investment a function in each of the interest rate and

criticism.

The results of this study that the presentation of the money supply would positively affect the private

investment in the two countries, and the interest rate has a negative impact on investment in each of India and

Malaysia, and this is what has been reiterated in most of the studies which have been addressed in this search.

As well as the study of the (Gaobo pang, Ahmet Aysan; Middle East and North Africa

(MENA),1970_1999) : (analysis of the factors that lead to the growth of private sector investment in the countries

of Eastern and North Africa) Using data of 40 developing countries and the countries of eastern and central and

north Africa using data (private investment as a proportion of gross domestic product (GDP), an accelerated

investment, interest rates and the stability of the macroeconomic policies and structural reforms, external stability,

economic fluctuations, infrastructure) study concluded that the instability and the burden of indebtedness,

contributed largely to the volatility of private investment in the countries of the region in addition to the

contributions of less than in the composition of the private capital and contributed to the private sector in the

countries of the region about more than 20% of the GDP.

It is thus clear to us that the most studies models of Arab and foreign countries which dealt with the

subject of private investment followed the descriptive approach and methodology of the analytical work of the

standard research in building the model used most of the main determinants of private investment in developing

countries. Models of local studies have all studying some aspects of private investment and some other studies

dealt with the most important obstacles facing the private investment as a Study Center for Strategic Studies at the

Jordanian University.

This will study on the development of a model for private investment, particularly in the light of the

followers of financial and monetary policy, which makes the issue of private investment in extremely important.

Will Be the use of time-series analysis VAR aim to clarify the impact of each of the financial and monetary policy

on private investment.

The conceptual framework of the study

The process of economic development need for intensified efforts to move the economy to an advanced stage of

development. These efforts are summarized in the high investment rates sufficiently to achieve the growth rate in

income, more than Population growth rate rate at the very least, hence the importance of investment as the engine

of the process economic and social development, and a prerequisite for the exploitation of resources, the formation

of productive capacities in order to move the economic growth which is associated with the size capital formation.

Investing plays a key role in the economic life as a determinant of the rate of economic growth and development

of productive and component effective dynamically in the national income, increase production volume and

improve the living conditions of the members of the community and increase the operation of labor, thereby

achieving high growth rates. But achieving development and raise the economic growth rate, does not depend on

the extent to which your rate of investment only, but are closely linked to the quality of investment, and its

distribution on the economic sectors, and how it is used by this volume of investment, it comes to structural

investment.

The high investment rate and thus capital accumulation rate, is a necessary condition to accelerate process

development, and this is a clear matter of indisputable, but to do so it is not without the availability of the basic

elements of the development process, which provides the conditions and requirements necessary for the success

of the investment project development. Which affect it several variables are:

Economic and political variables, variables legal, administrative, and social and cultural variables.

The investment process as development projects require a favorable climate does not depend on a

particular specific law, but mainly based on a number of conditions and macro-economic fundamentals that create

ground can grow where development projects.

And can be summarized the importance of investment in the following points:

1. Increasing the national income.

2. The creation of jobs.

3. Support to the process of economic and social development.

4. The increase in production and trade balance and balance of payments.

Investment consists of several types:

1. The real investment and financial investment : the real investment in real assets (Economic concept), either

financial investment regarding investment in securities debentures, bonds, certificates of deposit and other.

2. Long-term investment, investment and short-term : long-term investment is the one who takes the form of

stocks and bonds, which is called the capital investment. The short-term investment is investment in securities



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56

in the form of treasury bills, acceptances and bank accounts or certificates of deposit called cash investment.

3. The independent investment and investment catalyst : The Independent Investment basis in the increased

income and gross national product by the business sector or the government or of foreign investment. The

catalytic investment comes as a result of the increased income (the relationship between the Positive).

4. The financial investment human investment : the financial investment what is the traditional form of

investment any real investment, either human investment is the interest of the human element through

education and training.

5. Investment in the areas of research and development : this type of investment of particular importance in

the developed countries, where the allocated to these states sums; because it helps to increase the

competitiveness of their products in the world market, as well as finding new ways of production.

Investment is determined by the number of determinants of the :

1. Rate of interest (inverse relationship in accordance with Economic concept for investment).

2. The marginal efficiency of capital (marginal productivity of capital invested or return on invested capital).

3. Scientific and technological progress.

4. Competitiveness and export capacities.

5. The degree of risk.

6. The availability of economic and political stability and investment environment.

7. Other factors such as the availability of awareness of savings and investment, as well as the availability

of the financial market.

The reality of investment in Jordan

Marked investment spending in Jordan during the period (1980 _2014 ) situation of instability in terms of both its

rates or development or in terms of the levels of its contribution to the gross domestic product (GDP).

The evolution of the volume of expenditure total investment and private sectors:

Will we are talking here about the evolution of the volume of private investment as a proportion of gross domestic

product (GDP) during the study period that extended from (1980 _2014 ).

With the mid 1970s and early 1980s witnessed the most Arab states high growth rates as a result of the

rise in oil prices and oil wealth at that time, this was reflected the growth rates in Jordan, the fact that Jordan in

that period was the most important exporters of the workforce. And affected workers' remittances on the movement

of investment in Jordan, with increasing rates of assistance and loans granted by the Arab States and the Gulf

countries, especially Jordan, thanks to the constant flow of large financial resources Jordan managed to achieve

investment rates high in this stage, as the volume of total investment in 1980 toward (463.9 million dinars and

private investment (294.15 million dinars, the rate (10.5%) of GDP, as shown in table No. (1). But in the late 1980s

after Jordan to the debt crisis and the sharp economic 1989 which had resulted in the decrease of the exchange rate

of the Jordanian dinar, investment had declined in Jordan, bringing the total investment to about (554.5 ) million

dinars, and private investment to about (307.2), a rate of 9 percent of GDP. (table 1).

In order to emerge from this crisis, the Government has taken the policies and in cooperation with the

International Monetary Fund and the World Bank was the most prominent of the programs of economic adjustment,

where the total investment and private sectors significantly as the total investment 1996 toward (1444.9 million

dinars, and private investment toward (901.6) million dinars, or (19.1%) of GDP, in 2014, the volume of total

investment (6303.3) million dinars, and private investment toward (4573.6), or (17.98%) of the GDP. Table No.

(1)



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57

Table No. ( 1 )

The evolution of the volume of investment spending in Jordan (Macroeconomic year, and private sectors

( million dinars)

The Year Private investment Government

investment total investment

The gross domestic

product (GDP)

1980 294.15 169.84 463.9 1164.8

1981 580.25 120.67 701 1448.7

1982 485.05 165.75 650.7 1649.9

1983 433.76 156.64 589.8 1786.6

1984 465.16 106.04 571.2 1909.7

1985 184.4 200.3 1,384.4 1970.5

1986 186.9 222.5 409.4 2240.5

1987 175.8 272.7 448.5 2286.7

1988 339.5 173.8 513.3 2349.5

1989 307.2 247.3 554.5 2425.4

1990 422.5 271.6 694.1 2760.9

1991 447.8 230.2 678 2,958

1992 804.2 245 1049.2 3611.6

1993 1046.5 257.1 1303.6 3885.2

1994 907.7 483.5 1391.2 4359.2

1995 969.7 425.3 1395 4714.7

1996 901.6 543.3 1444.9 4912.2

1997 828.1 1,496.9 1325 5137.4

1998 646.8 540.7 1187.5 5609.9

1999 619.6 733.1 1352.7 5778.2

2000 713.8 552.7 1266.7 5998.5

2001 712.5 523.3 1235.8 6363.7

2002 735.9 551.5 1287.4 5,545,000

2003 771.4 719.4 1490.8 7228.7

2004 1333.3 672.1 2005.4 8090.7

2005 1877.5 856.2 2733.7 8925.4

2006 2010 707.1 2717.1 10675.4

2007 2498.4 835.7 3334.1 12131.2

2008 2803.3 1060.1 3863.4 15593.4

2009 1945.1 688.4 2633.5 16912.2

2010 **3374.8 **1272.1 **4649.2 *18762

2011 **3681.7 **1388.3 **5074.1 *20476.6

2012 **3949.4 **1489.3 **5443.1 *21965.5

2013 **4288.5 **1617.1 **5910.5 *23851.6

2014 **4573.6 **1724.6 **6303.3 *25437.1

Source: The General Statistics Department, unpublished data

*Preliminary data

** been estimate data by the two researchers, through the calculation of the arithmetic average of the contribution

of private investment in total investment for the last five years) 2005_2009) and then hit the percentage of the total

investment for the year 2010 to 2014, as well as the case for government investment.

The development of private investment in Jordan as a percentage of the total investment:

Jordan followed in its economic system of the economic system of the mixed capitalist, giving the private sector

and its role in the process of growth, with paving the way for the government to intervene if necessary. The origin

of economic activity that is normally, the Government intervenes through its monetary policy and finance to solve

the problems of economic activity and the economy toward the objectives it seeks to achieve.

With the beginning of the 1980s, the private sector occupies its role properly after the availability of

appropriate infrastructure, strong and gave special investment acceptable position inside the Jordanian economy,

contributed to the process of economic growth effectively, the proportion of private investment in total investment

to about (82.8%) in 1981 and continued private investment good status and rates of advanced growth until 1985,

where the rates of private investment as a proportion of the total investment decline again until 1990.

And reached its lowest rate in 1987 (39.2%), and because of the economic circumstances and harsh



Vol.7, No.22, 2016

58

Jordanian economy, where the low rate of economic growth and increased the deficit in the balance of trade deficit

rose in the budget to Jordan's foreign debt. At the beginning of 1991 and the increased attention by the Government

to private sector investments, focus and adoption of investments in the first place, as a catalyst for economic growth

through programs of economic adjustment and development plans, returned to the rates of private investment to

form the biggest percentage ahead of public sector investments again. In 1996 the ratio of participation of private

investment as a proportion of the total investment toward (62.4%), while the reached about (72.6%) in 2014.

Table No. ( 2 )

Government and private investments as a percentage of GDP

As a proportion of the total investment

The

Year

Private investment

as a proportion of

gross domestic

product (GDP) Investment

The government

as a percentage

of GDP

Total

Investment as a

percentage of

GDP

Government

investment as a

percentage of the

Total Investment

Private

investment as a

percentage of the

total investment

1980 25.3 14.6 39.8 36.6 63.4

1981 40.1 8.3 48.4 17.2 82.8

1982 29.4 10.04 39.4 25.5 74.5

1983 24.3 8.8 33.01 26.5 73.5

1984 24.4 5.6 29.9 18.56 81.44

1985 9.4 10.2 19.5 (1,522,022) 48.0

1986 8.3 9.9 18.3 54.4 45.6

1987 7.7 11.9 19.6 60.8 39.2

1988 14.4 7.4 21.8 33.9 66.1

1989 12.7 10.2 22.9 44.6 55.4

1990 15.3 9.8 25.1 39.12 60.88

1991 15.1 7.8 22.9 33.95 66.05

1992 22.3 6.8 29.1 23.35 76.65

1993 26.9 6.6 33.6 19.7 80.3

1994 20.8 11.1 31.9 34.75 65.25

1995 20.6 9.02 29.6 30.5 69.5

1996 18.4 11.1 29.4 37.60 62.40

1997 16.1 9.7 25.8 37.5 62.5

1998 11.5 9.6 21.2 45.53 54.47

1999 10.7 12.7 23.4 54.2 45.8

2000 11.9 9.2 21.1 43.63 56.37

2001 11.2 8.2 19.4 42.35 57.65

2002 10.8 8.1 18.9 42.84 59.46

2003 10.7 9.9 20.6 48.26 51.74

2004 16.5 8.3 24.8 33.5 66.5

2005 21.1 9.6 30.6 31.32 68

2006 18.8 6.6 25.5 26.0 74.0

2007 20.6 6.9 27.5 25.0 0.75

2008 18.5 6.8 24.8 27.4 72.6

2009 11.5 4.1 15.6 26.14 73.86

2010 17.9 6.8 6.8 27.4 72.6

2011 17.9 6.8 6.8 27.4 72.6

2012 17.9 6.8 6.8 27.4 72.6

2013 17.9 6.8 6.8 27.4 72.6

2014 17.9 6.8 6.8 27.4 72.6

Source: were calculated from the data before the researcher.

The impact of the financial and monetary policy on private investment

You should use the monetary policy or financial policy? This question latest long discussion between the

supporters of the monetary policy led by Milton Friedman (Milton Friedman) and supporters of the financial policy

led by Walter Heller (Walter Heller) but this debate has been overtaken by events, it was decided that the financial



Vol.7, No.22, 2016

59

policy and monetary policy, and each of their objectives credentials, the modern debate is should be exercised in

the policies being pursued one effects to achieve the same goal or should be one budget remedial tool each other?

There is no doubt that both policies monetary, financial and playing a key role in achieving the economic instability,

and it is in this spirit that could be coordination between both policies in the economic goals .policy can

expansionary monetary play a key role in the increase in gross domestic product and reducing the interest rate.

While fiscal policy plays a key role in increasing gross domestic product and raising the interest rate. There is a

relationship of mutual assistance and the nexus between fiscal and monetary policies. We can distinguish between

the monetary policy of the financial policy of the inclusion of the tools that are designed to influence the monetary

offer both cost and cash to play its role in economic activity and the inclusion of a second income of taxes and

duties and debt management and public expenditures.

The economic balance (Absence of the contraction or inflation) can be monetary policy anti-or neutral

fiscal policy, the government can if desired in expanding the credit to the central bank to reduce the rate of the

discount, and vice versa also if it wanted to restrict credit can increase the rate of the discount, but the budget

policy and cumbersome it is awaiting the vote for a long time and it is better that the monetary policy must be

moving in the same direction of financial policy supplemented and supported by the reasons for this are:

1. Should the use of monetary policy to control the cash block in circulation, but not sufficient to achieve

that must be the use of financial policy and wage policy, prices, income as long as it is a requirement of

the effectiveness of monetary policy in the creation of the necessary financial resources for investments

through borrowing, individuals to be ready to accept the price levels of different interest rates and the

degree of competition with private investment, and the same note when you use the financial policy

alone to stimulate private investment and reduction of government expenditure or the year this could

lead to a decline in this type of investment instead of an attempt to increased, especially in the developing

countries experiencing the dependency of the economies of the industrialized countries, this means that

reliance on monetary policy to encourage investment and control in the rate of exchange and economic

stability .

2. Could not monetary policy alone to bear the damage and trauma in the fight against inflation and must

be the integration of the interdependence of the financial policy in these matters as it requires the use of

the instruments to influence on the demand side, this task of the financial policy.

3. Experience has shown that when prevailed recession in the 1970s in the major industrial countries

resorted to the economic authorities in these countries to use all of the two policies together to get out of

this crisis.

As experience has shown that coordination between the two policies in terms of the direction and the

timing of it is necessary for the State cannot neglect, because condone this means to miss the chance to that State

to achieve the desired goals.

It also calls for the urgent necessity of coordination between the Saudis and the fiscal and monetary

policies in all economic conditions, so that the financial policy of the Government as the executive authority and

in particular the Ministry of Finance or Economy, either the monetary policy of the competence of the Monetary

Authority, in particular the central bank, therefore, to achieve the desired objective of the State be necessary

coordination between those two bodies, where the use of both the financial policies and monetary policies in the

same time to achieve economic stability.

Therefore, there is no doubt that the effectiveness of each of the policies of the financial and monetary

depended on the degree of the slope of the curve is the market for goods and services) curved LM market (money),

the slope of the curve is the market for goods and services) is largely determined by the internal investment function,

if businessmen do not respond rapidly to changes in the rate of interest the investment function be steep and thus

be a curve is the market for goods and services) steep, furthermore, steep curve LM ( market money) depends

mainly on the slope of the curve of requesting money if individuals respond quickly to changes in the rate of

interest, a function of cash preference be small steep hills and the nearest to the equator, thus the curve of LM

( market Money ) Relatively surfaces accordingly, fiscal policy would be a powerful tool if businessmen do not

respond to changes in the rate of interest when the report of their investments, but strongly respond to changes in

the rate of interest when determining the amount of cash balances which keeps for the amount of entering the

situation where the financial policy ineffective be curve is the market for goods and services) surfaces while the

curve LM market (money) be steep, because the individuals affected by the changes to the interest rate at the report

of their investments, investment function be relatively flat and therefore the curve is the market for goods and

services) be relatively level, while individuals do not respond to changes in the rate of interest when the report of

the amount of cash balances which keeps by any that the function of liquidity preference be steep, Thus, LM also

be too steep.

Thus, if the economy is suffering from recession is following the policy of fiscal expansionary so that the

State increased government spending or reduce taxes which would lead to the increase of the overall expenditure

and is at the same time the application of the policy of the expansionary monetary and which lead to a decline in



Vol.7, No.22, 2016

60

the rate of interest which lead to increased investment and rising aggregate demand.

If the economy suffers from inflation is to follow a financial policy contractionary so that the State

reduction of government expenditure or taxes increase, leading to a reduction in the total demand and is at the

same time the implementation of the policy of deflationary monetary and leading to an increase in the interest rate

leading to a decline in investment and low aggregate demand.

Investment Obstacles in Jordan:

If we want to dwell a bit inhibiting factors, which limit the process of private investment, the talk about the

following:

1- The lack of capital and higher costs: Jordan suffer from weaknesses in the financial resources needed to

finance investment. To cover the financing investments resorts to the Government or the private sector to

borrowing whether internal or external. Often loans high benefits, which increases the cost of investment, one

of the major obstacles to reduce the rates of investment in Jordan, and plays workers' remittances play a major

role in the coverage of a significant part of the investment funds.

2- The scarcity of natural resources: Jordan is a country that is not only a few natural resources utilized by the

almost confined to the subjects of phosphates and potash, the intervention of these articles as raw cheap in

some industries.

The existence of a variety of natural sources lead to an increase in investment opportunities to benefit

from these resources, and reduces the chances of monopoly and control in the price, which does not apply to the

Jordanian situation.

estimation of the impact of the financial and monetary policy

On private investment in Jordan and the conclusions and recommendations

The study model:

Will choose a simplified model in this study to include six variables: Private Investment (I), the gross domestic

product (GDP), public expenditure (government) (G), the direct taxs (T) to represent the financial policy, as well

as the use of the interest rate (R), the money supply in its broadest sense (M2) to represent the monetary policy, to

analyze the impact of fiscal and monetary policy and on private investment in Jordan. Will be linked, including in

the form of a model VAR,Vector Auto Regression) reduced scope as follows:

Y t = A 1 Y t1 + A 2 Y t2 + ...+ A n Y t-n + U t

Where:

Yt = [It GDPt Gt M2t Tt Rt]

Ai: a matrix of transactions

Ut: matrix random error where:

Ut = [e1t e2t e3t e4t e5t e6t ], with the assumption that the expected value of each 0, and there is not a sequential

coherence in any of them, E(eit eit-s) = 0.

T: Time

N: Number of periods (Lags) .

In this model was considered private investment was the variable of the rest of the variables of the study are

independent variables.

It is a model (VAR) of modern methods of study of the relationship between macroeconomic variables. Where

this way of expression of all variable model written as a function of the changing values himself in previous

periods and the values of the other variables of the model in the previous periods. All of what the two researchers

in this model is: (Johanson, 1997)

1. determining variables that is expected to interact with each other in the model of the study. Of course there is

no external variables in a model (VAR) where treat all variables as internal variables, which selected based on

economic relations of mutual trust between the variables by economic theory.

2. The number (Lags).

3. Granger Causality Test.

4. Unit Root Test.

5. Variance Decompostion .

6. Impulse Response function .

The results of the analysis standard:

It has been the application of previous tests on the variables of the study, the following are the results of the

Standard tests obtained:

First: Unit root test: (Test Dickey _ expanded Voller ADF)

Applying this test to the Model variables, considering that the number of sightings (n) equal (35). Taking the



Vol.7, No.22, 2016

61

absolute value of the results indicate that all the variables unstable at the level I(0) where the gross domestic

product (GDP) and government spending and stable monetary when the second difference I(2), either private

investment and the interest rate and direct taxation is stable at the difference I(1). Table No. (3) values (ADF)

calculated and potential complementarities of the variables used in the model are as follows:

Table No. (3)

The results of the test of Dickey _The expanded Voller (Augmented Dickey-Fuller) (ADF)

The second difference I(2) The difference I(1) The variable

The

Result

Contingent

liabilities

The value of the

DF calculated

The Result Contingent

liabilities

The value of

the DF

calculated

........ ........ ........ Stable 0.000 -6.510 I

Stable 0.000 -11.800 Unstable 0.829 -0.711 GDP

Stable 0.000 -10.600 Unstable 0.842 -0.662 M2

........ ........ ........ Stable 0.005 -3.907 R

Stable 0.000 -9.504 Unstable 0.617 -1.298 G

........ ........ ........ Stable 0.000 -4.898 T

Source: the preparation of the two researchers

Secondly: Test number of idle periods (Lag Length) To test the number of periods of idling appropriate timetable to each variable being self-slide each variable for a

period of delay one after the other until obtaining the model best criteria to test the model through the use of test

( Akaike) and ( Schwartz), through the selection of less than the value of two criteria. When the holding of these

two tests on the annual data found that less than the value of the is when the number of idle periods a timetable

(Lags) = (3).

Table No. (4)

Test Akaike and Schwartz (AIS , SC)

SC AIS Lags

78.88698 78.61215 0

71.57468 69.65091 1

70.91074 67.33801 2

70.53550* 65.31381* 3


Thirdly: Granger Causality Test

In the application of this test was the results are as shown in the table No. (5).

Table No. (5)

The results of the test of causation

The Result

Contingent

liabilities F

The direction of

the causal link

The

Result

Contingent

liabilities F

The direction of

the causal link

Cause 0.0002 12.014 I / G Cause 0.015 4.852 G / I

Not Cause 0.522 0.664 I / GDP Cause 0.005 6.388 GDP / I

Not Cause 0.390 0.972 I / M2 Cause 0.002 7,300 M2 / I

Not Cause 0.147 2.048 I / R

Not

Cause 58.917 1.998 R / I

Cause 0.005 15.463 I / T Cause 0.030 3.966 T / I


Drawing on the value of the contingent to judge the results of the test of causation, if the value of the

contingent of less than 5% in both directions mean that there is a causal relationship reciprocal any that each

causing the other.

It is clear through extrapolation of the figures in table (5):

1. There are bilateral relationship between private investment and government spending any that each causing the

other.

2. there is a single trend between private investment and gross domestic product (GDP), that the gross domestic

product (GDP) cause private investment.

3. there is a single trend between private investment and criticism, any that the presentation of the IMF cause

private investment.

4. No causal relationship between any direction between the interest rate and private investment.

5. There is a bilateral relationship between private investment and direct taxation, each causing the other.



Vol.7, No.22, 2016

62

Fourthly: Co_integration Test

So that we can hold joint integration must be variables stable study the same class I(1) .since the test the root of

unity among us that the variables stable at various degrees, we can not test common integration in this situation.

The absence of a complementary relationship between the variables in the long term does not mean that

there is a relationship between the variables in the short term, therefore, will be the use of the analysis of the

components of the variance a respond to the backlash by the statement of the relationship between the variables,

and their importance in the description of the behavior of the model and giving forecasts to decision makers.

Fifthly: Variance Decomposition

The importance of the analysis of the components of the variance in that it gives the relative importance of the

impact of the sudden change in each variable model to all variables in the model.

The analysis of the components of the variance of investment:

When applying this test to the variables in the model shows us table No. (6) Private investment is strongly

influenced by changes in the gross domestic product (GDP) and government spending and IMF, as well as interest

rate and taxes but to varying degrees, this is evident through attrition in the interpretative declarations for

investment through exposure-time to increase the strength of the interpretation of the changes in the model

variables.

Where it is clear that private investment explain the rate (100%) of himself during the first year, then

force starts interpretative declarations decreasing up to about (39.61%) in the fifth year, and (28.45%) in the tenth

year.

On the other hand, we find that the change in real GDP explains about (32.97%) in the fifth year, and

(29.02%) in the tenth year of the wrong forecast in investment.

With regard to the presentation of the IMF and the interest rate _The representatives of monetary policy

_ we find that the presentation of the IMF interpreted or (15.28%) in the fifth year in spite of the increase of these

percentage in the following years but this ratio decreased to reach (17.48%) in the tenth year. The rate of interest

was interpreted slightly as interpreted or (2.71%) in the fifth year (10.89%) in the tenth year. This refers to the

effectiveness of monetary policy in the impact on investment in the short term.

With regard to government spending and direct taxation _ the representatives of the financial policy _ we

find that government spending interpreted the rate (2.03%) and (7.32%) in the fifth year and 10th respectively of

the wrong forecast in investment. Interpreted direct taxs rate (7.39 %) and (6.84%) in the fifth year and 10th

respectively of the wrong forecast in investment. Demonstrating the effectiveness of the financial policy in the

impact on private investment.

Table No. (6)

The analysis of the Variance Decomposition for investment


Sixth: Impulse Response Function

A. A function of the response from the reaction of the private investment to changes in the gross domestic product

(GDP):

Note of the figure (7) in response to the reaction of each of the Model variables and found that the impact of the



Vol.7, No.22, 2016

63

GDP would positively affect the private investment and the level of moral passable, where this influence on the

length of the period. Note that this result correspond with the result of the analysis of the components of the

disparity which between the increasing force interpretative declarations of GDP in the predictability of the Error

output in private investment over time, this result agrees with the study (Ahmad Badawi, Sudan, 2008) which

indicated the presence of a positive relationship directly between GDP and private investment.

This will answer the question the assumption of the first research that there is a direct relationship

(positive) Statistical indication of moral between GDP and private investment.

B. A function of the response from the reaction of the private investment to changes in the rate of interest:

Through testing shows us that any random shock in a variable interest rate negatively affect on private investment

and the level of moral passable, where the impact of the third year and the length of the period. Note that this result

correspond with the result of the analysis of the components of the contrast, in line with the results of a study

Haiyan County and Liu ( Haiyan Song and Zinan LIU, 2001) and the study (James 2009), which pointed to the

existence of a negative relationship between the interest rate and private investment. Thus clear to us question the

second hypothesis that interest rate a negative impact on private investment and moral significance.

C. A function of the response from the reaction of the private investment to changes in the presentation of the

money supply:

For the impact of the IMF, it is clear that any random shock in the variable monetary offer positively

affect the private investment and the level of moral passable, where this influence on the length of the period. Note

that this result correspond with the result of the analysis of the components of the variance and testing the causation

dialing the existence of unilateral relationship between private investment and any criticism that the presentation

of the IMF affect the private investment. Concurs with the results of a study (James 2009), which pointed to the

existence of a positive relationship between the IMF and private investment, and thus the question of the third

assumption shows that the impact of the IMF on private investment with a positive indication of moral statistical.

D. A function of the response from the reaction of the private investment to changes in government expenditure:

It is also apparent from the figure that any shock random variable in government spending would positively affect

the private investment and the level of moral passable, where the impact of the seventh year then begin to recede,

note that this result correspond with the result of the analysis of the components of the disparity which between

the increasing force interpretative declarations of government spending in the predictability of the Error output in

private investment over time. That answered the question of the fourth premise that the impact of government

spending on private investment with a positive indication of moral statistical, in line with the results of a study

Haiyan County and Liu ( Haiyan Song and Zinan LIU, 2001) and the study (James 2009) and study (Zyadat, 2000),

which pointed to the existence of a positive relationship between government spending and private investment.

E. A function of the response from the reaction of the private investment to changes in direct taxes:

As for the impact of direct taxes on private investment during the study period, it was clear that any shock random

variable in the direct taxes have a positive impact on private investment, and extends this impact to the first six

years and then start the negative impact which extends along the period this is in conformity with the result of the

( Haiyan Song and Zinan LIU, 2001), which pointed to the existence of a negative relationship between direct

taxes and private investment. Thus last assumption of this research shows that the direct taxes a negative impact

on private investment and moral significance.



Vol.7, No.22, 2016

64

figure (7)

A function of responding to the backlash by private investment and the variables of the Model

(gross domestic product (GDP), government spending, interest rate, and criticism, direct taxs)

Response I to Gdp Response I to R

Response I to M2 Response I to G

Response I to T

Conclusions and recommendations

The results

The aim of the study to the analysis of the development of private investment in Jordan during the period (1980_

2014) and determine the form of the relationship between the private investment and a group of influential factors

such as (gross domestic product (GDP), the money supply, and the interest rate, government spending, direct taxes).

The two researchers reached in this study to the following results:

1. Despite the difficult conditions in which the Jordanian economy, but the volume of private investment has been

characterized by increasing unstably V contains rise year or consecutive years and years or consecutive years, but

the general trend was increasing.

2. when calculating the rates of growth of private investment shows that investment achieved the average growth

rate (2.13%) during the study period.

3. By testing the unit root time series in the study, it was clear that all of the gross domestic product (GDP),

government expenditure (G), the IMF (M2) all stable at the second difference I(2), while private investment (I),

and the interest rate (R), and direct taxation (T) stable at the difference I(1).



Vol.7, No.22, 2016

65

4. Test Shows Granger Causality Test with that there is a bilateral relationship direction (reciprocal direction)

between private investment and government spending any each other causes, as well as there are bilateral

relationship between private investment and direct taxation. As the test showed that there is a single direction

between the gross domestic product and gross domestic investment, that the gross domestic product (GDP) cause

investment, also shows that there is a single direction between the IMF and investment, that the presentation of

the IMF cause investment.

5. The results of the analysis of the components of the variance that the presentation of the IMF, direct taxation

and play a larger role in the interpretation of the fluctuations on private investment, this is evidence of the

importance of these instruments in influencing the investment decision, where the force reached interpretative

declarations of these variables in their interpretation of changes in the Mediterranean Investment (14.86%),

(6.44%), while the proportion of the interpretation of each of the government expenditure, and the interest rate

small and uneven not interpreted significantly wrong forecasts in private investment.

6. test showed a function of responding to the backlash of the act that any sudden change in both the IMF and

government spending and gross domestic product (GDP) and a positive impact for several years to come on private

investment and the occurrence of any sudden change in each of the interest rate and direct taxation affects

negatively on private investment in Jordan.

7. Each of fiscal and monetary policy affecting private investment in Jordan, but the results showed the standard

analysis of the effectiveness of monetary policy with a strong impact on private investment in the short term, while

the impact of the financial policy in influence on private investment in Jordan in the long term are more effective

than the monetary policy.

Recommendations:

In the light of the above findings, the survey could provide a set of recommendations which can be summarized

as follows:

1. In view of the importance of the investment in the process of economic growth and economic development

should focus on increasing interest in investment, especially private investment and activating its role in increasing

productivity and diversification of the economic base to produce goods and services can compete in domestic and

foreign markets.

2. follow the appropriate policy toward economic variables and incentives to increase the volume of investments,

particularly private investment, such as the reduction of interest rates and the attempt to control inflation.

3. The need for coordination between the financial and monetary policy to influence in private investment.

4. The continuation of financial authority represented the government in general, Ministry of Finance, in particular,

under the guidance of the financial policy toward the strengthening of both sides of the aggregate demand and

supply macroeconomic stability through the removal of barriers to the private investment expenditure domestic

and foreign investment.

References

1. Ethel aljo mrad, due to the variables affecting the investment of the local private sector in Jordan, the Center

for Strategic Studies, Amman, 1996, p.8

2. Saeed Hallaq and Nadera Maryan, private investment and its impact on economic growth in Jordan in the

period (1975_1996m), studies magazine Administrative Sciences, 2000, vol. (27), the number (2).

3. Hashem, Mustafa,"measure the impact of the financial and monetary policy, the most important changes in

the Egyptian economy during the period (1974_1997 m) and future trends," a doctorate thesis, Suez Canal

University, 2001.

4. The International Monetary Fund (IMF),"the Charter of good practices in the area of monetary and financial

policies", September 1999, official of the International Monetary Fund on the Internet.

5. The Chalabi, Duraid Kamel, investment and investment analysis, Dar alyazede scientific publishing,

distribution, 2009, Amman_ Jordan.

6. Zoubi, Osama, 1995, an analytical study of government investment in Jordan during the period (1976_1991)

Letter Master, the Jordanian University.

7. Agad, Emad, 2002, foreign investment in Jordan: its determinants, letter master, the Jordanian University.

8. Economic Observatory _The Jordanian University (2011) entitled "The Jordanian economy: a vision of the

future" is available through the web site Http://www.amman-stock.com/showthread.php?p=108829

9. Alnsour , Ma'en, the evolution of the investment climate in Jordan, the promotion of investment, Amman,

2005.

10. The institution of investment, policies for the promotion of investment, search, 1998, p.5.

11. The institution of Investment Promotion and Research, 1998, p.5.

12. The Jordanian central bank, the statistical data yearly.

13. The General Statistics Department - analytical reports and statistics, annual reports.



Vol.7, No.22, 2016

75

Pension Superannuation Allowance Indexation in Ghana: Reality

or Myth?

John Bosco K. Damnyag Faculty of Information Technology and Communication Studies, University of Professional Studies Accra,

P. O. Box LG149, Accra Ghana.

Abstract

This study sought to examine the pension indexation in Ghana in the light of the prevailing macroeconomic indicators couple with the overall performance of the Social Security and National Investment Trust (SSNIT). The bases of pension superannuation allowance indexation remained questionable and a subject of dissatisfaction among retirees. The study purposively gathered time series data from 1991 to 2013 in relation to annual augmentation of pension superannuation allowance, Treasury bill rates, inflation rates, minimum wage and the performance of SSNIT pension scheme. The data were analyzed using paired wise observation test to ascertain whether beneficiaries of the scheme get real positive return on their investment and the sustainability level of the scheme. The findings of study revealed that the pension indexation is not significantly different from the macroeconomic indicators except Treasury-bills (T-bills) rate but significantly different from the performance of the scheme. Furthermore, retirees do not get real positive returns on their investments and the sustainability rate of the scheme is on the decline. The study concludes that the SSNIT pension allowance indexation is unrealistic and the scheme is not sustainable at the current operational level. The Trustee should engage in more profitable investment portfolios, minimizes its administrative expenditure and review the pension indexation upwards to ensure retirees get real positive returns for their investment. The article 80 of the pension act 766 which provides legal backing to pension indexation in Ghana should specify the relationship between pension indexation, inflation and minimum wage rates. Keywords: Pension Indexation, Reality and Myth

1. Introduction

The rising life expectancy rate of people coupled with the high unemployment level posed a lot of worry to the aged, governments and pension fund administrators in recent times. Longevity is a source of economic insecurity in that individuals may outlive their financial capacities to maintain themselves and their dependents (Joe, 2011). In developing countries, populations are aging much faster than they did in industrial countries and this is a cause for great concern. According to world population study in 2006, there is an aging population with a declining birth rate; the population over 65years was 4.1% in 1900, 11.6% in 1982, 13% in 2000 and projected 17.5%, 30% in 2020 and 2050 respectively. Life expectancy in Ghana was relatively low (45.53years and 46.15years) for male and female respectively in 1960, (48.45 and 50.26) in 1970, (51.08 and 53.52) in 1980, (55.68 and 57.88) in 1990, (56.23 and 57.78) in 2000, (59.73 and 61.54) 2010 and (60.52 and 62.51) in 2015 (Mundi, 2016). This shows an increase in life expectancy for both males and females which can be attributed to scientific advancements in medicine, technology, improve life style of people and other social intervention programs.

According to the life cycle model, an individual lives for two periods, in the first period he earns a wage for his labour and in the second period he is retired, and savings from his wage income cater for the second period consumption with a constant rate of interest (Atkison & Stiglitz, 1980; Lawrance, 2003). The high unemployment rate and the unsustainable nature of private or self-employed businesses in the developing countries turn to question the future of such people during their old age. The saving habit of people in relation to non-mandatory pension instruments is quite erratic and savings towards pension aside the compulsory pension scheme is on the decline. Personal savings in Ghana had rarely gone beyond 15 percentage mark of GDP, attaining an average of 10.15% in the 1970s, 4.75% in the 1980s, 7.53% in the 1990s and 5.4% from 2000 to 2010 (Larbi, 2013). Pensioners generally dependent on the mandatory schemes for their old age livelihood with high expected lumpsum and monthly superannuation allowance.

Life after retirement is confronted with aging and health care challenges, family dependents couple with shrinking sources of income. Care for the aged may take the form of the state support system or the family care system. While in the developed countries it is more of the state responsibility, in the developing country the responsibility is on the extended family (Liu, 1998). In Ghana the extended family system used to serve as the social protection for family members during old age where active family members support the young and the aged ones. The evolution of formal social protection has virtually eliminated the extended family system there by rendering care for the aged neither the direct responsibility of the state nor the extended family. The state or the employer in Ghana contributes currently 13.5% of employee’s basic salary towards the person’s first Tier pension scheme. This mandatory contribution frees the state or employer from the employee during retirement challenges as it is expected that such contributions will provide monthly superannuation allowance for the retiree. Conversely,



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whether you support your extended family during active work life time or not, a retiree is not guarantee reciprocal financial support.

The main secure source of livelihood to the aged in Ghana is the pension benefits. The pension benefits can take the form of invalidity, lumpsum, superannuation allowance or survivors’ benefits. The focus of the study is to examine the fairness of pension superannuation allowance indexation in Ghana in the light of the prevailing economic indicators and the performance of the pension scheme. The comparison of pension allowance increment to the prevailing macro-economic indicators is key to the sustainability of the livelihood of retiree in Ghana. Despite the fact that the Social Security and National Insurance Trust (SSNIT) pension scheme is a social insurance and not a provident fund where by individuals have their own account, social insurance benefits computation is still based on employee’s contribution. On retirement, employees’ contributions are used in computing the total benefits due the person and a proportion of 25% is paid as lumpsum and the remaining 75% for the superannuation allowance. As a result of the irrational spending pattern of human beings, the whole amount could have been paid to the person, but the scheme continues to manage the superannuation component. This therefore ascribe to the fact that there is no cost in collecting the contribution as far as retirees are concern apart from ensuring that their funds are invested judiciously.

According to article 80 of Ghana social security Act 766, the Trust shall annually review the pension payment which shall be indexed to wage inflation rates of active members or another rate determined by the Trust in consultation with the Board of the Authority. It is against this backdrop that this study sought to examine the pension allowance indexation in Ghana in the light of the various economic indicators and the performance of the SSNIT pension scheme. The paper is organized into review of related literature, research methodology, results, discussions and conclusion.

2. Literature Review

2.1 Conceptual Framework The conceptual frame was adapted from Schmahl (1990) in relation to his conceptualization of demography, labour market, capital market and social security linkages. The study adopted and modified Schmahl’s concept to include social security, capital market, pension package and pension life linkages. The modification provides a platform for comparison between the net returns on personal savings from the capital market and SSNIT pension benefits in the sustenance of retirees pension life.

Figure 1.Demography, Labour Market, Capital Market, Social Security and Pension life linkages

Source: Adapted from Schmahl (1990)

LABOUR MARKET Demand

Employment Supply

Wage Rate

SOCIAL SECRUITY/CAP30

Contribution Return on investment Benefits Expenditure

DEMONGRAPHY Number of people

Population Structure

National pension Regulatory Authority

Fertility Mortality

Migration

Labour force

participation rate

CAPITAL MARKET Insurance Banks/Fin. Institutions Stock Exchange Commission Foreign bureau /Other businesses

PENSION PACKAGE SSNIT/CAP 30 Benefits Benefits from other

investments

PENSION LIFE

Indexation Death



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The demography of a country depicts the number of people and the age structure of the population. The demography is directly linked to the fertility, mortality and migration rates of the country as well as labour market activities and the operations of social security schemes (Schmahl, 1990). While the demography of a country depends largely on these indicators, the labour market rather depends on the demography of the country as indicated in figure 1. Increase in the fertility rate have the likelihood of increasing the population and increases in mortality and migration rates are most likely to cause a reduction in the population. The overall effect of these indicators on the demography and the consequential effect on social security depend on the impact of these changes on fertility, mortality and migration rates in the country.

The labour market and social security schemes have an interdependent relationship. The activities of the labour market depend on the employment rate of the country and the contribution of these people to the pension schemes (Schmahl, 1990). The social security schemes determine the retirement age of employees and this will determine the replacement rate from the labour market. Changes in the labour market conditions do not affect only the social security schemes in the country but also to a great extent the capital market (Kumado & Gockel, 2003; Lawrence, 2003). The pension regulatory authority has a supervisory role over all pension related activities in Ghana and since the second and third tiers components of the three tier pension scheme of the country are managed by operators of the capital market, and hence is linkage with the labour and capital markets.

The pension package depends on returns on investment from social security schemes and returns from investments in the capital market. Personal investment in the capital market is quite erratic and mostly unsustainable. This study is not so much interested in the interdependent nature of the various endogenous variables to pension life but rather, the reality of pension allowance superannuation indexation in relation to the macroeconomic indicators and the trustee’s performance. 2.2 Empirical Evidence A number of empirical research works had been carried out on pension planning and management of pension funds. However, majority of these research works over concentrated on the importance of pension scheme and its externalities to the detriment of whether the contributors are paid benefits that commensurate their contributions at the prevailing macroeconomic indicators rates. The uniqueness of this study lies in its key focus on whether pension indexation commensurate prevailing macroeconomic indicators and the scheme’s performance. As depicted in the conceptual frame-work of this research, the pension schemes, capital market, labour market, demography and pension package of a country are interdependent and researchers are always caught in the web as the change in one of these indicators affect the others making it difficult for researchers to focus on only one of these variables. The pension life is an output variable and has no interdependent relationships with any of its endogenous variables and this makes the study quite explicit.

Amu, M.E.K. and Amu, E.K. (2012) examined the saving behavior of rural households in Ghana. The study revealed that there is no defined saving pattern of Ghanaians as they save whenever there is excess income. The research also suggested that there is low knowledge about saving among rural households. This research work is quite related to the current study but it failed to discuss the returns on savings and the sustainability of livelihood of the retirees. Larbi (2013) explored the long run determinants of private savings in Ghana using co-integration approach. The findings of the study revealed that financial liberalization, per capita income and inflation are the key determinants of private savings. The study also pointed to the erratic saving rate of Ghanaians from 1970 to 2010. Despite the closed similarities and relevant relation between Larbi’s work and the current study, the former failed to distinguish between what component of savings rates are pension related and non-pension savings.

Aryeetey and Udry (2000) conducted a study on saving in Sub-Saharan Africa. The study suggested that, Gross Domestic Savings in Africa averaged only 8% of GDP in the 1980s, compared to 23% for Southeast Asia and 35% in the newly industrialized economies. The study also revealed that there is low savings in Africa as a result of array of transaction costs with formal financial markets, coupled with risk management strategies, production activities of households and savings in assets acquisition. Loaya et al. (2000) assessed the savings trend in developing countries. This study pointed out that savings rates around the world vary widely. The East Asians save more than 30% of gross national disposable income (GNDI), while Sub-Saharan Africans save less than 15%. These savings disparities do not call for a common saving policy due to the differences in income streams, preferences, demographics and economies. The determinants of savings are host of externalities, market failures and policy induced distortions.

Afutu (2011) researched on the impact of social security on the Ghanaian teachers and concluded that social security in Ghana has enhanced the standard of living of retirees who were teachers. The research sampled 50 basic school teachers on retirement and collected qualitative and quantitative data using the survey design. The study revealed that, public servants especially have benefited from the introduction of social security, however most of them were disappointed with the inadequate benefit received as they were expecting something higher. According to Agyemang (2011) in his study on the assessment of the returns on employee’s pension fund investment and the impact on future benefit payment, the returns on SSNIT investment were generally below the



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returns achieved by other investment funds over the study period. According to Musenge (2003), good governance in social security schemes is critical for the viability and

sustainability of the schemes. It is equally critical for building trust in institutions that have often been the subject of suspicion and scorn. One of the major sources of distrust in social security institutions in Africa is the mismanagement of the schemes, political interferences, government control of the composition of the board and inadequate benefits (Kawor, 2009; Oliver, 2003). Joe (2009) also argued that pension funds are invested in companies, households as well as the government which is in contravention with the scheme investment policies. Pension funds are used to grant loans to companies to allow for growth. Shares are also purchased in various companies in order to earn dividends. Loans are also granted to households in order to supplement their income for consumption. Governments also use pension funds to supplement their budgets.

A survey by Mercer (2006) of the governance of global retirement plans offered by multinational Corporations found that sponsoring employers are very concerned about the lack of governance of their benefit plans in the different countries in which they operate. A lack of resources (including skills) and weak local engagement were found to be the most common challenges multinational corporations had in meeting their global pension’s governance goals. Kaplan (1995) examined the top ten myths of social security in the United State of America as (1) there is a trust fund, (2) Social Security does not increase the federal budget deficit; (3) retirees are only recovering their own money, (4) Social Security will not be there when one retires, (5) retirement benefits are proportional to one’s lifetime earnings, (6) Social Security favors two-income married couples, (7) Social Security favors long-lived marriages, (8) one could do better investing directly, (9) working after retirement makes financial sense, and (10) retirement benefits are taxed more heavily than other pension.

Rauh (2010) conducted a study into whether state pension funds are sustainable and why the government should worry about state pension liabilities. The study analyzes the flow of state pension benefit payments relative to asset levels and contributions. Assuming future state contributions fund the full present value of new benefits, many state systems will run out of money in 10-20 years if some attempt is not made to improve the funding of liabilities that have already been accrued. The expected shortfalls raise the possibility that the federal government will be faced with a decision as to whether to bail out states driven to insolvency by their pension programs. The empirical literature review above demonstrated the veracity of research works carried out in the study area which points to the existence of research gap in the reality of pension superannuation allowance indexation in Ghana and hence the relevant of this study.

3. Research Methodology

The study sought to assess the pension indexation in Ghana and whether the monthly superannuation allowance is sustainable, commensurate the country economic indicators and the performance of SSNIT. The ontology of this study is positivism since pension indexation, monthly superannuation allowance, economic indicators and SSNIT performance can be quantified and objectively measured. The research paradigm is quantitative, deploying times series data on the various indicators from 1991 to 2013. The choice of period is based on the fact that effective social pension started in 1991 despite the promulgation of the 1972 pension act which was operated as provident fund until 1991. SSNIT had not yet released the 2014 and 2015 official annual report of the scheme and hence the limitation of the time series data from 1991 to 2013.

Secondary data were collected on pension fund inflow and outflow, pension superannuation indexation and macroeconomic indicators from 1991 to 2013. In terms of fund inflow and outflow data were collected on annual contribution, annual benefit paid, administrative expenditure, return on investment, fund size in addition to exchange rate and minimum wage. In relation to the macroeconomic indicators, data were also collected on T-bill rates, inflation rates and real return rates computed. The macroeconomic indicators data were collected from bank of Ghana website and the fund inflow, outflow and pension indexation data were obtained from the SSNIT annual reports.

The analytical techniques deployed in this study were the Pair-wised observation Test, the Pearson Product moment correlation Test and the student t-test. The Paired observation test was conduct on the SSNIT pension scheme performance indicators and the pension indexation. The pension indexation was also compared with macroeconomic indicators. The pair-wised test sought to determine whether there are any significant differences between pension indexation and SSNIT performance in terms of growth in contribution, funds size, benefits payment, expenditure and return on investment rate. The test equally assessed whether there is any significant differences between pension indexation and prevailing economic indicators in relation to Treasury bill, inflation, minimum wage and Ghana Cedi to US dollar exchange rates. The pearson product moment correlation assessed the association between the pension indexation and the macroeconomic indicators as well the trustee’s performance. The sustainability of the scheme was also put into test using the student t-test of mean.

4. Results and Discussions

The data collected on the pension scheme performance in relation to fund inflow and outflow, and the prevailing



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economic indicators were subjected to both descriptive and inferential analysis. The results of the analysis as depicted in the tables below formed the bases for the discussions, conclusion and policy implication of this study.

Table 1. Fund inflow and outflow analysis

Year

annual

Contribution

(Gh¢ m)

Benefits paid

(Gh¢ 'm)

Adm.

Expendi

ture

(Gh¢ 'm)

ROI (Gh¢

'm)

Fund

size(Gh¢'m)

Exchange

rate

(Gh¢=$)

Monthly

Min wage

(Gh¢)

1991 2.10 0.08 0.50 0.43 8.38 0.04 1.24 1992 3.20 0.25 0.70 0.89 11.85 0.04 1.24 1993 8.61 0.33 0.99 1.85 21.23 0.07 1.24 1994 8.34 0.81 1.78 2.73 29.64 0.10 2.13 1995 11.56 1.35 2.03 3.77 50.90 0.12 3.24 1996 17.00 2.08 3.05 7.68 72.62 0.16 4.59 1997 21.17 3.34 4.95 11.79 99.61 0.21 5.40 1998 23.52 4.54 7.09 16.88 118.17 0.23 5.40 1999 37.28 6.23 8.68 21.17 144.67 0.36 7.83 2000 45.88 9.55 12.32 17.86 205.33 0.67 11.34 2001 72.84 13.35 18.47 26.39 272.67 0.71 14.85 2002 100.17 19.46 22.38 38.59 387.00 0.77 19.31 2003 134.02 30.21 26.65 68.33 621.50 0.86 24.84 2004 163.25 46.55 36.92 85.93 878.00 0.89 30.24 2005 190.60 63.02 40.10 77.77 929.20 0.91 36.45 2006 286.80 79.87 51.83 134.75 1,182.00 0.92 43.20 2007 384.97 117.08 56.75 113.60 1,731.87 0.95 51.30 2008 418.75 163.43 62.37 159.91 2,228.75 1.07 60.75 2009 667.60 223.24 119.10 132.28 2,374.80 1.41 71.69 2010 576.83 310.75 92.92 215.58 2,900.61 1.45 83.97 2011 825.96 355.15 100.61 176.63 3,419.04 1.49 100.71 2012 934.13 443.15 145.67 524.24 4,280.60 1.69 120.97 2013 1159.71 692.31 179.25 515.42 5,564.78 1.96 141.48

Source: SSNIT Annual reports (various years) and Auditor General Reports Table 1 shows the annual pension contributions, benefits payment, administrative expenditure, return on

investment and fund size in millions Ghana cedis. The table also captured the Ghana cedi to dollar exchange rate and the minimum wages within the study period. There is a general steady growth of all these indicators in absolute terms which cannot easily be compared with the relative nature of pension indexation. Table 1 was transformed into relative terms or percentage growth as shown in table 2 to create common bases for the paired observation test.

Table 2.Percentage change in fund inflow and outflow and indexation

Year

% change in

contribution

% change in

benefits

% change in

expenditure

% change in

ROI

% change in

Fund size

SSNIT pension

Indexation (%)

1991 - - - - - - 1992 52 213 40 107 41 10.0 1993 169 32 41 108 79 10.0 1994 -3 145 80 48 40 10.0 1995 39 67 14 38 72 10.0 1996 47 54 50 104 43 30.0 1997 25 61 62 53 37 25.0 1998 11 36 43 43 19 14.0 1999 59 37 22 25 22 12.5 2000 23 53 42 -16 42 20.0 2001 59 40 50 48 33 21.8 2002 38 46 21 46 42 39.0 2003 34 55 19 77 61 34.0 2004 22 54 39 26 41 21.8 2005 17 35 9 -9 6 27.4 2006 50 27 29 73 27 20.0 2007 34 47 9 -16 47 15.0 2008 9 40 10 41 29 16.2 2009 59 37 91 -17 7 21.6 2010 -14 39 -22 63 22 11.0 2011 43 14 8 -18 18 7.0 2012 13 25 45 197 25 12.0 2013 24 56 23 -2 30 22.6

Source: SSNIT Annual reports (various years) and Auditor General Reports



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Table 3. Paired Test between Pension Indexation and the Scheme (SSNIT) Performance

Paired Differences

t df P-Values

Mean Std. Deviation

Std. Error Mean

95% Confidence Interval of the Difference

Lower Upper

Indexation - % Change in fund size

-18.27727 22.39766 4.77520 -28.20784 -8.34671 -3.828 21 .001

Indexation - % change in ROI

-29.00455 55.29473 11.78888 -53.52086 -4.48824 -2.460 21 .023

Indexation - % change in expenditure

-15.64091 28.13980 5.99943 -28.11740 -3.16442 -2.607 21 .016

Indexation - % change in benefits

-37.82273 48.37845 10.31432 -59.27253 -16.37293 -3.667 21 .001

Indexation - % change in contribution

-19.50455 39.24493 8.36705 -36.90477 -2.10432 -2.331 21 .030

Source: Author’s Computation The analysis in table 3 depicts the paired test between pension indexation and the performance of the

SSNIT pension scheme. The preliminary analysis revealed that the mean differences between the pension indexation and the scheme performance indicators are all negative which suggests that the scheme’s performance exceeded the pension indexation from the descriptive perspective. The p-values of 0.001, 0.023, 0.016, 0.001 and 0.030 for fund size, return on investment, expenditure, benefit payment and contribution growth rates respectively are all less than 5% (0.05) significant level. This suggests that there are significant mean differences between the pension indexation and the scheme performance indicators.

Table 4. Economic indicators

Year Inflation

(%)

91-day

T-bills

(%)

% change

in

exchange

(Gh¢=$)

% change

in min.

wage

SSNIT

Pension

Indexation

(%)

real

return %

Fund

sustainability

ratio (yrs)

1991 18.03 21.05 33.33 111.1 - - 14 1992 10.06 27.13 0.0 0.0 10 -0.06 12 1993 24.96 34.78 75 0.0 10 -14.96 16 1994 24.4 34.78 42.86 71.74 10 -14.4 11 1995 58.04 45.06 20 51.9 10 -48.04 15 1996 46.56 47.88 33.33 41.67 30 -16.56 14 1997 27.9 47.53 31.25 17.65 25 -2.9 12 1998 19.3 28.67 9.52 0.0 14 -5.3 10 1999 12.5 34.18 56.52 45 12.5 0 10 2000 24.9 41.99 86.11 44.83 20 -4.9 9 2001 32.9 28.94 5.97 30.95 21.8 -11.1 9 2002 14.8 26.6 8.45 30 39 24.2 9 2003 26.7 19.6 11.69 28.67 34 7.3 11 2004 12.7 17.1 3.49 21.74 21.8 9.1 11 2005 15.1 11.4 2.25 20.54 27.4 12.3 9 2006 11.02 9.6 1.1 18.52 20 8.98 9 2007 10.7 10.6 3.26 18.75 15 4.3 10 2008 16.5 24.7 12.63 18.42 16.2 -0.3 10 2009 19.3 22.5 31.78 18.01 21.6 2.3 7 2010 9.38 12.25 2.84 17.13 11 1.62 7 2011 8.73 10.67 2.76 19.94 7 -1.73 8 2012 8.88 11.5 13.42 20.12 12 3.12 7 2013 11.65 18.79 15.98 16.95 22.6 10.95 6

Source: SSNIT Annual reports, Bank of Ghana, Ghana statistical Services, Ghana Stock



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Table 5. Paired observation Test between Pension Indexation and Prevailing Economic Indicators

Paired Differences

T Df P-values

Mean Std. Deviation

Std. Error Mean


Lower Upper

Pension Indexation – Inflation

-1.91783 13.96366 2.91162 -7.95616 4.12051 -.659 22 .517

Pension Indexation - T-bills

-7.23478 14.43737 3.01040 -13.47797 -.99160 -2.403 22 .025

Pension Indexation - Exchange rate ($)

-3.59304 26.56200 5.53856 -15.07931 7.89323 -.649 22 .523

Pension Indexation - Minimum wage

-10.55348

27.02115 5.63430 -22.23830 1.13134 -1.873 22 .074

Source: Author’s Computation Table 4 captured the prevailing macroeconomic indicators within the study period. There is a continuous

fluctuation of the economic indicators which does not necessarily implied similar fluctuating performance of pension schemes in Ghana. This postulation is supported by the assertion that economic indicators have their sensitivity limit with regards to pension performance. Table 5 depicts the pair-wised test between pension indexation and the prevailing macroeconomic indicators. The descriptive analysis revealed that all the mean differences between pension indexation and the economic indicators are negative which suggest that all the economic indicators exceeded the pension indexation. The significance of these differences was ascertained from the inferential analysis. The p-values of 0.517, 0.523 and 0.074 for inflation, exchange rate and minimum wage respectively which are greater than 5% (0.05) level of significance suggest that there are no significant mean differences between pension indexation and the economic indicators such as inflation, exchange rate and minimum wage. Conversely the p-value of 0.025 which is less than 5% (0.05) significant level implies that there is significance mean difference between the pension indexation and Treasury bill rates.

Table 6. Sustainability and Real Return on Investment analysis

Paired Differences

T Df P-value

Mean Std. Deviation

Std. Error Mean


Lower Upper

sustainability – Idealstable (15yrs)

-4.73913

2.64948 .55246 -5.88485 -3.59341 -8.578 22 .000

real return - zero return

-1.64000

14.22704 3.03322 -7.94792 4.66792 -.541 21 .594

Source: Author’s Computation The pension fund sustainability which is the ratio between the fund size and the total expenditure was

computed and compared with the assumed ideal sustainability rate of 15 years. This assumption is grounded on the premise that the current full pension qualification under the SSNIT pension scheme is a minimum of 15years contribution, attainment of age 60 years among others. There is a negative difference of 4.739 years between the fund sustainability and the assumed ideal stable rates with a p-value of 0.000 which suggests that mean difference is significance at 5%. The mean real return difference was negative and the test analysis with 0.594 p-values which is greater than 5% (0.05) suggests that the negative mean real return is not significantly different from zero return. The correlation between the pension indexation, macroeconomic indicators and SSNIT performance is not significant and even negative in some cases as depicted in the Appendix.

5. Conclusion and Policy Implication

The pension indexation recorded negative differences between all the scheme performance and prevailing economic indicators. All the negative differences in relation to the scheme performance are significant which confirmed that pension superannuation allowance indexation in Ghana is far less that the relative growth rates of pension contribution, administrative expenditure, benefit payment and return on investment. The negative differences between the pension indexation and the economic indicators are not significant for inflation, Ghana cedi and dollar exchange rates and national minimum wage and the converse for Treasury bill rates. The results of



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the study also ascribed to the fact that retirees do not get positive real return on their pension superannuation. The pension fund sustainability which measures the viability of the scheme and its ability to settle all expenditure or liabilities that fall due is on the decline and even below expectation.

The legal determinant of SSNIT pension superannuation allowance indexation in Ghana is enshrine in article 80 of the social security Act 766 which states that “ the Trust (SSNIT) shall annually review the pension payment which shall be indexed to wage inflation rates of active members or another rate determined by the Trust in consultation with the Board of the Authority”. The analysis of the study revealed that the annual pension indexation in Ghana is less than the economic indicators including the minimum wage and prevailing inflation rate. The other rates determined in consultation with the SSNIT Board per the Act 766 cannot be attributed to the scheme performance due to the fact that the scheme performance indicators far exceeded the pension indexation. The underpinning of pension indexation in Ghana is therefore a myth and not a reality.

The policy implication of the findings and the conclusion of the study suggest that the board and management of SSNIT, the pension regulatory authority and the Government should review the disconnect between nonpayment of realistic pension indexation rate culminating into negative real return on the part of retirees and the unsustainability rate of the fund. The fund inflow and outflow in relation to return on investment and administrative expenditure respectively are potential activators of the disconnect and should also be reviewed.

References

Afutu, T. (2011). Impact of social security on the Ghanaian teachers. Central University Publication Accra-Ghana

Amu, M. E. K. & Amu, E. K.(2012). Saving behavior in Ghana: A study of Rural households in the Ho Municipality of the Volta Region. Journal of Social Science Research Vol. 1

Aryeetey, E. & Udry, C.(2000). Saving in Sub-Saharan Africa. Center for international development, Hardvard

University Press No. 38.

Agyemang, A. (2011). The assessment of the returns on employee pension fund investment and their impact on future benefit payment. Central University publication, Accra

Gockel, A., F. (1996). Formal Social Security System in Ghana. Accra, Ghana: Friedrich Ebert

Foundation publication.

Joe, A. (2011). The Impact of the SSNIT Pension Scheme on Its Contributors and Pensioners. Wisconsin University.

Ghana Publication, Accra . Kaplan, R. L. (2008). Top Ten Myths of Social Security. Social Science Research Network- id1087367

Kawor, S. (2009). Analysis of the Performance of Social Security and National Insurance in Ghana. University of

Cape Coast Publication, Cape Coast. Kumado, K., & Gockel, A. F. (2003). A Study of Social Security in Ghana. Friedrich Ebert Foundation (FES)

Publication, Ghana

Larbi, D.A.(2013). The Long Run Determinants of Private Domestic savings in Ghana: A Cointegration Approach. Journal of economics and sustainable development Vol.4. ISSN 2222-1700. Lawrence, D. (2005). Mobilizing Domestic Resources for Economic Development: The Role of Pension Funds in Ghana. Legon, Ghana: University of Ghana Legon. Liu, T. W. (1998). New Research Question Assumption that Non-Nuclear families cannot provide care. Ageing

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Economics Perspectives 23(4), 191-20

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Appendix

Table 7.Correlation matrix of SSNIT performance and Pension Indexation

Inflation rate

91 day T-bill rate

Percentage change in exchange rate

Percentage change in minimum wage

Percentage change in average GSE return rate

SSNIT pension indexation

Inflation rate Pearson Correlation

1 .755** .290 .303 .100 .131

Sig. (2-tailed) .000 .179 .159 .649 .551

N 23 23 23 23 23 23

91 day T-bill rate Pearson Correlation

.755** 1 .622** .231 .113 .016

Sig. (2-tailed) .000 .002 .289 .607 .943

N 23 23 23 23 23 23

Percentage change in exchange rate

Pearson Correlation

.290 .622** 1 .312 .109 -.220

Sig. (2-tailed) .179 .002 .148 .621 .313

N 23 23 23 23 23 23

Percentage change in minimum wage

Pearson Correlation

.303 .231 .312 1 -.078 -.197

Sig. (2-tailed) .159 .289 .148 .724 .366

N 23 23 23 23 23 23

Percentage change in average GSE return rate

Pearson Correlation

.100 .113 .109 -.078 1 .012

Sig. (2-tailed) .649 .607 .621 .724 .958

N 23 23 23 23 23 23


Pearson Correlation

.131 .016 -.220 -.197 .012 1

Sig. (2-tailed) .551 .943 .313 .366 .958

N 23 23 23 23 23 23

**. Correlation is significant at the 0.01 level (2-tailed).

a. Cannot be computed because at least one of the variables is constant.



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Table 8.Correlation matrix of Economic indicators and Pension Indexation

percentage change in contribution

percentage change in benefits

Percentage change in expenditure

Percentage change in ROI

Percentage change in fund size


percentage change in contribution

Pearson Correlation

1 -.097 .191 .162 .472* .093

Sig. (2-tailed) .667 .394 .471 .027 .681

N 22 22 22 22 22 22

percentage change in benefits

Pearson Correlation

-.097 1 .281 .181 .228 .110

Sig. (2-tailed) .667 .205 .419 .307 .625

N 22 22 22 22 22 22

Percentage change in expenditure

Pearson Correlation

.191 .281 1 .128 -.026 .229

Sig. (2-tailed) .394 .205 .571 .909 .306

N 22 22 22 22 22 22

Percentage change in ROI

Pearson Correlation

.162 .181 .128 1 .290 .051

Sig. (2-tailed) .471 .419 .571 .191 .823

N 22 22 22 22 22 22

Percentage change in fund size

Pearson Correlation

.472* .228 -.026 .290 1 .173

Sig. (2-tailed) .027 .307 .909 .191 .442

N 22 22 22 22 22 22


Pearson Correlation

.093 .110 .229 .051 .173 1

Sig. (2-tailed) .681 .625 .306 .823 .442

N 22 22 22 22 22 22

*. Correlation is significant at the 0.05 level (2-tailed).



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Industrial Investment in Ma'an Governorate, Obstacles,

Opportunities and Successful Projects

Bassam Abu Karaki Mohamad Ali Helalat Suleiman A. Al Khattab

Faculty of Business Administration, Al Hussein Bin Talal University, P.O. Box 20- Ma'an- Jordan

Abstract: Industrial investment is one of the most important factors that help achieving sustainable economic development.

This study aims to explore the obstacles, which constrain industrial investments in Ma'an Governorate (located in

south Jordan) and the incentives to promote these investments. It also aims to explore investment projects with

successful future opportunities. A survey on government and private departments’ managers, individual

entrepreneurs, and professionals in Ma’an Governorate was conducted for data collection. A total of 300

questionnaires were distributed. Out of this number, only 186 were returned. The response rate was about 58%.

One-sample t-test and descriptive statistics showed that there are obstacles facing industrial investments, on the

other side it showed that there are real incentives for industrial investments. The research findings show that the

Governorate of Ma'an is eligible to attract various industrial projects, which have opportunities to be highly

successful in the future such as glass factories, plastics, marble, clothing, and construction materials industries.

This study recommends Jordanian government to improve basic infrastructure, promote private industrial

investments and exploit the opportunities in the area through directing industrial investments towards the available

resources. It also recommends promoting the governorate of Ma'an through media and highlights the prospects of

success in various fields of industrial investment in a positive way.

Keywords: Industrial Investment, investment obstacles, investment opportunities, future investment projects,

Ma’an Governorate.

1. Introduction:

In the light of recent changes world has witnessed during the past few decades, it has become imperative for

countries, especially small ones, to draw clear economic vision with solid foundations in order to achieve national

goals and overcome the obstacles and challenges that have arisen with the modern concepts and institutions such

as globalization, WTO and others.

Jordan movement towards drawing a national strategy to encourage investment, economic reforms,

opening up to the surrounding Arab and international markets and signing a range of trade agreements, are all

essentials to provide appropriate environment to encourage and attract investment and achieve sustainable

economic development. The present study demonstrates industrial investments in the Southern Region of Jordan

(Governorate of Ma’an) to point out the obstacles and opportunities facing industrial sector in Ma’an. Although,

industrial sector faces significant challenges, it can be an attractive destination for industrial investment with a

variety of incentives that could make it a leader in economic development of Jordan. This study is carried out to

show general framework for industrial investments and obstacles which hamper investment opportunities,

therefore, suggests proper solutions and draw an appropriate strategy that fits future industrial investment

attractions in the area.

2. Problem of the Study

Ma'an Governorate has an exclusive investment environment that qualifies it to be an active in supporting national

economy. It is one of the largest provinces of the Kingdom that makes it rich in natural and mineral resources such

as phosphate, cement, glass sand and many valuable natural resources. Hence, the study problem arises from the

fact that; "Industrial investments in Ma'an are still limited as compared to the available opportunities and

resources".

3. Significance of the Study

The importance of this study stems from many aspects as follows:

· Although a number of studies and researches in different investment areas at national level were carried

out, however, studies related to Governorate of Ma'an were limited. The importance of conducting

specialized research in the field of investment in the province, including industrial investment would be

of great importance.

· Industry is considered most important factor of the economy, hence the current study intends to focus on

industrial investment and identifies its role in solving social and economic problems of the province.

· Ma'an is distinguished from the rest of the provinces of Jordan by several vital and strategic advantages;

most important is the large area and wide availability of natural resources. Therefore, the study is deemed

as a specialized qualitative addition in the field of industrial investment with the availability of these



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86

resources to push forward economic progress in the province.

· The current study monitors the most important indicators to attract and guide national and international

investors.

4. Objectives of the study

The main objectives of the study are as follows:

· To identify the nature of industrial investment in Ma'an.

· To identify the main obstacles preventing local and foreign industrial investment in the province.

· To identify investment opportunities in industrial sector and demonstrate their role in developing national

economy and local investment environment.

· To draw an appropriate strategy that fits with the parameters of the industrial investment future in the

province.


Investment was and still of great interest of developed and developing countries alike, because of its economic and

social outcome that is reflected on the level of progress of the societies of these countries.

One important fact that countries must take into consideration in order to cope with the rapid world

economic progress is transforming from a resource and consumption based economy to a manufacturing and

investment oriented economy. Countries have to work on building industrial base that will allow it to reduce its

dependence on imports and keep more value within the economy.

Degree of liberalization is one of the main determinants of investment, the more liberalized the trade

regime is, the more investment they attract. Investment on human capital is needed to enhance the absorptive

capacity, which in turn facilitates technology transfer, or trade reforms to increase access to foreign capital and

intermediate goods.

A study that finds a positive effect of FDI is that of Griffith, Redding and Simpson (2003), which

investigates both the dynamics of productivity growth in manufacturing establishments in the U.K. from 1980 to

1992 and the role of foreign multinationals. The authors focus on two mechanisms through which inward FDI can

affect either the level or the growth rate of domestic productivity, the first mechanism is the introduction of new

technologies. The second is that a foreign presence may increase competition in the domestic market, as well as

broaden the market by opening up to foreign markets. They find that foreign firms do indeed play a role in the

convergence process, as do other high-productivity domestic firms. An increased foreign presence within an

industry is correlated with productivity growth in domestically owned establishments through increased speed of

technology transfer. The latter is consistent with foreign presence stimulating competition and increasing

incentives for technology adoption1.

In a study conducted by Paolino (2009) examining the domestic investment, economic growth and human

development factors on foreign direct investment into China, the study indicate that when domestic investment

and economic growth in China are increasing, foreign direct investment is attracted to the country. Hence, domestic

investment is an important determinant to attract foreign investment. Domestic investment must be given priority

than foreign investment.

Growth depends on savings and investment in human capital on one hand Lucas (1988), and investment

in research and development on the other, Romer (1990) and Mattana (2004). In addition, it is argued that the free

market leads to less than optimal level of capital accumulation in human capital and research and development.

Therefore, the government may improve the efficiency of resource allocation through investment in human capital,

and encouraging private investment in high-tech industries

Jameel et al (2003) discussed the relationship between intensive use of technology and demand for both

labor and capital elements in economic activities in the long term, as well as their relationship to production costs.

The study included three major industries in Jordan, chemical, manufacturing and extractive industries. One of the

most important results was that the use of information technology has led to increased demand for labor component,

also these industries helped to increase the level of investment to its maximum potential and achieve cost savings

accompanied by expansion of production volume.

A study was conducted by Al-Dhmour (2004) on 41 companies which have joint investments in Jordan.

The study aimed to identify and analyze the motivating factors for joint investment in Jordan and to determine

their significance, as well as to identify investors' satisfaction with the elements of investment environment in

Jordan and analysis of the relative importance of the criteria used in the selection of a local partner. The study

concluded a set of results, the most important one was; there is an acceptance by investors of the joint investment

incentive. The level of investors' satisfaction in the elements of investment environment was ordinary. The study

1 United Nations Industrial Development Organization (2007), "Determinants of Total Factor Productivity: a Literature

Review" Anders Isaksson Research and Statistics Branch Staff Working Paper 02.



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also concluded that the possibility to classify the selection criteria of local partner was based on four key factors,

namely: knowledge and ability to communicate with official authorities, marketing capabilities, technical and

administrative capabilities, and personal and regulatory compliance.

Ministry of Industry and Trade (2010) in collaboration with governmental and private agencies in the

industry sector has developed a general framework of national industrial policy (National holistic Programme for

rehabilitation and development of industrial sector in Jordan). The study was culminated in the formulation of

Jordanian national industrial policy within six axes formed a whole integrated system of policies aimed at

achieving sustainable development, where these themes include: policies and legislations, government actions,

infrastructure support, information and services, financial and technical support, development of exports,

investment encouragement, human resources, environmental protection, specifications and standards, and finally

the partnership of the public and private sectors and activating the role of private sector. The Governorate of Ma’an

could implement these policies for the promotion of investment in the area.

Khrais et al. (2010) conducted a study on constraints facing garment industrial sector operating within

QIZ in Jordan. The study reveals that the level of basic services infrastructure, customs and clearance procedures,

double standards procedures, and Egypt's signing the agreement of qualified industrial zones are

all problems facing garment industrial sector operating within qualified industrial zones in Jordan. The study

recommends effective tools to solve the problems facing the garment manufacturing industries operating in the

QIZ in Jordan1. These problems are common for the industrial sector in Jordan, solving such issues could be of a

great help to promote investment in Ma’an.

Al-Shoura and Al-Bakri (2013) in the statistical analysis of their study “The evaluation of investment

environment in the industrial activity in Jordan” showed that the characteristics of economic infrastructure, the

economic investment environment and the industrial free zones have positive impact on attracting foreign

investments2.

A Study by Al-Hussein Bin Talal University (2004), the University has carried out a survey on economic

and social reality of Ma’an Governorate. The most important indicators shown by the survey, which are related to

industrial and economic sector, were as follows:

· General illiteracy rate for individuals over the age of 15 years was (15.2%).

· Percentage of labor force for individuals aged 15-64 years was (47.5%); (percentage of actually employed

was (28.5%), unemployed (19%).

· Percentage of individuals employed in the industrial sector whose ages are 15-64 years was (5.3%).

· Percentage of families that depend on handicrafts as income was (4.6%).

· Percentage of families that intend to establish income-generating projects of industrial projects (4.2%),

and craft projects (9.4%).

6. Theoretical framework

How can governments more effectively promote their locations? Industry is considered as one of the most

important achievements of societies, it is an indicator of living standard of a society, social welfare and progress

in various sectors, which leads to higher employment levels. Industry also contributes to development of education

and all other economic and social sectors; thus, it measures the progress or failure of a society.

According to Moore "industry is the total physical production that comes using machinery through

various sources of energy", Addakks (1999). Industry has also been defined as "All sectors of the industry and its

branches, including any partial or total change of material to produce a product which differs in terms of description,

shape, characteristics and composition, so that these works are constantly taking place within their own facility,"

(Jordanian Investment Encouragement Law, 1995).

Industry includes three main groups which are: First, Extractive industry based on the extraction of raw

materials from earth. Second, manufacturing industry based on the conversion of material to another material.

Third, The construction industry that includes various constructions, Addakks (1996).

The human factor, and what it aspires to the well-being and improvement of living standards and the

achievement of social goals, is the focus of industry and the main aim of manufacturing process. For this,

individuals shift towards industrial action depends on several factors; the most important are: (Addakks, 1999):

1. Selection of Work: it differs from one society to another depending on the technological level of the

community and availability of alternatives to work. In advanced industrial societies, industrial worker chooses

industrial work for lack of alternative work, because of the control of industrial sector on other sectors. In

developing societies, due to the weakness of industrial sector and limited production, individuals go to professional

1 Khrais, E., Azzam, Z. & Assaf, A. (2010). Constraints Facing Garment Industrial Sector Operating within the

Qualified Industrial Zones in Jordan, Zarqa Journal for Research and Studies Humanities, 10(2), 82-91

2 Al-Shoura, M. & AlBakri, A. (2013). The evaluation of the investment environment in the industrial activity in Jordan, Journal

of Accounting and Taxation, 5(1), 15-26.



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alternatives instead of working in the industry.

2. Type of business: the profession is gaining great interest by worker, in addition to being a means to earn a living

and satisfaction of material needs; it is also a way to achieve self-fulfillment and social status. However, the worker

tendency to a certain profession is subject to the terms of that profession in terms of level of education and

experience required efficiency and field work.

3. Type of Industrial Corporation: Industrial Corporation is considered as an attractive element to the worker

through several variables, such as nature of its production, large size, reputation, financial, social advantages and

services it offers.

4. Other factors: include culture of individuals, work difficulty, wage rate, work site of work and its distance from

worker’s place of resident and other factors.

Despite the importance of industry in the development of national economies, developing countries are lagging

behind in this sector, particularly at the level of heavy industry. Economies of developing countries in general face

many problems, including the following:

1. Lack of financial resources, and general weakness in most economic activities.

2. Accumulation of debt, which exhausts these countries and restricts the available financial resources

channeled towards diversified investments including industrial investments.

3. Migration of many individuals with talent due to lack of financial and physical facilities that stimulate

creativity and innovation, such as lack of laboratories and shortage of funding for research and development

purposes

4. Obvious weaknesses in the administrative departments of institutions in developing countries in general,

facing many problems which are as follows (Shehadeh, 2001):

a. Restrictions in the regulations and procedures that result in the accumulation of transactions and delay of

approvals.

b. Surplus labor, which paralyzes the ability to fast-moving and creates fake jobs and increases restrictions

on transactions.

c. Meager wages that do not attract the most efficient workers and make some of them to conduct illegal

ways to meet their needs.

d. Failure to provide dedicated resources for public institutions, which increases the rigors of working

conditions and the difficulty of dealing inside.

With regard to Jordan, in particular, its economy is not far behind from the previous problems; in addition

to that it is facing particular problems which in turn affect the industrial sector. Alenaimat and Bakhit (2005) have

summed the most important of these problems and issues as followed: unemployment, poverty, small size of

market, instability of area politically and security, high imported energy costs following Iraq War, debt, weakness

of productive base, trade deficit, and budget deficit. Fakhoury (2002) adds the problems of high population growth

and low standard of living, which is an indication that would put a strain on national economy and the ability of

Jordan in terms of economic and social development.

7. Investment climate in Jordan and Governorate of Ma'an:

Investment is one of the most important elements of economic and social life, it depends on many activities that

achieve comprehensive and sustainable development, as well as being the backbone of the most important issues

in dealing with social problems such as poverty and unemployment, Al-Dhmour (2004).

Investment has multiple concepts, as it was defined as "the use of savings of goods that are not consumed

in the manufacture or product interaction”, as it was also defined by others as “the purchase of capital goods, which

are used directly in the production process, such as the purchase of machinery and buildings, or purchase additional

productive assets from third parties or its recreation", Mayada (1985).

Generally, investment climate is defined as: the overall situation and circumstances affecting the flow of

capital and employment trends, which include political and economic dimensions and efficiency and effectiveness

of administrative regulations that must be appropriate and suitable to attract and encourage local and foreign

investments, Ereqat, (1998).

The successive Jordanian governments have adopted in the past three decades, a set of policies and

practical steps that contribute to the overall economic development orientation towards the development and

promotion of investments. Hence, investment climate in the Kingdom, particularly in Ma'an, is affected by variety

of factors, the most important of which are summarized in the following:

First: general investment direction of the Government:

Generally, there is a plan towards the development of investments by the government, and the most important

evidence of this plan is as follows:

a. To promote infrastructure investment, which can be achieved throw: (Tareef, 2002)

· Strengthening economic liberalization and removal of barriers to trade and investment.

· Achievement of financial and monetary stability.



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· Restructuring capital market.

· Privatization.

b. Engage in international and bilateral agreements with Arab and foreign countries, and building industrial

cities, and promotion of Qualified Industrial Zones.

Second: Support of Small and Medium Enterprises:

The small and medium enterprises are considered the sources of national income, and the basic drive of national

economies. International statistics indicate that the contribution rate of small and medium-sized enterprise is (70-

80%) of GDP. A report prepared by the Directorate of Competitiveness in the Ministry of Planning and

International Cooperation has been pointed out that small and medium-sized enterprises in Jordan representing 98%

of the total public installations, employing about 6% of the workforce and contributes to 50% of GDP, Ministry

of Planning and International Cooperation (2014).

In the Kingdom, there are various active programs aim at supporting small and medium enterprises that

employ between 5-250 workers in the sectors of industry and services. Currently, the government is working to

coordinate and unify the efforts of these programs to enhance the competitiveness of national economy through

the provision of a strategy for the development of these projects, which are mostly complementary to each other

and can be collected within five groups provide technical and technical assistance, consulting, financing, training

and support policy, Ministry of Planning and International Cooperation (2004).

Third: Investment Promotion Law:

Jordan Investment Bureau (JIB) as a private institution implemented legislation that would attract, motivate and

encourage domestic and foreign investment through customs and tax exemptions.

With regard to industrial projects, Ma'an is classified as a category (C) development area that gets tax

exemptions by 75% as per the Investment Promotion Law. The industrial city of Ma'an, received a number of

incentives and exemptions to be granted to the investor such as:

A. Exemption from social services and income tax by 100% for a period of 20 years.

B. The existence of government support programs to bear part of the Jordanians workers costs during the

training period including wages, transportation and meals.

Fourth: Elements of Investment Business:

Huge resources and economics of scale are needed for many organizations to compete globally Amah, et al.

(2013)1. Investment business depends on a set of elements necessary for the completion of development and its

activities. According to Amish (2001) the most important elements include natural resources, qualified and

efficient human resources, scientific and technical resources, and cognitive and experience resources.

Governorate of Ma'an occupies a large amount of natural resources and wealth of Jordan. The economic

value of these resources qualifies the governorate to attract huge financial investments to exploit these resources.

The most important economic resources available in the governorate include:

a) Phosphate: available in large economic quantities, where Jordan is among the top six exporting countries.

Despite the existence of joint ventures for the production of many of phosphate products, this resource can be

tapped with large quantities and high quality with great demand for its products globally.

b) Cement: available in some areas of the province, but untapped yet.

c) White Cement: available at Al-Sharaah areas, but untapped yet.

d) Limestone: used in manufacturing Portland cement, white cement, ornamental stones and construction stone

industry.

e) Glass sand: Glass sand available in the Ma'an area and considered as the finest quality with purity of 99%,

available in large quantities and used in glass industry, and manufacturing of some computers and other glass

industry requirements.

f) Clay: used in pottery, bricks, construction tools, sewer pipes and tiles, heaters, pipes for electrical extensions

and electricity switches and other similar industries.

g) Sandstone: available in economic quantities and is used in construction purposes.

h) Tuff: used in manufacturing of insulating materials (rock wool) and light concrete prefabricated concrete, such

as plates.

i) Basalt: used in rock wool manufacturing and cement shields resistant to radiation, paving, paving railway track.

j) Semi-precious stones: including quartz and black granite, sandstone and Agate.

Other investment elements, it can be said that the province has satisfactory levels of human resources and training

centers, in addition to Al-Hussein Bin Talal University.

8. Methodology:

The study sample, table 1, consisted of 300 participants spread over four main administrative divisions in the

1 Amah, E., Nwuche, C. A. & Chukuigwe, N. (2013). The influence of size on organizational climate and corporate

performance in the Nigerian oil industry, IOSR Journal of Humanities and Social Science, 16(5), 38-45



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governorate, namely, Ma'an District, Al-Shoubak, Petra, and Al-Husaineh. Out of this number, 186 questionnaires

were returned; only 173 were usable. The overall response rate, as in Table 1, was about 58%, which is considered

high, Sekaran (2003).

Table 1. Distribution of questionnaires according to administrative divisions of Governorate of Ma'an

Administrative divisions Distributed questionnaires Recovered questionnaires Response rate

Ma'an District 150 80 0.53

Al-Shoubak 50 30 0.60

Petra 50 34 0.68

Al-Husaineh 50 29 0.58

Total 300 173 0.58

Secondary data such as academic studies, books, periodicals and Internet websites were utilized. In

addition, in-depth interviews with specialists and those interested in investment promotion were conducted to

develop a special questionnaire covering all dimensions of the study variables, namely, obstacles, investment

opportunities, and Successful future projects. To achieve validity of the study instrument, it has been sent to a

group of specialists in the field of study where some questionnaire items were modified according to their opinions

and suggestions.

The questionnaire consisted of three main parts. The first part contains 14 items, where the respondents

were asked to rate their responses to which extent these items represent obstacles constrain the industrial projects

in the governorate of Ma'an. The second part contains 12 items, where the respondents were asked to rate their

responses to which extent these items represent Investment incentives in governorate of Ma'an. The third part

contains 14 items, where the respondents were asked to rate their responses to which extent these items represent

successful future projects in the governorate. The Likert scale was used to measure all three variables, ranging

from minimum of 1="strongly disagree" to the maximum of 5= "strongly agree".

The methods of analysis employed in the study were descriptive statistics, test for normality, and one

sample t-test. In addition, Cronbach's alpha was used to test stability of the measuring instrument. The values, as

presented in Table 2, exceed the level of 70%, a ratio that can be reliable for the purposes of analysis and draw

conclusions, Hair et al. (2003).

Table 2. Cronbach’s alpha reliability coefficients for variables

Variables dimensions alpha

The instrument 40 0.87

Obstacles 14 0.78

Opportunities 12 0.80

Successful future projects 14 0.77

8.1 Study variables

A. Obstacles: this variable represents the problems and difficulties which stand in the way of evolution of

current industrial projects and for the establishment of future projects. Fourteen obstacles have been

addressed in this study.

B. Opportunities: this variable represents positive environmental factors (social, economic, political, and

geographical factors) that help in creating new investment opportunities and encourage domestic and

foreign investment capital to be invested in the proposed projects.

C. Successful future projects: this variable represents areas available for domestic and foreign investments,

which is expected to be accomplished subsequent to elimination of obstacles and exploitation of available

incentives.

8.2 Test of normality

Kolmogorov-Smirnov test was used for the current study to know whether the data are normally distributed or not.

Table 3 shows that data for all variables are normally distributed.

Table 3. K-S Tests of Normality

Kolmogorov-Smirnov

Statistic Df Sig.

Investment obstacles 0.084 173 0.181

Investment opportunities 0.086 173 0.165

Successful future projects 0.097 173 0.083

9. Hypotheses testing and discussions

One-sample t-test was conducted for testing hypotheses from H01 to H03 to know whether there are investment

obstacles, investment opportunities, or successful future projects in the governorate of Ma'an.



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H01: There are no obstacles constrain the growth of industrial investments in the governorate of Ma'an.

Table 4, one-sample t-test shows that there are serious obstacles constrain the growth of industrial investments in

the governorate of Ma'an; where the values for this variable were as follows: t(172)=15.50, P<0.001. In addition,

as shown in Table 4, the descriptive statistics support one-sample t-test, where (mean score=3.18), is more than

the general mean in this study, which is moderately agree (mean=3). These results indicate the existence of

investment obstacles in the governorate of Ma'an.

Table 4. Descriptive statistics and one-sample t-test for Investment obstacles in the governorate of Ma'an

Investment obstacles

One-sample t-test

t Df Significance

15.50 172 0.000

Descriptive statistics

N Mean Standard Deviation

173 3.18 0.58

Extent of obstacles existence: 1= strongly disagree; 2= disagree; 3=moderately agree; 4= agree; 5= strongly

agree.

In Table (5), descriptive statistics, we can divide the items into two groups. First group contains seven

items that achieved mean score more than (mean=3) which is the general mean in this study. The most important

items that considered as investment obstacles in this study were lack the infrastructure (mean score=4.50) and lack

of skilled labor (mean score=4.04), where they achieved the highest mean score respectively. The other five items

that achieved mean score more than the general mean are: the weakness of the governmental media to attract

industrial investment (mean score=3.99), scarcity of research and feasibility studies for industrial projects (mean

score=3.84), tendency in the governorate towards the government jobs (mean score=3.67), the weakness of

incentives offered by the investment promotion laws for investors (mean score=3.45), and the small size of the

domestic market in the governorate (mean score=3.99).

Second group also contains seven items that achieved mean score less than the general mean. The decline

in mean score means that these items could not be considered as enormous obstacles to the investments in the

governorate. Lack of capital (mean score=1.62) and natural resources (mean score=1.63) are most available

resources in the governorate. These two items followed by proper planning in selection of appropriate industrial

projects in the governorate (mean score=1.67). The rest four items are the difficulty of obtaining private financing

from banks and other lending institutions (mean score=2.00), weakness of government funding for industrial

projects (mean score=2.10), high level of production costs (mean score=2.16), and finally the decline in

educational and cultural standards (mean score=2.33).

Table 5. Investment obstacles in the governorate of Ma'an

Obstacle Mean SD

1- Lack of infrastructure to assist in various service sectors. (Consulting centers, decision-

making centers, public and private education services, health services, recreational

places, communications, transportation, hotel services, ... etc.

4.30 0.96

2- Lack of availability of skilled labor in the governorate. 4.04 1.39

3- The weakness of the governmental media to attract industrial investment to the

governorate.

3.99 1.05

4- Scarcity of scientific research and feasibility studies for industrial projects in the

governorate.

3.84 0.99

5- Tendency towards government jobs (public service). 3.67 0.96

6- Weakness of incentives offered by investment promotion law for investors. 3.45 0.94

7- Small size of domestic market in the governorate. 3.19 1.20

8- Decline in educational and cultural standards of the people in the governorate. 2.33 0.93

9- High level of production costs. 2.16 0.99

10- Low government funding for industrial projects. 2.10 0.92

11- Difficulty of obtaining private financing from banks and other lending institutions. 2.00 0.90

12- Lack of proper planning in the selection of industrial projects appropriate to the nature

of the governorate.

1.67 1.02

13- Lack of natural resources and wealth. 1.63 0.98

14- Lack of capital. 1.62 1.10

H02: There are no opportunities that can be considered as incentives for industrial investment in the

governorate of Ma'an.

One-sample t-test, Table (6) shows that there are opportunities that can be considered as incentives for industrial

investment in the governorate of Ma'an; where the values for this variable were as follows: t(172)=17.90, P<0.001.

In addition, as shown in Table 6, the descriptive statistics support one-sample t-test, where (mean score=3.35) is



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more than the general mean in this study, which is moderately agree (mean=3). These results indicate that there

are real opportunities to encourage investment in Ma'an.

Table 6. Descriptive statistics and one-sample t-test for Investment opportunities in the governorate of

Ma'an

Investment opportunities

One-sample t-test

t Df Significance

17.90 172 0.000

Descriptive statistics


173 3.35 0.63

Extent of representing investment incentives: 1= strongly disagree; 2= disagree; 3=moderately agree; 4=

agree; 5= strongly agree.

Table (7), the descriptive statistics, indicates that all (12) items achieved mean score more than the general

mean in this study. The best three items that considered opportunities were abundance and diversity of natural

resources (mean score=4.38), the geographical location of the governorate and its easy access to international

markets (mean score=4.19), and the existence of industrial city (mean score=4.02). The other nine items are still

considered important opportunities that encourage industrial investments in the governorate of Ma'an.

Table 7. Investment opportunities in the governorate of Ma'an

Investment Incentives Mean SD

1- Abundance and diversity of natural resources. 4.38 1.23

2- The geographical location of the governorate and its easy access to international

markets.

4.19 0.98

3- The existence of industrial city in the governorate. 4.02 1.30

4- Facilities offered by the investment promotion laws. 3.89 0.99

5- The important location of the governorate, near the port of Aqaba. 3.84 1.30

6- Positive viewpoint by people of the governorate towards industrial investment. 3.82 0.88

7- Security and stability in the governorate and whole country. 3.65 0.99

8- The existence of Al-Hussein Bin Talal University. 3.59 0.97

9- The presence of handicraft areas. 3.28 0.97

10- The availability of government support for industrial projects in the governorate. 3.10 1.22

11- The existence of Aqaba Railway. 3.05 1.50

12- The existence of overland port. 3.04 1.06

H03: There are no investment projects that have opportunities for success in the future in the governorate of

Ma’an.

Table (8), one-sample t-test, shows that the proposed projects in this study have in general, opportunities to be

successful in the future in the governorate of Ma'an; where the values for this variable were as follows:

t(172)=10.23, P<0.001. In addition, the descriptive statistics, as shown in Table (8), support one-sample t-test,

where (mean score=3.08) is more than the general mean in this study.

Table 8. Descriptive statistics and one-sample t-test for successful future projects in the governorate of

Ma'an

Successful future projects

One-sample t-test

t df Significance

10.23 172 0.000

Descriptive Statistics


173 3.08 0.74

Extent of successful future projects: 1= strongly disagree; 2= disagree; 3=moderately agree; 4= agree; 5=

strongly agree.

Table (9), the descriptive statistics, indicates that only five projects were found to be successful in the

future out of fourteen proposed projects. These projects are glass factory (mean score=4.16), plastics factories

(mean score=4.09), marble factories (mean score=3.88), clothing factories (mean score=3.87), and light building

materials factories (mean score=3.22).

The worst four projects to be invested in the future are: dairy factory (mean score=1.96), factories for

stone and brick (mean score=1.75), factories for meat packaging (mean score=1.72), and olive presses (mean

score=1.58).The other five projects that were found to be not successful in the future are: white cement factory

(mean score=2.79), tires factory (mean score=2.40), factories for normal cement (mean score=2.34), workshops

to manufacture pottery products (mean score=2.21), and workshops to manufacture traditional textile (mean

score=2.13). Despite these projects did not achieve acceptable mean scores, they still have opportunities to be



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successful projects in the future.

Table 9. The successful future investment projects in the governorate of Ma'an

Proposed projects Mean SD

1- Glass Factory. 4.16 1.02

2- Plastics factories. 4.09 1.60

3- Marble Factory. 3.88 0.99

4- Clothing factories. 3.87 0.78

5- Light building materials factories (screws, paint, etc ...) 3.22 1.23

6- White Cement factory. 2.79 0.87

7- Tires factory. 2.40 0.88

8- Factories for normal cement. 2.34 0.83

9- Units for manufacturing pottery products. 2.21 1.10

10- Traditional textile manufacturing units. 2.13 0.99

11- Dairy factories. 1.96 1.30

12- Stone and brick factory. 1.75 1.92

13- Factories for meat packaging. 1.72 1.44

14- Olive process. 1.58 0.95

10. Findings

The results presented in Table 4 show, that there are serious obstacles constrain the growth of industrial

investments in the governorate of Ma'an. Based on the descriptive statistics presented in Table 5, the most

important items that considered as investment obstacles were lack of infrastructure, lack of skilled labor, absence

of the governmental media to attract industrial investment, scarcity of research and feasibility studies for industrial

projects, low incentives offered by the investment promotion laws for investors, and the small size of domestic

market in the governorate. On the other hand, there are some items considered as obstacles but do not constitute

serious constraint to industrial investment in the governorate of Ma'an including, lack of capital, natural resources,

proper planning in selection of appropriate industrial projects, difficulty of obtaining private financing, shortage

of government funding, high production costs, and finally the decline in educational performance.

As presented in Table 6, the results show that there are real incentives for industrial investment in the

governorate of Ma'an. The descriptive statistics, shown in Table 7, indicate that all of 12 items that classified as

opportunities in this study were found to be incentives for industrial investment in the governorate. The best three

items that considered opportunities were abundance and diversity of natural resources, geographical location of

the governorate and its nearness to international markets, and the existence of industrial zone. The existence of

other nine items is still considered important opportunities that encourage industrial investment in the governorate

of Ma'an. These items include: investment promotion laws, governorate location (near the sea port of Aqaba),

positive viewpoint towards industrial investment, security and stability, Al-Hussein Bin Talal University, craft

areas, government support for industrial projects, Aqaba Railway, and overland port.

The industrial investment is one of the most important factors that help in achieving sustainable economic

development. The governorate of Ma'an has huge and diverse reserves of natural resources of raw materials and

high rate of demand on its products locally and at global levels. Tables 8 and 9 show that the governorate of Ma'an

is eligible to attract many industrial projects which have opportunities to be highly successful in the future such as

glass factories, plastics, marble, clothing, and construction industries. On the other hand, the other nine proposed

investment projects mentioned in table 9 have little opportunities to be successful in the future include factories

such as: white cement, tires, normal cement, pottery products, traditional textile, dairy, stone and brick, meat

packaging, and olive presses.

Finally, this study is consistent, in general, with the prior studies conducted in Jordan about investment

obstacles and opportunities. It is also partially consistent with the study conducted by Almagaira (1993) and the

study conducted by Ubidat and Aljulany (1993)

11. Summary and conclusion

The aims of this study are to explore the obstacles which constrain the evolution of the current and future industrial

projects in the governorate of Ma'an, explore the opportunities that can be considered as incentives for industrial

investments in the governorate, and to explore the investment projects that have great opportunities to be successful

in the future.

The study reveals that there are serious obstacles constrain the growth of industrial investments in the

governorate of Ma'an. There is a need for increasing government attention to improving basic infrastructure, and

work to guide the private industrial sector and stimulate development towards adopting a more active role in

maintaining service to the industry.



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94

The findings show that there are many of real incentives which promote industrial investment in the

governorate. For these reasons, the governorate is eligible to attract many industrial projects which have

opportunities to be highly successful in the future. Regarding the projects that have little opportunities to be

successful in the future, the government is required to carry out more feasibility studies about these projects. The

government is required also to exploit the potentials and opportunities available at the governorate in directing

industrial investments towards the available resources. It is also important to marketing the governorate of Ma'an

through various media and to highlight the chances of success in various fields of industrial investment in a more

positive way.

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Analysis of the Difference of Financial Literacy between Men and

Women

Masika Ikandari Dwi Wulandari

Faculty of Economics, Universitas Negeri Malang, Jalan Semarang 5 Malang, Indonesia 65145

Abstract

Financial literacy is important in human life. Not only for adult who have income but also for student. Student is

one of the components of society that are considerable in number, who has the ability and academic achievement

so that they are considered capable of reasoning an economic problem appropriately. Male and female students is

influenced by intrinsic and extrinsic factors that have different behaviors in looking at each of the financial

problems being faced. This research aims to analyze whether there are differences in the level of understanding of

financial literacy in the form of general knowledge, savings, insurance and investment between male and female

students of Faculty of Economics of 2013 at Universitas Negeri Malang. Data processing of this research using a

test independent sample T-test with the number of samples 314 respondents. The result of data processing shows

that gender is not a differentiating factor the level of financial literacy in the form of general knowledge, but the

differentiating factor the level of financial literacy in the form of savings, insurance, and investments.

Keywords: Financial Literacy, Knowledge, Saving, Insurance, Investment, Gender.

Introduction

Financial literacy is a series of processes or activities to improve knowlegde, skill, and confidence of the customers

and society so that they capable to manage their personal finances better (Otoritas Jasa Keuangan, 2014).

Furthermore, Sina (2012) stated that in principle financial literacy is a useful tool to change the behavior of students

to be smart financially, such as how to utilize revenues for saving, investing, protection, and satisfy their needs.

Today, financial literacy is especially important for students because student is one of the components of society

are considerable in number, who have the ability and academic achievement so that they are considered capable

of reasoning an economic problem appropriately, who would later give leave his role in economic activities to

boost economic growth.

At the time of the lecture, the students experienced a very crucial period while researching at the

university because they have to learn to be financially independent and responsible for the decisions they make.

Students in transition from dependence to independence financially and the student must make a plan that will

affect the well-being and future success (Nababan and Isdahlia, 2010). In the transitional period, the students tend

to spend is not because they need it but their desire to spend it, so that if there are not careful in managing their

finances, it would increase debt (Yulis, 2010). The desire appear to follow fashions and trends are growing to

support their appearance to be accepted in the herd which causes them to spend money on things that are not

necessary. As a result of their monthly allowance runs out prematurely and had to ask for extra money on his

parents. This is a vital issue that is often experienced by students during the lecture.

Male dan female students have different behaviors in looking at every problem including the financial

problems being faced. According to Lim and Teo (1997), it can be affected by intrinsic and extrinsic factors.

Intrinsic factor is a factor that is inherent in a person such as gender whereas extrinsic factors are outside factors

that affect a person such as financial difficulties being faced. The difference behavior, then there are differences

in the level of financial literacy among male and female students. Here is some empirical evidence on the existence

of differences in the level of financial literacy by gender were found by Lusardi and Mitchell (2009) found that

there is a difference between men and women in making financial decisions, and men better because it has the

financial knowledge higher. Similar results were also found by Ibrahim, Harun and Isa (2009), namely that the

majority of female students in Malaysia has the financial knowledge (financial literacy) are less high, and this can

lead to not properly aligned when making financial decisions every day. Danes and Hira (1987) and Chen and

Volpe (1998) also found that the level of financial literacy female students lower than male students. Meanwhile,

Krishna, Sari, and Rofaida (2010) found different findings that male students have the financial literacy levels

lower than female students, especially with regard to knowledge investment, credit, and insurance. Almost similar

findings found by Septiani and Rita (2013) that the female students has the financial literacy level higher than male

students in the general knowledge section, savings and loans, and investment. However in terms of insurance, the

male students is still higher than the sophomores.

Based on the findings above, its known that financial literacy can improve the accuracy of personal money

management, but based on empirical evidence above shows that between men and women have a level of

understanding of financial literacy inconsistent on any research results. The difference of these results according

to Lim and Teo (1997) is caused by differences in the object of research, differences in economic conditions, and

social and cultural differences, the different outcomes can be demonstrated in previous studies. Therefore, in this



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research intends to examine whether there are differences between gender factors related financial literacy in the

form of general knowledge, savings, insurance and investment with the use of students of the Faculty of Economics

of 2013 at Universitas Negeri Malang as a research object.

Research Method

The type of research is descriptive quantitative that is a form of research aimed to describe the existing

phenomenon, whether a natural phenomenon or made phenomenon (Sukmadinata, 2006). The results of this

research will be described in a systematic and objective. Furthermore, this research use a quantitative approach

means the research use a lot of numbers, ranging from data collection, interpretation of these data, as well as the

appearance of the results.

The data used are primary data on the results of questionnaires to the students of the Faculty of Economics

force 2013 at Universitas Negeri Malang as the sample of population. For the selection of the sample using

Accidental Sampling method is the technique of sampling or data source do with as they pleased, the selection of

sample members only at the moment or a particular time or sampling is done by selecting those who currently do

on-site research study. This technique is done because of time, effort, and funds that cannot take a large sample

and distant. The advantage of this technique lies in the accuracy of researchers selected data source according to

the variables studied (Arikunto, 2002). In the sampling, the important thing is to avoid sample size is too small to

cause the research cannot describe the actual conditions of the population and sampling that are too large can lead

to wastage of research costs. To avoid two mistakes are then used one method of determining the number of

samples by using the Slovin formula (Sevilla et. al., 1960), as follows:

� =�

1 + ��

n : number of samples

N : size of the population (population)

E : boundary fault tolerance is stated with a small, the percentage of fault tolerance, the more accurate the sample

illustrates the of the population (2%, 5% and 10%)

Its known that the amount of the student population Faculty of Economics Universitas Negeri Malang of

2013 is 1,474 students. With Slovin formula, the obtained number of samples that will be the respondent a total of

314 students with a tolerance limit or standard error of 5%.

The research instrument was a questionnaire adapted from Chen and Volpe (1998) that a number of 20

questions. Financial literacy is divided into four parts, namely the aspects or general knowledge, savings, insurance,

and investments. In each section consists of five financial literacy questions grains containing several indicators,

as follows.

Financial Literacy Aspect Indicator

General Knowledge 1. The benefits of personal financial literacy knowledge

2. Knowledge of personal financial planning

3. The liquidity of an asset

4. Knowledge of asset net

5. Knowledge about expenses and income

Savings 1. The interest rate calculation is

2. Knowledge of the time deposit

3. Knowledge of credit card

4. Knowledge of financial institutions

Insurance 1. General knowledge about insurance

2. Knowledge of motor vehicle insurance premiums

3. Knowledge about health insurance

4. Knowledge about life insurance

Investment 1. General knowledge about asset investment

2. Knowledge about interest rates and prices of bonds

3. Knowledge of mutual funds

4. Knowledge regarding the selection of risk investment

Table of indicators in every aspect of Financial Literacy

Well: Mendari dan Kewal, 2013.

The collection of data from the questionnaires will be processed using SPSS Version 21:00. In this

research using data analysis test independent sample T-test (Hypothesis Testing). Test independent sample T-test

is a test done to see if there are differences in the two samples were not related or mate with one another. In this

study, researchers will examine whether there are differences in the average of two samples consisted of men and

women in relation to the level of financial literacy owned by FE UM students force in 2013. Before performing

the test independent sample T-test there requirements that must be met (Sundayana, 2014) are as follows.



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a. Data is tested quantitative data (interval data or ratio data).

b. The data should be normally distributed, to know the data is normally distributed, it can be done with the

Kolmogorov-Smirnov normality test with SPSS version 21.00.

c. Data already distributed normally be tested Variants homogeneity. If the data is homogeneous then followed

by t test, but if the data is not homogeneous then continued with test of t '.

To test the hypothesis, its the decision to use two basic as follows.

a. Base Decision I

1) If the significance or value of Sig. (2-tailed) > 0.05 then H0 is accepted and Ha rejected.

2) If the significance or value of Sig. (2-tailed) <0.05 then H0 rejected and Ha accepted.

b. Base Decision II

1) If tarithmetic < ttable then H0 is accepted and Ha rejected.

2) If tarithmetic > ttable then H0 is accepted and Ha rejected.

Furthermore, if at the time of data processing is known that the data results of questionnaires are not normal then

the next step is using the Mann-Whitney test. And for the hypothesis test, Mann-Whitney test also uses two basic

decisions is as follows.

a. Base Decision I

1) If the value Asymp. Sig. (2-tailed) > 0.05, then there is no difference significant (Ha rejected).

2) If the value Asymp. Sig. (2-tailed) < 0.05, then there is a difference significant (H0 rejected).

b. Base Decision II

1) If Zarithmetic < Ztable then there is no significant difference (Ha rejected).

2) If Zarithmetic > Ztable then there is no significant difference (H0 rejected).

Result and Discussion

Experiment result of Normalitas Data test as follow.

Financial

Literacy Gender

Kolmogorov-

Smirnov Value Sig. Description

Part I Male 2,440 0,000 Not Gaussian

Female 2,279 0,000 Not Gaussian

Part II Male 2,237 0,000 Not Gaussian


Part III Male 2,453 0,000 Not Gaussian


Part IV Male 2,304 0,000 Not Gaussian


Combined Male 1,875 0,002 Not Gaussian


Source: Primary data processing, 2015

Normality Test from the test results, the data obtained will have a normal distribution so as to further

hypothesis testing using the Mann-Whitney test. The following is a summary of the results of the processing of

the Mann-Whitney test.

Part of Gender Mean ± SD Z score Sig Description

I Male 67,01 ± 19,46

-0,197 0,843 Does Not Differ Significantly Female 67,26 ± 22,21

II Male 63,82 ± 20,65

-5,601 0,000 Differ Significantly Female 76,94 ± 17,85

III Male 63,06 ± 20,65


IV Male 59,87 ± 21,66


Combined Male 63,44 ± 12,17


Source: Primary data processing, 2015

Based on the above table its known that there was no significant difference in the form of financial literacy

of general knowledge among students of both male and female. In this research male students of the Faculty of

Economics of Universitas Negeri Malang relative has the understanding of the basics of general knowledge about

personal finance and financial management so that they only need to be improved other capabilities related to

managing financial resources with appropriate private owned. Male students still can distinguish between primary

and tertiary requirement for a student. Male students can divide the financial resources held to prioritize the needs



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of his life in priorities such as food. Likewise, female students, in terms of basic knowledge of finance female

students also did not differ much from the male students, although female students are more diligent in making

notes every day, so in spending money, female students are more controlled. However, this does not provide a

significant impact on the financial literacy level differences between male students and female in the form of

general knowledge. They have the same knowledge as they are in the same class and the same field in the Faculty.

Furthermore, financial literacy in the form of savings are significant differences between men and women.

Female students are more aware of the importance of making financial records for any expenses that they do. The

notes were made in detail for spending the slightest, because women are more diligent in making each of her

writings. With a lifestyle like this, female students more control over all its expenditures so that they do not make

expenditures beyond the budget they create so that female students be able to save rather than male students. Male

students tend to assume that making a record spending and budget for each of their needs is troublesome. Male

students are classified as belonging to the type of financial literacy in the form of low savings tend to have a poor

financial management, there are no details of the expenditure and only limited in imagination that makes the

respondent cannot control its finances. It tends to be wasteful because it does not have a clear financial plan in

addition to the lifestyle that always follow the trend to make more respondents cannot control its finances.

For financial literacy in the form of insurance, data processing results show a significant difference

between men and women. This is because women are more careful about his future so as to guard the assets owned,

more women have regarding the readiness of emergency funds. Women are more worried about his future so that

a woman would be more careful in selecting the type of insurance in accordance with their needs. In using the

services of insurance, a woman can find out what he needed in the future. Insurance education is one type of

insurance that is promising for the future in which when a person is experiencing financial difficulties, it is not to

be confused thinking about the cost of education to a higher level for their insurance. In contrast to men, who tend

to be indifferent towards condition, men living patterns tend to go with the flow rather than a precaution. Male

students have a low degree of caution. This is because the average respondents do not know the main purpose in

buying insurance.

Lastly, the data processing showed that there were significant differences in the form of investments of

financial literacy among male and female students. Investment required tenacity and patience to overcome the ups

and downs of stock prices in order to get a higher return. Men tend to have less patience properties in terms of

waiting especially for things that are uncertain as stock prices rise and fall so that the possibility of return earned

higher or many women than men. Besides lack of patience, male students tend to be lazy to learn something new.

In otherhand, many guidebooks written by brokers, investors, and economists. Starting from the local to the foreign

language about market movements. How can predict the stock prices rise and fall. Everything will go well if we

understand it properly.

Conclusion

This research aims to determine whether the level of understanding of the difference between male and female

students of Faculty of Economics of 2013 at Universitas Negeri Malang. This study used a sample of 314

undergraduate students FE UM of consisting of 157 samples of male students and 157 female students. Based on

the description in Data Analysis, Results, and Discussion before, it can be concluded that there is no difference of

financial literacy in the form of general knowledge, between male students and female. This is because the students,

both male and female have to understand the basics of general knowledge about personal finance and financial

management so that they only need to be improved other capabilities related to managing financial resources with

appropriate private owned. They can differentiate between primary and tertiary requirement for a student, where

the student can prioritize the needs of his life in priorities such as food, textbooks, photocopying and print tasks.

In the form of savings, there are significant differences between male students and female students where women

have high levels of financial literacy is higher than male students. This is because female students are more diligent

in keeping records of expenditure and budgeted every requirement with care and caution. In contrast men who do

not bother to record every expenditure although male students know the importance of making a record of

expenditure. Male students tend to rely on submissions from parents when the quota per month disappeared in

contrast to female students who are trying to downsize and find part-time jobs to support their needs.

Then, for the level of financial literacy in the form of insurance there are also differences that female

students was higher than male students. Male students tend to think that they are still a student that does not have

income so they will not have to take out insurance to protect their assets. This means that male students are not

prepared to confront the events are not unexpected in the future. Unlike the female students, they are more careful

and cautious in managing life in the upcoming period. More female students to know the real meaning of an

insurance so that they know exactly what insurance will be taken according to their needs.

And finally, the level of financial literacy in the form of investment, have the same result that the financial

literacy of female is higher than male students. The reason is because the female students tend to be curious so

they want to learn more about the science of investing and the science of market movements. And female students



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are also not afraid to lose because they realize that investing is a business that there will be a profit and loss. In

contrast, male students tend to want to learn, but they still do not learn about science, fear of loss, and has no

money left so there is no capital for investment. Overall of the four forms of financial literacy shows that financial

literacy of undergraduate of 2013 in middle category.

References

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Chen and Volpe. (1998). “An Analysis of Personal Financial Literacy Among College Students, Financial Services

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Ibrahim, D., Harun, R., and Isa, Z. M. (2009). A Study on Financial Literacy of Malaysian Degree Students.

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Affecting (Survey On Student Universitas Negeri Malang).

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18, 369 - 386.

Lusardi, A & Mitchell, O. S. (2009). Financial literacy: evidence and implication for financial education. Trends

and issues may 2009

Mendari, A. S., dan Kewal, S. S. (2013). Level of Financial Literacy Among Students STIE Musi. Jurnal Economia,

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Strata I Faculty of Economics, Universitas Sumatra Utara. (Online), (http://repository.usu.ac.id/

handle/123456789/34557), accessed on July, 15th 2015.

Septiani, N., dan Rita, M. R. (2013). Financial Literacy and Spending Habits by Gender (Empirical Study at

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accessed on July, 17th 2015.

Sevilla, C. G., et. al. (2007). Research Methods. Rex Printing Company. Quezon City.

Sina, P. G. (2012). Analysis of Economic Literacy. Jurnal Economia, 8(2012): 135-143.

Sukmadinata, N. S. (2006). Educational Research Methods. Bandung: Remaja.

Sundayana. R. (2014). Statistics Education Research. Bandung: Alfabeta.

Surat Edaran Otoritas Jasa Keuangan Nomor 1/SEOJK.07/2014.

Yulis, I. (2010). Financial Intelligence and Emotional Intelligence in Managing Financial. Thesis 2 Program

Master of Management Universitas Kristen Satya Wacana Salatiga.



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Effect of Comparative Advantages, The Real Exchange Rate, Per

Capita Income to Indonesia Export Value in ASEAN

Galih Dwi Prastio Dwi Wulandari Hadi Sumarsono Faculty of Economics, Universitas Negeri Malang, Jalan Semarang 5 Malang, Indonesia

Abstract

One of the formulas in economics describes the trade (exports and imports) is one of the key economic growth of a country, in addition to consumption, investment and government spending. The goal of this study was able to formulate how much influence and relationship variables that have been determined are able to influence the export value of Indonesia in ASEAN. Variables contained in this research is the export value of Indonesia (V) as the dependent variable, then the comparative advantage (RCA), the real exchange rate (REER) and per capita income export destination countries (GDPP) as independent variables. This study uses regression analysis and panel data RCA, and found that based on the index of revealed comparative advantage, the pattern of Indonesia's comparative advantage in international trade is so dynamic. The data used is secondary data and panel data is the combination of time series and cross section (Philippines, Malaysia, Singapore, Thailand, and Vietnam) year period from 2005 to 2014, resulting in 50 observations. Overall results of the analysis of comparative advantage over Indonesia's trade with major partners at regional and country still shows a pattern that is consistent with the law of comparative advantage. Furthermore, the econometric estimation of equation exports resulted in the fact that the comparative advantage, the real exchange rate, and foreign demand, as reflected by the GDP per capita significantly affect Indonesia's export performance in ASEAN. Keywords: Comparative Advantage, The Real Exchange Rate, Per capita Income, Exports, Endowment Factor.

1. Introduction

Based on one of the most popular formulas in economics, trade (exports and imports) is one of the key economic growth of a country, in addition to consumption, investment and government spending. The studies conducted by Tambunan (2001); Abdurohman and Zuladin (2012) illustrates the importance of the role of exports in sustaining economic growth and job creation. Therefore, the Indonesian government also makes export as one of the levers of economic growth in Indonesia. Indonesia is one country that is experiencing openness economic.

It is described from Indonesian export ratio to gross domestic product in 2012 was 24.59%, while the ratio of imports to GDP in 2012 reached 24.77%. This means that Indonesia's export to GDP ratio is greater than the ratio of the world. Data growth in the ratio of world exports to world GDP, indicating that the development of world trade showed a surge very rapidly. In 1965 the ratio of exports to world GDP is only around 3.3%, jumped to 10.2% in 1975, in 1985 grew to 14%, increasing to 17% in 1995. The latest data show that in 2013 the ratio of exports to world GDP reached 32% (World Bank, 2013).

According to the theory well known from the Heckscher-Ohlin international economy, a country that adopted the law of comparative advantage in exports based on factor endowment or factor gift of nature, will be able to export more products and receive more profit trade so as to create the sustained growth in economic development. As far as the abundance of labor in developing countries can be utilized, it is a potential force in the competitiveness in labor-intensive commodities in international trade. This also applies to raw commodities, such as minerals, oil, results of the agricultural sector where Indonesia should have a comparative advantage in it.

But in fact the overall proportion of international trade in Indonesia is still lagging behind when compared to ASEAN countries though, such as Thailand and Malaysia which incidentally factor endowment characteristics that these countries have almost similar to Indonesia and Indonesia even more superior. In 2015 marks the official ASEAN regional countries step forward in the effort to deeper economic integration through one of increased trade between its member countries through the AEC (ASEAN Economic Community). This is a great opportunity for Indonesia with an abundance of various factors of production owned. But otherwise if Indonesia cannot apply the proper export strategy with Indonesia it is not impossible it will be targeted member countries of ASEAN are from year to year has made remarkable progress in export, such as Vietnam and Myanmar who have very cheap labor or Singapore that have become industrialized countries as well as Thailand and Malaysia now has its share of world trade is larger than Indonesia.

For it is necessary to build an analytical model that allows able to reflect the pattern of exports of Indonesia in ASEAN. The model is able to give you an idea to what extent the factors that allegedly capable of influencing the amount of the export value of Indonesia in the ASEAN region. Therefore, in this study based on literature study, researchers chose a comparative advantage as reflected by 8 index RCA commodity groups according SITC one digit, the real exchange rate and the income per capita of export destination countries as independent variables suspected of having an influence on the value of Indonesian exports in ASEAN. The purpose of the study was able to formulate how much influence and relationship variables that have been determined are



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able to influence the export value of Indonesia in ASEAN.


2.1 International Trade Theory

The economy is the case today in all parts of the world refers to an open economy, where every country will make trade between countries or international trade. Countries that trade are expecting an increase in welfare or the welfare state itself. According to Lipsey (1997), through trade, any person, region or nation can focus on producing goods or services that can be produced efficiently and then trade to obtain goods or services that are not produced. Source of comparative advantage of trade benefits are derived from the difference in opportunity costs between countries. The ability of a country to utilize the factors of production are owned by effectively has a comparative advantage in producing a commodity compared with other countries.

2.2 Concept of Comparative Advantage

The concept of the law of comparative advantage was first discovered by David Ricardo in the early 19th century the concept of comparative advantage Ricardo stated that a country will tend to produce and export commodities with production costs are relatively cheaper compared to other countries and production costs based on the production, namely labor (Salvatore, 1997). Heckscher and Olin (H-O) stress factors fare difference gifts of nature (endowment) and the prices of factors of production between countries as the most important determinant of trade.

H-O theory assumes that each country will export commodities which have relatively the factors of production are plentiful and cheap, and import the commodity factors of production are relatively scarce and expensive (Salvatore, 1997). According to Tambunan (2001), comparative advantage can be measured by using Revealed Comparative Advantage (RCA) and can be calculated from the value of the RCA.

One measure of the level of international trade performance was introduced by Balassa in 1965 based on the concept of comparative advantage is commonly called the RCA index. Simply put, RCA state i j to trade products measured by the percentage of the country's exports relative to world trade. So, if Xij is the value of exports of country j for product i, and Xit is the country's total exports, the RCA index can be described as follows:

RCAij = (Xij/Xtj)/(XiwXtw) Which w is a symbol to represent the value of the global total. RCA index is relatively easy to interpret.

If the value obtained is less than the world comparison then the conclusion it has no comparative advantage for these products in the world market and vice-versa. If the RCA index of a country is equal to or greater than 1 then the country has a comparative advantage in international trade and vice-versa if the RCA index is below 1, the state does not have a comparative advantage in producing a commodity for international trade.

Table 1.1 Details Classification of Goods Based on SITC 1 Digit Code

SITC Code

Detailed Analysis

0 Food and Live Animals Food and live animals 1 Beverages and Tobacco Beverages and Tobacco

2 Crude Material, Inedible, Except Fuels Raw Materials, Not Edible, Except Fuels

3 Mineral Fuels, Lubricants and Related

Materials

Mineral Fuels, Lubricants and the like

4 Animal and Vegetable Oils, Fats and Waxes Vegetable and animal oils, fats and Candles

5 Chemicals and Related Products, n.e.s Chemicals and the like

6 Manufactured Goods Classified Chiefly by

Material

The results are classified according to Raw Material Industrial Chemicals, and the like

7 Machinery and Transport Equipment Machinery & Transport Equipment

8 Miscellaneous Manufactured Articles Various Kinds of Goods Industry Results

9 Commodities and Transactions Not

Calssified Elsewhere in The SITC

Commodities and transactions not classified in the SITC

Source: Central Bureau of Statistics (BPS) and the UN Comtrade, Data Processed In calculating the index of RCA, it must be done before each commodity grouping to simplify the

calculation and analysis. International trade in the fixed rule, there are several kinds of basic standards of grading or so-called coding by classifying commodities according to specific criteria. One of the most commonly used is based on the commodity groups SITC (Standard International Trade Classification). Table 1.1 above outlines the details of classification by SITC one digit.

3. Research Methods

This research was conducted using a quantitative approach for the implementation of research based on the theory



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that became the basis of research and trying to explain an issue in this case regarding the effect of comparative advantage, real exchange rate, and per capita income of the partner countries export value of Indonesia-year period 2005-2014. The data used is secondary data panel data is the combination of time series and cross section. In this study cross section data is the data of five major trading partner of Indonesia in ASEAN (Philippines, Malaysia, Singapore, Thailand and Vietnam) and the period of time series data from 2005 to 2014, resulting in 50 observations.

Variables contained in this research is the export value of Indonesia (V) as the dependent variable, then the comparative advantage (RCA), the real exchange rate (REER) and export income destination countries per capita (GDPP) as independent variables. The data used in this research is secondary data. Secondary data constituante quantitative data obtained from several institutions and agencies, including the Central bureau of Statistics (BPS), Bank Indonesia (BI), the International Monetary Fund (IMF), World Bank and United Nations Commodity of Trade (UNCOMTRADE).

All data used in this research is secondary data including export value comes from UN Comtrade (United Nations Commodity of Trade). Secondary data used comparative advantage represented by RCA index and index RRCA sourced from UN Comtrade Based on the classification SITC one digit which is then processed. SITC classification systems trade as identification code to represent certain trade commodities in international trade. Data real exchange rate rupiah consists of nominal exchange rate of Bank Indonesia sourced of publications and consumer price index data each partner country are sourced from IMF publications are then processed. Data per capita income, per capita GDP is represented by partner countries comes from the publication of the World Bank. Data collection techniques in this study using the method of documentation.

Analysis of the data in this study using quantitative descriptive method. Descriptive method chosen to determine how the condition and the development of Indonesia's export performance. The next stage is to conduct a quantitative analysis using panel data regression techniques, to make it easier to analyze the extent whether the independent variables have been determined affect Indonesia's export performance. Processing data using the help of software Eviews and Ms. Office.

Panel Data Regression analysis is a combination of cross section with time series data. According to Gujarati (2006), the panel data method is a method that can be used to perform empirical analysis which is not possible when only using cross section data or just using time series data. The regression model for cross section data and time series respectively, are as follows: Model with cross section data

Yi = β0 + β1X1 + εi;I = 1,2,... N

N : the number of cross section data Model with time series data

Yt = β0 + β1Xt + εt; t= 1,2,..., T

T : the number of time series date Given the panel data used to analyze the effect of comparative advantage (RCA0-RCA8), the real exchange rate (REER), per capita income (PDBKAP) of the export value of Indonesia (V). Data panel is a combination of cross section data and time series data. Equations panel data in this study using a log linear form or leave a symbol of the natural logarithm (In) as in the model below, are intended for a unit change different variables into a percentage (%). Furthermore, the panel data model is written as follows:

In Vit = β0 + β1InRCA0it+β2 InRCA1it+β3 InRCA2it+β4 InRCA3it+β5 InRCA4it+β6 InRCA5it +β7 InRCA6it+β8

InCA7it +β9InRCA8it +β10 InREERit+β11 InPDBKAPit+eit

Explanation: V = Export value RCA0 = SITC commodity RCA index 0 RCA1 = SITC commodity RCA index 1 RCA2 = SITC commodity RCA index 2 RCA3 = SITC commodity RCA index 3 RCA4 = SITC commodity RCA index 4 RCA5 = SITC commodity RCA index 5 RCA6 = SITC commodity RCA index 6 RCA7 = SITC commodity RCA index 7 RCA8 = SITC commodity RCA index 8 REER = Real Exchange Rates GDPP = Income per capita β0 = Intercept β1 = Variable Regression coefficient SITC commodity RCA index 0 β2 = Variable Regression coefficient SITC commodity RCA index 1 β3 = Variable Regression coefficient SITC commodity RCA index 2



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β4 = Variable Regression coefficient SITC commodity RCA index 3 β5 = Variable Regression coefficient SITC commodity RCA index 4 β6 = Variable Regression coefficient SITC commodity RCA index 5 β7 = Variable Regression coefficient SITC commodity RCA index 6 β8 = Variable Regression coefficient SITC commodity RCA index 7 β9 = Variable Regression coefficient SITC commodity RCA index 8 β10 = Variable Regression Coefficients Real Exchange Rates β11 = Regression Coefficients Variable Income Per Capita e = Error Terms

i = Unit cross section major trading partners in ASEAN t = Unit time series 2005-2014


4.1 Comparative Advantage in Indonesia

Table 1.2 shows the RCA index of Indonesia in accordance with the commodity groups SITC 1 -digit in 2005 - 2014. Tabel 3.2 shows the group SITC 0 (food and live animals) Indonesia lost comparative advantage since 2007, but with RCA index is still close to 1 until year 2013, and in 2014 returned to have a comparative advantage. In 2006, the loss of Indonesia's comparative advantage due to the growth of this sector is lower than the average growth of other sectors.

Table 1.2: RCA Index SITC Group 1 Digit Indonesia Export 2005-2014

Year SITC0 SITC1 SITC2 SITC3 SITC4 SITC5 SITC6 SITC7 SITC8

2005 1.041 0.50 3.304 2.253 15.815 0.493 1.207 0.415 1.037 2006 1.047 0.47 3.884 1.976 16.670 0.495 1.211 0.373 1.027 2007 0.868 0.43 3.176 1.713 17.438 0.454 0.979 0.307 0.814 2008 0.994 0.49 2.786 1.597 18.473 0.438 0.983 0.332 0.811 2009 0.929 0.59 2.828 2.041 19.267 0.412 1.102 0.382 0.823 2010 0.924 0.59 3.172 2.065 19.799 0.467 1.073 0.362 0.820 2011 0.865 0.53 2.745 2.123 17.441 0.524 0.955 0.326 0.753 2012 0.968 0.60 2.365 2.053 19.187 0.519 0.958 0.361 0.783 2013 0.998 0.70 2.645 1.960 20.367 0.561 0.984 0.366 0.831 2014 1.098 0.45 1.947 2.193 23.892 0.593 1.013 0.358 0.919

Source : UN Comtrade, the data is processed Results of regression, comparative advantage (RCA index) SITC groups 0 does not have a significant

effect on the export value of Indonesia in ASEAN. This is reflected by the p-value t-stat greater than a. No significant effect of variable comparative advantage SITC groups 0 one of them thought to be caused by poor export percentage Indonesia's top commodity groups in ASEAN. The latest data show that in 2014 the value of exports of SITC 0 Indonesia in ASEAN amounted to US $ 2,708,052,340, or only around 7% of the total export value of Indonesia in ASEAN. So that changes in comparative advantage SITC group 0 no affect the export value of Indonesia in ASEAN.

In Table 1.2 SITC groups 1 (Beverages and Tobacco) in 2005 and 2014 Indonesia did not have a comparative advantage. Nevertheless RCA index trend continues to experience growth from 2005 to 2013. This was driven by a rapid increase in the portion of donations SITC group 1 of Indonesian exports. But in 2014, the RCA index for this commodity has been going down, it motivated many restrictions against Indonesian tobacco products in the international market, especially the products of clove.

SITC group 2 (Raw Materials, Not Edible, Except Fuels) has RCA index values fluctuate, this group is very sensitive to global economic conditions. This was reflected in the RCA index trend since 2008 has fluctuated at which time it was going economic recession in many countries of the world. This is because the demand for this commodity group depends heavily on demand for heavy industry. When the recession caused collapse of heavy industry so that the effect on the demand for this commodity group in the world market. SITC Group 3 (Mineral Fuels, Lubricants, and the like) are still the group with the largest share in the total export of Indonesia with the percentages 25%. From the years 2005 - 2014 Indonesia's position in this commodity group always has a comparative advantage. In 2005 to 2008, the RCA index value continues to decline, it is driven by the group's share of exports in world trade has skyrocketed as the impact of increasing energy consumption, especially in developing countries. The current economic recession 2008 and 2011 indices RCA Indonesia has just raised, but this does not happen due to a surge in exports of Indonesia, but rather to a decline in the percentage of world trade this commodity as a result of falling prices and trading volume. In 2012 and 2013 RCA index again decreased due to the decline in the value of exports of this commodity.

SITC group 4 (vegetation and animal oils, fats and wax) has the greatest RCA index, which reached double digits. This is because Indonesia is one of the largest exporters of this commodity group in the international



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market with a market share of 20% of world supply. From 2005 to 2014 Indonesia RCA index rose nearly 100%, which is consistent with the very rapid growth of export value of these commodities in the world market, even more than 500% from 2005 to 2014.

In the year of 2005 to 2006, Indonesia has a comparative advantage for SITC group 6 (Results Industries are classified according to Material Material), but in 2007 and 2008 indices RCA Indonesia is below 1, this is caused by the decline in the portion of the export value of Indonesia SITC group 6 to total exports Indonesia. The decline of the portion of the value of exports SITC group 6 Indonesia is still also continue until 2013. Only in 2009 and 2010, when the recession hit, the manufacturer contenders deeper decline so that in 2009 and 2010 Indonesia once again have a comparative advantage over the world although external factors act more as a trigger.

For SITC group 8 (Various Kinds of Goods Results Industry), Indonesia has a comparative advantage only until 2006. From 2007 to 2013 Indonesia have lost comparative advantage for labor-intensive commodity SITC group 8 with RCA index value is deteriorated. Attractions this can be caused by several factors, technology is increasingly able to replace human labor but can also be caused by other factors that make labor-intensive industries do not grow, such as poor logistics, labor costs are too high and so on. SITC Group 5 (Chemicals and the like) and SITC 7 (Machinery and transport) which is a group of capital-intensive industries and technologies that in fact a scarce resource in Indonesia has an index of RCA far below one during 2005 to 2014, or by word another Indonesia did not have the comparative advantage in international trade.

To learn more comprehensive comparative advantage, this study will also calculate the index RRCA (Regional Revealed Comparative Advantage). Referring to Richardson (1999), RCA Regional Index can be searched by replacing the letter symbol w be R.

RRCAij = (Xij / XTJ) / (XIR / XTR) In this RRCA analysis also conducted an analysis of the state of Indonesia's trading partners in ASEAN

as well as China and Japan as a comparison, it aims to obtain a broader picture of the pattern of Indonesia's comparative advantage in international trade.

Table 1.3 shows the position of Indonesia on the comparative advantages of regional ASEAN. Compared by five major trading partner of Indonesia in ASEAN, the proportion of the factors of production are owned almost the same. Therefore RRCA patterns between Indonesia with ASEAN more complicated. Four out of five (SITC 0-4) natural resource intensive group had RRCA index greater than one, only the group of food and live animals (SITC 0) having a value <1 this indicates that the condition of the food processing industry five trading partner countries ASEAN regional primary is generally better than Indonesia, particularly Malaysia, Singapore and Thailand.

Table 1.3 Regional indexes RCA Indonesia on 5 Main Partner in ASEAN Countries

Regional Year SITC

0 1 2 3 4 5 6 7 8

2005 1.16 0.98 4.64 2.52 4.25 0.66 2.43 0.30 1.20

2006 1.14 0.91 4.98 2.37 4.62 0.64 2.32 0.27 1.17

2007 1.07 0.90 5.13 2.19 5.01 0.70 2.08 0.27 1.08

2008 1.05 0.89 4.37 1.92 4.80 0.69 1.89 0.30 0.97

2009 0.95 0.99 4.73 2.34 5.16 0.62 1.87 0.30 0.93

ASEAN5 2010 0.91 0.85 4.61 2.37 4.66 0.61 1.79 0.28 0.85

2011 0.80 0.70 3.44 2.31 4.00 0.60 1.54 0.27 0.76

2012 0.93 0.73 3.60 2.30 5.19 0.59 1.51 0.29 0.80

2013 1.02 0.83 3.83 2.24 5.89 0.66 1.47 0.29 0.83

2014 1.08 0.90 3.05 2.19 6.96 0.69 1.58 0.29 0.91

Source : UN Comtrade, data processed Judging from the index value RRCA, Indonesia has a comparative advantage in labor-intensive group

(SITC 6) but at the same time does not have an edge on other labor intensive group (SITC 8). In general meaning in labor intensive industries Indonesia to compete against 5 major partner country in ASEAN, one of the reasons Indonesia still has a comparative advantage for commodity groups SITC 6 are groups other than labor-intensive also need a large proportion of the factors of natural resources which abound in Indonesia, In the group of SITC 8, since 2008 Indonesia has lost comparative advantage for this commodity group. This happens because when compared to the five main trading partner in ASEAN, Indonesia is a country with export value growth is the lowest for this group of SITC 8.

In the group of capital-intensive SITC 5 (Chemicals and the like) Indonesia did not have a comparative advantage over even the ASEAN countries which incidentally is also not the countries that have a proportion scattered capital resources and technology, especially against Malaysia, Thailand and Singapore this is an industrial base in ASEAN. In the SITC group 7 (machinery and transportation equipment) that is supported by the majority of automotive and machinery industry, the export value of Indonesia is the lowest when compared to the five countries of the ASEAN's major trading partners.



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Selection of the Best Model

Of the three models that have been in will estimate which model is most appropriate/suitable for purposes of research. There three trials (test) that can be used as a tool in selecting a panel data regression model which will be concluded to choose among the three models, Pooled Least Square (PLS), Fixed Effect or Random Effect (PLS, FE or RE) based on the characteristics of the data held, namely : F Test ( Chow Test) and Hausman Test. F Test (Chow Test) This test is performed to compare/select which model best among PLS or FE.

Table 1.4 Chow Test Result

Redundant Fixed Effects Tests

Pool: BS

Test cross-section fixed effects Effects Test Statistic d.f. Prob. Cross-section F 11.396645 (4,34) 0.0000

Cross-section Chi-square 42.524249 4 0.0000 Source: Panel Data Regression Output Eviews 8

Table 1.4 is an output of the F Test (Chow Test) with the help of software Eviews 8. If the probability value (Prob .) For Cross section F > a (0.05), the PLS model is chosen, but if the < a then model elect is FE. In the picture above the value of Prob. Cross section F of 0,0000 or in other words < 0.05 so that it can be concluded that the FE models more precise than the PLS model.

Hausman Test

Hausman Test is done to choose the best model between Fixed Effects and the Random Effect. In testing using Hausman Test, if the value of the probability (Prob.) Cross section value > A (0.05) then the model chosen is the RE, but if <a (0.05) then the model chosen is FE.

Table 1.5 Hausman Test Result

Correlated Random Effects - Hausman Test Test cross-section random effects Test Summary Chi-Sq. Stat Chi-Sq. d.f. Prob. Cross-section random 198.201543 4 0.0000

Source: Output Eviews 8 In Table 1.5 which is the result output software Eviews 8 Cross section random probability value of

0.0000 or <a (0.05) so that it can be concluded that the best model selected is Fixed Effect.

4.2 Interpretation Panel Data Regression Results (Fixed Effect Model) From table 1.6 obtained R2 values of 0.995597, which means a variation of 99.55 % of the variation value of Indonesian exports in some destination countries can be explained by the independent variables in the model, namely the comparative advantages of each commodity group based encoding SITC one digit (RCA0, RCA1 , .... RCA8) real exchange rate (REER) and income per capita GDPP)



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Table 1.6 Panel Data Regression Results (Fixed Effect Model)

Variable Coefficient Std. Error t-Statistic Prob. LOG(REER?) -1.031632 0.141305 -7.300744 0.0000 LOG(GDDP?) 3.246747 0.273097 11.88862 0.0000 LOG(RCA0?) 0.252075 0.194915 1.293255 0.2046 LOG(RCA1?) -0.086380 0.072876 -1.185305 0.2441 LOG(RCA2?) -0.049883 0.054529 -0.914804 0.3667 LOG(RCA3?) 0.256419 0.047864 5.357239 0.0000 LOG(RCA4?) -0.103005 0.037276 -2.763315 0.0092 LOG(RCA5?) -1.70E-05 0.108501 -0.000156 0.9999 LOG(RCA6?) -0.278808 0.140254 -1.987883 0.0549 LOG(RCA7?) 0.327102 0.105741 3.093436 0.0039 LOG(RCA8?) -0.296281 0.116779 -2.537110 0.0159 C -8.255153 2.439386 -3.384112 0.0018 Fixed Effects (Cross) FILIPPINA--C 2.652425 SINGAPURA--C -5.759823 VIETNAM--C 3.783529 MALAYSIA--C -1.338758 THAILAND--C 0.662627 R-squared 0.995597 Mean dependent var 130.1199 Adjusted R-squared 0.993654 S.D. dependent var 87.28988 S.E. of regression 1.120930 Sum squared resid 42.72043 F-statistic 512.4851 Durbin-Watson stat 1.921405 Prob(F-statistic) 0.000000 Source: Output Eviews 8

The model used in this study is the fixed effect model (FEM). As we have seen in the FEM, differences in individual characteristics and the time accommodated in the intercept that the intercept of each country is different as well as the constant owned by different so that the model equations are individually different. However, the general equation of this study are as follows: V = -8,255153 -1,031632 REER + 3,246747 GDPP + 0,256419 RCA3 – 0,103005 RCA4 – 0,278808 RCA6 +

0,327102 RCA7 – 0,296281 RCA8 + e

4.3 Effect of Comparative Advantage (Revealed Comparative Advatage Index) Indonesia Export Value in

ASEAN

Based on the analysis that has been carried out on 9 index RCA for commodity groups with the classification SITC one digit, 5 of the 9 groups of index RCA significantly affect the export value of Indonesia in ASEAN, two groups of index RCA has a positive relationship with export value of Indonesia, the index RCA commodity SITC 3 and 7 while RCA Commodity index SITC 4, SITC 6 and STIC 8 has a negative correlation with the export value of Indonesia in ASEAN. This means that five out of nine RCA became independent variable in accordance with the initial hypothesis that has a significant influence on the export value of Indonesia in ASEAN, while the other four did not have a significant effect on the export value of Indonesia in ASEAN so it does not correspond to the initial hypothesis.

4.3.1 Comparative Advantage SITC Group 3 (Mineral Fuels, Lubricants, and the like)

The regression results show a comparative advantage (RCA index) for export commodity groups SITC 3 significantly and positively associated with export value of Indonesia with a regression coefficient of 0.256419. This indicates if the RCA index of commodity SITC 3 increased by 1%, the export value of Indonesia in ASEAN will increase by 0.25%.

Commodity groups SITC 3 is the code for the commodity trade of mineral fuels, including petroleum, natural gas and coal as well as derivative products. Export commodity groups by SITC 3 is a commodity with factor endowment of natural resources are also contained in Indonesia. Although the balance of trade for commodities by SITC 3 deficit but this is still a commodity groups commodity groups contributed the largest export value of Indonesia in ASEAN with a value of 13,731,104,916 US dollars in 2014, or 35.5% of total export value of Indonesia in ASEAN.



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The results of this study reinforced by research conducted by Yue (2001) where commodity exports of a country that has a factor endowments and comparative advantage was positively related to the value of exports. That is, if a country wants an increase of the value of exports then a country should focus on more focused resources in producing commodities that have a comparative advantage.

If based on the results of the regression then focus resources and investments to develop the sector will be able to increase the export value of Indonesia. However, it should also note group SITC 3 is a commodity groups most affected by the global recession, especially in terms of prices falling so deep, in addition to the discovery of shale gas which then have contributed to exacerbating the fall of the price of this commodity group. In addition the group SITC 3 included in the resource is not renewable, so that the dependence of the value of exports that are too large in this commodity group would be very dangerous in the long run.

4.3.2 Comparative Advantage SITC Group 4 (vegetation and animal oils, fats and wax)

SITC 4commodity groups are trademarks codes for oil and vegetable and animal fats, including palm oil, copra and so on. Judging from the value of RCA index, Indonesia has a comparative advantage for these commodity groups SITC 4. On the world market commodity group is a group of the fourth largest export commodity Indonesia with a value of 20.20 billion US dollars in 2014. However, in the ASEAN market value of exports of SITC 4 only took sixth place with export value amounted to 2,243,028,080 US $ or 5, 8% of the total export value Indonesia in ASEAN in 2014.

The regression results show a comparative advantage (RCA index) for export commodity groups SITC 4 significant but has a negative correlation with the value of Indonesian exports, with a regression coefficient -0.103005. That is, if the index RCA 4 SITC commodity increased by 1%, the value of Indonesia's exports fell by -0.10%.

Empirical data shows from 2009 to 2014 both exports nor RCA index for relative commodity groups experienced an increase, only once has decreased the value of exports and the RCA index in 2013 due to falling prices of this commodity group SITC 4 in the world market. However, although the value of exports and commodity groups SITC RCA index 4 relatively increased every year, but still not able to increase the downward trend in the export value of Indonesia that continue to occur from 2011 to 2014. The major reasons for the decline of the value of Indonesian exports since 2011 is the drop in value exports of the two main commodities, namely groups SITC 2 caused the drop in commodity prices on the world economy has not been able to get up after the crisis as well as the issuance of regulations banning the export of raw materials from mining, and the group SITC 3 due to falling prices for energy commodities world as the impact is not the global economic recovery as well as finding ways to harvest shale gas in the United States that became a source of cheap energy.

4.3.3 Comparative Advantage Group SITC 6 (Results Industrial Materials classified according to Material)

SITC 6 commodity groups are trademarks codes for manufactured products grouped by material, such as products processed leather, rubber, wood, textiles and others. This commodity group is the group's second largest export commodity Indonesia with a value of 22.68 billion US dollars in 2014. While in ASEAN, Indonesia's SITC group 6 is the group with the third largest export by value reaching 5,674,884,215 or 14.7 % of the total export value of Indonesia in ASEAN.

The regression results show a comparative advantage (RCA index) for export commodity groups SITC 6 significantly but negatively related to the value of Indonesian exports to the regression coefficient -0.278808. This indicates if the RCA index of commodity SITC 6 increased by 1%, the export value of Indonesia in ASEAN will decrease by 0.28%.

Empirical data show the development of Indonesia's RCA index SITC group 6 in ASEAN continued to decline, for example in 2005indeks RCA for SITC group 6 is 2.43. In 2010 down to 1.79, and the latest data in 2014 down to 1.58 or the lowest in the last 10 years. This condition can be explained by several reasons, including the increasing labor costs that are not offset by an increase in productivity led to Indonesia cannot compete with countries with production factor labor relatively cheaper as Vietnam, the Philippines and Myanmar, given the rewards factors play a key role the cost of production of this commodity group SITC 6. If seen from the results of the regression and the index value RCA, shifting the allocation of factors of production to other industries it will be able to increase the export value of Indonesia as a whole, (ceteris paribus).

4.3.4 Comparative Advantage Group SITC 7 (Machinery & Transportation Equipment) SITC 7 Commodity groups is the code for the commodity trade machinery and transportation equipment, especially the automotive industry and its components. Theoretically Indonesia do not possess a comparative advantage for this group. Similarly, if seen from an index value of RCA Indonesia does not have a comparative advantage for these commodity groups SITC 5. Even when compared with the 5 main trading partner in ASEAN, Indonesia has a comparative advantage over Vietnam, and even then only until 2005, after which Indonesia did not have a comparative advantage against five major trading partners in ASEAN.

Although it does not have the comparative advantage, regression results indicate a comparative advantage (RCA index) for export commodity group SITC 7 significantly and positively associated with export value of Indonesia with a regression coefficient of 0.327102. This indicates if the RCA index of commodity SITC 3



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increased by 1%, the export value of Indonesia in ASEAN will increase by 0.32%. Several reasons can be stated as to why the coefficient estimate precisely significant positive relationship.

The first, in the Products Cycle Theory and study by Vermon in Yue (2001) explained that industry capital intensive can turn out to be a relatively labor intensive when the technology has been at the mature stage or mature and standardized, this strategy is done to offset the competitor product from countries are relatively rich in capital resources. In addition, recent data show that in 2014 the value of exports of SITC 7 Indonesia in ASEAN amounted to US $ 8,084,371,587, or 20.9% of total export value of Indonesia in ASEAN. The percentage of the value of exports of SITC 7 causes changes in comparative advantage SITC group 7 will greatly affect the export value of Indonesia in ASEAN.

4.3.5 Comparative Advantage SITC 8 Group (Various Kinds of Goods Industrial Results)

SITC 8 Commodity groups is the code for the commodity trading results in the form of finished goods manufacturing industry. Export value of this commodity group in ASEAN only reached 1,327,631,515 or 3.4% of the total export value of Indonesia in ASEAN. The regression results show a comparative advantage (RCA index) for export commodity groups SITC 8 significantly but negatively related to the value of Indonesian exports to the regression coefficient -0.296281. This indicates if the RCA index of commodity SITC 6 increased by 1%, the export value of Indonesia in ASEAN will decrease by 0.29%.

According to Yue (2001) with the export commodity SITC groups 6 is a commodity labor-intensive manufacturing. Thus, a country with an abundance of labor factors of production such as Indonesia have an advantage in producing it. But in this study, the countries in the ASEAN export destination other than Singapore, are among the countries that have an abundance of similar factors. Data show of the year 2005-2014, consistently Indonesia has a comparative advantage over the Philippines and Singapore, while Thailand and Malaysia fluctuated from year to year. Meanwhile, when compared with Indonesia Vietnam did not have a comparative advantage for SITC groups 8.

This condition can be explained by several reasons, including the increasing labor costs that are not offset by an increase in productivity led to Indonesia cannot compete with countries with production factor labor relatively cheaper as Vietnam, given the rewards factors play a key role in the production cost group SITC commodity 8. If seen from the results of the regression and the index value RCA, shifting the allocation of factors of production to other industries such as industrial group SITC 7 it will be able to increase the export value of Indonesia as a whole, (ceteris paribus).

4.4 Effect of Real Effective Exchange Rate of the Export Value of Indonesia in ASEAN

Based on the analysis that has been made known that the real exchange rate variable has a negative and significant relationship to the value of Indonesian exports to the regression coefficient of -1.031632. This indicates that exchange rate real is 1%, the value of Indonesia's exports dropped by 1.03%. These results are consistent with the initial hypothesis where the real exchange rate has a significant influence on the export value of Indonesia in ASEAN. This means that in case of appreciation of the real exchange rate Rupiah against the currencies of export destination countries it will affect the decline in export value of Indonesia. Apply vice versa in case of depreciation of the real exchange rate of the rupiah against trade partner countries will increase the value of Indonesia's exports. It can happen because of the real exchange rate is one of the key level of competitiveness of export products to compete on price. When there is depreciation of the rupiah, the Indonesian products will have a cheaper price compared with competitors from other countries. Conversely, if the exchange rate has appreciated the products of Indonesia would have a more expensive price so it becomes less competitive in overseas markets.

Currency exchange rate plays a central role in international trade relations, because it allows the exchange rate can compare prices of goods and services produced from one country to another. In addition the event depreciation or devaluation policy by a country against their currency's value will make the country product prices become cheaper thus increasing the competitiveness of these products on the international market and resulted in increased volume and export value of these products.

From the research results obtained, Indonesia's export performance very significantly influenced by the position of the real exchange rate of the rupiah, a government policy that has directly or indirectly influence the exchange rate will be very significant effect on the position of Indonesian exports. The exchange rate is relatively low and stable would be advantageous in terms of export Indonesia. It is necessary synergy between the government and the monetary authorities in order to maintain the stability of the rupiah.

4.5 Effect of Per Capita Income Export Destination to Indonesia Export Value in ASEAN

Results of analysis of research have found a positive and significant relationship between income per capita export destination with ASEAN export value of Indonesia in the period 2005-2014 with a regression coefficient sebesar3,246747. That is, if there is an increase in GDP per capita export destination of 1% there will be an increase of the export value of Indonesia in ASEAN amounted to 3.24%.

Significant influence between income per capita export destinations of the export value of Indonesia in



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accordance with the hypothesis expected. The level of per capita income which is a reflection of the level of per capita income of individuals in a country is one of the main factors affecting the level of consumption, according to the Keynesian consumption theory.

Empirical evidence indicates that not all consumer goods can be produced in a country, or at least inefficient to be produced by the state itself. It is closely related with the proportion of production factors as well as the mastery of technology as proposed in Heckscher-Ohlin theory. So the import of certain products to be more efficient and profitable than if they have to produce in the country. Like for example, Japan, which does not have an abundance of factors of labor and natural resources prefer to import goods labor-intensive industries and dense natural resources from countries with an abundance of labor, such as Indonesia and China. So when there is an increase in public consumption or as reflected by the increasing per capita income of a country, there will be an increase in imports from the country concerned, both imports of consumer goods and goods, industrial raw materials.

5. Conclusion

From the research results can be conclusions in this study. The first is based on the analysis of RCA index can be concluded that Indonesia is losing comparative advantages of both the ASEAN regional and world markets in labor-intensive commodities, as reflected in the trend decrease RCA group index SITC 6 and STIC 8 in the last ten years. As for the capital intensive commodity groups SITC 5 and STIC 8 Indonesia did not have a comparative advantage both in the region ASEAN and the world market. The regression results showed five of the nine groups of SITC have a significant influence on the export value of Indonesia in ASEAN, which groups SITC 3, SITC 4, SITC 6 SITC 7, and SITC 8. Furthermore, the regression results also indicate that the real exchange rate and the income per capita of export destinations also have a significant effect on the exchange rate Indonesia in ASEAN.

The results showed that the comparative advantage of a significant effect on the value of Indonesian exports to all commodity groups studied. For SITC groups that have a positive relationship with the export value increased investment and focus resources to the group will be able to increase the value of exports. As for the SITC group that has a negative correlation with the value of exports then slightly shifting the allocation of resources for commodity groups that have a positive relationship as group SITC 7 is largely the automotive industry and components will increase the export value of Indonesia in ASEAN, ceteris paribus.

Furthermore, of the research results obtained, Indonesia's export performance very significantly influenced by the position of the real exchange rate of the rupiah, the policy of the government which have direct or indirect influence of the exchange rate and inflation will be very significant effect on the position of Indonesian exports. Relatively low exchange rate will benefit from the export side Indonesia. Next is the per capita income of export destinations, as reflected by the level of per capita gross domestic product Country of also significantly affect the value of exports, so the government needs to continue to maintain competitiveness through price, product differentiation, and improve the quality of Indonesian products overseas. For yet amid uncertainty in the global economy will also impact on the unstable economies the main export destinations. The government should have a specific strategy to determine the tastes of the market and actively encourages exports to new markets of potential that has not been touched. For more extensive export market will make the less the risk is affected by the economic slowdown that hit the export destination countries, as happened in the Chinese economy lately which affect Indonesia.

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Local Wisdom in Governance Natural Resources Management

Wahyu Wiyani1 Eko Yuni Prihantono2

1. Lecturer, Faculty of Social and Political Science, Merdeka University, Malang Indonesia

2. Lecturer, Faculty of Economic and Business, Merdeka University, Malang Indonesia

Abstract

This study aimed to describe governance based on local wisdom in the management of water resources in some

areas in Malang, East Java, Indonesa. Discussions focused on local knowledge as social capital in meeting water

needs of society, and society as a form of protection against water resources. Governance in water resource

management organizations chosen because it has its own uniqueness in the management of the organization. The

study also aims to explore the local values of any underlying organizational governance because in the beginning,

the organization managing the water resources to grow with traditional values. To achieve the objectives of this

study, the researchers chose to use a qualitative approach. The findings show that the Council consensus and

cooperation is the center of the uniqueness of governance based on local wisdom that produces: (1) selection of

the orientation of the water resources management institution that emphasizes efforts to maximize the usefulness

of water for the people of maximizing profits; (2) still bound water resource management organization with

institutional rural communities by promoting the power of social capital, particularly the dimension of trust and

patience among residents. Although concomitant change in space, time, mode of organization and human resources,

but in substance, the uniqueness of governance by promoting local wisdom still performing well. The role of local

wisdom in the governance of water resources to maintain balance and harmony with nature society particularly in

efforts to manage water resources in a sustainable manner.

Keywords: local knowledge, governance, natural resources

1. Introduction

Natural resources have an important role in human life. Natural resource for the community not only has economic

value but also social significance, cultural and political. The process of formation of civilization in human life can

not be separated from the important role of natural resources, so that every cultural and ethnic conception and its

own views in managing natural resources.

In general, the shape and status control of natural resources can be divided into four groups: (1) public

property, (2) state, (3) private property or individuals, and (4) the commons (Iskandar, 2001). In the natural

resources of public property, its ownership status floated, everyone is free and open to obtain benefits. While

privately owned resource is a resource that is firmly held by the individual so that other people can not be controlled

and set. While the shared resource is a resource that is controlled by a group / community, hence another person

or group can not take advantage of these resources without the permission of the group master. In the state-owned

resource is a resource that is strictly controlled and controlled by the state.

In practice, the fourth form of control over these resources often overlap and vary, because the form of

mastery associated with social and cultural systems as well as the views in which those resources are located.

Some ethnic groups in Indonesia are not always considered common property resources has no owner, the

resources of this type controlled by an indigenous community or ethnic group. Whatever the form of control over

the resources have consequences to society in terms of incentives and interests of the management of these

resources. In this context, management of natural resources should take into account the institutional framework

in these locations.

In the literature on common property resources, institutional deemed shape human behavior in its relations

with resource utilization. Institutional term used here to refer to the organization or authority resource management.

Organizations or authorities are defined, by following the North (1990), as governance structures are developed to

manage human interaction. Rules and regulations are treated as institutional arrangements. Institutional

arrangements often forms the basis for guiding the activities of the organization, although it could be informal

nature, and are not associated with any specific organization.

Local regulations in the management of resources in an area is what is meant by local knowledge. Local

knowledge has become a social control mechanism to prevent conflicts in resource management. Thus, in the

management of resources, particularly shared resources will be two major concepts that influence, namely the

perception of management and social control. Perception management is the community perceptions of resources.

That is, their use without rules, without limitation, everyone can take advantage of. To give balance, the need for

social control in the form of local wisdom.

In addition, in realizing good governance, aspects of trust becomes an important factor when the public

is increasingly skeptical about government and politics. Therefore, local wisdom should be strengthened to

maintain that trust. In the context of governance, local knowledge is wisdom and noble values contained in the



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riches of the local culture.

Resource management based on local wisdom has been supported by the issuance of UU No. 32 Tahun

2009. Solihin and Satria (2007) stated that a solution to overcome problems related to resource management is the

provision of management rights to local communities in accordance with the social, economic, political, cultural,

and characteristics of their resources.

Local knowledge is a collection of knowledge and ways of thinking that are rooted in the culture of a

group of people, which is the result of observations over a long period of time (Babcock 1999 in Arafah 2002).

Those definitions are a few key words, namely: knowledge, ideas, values, skills, experience, behavior, and

customary usage by the community in a particular region (Keraf, 2002; Ardana, 2005; Aprianto et al, 2008; Mukti,

2010; Yamani, 2011). The knowledge and experience of the community, according to Sunaryo (2003), together

with the system of norms, trust, solidarity, justice expressed as a tradition as a result of abstraction and interaction

with nature and the surrounding environment over a period of time. Local wisdom, because it is a guideline in

attitude and action to meet the needs of people's daily life (Wardhana, 2005).

Generally, local wisdom embodied in its own unique way in the cultural norms in the rituals and traditions

of the community. Sartini (2004) explains that the forms of local wisdom in the community can be: values, norms,

beliefs, and special rules. The form that these different influences the function of local knowledge to be diverse as

well. These functions include: (1) Local knowledge to work for the conservation and preservation of natural

resources, (2) Local knowledge serves to develop human resources, (3) Serves as the development of culture and

science, (4) Serves as advice, beliefs, literature and abstinence.

Thus, local knowledge is an adaptation strategies that do arise from within the community itself in fixing

social problems concerning people's lives. Local knowledge is growing from the interaction between people and

their environment.

In the case of water resources management, Pawitan (2011) and Ryadi (2012) revealed that the water

resources in Indonesia have been degraded, indicated from the use of excess water, increasing water pollution, as

well as the threat of drought in the dry season and floods in the rainy season. Increasingly complex problems with

conflicts of interest among stakeholders related to water resources in the area of the upstream and / or downstream,

degradation of rivers and lakes as well as soil erosion.

Local knowledge as social capital is very important in the management of water resources in a region.

Local knowledge has two main roles, namely: water needs for the life and community life, and maintain a

harmonious relationship between the community and the water resources and the surrounding environment. Local

knowledge includes five social dimension, namely local knowledge, local culture, local skills, local resources, and

local social processes (Aprianto et al, 2008).

Subak is a form of Balinese folk wisdom that regulates rotation and water supply and regulation of

cropping patterns. Regulating the use of water is the result of community meetings which are based on the

philosophy of Tri Hita Karana. Balinese philosophy emphasizes on the principles of harmony, balance and

harmonious relationship among fellow members of the community, the environmental community, and the

community with God. Under conditions of limited water, the setting is necessary for all members of society have

access to water in the manner and place agreed. One way to regulate water is a period in which the territory Gadon

Subak was divided into two groups, namely the period whose turn the water in the rainy season and Gadon group

whose turn water in the dry season. While cropping, crop types, and schedule when to plant is determined and

agreed upon by the board and members of Subak. (Aprianto et al, 2008; Ardana, 2005; and Sutawan, 2003).

Community wisdom in the management of water resources in Indonesia unfortunately many who have

undergone a shift. Demand for water continues to rise with the increase of population (with different types of needs)

and development activities to less attention to the preservation of water resources and the environment. The water

has now become a problem that needs serious attention because of a decrease in capacity and quality of water

resources in most parts of the country.

This paper discusses governance based on local wisdom in the management of water resources in some

areas in Malang, East Java, Indonesa. Discussions focused on local knowledge as social capital in meeting water

needs of society, and society as a form of protection against water resources. The role of local wisdom in the

governance of water resources to maintain balance and harmony with nature society particularly in efforts to

manage water resources in a sustainable manner.

2. Method

This study used a qualitative research approach, which is based on the paradigm of interpretive and constructive,

very different from the positivist approach as a pillar of quantitative research (Creswell, 2010; Sugiyono, 2010).

Furthermore, as part of a qualitative approach, research phenomenology selected by the researchers to be more

able to identify the nature of the experience of individuals or communities about particular phenomena (Creswell,

2010; Kuswarno, 2009).

The research object is basically an explanation of the focus and locus of research, the research objectives



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are reflected in the topic or title of the study, and is concretely expressed in the formulation of research problems

(Bungin, 2008). Thus, the object of this study once the analysis unit includes governance, patterns of interaction

with other economic agencies, as well as the rules of the game in the aspect of local wisdom surrounding the

management of water resources.

While the study subjects are people who have and understand the information related to the process of

land management and administration as well as members / residents of rural communities that have attention or

receive benefit from the management of water resources, both as actors directly or through others who understand

the object of study. Therefore, this study is the subject of a resource or informant to uncover local wisdom in the

management of water resources in Malang.

Malang deliberately selected researchers as the locus of research which is based on considerations that

Malang, East Java, is considered a "small portraits" of the region with character rural areas in Indonesia, and

historically the existence of the community are very long-established (over 1,251 years ago). While the area of

research in this study is the village of Ketindan and Wonorejo in District Lawang village, and the village in the

district Gondowangi Wagir determined with consideration have a principal business activities such as procurement

and distribution of clean water.

In a phenomenological study, the selection of data sources (participants or informants) is crucial (Bungin

2008; Kuswarno, 2009), given the informants are better able to articulate the experience and views related to the

things that are asked and explored researchers. Therefore, interviews were conducted to actors or ever manage

water resources, and stakeholders kepentingandalam management of water resources as a potential informant.

Given the many sources of qualified candidates for the informant, this study establishes the village head as an

informant as the entrance to the informants next. The considerations that the village head as a central actor in the

village. Furthermore, the management of water resources, rural community leaders following ordinary citizens,

can even confirm to anyone who has the competence and capacity of the focus of this study.

Considering the research data obtained in the form of qualitative data in this study using data analysis

model of Miles and Huberman (1992) through the activity / process called encoding. The analysis model is done

in three (3) activities, and can take place in palalel, with a brief explanation, namely: (1). Data reduction: process

of sorting, selecting, focusing, simplification, abstraction, and transform raw data have been obtained from the

data collection process in the field; (2) The presentation of the data, by drafting a set of information that allows

drawing conclusions and making recommendations of data; (3) The conclusions-conclusions that have been drawn,

then verified during the study. Verification in the form of reviews or rethinking the record field results that may

be fleeting or have been time consuming, as well as exchange ideas (discussion) with the informant to develop

meaning. Meanings that emerge from the data need to be tested its validity by means of triangulation (including

credibility test data through triangulation of data sources) in order to form its validity. these activities not be partial,

but interrelated, simultaneous and continuous so that it becomes a cycle (interactive model).

3. Findings and Discussion

The three organizations studied rural communities are engaged in the supply and distribution of clean water daily

in order to meet customers. The supply of raw water comes from springs in the environment around the village.

For water distribution, the three organizations managing the water resources using gravity and electric pumps.

This is because the topography is hilly area and some of the residents or customers to stay higher than in the water

source.

Design of water resource management organization studied is not only to manage water as a commodity

which tends rare. Rationality over the choice of organizational form of the management of water resources intended

to build an organization that productive (profitable), and independent (independent or free from power) as an effort

to improve and perfect public management. It is still consistent with rational choice theory (Williams and

Fedorowicz, 2012), as well as institutional forms as social businesses by Yunus (2011) only has 2 types, but

specific to the management organization of water appears as a social business type 3 (as a combination of the type

1 with type 2).

In the system of management of water resources, was the organization manage the water resources is an

effort to provide clean water for villagers institutions aimed to improve people's lives and the community level

together with village government are "self-managed". Meaning that self-management is to promote the spirit of

mutual cooperation which is based on a sense of togetherness of the villagers, and commitment to realize life is

better with emphasis on common interests. This is in line with the opinion / research Vel (2010), and Williams and

Fedorowicz (2012), and the results proved to be "powerful moment" when the organization that manages the water

resources faced with the issue of the funding requirements for the development of utility networks.

Findings 1: governance of water resources tend to be communities with the advanced rationality based

groups and social capital.

In the perspective of water management as a resource that is classified as restricted, then the individual

as well as members of rural communities faced with the choice of an alternative accept rate adjustment (price of



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water) as the implications of the market mechanism, or alternatively take action, both individually and communal

impact on expediency together. Concrete, water harvesting is done by: (1) saving and patient, so that other

communities can also enjoy, (2) using clean water according to mutual agreement, namely water for human needs

first, and livestock and further crop, (3 ) conduct mutual cooperation to "fight" option to raise water rates in order

to repay the loan.

Attitudes and behaviors patient, saving, mutual trust to take advantage of limited fresh water is a few

dimensions and applications of social capital. The social capital is intended as an answer to the management of

limited water resources to be used together.

Findings 2: Management of public relations managers and users of water resources is based on motivation

and non-material orientation.

Motivation manager of water resources do not always based on financial interests. That is, with the

incentive of becoming caretaker or employee is financially inadequate, still have high dedication and loyalty to

the execution of tasks to users of water. It is based on considerations of non-material, the orientation of the role

(role) of social and functional alone. Concretely, that an administrator who does not have a background in

despicable behavior, have a great chance of success (Wallis, et al., 2004). Besides the response from the public to

the management of water resources as well as a form of social capital in the form of a positive appreciation, so

that its staff can continue. The promotion back to the pattern of social capital management and staffing in order to

be effective rural poverty reduction (Abdul-Hakim, et al., 2010).

Findings 3: Implementation of regulatory and institutional manifestations adapted to local needs and

potential in each village in order to realize the improvement of social welfare.

Development of Water Supply System, has been given the authority and responsibility for management

of water resources to the Village Government to organize, assign, and grant permits for the allotment, provision,

use and exploitation of water resources. This has implications for the pattern of water resource management that

aims to better ensure the protection of the interests of the community (village), which economically is still

classified as weak to be neglected. However, in the Malang District Regulation No. 4 of 2009 is, to interpret and

express the general provision that the entities whether incorporated or not incorporated as a business entity to

manage groundwater in Malang. It is slightly open "opportunity" for the management of community-based water

resources to manage ground water intended for the welfare of the people in a sustainable manner. In addition, the

institutional village drinking water supply as a system that for the sake of effectiveness, efficiency, quality, and

order management of water resources, the village still has a strategic role. This role is related to the facilitation of

community groups to meet the water needs of society, and the existing availability of water, as well as consider

the interests of other villages.

Findings 4: Setting incentives and dis-incentives by the Government or Local Government to the

management of water resources, has not fully support the system of management of water resources.

In an effort to accelerate the supply of drinking water for people living in rural areas it is responsible in

the control and operation of water resources. These responsibilities as well as the anticipation of a response to a

new perspective of the water, ie water as an economic good which allows the commercialization and privatization

of water. Meaning, individual ownership over water be justified according to the understanding of property rights

over water, and also put the water as exclusive items that can be monopolized by a group of people or individuals.

This understanding of course different views of water rights that is based on that water as a human right. As for

human rights, then the water is inklusive, and can not be monopolized by a group of people or individuals.

Therefore, the interference of the state (in this case the Government and Local Government / village) to guarantee

the right of every person to obtain water for their basic needs minimal daily to meet life healthy, clean, and

productive, as well as to solve the problem of externalities (Gregory and Stuart, 1998).

Given the rules or regulations, even the state constitution has insisted that the point that water resources

controlled by the state and utilized for the welfare of the people, then the control and operation of water resources

by the Government and / or local government (provincial, district / city). While the rights, powers, and

responsibilities of village government according to the regulations in the development of water supply systems,

namely: (1). facilitate and permit public participation at the level of the group / community in its territory; (2).

monitoring the utilization of water resources for drinking water supply at the level of the group / community; and

(3). report the results of monitoring the utilization of water resources for drinking water supply in the region to the

district / city.

With the right, authority, and responsibility, shows that the role of the village government only as a

regulator and supervision only, and not as an operator (active) in order to avoid imbalances between water

availability tends to decrease, and the needs and demand for water is increasing. The division of authority and

responsibilities among different levels of government are already there, namely between central government, local

government, and the village government. However, to manage the water resources that type of business engaged

in the provision of drinking water for the village, completely untouched facilities or support financially. Even emik,

administrators who manage water resources was only fulfill licensing obligations and / or payment of the tax



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burden. Furthermore the utilization of community resources to address the deterioration of water quality seems

still untouched.

Rationality over the choice of the form of the institution managing the water resources will aim to build

an organization that is productive (profitable) and independent (independent / free of power) as an effort to improve

and perfect public management, and appears as a reaction to the criticism of the bureaucratic model of Weberian

(Osborne and Gaebler, 1996). In water resource management organization exists decentralization of power to the

bottom and a separate structure that is management, standard operating procedures are elastic, their creativity and

innovation, clear hierarchies of power, as well as staffing and management system that is more competitive and

open.

However, the organization managing the water resources are facing an internal problem (conflict

management and objection / protest of customers), it turns back to "influence" the governing elite of the village as

been reviewed by Shepherd (in Dharmawan, 2006; Ellis and Biggs in Yustika 2012) , It can be seen from the fact

that the organization's research manager of water resources that legally choose progressive tariff scheme, as the

concept of classical economics / neoclassical to pricing water or consumption costs. On the other hand, in other

locations prefer the gotong-royong to determine water rates. Meaning, people in the village believe that the study

measured rates or the price of a sum of money as a symbol of materialism to the economic concept of classical /

neoclassical, not a model of incentives or disincentives are most effective for maintaining the benefit of clean

water. But with the mutual cooperation activities in the community, or with patience and savers, as well as mutual

understanding of the villagers to use water, it further enhances the benefits of clean water, and most importantly,

do not lower the water utility for the customer / other villagers. That is, the behavior of mutual cooperation,

patience or savers, as well as mutual trust and confidence among the villagers is a form of social capital, as well

as the "resistance" of the instrument price (raising rates).

The decision to require a specific thing as caretaker manager of water resources on the basis of

consideration of local potentials in each village. That is, the choice of form / structure of water resource

management organization based thinking reinventing government or with the type of Weberian bureaucracy that

is reflected in the standard operating procedures, creativity and innovation, as well as the power level of its

personnel system. In the management of water resources, is an effort to provide clean water for villagers who

aimed to improve people's lives at the community level with the government of the village as a "self-managed".

Meaning that self-management is to promote the spirit of mutual cooperation which is based on a sense of

togetherness villagers, commitment to realize life is better with emphasis on common interests. It proved to be

"powerful moment" when faced with the issue of the funding requirements for the development of utility networks.

In fact, if it adopts the ideas of the classical / neoclassical is only by raising the tariff (price of water) so that the

funding needs can be satisfied, and can make a profit (profit) for optimally managing organization (Skousen, 2006).

The condition shows that the orientation of the manager of water resources is still bound by their local

wisdom, namely maximizing the benefit of clean water for villagers. Thus, the institutional organization that

manages the water resources refers to utility maximization as the goal, rather than profit maximization.

This reality shows that local knowledge society in the governance of water resources is able to withstand

the shifting of the orientation of the value of water and natural resources, namely the social dimension to the

economic dimension. Water which was originally used as a 'free' in the absence of compensation, it has economic

value and the higher this value over time. Commercialization of water to grow and evolve as more and more

volume of water required by the community and the variety of types of demand for these resources. This condition

mainly occurs as water resources become more limited, and conversely demand for water is high. Value of local

wisdom in the governance of water resources management are still awake shows still eksisnya traditional

institutions in the management of water-based 'values and traditions' in the community combined with live

harmony with the surrounding nature.

4. Conclusion

The results of this study indicate that one of the values of local wisdom that evolved and is still implemented in

the management of water resources is a value consensus and cooperation. It serves nurturing consensus customs,

making the rules villages, communities and share their aspirations. So it is with the values of local wisdom to

manage water resources are the values that are considered good and noble contained in the richness of the local

culture that developed in the community and can be used for the development of the governance of water resources

management is good.

Consensus and cooperation are central uniqueness of governance that produces: (1) selection of the

orientation of the water resources management institution that emphasizes efforts to maximize the usefulness of

water for the people of maximizing profits; (2) are still dependent organizations managing the water resources

with the village community institutions concerned with promoting the power of social capital, particularly the

dimension of trust and patience among residents.

Thus governance based on local wisdom to be able to synergize government, private, and community that



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puts local values as the basic principle in governance. Therefore, the recommendations offered are; (1)

internalization and institutionalization of value-nailai likal wisdom needs to be done in public life; (2) interpret the

manager of water resources in the context of common property resources as organizations seek to improve services

according to the needs and character of the local community; (3) the rule of the institutional organization of water

resource managers need to be simplified and harmonized with the essence of the village as a unit of community

has the authority to regulate and manage the interests of local communities, based on the origin, and local customs

that must be recognized and respected.

5. References

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Indonesia. Bogor (ID): IPB Press.

Aprianto, Y., Pardede, I.A., dan Fernando, E.R. 2008. Kearifan Lokal dalam Mewujudkan Sumber Daya Air Yang

Berkelanjutan. Institute Pertanian Bogor.

Arafah, N. 2002. Pengetahuan Lokal Suku Moronene dalam Sistem Pertanian di Sulawesi Tenggara. Program

Pasca sarjana Institut Pertanian Bogor.

Ardhana, G. 2005. Kearifan Lokal Tanggulangi Masalah Sosial Menuju Ajeg Bali.

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Bungin, Burhan. 2009. Penelitian Kualitatif: Komunikasi, Ekonomi, Kebijakan Publik, dan Ilmu Sosial Lainnya.

Kencana. Jakarta.

Creswell, J.W. 2010. Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. Achmad

Fawaid (penerjemah). Research Design: Pendekatan Kualitatif, Kuantitatif, dan Mixed, Pustaka Pelajar.

Yagyakarta.

Dwiyanto, Agus. 2007. Kinerja Tata Pemerintahan Daerah di Indonesia. Jogyakarta. Penerbit Pusat Studi

Kependudukan dan Kebijakan Universitas Gadjah Mada. Yogyakarta.

Iskandar,J., 2001. Manusia, Budaya dan Lingkungan Ekologi. Humaniora Bandung.

Keraf, A.S. 2002. Etika Lingkungan. Penerbit Buku Kompas.Jakarta.

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Bandung.

Miles, Matthew B., dan Huberman, Michael. 1992. Analisa Data Kualitatif, Buku Sumber Tentang Metode-Metode

Baru. Diterjemahkan oleh TR. Rohidi. Penerbit Universitas Indonesia. Jakarta

North, D.C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge University Press,

Cambridge, UK.

Pawitan, H. 2011. Konsep Ekohidrologi sebagai Paradigma Baru Pengelolaan Sumber Daya Air Berkelanjutan.

Makalah disajikan dalam KIPNAS X Thema: Pemanfaatan Ilmu Pengetahuan dalam Membangun

Kemandiarian serta Kedaulatan Bangsa dan ditengah Perubahan Global. Jakarta, 8-10 November 2011.

Skousen, M. 2006. The Making of Modern Economics: The Lives and Ideas of Great Thinkers. Tri Wibowo Budi

Santoso (penerjemah). Sang Maestro Teori-teori Ekonomi Modern: Sejarah Pemikiran Ekonomi,

Prenada Media. Jakarta.

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Berkelanjutan: Kasus awig-awig di Lombok Barat. Sodality. 1(April 2007)

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di Bali. Makalah Seminar Peran Budaya Lokal dalam Menunjang Sumber Daya Air yang Berkelanjutan.

Kerjasama antara BAPPENAS dengan FAO-UN, Kuta Beach, Bali, 2 Oktober 2003.

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Indonesia). Myrne Tehubijuluw-Umboh (penerjemah). Ekonomi-Uma: Penerapan adat dalam dinamika

ekonomi berbasis kekerabatan, HuMa; Van Vollenhoven Institute; KITLV. Jakarta.

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Bengkulu. Jurnal Hukum No.2 Vol. 18, April 2011, hal 175-192.

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Malang.



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Impact of Soil and Water Conservation Improvement on the

Welfare of Smallholder Farmers in Southern Malawi

Francis Maguza-Tembo* Edriss Abdi-Khalil Julius Mangisoni

Department of Agricultural and Applied Economics

Lilongwe University of Agriculture and Natural Resources, Box 219, Lilongwe, Malawi

Abstract

This study employed full Mahalanobis matching and a variety of propensity score matching methods to adjust for

pre-treatment observable differences between treated and untreated groups for measuring the impact of

technologies. Data were collected from 619 smallholder farmers in the districts of Nsanje and Balaka in southern

Malawi during 2014-2015 cropping season. There was a 27% reduction in per capita income because of farmer’s

involvement in soil and water conservation technologies. The impact is significant at 5% level. Similarly, there is

an 8% reduction in per capita expenditure because of farmer’s involvement in soil and water conservation

technologies. Although households practicing the technologies under study realized nominally higher yields, the

yield differences between them and those not practicing were not as significant. The study concluded that adoption

of soil and water conservation technologies did not improve the incomes of small-scale farmers in the areas. These

results were surprising, but several feasible explanations were made for the incongruity in the findings.

Keywords: propensity score matching, incomes, impact, smallholder farmers

1.0 Introduction

Soil and water conservation is important for alleviating water shortages, worsening soil conditions, and other

negative effects of climate variability (Kurukulasuriya and Mendelsohn 2006). Soil and water conservation has

changed from an initial emphasis on structures to reverse soil erosion to an important part of sustainable land

management (Spielman et al., 2009). Reviewed studies has shown that farmers do apply soil and water

conservation approaches for various reasons, including adaptation to environmental change and at local level to

maintain or enhance the productive capacity of the land in areas prone to degradation.

For farmers to make investment decisions in agricultural practice that will improve their welfare and

livelihood, there is a need to evaluate impacts between adopters and non-adopters of the technology. This paper

explores the impact of soil & water conservation on smallholder farmers’ income and expenditure patterns. A

counterfactual analysis was built, and comparisons between the expected per capita income and expenditure under

the actual and counterfactual cases between adopters and non-adopters analysed. In addition, treatment and

heterogeneity effects were calculated to understand the differences in per capita income and expenditure between

farm households that adopted and those that did not adopt. The study has taken into account if the differences in

per capita income and expenditure between farming households that did adopt and those that did not adopt might

have been perhaps due to unobserved heterogeneity.

2.0 Study Areas

This study was carried out in two districts of Balaka and Nsanje in Malawi. The districts were purposively chosen

because of being prone to climate variability of droughts and flooding. Balaka District is located in the southern

region of Malawi, positioned at 150 00’S latitude and 350 00’E longitude. It is on the eastern edge of the Great

Rift Valley, hence has a varied topography ranging from an elevation of about 350 to 800 meters above sea level

(Balaka SEP, 2010). Whereas Nsanje District is situated at the southern tip of the country within the Lower Shire

valley, located 160 45’S latitude and 350 10’E longitude (Nsanje SEP, 2010).

3.0 Sampling design, instruments and data needs

This study used a mixed methods approach; both qualitative and quantities techniques involving focus group

discussions and a cross-sectional survey were used. Multi-stage stratified random sampling was applied, with 619

respondents interviewed. Data was collected on the explanatory variables as adapted from the concept by Yohe

and Tol (2002) and Chambers (1989). Data were analysed through the generation of descriptive statistics, and

through the incorporation of a psmatch2, which implements full Mahalanobis matching and a variety of propensity

score matching methods.

3.1 Propensity Score Matching (PSM) approach

As it was shown by Rosenbaum and Rubin (1983) in their work, if we can match on variable (�), then we can as

well match on probability of (�). Therefore, in estimating the impact of adopting a technology on per capita income

and expenditure, two groups are identified, those adopting a technology (denoted as �� =1 for household � and

those without (�� = 0). Those adopting a technology (treated) are matched to those not adopting the technology in



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119

question (control group) on the basis of the propensity score, given as

�� = �� = 1|��

�0 < �� < 1�

(1)

Where �� is a vector of pre adoption of technology control variables. If the��’s are independent over all (�), and

the outcomes are independent of technology adoption given (��) then outcomes are also independent of technology

adoption given p (��), just as they would be if technology adoption was done randomly. Rosenbaum and Rubin

(1983) established some conditions in order to be able to estimate Average Treatment on the Treated (ATT) effect

based on the propensity score. The first condition is the balancing hypothesis where

�⟘�│�� (2)

This means that for observations with the same propensity score, the distribution of pre-treatment characteristics

must be the same across control and treated groups (Appendix 1). That is, conditional on the propensity score,

each individual has the same probability of assignment to treatment, as in a randomized experiment. We also tested

the “balancing properties” of the data by testing that treatment and comparison observations had the same

distribution (mean) of propensity scores and of control variables within groupings (roughly quantiles) of the

propensity score. The second condition is on un-confoundedness or Conditional Independence Assumption (CIA)

given the propensity score

��, �� ⟘ �│� ⇒��, ��, ⟘ �│ �� (3)

If assignment to treatment is un-confounded conditional on the variables pre-treatment, then assignment to

treatment is un-confounded given the propensity score. The performance difference between treatment and control

groups was estimated by the average treatment effect on the treated (ATT), as a second step (Appendix 2). After

computing the propensity score, the ATT �� effect was estimated as follows:

� = �� −��|�� = 1� (4)

� = �� −��|�� = 1, �� (5)

� = � �� −��!�� = 1, �� − ��|�� = 0, ��│�� = 1" (6)

where: ��is the potential outcome if the individual is treated.

�� is the potential outcome if the individual is not treated.

After running the propensity score matching test on the technologies, we were able to isolate the untreated

group, treated group on support and the treated group but of support (Appendix 3).

The strength of these matching approaches is that they can provide reliable estimates of program impact

provided that (1) a comparable group of non-beneficiary households is available, and (2) there is access to carefully

collected household survey data with many variables that are correlated with program participation and the

outcome variables.

These approaches relies on two assumptions about the data and the model. The first assumption is that,

after controlling for all pre-adoption observable household and community characteristics that are correlated with

technology participation and the outcome variable, non-beneficiaries have the same average outcome as

beneficiaries would have had if they did not adopt the technology. The second assumption is that for each

beneficiary household and for all observable characteristics, a comparison group of non-beneficiaries with similar

propensity scores exists. Heckman et al., (1997) emphasised that the quality of the match can be improved by

ensuring that matches are formed only where the distribution of the density of the propensity scores overlap

between treatment and comparison observations, or where the propensity score densities have common support

(Appendix 4).

Common support was then improved by dropping treatment observations whose estimated propensity

score is greater than the maximum or less than the minimum of the comparison group propensity scores. Similarly,

comparison group observations with a propensity score below the minimum or above the maximum of the

treatment observations can be dropped. All results presented below are based on specifications that passed the

balancing tests (Appendix 5) conducted.

The true ATT indicates the mean difference between those adopting a technology and non-adopters, who

are identical in observable characteristics and adequately weighted by a balanced probability of participation. An

adequate match of a participant with his/her counterfactual is achieved, as long as they are identical in their

observable characteristics. In order to obtain such matched pairs, this study applied three different matching

methods that vary in terms of bias and efficiency as applied by Caliendo and Kopeinig (2005). Nearest neighbour

matching, stratification matching, and kernel matching were the three matching techniques used.

3.2 Sensitivity Analysis

Lastly we had to do a sensitivity analysis to examine how strong the influence of γ on the participation process

needs to be, in order to attenuate the impact of participation on potential outcomes (Rosenbaum, 2002). For the

sake of simplicity, it is assumed that the unobservable variable is a binary variable taking values zero or one

(Rosenbaum, 2002). The following bounds on the odds ratio of the participation probability of both individuals

were applied as



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120

�#$ ≤ &�'(��)&�'*��

&�'*��)&�'(�� ≤ +, (7)

In this case individuals had the same probability of participation in soil & water technology adoption, provided

that they were identical in�, only if +, = 1 (Rosenbaum, 2002). If +, is close to one and changes the inference

about the treatment effect, the impact of participation on potential outcomes is said to be sensitive to hidden bias.

In contrast, insensitive treatment effects would be obtained if a large value of +, does not alter the inference about

treatment effects (Rosenbaum, 2002). In this sense, +, could be interpreted as a measure of the degree of departure

from a study that is free of unobservable selection bias (Rosenbaum, 2002).

We also checked the quality of the matching estimators by standardizing the differences in observables’ means

between participants and non-participants. The standardized difference in percent after matching represents, for a

given independent covariate � , the difference in sample means in the participating (�� ) and matched non-

participating (��) sub-samples as a percentage of the square root of the average sample variances ( -�. and -�. )

(Rosenbaum and Rubin, 1985), given as

-� = /100 �'01)'20000�3�.5�6789628:�2.;<

(8)

Although there exists no clear threshold of successful or failed matching, a remaining bias below 5% after

matching is accepted as an indication that the balance among the different observable characteristics between the

matched groups is sufficient (Caliendo and Kopeinig, 2005).

Our results of sensitivity analysis (Appendix 6) show that the inference for the effect of the two

technologies is not changing though the participants and non-participant households have been allowed to differ

in their odds of being treated up to (+, = 3) in terms of unobserved covariates. This means that for all outcome

variables estimated, at various level of critical value of+,, the p-critical values are significant which further

indicate that we have considered important covariates that affected both participation and outcome variables. We

couldn’t get the critical value +, where the estimated ATT is questioned even if we had set largely up to 3. Thus,

we can conclude that our impact estimates (ATT) are insensitive to unobserved selection bias and are a pure effect

of the technologies.

4.0 Results and Discussion

Our data shows that about 41% of the farmers use soil and water conservation practices. Farmers did practice a

range of soil and water conservation strategies such as vertiver grass planting (42.4%), agroforestry (14.0%), box

ridges (27.6%) and gulley check (4.4%). When mean crop yields, revenue and expenditure comparisons are made

between adopters and non-adopters using t-statistics analysis. There are some statistical significant mean

differences in the mean increase of maize and tobacco yields for those practicing soil and water conservation

(Table 1). Our findings do concur to those by Asfaw et al., (2014) who found that adoption of soil water

conservation strategies consistently improved overall maize yields.

TABLE 1: COMPARISON OF HOUSEHOLD AVERAGE CROP YIELD, REVENUE AND

EXPENDITURE

Non adopters Adopters

Crop yield (kg)

Maize 659 (54) 906***(78)

Millet 90 (14) 94(13)

Tobacco 19 (4)*** 61***(13)

Revenue (MK)

Crop revenue 29374 (2864)** 41635(4229)

Livestock revenue 15963 (2835) 15814 (2458)

Total agric. Revenue 45337 (4117)** 57449 (4814)

Non-farm revenue 144160 (10230)* 183130*(15923)

Total revenue 189498 (11354)** 240580**(16623)

Expenditure (MK)

Agriculture cost 15312(2460)*** 30325**(4052)

Capital expenditure 1229 (404)* 2599 (759)

Clothing expenditure 19534 (1707)*** 26593 (2624)

Other expenditures 26564 (2154)*** 39236*** (3592)

Total expenditure 137056 (8839)*** 193295** (11753)

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

The mean income from non-farm sources was statistically different for adopters and non-adopters. We note with

interest that on the expenditure, the mean agriculture cost and other expenses was also t- statistically different, this

could signify that technologies implemented do come at a cost despite them improving farmer’s livelihood.



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The difference between net value of crop production and their associated costs using t-test, shows that adopters

were better off than non-adopters. These findings are similar to Muzari et al., (2013), who found that smallholder

households practicing conservation agriculture in Zimbabwe’s Makonde region had significantly higher mean

maize output per household of 7.31 ton. Those not practicing conservation agriculture had a significantly lower

mean crop output per household of 1.04 ton. (Muzari et al., 2013). However, because adoption is endogenous, a

simple comparison of the outcome indicators of adopter and non-adopters has no causal interpretation (Asfaw et

al., 2013). Hence this results, must be interpreted with caution because crop productivity may also be influenced

by plot and household characteristics, apart from adoption of technologies.

4.1 Propensity score matching result

The estimated results appears to perform well for the intended matching exercise and impact assessment, as the

pseudo-R2 values (pseudo R2 = 0.091 for soil & water conservation) shows that the competing households do not

have many distinct characteristics in per capita income, so that finding a good match between the treated and non-

treated households becomes easier in the different technologies under study.

The maximum likelihood estimate shows that being a lead farmer and artisan/skilled tradesman

significantly influenced adoption of soil and water conservation. This pattern was similarly observed in per capita

expenditure. These variables, had greater significant effect on the decisions of the farmers to adopt soil & water

conservation (Table 2). Amongst the variables included in our model, education of the household head, household

size, farm size and the occurrence of droughts were theorised to increase the likelihood of farm households

adopting soil and water conservation. Scaled adoption of a technology requires a certain level of technical

understanding of the husbandry practices associated with the given technology. Literature suggests that adoption

of agricultural technologies, generally, is conditioned by socioeconomic and biophysical environment from within

farmers operate and attributes of the technology in question (Feder, et al., 1985; Saha, et al., 1994; Batz, et al.,

1999). Factors like gender, level of education, access to extension services and markets, proximity to main roads,

household incomes as well as social capital somehow influence the adoption of agricultural technologies (Doss,

2006; Katengeza, et al., 2012).

TABLE 2: MAXIMUM LIKELIHOOD ESTIMATE TO PARTICIPATION IN THE

TECHNOLOGIES

Dummy variable Ln _ per capita income Ln _ per capita expenditure

Lead farmer (1=yes) 0.799*** (0.273) 0.791*** (0.273)

Artisan/skilled tradesman (1=yes) -1.234** (0.639) -1.224** (0.638)

_cons 3.505 (4.907) 3.876 (4.898)

N

LR chi.

P> chi.

Pseudo R.

Log likelihood

216

26.28

0.0935

0.091

130.73

217

26.04

0.0988

0.0899

-131.8

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

There is a 27% reduction in per capita income because of farmer’s involvement in soil and water

conservation. The impact is significant at 5% level. The results are consistent with stratification and kernel

matching methods, as soil and water conservation technologies reduces per capita income by 12 and 7%

respectively at a 5% significance level. Similarly, there is an 8% reduction in per capita expenditure because of

farmer’s involvement in soil and water conservation. The impact is significant at 5% level. Stratification and kernel

matching methods also reduces per capita expenditure by 3 and 27.4% respectively at a 5% significance level.

These results contradicts those by Kato et al., (2011), who found a significant contribution of 4% and 25%

production increase, for the adopters of soil and water conservation in the low and high rainfall areas of Ethiopia

using a Cobb-Douglas function. Kassie (2013) found that the adoption of minimum tillage with residue retention

significantly increased maize yield of between 60 to 75%.

Literature has confirmed the controversial, mixed and sometimes conflicting results relative to expected

benefits of soil and water conservation strategies (Zulu, 2016). Although adopters in this study realized nominally

higher yields, the yield differences were not as significant. We expected the yield response in most crops by the

adopters to be significantly higher yields for farmers employing the technology. In a study by Thierfelder et al.,

(2013), it is stated that conservation agriculture do increase rainwater infiltration by 24 to40%, increases maize

yield up to two-fold (Thierfelder et al., 2013).

There are several feasible explanations for the incongruent in our results obtained. The first one being

that for crop plants to be able to assimilate nutrients, they need water in adequate amounts. Water is not readily

available in these districts because of low precipitation levels hence the root zone find it difficult absorb these

nutrients. The soil biophysical conditions in the district are not suitable for the technology. Although the use of



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soil and water conservation technologies has often been promoted in the study areas, several farmers lack access

to complementary agricultural services, such as access to credit and information. There could be possible ways to

make soil and water conservation measures more profitable, but the question, of course, is why farmers many of

whom had more than 15 years’ experience of farming, were not taking the technologies.

5.0 Conclusion

This study aimed to gauge the impact of soil and water conservation on the welfare of the farmers by using income

and expenditure as proxies. Lack of positive impact in our findings might be a result of respondents hiding

information on income earned/spent and assets available, as most of them were not willing to disclose their

income/expenditure and assets owned in anticipation to receive hand outs from the researchers. The other reason

per our intuition is that farmers from Nsanje, which contributed a bigger proportion of the sample size do not use

soil and water conservation because they see their land to be already fertile and no need for them to adopt the

technologies. This was confirmed in the focus group discussions. Nevertheless increased effort for exploring these

technologies further and provide optimum plot specific productivity rate of changes is necessary for policy

formulation

6.0 Acknowledgement

The paper is an extract based on the first author’s PhD work at Lilongwe University of Agriculture and Natural

Resources supported by Climate Smart Agriculture Climate Smart Agriculture-FAO Project, CABMACC and

Carnegie Cooperation of New York through RUFORUM.

7.0 References

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Asfaw, S., McCarty N., Lipper L., Arslan A., and Cattaneo A. (2013). Adaption to Climate Change and Food

Security: Micro-evidence from Malawi: Invited paper presented at the 4th International Conference of

the African Association of Agricultural Economists, September 22-25, 2013, Hammamet, Tunisia.

Balaka District Assembly. (2010). Socio-Economic Profile. Balaka. Malawi.

Batz, F. J., Peters, K. J. and Janssen, W. (1999). The influence of technology characteristics on the rate and speed

of adoption. Agricultural Economics 21:121-130.

Caliendo, M., and Kopeinig, S. (2005). Some practical guidance for the implementation of propensityscore

matching. Discussion Paper no. 1588. Institute for the Study of Labour (IZA), Bonn, Germany.

Chambers, R. (1989). Editorial Introduction: Vulnerability, Coping and Policy. IDS Bulletin 20: 1‐7. Institute of

Development Studies, Brighton, UK.

Doss, C. (2006). Analysing Technology Adoption Using Micro studies: Limitations, Challenges and Opportunities

for Improvement. Agricultural Economics 34:207-219.

Edriss, A.K. (2013). Pearls of Applied Statistics. I-Publishers, Toronto, Canada.

Feder, G., Just, R. E. and Zilberman, D. (1985). Adoption of agricultural Innovations in Developing Countries: A

Survey. Economic Development and Cultural change, 33(2):255-298.

Heckman, J. J., Ichimura, H., and Todd, P. E. (1997). Matching as an econometric evaluation estimator: Evidence

from evaluating a job training program. Review of Economic Studies, 64 (4): 605-654.

Katengeza, S. P., Mangisoni J. H., Kassie G. T., Sutcliffe C., Langyintuo A., La Rovere R., and Mwangi W. (2012).

Drivers of Improved Maize Variety Adoption in Drought Prone Areas of Malawi. Journal of

Development and Agricultural Economics 4:393-403.

Kato, E., Ringler C., Yesuf M. and Bryan E., (2011). Soil and water conservation technologies:A buffer against

production risk in the face of climate change? Insights from the Nile basin in Ethiopia. Agriculture

Economics, 42:593-604.

Kassie, M., Jaleta, M., Shiferaw, B., Mmbando, F., & Mekuria, M. (2013). Adoption of interrelated sustainable

agricultural practices in smallholder system: evidence from rural Tanzania. Technological Forecast and

Social Change, 80:525–540.

Kurukulasuriya P. and Mendelsohn R. (2006). A Ricardian analysis of the impact of climate change on African

cropland. Centre for Environmental Economics and Policy in Africa Discussion Paper No. 8. Special

series on climate change and agriculture in Africa.

Muzari W., Kupika O., Danha O., and Mapingure C. (2013). The impacts of agricultural technology use on

productivity and food security among smallholder farmers in Zimbabwe: The case of Makonde district.

In the Journal of Agricultural Extension and Rural Development. 5(10):225-231.

Nsanje District Assembly 2010. Socio-Economic Profile. Nsanje. Malawi

Rosenbaum, P., and Rubin, D. (1983). The Central Role of the Propensity Score in Observational Studies for

Causal Effects. Biometrika, 70:41–50.



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Rosenbaum, P. and Rubin, D. (1985). Constructing a Control Group Using Multivariate Matched Sampling

Methods that Incorporate the Propensity Score. The American Statistican, 39:33-38.

Rosenbaum, P.R. 2002. Observational Studies. Springer link, New York.

Saha, A., Love, H. A. and Schwart, R. (1994). Adoption of emerging technologies under output uncertainty.

American Journal of Agricultural Economics, 74(4): 836-846.

Spielman, D.J. and Pandya-Lorch, R. (editors.). (2009). Millions Fed Proven Successes in Agricultural

Development. IFPRI.

Thierfelder, C., J.L. Chisui, M. Gama, S. Cheesman, Z.D. Jere, W. Bunderson, N.S. Eash, and L.

Rusinamhodzi. (2013). Maize-based Conservation Agriculture Systems in Malawi: Long-term Trends

in Productivity. Field Crops Research 142: 47-57.

Yohe, G., and Tol R.S.J. (2002). Indicators for social and economic coping capacity moving toward a working

definition of adaptive capacity. Global Environmental Change 12: 25-32.

Zulu L. (2016). Existing Research and Knowledge on Impacts of Climate Variability and Change on Agriculture

and Communities in Malawi: Technical Report of the Malawian Innovation Activity, Improving Food

Security and Resilience to Climate Change: Malawi Report No. 004

Appendix 1: Distribution in per capita income before and after transformation

0.2

.4.6

De

nsity

11 12 13 14psmatch2: value of lnHH_income of match(es)

Kernel density estimate

Normal density

kernel = epanechnikov, bandwidth = 0.2191

Kernel Density Distribution after Matching

0.1

.2.3

.4D

en

sity

0 5 10 15lnHH_income

Kernel density estimate

kernel = epanechnikov, bandwidth = 0.2260

Kernel Density Distribution before Matching

Appendix 2: Performance difference between treatment and control groups

Treated Controls Difference S.E. T-stat

Ln_percapita Income with Soil and water technologies

Unmatched 11.96 12.02 -0.07 0.13 -0.52*

ATT 11.98 12.08 -0.10 0.17 -0.59*

Ln_percapita Expenditure with Soil and water technologies

Unmatched 9.82 10.06 -0.24 0.16 -1.49*

ATT 9.87 10.15 -0.28 0.17 -1.70*

*** p<0.01, ** p<0.05, * p<0.1



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Appendix 3: Propensity score distribution and common support

Note: Treated: on support” indicates the observations in the adoption group that have suitable comparison.

“Treated: off support’ “indicates that the observations in the adoption group that do not have a suitable

comparison

APPENDIX 4: BALANCING PROPERTIES TEST

Area of Common Support Blocks Balancing Result

ln_percapita income

Soil and water technologies 0.24640378, 0.97168243 5 Satisfied

ln_percapita expenditure

Soil and water technologies 0.20993335, 0.97689421 5 Satisfied

Appendix 5 Graphical output of the propensity score matching

0.5

11.5

2

kdensity m

ypscore

0 .2 .4 .6 .8 1propensity score

treated control

0 .2 .4 .6 .8 1 Propensity Score

Untreated Treated: On support Treated: Off support



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Appendix 6: Income and expenditure sensitivity analysis

Gam

ma

(Γ)

Income sensitivity analysis Expenditure sensitivity analysis

Lower. Bound

HL Est.

Upper. Bound

HL Est.

Confidence

interval

Lower. Bound

HL Est.

Upper. Bound

HL Est.

Confidence

interval

1 -0.218 -0.176 -0.462, 0.163 -0.218 -0.176 -0.462, 0.163

1.2 -0.317 -0.059 -0.574, 0.261 -0.317 -0.059 -0.574, 0.261

1.4 -0.397 0.019 -0.676, 0.353 -0.397 0.019 -0.676, 0.353

1.6 -0.472 0.080 -0.735, 0.431 -0.472 0.080 -0.735, 0.431

1.8 -0.543 0.158 -0.809, 0.501 -0.543 0.158 -0.809, 0.501

2 -0.595 0.215 -0.885, 0.563 -0.595 0.215 -0.885, 0.563

2.2 -0.658 0.259 -0.944, 0.628 -0.658 0.259 -0.944, 0.628

2.4 -0.700 0.298 -0.999, 0.679 -0.700 0.298 -0.999, 0.679

2.6 -0.742 0.347 -1.062, 0.735 -0.742 0.347 -1.062, 0.735

2.8 -0.782 0.388 -1.112, 0.783 -0.782 0.388 -1.112, 0.783

3 -0.820 0.418 -1.162, 0.822 -0.820 0.418 -1.162, 0.822

Gamma (Γ): log odds of differential assignment due to unobserved factors

Lower Bound HL Est.: upper bound Hodges-Lehmann point estimate

Upper Bound HL Est.: lower bound Hodges-Lehmann point estimate

Lower and Upper confidence interval (95%)



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Manufacturing and Economic Growth in Africa: A Panel Test of

Kaldor’s First Growth Law

Olumuyiwa Olamade* Oluwasola Oni

Department of Economics, Caleb University. PMB 21238, Ikeja, Lagos, Nigeria

Abstract

This paper examines the importance of the manufacturing sector for economic growth in African countries.

Although many African countries have posted impressive growth performance in last one decade. A notable fact

of this growth is the declining share of manufacturing in the gross domestic product (GDP). Will the contraction

of the manufacturing sector hurt African economic growth in the long-run? We approach this question by testing

Kaldor’s first law of economic growth using panel data for a sample of 28 African countries over the period

1981-2015. Results obtained from pooled Ordinary Least Squares, Fixed Effects, and System Generalized

Method of Moments provides current evidence to support manufacturing as the engine of growth in Africa. The

Fagerberg-Verspagen (1999) criteria show that despite the falling share of manufacturing in the GDP, the

difference between the coefficient of manufacturing output growth and share of manufacturing in GDP is

positive and significant. We conclude that de-industrialisation will adversely affect both the growth rate of the

non-manufacturing sectors and of the whole economy in African countries.

Keywords: Economic growth, manufacturing, non-manufacturing, productivity, value added

1. Introduction

Since Clark (1941) a wide range of literature, especially those associated with the post-Keynesian and

evolutionary economists, have empirically confirmed that structural change is the necessary process of economic

growth. The expansion of the manufacturing sector is generally viewed as the most significant engine of the

growth process. Kaldor (1966, 1967) posits a strong positive causal relationship between the growth of

manufacturing output and that of the GDP. This relationship rests on certain special characteristics of the

manufacturing sector, which makes it the engine of GDP growth and of living standards. First, manufacturing is

characterised by both static and dynamic increasing returns to scale, while other non-manufacturing activities are

subject to diminishing returns. Secondly, manufacturing output growth draws labour from non-manufacturing

activities where there are diminishing returns resulting in productivity growth in these activities because the

average product of labour is above the marginal product. The manufacturing sector’s characteristics with regard

to GDP growth is the foundation of what now is known as the Kaldor’s growth laws. The laws state that: (1)

manufacturing is the engine of GDP growth (2) the productivity of the manufacturing sector is positively related

to it's on growth (also known as the Verdoorn’s law), and (3) the productivity of the non-manufacturing sector is

positively related to the growth of the manufacturing sector. Thus, the post-Keynesian development paradigm

based on Kaldor’s ‘engine of growth’ hypothesis advance the strengthening of the manufacturing sector, even if

the sector offers no comparative advantage in the initial stage of development. The special characteristics of the

manufacturing sector will enhance its competitiveness over time and spread positive externalities to other

important sectors of the economy (Cantore, Clara and Soare, 2014).



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Developments in structural transformation paths of some developing countries in the last two decades

appear to question the role of manufacturing as engine of growth or the sole engine of growth. Dasgupta and

Singh (2006) outline certain long-term structural tendencies observed in some developing countries which prima

facie challenges the Kaldor’s theses. These tendencies include the onset of de-industrialisation at a much lower

level of per capita income than historically observed in the advanced countries during their period of

industrialisation; the phenomenon of jobless growth in the formal manufacturing sector in both slow-growing

and fast-growing economies; and a faster long-term growth of services than manufacturing. Drawing from the

experience of India, Amirapu and Subramanian (2015) posit that any sector of the economy could lead growth if

it features a high level of productivity, dynamic productivity growth, extensive backward and forward linkages,

exportability, and comparative advantage for the home country. Thus, services or any other sector or branches

thereof could displace manufacturing as engine of growth.

With developments in information and communications technology (ICT) and the emergence of

services as the leading growth sector in many developing countries the debate on the best way to stimulate

growth in developing countries remains unsettled. The question then arises as to whether African countries need

to industrialize in order to grow and prosper. Put differently, should manufacturing remain the focus of

industrial policy in developing countries, and Africa in particular? This paper attempts to answer this question by

examining the GDP-manufacturing growth relationship. If we find significant evidence that, the influence of

manufacturing output expansion on economic growth transcends the percentage share of manufacturing in the

GDP, we conclude that the manufacturing as engine of growth hypothesis is still relevant to Africa. The

manufacturing sector in Africa offers opportunities for economic growth through economy-wide diffusion of

technological progress believed to originate principally from the manufacturing sector. The rest of the paper is

organized as follows; review of relevant literature comes up section 1, while the description of the data used and

the source is in section 2. The theoretical foundation of the work, the regression equations, and estimation

methodologies are set out in section 3. We report the findings and conclude in sections 4 and 5, respectively.

2. Review of literature

There appear to be two major definitive consensuses in the empirical literature regarding the pattern of growth in

developed and developing economies. First is that the major sources of economic growth for developed and

developing economies are completely different. Secondly, that the linear structural change from agriculture to

manufacturing, and then from manufacturing to services that characterized the economic transformation of the

developed economies may not generally apply to developing economies. In addressing the economic growth

concerns of developing economies, two key and somehow divergent strands of literature are identifiable. On the

one hand is the neoclassical paradigm which emphasises that countries ought to specialise in those sectors they

have comparative costs advantage than competitors. On the other hand, the post-Keynesian and evolutionary

economists argue that countries ought to specialise in those strategic sectors that can stimulate economy-wide

productivity and innovation, even if such sectors confers no comparative advantage at the initial stages of

development (Cantore et al, 2014).

While both paradigms are appropriate for developed economies largely driven by rapid technological

changes based on efficient accumulation of physical and human capital, they pose different development



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challenges for low-income and middle-income developing countries. According to the comparative advantage

paradigm, developing countries ought to focus on agriculture and successively transit from agriculture to the

modern sectors following the linear structural transformation path. Su and Yao (2016) identified the challenge

posed by the neoclassical paradigm for low-income developing countries as the lack of a driving force to transfer

resources from agriculture to the modern sectors. Where the driving force is available and activated, research has

empirically shown that the structural change bonus resulting from such transfer has been a major source of

growth in developing countries (Timmer and Szirmai, 2000; Temple and Woessmann, 2006; Rodrik, 2009 and

Timmer and de Vries, 2007). For the middle-income countries, the challenge is how to transit from middle-

income to high-income countries or avoid the supposed ‘middle-income trap’ (Agenor, Canuto and Jelenic,

2012). For countries experiencing income growth slowdowns, Krugman (1994) identified labour productivity

growth as a veritable new source of long-term economic growth. Thus, breaking out of income trap and catching

up with developed economies is actually a process of eliminating the productivity gap. Eichengreen, Park and

Shin in a 2011 paper also advanced the productivity argument as a fundamental development challenge of

developing countries. To Eichengreen et al, slowdown in the rate of total factor productivity (TFP) growth may

result in prolonged slow output growth, and freezes income growth. Which route should developing economies

take to ensure sustained long-term income growth? According to the neoclassical growth model, it is the way of

efficient accumulation of physical and human capital. The post-Keynesians and evolutionary economists point to

the way of continual productivity growth.

The essential contribution of the Kaldor’s engine of growth hypothesis is the proposition of a theoretical

foundation for a development strategy, which locates manufacturing output growth as the fulcrum for both

efficient physical and human capital accumulation (neoclassical theses) , and factor productivity growth (post-

Keynesians prescription). If productivity growth in both the manufacturing sector and non-manufacturing sector

of the economy is positively related to output growth in the manufacturing sector as proposed by Kaldor (1966,

1967), then a transfer of resources from other sectors to manufacturing will result in more rapid aggregate

growth (Szirmai, 2011; Cantore et al, 2014). Evidence of this dynamic shift effect in developing countries is

unambiguous as productivity growth in manufacturing has been more rapid than in the primary sector (Szirmai,

2011). Further, the manufacturing sector compared to other sectors has a higher demand for capital and

investment thereby providing opportunities for capital accumulation and increase in the private saving ratio (Su

and Yao, 2016). The neoclassical growth theory regards savings as one the most important factors for long-run

economic growth.

The manufacturing sector, more than other sectors, offer superior opportunities for embodied and

disembodied technological progress crucial for the development of developing countries. Rapid capital

accumulation puts into operation in firms new machines that incorporate the latest technological advances that

drive productivity growth in firms and in the economy. Greenwood, Hercrwitz, and Krusell (1997) estimated that

60% of labour productivity growth is directly attributable to embodied technological progress. It is logical that if

new machines embody technology that is more productive than that of older machines, then a sustained

investment in new machines should lead to an increase in TFP growth. The positive effects of embodied

technological progress are also positive for advanced economies. Stiroh (2001) inquiring into recent changes in

the US economy attributes accelerated aggregate productivity growth to a combination of accelerating technical



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progress in high-tech industries and corresponding investment and capital deepening. Sakellaris and Wilson

(2002) evaluated the impact of embodied technological change on US manufacturing productivity growth

between 1972 and 1996, and concluded that the role of investment-specific technological change as an engine of

growth is even larger than previously estimated.

The manufacturing sector allows for faster growth rate in both embodied and disembodied

technological progress. Cornwall (1977) argued that embodied and disembodied technological progress largely

originates in the manufacturing sector and diffused to other sectors therefore making manufacturing the locus of

technological progress in the economy. Manufacturing generates more extensive and stronger linkages with, and

spillovers into, the economy than nonmanufacturing activities (Herzer, 2007). While linkages can create

economies of scale, spillovers create an environment for new product and process technologies ideas resulting in

further expansion of both the manufacturing and nonmanufacturing sectors.

Empirical economic growth literature using different econometric models had tested and confirmed the

validity of manufacturing as engine of growth. Studies at national and regional levels largely agreed that output

growth in the manufacturing sector is uniquely important to the process of national economic growth as

aggregate economic growth positively relates to both output growth and productivity growth in the

manufacturing sector. At the level of individual countries, the U.S. Department of Commerce (1995) finds the

manufacturing sector a powerful source and a principal arena of growth and change. Other country level studies

include the works done for the United Kingdom (Stoneman, 1979), Australia (Whiteman, 1987), Greece

(Drakopoulos and Theodossiou, 1991) and Turkey (Bairam, 1991).

Wells and Thirlwall (2003) evaluated Kaldor’s law across African countries. Dasgupta and Singh

(2005) evaluated the engine of growth hypothesis for 30 developing countries. In a 2006 work, Dasgupta and

Singh analysed a sample of 48 developing countries. Szirmai (2009) worked with a panel of 63 developing

countries and 16 advanced countries for the period 1950-2005. Lavopa and Szirmai (2012) used a sample of 92

countries for the period 1960 – 2010. Libanio and Moro (2013) applied panel data for 11 largest economies in

Latin America during the period 1980-2006. All these studies find strong evidence to support the engine of

growth hypothesis for manufacturing. Pacheco-Lopez and Thirlwall (2013) reinterpreted Kaldor´s first law.

Starting with a premise that the model in its original form is essentially ‘closed-economy’ hypothesized that

export growth drives GDP growth, and export growth itself is a positive function of manufacturing output

growth. Using a dataset comprising 89 open developing economies for the period 1990-2011, the authors show

that manufacturing growth translates into economic growth through international trade.

Eguez (2014) applied Kaldor’s first law to a world panel of 119 countries over the period 1990 – 2011.

The study confirmed that manufacturing continues to be an engine of growth in both low and middle-income

countries. Manufacturing activities with higher technology component generate more space for technological

progress, human capital development and productivity increase, which ultimately contribute positively to a faster

economic growth. For a sample of 80 countries, Cantore et al (2014) decomposed manufacturing sector growth

into intensive and extensive industrialisation. They affirm the validity of Kaldor’s law of manufacturing as

engine of growth while concluding that intensive rather than extensive industrialisation more closely relates to

GDP growth. In a more recent study, Su and Yao (2016) in a sample of 180 middle-income countries for the

period 1950-2013 found that compared with other sectors, manufacturing development can better utilise human



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capital and economic institutions, improve the incentives of savings, enhance the technological accumulation.

In conclusion, empirical literature undeniably is divided on the engine of growth hypothesis. While

some supports the engine of growth hypothesis for manufacturing others argued that the recent surge in service

sector expansion in some developing countries and early de-industrialisation experienced by others appears to

suggest that manufacturing is not the only engine of growth. For instance, Eguez (2014) found that

manufacturing and services both turn out to be engines of growth for middle-income countries, though

manufacturing is the stronger source of growth. The result suggests that for these countries manufacturing is not

the only route to achieving economic growth. While strongly validating the manufacturing as engine of growth

hypothesis, Cantore et al (2014) showed that not every dollar of additional manufacturing value added

contributes to growth.

3. Data description and source

The variable representing manufacturing output growth is the growth rate of the manufacturing value added. The

non-manufacturing sector is made up of the valued added of both the agriculture and services sectors. This

follows the practice well established in the literature. As the influence of manufacturing value added growth rate

on economic growth might not be significantly visible in a single year, we work with a 5-year average of the

growth rate of real GDP, manufacturing value added growth rate, and non-manufacturing value added growth

rate. Based on data constraint we select a sample of 28 African countries for which continuous data are available

for the period 1981 – 2015. All the data used are from the 2016 edition of the World Bank’s World Development

Indicators (WDI). All computations were done on Eviews 9.5.

4 Empirics

4.1 The equations

Kaldor’s first law of growth often referred as the ‘engine of growth hypothesis’ posits that the growth rate of

GDP is positively related to the growth rate of manufacturing output. Kaldor expressed the hypothesis as:

q = a1 + a2m, (1)

where q and m represent growth of GDP and manufacturing output, respectively. The regression

coefficient (a2) should be positive and less than a unity suggesting that the overall growth rate of the economy is

associated with the excess of the growth rate of manufacturing output over the growth rate of non-manufacturing

output.

Kaldor premised the explanation for the correlation between the growth rate of manufacturing output

and the aggregate economic performance on two possible reasons. The first relates to the fact that the expansion

of manufacturing output leads to the transfer of labour to the manufacturing sector from the low productivity

non-manufacturing sector. The result is an increasing economy-wide productivity with little or no negative

impact on the output of the non-manufacturing sector, given the existence of surplus labour. The second reason

relates to the existence of static and dynamic increasing returns in the manufacturing sector. While static returns

relate essentially to economies of scale internal to the firm, dynamic returns refer to increasing productivity

derived from learning by doing, ‘induced’ technological change, and external economies in production.

As regards equation (1) Kaldor made the important point that the correlation between q and m is not

only due to manufacturing output constituting a large component of GDP, rather that high economic growth rates



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is positively related to the excess of manufacturing output growth over non-manufacturing output growth. He

demonstrated that countries that exhibit GDP growth rates over 3% a year, present a manufacturing growth rate

output higher than the growth rate of the non-manufacturing sector. Kaldor expressed this claim in equation form

as:

q = a3 + a4(m – nm) (2)

where nm refers to the growth of non-manufacturing output, and (m – nm) the excess of manufacturing

output growth over non-manufacturing output growth. We will simply denote this excess as (λ) and rewrite

equation (2) as: q = a3 + a4(z). To further support his first law of growth Kaldor showed that non-manufacturing

output growth also responds positively to the growth of manufacturing output resulting in overall economic

performance growth. This he expressed as:

nm = a5 + a6m (3)

Equation (1) essentially is the culmination of the manufacturing as engine of growth hypothesis. The

other two equations offer support for the hypothesis and abate the endogeneity problem, which characterises

equation (1). We will subject equations (1) – (3) to pooled OLS and Fixed Effects (FE) regression. The system

generalised method of moments (system GMM) will test only equation (1). For each of the estimation

techniques, appropriate transformation of the three original equations is made to suit the assumptions of the

technique.

4.2 Empirical methodology

Empirical research has shown that the traditional ordinary least squares (OLS) estimation (the technique used by

Kaldor) is incapable of handling the problems of highly correlated regressors, country heterogeneity, reverse

causality, etc often associated with empirical growth regression analyses. Kaldor’s own results for his first law

suffer from endogeneity bias, which may arise from the independent variable (m) being correlated with the error

term, omitted variables in the regression, and simultaneity bias. In the relations between GDP growth (q) and

manufacturing growth (m) both variables could be reciprocally correlated. In the face of reciprocal causality, the

OLS technique produces biased estimates. To circumvent this concern researchers have employed alternative

econometric models to test the engine of growth hypothesis. In this paper, we employed the pooled OLS, FE

model and the system GMM. The pooled OLS is simply the conventional least squares method fitted to a panel

sample. In the face of heterogeneity across countries and the likelihood that the country-specific effects may be

correlated to the regressors, the FE model provides improvements to pooled OLS results and thus address the

concern of spurious correlation. We chose system GMM over the difference GMM because it offers better

results. It improves difference GMM by introducing instruments in differences for equations in levels. We

therefore expect that our results would progressively improve as we proceed from pooled OLS to FE, and to

system GMM.

4.2.1 Pooled OLS

For the pooled OLS regression equation (1) which describes the relationship between GDP growth and

manufacturing output expansion is transformed as:

qit = b1t + b2i(mit) + λ t + ɛit, b2 > 0 (4)

where λ is the time-specific effects introduced to check if the influence of manufacturing growth on GDP growth



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changes during the study period. Similarly, equation (2) which predicts the GDP growth rate by the difference

between the growth rates of manufacturing value added and non-manufacturing value added is transformed as:

qit = b3t + b4i(zit ) + λt + ɛit, b4 > 0 (5)

In the same vein, equation (3) which posits that non-manufacturing value added growth positively responds to

growth of manufacturing value added is transformed for pooled OLS regression as

(nmit)= b5t + b6i(mit) + λt + ɛit, b6 > 0 (6)

The pooled OLS model estimates equations (4) – (6) without regard to country-specific income effects.

We conduct heteroscedasticity and autocorrelation tests to check the validity and reliability of the

estimates obtained by pooled OLS. Tests of the null hypotheses of no cross-section random effect, and of the

combined cross-section and time random effect conducted with the Breusch-Pagan, Honda, King-Wu,

Standardized Honda and Standardized King-Wu statistics overwhelmingly supports the acceptance of the null at

5%. However, the Pesaran scaled LM, Biased-corrected scale LM, and Pesaran CD all fail to accept the null of

no cross-section dependence in residuals.

4.2.2 Fixed Effects model

The main assumption of the FE model is that the error term is divided into two distinct components as: ɛit = fi +

µ it. Where µ it is the conventional idiosyncratic random error and f the country-specific effects. In this model, f

depends on the regressors and is therefore a random variable. Like in the Pooled OLS, we estimate the FE model

without regard to country-specific effects often captured by the introduction of income category dummies. To

implement the FE model, the following transformation of equations (1) – (3) apply:

qit = c1t + c2i(mit) + λt + fi + µ it. (7)

qit = c3t + c4i(zit) + λt + fi + µ it. (8)

(nmit)= c5t + c6i(mit) + λ t + fi + µ it. (9)

Combinations of the Pesaran scaled LM, Biased-corrected scale LM, and Pesaran CD tests provide

strong support to accept the absence of residuals correlation at 5% in the FE model. We therefore, assume the

validity and reliability of the estimates of the three equations under the pooled OLS and FE model.

4.2.3 System GMM

Researchers have also estimated equation (1) by including the lagged values of the dependent variable (q) as a

way to capture possible autocorrelations as in Holland et al (2012).

There is a consensus that when such a dynamic model is regressed with either the OLS or FE techniques the

coefficient of the lagged dependent variable may bias upwards in case of individual-specific effects or

downwards in the case of FE (Nickell, 1981). In this situation, the GMM is helpful to correct the bias. The GMM

is a modern econometric technique to deal with endogeneity bias with or without lagged dependent variable.

There are different alternatives to perform the GMM technique. Arellano and Bond (1991) proposed the

difference GMM estimator that transforms the regressors, usually by differencing them in order to remove

country specific FE, which are the source of endogeneity. Then the first difference of the dependent variable is

instrumented with lagged values of the regressor in level. Nevertheless, the past values in levels may turn out to

be poor instruments for first differences (Blundell and bond 1998). Consequently, Arellano and Bover (1995),

and Blundell and Bond (1998) proposed the system GMM estimator that builds a system using the original

equation with the dependent variable in first difference and the transformed equation. In this model, the



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133

transformed equation has a dependent variable in levels that is instrumented with suitable lags of their own first

differences based on the assumption that the first differences of instrument variables are uncorrelated with

country FE. According to Roodman (2006), this process allows the introduction of more instruments, and can

dramatically improve efficiency. Equation (1) is expressed for system GMM regression as follows:

qit = α1t + φ(qit-1) + α2i(mit) + λt + fi + µ it (10)

For consistency and asymptotic normality, GMM relies on the correct specification of the model and,

given the model, on the specification of correct moment conditions (Andrews and Lu, 2001). Thus, when fitting

a model by GMM, it is required that a check is made to see whether instruments used are uncorrelated with the

errors (orthogonality condition). In GMM estimation, the Hansen’s J statistic is the most common test statistic.

The test statistic has a χ2 distribution under the null hypothesis that the instruments are valid. If the equation,

excluding suspect instruments, is exactly identified the J-statistic will be zero. A J-statistic of less than 0.1 is

acceptable to satisfy the orthogonality condition (Benchimol, 2013).

Finally, we apply the Fagerberg-Verspagen criteria to the coefficient estimate of the system GMM to

obtain additional evidence in support or against the manufacturing as engine of growth hypothesis. The criteria

test whether the coefficient of manufacturing value added growth is positive, and if positive, whether it is

significantly greater than the share of manufacturing value added in the GDP. If the difference is positive and

significant, it is interpreted as support for the engine of growth hypothesis.

4. Empirical findings and discussion

The results of pooled OLS, FE and system GMM regressions are presented in Tables 1, 2 and 3 respectively. The

pooled OLS and FE model returned the same result for equation (1) which tests the direct relationship between

GDP growth (q) and manufacturing output growth (m). In the two models, the constant terms (b1 and c2) and the

coefficient of manufacturing output growth (b2 and c2) are (0.023) and (0.31) respectively, and are significant.

Under the pooled OLS and FE regressions the constant terms vary within the range 0.22 and 0.34. The

implication is that when manufacturing valued added remain unchanged, on the average, GDP grows within the

range captured by the constant term. The coefficients of manufacturing output growth (b2 and c2) and of the

excess of manufacturing output growth over non-manufacturing output growth (b4 and c4) lie between 0.23 and

0.31. This means that when manufacturing output and the excess of manufacturing output over other sectors

output grows by 1%, the GDP growth rate increases within the range of 0.23% and 0.31%. It is notable that these

coefficient values are considerably less than one, which suggests that the greater the manufacturing output

growth and the excess of manufacturing growth over other sectors, the greater the GDP growth. Also, we found

that the lowest coefficient of the manufacturing output growth (27% in the pooled OLS regression) is higher than

the average share of manufacturing value added in the GDP (13.05%) computed for the 28 countries for the

period covered in the analysis. Results obtained for equations (4) and (5) with the pooled OLS and FE supports

manufacturing as engine of economic growth for Africa. As manufacturing output increases and in excess of

output growth in the non-manufacturing sector, it drives growth in the GDP via growth of output in other sectors

of the economy. Equation (6) which shows the effect of manufacturing output growth on the growth performance

in non-manufacturing sector produced a coefficient value of 1.15 suggesting that a 1% increase in manufacturing

output induces more than a 1% increase in non-manufacturing output.



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134

Table 1: Pooled OLS results

Equation 4

(b2)

Equation 5

(b4)

Equation 6

(b6)

Coefficient 0.31

(0.0000)

0.27

(0.0000)

1.15

(0.0000)

Constant 0.023

(0.0000)

0.034

(0.0000)

0.022

(0.0000)

R2 0.35 0.09 0.66

DW 1.24 1.35 1.71

LM tests for random effects (cross-section)

Null hypothesis: No cross-section effect

Breusch-Pagan 4.56

(0.0328)

0.86

(0.3543)*

0.12

(0.7282)*

Honda 2.13

(0.0164)

0.93

(0.1771)*

-0.347542*

King-Wu 2.13

(0.0164)

0.93

(0.1771)*

-0.347542*

Standardized Honda 2.29

(0.0111)

1.08

(0.1404)*

-0.230429*

Standardized King-Wu 2.29

(0.0111)

1.08

(0.1404)*

-0.230429*

LM tests for random effects (cross-section and time)

Null hypothesis: No cross-section and time effects

Breusch-Pagan 16.07

(0.0001)

5.83

(0.0158)*

3.56

(0.0591)*

Honda 3.91

(0.0000)

2.23

(0.0128)*

1.07

(0.1432)*

King-Wu 3.98

(0.0000)

2.41

(0.0079)

1.53

(0.0630)*

Standardized Honda -0.01922* -1.83625* -3.108506*

Standardized King-Wu 0.92

(0.1797)*

-0.809213* -1.782791*

Residual cross-section dependence test

Null hypothesis: No cross-section dependence (correlation) in residuals

Breusch-Pagan LM 537.71

(0.0000)

489.84

(0.0001)

473.23

(0.0006)

Pesaran scaled LM 4.79

(0.0000)

3.04

(0.0023)

2.45

(0.0145)

Pesaran CD 7.05

(0.0000)

5.19

(0.0000)

2.65

(0.0081)

Period included :7, Cross-section included: 28, Total panel (balanced) observations: 196



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135

The result shows that the non-manufacturing sector in African countries responds positively to output

growth in the manufacturing sector. More importantly, the result reinforces the commanding role of the

manufacturing sector as the locus of technological progress because of its more extensive and stronger linkages

with, and spillovers into, the economy. Manufacturing spillovers create an environment for new product and

process technologies ideas resulting in further expansion of both the manufacturing and nonmanufacturing

sectors (Cornwall, 1977; Herzer, 2007). Thus, manufacturing drives economic growth both by its own output

expansion and by the induced output growth in other sectors of the economy. The manufacturing sector drives

GDP growth both by its own output growth and by the induced growth of output in other sectors. Consequently,

there appears a great latitude for manufacturing sector expansion to drive growth in Africa.

Table 2: Fixed effects regression results

Fixed effects (cross-section and period fixed)

Equation 7

(c2)

Equation 8

(c4)

Equation 9

(c6)

Coefficient 0.31

(0.0000)

0.23

(0.0002)

1.15

(0.0000)

Constant 0.023 0.034 0.022

R2 0.56 0.32 0.72

DW 1.68 1.61 1.99

Residual cross-section dependence test

Null: No cross-section dependence (correlation) in residuals

Pesaran scaled LM 1.84

(0.0656)*

2.53

(0.0114)

5.88

(0.0000)

Bias-corrected scaled

LM

-0.49

(0.6225)*

0.19

(0.8429)*

3.55

(0.0004)

Pesaran CD -1.76

(0.0788)*

-1.59

(0.1107)*

0.74

(0.4616)*

Period included :7, Cross-section included: 28, Total panel (balanced) observations: 196

The diagnostics in terms of cross-section heteroscedasticity and combined cross-section and time

heteroscedasticity conducted for the pooled OLS are all satisfactory at 5% when testing the positive relationship

between excess of manufacturing growth over non-manufacturing output growth as a predictor of GDP growth

(equation 5). We therefore accept the null of no heteroscedasticity effect. We cannot accept at 5% the null of no

effect on the test of the positive relationship between manufacturing output growth and GDP growth (equation

4). Also, the OLS regression failed the test of no correlation in residuals. Expectedly, we can accept the null of

no correlation in residuals at 5% for FE regression. The four test statistics largely supports the acceptance of the

null at 5%. We therefore hold our regression coefficient values are valid and reliable to predict the growth rate of

GDP.



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136

Table 3: System GMM regression and Fagerberg-Verspagen test results

GMM Fagerberg-Verspagen test

Equation 10

(α2)

Share of m in

GDP (Ƞ)

Difference

(α2 - Ƞ)

Wald test

statistic value

P value

Coefficient 0.56

(0.0584)*

0.1303 0. 43 t-sta. 1.4771

F-sta. 2.1817

Chi-sq. 2.1817

0.1439

0.1439

0.1397

J-Statistic 0.00

(0.9212)*

- - - -

GMM: Period included 3, Cross-section included: 28, Total panel (balanced) observations: 84. White period

instrument weighting matrix, white period standard errors & covariance (d.f corrected). Instrument rank 11.

We apply the system GMM to test the principal model of the engine of growth hypothesis represented

by equation (1). The system GMM provides a higher value of manufacturing output growth coefficient than the

pooled OLS and FE. A 1% rise in manufacturing output growth increases the growth rate of the GDP by 0.56%

as compared to a maximum 0.31% obtained in pooled OLS and FE. The higher value of (m) under the GMM

estimation compared to OLS and FE implies that the traditional techniques, which do not properly handle the

problem of endogeneity, bias the coefficient estimate of manufacturing value added downwards. This result is

consistent with other studies like Acevedo (2009), Cantore et al (2014), Eguez (2014), and Su and Yao (2016).

In the analysis of the pooled OLS and FE regressions, we found ample support for the claim of

manufacturing as the engine of growth by simply looking at the sign and magnitude of the coefficient of the

regressors. A further test of the hypothesis is the criteria of Fagerberg and Verspagen (1999). The criteria test

whether the coefficient of the manufacturing output growth (m) is positive and significantly higher than the share

of manufacturing output in GDP (Ƞ). Essentially, we test the null hypothesis (α2 = Ƞ) against the alternative (α2 >

Ƞ). The result of the Wald test reported in Table 3 showed the value of each of the test statistic greater than (α2 -

Ƞ) and having significant p-values. There is therefore no reason to accept the null hypothesis of no difference

between α2 and Ƞ. There is thus empirical evidence to suggest that the positive influence of manufacturing on

economic growth in Africa is not due to manufacturing output share in total GDP but principally resulting from

the excess of manufacturing growth rate over non-manufacturing activities.

5 Conclusion

This paper analysed the relation between manufacturing output growth and economic growth in 28 African

countries during 1981-2015 from the perspective of the Kaldor’s first law of economic growth. We analysed the

relation between manufacturing output growth and GDP growth by examining the effects of manufacturing value

added growth on overall economic performance, and the output growth of non-manufacturing sector. The results

presented uphold the “manufacturing as engine of growth” hypothesis, and suggest that the economic growth

process of African countries is in a significant way positively correlated to the growth of the manufacturing

sector. This result agrees with similar studies for low and middle-income developing countries. We therefore

conclude that a prolonged contraction of manufacturing output (de-industrialisation) will be harmful to the



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economic growth of African countries.

The Economic development of African countries has suffered severally because of their vulnerability to

low agriculture terms of trade and resource price volatility. Sustained economic growth in African countries can

result from a process of growth-enhancing structural change. Ocampo (2005) recommends two key mechanisms

to drive this process: a shift toward high-productivity manufacturing, and the creation of new inter-sectoral

linkages that leads to a more intensely integrated production structure. Structural change towards higher

productivity and sophisticated manufacturing activities can lower the vulnerability of African countries to

external shocks and bring benefits from the positive externalities that the manufacturing sector transmits in the

rest of the economy. The task for policy makers is to decide the type of manufacturing activities that will trigger

sustainable economic growth in Africa. Evidence shows that manufacturing activities with higher technology

component generate more opportunity for technological progress, human capital development and productivity

increase, which ultimately contribute positively to a faster growth. However, it is unlikely that developing

countries with limited technological capabilities can initiate an advanced industrialisation process (Egüez, 2014).

Thus, African countries could start by developing basic and labour intensive industries that optimally exploits

the comparative advantage in agriculture, and progressively move up to medium and advanced technology

manufacturing, which demands the inputs of specialised services. With industrialisation as the focus of economic

development, well-articulated and integrated industrial policies, effective macroeconomic management, and

strong commitment to policy implementation will ensure that productivity growth and technological change

originating from the manufacturing sector engender spillover mechanisms that benefit other sectors of the

economy.

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Appendix

List of countries used in the analysis covering the period 1981 - 2015

5. Algeria

6. Benin

7. Botswana

8. Burkina Faso

9. Cameroon



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10. Central African Republic

11. Comoros Island

12. Congo D. R.

13. Congo Republic

14. Gabon

15. Gambia

16. Kenya

17. Lesotho

18. Malawi

19. Mauritius

20. Morocco

21. Namibia

22. Nigeria

23. Rwanda

24. Senegal

25. Seychelles

26. South Africa

27. Sudan

28. Swaziland

29. Togo

30. Tunisia

31. Zambia

32. Zimbabwe



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Commune/Sangkat Fund and Local Development

Case of Cambodia

Mom Virak ˡ* Xu Xiaolin ² 1. PhD Scholar, College of Public Administration, Huazhong University of Science and Technology

Wuhan, 430074, P.R.China 2. Professor, College of Public Administration, Huazhong University of Science and Technology

Wuhan, 430074, P.R.China

Abstract

The article is aimed to illustrate the commune/sangkat fund which was allocated to the local administration of Cambodia in term of local development as well as to clarify the characteristic of commune/sangkat’s general situation, statistics and fund allocation. In particular, the result of the commune/sangkat fund allocation implementation will be able to show how the fund was used in the effective way. However, the weaknesses and challenges of commune/sangkat fund project implementation is also revealed when the ministry of interior and ministry of economy and finance have done its annually monitoring and evaluation. Accordingly, the article will be provided the recommendation to relevant persons or institutions which its projects and research correlate with the commune/sangkat fund project and local development. Keywords: Commune/Sangkat, Fund, Allocation, Local Development.

1. Introduction

The Kingdom of Cambodia is a country which adopts the multi-party liberal democracy. The lead and management are taken through the direct and indirect election (Constitution, 1993). And the territorial administrative management and organization appear in division as capital, provinces, municipalities, districts, khans and commune/sangkat. Meanwhile, commune/sangkat administers the local tasks in his territory based on the constitution, law, royal decree, sub-decree, prakas and relevant legal regulations. Presently, the royal government pays attention on commune/sangkat by creating commune/sangkat fund aiming at local development and decentralization and de-concentration reform at the sub-national administrations, supported by Ministry of Interior and National Committee for Sub-National Democratic Development (NCDD & MOI, 2008). To cope with the local development barrier, the fund has to be used with transparency and accountability (sub-degree of the commune/sangkat fund, 2002).

So far, the commune/sangkat fund was used and implemented by the sub-national administration offices, monitoring and evaluating by the Ministry of Interior, Ministry of Economy and Finances, NCDD, and other relevant institutions (MOI, 2016). The result of the research addressed that the commune/sangkat fund is the useful tool to help the commune/sangkat administrative offices in term of development and poverty reduction. However, the weaknesses and challenges are raised as well (GDA, MOI, 2016). To cope with the weaknesses and challenges of commune/sangkat fund implementation, the recommendation in this article will be the helpful and useful material for the future strategy and policy to commune/sangkat fund implementation.

2. General Situation of Commune/Sangkat

Cambodia is officially known as the Kingdom of Cambodia. She is divided into one Capital (Phnom Penh Capital) and 24 provinces. The Capital is divided into Khans, and the Khan is divided into Sangkats. Whereas Province is divided into Municipalities and Districts. And the District is divided into Communes and Sangkats. The Commune/Sangkat shall be governed in accordance with the Law on Administrative Management of Commune/Sangkat, except for any matters that are provided in this law (Law on Administrative Management of the Capital, Provinces, Municipalities, Districts, and Khans, 2008).

A Commune/Sangkat is a legal entity [Article 2]. The system of Local Governance shall be implemented at Commune/Sangkat level [Article 3]. The power to govern and manage commune/Sangkats are derived for the general, universal, free and fair, equal, direct and secret elections within the framework of each commune/Sangkats [Article 4]. A commune/Sangkats governs local affairs of its territory in accordance with the Constitution, laws, Royal decrees, sub-decrees, proclamations (Prakas) and legal instruments concerned. Legislative power and Executive Power shall be vested to Communes/Sangakats and these Powers shall be implemented in consistence with the Constitution, laws, Royal Decrees, sub-decrees, proclamations and legal instruments concerned [Article 5]. Each commune/Sangkat shall have a council called the Commune/Sangkat Council. The Commune/Sangkat is a body representing citizens in its commune/Sangkat and have missions to serve the general interests of its commune/Sangkat. A Commune/Sangkat Council is elected by the citizens in its commune/Sangkat in accordance with the procedures prescribed in the law on the Elections of Commune/ Sangkat Councils (PREACH REACH KRAMNS / RKM/ 0301/05 March 19, 2001; Law on Commune/Sangkat Administrative Management).



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3. Statistics of Commune/Sangkat

Since commune/sangkat is created, the number of commune/sangkat each year changes continuously depending on the political pattern, population growth and national economy (MOI, 2016). The document of Ministry of Economy and Finance and of Department of Administrative Affairs of the Municipalities, Districts and Commune/Sangkat of General Department of Administration, Ministry of Interior, show that in 2011, there were 1621 communes/sangkats nationwide. In 2016, there are 1633 communes/sangkats over the country. In the capital and each provinces, the division of the number of commune/sangkat depends on the size of the capital and provinces.

Table1 Total Number of Communes/Sangkat 2016

No. Name of Capital and Provinces Number of Communes/Sangkats

1 Phnom Penh 96

2 Banteay Meanchey 65

3 Battambong 102

4 Kampung Cham 109

5 Kampung Chhnang 69

6 Kampung Speu 87

7 Kampung Thom 81

8 Kompot 93

9 Kandal 127

10 Koh Kong 29

11 Kratei 46

12 Mondolkiri 21

13 Preah Vihea 51

14 Prey Veng 116

15 Pursat 46

16 Ratanakiri 50

17 Siem Reap 100

18 Preah Sihanuk 27

19 Steng Treng 34

20 Svay Rieng 80

21 Takeo 100

22 Oddar Meanchey 24

23 Kep 5

24 Pailin 8

25 Tbong Khmum 64

Total 1633

(Source: General Department of Administration, GDA, MOI, 2016)

4. Commune/Sangkat Fund

Commune/Sangkat Fund is a budget package that the royal government shall transfer to the commune/sangkat councils includes both tax revenue and development partner contributions to cover administration and local development. The transfer of revenue from the national level to the above fund based on the formula or the exact rate for at least 03 years and no later than 05 years determined by the sub-decree. This fund is divided into two main parts-administration and local development (CDRI, 2008).

In addition, Commune/Sangkat councils are entitled to collect local resources. However, as Commune/Sangkat councils do not have powers to collect taxes local resources cover only local contribution at present (RGC, 2009). In 2007, Cambodia’s 1621 communes received an average USD8700 for development (usually spent on a single investment), and USD5000 for administration (Chou, 2007). The development distribution follows a formula of equal shares [40 percent], population [40 percent] and poverty index [20 percent] (CDRI, 2008).

• Legal Framework

The management of commune/sangkat fund is based on some legal principles and regulations such as Law on Administrative Management of the Capital, Provinces, Municipalities, Districts and Khans, Law on Financial Regime and Management of Assets of the Sub-National Administrations, Sub-Decree on Commune/Sangkat Financial Management System dated April 02, 2002, etc.

• Sources of Commune/Sangkat Revenue

Commune/Sangkat has sources of revenue such as local administrative revenue and the revenue from national source.



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� Local administrative revenue

Each commune/sangkat can earn the revenue from:

- The revenue from local source including tax revenues and non-tax revenues.

- The revenue from development partners.

- The donations from internal and external source of the competence of each council.

- Other sources defined by law or legal regulations.

� Revenue from national source

- Shared revenue is the revenue which is shared between the national level and commune/sangkat level. Types of revenue and division proportion shall be determined by law or sub-decree.

- National transfers is a budget package that the national level transfers to the commune/sangkat administration (Conditional and Unconditional transferred fund).

- And agency fees for special services performed by the council on behalf of a government ministry or institution. (according to article 24 and 26 of the Law on Financial Regime and Management of Assets of the Sub-National Administrations).

• Allocation of Funds from National level to Commune/Sangkat from 2002 to 2018

Conforming to article 77 of the Law on Administrative Management of Commune/Sangkat, the limit of the transfer from recurrent state budget to the fund account is planned for at least 03 years and no later than 05 fiscal years:

- Fiscal year 2002, transfer of state budget to commune/sangkat fund is 20,000,000,000R (twenty thousand million riels, *1$≈4000R)

- Fiscal year 2003, not less than 2% (two percent) of recurrent budget

- Fiscal year 2004, not less than 2.5% (two point five percent) of recurrent budget

- Fiscal year 2005, not less than 2.54% of recurrent state budget



- Fiscal year 2012, not less than 0.8% of recurrent state budget approved in 2011






- Fiscal year 2018, not less than 2.8% of recurrent state budget approved in 2017 (Source: MEF, 2016)

• Principle of Division of Commune/Sangkat Fund Allocation of budget from national level to commune/sangkat administration is not equal (Sub-decree 465

ANKR.BK on Transfer of National Resources to Commune/Sangkat Fund, 2013). Some commune/sangkat received proper amount of allocated budget but some other commune/sangkat did not based on the following principles:

- Equal share as basis

- Number of people in each commune/sangkat (document of Ministry of Planning)

- Poverty index of each commune/sangkat (document of Ministry of Planning)

- Other index stated by the board of directors of commune/sangkat fund From the first mandate to the present (2002-2016), the commune/sangkat councils have obtained the

annual increased allocated budget from the royal government according to the national economic growth. In 2016, the commune/sangkat administration obtained the allocated budget from the royal government in amount of 308 410.00 million riels, among that, the amount of administrative budget is 160 177.00 million riels and the amount of local development budget is 148 233.00 million riels, among the total plan of 1 710 which are the infrastructure plans (MEF, 2016).

5. Development of Commune/Sangkat

• Use of Commune/Sangkat Fund

- Target administrative expense includes remuneration for council, personnel’s salary and other expense for personnel, repair of administrative premises, purchase of furniture, office equipment, repair and maintenance of administrative equipment, electric, water, vehicle and other expense.

- Target local development expense includes 1/Service Plan (human resources development, income raising activities, provision of equipment, goods, species, management of community and/or small



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construction, etc.) and 2/Infrastructure (Construction, plan design, repair and maintenance of road, market, health center, school, center, community, irrigation system construction, agricultural products warehouse, water and energy supply system and other economic and social infrastructure like road, bridge, sewage pipe, etc.).

From 2002 to 2016, there are 8,780 commune/sangkat fund plans in total, most of which focus on trails [48%], irrigation system [07%], rural hygiene [03%], clean water supply [01%] and other constructions [01%] (MEF & MOI, 2016).

• Allocation of commune/sangkat fund in 2015 and 2016

In 2015, the royal government allocated the total amount of budget of 27 1954.00 million riels for commune/sangkat, in which the administration amount is 105 280.60 million riels. Whereas in 2016, the royal government allocated the total amount of budget of 308,410.00 million riels for commune/sangkat, in which the administration amount is 160 177.00 million riels (MEF, 2016).

Table2 Commune/Sangkat Fund Allocation 2015

Commune/Sangkat Fund Allocation

Capital and Provinces

No. Name of C/P C/S Num. of

C/S Council

Village

C/SFA 2015 (Million Riel)

Administration Development Unplanned

Exp. Total

1 Banteay Meanchey 65 515 656 4 688.39 5 764.64 1 558.08 12 011.11

2 Battambong 102 814 799 6 631.20 8 795.97 2 151.84 17 579.01

3 Kampung Cham 109 817 916 7 115.00 9 124.63 2 325.60 18 565.23

4 Kampung Chhnang 69 419 560 4 081.66 5 350.52 1 325.76 10 757.94

5 Kampung Speu 87 609 1349 7 745.98 7 640.43 2 694.24 18 080.65

6 Kampung Thom 81 577 749 5 425.03 6 695.87 1 788.96 13 909.86

7 Kompot 93 561 488 4 522.00 6 715.70 1 398.24 12 635.94

8 Dandal 127 915 1010 7 938.43 10 046.85 2 582.88 20 568.16

9 Koh Kong 29 167 118 1 258.79 1 868.27 377.28 3 504.34

10 Kratei 46 282 253 2 286.16 3 480.89 709.44 6 476.49

11 Mundulkiri 21 107 90 878.85 1 326.46 263.44 2 468.35

12 Phnom Penh 96 810 909 6 942.34 8 831.19 2 034.00 18 077.53

13 Phreah Vihea 51 333 229 2 440.29 3 423.68 741.60 6 605.57

14 Prey Veng 116 892 1137 8 230.64 9 703.94 2 735.52 20 670.10

15 Pursat 49 343 507 3454.02 4 155.66 1 152.00 8 761.68

16 Ratanakiri 50 260 243 2 213.54 3 172.72 673.92 6 060.18

17 Siem Reap 100 668 876 6 364.07 8 353.94 2 087.04 16805.05

18 Preah Sihanuk 27 169 110 1 219.13 1 935.34 367.68 3 522.15

19 Steng Treng 34 176 128 1 371.04 2 202.83 403.68 3 977.55

20 Svay Rieng 80 518 690 4 982.16 5 978.44 1 634.40 12 595.00

21 Takeo 100 736 1119 7 473.21 8 430.77 2 517.12 18 421.10

22 Oddor Meanchey 24 152 286 1 710.56 2 061.00 575.52 4 347.08

23 Kep 5 31 18 216.61 365.30 64.32 646.23

24 Pailin 8 52 79 535.18 632.22 178.08 1 345.48

25 Tbong Khmum 64 536 865 5 556.32 6 101.74 1 904.16 13 562.22

Total 1633 11 459 14184 105 280.60 132 159.00 34 514.40 271 954.00

C/P: Capital/Province; C/S: Commune/Sangkat; C/SFA: Commune/Sangkat Fund Allocation (Source: Ministry of Economy and Finance, 2016)



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Table3 Commune/Sangkat Fund Allocation 2016

Commune/Sangkat Fund Allocation

Capital and Provinces

No. Name of C/P C/S Num. of C/S

Council Village

C/SFA 2016 (Million Riel)

Administration Development Total

1 Banteay Meanchey 65 515 656 7 246.38 6 514.20 13 760.58

2 Battambong 102 814 799 10 136.96 9 822.19 19 959.15

3 Kampung Cham 109 817 916 10 833.76 10 150.71 20 984.47

4 Kampung Chhnang 69 419 560 6 175.43 5 986.16 12 161.59

5 Kampung Speu 87 609 1349 11 578.45 8 561.22 20 139.67

6 Kampung Thom 81 577 749 8 235.50 7 503.16 15 738.66

7 Kompot 93 561 488 6 919.72 7 526.21 14 445.93

8 Dandal 127 915 1010 12 097.14 11 318.72 23 415.86

9 Koh Kong 29 167 118 1 933.67 2 084.00 4 017.67

10 Kratei 46 282 253 3 524.49 3 924.38 7 448.87

11 Mundulkiri 21 107 90 1 342.66 1 499.11 2 841.77

12 Phnom Penh 96 810 909 10 589.86 10 021.32 20 611.18

13 Phreah Vihea 51 333 229 3 754.98 3 831.73 7 586.71

14 Prey Veng 116 892 1137 12 496.93 10 870.88 23 367.81

15 Pursat 49 343 507 5 224.04 4 617.26 9 841.30

16 Ratanakiri 50 260 243 3 375.28 3 581.19 6 956.47

17 Siem Reap 100 668 876 9 642.38 9 458.92 19 101.30

18 Preah Sihanuk 27 169 110 1 879.45 2 161.46 4 040.91

19 Steng Treng 34 176 128 2 098.99 2 444.03 4 543.02

20 Svay Rieng 80 518 690 7 548.47 6 723.22 14 271.69

21 Takeo 100 736 1119 11 296.89 9 438.68 20 735.57

22 Oddor Meanchey 24 152 286 2 721.33 2 319.00 5 040.33

23 Kep 5 31 18 334.46 406.41 740.87

24 Pailin 8 52 79 807.91 710.54 1 518.45

25 Tbong Khmum 64 536 865 8 381.87 6 758.30 15 140.17

Total 1633 11459 14184 160 177.00 148 233.00 308 410.00

(Source: Ministry of Economy and Finance, 2016)

Table4 Allocation Fund 2015 & 2016 C/P

C/S

Allocation Fund 2015 Allocation Fund 2016

Admin. Development Unplanned Expenditures

Total Admin. Development Unplanned Expenditures

Total

25 1633 105280.60 132159.00 34514.40 271954.00 160177.00 148233.00 N/A 308410.00

(Source: Ministry Economy and Finance, 2016)

a) General Administration

- Equal share as basis by 30% is divided equally for each commune/sangkat administration

- 60% for members of council is divided in proportion to the number of council members of each commune/sangkat administration.

- 10% for poverty index is divided in proportion to the poverty index based on the data of Ministry of Planning.

b) Development

- Equal share as basis by 30% is divided equally for each commune/sangkat administration.

- 30% for people is divided in proportion to the number of people of each commune/sangkat administration based on the official data of Ministry of Planning.

- 30% for poverty index is divided in proportion to the poverty index based on the data of Ministry of Planning.

- 10% for village is divided in proportion to the number of villages of each commune/sangkat administration based on the data of Ministry of Interior. [Sources a) & b): Sub-decree 465 ANKR.BK on Transfer of National Resources to Commune/Sangkat Fund, 2013].

6. Conclusion

The document of reflection seminar on budget implementation and commune/sangkat plan in July 2016 illustrates the budget implementation in commune/sangkat is now better than in municipality-district, though the procedure has some change or the document is more complicated (GDA, MOI, 2016). Moreover, there are also some



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weaknesses, challenges and recommendation as follows:

• Weaknesses: 1/ commune/sangkat budget plan has no some attached documents like report on the limit of

participation of people in budget arrangement process, report on budget implementation of processing year.

2/ prepare and clear the budget list of commune/sangkat is slow (up to June 2016, the clearance of the commune/sangkat budget is not yet officially recognized).

3/ registration with accounting technique is the problem for commune/sangkat administration. 4/ advance settlement in each round of some commune/sangkat is slow and some

commune/sangkat withdraw the advances only 2 or3 rounds in 2015. 5/ no report on monthly budget implementation of all months (lack of 3-6 months). 6/ some commune/sangkat administrations do not publicize the budget plan.

• Challenges: 1/ some finance offices have no enough ability in providing technical support for the

commune/sangkat because this task is supported by the investment and planning office and provincial advisor in finance over the past.

2/ the specialized department and provincial treasury have no high responsibility in providing technical support for the commune/sangkat.

3/ some instructions and circulars of Ministry of Economy and Finance to the sub-national administration did not discuss with Ministry of Interior or NCDD which illegalize some content conforming to the law, sub-decree or affect the work performance of commune/sangkat administration.

4/ limited human resources at commune/sangkat level. 5/ corruption during the bid.

• Recommendation: 1/ train the commune/sangkat administrative officials more related to the financial and budget

techniques. 2/ should strengthen the specialized institutions that are capable of supporting and providing

techniques to the commune/sangkat in performing the role and responsibility responsibly. 3/ examination and grant the conformity shall be based on the principle and shall not be modified

or objected to the choice of expense decided by the council. 4/ the specialized department and provincial treasury should well-cooperate with the provincial

administration in technical support for the commune/sangkat. 5/ some instructions and circulars of Ministry of Economy and Finance to the sub-national

administration have prior discussion with Ministry of Interior or NCDD to legalize the content conforming to the law, sub-decree or make it easy in work performance of commune/sangkat administration.

6/ should arrange an inter-institutional meeting which compose of those participants from Ministry of Interior, Ministry of Economy and Finance, General Department of National Treasury, General Department of Procurement and other relevant people in order to discuss and seek for solution of some common problems.

To sum up, local development is an obligation of the national and sub-national level. However, the commune/sangkat development is the root of decentralization and de-concentration reform focusing on the improvement of people living standard and poverty reduction. Having granted the commune/sangkat fund by the royal government, the sub-national administrations (commune/sangkat administrative offices) should pay much attention to the real situation happened at the local area by using the fund in the effective way. More importantly, the capital and provincial department of economy and finance and the department of treasury should provide the useful material, document or training regarding to commune/sangkat fun project implementation and procurement.

References 1- General Department of Administration, Ministry of Interior (MOI), 2016. 2- M. Virak, X. Xiaolin & Y. Lanrong (2016): the Mediating Role of Netizen in Cambodia. 3- Ministry of Economy and Finance (MEF), 2016. 4- World Bank, 2015: Cambodia-Country-Brief. 5- Sub-decree 465 ANKR.BK on Transfer of National Resources to Commune/Sangkat Fund, 2013. 6- CDRI, 2013: Annual Development Review (2012-2013). 7- Law on Administrative Management of the Capital, Provinces, Municipalities, Districts, and Khans, 2008. 8- CDRI, 2008: Assessment of the Second Term of Decentralization of Cambodia. 9- NCDD, 2003: Commune/Sangkat Fund Project Implementation Manual-PIM.



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10- Sub-decree on the Establishment of the Commune-Sangkat Fund, 2002. 11- Law on Commune/Sangkat Administrative Management, 2001.

The Authors

1. Mr. Mom Virak is presently the Ph.D. Candidate at the College of Public Administration, Huazhong University of Science and Technology, China. By the way, he hold double master degrees in Public Administration and Business Administration from Huazhong University of Science and Technology (2012) and National University of Management, Cambodia (2008). On the other hands, he also hold double bachelor degrees in Business Administration and English Literature (Education) from National University of Management (NUM, 2006) and Institute of Foreign Languages (IFL), Royal University of Phnom Penh (RUPP, 2008). Meanwhile, he is currently the deputy director at Training Department, General Department of Administration, Ministry of Interior, Royal Government of Cambodia. Before serving the current position, he worked as the senior administrative official for General Department of Logistic and Finance (2008) after moving to the Department of Capital and Provincial Administrative Affairs, General Department of Administration, as the chief office level (2013). In private sector experience, he also worked as the part-time university lecturer in Phnom Penh, Cambodia. Furthermore, in research fields, he has so far interested and published several articles relevant to Good Governance, E-Government, Local Administration Development & Economy, Public & Private Management, Public Administration, Government Reform and Public Policy. 2. Dr. Xu Xiaolin is the Professor and Dean at the College of Public Administration, Huazhong University of Science and Technology. He hold the Ph.D. Degree in the field of Public Management, Huazhong University of Science and Technology, China (2000), and he also hold the bachelor degree in Political Sciences, Huazhong Institute of Technology (1977). In addition, he is currently the Membership Steering Committee for the Discipline of Public Administration under the Ministry of Education of China. And he also served as the deputy director at National Society of Public Administration in China and the deputy director at Provincial Society of Politics, Public Administration, and Public Relation in Hubei, China. In research fields, he published more than 30 articles in local and international journals. His research is relevant to E-Government & Management, Public Administration, Public Policy, Urban Management Policy and Public Service Reform.



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Government Expenditure as Determinants of Economic Growth

and Income Inequality of Inter-Province of the Islands in

Indonesia

Sjamsu Djohan 1 Zamruddin Hasid 2 Djoko Setyadi2

1.Student of Doctoral Program, Faculty of Economics and Business, Mulawarman University, Indonesia

2.Professor at the Faculty of Economics and Business, Mulawarman University, Indonesia

Abstract

Indonesia is an archipelago, consisting of 13.466 islands, and grouped into 34 provinces. Each province has a

government expenditure and economic growth, thus causing variations of government expenditure and economic

growth among provinces. This matter may rise the income inequality between provinces in the island, as measured

by the coefficient of variation.This study aims to clarify the effect of variations in government expenditure to

economic growth and the income inequality among provinces in Indonesia islands. The secondary data used came

from Statistics Indonesia, for period 2007 - 2012 (6 years), with 36 observations. Pooled panel data is used to

estimate the equation with a common effect, using Path Analysis Recursive Model. Variation in government

expenditure acts as exogenous variables. Variation in economic growth is the endogenous variable as well as the

mediating variable. Variations in government expenditure and economic growth are expressed by the coefficient

of variation. Income inequality among the provinces that acts as the last endogenous variable, is shown by

Williamson Index. The results showed that variation in government expenditure has very small and negative effect,

but insignificant to variation in economic growth. The results also show that the variation of economic growth has

small and negative effect, but insignificant to the income inequality. Furthermore, variation in government

expenditure has a significant positive effect on the income inequality. This shows that the variation in government

expenditure is a determinant of increasing income inequality among provinces in the island. The results of this

study did not find any existence of indirect effect of variation in government expenditure through the variation of

economic growth on the income inequality among provinces in the Indonesia islands. It is suggested to the

government that variation of government expenditure among the provinces in the island to be reduced or

minimized, so that the income inequality between provinces in the Indonesia islands are more convergent.

Keywords: Economic growth, Government expenditure, Income inequality

I. INTRODUCTION Economic development is the effort to improve the welfare and prosperity of people. A country can be said

successful in economic development if it achieves high economic growth (Jane-Catrice and Meda, 2013). The

paradigm of economic development focused in economic growth has been widely applied in developing countries.

Since the beginning of economic development until today, Indonesia remains launching economic growth as a

development priority, such as in the Reformation Era with Triple Track (pro-growth, pro-job, pro-poor).

According to the Institute for Development of Economics and Finance (INDEF), Indonesia's economic

performance is quite good, and was ranked second in Asia in 2012 (INDEF, 2012). However, economic growth

reached only at a national level. This shows that the economic development strategy has been successful in

increasing the growth rate of the national economy in 2007 amounted to 5.71% and in 2012 reached 6.42%. At the

same time, economic growth in the other regions is below the national level. During 2007-2012, the province with

economic growth below the national level, for example the province on the island of Sumatra, Kalimantan, Bali

and Nusa Tenggara. Since 2007 - 2012, based on Williamson index to measure income inequality among the

provinces in the island showed that there is income inequality. In 2007, Williamson index was 0,52 and in 2012

increased to 0.66 (Source: BPS, 2011 and BPS, 2013). The achievement of economic growth still leaves a problem

because it cannot provide significant benefits to other regions. In fact what happens is the inequality between the

economic growth of the province in the islands, which in turn raises the income inequality. Thus, it can be said

that the implemented economic development strategy has been able to achieve high economic growth, but has not

been able to achieve equitable economic growth relative to each province. In the National Long-Term

Development Plan (RPJPN) 2005-2025, it has been declared that the national development objective is to achieve

high average income and equitable economic development among regions, as well as reduce disparities among

regions within the framework of the Unitary State of the Republic of Indonesia (NKRI). RPJPN target envisioned

in the year 2005 - 2025 is only able to achieve the target of increasing national economic growth, but has not been

able to reduce the income inequality among regions. Although the income inequality among regions is a

phenomenon that cannot be avoided, but efforts to reduce the income inequality among regions still need to be

pursued by the government (Karunaratne, 2007). Income inequality can negatively impact the internal and external

conflicts, vertical and horizontal conflicts, rising crime, and potential to cause disintegration of the nation (Kim,



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2006; Lessman, 2013; Dabalen, et al, 2012; Ostby, 2004; and Cramer, 2003). Therefore, every country wants to

achieve equalitable distribution of incomes among individuals, communities and regions, as one of many indicators

of the successful economic development.

In Indonesia, government roles in the economy can be seen through the State Budget. In macro-economic

perspective, government expenditure is one component of aggregate demand or expenditure (Blanchard and

Johnson, 2013). It means that government expenditure will affect economic growth. Every province in Indonesia

has government expenditure respectively. Consequently, there will be a difference or variation in provincial

government expenditure, mainly due to the potential areas that differ from one province to another province.

Variation of government expenditure among the provinces in the Indonesia islands tends to decrease. Variation of

government expenditure among the provinces in the Indonesia islands in 2007 was 0.69 and in 2012 amounted to

0.60 (BPS, 2011 and BPS, 2013). Government expenditure affects the economic growth (Alexiou, 2009) and the

income inequality among provinces (Gries and Redlin, 2008). In the context of regional economic, the national

economy is divided into an economy that is composed of several regions or provinces, in which the government

expenditure is different in quantity. So that size of regional income (GDP) will be different, causing the income

inequality among provinces.

The Unitary State of the Republic of Indonesia is an archipelago state. Indonesia is a state whose territory

consists of 13.466 islands that can be grouped into six major islands, namely: Sumatra, Java, Bali and Nusa

Tenggara, Sulawesi, Kalimantan, Maluku and Papua. In each of the island, there are the provinces, totaling 34

provinces. From the standpoint of regional economic, each province has different and thus potentially lead to

differences in income among regions, as measured by Gross Domestic Product (GDP). Differences in government

expenditure will cause differences in economic growth and inequality income among provinces (Frieden, 2001).

Based on the previous description, it is necessary to study the direct and indirect effect of differences in

government expenditure among provinces to the difference in economic growth and the income inequality among

provinces in the island in Indonesia. High economic growth is necessary to achieve, but income distribution must

also occur. This suggests that the increasing of economic growth should be in line with the decrease in the income

inequality between individuals, groups, communities and regions. Economic growth is one of success indicator in

the regional economic development. In the other hand, with development and high economic growth, it is expected

that income inequality among regions may decreases (convergent).

The differences in economic growth and the income inequality among regions should be related to all

aspects that contribute to the differences in economic growth and the income inequality among regions. In principle,

each region has different characteristics. It can be seen in terms of geography, natural resources, quantity and

quality of human resources, capital resources, availability of infrastructure, et cetera. (Adisasmita, 2013).

Therefore, explanation of the income inequality among regions should be seen from the elements that causes the

differences of the economic growth among regions, namely economic and non-economic factors (Frieden, 2001).

This study was conducted to elucidate the direct and indirect effect of differences in government

expenditure to differences in economic growth and the income inequality among provinces in the Indonesia islands.

Differences in government expenditure and economic growth are expressed as the coefficient of variation. This is

done so that this study does not result in invalid and confusing conclusions. All determinants of income inequality

also illustrate the differences or variations among provinces in the island in Indonesia. There are many

determinants of the income inequality among regions. This study only examined the effect of variations in

government expenditure to variations in economic growth and the regional income inequality among the provinces

in the island in Indonesia.

II. LITERATURE REVIEW

2.1. The Effect of Government Expenditure on Economic Growth

In the context of macro-economic theory, expenditure approach is one of three approaches to determine the amount

of Gross Domestic Product (GDP) at the national level and the Gross Regional Domestic Product (GRDP) at the

provincial level in Indonesia. In determining the amount of the GDP, the government expenditure is one of the

four components of aggregate expenditure. Government expenditure indicates the government role in the economy

in areas that can boost the economy, especially those that lead to the creation of social overhead (public goods),

such as transportation, education, health and so forth (McConnell and Brue, 2002). This will improve the national

and local productivity (including the provinces), and further it will increase GDP or GRDP. The increase in the

GDP can also be interpreted as an increase in economic growth. There are many factors that influence economic

growth, those are human resources, natural resources, capital (including social overhead capital), change in

technology and innovation (Samuelson and Nordhaus, 2010).

Lotto (2011) conducted a study to determine the effect of government expenditure to economic growth

in Nigeria during the period of 1980 - 2008, which focused on sectoral government expenditure. Government

expenditure is in the field of security, health, education, transport and communications, and agriculture. The

analytical tool used is a linear regression analysis (Ordinary Least Square). The study results showed that in the



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short term, government expenditure on health has positive and significant effect on economic growth. Expenditure

on education has a negative but insignificant effect on economic growth. Expenditure on agriculture has a

significant negative effect on the economic growth. Expenditure on national security, transport and

communications has a positive but insignificant effect on economic growth.

Saad and Kalakech (2009) conducted a study to determine the effect of government sectoral expenditure

towards the economic growth of Lebanon. There are four sectors that affect economic growth, those are

government expenditure in defense sector, education, health, and agriculture. The data is time series during 1962-

2007. The analytical tool used is a co-integration multivariate analysis. The finding shows that the government

expenditure for the defense sector, education, health and agriculture have provided benefits to economic growth.

In long-term, the effect of government expenditure on education to economic growth is positive and significant.

Government expenditure for the defense sector negatively affects economic growth. Government expenditure for

health and agriculture had no significant effect. Government expenditure for education sector is a key factor to

improve economic growth in the long term. Using dummy variable in times of war and peace, there is positive and

significant impact that shows that peaceful conditions are crucial factors to achieve high economic growth rates.

Dandan (2011) conducted a study to determine the effect of government expenditure on economic growth

in Jordan. The data used is secondary data during 1990 - 2006. Analysis tool used is regression. Dependent variable

is GDP. The independent variable is the routine expenditures, capital expenditures, and transfer of payment and

interest charges. The study shows that the government expenditure has positive effect to GDP. Regression

coefficient of each independent variable is positive. It means that the increasing in Jordan government expenditure

will boost economic growth. This conclusion is consistent with the theory of Keynes. Furthermore, Dandan

proposes the importance of human resource development through transfer of payment.

The studies of Loto (2011), Saad and Kalakech (2009), and Dandan (2011) are determining the effect of

government expenditure on economic growth according to the education sector, defense, health and agriculture,

resulting in different conclusions. The former studies differ from this research, in terms of variables and analysis

tools that are used. However, the three previous studies can be used as a reference to formulate the direction of the

effect of government expenditure on economic growth. Government expenditure will affect the economic growth.

Because of government expenditure vary from a region to another one, there will be differences in economic

growth.

2.2. The Effect of Economic Growth on Income Inequality

Economic growth can be measured by output per capita or GDP and GRDP in provinces, districts and cities.

Economic growth occurs if the GDP or the GRDP per capita is higher compared with the previous year (Samuelson

and Nordhaus, 2010). Economic growth of a country or region is affected by the natural resources, human

resources, capital resources, innovation technology. In the context of macro economy, economic growth can be

sourced from the four components in aggregates expenditure, namely the consumption of the household sector,

private sector investment, government expenditure and foreign sector (exports and imports).

The determinants of regional economic growth will lead to the differences of economic growth among

regions (Hilhorst, 1990). As stated by Sjafrizal (2008) that economic growth varies considerably from one region

to another, because economic growth is strongly influenced by the economic potential possessed by each region.

Therefore, economic growth among regions will differ between one region to another. Adisasmita (2013)

suggested that each region has different characteristics, for example: (1) geographic, (2) the quality and capacity

of natural resources, (3) the quality and quantity of human resources, (4) the accumulation of capital and (5) the

technological advances. The conditions at each different region are because of its production factor, so there is a

fast growing area and also many slow growing area. This causes differences in economic growth that will cause

income inequality or disparity among regions.

Gurgul and Lach (2011) conducted a study to determine the causal relationship (mutual/ non recursive or

reciprocal) distribution of income and economic growth in Poland. The data used are annual data from 2000-2009.

Research result found that the economic growth affect the income inequality among provinces in 2000-2009. The

influence of economic growth on the income inequality is causally found only in poor region. The income

inequality among provinces in Poland is still going on. The relationship between economic growth and the income

inequality is a two-way or reciprocal (in the sense of Granger causality) and positive. If the economic growth

increases, the income inequality will increase as well. Conversely, if the income inequality increases, economic

growth would increase. The main source of economic growth in Poland is located in an urban area as a place of

economic activity. Rural areas are underdeveloped with high unemployment rates. Therefore, GDP and income in

rural areas was significantly lower than in urban areas. It also occurs in countries in transition in Central Europe.

Sultan and Sodik (2010) conducted a study to determine the effect of the growth of foreign direct

investment (FDI), export growth and the growth of GRDP (economic growth) on regional income inequality in

Indonesia, namely the Special Region of Yogyakarta (DIY) and Central Java in 2000-2004. DIY consists of 5

districts and 35 districts of Central Java. The data used is the cross section - time series, those are GDP growth,



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population, growth in exports, and foreign investment growth in each region. The model used is a regression model

with panel data. According to Hausman test, the selected model is random effect. The results showed that the

growth of foreign investments have a significant negative effect on the regional income inequality in DIY and

Central Java. GRDP growth has a negative significant effect on regional income inequality in DIY and Central

Java. It can be concluded that the increase in foreign investment, export and economic growth will reduce the

income inequality among regions.

Janikas and Rey (2008) analyzed the relationship between economic growth and the inequality among

countries in the United States in 1969-2000. The analytical tool used is a model of Ordinary Least Square (OLS).

The analysis results showed that the income inequality is the partial functions of economic growth, but it is not

reciprocal (not vice-versa) in a single equation analysis. Countries with higher income per capita in the initial

period have greater income inequality. Economic growth also boosts the income inequality within the countries

(intra-state).

Results of research conducted by Janikas and Rey (2008), Gurgul and Lach (2011) concluded that

economic growth affects the increasing of income inequality among regions within a country. The cause of

disparities in Poland is the concentration of economic activities that differ between rural and urban areas. It is in

contrast to the research results of Sultan and Sodik (2010) who found that the economic growth negatively affect

the income inequality. The difference of previous studies may be caused by different units of analysis or different

of region conditions (characteristics) and different time periods. Economic growth can influence positively or

negatively on the income inequality among regions.

2.3. The Effect of Government Expenditure on Income Inequality

In this study, the term of the income inequality means the different of income among provincial administrative

regions. Statistically, this inequality is the deviation of the averaged data, which is done by measuring the

dispersion. The dispersion measurement is the coefficient of variation. In statistical inferences, the coefficient of

variation is the ratio between the standard deviation and the arithmetic mean. All determinants of the income

inequality among provinces in the island are the coefficient of variation. The coefficient of variation shows the

differences in government expenditure and economic growth among provinces in the island. To measure the

magnitude of the inequality of income distribution among regions within a territory, then weighted coefficient of

variation of Williamson is used. Weighted coefficient of variation starts from 0 (shows an absolute equitable

distribution of income) and maximum 1 (shows the absolute income inequality).

Potential income inequality among regions will always exist because of the different factors, including

the endowment factor that differs among regions. The greater the difference in income per capita among regions

means that the income inequality among regions is widened (divergent). Many factors determine the income

inequality among regions, namely the concentration of economic activities among regions, the mobility of goods

(trade), production factors among regions, the allocation of public and private investment across the region. The

concentration of economic activities among different regions will lead to greater inequality among regions

(Sjafrizal, 2008). The concentration of economic activity across different regions shows difference in growth

among regions as well. Allocation of government investment is government expenditure. Therefore, the

differences in government expenditure and economic growth will cause the income inequality among regions.

Mukaramah, et al. (2011) conducted research on the effect of public expenditure on the income inequality

between rural and urban areas in Malaysia. The results showed that the government's public expenditure on

education could increase the income inequality among ethnic and income disparities between urban and rural areas.

Government expenditure on agriculture and rural development has a positive effect on the income inequality

among ethnic groups and has an influence on the income disparity between urban and rural areas.

Calderon and Servien (2004) conducted a study to determine the effect of government expenditure on

infrastructure to economic growth and income distribution. Data panel are used from 121 countries over the years

of 1960-2000. This study uses regression equation. The study results showed that in terms of quantity,

infrastructure had a significant positive impact on economic growth in the long term. In quality, infrastructure had

a weak effect on economic growth. The conclusion of this study is infrastructure had to boost economic growth

and lower income inequality. This implies that the development of infrastructure through government expenditure

is needed to boost economic growth and reduce the income inequality.

Martines-Vazquez, et al. (2012) conducted a study to determine the effect of taxes and public expenditure

on the income inequality. This study uses panel data of 150 developed countries, developing countries and

countries in transition, during 1970-2009, with analytical tools OLS and GMM (Generalized Method of Moment).

The dependent variable is the gini coefficient. Independent variables are taxes and public expenditure. Public

expenditures are social protection, education, health and housing. The analysis finds that taxes and public

expenditure significantly affect the gini coefficient (income inequality). Progressive tax (on income) positively

affects income distribution and contributes to the decrease of income inequality. The corporate income tax has

positive effect on income distribution, but the effect is decreased along with the increasing of globalization and



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trade openness (international trade). Share of public expenditure in GDP for social welfare, education and housing

has positive effect on income distribution. In terms of public expenditure, the increasing of expenditure on social

protection causes the decreasing of the gini coefficient 0.22. The increase in expenditures for public health caused

a decline in the income inequality. The decline in public expenditure on education and housing led to an increase

in the income inequality.

All of these studies indicate that the effect of government expenditure on the income inequality can vary

among countries. Effect of government expenditure on the income inequality can be positive or negative,

depending on the type of government expenditure. The previous studies are different from this research, in term

of analytical tools and variables used, as well as indicators of income inequality used. In this study, government

expenditure is not broken down by sector, but it is the sum of direct and indirect expenditure, so the effect of

government expenditure towards sectorial income inequality among regions can be seen.

This study uses a recursive models to estimate Common Effect and Multiple Equation Analysis to

determine the effect of the recursive or one directions (asymmetric) of exogenous variables on the endogenous

variables in the research model. This study uses analysis unit in the provincial administrative region of the island

to determine the influence of exogenous variables on the endogenous variables in the empirical research model.

III. DATA AND RESEARCH METHOD

3.1. Data This study uses secondary data, time-series and cross section, or panel pooled data. Time series data are from

2007- 2012, consist of government expenditure, GRDP, economic growth and the number of residents in all

provinces in Indonesia. Cross section data are all provinces in Indonesia, as many as 33 provinces, excluding

Kalimantan Utara because the province is newly formed and separated from East Kalimantan on 25 October 2012,

so that the necessary data are not available yet. Total observation in this research is 36. All data used comes from

the Gross Regional Domestic Product of Provinces in Indonesia by Expenditure, published in 2011 and 2013 by

the Central Bureau of Statistic of Indonesia.

3.2. Estimation Method This study uses a recursive model to explain the direct effect, indirect effects and total effect. Quantitative method

and analytical tools used is Path Analysis using Amos (Analysis of Moment Structure) version 22. This study uses

a simultaneous equations model, with two structural equations. All structural equations are estimated by the

common effect of estimation method. The equations are:

Y₁ = F (X₁ , ε₁) (1)

Y₂ = F ( X₁ , Y₁ , ε₂) (2)

Endogenous variables:

Y₁ = Variations of economic growth among provinces in the island

Y₂ = The income inequality among provinces in the island

Exogenous variables:

X₁ = Variations of government expenditure among provinces in the island

ε₁ = Error term for Y₁ in equation (1)

ε₂ = Error term for Y₂ in equation (2)

Path coefficient used to explain the influence of exogenous variables on the endogenous variables in the model is

standardized regression weight or standardized coefficient beta.

To show the direct influence between variables, then the equations (1) and (2) are explained, as follows:

1. The direct effect of variations in government expenditure to variations in economic growth among provinces

in the island:

Y₁ = ɑ₁ X₁ + ε₁ (1a)

in which:

ɑ₁ = Direct effect of X₁ on Y₁ ε₁ = Error term for Y₁

2. The direct effect of variations in government expenditure and economic growth on income inequality among

provinces in the island:

Y₂ = ɓ₁X₁ + ɓ₂Y₁ + ε₂ (2a)

in which:

ɓ₁ = Direct effect of X₁ on Y₂ ɓ₂ = Direct effect of Y₁ on Y₂ ε₂ = Error term for Y₂

The direct and indirect effects between variables can be seen in the reduced form equation.

Y₁ = ɑ₁X₁ + ε₁ (1b)

- ɓ₂Y₁ + Y₂ = ɓ₁X₁ + ε₂ (2b)



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The equations after the reduced form are as follows:

1. The direct effect of variations in government expenditure to variations in economic growth among provinces

in the island:

Y₁ = ɑ₁ X₁ + ε₁ (1c)

in which:

ɑ₁ = Direct effect of X₁ on Y₁ ε₁ = Error term for Y₁ in equation (1c)

2. The direct and indirect effects of variations in government expenditure and economic growth on income

inequality among provinces in the island.

Y₂ = (ɓ₁+ɑ₁ ɓ₂) X₁ + (ε₂+ ɓ₂ε₁) (2c)

in which:

ɓ₁ = Direct effect of X₁ to Y₂ ɑ₁ ɓ₂ = The indirect effect of X₁ to Y₂ through Y₁ (ɓ₁+ɑ₁ɓ₂) = Total Effect X₁ to Y₂ ɓ₂ = Direct effect Y₁ to Y₂ (ε₂+ ɓ₂ε₁) = Error term for Y₂ in equation (2c)

Direct and indirect relationships between variables can be seen on the path diagram in figure 3.1.

Figure 3.1. Diagram Empirical Research Model Line Where:

X1 = Variations of government expenditure among provinces in the island

Y1 = Variations of economic growth among provinces in the island

Y2 = Income inequality among provinces in the island

3.3. The Operational Definition and Measurement of Variables 1. Government expenditure is the amount of expenditure by the government that has been realized in Rupiah unit.

The difference in government expenditure among the provinces in the island is a variation or dispersion of

government expenditure among the provinces in the island, indicated by the coefficient of variation, in the form

of a ratio.

CVX1it = /

in which:

CVX 1it = Variation coefficient of provincial government expenditure in the island i in year t

X1jit = Government expenditure of the province j in the island i in year t

�1it = Average expenditure of the provincial government in the island i in year t

ni = Number of provinces in the island i

2. Economic growth is the change of Gross Regional Domestic Product from year to year according to constant

prices. The difference in economic growth is a variation or dispersion of economic growth among provinces in

the island, measured by the coefficient of variation in the form of a ratio. The coefficient of variation is:

CVY1it = /

ɓ₁ ɑ1

X1

Y1

Y2

ε2

ɓ2

ε1



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154

in which:

CVY1it = Variation coefficient of provincial economic growth in the island i in year t

Y1jit = Economic growth of the province j in the island i in year t

�1it = Average growth of the provincial economy in the island i in year t

ni = Number of provinces in the island i

3. The income inequality is the difference in per capita income among provinces in the island indicated by the

Williamson Index in the form of a ratio.

CVY2it =

in which:

CVY2it = Williamson Index or the income inequality among provinces in the island i on year t

pjit = The population of province j in the island i in year t

Y2jit = The GRDP per capita of province j in the island i in year t

�2it = The average GRDP per capita of province j in the island i in year t

IV. ANALYSIS RESULT

This study aims to explain the direct effect of variation in government expenditure (X1) on economic growth (Y1)

and the income inequality (Y2) among the provinces in the island. The study also aims to explain the indirect effect

of variations in government expenditure to the income inequality through variations in economic growth among

provinces in the island in Indonesia.

The estimation results of the model parameter (Standardize Regression Weight) are presented in Table 4.1.

Table 4.1. Results Summary of Model Parameter

Influence Coefficient P R2

Y1 � X1 -0.097 0.565 0.009

Y2 � X1

Y2 � Y1

0.454

-0.001

0,003*

0.997

0.206

Remarks: * significance level α = 5%

Assessment normality shows that the critical ratio = 0.067 <1.645 at significant level of 19%, this shows that the

multivariate normal distribution of data and models built capable of producing a unique parameter estimation.

Based on the Table 4.1, we can make an equation (direct effect):

Y1 = -0.097 X1 (1d)

Where R2 = 0.009, meaning 99.1% change in Y1 is determined by other variables that are not included in the model.

The path coefficients ε1 √1 � 0.009 = 0.995.

Y2 = 0.454 X1 – 0.001 Y1 (2d)

Where R2 = 0.206, meaning 20.6% change in Y2 is determined by the variable X1 and Y1, while 79.4% is

determined by other variables that are not included in the model. The path coefficients ε2 = √1 � 0.206 = 0.891.

Based on Table 4.1, the path analyses diagram is as follows:

Figure 4.1. Path Diagram

From figure 4.1, it can be found that:

1) The indirect effect (ID) X1 to Y2 : ID = (-0.097) (-0.001) = 0.00097

2) The total effect (TE) X1 to Y2 : TE = (0.454) + (0.000097) = 0.454097

0.891 0.995

-0.001

0.454 -

X1

Y1

Y2

ε2 ε1



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V. DISCUSSION

5.1. The Effect of Government Expenditure on Economic Growth The research results shows that variation in government expenditure negatively affect the variation in economic

growth among provinces in the island in Indonesia, but insignificant. If the variation in government expenditure

increases, the variation of economic growth among the province will decline insignificantly. This condition can

be caused by many other variables that also affect the economic growth, but it is not included in this research

model. R2 = 0.9% (low), means that 99.1% variation of the economic growth among provinces in the island is

influenced by other variables outside the model. Indeed, inter-regional variations in economic growth caused by

many factors, for example capital accumulation, technological progress, internal and external conflicts of different

regions (Blanchard and Johnson, 2013).

The results are consistent with Awaworyi, et al. (2015) who found that the government expenditure has

negative and insignificant effect on economic growth in developing countries. However, these results do not concur

with Dandan (2011), Akai and Sakata (2002), and Herath (2010) which show that government expenditure has

positive influence on economic growth. The difference in government policy, including government expenditure

among regions, are the factors that influence the difference in economic growth among regions (Barro, 1999). This

means that the variation in government expenditure among provinces in the island will affect directly on variations

in economic growth among provinces in the island.

It can be said that there is no consistent facts showing that the government expenditure significantly and

positively affect the economic growth (Hsich and Lai, 1994; and Ghali, 1997). Likewise the influence of variation

in government expenditure to variation in economic growth across the region. It may occur because of the

difference or variation of the sources of economic growth, not only in the government expenditure (Mankiw, 2009)

5.2. The Effect of Economic Growth on Income Inequality The research results showed that variation in economic growth has negative and insignificant effect on the income

inequality among provinces in the island in Indonesia. If variation in the economic growth increases, the income

inequality among provinces will decline, but the effect is insignificant. This is consistent with Eric (2010) and

Kaasa (2003) who showed that economic growth lowers the income inequality. The result of this study conflicts

with Jibene and Ghazi (2013) who showed that economic growth has positive influence on the income inequality

in 9 countries of MENA (Middle East and North Africa Region). High concentration of economic activity in a

region also showed increased economic growth and lead to differences income among regions, causing the income

inequality among provinces in the island (Heshmati, 2004).

The effect of economic growth on the income inequality is still ambiguous, depending on its

characteristics and measurement method of the income inequality among regions. The income inequality is also

influenced by government policies, geography, religion, and human capital that is diverse among regions (Romer,

2012). Therefore, the effect of variation in economic growth on the income inequality among regions will vary

from one country to another, or among regions within a country.

5.3. The Effects of Government Expenditure on Income Inequality The research results showed that variation in government expenditure has positive and significant effect on income

inequality among provinces in the island in Indonesia. If variation in government expenditure increases, the income

inequality among provinces in the island will also rise. These results concur with Song (2013), who expressed that

government expenditure contributed to the increasing of regional income inequality in China in 1978-2007. The

incomes inequality among the provinces in China is due to government policies that are biased to a certain region.

This is led to the distribution of government expenditure that is unequally distributed among the provinces, causing

the income inequality among the provinces in China (Zhang and Zou, 2012). Samanta and Cerf (2009) also stated

that government expenditure which is distributed properly can reduce the income inequality.

The results of this study are not consistent with Ostergaard (2013) who found that government

expenditure affect the decrease in the income inequality in Sub Sahara countries. According to Claus, et al. (2014),

if government expenditure seen by sector, then public expenditure on health and education can lower the income

inequality in Asian countries. Furthermore, Park and Shin (2015) stated that government expenditure on education

can help reduce the income inequality. Ospina (2010) showed that public expenditure on education and health has

influence on decreasing the income inequality. Doerrenberg and Peichl (2014) showed that government

expenditure can reduce the income inequality.

It can be concluded that government expenditure could decrease the income inequality among regions, if

public expenditure is allocated to regions with low income. Regions with low incomes may be caused by the low

quality of human resources in terms of education and health. Or it may also be caused lacking of government

expenditure on infrastructure and public services, compared to other regions. Many factors are causing the income

inequality among regions, such as the government policy differences among regions, especially government

expenditure is biased to a certain area. The role of government, which is seen through expenditure (fiscal policy),



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is an essential instrument to influence the inequality income, but not the only factor affecting the income inequality

among regions (Crudu, 2015).

5.4. Indirect Effect and Total Effect The research result showed that variation in provincial government expenditure in the island does not significantly

influence the variation of economic growth among provinces in the Indonesia islands. The variation in economic

growth does not significantly affect the income inequality among provinces in the island in Indonesia. It shows

that the indirect effect of variation in government expenditure to the income inequality among provinces is

insignificant. The variation of the income inequality among provinces in the island is not caused by variation in

government expenditure through a variety of economic growth among provinces in the island.

Total effect of variation in government expenditure is equal to the direct effect of variation in government

expenditure on income inequality through variation in economic growth among provinces in the island in Indonesia.

It shows that the income inequality among provinces in the island only due to the direct effect of the variation in

government expenditure among provinces in the Indonesia islands.

VI. CONCLUSION

This research results can be summarized as follows:

1. Variation of provincial government expenditure in the island has a very small and insignificant effect on

variations in economic growth among provinces in the island. It means that the variation of economic growth

is more influenced by other variables that are not included in the model.

2. Variation in economic growth among provinces in the island has a very small and insignificant effect on the

income inequality among provinces in the island. It means that the income inequality is more influenced by

other variables that are not included in the model.

3. Variation of government expenditure among the provinces in the island has a positive and significant effect to

the income inequality among provinces in the island. It means that the increasing of government expenditure

is one of several determinants of the increasing of income inequality among provinces in the island in Indonesia.

4. Variation in government expenditure among the provinces in the island does not provide indirect effect on the

incomes inequality among the provinces in the island through the variation of economic growth.

VII. SUGGESTION

From these research findings, it is proposed the following suggestions:

1. To reduce the variation in economic growth among provinces in the island, there is no need to reduce the

variation in government expenditure, but the other factors that drive economic growth, such as equalization of

investment and technology.

2. To reduce the income inequality among provinces, we need to consider other factors such as government

policies and equitable distribution of human resources among the provinces, and not by reducing variation in

economic growth among provinces in the island.

3. Variations in provincial government expenditure in the island are an important factor that can increase the

income inequality. Therefore, to lower or reduce the income inequality among provinces, we need equal

distribution of government expenditure among the provinces, such as for education and health, infrastructure

and public services.

4. Variation in government expenditure does not provide indirect effect on the income inequality among provinces

in the island, through the variation of economic growth in Indonesia. Therefore, the equalization of government

expenditure is needed according to regional characteristics, such as geography, population and natural

resources. Handling the income inequality among regions should be done with a holistic approach.

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Governance and Accountability of Multi-Purpose Cooperatives in

the Shiselweni Region of Swaziland: Implications for Education

and Training

Thoko A. Masuku1 Joseph P.B. Mutangira2 Micah B. Masuku3

1.P.O. Box 5481, Manzini, M200, Swaziland 2.Department of Adult Education, University of Swaziland, P/B 4 Kwaluseni, Swaziland

3.Department of Agricultural Economics and Management, University of Swaziland, P. O. Luyengo, M2005, Luyengo Swaziland

Abstract

Cooperatives are perceived as innovative institutions that are able to secure the participation of communities in economic development. The study examined the extent of good governance and accountability in multi-purpose cooperatives and the implications for member education and training in Swaziland. The objectives of the study were to: determine the status of governance; establish the level of accountability; and establish the status of cooperative member education and training in multi-purpose cooperatives in Swaziland. A descriptive research design was used where quantitative and qualitative methods were employed to collect and analyse the data. The target population was all registered and active multi-purpose cooperatives in the Shiselweni region. A multistage stratified sampling technique was used to draw a sample of 80 cooperative members, 35 committee members and 5 cooperative officers. Therefore the sample size was 120. Interviews and analysis of documents were used to collect data. Data were analysed using descriptive statistics. The findings of the study were that, cooperatives were governed democratically and member participation was adhered to; that the level of accountability in cooperatives was average; members were consulted before any decision was taken in the cooperatives; cooperative education and training in multi-purpose cooperatives was conducted regularly by education and training committees; cooperative officers educated and trained cooperative members once a year. The study concluded that multi-purpose cooperatives were not well governed and there was moderate accountability. The study recommends that multi-purpose cooperatives should invest in education for their members and workers on cooperative principles. The study also recommends that other studies be carried out to cover the whole of Swaziland, by including all cooperatives. Keywords: Accountability, education and training, governance, multi-purpose cooperatives,

1. Introduction

1.1 Multi-purpose cooperatives

A cooperative is an autonomous association of persons united voluntarily to meet their common economic needs and aspirations through a jointly owned and democratically controlled enterprise (International Cooperative Alliance, 2006). The distinguishing features of cooperatives are encapsulated in the seven cooperative principles, which include (i) voluntary and open membership, (ii) democratic member control, (iii) member economic participation, (iv) autonomy and independence, (v) education, training and information, (vi) cooperation among cooperatives and (vii) concern for community. Cooperatives function on the basis of the values of self-help, self-responsibility, democracy, equality, equity and solidarity. Cooperative Principles, for example, emphasize the centrality of cooperative education, training and information so that they contribute effectively to the development of their cooperatives (Chambo, 2009). Cooperatives should provide education and training for their members, elected representatives and employees. The cornerstone of any cooperative is the education and training on cooperative matters of all members (Mdluli, 2003).

A multi-purpose cooperative is a business that is a mixture of two or more different types of cooperatives. Multi-purpose cooperatives are member based organisations for agricultural farmers in rural communities (International Cooperative Alliance, 2006). Dlamini (2010) studied elements constituting an effective agricultural cooperative in South Africa and found that the objectives of collective farming were creation of employment and income generating activities, improving access to funding, strengthening market access, and strengthening human and community development.

1.2 Problem Statement

The Swaziland Government is mandated to support the development of cooperatives and assist in overcoming their constraints (Swaziland Government, 1999). Cooperatives serve their membership to achieve their socio-economic needs and goals through the establishment and operation of autonomous, member-owned businesses that generate income and employment. They are also perceived as innovative institutions that are able to secure the participation of communities in economic development (Swaziland Government & UNDP, 2012).



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Multi-purpose cooperatives are regarded as key institutions for promoting rural development and poverty alleviation. They are channels for community participation in economic development, enabling members to coordinate their efforts and gain economic benefits. The participation of people in multi-purpose cooperatives in Swaziland is very low at primary level because of different reasons emanating from social and economic influences (Hlatshwako, 2010), however the management of cooperatives remains crucial for their sustenance as vehicles of income generation and social security in communities (Swaziland Government & UNDP, 2012). Poor performance of multi-purpose cooperatives could be attributed to: inadequate business management and entrepreneurial skills among staff and elected committee members, poor governance in administering cooperatives principles, limited advocacy and communication skills, and financial constraints that make it impossible to recruit and retain a good calibre of staff and to provide capacity building among members and leaders. 1.3 Objectives of the study

The purpose of the study was to assess the status of governance and accountability in multi-purpose cooperatives in the Shiselweni region. The specific objectives were:

i. To determine the status of governance in multi-purpose cooperatives in Swaziland; ii. To establish the level of accountability in multi-purpose cooperatives in Swaziland; and

iii. To establish the status of cooperative member education and training


2.1 Overview of Cooperatives

Cooperatives help to democratize and empower people in developing countries, for example, by instilling basic democratic values, fostering self-reliance through collective action and shaping relationships between institutions and civil society that encourage participation and conflict management. Furthermore, cooperatives instil (i) democratic member control (one member, one vote), (ii) promote participatory management practices, (iii) promote transparency in decision-making and financial accountability and (iv) they encouraged evolution of power and lastly (v) promote collective action and bargaining power among members (The US Overseas Cooperative Development Council, 2007).

Rural poor farmers have found that single purpose cooperatives hold less appeal than multi-purpose cooperatives because they need a cooperative that will offer them a platform to receive all the services they need starting from different farm operations up to and including product marketing as well as provision of agro-credit. It is upon this premise that the idea of farmers’ multi-purpose cooperatives (FMCs) gained prominence among rural farmers in developing countries (Akinwumi, 2011).

Multi-purpose cooperatives are known to have management problems in the area of determining equitable ways of distributing results, retention of members’ interests and difficulties in educating members about the workings of this type of cooperative (Agbo, 2010). There is a growing concern among cooperative promoters regarding the validity of the claim that farmers’ multi-purpose cooperatives hold better appeal to farmers than their single-purpose variants. This doubt comes in the wake of the outstanding performance of institution based single-purpose cooperatives like credit and marketing cooperatives (Akinwumi, 2011). However, such outstanding results have not been confirmed among single-purpose cooperatives belonging to rural farmers. It is therefore, necessary to analyze the relevance of the FMC variant of cooperatives with respect to its appeal to farmers and their performances, challenges and future prospects.

The strength of a cooperative depends, in part, upon its ability to mobilize its resources and members not only in gaining market share and achieve economic growth, but also in maintaining member commitment and satisfaction and retaining them. Satisfied, highly committed members are more likely to support their cooperative by participating in all cooperative activities. The opposite occurs when members are unhappy. It is evident that members' goals, what they desire from their cooperatives, are critically related to why they joined the cooperative in the first place. These goals also affect member satisfaction with the cooperative, their commitment to it, and their participation in its activities (Dakurah, Goddard & Osuteye, 2005).

Members’ attitudes towards their cooperatives also have a significant impact on their cooperative participation and behavioural intentions. The attitudes people hold towards an organisation could, and do influence their behaviour towards that organisation. All things being equal, the more positive attitude one holds towards an organisation, the more likely it is that the person will patronize or use a service from it. Cooperatives, as democratic organisations, rely on members’ patronisation for the realisation of their distinctive character. A vital part of any cooperative is its members, and their active participation. Loyalty to the cooperative is integral for its success (Fishbein & Ajzen, 2010).

Gray and Kraenzle (2002) stated that the majority of agricultural cooperatives were struggling with issues around capital investment to expand or adopt new technologies and governance issues, while issues of member commitment and patronisation may be adding to other problems in the cooperative sector. Cooperatives exist to address the needs of citizens by providing services such as, helping farmers market their products, buying farm



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supplies, providing communities with financial services, retail goods and as well as providing communities with utilities (gas, electricity, and other essential services). They are also used as tools in addressing a broad range of socio-economic issues such as unemployment and value-added industries in rural communities.

2.2 Governance in multi-purpose cooperatives

Governance is viewed as the process whereby cooperatives or organisations determine how power is exercised, whom they involve and how they account to the populace, and it is important for economic growth (Bobtricker & Robert, 2012). Corporate governance is holding the balance between economic and social goals and between individuals and communal goals, with the aim to align as nearly as possible the interest of individuals, corporations and society. Good corporate governance is characterised by discipline, transparency, independence, accountability, responsibility, fairness and social responsibility (Hermes, 2008; King 2009). Governance involves network and assumes accommodative orientation within such networks with a shared willingness to learn from each other. Good governance can also mean enhanced transparency and accountability in the activities of the organisation. Zamora and Agutaya (2007) emphasized that when multi-purpose cooperatives are properly managed, financial records and reports are up to date and are made available to members, and opinions of each member are recognized and respected. 2.2.1 Accountability in multi-purpose cooperatives Accountability is a fundamental value in the cooperative business. In order to have efficiently well managed cooperatives, there are critical factors that need to be addressed in the management of the cooperatives in order to promote homogeneity and limit free riding or opportunistic tendencies by members (Develtere et al., 2008). These factors include; transparency, democratic governance, internal accountability and control (Develtere et al., 2008). The system for accountability is an organisational aspect affected by low education among members. If the education level of members is low it becomes easier for local leaders to abuse the cooperative and divert activities in accordance with their own priorities (Chirwa et al., 2005). It is noted that one consequence of low accountability is the progress of a few committee members at the expense of the majority of members, which is a clear contradiction to the main purpose of a cooperative (Chirwa et al., 2005). 2.2.2 Democracy in cooperatives Democracy is one of the governance mechanisms. It consists of participatory and 'voice giving' decision-making procedures. In a democratic organisation like cooperatives, the general membership is the supreme organ of the organisation and the management committee is elected by the general membership to look after the business affairs of the cooperatives (Kogut & Zander, 1996; Develtere et al., 2008). The democratic value of co-operatives is seen through good cooperative governance and accountability as a result of education and training.

Cooperatives help to democratize and empower many people in developing countries. For example, they instill basic democratic values and foster self-reliance through collective action and shape relationships between institutions and civil society that encourage participation and conflict management. Furthermore, cooperatives instill (i) democratic member control (one member, one vote), (ii) promote participatory management practices and (iii) promote transparency in decision-making and financial accountability and (iv) they en-courage devolution of power and lastly (v) promote collective action and bargaining power among members (The US Overseas Cooperative Development Council, 2007). 2.2.3 Participation in cooperatives Participation enhances efficiency and effectiveness of investment and promotes processes of democratisation and empowerment of those who participate in cooperatives. Participation of farmers in public meetings or workshops, trainings, and exposure visits enhance the awareness of the rural people on the importance of cooperative societies (Develtere et al., 2008; Papadopoulos, 2003). The success or failure of any cooperative is as a result of functioning committee that represents cooperative members. The Board members should be able to (i) have good business judgment (ii) think independently and (iii) be willing to ask critical questions and, respect other members and (iv) be of integrity, as well as have strong work ethics and comprehensive understanding of cooperatives.

The responsibilities of cooperative management include to: (i) coordinate business activities; (ii) setting goals and develop short term strategic plans; (iii) recruit, appraise, and terminate employees; (iv) organize and coordinate internal activities; (v) control daily operations; (vi) maintain an accurate bookkeeping system; (vii) prepare and present accurate financial and operational reports; and (viii) attend board meetings (United States Department of Agriculture 1997). 2.2.4 Education and training in cooperatives Education and training play a crucial role in the development of human resources. Competence is more than just academic skills. Kherallah and Kirsten (2001) argued that competence should be defined as a learned ability to adequately perform a task, duty or role. Competence is usually acquired in a process of learning-by-doing in the actual work situation.

A study by Keeling (2004) showed that cooperatives need highly skilled management with the capacity to make informed business decisions just like a private enterprise. Wanyama, Develtere, and Pollet (2009)



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indicated that a committed leadership and a clear vision of finding solutions to the daily problems of members are of key importance to cooperative success. The leadership capacity in a rural cooperative is directly related to the level of literacy among its members as leaders are usually elected from the member base. In developing countries where the education level is low, this can be a major constraint for cooperative development. This was shown by African cooperatives’ failure in the past where corrupt, illiterate and opportunistic leaders drove the cooperatives into financial mismanagement and nepotism (Wanyama et al., 2009). 2.3 Theoretical Framework

2.3.1 Neo-classical theory An economic theory begins with assertion about behaviour, such as consumers maximize utility, or firms maximize profits. Helmberger and Hoos (1962) developed the first complete mathematical model of behaviour of an agricultural cooperative. They used the neo-classical theory of the firm to develop short-run and long run models of a cooperative (including behavioural relations and positions of equilibrium for a cooperative and its members under different sets of assumptions) using traditional marginal analysis. In their model, the cooperative’s objective was to maximize benefits to members by maximizing the ‘per unit’ value or average price through distributing all earnings back to members in proportion to their patronage volume or use (Torgerson et al., 1998). Sexton (1995) analyzing aa paper by Helmberger and Hoos (1962), regarded it as a milestone paper because (i) the (correct) analysis of cooperative and member behaviour was based on a clear set of assumptions; (ii) the model clearly distinguished between short and long-run behaviour in a cooperative; and (iii) based on these characteristics, the model set the stage for further advances in cooperative theory in the 1970s and 1980s.

There had been various debates on whether a cooperative enterprise should be treated as a firm (a decision making entity) as Helmberger and Hoos (1962) did, or as an organisation (aggregation) of economic units (members). Rhodes (1995) presented an overview of the debate on the Helmberger and Hoos (1962) and Phillips (1953) models, with the former initially having the greatest support among economists, although their contribution has also been criticized. Sexton (1995) viewed this debate as one of semantics, and considered the issue not important to the understanding of cooperatives.

Over the past few decades, the rapidly changing economic environment reflected in increasing globalization and agricultural industrialization, which has led many agricultural cooperatives to undertake substantial structural changes in order to adapt to the new situation. Royer (1999), for example, aluded that, in addition to mergers, consolidations and acquisitions (horizontal and vertical restructuring), research on cooperatives have become increasingly involved in the economic theory of cooperatives. These developments raised the question whether there are fundamental features intrinsic in the cooperative organisational form that restrict cooperatives from being able to compete effectively in an increasingly complex economy. Royer (1999) suggested that these methods collectively can be referred to as New Institutional Economics (NIE) because they focus on institutions and institutional constraints rather than the profit maximizing behaviour of abstract firms in the neoclassical economic paradigm. However, Sykuta and Chaddad (1999) considered the three components (methods) as merely comprising a subset of a much larger (evolving) literature, although they do contribute to a more complete understanding of integration, contracting, and organisation.

According to the neo-classical theory of the firm, each firm maximizes its profits subject to its cost structure and product demand constraints. Emelianoff (1942) and Phillip (1953) argued that cooperatives do not accumulate capital and seek profit for their account, but for members, hence they do not meet the classical definition of a firm. These critics countered by describing cooperatives as a “going concern” an entity to which participants delegate entrepreneurial functions to gain the advantage of joint action. Emelianoff (1942) further argued that such revocable delegation of decision making authority resulted in hired managers making most of the day-to-day decisions. Transaction costs, which include costs of obtaining information about alternatives and costs of negotiating, monitoring and enforcing contracts are assumed to be zero, as are adjustment costs, and resources are privately held and fully allocated among alternative uses purely in response to financial incentives. Criticism of the neo-classical theory of the firm was based on the assumption of profit maximization, but more fundamentally, that the theory does not explain why these firms exist in the first place, and how the resources within these organisations are employed, allocated, and motivated to achieve maximum profits (Royer, 1999; Sykuta & Chaddad, 1999). Sykuta and Chaddad (1999) contended that criticism of neo-classical economics also extends to the study of markets because it is ill-suited to answering questions about when, why, and how markets evolve; about the institutional infrastructure required to support market activity; and about the structures of the organisations involved in market activity.

Royer (1999) stated that criticisms of the neo-classical theory led to the development of alternative models like the New Institutional Economics (NIE) of the firm based on other assumptions (for example, maximizing rate of growth, sales, and firm size subject to a profit constraint), focusing on the process of decision-making within the firm (i.e., rejecting the maximizing behaviour), and eliminating some of the unrealistic conditions of the model (e.g., by considering utility maximization, positive transaction and information costs, and



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alternative property rights structures). The role of positive transaction costs and variable property rights has given new insights into the existence of firms (including cooperatives), the evolution of alternative forms of business organisation, and the choice of organisational form (aimed at minimizing both production and exchange costs). Sykuta and Chaddad (1999), and Iliopoulos and Cook (1999), provided a summary of the main components of the new institutional economics, namely, transaction cost economics, agency theory, and property rights theory. 2.2.2 Transaction cost economics (TCE) Transaction costs are the costs of organizing and transacting exchanges which include search and information costs, bargaining and decision making costs, and policing and enforcement costs (Williamson, 1985). Sykuta and Chaddad (1999) argued that every exchange involves each of these costs to a greater or lesser extent, with each transaction cost item being influenced by social institutions (norms of behaviour), legal institutions (definition and enforcement of property rights), political institutions (mechanisms by which property rights are allocated), and economic institutions (availability and efficiency of markets). Williamson (1985) was the first to introduce the term “transaction cost economics” and it has since been associated with the new institutional economics.

The reason for economic activity occurring in formal organisations (firms) is the inefficiencies of transacting in a world of imperfect information, thus, it may be less costly to coordinate production within a firm as opposed to in market when the transaction costs of market exchange are high (Royer, 1999). Due to the possibility of opportunistic behaviour by one or more parties in a transaction (i.e. to seek private gain at the expense of the group), contracts play a crucial role. Contracts enable the parties to fulfil their obligations by protecting them from opportunistic behaviour, thus decreasing the costs of transacting. The ability of a contract to facilitate exchange depends on the completeness of the contract and the relevant body of contract law. Incomplete contracts caused by bounded rationality (limits on the capacity of individuals to process information) deal with complex issues and consider all possible contingencies. Difficulties in specifying or measuring performance, and asymmetric information (when the parties do not have equal access to all information relevant to the contract), will inevitably result in opportunism and transaction costs (Royer, 1999). Sykuta and Chaddad (1999) contended that in the TCE framework, the incompleteness of contracts is a result (to one degree or another) of both transaction costs and bounded rationality. Transaction costs may make it too expensive to write a more complete contract that will better specify the foreseeable contingencies and resultant obligations of each party involved. The optimal completeness of a contract depends on the trade-off between marginal benefits and costs.

Opportunism and the related transaction costs can also be associated with asset specificity, (i.e. assets that are acquired to support specific transactions) (Royer, 1999). Owners of such relationship specific assets cannot use these assets in other transactions without some loss in productivity or incurring costs in adapting them to other uses. Hence, once investments in relationship-specific assets have been made, the trading parties involved may have few or no alternative trading parties, which eliminates competitive trading (i.e., the asset’s opportunity cost will fall). This creates quasi-rents (i.e., a specific asset’s earnings in excess of the minimum required to keep the owner from exiting the relationship), which can lead to opportunistic behaviour. Sykuta and Chaddad (1999) contended that an asset’s specificity is determined more by its value outside the specific relationship than by the motivation for its purchase. An asset is said to be relationship specific if its value in any other use is significantly lower. This decrease in value creates the quasi-rents that attract opportunistic behaviour.

Royer (1999) mentioned four different forms of asset specificity, namely: (i) site specificity (where assets are located nearby to reduce transport or inventory costs); (ii) physical asset specificity (assets with physical properties specifically tailored to a particular transaction; e.g. a cheese factory or ethanol plant); (iii) dedicated assets (investments based on a promise of a particular customer’s business, which would make it profitable); and (iv) human asset specificity (acquired skills and knowledge of certain workers which are more valuable within a particular relationship than outside it). Sykuta and Chaddad (1999) added another form of specificity of importance to agricultural transactions, namely temporal specificity. This is due to the time-sensitive value of agricultural products and production processes, which create another margin which may entice opportunistic behaviour by trading parties. Thus, a holdup problem arises when one party in a contractual relationship seeks to exploit the other party’s vulnerability due to relationship-specific assets (Royer, 1999).

In general, TCE could help to identify the important dimensions of a transaction and thus assist with the design of the most efficient institutional arrangement for conducting the transaction. Essentially, a firm should select the institutional arrangement that minimizes the sum of its production and transaction costs (Royer, 1999). 2.3.3 Agency theory Agency relationships exist whenever an individual or organisation (the agent) action on behalf of another (the principal). The Principal agent problems arise because the objectives of the agent are usually not the same as those of the principal, and thus the agent may not always best represent the interests of the principal (Alchian & Demsetz, 1972; Royer, 1999; Sykuta & Chaddad, 1999). The terms of an agency relationship are typically defined in a contract between the agent and the principal (which could bind the agent to act in the principal’s interests). Management of contracts are difficult because contracts are generally incomplete, there are opportunities for shirking due to moral hazard and imperfect observability (Royer, 1999). Hence, the main focus of agency theory



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is on incentive and measurement problems, but the risk-sharing implications of incentive contracts are also crucial. Sykuta and Chaddad (1999) pointed out that most applications of agency theory focus on the incentive compared to risk sharing trade-off of contracts aimed at aligning the interests of the agent with those of the principal. Agency theory is thus very relevant to the institutional structure of cooperatives because employed agents (managers) may not act in the best interests of cooperative owner-members (principal). The challenge, therefore, is which ownership and capital structures can be developed to lower agency costs (Fama, 1980; Fama & Jensen, 1983). Principal agent problems in a cooperative are likely to give rise to member dissatisfaction. Richards, Klein, and Walburger (1998) argued that, cooperatives experience greater principal agent problems than proprietary firms due to lack of capital market discipline, a clear profit motive, and the transitive nature of ownership. However, cooperatives have no market for their equity (as opposed to Investor Owned Firms (IOFs). Therefore, there is less incentive for members to monitor the actions of their managers. Cooperatives may also have difficulty of designing incentive schemes for managers that will align their personal objectives with those of the cooperative. Using data from a survey of cooperative members in Alberta, Canada, Richards et al. (1998) compared members’ objectives (expectations) with those they perceived were held by their managers. Younger farmers and large producers, for example, felt that managers focused too much on the social role of cooperatives and not enough on profit issues such as higher prices, return on equity and quality of service (Richards et al., 1998). 2.3.4 Property rights theory Property rights are defined as the capacity to use or control the use of an asset or resource. Royer (1999) argued that, for any form of human cooperation to be workable, especially a form involving agreement, there is need for clearly defined and enforced property rights. The neo-classical theory specifies that property is privately held and property rights are exclusive and transferable on a voluntary basis. Since transaction costs are assumed to be zero, these property rights can be fully defined, allocated, and enforced, and will be allocated to those uses where they yield the highest return (Royer, 1999).

Property rights theory, also referred to as the incomplete contracting theory of the firm, was developed by Grossman and Hart (1986), Hart and Moore (1990) and Hart (1995). It is based on the assumption that contracts are necessarily incomplete (e.g., due to asymmetric information between trading parties and bounded rationality), and thus do not fully specify the division of value in an exchange relationship for every contingency (Sykuta & Chaddad, 1999). Hence, ownership (the right of residual control) of the assets involved in a transaction becomes critical in deciding how value is divided when a (not covered) contingency arises. Since transaction costs are positive, the allocation (and possible non-transferability) of property rights may have significant consequences for economic organisation, behaviour, and performance (Sykuta &Chaddad, 1999). Iliopoulos and Cook (1999) also referred to the distinction between the “traditional” property rights approach, in which ownership is synonymous with the possession of residual claims, the property rights and incomplete contracting theory discussed above. Cook (1995) contended that property rights were vital for cooperatives to be sustainable, producer-controlled organisations. Before a cooperative could achieve improved market performance (correcting market failures), internal stability in a cooperative needs to be achieved with clearly defined property rights. 2.3.5 Collective action theory Literature on the application of NIE to cooperatives reflected the difficulty of clearly linking economic theory and cooperative practice. Royer (1999) observed that many of the benefits farmers received from establishing cooperatives originated from the holdup problem and the opportunistic behaviour associated with asset fixity.

Royer (1999) used the standard example of the holdup problem in agriculture involving farmers of a perishable commodity and a processor who had no competition in the region. At harvest, the processor could refuse to accept delivery from farmers in an attempt to force them to accept a lower price or risk spoilage of their product. Sometimes, the processor who had invested in specific (idiosyncratic) plant and equipment is also prone to the threat of hold-up by the farmers (if there were no other suppliers). A strategy for producers to eliminate or minimize the hold-up problem is for them to purchase the processing plant (i.e., to vertically integrate their operations).This could provide them with the necessary market power and guarantee market access.

Iliopoulos and Cook (1999) referred to other studies linking economic theory to practice. For example, the characteristics of transactions between farmers and their cooperatives and concluded that the cooperative represented a hybrid organisational mode blending market forces with elements of internal organisation designed to minimize transaction costs (Iliopoulos & Cook, 1999). They also considered avoidance of the hold-up problem, by internalizing crucial transactions, as a main benefit of a cooperative structure.

3. Methodology

3.1 Design of the study The study used quantitative and qualitative research methods (Creswell, 2009) to determine the status of governance, accountability and education and training, as well as the nature of constraints faced by multi-purpose cooperatives in Swaziland. Quantitative research methods were used on the basis that quantitative research has the potential to generate research data that can be analysed using numerical techniques (Babbie, 2013). Quantitative



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research uses quantified data that can be analysed using statistical tools. Qualitative research methods were also used to get an in-depth understanding of social practice of the respondents. 3.2 Sample Size and Sampling Procedure The target population for the study was all registered and active multi-purpose cooperatives in the Shiselweni region of Swaziland, which were involved in the supply of farm inputs and consumer goods. It comprised of 396 members of multi-purpose cooperatives and 5 cooperative officers who provide services to all multi-purpose cooperatives in the Shiselweni region.

A two-stage stratified random sampling procedure (Babbie, 2013 was used for the selection of the sample for cooperative members in the Shiselweni region. The first stage was to purposively choose all multi-purpose cooperatives whose main activities were the provision of farm inputs and consumer goods. This included seven multi-purpose cooperatives as shown in Table 1, whilst the second stage involved a stratified random sampling of 80 cooperative members from a population of 396, using a Slovin sampling technique (Simamora, 2004). Given the available resources and time at their disposal, the researcher used a 10% margin of error as desired for the sample.

� =�

1 + ��²

n = Sample size N = Population e = Margin of error desired N =396

� =�

�� ²=396/ (1+ (396 x 0.10 x 0.10)) = 80

Table 1. Distribution of sample

Multi-purpose

Cooperative

Population (Ci) Sample

(Ci/396)

x115

Committee

members

Ordinary

members

Cooperative

officers

Gege 56 16 5 11 Mthonjeni 57 17 5 12 Zombodze 29 8 5 3 Phakamani 36 11 5 5 Kaphunga 167 49 5 44 Nkhungwini 23 7 5 2 Simoyini 28 8 5 3 Total 396 115 35 80 5

Thirty five committee members of the multi-purpose cooperatives were purposely selected. These consisted of Chairperson, Secretary, Treasurer and two other randomly selected committee members to make a total of 5 committee members per cooperative. These committee members were assumed to possess rich knowledge about the cooperative. No sampling was done for the five (5) cooperative officers who provide services to all cooperatives in the Shiselweni region. Thus the sample size for the study was (n=120). 3.3 Data collection

Data were collected through personal face to face interviews, using semi-structured questionnaires . The questionnaires were reviewed by experts in the Cooperative college of Swaziland and the University of Swaziland. The questionnaires were further pre-tested in one of the multi-purpose cooperative (Mahlangatsha multi-purpose cooperative), which was not part of the sample.


4.1 Profile of multi-purpose cooperatives in the study

Table 2 shows that Kaphunga had the highest (167) membership followed by Mthonjeni (57) and Gege (56). Nkhungwini had the least (23) membership. These findings suggest that the multi-purpose cooperative had been in existence for years. The oldest in terms of registration was 46 years old (Gege) which was registered in 1969, whilst the youngest was 5 years old (Simoyini) and was registered in 2010. Hence, in terms of experience they were expected to have gained more experience, which positively influenced their performance.



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Table 2 Multi-purpose Cooperatives Multi-purpose Cooperative Membership size Year of registration

Gege 56 1969 Mthonjeni 57 1970 Zombodze 29 1972 Phakamani 36 1989 Kaphunga 167 2009 Nkhungwini 23 2009 Simoyini 28 2010

4.2 Services offered by multi-purpose cooperatives

The findings presented in Table 3 show that Gege multi-purpose cooperative sold consumer goods, farm inputs and also provided tractor hire services. Nkhungwini sold consumer goods and farm inputs, whilst Simoyini provided savings and credit facility, sold consumer goods and farm inputs. Kaphunga provided savings and credit facility as well as hammer mill and tractor hire services. It also sold diesel, consumer goods and farm inputs. Zombodze sold consumer goods and farm inputs, while Phakamani kept poultry and sold consumer goods and farm inputs. Mthonjeni provided hammer mill services, sold diesel, consumer goods and farm inputs. The results are in agreement with Mathews-Njoku, Ugochukwu and Chendo (2003) who found that the success of cooperatives is influenced by providers of unique services and easy access to capital. Table 3. Services provided by cooperatives

Service Cooperative

Poultry keeping

Diesel Hammer mill

Consumer goods

Farm inputs

Savings & credit facility

Tractor hire

Gege √ √ √ Mthonjeni √ √ √ √ Zombodze √ √ Phakamani √ √ √ Kaphunga √ √ √ √ √ √ Nkhungwini √ √ Simoyini √ √ √ √ denotes services provided by multi-purpose cooperatives

4.3 Status of governance in multi-purpose cooperatives

The study measured the status of cooperative governance using 12 statements; 7 statements for democracy and 5 for participation. Ordinary members of the multi-purpose cooperatives were asked to indicate their level of agreement with each statement using a five-point rating scale (Rating scale: 1 = Strongly Agree, 2 = Agree, 3 = Uncertain, 4 = Disagree, 5 = Strongly Disagree). Table 4 presents the findings of the perceptions of cooperative members on the governance of multi-purpose cooperatives. A mean of less than 3.0 meant members agreed with the statement, while a mean above 3.0 meant they disagreed. Table 4.Status of governance in multi-purpose cooperatives (n=80)

Item Mean SD Democracy Nomination and election of committee members at AGM 1.202 0.404 Independent audit of annual accounts 1.262 0.518 Secret ballot voting 1.310 0.760 Accessibility of annual accounts by members 1.345 0.720 Members are given sufficient notice for AGM 1.369 0.757 Management is trained 1.429 0.826 Education and training is provided to all members 1.595 0.933 Overall 1.359 0.556 Participation Members are involved in decision making 1.512 0.736 Fair distribution of responsibilities among members 1.583 0.732 Open discussion by members during meetings 1.583 0.734 Members attend general meetings regularly 1.750 0.863 Members attend to all business activities 1.762 0.801 Overall 1.638 0.710

Rating scale: 1 = Strongly Agree, 2 = Agree, 3 = Uncertain, 4 = Disagree, 5 = Strongly Disagree.



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Democracy: The findings indicated that respondents were of the view that their cooperatives were governed democratically (mean = 1.359) with a standard deviation of 0.556, suggesting that there was little variation in the responses of the members regarding governance.

The results corroborate with the findings of a study by Gasana (2011) whose study established that the management of cooperatives practice democratic governance as required by the Rwanda Cooperative Law (2007). For example, the cooperatives reported that management of the two cooperatives (i) held regular elections (ii) observed and followed the laws governing the cooperatives, (iii) gave the same treatment to women and men (iv) when sharing bonuses, every member was given equal share and (v) gave equal opportunities for training to all members including the youth.

Participation: The results in Table 4 revealed that cooperative members perceived that there was participation (mean = 1.638) by members in the activities of the cooperatives. The standard deviation (0.710) suggests that there was less variation in the responses regarding perception of member participation in the multi-purpose cooperatives. Participation enhances efficiency and effectiveness of investment and promotes processes of democratisation and empowerment of those who participate (Develtere et al., 2008; Papadopoulos, 2003). The results though positive indicate a slightly above average agreement on participation. The results are in agreement with the findings by Gasana (2011) whose study established that the leaders had good governance practices. For example, the committee members held free and fair elections which were perceived to be impartial as they did not take sides with members and respected the cooperative constitution by observing the term of office and conducted regular elections. 4. 4. Status of accountability in multi-purpose cooperatives

Respondents were asked 7 statements about status of accountability in multi-purpose cooperatives. The results in Table 5 suggest that respondents perceived that there was accountability (mean =1.883) in their cooperatives. The standard deviation (SD=0.769) shows that there was not much variation on the respondents’ responses to the statements on level of accountability. This was further asserted by the committee members who indicated that members are consulted before any decision was taken in the cooperatives. This is in line with the principles of cooperatives, that members are the owners of the cooperative and as such have to make decisions (Swaziland Government, 2002). The results corroborate with Wanyama et al. (2009) when he indicated that a committed leadership and a clear vision of finding solutions to the daily problems of members are important for cooperative success.

In terms of transparency, the findings indicate that there was transparency (mean =1.800) in the cooperatives and the variation on members’ responses was minimal as shown by the standard deviation (SD = 0.664). Pandey (2005) stated that transparency means things and information are totally transparent for anyone who is related with them. Cooperative transparency suggests that all activities, decisions and other related information of cooperatives are to be disseminated to every user. Table 5.Status of accountability and transparency in multi-purpose cooperatives (n=80)

Item Mean SD Accountability Members have access to financial information 1.600 0.826 Audits are conducted regularly 1.699 0.852 Members formulate policies 1.747 0.961 Members share information 1.880 0.942 Committee members advise management 1.988 1.018 Office bearers report to members 2.048 1.070 Prompt response from members and vice versa 2.217 1.127 Overall 1.883 0.769 Transparency Members never hide information 1.667 0.608 Management and committee consider members as owners 1.714 0.800 Members have access to documents 1.726 0.683 Management never hides information 1.845 0.857 Information disseminated to all members 1.917 0.996 Committee members never hide information 1.929 0.889 Overall 1.800 0.664

Rating scale: 1 = Strongly Agree, 2 = Agree, 3 = Uncertain, 4 = Disagree, 5 = Strongly Disagree. 4.5 Status of cooperative member’s education and training The study sought to find out the status of education and training within multi-purpose. Cooperative members and committee members were asked about the status of their cooperative with regard to education and training. The



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findings in Table 6 indicate both members and committee members (74%) expressed the need for continuous education and training on cooperative principles, values, ethics, records keeping and members’ responsibilities. Similarly, 61% of the members and committee members expressed theneed for training of members, employees, the public and traditional leaders, . Table 6. Member education and training in multi-purpose cooperatives. (n=115)

Item Frequency

of responses

Per

cent

Role of education committee Educate and train all cooperative members, employees, the public and traditional leaders

70 61

Areas which MPC members and committee members expressed needfor

training

Strategies to recruit more people to increase membership 50 43 Full participation of members in cooperatives operations 40 35 Continuous education on cooperative principles, values and ethics, keeping proper records, rights and responsibilities of members

85 74

Training of management (employees) Keeping of proper records 35 30 Importance of effecting internal controls 10 9 Training of the public and the traditional leaders People need to be sensitised on cooperative philosophy 6 5 Traditional Leaders to learn how MPCs are governed How often members are trained

5 4

Conducted once a year in each cooperative because there are no funds to cater for training expenses

10 9

Conclusions and Recommendations

5.1 Conclusions

The purpose of the study was to determine the governance and accountability of multi-purpose cooperatives in the Shiselweni region of Swaziland and the implications for education and training. The following conclusions were drawn from the findings of the study.

The study found that there was good governance amongst the cooperatives, which is a clear indication that cooperative have the ability to be sustained if good governance is adhered to. Good governance is therefore important for the performance and sustainability of multi-purpose cooperatives.

In some of the multi-purpose cooperatives, committees and management applied effectively the knowledge they had on how to manage cooperatives. Such scenario in the cooperative is a clear indication that cooperatives can play a crucial role in enhancing the economic well-being of their members.

Secondly, it is concluded that the level of accountability in multi-purpose cooperatives was high. Accountability was one important factor that was considered by every cooperative as expressed by cooperative officers. Committees had knowledge on cooperative management and employees had been properly trained for their jobs. However, multi-purpose cooperatives were weak in communication linkages between committee members and the ordinary membership. Accountability was average in cooperatives, as such to account for the work done in the cooperatives resulted in poor participation by the general membership. Failure to understand the financial reports as a result of low levels of education amongst the membership could result in average performance of multi-purpose cooperatives.

5.2 Recommendations

Based on the findings of the study, it is recommended that there should be close supervision of cooperative employees by committee members and cooperative officers to improve performance. Inspection of records should be conducted on a regular basis to ensure that financial statements are in place for auditing.

There is need to educate and train cooperative members on cooperative principles in order to improve their participation and to strengthen accountability of the committee members.

It is recommended that members who have served for a long period of time in the cooperative should encourage and train the youth to join multi-purpose cooperatives to allow for continuity and sustainability.

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Financial Statement Announcement and Its Effect on Stocks in

Amman Bourse

Deema Daifallah Massadeh

Financial & Banking Sciences Department, Al-Balqaa Applied University, P.O.Box 17038 Amman, Jordan

Abstract

This study aims to test the effect of financial statement disclosure on stock prices on industrial shareholding

companies, and investigating the information content of this statement on either stock prices and (trading volumes),

it is also aims to investigate the ability of investors to earn abnormal return by using these information. This study

draws sources of information from secondary data. The behavior of stock prices was studied on the basis of daily

movements. On this paper an attempt was made to analyze the stock prices of all industrial shareholding companies

listed in Amman bourse using market model to estimate the normal return and the percentage change of daily stock

prices to estimate the actual return. Hypothesizes of this study were examined by using parametric tests as one-

sample test and paired sample to test. It was found that there was no information content to these statements on

stock prices. The investors could neither using this information to beat the market, nor earning abnormal return.

This study can be a source of help to industrial companies’ managers to improve either way of publishing financial

statement or the information content of these statements. And it is also a source of help to investors to improve

their understanding and reading of these statements.

Keywords: financial statement disclosure, stock prices, abnormal return, normal return, information content,

Amman Bourse.

1. Introduction:

Financial statement is considered as a key instrument for information used to make financial decisions by financial

institution, creditors and investors because it has multi information content for these groups.

Financial statement provide key information for current and anticipated investors, creditors and many

other groups to make rational decisions related to their investment, loans and portfolios , annual financial

statements contains many information which may change investor behavior related to a specified stock or portfolio

and may affect trading volume as financial statements are public information and available for all . This study is

an attempt to find the effect of this information on stock prices which has published its financial statement, and

then it is a testing efficiency of Amman bourse at semi strong level.

1.1 Importance of the study:

Studying the efficiency of markets in general and Amman bourse in specific terms will provide many investors

either – current or anticipated – with information about the strategies for investing in these markets. According of

the level of efficiency they deal with, as capital markets are working beyond strong level of efficiency. Then the

information monopoly will not exist and no one can earn abnormal return more than other investors.

Also this study is anticipated to make contributions in three fields:

First: to know the information content of financial statement announcements and the effect of that

information on investor’s behavior.

Secondly: contributions to the investors either current of anticipated to perform and build their investment

strategies

Thirdly: contributions to the academic fields by providing a new perspective in finding out the efficiency

of Amman bourse from this study,

The academic fields will be able to gain better understanding in the interaction between the information

content and efficiency of markets.

1.2 Objective of the study:

The main objectives of the study

1- To examine the efficiency of stock pricing in Amman bourse using financial statements disclosure as a surprise

event.

2- To clarify the factors that affects the efficiency of markets at semi strong.

3-Identifying the obstacles and difficulties facing investors in Amman bourse.

1.3 Problem statement : this study intended to examine the following three major hypothesis according

efficiency market hypothesis , it is expected that stock prices will response rapidly and simultaneously to any new

information and may they will change their image for a stock issued by some company in efficient market it is

anticipated that the price of a stock issued by a company must reflect all available information , these information



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may represent financial statements , historical price of stock , information published by journals and other mass

media , or any report or analysis for macro economic conditions .we can say that in efficient market , the stock

will be priced fairly and its intrinsic value will equal its fair value which generate a sufficient return that will

compensate investors in that stock with a suitable return according to its systematic risk .

2. Literature review:

According to Omet (1997), Amman bourse has to improve its techniques and efficiency to attract investment. This

study aimed to test the liquidity and pricing efficiency in Amman Bourse during (1978-1996).

Roll (1997) compared the risk adjusted return for small size companies as with large size companies

during (1962-1997).He found that annual yields for small size company’s outperformed large size companies with

a rate 12% with even risk for the two groups.

Ghilani (1995) has found the bourse of Masqat was not efficient at week from because historical data

didn’t influence on stock shares and there was an opportunity of accomplishing abnormal returns.

Musa (2001) the size of the company has no significant impact on stock yield either if we use the book

value or market value as a measure of size while the existence of size impact was found before the return was

adjusted with risk.

There was no difference between risks of portfolios consisting of small size or large size companies.

According to Ghilani (1995), there’s no evidence of efficiency at the week form level in masquat market

and historical information hadn’t be reflected on stock prices and the stock prices had the characteristics of normal

distribution .

Kawkattsu (1999) - financial liberalization in emergency markets- has found no effect on these markets

and those markets were efficient before liberalization.

Lonie (1996) - The firms with high EPS and DPS had earned abnormal returns while those with low EPS

and DPS had earned abnormal loss. Finally firms with no change in EPS and DPS had more abnormal return

compared with other that had increased EPS and DPS.

Beaver (1998) - The annual financial reports had trading volumes- , also found the investor modified his

portfolio to keep up with these information.

3. Methodology:

To achieve the main objectives of the study , the data for this study was gathered from secondary sources –the

closing prices of stocks as published in Amman bourse (2001- 2009) these data were used to compute normal

returns and abnormal returns of the selected Jordanian firms for the mentioned period , as well as to assess the

efficiency of markets .

Dominant industrial firms of Jordan were selected as a sample of the study which it accounts 40% of the

study population. However the dependent variable of this study will be the stock returns which will be measured

by market model. The independent variable is the return of market portfolio which will be measured by the

percentage change of Amman Bourse financial indicator.

For the purpose of analyzing this study we uses the market model to estimate the normal return and the

variance between realized return and expected return to estimate the abnormal return the paired sample test

ANOVA was used in testing the hypotheses and to measure the difference between abnormal return before and

after the event Pearson correlation coefficient also used to investigate the correlation between the paper variables

at 5% level of confidence according to the SPSS software package.

3.1 Results and Analysis:

Table (1) shows the average normal return accumulated average abnormal return for companies involved in the

study sample before and after the event (25days before and 25 days after the event ):



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Table (1): average normal return, accumulated average abnormal return for companies involved

Accumulative average abnormal return Average abnormal return Days before \after Serial

25 1

0.00660 0.0066 24 2

0.01299 0.00638 23 3

0.02278 0.00979 22 4

0.03229 0.00951 21 5

0,04328 0.01099 20 6

0.05229 0.00902 19 7

0.06779 0.00829 18 8

0.07350 0.00572 17 9

0.08092 0.00742 16 10

0.008807 0.00715 15 11

0.09373 0.00566 14 12

0.09988 0.00613 13 13

0.10548 0.00598 12 14

0.11324 0.00740 11 15

0.12691 0.01230 10 16

0.13895 0.00366 9 17

0.14260 0.00654 8 18

0.14914 0.00777 7 19

0.12691 0.00637 6 20

0.16329 0.00901 5 21

0.17230 0.00858 4 22

0.18088 0.00834 3 23

0.18922 0.00670 2 24

0.19682 0.01251 1 25

0.20933 0.00868 0 26

0.21801 0.00640 1 27

0.23259 00818 2 28

0.23885 .00626 3 29

24755 0.00870 4 30

0.24755 .00981 5 31

0.26520 .00784 6 32

0.27112 0.00591 7 33

0.27828 0.00716 8 34

0.28589 0.00761 9 35

0.29282 0.00693 10 36

0.30414 0.01132 11 37

0.31120 0.0706 12 38

0.31786 0.00666 13 39

0.32427 0.00642 14 40

0.33136 .00709 15 41

0.33903 .00767 16 42

0.34690 .00787 17 43

0.35636 .00946 18 44

0.37243 0.01607 19 45

0.38121 20 46

0.39015 000878 21 47

0.39969 0.00894 22 48

0.40697 0.00788 23 49

0.41582 0.00885 24 50

Source: computed from Amman stock exchange using daily closing, 2011

Table (1) shows the window dressing which consist of 25 day before the event, 25 after the event in

addition to the event day (day o) and provides the average abnormal return for the all selected companies and the

accumulative average abnormal return .

Moreover table (1) indicates that these were an existing of positive abnormal return during the window



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dressing and an increasing of accumulative average abnormal return during the period surrounding the event.

3.1.1 Testing: the decision rule, accept HO if calculated hypotheses value is less than tabulated value and reject

HO if calculated value is greatest.

This study proposes 3 hypotheses: the first one stated that the sum of daily abnormal return at the day of

publishing financial didn’t differ from zero.

This hypothesis was examined using one sample t-test and it was

Result of HO t-tabulated t-calculated Mean

Reject 1,91818 1,708- 0,00043-

Found that (calculated t=1.708) is smaller than (tabulated t = 1.91818) according to decision rule this

hypothesis is rejected and we can state that there is a positive abnormal return at the event day (the day of

publishing financial statement).

Hypothesis 1-2:

Ho: prices don’t adjust rapidly to new information

Hypothesis (1-2)

Test of hypothesis (1-2)

Result of ho req tabulated T calculate Mean residual

Accept 0.08 1.9818 1.754 0.00093

This study was examined using paired sample test, it is found that there is no statically difference between

pre and post mean which ascertain that there is no information content to that event (the event of publishing

financial statements.

3.1.2 Results:

After analyzing the data and testing the hypothesis the following results were extracted:

1-It was found that the sum of daily abnormal return at the day of publishing financial statements doesn’t differ

from zero. This result doesn’t ignore the abnormal return at the event day, but some companies earn abnormal loss

and others earn abnormal return and the sum of abnormal return and abnormal loss doesn’t differ from zero

(abnormal return has deleted when we add abnormal loss)

2- The sum of absolute abnormal return at the day of publishing financial statement differs from zeros and these

abnormal returns ascertain the inefficiency of Amman Bourse.

3- We can use the event of publishing financial statements in earning abnormal returns; this result doesn’t ignore

the existence of abnormal return but the average of abnormal return before publishing the financial statement and

after the publishing doesn’t differ.

4- According to the stock prices responsiveness to new information, we can describe that process is very slowly

because of the existence of abnormal return during the days following the event.

5-There is a delay stock prices response to new information which is seemed by the existence of abnormal return

during the period surround the event : this is ascertain that publishing financial statements has an information

content but the process of generating abnormal return ascertain the delay of adjusting prices to that event and the

under action response.

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Online Shopping Experience and Customer Satisfaction in Nigeria

N. Gladson Nwokah Department of Marketing, Rivers State University of Science and Technology, Port Harcourt, Nigeria

Gladson-Nwokah, Juliet

Department of Marketing, Ken Saro-wiwa Polytechni, Bori, Rivers State, Nigeria

Abstract

This study reported in this paper discussed the online shopping experience in Nigeria and its effects on customers’ satisfaction. Nigeria population is so large with a total of states with Abuja as the Federal capital. Because of the difficulties in ascertaining the population of online shopping in Nigeria, the population from previous study was used. This descriptive study adopted multiple regression analysis in establishing the relation between customers’ online shopping experience and theirs level of satisfaction. The study observed that though online shopping experience in Nigeria is very recent not having ten years’ experience, it is increasingly growing. The adoption of online e-tail from the both sides of the buyers and sellers are rapidly increasing. Customers’ intention to continue shopping online is of a very high side. Though, it still has its numerous challenges. The study recommends that Nigeria Government, e-tailers and the online community involve in online shopping, could engage more creative awareness on online shopping. Attention could be paid to mitigating the identified challenges of online shopping experience in Nigeria.

Introduction

Online shopping is the use of electronic means to carryout buying over the internet at any given time. An online shop is where purchasing of goods and services is done directly with consumers/client is known as Business to Consumer (B2C) online shopping. On the other hand, the Business to Business (B2B) online shopping takes place when a business buys from another business. Before now, while emphasis of a business turnover was about durable good on the internet, today nearly every product or even service can be bought and sold via the internet. The internet, which is seen as a new marketing channel presents a different and unique shopping environment for consumers, provides a different shopping platform by which customers can shop without having to visit the stores which can be very exhausting.

The rapid growth of online marketing has given a new dimension to the customer shopping experience. In this day and age everyone wants to shop online due to its numerous benefits, such as convenience, effectiveness, easy to use, swift services, 24 hour day and 7 day week availability and so on. People just want to stay in the comfort of their homes or offices to place orders for products or services in order to avoid staying in long queues and to save time also. Online shopping is the widely and frequently used channel for stress free shopping. It is in fact, a well-known channel of shopping within the web community (Bourlakis et al., 2008). Shopping Online is receiving a very wide acceptance in recent times, whether it’s for household products or services, or office requirements. It is becoming very obvious that Online shopping is the fastest and easiest way to make all your purchases, be it at home or in the office, or in a different country. This is particularly true for developed nations, where every store has its own website that one can buy from online.

Customer satisfaction is a well-known topic in the marketing literature, consumer research and psychology. Several authors have view satisfaction from the point sentiment which is as a result of evaluating the procedure which the basis for comparing what have been received with what was expected and not losing focus on what purchase decision and the needs that is related to the purchase. Conversely, satisfaction is the assessment made by customers about a product or service, as to whether it has met with their expectations or needs (Zeithatril and Bitner, 2003). Nowadays, consumer goods goes beyond the products one see displayed in the marketplace that attracts attention to be bought and consumed to satisfy a need or desire (Kotler and Armstrong, 2006). The aim is to surpass expectations and to create a long lasting impression in the consumer (Kotler et al, 2011).

Several academic research and practitioner literature have stressed on the importance of customer satisfaction in online shops. Previous studies on e-commerce have considered customers’ satisfaction from different stand points. For example, previous studies have narrowed the operationalization of customers’ satisfaction by focusing on e-satisfaction, information satisfaction, satisfaction with site and system satisfaction. Several studies, for example Shih (2005) used satisfaction in terms of the internet to proxy online shopping satisfaction and to predict the level of online shopping acceptance. Nevertheless, online shopping experience may not be in tandem with general satisfaction. In recent time, Nigeria has experienced an unprecedented increase in the online shopping following the commencement of emergence of some online retailers, relatively little is currently known about Nigeria non-physical store shopping behaviour in general and specifically Nigeria online shopping. The thrust of this .study is to fill that knowledge gap by exploring Nigeria online shopping experience



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and how they relate to customers’ satisfaction. Siddiqui et al (2003), argued that substituting the use of traditional retail outlet with the online marketing

formats through the internet has resulted to a high growth in online sales amount globally. Although, the online retail market sector has shown signs of high competition amongst e-retailers, nevertheless, the high growth rate in online sales is expected to continue for a long while, the current slow economic environment creates challenges for retailers to ensure that customers have a good enough reason to participate in online shopping activities given the fact that it is different in nature and form from the regular offline stores, some of these perceived differences play a significant role in influencing customers’ decision to shop online even though others may be discouraging.

There are several studies that have examined the online shopping and associated it to several other factors but not much has been said about shopping experience and satisfaction of the online shoppers. In view of this gap, this study is designed to investigate the online shopping experience of online shoppers with the view of examining their satisfaction level.

Online Shopping Trends in Nigeria

Customer’s attitude in online shopping plays a very significant role in the increase of customer satisfaction (Roman, 2010). Lucas (1978) noted that user’s attitude towards computer systems are highly related to user satisfaction. Furthermore, online shopping is associated with computer system usage towards online shopping system can greatly influence user satisfaction. Kwak et al (2002) asserted that customers who exhibit higher computer proficiency are likely to enjoy and adapt quickly to online shopping than those who are novice.

Olusoji et al (2015) stated that since online shopping is recently introduced in most developing countries in the world, as such online shopping development in Nigeria has not gained the most need acceptance as their counterparts in developed nations. They further stressed that people are beginning to involve themselves in online banking (e-banking) that yet most people still find it difficult to be open in shopping online.

Several studies such as Egwali (2009); Adeshina and Ayo (2010); Adeyeye (2008); Ajayi (2008) and Ayo (2008), have stated the rate of internet usage in Nigeria compare to the developed countries. A recent study on internet usage conducted in United Kingdom reveals that 82.5% of the total population are internet users and 29.4% are broadband subscribers (internet World Stats, 2010). The ease accessibility to the internet has been seen as one of the major factors that encourages the growth and adoption of e-transaction and online shopping in the United Kingdom (Soopramanien and Robertson, 2007).

However, there is a sharp difference on the majority of internet users in Nigeria. A recent study on the usage of internet in Nigeria revealed about 16.1% of the total population (149.22,090) people use internet and less the 1% of the populace (67,8000 people) subscribe to broadband (Internet World Stats, 2009). From the above result, it is obvious that only a fraction of the population are internet users and those who even access it do so through the help of numerous cybercafés in urban parts of the country (Ayo, 2006) as cited by (Olusoji et al, 2015).

Ajayi et al (2008) stated that the factor affecting the use of e-economic for online shopping in Nigeria. He further stressed that most Nigerian populace finds it difficult to make payments using the internet for the purchase of goods and services. Ayo et al (2008) noted that the cause of low-level e-payment in Nigeria is as a result of infrastructure in the country which serves as a hindrance for customers to engage in using online transactions.

Most Nigerian also find it difficult using online to do their transaction. This is because, the infrastructure of facilitates, and the software and network used for shopping and usually out dated or being ineffective due to network problems. We are inclined t say that (ATM) Automated Teller Machine is the most popularity used method of payment in Nigeria. At least four in the number of five person use the ATM (cash) card in Nigeria which makes banking through online more convenient and without queuing up in the banking hall. We also support the argument of Ayo et al (2008) that ATM is widely used in Nigeria for local payments and other transaction, while online shopping has not gained ground in Nigeria which has a negative effect on shopping online in Nigeria.

Adeyeye (2008), noted the main factor that is affecting online shopping in Nigeria is alack of indigenous online vendors. He further stressed that foreign online vendors such as Amazon and Ebat are yet to be fully utilized in Nigeria. Nigeria which is seen as having a negative reputation of being the most world corrupt countries that engages in a wide scale of internet fraud. Secondly from a recent survey carried out by the Internet Crime Complaint Centre (ICCC), Nigeria is being rated as the third in the world with 8.0% operators of cybercrime living Nigeria after US (65.5%0 and UK (9.9%), (Internet Crime Complaint Centre, 2009). The percentage when compared to the total population in (i.e. over 140 million people) poses a serious threat to the internet world. And this has affect the foreign online vendors from dealing with most Nigerians to avoid fraud.

It was also observed that few online vendors that exist do not have standardized and structure pattern of presenting information (product categories) to users, they are also negligent in helping customers locate appropriate products.



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Due to the fear of fraud, lack of structured payment systems, poor internet access, and few online vendors and other factors affecting online shipping in Nigeria, only a fraction of Nigerian population use online shopping for transactions. Most Nigerians would rather engage in face-to-face transactions than go through the challenges associated with shopping online (Olusoji et al, 2915.

The Concept of Online Shopping Experience

Online shopping is seen as the process where online customers buy goods and services directly from a seller in real times without the use of a traditional or physical intermediary service (Hsiao, 2009). Online shopping is evaluated as a type of electronic commerce (e-commerce) which utilizes an online shop, commonly known as web-shop, e-shop and e-store (Shelly et al., 2008).

Consumers’ attitude on online shopping plays a crucial role in the increase of satisfying a given customers (Roman, 2010). It is necessary to say that the attitude of one using the computer systems is highly associated with the user’s satisfaction. Online shopping as it were depends or relies heavily on the use of computer systems. In other words, customers’ positive attitude toward the use of online shopping systems brings abut beneficial influence on users satisfaction.

That is to say those customers who are proficient with computer systems are more likely to adopt online shopping quickly than those with low proficiency. Lots of online stores and firms help their customer to develop a more positive attitude toward online shopping by recommending and using user rating mechanisms. Furthermore, web interactivity channels are being utilized to help strengthen this positive attitude in engaging in online shopping (Cho, 2004).

Dimensions of Online Shopping Experience

When a consumer decides to buy online several features will determine whether the customer is willing to continue using the e-retail system or not. However, novelties which are form of innovative graphics done on the site proves to be irreplaceable when it comes to referring and encouraging customers to visit online stores, browse the internet and also consumption of various products and services on the online platform. According to Ward (2008), consumers are conscious of time pressed and are more convenience –an oriented, value-added service that brings and saves their time.

Online stores have been seen to have a ubiquitous nature, as they are available 24 hours a day for the purpose of customers’ convenience. Therefore, online shopping saves times for both the seller and the buyer, as it can discard long trips to the store, long queues and delay when at the store. Liang (2009) asserted that most online customers prefer using online shopping for faster and efficient shopping experience from the comfort of their homes. Additionally, it is evident that most online retailers are providing better channel variations that bring them into direct contract with the consumer without setting an eye on the customer in the physical store (Smith et al, 2013). Thus, online shopping services have the ability to fulfil the goals of both the customers and the online firms.

The importance of web design has been stressed as salient factors towards online shoppers’ perception in several studies.. Ranganathan and Ganapathy (2002), Ward (2008) stated that security and privacy are essential and are used as the dimensions of online shopping experience. Wafinbarger and Grilly (2003) also identified security as one of the factors for measuring the nature of online shopping service quality.

Siddiqui et al., (2003) are of the view that there are elements that encourage customers to buy various products and services online which include, web page design, ease navigation and the search for information, guaranteed security and a clearly organized return policy.

Several studies have discussed online shopping experience and pointed out some outstanding factors such as: perceived time saved, Cude (2000); perceived risk, Rangantahan and Ganapathy (2002); web design, Liang and Lai (2000); convenience, Bhatnagar and Ghose (2004); flexibility of website, Clemes, Gan and Zhong (2014); security website, Wolfinbarger and Gilly (2003).

Convenience

Convenient factor is a process that enables customers to browse and search for information easily through the internet. This factor brings about faster access than the traditional retail shopping. Through online, customers can easily search for product through online catalog. When the customers gets the products or services he needs online, he immediately places an order and the online store processes the order and gives the customers feedback, within 48 hours, the customers gets the product at his doorposts, this brings about reducing the time to be consumed in shopping physically in the retail store.

Darian (1987) noted that online customers look forward to multiple benefits in terms of convenience which includes flexibility, less time of consumption and physical effort. Bhatnagar and Ghose (2004), claims that convenience is a very crucial advantage for online shopping.

Robinson et al., (2005) noted that one major motivation in online purchasing is that, it is convenient and



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one can shop at any time and having bundles of items delivered at one’s door step. Convenience and to seek variety of items and information are major motivation of online shopping. Through online purchasing customers can easily compare prices with other online stores at the comfort of their homes with visiting the traditional or physical stores.

Perceived Time Saved

Customers are very conscious about how long they spend while transacting with a firm. They tend to be discouraged when their time is being wasted in a particular transaction. Time savings is one most important elements of online shopping. Customers enjoy speedy transaction, and they are being attended to quickly it brings about satisfaction, thereby creating loyalty.

Rohm and Swaminathan (2004), posited that online shopping saves times in the purchasing of goods and it can eliminate the stores involved in traveling or going to the traditional store. Although, time saving is one of the motivating factor, but it is also a challenge for online stores to deliver the good immediately. Furthermore, Goldsmith and Bridges (2000) noted that there is discrimination between customers that shopper online and customers that does not. Online shoppers are concerned with convenience, time saving and selection, while non-online shoppers are more concern or worried about privacy, security and on time delivery.

Website Design/Features

The Design and features of the website plays a very vital role in online shopping. The website design, reliability, fulfilment, website customer service and website security/privacy are most of the features that attracts customers when buying online (Shergill and Chen, 2005). Website quality outlook gives the consumer a perception about the online firms. Web design also plays an important role on consumer choice of electronic stores (Liang and Lai, 2000). According to Zhang and Dran (2000), website design and features displayed on the website are important and influencing factors that lead to customers’ satisfaction and dissatisfaction with a particular website.

The study

Nigeria is a country with 36 states and a Federal Capital Territory. It is considered extremely expensive to obtain data from all parts of the country covering all individual due to the very vast population of the country. Since we do not know the variability in the proportion that have shopped online across the country, we relied on a study conducted by Philip Consulting (2015), which revealed that 65 per cent of internet users in Nigeria has shopped online in one time or the other. The sample size used in that study was 500 online shoppers nationwide. Therefore, a sample size of 200 online shoppers was considered appropriate for a Port Harcourt study.

To analyze the extent to which online shopping experience is associated with customers’ satisfaction, regression analysis technique is the major statistical methods. The justification for using regression analysis are: firstly, most variables in the study are in interval/ratio scales; secondly, the sample size of 200 is a sufficient sample for the use of regression analysis to test the correlation between two or more variables than other statistical methods like nonparametric tests. Basically we are going to work with the following form of model:

Yt = a1 + b1X1 + b2X2 + b3X3 + b4X4 + b5X5 + b6X6 + Ɛ1 ……….(1) Where a1, b1 b2, b3 etc. are coefficients of the regression. X1, X2, X3, etc. are the independent variables

while Y is the dependent variable. We employed the use of Statistical Program for Social Sciences (SPSS) to facilitate the computation of critical test criteria. In order to have a reliable and valid conclusion, we carried out statistical diagnosis as much as possible to ensure that our analysis is free from any econometric shortfalls.

Table 1: Distribution of online shopping preference of respondents against their marital status

Respondents’

Marital Status

Product Classes Receiving Patronages from Respondents Total

1 2 3 8 9 11

Married 0 12 15 14 3 0 44 Unmarried 24 0 3 4 45 8 84

Total 24 12 18 18 48 8 128

Source: Field Survey, 2016

Health & Beauty product appears. Out of the 48 respondents who buy Health & Beauty product class, 45 are unmarried.

The questionnaire is also designed to be the category of items online shoppers patronizes the most, followed by fashion products capture the source of online shopping awareness of respondents. Respondents were requested to indicate from which of the following sources they got online shopping awareness:

1. Television 2. Newspaper 3. Social media 4. Radio 5. Family



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6. Internet 7. Friends/neighbours It is hoped that this may give an indication of the respondents’ preference for information media. The

more a consumer is inclined to getting his market and other news source, the more likely the consumer will depend on that source for his purchase decisions. Of the respondents, the dominant source is social media, as disclosed by table 4.4 below:

Table 2: Distribution of Respondents’ Online Awareness Sources against their Marital Status

Respondents’

Marital Status

Respondents’ Online Awareness Sources Total

1 2 3 4 5 6 7

Married 7 6 20 0 5 3 3 44 Unmarried 0 1 48 3 2 24 6 84

Total 7 7 68 3 7 27 9 128


Table 4.5 similarly indicates the distribution of online awareness source against the age brackets of respondents. There seems to be an indication that the younger age brackets (18 33 years) are more active online than the older age brackets. This observation is clearly corroborated by table 4.5 as disclosed below:

Table 3: Distribution of Respondents’ Online Awareness Sources against their Age Bracket

Respondents’ Age

Brackets

Respondents’ Online Awareness Sources

1 2 3 4 5 6 7

18 – 25 0 0 28 0 0 12 0 26 – 33 0 1 48 3 2 24 6 34 – 41 3 7 8 0 6 9 3 42 – 49 4 0 0 0 0 0 0

Total 7 7 68 3 7 27 9


Following from the outcome of factor analyses carried out on each of the measures, latent variables are extracted and the resultant factor scores are determined. In all, there are nine latent variables which are extracted to facilitate further multiple regression analysis. The dependent variable is Customers’ Satisfaction which is measured by Var S. The independent variables are Online Experience dimensions: Perceived Quality of Service (measured by Var A15 and Var B 15); Perceived Time-Saved (measured by the variables:

Var A16 and Var B 16); Perceived Product Variety (measured by the variables: Var Al 7 and Var B 17); and Perceived Risk (measured by the variables: Var A18 and Var B 18). Table 4.6 below, discloses the direction and magnitude of relation among these various variables. There are only few indications of significant relationship among the variables.

The vast majority of the relationships are weak which is suggestive of possible low impact or absence of multicolinearity.

Table 4: Correlation Matrix

Var

A15

Var

A15

Var

A16

Var

A16

Var

A17

Var

A17

Var

A18

Var

A18

Var A5

Var A15 1

Var A15 -0974 1

Var A16 0.150 -0.107 1

Var A16 -0.013 -0.004 -0.802 1

Var A17 0.348 -0.305 0.266 -0.207 1

Var A17 -0.281 0.270 -0.232 0.172 -0.901 1

Var A18 0.179 -0.088 -0.062 0.165 0.495 -0.435 1

Var A18 -0.189 0.106 -0.034 -0.047 -0.417 0.420 -0.945 1

Var A5 0.094 -0136 0.453 -0.372 -0.247 0.094 -0.370 0.177 1


For each of the respective constructs, the scores obtained were standardized and the factor loading were then applied on them to determine the factor scores. This explains why the mean scores as presented in the descriptive statistics below are zeros. in overall, the data seem to be normally distributed as suggested by the near equality among the mean, mode and median of the distribution for some of the variables.



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Table 5: Distribution f how often respondents shop online

Frequency Percent Valid Percent Cumulative Percent

Valid One week 11 7.8 7.8 7.8 Once a month 22 17.2 17.2 25.0 Every two month 68 53.1 53.1 78.1 Every four month 15 11.7 11.7 89.8 Once a year 13 10.2 10.2 100.0 Total 128 100.0 100.0


From the table above 7.8% (10 respondents) said they shopped online once a week, while 17.2% (22 respondents) said they shopped online once in a month also 53.l% (68 respondents) said they shopped online every two months also, 11.7% (15 respondents) said they shopped online once every four months meanwhile, 10.2% ( 13 respondents) said they shopped online once every year

Results

The Multivariate Regression Analysis:

In order to further analyse the influence factors of online shopping experience with customer satisfaction, among online shoppers in Nigeria, the following multiple regression model is developed: VarS = a1 + b1VarAl5 + b2VarBl5 + b3VarAl6 + b4VarBl6 + b5VarAl7 + b5VarBl7 + b6VarA18 +

b7VarB18 + E1 Where a, b1 b2, b3 etc. are coefficients of the variables VarAl5, VarBl5, VarAl6, etc. which are the

independent variables while VarS is the dependent variable. In specific terms, the regression equation is specified thus: “Online shopping customer satisfaction’ (VarS), and online shopping experience: “Perceived quality of service” (VarAl5 and VarB15); “Perceived time-saved” (VarA16 and VarB16); “Perceived product variety” (VarAl7 and B17); “Perceived Risk of Website” (VarAl8 and VarBl8).

The Results of Regression Analysis

Using step-wise regression analysis, below is the result of the analysis:

Table 6: Summary of Output

Regression Statistics

Multiple R 0.7549 R Square 0.5699 Adjusted R Square 0.5410 Standard Error 1.1978 Observations 128

ANOVA

df Ss Ms F Sig. F

Regression 8 226.2265 28.2783 19.7107 0.0000 Residual 119 170.77256 1.4347 Total 127 396.9521

Coefficient Standard Error T Stat P-value Lower 95% Upper 95%

β0 0.0000 0.1059 0.0000 1.0000 -0.2096 0.2096

B1 -0.1043 0.1263 -0.8262 0.4104 -03544 0.1457 B2 -0.2265 0.1725 -1.3131 0.1917 -0.5681 0.1151 B3 0.3549 0.0752 4.7194 0.0000 0.2060 0.5038 B4 0.1270 0.1252 1.0143 0.3125 -01210 0.3750 B5 -0.4010 0.1252 -30454 0.0029 -0.6618 -01403 B6 -0.7895 0.3461 -2.2809 0.0243 -1.4748 -0.1041 B7 -04676 0.1080 -4.3313 0.0000 -0.6813 -0.2538 B8 -0.7039 0.1761 -3.9982 0.0001 -10525 -03553

Var S = 0.00 - 0.lO4Var A15 - 0.227Var B1 + 0.355Var A16 + 0.l27Var B16 - 0.4O1Var A17 - 0.79OVar 817 -

0.468Var A18- 0.7O4Var B18 + µ Regression analysis discloses that R2 is 0.5699. Since the technique employed in this study is multiple-

regression model, the most appropriate coefficient of determination is the adjusted R2 which is 0.54 10. This means the independent variables in the model can predict 54.10% of the variance in dependent variable. This is a good fit. Specifically, Adjusted R2 reveals the explanatory variables accounted for 54.10% of the variables in volume to determine Online shopping Satisfaction. The F-Statistic of 19.7 107 compared to the p-value of 0.000 at 5% level of significance reveals that the explanatory variables are jointly significant in explaining the variations in online



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shopping satisfaction. However, of the eight variables, only five variables passed the threshold of significance.

Discussion of Major Findings

This study has provided significant contribution to the body of knowledge and existing literature as regards online shopping experience and its associated effect with customers’ satisfaction. In addition, results suggest that consumers’ satisfaction is a critical antecedent to predict online shopping experiences. Insights into understanding the factors affecting online shopping are important as little research exists regarding this unique format. Service Quality and Repeat Purchase were significant determinants of customer satisfaction.

It was observed also that customer satisfaction can be affected by the six different intensity, table 5.1 shows that the Perceived Time Saved and Service Quality, Perceived Time Saved and Repeat Purchase, Perceived Product Variety and Service Quality, Perceived Product Variety and Repeat Purchase, Perceived Risk and Service Quality, Perceived Risk and Repeat Purchase Policy has significant positive influence on customer satisfaction,

Research Hypotheses Test Results

Hypotheses Hypotheses Contents support or not H01 There is no significant relationship between perceived service quality Support

and online shopping customers.

H02 There is no significant association between perceived time saved from shopping online and customers’ satisfaction in Nigeria Not Support .

H03 There is no significant relationship between perceived product variety Not Support and customers’ satisfaction in Nigeria

H04 There is no significant relationship between perceived online shopping Not Support related risk and customers’ satisfaction in Nigeria.

Source: SPSS Output

It was also observed that there exists a negative and significant effect of customers’ expectations on online customers’ satisfaction. Also, features and designs of website and customer perceived time saved does not significantly affect customers’ satisfaction.

This implies that online store has a competitive price advantage and provide high quality goods, at the same time enhance the security of online payment, improve the speed and quality of logistics distribution, provide flexible exchange policy, which return in terms of creating a positive customer experience is crucial, and the return of the freight is one of the key elements that affect the return experience, do not pay back freight is prompted to buy again drive factors, relaxed and easy return policy experience and good returns in stimulating purchase, attract repeat customers, and create brand loyalty plays a significant role, so as to improve customer satisfaction.

This study therefore made the following findings: Product variety perception of customers does not always associate with their satisfaction. This finding is

at variance with the popularly held view (Butler and Peppard, 1998) that more product variety made available translates to customers’ satisfaction and therefore retention. Bourlakis et al., (2008) argued that one of the most widely and commonly means of convenient shopping is shopping online. It is in fact, a popular means of shopping in the internet community. Its creation of a platform where consumers are provided with variety of product and multiple choices to choose from gives online shopping an edge over the traditional offline stores.

This study has made its contribution in the growing number of literature as regards online shopping experience and customers’ satisfaction. This study advances the knowledge on online shopping experience and customers’ satisfaction in making purchase decisions in general. Its key contribution however is that adequate attention is given to the weight of influence customers’ perceive time-savings, perceived product variety and perceived risk from shopping online, rather than from conventional shops, would exert on online shoppers’ satisfaction. The investigation of this new insight is considered practically important as the findings can be used by online shops in some ways:

1. In the development of customer acquisition strategies. 2. As empirical local evidence in evaluating the efficacy of customers’ satisfaction strategies as a business

development enabler.

Managerial implications

For managers, this study will help to build their knowledge on how best to manage online shopping, with the understanding that there are different types of customers with different antecedents. The study will help managers refine their website, by distinguishing the concept of online shopping practices from other related concepts in the



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marketing literature. Managers will need to understand the factors which bring positive online shopping experiences to the customers and improve on them and avoid the factors that bring negative online shopping experiences to the customers.

Further research areas

The current study uncovered some questions that are considered worthy of further research attention. One of the reviewed literatures by Kamariah and Salwani (2005) suggested that the higher a website quality is, the higher consumer intends to shop online. As much as this opinion can be easily admissible in industries such as digital product (e.g. MP3 files) markets where purchases are on a one-off basis and consumers risk is primarily on the quality of product offerings which can easily be mitigated by ascertaining the producers’ claims, product quality-wise, same may not be said of non-digital products where product quality claims and specifications are difficult to be ascertained. Besides, one is left to wonder if this theory holds true across cultural line.

In view of the above, future research is recommended to clearly ascertain whether or not there is a relationship between purchase intentions and website quality across cultural and product lines. The findings from such a study will be of benefit to prospective online shops in their customers’ acquisition strategies.

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Livestock Dilemma, Pastoralism and Decentralization in the

Sahel: A SAM Approach in a Rural Commune in Mali

Daniel P. Kaboré Centre d’Analyse des Politiques Economiques et Sociales (CAPES),Ouagadougou, Burkina Faso

Abstract

This paper examines the effects of hypothetical policies on the livestock activity and on pastoralists in the Madiama rural commune in Mali, using a SAM model. The results showed that family labor is the most rewarding factor for livestock activities which benefit far more of an exogenous unitary money injection in the economy than cropping ones. Pastoralists appeared to be the best channels to implement communal policies. However, since animal rearing in the current system is land-demanding, the Madiama commune is in a dilemma: promoting livestock activities will end up with generating or exacerbating conflicts between pastoralists and farmers. Given that the decentralization process is irreversible, it is recommended that the communal authorities be wary of the need to build consensus between stakeholders for a sustainable management of natural resources. Livestock activities as well as the pastoralists should be strongly included in the process of this consensus building. Communal authorities should get rid of (or ban) misconceptions and preconceived ideas on the livestock activities and pastoralists’ way

of life in natural resource management. Keywords: transhumant pastoralists, SAM model, decentralization, Madiama, misconception, Mali

II. Context of the study

2.1. Presentation of Mali

Mali is a landlocked country in West Africa (see Map 1) that depends on gold mining and agricultural exports for revenue; it is among the 25 poorest countries in the world and the poverty headcount ratio is 43.6% nationally. The economic activity is largely confined to the Niger River watershed, while approximately 65% of its land area is desert or semi-desert. About 10% of the population is nomadic and about 80% of the labor force is engaged in farming and fishing; industrial activity is concentrated on processing farm commodities. Eighty percent of the population is engaged in agriculture, which constitutes 45% of the country’s GDP. Crop and pasture lands account

for 64% of the country’s area. Agriculture is dominated by the subsistence farming of millet, rice, sorghum, and corn and the rearing of cows, sheep, and goats. Livestock rearing constitutes 10.8% of GDP and is among the country’s top three exports (after gold and cotton) (http://www.ruralpovertyportal.org/country/statistics/tags/mali accessed on May 18, 2016).

The Sahara Desert covers nearly two-thirds of Mali, and 90% of the population resides in the more fertile southern zone below it. Ranking 179th out of 188in 2014 in the United Nations Human Development Index (UNDP, 2015), the country relies economically on traditional agriculture and fisheries that are both highly vulnerable to climate change. This vulnerability is aggravated by resource scarcity and the landlocked position of the country. Food insecurity is chronic in most rural areas and the situation worsens with the insecurity (kidnapping and insurgency since 2006) as manifested through massive population displacement, and the disruption in traditional activities like farming, livestock production and tourism.



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Map 1: Mali in West Africa

Medium-term macroeconomic prospects are good and the economy should advance with GDP growth of 5.4% in 2015 and 5.1% in 2016, once again driven by agriculture and the services sector, as well as by the large-scale return of technical and financial partners (http://www.africaneconomicoutlook.org/en/country-notes/west-africa/mali/accessed on May 18, 2016).

2.2. The inner delta of Niger River in Mali

In Mali, the soil natural resource has been degraded the past few decades as is true in other Sahelian countries. In particular, soil fertility has declined (Jones-Casey& Knox, 2011) due to continuous cultivation without fallow or adequate organic and/or inorganic fertilizer application, and crop production expansion into more marginal land. This shift is due to demographics, stakeholder transition from fishing and pastoralists to sedentary farmers, and more integration of livestock with crop production. The management focus is on reducing risk, thereby being able to maintain or expand their cattle herds.

There are four main categories of stakeholders in the Madiama commune, which form a gradient from sedentary crop producers to transhumant pastoralists:

· Farmers: their main activity is crop production, and this activity requires use of more-and-more land to meet family economic needs; many members of this group are former fishermen;

· Agro-pastoralists: their main focus is crop production, but they integrate livestock into the farming enterprise;

· Sedentary pastoralists: their main activity is livestock production, but they have become sedentary and integrate some crop production into the farming enterprise;

· Transhumant pastoralists: their economic activity is livestock production, and they migrate within and outside of the commune in search of water and pasture for their animals. Stakeholder shifts among the above groups has increased the overall demand for crop and pasture land,

thereby increasing conflict among the different groups (Jones-Casey& Knox, 2011 op.cit). This has been aggravated by increased human population (2, 97% per year) and environmental changes associated with climate change (Swedish Government, 2013). These conflicts, both inter- and intra-communal, influence all members of the commune as the land/natural resource base shrinks on a per capita basis. These conflicts revolve around access to land, particularly to specific rights to cultivate and graze land, and access to water (Moore, 1990). III. Misconceptions on livestock, pastoralists and their way of life

More than five hundred million people (over thirty million are in Africa) live in arid or semi-arid areas in the world, some of which entirely rely on their animals for living. They opportunistically access available natural resources by nomadic movement of herds in response to climate and other constraints to make use of available grazing and



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water (Bassett & Koné, 2011). However, post-colonial governments have neglected the need to develop policies to meet pastoralist needs, with the intent to end pastoralism. Rural development efforts have largely assumed negative effects of the pastoralists’ life and their impact on natural resources (Kandagor, 2005), and that their activities overstretch land resources due to focus on herd size maximization (Abubakar (2005)). Some government policies advocated the moving from pastoralism to sedentarization as a more sustainable natural resource management scheme. Most post-colonial governments have force tranhumant pastoralists to adopt a sedentary life style to prevent over-grazing (Nori et al. 2008, p. 5). Abubakar (2005, op. cit.) explained the negative consequences in Nigeria of implementing ill-conceived policies based upon this misconception.

At the local level, prevailing conflicts are attributed to the livestock activity and pastoralism; communal authorities are often prone to make decisions based on the misconception about this activity and the associated way of life while a consensus is needed for local development through the decentralization process. Are the transhumant pastoralists and their livestock activity so harmful to the sustainability of natural resources that they should be forced to give up their activity and way of life, and thereby be an alienated group, which could undermine the rural development process? The present paper aims to answer this central question using results from the Madiama commune SAM model.

IV. Data and methods

4.1. Research site, sample and data collection

In the decentralization process, the commune is deemed to be the most relevant unit of investigation and Madiama commune located in the inner delta of the Niger River of Mali, close to Djenné in the 5th Region (Mopti) (Map 2) was selected for the research due to its representativeness of the region in terms of population pressure, diversity of the activities and natural resources endowment as well as their progressive degradation.

The commune of Madiama is about 25 kilometers south-east from Djenné and 120 kilometers from Mopti, the capital of the 5th region of Mali.

It is located in the extreme northern part of the North-Sudanian bio-climatic area, almost in the South-Sahelian area. This area is characterized by the sequence of a rainy season (4-5 months) and a dry season. The cropping season is about 80-90 days with 40 rainfall days. The analysis of most recent climatic data revealed a long-term tendency to aridity (Leisinger & Schmitt (1996)). The climatic characteristics of the commune are influenced by the ecological features of the inland delta. Three agro-ecological zones can be delineated in the commune from East to West: the lower Bobo Plateau, the Mid Bani-Niger and the Delta. The Delta is made of floodable plains that can be cropped only under water control; seasonally flooded soils represent 74% of this agro-ecological zone. The Mid Bani-Niger is characterized by high humidity and slightly sandy soils. The last agro-ecological i.e. the lower Bobo Plateau exhibits more apparent relief and lateritic soils. The presence of three types of soils i.e. plain hydromorphic soils of the Delta, the sandy soils in the Mid Bani-Niger and the rocky soils on the Bandiagara Plateau, suggests three cropping management patterns (see Badini & Doumbia (2002)). The commune comprises 10 villages for a total land area of about 170 square kilometer Badini & Doumbia (2002). Madiama which is the largest village and located in the central part of the commune serves as the capital (see Map 1 for location) and counts for 30 % of the total population and 22% of the households living in the commune.

The ethnic groups include (i) a majority of Markas (50.6%) and Fulanis (42.1%) and (ii) others e.g. Bambaras (3.6%), Bozos (2.4%), Dogons (0.8%) and Sonraï (0.4%).

Five out of the 10 villages in the commune were selected to represent the different identities: Madiama, the headquarters of the commune; Nerokoro, a pastoralist village; Promani, a village of sedentary and transhumant pastoralists and farmers; Tombonkan, a farmers’ village; and Tatia-Nouna, a village of farmers and agro-pastoralists. The list of the households in the commune was obtained for each village from data available in government offices. The household sample was randomly selected from the village household list. For each household, its belonging to one of the four main household groups was determined by consensus at a meeting with all villagers; the household sample then was randomly selected for a total of 120, which represented about 10% of the households in the commune.



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Source: Kaboré (2008) Map 2: Study area location

The survey was conducted on this sample of 43 farmers, 33 agro-pastoralists, 23 sedentary pastoralists, and 21 pastoralists. Two types of data were collected. The first set of data was related to household characteristics, production and consumption, factors (labor, equipment, land) and remittances; the origin and the source of exchanged factors were also recorded. The second group of collected data focused on micro-enterprise activities in the commune that generate income, such as food processing, handicrafts, retail trade, and livestock and cereal trading.

4.2. Methods and analysis tools

The methodological tool used to address the above objectives is the Social Accounting Matrix (SAM). 4.2.1. The SAM model

The SAM was used to better capture the linkages between the large diversity of stakeholders in the Niger River delta region of Mali. This tool provides a better understanding of such linkages and the results are likely to give a good guidance to the communal authorities for sound decisions, appropriate to complete and improve household farm information.

It is a square matrix whose columns and rows represent the receipts and expenditures of economic agents. The cell located at the intersection of a column and a row represents the payment of this column to the agent on this line.

Let Tij be the matrix of transactions; tij is the payment from column j to row i. According to the accounting principle of double-entry, total receipts (income) of each actor must be equal to its expenditures; this means that for the whole matrix, the sum of each line must be equal to the sum of the corresponding column, that is:

! = " #!, $ =% " #$, !&' (1) where ! is the sum of receipts and expenditures. The matrix of the coefficients Aij is obtained by dividing the cell in each column of T by the sum of the corresponding column

j

ij

ijy

ta =

with &&&" (!$ = 1' ; it also follows that, in matrix format y Ay (2)

MaliMALI

Djenné Circle (Mopti Region)

Madiama

Madiama commune (Djenné Circle)



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From (2), it can be written å=

=1j

jiji yay

+xi (3) i,j=1,….n, or in vector form xAyy += ; x is a

vector of final demand xAyy += Þ xyAI =- )( (4) where I is a nxn identy matrix.

If (I-A)-1 exists, then xAIy 1)( --= (5); (I-A)-1 is the multiplier coefficients matrix. For a final

demand of x, xAIy 1)( --= enables to calculate the effects on the other sectors of the economy; the higher

the coefficient between two sectors, the stronger the relationship is between them. Being an enlargement of the model (I-O), the SAM includes socio-economic structures in the analysis

and to measure policy effects. Changes in the final demand are the starting point of the simulations using the SAM model after excluding the exogenous accounts. It is then possible, among others, to calculate the effects of policies on the level of activities, income (from activities and factors), to follow the policy effects across the whole economy. However, it is to be noted that policies related to price changes cannot be accounted for by the SAM because it is only a photograph of the situation for a given level of prices. SAM multipliers are able to provide the possible effects of an exogenous injection on different accounts which follow paths through the whole economy (Thorbecke, 2000, Round, 2003). The effects can be decomposed into (i) direct, within-accounts, own, transfer or intra-group effects, (ii) indirect, open-loop, spillover or extra-group effects and (iii) between-account, closed loop, circular or inter-group effects. Table 1 presents the Madiama SAM accounts, a 71x71 matrix1. Table 1: Madiama SAM accounts

ACTIVITIES COMMODITIES FACTORS DECISION MAKING UNITS

Millet Millet FamilyLaborFarmers Farmers Sorghum Sorghum FamilyLaborAGP Agro-pastoralists (AGP) Rice Rice FamilyLaborSedP Sedentary Pastoralists (SedP) Other Cereals Other Cereals FamilyLaborTrans Transhumant pastoralists(Trans) Vegetables Vegetables HiredLaborFarmers Mosque Legumes Legumes HiredLaborAGP Central Government Small ruminants Small ruminants HiredLaborSedP Tax Large ruminants Large ruminants HiredLaborTrans Capital Poultry Poultry LandFarmers Rest of the world Milk Milk LandAGP Fish Fish LandSedP Millet M Millet M LandTrans Sorghum M Sorghum M CapitalFarm Rice M Rice M CapitalAGP Other Cereals M Other Cereals M CapitalSedP Small ruminants M Small ruminants M CapitalTransh Large ruminants M Large ruminantsM PoultryM PoultryM Milk M MilkM FishSmoking FishSmoking Retail trade Retail trade Textiles Textiles NR&foodProcess NR&foodProcess

M: relates to micro-enterprise activity/commodity NR&foodProcess: Natural resource and food processing After a given effect of an injection on any account of the SAM, we investigate the decomposition of such an effect on the four groups of households in the Madiama commune through the analysis of direct, the open-loop (indirect) and closed-loop (circular) effects. The decomposition is done by partitioning the Social Accounting Matrix into endogenous and exogenous accounts; the endogenous accounts can be written in the following form (see Kaboré, 2008 for the algebra of the multiplier decomposition).

S=úúú

û

ù

êêê

ë

é

HY

V

EA

0

00

0

where S is the matrix of the SAM coefficients related to endogenous accounts; A the matrix of

1 Due to lack of space, the Madiama SAM cannot be presented here but can be obtained on request from the author.



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coefficients for production activities, V the matrix of value-added coefficients (factors), Y the matrix of value-added distribution coefficients, E the matrix of expenditure coefficients and H the matrix of household distribution. The algebraic manipulation comes up with M1, M2 and M3 as follows:

*úúú

û

ù

êêê

ë

é

-

-

=-

-

1

1

1

)(00

00

00)(

HI

I

AI

M

(A) which is the direct, within-account, own or intra-group multipliers; it captures the effects of one group of accounts on itself through direct transfers; they are different from the closed-loop nature of the system. In other words, effects transmitted to or from other accounts are excluded;

*úúú

û

ù

êêê

ë

é

--

-

---

=--

-

---

IYHIYVHI

EAIVIV

EAIYHIEAII

M11

1

111

2

)()(

)(

)()()(

(B) the matrix of extra-group, open loop or spillover multipliers which reports the effects of an injection going

through all sectors except the originating one; EAI 1)( -- measures the open-loop effects of a transfer from government to households’ income in terms of commodity demand;

úúú

û

ù

êêê

ë

é

---

---

---

=---

---

---

111

111

111

3

])()([00

0])()([0

00])()([

EAIYVHII

YHIEAIVI

YVHIEAII

M

(C) known as inter-group, between-block, circular or closed loop multipliers The closed-loop multipliers are a class of particularly interesting multipliers since they isolate a measure of the overall interdependence between sectors, factors and decision-making units in the economy.

In total, they capture the entire and complex linkages through the whole economy given an injection on an account: for example, given an exogenous injection on an activity in the form of an increase in demand, there will be a closed-loop effect on value-added, proceeding to impact distribution among decision making units (transfers), households’ incomes, consumption sectors and from there gets back to activities. We particularly

examine the effects of such an injection on a sensitive variable, namely households’ incomes given the poverty

prevalence which needs to be alleviated.

V. Results and discussion

5.1. The importance of livestock in the Madiama commune

SAM multipliers show that livestock activities have the greatest absorption effects, that is, they record the highest overall increase in the nominal income when there is an injection of one monetary unit in the economy: 15.3295 for large ruminants and 3.5460 for small ruminants against 4.7588 and 3.63331 for rice and millet respectively. This confirms the pivotal position of livestock (large ruminants in particular) in the local economy.

On the other hand, Figure 1 shows for the main activities the payments to family labor--the most rewarding factor: livestock activities reward better than cropping activities across all household groups. More specifically, we notice that they are more rewarding for sedentary pastoralists and agro-pastoralists. This result confirms the importance of the livestock activity in the area.



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Figure 1: Payment to family labor by main activity and household group

Source: Kaboré (2008) As it can be seen, livestock activities benefit far more from an exogenous unitary money inflow in the

economy than the cropping activities of the Madiama commune by absorption effect. This means that the way livestock activities are currently conducted, they are likely to develop or exacerbate existing conflicts. Despite their high absorption capacity, livestock activities require more land for pasture and for transhumance while land is more and more devoted to cropping; this means that any policy that aims to promote the current livestock activities in the economy could end up with more conflicts since it primarily benefits to the most land-consuming livestock sector.

5.2. Decomposed effects of injections

SAM multipliers are decomposed into direct (intra-group), extra-group (open-loop) and closed-loop effects. Such decomposition enables to highlight the effects of an injection on each household group and therefore the importance of their reaction to communal policies. 5.2.1. Direct, transfer, own or intra-groups effects

Referring to equation (A), we focus on 1)( --HI which captures the effects of an exogenous increase on

transfers between households. If the government increases households’ income exogenously, 1)( --HI reflects

the subsequent effects on direct transfers between households. An exogenous transfer of 1 billion of FCFA1 to agro-pastoralists induces not only one of the largest effects on the income of this group 1,500,000 FCFA but also for the other three groups: 700,000 FCFA for farmers, 3,000,000 FCFA for sedentary pastoralists and 700,000 FCFA for transhumants (Table 2). A transfer to any other group performs less in terms of overall effects. The agro-pastoralist group is the best channel for overall income redistribution (6,000,000 FCFA), while the sedentary pastoralists category is the poorest one (1,000,000 FCFA). Table 2: Between households direct effects of an exogenous injection, Madiama commune

Farmers

Agro-

pastoralists

Sedentary

pastoralists

Transhumant

pastoralists

Farmers 0.0015 0.0007 0.0000 0.0001 Agro-pastoralists 0.0000 0.0015 0.0000 0.0001 Sedentary pastoralists 0.0007 0.0030 0.0000 0.0001 Transhumant

pastoralists 0.0007 0.0007 0.0000 0.0000 TOTAL 0.0030 0.0060 0.0001 0.0004

Source: Kaboré (2008) 5.2.2. Open loop effects

In the case above, we dealt with the direct effects of exogenous injections in a set of accounts, alone, not including possible other further effects on the other segments of the economy. In the current sections, we examine effects

traveling around and ending up in the other sectors. Focusing on the component EAI 1)( -- of equation (B)

1 FCFA=franc de la Communauté Financière Africaine (500 FCFA= 1US dollar)

0

2

4

6

8

10

12

14

Farmers AGP Sed.Past. Transhum.

Household Groups

Per

cent Cropping activities

Livestock activities



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above which measures the open-loop effects of a transfer from government to households’ income in terms of

commodity demand (expenditures), one can notice that a unitary increase of exogenous demand induces households’ expenditures of 0.76 for transhumant pastoralists, 0.68 for the other groups (Table 3). This clearly

shows that the transhumants are overall, more reactive in terms of consumption, to a policy that increases household income. Farmers and agro-pastoralists tend to increase their crop consumption expenditures. The pattern indicates that a greater number of animals (large ruminants in particular) are expected, following an increase in the household income. This in turn could increase conflicts between farmers and pastoralists in the area since the livestock system is extensive and therefore more space-consuming. Table 3: Open loop effects of an exogenous injection on households’ income on activities, Madiama

Communue, 1999.

Farmers AgroPast SedPast Transhum

Millet 0.105580 0.062198 0.025482 0.011848 Sorghum 0.015243 0.014799 0.002496 0.001838 Rice 0.147315 0.099500 0.018396 0.004529 Other Cereals 0.000025 0.000012 0.000006 0.000021 Vegetables 0.016240 0.020103 0.004172 0.003816 Legumes 0.015424 0.001143 0.000000 0.000000 Small ruminants 0.028740 0.092550 0.036211 0.031523 Large ruminants 0.230499 0.294104 0.453704 0.550211 Poultry 0.000414 0.000612 0.000201 0.000110 Milk 0.010519 0.000564 0.029463 0.075036 Fish 0.013386 0.002573 0.000208 0.000174 Total 0.675667 0.680932 0.677820 0.761107

Totals for selected activities only; they are therefore slightly different from totals including all activities

Source: adapted from Kaboré (2008) 5.2.3. Closed-loop effects

Table 4 presents selected closed-loop effects of an exogenous injection on activities, based on 111 ])()([ --- --- YVHIEAII from equation (C). They are highest for (large ruminants) in the whole

economy; the effects sum up to over 15.328952 against 4.644047 for rice and 3.599120 for millet, confirming the high absorption capacity of those sectors. Individually taken, milk is the most responsive to an external injection: an exogenous injection of 1billion in the milk sector induces the highest inter-group effects by 2.798017 billion. This effect is of 2.5316 billion for millet, 2.531674 for sorghum, and 2.622760 for large ruminants. Table 4: Selected activity closed loop effects of an exogenous injection on activities, Madiama Commune,

1999 Activities Millet Sorghum Rice Vegetables Legumes Small ruminants Large ruminants Poultry Milk Fish Total*

Millet 1.148741 0.147546 0.139678 0.146153 0.175648 0.135509 0.120922 0.148003 0.100408 0.174898 3.599120 Sorghum 0.025893 1.026520 0.024816 0.027577 0.028199 0.025193 0.020987 0.026565 0.016460 0.029946 1.467837

Rice 0.208736 0.210095 1.198056 0.211110 0.244801 0.189384 0.160987 0.207182 0.121099 0.247168 4.644047 Vegetables 0.032224 0.033280 0.031013 1.035309 0.033185 0.032938 0.027433 0.033868 0.022637 0.036531 1.596661 Legumes 0.013095 0.012262 0.011928 0.010418 1.019840 0.008472 0.008253 0.011302 0.005632 0.017005 1.198305

Small ruminants 0.121962 0.128235 0.118254 0.143563 0.102962 1.143952 0.122123 0.137970 0.116081 0.128679 3.429390 Large ruminants 0.721092 0.700427 0.661040 0.725441 0.675218 0.843166 1.872996 0.816618 1.077206 0.745266 15.328952 Poultry 0.000949 0.000980 0.000912 0.001052 0.000933 0.001008 0.000850 1.001016 0.000730 0.001053 1.017875 Milk 0.034265 0.030449 0.029427 0.028726 0.033852 0.042561 0.054787 0.040772 1.087918 0.033866 1.720940

Fish 0.012820 0.012272 0.011824 0.011005 0.018180 0.009238 0.008571 0.011536 0.006040 1.016243 1.202638

Total 2.531674 2.510113 2.423285 2.554150 2.545394 2.661628 2.622760 2.664924 2.798017 2.658806

* Totals are for selected activities only; they are therefore different from totals including all activities

Source: adapted from Kaboré (2008)

Focusing on [ 111 ])()( --- --- EAIYVHII from equation (C), Table 5 shows the closed loop effect of an injection on household income distribution (governmental or NGOs transfers to households for instance); they are the highest when income transfer occurs to the transhumants: 1.6916 against a total effect of around 1.42-1.44 for the three other groups; transferring income to transhumant pastoralists induces a larger impact on all other households than doing so to any other group, although any such a policy will tend to benefit less to transhumants as a separate group (only 0.2728) (Table 5). Such a result implies that the transhumant group is likely to better spread good impacts of this policy all over the commune; although counter-intuitive given the misconception of the way of life of this group, this result is due to the ability of transhumants to opportunistically move from one place to the other in order to use natural resources and be in contact with the other groups.

If from the net transfer effects standpoint, transhumants are the second best channel for income



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redistribution, they are the best with respect to the closed-loop effects multiplier. Table 5: Closed-loop effects of an exogenous injection on household income distribution pattern, Madiama

Commune

Household category Farmers Agro-Pastoralists

Sedentary

Pastoralists Transhumants

Farmers 0.3962 0.3565 0.3071 0.3401 AGP 0.5305 0.5455 0.4817 0.5480 SP 0.3425 0.3744 0.4313 0.5308 ST 0.1551 0.1703 0.2117 0.2728 TOTAL 1.4243 1.4467 1.4319 1.6916

Source: Kaboré (2008) VI. Conclusion and recommendations

The objective of this paper was to analyze the effects of hypothetical policies on the livestock sector in the Madiama commune as well as the pastoralists’ reaction to decisions made by the authorities of the commune. The main findings in this paper can be summarized as follows:

· Family labor is the most rewarded factor for the agro-pastoralists, confirming that this household group’s

ability to operate more efficiently through feed-lot activity for instance. It clearly appears that any policy promoting family labor that is making, more efficient the use of family labor by new technologies for example, is likely to be in favor of the agro-pastoralists. Livestock activities (small and large ruminants) would benefit far more of an exogenous unitary money

injection in the economy than cropping ones. Since they require more land for pasture, this means that any policy that aims to promote livestock activities in the economy could end up with more conflicts since it primarily benefits to the land-consuming livestock sector. An exogenous transfer of 1 billion of FCFA to agro-pastoralists is expected to induce not only one of the largest direct effects on the income of this group but also for the other three groups. However, in terms of open-loop effects and closed-loop effects, transhumants are (i) more reactive in terms of commodity consumption to a policy that increases households’ income and (ii) benefit less from an income injection despite an overall larger impact.

In total, we are in a dilemma: on the one hand, (i) livestock activities are the most family-labor rewarding and (ii) pastroralists seem to be the best channels for communal policies implementation. Moreover, we know that livestock activity requires more and more land for pasture and water through transhumance, which gives rise to conflicts between stakeholders. This needs negotiation between stakeholders and with the communal authorities to make decisions for a sustainable management.

On the other hand, the decentralization process is irreversible and local development should be promoted based on the participation of all stakeholders. Communal authorities should therefore be wary of the need to build consensus between stakeholders for a sustainable of natural resources. Livestock activities as well as the pastoralists should be strongly included in the process of this consensus building. They should get rid of (or ban) misconceptions and preconceived ideas on the livestock activities and pastoralists’ way of life in natural resource

management scheme.

Acknowledgments

The author wishes to thank the former SANREM/USAID project which funded the author’s Ph.D research; this

paper used data and results from this research to answer the research question. References

1. Abubakar A. S. (2005): “The fallacy of the cattle complex theory and its implications on the development of

the pastoral Fulani of Nigeria” Securities & Exchange Commission (SEC), Tower 421, Constitution Avenue Central Area, P. M. B 315, Garki – Abuja, Nigeria

2. Badini. O. & Doumbia O. (2002): “Caractérisation des sols de la commune de Madiama”. Working Paper Nr. 004. SANREM CRSP. Washington State University, Pullman, USA

3. Bassett, T.J & Koné, M (2006) : Grazing lands and opportunistic models: the political ecology of herd mobility in northern Côte d’Ivoire, Department of Geography, University of Illinois, Urbana-Champaign

4. http://www.africaneconomicoutlook.org/en/country-notes/west-africa/mali/ accessed on May 18 2016 5. http://www.ruralpovertyportal.org/country/statistics/tags/mali accessed on May 18 2016 6. Jones-Casey, K. & Knox A.. (2011): “Farmer-Herder Conflicts in Mali.” Focus on Land in Africa. World

Resources Institute and Landesa, Rural Development Institute. 7. Kaboré D.P. (2008) : Conflicts over Land in the Niger River Delta Region of Mali:Exploring the usefulness

of SAM and CGE models to study Participatory Natural Resource Management in Agricultural and Pastoral Systems, University of Groningen, The Netherlands



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8. Kandagor R.D. (2005) Rethinking pastoralism and African development: the case study from the Horn of Africa, Department of History, Egerton University, Njoro-Kenya.

9. Leisinger K.M & Schmitt K. (1996) : Survivre au Sahel. un défi pour l’écologie et la politique de

développement, ISNAR, The Netherlands 10. Moore, K.(2005): The Madiama commune in Conflict, social capital and managing natural resources: a West

African case study, CABI Publishing, Wallingford, UK 11. Nori M., Taylor M. & Sensi A. (2008) : Droits pastoraux, modes de vie et adaptation au changement

climatique. IIED, Dossier n°148 12. Round, J.I. (2003):Social Accounting Matrices and SAM-based Multiplier Analysis, Chapter 14 in F

Bourguignon, and L A Pereira da Silva (editors) Techniques and Tools for Evaluating the Poverty Impact of Economic Policies, World Bank and Oxford University Press.

13. Swedish Government (2013):Mali Environmental and Climate Change Policy Brief, SLU, GÖtebergs Universitet, Chalmers, Sweden

14. Thorbecke, E. (2000): The Use Of Social Accounting Matrices In Modeling, Paper Prepared for the 26th General Conference of The International Association for Research in Income and Wealth Cracow, Poland, 27 August to 2 September 2000

15. UNDP (2015): Report on Human Development: work for human development, 1 UN Plaza, New York, NY 10017, USA



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Factors Influencing on-Farm Common Bean Profitability: The

Case of Smallholder Bean Farmers in Babati District, Tanzania

Saimon K. Venance1 Mshenga, P.1 Birachi, E.A.2 1.Faculty of Agriculture, Department of Agriculture Economics and Agribusiness management, Egerton

University, P. O. Box 536-20115, Egerton, Njoro, Kenya 2.International Centre for Tropical Agriculture [CIAT], P.O. Box 1269, Kigali, Rwanda

This research was financed by USAID through iAGRI under Feed-the-Future Project with facilitation of Regional

Universities Forum (RUFORUM)

Abstract

Legumes are important food and cash crops in developing countries. In Tanzania, more than half the farmers grow several species of grain legumes which include common bean, groundnut, pigeonpea, cowpea, chickpea, peas and soybean. However, productivity of all grain legumes is still low and far below potential and this has impacted on profitability. The aim of this study was to contribute to improved bean profitability facts for income and food security in Tanzania. Multistage sampling procedure was used to select respondents from the four divisions in Babati district (Babati, Gorowa, Mbugwe and Bashnet). The first stage involved a purposive selection of two divisions from the four divisions mentioned. The second stage entailed the selection of six wards from the two divisions, using purposive sampling technique; four from Bashnet division and two from Babati division. The fourth stage entailed purposive selection of 9 villages from the six wards basing on bean production dominance. Then the final stage employed systematic sampling technique to select 200 bean farmers from the nine villages. Primary data was collected from the field using a structured interview schedule method. Secondary data were obtained from published literature from Babati District Council, Sokoine National Agricultural Library and Egerton University main library. Smallholder farmers’ gross margin as a proxy of profitability was analysed using Gross Margin Analysis procedure. Moreover, Multiple Regression Analysis approach was used to analyse factors affecting on-farm farmers’ gross margin. The study results showed that, at farm level, a gross margin of TZS 133,710.20/= (US$63.67) and TZS 307,283.70/= (US$146.33) for local and improved variety respectively was generated per acre per season. Moreover, age of respondents; gender; yield; selling price (farm-gate price); access to credit; and off-farm income affected the gross margin realized by smallholder farmers. Keywords: Improved variety, Babati, VSLA, common bean, profitability

1. Introduction

Agriculture plays a fundamentally important role in the economic growth and development prospects of a vast majority of developing countries including Tanzania (WTO, 2000). The sector contributes almost a quarter of Gross Domestic Product (24.1%) and employs 75% of the active labour force in Tanzania (Economic Survey, 2011 and URT, 2013). Amongst the important agricultural subsectors in Tanzania are livestock, fishery, agro-forestry and crops (URT, 2013). The major food crops in the country include maize, sorghum, millet, rice, wheat, cassava, potatoes, bananas and legumes (OECD/ADB, 2012). Moreover, the principal export crops include coffee, tea, cotton, cashew nuts, sisal, oil seeds, horticultural crops, pyrethrum, fresh cut flowers, cloves and spices (UNESCO, 2011).

Legumes represent an important component of agricultural food crops in developing countries as they complement cereal crops as a source of protein and minerals especially in Sub-Saharan Africa (Akibode, 2011). Grain legumes also serve as rotation crops with cereals, reducing soil pathogens and supplying nitrogen to the cereal crop (Beebe, undated). Food legume crops are considered vital crops for achieving food and nutritional security for both poor producers and consumers (ICRISAT, 2012). Food legumes as well play an important role as a source of animal feed in smallholder livestock systems (ibid). Food legumes moreover have higher prices, compared to cereals, and are increasingly grown to supplement farmers’ incomes (Gowda et al., 2009 and Giller, 2012). One of the important legume crops grown in Tanzania is common bean. Common bean (Phaseolus vulgaris

L.) is the most important food legume for direct consumption and as a source of farm income in Tanzania (NBS, 2012). In the country, beans are often cultivated by smallholder farmers for food consumption without the use of fertilizers where quarter to one-third of the households sell their beans (Ndakidemi et al., 2006), with around 20% surplus being marketed (FAO, 2005). Common bean is a popular crop among small-scale farmers because beans are a short duration crop (2.5-4 months) which permits production even when rainfall is erratic (CIAT, 2008). This helps in shortening the hunger periods as well as for providing quick cash (ibid). The average bean productivity in Tanzania is around 662 kg/ha (Ndakidemi et al., 2006). However, the potential productivity under reliable rain-fed conditions, using improved varieties under proper crop and land husbandry is 1,500–3,000 kg/ha (ibid).

In Manyara region, beans dominate the production of pulse crops (URT, 2003). The production of beans among other legumes is much higher in Babati than in other districts in the region. The planted area using improved



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seeds is more than 41,000 ha, which represent more than 15% of the total planted area with the annual crops and vegetables (URT, 2013). The number of households in Manyara who were reported to be selling common bean in 2010/2011 season was 88,121 (58.6%), of the total number of crop growing households (NPS, 2011). The percentage of crops growing households selling common bean was highest in Babati (81%) followed by Kiteto (55%), Hanang (52%), Mbulu (48%), and Simanjiro at 23% (ibid).

1.1 Objectives

The overall objective of the study was to contribute to common bean improved profitability facts for income and food security in Tanzania.

1.1.1 Study description

The study was carried out in Babati District of Manyara region in Tanzania located at 4°14'08.2"S 35°30'46.0"E. The region was conveniently chosen because of its potential in grain legumes production among other factors which favoured this study. The main economic activities in Manyara Region are agricultural production, livestock keeping and mining. Agricultural production is dominated by peasant farming. The major food crops and cash crops that are cultivated by smallholder farmers include maize, food beans, pigeon peas, sunflower, onions, garlic, coffee, paddy and finger millet (URT, 2003).

The sample size was 200 drawn from a population of common bean smallholder farmers with less than or equal to two hectares under common bean. The sampling units were the households from the sampled villages in the study area. Moreover, because common bean smallholder farmers were evenly distributed among the two selected divisions, 100 farmers from each division were sampled to make a targeted total sample size of 200 farmers. In Bashnet division; out of 11 wards, the sample was drawn from Bashnet, Nar, Dareda and Ayalagaya. Specifically, farmers forming the sample were residing in the villages of Long and Bashnet in Bashnet ward. Respectively, 30 and 10 households from Long and Bashnet villages were systematically selected from a farmers’ sampling frame. 10 households were conveniently sampled from Gabadaw village, which is among the only 2 villages in Nar ward. On the other hand, Seloto among 3 villages in Dareda ward was purposively selected. From this village, 25 households were sampled. Hayesam village, among 3 villages in Ayalagaya ward was conveniently selected, where 25 households were sampled to complete a list of 100 households from Bashnet division.

On the other hand, from Babati division, Gallapo and Qashi wards were purposively selected. Gallapo and Endanoga villages among 5 in Gallapo ward were subsequently selected basing on the same approach. 20 households from each village were sampled. Tsamas and Ng’wang’weli villages were purposively selected amongst 6 villages in Qashi ward. 40 and 20 households, respectively, were sampled from these two villages. This is because, according to Ms Manzi, the public extension officer and the sampling frame, there were more common bean farmers in Tsamas as compared to Ng’wang’weli. 40 and 60 households sampled from Gallapo and Qashi wards respectively made another 100 household to complete a total sample size of 200 households. Primary data such as social-economic status of households and institutional characteristics like farmer’s age, gender, years of schooling, farming experience, main occupation, household size, the income profiles, distance to the market, extension contacts, group membership, credits, cropping and farming characteristics were collected from the smallholder farmers in the field using structured interview schedules method. In addition, secondary data such as district production estimates and costs including average input prices, yearly quantities of seeds produced along with the supply of fertilizers and agro-chemicals was obtained from published literature and key informants from Selian Agriculture Research Institute (SARI) and Babati District Council in the agriculture department. Published literature such as books, journals and articles were reviewed from Sokoine National Agricultural Library, Egerton University main library and the internet to get a robust of information related to this study.

To achieve the objectives of the study, several statistical techniques and methodologies were employed during data analysis including Descriptive Statistics, Gross Margin analysis and empirical models. The descriptive statistics and analysis of Gross margin were done on MS Excel while the empirical models were run in SPSS (version 22) and STATA computer software.

2. Results

The study sampled 200 households. Among the interviewed farmers, 81.4% were male and 18.6% were female. 52.5% of common bean farmers were aged between 40 to 60 years. Based on Tanzanian education system, 73% of respondents had primary school education. The average farming experience was found to be 18 years. On the other hand, the common bean farming experience of the household head was 17 years while common bean marketing experience was found to be 14 years. The average land owned by sampled smallholder farmers was found to be 2.48 Ha. The findings indicated that 43% of the land was allocated to cereals, 29% and 14% to beans and other legumes respectively. Study results show that, the average working hours for men is 5 while that for women is 7 hours a day. Land preparation, sowing and weeding activities are done by women at 54%. In addition, harvesting, threshing and transportation of threshed bean to home are equally done by male and female at 32%. Furthermore, storage and marketing activities are done by men at 53% compared to 16% by women. 55% of



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respondents growing local bean variety and 74% growing improved bean variety, intercropped with maize. Local and improved bean varieties were mono-cropped by 38% and 20% of smallholder bean farmers respectively. The average productivity of local and improved bean variety is 594.45Kg/Ha and 695.44Kg/Ha respectively.

Table 1: Babati District Local and improved Bean variety productivity

Among the sampled farmers, 47% of common bean farmers had off-farm income generating activities. The average distance to the nearest market was 2.88 Km, 6.20 Km to the most visited market and 10.51 Km to the most preferred market. The transport cost was TZS 24/= /Kg to the nearest and most visited markets while TZS 26/=/Kg was the cost of transporting common bean to the most preferred market. The most common modes of transport to the markets are vehicles (34%) and animal carts (31%). Other modes are head loading (16%), pack animals (10%) and motorbikes (8%). 26% of smallholder farmers sell their beans on-farm, 58% to local market, 14% to main road, and 2% to district market. In all the buying points, 23% of buyers are local assemblers, 25% wholesalers, 29% retailers, 12% urban collectors, and 11% direct consumers.

At farm-gate, improved bean variety fetched an average price of TZS 1,023.68/= (US$0.49) per Kg while at the market level, 1 Kg of improved bean variety was sold at an average price of TZS 1,208.33/= (US$0.58). Local bean variety fetched an average price of TZS 770.87/= (US$0.36) and 914.38/= (US$0.44) per Kg at farm-gate and market level respectively.

Table 2: Babati District Local and improved Bean variety prices

The 7% of interviewed farmers had access to credit. 60% of the smallholder farmers obtained their credit from VSLA; 20% from banks; 13% from SACCO; 7% from other sources. 47% of the sampled smallholder farmers in the study area have access to extension services. 31% of them received advisory services during the outbreak of disease and or pests; 28% harvesting; 24% got the service during sowing time. Farmers get information on improved bean varieties through field days/visits from other NGOs at 48%, researchers (25%), SARI/CIAT (18%) and government (9%). Farmers get information on improved varieties through direct trainings from the government (35%), other NGOs (31%), SARI/CIAT (27%) and researchers (6%). 17% of the interviewed smallholder famers had group membership.

An average produce of 358.70Kg and 72.095Kg per season, per smallholder farmer, for local and improved variety respectively. Moreover, the average farm-gate prices were TZS 962.18/= (US$0.45) and TZS 1,161.67/= (US$0.55) per Kg for local and improved variety correspondingly. The average total revenue of common bean per smallholder farmer at farm level was TZS 428,884.57/= (US$204.23) / acre per season. TZS 345,133.97/= (US$164.34) from local bean variety and TZS 83,750.60/= (US$39.88) from improved bean variety. The total costs incurred during production was TZS 117,401/= (US$55.90) per season. The Gross Margin (net profit margin) was TZS 311, 483.56/= (US$148.33) per season.

Crop grown Total Area(Ha) Total yield (Kg) Productivity (Kg/Ha)

Local bean variety 123.45 73,385 594.45 Improved bean variety 21.20 14,740 695.44

Category Farm gate

(TZS/Kg)

Farm gate

(US$/Kg)

Market

(TZS/Kg)

Market

(US$/Kg)

Improved variety average price 1,023.68 0.49 1,208.33 0.58 Local variety average Price 770.87 0.36 914.38 0.44 Difference (TZS/Kg) 252.82 0.12 293.95 0.14



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Table 3: The results of the profit margin of common bean at farm level

VARIABLES LOCAL VARIETY IMPROVED VARIETY

REVENUE

Average produce (Kg/season/Farmer) 358.70 72.10 Total Land/Area under Beans(Acres) 305.06 52.38 Total Yield (Kgs) 73,385.00 14,740.00 Productivity (Kgs/Acre) 240.56 281.43 Average farmgate (TZS/Kg) 962.18 1,161.67

TOTAL GROSS MARGIN/ACRE/SEASON 231,464 326,931

PRODUCTION COSTS Labour 40,298.46 8,099.54 Seed 43,410.06 8,724.94 Fertilizer 2,831.00 569.00 Pesticides 7,225.71 1,452.29 Others 3,988.38 801.62

TOTAL COSTS/ACRE/SEASON 97,753.61 19,647.39

PROFIT MARGIN/ACRE/SEASON 133,710.20 307,283.70

Total Gross Margin/Total Variable costs per season 1.37 15.64

Net profit/Gross Margin*100 57.77 93.99

Profit Margin/Average produce 372.76 4,262.21

US$ 1~TZS 2, 100

3. Discussion

Common bean business has preponderantly attracted male farmers and generates significant income. Men are attracted to agricultural activities which generate sizeable income. Often for a crop cultivated by a large number of women, the produce is consumed at home or sold to generate family income. This indicates that common bean is a traditional crop cultivated by older farmers. This means that farmers have basic education and can be considered literate. Education can be considered to be important as it makes a farmer innovative and also easily understand concepts that are taught in the trainings and consequently adopt new technologies with ease. This implies that, smallholder farmers in Babati district consider common bean as second most important crop after cereals (mainly maize) when allocating land. The higher proportion of labour force in common bean production is offered by women. Moreover, most of common bean produced by women are grown on smaller plots of land and only consumed at home. Smallholder farmers in the study area prefer intercropping to other systems because, common bean, as other legumes fix soil nitrogen which caters as fertilizer for cereals like maize.

A farmer who grows improved bean variety harvests 100.99Kg more on land of the same size as compared to the counterpart growing local bean variety. Smallholder farmers distribute risk through investing in off-farm activities which are more liquid such as retail trading thus a reliable insurance during hunger periods. Improved bean variety fetched TZS 252.82/= (US$0.12) and TZS 293.95/= (US$0.14) per Kg more at farm-gate and market level respectively. This is because; improved bean variety has customer desirable characteristics such as shorter cooking time, single seed colour, and pleasant taste. The stringent rules to obtaining and repaying credit determined the amount of credit to be invested in farming. Most of credit beneficiaries preferred investing their credit in crops which they may harvest in as short time as possible, crops like common bean were most preferred. The main constraints to accessing credit were mainly due to failure in meeting the criteria of loans such as an evidence of reasonable commitments in cash or in kind. The other obstacle to farmers towards accessing credit was absence or poor business records which track their historical business information.

Extension service is still a constraint to majority of smallholder farmers in Babati district. This is due to the fact that farmers depend heavily on government extension officers who are very few and each has too large coverage area to manage, and therefore do not reach as many farmers as possible. Smallholder farmers have enough channels for receiving information. However, farmers are pessimistic about some sources of, and information conveyed to them especially on prices and seed quality from buyers and seed dealers respectively. Information received by common bean farmers affects decisions made, and the transaction costs. The role of collective action in mitigating the challenges facing farmers is still underutilized. Group membership would significantly influence the output of bean producers. This implies that producers still get profit from their produce though they are always exploited by traders. The implication of low profit margins earned by smallholder farmers could be attributed by relatively small quantities of output, growing of local bean varieties which fetch relatively low prices as compared to prices paid to improved varieties, and poor access to market information especially on demand and supply to urban areas. Poor access to market information allows the smallholder farmers to sell their produce at low farm gate prices.



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Socio-economic factors influencing the profit margin were; age of respondents; gender; yield; selling price (farm-gate price); access to credit; and off-farm income affected the gross margin realized by smallholder farmers.

Table 4: Regression results of factors affecting common bean’s gross margin

Variables Coefficient Standard Error P>t

Age -0.1107 0.03695 0.003 Gender 0.21237 0.10856 0.052 Farming experience -0.48441 0.38595 0.211 Household size -0.2303 0.16015 0.152 Bean yield 0.29613 0.01532 0.000 Land size -0.19234 0.27054 0.478 Most visited market -0.12461 0.19418 0.522 Farm-gate price 0.14054 0.01415 0.000 Access to market information -0.06972 0.05043 0.488 Access to credit 0.32619 0.17604 0.066 Access to extension -0.07379 0.09223 0.425 Off-farm income -0.15378 0.0895 0.087

Number of obs = 204; F (12, 191) = 109.93; Prob > F = 0.0000; R-squared = 0.8811; Adj R-squared = 0.8731; Root MSE = 1.2e+05

The study results indicate that, age of respondents had a negative effect on profit margin. A unit increase in age led to a decrease in profit margin by 0.1107 units at 1% level of significance. This is because the innovativeness and optimism of the entrepreneur as well as his mental capacity to cope with the challenges of his business activities and his mental and physical abilities to do manual work decrease with age. The study results concur with those by Nwaru and Iwuji (2005) who reported that entrepreneurship gradually becomes less as the age of the entrepreneur increases.

In addition, study results indicate that gender of respondents had a positive effect on profit margin. Being male would lead to an increase in profit margin by 0.21237 units at 10% level of significance. The positive effect of gender on profit margin of the producers is explained by aspects of labour provision and adoption of technologies in agricultural production. Female farmers on one hand, perform most of farm activities and work longer hours as compared to male farmers on the other hand. However, most female farmers produced common bean in small quantities for home consumption only. In addition, male farmers who mainly produced common bean in larger quantities for selling, quickly adopted new technologies as compared to female farmers because they were the ones who were mostly attending trainings, which eventually enabled men to fetch relatively more profit compared to women. Combined efforts in common bean production could reflect high produce for sale, and in return, the more the profit can be generated. This observation compares to the studies by Tesfaye et al. (2001) and Mesfin (2005) who reported that, gender influences adoption of technology like common bean variety in Ethiopia, which affects the total earning from the farm. They further informed that, male farmers are more likely to adopt new technology which positively influences their gross margins.

Furthermore, common bean yield had a positive effect on profit margin. A unit increase in common bean yield led to an increase in profit margin by 0.29613 units at 1% level of significance. Ideally, when smallholder farmers get more units of common bean which sells at a per unit profit, more profit is fetched from the quantity being sold. Smallholder farmers who realised higher output supplied larger proportion of their beans to the market. The results showed that farmers who increased their output increased the quantity of marketable supply. This study corresponds to Birachi et al. (2011) who reported that, the quantity of beans produced greatly influence the quantity marketed. Moreover, Katungi et al. (2010) observed that, farmers with higher bean output have the potential for commercialisation that could increase their incomes thereby enabling them purchase more inputs to increase output.

Selling price (farm-gate) had a positive effect on profit margin. A unit increase in farm-gate price led to an increase in the profit margin by 0.14054 units at 1% level of significance. A positive coefficient of selling price implies that a unit increase in selling price led to increased profit margin of smallholder farmers. Ideally, when smallholder farmers sell at high prices, more profit is fetched from the products being sold. This is in line with the study by Nekesa et al. (1998) who reported that, prices offered to smallholder farmers positively impacted their incomes from bean. The report further asserts that, the attained incomes from common bean as a result of good prices offered to these farmers help in commercialization of the enterprises.

Study results show that, access to credit had a positive effect on profit margin. A unit increase in the credit accessed by common bean farmers led to an increase in the profit margin by 0.32619 units at 10% level of significance. Perfectly, credit facilitates the introduction of innovative technologies and ensures input and output marketing arrangements. The results concur with that of Reddy, 1998 who reported that, having access to credit services enable farmers to purchase improved varieties and hence increase productivity and profitability at farm level.



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Off-farm income generating activities had a negative effect on profit margin. A unit increase in off-farm activities led to a decrease in profit margin by 0.15378 units at 10% level of significance. This implies that, when a smallholder farmer owns a more rewarding off-farm income generating activity, the more she/he concentrates to that business and light-touches the common bean business which leads to low and low gross margins. Preferably, when smallholder farmers have a non-farming, and most rewarding business, they tend to opt and concentrate on that business and give less priority to common bean business which leads to low gross margins realized from farming. This is contrary to the result reported by Techane (2006) who found that participation in off farm activities increases the smallholder farmers’ financial capacity and profitability after investing on new technologies.

4. Conclusion and recommendation

The Gross Margin (Net Profit Margin) per acre was TZS 133,710.20/= and TZS 307,283.70/= per season for local and improved variety respectively. This indicates that, common bean farming in Babati district is profitable and plays an important role in rural poverty reduction, through creation of employment and wealth for women, men and youth. Moreover, common bean farming in Babati enhanced household nutrition and general food security. The socio-economic factors determining common bean on-farm level gross margin were age of respondents; gender; yield; selling price (farm-gate price); access to credit; and off-farm income. Furthermore, factors influencing the household common bean supply to the market were age of respondents; gender; family size; education level (years of schooling); farm-gate price; distance to the market; and off-farm income. Therefore, this study positively contributes to improved bean profitability for income and food security as articulated in the United Nations Sustainable Development Goals I and II.

This study recommends that; smallholder farmers should allocate more land to production of improved bean variety; and improve on use of recommended fertilizers, at the right calibrations to enhance bean productivity to the potential level. Moreover, in the context of bean production, there is need for the Ministry of Agriculture, Food Security and Cooperatives (MAFSC) to take lead in interventions towards improvement of farmers’ extension service and training which will be attributed as approaches for fighting killer diseases such as early-blight, and pests like aphids. Trainings suggested are on correct pesticides use; good agricultural practices including growing improved seed varieties; and record keeping. Improved varieties were relatively more productive, pests and disease resistant, and incurred less cost of production as compared to local varieties. Furthermore, the National Beans Programmes carrying out research in the country are advised to have proper mechanisms of disseminating and monitoring new seed varieties in the industry. This is because, most of farmers either have not heard about the improved variety, which are relatively highly producing, or fail to differentiate between QDS normally improved and counterfeit.

References

Abate, T. (2012). Four Seasons of Learning and Engaging Smallholder Farmers: Progress of Phase 1, Tropical Legumes II Project, Nairobi, Kenya. International Crops Research Institute for the Semi-Arid Tropics, 258 pp. ISBN 978-92-9066-546-5.

Abate, T. Alene, A. D., Bergvinson, D., Silim, S., Asfaw, S., and Orr, A. (2011). Tropical Legumes in Africa and

South Asia: knowledge and opportunities. TL II Research Report No. 1, ICRISAT-Nairobi VI. Agwu, A. E, (2004). Factors Influencing Adoption of Improved Cowpea Production Technologies in Nigeria,

Journal of International Agricultural and Extension Education, 11(1):81-88. Akibode, S. and Maredia, M. (2011). Global and regional trends in Production, Trade and Consumption of food

legume crops, Report Submitted to CGIAR Special Panel on Impact Assessment, 27 March 2011, 83 pp. Beebe, S., Ramirez, J., Jarvis, A., Rao, I. M., Mosquera, G., Bueno, G. M. and Blair, M., (2011). Genetic Improvement of common beans and the challenges of climate change. Pages 356-369, in Crop

adaptation to climate change (Yadav, S. S, Redden, R. J., Hatfield, J. L., Lotze-Campen, H. and Hall, A. E. edition), John Wiley & Sons, Ltd., Published by Blackwell Publishing Ltd, Richmond, Australia.

Beebe, S. E., Rao, I. M., Cajiao, C. and Grajales, M. (2008). Selection for drought resistance In Common bean also improves yield in phosphorus limited and favourable environments. Crop Science 48: 582-

592. Birachi, E. A. (CIAT), (2012), Value chain analysis of beans in eastern and southern Africa : Building partnerships

for impact through research on sustainable intensification of farming systems. Birachi, E. A., Ochieng, J., Wozemba, D., Ruraduma, C., and Niyuhire, M. C. (2011). Factors Influencing

Smallholder Farmers’ Bean Production and Supply to Market In Burundi.



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Effects of Reward System on Productivity in the Local

Government System in Benue State

Richard Gbande

Faculty of Management, University of Jos, Jos

Abstract

The study investigated the effect of reward system on productivity in the Local Government System in Benue

State. The study made use of the structured questionnaire as the major instrument for data collection. The

descriptive statistic of mean and standard deviation were used for answering the questions while the inferential

statistic of Chi-square was used testing the hypothesis. The found out that, productivity in the local government

system is dependent on reward system given that the calculated value of the chi-square (489.7) is greater than the

critical value of the chi-square (16.92) at 5% level of significance. The study concludes that, rewarding employees

is critical not only to increase in the level of productivity but also leads to job satisfaction on the part of the

employees. The study therefore recommended that, both employers and leaders or local government to as a matter

of urgency design appropriate employees rewarding systems and implement same in their various local

governments in order to enhance productivity and achieve their desired goals.

Keywords: Reward System, Productivity and Local Government System

Introduction

Critical to the success of every organization is the welfare and working conditions of the employees. Most often

than not, motivation and reward are used interchangeably. Motivation or reward of employee is a highly relative

matter since it varies in degrees, dimensions and places of employment (Issah, 2012). Thus, the policies formulated

in any organization cannot be enthusiastically and successfully implemented when the employees are very

apathetic with the conditions prevailing in their workplace. Hence, reward/motivation of employees in any

organization is a sine qua non to the achievement of the desired or designed goals or objectives.

The relationship between leaders and their employees is expected to be mutually reciprocal in that, while

leaders expect employees to give their best, employees on the other hand expect leaders to reward or motivate

them during or after giving in their best.

The condition of employment in Nigerian local governments is not fundamentally different from other

organizations in the country which implies that reward/motivation is likely to encourage performance and

consequently, productivity. This paper therefore seeks to find out the influence that reward system have on

productivity in the Local Government System in Benue State. It tests the hypothesis that, reward system has no

significant effect on productivity in the local government system in Benue State. This study is considered apt

because, the issue of productivity of the Local Government employees has been a contentious issues over time.

This study is particularly important because, it avails leaders of the Local Government system the opportunity of

finding a way out of the low productivity level in the system. Also, there is no known study on the influence of

reward system on productivity in the Local Government System in Benue State. The findings of the study will

benefit operators of local government system like administrators, workers and other opinion leaders. It will also

be relevant to the academia, Federal and States governments as a guide to policy formulation and implementation

with the view to enhancing employees’ productivity in the system. The rest of the paper is divided into five sections;

literature review, methodology and analysis of results.

Literature Review

Reward System

Employees in any organization either public or private like to be appreciated and valued for higher productivity.

Cook and Hunsaker (2001) view reward systems as programs set up by an organization to reward employees

performance and motivate them for higher productivity. There are two types of rewards; extrinsic and intrinsic

rewards. Extrinsic rewards include those tangible benefits such as pay (salary), fringe benefits, pensions,

conditions of work and security that individuals receive in return for their efforts. Intrinsic rewards include the

psychological rewards that come from experience of work, or from being part of an organization, having a sense

of achievement or one’s efforts properly recognized and valued (Rollinson, 2002). Workers are also critical

stakeholders in an organization. They contribute tremendously for organizational success. To enhance higher

productivity, employees expect harmonious reciprocal relationship from management such as fair pay, safe

working conditions or providing a work environment which does not endanger employees (Dunford, 1992; Ali &

Ahmed, 2008). It is important to know that rewards play a key factor in enhancing organizational productivity.

Mutia and Sikalieh (2013) agree that organizations should combine both extrinsic and intrinsic motivation



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strategies to achieve organizational productivity.

An organization with an effective and good rewards system ensures sustainable achievement of objectives.

Employee reward programs are one method of motivating employees to change work habits and key behaviours

to ensure business success. A well designed pay and benefit packages can attract people in their numbers to an

organization, retain and motivate them. Organizations must acquire skills on how to manage employee rewards

properly. This is as a result of what is expected and how much is received. Employee satisfaction is also affected

by comparisons with other people in similar jobs to determine the output of their activities in relation to benefit.

Rewards must be seen as timely and tied to effective performance and productivity. Employees expect that

effective and positive organizational outcome will lead to certain rewards. Therefore, organizations must establish

a philosophy about rewards in order to enhance productivity (Brian, 2006; Searle, 1990). The rewards system in

the public sector is not fair and not tied to effective performance. It has over the years encouraged disparities

leading to dissatisfaction by employees.

A motivated workforce can be a significant factor in organizational success (Nongo, 2005). When

employees are motivated to work at higher levels of productivity, the organization as a whole runs more efficiently

and is more effective at reaching its goals. This is in contrast to an unmotivated workforce, who can negatively

disrupt an organization and distract employees from their work. For this reason, it is imperative that managers

understand the power of reward systems and how they are used to influence employee behavior (Sev, Abayan &

Wombo, 2013).

Rewards are positive outcomes that are earned as a result of an employee's performance. These rewards

are aligned with organizational goals. When an employee helps an organization in the achievement of one of its

goals, a reward often follows. There are two general types of rewards that motivate people: intrinsic and extrinsic.

(a) Intrinsic Rewards

Intrinsic motivation is internal to the person in that it is something that you have to offer yourself and is driven by

personal interest or enjoyment in the work itself. Because intrinsic motivation exists within the individual,

achieving it does not depend on others. Some people believe that the most powerful rewards come from inside a

person (Nongo, 2005).

Think of that sense of accomplishment you feel once you have overcome a significant challenge or

completed an assignment or work project that required a good deal of effort. Intrinsic motivation provides that

personal pat on the back or natural height that reflects a person's ability, competency, growth, knowledge and self-

control over their endeavors. Employees who tend to work at higher levels of productivity and strive to develop

professionally. Intrinsic rewards include things such as: personal achievement, professional growth, sense of

pleasure and accomplishment.

In a knowledge economy where the greatest asset an employee can offer an organization is their

intelligence, experience, problem solving ability and change-savvy persona, intrinsic rewards are especially

important to workers. In fact, Frederick Herzberg, who is one of the leading theorists of workplace motivation,

found intrinsic rewards to be much stronger than financial rewards in increasing employee motivation. This is not

to say that employees will not seek financial rewards in addition to intrinsic rewards, rather it just means that

money is not enough to maximize motivation in most employees. People want to feel like their contributions matter

(Nongo, 2005).

For example, an employee might want to reach a sales quota set by his manager to earn the bonus that is

attached to it, but unless the employee feels a sense of accomplishment as part of making those sales, the motivation

to achieve the quota is less powerful. Nongo (2005) argues that to help employees with their intrinsic motivation,

managers should:

1. Provide meaningful work

2. Allow workers to make choices through a high level of autonomy

3. Provide opportunities for employees to show their competence in areas of expertise

4. Facilitate professional development so that employees can expand on their level of knowledge

5. Offer frequent opportunities for employees to reward themselves

6. Allow employees the opportunity to connect with those with whom they serve to obtain valuable

feedback

7. Give them a path to monitor their progress with milestones along the way.

(b) Extrinsic Rewards

Extrinsic motivation is based on tangible rewards. Unlike intrinsic motivation that is self-administered, extrinsic

motivation is external to the individual and is typically offered by a supervisor or manager who holds all the power

in relation to when extrinsic rewards are offered and in what amount. Extrinsic rewards are usually financial in

nature, such as a raise in salary, a bonus for reaching some quota or paid time off. However, extrinsic rewards can

also be as simple as getting the better office, verbal praise, public recognition or awards, promotions and additional



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responsibility (Dugguh, 2004).

These material rewards can be motivating to employees because pay, time off, advancement and

recognition are important to most workers. Just imagine how de-motivating it would be to underpaid, overworked

and unappreciated, and you can quickly see how important extrinsic rewards are to organizational success. An

extrinsically motivated person will work on a task that they do not particularly care for simply because of the

anticipated satisfaction that will come from some extrinsic reward. For example, the employee may not be

interested in the product he is selling, but reaching the quota means the bonus, therefore he is motivated to put

forth the effort he needs to meet the sales quota.

Providing employees with extrinsic rewards is relatively straightforward and usually built into

performance reviews or individual projects. They are particularly useful in the short-term for motivating

employees to work towards one specific organizational goal. Meeting the sales quota for a bonus is an example of

offering an extrinsic reward for a short-term goal.

Productivity

Generally speaking, productivity is defined as the relation of output to input. Productivity is therefore, on the one

hand, closely connected to the use and availability of resources. This means in short that productivity is reduced

if an organisation’s resources are not properly used or if there is a lack of them. On the other hand, productivity is

strongly linked to the creation of value. It is argued that productivity is one of the basic variables governing

economic production activities, perhaps the most important one (Singh, Motwani & Kumavi, 2000). Elimination

of waste give rise to improve productivity.

Productivity is a relative concept, which cannot be said to increase or decrease unless a comparison is

made, either of variations from competitors or other standards at a certain point in time, or of changes over time.

Misterek, Dooley and Anderson (1992) agree that improvements in productivity can be caused by five different

relationships:

(1) Output and input increases, but the increase in input is proportionally less than the increase in

output.

(2) Output increases while input stays the same.

(3) Output increases while input is reduced.

(4) Output stays the same while input decreases.

(5) Output decreases while input decreases even more.

Productivity is an economic measure of efficiency that summarizes and reflects the value of the output

created by an individual, organization, industry or economic system relative to the value of the inputs used to

create them (Denisi and Griffin, 2005). They agree that organizations around the world have come to recognize

the importance of productivity for its ability not only to compete but also to survive, furthermore, an organization

that is serious about productivity will need to lead workers by given them direction and focus to create high quality

products and services. Effective leadership in an organization results to enhance productivity (Ene, 2008).

Hartzell (2011) views productivity as a measured relationship between the quality and quantity of results

produced and the quantity of resources required for production. Productivity is in essence a measure of the work

efficiency of an individual, work unit or entire organization. He further stressed that productivity can be measured

in two ways, one way relates the output of an enterprise, industry or economic sector to a single input, such as

labour or capital. The other relates output to a composite of input combined so as to account for their relative

importance. The choice of a particular productivity measure depends on the purpose for which it is to be used. He

further defined productivity as a war against waste. Even if the technical and economic concept of productivity is

taken into consideration i.e. productivity is the ratio of output and input. This could be favourable only when

planned efforts are made to utilize the scarce resources as economically as possible to achieve the best result. He

concludes that among several factors affecting productivity, safety in industry, one of the most important factor to

be kept in view for promoting productivity is the rate of output of a worker or machine.

Nwachukwu (2002, p.56) argues that productivity is the measure of how well resources are brought

together in an organization and utilized for accomplishing of set result produced in reaching the highest level of

performance with the least expenditure of resources. It can be seen as the amount of production in relations to

labour put in. Explaining productivity, Kerlinger (1980, p.208) states that public managers have worked under the

uneasy assumption that a good, smoothly functioning programme was an effective one. He went further to explain

how a manager used to think that if he or she spent the entire budget allocation and did not hear complaints from

clients or the public, he or she was running an effective programme. From that perspective, productivity is equated

to the quantity of public complaints. Nevertheless, several more precise measures of the public sector have

emerged in recent years where productivity is measured in terms of cost efficiency, cost effectiveness, and

programme worthiness.



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Theoretical Review

The Maslow’s (1943) and Herzberg’s (1968) job satisfaction theories emphasize how employees should be

motivated in order to seek and achieve satisfaction in the workplace environment. These include how the existence

of opportunities for achievement develops in organization; with enhanced job recognition and enlargement,

responsibility of action, autonomy of decision, challenges and dynamics of the tasks as well as opportunities for

growth and development. In addition, other aspects are addressed in the perspectives of how jobs are delegated, of

course, with enhanced decentralization of authority. However, employees in organizations (local government)

would need to be directly involved in meeting targets and challenges, breaking new frontiers, and therefore,

contributing in fashioning new organizational vision, mission and values.

Empirical Studies

Mayson and Barret (2006) in a study on the impact of reward on employee performance found that a firm’s ability

to attract, motivate and retain employees by offering competitive salaries and appropriate rewards is linked to firm

performance and growth. On the other hand, Inés and Pedro (2011) found that the compensation system used for

the sales people has significant effects on individual salesperson performance and sales organization effectiveness.

Therefore, in an ever competitive business environment, many companies today are attempting to identify

innovative compensation strategies that are directly linked to improving organizational performance (Denis and

Michel 2011).

According to Nebeker et al. (2001) Customer’s satisfaction and organizations performance is the result

of its employee’s satisfaction. There has been research proving a positive relationship between stock bonus and

employee performance. The evidences in Taiwan suggest that there exist positive associations between the amount

of stock bonuses and firms’ operating performance. It is also found that firms with larger firm size or high growth

opportunity tend to adopt stock bonus.

Performance-based compensation is the dominant human Resource practice that firms use to evaluate and

reward employees’ efforts (Collins and Clark, 2003). Evidently, performance-based compensation has a positive

effect upon employee and organizational performance. In a quantitative content analysis of the narrative

descriptions of 50 rapid-growth firms and a comparison group of 50 slow-growth companies conducted by

Barringer et al., 2005 results demonstrated that employee incentives differentiated the rapid-growth from the slow

growth firms. Firms that were rapid-growth oriented provided their employees financial incentives and stock

options as part of their compensation packages. In doing so, firms managed to elicit high levels of performance

from employees, provide employees the feeling that they 20have an ownership interest in the firm, attract and

retain high-quality employees, and shift a portion of a firm’s business risk to the employees. Delery and Doty

(1996) identified performance-based compensation as the single strongest predictor of firm performance. Both

performance-based compensation and merit-based promotion can be viewed as ingredients in organizational

incentive systems that encourage individual performance and retention (Cho et al. 2005). Collins and Clark (2003)

studied 73 high-technology firms and showed that the relationships between the HR practices and firm

performance (sales growth and stock growth) were mediated through their top managers’ social networks. Cho et

al. (2005) suggested that incentive plans is effective in decreasing turnover rates. Banker et al. (2001) conducted

a longitudinal study of the effectiveness of incentive plans in the hotel industry and found that incentive plans were

related to higher revenues, increased profits, and decreased cost. In a related study Paul and Anantharaman (2003)

found that compensation and incentives directly affect operational performance. To be effective, compensation

practices and policies must be aligned with organizational objectives. While performance-based compensation can

motivate employees, sometimes employees perceive it as a management mechanism to control their behaviour

(Lawler and Rhode, 1976). In such a case, employees are less loyal and committed, thus compensation plans have

the opposite than desired outcome (Rodrıguez and Ventura, 2003). Employee turnover can significantly slow

revenue growth, particularly in knowledge-intensive industries (Baron and Hannan, 2002).

Method of Data Analysis

The paper adopted the descriptive statistics of mean ( X ) and standard deviations and the non-parametric test of

Chi-square as methods for analyzing the data collected through the use of structured questionnaires. For the

descriptive statistic, the cut-off mark of 2.50 was used for decision making on each item of the instrument. Any

item with a mean of 2.50 and above was considered agreed while any item with a mean of below 2.50 was

considered disagreed. Similarly, the Chi-square test of independence (also known as the Pearson Chi-square or

simply the Chi-square) was used for testing the dependency of reward system on productivity in the local

government system in Benue State. The chi-square test is considered appropriate for this study because it is a non-

parametric statistic for treating data consisting of frequency counts; it permits the researcher to determine whether

or not a significant relationship exists between the observed number of cases falling into each category and the

expected number of cases based on the null hypothesis (Emaikwu, 2011). The general form of the Chi-square is



Vol.7, No.22, 2016

206

stated as;

E

EO 22 )( −=χ

Where 2χ

is the value of the calculated chi-square is, O is the observed value and E is the expected value.

Similarly, the value of the chi-square can be calculated using the formula;

∑∑==

−=

m

j

n

i eij

eijoij

1

2

1

2 )(χ

Given the degree of freedom (df) = (C – 1) (R – 1)

Where 2χ

= calculated value of the chi-square

oij

= observed frequency of the ith row and jth column

eij

= expected frequency of the ith row and jth column

∑ = summation

Estimation and Discussion of Result

Effect of reward system on productivity in the Local Government System in Benue State

The result from Table 4.1 below revealed mean scores and standard deviations for all the items on the reward

system. The study showed that reward system is important and affects the productivity of the local government

system. The respondents virtually agreed to all items except that of item one (1) and three (3) where they disagreed

that the attitude of leaders to the welfare of local government employees does not affect productivity and

employees salaries and other incentives are not paid regularly. The respondents disagree with the attitude of leaders

to the welfare of local government employees (M = 1.93, SD = 1.192), agree with considerations for reward in the

local government system (M = 2.58, SD = 1.181). They disagreed with the issue of salaries and other incentives

been paid regularly (M =2.47, SD = 0.961). They agree that reward and other incentive play significant role on

how much they perform their jobs (M = 2.56, SD = 1.010). Most of respondents agree that they operate in decent

offices (M = 2.98, SD = 1.028). Also, majority of the respondents agree that rewarding right people in the local

government will affect productivity (M = 2.84, SD = 1.091). The overall or cluster mean of 2.60 with a standard

deviation of 1.069 implied that, reward system has effect on productivity in local government system in Benue

state.

Table 4.1: Reward System and Productivity in the Local Government System

_________________________________________________________________________

Reward System N Mean Std. Deviation

_________________________________________________________________________

1. Does attitudes of leaders to the welfare

of local government employees affect productivity? 363 1.93 1.192

2. What is the major consideration for reward in the local

government system in Benue State? 363 2.58 1.181

3. Do local government employees have their salaries

and other incentives paid regularly? 363 2.47 .961

4. Does reward such as alary and other incentives play

any role on how much you perform your job? 363 2.56 1.010

5. Do local government employees operate in decent office

or have good office accommodation? 363 2.98 1.020

6. What is the major function in reward system which affects

productivity in the local government? 363 2.76 1.028

7. Do you agree that rewarding right people in the local

government will affect their productivity? 363 2.84 1.091

Overall Mean and Standard Deviation 2.60 1.069

_________________________________________________________________________

Source: Filed Survey, 2016



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207

Two questions (question 4 and 7) were used to generate data for testing the study hypothesis Question 4 has the

following frequency distribution

Role of Reward on Productivity Frequency

Absolutely 110

To a great extent 149

To some extent 88

Not at all 16

363

Question 7 has the following frequency distribution

Major Factors in Reward that affect Frequency

Productivity_______________________

Nepotism 88

God fatherism 133

Disregards for Performance 104

Lack of adherence to Seniority 38

363

These data were combined to form the contingency Table (Table 4.2)

Table 4.2: Contingency Table Based on Responses of Respondents to Questions 9 and 11 of the first cluster.

Role of Reward on Productivity

Major factors in Reward that

affect Productivity Absolutely

To greater a

extent

To some

extent Not at all Total

Nepotism 88(141.03) 0(36.12) 0(21.33) 0(3.88) 88

Godfatherism 22(14.4) 111(0.48) 0(8.0) 0(1.45) 133

Disregard for Performance 0(30.91) 38(0.36) 64(62.36) 0(4.5) 102

Lack of adherence to seniority 0(12.12) 0(16.42) 24(21.08) 16(115.21) 40

Total 110 149 88 16 363

The expected frequencies are calculated using the formula:

N

nnE

jiij

×=

Where Eij is the expected frequency for the cell in the ith row and the jth column

ni is the total number of subjects in the ith row

nj is the total number of subjects in the jth column and

N is the total number subjects in the whole table

E(Nepotism and Absolutely) = 363

88110×

= 26.67

E(Nepotism and To a greater extent) = 363

88149×

= 36.12

E(Nepotism and To some extent) = 363

8888×

= 21.33

E(Nepotism and Not at all) = 363

8816×

= 3.88

E(Godfatherism and Absolutely) = 363

33110×

= 10.0

E(Godfatherism and To a greater extent) = 363

33149×

= 13.55



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208

E(Godfatherism and To some extent) = 363

3388×

=8.0

E(Godfatherism and Not at all) = 363

3316×

=1.45

E(Disregard for Performance and Absolutely) = 363

102110×

=30.91

E(Disregard for Performance and To a greater extent) = 363

102149×

=41.87

E(Disregard for Performance and To some extent) = 363

10288×

=24.73

E(Disregard for Performance and Not at all) = 363

10216×

=4.50

E(Lack of adherence to seniority and Absolutely) = 363

40110×

= 12.12

E(Lack of adherence to seniority and To a greater extent) = 363

40149×

=16.42

E(Lack of adherence to seniority and To some extent) = 363

4088×

=9.70

E(Lack of adherence to seniority and Not at all) = 363

4016×

= 1.76

Thus

∑∑==

−=

m

j

n

i eij

eijoij

1

2

1

2 )(χ

=

7.48976.1

)76.116(

70.9

)70.924(

42.16

)42.160(

12.12

)12.120(

50.4

)50.40(

73.24

)73.2464(

87.41

)87.4138(

91.30

)91.300(

45.1

)45.10(

0.8

)0.80(

55.13

)55.1311(

0.10

)0.1022(

88.3

)88.30(

33.21

)33.210(

12.36

)12.360(

67.26

)67.2688(

2222

222222

222222

=−

+−

+−

+−

+

−+

−+

−+

−+

−+

−+

−+

−+

−+

−+

−+

−

Using df = (C – 1) (R – 1)

(4 – 1) (4 – 1)

3 x 3 = 9

2χ critical at 5% confidence level and degree of freedom of 9 = 16.92

(See Appendix ‘A’ for detailed analysis)



Vol.7, No.22, 2016

209

Decision

Since 2χ

calculated (489.7) is greater than 2χ

critical at 5% confidence level (16.92), the null hypothesis is

rejected and the alternative hypothesis which states that “Reward System has significance effect on productivity

in the Local Government System in Benue State” is accepted.

This means that; productivity depends on reward system; the more employees are motivated and

stimulated, the higher their morals to give in their best which consequently leads to higher productivity. This

finding conforms to the finding of Kibisu, Muturi and Elijah (2014) who found out that reward system (salary,

house allowance and health benefits) have very strong influence on employee performance. The implication of

this finding is that, productivity in the Local Government System will be improved if the reward system is adequate

and properly carried out.

Conclusion and Policy Recommendations

The study concludes that, rewarding employees is critical not only to increase in the level of productivity but also

leads to job satisfaction on the part of the employees. It also leads to leadership and business successes. It is

therefore recommended that, both employers and leaders or local government to as a matter of urgency design

appropriate employees rewarding systems and implement same in their various local government in order to

enhance productivity and achieve their desired goals.

REFERENCES

Ali, R., & Ahmed, M. (2008). The Impact of Reward & Recognition Programs on Employees

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Baron, J. N., & Hannan, M. T. 2002. Organizational blueprints for success in high-tech start-ups: Lessons from

the Stanford project on emerging companies. California Management Review, 44(3): 8–36.

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Collins C. J., and Clark K. D., (2003). Strategic human resource practices, top management commitment, team

social networks and firm performance: the role of human resource practices in creating organizational

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Targets in the Semi-Autonomous Government Agencies. International journal for Innovation Education

and Research, 2(11), 184-196

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Pacific Palisades, CA

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Human Resources Management Review, Vol. 16 No. 4, pp. 447-455.

Mutua, P. & Sikalieh, D. (2013). The influence of Rewards and Recognition on productivity levels among

extension officers in the ministry of Agriculture in Kenya. Interdisciplinary Journal of Research in



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Business 2(10), 31-39.

Nongo, S. (2005). Fundamentals of Management. Makurdi: Aboki Publishers

Nwachukwu, C.C. (2002). Management Theory and Practice. Nigeria. African first publishing Ltd.

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Rodriguez, J. M., and Ventura J., (2003). Human resource management systems and organizational performance:

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in Manufacturingorganization. Nigeria Journal of Management Sciences, 3(2), 293.



Vol.7, No.22, 2016

211

Private Consumption in The WAEMU Zone: Does Interest Rate

Matter?

Dr Adama COMBEY*

Macroeconomist at the Central Bank of West African States, PO box 4054, Lome Togo

Abstract This paper investigates the effect of interest rates on private consumption in the West African Economic and

Monetary Union (WAEMU). After checking for unit root and co-integration, Error Correction Model is specified,

and three estimators are performed: Mean Group, Pooled Mean Group and Dynamic Fixed-Effects. Hausman tests

indicate that the Dynamic Fixed-Effects estimator is more efficient and consistent than others. Results suggest that

there is no statistical evidence, both in short-run and long-run, impact of real and nominal saving interest rates on

private consumption in the WAEMU region from 2006 to 2014. These finds imply that neither substitution effect,

nor income effect, operate in this zone. However, the paper finds that the growth of private consumption is strongly

depends positively in the long-run on the gross national disposable income and the credit to private sector ratio.

The long-run income elasticity and semi-elasticity of liquidity constraints are statistically significant and average

to 0.92 and 0.0085, respectively. These finds imply that there is a need for more proper financial market

development and financial education policies implementation to have negative and significant impact of interest

rates on private consumption in the WAEMU zone.

Keywords: Private Consumption, Interest Rates, WAEMU

* The views expressed in this paper are those of the author and should not be attributed to the Central Bank of

West African States.

1. Introduction The relation between real interest rates and private consumption has been widely debated in the economic literature.

In general, standards models of private consumption indicate that households will tend to smooth consumption

over time according to the evolution of real interest rates. A higher interest rates make current consumption more

costly than future consumption (substitution effect) and causes private consumption to decrease. But higher real

interest rates also make it possible to enjoy more future consumption without decreasing current consumption

(income effect). The final effect is ambiguous and depends on the relative magnitudes of the substitution effect and

the income effect.

McKinnon (1973) and Shaw (1973) have developed theoretical framework in favor of financial

liberalization as a way to promote saving and hence growth. This framework is based on assumption that the

negative substitution effect dominates the positive income effect in developing countries.

Since the theory provides an ambiguous answer, it is necessary to empirically determine which effect

dominates in order to know whether interest rates will always have a negative effect on private consumption. Thus,

empirical literature on the effect of interest rates on private consumption in developing countries has produced

very little consensus, and predictions are ambiguous as those made by the theory (Khatkhate, 1988; Arrieta, 1988).

In addition, the results often seem to depend on the particular data sets, sample choices, and specifications.

Giovannini (1985), Bordes and al. (1995), and Loayza et al. (2000) point the negative effect of real interest

rates on private consumption in developing countries. Modigliani and Caa (2004), and Blanchard and Giavazzi

(2006) reach the same results in the context of China. In Nepal, Gaire (2010) finds that there is a long-run

relationship between real interest rate and private consumption but negligibly.

On the other hand, Reinhart and Ostry (1995) find that consumption is not very responsive to fluctuations

in real interest rates. Gleizer (2013) assesses that, policies to strengthen national and private savings, by increasing

the real interest rates, was not any occur in Brazil, because there was not any significant relation between these

variables from 1960 to 1985. In addition, Simon-Oke and Jolaosho (2013) indicate that real interest rate has

negatively impacted on the level of savings mobilization in Nigeria from 1980 to 2008, wile Singh (2004) finds

that this negative effect differ over time in Fiji’s context. He indicates that, in the short-run, Fiji’s real private

consumption growth is significantly affected by changes in income, wealth, real interest rate and net private

transfers. But, in the long-run, only wealth and income variables determine private consumption growth.

Wilcox (1990) argues that interest rates have powerful effects on private consumption, but they operate

through nominal, not real interest rates.

In recent years, private consumption increased in the West African Economic and Monetary Union

(WAEMU) in the context of real interest rates progressing. While private consumption average 4.0 percents over

1997-2005, it rose to an average of 5.6 percents over 2006-15. At the same time, 2006-15, real interest rates, both

creditor and debtor, progressed from 2.44 percents and 5.52 percents in 2005 to 4.15 percents and 6.0 percents in

2015, respectively.



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212

These stylized facts raise questions about the empirical relationship between interest rates and private

consumption in the WAEMU zone: Does income effect more dominant substitution effect in this zone? Or it is

nominal, not real interest rate, that most influence consumer spending and saving in this region?

This paper is the first focusing on the analysis of interest rates effect on private consumption in the

WAEMU region. It's also the first proxying the disposable income with the gross national disposable income

among the empirical private consumption function works on developing countries. This study should be useful,

not only for researchers, due to his empirical approach in the WAEMU context, but also for policymakers in

providing knowledge about designing policies for saving or consumption promotion.

The rest of the paper is organized as follows. Next section offers an overview of the empirical framework.

Section three presents results, discussion, and an analysis of the robustness. Concluding remarks and policy

implications are provided in the final section.

2. Methodology and Data 2.1 Model Specification

To facilitate comparison to recognize econometric specifications, we adopt a fairly standard empirical model of

private consumption. A standard representation of that private consumption function is:

C i , t= θ0t+ αi IRi ,t+ βi X i , t+ µ i+ εi , t (1)

Where Ci,t represents the real private consumption per capita of country i in time t, IR is the nominal or

real saving interest rate (real saving interest rate is computed by subtracting inflation rate from nominal saving

interest rate). X is a set of control variables, informed by both theory and empirical evidence, such as real Gross

National Disposable Income per capita (GNDI), as a proxy of disposable income; and Financial Development

(FD), measured by domestic credit to private sector as share of Gross Domestic Product (GDP), proxy for liquidity

constraints.

2.2 Data Description and Pre Diagnostic Tests

The data set of real private consumption, interest rates, and control variables consist of annual observations, from

2006 to 2014, and cover seven member countries of the WAEMU region: Benin, Burkina Faso, Cote d'Ivoire, Mali,

Niger, Senegal, and Togo. Guinea-Bissau is excluded, due to data unavailability. Real private consumption,

interest rate, real gross national disposable income, and credit to private sector as share of GDP have been gained

from the Central Bank of West African States database, while population were obtained from the data set of

“Perspective Monde website” (Table 1).

Table 1: Definitions and Sources of Variables

Variables Definitions Sources

Real Private Consumption

per capita

C = Ln (Final Private Consumption at Constant

Price (Base = 2008) / Population) BCEAO Data Base, Eden

Gross National Disposable

Income per capita

GNDI = Ln ((Gross Domestic Product +

Primary Income Balance + Secondary Income

Balance) / Deflator / Population)

BCEAO Data Base, Eden, and

Balance of Payment Reports

Financial Development FD = Credit to Private Sector / GDP

BCEAO Data Base Eden

Nominal Saving Interest

Rate NSIR = Annual Average Saving Interest Rate

Real Saving Interest Rate RSIR = (Annual Average Saving Interest Rate –

Inflation Interest Rate)

Population Perspective Monde, Canada

Source: Author

As a common wisdom in panel data analysis, econometric methodology involves a battery of pre and post

diagnostic tests, checking for unit root and co-integration. The results of panel unit root tests of Levin, Lin and

Chu (2002); Im, Pesaran and Shin (2003); and Maddala and Wu (1999), and Choi (2001), indicate that private

consumption and interest rates are stationary in level, while gross national disposable income, and credit to private

sector ratio are stationary in first difference (Table 2). In addition, Westerlund (2007) tests largely conclude that

the null hypotheses of no co-integration are rejected for gross national disposable income (Table 3).



Vol.7, No.22, 2016

213

Table 2: Summary Results of Panel Unit Root Tests

Levin, Lin and Chu Im, Pesaran and Shin Maddala and Wu

C, level with trend -16.79*** -1.56** 21.37***

GNDI, first difference -7.32*** -1.74*** 16.77***

FD, first difference with trend -7.26*** -2.93*** 10.01***

NSIR, level with trend -7.43*** -2.09** 4.32***

RSIR, level -4.34*** -2.52*** 2.44***

Source: Author, ***, **, and * indicate that the statistic is statistically significant at the 1%, 5%, and 10% levels,

respectively. The null hypothesis of stationarity tests are = Non stationarity.

Table 3: Westerlund Error Correction based Panel Co-integration Tests

Variables Private Consumption, C

Gt Ga Pt Pa

GNDI -4.18*** -3.52 -4.77*** -3.64***

FD -0.91 -0.13 0.38 0.03

RSIR -0.74 -0.02 -0.99 -0.01

NSIR 0.11 0.07 -0.11 -0.01


respectively. The null hypothesis of Westerlund test is = Non co-integration.

2.3 Estimation Techniques

This feature of the data implies an Error Correction Model Specification in which the short-run dynamics of the

variables in the system are influenced by the deviation from equilibrium. Thus, the equation (1) is become as

follows:

∆C i ,t= a0, i(C i , t− 1− θ0t− µi− α i IR i , t− βi X i ,t)+ γ i∆ IR i ,t+ δi∆ X i ,t+ εi , t (2)

The parameter a0,i is the error-correcting speed of adjustment term. If a0,1 = 0, then there would be no

evidence for the long-run relationship. This parameter is expected to be significantly negative under the prior

assumption that the variables show a return to a long-run equilibrium. Most aggregate consumption theories

indicate that the long-run income elasticity should be equal to one, and the liquidity constraints effect is generally

positive.

The recent literature on dynamic heterogeneous panel estimation, in which both N and T are large, with

a co-integration mixed of I (0) and I (1) variables, suggests several approaches to estimate equation (2) (See

Blackburne and Frank (2007) for more details).

On one extreme, a Dynamic Fixed-Effects (DFE) estimation approach could be used in which the time-

series data for each country are pooled and only the intercepts are allowed to differ across countries. If the slope

coefficients are in fact not identical, however, the DFE approach produces inconsistent and potentially misleading

results. On the other extreme, the model could be fitted separately for each country, and a simple arithmetic average

of the coefficients could be calculated. This is the Mean Group (MG), estimator proposed by Pesaran and Smith

(1995). With this estimator, the intercepts, slope coefficients, and error variances are all allowed to differ across

country.

More recently, Pesaran, Shin, and Smith (1997, 1999) have proposed a Pooled Mean Group (PMG)

estimator that combines both pooling and averaging. This intermediate estimator allows the intercept, short-run

coefficients, and error variances to differ across the countries (as would the MG estimator) but constrains the long-

run coefficients to be equal across countries (as would the DFE estimator). Hausman specification test is performed

to obtain the estimator that is efficient and consistent according to the data feature.

3. Results, Analysis and Discussion Results indicate that the Pooled Mean Group estimator, the efficient estimator under the null hypothesis, is

preferred to Mean Group estimator. The calculated Hausman statistic is 0.94 and is distributed Chi2. But it also

confirms that the Dynamic Fixed-Effects estimator is more efficient and consistent than the Pooled Mean Group

estimator, according to Hausman test, checking for endogeneity between the error term and the lagged dependent

variable. The calculated Hausman statistic is 18,213.86 with a corresponding p-value of zero (Table 4). In addition,

residuals of the models are checked and the skewness and kurtosis suggest normally distributed residuals, implying



Vol.7, No.22, 2016

214

the robustness of models.

Table 4: Hausman's models Specification Tests, Optimal Estimator

MG vs PMG DFE vs PMG

Chi2 Statistic 0.94 18213.86***

P-value 0.81 0.00


respectively.

The Dynamic Fixed-Effects results (Table 5) suggest that there is no statistical evidence, both in short-

run and long-run, impact of real and nominal saving interest rates on private consumption in the WAEMU region.

This implies that neither substitution effect, nor income effect, operate in this zone, from 2006 to 2014, and reflect

that raising real interest rates is necessary, but not sufficient to increase private saving, and thus provide the

resources for growth in the WAEMU countries. This implies also that financial liberalization may not be sufficient

to catalyze higher saving rates. Other reforms should be initiated. These results could be explained by the fact that,

the private sector in these countries lives at subsistence level, the financial market is less developed and the

population is lack of financial education.

The results indicate moreover that the growth of private consumption is found to strongly depend

positively, in the long-run, on the gross national disposable income and the credit to private sector ratio. The long-

run income elasticity and semi-elasticity of liquidity constraints are statistically significant and average to 0.92

and 0.0085, respectively. These finds imply that a 10 percentage points increase in gross national disposable

income may rise in overall 9.2 percentage of private consumption. Furthermore, when the liquidity constraints is

loss of 10 percentage points, private consumption will increase approximately 0.085 percent.

The error correction term, the adjustment coefficient, has a negative and statistically significant value

(- 0.86). This infers that, the model is dynamically stable, and private consumption in the WAEMU adjusts fast to

equilibrium levels in the current period (t), from a disequilibrium experienced in the previous period (t-1) after a

shock to any of its determinants.

Table 5. Long-Run and Short-Run Dynamic Fixed-Effects Estimation in The WAEMU

VARIABLES MODEL 1 MODEL 2 MODEL 3

D.GNDI 0.485 0.474 0.437

(0.602) (0.578) (0.628)

D.FD -0.00522 -0.00630 -0.00789

(0.00796) (0.00868) (0.00872)

D.RSIR 0.00407

(0.00380)

D.NSIR 0.0421

(0.0303)

EC -0.860*** -0.853*** -0.858***

(0.161) (0.150) (0.161)

GNDI 0.885*** 0.930*** 0.955***

(0.211) (0.241) (0.235)

FD 0.00772*** 0.00896*** 0.00887***

(0.00275) (0.00329) (0.00286)

RSIR -0.00540

(0.00429)

NSIR -0.0285

(0.0211)

Constant -2.640 -2.324 -2.048

(1.714) (1.876) (1.832)

Source: Author, Robust standard errors (in parentheses) and cluster the standard errors at country level ***

p<0.01, ** p<0.05, * p<0.1



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215

4. Conclusion and Policy Implications Liberalization policies to promote saving and economic growth in developing countries are based on assumption

that, the negative substitution effect of saving interest rates to private consumption rising dominates the positive

income effect to private consumption in these countries. However, theory provides an ambiguous answer on this

subject and empirical studies produce divergent results. This situation requires appropriate investigations to

identify the characteristics of each area in order to guide economic policies.

The paper finds, however, that the growth of private consumption is strongly depends positively in the

long-run on the gross national disposable income and the credit to private sector ratio. Furthermore, the study also

finds that WAEMU’s consumption adjusts to equilibrium levels quite fast. The results suggest that WAEMU’s

consumers adjust their consumption behavior quite early, probably as soon as they gain the slightest indications

that the change in their income would be permanent.

These finds imply that there is a need for more proper financial market development and financial

education policies implementation to have negative and significant impact of saving interest rates on private

consumption in the WAEMU zone.

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pp. 63-92.

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of Economics and Statistics, 82(2), pp. 165-181.

Maddala, G.S. & Wu, S. (1999). A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test.

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Simon-Oke O. O. & O. M. Jolaosho. (2013). Real interest rate and savings mobilization in Nigeria. International

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Vol.7, No.22, 2016

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Capital Markets, Economic Growth and Sustainable Development

Financing: A Case Study of Nigeria

Oluwatosin Olushola1 Ojijo Odhiambo2* Pa Lamin Beyai2

1.Veritas University, P.M.B. 5171 Wuse GPO, Abuja -Nigeria. Tel (234) 706 8508809

2.UNDP – Nigeria; Plot 617/618, Diplomatic Zone, Central Area District, P.M.B

Garki, Abuja- Nigeria. Tel (234) 9 4616100

Abstract

Unlike the Millennium Development Goals (MDGs) which were largely premised on the availability of external

financing, in the form of Official Development Assistance (ODA), the Sustainable Development Goals (SDGs)

are premised on a multiplicity of financing sources, with domestic resource mobilization (DRM), including

through the capital markets, envisaged to play an increasingly important role. This study seeks to establish the

impact of the capital market on the performance of the Nigerian economy and propose ways of enhancing its role

in domestic resource mobilization for investments in SDG-related activities. The study employs an enhanced

version of the Neoclassical growth model, also known as Growth Accounting Framework, to incorporate other

economic and financial variables such as capital market development indices, as well as some indices for the

measurement of macroeconomic volatility. The study has established that, although the stock market development

indices captured in the model, do not individually exert any significant effect on growth, jointly, they do have a

significant impact on growth. Specifically, it is established that an estimated 61% of the changes in Real Gross

Domestic Product (RGDP) is explained by all the variables explicitly captured in the model, and that all the

explanatory variables are jointly statistically significant at 5% level of significance. The study makes a number of

plausible policy options including the need to put in place the requisite policy measures and regulatory frameworks

to ensure continuous development of the Nigerian capital market; the creation of an enabling environment to

facilitate increased investments in the capital market; the need to enhance investor confidence by ensuring

efficiency in the operations of the stock market; and the need to increase the diversity and complexity of investment

instruments in tandem with developments in other stock markets and growing demands and expectations of

investors and investment needs of the country.

Keywords: Nigeria, capital market development, economic growth, sustainable development goals

Article classification – Research paper

1. Introduction

High and sustained economic growth is a sine qua non for countries’ efforts to reduce poverty and, ultimately,

achieve sustainable development. Mobilizing financial resources for long term investments in key sectors of the

economy is among other factors, critical for high and sustained economic growth. It is with this realization that

the member states of the United Nations (UN), during the Third International Conference on Financing for

Development in July 2015 in Addis Ababa, Ethiopia, agreed on a wide range of initiatives and measures to

overhaul global finance practices and generate investments for tackling contemporary economic, social and

environmental challenges. One of the mechanisms agreed upon at the Addis Ababa conference as being necessary

to meet longer-term financing needs of countries is the development of domestic capital markets, particularly long-

term bond and insurance markets (UN, 2015).

The capital market is a network of financial institutions and infrastructure that act and interact to mobilize

and allocate long-term funds in the economy. The capital market is an organized exchange platform in which long-

term impersonal investments and borrowing through instruments such as stocks, bonds and futures markets occur.

Capital markets afford private firms and governments the opportunity to sell stocks and bonds, as well as other

instruments; and mobilise long-term funds from the savings of other economic agents. When functioning optimally,

capital markets also allow for effective monitoring of investments of various economic agents and promotion of

good corporate governance. The capital market is a highly specialized and organized financial market and is an

essential agent of economic growth because of its ability to facilitate and mobilize savings and investments.

Sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which

is consistent with external adjustment and rapid economic growth (Iyola, 2004). Capital markets encourage savings

by providing individuals with additional financial instruments that may better meet their risk preferences and

liquidity needs. Capital markets also provide an avenue for growing companies to raise capital at lower cost. In

addition, companies in countries with developed stock markets are less dependent on bank financing, thereby

reducing the risk to financial shocks. Capital markets therefore, are able to positively influence economic growth

by encouraging savings among individuals and providing avenues for firm financing (Levine and Zervos, 1998).

Over the past few decades, on the global scene, there has been an upsurge in capital market activity,

implying a growing recognition of this institution as a tool for fast-tracking economic progress. Chinwuba and



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Amos (2011) note that, the capital market is one of the major institutions that acts in propelling a prostrate economy

for growth and development. Nyong (1997), however, views the capital markets as a complex institution imbued

with inherent mechanism through which long-term funds of the surplus sectors of the economy are mobilized,

harnessed and made available to deficit sectors of the economy. Sule and Momoh (2009) have argued that through

the capital formation and allocation mechanism, the capital market ensures an efficient and effective distribution

of the scarce resources for the optimal benefit to the economy; reduces the over reliance of the corporate sector on

short-term financing for long term projects; and provides opportunities for government to finance projects aimed

at providing essential amenities for socio-economic development. Levine (1991) on the other hand has asserted

that capital markets can help the process of financial integration, financial intermediation and speed up the

economic growth through two key processes: first, by making property changes possible in the companies, whilst

not affecting their productive process; and second, by offering higher possibilities of portfolio diversification to

the agents. Osaze and Anao (1999) assert that the capital market is the cornerstone of any financial system since

it provides the funds needed for financing, not only business and other economic institutions, but also the programs

of government as a whole while Ilaboya and Ibrahim (2004) stress that capital market functions as an economic

barometer for galvanizing economic activities.

According to Levine (1997), the first comprehensive study of the relationship between capital market

development and economic growth was undertaken by the World Bank Research Group. The group investigated

the compatibility of stock market development with financial intermediaries and economic growth and concluded

that stock market development is positively correlated with the development of financial intermediaries and long-

term economic growth. Levine (1997) confirms that capital markets can boost economic activity through the

creation of liquidity, while Obstfeld (1995) identifies risk diversification, through internationally integrated stock

markets, as another vehicle through which stock markets can raise resources and affect growth.

Adamu and Sanni (2005), examine the role of the stock market on Nigeria’s economic growth, using

Granger-causality test and regression analysis. They established a positive and significant unidirectional causality

between Gross Domestic Product (GDP) growth and market turnover and thus proposed that the government

should encourage the development of capital market. Similar results have been reported by Osinubi and

Amaghionyeodiwe (2003); and Chinwuba and Amos (2011) who employed the Ordinary Least Square (OLS)

regression model over two different time frames; Obamiro (2005); Abdullahi (2005); Kolapo and Adaromola

(2012); and Adenuga (2010) who employed the Vector Error Correlation model using quarterly time series data

from 1990 to 2009. The same estimation technique was used by Ujunwa and Salami (2010) to study the relationship

between the stock market and economic growth using annual time series data from 1986 to 2006. They however,

obtained slightly different results. Their results show that market capitalization and rate of turnover are positively

associated with economic growth while the stock market liquidity is negatively correlated with economic growth,

a finding which contradicts the empirical work of Levine (1996).

Using the Error Correlation approach, Abu (2009), examines whether stock market development raises

economic growth in Nigeria with the econometric results indicating that stock market development raises

economic growth. He however, encouraged the Securities and Exchange Commission (SEC) to facilitate the

growth of the market, restore the confidence of stock market participants and safeguard the interest of shareholders

by checking sharp practices of market operators. In appraising the impact of capital market efficiency on economic

growth in Nigeria using time series data from 1963 to 2004, Ewah et al (2009) found that the capital market has

potential of growth-inducing, but that the growth-inducing potential is limited by low market capitalization, low

absorptive capacity, illiquidity and misappropriation of funds, among other factors. Ahmed and Wahid (2011) used

the Co-integration panel data technique and Dynamic time series modelling approach to investigate the linkages

between financial structure and economic growth in selected African economies. In the Nigerian case, the Granger

Causality test rejects non-causality from financial indicators on real income growth. There is strong evidence that

financial activity causes real income in the short run and long run causality in Nigeria. The finding of this study is

similar to the finding of Anyanwu (1998); that is, there is a strong empirical association between Nigerian stock

market development and long-run economic growth.

The following year, Ihendinihu & Onwuchekwa (2012) employed Endogenous Growth Model on annual

time series data from 1984 to 2011 to examine the relationship between the stock market performance and

economic growth. The result indicates that All-share index market capitalization and the number of listed

companies are positively correlated with GDP. Also, value of the total transaction and market capitalization are

positively associated with gross fixed capital formation (GFCF). In the same year, Bernard and Austin (2012)

investigated the role of the stock market development on economic growth in Nigeria using data from 1994 to

2008 employing the OLS technique. In the study, the rate of market capitalization was used as a proxy for the

stock market size while the turnover ratio and value of traded stock were used as a proxy for the total market

liquidity. The results indicate that the turnover ratio is strong and positively correlated with economic growth.

However, the market capitalization ratio is weak and negatively correlates with economic growth. The author

suggests that the government should encourage domestic investors in the capital market so as to increase the rate



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of economic activities in the stock market. A study conducted by Okey (2013) using data from 1985 to 2011

reported a positive relationship between the operations of capital market and economic growth. While the market

capitalization and number of dealings show a negative relationship with economic growth, the All-share index

shows a positive impact on the long-term economic growth. The study therefore, concludes that the increase in

market capitalization and the number of dealings can reduce economic performance. The error correction

mechanism indicates that the GDP adjust to past short run distortion at high speed of 146%.

In examining the relationship between stock market performance and sustainable economic growth,

Okodua and Ewetan (2013) applied Bound Testing Co-integration approach using data from 1981 to 2011. They

used GDP, market capitalization, value of traded securities, average dividend yield, interest rate and financial

depth as the variables. Their computed F-statistic lies above the critical upper bound at 5 percent, indicating that

there exists a long run relationship between dependent and independent variables, a result which was later

supported by the empirical study of Bakare and Awotundun (2014). In other related strands of literature,

Oluwatosin et al, (2013) used data from 1999 to 2012 to investigate the impact of capital market and economic

growth in Nigeria, employing the OLS method. The result shows that all capital market variables can jointly predict

economic growth, but at an insignificant rate. The study concluded that there is potential growth in the Nigerian

capital market, but the market has failed to do so because of low market capitalization, low absorptive capacity,

illiquidity and misuse of funds, among other factors. Maduka and Onwuka (2013), using the Vector Error

Correlation model, investigated both long run and the short-run relationship between financial structure and

economic growth using annual time series data. Contrary to expectations, the result reveals that the Nigerian

financial structure has negative and significant effect on the rate of economic growth. The study, therefore, calls

for sound financial policies that would encourage the growth of the GDP to be put in place. A year later, Osho

(2014) used time series data from 1980 to 2010 to examine the role of stock market development in economic

growth in Nigeria using Multiple-regression method of OLS to test the formulated hypothesis. The study used

market capitalization ratio, the value of total traded ratio and turnover ratio as independent variables. The result

revealed that the stock market capitalization and the total value of traded ratio negatively affect GDP while the

total turnover ratio has a positive effect on the dependent variable, the GDP. The empirical work of Yadirichukwu

and Chigbu (2014) examined the impact of capital market on economic growth in Nigeria using annual time series

data from 1985 to 2012. They utilized regression analysis where multivariate and error correction is used to observe

four formulated hypotheses. The result shows that there is a statistically significant inverse relationship between

the stock market capitalization ratio and long-run economic growth. A positive long run relationship between value

of total transaction and economic growth is however, observed. The authors recommend that to improve investors’

confidence, efficiency and transparency, a favourable macroeconomic environment should be achieved and

maintained.

Nwaolisa et al (2013) sought to examine the impact of capital market on the Nigerian economic growth

under democratic rule. The study used Multivariate regression technique to analyse time series data. The result

revealed that while total market capitalization and All-share indexes exert positive impact on the GDP growth rate,

the value of the stock has an insignificant negative effect on the GDP. Similarly, Owolabi and Ajayi (2013)

employed the OLS technique to study the impact of capital market on economic growth in Nigeria over the 1971-

2010 period. The result shows a positive relationship between economic growth and stock market variables in the

analysis; a finding similar to the results of the work of Tarhom (2014). Babatunde (2013) investigated the relative

contribution of equity market volatility on economic growth in Nigeria over the 1980 - 2010 period. The empirical

work is one among many that employs Exponential Generalized Autoregressive Conditional Heteroskedasticity

(EGARCH). The study shows that stock market volatility is quite persistent in Nigeria, a situation which distorts

economic growth in the country. For less volatile stock markets, the study suggests further strengthening of the

manpower and processes of the SEC to enable the organization to improve its oversight function over the capital

market.

The empirical study of Nathanael (2014) examined the influence of stock price and capital market

development on economic development in Nigeria, using annual time series data from 1980 to 2012, covering both

the pre-Structural Adjustment Program (SAP) and SAP era. The author used the econometric technique of

Johansen co-integration and ECM; and capital market variables such as market capitalization, government stock

rate, value of equities and new issues in the stock market. The result reveals that the value of equities (a measure

of stock prices) is statistically significant and has a positive linear association with the economic growth in Nigeria,

in line with new economic growth theory. Also, government stock rate has a significant and positive correlation

with the rate of economic growth in Nigeria.

Osamwonyi and Kasimu (2013) examined the relationship between stock markets and economic growth

in three sub-Saharan African countries, Nigeria included. The study regressed five indicators of stock market,

namely: stock market capitalization, rate of stock turnover ratio, value of traded stock, number of listed securities

and stock market index against the real gross product which is used as a proxy for economic growth. They made

use of Granger Causality Test, and found no causal relationship between stock market development and economic



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growth in Nigeria. This finding does not support new growth theory which posits that the stock market

development leads to economic growth. In the same year, Adefeso et al, (2013) used the Vector Error Correction

Model to investigate the long-run and causal link between the stock market and economic growth in Nigeria using

data covering 1980 - 2010 period. The finding as that, stock market development and economic development have

long run relationship in Nigeria. It also indicates that the stock market development and banking activities both

cause economic growth in Nigeria. The empirical study, therefore, urges policy makers to emphasize economic

growth through the appropriate regulatory and macroeconomic policies to achieve sustainable growth.

A later study by Okonkwo (2014) had the primary aim of examining the impact of stock market

development on economic growth in Nigeria using data from 1981-2012, by using stationary test of augmented

Dickey-Fuller. The error correction estimate shows that, the market capitalization and value of turnover ratio are

all statistically significant, while the total value of the transaction is negatively significant. The VECM Granger

causality revealed a unidirectional causality from listed securities to real GDP. A bi-directional causality runs from

the ratio of the total traded stock to market capitalization ratio. The study suggests that the stock market can

positively increase economic growth if an enabling environment for enlisting companies is created.

In France, Vazakidis and Adamopoulos, (2009), employed Co-integration Granger Causality test and

Vector Error Correction model to examine the causal nexus between stock market development and economic

growth for the 1965 -2007 period. They found a significant positive association between economic growth and

stock markets development. In India, Mishra, et al (2010) examined the impact of capital market efficiency on

economic growth using the time series data on market capitalization, total market turnover and stock price index

over the period spanning from the first quarter of 1991 to the first quarter of 2010. Their study reveals a linkage

between capital market efficiency and economic growth in India.

Most Nigerian businesses, and even the government, lack long-term capital for investments. The business

sector has depended mainly on short-term financing such as overdrafts to finance even long-term capital projects.

Based on the maturity matching concept, such financing is risky. In addition to the political, social and institutional

factors that have historically inhibited the process of economic development in Nigeria, the bottleneck created by

the dearth of long-term finance to the critical sectors of the economy constitutes a major setback to her

development. As a signatory to the global and universal Agenda 2030 to be achieved through 17 time-bound

Sustainable Development Goals (SDGs) and 179 targets, Nigeria has committed to a new set of ambitious

development goals and targets. Unlike the Millennium Development Goals (MDGs) which were largely premised

on the availability of external financing, in the form of Official Development Assistance (ODA), the SDGs are

premised on a multiplicity of financing sources, with domestic resource mobilization (DRM) envisaged to play an

increasingly important role. The Addis Ababa Action Agenda (AAAA) (See UN, 2015) indeed emphasizes the

need to build the capacities for domestic resource mobilization, including through capital markets. The present

study seeks to establish, empirically, using a parsimonious number of explanatory variables, the impact of the

capital market on the performance of the Nigerian economy and propose ways on enhancing the role of the capital

market in domestic resource mobilization for the implementation of the Agenda 2030 (SDGs). The broad objective

of the study is to examine the link between stock market development and economic growth in Nigeria. The

specific objectives of the study are to: evaluate the performance, over time, of the capital market in Nigeria in

relation to the major indices; examine the causal relationship between capital market performance and economic

growth in Nigeria; and make policy proposals for enhancing the role of capital market in economic growth and

domestic resource mobilization for development financing in order for the country to effectively implement

Agenda 2030. The rest of the paper is structured as follows: Section 2 traces the historical development of the

stock market in Nigeria and presents the conceptual framework and methodology adopted; Section 3 presents and

discusses the results of analysis, while the conclusions and policy recommendations are presented in Section 4.

2 Conceptual Framework and Methodology

2.1 An Overview of the Nigerian Capital Market

The establishment of the Central Bank of Nigeria in 1959; and the coming into existence of the Lagos Stock

Exchange in 1961 and, later, the Nigerian Stock Exchange vide Securities and Exchange Commission (SEC) Act

in 1979, laid the foundation for the legal and regulatory framework for the operations of the Nigerian capital

market. The functions of the Nigerian Stock Exchange are to: provide opportunities for raising new capital;

promote increasing participation by the public in the private sector of the economy; provide appropriate machinery

to facilitate further offerings of stocks and shares to the public; provide a central meeting place for members to

buy and sell existing stocks and shares and for granting quotation to new ones; and reduce the risk of liquidity by

facilitating the purchase and sale of securities. Over time, various forms of financial instruments have been issued

in the capital market by new and existing businesses to finance product development, new projects or general

business expansion.

The Central Bank of Nigeria (CBN) has reported that, in terms of equity market capitalization, the

Nigerian capital market is relatively small and not well-developed in comparison to similar countries in Africa;



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North and South America; Asia; and Europe (CBN (2014) and remains vulnerable and highly exposed to global

economic shocks. At the height of the 2008/2009 global financial crisis, the market capitalization declined from a

record high of N13.5 trillion in early 2008 to less than N4.5 trillion during the corresponding period in 2009. From

a high of N 19 trillion in the fourth quarter of 2013, aggregate market capitalization for all listed securities stood

at N17.00 trillion as at fourth quarter of 2015 while the All Share Index declined from 41,329.9 to 26,871.24 with

volume of shares traded declining from 26 billion to 18.4 billion while the value of shares traded declined from N

234 billion to N 72.6 billion over the same period. The relatively small market capitalization; and the under-

developed, vulnerable and volatile nature of Nigeria’s capital market greatly limit its potential to promote

economic growth and development in Nigeria.

2.2 Capital Markets and Economic Growth: Conceptual Framework

The nexus between capital markets and economic growth is often analysed using Efficient Market Hypothesis

(EMH) developed by Fama in 1965. According to EMH, financial markets are efficient or prices of traded assets

reflect all known information and are therefore, unbiased because they represent the collective beliefs of all

investors about future prospects. This implies that no amount of data mining can predict future prices and that an

analysis of past or current data cannot identify undervalued stocks. Applying this to the securities markets, the

EMH implies that no trading mechanism can consistently beat the market. Hence, for a given level of risk,

speculators cannot earn supernormal returns. Similarly, no betting system can consistently earn super normal

returns. Fama (1965) however, has argued that there are three degrees or forms of markets through which the EMH

should be examined. The first is the weak form, which simply states that all past information is reflected in current

prices. The second is the semi-strong form which states that all publicly available information is incorporated in

prices, while the third, the strong form, an extension of the first two, states that all information, including insider

information, is included in share prices. In practice however, market efficiency is categorized by the strength of

the efficiency that can be established with respect to a particular information set. Information sets can be

categorized into: past price and volume information; public information; and public and private information.

Previous tests of the EMH have relied on long-range dependence of equity returns. These tests show that

past information is useful in improving predictive accuracy. This assertion however, tends to invalidate the EMH

in most developing countries where equity prices tend to exhibit long memory or long range dependence, because

of the narrowness of their markets arising from immature regulatory and institutional arrangement (Nagayasu,

2003 and Nyong, 2003). It should be noted that where the market is highly and unreasonably speculative, this acts

as a disincentive for investors for fear of incurring financial losses, with a resultant detrimental effect on economic

growth of any country since private businesses cannot raise additional capital for expansion.

The Capital Asset Pricing Model (CAPM) was developed, independently, by Sharpe (1964), and Mossin

(1966). The model assumes, in the first instance, that investors use the logic of Markowitz in forming portfolios.

It further assumes that there is an asset (the risk-free asset) that has a certain return. With a risk-free asset, the

efficient frontier is no longer the best that investors can do. Under this model, investors choose portfolios along

this line (the capital market line), which shows combinations of the risk-free asset and the risky portfolio (M). In

order for markets to be in equilibrium (quantity supplied = quantity demanded), the portfolio (M) must be the

market portfolio of all risky assets. In essence, all investors combine the market portfolio and the risk-free asset,

and the only risk that investors are paid for bearing is the risk associated with the market portfolio.

The CAPM equation is thus stated as:

E(Rj) = Rf + βj [E(Rm) - Rf] ……………………………………………………………. (1)

Where: E(Rj) and E(Rm) are the expected returns to asset j and the market portfolio, respectively; Rf is

the risk free rate; and βj is the beta coefficient for asset j. βj measures the tendency of asset j to co-vary with the

market portfolio. It represents the part of the asset's risk that cannot be diversified away, and this is the risk that

investors are compensated for bearing. The CAPM equation says that the expected return of any risky asset is a

linear function of its tendency to co-vary with the market portfolio. So, if the CAPM is an accurate description of

the way assets are priced, this positive linear relation should be observed when average portfolio returns are

compared to portfolio betas. Further, when beta is included as an explanatory variable, no other variable should be

able to explain cross sectional differences in average returns; beta should be all that matters in a CAPM world.

The Exogenous Growth Model (EGM), also known as the Neo – classical Growth Model or Solow-Swan

growth model, was first devised by Nobel Prize-winning Economist, Robert Solow in 1957. The centrepiece of

the standard neoclassical growth model developed by Solow is an aggregate production function of the form:

Yt = F (Kt, Lt, At) ………………………………………………………………………. (2)

Where: Y is output, K is capital, L is labour and A is an index of technology or efficiency. Solow posits that F has

the usual neoclassical properties. In particular, it is characterized by constant returns to scale; decreasing returns

to each input; and a positive and constant elasticity of substitution. The fundamental dynamic equation of the

model relates the evolution of the capital stock to a constant rate of saving and a constant rate of depreciation.

Labour and the level of technology grow at exogenous exponential rates. This model assumes that



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countries use their resources efficiently and that there are diminishing returns to capital as labour increases. From

these two premises, the neo-classical model makes three important predictions. First, increasing capital relative to

labour creates economic growth, since people can be more productive given more capital. Second, poor countries

with less capital per person will grow faster because each investment in capital will produce a higher return than

rich countries with ample capital. Third, because of diminishing returns to capital, economies will eventually reach

a point at which no new increase in capital will create economic growth. This point is called a “steady state”. In

the absence of technological progress, growth in this model would eventually come to a halt. However, the

formulation of the model is chosen so as to allow increases in efficiency to offset the diminishing returns to capital.

The economy therefore, converges to a steady state in which output and capital per worker both grow at the

exogenous rate of technological progress. Accordingly, in the long run, economic growth is unaffected by changes

in the rate of saving or population growth. Changes in these parameters alter only the level of the long run growth

path, but not its slope.

2.3 Methodology

2.3.1 Research Design and Analytical Techniques Employed

This study is quantitative and explanatory in nature. Data analysis was carried out by running a regression of the

specified model using the OLS estimation method on the basis of it desirable properties and the relative simplicity

of its application. Unit root test was carried out to assess the stationarity of the time series data. Also, various test

statistics which include R2, Adjusted R2, Student t-test, F-Statistic, and Durbin Watson statistic were adopted in

assessing the explanatory power of the estimated regression model and the statistical significance of estimated

parameters. The Durbin Watson statistic was used to detect the presence or otherwise of autocorrelation in the

estimated model. In addition, trend analysis was carried out to determine recent patterns of movement and

structural composition of capital market key indices. The test of hypothesis was carried out at 5% (0.05) level of

significance.

The notations for the test statistics are highlighted below:

t = Student t- statistics

R2 = Co-efficient of determination.

F = Fisher’s test

S.E = Standard error

D-W = Durbin Watson statistic

The study used secondary data sourced mainly from the statistical bulletin, annual reports as well as quarterly

reports of the Central Bank of Nigeria (CBN).

2.3.2 Model Specification

The model specification employed in this study is based on the Neoclassical Growth Model (otherwise known as

the Growth Accounting Framework) which explains the sources of growth in an economy and is stated as:

Gr = f (A,L, K,)……………………………………………………………………………(3)

This means economic growth is a function of labour, capital, and technological progress. This model however, has

been enhanced to incorporate other economic and financial variables such as capital market development indices,

governments’ participation index, as well indices for the measurement of macroeconomic volatility (See; Collier

& Gunning, 1998; Demirguc-Kunt & Levine, 1996; Emenuga, 1998; and Osinubi (2001).

The multiple linear regression model for the study is thus stated as:

RGDPt = a0 + a1MCAPGRt + a2VLTRt + a3TRBILLSRt + a4INFt + a5EXRATESt + Ut ………….. (4)

Where:

RGDPt = Real Gross Domestic Product

MCAPGRt = Market Capitalization Growth Rates

VLTRt = Value of Transactions on the Nigerian Stock Exchange

TRBILLSRt = Treasury Bills Ratio

INFt = Inflation Rate

EXRATESt = Exchange Rates

a0 is a constant. a1, a2, a3, a4, and a5 are the parameters or the coefficients of the variables under consideration. t

denotes time. The a-priori expectations of the coefficients of the explanatory variables in the model are a0, a1, a2,

a3, a5, > 0, a4 < 0.

2.3.3 Evaluation Criteria

We evaluated the results of the basis of the following criteria: economic a priori criterion, statistical criterion and

econometric criterion.

2.3.3.1 Evaluation based on economic a-priori criterion

We carried out this test to check if the signs and magnitudes of the estimated parameters conform to what economic

theory postulates.



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2.3.3.2 Evaluation based on statistical criterion

The coefficient of determination (R2): This was used to determine the explanatory power of the estimated

regression model. It captures the proportion of the total variation in the dependent variable, Real GDP in this case,

that can be explained by the explanatory variables explicitly captured in the model.

The F-Test: The F-test was used to test whether the explanatory variables included in the model are significant or

not in determining the level of economic growth in Nigeria. The F-statistic was used to determine the joint

statistical significance of all the explanatory variables included in the model.

The T-Test: The t-test was used in testing the statistical significance of individual parameters of the regression

model. It was used to evaluate the statistical significance of each explanatory variable included in the model.

2.3.3.3 Evaluation based on econometric criterion

We tested for autocorrelation to determine whether the errors corresponding to different observations are

uncorrelated. We adopted the Durbin Watson statistic because of the absence of lagged dependent variables in the

specified regression model. Also, the White’s test of heteroscedasticity was carried out to ensure that the variance

of the error term is constant.

3. Empirical Results and Discussions

This section presents the data and data sources; results of analysis; and discussion and interpretation of results. On

the basis of empirical results obtained through econometric analysis of the economy, we assess the impact of

selected capital market indices, as well as some relevant macroeconomic aggregates, on economic growth in

Nigeria.

3.1 Data and Data Sources

The variables used in this study are annual data on Real Gross Domestic Product (RGDP), Market Capitalization

(MCAPGR), Value of Transactions on the Nigerian Stock Exchange (VLTR), Treasury Bills (TRBILLSR),

Inflation Rates (INF) and Exchange Rates (EXRATES). These data have been sourced from the Statistical Bulletin

and Annual Reports of the Central Bank of Nigeria (CBN) covering the period 1986 to 2014.

3.2 Data Analysis and Interpretation of Results

3.2.1 Unit Root Tests

In an attempt to overcome and address the phenomenon of spurious regression usually associated with

nonstationary time series data, the Augmented Dickey Fuller (ADF) unit root test was carried out to ascertain the

stationarity status of each individual time series data. Table 1 presents a summary of unit root tests carried out on

the variables used for the regression analysis.

Table 1: Unit Root Test Results

Variables ADF Statistic Order of Integration

RGDP -3.209422 I(1)

MCAPGR -4.088434 I(0)

VLTR -3.212219 I(0)

TRBILLSR -3.566740 I(0)

INF -3.053645 I(0)

EXR -3.638945 I(0)

Source: Authors’ Computation

As is evident from the Augmented Dickey Fuller (ADF) unit root test results shown in the Table 1 above,

the time series data for Real Gross Domestic Product (RGDP) is not stationary at level and only attains stationarity

after first differencing, implying that the time series data on Real Gross Domestic Product is integrated of order

one (1). The outcome of the unit root test regarding Real Gross Domestic Product substantiates the theoretical

assertion that most economic time series are usually not stationary at level, but they attain stationarity after first

differencing. The Augmented Dickey Fuller unit root test shows that the annual time series data on Market

Capitalization (MCAPGR), Value of Transactions (VLTR), Treasury Bills (TRBILLSR), Inflation Rates (INF) as

well as Exchange Rates (EXRATES) however, are all stationary at level, implying that the time series data are

integrated of order zero.



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Table 2: Summary of Regression Results

Variables Coefficients Standard Error T-Statistic P-Values

INTERCEPT 7.544962 6.545910 1.152622 0.2614

MCAPGR 0.988136 5.499594 0.179674 0.8591

VLTR 0.006383 0.004298 1.485084 0.1517

TRBILLS 1.758613 1.514743 1.160998 0.2581

INF -0.006011 0.153927 -0.039054 0.9692

EXRATES 0.113905 0.083429 1.365297 0.1860

R2 0.683140

Adjusted R2 0.611127

Durbin-Watson statistic 1.532857

F-statistic 9.486275 0.000062

Based on the results contained in Table 2 above, Equation 4 becomes

∆RGDP = 7.544962 + 0.988136MCAPGR + 0.006383VLTR + 1.758613TRBILLS - 0.006011INF +

0.113905EXRATES………………………………………………..(5)

Where :

∆ = first difference operator

3.2.2 Evaluation of Results

3.2.2.1 Evaluation based on economic a-priori criteria

From the regression results in Equation 5, the coefficients of Market Capitalization (MCAPGR), Value of

Transactions (VLTR), Treasury Bills (TRBILLSR), as well as Exchange Rates (EXR) are all positive while the

coefficient of Inflation Rates (INF) is negative. The signs of the coefficients of explanatory variables explicitly

captured in the regression model conform to the a-priori expectations as Market Capitalization (MCAPGR), Value

of Transactions (VLTR), Treasury Bills (TRBILLSR), and Exchange Rates (EXR) are all expected to influence

economic growth positively while an inverse relationship is expected between economic growth and the rate of

inflation.

The estimated regression results in Equation 5 show that, a unit change in the growth rates of market

capitalization (MCAPGR) will result in an average change in Real Gross Domestic Product (RGDP) by 0.988136

units, holding all other explanatory variables in the regression model constant. The coefficient of Value of

Transactions implies that a unit change in Value of Transactions will result in an average change in Real Gross

Domestic Product (RGDP) by 0.006383 units, holding all other explanatory variables in the regression model

constant. The coefficient of Treasury Bills (TRBILLSR) implies that a unit change in Treasury Bills will result in

an average change in Real Gross Domestic Product (RGDP) by 1.758613 units, holding all other explanatory

variables in the regression model constant. Also, from the estimated regression equation in Equation 5, the

coefficient of Exchange Rates (EXRATES) implies that a unit change in Exchange Rates will result in an average

change in Real Gross Domestic Product (RGDP) by 0.113905 units, holding all other explanatory variables in the

regression model constant. The coefficient of Inflation Rates (INF) on the other hand implies that a unit change in

Inflation will result in an average change in Real Gross Domestic Product (RGDP) by -0.006011 units, holding all

other explanatory variables in the regression model constant.

3.2.2.2 Evaluation based on statistical criteria

The Adjusted R2 from the estimated regression model shows that about 61% (0.611127) of the changes in Real

Gross Domestic Product (RGDP) can be explained by the explanatory variables explicitly captured by the

regression model, implying that the regression model has a good fit.

Based on the students’ T-test for each of the parameters in the model, the coefficients of the Coefficients

of Market Capitalization (MCAPGR), Value of Transactions (VLTR), Treasury Bills (TRBILLSR), Exchange

Rates (EXR), as well as Inflation Rates (INF) are not statistically significant at 5% level of significance. This

implies that the Coefficients of Market Capitalization (MCAPGR), Value of Transactions (VLTR), Treasury Bills

(TRBILLSR), Exchange Rates (EXR), as well as Inflation Rates (INF) did not have significant impact on Real

Gross Domestic Product (RGDP) in Nigeria during the period under review. This outcome is consistent with the

findings of Samwanyi and Kasimu (2013). This phenomenon has been attributed to the fact that the Nigerian

capital market is still relatively underdeveloped for individual capital market indices to exert significant impact on

the growth of the economy.

The F-Statistic (ANOVA) which is used to test the equality of these estimates and to establish the overall

significance of the regression at the 5% significance level, shows that the equation or model employed is

statistically significant with P- value of 0.000062 and F = 9.486275. This implies that the relationship between

Real Gross Domestic Product (RGDP) and all the explanatory variables explicitly captured in the regression model

(MCAPGR, VLTR, TRBILLSR, INF, and EXRATES) is statistically significant at 5% level of significance. It is

thus instructive to note that even though the individual coefficients of explanatory variables are not statistically



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significant, they are jointly statistically significant. That is, during the period 1986 – 2014, all the capital market

indices jointly exerted significant effect on economic growth in Nigeria. But taken individually, the market indices

did not exert any significant impact on economic growth.

3.2.2.3 Evaluation based on econometric criteria

The estimated Durbin Watson statistic (D-W = 1.532857) shows that the regression model is devoid of first order

serial correlation. Also, the White’s test of heteroscedasticity was carried out to ensure that the variance of the

error term is constant. Since the calculated value of the test statistic is 10.04444, which is lower than the 5% critical

value for of 23.6848 (P-value = 0.436603), the null hypothesis is accepted; the disturbances of the regression

model are homoscedastic.

3.3 Hypothesis Testing

The hypotheses formulated for the purpose of this study were stated thus:

Ho: Stock market development has no significant impact on economic growth in Nigeria.

H1: Stock market development has significant impact on economic growth in Nigeria.

In testing the first hypothesis relating to capital market development and economic growth in Nigeria, the

adjusted R2 shows that only about 61% of the changes in Real Gross Domestic Product (RGDP) is explained by

all the variables explicitly captured in the regression model. Also, the estimated F-statistic reveals that all the

explanatory variables explicitly captured in the regression model are jointly statistically significant at 5% level of

significance. Hence, the null hypothesis that stock market development has no significant impact on economic

growth in Nigeria is rejected in favour of the alternative hypothesis that stock market development has a significant

impact on economic growth in Nigeria. The findings of this study are similar to findings of earlier studies on the

relationship between capital market development and economic growth in Nigeria.

Although not explicitly examined in this study, economic theory posits that there exists a bi-directional

causality relationship between capital market development and economic growth since some of capital market

development variables depend, crucially, on the rate of economic growth. In a comparative study of Nigeria and

South Africa, Ndako (2010) examined the long-run causality between financial development and economic growth

using the Multivariate Vector Autoregressive and Vector Error Correction models as well as Generalized impulse

response function and variance decomposition and concluded that there is bi-directional causality between

financial development and economic growth. There is thus a need to maintain a stable macroeconomic

environment to promote growth by inter alia, reducing the negative effects of inflation. The findings of Ndako

(2010) however, are at variance with those of Aye (2013) who applied Vector Autocorrelation and Vector Error

Correlation models and using annual time series data covering the period 1960 to 2001and established that there

exists only a unidirectional causal relationship between financial development and poverty via growth in the short

run and not the long-run.

4. Conclusions and Policy Recommendations

By using data for the 1986 – 2014 period, it is established that capital market development as measured by market

capitalization growth rates, value of transactions, treasury bills ratio and inflation rates and exchange rates, jointly,

have a significant effect on economic growth in Nigeria. However, the individual capital market indices do not

have significant impact on economic growth in Nigeria. This finding that is consistent with the those of Samwanyi

and Kasimu (2013), has been attributed to the fact that the Nigerian capital market is still relatively underdeveloped

for individual capital market indices to exert significant impact on the growth of the economy. The capital market

in Nigeria can nonetheless make a significant contribution to the achievement of the SDGs and Agenda 2063 via

economic growth, both a target in itself but also through inter alia, resource mobilization for increased investments;

job creation; and reduction of poverty and inequalities.

Based on the foregoing, at the macro level, there is need to put in place the requisite policy measures and

regulatory frameworks to ensure effective and sustainable development of the Nigerian capital market with a view

to optimizing its contribution towards economic growth. Similarly, an enabling environment should be created to

facilitate further increase in domestic and foreign investments in order to further strengthen capital market indices

and enhance their singular and collective impact on economic growth. On the basis of the findings of this study,

we recommend the following specific policy measures:

• Relevant regulatory and administrative authorities should ensure that the Nigerian capital market operates

in an efficient and transparent manner in order enhance investor confidence. This could be achieved, for

instance, through the introduction of state-of-the-art technology platforms that enable automated trading

and settlement practices; and electronic fund clearance to eliminate the current practice of physical

transfer of shares. There is also need to address and protect new entrants in the stock market from reported

cases of sharp practices, that is those which as dishonest but not entirely illegal, by some dominant players

in the market.



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• Increase the diversity and complexity of investment instruments, available on the Nigerian stock market

to possibly include derivatives, convertibles, futures, swaps, options in the market in tandem with

developments in other stock markets and demands and expectations regarding resource mobilization of a

wide array of investors. In the specific context of the SDGs, the country should consider issuing a Green

bond, a typical fixed income instrument issued for the sole purpose of investing the proceeds in projects

and programmes with clearly defined environmental benefits.

• Maintain a stable macroeconomic environment to promote growth and reduce the negative impact of

inflation of economic growth. A stable macroeconomic environment is also likely to have a positive

impact on the number of listed companies by encouraging foreign multinational companies or their

subsidiaries, as well as local companies, to be listed on the Nigerian Stock Exchange. This would, ceteris

paribus, positively influence market capitalization which has been shown to have a positive causal effect

on economic growth.

• Authorities should review the listing requirements, especially the first tier market and ensure tax

rationalization in the capital market to encourage quotation and public interest in shareholdings. For new

issues, there is need to increase the minimum equity capital requirements for companies other than banks,

insurance companies and other financial institutions; encourage merger and consolidation; discriminatory

income tax in favour of public quoted companies; and aggressive enlightenment programme to increase

awareness of the benefits of investing in the stock market and seeking quotation at the stock exchange.

• Ensure that the channels of capital market induced growth are built around effective systems and that the

policy and institutional frameworks promote proper regulations, systematic check and appropriate

interventions to ensure capital market led economic growth and subsequently, the attainment of the SDGs

in Nigeria, via taxation and other means of domestic resource mobilization; and prudent and targeted

resource allocation and programme implementation.

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Mr. Oluwatosin Olushola is currently a Lecturer in the Department of Economics at Veritas University Abuja,

Nigeria. Prior to joining Veritas University Abuja, he has served as Business Development Executive in Diamond

Bank Plc, as well as Aiico Insurance Plc. He is a member of the Nigerian Economics Society (NES) and the

Nigerian Institute of management (NIM). He is also currently serving as the Country Representative of The

Creative Concept for Youth Development (TCCFYD), a youth based Non Governmental Organization (NGO)

registered with the Nigerian Corporate Affairs Commission. He is married to Theresa Olushola and their marriage

is blessed with a son (Oluwaseun Olushola). Mr. Olushola holds a Master of Science (M.Sc.) degree in Economics

from University of Abuja, Nigeria; Bachelor of Science (Honours) in Economics from University of Abuja,

Nigeria. He is also currently a Doctorate student of Economics, specializing in Quantitative Analysis and Human

Resource Economics at the University of Abuja.

Mr Ojijo Odhiambo is the UNDP’s Economic Advisor and Head of Strategy and Policy Unit in Nigeria. Mr

Odhiambo started his professional career in 1991 in Kenya when he joined the Kenya Energy and Environment

Organisation as a Consulting Economist Analyst. Between 1992 and 1997, he served in the same organisation in

various capacities including Manager, Planning Officer and Senior Resource Economist during which time he also

had a short stint serving as the Trade, Environment and Development Advisor at the Environment and Resource

Development Centre in Brussels, Belgium. In 1997 he co-founded the Nairobi-based Resource Management and

Policy Analysis Institute where he served as Co- Director until 2000 when he joined UNDP Kenya Office as the

Advisor for the Good Governance and Poverty Eradication Programme, a position he held until 2004 when he was

appointed the MDGs Advisor in the same office. He spent 2008 on secondment at the UNICEF Kenya Office

where he was the Lead Consultant for the Situation Analysis of Women and Children in Kenya before being

appointed, in 2009, to the position of Economic Advisor in Namibia. Apart from UNDP and UNICEF, Mr

Odhiambo has worked for other UN Agencies such as UNITAR and UNEP where he has served, since 1995, at

various times as Consultant, Special Advisor, Member of various Technical Advisory Groups and currently, as

member of core group of contributors to the development and reviewer of the new UNEP Guidelines for

Conducting Integrated Environmental Assessments. He holds a Master of Science degree in Agricultural

Economics and Bachelor of Science degree in Agriculture (First Class Honours) from the University of Nairobi,

Kenya.

Mr. Pa Lamin Beyai currently serves as UNDP Country Director in the Federal Republic of Nigeria. Prior to this,

he served as Economic Advisor & Team Leader Inclusive Growth Cluster at the UNDP Country Office, Ghana

from 2009-2013. Pa Lamin began his UN career in The Gambia, his home country in 1999, where he worked as

Health Economist with the World Health Organization (WHO) from (1999-2006). He served as Financial

Sustainability at WHO Inter-Country Support Team for Eastern and Southern Africa (WHO/IST-ESA) in

Zimbabwe; supporting 18 countries in Eastern and Southern Africa in immunization programme planning,

implementation, monitoring and evaluation, financial sustainability. He was also the focal point for regional

vaccine procurement. Before joining UN, Pa Lamin held various positions of increasing responsibility at The

Gambia Public Transport Corporation (GPTC)/GOPA (KFW) project from 1994-1999; including as Corporate

Management Services Officer (Trainee Manager), (November 1994-June 1995), Manager Corporate Management

Services (July 1995-Septmeber 1997), and Senior Manager Administration & Human Resources (October 1997-

March 1999). Pa Lamin holds a PhD (Economics) with focus on Health Economics, from the London School of

Hygiene & Tropical Medicine, University of London, United Kingdom; a Master of Business Administration

(MBA) from University of Newcastle Upon Tyne, United Kingdom; Bachelors of Science (Honours) in Economics

from Fourah Bay College, University of Sierra Leone; Sierra Leone, and a Postgraduate Diploma from Curtin

University of Technology, Perth, Western Australia.



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An Analysis of the Relationship Between Leadership Styles and Community Development in Selected Counties of the Alabama

Black Belt

David Nii O. Tackie1* Bridget J. Perry1 Henry J. Findlay2 Prosper K. Doamekpor1

Gwendolyn J. Johnson1 George X. Hunter1 LaTanya Hunt-Haralson1 Lawrence Haygood, Jr.1 1.College of Agriculture, Environment and Nutrition Sciences, Tuskegee University, Tuskegee, Alabama,

36088, USA 2.School of Education, Tuskegee University, Tuskegee, Alabama, 36088, USA

* E-mail of the corresponding author: [email protected]

Abstract Leadership styles are surmised to influence community development. The study, therefore, assessed the relationship between leadership styles and community development in selected Black Belt Counties of Alabama. Data were collected from a purposive sample of 38 locally elected officials, and were analyzed using descriptive statistics and multiple regression analysis. The most dominant leadership style selected was participating; followed by telling and selling, with identical ratings; delegating; autocratic, and democratic. The most preferred economic indicators were improving the physical infrastructure and constructing a 24-hour health facility. Additionally, participants indicated that constructing or improving of an industrial park; locating a manufacturing company, and locating a tier-1 automobile supplier are important facets of community development. Furthermore, the more preferred educational factor was providing after school programs, and the more preferred social factor was providing recreational facilities. The regression results revealed that of the economic indicators, democratic leadership style had the most relative importance; of the educational indicators, telling leadership style had the most relative importance, and of the social indicators, delegating leadership style had the most relative importance. For the overall community development indicator, democratic leadership style had the most relative importance. Keywords: Leadership Styles, Leadership, Community Development, Black Belt 1. Introduction Communities need quality leadership to bring about quality communities. That said, leadership may be variously defined; however, most of the definitions appear to suggest “influence.” For example, Yukl (1981) defined leadership as a process whereby one person intentionally exerts influence over other people to structure the activities and relationships in a group or organization. Hersey & Blanchard (1993, p. 94) described leadership as the “process of influencing the activities of an individual or group in efforts toward goal achievements in a given situation.” Yet, another definition of leadership provided by Brennan, Moon, & Pracht (2015) is the ability to mobilize people towards a shared vision, and encouraging their contributions to the process of achieving the vision. They explained that the type of leadership behavior a leader uses depends on the nature of the organization.

Leadership is related to leadership style. McCrimmon (2011) emphasized that leadership styles refer to how leaders relate to subordinates, and how leaders manage subordinates and make decisions. Lester (1975, p. 5) came up with three general leadership styles, namely, autocratic, democratic, and free-rein. In autocratic leadership, the leader “determines all policies, activities, and goals of the organization.” In democratic leadership, the leader provides a “shared leadership that promotes a feeling of satisfaction and achievement as the group makes progress on tasks.” In free-rein leadership, the leader gives “minimum guidance” to followers. Additionally, Lester stated that the democratic leadership style appear to have the potential to realize maximum results. Blanken (2013) alluded to eight leadership styles; specifically, charismatic; innovative; command and control; laissez-fair; pace setter; servant; situational, and transformational. Blanken argued that no leader has one leadership style, and therefore, has to use a combination of leadership styles in order to engage members of an organization to meet common goals. Sharpe (2015) also discussed five types of leadership styles that a leader may use. The first is the cavalier who is pleasure-seeking; the second is the martyr who works beyond reasonable expectations; the third is the abdicator who is a leader in title only; the fourth is the controller who tries to use power to frighten his or her followers into action, and the fifth is the activator who tries to involve others when handling a group problem or situation. The author stressed that the style chosen is situation dependent. Therefore, the leader must analyze the situation to choose the most appropriate style, in order to enhance the group’s or organization’s success.

Furthermore, it is argued that leadership affects leadership styles, and leadership styles affect community development. Community development, especially economic, educational, and social issues, as it



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relates to leadership is a concern in the Black Belt counties of Alabama. Winemiller (2009) described characteristics of the Alabama Black Belt as high rates of poverty, low taxes on property, high rates of unemployment, low-achieving schools, high rates of out-migration, high levels of single-parent homes, high levels of teen pregnancies, limited access to health-care services, and largely inhabited by African American populations. Therefore, this study focuses on the Alabama Black Belt because development in this region has generally been slow. Also, a lack of effective leadership threatens community development causing concern for sustainability and growth. Nelson et al. (2012) maintained that rural areas, like the Alabama Black Belt, usually have fewer resources to respond to development proposals and growth pressures than urban and suburban areas. Therefore, these rural communities must find strategies and polices that complement their available resources. Correspondingly, Cavaye (2001) explained that the vitality of a community depends on its ability to maintain adequate infrastructure, have access to services, enhance business and economic opportunities, and establish policies to generate expected outcomes.

Based on the foregoing arguments, there is a need to closely examine issues of community development and its relationship to leadership in the Alabama Black Belt Counties. The purpose of the study, therefore, was to analyze the relationship between leadership styles and community development in selected counties of the Alabama Black Belt. The specific objectives were to (1) examine situational leadership, (2) examine economic, educational, and social attributes of community progress, and (3) examine the relative impact or importance of leadership styles to community development. 2. Literature Review Leadership styles determine how leaders will behave. Also, the economic, educational, and social dimensions of community development depend to a large extent on the quality of leadership. This section outlines and discusses selected literature on leadership styles as well as economic, educational, and social issues related to community development. 2.1 Leadership Styles Hershey and Blanchard (1993) discussed the situational leadership model, originally developed by Hershey and Blanchard, which Hershey modified in 1985. Situational leadership is based on direction (task behavior) a leader provides; the level of emotional support (relationship behavior) a leader provides, and the level of readiness that the followers show when carrying out a task or function. In the model, the authors identified four leadership styles: telling, selling, participating, and delegating. They explained that telling leadership style involves high task and low relationship; selling leadership style involves high task and high relationship; participating leadership style involves high relationship and low task, and delegating leadership style involves low relationship and low task. They emphasized that each style is appropriate and effective; it is situation dependent.

Miller & Miller (2008) analyzed leadership styles for success in collaborative work. They argued that collaboration is a key organizational mechanism for advancing a community’s or organization’s mission. The authors indicated six principles of collaborative leadership, which included inspiring commitment and action, leading as peer problem solver, building broad-based involvement, sustaining hope and participation, practicing servant leadership, and viewing leadership as a process. They also discussed six different styles that a community or organization can practice while collaborating. These styles included contingency leadership, transactional leadership, traditional leadership, charismatic leadership, transformational leadership, and servant leadership.

Pasmore (2014) addressed the development of a leadership strategy as an ingredient for organizational success. He posited five factors that should be considered when developing a leadership strategy for organizational success. The first is identify the “quantity” of leaders needed (number, level, location, function, reporting relationships). The second is to identify the qualities desired in selection process (demographics, diversity, background, experience level). The third involves indicating the skills and behavior that are needed to implement the business strategy and create the desired culture (skills, competencies, knowledge base). The fourth encompasses the collective leadership capabilities of leaders acting together in groups and across boundaries to implement strategies, solve problems, respond to threats, adapt to change, support innovation, etc. The fifth is the desired leadership culture, including the leadership practices in use (collaboration across boundaries, engagement of employees, accepting responsibility for outcomes, creating opportunities for others to lead).

Nanjundeswaraswamy & Swamy (2014) discussed different types of leadership styles. They argued that leadership style has an effect on quality of work life and organizational performance. The authors specifically mentioned two types of leadership styles; transformational and transactional. They explained that transformational leadership style focuses on the development of followers as well as their needs. However, transactional leadership style focuses on exchange of rewards and targets between employees and management. The authors further described managers with the transformational leadership style as those who concentrate on



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the growth and development of value system of employees; whereas, managers with the transactional leadership style motivate through incentives.

Okoji (2014) assessed the influence of leadership styles on community development programs implemented in rural communities. He found that community leaders who adopted democratic styles usually foster open communication among the followers in the implementation of community development programs. In addition, followers enjoyed freedom of operation under a democratic leader, and such leaders usually encouraged team work. He also reported that democratic leaders place more emphasis on rewards of the followers in community development program implementation. However, there was no effective communication between autocratic leaders and their followers. The autocratic leaders were, generally, very rigid in their views about the implementation of community development programs. Despite, these findings, both democratic and autocratic leadership styles had positive and significant effects on the implementation of community development programs. The effect was greater though for the democratic leadership style than the autocratic leadership style.

2.2 Economic Issues and Community Development Baharanyi, Zabawa, & Boateng (2000) discussed ending the legacy of poverty in the rural south. They explained that the condition of the Southern Black Belt had historical and socioeconomic roots. They argued that the region was one of the most underdeveloped in the U.S., based on its high levels of poverty, low average income, few employment opportunities, high levels of unemployment, and high proportion of unskilled residents. The authors made a case that success in rural or community development requires the integration of several functional parts, and contingent on strategies that are knowledge-based. Furthermore, the authors argued that social scientists can work with various community groups to enhance community development. However, they stressed that based on their experiences, local capacity to do community development is quite weak; leadership for governance and local citizen participation is usually low, and local organizations that assist in providing help for community development are also weak to make significant impact. They stressed a need to strengthen capacity of local institutions or organizations to positively enhance community development.

Rainey & McNamara (2002) investigated tax incentives as an effective development strategy for rural communities. The authors stressed that taxes, along with many other factors, can affect the location of industrial activity. They mentioned that a large portion of the growth in rural areas happen in areas that are close to metropolitan areas. They contended, therefore, that tax policy can be a factor in whether a potential firm chooses a community on one side of a metropolis relative to another. Consequently, a reduction of any kind of taxes in the latter communities (i.e., in communities usually not chosen) will decrease resources and lessen the long-run competitiveness and ability to grow.

Huling (2002) examined building a prison economy in rural America. He explained that rural communities have suffered from a shift in the economy’s structure and economic down turns such as declines in farming, mining, timber-work, and manufacturing. He further indicated that these issues led to the use of prisons as source of income and uplift for many struggling rural communities. The latter phenomenon has already become a major factor driving criminal justice policy toward the mass incarceration of the urban poor. The author found that some incentives offered for prison development in rural or small towns include financial assistance and concessions, such as donated land, upgraded sewer and water systems, and housing subsidies.

King, Mauer, & Huling (2003) assessed big prisons, small town prison economics in rural America. The findings indicated that depending on prisons as a means of economic development is not an efficient long-term growth plan. The authors reported that locating prisons in a geographical area did not noticeably decrease unemployment or raise income per capita. They stated that many prison-county economies usually exclude themselves from other options of sustainable development once these economies become a “prison town”, and do not further effectively discuss other forms of economic development.

Zekeri (2004) conducted a study on the causes of enduring poverty in Alabama’s Black Belt. The author reported nine underlining causes of poverty. These include race (high concentration of African Americans); family structure (high concentration of female-headed households and single parents); lack of jobs and income; business closings; age (high concentration of children and the elderly); lack of human capital endowment; social cost of space (physical isolation); globalization (dependency on outside profit-seeking firms), and poor public goods and services. The author suggested that attention should be placed on the needs of the people as well as the opportunity to build their own future by making decisions about their communities.

Nelson et al. (2012) evaluated essential smart growth fixes for rural planning, zoning, and development codes. They discussed a growth policy that small towns and rural communities can implement. The authors also suggested ten strategies that will help in ensuring that communities develop fiscally, environmentally, and socially. The ten strategies included the following: determine areas for growth and for preservation; incorporate fiscal impact analysis in development reviews; reform rural planned unit developments; use wastewater infrastructure practices that meet development goals; right-size rural roads; encourage appropriate densities on



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the periphery; use cluster development to transition from town to countryside; create annexation policies and development standards that preserve rural character; protect agricultural and sensitive natural areas, and plan and encourage rural commercial development.

2.3 Educational Issues and Community Development Afterschool Alliance (2007) examined how afterschool programs are helping kids in rural America succeed. The Alliance found that in regions where opportunities and resources are limited, afterschool programs are often times the only source of supplemental enrichment in literacy, nutrition education, technology, and preparation for college entrance exams. The study indicated that collaboration, among local partners and businesses as well as families and residents in the establishment of new or updated afterschool programs, is essential to improving the quality of life for youth in rural communities. Some of the improvements to quality of life include reduction in at-risk behaviors; removal of transportation barriers; enhancement of academic potential, and promotion of literacy skills and healthy lifestyles.

Letiecq, Bailey, & Keller (2007) evaluated rural afterschool programs that assist at-risk youth and their families. They found that afterschool programs in small rural communities had an effect on youth and their families. Programs designed to have a nurturing adult teacher aspect, and enhanced life skills such as decision making, conflict resolution strategies, positive peer relationships, and social interactions had positive outcomes. The authors also reported that having a safe facility for afterschool programs lessened a youth’s risk to engage in antisocial behaviors, and motivated youth to take advantage of opportunities to complete homework in order to interact with peers during leisure time.

Collins, Bronte-Tinkew, & Logan (2008) analyzed strategies for improving out-of-school programs in rural communities. They found that rural out-of-school programs faced obstacles, and these obstacles included serving at-risk populations; geographic isolation contributing to poor access to transportation; limited funding, and few highly trained staff members. They suggested five strategies for obtaining resources for rural out-of-school programs, namely, considering building coalitions to help with transportation; identifying possible funding sources; increasing the number of trained staff members using existing volunteer organizations to recruit staff, and maximizing resources.

Lindahl (2011) assessed the state of education in Alabama’s K-12 rural public schools. The findings showed that students in rural schools performed below their peers in both reading and math, except for math performance on the 11th grade Alabama High School Graduation Examination, where they performed the same as their peers. Lindahl also indicated that Alabama’s rural districts service a lower percentage of minority students than its non-rural districts; however, the rural districts’ test scores were behind those of the non-rural districts. An additional finding was that rural districts spent a higher percentage of their budgets on transportation and that rural districts were smaller than non-rural districts.

Hightower et al. (2011) evaluated improving student learning by supporting quality teaching. They found that youth who participated in high-quality early-childhood education programs compared to those who did not, tend to have higher grades and are more likely to earn a high school diploma. They also reported that these youth are less likely to engage in criminal activities, and have a stronger ability to focus and participate in school work. The authors concluded that training and strategies should be implemented to help administration and teachers become more effective leaders in assisting troubled youth. Furthermore, they indicated characteristics such as teacher coursework, degree attainment, and certifications have a big impact on quality education.

2.4 Social Issues and Community Development Brennan, Barnett, & Baugh (2007) analyzed youth involvement in community development related to

implications and possibilities for Extension activities. They stressed that when older youth become more active in their communities, it influences younger ones to do the same, and it is a way to enhance social and civic skill development. They argued that this same influence is needed from Extension and community development professionals to motivate youth of all ages to become involved in their communities, and encourage the youth to believe that they can make a difference through their participation in community building efforts and projects on any level.

Orrell & Ouellette (2008) evaluated effective summer youth employment programs. The authors argued that greater accountability must be taken by the community and administration in planning, implementing, reporting, and evaluating opportunities and programs during the summer for the youth. They emphasized that the purpose of most summer youth employment programs is to introduce youth to the labor market in order to gain a better understanding of attendance, punctuality, communication, listening to instructions and criticism, solving problems, and being proactive. The authors found that most summer programs reinforce key academic skills that are relevant in everyday life.

Witt & Caldwell (2010) addressed the rationale for recreation services for youth. They maintained that the capacities of youth should be developed with adult involvement and guidance. They argued that parks and



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recreation departments are primarily useful in providing support, opportunities, programs, and services to facilitate the growth of adolescents into fully capable adults. The authors also argued that participation in the programs that parks and recreation departments offer is related to autonomy and identity development, positive social relationships, learning conflict resolution, academic success, mental health, and civic engagement.

Lerner & Lerner (2011) assessed positive development for youth. The authors reported that youth that participated in afterschool programs and activities, such as 4-H, were more likely to exhibit healthy behaviors and decision making (e.g., participate in physical activity, not use drugs, and not engage in delinquent behaviors). They also reported that participation in afterschool programs can influence youth to engage in science, engineering, and computer technology programs, which in turn influences future interests of study and career paths.

The Office of Juvenile Justice and Delinquency Prevention (2014) examined the National Juvenile Justice Action Plan in order to provide opportunities for youth in society or their communities. It made recommendations that state and local authorities could use to reduce juvenile delinquency. Some of the recommendations include the following: establishing and enhancing programs that bring together teachers, school administrators, social service providers, police, juvenile justice practitioners, and citizens; developing partnerships between parks and recreation agencies, libraries, public housing agencies, community centers, and gymnasiums to furnish safe sites for positive activities for youth; advocating volunteerism for mentoring and tutoring programs; increasing funding for youth employment and training programs, and reviewing allocation of funding to ensure equitable distribution of resources for delinquency prevention programs in schools.

2.5 Summation The above literature review has examined leadership styles, economic issues and community development, educational issues and community development, and social issues and community development. A common thread throughout the literature is that positive leadership styles, economic, educational, and social outcomes lead to community development. Hence, the need to examine the relative importance of leadership styles to community development in the Alabama Black Belt. 3. Methodology 3.1 Data Collection A questionnaire was developed and used to collect the data for the study. It consisted of five sections, namely, situational attributes, economic scenario, educational scenario, social scenario, and demographic attributes. The questionnaire was submitted to the Institutional Review Board of the Institution for review and approval, before being administered using purposive sampling. It was administered to elected city and county officials from selected Black Belt Counties of Alabama; specifically, city councillors, mayors, and county commissioners. The Black Belt was chosen because of its unique characteristics and challenges (already alluded to in the Introduction).

Four Black Belt Counties were selected and labeled as counties A, B, C, and D for confidentiality reasons. Counties A and D are situated in the east of the Black Belt; county B is located in the west of the Black Belt, and county C is located in the central part of the Black Belt. The data were collected through self-administration by subjects in the spring, summer, and fall of 2015 as well as spring of 2016. The assistance of county Extension agents was sought to facilitate the process. In all, 38 local officials were surveyed; this was considered adequate for the analysis. 3.2 Data Analysis The data were analyzed using descriptive statistics, and multiple regression analysis using SPSS 12.0 (Mapinfo Corporation, Troy, NY). The descriptive statistics included frequencies, percentages, and correlational analysis. The general model for the multiple regression analysis was stated as: Y= β0 + X1β1 + X2β2 + … + Xnβn+ ε (1) Where: Y = dependent variable Xi = independent variables βi = coefficients ε = error term

Four models were developed based on community development components and the overall community development indicator; particularly, economic, educational and social scenario indicators, and the composite of the three sets of indicators. The empirical model for model 1 was stated as: EC = β0 + βiLSi (2) Where:



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EC = unified economic indicator βi = coefficients LSi = leadership styles Equation 2 can be expanded to reflect a broad range of leadership styles thus: EC = β0 + β1TEL + β2SEL + β3PAR + β4DEL + β5AUT + β6DEM (3) Where: EC = a mean of eight economic attributes (support for manufacturing, retail, automotive supplier, landfill, jail, physical infrastructure, industrial park, and health facility) TEL = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely SEL = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely PAR = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely DEL = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely AUT = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely DEM = 1 if respondent indicated not likely; 2 if respondent indicated somewhat likely; 3 if respondent indicated likely; 4 if respondent indicated most likely βi = coefficients Identical models were set up for models 2 to 4, as follows: Model 2 ED = β0 + β1TEL + β2SEL + β3PAR + β4DEL + β5AUT + β6DEM (4) Where: ED = unified educational indicator, a mean of two educational attributes (support for line item in budget for improvement in academic performance, and after school classes or programs) Independent variables = as previously described Model 3 SO = β0 + β1TEL + β2SEL + β3PAR + β4DEL + β5AUT + β6DEM (5) Where: SO = unified social indicator, a mean of two social attributes (support for funds for recreational facilities, and summer classes or programs) Independent variables = as previously described Model 4 CD = β0 + β1TEL + β2SEL + β3PAR + β4DEL + β5AUT + β6DEM (6) Where: CD = composite community development indicator, a mean of twelve attributes (support for manufacturing, retail, automotive supplier, landfill, jail, physical infrastructure, industrial park, health facility, line item in budget for improvement in academic performance, after school classes or programs, funds for recreational facilities, and summer classes or programs) Independent variables = as previously described Specifically then, the empirical models hypothesize that the unified economic indicator (ED), unified educational indicator (ED), unified social indicator (SO), and the composite community development (CD) are influenced by telling leadership style (TEL), selling leadership style (SEL), participating leadership style (PAR), delegating leadership style (DEL), autocratic leadership style (AUT), and democratic leadership style (DEM). These leadership styles were selected based on the review of the literature and authors’ experiences. It was assumed that the directions of the influences or expected signs of the independent variables were not known a priori. The criterion that was used to evaluate the model was the beta coefficient, also known as the standardized beta. The beta coefficient measures the relative impact or importance of the independent variable to the dependent variable. This indicates that the larger the beta coefficient, the stronger the independent variable’s influence on the dependent variable (O’Sullivan & Rassell, 1995). 4. Results and Discussion The summary of the demographics revealed more male than female elected officials (74 vs. 26%); more Black elected officials than other races (76 vs. 24%); more older (over 44 years) than younger elected officials (86 vs. 11%); more highly educated (college graduates or higher) officials than otherwise (61 vs. 37%), and more officials with higher annual household incomes (equal to or greater than $50,000) than otherwise (69 vs. 20%). The average number of years the participants had been in office or held position was ten years.



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Table 1 shows responses on situational attributes (or leadership styles). Respondents were presented with a situational statement: “the members of your staff in your department or organization usually are able to take responsibility, but recently, they are not responding to your new standards of excellence.” When respondents were asked to what extent they were likely to Instruct, or direct staff members to improve the situation described above, 11% indicated somewhat likely; 40% indicated likely, and 46% indicated most likely. Also, when respondents were asked to what extent they were likely to persuade or convince staff members to improve the situation, again11% indicated somewhat likely; 40% indicated likely, and 47% indicated most likely. In addition, when respondents were asked to what extent they were likely to encourage staff members to “buy-in” to improve the situation, 11% stated somewhat likely; 42% stated likely, and 47% indicated most likely. When respondents were asked to what extent they were likely to relinquish some authority for flexibility and creativity to improve the situation, 18% stated somewhat likely; 42% stated likely, and 31% stated most likely. Furthermore, when respondents were asked to what extent they were likely to demand that what they wanted must be done because they said so to improve the situation, 16% answered somewhat likely; 40% answered likely, and 32% answered most likely. Lastly, when respondents were asked to what extent they were likely to defer to majority opinion to improve the situation, 24% answered somewhat likely; 53% answered likely, and 16% answered most likely. These six sets of questions and/or responses align, respectively, with telling, selling, participating, delegating, autocratic, and democratic leadership styles. Table 1. Situational Attribute (Leadership Style) Responses ______________________________________________________________________________________ Variable Frequency Percentage ______________________________________________________________________________________ Instruct, or Direct (Telling) Not Likely 1 2.6 Likely 4 10.5 Somewhat Likely 15 39.5 Most Likely 18 47.4 Persuade or Convince (Selling) Not Likely 1 2.6 Likely 4 10.5 Somewhat Likely 15 39.5 Most Likely 18 47.4 ______________________________________________________________________________________ Table 1. Continued ______________________________________________________________________________________ Variable Frequency Percentage ______________________________________________________________________________________ Buy-in (Participating) Not Likely 0 0.0 Likely 4 10.5 Somewhat Likely 16 42.1 Most Likely 18 47.4 Authority for Flexibility and Creativity (Delegating) Not Likely 0 7.9 Likely 3 18.4 Somewhat Likely 16 42.1 Most Likely 12 31.6 Demand Directives be Carried Out (Autocratic) Not Likely 5 13.2 Likely 6 15.8 Somewhat Likely 15 39.5 Most Likely 12 31.6 Defer to Majority Opinion (Democratic) Not Likely 3 7.9 Likely 9 23.7 Somewhat Likely 20 52.6 Most Likely 6 15.8 ______________________________________________________________________________________



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The most dominant leadership style (based on likely and most likely) is the participating leadership style, 90%; followed by the telling leadership style and selling leadership style, both were 87%; delegating leadership style, 74%; autocratic leadership style, 71%, and democratic leadership style, 68%. Since these were high ratings (greater than 68%), there appears to be multiple leadership styles at play among the respondents; a possible case of situational leadership (Hershey & Blanchard, 1993; Blanken 2013; Sharpe, 2015).

Table 2 presents responses for economic scenario attributes presented to participants. The participants were given a scenario: “the economic situation in your community has not improved much over the last 20 years. Companies would like to invest in your community, but they are demanding incentives in the form of tax breaks.” They were then asked a series of eight questions to ascertain their feedback. Regarding the extent to which they were likely to support a manufacturing company locating to the community, with significant tax incentives, 26% indicated likely, and 66% indicated most likely. Regarding the extent to which they were likely to support a retail business locating to the community, with significant tax incentives, 29% indicated likely, while 61% indicated most likely. Regarding the extent to which they were likely to support a tier-1 automobile supplier locating to the community, with significant tax incentives, 32% indicated likely, and 61% indicated most likely. Considering the extent to which they were likely to support a landfill locating to the community if it will benefit the community economically, 21% stated likely, and another 21% stated most likely.

Considering the extent to which they were likely to support the construction of a jail in the community if it will benefit the community economically, 42% stated likely, and 37% stated most likely. Pertaining to the extent to which they were likely to support development or improvement of physical infrastructure, 11% answered likely, while 87% answered most likely. Focusing on the extent to which they were likely to support the construction or improvement of an industrial park in the community, 11% answered likely, while 84% answered most likely. Focusing on the extent to which there were likely to support construction of a health facility in the community to provide a 24-hour urgency care, 11% responded likely, and 84% responded most likely.

The ratings, based on likely and most likely, for constructing a 24-hour health facility, improvement of physical infrastructure, and construction or improvement of an industrial park were very high, respectively, 97, 97, and 95%. Identical ratings were also high for locating a manufacturing company, tier-1 automobile supplier, and retail business, respectively, 92, 92, and 81%. The rating for construction of a jail was fairly high, 79%. However, the indicator with the lowest rating was locating a landfill in the community, 42%. This is not surprising given the bad publicity in locating landfills in communities, with the perceived environmental concerns. The high ratings for the first six indicators express the desire of locally elected officials to improve the economic situations in their communities. These findings are in agreement with Table 2. Economic Scenario Responses Variable Frequency Percentage ______________________________________________________________________________________ Manufacturing Not Likely 0 0.0 Likely 3 7.9 Somewhat Likely 10 26.3 Most Likely 25 65.8 Retail Not Likely 0 0.0 Likely 4 10.5 Somewhat Likely 11 28.9 Most Likely 23 60.5 Automobile Suppliers Not Likely 0 0.0 Likely 3 7.9 Somewhat Likely 12 31.6 Most Likely 23 60.5 Landfill Not Likely 17 44.7 Likely 5 13.2 Somewhat Likely 8 21.1 Most Likely 8 21.1 Jail Not Likely 4 10.5 Likely 4 10.5 Somewhat Likely 16 42.1 Most Likely 14 36.8



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Physical Infrastructure Not Likely 0 0.0 Likely 1 2.6 Somewhat Likely 4 10.5 Most Likely 33 86.8 Industrial Park Not Likely 0 0.0 Likely 2 5.3 Somewhat Likely 4 10.5 Most Likely 32 84.2 Health Facility Not Likely 0 0.0 Likely 1 2.6 Somewhat Likely 4 10.5 Most Likely 33 86.8 ______________________________________________________________________________________

Baharanyi et al. (2000), who make a case for improving economic conditions in the Alabama Black Belt. Also, they are in agreement with Rainey & McNamara (2002) who stressed that providing tax incentives could help spur growth in rural communities.

Table 3 reflects responses for educational and social scenario attributes presented to participants. Participants were given an educational scenario: “the dropout rate has been increasing and graduation rate has been declining steadily over the last 10 years. Many reasons, including, the quality of teachers, lack of recreational and after school programs, have been cited to be contributing to these statistics. In fact, many students are leaving the public schools for private schools because state laws provide funding for these students to attend the private schools; this action means less money for the public schools.” Regarding the extent to which they were likely to support including a line item in the budget for classes to improve academic performance in the school system, 32% answered likely, while 55% answered most likely. Considering the extent to which they were likely to support after school classes or activities in the school system to improve academic performance, 18% answered likely, and 76% answered most likely. Participants were then given a social scenario: “crime, drugs, break-ins, and other deviant behaviors are on the increase in the community.” Focusing on the extent to which they were likely to solicit funds to build and/or support recreational facilities for the youth in the community, 34% indicated likely and 66% indicated most likely. With respect to the extent to which they were likely to support summer classes or programs in the community, 32% indicated likely, while 66% indicated most likely. In the cases of educational and social scenarios, the ratings, based on likely and most likely, were very high, with educational scenario indicators, support for after school classes or activities and a line item budget to improve academic performance rated, respectively, 95 and 87%; the social scenario indicators, support for recreational facilities and summer classes or programs, were rated, respectively, 100 and 79%.

These results are consistent with Afterschool Alliance (2007) and Letiecq et al. (2007) who supported the use of after school programs to help improve the quality of life of youth in rural communities, including enrichment in literacy, preparation for college exams, and the reduction in antisocial behaviors. The study also seems to agree with Orrell & Ouellette (2008) and Witt & Coldwell (2010). Orrell & Ouellette emphasized that summer youth employment programs help youth to gain soft skills, such as punctuality, communication, solving problems, and being proactive, as well as reinforcing key academic skills. Witt & Caldwell argued that recreational programs are useful in providing support for the growth of adolescents into fully responsible adults. Hence, the propensity of the respondents to highly support afterschool, recreational, summer programs.

Table 4 shows the descriptive statistics for the variables used in the regression analysis. The minimum and maximum values for the leadership styles were, respectively, 1.000 and 4.000, and the mean values ranged from 2.763 to 3.368. Moreover, the minimum and maximum values for the community development components and the overall community development indicator were, respectively, 2.000 and 4.000, and the mean values ranged from 3.381 to 3.632. Table 5 shows the multiple regression results. The first result reflects the relationship between leadership styles and the unified economic scenario indicator. The beta coefficients were 0.015, -0.021, 0.038, -0.028, 0.051, and 0.205 for telling, selling, participating, delegating, autocratic, and democratic leadership styles, respectively. The democratic style had the most relative impact, followed by autocratic, delegating, participating, selling, and telling leadership styles. Democratic, autocratic, participating, and telling leadership styles had a positive impact on the unified economic indicator. This seems to suggest that the aforementioned styles enhance economic progress. However, delegating and selling leadership styles had a negative impact. This means that the latter leadership styles may depress economic progress.

The second result shows the relationship between leadership styles and the unified educational scenario indicator. The beta coefficients were 0.408, -0.037, 0.023, -0.091, -0.376, and 0.138 for telling, selling, participating, delegating, autocratic, and democratic leadership styles, respectively. In this case, the telling style



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had the most relative impact, followed by autocratic, democratic, delegating, selling, and participating leadership styles. Table 3. Educational and Social Scenario Responses ______________________________________________________________________________________ Variable Frequency Percentage ______________________________________________________________________________________ Line Item Not Likely 0 0.0 Likely 5 13.2 Somewhat Likely 12 31.6 Most Likely 21 55.3 After School Classes or Activities Not Likely 0 0.0 Likely 2 5.3 Somewhat Likely 7 18.4 Most Likely 29 76.3 Recreational Facilities Not Likely 0 0.0 Likely 0 0.0 Somewhat Likely 13 34.2 Most Likely 25 65.8 Summer Classes or Programs Not Likely 1 2.6 Likely 0 0.0 Somewhat Likely 12 31.6 Most Likely 25 65.8 ______________________________________________________________________________________

Telling, democratic, and participating leadership styles had a positive impact on the unified educational indicator; whereas, autocratic, delegating, and selling had a negative impact. This implies, for example, that telling leadership style enhances educational progress and autocratic leadership style depresses educational progress.

The third result presents the relationship between leadership styles and the unified social scenario indicator. The beta coefficients were -0.110, 0.133, 0.004, -0.208, -0.147, and 0.168 for telling, selling, participating, delegating, autocratic, and democratic leadership styles, respectively. Here, the delegating style had the most relative impact, followed by democratic, autocratic, selling, telling, and participating leadership styles. Democratic, selling, and participating leadership styles had a positive impact on the unified social indicator; and, delegating, autocratic, and telling had a negative impact. This implies, for example, that democratic and selling leadership styles enhance social progress, and delegating and autocratic leadership styles depress social progress. Table 4. Variable Definitions for Variables ______________________________________________________________________________________ Variable N Minimum Maximum Mean Standard Deviation ______________________________________________________________________________________ Telling 38 1.00 4.00 3.316 0.775 Selling 38 1.00 4.00 3.316 0.775 Participating 38 2.00 4.00 3.368 0.675 Delegating 38 1.00 4.00 2.974 0.915 Autocratic 38 1.00 4.00 2.895 1.008 Democratic 38 1.00 4.00 2.763 0.820 Economic 38 2.38 4.00 3.477 0.345 Educational 38 2.00 4.00 3.381 0.470 Social 38 2.00 4.00 3.566 0.560 CDevelop 38 2.75 4.00 3.632 0.516 ______________________________________________________________________________________

The fourth result reflects the relationship between leadership styles and the overall community development indicator. The beta coefficients were 0.011, -0.060, 0.091, -0.042, -0.109, and 0.233 for telling, selling, participating, delegating, autocratic, and democratic leadership styles, respectively. The leadership style with the most relative impact was the democratic style, followed by autocratic, participating, selling, delegating,



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and telling leadership styles. Democratic, participating, and telling leadership styles had a positive impact on the community development indicator. This seems to suggest that these styles enhance community development. However, autocratic, delegating, and selling leadership styles had a negative impact. This implies that the latter leadership styles depress community development. Table 5. Relationship between Leadership Styles and Economic, Educational, and Social Scenario Indicators as well as Overall Community Development Indicator ______________________________________________________________________________________ Variable Beta Weight ______________________________________________________________________________________ Leadership Styles/Economic Scenario Telling 0.015 Selling -0.021 Participating 0.038 Delegating -0.028 Autocratic 0.051 Democratic 0.205 Leadership Styles/Educational Scenario Telling 0.408 Selling -0.037 Participating 0.023 Delegating -0.091 Autocratic -0.376 Democratic 0.138 Leadership Styles/Social Scenario Telling -0.110 Selling 0.133 Participating 0.004 Delegating -0.208 Autocratic -0.147 Democratic 0.168 Leadership Styles/Community Development Telling 0.011 Selling -0.060 Participating 0.091 Delegating -0.042 Autocratic -0.109 Democratic 0.233 ______________________________________________________________________________________

Since the relative impacts of each leadership style appears four times (i.e., under each “situation”), a sign grid or table was developed for them (Table 6). It confirms that democratic, participating, and telling leadership styles enhance community development, and delegating, autocratic, and selling leadership styles depress community development. The results are in partial agreement with Okoji (2004) who found that both autocratic and democratic leadership styles had positive effects on community development programs. Of course, in this study also, democratic leadership style enhances community development.



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Table 6. Magnitude (and number) of Leadership Styles on Community Development ______________________________________________________________________________________ Variable Positive Negative (number of times) (number of times) ______________________________________________________________________________________ Telling 3 1 Selling 1 3 Participating 4 0 Delegating 0 4 Autocratic 1 3 Democratic 4 0 ______________________________________________________________________________________

The results also seem to suggest that when a leader defers to majority opinion (democratic leadership style), encourages followers to buy-in to the vision (participating leadership style), and instructs or directs followers (telling leadership style), community development will likely improve. On the flip side, when a leader relinquishes some authority for flexibility and creativity (delegating leadership style), demands followers carry out tasks by “hook or crook” (autocratic leadership style), and persuades or convinces followers to carry out tasks (selling leadership style), community development will likely be adversely affected. Also, the democratic leadership style had the most relative impact giving the confirmation to Lester’s (1975) assertion that this leadership style has the potential to realize maximum results. Furthermore, based on correlational analysis, there was an overall positive relationship (ρ = 0.11) between the combined leadership style and the combined community development indicator; however, this relationship was not significant (p = 0.523). This lends credence to the notion that, at least, one leadership style must be in operation in a particular situation (Hersey & Blanchard, 1993). 5. Conclusion The study assessed the relationship between leadership styles and community development in selected counties of the Alabama Black Belt. Specifically, it examined situational leadership attribute; examined economic, educational, and social attributes of community progress, and examined the relative impact or importance of leadership styles to community development. Data were collected from a purposive sample of 38 locally elected officials, and analyzed by descriptive statistics and regression analysis.

The results showed that the most dominant leadership style (by selection) was participating leadership style; followed by telling leadership style and selling leadership style, and delegating leadership style. The most preferred economic scenario indicator was improvement of physical infrastructure and constructing a 24-hour health facility; followed by construction or improvement of an industrial park; locating a manufacturing company and a tier-1 automobile supplier, and locating a retail business. Locating a landfill had the lowest rating. In addition, in considering the educational and social scenarios; ratings were all high. For the educational scenario ratings, support for after school classes or activities was higher compared to support for a line item budget to improve academic performance. For the social scenario, support for recreational facilities was slightly higher than support for summer classes or programs. The regression results showed that democratic, participating, and telling leadership styles had enhancing effects on community development; yet, the democratic leadership style had the greatest relative impact. On the contrary, delegating, autocratic, and selling leadership styles had depressing effects on community development.

Since the ratings were high (68% or higher) for leadership styles, there seem to be a mix of leadership styles at play; that is, the officials likely have more than one dominant leadership style. This has to be taken into consideration when designing leadership and/or community development programs. Also, since constructing a 24-hour health facility, improvement of physical infrastructure, construction or improvement of an industrial park, locating a manufacturing company, locating a tier-1 automobile supplier, and locating a retail business seem to be very highly rated, these should be considered in a community development plan in the Black Belt counties in question. Locating a landfill in the community rated very poorly. The latter seems to have lost its previous popularity with distressed communities, and should not be considered as a path of development for these counties. Furthermore, social and educational factors, specifically, recreational facilities, summer classes or programs, after-school classes and line-item to improve academic performance should be part of a community development program in theses counties. Also, elected leaders might want use more of democratic, participating, and telling leadership styles (in descending order) as these enhance community development, and shy away from delegating, autocratic, and selling leadership styles as these appear to depress community development. The paucity of empirical studies on leadership styles and community development makes contribution of this study worthwhile. At the very least, it shows that the democratic leadership style has the greatest impact on enhancing community development. Future studies are needed to validate the results of the study, and should include



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increasing the sample size. Acknowledgment This study was funded by USDA National Institute of Food and Agriculture, Capacity Building Grant, Number 2012-38821-20072. References Afterschool Alliance. (2007). After school programs: helping kids succeed in rural America. Retrieved May 8,

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