dynamic optimization in natural resources ...

ASERS

Volume I Issue 2(2) Winter 2010

J

Biannually Volume I Issue 2(2) Winter 2010 ISSN 2068 ² 7729

82

Winter 2010 Volume I,Journal of Environment Management and Tourism Issue 2(2) Editor in Chief

Cristina Barbu Spiru Haret University, Romania

Contents:

Editorial Advisory Board Huseyin Arasli Eastern Mediterranean University, North Cyprus

Madalina Constantinescu

Spiru Haret Romania

University,

Jean-Paul Gaertner Ecole de Management de Strasbourg, France

1

Shankar Gargh Editor in Chief of Advanced in Management, India

2

Andreea Marin-Pantelescu, Academy of Economic Studies Bucharest, Romania

Resources Management George E. Halkos and

George Papageorgiou University of Thessaly «92

Laura Ungureanu Spiru Haret University, Romania

Do ISO14001 EMS Companies in Malaysia Reward Employees for Environmental Initiatives? Harjeet Kaur HELP University College Malaysia «98 State Institutions and their Role in Harmonizing the Environment Legislation on the Basis of European Conventions Armand Krasniqi University of Pristine, Kosovo «108 Nature based Tourism, Seasonal Variation and its Impact on Employment and Income: Evidence from Meghalaya Utpal Kumar De and Amrita Devi North-Eastern Hill University «116

Hans-Jürgen Weißbach, University of Applied Sciences ± Frankfurt am Main, Germany

Piotr Misztal Technical University of Radom, Economic Department, Poland

3

Marco Novarese University of Piemonte Orientale, Italy

Rajesh K. Pillania Management Developement Institute, India

4

Rachel Price-Kreitz Ecole de Management de Strasbourg, France

Dan Selisteanu University of Craiova, Romania

ASERS Publishing

http://www.asers.eu/asers-publishing ISSN 2068 ± 7729

6

Dynamic Optimization in Natural

Nodal Lekishvili, Tibilisi State University, Georgia

How the Economic Crisis Affects the Environment? Cristina Barbu Spiru Haret 8QLYHUVLW\«

5

7

Informational Barriers to Energy Efficiency ² Combining Theory and European Policies Lars Morten Andersen University of Copenhagen, Denmark, College of Europe Bruges, Belgium Raimund Bleischwitz College of Europe Bruges, Belgium, Wuppertal Institute/Univestities of :XSSHUWDODQG.DVVHO*HUPDQ\« 132 Developing Indicators for Monitoring Tourism and Sustainability in Rameswaram, A Buffer Area in the Gulf of Mannar Marine Biosphere Reserve, India Jana Murali and Gopalsamy Poyyamoli Pondicherry University, India «155

8

Water and Energy in South Africa ² Managing Scarcity Petrus H. Potgieter Department of Decision Sciences, University of South Africa «166

9

Modelling of an Activated Sludge Wastewater Treatment Bioprocess Monica Roman University of Craiova, Romania «179

10

Impact of the Risk Managment and Quality In Tourism Trends Fatos Ukaj University in Prishtina, Pejë «187

83

Call for Papers Summer_Issue 2011 Volume I Issue 2(2) Winter 2010

Journal of Environmental Management and Tourism Journal of Environmental Management and Tourism is a young interdisciplinary research journal, aimed to publish articles and original research papers that should contribute to the development of both experimental and theoretical nature in the field of Environmental Management and Tourism Sciences. Journal will publish original research and seeks to cover a wide range of topics regarding environmental management and engineering, environmental management and health, environmental chemistry, environmental protection technologies (water, air, soil), pollution reduction at source and waste minimization, energy and environment, modelling, simulation and optimization for environmental protection;; environmental biotechnology, environmental education and sustainable development, environmental strategies and policies, etc. This topic may include the fields indicated above, but are not limited to these. Authors are encouraged to submit high quality, original works that discuss the latest developments in environmental management research and application with the certain scope to share experiences and research findings and to stimulate more ideas and useful insights regarding current best-practices and future directions in environmental management. All the papers will be first considered by the Editors for general relevance, originality and significance. If accepted for review, papers will then be subject to double blind peer review. Deadline for Submission: 15th May 2011 Expected Publication Date: 15th June 2011 web: www.asers.eu/journals/jemt/ E-mail: [email protected] To prepare your paper for submission, please see full author guidelines in the following file: JEMT_Full_Paper_Template.doc, then send it via email at [email protected].

84

Journal of Environment Management and Tourism

HOW THE ECONOMIC CRISIS AFFECTS THE ENVIRONMENT?

Cristina BARBU Spiru Haret University, Craiova, Romania [email protected]

Abstract 2YHU WKH ODVW WZHQW\ \HDUV 5RPDQLD¶V HFRQRP\ KDV JURZQ 0DQ\ ]RQHV KDYH UHGXFHG SRYHUW\ DQG LPSURYHG education. During the last two years, industrial production has been affected by the crisis. There are both immediate and long-term positive and negative environmental implications of the crisis. Some of researchers think that the decline in production will automatically lead to a lower level of pollution. On the contrary, other researchers think that the problem of pollution may become worse during the crisis period. In our country, environmental protection seems to have a lower priority but the sustainable development is no longer D³FKRLFH´. Keywords: economic crisis, environment, green economy JEL Classiffication: P28, Q52, Q56

1. Aims and scope of the paper The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and LQWR$SDUWRIWKHZRUOG¶VVFientists think that the crisis will move people to use less energy and help limit carbon emissions. They saw the crisis as a short-term and long-term opportunity for Europe. The global slowdown means people will have less money to buy. This translates into fewer products and goods being manufactured which means fewer natural resources used. In the short-term, as well as a reduction in consumption of resources and technologies that emit or discharge pollution can provide immediate relief to the environment. Also, the drop in exports provides an opportunity to use new energy technologies domestically rather than send them overseas. That way, local environmental conditions can be improved. In the long-term, mass-producing, energy-consuming industries have taken their rROORQWKHQDWLRQ¶VZDWHU supply and air quality. The regime can use the recent factory closings and enterprise to develop a cleaner, high- technology industrial sector. Both in the short and long-term, the government can use the increasing need and demand for clean technology to become a global leader in green technology and renewable energy investment. 2WKHUSDUWRIWKHZRUOG¶VVFLHQWLVWVDUJXHVWKDWZLWKWKHILQDQFLDOFULVLVWKHUHZLOOEHOHVVHFRQRPLFDFWLYLW\ around the globe within the next few years. This could mean people putting the economy ahead of the environment, although until very recently, the environment got center stage in world attention. The negative impact of the crisis on the environment is more obvious: the scientists fear that the momentum in the global environmental movement has been diverted amid the economic crisis. As attention is elsewhere, government policies will prioritize quick economic development and employment fixes. Also, there is the fear that approved policies will be shelved because of cost. $OWKRXJK WKH HIIHFW RI WKH UHJLPH¶V VWLPXOXV investment in major industries has yet to be measured, the scientists predict that heavy pollution, heavy energy consumption and weak regulatory oversight will likely occur. This would be disastrous and a step back for (XURSH¶VHQYLURQPHQWDOSURJUHVV Last, the strengthening of government intervention and the weakening of the market will give rise to further administrative problems with individual or factional interests trumping national ones. This includes local promotion of environmentally damaging enterprises that harm locals and national environmental goals. 7KLVSDSHUWULHVWRILQGRXWLIWKHHFRQRPLFFULVLVLVJRRGRUEDGIRU5RPDQLD¶VHQYLURQPHQW

2. The crisis in the world The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems (Shah 2009). On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues 85

Volume I Issue 2(2) Winter 2010 VXSSRUWLQJWKHFXUUHQWHFRQRPLFVPRGHOVZHUHQ¶WVRYRFDOLQIOXHQWLDODQGLQFRQVLGHUDWHRIRWKHUV¶YLHZSRLQWVDQG concerns. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities. Both MBS and CDO were purchased by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. Moreover, the de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October 2008 a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund. The European Union is no different from the world system and its political and economic coherence rest on a firm response to the economic crisis. However, one of the long-term worldwide consequences of the economic breakdown is apparently the Eurocrisis 2010. The events, which dated mainly at springtime of that year, concerned an important community of European states called "the Euro group", namely Portugal, Spain, France, Ireland, Belgium, The Netherlands, Luxemburg, Germany, Finland, Austria, Italy, and Greece. The collapse started when on Friday, May 7, at first a long-desired financial help package for Greece was constructed;; but it was obvious that also other states, because of their extremely large debts, would have - or already had - financial difficulties. Therefore already at the following Sunday a large crew of ministers of the Euro group gathered in Brussels, decided on a mutual financial help package of 750 Billion ¼ DW WKDW WLPH URXJKO\ 1000 Billion $);; and finally the European Central Bank announced that in future it would support by explicit monetarian help, if necessary, government bonds of the states of the Euro group (which was not allowed before, because of fears of inflation). Already on May 21, 2010 the German parliament, actually only with a slight majority, was the first one to accept the new rules. In Europe, a number of major financial institutions failed. Others needed rescuing. A number of European countries have attempted different measures (as they seemed to have failed to come up with a united response). For example, some nations have stepped in to nationalize or in some way attempt to provide assurance IRUSHRSOH7KLVPD\LQFOXGHJXDUDQWHHLQJRISHRSOH¶VVDYLQJVRUKHOSLQJEURNHUGHDOVEHWZHHQODUJHEDQNV WRHQVXUHWKHUHLVQ¶WDIDLOXUH In Iceland, where the economy was very dependent on the finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. In the end, public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell. The EU is also FRQVLGHULQJVSHQGLQJLQFUHDVHVDQGWD[FXWVVDLGWREHZRUWK¼EQ over two years. The plan is supposed to help restore consumer and business confidence, shore up employment, getting the banks lending again, and promoting green technologies. 5XVVLD¶VHFRQRP\LVFRQWUDFWLQJVKDUSO\ ZLWKPDQ\PRUHIHDUHGWRVOLGHLQWRSRYHUW\2QHRI5XVVLD¶VNH\ exports, oil, was a reason for a recent boom, but falling prices have had a big impact and investors are withdrawing from the country. The current financial crisis is the result of an improperly-regulated banking and financial sector where the drive for corporate profits and personal wealth created a culture of risk-taking on an unprecedented scale. Industrial production will be adversely affected by the crisis through both price effects that increase the cost of production and income effects that decrease the demand for products in the markets (Magdoff, F. 2002). However it is unclear how large and widespread the impact is. It is also possible that some enterprises may benefit from the crisis;; for instance, sectors that utilize domestic raw material and export all their products. The financial crisis and climate change share some fundamental characteristics. Both are a consequence of speculative and narrow interests superseding the common interest, both evolved dramatically over the current decade and both have global implications. Both are also about risk and how it is priced and managed² and the consequences when risk management goes wrong.

86

Journal of Environment Management and Tourism There are also some fundamental differences. First, while the worst impacts of the financial crisis are likely to pass within a few years the impacts of climate change could be felt for centuries. Second, the risks posed by climate change are much larger than those posed by the current global financial crisis. In the event of a financial or economic crisis, environmental concerns are put on the back burner. One factor driving this behavior is the perception that the decline in production will automatically lead to a lower level of pollution (Garnaut 2008). We show, on the contrary, that the pollution problem may become worse during the crisis period. The net effect on pollution is determined by the interactions of three factors: decline in production, increase in the abatement cost due to the higher input prices, and decrease in the expected cost of non- compliance due to the lower inspection and enforcement rate caused by budget cuts. As a result, the reduction in pollution due to lower production is cancelled out by the increase in pollution resulting from higher pollution abatement cost and lower inspection and enforcement rates. There are also other indirect consequences of this massive public investment which could have significant impacts (Hardisty 2008). Among them are the possible repercussions on the SODQHW¶V environment, and in particular efforts to arrest the effects of climate change. Recent studies by the Intergovernmental Panel on Climate Change (IPCC) and national governments have suggested that the cost of transitioning the global economy to a new lower-carbon footing, thus significantly reducing the risks of damage from climate change, is in the order of 1% of global product per year over the next generation. Depending on the rate of global growth, we need to spend in the order of $200bn a year over the next 20 years or so building new cleaner and more efficient power plants, deploying new low-emissions vehicles and fuels, constructing energy-efficient buildings and communities, saving and protecting forests, planting new trees, vastly improving agricultural and water efficiency, and reducing poverty around the world. This spending would generate direct economic activity, stimulate demand for goods and services throughout the global economy, and support innovative new products and businesses. The energy sector in particular needs significant investment to transition to lower carbon footing. World natural gas production and delivery need to be boosted significantly as part of a massive effort to substitute carbon-intensive coal for cleaner natural gas. Our electrical power generation mix needs to shift fundamentally over the next 20 years towards renewable energy, nuclear power, and clean coal technology. The benefits of all RI WKLV LQYHVWPHQW WR WKH ZRUOG¶V UHDO HFRQRP\ WKH SODQHW¶V environment, and ultimately the well-being of humankind, would be considerable (Hardisty 2008). The struggle over environmental problems - the land, air, and water degraded with poisons and other harmful chemicals, the destruction of large areas of forests, the depletion of nonrenewable resources, and the loss of many species ± goes through an ebb and flow similar to the class struggle. When enough people, sometimes even including representatives of capital, are concerned and mobilized over threats to their own health or the long-term well-being of the planet, real progress can occur in cleaning up the environmental mess that is one of the twin crises of capitalist production. Of course, every effort is made by capital to socialize the costs of such cleanups, by using general tax revenues whenever possible (Magdoff 2002). Before the crisis, people using public transportation increased, they left their cars at home and car pooling gained popularity, all for the sake of fuel conservation. With the reduced price of oil today, due to the financial crisis, people may just decide to go back to using their cars. It could even dampen their initial enthusiasm to buy hybrid cars. According to a European Union-Commissioned Study, the global economy is losing more money from the disappearance of forests than through the current banking crisis. It estimates the annual cost of forest loss at between $2 and $5 trillion. The report explains that as forests decline, nature stops providing services which it used to provide essentially for free. Consequently, we have to resort to building water reservoirs and facilities to sequester carbon dioxide, or farming foods that were once naturally available.

3. The crisis in Romania Not too long ago it was riding the wave of Eastern Europe's economic boom. With 8% annual growth, Romania - one of the newest members of the European Union - was the envy of Old Europe, seemingly impervious to the global economic decline. But the aura of invincibility has started to fade. The financial crisis is also felt in Romania. In the current macroeconomic context, Romania is exposed to the effects of economic and financial crisis, which may materialize in the plan of real economy, by slowing down the economical growth and reducing the number of work places.

87

Volume I Issue 2(2) Winter 2010 ³(IIHFWVRIWKHILQDQFLDOFULVLVZLOOKXUWWKHUHDOHFRQRP\RI5RPDQLDDQGWKHVLWXDWLRQZLOOQRWUHFRYHUZLWKLQ less than one year or two, and Romania will take the heaviest blows in the coming period1´ Romania is now the only country in the European Union with a junk rating on its bonds, which is bad news for the Romanian government, given that investors are more conscious than ever of ratings downgrades. A country which attracted 7.2 bn euros (£5.8bn) worth of investment in 2007 appears to have lost its appeal to investors. Once enthusiastic about Eastern Europe, investors have dumped assets amid concerns that other countries with large debt deficits could follow Hungary into crisis. The downgrade also hit the local currency, the Romanian leu, which fell against the euro. Foreign investors, who made serious money in Romania in the last decade, are now suffering2. French car maker Renault temporarily closed its Romanian plant, Dacia, as demand for its cheap compact model, Logan, started to dwindle worldwide. But hardest hit is the once-booming property market. With prices in old communist blocks of flats falling 30% year-on-year and new developments also hit by from falling demand, some foreign investment funds have to quit the country overnight. Zaman G. et. al. said that at the first signs of the financial crisis in the United States it was supposed that WKHDGYDQFHGHFRQRPLHVRI(XURSHVKRXOGQ¶WEHDIIHFWHGEXWWKHUHDOHVWDWHPDUNHWVLQVRPHFRXQWULHV8QLWHG Kingdom, Ireland, Spain) entered the crisis in 2008, suffering significant losses and triggering panic throughout the financial sector. By the end of 2008, the effects on Europe had expanded both in territory (Germany, France, Sweden, Benelux etc.) and sectors (including housing and automotive industry). The primary capital markets have also entered the crisis, which required the States intervention through nationalization, in whole or in part, of the credit institutions with liquidity problems, spending huge amounts of public money. The secondary capital markets, respectively, their indexes of market capitalization, have suffered a fall down to 20 percent in only a few weeks (end of September and the first half of October in 2008). Iceland was on the verge of financial collapse at the sovereign level, being saved in extremis, by the nationalization of three major banks, with financial assistance from the IMF. Paradoxically, despite the insignificant proportion of toxic assets in their banking system, the emerging countries of Central and Eastern Europe, escaped from an experimental system of command economy and going through a transition to a market economy, have also been exposed to the effects of the crisis, mainly due to their excessive openness to the foreign capital, including the financial one, sometimes of pure speculative nature. The effects of the crisis on emerging European countries have been multiplied by their super positioning to the persistent inflationary pressures caused by the rise of energy, raw materials and agricultural products global prices, during 2007 until the second half of 2008. Moreover, in this context, a flight of foreign capital has been noticed, some of these countries (Hungary, Romania, Czech Republic, Poland) facing a sharp depreciation of their currencies and the decline of investors appetite, which resulted in an increase in external financial imbalances. During the first quarter of 2009 the gross domestic product of Romania fell by 2.6 percent compared to fourth quarter of 2008 (adjusted data taking into account the seasonal variations) and 6.4 percent compared to first quarter 2008 (data not adjusted). The fourth quarter of 2008 witnessed a reduction of gross domestic product by 3.4 percent over the third quarter. The second quarter of 2009 saw another decline of GDP, by 1.1 percent compared with the previous quarter and by 8.8 percent compared with the same period of 2008. So, according to the technical definition of a recession, i.e. a decline in GDP for two consecutive quarters, Romania has entered recession in 2009. The global crisis has seriously affected in 2009 the industrial sector, whose main branches are under the majority control of foreign capital and subsidiaries of multinational corporations, being more exposed to international markets. In the first seven months of 2009, the industrial production decreased by 9.6 percent over the same period of last year (Table 1). On sections, a decline by 10.8 percent has been recorded both in extractive industry and manufacturing. On industry groups, more severe production drop was in intermediate goods (-15.3 percent) and durable consumer goods (-17.4 percent). In the first eight months of 2009, compared with the same period of 2008, the biggest fall in the industrial production was registered in manufacturing of basic metals, manufacture of other nonmetallic mineral products and textiles. Other manufacturing industries in decline were clothes, paper and paper products, chemicals and 1 Dumitru I.

senior economist of Raiffeisen Bank Romania. Crisis hits Romania at poll time. Analysis by Business reporter, BBC News.

2 Georgescu V.

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Journal of Environment Management and Tourism chemical products, rubber and plastics, petroleum products, furniture. Industries less affected by the crisis and where production has increased during the analyzed period (wood processing, publishing houses, printing and reproduction of recorded media, manufacture of electric equipment), even are not touching essential sectors of the economy, could see a more rapid recover (Zaman et. al. 2009).

Table 1. Industrial production in Romania August 2009 as compared with: August 2008

Jan-Aug. 2009/ Jan-Aug. 2008

84.2

94.7

90.9

103.5

84.4

88.5

81.5

92.9

89.6

Intermediate goods

93.9

94.1

85.9

Capital goods

62.4

91.8

93.1

Durable consumer goods

95.7

93.2

83.4

Nondurable consumer goods

88.4

89.8

90.8

100.9

107.1

98.3

July 2009

Industry ² total On sections : Extractive Industry Manufacturing On industry groups:

Energy industry

Source: National Institute of Statistics, Press Release no 205, 7 October 2009.

The actors involved in the green sector see themselves forced to adapt their strategies, taking into account new global conditions, the difficulties of accessing credits, the more expensive loans and even closure of some companies. The green economy is going down. And the economic environment of Romania is not exempt from the global effects of the financial crisis. Over the green businesses heavy clouds gathered. In the latter half of 2008 the overall amount spent to fund clean energy related projects dropped 25% and reached 18 billion dollars. This amount will continue to fall at the beginning 2009 (Deleanu 2008). In recent months, global green market has lost money, and companies have cut ruthlessly from investments in alternative energy. $W WKH FDWHJRU\ ³SRWHQWLDO HIIHFWV´ LW LV FRQVLGHUHG WKDW WKH DXWKRULWLHV - especially mayors and local councils - will be taken off their environmental responsibilities, again suffering from financial deprivation. Moreover, the European funds intended for Romania will reach their beneficiaries in our country harder. Fund raising phenomenon, as well as environmental funds will be reduced;; pressure on nature and natural resources will reduce due to the lack of liquidity, demand for products, precious metal mining and quarrying with obvious impact on the environment, which is already stimulated due to the increasing value of these metals in relation to liquidity, are other effects of the crisis. In the same category, other conclusions can be taken. Poor members of society, already exposed to environmental risks, are even more vulnerable, the more public funds, including European ones, are more difficult to reach, the more working contracts and environmental job contracts awarded by Procurement will be increasingly allocated preferentially. Some analysts believe that the signs of crisis are not very visible in environmental protection, provided that this is not a priority in Romania. "Not when actual constraints had appeared, nor when budgets had not been adapted to the current weak economic situation, the environment was not of age. They believe that once the crisis installed in Romania, the green will be even more left aside (Deleanu. 2008). The global crisis will curb economic growth of Romania in 2009 after our country was the leader of Europe in 2008 - an increase of 8.9%. The economy could record more than 1.2 million unemployed;; say the darkest statistics and announced salary increases could be postponed (Grosereanu 2009). According to the gloomy forecasts, the unemployment rate will exceed 8% in 2009, and the number unemployed will reach 1.2 million people, given that nearly 500,000 Romanians will return to the country from Spain and Italy and in the context of doubling the number of unemployed in Romania. The most affected are those who work in the construction area, auto parts and clothing areas. Latest statistics indicate that in Romania there are 353,000 officially registered persons, the unemployment rate being 3.9%. 89

Volume I Issue 2(2) Winter 2010 Ciutacu C.3 (in 2009) thinks that in Romania, the social partners in industry, agriculture and tourism and the central and local public administration have understood the importance of this chance, and the general opinion is in favour of a green economy. In this context, the package of measures designed to dampen the crisis include proposals made by the social partners, some of which are related to the green economy and environmental protection. There is much talk now of a 'green reindustrialisation of Romania', for which the country has the natural resources, but lacks the finance. This mapping and inventory exercise will help to take stock of what the different Member States and social partners are doing to mitigate the effects of climate change and harness the potential of the green economy. It will also help to identify particularly interesting and successful initiatives which can be shared and disseminated as positive practice examples. With the annual budget for 2009 already approved and tailored to buffer the worst effects of the crisis that ZHUH\HWWRIROORZDQGPLQGIXORIWKH(XURSHDQ&RPPLVVLRQ¶VFRQFHUQVIRUDQWL-crisis programs, the government, the employer organizations, the trade unions, and the banking and financial sector have set up joint working groups to draw up a national anti-crisis plan After several rounds of talks with the social partners, it was agreed on an anti-crisis plan consisting of 23 measures to be backed up by some EUR 13 billion. Some of the measures proposed target the green economy. Public investments will be made to improve energy efficiency with final users, in accordance with Directive 2006/32/CE. The government has already issued an emergency ordinance making it mandatory for dwellers of apartment buildings to step up the installation of energy-saving devices. The purpose is to cut on energy consumption and thereby diminish greenhouse emissions caused by the use of central heating boilers powered by coal and natural gas. Another measure, instituted WKURXJKDJRYHUQPHQW¶VHPHUJHQF\RUGLQDQFHLVWKHUHVXPSWLRQLQRI the renewal of the automotive fleet, also aimed at abating pollution. Among 'green investments' are also the technical upgrading of central heating plants, the building of new nuclear-power stations, and the development of the energy transport routes for the intake of the energy from renewable sources, wind included. With effect from this year, the Ministry of the Environment has started charging the so-called eco-tax, a charge on non-degradable plastic bags. Employer organizations, professional associations of agricultural and food industry workers criticize the fact that Romania seems to be the only European Union member that does not subsidize agriculture and renders no state aid to its organic farming and green food manufacturers, although the area cultivated in 2008 according to organic technologies was more than 200,000 hectares.

4. Concluding Remarks Economic development means working very hard to create something in one place and to destroy something in another place. Climate change is already being observed through rising temperatures, melting glaciers, shifting rain patterns, increased storm intensity and rising sea levels. Greenhouse gas (GHG) emissions from human activities ± mainly fossil fuel use, deforestation and agriculture ± cause climate change. During the crisis the emissions of CO2 are diminished and this is good for the environment. As a general conclusion, short-term crisis had a beneficial effect on the environment by reducing emissions of pollutants into the atmosphere, by reducing discharges into the main rivers of Romania, following cut down mining operations, tourism, economic, generally. But long term, the economic crisis could have a negative impact on the environment, due to the reduction of funds and investments in the green industry. The good conclusions: Compared to other European country Romania has high levels of biodiversity and a relatively low level of greenhouse-gas emissions per person. Our country's environmental legislation is slowly coming in line with that of the European. The bad conclusions: Romania's environmental infrastructure is insufficient;; There is still a lot of pollution from agriculture, energy, and transportation, some of which is encouraged by subsidies in those sectors;; Road traffic (and thus, air pollution) has increased;;

3 Ciutacu C. - Institute of National Economy, Romanian Academy

90

Journal of Environment Management and Tourism Half of industrial wastewater, containing mercury, lead, chromium, zinc, and other toxins, is still being discharged untreated into rivers and coastal waters;; Patterns of production and consumption are unsustainable.

References [1] Amado de Jesus. 2006. Financial crisis affects environment. Philippine Daily Inquirer. [2] Barbu, C.M., Ghita, E., Simionescu, A., Preda, A., Ghitulescu, A. 2010. Studies on pollutants in Jiu and Olt Rivers of Romania. Asian Journal of Chemistry Vol. 22, No. 2(2010):1301-1306. [3] Deleanu, C. 2008. Criza muʓFă din sectorul verde, Green Report, in Romanian. [4] Garnaut, R. 2008. Garnaut Climate Change Review. Commonwealth of Australia, Canberra. [5] Grosereanu, B. 2009. 2009 - sub semnul crizei economice. Gazeta de Sud, Anul 14, nr. 4321, in Romanian. [6] Hardisty, P.E. 2008. Environmental Consequences of the Financial Crisis (Crisis? Which Crisis?). Middle East Economic Survey, Vol. LI, No 49. [7] Planul de dezvoltare Regionala Sud-Vest Oltenia, 2004-2006, in Romanian. [8] 0DJGRII)&DSLWDOLVP¶V7ZLQ&ULVHV(FRQRPLFDQG(QYLURQPHQWDOMonthly Review 54(4): 1-15. [9] Schwartz, P., and Randall, D. 2003. An Abrupt Climate Change Scenario and its Implications for United States National Security. Report to the US Department of Defense, Washington, DC. [10] Stern, N. 2006. The Economics of Climate. The Stern Review. Cambridge University Press. [11] Shah, A. 2009. Global financial crisis. Global Issues. [12] Zaman, G., and Georgescu, G. 2009. 7KH LPSDFW RI JOREDO FULVLV RQ 5RPDQLD¶V HFRQRPLF GHYHORSPHQW Annales Universitatis Apulensis Series Oeconomica, 11(2).

91


DYNAMIC OPTIMIZATION IN NATURAL RESOURCES MANAGEMENT

George E. HALKOS Department of Economics, University of Thessaly, Greece [email protected] George PAPAGEORGIOU Department of Economics, University of Thessaly, Greece [email protected]

Abstract Dynamic modeling is general and recently the most interesting perspective to solve a dynamic economic problem EDVHGRQ3RQWU\DJLQ¶VPD[LPXP principle. Moreover traditional economic theory, up to the middle of twentieth century, builds XSWKHSURGXFWLRQIXQFWLRQVUHJDUGOHVVWKHLQSXWV¶VFDUFLW\1RZDGD\VLWLVFOHDUWKDWERWKWKHLQSXWVDUHGHSOHWDEOHTXDQWLWies and a lot of constraints are imSRVHGLQWKHLUXVDJHLQRUGHUWRHQVXUHHFRQRPLFVXVWDLQDELOLW\)RUH[DPSOHWKHLQSXW³RLO´ used in the production is a non renewable resource so it can be exhausted. In a same way every biomass resides in ecosystems is a resource that can be used in a generalized production function for capital accumulation purposes but the latter resource is a renewable one. The purpose of this paper is the presentation of some natural resources dynamic models in order to extract the optimal trajectories of the state and control variables for the optimal control economic problem. We show how methods of infinite horizon optimal control theory developed for natural resources models.

Keywords: Dynamic optimization, optimal control, maximum principle, natural resources JEL Classiffication: C61, C62, Q32 1. Introduction In economic literature one of the driving forces in a market economy is the growth of firms and industries. While traditionally economists have analysed firm and industry growth under the assumption of perfectly competitive product markets in a static framework (i.e. firms are assumed to be price takers in the output market) more recent research has focused on intertemporal dynamical theoretic models of growth and capital accumulation. Moreover traditional economic theory, up to the middle of twentieth century, builds up the SURGXFWLRQIXQFWLRQVUHJDUGOHVVWKHLQSXWV¶VFDUFLW\ Nowadays it is clear that both the inputs are depletable quantities and a lot of constraints are imposed in WKHLU XVDJH WR HQVXUH HFRQRPLF VXVWDLQDELOLW\ )RU H[DPSOH WKH LQSXW ³RLO´ used in the production is a non renewable resource so it can be exhausted. In a same way every biomass resides in ecosystems is a resource that can be used in a generalized production function for capital accumulation purposes but the latter resource is a renewable one. With the above simplified classification of the natural resources several constraints arises in their usage. One reasonable constraint for the exhaustible resource could be the fact that the rate of extraction reduces the remainder stock. In the field of renewable resources a serious constraint could be the fact that KXPDQKDUYHVWLQJHIIRUWFDQ¶WEHJUHDWHUWKDQWKHJURZWKRIWKHUHVRXUFH On the other hand dynamic modeling is general and recently the most interesting perspective to solve a G\QDPLFHFRQRPLFSUREOHPEDVHGRQ3RQWU\DJLQ¶VPD[LPXPSULQFLSOH7KHPDLQYDULDEOHVLQYROYHGLQDG\QDPLF model distinguished in two broad categories, the state and control variables. A state variable is defined as the variable that describes the state of an economic system that transferred from an initial time (time zero) to the terminal time with an optimal way. Control variables are those that help (under appropriate manipulations) the transfer from an initial to the terminal time in an optimal way of WKHV\VWHP¶VVWDWH,QRXUFDVHVVWDWHYDULDEOHV could be the resource stock while control variables are the human rate of extraction. The purpose of this paper is the presentation of some natural resources dynamic models in order to extract the optimal trajectories of the state and control variables for the optimal control economic problem. We show how methods of infinite horizon optimal control theory developed for renewable resources models.

2. The first model We assume a representative competitive firm that extracts a renewable resource and the stock of the resource evolves according to the following differential equation:

92


(1)

The left hand side of the above equation (1) means the instantaneous change in the current resource stock while the right hand side consists of the two following functions. The implicit function denotes the resource evolution (births and deaths) that is clearly a function of the existing resource stock . With the second term of the right hand side of equation (1) we denote the human harvesting effort (rate of extraction) of the resource at the same time instant t ZKLFKHIIRUWFOHDUO\UHGXFHVUHVRXUFH¶VVWRFN6RHTXDWLRQ (1) completely GHVFULEHVVWRFN¶VDFFXPXODWLRQDWWLPHLQVWDQW t . It is worth noting that implicit function is OHIWLQDJHQHUDOIRUPLQRUGHUWRJHQHUDOL]HPRGHO¶VDQDO\VLVWKDWIROORZV Moreover we assume that the resource extractor sells the renewable resource at a price which is maybe a constant, while extraction cost is described again implicitly as a function of the current stock , that is the generalized cost function of the form . Representative firm (or agent) faces now an infinite horizon intertemporal utility maximization problem as in the following

(2)

subject to the resource accumulation equation, that is equation (1). State variable of the maximization problem is the renewable resource stock , while control variable is the rate of extraction of the resource . In order to solve the above optimal control problem we apply techniques analyzed by the optimal control theory and more specifically we form the Hamiltonian current value function as follows:

(3)

With to denote the costate variable which associates (shadow price) with the state . Because the function of the resource population evolution is left in undetermined form we assume moreover that the system evolves in the steady states. ,QZKDWIROORZVZHWDNHILUVWRUGHUFRQGLWLRQVDQGZH¶OOWU\WRLPSRVHVHYHUDOUHDOZRUOGFRQGLWLRQVLQRUGHU to find the stability of equilibrium. 3. Qualitative equilibrium analysis The first order conditions for the above Hamiltonian function are

(4)

(5)

and the steady state conditions . Substituting (1) into (5) and making use of (4) we arrive into the following equation, under the assumption that the renewable resource selling price is constant:

Equation (6) QRZH[SUHVVHVWKHPRGHO¶VVWHDG\VWDWHRIWKHV\VWHPIRUWKHVWDWHDQGFRVWDWHRUELWV In order to ensure unique equilibrium we impose further restrictions on the involved variables.

93

(6)

Volume I Issue 2(2) Winter 2010 Condition 1. Extraction cost function is decreasing function with respect to the resource stock, that is

Condition 2. The population evolution function is positive, but is a decreasing function with respect to the resource stock, that is , and .

Condition 3. We impose which means that price is beneficial with respect to extraction cost. The above imposed conditions seems to be in reality and if are they then the signs of both sides of equation (6) are negatives. Differentiation of the left hand side of equation (6) reveals the quantity

(7)

which is clearly a positive quantity further imposing the next condition. Condition 4. Harvesting cost increases with respect to the population size with an increasing rate, that is .

Quantity (7) ensures that the left hand side of equation (6) is an increasing function with respect to the equilibrium resource stock denoted by . Obviously if we assume the renewable resource grows up in an increasing rate, then the right hand side of equation (6) is a decreasing function of the equilibrium population variable . Consequently we have only one value of the variable that satisfies equation (6). Since the left hand side of (6) is a strictly negative increasing quantity, if there exists a positive value of the variable such that the right hand side of WKH VDPH HTXDWLRQ YDQLVKHV WKHQ ZH¶OO KDYH D XQLTXH VWHDG\ VWDWH VWRFN RI WKH resource. The later requires harvesting cost to increase until the resource selling price for a small but positive value of the resource stock. In this way the last imposed condition must be the following.

Condition 5. We record previous discussion into the next proposition. Proposition 1. The renewable resource harvesting model achieves unique steady state equilibrium under the imposed conditions 1 ± 5.

4. The second model Now we consider the problem of optimal harvesting policy of a renewable resource. Therefore we assume a representative agent that enjoys utility from harvesting of the renewable resource and utility is a function of the extraction rate so it can be expressed implicitly as . As in the usual practice in order to form the standard optimal control maximization problem we must specify the equation for the resource accumulation. We FRQVWUXFW UHQHZDEOH UHVRXUFH¶V VWRFN DFFXPXODWLRQ IXQFWLRQ Ds a function of the population evolution and the KXPDQKDUYHVWLQJ7KHUHIRUHZHDFFHSWIURPELRORJ\¶VOLWHUDWXUHWKHIROORZLQJJURZWKIXQFWLRQDOIRUP4.

Where is the resource stock and c LV D QDWXUH¶V FRQVWDQW DERYH WKH YDOXH Rf which population decays (i.e. diseases diffusion). With the previous population growth function acceptance the instantaneous change in the resource stock can be expressed as

(8)

4 7KHUHQHZDEOHUHVRXUFH¶VSRSXODWLRQJURZWKIXQFWLRQLVRQHRIWKHDFFHSWDEOHIXQFWLRQVIURPELRORJ\¶VOLWHUDWXUH$

second well defined function could be the so called Gompertz growth function defined as g(x) = x [1- lnx ] with x to denotes WKHUHQHZDEOHUHVRXUFH¶VVWRFN

94

Journal of Environment Management and Tourism where the harvesting effort reduces the renewable resource stock accumulation. The problem of the representative agent is now set as the utility maximization problem subject to resource accumulation constraint that is the problem:

(9)

which is an optimal control problem with the state and control variables

and

respectively.

5. Equilibrium analysis We proceed with the equilibrium analysis for the described model. Proposition 2. Optimal trajectories of the state and control variables following differential equations:

and

satisfies the

(10)

(11)

Proof We form the Hamiltonian of problem (9) e.g. the function:

&RQGLWLRQVIRUWKH3RQWU\DJLQ¶VPD[LPXPSULQFLSOHDUHPHWFRQVHTXHQWO\WKHWLPHSDWKVRIWKHVWDWHDQG control variables satisfies the following system of equations:

(12)

(13)

(14)

where denotes the shadow price of state variable . Differentiation of the right hand side of (14) with respect to the control variable maximum determined from the following equation.

reveals that the

(15)

(16)

Further differentiation of (15) w.r.t. time now yields

Substituting into (16) the (13) we now have:

95


Solving last equation we derive the desired maximized solutions

(17)

(18)

as proposition 2 claims. We assume moreover for the constant , that expresses the critical value above this the renewable resource stock decreases, satisfies the inequality (the critical value is greater than the discount factor), then we record the next proposition. Proposition 3. There exists a unique saddle point equilibrium of the above model under the assumption c > ȡ that is given from the solutions of equations (17) and (18). Proof The system of (17) and (18) admits an equilibrium point in the positive quadrant. Clearly because equilibrium determined as the intersection point of the parabola is easy verified that equilibrium point is the point:

and the straight line

. Now

. In order to determine the solution behavior in a vicinity of equilibrium points we consider the Jacobian matrix of (17) and (18) at the point . Simple calculations shows that the Jacobian matrix of derivatives is given from the matrix:

. The characteristic polynomial of the above matrix is

and

is the determinant of the matrix. With the assumptions that utility is increasing with respect to harvesting effort but with decreasing rate, that is obviously . The latter implies that characteristic polynomial has one negative and one positive real root. Consequently solution is a saddle point equilibrium. The isoclines are for and for . The behavior inside the sectors is given from the following Figure 1.

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Journal of Environment Management and Tourism p 4 2 n 2 4

Figure 1. Phase diagram for the system (17) and (18)

6. Concluding remarks In this paper we show how methods of infinite horizon dynamic optimal control theory developed in the field of natural resource economics. We begin first with methodology analysis and second we propose two dynamical models of renewable resources. As methodology suggests main variables involved in an optimal control problem distinguished in the states and controls. A state variable is the variable that only monitors the state of the economic system that transferred form an initial point time to the terminal time. Control variables are the chosen policy instruments that aid the motion of the state to make in an optimal way. One other variable involved at the solution process is the so called costate or auxiliary variable that is the shadow price of the state. The vehicle through the latter variable enters into the maximization process is the well known Hamiltonian function. To that end we propose two dynamical models managing renewable resource extraction. Accepting optimal control theory we define as state variable the resource stock and as control variable the human harvesting effort. In the first model we assume a generalized population growth function in order to build the FRQVWUDLQWVXQGHUZKLFKUHSUHVHQWDWLYHILUP¶VXWility maximization problem set and impose some reality conditions in order to conclude the unique equilibrium of the system. In the second proposed model we borrow from ELRORJ\¶V OLWHUDWXUH DQ DGPLVVLEOH SRSXODWLRQ JURZWK IXQFWLRQ DQG IRXQG WKH FRQGLWLRQV under which the unique saddle point equilibrium exists.

References [1] Benchekroun, H., and Long, N.V. 2001. Tranboundary Fishery: A Differential Game Model. Economica, 69, 207 ± 221. [2] Brock, W.A., and Starrett, D. 2003. Managing Systems with non±convex Positive Feedback. Environmental and Resource Economics, 26: 575 ± 602. [3] Dasgupta, P., and Maler, K.G. 2003. The Economics of Non ± Convex Ecosystems: Introduction. Environmental and Resource Economics, 26: 499 ± 525. [4] Dockner, E.J. et al. 2000. Differential Games in Economics and Management Science, Cambridge, Cambridge University Press. [5] Hotelling, H. 1931. The economics of exhaustible resources. Journal of Political Economy 39: 137 ± 175. [6] Levhari, D., and Mirman, L. 1980. The great fish war. Bell Journal of Economics: 322-344. [7] Pontryagin et al. 1961. The Mathematical Theory of Optimal Processes, Gordon and Breach Science Publishers (translated by K.N. Trirogoff). [8] Stiglitz, J. 1976. Monopoly and the Rate of Extraction of Exhaustible Resources. The American Economic Review, 66 (4): 655 ± 661. 97


DO ISO14001 EMS COMPANIES IN MALAYSIA REWARD EMPLOYEES FOR ENVIRONMENTAL INITIATIVES? Harjeet KAUR HELP University College Malaysia Faculty of Business, Economics and Accounting Department of Business [email protected] Abstract The environmental management literature recommends that companies committed towards achieving their sustainable environmental aspirations should establish a rewards scheme for reinforcing employee motivation in the search for innovative solutions to environmental problems. This paper will assess whether rewards1 will provide a good indicator of employee willingness to try eco-initiatives2 in some of the leading environmentally proactive ISO 14001 companies in Malaysia. Of the two hundred and twenty three survey responses used in the final data analysis, two hundred and eleven responses are from the recipiHQWVRIWKH0DOD\VLDQ3ULPH0LQLVWHU¶V+LELVFXV$ZDUG30+$ 7KH30+$ZDVILUVWODXQFKHG LQDV0DOD\VLD¶VSUHPLHUSULYDWHVHFWRUHQYLURQPHQWDODZDUGIRUEXVLQHVVDQGLQGXVWU\0RUHRYHUJLYHQWKDWHPSOR\HHV¶ job appraisals rarely include an environmental category, several environmental initiatives are proposed which could provide SUDFWLWLRQHUVDWRROWRDVVHVVHPSOR\HHV¶SHUIRUPDQFHHYDOXDWLRQ7KHGDWDZDVWUHDWHGWRGHVFULSWLYHUHOLDELOLW\YDOLGLW\and correlation analysis using the SPSS computer program version 16. The rewards and employee willingness to try eco- initiatives constructs exhibited good internal consistency and adequate construct validity. In summary the findings suggest that middle and lower level employees are rarely rewarded for their environmental initiatives.

Keywords: rewards, recognition, eco-initiatives, environmental management, ISO 14001, EMS. JEL Classification: Q2, Q5

1. Introduction $Q HQYLURQPHQWDO PDQDJHPHQW V\VWHP (06 SURYLGHV WKH IUDPHZRUN IRU FRPSDQLHV WR µV\VWHPDWLFDOO\ LGHQWLI\ SULRULWL]H PDQDJH PLWLJDWH DQG GRFXPHQW WKH HQYLURQPHQWDO DVSHFWV DQG LPSDFWV RI LWV RSHUDWLRQV¶ (Graves 2003, 62). Employees are willing to be held responsible for protecting the environment only when they are properly rewarded or motivated to do so (Quazi 1999). Empirical findings suggest that line managers should have rewards at their disposal in order to reinforce employee environmental problem solving (Ramus, and Steger 2000, Ramus 2002, Ramus 2001). According to Daily, and Huang (2001) rewards reinforce empowerment and good-decision making, improving the corrective and preventive measures employees initiate in the implementation of the ISO14001 EMS. In a study of eight oil and gas firms operating in the United Kingdom Continental Shelf (UKCS), Strachan et al. (2003) discovered that rewards and recognition schemes were the main methods employed to sustain employee motivation for ISO 14001 EMS implementation. To date issues pertaining to environmental training and management support have received the greatest attention in the environmental management literature while issues of rewards have received less (Massoud et al. 2007, 496). This paper will assess whether rewards will provide a good indicator of employee willingness to try eco- initiatives in some of the leading environmentally proactive ISO 14001 EMS companies in Malaysia. In addition several environmental initiatives are proposed which should EHDSDUWRIHPSOR\HHV¶SHUIRUPDQFHDSSUDLVDO

2. Ecoinitiatives Eco-initiatives are actions (or initiatives) taken by individuals and teams that improve the environmental performance of the companies (Ramus 2002, Ramus 2001). The case study of Kitazawa and Sarkis (2000) of the relationship between ISO 14001 EMS and the continuous source reduction programmes of three industrial companies identified employee willingness to make suggestions for improvement as one of their three crucial factors for managing source reduction programs (i.e. reducing waste or toxicity of substances). To quote Govindarajulu, DQG'DLO\ µEmployees actively involved in environmental endeavors may significantly HQKDQFHDFRPSDQ\¶VFKDQFHIRUVXSHULRUHQYLURQPHQWDOperformance. Employees who feel empowered to make changes for environmental efficiencies may provide opportunities for improvement to the product and reduce waste. This should lead to greener product and green savings from waste elimination. These efficiencies should DOVRLQVRPHZD\HLWKHULQGLUHFWO\RUGLUHFWO\LQFUHDVHFXVWRPHUVDWLVIDFWLRQ¶.

98

Journal of Environment Management and Tourism Several companies have benefited from their employees creative environmental solutions which lead to significant improvements in the environmental performance.Nordstrom and 3M are examples of firms that offer UHZDUGV IRU LQGLYLGXDO VXJJHVWLRQV WKDW KHOS ERWK WKH FRPSDQ\¶V ERWWRP OLQH DQG WKH HQYLURQPHQW 0D\, and Flannery 1995). )RUH[DPSOHRQHVLPSOHVXJJHVWLRQWRUHGXFHHOHFWULFLW\XVHIRU1RUGVWURP¶V³/HDQDQG*UHHQ´ program saved the company $600-700 per year. The employee suggested that individuals turn out their office lights when they go to lunch, on break, or to a meeting (May, and Flannery 1995, 35). At Neste Oxo plant in Steningsund, Sweden, a team of employees suggested that residue from the aldehyde plant be distilled one additional time resulting in higher productivity, lower costs, and lower airborne emissions (Ramus 2001, 101). Although support from top managers is crucial to EMS success, proactive environmental initiatives often come from middle and lower parts of the organization (Pun et al. 2002). For example, research findings in the quality management literature suggest that production workers are more important to their pollution prevention efforts than R&D staff, suppliers, customers or consultants (Florida 1996). Despite the significant role production ZRUNHUVSOD\LQLPSURYLQJWKHFRPSDQLHV¶HQYLURQPHQWDOSHUIRUPDQFHWhere have been relatively few studies that have investigated shop floor reactions to EMS via survey questionnaire. Further studies in this area are now required. Employees are generally more knowledgeable about the intricacies of the ISO14001 EMS operations and systems and can provide managers with valuable suggestions for improving environmental performance (Zutshi, and Sohal 2003). Ramus, and Steger (2000) assessed whether organizational environmental policies and supervisory support behaviors provide a good indicator of employee willingness to try eco-initiatives in six environmentally proactive companies in Europe. The companies represented a number of industries, including chemicals, entertainment, manufacturing, medical devices, oil and retail. 353 survey responses were received from mid-and- low level employees from diverse workforce units representing different functions, divisions and geographic locations. The categories of supervisory support behaviors that were rank ordered by the respondents to the survey as having the greatest impact on their willingness to eco-innovate are: 1) environmental communication, 2) environmental competence building, 3) environmental rewards and recognition, 4) management of environmental goals and responsibilities, and 5) environmental innovation. Findings indicate that the existence of a pubOLVKHG HQYLURQPHQWDO SROLF\ DQG VXSHUYLVRU\ VXSSRUW EHKDYLRUV HQFRXUDJHG HPSOR\HHV¶ ZLOOLQJQHVV WR promote eco-initiatives. Supervisory support for environmental information dissemination (i.e. environmental communication) had no significant impact on employee eco-initiatives. The ISO 14001 standard involves implementation and continuous improvement of five key elements: the environmental policy;; the environmental plan;; implementation and operation of programs to meet objectives and targets;; checking and corrective action;; and management review (Zutshi, and Sohal 2004, Babakri et al. 2003, Aboulnaga 1998). The existence of a published environmental policy in ISO 14001 companies may indirectly affect employee willingness to try eco-initiatives.

3. Rewards and recognition in environmental management The significance of rewards for successful implementation of ISO14001 EMS is well supported by the literature )RU H[DPSOH LQ WKH FDWHJRULHV RI VXSHUYLVRU\ VXSSRUWLYH EHKDYLRUV RI 5DPXV DQG 6WHJHU¶V study, environmental rewards and recognition is the second most significant factor that encouraged employee willingness to try eco-initiatives. Recently, Daily et al. (2003, 2007) studied the impact of human resource factors on employee perception of environmental performance in a large organization currently certified to ISO 14001. Findings suggest that PDQDJHPHQWVXSSRUWIRUDQ(06(06WUDLQLQJHPSOR\HH¶Vpsychological empowerment, teamwork, and EMS rewards have a significant relationship to perceived environmental performance and may be significant predictors of success or failure in the implementation of an EMS. Govindarajulu, and Daily (2004, 365) presented a comprehensive theoretical framework for environmental performance by looking at the crucial employer and employee factors affecting environmental performance. Management commitment, employee empowerment, feedback and review, and rewards are key elements in increasing employee motivation for successful implementation of an ISO14001 EMS and hence enhanced environmental performance. Russo, and Harrison (2005) showed by means of an empirical analysis that when managerial pay is tied to environmental performance, electronics facilities in the U.S reported improvements in their environmental performance. In another empirical study, Berrone, and Gomez-Mejia (2009) survey of large companies in the U.S revealed that good environmental performance increases CEO pay. Some employees may be more motivated by non-monetary rewards, recognition and praise than other factors (Govindarajulu, and Daily 2004). For example, 'RZ &KHPLFDO EHOLHYHV FDVK DZDUGV IRU HPSOR\HHV¶ LQQRYDWLYH ZDVWH UHGXFWLRQ LGHDV FDQ DFWXDOO\ EH GH- motivating. Thus instead of receiving cash awards, employees are awarded an engraved plaque given at formal 99

Volume I Issue 2(2) Winter 2010 awards ceremony (Denton 1999). Case study findings at Cooke Brothers Ltd showed that recognition for work well done was an effective means of promoting positive attitudes and increased involvement at lower levels for WKHDSSOLFDWLRQRI6DVDPHDQVRILPSURYLQJHQYLURQPHQWDOSHUIRUPDQFH2¶K(RFKD According to Govindarajulu, and Daily (2004) sometimes negative reinforcements may be necessary for making employees perform certain environmental improvement tasks. Although the use of negative rewards can avoid certain kinds of behaviors, the authors cautioned that problems associated with turnover, absenteeism, and self-protective behaviors (i.e. failure to disclose environmental problems when they arise) may intensify. A survey on some of the best known pollution reducing companies in the world revealed that rarely are incentives, bonuses, salaries and promotions linked to environmental performance. In addition HPSOR\HHV¶ MRE appraisals rarely included an environmental category (Denton 1999). Companies need to decide if environmental LQLWLDWLYHV DQG LPSURYHPHQWV VKRXOG EH D SDUW RI HPSOR\HHV¶ SHUIRUPDQFH DSSUDLVDO DV LW FRXOG EH D PDMRU motivating factor for some employees (Govindarajulu, and Daily 2004). In fact Miles, and Russell (1997) suggested that employee performance evaluations could include environmental concern as well as recycling and waste reduction initiatives. Environmental concern according to SchXOW] LV µOLQNHG WR WKH GHJUHH WR which people view themselves as part of the QDWXUDOHQYLURQPHQW¶ In this paper several environmental initiatives DUHSURSRVHGZKLFKFRXOGSURYLGHSUDFWLWLRQHUVDWRROWRDVVHVVHPSOR\HHV¶SHUIRUPDQFHHYDOXDWLRQ. In contrast to extrinsic motivation, which is based on rewards and punishments controlled by the organization, intrinsic motivation is based on positively valued (rewarding) experiences that a person gets directly from their work tasks (Quigley, and Tymon 2006). Takahashi (2006) examined the effects of wage and promotion incentives on the motivation levels of Japanese employees working in 75 companies of Toyota Group. 5HVXOWV VKRZHG WKDW ERWK SURPRWLRQ DQG ZDJHV SRVLWLYHO\ LQIOXHQFHG HPSOR\HHV¶ ZRUN PRWivation. As compared to wages, promotion had a greater effect on the motivation of Japanese white-collar and blue-collar workers. In this regard, proactive environmental companies should also consider how promotion is linked to environmental performance, as it could be a major motivating factor for some employees. In sum, it is important that organizations combine both extrinsic and intrinsic needs for effectively motivating employees in the search for innovative solutions to environmental problems.

4. Methodology The initial research was undertaken using a three-phase approach: 1) preliminary scale development through feedback obtained from management representatives of ISO 14001 companies and two technical committee members of the Malaysian Prime MinLVWHU¶V+LELVFXV$ZDUG30+$ SUH-testing of survey primarily to determine the clarity of questions, suitability of the length, layout as well as the time required to complete the survey and, 3) implementation of a large scale survey to ascertain the hypothesized relationships. ISO 14001 takes a systems approach for improving environmental performance so that environmental responsibilities are not only confined to the environmental function rather it is coordinated with existing efforts in other areas of an organization. The review of the literature suggest that some of the departments that play a key role in improving environmental performance are the environmental, health and safety (EHS) department and operations management (Hanna et al. 2000), management, R&D, production and marketing (Hart 1995), and purchasing (Zsidisin, and Hendrick 1998). Within each company, a plant research coordinator served as a liaison between the researcher and the respondents to the survey. He or she was responsible for selecting employees, distributing and collecting the survey questionnaires. Through the assistance of these coordinators, random samples of middle and lower level employees were selected by utilizing a stratified sampling approach. The stratified sampling approach is utilized in order to achieve heterogeneity among respondents to reduce the common survey bias (Jun et al. 2006). A pre-tested survey was distributed to four hundred seventy two (472) to middle and lower level employees in various departments within five multiple manufacturing companies currently certified to ISO 14001 (06,QDGGLWLRQIRXUFRPSDQLHVDUHUHFLSLHQWVRIWKH0DOD\VLDQ3ULPH0LQLVWHU¶V+LELVFXV$ZDUG30+$ 7KH 30+$ ZDV ILUVW ODXQFKHG LQ DV 0DOD\VLD¶V SUHPLHU SULYDWH VHFWor environmental award for business and industry. The PMHA winners are expected to manifest superior leadership and human resource management and could become learning targets for other firms in the implementation of a successful EMS. Two hundred and thirty four (234) surveys were received, producing a valid response rate of 49.58 percent. Eleven responses from an onsite survey conducted in a small and medium enterprise were excluded from the final data analysis. Of the two hundred and twenty three (223) survey responses used in the final data analysis, two hundred and eleven (211) responses are from the recipients of the PMHA. The data was treated to descriptive, reliability, validity and correlation analyses using the SPSS computer program version 16.

100

Journal of Environment Management and Tourism The survey was structured to elicit perceptual data. The survey items were derived from an extensive review of the literature. Available and appropriate existing measurement items that had been empirically tested were adapted and utilized to ensure reliability and validity. The survey was translated from English to Malay by the researcher and all wording discrepancies were then corrected with the assistance of a qualified and experienced instructor. In addition respondents to the survey were required to provide demographic information pertaining to: 1) educational level, 2) work department, 3) length of experience with current type of job, 4) length of service in the current organization, 5) gender, 6) age, 7) race, and 8) job title. The respondents to the survey in Ramus, DQG 6WHJHU¶V VWXG\ ZHUH DVNHG LI WKH\ KDG HYHU ³WULHGWRSURPRWHDQHQYLURQPHQWDOLQLWLDWLYHZLWKLQWKHFRPSDQ\´7KH\ZHUHJLYHQDFKRLFHRID³\HV´DQG³QR´ response. Ramus, DQG 6WHJHU¶V VWXG\ DGGUHVVHG ZKHWKHU RU QRW D UHVSRQGHQt felt that she or he tried an environmental initiative, not whether someone else knew that they had. The single measure was considered as a very good proxy for actual employee eco-initiatives in companies. Rondinelli, DQG 9DVWDJ HPSKDVL]HG WKDW WKH ,62 (06 JXLGHOLQHV¶ VWURQJ HPSKDVLV RQ pollution prevention can save companies money by improving efficiency and reducing costs of energy, materials, fines and penalties. Essentially pollution prevention requires significant changes in existing production processes and requires a basic rethinking of product design (Christmann 2000, Klassen 2000, Bhamra 2004, Bansal, and Hunter 2003). According to Ramus (2001, 2002) eco-initiatives can be grouped into three distinct categories: 1) suggestions that decrease environmental impacts (like reuse and recycling), 2) suggestions that solve environmental problems (like hazardous substance use reduction), and 3) suggestions that develop a more eco- efficient product/service (for example, less resource and/or energy intensive). Thus the employee willingness to try eco-initiatives construct was measured using a five-point interval scale (1 = never, 2 = seldom, 3 = sometime, 4 = usually, 5 = always) with the following questions:

Item 1: I have tried to promote suggestions to decrease environmental impacts (like reuse and recycle). Item 2: I have tried to promote suggestions to solve environmental problems (like reducing the need for hazardous substances). Item 3: I have tried to promote suggestions to develop a more eco-efficient product/service (example less resource and/or energy intensive). The survey items for the rewards construct were adapted from Chinander (1997), Ramus, and Steger (2000), Wee, and Quazi (2005), Daily et al. (2003, 2007). The rewards construct was measured using a five-point interval scale (1=strongly disagree, 2=disagree, 3= neither disagree nor agree, 4 =agree, 5 = strongly agree) with the following questions:

Item 4: In the past, our organization has been known to discipline an employee for violating environmental policies and procedures. Item 5: We are rewarded for making suggestions for improvement on EMS. Item 6: Employees are recognized for taking initiative for environmental management through company environmental awards to individuals or teams. Item 7: I feel that if I do not contribute to improving environmental performance, my chance of career advancement will be negatively affected. Item 8: Achievement of environmental goals is used as one of the criteria in my performance appraisal. Item 9: Supervisors in my department give credit to people when they work on EMS improvements. Item 10: Employees who have achieved or surpassed their environmental goals are rewarded bonus pay or other monetary awards. Item 11: Our organization provides individual financial incentives for EMS improvements.

5. Data Analysis and Findings 5.1 Profiles of the respondents to the survey Age of participants ranged from 19 to 55, the mean age of the total employee sample was 33 years. 68.6 percent of the employees were male and 31.4 percent female. The average tenure was close to 7.77 years. Approximately 45.3 percent of the employees were Malays, 25.6 percent Chinese, 19.7 percent Indians, 9.0 percent others and 0.4 percent failed to categorize their ethnicity. Educational background for the respondents ranged from secondary school to the doctorate level. The mean number of years on experience with current type of job was 9.5 years. 15.7 percent of the respondents to the survey consist of executives, managers and

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Volume I Issue 2(2) Winter 2010 supervisors whereas 84.3 percent comprised of engineers, technicians and the majority being the production workers. 5.2 Reliability and Validity analyses Internal consistency analysis was carried out to measure the reliability of the items using Cronbach alpha. Items were eliminated in order to achieve maximization of the alpha coefficient, where needed. Item 4 and item 7 were dropped during the reliability analysis. The alpha value for the rewards construct is 0.781. None of the items for employee willingness to try eco-initiatives construct required deletion and the alpha coefficient is 0.879. Both constructs exhibited good internal consistency as the minimum suggested alpha level for established scales is 0.70 although it may be reduced to 0.6 for new scales in exploratory research (Nunnally 1978). In an effort to ensure content validity the survey was reviewed by management representatives of ISO FHUWLILHG FRPSDQLHV DQG WZR WHFKQLFDO FRPPLWWHH PHPEHUV RI WKH 0DOD\VLDQ 3ULPH 0LQLVWHU¶V +LELVFXV Award (PMHA). To limit the threats of construct validity available and appropriate existing measurement items that had been empirically tested were adapted and utilized whenever possible. The principal components factor analysis is chosen to evaluate construct validity, which is consistent with the literature (see for example, Wee, and Quazi 2005, Geralis, and Terziovski 2003, Samson, and Terziovski 1999, Flynn et al. 1994). The rewards and employees willingness to try eco-initiatives constructs were factor analyzed separately using the principal components factor analysis with orthogonal rotation using the Varimax method. The result of the reliability and factor analysis is summarized in Table 1. A single factor solution emerged with an eigenvalue of 2.416 explaining 80.526 percent of variance in the employee willingness to try eco-initiatives. As for rewards, a single factor solution emerged with an eigenvalue of 2.879 explaining 47.976 percent of variance. Further support for their loading on single factor was provided by the graphical scree test (shown in Figure 1 and Figure 2) which both scales easily passed. The percentage of variance explained for the employee willingness to try eco-initiatives scale is very much higher as the survey items are worded in a similar manner as compared to the rewards items. Future research needs to work on continuing to improve the rewards scale. This can be accomplished by continuing to add and modify items, based on feedback obtained from experts on the subject and by testing the scales in various samples (i.e. different industries). The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy test results is 0.817 and 0.712 for the rewards and employee willingness to try eco-initiatives respectively, which is much above the suggested PLQLPXP VWDQGDUG RI UHTXLUHG IRU UXQQLQJ IDFWRU DQDO\VLV &RDNHV 7KH %DUWOHWW¶V WHVW of sphericity GHPRQVWUDWHGVLJQLILFDQWO\KLJKYDOXHVDWS IRUERWKVFDOHV0RUHRYHUitems with factor loading 0.50 or greater are considered practically significant (Hair et al. 1998). In summary, the results indicate that the sample was suitable for factor analytic procedures.

Variables Employee willingness to try eco-initiatives

Table 1. Summary statistics for factor and reliability analyses Original Item % variance items KMO loading Eigenvalue explained (item range number) .712 .862 - .930 2.416 80.526 1-3 .817 .617 - .789 2.879 47.976 4-11

Rewards Source: SPSS data analysis

102

Items deleted (item number) - 4, 7

Cronbac h alpha .879 .781


Figure 1. Scree plot for employee willingness to try eco-initiatives construct

Figure 2. Scree plot for rewards construct

5.3 Descriptive analysis Adopting the methodology used by Geralis, and Terziovski (2003) in the field of quality management, the SHUFHQWDJH IUHTXHQFLHV ZLWKLQ WKH ³DJUHH´ DQG ³VWURQJO\ DJUHH´ UHVSRQVH FDWHJRULHV RI HDFK YDULDEOH RI WKH UHZDUGVFRQVWUXFWZHUHFRPELQHG³DJUHHG´ ,QVXPPDU\SHUFHQWRIWKHUHVSRQGHQWVWRWKHVXUYH\DJUHHG that employees are rewarded for making suggestions for improvement on EMS;; 2) 34.5 percent agreed that employees are recognized for taking initiative for environmental management through company environmental awards to individuals or teams;; 3) 30 percent agreed that supervisors give credit to employees when they work on EMS improvements;; 4) 30.1 percent agreed that employees who have achieved or surpassed their environmental goals are rewarded bonus pay or other monetary awards;; 5) 30.1 percent agreed that organizations provided individual financial incentives for EMS improvements;; 6) 30 percent agreed that achievement of environmental goals is included in the performance appraisal. In summary the percentage IUHTXHQFLHVZLWKLQWKH³DJUHHGÚHVSRQVHFDWHJRULHVZHUHYHU\ORZUDQJLQJIURPSHUFent to 41.7 percent. In some cases research findings have shown that managerial pay is tied to environmental performance (see Russo, and Harrison 2005, Berrone, and Gomez-Mejia 2009). 15.7 percent of the respondents to the survey in this exploratory study are executives, managers and supervisors whereas 84.3 percent comprised of engineers, technicians and the majority being the production workers. It is possible that the respondents to the survey may have deliberately rated themselves higher in the survey. This might have introduced certain amount of bias in the data collected. 103

Volume I Issue 2(2) Winter 2010 The frequencies and percentage frequencies for the three categories of employee willingness to try eco- initiatives are shown in Table 2. The measures of central tendencies were calculated for each variable. For H[DPSOH WKH YDULDEOH µ, KDYH WULHG WR SURPRWH VXJJHVWLRQV GHFUHDVH HQYLURQPHQWDO LPSDFWV OLNH UHXVH DQG UHF\FOH ¶ \LHOG D PHDQ RI PHGLDQ RI DQG PRGH RI 7KH YDULDEOH µ, KDYH WULHG WR SURPRWH suggestions to solve HQYLURQPHQWDOSUREOHPVOLNHUHGXFLQJWKHQHHGIRUKD]DUGRXVVXEVWDQFHV ¶\LHOGDPHDQRI PHGLDQRIDQGPRGHRI)LQDOO\WKHYDULDEOHµ,KDYHWULHGWRSURPRWHVXJJHVWLRQVWRGHYHORSD more eco-efficient product/service (example less resourFHDQGRUHQHUJ\LQWHQVLYH ¶\LHOGDPHDQRIPHGLDQ of 3.00 and mode of 3.00. The central tendency measures for the three variables above indicate a tendency of UHVSRQVHVLQWKHµVRPHWLPH¶RSWLRQ2IWKHWZRKXQGUHGDQGWZHQW\WKUHHVXUYH\UHVSRQVHVused in the final data DQDO\VLVWZRKXQGUHGDQGHOHYHQDUHIURPWKHUHFLSLHQWVRIWKH3ULPH0LQLVWHU¶V+LELVFXV$ZDUG30+$ +HQFH the employees are expected to be possibly more proactive and may even have tried eco-initiatives than the population at large.

Table 2. Frequencies and percentage frequencies for employee willingness to try eco-initiatives. Categories of Eco-initiatives I have tried to promote suggestions to decrease environmental impacts (like reuse and recycle). I have tried to promote suggestions to solve environmental problems (like reducing the need for hazardous substances). I have tried to promote suggestions to develop a more eco-efficient product/service (example less resource and/or energy intensive).

Never

Seldom

Sometimes

Usually

Always

Total

27 (12.1)

50 (22.4)

101 (45.3)

30 (13.5)

15 (6.7)

223 (100)

48 (21.5)

60 (26.9)

79 (35.4)

23 (10.3)

13 (5.8)

223 (100)

44 (19.7)

59 (26.5)

79 (35.4)

31 (13.9)

10 (4.5)

223 (100)

Note: Percentage frequency appears in the parentheses

5.4 . Correlation analysis With reliability and validity of the scales established, factor scores were calculated from the remaining variables to provide estimates for each scale. The factors scores for the scales were used as variables in the Pearson correlation analysis. Given that the research facilities for this study had fully developed ISO14001 EMS SURJUDPV DQG IRXU DUH UHFLSLHQWV RI WKH 3ULPH 0LQLVWHU¶V +LELVFXV $ZDUG 30+$ RQH ZRXOG H[SHFW D VWURQJ positive relationship (i.e. correlation) between employee willingness to try eco-initiatives and rewards. On the contrary the results of this exploratory study indicates a significant weak positive correlation (r = 0.223, p < 0.001) between rewards and employee willingness to try eco-initiatives. The results somehow suggest that middle and lower levels employees are rarely rewarded for their environmental initiatives.

6. Conclusion The rewards and employee willingness to try eco-initiatives scales suggest good internal consistency and adequate construct validity. In summary the research findings suggest that middle and lower levels employees in some of the leading environmentally proactive ISO14001 EMS companies in Malaysia are rarely rewarded for their environmental initiatives. The results support the contention by Denton (1999) that incentives, bonuses, salaries and promotions are rarely linked to environmental performance. 0RUHRYHU JLYHQ WKDW HPSOR\HHV¶ MRE appraisals rarely include an environmental category, the proposed employee willingness to try eco-initiatives evaluations could provide practitioners a tool to assess emSOR\HHV¶SHUIRUPDQFHHYDOXDWLRQ)RUH[DPSOHLWHP FDQEHUHVWDWHGWRVD\µ7KHHPSOR\HHKDVWULHGWRSURPRWHVXJJHVWLRQVWRGHFUHDVHHQYLURQPHQWDOLPSDFWVOLNH UHXVH DQG UHF\FOH ¶ 6LPLODUO\ LWHPV DQG VKRXOG EH UHVWDWHG WR VD\ µ7KH HPSOR\HH KDV WULed to promote VXJJHVWLRQV WR VROYH HQYLURQPHQWDO SUREOHPV OLNH UHGXFLQJ WKH QHHG IRU KD]DUGRXV VXEVWDQFHV ¶ DQG µ7KH employee has tried to promote suggestions to develop a more eco-efficient product/service (example less UHVRXUFHDQGRUHQHUJ\LQWHQVLYH ¶ respectively. Future research needs to work on continuing to improve the rewards scale. It is important to test the scales using samples from other populations, in order to enhance their generalizability.

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Journal of Environment Management and Tourism Notes:

1 7KHWHUP³UHZDUGV´LQFOXGHVPRQHWDU\DQGQRQ-monetary rewards, and recognition awards.

7KH WHUPV ³HQYLURQPHQWDO LQLWLDWLYHV´ ³HQYLURQPHQWDO LQQRYDWLRQV´ ³HFR-LQLWLDWLYHV´ DQG ³LQQRYDWLYH VROXWLRQVWRHQYLURQPHQWDOSUREOHPV´KDYHEHHQXVHGLQWHUFhangeably within this paper. 2

Acknowldegement: The initial research for this paper was part of a larger project, published recently as a book (see Kaur, Harjeet. 2010. Impact of HR factors on environmental performance: Impact of HR factors on employee attitudes and environmental performance. LAP LAMBERT Academic Publishing).

References [1] Aboulnaga, I.A. 1998. Integrating quality and environmental management as competitive business strategy for 21st century. Environmental Management and Health 9/2: 65-71. [2] Babakri, K.A., Bennett, R.A., and Franchetti, M. 2003. Critical factors for implementing ISO 14001 standard in United States industrial companies. Journal of Cleaner Production 11/7: 749-775. [3] Bansal, P., and Hunter, T. 2003. Strategic explanation for the early adoption of ISO 14001. Journal of Business Ethics 46/3: 289-99. [4] Berrone, P., and Gomez-Mejia, L.R. 2009. Environmental performance and executive compensation: an integrated agency-institutional perspective. Academy of Management Journal 52/1: 103-126 [5] Bhamra, T. 2004. Ecodesign: the search for new strategies in product development. Journal Engineering Manufacture 218/5: 557-569. [6] Christmann, P. 2000. Effects of best practices of environmental management on cost advantage: the role of complementary assets. Academy of Management Journal 43/4: 663-80. [7] Chinander, K.R. 1997. The influence of accountability and responsibility on managerial decision making: an investigation of environmental, health and safety decisions within the chemical industry. PhD diss., University of Pennsylvania. [8] Coakes, S.J. 2005. SPSS: analysis without anguish: version 12.0 for Windows. John Wiley & Sons Australia Ltd. [9] Daily, B.F., Bishop, J.W., and Steiner, R. 2007. The Mediating Role of EMS Teamwork as it pertains to HR Factors and Perceived Environmental Performance. Journal of Applied Business Research, vol. 23, no. 1: 95-109. [10] Daily, B.F., Bishop, J.W., and Steiner, R. 2003. The impact of human resource management practices on employee perceptions of environmental performance. Proceedings of National Decision Sciences Institute Conference Meeting, in Washington D.C. [11] Daily, B.F., and Huang, S. 2001. Achieving sustainability through attention to human resource factors in environmental management. International Journal of Operations & Production Management 21/12: 1539-552. [12] Denton, D.K. 1999. Employee involvement, pollution control and pieces to the puzzles. Environmental Management and Health 10/2: 105-111. [13] Florida, R. 1996. Lean and Green: The move to environmentally conscious manufacturing. California Management Review 39/1: 80-105. [14] Flynn, B.B., Schroeder, R.G., and Sakakibara, S. 1994. A framework for quality management research and an associated measurement instrument. Journal of Operations Management 11/4: 339-66. [15] Geralis, M., and Terziovski, M. 2003. A quantitative analysis of the relationship between empowerment practices and service quality outcomes. Total Quality Management & Business Excellence 14/1: 45-62. [16] Govindarajulu, N., and Daily, B.F. 2004. Motivating employees for environmental improvement. Industrial Management & Data Systems 104/4: 364-72.

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Volume I Issue 2(2) Winter 2010 [17] Graves, B.$,62(QYLURQPHQWDO0DQDJHPHQW:KDWLVLW":KDWLVUHTXLUHG"2WKHUFRPSDQ\¶V H[SHULHQFHV«Products Finishing: 62-68. [18] Hair, J.F., Anderson, R.E., Tatham, R.L., and Black, W.C. 1998. Multivariate data analysis, 5th ed. Englewood Cliffs, NJ: Prentice-Hall International. [19] Hanna, M.D., Newman, W.R., and Johnson, P. 2000. Linking operational and environmental improvement through employee improvement. International Journal of Operations & Production Management 20/2: 148-65. [20] Hart, S.L. 1995. A natural-resource based view of the firm. Academy of Management Review 20/4: 986-1014. [21] Jun, M., Cai, S., and Shin, H. 2006. TQM practice in maquilodora: antecedents of employee satisfaction and loyalty. Journal of Operations Management 24/6: 791-812. [22] Kaur, H. 2010. Impact of HR factors on environmental performance: Impact of HR factors on employee attitudes and environmental performance of ISO14001 EMS companies. LAP LAMBERT Academic Publishing. [23] Kitazawa, S., and Sarkis, J. 2000. The relationship between ISO 14000 and continuous source reduction. International Journal of Operations & Production Management 20/2: 225-48. [24] Klassen, R.D. 2000. Exploring the linkage between investment in manufacturing and environmental technologies. International Journal of Operations & Production Management 20/2: 127-47. [25] Massoud, J.A., Daily, B.F., and Bishop, J.W. 2007. Application of the Scanlon plan as catalyst to improve environmental performance. Proceedings of the Southwest Decision Sciences Meeting, March 13-17 in San Diego. [26] May, D.R., and Flannery, B.L. 1995. Cutting waste with employee involvement teams. Business Horizons 38/5: 28-38. [27] Miles, M.P., and Russell, G.R. 1997. ISO 14000 Total Quality Environmental Management: The Integration of Environmental Marketing, Total Quality Management, and Corporate Environmental Policy. Journal of Quality Management 2/1: 151-68. [28] Nunnally, J.C. 1978, Psychometric Theory, 2nd ed., McGraw-Hill Book Company. [29] 2¶K(RFKD0. 2000. A study of the influence of company culture, communications, and employee attitudes on the use of 5Ss for environmental management at Cooke Brothers Ltd. The TQM Magazine 12/5: 321-30. [30] Pun, K.F., Hui, I.K., Henry, C.W.L., Hang-Wai, L., and Winston, L.G. 2002. Development of an EMS planning framework for environmental management practices. International Journal of Quality & Reliability Management 19/6: 688-709. [31] Quazi, H.A. 1999. Implementation of an Environmental Management System: the Experience of Companies Operating in Singapore. Industrial Management & Data Systems 99/7: 302-11. [32] Quigley, N.R., and Tymon, Jr., W.G. 2006. Toward an integrated model of intrinsic motivation and career self-management. Career Development International 11/6: 522-543. [33] Ramus, C.A. 2002. Encouraging innovative environmental actions: what companies and managers must do. Journal of World Business 37/2: 151-164. [34] Ramus, C.A. 2001. Organizational support for employees: encouraging creative ideas for environmental sustainability. California Management Review 43/3: 85-105. [35] Ramus, C.A., and Steger, U. 2000. The roles of the supervisory support behaviors and environmental policy in employee ecoinitiatives at leading-edge European companies. Academy of Management Journal 43/4: 605-26. [36] Rondinelli, D., and Vastag, G. 2000. Panacea, common sense, or Just a label? The value of ISO 14001 environmental management systems. European Management Journal 18/5: 499-510. [37] Russo, M.V., and Harrison, N.S. 2005. Organizational design and environmental performance: clues from the electronics industry. Academy of Management Journal 48/4: 582-93.

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STATE INSTITUTIONS AND THEIR ROLE IN HARMONIZING THE ENVIRONMENT LEGISLATION ON THE BASIS OF EUROPEAN CONVENTIONS Armand KRASNIQI University of Pristine, Kosovo [email protected]

Abstract The purpose of this paper work is to provide a basic juridical-legislative strategy under which countries of the south- eastern Europe would regulate and harmonize their local legislation with European conventions assuming to provide protection and sustainability to the environment. This due to the fact that these countries effected by their past are facing with a high rate of pollution and with lack of efficient policies dedicated to ecological sustainability. It is uncontested that the global social-economical development has shown an unforeseen growth before. On the other side, we have silently ascertained that in parallel with this advancing the environment where we live has been catastrophically degraded and destructed so that we GRQ¶WHYHQWKLQk that the future generation has the right to live normally as well. Due to this gradual risk, in particular in the EHJLQQLQJ RI WKH ¶V SULPDULO\ IURP WKH LQWHUQDWLRQDO LQVWLWXWLRQV DQG ODWHU IURP VWDWH JRYHUQPHQWV WKHPVHOYHV WKHUH DUH symbolically noticed programs for environment protection, and issue and execution of declarations and conventions, by which not only particular preventing reacting measures are recommended, but also they enforce governments of countries to approximate their national legislation with the principles and standards these significant documents provide. Due to the continuous increase of the social risk and environment destruction trend two conventions have been issued which enforce countries to regulate the responsibility for environment protection with the Civil Law and the Criminal Law, this way qualifying and considering dangerous actions of objects towards the environment. Keywords: Environment, legislation, civil and penal liability, convention, directive

JEL Classiffication: K, K3, K32

1. Introduction 7KHODWH¶VRI;;FHQWXU\RIWKHVRXWK-eastern Europe marks only the beginning of the social-economical democratization process which simultaneously interfere the implementation of political and program activities in the scope of harmonization and the promulgation of the national legislation over the international one in the environment protection aspect. Just after a decade this activity began to come into force and actually not because of the governmental willingness to minimize the pollution effects in harm of economical growth but only for their necessity for accession in international conventions which at the very end ensure an easier integration process in the European Union. The stabilization process and their association through financial, logistic and human DVVLVWDQFH DQG WKURXJK SURJUDPV VXFK DV ³(QYLURQPHQW IRU (XURSH´ ZKLFK ZHUH OHG DQG SURPRWHG VRPH particular International organizations (OSCE, EU, REC, etc) which firstly have achieved to raise state and individual awareness not only for quality environment protection, but possibly its advance as well. Some of the projects regarding the improve of legislation on the environment have finished or are being finalized thanks to the international cooperation which aims the development of institutions, personnel and environment legislation branch. The technical and technological development of the late years of the last century has created many dangerous centers for the environment. This condition has been caused by the human kind itself by misadministration not only of nature and its resources, but also the work environment and it has brought great damages to their lives, their physical integrity, health, wealth and other values. At the same time by such actions the basis of human survival is being seriously and extremely jeopardized. Starting from these concerns, the international community has started to reflect a more serious engagement in the prevention and protection plan in this field. Our country is also in the phase of social, economical, political and legislative reforms. In this aspect it is paying special attention to the issue of harmonization, respectively approximation of the local legislation with the regulations, acts and important international documents which aim for environment balance. In this sense, the aspect of environment protection and elimination of damages caused by possible centers of existing or potential risks is assessed as of special significance, which shows the urgent need to harmonize much deeper and with more diligence the legislative basis in conformity with both conventions: The Convention for Civil liability for the damages caused from dangerous activities for the environment from 1993, and the Convention on the protection of living environment through the criminal Law in year 1998. Moreover, due to the importance the environment protection has now, there are several documents and recommendations which enforce countries to act on the

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Journal of Environment Management and Tourism legislative, economical, and social, and lately the humanitarian aspects. The aim of these elements is the composition of the legislative basis and economical measures which always must be developed upon sustainable bases towards environment protection.

2. National centers as initial institutions for sustainable growth Efficient reaction for pollution by no doubt is the task and liability of state bodies. In order to do this task properly initially specialized national institutional capacities have to be created. Establishment of National Centers for Sustainable Growth should be perceived as independent public institutions with clear objectives, ready to provide consultancy, information service, advices for education by promoting the role and significance of sustainable growth which would be dedicated to state institutions and public. According to our opinion when concerning the South-eastern European countries, these institutions on the initial reaction aspect not only support on ensuring a sustainable growth, but also reflect measures which impact on the decrease of poverty through increase of protection care. The objectives of such Centers should be focused on information collection, organization and elaboration regarding the sustainable growth, or on the situation/decrease of poverty in each country. In addition, we have to aim the identification of the environment condition and giving accurate and reliable data to governmental agencies and other interested institutions. It is to be considered of particular significance the participation in compiling, execution of the evaluation strategy, political measures, programs and projects which the Government takes into consideration for sustainable growth. Ensuring technical and scientific support by focusing the programs together with the undertaken measures on the national, regional and international level are considered as crucial for efficient reaction. The issues dealing with the membership in the European Union are treated with particular significance. The objectives are to be extended in distributing knowledge and information to increase awareness for the importance of sustainable growth and for the current problems to be overcome. All this can be achieved through educating and training the public administration on the local and national level, but also the education of students and citizens who are interested on sustainable growth. The activities of these centres should be focused in the compilation of sustainable growth strategies through policies, particular measures and activities. Building of institutions in these countries should be included through the preparation of action plans, their monitor, evaluation and execution on medium term and long term period for sustainable growth. Supervision and scientific and operational review should be implemented through a technical support for all the ministries and other state institutions dealing with the issues of sustainable growth, or through reduction of poverty and protection of the living environment. We have top take secure steps in the function of supporting and strengthening the cooperation between ministries and other state institutions in the SURFHVV RI ³HQYLURQPHQW PDQDJHPHQW¶ DQG LQFUHDVH RI HIILFLHQF\ LQ WKH H[HFXWLRQ RI WKH SRYHUW\ GHFUHDVH strategy. A special attention should be given to monitoring and evaluation of international convention implementation with the purpose to provide a complete picture for international activities in the field of sustainable growth. These centers should have a an active involvement in the preparation to harmonize the national legislation with the EU legislation in all issues regarding sustainable growth. They should be involved in the harmonization process in the level of consultant-expert in the Integration Office with EU and the special ministers whose activities are related with sustainable growth, creation of regular mechanisms and indicators for environment sustainability, identification and recognition of quantity indicators of sustainability, and evaluation of their impact in sustainable growth. Implementation of these activities and receiving these information leads to the identification of the discrepancy phenomenon of actual values giving reasons for reviewing and adjusting policies which are currently applicable. Creating facilities in the function of scientific and technical support for the ministries and other state institutions by preparing measures, plans, programs, and actions emerging from the national and European legislation, and other international treaties is of specific importance. Organization of education and training through programs which are related with sustainable growth, as well as preparation of publications, reports, analyses, researches, opinions and recommendations of experts etc. on written and electronic form create a very productive institutional system. Centre publishing, especially when concerning the implementation of legislation and its approximation with international acts plays an irreplaceable role in an environment for everyone. 3. 7KH´HQYLURQPHQWDOµGLSORPDF\WRZDUGVDOHJLVODWLYHKDUPRQL]DWLRQ The main problem in ecology is the pollution and its level that knows no national or international boundaries regardless whether such boundaries are political, racial, and religious or even in cultural diversity. Being aware of what pollution is causing, countries have started to develop joint actions which has enabled 109

Volume I Issue 2(2) Winter 2010 establishing a special form of cooperation known as environmental diplomacy. The environment diplomacy in relation to the concerns raised on environmental deregulations is not only visible, but has been proven as successful by examples such as joint adoption of Kyoto Protocol, United Nation Convention on Environmental Change etc. We must admit that the environmental policy is considered a specific, complex and necessary activity that needs to be implemented having into account the circumstances of the globalization process. Therefore this diplomatic reaction must not be ignored by South Eastern European countries but has to be advanced regardless of legislative specifics of each country of this part of Europe. This provides a guarantee for joint intergovernmental reaction and does not apply to respecting and implementing the international legal act but also applies to rule of law on environmental area. Having into account that states institutional responsibilities should not be taken only as implementation of commitments related to environment protection because this is considered as difficult to be implemented if there is no strategy into place and as so it needs to be implemented together with the strategy which will serve to successfully coordinate with international cooperation as well as in partnership with the community. This means that creation and use of environmental diplomacy mechanisms will first create the possibility of entering into a series of multilateral agreements in the South Eastern European region which afterwards in another certain level will coordinate and successfully implement governmental and non-governmental mechanisms in form of joint policies. Bilateral governments signed between ministries, respectively between competent departments dealing with environmental protection, although their nature is entirely political, no doubts that they are perquisites to effectively resolve the environmental issues. 7KHUHIRUHWKHQHZIRUPVNQRZQDVHQYLURQPHQWDOGLSORPDF\RU³JUHHQ´GLSORPDF\QHHGWREHGHYHORSHG with the maximum speed by all countries in the region. Certainly, the environmental diplomacy firstly will not only be an incentive instrument for an international cooperation for environmental issues but will also be transformed into a very effective mean that will facilitate the current crisis in the region. The environmental diplomacy has the potential to become a supporter of prevention policies against the environment pollution and policies that constitute an awareness and coordination approach amongst the citizens. 5

4. How to regulate civil responsibility in local legislation In accordance with the Rio Declaration on the Environment of year 1992,6 in order to regulate and provide a due compensation for eventual damages caused by dangerous activities for the environment, the European Commission issued the Convention on the civil liability of subjects performing dangerous activities for the environment on 21 June 1993, in Lugano.7 The entrance dispositions of this Convention have created clear essential concepts so that their content will be interpreted similarly by each member of this old European organization. In the environment and the liability aspect, this Convention considers of great significance: the life resources as abiotic and biotic, air, water, earth, flora, fauna, and other elements in interaction between these factors. The said Convention tends to regulate the specific environment protection which could be exposed or effected by different dangerous resources. In addition, property aspects are also regulated, especially those being a part of cultural inheritance, and special aspects of landscapes. According to the dispositions of this Convention the following would be considered as dangerous: production, treating, storage, use, or emission of one or more dangerous substances, or any activities which is of the similar nature relating these substances, production, agricultural, treating, storage, use, destruction, disposal, emission, or any other activities of one or more genetically modified organisms or microorganisms which represent significant danger for the human kind, environment, or property, work and setting of cremation equipments, treatment, or recycling of solid waste, with the condition that these represent a significant danger for the human kind and the environment. When interpreting the said convention it is stressed how a substance or hazardous substances prepared in advance have the ability to emit a hazard for the environment and the human kind, and their property (e.g. explosive, oxidative, carbonating, toxic, hazardous, corrosive, irritating devices, etc.) raise the liability for the eventual dispute or contractual damage, which has to be compensated if it is done. The incidents towards causing environment damage could be any unexpected continuous phenomenon or events which are of the same origin, causing damages ore raise permanent serious risks to cause damage. Due to the effects of dangerous activities, damaged substances or products endanger or could endanger the environment condition, which 5 *3DSDQGUHX H[ *UHHN 0LQLVWHU IRU )RUHLJQ $IIDLUV DW ,QWHUQDWLRQDO &RQIHUHQFH ³6XVWDLQDEOH 'HYHORSPHQW IRU 3HUPDQHQW3HDFH´$WKHQV-7 May 2003. 6 Rio Declaration on Environment and Development, Having met at Rio de Janeiro from 3 to 14 June 1992, për shumë shih ne http://www.unep.org/Documents.Multilingual/Default.asp?documentid=78&articleid=1163 7 Convention on Civil Liability for Damage Resulting from Activities Dangerous to the Environment Lugano, 21.VI.1993, for more please see http://conventions.coe.int/treaty/en/treaties/html/150.htm

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Journal of Environment Management and Tourism manifests in the emergence of particular damages. Damages caused from a particular subject which have to be compensated in conformity with the foreseen regulations of the convention are: dying or personal injury, loss or damage of property in the aspect of dangerous activities, loss or damage on the environment, costs of prevention measures and any damages caused by the execution of these measures. The eventual liability for the caused damages is clearly regulated by the dispositions of the European Convention, and if this damage has been caused after the entry into force of this international legal act, or if the incident has happened in the territory of a contractual party, regardless where the damage consequences occur, it is always the subjects that are charged with the liability. This liability could be carried in two forms as following: the Liability regarding particular substances, organisms and settings of solid waste or places;; and the Liability of a permanent place for waste extermination. In the first case, the carrier of substances who performs a dangerous activity is liable for the caused damage because the operation with such substances has been the result of the accident, or during the period he has the activities on control. In other cases the carrier, respectively the operator is liable for continuous regularity of waste deposit and if during this time a damage is done during their deposit on that place raises the civil liability alongside with obligation to compensate the damage. From the regulations on the liability for caused damages the convention has foreseen some exceptions in cases when the operator is free of obligation. These cases are when the damage is caused in events of hostility, civil war, natural phenomenon of extraordinary nature which neither can be avoided nor can they object the activities of a third party, or acceptable levels of pollution (and what are the acceptable levels of pollutions is a factual issue which has to be solved for each case considering all the circumstances of the objective or subjective aspect), or the dangerous activities which have been performed in compliance with the law on the interest of a person who has been damaged. The liability for the damage caused from pollution has been practically reduced to a compensation only for material and immaterial damage. The request for compensation is initiated to the national court authorities and at the place where the loss has been caused, or at the place where dangerous activities has been performed, or on the basis of permanent inhabitation of the sued party (the so-called alternative jurisdiction). However, this convention gives the possibility for the requirements of particular subjects, bodies and organizations dealing with protection, preservation and improvement of environment to be given a quality civil-legal protection. Therefore with this legal act it is managed to: Prohibit dangerous illegal activities which are a serious threat for environment damage;; Have operators on charge to undertake particular and exactly specified measures in order to prevent incidents or events of such damages in the future;; Have operators in charge to undertake measures after the incident in order to prevent damages also in the future;; Have operators on charge to undertake measures in order to turn back on the previous condition of damaged places or items. In order to increase the liability of individuals, natural or legal persons, companies, institutions or other organizations of the multiethnic nature, this convention has enforced many countries and international organization to organize campaigns in the field of reduction, preservation, promotion, and protection of the living environment in the international frames. However, it was soon ascertained that for such an efficient social-legal reaction it was not sufficient only the possibility of creating civil liabilities for damages caused in the environment. After five years of intensive efforts of many scientists and experts it was managed to adopt the new European Convention, which sets a significant basis and the framework of criminal liability for such damages caused by the environment. 5. How to regulate the criminal responsibility in local legislation For the first time in Southern Eastern Balkans a protection has been provided for the environment through criminal law, in accordance with the international Convention through Criminal Law8. Within the scope of this law, our country has respected the principles and requirements of the International Convention on the Protection of Environment through Criminal Law. This Convention has been adopted by the European Council in Strasburg on 4th of November 19989.Thereby this very important international act aimed to enhance efficiency and quality of the plan on environment protection in the region and tasks that serve to classify actions or offences committed by certain entities against the environment as punishable offences when such actions have caused damages or serious harm on the environment. Practically, such solutions managed to establish effective unique grounds for criminal ± legal protection of environment within the European territory and unify basic responsibilities of natural 8 European Council, Committee on the Environment, Regional Planning and Local Authorities, Strasbourg, 1998. 9

Convention on the Protection of Environment through Criminal Law CETS No.: 172 for more please see http://conventions.coe.int/treaty/Commun/QueVoulezVous.asp?NT=172&CL=ENG 111

Volume I Issue 2(2) Winter 2010 legal persons for any eventual commission of these criminal offences 10. It has to be taken into account that the noted convention, in the environment protection plan, recommends to issue and adopt other legal acts that are outside the scope of the criminal law and cause harm to the environment (such as administrative offences etc), such offences also need to be punishable and regulated with an appropriate legislation. All the countries that have signed this Convention are required to undertake actions and certain activities. These activities are of the dubious character: national and international level. Within the national level this convention establishes the foundation to anticipate certain behaviors, criminal offences and description of criminal sanctions against the perpetrators within the criminal legislation. Within the international level this reflects commitment and perfection of the rules in legal-international cooperation amongst the countries against the criminal activities that might harm the environment in the region and wider. The provisions set forth in this Convention, specifically under the Section 2, stipulate the object of environment protection. Certain objects are considered: humans or certain values of human life, physical and health integrity, air, water, soil, protected monuments, other protected facilities, property, plants and animals. As forms of threats to these protected values special actions have been determined (an action or inaction failure) that are associated with certain substances that cause ionizing radiation, hazardous waste, hazardous activities, nuclear material and other dangerous radioactive materials that threaten the environment or its individual components. These activities may be committed intentionally or by gross negligence. In Europe, in the viewpoint of criminal law and its harmonization with environment protection it is particularly important to clearly define ways and forms to handle with hazardous activities. Commission of certain offences such as criminal offences that infringe, restrict or endanger the environment in accordance with the provisions of this Convention for criminal conviction are set by the following activities: the discharge, emission or introduction of a quantity of substances or ionizing radiation into air, soil or water which, the unlawful disposal, treatment, storage, transport, export or import of hazardous waste. The unlawful operation of a plant where a dangerous activity is carried out and which causes or is likely to cause death or serious injury to any persons or substantial damage to protected monuments, other protected objects, property, animals or plants;; Apart from these actions and activities classified as criminal offences that intent or assist to carry out activities that violate and threaten the environment it is foreseen to punish appropriately. This clearly means that the provisions set forth under the Convention foresee responsibilities in the form of cooperation in encouraging and supporting the struggle towards prevention and repression against the criminal offences of this nature. For these prohibited and illegal offences and activities committed by natural and legal persons, the convention provides certain types of measures and criminal sanctions. These sanctions are different such as: punishment by imprisonment and property seizure (in the form of assets, incomes or other assets). Despite fines and liabilities that sanction a criminal offence, there are other punishable measures that serve to maintain a sustainable and balanced environment within the scope of secondary legislation. This Convention does not imply a direct application in special environment cases. Provisions are to be applied only if countries are individually determined to do so. This means that the European Council and others that recognize and implement this convention unilaterally are required to include this in their national criminal legislation, including the penalty system by providing them in accordance to their type and according to the level of penalty in compliance with the convention framework. 6. Environmental legislation The concept for appropriate and modern legislation for a healthy environment means that is a task of each and everyone to have an ultimate goal which economic development in accordance with sustainability principles. If we look in the formal-legal aspect, knowing the relevance of the environment and the complexity that it contains for the society, apart from the internal legal framework, initially it requires having the role and the power of the international legislation. Within this plan it requires starting by assessing Stockholm Declaration on the Human Environment dated on 197211 . This declaration has been adopted aiming to set up the foundation of a equilibrated ecological development which explicitly aims to deduct the risk in sense of provision of conditions that impact on life and its qualities by paying special attention to environment protection. Apart from Stockholm 10 Criminal Code of Kosovo, Chapter XXIV, due to the environment importance, animals, plants and cultural objects,

in accordance with the Convention on the Protection of Environment through Criminal Law has provided legal-criminal protection to certain offences that in this way jeopardizes social life. 11 http://www.unep.org/Documents.Multilingual/Default.asp?documentid=97&articleid=1503

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Journal of Environment Management and Tourism Declaration, the United Nations made a decision to establish competent central bodies not only to handle with the problem of environment protection but also with the activity coordination in this area ± UNEP Program (United Nations Environment Program)12, which operates since 1973. The importance of Stockholm conference about the right to live in a healthy and suitable environment was a solid ground of many international reports and a basic important legal act for many national constitutions and court rulings. With the aim of accomplishment of international legislation for regulation of mutual issues, being well aware of the problem of an effective and efficient control of trans-border movements of toxic waste, in 1992 the Basel Convention has been adopted. The aim of this convention and its protocols is to ensure a completed legislative framework in order to perform a full control of the trans-border movement of dangerous material and toxic waste. Additionally, this document within its provisions regulates the responsibilities and duly payments of compensations for the damages caused as a result of the trans-border movements of dangerous substances and toxic waste, including even the incidents that might occur as a consequence of illegal trafficking. In order to provide a more efficient legal basis and a rational reaction worldwide in 1992 in Rio de Janeiro the United Nations Conference was held for Environment and Development. In the summit which was organized on the highest level took part 178 countries and the majority voted for the United Nation Declaration for Environment and Sustainable Development which contains 27 principles stipulated in terms for sustainable development.13 In this summit the principles of the Stockholm Declarations are still being elaborated and a new perception is being introduced that the obligation and the way of environment protection is not only of the national category but also a universal one. The commission for Sustainable Development was established as a body of the United Nations with the clear task to monitor the further course of actions started at Earth Summit in Rio. The Commission for Sustainable Development gathers each year in the United Nations and in specific sessions is committed to a particular subject. In the conference in Rio de Janeiro a global action plan is adopted for sustainable development for XXI Century. The obligations that emerge from Agenda 21 enforce 173 recipient countries. Agenda 21 is of great significance for the local governing because it foresees and regulates a specific role for the local authorities in order to begin with the process of sustainable development in this level. In this XQLYHUVDODFWLWLVVWUHVVHGWKDWµ«HDFKORFDODXWKRULW\PXVWHQWHULQto dialog with its citizens, local and private organizations, companies, etc. and to co-consent the local Agenda 21. Based on these dispositions, respectively international obligations, the government should create the legislative basis in order to reach a consensus with the wide local, civil public, particular social categories, commercial and industrial subjects, and to collect close and necessary information to compile initially a local legislative strategy, which at the end it should be appropriate in order to be integrated in both the national and international strategy. The Millennium Summit of the United Nations which dealt with the purposes for development and the schedules for the implementation of the stipulated principles for environment protection has set eight essential objectives. This was done in order to encourage all countries to participate in solving problems in the human development aspect. The objectives include 18 clear possible tasks to be achieved through: policies and programs in the country;; international aid;; and engagement of the civil society Implementation of these objectives has to be achieved retroactively in a period of 25 years starting from 1990 until 2015. One of the eight main objectives on ensuring the environment protection has to be achieved by accomplishing three tasks: integration of sustainable development principles into policies and programs of the country and by reversing the harmful process of natural resources on the other direction;; increase of people percentage by 2012 to have a sustainable access to drinking water, and achievement of a sound improvement of living condition at least 100.000.000 of inhabitants of poor neighbourhoods as of 202014. In this meeting a conclusion was achieved that many efforts for environment protection have shown no results and this mainly due to largest world polluters (USA, Russia and others) they did not accept principles encompassed in previous declaration and conventions issued. The problems of climate change and global warming they become a focus only when a harmful change occurs in our life and when the social reaction is the only opportunity to improve such radical changes. The reaction of international community in the legal-formal plan towards this alarming situation has seriously started to be implemented based on Kyoto Treaty, a legal act that regulates the issue of environment protection from the polluting activities and what they impact on our climate. This proves that there has been a serious effort by the eligible countries for their responsibilities undertaken in 12 For more in relation to the mission and program of this forum please see http://www.unep.org 13 http://www.unep.org/Documents.Multilingual/Default.asp?documentid=78&articleid=1163 14 World Summit on Sustainable Development held on 2002 in Johanesburg

http://www.un.org/jsummit/html/basic_info/basicinfo.html 113

Volume I Issue 2(2) Winter 2010 accordance with the Convention. The Kyoto Protocol has been adopted in Kyoto, Japan, on 11 th of December 1997 and has entered into force on 16th of February 2005. Insofar this is signed by more then 140 countries. The detailed rules on implementation of the Protocol were approved in COP 7 in Marrakech in 2001, the so-called ³0DUUDNHFK$JUHHPHQW´ The objective is to ensure stabilization and reconstruction of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. The objectives are clearly defined and simultaneously set up requirement to developing countries, countries with transitional economy and to industrialized countries to continuously apply this protocol. The protocol regulates respectively the target agreed upon was an average reduction of 5.2% from 1990 in the period from 2008 until 2012. All the countries that are required to reduce gas emissions are listed in Annex 1 of the Kyoto Protocol. European Union is one of large supporters of this Protocol. This important legal act has ratified with the decision of Council of Ministers of European Union. This has entered into force on 31st of May 2002. Negotiations on concluding a new agreement commenced during early 2008 that shall replace the Coyote Protocol. Based upon the agreement, UN Experts were authorized and designated to conduct assessments about the climate changes, aiming to restrict gas emissions in all the countries even though there happens to be serious disagreements on this issue in sense of distributing the burden amongst the rich headed by United States and developing countries such as China and India. As far as the developing countries are concerned including Kosovo, Albania etc, the Protocol does not provide new requirements in conjunction with those foreseen by the Convention, i.e. there is no anticipation about the requirement for reduction of greenhouse emission, but it provides the possibility that each one of them may take upon itself a responsibility based on its capability. In order to produce effects and create institutional conditions it is necessary for Protocol to undertake further actions such as: a register for gas emission;; commitment of relevant state institutions to cooperate with UN bodies in charge to implement the Convention and the noted Protocol. This requires to be implemented by establishing partnerships with interested investors aiming to use clean technology in Republic of Kosovo and transfer of knowledge including the necessary measures for a transparent process of investments that are financially attractive. Afterwards the activity and attention needs to be increased in relation to the issues for the definition and content of the environment protection, the right to live in a healthy environment i.e. procedural aspects of this legislation which mean the procedural rights as follows: access to information in respect to living environment, participation in decision-making in conjunction with the environment and right to make questions for the decisions made with regard to environment including the procedural rights for certain issues that need to be filed to the court. Procedural regulation of the noted issues is important because it establishes a flexible and affordable process for environment protection. 7. Conclusions The end of the last century marks an optimistic quality in the awareness of people and governmental policies in sense of environment protection within national and international level. This occurred due to significant concerns on degradation and high pollution that has been caused to global system. Now, we have more reasons to be optimistic because the institutional reaction is more serious and has reflected this through multidimensional governmental programs which set as a priority the environment protection and sustainable development not only in their formal plans but efforts are made to implement them in practice. There are no doubts that people need to preserve, promote and protect the environment. However, the damage caused insofar and the danger which is constantly preset due to economic growth does not remain a limited problem in a territory of a single country. Therefore, it is logical for the international community to analyze these risks and to mobilize countries about this risk alarm from the environment pollution on a global level, as well as the need for the proper quality and effective protection. The Council of Europe as one of the oldest international organizations has joined the approach of codification and determination of the basic rules of civil and criminal responsibility for the commission of damages. Within this international organization during nineties of XX Century conventions were issued aiming to enhance the accountability system, rules to determine the responsibility, responsibility of entities and the sanctioning system under the condition that liabilities of the member states to incorporate these regulation into their national legislation. Having into account that our country is currently subject of essential reforms of policy, social, economic and legal system going towards the harmonization of internal regulations in compliance with the regulation or laws of the European Union, a special importance is deemed to be rapid adoption of environmental regulations (environmental law) and to be in compliance with the European law. Therefore, these conventions show a contribution towards a rapid and effective harmonization of our legal system with European legislation, especially when we have in mind the environmental risk in our country. Clearly, during the last century the

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Journal of Environment Management and Tourism awareness and perception of people and governments was positively provoked in respect to environment protection, in both national and international level. This concern can also be noticed within the governmental programs on protection of environment and sustainable development, which is deemed to one of the priority issues. There is no doubt that people need to preserve, promote and protect the environment. By summarizing this it means that actions undertaken for environment protection are to be implemented through sustainable development. Within this logic, the effectiveness of social reaction mainly depends on the rule of law, adoption of compatible legislation with relevant international acts, drafting of a sustainable tourist development strategy and lastly the political will is required. The South Eastern European Countries need to clearly run their strategies by dividing them in initial ones where the responsibility lies on reaction and environmental protection which needs to be shared amongst the governmental institutions, specialized centers for sustainable development and citizens. And the advanced strategy constitutes the political role of the institutions which is formulated on strong local and LQWHUQDWLRQDOVXSSRUWE\HVWDEOLVKLQJPHFKDQLVPVIRUJRYHUQLQJDJUHHQGLSORPDF\³HFRGLSORPDF\´ZKLFKZLOOQRW only create partnership with relevant countries but will also harmonize the reactions, policies and operations in global level. References [1] Ardal, B. 1990. Green Politics: A Norwegian Experience, Scandinavian Political Studies. [2] Adam, J. 1995. Risk London, ULC Press. [3] Carter, N. 2001. The politics of the environment, Cambridge University Pres. [4] Krasniqi, A. 2004. E drejta në turizëm dhe hotelieri, Pejë [5] Turner, R., Kerry, P.D., and Bateman, I. 1994. Environmental Economics: An Elementary Introduction, Hamel Hempstead, Harvester Wheatshef. [6] European Council, Committee on the Environment, Regional Planning and Local Authorities, Strasbourg, 1998 [7] Kyoto Protocol to the United Nations Framework Convention on Climate Change Ardal Brent., Green Politics: A Norwegian Experience, Scandinavian Political Studies, 1990;; [8] Provision Criminal Code of Kosovo, [9] Report Of The United Nations Conference On The Human Environment Stockholm 1972. [10] Convention on the Protection of Environment through Criminal Law CETS No.: 172 Place: Strasbourg, Date 4/11/1998, for more please see http://conventions.coe.int/treaty/Commun/QueVoulezVous.asp?NT=172&CL=ENG [11] Convention on Civil Liability for Damage Resulting from Activities Dangerous to the Environment Lugano, 21.VI.1993, for more please see http://conventions.coe.int/treaty/en/treaties/html/150.htm http://www.unep.org/Documents.Multilingual/Default.asp?documentid=97&articleid=1503 [12] Declaration of the United Nations Conference on the Human Environment, Stockholm from 5 to 16 June 1972, for more please see http://www.unep.org/Documents.Multilingual/Default.asp?documentid=97&articleid=1503 [13] Rio De Janeiro Platform for action on the road to Johannesburg 2002. http://www.eclac.org/dmaah/noticias/paginas/5/8435/platform1.pdf [14] Rio Declaration on Environment and Development, Having met at Rio de Janeiro from 3 to 14 June 1992, për shumë shih ne http://www.unep.org/Documents.Multilingual/Default.asp?documentid=78&articleid=1163 [15] World Summit on Sustainable Development held on 2002 in Johanesburg http://www.un.org/jsummit/html/basic_info/basicinfo.html [16] European Council, Committee on the Environment, Regional Planning and Local Authorities, Strasbourg, year 1998. @@3DSDQGUHX*H[*UHHN0LQLVWHUIRU)RUHLJQ$IIDLUVDW,QWHUQDWLRQDO&RQIHUHQFH³6XVWDLQDEOH'HYHORSPHQW IRU3HUPDQHQW3HDFH´$WKHQV-7 May 2003.

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NATURE BASED TOURISM, SEASONAL VARIATION AND ITS IMPACT ON EMPLOYMENT AND INCOME: EVIDENCE FROM MEGHALAYA Utpal KUMAR DE North-Eastern Hill University, India Department of Economics [email protected], [email protected] Amrita DEVI North-Eastern Hill University, India Department of Economics [email protected]

Abstract The present paper attempts to examine the impact of nature based tourism in Meghalaya on the income and employment. Nature based tourism has important impact on the welfare of the local people of Meghalaya, especially women who have been engaged in various tourism related activities along with the others involved in hotel and higher level activities related to tourism. It is examined through the variation in income and employment in relation to the seasonal variation in tourist inflow in various sites of the state. The analysis of primary data and estimated income and employment multiplier reveals huge potential of tourism for the growth of the state economy. It thus calls for a better tourism management and adoption of appropriate tourism policy.

Keywords: Nature based Tourism, seasonality, income multiplier, employment multiplier, Meghalaya

JEL Classiffication: Q20, Q26, Q56, L26, D31, O13, D31 E26 1. Introduction Tourism is a multicomponent industry, many parts of which are inextricably linked to other economic sectors such as airlines to transportation;; souvenir shops, concession stands and restaurants to retail or service;; hotels and other accommodation to commercial development. Thus it generates employment and income directly and indirectly through its multidimensional inter-sectoral linkages in various ways. The impact of tourism is manifold. Tourism industry nourishes economy of an area, stimulates development process, restores cultural heritage, and helps in maintaining international peace and understanding. Thus, an analysis of employment and income generated through tourism in an area would help in understanding the potential of tourism and provide some guidelines for the policy formulation towards investment and other measures necessary for the overall improvement of tourism in the area. The present paper seeks to examine the potential impact of tourism on income and employment in Meghalaya. The plan of the paper is as follows. In the next section a background of the study is provided, which is followed by a brief description of tourism scenario in Meghalaya is given. Then impact of tourism and a few relevant studies have been outlined. Thereafter, the methodology adopted in the presented study is described, which is followed by a brief description of the sample characteristics. The next section provides the observation and the final section includes the policy implication of the study. 2. Background Tourism has now emerged as an instrument for employment generation, poverty alleviation and sustainable human development. ,WKDVHPHUJHGDVWKHZRUOG¶VODUJHVWLQGXVWU\DQGJURZLQJDWDYHU\IDVWUDWH (UNEP, 2002). During last few decades both the international tourism as well as domestic has grown at very fast rate both in developed countries and also in many Asian and Latin American countries (Roe et al. 1997;; Goodwin 2000). It has become a major source of foreign exchange earnings, employment generation and a very important contributor to government revenues, for both developed and developing countries alike. In 2009, this industry contributed over US $13 trillion to global revenue and this number has been increasing exponentially ever since. For many developing countries, tourism has become one of the major contributors to social and economic development, whereas for many others, tourism is the prime source of foreign exchange revenue. For example, it contributes nearly 70 per cent of the GDP in Maldives. About $ 900 million is generated and 160000 people got employment directly and indirectly from tourism in Ghana in 2006 (Waveren et al. 2009). However, the benefits of

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Journal of Environment Management and Tourism tourism may be outweighed by the damages done to local environment, and the repatriation of profits by the foreign investors (leakages from tourism). Therefore, maintenance of tourism resources has become an important issue in the context of development of tourism activities for its sustainable progress as well as maintenance of economic growth. The World Travel and Tourism Council (WTTC) statistics revealed that in the year 2009, travel, tourism and related aFWLYLWLHVKDYHFRQWULEXWHGDSSUR[LPDWHO\SHUFHQWRIWKHZRUOG¶V*'3WKDWZDVH[SHFWHGWRJURZ to 10.6 per cent by 2012.15 The estimated contribution to the total employment by this industry was 1 in every 12.2 jobs i.e., 8.2 per cent of total employment and that was expected to rise to 8.6 per cent by 2012 (WTTC 2010). India has also taken rapid strides in this industry. From a modest 17,000 tourist arrivals with foreign exchange earnings of 7.7 cr in Indian Rupees (Rs)16 in 1951, the industry has progressed to earn about Rs. 5070 cr. of foreign exchange in 2008 with a tourist inflow of over 39.2 lakhs (Gupta 2007;; indiastat.com). This industry also provided direct employment to 5.3 million people and an estimated 8.5 million people got employment indirectly, recording a total of 13.8 million people in the industry in 2001. This industry also provides an opportunity to display the local specialties in terms of the skills of local people in handloom and handicrafts through fairs and festivals (Gupta 2007, op. cit.). The potential of Travel and Tourism industry in Indian economy is also reflected by the Travel and Tourism Competitiveness Report 2009 published by the World Economic Forum. According to this Report, India is ranked 11th in the Asia Pacific region and 62nd overall on the list of the world's attractive destinations. It is ranked the 14th best tourist destination for its natural resources and 24th for its cultural resources, with many World Heritage sites, both natural and cultural, rich fauna, and strong creative industries in the country. India also bagged the 37th rank for its air transport network. The Indian travel and tourism industry ranked 5th in terms of expected long-term (10- year) growth and is expected to be the second largest employer in the world by 2019. This Report also estimated the contribution of travel and tourism to the gross domestic product (GDP) to be about 6.0 per cent (US$ 67.3 billion) in 2009 and indicated that this could increase to US$ 187.3 billion by 2019. Moreover, it was expected that the travel and tourism sector would contribute 6.4 per cent of total employment (i.e., 1 in every 15.6 jobs) in 2009 and this contribution is expected to grow over time and generate 40037000 jobs i.e. 7.2 per cent of total employment (1 in every 13.8 jobs) in the country by 2019 (IBEF Report 2009). Another recent report of the ASSOCHAM indicated that an investment of Rs. 10 lakhs in tourism in India can generate 89 jobs, as against 45 jobs in agriculture and 13 in manufacturing industry (BSE 2003). As such, by 2020, Tourism in India may contribute Rs 8.5 crores to the GDP and in the process enable every man, woman and child to become richer by Rs 7000 (WTTC 2005). This can be further validated by the increasing volume of tourist inflow to the country. According to the 7RXULVP6WDWLVWLFV,QGLD¶VRFFXSLHGWKHst rank in World Tourism Arrivals and in terms of World Tourism Receipts its rank improved from 34th in 1998 to 23rd in 2008. Average Indian foreign exchange earning per tourist in 2005 was $1462 which was 2nd to USA that stood at $1698. The latest Tourism Satellite Accounting (TSA) research, released by the World Travel and Tourism Council (WTTC) and its strategic partner Oxford Economics in March 2009 indicated that: The demand for travel and tourism in India is expected to grow by 8.2 per cent between 2010 and 2019 and will place India at the third position in the world;; ,QGLD¶VWUDYHODQGWRXULVPVHFWRULVH[SHFWHGWREHWKHVHFRQGODUJHVWHPSOR\HULQWKHZRUOGHPSOR\LQJ 40037000 by 2019 (same as IBEF Report 2009);; Capital investment in India's travel and tourism sector is expected to grow at 8.8 per cent between 2010 and 2019;; The report forecasts India to get capital investment worth US$ 94.5 billion in the travel and tourism sector in 2019;; India is projected to become the fifth fastest growing business travel destination from 2010-2019 with an estimated real growth rate of 7.6 per cent. In spite of the immense tourism potential, India is yet to realize its full potential as a popular tourist GHVWLQDWLRQDQGDWSUHVHQWWRXULVPFRQWULEXWHVRQO\DERXWSHUFHQWRIWKHFRXQWU\¶V*'3*2, ,QIDFWLQ India could attract only 1.25 per cent of the total tourists visiting different countries in the world. Therefore in order 15 This is despite the fact that during 2008-09 there was a significant decline in international tourism due to swine flu

and economic slowdown and income from tourism decline by 4.8 per cent. 16 At present one US dollar is equivalent to about 47 Indian Rupee (Rs). 117

Volume I Issue 2(2) Winter 2010 to harness the vast unexplored prospects of tourism, a New Tourism Policy was formulated in 2002, which envisaged the role of tourism as a catalyst in employment generation, wealth creation, development of remote and rural areas, environment preservation and social integration. This policy also aimed to spruce up economic JURZWKDQGSURPRWH,QGLD¶VVWUHQJWKVDVDWRXULVPGHVWLQDWLRQWKDWLVERWKVDIHDQGDWWKHVDPHWLPHH[FLWLQJ7R achieve all these, the policy proposed the inclusion of tourism in the Concurrent List of the Indian Constitution so as to enable both the central and the state governments to participate in the growth of this sector. Looking at its potential, government of India in the 2006-07 annual budgets had allocated about Rs.350 crores for the creation of better tourism facilities. The Central Government of India has also given special emphasis to boost this sector further and in 2007-2008 had sanctioned nearly Rs.146 crores for 86 projects involved in the creation of better tourism infrastructure and its promotion.

3. Tourism Scenario of Meghalaya Nature based tourism has been occupying the central stage of tourism in the state of Meghalaya in terms of generation of revenue and employment. This state is endowed with diverse scenic natural beauty that attracts a large number of domestic and foreign tourists every year. At present there are over 70 tourist spots in the state, of which 25 are major sites. Barring Assam, the state of Meghalaya has a good potential of attracting domestic and foreign tourists than the other North-Eastern states due to its better transport and communication network, absence of Inner Line Permit norms, limited socio-cultural disturbances in the state, presence of a greater number of hotels and tourist resorts and the pleasant climate and scenic beauty, which is preferred by the visitors from other zones especially during the summer time. Although, tourism is one of the most important economic activities in the state of Meghalaya, yet the state has not been able to utilise the full potential of its tourism resources for the generation of employment and income. At present, the transport and tourism sectors contribute only about 5-6 per cent of Net State Domestic Product (NSDP).17 However, hotel, trade and restaurants together contribute around 12 per cent of the NSDP that have a very close link with the development of tourism in the state. Majority of hotels and restaurants in Meghalaya and the transport sector primarily cater to the needs of the tourists throughout the year. In order to boost the tourism sector in the state, the Government of Meghalaya allocated Rs 35 crores for the development of tourism in the 11th five year plan of which, Rs 3.75 crores were allocated in 2008-09 budget and Rs 20 crores are expected to be spent in the current fiscal year (2009-10). Table 1. Tourist Inflow to Some of the Popular North-Eastern States of India (1996-2007) Meghalaya Year

DomesticForeign

Manipur Total

Domestic Foreign

Sikkim

Assam

Nagaland

Total

Domestic

Foreign

Total

Domestic

Foreign

Total

Domestic

Foreign

Total

1996 136183 1573

137756

84,025

288

84,313

145256

8642

153898

348532

2575

351107

NA

NA

NA

1997 115563 1071

116634

87,074

219

87,293

116500

8068

124568

327160

5885

333045

NA

NA

NA

1998 136952 1055

138007

91,620

173

91,793

133158

6111

139269

842656

4194

846850

NA

NA

NA

1999 159730 1971

161701

95,897

294

96,191

139085

8563

147648

939721

3843

943564

NA

NA

NA

2000 169929 2327

172256

99,399

335

99,734

144203

8794

152997

964939

5218

970157

13268

551

13819

2001 178697 2390

181087

NA

NA

NA

146923

7757

154680

1015077

5959

1007536

29952

920

30872

2002 268529 3191

271720

NA

NA

NA

160789

8539

169328

1010651

6171

1016822

13543

526

14069

2003 371953 6304

378257

NA

NA

NA

176759

10926

187685

1953915

6409

1960318

14870

870

15740

2004 433495 12407 445902

NA

NA

NA

230719

14646

245365

2156675

6613

2163288

10056

1084

11140

2005 375911 5099

381010

NA

NA

NA

251697

16517

268214

2286630

7285

2293915

17470

883

18353

2006 400287 4259

404546

NA

NA

NA

302486

18049

320535

1786823

8404

1795227

15030

1002

16032

2007 457685 5267

462952

NA

NA

NA

331182

17837

349019

NA

NA

NA

NA

NA

NA

13.8

8.86

18.36

-2.4

ȕ

Source: Directorate of Tourism of Assam, Manipur, Meghalaya and Sikkim. Note: L ȕUHSUHVHQWVDQQXDOH[SRQHQWLDOJURZWKUDWHLL 1$PHDQVGDWDDUHQRWDYDLODEOH

17

It is calculated by the author from the industry-wise division of NSDP obtained from Statistical Abstract of Meghalaya.

118

3.1. Tourist Inflow in Meghalaya during Last Decade The temporal variation in tourist inflow in Meghalaya and some other states for which data were available have been presented in Table 1. The table shows that total number of domestic tourists visiting the state of Meghalaya has increased significantly from 136183 to 457685 during 1996 to 2007;; while the numbers of foreign tourists have increased from 1573 to 5267 during the same period. Despite that, the percentage share of Meghalaya to total number of tourists visiting North-East India as a whole has declined over time, which may be attributed to the fact that in the early years, Meghalaya was the preferred destination of most of the tourists visiting North-Eastern India. However, with the emergence of new tourist destinations, particularly in the states of Assam and Arunachal Pradesh, the percentage of tourist inflow to Meghalaya as compared to the other North- Eastern states is decreasing. 3.2. A Brief Overview of the Tourism Infrastructure in Meghalaya Growth of tourism in any area depends not only on the diversity of tourist sites but also on several other factors including transport and communication facilities, availability of hotels and restaurants, expansion of information network, condition of security of the people etc. Table 2 shows the growth of a few of those indicators in the state of Meghalaya. The table shows that annual exponential growth of number of registered hotels in Meghalaya during 1999-00 to 2007-08 was 6.8 per cent. Though there are 51 registered hotels the actual number of hotels and other guest houses of different government and private organisations are much more that hosts a large number of visitors every year. Though the rate of growth of registered taxies during the period was over 29 per cent and that of road density per 100 sq. km. was merely 1.7 per cent and that indicates the rising pressure of vehicles on the roads. Besides that there are other regional and other transport services and the growth of vehicles is an indication of rising demand of the visitors in the state.

Table 2. Growth of Various Tourism Related Infrastructures in Meghalaya

Year

No. of Registered Hotels

No. of Registered Taxis

Road Length in K.M.

Road Density per 100 Sq. Km.

1996-97

NA

NA

6491

28.94

1999-00

29

1209

7117

31.73

2000-01

--

NA

7328

32.67

2001-02

--

NA

7598

33.88

2002-03

--

NA

7490

33.39

2003-04

--

5985

7682

34.25

2004-05

--

7150

7877

35.12

2005-06

--

8338

7978

35.57

2006-07

--

9387

7960

35.49

2007-08

51

NA

8164

36.39

Annual Exponential Growth Rate (%)

6.8

29.28

1.7

1.7

Sources: (i) PWD (R&B), Meghalaya and Directorate of Tourism, Government of Meghalaya. (ii) Directorate of Statistics, Government of Meghalaya. Note: NA means not available.

Though the number of hotels does not indicate the exact capacity of boarding and various hotels have different capacities including their variation in facilities for the guests, yet in the absence of full information;; it provides a rough idea of over time rising capacity to meet the requirements of rising tourists. Excluding the increase in the number of taxies over time, the growth of road network and hotels are found to be insufficient for

Volume I Issue 1(1) Winter 2010 meeting the increasing demand of tourists in the state. From the practical experience of the researcher, it has also been found that it is very difficult to get a booking in a good hotel in Shillong even a month in advance especially during the months of vacation in other parts of the country when the number of visitors multiply by several times (as the peak tourist season) every year. Sometimes, these factors along with road blockades, political strike in the adjoining transit states etc. cause adverse impact on the number of visitors. 4. A Brief Description of the Positive Impacts of Tourism and Earlier Studies It has already been mentioned that growth of tourism in any area has both positive and negative impacts. It has been observed that the rapid growth of tourism in the twentieth century has produced both problems and opportunities on a vast scale for societies and its impact has been manifold - economic, socio-cultural, environmental and political (Chopra 1991). Governments have become aware that tourism is not merely a useful PHDQVRIDGGLQJWRDQDWLRQ¶VZealth but also brings with it serious long-term problems which, without careful control and planning, can escalate to a point where they threaten the society. As in the case of any other industry, tourism has important bearing on the economy of the area in which it is undertaken. Notwithstanding the size of an area affected by tourism, its economic effects can be categorised into four groups: Income, Employment, Balance of Payments and Investment and Development (Holloway 1985). Mechanism through which the people around the places of tourist importance especially the poorer can benefit from tourism are (a) employment in tourism enterprises, (b) supply of goods and services to tourism enterprises, (c) direct sales of goods and services to visitors, (d) establishment and running of tourism enterprises, (e) tax or levy on tourism income or profits with proceeds benefiting the poor, (f) donations and support provided by tourism enterprises and tourists and (g) investments in infrastructure stimulated by tourism development benefiting the poor. The growth of tourism in an area also has visible social and environmental effects, which can have both political and economic consequences. These effects are significantly compounded in the case of international tourism. Recognising this aspect of tourism, the OECD in its report on the impact of tourism on the environment FRPPHQWHG³$KLJKTXDOLW\RIHQYLURQPHQWLVHVVHQWLDOIRUWRXULVP2QWKHRWKHUKDQGWKHTXDOLW\RIWKH environment is threatened by tourist devHORSPHQW LWVHOI ZKLFK LV SURPRWHG«EHFDXVH RI LWV HFRQRPLF LPSRUWDQFH´7KHUHIRUHWKHUHH[LVWVDSDUDGR[EHWZHHQWRXULVPGHYHORSPHQWDQGWKHHQYLURQPHQWTXDOLW\RIDQ area. The cultural and social impacts of tourism are not only dependent on the number of tourists visiting a UHJLRQEXWDOVRRQWKHµQDWXUH¶RIWRXULVPSURYLGHGE\WKHDUHD)RULQVWDQFHDWRXULVWZKRVHSULPDU\PRWLYHLVWR learn about new cultures will fully accept and acclimatise to the foreign customs and traditions, and will also attempt WRH[SORUHWKHUHJLRQLQGHSHQGHQWO\LQRUGHUWREHµOHVVYLVLEOH¶LQWKHDUHD+RZHYHUWRXULVPRSHUDWRUV WRGD\ DUH LQFUHDVLQJO\ µSDFNDJLQJ¶ UHFUHDWLRQDO VLWHV IRU ZHDOWK\ WRXULVWV ZKR YLVLW DQ DUHD ZLWK VSHFLILF expectations for facilities that they are accustomed to using in every day life. Since many recreational sites, situated in remote areas do not normally have access to such resources, the surrounding areas have to be SHUPDQHQWO\DOWHUHGIRUPHHWLQJWKHYLVLWRUV¶UHTXLUHPHQWV7KLVRIWHQLQYROYHVGisplacing local indigenous people and interference in their ordinary lives, which is not surprisingly strongly resented by them, and at times viewed DVDQHZIRUPRIµFRORQLDOLVP¶E\WKHULFKHUVHFWLRQVRIVRFLHW\+ROORZD\ op. cit.). However, the growth of tourism in an area also has positive social impacts, since it not only opens up new avenues for earning income, but also OHDGVWRDUHJHQHUDWLRQRIDZDUHQHVVDQGSULGHLQRQH¶VWUDGLWLRQVDQGFXOWXUHV,QPDQ\DUHDVWRXULVPKDVOHG to the revival of interest in tribal culture and traditions, regeneration and growth of cottage industries catering to tourist needs and has also opened up new avenues for knowledge and learning. In most tourist destinations of developing countries, the livelihood impacts of tourism, takes various forms. Jobs and wages are only a part of livelihood gains and often not the most significant ones. Tourism can generate four different types of local cash income, involving four distinct categories of people: (a) Wages from formal employment, (b) Earnings from selling goods, services, or casual labour (e.g. food, crafts, building materials, guide services), (c) Dividends and profits arising from locally-owned enterprises and (d) Collective income: this may include profits from a community-run enterprise, dividends from a private sector partnership and land rental paid by an investor. Waged employment can be sufficient to lift a household from an insecure to a secure footing, but it may only be available to a minority of people, and not the poor. Casual earnings may be very small, but more widely spread, and may be enough, for instance, to cover school fees for one or more children. Local participation in the industry can be categorised into three different categories: the formal sector (such as hotels), the informal sector (such as vending) and secondary enterprises that are linked to tourism (such as food retail and telecommunications).

120

Journal of Environment Management and Tourism Experience from Asia suggests that as a destination is developing, accommodation for tourists can be as simple as offering home stays at the early stage, with lodges, guest houses and hotels replacing more basic options as tourism grow, and some of these may even include foreign companies. Once luxury resorts start to develop, the scenario becomes more complex with international investors beginning to play a much more dominant role. Transport tends to fall into a grey area between formal and informal sectors. Most destinations have taxis, jeeps or other motorised forms of transport, often driven by the owners. As things expand organised associations of owners, operating on a rota system become more common. There are references of cases where high-status jobs in resorts typically go to non-locals, expatriate staff or foreign-trained nationals. However, there is almost no analysis of who is employed in middle and lower ranking jobs. The potential for employment of local staff seems to improve as one move away from the luxury resorts into less established areas. The informal sector includes activities such as vending, running stalls and collecting fuel wood for the tourist industry. The informal sector often provides an easy entry into the industry for the poor, especially for women. Many of the small food shops, local artisan shops in the tourist sites of Meghalaya are own and run by the women. The incomes can be substantial but unreliable as it is often reported a seasonal activity. The informal sector in many areas tends to get the least attention when interventions are planned, and interventions such as planning permissions are frequently detrimental to this sector. However, there are cases where initiatives such as flexible licensing systems and cooperatives and associations have helped the sector. In Meghalaya many of those are controlled and regulated by the local Dorbars while some are still unregulated and run independently by the owners. In most of the cases, causal labour and self-employment provide major opportunities for local communities here to enhance their livelihood opportunities from tourism. Here, unlike the formal employment, self-employment tends to highlight the entrepreneurial spirit of village communities. Significant gains also accrue from economic linkages between tourism and other economic sectors such as agriculture, horticulture, animal husbandry and handicrafts which are also found in the study of Shah, and Gupta (2000). The relation between tourism and employment in Kenya and Tanzania has been recognised by Elkan (1975). He however pointed out that the unqualified enthusiasm of some for the development of tourism as a strategy for the development of low income countries was only matched by the equally unqualified scepticism of others. Using the survey of hotels and tourist industries of Kenya and Tanzania he examined costs and benefits of tourism and argued that the balance of advantage was dependent greatly on the policies pursued with regard to the particular form of hotel and tourist development. Besides employment and income, the impacts of tourism were also found in the non-economic spheres like moral, social and family life (Mings 1978). Thus Mings stressed on further research on various unexplored aspects of impacts of tourism. Farver (1984) analysed the actual employment possibilities in Gambia in the light of the tourism investment. Using findings of an economic survey he concluded that hopes of economic development being catalysed by tourism are unfounded and misleading. His conclusion was supported by another structural analysis and characterisation of the tourist industry in Gambia. Wilkinson (1989) also emphasized on the tourism as an alternative source of economic development in the Island Microstates and thus prescribed for careful planning and integration of tourism into the local system. The Island Microstates were suggested to maximise benefits along with minimising environmental economic and socio-cultural costs. Using inter-sectoral linkages through input-output analysis Kweka, Morrissey, and Blake (2001) has shown the significant positive impact of tourism on the economy of Tanzania. Again Kweka (2004) through computable general equilibrium (CGE) demonstrated the potential contribution of tourism for economic growth in Tanzania. Infrastructure development is found to amplify the welfare impact of tourism taxation through its interaction effect which in turn can help improving infrastructure and thus benefit the economy as a whole. McCatty, and Serju (2006) estimated that the multiplier effect of Jamaican tourist on the GDP of the country was small at 1 and for every one per cent growth of tourism;; employment expands by 0.3 per cent only. Ajala (2008) explained four tourism enterprises viz. hotel, souvenir, tour guide and water transport business to pin point the potentiality of tourism as catalyst of development. Using secondary as well as primary data collected through survey and questionnaire administration he calculated the multiplier effect of tourism investment on the nation economy.

121

Volume I Issue 1(1) Winter 2010 Pratt (2009) examined the economic impact of uncertain tourism demand in Hawaii by incorporating a risk factor into a CGE model. Also he suggested some measure that the government should undertake to overcome such adverse impact that may arise due to the shock in tourism demand in the country. The importance of natural amenities in explaining rural growth patterns has also been widely accepted within the rural development literature (Marcouiller 2007, Isserman 2001;; OECD 1999, Power 1988). Both descriptive analysis (McGranahan 1999) and more advanced statistical modelling approaches (Deller, Tsai, Marcouiller, and English 2001) have consistently found that rural areas endowed with natural and built amenities- such as scenic beauty, recreational sites, and tourism attributes- experience higher rates of economic growth than the US average. Using Gini coefficient of observed data, Marcouiller Kim, and Deller (2004) however showed that certain types of natural amenities in the US lake states were clearly related to the distribution of income. Although a number of studies mention the ability of tourism to provide employment to semi-skilled and unskilled labourer (John, 1974;; Attanayake, Samaranayake, and Ratnapala, 1983) as well as women UNED-UK, 1999), some others pointed out the higher proportion of skilled labour employed in this sector (Green 1979). Riley, and Szivas (2009) however opined that the creation of new jobs by the development of tourism alone does not lead automatically to the creation of wealth for the indigenous population because new jobs may not provide an acceptable standard of living, which in turn leads to an abnormal extension of effort in terms of hours worked. From the micro-level study of unskilled labour they proved the downward slopping nature of labour supply function indicating the distress supply of labour in the tourism sector and thus raised doubt about the actual impact of tourism on removing poverty. The returns to unskilled workers engaged in tourism related industries were found to be less than those to other tourism related occupations such as skilled workers or entrepreneurs, even in the expanding phase of the industry (Blake et al. 2008). 5. Materials and Methods In order to understand the potential of tourism for the generation of income and employment a sample survey has been conducted in the capital city of Meghalaya Shillong where most of the tourists stay throughout the year and around three major site areas, Lady Hydari Park (situated within the city), Shillong Peak (the highest peak of the state at about 15KM away from the city) and Cherrapunjee area (the wettest place on the earth). Data were collected from those who have been engaged in different categories of tourism related activities and earn their livelihood in various capacities from the/vicinity of those selected sites and cater to the needs of the tourists visiting Shillong in general and those sites in particular. Survey was conducted on 128 individuals who were chosen by simple random sampling in the selected areas. Out of them 24 were hotel owners, 18 were the heads of various restaurants, 12 were heads of fast food stalls and 10 street food stalls in vicinity of the sites, 34 were the vendors in those sites and 20 and 10 numbers of tourist and local taxis. The numbers here were not in proportion to the total number of various units operating in all the tourist sites of Meghalaya.18 The data were collected over the span of year 2008 in order to obtain reliable income estimates from the respondents in the lean as well as peak season. Though tourism activities vary across the seasons of the year (due to the official vacation in the source areas and variation in temperature and other climatic conditions in the tourist destinations) here much variation is not observed throughout the year. Throughout the year the hotels in and around the capital city remain booked except a few winter months. Here, the peak season ranges from April to October and the lean season constitutes of the remaining five months. Though official record of month-wise distribution of tourist arrivals in the state is not available, from the records of the a few renowned hotels and the entry tickets sold at those three major spots in the previous year we came to the conclusion that about seventy per cent of the yearly visitors visit during those seven months while the other thirty per cent of the tourists visit during the remaining five months. The potential 18 It is not possible to choose number of samples in exact proportion to the number of different categories of businesses related to tourism operating in the chosen areas. Many of the hotel and restaurant owners were reluctant to provide information on their incomes from various sources and expenditures on different items. The response rate is much poor in this respect. Not only that, by physical verification we observed that many of hotel respondents understated the number of employees and thus there is no wonder that the income statements would be understated. Though, number of each category in the sample is small by computing per head of each category here impact on each sector on an average is estimated from the changes in employment and income in between peak and lean season. If we assume that the understatement is similar in both cases the percentage changes remain more or less and thus there would be no problem of generalization. Though there are large number of tourist taxies and other vehicles, all of them experience more or less same effect during lean to peak season. Similar is the case for hotels, restaurants, vendors and other tourist related businesses.

122

Journal of Environment Management and Tourism impact of tourism on the income and employment can be analysed through the calculation of its multiplier impact reflected in the directly related activities like tourist guide, park guards and monitors, vendors in the sites, food courts in the sites and the vehicles, hotels used by the tourists and the indirectly related activities like the artisans whose products reach the tourist sites via several hands, suppliers of vegetables, milk, meat etc and producers of those items, the producers of inputs used in the production of those items and so on. Similarly, employment and income generated in the producing units of inputs used by the transport vehicles etc. Thus it has a long chain of impacts the data of which is very difficult to obtain. Most of the hotel and restaurant owners were also unwilling to share their information on investment and expenditures and response rates were below the 50 per cent. But the response rates of the vendors, tourist vehicles owners were outstanding. Thus it is very difficult to estimate the multiplier impact of unit investment in tourism sector and neither the input-output analysis could be possible to apply directly. Moreover, there is public investment in tourism sector like construction of road, park improvement that has direct influence with the visit rate. Considering all the facts mentioned above, the seasonal variation in income and employment of the major tourism related activities has been considered and compared with the variation in visit rate. The variation in visit rate during peak and lean months has direct impact on the hotel rents and earning of restaurants, rates of vehicles as well as the sale of the vendors. Therefore, after computing the variation in income and generation of employment in the peak and lean seasons, total variation in income and employment generated were estimated by taking into account the variation in number of visitors faced by those surveyed units in the selected sites. It is then used to infer about the changes in employment and income due to a certain change in tourist arrival in the area. It may be noted that the visitors faced by the respective surveyed categories were not the total number of visitors (as only a part of the individuals involved in each category were surveyed), which was much more than that. Of course, one can estimate the total number of employment just by considering the total units operating in the state under each category. But various categories of people involved indirectly in tourism related activities and many of them also operate multiple activities, which was very difficult to take into consideration. However, it may safely be assumed that the variation in number of tourists faced by the surveyed individual of different categories is proportional to the variation in tourists visited the area/sites in lean and peak season and hence the generalization of variation in income and employment generated due to variation in arrival of tourists from the estimated results would not be an exaggeration. Due to the problem mentioned above in estimating total employment and also income generated here employment and income elasticity with respect to visiting tourists and not the tourism investment has been estimated that would provide a clear idea about the impact of tourism in the state. 6. Results and Discussion It was mentioned that though employment is generated in various ways from tourism activities (e.g., those who are engaged in supplying vegetables, milk, meat;; taxi or other tourist vehicle repairing workshop, tourist guides, employees of various tourism promotion offices etc.), here only the seven categories of respondents have come under the survey. Thus the estimated figure will provide the idea of minimum employment generated than the actual and potential capacity of it, i.e. the estimate will be the minimum guaranteed level of employment and hence the income. Here, many of the vendors have been engaged in multiple activities including selling of cold drink, foods along with handloom and handicraft products and some have been specialised in selling handicraft or handloom items or even local agricultural produces. Information pertaining to the social and economic aspects of life like age, gender, marital status, level of education, family size, number of dependants, number of employees/assistants and total monthly income in the lean and peak tourist seasons etc. have been collected from the respondents and their distribution according to some important characteristics are presented below. 6.1. Distribution of the Surveyed Respondents According to their Gender Table 3 indicated that the larger portion of the vendors, fast food stalls were own by the females and majority of them were local tribal. On the other hand, majority of hotels and restaurants have been running by the male and all the taxi drivers have been men. In Meghalaya, presence of women is abundant in almost all the social and economic activities excepting the political field, taxi or bus drivers and in the hotels and restaurants.

123


Category Hotel Restaurant Fast Food stall Street Food stall Tourist Taxi Local Taxi Vendors Total

Table 3. Distribution of the Surveyed Respondents According to their Gender Male Female Total 21 3 24 (18.75) 15 3 18 (14.06) 4 8 12 (9.38) 6 4 10 (7.81) 20 0 20 (15.63) 10 0 10 (7.81) 5 29 34 (26.56) 81 (63.28) 47 (36.72) 128 (100)

Source: Field Survey by the researcher during 2007±08. Note: Figures in the parentheses represent percentage to total.

6.2. Distribution of the Surveyed Respondents According to their Level of Education Table 4 revealed that the educated people more involved in hotel and restaurant business while some middle level educated people were found in driving, fast food stalls and even in vending. 6.3. Distribution of Respondents According to the Total Number of their Employees in their Respective Businesses during Lean and Peak Seasons Since the respondents were mostly dependant on the tourist inflow to these areas for their activities, the number of employees/assistants that they hired in the different months of the year may indicate the nature of their economic gains from tourism in different months. A comparison of Tables 5 and 6 revealed that frequencies of the larger number of employees increased significantly during the peak season in all the categories despite their differences in percentage of growth. In all the categories increased requirement of labour has been met by employing casual labourer. Hotels and restaurants were found to be benefitted more than the other categories. Table 4. Distribution of the Surveyed Respondents According to their Level of Education

Level of Education Category

Sec. but below HS

HS but below Graduation

Graduate & above

Professional

Hotel

0

0

0

12

12

24 (18.75)

Restaurant

0

0

3

9

6

18 (14.06)

Fast Food stall

0

5

5

2

0

12 (9.38)

Street Food stall

4

4

2

0

0

10 (7.81)

Tourist Taxi

1

4

8

7

0

20 (15.63)

Local Taxi

2

3

3

2

0

10 (7.81)

Vendors

6

14

12

2

0

34 (26.56)

13(10.16)

30(23.44)

33 (25.78)

34 (26.56)

18 (14.06)

128 (100)

Total


Total

Below Sec.

124

Journal of Environment Management and Tourism Table 5. Distribution of the Surveyed Respondents According to the Total Number of Employees in their Respective Businesses during Lean Season Total Number of Employees

Category 1

2

3

4-6

7-9

10-15

16-20

21- 25

26 & above

Total

Hotel

0

0

0

2

9

9

4

0

0

24 (18.75)

Restaurant

0

0

0

3

3

7

5

0

0

18 (14.06)

0

3

5

4

0

0

0

0

0

12 (9.38)

3

4

3

0

0

0

0

0

0

10 (7.81)

Tourist Taxi

16

4

0

0

0

0

0

0

0

20 (15.63)

Local Taxi

7

2

1

0

0

0

0

0

0

10 (7.81)

Vendors

1

5

11

16

1

0

0

0

0

34 (26.56)

27 (20.09)

18 (14.06)

20 (15.63)

25 (19.53)

13 (10.16)

16 (12.5)

9 (7.03)

0 (00)

0 (00)

128 (100)

Fast Food stall Street Food stall

Total

Table 6. Distribution of the Surveyed Respondents According to the Total Number of Employees in their Businesses during Peak Season Category

Total Number of Employees 1

2

3

4-6

7-9

10-15

16-20

21-25

26 & above

Hotel

0

0

0

0

8

6

3

2

5

Restaurant

0

0

0

0

3

3

3

3

6

0

0

4

6

2

0

0

0

0

1

2

7

0

0

0

0

0

0

Tourist Taxi

10

6

4

0

0

0

0

0

0

Local Taxi

4

5

1

0

0

0

0

Vendors

0

0

12

15

7

0

0

0

0

13 28 (21.88) 21 (16.41) 20 (15.63) 9 (7.03) 6 (4.69) 5 (3.91) (10.16)

11 (8.59)


Total

15 (11.72)

Total 24 (18.75) 18 (14.06) 12 (9.38) 10 (7.81) 20 (15.63) 10 (7.81) 34 (26.56) 128 (100)


6.4. Distribution of the Surveyed Respondents According to their Level of Total Monthly Income during the Lean and Peak Season /LNHWKHQXPEHURIHPSOR\HHVWKHYDULDWLRQLQIUHTXHQFLHVLQYDULRXVPRQWKO\LQFRPHJURXSVIURPµOHDQ¶ WRXULVWVHDVRQWRWKHµSHDNWRXULVWVHDVRQ¶FDQEHREVHUYHGE\FRPSDULQJ7DEOHVDQG)URPWKLVYDULDWLRQRQH can forecast about the variation in income due to variation in number of tourists faced by the respondents. It is also observed that out of 24 hotels and 18 restaurants the number falling in income groups over Rs 90,000 per month has increased from 10 to 20 and 1 to 8 respectively. The comparison reveals an increase in frequencies of higher income groups from lean to peak season across all categories and the maximum benefit was accrued to the catering and hospitality industry. 125


Table 7. Distribution of the Surveyed Respondents According to their Net Monthly Income during the Lean Season (in Rs) Level of Income During Lean Season Category

15000 or Less

15001 - 30000

30001- 45000

45001- 60000

60001- 75000

75001- 90000

90001 ² 105000

More than 105000

Total

Hotel

0

0

0

3

4

7

5

5

24 (18.75)

Restaurant

0

4

5

5

3

0

0

1

18 (14.06)

0

8

2

2

0

0

0

0

12 (9.38)

9

1

0

0

0

0

0

0

10 (7.81)

2

9

6

3

0

0

0

0

20 (15.63)

2

5

2

1

0

0

0

0

10 (7.81)

27

4

3

0

0

0

0

0

34 (26.56)

40 (31.25)

1 (24.22)

18 (14.06)

14 (10.94)

7 (5.47)

7 (5.47)

5 (3.91)

6 (4.69)

128 (100)

Fast Food stall Street Food stall Tourist Taxi Local Taxi Vendors Total

Source: Field Survey by the researcher during 2007±08. Note: Figures in the parentheses represent percentage to total. Table 8. Distribution of the Surveyed Respondents According to their Net Monthly Income during the Peak Season (in Rs) Level of Income During Lean Season Category

15000 or Less

15001 - 30000

30001- 45000

45001- 60000

60001- 75000

75001 - 90000

90001 ² 105000

More than 105000

Hotel

0

0

0

0

1

3

6

14

24 (18.75)

Restaurant

0

0

0

1

4

5

6

2

18 (14.06)

0

0

3

5

4

0

0

0

12 (9.38)

3

3

3

1

0

0

0

0

10 (7.81)

Tourist Taxi

0

0

4

10

6

0

0

0

20 (15.63)

Local Taxi

0

2

4

3

1

0

0

0

10 (7.81)

Vendors

0

0

8

22

4

0

0

0

34 (26.56)

3 (2.34)

5 (3.91)

22 (17.19)

42 (32.81)

20 (15.63)

8 (6.25)

12 (9.38)

16 (12.50)

128 (100)


Total

Source: Field Survey by the researcher during 2007±08. Note: Figures in the parentheses represent percentage to total

126

Total

Journal of Environment Management and Tourism The impact of variation in arrival of tourists on the employment and income of a unit establishment of each category of activities has been estimated and presented in Table 9. First of all, total and average employment generated from different activities by the sample respondents have been calculated during both the seasons. Then comparing these two, the changes in employment and income per unit of sample establishment has been computed. It is evident from the table that employment and income per individual business unit has increased significantly but not uniformly as the changes in tourist inflow faced by each of them. This was due to the very simple reason that the number of each business category varies significantly and a tourist can visit multiple number of vendors but generally not hotels or taxis (unless they divide the time of visit to different hotels or vehicles). Hence the percentage increase in tourist faced by the vendors (as quoted by them) was much more than the other categories. But did not necessarily mean that changes in their earning will also follow the same pattern as it depends on the choice of visitors to use various sub-categories of each business (like type of hotels, vehicles, eateries and purchase etc.), which also depend on the type of visitors. Similarly, the rate of each category increased with the rise in demand during the peak season that also varies depending upon the type of activities. Here, except the government controlled entry charges, prices of all other categories are changed informally and thus unevenly depending upon the demand on a particular time.19 Moreover, there is the variation in number of each category of business. As there are other rest houses maintained by different organisations 6WDWH %DQN 7HOHFRPPXQLFDWLRQ GHSDUWPHQW 7HPSOH DXWKRULWLHV HWF DW QRPLQDO FKDUJH IRU WKHLU HPSOR\HHV¶ stay who visit from other region, some other vehicles enter into the market during the peak season and are withdrawn during lean period. From secondary sources, it has been observed that most of the popular hotels in Shillong 20 have on an average 50 rooms, of ZKLFKDUHIRUµVLQJOH¶RFFXSDQF\DQGWKHUHPDLQLQJDUHIRUµGRXEOH¶RFFXSDQF\,QWKH µOHDQ¶VHDVRQZKHQWKHKRWHOVGRQRWKDYHIXOORFFXSDQF\RQWKHDYHUDJHDERXWLQGLYLGXDOVUHVLGHLQDVLQJOH major hotel in a day and this number nearly doubles LQ WKH µSHDN¶ VHDVRQ 7KH SULPDU\ VXUYH\ UHVXOWV DOVR LQGLFDWH WKDW LQ WKH µOHDQ¶ VHDVRQ WKH KRWHOV KLUH WR IXOO WLPH ZRUNHUV RQ DQ DYHUDJH ZKLOH LQ WKH µSHDN¶ season they hire about 14-17 full time workers. Assuming that, on an average, for 55 individuals, a large hotel hires 10 permanent workers and therefore for every 100 individual visitors about 18 workers are employed. Thus, in the year 2008, when a total of 462952 tourists visited different sites of Meghalaya throughout the year, approximately minimum of 83,331 working days of employment in the hotels alone. During the peak seasons, everyday employment in the hotels alone increase by about 49 per cent as observed from the sample in the selected sites. Using the same the approximated number of working days in the hotels together during peak season was about 124163. These workers are employed at different positions such as waiters, bell boys, guards, receptionists, booking clerks, cleaner and cooks. Since these workers spend their incomes on various consumer goods and services, thereby providing new employment opportunities for individuals in other segments of the market. Therefore, with the increase in number of tourists visiting in an area, employment opportunities in different sectors including transport, hotels, restaurants and eateries;; agricultural farms, cottage industries that produce local handicraft and handloom products;; travel agents, tour operators and tour guides in the concerned area rises significantly. Here maximum benefit (as estimated from the total number of visitors faced by them) was found to go to the restaurants in case of employment and that was followed by the fast food stalls and hotels. Whereas, the hotels were found to receive maximum benefit in terms of increase in earning and this was followed by restaurants and then the vendors, local taxi operators, fast food stalls in the order. Using the number of tourists faced by the sample categories, employment and income elasticities were estimated that showed the changes in income and employment of each category for one per cent change in tourist faced by them. The overall employment and income elasticity of tourism is estimated to be 0.19 and 0.54 (Table 10). Of course, this result may differ from the actual one, as the sample of each category is not in

19 Though the rates of vehicles are fixed by the transport authority, during peak demand season most of the privately run vehicles are found to charge varied amount from the visitors. Similar is for the hotels. 20 One may argue that in those hotels, both the tourists as well as other visitors (for official or business activities) stay and thus the variation in the number of guests may be due to any of them. But here, we may assume that flow of other visitors remain more or less uniform over time (except a few days in winter when some people remain out of station) and the variation in the number of guests is primarily due to the visitors for recreation purposes. Moreover, most of the visitors for business and official purposes also enjoy recreation facilities in the area of and on.

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Volume I Issue 1(1) Winter 2010 proportion with total number of each establishment in the state. However, the impact of unit change in tourist arrival on each category would be identical irrespective of their size. Using the information from three sites on employment and income per tourist faced by each category and total number of registered tourist taxies, hotels and number of total tourist sites (for estimating the number of vendors and food stalls) overall employment and income in the state in the peak and lean seasons were estimated and presented in Table 10. Table 9. Percentage Variation in Average Daily Employment, Monthly income and Tourist Visiting Various Establishments from Lean to Peak Season as Observed from the Sample Survey

Total

Per Unit

Total

Per Unit

Percentage Variation in Employment

Hotel

259

10.79

385

16.04

11.17

346

48.65

Restaurant

201

19.22

3.33

62

72.14

Fast Food stall

40

5.17

20

2.00

26

55.00

Street Food stall

2.60

24

1.20

34

30.00

Tourist Taxi

1.70

14

1.40

17

41.67

Local Taxi

1.70

3.88

167

21.43

Vendors

132

4.91

26.52

Total

690

5.39

1037

8.10

50.29

Category

Employees in Lean Season (No)

Employees in Peak Season (No)

Category Hotel Restaurant Fast Food stall Street Food stall Tourist Taxi Local Taxi Vendors Total

Total

Per Unit

Total

Per Unit

Percentage Variation in Income

2252501 397500.5 75601.2 19445 117500.5 26500.5 125200 3014248

93854.21 22083.36 6300.10 1944.50 5875.03 2650.05 3682.35 23548.82

5903270 757500.6 118801.2 29167.08 158500.5 42000.5 203000 7212240

245969.6 42083.37 9900.10 2916.71 7925.03 4200.05 5970.59 56345.62

162.08 90.57 57.14 50.00 34.89 58.49 62.14 139.27

Income in Lean Season (Rs)

Income in Peak Season (Rs)

Total

Per Unit

Total

Per Unit

Percentage Variation in Tourist Inflow

Hotel

145

6.04

410

17.08

182.76

Restaurant

150

8.33

360

20.00

140.00

Fast Food stall

145

12.08

408

34.00

181.38

50

5.00

134

13.40

168.00

Tourist Taxi

100

5.00

205

10.25

105.00

Local Taxi

40

4.00

90

9.00

125.00

Vendors

3050

89.71

11620

341.76

280.98

Total

3680

28.75

13227

103.34

259.43

Category

Street Food stall

Tourists in Lean Season (No)

Tourists in Peak Season (No)

Source: Field Survey by the researcher during 2007±08.

128

Journal of Environment Management and Tourism Table 10. Income and Employer Multiplier of Tourism in Meghalaya

Category

Hotel Restaurant Fast Food stall Street Food stall Tourist Taxi Local Taxi Vendors Total

Employment Elasticity

Income Elasticity

0.27 0.52 0.30 0.18 0.40 0.17 0.09 0.19

0.89 0.65 0.32 0.30 0.33 0.47 0.22 0.54

Daily Total Employment (No)

Total Monthly Income (Rs)

Lean Season

Peak Season

Lean Season

Peak Season

550.29 1676 333 150 3152 911 3078 9851

818.04 2883 517 195 4466 1107 3895 13881

4786565 3312504 630010 145837.5 15433704 1725183 2921331 28955134

12544450 6312506 990010 218753.3 20819054 2734233 4736668 48355673

Notes: (i) Here the number of registered hotels of 51 of that time was considered for calculation. However there are many more non-registered hotels. (ii) From the sample we observed 18 recognised restaurants in these sites. There are 70 tourist spots in Meghalaya (as per record of the Tourism Department) but at the time of survey there 25 major sites where the presence of restaurants was observed. Using the average of 6 restaurants in 25 sites the calculation was done. Similar was the case of fast-food and street food stalls. (iii) Numbers of tourist and local taxi of the current time were not available. Here the figures of 2001 that were available from the Department of Transport, Government of Meghalaya have been used. (iv) Venders are found in all the sites but different in number. Here we observed 34 vendors altogether in the three survey sites, which was multiplied for the 70 sites and used for computation.

A minimum level of about 10 thousand daily employment was generated in the lean season while that increased to about 14 thousand in the peak season throughout the state. Similarly, a minimum of about Rs 2.9 crore was generated per month from those seven categories of tourism activities, which also increased significantly to about Rs 4.84 crore. Though many of the activities of tourism (park managers, vehicles other than taxi, hospitality related other activities etc.) it showed a significant impact on the employment and income.

7. Conclusion The overall analysis of variation in employment and income in relation to the seasonal variation in tourist inflow and estimated results of employment and income multiplier clearly reveals that there is significant positive impact of tourism on employment and income in the state of Meghalaya and around the tourist sites in particular. Therefore, the management of tourism is very important for the state of Meghalaya where there is dearth of other opportunities, to raise scope for employment and income to boost the economy of the area. Though it is examined with a small data set, it provides a guideline for undertaking tourism promotion programmes with proper care for environment, infrastructure and other social and cultural factors in the area, which would definitely improve welfare of the people who are engaged in tourism related activities in the long run. It is more important because the local people especially in the rural sites get employment at least in the lower level occupation like vehicle owning and driving, vending and small food courts that helps in improving their economy in a great way. Also, they become socially and culturally more advanced after their interaction with the visitors from outside.

8. Limitations of the Paper and Further Scope: Only a small part of the stakeholders of tourism is considered in the present study. There are employment in the government tourism offices, in the parks for collecting entry and parking fees, and for the maintenance and construction works and also in the allied activities who supplies materials to the hotels and restaurants. Also all the sites are not of equal importance and thus number of visitors as well as vehicles, other activities would be different. But here the minimum of all those have been considered and the estimate provide the lower bound of income and employment. There is thus ample scope of getting updated data and complete enumeration for estimating the exact income and employment impact of tourism. Also the adverse impact of tourism on the 129

Volume I Issue 1(1) Winter 2010 natural resources which again required employment for the management and cost for the regeneration may be taken into account for arriving at the net impact of tourism in the area.

References [1] Ajala, O.A. 2008. Employment and Income Potentiality of Tourism Development in Amhara Region of Ethiopia. Ethiopian Journal of Environmental Studies and Management. 1 (2): 74-82. [2] Attanayake, A., Samaranayake, H.M.S., and Ratnapala, N. 1983. Sri Lanka. in Pye, E. A. and Lin, Tzong-bian (eds.) Tourism in Asia: The Economic Impact. Singapore University Press for International Development Research Centre, Canada. [3] Blake, A., Arbache, J.S., Sinclair, M.T., and Teles, V. 2008. Tourism and poverty relief. Annals of Tourism Research. 35 (1): 107±126. [4] BSE Annual Capital Market Review. 2003. Section 2: Industry Review, Tourism. [5] Chopra, S. 1991. Tourism and Development in India. Ashish Publishing House. New Delhi. [6] Deller, S., Tsai, T., Marcouiller, D., and English, D. 2001. The Role of Amenities and Quality-of-life in Rural Economic Growth. American Journal of Agricultural Economics 83:352±365. [7] Elkan, W. 1975. The Relation Between Tourism and Employment in Kenya and Tanzania. Journal of Development Studies. January. 11 (2): 123-130. [8] Farver, J.A.M. 1984. Tourism and Employment in Gambia. Annals of Tourism Research. 11 (2): 249-265. [9] Goodwin, H. 2000. Pro-Poor Tourism: Opportunities for Sustainable Local Development. D+C Development and Cooperation. No. 5. September/October 2000. pp.12-14. [10] Green, R.H. 1979. Towards Planning Tourism in African Countries. in de Kadt, E. (ed.) Tourism- Passport to Development. Oxford University Press, New York. [11] Gupta, R.K. 2007. Sustainable Tourism Planning. Sumit Enterprises, New Delhi. [12] Holloway, C.J. 1985. The Business of Tourism (The M & E Hotel, Catering and Tourism Series). Chapter 13. pp. 246-262. Macdonald and Evans Ltd., London. [13] Isserman, A. 2001. The Competitive Advantages of Rural America in the Next Century. International Regional Science Review. 24: 35±58. [14] Kweka, J. 2004. Tourism and the Economy of Tanzania: A CGE Analysis. Paper presented at the CSAE &RQIHUHQFHRQµ*URZWK3RYHUW\5HGXFWLRQDQG+XPDQ'HYHORSPHQWLQ$IULFD¶-22 March, 2004. Oxford, UK. [15] Kweka, J., Morrissey, O., and Blake, A. 2001. Is Tourism a Key Sector in Tanzania? Input-Output Analysis of Income, Output, Employment and Tax Revenue. Christel Dehaan Tourism and Travel Research Institute discussion paper. Available at http://www.Nottinghn.ac.uk/ttri (accessed on 12/7/2010). [16] Marcouiller, D.W., Kim, K-K, Deller, S.C. 2004. Natural Amenities, Tourism and Income Distribution. Annals of Tourism Research. 31 (4): 1031±1050. [17] Marcouiller, D. 200%RRVWLQJ7RXULVPDV5XUDO3XEOLF3ROLF\3DQDFHDRU3DQGRUD¶V%R["The Journal of Regional Analysis and Policy. 37 (1): 28-31. [18] McCatty, M., and Serju, P. 2006. Tourism, Economic Growth and Employment. Working paper. Research and Economic Programming Division. Bank of Jamaica, Jamaika. [19] McGranahan, D. 1999. Natural Amenities Drives Rural Population Change. USDA ERS, Agricultural Economic Report, Number 781. Washington DC: USDA ERS. [20] MacCannell, D. 1976. The Tourist: A New Theory of the Leisure Class, Schocken, New York. [21] Mings, R.C. 1978. The Importance of More Research on the Impacts of Tourism. Annals of Tourism Research. 5 (3): 340-344.

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Journal of Environment Management and Tourism [22] OECD. 1999. Cultivating Rural Amenities. Organisation for Economic Cooperation and Development, Paris. [23] Pratt, S.A. 2009. The Economic Impact of Uncertain Tourism Demand in Hawaii: Risk in a Computable General Equilibrium Model. PhD dissertation, University of Nottingham. [24] Power, T. 1988. The Economic Pursuit of Quality. Armonk: M.E. Sharpe. [25] Riley, M., and Szivas, E. 2009. Tourism Employment and Poverty: Revisiting the Supply Curve. Tourism Economics. 15 (2): 297±305. [26] Roe, D., Leader-Williams, N., and Dalal-Clayton. 1997. Take only Photographs, Leave only Footprints: The Environmental Impacts of Wildlife Tourism. The International Institute for Environment and Development, London. [27] St. John New Brunswick Department of Tourism. 1974. Employment in the Tourism Industry: New Brunswik, 1972. Technical Service Division, St John. [28] UNED-UK. 1999. *HQGHU 7RXULVP:RPHQ¶V(PSOR\PHQWDQG3DUWLFLSDWLRQLQ7RXULVP. A Project Report. [29] UNEP. 2002. Sustainable Tourism: Briefing Paper No 4. Towards Earth Summit 2002. Pp. 1-14. [30] Waveren, E.V., Farouk, D.U., Awuni, C., Porekuu, P., and Ashie, E. 2009. SNV Briefing- The Scavannaland Destination Towards Pro-poor Tourism Development in Northern Ghana. Project Report of SNV Ghana (Northern Portfolio) and the Wildlife Division (Mole NP). Issue-7, August. [31] Wilkinson, P.F. 1989. Strategies of Tourism in Island Microstates. Annals of Tourism Research. 16 (2): 153- 177. [32] WTTC. 2002. The Impact of Travel & Tourism on Jobs and the Economy ± 2002. Available at http://www.wttc.org (accessed on 9/8/2010). [33] WTTC. 2010. The Impact of Travel & Tourism on Jobs and the Economy ± 2002. Available at http://www.wttc.org (accessed on 29/9/2010). Websites: http://www.ibef.org/industry/tourismhospitality.aspx (accessed on 10 th January2010) http://incredibleindia.org/Tourism_Stastics2008.pdf (accessed on 10 th January 2010) http://en.wikipedia.org/wiki/Tourism_in_india (accessed on 10 th January 2010)

131


INFORMATIONAL BARRIERS TO ENERGY EFFICIENCY ± COMBINING THEORY AND EUROPEAN POLICIES21

Lars MORTEN ANDERSEN M.Sc. Economics from the University of Copenhagen, Denmark, M.A. European Economics (EEIB) from the College of Europe Bruges, Belgium lars-[email protected] Raimund BLEISCHWITZ, Visiting professor at the College of Europe Bruges, Belgium, Professor at the Wuppertal Institute/Univestities of Wuppertal and Kassel, Germany [email protected]

Abstract This article addresses informational barriers to energy efficiency. It is a widely acknowledged result that an energy efficiency gap exists implying that the level of energy efficiency is at an inefficiently low level. Several barriers to energy efficiency create this gap and the presence of asymmetric information is likely to be one such barrier. The article finds that problems of moral hazard and adverse selection indeed can help explain the seemingly low levels of energy efficiency. The theory reveals two implications to policies on energy efficiency. First, the development of measures to enable contractual parties to base remuneration on energy performance must be enhanced, and second, the information on technologies and the education of consumers and installers on energy efficiency must be increased. Finally, it is found that the preferred EU policy instrument on energy efficiency, so far, seems to be the use of minimum requirements. Less used in EU legislation is the use of measuring and verification as well as the use of certifications. Therefore, it is concluded that the EU should consider an increased use of these instruments.

Keywords: Energy efficiency, Informational barriers, European policies

JEL Classiffication: Q48, D82, F42

1. Introduction The World is facing complex energy challenges. Countering climate change caused by rising emissions of carbon dioxide, ensuring affordable access to energy for an increasing population and securing the supply of energy. Because of these multifaceted challenges, strategies to counter climate change are likely to pose trade- offs. Increased energy efficiency is a key strategy with low trade-offs and huge win-win opportunities. However, VWLOODQ³HQHUJ\HIILFLHQF\JDS´RIH[SODLQHGE\PDUNHWIDLOXUHVH[LVWV7Kis paper focuses on the market failure posed by informational asymmetries. So far, the focus in the literature on agency and informational barriers has largely been on the problem of splitted incentives between principals and agents (IEA 2007). This problem deviates from traditional principal agent problems since the problem is caused by a split between the investor and the user of technologies, and not by asymmetries of information. That is exactly where this article starts;; it seeks to contribute to the understanding of market barriers arising through informational asymmetries. This is done by proposing a simple theoretical framework analyzing the cause and potential alleviations of inefficiencies caused by the problems of moral hazard and adverse selection. In a setting adopted from literature on economics of information it is illustrated how moral hazard and adverse selection impact on the outcome of energy efficiency. Afterwards, European legislation is briefly evaluated to assess the extent to which informational asymmetries are accommodated.

2. Theory Following Arrow (1962), an implicit assumption in welfare-economics is that the information is symmetric among the participants in the markets. Free-market Walrasian equilibriums will then, according to the First Welfare Theorem, lead to Pareto efficient outcomes, where no welfare improvements can be made. In reality, 21 7KLVDUWLFOHLVDUHYLVHGYHUVLRQRIWKHFRUUHVSRQGLQJDXWKRU¶VPDVWHU¶VWKHVLVGHOLYHUHGDWWKH&ROOHJHRI(XURSHLQ

2009. The thesis was awarded the Alcoa Prize for the best thesis related to sustainable development written at the College of Europe in 2009. The authors thank Nicole Täumel for useful discussions during the formulation of the model, Wolfgang Irrek for insights on EU projects in the area and Jacques Pelkmans for encouraging comments. All remaining omissions and PLVWDNHVDUHVROHO\WKHDXWKRUV¶DQGRSLQLRQVH[SUHVVHGLQWKLVDUWLFOHGRQRWQHFHVVDULO\UHIOHFt the view of the institutions the authors are affiliated with.

132

Journal of Environment Management and Tourism however, the information is often asymmetric, which causes the implicit assumption for the welfare theorem to break down, whereby the outcome is likely to end up being inefficient (Mas-Colell, Whinston, and Green 1995). The observed energy efficiency gap might be the result of such an inefficient outcome and potentially caused by informational asymmetries between the participants in the market for energy efficiency. As Nobel laureate Oliver E. Williamson (1975) (1985) has emphasized, contracts play a major role in organizing economic relationships and poorly designed contracts can lead to inefficient outcomes like the energy efficiency gap. For this reason, the understanding of the design of contracts, given the informational environment, is important in order to understand why inefficient outcomes occur and what can be cone to alleviate these inefficiencies (Macho-Stadler, and Pérez-Castrillo 1997). This part attempts to provide such an understanding of contractual settings related to energy efficiency. The presented framework builds on literature on economics of information and microeconomics as presented by Macho-Stadler, and Pérez-Castrillo (1997), and Mas-Colell, Whinston, and Green (1995). This means that the formal way of presenting and solving the problems follows the lines of the literature in the sense that the models contain a principal maximizing an objective function subject to an ageQW¶VSDUWLFLSDWLRQFRQVWUDLQW The maximization is done using the Lagrange method. However, in this setting the framework has been adapted to accommodate an energy efficiency context. The first section illustrates the basic setup. This means that the contract where a principal contracts an agent under symmetric information is found. Then the model is extended to illustrate the optimal contracts under moral hazard and adverse selection. In both extensions the ideal situation ± the first best - is identified. Then, the problem in hand is illustrated and the optimal contract ± the second best - given the information asymmetry is identified. For each problem the consequences of the problem and the contracting in case of asymmetric information is analyzed. Finally, the findings are summarized in a conclusion. 2.1 The Base Model Both models presented in this part are developed from a common framework. A principal contracts an agent in order to maximize an objective function. Since both models originate from this framework it is reasonable first to develop the basic framework where information is symmetric and then later extend it to the issues of asymmetric information. Also, since the contract under symmetric information will be used as a benchmark case for later comparison it is reasonable first to develop it. Therefore, the following paragraphs first state the assumptions underlying the model, then present and solve the maximization problem in order to find the optimal contract under symmetric information. Assumptions In the base model the information is symmetric. This means that the principal knows what effort the agent H[HUWVDVZHOODVWKHDJHQW¶VW\SHZKHUHE\WKHSULQFLSDOFDQZULWHDFRQWUDFWGHSHQGHQWRQHIIRUWDQGGLUHFWWKLV contract to a specific agent. The principal wants to hire the agent to search for and install a given amount of energy efficiency,‫ ܧܧ‬, and therefore offers the agent a contract. This contractual relationship goes on for one period. It is assumed that the level of energy efficiency can be translated into a monetary gain for the principal, for instance through a lower energy bill. The contract specifies the effort the agent must exert denoted by ݁ and the wage as a function of the outcome, denoted by ‫ ݓ‬. The contract can be considered as a document specifying WKHDJHQW¶VREOLJDWLRQVDQGWKHWUDQVIHUVWKDWPXVWEHPDGHLQGLIIHUHQWRXWFRPHV7KHFRQWUDFWSURSRVHGE\WKH principal is either accepted or rejected by the agent. However, it is assumed that the contract is designed such that it will always be accepted in equilibrium. After the agent has exerted his effort the outcome is realized. There are ܰ possible outcomes denoted by ܺ, where ܺ ൌ ሼ‫ܧܧ‬ଵ ǡ ‫ܧܧ‬ଶ ǡ ǥ ǡ ‫ܧܧ‬ே ሽ and ‫ܧܧ‬ଵ ൏ ‫ܧܧ‬ଵ ൏ ǥ ൏ ‫ܧܧ‬ே , meaning that the higher the subscript the higher is the energy efficiency. This final outcome is the result of both on the effort exerted by the agent but also of some random component. One can LPDJLQH WKDW WKH GHJUHH RI PHDVXUHG HQHUJ\ HIILFLHQF\ GHSHQGV ERWK RQ WKH DJHQW¶V HIIRUW EXW DOVR RQ some random component relating to the behavior of the users, the complexity of the technologies installed and of the environment the technologies are installed in, the climate and maybe pure luck. The probability of a given outcome, ‫ܧܧ‬௜ , depends on the effort exerted by the agent and ‫݌‬௜ ሺ݁ሻ ൐ Ͳ for all ݅ , where σே ௜ୀଵ ‫݌‬௜ ሺ݁ሻ ൌ ͳ. The probability for a given outcome must be positive for all effort-levels since, if this was not the case, a given result could signify what effort level was not exerted. When the outcome is realized the wage is paid to the agent. Since both the principal and the agent are exposed to uncertainty through the random component, their risk preferences must be examined. The concept employed here is that of expected utility, meaning that the

133

Volume I Issue 1(1) Winter 2010 preferences are of a von Neumann-0RUJHQVWHUQW\SH7KHSULQFLSDO¶VSD\RIIIXQFWLRQZKLFKPXVWEHLQFUHDVLQJ in the obtained level of energy efficiency and decreasing in the wage payment to the agent, is given by:

࡮ሺࡱࡱ െ ࢝ሻ

where it is assumed that ‫ ܤ‬ƍ ൐ Ͳ and that ‫ ܤ‬ƍƍ ൌ Ͳ reflecting that the payoff of higher energy efficiency and lower wage payment is increasing at a constant pace and that the principal is risk-neutral. Note that the principal, as such, does not care about the effort exerted by the agent, only because it affects the final outcome. The DJHQW¶VXWLOLW\ZKLFKLVDVVXPHGWREHLQFUHDVLQJLQWKHZDJHEXWGHFUHDVLQJLQWKHHIIRUWH[HUWHGLVJLYHQE\

ࢁሺ࢝ǡ ࢋሻ ൌ ࢛ሺ࢝ሻ െ ࢜ሺࢋሻ

where it is assumed that ‫ݑ‬ƍ ൐ Ͳ and ‫ݑ‬ƍƍ ൏ Ͳ reflecting the standard assumptions that the agent has a decreasing marginal utility to wage and that the agent is risk-averse when it comes to the remuneration. It is also assumed that ‫ ݒ‬ƍ ൐ Ͳ and ‫ ݒ‬ƍƍ ൐ Ͳ reflecting the assumptions that the agent suffers from an increasing marginal disutility to effort. It is also assumed that the agent has a reservation utility of ܷ, which is the level of utility that the contract offered must at least be equal to. One can imagine that the agent has another option than the contract proposed where this other option gives the agent a utility equal the reservation utility. Because of this the contract offered by the principal must at least give the agent a utility equal to the reservation utility. Briefly to summarize the timing of the relationship;; first, the principal offers the agent the contract which the agent accepts (or rejects). Then the agent supplies a verifiable effort, which together with the random component determines the final outcome and the payoff are paid. The timing is illustrated in the timeline below.

Figure 1. Time-line in the base model

Solving the model Since the relationship is of a sequential nature the solution concept applied is that of a sub-game perfect Nash equilibrium. This implies that the solution is found from backwards, meaning that the principal offers the agent a contract, which specifies the transfer the agent will get in all potential outcomes and the effort the agent must exert, ‫ ܥ‬ൌ ሼ݁ǡ ‫ݓ‬ሺ‫ܧܧ‬ଵ ሻǡ ǥ ǡ ‫ݓ‬ሺ‫ܧܧ‬ே ሻሽ. Furthermore, the contract is made such that the agent will obtain his reservation utility since otherwise he could get a higher utility from not engaging in the relationship. From backwards, the agent then accepts or rejects the contract after calculating what his expected utility will be and taking the optimal level of effort into account. The principal then offers the agent the contract that ensures KLPWKHKLJKHVWH[SHFWHGSD\RIIWDNLQJDFFRXQWRIZKDWWKHDJHQW¶VGHFLVLRQZLOOEH)RUPDOO\WKHSULQFLSal solves the following maximization problem:

ࡺ

ࡹࢇ࢞ࢋǡ࢝ሺࡱࡱ૚ ሻǡǥǡ࢝ሺࡱࡱࡺሻ ෍ ࢖࢏ ሺࢋሻ࡮൫ࡱࡱ࢏ െ ࢝ሺࡱࡱ࢏ ሻ൯ ࢏ୀ૚

ࡺ

࢙Ǥ ࢚Ǥ ෍ ࢖࢏ ሺࢋሻ࢛൫࢝ሺࡱࡱ࢏ ሻ൯ െ ࢜ሺࢋሻ ൒ ࢁ

࢏ୀ૚

134

Journal of Environment Management and Tourism where the constraint ensures that the agent will participate in the contract since the expected utility he obtains is at least equal to his reservation utility, for which reason the constraint is called the participation constraint (PC). The problem is solved using the Lagrangian: ே

ே

ࣦ ൌ ෍ ‫݌‬௜ ሺ݁ሻ‫ܤ‬൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ൅ ߣ ൭෍ ‫݌‬௜ ሺ݁ሻ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ሻ െ ܷ൱

௜ୀଵ

௜ୀଵ

where the solution can be identified from the first order condition (FOC) in case the second order condition (SOC) is negative. Furthermore, since we are maximizing over several variables the cross-derivative must be zero. These conditions are:

FOC: ߲ࣦൗ߲‫ݓ‬ሺ‫ ܧܧ‬ሻ ൌ ‫݌‬௜ ሺ݁ሻ‫ܤ‬ƍ ൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ሺെͳሻ ൅ ߣ‫݌‬௜ ሺ݁ሻ‫ݑ‬ƍ ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ ൌ Ͳ

௜

ଶ SOC: ߲ ࣦൗ

ሺ݁ሻ‫ܤ‬ƍƍ ൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ൅ ߣ‫݌‬௜ ሺ݁ሻ‫ݑ‬ƍƍ ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ ൏ Ͳ ߲‫ݓ‬ሺ‫ܧܧ‬௜ ሻଶ ൌ ‫݌‬௜

ଶ Cross derivative: ߲ ࣦ൘߲‫ݓ‬ሺ‫ ܧܧ‬ሻ߲‫ݓ‬ሺ‫ ܧܧ‬ሻ ൌ Ͳ ௜ ௝

Regarding the SOC it is seen that this condition must be negative since both probabilities are positive, ߣ is bigger than or equal to zero (can by definition not be negative) and since both ‫ܤ‬ƍƍ and ‫ݑ‬ƍƍ are negative (see assumptions above). Regarding the cross derivative this must be zero since ‫ݓ‬ሺ‫ܧܧ‬௝ ሻ does not occur in the FOC. As the conditions needed to identify the solution from the FOC are present the solution is found from the FOC to be:

ߣൌ

‫ ܤ‬ƍ ൫‫ܧܧ‬௜ െ ‫ ݓ‬ை ሺ‫ܧܧ‬௜ ሻ൯ ൘ƍ ை ‫ ݑ‬ሺ‫ ݓ‬ሺ‫ܧܧ‬௜ ሻሻ

This condition is called the optimality condition denoted with the superscript (O) in the wages. Notice that since both ‫ܤ‬ƍ and ‫ݑ‬ƍ are positive, ߣ must be positive as well, meaning that the participation constraint binds in equilibrium. This is clearly no surprise since the only effect of a combination of wage and effort that ensures a XWLOLW\KLJKHUWKDQWKHUHVHUYDWLRQXWLOLW\LVWKDWWKHSULQFLSDO¶VSD\RIILVORZHUHG7KHUHIRUHWKHSULQFLSDOKDVQR incentive to offer a contract that gives the agent a utility higher than needed to contract him. Knowing that the principal is risk neutral, ‫ ܤ‬ƍƍ ൌ Ͳ, it must be the case that ‫ ܤ‬ƍ equals a constant, whereby the optimality condition requires that ‫ݑ‬ƍ ሺ‫ ݓ‬ை ሺ‫ܧܧ‬௜ ሻሻ equals a constant for all outcomes, ݅ . Knowing that the agent is risk averse (his utility function is concave), the only possible way to ensure that his marginal utility is the same for all outcomes is to give him the same wage in all outcomes. In other words ‫ݑ‬ƍ ሺ‫ ݓ‬ை ሺ‫ܧܧ‬௜ ሻሻ ൌ ‫ݑ‬ƍ ൫‫ ݓ‬ை ሺ‫ܧܧ‬௝ ሻ൯ requires that ‫ ݓ‬ை ሺ‫ܧܧ‬௜ ሻ ൌ ‫ ݓ‬ை ሺ‫ܧܧ‬௝ ሻ, meaning that the optimal contract is independent of the result. Why is this the case? The reason is that the effort is verifiable, which enables the parties to contract directly on the effort, and that the principal is risk-neutral and the agent risk averse. With this risk-pattern it is optimal for the principal to demand the effort level from the principal that maximizes his payoff and insure the agent completely from the risk in the outcome by offering him a constant wage. The agent receives ‫ ݓ‬ை in all outcomes and this wage only depends on the effort level demanded by the principal. Finally, since the participation constraint binds the exact wage payment can be found:

‫ݑ‬ሺ‫ ݓ‬ை ሻ െ ‫ݒ‬ሺ݁ሻ ൌ ܷ ฻ ‫ ݓ‬ை ൌ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ை ሻ൯

This wage will be used as a reference wage in comparisons later. Consequences To conclude, in the base model where information is symmetric, the principal and the agent can write contracts directly on the effort level. Knowing this fact the principal will design a contract such that the agent will 135

Volume I Issue 1(1) Winter 2010 accept it and exert the effort which gives the principal the highest payoff. When designing the contract the principal looks at the combinations of wage and effort which makes the agent participate. The principal then chooses to offer the agent the contract which gives the principal the highest payoff. No other outcome can be EHWWHU WKDQ WKLVDQGVLQFH WKH SULQFLSDO¶VSURILW LV PD[LPL]HG WKHRXWFRPHPXVW EH 3DUHWR RSWLPDO 7KH DJHQW could be made better off, but this would come at a cost to the principal. The consequence of contracting in the case of symmetric information is that the most efficient outcome is reached, and assuming that the outcome with the highest energy efficiency pays the principal the highest payoff, the highest possible level of energy efficiency will be installed and the energy efficiency gap closed. However, this is not likely to be the case and the two models explained below offer some explanation. 2.2 Moral hazard The previous section illustrated the optimal contract in the situation where a principal contracts an agent to install some energy efficiency in a setting where the effort exerted by the agent is verifiable. However, in many relationships this assumption might be unrealistic. Take for instance the case of an architect or an engineer hired by a principal to exert some effort to install energy efficiency. If the level of effort exerted by the agent, i.e. how much time and resources are spent by the agent in looking for the most efficient and best performing technologies, cannot be verified the relationship suffers from potential moral hazard. If a contract in this situation just pays the agent a fixed wage, which was optimal in the base model, the agent has no incentive to work hard and find the best performing technologies given the environment. Even though a contract might have specified that the agent must work hard, due to the non-verifiability of effort there is room for opportunistic behavior by the agent, whereby the exerted effort-level will be the lowest possible. Fortunately, the non-verifiability does not completely exclude the possibility to write contracts. In theory, it might still be possible for the principal to contract the agent in a rational way, which is done by designing a compensation scheme that rewards the agent when the outcome signals that he exerted high effort and punish the agent when the outcome signals a low effort. This section analyzes the situation where a principal hires an agent to install some energy efficiency and where the effort exerted by the agent to look for the best performing techniques is no longer verifiable. To specify, a non-verifiable effort means that it might be observed but it cannot be verified in a court-room, whereby it becomes impossible to contract on it. The method used in the analysis is the following. First the optimal contract, the first best, in the case of verifiable effort is specified. This is followed by an illustration of the problem of moral hazard. As mentioned, even though effort might be non-verifiable, it might still be possible for the principal to contract the agent. Therefore, the following section analyses the optimal contract in the presence of moral hazard. The final section illustrates the likely consequences of both the moral hazard in itself, and the implications of the optimal compensation scheme when moral hazard is present. First best The first best outcome is the ideal situation where the effort exerted by the agent is at its optimal level. This implies that both the agent will engage in the contract since it offers him a utility equal to his reservation XWLOLW\DQGPD[LPL]HVWKHSULQFLSDO¶VSD\RII7KLVLVVLPSO\WKHFRQWUDFWIRXQGLQWKHEDVHPRGHOEHLQJ

‫ ݓ‬ை ൌ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ை ሻ൯

In this model the principal has chosen the effort level that maximizes his profits given that the agent will participate. One can for instance imagine that there are two effort levels;; high and low. The contract above can then be written such that a high effort results in a high wage (‫ ݓ‬ு ǡ ݁ ு ) or that a low effort results in a low wage (‫ ݓ‬௅ ǡ ݁ ௅ ). In the case of verifiable effort a contract satisfying this condition, following the maximization problem in the base model, cannot be improved. It is at its optimal level. Problem As mentioned in the introduction to moral hazard, in many settings it is impossible to contract directly on effort. However, in practice contracts might still be designed as if the effort was verifiable (but it is not!) or it might be the case that it is impossible to write other contracts than contracts with a flat wage. This implies that the exerted effort is at its lowest possible level, meaning that:

‫ ݓ‬௠௜௡ ൌ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ௠௜௡ ሻ൯

136

Journal of Environment Management and Tourism This result holds both in cases where effort is non-verifiable but the contract is still written on a specific effort level (i.e. the principal believes it is possible to contract on the effort), and in the situation where the principal knows it is impossible to contract directly on effort, but it is impossible to incorporate other measures in the contract. Second best Even though effort is non-verifiable, as mentioned above, it might still be possible to contract in a way that ensures an effort level above the minimal one. For the setting of the model some additional assumptions must be made. First, in the following it is assumed that there are only two effort levels;; high (H) where the agent works hard and low (L) where the agent is lazy and only perform at the minimum effort-level. Formally it is given by ݁ ‫ א‬ሼ݁ ௅ ǡ ݁ ு ሽ. Following from the specification of the disutility these effort levels implies that ‫ݒ‬ሺ݁ ு ሻ ൐ ‫ݒ‬ሺ݁ ௅ ሻ. Additionally, with only two effort levels the notation can be simplified such that, ‫݌‬௜ு ൌ ‫݌‬௜ ሺ݁ ு ሻ and ‫݌‬௜௅ ൌ ‫݌‬௜ ሺ݁ ௅ ሻ. In order to ensure that high outcomes are more likely under high than low effort it must be the case that:

σ௞௜ୀଵ ‫݌‬௜ு ൏ σ௞௜ୀଵ ‫݌‬௜௅ for all ݇ ൌ ͳǡ ǥ ǡ ݊ െ ͳ

The outcomes of the relationship are unchanged from above, meaning that there are ܰ potential outcomes denoted by ܺ, where ܺ ൌ ሼ‫ܧܧ‬ଵ ǡ ‫ܧܧ‬ଶ ǡ ǥ ǡ ‫ܧܧ‬ே ሽ and ‫ܧܧ‬ଵ ൏ ‫ܧܧ‬ଵ ൏ ǥ ൏ ‫ܧܧ‬ே . Briefly to summarize the timing of the relationship;; first, the principal offers the agent the contract which the agent accepts (or rejects). Then the agent supplies a non-verifiable effort, which together with the random component determines the final outcome from which the payoffs are paid. The timing is illustrated in the timeline below.

P offers A the contract

A supplies non- verifiable effort

Outcome realized and payment made

A accepts (or rejects)

State of nature is realized

Figure 2. Time-line in the moral hazard model

The principal can as such, through the contract he offers, demand two effort levels from the agent and the principal makes this decision based on which effort level that maximizes his profit. In the case where it is the low effort level that it optimal for the principal, no real moral hazard problem exists, since the principal can just offer WKH DJHQW D IL[HG ZDJH HQVXULQJ WKDW WKH DJHQW¶V UHVHUYDWLRQ XWLOLW\ LV UHDFKHG LPSO\LQJ WKDW ‫ ݓ‬௅ ൌ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ௅ ሻ൯. This situation is not really interesting, since the contract is similar to the ones above. The situation becomes more interesting when it is optimal for the principal to demand a high effort from the agent. This will be the case when good outcomes are sufficiently attractive, meaning that the level of energy efficiency, ‫ܧܧ‬௜ , is high for large ݅ ¶V,IWKLVLVWKHFDVHLWLVQHFHVVDU\WRLQFHQWLYL]HWKHDJHQWPHDQLQJWKDWDQ incentive constraint must be incorporated in the maximization problem. This incentive constraint is the following:

ே

ே

෍ ‫݌‬௜ு ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ு ሻ ൒ ෍ ‫݌‬௜௅ ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ௅ ሻ

௜ୀଵ

௜ୀଵ

The constraint above has the intuitive implication that the agent will chose to exert high effort if the expected utility from this is higher than or equal to the expected utility from exerting low effort. In order to find the optimal contract, when it is not possible to contract on effort and which induces the agent to exert high effort the principal must solve the following maximization problem:

137

Volume I Issue 1(1) Winter 2010 ே

‫ݔܽܯ‬௪ሺாாభ ሻǡǥǡ௪ሺாாಿ ሻ ෍ ‫݌‬௜ு ‫ܤ‬൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ௜ୀଵ

ு ு ‫ݏ‬Ǥ ‫ݐ‬Ǥ σே ௜ୀଵ ‫݌‬௜ ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ሻ ൒ ܷ

(PC)

ு ே ௅ ு ௅ σே ௜ୀଵ ‫݌‬௜ ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ሻ ൒ σ௜ୀଵ ‫݌‬௜ ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ሻ

(IC)

where (PC) indicates the participation constraint and (IC) indicates the incentive constraint. Note that since it is no longer possible to contract on effort this variable is excluded from the maximization problem. The problem can be solved using the Lagrangian:

ே

ࣦൌ

ே

෍ ‫݌‬௜ு ‫ܤ‬൫‫ܧܧ‬௜ ௜ୀଵ ൅

െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ൅ ߣ ൭෍ ‫݌‬௜ு ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ‫ݒ‬ሺ݁ ு ሻ െ ܷ൱ ே

௜ୀଵ

ߤ ൭෍ ‫݌‬௜ு ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ െ ௜ୀଵ

ே

‫ݒ‬ሺ݁

ுሻ

െ ෍ ‫݌‬௜௅ ‫ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ൅ ‫ݒ‬ሺ݁ ௅ ሻ൱ ௜ୀଵ

where, since the SOC is negative and the cross-derivative is equal to zero, the solution can again be found from the FOCs. The FOC for outcome ݅ is:

ு ƍ ு ƍ ு ௅ ߲ࣦൗ ሻ൯ ሻ൯ ሻ‫ݑ‬ƍ ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ ൌ Ͳ ߲‫ݓ‬ሺ‫ܧܧ‬௜ ሻ ൌ െ‫݌‬௜ ‫ ܤ‬൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ൅ ߣ‫݌‬௜ ‫ ݑ‬൫‫ݓ‬ሺ‫ܧܧ‬௜ ൅ ߤሺ‫݌‬௜ െ ‫݌‬௜ ฻

ߣ ൅ ߤ ቌͳ െ

‫ ܤ‬ƍ ൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ‫݌‬௜௅ ൘ƍ ൘ ுቍ ൌ ‫ ݑ‬ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ ‫݌‬௜

Since it is assumed that ‫ ܤ‬ƍƍ ൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ ൌ Ͳ it must be the case that ‫ ܤ‬ƍ ൫‫ܧܧ‬௜ െ ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ൯ equals a constant, which in the following is denoted ݇ . This gives the optimality condition:

ߣ ൅ ߤ ቌͳ െ

‫݌‬௜௅ ൘ ு ቍ ൌ ݇ൗ ƍ ሺ‫ݓ‬ሺ‫ ܧܧ‬ ‫ݑ‬ ‫݌‬௜ ௜ ሻሻ

(MH.1)

which characterizes the optimal contract in case of moral hazard. Before analyzing on the result it should be noted that both constraints are binding, meaning that both multipliers are positive. This is proved in annex I. With the result that both multipliers are positive, the design of the optimal contract in case of non-verifiable effort can be analyzed. First note the ratio of probabilities which is called the likelihood ratio. It indicates the precision with which the outcome of energy efficiency ‫ܧܧ‬௜ signals that the effort exerted by the agent was ݁ ு . The smaller this ratio, the larger is ‫݌‬௜ு relative to ‫݌‬௜௅ and so the indication that the effort exerted was ݁ ு is stronger. The two cases where the ratio decreases and increases are worth analyzing:

‫݌‬௅

1. ௜ ൘

‫݌‬௜ு

decreases => left hand side of (MH.1) increases => right hand side must increase as well =>

‫ݑ‬ƍ ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ must decrease => ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ must increase given the assumptions on ‫ݑ‬ሺ‫ݓ‬ǡ ݁ሻ. ‫݌‬௅ 2. ௜ ൘ ு increases => left hand side of (MH.1) decreases => right hand side must decrease as well => ‫݌‬௜ ‫ݑ‬ƍ ሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻሻ must increase => ‫ݓ‬ሺ‫ܧܧ‬௜ ሻ must decrease given the assumptions on ‫ݑ‬ሺ‫ݓ‬ǡ ݁ሻ.

138

Journal of Environment Management and Tourism The two cases illustrate how the optimal compensation mechanism in the case of non-verifiable effort works. If the outcome of energy efficiency ‫ܧܧ‬௜ (for example high energy efficiency) is relative more likely to occur under high effort compared to low effort it signals that the agent exerted high effort, whereby the agent must be rewarded through a higher wage. Contrary, if the outcome of energy efficiency ‫ܧܧ‬௜ (for example low energy efficiency) is relatively more likely to occur under low effort compared to high effort it signals that the agent exerted low effort, whereby the agent must be punished through a lower wage. Consequences Having presented the design of the optimal contract the consequences of this contract must be assessed. With the non-YHULILDELOLW\LQWURGXFHGLQWKHFRQWUDFWYDULDWLRQLQWKHDJHQW¶VFRPSHQVDWLRQLVLQWURGXFHGDVZHOO Knowing that the agent is risk averse and thereby dislikes uncertainty it must be the case that his expected compensation when exerting high effort is strictly greater than the fixed wage in the observable case: ‫ ݓ‬ு‫ כ‬ൌ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ு‫ כ‬ሻ൯ 7RVHHWKLVSRLQWIRUPDOO\QRWHWKDWVLQFHWKHDJHQW¶VH[pectation to his utility is ‫ܧ‬ሾܷሺ‫ݓ‬ሺ‫ܧܧ‬௜ ሻǡ ݁ ு ሻሿ ൌ ܷ ൅ ‫ݒ‬ሺ݁ ு ሻ, which basically follows from the binding participation constraint, and since ‫ݑ‬ƍƍ ሺ‫ݓ‬ሻ ൏ Ͳ-HQVHQ¶V LQHTXDOLW\WHOOVXVWKDWWKHDJHQW¶VXWLOLW\RIWKHH[SHFWHGZDJHLV

ܷሺ‫ܧ‬ሾ‫ݓ‬ሺ‫ܧܧ‬௜ ሻǡ ݁ ு ሿሻ ൐ ܷ ൅ ‫ݒ‬ሺ݁ ு ሻ

This implies that since ‫ ݓ‬ு‫ כ‬ൌ ܷ ൅ ‫ݒ‬ሺ݁ ு‫ כ‬ሻ it must be the case that:

‫ܧ‬ሾ‫ݓ‬ሺ‫ܧܧ‬௜ ሻǡ ݁ ு ሿ ൐ ‫ ݓ‬ு‫ כ‬

As a result, the non-YHULILDELOLW\ RI HIIRUW LQFUHDVHV WKH SULQFLSDO¶V H[SHFWHG FRPSHQVDWLRQ FRVWV ZKHQ implementing the high effort level. This result can have major implications for the implementation of the high effort level and thereby on the level of energy efficiency. The fact that the cost of implementing the high effort level is higher, everything else equal, it becomes more likely that the principal will not demand the high effort level since it is too expensive. Instead the principal will demand the low effort level, where the non-verifiability does not change the LPSOHPHQWDWLRQFRVW7KHUHDVRQIRUWKLVVRPHKRZVWULNLQJUHVXOWLVWKDWEHFDXVHRIWKHDJHQW¶VUisk aversion he must be paid some premium to take on the risk associated with the incentive;; in other words the expected transfer from the principal to the agent is higher than in the base model. In the case where this extra compensation needed to induce the agent to exert high effort outweighs the extra benefit to the principal from having a high effort-outcome compared to a low effort outcome, the principal will simply choose the low effort level. Note that to detect if this is the case it is necessary to assume functional forms on the payoff and utility function and not general forms like the ones used here. The fact that with non-verifiability it might be too expensive for the principal to demand high effort has a direct link to the level of energy efficiency which is necessarily lower under low effort than under high effort. This lower level of installed energy efficiency can then contribute to the explanation of the energy efficiency gap. 2.3. Adverse Selection In the base model above it was assumed thDW WKH SULQFLSDO NQHZ WKH DJHQW¶V W\SH +RZHYHU LQ PDQ\ contractual relationships this assumption is not realistic and the relationship considered here, a principal contracting an agent to exert an effort to increase the energy efficiency is no exception. Take for instance the case where two different agents differ in their productivity. In case the principal does not have knowledge on HDFKDJHQW¶VW\SHKHGRHVQRWNQRZKLVDELOLW\VNLOOVDQGPD\EHHYHQHGXFDWLRQDQGDVVXFKKHGRHVQRWNQRZ which contract to offer the agent. This setting is known as adverse selection. The economic description of adverse selection was pioneered by Akerlof (1970) in the Lemons model. In this model, Akerlof showed how asymmetric information in the market for used cars, where the seller has more information on the quality of the car than the buyer, causes the market for used cars to disappear. However, the disappearance of the market PLJKW QRW DOZD\V EH WKH FDVH RI DV\PPHWULF LQIRUPDWLRQ RQ WKH DJHQW¶V W\SH 6RPHWLPHV LW LV Sossible to discriminate between the agents. However, this discrimination implies a cost. This section analyses the relationship where a principal hires an agent to install an amount of energy efficiency, but there is asymmetric information regarding the agHQW¶VW\SHLHKRZWKHKLUHGDJHQW¶VXWLOLW\IXQFWLRQ looks like. Contrary to the situation under moral hazard, the effort exerted is assumed to be verifiable and it is still 139

Volume I Issue 1(1) Winter 2010 assumed that the principal is risk neutral and the agent risk averse. Furthermore, since uncertainty in the RXWFRPHGRHVQRWSOD\DNH\UROHIRUWKHUHODWLRQVKLS¶VLQHIILFLHQFLHVLWLVOHIWRXWRIWKHVHWWLQJ7KLVLPSOLHVWKDW the outcome of energy efficiency is no longer a function of both effort exerted and the random component, but now only a function of the effort. Since the effort exerted is now verifiable, the principal is risk neutral, and that the uncertainty is left out of the model the outcome is simplified to σ௡ ௜ୀଵ ‫݌‬௜ ‫ݔ‬௜ ൌ ‫ܧܧ‬ሺ݁ሻ. On the function on the ƍ ሺ݁ሻ ƍƍ ሺ݁ሻ outcome it is assumed that ‫ܧܧ‬ ൐ Ͳ and that ‫ܧܧ‬ ൏ Ͳ, illustrating that the energy efficiency is DVVXPHGWRH[KLELWDGHFUHDVLQJPDUJLQDOUHWXUQVWRHIIRUW7KHIDFWWKDWWKHSULQFLSDO¶VSD\RIILVQRZQRORQJHU dependent on the random component implies that it is possible to simplify the notation such that the function ‫ܤ‬ሺ‫ ܧܧ‬െ ‫ݓ‬ሻ now equals

‫ܧܧ‬ሺ݁ሻ െ ‫ ݓ‬

Regarding the agents, it is assumed that there are two types of agents that the principal cannot distinguish between. The agents have the same reservation utility and utility from wage and only differ in their disutility to effort. This means that the first type has a disutility of ‫ݒ‬ሺ݁ሻ and the second type a disutility of ݇‫ݒ‬ሺ݁ሻ, where ݇ ൐ ͳVXFKWKDWIRUDJLYHQHIIRUWOHYHOWKHVHFRQGW\SH¶VGLVXWLOLW\LVKLJKHUZKHUHE\LWEHFRPHV more expensive to contract the second type. For this reason the first type is the good type (denoted by ‫ ) ܩ‬ and the second type is the bad type (denoted by ‫ ܤ‬7KH UHVW RI WKH DJHQWV¶ SUHIHUHQFHV DUH VLPLODU WR WKH EDVH model meaning that the preferences are described by the equations:

ܷ ீ ሺ‫ݓ‬ǡ ݁ሻ ൌ ‫ݑ‬ሺ‫ݓ‬ሻ െ ‫ݒ‬ሺ݁ሻ and ܷ ஻ ሺ‫ݓ‬ǡ ݁ሻ ൌ ‫ݑ‬ሺ‫ݓ‬ሻ െ ݇‫ݒ‬ሺ݁ሻ

Finally it should be noted that, even though the principal does not know the exact type of a given agent, it is assumed that he knows the proportion of the two types of agents in the population, where type-G share is denoted ‫ ݍ‬ and type-B share is ͳ െ ‫ݍ‬. It is assumed that both types are always present, meaning that ͳ ൐ ‫ ݍ‬൐ Ͳ. First best With the new setting specified, the first best contract, i.e. the contract under symmetric information, can EHIRXQG:KHQWKHSULQFLSDONQRZVHYHU\DJHQW¶VW\SHKHGRHVQRWKDYHWRPD[LPL]HRYHUXQFHUWDLQW\RIWKH types, meaning that he can construct a maximization problem for each type and not pool the types into one maximization problem. Furthermore, since the principal can contract on both effort and wage the contract is the same as the one in the base model. With the additional simplifying assumptions WKH SULQFLSDO¶V PD[LPL]DWLRQ problem when hiring a type-G agent is:

‫ݔܽܯ‬௘ǡ௪ ‫ܧܧ‬ሺ݁ሻ െ ‫ ݓ‬

‫ݏ‬Ǥ ‫ݐ‬Ǥ‫ݑ‬ሺ‫ݓ‬ሻ െ ‫ݒ‬ሺ݁ሻ ൒ ܷ

‫ݑ‬

ିଵ

From the base model it is known that the optimal contract in case of symmetric information is: ‫ ݓ‬ൌ ൫ܷ ൅ ‫ݒ‬ሺ݁ሻ൯ which can be inserted in the maximization problem to give:

‫ݔܽܯ‬௘ ‫ܧܧ‬ሺ݁ሻ െ ‫ିݑ‬ଵ ൫ܷ ൅ ‫ݒ‬ሺ݁ ை ሻ൯

Solving this problem gives the following first order condition:

FOC: ‫ܧܧ‬ƍሺ݁ሻ െ ሺ‫ି ݑ‬ଵ ሻƍ ቀܷ ൅ ‫ݒ‬ሺ݁ ை ሻቁ ‫ݒ‬ƍሺ݁ ை ሻ

ൌ Ͳ ֞ ‫ ܧܧ‬ƍ ሺ݁ሻ െ ‫ݒ‬

ƍ ሺ݁ሻ

൘ƍ ൌ Ͳ ‫ ݑ‬ሺ‫ݓ‬ሻ

The first order condition and the participation constraint then characterize the optimal contract, which in the following is denoted by (݁ ‫ כ‬ǡ ‫ כ ݓ‬ሻ. For a type-G agent the optimal contract satisfies the two equations:

1. ‫ ܧܧ‬ƍ ሺ݁ ீ‫ כ‬ሻ

ൌ‫ݒ‬

ƍ ሺ݁ ீ‫ כ‬ሻ

൘ ƍ ீ‫ כ‬ ‫ ݑ‬ሺ‫ ݓ‬ሻ

140

(AS.1)


2. ‫ݑ‬ሺ‫ כீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ‫ כ‬ሻ

ൌ ܷ

(AS.2)

For a type-B agent the maximization problem is only changed when it comes to the disutility, whereby the conditions describing the optimal contract are:

3. ‫ ܧܧ‬ƍ ሺ݁ ஻‫ כ‬ሻ ൌ

݇‫ ݒ‬ƍ ሺ݁ ஻‫ כ‬ሻ൘ ‫ݑ‬ƍ ሺ‫ ݓ‬஻‫ כ‬ሻ

(AS.3)

4. ‫ݑ‬ሺ‫ ݓ‬஻‫ כ‬ሻ െ ݇‫ݒ‬ሺ݁ ஻‫ כ‬ሻ ൌ ܷ (AS.4) Before continuing to the analysis of the problem it is worth analyzing the optimal contracts in case of symmetric information. The four conditions above, (AS.1) to (AS.4), can be drawn in a (w,e)-diagram as the one below. The slopes of the curves are derived in the annex II. In the diagram, note that the curve (AS.4) is below (AS.2) since the constant ݇ ൐ ͳ. Furthermore, note that for a given effort-level the left hand side of (AS.1) and (AS.3) are the same which, since ݇ ൐ ͳ, implies that (AS.3) must be below (AS.1). The diagram reveals two important properties from the optimal contract. The first is that it is optimal for the principal to demand more effort from the agent with the lowest disutility of effort. That is to say that ݁ ீ‫ כ‬൐ ݁ ஻‫ כ‬. The second is that the relationship between the wages might be ambiguous, meaning that ‫ כீ ݓ‬൐ ‫ ݓ‬஻‫ כ‬ or ‫ כீ ݓ‬൏ ‫ ݓ‬஻‫ כ‬. This somehow counterintuitive result follows from the fact that it is not clear how IDUWKHFXUYH$6 OLHVIURP$6 $6 PLJKWMXVWDVZHOOOLHLQWKHFXUYH$6¶

e

AS.2 cG AS.4 cB¶ AS.1

cB

AS.3 AS.3

w Diagram 1.Optimal contracts with two different agents

Problem :KHQLQIRUPDWLRQRQWKHDJHQWV¶W\SHVEHFRPHVDV\PPHWULFPDMRUSUREOHPVDULVHLQWKHVHWWLQJDERYH One is the fact that it might be the case that in the optimal contract it can be the case that ‫ כீ ݓ‬൏ ‫ ݓ‬஻‫ כ‬ while ݁ ீ‫ כ‬൐ ݁ ஻‫ כ‬7KLV VLWXDWLRQ LV LOOXVWUDWHG LQ WKH GLDJUDP DERYH ZLWK WKH FXUYH $6¶ ZKHUH WKH HTXLOLEULXP contracts are ‫ ீܥ‬ and ‫ܥ‬஻ ƍ ,Q FDVH WKH SULQFLSDO GRHV QRWNQRZWKH DJHQWV¶ W\SHV DQG WKH FRQWUDFW FDQQRW EH optimal for the principal. The reason is that a type-G agent will obtain a higher utility from the contract intended for type-B agents than from the one intended for type-G agents, since the wage is higher and the effort is lower. The outcome is that the principal will end up offering type-B contracts to all agents ± even type-G agents. As with 141

Volume I Issue 1(1) Winter 2010 the case of moral hazard, a symmetric information contract is no longer optimal in the presence of asymmetric information. Second best Like in moral hazard it is still possible for the principal to contract facing an adverse selection problem. In this case the proportion of each agent, ‫ ݍ‬, becomes relevant. Briefly to summarize the timing of the relationship;; ILUVWVRPHH[WHUQDOIDFWRUGHWHUPLQHVWKHDJHQWV¶W\SHVZKLFKLVWKHQRQO\REVHUYHGE\WKHDJHQWV7KHQ the principal designs the contracts which the agents accepts (or rejects). Then the agents supply the effort, which, together with the random element, determines the final outcome from which the payoffs are paid. The timing is illustrated in the timeline below.

Nature chooses $¶VW\SH

A either accepts or rejects

Nature plays

P designs the menu of contracts

Outcome is realized and payment made

A supplies effort

Figure 3.Time-line in the adverse selection model

The aim is now for the principal to design a menu of contracts ensuring that each agent chose the FRQWUDFW LQWHQGHG IRU LWV VSHFLILF W\SH DQG WR GHVLJQ WKHVH FRQWUDFWV VXFK WKDW WKH SULQFLSDO¶V SD\RII LV VWLOO maximized. When the agents chose the exact contract intended for their type the principle employed is called the UHYHODWLRQ SULQFLSOH 7KH PHWKRG XVHG LV WR DGG RQH FRQVWUDLQW IRU HDFK SRWHQWLDO W\SH WR WKH SULQFLSDO¶V maximization problem which ensures that each agent chose the contract intended for their type. These constraints arHWKHSUREOHP¶VLQFHQWLYHFRQVWUDLQWV 7KHSULQFLSDO¶VPD[LPL]DWLRQSUREOHPZKLFKPD[LPL]HVWKHSULQFLSDO¶VXWLOLW\DQGHQVXULQJWKDWWKHDJHQWV pick the contracts intended for their types is then the following:

‫ݔܽܯ‬௘ ಸ ǡ௘ ಳ ǡ௪ ಸǡ௪ಳ ‫ݍ‬ሺ‫ܧܧ‬ሺ݁ ீ ሻ െ ‫ ீ ݓ‬ሻ ൅ ሺͳ െ ‫ݍ‬ሻሺ‫ܧܧ‬ሺ݁ ஻ ሻ െ ‫ ݓ‬஻ ሻ

‫ݏ‬Ǥ ‫ݐ‬Ǥ‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ ൒ ܷ,

(PC-G)

(PC-B)

(IC-G)

‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ݇‫ݒ‬ሺ݁ ஻ ሻ ൒ ‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ݇‫ݒ‬ሺ݁ ீ ሻ

(IC-B)

‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ݇‫ݒ‬ሺ݁ ஻ ሻ ൒ ܷ,

‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ ൒ ‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ‫ݒ‬ሺ݁ ஻ ሻ

where (PC-G) is the participation constraint for the good type and (PC-B) the participation constraint for the bad type. Similarly, (IC-G) is the incentive constraint for the good type, which ensures that a type-G agent picks the contract intended for him, and (IC-B) is the incentive constraint for type-B agents ensuring that a type-B agent picks a type-B intended contract. Before solving the problem it can be argued that only the (IC-G) and the (PC-B) are the binding constraints. This argumentation is in the annex III. Knowing this, the problem can be solved using the Lagrangian:

ࣦ ൌ ‫ݍ‬ሺ‫ܧܧ‬ሺ݁ ீ ሻ െ ‫ ீ ݓ‬ሻ ൅ ሺͳ െ ‫ݍ‬ሻሺ‫ܧܧ‬ሺ݁ ஻ ሻ െ ‫ ݓ‬஻ ሻ ൅ ߤ൫‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ݇‫ݒ‬ሺ݁ ஻ ሻ െ ܷ൯ ൅ ߣ൫‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ െ ‫ݑ‬ሺ‫ ݓ‬஻ ሻ ൅ ‫ݒ‬ሺ݁ ஻ ሻ൯

which has the following FOCs:

ƍ ሺ‫ ݓ‬஻ ሻ ߲ࣦൗ െ ߣ‫ݑ‬ƍ ሺ‫ ݓ‬஻ ሻ ൌ Ͳ ߲‫ ݓ‬஻ ൌ െሺͳ െ ‫ݍ‬ሻ ൅ ߤ‫ݑ‬ ƍ ሺ‫ ீ ݓ‬ሻ ߲ࣦൗ ൌ Ͳ ߲‫ ீ ݓ‬ൌ െ‫ ݍ‬൅ ߣ‫ݑ‬

142


ƍ ሺ݁ ஻ ሻ ߲ࣦൗ ሺͳ െ ߤ݇‫ ݒ‬ƍ ሺ݁ ஻ ሻ ൅ ߣ‫ ݒ‬ƍ ሺ݁ ஻ ሻ ൌ Ͳ ߲݁ ஻ ൌ െ ‫ݍ‬ሻ‫ܧܧ‬ ƍ ሺ݁ ீ ሻ ߲ࣦൗ െ ߣ‫ ݒ‬ƍ ሺ݁ ீ ሻ ൌ Ͳ ߲݁ ீ ൌ ‫ܧܧݍ‬

Before identifying the optimal contract the expressions for the two multipliers must be identified. Note the following:

‫ݍ‬ ƍ ሺ‫ ீ ݓ‬ሻ ߲ࣦൗ ൌ Ͳ ฻ ߣ ൌ ൗ ƍ ሺ‫ ீ ݓ‬ሻ ൐ Ͳ ߲‫ ீ ݓ‬ൌ െ‫ ݍ‬൅ ߣ‫ݑ‬ ‫ݑ‬

since (IC-G) binds. This is confirmed by the fact that ‫ ݍ‬൐ Ͳ and that ‫ݑ‬ƍ ሺ‫ ீ ݓ‬ሻ ൐ Ͳ, implying that the fraction must be positive.

ƍ ሺ݁ ஻ ሻ ߲ࣦൗ ሺͳ െ ߤ݇‫ ݒ‬ƍ ሺ݁ ஻ ሻ ൅ ߣ‫ ݒ‬ƍ ሺ݁ ஻ ሻ ൌ Ͳ ฺ ߤ ൐ Ͳ, ߲݁ ஻ ൌ െ ‫ݍ‬ሻ‫ܧܧ‬

since (PC-B) binds. This is confirmed by the fact that since both the first and the last term are positive it must be the case that ߤ ൐ Ͳ, since otherwise the expression could not equal zero. And finally, to find the expression for ߤ , ߣ is substituted into ߲ࣦൗ

߲‫ ݓ‬஻ to get:

‫ݍ‬ ƍ ሺ‫ ݓ‬஻ ሻ ߲ࣦൗ െ ൗ ƍ ሺ‫ ீ ݓ‬ሻ ‫ݑ‬ƍ ሺ‫ ݓ‬஻ ሻ ൌ Ͳ ฻ ߤ ߲‫ ݓ‬஻ ൌ െሺͳ െ ‫ݍ‬ሻ ൅ ߤ‫ݑ‬ ‫ݑ‬ ሺͳ െ ‫ݍ‬ሻ ‫ݍ‬ ൌ ൘ ƍ ሺ‫ ݓ‬஻ ሻ ൅ ൗ ƍ ሺ‫ ீ ݓ‬ሻ ‫ݑ‬ ‫ݑ‬

With expressions for the two multipliers the conditions characterizing the optimal menu of contracts in case of asymmetric information can be found. First, substituting ߣ into ߲ࣦൗ ீ to get:

߲݁

‫ ݒ‬ƍ ሺ݁ ீ ሻ ‫ݍ‬ ƍ ሺ݁ ீ ሻ ƍ ሺ݁ ீ ሻ ƍ ሺ݁ ீ ሻ ߲ࣦൗ ൘ ƍ ீ (AS.G) ൌ ‫ܧܧݍ‬ െ ‫ݒ‬ ൌ Ͳ ֞ ‫ܧܧ‬ ൌ ൗ ீ ƍ ீ ߲݁ ‫ ݑ‬ሺ‫ ݓ‬ሻ ‫ ݑ‬ሺ‫ ݓ‬ሻ

Then substitute ߣ and ߤ into ߲ࣦൗ

߲݁ ஻ to get:

ሺͳ െ ‫ݍ‬ሻ ‫ݍ‬ ‫ݍ‬ ƍ ሺ݁ ஻ ሻ ߲ࣦൗ ሺͳ െቌ ൘ ƍ ሺ‫ ݓ‬஻ ሻ ൅ ൗ ƍ ሺ‫ ீ ݓ‬ሻቍ ݇‫ ݒ‬ƍ ሺ݁ ஻ ሻ ൅ ൗ ƍ ሺ‫ ீ ݓ‬ሻ ‫ ݒ‬ƍ ሺ݁ ஻ ሻ ߲݁ ஻ ൌ െ ‫ݍ‬ሻ‫ܧܧ‬ ‫ݑ‬ ‫ݑ‬ ‫ݑ‬

ൌ Ͳ ฻

‫ ܧܧ‬ƍ ሺ݁ ஻ ሻ ൌ ݇‫ݒ‬

ƍ ሺ݁ ஻ ሻ

൘ ƍ ஻ ൅ ‫ݍ‬ൗͳ െ ‫ݍ‬ ‫ ݑ‬ሺ‫ ݓ‬ሻ

ሺ݇ െ ͳሻ‫ ݒ‬ƍ ሺ݁ ஻ ሻ൘ ‫ݑ‬ƍ ሺ‫ ீ ݓ‬ሻ

(AS.B)

The two conditions (AS.G) and (AS.B), along with the binding constraints (PC-B) and (IC-G) characterize the optimal menu of contracts. Before continuing to the final step of the analysis, the consequences of asymmetric information, four results can be derived from the optimal menu of contracts. 1. The good type earns informational rent. This means that in order to make the good agent reveal his type and accept the contract intended for him he must be paid some extra rent ± an informational rent. The informational rent is characterized by the additional rent from the contract on top of the reservation utility the good agent obtains and is given by:

143

Volume I Issue 1(1) Winter 2010 ‫ ܴܫ‬ൌ ‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ െ ܷ

Since (PC-B) binds it follows that ‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ݇‫ݒ‬ሺ݁ ஻ ሻ ൌ ܷ, and since (IC-G) binds it follows that ‫ݑ‬ሺ‫ ݓ‬஻ ሻ ൌ ‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ ൅ ‫ݒ‬ሺ݁ ஻ ሻ. Inserting these findings in the expression above the information rent becomes:

‫ ܴܫ‬ൌ ‫ݑ‬ሺ‫ ீ ݓ‬ሻ െ ‫ݒ‬ሺ݁ ீ ሻ െ ‫ݑ‬ሺ‫ ீ ݓ‬ሻ ൅ ‫ݒ‬ሺ݁ ீ ሻ െ ‫ݒ‬ሺ݁ ஻ ሻ ൅ ݇‫ݒ‬ሺ݁ ஻ ሻ ฻ ‫ ܴܫ‬ൌ ሺ݇ െ ͳሻ‫ݒ‬ሺ݁ ஻ ሻ ൐ Ͳ

2. The demanded effort level of the good type is at the efficient level. This follows from the condition that:

‫ ܧܧ‬ᇱ ሺ݁ ீ ሻ ൌ

‫ ݒ‬ᇱ ሺ݁ ீ ሻ ൘ ᇱ ீ ‫ ݑ‬ሺ‫ ݓ‬ሻ

which is equal to the demanded effort level from the good type under symmetric information. The fact that the demanded effort level is not distorted away from its optimal level in the case of asymmetric information is the standard result within HFRQRPLFVRILQIRUPDWLRQRI³QRGLVWRUWLRQDWWKHWRS´ 3. The effort level of the bad type is distorted downwards. This follows from:

‫ ܧܧ‬ᇱ ሺ݁ ஻ ሻ ൌ ݇‫ݒ‬

ᇱ ሺ݁ ஻ ሻ

൘ ᇱ ሺ‫ ݓ‬஻ ሻ ൅ ‫ݍ‬ൗͳ െ ‫ݍ‬ ‫ݑ‬

ሺ݇ െ ͳሻ‫ ݒ‬ᇱ ሺ݁ ஻ ሻ൘ ‫ݑ‬ᇱ ሺ‫ ீ ݓ‬ሻ

where the first term equals the optimal level from the symmetric case. Since the second term is positive it is the case that the total expression is larger than the expression under symmetric information and since ‫ ܧܧ‬ᇱ ൐ Ͳ and ‫ ܧܧ‬ᇱᇱ ൏ Ͳ it must be the case that ݁ ஻ has to fall below the optimal level. 4. The bad type earns no informational rent like the good type does. This result follows directly from the (PC-B), which binds:

‫ݑ‬ሺ‫ ݓ‬஻ ሻ െ ݇‫ݒ‬ሺ݁ ஻ ሻ ൌ ܷ

Consequences With the design of the optimal contract presented the consequences of this contract must be assessed as well. With the DV\PPHWULFLQIRUPDWLRQRQWKHDJHQWV¶W\SHVLQWURGXFHGLQWKHFRQWUDFWVLWEHFRPHVQHFHVVDU\IRU the principal to pay the good and highly productive agents an informational rent in order to make them reveal their type by accepting the contract intended for them. This is necessary to make them accept a contract where the effort is higher than the contract intended for the bad types. The formal cost of the informational rent was derived above. The implication is, like with the consequences of moral hazard deULYHGDERYHWKDWWKHSULQFLSDO¶V expected compensation costs when implementing the high productivity type agents is increased. More generally, a likely consequence of this result is then that the demand for high type agents will decrease since the cost of engaging them has increased. With fewer good type agents engaged in type-G contracts the outcome cannot be efficient, and the final result will necessarily be a low and inefficient level of installed energy efficiency. Note that this gloomy outlook changes only if the principal receives a return on his investments in the form of a lower energy bill such that that the total life-cycle costs of energy efficiency measures become negative. 2.4. Conclusion This part has illustrated how informational asymmetries can impact on the level of energy efficiency. The more severe the informational asymmetries are, the more inefficient the outcome and thereby a more inefficient use of energy. The results of the moral hazard and adverse selection models are summarized in the table below.

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Journal of Environment Management and Tourism First best

Problem

Second best

Consequences

Table 1. 6XPPDU\RIWKHWKHRU\¶VLPSOLFDWLRQV Moral hazard Adverse selection

Possible to contract on effort x No additional cost to the principal x Most efficient outcome => most efficient x level of energy efficiency Not possible to contract on effort x If not possible to contract on outcome => x lowest possible effort exerted Inefficient outcome => inefficient level of x energy efficiency

Possible to contract on type No additional cost to the principal Most efficient outcome => most efficient level of energy efficiency Not possible to contract on type If not possible to reveal type => only low effort contracts in equilibrium Inefficient outcome => inefficient level of energy efficiency

Possible to contract on outcome x Agent is exposed to risk and must be x compensated => additional cost to the principal Efficiency improved but not optimal x

Possible to reveal type Additional cost to the principal from informational rent to the good type Efficiency improved but not optimal

Additional cost to the principal => more x likely that principal will not offer high effort contract => lower level of energy efficiency installed

Additional cost to the principal from engaging good types => more likely that principal will not contract good types => lower level of energy efficiency installed

,Q ERWK PRGHOV WKH SULQFLSDO¶V FRVW RI LPSOHPHQWLQJ D KLJK HQHUJ\ HIILFLHQF\ LQFUHDVHV ZLWK WKH informational asymmetry, be it as an insurance payment to the agent for taking on risk as in the moral hazard model, or be it as an additional informational rent to the good type agents as in the adverse selection model. Though not illustrated formally, since functional forms are needed to do this, the likely implication is that the installed level of energy efficiency is not at its optimal level, which adds to the energy efficiency gap. 3. Evaluation of European policies The first part of this article illustrated how information asymmetries can help to explain prevailing low levels of energy efficiency. Based on the presented theory, this second part aims at evaluating the most important aspects of legislation enacted by the European Union within energy efficiency. The evaluation will assess to what extent the existing legislation accommodates the described two types of agency problems, and thereby to what extent the legislation accommodates agency barriers to energy efficiency. The evaluation is kept on an overall level. By this is meant a level which addresses the overall elements and implications of the legislation, without diving too much into specific details and without conducting any additional research such as interviews with officials. Since all EU legislation is subject to the principle of subsidiarity according to art. 5 of the Treaty establishing the European Community (TEC), the first section conducts a subsidiarity test of energy efficiency as an EU policy area. The test concludes that energy efficiency is an area where the EU can legislate. However, the extent to which EU can legislate is more blurred. The second section then provides a brief overview of the main elements of existing EU legislation on energy efficiency. The third section evaluates to what extent existing legislation accommodates agency barriers, whereas the fourth section makes a similar evaluation but based on flanking policies. The fifth section concludes. 3.1. Subsidiarity test of energy efficiency 5HJXODWLRQ DQG SXEOLF SROLFLHV DUH IURP DQ HFRQRPLVW¶V SRLQW RI YLHZ XVually justified in policy areas where market failures prevent the market to reach the most efficient outcome on its own. For reasons raised in the introduction and the barriers which are the topic of this article, energy efficiency is usually considered to be such a policy area. For the remainder of this part it is therefore assumed that public policies to spur energy efficiency are in general legitimate. From a European point of view, what is more interesting is whether and to what extent the EU should legislate. To assess the subsidiarity issue this section conducts a five step subsidiarity test on energy efficiency as an EU policy area (Pelkmans 2006). 145

Volume I Issue 1(1) Winter 2010 1. Is energy efficiency an area of shared competences? Yes, very likely so. Since the rational use of natural resources is determined as an aim of the EU in art. 174 of the TEC, sustainable development is acknowledged in art. 6 of the TEC and since energy efficiency potentially characterizes essential aspects of products placed on the Internal Market, energy efficiency can be considered as an area of shared competences. 2. Can the TEC art. 5 ± FULWHULDRQWKH³QHHG-to-act-in-FRPPRQÉHDSSOLHG"71% of travellers are in the age group of 36 years and above. There was some variation between the number of males and females visiting the destination. More males (54.36%) visited than females (45.64%) denoting an 8.72% difference in gender composition. It may be noted that majority of them (46.28%) belong to family group. Regarding stay < 45% of the tourists was staying for one to two days. Only 13% of them were staying more than three days. From the tourist survey, it was learnt that @'REULFHDQX06HOLúWHDQX'6XEĠLUHOX*DQG)XQGHDQX5Environment Monitoring - Techniques and Systems in Romanian. Craiova, Romania: Universitaria Publ. [5] Dochain, D. 2008. Automatic Control of Bioprocesses. ISTE Publ. [6] Dochain, D., and Perrier, M. 1992. Adaptive linearizing control of activated sludge processes. In: Proc. Control Systems'92, 211-215, Whistler, Canada. 185

Volume I Issue 1(1) Winter 2010 [7] Dochain, D., and Vanrolleghem, P. 2001. Dynamical Modelling and Estimation in Wastewater Treatment Processes. London, UK: IWA Publishing. [8] Karnopp, D., and Rosenberg, R. 1974. System Dynamics: A Unified Approach. New York: John Wiley. [9] Petre, E. 2004. Adaptive control of a recycled depollution bioprocess. In: Proc. of the 12th Int. Symposium SIMSIS 12, 127-*DODĠL5RPDQLD >@3HWUH(DQG6HOLúWHDQX'Modelling and Identification of Depollution Bioprocesses in Romanian. Craiova, Romania: Universitaria Publ. >@6HOLúWHDQX'5RPDQ0DQGùHQGUHVFX'3VHXGR%RQG*UDSK0RGHOOLQJDQG2Q-line Estimation of Unknown Kinetics for a Wastewater Biodegradation Process, Simulation Modelling Practice and Theory 18(9): 1297±1313. >@ 6HOLúWHDQX ' 3HWUH ( ùHQGUHVFX ' DQG 5RPDQ 0 High-Gain Observers for Estimation of Kinetics in Batch and Continuous Bioreactors. In: Mathematical Chemistry, Series: Chemistry Research and Applications. Nova Science Publ. [13] Thoma, J. 1975. Introduction to Bond Graphs and Their Applications. Oxford: Pergamon Press.

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IMPACT OF THE RISK MANAGMENT AND QUALITY IN TOURISM TRENDS

Fatos UKAJ University in Prishtina, Pejë, Kosovo Faculty of Applied Science in Business, [email protected]

Abstract In this paper, the uncertainty and risk are being treated as a result of the unsatisfactory situation in the country's tourist industry and in neighboring countries that affect the level and direction of developments in tourism now and in the future. Not a favorable environment such as: political and security situation, ecological problems, the situation with the epidemic and other health problems, inappropriate economic development and unfavorable situation in all field of traffic, are among the factors of the environment to be analyzed in order to come to conclusions about the current situation and their LPSDFW RQ WKH GHYHORSPHQW RI WRXULVW LQGXVWU\ LQ .RVRYR 1RZ GD\¶V Wourism is treated as an economical activity with a FRQVWDQWJURZWKDOORYHUWKHZRUOGWKLVLVDOVRH[SHFWHGIRU.RVRYR¶VWRXULVPDQGQHDUE\FRXQWULHVIRUFRPLQJSHULRGVRI time. In some developed countries tourism is treated as an important exporter and in meantime as an absorber of labor force and this branch is important for softening unemployment. Management with total quality in tourist industry and catering has its own specifics. A big attention should be paid to standards that have to do with quality and insured goods supplied to hotels, and those provided in tourism. Quality care is being placed in the first place, in wholesale of successful touristic enterprises. Here it should be noticed the fact that there is a liaison between the quality, consumers pleasure and consumers loyalty.

Keywords: tourism, risk management, quality, standards, development

JEL Classiffication: D81, L83

1. Introduction Kosovo can make a bigger progression to increase tourist number not just during the main season of tourism (counting 3 months of summer) but also during the rest of the year. In country tourism and in the decisions of tourists and tourist enterprises, uncertainty, risk and insecurity have a greater impact. Uncertainty and insecurity arise as a lack of a basis to estimate the important events and events for enterprise, while risk contains the chance occurrence or incidence of an unwanted event (for ex. the loss in business) or desirable event (to have profit in business) (Hoti 2008). A great concentration of risk is not always harmful, and it depends on perception rather than institutions, but enterprises also tend to develop activities which face the risk. Here we have the problem because most of enterprises and institutions have not compiled any of their strategies for dealing with risk. In this project total quality is described in tourism and hospitality. Management of total quality is one of the managing models that apply in business of enterprises in order of application, maintenance and progression of service quality and tourist product also. Starting from the description of tourism and its quality we pass to standards that are applied in hospitality and tourism, variety and types of quality and its development, contributing the growth of business. The future of the hospitality is in small hotels that will be the pillar of tourism development. However what should be suggested is caution to safety standards and health maintenance of guests in hotels. A great attention should be paid to standards dealing with quality and safety of goods supplied in hotels. Certainly that conclusion is, that tourism and hospitality to the Kosovo have a perspective, but this should be achieved by efforts to reach standards and total quality, and the most important is that once they are achieved they should be maintained and consistently introduced to innovations. In project we used deductive and inductive methods.

2. Risk in tourism In fact it is proved that tourism as a branch of the economy is very vulnerable to risk and uncertainty in the environment in which it conducts its activities, and that tourism is continuously subject exogenous and endogenous shocks, which are of an intensity higher or lower at various times. For this reason, to be able to develop tourism it is important that such preconditions are met, such as: quiet and stable political and security environment, the satisfactory ecologically environment, satisfactory level of health state, positive economic indicator, incorporation of technological and technical innovations, especially in traffic. From these conditions mentioned, the first three are related to safety of tourists, while the last two conditions are related to the fact that 187

Volume I Issue 1(1) Winter 2010 they have contributed that tourism to be a phenomenon of global dimensions. The strategy toward Risk should be defined by the top management, but in most cases it is sporadically formulated based on daily management decisions that have to do mainly about finance, but also other affairs. It is known that different managers have a different approach to risk, which often brings to the situation when the enterprise cannot be leaded easy. The objective of the enterprise and the institution that pays attention to risk management is to identify measure and evaluate risk in every unit of itself, and provide an integrated and consistent approach to risk at the level of the whole enterprise or institution. Structure that manages the risk will also depend on the type of business in which the enterprise is in. In large enterprises each unit should have the management function with the risk. In small enterprises, this function will be at the level of the whole enterprise. To be able to successfully manage the risk, four elements should be assured, which are: to have skilled personnel, to separate the tasks, to identify individual responsibility clearly, to have accountability. Tourism safety and security refer to protection of life, health, physical integrity, psychological and economic visitors, tourism staff and people who are part of the receiving community, and also includes review of security interests by visitors-tourists,(Quality and trade in tourism). Carefulness for tourists has been shown in the late 20th century when the number of tourists risk has been increased, during the trip or during the stay in tourist destination. The issue of security brings tourist policies at priorities of each subject that are as part of the overall tourism offer. Starting from enterprises and continuing by government institutions all of them are devoted to the care about security, because security is as guarantee to increases number of visitors and the probability to increase visits to most of tourist destinations. Tourists mostly are concerned for their physical safety, which is of great importance during any political crisis, or crises caused by war. Nowadays terrorism is a threat to physical safety of tourists. Fear and uncertainty to visitors especially in hospitality bring possibility of fire, etc. The health of tourists is in risk also by the inadequate hygienic conditions, which cause the appearance of many diseases. But far more dangerous to life and security of tourists are appearances of ecologically disastrous situations, and various epidemics that often appear jointly. In response to crisis situations as they were terrorist attacks in New York in 2001, the World Tourism Organization (WTTC) have compiled a ACTION PLAN which will be of help to businesses and institutions active in the tourism, also for tourist destinations will be of help in order that quickly and efficiently to overcome situations of crisis and to restore confidence of tourists (Travel & Tourism security action plan 2003). In this guide of WTTC is noted that whatever the nature of crisis is, the same way of solving her will be applied, and that these measures would include: Communication, Promotion, Security and insurance, researching the market. Here further is recommended that in cases of crisis the measures will have to be adequate and it includes: Before the crisis-so that actors should always be required to be prepared for the worst situation, during the problem-in order to achieve to reduce the negative effects of the crisis. Immediately after the crisis - this in order to achieve to restore the confidence of tourists. Risk management process involves several stages such as: risk analysis, risk assessment, risk management, information feedback. Enterprise and institutions need to have care that in risk management must be involved individuals who have knowledge, skills and experience in conducting these activities. Here we are dealing with knowledge about tourism and its activities and management and risk management techniques. Areas of risk in tourism include: abuse (physical, emotional, sexual, or financial, etc), personal, injury, medical, environmental, property, financial, image. Risk management helps enterprises involved in tourism activities to: enhance the quality of the service delivered, promote accountability to clients and society, enhance the safety of clients, identify and reduce or eliminate potentially harmful situations, avoid liability situations that could impact significantly on an enterprise financial stability and image, install client confidence in the organization and its services, and reduce insurance claims and satisfy insurers that the enterprise is risk conscious. Continuous Risk Management process includes: identification of risk, prioritization of risk, development of strategies to address risk, establishment of indicators and targets for monitoring success in managing risk, collection and analysis of data to determine success in managing risk, and implementation of continuous quality improvement, to improve strategies to manage risk. Management in tourism is a very specific as are tourism (hospitality and catering) activities which incorporate the products and services. Management coordinates in order to achieve the common interests of all starting from the employees, owners and tourists. Fulfilling desires and needs of tourists with avoiding risk situations is one of the objectives of all employed and involved in the tourism industry.

3. Quality management in tourism Many individuals have contributed on the analysis and implementation of quality management, among them is Deming, Juran, and Krosby. Philosophy of quality management of Deming who is mentioned constantly when fundamental principles of quality management are stressed. It is knowQWKHWKHRU\RI³&KDLQ5HDFWLRQ´RI

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Journal of Environment Management and Tourism Deming which states that the highest quality leads to a higher productivity which in turn leads to a long-term competitive strength (Nakuci 2009). Quality Improvment Reduce costs, no need for reworks, with fewer errors, reduce delays and difficulties and better used time and materials. Improve productivity, Conquer the market with better quality and lower process Persist in the business Provides work now, and more Works for future

Figure 1. Chain Reaction of Deming

Whereas J.M. Juran centralizes WKHTXDOLW\LVVXHLQWKUHHPDMRUDVSHFWVFDOOHGDV³7KH7ULORJ\RI4XDOLW\´ planning of quality, control of quality, and improvement of quality. Therefore this author considers the management of quality of primary importance as a management component in all enterprises (Nakuci 2009). Being a service activity, tourism contributes to life quality because it makes people happier and healthier in general. The management of total quality in the tourist industry, with its branch catering, has its own specifics, being also related to the characteristics of provided services in tourism alongside with the products in other economical activities. The characteristics of tourist services are: inviolability (immaterial), short-term, isochronous, diversity. Except these general characteristics listed above, the tourist and catering services have their own specific features, considering the diversity of the tourist product provided at present, but also there is the diversity of those who on the other side use the tourist product. The tourist product is defined as a set of heterogeneous products and services, such as hotels, restaurants, market, transport, tourist attractions, cultural and historical inheritance, etc. whereas the local population and the economy of the country are considered factors too. All such products and services, defined as tourist products, must be subject to the aim of achieving higher quality because their users are increasingly being refined in their demands and increase their demand for higher quality. Therefore, those who deal with this activity are always trying to get to satisfy the demand, but also to exceed the expectations of tourists, because they are aware that there is competition in this market. Indeed, quality is becoming the main and decisive factor for efficient competition of enterprises in the tourist market. The users, costumers, or briefly defined as tourists, want to receive quality, so the enterprises with their tourist offers manage with quality and have to control it continuously. It is normal to learn from leading countries in quality management such as USA, Sweden, and Switzerland. The meaning of the word quality now days is multiple because it is composed of many elements, which come out from various qualities of different goods and services, activities, use benefits and values, the manner of use, the significance it is given by the users, etc. This quality of goods and services is formed in all phases of their life cycles, beginning from the researches and developments up to their exploitation. All the phases during which the product quality is formed are introduced as the components of structure of the goods or the service itself, and they are known in theory as functions of quality. Each quality functions represent a composed entirety which is built of more specific units, and which impacts in the quality of that good or service. All the functions are interrelated with each other and often there is no difference or limit between them, and at the same time they are all under the impact of internal and external factors. The elements of the quality of goods or a service, such as wine, are: color, clearness, taste and flavor, whereas the elements to ascertain the quality of a restaurant could be: the architecture of the building, hospitability, table, the menu, service and personnel, food, drinks, the bill, and behavior with guests. Therefore each of the elements forms a part of the overall quality of the wine and restaurant. This resulted on ranking the quality and leads to the competition between companies trying to be the best, the first and the biggest, aiming to create a competitive advantage within the market where they operate. Whereas the ranking method and the way of expressing the level of quality may be different, one of those could be: counting the number of starts, numbers 189

Volume I Issue 1(1) Winter 2010 or different figures. Also, the price plays a role in the quality level, whether it is expensive or cheap it is an indicator of high or low quality. As far as the quality is concerned, it is enabled by identifying the brand of the Hotel (Holiday In) or the air company (Austrian). Now days, the quality could be identified based on revenues, as one of the economic targets of the enterprises, including the adoption of a management system with the total quality and it is estimated to be reasonable and successful if they manage to boost their revenues and decrease expenditures which results in profit generation. Regardless of whether we are dealing with the manufacturing or service enterprise, the quality has to be always in the main focus of those who design the business policies of an HQWHUSULVH7KLVLVEHFDXVHWKHTXDOLW\LVDVVRFLDWHGZLWKPDQ\SURGXFWHOHPHQWVWKDWDLPWRVDWLVI\FXVWRPHUV¶ needs. If we take the case of catering services, or catering tourist product, than we are aware about the important role of users or tourists about the tourist offer, because in this case they are treated as an integral part of that certain tourist product. Out of these assessments, we can estimate that for tourist enterprises the user or WRXULVWLV WKH PRVW YDOXDEOH SDUW RI WKHFRPSDQ\¶V DVVHWVDQG IURPWKLV LW UHVXOWV WKDWWKH FRPSDQ\¶VVWUDWHJLF orientation for the quality of offer will bring them a competitive advantage in the market. The quality of tourist and catering product must be advanced as result of adoption towards the changes which increasingly are more dynamic as far as the demand is concerned. A large differentiation is happening between market segments, and such quality will help to find the appropriate position within the market. A clear position of Kosovo tourist product as a whole as well as in parts will enable a definition of all those segments during the process of strategic management within the tourism industry. Kosovo tourism during the recent period is striving to follow-up tourism development trends in the region as well as the global level developments. Having into account the role of tourism and the environment in which the tourist industry is located, it is heading towards stable markets, but also towards new ways of provision of supply, which requires creation of new tourist products. When dealing with stable market in such cases everything has to be done to enhance the quality level of Kosovo tourist products in terms of overall product as well as for its components. The highest quality of the existing location requires focusing towards users or tourists of certain segments to whom it is necessary to provide a package containing units that are related to the system which would create the certain product. An example for this could be the relation of destinations located in Dukagjini area (Dukagjini Plain) in an arrangement that would reflect the highest existing quality. In other destinations that are usually smaller and have a limited capacity to accept a smaller number of users or tourists, in such cases the tourist product can be associated with the new forms of tourism such eco tourism, which is correlated with the tradition and folklore, new products from the rural areas and naturally preserved beauty sites. New destinations themselves create new tourist products, which in order to meet the sustainable principles of the product need to be subject of several phases that form a part of it, and which requires a continuous attention towards the quality. As a first plan derive opportunities for accommodation, meal and activities not included in the package. In this case it is very important that a large number of those DFWLYLWLHVWKDWFRQVWLWXWH³FRVWVQRWLQFOXGHGLQWKHSDFNDJH´ZKLFKSXWVDQDttention to its structure including the gastronomy, hospitality, entertainment, which will largely be a result of possibilities of that certain destination. Whereas in the second plan takes place the infrastructure of the tourist offer, which needs to be uniform throughout Kosovo. This applies to the roads, water supply and wastewater, power supply which serves to facilitate the arrival and provides pleasure to tourists during their stay, and will create an opportunity to such tourists to not force them in changing their lifestyle and habits. Construction of sport areas, different ethnological, entertaining and other entertaining facilities will enable the tourists to be creative while spending their vacation. The third plan of tourist product shall contain its own establishment starting from collection of its own elements up to distribution and usage by tourists. In this stage a main role will be played by management and leadership covering all stages of this tourist product up to the creation of its own brand, which will be known and present within the offer of the operators throughout the world. The forth plan constitutes the creation of tourist product that mainly depends from the policies and the government as a player involved in its creation. In order to provide a shape to a tourist product it is necessary to achieve a full coordination amongst the monetary policies, tourist organization, visa regime, agreements for tourist movements from one place to another, etc. Indeed, this is the most sensitive and complex area when creating a tourist product in Kosovo. As far as the quality part is concerned, in Kosovo this needs to be in compliance with the European level approved standards, such as ISO9000, ISO14000, ISO14002, etc. In terms of adjustment of quality this needs to be done by referring to international quality standards that are determined under the WTO, UNEP, European Commission, for certain types of tourism, gastronomical standards, laws and regulations adopted in Kosovo. Kosovo tourist product quality needs to be a product which the user respectively the tourist demands and is ready to pay for it.

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Journal of Environment Management and Tourism 4. Kosovo tourist product Kosovo has an area of 10,908 km2 and over 2,000,000 inhabitants. It lies in the center of Western Balkans, and is crossed by important roads linking this part of the Balkan Peninsula in Western Europe and Eastern Europe (Government and KOTAS, and GTZ 2008). Looking from the tourism aspect, Kosovo is divided into five tourism regions: - Central region of Prishtina;; - Tourist region of Albanian Alps (Cursed Mountains);; - Sharr-tourist region;; - Anamorava-tourist region;; - Mitrovica Tourist region & Shale of Bajgora. Depending from the constituting elements, the characteristics of Kosovo tourist product can be divided in several groups: - the future development of Kosovo tourist product will be associated with the enhancement of quality level of local values, (experience, tradition, and heritage). - Kosovo tourist product is a composition of mainly physical, economical, social, political and ecological elements;; therefore it is a multifactor and completed product. - this tourist product it increasingly based upon scientific-technical achievements, and will adopt the new technologies to provide satisfaction to tourists, which derives as a result of Kosovo local values on which this tourist product was earlier established.

Figure 2. $QLOOXVWUDWLRQRIWKHVXVWDLQDEOHGHYHORSPHQWDFFRUGLQJWRFRPSDQ\³6FKPLGW´

Kosovo tourist product must contain parts of the products of the regions and localities, in order to make the development of tourist industry to be in service of national objectives for economic growth, whereby to become a part of the national economical system. Creation of the tourist product is a blend of quantity, quality and continuity of the tourist offer throughout the country. Therefore this tourist product focuses on the improvement of structures of the existing destinations, or in other words known as old destinations, adopting new standards for each offer element by aiming to create a distinctive mark in all levels it is exposed. Other trends in global market make Kosovo tourism to be focus on the formation of the so-called sustainable development which defines the demand to create a sustainable tourist product, in economical, social and ecological aspect, in order to prevent and avoid degeneration of tourist destinations, by providing a new quality to the tourist offer. Sustainable economic development of a country can be achieved in cooperation with the governmental institutions and economic entities. This cooperation needs to be based in its three components, economy, HFRORJ\ DQG FRXQWU\¶V VRFLHW\ 7KHVH WKUHH GLPHQVLRQV RI VXVWDLQDEOH GHYHORSPHQW KDYH D FRQWLQXRXV DQG 191

Volume I Issue 1(1) Winter 2010 mutual interaction by supplementing each other (Ebner, and Baumgartner 7KHFRPSDQ\FLWHG³6FKPLGW´ has adopted in its business and determined the sustainable development as one of the ways to contribute in environment protection. Quality, environmental preservation and safety at work contribute to the 3 pillars of sustainable development (Schmidt 2009). Each is dependent on the other 2 to ensure the equilibrium of the whole structure. Therefore we talk of an Integrated Management System (IMS). The sustainable tourist product not only includes physical components of the tourist destinations which are also protected areas, but the entirety of cultural-historical values and natural beauty of those destinations. In order to determine the quality of sustainable tourism product in the country level, the identification and logging of all parts must be done based on their own value (Ukaj 2010). Afterwards this tourist product can be defined whether it will satisfy the quantity and quality part of the user-tourist, which is an objective of each enterprise. 5. Conclusion In future thanks to image acquired and the reputation of a totally peaceful and safe tourist country, combined with a successfully implemented marketing activities as well as significant improvement of here tourist offer, Kosovo will certainly begin to realize the increase of visits from all markets. In order to rapidly develop the tourist offer of the regions and Kosovo as a whole, the development concept has to be viewed in both micro and macro aspects. In micro level it is necessary to appropriately identify and plan the development of micro tourist locations throughout the regions. In macro level it is necessary to: draft, identify and plan the correlation of tourist micro locations in regional tourist destinations and in country level;; identify and plan supporting activities that aim to develop tourism (risk management, quality, cleanliness, traffic, legislation, etc.);; plan and support development of tourist catering capacities and supplementary tourist contents (hotels, motels, canteens, camping, restaurants, bars etc.), which is a precondition for the tourism development. It is not preferred to be based on positive emotions of spenders-visitors towards the existing offer, in terms of coming up to the saturation of the tourist offer;; therefore it is necessary to pay more attention to the long-term quality of services. Necessarily, risk management and quality in tourism should be the focus of attention of players involved in Kosovo tourism, making continuous efforts to update or build more innovative ways of providing services in tourism. From this it results that: Risk management helps enterprises involved in tourism activities to: enhance the quality of the service delivered, promote accountability to clients and society, enhance the safety of clients, identify and reduce or eliminate potentially harmful situations, avoid liability situations that could impact significantly on an enterprise financial stability and image, install client confidence in the organization and its services, and reduce insurance claims and satisfy insurers that the enterprise is risk conscious;; Continuous Risk Management process includes: identification of risk, prioritization of risk, development of strategies to address risk, establishment of indicators and targets for monitoring success in managing risk, collection and analysis of data to determine success in managing risk, and implementation of continuous quality improvement, to improve strategies to manage risk;; Quality needs to be start and end point of each action-activity to be undertaken currently and those to be undertaken in the future;; It is necessary to make efforts in reaching a better possible quality for products-services that constitute the tourist offer within the tourism-catering market, which is increasingly becoming more selective and refined;; It is necessary to create and establish a staQGDUGZLWKLQEXVLQHVVWKDWZLOOFRPSLOH³4XDOLW\RI5HJLRQDO 9DOXHV´ WR VWDQGDUGL]H WKH TXDOLW\ RI SURGXFWV-VHUYLFHV WKDW ZLOO IDFLOLWDWH DQG FUHDWH WKH LPDJH RI .RVRYR¶V Tourist Offer and other related issues. Creation and implementation of the quality standards is an urgent task, and an invitation to all businesses and institutions. Exchange of experiences from abroad and with countries in the region and wider should work through cooperation in permanent basis which will enable the balance of knowledge and skills, especially with the countries in the region that provide similar tourist offers. Building and developing of tourism offer either in concentrated way or in distributed way from case to case, but its level firstly should be based on fulfilling the conditions of current users of tourism offer and hospitality, but also maximum should be given in order that this RIIHURIJHRJUDSKLFUHJLRQVRI.RVRYRDVDµ¶WRXULVWGHVWLQDWLRQ¶¶FDQILQGWKHULJKWSODFHLQ Tourist Offer of Kosovo;;

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Journal of Environment Management and Tourism Tourist Offer of Western Balkan Region;; Global offer of tourist market. Based on these findings, it appears that it is necessary to conduct an intensive research about the updates and events occurring in tourism markets. This should be a broader activity and managed properly in IRUPDWLRQPDLQWDLQLQJDQGGHYHORSLQJWRXULVWSURGXFWVEXLOWRQWKHSULQFLSOHVRI³TXDOLW\ÉDVHGRQLQIRUPDWLRQ collected from interdisciplinary analysis and inter-sector cooperation.

References [1] Nakuci, V. 2009. Menaxhimi i Cilësisë. Tiranë. [2] Kotler, P., and Keller, K.L.³2006. Marketing Managment. Pearson Education Inc, New Jersey. [3] Juran, J.M., and Gryna, F.M. 1993. Planiranje i Analiza Kvalitete-od razvoja proizvoda do upotrebe. Mate, Zagreb. [4] Hoti, I. 2008. Industria e Sigurimeve dhe Menaxhimi i Rrezikut. Instituti I Inxhinierisë Financiare për Bankë dhe Sigurime, Tiranë. [5] Ebner, D., and Baumgartner, R.J. 2006. The relationship between Sustainable Development and Corporate Social Responsibility. www.crrconference.org [6] Ukaj, F. Support of Small - Medium Size Enterprises (SME) - Opportunity for Kosovo to Overcome Economic Crisis. First on-line International conference ³:RUOG¶V (FRQRPLHV ,Q DQG $IWHU Crisis: Challenges, Threats DQG2SSRUWXQLWLHV´-WECTO, 2010. ASERS Publishing, http://www.asers.eu/asers-publishing [7] Ukaj, F. 2010. Marketing Concept as a tool for Development of Tourism in Kosovo. Journal of Environmental Management and Tourism (JEMT), Volume 1 Issue1:57-62. [8] Ukaj, F. Trashëgimia kulturore dhe historike si potencial i zhvillimit të turizmit- me fokus në regjionet e Kosovës /Cultural and historical heritage in Kosova as a potential for development of tourism - focus on the Kosova regions´ University Library of Munich, Germany in its series MPRA Paper with number 2159, http://mpra.ub.uni-muenchen.de/21509/ [9] Ministry of Trade and Industry, Tourism Department, www.visitkosova.org [10] Travel& Tourism security action plan http://www.wttc.org/bin/pdf/original_pdf_file/securityactionplan2003fullreport.pdf [11] 4HYHULD H .RVRYsV .RWDV *7= ´3URMHNWHW H 3URGXNWLW 7XULVWLN Qs 5DMRQLn Turistik të Bjeshkëve të Nemuna(Alpeve Shqiptare), Prishtinë, 2008: 3-37. http://www.visitkosova.org/repository/docs/prospekti_shqip.pdf [12] Quality and trade in tourism, www.world-travel.org [13] Schmidt Company, 2009, http://www.schmidt-kitchens.com/company/sustainable-development.html [14] World 7UDGH2UJDQLVDWLRQ³7RXULVP+LJKOLJKWV(GLWLRQ´:72.

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Volume I Issue 1(1) Winter 2010 Journal of Advanced Research in Law and Economics ± Biannually

Editor in Chief: 3K'0ăGăOLQDConstantinescu Co-Editors: PhD Russell Pittman and PhD Eric Langlais Journal of Advanced Research in Law and Economics provides readers with high quality and empirical research in law and economics. The Journal publishes analytical studies on the impact of legal interventions into economic processes by legislators, courts and regulatory agencies. Finally, important developments and topics in law and economics analysis will be documented and examined in special issues dedicated to that subject. The journal is edited for readability;; lawyers and economists, scholars and specialized practitioners count among its readers. Journal of Advanced Research in Law and Economics, starting with its first issue, is indexed in RePEC, IndexCopernicus, CEEOL and EBSCO databases. Web: http://www.asers.eu/journals/jarle.html email: [email protected]

Journal of Advanced Research in Management Biannually

Editor in Chief: PhD Andy úWHIĄQHVFX Co-Editor: PhD Rajesh K. Pillania The Journal aims to serve researchers, scholars through prompt publications of significant advances in any branch of management science, and to provide a forum for the reporting and discussion of news and issues concerning management science. Journal of Advanced Research in Management starting with its first issue is indexed in RePEC, IndexCopernicus, and EBSCO databases. Web: http://www.asers.eu/journals/jarm.html email: [email protected]

Journal of Advanced Studies in Finance ± Biannually Editor in Chief: PhD. Laura úWHIĄQHVFX Co-Editor: PhD Rajmund Mirdala

The Journal aims to publish empirical or theoretical articles which make significant contributions in all areas of finance, such as: asset pricing, corporate finance, banking and market microstructure, but also newly developing fields such as law and finance, behavioural finance, and experimental finance. The Journal will serves as a focal point of communication and debates for its contributors for better dissemination of information and knowledge on a global scale.

Journal of Advanced Studies in Finance, starting with its first issue is indexed in IndexCopernicus, RePEC and EBSCO databases. Web: http://www.asers.eu/journals/jasf.html email: [email protected]

194

Journal of Environment Management and Tourism Journal of Environmental Management and Tourism ± Biannually

Editor in Chief: PhD Cristina Barbu Journal of Environmental Management and Tourism will publish original research and seeks to cover a wide range of topics regarding environmental management and engineering, environmental management and health, environmental chemistry, environmental protection technologies (water, air, soil), pollution reduction at source and waste minimization, energy and environment, modelling, simulation and optimization foenvironmental protection;; environmental biotechnology, environmental education and sustainable development, environmental strategies and policies, etc. Journal of Environmental Management and Tourism starting with its first issue is indexed in RePEC, IndexCopernicus and EBSCO databases. Web: http://www.asers.eu/journals/jemt.html email: [email protected]

Journal of Research in Educational Sciences ± Biannually

Editor in Chief: PhD Laura Ungureanu

The Journal is design to promote scholary thought in the field of education with the clary mission to provide an interdisciplinary forum for discussion and debDWH DERXW HGXFDWLRQ¶V PRVW YLWDO LVVXHV :H intend to publish papers that contribute to the expanding boundries of knowledge in education and are focusing on research, theory, current issues and applied practice in this area. Journal of Research in Educational Sciences starting with its first issue is indexed in RePEC, IndexCopernicus and EBSCO databases. Web: http://www.asers.eu/journals/jres.html email: [email protected]

Theoretical and Practical Research in Economic Fields ± Biannually Editor in Chief: PhD Laura Ungureanu Co-Editor: PhD Ivan Kitov

Theoretical and Practical Research in Economic Fields publishes original articles in all branches of economics - theoretical and empirical, abstract and applied, providing wide-ranging coverage across the subject area. Journal promotes research that aim at the unification of the theoretical-quantitative and the empirical- quantitative approach to economic problems and that are penetrated by constructive and rigorous thinking. The Journal starting with its first issue will be indexed in RePEC, IndexCopernicus and EBSCO databases. Web: http://www.asers.eu/journals/tpref.html email: [email protected]

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