Electronic Library of Scientific Literature
Volume 48 / No. 2 / 2000
The article illustrates (using the example of energy carriers) what mechanisms of a regulated price cause the deformation of the economy structure and its performance. It also gives opinion regarding the direction seeking solutions in the key documents on the economic policy in Slovakia. The article attempted to outline possible solutions for the deregulation in some prices and the role of so called natural monopolies.
If the price is considered to be a key factor for allocation of resources and a measure of a relative scarcity, we have to admit that direct interference of the state into pricing in the form of the price deregulation means a deformation of the allocation and cooperation mechanisms in the economy. The price deregulation field belongs to such areas in Slovakia where the transformation process has for a certain period of time stopped. The deformed price system is representing a portion of a total deformation and of the limited functionality of the allocation mechanism in the Slovak Republic. In addition, the list of deformations has been also amended by a non-functioning capital market, problems in the banking sector, limited labour market functionality and by the excessive influence of the economic-and-political center on the allocation and coordination mechanism.
The deformed allocation and coordination mechanism, however, finally leads to such adaptations of economic subjects that are divergent from the optimum. In this way the reasonable economic structure is injured. The impaired economy structure brings the economic growth in a long term which, however, is lower than the potential growth. A long lasting negligence to the price regulation problem has deforming impacts to regulated (regulated enterprises itself) and also to the non-regulated part of the economic system.
The price structure in the SR during the transformation did nod reflect the relative scarcity of the energy carriers or their production costs. Such price structure means inefficient energy spending and does not allow the energy companies to behave according to standard market rules.
Low prices of energy carriers add up to moving of the production structure towards energy demanding activities. Comparative indicators have proved that the energy demand in the SR in comparison with the developed countries has been considerably higher, in comparisons with the transforming Central Europe countries was the same or higher.
Due to relatively cheap traditional production inputs (energy), the other – substitution inputs (human capital, progressive and saving technologies) are relatively expensive. This relatively high price of the progressive production factors to compare the traditional inputs proves to be one of the associated factors responsible for the non-sufficient changes in the economy structure. At the same time, the tendency for exports based on the price competitiveness has been conserved, and on the other side there is a pressure against big volumes of fuel input imports, and following negative impact, on the external balance of our economy.
Probably the most important defect of the practical price regulation are incentive failures. The structure and subsequently economy performance are influenced by the fol-lowing basic failures:
a) A tendency to build capital demanding investment units (Averch-Johnsonov effect).
b) A loss of monopoly firm management incentive to improve production at minimum costs and as a result of that – wasting.
c) Asymmetric division of the investment risks. Under the regulated environment the investment costs are automatically included in prices and consumers will pay, even if the investment was not efficient. That has an important influence regarding the company decision making on investments – a firm will undertake also such investment which, if in a competitive market, would normally decline as too risky.
d) A reversed causality of prices – investments. In the non-regulated market the producers will decide investments for the future production volume based of the assessed future price of goods. After the investment was finalized, his investment decision cease to influence his price policy. Prices determine the investment volume. However, in the regulated market the decision making process is reversed.
When discussing the possibilities of price deregulation within the existing monopolies, it is important so that the economic-and-political center answered the question whet-her it wanted to see the former monopolies as business companies or as non-profit type of organizations. The SR government documents show that the position of such companies have been changed and the natural monopolies are no longer understood as a social po-licy tool. Market principles should be employed much more being a component of the reformed environment for the above mentioned companies (allowing pricing according to reasonable costs, separation of so called social activities from commercial ones, minimizing the need for cross donations or state budget contributions, open doors for competitors).
If the industry is really the natural monopoly, then it is not necessary to amend the natural entrance barrier by any administrative measures. There is a big difference if the natural monopoly position of the company is protected by an administrative barrier, or not. With the support of the administrative barrier the monopoly can achieve an above standard profit in a long term, because no real or potential competitor exist. If administrative barriers work, there are potential competitor companies (i. e. competitors that can enter the market if the price billed by the current monopoly is enough high so that the entrance of another competitor to the market is attractive), that restraint the monopoly in its price policy and force to bill prices which are low enough, so that competitors are not interested. The price can be very close to a flawless competitive price even it there is only one producer operating on the market. That is why in case when there is no real competitor it is useful to allow at least the existence of a potential competitor.
If the new legislative framework leaves a certain part of current natural monopolies on the field of regulated companies, based upon the experience from other countries, we can recommend so called incentive methods of price regulation. It has been proved as very important when the input price regulation rule was determined in advance for a lon-ger period of time, and that the regulating body during the specified period of time abstained from any additional interference regarding the pre-agreed rules. Only this would to sustain the incentive of the management in regulated companies for long term projects leading to lower costs a due to that also to moderate price increase.
Assuming that more serious reasons of the troublesome economic development in the SR reside in the form of:
a) the non-completed transformation,
b) the structural problems.
We can say that the problem of deregulated prices and creating a reasonable price structure is tied to both specified reasons. The non-finished transformation in the field of price deregulation and in the field of the so called natural monopolies have impacted the economy structure, investment directions, and indirectly also the overall economy performance.
The article aims to draw attention to some methodological and contextual links of relevance of statements and situations analyzed in the economic theory to create a port-rayal of a human being and his situation determination. A specific model of human beha-viour included in many economic models as a presumption is the model of rationality and such behaviour known as homo oeconomicus.
Certain problems occurs if this model is taken as a dominating approach to a human being in other social studies. The majority of authors including many economists refuse the approach called “economic imperialism” or “colonization” of the living space. The misunderstanding is based on considering homo oeconomicus being a paradigm for the interpretation and description of human nature in general. We must understand that this model has a cognitive importance and its meaning in the context of a special study in which it was created.
When interpreting this model, it is essential that are the signs of economic rationality taken into account. Each concept of economic rationality provides a certain arrangement or structure of individual preferences. However, it does not say anything about their origin or their content. The changes in behaviour related to changed situation will be judged from the perspective of this rationality. In this way we can forecast changes in the choice-distribution on the basis of general conditions. If we want to explain relations between description of a situation and a behaviour of a person, it is necessary to form a standardi-zed description of a situation. Individual behaviour as well as aggregates of individual performances, collective phenomena, can then be taken as the object of the theoretical research. Some hypotheses are formulated and verified on the aggregate level, but the true connection is expressed on the microlevel. Beyond the macrohypothesis there is a micro-model and the rule of aggregation, i. e. microfoundation. On the aggregate level we have to monitor the value-combinations of the aggregate characteristics.
It is difficult to forecast the behaviour of a single individual. Although on the macro-level under the condition of stable preference-distribution it is possible to forecast certain performance and influence it through restrictions of a particular situation. It is impossible, though, to pretend to complex portraying of the world. In this context, there is no need for polemic about the portrayal of a human being. But if we neutralize the incompatible specifications of the situation at the individual rather than at the aggregate level and to monitor performance of people unambiguously and adequatly to the situation, we can recognize behaviour maximizing utility. If this is applied to people in general, we get “homo oeconomicus” whose objectives do not depend on social or temporal context. They perceive the surrounding social environment as resources and restrictions. They also count on penalties as the possible result of their actions. Social standards represent data related to the situation in which they make decisions. This kind of socially not rooted and morally indiferent behaviour is often being criticized by sociologists, ethic-scientists, psychologists, etc… Even some economists try to overcome the accusation of egoism (F. Hayek, J. Buchanan) and some of them try to identify egoism with altruism (J. Kinkor).
Homo oeconomicus is not an overall description of human characteristics, it only deals with behaviour in certain situation. If we were to forecast a person’s behaviour, we would have to draw from a complex real situation and its complete description which is, in practice, impossible. However, there are some situations in which we can make a forecast even in case of reduced description. This happens in “single exit” types of situations, in models of economic analysis called situations of high costs with an extensive pressure to take a particular action. The optimum behaviour depends on the optimum level of information, i. e. on the balance between marginal costs and marginal revenues. It is not perfect or optimized description of situation that is most commonly used but a standardi-zed description, because people have limited possibilities to obtain and process information. People teach each other these standardizations as heuristics.
Behaviour is often standardized which increases the possibility to forecast individual cases. If the prognosed behaviour is maximizing, it is not because the individuals act “naturally” that way, but because the circumstances in a certain situation force them to a particular solution.
As a conclusion we want to emphasize that the model homo oeconomicus is an abstraction. The analysis of mechanisms of decision making included in the model can help us to avoid moralizing and also to keep us from applying it universally. Its relevance for analyzing and describing the reality must be considered in specific contexts.
The history can offer monetary unions that represented single independent states of various sizes and economic levels (at present e. g. Belgium and Luxembourg), but so far no monetary union was established among economically powerful sovereign states. In this aspect, the EMU has been representing a historical precedence with many supporters, but also with many opponents.
The monetary union is influencing the economic sovereignty of a country in a way that its member countries are loosing the key feature of their economic policy and that is the ability to control their own currency, i. e. the ability to control their independent mo-netary policy. It means, that the country once it joined the monetary union, cannot chan-ge the value of its local currency, either by a devaluation or revaluation, and will not be able to determine the volume of money in circulation. In addition, in case of exogenous demand shocks the introduction of a single currency would impede the implementation of market tools such as interest rate, exchange rate and that may increase the instability of the economy cycle development and through that to increase the recurrent unemployment level.
Loosing the ability to employ the monetary policy as an independent tool and a solution for economy cycles should not be a problem if the EMU countries’ economy cycles are equal and the single monetary policy will bring the same effect for each of the member countries. In case of an asymmetric shock (i. e. if the effect for single countries is not the same), we would have to face a different situation. A classical example of the asymmetric shock can be represented by an uneven spread of the aggregate demand. In an open economy hit by the asymmetric shock, the balance can be restored through devaluation or revaluation of the local currency, by transfer of mobile human resources or by flexible wages which are the necessary prerequisite for that.
The problem of the asymmetric shock and of the different development in the demand, costs and prices in the monetary union cannot be solved by a new exchange rate. The loss of the chance to use this tool in the monetary union is defined as the primary monetary union “cost”.
The mobile human resources are the factors that can assist for the balance recovery in the countries hit by the asymmetric shock. The mobile human resources in the EMU are very low to compare the USA. Despite the elimination of legal barriers within the EMU there are still human resources barriers in language skills and culture that prevent temporary or a long term work assignments of workers throughout Europe.
Under assumption that local prices and wages are flexible the decline in the demand would immediately bring adjustment to the level and the structure of wages and prices which are able to sustain full employment without changing the nominal exchange rate or the interest rate. However, rigidity (inflexibility) in prices and wages (due to the structural unemployment level) is very typical for Europe and that is why we cannot count on this factor if balancing the demand shocks.
The differences existing in the labour market represent a further factor that can considerably act upon the monetary union costs. In addition, the European union countries have different labour market organization – in some of them the labour market includes highly centralized trade unions (e.g. Germany), in contrary, other countries are typical for a high decentralization of trade unions (for example Great Britain). If the countries are exposed to the supply shock and have also different labour market systems, the price and wage development is different in such countries. Subsequently, it will be very difficult to bring the problems to the ground without changing the exchange rate (if the monetary union is in place and exchange rates are fixed and irrevocable).
There are different opinions regarding the frequency of demand shock among EMU countries. According to P. Krugman, the international trade integration which is still gro-wing due to savings on production scales is leading to regional concentration in the industrial production, and as a result, countries can cope up with stronger and more frequent asymmetric shocks. Several European economists (e. g. Gros, De Grauwe) have supported the opinion that the occurrence of the asymmetric shocks in the monetary union will gradually go down. Considering the existing trade structure we can assume that the majority of demand shocks would impact the countries in the same way.
An empiric research has proved that the countries situated in the center of the EU (Germany, France and Benelux) are economically more integrated and less prone to the asymmetric shock occurrence. However, if there are more countries integrated within the EMU, the risk involved can be caused due to the shock occurrence. One of the asymmetric shock risk sources is also the different structure of the European financial systems.
There are some opinions according to which the EMU can operate successfully in a long term only if the automated payment transfer system among countries was implemented, i. e. so called fiscal federalism. According the theory of optimum monetary region within the monetary union, there should work a certain degree of centralization of the national budgets. This would allow automated transfers to regions and countries hit by the asymmetric shocks.
The monetary policy in the monetary union is centralized and does not represent any source of asymmetric shocks for single countries. Although, in other economic fields where the member countries would preserve their powers, the situation is different. The budgetary field is the most important. Within the monetary union, the majority of powers including the decision making on the consumption and taxation will be in hands of the national bodies. And especially the changes in the consumption and taxation within the particular countries represent the source of big asymmetric shocks.
The summit in Amsterdam approved the Pact of Stability and Growth, which includes responsibilities of the EMU member countries. The main goals of the pact is to ensure a sustained harmony between fiscal policies and the budgetary vigilance and watching the fiscal development in the member countries with the aim to get early signals about any deterioration regarding the budgetary management.
The fiscal policies of the member countries of the monetary union should equally seek the balance between the flexibility, which was highlighted in the theory on optimum monetary region (where the exchange rate tool and the centralized European budget were missing, the national budget remained a unique tool for the state in a confrontation with the asymmetric shocks) and the non-sustainable national budgetary deficits and governmental debts, which can injure other member countries, as well as to evolve a pressure against the ECB.
The Pact of Stability counted mostly on non-sustainability of budgetary deficits than the flexibility of national fiscal policies. We can even say that the Pact of Stability, regarding this aspect, is unbalanced. The lack of the budgetary flexibility during recession can create a certain tension among national governments and the European institutions in two directions: at one hand, the pressure against the ECB following less strict the monetary policy (it is a paradox that the Pact of Stability was created with the aim to protect the ECB from political pressure), and on the other hand, the countries hit by the recession will expect from the European institutions that it will try to ease the impact to their countries.
It is clear that the decision to form the EMU was not based on evaluation of econo-mic pros and cons of a single currency, but it was mainly a political decision. It is necessary to draw our attention to the fact that the political vacuum on the European level has been the accompanying factor of the EMU. That means there is no central European government that would overtake the task of dampening the economic swings caused by the monetary union. The solution for a shock absorption has still remained in the hands of national states which cannot be neglected as a risk factor in the EMU, and it is questionable to what extent the national states will be able to solve the impacts of asymmetric shocks which can subsequently launch a conflict between national governments and the European central bank.
Lucius CHUDÝ – Igor FARKAŠ
State debt management represents one of the key tasks in administration of the state finance. Its optimal performance is quite complicated due to its relationship with monetary and fiscal policy as well as with the economic investment strategy of the state, especially in case of transition economies. A coordinated joint optimization of all these fields is necessary and allow avoiding a potential disbalance which emerges when independent actions are performed separately in these fields.
There can be distinguished two levels of the state debt management: 1. strategic economy planning, and 2. technical analysis and support.
First, we discuss the main aspects of the strategic economy planning, which is primarily determined by outer constraints (e. g. financing of fiscal and past debt, state eco-nomy investments). Our focus is the discussion of the key relationship between the state debt management and the government securities market. We have distinguished two basic types of this relationship – the partnership relation which is characteristic for developed economies, and the competitive relation which is more or less present in transition economies. In this respect, we analysed the situation in the Slovak Republic in the past period and we also proposed the main aims of the state debt administration for the future.
In addition we are discussing the main aspects of the emission policy of state securities – the structure, timing and conditions of the emissions; typical emission models in the Slovak Republic in the past and those considered for the future are investigated.
The main goals of the state debt management are recognised in three areas: 1. direct minimization of the (long-term) costs, 2. risk minimization, especially related to the fluctuations of interest rates, and 3. establishing various conditions which could improve the state debt management process. Main aims for the future are discussed regarding these areas in the Slovak Republic.
The major focus of this paper is the technical level of the state debt management. This should provide a proposal for the most effective information technologies aimed at collection, monitoring and evaluation of all relevant financial and economical data needed for the efficient state debt management. It should also support the development and research of modern mathematics and data processing methods for monitoring, evaluation and decision making. The technical level of the state debt management has typically been underestimated in countries with transition economies and this process has usually been intuitive, based mainly on skills and experience of the state administration. An increasing complexity and mutual coupling of the underlying processes which affect the state debt management, necessitates the massive application of modern hardware and software information tools and methods.
Next, there are distinguished four main areas of the mathematical and data processing methods which could improve the efficiency of the state debt management. These are: 1. evaluation and analysis of the cost and effectiveness of the debt management, 2. risk estimation and its analysis, 3. analysis and prediction of related financial processes and optimization methods, 4. supplementary monitoring tools for decision making.
In the paper we focused on the first two areas, whereas the other methods are omitted for the sake of brevity. We described and investigated some basic and simple methods, which could be useful for monitoring, evaluation and analysis of the state debt management process.
Within the first group of methods we described and illustrated a simple method of evaluation of direct costs (i. e. due to interests) related to the state debt financing. This measure is evaluated either in absolute or relative terms (with respect to the overall volu-me of the debt). We pointed out that be cautious ness is important regarding which emissions are to be covered by the investigated periods for the cost estimation purposes. In this respect, there can by distinguished three basic alternatives in cost evaluation depen-ding on the emission date and maturity date of particular emissions.
We have also proposed new characteristics which evaluate the security emission pro-cess efficiency by means of ratio between the volume of cash on the state budget account and volume of borrowed government securities, both calculated during the same specified period of time.
Within the group of risk estimation methods we have described a simple measure of duration of the debt portfolio together with more detailed characteristics of the redemption profile of the debt. Those approaches may be used in order to restructure the debt portfolio and thus to minimize various risks related to the accumulation of maturity payments and interest rate fluctuations.
Finally, we researched some methods based on the Cost at Risk analysis, which could provide a simple but effective tool for optimization of the structure of debt portfolio as well as emission process aspects in the future. Based on the histogram statistics of simulated costs, it is possible to evaluate so called absolute and relative CaR indices, which are based on the percentile probabilities of the cost distribution. These characteristics ser-ve as a simple tool for estimation of the maximum expected cost (with given probability) and its related variability under given emission scenario. These methods can also be used in analysis of the influence of various characteristics, e. g. mean interest rates or the level of the fluctuations of interest rates.
All methods described in the paper were illustrated based on real Slovak government securities data, both short-term maturity treasury bills and long-term maturity bonds over the period of years 1993– 1999.
In the period under discussion diplomacy has changed substantially, important changes have occured within the international system, which have affected players, procedures and the content of diplomacy and the decline in the decision-making power of the ambassador (but the widening of his area of competence through economic and commercial diplomacy).
As regards the widening content of diplomacy has undoubtely become more diverse and complex and the agenda of diplomacy has diversified. The major effects have been felt nationally in terms of the engagement of ministries other than those of foreign affairs, defence and trade in the international diplomacy.
Changes in the substantive form of diplomacy are reflected in terms such as “lobbying and corridor diplomacy, trade diplomacy”, etc. Trade has traditionally been a concern of diplomacy. Ideally, trade policy and foreign policy should support each other, in the same way in which defence and foreign policy have a mutually supportive relationship.
A divergency between trade and foreign policy can sometimes bring the practice of having separate diplomatic and trade missions reflecting the tendency to deal with the political and economic aspects of foreign policy separately. Foreign policy decision-makers may conceive particular trade interests being incompatible with foreign policy. Nowadays, trade is a central feature of diplomacy rather than a discreet or distinct area of activity as under the traditional diplomacy. The expansion of international trade issues requires foreign ministries to recruit or co-opt additional technical and multi-disciplinary personnel.