journal of security and 2012 1(3) march sustainability ... of security and... · issn 2029-7017...

ISSN 2029-7017

SECURITY AND SUSTAINABILITY ISSUES

Ministry of National Defence Republic of Lithuania

journal of

www.lka.lt/index.php/lt/217049/ 2012, 1(3)

Energy Security Center

The General Jonas ŽemaitisMilitary Academy of Lithuania

World Institute for Engineering and Technology

Education

University of Salford A Greater Manchester University

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International Entrepreneurial Perspectivesand Innovative Outcomes

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Contents 2012 1(3) March

Gediminas DubauskasSUSTAINABLE GROWTH OF THE FINANCIAL SECTOR: THE CASE OF CREDIT UNIONS 159

Manuela tvaronavičienė, Virginija GrybaitėSUSTAINABLE DEVELOPMENT AND PERFORMANCE OF INSTITUTIONS: APPROACHES TOWARDS MEASUREMENT 167

Mantas BileišisEMPOWERING INSTITUTIONS: A CASE FOR CONNECTING BUSINESS AND THE ACADEME THROUGH PHRONESIS 177

Jerzy Kaźmierczyk INFORMATION TECHNOLOGY SYSTEMS AND THEIR IMPACT ON THE EMPLOYMENT LEVEL IN THE POLISH BANKING SECTOR 187

Kristina Garškaitė-Milvydienė DIAGNOSTICS OF BANKRUPTCY THREAT TO ENTERPRISES 197

edoardo Beretta SOME MONETARY LESSONS FROM THE GERMAN ECONOMISTS OF THE PAST: LIGHTS AND SHADOWS IN THE COLLECTIVE MEMORY 205

Renata Korsakienė, olesia Gurina DOES NATIONAL CULTURE SIGNIFICANTLY IMPACT ORGANIZATIONAL CULTURE AT SMEs 219


Jerzy stańczyk EUROPEAN SECURITY AND SUSTAINABILITY ISSUES IN THE CONTEXT OF CURRENT INTERNATIONAL ENVIRONMENT 81

Gediminas Dubauskas INTERNATIONAL BANKS IN THE BALTIC STATES: ASPECTS OF GROWTH SUSTAINABILITY 91

Renata Korsakienė, Ieva Breivytė, evelyn WamboeHUMAN DEVELOPMENT INDEX AND SUSTAINABLE DEVELOPMENT 103

Mirjana Radović Marković CRITICAL APPROACH TOWARDS THE EMPLOYMENT ANALYSIS IN THEORY METHODOLOGY AND RESEARCH 113

Rasa smaliukienė, svajonė Bekešienė, Marzena trybull SUSTAINABILITY ISSUES IN MILITARY: AN APPLICATION OF COMPUTER-SUPPORTED COLLABORATING LEARNING 123

Audronė Balkytė, Manuela tvaronavičienė THE ROLE OF MIGRATION FOR SUSTAINABLE DEVELOPING ECONOMY: LITHUANIA IN THE EU CONTEXT 133

Audrius Dzikevičius, svetlana Šaranda CAN FINANCIAL RATIOS HELP TO FORECAST STOCK PRICES? 147

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I am glad to introduce the third issue of the “Journal of Security and Sustainability Issues” to peers, colleagues, doctoral students, practitioners and other readers of all walks of life, who are not indif-ferent to the future of our societies and care of the threats and difficulties, which emerge in the uneven path of our countries’ development.

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With warmest regards,

Prof. Dr. Sc. Eng. EDvINS KaRNItIS Leading Researcher, University of Latvia Member of advisory Board, Riga technical University Expert, Subcommittee of Saeima on Monitoring the Drafting and Implementation of the National Development Plan adviser to the Chairman, Public Utilities Commission of Latvia

Foreword to the third issue of peer reviewed scientific Journal of security and sustainability Issues

The General Jonas Žemaitis Military Academy of Lithuania

journal of Security and SuStainability iSSueS


20121(3)

Editors-in-Chief Dr. Valdas Rakutis

Prof. Jay MitraProf. Manuela Tvaronavičienė

ISSN 2029-7017 printISSN 2029-7025 online



World Institute for Engineering and Technology Education



Volume 1 Number 3 March 2012

The Journal of Security and Sustainability Issues is a peer-reviewed journal which publishes original research papers. it is the international journal published cooperating with the institutions

indicated on the cover of the journal. it is published quarterly.

areas of research include, but are not limited to, the following:

conceptual approaches towards Security and Sustainability Globalization Processes and Social Security defence and Security technologies innovations and technological development for Security and Sustainability energy Security regulation of the Security industry transition issues and Secure development computer and information Security Human and environmental Security biodiversity and ecological Sustainability economic Growth and Sustainable development economics of Sustainable organizations and industries Sustainable entrepreneurship intercultural communication for Security and Sustainability Secure development of Sector economics Sustainable finance and investment Strategic Management for Sustainability case Studies in the Process of Secure and Sustainable development evaluations of Security Measures

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© Authors of the articles, 2012© Military Academy of Lithuania, 2012

journal of Security and SuStainability iSSueSinternational entrepreneurial Perspectives and innovative outcomesISSN 2029-7017 print/ISSN 2029-7025 onlinewww.lka.lt/index.php/lt/217049/

Publishers

Mr. Vytautas umbrasas, Ministry of National Defence of the Republic of Lithuania Col. Gintaras bagdonas, The General Jonas Žemaitis Military Academy of Lithuania

editors-in-chief

Dr. Valdas rakutis, The General Jonas Žemaitis Military Academy of LithuaniaProf. jay Mitra, university of Essex, uKProf. Manuela tvaronavičienė, Vilnius Gediminas Technical university

executive editors

Dr. rasa Smaliukienė, The General Jonas Žemaitis Military Academy of LithuaniaProf. Mohamad Sepehri, Jacksonville university, uSA

editors

Prof. Zenon j. Pudlowski, World Institute for Engineering and Technology Education (WIETE) & Monash uni-versity, Melbourne, AustraliaProf. irina Sennikova, Riga International College of Economics and Business Administration, LatviaProf. natalja lace, Riga Technical university, LatviaProf. ruth alas, Estonian Business School, EstoniaProf. Marina Sheresheva, National Research university Higher School of Economics (HSE), Russian federationDr. dorothy Minkus-McKenna, Berkeley College, New york, uSAProf. abel femi adekola, university of Wisconsin-Stout Menomonie, uSA Prof. ramaswamy Ganesan, King Saud university, Kingdom of Saudi ArabiaProf. john Saee, Editor-in-Chief, Journal of Management Systems, uSA; Chairman- Global Divisions, Association of Management and International Association of Management, uSAProf. rebecca j.Moris, university of Nebraska, uSAProf. christian friedrich, university of Applied Sciences, Giessen, GermanyProf. Walter ruda, Kaiserslautern university of Applied Sciences, GermanyProf. em. Hanns Pichler, Vienna university of Economics and Business, AustriaProf. Sharda nandram, HAN university of Applied Sciences and Nyenrode Business university, the NetherlandsDr. christopher j. rees. university of Manchester, united KingdomDr. richard Haigh, university of Salford, united KingdomDr. ulku yuksel, The university of Sydney, AustraliaProf. Kari liuhto, Pan-European Institute, Turku School of Economics, finlandDr. Sibylle Heilbrunn, Ruppin Academic Center, IzraelDr. renata Korsakienė, Vilnius Gediminas Technical university, LithuaniaDr. Gitana dudzevičiūtė, The General Jonas Žemaitis Military Academy of LithuaniaProf. Massimo colombo, Politecnico di Milano, ItalyProf. Mirjana radović Marković, Institute of Economic Sciences, Belgrade, SerbiaDr. agota Giedrė raišienė, Mykolas Romeris university, LithuaniaProf. Mehmet Huseyin bilgin, Istanbul Medeniyet university, TurkeyProf. brian Maruffi, yeshiva university, fordham university, uSA Prof. Mathew j. Manimala, Indian Institute of Management Bangalore, IndiaProf. ing. Zuzana dvorakova, university of Economics, Prague, Czech RepublicAs. prof. Virginija Grybaitė, Vilnius Gediminas Technical university, LithuaniaProf. jaime del castillo, Basque Country university, Spain

journal of Security and Sustainability issues www.lka.lt/index.php/lt/217049/2011 1(1)






ISSN 2029-7017 print/ISSN 2029-7025 online

journal of Security and Sustainability issues www.lka.lt/index.php/lt/217049/2012, 1(3): 159–166






SuStainable GroWtH of tHe financial Sector: tHe caSe of credit unionS

Gediminas dubauskas

The General Jonas Žemaitis Military Academy of Lithuania,Šilo Str. 5 A, Vilnius, LT-10322, Lithuania,

e-mail: [email protected]

Received 15 September 2011; accepted 20 December 2011

abstract. A possible sustainable growth of the financial sector due to the development of activity of credit unions is being examined in this paper. Moreover the analysis of contemporary credit unions conceptions and problems of management improvement are performed. In addition theoretical priorities for credibility and international capabilities of credit unions are presented. A sketch of some actual theories is being performed and methods for analysis of credit unions’ activities are particularly composed. following method of improvement of observational research was performed in this paper. In order to evaluate common tendencies of activities of the credit unions in the World and particularly in the European union the financial institutions’ legal regulations are specially surveyed. furthermore legal regulations of credit unions are analyzed in practice for local and international credit unions of Lithuania. The preliminary evaluation of the credit unions activity in the circumstances of contem-porary waves of the financial crisis is presented. After examining available and possible theoretical and practical aspects the assumptions from the analyzed material are proposed. The article discusses the development of credit unions and the factors affecting the credit union managers approach to the credit union system development prospects. Despite an occurrence of the recent commercial banks global situation concerning the possible disap-pointment of consumers - credit unions are one of the best institutions for further financial sustainability in the retail credit markets. An object of this research is credit unions and some other self-credit institutions. In addition the accumulated global information from the cooperative financial institutions is overviewed.

Keywords: financial Sector, Credibility, Credit unions, Development.

reference to this paper should be made as follows: Dubauskas, G. 2012. Sustainable growth of the financial sec-tor: the case of credit unions, Journal of Security and Sustainability Issues 1(3): 159–166.

jel classifications: G21, E50, f33, R51.

1. introduction

Credit unions, banks and credit co-operative banks play an important role in the national economy and provide millions of its members to benefit from serv-ices in the European union as well as in many other countries around the World in different continents. Cooperative financial institutions operate alongside the traditional banking system - especially in the sector for small personal loans, savings and personal services. They focused on a specific market segment - usually in the middle or lower middle-income people with small and medium-sized businesses. Co-oper-ative financial system has made a significant contri-

bution to the economic sustainable development of many countries. furthermore these institutions are making the active circulation in the level of thousand billion of Euro equivalent.

Internationalization of the credit union activities is inspired from greatly intensified international eco-nomic relations practice. These days credit unions are much more exposed to international business and goods and services are exported and imported worldwide. Different cultures have different interests and priorities that respond differently to doubtful advertising and marketing techniques. During the process of rapid global (and particularly European)

G e d i m i n a s D u b a u s k a s Sustainable Growth of the financial Sector: the Case of Credit unions

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integration the businesses are forced to think about integration into the international markets (McIntyre 2002). Taking some discourse it could be necessary to mention that Lithuania’s mainly Western type capital market institutions are quite good integrated into the international organizations. Nevertheless some dis-trust of financial institutions has been caused by the global financial system recent crisis. Moreover this is a quite sensitive issue for credit unions. Credit unions as a part of the global financial system are almost entirely related on a trust of the people (i.e., the un-ion members) acting in the local and in many cases in the international markets. Therefore credit unions can intensify their competitiveness and ensure the continued existence of financial intermediary busi-nesses. Therefore could be worthy to examine activi-ties of the internationalization of credit unions to find out whether the credit union’s group action dominate the «logic of exchange of entities”. The significant re-search on credit union development has been done by McCarthy(2004), Di Salvo (2003), McKillop (2006). Lithuanian credit unions particularly were analyzed by McCarthy (2004), Igarytė (2006), Mc-Carthy (2004) and some other very few authors.

The problem. In order to understand why some finan-cial markets researchers have turned their attention on the analysis of credit unions it could be necessary to examine differences between commercial banks man-agement with some level of internationalization and the credit unions management with possible interna-tionalization direction. Besides the sustainable growth of credible financial institutions always is a part of country’s economical and national security. Moreover this particularly could be important for the sustain-able development of cooperative financial institutions such as credit unions. Especially, due to the lack of investigation in this subject in Lithuania’s case.

The object of this research is credit unions develop-ment and a possible internationalization advance.

The aim of research is to investigate credit unions growth with internationalization possibilities and to provide thoughts for the faster credit union develop-ment.

The tasks of research – to evaluate the management experience of credit unions and to overview improve-ments in these financial institutions with a possible internationalization accent based on literature, statis-tical analysis, empirical studies and strategic solutions for credit unions improvement.

The methods of research in this paper. In order to provide argument for credit unions to ensure their development (with a special emphasis on Lithuania’s cooperative credit institutions) concerning a possible internationalization this paper was carried out using quantitative and qualitative methods (the systematic empirical investigation of credit unions via statisti-cal, mathematical techniques, scientific literature and document analysis, interviews) and the results of a comparative analysis of the study.

2. credit union’s concept and its role in today’s economy

This section of the paper shows the modern concept of credit union operations and characteristics de-scribed in today’s credit union business development issues. However the credit union management and operations for the possible internationalization could be theoretical priorities. Excessively a short summary of the credit unions’ chronicle is presented.

Variety of sources in financial literature offers different credit union definitions but given all the mixture of credit union concept brings the same unified charac-teristics of credit unions. Literature on credit unions generally describes them as a co-operative financial institution providing financial services to a certain group of people connected by common membership criteria.

Meanwhile the majority of this study was done on the basis of nowadays credit unions experience. Moreo-ver the majority of the data was assembled from the Lithuania’s credit unions legal regulations and prac-tical experience. Lithuania’s credit union is defined by law as a credit institution that meets its members’ needs for economic and social activities, that has a license and can receive deposits and other repayable funds from them and to lend those funds to partici-pants according to the Law on the non-professional market associates. Credit unions are entitled to pur-sue other statutory financial services according to the Law and assume the associated risks and responsibili-ties (Lithuania’s Law on Credit unions 1995, Law on the Development of Small and Middle Business of the Republic of Lithuania 1998).

Credit unions activities are based on the fundamental principles of co-operative unions and are in general not-for-profit organizations. Moreover an each member is an owner who has the only one vote. Membership in

J o u r n a l o f S e c u r i t y a n d S u s t a i n a b i l i t y I s s u e s , 2 0 1 1 , 1 ( 3 ) : 1 5 9 – 1 6 6

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credit unions affects organic structure of a particular group of people. Each credit union member must buy shares and become the owner of the credit union.

In some countries, “credit union” concept replaces terms such as co-operative financial institutions, micro-credit or self-help organizations, co-operative banks. European union countries however often use the term a co-operative bank. In many countries - es-pecially in the Western Europe - credit co-operatives have grown into the large co-operative banks that pro-vide full banking services. Nevertheless their manage-ment remains based on the same principle - co-oper-ative banks are owned by co-operative members and governing bodies are elected by the same rule - “one member, one vote.” Credit unions differ from coopera-tive banks in the one important respect. A credit union - unlike a bank branch - is a separate and autonomous company controlled by its members. Moreover these members are both owners and customers and they are responsible for the company’s progress, growth and profitability. Co-operative banks in their membership are defined sometimes by membership in a particular economical or geographical region. Quite similar the credit union could be a public community partner. Moreover credit unions very often help proprietors and small businesses with a credit to create new jobs. It should be noted that the article analyzes activities of credit unions rather than co-operative banks.

Taking a closer look at the credit unions it could be useful to analyze empirical evidence from the Lithuanian Central Credit union (LCCu, LCKu in Lithuanian). The LCCu is organized on the basis of co-operative bodies as the corporate credit union. The LCCu institution is established by the law of the Re-public of Lithuania. The LCCu operates in accord-ance with the law on a registered credit institution and it is acting as a co-operative company (Law on the Central Credit union of the Republic of Lithua-nia 2000). Central Credit union operates on the basis of share capital and the credit union’s liquidity and solvency restoration functions.

Lithuanian’s credit unions supervisory authority is the Bank of Lithuania. The supervisory authority of the Republic of Lithuania acts according to: − the Law on Credit unions, and;− the license issued by the credit unions supervision administration;− the Republic of Lithuania Law on financial Insti-tutions, and;

− the Bank of Lithuania supervisory regulations (Lithuania's Law on Credit unions, 1995).

Going back to some historical appearance of financial co-operatives it is necessary to remark that the first institution which was a possible credit union initia-tor has roots in the nineteenth century. Therefore the business practices that today could be associated with co-operatives, was launched by weavers in Rochdale, England, in 1844. Besides a membership in this, con-sumers organized co-operatives was free. That co-op-erative fund had the democratic control and all profits were returned to members. Moreover the education of the members of the co-operative was regarded as a vital issue and is known as the Rochdale principle nowadays. Therefore these co-operatives have formed the basis for the principles on which co-operatives around the world operate to this day. Moreover the overwhelming majority of the credit unions are oper-ating according to these co-operatives rules.

The first cooperative credit society in the world was founded in Heddesdorf, Germany in 1850’s. The Hed-desdorf credit union was organized in Bavaria. Even before that some co-operatives for self-help purposes were established. friedrich Raiffeisen (friedrich Wil-helm Raiffeisen, 1818–1888) motivated by the misery of the unfortunate part of the population founded the Society for Bread and Grain Supply during the starva-tion of winter 1847. Raiffeisen conceived of the idea of cooperative self-help during his tenure as the young mayor of flammersfeld. furthermore the bread soci-ety as well as the mutual aid society was founded in flammersfeld, in 1849. Therefore the charitable so-ciety created in Heddesdorf was the ante-cooperative society based on the principle of cooperative assist-ance. Later Raiffeisen began to develop district and national associations and the central financial institu-tions. Besides the first credit union in Lithuania, then called the Savings Lending Company (Taupmenų skolinimosi bendrovė, in Lithuanian) was established in Pabiržė, 1871.

Therefore since the mid of the nineteenth century a member-owned financial co-operative or credits co-op-erative movement was widely developed in the major-ity of European Nations as well as in another countries around the world. Since then credit unions have more or less positive trends. Moreover these trends has an in-creasing magnitude in the beginning of the twenty first century. The following table shows the credit unions member statistics during the years 2005 - 2010.


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table no 1. Credit unions’ Global Development Trend in 2005 - 2010.

year Number of Countries

Credit unions Number

Credit unions ‘ Dynamics 2005=1 Members Change in number

of members

2005 92 42705 1 157103072 1

2006 96 46367 1,09 172007510 1,09

2007 96 49134 1,06 177383728 1,03

2008 97 53689 1,09 185800237 1,05

2009 97 49330 0,92 183916050 0,99

2010 100 52945 1,07 187986967 1,02

Source: Author’s Calculations from the International Credit union System Statistical Report, 2011.

table no 2. The World Credit unions Accumulated Data in 2001-2010.

year Deposits (uS $) Loans (uS $) Reserves (uS $) Assets (uS $)

2001 530.450.127.834 393.588.341.911 60.352.532.307 605.518.296.805

2002 589.219.828.002 424.950.529.304 67.419.839.501 676.049.302.487

2003 656.370.220.745 482.574.187.446 74.674.165.182 758.478.695.455

2004 707.438.184.755 531.418.500.904 82.926.748.099 824.653.392.302

2005 763.819.930.158 612.201.609.601 91.557.493.495 894.454.835.782

2006 904.120.858.300 758.208.659.672 106.825.743.418 1.092.135.905.636

2007 987.861.248.618 847.896.069.374 115.358.461.836 1.181.465.915.014

2008 995.741.235.545 847.058.749.226 115.316.544.867 1.193.811.863.722

2009 1.145.851.168.440 911.752.609.007 119.738.181.488 1.352.608.897.477

2010 1.229.389.373.992 960.089.324.653 131.659.476.972 1.459.605.561.772

Source: International Credit union System Statistical report, 2011.

Therefore it is obvious that the world global credit unions accumulated deposits increased each year since the 2001st. The biggest amount of deposits was accepted in the year 2010. The growth rate was 7.29 percent if compared with the previous year. Moreover the increase in the decade was 2.3 times as compared 2010 to the 2001 (see Table 2). 3. internationalization Theories applicable to the credit union’s business

Internationalization of the activities theoretically is inspired greatly by the intensified international eco-nomic relations practice. Many large companies began to intensify their rush to foreign country markets.

All activities of internationalization development theories can be conditionally divided into two ma-jor groups - the uppsala internationalization theory - that was pioneered by Swedish scientists - J. Johansen,

f. Wiedersheim-Paul, J. E. Vahlne and the operation-al stages theory of the internationalization process of innovation and factor theory studies, that are repre-sented by the united States of America scientists - W. J. Bilkey, G. Tesar, M. R. Czinkot, S.T. Cavusgil, S. D. Reid and others (figueira-de-Lemos et al. 2011).

Economic decisions based on the approach to tradi-tional internationalization theories and models of in-ternationalization, which is maximizing the specific economic aspects (Andersson et al. 2004, Berkema et al. 1998, Calof 1993,1994, Liesch 1999, Manolova 2002):

− Internationalization and the internationalization of the number of transactions cost theory is under-stood as dependent on economic decisions, how cred-it unions making strategic decisions in international business - chosen markets, access to them ways out business. These theories is that the credit union, the


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choice between alternatives, based on rational eco-nomic criteria such as cost, risk and control, gives the internationalization decisions;

−Resource-based theory explains the internationali-zation of the credit union's strategic decisions, which depend on the capabilities and components resulting from a controlled to certain resources, such as general human capital, management know-how, manufactur-ing know-how and access to financial capital.

Evolutionary behavioral approaches to the interna-tionalization stage theory known as the process theory says that the credit union is a gradual process of inter-nationalization. There are two stages of the theories of these schools:

−uppsala internationalization model (u-model), argues that internationalization is a long and grad-ual process, some credit unions are becoming more aware of foreign markets and, thereby, increasing its resources in order to increase the degree of foreign involvement;

− Innovation-based internationalization model (I-model) shows the credit union operations interna-tionalization stages. uppsala and the main difference between the models is that the internationalization of innovation-based model explains the internation-alization of the credit union as a result of manage-rial innovation in which each stage of the innovation. Operational level I-model is based on the export share in total sales figures, which may influence the credit union involvement in international activity.

The network model of internationalization of mar-kets is used to analyze the relationship between the credit union networks. The main causes of these net-works are that credit unions need extensive knowl-edge about each other to work together. Typically, such knowledge is dispersed, and credit unions need to be in long-term relationships in order to absorb this knowledge (Alimienė et al. 2004). That could be characterized by the increasing internationalization of the credit union and the geographic extent of involve-ment in foreign activities. There is a wide-reaching internationalization based on these interpretations. Perhaps the most popular concept of internationali-zation is the uppsala model, explaining the market-oriented operations in the establishment of forms and techniques.

4. aspects of credit unions Sustainable development

Summarizing credit unions operations in interna-tional markets could be appropriate to overview theo-retical research on the development of credit union performance. Mutual aid is beneficial for a credit un-ion sustainable growth as well as for the responsibility for credit union members. Credit union strength and success depend on the credit union members inten-tions to pursue common goals, share experiences and work together. A lot of that happens at the level of in-dividual credit unions. Besides a united system of or-ganizations is working to facilitate processes of credit unions from the local to an international level. Ana-lyzing the credit union system trends in various for-eign countries, the researchers (ferguson et al. 2002, McCarthy et al. 2001) generally distinguishes three stages of credit union and other cooperative financial institution systems development; The credit unions in the level of development; Transitional period; Ma-ture credit union system (ferguson, McKillop). On the other hand there is an another approach; Credit unions in the formation stage; The national credit un-ion system phase; International credit union system phase (MacPherson). Besides the existence of credit unions in the first or second level of development does not guarantee the transition to the next level of development; it can only be ensured by the consistent development of integration processes in the system.

Moreover the development of a credit union analysis suggests that further development of the network of credit unions associated with the credit union services with the development of new technologies, risk man-agement, strengthening their network stability and li-quidity. following the development of credit unions, there is an evident dependence on sociological - eco-nomic factors (Dudzevičiūtė 2006). The data study revealed that about 96 percent of the variation in the credit unions’ number has a direct correlation with the average wage trends in the Lithuanian economy, with the GDP per capita figure and the rate of foreign banks share in the banks’ system total capital. This analysis suggests that the banking sector privatization have had the direct impact on the credit union net-work increase.


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5. empirical evidence from credit unions in lithuania

This section presents a short overview of the empiri-cal research on Lithuanian credit unions. Objective of this part is to analyze the Lithuanian credit unions with international management practices and to ex-amine whether the credit union operations interna-tionalization dominated the logical system of interna-tional practice and resources exchange of entities. The main revealed obstacles could be a limited member-ship in a credit union by territorial, professional and citizenship status, occasional international exchanges of information on products, services and management good practice. An analysis of publications and cred-it unions’ web sites provided really useful informa-tion. Lithuania had the Central Credit union and 68 credit unions in more than 114 thousand members in 2011. Lithuanian credit unions members share capi-tal increased the each following year since 2005 (see Table 3). It occurred despite the global financial crisis that has an extremely negative impact on Lithuania’s economy in 2009 (the country’s GDP decreased by more than 17 percent).

table no 3. Members Share Accumulated Capital in Lithuania’s Credit unions in 2005-2010.

year Members

share capital (in million Litas)

Members share capital (in

million Euros )

Change over the previous

year2005 31.3 9.07 1

2006 46.6 13.5 1.49

2007 67.9 19.67 1.46

2008 92.5 26.79 1.36

2009 108 31.28 1.17

2010 135.8 39.33 1.26

Source: Author’s calculations

Credit unions share capital increased by 54.82 percent in 2005. Moreover credit union members share capi-tal increased by 48.86 percent, in the following year. The member share capital of credit unions increased by nearly 46 percent, in 2007. In 2008, credit union share capital increased by 36.23 percent. Just because of the impact of the global financial crisis credit union share capital increased only by 16.76 percent, in 2009. How-ever in 2010 the credit union share capital increased by 25.74 percent. Nevertheless the global financial crisis showed its impact on Lithuania’s credit unions in the

terms of accumulated profits (see Table 4).

table no 4. The Accumulated Profit of Lithuania’s Credit unions in 2005-2010.

year

The Accumulated

Profit (in million Litas)

The Accumulated

Profit (in million Euros)

Change over the previous

year

2005 1.7 0.49 1

2006 2.3 0.67 1.35

2007 2.7 0.78 1.17

2008 0.7 0.2 0.26

2009 -5.3 -1.53 -7.57

2010 -5.4 -1.56 1.02

Source: Author’s Calculations

fifty three credit unions were profitable but ten credit unions have experienced financial losses and the one credit union had expenses equal to its earned income in 2005. The accumulated profits for the all credit unions of Lithuania was 1,692.3 thousand Litas. This result was higher than 907.5 thousand Litas in 2004 and the highest figure since 1995. Profit growth was influenced by the increase in credit union activity. fif-ty eight credit unions earned a profit, eight credit un-ions have suffered losses in 2006. Total profit reached 2,272.7 thousand Litas for the all credit unions. It was 35 percent more than in 2005. furthermore fifty nine credit unions earned a profit and eight credit un-ions experienced a loss. Totally credit accumulated 2,722.4 thousand Litas in 2007. Nonetheless forty seven credit unions were profitable and twenty suf-fered a loss in the eve of the recent financial crisis. Totally credit unions earned only 0.7 million Litas in 2008. unfortunately the credit unions had 5.3 mil-lion Litas accumulated losses in 2009. As a sign of some recovery thirty seven credit unions were profit-able and thirty one had losses in 2010. Entirely the credit unions had 5.4 million Litas losses in this year.

Valuating Lithuania’s credit unions internationaliza-tion the following realities also can be an indicator for the international cooperation issues. Lithuanian credit unions represented by the Lithuanian Central Credit union (hereinafter - LCCu), actively participates in the activities of international rights. Moreover the LCCu has a membership in the following interna-tional organizations: Proxfin organization; European Association of Cooperative Banks; MasterCard Inter-


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national. (Proxfin is an international network of thirty community finance institutions and Développement international Desjardins (DID) whose members have made a commitment to work towards the dual ob-jectives of financial performance and social impact which they consider inseparable (Proxfin, 2012). Eu-ropean Association of Cooperative Banks (hereinafter - EACB) EACB unites all members of Europe’s big-gest co-operative banks whose assets represent about 20 percent of the retail banking market in Europe. MasterCard International or “MasterCard’s” is one of the world’s largest consumer credit card payment sys-tem operator based in New york).

Meanwhile Lithuanian emigrants abroad also estab-lished their credit unions since the mid of twentieth century. It could be mentioned that the Lithuanian credit unions exist around the world. Lithuanians es-tablished credit unions in their largest colonies - the united States (Lithuanian Credit union in Los Ange-les (since 1962), Lithuanian credit union “Taupa” in Cleveland, Lithuanian federal Credit union “Taupa” in Boston (since 1981), the California Lithuanian Credit union in Santa Monica (since 1969), Can-ada - Montreal Lithuanian credit union “Litas”, Lithuanian credit cooperative “Parama” (“Support”) in Toronto (since 1952), Lithuanian credit coopera-tive “Talka” Hamilton, Canada (operates since 1955), “Prisikėlimas” (“The Resurrection”) credit coopera-tive in Toronto, Lithuanian credit union “Talka” in Melbourne, Australia).

6. conclusions

During the process of the accelerating European un-ion integration distrust in financial institutions is a quite overcritical issue. This uncertainty has a tenden-cy to increase rapidly because of the recent financial system crisis. Therefore credit unions could be one of the main participants increasing the sustainable de-velopment of financial institutions especially in the retail market segment. Moreover credit unions had to think about integration into the international mar-kets. Sometime it could be necessary to solve prob-lems offering strategic decisions in the internation-alization of credit unions activities. furthermore the internationalization of the credit union activities can help in the restoration of the trust in financial insti-tutions and - even more important - to increase the number of its members.

On the other hand credit unions should estimate in-

dividual needs of a consumer (and a market) and do not always apply the same standardization strategy as other credit institutions in gaining the competitive advantage in global markets. Therefore the interna-tionalization of activities of the credit unions could help to achieve a required result. Thus necessary poli-cies and procedures can help to organize and monitor their activities and to ensure smooth and safe opera-tions. Moreover credit unions must comply with the laws and requirements of the provisions of the credit union in order to help implement good business prac-tice and experience.

In addition results from the analysis of credit unions’ legal regulation in Lithuania uncover that different amendments to the Law on credit unions is a per-manent dimension. Significant event in Lithuania’s credit union system development is the adoption of the Law on the Central Credit union and the Law on deposit insurance. Besides the adoption of the Law on financial institutions has very little influ-ence for credit union operations in practice. However the credit union sustainable development trends and prospects are rarely analyzed in contemporary scien-tific publications. Therefore more detailed studies are lacking in the credit union development prospects and forecasts. Since the mid of nineteenth century credits co-operative movement was widely developed in the majority of nations around the world. Still then credit unions demonstrate quite positive trends. fur-thermore these trends have an increasing ratio in the twenty first century.

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SuStainable deVeloPMent and PerforMance of inStitutionS: aPProacHeS toWardS MeaSureMent

Manuela tvaronavičienė¹, Virginija Grybaitė²

1,2Vilnius Gediminas Technical university, Saulėtekio Av. 11, LT-10223 Vilnius, Lithuania;1The General Jonas Žemaitis Military Academy of Lithuania, Šilo Str. 5 A, LT-10322 Vilnius, Lithuania

E-mails: ¹[email protected], ²[email protected]

Received 20 September 2011; accepted 15 January 2012

abstract. The aim of this paper is to estimate and to compare sustainable development processes in Lithuania, Latvia and Estonia focusing on institutional dimension of sustainable development. Attention has been focused on the selection of system of indicators with particular emphasis on institutional indicators. The authors employ the most popular two multicriteria methods: Simple Additive Weighting (SAW) and multi-criteria complex proportional method (MCP). Data embracing 2004-2010 year period is being analyzed. In order to obtain a multi-faceted view, several variants of sustainable development estimations of Lithuania, Latvia and Estonia are being performed. Each variant represents a different approach to development perception. The difference lies in emphasis, which is being put on the economic and institutional aspects of development. Hypothesis has been raised that the different methods employed may affect comparison results.

Keywords: Sustainable Development, Institutional Dimension, Multi-criteria Complex Proportional Method, SAW Method.

reference to this paper should be made as follows: Tvaronavičienė, M.; Grybaitė, V. 2012. Sustainable Develo-pment and Performance of Iinstitutions: Approaches towards Measurement, Journal of Security and Sustainability Issues 1(3): 167–175.

jel classifications: f02, H80, I00, I38, I39.

1. introduction

Properly functioning institutions are essential for sustainable development in the realization of social, economic, and environmental aims set by the society (Helm, 1998). The importance of institutions and their impact on economic development emerged in the 1970s with the North Douglas work on institu-tions. North (1991) emphasizes the importance of institutions. He claims that institutions provide the incentive structure of an economy and that, as the structure evolves; it shapes the direction of economic movement towards growth, stagnation or decline. Nevertheless, institutions, according to scientists, could obtain different meaning. North (1994) per-ceives institutions as humanly devised formal and informal constraints, respectively, rules, laws, consti-tutions, and norms of behaviour, conventions, and

self-imposed codes of conduct. Those formal and in-formal constrains, respectively, define the incentive structure of societies and, specifically, economies. North (1991) distinguishes institutions and organi-zations by indicating, that it is the interaction be-tween institutions and organizations that shapes the institutional evolution of an economy. If institutions are the rules of the game, organizations and their en-trepreneurs are the players. Institutions are humanly devised constraints that structure human interaction. Organizations are made up of groups of individuals bound together by some common purpose to achieve certain objectives. To generalize that approach, it could be stated that institutions and organizations must be two interacting parties, the first of which sets rules or transmits those, which are already set, and another party (i.e. organizations), which acts ac-

M a n u e l a T v a r o n a v i č i e n ė , V i r g i n i j a G r y b a i t ėSustainable Development and Performance of Institutions: Approaches towards Measurement

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cordingly to the established rules. Hodgson (2006) provides critical comment about North’s proposed definition of institutions, i.e. that institutions and organizations are not synonymous. Hodgson (2006) starts from distinguishing the main characteristic features of institutions and later uses those charac-teristics for comparison of organizations with insti-tutions. Hodgson (2006) recalls that “organizations are special institutions that involve (a) criteria to establish their boundaries and to distinguish their members from non-members, (b) principles of sov-ereignty concerning who is in charge, and (c) chains of command delineating responsibilities within the organization“. The World Bank (2003) provides a definition of institutions as “the rules and organi-zations, including informal norms that coordinate human behavior. Tvaronavičienė et al. (2009) assert that notion of institution is much wider than notion of organization and institutions could be considered in a broad and narrow sense. In a broad sense, the notion of institution embraces organizations, while in a narrow sense North’s approach can be adopted, i.e. “if institutions are the rules of the game, organiza-tions and their entrepreneurs are the players“(North 1994: 361). Williamson (2000) identified four levels of institutions: the highest level of the institutional hierarchy provides the basic foundations for society’s institutions. It encompasses informal institutions, customs, traditions, ethics and social norms, religion and some aspects of language and cognition. The basic institutional environment or, according to the author, the formal rules of game belong to level two. At this level constitutions, political systems and basic human rights are defined; property rights and their allocation; laws, courts and related institutions to enforce political, human rights and property rights, money, basic financial institutions, and the govern-ment’s power to tax; laws and institutions governing migration, trade and foreign investment rules; and the political, legal and economic mechanisms that facili-tate changes in the basic institutional environment. Institutions of governance are “the play of the game” (prices, wages, costs, quantities bought and sold). Sci-entists asserting prime importance of the institutions in the process of development have disagreements on the range of questions, for example, the definition of institution (whether political and economic institu-tions should be distinguished; whether institutions and organizations are synonymous, etc.). Another point of polemics concerns the origin of institution,

i.e. endogenous versus exogenous one (Gwartney et. al. 2006; Cervellati et al. 2004; Helliwell 1994; Schwartz 2003; Aoki 2001; Acemoglu et al. 2001; Greif 1998). And the last, even admitting those pit-falls of interpretation, we still need to select indica-tors reflecting institutional state in order to be able to take into account institutional development input into the achieved aggregated sustainable development level. Acemoglu and Robinson (2008) claim that dif-ferences in economic institutions serve as the main determinant of prosperity across different countries. Economic institutions are seen as “collective choices that are the outcome of a political process“, i.e. “de-pend on the nature of political institutions and the distribution of political power in society“. Acemoglu and Robinson (2008) distinguish two types of insti-tutions: economic and political. Political institutions condition efficiency of economic ones. Economic institutions, in their turn, are the main players con-sequently determining the level of sustainable devel-opment. While admitting that economic institutions are shaped by political ones, the authors state that they have “a highly preliminary understanding of the factors that lead a society into a political equilibrium which supports good economic institutions“. Ac-cording to the authors, some examples of political transitions leading to accomplishment of economic outcomes ex post could be observed. Nevertheless, good practices do not lead to clear frameworks. We can add that according to Acemoglu and Robinson (2008) the role of geographic, cultural and human interaction determinants in strengthening economic institutions remains unclear. To generalize, the im-pression is that the authors’ distinguished economic and political institutions can be equally efficiently renamed respectively into “organizations” and “state institutions” or policies. Tvaronavičienė et al. (2009) suggest a contextual framework, i.e. institutions em-brace organizations in their direct understanding and to consider further institutional impact on the sustainable development processes need to take into account both exogenous (outer) and indigenous (in-ner) stimuli to expand on various possible modes. for estimation purposes the authors of this paper will consider the role of institutions as environment conditioning tools. The better institutional perform-ance at separately taken country, the better perform-ance of organizations-market players and the faster sustainable development processes.


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2. Measurement of institutions: Selection of indicators

To choose a set of indicators reflecting institutional facets, suitable for further analysis, i.e. for process-ing by mathematical methods, such as multi-criteria ones, is a complicated task. Rodrik (2000) raised a question, which institutions are important and con-sequently (we reckon) what effects should be meas-urable. E.g., the following facets of institutional impact are being listed: property rights, macroeco-nomic stabilization, social insurance, and conflict management. Evaluation of institutional quality and indicators proposed by the freedom House, the fraser Institute, and the Heritage foundation are widely used by scientists. The Heritage foundation composes Index of Economic freedom, which cov-ers 10 freedoms: Business freedom, Trade freedom, fiscal freedom, Government freedom, Monetary freedom, Investment freedom, financial freedom, Property freedom, freedom for Corruption and La-bor freedom. All these areas are important to sus-tainable development. According to the freedom House, the quality of institutions is measured by grading areas which affect sustainable development. The two main categories have been selected: Politi-cal Rights and Civil Liberties. Political Rights are based on ten political questions grouped into three subcategories: Electoral Process (3 questions), Politi-cal Pluralism and Participation (4), and functioning of Government (3) and Civil Liberties based on 15 questions grouped into four subcategories: freedom of Expression and Belief (4 questions), Associational and Organizational Rights (3), Rule of Law (4), and Personal Autonomy and Individual Rights (4). The freedom House Index or freedom in the World is an average of the two indices: Political Rights and Civil Liberties. The Index of Economic freedom in the world constructed by Gwartney and Lawson (2003) measures the degree to which the policies and institutions of the countries are supportive of economic freedom. That Index measures the degree of economic freedom in related areas and embraces following facets: Size of Government, Expenditures, Taxes, Enterprises; Legal Structure and Security of Property Rights; Access to Sound Money; freedom to Trade Internationally; Regulation of Credit, La-bor, Business (fraser Institute 2011). The widely used measure of institutions is the Worldwide Governance Indicators (WGI) constructed by Kaufmann et al.

(2005). The World Governance Indicators measure six dimensions of governance: Voice and Account-ability; Political Stability and Absence of Violence/Terrorism; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption. To our minds while tackling institutional development impact on sustainable development, it is reason-able to distinguish two general groups of indicators: economic indicators and institutional indicators. It is obvious that those groups in some respect over-lap (e.g. Redek, Sušjan 2005) and any attribution to one or another group is rather conditional (Grybaitė, Tvaronavičienė 2008; Tvaronavičienė et al. 2008; Tvaronavičienė, Grybaitė, Tvaronavičius 2008). While agreeing, that economic indicators would em-brace major macroeconomic and some social facets (Table 1. Economic Indicators), let us concentrate further very specifically on the indicators, which do not fall under economic development characteristics. Many authors (ulubasoglu, Doucouliagos 2004) agree that both political and economic freedoms im-pact growth significantly and, as they claim, it has a positive effect. The authors indicate a wide array of possibly important aspects, which should be taken into account.

The following indicators, as reflecting institutional impact on sustainable development processes are be-ing selected, i.e. four aggregated Worldwide Govern-ance indicators: Rule of Law (measuring perceptions of the extent to which agents have confidence in and abide by the rules of society, and, in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence), Government Effectiveness Index (measuring perceptions of the quality of public serv-ices, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies), Voice and Accountability (captures percep-tions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of associa-tion, and free media) and, Regulatory Quality (cap-tures perceptions of the ability of the government to formulate and implement sound policies and regu-lations that permit and promote private sector de-velopment). The Heritage foundation embraces the Index of Economic freedom, which covers freedoms from property rights to entrepreneurship. Into the


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list of indicators authors include the Corruption Per-ception Index developed by Transparency Interna-tional. The index measures the degree to which pub-lic sector corruption is perceived to exist. The level of citizen’s confidence in the Eu institutions describes to what extent the confidence of the European citizens in the European institutions is perceived, E-govern-ment availability online, in per cent, Voter turnout in national elections, in per cent. The indicator makes a contribution towards the two renewed sustainable development strategy policy guiding principles ‘open and democratic society’ and ‘involvement of citizens’ (Eurostat 2011). Major economic and some social facets embrace socio-economic indicators (Table 1).

table 1. Set of Indicators

institutional Social-economic

Voice and accountabilityRegulatory qualityGovernment Effectiveness IndexRule of LawIndex of Economic freedomCorruption Perception IndexE-government on-line availability, in per centVoter turnout in national elections, in per centLevel of citizen’s confidence in the Eu institutions

Real GDP per capita (euro per inhabitant)Total R&D expenditure, % of GDPAnnual average inflation rateBusiness investment, % of GDPLevel of the Internet access-households Labour productivity per person employedGeneral government debtfDI intensityInequality of income distributionunemployment rate, annual average

The listed indicators will comprise institutional in-dicator group, while estimating relative sustainable development level of Lithuania, Latvia and Estonia. Indicators included into the set meet the following requirements (Bruntland 1987; Disano 2002): they do not contradict each other; they can be put into the hierarchical range according to significance; they are intrinsic to all considered countries; numeric val-ues of the chosen indicators are available. The indica-tors are attributed to two groups, representing, re-spectively, socio-economic and institutional aspects of development.

3. evaluation of relative Sustainable development in the baltic countries

Indicators’ set is composed ad hoc to reflect the in-stitutional aspect of sustainable development. To put

it in another way we suggest the set of indicators, which is customized for research purposes, i.e. is suit-able for revelation of relative impact of institutional development on aggregated level of sustainable de-velopment. Composing indicators’ set, modeling dif-ferent significances and application of multi-criteria evaluation on data of Lithuania, Latvia and Estonia, would allow us to reveal limits, within which ob-tained results could fluctuate. fluctuation range, in its turn, would indicate how much results could be affected by application of different development es-timation premises. Multi-criteria methods, as a rule, use experts’ questioning. for countries’ comparisons multi-criteria methods, which conventionally sug-gest participation of experts, are usually applied. We assert that the so-called “experts” in that particular case would express only their personal beliefs and values; discussion about, what aspects of develop-ment are more significant, is too great and complex to be wrapped up by experts. Opinions about more or less significant development sides can vary; experts could be biased. Switching from experts’ questioning to modeling of significances of the indicators includ-ed into the set, would allow us to reveal how much results could change if differently thinking groups of experts would be employed. The revealed differences are seen as tertiary data letting to judge the impact of institutional development on sustainable develop-ment level, when different approaches to significan-ces of economic and institutional aspects are being adopted. Multi-criteria methods allow to aggregate values of indicators, included into the system, and ob-tain the value of one integral indicator. That integral indicator would represent the measure of considered countries’ development at particular moment. Com-puting of such indicators for a period of 2004-2010 enables deriving tendency of development of a con-crete country. Integral indicators computed for the Baltic countries would allow comparing countries and getting insights of their development specifics. The technique of integral indicator computing may differ depending on the multi-criteria method ap-plied. We will use the most popular two methods: Simple Additive Weighting (SAW) and multi-criteria complex proportional method (MCP) (Saaty 1980, 1994; Ginevičius et al. 2006; Ginevičius 2006, 2008; Ginevičius, Podvezko 2008a, b; Zavadskas et al. 2006, 2008; Zavadskas 2008; Turskis et al. 2009). Not going into details, we just recall principles of multi-criteria methods’ application. Multi-criteria


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methods are devised to connect the product of two values. The first value is significance or weight of a particular indicator included into system; the second value is the value of the indicator, for which signifi-cance has been determined. usually significance is set as decimals, sum of which is equal to one. The first value is significance or weight of a particular indica-tor included into the system; the second value is the value of the indicator, for which significance has been determined. usually significances are set as decimals, the sum of which is equal to one (1):

∑=

=m

iiw

11

,

where wi – i- significance of considered indicator; m – number of indicators included into system (i = 1,...,n). In our case multi-criteria evaluation was performed on 19 indicators’ basis (Table 1). Develop-ment of Lithuania, Latvia and Estonia was estimat-ed taking annual values of considered indicators rij (i = 1, ... m; j = 1, ..., n), where m – number of indica-tors, n – number of countries.

We adopted an idea to model mathematically plau-sibly three different approaches to development; the first one would emphasize institutional aspects of de-velopment, the second one would emphasize socio-economic aspects, and in the third case all indica-tors included into the system would be considered as equally significant. Comparisons of resulting ag-gregated indicators’ values would reveal how much adopted approach reflected by attributed significan-ces affects the final result. To get answers to the raised scientific question, three different situations are be-ing mathematically modeled. In the first situation in-stitutional aspects of development are considered as the most important and, appropriately, institutional indicators receive the highest significances. In the second situation economic aspects are more stressed, hence, higher significances are attributed to them. In the third situation economic and institutional aspects are considered equally important; hence, all the indi-cators receive equal significance. (see Table 3, 4, 5).

As noted above, in the first modeled situation we as-sume that institutional aspects of development are being emphasized. Hence, economic indicators are being considered as less important in comparison with institutional ones, when the level of sustain-able development is estimated. The application of the MCP method provides us with results: in the

averaged period of 2004-2010 Estonia is the coun-try, which among the Baltic countries achieved the highest level of development (after the Eu-15). Ac-cording to the calculations, Lithuania and Latvia ap-pear in the second and the third place, respectively. The application of the SAW method provides us with similar results (see figure 1, 2).

0 0,1 0,2 0,3 0,4 0,5 0,6

EU27

EU15

Estonia

Latvia

Lithuania

First situationSecond situation

Third situation

figure1. Aggregated Assessment of the Baltic Coun-tries in the Eu Context during the Averaged Period of 2004-2010; MCP Method.

0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1

EU27

EU15

Estonia

Latvia

Lithuania

First situation

Second situation

Third situation

figure 2. Aggregated Assessment of the Baltic Coun-tries in the Eu Context during the Averaged Period of 2004-2010; SAW Method.

The Eu-15 countries appear to be better developed than Lithuania, Latvia and Estonia. If the European context is taken into consideration, the Eu-15 coun-tries get into the first place, Estonia gets into the sec-ond place, the Eu-27 get into the third place, and the fourth and the fifth is occupied by Lithuania and Latvia, respectively. As we see, the Eu-15 countries remain in the first place in all three modeled situations applying two different methods – MPS and SAW. In the second mathematically modeled situation socio-economic aspects of development are stressed; the highest significances are attributed to the indicators included into the group of economic ones (Table 4). Data employed in the calculations represent math-


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ematical averages of the selected indicators, comput-ed for the period of 2004-2010. Rationale behind choosing of averages lies in the following considera-tions. As we know, macroeconomic conditions dur-ing the last years have been changing drastically in the majority of countries. The notion of sustainable development embraces a vast array of dimension of development, hence, to avoid distortions we decided to base our countries’ comparisons on the period av-erages, as providing more objective insights into the processes of sustainable development. Aggregated indexes computed for Lithuania, Latvia, Estonia, the old European union (Eu-15), and the extended European union (Eu-27) countries for averaged pe-riod of 2004-2010 let us draw the following conclu-sions. (figure 1, 2). The Eu-15 countries remain in the first place; however, the SAW and MCP methods provide us with rather different results: Estonia and the Eu-27 countries change their position, and we see the Eu-27 in the second place, Estonia in the third place, Latvia in the fourth place and Lithuania in the fifth place (figure 1). Note the first situation when Lithuania was in the fourth place. However, when the SAW method is applied (figure 2), we see different situation while, the results remain the same as in the first modeled situation. In the third mod-eled situation we assume that socio-economic and in-stitutional aspects of development are being treated as equally important, and, hence, equal significances are attributed to all the indicators included into the sustainable development system. The application of multi-criteria method provides us with rather similar results as in the first situation, where greater signifi-cances are attributed to the institutional indicators. In the averaged period of 2004-2010, Estonia is the country, which among the Baltic countries achieved the highest level of development (after the Eu-15). The same applies if compared with the first situation: Estonia surpasses the Eu-27 countries. According to the calculations, Lithuania and Latvia appear, in the fourth and fifth place, respectively (figure 1 and 2) (Application of both multi-criteria methods (SAW and MPC) provides us with rather similar results). If the European context is taken into consideration, the Eu-15 countries get into the first place, the Eu-27 gets into the third place, the second place (third in the second situation (MCP method)) is occupied by Estonia, the fourth and the fifth places are occupied by Lithuania and Latvia, respectively. To conclude, the application of different methods provides us with

rather similar results, with exception of the second situation when applying the MCP method. Note that in all three situations Estonia was in the second place except the second situation according to the MCP method (see Table 2).

table 2. Countries’ Ranking according to General-ized Situational Results

1 situation 2 situation 3 situation

MCP SAW MCP SAW MCP SAW

Eu(15) 1 1 1 1 1 1

Eu(27) 3 3 2 3 3 3

Estonia 2 2 3 2 2 2

Lithuania 4 4 5 4 4 4

Latvia 5 5 4 5 5 5

conclusions

The scientists asserting prime importance of the institu-tions in the process of development have disagreements on the range of questions, for example, the definition of institution (whether political and economic institu-tions should be distinguished; whether institutions and organizations are synonymous, origin of institution, i.e. endogenous versus exogenous, etc.). Despite the fact, that there are no consensus about the definition of institutions, scientist agree, that properly functioning institutions are essential for sustainable development in the realization of social, economic, and environmental aims set by the society.

Tackling institutional development impacts on sustain-able development in their research the authors distin-guish two general groups of indicators: economic and institutional ones. It is obvious, that those groups over-lap in some respect; therefore the selection of sustain-able indicators’ system is complicated and partly sub-jective. for multi-criteria evaluations, the indicators’ system has to be sufficiently concise, comprising indi-cators quantitatively available. Hence, reflecting insti-tutional performance requires shortcut of other aspects of sustainable development.

To summarize the specifics of application of multi-cri-teria method, we need to emphasize that despite the fact that methods are quite different the selection for particular methods for research, has less impact on cal-culation results, than the attributed significance to one or other group of indicators.


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table 3. The first situation. Institutional aspects of development are considered as the most important and, appropriately, institutional indicators receive the highest significance.

indicators Score Signi- ficance

Socio-economic

GDP-current prices (euro per inhabitant) 0.19 1.00% 0.01

Total R&D expenditure % of GDP 0.19 1.00% 0.01

Annual inflation rate 0.19 1.00% 0.01

Business investment, % of GDP 0.19 1.00% 0.01

Level of the Internet access to households 0.19 1.00% 0.01

Labour productivity per person employed 0.19 1.00% 0.01

General government debt 0.19 1.00% 0.01

fDI investment intensity 0.19 1.00% 0.01

Inequality of income distribution 0.19 1.00% 0.01

unemployment rate, % 0.19 1.00% 0.01

Institutional

Rule of Law 1.9 10.00% 0.10

Voice and accountability 1.9 10.00% 0.10

Government Effectiveness Index

1.9 10.00% 0.10

Regulatory quality 1.9 10.00% 0.10

Level of citizen’s confidence in the Eu institutions

1.9 10.00% 0.10

Index of Economic freedom

1.9 10.00% 0.10

Corruption Perception Index

1.9 10.00% 0.10

E-government availability online

1.9 10.00% 0.10

Voter turnout in national and Eu parliament

1.9 10.00% 0.10

19 100.00% 100.00%


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table 4. The second situation. Socio-economic as-pects of development are considered as the most im-portant and, appropriately, socio-economic indica-tors receive the highest significance.

indicators Score Signi-ficance

Socio-economic

GDP-current prices (euro per inhabitant) 1.81 9.53% 0.10

Total R&D expenditure % of GDP 1.81 9.53% 0.10

Annual inflation rate 1.81 9.53% 0.10

Business investment, % of GDP 1.81 9.53% 0.10

Level of the Internet access to households 1.81 9.53% 0.10

Labour productivity per person employed 1.81 9.53% 0.10

General government debt 1.81 9.53% 0.10

fDI investment intensity 1.81 9.53% 0.10

Inequality of income distribution 1.81 9.53% 0.10

unemployment rate, % 1.81 9.53% 0.10

Institutional

Rule of Law 0.1 0.53% 0.01

Voice and accountability 0.1 0.53% 0.01

Government Effectiveness Index 0.1 0.53% 0.01

Regulatory quality 0.1 0.53% 0.01

Level of citizen’s confidence in the Eu institutions 0.1 0.53% 0.01

Index of Economic freedom 0.1 0.53% 0.01

Corruption Perception Index 0.1 0.53% 0.01

E-government availability online 0.1 0.53% 0.01

Voter turnout in national and Eu parliament 0.1 0.53% 0.01

19 100.00% 100.00%

table 5. The third situation. Socio-economic and in-stitutional aspects are considered equally important; hence, all the indicators receive equal significance.

indicators Score Signi-ficance

Socio-economic

GDP-current prices (euro per inhabitant) 1 5.26% 0.05

Total R&D expenditure % of GDP 1 5.26% 0.05

Annual inflation rate 1 5.26% 0.05

Business investment, % of GDP 1 5.26% 0.05

Level of the Internet access to households 1 5.26% 0.05

Labour productivity per person employed 1 5.26% 0.05

General government debt 1 5.26% 0.05

fDI investment intensity 1 5.26% 0.05

Inequality of income distribution 1 5.26% 0.05

unemployment rate, % 1 5.26% 0.05

Institutional

Rule of Law 1 5.26% 0.05

Voice and accountability 1 5.26% 0.05

Government Effectiveness Index 1 5.26% 0.05

Regulatory quality 1 5.26% 0.05

Level of citizen’s confidence in the Eu institutions 1 5.26% 0.05

Index of Economic freedom 1 5.26% 0.05

Corruption Perception Index 1 5.26% 0.05

E-government availability online 1 5.26% 0.05

Voter turnout in national and Eu parliament 1 5.26% 0.05

19 100.00% 100.00%








eMPoWerinG inStitutionS: a caSe for connectinG buSineSS and tHe acadeMe tHrouGH PhroneSIS

Mantas bileišis

Mykolas Romeris university, LT-10101 Vilnius, Valakupių Str. 5E-mail: [email protected]

Received 22 August 2011; accepted 15 December 2011

abstract. Arguably World War II had a fundamental and profound impact on the Western culture, practices and institutions. One central feature of this impact was the disillusionment with the capacity of social sciences to help policymakers improve society. The past 60 or so years have seen a major crisis of identity throughout the disciplines of social science. On one hand, positivism stood on the premise that the war was a result of irrational and pseudoscientific totalitarian social theories; on the other hand, post-modernist (and various other “post-isms”) raised doubts about the possibility of social science being something more than just another variation of totalitarian ideology. This polarization has seen animated polemic and methodological confrontation with seem-ingly no victors. As a result, social science as a whole lost its reputation as a credible source of knowledge for suc-cessful action. A strand of social science reformers in various disciplines are trying to build alternative definitions of what social science ought to constitute which would accommodate claims of both warring sides. However, persuasive as these integrative attempts may be, such ideas are having a hard time of becoming the mainstream of social science. By borrowing from institutionalist perspectives, this paper constructs an argument that the reason for the lack of relevance of social science in business and policy is not so much a methodological weakness of the science as it is the incompatibility of institutionalized interest between business and the academe.

Keywords: Phronetic Social Science, Institutionalism, Positivism, Structure-agency Problem, Applied Social Re-search, Institutional Inertia.

reference to this paper should be made as follows: Bileišis, M. 2012. Empowering institutions: a case for con-necting business and the academe through phronesis, Journal of Security and Sustainability Issues 1(3): 177–185.

jel classifications: B59; D02, H83.

1. introduction

Herbert Simon, a political scientist by training who earned the Nobel Prize in Economics (1978) for a study in what essentially can be attributed to man-agement and/or public administration studies and later expanded on his work by contributing to com-puter sciences and cognitive psychology, is a person whose work transcends disciplines and all disciplines are honoured to having him as one of their own. But at the same time his case is illustrative of the gross inadequacy of any organizational arrangements in social science that are based on subject matter. The very core of the added value of the work of a social scientist is the novelty of finding connections be-tween social phenomena that were not known previ-

ously. And this cannot possibly be helped by framing his inquiry within a discipline. yet, if the statement above is possible to have broad agreement on, why is it that scientific disciplines persist? Norkus (2008) suggests that formation of social science disciplines is contingent upon the needs of policy makers of other founders of academic institutions. Modern social sci-ence disciplines, such as political science, were only possible under democracy to study democracy; eco-nomics was needed only after capitalism was there to be studied and so on. However, once a discipline is established, it cannot be easily dissolved. There are several attempts at explaining why the phenomenon of institutional inertia occurs. Most of these expla-nations are variations upon a classical social science problem of structure-agency relation. This paper

M a n t a s B i l e i š i sEmpowering Institutions: a Case for Connecting Business and the Academe through Phronesis

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claims that the institutionalization of a scientific dis-cipline comes not only with a name but also with an agenda. And this agenda over time may start to sig-nificantly differ from the needs of the outside society. Consequently, the argument why businesses, policy-makers and the academe might not be able to find a common language is not the disparities in opinion among academicians on the issues of methodology, epistemology or ontology but, rather, disparities among the interest of academic and other institu-tions, which may be so deep seeded that become un-reflected and therefore almost impossible to uproot.

2. “Schizophrenia” of Social Science: Structure-agency Problem

Simon in his 1947 (1997) study says that social sci-ence can be suspected of being schizophrenic. On one hand it describes history as grand schemes which become reality because they are of superior rationality compared to other scenarios. Here individuals have no power to affect history and can only act ration-ally in-step with events or be swept away by them. On the other end of the spectrum lie froidian inter-pretations that all human action is irrational, driven by instincts and therefore early childhood experience events are radically unpredictable.

Simon himself has sided with the determinist camp. for him rationality is a measurable element of social reality. In the broadest sense adherents to this ap-proach can be called positivists. Positivism for Simon was a must for social science if it were to become relevant in the true sense of the term “science”. In 1946 Simon attacked administrative theory as being a methodologically unsound arena for production of proverbs, which often are contradictory and do not represent scientific knowledge. The method he called for was the one borrowed from natural sciences which saw social reality only as a more complex extension of the natural world. for positivists the reason why there is a lack of precision in measurement and pre-dictions of social science research is an issue of tech-nology, which in turn is an issue of time.

But positivism had always had its discontents. The issue at the heart of positivist and anti-positivist de-bates can be traced to the question of human subjec-tivity. The most radical idea that renounced human subjectivity can be attributed to the 18th century french mathematician Pierre-Simon Laplace who suggested that if it were possible to know all the posi-

tions of all atoms at any one time, it would also be possible to calculate all the past and future events. The system that would have such ability would be all-knowing. This deterministic approach that has become known as Laplace’s demon is no longer con-sidered feasible (Waldner 2002). yet even if deter-minism in Laplacean terms is not the endgame for science, the idea that human subjectivity can be ob-jectivized is still an issue at large.

Empirically testing the idea that subjectivity is only possible when there is “the Other” is a tricky issue because we as persons live in the world filled with others. yet, in terms of interpersonal relations the impossibility to transcend the “abyss of the Other” is at the core of our subjectivity (Zizek et al. 2006). Paradoxically by becoming objective we inevitably subjectivize the other and vice versa. Science as an institution can similarly be accused of being able to exist only within a similar paradox on an inter-in-stitutional level. According to Žižek, “objective” sci-entific knowledge is only possible in a society which accepts “irrational” God (Zizek et al. 2006).

The problem for positivism can be summarized by the fact that separating objects and subjects in social inquiry is next to impossible because the researcher can never rise above the society, he is lodged in it himself and therefore is always subject to “double contingency” (Luhmann 1995).

Double contingency manifests itself through the in-ability of individual to know the true motives of his counterpart in any interaction (Luhmann 1995). Therefore, one is always immersed in the idle at-tempts to interpret what the other means when he or she says or does something. The positivist solu-tion to this problem is the attempt to measure and quantify behaviour (Bryman 2008). yet, the value of such knowledge is of little use in everyday practice. Thus, we are faced with a seemingly insurmountable problem. According to one approach, human moti-vations arise in the closed system of ego and alter ego of the human psyche (and constitute human agency) and both are unpredictable and irrational (Luhmann 1995). Conversely, the “scientific” approach to social reality can only observe and generalize behaviour in the belief that broader social forces (social structure) ultimately determine human action.

The structure/agency debate can be considered the core question for social theory which has character-ized the academic debate throughout the history of


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modern social science (Ritzer 2008). The moderniza-tion of society is a complex process that continues to fascinate historians. It has ushered a variety of struc-tural changes in society, such as leisure, urbanization, nationalism, capitalism and the pursuit of efficiency which is driven by and drives itself technological ad-vance. All these are features of a society not known in the millennia of human existence before. Social theories that attempted to explain this unprecedent-ed development had their work cut out for them try-ing to find the underlying causes for this. And the major question that structured academic debate was whether modernization was inevitable or was it a coincidence? And there were plenty of theories that pulled the rope either way: agency centred theories saw the explanation in the action of great visionaries and historical contingency while structuralists sought to switch the hen and the egg by claiming that mod-ernization was an inevitable outcome of history and geography and that personalities that actually are as-sociated with particular events had little more than instrumental role to play in this process. And it was only comparatively recently (past 30 years) that so-cial theorists dissatisfied with the inability of either approach to resolve outstanding issues attempted to construct alternative approaches in order to come to some sort of unifying solution (Ritzer 2008). The works of the likes J. Habermass, A. Giddens, N. Elias have offered theories which tried to reflect upon the social process not as being determined by either the structure or agency but as a process that is driven by complex interaction between the two. And invariably they all gave some credit to the capacity of human agency to affect the outcomes of social events albeit in a limited way.

This implies that the human agency has capacity to act strategically. And for businesses this indetermi-nable capacity of agents to act strategically, whether it is the government, competition, suppliers or cus-tomers, is what defines constitutes uncertainty and creates risk. And it is by definition the task of the academic field of management to find ways how to minimize the negative effects of strategic behaviour of the participants in the organizational environment and find strategies how to maximize the effects of ac-tions done by the organization itself. But this task has proven to be rather tough and, what is more im-portant, appears to be open-ended.

3. Power vs. Values: instructive case of Public administration

The field of public administration in many respects is different from that of other social sciences in the sense that it had to grapple with the structure/agency problem much earlier than many of other fields in social science. Public administration as an academic field cannot be considered apart from the state and the formation of administrative science originated in the absolute monarchies in Europe in the 17th centu-ry. However, the study was limited to cases and exam-ples with the core concern of managing king’s income and domain (Raadschelders 2008). The European tradition of public administration has remained con-cerned with the issues far removed from politics. for M. Weber the rise of the bureaucratic state is insepara-ble from the development of capitalism. The capitalist system rests upon rational calculation and therefore predictable system of administration and justice is the key to its proper functioning (Ringer 2004).

However, the organic development of the European public administration can be contrasted with the “scientifically”-based and wilful attempts to reform the American state. Prior to the writings of W. Wil-son in the late 19th century, the idea of bureaucra-cy had a low standing in the American public dis-course. American government was organized around the spoils system. The spoils (Cook 2007) system is a feature of radical nature America republicanisms (Stillman 1990). The republican idea contended that government can only be elected; therefore, the win-ner of election would appoint people on the basis of trust rather than professional merit. However, Wilsons’ (1887) essay inspired by the economic ad-vances in Europe and the ideas of Taylors’ scientific management argued that the study of administration had important place in the workings of government. for him administration which is run not through democratic bargaining but through efficient manage-ment is an all important feature of the state. Demo-cratic process alone is not sufficient for a democratic system. Good decisions are worth nothing if they are not implemented properly. Thus, in a paradoxi-cal twist less democracy through more bureaucracy for Wilson actually amounts to more democracy through increased efficiency (Cook 2007). Wilsons’ ideas follow the broader contemporary belief that the development of society is teleological, i.e. is moving towards some final goal or form. This perspective


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known as historicism for Wilson meant that if the uS were to succeed as a state, it had to go in step with time (Pestritto 2005). This resulted in the con-struction of the American administrative state as a political project rather than an incremental outcome interaction among social forces.

But by the middle of the 20th century it was obvi-ous that not everything in the development of the administrative state which was managed according to the latest achievements of “scientific” manage-ment study went according to the expectation. The search for the reasons has resulted in fundamental methodological debate that has been raging in the American Public administration academe for more than fifty years and which by no means has ended. In 1946 D. Waldo published his work on the develop-ment of the American administrative state in which he contended that the real reason for its occurrence were not the structural conditions (such as urbani-zation, territorial consolidation, the need to service capitalism and the obvious success of the hierarchical model in business). It was the political ideology that drove the development of bureaucracy in particular ways (he points the finger of blame primarily on the progresivist movement of which W. Wilson is the most prominent). The main features of the ideology behind the administrative state are the “evangelic of efficiency” and the moral mission of America to ex-port democracy, which was only possible by demon-strating its merit of superior efficiency (Waldo 2007 [1948]). for Waldo subverting the democratic proc-ess with ideology such as described above was unac-ceptable because he saw democracy not as means of progress (which would make it redundant in case it became a hindrance) but as ends.

In the same year Simon (1946) published his paper criticizing public administration theory for being not rigorous enough in its scientific inquiry and therefore producing conflicting results which do not allow for an improvement of administrative performance. This inevitably led to a fundamental rift in the theory of public administration which manifested itself in the open polemic between Waldo and Simon and forced many of the scholars to start taking sides with ei-ther one of them since the early 50s’ (Raadschelders 2008).

The core issue of this debate will resonate with a reader informed in a broader social theory problem-atic. for Simon the separation of values and facts

was a possible and important exercise in both study and practice of public administration (Simon 1997 [1947]) while for Waldo the two were inseparable (Miller 2007). The reason for the difference is that efficiency for Simon was a value-neutral index of or-ganizational performance while Waldo saw efficiency as a political value in itself and contended that by making a case for the value-neutrality of efficiency one removes it away from the field of political debate and thus reduces the amount of democracy and cre-ates the conditions for the increase of unaccountable bureaucratic power (Harmon 1989).

Arguably in human society the question of power can never be overlooked. And in some recent litera-ture the conceptualization of power is considered to be the key to the resolution of the conflict between the positivist and competing arguments. One such attempt is that of flyvbjerg (2001). flyvbjerg con-tends that the problem with social science is that it is conceptualized in a similar way as natural science and that this approach is fundamentally flawed. Or as Miller & fox (2006) put it: “rational-comprehensive social science is a mistake the Enlightenment”. To as-sume that such a thing is possible means an assump-tion that a society is inhabited by predictable, rational and maximizing individuals. for flyvbjerg attempts to mimic natural science in social research are misled because modern understanding of a science overlooks certain modes of knowledge which were fundamen-tal in ancient philosophy. In Nicomachean Ethics Ar-istotle outlines three intellectual virtues: techne, ph-ronesis and episteme (Eikeland 2007). Techne is con-cerned with skill and calculation and has given rise to technology, episteme on the other hand has given rise to the theory of knowledge and abstract science that discovers natural laws and produces explanatory and predictive theory. Social sciences attempts to dis-cover natural laws for society have all but failed. One explanation may be that there are fundamental irra-tionalities behind the rationalization of society itself. for Weber rational behaviour in secular capitalism was only possible given the irrational belief of pre-destination which allowed for a rule abiding activity in economy in the single aim of profit maximization (Kim 2004). But in a secular setting an argument for rationality and objectivity can only exist provided that there is a possibility to separate mind and emo-tion inside a human (Martin 2007). Discredited as it maybe, this belief is so strong that for Hood (2007) it is amounts to a form of religion. And if we ac-


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cept that impersonality is impossible in any social setting we can claim that a belief in rationality and objectivity than we must accept that this belief must serve a certain function in order to explain its per-sistence. from this perspective a claim can be made that claims of science to rationality and objectivity allow for the legitimation of its institutional power. However, such power depends on the credibility of the outputs that science produces. Therefore, it may be no coincidence that the field of public administra-tion has produced the first attempts to differentiate between social and natural sciences by investigating alternatives to the episteme. Notably, this idea was put forward by Morgan (1988) as a consequence of the methodological crisis brought about by Waldo/Simon debate.

4. Paradigms: Good for institutions bad for cooperation?

It has become a convention to suggest that coopera-tion is the mechanism that produces greatest social good when considering relations between Business and the Academe. At first glance this seems perfectly feasible as Business and the Academe perform dif-ferent social functions which are complimentary: universities have a task to develop technology and train personnel and businesses have a task to put these technologies and personnel to good use driving profitability. However, the separation is not as clear cut as one would want. universities themselves have stakeholders who have agendas either for profitability (in case of private institutions) or accountability (in case of public institutions) while businesses can go about training personnel and developing technology in-house. Therefore, it is not given that an academic and business organization would cooperate when put together and (if they do) produce added value.

from the point of view of social sciences, the value that can be provided to a business is problematic in a sense that the product is seldom tangible. And the case is completely opposite when natural and techno-logical sciences come together with a business. Con-sider this: a new design of a washing machine either works or it does not and either way it can be quanti-fied and business plans can be adjusted accordingly. Whereas when a business consultant comes knock-ing, doing as he says is impossible to compare against a range of alternative strategies because they simply never happened. If the performance of a business im-

proves greatly or it collapses to make a judgment on the worth of the consultant, advice is rather simple yet in most cases the results ends up being in the “grey zone”. So, businesses are not necessarily ready to try out the discoveries of social sciences on their own skin.

On the academic side of the interaction, the issue is still more complex. The Academe as a whole has never been established to serve the interests of capi-talism and very often it is a potent source of criti-cism towards capitalism. Much of social science aims at changing the way government works rather than the way business works. And much of the research finds that this improvement can come at the expense of businesses. This internal institutional disconnect within social science works on several levels: first, it is the legitimation of research conducted in a “scientif-ic” way and, second, it is the disciplinary and “para-digm” differentiations that decentralize social science to a point where one can get irreconcilable conclu-sions on the management of any given problem.

It is a fact that academic institutions are the place for the socialization of the elites of any political sys-tem. Science as the institution for the production of rational knowledge serves a pivotal ideological func-tion. In the modern rationality the main myth un-derpins social cohesion. Through this, it is possible to explain organizational isomorphism towards the Weberian “iron cage” where the legal-rational model of bureaucratic governance becomes crucial in main-taining this myth that society is governed through ra-tional and calculated decisions that produce the best possible outcomes (DiMaggio and Powell 1991). However, recent decades have seen the rise of criti-cism towards the bureaucratic model and sustained attempts to find new organizational solutions to the challenges of modern capitalism (Child 2005). How-ever, the ability of business and political leaders alike to claim rationality in their decisions remains the necessary minimum that legitimizes their right to a leadership position.

This puts disciplines of social science in a seemingly impossible situation: the idea of rationality demands that there should be a set of laws which determine the behaviour of society, knowledge of which would allow the conduct of leaders to produce the best pos-sible outcomes. The only reason why an academic institution can hope to get financing is by sustaining this position. On the other hand, attempts to find


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these “laws” over the past century have failed miser-ably and many thinkers from within the institutional ranks become dissident with such a view. yet embrac-ing the position of these dissidents at the organiza-tional level would be suicidal to an institution be-cause it could not possibly claim to generate superior knowledge to any other form of knowledge, such as shamanism (see e.g. Stewart 2009).

However, obvious persistence of academic institu-tions is a testament to the fact that there was a way found around this problem. And the solution came in the form of a notion of paradigm. Physicist-turned-historian T. Kuhn is credited with proposing the idea that scientific knowledge comes about not through cumulative process but through revolutionary dis-covery that contradicts all or most previous scientific beliefs. Kuhn has demonstrated this by analyzing the genesis of the field of physics (1996 [1962]). But nat-ural science has always been a source of inspiration for the social and it was only a matter of time un-til the idea of paradigms became an inseparable part of the social sciences. But the social science idea of paradigm came with a twist. If for Kuhn science can only be considered as such only when a given field operates within a single paradigm, in social sciences this stops being the case (Guba and Lincoln 2004). In social sciences we can discern a variety of para-digms. And what is even odder is that paradigms do not really need to be institutionalized but are often the researcher’s result of creative work through which he positions his beliefs relative to other researchers or groups of researchers whom he generalizes into para-digms. These can be generalized to the entire social sciences (e.g. Ritzer 2008, Guba and Lincoln, 2004, Blaikie 2010) or limited to a particular discipline (e.g. Sil and Katzenstein 2010, Hay 2002).

A case may be made that the attractiveness of para-digm discourse in the social science is so great be-cause to an extent it solves the contradiction between rationality and the impossibility to prove that ration-ality is ultimately possible. Paradigm allows a scien-tist to assume a set of “axioms” and not worry about trying to prove their factuality. They are simply pre-sented as part of the paradigm he operates in. This allows producing logically and empirically consist-ent research and knowledge and avoiding irrefutable criticism from peer who may be representatives of some other paradigm. Both for the researcher who gets his payroll from the academic institution and for

the institution itself it is a positive outcome. for the former it saves a great deal of time and effort for de-signing and theorizing research which ultimately has little added value to himself; for the latter it allows to uphold the reputation of a place that produces objec-tive knowledge.

But this situation has a dark side as it demonstrates the typical features of the dilemma of the “tragedy of the commons” (coined by Hardin 1968). Tragedy of the commons is a situation when there is useful recourse that is not owned by anyone. All the users of such recourse will not be motivated to use it sustain-ably because individual restraint will only put one in a position where the person who shows less wins more. ultimately, this leads to the depletion of the recourse. A claim of science as a whole to the produc-tion of objective knowledge can be considered such a recourse. When contradicting paradigms claim to be the ones that produce the best type of knowledge, it is impossible (of course it may equally be impossible to do that for an insider) for an outsider to evaluate which of the claims has greater merit. And this for a rational businessman means that investment into such research is not a good idea. Thus, the competi-tion among paradigms serves not to distribute the funds that would be available to social research but rather to deplete by discouraging investment.

5. alternative: Phronesis as Grounds for cooperation

following Weber, flyvbjerg (2001) differentiates between the value rationality and instrumental ra-tionality. He contends that this is a very important differentiation. Modernity has continued along the path of favouring instrumental rationality because the rationality of homo economicus is considered as a given (Miller and fox, 2006). On the other hand, ac-cording to Weber this results in the production of the iron cage where the calculation of means supersedes the understanding what ends social ends should any action be achieving (Kim 2004). Social science is ac-complice to it if it operates along the lines of positiv-ism. In other words, science in the natural science sense of the word cannot possibly hope to provide meaning and therefore cannot be considered suffi-cient for social action (Lindenfeld 1980).

Maintaining the argument that social science can produce deterministic knowledge about the causal-ity of social events is a position that the social sci-


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entist can never hope to defend in a discussion with a natural scientist. As feynman once put it: “social science is an example of pseudoscience, they follow forms but they don’t get any laws” (feynman, 2000 [1981]). However, for flyvbjerg (2001) this is only the case when a social scientist is trying to beat the natural scientist at his own game. Social inquiry has its strengths in a completely different form of knowl-edge. Aristotle flyvbjerg contends that the Enlight-enment philosophy overlooked a fundamental form of knowledge that of Phronesis which was an integral part of prior understanding.

flyvbjerg (2001) begins with the notion that hu-mans are self reflecting which is not available to non-living objects or non-conscious animal. That is the reason for the problem of prediction as Karl Pop-per observed: “human behavior depends upon new knowledge” (Checkland 2007). And no human is in any position to know what future knowledge would because as the logic tells us he would know it in the present. This self-reflection means that a useful prod-uct to businesses and societies can only be produced through value sensitivity and open system of praxis (realized through social commentary and social ac-tion). This means that social scientist ought to oper-ate through the accumulation of experience which makes him better positioned to offer a superior strat-egy to the consumer of his knowledge. for that the understanding of ever changing power relations in the society is paramount. And this is where the added value of a scientist and a social scientific institution might lie: the ability to continuously observe and up-date their knowledge and learn from prior research giving understanding of society that is unattainable or too expensive for anyone business institution.

flyvbjerg (2001) propose to approach to the Phronet-ic research by asking four value-rational questions: (i) Where are we going? (ii) Who gains, who loses, and by which mecha-nisms? (iii) Is it desirable? (iv) What should be done?

These are the questions that ultimately interest the stakeholders outside the institution of science and these are the questions that can realistically be hoped to be answered by social inquiry.

6. institutional Persistence: obstacle for Phronetic Social Science

One important lesson that Putnam draws from his 1993 study is that social institutions are incredibly persistent and even centuries of government imposed social practice are not guaranteed to uproot the mil-lennia-long civic practices.

A strand of Organizational Theory that is known as institutionalism over the past decades has tried to develop a theory explaining why certain institutions are impossible to change. Scott (2008) summarizes that institutionalization happens at three levels: (i) regulative, (ii) normative and (iii) cultural-cognitive. Although institutions can be understood as sets of rules to which individuals feel the need to abide, they are inseparable from organizational arrangements. These can be incredibly varied. for instance, monog-amous family as a network of micro-organizations is astoundingly persistent despite the fact that over the period of secularization of the state practice of life in the family has had no formal coordination.

from this point of view, universities, Colleges, Capi-talism, and Corporations are all institutions. To some extent they all have originally been established in act of state-regulative or church-regulative (in case of universities) institutions. However, later they devel-oped specific organizational forms. Over time society socialized to accept that these organizational forms are the proper way to go about business and become limited in their imagination. functionaries of any such organizations have an interest in the perpetua-tion of these practices. This results in the institution-alization of practice towards a deeper (normative) level. ultimately, some practices through tradition become so deep seated they are bound to individual identity. They become the cultural-cognitive factors of society and attempts to alter them cause physi-ological and neurological reactions (Newton 2007).

Therefore, we can conclude that policy failures can often be attributed to regulative attempts to alter so-cial practices at the normative or cultural-cognitive level. Trying to reform social science along the looser lines of phronesis can be a very dangerous task. In the fields of economics and political science there are movements aimed at such reforms known as post-autistic economic and perestroika respectively. In the case of political science, the name may be instructive. The Soviet union was built by force and force was


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the legitimizing principle which allowed it to exist. The very moment the Soviet leadership attempted to remove this practice, the entire system lost any legiti-macy with society and resulted in a collapse. And it is not unwarranted to question whether the Academe, as we know it today, can successfully reform from within because a Phronetic challenges the very argu-ment which was used to establish many of the social science disciplines.

7. conclusions

What is said above leads us to conclude that coopera-tion between Business and Science (especially social science) raises a set of fundamental challenges to the Academe which it at present setup may not be able to accommodate. Examples of Science-Business co-operation success are generally found in the technol-ogy sector which does not suffer from the Simonian “schizophrenia”. Attempts to heal social science have led nowhere so far. And there is an increasing cho-rus of voices, which call for the reformation of social science instead of trying to find laws of social reality which may well not exist. And even if they did, it is hard to imagine that the scientist being only another human may attain them. However, few reforms yield results that reformers initially hope to achieve. And in the case of social sciences, the dangers are obvious. So, to conclude a metaphor from geography may be ap-propriate. Hay and Lister (2006) propose to view the society as an “institutional landscape”. In this land-scape some institutions are stable and powerful, others are more dynamic constantly interacting with other institutions giving rise to new institutions and de-stroying the less well adapted. Any business in this en-vironment has a lot of “blind spots” in this landscape because opponents may be hiding behind seemingly harmless institutions. And the added-value, which the social researcher may bring to a business, is providing it with a map of institutions. This map may never be as accurate as reality, but no map is. It is this cartograph-ic work which needs to constantly be updated that is the basis for social scientific knowledge and reflection (Hood 2007). With this understanding we must also be ready to accept that the organizational settings we are familiar with may be the impediment to this work rather than help. So in the spirit of Phronesis we must constantly be on the lookout for cases of success which will come from where all cases of success come from: entrepreneurial trial and error.

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inforMation tecHnoloGy SySteMS and tHeir iMPact on tHe eMPloyMent leVel in tHe PoliSH banKinG Sector

jerzy Kaźmierczyk

Poznan university of EconomicsAl. Niepodległości 10, 61-875 Poznań, Poland

E-mail: [email protected]

Received 19 July 2011; accepted 10 December 2012

abstract. The issues of techniques and technology are frequently discussed in economic literature. A variety of professional terminology, language phrases and sometimes neologisms functioning in practice and professional literature of the subject indicate the importance of techniques and technology for the banking activities. One of the aspects of techniques and technology are information technology (IT) systems supporting human resource (HR) management and operation information technology systems. The purpose of this article is to present, analyze and evaluate the impact of information technology systems on the level and structure of employment in the Polish banks. The author’s intention is to support the thesis that application of information technology systems in the Polish banking systems has caused a significant change in the level and structure of employment. In the analysis, the usage of the IT systems supporting human resource management has been depicted in order to finally be able to evaluate the impact of the IT systems on the level and structure of employment in banks.

Keywords: Banks, Eelectronic Banking, Employment, Labour and Employment, Communication Networks, Communication Systems, Technology.

reference to this paper should be made as follows: Kaźmierczyk, J. 2012. Information technology systems and their impact on the employment level in the Polish banking sector, Journal of Security and Sustainability Issues 1(3): 187–195.

jel classifications: D8, G21, J20, J21.

1. introduction

The issues of techniques and technology1 are fre-quently discussed in economic literature. Attention is often drawn to the strength and even non-reversi-bility of changes which take place in this field. As ex-emplified by T. Białobłocki, J. Moroz “Rushing ma-1 It is assumed that technology is “a part of human activity which purpose is to use knowledge (science), to produce things, create phenomena which do not exist in nature and transform nature; major factor of civilization de-velopment and, together with science, significant part of human culture. T. is called also a way and fluency of doing certain things in particular field, e.g. playing a musical instrument, t. in football, t. in mental work” Technology is “a part of technique dealing with preparation and application of production and processing procedures which are most convenient in given conditions; e.g. t. chem. biolog. (biotechnology), mechanical technology (changes of materials’ shape and look caused by mechanical actions e.g. welding, cast-ing); depending on the final products: t. paper, gum, machine construction” [http://encyklopedia.pwn.pl, as of 12.1.2011]; from now on the author will treat techniques and technology as one employment determinant.

chine of technological progress cannot be stopped…” (Białobłocki & Moroz, 2006). J. D. Sachs is of the opinion that “…we live in the network age...” (Sachs, 2008). A lot has been written about “technological revolution” (Parysek, 2008). Similar opinions may be found both among economists, sociologists, political scientists as well as among other representatives of the scientific circles and economic practitioners.

A variety of professional terminology, language phrases and sometimes neologisms functioning in practice and professional literature of the subject indicate the importance of techniques and technol-ogy for the banking activities. Economic processes and also technical and technological progress have reached such a pace that in practice almost nobody is now able to be well informed about techniques and

J e r z y K a ź m i e r c z y k Information Technology Systems and their Impact on the Employment Level in the Polish Banking Sector

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technology sensu largo. One of the aspects of tech-niques and technology are information technology (IT) systems supporting human resource (HR) man-agement and operation information technology sys-tems. The purpose of this article is to present, analyze and evaluate the impact of information technology systems on the level and structure of employment in the Polish banks.

The main sources used in the article are as follows:• professional literature,• reports, strategy papers, prospectuses and other documents published by banks and supporting insti-tutions,• results of a survey conducted among banks’ staff employed in the Wielkopolska region,• results of direct interviews with nine (not ran-domly selected) human resource staff members and members of the management boards of two banks operating in the Wielkopolska region.

Questionnaires and interviews were conducted in2

2 The questionnaire-based survey was conducted because of the lack of any statistical data other than aggregated data for the whole financial sector. Official correspondence, e-mails and phone calls with the Central Statisti-cal Office (GuS), Polish financial Supervision Authority (KNf), National Bank of Poland (NBP) and Polish Bank Association (ZBP) show that the institutions do not gather detailed data on employment in the sector. Pilot research was conducted in the last quarter of 2009. first, 93 students of the Poznań university of Economics were asked to fill in the questionnaire. Their comments and suggestions concerning construction of the question-naire were taken into account and the improved questionnaire was distrib-uted among 37 bank employees (both in the region of Wielkopolska, Lu-buskie, Dolnośląskie, Pomorskie and Łódzkie). Guidelines received from the employees were again used to improve the questionnaires. The minimum sample size was taken from the equation n = ualfa^2/(4*d^2), for: estima-tion error d = 0,05; 1-alfa = 0,9; ualfa = 1,64. [Szuman 2008, p57-59]. The minimum sample size was 269. During the research a snowball technique was used. Answers were received from 342 bank employees (out of which 17 were rejected due to their low reliability and credibility). finally, 266 ques-tionnaires were collected from non-management employees and 59 from managers. It should be emphasized that the banks which employees took part in the survey account for over 90% of the total banking sector assets in Poland and employ over 74% of all banking sector employees in the country. Due to its superior position over the rest of the banks, the NBP was not cov-ered by the survey. The questionnaire encompasses the period of 1996-2008 although employees also referred to the changes that took place after 2008. Opinions provided by the surveyed later were analyzed and divided into 32 categories: employees of commercial/cooperative/foreign banks; employees of big banks (according to a classification created by the Polish financial Supervision Authority, assets of these banks are above PLN 50 mio. [Raport o sytuacji banków w 2009 roku, p23]): PKO, Pekao, BRE, ING Bank Śląski, BZ WBK, BGK; „McBanks” employees; women/men; employees working in a bank under 1 year, 1-3years/4-6years/7-17 years/above 12 years; employees of banks which were or were not merged, employees of banks where equity belongs or not to foreign investor; employees of banks that were privatized/employees of banks which from the beginning were in private hands and thus could not be privatized/ bank which were not fully privatized and remain (at least 50%) state owned; employees of headquarters/regional branches/small branches with up to 6 employees/medium-size branch with 7-20 employees/big branches with over 20 employees/ franchise units; employees working in Poznań/outside Poznań; managers of the lower/medium/high level.

2009 and 2010. Two types of anonymous question-naires were used depending on the position the sur-veyed occupied in the company, i.e. managerial or non managerial one, the surveyed were asked to fill in an adequate, anonymous questionnaire.

The author’s intention is to support the thesis that application of information technology systems in the Polish banking systems has caused a significant change in the level and structure of employment. In the analysis, the usage of the IT systems supporting human resource management has been depicted in order to finally be able to evaluate the impact of the IT systems on the level and structure of employment in banks. The author aimed to confirm the thesis that the use of the IT systems in the Polish banking sector caused changes in the level and structure of employ-ment. The use of supporting staff management sys-tems and operation technology systems is presented to be subsequently able to assess the impact of the IT systems on the level and structure of employment in banks.

2. information technology Systems Supporting Staff Management and operation information technology Systems in Theory

One of the technological solutions directly relating to the employment sphere are information technology systems supporting human resource management. They encompass primarily HR databases and more advanced programs of staff management. The afore-mentioned programs may be applied to each step of the contact with employees starting with recruitment, selection, through employment, evaluation, courses and vocational training (Staniewski 2008) of employ-ees and finally finishing the employment span.

As far as recruitment and selection are concerned, the programs supporting staff management collect and classify information on employees. Due to its use, the recruitment process may be completed much eas-ier and faster since they facilitate selection of appli-cants fulfilling certain criteria (e.g. education) among hundreds and sometimes thousands of applications which stockpiled over a longer period. Banks’ human resources databases usually are centrally located in the organizational structure that effectively stream-lines organisational procedures in banks and makes it easier to share information with bank branches and divisions (e.g. when a bank has regional HR centers), and makes it possible for the organisation’s headquar-


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ters to manage bank’s HR department. Today’s ten-dency to introduce new techniques, increased infor-matization and networking (Zacher 2007) extensive application of information technologies in banking processes, or at least their selected elements seems to be a necessary condition for HR services to be man-aged by a headquater.

undoubtedly, operation information technology sys-tems influence the level and employment structure in the banking sector. Often introduction of such systems in banks was expected to make information management more centralized. New the IT solutions favored transferring non-sales units to bank central offices or regional branches. More and more wide-spread application of the IT tools in the Polish banks brought about reduction in back office force and an increase in the level of front office workers (Czapel-ska 2004). Growing centralisation turned other units into sales centres (Harasim 2005). And now people working in the sales units are able to contact credit centres which have been taking decisions via the IT systems.

The situation results in increasing work specialization due to which employees become specialists in rela-tively narrow fields, what in turn creates the necessity of creating teams of specialists in various fields who together are capable of running wider projects. On the other hand, it should be noticed that techniques affect perception, thinking, aims and methods of project execution. Technology imposes new work re-lations and hampers creation of long lasting personal relations at work. Thus, work is losing its “collective identity” (Zacher 2007). Specialized workers concen-trate on their narrow part of executed work and often co-operate with information network rather than a concrete colleague.

As P. Mudie and A. Cottam point out, informati-zation and centralization which causes unification of procedures usually go along with a decrease of employee activity (Bąkowska & Balcerzyk 2008). Informatization causes the increase of control over employee. Sometimes the moment a worker logs into the IT system is seen as a proof of starting work; more frequently gets under the rules that apply to physical work (Jemielniak 2008).

3. information technology Systems Supporting Staff Management and operation information technology Systems in Practice

Data shows that a number of banks in Poland decid-ed to implement the IT-based HR systems. The bank Zachodni Wielkopolski Bank Kredytowy (BZ WBK) which decided to implement one of the most popu-lar systems of the kind – SAP HR – has been using the system to manage the bank’s training information service (Raport roczny 2004, Bank Zachodni WBK S.A.) and since 2004 also its central personnel and payroll register (Sprawozdanie Zarządu z działalności Grupy Kapitałowej Banku Zachodniego WBK S.A. w 2004 roku). It took the bank several years to fully implement the system and the process was finished in 2008 (Sprawozdanie Zarządu z działalności Banku Zachodniego WBK S.A. w 2004 roku). Now the em-ployees have access to their personal HR, salary and training data through interactive online e-HR plat-form (Raport roczny 2008, Bank Zachodni WBK S.A.). Internationale Nederlanden Groep Bank Śląski (ING Bank Śląski) created the HR platform in 2005. Its major task was to help the employees from re-organized departments find work in different units of the bank (Sprawozdanie z działalności ING Banku Śląskiego S.A. w 2005 roku). Administration, HR and payroll procedures were streamlined by means of the system in Pekao as well (Sprawozdanie z działalności Banku Pekao S.A. za 2008 r.). In turn, the SAP sys-tem implemented in 2006 by Bank Przemysłowo-Handlowy (BPH) helped the institution introduce internal electronic document management system (Sprawozdanie z działalności Grupy Banku BPH SA za rok 2007) and document confirmation within the bank’s IT system (Sprawozdanie z działalności Banku BPH SA za rok 2006) and “employees’ development platform” which may be accessed via the Internet. Thanks to the system which was introduced by Bank Gospodarki Żywnościowej (BGŻ) in 2000, the institu-tion could effectively economize on its staff-payroll policy (Raport roczny 2000).

Relatively often employees of banks’ branches receive clients’ credit applications together with all the nec-essary documents, conduct the introductory analy-sis and forward the documents for final analysis to credit centers. Documents are sent either via elec-tronic channels or post. Scoring systems that award points to potential debtors (Sprawozdanie Zarządu z działalności fortis Bank Polska S.A. w 2005 roku) are


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widespread and thus later serve for evaluation of credit standing. The aspect of centralization was launching in fortis Bank in 2005. In turn, BZ WBK in 2001 opened communication center located in Środa Wielkopolska (Sprawozdanie z działalności Grupy Kapitałowej Banku Zachodniego WBK S.A. 2001).

table 1. Implementation of New IT Systems in Banks in 1996-2008 (managers’ opinion)

Criterium All surveyed

A. Implemented new HR system

B. Implemented new accounting

system

C. Implemented basic bank IT system

D. No new system implemented

Missing answers

Together 59 17 28,81% 23 38,98% 29 49,15% 8 13,56% 11 18,64%

Cooperative banks 7 1 14,29% 5 71,43% 2 71,43% 1 14,29% 0 0

McBanks 4 2 50% 2 50% 3 75% 1 25% 0 0

Source: personal research.

The conducted surveys show that almost half of managerial staff concluded that in 1996-2008 their banks implemented basic IT system; 38.98% of the staff confirmed in (Table 1); almost 25% indicated acquisition of HR IT systems. Similar answers were received during the interviews with HR managers and board members. Many answers confirmed the implementation of basic IT system in the cooperative banks and McBanks. The first group may be a prove of mass change of the IT systems after previous stag-nation and backwardness in this field. Introduction of information systems in McBanks seems to have a lot to do with the fact that the banks are quite young. The observations confirm results of interviews con-ducted with HR staff.

from the he analysis of bank reports it results that in 2002 Kredyt Bank (KB) implemented a central-ized information system called Profile (http://www.kredytbank.pl, as of 22.1.2011). Bank ING finished implementation of a newer version of their basic bank system ICBS at the beginning of 2003 (Sprawozdanie z działalności grupy kapitałowej ING Banku Śląskiego S.A. w 2003 roku). In turn, Pekao acquired a new centralized IT system (Rocket) in 2004 (installed in the bank’s all subsidiaries) (Sprawozdanie Roczne 2004, Bank Pekao S.A.). Implementation of a central information system in bank BGŻ resulted inimme-diate employment reductions in the bank’s IT and accounting units (Raport roczny 2004).

Moreover, the systems improved work at banks’ branches by making it possible to cut cost of every-day operations; in particular they reduced salary costs (Raport roczny 2001, BGŻ S.A.). BPH in 1999 im-plemented centralized IT management system after

a merger with Powszechny Bank Kredytowy (PBK) in 2002 and is now a leader in this regard (Raport roczny 2006). In 2006 the bank implemented applications which made electronic circulation of documents and HR decisions possible (Raport roczny 2006). New IT platform in Bank Millenium initiated in 2002 a process of employment rationalization in the insti-tution (Sprawozdanie Zarządu z działalności Banku Millennium S.A. w ciągu 12 miesięcy roku obrotowego 2002).

In 2005 Bank Ochrony Środowiska (BOŚ) imple-mented a CSI project encompassing integration of the IT solutions together with applications enabling intra-country/national payments in euro (Euro-Elixir and Euro-Sorbnet), a credit risk management system and a new version of Comp-Lex system for presentation of internal bank documents. In March 2006 a system of electronic banking for corporate customers was started. Within the emergency plan of the headquarter a plan of electronic filing system of documents in the head office was launched (Raport roczny 2005).

In May 2000, bank WBK and bank BZ (Bank Za-chodni) signed a contract to purchase an ICBS license from fiserv (Europe) Limited to install branch sys-tems in the banks. The aim of the introduction of the integrated, centralized IT system was to improve the merged bank management and organizational structure and consequently to better ways of pro-viding services to the bank’s clients (Dodatkowe noty objaśniające, SAB-RS 2001, Bank Zachodni WBK S.A.). The WBK was completing a B1 program, which included implementation of a new ICBS IT platform. Work organization in the branches was changed.


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Due to the changes, the functions of back office were centralized and processes and the bank procedures were unified. In 2001 within the B1 programme employees of the bank’s branches and the Centrum Wsparcia Biz-nesu (Business Support Center) were trained both in the area of the ICBS maintenance, and new procedure and processes. Till the end of December 2002, the bank organised weekly training sessions in three training centers and managed to train over 4.5 thousand employees. After the sessions, post-implementation complementary trainings were run in the branches. The employees could also participate in the trainings via the Intranet

table 2. Logging to the IT Systems as a Tool of Control to Verify when an Employee Starts and finishes Work (opinion of non management employees)

Criterium All surveyed

A. Logging is used as a control tool

B. Logging is not used as a control tool

C. Hard to say Missing answers

Altogether 266 87 32,71% 164 61,65% 4 1,5% 11 4,14%

Commercial banks 178 66 37,08% 100 56,18% 4 2,25% 8 4,49%

Cooperative banks 28 4 14,29% 23 82,14% 0 0 1 3,57%

Big banks 100 45 45% 47 47% 1 1% 7 7%

Banks with a majority of national capital 61 14 22,95% 43 70,49% 1 1,64% 3 4,92%

Banks with a majority of foreign capital 149 56 37,58% 83 55,7% 2 1,34% 8 5,37%

Privatized banks 94 40 42,55% 48 51,06% 1 1,06% 5 5,32%


and turn for help to a help desk (Sprawozdanie Za-rządu z działalności Grupy Banku Zachodniego WBK S.A. w 2002 roku). Similar trainings were organised by the bank BGŻ in 2003 when the institution im-plemented a new IT system (Raport roczny 2003).

The majority of the surveyed non-management em-ployees (61.65%) have concluded that their bank is not verifying the times they log into the IT systems and is not using the data as a tool of control (Table 2). At the same time, almost 1/3 of the employees (32.71%) were of different opinion. Such supervision was more popu-lar in commercial banks than in co-operative banks and particularly common in big banks, foreign banks and privatized ones. So it may lead to the conclusion that the bigger the bank, the more popular the corporate tools. Big banks tend to use more “mass tools” in their HR policy. Additionally, it turns out that application of such innovative solutions has a lot to do with the origin of foreign strategic capital involved in the bank. foreign capital tends to attract implementation of this type of know how.

4. impact of the information technology Sys-tems on the level and employment Structure in the Polish banking Sector

Employees who concluded that new IT system was implemented in their banks when surveyed assessed that the system caused primarily changes in the or-ganizational structure (35.29% of answers). They also were of the opinion that it did not cause bigger changes in the level of employment and definitely did not contribute to its increase (figure 1).


192

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figure 1. Consequences of the Implementation of New Information System (opinions of managers) (percentages of answers)


Banks tend to see the situation in a slightly different way and from their official reports one can see that the implementation of new IT system entails restruc-turization. This was the case of the bank WBK, where as a result of automatization of processes in regional branches and centralization of back office activities the demand for employee branches decreased. In order to diminish the outflow of specialist caused by the chang-es in work organisation, internal recruitment processes were conducted to fill vacancies within the company. Employment in the bank fell from 9764 at the end of 2001 to 9116 in December 2002 (Sprawozdanie Zarządu z działalności Banku Zachodniego WBK S.A. w 2002 roku). In 2002 the bank planned to lay off 2150 people due to the introduction of the IT new system (Raport roczny 2001, Bank Zachodni WBK). At that time the bank declared that new organisational and technological solutions reduced operational costs of the organisation to PLN 998.1 million, i.e. cut the costs by 7.2% when compared to 2001. Salaries that constituted the major share in the cost structure de-creased by 18% to the level of PLN 412.6 m (Spra-wozdanie Zarządu z działalności Banku Zachodniego WBK S.A. w 2002 roku).

In 2006 the ING also started to dismiss employees because of technological and operational reasons.

The bank signed the agreement with its employ-ees’ trade unions (Sprawozdanie z działalności ING Banku Śląskiego S.A. w 2005 roku). The bank BOŚ assessed that as a result of technological and orga-nizational modernization of the bank (implementa-tion of a centralized IT system, systems supporting management and sales as well as new organizational model), the level of employment in the institution fell by about 3% in 2011, i.e. 50 persons were dis-missed despite the fact that the number of branches rose to 111 (Prospekt Emisyjny Spółki Bank Ochrony Środowiska S.A. w Warszawie 2007). Similar changes resulting from technology advancement took place in the evaluated period in the majority of banks.

All in all, distribution of bank services through elec-tronic channels brought about a decline in demand for workers in the sector. The decline varied across the field of activities undertaken by the banks. J Cza-pelski claims that despite the decline, the number of workers who operate the IT systems has been on the increase (Czapelska 2004). However, bank employees who took part in the survey do not tend to confirm the tendency (47.46%). Only 30.51% of the mana-gerial staff thinks that the number of the IT workers rises (figure 2).

One should not forget that the tendency could have been seen only in the selected areas and thus could have not been felt by all workers, e.g. as much as 52.94% of managerial staff working outside Poznań did see the trend. The trend definitely was not no-ticed in cooperative banks where as much as 57.14% of the surveyed did not feel the change. The lack of such signs could testify the bank’s IT underdevelop-ment. undoubtedly HR specialist tended to pay at-tention to employment levels among the peole oper-ating the IT systems. In this field one could also see the trend for centralisation. Thus the number of the IT specialists hired by regional branches was falling as opposed to the number of people collected in re-gional or central specialised IT centres. HR special-ists pointed out that a number of commercial banks and institutions which give credits established spe-cial help descs, i.e. units which help workers whenever they signal problems with software or hardware. In 2009 ING also signalled that authomatization of nu-merous processes caused increase in employment lev-el (Sprawozdanie Zarządu z działalności ING Banku Śląskiego S.A. w 2009 roku).


193

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figure 2. Increase of the Number of Employees deal-ing with Information Systems in 1996-2008 (opin-ions of managers) (in percentages of answers)


5. conclusions

The issues of techniques and technology are fre-quently discussed in economic literature. One of the aspects of techniques and technology are information technology (IT) systems supporting human resource (HR) management and operation information tech-nology systems. Information technology systems supporting human resource management made cen-tralization of HR possible. Similar to other technical and technological determinants and their introduc-tion forced employees to constant learning.

This process was completed with the centralization of other bank functions which was progressing because of the introduction of the IT systems. Only 13.56% of managerial staff recognised that in 1996-2008 new IT system was not implemented in their bank. Reduction of back office which resulted from the centralisaton increased specialization in the banks. They started to establish centers specializing in nar-row functions, e.g. accounting. Some banks created Shared Services Centers. The fact that due to the changes work efficiency in the centres increased may be regarded as the most important achievement of the IT systems. unfortunately, it resulted in dismiss-al of employees. Some of them were leaving banks and taking jobs in companies which were providing outsourcing services to the very same banks.

Significant majority of banks in Poland implements new IT systems. On the one hand, the systems are a

prerequisite to conduct efficient, centralised banking operations; on the other hand, they often cause signif-icant changes in the area of organization of activities and employment in the banks. SAP and ISBC–type systems enjoyed big popularity among the banks. However, perception of increasing informatization was viewed differently by different groups. While bank management boards perceived IT systems as a factor which increaseed effectiveness and helped cut cost, normal workers tended to pay more attention to the systems’ negative influence. undoubtedly, infor-matization changed employment structure in banks as it strongly centralized bank activities.

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diaGnoSticS of banKruPtcy tHreat to enterPriSeS

Kristina Garškaitė-Milvydienė

Vilnius Gediminas Technical university, Saulėtekio Av. 11, LT-10223 Vilnius, LithuaniaE-mail: [email protected]

Received 25 June 2011; accepted 15 December 2011

Summary. The prepared diagnostics of bankruptcy threatening to the enterprises is submitted in the present thesis. Herein, bankruptcy threatening to the enterprises is being diagnosed as per three stages, i.e. the condition of the enterprise and the reasons, which have determined such condition, are being gradually concretized. The fi-nancial condition of the enterprises and the threat of bankruptcy are being evaluated at the first stage by applying the integrated model, which assists in achieving the generalized evaluation of the condition. The relative financial indices of the enterprise are being analyzed at the second stage seeking for diagnosing the problematic fields of the enterprise. The third stage, at which the absolute financial indices are being analyzed, is aimed at ascertain-ing the reasons, which have determined the condition of the enterprise. The size of the crisis, its activity factors are ascertained considering evaluation indices of the enterprise condition; they allow selecting substantially the bankruptcy prevention measures out of the possible leading set of internal and external measures.

Keywords: Analysis and Evaluation of the Condition of the Enterprise, Diagnostics of the Threat of Bankruptcy, Model of Integrated Evaluation, Relative financial Indices, Absolute financial Indices.

reference to this paper should be made as follows: Garškaitė-Milvydienė, K. 2012. Diagnostics of bancrupcy threat to enterprises, Journal of Security and Sustainability Issues 1(3): 197–203

jel classifications: D0, D20, D21, D22.

1. introduction

Business environment is becoming increasingly com-plicated and vague due to the growing number of various internal and external (international) factors influencing it. To reduce business risk, enterprises adapt and use more and more modern diverse man-agement methods and techniques. However, the sta-tistical data of Lithuania and other countries with market economy show that a large number of en-terprises have become bankrupt, particularly in the time of recession. It is widely accepted that, in most cases, bankruptcy is a worse scenario for many sub-jects and states than making every effort to avoid it. Bankruptcy has grave consequences for society, e. g. growing unemployment, declining economy, de-creasing living standard and economic development of the country.

under the conditions of economic globalization and increasing competition in business, great attention

is paid to the evaluation of the financial state of en-terprises and the prediction of their bankruptcy, the analysis of its causes and their elimination. The need for measures and instruments helping to diagnose and prevent enterprise crisis and bankruptcy is constantly growing. As a result, under the conditions of market economy, the prevention of enterprise bankruptcy (anti-crisis management) has become one of the most important practical and research areas. The preven-tion of enterprise bankruptcy may be perceived as a number of methods and means, ranging from enter-prise crisis diagnostics to the implementation of the appropriate measures aimed at overcoming the crisis (Garškienė, Garškaitė 2005). The core of bankruptcy prevention, i. e. the diagnostics of enterprise bank-ruptcy, determines other measures to be taken by en-terprises, which have assessed their financial state and the scale of the crisis. This accounts for the fact that enterprise bankruptcy threat diagnostics is an essen-tial part of enterprise bankruptcy prevention system.

K r i s t i n a G a r š k a i t ė - M i l v y d i e n ėDiagnostics of Bankruptcy threat to Enterprises

198

Object of research includes enterprise bankruptcy di-agnostics and bankruptcy prevention models.

Aim of the research is the development of enterprise bankruptcy threat diagnostics as an essential part of bankruptcy prevention (antichrists management), easily adaptable to rapidly changing business envi-ronment, which would allow enterprises to increase the reliability of bankruptcy prognosis and avoid the crisis or bankruptcy.

The research methods used in the paper include the analysis of scientific literature, statistical methods, grouping theory, comparative analysis and synthesis.

The problems of enterprise bankruptcy diagnostics and prevention are in the focus of many research-ers worldwide (Balcaen, Ooghe 2006; Ravi K., Ravi V. 2007; Sun 2007; Sueyoshi, Goto 2009, etc.). The names of the following foreign scientists, dealing in their works with the problems associated with en-terprise bankruptcy, should be mentioned: E. I. Alt-man, O. V. Antonov, W. H. Beavery, L. Bernstein, I. A. Blank, J. fulmer, W. N. Grant, A. P. Kovaliov, T. Lis, G. V. Savitskaya, G. Springate, A. D. Sher-emet, R. Taffler, E. A. utkin, C. J. Van Horne, etc. In Lithuania, the problems of determining a threat of enterprise bankruptcy are investigated by J. Bivainis, S. Grigaravičius, J. Mackevičius, D. Poškaitė, C. Pur-lys, A. Rakštelienė, A. Sakalas, S. Silvanavičiūtė, M. Tvaronavičienė, A. Valackienė, etc.

There are plenty of works devoted to the develop-ment of enterprise bankruptcy prediction models aimed at determining the scope of bankruptcy threat, and various types of these models have been suggest-ed (Altman 1992; Mackevičius, Silvanavičiūtė 2006; Agarwal, Taffler 2008, etc.). However, there were also many critical remarks, concerning such draw-backs of the suggested models as their limited appli-cability and insufficient reliability (Tvaronavičienė 2001; Grant 2003; Harrington 2003; Mackevičius 2007). Some researchers doubt about the principle of model development and the perspective of models’ adaptability to ever changing business environment (Ginevičius, Čirba 2009). Another drawback of this methodology is the lack of systematic and complex evaluation of the financial state of enterprises, as well as fragmentariness of the suggestions, which are not oriented to the development of a consistent system of diagnostics and prevention of enterprise bankruptcy.

Lithuanian researchers often rely on the experience

of other countries, using enterprise bankruptcy pre-diction models suggested by foreign researchers. The evaluation of the enterprise state by the models not investigated either theoretically or practically with respect to their suitability to a particular case can hardly be considered reliable and yield practically acceptable results. In general, the analysis of the sci-entific literature allows us to state that the available methodological potential suffers from the essential shortcoming: the lack of comprehensive evaluation of the financial state of an enterprise (with respect to the bankruptcy threat) and the adequacy of models under rapidly changing business and environmental conditions. This explains the existence of the gap between the practical needs and the available meth-odological potential. Therefore, the problem of diag-nostics and prevention of bankruptcy of Lithuania enterprises is still acute. In the context of current challenges, it requires new approaches to its solution by researchers and practitioners.

2. The results empirical Studies of enterprise bankruptcy Threat assessment

In this Chapter, the main result obtained in the em-pirical research carried out by the author is presented. This is a model of integrated evaluation suggested for predicting the enterprise bankruptcy threat. A pro-totype of the model is developed and the algorithm for its adapting to a particular application is present-ed. The solution is based on the conclusion made in studying the methodological potential described in the literature, its use for identifying enterprise bank-ruptcy threat and the evaluation of the results ob-tained. It is concluded that practical application of the considered models is possible only if they take into account the specific character of particular sec-tors of economy, and the quantitative parameters of these models are permanently actualized on the prin-ciple of the sliding retrospective data updating.

To develop a model of integrated evaluation, twelve most suitable and informative relative financial crite-ria, describing the state of enterprises with respect to the bankruptcy threat, were chosen out of five groups of criteria, reflecting various financial aspects of the enterprise state (e.g. profitability, effectiveness of per-formance, financial stability, liquidity and others). In selecting the financial criteria, two methods were used: pairwise correlation analysis and comparative analysis (based on the results obtained). The criteria


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were selected, taking into account:• the obtained quantitative parameters of stochastic relationship;• the results of comparative analysis;• similarity (overlapping) of the criteria (with re-spect to the aspect described);• the determined structural features of the bank-ruptcy prediction models used.

In the set of the criteria obtained, each group is rep-resented by 1-3 criteria. Therefore, it was conclud-ed that an integrated evaluation model of this type could have some duplicating criteria (with respect to the features they describe). This may be considered to be a surplus or a certain reserve for increasing model effectiveness. In further empirical investigation, two most important financial criteria were selected out of each group, based on the results obtained from pairwise and polynomial correlation regression anal-ysis. The model (prototype) of integrated evaluation was developed, making the assumptions based on the results of the methodological potential analysis (Garškaitė 2008). They are as follows:• bankruptcy threat is a stochastic dependence on relative financial indicators of an enterprise;• linear polynomial regression is the best form of de-scribing the considered dependence;

• independent variables are relative financial indica-tors – the members of the sets of criteria, describing various aspects of the enterprise state.

A formal expression of the integrated evaluation model (prototype) based on these assumptions is as follows:

Y = f (X1, X2, X3, X4, X5) + ε,

where Y is a bankruptcy threat; Xi denotes independ-ent financial variables representing relative enterprise financial criteria of 5 groups according to the pro-file of a particular branch of economy; ε is a random component.

Given the results of the empirical research and the-oretical analysis findings as well as the determined relationships between the data of enterprise bank-ruptcy threat evaluation and solutions (Table 1), it is possible to correlate the enterprise bankruptcy threat determined by the integrated evaluation model with a particular crisis stage and thereby with certain bankruptcy prevention measures (pursuing different aims). This radically changes the applicability of the suggested model for practical purposes, compared to similar models of enterprise bankruptcy prediction based on the principle of synthesis.

table 1. The relations between the results of enterprise bankruptcy threat evaluation

Group of enterprises

Enterprise bankruptcy threat (Y value) Stage of enterprise crisis Measures and procedures

(their orientation)1 more than Yo – very small Not critical, or the signs of

crisis cannot be observedNone, or internal procedures aimed at maintaining enterprise financial balance

2 from Ym to Yn – small Shallow crisis Internal measures aimed at enterprise restructuring3 from Yk to Yl – large Deep crisis Internal and external measures (restructurization or

bankruptcy procedures)4 up to Yj – very large financial failure External measures (bankruptcy of an enterprise or its

liquidation procedure)

Source: made by author

The following algorithm is suggested for adapting the developed model of integrated evaluation to specific applications:1) the retrospective data for evaluating the state of enterprises of the considered economic sector are collected, enterprises are divided into groups and the relative estimates are provided to enterprises;2) the strength of the correlation between the enterprise state and each of the selected 12 relative financial criteria is determined by applying pairwise correlation analysis;3) the most important financial criteria are selected from each group of criteria based on the correlation coef-ficients;

a discriminant analysis is performed, the analytical equation is obtained and the integrated evaluation model adapt-ed to enterprises of a particular profile is analysed, based on retrospective data on the selected financial criteria.


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3. The Stages of enterprise bankruptcy Threat diagnostics

In this Chapter, the developed consistent complex diagnostics of enterprise bankruptcy threat, based on in-novative principles and consisting of three different analysis components, is considered. Each component is actually a diagnostics stage of evaluating the enterprise financial state and bankruptcy threat according to the principle – from the most general (integrated estimate) to concrete evaluation (of the problem areas and causes of the diagnosed state) (figure 1).

1. Evaluation based on integrated model

2. Analysis of relative financial indicators

3. Analysis of financial accounts

Periodical planned

evaluation

Critical situation

Problem area Analysis of another financial

state aspect

• shallow crisis; • deep crisis; • financial failure

• profitability; • effectiveness of

performance; • financial stability; • liquidity; • other

Negative changes

Cause

• indicators of balance items;

• profit (loss) indicators of the account items

Analysis of another absolute

financial indicator

Yes

No

Yes

No

No

Yes

fig.1. A basic diagram of enterprise bankruptcy threat diagnostics

Source: made by author

Each stage includes a particular analysis and evaluation of the financial state of an enterprise, performed using exhaustive and reliable enterprise accounts, as well as various data and specific methods. The actions taken at each stage are defined and the relations between the stages are determined. In each particular case, the types of the relationships and their essential features are determined, taking into account the results obtained in the analysis of the previous stage.

It is suggested that the integrated evaluation model allowing us to obtain a general estimate of an enterprise state with respect to bankruptcy threat should be used at the first stage. Applying this model to enterprise state assess-ment, a real bankruptcy threat may be calculated. More exactly, one of the four possible situations may be deter-mined based on the estimates obtained (they are expressed in conditional terms, such as ‘no crisis signs’, shallow crisis, deep crisis, financial collapse). The state identified determines the actions to be taken. When there are no signs of crisis, the diagnostics is discontinued to be performed later according to schedule. In three other cases (when crisis signs have been observed), the causes of the identified situation should be found. Therefore, the analy-


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sis is continued at the second stage and the orientation of bankruptcy prevention measures is determined (see Chapter 2, Table) for each critical situation according to the results obtained.

At the second stage, the analysis of relative financial indicators (criteria), belonging to various groups and reflecting various aspects of enterprise financial state (e.g. profitability, efficiency of performance, financial stability, liquidity and others), should be performed. This analysis is aimed at determining the main prob-lem areas (it should be noted that the inclusion of criteria in a particular group depends on the results obtained in the empirical research). The values of the financial criteria obtained in the analysis are com-pared with the specified criterion values as well as with the appropriate norms and other specified pa-rameters (Mackevičius, Poškaitė 1998; Bernstein 2000; Савицкая 2003; Шеремет, Негашев 2003; Антонова 2004; Brigham, Daves 2004; Buškevičiū-tė, Mačerinskienė 2004; Mackevičius 2007). Based on the relationship between the values of the criteria and limiting values, the state of an enterprise is de-termined, taking into account every aspect (it may be assessed as very good, good, satisfactory, unsat-isfactory and bad). When the problem area or areas are defined, the search field gets narrower, and the diagnostics of enterprise bankruptcy threat passes on to the third stage.

At the third stage, it is recommended to perform the analysis of absolute financial criteria, oriented to the ex-amination of the potential problem areas with the aim of identifying the main causes of the critical enterprise state. The constituent parts (components) of relative fi-nancial criteria of the identified problem area (areas), i. e. absolute financial criteria, are analysed. In the analy-sis of absolute criteria, i. e. the respective data found in the balance sheet and profit (loss) account items, and their variations are determined (Buškevičiūtė, Mačerinskienė 2004; Mackevičius 2007, 2009). Nega-tive changes indicate the causes of the critical states of an enterprise. In examining the criteria of the financial accounting and the character of the criterion variation, the field of analysis is being gradually narrowed and the particular causes of the critical state of an enterprise are becoming clear. This analysis makes the last stage of enterprise bankruptcy threat diagnostics. It substan-tiates and supplements the enterprise state evaluation results obtained at the earlier stages.

The performed comprehensive diagnostics of the en-

terprise bankruptcy threat provides the exhaustive information about the financial state of enterprises, the scale of the bankruptcy threat, the problem areas and causes of the enterprise critical financial state. The latter determine the types and aims of measures, recommended for preventing enterprise bankruptcy. The suggested diagnostics increases the reliability of enterprise state evaluation and bankruptcy predic-tion. It can be adapted to rapidly changing business environment and the specific conditions of enterprise performance in a particular branch of economy.

4. conclusions

1. Taking into account the existing gap between the practical needs and the available methodological po-tential, a complex enterprise bankruptcy threat diag-nostics based on new approaches, which is adapted to rapidly changing business conditions and is applicable to the enterprises of various profiles (belonging to vari-ous economic sectors), is developed. It also allows for increasing the reliability of enterprise state evaluation and bankruptcy prediction. The suggested diagnos-tics system consists of three different but interrelated components. Each component represents a diagnos-tics stage, when the enterprise state is evaluated ac-cording to the principle: the analysis proceeds from a general (integrated) estimate to concrete evaluation (of the problem areas and causes of the diagnosed state). In each case of the system’s application, the types and specific features of the relationships between the diag-nostics stages are defined, taking into account the re-sults obtained at an earlier stage. This kind of diagnos-tics allows us to get comprehensive information about the enterprise bankruptcy threat, as well as the factors contributing to critical state development and its caus-es and to correlate the scale of bankruptcy threat with the recommended approximate internal and external measures of enterprise bankruptcy prevention.

2. At the first stage of enterprise bankruptcy threat diagnostics, aimed at determining the threatening danger, the application of the integrated evaluation model is recommended. The prototype of this model is created and the algorithm for its adaptation to a particular application is developed. The solution is based on the conclusion made in the research that the applicability of the considered models may be en-sured only by their ability to assess enterprises of dif-ferent profiles (i. e. enterprises belonging to various economic sectors) and by permanent actualization


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of quantitative model parameters on the principle of the sliding retrospective data updating.

3. At the second stage of enterprise bankruptcy threat diagnostics, the analysis of the relative financial crite-ria of five groups (i.e. profitability, efficiency of per-formance, financial stability, liquidity and others) is recommended for determining problem enterprise state areas. The selection of the criteria to be included in a set is determined by the results of the empirical research. The criteria adequately reflecting the enter-prise bankruptcy threat were chosen, taking into ac-count the strength of the stochastic relation between the bankruptcy threat and relative financial criteria, as well as relative values of the relation strength, conceptual differences of the criteria (required for expanding the scope of evaluation) and the rate of using the particular criteria in enterprise bankruptcy threat prediction models.

4. At the third stage of enterprise bankruptcy threat diagnostics, it is recommended to perform the analy-sis of absolute financial criteria, aimed at determin-ing the main causes of the critical enterprise state, with the emphasis placed on the examination of the problem areas. Vertical and horizontal analyses are made, narrowing the field of analysis and revealing the factors influencing the situation and causes of the critical state of an enterprise.

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Balcaen, S.; Ooghe, H. 2006. 35 years of Studies on Business failure: An Overview of the Classical Sta-tistical Methodologies and their Related Problems, British Accounting Review, 38 (1): 63-93.

Bernstein, L. 2000. Analysis of financial Manage-ment. McGraw-Hill. 367 p.

Brigham, E. f.; Daves, P. R. 2004. Intermediate fi-nancial Management. uSA, Thomson, South-West-ern. 230 p.

Buškevičiūtė, E.; Mačerinskienė, I. 2004. finansų ana-

lizė [financial Analysis]. Kaunas: Technologija. 379.

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Garškienė, A.; Garškaitė, K. 2005. Antikrizinio val-dymo turinys: esmė, tikslai ir priemonės [The con-tent of the anti-crisis management: the essence, goals and measures], Verslas: teorija ir praktika [Business: Theory and Practice] 6(1): 44–55.

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Harrington, D. R. 2003. Corporate financial Analysis in a Global Environment. Thomson South Western. 492 p.

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Mackevičius, J. 2007. Įmonės veiklos analizė. Informa-cijos rinkimas, sisteminimas ir vertinimas [The analy-sis of the enterprise’s activity. Gathering, systemati-zation and evaluation of the information]. Vilnius: TEV. 510 p.

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Mackevičius, J.; Silvanavičiūtė, S. 2006: Įmonių bankroto prognozavimo modelių tinkamumo nusta-tymas. – Verslas: teorija ir praktika – 2006, VII t., Nr. 4, 193-202.

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Tvaronavičienė, M. 2001 Įmonių bankroto proceso ekonominio efektyvumo kryptys [The ways of eco-nomic efficiency of the process of bankruptcy of the enterprises], Ekonomika [Economics] 54: 135-144.

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Савицкая, Г. В. 2003. Анализ хозяйственной деятель-ности [The analysis of economic activity]. М.: ЮНИ-ТИ-ДАНА. 255 с.

Шеремет, А. Д.; Негашев, Е. В. 2003. Методика фи-нансового анализа деятельности коммерческих организа-ций [The methods of financial analysis of commercial activity of the organizations]. М.: Инфра-М. 237 с.








SoMe Monetary leSSonS froM tHe GerMan econoMiStS of tHe PaSt: liGHtS and SHadoWS in tHe collectiVe MeMory*

edoardo beretta1

università della Svizzera Italiana (uSI), Via G. Buffi 13, CH-6900 Lugano, Switzerland

E-mail: [email protected]

Received 15 August 2011; accepted 5 December 2011

abstract. What is stopping Governments from establishing a new economic order? What are the principal stages on the way to a truly international payment system? Would an international currency unit, to be issued by a “Central Bank of Central Banks”, remove or cure many instances of disorders? furthermore, what advice have Germanophone economists of the past centuries provided to help us avert a crisis? How can their recommenda-tions be reformulated and/or revived?The paper deals with these concerns among others and mostly adopts a Quantum theoretical macroeconomic approach to analyze the (forgotten) contribution of the German economists in this respect. In addition, there is enough evidence to claim that ignorance of the findings of economic thought and history has led to unbelievable mistakes in the structure of the modern international payment system.

Keywords: External Debt Sustainability, War Reparations, Economic History, International Payment System.

reference to this paper should be made as follows: Beretta, E. 2012. Some Monetary Lessons from the German Economists of the Past: Lights and Shadows in the Collective Memory, Journal of Security and Sustainability Issues 1(3): 205–217.

jel classifications: E00, E5,f30, G01, G20, H6.

1. introduction: Monetary Macroeconomics and the Source of all crises

Even granting that the science of economics is being more and more ‘financialized’ as financial problems regarding banks, companies and other institutions are cropping up with greater frequency and urgency, a structural analysis of crises cannot exclude a macr-oeconomic-monetary approach.

Thus, side by side with economic agents’ behaviour,

expectations and fears, there subsist some economic principles, which, if disregarded, will spark systemic crises. If the international payment system fails to comply with macroeconomic laws, then every anti-cyclical measure will fail.

On this basis, there seems to be even more urgent need for an in-depth investigation into the funda-mental (i.e. macroeconomic) nature and causes of financial and economic crises, which we suggest have been only partially caused by the activities of some economic actor (i.e. microeconomic). And this is precisely the purpose of this scientific article. De-termined to prove its point, our methodological approach is based on the findings of the Quantum School of Economic Thought, which was founded more than four decades ago by two economists: Prof. Bernard Schmitt (french) and Prof. Alvaro Cencini (Swiss). Their analyses show that as long as econom-

* The author would like to thank Simona Cain of the università della Svizzera Italiana (Switzerland) for her accurate and expert editing of the abstract and also the working paper. I would also like to express my sincere gratitude to my Thesis supervisor Prof. Dr. Alvaro Cencini, Ph.D. ([email protected]), who is full Professor and Vice-Dean of the faculty of Economic Sciences at the università della Svizzera Italiana (Switzerland) and who has supported and encouraged me by patiently reviewing my contribution from the beginning of the writing process. furthermore, this article reflects the opinions of the author, who is solely responsible for any incomplete or inaccurate statements, or any errors the readers may detect.

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E d o a r d o B e r e t t a Some Monetary Lessons from the German Economists of the Past: lights and Shadows in the Collective Memory

ics refuses to see the difference between three main concepts like money, income and capital and their monetary implications, nothing can significantly change. This in turn means that the roots of eco-nomic crises fuelled by (undiscovered) fallacies in the design of the current international economic order will sink even further into the ground and become harder to remove.

With specific regard to this paper and this last con-cern, the purely macroeconomic Quantum theoreti-cal approach to the prescient German economists of the past is an original and innovative way of redis-covering forgotten economic literature and analyzing its elements of truth and fallacy. In addition, the an-alytical-theoretical methodology adopted combines elements of the history of economic thought (e.g. the debate on the ‘War Reparations Problem’ of the 1930s) with reform plans (now consigned to obliv-ion) of the international payments system and their findings seen through Quantum economic lenses.

Nonetheless, aware of the fact that decades of innova-tive macroeconomic analyses cannot be summarised instantly, we want at least to describe the main char-acteristics of the three above-mentioned concepts in the perspective of Quantum macroeconomics.

In Alvaro Cencini’s words, “money has to be seen, first of all, as a numéraire, i.e. as a standard of meas-ure required for counting of goods and services cur-rently produced by real economy. The task of banks is that of providing the economy with this unit of ac-count through the emission and the lending of their acknowledgement of debt. for the asset-liability is-sued by banks to represent real output it is necessary, however, that the emission of money reaches the sec-tor of real production. In other words, money has to be associated to real output if it is to play the role of ‘form’ or ‘numerical container’ of goods.” (Cencini 1995). So, monetary units:• havenointrinsicworth;• measurethephysicalproductofhumanlabour;• aremediaofexchangeanddefinitelynotthepay-ment’s object.

On the other hand, income represents the economic product, i.e. the economic worth of human physi-cal production. The latter becomes income as it is measured by money units through wage and salary payments: it follows that money wages is the meas-ure and goods/services the measured objects, which are thus the very object of money income. Therefore,

monetary units are not assets spontaneously created by banks and/or Government. They only express economic worth of physical goods and services: “In The Wealth of Nations Smith speaks of money as ‘the great wheel of circulation’ (1978: 385). Smith is de-finitively opposed to the addition of money and out-put: “The revenue of the society consists altogether in those goods, and not in the wheel which circulates them”. Clearly, this means that money is conceived as an empty vehicle whose value is determined by its load (current output) and not by its own physical characteristics.” (Cencini 1988)

Correctly, the Swiss economist adds that “one of the most frequent mistakes in monetary economics is to identify money as such with money income. It is in-come, and not money, which is deposited with the banking system, and it is money, and not income, which is created as a numerical vehicle of payments.” (Cencini 2001).

The practical/empirical refusal to distinguish be-tween money and income does not modify the logi-cal distinction between these concepts. Nevertheless, economic systems, which contravene this status quo, will suffer from chronic monetary disorders as in-, deflation, exchange rate erratic fluctuations.

We admit that behavioural over-issuing of money is not the worst (structural) source of economic dis-eases; yet the following prominent quotation clearly exposes a degree of carelessness in the logical distinc-tion between money and income. Thus, “suppose that despite all precautions, deflation were to take hold in the u.S. economy and, moreover, that the fed’s pol-icy instrument--the federal funds rate--were to fall to zero. What then? […] a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero. But the u.S. govern-ment has a technology, called a printing press (or, today, its electronic equivalent), that allows it to pro-duce as many u.S. dollars as it wishes at essentially no cost.” (Bernanke 2002) This way of thinking is not only prejudicial to economic stability, but it also fails to take notice of centuries of economic litera-ture, thinkers and history, which clearly proved the fallacy of such assertions.

Last but not least, capital can be divided into:• fixed capital, which consists of profits definitive-ly spent in order to increase physical productivity

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through machinery;• capital-time, which can always be reconverted to income.

“Reversible capital-time (that is, a capital that will eventually be reconverted into income and spent on the commodity market) whereas the latter is derived from an irreversible, fixed capital (that is, a capital de-fining a macroeconomic saving)” (Cencini 2005a).

Summing up, we assume that:• ifmoney, income and capital are fallaciously used as synonyms and the international payments system disregards the true distinction between them,• thenstructuraleconomiccriseswillbecomeuna-voidable.

In other words, any future reform of the world eco-nomic system should respect these axioms. for in-stance, would an international currency unit, to be issued by a “Central Bank of Central Banks”, remove or cure many instances of disorder? No doubt it would, if the reform proposals were coherent with the modern essence of bank money and double-entry bookkeeping principles.

In the next pages, we want to apply precisely this analytical-theoretical approach, developed by the leading representatives of and contributors to the Quantum School of economic thought to exploring the ideas of forgotten but still innovative Germano-phone economists of the past. undoubtedly, even to-day their articulated and manifold plans represent an innovative stage on the way to a truly international payments system.

2. buried German economic Thought, international Payments System and crises

Not surprisingly, the history of economic thought abounds with examples of early plans for reform by enlightened economists who recognized the elements of fallacy in the entire system, but who have been literally removed from collective memory. If we look at the German authors, the latter conclusion rings sadly true. Their writings, where theoretical analysis blends economics with a philosophical and histori-cal approach, unlike their Anglo-Saxon counterpart, have been largely disregarded:• EmanuelHugoVogel (* 1875 - † 1946) and his developments in gold-core-currency standard;• Economicus alias Gustav Lilienthal (* 1849 - † 1933) and his concept of global money unit;

• Felix Hecht (* 1847 - † 1909) and his (at the time revolutionary) giro system;• Hans Heymann (* 1885 - † 1949) and his global plan to establish a worldwide credit and financial sys-tem;• Hubert Ladenburg (* 1909 - † ?) and his Plan for a Postwar World Clearing Bank (1942);• Ernst Friedrich Schumacher (* 1911 - † 1977) and his idea of multilateral clearing between credits and debits of Central Banks;• Julius Wolf (* 1862 - † 1937) and his manifold proposals to internationalize the payments system;

are only some Germanophone economists, who out-lined extended reforms to ensure lasting monetary stability.

Although their ideas were not set to establish a com-plete macroeconomic order, as Quantum economics shows, they would have paved the way for successive reform projects at least. Strange enough, the questions they analysed at the time are barely different from to-day’s. Indeed, not only the same monetary problems have remained unsolved over the past decades, but they have also become more severe: issues, such as growing volumes of transactions, closer financial/eco-nomic interconnectedness, and simply the fact that structural disorder has become chronic over time.

Let us briefly and critically analyse the economic thought of the above mentioned German or Ger-man-speaking authors.

for instance, Emanuel Hugo Vogel (* 1875 - † 1946) was an early promoter of logical and factual segmentation between national and international payments (system). He also recognized that the new international monetary unit should not be subject to fluctuations and currency trading: in his words, “the internal and external payment function can be suc-cessfully segmented only if the external currency unit does not originate from a single national issuing op-eration. Coherent with its international function, this type of money unit should have supranational char-acteristics and also be free from being influenced by national assessment” (Vogel 1933 [own translation]).

Correctly, one of the most relevant principles under-pinning the new currency unit refers to its stability, which cannot be assured if currencies become an ob-ject of trade.

Economicus alias Gustav Lilienthal (* 1849 - † 1933) recognizes some key principles of a sound eco-

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nomic system, which was not obvious at the time. for example, he affirms that money units cannot have any intrinsic value, but also that in modern banking they should not be linked to any precious metal (Economicus 1923). furthermore, the Ger-man author identifies in human work only - aston-ishingly correct! - the source of economic worth and he also realizes what some Governments still fail to do, namely that the economic wealth of Nations con-sists of income out of human work (and not of sei-gniorage or money over-issue) (Economicus 1923). Although Gustav Lilienthal contradicts himself a few pages later, his intuition continues to be ‘foreign’ to many economists.

The same is true of Felix Hecht (* 1847 - † 1909), who advocated the introduction of giro systems at the international level in order to establish a true in-ternational payment system (which is still absent). More precisely, he suggested the establishment of clearing houses in some European cities - Vienna, Budapest, Berlin, frankfurt am Main and Hamburg - so that the Austrian-Hungarian and German clear-ing system could soon become the first step towards an integrated world economy (Hecht 1906). What is it that prevented his proposal from being fully ‘right’ and establishing a proper international payment sys-tems? Of course, the answer is in the fact that fe-lix Hecht was not aware of the vehicular essence of money, conditio sine qua non for economic order.

These authors were conscious of the difficulty of re-forming the entire international payment system. for this very reason, economists like Hans Heymann (* 1885 - † 1949) developed a ‘step-by-step’-approach, which he explained in Die Welt-Kredit- und finanzre-form - Ein Aufruf zum Solidarismus (1921) and Die Völkerbank (1922) while summing up and further investigating his findings in the more recent Plan for Permanent Peace (1941). Thus, creating a worldwide accepted “Central Bank of Central Banks”, which is-sues an international currency unit, is a delicate mat-ter. In order to overcome resistance, some economists recommend establishing “several «continental banks» for Europe, the Western Hemisphere and Asia, all to be topped by a «Bank of Nations»”. (Heilperin 1941). More precisely, Hans Heymann imagines the creation of:• aBankofNations,whosemembershipdependsonbuying its shares;• aHemisphereBank,Europa Bank, Oriental Bank

as a sort of ‘Continental Central Banks’;• andtheBankforInternationalSettlements(BIS)as a world money-clearing department.

Each of these institutions would also be characterized by a ‘credit department’ and an ‘issue department’, which is still a long way away from reality today.

As Alvaro Cencini (2005a) adds, “the new central bank will also have to act as a clearing house in con-nection with the central banks of three areas. What is needed for the whole system to work is therefore that (a) within each currency area payments among countries are carried out through the intermediation of their central banks and of a central bank of cen-tral banks, and that (b) between currency areas an in-ternational central bank acts as the central bank of their central banks. The International Central Bank (ICB) brings the European Central Bank (ECB), the American Central Bank (AMCB) and the Asian Cen-tral Bank (ASCB) together into a system of interna-tional clearing based, like the national clearings, on the principles of real-time gross settlement transfers. finally, DM stands for the domestic money used by each country; the euro, the dollar, and the yen are the currencies used within each currency area when pay-ments between member countries are involved; and the international money (IM) is the new means of payment used to ‘vehiculate’ transactions among the three currency areas members and between them and the rest of the world.” (Cencini 2005a) Cencini’s anal-ysis clearly reflects the correct scenario, while Hans Heymann (1941) had done little more than foreshad-owing it. And yet, the latter’s assertions are surprising-ly innovative and unusual in economic literature. for instance, he argues that “price, which mediated the exchange, merely represents the value of the labour hours expended by both parties in the manufacture of the products, and expressed in money units as a standard of measurement. […] in the not too distant future, the world will recognize that the true purchas-ing power of a medium of exchange is not dependent upon the extent of gold coverage. Such purchasing power in a medium of exchange is dependent upon the cost of production, which are to be calculated ac-cording to the average work cost of production, wages, and other cost factor.” (Heymann 1941).

Not uncommonly, modern economists still think of money as an object of payments entailing a positive intrinsic worth (perhaps even distributed through friedman’s famous “helicopter drop”), while only

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human work should explain the so-called ‘purchas-ing power’. There is no doubt that such mindset is at the origin of crises since the present ‘non-system’ rests on it.

On the one hand, Heymann’s reform proposal (1941) is very similar to a reformed International Monetary fund (IMf), which itself is the result of the Interna-tional Monetary Conference in Bretton Woods (1-22 July 1944); on the other hand, his project cannot be assimilated to modern economic world institutions, which lack strong monetary interconnectedness pre-cisely because they have not established a real, prop-er, functioning payments system. Thus, Hans Hey-mann’s concept is based:• notonlyonissuingrespective(nationalandcon-tinental) currency units respectively on behalf of Na-tional Central Banks and Hemisphere Central Banks topped by a ‘Central Bank of Central Banks’,• butalsoongrantingcreditstomembercountries(Heymann 1941).

The latter characteristic recalls the role of Harry Dex-ter White’s ‘International Stabilization fund’ (ISf) and ‘International Bank for Reconstruction and De-velopment’ (IBRD), which are the forerunners of the modern International Monetary fund (IMf) and the World Bank Group.

Now, we wonder what drawbacks there might have been in adopting Heymann’s proposal? Although the German economist had an extraordinarily valid intui-tion, he was unfortunately not aware of the distinction between ‘money creating’ and ‘money issuing’. And so, while the second concept is coherent with the essence of modern bank money (i.e. devoid of inherent eco-nomic value), the first conception presents inflation-ary features, since it suggests the contradictory issue of positive worth by a banker’s stroke of the pen.

Kenneth E. Boulding claims in his The Economics of Peace (1948) that although these authors often con-tradict themselves, they were nonetheless able to re-veal aspects of the truth which were not recognized by orthodox economists (Bounding 1948).

for example, Hubert Ladenburg (* 1909 - † ?) and Ernst Friedrich Schumacher (* 1911 - † 1977) pointed out the relevance of assuring an internation-al clearing between debits and credits. What stands out in Ladenburg’s work (1942) is the establishment of a World Clearing Bank, which issues an inter-national currency unit. furthermore, he knows the

role of double-entry bookkeeping in economics, but unfortunately he misunderstands some of its main principles. In fact, his reform scheme is based on the achievement (and maintenance) of commercial equi-librium between Nations, which is manifestly un-necessary and also damages economic growth: most probably, he wanders off course because he does not perceive the logical distinction between:• ‘commercialequilibrium’,whichisahalfwaystageof the balance of trade other than commercial sur-plus/deficit; • and ‘monetary equilibrium’, which is always as-sured by double-entry bookkeeping and the circular nature of vehicular money.

Ernst Friedrich Schumacher (* 1911 - † 1977) proposes an innovative multilateral clearing system, which is a conditio sine qua non for orderly economic working, but he fails to realize that his plan would not work in the absence of a well-conceived world monetary unit. furthermore, he shares with Hu-bert Ladenburg (1942) a misunderstanding of com-mercial/monetary equilibrium (Schumacher 1943). This notwithstanding, he analyzes the matter of in-ternational payments from the standpoint of view not only of residents but also their Nations, which implies a macroeconomic conception: in addition, Swiss economist Alvaro Cencini (2008) notices that Ernst friedrich Schumacher (1943) links net com-mercial imports of deficit countries with their finan-cial claims (Cencini 2008).

In the end, Julius Wolf (* 1862 - † 1937) formu-lates manifold proposals to internationalize the pay-ment system. As many of his German colleagues, he suggests the establishment of an international giro system topped by a World Clearing Bank (interna-tionale Giro-Stelle), where all world payments would go through. Besides pleading for more bancarization on the basis of accounting principles, he sometimes adopts an inconsistent approach: in his opinion, pre-cious metals are sometimes a barbarous relic (Wolf 1892) while sometimes the basis for creating special gold certificates (Mitteleuropäischer Wirtschaftsv-erein in Deutschland, 1909).

So what have the above-mentioned Germanophone authors in common? Certainly, their prescience but also the fact that they have been removed from col-lective memory, although their ideas are pervaded by concepts, such as ‘internationalization’, ‘multilater-alism’, ‘world currency unit’. Hence, their writings

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have been discriminated by mainstream economists from the Anglo-Saxon world. This last remark would be serious enough, but reality is even more alarming: modern economists tend to be analysts of statistical data seemingly with little time for findings handed down through past economic literature.

Now, is it possible to understand trends, numbers, and graphics correctly if economists are no longer aware of economic thought and history? Hardly so! Consequently, economic policies (obviously) become incomprehensibly ineffective based as they are on su-perficial analyses. World and economic history show plenty of reasonable leading lights that have been literally ignored. Therefore, quite probably, even ad-mitting that knowing the theories of the German economists would not necessarily have prevented a vexatious series of global economic crises that would at least have raised unanimous strong doubts on the economic system and its ‘goodness’.

The war reparations problem, which is the old ver-sion of modern external (over)indebtedness, is one of the most famous examples of how, if neglected, pathologies can degenerate. In this case, too, there have been several economists who warned against the economic consequences of war indemnities and were fatally dismissed as Cassandras.

3. reparation Payments Then, external over-indebtedness now

The most recent and discussed case of war indemnities pertains to Germany after World War I (1925-1933). Although it was not serviced “[…] the total amount which was set by the London conference of 1921 at the astronomical figure of 132,000,000,000 gold Marks - nearly $32,000,000,000” (Staley 1935), the affordability of reparation payments gained relevance at least in 1929, as John Maynard Keynes, Jacques Rueff and Bertil Ohlin began debating about its con-sequences. In the words of the British economist, “so much nonsense has been written lately (and even more, I suspect, spoken) about the theory of the trans-fer problem that I felt I ought to try and write down what seems to me to be the truth.” (Keynes 1978)

As he pointed out, “the Dawes Committee divided the problem of the payment of the German repara-tions into two parts - into the Budgetary Problem of extracting the necessary sums of money out of the pockets of the German people and paying them to the

account of the Agent-general, and the Transfer Prob-lem of converting the German money so received into foreign currency.” (Keynes 1929) In other words, the emphasis is on the “distinction between ability to pay and ability to transfer the payment. The latter is a question of foreign trade: the former is primarily a question of national resources and income, when viewed from the standpoint of their government. That these and the foreign trade are but different as-pects of the same problem, and closely interrelated, is of course obvious” (Williams 1922). The emphasis is also on the fact that: “the German Government will have to find corresponding fiscal resources through taxes and the like compulsory charges [→ Budgetary Problem]. This is a heavy burden, but not necessarily an impossible one. At all events, whatever the internal burden and the ways of carrying it, the problem is how a sum of this kind, secured by the German Govern-ment from its own citizens, can be remitted outside Germany, and what will be the consequences of the operations [→ Transfer Problem]” (Taussig 1920).

Generally speaking, economic literature regarding the German Reparations Problem can be divided into three different currents of thought. To begin with, there are those who deny the existence of any secondary burden, while, secondly there are scien-tists who claim that war indemnity payments will cause terms-of-trade- and/or currency-depreciation. Thirdly, and equally importantly, a few economists try to explain why reparation service is subject to a pathology, which unaccountably duplicates the total amount of repayment due by the debtor country.

As reported above, some audacious economists hazard the claim that countries servicing war reparations will have to bear a ‘secondary burden’ due to the fact that:• retrievingsufficientincomeandtransferringitout-side by handing over a corresponding sum of foreign (accepted) currencies is not the same [→ transfer Problem];• noristhe‘Government’,whichcollectstheinter-nal resources [→ budgetary Problem], coterminous with the ‘Nation as a whole’, which comprises the set of economic residents as well as the ‘State’.

“Keynes’ criticism of the German international obli-gations after World War I stressed that the macroeco-nomic costs of any given amount of war reparations - the ‘primary burden’ of a transfer - were bound to be magnified by the adverse effects of deteriorating terms of trade and real exchange rates - the ‘second-

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ary burden’ or ‘double punishment’” (Corsetti, Mar-tin and Pesenti 2008)

Now, sceptical readers will claim that reparation pay-ments belong to the economic history of some coun-tries (for example, france between 1870 and 1873) and, more generally, to the past. Actually, such an assertion would be true, if the nature of today’s eco-nomic problems were not the same as sixty years ago.

No matter how sophisticated crises are today, deriva-tives, credit-default swaps (CDS) and other financial instruments did not exist: their roots go back to the pathological international payment system, which has never been duly reformed. for example, no econ-omist would dare deny that America’s external debt does go back to the Bretton Woods Conference of July, 1944.

Not surprisingly, reparation payments or, more gen-erally, war debts are a previous incarnation of mod-ern sovereign external debt and its interest payments. The only remarkable difference is that war indem-nities originate ex nihilo, i.e. they are imposed ex abrupto without the debtor country having benefited from capital inflows (i.e. a corresponding or match-ing credit) in the past, while increasing external debt is the consequence of growing net current account deficits. In fact, both servicing operations are path-ologically unilateral; hence the monetary necessary equivalence between receipts and expenditures be-comes an inequation:

IM + x (total expenditures) > EX (total receipts),

where IM and EX represent respectively the com-mercial/financial imports/exports of each economic subject.

Thus, double-entry bookkeeping teaches us that eve-ry economic agent - firms, private consumers/inves-tors but also the State or the Nation itself - while selling (buying) buys (sells) a corresponding amount. And this is tantamount to saying that everyone is credited (debited) and debited (credited) in every transaction.

for example, when an economic agent A in Nation N(A) sells goods/services to a subject B in country N(B) who pays with an equivalent sum of goods/services/financial claims:• Aiscreditedanddebited,• whileBisdebitedandcreditedsimultaneously.

Hence, economic agent A sells goods/services [→

credit] and contemporarily buys goods/services/fi-nancial claims [→ debit], while resident B buys the above mentioned goods/services [→ debit] but also sells goods/services/financial claims [→ credit]. Since it is an international economic transaction:• notonlyAandB,• but also bothNationsN(A) andN(B) involvedshould be respectively credited-debited and debited-credited.

Nowadays as in the past, such modus operandi applies to every economic operation except the reparations payments and their modern version, i.e. sovereign ex-ternal debt. Referring to the latter concept, “the cor-rect meaning of «sovereign debt» refers to the external debt incurred by the Nation as a whole. Manifestly, the public debt financed by the rest of the world is a part of it, but it does not represent its total amount. Thus, it is necessary to add the private indebtedness, which also involves the country’s intervention” (Sch-mitt and Cencini 2011 [own translation]).

“After all, a country considered in itself, per se, is akin to a mere abstraction, while its residents are alive and kicking. So long as no residents of the debtor country are being victimized or defrauded, the disorder seems to be inconsequential. In reality, however, it exerts all its weight upon the undivided welfare of the national economy in its entire extension, by significantly and often even decisively thwarting its development” (Schmitt 2009). We obviously cannot claim, here, to accurately demonstrate all facets of the monetary pa-thology as studied by the economist Bernard Schmitt (Dijon) for decades. We can nonetheless identify the crux of the matter in the fact that by servicing A’s external debt:• A and B are respectively debited-credited andcredited-debited [→ Budgetary Problem],• while countryN(A) is only (net) debitedby theforeign currency amount [→ Transfer Problem] needed to transfer A’s income.

In sum, Nation N(A) shows a net debit (debiting without crediting), without Nation N(B) recording a net credit (crediting without debiting). Since the monetary equivalence between receipts and expen-ditures must be restored, country N(A) has to fill up the monetary pathological gap by reducing its official reserves, which also leads to over-indebtedness.

Let us do some numerical examples belonging as to Germany’s past as to its present time.

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If it is correct that Nation N(A) registers a net debit, this discrepancy will result from observation of the balances of payments of both countries involved. In other words, assuming only these two countries in the world, the monetary pathology of the secondary burden lasting of N(A) will result in a net deficit in the global current account, while the global financial and capital account will show a net surplus. Apart from net errors and omission in balance of payments, which tend to zero in the medium/long time, the global current account (GCA), which consists of the sum of N(A)’s and N(B)’s current account (CA) but also the global capital and financial account (GCfA), which is the aggregation of N(A)’s and N(B)’s capital and financial account (CfA), should be equal to zero (Table 1).

table 1. The Global Current (GCA) and Capital/financial Account (GCfA)

N(A): CA = -x1 N(A): CfA = +x1

balance: boP = 0

N(B): CA = +x1 N(B): CfA = -x1

balance: boP = 0

balance: Gca = 0

balance: Gcfa = 0

Source: author

Since the service of external debts belongs to interna-tional transactions, both Nations N(A) and N(B) are involved. If the reader continues reasoning in terms of net debits regarding N(A), the pathological dise-quilibrium between monetary in- and outflows (|x2|) in the global current (GCA) and the global capital and financial account (GCfA) is evident (Table 2).

table 2. The ‘missing surplus’ of the Global Current (GCA) and the ‘missing capital outflow’ of the Capi-tal/financial Account (GCfA)

N(A): CA = -x1 - x2 N(A): CfA = +x1 + x2

balance: boP = 0

N(B): CA = +x1 N(B): CfA = -x1

balance: boP = 0

balance: Gca = -x2 (missing surplus)

balance: Gcfa =+x2 (missing capital

outflow)

Source: author

As the International Monetary fund (1987) has pointed out, the result of aggregating world balances of payments is far from equal to zero, as it should

be. Since the world monetary institutions are aware of the fact that errors and omissions cannot explain the monstrous gap, the IMf economists coined the concepts of:• missing surplus of the global current account(GCA)• andmissingcapitaloutflowfromtheglobalcapitaland financial account (GCfA).

In other words, the GCA is extremely negative (-x2), which means that it misses a positive entry to restore the equilibrium (missing surplus), while the GCfA is in absolute terms similar but positive. More gener-ally, the global capital and financial account (GfCA) misses an outflow (-x2), which would bring it to zero. As Alvaro Cencini (2005b) explains, “irrespective of individuals or governments’ behaviour, the present system of international payments is so structured as to impose on indebted countries a double pay-ment of interests. Two equivalent flows are required to convey the real payment of net interests between countries. In conformity with the IMf experts’ intui-tion, the payment of net interests gives thus rise to an unreported capital outflow defining a net loss for the indebted countries’ official reserves. It is this unac-counted loss that explains the mystery of the ‘missing surplus’”. (Cencini 2005b)

Even though ‘Quantum macroeconomics’ only sug-gests the correct interpretation, other economists acknowledge that “the inconsistency between flow and stock data […] relates in a fairly systematic way to fDI flows, risk characteristics of local output and debt relief.” (Hausmann and Sturzenegger 2006)

If interest payments on external debt and reparation payments are truly twin transactions from a mon-etary point of view, then the GCA and GfCA at the time of the German indemnity payments should show the same discrepancy. In effect, between 1927 and 1933 Germany paid 8,914 million Reichsmark (Deutsche Bundesbank 1976), while the missing surplus of the GCA corresponds to -8,227.9 million Reichsmark and the missing outflow of the GCfA reaches +6,388.8 million Reichsmark (League of Nations (1934a and 1934b) and united Nations (1949)). To rephrase it, German war debt payments cover 92.3 per cent and 71.7 per cent, respectively, of the discrepancy in the global current account (GCA) and the global capital and financial account (GCfA). Given that the latter measure is subject to cross cur-rency valuations and other debt flows during the

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same period were negligible, the statistical evidence is powerful. As Alvaro Cencini (2005a) adds, “the second payment of interest [and reparations] is an over-expenditure carried out by the indebted coun-tries and unrecorded by creditor countries.” (Cen-cini, 2005a) and: “debtor countries pay what they have to pay as interest [and reparations] and creditor countries are paid their due, yet the amount paid gets unrecorded in the current account of creditor coun-tries.” (Cencini, 2005a)

Another astonishing example of anomaly in the inter-national payments system is related to modern over-indebtedness, not only of Less and Least Developed Countries but also of industrialized nations, whose economies are often described as models of integrity. Germany is no doubt the best example.

If economists agree that the balance of payments (BOP) is the account that should register every (commercial and financial) transaction between resi-dents of two different countries. The balance of pay-ments (BOP) is a statistical statement that system-atically summarises, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions, for the most part between residents and nonresidents, consist of those involving goods, services, and income, those involving finan-cial claims on, and liabilities to, the rest of the world; and those (such as gifts) classified as transfers, which involve offsetting entries to balance - in an account-ing sense - one sided transactions. (International Monetary fund 1996), it logically follows that there should be no (relevant) discrepancy between:• expectedincreaseoftheexternaldebtonthebasisof BOP-transactions• andtheeffectivegrowthoftheexternaldebtasre-ported by the International Monetary fund (IMf) or the World Bank (WB).

In other words, “it is clear that the increase in in-debtedness should be equal to the sum of the cur-rent account deficits and the increase in international reserves. Nonetheless, official statistical data show that Nations’ external debt is much higher than log-ic would imply” (Schmitt and Cencini 2011 [own translation]).

Between 2002 and 2009, Germany’s cumulative current account surplus reached the (impressive) amount of 1,213.82 billion u.S. Dollars, while Ger-man official reserves increased by 89.9 billion u.S. Dollars (International Monetary fund 2010). It

should be expected that German external debt stock would have been reduced by 1,123.92 billion u.S. Dollars (= 1,213.82 billion u.S. - 89,9 billion u.S. Dollars). Instead, Germany’s gross external debt po-sition worsened by approximately 2,944.53 billion u.S. Dollars (World Bank Database [online] 2011), which is unexplainable on the basis of BOP’s regis-trations. More precisely, since the gross external debt position should have shrunk by the above mentioned 1,123.92 billion u.S. Dollars, but it grew to 2,944.53 billion u.S. Dollars, there is statistical evidence that the pathological mechanism, which leads to Germa-ny’s over-indebtedness, ballooned to 4,068.67 bil-lion u.S. Dollars (= 1,123.92 billion u.S. Dollars + 2,944.53 billion u.S. Dollars)!

Quantum macroeconomics explains this unbeliev-able gap affecting interest payments on external debt, but also - which is a new discovery - external borrow-ing. Accounting unilateralism characterizing:• warreparations;• interestpaymentsonexternaldebt;• foreigndebt

combined with a misconception of money and (mon-etary) macroeconomics explains this anomaly, which is becoming more and more serious.

Bernard Schmitt and Alvaro Cencini explain in their new joint (unpublished) paper, Les emprunts ex-térieurs comme cause du surendettement des pays et de l’expansion de la bulle financière (2011) the reasons for the literal duplication of the external debt bur-den: “in the same way as the increase in the exter-nal indebtedness of the Nation as a whole exceeds its current account deficit - the additional boost is equal to the newly issued IOus of the internal economy, which have been handed over to the foreign econom-ic agents - the country itself becomes indebted to the «financial bubble». On the one hand, the sovereign debt with the rest of the world corresponds to the current account deficit; on the other hand, the com-plementary indebtedness due to the monetary deficit originated by the unordered international payments system is incurred with the stateless «financial bub-ble». With specific regard to the over-increase in sov-ereign indebtedness as compared to the new current account deficit, the concept of «rest of the world» as-sumes a different meaning; this time it is synonymic with «financial bubble». In the same way as the ex-ternal debt position of the Nation as a whole wors-ens by the net value of the IOus, which have been

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issued by the internal economy to the benefit of the foreign lender, [the country itself ] incurs a debt with the financial bubble.” (Schmitt and Cencini 2011). Conscious that summing up or compressing their findings covering decades of research is an impossible mission, what should economists do in order to solve the charge of over-indebtedness or, more precisely, avoid stubborn pragmatism belonging to blaming (and fruitless) economic policies? Doubtless, knowl-edge of history of economic thought and economic history would have contributed to eliminate many collective mistakes or misinterpretations of economic happenings, whose origins go back to (less sophisti-cated) concerns of economists of the past.

Since Germany has faced the economic consequenc-es of World Wars, German scientists of past centuries have been remarkably active in looking for structural remedies. If modern economists do not realise soon that their predecessors and their intellectual work still have much to teach the new generations of economic thinkers, it is only a matter of time before external debt crises hit leading countries, too (as they have already started to do in Greece, Ireland, Portugal, Spain and Italy).

4. conclusions

Quantum Macroeconomics, whose findings char-acterize the approach adopted, focuses purely on macroeconomic analysis starting from profound knowledge of economic thought. How could it be otherwise? Thus, “theories are facts. This remark is very true, and the history of those facts is the founda-tion of a theory about them, that is, a theory about theories”. (Pareto 1980) furthermore, “it is possible to view the development of economic thought as progressive in the sense that each generation learns something and absorbs something from the thought of preceding generations - thus, as the saying credited to Newton has it, we all stand on the shoulders of gi-ants.” (Spiegel 1991)

Now, if such a mechanism of knowledge loses its vitality, the consequences will not be affordable in the long run: more precisely, modern economics shows a pronounced quantitative-econometric ap-proach without demonstrating interest in economic thought and history, i.e. the memory and findings of economists of the past. Hence, a growing reliance on econometric and sophisticated quantitative tools in the absence of economic-philosophical knowledge

cannot compensate for any underlying shortcomings or flaws. Mere data analysis unsupported by solid eco-nomic thought leads to blunders and, consequently, to distrust of economics (and economists). Crises are bound to occur if central bankers, economists, and analysts stubbornly overlook some fundamental milestones and achievements in economic thought.

Manifestly inflationary policies as Government’s over-issuing combined with the refusal of a new Bret-ton Woods Conference are some true samples of the modern economic approach. No wonder that today’s world economy is more troubled than yesterday’s! for instance, over-indebtedness in some Southern Euro-pean countries is frequently blamed on inefficiency, fiscal evasion, corruption and high spending: obvi-ously, such modus cogitandi is not only prejudicial to the countries involved but it is also due to an intrin-sically microeconomic approach, which looks for the source of economic diseases in (human) behaviour, expectations and contingent factors. What if finan-cial, employment and debt crises were the result of macroeconomic - i.e. structural, not man-made - fal-lacies in the international system of payments? Why is it so difficult to hold this opinion and advocate reform accordingly? first of all, because of human tendency to impute only to people’s conducts the ori-gin of crises (microeconomic approach). In addition, a systematic course of action requires deep under-standing of previous scientific findings so that new conclusions can be drawn from them.

furthermore, countries’ over-indebtedness has path-ological roots, which do not depend on economic agents’ handling. Of course, exaggerated and ir-responsible economic practices, like bull operators’ speculation, have repercussions on global wealth, but their essence is micro-, not macroeconomic, namely structural.

for instance, the current crisis is the outcome of huge and deep fallacies in the modern international payments system, which Quantum Macroeconomics deals with. We wouldn’t call it the root of all evil, but depriving European countries of monetary sov-ereignty and associated policies has, if nothing else, reduced the acting power of Central Banks by try-ing to contrast economic crises. furthermore, many Southern European countries need to regain mon-etary independence. “Loss of monetary sovereignty resulting from the adoption of the Euro as a unique currency has had a negative impact on capital move-

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ments, which has arguably been underestimated. Given the past and present economic situation of the Eu member countries, monetary unification is a great threat to employment in the South and a cause of increasing social turmoil in the North.” (Cenci-ni 2005a) In addition, let us look at how exchange rates are set in the Eurozone: since there is a nomi-nal one-to-one correspondence between richer and poorer countries’ Euros, it will be predictably more convenient to invest in/buy from the first group of nations. More precisely, since goods and services of both richer and poorer Eurozone-countries are avail-able to foreigners at the same exchange rate, buyers will prefer consuming or investing in wealthier coun-tries. Hence, if both country groups had maintained their original national currencies, it is quite sure that exchange rates:• ofrichernationswouldhavegrowncuttingdownon commercial exports,• whilethatofcountriesineconomicneedhadfall-en, contributing to more competitiveness.

Ceteris paribus, since nominal exchange rates are ar-tificially equivalent both for more as less prosperous European countries, the latter cannot compete with wealthier nations, which in turn means that:• commercial importswillgrowmorerapidlythanexports• causingacurrentaccountdeficit• andincreasingexternalindebtedness.

As the renowned German economist Wilhelm Hankel et al. (2010) points out, according to our own trans-lation, that “the reason for the financial difficulties experienced by some EMu-Member-States is their fairly limited competitiveness, which is in turn due to the exchange rate of the Euro. As economic forecasts show, the Greek currency unit should be depreciated to a value of uS$0.34 so that companies would be-come more competitive in the international arena. furthermore, the Euro also dampens the competitive potential of these comparatively under-performing States belonging to the European union (or, at least, the European Monetary union), because the value of the European single currency does not reflect their economic performance. With regard to Germany, the value of the currencies of these States should be drasti-cally reduced, but it is also conceivable that this would spark a corresponding rise in the value of the German money unit. This economic principle remains uncom-promising.” (Hankel et al. 2010 [own translation])

furthermore, Quantum economics claims that (growing) external debts are subject to the outlined pathological duplication mechanism, which leads to over-indebtedness as German reparations’ analysis shows. In the end, who would buy overpriced goods/services - i.e. the products of poorer countries - if nominal exchange rates (between other factors) en-able to obtain comparatively cheaper merchandises from richer nations? Not surprisingly, economists like Emanuel Hugo Vogel amongst others excluded a pri-ori the creation of a monetary union, although they pleaded for the introduction of an international/a continental money unit.

At the risk of exaggerating its bearing, “everything has been said, and we are more than seven thousand years of human thought too late” (De la Bruyère 1688). ul-timately, while this paper aimed to show the structural (i.e. macroeconomic) nature of economic crises – these days misunderstood to the advantage of more contin-gent and behavioural (i.e. microeconomic) sources -- it also sought to draw attention to the fact that there have been several (not only Germanophone) economists in the past centuries who proposed particularly innova-tive and interconnected reform plans of the world monetary architecture. True, they were inexplicably and unjustifiably removed from collective memory. yet – and this is precisely the paper’s golden thread - their proposals are even more suited to establishing a new global monetary system than the contemporary international economic and financial institutions (at least, as they are currently designed).

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doeS national culture SiGnificantly iMPact orGaniZational culture at SMes

renata Korsakienė1, olesia Gurina2

1,2Vilnius Gediminas Technical university, Saulėtekio Av. 11, LT-10223 Vilnius, Lithuania Email: [email protected], [email protected]

Received 5 October 2011; accepted 5 December 2011

abstract. The paper presents research which investigates the implications of national culture and organizational culture in the Lithuanian and Russian SMEs. While much of the attention has been given to organizational culture in large companies, little research has been focused on organizational and national culture in SMEs. The research is based on the main ideas of Hofstede’s framework of seven cultural dimensions and Denison’s cultural model, which measures culture in organizations with four major traits, such as involvement, consistency, adaptability, and mission. The quantitative research is based on responses to a questionnaire embracing various aspects of national and organizational culture. The authors of the research have elaborated proposals for further research.

Keywords: National Culture, Organisational Culture, SMEs, Lithuania, Russia.

reference to this paper should be made as follows: Korsakienė, R.; Gurina, O. 2012. Does National Culture Sig-nificantly impact Organizational Culture at SMEs, Journal of Security and Sustainability Issues 1(3): 219–228.

jel classification: M10, M14, M19.

1. introduction

The focus of scholars on culture has been vast over the past decades. The scientific reearches have ex-plored the impact of culture at the national and or-ganisational levels. Obviously, the different layers of culture interact and impact each other.

The impact of national culture on organizational cul-ture in large companies has been widely addressed by researchers from various countries. On the other hand, litle research has been focused on organization-al and national culture in small and medium enter-prises (SMEs). SMEs, playing a significant role in the growth and change of economy, are confronted with international competition and are forced to compete in international markets. The managers of SMEs are forced to understand peculiarities of various coun-tries and the impact of culture on the firm’s success.

The paper aims to reveal the implications of national culture and organizational culture in Lithuanian and Russian SMEs. The research is based on the main

ideas of Hofstede’s framework and Denison’s cultural model, which measure involvement, consistency, adapt-ability, and mission. The paper is based on quantitative research.

2. culture

The scientific literature linked to culture is seen as vast and extensive. Notably, a lot of attempts were made in order to clarify the concept of culture. The researchers have proposed to define culture as the shared patterns of behaviours and the meanings that are attributed to these behaviours (Schneider, Bar-soux 2003). Therefore, culture consists of language, ideas, beliefs, customs, taboos, codes, institutions, tools, techniques, works of art, rituals, ceremonies, and other related components.

Kroeber and Kluckhohn (1954) have provided 164 definitions of culture and have come to the conclu-sions that usually the word culture is used in three basic assumptions:

R e n a t a K o r s a k i e n ė , O l e s i a G u r i n aDoes National Culture Significantly Impact Organizational Culture at Smes

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1. Different expressions of art also known as high culture.2. Human beliefs, behavior and knowledge gained through social learning.3. Shared values, goals, practices and attitudes within a specific organization, institution or group.

Culture is seen as the shared system of meanings (guides how the world is perceived and culture is organized), relative (there is no cultural absolute and there is no set standards for perceiving culture), learned (it is derived from social environment and not from genetics) and about groups (it is a collective phenomenon and about shared values and mean-ings). On the other hand, culture could not be right or wrong, inherited or about individual behavior (Hoecklin 1995; McKenna, Beech 1995).

Trompenaars and Hampden-Turner (1998) are stat-ing that culture of one country could not ever be un-derstood by other cultures. Even people of the same culture can never say that they fully understand even people of their own culture. On the other hand, the discussions in scientific literature predict that inter-nationalization will create a common culture world-wide and it should make the life of international managers much easier. According to Ohmae (1994), the impact of national cultures on organisational cul-tures appears likely to continue to decline.

Despite the debate related with convergence of cul-tures, other scholars adopt different approach (Hof-stede 2001; Tayeb 1996). They state that organi-sations need to be aware of differences in national cultures and the influence of these differences upon the organisation’s culture. Cultural differences exist not only in respect to distant and exotic countries. Neighboring countries and even regions within the same country can also have significant differences. for example, European union is a symbol of unifica-tion of many countries. Apart from legal problems, there is a whole layer of different problems, as no-where cultures do differ as much as inside Europe (Kaarna 2010; Korsakiene 2009; Ruzier et al. 2006; Adekola et al. 2008; Trompenaars and Hampden-Turner 1998; Hoecklin 1995).

The review of the concept of culture implies that there is no single interpretation of the meaning (Stankevičienė et al. 2009). Nevertheless, most schol-ars agree that culture concept is a multifaceted notion that plays an important role on various levels, such

as community, organizations and firms, and nation. In order to set consistent basis for further course of current research, Hofstede’s interpretation of cultural concept and its application is chosen as the basis for current research.

3. Hofstede’s dimensions of culture

Cultural differences at the country level reside mostly in values, less in practices. At the organizational level, cultural differences are considered mostly of differ-ent practices, not of different values. using one word culture for speaking about organizational culture and national culture is a mistake as nation is not an organization and there are two types of cultures of different kinds (Hofstede 2001). Social behavior is embedded in a particular content of the country and is connected to others deeply held values and beliefs. Mismanaging cultural differences can lead to inabil-ity to motivate employees, increase rotation and fail to build competitive advantage. On the other hand, when successfully managed, differences in cultures can lead to increasing innovations in business prac-tices, faster and better learning within the organiza-tion and sustainable growth (Hoecklin 1995).

Geert Hofstede is the Dutch sociologist and anthro-pologist best known for his research in the field of cross-cultural organizations. The research of Hof-stede focuses on the differences and similarilies be-tween national cultures. Hofstede (1991) has pro-posed several cultural dimensions: power distance (PDI), individualism vs. collectivism (IND), mascu-linity vs. femininity (MAS), uncertainty avoidance (uAI). With conducting new research Hofstede has introduced new dimension – long term orientation (LTO), which originally was named Confucian dy-namism and was identified only when Hofstede’s re-search was restructured with the involvement of Chi-nese researchers to deliberately create a non western bias (Hofstede 2001). Later on, based on the work of Minkov (2007), Hofstede has added two dimensions more: indulgence vs. restraint and monumentalism vs. self- effacement (Hofstede 2009).

Power distance is the extent of inequality in a soci-ety - less powerful members of institutions and or-ganizations within a country are expecting and ac-cepting that power is distributed unequally. Power and inequality are fundamental factors of any soci-ety and any person with international experience has to know that “all societies are unequal but some are


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more unequal than others cultures (Hofstede 2001). In countries where power distance is low, inequilities between people are more likely to be minimised and leading to consultative management style as power distance between the hierarchy levels is small and en-courages more communication between the boss and his or her subordinates. However, in the countries where power distance is high, there is more depend-ence between the boss and subordinates, where sub-ordinates prefer dependence and more authoritarian boss (Hofstede 2001; Machado, Carvalho 2008).

Notably, individualism vs. collectivism refers to the extent to which individuals are oriented to them-selves and their immediate family, rather than groups (Millmore et al. 2007). This dimension is the only one of all other dimensions for which worldwide shifts have been noticeable in the past. According to the observations, there is a relationship between cultural individualism and economic wealth. for instance, wealthier countries score more individual-ist and countries which recently started to become wealthier start to become individualist. Neverthe-less, while wealth increases individualism, it does not make those countries as individualist as West-ern countries. Therefore, increasing or decreasing wealth reduces but does not eliminate differences in individualism/collectivism among parts of the world (Hofstede 2001).

The dimension of masculinity vs. femininity refers to the extent to which assertiveness and decisiveness are prioritized over more caring values. Notably, this dimension refers to the division of emotional roles between the genders which is another fundamental issue for any society. The research discovered that women’ values vary less among societies than men’ values (Hofstede 2001). However, what behaviors are supposed to be feminine or masculine is the subject of discussion among modern societies. According to Hofstede (1991), masculine societies have estab-lished clear roles of males, meaning that males have to be confident and oriented towards the material success. In such societies where gender roles overlap are supposed to be feminine (Hofstede 1991, 2001; Machado, Carvalho 2008).

uncertainty avoidance is the extent to which the members of a culture feel threatened by uncertain or unknown situations and opposes toughness and is towards more flexible cultures. Weak uncertainty avoidance stands for citizen competence - that is the

belief that ordinary person is able to influence the authorities and shares some degree of mutual trust among them. Strong uncertainty avoidance implies that decisions should be left to experts – citizens and authorities mutually distrust each other (Hofstede 2001). Cultures which are avoiding uncertainty are trying to control it by installing laws and regulations, various safety measures, or by emphasizing the philo-sophical and religious taboos. On the opposite type, uncertainty accepting cultures are more tolerant to-wards the change and different opinions compared to what they are used to. They have very few rules and laws and their philosophical and religious views are relative and could be openly discussed and contra-dicted (Hofstede 2001).

Long-term vs. short-term orientation originally was called Confucian dynamism. Later renamed to long-term vs. short-term orientation this dimension was added as a fifth dimension to the original four ones to distinguish thinking between the East and West (Draguns 2007). Long-term orientation means fo-cusing on the future. It implies a cultural trend to-wards delaying immediate result by practicing per-sistence and thriftiness. On the opposite, short-term orientation means focusing on the past and present by respecting tradition and by a need to follow trends in spending even if this means borrowing money. Long-term oriented societies encourage virtues of orientation towards rewards, holding savings and fast adaptation to changes in situations. Short-term ori-ented societies are more related to valuing past and present it as national pride, respects traditions and fulfilling obligations to the society of being an obedi-ent citizen environment (Hofstede 2001).

Indulgence vs. restraint dimension is based on Mink-ov’s (2007) World Survey data analysis for 93 coun-tries. Notably, indulgence stands for society which allows relatively free display of basic human desires, enjoying life and having fun. High indulgence cul-ture will emphasize generous spending which can be caused by self-enhancing attempts to be proud and successful individuals who are not saving their money to get satisfaction or limit themselves in their desires and feelings. On the opposite, restraint stands for a society that suppresses the display of human desire of having fun and regulates it by introducing strict so-cial norms and taboos environment. Minkov (2007) specified that happiness is linked to the perception of the control of personal life, with life representing a source of freedom and leisure.


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Minkov (2007) explained that in monumentalist cul-tures people will have a tendency to have a positive self-regard and seek for positive information about themselves. In such culture, interpersonal competition is valued as it provides an opportunity to demonstrate personal superiority. Because of the interpersonal competition, the large differences in income will be present. According to Heine (2003), such individu-als will not be interested in self-improvement as they will not see the need to improve what is already good enough. Moreover, as they don’t view individuals being flexible, they would not be easily convinced that self-improvement will bring positive results. Representa-tives of such culture will view cultural adaptation as a kind of betrayal as they are proud of who they are and view their values and beliefs indispensable (Minkov 2007). On the other side, self-effacement cultures will be more flexible and obedient. People will view themselves as adaptive individuals who can adjust to any situation and view self-improvement activities as the way of coping with deficiencies (Heine 2003). In such cultures, failure would not be perceived as a problem and task at which one has failed will not be dismissed as unimportant, as they will view failure as a lesson and they will admit their mistakes and will try to learn from them in order to avoid repeating them in the future (Minkov 2007).

The researches of Hofstede have influenced works of other scholars. for instance, Trompenaars and Hampden-Turner (1998) have identified seven di-mensions of culture, which are conceptually related to Hofstede’s dimensions. On the other hand, Mc-Sweeney has argued that Hofstede’s research fails to show a cousal link between the dimensions of a particular culture and specific actions (McSweeney 2002). However, despite the prevailing critics, the analysis of culture based on Hofstede’s dimensions can not be ignored.

4. denison’s Model

fey and Denison (2003) argue that organizational culture is a multifaceted phenomenon, scoping from deeper layers like beliefs and assumptions to visible layers like structures and practices. Notably, Denison and his colleagues have developed an organizational culture model based on four traits of organizational cultures: involvement, consistency, adaptability and mission (Denison, Mishra 1995). Each trait breaks down into three more specific areas for a total of 12 indices (Hooijberg, Denison, 2002).

Involvement describes the empowerment and team-work which are necessary to address competitive environment. Indices which measure involvement are: empowerment, teamwork and capability devel-opment. Consistency measures the unified approach to goal achievement and problem resolution that al-low dealing with various challeneges (Denison et al. 2004). Consistency creates a “strong” culture based on beliefs, values and symbols that are widely and commonly understood by all people in organiza-tion (Guidroz et al. 2005). Indices which measure consistency are: core values, agreement and coordi-nation. The trait of adaptability assumes translating the demands of business environment into action. This trait describes organization’s efforts to balance internal identity with external events and impetus to change (Denison et al. 2004). Indices which measure adaptability are: creating change, customer focus and organizational learning. The mission trait empha-sizes defining a meaningful long-term direction for the organization. The indices of mission consist of: strategic direction and intent, goals and objectives, and vision.

The scholars emphasise that the model focuses on the contradictions involved in simultaneously achieving internal integration and external adaptation (fey, Denison, 2003). Hence, the authors of this paper agree with the main ideas and insight proposed by Denison and his colleagues. Therefore, the above dis-cussion leads to several research questions which are related to dimensions of national and organizational culture.

5. MethodologyCurrent research is developed to investigate the impact of national culture on organizational culture in the Lithuanian and Russian SMEs. for present explora-tory research a convenience sample was chosen as this sampling method is less costly in time and monetary terms than random sampling (Marshall 1996).

In order to determine and evaluate difference of na-tional culture impact on organizational culture, the decision was made to conduct the research in two stages. During the first stage questionnaires on na-tional culture dimensions were distributed to the managers of the Lithuanian and Russian SMEs. The second stage of the research included distribution of questionnaire on organizational culture dimensions to the participants from the same sample.


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The review of the relevant literature has allowed for-mulating hypothesis:

Hypothesis 1: In the Lithuanian SMEs participants of Lithuanian nationality will score less on power distance (PDI) and monumentalism (MON) than participants of Russian nationality.

Hypothesis 2: In the Lithuanian SMEs participants of Lithuanian nationality will score more on mission, adaptability, consistency and involvement traits of organizational culture than participants of Russian nationality.

Hypothesis 3: the higher Power Distance (PDI), Long-Term Orientation (LTO), Indulgence vs. Re-straint (IVR) and Monumentalism (MON), the low-er Involvement trait of organizational culture in the Lithuanian and Russian SMEs.

Hypothesis 4: the higher Individualism, Masculinity (MAS) and uncertainty Avoidance (uAI), the higher organizational trait Involvement in the Lithuanian and Russian SMEs.

Hypothesis 5: the higher Power Distance (PDI), In-dividualism (IDV), uncertainty Avoidance (uAI) and Long-Term Orientation (LTO), the higher or-ganizational culture trait Consistency in Lithuanian and Russian SMEs.

Hypothesis 6: the higher Masculinity (MAS), In-dulgence (IVR) and Monumentalism (MON), the lower organizational culture trait Consistency in the Lithuanian and Russian SMEs.

SMEs were selected from tourism, recruitment agen-cies, transportation and logistics industries. The on-line questionnaire was distributed to the respondents through personal e-mail invitations followed by per-sonal phone calls. The e-mails of managers and direc-tors were obtained upon personal referral in Russia and Lithuania as well as retrieved from the database of SMEs in Lithuania - Creditreform database or on company’s website, where it possible.

The ideal size of a homogeneous sample, as indicated by Hofstede, is 50 respondents though a heteroge-neous sample of 20 respondents in one country is considered to be yet sufficient for statistical analysis (Hofstede et al., 2008). Therefore, the ideal target sample of present research is 50 respondents in each of both countries - Lithuania and Russia. A total of 29 and 26 usable questionnaires were returned from the Lithuanian and Russian samples respectively.

6. discussion of results

In order to check the reliability of data, the Cron-bach Alpha analysis was applied. A reliability test like Cronbach’s Alpha should not be based on individual scores but on country mean scores. Obviously this presupposes data from a sufficient number of coun-tries, in practice at least ten. for comparison, across fewer countries the reliability of the VSM at the country level has to be taken for granted. Since cur-rent research observed only two countries, the Cron-bach Alpha analysis was used to check reliability of dependent variables of organizational culture.

table 1. Reliability Statistics

Scale Cronbach’s Alpha

Number of valid cased

% of valid

Involvement 0,926 55 100,0

Consistency 0,741 55 100,0

Adaptability 0,429 55 100,0

Mission 0,686 55 100,0

Reliability analysis showed that the data obtained from the survey questionnaires provides well-designed measures that accepted internal consistency of data only for two organizational culture traits, such as in-volvement and consistency. The data for adaptability and mission organizational traits have not passed reli-ability test for data consistency. Consequently, adapt-ability and mission organizational traits could not be considered well-designed constructs and measures within the scope of current research (Table 1).

In order to check the compatibility of the data from the two samples, the t-test analysis (α=.05) was conducted to compare sample means and reveal if there are sig-nificant differences in variance of the two samples. The t-test (α=.05) failed to reveal any significant variance in samples. Consequently, the means for dependent and independent variables can be compared to iden-tify differences in national culture and organizational culture dimensions in both samples (Table 2).

The comparison of means of variables suggests that there is slightly significant difference in power dis-tance (PDI), whereas all other dimensions of national culture differ significantly in both samples. Despite slightly significant difference in power distance (PDI) between the Lithuanian and Russian participants, the mean value for Lithuania (mean=47,241) and mean


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value for Russia (mean=43,269) suggest that namely Lithuanian managers are more willing to accept in-

The mean value for individualism vs. collectivism (IDV) dimension is (mean=38,621) for the Lithua-nian managers and (mean=59,231) for the Russian managers imply that the Russian managers tend to be more independent and self-reliant than the Lithua-nian managers.

Masculinity vs. femininity (MAS) mean value is (mean=21,724) for Lithuanian managers, while for Russian managers it is (mean=6,731). The compari-son of MAS means implies that the Lithuanian man-agers are more assertive, focused on performance and material success, whereas the Russian managers tend to focus more on relationships and quality of life.

uncertainty avoidance (uAI) mean value is negative due to subtraction in the formulas when no adjust-ment constant was applied. However, the Lithuanian participants score higher than the Russian partici-pants with mean values (mean= -22,931) and (mean= -53,654) respectively. This implies that the Lithua-nian managers perceive the ambiguity more stressful and avoid unknown situations and uncertainty more than the Russian managers.

Long-term orientation vs. short-term orienta-tion (LTO) dimension mean values imply that the Lithuanian managers are more focused on future and tend to delay immediate results by thriftiness as their mean score is (mean=27,759). On the contrary, the Russian managers focused more on present and

immediate results since mean value for the Russian sample is (mean=5,769).

Indulgence vs. restraint (IVR) mean value for the Lithuanian sample is (mean=25,000), whereas for the Russian sample it is (mean=79,231). High mean value for the Russian sample implies that the Russian managers tend to display human desires more, to en-joy life and to spend generously to approve their suc-cess. On the contrary the Lithuanian managers tend to introduce strict norms and taboos as well as have more control over life.

Monumentalism vs. self-effacement (MON) mean value is (mean=13,103) for the Lithuanian sam-ple and (mean=38,654) for Russian sample, which implies that the Russian managers tend to be more self-enhancers and reject the change more than the Lithuanian managers.

In regard to organizational culture traits, mean val-ues (mean=3,515) for the Lithuanian sample and (mean=3,500) for the Russian sample imply that there is no significant difference for consistency in both countries. Therefore, managers in both coun-tries perceive “strong” culture based on beliefs, values and symbols that are commonly understood in their organizations.

Involvement mean values are (mean=3,566) for the Lithuanian sample and (mean=3,217) for the Russian

table 2. Independent Samples Test and Group Statistics

Lithuania Russia t Sig.

N 29 26

Power Distance (PDI) 47,241 43,269 0,240 0,873

Individualism vs. Collectivism (IDV) 38,621 59,231 -1,278 0,447

Masculinity vs. femininity (MAS) 21,724 6,731 0,953 0,354

uncertainty Avoidance (uAI) -22,931 -53,654 1,964 0,255

Long-Term Orientation vs. Short-Term Orientation (LTO) 27,759 5,769 1,503 0,897

Indulgence vs. Restraint (IVR) 25,000 79,231 -2,834 0,987

Monumentalism vs. Self-effacement (MON) 13,103 38,654 1,493 0,294

Involvement 3,566 3,217 1,949 0,344

Consistency 3,515 3,500 0,126 0,888

Adaptability 3,903 3,664 3,700 0,140

Mission 3,586 3,408 1,496 0,608

equality and unequal power in the organization than Russian managers.


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sample, implying that the Lithuanian managers encour-age sense of responsibility and nurture commitment to organization more than the Russian managers.

The mean values for adaptability organizational cul-ture trait are (mean=3,903) and (mean=3,664) for the Lithuanian and Russian samples respectively. Higher mean for the Lithuanian sample implies that the Lithuanian managers favor organizational change in response to customers and the marketplace more than the Russian managers do.

The mean values for mission organizational trait are

(mean=3,586) and (mean=3,408) for the Lithuanian and Russian samples respectively, which implies that defining long-term direction for the organization and shaping current behaviors by envisioning a de-sired future state are more pursued by the Lithuanian managers than the Russian managers.

Multiple regression analysis during which dependent variables of organizational culture traits Involvement and Consistency were regressed against independent variables of national culture dimensions, was used to test hypotheses 3-6.

table 3. Multiple Regression Coefficients of National Culture Dimensions Impact on Organizational Trait Involvementa

unstandardized Coefficients Standardized Coefficients t Sig.

B Std. Error Beta

(Constant) 4,379 0,417 10,490 0,000

PDI 0,000 0,002 -0,026 -0,187 0,853

IDV 0,003 0,002 0,294 2,152 0,037

MAS 0,001 0,002 0,071 0,488 0,628

uAI -0,002 0,002 -0,156 -1,023 0,312

LTO -0,001 0,002 -0,096 -0,736 0,466

IVR -0,003 0,001 -0,304 -2,016 0,050

MON 0,000 0,001 0,027 0,193 0,848

What is your country of residence? -0,092 0,225 -0,069 -0,410 0,684

What is your nationality? -0,525 0,255 -0,340 -2,058 0,045

a. Dependent Variable: Involvement, R=0,570, R2=0,325, f=2,405, p<0.05, Sig.=0,025, df=55, α=0,05

Initial multiple regression analysis for Involvement organizational culture trait as dependent variable and nationality and country of residence as control variables revealed significant relationship of Involve-ment with Individualism (IDV) and Indulgence vs. Restraint (IVR) national culture dimensions. Con-sequently, Hypothesis 3 “The higher Power Distance (PDI), Long-Term Orientation (LTO), Indulgence vs. Restraint (IVR) and Monumentalism (MON) are, the lower Involvement trait of organizational culture will be in Lithuanian and Russian SMEs” and Hypothesis 4 “The higher Individualism, Masculinity (MAS) and uncertainty Avoidance (uAI) are, the higher organiza-tional trait Involvement will be in the Lithuanian and

Russian SMEs” are partially accepted for independent variables of Individualism (IDV) and Indulgence vs. Restraint (IVR) significant relationship.

Therefore, decision has been made to modify hy-pothesis to reflect the impact of national culture di-mensions that have shown significant influence on organizational culture traits. Thus, modified hypoth-esis are:

Hypothesis 3a: The higher Power Indulgence vs. Re-straint (IVR), the lower Involvement trait of organiza-tional culture in the Lithuanian and Russian SMEs.

Hypothesis 4a: The higher Individualism (IDV), the higher organizational trait Involvement in the Lithua-nian and Russian SMEs

Summary of significant relationships revealed by multiple regression analysis for impact of Individual-


226

ism and Indulgence vs. Restraint national culture dimensions on organizational trait Involvement is presented in the Table 4.

table 4. Multiple Regression Coefficients of Individualism and Indulgence National Culture Dimensions Im-pact on Organizational Trait Involvementa

unstandardized Coefficients

Standardized Coefficients t Sig.

B Std. Error Beta

(Constant) 4,389 0,346 12,703 0,000

IDV 0,003 0,001 0,276 2,246 0,029

IVR -0,002 0,001 -0,220 -1,709 0,094



a. Dependent Variable: Involvement, R=0,537, R 2=0,288, f=5,056, p<0.05, Sig.=0,002, df=55, α=0,05

Hypothesis 3a is accepted as there is negative relationship between Indulgence national culture dimension and organizational trait Involvement.

Since there is positive relationship between Individualism national culture dimension and Involvement organi-zational culture trait, the Hypothesis 4a is accepted.

table 5. Multiple Regression Coefficients of National Culture Dimensions Impact on Organizational Trait Con-sistencya

unstandardized Coefficients

Standardized Coefficients

t Sig.B Std. Error Beta

(Constant) 3,622 0,308 11,768 0,000

PDI 0,001 0,001 0,168 1,039 0,304

IDV -2,691 0,001 -0,004 -0,024 0,981

MAS 0,001 0,001 0,106 0,632 0,530

uAI -0,001 0,001 -0,173 -0,984 0,330

LTO -0,002 0,001 -0,211 -1,398 0,169

IVR 0,000 0,001 -0,054 -0,309 0,759

MON 0,000 0,001 0,031 0,197 0,845



a. Dependent Variable: Consistency, R=0,318, R2=0,101, f=0,563, Sig. 0,819, df=55, α=0,05

The multiple regression analysis does not reveal any significant relationship between national culture dimen-sions and organizational trait Consistency. Consequently, Hypothesis 5 “The higher Power Distance (PDI), Individualism (IDV), uncertainty Avoidance (uAI) and Long-Term Orientation (LTO), the higher organizational trait Consistency in the Lithuanian and Russian SMEs” and Hypothesis 6 “The higher Masculinity (MAS), Indul-gence (IVR) and Monumentalism (MON, the lower organizational trait consistency in the Lithuanian and Russian SMEs” are both rejected.


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7. conclusions

Given the results of current research on the impact of national culture on organizational culture and their im-plications for HRM, following conclusions were made:

There is slightly significant difference in power dis-tance in both Lithuanian and Russian SMEs, whereas other national culture dimensions of individualism, masculinity, uncertainty avoidance, long-term orien-tation, indulgence vs. restraint and monumentalism differ significantly.

Organizational culture traits, such as involvement, consistency, adaptability and mission are higher for organizational cultures in the Lithuanian SMEs, pro-viding grounds to conclude that the Lithuanian SMEs have stronger organizational culture and organiza-tional values if compared to the Russian SMEs.

The limitations of the presented study were connect-ed with the small sample size and the fact that SMEs included in the sample represented only some busi-ness sectors. further research should therefore con-centrate on a deeper analysis of differences between the countries and business sectors.

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journal of Security and SuStainability iSSueS 2012, 1(3)

International Entrepreneurial Perspectives and Innovative Outcomes

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Foreword to the third issue of peer reviewed scientific Journal of security and sustainability Issues


ISSN 2029-7017

SECURITY AND SUSTAINABILITY ISSUES


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Gediminas DubauskasSUSTAINABLE GROWTH OF THE FINANCIAL SECTOR: THE CASE OF CREDIT UNIONS 159

Manuela tvaronavičienė, Virginija GrybaitėSUSTAINABLE DEVELOPMENT AND PERFORMANCE OF INSTITUTIONS: APPROACHES TOWARDS MEASUREMENT 167

Mantas BileišisEMPOWERING INSTITUTIONS: A CASE FOR CONNECTING BUSINESS AND THE ACADEME THROUGH PHRONESIS 177

Jerzy Kaźmierczyk INFORMATION TECHNOLOGY SYSTEMS AND THEIR IMPACT ON THE EMPLOYMENT LEVEL IN THE POLISH BANKING SECTOR 187

Kristina Garškaitė-Milvydienė DIAGNOSTICS OF BANKRUPTCY THREAT TO ENTERPRISES 197

edoardo Beretta SOME MONETARY LESSONS FROM THE GERMAN ECONOMISTS OF THE PAST: LIGHTS AND SHADOWS IN THE COLLECTIVE MEMORY 205

Renata Korsakienė, olesia Gurina DOES NATIONAL CULTURE SIGNIFICANTLY IMPACT ORGANIZATIONAL CULTURE AT SMEs 219


Jerzy stańczyk EUROPEAN SECURITY AND SUSTAINABILITY ISSUES IN THE CONTEXT OF CURRENT INTERNATIONAL ENVIRONMENT 81

Gediminas Dubauskas INTERNATIONAL BANKS IN THE BALTIC STATES: ASPECTS OF GROWTH SUSTAINABILITY 91

Renata Korsakienė, Ieva Breivytė, evelyn WamboeHUMAN DEVELOPMENT INDEX AND SUSTAINABLE DEVELOPMENT 103

Mirjana Radović Marković CRITICAL APPROACH TOWARDS THE EMPLOYMENT ANALYSIS IN THEORY METHODOLOGY AND RESEARCH 113

Rasa smaliukienė, svajonė Bekešienė, Marzena trybull SUSTAINABILITY ISSUES IN MILITARY: AN APPLICATION OF COMPUTER-SUPPORTED COLLABORATING LEARNING 123

Audronė Balkytė, Manuela tvaronavičienė THE ROLE OF MIGRATION FOR SUSTAINABLE DEVELOPING ECONOMY: LITHUANIA IN THE EU CONTEXT 133

Audrius Dzikevičius, svetlana Šaranda CAN FINANCIAL RATIOS HELP TO FORECAST STOCK PRICES? 147